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•	any adverse results of our internal review into our emissions certification process and compliance with emission standards;

•	increased scrutiny from regulatory agencies, as well as unpredictability in the adoption, implementation and enforcement of emission standards around the world;

•	a sustained slowdown or significant downturn in our markets;

•	an extended shutdown of our operations in China due to the coronavirus outbreak;

•	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 decision to end its membership in the European Union (EU);

•	lower than expected acceptance of new or existing products or services;

•	supply shortages and supplier financial risk, particularly from any of our single-sourced suppliers;

•	changes in the engine outsourcing practices of significant customers;

•	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;

•	aligning our capacity and production with our demand;

•	challenges or unexpected costs in completing cost reduction actions and restructuring initiatives;

•	a major customer experiencing financial distress;

•	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;

•	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;

•	changes in taxation;

•	global legal and ethical compliance costs and risks;

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•	product liability claims;

•	increasingly stringent environmental laws and regulations;

•	future bans or limitations on the use of diesel-powered products;

•	the price and availability of energy;

•	the performance of our pension plan assets and volatility of discount rates;

•	labor relations;

•	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 Item 1A. under the caption "Risk Factors."

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•	Engines with a displacement range of 2.8 to 15 liters and horsepower ranging from 48 to 715; and

•	New parts and service, as well as remanufactured parts and engines, primarily through our extensive distribution network.

•	Heavy-duty truck - We manufacture diesel and natural gas engines that range from 310 to 605 horsepower serving global heavy-duty truck customers worldwide, primarily in North America, China and Australia.

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Medium-duty truck and bus - We manufacture diesel and natural gas engines ranging from 130 to 450 horsepower serving medium-duty truck and bus customers worldwide, with key markets including North America, Latin America, China, Europe and India. Applications include pick-up, delivery and vocational trucks and school, transit and shuttle buses. We also provide diesel engines for Class A motor homes (RVs), primarily in North America.

•	Light-duty automotive (Pick-up and Light Commercial Vehicle (LCV)) - We manufacture 105 to 400 horsepower diesel engines, including engines for the pick-up truck market for Fiat Chrysler Automobiles (Chrysler) in North America and LCV markets in China, Europe and Latin America.

•	Off-highway - We manufacture diesel engines that range from 48 to 715 horsepower serving key global markets including construction, mining, marine, rail, oil and gas, defense and agriculture and also the power generation business for standby, mobile and distributed power generation solutions throughout the world.

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Emission solutions - We are a global leader in designing, manufacturing and integrating aftertreatment technology and solutions for the commercial on and off-highway light, medium, heavy-duty and high-horsepower engine markets. Aftertreatment is the mechanism used to convert engine emissions of criteria pollutants, such as particulate matter, nitrogen oxides (NOx), carbon monoxide and unburned hydrocarbons into harmless emissions. Our products include custom engineering systems and integrated controls, oxidation catalysts, particulate filters, selective catalytic reduction systems and engineered components, including dosers. Our emission solutions business primarily serves markets in North America, Europe, China, India, Brazil, Russia and Australia. We serve both OEM first fit and retrofit customers.

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Turbo technologies - We design, manufacture and market turbochargers for light-duty, mid-range, heavy-duty and high-horsepower diesel markets with worldwide sales and distribution. We provide critical air handling technologies for engines to meet challenging performance requirements and worldwide emission standards. We primarily serve markets in North America, Europe, China, India, Brazil, Russia and Australia.

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Filtration - We design, manufacture and sell filters, coolant and chemical products. Our filtration business offers over 8,300 products for first fit and aftermarket applications including air filters, fuel filters, fuel water separators, lube filters, hydraulic filters, coolants, fuel additives and other filtration systems to OEMs, dealers/distributors and end-users. We support a wide customer base in a diverse range of markets including on and off-highway segments such as oil and gas, agriculture, mining, construction, power generation and marine. We produce and sell globally recognized Fleetguard® branded products in over 130 countries including countries in North America, Europe, South America, Asia and Africa. Fleetguard products are available through thousands of distribution points worldwide.

•	Electronics and fuel systems - We design and manufacture new, replacement and remanufactured fuel systems primarily for heavy-duty on-highway diesel engine applications, as well as develop and supply electronic control modules (ECMs), sensors and harnesses for the on-highway, off-highway and power generation applications. We primarily serve markets in North America, China, India and Europe.

•	Automated transmissions - We develop and supply automated transmissions for the heavy-duty commercial vehicle market. Formed in 2017, the Eaton Cummins Automated Transmission Technologies joint venture is a consolidated 50/50 joint venture between Cummins Inc. and Eaton Corporation Plc. and primarily serves the North American market.

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Power generation - We design, manufacture, sell and support standby and prime power generators ranging from 2 kilowatts to 3.5 megawatts, as well as controls, paralleling systems and transfer switches, for applications such as consumer, commercial, industrial, data centers, health care, global rental business, telecommunications and waste water treatment plants. We also provide turnkey solutions for distributed generation and energy management applications using natural gas, diesel or biogas as a fuel.

•	Industrial - We design, manufacture, sell and support diesel and natural gas high-speed, high-horsepower engines up to 5,500 horsepower for a wide variety of equipment in the mining, rail, defense, oil and gas, and commercial marine applications throughout the world.

•	Generator technologies - We design, manufacture, sell and support A/C generator/alternator products for internal consumption and for external generator set assemblers. Our products are sold under the Stamford and AVK brands and range in output from 3 kilovolt-amperes (kVA) to 12,000 kVA.

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Beijing Foton Cummins Engine Co., Ltd. - Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which has two distinct lines of business - a light-duty business and a heavy-duty business. The light-duty business produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-duty and medium-duty commercial trucks, pick-up trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types of small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces the X11 and X12, ranging from 10.5 liter to 12.9 liter, high performance heavy-duty diesel engines in Beijing, and is nearing the launch of the X13 engine. Certain types of construction equipment and industrial applications are also served by these engine families.

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Dongfeng Cummins Engine Company, Ltd. - Dongfeng Cummins Engine Company, Ltd. (DCEC) is a joint venture in China with Dongfeng Automotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation and one of the largest medium-duty and heavy-duty truck manufacturers in China. DCEC produces 3.9 liter to 14 liter diesel engines, with a power range from 80 to 680 horsepower, and natural gas engines. On-highway engines are used in multiple applications in light-duty and medium-duty trucks, special purpose vehicles, buses and heavy-duty trucks with a main market in China. Off-highway engines are used in a variety of construction, power generation, marine and agriculture markets in China.

•	Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines primarily serving the industrial and stationary power markets in China.

•	working with suppliers to measure and improve their environmental footprint;

•	selecting and managing suppliers to comply with our supplier code of conduct; and

•	assuring our suppliers comply with Cummins' prohibited and restricted materials policy.

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•	a product vision statement — "powering the future through product innovation that makes people's lives better and reduces our environmental footprint;"

•	partnering with customers to improve the fuel efficiency of our products in use, targeting an annual run-rate reduction of 3.5 million metric tons of carbon dioxide;

•	achieving a 32 percent energy intensity reduction from company facilities by the end of 2020 (using a baseline year of 2010) and increasing the portion of electricity we use derived from renewable sources;

•	reducing direct water use by 50 percent adjusted for hours worked and achieving water neutrality at 15 sites by the end of 2020;

•	increasing our recycling rate from 88 percent to 95 percent and achieving zero disposal at 30 sites by the end of 2020; and

•	utilizing the most efficient methods and modes to move goods across our network to reduce carbon dioxide per kilogram of goods moved by 10 percent by the end of 2020.

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•	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.

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•	EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS

•	RESULTS OF OPERATIONS

•	OPERATING SEGMENT RESULTS

•	2020 OUTLOOK

•	LIQUIDITY AND CAPITAL RESOURCES

•	CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

•	APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

•	RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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•	Engine segment sales decreased 5 percent, primarily due to lower demand across most markets, especially in global construction markets, LCV and bus markets, as well as the Brazilian medium-duty truck market and the North American heavy-duty truck market.

•	Unfavorable foreign currency impacts of 1 percent, mainly the Chinese renminbi, Euro, British pound, Australian dollar, Brazilian real and Indian rupee.

•	Components segment sales decreased 4 percent, primarily due to lower demand in Western Europe and India.

•	Power Systems segment sales decreased 4 percent, due to lower demand in all product lines, especially industrial, as demand declined in oil and gas markets in North America and the global mining market.

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•	Off-highway sales decreased $250 million, primarily due to lower demand in construction markets, especially in China, Asia Pacific and India.

•	Medium-duty truck and bus sales decreased $148 million, principally due to decreased global bus sales and lower medium-duty truck demand in Brazil, partially offset by increased medium-duty truck sales in North America.

•	Heavy-duty truck engine sales decreased $97 million, mainly due to lower demand in the North American heavy-duty truck market with decreased shipments of 6 percent, partially offset by increased sales in China.

•	Unfavorable foreign currency fluctuations, primarily in the Chinese renminbi, Brazilian real and Euro.

•	Light-duty automotive sales decreased $15 million as lower LCV sales, mainly in China, were mostly offset by higher pick-up truck sales in North America.

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•	North American sales increased $192 million, representing 79 percent of the total change in Distribution segment sales, largely due to increased demand across the power generation product line mostly for improved data center orders, partially offset by decreased engine sales in oil and gas markets.

•	Chinese sales increased $38 million, primarily due to higher on-highway engine volumes and improved aftermarket mining demand.

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•	Turbo technologies sales decreased $125 million, principally due to lower demand in Western Europe and North America.

•	Unfavorable currency fluctuations mainly in the Chinese renminbi, Euro and British pound.

•	Electronics and fuel systems sales decreased $79 million, primarily due to lower demand in North America and India.

•	Emission solutions sales decreased $55 million, largely due to weaker market demand in Asia Pacific, Western Europe, India and China, mostly offset by stronger demand in North America.

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•	Industrial sales decreased $87 million, primarily due to lower demand in oil and gas markets in North America and weaker demand in global mining markets, especially in Europe and Russia, partially offset by stronger demand in oil and gas markets in China.

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•	Unfavorable foreign currency fluctuations mainly in the British pound, Indian rupee and Chinese renminbi.

•	Power generation sales decreased $68 million, principally due to lower demand in Western Europe, Middle East and Latin America, partially offset by higher demand in North America and China from data center customers.

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•	We expect to realize annualized savings from restructuring and other actions of approximately $250 million to $300 million.

•	We may close or restructure additional manufacturing and distribution facilities as we evaluate the appropriate size and structure of our manufacturing and distribution capacity, which could result in additional charges.

•	Industry production of heavy-duty and medium-duty trucks in North America is expected to decline.

•	North American pick-up truck demand should decline.

•	Power generation markets are expected to decline.

•	Demand in North American, Chinese and European construction markets is expected to weaken.

•	Weak economic conditions in India may continue to negatively impact demand across our businesses.

•	Demand in Chinese truck markets is expected to decline.

•	Lower commodity prices and capital expenditures by mining companies could reduce demand for mining engines.

•	Demand in oil and gas markets in North America should remain weak.

•	Uncertainty in the U.K. surrounding its ability to negotiate trade agreements as a sovereign country could have material negative impacts on our European operations in the long-term.

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•	In July 2019, the Board authorized an increase to our quarterly dividend of 15 percent from $1.14 per share to $1.311 per share.

•	In July 2018, the Board authorized an increase to our quarterly dividend of 5.6 percent from $1.08 per share to $1.14 per share.

•	In July 2017, the Board authorized an increase to our quarterly dividend of 5.4 percent from $1.025 per share to $1.08 per share.

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(1)	Includes principal payments and expected interest payments based on the terms of the obligations.

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•	Macroeconomic conditions, such as a deterioration in general economic conditions, fluctuations in foreign exchange rates and/or other developments in equity and credit markets;

•	Industry and market considerations, such as a deterioration in the environment in which an entity operates, material loss in market share and significant declines in product pricing;

•	Cost factors, such as an increase in raw materials, labor or other costs;

•	Overall financial performance, such as negative or declining cash flows or a decline in actual or forecasted revenue;

•	Other relevant entity-specific events, such as material changes in management or key personnel and

•	Events affecting a reporting unit, such as a change in the composition or carrying amount of its net assets including acquisitions and dispositions.

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•	Management's Report to Shareholders

•	Report of Independent Registered Public Accounting Firm

•	Consolidated Statements of Net Income for the years ended December 31, 2019, 2018 and 2017

•	Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017

•	Consolidated Balance Sheets at December 31, 2019 and 2018

•	Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

•	Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018 and 2017

•	Notes to the Consolidated Financial Statements

•	Selected Quarterly Financial Data (Unaudited)

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(a)	Includes sales to nonconsolidated equity investees of $1,191 million, $1,267 million and $1,174 million for the years ended December 31, 2019, 2018 and 2017, respectively.

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Nature of Operations

We were 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, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated 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.

Principles of Consolidation

Our Consolidated Financial Statements include the accounts of all wholly-owned and majority-owned domestic and foreign subsidiaries where our ownership is more than 50 percent of outstanding equity interests except for majority-owned subsidiaries that are considered variable interest entities (VIEs) where we are not deemed to have a controlling financial interest. In addition, we also consolidate, regardless of our ownership percentage, VIEs or joint ventures for which we are deemed to have a controlling financial interest. Intercompany balances and transactions are eliminated in consolidation. Where our ownership interest is less than 100 percent, the noncontrolling ownership interests are reported in our Consolidated Balance Sheets. The noncontrolling ownership interest in our income, net of tax, is classified as "Net income (loss) attributable to noncontrolling interests" in our Consolidated Statements of Net Income.

We have variable interests in several businesses accounted for under the equity method of accounting that are deemed to be VIEs and are subject to generally accepted accounting principles in the United States of America (GAAP) for variable interest entities. Most of these VIEs are unconsolidated.

Reclassifications

Certain amounts for 2018 and 2017 have been reclassified to conform to the current year presentation.

Investments in Equity Investees

We use the equity method to account for our investments in joint ventures, affiliated companies and alliances in which we have the ability to exercise significant influence, generally represented by equity ownership or partnership equity of at least 20 percent but not more than 50 percent. Generally, under the equity method, original investments in these entities are recorded at cost and subsequently adjusted by our share of equity in income or losses after the date of acquisition. Investment amounts in excess of our share of an investee's net assets are amortized over the life of the related asset creating the excess. If the excess is goodwill, then it is not amortized. Equity in income or losses of each investee is recorded according to our level of ownership; if losses accumulate, we record our share of losses until our investment has been fully depleted. If our investment has been fully depleted, we recognize additional losses only when we are the primary funding source. We eliminate (to the extent of our ownership percentage) in our Consolidated Financial Statements the profit in inventory held by our equity method investees that has not yet been sold to a third-party. Dividends received from equity method investees reduce the amount of our investment when received and do not impact our earnings. Our investments are classified as "Investments and advances related to equity method investees" in our Consolidated Balance Sheets. Our share of the results from joint ventures, affiliated companies and alliances is reported in our Consolidated Statements of Net Income as "Equity, royalty and interest income from investees," and is reported net of all applicable income taxes.

Our foreign equity investees are presented net of applicable foreign income taxes in our Consolidated Statements of Net Income. Our remaining U.S. equity investees are partnerships (non-taxable), thus there is no difference between gross or net of tax presentation as the investees are not taxed. See Note 3, "INVESTMENTS IN EQUITY INVESTEES," for additional information.

Use of Estimates in the Preparation of the 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 Consolidated Financial Statements. Significant estimates and assumptions in these Consolidated Financial Statements require the exercise of judgement and are used for, but not limited to,

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estimates of future cash flows and other assumptions associated with goodwill and long-lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, determination of discount rate and other assumptions for pensions and other postretirement benefit costs, restructuring costs, income taxes and deferred tax valuation allowances and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

Revenue Recognition

On January 1, 2018, we adopted the new revenue recognition standard in accordance with GAAP on a modified retrospective basis.

Revenue Recognition Sales of Products

We sell to customers either through long-term arrangements or standalone purchase orders. Our long-term arrangements generally do not include committed volumes until underlying purchase orders are issued. Our performance obligations vary by contract, but may include diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, transmissions, power generation systems and construction related projects, batteries, electrified power systems, hydrogen systems, fuel cells, parts, maintenance services and extended warranty coverage.

Typically, we recognize revenue on the products we sell at a point in time, generally in accordance with shipping terms, which reflects the transfer of control to the customer. Since control of construction projects transfer to the customer as the work is performed, revenue on these projects is recognized based on the percentage of inputs incurred to date compared to the total expected cost of inputs, which is reflective of the value transferred to the customer. Revenue is recognized under long-term maintenance and other service agreements over the term of the agreement as underlying services are performed based on the percentage of the cost of services provided to date compared to the total expected cost of services to be provided under the contract. Sales of extended coverage are recognized based on the pattern of expected costs over the extended coverage period or, if such a pattern is unknown, on a straight-line basis over the coverage period as the customer is considered to benefit from our stand ready obligation over the coverage period. In all cases, we believe cost incurred is the most representative depiction of the extent of service performed to date on a particular contract.

Our arrangements may include the act of shipping products to our customers after the performance obligation related to that product has been satisfied. We have elected to account for shipping and handling as activities to fulfill the promise to transfer goods and have not allocated revenue to the shipping activity. All related shipping and handling costs are accrued at the time the related performance obligation has been satisfied.

Our sales arrangements may include the collection of sales and other similar taxes that are then remitted to the related taxing authority. We have elected to present the amounts collected for these taxes net of the related tax expense rather than presenting them as additional revenue.

We grant credit limits and terms to customers based upon traditional practices and competitive conditions. Typical terms vary by market, but payments are generally due in 90 days or less from invoicing for most of our product and service sales, while payments on construction and other similar arrangements may be due on an installment basis.

For contracts where the time between cash collection and performance is less than one year, we have elected to use the practical expedient that allows us to ignore the possible existence of a significant financing component within the contract. For contracts where this time period exceeds one year, generally the timing difference is the result of business concerns other than financing. We do have a limited amount of customer financing for which we charge or impute interest, but such amounts are immaterial to our Consolidated Statements of Net Income.

Sales Incentives

We provide various sales incentives to both our distribution network and OEM customers. These programs are designed to promote the sale of our products in the channel or encourage the usage of our products by OEM customers. When there is uncertainty surrounding these sales incentives, we may limit the amount of revenue we recognize under a contract until the uncertainty has been resolved. Sales incentives primarily fall into three categories:

•	Volume rebates;

•	Market share rebates; and

•	Aftermarket rebates.

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For volume rebates, we provide certain customers with rebate opportunities for attaining specified volumes during a particular quarter or year. We consider the expected amount of these rebates at the time of the original sale as we determine the overall transaction price. We update our assessment of the amount of rebates that will be earned quarterly based on our best estimate of the volume levels the customer will reach during the measurement period. For market share rebates, we provide certain customers with rebate opportunities based on the percentage of their production that utilizes our product. These rebates are typically measured either quarterly or annually and we assess them at least quarterly to determine our current estimates of amounts expected to be earned. These estimates are considered in the determination of transaction price at the time of the original sale based on the current market shares, with adjustments made as the level changes. For aftermarket rebates, we provide incentives to promote sales to certain dealers and end-markets. These rebates are typically paid on a quarterly, or more frequent basis. At the time of the sales, we consider the expected amount of these rebates when determining the overall transaction price. Estimates are adjusted at the end of each quarter based on the amounts yet to be paid. These estimates are based on historical experience with the particular program.

Sales Returns

The initial determination of the transaction price may also be impacted by expected product returns. Rights of return do not exist for the majority of our sales other than for quality issues. We do offer certain return rights in our aftermarket business, where some aftermarket customers are permitted to return small amounts of parts and filters each year, and in our power generation business, which sells portable generators to retail customers. An estimate of future returns is accounted for at the time of sale as a reduction in the overall contract transaction price based on historical return rates.

Multiple Performance Obligations

Our sales arrangements may include multiple performance obligations. We identify each of the material performance obligations in these arrangements and allocate the total transaction price to each performance obligation based on its relative selling price. In most cases, the individual performance obligations are also sold separately and we use that price as the basis for allocating revenue to the included performance obligations. When an arrangement includes multiple performance obligations and invoicing to the customer does not match the allocated portion of the transaction price, unbilled revenue or deferred revenue is recorded reflecting that difference. Unbilled and deferred revenue are discussed in more detail below.

Long-term Contracts

Our long-term maintenance agreements often include a variable component of the transaction price. We are generally compensated under such arrangements on a cost per hour of usage basis. We typically can estimate the expected usage over the life of the contract, but reassess the transaction price each quarter and adjust our recognized revenue accordingly. Certain maintenance agreements apply to generators used to provide standby power, which have limited expectations of usage. These agreements may include monthly minimum payments, providing some certainty to the total transaction price. For these particular contracts that relate to standby power, we limit revenue recognized to date to an amount representing the total minimums earned to date under the contract plus any cumulative billings earned in excess of the minimums. We reassess the estimates of progress and transaction price on a quarterly basis. For prime power arrangements, revenue is not subject to such a constraint and is generally equal to the current estimate on a percentage of completion basis times the total expected revenue under the contract.

Deferred Revenue

The timing of our billing does not always match the timing of our revenue recognition. We record deferred revenue when we are entitled to bill a customer in advance of when we are permitted to recognize revenue. Deferred revenue may arise in construction contracts, where billings may occur in advance of performance or in accordance with specific milestones. Deferred revenue may also occur in long-term maintenance contracts, where billings are often based on usage of the underlying equipment, which generally follows a predictable pattern that often will result in the accumulation of collections in advance of our performance of the related maintenance services. Finally, deferred revenue exists in our extended coverage contracts, where the cash is collected prior to the commencement of the coverage period. Deferred revenue is included in our Consolidated Balance Sheets as a component of current liabilities for the amount expected to be recognized in revenue in a period of less than one year and long-term liabilities for the amount expected to be recognized as revenue in a period beyond one year. Deferred revenue is recognized as revenue when control of the underlying product, project or service passes to the customer under the related contract.

Unbilled Revenue

We recognize unbilled revenue when the revenue has been earned, but not yet billed. Unbilled revenue is included in our Consolidated Balance Sheets as a component of current assets for those expected to be collected in a period of less than one year and long-term assets for those expected to be collected in a period beyond one year. Unbilled revenue relates to our right

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to consideration for our completed performance under a contract. Unbilled revenue generally arises from contractual provisions that delay a portion of the billings on genset deliveries until commissioning occurs. Unbilled revenue may also occur when billings trail the provision of service in construction and long-term maintenance contracts. We periodically assess our unbilled revenue for impairment. We did not record any impairment losses on our unbilled revenues during 2019.

Contract Costs

We are required to record an asset for the incremental costs of obtaining a contract with a customer and other costs to fulfill a contract not otherwise required to be immediately expensed when we expect to recover those costs. The only material incremental cost we incur is commission expense, which is generally incurred in the same period as the underlying revenue. Costs to fulfill a contract are generally limited to customer-specific engineering expenses that do not meet the definition of research and development expenses. As a practical expedient, we have elected to recognize these costs of obtaining a contract as an expense when the related contract period is less than one year. When the period exceeds one year, this asset is amortized over the life of the contract. We did not have any material capitalized balances at December 31, 2019.

Extended Warranty

We sell extended warranty coverage on most of our engines and on certain components. We consider a warranty to be extended coverage in any of the following situations:

•	When a warranty is sold separately or is optional (extended coverage contracts, for example) or

•	When a warranty provides additional services.

The consideration collected is initially deferred and is recognized as revenue in proportion to the costs expected to be incurred in performing services over the contract period. We compare the remaining deferred revenue balance quarterly to the estimated amount of future claims under extended warranty programs and provide an additional accrual when the deferred revenue balance is less than expected future costs.

Foreign Currency Transactions and Translation

We translate assets and liabilities of foreign entities to U.S. dollars, where the local currency is the functional currency, at month-end exchange rates. We translate income and expenses to U.S. dollars using weighted-average exchange rates. We record adjustments resulting from translation in a separate component of accumulated other comprehensive loss (AOCL) and include the adjustments in net income only upon sale, loss of controlling financial interest or liquidation of the underlying foreign investment.

Foreign currency transaction gains and losses are included in current net income. For foreign entities where the U.S. dollar is the functional currency, including those operating in highly inflationary economies when applicable, we remeasure non-monetary balances and the related income statement amounts using historical exchange rates. We include in income the resulting gains and losses, including the effect of derivatives in our Consolidated Statements of Net Income, which combined with transaction gains and losses amounted to a net gain of $28 million and a net loss of $34 million and $6 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Fair Value Measurements

A three-level valuation hierarchy, based upon the observable and unobservable inputs, is used for fair value measurements. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available. These two types of inputs create the following fair value hierarchy:

•	Level 1 - Quoted prices for identical instruments in active markets;

•	Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose significant inputs are observable; and

•	Level 3 - Instruments whose significant inputs are unobservable.

Derivative Instruments

We make use of derivative instruments in foreign exchange, commodity price and interest rate hedging programs. Derivatives currently in use are foreign currency forward contracts, commodity swap and physical forward contracts, commodity zero-cost collars and interest rate swaps. These contracts are used strictly for hedging and not for speculative purposes.

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We are exposed to market risk from fluctuations in interest rates. We manage our exposure to interest rate fluctuations through the use of interest rate swaps. The objective of the swaps is to more effectively balance our borrowing costs and interest rate risk. The gain or loss on these derivative instruments as well as the offsetting gain or loss on the hedged item are recognized in current income as "Interest expense." For more detail on our interest rate swaps, see Note 11, "DEBT."

Due to our international business presence, we are exposed to foreign currency exchange risk. We transact in foreign currencies and have assets and liabilities denominated in foreign currencies. Consequently, our income experiences some volatility related to movements in foreign currency exchange rates. In order to benefit from global diversification and after considering naturally offsetting currency positions, we enter into foreign currency forward contracts to minimize our existing exposures (recognized assets and liabilities) and hedge forecasted transactions. Foreign currency forward contracts are designated and qualify as foreign currency cash flow hedges under GAAP. The unrealized gain or loss on the forward contract is deferred and reported as a component of AOCL. When the hedged forecasted transaction (sale or purchase) occurs, the unrealized gain or loss is reclassified into income in the same line item associated with the hedged transaction in the same period or periods during which the hedged transaction affects income. At December 31, 2019 and 2018, realized and unrealized gains and losses related to these hedges were not material to our financial statements.

To minimize the income volatility resulting from the remeasurement of net monetary assets and payables denominated in a currency other than the functional currency, we enter into foreign currency forward contracts, which are considered economic hedges. The objective is to offset the gain or loss from remeasurement with the gain or loss from the fair market valuation of the forward contract. These derivative instruments are not designated as hedges under GAAP.

We are exposed to fluctuations in commodity prices due to contractual agreements with component suppliers. In order to protect ourselves against future price volatility and, consequently, fluctuations in gross margins, we periodically enter into commodity swap, forward and zero-cost collar contracts with designated banks and other counterparties to fix the cost of certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. Commencing in 2019, these commodity swaps are designated and qualify as cash flow hedges under GAAP. At December 31, 2019, realized and unrealized gains and losses related to these hedges were not material to our financial statements. The physical forward contracts qualify for the normal purchases scope exceptions and are treated as purchase commitments. Additional information on the physical forwards is included in Note 15, "COMMITMENTS AND CONTINGENCIES." The commodity zero-cost collar contracts that represent an economic hedge, but are not designated for hedge accounting, are marked to market through earnings.

We record all derivatives at fair value in our financial statements. Cash flows related to derivatives that are designated as hedges are included in the Cash Flows From Operating Activities, while cash flows related to derivatives, that are not designated as hedges, are included in Cash Flows From Investing Activities in our Consolidated Statements of Cash Flows.

Substantially all of our derivative contracts are subject to master netting arrangements, which provide us with the option to settle certain contracts on a net basis when they settle on the same day with the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. When material, we adjust the value of our derivative contracts for counter-party or our credit risk. None of our derivative instruments are subject to collateral requirements.

Income Tax Accounting

We determine our income tax expense using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Future tax benefits of net operating loss and credit carryforwards are also recognized as deferred tax assets. We evaluate the recoverability of our deferred tax assets each quarter by assessing the likelihood of future profitability and available tax planning strategies that could be implemented to realize our net deferred tax assets. A valuation allowance is recorded to reduce the tax assets to the net value management believes is more likely than not to be realized. In the event our operating performance deteriorates, future assessments could conclude that a larger valuation allowance will be needed to further reduce the deferred tax assets. In addition, we operate within multiple taxing jurisdictions and are subject to tax audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. We accrue for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions. We have taken and we believe we have made adequate provisions for income taxes for all years that are subject to audit based upon the latest information available. A more complete description of our income taxes and the future benefits of our net operating loss and credit carryforwards is disclosed in Note 5, "INCOME TAXES."

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Cash and Cash Equivalents

Cash equivalents are defined as short-term, highly liquid investments with an original maturity of 90 days or less at the time of purchase. The carrying amounts reflected in our Consolidated Balance Sheets for cash and cash equivalents approximate fair value due to the short-term maturity of these investments.

		Years ended December 31,
In millions		2019				2018				2017
Cash payments for income taxes, net of refunds		$	691			$	699			$	622
Cash payments for interest, net of capitalized interest		109				114				82

Marketable Securities

We account for marketable securities in accordance with GAAP for investments in debt and equity securities. Debt securities are classified as "held-to-maturity," "available-for-sale" or "trading". We determine the appropriate classification of debt securities at the time of purchase and re-evaluate such classifications at each balance sheet date. At December 31, 2019 and 2018, all of our debt securities were classified as available-for-sale. Debt and equity securities are carried at fair value with the unrealized gain or loss, net of tax, reported in other comprehensive income and other income, respectively. For debt securities, unrealized losses considered to be "other-than-temporary" are recognized currently in other income. The cost of securities sold is based on the specific identification method. The fair value of most investment securities is determined by currently available market prices. Where quoted market prices are not available, we use the market price of similar types of securities that are traded in the market to estimate fair value. See Note 6, "MARKETABLE SECURITIES," for a detailed description of our investments in marketable securities.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable represent amounts billed to customers and not yet collected or amounts that have been earned, but may not be billed until the passage of time, and are recorded when the right to consideration becomes unconditional. Trade accounts receivable are recorded at the invoiced amount, which approximates net realizable value, and generally do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on our historical collection experience and by performing an analysis of our accounts receivable in light of the current economic environment. We review our allowance for doubtful accounts on a regular basis. In addition, when necessary, we provide an allowance for the full amount of specific accounts deemed to be uncollectible. Account balances are charged off against the allowance in the period in which we determine that it is probable the receivable will not be recovered. The allowance for doubtful accounts balances were $19 million and $15 million at December 31, 2019, and 2018, respectively, and bad debt write-offs were not material.

Inventories

Our inventories are stated at the lower of cost or market. For the years ended December 31, 2019 and 2018, approximately 14 percent and 13 percent, respectively, of our consolidated inventories (primarily heavy-duty and high-horsepower engines and parts) were valued using the last-in, first-out (LIFO) cost method. The cost of other inventories is generally valued using the first-in, first-out (FIFO) cost method. Our inventories at interim and year-end reporting dates include estimates for adjustments related to annual physical inventory results and for inventory cost changes under the LIFO cost method. Due to significant movements of partially-manufactured components and parts between manufacturing plants, we do not internally measure, nor do our accounting systems provide, a meaningful segregation between raw materials and work-in-process. See Note 7, "INVENTORIES," for additional information.

Property, Plant and Equipment

We record property, plant and equipment at cost, inclusive of assets under capital leases in 2018 and finance lease assets starting in 2019, with the adoption of the new lease standard. We depreciate the cost of the majority of our property, plant and equipment using the straight-line method with depreciable lives ranging from 20 to 40 years for buildings and 3 to 15 years for machinery, equipment and fixtures. Capital lease amortization in 2018 and finance lease asset amortization starting in 2019 are recorded in depreciation expense. We expense normal maintenance and repair costs as incurred. Depreciation expense totaled $494 million, $455 million and $467 million for the years ended December 31, 2019, 2018 and 2017, respectively. See RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS sections below and Note 9, "LEASES," for additional information.

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Impairment of Long-Lived Assets

We review our long-lived assets for possible impairment whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. We assess the recoverability of the carrying value of the long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment of a long-lived asset or asset group exists when the expected future pre-tax cash flows (undiscounted and without interest charges) estimated to be generated by the asset or asset group is less than its carrying value. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is measured based on the difference between the estimated fair value and carrying value of the asset or asset group. Assumptions and estimates used to estimate cash flows in the evaluation of impairment and the fair values used to determine the impairment are subject to a degree of judgment and complexity. Any changes to the assumptions and estimates resulting from changes in actual results or market conditions from those anticipated may affect the carrying value of long-lived assets and could result in a future impairment charge.

Lease Policies

We determine if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (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. See Note 9, "LEASES," for additional information.

Goodwill

Under GAAP for goodwill, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform an annual quantitative goodwill impairment test. We have elected this option on certain reporting units. The quantitative impairment test is only required if an entity determines through this qualitative analysis that it is more likely than not that the fair value of the reporting unit is less than its carrying value. In addition, the carrying value of goodwill must be tested for impairment on an interim basis in certain circumstances where impairment may be indicated. We perform our annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

When we are required or opt to perform the quantitative impairment test, the fair value of each reporting unit is estimated by discounting the after-tax future cash flows less requirements for working capital and fixed asset additions. Our reporting units are generally defined as one level below an operating segment. However, there are three situations where we have aggregated two or more reporting units which share similar economic characteristics and thus are aggregated into a single reporting unit for testing purposes. These three situations are described further below:

•	Within our Components segment, our emission solutions and filtration businesses have been aggregated into a single reporting unit,

•	Within our New Power segment, our electrified power and fuel cell businesses have been aggregated into a single reporting unit and

•	Our Distribution segment is considered a single reporting unit as it is managed geographically and all regions share similar economic characteristics and provide similar products and services.

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The discounted cash flow model requires us to make projections of revenue, gross margin, operating expenses, working capital investment and fixed asset additions for the reporting units over a multi-year period. Additionally, management must estimate a weighted-average cost of capital, which reflects a market rate, for each reporting unit for use as a discount rate. The discounted cash flows are compared to the carrying value of the reporting unit and, if less than the carrying value, the difference is recorded as a goodwill impairment loss. In addition, we also perform a sensitivity analysis to determine how much our forecasts can fluctuate before the fair value of a reporting unit would be lower than its carrying amount. We perform the required procedures as of the end of our fiscal third quarter. While none of our reporting units recorded a goodwill impairment in 2019, we determined the automated transmission business is our only reporting unit with material goodwill where the estimated fair value does not substantially exceed the carrying value. The estimated fair value of the reporting unit exceeds its carrying amount of $1.2 billion by approximately 34 percent. Total goodwill in this reporting unit is $544 million. This reporting unit is made up of only one business, our joint venture with Eaton (Eaton Cummins Automated Transmission Technologies), which was acquired and recorded at fair value in the third quarter of 2017. As a result, we did not expect the estimated fair value would exceed the carrying value by a significant amount.

At December 31, 2019, our recorded goodwill was $1,286 million, approximately 42 percent of which resided in the automated transmissions reporting unit, 30 percent in the aggregated emission solutions and filtration reporting unit, 20 percent in the new power reporting unit and 6 percent in the distribution reporting unit. Changes in our projections or estimates, a deterioration of our operating results and the related cash flow effect or a significant increase in the discount rate could decrease the estimated fair value of our reporting units and result in a future impairment of goodwill. See Note 10, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.

Other Intangible Assets

We capitalize other intangible assets, such as trademarks, patents and customer relationships, that have been acquired either individually or with a group of other assets. These intangible assets are amortized on a straight-line basis over their estimated useful lives generally ranging from 3 to 25 years. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. See Note 10, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.

Software

We capitalize software that is developed or obtained for internal use. Software costs are amortized on a straight-line basis over their estimated useful lives generally ranging from 3 to 12 years. Software assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable over the remaining lives of the assets. Upgrades and enhancements are capitalized if they result in significant modifications that enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed in the period in which they are incurred. See Note 10, "GOODWILL AND OTHER INTANGIBLE ASSETS," for additional information.

Warranty

We estimate and record a liability for base warranty programs at the time our products are sold. Our estimates are based on historical experience and reflect management's best estimates of expected costs at the time products are sold and subsequent adjustment to those expected costs when actual costs differ. Factors considered in developing these estimates included component failure rates, repair costs and the point of failure within the product life cycle. As a result of the uncertainty surrounding the nature and frequency of product campaigns, the liability for such campaigns is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when it is announced. The liability for these campaigns is reflected in the provision for warranties issued. We review and assess the liability for these programs on a quarterly basis. We also assess our ability to recover certain costs from our suppliers and record a receivable when we believe a recovery is probable. In addition to costs incurred on warranty and product campaigns, from time to time we also incur costs related to customer satisfaction programs for items not covered by warranty. We accrue for these costs when agreement is reached with a specific customer. These costs are not included in the provision for warranties, but are included in cost of sales. In addition, we sell extended warranty coverage on most of our engines. See Extended Warranty policy discussion above and Note 12, "PRODUCT WARRANTY LIABILITY," for additional information.

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Research and Development

Our research and development program is focused on product improvements, product extensions, innovations and cost reductions for our customers. Research and development expenditures include salaries, contractor fees, building costs, utilities, testing, technical IT, administrative expenses and allocation of corporate costs and are expensed, net of contract reimbursements, when incurred. From time to time, we enter into agreements with customers and government agencies to fund a portion of the research and development costs of a particular project. When not associated with a sales contract, we generally account for these reimbursements as an offset to the related research and development expenditure. Research and development expenses, net of contract reimbursements, were $998 million, $894 million and $734 million for the years ended December 31, 2019, 2018 and 2017, respectively. Contract reimbursements were $90 million, $120 million and $137 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Related Party Transactions

In accordance with the provisions of various joint venture agreements, we may purchase products and components from our joint ventures, sell products and components to our joint ventures and our joint ventures may sell products and components to unrelated parties. Joint venture transfer prices may differ from normal selling prices. Certain joint venture agreements transfer product at cost, some transfer product on a cost-plus basis, and others transfer product at market value. Our related party sales are presented on the face of our Consolidated Statements of Net Income. Our related party purchases were not material to our financial position or results of operations.

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Recently Adopted

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 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.

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 Consolidated Financial Statements and no transition adjustment was required upon adoption.

Accounting Pronouncements Issued But Not Yet Effective

In August 2018, the FASB issued a new standard that aligns the accounting for implementation costs incurred in a cloud computing arrangement accounted for as a service contract with the model currently used for internal use software costs. Under the new standard, costs that meet certain criteria will be required to be capitalized on the balance sheet and subsequently amortized over the term of the hosting arrangement. The standard is effective for us beginning on January 1, 2020. We will adopt this standard on a prospective basis as allowed by the standard and as a result the adoption will not have an impact on our Consolidated Financial Statements.

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In June 2016, the FASB amended its standards related to accounting for credit losses on financial instruments. This amendment introduces new guidance for accounting for credit losses on instruments including trade receivables and held-to-maturity debt securities. The new rules are effective for annual and interim periods beginning after December 15, 2019. We will adopt this standard for 2020 and we do not expect adoption of this standard to have a material impact on our Consolidated Financial Statements.

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 have not been satisfied as of December 31, 2019, was $890 million. We expect to recognize the related revenue of $241 million over the next 12 months and $649 million over periods up to 10 years. See Note 12,"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 costs incurred when providing goods and services to our customers or represent sales-based royalties.

Deferred and Unbilled Revenue

The following is a summary of our unbilled and deferred revenue and related activity:

		Years ended December 31,
In millions		2019				2018
Unbilled revenue		$	68			$	64
Deferred revenue, primarily extended warranty		1,354				1,156

We recognized revenue of $365 million and $361 million in 2019 and 2018, respectively, 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 2019 or 2018.

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.

		Years ended December 31,
In millions		2019				2018				2017
United States		$	13,519			$	13,218			$	11,010
China		2,331				2,324				2,137
India		848				965				805
Other international		6,873				7,264				6,476
Total net sales		$	23,571			$	23,771			$	20,428

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Segment Revenue

Engine segment external sales by market were as follows:

		Years ended December 31,
In millions		2019				2018
Heavy-duty truck		$	2,626			$	2,885
Medium-duty truck and bus		2,244				2,536
Light-duty automotive		1,656				1,501
Total on-highway		6,526				6,922
Off-highway		1,044				1,080
Total sales		$	7,570			$	8,002

Distribution segment external sales by region were as follows:

		Years ended December 31,
In millions		2019				2018
North America		$	5,513			$	5,331
Asia Pacific		875				851
Europe		528				536
China		356				317
Africa and Middle East		235				242
India		200				192
Latin America		176				169
Russia		157				169
Total sales		$	8,040			$	7,807

Distribution segment external sales by product line were as follows:

		Years ended December 31,
In millions		2019				2018
Parts		$	3,278			$	3,222
Power generation		1,777				1,482
Engines		1,511				1,632
Service		1,474				1,471
Total sales		$	8,040			$	7,807

Components segment external sales by business were as follows:

		Years ended December 31,
In millions		2019				2018
Emission solutions		$	2,763			$	2,780
Filtration		1,024				1,010
Turbo technologies		696				761
Automated transmissions		534				543
Electronics and fuel systems		236				237
Total sales		$	5,253			$	5,331

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Power Systems segment external sales by product line were as follows:

		Years ended December 31,
In millions		2019				2018
Power generation		$	1,414			$	1,467
Industrial		908				801
Generator technologies		348				357
Total sales		$	2,670			$	2,625

NOTE 3. INVESTMENTS IN EQUITY INVESTEES

Investments and advances related to equity method investees and our ownership percentages were as follows:

				December 31,
Dollars in millions		Ownership %		2019				2018
Komatsu alliances		20-50%		$	267			$	238
Beijing Foton Cummins Engine Co., Ltd.		50%		193				203
Dongfeng Cummins Engine Company, Ltd.		50%		149				160
Chongqing Cummins Engine Company, Ltd.		50%		110				102
Cummins-Scania XPI Manufacturing, LLC		50%		96				101
Tata Cummins, Ltd.		50%		60				58
Other		Various		362				360
Investments and advances related to equity method investees				$	1,237			$	1,222

We have approximately $758 million in our investment account at December 31, 2019, that represents cumulative undistributed income in our equity investees. Dividends received from our unconsolidated equity investees were $260 million, $242 million and $219 million in 2019, 2018 and 2017, respectively.

Equity, royalty and interest income from investees, net of applicable taxes, was as follows:

		Years ended December 31,
In millions		2019				2018				2017
Manufacturing entities
Beijing Foton Cummins Engine Co., Ltd.		$	60			$	72			$	94
Dongfeng Cummins Engine Company, Ltd.		52				58				73
Chongqing Cummins Engine Company, Ltd.		41				51				41
All other manufacturers		88				129				71			(1)
Distribution entities
Komatsu Cummins Chile, Ltda.		28				26				30
All other distributors		2				—				(1		)
Cummins share of net income		271				336				308
Royalty and interest income		59				58				49
Equity, royalty and interest income from investees		$	330			$	394			$	357

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⁽¹⁾ Tax legislation passed in December 2017 decreased our equity earnings at certain equity investees by $39 million due to withholding tax adjustments on foreign earnings and remeasurement of deferred taxes. See Note 5, "INCOME TAXES," to our Consolidated Financial Statements for additional information.

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Manufacturing Entities

Our manufacturing joint ventures have generally been formed with customers and are primarily intended to allow us to increase our market penetration in geographic regions, reduce capital spending, streamline our supply chain management and develop technologies. Our largest manufacturing joint ventures are based in China and are included in the list below. Our engine manufacturing joint ventures are supplied by our Components segment in the same manner as it supplies our wholly-owned Engine segment and Power Systems segment manufacturing facilities. Our Components segment joint ventures and wholly owned entities provide electronics, fuel systems, filtration, aftertreatment systems, turbocharger products and automated transmissions that are used with our engines as well as some competitors' products. The results and investments in our joint ventures in which we have 50 percent or less ownership interest (except for Eaton Cummins Automated Transmission Technologies joint venture which is consolidated due to our majority voting interest) are included in “Equity, royalty and interest income from investees” and “Investments and advances related to equity method investees” in our Consolidated Statements of Net Income and Consolidated Balance Sheets, respectively.

•

Beijing Foton Cummins Engine Co., Ltd. - Beijing Foton Cummins Engine Co., Ltd. is a joint venture in China with Beiqi Foton Motor Co., Ltd., a commercial vehicle manufacturer, which has two distinct lines of business - a light-duty business and a heavy-duty business. The light-duty business produces our families of ISF 2.8 liter to 4.5 liter high performance light-duty diesel engines in Beijing. These engines are used in light-duty and medium-duty commercial trucks, pick-up trucks, buses, multipurpose and sport utility vehicles with main markets in China, Brazil and Russia. Certain types of small construction equipment and industrial applications are also served by these engine families. The heavy-duty business produces the X11 and X12, ranging from 10.5 liter to 12.9 liter, high performance heavy-duty diesel engines in Beijing, and is nearing the launch of the X13 engine. Certain types of construction equipment and industrial applications are also served by these engine families.

•

Dongfeng Cummins Engine Company, Ltd. - Dongfeng Cummins Engine Company, Ltd. (DCEC) is a joint venture in China with Dongfeng Automotive Co. Ltd., a subsidiary of Dongfeng Motor Corporation and one of the largest medium-duty and heavy-duty truck manufacturers in China. DCEC produces 3.9 liter to 14 liter diesel engines, with a power range from 80 to 680 horsepower, and natural gas engines. On-highway engines are used in multiple applications in light-duty and medium-duty trucks, special purpose vehicles, buses and heavy-duty trucks with a main market in China. Off-highway engines are used in a variety of construction, power generation, marine and agriculture markets in China.

•	Chongqing Cummins Engine Company, Ltd. - Chongqing Cummins Engine Company, Ltd. is a joint venture in China with Chongqing Machinery and Electric Co. Ltd. This joint venture manufactures several models of our heavy-duty and high-horsepower diesel engines primarily serving the industrial and stationary power markets in China.

Distribution Entities

We have an extensive worldwide distributor and dealer network through which we sell and distribute our products and services. Generally, our distributors are divided by geographic region with some of our distributors being wholly-owned by Cummins, some partially-owned and some independently owned. We consolidate all wholly-owned distributors and partially-owned distributors where we are the primary beneficiary and account for other partially-owned distributors using the equity method of accounting.

Komatsu Cummins Chile, Ltda. - Komatsu Cummins Chile, Ltda. is a joint venture with Komatsu America Corporation. The joint venture is a distributor that offers the full range of our products and services to customers and end-users in Chile and Peru.

In certain cases where we own a partial interest in a distributor, we may be obligated to purchase the other equity holders' interests if certain events occur (such as the death or resignation of the distributor principal or a change in control of Cummins Inc.). The purchase consideration of the equity interests may be determined based on the fair value of the distributor's assets. Repurchase obligations and practices vary by geographic region.

All distributors that are partially-owned are considered to be related parties in our Consolidated Financial Statements.

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Equity Investee Financial Summary

Summary financial information for our equity investees was as follows:

		For the years ended and at December 31,
In millions		2019				2018				2017
Net sales		$	7,068			$	7,352			$	7,050
Gross margin		1,274				1,373				1,422
Net income		566				647				680
Cummins share of net income		$	271			$	336			$	308
Royalty and interest income		59				58				49
Total equity, royalty and interest from investees		$	330			$	394			$	357
Current assets		$	3,282			$	3,401
Non-current assets		1,622				1,449
Current liabilities		(2,654		)		(2,669		)
Non-current liabilities		(326		)		(218		)
Net assets		$	1,924			$	1,963
Cummins share of net assets		$	1,159			$	1,144

NOTE 4. 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 accepted. 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 $119 million ($90 million after-tax) in the fourth quarter of 2019 for these actions which impacted approximately 2,300 employees. The voluntary actions were completed by December 31, 2019 and the majority of the involuntary actions were executed prior to January 31, 2020, with expected completion by March 31, 2020. Due to the inherent uncertainty involved, actual amounts paid for such activities may differ from amounts initially recorded and we may need to revise previous estimates.

Restructuring actions were included in our segment and non-segment operating results as follows:

In millions		Years ended December 31, 2019
Engine		$	18
Distribution		37
Components		20
Power Systems		12
New Power		1
Non-segment		31
Restructuring actions		$	119

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The table below summarizes the activity and balance of accrued restructuring, which is included in "Other accrued expenses" in our Consolidated Balance Sheets:

In millions		Restructuring Accrual
Workforce reductions		$	119
Cash payments		(4		)
Foreign currency loss		1
Balance at December 31, 2019		$	116

NOTE 5. INCOME TAXES

The following table summarizes income before income taxes:

		Years ended December 31,
In millions		2019				2018				2017
U.S. income		$	1,677			$	1,239			$	1,237
Foreign income		1,157				1,514				1,128
Income before income taxes		$	2,834			$	2,753			$	2,365

Income tax expense (benefit) consists of the following:

		Years ended December 31,
In millions		2019				2018				2017
Current
U.S. federal and state		$	288			$	303			$	355
Foreign		282				348				289
Impact of tax legislation		—				153				349
Total current income tax expense		570				804				993
Deferred
U.S. federal and state		(32		)		(71		)		(42		)
Foreign		28				(26		)		(12		)
Impact of tax legislation		—				(141		)		432
Total deferred income tax (benefit) expense		(4		)		(238		)		378
Income tax expense		$	566			$	566			$	1,371

A reconciliation of the statutory U.S. federal income tax rate to the effective tax rate was as follows:

		Years ended December 31,
		2019			2018			2017
Statutory U.S. federal income tax rate		21.0	%		21.0	%		35.0	%
State income tax, net of federal effect		1.1			0.9			0.6
Differences in rates and taxability of foreign subsidiaries and joint ventures		1.5			(0.2	)		(6.4	)
Research tax credits		(1.5	)		(1.2	)		(1.4	)
Foreign derived intangible income		(1.3	)		(1.3	)		—
Impact of tax legislation		—			0.5			33.1
Other, net		(0.8	)		0.9			(2.9	)
Effective tax rate		20.0	%		20.6	%		58.0	%

Our effective tax rate for 2019 was 20.0 percent compared to 20.6 percent for 2018 and 58.0 percent for 2017. The year ended December 31, 2019, contained $34 million of favorable net discrete tax items, primarily due to withholding taxes and provision to return adjustments.

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The year ended December 31, 2018, contained $14 million of favorable net discrete tax items, primarily due to $26 million of other favorable discrete tax items, partially offset by $12 million of unfavorable discrete tax items related to the tax legislation.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (Tax Legislation) which changed the U.S. statutory rate to 21 percent effective January 1, 2018 and required companies to pay a one-time transition tax on certain previously undistributed earnings on certain foreign subsidiaries and foreign joint ventures that were tax deferred. The impacts of the Tax Legislation resulted in additional tax expense of $12 million in 2018 and $781 million in 2017. See Tax Legislation Summary below for additional information.

Carryforward tax benefits and the tax effect of temporary differences between financial and tax reporting that give rise to net deferred tax (liabilities) assets were as follows:

		December 31,
In millions		2019				2018
Deferred tax assets
U.S. state carryforward benefits		$	207			$	191
Foreign carryforward benefits		157				149
Employee benefit plans		279				245
Warranty expenses		427				401
Lease liabilities		122				—
Accrued expenses		76				94
Other		44				65
Gross deferred tax assets		1,312				1,145
Valuation allowance		(317		)		(327		)
Total deferred tax assets		995				818
Deferred tax liabilities
Property, plant and equipment		(260		)		(255		)
Unremitted income of foreign subsidiaries and joint ventures		(181		)		(184		)
Employee benefit plans		(222		)		(202		)
Lease assets		(120		)		—
Other		(77		)		(30		)
Total deferred tax liabilities		(860		)		(671		)
Net deferred tax assets		$	135			$	147

Our 2019 U.S. carryforward benefits include $207 million of state credit and net operating loss carryforward benefits that begin to expire in 2020. Our foreign carryforward benefits include $157 million of net operating loss carryforwards that begin to expire in 2020. A valuation allowance is recorded to reduce the gross deferred tax assets to an amount we believe is more likely than not to be realized. The valuation allowance is $317 million and decreased in 2019 by a net $10 million. The valuation allowance is primarily attributable to the uncertainty regarding the realization of a portion of the U.S. state and foreign net operating loss and tax credit carryforward benefits.

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Our Consolidated Balance Sheets contain the following tax related items:

		December 31,
In millions		2019				2018
Prepaid expenses and other current assets
Refundable income taxes		$	191			$	117
Other assets
Deferred income tax assets		441				410
Long-term refundable income taxes		23				6
Other accrued expenses
Income tax payable		52				97
Other liabilities
One-time transition tax		293				293
Deferred income tax liabilities		306				263

A reconciliation of unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017 was as follows:

		December 31,
In millions		2019				2018				2017
Balance at beginning of year		$	71			$	41			$	59
Additions to current year tax positions		23				10				11
Additions to prior years' tax positions		5				27				9
Reductions to prior years' tax positions		(11		)		(2		)		(3		)
Reductions for tax positions due to settlements with taxing authorities		(11		)		(5		)		(35		)
Balance at end of year		$	77			$	71			$	41

Included in the December 31, 2019, 2018 and 2017, balances are $69 million, $62 million and $32 million, respectively, related to tax positions that, if released, would favorably impact the effective tax rate in future periods. We have also accrued interest expense related to the unrecognized tax benefits of $5 million, $4 million and $4 million as of December 31, 2019, 2018 and 2017, respectively. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.

Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although we believe that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on our earnings. Conversely, if these issues are resolved favorably in the future, the related provision would be reduced, thus having a positive impact on earnings.

As a result of our global operations, we file income tax returns in various jurisdictions including U.S. federal, state and foreign jurisdictions. We are routinely subject to examination by taxing authorities throughout the world, including Australia, Belgium, Brazil, Canada, China, France, India, Mexico, the U.K. and the U.S. With few exceptions, our U.S. federal, major state and foreign jurisdictions are no longer subject to income tax assessments for years before 2015.

TAX LEGISLATION SUMMARY

The Securities and Exchange Commission (SEC) issued guidance which addressed the uncertainty in the application of GAAP to the Tax Legislation where certain income tax effects could not be finalized at December 31, 2017. This guidance allowed entities to record provisional amounts based on current estimates that were updated on a quarterly basis in 2018. The SEC required final calculations to be completed within the one year measurement period ending December 22, 2018 and reflect any additional guidance issued throughout the year. We made provisional estimates of the effects of the Tax Legislation in three primary areas: (1) our existing deferred tax balances; (2) the one-time transition tax and (3) the withholding tax accrued on those earnings no longer considered permanently reinvested at December 31, 2017. Each of these items is described in more detail below.

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2017 Impact of Tax Legislation

Deferred tax assets and liabilities

We remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future, which was generally 21 percent. The provisional amount related to the remeasurement of our deferred tax balance was an incremental tax expense of $152 million in 2017. See Note 3, "INVESTMENTS IN EQUITY INVESTEES," for the impact to our equity investees.

One-time transition tax

The one-time transition tax was based on our total post-1986 unrepatriated earnings and profits not previously subject to U.S. income tax. The recorded provisional amount for our one-time transition tax was a tax expense of $298 million with a cash impact of $338 million.

Withholding tax

Withholding tax is an additional cost associated with the distribution of earnings from some jurisdictions. As a result of the Tax Legislation, we reconsidered previous assertions regarding earnings that were considered permanently reinvested, which required us to record withholding taxes on earnings likely to be distributed in the foreseeable future. The assertion as to which earnings are permanently reinvested for purposes of calculating withholding tax was provisional as we refined the underlying calculations of the amount of earnings subject to the tax and the rate at which it will be taxed. The recorded provisional amount for the withholding tax resulted in an incremental tax expense of $331 million. See Note 3, "INVESTMENTS IN EQUITY INVESTEES," and Note 18, "NONCONTROLLING INTERESTS," for the impact of withholding taxes to our equity investees and noncontrolling interests.

2018 Adjustments to Tax Legislation

We completed accounting for the tax effects of the enactment of the Tax Legislation as of December 31, 2018 and included $12 million of unfavorable discrete tax items in our 2018 tax provision.

The adjustments for income tax expense (benefit) during the one-year Tax Legislation measurement period for each group and other Tax Legislation adjustments consisted of the following:

		Years Ended December 31,
In millions		2018				2017				Total Impact
One-year measurement adjustments to 2017 estimates
Withholding tax accrued		$	(148	)		$	331			$	183
Deferred tax balances		7				152				159
One-time transition tax		111				298				409
Net impact of measurement period changes		(30		)		781				751
Other 2018 adjustments
Deferred tax charges(1)		35				—				35
Foreign currency adjustment related to Tax Legislation		7				—				7
Net impact of 2018 adjustments		42				—				42
Total Tax Legislation impact		$	12			$	781			$	793

____________________________________________________

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NOTE 6. MARKETABLE SECURITIES

A summary of marketable securities, all of which are classified as current, was as follows:

		December 31,
		2019												2018
In millions		Cost				Gross unrealized gains/(losses) (1)				Estimated fair value				Cost				Gross unrealized gains/(losses) (1)				Estimated fair value
Equity securities
Debt mutual funds		$	180			$	3			$	183			$	103			$	1			$	104
Certificates of deposit		133				—				133				101				—				101
Equity mutual funds		19				4				23				16				—				16
Bank debentures		1				—				1				—				—				—
Debt securities		1				—				1				1				—				1
Total marketable securities		$	334			$	7			$	341			$	221			$	1			$	222

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⁽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 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 2019 or 2018.

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 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.

•

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 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:

		Years ended December 31,
In millions		2019				2018				2017
Proceeds from sales of marketable securities		$	258			$	253			$	145
Proceeds from maturities of marketable securities		131				78				121
Investments in marketable securities - liquidations		$	389			$	331			$	266

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NOTE 7. INVENTORIES

Inventories are stated at the lower of cost or market. Inventories included the following:

		December 31,
In millions		2019				2018
Finished products		$	2,214			$	2,405
Work-in-process and raw materials		1,395				1,487
Inventories at FIFO cost		3,609				3,892
Excess of FIFO over LIFO		(123		)		(133		)
Total inventories		$	3,486			$	3,759

NOTE 8. PROPERTY, PLANT AND EQUIPMENT

Details of our property, plant and equipment balance were as follows:

		December 31,
In millions		2019				2018
Land and buildings		$	2,487			$	2,398
Machinery, equipment and fixtures		5,618				5,391
Construction in process		594				530
Property, plant and equipment, gross		8,699				8,319
Less: Accumulated depreciation		(4,454		)		(4,223		)
Property, plant and equipment, net		$	4,245			$	4,096

NOTE 9. LEASES

Our lease portfolio consists primarily of real estate and equipment leases. Our real estate leases primarily consist of land, office, distribution, warehousing and manufacturing facilities. These leases typically range in term from 2 to 50 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 cost were as follows:

In millions		Year Ended December 31, 2019
Operating lease cost		$	208
Finance lease cost
Amortization of right-of-use asset		18
Interest expense		9
Short-term lease cost		5
Variable lease cost		7
Total lease cost		$	247

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Supplemental balance sheet information related to leases:

In millions		December 31, 2019				Balance Sheet Location
Assets
Operating lease assets		$	496			Other assets
Finance lease assets(1)		90				Property, plant and equipment, net
Total lease assets		$	586
Liabilities
Current
Operating		$	131			Other accrued expenses
Finance		12				Current maturities of long-term debt
Long-term
Operating		370				Other liabilities
Finance		78				Long-term debt
Total lease liabilities		$	591

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⁽¹⁾ Finance lease assets were recorded net of accumulated amortization of $62 million at December 31, 2019.

Supplemental cash flow and other information related to leases:

In millions		Year Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	163
Operating cash flows from finance leases		47
Financing cash flows from finance leases		9
Right-of-use assets obtained in exchange for lease obligations
Operating leases		$	214
Finance leases		5

Additional information related to leases:

		December 31, 2019
Weighted-average remaining lease term (in years)
Operating leases		5.3
Finance leases		12.1
Weighted-average discount rate
Operating leases		3.3	%
Finance leases		4.4	%

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Following is a summary of the future minimum lease payments due to finance and operating leases with terms of more than one year at December 31, 2019, together with the net present value of the minimum payments:

In millions		Finance Leases				Operating Leases
2020		$	15			$	143
2021		11				117
2022		10				90
2023		9				60
2024		7				47
After 2024		65				95
Total minimum lease payments		117				552
Interest		(27		)		(51		)
Present value of net minimum lease payments		$	90			$	501

Following is a summary of the future minimum lease payments due under 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 under capital leases:

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. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018:

In millions		Components				New Power				Distribution				Power Systems				Engine				Segment Total				Unallocated				Total
Balance at December 31, 2017		$	940			$	—			$	79			$	10			$	6			$	1,035			$	47		(2)	$	1,082
Acquisitions		—				49			(1)	—				—				—				49				—				49
Translation and other		(5		)		—				—				—				—				(5		)		—				(5		)
Allocation to segment		—				47			(2)	—				—				—				47				(47		)	(2)	—
Balance at December 31, 2018		935				96				79				10				6				1,126				—				1,126
Acquisitions		—				161			(1)	—				—				—				161				—				161
Translation and other		(1		)		—				—				—				—				(1		)		—				(1		)
Balance at December 31, 2019		$	934			$	257			$	79			$	10			$	6			$	1,286			$	—			$	1,286

____________________________________________________

(1)	See Note 21, "ACQUISITIONS," for additional information on acquisition goodwill.

(2)	Goodwill associated with the Brammo Inc. acquisition was presented as an unallocated item as it had not yet been assigned to a reportable segment at December 31, 2017. Effective January 1, 2018, Brammo Inc. was assigned to our New Power segment. See Note 21, "ACQUISITIONS," for additional information.

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Intangible assets that have finite useful lives are amortized over their estimated useful lives. The following table summarizes our other intangible assets with finite useful lives that are subject to amortization:

		December 31,
In millions		2019				2018
Software		$	708			$	662
Less: Accumulated amortization		(425		)		(372		)
Software, net		283				290
Trademarks, patents, customer relationships and other		956				803
Less: Accumulated amortization		(236		)		(184		)
Trademarks, patents, customer relationships and other, net		720				619
Total other intangible assets, net		$	1,003			$	909

Amortization expense for software and other intangibles totaled $175 million, $153 million and $112 million for the years ended December 31, 2019, 2018 and 2017, respectively. The projected amortization expense of our intangible assets, assuming no further acquisitions or dispositions, is as follows:

In millions		2020				2021				2022				2023				2024
Projected amortization expense		$	136			$	118			$	101			$	84			$	66

NOTE 11. DEBT

Loans Payable and Commercial Paper

Loans payable at December 31, 2019 and 2018 were $100 million and $54 million, respectively, and consisted primarily of notes payable to financial institutions. The weighted-average interest rate for notes payable, bank overdrafts and current maturities of long-term debt at December 31 was as follows:

		2019			2018			2017
Weighted-average interest rate		3.20	%		4.66	%		3.01	%

We can issue up to $3.5 billion of unsecured, short-term promissory notes (commercial paper) pursuant to the Board of Directors (the Board) authorized commercial paper programs. The programs facilitate the private placement of unsecured short-term debt through third-party brokers. We intend to use the net proceeds from the commercial paper borrowings for general corporate purposes. We had $660 million and $780 million in outstanding borrowings under our commercial paper programs at December 31, 2019 and 2018, respectively. The weighted-average interest rate for commercial paper at December 31 was as follows:

		2019			2018			2017
Weighted-average interest rate		1.82	%		2.59	%		1.56	%

Revolving Credit Facilities

On August 22, 2018, we entered into a new 5-year revolving credit agreement with a syndicate of lenders and we amended the agreement on August 21, 2019. The amended credit agreement provides us with a $2 billion senior unsecured revolving credit facility until August 22, 2023. Amounts payable under our revolving credit facility will rank pro rata with all of our unsecured, unsubordinated indebtedness. Advances under the facility bear interest at (i) an alternate base rate or (ii) a rate equal to the adjusted LIBOR plus an applicable margin based on the credit ratings of our outstanding senior unsecured long-term debt. Based on our current long-term debt ratings, the applicable margin on adjusted LIBOR rate loans was 0.75 percent per annum as of December 31, 2019. Advances under the facility may be prepaid without premium or penalty, subject to customary breakage costs.

On August 21, 2019, we entered into an amended and restated 364-day credit agreement that allows us to borrow up to $1.5 billion of unsecured funds at any time through August 18, 2020. This credit agreement amends and restates the prior $1.5 billion 364-day credit facility that matured on August 21, 2019.

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Both credit agreements include various covenants, including, among others, maintaining a net debt to total capital leverage ratio of no more than 0.65 to 1.0. At December 31, 2019, we were in compliance with the covenants. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and for general corporate purposes. There were no outstanding borrowings under these facilities at December 31, 2019. We intend to maintain credit facilities of a similar aggregate amount by renewing or replacing these facilities before expiration.

At December 31, 2019, our $660 million of commercial paper outstanding effectively reduced the $3.5 billion available capacity under our revolving credit facilities to $2.84 billion.

At December 31, 2019, we also had $204 million available for borrowings under our international and other domestic credit facilities.

Long-term Debt

				December 31,
In millions		Interest Rate		2019				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				59				64
Unamortized discount				(50		)		(52		)
Fair value adjustments due to hedge on indebtedness				35				25
Finance leases				90				132
Total long-term debt				1,607				1,642
Less: Current maturities of long-term debt				31				45
Long-term debt				$	1,576			$	1,597

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⁽¹⁾ The effective interest rate on this debt is 7.48%.

Principal payments required on long-term debt during the next five years are as follows:

In millions		2020				2021				2022				2023				2024
Principal payments		$	31			$	46			$	9			$	506			$	5

The $250 million 7.125% debentures and $165 million 5.65% debentures are unsecured and are not subject to any sinking fund requirements. We can redeem these debentures at any time prior to maturity at the greater of par plus accrued interest or an amount designed to ensure that the debenture holders are not penalized by the early redemption.

Our debt agreements contain several restrictive covenants. The most restrictive of these covenants applies to our revolving credit facility which will upon default, among other things, limit our ability to incur additional debt or issue preferred stock, enter into sale-leaseback transactions, sell or create liens on our assets, make investments and merge or consolidate with any other entity. At December 31, 2019, we were in compliance with all of the covenants under our borrowing agreements.

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. Our current shelf is scheduled to expire in February 2022.

Interest Expense

For the years ended December 31, 2019, 2018 and 2017, total interest incurred was $112 million, $116 million and $85 million, respectively, and interest capitalized was $3 million, $2 million and $4 million, respectively.

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Interest Rate Risk

In the second half of 2019, we entered into a series of interest rate lock agreements to reduce the variability of the cash flows of the interest payments on $350 million of fixed rate debt forecast to be issued in 2023 to replace our senior notes at maturity. The terms of the rate locks mirror 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 in "Other comprehensive (loss) income" for the year ended December 31, 2019, was $10 million.

We have a series of interest rate swaps to effectively convert our September 2013, $500 million debt issue, due in 2023, from a fixed rate of 3.65 percent to a floating rate equal to the one-month LIBOR plus a spread. The debt is included in the Consolidated Balance Sheets as "Long-term debt." The terms of the swaps mirror those of the debt, with interest paid semi-annually. The swaps were designated, and will be accounted for, as fair value hedges under GAAP. The gain or loss on these derivative instruments, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current income as “Interest expense.” The net swap settlements that accrue each period are also reported in the Consolidated Financial Statements as "Interest expense." A basis adjustment related to credit risk, excluded from the assessment of effectiveness, is being amortized over the life of the hedge using a straight-line method and is considered de minimis.

The carrying amount of the hedged debt was $500 million. The cumulative amount of the fair value hedging adjustments to hedged liabilities included in the carrying amount of the hedged liabilities recognized on the balance sheets was a $4 million net loss.

The following table summarizes the gains and losses:

		Years ended December 31,
In millions		2019								2018								2017
Type of Swap		Gain (Loss) on Swaps				Gain (Loss) on Borrowings				Gain (Loss) on Swaps				Gain (Loss) on Borrowings				Gain (Loss) on Swaps				Gain (Loss) on Borrowings
Interest rate swaps(1)		$	16			$	(14	)		$	(8	)		$	7			$	(7	)		$	8

___________________________________________________________

⁽¹⁾ The difference between the gain/(loss) on swaps and borrowings represents hedge ineffectiveness.

The following table summarizes the interest rate lock activity in AOCL for 2019:

		Year ended December 31,
In millions		2019
Type of Swap		Gain (Loss)  Recognized in AOCL				Gain (Loss) Reclassified from AOCL into Interest Expense
Interest rate locks		$	(10	)		$	—

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:

 

		December 31,
In millions		2019				2018
Fair values of total debt (1)		$	2,706			$	2,679
Carrying values of total debt		2,367				2,476

___________________________________________

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NOTE 12. 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:

		December 31,
In millions		2019				2018				2017
Balance, beginning of year		$	2,208			$	1,687			$	1,414
Provision for base warranties issued		458				437				376
Deferred revenue on extended warranty contracts sold		356				293				240
Provision for product campaigns issued		210				481				181
Payments made during period		(590		)		(443		)		(398		)
Amortization of deferred revenue on extended warranty contracts		(230		)		(244		)		(219		)
Changes in estimates for pre-existing product warranties		(24		)		3				85
Foreign currency translation and other		1				(6		)		8
Balance, end of year		$	2,389			$	2,208			$	1,687

We recognized supplier recoveries of $67 million, $26 million and $16 million for the for the years ended December 31, 2019, 2018 and 2017, respectively.

Warranty related deferred revenues and warranty liabilities on our Consolidated Balance Sheets were as follows:

		December 31,
In millions		2019				2018				Balance Sheet Location
Deferred revenue related to extended coverage programs
Current portion		$	227			$	227			Current portion of deferred revenue
Long-term portion		714				587				Deferred revenue
Total		$	941			$	814
Product warranty
Current portion		$	803			$	654			Current portion of accrued product warranty
Long-term portion		645				740				Accrued product warranty
Total		$	1,448			$	1,394
Total warranty accrual		$	2,389			$	2,208

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. We recorded charges of $36 million to "Cost of sales" in our Consolidated Statements of Net Income during 2017 for the then expected cost of field campaigns to repair some of these engine systems.

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 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, we increased the number of systems 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 Consolidated Statements of Net Income ($91 million recorded in the Engine segment and $90 million in the Components segment).

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NOTE 13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS

Pension Plans

We sponsor several pension plans covering substantially all employees. Generally, pension benefits for salaried employees are determined as a function of employee’s compensation. Pension benefits for most hourly employees are determined similarly and as a function of employee’s compensation, with the exception of a small group of hourly employees whose pension benefits were grandfathered in accordance with agreements with their union representation and are based on their years of service and compensation during active employment. The level of benefits and terms of vesting may vary among plans and are offered in accordance with applicable laws. Pension plans assets are administered by trustees and are principally invested in fixed income securities and equity securities. It is our policy to make contributions to our various qualified plans in accordance with statutory and contractual funding requirements, and any additional contributions we determine are appropriate.

Obligations, Assets and Funded Status

Benefit obligation balances presented below reflect the projected benefit obligation (PBO) for our pension plans. The changes in the benefit obligations, the various plan assets, the funded status of the plans and the amounts recognized in our Consolidated Balance Sheets for our significant pension plans at December 31 were as follows:

		Qualified and Non-Qualified Pension Plans
		U.S. Plans								U.K. Plans
In millions		2019				2018				2019				2018
Change in benefit obligation
Benefit obligation at the beginning of the year		$	2,562			$	2,765			$	1,550			$	1,662
Service cost		116				120				26				29
Interest cost		108				98				43				41
Actuarial loss (gain)		296				(212		)		232				(46		)
Benefits paid from fund		(150		)		(193		)		(62		)		(62		)
Benefits paid directly by employer		(16		)		(16		)		—				—
Plan amendment		—				—				—				15			(1)
Exchange rate changes		—				—				62				(89		)
Benefit obligation at end of year		$	2,916			$	2,562			$	1,851			$	1,550
Change in plan assets
Fair value of plan assets at beginning of year		$	2,937			$	3,166			$	1,782			$	1,960
Actual return on plan assets		493				(36		)		193				(33		)
Employer contributions		77				—				28				21
Benefits paid from fund		(150		)		(193		)		(62		)		(62		)
Exchange rate changes		—				—				69				(104		)
Fair value of plan assets at end of year		$	3,357			$	2,937			$	2,010			$	1,782
Funded status (including unfunded plans) at end of year		$	441			$	375			$	159			$	232
Amounts recognized in consolidated balance sheets
Pension assets		$	842			$	697			$	159			$	232
Accrued compensation, benefits and retirement costs		(16		)		(14		)		—				—
Pension and other postretirement benefits		(385		)		(308		)		—				—
Net amount recognized		$	441			$	375			$	159			$	232
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss		$	611			$	635			$	323			$	230
Prior service cost		7				8				22				16
Net amount recognized		$	618			$	643			$	345			$	246

___________________________________________________________

⁽¹⁾ Guaranteed minimum pension benefits to equalize certain pension benefits between men and women per the U.K. court decision.

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In addition to the pension plans in the above table, we also maintain less significant defined benefit pension plans in 14 other countries outside of the U.S. and the U.K. that comprise approximately 3 percent and 5 percent of our pension plan assets and obligations, respectively, at December 31, 2019. These plans are reflected in "Other liabilities" on our Consolidated Balance Sheets. In 2019 and 2018, we made $15 million and $11 million of contributions to these plans, respectively.

The following table presents information regarding the total accumulated benefit obligation (ABO), the ABO and fair value of plan assets for defined benefit pension plans with ABO in excess of plan assets and the PBO and fair value of plan assets for defined benefit pension plans with PBO in excess of plan assets:

		Qualified and Non-Qualified Pension Plans
		U.S. Plans								U.K. Plans
In millions		2019				2018				2019				2018
Total ABO		$	2,894			$	2,544			$	1,756			$	1,473
Plans with ABO in excess of plan assets
ABO		379				304				—				—
Plans with PBO in excess of plan assets
PBO		401				322				—				—

Components of Net Periodic Pension Cost

The following table presents the net periodic pension cost under our plans for the years ended December 31:

		Qualified and Non-Qualified Pension Plans
		U.S. Plans												U.K. Plans
In millions		2019				2018				2017				2019				2018				2017
Service cost		$	116			$	120			$	107			$	26			$	29			$	26
Interest cost		108				98				106				43				41				40
Expected return on plan assets		(189		)		(196		)		(204		)		(70		)		(69		)		(70		)
Amortization of prior service cost		1				1				—				2				—				—
Recognized net actuarial loss		17				33				37				11				29				40
Net periodic pension cost		$	53			$	56			$	46			$	12			$	30			$	36

Other changes in benefit obligations and plan assets recognized in other comprehensive loss (income) for the years ended December 31 were as follows:

In millions		2019				2018				2017
Amortization of prior service cost		$	(3	)		$	—			$	—
Recognized net actuarial loss		(28		)		(62		)		(77		)
Incurred actuarial loss (gain)		101				91				(40		)
Foreign exchange translation adjustments		4				(5		)		30
Total recognized in other comprehensive loss (income)		$	74			$	24			$	(87	)
Total recognized in net periodic pension cost and other comprehensive loss (income)		$	139			$	110			$	(5	)

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Assumptions

The table below presents various assumptions used in determining the PBO for each year and reflects weighted-average percentages for the various plans as follows:

		Qualified and Non-Qualified Pension Plans
		U.S. Plans						U.K. Plans
		2019			2018			2019			2018
Discount rate		3.36	%		4.36	%		2.00	%		2.80	%
Cash balance crediting rate		4.11	%		4.03	%		—			—
Compensation increase rate		2.73	%		3.00	%		3.75	%		3.75	%

The table below presents various assumptions used in determining the net periodic pension cost and reflects weighted-average percentages for the various plans as follows:

		Qualified and Non-Qualified Pension Plans
		U.S. Plans									U.K. Plans
		2019			2018			2017			2019			2018			2017
Discount rate		4.36	%		3.66	%		4.12	%		2.80	%		2.55	%		2.70	%
Expected return on plan assets		6.25	%		6.50	%		7.25	%		4.00	%		4.00	%		4.50	%
Compensation increase rate		2.73	%		3.00	%		4.87	%		3.75	%		3.75	%		3.75	%

Plan Assets

Our investment policies in the U.S. and U.K. provide for the rebalancing of assets to maintain our long-term strategic asset allocation. We are committed to this long-term strategy and do not attempt to time the market given empirical evidence that asset allocation is more critical than individual asset or investment manager selection. Rebalancing of the assets has and continues to occur. The rebalancing is critical to having the proper weighting of assets to achieve the expected total portfolio returns. We believe that our portfolio is highly diversified and does not have any significant exposure to concentration risk. The plan assets for our defined benefit pension plans do not include any of our common stock.

U.S. Plan Assets

For the U.S. qualified pension plans, our assumption for the expected return on assets was 6.25 percent in 2019. Projected returns are based primarily on broad, publicly traded equity and fixed income indices and forward-looking estimates of active portfolio and investment management. We expect additional positive returns from this active investment management. Based on the historical returns and forward-looking return expectations, we have elected to maintain our assumption of 6.25 percent in 2020.

The primary investment objective is to exceed, on a net-of-fee basis, the rate of return of a policy portfolio comprised of the following:

Asset Class		Target			Range
U.S. equities		5.0	%		+5.0/ -5.0%
Non-U.S. equities		1.0	%		+3.0/ -1.0%
Global equities		6.0	%		+3.0/ -3.0%
Total equities		12.0	%
Real assets		6.0	%		+4.0/ -6.0%
Private equity/venture capital		6.0	%		+4.0/ -6.0%
Opportunistic credit		4.0	%		+6.0/ -4.0%
Fixed income		72.0	%		+5.0/ -5.0%
Total		100.0	%

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The fixed income component is structured to represent a custom bond benchmark that will closely hedge the change in the value of our liabilities. This component is structured in such a way that its benchmark covers approximately 100 percent of the plan's exposure to changes in its discount rate (AA corporate bond yields). In order to achieve a hedge on more than the targeted 72 percent of plan assets invested in fixed income securities, our Benefits Policy Committee (BPC) permits the fixed income managers, other managers or the custodian/trustee to utilize derivative securities, as part of a liability driven investment strategy to further reduce the plan's risk of declining interest rates. However, all managers hired to manage assets for the trust are prohibited from using leverage unless approved by the BPC.

U.K. Plan Assets

For the U.K. qualified pension plans, our assumption for the expected return on assets was 4.0 percent in 2019. The methodology used to determine the rate of return on pension plan assets in the U.K. was based on establishing an equity-risk premium over current long-term bond yields adjusted based on target asset allocations. Our strategy with respect to our investments in these assets is to be invested in a suitable mixture of return-seeking assets such as equities, real estate and liability matching assets such as group annuity insurance contracts and duration matched bonds. Therefore, the risk and return balance of our U.K. asset portfolio should reflect a long-term horizon. To achieve these objectives we have established the following targets:

Asset Class		Target
Equities		10.0	%
Private markets/secure income assets		18.0	%
Credit		7.5	%
Diversifying strategies		8.0	%
Fixed income/insurance annuity		55.5	%
Cash		1.0	%
Total		100.0	%

As part of our strategy in the U.K. we have not prohibited the use of any financial instrument, including derivatives. As in the U.S. plan, derivatives may be used to better match liability duration and are not used in a speculative way. The 55.5 percent fixed income component is structured in a way that covers approximately 80 percent of the plan's exposure to changes in its discount rate. Based on the above discussion, we have elected an assumption of 4.0 percent in 2020.

Fair Value of U.S. Plan Assets

The fair values of U.S. pension plan assets by asset category were as follows:

		Fair Value Measurements at December 31, 2019
In millions		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
Equities
U.S.		$	96			$	—			$	—			$	96
Non-U.S.		47				—				—				47
Fixed income
Government debt		—				72				—				72
Corporate debt
U.S.		—				357				—				357
Non-U.S.		—				11				—				11
Asset/mortgaged backed securities		—				1				—				1
Net cash equivalents(1)		338				33				—				371
Private markets and real assets(2)		—				—				371				371
Net plan assets subject to leveling		$	481			$	474			$	371			$	1,326
Accruals(3)														5
Investments measured at net asset value														2,026
Net plan assets														$	3,357

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		Fair Value Measurements at December 31, 2018
In millions		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
Equities
U.S.		$	77			$	—			$	—			$	77
Non-U.S.		42				—				—				42
Fixed income
Government debt		—				38				—				38
Corporate debt
U.S.		—				323				—				323
Non-U.S.		—				15				—				15
Asset/mortgaged backed securities		—				5				—				5
Net cash equivalents (1)		175				17				—				192
Private markets and real assets (2)		—				—				316				316
Net plan assets subject to leveling		$	294			$	398			$	316			$	1,008
Pending trade/purchases/sales														9
Accruals (3)														5
Investments measured at net asset value														1,915
Net plan assets														$	2,937

____________________________________________________

(1)	Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments.

(2)	The instruments in private markets and real assets, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by audited financial statements of the funds. Private markets include equity, venture capital and private credit instruments and funds. Real assets include real estate and infrastructure.

(3)	Accruals include interest or dividends that were not settled at December 31.

Certain of our assets are valued based on their respective net asset value (NAV) (or its equivalent), as an alternative to estimated fair value due to the absence of readily available market prices. The fair value of each such investment category was as follows:

•	U.S. and Non-U.S. Corporate Debt ($939 million and $821 million at December 31, 2019 and 2018, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	Government Debt ($503 million and $602 million at December 31, 2019 and 2018, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	U.S. and Non-U.S. Equities ($367 million and $343 million at December 31, 2019 and 2018, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	Real Estate ($140 million and $147 million at December 31, 2019 and 2018, respectively) - This asset type represents different types of real estate including development property, industrial property, individual mortgages, office property, property investment companies and retail property. These funds are valued using NAVs and allow quarterly or more frequent redemptions.

•	Asset/Mortgage Backed Securities ($77 million and $2 million at December 31, 2019 and 2018, respectively) - This asset type represents investments in fixed- and floating-rate loans. These funds are valued using NAVs and allow quarterly or more frequent redemptions.

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The reconciliation of Level 3 assets was as follows:

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
In millions		Private Markets				Real Assets				Total
Balance at December 31, 2017		$	180			$	66			$	246
Actual return on plan assets
Unrealized gains on assets still held at the reporting date		33				6				39
Purchases, sales and settlements, net		34				(3		)		31
Balance at December 31, 2018		247				69				316
Actual return on plan assets
Unrealized gains on assets still held at the reporting date		24				5				29
Purchases, sales and settlements, net		28				(2		)		26
Balance at December 31, 2019		$	299			$	72			$	371

Fair Value of U.K. Plan Assets

The fair values of U.K. pension plan assets by asset category were as follows:

		Fair Value Measurements at December 31, 2019
In millions		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
Equities
U.S.		$	—			$	45			$	—			$	45
Non-U.S.		—				58				—				58
Fixed income
Net cash equivalents (1)		35				—				—				35
Insurance annuity (2)		—				—				476				476
Private markets and real assets (3)		—				—				259				259
Net plan assets subject to leveling		$	35			$	103			$	735			$	873
Investments measured at net asset value														1,137
Net plan assets														$	2,010

		Fair Value Measurements at December 31, 2018
In millions		Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)				Total
Equities
U.S.		$	—			$	47			$	—			$	47
Non-U.S.		—				61				—				61
Fixed income
Net cash equivalents (1)		12				—				—				12
Insurance annuity (2)		—				—				442				442
Private markets and real assets (3)		—				—				244				244
Net plan assets subject to leveling		$	12			$	108			$	686			$	806
Investments measured at net asset value														976
Net plan assets														$	1,782

_____________________________________________________

(1)	Cash equivalents include commercial paper, short-term government/agency, mortgage and credit instruments.

(2)	In July 2012, the U.K. pension plan purchased an insurance contract that will guarantee payment of specified pension liabilities. The contract defers payment for 10 years.

(3)	The instruments in private markets and real assets, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by audited financial statements of the funds. Private markets include equity, venture capital and private credit instruments and funds. Real assets include real estate and infrastructure.

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Certain of our assets are valued based on their respective NAV (or its equivalent), as an alternative to estimated fair value due to the absence of readily available market prices. The fair value of each such investment category was as follows:

•	U.S. and Non-U.S. Corporate Debt ($791 million and $753 million at December 31, 2019 and 2018, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	U.S. and Non-U.S. Equities ($160 million and $100 million at December 31, 2019 and 2018, respectively) - These commingled funds have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	Asset/Mortgage Backed Securities ($96 million and $0 million at December 31, 2019 and 2018, respectively) - This asset type represents investments in fixed- and floating-rate loans. These funds are valued using NAVs and allow quarterly or more frequent redemptions.

•	Diversified Strategies ($60 million and $46 million at December 31, 2019 and 2018, respectively) - These commingled funds invest in commodities, fixed income and equity securities. They have observable NAVs provided to investors and provide for liquidity either immediately or within a couple of days.

•	Re-insurance ($30 million and $77 million at December 31, 2019 and 2018, respectively) - This commingled fund has a NAV that is determined on a monthly basis and the investment may be sold at that value.

The reconciliation of Level 3 assets was as follows:

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
In millions		Insurance Annuity				Real Assets				Private Markets				Total
Balance at December 31, 2017		$	477			$	59			$	135			$	671
Actual return on plan assets
Unrealized (losses) gains on assets still held at the reporting date		(35		)		(2		)		21				(16		)
Purchases, sales and settlements, net		—				—				31				31
Balance at December 31, 2018		442				57				187				686
Actual return on plan assets
Unrealized gains on assets still held at the reporting date		34				5				14				53
Purchases, sales and settlements, net		—				(27		)		23				(4		)
Balance at December 31, 2019		$	476			$	35			$	224			$	735

Level 3 Assets

The investments in an insurance annuity contract, venture capital, private equity and real estate, for which quoted market prices are not available, are valued at their estimated fair value as determined by applicable investment managers or by quarterly financial statements of the funds. These financial statements are audited at least annually. In conjunction with our investment consultant, we monitor the fair value of the insurance contract as periodically reported by our insurer and their counterparty risk. The fair value of all real estate properties, held in the partnerships, are valued at least once per year by an independent professional real estate valuation firm. Fair value generally represents the fund's proportionate share of the net assets of the investment partnerships as reported by the general partners of the underlying partnerships. Some securities with no readily available market are initially valued at cost, utilizing independent professional valuation firms as well as market comparisons with subsequent adjustments to values which reflect either the basis of meaningful third-party transactions in the private market or the fair value deemed appropriate by the general partners of the underlying investment partnerships. In such instances, consideration is also given to the financial condition and operating results of the issuer, the amount that the investment partnerships can reasonably expect to realize upon the sale of the securities and any other factors deemed relevant. The estimated fair values are subject to uncertainty and therefore may differ from the values that would have been used had a ready market for such investments existed and such differences could be material.

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Estimated Future Contributions and Benefit Payments

We plan to contribute approximately $100 million to our defined benefit pension plans in 2020. The table below presents expected future benefit payments under our pension plans:

		Qualified and Non-Qualified Pension Plans
In millions		2020				2021				2022				2023				2024				2025 - 2029
Expected benefit payments		$	258			$	256			$	263			$	265			$	271			$	1,388

Other Pension Plans

We also sponsor defined contribution plans for certain hourly and salaried employees. Our contributions to these plans were $102 million, $104 million and $84 million for the years ended December 31, 2019, 2018 and 2017.

Other Postretirement Benefits

Our other postretirement benefit (OPEB) plans provide various health care and life insurance benefits to eligible employees, who retire and satisfy certain age and service requirements, and their dependents. The plans are contributory and contain cost-sharing features such as caps, deductibles, coinsurance and spousal contributions. Employer contributions are limited by formulas in each plan. Retiree contributions for health care benefits are adjusted annually, and we reserve the right to change benefits covered under these plans. There were no plan assets for OPEB plans as our policy is to fund benefits and expenses for these plans as claims and premiums are incurred.

Obligations and Funded Status

Benefit obligation balances presented below reflect the accumulated postretirement benefit obligations (APBO) for our OPEB plans. The changes in the benefit obligations, the funded status of the plans and the amounts recognized in our Consolidated Balance Sheets for our significant OPEB plans were as follows:

		December 31,
In millions		2019				2018
Change in benefit obligation
Benefit obligation at the beginning of the year		$	246			$	318
Interest cost		10				11
Plan participants' contributions		14				21
Actuarial gain		—				(51		)
Benefits paid directly by employer		(43		)		(53		)
Benefit obligation at end of year		$	227			$	246
Funded status at end of year		$	(227	)		$	(246	)
Amounts recognized in consolidated balance sheets
Accrued compensation, benefits and retirement costs		$	(21	)		$	(22	)
Pension and other postretirement benefits		(206		)		(224		)
Net amount recognized		$	(227	)		$	(246	)
Amounts recognized in accumulated other comprehensive loss:
Net actuarial gain		$	(25	)		$	(24	)
Prior service credit		(4		)		(4		)
Net amount recognized		$	(29	)		$	(28	)

In addition to the OPEB plans in the above table, we also maintain less significant OPEB plans in four other countries outside the U.S. that comprise approximately 11 percent and 9 percent of our OPEB obligations at December 31, 2019 and 2018, respectively. These plans are reflected in "Other liabilities" in our Consolidated Balance Sheets.

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Components of Net Periodic OPEB Cost

The following table presents the net periodic OPEB cost under our plans:

		Years ended December 31,
In millions		2019				2018				2017
Interest cost		$	10			$	11			$	14
Recognized net actuarial loss		—				—				6
Net periodic OPEB cost		$	10			$	11			$	20

Other changes in benefit obligations recognized in other comprehensive (income) loss for the years ended December 31 were as follows:

		Years ended December 31,
In millions		2019				2018				2017
Recognized net actuarial loss		$	—			$	—			$	(6	)
Incurred actuarial gain		(1		)		(51		)		(35		)
Total recognized in other comprehensive (income) loss		$	(1	)		$	(51	)		$	(41	)
Total recognized in net periodic OPEB cost and other comprehensive loss (income)		$	9			$	(40	)		$	(21	)

Assumptions

The table below presents assumptions used in determining the OPEB obligation for each year and reflects weighted-average percentages for our other OPEB plans as follows:

		2019			2018
Discount rate		3.15	%		4.25	%

The table below presents assumptions used in determining the net periodic OPEB cost and reflects weighted-average percentages for the various plans as follows:

		2019			2018			2017
Discount rate		4.25	%		3.55	%		4.00	%

Our consolidated OPEB obligation is determined by application of the terms of health care and life insurance plans, together with relevant actuarial assumptions and health care cost trend rates. For measurement purposes, a 7.25 percent annual rate of increase in the per capita cost of covered health care benefits was assumed in 2019. The rate is assumed to decrease on a linear basis to 5.0 percent through 2026 and remain at that level thereafter.

Estimated Benefit Payments

The table below presents expected benefit payments under our OPEB plans:

In millions		2020				2021				2022				2023				2024				2025 - 2029
Expected benefit payments		$	22			$	21			$	21			$	19			$	19			$	77

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NOTE 14. SUPPLEMENTAL BALANCE SHEET DATA

Other accrued expenses included the following:

		December 31,
In millions		2019				2018
Other taxes payable		$	228			$	196
Marketing accruals		176				199
Current portion of operating lease liabilities		131				—
Income taxes payable		52				97
Other		452				360
Other accrued expenses		$	1,039			$	852

Other liabilities included the following:

		December 31,
In millions		2019				2018
Operating lease liabilities		$	370			$	—
Deferred income taxes		306				263
One-time transition tax		293				293
Accrued compensation		206				173
Other long-term liabilities		204				163
Other liabilities		$	1,379			$	892

NOTE 15. 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.

On April 29, 2019, we announced that we were conducting a formal internal review of our emissions certification process and compliance with emission 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 our 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 emissions systems to improve the effectiveness of all of our pick-up truck applications and to fully address the regulators’

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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 December 31, 2019, the maximum potential loss related to these guarantees was $53 million.

We have arrangements with certain suppliers that require us to purchase minimum volumes or be subject to monetary penalties. At December 31, 2019, if we were to stop purchasing from each of these suppliers, the aggregate amount of the penalty would be approximately $48 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 December 31, 2019, the total commitments under these contracts were $58 million. These arrangements enable us to fix 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 $96 million at December 31, 2019.

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

•	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.

NOTE 16. CUMMINS INC. SHAREHOLDERS' EQUITY

Preferred and Preference Stock

We are authorized to issue one million shares of zero par value preferred and one million shares of preference stock with preferred shares being senior to preference shares. We can determine the number of shares of each series, and the rights, preferences and limitations of each series. At December 31, 2019, there was no preferred or preference stock outstanding.

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Common Stock

Changes in shares of common stock, treasury stock and common stock held in trust for employee benefit plans were as follows:

In millions		Common Stock			Treasury Stock			Common Stock Held in Trust
Balance at December 31, 2016		222.4			54.2			0.7
Shares acquired		—			2.9			—
Shares issued		—			(0.4	)		(0.2	)
Balance at December 31, 2017		222.4			56.7			0.5
Shares acquired		—			7.9			—
Shares issued		—			(0.2	)		(0.1	)
Balance at December 31, 2018		222.4			64.4			0.4
Shares acquired		—			8.1			—
Shares issued		—			(0.8	)		(0.2	)
Balance at December 31, 2019		222.4			71.7			0.2

Treasury Stock

Shares of common stock repurchased by us are recorded at cost as treasury stock and result in a reduction of shareholders' equity in our Consolidated Balance Sheets. Treasury shares may be reissued as part of our stock-based compensation programs. When shares are reissued, we use the weighted-average cost method for determining cost. The gains between the cost of the shares and the issuance price are added to additional paid-in-capital. The losses are deducted from additional paid-in capital to the extent of the gains. Thereafter, the losses are deducted from retained earnings. Treasury stock activity for the three-year period ended December 31, 2019, consisting of shares issued and repurchased is presented in our Consolidated Statements of Changes in Equity.

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 upon completion of the 2016 repurchase plan. For the year ended December 31, 2019, we made the following purchases under the 2018 stock repurchase program:

In millions (except per share amounts) For each quarter ended		2019 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
December 31		2.8			167.82				465				635
Total		8.1			156.46				$	1,271

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⁽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 2018, we entered into an accelerated share repurchase agreement with Goldman, Sachs & Co. LLC to repurchase $500 million of our common stock under our previously announced share repurchase plans and received 3.5 million shares at an average price of $144.02 per share.

We repurchased $1,271 million, $1,140 million and $451 million of our common stock in the years ended December 31, 2019, 2018 and 2017, respectively.

Dividends

Total dividends paid to common shareholders in 2019, 2018 and 2017 were $761 million, $718 million and $701 million, respectively. Declaration and payment of dividends in the future depends upon our income and liquidity position, among other factors, and is subject to declaration by the Board, who meet quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations.

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In July 2019, the Board authorized an increase to our quarterly dividend of 15.0 percent from $1.14 per share to $1.311 per share. In July 2018, the Board authorized a 5.6 percent increase to our quarterly cash dividend on our common stock from $1.08 per share to $1.14 per share. In July 2017, the Board approved a 5.4 percent increase to our quarterly dividend on our common stock from $1.025 per share to $1.08 per share. Cash dividends per share paid to common shareholders for the last three years were as follows:

		Quarterly Dividends
		2019				2018				2017
First quarter		$	1.14			$	1.08			$	1.025
Second quarter		1.14				1.08				1.025
Third quarter		1.311				1.14				1.08
Fourth quarter		1.311				1.14				1.08
Total		$	4.90			$	4.44			$	4.21

Employee Benefits Trust

In 1997, we established the Employee Benefits Trust (EBT) funded with common stock for use in meeting our future obligations under employee benefit and compensation plans. The primary sources of cash for the EBT are dividends received on unallocated shares of our common stock held by the EBT. Shares of Cummins stock and cash in the EBT may be used to fund the accounts of participants in the Cummins Retirement and Savings Plan who have elected to receive company matching funds in Cummins stock. In addition, we may direct the trustee to sell shares in the EBT on the open market and sweep cash from the EBT to fund other employee benefit plans. Matching contributions charged to income for the years ended December 31, 2019, 2018 and 2017 were $10 million, $12 million and $17 million, respectively.

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NOTE 17. ACCUMULATED OTHER COMPREHENSIVE LOSS

Following are the changes in accumulated other comprehensive income (loss) by component:

In millions		Change in pensions and other postretirement defined benefit plans				Foreign currency translation adjustment				Unrealized gain (loss) on debt securities (1)				Unrealized gain (loss) on derivatives				Total attributable to Cummins Inc.				Noncontrolling interests				Total
Balance at December 31, 2016		$	(685	)		$	(1,127	)		$	(1	)		$	(8	)		$	(1,821	)
Other comprehensive income before reclassifications
Before-tax amount		73				335				2				(12		)		398				$	20			$	418
Tax benefit (expense)		(36		)		(20		)		—				5				(51		)		—				(51		)
After-tax amount		37				315				2				(7		)		347				20				367
Amounts reclassified from accumulated other comprehensive income(2)		62				—				—				12				74				—				74
Impact of tax legislation (Note 5)		(103		)	(3)	—				—				—				(103		)		$	—			$	(103	)
Net current period other comprehensive income (loss)		(4		)		315				2				5				318				$	20			$	338
Balance at December 31, 2017		$	(689	)		$	(812	)		$	1			$	(3	)		$	(1,503	)
Other comprehensive income before reclassifications
Before-tax amount		(42		)		(333		)		2				21				(352		)		$	(30	)		$	(382	)
Tax benefit (expense)		7				7				—				(7		)		7				—				7
After-tax amount		(35		)		(326		)		2				14				(345		)		(30		)		(375		)
Amounts reclassified from accumulated other comprehensive income(2)		53				—				(3		)		(9		)		41				1				42
Net current period other comprehensive income (loss)		18				(326		)		(1		)		5				(304		)		$	(29	)		$	(333	)
Balance at December 31, 2018		$	(671	)		$	(1,138	)		$	—			$	2			$	(1,807	)
Other comprehensive income before reclassifications
Before-tax amount		(106		)		(153		)		—				(12		)		(271		)		$	(5	)		$	(276	)
Tax benefit (expense)		16				6				—				5				27				—				27
After-tax amount		(90		)		(147		)		—				(7		)		(244		)		(5		)		(249		)
Amounts reclassified from accumulated other comprehensive income(2)		27				—				—				(4		)		23				—				23
Net current period other comprehensive income (loss)		(63		)		(147		)		—				(11		)		(221		)		$	(5	)		$	(226	)
Balance at December 31, 2019		$	(734	)		$	(1,285	)		$	—			$	(9	)		$	(2,028	)

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⁽¹⁾ Effective January 1, 2018 and forward, unrealized gains and losses, net of tax for equity securities are reported in "Other income, net" on the Consolidated Statements of Net Income instead of comprehensive income.

⁽²⁾ Amounts are net of tax. Reclassifications out of accumulated other comprehensive income (loss) and the related tax effects are immaterial for separate disclosure.

⁽³⁾ Impact of tax legislation includes a $126 million loss related to Tax Legislation offset by a $23 million favorable impact related to 2017 activity. See Note 5, "INCOME TAXES," to our Consolidated Financial Statements for additional information.

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NOTE 18. NONCONTROLLING INTERESTS

Noncontrolling interests in the equity of consolidated subsidiaries were as follows:

		December 31,
In millions		2019				2018
Eaton Cummins Automated Transmission Technologies		$	581			$	602
Cummins India Ltd.		302				293
Hydrogenics Corporation (1)		58				—
Other		17				16
Total		$	958			$	911

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⁽¹⁾ See Note 21, "ACQUISITIONS," for additional information.

NOTE 19. STOCK INCENTIVE AND STOCK OPTION PLANS

Our stock incentive plan (the Plan) allows for granting of up to 8.5 million total shares of equity awards to executives, employees and non-employee directors. Awards available for grant under the Plan include, but are not limited to, stock options, stock appreciation rights, performance shares and other stock awards. Shares issued under the Plan may be newly issued shares or reissued treasury shares.

Stock options are generally granted with a strike price equal to the fair market value of the stock on the date of grant and a life of 10 years. Stock options granted have a three-year vesting period. The strike price may be higher than the fair value of the stock on the date of the grant, but cannot be lower. Compensation expense is recorded on a straight-line basis over the vesting period beginning on the grant date. The compensation expense is based on the fair value of each option grant using the Black-Scholes option pricing model. Options granted to employees eligible for retirement under our retirement plan are fully expensed at the grant date.

Stock options are also awarded through the Key Employee Stock Investment Plan (KESIP) which allows certain employees, other than officers, to purchase shares of common stock on an installment basis up to an established credit limit. For every block of 100 KESIP shares purchased by the employee 50 stock options are granted. The options granted through the KESIP program are considered awards under the Plan and are vested immediately. Compensation expense for stock options granted through the KESIP program is recorded based on the fair value of each option grant using the Black-Scholes option pricing model.

Performance shares are granted as target awards and are earned based on certain measures of our operating performance. A payout factor has been established ranging from 0 to 200 percent of the target award based on our actual performance during the three-year performance period. The fair value of the award is equal to the average market price, adjusted for the present value of dividends over the vesting period, of our stock on the grant date. Compensation expense is recorded ratably over the period beginning on the grant date until the shares become unrestricted and is based on the amount of the award that is expected to be earned under the plan formula, adjusted each reporting period based on current information.

Restricted common stock is awarded from time to time at no cost to certain employees. Participants are entitled to cash dividends and voting rights. Restrictions limit the sale or transfer of the shares during a defined period. Generally, one-third of the shares become vested and free from restrictions after two years and one-third of the shares issued become vested and free from restrictions each year thereafter on the anniversary of the grant date, provided the participant remains an employee. The fair value of the award is equal to the average market price of our stock on the grant date. Compensation expense is determined at the grant date and is recognized over the restriction period on a straight-line basis.

Employee compensation expense (net of estimated forfeitures) related to our share-based plans for the years ended December 31, 2019, 2018 and 2017, was approximately $48 million, $52 million and $39 million, respectively. In addition, non-employee director share-based compensation expense for the years ended December 31, 2019, 2018 and 2017, was approximately $1 million, $1 million and $2 million, respectively. Shares granted to non-employee directors vest immediately and have no restrictions or performance conditions. The excess tax benefit associated with our employee share-based plans for the years ended December 31, 2019, 2018 and 2017, was $4 million, $2 million and $2 million, respectively. The total unrecognized compensation expense (net of estimated forfeitures) related to nonvested awards for our employee share-based plans was approximately $40 million at December 31, 2019 and is expected to be recognized over a weighted-average period of less than two years.

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The tables below summarize the employee share-based activity in the Plan:

		Options			Weighted-average Exercise Price				Weighted-average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in millions)
Balance at December 31, 2016		2,734,764			$	115.02
Granted		648,900			149.98
Exercised		(355,479	)		105.91
Forfeited		(126,816	)		125.65
Balance at December 31, 2017		2,901,369			123.49
Granted		515,320			159.06
Exercised		(140,133	)		88.74
Forfeited		(32,894	)		133.00
Balance at December 31, 2018		3,243,662			130.55
Granted		710,120			163.42
Exercised		(652,980	)		116.76
Forfeited		(63,232	)		139.86
Balance at December 31, 2019		3,237,570			$	140.36			6.6		$	125
Exercisable, December 31, 2017		1,063,889			$	115.26			4.7		$	66
Exercisable, December 31, 2018		1,366,722			$	124.97			4.7		$	18
Exercisable, December 31, 2019		1,665,710			$	123.55			4.8		$	92

The weighted-average grant date fair value of options granted during the years ended December 31, 2019, 2018 and 2017, was $31.04, $34.21 and $36.86, respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017, was approximately $35 million, $9 million and $19 million, respectively.

The weighted-average grant date fair value of performance and restricted shares was as follows:

		Performance Shares							Restricted Shares
Nonvested		Shares			Weighted-average Fair Value				Shares			Weighted-average Fair Value
Balance at December 31, 2016		404,494			$	120.41			9,841			$	115.76
Granted		150,225			138.23				—			—
Vested		(85,020	)		141.50				(1,752	)		106.89
Forfeited		(58,460	)		132.52				—			—
Balance at December 31, 2017		411,239			120.84				8,089			117.68
Granted		124,700			146.50				—			—
Vested		(80,996	)		128.47				(2,696	)		117.68
Forfeited		(44,593	)		127.90				—			—
Balance at December 31, 2018		410,350			126.36				5,393			117.68
Granted		185,377			141.01				—			—
Vested		(176,613	)		98.28				(2,696	)		117.68
Forfeited		(23,183	)		145.26				—			—
Balance at December 31, 2019		395,931			$	144.64			2,697			$	117.68

The total vesting date fair value of performance shares vested during the years ended December 31, 2019, 2018 and 2017 was $27 million, $13 million and $13 million, respectively. The total fair value of restricted shares vested was less than $1 million, $1 million and $1 million for the years ended December 31, 2019, 2018 and 2017, respectively.

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The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

		2019			2018			2017
Expected life (years)		6			6			6
Risk-free interest rate		2.41	%		2.72	%		2.08	%
Expected volatility		23.79	%		25.40	%		29.97	%
Dividend yield		2.68	%		2.48	%		2.28	%

Expected life—The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding based upon our historical data.

Risk-free interest rate—The risk-free interest rate assumption is based upon the observed U.S. treasury security rate appropriate for the expected life of our employee stock options.

Expected volatility—The expected volatility assumption is based upon the weighted-average historical daily price changes of our common stock over the most recent period equal to the expected option life of the grant, adjusted for activity which is not expected to occur in the future.

Dividend yield—The dividend yield assumption is based on our history and expectation of dividend payouts.

NOTE 20. EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CUMMINS INC.

We calculate basic earnings per share (EPS) of common stock by dividing net income attributable to Cummins Inc. by the weighted-average number of common shares outstanding for the period. The calculation of diluted EPS assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. We exclude shares of common stock held in the Employee Benefits Trust (EBT) (see Note 16, "CUMMINS INC. SHAREHOLDERS' EQUITY") from the calculation of the weighted-average common shares outstanding until those shares are distributed from the EBT to the Retirement Savings Plan. Following are the computations for basic and diluted earnings per share:

		Years ended December 31,
In millions, except per share amounts		2019				2018				2017
Net income attributable to Cummins Inc.		$	2,260			$	2,141			$	999
Weighted-average common shares outstanding
Basic		155.4				162.2				166.7
Dilutive effect of stock compensation awards		0.7				0.6				0.6
Diluted		156.1				162.8				167.3
Earnings per common share attributable to Cummins Inc.
Basic		$	14.54			$	13.20			$	5.99
Diluted		14.48				13.15				5.97

The weighted-average diluted common shares outstanding excludes 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. The options excluded from diluted earnings per share were as follows:

		Years ended December 31,
		2019			2018			2017
Options excluded		473,845			969,385			31,991

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NOTE 21. ACQUISITIONS

Acquisitions for the years ended December 31, 2019, 2018 and 2017 were as follows:

Entity Acquired (Dollars in millions)		Date of Acquisition		Percent Interest Acquired		Payments to Former Owners				Acquisition Related Debt Retirements				Total Purchase Consideration(1)				Goodwill Recognized				Intangibles Recognized(2)				Net Sales Previous Fiscal Year Ended
2019
Hydrogenics Corporation		09/09/19		81%		$	235			$	—			$	235			$	161			$	161			$	34
2018
Efficient Drivetrains, Inc.		08/15/18		100%		$	51			$	2			$	64		(3)	$	49			$	15			$	3
2017
Brammo Inc.		11/01/17		100%		$	60			$	—			$	68		(3)	$	47			$	23			$	4
Eaton Cummins Automated Transmission Technologies		07/31/17		50%		600			(4)	—				600				544				596				—

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(1)

All results from acquired entities (excluding Brammo Inc. in 2017) were included in segment results subsequent to the acquisition date. Newly consolidated entities were accounted for as business combinations and (excluding Brammo Inc. and Eaton Cummins Automated Transmission Technologies) were included in the New Power Segment on the date of acquisition. The Brammo Inc. acquisition was allocated to the New Power Segment on January 1, 2018. Eaton Cummins Automated Transmission Technologies was included in the Components Segment on the date of acquisition.

(2)	Intangible assets acquired in business combinations were mostly customer and technology related, the majority of which will be amortized over a period of`up to 25 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. The Brammo Inc. acquisition contains an earnout based on future results of the acquired business and could result in a maximum contingent consideration payment of $100 million (fair value of $5 million) to the former owners.

⁽⁴⁾ This transaction created a newly formed joint venture that we consolidated as we have a majority voting interest in the venture by virtue of a tie-breaking vote on the joint venture's board of directors.

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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 maintain a 19 percent noncontrolling interest in 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 New Power segment in the third quarter of 2019. We assigned this business to our New Power reporting unit, which included both our electrified power and fuel cell businesses, for goodwill impairment purposes. The purchase price allocation was as follows:

In millions
Inventory		$	21
Other current assets		25
Intangible assets
Technology assets		96
Customer relationships		29
In-process research and development		35
Other intangible assets		1
Goodwill		161
Other assets		18
Current liabilities		(53		)
Other liabilities		(42		)
Total business valuation		291
Less: Noncontrolling interest		56
Total purchase consideration		$	235

As of December 31, 2019, our purchase accounting was complete. The intangible assets will be amortized over periods ranging from 3 to 20 years. As a result of our review and validation of the significant assumptions used to value the intangible assets and our validation of calculations related to deferred tax assets and liabilities, our final valuation resulted in increases from our original estimates of $2 million to technology assets and $1 million to customer relationships and decreases of $5 million to other liabilities and $5 million to goodwill.

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 expected 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 multiperiod 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 20 years. Annual amortization of the intangible assets for the next five years is expected to approximate $8 million.

In-process research and 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 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 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.

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This business was included in our results starting in September 2019. Pro forma financial information was not provided as the historical financial statement activity of Hydrogenics Corporation is not material to our consolidated results.

NOTE 22. 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.

In November 2019, we renamed our Electrified Power segment as "New Power" in order to better represent the incorporation of fuel cell and hydrogen production technologies resulting from our acquisition of Hydrogenics Corporation. The New Power segment includes our electrified power, fuel cell and hydrogen production technologies.

Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and New 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 New Power segment designs, manufactures, sells and supports electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery, fuel cell and hydrogen production technologies. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.

We use EBITDA (defined as earnings before interest expense, income taxes, noncontrolling interests, depreciation and amortization) as the primary basis for the CODM to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments.

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Summarized financial information regarding our reportable operating segments at December 31, is shown in the table below:

In millions		Engine				Distribution				Components				Power Systems				New Power				Total Segments				Intersegment Eliminations (1)				Total
2019
External sales		$	7,570			$	8,040			$	5,253			$	2,670			$	38			$	23,571			$	—			$	23,571
Intersegment sales		2,486				31				1,661				1,790				—				5,968				(5,968		)		—
Total sales		10,056				8,071				6,914				4,460				38				29,539				(5,968		)		23,571
Research, development and engineering expenses		337				28				300				230				106				1,001				—				1,001
Equity, royalty and interest income from investees		200				52				40				38				—				330				—				330
Interest income		15				15				8				8				—				46				—				46
Segment EBITDA (excluding restructuring actions)		1,472				693				1,117				524				(148		)		3,658				73				3,731
Restructuring actions(2)		18				37				20				12				1				88				31				119
Segment EBITDA		1,454				656				1,097				512				(149		)		3,570				42				3,612
Depreciation and amortization (3)		202				115				222				118				12				669				—				669
Net assets		1,094				2,536				2,911				2,245				472				9,258				—				9,258
Investments and advances to equity investees		575				296				193				171				2				1,237				—				1,237
Capital expenditures		240				136				191				107				26				700				—				700
2018
External sales		$	8,002			$	7,807			$	5,331			$	2,625			$	6			$	23,771			$	—			$	23,771
Intersegment sales		2,564				21				1,835				2,001				1				6,422				(6,422		)		—
Total sales		10,566				7,828				7,166				4,626				7				30,193				(6,422		)		23,771
Research, development and engineering expenses		311				20				272				230				69				902				—				902
Equity, royalty and interest income from investees		238				46				54				56				—				394				—				394
Interest income		11				13				5				6				—				35				—				35
Segment EBITDA		1,446				563				1,030				614				(90		)		3,563				(87		)		3,476
Depreciation and amortization (3)		190				109				185				119				6				609				—				609
Net assets		1,265				2,677				2,878				2,262				138				9,220				—				9,220
Investments and advances to equity investees		561				278				206				177				—				1,222				—				1,222
Capital expenditures		254				133				182				129				11				709				—				709

(Table continued on next page)

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In millions		Engine				Distribution				Components				Power Systems				New Power				Total Segments				Intersegment Eliminations (1)				Total
2017
External sales		$	6,661			$	7,029			$	4,363			$	2,375			$	—			$	20,428			$	—			$	20,428
Intersegment sales		2,292				29				1,526				1,683				—				5,530				(5,530		)		—
Total sales		8,953				7,058				5,889				4,058				—				25,958				(5,530		)		20,428
Research, development and engineering expenses		280				19				241				214				—				754				—				754
Equity, royalty and interest income from investees (4)		219				44				40				54				—				357				—				357
Interest income		6				6				3				3				—				18				—				18
Segment EBITDA		1,143				500				917				411				—				2,971				55				3,026
Depreciation and amortization (3)		184				116				163				117				—				580				—				580
Net assets		1,180				2,446				2,811				2,137				—				8,574				—				8,574
Investments and advances to equity investees		531				267				194				164				—				1,156				—				1,156
Capital expenditures		188				101				127				90				—				506				—				506

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(1)	Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. The year ended December 31, 2019, includes a $31 million restructuring charge related to corporate functions. There were no significant unallocated corporate expenses for the years ended December 31, 2018 and 2017.

(2)	See Note 4 "RESTRUCTURING ACTIONS," for additional information.

(3)

Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs were $3 million, $2 million and $3 million for the years ended 2019, 2018 and 2017, respectively. A portion of depreciation expense is included in "Research, development and engineering expense."

(4)	U.S. tax legislation passed in December 2017 decreased our equity earnings at certain equity investees, negatively impacting our "Equity, royalty and interest income from investees" by $23 million, $4 million and $12 million for the Engine, Distribution and Components segments, respectively. See Note 5, "INCOME TAXES," for additional information.

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A reconciliation of our segment information to the corresponding amounts in the Consolidated Statements of Net Income is shown in the table below:

		Years ended December 31,
In millions		2019				2018				2017
Total EBITDA		$	3,612			$	3,476			$	3,026
Less:
Depreciation and amortization		669				$	609			580
Interest expense		109				$	114			$	81
Income before income taxes		$	2,834			$	2,753			$	2,365

A reconciliation of our segment net assets to the corresponding amounts in the Consolidated Balance Sheets is shown in the table below:

		December 31,
In millions		2019				2018				2017
Net assets for operating segments		$	9,258			$	9,220			$	8,574
Cash, cash equivalents and marketable securities		1,470				1,525				1,567
Brammo Inc. assets		—				—				72			(1)
Net liabilities deducted in arriving at net assets (2)		8,498				7,836				7,398
Pension and OPEB adjustments excluded from net assets		67				68				156
Deferred tax assets not allocated to segments		441				410				306
Deferred debt costs not allocated to segments		3				3				2
Total assets		$	19,737			$	19,062			$	18,075

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(1)	Assets associated with the Brammo Inc. acquisition were presented as a reconciling item as Brammo Inc. had not yet been assigned to a reportable segment at December 31, 2017. See Note 21, "ACQUISITIONS," for additional information.

(2)	Liabilities deducted in arriving at net assets include certain accounts payable, accrued expenses, long-term liabilities and other items.

See Note 2, "REVENUE RECOGNITION," for segment net sales by geographic area.

Long-lived assets include property, plant and equipment, net of depreciation, investments and advances to equity investees and other assets, excluding deferred tax assets, refundable taxes and deferred debt expenses. Long-lived segment assets by geographic area were as follows:

		December 31,
In millions		2019				2018				2017
United States		$	3,555			$	3,174			$	3,157
China		893				823				795
India		616				577				563
United Kingdom		370				337				339
Netherlands		253				234				221
Mexico		175				171				136
Canada		139				114				116
Brazil		106				104				149
Other international countries		489				329				293
Total long-lived assets		$	6,596			$	5,863			$	5,769

Our largest customer is PACCAR Inc. Worldwide sales to this customer were $3,937 million, $3,643 million and $2,893 million for the years ended December 31, 2019, 2018 and 2017, representing 17 percent, 15 percent and 14 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales.

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SELECTED QUARTERLY FINANCIAL DATA

UNAUDITED

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
In millions, except per share amounts		2019
Net sales		$	6,004			$	6,221			$	5,768			$	5,578
Gross margin		1,532				1,641				1,494				1,313
Net income attributable to Cummins Inc.		663				675				622				300			(1)
Earnings per common share attributable to Cummins Inc.—basic (2)		$	4.22			$	4.29			$	3.99			$	1.98		(1)
Earnings per common share attributable to Cummins Inc.—diluted (2)		4.20				4.27				3.97				1.97			(1)
Cash dividends per share		1.14				1.14				1.311				1.311
Stock price per share
High		$	162.34			$	171.84			$	175.91			$	186.73
Low		130.03				150.48				141.14				151.15

		2018
Net sales		$	5,570			$	6,132			$	5,943			$	6,126
Gross margin		1,200			(3)	1,440			(3)	1,551				1,546
Net income attributable to Cummins Inc.		325			(3)	545			(3)	692				579
Earnings per common share attributable to Cummins Inc.—basic (2) (4)		$	1.97		(3)	$	3.33		(3)	$	4.29			$	3.65
Earnings per common share attributable to Cummins Inc.—diluted (2) (4)		1.96			(3)	3.32			(3)	4.28				3.63
Cash dividends per share		1.08				1.08				1.14				1.14
Stock price per share
High		$	194.18			$	172.08			$	151.87			$	156.49
Low		154.58				131.58				129.90				124.40

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(1)	Net income attributable to Cummins Inc. and earnings per share were negatively impacted by $119 million ($90 million after-tax) of restructuring actions in the fourth quarter of 2019 ($0.59 per basic share and $0.59 per diluted share).

(2)	Earnings per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while earnings per share for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters earnings per share may not equal the full year earnings per share.

(3)

Gross margin, net income attributable to Cummins Inc. and earnings per share in 2018 were negatively impacted by an Engine Campaign charge of $187 million ($144 million after-tax) in the first quarter ($0.87 per basic share and $0.87 per diluted share). The second quarter of 2018 was negatively impacted by an additional charge of $181 million ($139 million after-tax) ($0.85 per basic share and $0.85 per diluted share).

(4)

Net income attributable to Cummins Inc., basic and diluted earnings per share were impacted by Tax Legislation adjustments. Net income attributable to Cummins Inc. was reduced by $74 million and $8 million in the first and second quarter, respectively, while it increased in the third and fourth quarter $33 million and $10 million, respectively. Basic and diluted earnings per share were reduced by $0.45 per share and $0.05 per share in the first and second quarters, respectively, while they increased in the third and fourth quarters by $0.20 per share and $0.06 per share, respectively.

At December 31, 2019, there were approximately 3,123 holders of record of Cummins Inc.'s $2.50 par value common stock.

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(1)	The number is comprised of 3,237,570 stock options, 395,931 performance shares and 2,697 restricted shares. See Note 19, "STOCK INCENTIVE AND STOCK OPTION PLANS," to the Consolidated Financial Statements for a description of how options and shares are awarded.

(2)	The weighted-average exercise price relates only to the 3,237,570 stock options. Performance and restricted shares do not have an exercise price and, therefore, are not included in this calculation.

(a)	The following Consolidated Financial Statements and schedules filed as part of this report can be found in Item 8 "Financial Statements and Supplementary Data":

•	Management's Report to Shareholders

•	Report of Independent Registered Public Accounting Firm

•	Consolidated Statements of Net Income for the years ended December 31, 2019, 2018 and 2017

•	Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017

•	Consolidated Balance Sheets at December 31, 2019 and 2018

•	Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

•	Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018 and 2017

•	Notes to the Consolidated Financial Statements

•	Selected Quarterly Financial Data (Unaudited)

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(b)	The exhibits listed in the following Exhibit Index are filed as part of this Annual Report on Form 10-K.

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