Annual report pursuant to Section 13 and 15(d)

ACQUISITIONS

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ACQUISITIONS
 12 Months Ended
Dec. 31, 2022
Business Combinations [Abstract]  
Acquisitions
NOTE 2. ACQUISITIONS
Acquisitions for the year ended December 31, 2022, were as follows.
Entity Acquired (Dollars in millions) Date of Acquisition Additional Percent Interest Acquired Payments to Former Owners Acquisition Related Debt Retirements
Total Purchase Consideration(1)
Goodwill Acquired
Intangibles Recognized(2)
Siemens Commercial Vehicles Propulsion (Siemens CVP) 11/30/22 100% $ 187  $ —  $ 187  $ 70  $ 106 
Meritor, Inc. 08/03/22 100% 2,613  248  2,861  894  1,610 
Jacobs Vehicle Systems 04/08/22 100% 345  —  345  108  164 
Westport JV 02/07/22 50% 42  —  42  —  20 
(1) The newly consolidated entities were accounted for as business combinations. On the date of acquisition, Meritor, Inc. was included in the Components and New Power segments, Siemens CVP was included in the New Power segment, Jacobs Vehicle Systems was included in the Components segment and Westport JV was included in the Engine segment.
(2) Intangible assets acquired in the business combination were mostly customer, technology and trade name related.
Siemens CVP
On November 30, 2022, we acquired Siemens' Commercial Vehicles Propulsion business for approximately $187 million, subject to working capital and other customary adjustments. This business develops, designs and produces electric drive systems including electric motors, inverters, software and related services for the commercial vehicle markets. This acquisition is included in our New Power segment. This acquisition added key capabilities in direct drive and transmission-based remote mount electric motors, inverters, software and related services that are critical elements in the next generation of electric powertrain, which will accelerate our ability to offer global customers a wider array of electrified product solutions across commercial vehicle applications.
The preliminary purchase price allocation was as follows:
In millions
Inventories $ 21 
Property, plant and equipment 3 
Intangible assets 106 
Goodwill 70 
Deferred revenue (3)
Other, net (10)
Total purchase price $ 187 
The estimated fair values (all considered Level 3 measurements) of the identifiable intangible assets acquired, their weighted-average useful lives, the related valuation methodology and key assumptions are as follows:
Fair Value (in millions) Weighted-Average Useful Life (in years) Valuation Methodology Key Assumptions
Customer relationships $ 62  20 Multi-period excess earnings Discount rate, customer renewal rates
Technology 28  11 Relief-from-royalty Royalty rate, rate of return, obsolescence factor
Trade name 16  17 Relief-from-royalty Royalty rate, discount rate
Annual amortization of the intangible assets for the next five years is expected to approximate $7 million per year.
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 majority of the goodwill is deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are the business's expected future customers, new versions of technologies, an acquired workforce and other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.
Included in our results for the year ended December 31, 2022, were revenues of $2 million and loss of $4 million related to this business. The results of this business were reported in our New Power segment. Pro forma financial information for the acquisition was not presented as the effects are not material to our Consolidated Financial Statements.
Meritor, Inc.
On August 3, 2022, we completed the acquisition of Meritor whereby we paid $36.50 per share for each outstanding share of Meritor, a global leader of drivetrain, mobility, braking, aftermarket and electric powertrain solutions for commercial vehicle and industrial markets. The total purchase price was $2.9 billion, including debt that was retired on the closing date of $248 million. In addition, we assumed $1.0 billion of additional debt, of which $0.9 billion was retired prior to the end of the third quarter. The acquisition was funded with a combination of $2.0 billion in new debt (see NOTE 13, "DEBT" for additional details), cash on hand and additional commercial paper borrowings. The integration of Meritor’s people, technology and capabilities position us as one of the few companies able to provide integrated powertrain solutions across combustion and electric power applications at a time when demand for decarbonized solutions is continuing to accelerate. The majority of this business will be included within our Components segment with the exception of the electric powertrain business, which will be included in our New Power segment. The values assigned to individual assets acquired and liabilities assumed are preliminary based on management’s current best estimate and subject to change as certain matters are finalized. The primary areas that remain open include, but are not limited to, legal and other contingent liabilities and deferred taxes as we continue to refine our allocation by jurisdiction.
The preliminary purchase price allocation has been updated as follows:
In millions
Cash and cash equivalents $ 98 
Accounts and notes receivable, net 640 
Inventories 750 
Property, plant and equipment 846 
Intangible assets 1,610 
Investments and advances related to equity method investees 382 
Goodwill 894 
Pension assets 147 
Other current and long-term assets 322 
Accounts payable (principally trade) (711)
Net deferred taxes (320)
Other liabilities (pensions and other postretirement benefits) (129)
Long-term debt (962)
Other current and long-term liabilities (595)
Noncontrolling interests (111)
Total purchase price $ 2,861 
We made certain measurement period adjustments in the fourth quarter to the balance sheet resulting in an increase in goodwill of $44 million. None of the adjustments were individually material. There was no income statement impact on prior periods as a result of these changes. The estimated fair values (all considered Level 3 measurements) of the identifiable intangible assets acquired, their weighted-average useful lives, the related valuation methodology and key assumptions are as follows:
Fair Value (in millions) Weighted-Average Useful Life (in years) Valuation Methodology Key Assumptions
Customer relationships $ 960  12 Multi-period excess earnings
Revenue, EBITDA(1), discount rate, customer renewal rates, customer attrition rates
Technology 345  8 Relief-from-royalty Royalty rate, discount rate, obsolescence factor
Trade name 305  21 Relief-from-royalty Royalty rate, discount rate
(1) Earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests
Annual amortization of the intangible assets for the next five years is expected to approximate $142 million per year.
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. Goodwill was allocated to the Components segment ($727 million) and the New Power segment ($167 million) based on the relative value of those businesses compared to the assets and liabilities assigned to them. We do not expect any of the goodwill to be deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are Meritor’s expected future customers, new versions of technologies, an acquired workforce, other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.
Included in our results for the year ended December 31, 2022, were revenues of $1.9 billion and net loss of $43 million related to this business. In addition, in 2022 we incurred acquisition related costs of $30 million included in selling, general and administrative expenses in our Consolidated Statements of Net Income.
The following table presents the supplemental consolidated results of the Company for the years ended December 31, 2022 and 2021, on an unaudited pro-forma basis as if the acquisition had been consummated on January 1, 2021. The primary adjustments reflected in the pro-forma results related to (1) increase in interest expense for debt used to fund the acquisition, (2) removal of acquisition related costs from 2022 (and included in 2021) and (3) changes related to purchase accounting primarily related to amortization of intangibles, fixed assets and joint ventures. The unaudited pro forma financial information presented below does not purport to represent the actual results of operations that Cummins and Meritor would have achieved had the companies been combined during the periods presented and was not intended to project the future results of operations that the combined company could achieve after the acquisition. The unaudited pro forma financial information does not reflect any potential cost savings, operating efficiencies, long-term debt pay down estimates, financial synergies or other strategic benefits as a result of the acquisition or any restructuring costs to achieve those benefits.
(Unaudited) Years ended
In millions December 31,
2022		 December 31,
2021
Net sales $ 30,841  $ 27,949 
Net income 2,196  2,058 
The Meritor acquisition increased net assets in the Components segment by $3.8 billion and New Power segment by $0.3 billion.
Jacobs Vehicle Systems
On April 8, 2022, we completed the acquisition of Jacobs Vehicle Systems business (Jacobs) from Altra Industrial Motion Corp. The purchase price was $345 million in cash, subject to typical adjustments related to closing working capital and other amounts and does not contain any contingent consideration. Jacobs is a supplier of engine braking, cylinder deactivation and start and stop thermal management technologies. The acquisition furthers our investment in key technologies and capabilities to drive growth, while securing our supply base.
The final purchase price allocation was as follows:
In millions
Cash and cash equivalents $ 18 
Accounts and notes receivable, net 24 
Inventories 15 
Property, plant and equipment 70 
Intangible assets 164 
Goodwill 108 
Accounts payable (principally trade) (21)
Net deferred taxes (27)
Other, net (6)
Total purchase price $ 345 
The estimated fair values (all considered Level 3 measurements) of the identifiable intangible assets acquired, their weighted-average useful lives, the related valuation methodology and key assumptions are as follows:
Fair Value (in millions) Weighted-Average Useful Life (in years) Valuation Methodology Key Assumptions
Customer relationships $ 108  9 Multi-period excess earnings Discount rate, customer renewal rates
Technology 31  7 Relief-from-royalty Royalty rate, rate of return, obsolescence factor
Trade name 25  14 Relief-from-royalty Royalty rate, discount
Annual amortization of the intangible assets for the next five years is expected to approximate $18 million per year.
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. Approximately $9 million of the goodwill is deductible for tax purposes. Among the factors contributing to a purchase price resulting in the recognition of goodwill are Jacob’s expected future customers, new versions of technologies, an acquired workforce and other economic benefits that are anticipated to arise from future product sales and operational synergies from combining the business with Cummins.
Included in our results for the year ended December 31, 2022, were revenues of $118 million and loss of $1 million related to this business. The results of this business were reported in our Components segment. Pro forma financial information for the acquisition was not presented as the effects are not material to our Consolidated Financial Statements.
Westport JV
On February 7, 2022, we purchased Westport Fuel System Inc.'s stake in Westport JV. We will continue to operate the business as the sole owner. The purchase price was $42 million and was allocated primarily to cash, warranty and deferred revenue related to extended coverage contracts. The results of the business were reported in our Engine segment. Pro forma financial information for the acquisition was not presented as the effects are not material to our Consolidated Financial Statements.
Pending Acquisition
In October 2022, we signed an agreement to purchase all of the equity ownership interest of Teksid Hierro de Mexico, S.A. de C.V. (Teksid MX) and Teksid, Inc. from Stellantis N.V. for approximately €115 million, subject to certain adjustments set forth in the agreement. Teksid MX operates a cast iron foundry located in Monclova, Mexico, which primarily forges blocks and heads used in our and other manufacturers’ engines. Teksid, Inc. facilitates the commercialization of Teksid MX products in North America. The transaction, which is subject to customary closing conditions and receipt of applicable regulatory approvals, is expected to close in early 2023. Since we are the primary customer of the foundry, the acquisition is not expected to result in material incremental sales to our business. The acquisition will be included in our Engine segment.