Quarterly report pursuant to Section 13 or 15(d)

ACQUISITIONS

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ACQUISITIONS
 9 Months Ended
Sep. 30, 2022
Business Combinations [Abstract]  
Mergers, Acquisitions and Dispositions Disclosures
NOTE 16. ACQUISITIONS
Acquisitions for the nine months ended September 30, 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)
Meritor, Inc. 08/03/22 100% $ 2,613  $ 248  $ 2,861  $ 850  $ 1,610 
Jacobs Vehicle Systems 04/08/22 100% 346  —  346  108  164 
Cummins Westport Joint Venture 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, Jacobs Vehicle Systems was included in the Components segment and Cummins Westport Joint Venture was included in the Engine segment.
(2) Intangible assets acquired in the business combination were mostly technology and customer related.
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, including debt that was retired on the closing date of $248 million, was $2.9 billion. 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 11, "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 are preliminary include, but are not limited to, valuation of intangibles, legal and other contingent liabilities and deferred taxes. The preliminary purchase price allocation was as follows:
In millions
Cash and cash equivalents $ 98 
Accounts and notes receivable, net 640 
Inventories 752 
Property, plant and equipment 846 
Intangible assets 1,610 
Investments and advances related to equity method investees 382 
Goodwill 850 
Pension assets 147 
Other current and long-term assets 364 
Accounts payable (principally trade) (711)
Net deferred taxes (325)
Pensions and other postretirement benefits (129)
Long-term debt (962)
Other current and long-term liabilities (590)
Noncontrolling interests (111)
Total purchase price $ 2,861 
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, rate of return, renewal rates
Technology 345  8 Relief-from-royalty Royalty rate, rate of return, obsolescence factor
Trade name 305  21 Relief-from-royalty Royalty rate, rate of return
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 ($691 million) and the New Power segment ($159 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 third quarter results were revenues of $737 million and net loss of $37 million related to this business. In addition, on a year-to-date basis we have incurred acquisition related costs of $30 million included in selling, general and administrative expenses in our Condensed Consolidated Statements of Net Income.
The following table presents the supplemental consolidated results of the Company for the three and nine months ended September 30, 2022 and October 3, 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) Three months ended Nine months ended
In millions September 30,
2022		 October 3,
2021		 September 30,
2022		 October 3,
2021
Net sales $ 7,734  $ 6,913  $ 23,071  $ 21,115 
Net income 397  544  1,565  1,662 
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 $346 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 preliminary 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 (5)
Total purchase price $ 346 
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 Rate of return, renewal rates
Technology 31  7 Relief-from-royalty Royalty rate, rate of return, obsolescence factor
Trade name 25  14 Relief-from-royalty Royalty rate, rate of return
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 three and nine months ended September 30, 2022, were revenues of $43 million and $80 million, respectively, and loss of $2 million and break-even, respectively, 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 Condensed Consolidated Financial Statements.
Cummins Westport Joint Venture
On February 7, 2022, we purchased Westport Fuel System Inc.'s stake in the Cummins Westport Joint Venture. 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 Condensed Consolidated Financial Statements.
Pending Acquisition
Prior to our acquisition of Meritor, Meritor signed an agreement with Siemens to purchase its Commercial Vehicles business for approximately €190 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 transit, off-highway and specialty markets. We expect the acquisition to close in the fourth quarter of 2022. This acquisition will be included in our New Power segment.