# CUMMINS INC (CMI) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from CUMMINS INC's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/26172/000002617222000008/cmi-20211231.htm Accession: 0000026172-22-000008 Filing date: 2022-02-08 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/CMI/ All MD&A years: /company/CMI/mda/ Next year: /company/CMI/mda/fy2022/ (FY 2022) ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations ORGANIZATION OF INFORMATION The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) was prepared to provide the reader with a view and perspective of our business through the eyes of management and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes to those financial statements. Our MD&A is presented in the following sections: •EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS •RESULTS OF OPERATIONS •OPERATING SEGMENT RESULTS •2022 OUTLOOK •LIQUIDITY AND CAPITAL RESOURCES •APPLICATION OF CRITICAL ACCOUNTING ESTIMATES The following is the discussion and analysis of changes in the financial condition and results of operations for fiscal year 2021 compared to fiscal year 2020. The discussion and analysis of fiscal year 2019 and changes in the financial condition and results of operations for fiscal year 2020 compared to fiscal year 2019 that are not included in this Form 10-K may be found in Part II, ITEM 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commission (SEC) on February 10, 2021. EXECUTIVE SUMMARY AND FINANCIAL HIGHLIGHTS Overview 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 production and fuel cell products. We sell our products to original equipment manufacturers (OEMs), distributors, dealers and other customers worldwide. We have long-standing relationships with many of the leading manufacturers in the markets we serve, including PACCAR Inc, Navistar International Corporation, Daimler Trucks North America and Stellantis N.V. We serve our customers through a service network of approximately 500 wholly-owned, joint venture and independent distributor locations and more than 10,000 Cummins certified dealer locations in approximately 190 countries and territories. 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 hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems. 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. 31 Table of Contents Our financial performance depends, in large part, on varying conditions in the markets we serve, particularly the on-highway, construction and general industrial markets. Demand in these markets tends to fluctuate in response to overall economic conditions. Our sales may also be impacted by OEM inventory levels, production schedules, stoppages and supply chain challenges. Economic downturns in markets we serve generally result in reduced sales of our products and can result in price reductions in certain products and/or markets. As a worldwide business, our operations are also affected by currency, political, economic, public health crises, epidemics or pandemics and regulatory matters, including adoption and enforcement of environmental and emission standards, in the countries we serve. As part of our growth strategy, we invest in businesses in certain countries that carry high levels of these risks such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. At the same time, our geographic diversity and broad product and service offerings have helped limit the impact from a drop in demand in any one industry or customer or the economy of any single country on our consolidated results. COVID-19 Update The outbreak of COVID-19 in early 2020 became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our markets globally, which negatively impacted our sales and results of operations during 2020. While the majority of the negative impacts to demand largely subsided in 2021, we are still experiencing supply chain disruptions and related financial impacts reflected as increased cost of sales. Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues and slowing production. Should the supply chain issues continue for an extended period of time or worsen, the impact on our production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows. Our Board of Directors (the Board) continues to monitor and evaluate all of these factors and the related impacts on our business and operations, and we are diligently working to minimize the supply chain impacts to our business and to our customers. 2021 Results A summary of our results is as follows: [[GREPCENT_TABLE]] [["","","Years ended December 31,"],["In millions, except per share amounts","","2021","","2020","","2019"],["Net sales","","$","24,021","","","$","19,811","","","$","23,571"],["Net income attributable to Cummins Inc.","","2,131","","","1,789","","","2,260"],["Earnings per common share attributable to Cummins Inc."],["Basic","","$","14.74","","","$","12.07","","","$","14.54"],["Diluted","","14.61","","","12.01","","","14.48"]] [[/GREPCENT_TABLE]] Worldwide revenues improved 21 percent in 2021 compared to 2020, as we experienced higher demand in all operating segments and all geographic regions due to an improved economic environment and fewer effects from the COVID-19 pandemic. International demand (excludes the U.S. and Canada) improved by 27 percent compared to 2020, with higher sales in all geographic regions. The increase in international sales was principally due to higher demand in all components businesses (primarily emission solutions in India and Western Europe), industrial (especially mining) and power generation equipment (mainly in China and India), most distribution product lines and most off-highway markets (principally construction markets in Europe, Asia Pacific and China). Favorable foreign currency fluctuations impacted international sales by 3 percent (mainly the Chinese renminbi, Euro and Australian dollar). Net sales in the U.S. and Canada improved by 17 percent primarily due to increased demand in North American on-highway markets, which positively impacted all components businesses. The following table contains sales and EBITDA (defined as earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests) by operating segment for the years ended December 31, 2021 and 2020. See Note 22, "OPERATING SEGMENTS," to the Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Consolidated Statements of Net Income. 32 Table of Contents [[GREPCENT_TABLE]] [["","","Operating Segments"],["","","2021","","2020","","Percent change"],["","","","","Percent of Total","","","","","","Percent of Total","","","","2021 vs. 2020"],["In millions","","Sales","","EBITDA","","Sales","","EBITDA","","Sales","","EBITDA"],["Engine","","$","9,954","","","42","%","","$","1,411","","","$","8,022","","","41","%","","$","1,235","","","24","%","","14","%"],["Distribution","","7,772","","","32","%","","731","","","7,136","","","36","%","","665","","","9","%","","10","%"],["Components","","7,665","","","32","%","","1,180","","","6,024","","","31","%","","961","","","27","%","","23","%"],["Power Systems","","4,415","","","18","%","","496","","","3,631","","","18","%","","343","","","22","%","","45","%"],["New Power","","116","","","1","%","","(223)","","","72","","","\u2014","%","","(172)","","","61","%","","(30)","%"],["Intersegment eliminations","","(5,901)","","","(25)","%","","(74)","","","(5,074)","","","(26)","%","","76","","","16","%","","NM"],["Total","","$","24,021","","","100","%","","$","3,521","","","$","19,811","","","100","%","","$","3,108","","","21","%","","13","%"],["\"NM\" - not meaningful information"]] [[/GREPCENT_TABLE]] Cost of sales, selling, general and administrative and research, development and engineering expenses increased due to higher compensation costs (primarily driven by the restoration of 2020 salary reductions, higher variable compensation and 2020 salary increases deferred until 2021), which impacted the variances in gross margin and net income as well as all of our operating segments for the year ended December 31, 2021. Net income attributable to Cummins Inc. for 2021 was $2.1 billion, or $14.61 per diluted share, on sales of $24.0 billion, compared to 2020 net income attributable to Cummins Inc. of $1.8 billion, or $12.01 per diluted share, on sales of $19.8 billion. The increases in net income attributable to Cummins Inc. and earnings per diluted share was driven by higher net sales, increased gross margin, higher equity, royalty and interest income from investees (primarily in China due to stronger demand for trucks and construction equipment in the first half of the year), favorable foreign currency fluctuations (principally the Chinese renminbi and Australian dollar, partially offset by the Brazilian real and British pound) and a lower effective tax rate, partially offset by higher compensation expenses and incremental costs associated with supply chain constraints. The increase in gross margin was mainly due to higher volumes and favorable pricing, partially offset by higher compensation expenses, increased freight costs and higher material costs. The 1.0 percentage point decrease in gross margin as a percentage of net sales was primarily due to higher compensation expenses and increased freight costs due to supply chain constraints, which increased at a faster rate than the increase in net sales. Diluted earnings per common share for 2021 benefited $0.34 per share from fewer weighted-average shares outstanding, primarily due to the stock repurchase program. We generated $2.3 billion of operating cash flows in 2021, compared to $2.7 billion in 2020. See the section titled "Cash Flows" in the "LIQUIDITY AND CAPITAL RESOURCES" section for a discussion of items impacting cash flows. Our debt to capital ratio (total capital defined as debt plus equity) at December 31, 2021, was 30.7 percent, compared to 31.7 percent at December 31, 2020. The decrease was primarily due to a $412 million higher equity balance driven by strong returns on pension assets. At December 31, 2021, we had $3.2 billion in cash and marketable securities on hand and access to our $3.5 billion credit facilities, if necessary, to meet currently anticipated working capital, investment and funding needs. In 2021, we repurchased $1.4 billion or 5.7 million shares of common stock. In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2019 repurchase plan. See Note 15, "CUMMINS INC. SHAREHOLDERS' EQUITY" to the Consolidated Financial Statements for additional information. On August 18, 2021, we entered into an amended and restated five-year revolving credit agreement, which allows us to borrow up to $2 billion of unsecured funds at any time prior to August 18, 2026. On August 18, 2021, we also entered into an amended and restated 364-day credit agreement, which allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 17, 2022. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 18, 2021. On August 3, 2021, we announced our exploration of strategic alternatives for our filtration business. Potential strategic alternatives to be explored include the separation of our filtration business into a stand-alone company. The execution of this exploration process is dependent upon business and market conditions, along with a number of other factors and considerations. In July 2021, the Board authorized an increase to our quarterly dividend of 7.4 percent from $1.35 per share to $1.45 per share. 33 Table of Contents In 2021, the investment gain on our U.S. pension trust was 8.1 percent while our U.K. pension trust gain was 5.1 percent. Our global pension plans, including our unfunded and non-qualified plans, were 121 percent funded at December 31, 2021. Our U.S. defined benefit plan, which represented approximately 52 percent of the worldwide pension obligation, was 138 percent funded, and our U.K. defined benefit plan was 127 percent funded at December 31, 2021. We expect to contribute approximately $47 million in cash to our global pension plans in 2022. In addition, we expect our 2022 net periodic pension cost to approximate $33 million. See application of critical accounting estimates within MD&A and Note 10, "PENSIONS AND OTHER POSTRETIREMENT BENEFITS," to the Consolidated Financial Statements, for additional information concerning our pension and other postretirement benefit plans. As of the date of this filing, our credit ratings and outlooks from the credit rating agencies remain unchanged. 34 Table of Contents RESULTS OF OPERATIONS [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions (except per share amounts)","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["NET SALES","","$","24,021","","","$","19,811","","","$","23,571","","","$","4,210","","","21","%","","$","(3,760)","","","(16)","%"],["Cost of sales","","18,326","","","14,917","","","17,591","","","(3,409)","","","(23)","%","","2,674","","","15","%"],["GROSS MARGIN","","5,695","","","4,894","","","5,980","","","801","","","16","%","","(1,086)","","","(18)","%"],["OPERATING EXPENSES AND INCOME"],["Selling, general and administrative expenses","","2,374","","","2,125","","","2,454","","","(249)","","","(12)","%","","329","","","13","%"],["Research, development and engineering expenses","","1,090","","","906","","","1,001","","","(184)","","","(20)","%","","95","","","9","%"],["Equity, royalty and interest income from investees","","506","","","452","","","330","","","54","","","12","%","","122","","","37","%"],["Restructuring actions","","\u2014","","","\u2014","","","119","","","\u2014","","","\u2014","%","","119","","","100","%"],["Other operating expense, net","","(31)","","","(46)","","","(36)","","","15","","","33","%","","(10)","","","(28)","%"],["OPERATING INCOME","","2,706","","","2,269","","","2,700","","","437","","","19","%","","(431)","","","(16)","%"],["Interest expense","","111","","","100","","","109","","","(11)","","","(11)","%","","9","","","8","%"],["Other income, net","","156","","","169","","","243","","","(13)","","","(8)","%","","(74)","","","(30)","%"],["INCOME BEFORE INCOME TAXES","","2,751","","","2,338","","","2,834","","","413","","","18","%","","(496)","","","(18)","%"],["Income tax expense","","587","","","527","","","566","","","(60)","","","(11)","%","","39","","","7","%"],["CONSOLIDATED NET INCOME","","2,164","","","1,811","","","2,268","","","353","","","19","%","","(457)","","","(20)","%"],["Less: Net income attributable to noncontrolling interests","","33","","","22","","","8","","","(11)","","","(50)","%","","(14)","","","NM"],["NET INCOME ATTRIBUTABLE TO CUMMINS INC.","","$","2,131","","","$","1,789","","","$","2,260","","","$","342","","","19","%","","$","(471)","","","(21)","%"],["Diluted earnings per common share attributable to Cummins Inc.","","$","14.61","","","$","12.01","","","$","14.48","","","$","2.60","","","22","%","","$","(2.47)","","","(17)","%"],["\"NM\" - not meaningful information"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable) Percentage Points"],["Percent of sales","","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Gross margin","","23.7","%","","24.7","%","","25.4","%","","(1.0)","","","(0.7)"],["Selling, general and administrative expenses","","9.9","%","","10.7","%","","10.4","%","","0.8","","","(0.3)"],["Research, development and engineering expenses","","4.5","%","","4.6","%","","4.2","%","","0.1","","","(0.4)"]] [[/GREPCENT_TABLE]] 2021 vs. 2020 Cost of sales, selling, general and administrative and research, development and engineering expenses increased due to higher compensation costs (primarily driven by the restoration of 2020 salary reductions, higher variable compensation and 2020 salary increases deferred until 2021), which impacted the variances in gross margin and net income as well as all of our operating segments for the year ended December 31, 2021. Net Sales Net sales increased $4.2 billion, primarily driven by the following: •Engine segment sales increased 24 percent principally due to higher volumes in global medium-duty truck markets and the North American heavy-duty truck and pick-up truck markets. •Components segment sales increased 27 percent largely due to higher emission solutions demand in North America, India and Western Europe. •Power Systems segment sales increased 22 percent primarily due to higher demand in power generation markets in China, India and North America and global mining markets. •Distribution segment sales increased 9 percent mainly due to higher demand across all product lines in North America and improved demand in Russia, Asia Pacific, Africa and India. 35 Table of Contents •Favorable foreign currency fluctuations of 2 percent of total sales, primarily in the Chinese renminbi, Euro and Australian dollar. •New Power segment sales increased 61 percent principally due to higher sales in North America. Sales to international markets (excluding the U.S. and Canada), based on location of customers, were 44 percent of total net sales in 2021, compared with 42 percent of total net sales in 2020. A more detailed discussion of sales by segment is presented in the "OPERATING SEGMENT RESULTS" section. Cost of Sales The types of expenses included in cost of sales are the following: parts and material consumption, including direct and indirect materials; salaries, wages and benefits; depreciation on production equipment and facilities and amortization of technology intangibles; estimated costs of warranty programs and campaigns; production utilities; production-related purchasing; warehousing, including receiving and inspection; freight costs; engineering support costs; repairs and maintenance; production and warehousing facility property insurance; rent for production facilities and other production overhead. Gross Margin Gross margin increased $801 million and decreased 1.0 points as a percentage of sales. The increase in gross margin was mainly due to higher volumes and favorable pricing, partially offset by higher compensation expenses, increased freight costs and higher material costs. The 1.0 percentage point decrease in gross margin as a percentage of net sales was primarily due to higher compensation expenses and increased freight costs due to supply chain constraints, which increased at a faster rate than the increase in net sales. The provision for base warranties issued as a percentage of sales, was 2.1 percent in 2021 and 2.2 percent in 2020. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $249 million, primarily due to higher compensation expenses. Overall, selling, general and administrative expenses, as a percentage of sales, decreased to 9.9 percent in 2021 from 10.7 percent in 2020. The decrease in selling, general and administrative expenses as a percentage of sales was mainly due to net sales increasing at a faster rate than the increase in selling, general and administrative expenses. Research, Development and Engineering Expenses Research, development and engineering expenses increased $184 million, primarily due to higher compensation expenses and increased spending on consulting. Overall, research, development and engineering expenses, as a percentage of sales, decreased to 4.5 percent in 2021 from 4.6 percent in 2020, mainly due to net sales increasing at a faster rate than the increase in research, development and engineering expenses. Research activities continue to focus on development of new products to meet future emission standards around the world, improvements in fuel economy performance of diesel and natural gas-powered engines and related components as well as development activities around fully electric, hybrid and hydrogen powertrain solutions. Equity, Royalty and Interest Income From Investees Equity, royalty and interest income from investees increased $54 million, primarily due to higher earnings at Dongfeng Cummins Engine Co., Ltd., Tata Cummins Ltd. (excluding the 2020 benefits noted below) and Chongqing Cummins Engine Co., Ltd., as well as the absence of $13 million of impairment charges and an $8 million loss on sale of a joint venture both recorded in 2020. These increases were partially offset by the absence of a $37 million favorable adjustment ($18 million of which related to Tata Cummins Ltd.) as the result of tax changes within India's 2020-2021 Union Budget (India Tax Law Changes) passed in March 2020 and $18 million of technology fee revenue related to Tata Cummins Ltd., both recorded in 2020. See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes. Our joint venture agreement for Cummins Westport, Inc. expired on December 31, 2021, and will not be renewed. Beginning in January 2022, engines previously sold through the joint venture will now be included in our consolidated results. 36 Table of Contents Other Operating Expense, Net Other operating (expense) income, net was as follows: [[GREPCENT_TABLE]] [["","","Years ended December 31,"],["In millions","","2021","","2020"],["Amortization of intangible assets","","$","(22)","","","$","(22)"],["Loss on write-off of assets","","(12)","","","(20)"],["Loss on sale of assets, net","","(2)","","","(10)"],["Royalty income, net","","9","","","5"],["Other, net","","(4)","","","1"],["Total other operating expense, net","","$","(31)","","","$","(46)"]] [[/GREPCENT_TABLE]] Interest Expense Interest expense increased $11 million, primarily due to increased interest expense associated with our $2 billion senior unsecured notes issued in August of 2020, partially offset by lower commercial paper interest expense. Other Income, Net Other income, net was as follows: [[GREPCENT_TABLE]] [["","","Years ended December 31,"],["In millions","","2021","","2020"],["Non-service pension and OPEB credit","","$","96","","","$","65"],["Interest income","","25","","","21"],["Gain on sale of land","","18","","","\u2014"],["Gain on marketable securities, net","","6","","","9"],["Foreign currency gain, net","","2","","","4"],["Gain on corporate owned life insurance","","\u2014","","","57"],["Other, net","","9","","","13"],["Total other income, net","","$","156","","","$","169"]] [[/GREPCENT_TABLE]] Income Tax Expense Our effective tax rate for 2021 was 21.3 percent compared to 22.5 percent for 2020. The year ended December 31, 2021, contained unfavorable net discrete tax items of $9 million, primarily due to $12 million of unfavorable provision to return adjustments related to the 2020 filed tax returns, partially offset by $3 million of favorable other discrete tax items. The year ended December 31, 2020, contained $26 million of unfavorable net discrete tax items, primarily due to $33 million of unfavorable changes in tax reserves and $10 million of withholding tax adjustments, partially offset by $15 million of favorable changes due to the India Tax Law Change. The India Tax Law Change eliminated the dividend distribution tax and replaced it with a lower rate withholding tax as the burden shifted from the dividend payor to the dividend recipient for a net favorable income statement impact of $35 million. See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes. The change in effective tax rate for the year ended December 31, 2021, versus year ended December 31, 2020, was primarily due to a $16 million decrease in net discrete tax items. Our effective tax rate for 2022 is expected to approximate 21.5 percent, excluding any discrete tax items that may arise. Net Income Attributable to Noncontrolling Interests Noncontrolling interests eliminate the income or loss attributable to non-Cummins ownership interests in our consolidated entities. Noncontrolling interests in income of consolidated subsidiaries increased $11 million principally due to higher earnings at Cummins India Limited and Eaton Cummins Joint Venture, partially offset by the absence of a $19 million unfavorable adjustment as the result 37 Table of Contents of India Tax Law Changes passed in March 2020. See NOTE 4, "INCOME TAXES" to the Consolidated Financial Statements for additional information on India Tax Law Changes. Net Income Attributable to Cummins Inc. and Diluted Earnings Per Common Share Attributable to Cummins Inc. Net income and diluted earnings per share attributable to Cummins Inc. decreased $342 million and $2.60 per share, respectively, primarily due to higher net sales, increased gross margin, higher equity, royalty and interest income from investees (primarily in China due to stronger demand for trucks and construction equipment in the first half of the year), favorable foreign currency fluctuations (principally the Chinese renminbi and Australian dollar, partially offset by the Brazilian real and British pound) and a lower effective tax rate, partially offset by higher compensation expenses and incremental costs associated with supply chain constraints. Diluted earnings per common share for 2021 benefited $0.34 per share from fewer weighted-average shares outstanding, primarily due to the stock repurchase program. 2020 vs. 2019 For prior year results of operations comparisons to 2019 see the Results of Operations section of our 2020 Form 10-K. Comprehensive Income - Foreign Currency Translation Adjustment The foreign currency translation adjustment was a net loss of $9 million and a net gain of $71 million for the years ended December 31, 2021 and 2020, respectively. The details were as follows: [[GREPCENT_TABLE]] [["","","Years ended December 31,"],["","","2021","","2020"],["In millions","","Translation adjustment","","Primary currency driver vs. U.S. dollar","","Translation adjustment","","Primary currency driver vs. U.S. dollar"],["Wholly-owned subsidiaries","","$","(23)","","","Brazilian real, British pound, Indian rupee, Euro, partially offset by Chinese renminbi","","$","23","","","Chinese renminbi, partially offset by Brazilian real and British pound"],["Equity method investments","","19","","","Chinese renminbi, partially offset by Indian rupee","","58","","","Chinese renminbi"],["Consolidated subsidiaries with a noncontrolling interest","","(5)","","","Indian rupee","","(10)","","","Indian rupee"],["Total","","$","(9)","","","","","$","71"]] [[/GREPCENT_TABLE]] 2020 vs. 2019 For prior year foreign currency translation adjustment comparisons to 2019 see the Results of Operations section of our 2020 Form 10-K 38 Table of Contents OPERATING SEGMENT RESULTS Our reportable operating segments consist of the Engine, Distribution, Components, Power Systems and New Power segments. This reporting structure is organized according to the products and markets each segment serves. We use segment EBITDA as the primary basis for the Chief Operating Decision Maker to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments. See Note 22, "OPERATING SEGMENTS," to the Consolidated Financial Statements for additional information and a reconciliation of our segment information to the corresponding amounts in our Consolidated Statements of Net Income. The outbreak of COVID-19 in early 2020 became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our markets globally, which negatively impacted our sales and results of operations during 2020. While the majority of the negative impacts to demand largely subsided in 2021, we are still experiencing supply chain disruptions and related financial impacts reflected as increased cost of sales. Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues and slowing production. Following is a discussion of results for each of our operating segments. For all prior year segment results comparisons to 2019 see the Results of Operations section of our 2020 Form 10-K. Engine Segment Results Financial data for the Engine segment was as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["External sales","","$","7,589","","","$","5,925","","","$","7,570","","","$","1,664","","","28","%","","$","(1,645)","","","(22)","%"],["Intersegment sales","","2,365","","","2,097","","","2,486","","","268","","","13","%","","(389)","","","(16)","%"],["Total sales","","9,954","","","8,022","","","10,056","","","1,932","","","24","%","","(2,034)","","","(20)","%"],["Research, development and engineering expenses","","399","","","290","","","337","","","(109)","","","(38)","%","","47","","","14","%"],["Equity, royalty and interest income from investees","","340","","","312","","","200","","","28","","","9","%","","112","","","56","%"],["Interest income","","8","","","9","","","15","","","(1)","","","(11)","%","","(6)","","","(40)","%"],["Restructuring actions","","\u2014","","","\u2014","","","18","","","\u2014","","","\u2014","%","","18","","","100","%"],["Segment EBITDA","","1,411","","","1,235","","","1,454","","","176","","","14","%","","(219)","","","(15)","%"],["","","","","","","","","Percentage Points","","Percentage Points"],["Segment EBITDA as a percentage of total sales","","14.2","%","","15.4","%","","14.5","%","","","","(1.2)","","","","","0.9"]] [[/GREPCENT_TABLE]] Sales for our Engine segment by market were as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["Heavy-duty truck","","$","3,328","","","$","2,648","","","$","3,555","","","$","680","","","26","%","","$","(907)","","","(26)","%"],["Medium-duty truck and bus","","2,777","","","2,066","","","2,707","","","711","","","34","%","","(641)","","","(24)","%"],["Light-duty automotive","","1,912","","","1,547","","","1,804","","","365","","","24","%","","(257)","","","(14)","%"],["Total on-highway","","8,017","","","6,261","","","8,066","","","1,756","","","28","%","","(1,805)","","","(22)","%"],["Off-highway","","1,937","","","1,761","","","1,990","","","176","","","10","%","","(229)","","","(12)","%"],["Total sales","","$","9,954","","","$","8,022","","","$","10,056","","","$","1,932","","","24","%","","$","(2,034)","","","(20)","%"],["","","","","","","","","Percentage Points","","Percentage Points"],["On-highway sales as percentage of total sales","","81","%","","78","%","","80","%","","","","3","","","","","(2)"]] [[/GREPCENT_TABLE]] 39 Table of Contents Unit shipments by engine classification (including unit shipments to Power Systems and off-highway engine units included in their respective classification) were as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["Heavy-duty","","117,600","","","92,500","","","122,600","","","25,100","","","27","%","","(30,100)","","","(25)","%"],["Medium-duty","","273,800","","","220,900","","","283,400","","","52,900","","","24","%","","(62,500)","","","(22)","%"],["Light-duty","","273,300","","","215,800","","","245,900","","","57,500","","","27","%","","(30,100)","","","(12)","%"],["Total unit shipments","","664,700","","","529,200","","","651,900","","","135,500","","","26","%","","(122,700)","","","(19)","%"]] [[/GREPCENT_TABLE]] 2021 vs. 2020 Sales Engine segment sales increased $1,932 million across all markets. The following were the primary drivers by market: •Medium-duty truck and bus sales increased $711 million mainly due to higher global medium-duty demand, especially in North America, Brazil and Western Europe, partially offset by lower bus sales, mainly in North America and Western Europe. •Heavy-duty truck engine sales increased $680 million principally due to higher volumes in North America with shipments up 37 percent. •Light-duty automotive sales increased $365 million primarily due to higher pick-up sales in North America with shipments up 27 percent. •Off-highway sales increased $176 million mainly due to increased demand in global construction markets, especially in Asia Pacific, Europe and North America. Segment EBITDA Engine segment EBITDA increased $176 million, primarily due to higher volumes and higher equity, royalty and interest income from investees mainly from our Chinese joint ventures, partially offset by increased compensation expenses, higher freight costs due to supply chain constraints and increased material costs. Distribution Segment Results Financial data for the Distribution segment was as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["External sales","","$","7,742","","","$","7,110","","","$","8,040","","","$","632","","","9","%","","$","(930)","","","(12)","%"],["Intersegment sales","","30","","","26","","","31","","","4","","","15","%","","(5)","","","(16)","%"],["Total sales","","7,772","","","7,136","","","8,071","","","636","","","9","%","","(935)","","","(12)","%"],["Research, development and engineering expenses","","48","","","31","","","28","","","(17)","","","(55)","%","","(3)","","","(11)","%"],["Equity, royalty and interest income from investees","","63","","","62","","","52","","","1","","","2","%","","10","","","19","%"],["Interest income","","7","","","4","","","15","","","3","","","75","%","","(11)","","","(73)","%"],["Restructuring actions","","\u2014","","","\u2014","","","37","","","\u2014","","","\u2014","%","","37","","","100","%"],["Segment EBITDA","","731","","","665","","","656","","","66","","","10","%","","9","","","1","%"],["","","","","","","","","Percentage Points","","Percentage Points"],["Segment EBITDA as a percentage of total sales","","9.4","%","","9.3","%","","8.1","%","","","","0.1","","","","","1.2"]] [[/GREPCENT_TABLE]] 40 Table of Contents Sales for our Distribution segment by region were as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["North America","","$","4,912","","","$","4,696","","","$","5,533","","","$","216","","","5","%","","$","(837)","","","(15)","%"],["Asia Pacific","","906","","","805","","","878","","","101","","","13","%","","(73)","","","(8)","%"],["Europe","","650","","","598","","","531","","","52","","","9","%","","67","","","13","%"],["Russia","","335","","","194","","","159","","","141","","","73","%","","35","","","22","%"],["China","","330","","","346","","","358","","","(16)","","","(5)","%","","(12)","","","(3)","%"],["Africa and Middle East","","259","","","200","","","235","","","59","","","30","%","","(35)","","","(15)","%"],["India","","198","","","150","","","201","","","48","","","32","%","","(51)","","","(25)","%"],["Latin America","","182","","","147","","","176","","","35","","","24","%","","(29)","","","(16)","%"],["Total sales","","$","7,772","","","$","7,136","","","$","8,071","","","$","636","","","9","%","","$","(935)","","","(12)","%"]] [[/GREPCENT_TABLE]] Sales for our Distribution segment by product line were as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["Parts","","$","3,145","","","$","2,931","","","$","3,290","","","$","214","","","7","%","","$","(359)","","","(11)","%"],["Power generation","","1,762","","","1,692","","","1,784","","","70","","","4","%","","(92)","","","(5)","%"],["Engines","","1,499","","","1,250","","","1,518","","","249","","","20","%","","(268)","","","(18)","%"],["Service","","1,366","","","1,263","","","1,479","","","103","","","8","%","","(216)","","","(15)","%"],["Total sales","","$","7,772","","","$","7,136","","","$","8,071","","","$","636","","","9","%","","$","(935)","","","(12)","%"]] [[/GREPCENT_TABLE]] 2021 vs. 2020 Sales Distribution segment sales increased $636 million across all product lines. The following were the primary drivers by region: •North American sales increased $216 million, representing 34 percent of the total change in Distribution segment sales, due to higher demand in all product lines. •Improved demand in Russia, Asia Pacific, Africa and India. •Favorable foreign currency fluctuations, primarily in the Australian dollar, Canadian dollar and Chinese renminbi. Segment EBITDA Distribution segment EBITDA increased $66 million, primarily due to higher volumes and favorable foreign currency fluctuations (especially the Australian dollar), partially offset by higher compensation expenses. 41 Table of Contents Components Segment Results Financial data for the Components segment was as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["External sales","","$","5,932","","","$","4,650","","","$","5,253","","","$","1,282","","","28","%","","$","(603)","","","(11)","%"],["Intersegment sales","","1,733","","","1,374","","","1,661","","","359","","","26","%","","(287)","","","(17)","%"],["Total sales","","7,665","","","6,024","","","6,914","","","1,641","","","27","%","","(890)","","","(13)","%"],["Research, development and engineering expenses","","307","","","264","","","300","","","(43)","","","(16)","%","","36","","","12","%"],["Equity, royalty and interest income from investees","","50","","","61","","","40","","","(11)","","","(18)","%","","21","","","53","%"],["Interest income","","5","","","4","","","8","","","1","","","25","%","","(4)","","","(50)","%"],["Restructuring actions","","\u2014","","","\u2014","","","20","","","\u2014","","","\u2014","%","","20","","","100","%"],["Segment EBITDA","","1,180","","","961","","","1,097","","","219","","","23","%","","(136)","","","(12)","%"],["","","","","","","","","Percentage Points","","Percentage Points"],["Segment EBITDA as a percentage of total sales","","15.4","%","","16.0","%","","15.9","%","","","","(0.6)","","","","","0.1"]] [[/GREPCENT_TABLE]] Sales for our Components segment by business were as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["Emission solutions","","$","3,499","","","$","2,632","","","$","3,122","","","$","867","","","33","%","","$","(490)","","","(16)","%"],["Filtration","","1,438","","","1,232","","","1,281","","","206","","","17","%","","(49)","","","(4)","%"],["Turbo technologies","","1,351","","","1,098","","","1,218","","","253","","","23","%","","(120)","","","(10)","%"],["Electronics and fuel systems","","899","","","754","","","759","","","145","","","19","%","","(5)","","","(1)","%"],["Automated transmissions","","478","","","308","","","534","","","170","","","55","%","","(226)","","","(42)","%"],["Total sales","","$","7,665","","","$","6,024","","","$","6,914","","","$","1,641","","","27","%","","$","(890)","","","(13)","%"]] [[/GREPCENT_TABLE]] 2021 vs. 2020 Sales Components segment sales increased $1,641 million across all businesses. The following were the primary drivers by business: •Emission solutions sales increased $867 million primarily due to stronger demand in North America, India and Western Europe. •Turbo technologies sales increased $253 million principally due to higher demand in North America and Western Europe. •Filtration sales increased $206 million mainly due to stronger demand in North America, Europe, Latin America and Asia Pacific. •Automated transmission sales increased $170 million principally due to higher demand in North America and expanded product offering in China. •Favorable foreign currency fluctuations primarily in the Chinese renminbi and Euro. Segment EBITDA Components segment EBITDA increased $219 million, mainly due to higher volumes and favorable mix, partially offset by higher compensation expenses, increased material costs and higher freight costs due to supply chain constraints. 42 Table of Contents Power Systems Segment Results Financial data for the Power Systems segment was as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["External sales","","$","2,650","","","$","2,055","","","$","2,670","","","$","595","","","29","%","","$","(615)","","","(23)","%"],["Intersegment sales","","1,765","","","1,576","","","1,790","","","189","","","12","%","","(214)","","","(12)","%"],["Total sales","","4,415","","","3,631","","","4,460","","","784","","","22","%","","(829)","","","(19)","%"],["Research, development and engineering expenses","","234","","","212","","","230","","","(22)","","","(10)","%","","18","","","8","%"],["Equity, royalty and interest income from investees","","56","","","21","","","38","","","35","","","NM","","(17)","","","(45)","%"],["Interest income","","5","","","4","","","8","","","1","","","25","%","","(4)","","","(50)","%"],["Restructuring actions","","\u2014","","","\u2014","","","12","","","\u2014","","","\u2014","%","","12","","","100","%"],["Segment EBITDA","","496","","","343","","","512","","","153","","","45","%","","(169)","","","(33)","%"],["","","","","","","","","Percentage Points","","Percentage Points"],["Segment EBITDA as a percentage of total sales","","11.2","%","","9.4","%","","11.5","%","","","","1.8","","","","","(2.1)"],["\"NM\" - not meaningful information"]] [[/GREPCENT_TABLE]] Sales for our Power Systems segment by product line were as follows: [[GREPCENT_TABLE]] [["","","","","","","","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["Power generation","","$","2,515","","","$","2,167","","","$","2,518","","","$","348","","","16","%","","$","(351)","","","(14)","%"],["Industrial","","1,534","","","1,188","","","1,576","","","346","","","29","%","","(388)","","","(25)","%"],["Generator technologies","","366","","","276","","","366","","","90","","","33","%","","(90)","","","(25)","%"],["Total sales","","$","4,415","","","$","3,631","","","$","4,460","","","$","784","","","22","%","","$","(829)","","","(19)","%"]] [[/GREPCENT_TABLE]] 2021 vs. 2020 Sales Power Systems segment sales increased $784 million across all product lines. The following were the primary drivers: •Power generation sales increased $348 million due to higher demand in China, India and North America. •Industrial sales increased $346 million due to higher demand in global mining markets. •Favorable foreign currency fluctuations primarily in the Chinese renminbi and British pound. Segment EBITDA Power Systems segment EBITDA increased $153 million, primarily due to higher volumes and increased earnings in equity, royalty and interest income from investees, partially offset by higher compensation expenses, increased freight costs due to supply chain constraints and higher material costs. New Power Segment Results The New Power segment designs, manufactures, sells and supports hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems. Financial data for the New Power segment was as follows: 43 Table of Contents [[GREPCENT_TABLE]] [["","","","","","","Favorable/(Unfavorable)","","Favorable/(Unfavorable)"],["","","Years ended December 31,","","2021 vs. 2020","","2020 vs. 2019"],["In millions","","2021","","2020","","2019","","Amount","","Percent","","Amount","","Percent"],["External sales","","$","108","","","$","71","","","$","38","","","$","37","","","52","%","","$","33","","","87","%"],["Intersegment sales","","8","","","1","","","\u2014","","","7","","","NM","","1","","","NM"],["Total sales","","116","","","72","","","38","","","44","","","61","%","","34","","","89","%"],["Research, development and engineering expenses","","102","","","109","","","106","","","7","","","6","%","","(3)","","","(3)","%"],["Equity, royalty and interest loss from investees","","(3)","","","(4)","","","\u2014","","","1","","","25","%","","(4)","","","NM"],["Restructuring actions","","\u2014","","","\u2014","","","1","","","\u2014","","","\u2014","%","","1","","","100","%"],["Segment EBITDA","","(223)","","","(172)","","","(149)","","","(51)","","","(30)","%","","(23)","","","(15)","%"],["\"NM\" - not meaningful information"]] [[/GREPCENT_TABLE]] New Power segment sales increased 61 percent principally due to increased sales in North America. 44 Table of Contents 2022 OUTLOOK COVID-19 Impacts The outbreak of COVID-19 in early 2020 became a global pandemic with the resultant economic impacts evolving into a worldwide recession. The pandemic triggered a significant downturn in our markets globally, which negatively impacted our sales and results of operations during 2020. While the majority of the negative impacts to demand largely subsided in 2021, we are still experiencing supply chain disruptions and related financial impacts reflected as increased cost of sales. Our industry continues to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues and slowing production. Should the supply chain issues continue for an extended period of time or worsen, the impact on our production and supply chain could have a material adverse effect on our results of operations, financial condition and cash flows. Our Board of Directors (the Board) continues to monitor and evaluate all of these factors and the related impacts on our business and operations, and we are diligently working to minimize the supply chain impacts to our business and to our customers. Business Outlook Our outlook reflects the following positive trends and challenges to our business that could impact our revenue and earnings potential in 2022. Positive Trends •We expect demand for pick-up trucks in North America to remain strong. •We estimate North American medium-duty and heavy-duty truck demand will continue to improve. •We believe market demand for trucks in India will continue the improvement trend from the second half of 2021. •We anticipate our aftermarket business will continue to improve, driven primarily by increased truck utilization in North America. •Our liquidity of $6.4 billion in cash, marketable securities and available credit facilities puts us in a strong position to deal with any uncertainties that may arise in 2022. Challenges •Supply constraints driven by strong demand in multiple end markets and regions may lead to increased costs, including higher freight and conversion costs. •Continued increases in material and commodity costs could negatively impact earnings. •Our industry's sales continue to be unfavorably impacted by supply chain constraints leading to shortages across multiple components categories and limiting our collective ability to meet end-user demand. Our customers are also experiencing other supply chain issues slowing production. •We expect market demand in truck and construction markets in China to decline from 2021 full year levels. Separation of Filtration Business On August 3, 2021, we announced our exploration of strategic alternatives for our filtration business. Potential strategic alternatives to be explored include the separation of our filtration business into a stand-alone company. The execution of this exploration process is dependent upon business and market conditions, along with a number of other factors and considerations. 45 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Key Working Capital and Balance Sheet Data We fund our working capital with cash from operations and short-term borrowings, including commercial paper, when necessary. Various assets and liabilities, including short-term debt, can fluctuate significantly from month to month depending on short-term liquidity needs. As a result, working capital is a prime focus of management's attention. Working capital and balance sheet measures are provided in the following table: [[GREPCENT_TABLE]] [["Dollars in millions","","December 31, 2021","","December 31, 2020"],["Working capital (1)","","$","5,225","","","$","5,562"],["Current ratio","","1.74","","","1.88"],["Accounts and notes receivable, net","","$","3,990","","","$","3,820"],["Days' sales in receivables","","59","","","69"],["Inventories","","$","4,355","","","$","3,425"],["Inventory turnover","","4.6","","","4.2"],["Accounts payable (principally trade)","","$","3,021","","","$","2,820"],["Days' payable outstanding","","57","","","68"],["Total debt","","$","4,159","","","$","4,164"],["Total debt as a percent of total capital","","30.7","%","","31.7","%"],["(1) Working capital includes cash and cash equivalents."]] [[/GREPCENT_TABLE]] Cash Flows Cash and cash equivalents were impacted as follows: [[GREPCENT_TABLE]] [["","","Years ended December 31,","","Change"],["In millions","","2021","","2020","","2019","","2021 vs. 2020","","2020 vs. 2019"],["Net cash provided by operating activities","","$","2,256","","","$","2,722","","","$","3,181","","","$","(466)","","","$","(459)"],["Net cash used in investing activities","","(873)","","","(719)","","","(1,150)","","","(154)","","","431"],["Net cash (used in) provided by financing activities","","(2,227)","","","280","","","(2,095)","","","(2,507)","","","2,375"],["Effect of exchange rate changes on cash and cash equivalents","","35","","","(11)","","","(110)","","","46","","","99"],["Net (decrease) increase in cash and cash equivalents","","$","(809)","","","$","2,272","","","$","(174)","","","$","(3,081)","","","$","2,446"]] [[/GREPCENT_TABLE]] 2021 vs. 2020 Net cash provided by operating activities decreased $466 million, primarily due to higher working capital requirements of $724 million and a net decrease in changes in other liabilities of $195 million, partially offset by higher consolidated net income of $353 million and lower restructuring payments of $109 million. During 2021, higher working capital requirements resulted in a cash outflow of $359 million compared to a cash inflow of $365 million in 2020, mainly due to higher inventories, partially offset by higher accrued expenses. Net cash used in investing activities increased $154 million, principally due to higher capital expenditures of $206 million, partially offset by favorable changes in cash flows from derivatives not designated as hedges of $45 million and increased proceeds from sale of land of $20 million. Net cash used in financing activities increased $2,507 million, primarily due to lower proceeds from borrowings of $1,935 million, mainly resulting from our $2 billion bond issuance in 2020, and higher repurchases of common stock of $761 million, partially offset by lower net payments of commercial paper of $327 million. The effect of exchange rate changes on cash and cash equivalents increased $46 million, primarily due to favorable fluctuations in the British pound of $55 million, partially offset by unfavorable fluctuations in the South Korean won, Chinese renminbi and Australian dollar. 2020 vs. 2019 For prior year liquidity comparisons see the Liquidity and Capital Resources section of our 2020 Form 10-K. 46 Table of Contents Sources of Liquidity We generate significant ongoing cash flow. Cash provided by operations is our principal source of liquidity with $2.3 billion provided in 2021. At December 31, 2021, our sources of liquidity included: [[GREPCENT_TABLE]] [["","","December 31, 2021"],["In millions","","Total","","U.S.","","International","","Primary location of international balances"],["Cash and cash equivalents","","$","2,592","","","$","509","","","$","2,083","","","China, Singapore, Netherlands, Belgium, Australia, Mexico, Canada"],["Marketable securities (1)","","595","","","106","","","489","","","India"],["Total","","$","3,187","","","$","615","","","$","2,572"],["Available credit capacity"],["Revolving credit facilities (2)","","$","3,187"],["International and other uncommitted domestic credit facilities","","$","234"],["(1) The majority of marketable securities could be liquidated into cash within a few days."],["(2) The five-year credit facility for $2.0 billion and the 364-day credit facility for $1.5 billion, maturing August 2026 and August 2022, respectively, are maintained primarily to provide backup liquidity for our commercial paper borrowings and general corporate purposes. At December 31, 2021, we had $313 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion."]] [[/GREPCENT_TABLE]] Cash, Cash Equivalents and Marketable Securities A significant portion of our cash flows are generated outside the U.S. We manage our worldwide cash requirements considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As a result, we do not anticipate any local liquidity restrictions to preclude us from funding our operating needs with local resources. If we distribute our foreign cash balances to the U.S. or to other foreign subsidiaries, we could be required to accrue and pay withholding taxes, for example, if we repatriated cash from certain foreign subsidiaries whose earnings we asserted are completely or partially permanently reinvested. Foreign earnings for which we assert permanent reinvestment outside the U.S. consist primarily of earnings of our China, India and Netherlands domiciled subsidiaries. At present, we do not foresee a need to repatriate any earnings for which we asserted permanent reinvestment. However, to help fund cash needs of the U.S. or other international subsidiaries as they arise, we repatriate available cash from certain foreign subsidiaries whose earnings are not permanently reinvested when it is cost effective to do so. Debt Facilities and Other Sources of Liquidity On August 18, 2021, we entered into an amended and restated five-year revolving credit agreement, which allows us to borrow up to $2 billion of unsecured funds at any time prior to August 18, 2026. On August 18, 2021, we also entered into an amended and restated 364-day credit agreement, which allows us to borrow up to $1.5 billion of unsecured funds at any time prior to August 17, 2022. This credit agreement amended and restated the prior $1.5 billion 364-day credit facility that matured on August 18, 2021. See Note 12, "DEBT," to our Consolidated Financial Statements for additional information. We have access to committed credit facilities that total $3.5 billion, including the $1.5 billion 364-day facility that expires August 17, 2022 and our $2.0 billion five-year facility that expires on August 18, 2026. We intend to maintain credit facilities at the current or higher aggregate amounts by renewing or replacing these facilities at or before expiration. These revolving credit facilities are maintained primarily to provide backup liquidity for our commercial paper borrowings and for general corporate purposes. Both credit agreements include various financial covenants, including, among others, maintaining a net debt to capital ratio of no more than 0.65 to 1.0. At December 31, 2021, our leverage ratio was 0.12 to 1.0. There were no outstanding borrowings under these facilities at December 31, 2021. We can issue up to $3.5 billion of unsecured, short-term promissory notes (commercial paper) pursuant to 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. The total combined borrowing capacity under the revolving credit facilities and commercial paper programs should not exceed $3.5 billion. See Note 12, "DEBT," to our Consolidated Financial Statements for additional information. At December 31, 2021, we had $313 million of commercial paper outstanding, which effectively reduced the available capacity under our revolving credit facilities to $3.2 billion. 47 Table of Contents In the second half of 2021, we entered into a series of interest rate swaps to effectively convert our $500 million senior notes, due in 2025, from a fixed rate of 0.75 percent to a floating rate equal to the three-month LIBOR plus a spread. We also entered into a series of interest rate swaps to effectively convert $765 million of our $850 million senior notes, due in 2030, from a fixed rate of 1.50 percent to a floating rate equal to the three-month LIBOR plus a spread. The swaps were designated, and will be accounted for, as fair value hedges. 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. We plan to file a new shelf registration statement in the first quarter of 2022, prior to the expiration of the shelf registration statement currently in effect. In July 2017, the U.K.'s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced it intends to phase out LIBOR by the end of 2021. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended until mid-2023. Various central bank committees and working groups continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for U.S. dollar LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. We have evaluated the potential impact of the replacement of the LIBOR benchmark interest rate including risk management, internal operational readiness and monitoring the Financial Accounting Standards Board standard-setting process to address financial reporting issues that might arise in connection with transition from LIBOR to a new benchmark rate. While we do not believe the change will materially impact us due to our operational and system readiness coupled with relevant contractual fallback language, we continue to evaluate all eventual transition risks. In anticipation of LIBOR's phase out, our most recent revolving credit agreements include a well-documented transition mechanism for selecting a benchmark replacement rate for LIBOR, subject to our agreement. Additionally, with respect to our $1.3 billion in LIBOR-based fixed to variable rate swaps maturing in 2025 and 2030, we reviewed and believe our adherence to the 2020 LIBOR fallback protocol will allow for a smooth transition to the designated replacement rate when that transition occurs. Supply Chain Financing We currently have supply chain financing programs with financial intermediaries, which provide certain vendors the option to be paid by financial intermediaries earlier than the due date on the applicable invoice. When a vendor utilizes the program and receives an early payment from a financial intermediary, they take a discount on the invoice. We then pay the financial intermediary the face amount of the invoice on the regularly scheduled due date. The maximum amount that we may have outstanding under the program is $361 million. We do not reimburse vendors for any costs they incur for participation in the program and their participation is completely voluntary. As a result, all amounts owed to the financial intermediaries are presented as "Accounts payable" in our Consolidated Balance Sheets. Amounts due to the financial intermediaries reflected in accounts payable at December 31, 2021, were $147 million. Uses of Cash Stock Repurchases In December 2021, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2019 repurchase plan. In December 2019, the Board authorized the acquisition of up to $2.0 billion of additional common stock upon completion of the 2018 repurchase plan. For the year ended December 31, 2021, we made the following purchases under our stock repurchase program: [[GREPCENT_TABLE]] [["In millions (except per share amounts) For each quarter ended","","Shares Purchased","","Average Cost Per Share","","Total Cost of Repurchases","","","","RemainingAuthorizedCapacity (1)"],["April 4","","1.7","","","$","247.35","","","$","418","","","","","$","1,576"],["July 4","","2.7","","","252.66","","","672","","","","","904"],["October 3","","0.6","","","231.57","","","138","","","","","766"],["December 31","","0.7","","","222.14","","","174","","","","","2,592"],["Total","","5.7","","","244.73","","","$","1,402"],["(1) The remaining $592 million authorized capacity under the 2019 plan was calculated based on the cost to purchase the shares, but excludes commission expenses in accordance with the authorized plan."]] [[/GREPCENT_TABLE]] We intend to repurchase outstanding shares from time to time during 2022 to enhance shareholder value. 48 Table of Contents Dividends Total dividends paid to common shareholders in 2021, 2020 and 2019 were $809 million, $782 million and $761 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 meets quarterly to consider our dividend payment. We expect to fund dividend payments with cash from operations. In July 2021, the Board authorized an increase to our quarterly dividend of 7.4 percent from $1.35 per share to $1.45 per share. Cash dividends per share paid to common shareholders and the Board authorized increases for the last three years were as follows: [[GREPCENT_TABLE]] [["","","Quarterly Dividends"],["","","2021","","2020","","2019"],["First quarter","","$","1.35","","","$","1.311","","","$","1.14"],["Second quarter","","1.35","","","1.311","","","1.14"],["Third quarter","","1.45","","","1.311","","","1.311"],["Fourth quarter","","1.45","","","1.35","","","1.311"],["Total","","$","5.60","","","$","5.28","","","$","4.90"]] [[/GREPCENT_TABLE]] Capital Expenditures Capital expenditures, including spending on internal use software, were $786 million, $575 million and $775 million in 2021, 2020 and 2019, respectively. We continue to invest in new product lines and targeted capacity expansions. We plan to spend an estimated $850 million to $900 million in 2022 on capital expenditures, excluding internal use software, with over 60 percent of these expenditures expected to be invested in North America. In addition, we plan to spend an estimated $70 million to $80 million on internal use software in 2022. Current Maturities of Short and Long-Term Debt We had $313 million of commercial paper outstanding at December 31, 2021, that matures in less than one year. The maturity schedule of our existing long-term debt does not require significant cash outflows until 2023 when our 3.65 percent senior notes and 2025 when our 0.75 percent senior notes are due. Required annual long-term debt principal payments range from $24 million to $536 million over the next five years. See Note 12, "DEBT," to the Consolidated Financial Statements for additional information. Pensions Our global pension plans, including our unfunded and non-qualified plans, were 121 percent funded at December 31, 2021. Our U.S. defined benefit plan, which represented approximately 52 percent of the worldwide pension obligation, was 138 percent funded, and our U.K. defined benefit plan was 127 percent funded at December 31, 2021. The funded status of our pension plans is dependent upon a variety of variables and assumptions including return on invested assets, market interest rates and levels of voluntary contributions to the plans. In 2021, the investment gain on our U.S. pension trust was 8.1 percent while our U.K. pension trust gain was 5.1 percent. Approximately 69 percent of our pension plan assets are held in highly liquid investments such as fixed income and equity securities. The remaining 31 percent of our plan assets are held in less liquid, but market valued investments, including real estate, private equity, venture capital, opportunistic credit and insurance contracts. We sponsor funded and unfunded domestic and foreign defined benefit pension plans. Contributions to the U.S. and U.K. plans were as follows: [[GREPCENT_TABLE]] [["","","","","Years ended December 31,"],["In millions","","","","","","2021","","2020","","2019"],["Defined benefit pension contributions","","","","","","$","78","","","$","92","","","$","121"],["Defined contribution pension plans","","","","","","92","","","85","","","102"]] [[/GREPCENT_TABLE]] We anticipate making total contributions of approximately $47 million to our global defined benefit pension plans in 2022. Expected contributions to our defined benefit pension plans in 2022 will meet or exceed the current funding requirements. 49 Table of Contents Future Uses of Cash A summary of our contractual obligations and other commercial commitments at December 31, 2021, are as follows: [[GREPCENT_TABLE]] [["Contractual Cash Obligations","","Payments Due by Period"],["In millions","","Current","","Long-Term"],["Long-term debt and finance lease obligations (1)","","$","172","","","$","5,463"],["Operating leases (1)","","138","","","348"],["Capital expenditures","","264","","","\u2014"],["Purchase commitments for inventory","","1,037","","","2"],["Other purchase commitments","","383","","","59"],["Transitional tax liability","","34","","","255"],["Other postretirement benefits","","19","","","134"],["International and other domestic letters of credit","","77","","","46"],["Performance and excise bonds","","29","","","74"],["Guarantees, indemnifications and other commitments","","25","","","14"],["Total","","$","2,178","","","$","6,395"],["(1) Includes principal payments and expected interest payments based on the terms of the obligations."]] [[/GREPCENT_TABLE]] The contractual obligations reported above exclude our unrecognized tax benefits of $89 million as of December 31, 2021. We are not able to reasonably estimate the period in which cash outflows relating to uncertain tax contingencies could occur. See Note 4, "INCOME TAXES," to the Consolidated Financial Statements for additional information. Credit Ratings Our rating and outlook from each of the credit rating agencies as of the date of filing are shown in the table below: [[GREPCENT_TABLE]] [["","","Long-Term","","","","Short-Term"],["Credit Rating Agency (1)","","Senior Debt Rating","","","","Debt Rating","","","","Outlook"],["Standard & Poor\u2019s Rating Services","","A+","","","","A1","","","","Stable"],["Moody\u2019s Investors Service, Inc.","","A2","","","","P1","","","","Stable"],["(1) Credit ratings are not recommendations to buy, are subject to change, and each rating should be evaluated independently of any other rating. In addition, we undertake no obligation to update disclosures concerning our credit ratings, whether as a result of new information, future events or otherwise."]] [[/GREPCENT_TABLE]] Management's Assessment of Liquidity Our financial condition and liquidity remain strong. Our solid balance sheet and credit ratings enable us to have ready access to credit and the capital markets. We assess our liquidity in terms of our ability to generate adequate cash to fund our operating, investing and financing activities. We believe our existing cash and marketable securities, operating cash flow and revolving credit facilities provide us with the financial flexibility needed to fund common stock repurchases, dividend payments, targeted capital expenditures, projected pension obligations, acquisitions, working capital and debt service obligations through 2022 and beyond. We continue to generate significant cash from operations and maintain access to our revolving credit facilities and commercial paper programs as noted above. APPLICATION OF CRITICAL ACCOUNTING ESTIMATES A summary of our significant accounting policies is included in Note 1, "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES," of our Consolidated Financial Statements which discusses accounting policies that we selected from acceptable alternatives. Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the U.S. which often requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements. Management reviews these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors they believe to be reasonable under the circumstances. In any given reporting period, our actual results may differ from the estimates and assumptions used in preparing our Consolidated Financial Statements. 50 Table of Contents Critical accounting estimates are defined as follows: the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made; different estimates reasonably could have been used; or if changes in the estimate are reasonably likely to occur from period to period and the change would have a material impact on our financial condition or results of operations. Our senior management has discussed the development and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of the Board. We believe our critical accounting estimates include estimating liabilities for warranty programs, assessing goodwill impairments, accounting for income taxes and pension benefits. Warranty Programs 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. As a result of the uncertainty surrounding the nature and frequency of product recall programs, the liability for such programs is recorded when we commit to a recall action or when a recall becomes probable and estimable, which generally occurs when management internally approves or commits to the action. Our warranty liability is generally affected by component failure rates, repair costs and the point of failure within the product life cycle. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. New product launches require a greater use of judgment in developing estimates until historical experience becomes available. Product specific experience is typically available four or five quarters after product launch, with a clear experience trend evident eight quarters after launch. We generally record warranty expense for new products upon shipment using a preceding product's warranty history and a multiplicative factor based upon preceding similar product experience and new product assessment until sufficient new product data is available for warranty estimation. We then use a blend of actual new product experience and preceding product historical experience for several subsequent quarters and new product specific experience thereafter. Note 13, "PRODUCT WARRANTY LIABILITY," to our Consolidated Financial Statements contains a summary of the activity in our warranty liability account for 2021, 2020 and 2019 including adjustments to pre-existing warranties. Goodwill Impairment We are required to make certain subjective and complex judgments in assessing whether a goodwill impairment event has occurred, including assumptions and estimates used to determine the fair value of our reporting units. We test for goodwill impairment at the reporting unit level and our reporting units are the operating segments or the components of operating segments that constitute businesses for which discrete financial information is available and is regularly reviewed by management.  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 elected this option on certain reporting units. The following events and circumstances are considered when evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount: •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. The examples noted above are not all-inclusive, and we consider other relevant events and circumstances that affect the fair value of a reporting unit in determining whether to perform the quantitative goodwill impairment test. Our goodwill recoverability assessment is based on our annual strategic planning process. This process includes an extensive review of expectations for the long-term growth of our businesses and forecasted future cash flows. In order to determine the valuation of our reporting units, we use either the market approach or the income approach using a discounted cash flow model. Our income approach method uses a discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate of return. Our estimates are based upon our historical experience, our current knowledge from our commercial relationships and available external information about future trends. 51 Table of Contents 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. Accounting for Income Taxes 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. At December 31, 2021, we recorded net deferred tax assets of $25 million. The assets included $395 million for the value of net operating loss and credit carryforwards. A valuation allowance of $360 million was recorded to reduce the tax assets to the net value management believed was 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 believe we 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 4, "INCOME TAXES," to our Consolidated Financial Statements. Pension Benefits We sponsor a number of pension plans globally, with the majority of assets in the U.S. and the U.K. In the U.S. and the U.K., we have major defined benefit plans that are separately funded. We account for our pension programs in accordance with employers' accounting for defined benefit pension plans, which requires that amounts recognized in financial statements be determined using an actuarial basis. As a result, our pension benefit programs are based on a number of statistical and judgmental assumptions that attempt to anticipate future events and are used in calculating the expense and liability related to our plans each year at December 31. These assumptions include discount rates used to value liabilities, assumed rates of return on plan assets, future compensation increases, employee turnover rates, actuarial assumptions relating to retirement age, mortality rates and participant withdrawals. The actuarial assumptions we use may differ significantly from actual results due to changing economic conditions, participant life span and withdrawal rates. These differences may result in a material impact to the amount of net periodic pension cost to be recorded in our Consolidated Financial Statements in the future. The expected long-term return on plan assets is used in calculating the net periodic pension cost. We considered several factors in developing our expected rate of return on plan assets. The long-term rate of return considers historical returns and expected returns on current and projected asset allocations. Projected returns are based primarily on broad, publicly traded passive fixed income and equity indices and forward-looking estimates of the value added by active investment management. At December 31, 2021, based upon our target asset allocations, it is anticipated that our U.S. investment policy will generate an average annual return over the 30-year projection period equal to or in excess of 6.25 percent, including the additional positive returns expected from active investment management. The one-year return for our U.S. plans was 8.1 percent for 2021. Our U.S. plan assets averaged annualized returns of 8.61 percent over the prior ten years and resulted in approximately $431 million of actuarial gains in accumulated other comprehensive loss (AOCL) in the same period. Based on the historical returns and forward-looking return expectations for capital markets, as plan assets continue to be de-risked, consistent with our investment policy, we believe our investment return assumption of 6.25 percent in 2022 for U.S. pension assets is reasonable and attainable. 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. At December 31, 2021, based upon our target asset allocations, it is anticipated that our U.K. investment policy will generate an average annual return over the 20-year projection period equal to or in excess of 4 percent. The one-year return for our U.K. plans was 5.1 percent for 2021. We generated average annualized returns of 9.14 percent over ten years, resulting in approximately $767 million of actuarial gains in AOCL. Our strategy with respect to our investments in pension plan assets is to be invested with a long-term outlook. Based on the historical returns and forward-looking return expectations as the plan assets continue to be de-risked, we believe that an investment return assumption of 52 Table of Contents 3.75 percent in 2022 for U.K. pension assets is reasonable and attainable. Our target allocation for 2022 and pension plan asset allocations at December 31, 2021 and 2020 are as follows: [[GREPCENT_TABLE]] [["","","U.S. Plans","","U.K. Plans"],["","","Target Allocation","","Percentage of Plan Assets at December 31,","","Target Allocation","","Percentage of Plan Assets at December 31,"],["Investment description","","2022","","2021","","2020","","2022","2021","","2020"],["Liability matching","","72.0","%","","70.0","%","","66.0","%","","57.0","%","","52.0","%","","57.0","%"],["Risk seeking","","28.0","%","","30.0","%","","34.0","%","","43.0","%","","48.0","%","","43.0","%"],["Total","","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%","","100.0","%"]] [[/GREPCENT_TABLE]] The differences between the actual return on plan assets and expected long-term return on plan assets are recognized in the asset value used to calculate net periodic cost over five years. The table below sets forth our expected rate of return for 2022 and the expected return assumptions used to develop our pension cost for the period 2019-2021. [[GREPCENT_TABLE]] [["","","Long-term Expected Return Assumptions"],["","","2022","","2021","","2020","","2019"],["U.S. plans","","6.25","%","","6.25","%","","6.25","%","","6.25","%"],["U.K. plans","","3.75","%","","4.00","%","","4.00","%","","4.00","%"]] [[/GREPCENT_TABLE]] Pension accounting offers various acceptable alternatives to account for the differences that eventually arise between the estimates used in the actuarial valuations and the actual results. It is acceptable to delay or immediately recognize these differences. Under the delayed recognition alternative, changes in pension obligations (including those resulting from plan amendments) and changes in the value of assets set aside to meet those obligations are not recognized in net periodic pension cost as they occur but are recognized initially in AOCL and subsequently amortized as components of net periodic pension cost systematically and gradually over future periods. In addition to this approach, we may also adopt immediate recognition of actuarial gains or losses. Immediate recognition introduces volatility in financial results. We have chosen to delay recognition and amortize actuarial differences over future periods. If we adopted the immediate recognition approach, we would record a loss of $545 million ($418 million after-tax) from cumulative actuarial net losses for our U.S. and U.K. pension plans. The difference between the expected return and the actual return on plan assets is deferred from recognition in our results of operations and under certain circumstances, such as when the difference exceeds 10 percent of the greater of the market value of plan assets or the projected benefit obligation, the difference is amortized over future years of service. This is also true of changes to actuarial assumptions. Under the delayed recognition alternative, the actuarial gains and losses are recognized and recorded in AOCL. As our losses related to the U.S. and U.K. pension plans exceed 10 percent of their respective plan assets, the excess is amortized over the average remaining service lives of participating employees. Net actuarial gains increased our shareholders' equity by $280 million after-tax in 2021. The gain is primarily due to strong asset returns and higher discount rates in the U.S. and U.K. The table below sets forth the net periodic pension cost for the years ended December 31 and our expected cost for 2022. [[GREPCENT_TABLE]] [["In millions","","2022","","2021","","2020","","2019"],["Net periodic pension cost","","$","33","","","$","78","","","$","102","","","$","65"]] [[/GREPCENT_TABLE]] We expect 2022 net periodic pension cost to decrease compared to 2021, primarily due to higher discount rates in the U.S. and U.K., and favorable actuarial experience in the U.S., partially offset by a lower expected rate of return in the U.K. The decrease in net periodic pension cost in 2021 compared to 2020 was primarily due to favorable actuarial experience and investment returns, partially offset by lower discount rates in the U.S. and U.K. The increase in net periodic pension cost in 2020 compared to 2019 was due to lower discount rates in the U.S. and U.K. The weighted-average discount rates used to develop our net periodic pension cost are set forth in the table below. [[GREPCENT_TABLE]] [["","","Discount Rates"],["","","2022","","2021","","2020","","2019"],["U.S. plans","","3.01","%","","2.62","%","","3.36","%","","4.36","%"],["U.K. plans","","1.95","%","","1.50","%","","2.00","%","","2.80","%"]] [[/GREPCENT_TABLE]] 53 Table of Contents The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. The guidelines for setting this rate suggest the use of a high-quality corporate bond rate. We used bond information provided by Moody's Investor Services, Inc. and Standard & Poor's Rating Services. All bonds used to develop our hypothetical portfolio in the U.S. and U.K. were deemed high-quality, non-callable bonds (Aa or better) at December 31, 2021, by at least one of the bond rating agencies. Our model called for projected payments until near extinction for the U.S. and the U.K. For both countries, our model matches the present value of the plan's projected benefit payments to the market value of the theoretical settlement bond portfolio. A single equivalent discount rate is determined to align the present value of the required cash flow with the value of the bond portfolio. The resulting discount rate is reflective of both the current interest rate environment and the plan's distinct liability characteristics. The table below sets forth the estimated impact on our 2022 net periodic pension cost relative to a change in the discount rate and a change in the expected rate of return on plan assets. [[GREPCENT_TABLE]] [["In millions","","Impact on Pension Cost Increase/(Decrease)"],["Discount rate used to value liabilities"],["0.25 percent increase","","$","(10)"],["0.25 percent decrease","","16"],["Expected rate of return on assets"],["1 percent increase","","(55)"],["1 percent decrease","","55"]] [[/GREPCENT_TABLE]] The above sensitivities reflect the impact of changing one assumption at a time. A higher discount rate decreases the plan obligations and decreases our net periodic pension cost. A lower discount rate increases the plan obligations and increases our net periodic pension cost. It should be noted that economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear. Note 10, "PENSIONS AND OTHER POSTRETIREMENT BENEFITS," to our Consolidated Financial Statements provides a summary of our pension benefit plan activity, the funded status of our plans and the amounts recognized in our Consolidated Financial Statements.