Cummins Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

OPERATING SEGMENTS

OPERATING SEGMENTS

12 Months Ended

Dec. 31, 2019

NOTE 22. OPERATING SEGMENTS

Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the President and Chief Operating Officer.

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

Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and New Power. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and smaller) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems and automated transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. The New Power segment designs, manufactures, sells and supports electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery, fuel cell and hydrogen production technologies. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.

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

The accounting policies of our operating segments are the same as those applied in our Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. We do not allocate gains (losses) of corporate owned life insurance or restructuring charges related to corporate functions to individual segments. EBITDA may not be consistent with measures used by other companies.

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



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

(Table continued on next page)



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

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


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

⁽³⁾

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


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

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



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

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



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

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


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

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

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



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

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