Annual report pursuant to Section 13 and 15(d)

OPERATING SEGMENTS

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OPERATING SEGMENTS
 12 Months Ended
Dec. 31, 2012
OPERATING SEGMENTS  
OPERATING SEGMENTS

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, or decision-making group, in deciding how to allocate resources and in assessing performance. Cummins chief operating decision-maker (CODM) is the Chief Executive Officer.

        Our reportable operating segments consist of the following: Engine, Components, Power Generation and Distribution. This reporting structure is organized according to the products and markets each segment serves and allows management to focus its efforts on providing enhanced service to a wide range of customers. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military equipment. The Components segment sells filtration products, aftertreatment, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators. 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.

        We use segment EBIT (defined as earnings before interest expense, taxes and noncontrolling interests) as a primary basis for the CODM to evaluate the performance of each of our operating segments. 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 have allocated certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These include certain costs and expenses of shared services, such as information technology, human resources, legal and finance. We also do not allocate debt-related items, actuarial gains or losses, prior service costs or credits, changes in cash surrender value of corporate owned life insurance, flood damage gains or losses, divestiture gains or losses or income taxes to individual segments. In 2012, non-segment items included a $20 million reserve ($12 million after-tax) related to legal matters and a $6 million gain related to adjustments from our 2011 divestitures, while 2011 included the gain on disposition of certain assets and liabilities of our exhaust business and our light-duty filtration business and 2010 included a Brazil revenue tax recovery. These gains were not allocated to the businesses as they were not considered in our evaluation of operating results for the year. Segment EBIT 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   Components   Power
Generation		   Distribution   Non-segment
Items(1)		   Total  

2012

                                      

External sales

   $ 9,101   $ 2,809   $ 2,163   $ 3,261   $ —   $ 17,334  

Intersegment sales

     1,632     1,203     1,105     16     (3,956 )   —  
                           

Total sales

     10,733     4,012     3,268     3,277     (3,956 )   17,334  

Depreciation and amortization(2)

     192     82     47     34     —     355  

Research, development and engineering expenses

     433     213     76     6     —     728  

Equity, royalty and interest income from investees

     127     29     40     188     —     384  

Interest income

     11     3     9     2     —     25  

Segment EBIT(3)

     1,248     426     285     369     (25 )   2,303  

Net assets

     3,373     1,830     1,582     1,392     —     8,177  

Investments and advances to equity investees

     401     127     88     281     —     897  

Capital expenditures

     399     134     95     62     —     690  

2011

                                      

External sales

   $ 9,649   $ 2,886   $ 2,492   $ 3,021   $ —   $ 18,048  

Intersegment sales

     1,658     1,177     1,006     23     (3,864 )   —  
                           

Total sales

     11,307     4,063     3,498     3,044     (3,864 )   18,048  

Depreciation and amortization(2)

     181     73     42     25     —     321  

Research, development and engineering expenses

     397     175     54     3     —     629  

Equity, royalty and interest income from investees

     166     31     47     172     —     416  

Interest income

     18     5     8     3     —     34  

Segment EBIT

     1,384     470     373     386     102     2,715  

Net assets

     3,167     1,467     1,547     1,123     —     7,304  

Investments and advances to equity investees

     398     123     79     238     —     838  

Capital expenditures

     339     141     87     55     —     622  

2010

                                      

External sales

   $ 6,594   $ 2,171   $ 2,150   $ 2,311   $ —   $ 13,226  

Intersegment sales

     1,294     875     769     13     (2,951 )   —  
                           

Total sales

     7,888     3,046     2,919     2,324     (2,951 )   13,226  

Depreciation and amortization(2)

     171     79     41     25     —     316  

Research, development and engineering expenses

     263     114     36     1     —     414  

Equity, royalty and interest income from investees

     161     23     35     132     —     351  

Interest income

     12     2     5     2     —     21  

Segment EBIT

     809     278     299     297     (26 )   1,657  

Net assets

     2,662     1,450     1,286     929     —     6,327  

Investments and advances to equity investees

     355     106     73     200     —     734  

Capital expenditures

     197     78     53     36     —     364  
(1)
Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. The year ended December 31, 2012, includes a $6 million gain ($4 million after-tax) related to adjustments from our 2011 divestitures and a $20 million reserve ($12 million after-tax) related to legal matters. The year ended December 31, 2011, includes a $68 million gain ($37 million after-tax) related to the sale of certain assets and liabilities of our exhaust business and a $53 million gain ($33 million after-tax) recorded for the sale of certain assets and liabilities of our light-duty filtration business, both from the Components segment, and a $38 million gain ($24 million after-tax) related to flood damage recoveries from the insurance settlement regarding a June 2008 flood in Southern Indiana. For the year ended December 31, 2010, unallocated corporate expenses include $32 million in Brazil tax recoveries ($21 million after-tax) and $2 million in flood damage expenses. The gains and losses have been excluded from segment results as they were not considered in our evaluation of operating results for the years ended December 31, 2012, 2011 and 2010.

(2)
Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount that is included in the Consolidated Statements of Income as "Interest expense."
(3)
Segment EBIT includes restructuring and other charges for each business segment of $20 million for the Engine segment, $6 million for the Components segment, $12 million for the Power Generation segment and $14 million for the Distribution segment. See Note 19, "RESTRUCTURING CHARGES," for additional detail.

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

 
   Years ended December 31,  
In millions
   2012   2011   2010  

Segment EBIT

   $ 2,303   $ 2,715   $ 1,657  

Less: Interest expense

     32     44     40  
               

Income before income taxes

   $ 2,271   $ 2,671   $ 1,617  
               


 

 
   December 31,  
In millions
   2012   2011   2010  

Net assets for operating segments

   $ 8,177   $ 7,304   $ 6,327  

Liabilities deducted in arriving at net assets

     4,913     4,832     4,412  

Pension and other postretirement benefit adjustments excluded from net assets

     (977 )   (928 )   (879 )

Deferred tax assets not allocated to segments

     410     435     517  

Debt-related costs not allocated to segments

     25     25     25  
               

Total assets

   $ 12,548   $ 11,668   $ 10,402  
               

        The table below presents certain segment information by geographic area. Net sales attributed to geographic areas are based on the location of the customer.

 
   Years ended and as of
December 31,		  
In millions
Net Sales
  2012   2011   2010  

United States

   $ 8,107   $ 7,354   $ 4,817  

China

     1,056     1,452     1,206  

Brazil

     798     1,286     1,014  

India

     757     859     808  

Mexico

     692     631     415  

United Kingdom

     660     727     562  

Canada

     642     653     506  

Other foreign countries

     4,622     5,086     3,898  
               

Total net sales

   $ 17,334   $ 18,048   $ 13,226  
               


 

 
   Years ended and as of
December 31,		  
In millions
Long-lived assets
  2012   2011   2010  

United States

   $ 2,440   $ 2,218   $ 1,981  

China

     589     520     446  

United Kingdom

     339     318     266  

India

     243     203     173  

Brazil

     170     151     146  

Netherlands

     130     111     —  

Mexico

     77     72     62  

Canada

     69     64     64  

Germany

     49     47     44  

Korea

     37     27     19  

Turkey

     29     19     1  

Australia

     25     34     48  

United Arab Emirates

     16     14     9  

Singapore

     16     9     7  

Romania

     15     10     10  

France

     13     13     14  

Other foreign countries

     33     32     32  
               

Total long-lived assets

   $ 4,290   $ 3,862   $ 3,322  
               

        Our largest customer is PACCAR Inc. Worldwide sales to this customer were $2,232 million in 2012, $2,144 million in 2011 and $986 million in 2010, representing 13 percent, 12 percent and 7 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales.