Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.3.0.814
OPERATING SEGMENTS
 9 Months Ended
Sep. 27, 2015
Segment Reporting [Abstract]  
OPERATING SEGMENTS
NOTE 13. 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, Distribution, Components and Power Generation. This reporting structure is organized according to the products and markets each segment serves. 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 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 and fuel systems. The Power Generation segment is an integrated provider of power systems, which sells engines, generator sets and alternators.
We use segment EBIT (defined as earnings before interest expense, income 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 Condensed 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 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 or income taxes to individual segments. Segment EBIT may not be consistent with measures used by other companies.
Summarized financial information regarding our reportable operating segments for the three and nine month periods is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Generation
 
Non-segment
Items (1)
 
Total
Three months ended September 27, 2015
 
 

 
 
 
 

 
 

 
 

 
 

External sales
 
$
1,800

 
$
1,543

 
$
891

 
$
386

 
$
—

 
$
4,620

Intersegment sales
 
728

 
8

 
349

 
273

 
(1,358
)
 
—

Total sales
 
2,528

 
1,551

 
1,240

 
659

 
(1,358
)
 
4,620

Depreciation and amortization(2)
 
60

 
26

 
28

 
14

 
—

 
128

Research, development and engineering expenses
 
116

 
2

 
65

 
14

 
—

 
197

Equity, royalty and interest income from investees
 
40

 
19

 
9

 
10

 
—

 
78

Interest income
 
6

 
1

 
1

 
1

 
—

 
9

Segment EBIT
 
252

 
123

(3) 
156

 
42

 
4

 
577

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 28, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
2,181

 
$
1,282

 
$
946

 
$
481

 
$
—

 
$
4,890

Intersegment sales
 
635

 
10

 
341

 
273

 
(1,259
)
 
—

Total sales
 
2,816

 
1,292

 
1,287

 
754

 
(1,259
)
 
4,890

Depreciation and amortization(2)
 
50

 
22

 
27

 
13

 
—

 
112

Research, development and engineering expenses
 
114

 
2

 
64

 
18

 
—

 
198

Equity, royalty and interest income from investees
 
40

 
37

 
9

 
13

 
—

 
99

Interest income
 
3

 
1

 
1

 
1

 
—

 
6

Segment EBIT
 
330

 
131

(3) 
172

 
60

 
(9
)
 
684

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 27, 2015
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
5,747

 
$
4,499

 
$
2,839

 
$
1,259

 
$
—

 
$
14,344

Intersegment sales
 
2,174

 
23

 
1,097

 
827

 
(4,121
)
 
—

Total sales
 
7,921

 
4,522

 
3,936

 
2,086

 
(4,121
)
 
14,344

Depreciation and amortization(2)
 
178

 
78

 
82

 
43

 
—

 
381

Research, development and engineering expenses
 
321

 
8

 
183

 
46

 
—

 
558

Equity, royalty and interest income from investees
 
127

 
60

 
26

 
27

 
—

 
240

Interest income
 
11

 
3

 
3

 
3

 
—

 
20

Segment EBIT
 
846

 
324

(3) 
574

 
148

 
(32
)
 
1,860

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 28, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
6,449

 
$
3,453

 
$
2,821

 
$
1,408

 
$
—

 
$
14,131

Intersegment sales
 
1,674

 
27

 
976

 
728

 
(3,405
)
 
—

Total sales
 
8,123

 
3,480

 
3,797

 
2,136

 
(3,405
)
 
14,131

Depreciation and amortization(2)
 
153

 
58

 
79

 
38

 
—

 
328

Research, development and engineering expenses
 
335

 
7

 
170

 
55

 
—

 
567

Equity, royalty and interest income from investees
 
117

 
120

 
27

 
30

 
—

 
294

Interest income
 
9

 
2

 
3

 
3

 
—

 
17

Segment EBIT
 
910

 
333

(3) 
524

 
146

 
(44
)
 
1,869

____________________________________
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended September 27, 2015 and September 28, 2014.
(2) Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were $2 million and $2 million for the nine months ended September 27, 2015 and September 28, 2014, respectively.
(3) Distribution segment EBIT included gains of $17 million for both the three and nine month periods ended September 27, 2015 and $18 million and $38 million for the three and nine month periods ended September 28, 2014, respectively, on the fair value adjustments resulting from the acquisition of the controlling interests in North American distributors. See Note 3, "ACQUISITIONS," for additional information.
A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Income is shown in the table below:
 
 
Three months ended
 
Nine months ended
In millions
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Total EBIT
 
$
577

 
$
684

 
$
1,860

 
$
1,869

Less: Interest expense
 
16

 
15

 
47

 
47

Income before income taxes
 
$
561

 
$
669

 
$
1,813

 
$
1,822