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, 2017

NOTE 21. 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.

Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and less in size) 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, fuel systems and 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.

We use 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 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 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. 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		Distribution			Components ⁽¹⁾		Power Systems			Total Segment		Intersegment Eliminations ⁽²⁾			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
Depreciation and amortization ⁽³⁾	184		116			163		117			580		—			580
Research, development and engineering expenses	279		19			240		214			752		—			752
Equity, royalty and interest income from investees ⁽⁴⁾	219		44			40		54			357		—			357
Interest income	6		6			3		3			18		—			18
Loss contingency charge ⁽⁵⁾	5		—			—		—			5		—			5
Segment EBIT	959		384			754		294			2,391		55			2,446
Net assets	1,290		2,700			3,028		3,124			10,142		—			10,142
Investments and advances to equity investees	531		267			194		164			1,156		—			1,156
Capital expenditures	188		101			127		90			506		—			506
2016
External sales	$	5,774	$	6,157		$	3,514	$	2,064		$	17,509	$	—		$	17,509
Intersegment sales	2,030		24			1,322		1,453			4,829		(4,829		)	—
Total sales	7,804		6,181			4,836		3,517			22,338		(4,829		)	17,509
Depreciation and amortization ⁽³⁾	163		116			133		115			527		—			527
Research, development and engineering expenses	226		13			208		189			636		—			636
Equity, royalty and interest income from investees	148		70			41		42			301		—			301
Interest income	10		4			4		5			23		—			23
Loss contingency charge ⁽⁵⁾	138		—			—		—			138		—			138
Segment EBIT	686		392		⁽⁶⁾	641		263		⁽⁷⁾	1,982		17			1,999
Net assets	1,620		2,604			1,868		2,629			8,721		—			8,721
Investments and advances to equity investees	427		204			176		139			946		—			946
Capital expenditures	200		96			143		92			531		—			531
2015
External sales	$	6,733	$	6,198		$	3,745	$	2,434		$	19,110	$	—		$	19,110
Intersegment sales	1,937		31			1,427		1,633			5,028		(5,028		)	—
Total sales	8,670		6,229			5,172		4,067			24,138		(5,028		)	19,110
Depreciation and amortization ⁽³⁾	187		105			109		110			511		—			511
Research, development and engineering expenses	263		10			236		226			735		—			735
Equity, royalty and interest income from investees	146		78			35		56			315		—			315
Interest income	11		4			4		5			24		—			24
Loss contingency charge ⁽⁵⁾	60		—			—		—			60		—			60
Impairment of light-duty diesel assets ⁽⁸⁾	202		—			9		—			211		—			211
Restructuring actions and other charges ⁽⁹⁾	17		23			13		26			79		11			90
Segment EBIT	636		412		⁽⁶⁾	727		335			2,110		(20		)	2,090
Net assets	2,107		2,330			1,891		2,736			9,064		—			9,064
Investments and advances to equity investees	445		192			150		188			975		—			975
Capital expenditures	345		125			137		137			744		—			744

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⁽¹⁾	Includes Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017. See Note

18 , "ACQUISITIONS," for additional information.


⁽²⁾	Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the years ended December 31, 2017, 2016 and 2015, respectively.


⁽³⁾	Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs that are included in the Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were $3 million, $3 million and $3 million for the years ended December 31, 2017, 2016 and 2015, respectively.


⁽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 2, "INCOME TAXES," for additional information.


⁽⁵⁾	See Note 12, "COMMITMENTS AND CONTINGENCIES," for additional information.


⁽⁶⁾	Distribution segment EBIT included gains on the fair value adjustment resulting from the acquisition of controlling interests in North American distributors of $15 million and $18 million for the years ended December 31, 2016 and 2015, respectively. See Note 18, "ACQUISITIONS," for additional information.


⁽⁷⁾	Power Systems segment EBIT included a $17 million gain on the sale of an equity investee for the year ended December 31, 2016. See Note 3, "INVESTMENTS IN EQUITY INVESTEES," for additional information.


⁽⁸⁾	See Note 19, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," for additional information.


⁽⁹⁾	See Note 20, "RESTRUCTURING ACTIONS AND OTHER CHARGES," for additional information.

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	2017		2016		2015
Total EBIT	$	2,446	$	1,999	$	2,090
Less: Interest expense	81		69		65
Income before income taxes	$	2,365	$	1,930	$	2,025



	December 31,
In millions	2017			2016			2015
Net assets for operating segments	$	10,142		$	8,721		$	9,064
Brammo Inc. assets	72		⁽¹⁾	—			—
Liabilities deducted in arriving at net assets	7,397			6,152			5,920
Pension and other postretirement benefit adjustments excluded from net assets	156			(284		)	(242		)
Deferred tax assets not allocated to segments	306			420			390
Deferred debt costs not allocated to segments	2			2			2
Total assets	$	18,075		$	15,011		$	15,134

____________________________________________________


⁽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 18, "ACQUISITIONS," for additional information.

The tables below present certain segment information by geographic area. Net sales attributed to geographic areas were based on the location of the customer.



In millions	Years ended December 31,
Net Sales	2017		2016		2015
United States	$	11,010	$	9,476	$	10,757
China	2,137		1,544		1,451
Other International	7,281		6,489		6,902
Total net sales	$	20,428	$	17,509	$	19,110

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.



In millions	December 31,
Long-lived assets	2017		2016		2015
United States	$	3,157	$	3,092	$	2,968
China	795		652		668
India	563		475		450
United Kingdom	339		254		349
Netherlands	221		197		172
Brazil	149		149		124
Mexico	136		131		108
Canada	116		132		133
Other international countries	293		236		261
Total long-lived assets	$	5,769	$	5,318	$	5,233

Our largest customer is PACCAR Inc. Worldwide sales to this customer were $2,893 million in 2017, $2,359 million in 2016 and $2,949 million in 2015, representing 14 percent, 13 percent and 15 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales.