Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.8.0.1
OPERATING SEGMENTS
3 Months Ended
Apr. 01, 2018
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 (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, Power Systems and Electrified Power. 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 formed the Electrified Power segment, effective January 1, 2018, which will provide fully electric and hybrid powertrain solutions along with innovative components and subsystems to serve all our markets as they adopt electrification, meeting the needs of our OEM partners and end customers.
Our Electrified Power segment will design, manufacture, sell and support electrified power systems ranging from fully electric to hybrid. We are currently developing the Cummins Electric Power Battery and the Cummins Hybrid Plug-In systems for urban bus, which are expected to launch in 2019 and 2020, respectively. We also design and manufacture battery modules, packs and systems for commercial, industrial and material handling applications. We use a range of cell chemistries which are suitable for pure electric, hybrid and plug-in hybrid applications. In addition to electrified powertrains for urban bus, we intend to deliver product offerings to future markets, including pick-up and delivery applications and other markets as they adopt electric solutions. We invest in and utilize our internal research and development capabilities, along with strategic acquisitions and partnerships to meet our objectives.
Effective January 1, 2018, we changed our measure to 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. EBITDA assists investors and debt holders in comparing our performance on a consistent basis without regard for depreciation and amortization, which can vary significantly depending upon many factors. Prior periods have been revised to reflect the current presentation. 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 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 changes in cash surrender value of corporate owned life insurance to individual segments. EBITDA may not be consistent with measures used by other companies.Summarized financial information regarding our reportable operating segments is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Electrified Power
 
Total Segment
 
Intersegment Eliminations (1)
 
Total
Three months ended April 1, 2018
 
 

 
 
 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
1,813

 
$
1,847

 
$
1,313

 
$
595

 
$
2

 
$
5,570

 
$

 
$
5,570

Intersegment sales
 
633

 
6

 
440

 
479

 

 
1,558

 
(1,558
)
 

Total sales
 
2,446

 
1,853

 
1,753

 
1,074

 
2

 
7,128

 
(1,558
)
 
5,570

Research, development and engineering expenses
 
79

 
5

 
62

 
57

 
7

 
210

 

 
210

Equity, royalty and interest income from investees
 
67

 
13

 
16

 
19

 

 
115

 

 
115

Interest income
 
2

 
2

 
1

 
2

 

 
7

 

 
7

Segment EBITDA
 
286

 
123

 
227

 
142

 
(10
)
 
768

 
(68
)
 
700

Depreciation and amortization (2)
 
49

 
27

 
46

 
30

 
1

 
153

 

 
153

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended April 2, 2017
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
1,457

 
$
1,637

 
$
980

 
$
515

 
$

 
$
4,589

 
$

 
$
4,589

Intersegment sales
 
566

 
8

 
364

 
367

 

 
1,305

 
(1,305
)
 

Total sales
 
2,023

 
1,645

 
1,344

 
882

 

 
5,894

 
(1,305
)
 
4,589

Research, development and engineering expenses
 
54

 
4

 
50

 
50

 

 
158

 

 
158

Equity, royalty and interest income from investees
 
72

 
11

 
13

 
12

 

 
108

 

 
108

Interest income
 
1

 
1

 

 

 

 
2

 

 
2

Segment EBITDA
 
273

 
130

 
216

 
85

 

 
704

 
1

 
705

Depreciation and amortization (2)
 
44

 
30

 
37

 
28

 

 
139

 

 
139

____________________________________
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended April 1, 2018 and April 2, 2017.
(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 was $1 million and less than $1 million for the three month periods ended April 1, 2018 and April 2, 2017, respectively.
 
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
In millions
 
April 1,
2018
 
April 2,
2017
Total EBITDA
 
$
700

 
$
705

Less:
 
 
 
 
Depreciation and amortization
 
153

 
139

Interest expense
 
24

 
18

Income before income taxes
 
$
523

 
$
548