Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.10.0.1
OPERATING SEGMENTS
6 Months Ended
Jul. 01, 2018
Segment Reporting [Abstract]  
OPERATING SEGMENTS NOTE 14. 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 for the three months ended is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Electrified Power
 
Total Segment
 
Intersegment Eliminations (1)
 
Total
Three months ended July 1, 2018
 
 

 
 
 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
2,050

 
$
1,988

 
$
1,402

 
$
691

 
$
1

 
$
6,132

 
$

 
$
6,132

Intersegment sales
 
646

 
6

 
485

 
555

 

 
1,692

 
(1,692
)
 

Total sales
 
2,696

 
1,994

 
1,887

 
1,246

 
1

 
7,824

 
(1,692
)
 
6,132

Research, development and engineering expenses
 
76

 
5

 
62

 
60

 
16

 
219

 

 
219

Equity, royalty and interest income from investees
 
67

 
11

 
14

 
18

 

 
110

 

 
110

Interest income
 
3

 
3

 
2

 
2

 

 
10

 

 
10

Segment EBITDA
 
362

 
145

 
237

 
186

 
(21
)
 
909

 
(12
)
 
897

Depreciation and amortization (2)
 
47

 
27

 
47

 
32

 
1

 
154

 

 
154

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended July 2, 2017
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
1,711

 
$
1,716

 
$
1,064

 
$
587

 
$

 
$
5,078

 
$

 
$
5,078

Intersegment sales
 
596

 
6

 
390

 
430

 

 
1,422

 
(1,422
)
 

Total sales
 
2,307

 
1,722

 
1,454

 
1,017

 

 
6,500

 
(1,422
)
 
5,078

Research, development and engineering expenses
 
63

 
4

 
58

 
50

 

 
175

 

 
175

Equity, royalty and interest income from investees
 
56

 
13

 
15

 
14

 

 
98

 

 
98

Interest income
 
2

 
1

 
1

 
1

 

 
5

 

 
5

Segment EBITDA
 
323

 
127

 
228

 
90

 

 
768

 
(4
)
 
764

Depreciation and amortization (2)
 
46

 
31

 
38

 
29

 

 
144

 

 
144

____________________________________
(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 July 1, 2018 and July 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. A portion of depreciation expense is included in "Research, development and engineering expenses" above.
Summarized financial information regarding our reportable operating segments for the six months ended is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Electrified Power
 
Total Segment
 
Intersegment Eliminations (1)
 
Total
Six months ended July 1, 2018
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
3,863

 
$
3,835

 
$
2,715

 
$
1,286

 
$
3

 
$
11,702

 
$

 
$
11,702

Intersegment sales
 
1,279

 
12

 
925

 
1,034

 

 
3,250

 
(3,250
)
 

Total sales
 
5,142

 
3,847

 
3,640

 
2,320

 
3

 
14,952

 
(3,250
)
 
11,702

Research, development and engineering expenses
 
155

 
10

 
124

 
117

 
23

 
429

 

 
429

Equity, royalty and interest income from investees
 
134

 
24

 
30

 
37

 

 
225

 

 
225

Interest income
 
5

 
5

 
3

 
4

 

 
17

 

 
17

Segment EBITDA
 
648

 
268

 
464

 
328

 
(31
)
 
1,677

 
(80
)
 
1,597

Depreciation and amortization(2)
 
96

 
54

 
93

 
62

 
2

 
307

 

 
307

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended July 2, 2017
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
3,168

 
$
3,353

 
$
2,044

 
$
1,102

 
$

 
$
9,667

 
$

 
$
9,667

Intersegment sales
 
1,162

 
14

 
754

 
797

 

 
2,727

 
(2,727
)
 

Total sales
 
4,330

 
3,367

 
2,798

 
1,899

 

 
12,394

 
(2,727
)
 
9,667

Research, development and engineering expenses
 
117

 
8

 
108

 
100

 

 
333

 

 
333

Equity, royalty and interest income from investees
 
128

 
24

 
28

 
26

 

 
206

 

 
206

Interest income
 
3

 
2

 
1

 
1

 

 
7

 

 
7

Segment EBITDA
 
596

 
257

 
444

 
175

 

 
1,472

 
(3
)
 
1,469

Depreciation and amortization(2)
 
90

 
61

 
75

 
57

 

 
283

 

 
283

____________________________________
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the six months ended July 1, 2018 and July 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 $1 million for the six month periods ended July 1, 2018 and July 2, 2017, respectively. A portion of depreciation expense is included in "Research, development and engineering expenses" above.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
 
Six months ended
In millions
 
July 1,
2018
 
July 2,
2017
 
July 1,
2018
 
July 2,
2017
Total EBITDA
 
$
897

 
$
764

 
$
1,597

 
$
1,469

Less:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
154

 
144

 
307

 
283

Interest expense
 
28

 
21

 
52

 
39

Income before income taxes
 
$
715

 
$
599

 
$
1,238

 
$
1,147