Cummins Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

OPERATING SEGMENTS

6 Months Ended

Jul. 01, 2018

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

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⁽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.

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

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⁽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