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

Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

OPERATING SEGMENTS

9 Months Ended

Sep. 30, 2018

NOTE 15. 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 designs, manufactures, sells and supports 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 Segments		Intersegment Eliminations ⁽¹⁾			Total
Three months ended September 30, 2018
External sales	$	2,082	$	1,927	$	1,297	$	636	$	1		$	5,943	$	—		$	5,943
Intersegment sales	644		4		457		471		1			1,577		(1,577		)	—
Total sales	2,726		1,931		1,754		1,107		2			7,520		(1,577		)	5,943
Research, development and engineering expenses	74		5		71		57		22			229		—			229
Equity, royalty and interest income from investees	55		9		12		14		—			90		—			90
Interest income	3		4		1		1		—			9		—			9
Segment EBITDA	405		155		288		163		(30		)	981		2			983
Depreciation and amortization ⁽²⁾	46		27		44		29		2			148		—			148

Three months ended October 1, 2017
External sales	$	1,783	$	1,748	$	1,139	$	615	$	—		$	5,285	$	—		$	5,285
Intersegment sales	553		5		394		441		—			1,393		(1,393		)	—
Total sales	2,336		1,753		1,533		1,056		—			6,678		(1,393		)	5,285
Research, development and engineering expenses	83		6		63		61		—			213		—			213
Equity, royalty and interest income from investees	58		11		12		14		—			95		—			95
Interest income	1		2		—		1		—			4		—			4
Segment EBITDA	276		120		259		111		—			766		22			788
Depreciation and amortization ⁽²⁾	47		29		42		30		—			148		—			148

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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 September 30, 2018 and October 1, 2017.

Summarized financial information regarding our reportable operating segments for the nine months ended is shown in the table below:



In millions	Engine		Distribution		Components		Power Systems		Electrified Power			Total Segments		Intersegment Eliminations ⁽¹⁾			Total
Nine months ended September 30, 2018
External sales	$	5,945	$	5,762	$	4,012	$	1,922	$	4		$	17,645	$	—		$	17,645
Intersegment sales	1,923		16		1,382		1,505		1			4,827		(4,827		)	—
Total sales	7,868		5,778		5,394		3,427		5			22,472		(4,827		)	17,645
Research, development and engineering expenses	229		15		195		174		45			658		—			658
Equity, royalty and interest income from investees	189		33		42		51		—			315		—			315
Interest income	8		9		4		5		—			26		—			26
Segment EBITDA	1,053		423		752		491		(61		)	2,658		(78		)	2,580
Depreciation and amortization⁽²⁾	142		81		137		91		4			455		—			455

Nine months ended October 1, 2017
External sales	$	4,951	$	5,101	$	3,183	$	1,717	$	—		$	14,952	$	—		$	14,952
Intersegment sales	1,715		19		1,148		1,238		—			4,120		(4,120		)	—
Total sales	6,666		5,120		4,331		2,955		—			19,072		(4,120		)	14,952
Research, development and engineering expenses	200		14		171		161		—			546		—			546
Equity, royalty and interest income from investees	186		35		40		40		—			301		—			301
Interest income	4		4		1		2		—			11		—			11
Segment EBITDA	872		377		703		286		—			2,238		19			2,257
Depreciation and amortization⁽²⁾	137		90		117		87		—			431		—			431

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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 nine months ended September 30, 2018 and October 1, 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 $2 million for the nine month periods ended September 30, 2018 and October 1, 2017, respectively. A portion of depreciation expense is included in "Research, development and engineering expenses."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 30, 2018		October 1, 2017		September 30, 2018		October 1, 2017
Total EBITDA	$	983	$	788	$	2,580	$	2,257
Less:
Depreciation and amortization	148		148		455		431
Interest expense	30		18		82		57
Income before income taxes	$	805	$	622	$	2,043	$	1,769