Annual report pursuant to Section 13 and 15(d)

OPERATING SEGMENTS

v2.4.0.6
OPERATING SEGMENTS
 12 Months Ended
Dec. 31, 2011
OPERATING SEGMENTS  
OPERATING SEGMENTS

NOTE 23. 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, or decision-making group, in deciding how to allocate resources and in assessing performance. Cummins chief operating decision-maker (CODM) is the Chief Executive Officer.

        Our reportable operating segments consist of the following: Engine, Components, Power Generation and Distribution. This reporting structure is organized according to the products and markets each segment serves and allows management to focus its efforts on providing enhanced service to a wide range of customers. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, mining, agriculture, marine, oil and gas, rail and military equipment. The Components segment sells filtration products, exhaust aftertreatment systems, turbochargers and fuel systems. The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators. 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.

        We use segment EBIT (defined as earnings before interest expense, 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 have allocated certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). These include certain costs and expenses of shared services, such as information technology, human resources, legal and finance. We also 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, restructuring and other charges, flood damage gains or losses, or income taxes to individual segments. In 2011 non-segment items included the gain on disposition of certain assets and liabilities of our exhaust business and our light-duty filtration business while 2010 included a Brazil revenue tax recovery. These gains were not allocated to the businesses as they were not considered in our evaluation of operating results for the year. Segment 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   Components   Power
Generation 		  Distribution   Non-segment
Items(1) 		  Total  

2011

                                      

External sales

   $ 9,649   $ 2,886   $ 2,492   $ 3,021   $ —   $ 18,048  

Intersegment sales

     1,658     1,177     1,006     23     (3,864 )   —  
                           

Total sales

     11,307     4,063     3,498     3,044     (3,864 )   18,048  

Depreciation and amortization(2)

     181     73     42     25     —     321  

Research, development and engineering expenses

     397     175     54     3     —     629  

Equity, royalty and interest income from investees

     166     31     47     172     —     416  

Interest income

     18     5     8     3     —     34  

Segment EBIT

     1,384     470     373     386     102     2,715  

Net assets

     3,167     1,467     1,547     1,123     —     7,304  

Investments and advances to equity investees

     398     123     79     238     —     838  

Capital expenditures

     339     141     87     55     —     622  

2010

                                      

External sales

   $ 6,594   $ 2,171   $ 2,150   $ 2,311   $ —   $ 13,226  

Intersegment sales

     1,294     875     769     13     (2,951 )   —  
                           

Total sales

     7,888     3,046     2,919     2,324     (2,951 )   13,226  

Depreciation and amortization(2)

     171     79     41     25     —     316  

Research, development and engineering expenses

     263     114     36     1     —     414  

Equity, royalty and interest income from investees

     161     23     35     132     —     351  

Interest income

     12     2     5     2     —     21  

Segment EBIT

     809     278     299     297     (26 )   1,657  

Net assets

     2,662     1,450     1,286     929     —     6,327  

Investments and advances to equity investees

     355     106     73     200     —     734  

Capital expenditures

     197     78     53     36     —     364  

2009

                                      

External sales

   $ 5,582   $ 1,562   $ 1,879   $ 1,777   $ —   $ 10,800  

Intersegment sales

     823     793     538     7     (2,161 )   —  
                           

Total sales

     6,405     2,355     2,417     1,784     (2,161 )   10,800  

Depreciation and amortization(2)

     185     73     49     17     —     324  

Research, development and engineering expenses

     241     88     33     —     —     362  

Equity, royalty and interest income from investees

     54     13     22     125     —     214  

Restructuring and other charges

     —     —     —     —     99     99  

Interest income

     3     1     3     1     —     8  

Segment EBIT

     252     95     167     235     (74 )   675  

Net assets

     2,176     1,287     1,123     687     —     5,273  

Investments and advances to equity investees

     261     91     50     172     —     574  

Capital expenditures

     207     59     34     10     —     310  
(1)
Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. The year ended December 31, 2011, includes a $68 million gain ($37 million after-tax) related to the sale of certain assets and liabilities of our exhaust business and a $53 million gain ($33 million after-tax) recorded for the sale of certain assets and liabilities of our light-duty filtration business, both from the Components segment, and a $38 million gain ($24 million after-tax) related to flood damage recoveries from the insurance settlement regarding a June 2008 flood in Southern Indiana. The gains have been excluded from segment results as they were not considered in our evaluation of operating results for the year ended December 31, 2011. For the year ended December 31, 2010, unallocated corporate expenses include $32 million in Brazil tax recoveries ($21 million after-tax) and $2 million in flood damage expenses. The Brazil tax recovery has been excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2010. For the year ended December 31, 2009, unallocated corporate expenses included $99 million in restructuring and other charges and a gain of $12 million related to flood damage recoveries.

(2)
Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount that is included in the Consolidated Statements of Income as "Interest expense."

        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
   2011   2010   2009  

Segment EBIT

   $ 2,715   $ 1,657   $ 675  

Less:

                    

Interest expense

     44     40     35  
               

Income before income taxes

   $ 2,671   $ 1,617   $ 640  
               

 

 
   December 31,  
In millions
   2011   2010   2009  

Net assets for operating segments

   $ 7,304   $ 6,327   $ 5,273  

Liabilities deducted in arriving at net assets

     4,832     4,412     4,018  

Pension and other postretirement benefit adjustments excluded from net assets

     (928 )   (879 )   (1,180 )

Deferred tax assets not allocated to segments

     435     517     680  

Debt-related costs not allocated to segments

     25     25     25  
               

Total assets

   $ 11,668   $ 10,402   $ 8,816  
               

        The table below presents certain segment information by geographic area. Net sales attributed to geographic areas are based on the location of the customer.

 
   Years ended and as of
December 31, 		 
In millions
   2011   2010   2009  

Net Sales

                    

United States

   $ 7,354   $ 4,817   $ 5,141  

China

     1,452     1,206     630  

Brazil

     1,286     1,014     596  

India

     859     808     592  

United Kingdom

     727     562     406  

Canada

     653     506     327  

Mexico

     631     415     240  

Other foreign countries

     5,086     3,898     2,868  
               

Total net sales

   $ 18,048   $ 13,226   $ 10,800  
               

 

 
   Years ended and as of
December 31, 		 
In millions
   2011   2010   2009  

Long-lived assets

                    

United States

   $ 2,218   $ 1,981   $ 1,811  

China

     520     446     322  

United Kingdom

     318     266     188  

India

     203     173     134  

Brazil

     151     146     125  

Netherlands

     111     —     —  

Mexico

     72     62     54  

Canada

     64     64     27  

Germany

     47     44     37  

Australia

     34     48     11  

Korea

     27     19     2  

Turkey

     19     1     1  

Other foreign countries

     78     72     74  
               

Total long-lived assets

   $ 3,862   $ 3,322   $ 2,786  
               

        Our largest customer is PACCAR Inc. Worldwide sales to this customer were $2,144 million in 2011, $986 million in 2010 and $925 million in 2009, representing 12 percent, seven percent and nine percent, respectively, of our consolidated net sales. No other customer accounted for more than ten percent of consolidated net sales.