Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v2.4.0.8
OPERATING SEGMENTS
 6 Months Ended
Jun. 29, 2014
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, 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, 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 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 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 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, divestiture gains or losses or income taxes to individual segments.  Segment EBIT may not be consistent with measures used by other companies.

Summarized financial information regarding our reportable operating segments for the three and six month periods is shown in the table below:
In millions
 
Engine
 
Components
 
Power Generation
 
Distribution
 
Non-segment
Items (1)
 
Total
Three months ended June 29, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
2,178

 
$
953

 
$
475

 
$
1,229

 
$
—

 
$
4,835

Intersegment sales
 
566

 
327

 
268

 
9

 
(1,170
)
 
—

Total sales
 
2,744

 
1,280

 
743

 
1,238

 
(1,170
)
 
4,835

Depreciation and amortization(2)
 
52

 
26

 
13

 
20

 
—

 
111

Research, development and engineering expenses
 
105

 
53

 
18

 
3

 
—

 
179

Equity, royalty and interest income from investees
 
45

 
9

 
9

 
42

 
—

 
105

Interest income
 
4

 
1

 
1

 
—

 
—

 
6

Segment EBIT
 
311


185


61


126

(3) 
(26
)
 
657

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2013
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
2,209

 
$
786

 
$
583

 
$
947

 
$
—

 
$
4,525

Intersegment sales
 
447

 
331

 
231

 
7

 
(1,016
)
 
—

Total sales
 
2,656

 
1,117

 
814

 
954

 
(1,016
)
 
4,525

Depreciation and amortization(2)
 
51

 
23

 
12

 
15

 
—

 
101

Research, development and engineering expenses
 
102

 
57

 
17

 
1

 
—

 
177

Equity, royalty and interest income from investees
 
52

 
9

 
10

 
37

 
—

 
108

Interest income
 
7

 
—

 
2

 
1

 
—

 
10

Segment EBIT
 
339


136


76


100

(3) 
(30
)
 
621

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 29, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
4,268

 
$
1,875

 
$
927

 
$
2,171

 
$
—

 
$
9,241

Intersegment sales
 
1,039

 
635

 
455

 
17

 
(2,146
)
 
—

Total sales
 
5,307

 
2,510

 
1,382

 
2,188

 
(2,146
)
 
9,241

Depreciation and amortization(2)
 
103

 
52

 
25

 
36

 
—

 
216

Research, development and engineering expenses
 
221

 
106

 
37

 
5

 
—

 
369

Equity, royalty and interest income from investees
 
77

 
18

 
17

 
83

 
—

 
195

Interest income
 
6

 
2

 
2

 
1

 
—

 
11

Segment EBIT
 
580


352


86


202

(3) 
(35
)
 
1,185

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
4,094

 
$
1,508

 
$
1,122

 
$
1,723

 
$
—

 
$
8,447

Intersegment sales
 
865

 
627

 
438

 
9

 
(1,939
)
 
—

Total sales
 
4,959

 
2,135

 
1,560

 
1,732

 
(1,939
)
 
8,447

Depreciation and amortization(2)
 
103

 
47

 
24

 
25

 
—

 
199

Research, development and engineering expenses
 
207

 
114

 
35

 
3

 
—

 
359

Equity, royalty and interest income from investees
 
75

 
16

 
17

 
82

 
—

 
190

Interest income
 
9

 
1

 
4

 
1

 
—

 
15

Segment EBIT
 
534


255


127


195

(3) 
(53
)
 
1,058

_________________________________________________________________
(1) Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended June 29, 2014 and June 30, 2013.
(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 were $1 million and $5 million for the six months ended June 29, 2014 and June 30, 2013, respectively.
(3)Distribution segment EBIT included gains as disclosed in the table below. See Note 3, "ACQUISITIONS" for additional information.


Distribution segment EBIT included gains on the fair value adjustment resulting from the acquisition of controlling interests in North American distributors in the periods presented below:
 
 
Three months ended
 
Six months ended
In millions
 
June 29, 2014
 
June 30, 2013
 
June 29, 2014
 
June 30, 2013
Southern Plains
 
$
13

 
$
—

 
$
13

 
$
—

Mid-South
 
1

 
—

 
7

 
—

Rocky Mountain
 
—

 
5

 
—

 
5

Northwest
 
—

 
—

 
—

 
7

Total gains included in EBIT
 
$
14

 
$
5

 
$
20

 
$
12



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
 
June 29, 2014
 
June 30, 2013
 
June 29, 2014
 
June 30, 2013
Total EBIT
 
$
657

 
$
621

 
$
1,185

 
$
1,058

Less: Interest expense
 
15

 
8

 
32

 
14

Income before income taxes
 
$
642

 
$
613

 
$
1,153

 
$
1,044