Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v2.4.0.8
OPERATING SEGMENTS
 9 Months Ended
Sep. 28, 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 nine month periods is shown in the table below:
In millions
 
Engine
 
Components
 
Power Generation
 
Distribution
 
Non-segment
Items (1)
 
Total
Three months ended September 28, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
2,181

 
$
946

 
$
481

 
$
1,282

 
$
—

 
$
4,890

Intersegment sales
 
635

 
341

 
273

 
10

 
(1,259
)
 
—

Total sales
 
2,816

 
1,287

 
754

 
1,292

 
(1,259
)
 
4,890

Depreciation and amortization(2)
 
50

 
27

 
13

 
22

 
—

 
112

Research, development and engineering expenses
 
114

 
64

 
18

 
2

 
—

 
198

Equity, royalty and interest income from investees
 
40

 
9

 
13

 
37

 
—

 
99

Interest income
 
3

 
1

 
1

 
1

 
—

 
6

Segment EBIT
 
330


172


60


131

(3) 
(9
)
 
684

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 29, 2013
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
2,045

 
$
784

 
$
499

 
$
938

 
$
—

 
$
4,266

Intersegment sales
 
447

 
288

 
213

 
6

 
(954
)
 
—

Total sales
 
2,492

 
1,072

 
712

 
944

 
(954
)
 
4,266

Depreciation and amortization(2)
 
53

 
24

 
13

 
15

 
—

 
105

Research, development and engineering expenses
 
103

 
51

 
18

 
1

 
—

 
173

Equity, royalty and interest income from investees
 
31

 
5

 
13

 
42

 
—

 
91

Interest income
 
4

 
1

 
1

 
—

 
—

 
6

Segment EBIT
 
272


132


45


86

(3) 
1

 
536

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 28, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
6,449

 
$
2,821

 
$
1,408

 
$
3,453

 
$
—

 
$
14,131

Intersegment sales
 
1,674

 
976

 
728

 
27

 
(3,405
)
 
—

Total sales
 
8,123

 
3,797

 
2,136

 
3,480

 
(3,405
)
 
14,131

Depreciation and amortization(2)
 
153

 
79

 
38

 
58

 
—

 
328

Research, development and engineering expenses
 
335

 
170

 
55

 
7

 
—

 
567

Equity, royalty and interest income from investees
 
117

 
27

 
30

 
120

 
—

 
294

Interest income
 
9

 
3

 
3

 
2

 
—

 
17

Segment EBIT
 
910


524


146


333

(3) 
(44
)
 
1,869

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 29, 2013
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
6,139

 
$
2,292

 
$
1,621

 
$
2,661

 
$
—

 
$
12,713

Intersegment sales
 
1,312

 
915

 
651

 
15

 
(2,893
)
 
—

Total sales
 
7,451

 
3,207

 
2,272

 
2,676

 
(2,893
)
 
12,713

Depreciation and amortization(2)
 
156

 
71

 
37

 
40

 
—

 
304

Research, development and engineering expenses
 
310

 
165

 
53

 
4

 
—

 
532

Equity, royalty and interest income from investees
 
106

 
21

 
30

 
124

 
—

 
281

Interest income
 
13

 
2

 
5

 
1

 
—

 
21

Segment EBIT
 
806


387


172


281

(3) 
(52
)
 
1,594

_________________________________________________________________
(1) Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended September 28, 2014 and September 29, 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 $2 million and $8 million for the nine months ended September 28, 2014 and September 29, 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
 
Nine months ended
In millions
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Eastern Canada
 
$
18

 
$
—

 
$
18

 
$
—

Southern Plains
 
—

 
—

 
13

 
—

Mid-South
 
—

 
—

 
7

 
—

Rocky Mountain
 
—

 
—

 
—

 
5

Northwest
 
—

 
—

 
—

 
7

Total gains included in EBIT
 
$
18

 
$
—

 
$
38

 
$
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
 
Nine months ended
In millions
 
September 28,
2014
 
September 29,
2013
 
September 28,
2014
 
September 29,
2013
Total EBIT
 
$
684

 
$
536

 
$
1,869

 
$
1,594

Less: Interest expense
 
15

 
8

 
47

 
22

Income before income taxes
 
$
669

 
$
528

 
$
1,822

 
$
1,572