Annual report pursuant to Section 13 and 15(d)

OPERATING SEGMENTS

v2.4.1.9
OPERATING SEGMENTS
 12 Months Ended
Dec. 31, 2014
Segment Reporting [Abstract]  
OPERATING SEGMENTS
NOTE 19. 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, Distribution, Components and Power Generation. This reporting structure is organized according to the products and markets each segment serves. 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 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 and fuel systems. The Power Generation segment is an integrated provider of power systems, which sells engines, generator sets and alternators.
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 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 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 at December 31, is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Generation
 
Non-segment
Items(1)
 
Total
2014
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
8,437

 
$
5,135

 
$
3,791

 
$
1,858

 
$
—

 
$
19,221

Intersegment sales
 
2,525

 
39

 
1,327

 
1,038

 
(4,929
)
 
—

Total sales
 
10,962

 
5,174

 
5,118

 
2,896

 
(4,929
)
 
19,221

Depreciation and amortization(2)
 
207

 
86

 
106

 
53

 
—

 
452

Research, development and engineering expenses
 
438

 
9

 
230

 
77

 
—

 
754

Equity, royalty and interest income from investees
 
147

 
148

 
36

 
39

 
—

 
370

Interest income
 
12

 
4

 
4

 
3

 
—

 
23

Segment EBIT
 
1,225

 
491

(3) 
684

 
168

 
(70
)
 
2,498

Net assets
 
3,450

 
2,441

 
2,152

 
1,694

 
—

 
9,737

Investments and advances to equity investees
 
468

 
209

 
164

 
140

 
—

 
981

Capital expenditures
 
395

 
89

 
162

 
97

 
—

 
743

2013
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
8,270

 
$
3,726

 
$
3,151

 
$
2,154

 
$
—

 
$
17,301

Intersegment sales
 
1,743

 
23

 
1,191

 
877

 
(3,834
)
 
—

Total sales
 
10,013

 
3,749

 
4,342

 
3,031

 
(3,834
)
 
17,301

Depreciation and amortization(2)
 
205

 
54

 
96

 
50

 
—

 
405

Research, development and engineering expenses
 
416

 
6

 
218

 
73

 
—

 
713

Equity, royalty and interest income from investees
 
136

 
165

 
28

 
32

 
—

 
361

Interest income
 
16

 
2

 
3

 
6

 
—

 
27

Segment EBIT(3)
 
1,041

 
388

(3) 
527

 
218

 
(14
)
 
2,160

Net assets
 
4,323

 
1,637

 
1,885

 
1,801

 
—

 
9,646

Investments and advances to equity investees
 
419

 
262

 
140

 
110

 
—

 
931

Capital expenditures
 
372

 
57

 
141

 
106

 
—

 
676

2012
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
9,101

 
$
3,261

 
$
2,809

 
$
2,163

 
$
—

 
$
17,334

Intersegment sales
 
1,632

 
16

 
1,203

 
1,105

 
(3,956
)
 
—

Total sales
 
10,733

 
3,277

 
4,012

 
3,268

 
(3,956
)
 
17,334

Depreciation and amortization(2)
 
192

 
34

 
82

 
47

 
—

 
355

Research, development and engineering expenses
 
433

 
6

 
213

 
76

 
—

 
728

Equity, royalty and interest income from investees
 
127

 
188

 
29

 
40

 
—

 
384

Interest income
 
11

 
2

 
3

 
9

 
—

 
25

Segment EBIT
 
1,248

 
369

(3) 
426

 
285

 
(25
)
 
2,303

Net assets
 
3,373

 
1,392

 
1,830

 
1,582

 
—

 
8,177

Investments and advances to equity investees
 
401

 
281

 
127

 
88

 
—

 
897

Capital expenditures
 
399

 
62

 
134

 
95

 
—

 
690

____________________________________________________
(1) 
Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the years ended December 31, 2014 and 2013. The year ended December 31, 2012, included a $20 million charge ($12 million after-tax) related to legal matters. The charge was excluded from segment results as it was not considered in our evaluation of operating results for the year ended December 31, 2012.
(2) 
Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount and deferred costs that are included in the Consolidated Statements of Income as "Interest expense." The amortization of debt discount and deferred costs were $3 million, $2 million and $6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
(3) 
Distribution segment EBIT included gains on the fair value adjustment resulting from the acquisition of controlling interests in North American distributors of $73 million, $12 million and $7 million for the periods ended December 31, 2014, 2013, and 2012, respectively. See Note 2, "ACQUISITIONS," for additional information.


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
 
2014
 
2013
 
2012
Total EBIT
 
$
2,498

 
$
2,160

 
$
2,303

Less: Interest expense
 
64

 
41

 
32

Income before income taxes
 
$
2,434

 
$
2,119

 
$
2,271



 
 
December 31,
In millions
 
2014
 
2013
 
2012
Net assets for operating segments
 
$
9,737

 
$
9,646

 
$
8,177

Liabilities deducted in arriving at net assets
 
6,009

 
5,103

 
4,913

Pension and other postretirement benefit adjustments excluded from net assets
 
(319
)
 
(346
)
 
(977
)
Deferred tax assets not allocated to segments
 
314

 
292

 
410

Debt-related costs not allocated to segments
 
35

 
33

 
25

Total assets
 
$
15,776

 
$
14,728

 
$
12,548


The tables below present certain segment information by geographic area. Net sales attributed to geographic areas were based on the location of the customer. Long-lived assets include property, plant and equipment, net of depreciation, investments and advances to equity investees and other assets, excluding deferred tax assets, refundable taxes and deferred debt expenses.
In millions
 
Years ended December 31,
Net Sales
 
2014
 
2013
 
2012
United States
 
$
10,058

 
$
8,382

 
$
8,107

China
 
1,446

 
1,194

 
1,056

Canada
 
771

 
655

 
642

Brazil
 
730

 
882

 
798

India
 
546

 
630

 
757

Mexico
 
561

 
556

 
692

United Kingdom
 
479

 
453

 
660

Other foreign countries
 
4,630

 
4,549

 
4,622

Total net sales
 
$
19,221

 
$
17,301

 
$
17,334


In millions
 
December 31,
Long-lived assets
 
2014
 
2013
 
2012
United States
 
$
2,949

 
$
2,606

 
$
2,440

China
 
692

 
646

 
589

India
 
391

 
330

 
243

United Kingdom
 
339

 
319

 
339

Brazil
 
161

 
172

 
170

Netherlands
 
156

 
138

 
130

Canada
 
126

 
68

 
69

Mexico
 
96

 
87

 
77

Germany
 
79

 
69

 
49

Korea
 
34

 
37

 
37

Romania
 
31

 
27

 
15

Turkey
 
30

 
28

 
29

Australia
 
17

 
18

 
25

United Arab Emirates
 
16

 
15

 
16

Singapore
 
13

 
17

 
16

France
 
12

 
13

 
13

Other foreign countries
 
42

 
34

 
33

Total long-lived assets
 
$
5,184

 
$
4,624

 
$
4,290


Our largest customer is PACCAR Inc. Worldwide sales to this customer were $2,706 million in 2014, $2,085 million in 2013 and $2,232 million in 2012, representing 14 percent, 12 percent and 13 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales.