Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.2.0.727
OPERATING SEGMENTS
 6 Months Ended
Jun. 28, 2015
Segment Reporting [Abstract]  
OPERATING SEGMENTS
NOTE 12. 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, income 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 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
 
Distribution
 
Components
 
Power Generation
 
Non-segment
Items (1)
 
Total
Three months ended June 28, 2015
 
 

 
 
 
 

 
 

 
 

 
 

External sales
 
$
2,058

 
$
1,487

 
$
1,017

 
$
453

 
$
—

 
$
5,015

Intersegment sales
 
739

 
8

 
380

 
294

 
(1,421
)
 
—

Total sales
 
2,797

 
1,495

 
1,397

 
747

 
(1,421
)
 
5,015

Depreciation and amortization(2)
 
60

 
25

 
28

 
13

 
—

 
126

Research, development and engineering expenses
 
91

 
3

 
57

 
15

 
—

 
166

Equity, royalty and interest income from investees
 
57

 
21

 
8

 
8

 
—

 
94

Interest income
 
3

 
1

 
1

 
1

 
—

 
6

Segment EBIT
 
341

 
113

 
223

 
57

 
(13
)
 
721

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 29, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
2,178

 
$
1,229

 
$
953

 
$
475

 
$
—

 
$
4,835

Intersegment sales
 
566

 
9

 
327

 
268

 
(1,170
)
 
—

Total sales
 
2,744

 
1,238

 
1,280

 
743

 
(1,170
)
 
4,835

Depreciation and amortization(2)
 
52

 
20

 
26

 
13

 
—

 
111

Research, development and engineering expenses
 
105

 
3

 
53

 
18

 
—

 
179

Equity, royalty and interest income from investees
 
45

 
42

 
9

 
9

 
—

 
105

Interest income
 
4

 
—

 
1

 
1

 
—

 
6

Segment EBIT
 
311

 
126

(3) 
185

 
61

 
(26
)
 
657

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 28, 2015
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
3,947

 
$
2,956

 
$
1,948

 
$
873

 
$
—

 
$
9,724

Intersegment sales
 
1,446

 
15

 
748

 
554

 
(2,763
)
 
—

Total sales
 
5,393

 
2,971

 
2,696

 
1,427

 
(2,763
)
 
9,724

Depreciation and amortization(2)
 
118

 
52

 
54

 
29

 
—

 
253

Research, development and engineering expenses
 
205

 
6

 
118

 
32

 
—

 
361

Equity, royalty and interest income from investees
 
87

 
41

 
17

 
17

 
—

 
162

Interest income
 
5

 
2

 
2

 
2

 
—

 
11

Segment EBIT
 
594

 
201

 
418

 
106

 
(36
)
 
1,283

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 29, 2014
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
4,268

 
$
2,171

 
$
1,875

 
$
927

 
$
—

 
$
9,241

Intersegment sales
 
1,039

 
17

 
635

 
455

 
(2,146
)
 
—

Total sales
 
5,307

 
2,188

 
2,510

 
1,382

 
(2,146
)
 
9,241

Depreciation and amortization(2)
 
103

 
36

 
52

 
25

 
—

 
216

Research, development and engineering expenses
 
221

 
5

 
106

 
37

 
—

 
369

Equity, royalty and interest income from investees
 
77

 
83

 
18

 
17

 
—

 
195

Interest income
 
6

 
1

 
2

 
2

 
—

 
11

Segment EBIT
 
580

 
202

(3) 
352

 
86

 
(35
)
 
1,185

____________________________________
(1) Includes inter-segment 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 28, 2015 and June 29, 2014.
(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 $1 million for the six months ended June 28, 2015 and June 29, 2014, respectively.
(3) Distribution segment EBIT included gains of $14 million and $20 million on the fair value adjustments resulting from the acquisition of the controlling interests in North American distributors for the three and six month periods ended June 29, 2014.
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 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Total EBIT
 
$
721

 
$
657

 
$
1,283

 
$
1,185

Less: Interest expense
 
17

 
15

 
31

 
32

Income before income taxes
 
$
704

 
$
642

 
$
1,252

 
$
1,153