Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.4.0.3
OPERATING SEGMENTS
 3 Months Ended
Apr. 03, 2016
Segment Reporting [Abstract]  
OPERATING SEGMENTS
NOTE 13. 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 Operating Officer.
Our reportable operating segments consist of 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.
As previously announced, effective April 2016, we re-organized our business to combine our Power Generation segment and our high horsepower engine business to create the new Power Systems segment. Going forward we will present results for four operating segments: Engine, Distribution, Components and Power Systems. We will begin to report results for our new reporting structure in the second quarter of 2016 and will also reflect this change for historical periods. The formation of the Power Systems segment combines two businesses that are already strongly interdependent which will allow us to streamline business and technical processes to accelerate innovation, grow market share and more efficiently manage our supply chain and manufacturing operations.
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 allocate 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 month periods is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Generation
 
Non-segment
Items (1)
 
Total
Three months ended April 3, 2016
 
 

 
 
 
 

 
 

 
 

 
 

External sales
 
$
1,624

 
$
1,458

 
$
897

 
$
312

 
$
—

 
$
4,291

Intersegment sales
 
710

 
5

 
340

 
238

 
(1,293
)
 
—

Total sales
 
2,334

 
1,463

 
1,237

 
550

 
(1,293
)
 
4,291

Depreciation and amortization(2)
 
58

 
26

 
27

 
16

 
—

 
127

Research, development and engineering expenses
 
97

 
2

 
54

 
13

 
—

 
166

Equity, royalty and interest income from investees
 
41

 
18

 
8

 
5

 
—

 
72

Interest income
 
3

 
1

 
1

 
1

 
—

 
6

Segment EBIT
 
200

 
95

 
173

 
31

 
(15
)
 
484

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 29, 2015
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
1,889

 
$
1,469

 
$
931

 
$
420

 
$
—

 
$
4,709

Intersegment sales
 
707

 
7

 
368

 
260

 
(1,342
)
 
—

Total sales
 
2,596

 
1,476

 
1,299

 
680

 
(1,342
)
 
4,709

Depreciation and amortization(2)
 
58

 
27

 
26

 
16

 
—

 
127

Research, development and engineering expenses
 
114

 
3

 
61

 
17

 
—

 
195

Equity, royalty and interest income from investees
 
30

 
20

 
9

 
9

 
—

 
68

Interest income
 
2

 
1

 
1

 
1

 
—

 
5

Segment EBIT
 
253

 
88

 
195

 
49

 
(23
)
 
562

____________________________________
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended April 3, 2016 and March 29, 2015.
(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 three months ended April 3, 2016 and March 29, 2015, respectively.
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
In millions
 
April 3,
2016
 
March 29,
2015
Total segment EBIT
 
$
484

 
$
562

Less: Interest expense
 
19

 
14

Income before income taxes
 
$
465

 
$
548