Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.5.0.2
OPERATING SEGMENTS
 9 Months Ended
Oct. 02, 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 (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the Chief Operating Officer.
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.
As previously announced, beginning with the second quarter of 2016, we realigned certain of our reportable segments to be consistent with changes to our organizational structure and how the CODM monitors the performance of our segments. We reorganized our business to combine our Power Generation segment and our high-horsepower engine business to create the new Power Systems segment. Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. We began to report results for our new reporting structure in the second quarter of 2016 and also reflected this change for historical periods.
We allocate certain common costs and expenses, primarily corporate functions, among segments. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. In addition to the reorganization noted above, we reevaluated the allocation of these costs, considering the new segment structure created in April 2016 and adjusted our allocation methodology accordingly. The revised methodology, which is based on a combination of relative segment sales and relative service usage levels, is effective for the periods beginning after January 1, 2016 and resulted in the revision of our segment operating results, including segment EBIT, for all four segments for the first quarter of 2016 with a greater share of costs allocated to the Distribution and Components segments than in previous years. Prior periods were not revised for the new allocation methodology. These changes had no impact on our consolidated results.
Our new reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and less in size) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. 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 Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas and marine), standby and prime power generator sets, alternators and other power components.
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. As noted above, we allocate certain common costs and expenses, primarily corporate functions, among segments. We 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 nine month periods is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Non-segment
Items (1)
 
Total
Three months ended October 2, 2016
 
 

 
 
 
 

 
 

 
 

 
 

External sales
 
$
1,357

 
$
1,497

 
$
824

 
$
509

 
$
—

 
$
4,187

Intersegment sales
 
502

 
7

 
319

 
347

 
(1,175
)
 
—

Total sales
 
1,859

 
1,504

 
1,143

 
856

 
(1,175
)
 
4,187

Depreciation and amortization(2)
 
42

 
28

 
32

 
29

 
—

 
131

Research, development and engineering expenses
 
56

 
3

 
54

 
44

 
—

 
157

Equity, royalty and interest income from investees
 
38

 
19

 
9

 
8

 
—

 
74

Loss contingency
 
99

(3) 
—

 
—

 
—

 
—

 
99

Interest income
 
3

 
1

 
1

 
1

 
—

 
6

Segment EBIT
 
89

 
96

 
148

 
59

 
6

 
398

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 27, 2015
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
1,627

 
$
1,543

 
$
891

 
$
559

 
$
—

 
$
4,620

Intersegment sales
 
475

 
8

 
349

 
423

 
(1,255
)
 
—

Total sales
 
2,102

 
1,551

 
1,240

 
982

 
(1,255
)
 
4,620

Depreciation and amortization(2)
 
47

 
26

 
28

 
27

 
—

 
128

Research, development and engineering expenses
 
73

 
2

 
65

 
57

 
—

 
197

Equity, royalty and interest income from investees
 
33

 
19

 
9

 
17

 
—

 
78

Interest income
 
6

 
1

 
1

 
1

 
—

 
9

Segment EBIT
 
217

 
123

 
156

 
74

 
7

 
577

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended October 2, 2016
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
4,350

 
$
4,493

 
$
2,654

 
$
1,509

 
$
—

 
$
13,006

Intersegment sales
 
1,487

 
18

 
1,005

 
1,076

 
(3,586
)
 
—

Total sales
 
5,837

 
4,511

 
3,659

 
2,585

 
(3,586
)
 
13,006

Depreciation and amortization(2)
 
121

 
86

 
95

 
87

 
—

 
389

Research, development and engineering expenses
 
166

 
10

 
161

 
141

 
—

 
478

Equity, royalty and interest income from investees
 
120

 
56

 
29

 
29

 
—

 
234

Loss contingency
 
138

(3) 
—

 
—

 
—

 
—

 
138

Interest income
 
8

 
3

 
3

 
4

 
—

 
18

Segment EBIT
 
492

 
270

 
501

 
195

 
15

 
1,473

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 27, 2015
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
5,150

 
$
4,499

 
$
2,839

 
$
1,856

 
$
—

 
$
14,344

Intersegment sales
 
1,422

 
23

 
1,097

 
1,225

 
(3,767
)
 
—

Total sales
 
6,572

 
4,522

 
3,936

 
3,081

 
(3,767
)
 
14,344

Depreciation and amortization(2)
 
140

 
78

 
82

 
81

 
—

 
381

Research, development and engineering expenses
 
195

 
8

 
183

 
172

 
—

 
558

Equity, royalty and interest income from investees
 
107

 
60

 
26

 
47

 
—

 
240

Interest income
 
10

 
3

 
3

 
4

 
—

 
20

Segment EBIT
 
695

 
324

 
574

 
302

 
(35
)
 
1,860

____________________________________
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and nine months ended October 2, 2016 and September 27, 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 was $2 million for the nine months ended October 2, 2016 and September 27, 2015.
(3) See Note 10, "COMMITMENTS AND CONTINGENCIES," for additional information.
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
 
October 2,
2016
 
September 27,
2015
 
October 2,
2016
 
September 27,
2015
Total segment EBIT
 
$
398

 
$
577

 
$
1,473

 
$
1,860

Less: Interest expense
 
16

 
16

 
51

 
47

Income before income taxes
 
$
382

 
$
561

 
$
1,422

 
$
1,813