Annual report pursuant to Section 13 and 15(d)

OPERATING SEGMENTS

v3.6.0.2
OPERATING SEGMENTS
 12 Months Ended
Dec. 31, 2016
Segment Reporting [Abstract]  
OPERATING SEGMENTS
NOTE 21. 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 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 at December 31, is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Intersegment Eliminations
 
Total
2016
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
5,774

 
$
6,157

 
$
3,514

 
$
2,064

 
$
—

 
$
17,509

Intersegment sales
 
2,030

 
24

 
1,322

 
1,453

 
(4,829
)
 
—

Total sales
 
7,804

 
6,181

 
4,836

 
3,517

 
(4,829
)
 
17,509

Depreciation and amortization (1)
 
163

 
116

 
133

 
115

 
—

 
527

Research, development and engineering expenses
 
226

 
13

 
208

 
189

 
—

 
636

Equity, royalty and interest income from investees
 
148

 
70

 
41

 
42

 
—

 
301

Interest income
 
10

 
4

 
4

 
5

 
—

 
23

Loss contingency charges (2)
 
138

 
—

 
—

 
—

 
—

 
138

Segment EBIT
 
686

 
392

(3) 
641

 
263

(4) 
17

 
1,999

Net assets
 
1,620

 
2,604

 
1,868

 
2,629

 
—

 
8,721

Investments and advances to equity investees
 
427

 
204

 
176

 
139

 
—

 
946

Capital expenditures
 
200

 
96

 
143

 
92

 
—

 
531

2015
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
6,733

 
$
6,198

 
$
3,745

 
$
2,434

 
$
—

 
$
19,110

Intersegment sales
 
1,937

 
31

 
1,427

 
1,633

 
(5,028
)
 
—

Total sales
 
8,670

 
6,229

 
5,172

 
4,067

 
(5,028
)
 
19,110

Depreciation and amortization (1)
 
187

 
105

 
109

 
110

 
—

 
511

Research, development and engineering expenses
 
263

 
10

 
236

 
226

 
—

 
735

Equity, royalty and interest income from investees
 
146

 
78

 
35

 
56

 
—

 
315

Interest income
 
11

 
4

 
4

 
5

 
—

 
24

Loss contingency charge (2)
 
60

 
—

 
—

 
—

 
—

 
60

Impairment of light-duty diesel assets (5)
 
202

 
—

 
9

 
—

 
—

 
211

Restructuring actions and other charges (6)
 
17

 
23

 
13

 
26

 
11

 
90

Segment EBIT
 
636

 
412

(3) 
727

 
335

 
(20
)
 
2,090

Net assets
 
2,107

 
2,330

 
1,891

 
2,736

 
—

 
9,064

Investments and advances to equity investees
 
445

 
192

 
150

 
188

 
—

 
975

Capital expenditures
 
345

 
125

 
137

 
137

 
—

 
744

2014
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
7,462

 
$
5,135

 
$
3,791

 
$
2,833

 
$
—

 
$
19,221

Intersegment sales
 
1,505

 
39

 
1,327

 
1,581

 
(4,452
)
 
—

Total sales
 
8,967

 
5,174

 
5,118

 
4,414

 
(4,452
)
 
19,221

Depreciation and amortization (1)
 
163

 
86

 
106

 
97

 
—

 
452

Research, development and engineering expenses
 
265

 
9

 
230

 
250

 
—

 
754

Equity, royalty and interest income from investees
 
118

 
148

 
36

 
68

 
—

 
370

Interest income
 
9

 
4

 
4

 
6

 
—

 
23

Segment EBIT
 
1,031

 
491

(3) 
684

 
361

(7) 
(69
)
 
2,498

Net assets
 
2,401

 
2,441

 
2,152

 
2,743

 
—

 
9,737

Investments and advances to equity investees
 
415

 
209

 
164

 
193

 
—

 
981

Capital expenditures
 
268

 
89

 
162

 
224

 
—

 
743

____________________________________________________
(1) 
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, $3 million and $3 million for the years ended December 31, 2016, 2015 and 2014, respectively.
(2) 
See Note 12, "COMMITMENTS AND CONTINGENCIES," for additional information.
(3) 
Distribution segment EBIT included gains on the fair value adjustment resulting from the acquisition of controlling interests in North American distributors of $15 million, $18 million and $73 million for the years ended December 31, 2016, 2015 and 2014, respectively. See Note 18, "ACQUISITIONS," for additional information.
(4) 
Power Systems segment EBIT included a $17 million gain on the sale of an equity investee.
(5) 
See Note 19, "IMPAIRMENT OF LIGHT-DUTY DIESEL ASSETS," for additional information.
(6) 
See Note 20, "RESTRUCTURING ACTIONS AND OTHER CHARGES," for additional information.
(7) 
Power Systems segment EBIT included $32 million of restructuring charges primarily related to the closure of a plant in Germany.
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
 
2016
 
2015
 
2014
Total segment EBIT
 
$
1,999

 
$
2,090

 
$
2,498

Less: Interest expense
 
69

 
65

 
64

Income before income taxes
 
$
1,930

 
$
2,025

 
$
2,434


 
 
December 31,
In millions
 
2016
 
2015
 
2014
Net assets for operating segments
 
$
8,721

 
$
9,064

 
$
9,737

Liabilities deducted in arriving at net assets
 
6,152

 
5,920

 
6,009

Pension and other postretirement benefit adjustments excluded from net assets
 
(284
)
 
(242
)
 
(319
)
Deferred tax assets not allocated to segments
 
420

 
390

 
314

Deferred debt costs not allocated to segments
 
2

 
2

 
23

Total assets
 
$
15,011

 
$
15,134

 
$
15,764


The tables below present certain segment information by geographic area. Net sales attributed to geographic areas were based on the location of the customer.
In millions
 
Years ended December 31,
Net Sales
 
2016
 
2015
 
2014
United States
 
$
9,476

 
$
10,757

 
$
10,058

International
 
8,033

 
8,353

 
9,163

Total net sales
 
$
17,509

 
$
19,110

 
$
19,221


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
 
December 31,
Long-lived assets
 
2016
 
2015
 
2014
United States
 
$
3,092

 
$
2,968

 
$
2,949

China
 
652

 
668

 
692

India
 
475

 
450

 
391

United Kingdom
 
254

 
349

 
339

Netherlands
 
197

 
172

 
156

Brazil
 
149

 
124

 
161

Canada
 
132

 
133

 
126

Mexico
 
131

 
108

 
96

Other international countries
 
236

 
261

 
274

Total long-lived assets
 
$
5,318

 
$
5,233

 
$
5,184


Our largest customer is PACCAR Inc. Worldwide sales to this customer were $2,359 million in 2016, $2,949 million in 2015 and $2,706 million in 2014, representing 13 percent, 15 percent and 14 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales.