Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.7.0.1
OPERATING SEGMENTS
 3 Months Ended
Apr. 02, 2017
Segment Reporting [Abstract]  
OPERATING SEGMENTS
NOTE 11. 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.
Our reportable operating segments consist of Engine, Distribution, Components and Power Systems. This 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, marine and rail), standby and prime power generator sets, alternators and other power components.
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, finance and supply chain management. 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 is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Non-segment
Items (1)
 
Total
Three months ended April 2, 2017
 
 

 
 
 
 

 
 

 
 

 
 

External sales
 
$
1,457

 
$
1,637

 
$
980

 
$
515

 
$
—

 
$
4,589

Intersegment sales
 
566

 
8

 
364

 
367

 
(1,305
)
 
—

Total sales
 
2,023

 
1,645

 
1,344

 
882

 
(1,305
)
 
4,589

Depreciation and amortization (2)
 
44

 
30

 
37

 
28

 
—

 
139

Research, development and engineering expenses
 
54

 
4

 
50

 
50

 
—

 
158

Equity, royalty and interest income from investees
 
72

 
11

 
13

 
12

 
—

 
108

Interest income
 
1

 
1

 
—

 
—

 
—

 
2

Segment EBIT
 
229

 
100

 
179

 
57

 
1

 
566

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended April 3, 2016 (3)
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
1,489

 
$
1,458

 
$
897

 
$
447

 
$
—

 
$
4,291

Intersegment sales
 
487

 
5

 
340

 
361

 
(1,193
)
 
—

Total sales
 
1,976

 
1,463

 
1,237

 
808

 
(1,193
)
 
4,291

Depreciation and amortization (2)
 
39

 
28

 
31

 
29

 
—

 
127

Research, development and engineering expenses
 
57

 
4

 
56

 
49

 
—

 
166

Equity, royalty and interest income from investees
 
36

 
18

 
8

 
10

 
—

 
72

Interest income
 
2

 
1

 
1

 
2

 
—

 
6

Segment EBIT
 
197

 
87

 
163

 
46

 
(9
)
 
484

____________________________________
(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 2, 2017 and April 3, 2016.
(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 less than $1 million and $1 million for the three months ended April 2, 2017 and April 3, 2016, respectively.
(3) In the second quarter of 2016, we realigned our reportable operating segments. The three months ended April 3, 2016, were revised retrospectively to conform with these changes.
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 2,
2017
 
April 3,
2016
Total segment EBIT
 
$
566

 
$
484

Less: Interest expense
 
18

 
19

Income before income taxes
 
$
548

 
$
465