Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.7.0.1
OPERATING SEGMENTS
 6 Months Ended
Jul. 02, 2017
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 (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the President and 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
 
Intersegment Eliminations (1)
 
Total
Three months ended July 2, 2017
 
 

 
 
 
 

 
 

 
 

 
 

External sales
 
$
1,711

 
$
1,716

 
$
1,064

 
$
587

 
$
—

 
$
5,078

Intersegment sales
 
596

 
6

 
390

 
430

 
(1,422
)
 
—

Total sales
 
2,307

 
1,722

 
1,454

 
1,017

 
(1,422
)
 
5,078

Depreciation and amortization (2)
 
46

 
31

 
38

 
29

 
—

 
144

Research, development and engineering expenses
 
63

 
4

 
57

 
50

 
—

 
174

Equity, royalty and interest income from investees
 
56

 
13

 
15

 
14

 
—

 
98

Interest income
 
2

 
1

 
1

 
1

 
—

 
5

Segment EBIT
 
277

 
96

 
190

 
61

 
(4
)
 
620

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended July 3, 2016
 
 
 
 
 
 
 
 
 
 
 
 
External sales
 
$
1,504

 
$
1,538

 
$
933

 
$
553

 
$
—

 
$
4,528

Intersegment sales
 
498

 
6

 
346

 
368

 
(1,218
)
 
—

Total sales
 
2,002

 
1,544

 
1,279

 
921

 
(1,218
)
 
4,528

Depreciation and amortization (2)
 
41

 
29

 
32

 
29

 
—

 
131

Research, development and engineering expenses
 
53

 
3

 
51

 
48

 
—

 
155

Equity, royalty and interest income from investees
 
46

 
19

 
12

 
11

 
—

 
88

Loss contingency (3)
 
39

 
—

 
—

 
—

 
—

 
39

Interest income
 
3

 
1

 
1

 
1

 
—

 
6

Segment EBIT
 
206

 
87

 
190

 
90

 
18

 
591

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended July 2, 2017
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
3,168

 
$
3,353

 
$
2,044

 
$
1,102

 
$
—

 
$
9,667

Intersegment sales
 
1,162

 
14

 
754

 
797

 
(2,727
)
 
—

Total sales
 
4,330

 
3,367

 
2,798

 
1,899

 
(2,727
)
 
9,667

Depreciation and amortization(2)
 
90

 
61

 
75

 
57

 
—

 
283

Research, development and engineering expenses
 
117

 
8

 
107

 
100

 
—

 
332

Equity, royalty and interest income from investees
 
128

 
24

 
28

 
26

 
—

 
206

Interest income
 
3

 
2

 
1

 
1

 
—

 
7

Segment EBIT
 
506

 
196

 
369

 
118

 
(3
)
 
1,186

 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended July 3, 2016
 
 

 
 

 
 

 
 

 
 

 
 

External sales
 
$
2,993

 
$
2,996

 
$
1,830

 
$
1,000

 
$
—

 
$
8,819

Intersegment sales
 
985

 
11

 
686

 
729

 
(2,411
)
 
—

Total sales
 
3,978

 
3,007

 
2,516

 
1,729

 
(2,411
)
 
8,819

Depreciation and amortization(2)
 
80

 
57

 
63

 
58

 
—

 
258

Research, development and engineering expenses
 
110

 
7

 
107

 
97

 
—

 
321

Equity, royalty and interest income from investees
 
82

 
37

 
20

 
21

 
—

 
160

Loss contingency (3)
 
39

 
—

 
—

 
—

 
—

 
39

Interest income
 
5

 
2

 
2

 
3

 
—

 
12

Segment EBIT
 
403

 
174

 
353

 
136

 
9

 
1,075

____________________________________
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three and six months ended July 2, 2017 and July 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 $1 million and $1 million for the six months ended July 2, 2017 and July 3, 2016, respectively.
(3) See Note 9, "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
 
Six months ended
In millions
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Total segment EBIT
 
$
620

 
$
591

 
$
1,186

 
$
1,075

Less: Interest expense
 
21

 
16

 
39

 
35

Income before income taxes
 
$
599

 
$
575

 
$
1,147

 
$
1,040