Cummins Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

OPERATING SEGMENTS

9 Months Ended

Oct. 01, 2017

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, fuel systems and transmissions. 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 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. 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⁽¹⁾		Power Systems		Total Segment		Intersegment Eliminations ⁽²⁾			Total
Three months ended October 1, 2017
External sales	$	1,783	$	1,748	$	1,139	$	615	$	5,285	$	—		$	5,285
Intersegment sales	553		5		394		441		1,393		(1,393		)	—
Total sales	2,336		1,753		1,533		1,056		6,678		(1,393		)	5,285
Depreciation and amortization ⁽³⁾	47		29		42		30		148		—			148
Research, development and engineering expenses	83		6		63		61		213		—			213
Equity, royalty and interest income from investees	58		11		12		14		95		—			95
Interest income	1		2		—		1		4		—			4
EBIT	229		91		217		81		618		22			640

Three months ended October 2, 2016
External sales	$	1,357	$	1,497	$	824	$	509	$	4,187	$	—		$	4,187
Intersegment sales	502		7		319		347		1,175		(1,175		)	—
Total sales	1,859		1,504		1,143		856		5,362		(1,175		)	4,187
Depreciation and amortization ⁽³⁾	42		28		32		29		131		—			131
Research, development and engineering expenses	56		3		54		44		157		—			157
Equity, royalty and interest income from investees	38		19		9		8		74		—			74
Loss contingency⁽⁴⁾	99		—		—		—		99		—			99
Interest income	3		1		1		1		6		—			6
EBIT	89		96		148		59		392		6			398

Nine months ended October 1, 2017
External sales	$	4,951	$	5,101	$	3,183	$	1,717	$	14,952	$	—		$	14,952
Intersegment sales	1,715		19		1,148		1,238		4,120		(4,120		)	—
Total sales	6,666		5,120		4,331		2,955		19,072		(4,120		)	14,952
Depreciation and amortization⁽³⁾	137		90		117		87		431		—			431
Research, development and engineering expenses	200		14		170		161		545		—			545
Equity, royalty and interest income from investees	186		35		40		40		301		—			301
Interest income	4		4		1		2		11		—			11
EBIT	735		287		586		199		1,807		19			1,826

Nine months ended October 2, 2016
External sales	$	4,350	$	4,493	$	2,654	$	1,509	$	13,006	$	—		$	13,006
Intersegment sales	1,487		18		1,005		1,076		3,586		(3,586		)	—
Total sales	5,837		4,511		3,659		2,585		16,592		(3,586		)	13,006
Depreciation and amortization⁽³⁾	122		85		95		87		389		—			389
Research, development and engineering expenses	166		10		161		141		478		—			478
Equity, royalty and interest income from investees	120		56		29		29		234		—			234
Loss contingency ⁽⁴⁾	138		—		—		—		138		—			138
Interest income	8		3		3		4		18		—			18
EBIT	492		270		501		195		1,458		15			1,473

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⁽¹⁾The 2017 disclosures include Eaton Cummins Automated Transmission Technologies joint venture results consolidated during the third quarter of 2017. See Note 11 , "ACQUISITION," for additional information.

⁽²⁾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 1, 2017 and October 2, 2016.

⁽³⁾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 $2 million and $2 million for the nine months ended October 1, 2017 and October 2, 2016, respectively.

⁽⁴⁾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				Nine months ended
In millions	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016
Total EBIT	$	640	$	398	$	1,826	$	1,473
Less: Interest expense	18		16		57		51
Income before income taxes	$	622	$	382	$	1,769	$	1,422