Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.8.0.1
OPERATING SEGMENTS
9 Months Ended
Oct. 01, 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, 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

____________________________________
(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