Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.10.0.1
OPERATING SEGMENTS
9 Months Ended
Sep. 30, 2018
Segment Reporting [Abstract]  
OPERATING SEGMENTS NOTE 15. 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, Power Systems and Electrified Power. 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 formed the Electrified Power segment, effective January 1, 2018, which will provide fully electric and hybrid powertrain solutions along with innovative components and subsystems to serve all our markets as they adopt electrification, meeting the needs of our OEM partners and end customers.
Our Electrified Power segment designs, manufactures, sells and supports electrified power systems ranging from fully electric to hybrid. We are currently developing the Cummins Electric Power Battery and the Cummins Hybrid Plug-In systems for urban bus, which are expected to launch in 2019 and 2020, respectively. We also design and manufacture battery modules, packs and systems for commercial, industrial and material handling applications. We use a range of cell chemistries which are suitable for pure electric, hybrid and plug-in hybrid applications. In addition to electrified powertrains for urban bus, we intend to deliver product offerings to future markets, including pick-up and delivery applications and other markets as they adopt electric solutions. We invest in and utilize our internal research and development capabilities, along with strategic acquisitions and partnerships to meet our objectives.
Effective January 1, 2018, we changed our measure to EBITDA (defined as earnings before interest expense, income taxes, noncontrolling interests, depreciation and amortization) as the primary basis for the CODM to evaluate the performance of each of our reportable operating segments. EBITDA assists investors and debt holders in comparing our performance on a consistent basis without regard for depreciation and amortization, which can vary significantly depending upon many factors. Prior periods have been revised to reflect the current presentation. 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 changes in cash surrender value of corporate owned life insurance to individual segments. EBITDA may not be consistent with measures used by other companies.Summarized financial information regarding our reportable operating segments for the three months ended is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Electrified Power
 
Total Segments
 
Intersegment Eliminations (1)
 
Total
Three months ended September 30, 2018
 
 

 
 
 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
2,082

 
$
1,927

 
$
1,297

 
$
636

 
$
1

 
$
5,943

 
$

 
$
5,943

Intersegment sales
 
644

 
4

 
457

 
471

 
1

 
1,577

 
(1,577
)
 

Total sales
 
2,726

 
1,931

 
1,754

 
1,107

 
2

 
7,520

 
(1,577
)
 
5,943

Research, development and engineering expenses
 
74

 
5

 
71

 
57

 
22

 
229

 

 
229

Equity, royalty and interest income from investees
 
55

 
9

 
12

 
14

 

 
90

 

 
90

Interest income
 
3

 
4

 
1

 
1

 

 
9

 

 
9

Segment EBITDA
 
405

 
155

 
288

 
163

 
(30
)
 
981

 
2

 
983

Depreciation and amortization (2)
 
46

 
27

 
44

 
29

 
2

 
148

 

 
148

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

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

Segment EBITDA
 
276

 
120

 
259

 
111

 

 
766

 
22

 
788

Depreciation and amortization (2)
 
47

 
29

 
42

 
30

 

 
148

 

 
148

____________________________________
(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 September 30, 2018 and October 1, 2017.
(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." A portion of depreciation expense is included in "Research, development and engineering expenses."
Summarized financial information regarding our reportable operating segments for the nine months ended is shown in the table below:
In millions
 
Engine
 
Distribution
 
Components
 
Power Systems
 
Electrified Power
 
Total Segments
 
Intersegment Eliminations (1)
 
Total
Nine months ended September 30, 2018
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

External sales
 
$
5,945

 
$
5,762

 
$
4,012

 
$
1,922

 
$
4

 
$
17,645

 
$

 
$
17,645

Intersegment sales
 
1,923

 
16

 
1,382

 
1,505

 
1

 
4,827

 
(4,827
)
 

Total sales
 
7,868

 
5,778

 
5,394

 
3,427

 
5

 
22,472

 
(4,827
)
 
17,645

Research, development and engineering expenses
 
229

 
15

 
195

 
174

 
45

 
658

 

 
658

Equity, royalty and interest income from investees
 
189

 
33

 
42

 
51

 

 
315

 

 
315

Interest income
 
8

 
9

 
4

 
5

 

 
26

 

 
26

Segment EBITDA
 
1,053

 
423

 
752

 
491

 
(61
)
 
2,658

 
(78
)
 
2,580

Depreciation and amortization(2)
 
142

 
81

 
137

 
91

 
4

 
455

 

 
455

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Research, development and engineering expenses
 
200

 
14

 
171

 
161

 

 
546

 

 
546

Equity, royalty and interest income from investees
 
186

 
35

 
40

 
40

 

 
301

 

 
301

Interest income
 
4

 
4

 
1

 
2

 

 
11

 

 
11

Segment EBITDA
 
872

 
377

 
703

 
286

 

 
2,238

 
19

 
2,257

Depreciation and amortization(2)
 
137

 
90

 
117

 
87

 

 
431

 

 
431

____________________________________
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the nine months ended September 30, 2018 and October 1, 2017.
(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 was $1 million and $2 million for the nine month periods ended September 30, 2018 and October 1, 2017, respectively. A portion of depreciation expense is included in "Research, development and engineering expenses."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
 
September 30,
2018
 
October 1,
2017
 
September 30,
2018
 
October 1,
2017
Total EBITDA
 
$
983

 
$
788

 
$
2,580

 
$
2,257

Less:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
148

 
148

 
455

 
431

Interest expense
 
30

 
18

 
82

 
57

Income before income taxes
 
$
805

 
$
622

 
$
2,043

 
$
1,769