Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

v3.20.2
OPERATING SEGMENTS
 6 Months Ended
Jun. 28, 2020
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 New Power. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and smaller) 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, electronics, fuel systems and automated 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. The New Power segment designs, manufactures, sells and supports electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery, fuel cell and hydrogen production technologies. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.
We use 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. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. 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 gains (losses) of corporate owned life insurance or restructuring charges related to corporate functions 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 New Power Total Segments
Intersegment Eliminations (1)
Total
Three months ended June 28, 2020        
External sales $ 937    $ 1,601    $ 876    $ 428    $ 10    $ 3,852    $ —    $ 3,852   
Intersegment sales 486    4    274    349    —    1,113    (1,113)   —   
Total sales 1,423    1,605    1,150    777    10    4,965    (1,113)   3,852   
Research, development and engineering expenses 65    4    55    41    24    189    —    189   
Equity, royalty and interest income from investees 84    11    12    9    (1)   115    —    115   
Interest income 1    1    1    1    —    4    —    4   
Segment EBITDA 150    160    141    91    (38)   504    45    549   
Depreciation and amortization (2)
51    30    47    32    4    164    —    164   
Three months ended June 30, 2019            
External sales $ 2,073    $ 2,015    $ 1,401    $ 724    $ 8    $ 6,221    $ —    $ 6,221   
Intersegment sales 630    13    445    479    —    1,567    (1,567)   —   
Total sales 2,703    2,028    1,846    1,203    8    7,788    (1,567)   6,221   
Research, development and engineering expenses 88    7    75    57    24    251    —    251   
Equity, royalty and interest income from investees 62    12    11    11    —    96    —    96   
Interest income 4    4    2    2    —    12    —    12   
Segment EBITDA 416    172    297    173    (33)   1,025    33    1,058   
Depreciation and amortization (2)
51    28    47    30    2    158    —    158   
(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 June 28, 2020 and June 30, 2019.
(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 Net 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 six months ended is shown in the table below:
In millions Engine Distribution Components Power Systems New Power Total Segments
Intersegment Eliminations (1)
Total
Six months ended June 28, 2020            
External sales $ 2,516    $ 3,408    $ 1,991    $ 928    $ 20    $ 8,863    $ —    $ 8,863   
Intersegment sales 1,065    11    661    733    —    2,470    (2,470)   —   
Total sales 3,581    3,419    2,652    1,661    20    11,333    (2,470)   8,863   
Research, development and engineering expenses 145    11    123    95    53    427    —    427   
Equity, royalty and interest income from investees 162    32    33    18    (1)   244    —    244   
Interest income 5    2    2    2    —    11    —    11   
Segment EBITDA 515    318    420    168    (81)   1,340    55    1,395   
Depreciation and amortization(2)
104    61    95    64    8    332    —    332   
Six months ended June 30, 2019            
External sales $ 4,057    $ 4,008    $ 2,802    $ 1,347    $ 11    $ 12,225    $ —    $ 12,225   
Intersegment sales 1,299    21    905    933    —    3,158    (3,158)   —   
Total sales 5,356    4,029    3,707    2,280    11    15,383    (3,158)   12,225   
Research, development and engineering expenses 166    14    150    113    45    488    —    488   
Equity, royalty and interest income from investees 118    23    21    26    —    188    —    188   
Interest income 8    8    4    4    —    24    —    24   
Segment EBITDA 854    343    622    311    (62)   2,068    23    2,091   
Depreciation and amortization(2)
101    57    93    59    4    314    —    314   
(1) Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the six months ended June 28, 2020 and June 30, 2019.
(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 Net Income as "Interest expense." The amortization of debt discount and deferred costs was $1 million and $1 million for the six months ended June 28, 2020 and June 30, 2019, 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 Net Income is shown in the table below:
  Three months ended Six months ended
In millions June 28,
2020		 June 30,
2019		 June 28,
2020		 June 30,
2019
Total EBITDA $ 549    $ 1,058    $ 1,395    $ 2,091   
Less:
Depreciation and amortization 164    158    332    314   
Interest expense 23    29    46    61   
Income before income taxes $ 362    $ 871    $ 1,017    $ 1,716