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