OPERATING SEGMENTS

12 Months Ended

Dec. 31, 2021

Segment Reporting [Abstract]

OPERATING SEGMENTS

NOTE 22. 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 hydrogen production solutions as well as electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery and fuel cell technologies. The New Power segment is currently in the development phase with a primary focus on research and development activities for our power systems, components and subsystems. 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 segment earnings or losses before interest expense, income taxes, depreciation and amortization and noncontrolling interests (EBITDA) 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 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 or losses 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 at December 31, is shown in the table below:

In millions	Engine		Distribution		Components		Power Systems		New Power		Total Segments
2021
External sales	$	7,589	$	7,742	$	5,932	$	2,650	$	108	$	24,021
Intersegment sales	2,365		30		1,733		1,765		8		5,901
Total sales	9,954		7,772		7,665		4,415		116		29,922
Research, development and engineering expenses	399		48		307		234		102		1,090
Equity, royalty and interest income (loss) from investees	340		63		50		56		(3)		506
Interest income	8		7		5		5		—		25
Segment EBITDA	1,411		731		1,180		496		(223)		3,595
Depreciation and amortization (1)	205		116		183		131		24		659
Net assets	1,554		2,294		2,938		2,251		602		9,639
Investments and advances to equity investees	742		329		254		164		49		1,538
Capital expenditures	341		92		184		80		37		734
2020
External sales	$	5,925	$	7,110	$	4,650	$	2,055	$	71	$	19,811
Intersegment sales	2,097		26		1,374		1,576		1		5,074
Total sales	8,022		7,136		6,024		3,631		72		24,885
Research, development and engineering expenses	290		31		264		212		109		906
Equity, royalty and interest income (loss) from investees	312		62		61		21		(4)		452
Interest income	9		4		4		4		—		21
Segment EBITDA	1,235		665		961		343		(172)		3,032
Depreciation and amortization (1)	208		122		192		130		18		670
Net assets	1,306		2,444		2,878		2,134		504		9,266
Investments and advances to equity investees	681		313		215		200		32		1,441
Capital expenditures	202		89		140		79		18		528

(Table continued on next page)

In millions	Engine		Distribution		Components		Power Systems		New Power		Total Segments
2019
External sales	$	7,570	$	8,040	$	5,253	$	2,670	$	38	$	23,571
Intersegment sales	2,486		31		1,661		1,790		—		5,968
Total sales	10,056		8,071		6,914		4,460		38		29,539
Research, development and engineering expenses	337		28		300		230		106		1,001
Equity, royalty and interest income from investees	200		52		40		38		—		330
Interest income	15		15		8		8		—		46
Segment EBITDA (excluding restructuring actions)	1,472		693		1,117		524		(148)		3,658
Restructuring actions (2)	18		37		20		12		1		88
Segment EBITDA	1,454		656		1,097		512		(149)		3,570
Depreciation and amortization (1)	202		115		222		118		12		669
Capital expenditures	240		136		191		107		26		700
(1) Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs were $3 million, $3 million and $3 million for the years ended 2021, 2020 and 2019, respectively. A portion of depreciation expense is included in "Research, development and engineering expense."
(2) See Note 21 "RESTRUCTURING ACTIONS," for additional information.

A reconciliation of our total segment sales to total net sales in the Consolidated Statements of Net Income was as follows:

	Years ended December 31,
In millions	2021		2020		2019
Total segment sales	$	29,922	$	24,885	$	29,539
Elimination of intersegment sales	(5,901)		(5,074)		(5,968)
Total net sales	$	24,021	$	19,811	$	23,571

A reconciliation of our segment information to the corresponding amounts in the Consolidated Statements of Net Income is shown in the table below:

	Years ended December 31,
In millions	2021		2020		2019
TOTAL SEGMENT EBITDA	$	3,595	$	3,032	$	3,570
Intersegment elimination	(74)		76		42
Less:
Interest expense	111		100		109
Depreciation and amortization	659		670		669
INCOME BEFORE INCOME TAXES	2,751		2,338		2,834
Less: Income tax expense	587		527		566
CONSOLIDATED NET INCOME	2,164		1,811		2,268
Less: Net income attributable to noncontrolling interests	33		22		8
NET INCOME ATTRIBUTABLE TO CUMMINS INC.	$	2,131	$	1,789	$	2,260

A reconciliation of our segment net assets to the corresponding amounts in the Consolidated Balance Sheets is shown in the table below:

	December 31,
In millions	2021		2020
Net assets for operating segments	$	9,639	$	9,266
Cash, cash equivalents and marketable securities	3,187		3,862
Net liabilities deducted in arriving at net assets (1)	9,486		8,947
Pension and OPEB adjustments excluded from net assets	966		67
Deferred tax assets not allocated to segments	428		479
Deferred debt costs not allocated to segments	4		3
Total assets	$	23,710	$	22,624
(1) Liabilities deducted in arriving at net assets include certain accounts payable, accrued expenses, long-term liabilities and other items.

See Note 2, "REVENUE FROM CONTRACTS WITH CUSTOMERS," for segment net sales by geographic area.

Long-lived assets include property, plant and equipment, net of depreciation, investments and advances to equity investees and other assets, excluding deferred tax assets, refundable taxes and deferred debt expenses. Long-lived segment assets by geographic area were as follows:

	December 31,
In millions	2021		2020
United States	$	3,978	$	3,776
China	1,136		1,010
India	573		595
United Kingdom	384		370
Netherlands	314		295
Mexico	195		187
Canada	163		149
Other international countries	554		545
Total long-lived assets	$	7,297	$	6,927

Our largest customer is PACCAR Inc. Worldwide sales to this customer were approximately $3.6 billion, $2.9 billion and $3.9 billion for the years ended December 31, 2021, 2020 and 2019, representing 15 percent, 15 percent and 17 percent, respectively, of our consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales.