Print PageCUMMINS INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. OPERATING SEGMENTS
SFAS No. 131, ‘‘Disclosures about Segments of an Enterprise and Related Information,’’ set standards for reporting information regarding operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision making group, in deciding how to allocate resources and in assessing performance. Cummins chief operating decision-maker (CODM) is the Chief Executive Officer.
Our reportable operating segments consist of the following: Engine, Power Generation, Components and Distribution. This reporting structure is organized according to the products and markets each segment serves. This type of reporting structure allows management to focus its efforts on providing enhanced service to a wide range of customers. The Engine segment produces engines and parts for sale to customers in on-highway and various industrial markets. The engines are used in trucks of all sizes, buses and recreational vehicles, as well as various industrial applications including construction, mining, agriculture, marine, oil and gas, rail and military. The Power Generation segment is an integrated provider of power systems which sells engines, generator sets and alternators and rents power equipment for both standby and prime power uses. The Components segment includes sales of filtration products, exhaust and aftertreatment systems, turbochargers and fuel systems. 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 original equipment manufacturers.
We use segment EBIT (defined as earnings before interest expense, taxes and minority 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 the 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 have allocated 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 and finance. We also do not allocate debt-related items, actuarial gains and losses, prior service costs or credits or income taxes to individual segments. Segment EBIT 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:
| Power Engine |
Generation | Components | Distribution | Non-segment items(1) |
Total | ||||||||||||||
| Millions | |||||||||||||||||||
| 2007 | |||||||||||||||||||
| External sales | $ | 7,129 | $ | 2,375 | $ | 2,007 | $ | 1,537 | $ | — | $ | 13,048 | |||||||
| Intersegment sales | 1,053 | 685 | 925 | 3 | (2,666 | ) | — | ||||||||||||
| Net sales | 8,182 | 3,060 | 2,932 | 1,540 | (2,666 | ) | 13,048 | ||||||||||||
| Depreciation and amortization(2) | 176 | 42 | 59 | 11 | — | 288 | |||||||||||||
| Research and engineering expense | 222 | 34 | 73 | — | — | 329 | |||||||||||||
| Investee equity, royalty and other income |
92 | 17 | 4 | 92 | — | 205 | |||||||||||||
| Interest income | 26 | 6 | 3 | 1 | — | 36 | |||||||||||||
| Segment EBIT | 589 | 334 | 153 | 187 | (36 | ) | 1,227 | ||||||||||||
| Net assets | 1,727 | 931 | 1,270 | 506 | — | 4,434 | |||||||||||||
| Investment in and advances to equity investees |
327 | 24 | 51 | 112 | — | 514 | |||||||||||||
| Capital expenditures | 189 | 51 | 99 | 14 | — | 353 | |||||||||||||
| 2006 | |||||||||||||||||||
| External sales | $ | 6,640 | $ | 1,880 | $ | 1,473 | $ | 1,369 | $ | — | $ | 11,362 | |||||||
| Intersegment sales | 871 | 536 | 808 | 16 | (2,231 | ) | — | ||||||||||||
| Net sales | 7,511 | 2,416 | 2,281 | 1,385 | (2,231 | ) | 11,362 | ||||||||||||
| Depreciation and amortization(2) | 192 | 36 | 57 | 11 | — | 296 | |||||||||||||
| Research and engineering expense | 225 | 28 | 68 | — | — | 321 | |||||||||||||
| Investee equity, royalty and other income |
67 | 12 | 7 | 54 | — | 140 | |||||||||||||
| Interest income | 36 | 7 | 2 | 2 | — | 47 | |||||||||||||
| Segment EBIT | 733 | 220 | 107 | 144 | (25 | ) | 1,179 | ||||||||||||
| Net assets | 1,698 | 850 | 1,063 | 445 | — | 4,056 | |||||||||||||
| Investment in and advances to equity investees |
213 | 23 | 40 | 69 | — | 345 | |||||||||||||
| Capital expenditures | 125 | 45 | 70 | 9 | — | 249 | |||||||||||||
| 2005 | |||||||||||||||||||
| External sales | $ | 5,836 | $ | 1,582 | $ | 1,324 | $ | 1,176 | $ | — | $ | 9,918 | |||||||
| Intersegment sales | 821 | 417 | 676 | 15 | (1,929 | ) | — | ||||||||||||
| Net sales | 6,657 | 1,999 | 2,000 | 1,191 | (1,929 | ) | 9,918 | ||||||||||||
| Depreciation and amortization(2) | 182 | 45 | 53 | 15 | — | 295 | |||||||||||||
| Research and engineering expense | 201 | 21 | 56 | — | — | 278 | |||||||||||||
| Investee equity, royalty and other income |
80 | 9 | 8 | 34 | — | 131 | |||||||||||||
| Interest income | 17 | 3 | 1 | 3 | — | 24 | |||||||||||||
| Segment EBIT | 582 | 145 | 89 | 107 | (16 | ) | 907 | ||||||||||||
| Net assets | 1,518 | 718 | 944 | 299 | — | 3,479 | |||||||||||||
| Investment in and advances to equity investees |
177 | 23 | 31 | 47 | — | 278 | |||||||||||||
| Capital expenditures | 75 | 36 | 68 | 7 | — | 186 | |||||||||||||
| (1) | Includes intersegment sales and profit in inventory eliminations and unallocated corporate expenses. |
| (2) | Depreciation and amortization as shown on a segment basis excludes the amortization of debt discount that is included in the consolidated income statement as Interest expense. |
A reconciliation of our segment information to the corresponding amounts in the Consolidated Financial Statements is shown in the table below:
| Years ended December 31, | |||||||||
| 2007 | 2006 | 2005 | |||||||
| Millions | |||||||||
| Segment EBIT | $ | 1,227 | $ | 1,179 | $ | 907 | |||
| Less: Interest expense |
58 | 96 | 109 | ||||||
| Earnings before income taxes and minority interests | $ | 1,169 | $ | 1,083 | $ | 798 | |||
Years ended December 31, |
|||||||||
| 2007 | 2006 | 2005 | |||||||
| Millions | |||||||||
| Net assets for operating segments | $ | 4,434 | $ | 4,056 | $ | 3,479 | |||
| Liabilities deducted in arriving at net assets | 3,759 | 3,510 | 3,354 | ||||||
| Minimum pension liability excluded from net assets | — | — | (837 | ) | |||||
| Pension and other postretirement benefit adjustments excluded from net assets |
(570 | ) | (837 | ) | — | ||||
| Deferred tax assets not allocated to segments | 546 | 710 | 863 | ||||||
| Debt-related costs not allocated to segments | 26 | 26 | 26 | ||||||
| Total assets | $ | 8,195 | $ | 7,465 | $ | 6,885 | |||
The table below presents certain segment information by geographic area. Net sales attributed to geographic areas are based on the location of the customer.
| Years ended and as of December 31, |
|||||||||
| 2007 | 2006 | 2005 | |||||||
| Millions | |||||||||
| Net sales United States |
$ | 6,007 | $ | 5,719 | $ | 4,832 | |||
| United Kingdom | 621 | 463 | 437 | ||||||
| Canada | 405 | 743 | 728 | ||||||
| Other foreign countries | 6,015 | 4,437 | 3,921 | ||||||
| Total net sales | $ | 13,048 | $ | 11,362 | $ | 9,918 | |||
| Long-lived assets United States |
$ | 1,677 | $ | 1,397 | $ | 1,387 | |||
| United Kingdom | 289 | 207 | 204 | ||||||
| Other foreign countries | 604 | 456 | 420 | ||||||
| Total long-lived assets | $ | 2,570 | $ | 2,060 | $ | 2,011 | |||
Our largest customer is Chrysler. In 2007 Daimler AG sold a majority of its ownership interest in Chrysler. As a result of this sale, our standalone sales to Chrysler were less than 10 percent for 2007, 2006 and 2005. No other customer accounted for more than 10 percent of consolidated net sales.
SELECTED QUARTERLY FINANCIAL DATA
UNAUDITED
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||
| 2007(b) | ||||||||||||
| Millions, except per share amounts | ||||||||||||
| Net sales | $ | 2,817 | $ | 3,343 | $ | 3,372 | $ | 3,516 | ||||
| Gross margin | 552 | 670 | 652 | 682 | ||||||||
| Net earnings | 143 | 214 | 184 | 198 | ||||||||
| Net earnings per share—basic (a) | $ | 0.72 | $ | 1.07 | $ | 0.93 | $ | 1.01 | ||||
| Net earnings per share—diluted (a) . | $ | 0.71 | $ | 1.06 | $ | 0.92 | $ | 1.00 | ||||
| Dividends per share | $ | 0.09 | $ | 0.09 | $ | 0.125 | $ | 0.125 | ||||
| Stock price per share High |
$ | 37.99 | $ | 53.62 | $ | 70.13 | $ | 71.73 | ||||
| Low | $ | 28.16 | $ | 36.01 | $ | 48.00 | $ | 51.84 | ||||
| 2006(b) | ||||||||||||
| Net sales | $ | 2,678 | $ | 2,842 | $ | 2,809 | $ | 3,033 | ||||
| Gross margin (c) | 566 | 646 | 617 | 636 | ||||||||
| Net earnings | 135 | 220 | 171 | 189 | ||||||||
| Net earnings per share—basic (a) | $ | 0.76 | $ | 1.20 | $ | 0.85 | $ | 0.95 | ||||
| Net earnings per share—diluted (a) . | $ | 0.68 | $ | 1.10 | $ | 0.84 | $ | 0.94 | ||||
| Dividends per share | $ | 0.075 | $ | 0.075 | $ | 0.09 | $ | 0.09 | ||||
| Stock price per share High |
$ | 27.65 | $ | 30.69 | $ | 31.24 | $ | 34.80 | ||||
| Low | $ | 22.17 | $ | 25.06 | $ | 27.13 | $ | 29.39 | ||||
| (a) | Earnings per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while earnings per share for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters earnings per share does not equal the full year earnings per share. |
| (b) | All 2006 and 2007 per share amounts were adjusted for the impact of a two-for-one stock split on April 9, 2007 and an additional two-for-one stock split on January 2, 2008 (See Note 17). |
| (c) | All 2006 gross margins were adjusted retrospectively to reflect a revision in our accounting policy related to shipping and handling costs (See Note 1). |
At December 31, 2007, there were approximately 3,539 holders of record of Cummins Inc.’s $2.50 par value common stock.
The accompanying notes are an integral part of the Consolidated Financial Statements.