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Caterpillar Inc.: Caterpillar Files Form 10-Q FQE 30 June 2018
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Caterpillar Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2018 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 1-768
CATERPILLAR INC. (Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation) 510 Lake Cook Road, Suite 100, Deerfield, Illinois (Address of principal executive offices)
(IRS Employer I.D. No.) 60015 (Zip Code)
Registrant's telephone number, including area code: (224) 551-4000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
At June 30, 2018, 594,325,388 shares of common stock of the registrant were outstanding.
Table of Contents
Part I. Financial Information Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 63 Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 94 Item 4. Controls and Procedures 94 Part II. Other Information
* Item omitted because no answer is called for or item is not applicable.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Sales and revenues:
Consolidated Statement of Results of Operations (Unaudited) (Dollars in millions except per share data)
Three Months Ended June 30 2018 2017
1 Profit attributable to common shareholders. 2 Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
Caterpillar Inc. Consolidated Statement of Comprehensive Income (Unaudited) (Dollars in millions)
Three Months Ended June 30 2018 2017
Profit of consolidated and affiliated companies ............................................................................................. $ 1,705 $ 803 Other comprehensive income (loss), net of tax: Foreign currency translation, net of tax (provision)/benefit of: 2018 - $(30); 2017 - $51 .............................. (411) 324
Pension and other postretirement benefits: Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2018 - $1; 2017 - $3 .......... (7) (4)
Derivative financial instruments: Gains (losses) deferred, net of tax (provision)/benefit of: 2018 - $(13); 2017 - $0 ................................... 36 - (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2018 - $30; 2017 - $(14) .......... (96) 26
Available-for-sale securities: Gains (losses) deferred, net of tax (provision)/benefit of: 2018 - $1; 2017 - $(3) ..................................... (2) 10
Total other comprehensive income (loss), net of tax .......................................................................................... (480) 356
Comprehensive income ...................................................................................................................................... 1,225 1,159 Less: comprehensive income attributable to the noncontrolling interests .......................................................... 2 (1)
Comprehensive income attributable to shareholders .................................................................................... $ 1,227 $ 1,158
Sales and revenues:
Consolidated Statement of Results of Operations (Unaudited) (Dollars in millions except per share data)
Six Months Ended June 30 2018 2017 Sales of Machinery, Energy & Transportation ........................................................................ $ 25,429 $ 19,769 Revenues of Financial Products .............................................................................................. 1,441 1,384 Total sales and revenues .......................................................................................................... 26,870 21,153
Operating costs:
Other income (expense)........................................................................................................... 248 128
Consolidated profit before taxes ............................................................................................... 4,320 1,448
Provision (benefit) for income taxes ....................................................................................... 962 451 Profit of consolidated companies ............................................................................................ 3,358 997 Equity in profit (loss) of unconsolidated affiliated companies................................................ 14 - Profit of consolidated and affiliated companies....................................................................... 3,372 997
Less: Profit (loss) attributable to noncontrolling interests ........................................................... - 3
Profit 1.......................................................................................................................................... $ 3,372 $ 994
1 Profit attributable to common shareholders. 2 Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
Caterpillar Inc. Consolidated Statement of Comprehensive Income (Unaudited) (Dollars in millions)
Six Months Ended June 30 2018 2017 Profit of consolidated and affiliated companies ............................................................................................. $ 3,372 $ 997 Other comprehensive income (loss), net of tax: Foreign currency translation, net of tax (provision)/benefit of: 2018 - $(15); 2017 - $58 ............................... (227) 471 Pension and other postretirement benefits: Current year prior service credit (cost), net of tax (provision)/benefit of: 2018 - $1; 2017 - $(4) .............. (2) 8 Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2018 - $3; 2017 - $4 ........... (14) (8) Derivative financial instruments:
Available-for-sale securities:
Comprehensive income attributable to shareholders .................................................................................... $ 3,079 $ 1,562
Caterpillar Inc. Consolidated Statement of Financial Position (Unaudited) (Dollars in millions)
June 30,
December 31,
Assets Current assets:
Common stock of $1.00 par value: Authorized shares: 2,000,000,000 Issued shares: (6/30/18 and 12/31/17 - 814,894,624) at paid-in amount............................................ 5,746 5,593 Treasury stock (6/30/18 - 220,569,236 shares; 12/31/17 - 217,268,852 shares) at cost .................... (18,028) (17,005) Profit employed in the business........................................................................................................... 28,657 26,301 Accumulated other comprehensive income (loss)............................................................................... (1,496) (1,192) Noncontrolling interests....................................................................................................................... 63 69 Total shareholders' equity......................................................................................................................... 14,942 13,766 Total liabilities and shareholders' equity ................................................................................................. $ 78,987 $ 76,962
Caterpillar Inc. Consolidated Statement of Changes in Shareholders' Equity (Unaudited) (Dollars in millions)
Six Months Ended June 30, 2017
Common stock
Treasury stock
Profit employed in the business
Accumulated other comprehensive income (loss)
Noncontrolling interests Total Balance at December 31, 2016 ....................................................... $ 5,277 $ (17,478) $ 27,377 $ (2,039) $ 76 $ 13,213 Adjustment to adopt stock-based compensation guidance1 .............. - - 15 - - 15 Balance at January 1, 2017 ............................................................ $ 5,277 $ (17,478) $ 27,392 $ (2,039) $ 76 $ 13,228 Profit of consolidated and affiliated companies................................ - - 994 - 3 997 Foreign currency translation, net of tax ............................................ - - - 471 - 471 Derivative financial instruments, net of tax...................................... - - - 76 - 76 Available-for-sale securities, net of tax............................................. - - - 21 - 21 Change in ownership from noncontrolling interests......................... 4 - - - (3) 1 Common shares issued from treasury stock for stock-based compensation: 4,486,768 .................................................................. (88) 171 - - - 83 Stock-based compensation expense.................................................. 117 - - - - 117 Other ................................................................................................. 6 - - - - 6 Balance at June 30, 2017 ................................................................ $ 5,316 $ (17,307) $ 27,471 $ (1,471) $ 70 $ 14,079
Six Months Ended June 30, 2018 Balance at December 31, 2017 ....................................................... $ 5,593 $ (17,005) $ 26,301 $ (1,192) $ 69 $ 13,766 Adjustments to adopt new accounting guidance1 Revenue recognition ...................................................................... - - (12) - - (12) Tax accounting for intra-entity asset transfers ............................... - - (35) - - (35) Recognition and measurement of financial assets and liabilities... - - 11 (11) - - Balance at January 1, 2018 ............................................................ $ 5,593 $ (17,005) $ 26,265 $ (1,203) $ 69 $ 13,719 Profit of consolidated and affiliated companies................................ - - 3,372 - - 3,372 Foreign currency translation, net of tax ............................................ - - - (227) - (227) Pension and other postretirement benefits, net of tax ....................... - - - (16) - (16) Derivative financial instruments, net of tax...................................... - - - (37) - (37) Available-for-sale securities, net of tax............................................. - - - (13) - (13) Change in ownership from noncontrolling interests......................... 2 - - - (5) (3) Dividends declared............................................................................ - - (980) - - (980) Distribution to noncontrolling interests ............................................ - - - - (1) (1) Common shares issued from treasury stock for stock-based
Cash flow from operating activities:
Consolidated Statement of Cash Flow (Unaudited) (Millions of dollars)
Six Months Ended June 30 2018 2017
Other liabilities - net ............................................................................................................... (57) 38 Net cash provided by (used for) operating activities............................................................................ 3,083 3,924 Cash flow from investing activities:
Other - net....................................................................................................................................... 21 25 Net cash provided by (used for) investing activities ............................................................................ (2,068) (159) Cash flow from financing activities:
Payments on debt (original maturities greater than three months): Machinery, Energy & Transportation...................................................................................... (3) (505) Financial Products ................................................................................................................... (4,433) (3,723) Short-term borrowings - net (original maturities three months or less) ......................................... 1,487 (505) Other - net (4) (6) Net cash provided by (used for) financing activities............................................................................ (573) (694) Effect of exchange rate changes on cash .............................................................................................. (68) 13 Increase (decrease) in cash and short-term investments and restricted cash ............................... 374 3,084 Cash and short-term investments and restricted cash at beginning of period ...................................... 8,320 7,199 Cash and short-term investments and restricted cash at end of period................................................. $ 8,694 $ 10,283
All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. A. Nature of operations
Information in our financial statements and related commentary are presented in the following categories:
Machinery, Energy & Transportation (ME&T) - Represents the aggregate total of Construction Industries, Resource Industries, Energy & Transportation and All Other operating segments and related corporate items and eliminations.
Financial Products - Primarily includes the company's Financial Products Segment. This category includes Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings Inc. (Insurance Services) and their respective subsidiaries.
B. Basis of presentation
In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated results of operations for the three and six months ended June 30, 2018 and 2017, (b) the consolidated comprehensive income for the three and six months ended June 30, 2018 and 2017, (c) the consolidated financial position at June 30, 2018 and December 31, 2017, (d) the consolidated changes in shareholders' equity for the six months ended June 30, 2018 and 2017 and (e) the consolidated cash flow for the six months ended June 30, 2018 and 2017. The financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our company's annual report on Form 10-K for the year ended December 31, 2017 (2017 Form 10-K).
The December 31, 2017 financial position data included herein is derived from the audited consolidated financial statements included in the 2017 Form 10-K but does not include all disclosures required by U.S. GAAP. Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation. See Note 2 for more information. In addition, deferred revenue of $233 million was reclassified from Other current liabilities to Customer advances in the December 31, 2017 Consolidated Statement of Financial Position.
Unconsolidated Variable Interest Entities (VIEs)
We have affiliates, suppliers and dealers that are VIEs of which we are not the primary beneficiary. Although we have provided financial support, we do not have the power to direct the activities that most significantly impact the economic performance of each entity.
Our maximum exposure to loss from VIEs for which we are not the primary beneficiary was as follows:
1 Related contract was terminated during the first quarter of 2018. No payments were made under the guarantee.
In addition, Cat Financial has end-user customers that are VIEs of which we are not the primary beneficiary. Although we have provided financial support to these entities and therefore have a variable interest, we do not have the power to direct the activities that most significantly impact their economic performance. Our maximum exposure to loss from our involvement with these VIEs is limited to the credit risk inherently present in the financial support that we have provided. These risks are evaluated and reflected in our financial statements as part of our overall portfolio of finance receivables and related allowance for credit losses.
2. New accounting guidance
Revenue recognition - In May 2014, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance to provide a single, comprehensive revenue recognition model for all contracts with customers. Under the new guidance, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. A five step model has been introduced for an entity to apply when recognizing revenue. The new guidance also includes enhanced disclosure requirements. The guidance was effective January 1, 2018, and was applied to contracts that were not completed at the date of initial application on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 1, 2018. The prior period comparative information has not been recasted and continues to be reported under the accounting guidance in effect for those periods.
Under the new guidance, sales of certain turbine machinery units changed to a point-in-time recognition model. Under previous guidance, we accounted for these sales under an over-time model following the percentage-of-completion method as the product was manufactured. In addition, under the new guidance we began to recognize an asset for the value of expected replacement part returns and discontinued lease accounting treatment for certain product sales containing residual value guarantees.
See Note 3 for additional information.
The cumulative effect of initially applying the new revenue recognition guidance to our consolidated financial statements on January 1, 2018 was as follows:
Consolidated Statement of Financial Position
Cumulative Impact from
Liabilities
The impact from adopting the new revenue recognition guidance on our consolidated financial statements was as follows:
Consolidated Statement of Results of Operations Three Months Ended June 30, 2018
Consolidated Statement of Results of Operations Six Months Ended June 30, 2018
Recognition and measurement of financial assets and financial liabilities - In January 2016, the FASB issued accounting guidance that affects the accounting for equity investments, financial liabilities accounted for under the fair value option and the presentation and disclosure requirements for financial instruments. Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification for equity securities with readily determinable fair values. For financial liabilities when the fair value option has been elected, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance was effective January 1, 2018, and was applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 1, 2018. The adoption did not have a material impact on our financial statements.
Lease accounting - In February 2016, the FASB issued accounting guidance that revises the accounting for leases. Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability for substantially all leases. The new guidance will continue to classify leases as either financing or operating, with classification affecting the pattern of expense recognition. The accounting applied by a lessor under the new guidance will be substantially equivalent to current lease accounting guidance. Entities have the option to adopt the new guidance using a modified retrospective approach through a cumulative effect adjustment to retained earnings applied either to the beginning of the earliest period presented or the beginning of the period of adoption. In addition, the new guidance provides for certain practical expedients. The new guidance is effective January 1, 2019, with early adoption permitted. Ateam is currently designing new processes and controls, implementing a software solution and evaluating our population of leased assets to assess the effect of the new guidance on our financial statements. We plan to adopt the new guidance effective January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption.
Stock-based compensation - In March 2016, the FASB issued accounting guidance to simplify several aspects of the accounting for share-based payments. The new guidance changes how reporting entities account for certain aspects of share-based payments, including the accounting for income taxes and the classification of the tax impact on the Consolidated Statement of Cash Flow. Under the new guidance all excess tax benefits and deficiencies during the period are recognized in income (rather than equity) on a prospective basis. The guidance removes the requirement to delay recognition of excess tax benefits until it reduces income taxes currently payable. This change was required to be applied on a modified retrospective basis, resulting in a cumulative-effect adjustment to opening retained earnings in the period of adoption. In addition, Cash flows related to excess tax benefits are now included in Cash provided by operating activities and will no longer be separately classified as a financing activity. This change was adopted retrospectively. The guidance was effective January 1, 2017, and did not have a material impact on our financial statements.
Measurement of credit losses on financial instruments - In June 2016, the FASB issued accounting guidance to introduce a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new guidance will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. The new guidance will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. The new guidance is effective January 1, 2020, with early adoption permitted beginning January 1, 2019. We are in the process of evaluating the effect of the new guidance on our financial statements.
Classification for certain cash receipts and cash payments - In August 2016, the FASB issued accounting guidance related to the presentation and classification of certain transactions in the statement of cash flows where diversity in practice exists. The guidance was effective January 1, 2018, and was applied on a retrospective basis. The adoption did not have a material impact on our financial statements.
Tax accounting for intra-entity asset transfers - In October 2016, the FASB issued accounting guidance that requires the recognition of tax expense from the sales of intra-entity assets in the seller's tax jurisdiction at the time of transfer. The new guidance does not apply to intra-entity transfers of inventory. Under previous guidance, the tax effects of these assets were deferred until the transferred asset was sold to a third party or otherwise recovered through use. The guidance was effective January 1, 2018, and was applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 1, 2018. The adoption did not have a material impact on our financial statements.
Classification of restricted cash - In November 2016, the FASB issued accounting guidance related to the presentation and classification of changes in restricted cash on the statement of cash flows where diversity in practice exists. The
guidance was effective January 1, 2018, and was applied on a retrospective basis. The adoption did not have a material impact on our financial statements.
Presentation of net periodic pension costs and net periodic postretirement benefit costs - In March 2017, the FASB issued accounting guidance that requires that an employer disaggregate the service cost component from the other components of net benefit cost. Service cost is required to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be reported outside the subtotal for income from operations. Additionally, only the service cost component of net benefit costs is eligible for capitalization. The guidance was effective January 1, 2018. We applied the presentation changes retrospectively and the capitalization change prospectively. The adoption primarily resulted in the reclassification of other components of net periodic benefit cost outside of Operating profit in the Consolidated Statement of Results of Operations.
Consolidated Statement of Results of Operations
Three Months Ended June 30, 2017
(Millions of dollars) As Revised Previously Reported Effect of Change
Premium amortization on purchased callable debt securities - In March 2017, the FASB issued accounting guidance related to the amortization period for certain purchased callable debt securities held at a premium. Securities held at a premium will be required to be amortized to the earliest call date rather than the maturity date. The new standard is required to be applied with a modified retrospective approach through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance is effective January 1, 2019, with early adoption permitted. We do not expect the adoption to have a material impact on our financial statements.
Clarification on stock-based compensation - In May 2017, the FASB issued accounting guidance to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance was effective January 1, 2018, and was applied prospectively. The adoption did not have a material impact on our financial statements.
Derivatives and hedging - In August 2017, the FASB issued accounting guidance to better align hedge accounting with a company's risk management activities, simplify the application of hedge accounting and improve the disclosures of hedging arrangements. The new guidance is required to be applied on a modified retrospective basis, resulting in a cumulative-effect adjustment to opening retained earnings in the period of adoption. The guidance is effective January
1, 2019, with early adoption permitted. The impact on our financial statements at the time of adoption will primarily be reclassification of our gains (losses) for designated ME&T foreign exchange contracts from Other income (expense) to components of Operating profit in the Consolidated Statement of Results of Operations. We plan to adopt the new guidance effective January 1, 2019.
Reclassification of certain tax effects from accumulated other comprehensive income - In February 2018, the FASB issued accounting guidance to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. tax reform legislation. The new guidance is required to be applied either in the period of adoption or retrospectively to each period affected by U.S. tax reform legislation. The guidance is effective January 1, 2019, with early adoption permitted. We are in the process of evaluating the effect of the new guidance on our financial statements.
3. Sales and revenue recognition
A. Sales of Machinery, Energy & Transportation
Sales of Machinery, Energy & Transportation are recognized when all the following criteria are satisfied: (i) a contract with an independently owned and operated dealer or an end user exists which has commercial substance; (ii) it is probable we will collect the amount charged to the dealer or end user; and (iii) we have completed our performance obligation whereby the dealer or end user has obtained control of the product. A contract with commercial substance exists once we receive and accept a purchase order under a dealer sales agreement, or once we enter into a contract with an end user. If collectibility is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Control of our products typically transfers when title and risk of ownership of the product has transferred to the dealer or end user. Typically, where product is produced and sold in the same country, title and risk of ownership transfer when the product is shipped. Products that are exported from a country for sale typically transfer title and risk of ownership at the border of the destination country.
Our remanufacturing operations are primarily focused on the remanufacture of Cat engines and components and rail related products. In this business, used engines and related components (core) are inspected, cleaned and remanufactured. In connection with the sale of our remanufactured product to dealers, we collect a deposit that is repaid if the dealer returns an acceptable core within a specified time period. Caterpillar owns and has title to the cores when they are returned from dealers. The rebuilt engine or component (the core plus any new content) is then sold as a remanufactured product to dealers and end users. Revenue is recognized pursuant to the same criteria as Machinery, Energy & Transportation sales noted above (title and risk of ownership of the entire remanufactured product passes to the dealer or end user upon sale). At the time of sale, the deposit is recognized in Other current liabilities in the Consolidated Statement of Financial Position, and the core to be returned is recognized as an asset in Prepaid expenses and other current assets in the Consolidated Statement of Financial Position at the estimated replacement cost (based on historical experience with usable cores). Upon receipt of an acceptable core, we repay the deposit and relieve the liability. The returned core is then included in inventory. In the event that the deposit is forfeited (i.e., upon failure by the dealer to return an acceptable core in the specified time period), we recognize the core deposit and the cost of the core in Sales and Cost of goods sold, respectively.
We provide discounts to dealers through merchandising programs. We have numerous programs that are designed to promote the sale of our products. The most common dealer programs provide a discount when the dealer sells a product to a targeted end user. Generally, the cost of these discounts is estimated for each product by model by geographic region based on historical experience and known changes in merchandising programs. The cost of these discounts is reported as a reduction to the transaction price when the product sale is recognized. A corresponding post-sale discount reserve is accrued in the Consolidated Statement of Financial Position, which represents discounts we expect to pay on previously sold units. If discounts paid differ from those estimated, the difference is reported as a change in the transaction price.
Except for replacement parts, no right of return exists on the sale of our products. We estimate replacement part returns based on historical experience and recognize a parts return asset in Prepaid expenses and other current assets in the Consolidated Statement of Financial Position, which represents our right to recover replacement parts we expect will be returned. We also recognize a refund liability in Other current liabilities in the Consolidated Statement of Financial Position for the refund we expect to pay for returned parts. If actual replacement part returns differ from those estimated, the difference in the estimated replacement part return asset and refund liability is recognized in Cost of goods sold and Sales, respectively.
Our standard dealer invoice terms are established by marketing region. Our invoice terms for end user sales are established by the responsible business unit. Payments from dealers are due shortly after the time of sale. When a sale is made to a dealer, the dealer is responsible for payment even if the product is not sold to an end user. Dealers and end users must make payment within the established invoice terms to avoid potential interest costs. Interest at or above prevailing market rates may be charged on any past due balance, and generally our practice is to not forgive this interest. In addition, Cat Financial provides wholesale inventory financing for a dealer's purchase of inventory. Wholesale inventory receivables have varying payment terms and are included in Receivables - trade and other and Long-term receivables - trade and other in the Consolidated Statement of Financial Position. Trade receivables from dealers and end users were $6,944 million and $6,399 million as of June 30, 2018 and January 1, 2018, respectively, and are recognized in Receivables - trade and other in the Consolidated Statement of Financial Position. Long-term trade receivables from dealers and end users were $634 million and $639 million as of June 30, 2018 and January 1, 2018, respectively, and are recognized in Long-term receivables - trade and other in the Consolidated Statement of Financial Position.
We establish a bad debt allowance for Machinery, Energy & Transportation receivables when it becomes probable that the receivable will not be collected. Our allowance for bad debts is not significant.
We invoice in advance of recognizing the sale of certain products. Advanced customer payments are recognized as a contract liability in Customer advances and Other liabilities in the Consolidated Statement of Financial Position. Long- term customer advances recognized in Other liabilities in the Consolidated Statement of Financial Position were $434 million and $396 million as of June 30, 2018 and January 1, 2018, respectively. We reduce the contract liability when revenue is recognized. During the three and six months ended June 30, 2018, we recognized $362 million and $979 million, respectively, of revenue that was recorded as a contract liability at the beginning of the period.
We have elected the practical expedient to not adjust the amount of revenue to be recognized under a contract with a dealer or end user for the effects of time value of money when the timing difference between receipt of payment and recognition of revenue is less than one year.
As of June 30, 2018, we have entered into contracts with dealers and end users for which sales have not been recognized as we have not satisfied our performance obligations and transferred control of the products. The dollar amount of unsatisfied performance obligations for contracts with an original duration greater than one year is $5.6 billion, of which $2.6 billion is expected to be completed and revenue recognized in the twelve months following June 30, 2018. We have elected the practical expedient to not disclose unsatisfied performance obligations with an original contract duration of one year or less. Contracts with an original duration of one year or less are primarily sales to dealers for machinery, engines and replacement parts.
Sales and other related taxes are excluded from the transaction price. Shipping and handling costs associated with outbound freight after control over a product has transferred are accounted for as a fulfillment cost and are included in Cost of goods sold.
We provide a standard manufacturer's warranty of our products at no additional cost. At the time a sale is recognized, we record estimated future warranty costs. See Note 10 for further discussion of our product warranty liabilities.
See Note 15 for further disaggregated sales and revenues information.
B. Revenues of Financial Products
Revenues of Financial Products are generated primarily from finance revenue on finance receivables and rental payments on operating leases. Finance revenue is recorded over the life of the related finance receivable using the interest method, including the accretion of certain direct origination costs that are deferred. Revenue from rental payments received on operating leases is recognized on a straight-line basis over the term of the lease.
Recognition of finance revenue and rental revenue is suspended and the account is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due). Recognition is resumed, and previously suspended income is recognized, when the account becomes current and collection of remaining amounts is considered probable. See Note 16 for more information.
Revenues are presented net of sales and other related taxes.
4. Stock-based compensation
Accounting for stock-based compensation requires that the cost resulting from all stock-based payments be recognized in the financial statements based on the grant date fair value of the award. Our stock-based compensation primarily consists of stock options, restricted stock units (RSUs) and performance-based restricted stock units (PRSUs).
Beginning with the 2018 grant, RSU and PRSU awards are credited with dividend equivalent units on each date that a cash dividend is paid to holders of Common Stock. The fair value of the RSU and PRSU awards granted in 2018 was determined as the closing stock price on the date of grant. Prior to 2018, RSU and PRSU awards were not credited with dividend equivalent units and the fair value was determined by reducing the stock price on the date of grant by the present value of the estimated dividends to be paid during the vesting period. The estimated dividends were based on Caterpillar's quarterly dividend per share at the time of grant.
We recognized pretax stock-based compensation expense of $62 million and $112 million for the three and six months ended June 30, 2018, respectively, and $68 million and $117 million for the three and six months ended June 30, 2017, respectively.
The following table illustrates the type and fair value of the stock-based compensation awards granted during the six months ended June 30, 2018 and 2017, respectively:
Six Months Ended June 30, 2018 Six Months Ended June 30, 2017 Weighted- Average Fair Weighted- Average Weighted- Average Fair Weighted- Average
The following table provides the assumptions used in determining the fair value of the stock-based awards for the six months ended June 30, 2018 and 2017, respectively:
Grant Year
As of June 30, 2018, the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $264 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 2.0 years.
5. Derivative financial instruments and risk management
Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward, option and cross currency contracts, interest rate contracts and commodity forward and option contracts. Our derivative activities are subject to the management, direction and control of our senior financial officers. Risk management practices, including the use of financial derivative instruments, are presented to the Audit Committee of the Board of Directors at least annually.
All derivatives are recognized on the Consolidated Statement of Financial Position at their fair value. On the date the derivative contract is entered into, we designate the derivative as (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flow (cash flow hedge) or (3) an undesignated instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk, are recorded in current earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in Accumulated other comprehensive income (loss) (AOCI), to the extent effective, on the Consolidated Statement of Financial Position until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged on the Consolidated Statement of Cash Flow. Cash flows from undesignated derivative financial instruments are included in the investing category on the Consolidated Statement of Cash Flow.
We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Consolidated Statement of Financial Position and linking cash flow hedges to specific forecasted transactions or variability of cash flow.
We also formally assess, both at the hedge's inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items. When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, we discontinue hedge accounting prospectively, in accordance with the derecognition criteria for hedge accounting.
Foreign Currency Exchange Rate Risk
Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies. Movements in foreign currency rates also affect our competitive position as these changes may affect business practices and/or pricing strategies of non-U.S.-based competitors. Additionally, we have balance sheet positions denominated in foreign currencies, thereby creating exposure to movements in exchange rates.
Our Machinery, Energy & Transportation operations purchase, manufacture and sell products in many locations around the world. As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to five years. As of June 30, 2018, the maximum term of these outstanding contracts was approximately 51 months.
We generally designate as cash flow hedges at inception of the contract any Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, Indian rupee, Japanese yen, Mexican peso, Singapore dollar or Thailand baht forward or option contracts that meet the requirements for hedge accounting and the maturity extends beyond the current quarter-end. Designation is performed on a specific exposure basis to support hedge accounting. The remainder of Machinery, Energy & Transportation foreign currency contracts are undesignated.
As of June 30, 2018, $34 million of deferred net losses, net of tax, included in equity (AOCI in the Consolidated Statement of Financial Position), are expected to be reclassified to current earnings (Other income (expense) in the Consolidated Statement of Results of Operations) over the next twelve months when earnings are affected by the hedged transactions. The actual amount recorded in Other income (expense) will vary based on exchange rates at the time the hedged transactions impact earnings.
In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions, and future transactions denominated in foreign currencies. Our policy allows the use of foreign currency forward, option and cross currency contracts to offset the risk of currency mismatch between our assets and liabilities, and exchange rate risk associated with future transactions denominated in foreign currencies. Our foreign currency forward and option contracts are primarily undesignated. We designate fixed-to-fixed cross currency contracts as cash flow hedges to protect against movements in exchange rates on foreign currency fixed-rate assets and liabilities. Table of Contents
Interest Rate Risk
Interest rate movements create a degree of risk by affecting the amount of our interest payments and the value of our fixed-rate debt. Our practice is to use interest rate contracts to manage our exposure to interest rate changes.
Our Machinery, Energy & Transportation operations generally use fixed-rate debt as a source of funding. Our objective is to minimize the cost of borrowed funds. Our policy allows us to enter into fixed-to-floating interest rate contracts and forward rate agreements to meet that objective. We designate fixed-to-floating interest rate contracts as fair value hedges at inception of the contract, and we designate certain forward rate agreements as cash flow hedges at inception of the contract.
Financial Products operations has a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate) of Cat Financial's debt portfolio with the interest rate profile of their receivables portfolio within predetermined ranges on an ongoing basis. In connection with that policy, we use interest rate derivative instruments to modify the debt structure to match assets within the receivables portfolio. This matched funding reduces the volatility of margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move.
Our policy allows us to use fixed-to-floating, floating-to-fixed and floating-to-floating interest rate contracts to meet the match-funding objective. We designate fixed-to-floating interest rate contracts as fair value hedges to protect debt against changes in fair value due to changes in the benchmark interest rate. We designate most floating-to-fixed interest rate contracts as cash flow hedges to protect against the variability of cash flows due to changes in the benchmark interest rate.
We have, at certain times, liquidated fixed-to-floating and floating-to-fixed interest rate contracts at both Machinery, Energy & Transportation and Financial Products. The gains or losses associated with these contracts at the time of liquidation are amortized into earnings over the original term of the previously designated hedged item.
Commodity Price Risk
Commodity price movements create a degree of risk by affecting the price we must pay for certain raw material. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials.
Our Machinery, Energy & Transportation operations purchase base and precious metals embedded in the components we purchase from suppliers. Our suppliers pass on to us price changes in the commodity portion of the component cost. In addition, we are subject to price changes on energy products such as natural gas and diesel fuel purchased for operational use.
Our objective is to minimize volatility in the price of these commodities. Our policy allows us to enter into commodity forward and option contracts to lock in the purchase price of a portion of these commodities within a five-year horizon. All such commodity forward and option contracts are undesignated.
The location and fair value of derivative instruments reported in the Consolidated Statement of Financial Position are as follows:
(Millions of dollars) Consolidated Statement of Financial Asset (Liability) Fair Value Position Location June 30, 2018 December 31, 2017
Designated derivatives Foreign exchange contracts Machinery, Energy & Transportation............. Receivables - trade and other ...................... $ 6 $ 8 Machinery, Energy & Transportation............. Long-term receivables - trade and other ..... 1 4 Machinery, Energy & Transportation............. Accrued expenses......................................... (51) (14) Machinery, Energy & Transportation............. Other liabilities............................................. (6) (2) Financial Products.......................................... Receivables - trade and other ...................... 20 - Financial Products.......................................... Long-term receivables - trade and other ..... 26 7 Financial Products.......................................... Accrued expenses......................................... (26) (57) Interest rate contracts Financial Products.......................................... Long-term receivables - trade and other ..... 6 3 Financial Products.......................................... Accrued expenses......................................... (3) (2) $ (27) $ (53)
Undesignated derivatives Foreign exchange contracts Machinery, Energy & Transportation............. Receivables - trade and other ...................... $ 7 $ 19 Machinery, Energy & Transportation............. Accrued expenses......................................... (44) (9) Financial Products.......................................... Receivables - trade and other ...................... 26 12 Financial Products.......................................... Long-term receivables - trade and other ..... 5 - Financial Products.......................................... Accrued expenses......................................... (10) (9) Commodity contracts Machinery, Energy & Transportation............. Receivables - trade and other ...................... 10 21 Machinery, Energy & Transportation............. Accrued expenses......................................... (4) - $ (10) $ 34
The total notional amounts of the derivative instruments are as follows:
(Millions of dollars) June 30, 2018 December 31, 2017
The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties. The amounts exchanged by the parties are calculated by reference to the notional amounts and by other terms of the derivatives, such as foreign currency exchange rates, interest rates or commodity prices.
Cash Flow Hedges
(Millions of dollars)
Amount of Gains (Losses) Recognized
Three Months Ended June 30, 2018 Recognized in Earnings Amount of Gains (Losses) Reclassified
Recognized in Earnings
Foreign exchange contracts
(Effective Portion) Classification of Gains (Losses) from AOCI to Earnings
Portion)
Machinery, Energy & Transportation.. $ (79) Other income (expense) ........................ $ 4 $ - Financial Products............................... 123 Other income (expense) ........................ 119 - Financial Products............................... - Interest expense of Financial Products . 5 - Interest rate contracts Interest expense excluding Financial Products ............................................
$ 49 $ 126 $ -
Amount of Gains (Losses) Recognized
Recognized in Earnings Amount of Gains (Losses) Reclassified
Recognized in Earnings
Foreign exchange contracts
(Effective Portion) Classification of Gains (Losses) from AOCI to Earnings
Portion)
Machinery, Energy & Transportation.. $ 23 Other income (expense) ........................ $ (14) $ - Financial Products............................... (23) Other income (expense) ........................ (27) - Interest rate contracts Interest expense excluding Financial Products ............................................
(1) -
$ - $ (40) $ -
Amount of Gains (Losses) Recognized
Recognized in Earnings Amount of Gains (Losses) Reclassified
Recognized in Earnings
Foreign exchange contracts
(Effective Portion) Classification of Gains (Losses) from AOCI to Earnings
Portion)
Machinery, Energy & Transportation.. $ (40) Other income (expense) ........................ $ 5 $ - Financial Products............................... 90 Other income (expense) ........................ 90 - Financial Products............................... - Interest expense of Financial Products . 8 - Interest rate contracts Interest expense excluding Financial Products ............................................
Financial Products............................... 5 Interest expense of Financial Products . 1 - $ 55 $ 102 $ -
Amount of Gains (Losses) Recognized
Recognized in Earnings Amount of Gains (Losses) Reclassified
Recognized in Earnings
Foreign exchange contracts
(Effective Portion) Classification of Gains (Losses) from AOCI to Earnings
Portion)
Machinery, Energy & Transportation.. $ 56 Other income (expense) ........................ $ (53) $ - Financial Products............................... (41) Other income (expense) ........................ (49) - Interest rate contracts Interest expense excluding Financial Products ............................................
Financial Products............................... - Interest expense of Financial Products . 3 - $ 15 $ (102) $ -
The effect of derivatives not designated as hedging instruments on the Consolidated Statement of Results of Operations is as follows:
(Millions of dollars)
Foreign exchange contracts
Classification of Gains (Losses) Three Months Ended June 30, 2018 Three Months Ended June 30, 2017
Machinery, Energy & Transportation .............. Other income (expense) ........................ $ (54) $ 39 Financial Products ........................................... Other income (expense) ........................ 23 17 Commodity contracts
$ (22) $ 56
Foreign exchange contracts
Classification of Gains (Losses) Six Months Ended June 30, 2018 Six Months Ended June 30, 2017
Machinery, Energy & Transportation .............. Other income (expense) ........................ $ (38) $ 52 Financial Products ........................................... Other income (expense) ........................ 16 10 Commodity contracts Machinery, Energy & Transportation .............. Other income (expense) ........................ - 1 $ (22) $ 63
We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within Machinery, Energy & Transportation and Financial Products that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.
Collateral is generally not required of the counterparties or of our company under the master netting agreements. As of June 30, 2018 and December 31, 2017, no cash collateral was received or pledged under the master netting agreements.
The effect of the net settlement provisions of the master netting agreements on our derivative balances upon an event of default or termination event is as follows:
June 30, 2018
Gross
Gross Amounts Offset in the
Net Amount of Assets Presented
Machinery, Energy & Transportation......................
$ 24 $ - $ 24 $ (23) $ - $ 1 Financial Products.................... 83 - 83 (13) - 70 Total .............................................. $ 107 $ - $ 107 $ (36) $ - $ 71 June 30, 2018 (Millions of dollars) Gross Amount of
Gross Amounts Offset in the Statement of
Net Amount of Liabilities Presented in the Statement of
Gross Amounts Not Offset in the Statement of Financial Position
Cash
Net
Derivatives Recognized Liabilities Financial Position Financial Position Financial Instruments Collateral Pledged Amount of Liabilities Machinery, Energy & Transportation......................
$ (105) $ - $ (105) $ 23 $ - $ (82) Financial Products.................... (39) - (39) 13 - (26) Total .............................................. $ (144) $ - $ (144) $ 36 $ - $ (108)
December 31, 2017
Gross
Gross Amounts Offset in the
Net Amount of Assets Presented
Machinery, Energy & Transportation......................
$ 52 $ - $ 52 $ (22) $ - $ 30 Financial Products.................... 22 - 22 (10) - 12 Total .............................................. $ 74 $ - $ 74 $ (32) $ - $ 42 December 31, 2017 (Millions of dollars) Gross
Gross Amounts Offset in the
Net Amount of Liabilities Presented in the
Gross Amounts Not Offset in the Statement of Financial Position
Machinery, Energy & Transportation......................
$ (25) $ - $ (25) $ 22 $ - $ (3) Financial Products.................... (68) - (68) 10 - (58) Total .............................................. $ (93) $ - $ (93) $ 32 $ - $ (61)
6. Inventories
Inventories (principally using the last-in, first-out (LIFO) method) are comprised of the following:
(Millions of dollars) June 30, 2018
2017
(Millions of dollars) Weighted Amortizable
Gross Carrying
Accumulated
Weighted Amortizable
Gross Carrying December 31, 2017 Accumulated
During the first quarter of 2018, we acquired finite-lived intangible assets of $112 million and $5 million due to the purchase of ECM S.p.A. and Downer Freight Rail, respectively. See Note 20 for details on these acquisitions.
Amortization expense for the three and six months ended June 30, 2018 was $83 million and $166 million, respectively. Amortization expense for the three and six months ended June 30, 2017 was $80 million and $159 million, respectively. Amortization expense related to intangible assets is expected to be:
(Millions of dollars)
B. Goodwill
No goodwill was impaired during the six months ended June 30, 2018 or 2017.
During the first quarter of 2018, we acquired net assets with related goodwill of $121 million in the Energy & Transportation segment. We recorded goodwill of $109 million related to the acquisition of ECM S.p.A. and $12 million related to the acquisition of Downer Freight Rail. See Note 20 for details on these acquisitions.
The changes in carrying amount of goodwill by reportable segment for the six months ended June 30, 2018 were as follows:
(Millions of dollars) December 31,
Energy & Transportation Goodwill ............................................................ 2,806 121 (40) 2,887 All Other 3 Goodwill ............................................................ 54 - 2 56 Consolidated total
1 See Note 20 for additional details. 2 Other adjustments are comprised primarily of foreign currency translation. 3 Includes All Other operating segments (See Note 15).
8. Investments in debt and equity securities
We have investments in certain debt and equity securities, primarily at Insurance Services, which are recorded at fair value and are primarily included in Other assets in the Consolidated Statement of Financial Position.
Debt securities have been classified as available-for-sale and the unrealized gains and losses arising from the revaluation of these debt securities are included, net of applicable deferred income taxes, in equity (Accumulated other comprehensive income (loss) in the Consolidated Statement of Financial Position). Realized gains and losses on sales of debt investments are generally determined using the specific identification method and are included in Other income (expense) in the Consolidated Statement of Results of Operations.
Beginning January 1, 2018, we adopted new accounting guidance issued by the FASB resulting in the unrealized gains and losses arising from the revaluation of these equity securities to be included in Other income (expense) in the Consolidated Statement of Results of Operations. Prior to January 1, 2018, the unrealized gains and losses arising from revaluation of the available-for-sale equity securities and the Real Estate Investment Trust were included, net of applicable deferred income taxes, in equity (Accumulated other comprehensive income (loss) in the Consolidated Statement of Financial Position). See Note 2 for additional information.
The cost basis and fair value of debt and equity securities with unrealized gains and losses included in equity (Accumulated other comprehensive income (loss) in the Consolidated Statement of Financial Position) were as follows:
June 30, 2018 December 31, 2017
(Millions of dollars) Unrealized Pretax Net Unrealized Pretax Net
Government debt
Corporate bonds
1 Beginning January 1, 2018, the unrealized gains and losses arising from the revaluation of the equity securities are included in Other income (expense) in the Consolidated Statement of Results of Operations. See Note 2 for additional information.
Available-for-sale investments in an unrealized loss position that are not other-than-temporarily impaired:
June 30, 2018 Less than 12 months 1 12 months or more 1 Total (Millions of dollars) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
Corporate bonds Corporate bonds.................................... $ 529 $ 12 $ 29 $ 1 $ 558 $ 13 Mortgage-backed debt securities
December 31, 2017 Less than 12 months 1 12 months or more 1 Total (Millions of dollars) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
Corporate bonds Corporate bonds.................................... $ 312 $ 2 $ 38 $ - $ 350 $ 2 Mortgage-backed debt securities U.S. governmental agency.................... 129 1 110 3 239 4 Equity securities 1 Indicates the length of time that individual securities have been in a continuous unrealized loss position.
Corporate Bonds. The unrealized losses on our investments in corporate bonds relate to changes in interest rates and credit-related yield spreads since time of purchase. We do not intend to sell the investments, and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of June 30, 2018.
Mortgage-Backed Debt Securities. The unrealized losses on our investments in U.S. government agency mortgage- backed securities relate to changes in interest rates and credit-related yield spreads since time of purchase. We do not intend to sell the investments, and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of June 30, 2018.
The cost basis and fair value of the available-for-sale debt securities at June 30, 2018, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.
June 30, 2018
(Millions of dollars) Cost Basis Fair Value Due in one year or less...................................................................................................................... $ 135 $ 135 Due after one year through five years............................................................................................... 518 509 Due after five years through ten years .............................................................................................. 123 120 Due after ten years ............................................................................................................................ 18 18 U.S. governmental agency mortgage-backed securities ................................................................... 304 296 Residential mortgage-backed securities............................................................................................ 7 7 Commercial mortgage-backed securities .......................................................................................... 16 15 Total debt securities - available-for-sale........................................................................................... $ 1,121 $ 1,100 Sales of available-for-sale securities: Three Months Ended June 30 Six Months Ended June 30 (Millions of dollars) 20181 2017 20181 2017 Proceeds from the sale of available-for-sale securities ............. $ 67 $ 98 $ 140 $ 187 Gross gains from the sale of available-for-sale securities......... $ - $ 1 $ - $ 2 Gross losses from the sale of available-for-sale securities ....... $ - $ 1 $ - $ 2
1 Beginning January 1, 2018, equity securities are no longer classified as available-for-sale securities. See Note 2 for additional information.
For the three and six months ended June 30, 2018, the net unrealized gains (losses) for equity securities were $6 million and $4 million, respectively, and there were no realized net gains (losses) recognized on the sale of equity securities.
9. Postretirement benefits
A. Pension and postretirement benefit costs
In the first quarter of 2017, we announced the closure of our Gosselies, Belgium, facility. This announcement impacted certain employees that participated in a defined benefit pension plan and resulted in a net loss of $20 million in the first quarter of 2017 for curtailment and termination benefits. In addition during the first quarter of 2017, we announced the decision to phase out production at our Aurora, Illinois, facility, which resulted in termination benefits of $9 million for certain hourly employees that participate in our U.S. hourly defined benefit pension plan.
See Note 19 for more information on the Gosselies closure.
U.S. Pension Benefits
Non-U.S. Pension Benefits Other Postretirement Benefits (Millions of dollars) June 30 June 30 June 30
For the six months ended: Components of net periodic benefit cost:
1 Prior service cost (credit) for both pension and other postretirement benefits is generally amortized using the straight-line method over the average remaining service period of active employees expected to receive benefits from the plan. For pension plans in which all or almost all of the plan's participants are inactive and other postretirement benefit plans in which all or almost all of the plan's participants are fully eligible for benefits under the plan, prior service cost (credit) is amortized using the straight-line method over the remaining life expectancy of those participants. 2 The service cost component of net periodic pension and other postretirement benefits cost (benefit) is included in Operating costs in the Consolidated Statement of Results of Operations. All other components of net periodic pension and other postretirement benefits cost (benefit) are included in Other income (expense) in the Consolidated Statement of Results of Operations.
We made $75 million and $227 million of contributions to our pension and other postretirement plans during the three and six months ended June 30, 2018, respectively. We currently anticipate full-year 2018 contributions of approximately $365 million. We made $92 million and $198 million of contributions to our pension and other postretirement plans during the three and six months ended June 30, 2017, respectively.
B. Defined contribution benefit costs
Total company costs related to our defined contribution plans were as follows:
Three Months Ended June 30 Six Months Ended June 30
$ 98 $ 109 $ 193 $ 205
10. Guarantees and product warranty
Caterpillar dealer performance guarantees We have provided an indemnity to a third-party insurance company for potential losses related to performance bonds issued on behalf of Caterpillar dealers. The bonds have varying terms and are issued to insure governmental agencies against nonperformance by certain dealers. We also provided guarantees to third-parties related to the performance of contractual obligations by certain Caterpillar dealers. These guarantees have varying terms and cover potential financial losses incurred by the third-parties resulting from the dealers' nonperformance.
In 2016, we provided a guarantee to an end user related to the performance of contractual obligations by a Caterpillar dealer. Under the guarantee, which expires in 2025, non-performance by the Caterpillar dealer could require Caterpillar to satisfy the contractual obligations by providing goods, services or financial compensation to the end user up to an annual designated cap.
Customer loan guarantees We provide loan guarantees to third-party lenders for financing associated with machinery purchased by customers. These guarantees have varying terms and are secured by the machinery. In addition, Cat Financial participates in standby letters of credit issued to third parties on behalf of their customers. These standby letters of credit have varying terms and beneficiaries and are secured by customer assets.
Supplier consortium performance guarantees We have provided guarantees to a customer in Brazil and a customer in Europe related to the performance of contractual obligations by supplier consortiums to which our Caterpillar subsidiaries are members. The guarantees cover potential damages incurred by the customers resulting from the supplier consortiums' non-performance. The damages are capped except for failure of the consortiums to meet certain obligations outlined in the contract in the normal course of business. The guarantees will expire when the supplier consortiums perform all their contractual obligations, which are expected to be completed in 2022 for the customer in Europe and 2025 for the customer in Brazil.
Third party logistics business lease guarantees We have provided guarantees to third-party lessors for certain properties leased by a third party logistics business, formerly Caterpillar Logistics Services LCC, in which we sold our equity interest in 2015. The guarantees are for the possibility that the third party logistics business would default on real estate lease payments. The guarantees were granted at lease inception and generally will expire at the end of the lease terms.
We have dealer performance guarantees and third party performance guarantees that do not limit potential payment to end users related to indemnities and other commercial contractual obligations. In addition, we have entered into contracts involving industry standard indemnifications that do not limit potential payment. For these unlimited guarantees, we are unable to estimate a maximum potential amount of future payments that could result from claims made.
No significant loss has been experienced or is anticipated under any of these guarantees. At both June 30, 2018 and December 31, 2017, the related liability was $8 million. The maximum potential amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) we could be required to make under the guarantees are as follows:
(Millions of dollars) June 30, 2018
2017
Caterpillar dealer performance guarantees .................................................................... $ 1,375 $ 1,313 Customer loan guarantees .............................................................................................. 35 40 Supplier consortium performance guarantees................................................................ 562 565 Third party logistics business lease guarantees ............................................................. 68 69 Other guarantees ............................................................................................................ 134 118 Total guarantees ............................................................................................................. $ 2,174 $ 2,105 Cat Financial provides guarantees to repurchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a variable interest entity. The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers. This SPC issues commercial paper and uses the proceeds to fund its loan program. Cat Financial has a loan purchase agreement with the SPC that obligates Cat Financial to purchase certain loans that are not paid at maturity. Cat Financial receives a fee for providing this guarantee, which provides a source of liquidity for the SPC. Cat Financial is the primary beneficiary of the SPC as its guarantees result in Cat Financial having both the power to direct the activities that most significantly impact the SPC's economic performance and the obligation to absorb losses, and therefore Cat Financial has consolidated the financial statements of the SPC. As of June 30, 2018 and December 31, 2017, the SPC's assets of $1,081 million and $1,107 million, respectively, were primarily comprised of loans to dealers, and the SPC's liabilities of $1,080 million and $1,106 million, respectively, were primarily comprised of commercial paper. The assets of the SPC are not available to pay Cat Financial's creditors. Cat Financial may be obligated to perform under the guarantee if the SPC experiences losses. No loss has been experienced or is anticipated under this loan purchase agreement. Our product warranty liability is determined by applying historical claim rate experience to the current field population and dealer inventory. Generally, historical claim rates are based on actual warranty experience for each product by machine model/engine size by customer or dealer location (inside or outside North America). Specific rates are developed for each product shipment month and are updated monthly based on actual warranty claim experience.
(Millions of dollars) 2018
(Millions of dollars) 2017
11. Profit per share
Computations of profit per share: Three Months Ended June 30 Six Months Ended June 30
(Dollars in millions except per share data) 2018 2017 2018 2017 Profit for the period (A) 1 ............................................................................. $ 1,707 $ 802 $ 3,372 $ 994 Determination of shares (in millions): Weighted-average number of common shares outstanding (B)................. 596.2 590.2 597.0 588.8 Shares issuable on exercise of stock awards, net of shares assumed to be purchased out of proceeds at average market price ................................... 8.0 5.2 9.1 5.6 Average common shares outstanding for fully diluted computation (C) 2 . 604.2 595.4 606.1 594.4
Profit per share of common stock:
1 Profit attributable to common shareholders. 2 Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
SARs and stock options to purchase 1,478,726 and 8,062,177 common shares were outstanding for the three and six months ended June 30, 2018 and 2017, respectively, which were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
In January 2014, the Board authorized the repurchase of up to $10.0 billion of Caterpillar common stock, which will expire on December 31, 2018. During the first quarter of 2018, 3.1 million shares of our common stock were repurchased at an aggregate cost to Caterpillar of $500 million.
During the second quarter of 2018, we repurchased $750 million of common stock. In May 2018, we entered into an accelerated stock repurchase agreement (ASR) with a third-party financial institution to purchase shares of our common stock. Pursuant to the terms of the ASR Agreement, 3.3 million shares of our common stock were repurchased at an aggregate cost to Caterpillar of $500 million. In May 2018, we repurchased 1.6 million shares for $250 million in open market transactions. As of June 30, 2018, $4.2 billion of the $10.0 billion authorization remained.
In July 2018, the Board approved a new share repurchase authorization of up to $10.0 billion of Caterpillar common stock effective January 1, 2019, with no expiration.
12. Accumulated other comprehensive income (loss)
Comprehensive income and its components are presented in the Consolidated Statement of Comprehensive Income. Changes in Accumulated other comprehensive income (loss), net of tax, included in the Consolidated Statement of Changes in Shareholders' Equity, consisted of the following:
(Millions of dollars) Foreign currency translation Pension and other postretirement benefits
Derivative financial instruments
Available- for-sale securities Total
Three Months Ended June 30, 2018 Balance at March 31, 2018............................. $ (1,021) $ 37 $ (18) $ (14) $ (1,016) Other comprehensive income (loss) before reclassifications.......................... (411) - 36 (2) (377) Amounts reclassified from accumulated
Three Months Ended June 30, 2017
(Millions of dollars)
Foreign currency translation Pension and other postretirement benefits
Derivative financial instruments
Available- for-sale securities Total
Six Months Ended June 30, 2018 Balance at December 31, 2017 ....................... $ (1,205) $ 46 $ (41) $ 8 $ (1,192) Adjustment to adopt recognition and measurement of financial assets and
The effect of the reclassifications out of Accumulated other comprehensive income (loss) on the Consolidated Statement of Results of Operations is as follows:
(Millions of dollars) Classification of Three Months Ended June 30 2018 2017 Pension and other postretirement benefits: Amortization of prior service credit (cost)....... Other income (expense).... $ 8 $ 7 Tax (provision) benefit ......................................................................................... (1) (3) Reclassifications net of tax ................................................................................... $ 7 $ 4
Derivative financial instruments: Foreign exchange contracts.............................. Other income (expense).... $ 123 $ (41) Interest expense of Foreign exchange contracts..............................
Interest rate contracts .......................................
Interest rate contracts .......................................
Interest expense excluding Financial Products ........ (2) (1) Interest expense of Financial Products ........ - 2
Reclassifications before tax .................................................................................. 126 (40) Tax (provision) benefit ......................................................................................... (30) 14 Reclassifications net of tax ................................................................................... $ 96 $ (26) Total reclassifications from Accumulated other comprehensive income (loss) ... $ 103 $ (22)
Six Months Ended June 30 Classification of (Millions of dollars) income (expense) 2018 2017
Foreign currency translation Gain (loss) on foreign currency translation...... Other income (expense).... $ (1) $ (2) Tax (provision) benefit ......................................................................................... - - Reclassifications net of tax ................................................................................... $ (1) $ (2)
Pension and other postretirement benefits: Amortization of prior service credit (cost)....... Other income (expense).... $ 17 $ 12 Tax (provision) benefit ......................................................................................... (3) (4) Reclassifications net of tax ................................................................................... $ 14 $ 8
Derivative financial instruments: Foreign exchange contracts.............................. Other income (expense).... $ 95 $ (102) Interest expense of Foreign exchange contracts..............................
Interest rate contracts .......................................
Interest rate contracts .......................................
Interest expense excluding Financial Products ........ (2) (3) Interest expense of Financial Products ........ 1 3
Reclassifications before tax .................................................................................. 102 (102) Tax (provision) benefit ......................................................................................... (24) 36 Reclassifications net of tax ................................................................................... $ 78 $ (66) Available-for-sale securities: Realized gain (loss) .......................................... Other income (expense).... $ - $ (4) Tax (provision) benefit ......................................................................................... - 1 Reclassifications net of tax ................................................................................... $ - $ (3)
Total reclassifications from Accumulated other comprehensive income (loss) ... $ 91 $ (63)
13. Environmental and legal matters
The Company is regulated by federal, state and international environmental laws governing its use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and other operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. We have made, and will continue to make, significant research and development and capital expenditures to comply with these emissions standards.
We are engaged in remedial activities at a number of locations, often with other companies, pursuant to federal and state laws. When it is probable we will pay remedial costs at a site, and those costs can be reasonably estimated, the investigation, remediation, and operating and maintenance costs are accrued against our earnings. Costs are accrued based on consideration of currently available data and information with respect to each individual site, including available technologies, current applicable laws and regulations, and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. Where multiple potentially responsible parties are involved, we consider our proportionate share of the probable costs. In formulating the estimate of probable costs, we do not consider amounts expected to be recovered from insurance companies or others. We reassess these accrued amounts on a quarterly basis. The amount recorded for environmental remediation is not material and is included in Accrued expenses. We believe
there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all the sites in the aggregate, will be required.
On January 7, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company has received additional subpoenas relating to this investigation requesting additional documents and information relating to, among other things, the purchase and resale of replacement parts by Caterpillar Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL and related structures. On March 2-3, 2017, agents with the Department of Commerce, the Federal Deposit Insurance Corporation and the Internal Revenue Service executed search and seizure warrants at three facilities of the Company in the Peoria, Illinois area, including its former corporate headquarters. The warrants identify, and agents seized, documents and information related to, among other things, the export of products from the United States, the movement of products between the United States and Switzerland, the relationship between Caterpillar Inc. and Caterpillar SARL, and sales outside the United States. It is the Company's understanding that the warrants, which concern both tax and export activities, are related to the ongoing grand jury investigation. The Company is continuing to cooperate with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.
On March 20, 2014, Brazil's Administrative Council for Economic Defense (CADE) published a Technical Opinion which named 18 companies and over 100 individuals as defendants, including two subsidiaries of Caterpillar Inc., MGE - Equipamentos e Serviços Ferroviários Ltda. (MGE) and Caterpillar Brasil Ltda. The publication of the Technical Opinion opened CADE's official administrative investigation into allegations that the defendants participated in anticompetitive bid activity for the construction and maintenance of metro and train networks in Brazil. While companies cannot be held criminally liable for anticompetitive conduct in Brazil, criminal charges have been brought against two current employees of MGE and one former employee of MGE involving the same conduct alleged by CADE. The Company has responded to all requests for information from the authorities. The Company is unable to predict the outcome or reasonably estimate the potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.
In addition, we are involved in other unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability (including claimed asbestos and welding fumes exposure), contracts, employment issues, environmental matters, intellectual property rights, taxes (other than income taxes) and securities laws. The aggregate range of reasonably possible losses in excess of accrued liabilities, if any, associated with these unresolved legal actions is not material. In some cases, we cannot reasonably estimate a range of loss because there is insufficient information regarding the matter. However, we believe there is no more than a remote chance that any liability arising from these matters would be material. Although it is not possible to predict with certainty the outcome of these unresolved legal actions, we believe that these actions will not individually or in the aggregate have a material adverse effect on our consolidated results of operations, financial position or liquidity.
14. Income taxes
The provision for income taxes for the first six months of 2018 reflected an estimated annual tax rate of 24 percent, compared to 32 percent for the first six months of 2017, excluding the discrete items discussed in the following paragraph. The decrease was primarily due to the reduction in the U.S. corporate tax rate beginning January 1, 2018, along with other changes in the geographic mix of profits from a tax perspective.
In addition, a discrete tax benefit of $49 million was recorded in the first six months of 2018, compared to $27 million in the first six months of 2017, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense. The provision for income taxes for the first six months of 2018 also included a $25 million benefit for the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary. The provision for income taxes for the first six months of 2017 also included a $15 million increase to prior year taxes related to non-U.S. restructuring costs.
Our analysis of U.S. tax reform legislation, updated through June 30, 2018, resulted in no change to the 2017 year-end provisional charge of $2.371 billion. We will continue to update our calculations as additional required information is prepared and analyzed, interpretations and assumptions are refined, additional guidance is issued, and due to actions we may take as a result of the legislation. These updates could significantly impact the provision for income taxes, the amount of taxes payable and the deferred tax asset and liability balances.
On January 31, 2018, we received a Revenue Agent's Report from the Internal Revenue Service (IRS) indicating the end of the field examination of our U.S. income tax returns for 2010 to 2012. In the audits of 2007 to 2012 including the impact of a loss carryback to 2005, the IRS has proposed to tax in the United States profits earned from certain parts transactions by Caterpillar SARL, based on the IRS examination team's application of the "substance-over-form" or "assignment-of-income" judicial doctrines. We are vigorously contesting the proposed increases to tax and penalties for these years of approximately $2.3 billion. We believe that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines. We have filed U.S. income tax returns on this same basis for years after 2012. Based on the information currently available, we do not anticipate a significant increase or decrease to our unrecognized tax benefits for this matter within the next 12 months. We currently believe the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.
15. Segment information
A. Basis for segment information
Our Executive Office is comprised of a Chief Executive Officer (CEO), five Group Presidents, a General Counsel & Corporate Secretary and a Chief Human Resources Officer. Group Presidents are accountable for a related set of end- to-end businesses that they manage. The General Counsel & Corporate Secretary leads the Law and Public Policy Division. The Chief Human Resources Officer leads the Human Resources Organization. The CEO allocates resources and manages performance at the Group President level. As such, the CEO serves as our Chief Operating Decision Maker, and operating segments are primarily based on the Group President reporting structure.
Three of our operating segments, Construction Industries, Resource Industries and Energy & Transportation, are led by Group Presidents. One operating segment, Financial Products, is led by a Group President who also has responsibility for Corporate Services. Corporate Services is a cost center primarily responsible for the performance of certain support functions globally and to provide centralized services; it does not meet the definition of an operating segment. One Group President leads two smaller operating segments that are included in the All Other operating segments. The Law and Public Policy Division and the Human Resources Organization are cost centers and do not meet the definition of an operating segment.
Segment information for 2017 has been recast due to our adoption of new accounting guidance issued by the FASB related to the presentation of net periodic pension costs and net periodic postretirement benefit costs. Prior service cost (credits) is no longer included in segment profit. See Note 2 for additional information.
B. Description of segments
We have six operating segments, of which four are reportable segments. Following is a brief description of our reportable segments and the business activities included in the All Other operating segments:
Construction Industries: A segment primarily responsible for supporting customers using machinery in infrastructure, forestry and building construction applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes asphalt pavers, backhoe loaders, compactors, cold planers, compact track and multi-terrain loaders, mini, small, medium and large track excavators, forestry excavators, feller bunchers, harvesters, knuckleboom loaders, motor graders, pipelayers, road reclaimers, site prep tractors, skidders, skid steer loaders, telehandlers, small and medium track-type tractors, track-type loaders, utility vehicles, wheel excavators, compact, small and medium wheel loaders and related parts and work tools. Inter-segment sales are a source of revenue for this segment.
Resource Industries: A segment primarily responsible for supporting customers using machinery in mining, quarry and aggregates, waste and material handling applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large track-type tractors, large mining trucks, hard rock vehicles, longwall miners, electric rope shovels, draglines,
hydraulic shovels, rotary drills, large wheel loaders, off-highway trucks, articulated trucks, wheel tractor scrapers, wheel dozers, landfill compactors, soil compactors, hard rock continuous mining systems, select work tools, machinery components, electronics and control systems and related parts. In addition to equipment, Resource Industries also develops and sells technology products and services to provide customers fleet management, equipment management analytics and autonomous machine capabilities. Resource Industries also manages areas that provide services to other parts of the company, including integrated manufacturing and research and development. Inter-segment sales are a source of revenue for this segment.
Energy & Transportation: A segment primarily responsible for supporting customers using reciprocating engines, turbines, diesel-electric locomotives and related parts across industries serving Oil and Gas, Power Generation, Industrial and Transportation applications, including marine and rail-related businesses. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support of turbine machinery and integrated systems and solutions and turbine-related services, reciprocating engine-powered generator sets, integrated systems used in the electric power generation industry, reciprocating engines and integrated systems and solutions for the marine and oil and gas industries; reciprocating engines supplied to the industrial industry as well as Cat machinery; the remanufacturing of Cat engines and components and remanufacturing services for other companies; the business strategy, product design, product management and development, manufacturing, remanufacturing, leasing and service of diesel-electric locomotives and components and other rail-related products and services and product support of on-highway vocational trucks for North America. Inter-segment sales are a source of revenue for this segment.
Financial Products Segment: Provides financing alternatives to customers and dealers around the world for Caterpillar products, as well as financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The segment also provides insurance and risk management products and services that help customers and dealers manage their business risk. Insurance and risk management products offered include physical damage insurance, inventory protection plans, extended service coverage for machines and engines, and dealer property and casualty insurance. The various forms of financing, insurance and risk management products offered to customers and dealers help support the purchase and lease of our equipment. The segment also earns revenues from Machinery, Energy & Transportation but the related costs are not allocated to operating segments.
All Other operating segments: Primarily includes activities such as: business strategy, product management and development, manufacturing of filters and fluids, undercarriage, ground engaging tools, fluid transfer products, precision seals, rubber sealing and connecting components primarily for Cat products; parts distribution; integrated logistics solutions, distribution services responsible for dealer development and administration including a wholly owned dealer in Japan, dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; digital investments for new customer and dealer solutions that integrate data analytics with state-of-the-art digital technologies while transforming the buying experience. Results for the All Other operating segments are included as a reconciling item between reportable segments and consolidated external reporting.
C. Segment measurement and reconciliations
There are several methodology differences between our segment reporting and our external reporting. The following is a list of the more significant methodology differences:
* Machinery, Energy & Transportation segment net assets generally include inventories, receivables, property, plant and equipment, goodwill, intangibles, accounts payable and customer advances. Liabilities other than accounts payable and customer advances are generally managed at the corporate level and are not included in segment operations. Financial Products Segment assets generally include all categories of assets.
* Segment inventories and cost of sales are valued using a current cost methodology.
* Goodwill allocated to segments is amortized using a fixed amount based on a 20 year useful life. This methodology difference only impacts segment assets; no goodwill amortization expense is included in segment profit. In addition, only a portion of goodwill for certain acquisitions made in 2011 or later has been allocated to segments.
* The present value of future lease payments for certain Machinery, Energy & Transportation operating leases is included in segment assets. The estimated financing component of the lease payments is excluded.
* Currency exposures for Machinery, Energy & Transportation are generally managed at the corporate level and the effects of changes in exchange rates on results of operations within the year are not included in segment profit. The net difference created in the translation of revenues and costs between exchange rates used for U.S. GAAP reporting and exchange rates used for segment reporting is reported as a methodology difference.
* Stock-based compensation expense is not included in segment profit.
* Postretirement benefit expenses are split; segments are generally responsible for service costs, with the remaining elements of net periodic benefit cost included as a methodology difference.
* Machinery, Energy & Transportation segment profit is determined on a pretax basis and excludes interest expense and most other income/expense items. Financial Products Segment profit is determined on a pretax basis and includes other income/expense items.
Reconciling items are created based on accounting differences between segment reporting and our consolidated external reporting. Please refer to pages 42 to 48 for financial information regarding significant reconciling items. Most of our reconciling items are self-explanatory given the above explanations. For the reconciliation of profit, we have grouped the reconciling items as follows:
* Corporate costs: These costs are related to corporate requirements primarily for compliance and legal functions for the benefit of the entire organization.
* Restructuring costs: Primarily costs for employee separation, long-lived asset impairments and contract terminations. These costs are included in Other operating (income) expenses except for defined-benefit plan curtailment losses and special termination benefits, which are included in Other income (expense). Restructuring costs also include other exit-related costs primarily for accelerated depreciation, inventory write-downs, equipment relocation and project management costs and LIFO inventory decrement benefits from inventory liquidations at closed facilities (all of which are primarily included in Cost of goods sold). Atable, Reconciliation of Restructuring costs on page 45, has been included to illustrate how segment profit would have been impacted by the restructuring costs. See Note 19 for more information.
* Methodology differences: See previous discussion of significant accounting differences between segment reporting and consolidated external reporting.
* Timing: Timing differences in the recognition of costs between segment reporting and consolidated external reporting. For example, certain costs are reported on the cash basis for segment reporting and the accrual basis for consolidated external reporting.
Reportable Segments Three Months Ended June 30 (Millions of dollars)
External
Inter- segment
Total sales
Depreciation
Segment
Total .................................... $ 14,111 $ 1,140 $ 15,251 $ 574 $ 2,711 $ 55,321 $ 774 External Inter- segment
Depreciation
Total .................................... $ 11,406 $ 933 $ 12,339 $ 596 $ 1,884 $ 53,698 $ 597 1 Includes revenues from Machinery, Energy & Transportation of $118 million and $102 million in the second quarter of 2018 and 2017, respectively.
Reportable Segments Six Months Ended June 30 (Millions of dollars)
External
Inter- segment
Total sales
Depreciation
Segment
Total .................................... $ 21,283 $ 1,813 $ 23,096 $ 1,191 $ 3,406 $ 53,698 $ 1,026
1 Includes revenues from Machinery, Energy & Transportation of $223 million and $188 million in the first half of 2018 and 2017, respectively.
For the three and six months ending June 30, 2018, sales and revenues by geographic region reconciled to consolidated sales and revenues were as follows:
Sales and Revenues by Geographic Region External
For the three and six months ending June 30, 2018, Energy & Transportation segment sales by end user application were as follows:
Energy & Transportation External Sales
Three Months
Six Months
Reconciliation of Sales and revenues: (Millions of dollars) Three Months Ended June 30, 2017
Machinery, Energy & Transportation
Financial Products
Consolidating Adjustments
Consolidated Total
Total external sales and revenues from reportable segments ....... $ 10,630 $ 776 $ - $ 11,406 All Other operating segments....................................................... 33 - - 33 Other............................................................................................. (24) 17 (101) 1 (108) Total sales and revenues............................................................... $ 10,639 $ 793 $ (101) $ 11,331
Six Months Ended June 30, 2017
Machinery, Energy & Transportation
Financial Products
Consolidating Adjustments
Consolidated Total
Total external sales and revenues from reportable segments ....... $ 19,747 $ 1,536 $ - $ 21,283 All Other operating segments....................................................... 70 - - 70
Total sales and revenues............................................................... $ 19,769 $ 1,570 $ (186) $ 21,153
1 Elimination of Financial Products revenues from Machinery, Energy & Transportation.
Reconciliation of Consolidated profit before taxes: (Millions of dollars) Three Months Ended June 30, 2018
Machinery, Energy & Transportation
Financial Products
Consolidated Total Total profit from reportable segments .................................................................. $ 2,577 $ 134 $ 2,711 All Other operating segments ............................................................................... 23 - 23 Cost centers........................................................................................................... (1) - (1) Corporate costs ..................................................................................................... (178) - (178) Timing................................................................................................................... (66) - (66) Restructuring costs ............................................................................................... (113) (1) (114) Methodology differences: Inventory/cost of sales..................................................................................... 31 - 31 Postretirement benefit expense........................................................................ 82 - 82 Stock-based compensation expense ................................................................ (60) (2) (62) Financing costs................................................................................................ (69) - (69) Currency .......................................................................................................... (52) - (52) Other income/expense methodology differences ............................................ (95) - (95) Other methodology differences ....................................................................... (29) 5 (24)
Total consolidated profit before taxes .................................................................. $ 2,050 $ 136 $ 2,186
Inventory/cost of sales..................................................................................... (8) - (8) Postretirement benefit expense........................................................................ 44 - 44 Stock-based compensation expense ................................................................ (65) (3) (68) Financing costs................................................................................................ (123) - (123) Currency .......................................................................................................... (119) - (119) Other income/expense methodology differences ............................................ 21 - 21
Total consolidated profit before taxes .................................................................. $ 971 $ 188 $ 1,159
Reconciliation of Consolidated profit before taxes: (Millions of dollars) Six Months Ended June 30, 2018
Machinery, Energy & Transportation
Financial Products
Consolidated Total Total profit from reportable segments .................................................................. $ 4,946 $ 275 $ 5,221 All Other operating segments ............................................................................... 80 - 80 Cost centers........................................................................................................... 26 - 26 Corporate costs ..................................................................................................... (346) - (346) Timing................................................................................................................... (150) - (150) Restructuring costs ............................................................................................... (182) (1) (183) Methodology differences: Inventory/cost of sales..................................................................................... 23 - 23 Postretirement benefit expense........................................................................ 169 - 169 Stock-based compensation expense ................................................................ (108) (4) (112) Financing costs................................................................................................ (147) - (147) Currency .......................................................................................................... (49) - (49) Other income/expense methodology differences ............................................ (173) - (173) Other methodology differences ....................................................................... (42) 3 (39)
Total consolidated profit before taxes .................................................................. $ 4,047 $ 273 $ 4,320
Inventory/cost of sales..................................................................................... (76) - (76) Postretirement benefit expense........................................................................ 91 - 91 Stock-based compensation expense ................................................................ (112) (5) (117) Financing costs................................................................................................ (253) - (253) Currency .......................................................................................................... (158) - (158) Other income/expense methodology differences ............................................ (34) - (34) Other methodology differences ....................................................................... (61) 4 (57)
Total consolidated profit before taxes .................................................................. $ 1,076 $ 372 $ 1,448
Reconciliation of Restructuring costs:
As noted above, restructuring costs are a reconciling item between Segment profit and Consolidated profit before taxes. Had we included the amounts in the segments' results, the profit would have been as shown below:
Reconciliation of Restructuring costs:
Segment profit
Reconciliation of Restructuring costs:
(Millions of dollars) Segment profit (loss)
Restructuring costs
Segment profit (loss) with restructuring costs
Six Months Ended June 30, 2018
Reconciliation of Assets: (Millions of dollars) June 30, 2018
Machinery, Energy & Transportation
Financial Products
Consolidating Adjustments
Consolidated Total Total assets from reportable segments ................................................ $ 19,413 $ 35,908 $ - $ 55,321 All Other operating segments.............................................................. 1,278 - - 1,278 Items not included in segment assets: Cash and short-term investments ................................................... 7,786 - - 7,786 Intercompany receivables .............................................................. 1,585 - (1,585) - Investment in Financial Products................................................... 4,063 - (4,063) - Deferred income taxes ................................................................... 2,107 - (586) 1,521 Goodwill and intangible assets ...................................................... 4,325 - - 4,325 Property, plant and equipment - net and other assets .................... 2,196 - - 2,196 Operating lease methodology difference............................................. (183) - - (183) Inventory methodology differences .................................................... (2,333) - - (2,333) Liabilities included in segment assets ................................................. 9,757 - - 9,757 Other.................................................................................................... (642) - (39) (681)
Total assets .......................................................................................... $ 49,352 $ 35,908 $ (6,273) $ 78,987
Reconciliations of Depreciation and amortization: Machinery, (Millions of dollars) Energy & Transportation
Financial Products
Consolidated Total
Three Months Ended June 30, 2018 Total depreciation and amortization from reportable segments ....................................... $ 362 $ 212 $ 574 Items not included in segment depreciation and amortization: All Other operating segments...................................................................................... 58 - 58 Cost centers ................................................................................................................. 32 - 32 Other............................................................................................................................ 13 9 22 Total depreciation and amortization ................................................................................. $ 465 $ 221 $ 686 Three Months Ended June 30, 2017
Reconciliations of Depreciation and amortization: Machinery,
Reconciliations of Capital expenditures: (Millions of dollars) Three Months Ended June 30, 2018
Machinery, Energy & Transportation
Financial Products
Consolidating Adjustments
Consolidated Total
Reconciliations of Capital expenditures: (Millions of dollars) Six Months Ended June 30, 2018
Machinery, Energy & Transportation
Financial Products
Consolidating Adjustments
Consolidated Total
16. Cat Financial financing activities Allowance for credit losses The allowance for credit losses is an estimate of the losses inherent in Cat Financial's finance receivable portfolio and includes consideration of accounts that have been individually identified as impaired, as well as pools of finance receivables where it is probable that certain receivables in the pool are impaired but the individual accounts cannot yet be identified. In identifying and measuring impairment, management takes into consideration past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of underlying collateral and current economic conditions.
Accounts are identified for individual review based on past-due status and information available about the customer, such as financial statements, news reports and published credit ratings, as well as general information regarding industry trends and the economic environment in which Cat Financial's customers operate. The allowance for credit losses attributable to finance receivables that are individually evaluated and determined to be impaired is based on the present value of expected future cash flows discounted at the receivables' effective interest rate, the fair value of the collateral for collateral- dependent receivables or the observable market price of the receivable. In determining collateral value, Cat Financial estimates the current fair market value of the collateral less selling costs. Cat Financial also considers credit enhancements such as additional collateral and contractual third-party guarantees. The allowance for credit losses attributable to the remaining accounts not yet individually identified as impaired is estimated based on loss forecast models utilizing probabilities of default, our estimate of the loss emergence period and the estimated loss given default. In addition, qualitative factors not able to be fully captured in the loss forecast models including industry trends, macroeconomic factors and model imprecision are considered in the evaluation of the adequacy of the allowance for credit losses. These qualitative factors are subjective and require a degree of management judgment.
Cat Financial's allowance for credit losses is segregated into two portfolio segments:
* Customer - Finance receivables with retail customers. * Dealer - Finance receivables with Caterpillar dealers.
A portfolio segment is the level at which the company develops a systematic methodology for determining its allowance for credit losses.
Cat Financial further evaluates portfolio segments by the class of finance receivables, which is defined as a level of information (below a portfolio segment) in which the finance receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk. Typically, Cat Financial's finance receivables within a geographic area have similar credit risk profiles and methods for assessing and monitoring credit risk. Cat Financial's classes, which align with management reporting for credit losses, are as follows:
* North America - Finance receivables originated in the United States or Canada. * Europe - Finance receivables originated in Europe, Africa, the Middle East and the Commonwealth of Independent States. * Asia Pacific - Finance receivables originated in Australia, New Zealand, China, Japan and Southeast Asia. * Mining - Finance receivables related to large mining customers worldwide and project financing in various countries. * Latin America - Finance receivables originated in Mexico, and Central and South American countries. * Caterpillar Power Finance - Finance receivables originated worldwide related to marine vessels with Caterpillar engines and Caterpillar electrical power generation, gas compression and co-generation systems and non- Caterpillar equipment that is powered by these systems.
An analysis of the allowance for credit losses was as follows:
(Millions of dollars) June 30, 2018
Allowance for Credit Losses: Customer Dealer Total Balance at beginning of year ......................................................... $ 353 $ 9 $ 362 Receivables written off ............................................................... (130) - (130) Recoveries on receivables previously written off....................... 20 - 20 Provision for credit losses........................................................... 170 (1) 169 Other ........................................................................................... (9) - (9) Balance at end of period ................................................................ $ 404 $ 8 $ 412 Individually evaluated for impairment .......................................... $ 205 $ - $ 205 Collectively evaluated for impairment .......................................... 199 8 207 Ending Balance.............................................................................. $ 404 $ 8 $ 412 Recorded Investment in Finance Receivables: Individually evaluated for impairment .......................................... $ 827 $ - $ 827 Collectively evaluated for impairment .......................................... 18,336 3,455 21,791 Ending Balance.............................................................................. $ 19,163 $ 3,455 $ 22,618
(Millions of dollars) December 31, 2017
Allowance for Credit Losses: Customer Dealer Total Balance at beginning of year.......................................................... $ 331 $ 10 $ 341 Receivables written off................................................................ (157) - (157) Recoveries on receivables previously written off ....................... 43 - 43 Provision for credit losses ........................................................... 129 (1) 128 Other............................................................................................ 7 - 7 Balance at end of year.................................................................... $ 353 $ 9 $ 362
Individually evaluated for impairment........................................... $ 149 $ - $ 149 Collectively evaluated for impairment........................................... 204 9 213 Ending Balance .............................................................................. $ 353 $ 9 $ 362
At origination, Cat Financial evaluates credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit-rating agency ratings, loan-to-value ratios and other internal metrics. On an ongoing basis, Cat Financial monitors credit quality based on past-due status and collection experience as there is a meaningful correlation between the past-due status of customers and the risk of loss.
In determining past-due status, Cat Financial considers the entire recorded investment in finance receivables past due when any installment is over 30 days past due. The tables below summarize the recorded investment in finance receivables by aging category.
(Millions of dollars) 31-60
Recorded Investment in Customer
(Millions of dollars) 31-60
61-90
91+
December 31, 2017
Recorded Investment in
As of June 30, 2018, Cat Financial had $240 million of finance receivables classified as held for sale.
Impaired finance receivables
For all classes, a finance receivable is considered impaired, based on current information and events, if it is probable that Cat Financial will be unable to collect all amounts due according to the contractual terms. Impaired finance receivables include finance receivables that have been restructured and are considered to be troubled debt restructurings.
There were no impaired finance receivables as of June 30, 2018 or December 31, 2017, for the Dealer portfolio segment. Cat Financial's recorded investment in impaired finance receivables and the related unpaid principal balances and allowance for the Customer portfolio segment were as follows:
June 30, 2018 December 31, 2017
(Millions of dollars) Recorded Investment Unpaid Principal Balance
Related Allowance
Recorded Investment Unpaid Principal Balance
Related Allowance
Impaired Finance Receivables With No
Three Months Ended June 30, 2018 Three Months Ended June 30, 2017 Investment
Six Months Ended June 30, 2018 Six Months Ended June 30, 2017
Recognition of income is suspended and the finance receivable is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due). Recognition is resumed and previously suspended income is recognized when the finance receivable becomes current and collection of remaining amounts is considered probable. Payments received while the finance receivable is on non-accrual status are applied to interest and principal in accordance with the contractual terms.
As of June 30, 2018, there were finance receivables on non-accrual status for the Dealer portfolio segment of $77 million, all of which were in the Latin America finance receivable class. As of December 31, 2017, there were no finance receivables on non-accrual status for the Dealer portfolio segment. The recorded investment in customer finance receivables on non- accrual status was as follows:
(Millions of dollars) June 30, 2018 December 31, 2017
Troubled Debt Restructurings
A restructuring of a finance receivable constitutes a troubled debt restructuring (TDR) when the lender grants a concession it would not otherwise consider to a borrower experiencing financial difficulties. Concessions granted may include extended contract maturities, inclusion of interest only periods, below market interest rates, extended skip payment periods and reduction of principal and/or accrued interest.
As of June 30, 2018 and December 31, 2017, there were no additional funds committed to lend to a borrower whose terms have been modified in a TDR.
There were no finance receivables modified as TDRs during the three and six months ended June 30, 2018 or 2017 for the Dealer portfolio segment. Cat Financial's investment in finance receivables in the Customer portfolio segment modified as TDRs during the three and six months ended June 30, 2018 and 2017, were as follows:
Three Months Ended June 30, 2018 Three Months Ended June 30, 2017
(Millions of dollars)
Recorded Investment Post-TDR Recorded Investment Number of Contracts
Recorded Investment Post-TDR Recorded Investment
1In Caterpillar Power Finance, during the three months ended June 30, 2017, 42 contracts with a pre-TDR recorded investment of $175 million and a post-TDR recorded investment of $175 million were related to three customers.
17. Fair value disclosures
A. Fair value measurements
The guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. In accordance with this guidance, fair value measurements are classified under the following hierarchy:
* Level 1 - Quoted prices for identical instruments in active markets.
* Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value- drivers are observable in active markets.
* Level 3 - Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
When available, we use quoted market prices to determine fair value, and we classify such measurements within Level 1. In some cases where market prices are not available, we make use of observable market based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon valuations in which one or more significant inputs are unobservable, including internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.
Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.
Fair value measurement includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or Caterpillar) will not be fulfilled. For financial assets traded in an active market (Level 1 and certain Level 2), the nonperformance risk is included in the market price. For certain other financial assets and liabilities (certain Level 2 and Level 3), our fair value calculations have been adjusted accordingly.
Investments in debt and equity securities We have investments in certain debt and equity securities, primarily at Insurance Services, that are recorded at fair value. Fair values for our U.S. treasury bonds and large capitalization value and smaller company growth equity securities are based upon valuations for identical instruments in active markets. Fair values for other government bonds, corporate bonds and mortgage-backed debt securities are based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.
In addition, Insurance Services has an equity investment in a real estate investment trust (REIT) which is recorded at fair value based on the net asset value (NAV) of the investment. Beginning January 1, 2018, we adopted new accounting guidance issued by the FASB which results in the fair value of the REIT no longer being classified within the fair value hierarchy. Prior to January 1, 2018, the fair value was classified as Level 3.
See Note 8 for additional information on our investments in debt and equity securities.
Derivative financial instruments The fair value of interest rate contracts is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine discounted cash flows. The fair value of foreign currency and commodity forward, option and cross currency contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.
Assets and liabilities measured on a recurring basis at fair value, primarily related to Financial Products, included in our Consolidated Statement of Financial Position as of June 30, 2018 and December 31, 2017 are summarized below:
June 30, 2018 (Millions of dollars) Assets Debt securities Government debt
Level 1 Level 2 Level 3
Measured at NAV Total Assets / Liabilities, at Fair Value U.S. treasury bonds .......................................... $ 9 $ - $ - $ - $ 9 Other U.S. and non-U.S. government bonds.... - 47 - - 47 Corporate bonds Corporate bonds ............................................... - 665 - - 665 Asset-backed securities .................................... - 61 - - 61 Mortgage-backed debt securities U.S. governmental agency ............................... - 296 - - 296 Residential........................................................ - 7 - - 7 Commercial ...................................................... - 15 - - 15 Total debt securities .................................................... 9 1,091 - - 1,100 Equity securities Large capitalization value ................................ 285 - - - 285 Smaller company growth ................................. 70 - - - 70 REIT................................................................. - - - 115 115 Total equity securities ................................................. 355 - - 115 470 Total assets.................................................................. $ 364 $ 1,091 $ - $ 115 $ 1,570 Liabilities Derivative financial instruments, net .......................... - 37 - - 37 Total liabilities ............................................................ $ - $ 37 $ - $ - $ 37
(Millions of dollars) Assets Debt securities Government debt
Level 1 Level 2 Level 3
Total Assets / Liabilities, at Fair Value U.S. treasury bonds ................................................................ $ 10 $ - $ - $ 10 Other U.S. and non-U.S. government bonds ......................... - 42 - 42 Corporate bonds Corporate bonds ..................................................................... - 584 - 584 Asset-backed securities.......................................................... - 67 - 67 Mortgage-backed debt securities U.S. governmental agency ..................................................... - 261 - 261 Residential.............................................................................. - 8 - 8 Commercial............................................................................ - 17 - 17 Total debt securities .......................................................................... 10 979 - 989 Equity securities Large capitalization value ...................................................... 284 - - 284 Smaller company growth ....................................................... 56 - - 56 REIT....................................................................................... - - 110 110 Total equity securities....................................................................... 340 - 110 450 Total assets........................................................................................ $ 350 $ 979 $ 110 $ 1,439 Liabilities Derivative financial instruments, net................................................ $ - $ 19 $ - $ 19 Total liabilities .................................................................................. $ - $ 19 $ - $ 19
In addition to the amounts above, Cat Financial impaired loans are subject to measurement at fair value on a nonrecurring basis and are classified as Level 3 measurements. A loan is considered impaired when management determines that collection of contractual amounts due is not probable. In these cases, an allowance for credit losses may be established based either on the present value of expected future cash flows discounted at the receivables' effective interest rate, the fair value of the collateral for collateral-dependent receivables, or the observable market price of the receivable. In determining collateral value, Cat Financial estimates the current fair market value of the collateral less selling costs. Cat Financial had impaired loans with a fair value of $320 million and $341 million as of June 30, 2018 and December 31, 2017, respectively.
B. Fair values of financial instruments
In addition to the methods and assumptions we use to record the fair value of financial instruments as discussed in the Fair value measurements section above, we used the following methods and assumptions to estimate the fair value of our financial instruments:
Cash and short-term investments Carrying amount approximated fair value.
Restricted cash and short-term investments Carrying amount approximated fair value. Restricted cash and short-term investments are included in Prepaid expenses and other current assets in the Consolidated Statement of Financial Position.
Finance receivables Fair value was estimated by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.
Wholesale inventory receivables Fair value was estimated by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.
Short-term borrowings Carrying amount approximated fair value.
Long-term debt Fair value for fixed and floating rate debt was estimated based on quoted market prices.
Guarantees The fair value of guarantees is based upon our estimate of the premium a market participant would require to issue the same guarantee in a stand-alone arms-length transaction with an unrelated party. If quoted or observable market prices are not available, fair value is based upon internally developed models that utilize current market-based assumptions.
Please refer to the table below for the fair values of our financial instruments.
Fair Value of Financial Instruments June 30, 2018 December 31, 2017
Fair (Millions of dollars) Carrying Amount Fair Value Carrying Amount Fair Value
Levels Reference
Assets Cash and short-term investments ................... $ 8,654 $ 8,654 $ 8,261 $ 8,261 1 Restricted cash and short-term investments... $ 175 $ 175 $ 194 $ 194 1 Investments in debt and equity securities ...... $ 1,570 $ 1,570 $ 1,439 $ 1,439 1, 2 & 3 Note 8 Finance receivables - net (excluding finance
Liabilities
1 Total excluded items have a net carrying value at June 30, 2018 and December 31, 2017 of $7,409 million and $7,063 million, respectively.
18. Other income (expense)
Three Months Ended Six Months Ended
2
1 Includes gains (losses) from foreign exchange derivative contracts. See Note 5 for further details. 2 Pretax gain related to the sale of Caterpillar's equity interest in Iron Planet Holdings Inc.
19. Restructuring costs
Our accounting for employee separations is dependent upon how the particular program is designed. For voluntary programs, eligible separation costs are recognized at the time of employee acceptance unless the acceptance requires explicit approval by the company. For involuntary programs, eligible costs are recognized when management has approved the program, the affected employees have been properly notified and the costs are estimable.
Restructuring costs for the three and six months ended June 30, 2018 and 2017 were as follows:
(Millions of dollars) Three Months Ended June 30
Six Months Ended June 30
2 Represents costs related to our restructuring programs, primarily for accelerated depreciation, project management costs and equipment relocation (all of which are primarily included in Cost of goods sold). 3 Recognized in Other income (expense).
For the six months ended June 30, 2018, the restructuring costs were primarily related to ongoing facility closures across the company.
The restructuring costs for the six months ended June 30, 2017, were primarily related to the closure of the facility in Gosselies, Belgium, within Construction Industries. The remaining restructuring costs for the first six months of 2017 were related to other restructuring actions across the company.
Restructuring costs are a reconciling item between Segment profit and Consolidated profit before taxes. See Note 15 for more information.
The following table summarizes the 2017 and 2018 employee separation activity:
(Millions of dollars) Liability balance at December 31, 2016 ................................................................................................................... $ 147 Increase in liability (separation charges) ............................................................................................................. 525 Reduction in liability (payments) ........................................................................................................................ (423) Liability balance at December 31, 2017 ................................................................................................................... $ 249 Increase in liability (separation charges) ............................................................................................................. 78 Reduction in liability (payments) ........................................................................................................................ (150) Liability balance at June 30, 2018 ............................................................................................................................ $ 177
The majority of the liability balance at June 30, 2018 is expected to be paid in 2018. About half of this balance is for employee separation payments related to closure of the Gosselies, Belgium, facility. In March 2017, Caterpillar informed Belgian authorities of the decision to proceed to a collective dismissal, which led to the closure of the Gosselies site, impacting about 2,000 employees. Production of Caterpillar products at the Gosselies site ended during the second quarter of 2017. The other operations and functions at the Gosselies site were phased out by the end of the second quarter of 2018. We estimate restructuring costs incurred under this program to be about $675 million. In the first six months of 2018, we incurred $10 million of restructuring costs, and we incurred $653 million in 2017 for a total of $663 million through June 30, 2018. We expect to recognize the remaining costs in 2018. In September 2015, we announced a large scale restructuring plan (the Plan) including a voluntary retirement enhancement program for qualifying U.S. employees, several voluntary separation programs outside of the U.S., additional involuntary programs throughout the company and manufacturing facility consolidations and closures expected to occur through 2018. The largest action among those included in the Plan was related to our European manufacturing footprint, which led to the Gosselies, Belgium, facility closure as discussed above. In the first six months of 2018, we incurred $70 million of restructuring costs related to the Plan, and we have incurred $1,737 million related to the Plan through June 30, 2018. We expect to recognize approximately $150 million of additional restructuring costs related to the Plan in 2018.
20. Acquisitions ECM S.p.A. On January 2, 2018, we acquired 100 percent of the equity in privately held ECM S.p.A. (ECM). Headquartered in Pistoia, Italy, ECM designs, manufactures, sells and services advanced signal systems for the rail industry. The ECM acquisition was executed to expand our presence in the international freight and transit industries through a combination of broad product offerings and strong reputation in the signaling market. The purchase price for the acquisition was $225 million, consisting of $249 million paid at closing, net of $25 million of cash acquired and $1 million of debt assumed.
The transaction was financed with available cash. Tangible assets as of the acquisition date were $109 million, recorded at their fair values, and primarily included cash of $25 million, receivables of $28 million, inventories of $29 million, and property, plant and equipment of $17 million. Finite-lived intangible assets acquired of $112 million included customer relationships, developed technology and trade names. The finite lived intangible assets are being amortized on a straight- line basis over a weighted-average amortization period of approximately 13 years. Liabilities assumed as of the acquisition date were $79 million, recorded at their fair values, and primarily included accounts payable of $38 million and net deferred tax liabilities of $29 million. Goodwill of $109 million, non-deductible for income tax purposes, represented the excess of the consideration transferred over the net assets recognized and represented the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Factors that contributed to a purchase price resulting in the recognition of goodwill include ECM's strategic fit into our rail product portfolio, the opportunity to provide a complete line-up of signaling and train control systems and the acquired assembled workforce. These values represent a preliminary allocation of purchase price subject to finalization of post-closing procedures. The results of the acquired business for the period from the acquisition date are included in the accompanying consolidated financial statements and reported in the Energy & Transportation segment in Note 15. Assuming this transaction had been made at the beginning of any period presented, the consolidated pro forma results would not be materially different from reported results.
Downer Freight Rail
On January 2, 2018, we completed the acquisition of certain assets and liabilities of the Downer Freight Rail business (Downer Freight Rail). Headquartered in North Ryde, Australia, Downer Freight Rail provides a full suite of rolling stock, aftermarket parts and services throughout Australia. The acquisition was executed to strengthen our existing Rail footprint in Australia, which currently includes rolling stock maintenance facilities, as well as infrastructure and signaling facilities. The purchase price for the acquisition was $99 million.
The transaction was financed with available cash. Tangible assets as of the acquisition date were $92 million, recorded at their fair values, and primarily included receivables of $26 million, inventories of $42 million, and property, plant and equipment of $17 million. Finite-lived customer relationship intangible assets acquired were $5 million. The finite lived intangible assets are being amortized on a straight-line basis over an amortization period of 15 years. Liabilities assumed as of the acquisition date were $10 million, which represented their fair values. Goodwill of $12 million, not expected to be deducted for income tax purposes, represented the excess of the consideration transferred over the net assets recognized and represented the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Factors that contributed to a purchase price resulting in the recognition of goodwill include Downer Freight Rail's strategic fit into our rail product portfolio, the opportunity to expand our aftermarket parts and maintenance service portfolio in Australia and the acquired assembled workforce. These values represent a preliminary allocation of purchase price subject to finalization of post-closing procedures. The results of the acquired business for the period from the acquisition date are included in the accompanying consolidated financial statements and reported in the Energy & Transportation segment in Note 15. Assuming this transaction had been made at the beginning of any period presented, the consolidated pro forma results would not be materially different from reported results.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Second-quarter 2018 sales and revenues were $14.011 billion, a 24 percent increase from second-quarter 2017 sales and revenues of $11.331 billion. The increase was primarily due to higher sales volume driven by improved demand across the three primary segments, with the largest increase in Construction Industries. Sales were also higher due to currency impacts, primarily from a stronger euro and Chinese yuan. Profit per share for the second quarter of 2018 was $2.82, an increase of $1.47 from the second quarter of 2017. Profit was $1.707 billion in the second quarter of 2018, an increase of $905 million from the second quarter of 2017. Profit increased primarily due to higher sales volume and a lower effective tax rate. Favorable price realization was partially offset by higher manufacturing costs. Lower operating profit from Financial Products and slightly higher selling, general and administrative (SG&A) and research and development (R&D) expenses were partially offset by a decrease in restructuring costs. Sales and revenues for the six months ended June 30, 2018, were $26.870 billion, up $5.717 billion, or 27 percent, from $21.153 billion for the six months ended June 30, 2017. Profit per share for the six months ended June 30, 2018, was $5.56, up significantly from profit per share of $1.67 for the same period last year. Profit was $3.372 billion for the six months ended June 30, 2018, a substantial increase from $994 million for the six months ended June 30, 2017. Highlights for the second quarter of 2018 include: * Second-quarter sales and revenues were $14.011 billion, compared with $11.331 billion in the second quarter of 2017. Sales increased in Construction Industries, Energy & Transportation and Resource Industries. Financial Products' revenues were about flat. * Operating profit as a percent of sales and revenues was 15.5 percent in the second quarter of 2018, compared with 10.4 percent in the second quarter of 2017. Adjusted operating profit margin was 16.3 percent in the second quarter of 2018, compared with 11.9 percent in the second quarter of 2017. * Profit per share was $2.82 in the second quarter of 2018, compared with $1.35 in the second quarter of 2017. Excluding restructuring costs of $0.15 per share, second-quarter 2018 adjusted profit per share was $2.97. In comparison, adjusted profit per share for the second quarter of 2017, which excluded restructuring costs of $0.23 per share and a gain on sale of an equity investment of $0.09 per share, was $1.49. * During the second quarter of 2018, Machinery, Energy & Transportation (ME&T) operating cash flow was $2.1 billion, and the company repurchased $750 million of Caterpillar common stock. In June, the board of directors approved an increase to the quarterly dividend of 10 percent to $0.86 per share. The company ended the second quarter of 2018 with an enterprise cash balance of $8.7 billion. Highlights for the six months ended June 30, 2018, include: * Sales and revenues for the six months ended June 30, 2018, were $26.870 billion, compared with $21.153 billion for the six months ended June 30, 2017. Sales increased in Construction Industries, Energy & Transportation and Resource Industries. Financial Products' revenues were about flat. * Restructuring costs were $183 million for the six months ended June 30, 2018, with an after-tax impact of $0.23 per share, compared with restructuring costs of $921 million for the six months ended June 30, 2017, with an after-tax impact of $1.19 per share. * Operating profit as a percent of sales and revenues was 15.9 percent for the six months ended June 30, 2018, compared with 7.4 percent for the six months ended June 30, 2017. Adjusted operating profit margin was 16.6 percent for the six months ended June 30, 2018, compared with 11.6 percent for the six months ended June 30, 2017. * Profit per share was $5.56 for the six months ended June 30, 2018, compared with $1.67 in the six months ended June 30, 2017. Adjusted profit per share was $5.79 for the six months ended June 30, 2018, compared with $2.77 in the six months ended June 30, 2017. * Machinery, Energy & Transportation (ME&T) operating cash flow was $3.0 billion for the six months ended June 30, 2018, compared to $3.6 billion for the six months ended June 30, 2017. Restructuring Costs In recent years, we have incurred substantial restructuring costs to achieve a flexible and competitive cost structure. We incurred $114 million of restructuring costs during the second quarter of 2018 and $183 million during the first half of 2018. We incurred $169 million of restructuring costs during the second quarter of 2017 and $921 million during the first half of 2017. We expect restructuring actions to continue and anticipate costs of about $400 million for the full year of 2018. Notes:
* Glossary of terms is included on pages 77-79; first occurrence of terms shown in bold italics. * Information on non-GAAP financial measures is included on page 84.
Consolidated Results of Operations
THREE MONTHS ENDED JUNE 30, 2018 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2017
The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the second quarter of 2017 (at left) and the second quarter of 2018 (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's board of directors and employees. Total sales and revenues were $14.011 billion in the second quarter of 2018, an increase of $2.680 billion, or 24 percent, compared with $11.331 billion in the second quarter of 2017. The increase was primarily due to higher sales volume driven by improved demand across the three primary segments, with the largest increase in Construction Industries. Sales were also higher due to currency impacts, primarily from a stronger euro and Chinese yuan. Sales increased in all regions, with the largest sales increase in North America, which improved 25 percent as strong economic conditions in key end markets drove higher demand. Sales increased 10 percent in Latin America primarily due to stabilizing economic conditions in several countries in the region that resulted in improved demand from low levels. EAME sales increased 18 percent primarily due to higher demand as economic conditions have improved across the region, the impact of a stronger euro and favorable price realization. Asia/Pacific sales increased 39 percent mostly due to higher demand, including increased sales of construction equipment in China and favorable changes in dealer inventories. Dealer inventories increased more significantly in the second quarter of 2018, compared to the second quarter of 2017. The favorable impact of a stronger Chinese yuan also contributed to increased sales. Dealer machine and engine inventories increased about $100 million in the second quarter of 2018, compared to a decrease of about $300 million in the second quarter of 2017. Dealers are independent, and there could be many reasons for changes in their inventory levels, including their expectations of future demand and product delivery times. Dealers' demand expectations take into account seasonal changes, macroeconomic conditions, machine rental rates and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers. We believe the level of dealer inventories at the end of 2018 will depend on dealer expectations for business in 2019.
Sales and Revenues by Geographic Region
Consolidated Sales and Revenues ... $ 5,354 $ 1,040 $ 2,544 $ 2,393 $ 11,331 $ - $ 11,331
1 Includes revenues from Machinery, Energy & Transportation of $118 million and $102 million in the second quarter of 2018 and 2017, respectively.
Sales and Revenues by Segment
Second Quarter
Sales
Price
Inter- Segment /
Second Quarter $ %
The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the second quarter of 2017 (at left) and the second quarter of 2018 (at right). Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's board of directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses. Operating profit for the second quarter of 2018 was $2.167 billion, compared to $1.184 billion in the second quarter of 2017. The increase of $983 million was mostly due to higher sales volume. Favorable price realization was partially offset by higher manufacturing costs. Manufacturing costs were higher due to increased freight and material costs, partially offset by lower warranty expense. Freight costs were unfavorable primarily due to supply chain inefficiencies as the industry responds to strong global demand. Material costs were higher primarily due to increases in steel prices. Lower operating profit from Financial Products and slightly higher selling, general and administrative (SG&A) and research and development (R&D) expenses were partially offset by a decrease in restructuring costs. Short-term incentive compensation expense was about $360 million in the second quarter of 2018, compared to about $415 million in the second quarter of 2017. For the full year, we expect short-term incentive compensation will be about $1.4 billion, nearly the same as 2017. Other Profit/Loss Items Other income/expense in the second quarter of 2018 was income of $121 million, compared with income of $96 million in the second quarter of 2017. The favorable change was primarily a result of lower currency translation and hedging net losses, the impact from pension and other postemployment benefit (OPEB) plans and other miscellaneous items, mostly offset by the absence of a pretax gain of $85 million on the sale of Caterpillar's equity investment in IronPlanet in the second quarter of 2017. The provision for income taxes in the second quarter of 2018 reflected an estimated annual tax rate of 24 percent, compared to 32 percent for the second quarter of 2017, excluding the discrete items discussed in the following paragraph. The decrease was primarily due to the reduction in the U.S. corporate tax rate beginning January 1, 2018, along with other changes in the geographic mix of profits from a tax perspective. The provision for income taxes in the second quarter of 2018 also included a $25 million benefit for the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary. In addition, a discrete tax benefit of $9 million was recorded in the second quarter of 2018, compared to $10 million in the second quarter of 2017, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense.
Construction Industries Construction Industries' total sales were $6.172 billion in the second quarter of 2018, compared with $4.959 billion in the second quarter of 2017. The increase was mostly due to higher sales volume for construction equipment. Sales were also higher due to currency impacts, primarily from a stronger Chinese yuan and euro, partially offset by unfavorable price realization. Sales increased in all regions. In North America, the sales increase was mostly due to higher demand for construction equipment, primarily due to oil and gas, including pipelines, and non-residential construction activities. The sales increase was partially offset by unfavorable price realization. Although construction activities remained weak in Latin America, sales were slightly higher in the region. Sales increased in EAME primarily due to higher demand and the favorable impact of currency, mostly from a stronger euro. Higher demand was driven by increased construction activities across several countries in the region. Sales in Asia/Pacific were higher across the region, with most of the improved demand in China stemming from increased building construction and infrastructure investment. The favorable impact of a stronger Chinese yuan also contributed to increased sales. Construction Industries' profit was $1.154 billion in the second quarter of 2018, compared with $900 million in the second quarter of 2017. The increase in profit was a result of higher sales volume, partially offset by unfavorable price realization, higher material and freight costs, and increased SG&A/R&D expenses. Construction Industries' profit as a percent of total sales was 18.7 percent in the second quarter of 2018, compared with 18.1 percent in the second quarter of 2017. Resource Industries Resource Industries' total sales were $2.526 billion in the second quarter of 2018, an increase of $690 million from the second quarter of 2017. The increase was primarily due to higher demand for equipment across all regions. Commodity prices remained strong in the second quarter of 2018, and the company saw mining customers invest in current fleets and mine expansions, resulting in higher equipment sales. However, we believe mining customers have not yet commenced full scale fleet replacements. Increased mine production and higher machine utilization resulted in improved aftermarket parts sales. In addition, global economic growth contributed to stronger sales for heavy construction equipment. Favorable price realization also contributed to increased sales. Resource Industries' profit was $411 million in the second quarter of 2018, compared with $99 million in the second quarter of 2017. The improvement was mostly due to higher sales volume and favorable price realization. Manufacturing costs were favorable primarily due to lower warranty expense, partially offset by higher freight costs. The favorable warranty was mostly driven by the absence of a customer warranty program that occurred in the second quarter of 2017. Resource Industries' profit as a percent of total sales was 16.3 percent in the second quarter of 2018, compared with 5.4 percent in the second quarter of 2017.
Energy & Transportation
Sales by Application (Millions of dollars)
Second Quarter 2018
Second Quarter 2017
$ Change
% Change
Energy & Transportation's total sales were $5.724 billion in the second quarter of 2018, compared with $4.768 billion in the second quarter of 2017. The increase was primarily due to higher sales volume across all applications. Favorable currency impacts, mostly from a stronger euro, and favorable price realization also contributed to the increase in sales. Oil and Gas - Sales increased due to higher demand in North America for gas compression, well servicing and production applications. Higher energy prices and growth in U.S. onshore oil and gas drove increased sales for reciprocating engines and related aftermarket parts. Sales in North America were also positively impacted by the timing of turbine project deliveries. Power Generation - Sales improved mostly due to higher demand in EAME, primarily from growth in the gas power generation market and favorable currency impacts. Industrial - Sales were higher in North America and Asia/Pacific due to favorable economic conditions and increased demand from end users. Transportation - Sales were higher for rail services, driven primarily by acquisitions in Asia/Pacific and EAME, and increased rail traffic in North America. Marine sales were higher in EAME primarily due to activity in the cruise sector and favorable currency. Energy & Transportation's profit was $1.012 billion in the second quarter of 2018, compared with $694 million in the second quarter of 2017. The improvement was due to higher sales volume, favorable price realization and lower short-term incentive compensation expense. This was partially offset by higher freight costs and increased spending for targeted investments. Energy & Transportation's profit as a percent of total sales was 17.7 percent in the second quarter of 2018, compared with 14.6 percent in the second quarter of 2017. Financial Products Segment Financial Products' segment revenues were $829 million in the second quarter of 2018, an increase of $53 million, or 7 percent, from the second quarter of 2017. The increase was primarily due to higher average financing rates in North America and higher average earning assets in Asia/Pacific and North America, partially offset by lower intercompany lending activity in North America and lower average earning assets in Latin America. Financial Products' segment profit was $134 million in the second quarter of 2018, compared with $191 million in the second quarter of 2017. The decrease was primarily due to an increase in the provision for credit losses at Cat Financial, partially offset by an increase in net yield on average earning assets and a favorable impact from higher average earning assets. At the end of the second quarter of 2018, past dues at Cat Financial were 3.16 percent, compared with 2.71 percent at the end of the second quarter of 2017. Write-offs, net of recoveries, in the second quarter of 2018 were $80 million, compared with $26 million in the second quarter of 2017. The increase in write-offs, net of recoveries, was primarily driven by a small number of customers in the Cat Power Finance portfolio and recent collection experience in the Latin America portfolio. As of June 30, 2018, Cat Financial's allowance for credit losses totaled $416 million, or 1.48 percent of finance receivables, compared with $403 million, or 1.45 percent of finance receivables at March 31, 2018. The allowance for credit losses at year- end 2017 was $365 million, or 1.33 percent of finance receivables.
Corporate Items and Eliminations Expense for corporate items and eliminations was $471 million in the second quarter of 2018, a decrease of $123 million from the second quarter of 2017. Corporate items and eliminations include: restructuring costs; corporate-level expenses; timing differences, as some expenses are reported in segment profit on a cash basis; currency differences for ME&T, as segment profit is reported using annual fixed exchange rates; cost of sales methodology differences, as segments use a current cost methodology; and inter- segment eliminations. The decrease in expense was primarily due to lower restructuring costs and cost of sales methodology differences. Restructuring costs were $114 million in the second quarter of 2018, compared to $169 million in the second quarter of 2017.
SIX MONTHS ENDED JUNE 30, 2018 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2017
The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the six months ended June 30, 2017 (at left) and the six months ended June 30, 2018 (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's board of directors and employees. Total sales and revenues were $26.870 billion in the six months ended June 30, 2018, an increase of $5.717 billion, or 27 percent, compared with $21.153 billion in the six months ended June 30, 2017. The increase was primarily due to higher sales volume driven by improved demand for equipment across the three primary segments. Sales were also higher due to currency impacts, primarily from a stronger euro and Chinese yuan. Favorable price realization in Resource Industries and Energy & Transportation also contributed to the sales improvement. Financial Products' revenues were about flat. Sales increased in all regions, with the largest sales increase in North America, which improved 29 percent as strong economic conditions in key end markets drove higher end-user demand. Also contributing to the increase was the impact of an increase in dealer inventories in the six months ended June 30, 2018, compared to a decrease in the six months ended June 30, 2017. Sales increased 16 percent in Latin America primarily due to stabilizing economic conditions in several countries in the region that resulted in improved demand from low levels. EAME sales increased 22 percent primarily due to higher demand as economic conditions have improved across the region, the impact of a stronger euro and favorable price realization. Asia/Pacific sales increased 41 percent primarily due to higher end-user demand, favorable changes in dealer inventories and a stronger Chinese yuan. The increase in end-user demand was primarily for construction equipment with the largest increase in China. The impact of changes in dealer inventories was favorable as dealer inventories increased in the six months ended June 30, 2018, compared to a decrease in the six months ended June 30, 2017. The sharp increase in demand has led to supply chain challenges. Although the company continues to see improvements in material flows, constraints remain for some parts and components that are impacting lead times and availability. During the first six months of 2018, dealer machine and engine inventories increased about $1.3 billion, compared to a decrease of about $100 million in the first six months of 2017. The company believes the increase in dealer inventories during the first half of 2018 is reflective of current end-user demand. However, dealers are independent, and there could be many reasons for changes in their inventory levels, including their expectations of future demand and product delivery times. Dealers' demand expectations take into account seasonal changes, macroeconomic conditions, machine rental rates and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers. We believe the level of dealer inventories at the end of 2018 will depend on dealer expectations for business in 2019.
Sales and Revenues by Geographic Region
Construction Industries ....................... $ 4,231 Resource Industries ............................. 1,210 Energy & Transportation..................... 3,704 All Other Segments ............................. 18
Machinery, Energy &
1 Includes revenues from Machinery, Energy & Transportation of $223 million and $188 million in the six months ended June 30, 2018 and 2017, respectively.
Sales and Revenues by Segment
Six Months
Six Months
The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the six months ended June 30, 2017 (at left) and the six months ended June 30, 2018 (at right). Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's board of directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses. Operating profit for the six months ended June 30, 2018, was $4.275 billion, compared with $1.564 billion for the six months ended June 30, 2017. The increase of $2.711 billion was primarily due to higher sales volume and lower restructuring costs. Favorable price realization was mostly offset by increased SG&A/R&D expenses and higher manufacturing costs. Financial Products operating profit declined. The company expects price realization for the second half of 2018 will be favorably impacted by previously announced mid-year price increases. SG&A/R&D expenses increased primarily due to targeted investments that mostly impacted SG&A and higher short-term incentive compensation expense. During the remainder of 2018, we anticipate higher period costs due to making targeted investments in initiatives that are important to our future competitiveness, including enhanced digital capabilities and accelerating technology updates to our products. Manufacturing costs were higher due to increased freight and material costs, partially offset by lower warranty expense. Freight costs were unfavorable primarily due to supply chain inefficiencies as the industry responds to strong global demand. Material costs were higher primarily due to increases in steel prices. Recently imposed tariffs had a minimal impact on material costs in the first half of 2018. However, during the second half of 2018, the company expects these tariffs to impact material costs by approximately $100 million to $200 million. In addition, the company expects supply chain challenges to continue to pressure freight costs during the remainder of 2018. Restructuring costs were $183 million for the six months ended June 30, 2018. In the first six months of 2017, restructuring costs of $892 million were primarily related to the closure of the facility in Gosselies, Belgium. Short-term incentive compensation expense is directly related to financial and operational performance, measured against targets set annually. Expense for the six months ended June 30, 2018, was about $720 million compared to about $650 million for the six months ended June 30, 2017. For the full year, we expect short-term incentive compensation will be about $1.4 billion, nearly the same as 2017. Other Profit/Loss Items Other income/expense for the six months ended June 30, 2018, was income of $248 million, compared with income of $128 million for the six months ended June 30, 2017. The favorable change was primarily a result of lower currency translation and hedging net losses, the impact from pension and OPEB plans and other miscellaneous items, mostly offset by the absence of a pretax gain of $85 million on the sale of Caterpillar's equity investment in IronPlanet in the six months ended June 30, 2017. The provision for income taxes for the first six months of 2018 reflected an estimated annual tax rate of 24 percent, compared to 32 percent for the first six months of 2017, excluding the discrete items discussed in the following paragraph. The decrease was primarily due to the reduction in the U.S. corporate tax rate beginning January 1, 2018, along with other changes in the geographic mix of profits from a tax perspective.
In addition, a discrete tax benefit of $49 million was recorded in the first six months of 2018, compared to $27 million in the first six months of 2017, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense. The provision for income taxes for the first six months of 2018 also included a $25 million benefit for the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary. The provision for income taxes for the first six months of 2017 also included a $15 million increase to prior year taxes related to non-U.S. restructuring costs. Our analysis of U.S. tax reform legislation, updated through June 30, 2018, resulted in no change to the 2017 year-end provisional charge of $2.371 billion. We will continue to update our calculations as additional required information is prepared and analyzed, interpretations and assumptions are refined, additional guidance is issued, and due to actions we may take as a result of the legislation. These updates could significantly impact the provision for income taxes, the amount of taxes payable and the deferred tax asset and liability balances.
Construction Industries' total sales were $11.849 billion in the six months ended June 30, 2018, compared with $9.059 billion in the six months ended June 30, 2017. The increase was mostly due to higher sales volume for construction equipment. Sales were also higher due to currency impacts, primarily from a stronger euro and Chinese yuan. Sales volume increased primarily due to higher demand for construction equipment and the impact of favorable changes in dealer inventories. Dealer inventories increased significantly more in the six months ended June 30, 2018, than in the six months ended June 30, 2017. Sales increased in all regions. In North America, the sales increase was primarily due to higher demand for construction equipment, primarily due to non- residential, infrastructure and oil and gas construction activities, including pipelines. In addition, sales increased due to the favorable impact of dealer inventories, which increased in the six months ended June 30, 2018, compared to a decrease in the six months ended June 30, 2017. The sales increase was partially offset by unfavorable price realization. Although construction activities remained weak in Latin America, sales were higher in the region. Sales increased in EAME primarily due to higher demand and the favorable impact of currency, mostly from a stronger euro. Higher demand was driven by increased construction activities across several countries in the region. Favorable price realization also contributed to the sales increase. Sales in Asia/Pacific were higher across the region, with most of the improved demand in China stemming from increased building construction and infrastructure investment. The favorable impact of a stronger Chinese yuan also contributed to increased sales. Construction Industries' profit was $2.271 billion for the six months ended June 30, 2018, compared with $1.534 billion for the six months ended June 30, 2017. The increase in profit was a result of higher sales volume, partially offset by higher material and freight costs, and increased SG&A/R&D expenses, partially due to spending for targeted investments. Construction Industries' profit as a percent of total sales was 19.2 percent for the six months ended June 30, 2018, compared with 16.9 percent for the six months ended June 30, 2017.
Resource Industries Resource Industries' total sales were $4.835 billion in the six months ended June 30, 2018, an increase of $1.238 billion from the six months ended June 30, 2017. The increase was primarily due to higher demand for equipment across all regions. Commodity prices remained strong, and the company saw mining customers invest in current fleets and mine expansions, resulting in higher equipment sales. However, we believe mining customers have not yet commenced full scale fleet replacements. Increased mine production and higher machine utilization resulted in improved aftermarket parts sales. In addition, global economic growth contributed to stronger sales for heavy construction equipment. Favorable price realization also contributed to increased sales. Resource Industries' profit was $789 million for the six months ended June 30, 2018, compared with $259 million for the six months ended June 30, 2017. The improvement was mostly due to higher sales volume and favorable price realization. Resource Industries' profit as a percent of total sales was 16.3 percent for the six months ended June 30, 2018, compared with 7.2 percent for the six months ended June 30, 2017. Energy & Transportation
Sales by Application
(Millions of dollars) Six Months Ended June 30, 2018
Six Months Ended June 30, 2017
$ Change
% Change
Energy & Transportation's total sales were $10.943 billion in the six months ended June 30, 2018, compared with $8.904 billion in the six months ended June 30, 2017. The increase was primarily due to higher sales volume across all applications. Favorable currency impacts, mostly from a stronger euro, and favorable price realization also contributed to the increase in sales. Oil and Gas - Sales increased due to higher demand in North America for gas compression, well servicing and production applications. Higher energy prices and growth in U.S. onshore oil and gas drove increased sales for reciprocating engines and related aftermarket parts. Sales in North America were also positively impacted by the timing of turbine project deliveries. Power Generation - Sales improved across all regions, with the largest increase in EAME primarily from growth in the gas power generation market, project timing and favorable currency impacts. Industrial - Sales were higher across all regions except Latin America, primarily due to improving global economic conditions supporting higher engine sales into industrial applications. Sales in EAME were also positively impacted by favorable currency. Transportation - Sales were higher for rail services driven by acquisitions and growth in Australia and increased rail traffic in North America. Marine sales were higher primarily due to the timing of deliveries, activity in the cruise sector and favorable currency. Energy & Transportation's profit was $1.886 billion for the six months ended June 30, 2018, compared with $1.239 billion for the six months ended June 30, 2017. The improvement was due to higher sales volume and favorable price realization. This was partially offset due to higher freight costs and increased spending for targeted investments. Energy & Transportation's profit as a percent of total sales was 17.2 percent for the six months ended June 30, 2018, compared with 13.9 percent for the six months ended June 30, 2017. Financial Products Segment Financial Products' segment revenues were $1.622 billion for the six months ended June 30, 2018, an increase of $86 million, or 6 percent, from the six months ended June 30, 2017. The increase was primarily due to higher average financing rates in North America and higher average earning assets in Asia/Pacific and North America, partially offset by lower intercompany lending activity in North America and lower average earning assets in Latin America.
Financial Products' segment profit was $275 million for the six months ended June 30, 2018, compared with $374 million for the six months ended June 30, 2017. The decrease was primarily due to an increase in the provision for credit losses at Cat Financial, partially offset by an increase in net yield on average earning assets and a favorable impact from higher average earning assets. Corporate Items and Eliminations Expense for corporate items and eliminations was $844 million in the six months ended June 30, 2018, a decrease of $807 million from the six months ended June 30, 2017. Corporate items and eliminations include: restructuring costs; corporate-level expenses; timing differences, as some expenses are reported in segment profit on a cash basis; currency differences for ME&T, as segment profit is reported using annual fixed exchange rates; cost of sales methodology differences, as segments use a current cost methodology; and inter-segment eliminations. The decrease in expense was mostly due to lower restructuring costs and cost of sales methodology differences. Restructuring costs were $183 million for the six months ended June 30, 2018. In the first six months of 2017, restructuring costs of $892 million were primarily related to the closure of the facility in Gosselies, Belgium.
RESTRUCTURING COSTS
Restructuring costs for the three and six months ended June 30, 2018 and 2017 were as follows:
(Millions of dollars) Three Months Ended June 30
Six Months Ended June 30
2 Represents costs related to our restructuring programs, primarily for accelerated depreciation, project management costs and equipment relocation (all of which are primarily included in Cost of goods sold.) 3 Recognized in Other income (expense).
For the six months ended June 30, 2018, the restructuring costs were primarily related to ongoing facility closures across the company.
The restructuring costs for the six months ended June 30, 2017, were primarily related to the closure of the facility in Gosselies, Belgium, within Construction Industries. The remaining costs for the first six months of 2017 were related to other restructuring actions across the company.
Restructuring costs are a reconciling item between Segment profit and Consolidated profit before taxes. The following table summarizes the 2017 and 2018 employee separation activity:
(Millions of dollars) Liability balance at December 31, 2016 ................................................................................................................................... $ 147 Increase in liability (separation charges) ............................................................................................................................. 525 Reduction in liability (payments) ........................................................................................................................................ (423) Liability balance at December 31, 2017 ................................................................................................................................... $ 249 Increase in liability (separation charges) ............................................................................................................................. 78 Reduction in liability (payments) ........................................................................................................................................ (150) Liability balance at June 30, 2018 ............................................................................................................................................ $ 177
The majority of the liability balance at June 30, 2018 is expected to be paid in 2018. About half of this balance is for employee separation payments related to closure of the Gosselies, Belgium, facility. In March 2017, Caterpillar informed Belgian authorities of the decision to proceed to a collective dismissal, which led to the closure of the Gosselies site, impacting about 2,000 employees. Production of Caterpillar products at the Gosselies site ended during the second quarter of 2017. The other operations and functions at the Gosselies site were phased out by the end of the second quarter of 2018. We estimate restructuring costs incurred under this program to be about $675 million. In the first six months of 2018, we incurred $10 million of restructuring costs, and we incurred $653 million in 2017 for a total of $663 million through June 30, 2018. We expect to recognize the remaining costs in 2018. In September 2015, we announced a large scale restructuring plan (the Plan) including a voluntary retirement enhancement program for qualifying U.S. employees, several voluntary separation programs outside of the U.S., additional involuntary programs throughout the company and manufacturing facility consolidations and closures expected to occur through 2018. The largest action among those included in the Plan was related to our European manufacturing footprint, which led to the Gosselies, Belgium, facility closure as discussed above. In the first six months of 2018, we incurred $70 million of restructuring costs related to the Plan, and we have incurred $1,737 million related to the Plan through June 30, 2018. We expect to recognize approximately $150 million of additional restructuring costs related to the Plan in 2018.
We expect 2018 restructuring costs will be about $400 million, unchanged from the previous estimate. We expect that restructuring actions will result in a benefit to operating costs, primarily Cost of goods sold and SG&A expenses of about $120 million in 2018 compared with 2017.
GLOSSARY OF TERMS
1. Adjusted Operating Profit Margin - Operating profit excluding restructuring costs as a percent of sales and revenues. 2. Adjusted Profit Per Share - Profit per share excluding restructuring costs for 2018 and 2017. For 2017, adjusted profit per share also excludes a gain on the sale of an equity investment in IronPlanet recognized in the second quarter. 3. All Other Segments - Primarily includes activities such as: business strategy, product management and development, manufacturing of filters and fluids, undercarriage, ground engaging tools, fluid transfer products, precision seals, rubber sealing and connecting components primarily for Cat(R) products; parts distribution; integrated logistics solutions, distribution services responsible for dealer development and administration including a wholly owned dealer in Japan, dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; digital investments for new customer and dealer solutions that integrate data analytics with state-of-the-art digital technologies while transforming the buying experience. 4. Consolidating Adjustments - Elimination of transactions between Machinery, Energy & Transportation and Financial Products. 5. Construction Industries - A segment primarily responsible for supporting customers using machinery in infrastructure, forestry and building construction applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes asphalt pavers, backhoe loaders, compactors, cold planers, compact track and multi-terrain loaders, mini, small, medium and large track excavators, forestry excavators, feller bunchers, harvesters, knuckleboom loaders, motor graders, pipelayers, road reclaimers, site prep tractors, skidders, skid steer loaders, telehandlers, small and medium track-type tractors, track-type loaders, utility vehicles, wheel excavators, compact, small and medium wheel loaders and related parts and work tools. 6. Currency - With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to operating profit, currency represents the net translation
impact on sales and operating costs resulting from changes in foreign currency exchange rates versus the U.S. dollar. Currency only includes the impact on sales and operating profit for the Machinery, Energy & Transportation lines of business excluding restructuring costs; currency impacts on Financial Products' revenues and operating profit are included in the Financial Products' portions of the respective analyses. With respect to other income/expense, currency represents the effects of forward and option contracts entered into by the company to reduce the risk of fluctuations in exchange rates (hedging) and the net effect of changes in foreign currency exchange rates on our foreign currency assets and liabilities for consolidated results (translation). 7. EAME - A geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States (CIS). 8. Earning Assets - Assets consisting primarily of total finance receivables net of unearned income, plus equipment on operating leases, less accumulated depreciation at Cat Financial. 9. Energy & Transportation - A segment primarily responsible for supporting customers using reciprocating engines, turbines, diesel-electric locomotives and related parts across industries serving Oil and Gas, Power Generation, Industrial and Transportation applications, including marine and rail-related businesses. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support of turbine machinery and integrated systems and solutions and turbine-related services, reciprocating engine-powered generator sets, integrated systems used in the electric power generation industry, reciprocating engines and integrated systems and solutions for the marine and oil and gas industries; reciprocating engines supplied to the industrial industry as well as Cat machinery; the remanufacturing of Cat engines and components and remanufacturing services for other companies; the business strategy, product design, product management and development, manufacturing, remanufacturing, leasing and service of diesel-electric locomotives and components and other rail-related products and services and product support of on-highway vocational trucks for North America. 10. Financial Products Segment - Provides financing alternatives to customers and dealers around the world for Caterpillar products, as well as financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The segment also provides insurance and risk management products and services that help customers and dealers manage their business risk. Insurance and risk management products offered include physical damage insurance, inventory protection plans, extended service coverage for machines and engines, and dealer property and casualty insurance. The various forms of financing, insurance and risk management products offered to customers and dealers help support the purchase and lease of our equipment. The segment also earns revenues from Machinery, Energy & Transportation, but the related costs are not allocated to operating segments. Financial Products segment profit is determined on a pretax basis and includes other income/expense items. 11. Latin America - A geographic region including Central and South American countries and Mexico. 12. Machinery, Energy & Transportation (ME&T) - Represents the aggregate total of Construction Industries, Resource Industries, Energy & Transportation, All Other Segments and related corporate items and eliminations. 13. Machinery, Energy & Transportation Other Operating (Income) Expenses - Comprised primarily of gains/losses on disposal of long-lived assets, gains/losses on divestitures and legal settlements and accruals. Restructuring costs classified as other operating expenses on the Results of Operations are presented separately on the Operating Profit Comparison. 14. Manufacturing Costs - Manufacturing costs exclude the impacts of currency and restructuring costs (see definition below) and represent the volume-adjusted change for variable costs and the absolute dollar change for period manufacturing costs. Variable manufacturing costs are defined as having a direct relationship with the volume of production. This includes material costs, direct labor and other costs that vary directly with production volume such as freight, power to operate machines and supplies that are consumed in the manufacturing process. Period manufacturing costs support production but are defined as generally not having a direct relationship to short-term changes in volume. Examples include machinery and equipment repair, depreciation on manufacturing assets, facility support, procurement, factory scheduling, manufacturing planning and operations management. 15. Pension and Other Postemployment Benefit (OPEB) - The company's defined-benefit pension and postretirement benefit plans. 16. Price Realization - The impact of net price changes excluding currency and new product introductions. Price realization includes geographic mix of sales, which is the impact of changes in the relative weighting of sales prices between geographic regions. 17. Resource Industries - A segment primarily responsible for supporting customers using machinery in mining, quarry and aggregates, waste and material handling applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large 78
track-type tractors, large mining trucks, hard rock vehicles, longwall miners, electric rope shovels, draglines, hydraulic shovels, rotary drills, large wheel loaders, off-highway trucks, articulated trucks, wheel tractor scrapers, wheel dozers, landfill compactors, soil compactors, hard rock continuous mining systems, select work tools, machinery components, electronics and control systems and related parts. In addition to equipment, Resource Industries also develops and sells technology products and services to provide customers fleet management, equipment management analytics and autonomous machine capabilities. Resource Industries also manages areas that provide services to other parts of the company, including integrated manufacturing and research and development. 18. Restructuring Costs - Primarily costs for employee separation, long-lived asset impairments and contract terminations. These costs are included in Other operating (income) expenses except for defined-benefit plan curtailment losses and special termination benefits, which are included in Other income (expense). Restructuring costs also include other exit-related costs primarily for accelerated depreciation, inventory write-downs, equipment relocation and project management costs and LIFO inventory decrement benefits from inventory liquidations at closed facilities, primarily included in Cost of goods sold. 19. Sales Volume - With respect to sales and revenues, sales volume represents the impact of changes in the quantities sold for Machinery, Energy & Transportation as well as the incremental sales impact of new product introductions, including emissions- related product updates. With respect to operating profit, sales volume represents the impact of changes in the quantities sold for Machinery, Energy & Transportation combined with product mix as well as the net operating profit impact of new product introductions, including emissions-related product updates. Product mix represents the net operating profit impact of changes in the relative weighting of Machinery, Energy & Transportation sales with respect to total sales. The impact of sales volume on segment profit includes inter-segment sales.
LIQUIDITY AND CAPITAL RESOURCES
Sources of funds
We generate significant capital resources from operating activities, which are the primary source of funding for our ME&T operations. Funding for these businesses is also available from commercial paper and long-term debt issuances. Financial Products' operations are funded primarily from commercial paper, term debt issuances and collections from its existing portfolio. During the first half of 2018, we experienced favorable liquidity conditions globally in both our ME&T and Financial Products' operations. On a consolidated basis, we ended the first half of 2018 with $8.65 billion of cash, an increase of $393 million from year-end 2017. We intend to maintain a strong cash and liquidity position. Our cash balances are held in numerous locations throughout the world with approximately $7.7 billion held by our non-U.S. subsidiaries. As a result of U.S. tax reform legislation enacted in December 2017, we expect to be able to use cash held by non- U.S. subsidiaries in the United States in the future with minimal U.S. tax consequences. Consolidated operating cash flow for the first half of 2018 was $3.08 billion, down from $3.92 billion for the same period last year. The decrease was primarily due to higher working capital requirements to support increasing production volumes and higher short-term incentive compensation payments, partially offset by higher profit, in the first half of 2018, compared with the first half of 2017. See further discussion of operating cash flow under ME&T and Financial Products. Total debt as of June 30, 2018 was $36.17 billion, an increase of $1.29 billion from year-end 2017. Debt related to Financial Products increased $1.20 billion, reflecting increasing portfolio balances. Debt related to ME&T increased $90 million in the first half of 2018. In the first half of 2018, we repurchased $1.25 billion of Caterpillar common stock. We have three global credit facilities with a syndicate of banks totaling $10.50 billion (Credit Facility) available in the aggregate to both Caterpillar and Cat Financial for general liquidity purposes. Based on management's allocation decision, which can be revised from time to time, the portion of the Credit Facility available to ME&T as of June 30, 2018 was $2.75 billion. Information on our Credit Facility is as follows: * The 364-day facility of $3.15 billion (of which $0.82 billion is available to ME&T) expires in September 2018. * The three-year facility of $2.73 billion (of which $0.72 billion is available to ME&T) expires in September 2020. * The five-year facility of $4.62 billion (of which $1.21 billion is available to ME&T) expires in September 2022. At June 30, 2018, Caterpillar's consolidated net worth was $14.91 billion, which was above the $9.00 billion required under the Credit Facility. The consolidated net worth is defined as the consolidated shareholders' equity including preferred stock but excluding the pension and other postretirement benefits balance within Accumulated other comprehensive income (loss). At June 30, 2018, Cat Financial's covenant interest coverage ratio was 1.68 to 1. This is above the 1.15 to 1 minimum ratio calculated as (1) profit excluding income taxes, interest expense and net gain/(loss) from interest rate derivatives to (2) interest expense
79
calculated at the end of each calendar quarter for the rolling four quarter period then most recently ended, required by the Credit Facility. In addition, at June 30, 2018, Cat Financial's covenant leverage ratio was 7.62 to 1. This is below the maximum ratio of debt to net worth of 10 to 1, calculated (1) on a monthly basis as the average of the leverage ratios determined on the last day of each of the six preceding calendar months and (2) at each December 31, required by the Credit Facility. In the event Caterpillar or Cat Financial does not meet one or more of their respective financial covenants under the Credit Facility in the future (and are unable to obtain a consent or waiver), the syndicate of banks may terminate the commitments allocated to the party that does not meet its covenants. Additionally, in such event, certain of Cat Financial's other lenders under other loan agreements where similar financial covenants or cross default provisions are applicable, may, at their election, choose to pursue remedies under those loan agreements, including accelerating the repayment of outstanding borrowings. At June 30, 2018, there were no borrowings under the Credit Facility. Our total credit commitments and available credit as of June 30, 2018 were:
(Millions of dollars)
Machinery, Energy &
Financial
The other external consolidated credit lines with banks as of June 30, 2018 totaled $4.58 billion. These committed and uncommitted credit lines, which may be eligible for renewal at various future dates or have no specified expiration date, are used primarily by our subsidiaries for local funding requirements. Caterpillar or Cat Financial may guarantee subsidiary borrowings under these lines. We receive debt ratings from the major credit rating agencies. In December 2016, Moody's Investors Service downgraded our long-term ratings to A3 from A2, and short-term ratings to Prime-2 from Prime-1. The Moody's downgrade did not have a material impact on our borrowing costs or our overall financial health. A further downgrade of our credit ratings by Moody's or one of the other major credit rating agencies would result in increased borrowing costs and could make access to certain credit markets more difficult. However, our long-term ratings with Fitch and S&P continue to be "mid-A". In the event economic conditions deteriorate such that access to debt markets becomes unavailable, ME&T's operations would rely on cash flow from operations, use of existing cash balances, borrowings from Cat Financial and access to our Credit Facility. Our Financial Products' operations would rely on cash flow from its existing portfolio, existing cash balances, access to our Credit Facility and other credit line facilities of Cat Financial and potential borrowings from Caterpillar. In addition, we maintain a support agreement with Cat Financial, which requires Caterpillar to remain the sole owner of Cat Financial and may, under certain circumstances, require Caterpillar to make payments to Cat Financial should Cat Financial fail to maintain certain financial ratios.
Machinery, Energy & Transportation Net cash provided by operating activities was $3.03 billion in the first half of 2018, compared with $3.55 billion for the same period in 2017. The decrease was primarily due to higher working capital requirements to support increasing production volumes and higher short-term incentive compensation payments, partially offset by higher profit in the first half of 2018, compared with the first half of 2017. Within working capital, changes to accounts payable, inventories and customer advances unfavorably impacted cash flow. Net cash used for investing activities in the first half of 2018 was $664 million, compared with net cash used of $172 million in the first half of 2017. The change was primarily due to the acquisition of ECM S.p.A. and Downer Freight Rail in the first half of 2018, as well as increased cash used for capital expenditures during the first half of 2018 compared to the first half of 2017. Net cash used for financing activities during the first half of 2018 was $1.90 billion, compared with net cash provided of $327 million in the same period of 2017. In the first half of 2018, we repurchased $1.25 billion of Caterpillar common stock. The first half of 2017 included $1.50 billion in borrowings from Financial Products, proceeds of $360 million related to a sale-leaseback transaction in Japan and a long-term debt maturity of $500 million.
While our short-term priorities for the use of cash may vary from time to time as business needs and conditions dictate, our long- term cash deployment strategy is focused on the following priorities. Our top priority is to maintain a strong financial position in support of a Mid-A rating. Next, we intend to fund operational requirements and commitments. Then, we intend to fund priorities that profitably grow the company and return capital to shareholders through dividend growth and share repurchases. Additional information on cash deployment is as follows:
Strong financial position - Our top priority is to maintain a strong financial position in support of a Mid-A rating. We historically tracked a period ending debt-to-capital ratio and a target range as a key measure of ME&T's financial strength. We have transitioned to tracking a diverse group of financial metrics that focus on liquidity, leverage, cash flow and margins to better align with the various methodologies used by the major credit rating agencies and our cash deployment actions. Operational excellence and commitments - Capital expenditures were $554 million during the first half of 2018, compared to $379 million for the same period in 2017. We expect ME&T's capital expenditures in 2018 to be between $1.0 and $1.5 billion, up from $916 million in 2017. We made $227 million of contributions to our pension and other postretirement benefit plans during the first half of 2018. We currently anticipate full-year 2018 contributions of approximately $365 million. We made $198 million of contributions to our pension and other postretirement benefit plans during the first half of 2017. Fund strategic growth initiatives and return capital to shareholders - We intend to fund initiatives that drive long- term profitable growth that will be focused in the areas of expanded offerings and services, including acquisitions. In the first half of 2018, we acquired ECM S.p.A. and Downer Freight Rail. Each quarter, our Board of Directors reviews the company's dividend for the applicable quarter. The Board evaluates the financial condition of the company and considers the economic outlook, corporate cash flow, the company's liquidity needs, and the health and stability of global credit markets to determine whether to maintain or change the quarterly dividend. Dividends totaled $933 million in the first half of 2018, representing 78 cents per share. In June 2018, the Board approved a 10 percent increase in the quarterly dividend rate to 86 cents per share. In January 2014, the Board of Directors approved an authorization to repurchase up to $10 billion of Caterpillar common stock (the 2014 Authorization), which will expire on December 31, 2018. As of January 1, 2018, $5.47 billion remained available under the 2014 Authorization, and in the first half of 2018, we repurchased $1.25 billion of Caterpillar common stock, leaving $4.22 billion in the 2014 Authorization as of June 30, 2018. In July 2018, the Board of Directors approved a new share repurchase authorization of up to $10 billion of Caterpillar common stock effective January 1, 2019, with no expiration. We currently expect to repurchase common stock during the second half of 2018 in a similar range as the first half. Our share repurchase plans are subject to the company's cash deployment priorities and are evaluated on an ongoing basis; however, we plan to consistently repurchase common stock with the intent to, at a minimum, offset the impact of dilution over time. The timing and amount of future repurchases may vary depending on market conditions and investing priorities. Caterpillar's basic shares outstanding as of June 30, 2018 were approximately 594 million.
Financial Products Financial Products operating cash flow was $619 million in the first half of 2018, compared with $681 million for the same period a year ago. Net cash used for investing activities was $1.86 billion for the first half of 2018, compared with $1.75 billion for the same period in 2017. The change was primarily due to higher portfolio funding requirements, partially offset by the impact of lending with ME&T. Net cash provided by financing activities was $1.22 billion for the first half of 2018, compared with $435 million for the same period in 2017. The change was primarily due to the impact of net borrowings.
CRITICAL ACCOUNTING POLICIES
For a discussion of the company's critical accounting policies, see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Annual Report on Form 10-K. There have been no significant changes to our critical accounting policies since our 2017 Annual Report on Form 10-K.
OTHER MATTERS
Environmental and Legal Matters
The Company is regulated by federal, state and international environmental laws governing its use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and other operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. We have made, and will continue to make, significant research and development and capital expenditures to comply with these emissions standards.
We are engaged in remedial activities at a number of locations, often with other companies, pursuant to federal and state laws. When it is probable we will pay remedial costs at a site, and those costs can be reasonably estimated, the investigation, remediation, and operating and maintenance costs are accrued against our earnings. Costs are accrued based on consideration of currently available data and information with respect to each individual site, including available technologies, current applicable laws and regulations, and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. Where multiple potentially responsible parties are involved, we consider our proportionate share of the probable costs. In formulating the estimate of probable costs, we do not consider amounts expected to be recovered from insurance companies or others. We reassess these accrued amounts on a quarterly basis. The amount recorded for environmental remediation is not material and is included in Accrued expenses. We believe there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all the sites in the aggregate, will be required.
On January 7, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company has received additional subpoenas relating to this investigation requesting additional documents and information relating to, among other things, the purchase and resale of replacement parts by Caterpillar Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL and related structures. On March 2-3, 2017, agents with the Department of Commerce, the Federal Deposit Insurance Corporation and the Internal Revenue Service executed search and seizure warrants at three facilities of the Company in the Peoria, Illinois area, including its former corporate headquarters. The warrants identify, and agents seized, documents and information related to, among other things, the export of products from the United States, the movement of products between the United States and Switzerland, the relationship between Caterpillar Inc. and Caterpillar SARL, and sales outside the United States. It is the Company's understanding that the warrants, which concern both tax and export activities, are related to the ongoing grand jury investigation. The Company is continuing to cooperate with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.
On March 20, 2014, Brazil's Administrative Council for Economic Defense (CADE) published a Technical Opinion which named 18 companies and over 100 individuals as defendants, including two subsidiaries of Caterpillar Inc., MGE - Equipamentos e Serviços Ferroviários Ltda. (MGE) and Caterpillar Brasil Ltda. The publication of the Technical Opinion opened CADE's official administrative investigation into allegations that the defendants participated in anticompetitive bid activity for the construction and maintenance of metro and train networks in Brazil. While companies cannot be held criminally liable for anticompetitive conduct in Brazil, criminal charges have been brought against two current employees of MGE and one former employee of MGE involving the same conduct alleged by CADE. The Company has responded to all requests for information from the authorities. The Company is unable to predict the outcome or reasonably estimate the potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.
In addition, we are involved in other unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability (including claimed asbestos and welding fumes exposure), contracts, employment issues, environmental matters, intellectual property rights, taxes (other than income taxes) and securities laws. The aggregate range of reasonably possible losses in excess of accrued liabilities, if any, associated with these unresolved legal actions is not material. In some cases, we cannot reasonably estimate a range of loss because there is insufficient information regarding the matter. However, we believe there is no more than a remote chance that any liability arising from these matters would be material. Although it is not possible to predict with certainty the outcome of these unresolved legal actions, we believe that these actions will not individually or in the aggregate have a material adverse effect on our consolidated results of operations, financial position or liquidity.
Order Backlog
At the end of the second quarter of 2018, the dollar amount of backlog believed to be firm was approximately $17.7 billion, about flat with the first quarter of 2018. Energy & Transportation's order backlog increased, while Construction Industries' order backlog decreased. It is not uncommon for the construction order backlog to decline during the second quarter selling season. Resource Industries' order backlog was about flat as increased order rates were about offset by increased production and sales. Compared with the second quarter of 2017, the order backlog increased about $2.9 billion with increases across the three primary segments. Of the total backlog at June 30, 2018, approximately $3.1 billion was not expected to be filled in the following twelve months.
NON-GAAP FINANCIAL MEASURES
The following definitions are provided for the non-GAAP financial measures used in this report. These non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP and therefore are unlikely to be comparable to the calculation of similar measures for other companies. Management does not intend for these items to be considered in isolation or as a substitute for the related GAAP measures.
We incurred restructuring costs in 2017 and in the first half of 2018. We believe it is important to separately quantify the impact of restructuring costs on operating profit as a percent of sales and revenues and profit per share in order for our results to be meaningful to readers as these costs are incurred in the current year to generate longer-term benefits. In addition, we believe it is important to separately quantify the impact of a gain on sale of an equity investment during the second quarter of 2017 on profit per share. We do not consider these items indicative of earnings from ongoing business activities and believe the non-GAAP measures provide investors with useful perspective on underlying business results and trends and aids with assessing our period- over-period results.
Reconciliations of adjusted operating profit margin to the most directly comparable GAAP measure, operating profit as a percent of sales and revenues are as follows:
Three Months Ended June 30 Six Months Ended June 30 2018 2017 2018 2017
Reconciliations of adjusted profit per share to the most directly comparable GAAP measure, profit per share - diluted are as follows:
Three Months Ended June 30 Six Months Ended June 30 2018 2017 2018 2017
1 At estimated annual tax rate based on full-year outlook for per share restructuring costs at statutory tax rates. Three and six months ended June 30, 2018 at estimated annual tax rate of 24 percent. Three and six months ended June 30, 2017 at estimated annual rate of 22 percent. Six months ended June 30, 2017 also includes $15 million increase to prior year taxes related to non-U.S. restructuring costs recognized in the first quarter of 2017. Second-quarter 2017 includes an unfavorable interim adjustment of $0.01 per share and six months ended June 30, 2017 includes a favorable interim adjustment of $0.05 per share resulting from the difference in the estimated annual tax rate for consolidated reporting of 32 percent and the estimated annual tax rate for profit per share excluding restructuring costs, gain on sale of equity investment and discrete items of 29 percent. 2 At U.S. statutory tax rate of 35 percent.
Supplemental Consolidating Data
We are providing supplemental consolidating data for the purpose of additional analysis. The data has been grouped as follows:
Consolidated - Caterpillar Inc. and its subsidiaries.
Machinery, Energy & Transportation - Caterpillar defines Machinery, Energy & Transportation as it is presented in the supplemental data as Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. Machinery, Energy & Transportation information relates to the design, manufacturing and marketing of our products. Financial Products' information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment. The nature of these businesses is different, especially with regard to the financial position and cash flow items. Caterpillar management utilizes this presentation internally to highlight these differences. We also believe this presentation will assist readers in understanding our business.
Financial Products - Our finance and insurance subsidiaries, primarily Cat Financial and Insurance Services.
Consolidating Adjustments - Eliminations of transactions between Machinery, Energy & Transportation and Financial Products.
Pages 86 to 93 reconcile Machinery, Energy & Transportation with Financial Products on the equity basis to Caterpillar Inc. consolidated financial information.
Caterpillar Inc. Supplemental Data for Results of Operations For the Three Months Ended June 30, 2018 (Unaudited) (Millions of dollars) Supplemental Consolidating Data Machinery,
Sales and revenues:
Energy & Transportation 1 Financial Products Consolidating Adjustments
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products' revenues earned from Machinery, Energy & Transportation. 3 Elimination of net expenses recorded by Machinery, Energy & Transportation paid to Financial Products. 4 Elimination of interest expense recorded between Financial Products and Machinery, Energy & Transportation. 5 Elimination of discount recorded by Machinery, Energy & Transportation on receivables sold to Financial Products and of interest earned between Machinery, Energy & Transportation and Financial Products. 6 Elimination of Financial Products' profit due to equity method of accounting.
Caterpillar Inc. Supplemental Data for Results of Operations For the Six Months Ended June 30, 2018 (Unaudited) (Millions of dollars)
Supplemental Consolidating Data Machinery,
Sales and revenues:
Energy & Transportation 1 Financial Products Consolidating Adjustments
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products' revenues earned from Machinery, Energy & Transportation. 3 Elimination of net expenses recorded by Machinery, Energy & Transportation paid to Financial Products. 4 Elimination of interest expense recorded between Financial Products and Machinery, Energy & Transportation. 5 Elimination of discount recorded by Machinery, Energy & Transportation on receivables sold to Financial Products and of interest earned between Machinery, Energy & Transportation and Financial Products. 6 Elimination of Financial Products' profit due to equity method of accounting.
Caterpillar Inc. Supplemental Data for Results of Operations For the Three Months Ended June 30, 2017 (Unaudited) (Millions of dollars) Supplemental Consolidating Data Machinery,
Sales and revenues:
Energy & Transportation 1 Financial Products Consolidating Adjustments
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products' revenues earned from Machinery, Energy & Transportation. 3 Elimination of net expenses recorded by Machinery, Energy & Transportation paid to Financial Products. 4 Elimination of interest expense recorded between Financial Products and Machinery, Energy & Transportation. 5 Elimination of discount recorded by Machinery, Energy & Transportation on receivables sold to Financial Products and of interest earned between Machinery, Energy & Transportation and Financial Products. 6 Elimination of Financial Products' profit due to equity method of accounting.
Caterpillar Inc. Supplemental Data for Results of Operations For the Six Months Ended June 30, 2017 (Unaudited) (Millions of dollars)
Supplemental Consolidating Data Machinery,
Sales and revenues:
Energy & Transportation 1 Financial Products Consolidating Adjustments
Operating costs:
Operating profit .............................................................................. 1,564 1,350 372 (158)
Interest expense excluding Financial Products.......................... 244 290 - (46) 4 Other income (expense)............................................................. 128 16 - 112 5
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products' revenues earned from Machinery, Energy & Transportation. 3 Elimination of net expenses recorded by Machinery, Energy & Transportation paid to Financial Products. 4 Elimination of interest expense recorded between Financial Products and Machinery, Energy & Transportation. 5 Elimination of discount recorded by Machinery, Energy & Transportation on receivables sold to Financial Products and of interest earned between Machinery, Energy & Transportation and Financial Products. 6 Elimination of Financial Products' profit due to equity method of accounting. 7 Profit attributable to common shareholders.
Caterpillar Inc. Supplemental Data for Financial Position At June 30, 2018 (Unaudited) (Millions of dollars) Supplemental Consolidating Data Machinery, Consolidated Energy & Transportation 1 Financial Products Consolidating Adjustments
2,3 3 4
2,3 3 5 6
7 8
6,9
7
6 Other liabilities................................................................................................. 3,954 3,302 1,238 (586) Total liabilities ................................................................................................... 64,045 34,410 31,845 (2,210) Commitments and contingencies Shareholders' equity 5
5 5 5
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of receivables between Machinery, Energy & Transportation and Financial Products. 3 Reclassification of Machinery, Energy & Transportation's trade receivables purchased by Financial Products and Financial Products' wholesale inventory receivables. 4 Elimination of Machinery, Energy & Transportation's insurance premiums that are prepaid to Financial Products. 5 Elimination of Financial Products' equity which is accounted for by Machinery, Energy & Transportation on the equity basis. 6 Reclassification reflecting required netting of deferred tax assets / liabilities by taxing jurisdiction. 7 Elimination of debt between Machinery, Energy & Transportation and Financial Products. 8 Elimination of payables between Machinery, Energy & Transportation and Financial Products. 9 Elimination of prepaid insurance in Financial Products' other liabilities.
Caterpillar Inc. Supplemental Data for Financial Position At December 31, 2017 (Unaudited) (Millions of dollars) Supplemental Consolidating Data Machinery, Consolidated Energy & Transportation 1 Financial Products Consolidating Adjustments
2,3 3 4
2,3 3 5 6
7 8
6,9
7
6 Other liabilities ................................................................................................. 4,053 3,458 1,167 (572) Total liabilities.................................................................................................... 63,196 34,721 30,815 (2,340) Commitments and contingencies Shareholders' equity 5
5 5 5
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of receivables between Machinery, Energy & Transportation and Financial Products. 3 Reclassification of Machinery, Energy & Transportation's trade receivables purchased by Financial Products and Financial Products' wholesale inventory receivables. 4 Elimination of Machinery, Energy & Transportation's insurance premiums that are prepaid to Financial Products. 5 Elimination of Financial Products' equity which is accounted for by Machinery, Energy & Transportation on the equity basis. 6 Reclassification reflecting required netting of deferred tax assets / liabilities by taxing jurisdiction. 7 Elimination of debt between Machinery, Energy & Transportation and Financial Products. 8 Elimination of payables between Machinery, Energy & Transportation and Financial Products. 9 Elimination of prepaid insurance in Financial Products' other liabilities.
Caterpillar Inc. Supplemental Data for Cash Flow For the Six Months Ended June 30, 2018 (Unaudited) (Millions of dollars) Supplemental Consolidating Data Machinery,
Cash flow from operating activities:
Energy & Transportation 1 Financial Products Consolidating Adjustments
2
3 4
4, 5 4 4
Net cash provided by (used for) operating activities........................................... 3,083 3,032 619 (568) Cash flow from investing activities:
Other - net ........................................................................................................ 21 24 (4) 1 Net cash provided by (used for) investing activities ........................................... (2,068) (664) (1,861) 457 Cash flow from financing activities:
Other - net ........................................................................................................ (4) (4) - - Net cash provided by (used for) financing activities........................................... (573) (1,900) 1,216 111 Effect of exchange rate changes on cash............................................................. (68) (61) (7) - Increase (decrease) in cash and short-term investments and restricted cash ..................................................................................................................... 374 407 (33) - Cash and short-term investments and restricted cash at beginning of period ..... 8,320 7,416 904 - Cash and short-term investments and restricted cash at end of period ............... $ 8,694 $ 7,823 $ 871 $ -
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products' profit after tax due to equity method of accounting. 3 Elimination of non-cash adjustment for the undistributed earnings from Financial Products. 4 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting. 5 Reclassification of Financial Products' cash flow activity from investing to operating for receivables that arose from the sale of inventory. 6 Elimination of net proceeds and payments to/from Machinery, Energy & Transportation and Financial Products. 7 Elimination of proceeds received from Financial Products related to Machinery, Energy & Transportation's sale of businesses and investments. 8 Elimination of change in investment and common stock related to Financial Products.
4 4
4 4 5,7 5 5
6
7
8
8
6
Caterpillar Inc. Supplemental Data for Cash Flow For the Six Months Ended June 30, 2017 (Unaudited) (Millions of dollars) Supplemental Consolidating Data Machinery,
Cash flow from operating activities:
Energy & Transportation 1 Financial Products Consolidating Adjustments
2
Other - net......................................................................................................... (6) (6) - - Net cash provided by (used for) financing activities ........................................... (694) 327 435 (1,456) Effect of exchange rate changes on cash ............................................................. 13 (6) 19 - Increase (decrease) in cash and short-term investments and restricted cash ...................................................................................................................... 3,084 3,702 (618) - Cash and short-term investments and restricted cash at beginning of period...... 7,199 5,259 1,940 - Cash and short-term investments and restricted cash at end of period ................ $ 10,283 $ 8,961 $ 1,322 $ -
1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. 2 Elimination of Financial Products' profit after tax due to equity method of accounting. 3 Elimination of non-cash adjustment for the undistributed earnings from Financial Products. 4 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting. 5 Reclassification of Financial Products' cash flow activity from investing to operating for receivables that arose from the sale of inventory. 6 Elimination of net proceeds and payments to/from Machinery, Energy & Transportation and Financial Products.
3 4
4, 5
4
4 4
4 4 5 5 5
6
6
Forward-looking Statements
Certain statements in this Form 10-Q relate to future events and expectations and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believe," "estimate," "will be," "will," "would," "expect," "anticipate," "plan," "project," "intend," "could," "should" or other similar words or expressions often identify forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, without limitation, statements regarding our outlook, projections, forecasts or trend descriptions. These statements do not guarantee future performance and speak only as of the date they are made, and we do not undertake to update our forward- looking statements.
Caterpillar's actual results may differ materially from those described or implied in our forward-looking statements based on a number of factors, including, but not limited to: (i) global and regional economic conditions and economic conditions in the industries we serve; (ii) commodity price changes, material price increases, fluctuations in demand for our products or significant shortages of material; (iii) government monetary or fiscal policies; (iv) political and economic risks, commercial instability and events beyond our control in the countries in which we operate; (v) international trade policies and their impact on demand for our products and our competitive position, including the imposition of new tariffs or changes in existing tariff rates; (vi) our ability to develop, produce and market quality products that meet our customers' needs; (vii) the impact of the highly competitive environment in which we operate on our sales and pricing; (viii) information technology security threats and computer crime; (ix) additional restructuring costs or a failure to realize anticipated savings or benefits from past or future cost reduction actions; (x) failure to realize all of the anticipated benefits from initiatives to increase our productivity, efficiency and cash flow and to reduce costs; (xi) inventory management decisions and sourcing practices of our dealers and our OEM customers; (xii) a failure to realize, or a delay in realizing, all of the anticipated benefits of our acquisitions, joint ventures or divestitures; (xiii) union disputes or other employee relations issues; (xiv) adverse effects of unexpected events including natural disasters; (xv) disruptions or volatility in global financial markets limiting our sources of liquidity or the liquidity of our customers, dealers and suppliers; (xvi) failure to maintain our credit ratings and potential resulting increases to our cost of borrowing and adverse effects on our cost of funds, liquidity, competitive position and access to capital markets; (xvii) our Financial Products segment's risks associated with the financial services industry; (xviii) changes in interest rates or market liquidity conditions; (xix) an increase in delinquencies, repossessions or net losses of Cat Financial's customers; (xx) currency fluctuations; (xxi) our or Cat Financial's compliance with financial and other restrictive covenants in debt agreements; (xxii) increased pension plan funding obligations; (xxiii) alleged or actual violations of trade or anti-corruption laws and regulations; (xxiv) additional tax expense or exposure including the impact of U.S. tax reform; (xxv) significant legal proceedings, claims, lawsuits or government investigations; (xxvi) new regulations or changes in financial services regulations; (xxvii) compliance with environmental laws and regulations; and (xxviii) other factors described in more detail in Caterpillar's Forms 10-Q, 10-K and other filings with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is incorporated by reference from Note 5 - "Derivative financial instruments and risk management" included in Part I, Item 1 and Management's Discussion and Analysis included in Part I, Item 2 of this Form 10-Q.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
An evaluation was performed under the supervision and with the participation of the company's management, including the Chief Executive Officer (CEO) and Interim Chief Financial Officer (CFO), of the effectiveness of the design and operation of the company's disclosure controls and procedures, as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report. Based on that evaluation, the CEO and Interim CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
Changes in internal control over financial reporting
During the second quarter of 2018, there has been no change in the company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is incorporated by reference from Note 13 - "Environmental and legal matters" included in Part I, Item 1 of this Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased2
Average Price Paid per Share2
Total Number of Shares Purchased Under the Program Approximate Dollar Value of Shares that may yet be Purchased under the Program (in billions)1
1 In January 2014, the Board of Directors authorized the repurchase of up to $10.0 billion of Caterpillar common stock, which will expire on December 31, 2018 (the 2014 Authorization). As of June 30, 2018, approximately $4.2 billion remained available under the 2014 Authorization. 2 In second quarter 2018, we purchased $750 million of common stock. In May 2018, we entered into an accelerated stock repurchase agreement (ASR) with a third-party institution to repurchase $500 million of our common stock. We received 3.1 million shares in May 2018 and an additional 0.2 million shares in June 2018 upon final settlement of the ASR. Under this ASR, we repurchased 3.3 million shares at an average price per share of $152.33. In May 2018, we repurchased 1.6 million shares for $250 million in open market transactions at an average price per share of $156.82.
Share repurchases in the table above are reported based on the trade dates.
Non-U.S. Employee Stock Purchase Plans
As of June 30, 2018, we had 23 employee stock purchase plans (the "EIP Plans") that are administered outside the United States for our non-U.S. employees, which had approximately 12,000 active participants in the aggregate. During the second quarter of 2018, approximately 89,000 shares of Caterpillar common stock were purchased by the EIP Plans pursuant to the terms of such plans.
Item 6. Exhibits 10.1 Retention and Retirement Agreement dated April 6, 2018, by and between Caterpillar Inc. and Robert Brian Charter (incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 10, 2018). 10.2 Mercer Super Trust CatSuper Plan Special Arrangement Agreement dated April 4, 2018, by and between Caterpillar of Australia PTY LTD and Robert Brian Charter. 10.3 Letter Agreement dated May 1, 2018 by and between Caterpillar Inc. and Andrew Bonfield. 10.4 Caterpillar Inc. Directors' Deferred Compensation Plan, as amended and restated effective July 1, 2018.
11 Computations of Earnings per Share (included in Note 11 of this Form 10-Q filed for the quarter ended June 30, 2018).
31.1 Certification of D. James Umpleby, III, Chief Executive Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Joseph E. Creed, Interim Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of D. James Umpleby, III, Chief Executive Officer of Caterpillar Inc. and Joseph E. Creed, Interim Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101. CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EXHIBIT 10.2
Mercer Super Trust CatSuper Plan Special Arrangement Agreement Between:
CATERPILLAR OF AUSTRALIA PTY LTD (ABN 97 004 332 469) ("Participant")
ROBERT BRIAN CHARTER ("Member")
King & Wood Mallesons Level 61 Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Australia T +61 2 9296 2000 F +61 2 9296 3999 DX 113 Sydney www.kwm.com Details
Recitals A The Participant is the participant of a plan known as CatSuper (client code MT315) ("Plan") in the Corporate Superannuation Division of the Mercer Super Trust ("MST"). B The Member is a Member of the Plan. C Under rule 13.5 of the Designated Rules of the Corporate Superannuation Division of the MST, the Participant and the Member may vary, by agreement, any or all of:
(a) the benefits otherwise payable as a result of the Member's membership of the Plan;
(b) the contributions otherwise payable as a result of the Member's membership of the Plan; and
(c) other terms and conditions of membership.
ã King & Wood Mallesons Special Arrangement Agreement D The Participant and the Member entered into a previous "Special Arrangement Agreement" dated 26 June 2007 ("Previous SAA"), whereby the parties agreed to vary the membership of the Member on the terms specified in the Previous SAA. E The Participant and the Member have agreed to further vary the terms and conditions of the Member's membership of the Plan in the manner set out in this Agreement. F In particular, the Previous SAA made provision for certain benefit enhancements based on the recognition of an additional period of Service on the Member qualifying for a benefit pursuant to Rule 4.4.1(c) on the basis of the Member with the approval of the Participant having ceased Employment on or after the Member's 55th birthday (described in that Rule as being within 10 years of the Member's Normal Retirement Date) and in certain other circumstances, namely on the Member's death or on the Member ceasing Employment due to Total and Permanent Disablement or on the Member retiring no more than 5 years before the Member's Normal Retirement Date or on or after his Normal Retirement Date. G The Member's 55th birthday is on 8 April 2018. H The Member and the Participant have agreed that the benefit enhancements provided for in the Previous SAA will only be provided if the Member qualifies for a benefit on the basis of the Member having retired from Employment on or after the "Earliest Retirement Date" (being the Member's 55th birthday) and electing to retain his benefit entitlement in the Plan in which case, the enhanced benefit will be payable on the earlier of the Member's death and a specified "Nominated Date".
ã King & Wood Mallesons Special Arrangement Agreement
1 Operative Provisions: 1.1 Unless otherwise defined or the contrary intention appears, an expression defined in the Rules of the Plan has the same meaning in this Agreement and the Annexure to this Agreement. 1.2 The Participant and the Member agree that the benefits payable as a result of the Member's membership of the Plan are varied in the manner set out in the Previous SAA and in the Annexure to this Agreement. 1.3 The parties agree this Agreement is confidential and neither party will divulge information of the terms of the Agreement, other than as required by the force of law. 1.4 This Agreement may be amended only by another document executed by the parties. 1.5 This Agreement is governed by the law in force in New South Wales, Australia and the parties submit to the jurisdiction of the courts of New South Wales, Australia. 1.6 This Agreement may be executed in any number of counterparts. All counterparts taken together will be deemed to constitute one document. 1.7 This Agreement will take effect on and from the date it is executed by the parties.
EXECUTED as an agreement
DATED: 4 April 2018
Signed for and on behalf of Caterpillar ) of Australia Pty Ltd: ) ) ) /s/ Walter J. Bradbury /s/ Edrees Faizi Signature of director Signature of director
DIRECTOR DIRECTOR Office held Office held
WALTER J. BRADBURY EDREES FAIZI Name of director (block letters) Name of director
Signed by Robert Brian Charter ) ) /s/ Robert Brian Charter ) Signature )
Mercer Superannuation (Australia) Limited (ABN 79 004717 533), as trustee of the MST acknowledges receipt of the above agreement. Executed by Mercer Superannuation ) (Australia) Limited ABN 79 004 717 ) 533 by its Attorney, who has not ) received notice of the revocation of the ) Power of Attorney dated 29 November 2016 in the presence of:
/s/ Rita Harris Attorney Signature
RITA HARRIS Attorney Name
/s/ Sonia Campbell-Hirst Signature of Witness
SONIA CAMPBELL-HIRST Name of Witness Annexure - Benefits for Robert Brian Charter
1 Application 1.1 The provisions of this Annexure apply in respect of the Member.
2 Interpretation 2.1 In this Annexure the following words and expressions shall unless the context requires otherwise have the following meanings: "Earliest Retirement Date" means 8 April 2018. "Member" means Robert Brian Charter. "Nominated Date" means 31 July 2018. 2.2 A reference in clause 3 of this Annexure to a clause reference to that clause in the Annexure to the Participation Agreement.
3 Variation to benefits 3.1 Clause 4.4.1 shall not apply in respect of the Member and the following clause 4.4.2 shall apply instead, and in relation to the Member, all references in the Participation Agreement to clause 4.4.1 shall be read as references to clause 4.4.2: "4.4.2 (a) Subject to paragraphs (b) and (c) of this clause, if a Member ceases Employment on or after the Earliest Retirement Date, the Member shall be entitled to a lump sum benefit payable from the Plan equal to the greater of the following amounts, calculated when the benefit is to be paid or rolled over to another fund:
(A) the Member's Accrued Retirement Benefit; and
(B) two times the Member's Member Contribution Account Balance.
A Member who is entitled to a benefit pursuant to this clause 4.4.2 may call for payment of the benefit at any time before the Nominated Date, in which case, the Trustee must pay the benefit to the Member if Superannuation Law permits or may roll over the benefit to another superannuation fund in accordance with Superannuation Law and the Member's instructions. If the Member does not call for payment of the benefit before the Nominated Date, the Trustee must pay the benefit to the Member as soon as reasonably practical after the Nominated Date.
For the avoidance of doubt, for the purpose of calculating the benefit payable pursuant to this clause, the Member's Accrued Retirement Benefit is not adjusted to take account of any interest or earnings with respect to the period between the date the Member ceases Employment and the date on which the benefit is to be paid. (b) For the purpose of determining the Member's Accrued Retirement Benefit, if the Member does not call for payment of the benefit before the Nominated Date, with effect from the Nominated Date, "Service" shall be increased by including the period commencing on 7 April 1989 and ending on 22 March 1998.
(c) If a Member who is entitled to a benefit pursuant to this clause 4.4.2 dies before the Nominated Date, for the purpose of determining the Member's Accrued Retirement Benefit, "Service" shall be increased by including the period commencing on 7 April 1989 and ending on 22 March 1998 and the benefit shall be paid as soon as reasonably practical after the Trustee is notified of the Member's death to such persons and in such manner as if it were a benefit payable pursuant to clause 4.7.
(d) For the avoidance of doubt:
(i) a Member who ceases Employment on or after the Earliest Retirement Date remains a Member of the Plan until a benefit becomes payable pursuant to this clause 4.4.2 but apart from contributions required in the ordinary course to fund defined benefits payable from the Plan, including benefits payable pursuant to this clause 4.4.2, no contributions may be made to the Plan by or for the benefit of the Member after the Member ceases Employment; and
(ii) the benefit increase provided for in paragraph (b) of this clause does not accrue until the Nominated Date and the benefit increase provided for in paragraph (c) of this clause does not accrue until the Member's death." EXHIBIT 10.3
May 1, 2018
Andrew Bonfield Dalkeith House Shrubbs Hill Lane Sunningdale, SL5 OLD England
Dear Andrew:
It is my pleasure to confirm our offer for the position of Chief Financial Officer (CFO) at Caterpillar. Your position will report to the Chief Executive Officer (CEO). This offer is contingent upon and assumes you would commence employment as soon as possible on or before August 1, 2018.
This letter summarizes the significant components of your Total Rewards that you would receive as an employee and officer. The various components discussed below are each governed by the terms of their respective plans, and are regularly reviewed and subject to change at any time. Your employment with Caterpillar is at all time an at-will relationship, meaning that either you or the Company may terminate your employment at any time and for any reason, with or without cause. Neither this letter, nor any attachments, are intended to constitute an employment contract guaranteeing employment for a specified time. This offer is further contingent on your securing valid immigration status and work authorization before your expected start date and maintaining your valid immigration status and work authorization thereafter.
At Caterpillar, we provide a Total Rewards package that is designed to be competitive and align with our pay for performance philosophy. Annual cash compensation currently consists of base salary and a cash payment under our Annual Incentive Plan ("AIP"). Long-term incentive compensation currently consists of equity awards including nonqualified stock options ("Options") and performance-based restricted stock units ("PRSUs").
Annual Compensation
Base Salary The annual base salary for this position is $800,000. You will be eligible for salary increases based on market movements and your overall performance. Future increases are at the discretion of the Compensation and Human Resources Committee of the Board of Directors ("Committee") and subject to its approval.
Annual Incentive Plan The target AIP opportunity for this position is 115% of base salary. The AIP performance factor modifier can range from 0 to 2.0 (1.0 at target), depending on corporate and business unit performance during each year. The AIP payment for 2018 will be pro-rated based on your start date.
Long Term Incentive Plan The long-term incentive (LTI) plan at Caterpillar is administered under the authority of the Committee and is subject to change based on the Committee's discretion. For 2018, the Committee elected to grant long-term incentives in the form of 50% Options and 50% PRSUs to all officers and certain other key employees of Caterpillar. The target grant value for this position in 2018 was $3,000,000, with adjustments above or below the target level based on Committee discretion.
You will be granted a 2018 LTI award with a dollar value on the grant date of $1,500,000 to be made as soon as administratively practicable following the completion of your first day of employment. The vesting will align with those grants previously made by the Company to eligible employees on March 5, 2018 (i.e. options will have a 3-year pro-rata vesting schedule, vesting 1/3 on each of March 5th of 2019, 2020 and 2021 and PRSUs will have a 3 year performance period from 1/1/18 - 12/31/20). Additional terms of this grant will be set forth in a more formal award document that will be provided to you shortly after the grant date. You will be required to electronically accept the award in accordance with the Company's routine procedures established by Caterpillar's stock plan administrator.
Stock Ownership Guidelines The Board of Directors set a minimum stock ownership target for all Caterpillar officers to align executives' interests with our shareholders and to demonstrate confidence in the long-term success of Caterpillar. The current target ownership requirement for the CFO is three times base salary. You will have a 5-year grace period to meet the target ownership requirement.
SDCP The Supplemental Deferred Compensation Plan is a non-qualified executive compensation plan. This plan allows eligible employees to make contributions on a tax deferred basis and receive company contributions in excess of limitations imposed on our 401(k) plan by the tax code. (Details of our 401(k) plan are included in the attached U.S. Benefits summary).
Benefits and Paid Time Off Caterpillar offers competitive employee, and dependent health and welfare benefits. You will be eligible for relocation benefits under the Company's relocation policy relating to the sale of your current residence, relocation and moving expenses and purchase of a new residence. You will be eligible for twenty-three (23) paid vacation days. Vacation accrues annually and must be used in the calendar year it is earned, as unused vacation time does not accumulate or carry over after each December 31.
Sign-On Compensation
Cash Caterpillar will provide a cash sign-on bonus of $800,000, less applicable withholdings and taxes, to be paid as soon as administratively practicable following the completion of your first day of employment. You shall not have earned and thus shall be obligated to repay 100% of the cash sign- on bonuses described in the paragraph above, including any taxes withheld, within 30 days of your termination of employment, if you are terminated by the Company for cause or you voluntarily terminate employment with the Company prior to the first anniversary of your hire date.
Restricted Stock Units Caterpillar will award you a sign-on grant of restricted stock units ("RSUs") with a dollar value on the grant date of $5,360,000 to be made as soon as administratively practicable after you begin employment. This RSUs will have a two-year pro-rata vesting schedule, vesting ½ on each of the first two anniversaries of the grant date. Additional terms of the grant will be set forth in a more formal award document that will be provided to you shortly after the grant date. You will be required to electronically accept the award in accordance with the Company's routine procedures established by Caterpillar's stock plan administrator. If your employment with the Company terminates during the vesting period, except for termination due to long-service separation, involuntary termination of your employment by the Company without cause, disability, death or in connection with a change in control of the Company, you will forfeit all unvested RSUs associated with this grant.
* * * *
Please contact Cheryl Johnson with any questions regarding any details of this letter. Caterpillar is pleased to offer you this compensation package and I look forward to you joining our team.
Please indicate your acceptance of this offer by signing the bottom portion of this letter and returning a copy to Cheryl prior to close of business on May 16, 2018.
Sincerely,
Caterpillar Inc.
/s/ Jim Umpleby Jim Umpleby, Chief Executive Officer
I have read, understood and accept this offer of employment with Caterpillar Inc.
Andrew Bonfield
3 May 2018
Date EXHIBIT 10.4
Caterpillar Inc. Directors' Deferred Compensation Plan (Amended and Restated Effective as of July 1, 2018)
TABLE OF CONTENTS DIRECTORS' DEFERRED COMPENSATION PLAN ARTICLE I DEFINITIONS 1 1.1 GENERAL 1 1.2 CONSTRUCTION 1 ARTICLE II ELIGIBILITY 1 2.1 ELIGIBILITY 1 ARTICLE III DEFERRALS 1 3.1 DEFERRAL AGREEMENT 1 3.2 TIMING OF DEFERRAL ELECTIONS 1 3.3 AMOUNT OF DEFERRALS 1 ARTICLE IV VESTING 1 4.1 VESTING 1 ARTICLE V INVESTMENT OF ACCOUNTS 1
ARTICLE VI DISTRIBUTIONS 1 6.1 LIMITATION ON RIGHT TO RECEIVE DISTRIBUTION 1 6.2 GENERAL RIGHT TO RECEIVE DISTRIBUTION 1 6.3 FORM OF DISTRIBUTION 1 6.4 AMOUNT OF DISTRIBUTION 1 6.5 TIMING OF DISTRIBUTION 1 6.6 PAYMENT UPON DEATH 1 6.7 PAYMENT UPON UNFORESEEABLE EMERGENCY 1 6.8 DE MINIMIS DISTRIBUTION 1 6.9 WITHHOLDING 1 6.10 BAN ON ACCELERATION OF BENEFITS 1 ARTICLE VII ADMINISTRATION OF THE PLAN 1 7.1 GENERAL POWERS AND DUTIES 1 ARTICLE VIII AMENDMENT 1 8.1 AMENDMENT 1 8.2 EFFECT OF AMENDMENT 1 8.3 TERMINATION 1 ARTICLE IX GENERAL PROVISIONS 1 9.1 PARTICIPANT'S RIGHTS UNSECURED 1 9.2 NO GUARANTY OF BENEFITS 1 9.3 SECTION 409A COMPLIANCE 1 9.4 SPENDTHRIFT PROVISION 1 9.5 DOMESTIC RELATIONS ORDERS 1 9.6 INCAPACITY OF RECIPIENT 1 9.7 SUCCESSORS 1 9.8 LIMITATIONS ON LIABILITY 1 9.9 OVERPAYMENTS 1 CATERPILLAR INC. DIRECTORS' DEFERRED COMPENSATION PLAN PREAMBLE Previously, Caterpillar Inc. (the "Company") adopted the Caterpillar Inc. Directors'Deferred Compensation Plan (the "Plan") to provide members of its Board of Directors with an opportunity to defer the payment of compensation. The Plan has been amended and/or restated on a number of occasions with the most recent amendment and restatement being effective as of January 1, 2005, to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended. By execution of this document, the Company hereby further amends and restates the Plan in its entirety, effective as of July 1, 2018, to add a feature to permit Participants to defer certain equity compensation payable to them.
ARTICLE 1 DEFINITIONS
1.1 General. When a word or phrase appears in the Plan with the initial letter capitalized, and the word or phrase does not begin a sentence, the word or phrase shall generally be a term defined in this Article I, unless a clearly different meaning is required by the context in which the word or phrase is used or the word or phrase is defined for a limited purpose elsewhere in the Plan document:
(a) "Board" means the Board of Directors of the Company, or any authorized committee of the Board.
(b) "C+B Officer" means the Company's Director of Compensation + Benefits.
(c) "Cash Compensation" means Compensation paid to a Director in the form of cash, other than Equity Awards that happen to be settled in cash.
(d) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.
(e) "Company" means Caterpillar Inc. and, to the extent provided in Section 9.7 (Successors) below, any successor corporation or other entity resulting from a merger or consolidation into or with the Company or a transfer or sale of substantially all of the assets of the Company.
(f) "Company Share Equivalent Account" means the hypothetical investment fund described in Section 5.2(d) (Cash Deferrals - Special Company Share Equivalent Account Provisions).
(g) "Company Stock" means common stock issued by the Company.
(h) "Compensation" means the remuneration payable from time to time to a Director for services as a Director. Compensation shall include such remuneration attributable to annual fees, fees payable for attendance at meetings and fees payable for other services performed for or on behalf of the Company. Compensation shall not include expense reimbursements. Compensation also shall not include gains realized on the sale of shares, the exercise or other disposition of options or stock appreciation rights, or similar transactions.
(i) "Deferral Account" means the bookkeeping account maintained under the Plan to record amounts deferred under Article III (Deferrals). The Plan Administrator shall establish subaccounts to separately account for deferrals of Cash Compensation and Equity Compensation.
(j) "Deferral Agreement" means the deferral agreement(s) described in Section 3.1 (Deferral Agreement) that are entered into by a Participant pursuant to the Plan.
(k) "Deferrals" means the deferrals made by a Participant in accordance with Article III (Deferrals).
(l) "Director" means a member of the Board.
(m) "Disability" or "Disabled" means that a Participant is determined to be totally disabled by the Social Security Administration.
(n) "Distribution Election Form" means the election form by which a Participant elects the manner in which his accounts shall be distributed pursuant to Section 6.3 (Form of Distribution).
(o) "Effective Date" means July 1, 2018. The provisions of this amendment and restatement relating to the deferral of equity compensation shall become effective for Equity Compensation granted on or after January 1, 2019.
(p) "Equity Compensation" means Compensation payable to a Director upon the vesting of an equity-based compensation award granted to the Director under the Company's stockholder-approved equity compensation plan in effect from time to time, other than a stock option or a stock appreciation right award.
(q) "Equity Compensation Investment Account" means the investment account for Equity Compensation deferrals described in Section 5.1(b) (Equity Deferrals - Investment).
(r) "Interest Fund" means the hypothetical investment fund described in Section 5.2(c) (Cash Deferrals - Special Interest Fund Provisions).
(s) "Investment Funds" means the Interest Fund and the Caterpillar Share Equivalent Account.
(t) "Key Employee" means a "key employee" as defined in Section 416(i) of the Code without regard to Section 416(i)(5). (u) "Participant" means a Director who affirmatively elects to participate in the Plan pursuant to Section 2.1 (Eligibility).
(v) "Plan" means the Caterpillar Inc. Directors' Deferred Compensation Plan, as set forth herein.
(w) "Plan Administrator" means the C+B Officer. The Plan Administrator may delegate his authority hereunder in his sole and absolute discretion.
(x) "Plan Year" means the calendar year.
(y) "Separation from Service" means separation from service as determined in accordance with any regulations, rulings or other guidance issued by the Department of the Treasury pursuant to Section 409A(a)(2)(A)(i) of the Code, as it may be amended or replaced from time to time.
(z) "Unforeseeable Emergency" means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant's spouse, or a dependent (as defined in section 152(a) of the Code) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. For purposes of the Plan, an "Unforeseeable Emergency" shall not include a Participant's need to send his or her child to college or a Participant's desire to purchase a home.
(aa) "Valuation Date" means, except as otherwise provided herein, the last day of each month of the Plan Year.
1.2 Construction. The masculine gender, when appearing in the Plan, shall include the feminine gender (and vice versa), and the singular shall include the plural, unless the Plan clearly states to the contrary. Headings and subheadings are for the purpose of reference only and are not to be considered in the construction of the Plan. If any provision of the Plan is determined to be for any reason invalid or unenforceable, the remaining provisions shall continue in full force and effect. All of the provisions of the Plan shall be construed and enforced according to the laws of the State of Illinois, without regard to conflict of laws principles and shall be administered according to the laws of such state, except as otherwise required by ERISA, the Code, or other Federal law.
ARTICLE II ELIGIBILITY
2.1 Eligibility. Any Director who is not an Employee of the Company or any of its affiliates is eligible to participate in the Plan. An eligible Director shall elect to participate in the Plan by completing a Deferral Agreement as provided in Section 3.1 (Deferral Agreement). ARTICLE III DEFERRALS
3.1 Deferral Agreement. In order to make Deferrals, a Participant must complete a Deferral Agreement in the form prescribed by the Plan Administrator. The Plan Administrator may require a Participant to complete separate Deferral Agreements for Cash Compensation and Equity Compensation. The Deferral Agreement shall be delivered to the Plan Administrator (or his designee) by the time specified in Section 3.2 (Timing of Deferral Elections). An election made by a Participant pursuant to a Deferral Agreement shall be irrevocable with respect to the Plan Year covered by the election. Notwithstanding the foregoing, the Plan Administrator may permit a Participant to revoke an election if the Participant has experienced an Unforeseeable Emergency, but only to the extent that revoking the election would help the Participant meet the related emergency need.
3.2 Timing of Deferral Elections.
(a) General Rule. Deferral Agreements shall be completed by the Director and delivered to the Plan Administrator prior to the beginning of the Plan Year in which the Compensation to be deferred is otherwise earned by the Director. The Deferral Agreement will remain in effect from year-to-year until changed by the Participant in accordance with the preceding sentence. The Plan Administrator, in his discretion, may require an earlier time by which the election to defer Compensation must be completed.
(b) Initial Deferral Election. For the Plan Year in which a Director first becomes eligible to participate in the Plan (but only if the Director has never been eligible to participate in another "account balance plan," other than a separation pay plan, of the Company or an affiliate that is aggregated with the Plan under Section 409A of the Code), the Director may elect to make Deferrals with respect to services to be performed subsequent to the date of the election by completing and delivering a Deferral Agreement within 30 days after the date the Director becomes eligible to participate in the Plan.
3.3 Amount of Deferrals. Any Participant may elect to defer, pursuant to a Deferral Agreement, the receipt of 50% to 100% (designated in whole percentages) of the Compensation earned by the Participant by the Company in any Plan Year. If the Plan Administrator requires separate Deferral Agreements as provided in Section 3.1 (Deferral Agreement), the Participant may elect to defer 50% to 100% (designated in whole percentages) of the Cash Compensation earned by the Participant by the Company in any Plan Year and separately defer 50% to 100% (designated in whole percentages) of the Equity Compensation earned by the Participant by the Company in any Plan Year. The amounts deferred pursuant to this Section 3.3 shall be allocated to the Deferral Account maintained for the Participant.
ARTICLE IV VESTING
4.1 Vesting. Subject to Section 9.1 (Participant's Rights Unsecured), each Participant shall at all times be fully vested in all amounts credited to or allocable to his Deferral Account and his rights and interest therein shall not be forfeitable for any reason; provided that any Equity Compensation deferred under the Plan shall be credited to a Participant's Deferral Account only if such Equity Compensation first becomes vested in accordance with the terms of the applicable Equity Compensation award agreement.
ARTICLE V INVESTMENT OF ACCOUNTS
5.1 Equity Deferrals. The provisions of this Section 5.1 shall apply only to Equity Compensation deferred by the Participant.
(a) Adjustment of Accounts. Except as otherwise provided elsewhere in the Plan, as of each date on which Equity Compensation subject to a Participant's deferral election becomes vested, the Participant's account will be adjusted to reflect the deferral of such Equity Compensation under Article III (Deferrals) and the value of the Company Stock deferred in accordance with policies applied uniformly to all Participants.
(b) Investment. Each Participant may not direct the investment of deferrals of Equity Compensation credited to his Plan accounts. Rather, deferrals of Equity Compensation will be allocated to an Equity Compensation Investment Account which shall be notionally invested in Company Stock during the deferral period. Dividend equivalents will accrue and will be reinvested in additional notional shares of Company Stock.
5.2 Cash Deferrals. The provisions of this Section 5.2 shall apply only to Cash Compensation deferred by the Participant.
(a) Adjustment of Accounts. Except as otherwise provided elsewhere in the Plan, as of each Valuation Date, each Participant's accounts will be adjusted to reflect deferrals of Cash Compensation under Article III (Deferrals) and the positive or negative rate of return on the Investment Funds selected by the Participant pursuant to Section 5.2(b)(ii) (Cash Deferrals - Investment - Participant Directions). The rate of return will be credited or charged in accordance with policies applied uniformly to all Participants.
(b) Investment.
(i) Investment Funds. Each Participant may direct the notional investment of deferrals of Cash Compensation credited to his Plan accounts in the Investment Funds.
(ii) Participant Directions. Each Participant may direct that all of the amounts attributable to his deferral of Cash Compensation be invested in either the Company Share Equivalent Account or Interest Fund or may direct that fractional (percentage) increments of such accounts be invested in the Company Share Equivalent Account and Interest Fund as he shall desire in accordance with such procedures as may be established by the Plan Administrator.
(iii) Changes and Intra-Fund Transfers. Participant investment directions may be changed, and amounts may be transferred between the Investment Funds, in
5 accordance with the procedures established by the Plan Administrator. The designation will remain in effect until changed by the timely submission of a new designation.
(iv) Default Selection. In the absence of any designation, a Participant will be deemed to have directed the investment of his cash accounts in the Interest Fund.
(v) Impact of Election. The Participant's selection of Investment Funds shall serve only as a measurement of the value of the Participant's cash accounts pursuant to Section 5.2(a) (Cash Deferrals - Adjustment of Accounts) and this Section 5.2(b). Neither the Company nor the Plan Administrator is required to actually invest a Participant's accounts in accordance with the Participant's selections.
(vi) Investment Performance. Accounts shall be adjusted on each Valuation Date to reflect investment gains and losses as if the accounts were invested in the hypothetical Investment Funds selected by the Participants in accordance with this Section 5.2(b) and charged with any and all reasonable expenses as provided in Section 5.3 (Charges) below. The earnings and losses determined by the Plan Administrator in good faith and in his discretion pursuant to this Section shall be binding and conclusive on the Participant, the Participant's beneficiary and all parties claiming through them.
(c) Special Interest Fund Provisions.
(i) General. The Interest Fund shall accrue interest at a rate equal to (i) prior to January 1, 2007, the base corporate lending rate (sometimes referred to as the "prime rate") applicable to commercial lending customers of Citibank, N.A., New York, New York (or any successor thereto); or (ii) from and after January 1, 2007, the rate on U.S. Treasury Notes with a maturity of ten years. Such interest shall accrue and compound quarterly and be determined as of the last business day of each calendar quarter.
(ii) Installment Distributions Commencing Prior to January 1, 2007. Notwithstanding the provisions of Section 5.2(c)(i) (Cash Deferrals - Special Interest Fund Provisions - General) to the contrary, if a Participant elected to receive installment distributions pursuant to Section 6.3 (Form of Distribution) and such distributions commenced on or before December 31, 2006, interest shall accrue to such Participants' accounts at a rate equal to the base corporate lending rate (sometimes referred to as the "prime rate") applicable to commercial lending customers of Citibank, N.A., New York, New York (or any successor thereto).
(d) Special Company Share Equivalent Account Provisions.
(i) General. A Participant's interest in the Company Share Equivalent Account shall be expressed in whole and fractional hypothetical units of the Company Share Equivalent Account. As a general matter, the Company Share Equivalent Account shall track an investment in Company Stock and shall generally reflect share ownership for events such as stock splits. Dividend equivalents will accrue to the Company Share Equivalent Account and will be reinvested in additional units. Because investment in the Company Share Equivalent Account is investment in a hypothetical account, there shall be no voting or similar rights associated therewith. The number of units shall be determined by dividing the amount deferred into the Company Share Equivalent Account (or dividends credited) by the average of the high and low prices of Company Stock on the New York Stock Exchange on the date of such deferral or dividend credit (or the next succeeding trading day if there is no trading on that date).
(ii) Investment Directions. A Participant's ability to direct investments into or out of the Company Share Equivalent Account shall be subject to such procedures as the Plan Administrator may prescribe from time to time to assure compliance with Rule 16b-3 promulgated under Section 16(b) of the Securities Exchange Act of 1934, as amended, and other applicable requirements. Such procedures also may limit or restrict a Participant's ability to make (or modify previously made) deferral and distribution elections pursuant to Articles III and VI, respectively. In furtherance and not in limitation of the foregoing, to the extent a Participant acquires any interest in an equity security under the Plan for purposes of Section 16(b), the Participant shall not dispose of that interest within six months, unless specifically exempted by Section 16(b) or any rules or regulations promulgated thereunder.
5.3 Charges. The Plan Administrator may (but is not required to) charge Participants' accounts for the reasonable expenses of administration including, but not limited to, carrying out and/or accounting for investment instructions directly related to such accounts.
5.4 Compliance with Securities Laws. Any election by a Participant to defer Equity Compensation or to hypothetically invest any amount in the Company Share Equivalent Account, and any elections to transfer amounts from or to the Company Share Equivalent Account to or from any other Investment Fund, shall be subject to all applicable securities law requirements including, but not limited to, the last sentence of Section 5.2(d)(ii) (Cash Deferrals - Special Company Share Equivalency Account Provisions - Investment Directions) and Rule 16b-3 promulgated by the Securities Exchange Commission. To the extent that any election violates any securities law requirement, or the Company's stock trading policies and procedures, the election shall be void.
5.5 Compliance with Company Trading Policies and Procedures. Any election by a Participant to defer Equity Compensation or to hypothetically invest any amount in the Company Share Equivalent Account, and any elections to transfer amounts from or to the Company Share Equivalent Account to or from the other Investment Fund, shall be subject to all Company Stock trading policies promulgated by the Company. To the extent that any election violates any such trading policy or procedures, the election shall be void.
ARTICLE VI DISTRIBUTIONS
6.1 Limitation on Right to Receive Distribution. A Participant (or the Participant's beneficiary in the case of the Participant's death) shall not be entitled to receive a distribution prior to the first to occur of the following events:
(a) The Participant's Separation from Service, or, in the case of a Participant who is a Key Employee, the date which is six months after the Participant's Separation from Service; (b) The date the Participant becomes Disabled;
(c) The Participant's death;
(d) A specified time (or pursuant to a fixed schedule) specified at the date of deferral of compensation;
(e) An Unforeseeable Emergency; or
(f) To the extent provided by the Secretary of the Treasury, a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company.
This Section 6.1 restates the restrictions on distributions set forth in Section 409A of the Code and is intended to impose restrictions on distributions pursuant to the Plan accordingly. This Section 6.1 does not describe the instances in which distributions will be made. Rather, distributions will be made only if and when permitted both by this Section 6.1 and another provision of the Plan.
6.2 General Right to Receive Distribution. Following a Participant's Separation from Service, the Participant's Plan accounts will be distributed to the Participant at the time and in the manner provided in Sections 6.3 (Form of Distribution) and 6.5 (Timing of Distribution), or Section 6.6 (Payment Upon Death), as applicable.
6.3 Form of Distribution. Accounts shall be distributed in a single lump sum payment or in up to ten annual installments. Amounts attributable to the deferral of Equity Compensation shall be distributed in Company Stock (with any fractional shares attributable to the receipt of dividends rounded to the nearest whole share) and amounts attributable to the deferral of Cash Compensation shall be distributed in cash. Distributions shall be subject to such uniform rules and procedures as may be adopted by the Plan Administrator from time to time, consistent with Section 409A of the Code. The form of payment (i.e., lump sum or installments) shall be selected by the Participant in the initial Distribution Election Form (which may be contained in and be a part of a Deferral Agreement) submitted by the Participant to the Plan Administrator on entry into the Plan. A Participant may not subsequently change his election. If no valid Distribution Election Form exists, the Participant's accounts will be distributed in a single lump-sum.
6.4 Amount of Distribution. The amount distributed to a Participant shall equal the sum of the vested amounts credited to the Participant's accounts as of the Valuation Date immediately preceding the date of the distribution. Amounts invested in the Company Share Equivalent Account shall be based on the fair market value of the Company Stock on the relevant Valuation Date determined pursuant to uniform and non-discriminatory rules established by the Plan Administrator.
6.5 Timing of Distribution. Amounts will be distributed (or in the case of installment distributions, such installments shall commence) as soon as practicable after the January 1 coincident with or next following the Participant's Separation from Service (but not sooner than the six-month anniversary of such Separation in the case of a Key Employee). Notwithstanding the foregoing, in the event that Separation from Service occurs due to death, amounts may be distributed as soon as practicable after Separation from Service.
6.6 Payment Upon Death.
(a) Designation of Beneficiary. If a Participant should die before receiving a full distribution of his Plan accounts, distribution shall be made to the beneficiary designated by the Participant. If a Participant has not designated a beneficiary, or if no designated beneficiary is living on the date of distribution, such amounts shall be distributed to the Participant's estate.
(b) Timing and Form of Payment to Beneficiary.
(i) Payments Commenced at Time of Death. If, at the time of the Participant's death, installment payments of the Participant's accounts have commenced pursuant to this Article VI, such payments shall continue to the Participant's beneficiary in the same time and the same form as if the Participant has remained alive until the last installment payment was scheduled to be made. Notwithstanding the foregoing, a beneficiary may take a withdrawal upon an Unforeseeable Emergency pursuant to Section 6.7 (Payment Upon Unforeseeable Emergency), applying the provisions of such Section by substituting the term "beneficiary" for "Participant".
(ii) Payments Not Commenced at Time of Death. If, at the time of the Participant's death, payment of the Participant's accounts has not commenced pursuant to this Article VI, the distributions made pursuant to this Section 6.6 shall be made to the Participant's beneficiary in accordance with the then current and valid distribution election made by the Participant (or, in the absence of such a distribution election, in accordance with the "default" provisions of Section 6.3 (Form of Distribution).
6.7 Payment Upon Unforeseeable Emergency. Notwithstanding any provision of the Plan to the contrary, if a Participant incurs an Unforeseeable Emergency, the Participant may elect to make a withdrawal from the adjusted balance of the Participant's account. A distribution shall only be made on account of an Unforeseeable Emergency if, as determined under regulations of the Secretary of the Treasury, the amounts distributed with respect to an emergency do not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved:
(a) through reimbursement or compensation by insurance or otherwise;
(b) by liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or
(c) by cessation of deferrals under the Plan.
A Participant who wishes to receive a distribution pursuant to this Section 6.7 shall apply for such distribution to the Plan Administrator and shall provide information to the Plan Administrator reasonably necessary to permit the Plan Administrator to determine whether an Unforeseeable Emergency exists and the amount of the distribution reasonably needed to satisfy the emergency need.
6.8 De Minimis Distribution. Subject to Section 6.5 (Timing of Distribution) regarding Key Employees, if a Participant incurs a Separation from Service and as of the "payment date," the value of the Participant's accounts is not greater than the amount then in effect under Section 402(g) of the Code, the Participant's accounts shall be distributed to the Participant in a single lump sum regardless of any elections made by the Participant pursuant to Section 6.3 (Form of Distribution). For purposes of this Section 6.8, the "payment date" shall be the date on which the Participant's accounts are distributed pursuant to this Section 6.8. In no event shall the "payment date" be later than the later of (a) December 31 of the Plan Year in which the Participant's Separation of Service occurs and (b) the date which is two and one-half months immediately following the Participant's Separation from Service.
6.9 Withholding. All distributions will be subject to all applicable tax and withholding requirements.
6.10 Ban on Acceleration of Benefits. Notwithstanding any other provision of the Plan to the contrary, neither the time nor the schedule of any payment under the Plan may be accelerated except as provided in regulations or other guidance issued by the Internal Revenue Service or the Department of the Treasury.
ARTICLE VII ADMINISTRATION OF THE PLAN
7.1 General Powers and Duties. The following list of powers and duties is not intended to be exhaustive, and the Plan Administrator shall, in addition, exercise such other powers and perform such other duties as he may deem advisable in the administration of the Plan, unless such powers or duties are expressly assigned to another pursuant to the provisions of the Plan.
(a) General. The Plan Administrator shall perform the duties and exercise the powers and discretion given to him in the Plan document and by applicable law and his decisions and actions shall be final and conclusive as to all persons affected thereby. The Company shall furnish the Plan Administrator with all data and information that the Plan Administrator may reasonably require in order to perform his functions. The Plan Administrator may rely without question upon any such data or information.
(b) Disputes. Any and all disputes that may arise involving Participants or beneficiaries shall be referred to the Plan Administrator and his decision shall be final. Furthermore, if any question arises as to the meaning, interpretation or application of any provisions of the Plan, the decision of the Plan Administrator shall be final.
(c) Agents. The Plan Administrator may engage agents, including recordkeepers, to assist him and he may engage legal counsel who may be counsel for the Company. The Plan Administrator shall not be responsible for any action taken or omitted to be taken on the advice of such counsel, including written opinions or certificates of any agent, counsel, actuary or physician.
(d) Insurance. At the C+B Officer's request, the Company shall purchase liability insurance to cover the C+B Officer in his activities as the Plan Administrator.
(e) Allocations. The Plan Administrator is given specific authority to allocate responsibilities to others and to revoke such allocations. When the Plan Administrator has allocated authority pursuant to this paragraph, the Plan Administrator is not to be liable for the acts or omissions of the party to whom such responsibility has been allocated.
(f) Records. The Plan Administrator shall supervise the establishment and maintenance of records by its agents, the Company containing all relevant data pertaining to any person affected hereby and his or her rights under the Plan. In addition, the Plan Administrator may, in its discretion, establish a system for complete or partial electronic administration of the Plan and may replace any written documents described in the Plan with electronic counterparts as it deems appropriate.
(g) Interpretations. The Plan Administrator, in his sole discretion, shall interpret and construe the provisions of the Plan (and any underlying documents or policies).
(h) Electronic Administration. The Plan Administrator shall have the authority to employ alternative means (including, but not limited to, electronic, internet, intranet, voice response or telephonic) by which Participants may submit elections, directions and forms required for participation in, and the administration of, the Plan. If the Plan Administrator chooses to use these alternative means, any elections, directions or forms submitted in accordance with the rules and procedures promulgated by the Plan Administrator will be deemed to satisfy any provision of the Plan calling for the submission of a written election, direction or form.
(i) Accounts. The Plan Administrator shall combine the various accounts of a Participant if he deems such action appropriate. Furthermore, the Plan Administrator shall divide a Participant's accounts into sub-accounts if he deems such action appropriate.
(j) Delegation. The Plan Administrator may delegate his authority hereunder, in whole or in part, in his sole and absolute discretion.
ARTICLE VIII AMENDMENT
8.1 Amendment. The Company reserves the right to amend the Plan when, in the sole discretion of the Company, such amendment is advisable.
8.2 Effect of Amendment. Any amendment of the Plan shall apply prospectively only and shall not directly or indirectly reduce the balance of any Plan account as of the effective date of such amendment. 8.3 Termination. The Company expressly reserves the right to terminate the Plan. In the event of termination, the Company shall specify whether termination will change the time at which distributions are made; provided that any acceleration of a distribution is consistent with Section 409A of the Code. In the absence of such specification, the timing of distributions shall be unaffected by termination.
ARTICLE IX GENERAL PROVISIONS
9.1 Participant's Rights Unsecured. The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any distributions hereunder. The right of a Participant or his or her designated beneficiary to receive a distribution hereunder shall be an unsecured claim against the general assets of the Company, and neither the Participant nor a designated beneficiary shall have any rights in or against any specific assets of the Company. All amounts credited to a Participant's accounts hereunder shall constitute general assets of the Company and may be disposed of by the Company at such time and for such purposes as it may deem appropriate. Nothing in this Section shall preclude the Company from establishing a "Rabbi Trust," but the assets in the Rabbi Trust must be available to pay the claims of the Company's general creditors in the event of the Company's insolvency.
9.2 No Guaranty of Benefits. Nothing contained in the Plan shall constitute a guaranty by the Company or any other person or entity that the assets of the Company will be sufficient to pay any benefit hereunder.
9.3 Section 409A Compliance. The Company intends that the Plan meet the requirements of Section 409A of the Code and the guidance issued thereunder. The Plan shall be construed and interpreted in a manner consistent with that intention.
9.4 Spendthrift Provision. No interest of any person or entity in, or right to receive a distribution under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor shall any such interest or right to receive a distribution be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims in bankruptcy proceedings. This Section shall not preclude arrangements for the withholding of taxes from deferrals, credits, or benefit payments, arrangements for the recovery of benefit overpayments, arrangements for the transfer of benefit rights to another plan, or arrangements for direct deposit of benefit payments to an account in a bank, savings and loan association or credit union (provided that such arrangement is not part of an arrangement constituting an assignment or alienation).
9.5 Domestic Relations Orders. Notwithstanding the provisions of Section 9.4 (Spendthrift Provision) to the contrary and to the extent permitted by law, the amounts payable pursuant to the Plan may be assigned or alienated pursuant to a "Domestic Relations Order" (as such term is defined in Section 414(p)(1)(B) of the Code).
9.6 Incapacity of Recipient. If the Plan Administrator is served with a court order holding that a person entitled to a distribution under the Plan is incapable of personally receiving and giving a valid receipt for such distribution, the Plan Administrator shall postpone payment until such time as a claim therefore shall have been made by a duly appointed guardian or other legal representative of such person. The Plan Administrator is under no obligation to inquire or investigate as to the competency of any person entitled to a distribution. Any payment to an appointed guardian or other legal representative under this Section shall be a payment for the account of the incapacitated person and a complete discharge of any liability of the Company and the Plan therefore.
9.7 Successors. The Plan shall be binding upon the successors and assigns of the Company and upon the heirs, beneficiaries and personal representatives of the individuals who become Participants hereunder.
9.8 Limitations on Liability. Notwithstanding any of the preceding provisions of the Plan, neither the Plan Administrator, the Company, nor any individual acting as the Plan Administrator's or the Company's employee, agent, or representative shall be liable to any Participant, former Participant, beneficiary or other person for any claim, loss, liability or expense incurred in connection with the Plan.
9.9 Overpayments. If it is determined that a distribution under the Plan should not have been paid or should have been paid in a lesser amount, written notice thereof shall be given to the recipient of such distribution (or his legal representative) and he shall repay the amount of overpayment to the Company. If he fails to repay such amount of overpayment promptly, the Company shall arrange to recover for the Plan the amount of the overpayment by making an appropriate deduction or deductions from any future benefit payment or payments payable to that person (or his survivor or beneficiary) under the Plan or from any other benefit plan of the Company.
* * * * * * *
IN WITNESS WHEREOF, the Company has caused the Plan to be executed by its duly authorized representative as of the 14 day of June, 2018.
CATERPILLAR INC.
/s/ Cheryl H. Johnson
Cheryl H. Johnson Chief Human Resources Officer present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
August 7, 2018 /s/ D. James Umpleby, III Chief Executive Officer (D. James Umpleby, III)
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
(Joseph E. Creed) 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Caterpillar Inc. (the "Company") on Form 10-Q for the period ending June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
August 7, 2018 /s/ D. James Umpleby, III Chief Executive Officer (D. James Umpleby, III)
August 7, 2018 /s/ Joseph E. Creed Interim Chief Financial Officer (Joseph E. Creed)
A signed original of this written statement required by Section 906 has been provided to Caterpillar Inc. and will be retained by Caterpillar Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Fichier PDF dépôt réglementaire Titre du document : Caterpillar Inc. Files Form 10-Q FQE 30 June 2018 Document : http://n.eqs.com/c/fncls.ssp?u=RCLHMEAOMG |
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| Langue : | Français |
| Entreprise : | Caterpillar Inc. |
| 500 Lake Cook Road, Suite 100 | |
| 60015 Deerfield, Illinois | |
| États-Unis | |
| Téléphone : | 224-551-4000 |
| Internet : | www.caterpillar.com |
| ISIN : | US1491231015 |
| Ticker Euronext : | CATR |
| Catégorie AMF : | Autres communiqués |
| Fin du communiqué | EQS News-Service |
712893 09-Aou-2018 CET/CEST
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