Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
caterpillarlogo06302018a01.jpg 
 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)
 
37-0602744
(IRS Employer I.D. No.)
 
 
 
510 Lake Cook Road, Suite 100, Deerfield, Illinois
(Address of principal executive offices)
 
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 x    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 x   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
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
 
 
 
 
 
 
Emerging growth company
o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
At June 30, 2018, 594,325,388 shares of common stock of the registrant were outstanding.
 


Table of Contents

Table of Contents
 
 
 
 
 
 
 
 
Item 1A.
Risk Factors
*
Item 3.
Defaults Upon Senior Securities
*
Item 4.
Mine Safety Disclosures
*
Item 5.
Other Information
*
 
* Item omitted because no answer is called for or item is not applicable.


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Part I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements

Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
 
Three Months Ended
June 30
 
2018
 
2017
Sales and revenues:
 
 
 
Sales of Machinery, Energy & Transportation
$
13,279

 
$
10,639

Revenues of Financial Products
732

 
692

Total sales and revenues
14,011

 
11,331

 
 
 
 
Operating costs:
 

 
 

Cost of goods sold
9,422

 
7,816

Selling, general and administrative expenses
1,440

 
1,304

Research and development expenses
462

 
458

Interest expense of Financial Products
182

 
162

Other operating (income) expenses
338

 
407

Total operating costs
11,844

 
10,147

 
 
 
 
Operating profit
2,167

 
1,184

 
 
 
 
Interest expense excluding Financial Products
102

 
121

Other income (expense)
121

 
96

 
 
 
 
Consolidated profit before taxes
2,186

 
1,159

 
 
 
 
Provision (benefit) for income taxes
490

 
361

Profit of consolidated companies
1,696

 
798

 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
9

 
5

 
 
 
 
Profit of consolidated and affiliated companies
1,705

 
803

 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
(2
)
 
1

 
 
 
 
Profit 1
$
1,707

 
$
802

 
 
 
 
Profit per common share
$
2.86

 
$
1.36

 
 
 
 
Profit per common share – diluted 2
$
2.82

 
$
1.35

 
 
 
 
Weighted-average common shares outstanding (millions)
 

 
 

– Basic
596.2

 
590.2

– Diluted 2
604.2

 
595.4

 
 
 
 
Cash dividends declared per common share
$
1.64

 
$
1.55

 
1    Profit attributable to common shareholders.
2   Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
 
See accompanying notes to Consolidated Financial Statements.


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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

 
 
 
 

See accompanying notes to Consolidated Financial Statements.



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Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
 
Six Months Ended
June 30
 
2018
 
2017
Sales and revenues:
 
 
 
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:
 

 
 

Cost of goods sold
17,988

 
14,617

Selling, general and administrative expenses
2,716

 
2,365

Research and development expenses
905

 
883

Interest expense of Financial Products
348

 
321

Other operating (income) expenses
638

 
1,403

Total operating costs
22,595

 
19,589

 
 
 
 
Operating profit
4,275

 
1,564

 
 
 
 
Interest expense excluding Financial Products
203

 
244

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

 
 
 
 
Profit per common share
$
5.65

 
$
1.69

 
 
 
 
Profit per common share – diluted 2
$
5.56

 
$
1.67

 
 
 
 
Weighted-average common shares outstanding (millions)
 
 
 

– Basic
597.0

 
588.8

– Diluted 2
606.1

 
594.4

 
 
 
 
Cash dividends declared per common share
$
1.64

 
$
1.55


1    Profit attributable to common shareholders.
2   Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
 
See accompanying notes to Consolidated Financial Statements.



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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:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2018 - $(14); 2017 - $(5)
41

 
10

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2018 - $24; 2017 - $(36)
(78
)
 
66

 
 
 
 
   Available-for-sale securities:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2018 - $3; 2017 - $(9)
(13
)
 
18

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2018 - $0; 2017 - $(1)

 
3

 
 
 
 
Total other comprehensive income (loss), net of tax
(293
)
 
568

Comprehensive income
3,079

 
1,565

Less: comprehensive income attributable to the noncontrolling interests

 
(3
)
Comprehensive income attributable to shareholders
$
3,079

 
$
1,562

 
 
 
 

See accompanying notes to Consolidated Financial Statements.





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Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Dollars in millions) 
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Current assets:
 

 
 

Cash and short-term investments
$
8,654

 
$
8,261

Receivables – trade and other
7,991

 
7,436

Receivables – finance
8,906

 
8,757

Prepaid expenses and other current assets
1,835

 
1,772

Inventories
11,255

 
10,018

Total current assets
38,641

 
36,244

 
 
 
 
Property, plant and equipment – net
13,752

 
14,155

Long-term receivables – trade and other
1,084

 
990

Long-term receivables – finance
13,318

 
13,542

Noncurrent deferred and refundable income taxes
1,626

 
1,693

Intangible assets
2,039

 
2,111

Goodwill
6,249

 
6,200

Other assets
2,278

 
2,027

Total assets
$
78,987

 
$
76,962

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Short-term borrowings:
 

 
 

Machinery, Energy & Transportation
$
35

 
$
1

Financial Products
6,185

 
4,836

Accounts payable
6,831

 
6,487

Accrued expenses
3,450

 
3,220

Accrued wages, salaries and employee benefits
1,789

 
2,559

Customer advances
1,378

 
1,426

Dividends payable
511

 
466

Other current liabilities
1,871

 
1,742

Long-term debt due within one year:
 

 
 

Machinery, Energy & Transportation
9


6

Financial Products
6,241

 
6,188

Total current liabilities
28,300

 
26,931

 
 
 
 
Long-term debt due after one year:
 

 
 

Machinery, Energy & Transportation
7,982

 
7,929

Financial Products
15,717

 
15,918

Liability for postemployment benefits
8,092

 
8,365

Other liabilities
3,954

 
4,053

Total liabilities
64,045

 
63,196

Commitments and contingencies (Notes 10 and 13)


 


Shareholders’ equity
 

 
 

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

 
See accompanying notes to Consolidated Financial Statements.

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Caterpillar Inc.
Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in millions) 
 
Common
stock
 
Treasury
stock
 
Profit
employed
in the
business
 
Accumulated
other
comprehensive
income (loss)
 
Noncontrolling
interests
 
Total
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
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

Dividends declared

 

 
(915
)
 

 

 
(915
)
Distribution to noncontrolling interests

 

 

 

 
(6
)
 
(6
)
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 compensation: 4,729,038
29

 
227

 

 

 

 
256

Stock-based compensation expense
112

 

 

 

 

 
112

Common shares repurchased: 8,029,422 2

 
(1,250
)
 

 

 

 
(1,250
)
Other
10

 

 

 

 

 
10

Balance at June 30, 2018
$
5,746

 
$
(18,028
)
 
$
28,657

 
$
(1,496
)
 
$
63

 
$
14,942

 
 
 
 
 
 
 
 
 
 
 
 
1 See Note 2 for additional information.
 
 
 
 
 
 
 
 
 
 
 
2 See Note 11 for additional information.
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to Consolidated Financial Statements.



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Caterpillar Inc.
Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
 
Six Months Ended
June 30
 
2018
 
2017
Cash flow from operating activities:
 
 
 
Profit of consolidated and affiliated companies
$
3,372

 
$
997

Adjustments for non-cash items:
 

 
 

Depreciation and amortization
1,367

 
1,430

Other
446

 
490

Changes in assets and liabilities, net of acquisitions and divestitures:
 

 
 

Receivables – trade and other
(703
)
 
(442
)
Inventories
(1,208
)
 
(688
)
Accounts payable
545

 
1,113

Accrued expenses
(31
)
 
251

Accrued wages, salaries and employee benefits
(768
)
 
641

Customer advances
(54
)
 
374

Other assets – net
174

 
(280
)
Other liabilities – net
(57
)
 
38

Net cash provided by (used for) operating activities
3,083

 
3,924

 
 
 
 
Cash flow from investing activities:
 

 
 

Capital expenditures – excluding equipment leased to others
(645
)
 
(371
)
Expenditures for equipment leased to others
(883
)
 
(753
)
Proceeds from disposals of leased assets and property, plant and equipment
539

 
563

Additions to finance receivables
(6,143
)
 
(5,264
)
Collections of finance receivables
5,405

 
5,508

Proceeds from sale of finance receivables
124

 
83

Investments and acquisitions (net of cash acquired)
(348
)
 
(21
)
Proceeds from sale of businesses and investments (net of cash sold)
12

 
91

Proceeds from sale of securities
168

 
187

Investments in securities
(318
)
 
(207
)
Other – net
21

 
25

Net cash provided by (used for) investing activities
(2,068
)
 
(159
)
 
 
 
 
Cash flow from financing activities:
 

 
 

Dividends paid
(933
)
 
(906
)
Common stock issued, including treasury shares reissued
256

 
83

Common shares repurchased
(1,250
)
 

Proceeds from debt issued (original maturities greater than three months):
 

 
 

        Machinery, Energy & Transportation

 
361

        Financial Products
4,307

 
4,507

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.

See accompanying notes to Consolidated Financial Statements.

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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:

 
 
 
 
 
 
(Millions of dollars)
 
June 30, 2018
 
December 31, 2017
 
Receivables - trade and other
 
$
35

 
$
34

 
Receivables - finance
 
46

 
42

 
Long-term receivables - finance
 
31

 
38

 
Investments in unconsolidated affiliated companies
 
30

 
39

 
Guarantees1
 

 
259

 
Total
 
$
142

 
$
412

 
 
 
 
 
 
 

1 Related contract was terminated during the first quarter of 2018. No payments were made under the guarantee.
 
 
 
 
 

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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
 
 
 
 
 
 
(Millions of dollars)
 
Balance as of December 31, 2017
 
Cumulative Impact from Adopting New Revenue Guidance
 
Balance as of January 1, 2018
Assets
 
 
 
 
 
 
Receivables - trade and other
 
$
7,436

 
$
(66
)
 
$
7,370

Prepaid expenses and other current assets
 
$
1,772

 
$
327

 
$
2,099

Inventories
 
$
10,018

 
$
4

 
$
10,022

Property, plant and equipment - net
 
$
14,155

 
$
(190
)
 
$
13,965

Noncurrent deferred and refundable income taxes
 
$
1,693

 
$
2

 
$
1,695

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Accrued expenses
 
$
3,220

 
$
226

 
$
3,446

Customer advances
 
$
1,426

 
$
46

 
$
1,472

Other current liabilities
 
$
1,742

 
$
(17
)
 
$
1,725

Other liabilities
 
$
4,053

 
$
(166
)
 
$
3,887

 
 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
 
Profit employed in the business
 
$
26,301

 
$
(12
)
 
$
26,289

 
 
 
 
 
 
 



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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
 
 
As Reported
 
Previous Accounting Guidance
 
Impact from Adopting New Revenue Guidance
(Millions of dollars)
 
 
 
 
 
 
Sales of Machinery, Energy & Transportation
 
$
13,279

 
$
13,330

 
$
(51
)
Cost of goods sold
 
$
9,422

 
$
9,463

 
$
(41
)
Operating profit
 
$
2,167

 
$
2,177

 
$
(10
)
Consolidated profit before taxes
 
$
2,186

 
$
2,196

 
$
(10
)
Provision (benefit) for income taxes
 
$
490

 
$
492

 
$
(2
)
Profit of consolidated companies
 
$
1,696

 
$
1,704

 
$
(8
)
Profit of consolidated and affiliated companies
 
$
1,705

 
$
1,713

 
$
(8
)
Profit
 
$
1,707

 
$
1,715

 
$
(8
)
 
 
 
 
 
 
 
Consolidated Statement of Results of Operations
 
Six Months Ended June 30, 2018
 
 
As Reported
 
Previous Accounting Guidance
 
Impact from Adopting New Revenue Guidance
(Millions of dollars)
 
 
 
 
 
 
Sales of Machinery, Energy & Transportation
 
$
25,429

 
$
25,475

 
$
(46
)
Cost of goods sold
 
$
17,988

 
$
18,023

 
$
(35
)
Other operating (income) expenses
 
$
638

 
$
644

 
$
(6
)
Operating profit
 
$
4,275

 
$
4,280

 
$
(5
)
Consolidated profit before taxes
 
$
4,320

 
$
4,325

 
$
(5
)
Provision (benefit) for income taxes
 
$
962

 
$
963

 
$
(1
)
Profit of consolidated companies
 
$
3,358

 
$
3,362

 
$
(4
)
Profit of consolidated and affiliated companies
 
$
3,372

 
$
3,376

 
$
(4
)
Profit
 
$
3,372

 
$
3,376

 
$
(4
)
 
 
 
 
 
 
 
Consolidated Statement of Financial Position
 
June 30, 2018
 
 
As Reported
 
Previous Accounting Guidance
 
Impact from Adopting New Revenue Guidance
(Millions of dollars)
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Receivables - trade and other
 
$
7,991

 
$
8,019

 
$
(28
)
Prepaid expenses and other current assets
 
$
1,835

 
$
1,529

 
$
306

Inventories
 
$
11,255

 
$
11,223

 
$
32

Noncurrent deferred and refundable income taxes
 
$
1,626

 
$
1,623

 
$
3

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Accrued expenses
 
$
3,450

 
$
3,225

 
$
225

Customer advances
 
$
1,378

 
$
1,274

 
$
104

 
 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
 
Profit employed in the business
 
$
28,657

 
$
28,673

 
$
(16
)
 
 
 
 
 
 
 


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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. A team 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

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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
Cost of goods sold
$
7,816

 
$
7,769

 
$
47

Selling, general and administrative expenses
$
1,304

 
$
1,289

 
$
15

Research and development expenses
$
458

 
$
453

 
$
5

Total operating costs
$
10,147

 
$
10,080

 
$
67

Operating profit
$
1,184

 
$
1,251

 
$
(67
)
Other income (expense)
$
96

 
$
29

 
$
67

 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
As Revised
 
Previously Reported
 
Effect of Change
Cost of goods sold
$
14,617

 
$
14,527

 
$
90

Selling, general and administrative expenses
$
2,365

 
$
2,334

 
$
31

Research and development expenses
$
883

 
$
871

 
$
12

Other operating (income) expenses
$
1,403

 
$
1,432

 
$
(29
)
Total operating costs
$
19,589

 
$
19,485

 
$
104

Operating profit
$
1,564

 
$
1,668

 
$
(104
)
Other income (expense)
$
128

 
$
24

 
$
104

 
 
 
 
 
 

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

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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.


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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.


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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
 
Shares Granted
 
Weighted-Average Fair Value Per Share
 
Weighted-Average Grant Date Stock Price
 
Shares Granted
 
Weighted-Average Fair Value Per Share
 
Weighted-Average Grant Date Stock Price
Stock options
1,566,788

 
$
46.18

 
$
151.12

 
2,701,644

 
$
25.01

 
$
95.66

RSUs
683,339

 
$
151.16

 
$
151.16

 
906,068

 
$
89.76

 
$
95.63

PRSUs
339,559

 
$
151.12

 
$
151.12

 
437,385

 
$
86.78

 
$
95.66

 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
2018
 
2017
Weighted-average dividend yield
2.70%
 
3.42%
Weighted-average volatility
30.2%
 
29.2%
Range of volatilities
21.5-33.0%
 
22.1-33.0%
Range of risk-free interest rates
2.02-2.87%
 
0.81-2.35%
Weighted-average expected lives
8 years
 
8 years
 
 
 
 
 
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.
 

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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.
 

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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.
 

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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
 
 
 
 
 
Machinery, Energy & Transportation
 
$
2,696

 
$
3,190

Financial Products
 
$
6,559

 
$
3,691

 
 
 
 
 

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.
 
 
 
 
 
 
 
 
 
 
 



20

Table of Contents

 
 
 
 
 
 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
 
 
 
Recognized in Earnings
 
 (Millions of dollars)
Amount of Gains
(Losses) Recognized 
in AOCI
(Effective Portion)
 
Classification of 
Gains (Losses)
 
Amount of
Gains (Losses)
Reclassified 
from AOCI to
Earnings
 
Recognized
in Earnings 
(Ineffective
Portion)
 
Foreign exchange contracts
 

 
 
 
 

 
 

 
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
 
 
 
 
 
 
 
 
Machinery, Energy & Transportation

 
Interest expense excluding Financial Products
 
(2
)
 

 
Financial Products
5

 
Interest expense of Financial Products
 

 


 
$
49

 
 
 
$
126

 
$

 
 
Three Months Ended June 30, 2017
 
 
 
 
Recognized in Earnings
 
 
Amount of Gains
(Losses) Recognized 
in AOCI
(Effective Portion)
 
Classification of 
Gains (Losses)
 
Amount of
Gains (Losses)
Reclassified 
from AOCI to
Earnings
 
Recognized
in Earnings 
(Ineffective
Portion)
 
Foreign exchange contracts
 
 
 
 
 
 
 
 
Machinery, Energy & Transportation
$
23

 
Other income (expense)
 
$
(14
)
 
$

 
Financial Products
(23
)
 
Other income (expense)
 
(27
)
 

 
Interest rate contracts
 

 
 
 
 

 
 

 
Machinery, Energy & Transportation

 
Interest expense excluding Financial Products
 
(1
)
 

 
Financial Products

 
Interest expense of Financial Products
 
2

 


 
$

 
 
 
$
(40
)
 
$

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
Recognized in Earnings
 
 
Amount of Gains
(Losses) Recognized 
in AOCI
(Effective Portion)
 
Classification of 
Gains (Losses)
 
Amount of
Gains (Losses)
Reclassified 
from AOCI to
Earnings
 
Recognized
in Earnings 
(Ineffective
Portion)
 
Foreign exchange contracts
 
 
 
 
 
 
 
 
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
 
 
 
 
 

 
 

 
Machinery, Energy & Transportation

 
Interest expense excluding Financial Products
 
(2
)
 

 
Financial Products
5

 
Interest expense of Financial Products
 
1

 


 
$
55

 
 
 
$
102

 
$

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
Recognized in Earnings
 
 
Amount of Gains
(Losses) Recognized 
in AOCI
(Effective Portion)
 
Classification of 
Gains (Losses)
 
Amount of
Gains (Losses)
Reclassified 
from AOCI to
Earnings
 
Recognized
in Earnings 
(Ineffective
Portion)
 
Foreign exchange contracts
 
 
 
 
 
 
 
 
Machinery, Energy & Transportation
$
56

 
Other income (expense)
 
$
(53
)

$

 
Financial Products
(41
)
 
Other income (expense)
 
(49
)
 

 
Interest rate contracts
 

 
 
 
 

 
 

 
Machinery, Energy & Transportation

 
Interest expense excluding Financial Products
 
(3
)
 

 
Financial Products

 
Interest expense of Financial Products
 
3

 


 
$
15

 
 
 
$
(102
)
 
$

 
 
 
 
 
 
 
 
 
 

21

Table of Contents


The effect of derivatives not designated as hedging instruments on the Consolidated Statement of Results of Operations is as follows: 

 
 
 
 

 
 
 (Millions of dollars)
Classification of Gains (Losses)
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
Foreign exchange contracts
 
 
 
 
 
Machinery, Energy & Transportation
Other income (expense)
 
$
(54
)
 
$
39

Financial Products
Other income (expense)
 
23

 
17

Commodity contracts
 
 
 

 
 
Machinery, Energy & Transportation
Other income (expense)
 
9

 

 
 
 
$
(22
)
 
$
56

 
 
 
 
 
 
 
Classification of Gains (Losses)
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
Foreign exchange contracts
 
 
 
 
 
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.


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Table of Contents

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 Amounts Not Offset in the Statement of Financial Position
 
 
(Millions of dollars)
 
Gross Amount of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amount of Assets Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount of Assets
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
Machinery, Energy & Transportation
 
$
24

 
$

 
$
24

 
$
(23
)
 
$

 
$
1

Financial Products
 
83

 

 
83

 
(13
)
 

 
70

 Total
 
$
107

 
$

 
$
107

 
$
(36
)
 
$

 
$
71

June 30, 2018
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
(Millions of dollars)
 
Gross Amount of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amount of Liabilities Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount of Liabilities
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
Machinery, Energy & Transportation
 
$
(105
)
 
$

 
$
(105
)
 
$
23

 
$

 
$
(82
)
Financial Products
 
(39
)
 

 
(39
)
 
13

 

 
(26
)
 Total
 
$
(144
)
 
$

 
$
(144
)
 
$
36

 
$

 
$
(108
)
December 31, 2017
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
(Millions of dollars)
 
Gross Amount of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amount of Assets Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount of Assets
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
Machinery, Energy & Transportation
 
$
52

 
$

 
$
52

 
$
(22
)
 
$

 
$
30

Financial Products
 
22

 

 
22

 
(10
)
 

 
12

 Total
 
$
74

 
$

 
$
74

 
$
(32
)
 
$

 
$
42

December 31, 2017
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
(Millions of dollars)
 
Gross Amount of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amount of Liabilities Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount of Liabilities
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
Machinery, Energy & Transportation
 
$
(25
)
 
$

 
$
(25
)
 
$
22

 
$

 
$
(3
)
Financial Products
 
(68
)
 

 
(68
)
 
10

 

 
(58
)
 Total
 
$
(93
)
 
$

 
$
(93
)
 
$
32

 
$

 
$
(61
)
 
 
 
 
 
 
 
 
 
 
 
 
 


23

Table of Contents

6.                                     Inventories
 
Inventories (principally using the last-in, first-out (LIFO) method) are comprised of the following:
 
 
 
 
 
(Millions of dollars)
June 30,
2018
 
December 31,
2017
Raw materials
$
3,277

 
$
2,802

Work-in-process
2,678

 
2,254

Finished goods
5,092

 
4,761

Supplies
208

 
201

Total inventories
$
11,255

 
$
10,018

 
 
 
 

7.                                     Intangible assets and goodwill
 
A.  Intangible assets
 
Intangible assets are comprised of the following:
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2018
(Millions of dollars)
Weighted
Amortizable
Life (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
15
 
$
2,467

 
$
(1,173
)
 
$
1,294

Intellectual property
11
 
1,546

 
(899
)
 
647

Other
13
 
195

 
(97
)
 
98

Total finite-lived intangible assets
14
 
$
4,208

 
$
(2,169
)
 
$
2,039

 
 
 
December 31, 2017
 
Weighted
Amortizable
Life (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
15
 
$
2,441

 
$
(1,122
)
 
$
1,319

Intellectual property
11
 
1,538

 
(851
)
 
687

Other
13
 
198

 
(93
)
 
105

Total finite-lived intangible assets
14
 
$
4,177

 
$
(2,066
)
 
$
2,111

 
 
 
 
 
 
 
 

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)
 
 
 
 
 
 
 
 
 
 
 
Remaining Six Months of 2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
$164
 
$322
 
$311
 
$293
 
$274
 
$675
 
 
 
 
 
 
 
 
 
 
 
 
B.  Goodwill
 
No goodwill was impaired during the six months ended June 30, 2018 or 2017.


24

Table of Contents

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,
2017
 
Acquisitions 1
 
Other Adjustments 2
 
June 30,
2018
Construction Industries
 
 
 
 
 
 
 


Goodwill
 
$
305

 
$

 
$
3

 
$
308

Impairments
 
(22
)
 

 

 
(22
)
Net goodwill
 
283

 

 
3

 
286

Resource Industries
 
 
 
 
 
 
 
 
Goodwill
 
4,232

 

 
(37
)
 
4,195

Impairments
 
(1,175
)
 

 

 
(1,175
)
Net goodwill
 
3,057

 

 
(37
)
 
3,020

Energy & Transportation
 
 
 
 
 
 
 
 
Goodwill
 
2,806

 
121

 
(40
)
 
2,887

All Other 3
 
 
 
 
 
 
 
 
Goodwill
 
54

 

 
2

 
56

Consolidated total
 
 
 
 
 
 
 
 
Goodwill
 
7,397

 
121

 
(72
)
 
7,446

Impairments
 
(1,197
)
 

 

 
(1,197
)
Net goodwill
 
$
6,200

 
$
121

 
$
(72
)
 
$
6,249


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:

25

Table of Contents

 
June 30, 2018
 
December 31, 2017
(Millions of dollars)
Cost 
Basis
 
Unrealized Pretax Net Gains 
(Losses)
 
Fair 
Value
 
Cost 
Basis
 
Unrealized Pretax Net Gains 
(Losses)
 
Fair 
Value
Government debt
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury bonds
$
9

 
$

 
$
9

 
$
10

 
$

 
$
10

Other U.S. and non-U.S. government bonds
47

 

 
47

 
42

 

 
42

 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 

 
 

 
 
 
 

 
 

 
 

Corporate bonds
677

 
(12
)
 
665

 
585

 
(1
)
 
584

Asset-backed securities
61

 

 
61

 
67

 

 
67

 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed debt securities
 
 
 
 
 
 
 

 
 

 
 

U.S. governmental agency
304

 
(8
)
 
296

 
265

 
(4
)
 
261

Residential
7

 

 
7

 
8

 

 
8

Commercial
16

 
(1
)
 
15

 
17

 

 
17

Total debt securities
$
1,121

 
$
(21
)
 
$
1,100

 
$
994

 
$
(5
)
 
$
989

 
 
 
 
 
 
 
 
 
 
 
 
Equity securities1
 
 
 
 
 
 
 

 
 

 
 

Large capitalization value
 
 
 
 
 
 
287

 
(3
)
 
284

Real estate investment trust (REIT)
 
 
 
 
 
 
104

 
6

 
110

Smaller company growth
 
 
 
 
 
 
40

 
16

 
56

Total equity securities
 
 
 
 
 
 
$
431

 
$
19

 
$
450

 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
U.S. governmental agency
157

 
3

 
119

 
5

 
276

 
8

Total
$
686

 
$
15

 
$
148

 
$
6

 
$
834

 
$
21

 
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
 

 
 

 
 

 
 

 
 

 
 

Large capitalization value
129

 
5

 
14

 
2

 
143

 
7

Smaller company growth
17

 
1

 
1

 

 
18

 
1

Total
$
587

 
$
9

 
$
163

 
$
5

 
$
750

 
$
14

 
 
 
 
 
 
 
 
 
 
 
 
1 Indicates the length of time that individual securities have been in a continuous unrealized loss position.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

26

Table of Contents

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.

27

Table of Contents

 
U.S. Pension 
Benefits
 
Non-U.S. Pension 
Benefits
 
Other
Postretirement 
Benefits
(Millions of dollars)

June 30
 
June 30
 
June 30
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
For the three months ended:
 
 
 
 
 
 
 
 
 
 
 
Components of net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
31

 
$
29

 
$
23

 
$
24

 
$
21

 
$
20

Interest cost
134

 
131

 
24

 
25

 
31

 
32

Expected return on plan assets
(203
)
 
(183
)
 
(56
)
 
(56
)
 
(8
)
 
(9
)
Amortization of prior service cost (credit) 1

 

 

 
(1
)
 
(8
)
 
(6
)
Net periodic benefit cost (benefit) 2
$
(38
)
 
$
(23
)
 
$
(9
)
 
$
(8
)
 
$
36

 
$
37

 
 
 
 
 
 
 
 
 
 
 
 
For the six months ended:
 
 
 
 
 
 
 
 
 
 
 
Components of net periodic benefit cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
63

 
$
58

 
$
45

 
$
47

 
$
42

 
$
39

Interest cost
267

 
262

 
49

 
50

 
62

 
65

Expected return on plan assets
(405
)
 
(367
)
 
(112
)
 
(113
)
 
(16
)
 
(18
)
Amortization of prior service cost (credit) 1

 

 

 
(1
)
 
(17
)
 
(11
)
Curtailments and termination benefits

 
9

 

 
20

 

 

Net periodic benefit cost (benefit) 2
$
(75
)
 
$
(38
)
 
$
(18
)
 
$
3

 
$
71

 
$
75

 

 

 

 

 
 
 
 
Weighted-average assumptions used to determine net cost:
 
 
 
 
 
 
 
 
 
 
Discount rate used to measure service cost
3.7
%
 
4.2
%
 
2.3
%
 
2.3
%
 
3.5
%
 
3.9
%
Discount rate used to measure interest cost
3.2
%
 
3.3
%
 
2.2
%
 
2.3
%
 
3.2
%
 
3.3
%
Expected rate of return on plan assets
6.3
%
 
6.7
%
 
5.2
%
 
5.9
%
 
7.5
%
 
7.5
%
Rate of compensation increase
4.0
%
 
4.0
%
 
4.0
%
 
4.0
%
 
4.6
%
 
4.0
%
 
 
 
 
 
 
 
 
 
 
 
 
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
(Millions of dollars)
2018
 
2017
 
2018
 
2017
U.S. Plans
$
77

 
$
90

 
$
150

 
$
170

Non-U.S. Plans
21

 
19

 
43

 
35

 
$
98

 
$
109

 
$
193

 
$
205

 
 
 
 
 
 
 
 
 

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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
 
December 31,
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

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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
Warranty liability, January 1
$
1,419

Reduction in liability (payments)
(364
)
Increase in liability (new warranties)
362

Warranty liability, June 30
$
1,417

 
 


(Millions of dollars)
2017
Warranty liability, January 1
$
1,258

Reduction in liability (payments)
(860
)
Increase in liability (new warranties)
1,021

Warranty liability, December 31
$
1,419

 
 

 
 
 
 
 

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:
 

 
 

 
 
 
 
Assuming no dilution (A/B)
$
2.86

 
$
1.36

 
$
5.65

 
$
1.69

Assuming full dilution (A/C) 2
$
2.82

 
$
1.35

 
$
5.56

 
$
1.67

Shares outstanding as of June 30 (in millions)
 
 
 
 
594.3


591.0

 
 
 
 
 
 
 
 
1 Profit attributable to common shareholders.
 
 
 
 
 
 
 
2 Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
 
 
 
 
 
 
 
 
 
 


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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 other comprehensive (income) loss
 

 
(7
)
 
(96
)
 

 
(103
)
Other comprehensive income (loss)
 
(411
)
 
(7
)
 
(60
)
 
(2
)
 
(480
)
Balance at June 30, 2018
 
$
(1,432
)
 
$
30

 
$
(78
)
 
$
(16
)
 
$
(1,496
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2017
 
$
(1,823
)
 
$
18

 
$
(65
)
 
$
43

 
$
(1,827
)
Other comprehensive income (loss) before reclassifications
 
324

 

 

 
10

 
334

Amounts reclassified from accumulated other comprehensive (income) loss
 

 
(4
)
 
26

 

 
22

Other comprehensive income (loss)
 
324

 
(4
)
 
26

 
10

 
356

Balance at June 30, 2017
 
$
(1,499
)
 
$
14

 
$
(39
)
 
$
53

 
$
(1,471
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

(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 liabilities guidance1
 

 

 

 
(11
)
 
(11
)
Balance at January 1, 2018
 
(1,205
)
 
46

 
(41
)
 
(3
)
 
(1,203
)
Other comprehensive income (loss) before reclassifications
 
(228
)
 
(2
)
 
41

 
(13
)
 
(202
)
Amounts reclassified from accumulated other comprehensive (income) loss
 
1

 
(14
)
 
(78
)
 

 
(91
)
Other comprehensive income (loss)
 
(227
)
 
(16
)
 
(37
)
 
(13
)
 
(293
)
Balance at June 30, 2018
 
$
(1,432
)
 
$
30

 
$
(78
)
 
$
(16
)
 
$
(1,496
)
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
$
(1,970
)
 
$
14

 
$
(115
)
 
$
32

 
$
(2,039
)
Other comprehensive income (loss) before reclassifications
 
469

 
8

 
10

 
18

 
505

Amounts reclassified from accumulated other comprehensive (income) loss
 
2

 
(8
)
 
66

 
3

 
63

Other comprehensive income (loss)
 
471

 

 
76

 
21

 
568

Balance at June 30, 2017
 
$
(1,499
)
 
$
14

 
$
(39
)
 
$
53

 
$
(1,471
)
1 See Note 2 for additional information.
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

The effect of the reclassifications out of Accumulated other comprehensive income (loss) on the Consolidated Statement of Results of Operations is as follows:

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
(Millions of dollars)
 
Classification of
income (expense)
 
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
)
Foreign exchange contracts
 
Interest expense of Financial Products
 
5

 

Interest rate contracts
 
Interest expense excluding Financial Products
 
(2
)
 
(1
)
Interest rate contracts
 
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
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30
(Millions of dollars)
 
Classification of
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
)
Foreign exchange contracts
 
Interest expense of Financial Products
 
8

 

Interest rate contracts
 
Interest expense excluding Financial Products
 
(2
)
 
(3
)
Interest rate contracts
 
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

34

Table of Contents

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.


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Table of Contents

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,

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Table of Contents

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.


37

Table of Contents

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). A table, 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.

38

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reportable Segments
Three Months Ended June 30
(Millions of dollars)
 
2018
 
External 
sales and
revenues
 
Inter-
segment 
sales and
revenues
 
Total sales
and 
revenues
 
Depreciation
and 
amortization
 
Segment 
profit
 
Segment
assets at
June 30
 
Capital 
expenditures
Construction Industries
$
6,137

 
$
35

 
$
6,172

 
$
90

 
$
1,154

 
$
4,915

 
$
62

Resource Industries
2,431

 
95

 
2,526

 
115

 
411

 
6,410

 
39

Energy & Transportation
4,714

 
1,010

 
5,724

 
157

 
1,012

 
8,088

 
140

Machinery, Energy & Transportation
$
13,282

 
$
1,140

 
$
14,422

 
$
362

 
$
2,577

 
$
19,413

 
$
241

Financial Products Segment
829

1 

 
829

 
212

 
134

 
35,908

 
533

Total
$
14,111

 
$
1,140

 
$
15,251

 
$
574

 
$
2,711

 
$
55,321

 
$
774

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
External 
sales and
revenues
 
Inter-
segment 
sales and
revenues
 
Total sales
and 
revenues
 
Depreciation 
and
amortization
 
Segment 
profit
 
Segment 
assets at
December 31
 
Capital 
expenditures
Construction Industries
$
4,930

 
$
29

 
$
4,959

 
$
100

 
$
900

 
$
4,838

 
$
36

Resource Industries
1,759

 
77

 
1,836

 
130

 
99

 
6,403

 
31

Energy & Transportation
3,941

 
827

 
4,768

 
162

 
694

 
7,564

 
91

Machinery, Energy & Transportation
$
10,630

 
$
933

 
$
11,563

 
$
392

 
$
1,693

 
$
18,805

 
$
158

Financial Products Segment
776

1 

 
776

 
204

 
191

 
34,893

 
439

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.
 
 
 
 
 


39

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reportable Segments
Six Months Ended June 30
(Millions of dollars)
 
2018
 
External 
sales and
revenues
 
Inter-
segment 
sales and
revenues
 
Total sales
and 
revenues
 
Depreciation
and 
amortization
 
Segment 
profit
 
Segment
assets at
June 30
 
Capital 
expenditures
Construction Industries
$
11,796

 
$
53

 
$
11,849

 
$
179

 
$
2,271

 
$
4,915

 
$
104

Resource Industries
4,639

 
196

 
4,835

 
231

 
789

 
6,410

 
62

Energy & Transportation
8,990

 
1,953

 
10,943

 
315

 
1,886

 
8,088

 
302

Machinery, Energy & Transportation
$
25,425

 
$
2,202

 
$
27,627

 
$
725

 
$
4,946

 
$
19,413

 
$
468

Financial Products Segment
1,622

1 

 
1,622

 
415

 
275

 
35,908

 
894

Total
$
27,047

 
$
2,202

 
$
29,249

 
$
1,140

 
$
5,221

 
$
55,321

 
$
1,362

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
External 
sales and
revenues
 
Inter-
segment 
sales and
revenues
 
Total sales
and 
revenues
 
Depreciation 
and
amortization
 
Segment 
profit
 
Segment 
assets at
December 31
 
Capital 
expenditures
Construction Industries
$
9,021

 
$
38

 
$
9,059

 
$
202

 
$
1,534

 
$
4,838

 
$
57

Resource Industries
3,429

 
168

 
3,597

 
257

 
259

 
6,403

 
52

Energy & Transportation
7,297

 
1,607

 
8,904

 
320

 
1,239

 
7,564

 
207

Machinery, Energy & Transportation
$
19,747

 
$
1,813

 
$
21,560

 
$
779

 
$
3,032

 
$
18,805

 
$
316

Financial Products Segment
1,536

1 

 
1,536

 
412

 
374

 
34,893

 
710

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.
 
 
 
 
 


40

Table of Contents

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
 
 
 
 
 
 
 
 
 
 
(Millions of dollars)
 
North
 America
 
Latin
 America
 
EAME
 
Asia/
 Pacific
 
External Sales and Revenues
Three Months Ended June 30, 2018
 
 

 
 

 
 

 
 

 
 
Construction Industries
 
$
2,739

 
$
392

 
$
1,171

 
$
1,835

 
$
6,137

Resource Industries
 
804

 
394

 
569

 
664

 
2,431

Energy & Transportation
 
2,582

 
287

 
1,153

 
692

 
4,714

All Other operating segments
 
17

 
1

 
4

 
19

 
41

Corporate Items and Eliminations
 
(40
)
 
(3
)
 

 
(1
)
 
(44
)
Machinery, Energy & Transportation Sales
 
6,102

 
1,071

 
2,897

 
3,209

 
13,279

 
 
 
 
 
 
 
 
 
 
 
Financial Products Segment
 
537

 
71

 
101

 
120

 
829

Corporate Items and Eliminations
 
(57
)
 
(11
)
 
(7
)
 
(22
)
 
(97
)
Financial Products Revenues
 
480

 
60

 
94

 
98

 
732

 
 
 
 
 
 
 
 
 
 
 
Consolidated Sales and Revenues
 
$
6,582

 
$
1,131

 
$
2,991

 
$
3,307

 
$
14,011

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 

 
 

 
 

 
 

 
 
Construction Industries
 
$
5,359

 
$
736

 
$
2,238

 
$
3,463

 
$
11,796

Resource Industries
 
1,602

 
754

 
1,089

 
1,194

 
4,639

Energy & Transportation
 
4,807

 
567

 
2,245

 
1,371

 
8,990

All Other operating segments
 
32

 
1

 
8

 
37

 
78

Corporate Items and Eliminations
 
(68
)
 
(2
)
 
(3
)
 
(1
)
 
(74
)
Machinery, Energy & Transportation Sales
 
11,732

 
2,056

 
5,577

 
6,064

 
25,429

 
 
 
 
 
 
 
 
 
 
 
Financial Products Segment
 
1,049

 
145

 
202

 
226

 
1,622

Corporate Items and Eliminations
 
(106
)
 
(24
)
 
(12
)
 
(39
)
 
(181
)
Financial Products Revenues
 
943

 
121

 
190

 
187

 
1,441

 
 
 
 
 
 
 
 
 
 
 
Consolidated Sales and Revenues
 
$
12,675

 
$
2,177

 
$
5,767

 
$
6,251

 
$
26,870

 
 
 
 
 
 
 
 
 
 
 

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
 
 
 
 
(Millions of dollars)
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Oil and gas
 
$
1,467

 
$
2,682

Power generation
 
992

 
1,961

Industrial
 
969

 
1,875

Transportation
 
1,286

 
2,472

Energy & Transportation External Sales
 
$
4,714

 
$
8,990

 
 
 
 
 

41

Table of Contents

 
 
 
 
 
 
 
 
Reconciliation of Sales and revenues:
 
 
 
 
 
 
 
(Millions of dollars)
Machinery,
Energy &
Transportation
 
Financial
Products
 
Consolidating
 Adjustments
 
Consolidated
 Total
Three Months Ended June 30, 2017
 

 
 

 
 

 
 

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Machinery,
Energy &
Transportation
 
Financial
Products
 
Consolidating
 Adjustments
 
Consolidated
 Total
Six Months Ended June 30, 2017
 

 
 

 
 

 
 

Total external sales and revenues from reportable segments
$
19,747

 
$
1,536

 
$

 
$
21,283

All Other operating segments
70

 

 

 
70

Other
(48
)
 
34

 
(186
)
1 
(200
)
Total sales and revenues
$
19,769

 
$
1,570

 
$
(186
)
 
$
21,153

1 Elimination of Financial Products revenues from Machinery, Energy & Transportation. 
 
 
 
 

42

Table of Contents

Reconciliation of Consolidated profit before taxes:
 
 
 
 
 
(Millions of dollars)
Machinery,
Energy &
Transportation
 
Financial
Products
 
Consolidated
 Total
Three Months Ended June 30, 2018
 
 
 
 
 
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

 
 
 
 
 
 
Three Months Ended June 30, 2017
 

 
 

 
 

Total profit from reportable segments
$
1,693

 
$
191

 
$
1,884

All Other operating segments
(19
)
 

 
(19
)
Cost centers
(11
)
 

 
(11
)
Corporate costs
(174
)
 

 
(174
)
Timing
(69
)
 

 
(69
)
Restructuring costs
(169
)
 

 
(169
)
Methodology differences:
 
 
 
 

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

Other methodology differences
(30
)
 

 
(30
)
Total consolidated profit before taxes
$
971

 
$
188

 
$
1,159

 
 
 
 
 
 

43

Table of Contents

Reconciliation of Consolidated profit before taxes:
 
 
 
 
 
(Millions of dollars)
Machinery,
Energy &
Transportation
 
Financial
Products
 
Consolidated
 Total
Six Months Ended June 30, 2018
 
 
 
 
 
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

 
 
 
 
 
 
Six Months Ended June 30, 2017
 

 
 

 
 

Total profit from reportable segments
$
3,032

 
$
374

 
$
3,406

All Other operating segments
(33
)
 

 
(33
)
Cost centers
(4
)
 

 
(4
)
Corporate costs
(289
)
 

 
(289
)
Timing
(107
)
 

 
(107
)
Restructuring costs
(920
)
 
(1
)
 
(921
)
Methodology differences:
 
 
 
 
 
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

 
 
 
 
 
 


44

Table of Contents

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:
 
 
 
 
 
 
(Millions of dollars)
 
Segment
profit (loss)
 
Restructuring costs
 
Segment profit (loss) with
restructuring costs
Three Months Ended June 30, 2018
 
 
 
 
 
 
Construction Industries
 
$
1,154

 
$
(29
)
 
$
1,125

Resource Industries
 
411

 
(52
)
 
359

Energy & Transportation
 
1,012

 
(24
)
 
988

Financial Products Segment
 
134

 
(1
)
 
133

All Other operating segments
 
23

 
(5
)
 
18

Total
 
$
2,734

 
$
(111
)
 
$
2,623

 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
 
 
 
 
 
Construction Industries
 
$
900

 
$
(27
)
 
$
873

Resource Industries
 
99

 
(111
)
 
(12
)
Energy & Transportation
 
694

 
(44
)
 
650

Financial Products Segment
 
191

 
(1
)
 
190

All Other operating segments
 
(19
)
 
(13
)
 
(32
)
Total
 
$
1,865

 
$
(196
)
 
$
1,669

 
 
 
 
 
 
 

Reconciliation of Restructuring costs:
 
 
 
 
 
 
(Millions of dollars)
 
Segment
profit (loss)
 
Restructuring costs
 
Segment profit (loss) with
restructuring costs
Six Months Ended June 30, 2018
 
 
 
 
 
 
Construction Industries
 
$
2,271

 
$
(43
)
 
$
2,228

Resource Industries
 
789

 
(96
)
 
693

Energy & Transportation
 
1,886

 
(29
)
 
1,857

Financial Products Segment
 
275

 
(1
)
 
274

All Other operating segments
 
80

 
(9
)
 
71

Total
 
$
5,301

 
$
(178
)
 
$
5,123

 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
Construction Industries
 
$
1,534

 
$
(694
)
 
$
840

Resource Industries
 
259

 
(170
)
 
89

Energy & Transportation
 
1,239

 
(58
)
 
1,181

Financial Products Segment
 
374

 
(2
)
 
372

All Other operating segments
 
(33
)
 
(19
)
 
(52
)
Total
 
$
3,373

 
$
(943
)
 
$
2,430

 
 
 
 
 
 
 

45

Table of Contents

Reconciliation of Assets:
 
 
 
 
 
 
 
(Millions of dollars)
Machinery,
Energy &
Transportation
 
Financial
Products
 
Consolidating
 Adjustments
 
Consolidated
 Total
June 30, 2018
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
December 31, 2017
 

 
 

 
 

 
 

Total assets from reportable segments
$
18,805

 
$
34,893

 
$

 
$
53,698

All Other operating segments
1,312

 

 

 
1,312

Items not included in segment assets:
 

 
 

 
 

 
 

Cash and short-term investments
7,381

 

 

 
7,381

Intercompany receivables
1,733

 

 
(1,733
)
 

Investment in Financial Products
4,064

 

 
(4,064
)
 

Deferred income taxes
2,166

 

 
(574
)
 
1,592

Goodwill and intangible assets
4,210

 

 

 
4,210

Property, plant and equipment – net and other assets
2,341

 

 

 
2,341

Operating lease methodology difference
(191
)
 

 

 
(191
)
Inventory methodology differences
(2,287
)
 

 

 
(2,287
)
Liabilities included in segment assets
9,352

 

 

 
9,352

Other
(399
)
 
(14
)
 
(33
)
 
(446
)
Total assets
$
48,487

 
$
34,879

 
$
(6,404
)
 
$
76,962

 
 
 
 
 
 
 
 

46

Table of Contents

Reconciliations of Depreciation and amortization:
 
 
 
 
 
(Millions of dollars)
Machinery,
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
 

 
 

 
 

Total depreciation and amortization from reportable segments
$
392

 
$
204

 
$
596

Items not included in segment depreciation and amortization:
 

 
 

 
 

All Other operating segments
56

 

 
56

Cost centers
35

 

 
35

Other
24

 
9

 
33

Total depreciation and amortization
$
507

 
$
213

 
$
720

 
 
 
 
 
 

Reconciliations of Depreciation and amortization:
 
 
 
 
 
(Millions of dollars)
Machinery,
Energy &
Transportation
 
Financial
Products
 
Consolidated
 Total
Six Months Ended June 30, 2018
 
 
 
 
 
Total depreciation and amortization from reportable segments
$
725

 
$
415

 
$
1,140

Items not included in segment depreciation and amortization:
 
 
 
 
 

All Other operating segments
115

 

 
115

Cost centers
63

 

 
63

Other
30

 
19

 
49

Total depreciation and amortization
$
933

 
$
434

 
$
1,367

 
 
 
 
 
 
Six Months Ended June 30, 2017
 

 
 

 
 

Total depreciation and amortization from reportable segments
$
779

 
$
412

 
$
1,191

Items not included in segment depreciation and amortization:
 
 
 
 
 

All Other operating segments
110

 

 
110

Cost centers
70

 

 
70

Other
39

 
20

 
59

Total depreciation and amortization
$
998

 
$
432

 
$
1,430

 
 
 
 
 
 

47

Table of Contents

Reconciliations of Capital expenditures:
 
 
 
 
 
 
 
(Millions of dollars)
Machinery,
Energy &
Transportation
 
Financial
Products
 
Consolidating
 Adjustments
 
Consolidated
 Total
Three Months Ended June 30, 2018
 

 
 

 
 

 
 

Total capital expenditures from reportable segments
$
241

 
$
533

 
$

 
$
774

Items not included in segment capital expenditures:
 

 
 

 
 

 
 

All Other operating segments
27

 

 

 
27

Cost centers
26

 

 

 
26

Timing
(18
)
 

 

 
(18
)
Other
(45
)
 
43

 
(36
)
 
(38
)
Total capital expenditures
$
231

 
$
576

 
$
(36
)
 
$
771

 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 

 
 

 
 

 
 

Total capital expenditures from reportable segments
$
158

 
$
439

 
$

 
$
597

Items not included in segment capital expenditures:
 

 
 

 
 

 
 

All Other operating segments
25

 

 

 
25

Cost centers
14

 

 

 
14

Timing
(9
)
 

 

 
(9
)
Other
(18
)
 
11

 
(5
)
 
(12
)
Total capital expenditures
$
170

 
$
450

 
$
(5
)
 
$
615

 
 
 
 
 
 
 
 
Reconciliations of Capital expenditures:
 
 
 
 
 
 
 
(Millions of dollars)
Machinery,
Energy &
Transportation
 
Financial
Products
 
Consolidating
 Adjustments
 
Consolidated
 Total
Six Months Ended June 30, 2018
 

 
 

 
 

 
 

Total capital expenditures from reportable segments
$
468

 
$
894

 
$

 
$
1,362

Items not included in segment capital expenditures:
 
 
 
 
 

 
 

All Other operating segments
38

 

 

 
38

Cost centers
40

 

 

 
40

Timing
157

 

 

 
157

Other
(149
)
 
120

 
(40
)
 
(69
)
Total capital expenditures
$
554

 
$
1,014

 
$
(40
)
 
$
1,528

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 

 
 

 
 

 
 

Total capital expenditures from reportable segments
$
316

 
$
710

 
$

 
$
1,026

Items not included in segment capital expenditures:
 
 
 
 
 

 
 

All Other operating segments
45

 

 

 
45

Cost centers
23

 

 

 
23

Timing
79

 

 

 
79

Other
(84
)
 
43

 
(8
)
 
(49
)
Total capital expenditures
$
379

 
$
753

 
$
(8
)
 
$
1,124

 
 
 
 
 
 
 
 

48

Table of Contents

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.


49

Table of Contents

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

 
 
 
 
 
 
Recorded Investment in Finance Receivables:
 

 
 

 
 

Individually evaluated for impairment
$
942

 
$

 
$
942

Collectively evaluated for impairment
18,226

 
3,464

 
21,690

Ending Balance
$
19,168

 
$
3,464

 
$
22,632

 
 
 
 
 
 

Credit quality of finance receivables

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.


50

Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2018
 (Millions of dollars)
31-60
Days
Past Due
 
61-90
Days
Past Due
 
91+
Days
Past Due
 
Total Past
Due
 
Current
 
Recorded Investment in Finance
Receivables
 
91+ Still
Accruing
Customer
 

 
 

 
 

 
 

 
 

 
 

 
 

North America
$
72

 
$
16

 
$
43

 
$
131

 
$
8,067

 
$
8,198

 
$
7

Europe
31

 
12

 
106

 
149

 
2,659

 
2,808

 
42

Asia Pacific
30

 
12

 
8

 
50

 
2,415

 
2,465

 
3

Mining
2

 

 
10

 
12

 
1,631

 
1,643

 

Latin America
42

 
17

 
102

 
161

 
1,408

 
1,569

 

Caterpillar Power Finance
37

 
61

 
250

 
348

 
2,132

 
2,480

 
30

Dealer
 

 
 

 
 

 
 
 
 
 
 
 
 

North America

 

 

 

 
1,931

 
1,931

 

Europe

 

 

 

 
324

 
324

 

Asia Pacific

 

 

 

 
485

 
485

 

Mining

 

 

 

 
3

 
3

 

Latin America

 
1

 
77

 
78

 
632

 
710

 

Caterpillar Power Finance

 

 

 

 
2

 
2

 

Total
$
214

 
$
119

 
$
596

 
$
929

 
$
21,689

 
$
22,618

 
$
82

 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 (Millions of dollars)
31-60
Days
Past Due
 
61-90
Days
Past Due
 
91+
Days
Past Due
 
Total Past
Due
 
Current
 
Recorded Investment in Finance
Receivables
 
91+ Still
Accruing
Customer
 

 
 

 
 

 
 

 
 

 
 

 
 

North America
$
71

 
$
15

 
$
42

 
$
128

 
$
7,950

 
$
8,078

 
$
8

Europe
21

 
10

 
46

 
77

 
2,718

 
2,795

 
13

Asia Pacific
13

 
7

 
14

 
34

 
2,009

 
2,043

 
5

Mining
3

 
1

 
60

 
64

 
1,751

 
1,815

 
9

Latin America
37

 
55

 
142

 
234

 
1,531

 
1,765

 

Caterpillar Power Finance
20

 
32

 
144

 
196

 
2,476

 
2,672

 
1

Dealer
 

 
 

 
 

 
 

 
 

 
 

 
 

North America

 

 

 

 
1,920

 
1,920

 

Europe

 

 

 

 
222

 
222

 

Asia Pacific

 

 

 

 
553

 
553

 

Mining

 

 

 

 
4

 
4

 

Latin America

 
72

 

 
72

 
691

 
763

 

Caterpillar Power Finance

 

 

 

 
2

 
2

 

Total
$
165

 
$
192

 
$
448

 
$
805

 
$
21,827

 
$
22,632

 
$
36

 
 
 
 
 
 
 
 
 
 
 
 
 
 

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.


51

Table of Contents

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 Allowance Recorded
 

 
 

 
 

 
 

 
 

 
 

North America
$
20

 
$
20

 
$

 
$
19

 
$
19

 
$

Europe
6

 
6

 

 
45

 
45

 

Asia Pacific
29

 
29

 

 
34

 
33

 

Mining
38

 
38

 

 
121

 
121

 

Latin America
40

 
40

 

 
45

 
45

 

Caterpillar Power Finance
139

 
159

 

 
160

 
172

 

Total
$
272

 
$
292

 
$

 
$
424

 
$
435

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Impaired Finance Receivables With An Allowance Recorded
 

 
 

 
 

 
 

 
 

 
 

North America
$
49

 
$
47

 
$
23

 
$
44

 
$
43

 
$
17

Europe
48

 
47

 
24

 
9

 
8

 
5

Asia Pacific
3

 
3

 
1

 
8

 
8

 
2

Mining
62

 
62

 
21

 

 

 

Latin America
50

 
50

 
37

 
95

 
106

 
42

Caterpillar Power Finance
343

 
345

 
99

 
362

 
365

 
83

Total
$
555

 
$
554

 
$
205

 
$
518

 
$
530

 
$
149

 
 
 
 
 
 
 
 
 
 
 
 
Total Impaired Finance Receivables
 

 
 

 
 

 
 

 
 

 
 

North America
$
69

 
$
67

 
$
23

 
$
63

 
$
62


$
17

Europe
54

 
53

 
24

 
54

 
53


5

Asia Pacific
32

 
32

 
1

 
42

 
41


2

Mining
100

 
100

 
21

 
121

 
121

 

Latin America
90

 
90

 
37

 
140

 
151


42

Caterpillar Power Finance
482

 
504

 
99

 
522

 
537


83

Total
$
827

 
$
846

 
$
205

 
$
942

 
$
965

 
$
149

 
 
 
 
 
 
 
 
 
 
 
 


52

Table of Contents

 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
(Millions of dollars)
Average Recorded
Investment
 
Interest Income
Recognized
 
Average Recorded
Investment
 
Interest Income
Recognized
Impaired Finance Receivables With No Allowance Recorded
 

 
 

 
 

 
 

North America
$
18

 
$
1

 
$
11

 
$

Europe
7

 

 
48

 
1

Asia Pacific
28

 

 
30

 
1

Mining
45

 
1

 
130

 
3

Latin America
43

 

 
67

 

Caterpillar Power Finance
189

 
1

 
257

 
3

Total
$
330

 
$
3

 
$
543

 
$
8

 
 
 
 
 
 
 
 
Impaired Finance Receivables With An Allowance Recorded
 

 
 

 
 

 
 

North America
$
56

 
$

 
$
52

 
$
1

Europe
48

 
1

 
5

 

Asia Pacific
5

 

 
30

 

Mining
64

 
1

 

 

Latin America
65

 
1

 
107

 
1

Caterpillar Power Finance
356

 
3

 
125

 

Total
$
594

 
$
6

 
$
319

 
$
2

 
 
 
 
 
 
 
 
Total Impaired Finance Receivables
 

 
 

 
 

 
 

North America
$
74

 
$
1

 
$
63

 
$
1

Europe
55

 
1

 
53

 
1

Asia Pacific
33

 

 
60

 
1

Mining
109

 
2

 
130

 
3

Latin America
108

 
1

 
174

 
1

Caterpillar Power Finance
545

 
4

 
382

 
3

Total
$
924

 
$
9

 
$
862

 
$
10

 

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Table of Contents

 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
(Millions of dollars)
Average Recorded
Investment
 
Interest Income
Recognized
 
Average Recorded
Investment
 
Interest Income
Recognized
Impaired Finance Receivables With No Allowance Recorded
 

 
 

 
 

 
 

Customer
 

 
 

 
 

 
 

North America
$
18

 
$
1

 
$
11

 
$

Europe
23

 

 
48

 
1

Asia Pacific
30

 
1

 
18

 
1

Mining
78

 
2

 
129

 
4

Latin America
44

 
1

 
70

 
1

Caterpillar Power Finance
178

 
3

 
258

 
6

Total
$
371

 
$
8

 
$
534

 
$
13

 
 
 
 
 
 
 
 
Impaired Finance Receivables With An Allowance Recorded
 

 
 

 
 

 
 

Customer
 

 
 

 
 

 
 

North America
$
53

 
$
1

 
$
56

 
$
1

Europe
32

 
1

 
6

 

Asia Pacific
5

 

 
38

 
1

Mining
36

 
1

 

 

Latin America
76

 
2

 
101

 
2

Caterpillar Power Finance
355

 
4

 
96

 
1

Total
$
557

 
$
9

 
$
297

 
$
5

 
 
 
 
 
 
 
 
Total Impaired Finance Receivables
 

 
 

 
 

 
 

Customer
 

 
 

 
 

 
 

North America
$
71

 
$
2

 
$
67

 
$
1

Europe
55

 
1

 
54

 
1

Asia Pacific
35

 
1

 
56

 
2

Mining
114

 
3

 
129

 
4

Latin America
120

 
3

 
171

 
3

Caterpillar Power Finance
533

 
7

 
354

 
7

Total
$
928

 
$
17

 
$
831

 
$
18

 
 
 
 
 
 
 
 

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:

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Table of Contents


 
 
 
 
 (Millions of dollars)
June 30, 2018
 
December 31, 2017
North America
$
42

 
$
38

Europe
69

 
37

Asia Pacific
6

 
10

Mining
13

 
63

Latin America
142

 
192

Caterpillar Power Finance
357

 
343

Total
$
629

 
$
683

 
 
 
 


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)
 
Number 
of
Contracts
 
Pre-TDR
Recorded
Investment
 
Post-TDR
Recorded
Investment
 
Number
of
Contracts
 
Pre-TDR
Recorded
Investment
 
Post-TDR
Recorded
Investment
North America
 
17
 
$
7

 
$
7

 
17
 
$
8

 
$
7

Asia Pacific
 
 

 

 
1
 

 

Latin America
 
 

 

 
7
 
3

 
3

Caterpillar Power Finance 1
 
2
 
50

 
17

 
48
 
243

 
237

Total
 
19
 
$
57

 
$
24

 
73
 
$
254

 
$
247

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
 
Number 
of
Contracts
 
Pre-TDR
Outstanding
Recorded
Investment
 
Post-TDR
Outstanding
Recorded
Investment
 
Number 
of
Contracts
 
Pre-TDR
Outstanding
Recorded
Investment
 
Post-TDR
Outstanding
Recorded
Investment
North America
 
30

 
$
13

 
$
13

 
26

 
$
9

 
$
8

Europe
 

 

 

 
1

 

 

Asia Pacific
 

 

 

 
6

 
39

 
30

Mining
 
1

 
29

 
29

 
2

 
57

 
56

Latin America
 
1

 
3

 
3

 
14

 
5

 
5

Caterpillar Power Finance
 
5

 
53

 
20

 
54

 
268

 
261

Total 
 
37

 
$
98

 
$
65

 
103

 
$
378

 
$
360

 
 
 
 
 
 
 
 
 
 
 
 
 
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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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.


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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)
Level 1
 
Level 2
 
Level 3
 
Measured at NAV
 
Total
Assets / Liabilities,
at Fair Value
Assets
 

 
 

 
 

 
 
 
 

Debt securities
 

 
 

 
 

 
 
 
 

Government debt
 

 
 

 
 

 
 
 
 

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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December 31, 2017
 (Millions of dollars)
Level 1
 
Level 2
 
Level 3
 
Total
Assets / Liabilities,
at Fair Value
Assets
 

 
 

 
 

 
 

Debt securities
 

 
 

 
 

 
 

Government debt
 

 
 

 
 

 
 

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.

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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
 
 
 
 
(Millions of dollars)
 
Carrying
 Amount
 
Fair
 Value
 
Carrying
 Amount
 
Fair
 Value
 
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 leases 1)
 
$
15,040

 
$
15,002

 
$
15,452

 
$
15,438

 
3
 
Note 16
Wholesale inventory receivables – net (excluding finance leases 1)
 
$
1,178

 
$
1,151

 
$
1,153

 
$
1,123

 
3
 
 
Interest rate contracts – net
 
$
3

 
$
3

 
$
1

 
$
1

 
2
 
Note 5
Commodity contracts – net
 
$
6

 
$
6

 
$
21

 
$
21

 
2
 
Note 5
 
 
 
 
 
 
 
 
 
 
 
 

Liabilities
 
 

 
 

 
 

 
 

 
 
 
 
Short-term borrowings
 
$
6,220

 
$
6,220

 
$
4,837

 
$
4,837

 
1
 
 
Long-term debt (including amounts due within one year)
 
 

 
 

 
 

 
 

 
 
 
 
Machinery, Energy & Transportation
 
$
7,991

 
$
9,221

 
$
7,935

 
$
9,863

 
2
 
 
Financial Products
 
$
21,958

 
$
21,822

 
$
22,106

 
$
22,230

 
2
 
 
Foreign currency contracts – net
 
$
46

 
$
46

 
$
41

 
$
41

 
2
 
Note 5
Guarantees
 
$
8

 
$
8

 
$
8

 
$
8

 
3
 
Note 10

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.
 
 
 
 
 


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18.                         Other income (expense)

 
 
Three Months Ended
June 30
 
Six Months Ended June 30
 
(Millions of dollars)
 
2018
 
2017
 
2018
 
2017
 
Investment and interest income
 
$
45

 
$
32

 
$
81

 
$
54

 
Foreign exchange gains (losses) 1
 
(60
)
 
(112
)
 
(79
)
 
(160
)
 
License fee income
 
36

 
24

 
67

 
46

 
Gain on sale of affiliated company
 

 
85

2 


 
85

2 

Net periodic pension and OPEB income (cost), excluding service cost
 
86

 
67

 
172

 
104

 
Miscellaneous income (loss)
 
14

 

 
7

 
(1
)
 
Total
 
$
121

 
$
96

 
$
248

 
$
128

 
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
 
 
2018
 
2017
Employee separations 1
 
$
45

 
$
42

Contract terminations 1
 

 
17

Long-lived asset impairments 1
 
30

 
63

Other 2
 
39

 
47

Total restructuring costs
 
$
114

 
$
169

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30
 
 
2018
 
2017
Employee separations 1
 
$
78

 
$
506

Contract terminations 1
 

 
26

Long-lived asset impairments 1
 
30

 
275

Defined benefit plan curtailments and termination benefits 3
 

 
29

Other 2
 
75

 
85

Total restructuring costs
 
$
183

 
$
921

 
 
 
 
 
1 Recognized in Other operating (income) expenses.
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.


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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.

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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.

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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:

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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.

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Consolidated Results of Operations
 
THREE MONTHS ENDED JUNE 30, 2018 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2017

CONSOLIDATED SALES AND REVENUES
a2qsalesandrevenues.jpg
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.

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Sales and Revenues by Geographic Region
 
North America
 
Latin America
 
EAME
 
Asia/Pacific
 
External Sales and Revenues
 
Inter-Segment
 
Total Sales and Revenues
(Millions of dollars)
$
 
% Chg
 
$
 
% Chg
 
$
 
% Chg
 
$
 
% Chg
 
$
 
% Chg
 
$
 
% Chg
 
$
 
% Chg
Second Quarter 2018
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Construction Industries
$
2,739

 
18
%
 
$
392

 
8
%
 
$
1,171

 
21
%
 
$
1,835

 
43
%
 
$
6,137

 
24
%
 
$
35

 
21
%
 
$
6,172

 
24
%
Resource Industries
804

 
31
%
 
394

 
32
%
 
569

 
44
%
 
664

 
47
%
 
2,431

 
38
%
 
95

 
23
%
 
2,526

 
38
%
Energy & Transportation
2,582

 
30
%
 
287

 
(8
%)
 
1,153

 
7
%
 
692

 
22
%
 
4,714

 
20
%
 
1,010

 
22
%
 
5,724

 
20
%
All Other Segments
17

 
70
%
 
1

 
%
 
4

 
(64
%)
 
19

 
73
%
 
41

 
24
%
 
83

 
(21
%)
 
124

 
(10
%)
Corporate Items and Eliminations
(40
)
 
 
 
(3
)
 
 
 

 
 
 
(1
)
 
 
 
(44
)
 
 
 
(1,223
)
 
 
 
(1,267
)
 
 
Machinery, Energy & Transportation Sales
6,102

 
25
%
 
1,071

 
10
%
 
2,897

 
18
%
 
3,209

 
39
%
 
13,279

 
25
%
 

 
 %
 
13,279

 
25
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Products Segment
537

 
6
%
 
71

 
(10
%)
 
101

 
 %
 
120

 
32
%
 
829

1 
7
%
 

 
 %
 
829

 
7
%
Corporate Items and Eliminations
(57
)
 
 
 
(11
)
 
 
 
(7
)
 
 
 
(22
)
 
 
 
(97
)
 
 
 

 
 
 
(97
)
 
 
Financial Products Revenues
480

 
6
%
 
60

 
(6
%)
 
94

 
(2
%)
 
98

 
26
%
 
732

 
6
%
 

 
 %
 
732

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Sales and Revenues
$
6,582

 
23
%
 
$
1,131

 
9
%
 
$
2,991

 
18
%
 
$
3,307

 
38
%
 
$
14,011

 
24
%
 
$

 
 %
 
$
14,011

 
24
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Second Quarter 2017
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction Industries
$
2,318

 
 
 
$
364

 
 
 
$
964

 
 
 
$
1,284

 
 

 
$
4,930

 
 
 
$
29

 
 

 
$
4,959

 
 
Resource Industries
612

 
 
 
299

 
 
 
396

 
 
 
452

 
 

 
1,759

 
 
 
77

 
 

 
1,836

 
 
Energy & Transportation
1,982

 
 
 
312

 
 
 
1,079

 
 
 
568

 
 

 
3,941

 
 
 
827

 
 

 
4,768

 
 
All Other Segments
10

 
 
 
1

 
 
 
11

 
 
 
11

 
 

 
33

 
 
 
105

 
 

 
138

 
 
Corporate Items and Eliminations
(22
)
 
 
 

 
 
 
(2
)
 
 
 

 
 
 
(24
)
 
 
 
(1,038
)
 
 
 
(1,062
)
 
 
Machinery, Energy & Transportation Sales
4,900

 
 

 
976

 
 

 
2,448

 
 

 
2,315

 
 

 
10,639

 
 

 

 
 

 
10,639

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Products Segment
505

 
 
 
79

 
 
 
101

 
 
 
91

 
 

 
776

1 
 
 

 
 

 
776

 
 
Corporate Items and Eliminations
(51
)
 
 
 
(15
)
 
 
 
(5
)
 
 
 
(13
)
 
 

 
(84
)
 
 
 

 
 

 
(84
)
 
 
Financial Products Revenues
454

 
 

 
64

 
 

 
96

 
 

 
78

 
 

 
692

 
 

 

 
 

 
692

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Millions of dollars)
Second Quarter 2017
 
Sales
Volume
 
Price
Realization
 
Currency
 
Inter-Segment / Other
 
Second Quarter 2018
 
$
Change
 
%
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction Industries
$
4,959

 
$
1,126

 
$
(68
)
 
$
149

 
$
6

 
$
6,172

 
$
1,213

 
24
%
Resource Industries
1,836

 
565

 
94

 
13

 
18

 
2,526

 
690

 
38
%
Energy & Transportation
4,768

 
641

 
64

 
68

 
183

 
5,724

 
956

 
20
%
All Other Segments
138

 
6

 

 
2

 
(22
)
 
124

 
(14
)
 
(10
%)
Corporate Items and Eliminations
(1,062
)
 
(21
)
 
1

 

 
(185
)
 
(1,267
)
 
(205
)
 
 

Machinery, Energy & Transportation Sales
10,639

 
2,317

 
91

 
232

 

 
13,279

 
2,640

 
25
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Products Segment
776

 

 

 

 
53

 
829

 
53

 
7
%
Corporate Items and Eliminations
(84
)
 

 

 

 
(13
)
 
(97
)
 
(13
)
 
 

Financial Products Revenues
692

 

 

 

 
40

 
732

 
40

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Sales and Revenues
$
11,331

 
$
2,317

 
$
91

 
$
232

 
$
40

 
$
14,011

 
$
2,680

 
24
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

CONSOLIDATED OPERATING PROFIT
a2qoperatingprofit.jpg
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.


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Table of Contents

Profit by Segment
 
 
 
 
 
 
 
(Millions of dollars)
Second Quarter 2018
 
Second Quarter 2017
 
$
Change
 
%
 Change
Construction Industries
$
1,154

 
$
900

 
$
254

 
28
%
Resource Industries
411

 
99

 
312

 
315
%
Energy & Transportation
1,012

 
694

 
318

 
46
%
All Other Segments
23

 
(19
)
 
42

 


Corporate Items and Eliminations
(466
)
 
(589
)
 
123

 
 

Machinery, Energy & Transportation
2,134

 
1,085

 
1,049

 
97
%
 
 
 
 
 
 
 
 
Financial Products Segment
134

 
191

 
(57
)
 
(30
%)
Corporate Items and Eliminations
(5
)
 
(5
)
 

 
 

Financial Products
129

 
186

 
(57
)
 
(31
%)
Consolidating Adjustments
(96
)
 
(87
)
 
(9
)
 
 

Consolidated Operating Profit
$
2,167

 
$
1,184

 
$
983

 
83
%
 
 
 
 
 
 
 
 

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.

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Table of Contents

Energy & Transportation
Sales by Application
 
 
 
 
 
 
 
 
(Millions of dollars)
 
Second Quarter 2018
 
Second Quarter 2017
 
$
Change
 
%
 Change
Oil and Gas
 
$
1,467

 
$
1,053

 
$
414

 
39
%
Power Generation
 
992

 
877

 
115

 
13
%
Industrial
 
969

 
884

 
85

 
10
%
Transportation
 
1,286

 
1,127

 
159

 
14
%
External Sales
 
4,714

 
3,941

 
773

 
20
%
Inter-Segment
 
1,010

 
827

 
183

 
22
%
Total Sales
 
$
5,724

 
$
4,768

 
$
956

 
20
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

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Table of Contents

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.



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Table of Contents

SIX MONTHS ENDED JUNE 30, 2018 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2017

CONSOLIDATED SALES AND REVENUES
ytd2qsalesandrevenues.jpg
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.




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Table of Contents


Sales and Revenues by Geographic Region
 
North America
 
Latin America
 
EAME
 
Asia/Pacific
 
External Sales and Revenues
 
Inter-Segment
 
Total Sales and Revenues
(Millions of dollars)
$
 
% Chg
 
$
 
% Chg
 
$
 
% Chg
 
$
 
% Chg
 
$
 
% Chg
 
$
 
% Chg
 
$
 
% Chg
Six Months Ended June 30, 2018
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Construction Industries
$
5,359

 
27
%
 
$
736

 
20
%
 
$
2,238

 
26
%
 
$
3,463

 
44
%
 
$
11,796

 
31
%
 
$
53

 
39
%
 
$
11,849

 
31
%
Resource Industries
1,602

 
32
%
 
754

 
33
%
 
1,089

 
34
%
 
1,194

 
42
%
 
4,639

 
35
%
 
196

 
17
%
 
4,835

 
34
%
Energy & Transportation
4,807

 
30
%
 
567

 
(3
%)
 
2,245

 
13
%
 
1,371

 
33
%
 
8,990

 
23
%
 
1,953

 
22
%
 
10,943

 
23
%
All Other Segments
32

 
78
%
 
1

 
 %
 
8

 
(70
%)
 
37

 
54
%
 
78

 
11
%
 
162

 
(19
%)
 
240

 
(11
%)
Corporate Items and Eliminations
(68
)
 
 
 
(2
)
 
 
 
(3
)
 
 
 
(1
)
 
 
 
(74
)
 
 
 
(2,364
)
 
 
 
(2,438
)
 
 
Machinery, Energy & Transportation Sales
11,732

 
29
%
 
2,056

 
16
%
 
5,577

 
22
%
 
6,064

 
41
%
 
25,429

 
29
%
 

 
 %
 
25,429

 
29
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Products Segment
1,049

 
6
%
 
145

 
(10
%)
 
202

 
 %
 
226

 
24
%
 
1,622

1 
6
%
 

 
 %
 
1,622

 
6
%
Corporate Items and Eliminations
(106
)
 
 
 
(24
)
 
 
 
(12
)
 
 
 
(39
)
 
 
 
(181
)
 
 
 

 
 
 
(181
)
 
 
Financial Products Revenues
943

 
5
%
 
121

 
(9
%)
 
190

 
(1
%)
 
187

 
19
%
 
1,441

 
4
%
 

 
 %
 
1,441

 
4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Sales and Revenues
$
12,675

 
26
%
 
$
2,177

 
14
%
 
$
5,767

 
21
%
 
$
6,251

 
41
%
 
$
26,870

 
27
%
 
$

 
 %
 
$
26,870

 
27
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction Industries
$
4,231

 
 
 
$
614

 
 
 
$
1,776

 
 
 
$
2,400

 
 

 
$
9,021

 
 
 
$
38

 
 

 
$
9,059

 
 
Resource Industries
1,210

 
 
 
568

 
 
 
812

 
 
 
839

 
 

 
3,429

 
 
 
168

 
 

 
3,597

 
 
Energy & Transportation
3,704

 
 
 
587

 
 
 
1,979

 
 
 
1,027

 
 

 
7,297

 
 
 
1,607

 
 

 
8,904

 
 
All Other Segments
18

 
 
 
1

 
 
 
27

 
 
 
24

 
 

 
70

 
 
 
200

 
 

 
270

 
 
Corporate Items and Eliminations
(45
)
 
 
 

 
 
 
(4
)
 
 
 
1

 
 
 
(48
)
 
 
 
(2,013
)
 
 
 
(2,061
)
 
 
Machinery, Energy & Transportation Sales
9,118

 
 

 
1,770

 
 

 
4,590

 
 

 
4,291

 
 

 
19,769

 
 

 

 
 

 
19,769

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Products Segment
991

 
 
 
162

 
 
 
201

 
 
 
182

 
 

 
1,536

1 
 
 

 
 

 
1,536

 
 
Corporate Items and Eliminations
(89
)
 
 
 
(29
)
 
 
 
(9
)
 
 
 
(25
)
 
 

 
(152
)
 
 
 

 
 

 
(152
)
 
 
Financial Products Revenues
902

 
 

 
133

 
 

 
192

 
 

 
157

 
 

 
1,384

 
 

 

 
 

 
1,384

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Sales and Revenues
$
10,020

 
 

 
$
1,903

 
 

 
$
4,782

 
 

 
$
4,448

 
 

 
$
21,153

 
 

 
$

 
 

 
$
21,153

 
 


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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Millions of dollars)
Six Months Ended June 30, 2017
 
Sales
Volume
 
Price
Realization
 
Currency
 
Other
 
Six Months Ended June 30, 2018
 
$
Change
 
%
 Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction Industries
$
9,059

 
$
2,466

 
$
(9
)
 
$
318

 
$
15

 
$
11,849

 
$
2,790

 
31
 %
Resource Industries
3,597

 
989

 
180

 
41

 
28

 
4,835

 
1,238

 
34
 %
Energy & Transportation
8,904

 
1,410

 
105

 
178

 
346

 
10,943

 
2,039

 
23
 %
All Other Segments
270

 
5

 

 
3

 
(38
)
 
240

 
(30
)
 
(11
)%
Corporate Items and Eliminations
(2,061
)
 
(27
)
 
1

 

 
(351
)
 
(2,438
)
 
(377
)
 
 

Machinery, Energy & Transportation Sales
19,769

 
4,843

 
277

 
540

 

 
25,429

 
5,660

 
29
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Products Segment
1,536

 

 

 

 
86

 
1,622

 
86

 
6
 %
Corporate Items and Eliminations
(152
)
 

 

 

 
(29
)
 
(181
)
 
(29
)
 
 

Financial Products Revenues
1,384

 

 

 

 
57

 
1,441

 
57

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Sales and Revenues
$
21,153

 
$
4,843

 
$
277

 
$
540

 
$
57

 
$
26,870

 
$
5,717

 
27
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


72

Table of Contents

CONSOLIDATED OPERATING PROFIT
ytd2qoperatingprofit.jpg
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.

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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.
Profit by Segment
 
 
 
 
 
 
 
(Millions of dollars)
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
$
Change
 
%
 Change
Construction Industries
$
2,271

 
$
1,534

 
$
737

 
48
 %
Resource Industries
789

 
259

 
530

 
205
 %
Energy & Transportation
1,886

 
1,239

 
647

 
52
 %
All Other Segments
80

 
(33
)
 
113

 


Corporate Items and Eliminations
(837
)
 
(1,649
)
 
812

 
 

Machinery, Energy & Transportation
4,189

 
1,350

 
2,839

 
210
 %
 
 
 
 
 
 
 
 
Financial Products Segment
275

 
374

 
(99
)
 
(26
)%
Corporate Items and Eliminations
(7
)
 
(2
)
 
(5
)
 
 

Financial Products
268

 
372

 
(104
)
 
(28
)%
Consolidating Adjustments
(182
)
 
(158
)
 
(24
)
 
 

Consolidated Operating Profit
$
4,275

 
$
1,564

 
$
2,711

 
173
 %
 
 
 
 
 
 
 
 
Construction Industries
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.

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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
Oil and Gas
 
$
2,682

 
$
1,862

 
$
820

 
44
%
Power Generation
 
1,961

 
1,593

 
368

 
23
%
Industrial
 
1,875

 
1,661

 
214

 
13
%
Transportation
 
2,472

 
2,181

 
291

 
13
%
External Sales
 
8,990

 
7,297

 
1,693

 
23
%
Inter-Segment
 
1,953

 
1,607

 
346

 
22
%
Total Sales
 
$
10,943

 
$
8,904

 
$
2,039

 
23
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

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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
 
 
2018
 
2017
Employee separations 1
 
$
45

 
$
42

Contract terminations 1
 

 
17

Long-lived asset impairments 1
 
30

 
63

Other 2
 
39

 
47

Total restructuring costs
 
$
114

 
$
169

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30
 
 
2018
 
2017
Employee separations 1
 
$
78

 
$
506

Contract terminations 1
 

 
26

Long-lived asset impairments 1
 
30

 
275

Defined benefit plan curtailments and termination benefits 3
 

 
29

Other 2
 
75

 
85

Total restructuring costs
 
$
183

 
$
921

 
 
 
 
 
1 Recognized in Other operating (income) expenses.
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:


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(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® 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

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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

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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

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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:
 
June 30, 2018
(Millions of dollars)
Consolidated
 
Machinery,
Energy &
Transportation
 
Financial
Products
Credit lines available:
 

 
 

 
 

Global credit facilities
$
10,500

 
$
2,750

 
$
7,750

Other external
4,584

 
35

 
4,549

Total credit lines available
15,084

 
2,785

 
12,299

Less: Commercial paper outstanding
(5,133
)
 

 
(5,133
)
Less: Utilized credit
(1,299
)
 
(35
)
 
(1,264
)
Available credit
$
8,652

 
$
2,750

 
$
5,902

 
 
 
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.

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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 shareholdersWe 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.


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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.
   

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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.


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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
Operating profit as a percent of total sales and revenues
 
15.5
%
 
10.4
%
 
15.9
%
 
7.4
%
Restructuring costs
 
0.8
%
 
1.5
%
 
0.7
%
 
4.2
%
Adjusted operating profit margin
 
16.3
%
 
11.9
%
 
16.6
%
 
11.6
%
 
 
 
 
 
 
 
 
 

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
Profit per share - diluted
 
$
2.82

 
$
1.35

 
$
5.56

 
$
1.67

Per share restructuring costs 1 
 
0.15

 
0.23

 
0.23

 
1.19

Per share gain on sale of equity investment 2
 

 
(0.09
)
 

 
(0.09
)
Adjusted profit per share
 
$
2.97

 
$
1.49

 
$
5.79

 
$
2.77

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.

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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.


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Caterpillar Inc.
Supplemental Data for Results of Operations
For the Three Months Ended June 30, 2018
(Unaudited)
(Millions of dollars)
 
 
 
Supplemental Consolidating Data
 
 
Consolidated
 
Machinery,
Energy &
Transportation 1
 
Financial
Products
 
Consolidating
Adjustments
 
Sales and revenues:
 

 
 

 
 

 
 

 
Sales of Machinery, Energy & Transportation
$
13,279

 
$
13,279

 
$

 
$

 
Revenues of Financial Products
732

 

 
849

 
(117
)
2 

Total sales and revenues
14,011

 
13,279

 
849

 
(117
)
 
 
 
 
 
 
 
 
 
 
Operating costs:
 

 
 

 
 

 
 

 
Cost of goods sold
9,422

 
9,422

 

 

 
Selling, general and administrative expenses
1,440

 
1,223

 
223

 
(6
)
3 

Research and development expenses
462

 
462

 

 

 
Interest expense of Financial Products
182

 

 
191

 
(9
)
4 

Other operating (income) expenses
338

 
38

 
306

 
(6
)
3 

Total operating costs
11,844

 
11,145

 
720

 
(21
)
 
 
 
 
 
 
 
 
 
 
Operating profit
2,167

 
2,134

 
129

 
(96
)
 
 
 
 
 
 
 
 
 
 
Interest expense excluding Financial Products
102

 
111

 

 
(9
)
4 

Other income (expense)
121

 
27

 
7

 
87

5 

 
 
 
 
 
 
 
 
 
Consolidated profit before taxes
2,186

 
2,050

 
136

 

 
 
 
 
 
 
 
 
 
 
Provision (benefit) for income taxes
490

 
457

 
33

 

 
Profit of consolidated companies
1,696

 
1,593

 
103

 

 
 
 
 
 
 
 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
9

 
9

 

 

 
Equity in profit of Financial Products’ subsidiaries

 
98

 

 
(98
)
6 

 
 
 
 
 
 
 
 
 
Profit of consolidated and affiliated companies
1,705

 
1,700

 
103

 
(98
)
 
 
 
 
 
 
 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
(2
)
 
(7
)
 
5

 

 
 
 
 
 
 
 
 
 
 
Profit 7
$
1,707

 
$
1,707

 
$
98

 
$
(98
)
 
 
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.


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Caterpillar Inc.
Supplemental Data for Results of Operations
For the Six Months Ended June 30, 2018
(Unaudited)
(Millions of dollars)
 
 
 
 
Supplemental Consolidating Data
 
 
Consolidated
 
Machinery,
Energy &
Transportation 1
 
Financial
Products
 
Consolidating
Adjustments
 
Sales and revenues:
 

 
 

 
 

 
 

 
Sales of Machinery, Energy & Transportation
$
25,429

 
$
25,429

 
$

 
$

 
Revenues of Financial Products
1,441

 

 
1,660

 
(219
)
2 

Total sales and revenues
26,870

 
25,429

 
1,660

 
(219
)
 
 
 
 
 
 
 
 
 
 
Operating costs:
 

 
 

 
 

 
 

 
Cost of goods sold
17,988

 
17,988

 

 

 
Selling, general and administrative expenses
2,716

 
2,310

 
412

 
(6
)
3 

Research and development expenses
905

 
905

 

 

 
Interest expense of Financial Products
348

 

 
364

 
(16
)
4 

Other operating (income) expenses
638

 
37

 
616

 
(15
)
3 

Total operating costs
22,595

 
21,240

 
1,392

 
(37
)
 
 
 
 
 
 
 
 
 
 
Operating profit
4,275

 
4,189

 
268

 
(182
)
 
 
 
 
 
 
 
 
 
 
Interest expense excluding Financial Products
203

 
223

 

 
(20
)
4 

Other income (expense)
248

 
81

 
5

 
162

5 

 
 
 
 
 
 
 
 
 
Consolidated profit before taxes
4,320

 
4,047

 
273

 

 
 
 
 
 
 
 
 
 
 
Provision (benefit) for income taxes
962

 
898

 
64

 

 
Profit of consolidated companies
3,358

 
3,149

 
209

 

 
 
 
 
 
 
 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
14

 
14

 

 

 
Equity in profit of Financial Products’ subsidiaries

 
200

 

 
(200
)
6 

 
 
 
 
 
 
 
 
 
Profit of consolidated and affiliated companies
3,372

 
3,363

 
209

 
(200
)
 
 
 
 
 
 
 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests

 
(9
)
 
9

 

 
 
 
 
 
 
 
 
 
 
Profit 7
$
3,372

 
$
3,372

 
$
200

 
$
(200
)
 
 
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.


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Caterpillar Inc.
Supplemental Data for Results of Operations
For the Three Months Ended June 30, 2017
(Unaudited)
(Millions of dollars)
 
 
 
Supplemental Consolidating Data
 
 
Consolidated
 
Machinery,
Energy &
Transportation 1
 
Financial
Products
 
Consolidating
Adjustments
 
Sales and revenues:
 

 
 

 
 

 
 

 
Sales of Machinery, Energy & Transportation
$
10,639

 
$
10,639

 
$

 
$

 
Revenues of Financial Products
692

 

 
793

 
(101
)
2 

Total sales and revenues
11,331

 
10,639

 
793

 
(101
)
 
 
 
 
 
 
 
 
 
 
Operating costs:
 

 
 

 
 

 
 

 
Cost of goods sold
7,816

 
7,816

 

 

 
Selling, general and administrative expenses
1,304

 
1,169

 
139

 
(4
)
3 

Research and development expenses
458

 
458

 

 

 
Interest expense of Financial Products
162

 

 
167

 
(5
)
4 

Other operating (income) expenses
407

 
111

 
301

 
(5
)
3 

Total operating costs
10,147

 
9,554

 
607

 
(14
)
 
 
 
 
 
 
 
 
 
 
Operating profit
1,184

 
1,085

 
186

 
(87
)
 
 
 
 
 
 
 
 
 
 
Interest expense excluding Financial Products
121

 
146

 

 
(25
)
4 

Other income (expense)
96

 
32

 
2

 
62

5 

 
 
 
 
 
 
 
 
 
Consolidated profit before taxes
1,159

 
971

 
188

 

 
 
 
 
 
 
 
 
 
 
Provision (benefit) for income taxes
361

 
303

 
58

 

 
Profit of consolidated companies
798

 
668

 
130

 

 
 
 
 
 
 
 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
5

 
5

 

 

 
Equity in profit of Financial Products’ subsidiaries

 
129

 

 
(129
)
6 

 
 
 
 
 
 
 
 
 
Profit of consolidated and affiliated companies
803

 
802

 
130

 
(129
)
 
 
 
 
 
 
 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
1

 

 
1

 

 
 
 
 
 
 
 
 
 
 
Profit 7
$
802

 
$
802

 
$
129

 
$
(129
)
 
 
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.


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Caterpillar Inc.
Supplemental Data for Results of Operations
For the Six Months Ended June 30, 2017
(Unaudited)
(Millions of dollars)
 
 
 
 
Supplemental Consolidating Data
 
 
Consolidated
 
Machinery,
Energy &
Transportation 1
 
Financial
Products
 
Consolidating
Adjustments
 
Sales and revenues:
 

 
 

 
 

 
 

 
Sales of Machinery, Energy & Transportation
$
19,769

 
$
19,769

 
$

 
$

 
Revenues of Financial Products
1,384

 

 
1,570

 
(186
)
2 

Total sales and revenues
21,153

 
19,769

 
1,570

 
(186
)
 
 
 
 
 
 
 
 
 
 
Operating costs:
 

 
 

 
 

 
 

 
Cost of goods sold
14,617

 
14,617

 

 

 
Selling, general and administrative expenses
2,365

 
2,109

 
265

 
(9
)
3 

Research and development expenses
883

 
883

 

 

 
Interest expense of Financial Products
321

 

 
330

 
(9
)
4 

Other operating (income) expenses
1,403

 
810

 
603

 
(10
)
3 

Total operating costs
19,589

 
18,419

 
1,198

 
(28
)
 
 
 
 
 
 
 
 
 
 
Operating profit
1,564

 
1,350

 
372

 
(158
)
 
 
 
 
 
 
 
 
 
 
Interest expense excluding Financial Products
244

 
290

 

 
(46
)
4 

Other income (expense)
128

 
16

 

 
112

5 

 
 
 
 
 
 
 
 
 
Consolidated profit before taxes
1,448

 
1,076

 
372

 

 
 
 
 
 
 
 
 
 
 
Provision (benefit) for income taxes
451

 
337

 
114

 

 
Profit of consolidated companies
997

 
739

 
258

 

 
 
 
 
 
 
 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies

 

 

 

 
Equity in profit of Financial Products’ subsidiaries

 
255

 

 
(255
)
6 

 
 
 
 
 
 
 
 
 
Profit of consolidated and affiliated companies
997

 
994

 
258

 
(255
)
 
 
 
 
 
 
 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
3

 

 
3

 

 
 
 
 
 
 
 
 
 
 
Profit 7
$
994

 
$
994

 
$
255

 
$
(255
)
 
 
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.


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Caterpillar Inc.
Supplemental Data for Financial Position
At June 30, 2018
(Unaudited)
(Millions of dollars)
 
 
 
Supplemental Consolidating Data
 
 
Consolidated
 
Machinery,
Energy &
Transportation 1
 
Financial
Products
 
Consolidating
Adjustments
 
Assets
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
Cash and short-term investments
$
8,654

 
$
7,786

 
$
868

 
$

 
Receivables – trade and other
7,991

 
4,229

 
437

 
3,325

2,3 
Receivables – finance
8,906

 

 
13,814

 
(4,908
)
3 
Prepaid expenses and other current assets
1,835

 
1,278

 
559

 
(2
)
4 
Inventories
11,255

 
11,255

 

 

 
Total current assets
38,641

 
24,548

 
15,678

 
(1,585
)
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment – net
13,752

 
9,244

 
4,508

 

 
Long-term receivables – trade and other
1,084

 
255

 
243

 
586

2,3 
Long-term receivables – finance
13,318

 

 
13,943

 
(625
)
3 
Investments in Financial Products subsidiaries

 
4,063

 

 
(4,063
)
5 
Noncurrent deferred and refundable income taxes
1,626

 
2,107

 
105

 
(586
)
6 
Intangible assets
2,039

 
2,039

 

 

 
Goodwill
6,249

 
6,249

 

 

 
Other assets
2,278

 
847

 
1,431

 

 
Total assets
$
78,987

 
$
49,352

 
$
35,908

 
$
(6,273
)
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
Current liabilities:
 

 
 

 
 

 
 

 
Short-term borrowings
$
6,220

 
$
35

 
$
6,185

 
$

 
Short-term borrowings with consolidated companies

 

 
1,506

 
(1,506
)
7 
Accounts payable
6,831

 
6,728

 
180

 
(77
)
8 
Accrued expenses
3,450

 
3,123

 
327

 

 
Accrued wages, salaries and employee benefits
1,789

 
1,757

 
32

 

 
Customer advances
1,378

 
1,378

 

 

 
Dividends payable
511

 
511

 

 

 
Other current liabilities
1,871

 
1,454

 
419

 
(2
)
6,9 
Long-term debt due within one year
6,250

 
9

 
6,241

 

 
Total current liabilities
28,300

 
14,995

 
14,890

 
(1,585
)
 
 
 
 
 
 
 
 
 
 
Long-term debt due after one year
23,699

 
8,021

 
15,717

 
(39
)
7 
Liability for postemployment benefits
8,092

 
8,092

 

 

 
Other liabilities
3,954

 
3,302

 
1,238

 
(586
)
6 
Total liabilities
64,045

 
34,410

 
31,845

 
(2,210
)
 
Commitments and contingencies
 

 
 

 
 

 
 

 
Shareholders’ equity
 

 
 

 
 

 
 

 
Common stock
5,746

 
5,746

 
919

 
(919
)
5 
Treasury stock
(18,028
)
 
(18,028
)
 

 

 
Profit employed in the business
28,657

 
28,657

 
3,800

 
(3,800
)
5 
Accumulated other comprehensive income (loss)
(1,496
)
 
(1,496
)
 
(803
)
 
803

5 
Noncontrolling interests
63

 
63

 
147

 
(147
)
5 
Total shareholders’ equity
14,942

 
14,942

 
4,063

 
(4,063
)
 
Total liabilities and shareholders’ equity
$
78,987

 
$
49,352

 
$
35,908

 
$
(6,273
)
 
 
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.

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Table of Contents


Caterpillar Inc.
Supplemental Data for Financial Position
At December 31, 2017
(Unaudited)
(Millions of dollars)
 
 
 
Supplemental Consolidating Data
 
 
Consolidated
 
Machinery,
Energy &
Transportation 1
 
Financial
Products
 
Consolidating
Adjustments
 
Assets
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
Cash and short-term investments
$
8,261

 
$
7,381

 
$
880

 
$

 
Receivables – trade and other
7,436

 
4,596

 
343

 
2,497

2,3 
Receivables – finance
8,757

 

 
12,985

 
(4,228
)
3 
Prepaid expenses and other current assets
1,772

 
1,099

 
679

 
(6
)
4 
Inventories
10,018

 
10,018

 

 

 
Total current assets
36,244

 
23,094

 
14,887

 
(1,737
)
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment – net
14,155

 
9,823

 
4,332

 

 
Long-term receivables – trade and other
990

 
229

 
162

 
599

2,3 
Long-term receivables – finance
13,542

 

 
14,170

 
(628
)
3 
Investments in Financial Products subsidiaries

 
4,064

 

 
(4,064
)
5 
Noncurrent deferred and refundable income taxes
1,693

 
2,166

 
101

 
(574
)
6 
Intangible assets
2,111

 
2,106

 
5

 

 
Goodwill
6,200

 
6,183

 
17

 

 
Other assets
2,027

 
822

 
1,205

 

 
Total assets
$
76,962

 
$
48,487

 
$
34,879

 
$
(6,404
)
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
Current liabilities:
 

 
 

 
 

 
 

 
Short-term borrowings
$
4,837

 
$
1

 
$
4,836

 
$

 
Short-term borrowings with consolidated companies

 

 
1,623

 
(1,623
)
7 
Accounts payable
6,487

 
6,330

 
265

 
(108
)
8 
Accrued expenses
3,220

 
2,880

 
340

 

 
Accrued wages, salaries and employee benefits
2,559

 
2,504

 
55

 

 
Customer advances
1,426

 
1,426

 

 

 
Dividends payable
466

 
466

 

 

 
Other current liabilities
1,742

 
1,327

 
423

 
(8
)
6,9 
Long-term debt due within one year
6,194

 
6

 
6,188

 

 
Total current liabilities
26,931

 
14,940

 
13,730

 
(1,739
)
 
 
 
 
 
 
 
 
 
 
Long-term debt due after one year
23,847

 
7,958

 
15,918

 
(29
)
7 
Liability for postemployment benefits
8,365

 
8,365

 

 

 
Other liabilities
4,053

 
3,458

 
1,167

 
(572
)
6 
Total liabilities
63,196

 
34,721

 
30,815

 
(2,340
)
 
Commitments and contingencies
 

 
 

 
 

 
 

 
Shareholders’ equity
 

 
 

 
 

 
 

 
Common stock
5,593

 
5,593

 
918

 
(918
)
5 
Treasury stock
(17,005
)
 
(17,005
)
 

 

 
Profit employed in the business
26,301

 
26,301

 
3,598

 
(3,598
)
5 
Accumulated other comprehensive income (loss)
(1,192
)
 
(1,192
)
 
(592
)
 
592

5 
Noncontrolling interests
69

 
69

 
140

 
(140
)
5 
Total shareholders’ equity
13,766

 
13,766

 
4,064

 
(4,064
)
 
Total liabilities and shareholders’ equity
$
76,962

 
$
48,487

 
$
34,879

 
$
(6,404
)
 
 
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.


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Caterpillar Inc.
Supplemental Data for Cash Flow
For the Six Months Ended June 30, 2018
(Unaudited)
(Millions of dollars)
 
 
 
Supplemental Consolidating Data
 
 
Consolidated
 
Machinery,
Energy &
Transportation 1
 
Financial
Products
 
Consolidating
Adjustments
 
Cash flow from operating activities:
 
 
 
 
 
 
 
 
Profit of consolidated and affiliated companies
$
3,372

 
$
3,363

 
$
209

 
$
(200
)
2 
Adjustments for non-cash items:
 

 
 

 
 

 
 

 
Depreciation and amortization
1,367

 
933

 
434

 

 
Undistributed profit of Financial Products

 
(200
)
 

 
200

3 
Other
446

 
197

 
61

 
188

4 
Changes in assets and liabilities, net of acquisitions and divestitures:

 
 
 
 
 
 
 
Receivables - trade and other
(703
)
 
136

 
(74
)
 
(765
)
4, 5 
Inventories
(1,208
)
 
(1,186
)
 

 
(22
)
4 
Accounts payable
545

 
570

 
(56
)
 
31

4 
Accrued expenses
(31
)
 
(40
)
 
9

 

 
Accrued wages, salaries and employee benefits
(768
)
 
(745
)
 
(23
)
 

 
Customer advances
(54
)
 
(54
)
 

 

 
Other assets – net
174

 
176

 
(10
)
 
8

4 
Other liabilities – net
(57
)
 
(118
)
 
69

 
(8
)
4 
Net cash provided by (used for) operating activities
3,083

 
3,032

 
619

 
(568
)
 
 
 
 
 
 
 
 
 
 
Cash flow from investing activities:
 

 
 

 
 

 
 

 
Capital expenditures - excluding equipment leased to others
(645
)
 
(550
)
 
(95
)
 

 
Expenditures for equipment leased to others
(883
)
 
(4
)
 
(919
)
 
40

4 
Proceeds from disposals of leased assets and property, plant and equipment
539

 
93

 
461

 
(15
)
4 
Additions to finance receivables
(6,143
)
 

 
(6,823
)
 
680

5,7 
Collections of finance receivables
5,405

 

 
6,144

 
(739
)
5 
Net intercompany purchased receivables

 

 
(608
)
 
608

5 
Proceeds from sale of finance receivables
124

 

 
124

 

 
Net intercompany borrowings

 
112

 

 
(112
)
6 
Investments and acquisitions (net of cash acquired)
(348
)
 
(348
)
 

 

 
Proceeds from sale of businesses and investments (net of cash sold)
12

 
18

 

 
(6
)
7 
Proceeds from sale of securities
168

 
10

 
158

 

 
Investments in securities
(318
)
 
(19
)
 
(299
)
 

 
Other – net
21

 
24

 
(4
)
 
1

8 
Net cash provided by (used for) investing activities
(2,068
)
 
(664
)
 
(1,861
)
 
457

 
 
 
 
 
 
 
 
 
 
Cash flow from financing activities:
 

 
 

 
 

 
 

 
Dividends paid
(933
)
 
(933
)
 

 

 
Common stock issued, including treasury shares reissued
256

 
256

 
1

 
(1
)
8 
Common shares repurchased
(1,250
)
 
(1,250
)
 

 

 
Net intercompany borrowings

 

 
(112
)
 
112

6 
Proceeds from debt issued (original maturities greater than three months)
4,307

 

 
4,307

 

 
Payments on debt (original maturities greater than three months)
(4,436
)
 
(3
)
 
(4,433
)
 

 
Short-term borrowings – net (original maturities three months or less)
1,487

 
34

 
1,453

 

 
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.


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Caterpillar Inc.
Supplemental Data for Cash Flow
For the Six Months Ended June 30, 2017
(Unaudited)
(Millions of dollars)
 
 
 
Supplemental Consolidating Data
 
 
Consolidated
 
Machinery,
Energy &
Transportation 1
 
Financial
Products
 
Consolidating
Adjustments
 
Cash flow from operating activities:
 
 
 
 
 
 
 
 
Profit of consolidated and affiliated companies
$
997

 
$
994

 
$
258

 
$
(255
)
2 
Adjustments for non-cash items:
 

 
 

 
 

 
 

 
Depreciation and amortization
1,430

 
998

 
432

 

 
Undistributed profit of Financial Products

 
(255
)
 

 
255

3 
Other
490

 
453

 
(84
)
 
121

4 
Changes in assets and liabilities, net of acquisitions and divestitures:


 
 
 
 
 
 
 
Receivables - trade and other
(442
)
 
(54
)
 
63

 
(451
)
4, 5 
Inventories
(688
)
 
(688
)
 

 

 
Accounts payable
1,113

 
1,145

 
(52
)
 
20

4 
Accrued expenses
251

 
234

 
17

 

 
Accrued wages, salaries and employee benefits
641

 
634

 
7

 

 
Customer advances
374

 
374

 

 

 
Other assets – net
(280
)
 
(152
)
 
(48
)
 
(80
)
4 
Other liabilities – net
38

 
(130
)
 
88

 
80

4 
Net cash provided by (used for) operating activities
3,924

 
3,553

 
681

 
(310
)
 
 
 
 
 
 
 
 
 
 
Cash flow from investing activities:
 

 
 

 
 

 
 

 
Capital expenditures - excluding equipment leased to others
(371
)
 
(367
)
 
(4
)
 

 
Expenditures for equipment leased to others
(753
)
 
(12
)
 
(749
)
 
8

4 
Proceeds from disposals of leased assets and property, plant and equipment
563

 
87

 
481

 
(5
)
4 
Additions to finance receivables
(5,264
)
 

 
(6,240
)
 
976

5 
Collections of finance receivables
5,508

 

 
6,602

 
(1,094
)
5 
Net intercompany purchased receivables

 

 
(425
)
 
425

5 
Proceeds from sale of finance receivables
83

 

 
83

 

 
Net intercompany borrowings

 
44

 
(1,500
)
 
1,456

6 
Investments and acquisitions (net of cash acquired)
(21
)
 
(21
)
 

 

 
Proceeds from sale of businesses and investments (net of cash sold)
91

 
91

 

 

 
Proceeds from sale of securities
187

 
9

 
178

 

 
Investments in securities
(207
)
 
(11
)
 
(196
)
 

 
Other – net
25

 
8

 
17

 

 
Net cash provided by (used for) investing activities
(159
)
 
(172
)
 
(1,753
)
 
1,766

 
 
 
 
 
 
 
 
 
 
Cash flow from financing activities:
 

 
 

 
 

 
 

 
Dividends paid
(906
)
 
(906
)
 

 

 
Common stock issued, including treasury shares reissued
83

 
83

 

 

 
Net intercompany borrowings

 
1,500

 
(44
)
 
(1,456
)
6 
Proceeds from debt issued (original maturities greater than three months)
4,868

 
361

 
4,507

 

 
Payments on debt (original maturities greater than three months)
(4,228
)
 
(505
)
 
(3,723
)
 

 
Short-term borrowings – net (original maturities three months or less)
(505
)
 
(200
)
 
(305
)
 

 
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.


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Table of Contents

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.


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Table of Contents

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
April 1-30, 2018
 

 
$

 

 
$
4.975

May 1-31, 2018
 
4,727,539

 
$
153.67

 
4,727,539

 
$
4.248

June 1-30, 2018
 
154,254

 
$
152.33

 
154,254

 
$
4.225

Total
 
4,881,793

 
$
153.63

 
4,881,793

 
 
 
 
 
 
 
 
 
 
 
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.


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Table of Contents


Item 6. Exhibits
10.1
 
 
 
 
10.2
 
 
 
 
10.3
 
 
 
 
10.4
 
 
 
 
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
 
 
 
 
31.2
 
 
 
 
32
 
 
 
 
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


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Table of Contents

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.
 
 
 
CATERPILLAR INC.
 
 
 
 
 
 
 
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)
 
 
 
 
 
 
 
August 7, 2018
/s/ Suzette M. Long
General Counsel & Corporate Secretary
 
(Suzette M. Long)
 
 
 
 
 
 
 
August 7, 2018
/s/ Jananne A. Copeland
Chief Accounting Officer
 
(Jananne A. Copeland)
 


97