10-Q 1 cat_10qx3312019.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 caterpillarlogo012019.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 March 31, 2019
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 
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A

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. 
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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol (s)
Name of each exchange on which registered
Common Stock ($1.00 par value)
CAT
New York Stock Exchange
9 3/8% Debentures due March 15, 2021
CAT21
New York Stock Exchange
8% Debentures due February 15, 2023
CAT23
New York Stock Exchange
5.3% Debentures due September 15, 2035
CAT35
New York Stock Exchange

At March 31, 2019, 571,702,278 shares of common stock of the registrant were outstanding.
 



Table of Contents
 
 
* Item omitted because no answer is called for or item is not applicable.


2


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 March 31
 
2019
 
2018
Sales and revenues:
 
 
 
Sales of Machinery, Energy & Transportation
$
12,724

 
$
12,150

Revenues of Financial Products
742

 
709

Total sales and revenues
13,466

 
12,859

 
 
 
 
Operating costs:
 

 
 

Cost of goods sold
9,003

 
8,566

Selling, general and administrative expenses
1,319

 
1,276

Research and development expenses
435

 
443

Interest expense of Financial Products
190

 
166

Other operating (income) expenses
312

 
300

Total operating costs
11,259

 
10,751

 
 
 
 
Operating profit
2,207

 
2,108

 
 
 
 
Interest expense excluding Financial Products
103

 
101

Other income (expense)
160

 
127

 
 
 
 
Consolidated profit before taxes
2,264

 
2,134

 
 
 
 
Provision (benefit) for income taxes
387

 
472

Profit of consolidated companies
1,877

 
1,662

 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
7

 
5

 
 
 
 
Profit of consolidated and affiliated companies
1,884

 
1,667

 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
3

 
2

 
 
 
 
Profit 1
$
1,881

 
$
1,665

 
 
 
 
Profit per common share
$
3.29

 
$
2.78

 
 
 
 
Profit per common share – diluted 2
$
3.25

 
$
2.74

 
 
 
 
Weighted-average common shares outstanding (millions)
 

 
 

– Basic
572.4

 
598.0

– Diluted 2
578.8

 
608.0

 
 
 
 
 
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.


3



Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)
 
Three Months Ended March 31
 
2019
 
2018
 
 
 
 
Profit of consolidated and affiliated companies
$
1,884

 
$
1,667

Other comprehensive income (loss), net of tax:
 
 
 
   Foreign currency translation, net of tax (provision)/benefit of: 2019 - $(4); 2018 - $15
(22
)
 
184

 
 
 
 
   Pension and other postretirement benefits:

 
 
        Current year prior service credit (cost), net of tax (provision)/benefit of: 2019 - $0; 2018 - $1

 
(2
)
        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2019 - $3; 2018 - $2
(7
)
 
(7
)
 
 
 
 
   Derivative financial instruments:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2019 - $(3); 2018 - $(1)
10

 
5

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2019 - $2; 2018 - $(6)
(9
)
 
18

 
 
 
 
   Available-for-sale securities:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2019 - $(6); 2018 - $2
15

 
(11
)
        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2019 - $0; 2018 - $0
1

 

 
 
 
 
Total other comprehensive income (loss), net of tax
(12
)
 
187

Comprehensive income
1,872

 
1,854

Less: comprehensive income attributable to the noncontrolling interests
3

 
2

Comprehensive income attributable to shareholders
$
1,869

 
$
1,852

 
 
 
 

See accompanying notes to Consolidated Financial Statements.



4



Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Dollars in millions) 
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 

 
 

Cash and short-term investments
$
7,128

 
$
7,857

Receivables – trade and other
8,961

 
8,802

Receivables – finance
8,932

 
8,650

Prepaid expenses and other current assets
1,765

 
1,765

Inventories
12,340

 
11,529

Total current assets
39,126

 
38,603

 
 
 
 
Property, plant and equipment – net
13,259

 
13,574

Long-term receivables – trade and other
1,149

 
1,161

Long-term receivables – finance
12,674

 
13,286

Noncurrent deferred and refundable income taxes
1,378

 
1,439

Intangible assets
1,807

 
1,897

Goodwill
6,191

 
6,217

Other assets
3,142

 
2,332

Total assets
$
78,726

 
$
78,509

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Short-term borrowings:
 

 
 

Machinery, Energy & Transportation
$
4

 
$

Financial Products
5,586

 
5,723

Accounts payable
7,198

 
7,051

Accrued expenses
3,746

 
3,573

Accrued wages, salaries and employee benefits
1,200

 
2,384

Customer advances
1,354

 
1,243

Dividends payable

 
495

Other current liabilities
2,348

 
1,919

Long-term debt due within one year:
 

 
 

Machinery, Energy & Transportation
13


10

Financial Products
5,939

 
5,820

Total current liabilities
27,388

 
28,218

 
 
 
 
Long-term debt due after one year:
 

 
 

Machinery, Energy & Transportation
7,650

 
8,005

Financial Products
16,590

 
16,995

Liability for postemployment benefits
7,441

 
7,455

Other liabilities
4,179

 
3,756

Total liabilities
63,248

 
64,429

Commitments and contingencies (Notes 11 and 14)


 


Shareholders’ equity
 

 
 

Common stock of $1.00 par value:
 

 
 

Authorized shares: 2,000,000,000
Issued shares: (3/31/19 and 12/31/18 – 814,894,624) at paid-in amount
5,804

 
5,827

Treasury stock (3/31/19 – 243,192,346 shares; 12/31/18 – 239,351,886 shares) at cost
(21,214
)
 
(20,531
)
Profit employed in the business
32,435

 
30,427

Accumulated other comprehensive income (loss)
(1,588
)
 
(1,684
)
Noncontrolling interests
41

 
41

Total shareholders’ equity
15,478

 
14,080

Total liabilities and shareholders’ equity
$
78,726

 
$
78,509

 
See accompanying notes to Consolidated Financial Statements.

5



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
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
5,593

 
$
(17,005
)
 
$
26,301

 
$
(1,192
)
 
$
69

 
$
13,766

Adjustments to adopt new accounting guidance
 
 
 
 
 
 
 
 
 
 
 
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

 

 
1,665

 

 
2

 
1,667

Foreign currency translation, net of tax

 

 

 
184

 

 
184

Pension and other postretirement benefits, net of tax

 

 

 
(9
)
 

 
(9
)
Derivative financial instruments, net of tax

 

 

 
23

 

 
23

Available-for-sale securities, net of tax

 

 

 
(11
)
 

 
(11
)
Change in ownership from noncontrolling interests
2

 

 

 

 
(5
)
 
(3
)
Dividends declared

 

 
(1
)
 

 

 
(1
)
Common shares issued from treasury stock for stock-based compensation: 3,426,757
(9
)
 
158

 

 

 

 
149

Stock-based compensation expense
50

 

 

 

 

 
50

Common shares repurchased: 3,147,629 2

 
(500
)
 

 

 

 
(500
)
Other
4

 

 

 

 

 
4

Balance at March 31, 2018
$
5,640

 
$
(17,347
)
 
$
27,929

 
$
(1,016
)
 
$
66

 
$
15,272

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2018
$
5,827

 
$
(20,531
)
 
$
30,427

 
$
(1,684
)
 
$
41

 
$
14,080

Adjustments to adopt new accounting guidance1
 
 
 
 
 
 
 
 
 
 
 
Lease accounting

 

 
235

 

 

 
235

Reclassification of certain tax effects from accumulated other comprehensive income

 

 
(108
)
 
108

 

 

Balance at January 1, 2019
5,827

 
(20,531
)
 
30,554

 
(1,576
)
 
41

 
14,315

Profit of consolidated and affiliated companies

 

 
1,881

 

 
3

 
1,884

Foreign currency translation, net of tax

 

 

 
(22
)
 

 
(22
)
Pension and other postretirement benefits, net of tax

 

 

 
(7
)
 

 
(7
)
Derivative financial instruments, net of tax

 

 

 
1

 

 
1

Available-for-sale securities, net of tax

 

 

 
16

 

 
16

Distribution to noncontrolling interests

 

 

 

 
(1
)
 
(1
)
Common shares issued from treasury stock for stock-based compensation: 1,859,065
(73
)
 
68

 

 

 

 
(5
)
Stock-based compensation expense
45

 

 

 

 

 
45

Common shares repurchased: 5,699,525 2

 
(751
)
 

 

 

 
(751
)
Other
5

 

 

 

 
(2
)
 
3

Balance at March 31, 2019
$
5,804

 
$
(21,214
)
 
$
32,435

 
$
(1,588
)
 
$
41

 
$
15,478

 
 
 
 
 
 
 
 
 
 
 
 
1 See Note 2 for additional information.
 
 
 
 
 
 
 
 
 
 
 
2 See Note 12 for additional information.
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to Consolidated Financial Statements.



6



Caterpillar Inc.
Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
 
Three Months Ended March 31
 
2019
 
2018
Cash flow from operating activities:
 
 
 
Profit of consolidated and affiliated companies
$
1,884

 
$
1,667

Adjustments for non-cash items:
 

 
 

Depreciation and amortization
641

 
681

Other
88

 
148

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

 
 

Receivables – trade and other
(150
)
 
(326
)
Inventories
(813
)
 
(803
)
Accounts payable
355

 
486

Accrued expenses
135

 
66

Accrued wages, salaries and employee benefits
(1,185
)
 
(1,110
)
Customer advances
105

 
(46
)
Other assets – net
(44
)
 
165

Other liabilities – net
105

 
7

Net cash provided by (used for) operating activities
1,121

 
935

 
 
 
 
Cash flow from investing activities:
 

 
 

Capital expenditures – excluding equipment leased to others
(278
)
 
(412
)
Expenditures for equipment leased to others
(269
)
 
(345
)
Proceeds from disposals of leased assets and property, plant and equipment
209

 
258

Additions to finance receivables
(2,615
)
 
(2,621
)
Collections of finance receivables
2,818

 
2,671

Proceeds from sale of finance receivables
44

 
69

Investments and acquisitions (net of cash acquired)
(2
)
 
(340
)
Proceeds from sale of businesses and investments (net of cash sold)

 
12

Proceeds from sale of securities
57

 
89

Investments in securities
(107
)
 
(197
)
Other – net
(38
)
 
16

Net cash provided by (used for) investing activities
(181
)
 
(800
)
 
 
 
 
Cash flow from financing activities:
 

 
 

Dividends paid
(494
)
 
(467
)
Common stock issued, including treasury shares reissued
(5
)
 
149

Common shares repurchased
(751
)
 
(500
)
Proceeds from debt issued (original maturities greater than three months):
 

 
 

        Machinery, Energy & Transportation

 

        Financial Products
2,665

 
1,541

Payments on debt (original maturities greater than three months):
 

 
 

        Machinery, Energy & Transportation
(2
)
 
(1
)
        Financial Products
(2,565
)
 
(2,408
)
Short-term borrowings – net (original maturities three months or less)
(522
)
 
1,151

Other – net
(1
)
 
(3
)
Net cash provided by (used for) financing activities
(1,675
)
 
(538
)
Effect of exchange rate changes on cash
3

 
10

Increase (decrease) in cash and short-term investments and restricted cash
(732
)
 
(393
)
Cash and short-term investments and restricted cash at beginning of period
7,890

 
8,320

Cash and short-term investments and restricted cash at end of period
$
7,158

 
$
7,927


 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.

7


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 the All Other operating segment 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 months ended March 31, 2019 and 2018, (b) the consolidated comprehensive income for the three months ended March 31, 2019 and 2018, (c) the consolidated financial position at March 31, 2019 and December 31, 2018, (d) the consolidated changes in shareholders’ equity for the three months ended March 31, 2019 and 2018 and (e) the consolidated cash flow for the three months ended March 31, 2019 and 2018.  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, 2018 (2018 Form 10-K).
 
The December 31, 2018 financial position data included herein is derived from the audited consolidated financial statements included in the 2018 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.

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 $145 million and $131 million as of March 31, 2019 and December 31, 2018, respectively.
 
 
 
 
 
 
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.


8


2.                                    New accounting guidance

Lease accounting In February 2016, the Financial Accounting Standards Board (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. The new guidance was effective January 1, 2019 and was applied using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of January 1, 2019. The prior period comparative information has not been recasted and continues to be reported under the accounting guidance in effect for those periods.

The new guidance provides a number of optional practical expedients in transition. We elected the "package of practical expedients," which allows us not to reassess under the new guidance our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight practical expedient. In addition, the new guidance provides practical expedients for an entity’s ongoing lessee accounting. For certain property and information technology equipment leases, we have elected to separate payments for lease components from non-lease components. For all other leases, we have elected to not separate lease and non-lease components. We have elected the short-term lease recognition exemption for all leases that qualify which means we will not recognize right-of-use assets or lease liabilities for these leases with a term of twelve months or less.

The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities on our balance sheet for operating leases and providing new disclosures about our leasing activities. In addition, we derecognized existing assets and debt obligations for a sale-leaseback transaction that qualified for sale accounting under the new guidance. The gain associated with this change in accounting was recognized through opening retained earnings as of January 1, 2019. The adoption did not have a material impact on our results of operations.

In March 2019, the FASB issued accounting guidance which amended the new leasing guidance. Under these amendments, lessors that are not manufacturers or dealers will use their cost, less any discounts that may apply, as the fair value of the underlying asset, and lessors within the scope of Financial Services-Depository and Lending guidance will present all principal payments received under leases within investment activities on the statement of cash flows.  We adopted the new guidance effective January 1, 2019, and the adoption did not have a material impact to our financial statements.

See Note 10 for additional information.

The cumulative effect of initially applying the new lease guidance to our consolidated financial statements on January 1, 2019 was as follows:

Consolidated Statement of Financial Position
 
 
 
 
 
 
(Millions of dollars)
 
Balance as of December 31, 2018
 
Cumulative Impact from Adopting New Lease Guidance
 
Balance as of January 1, 2019
Assets
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
1,765

 
$
(17
)
 
$
1,748

Property, plant and equipment - net
 
$
13,574

 
$
(26
)
 
$
13,548

Noncurrent deferred and refundable income taxes
 
$
1,439

 
$
(77
)
 
$
1,362

Other assets
 
$
2,332

 
$
713

 
$
3,045

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Accrued expenses
 
$
3,573

 
$
(27
)
 
$
3,546

Other current liabilities
 
$
1,919

 
$
209

 
$
2,128

   Long-term debt due after one year
 
 
 
 
 
 
      Machinery, Energy & Transportation
 
$
8,005

 
$
(362
)
 
$
7,643

Other liabilities
 
$
3,756

 
$
538

 
$
4,294

 
 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
 
Profit employed in the business
 
$
30,427

 
$
235

 
$
30,662

 
 
 
 
 
 
 

9



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. An implementation team is currently evaluating data requirements and methodologies to assess the effect of the new guidance on our financial statements. We plan to adopt the new guidance effective January 1, 2020.

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 guidance was effective January 1, 2019, and 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 guidance was effective January 1, 2019. The adoption primarily resulted in the 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.  This presentation change was applied prospectively and did not have a material impact on our financial statements.

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. We adopted the guidance effective January 1, 2019, and the resulting reclassification was included in the period of adoption. The adoption did not have a material impact on our financial statements.

Defined benefit plan disclosures In August 2018, the FASB issued accounting guidance that revises the annual disclosure requirements for employers by removing and adding certain disclosures for these plans.  The applicable requirements that were removed include the disclosure of the amount of prior service cost (credit) that will be amortized from Accumulated other comprehensive income (loss) into net periodic benefit cost for the next fiscal year and the effect of a one-percentage-point change in the assumed health care cost trend rates on the service and interest cost components of other postretirement benefit cost and on the accumulated postretirement benefit obligations.  The new disclosure requirements include the weighted average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and narrative description of the reasons for significant actuarial gains and losses related to changes in benefit plan obligations or assets for the period.  The new guidance is required to be applied on a retrospective basis. The guidance is effective January 1, 2020, with early adoption permitted.  We plan to adopt the new guidance effective January 1, 2020, and do not expect the adoption to have a material impact on our financial statements.

Cloud computing arrangements In August 2018, the FASB issued accounting guidance that aligns the accounting for implementation costs incurred in a cloud computing arrangement service contract with the internal use software costs model. Under the new standard, costs that meet certain criteria will be required to be capitalized on the balance sheet and subsequently amortized over the term of the hosting arrangement.  The guidance is effective January 1, 2020, with early adoption permitted.  The new guidance allows for either prospective or retrospective transition.  We plan to adopt the new guidance effective January 1, 2020 on a prospective basis.  We do not expect the adoption to have a material impact on our financial statements.

3.
Sales and revenue contract information

Trade receivables represent amounts due from dealers and end users for the sale of our products. In addition, Cat Financial provides wholesale inventory financing for a dealer's purchase of inventory. Wholesale inventory receivables 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 $7,918 million and $7,743 million as of March 31, 2019 and December 31, 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 $640 million and $674 million as of March 31, 2019 and December 31, 2018, respectively, and are recognized in Long-term receivables – trade and other in the Consolidated Statement of Financial Position.

10



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 $430 million and $437 million as of March 31, 2019 and December 31, 2018, respectively. We reduce the contract liability when revenue is recognized. During the three months ended March 31, 2019, we recognized $507 million of revenue that was recorded as a contract liability at the beginning of 2019.

As of March 31, 2019, 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 $5.8 billion, of which $2.5 billion is expected to be completed and revenue recognized in the twelve months following March 31, 2019. 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.

See Note 16 for further disaggregated sales and revenues information.

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).

Upon separation from service, if a participant is 55 years of age or older with more than five years of service, the participant meets the criteria for a "Long Service Separation." For PRSU awards granted prior to 2019, only a prorated number of shares may vest at the end of the performance period based upon achievement of the performance target, with the proration based upon the number of months of continuous employment during the three-year performance period. Award terms for the 2019 PRSU grant allow for continued vesting upon achievement of the performance target specified in the award document for employees who meet the criteria for a "Long Service Separation" and fulfill a requisite service period of six months. Compensation expense for the 2019 PRSU grant with respect to employees who have met the criteria for a "Long Service Separation" is recognized over the period from the grant date to the end of the six-month requisite service period. For employees who become eligible for a "Long Service Separation" subsequent to the end date of the six-month requisite service period and prior to the completion of the vesting period, compensation expense is recognized over the period from the grant date to the date eligibility is achieved.

We recognized pretax stock-based compensation expense of $45 million and $50 million for the three months ended March 31, 2019 and 2018, respectively.

The following table illustrates the type and fair value of the stock-based compensation awards granted during the three months ended March 31, 2019 and 2018, respectively:

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
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
1,499,524

 
$
40.98

 
$
138.35

 
1,566,788

 
$
46.18

 
$
151.12

RSUs
657,389

 
$
138.35

 
$
138.35

 
676,228

 
$
151.12

 
$
151.12

PRSUs
342,097

 
$
138.35

 
$
138.35

 
339,559

 
$
151.12

 
$
151.12

 
 
 
 
 
 
 
 
 
 
 
 
 

11


The following table provides the assumptions used in determining the fair value of the stock-based awards for the three months ended March 31, 2019 and 2018, respectively:
 
 
 
 
 
 
Grant Year
 
2019
 
2018
Weighted-average dividend yield
2.56
%
 
2.70
%
Weighted-average volatility
29.1
%
 
30.2
%
Range of volatilities
25.1-38.7%

 
21.5-33.0%

Range of risk-free interest rates
2.48-2.68%

 
2.02-2.87%

Weighted-average expected lives
7 years

 
8 years

 
 
 
 
 
As of March 31, 2019, the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $333 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 1.9 years.
 
5.                                     Derivative financial instruments and risk management
 
Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices.  Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures.  Our policy specifies that derivatives are not to be used for speculative purposes.  Derivatives that we use are primarily foreign currency forward, option and cross currency contracts, interest rate contracts and commodity forward and option contracts.  Our derivative activities are subject to the management, direction and control of our senior financial officers.  Risk management practices, including the use of financial derivative instruments, are presented to the Audit Committee of the Board of Directors at least annually.
 
All derivatives are recognized on the Consolidated Statement of Financial Position at their fair value. On the date the derivative contract is entered into, we designate the derivative as (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flow (cash flow hedge) or (3) an undesignated instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk, are recorded in current earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in Accumulated other comprehensive income (loss) (AOCI), to the extent effective, on the Consolidated Statement of Financial Position until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings.  Changes in the fair value of undesignated derivative instruments 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.

12


 
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 March 31, 2019, 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 March 31, 2019, $2 million of deferred net gains, 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.
 
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.
 

13


Commodity Price Risk
 
Commodity price movements create a degree of risk by affecting the price we must pay for certain raw material. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials.
 
Our Machinery, Energy & Transportation operations purchase base and precious metals embedded in the components we purchase from suppliers.  Our suppliers pass on to us price changes in the commodity portion of the component cost. In addition, we are subject to price changes on energy products such as natural gas and diesel fuel purchased for operational use.
 
Our objective is to minimize volatility in the price of these commodities. Our policy allows us to enter into commodity forward and option contracts to lock in the purchase price of a portion of these commodities within a five-year horizon. All such commodity forward and option contracts are undesignated.
 
The location and fair value of derivative instruments reported in the Consolidated Statement of Financial Position are as follows:
 
 
 
 
 
 
 
 (Millions of dollars)
Consolidated Statement of Financial
 
Asset (Liability) Fair Value
 
Position Location
 
March 31, 2019
 
December 31, 2018
Designated derivatives
 
 
 
 
 
Foreign exchange contracts
 
 
 

 
 

Machinery, Energy & Transportation
Receivables – trade and other
 
$
19

 
$
16

Machinery, Energy & Transportation
Accrued expenses
 
(16
)
 
(26
)
Machinery, Energy & Transportation
Other liabilities
 
(3
)
 
(9
)
Financial Products
Receivables – trade and other
 
44

 
53

Financial Products
Long-term receivables – trade and other
 
44

 
35

Financial Products
Accrued expenses
 
(5
)
 
(9
)
Interest rate contracts
 
 
 
 
 

Financial Products
Receivables – trade and other
 

 
1

Financial Products
Long-term receivables – trade and other
 
3

 
3

Financial Products
Accrued expenses
 
(58
)
 
(40
)
 
 
 
$
28

 
$
24

Undesignated derivatives
 
 
 

 
 

Foreign exchange contracts
 
 
 

 
 

Machinery, Energy & Transportation
Receivables – trade and other
 
$
2

 
$
2

Machinery, Energy & Transportation
Accrued expenses
 
(5
)
 
(21
)
Financial Products
Receivables – trade and other
 
9

 
15

Financial Products
Long-term receivables – trade and other
 
6

 
5

Financial Products
Accrued expenses
 
(13
)
 
(14
)
Commodity contracts
 
 
 
 
 

Machinery, Energy & Transportation
Receivables – trade and other
 
6

 
1

Machinery, Energy & Transportation
Accrued expenses
 
(8
)
 
(31
)
 
 
 
$
(3
)
 
$
(43
)
 
 
 
 
 
 

The total notional amounts of the derivative instruments are as follows:

 
 
 
 
 
(Millions of dollars)
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
Machinery, Energy & Transportation
 
$
2,003

 
$
1,834

Financial Products
 
$
9,001

 
$
10,210

 
 
 
 
 

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.

14


 
 
 
 
 
 
 
 
 
 
The effect of derivatives designated as hedging instruments on the Consolidated Statement of Results of Operations is as follows:

 
 
 
 
 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2019
 
 
 
Recognized in Earnings
 (Millions of dollars)
Amount of Gains
(Losses) Recognized 
in AOCI
 
Classification of
Gains (Losses)
 
Amount of Gains
(Losses) Reclassified
from AOCI
 
Amount of the line items in the Consolidated Statement of Results of Operations containing hedging gains (losses)
Foreign exchange contracts
 

 
 
 
 

 
 

Machinery, Energy & Transportation
$
17

 
 
 
 
 
 
 


 
Sales of Machinery, Energy & Transportation
 
$
1

 
$
12,724

 
 
 
Cost of goods sold
 
(3
)
 
$
9,003

Financial Products
22

 
 
 
 
 
 
 


 
Interest expense of Financial Products
 
7

 
$
190

 
 
 
Other income (expense)
 
6

 
$
160

Interest rate contracts
 
 
 
 
 
 
 
Machinery, Energy & Transportation

 
Interest expense excluding Financial Products
 
(1
)
 
$
103

Financial Products
(26
)
 
Interest expense of Financial Products
 
1

 
$
190

 
$
13

 
 
 
$
11

 


 
Three Months Ended March 31, 2018
 
 
 
Recognized in Earnings
 
Amount of Gains
(Losses) Recognized
in AOCI
(Effective Portion)
 
Classification of
Gains (Losses)
 
Amount of Gains
(Losses) Reclassified
from AOCI
 
Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
 
 
 
 
 
 
 
Machinery, Energy & Transportation
$
39

 
Other income (expense)
 
$
1

 
$

Financial Products
(33
)
 
Other income (expense)
 
(29
)
 

Financial Products


 
Interest expense of Financial Products
 
3

 

Interest rate contracts
 

 
 
 
 

 
 
Financial Products

 
Interest expense of Financial Products
 
1

 

 
$
6

 
 
 
$
(24
)
 
$

 
 
 
 
 
 
 
 

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 March 31, 2019
 
Three Months Ended March 31, 2018
Foreign exchange contracts
 
 
 
 
 
Machinery, Energy & Transportation
Other income (expense)
 
$
6

 
$
16

Financial Products
Other income (expense)
 
(29
)
 
(7
)
Commodity contracts
 
 
 

 
 
Machinery, Energy & Transportation
Other income (expense)
 
23

 
(9
)
 
 
 
$

 
$

 
 
 
 
 
 
 

15


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 March 31, 2019 and December 31, 2018, no cash collateral was received or pledged under the master netting agreements.


16


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:

 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
 
 
 
 
 
 
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
 
$
27

 
$

 
$
27

 
$
(19
)
 
$

 
$
8

Financial Products
 
106

 

 
106

 
(22
)
 

 
84

 Total
 
$
133

 
$

 
$
133

 
$
(41
)
 
$

 
$
92

March 31, 2019
 
 
 
 
 
 
 
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
 
$
(32
)
 
$

 
$
(32
)
 
$
19

 
$

 
$
(13
)
Financial Products
 
(76
)
 

 
(76
)
 
22

 

 
(54
)
 Total
 
$
(108
)
 
$

 
$
(108
)
 
$
41

 
$

 
$
(67
)
December 31, 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
 
$
19

 
$

 
$
19

 
$
(19
)
 
$

 
$

Financial Products
 
112

 

 
112

 
(34
)
 

 
78

 Total
 
$
131

 
$

 
$
131

 
$
(53
)
 
$

 
$
78

December 31, 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
 
$
(87
)
 
$

 
$
(87
)
 
$
19

 
$

 
$
(68
)
Financial Products
 
(63
)
 

 
(63
)
 
34

 

 
(29
)
 Total
 
$
(150
)
 
$

 
$
(150
)
 
$
53

 
$

 
$
(97
)
 
 
 
 
 
 
 
 
 
 
 
 
 


17


6.                                     Inventories
 
Inventories (principally using the last-in, first-out (LIFO) method) are comprised of the following:
 
 
 
 
 
(Millions of dollars)
March 31,
2019
 
December 31,
2018
Raw materials
$
3,592

 
$
3,382

Work-in-process
2,737

 
2,674

Finished goods
5,785

 
5,241

Supplies
226

 
232

Total inventories
$
12,340

 
$
11,529

 
 
 
 

7.                                     Intangible assets and goodwill
 
A.  Intangible assets
 
Intangible assets are comprised of the following:
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2019
(Millions of dollars)
Weighted
Amortizable
Life (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
15
 
$
2,450

 
$
(1,283
)
 
$
1,167

Intellectual property
12
 
1,522

 
(966
)
 
556

Other
13
 
199

 
(115
)
 
84

Total finite-lived intangible assets
14
 
$
4,171

 
$
(2,364
)
 
$
1,807

 
 
 
December 31, 2018
 
Weighted
Amortizable
Life (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
15
 
$
2,463

 
$
(1,249
)
 
$
1,214

Intellectual property
11
 
1,557

 
(965
)
 
592

Other
13
 
199

 
(108
)
 
91

Total finite-lived intangible assets
14
 
$
4,219

 
$
(2,322
)
 
$
1,897

 
 
 
 
 
 
 
 

Amortization expense for the three months ended March 31, 2019 and 2018 was $82 million and $83 million, respectively. Amortization expense related to intangible assets is expected to be:

(Millions of dollars)
 
 
 
 
 
 
 
 
 
 
 
Remaining Nine Months of 2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
$243
 
$310
 
$292
 
$273
 
$215
 
$474
 
 
 
 
 
 
 
 
 
 
 
 
B.  Goodwill
 
No goodwill was impaired during the three months ended March 31, 2019 or 2018.


 

18


The changes in carrying amount of goodwill by reportable segment for the three months ended March 31, 2019 were as follows: 

 
 
 
 
 
 
 
(Millions of dollars)
 
December 31,
2018
 
Other Adjustments 1
 
March 31,
2019
Construction Industries
 
 
 
 
 


Goodwill
 
$
304

 
$
(1
)
 
$
303

Impairments
 
(22
)
 

 
(22
)
Net goodwill
 
282

 
(1
)
 
281

Resource Industries
 
 
 
 
 
 
Goodwill
 
4,172

 
(14
)
 
4,158

Impairments
 
(1,175
)
 

 
(1,175
)
Net goodwill
 
2,997

 
(14
)
 
2,983

Energy & Transportation
 
 
 
 
 
 
Goodwill
 
2,882

 
(10
)
 
2,872

All Other 2
 
 
 
 
 
 
Goodwill
 
56

 
(1
)
 
55

Consolidated total
 
 
 
 
 
 
Goodwill
 
7,414

 
(26
)
 
7,388

Impairments
 
(1,197
)
 

 
(1,197
)
Net goodwill
 
$
6,217

 
$
(26
)
 
$
6,191



1 Other adjustments are comprised primarily of foreign currency translation.
2 Includes All Other operating segment (See Note 16).
 
 
 
 
 

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). 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. Realized gains and losses on sales of investments are generally determined using the specific identification method for debt and equity securities and are included in Other income (expense) in the Consolidated Statement of Results of Operations.



19


The cost basis and fair value of debt securities with unrealized gains and losses included in equity (Accumulated other comprehensive income (loss) in the Consolidated Statement of Financial Position) were as follows:
 
March 31, 2019
 
December 31, 2018
(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

 
$
9

 
$

 
$
9

Other U.S. and non-U.S. government bonds
50

 

 
50

 
42

 

 
42

 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 

 
 

 
 
 
 

 
 

 
 

Corporate bonds
775

 
2

 
777

 
735

 
(15
)
 
720

Asset-backed securities
61

 

 
61

 
63

 

 
63

 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed debt securities
 
 
 
 
 
 
 

 
 

 
 

U.S. governmental agency
305

 
(1
)
 
304

 
301

 
(4
)
 
297

Residential
7

 

 
7

 
7

 

 
7

Commercial
17

 

 
17

 
14

 
(1
)
 
13

Total debt securities
$
1,224

 
$
1

 
$
1,225

 
$
1,171

 
$
(20
)
 
$
1,151

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale investments in an unrealized loss position that are not other-than-temporarily impaired:
 
 
 
March 31, 2019
 
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
$
20

 
$

 
$
342

 
$
3

 
$
362

 
$
3

Mortgage-backed debt securities
 
 
 
 
 
 
 
 
 
 
 
U.S. governmental agency
22

 

 
156

 
2

 
178

 
2

Total
$
42

 
$

 
$
498

 
$
5

 
$
540

 
$
5

 
December 31, 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
$
280

 
$
3

 
$
391

 
$
11

 
$
671

 
$
14

Asset-backed securities
6

 

 
38

 
1

 
44

 
1

Mortgage-backed debt securities
 

 
 

 
 

 
 

 
 

 
 

U.S. governmental agency
52

 

 
223

 
5

 
275

 
5

Commercial

 

 
14

 
1

 
14

 
1

Total
$
338

 
$
3

 
$
666

 
$
18

 
$
1,004

 
$
21

 
 
 
 
 
 
 
 
 
 
 
 
1 Indicates the length of time that individual securities have been in a continuous unrealized loss position.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate Bonds. The unrealized losses on our investments in corporate bonds relate to changes in interest rates and credit-related yield spreads since time of purchase. We do not intend to sell the investments, and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of March 31, 2019.


20


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 March 31, 2019.

The cost basis and fair value of the available-for-sale debt securities at March 31, 2019, 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.    
        
 
March 31, 2019
(Millions of dollars)
Cost Basis
 
Fair Value
Due in one year or less
$
132

 
$
132

Due after one year through five years
617

 
618

Due after five years through ten years
129

 
129