Leases

6 Months Ended

Jun. 30, 2019

Leases


A.	Lessor Arrangements

We lease Caterpillar equipment, machinery, engines and other equipment to customers primarily through sales-type (non-tax) leases, where the lessee for tax purposes is considered to be the owner of the equipment during the term of the lease. We also offer tax leases that are classified as either operating or direct finance leases for financial accounting purposes, depending on the characteristics of the lease. For tax purposes, we are considered the owner of the equipment.

Our lease agreements may include options for the lessee to purchase the underlying asset at the end of the lease term for either a stated fixed price or fair market value.

The residual values for leased assets, which are an estimate of the market value of leased equipment at the end of the lease term, are based on an analysis of historical wholesale market sales prices, projected forward on a level trend line without consideration for inflation or possible future pricing action. At the inception of the lease, residual values are estimated with consideration of the following critical factors: market size and demand, any known significant market/product trends, total expected hours of usage, machine configuration, application, location, model changes, quantities, past remarketing experience, third-party residual guarantees and contractual customer purchase options. Many of these factors are gathered in an application survey that is completed prior to quotation. The lease agreement also clearly defines applicable return conditions and remedies for non-compliance, to ensure that the leased equipment will be in good operating condition upon return. Model changes and updates, as well as market strength and product acceptance, are monitored and adjustments are made to residual values in accordance with the significance of any such changes. Our sales staff work closely with customers and dealers to manage the sale of lease returns and the recovery of residual exposure.

The residuals for leases classified as operating leases are included in Equipment on operating leases, net in the Consolidated Statements of Financial Position. The residuals for leases classified as finance leases are included in Finance receivables, net in the Consolidated Statements of Financial Position.

During the term of our operating leases, we evaluate the carrying value of our equipment on a regular basis taking into consideration expected residual values at lease termination. Adjustments to depreciation expense reflecting revised estimates of expected residual values at the end of the lease terms are recorded prospectively on a straight-line basis. For finance leases, residual value adjustments are recognized through a reduction of finance revenue.

Contractual maturities for finance lease receivables (classified as sales-type and direct finance leases) were as follows:



(Millions of dollars)	June 30, 2019
Amounts due in	Retail leases			Wholesale leases			Total
Remaining six months of 2019	$	1,834		$	14		$	1,848
2020	2,606			21			2,627
2021	1,543			14			1,557
2022	716			6			722
2023	302			3			305
Thereafter	149			2			151
Total	7,150			60			7,210
Guaranteed residual value	411			33			444
Unguaranteed residual value	835			2			837
Unearned income	(713		)	(6		)	(719		)
Total	$	7,683		$	89		$	7,772



(Millions of dollars)	December 31, 2018
Amounts due in	Retail leases			Wholesale leases			Total
2019	$	3,024		$	29		$	3,053
2020	2,055			21			2,076
2021	1,092			12			1,104
2022	465			5			470
2023	171			2			173
Thereafter	62			2			64
Total	6,869			71			6,940
Guaranteed residual value	416			42			458
Unguaranteed residual value	854			3			857
Unearned income	(640		)	(7		)	(647		)
Total	$	7,499		$	109		$	7,608

Our finance lease receivables generally may be repaid or refinanced without penalty prior to contractual maturity and we also sell finance lease receivables to third parties to mitigate the concentration of credit risk with certain customers. Accordingly, this presentation should not be regarded as a forecast of future cash collections.

Components of equipment on operating leases, less accumulated depreciation, were as follows:



(Millions of dollars)
	June 30, 2019			December 31, 2018
Equipment on operating leases, at cost	$	5,249		$	5,201
Less: Accumulated depreciation	(1,674		)	(1,639		)
Equipment on operating leases, net ⁽¹⁾	$	3,575		$	3,562

⁽¹⁾ Includes $66 million and $45 million of operating leases with Caterpillar as of June 30, 2019 and December 31, 2018, respectively.

The carrying amount of residual assets covered by residual value guarantees and subject to operating leases was $21 million and $25 million as of June 30, 2019 and December 31, 2018, respectively.

At June 30, 2019, payments due for operating leases were as follows:



(Millions of dollars)
Remaining Six Months of 2019		2020		2021		2022		2023		Thereafter		Total
$	525	$	620	$	346	$	165	$	69	$	31	$	1,756

At December 31, 2018, scheduled minimum rental payments for operating leases were as follows:



(Millions of dollars)
2019		2020		2021		2022		2023		Thereafter		Total
$	808	$	503	$	257	$	115	$	41	$	15	$	1,739

We also sell operating lease receivables to third parties to mitigate the concentration of credit risk with certain customers. Accordingly, this presentation should not be regarded as a forecast of future cash collections.

Revenue from finance and operating leases were as follows:



(Millions of dollars)
	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Finance lease revenue (included in retail and wholesale finance revenue)	$	135	$	253
Operating lease revenue	257		515
Total	$	392	$	768

We typically pay property taxes on tax leases directly to the taxing authorities and invoice the lessee for reimbursement. These property tax reimbursements are accounted for as variable lease payments and are included in Operating lease revenues in the Consolidated Statements of Profit. We individually assess our operating lease receivables for impairment. If collectability of a recorded operating lease receivable is not considered probable, we recognize a current-period adjustment against operating lease revenue.

Lessee Arrangements


B.	Lessee Arrangements

We lease certain property, vehicles and other equipment primarily through operating leases. We recognize a lease liability and corresponding right-of-use asset based on the present value of lease payments. To determine the present value of lease payments for most of our leases, we use our incremental borrowing rate based on information available on the lease commencement date. We have elected not to separate payments for lease components from non-lease components. Our lease agreements may include options to extend or terminate the lease. When it is reasonably certain that we will exercise that option, we have included the option in the recognition of right-of-use assets and lease liabilities. Our variable lease costs primarily include maintenance, taxes and insurance. We have elected not to recognize right-of-use assets or lease liabilities for leases with a term of twelve months or less.

Our finance leases are not significant and therefore are not included in the following disclosures.

The components of lease cost were as follows:



(Millions of dollars)
	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease cost	$	2	$	4
Short-term lease cost	$	1	$	1
Variable lease cost	$	—	$	—

Supplemental information related to operating leases was as follows:



(Millions of dollars)
	Consolidated Statements of Financial Position Location	June 30, 2019			January 1, 2019
Right-of-use assets	Other assets	$	20		$	22
Lease liabilities	Other liabilities	$	20		$	23
Weighted average remaining lease term		4 years			4 years
Weighted average discount rate		2.6		%	2.6		%

At June 30, 2019, maturities of operating lease liabilities were as follows:



(Millions of dollars)
Remaining six months of 2019	$	4
2020	6
2021	4
2022	3
2023	2
Thereafter	2
Total lease payments	21
Less: imputed interest	(1		)
Total	$	20

At December 31, 2018, minimum payments for operating leases having initial non-cancelable terms in excess of one year were as follows:



(Millions of dollars)
2019	$	8
2020	6
2021	4
2022	2
2023	2
Thereafter	2
Total	$	24

Supplemental cash flow information related to operating leases was as follows:



(Millions of dollars)
	Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	4
Right-of-use assets obtained in exchange for operating lease obligations⁽¹⁾	$	24

⁽¹⁾Includes a $23 million impact of initial recognition of right-of-use assets and lease liabilities.