Leases

9 Months Ended

Sep. 30, 2019

Leases

A. Lessee arrangements

We lease certain property, information technology equipment, warehouse equipment, vehicles and other equipment 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. 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 not to separate payments for lease and 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. 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 costs were as follows:




(Millions of dollars)
	Three Months Ended September 30		Nine Months Ended September 30
	2019
Operating lease cost	$	59	$	177
Short-term lease cost	$	11	$	43

Operating lease right-of-use assets are recognized in Other assets in the Consolidated Statement of Financial Position. The operating lease liabilities are recognized in Other current liabilities and Other liabilities.

Supplemental information related to leases was as follows:




(Millions of dollars)
	September 30, 2019			January 1, 2019
Operating Leases
Other assets	$	632		$	713
Other current liabilities	$	178		$	209
Other liabilities	$	462		$	511

Weighted average remaining lease term
Operating leases	7 years			7 years

Weighted average discount rates
Operating leases	2		%	2		%

Maturities of operating lease liabilities at September 30, 2019 and minimum payments for operating leases having initial or remaining non-cancelable terms in excess of one year at December 31, 2018 were as follows:




(Millions of dollars)	September 30, 2019
Amounts Due In
Remaining three months of 2019	$	47
2020	165
2021	124
2022	77
2023	59
Thereafter	205
Total lease payments	677
Less: Imputed interest	(37		)
Total	$	640


	December 31, 2018
Amounts Due In
2019	$	205
2020	154
2021	111
2022	67
2023	50
Thereafter	185
Total	$	772

Supplemental cash flow information related to leases was as follows:




(Millions of dollars)
	Nine Months Ended September 30
	2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	170
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	87

Leases of Lessor Disclosure

B. Lessor arrangements

We lease Caterpillar machinery, engines and other equipment to customers and dealers around the world, primarily through Cat Financial. Cat Financial leases 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. Cat Financial also offers 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, Cat Financial is 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 Cat Financial’s 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. Cat Financial’s sales staff work closely with customers and dealers to manage the sale of lease returns and the recovery of residual exposure.

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 of finance lease receivables (sales-type and direct finance leases) were as follows:




(Millions of dollars)	September 30, 2019
Amounts Due In	Retail Leases ¹			Wholesale Leases ²			Total
Remaining three months of 2019	$	889		$	30		$	919
2020	2,798			59			2,857
2021	1,733			43			1,776
2022	857			27			884
2023	366			17			383
Thereafter	176			25			201
Total	6,819			201			7,020
Guaranteed residual value	375			49			424
Unguaranteed residual value	793			37			830
Less: Unearned income	(650		)	(34		)	(684		)
Total	$	7,337		$	253		$	7,590


	December 31, 2018
Amounts Due In	Retail Leases ¹			Wholesale Leases ²			Total
2019	$	2,981		$	70		$	3,051
2020	2,026			48			2,074
2021	1,073			30			1,103
2022	453			16			469
2023	166			6			172
Thereafter	56			3			59
Total	6,755			173			6,928
Guaranteed residual value	392			66			458
Unguaranteed residual value	822			35			857
Less: Unearned income	(628		)	(16		)	(644		)
Total	$	7,341		$	258		$	7,599

¹ Included in Receivables - finance and Long-term receivables - finance on the Consolidated Statement of Financial Position.
² Included in Receivables - trade and other and Long-term receivables - trade and other in the Consolidated Statement of Financial Position. Wholesale lease receivables are receivables of Cat Financial that arise when Cat Financial provides financing for a dealer’s lease of inventory.

Our finance lease receivables generally may be repaid or refinanced without penalty prior to contractual maturity. Accordingly, this presentation should not be regarded as a forecast of future cash collections.

The carrying amount of equipment leased to others, included in Property, plant and equipment - net in the Consolidated Statement of Financial Position, under operating leases was as follows:




(Millions of dollars)
	September 30, 2019			December 31, 2018
Equipment leased to others - at original cost	$	6,313		$	6,015
Less: Accumulated depreciation	(2,021		)	(1,744		)
Equipment leased to others - net	$	4,292		$	4,271

Payments due for operating leases at September 30, 2019 and scheduled minimum rental payments for operating leases at December 31, 2018 were as follows:




(Millions of dollars)

September 30, 2019

Remaining Three Months of 2019	2020	2021	2022	2023	Thereafter	Total
$276	$827	$486	$250	$117	$111	$2,067

December 31, 2018

2019	2020	2021	2022	2023	Thereafter	Total
$896	$574	$314	$158	$71	$69	$2,082

Revenues from finance and operating leases, primarily included in Revenues of Financial Products on the Consolidated Statement of Results of Operations, were as follows:




(Millions of dollars)
	Three Months Ended September 30		Nine Months Ended September 30
	2019
Finance lease revenue	$	136	$	390
Operating lease revenue	317		941
Total	$	453	$	1,331

Revenues are presented net of sales and other related taxes.