Caterpillar Inc.: Files Form 10-Q FQE 30 September 2020

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Caterpillar Inc.

Caterpillar Inc.: Files Form 10-Q FQE 30 September 2020

03-Fév-2021 / 23:34 CET/CEST

Information réglementaire transmise par EQS Group.

Le contenu de ce communiqué est de la responsabilité de l'émetteur.


Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the quarterly period ended September 30, 2020

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 37-0602744

 (State or other jurisdiction of incorporation) (IRS Employer I.D. No.)
510 Lake Cook Road, Suite 100, Deerfield, Illinois 60015

(Address of principal executive offices) (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

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 1

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

1 In addition to the New York Stock Exchange, Caterpillar common stock is also listed on stock exchanges in France and Switzerland.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  Accelerated filer 

Non-accelerated filer  Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

At September 30, 2020, 543,258,283 shares of common stock of the registrant were outstanding.

 

Table of Contents

Table of Contents

Part I. Financial Information

Item 1. Financial Statements 3

Management's Discussion and Analysis of Financial Condition and Results of

Item 2.  54
Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk 93

Item 4. Controls and Procedures 93

Part II. Other Information

Item 1. Legal Proceedings 93

Item 1A. Risk Factors 94

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 94

Item 3. Defaults Upon Senior Securities *

Item 4. Mine Safety Disclosures *

Item 5. Other Information *

Item 6. Exhibits 95

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

 

2

 

Table of Contents

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)

Sales and revenues:

Three Months Ended September 30

2020 2019

 

 

Sales of Machinery, Energy & Transportation...................................

$ 9,228

$ 11,974

Revenues of Financial Products............................................

653

784

Total sales and revenues.................................................

9,881

12,758

Operating costs:

 

 

Cost of goods sold.....................................................

6,919

8,569

Selling, general and administrative expenses....................................

1,126

1,251

Research and development expenses.........................................

344

431

Interest expense of Financial Products........................................

137

189

Other operating (income) expenses..........................................

370

298

Total operating costs...................................................

8,896

10,738

Operating profit........................................................

985

2,020

Interest expense excluding Financial Products...................................

136

103

Other income (expense).................................................

14

88

Consolidated profit before taxes.............................................

863

2,005

Provision (benefit) for income taxes.........................................

187

518

Profit of consolidated companies...........................................

676

1,487

Equity in profit (loss) of unconsolidated affiliated companies.........................

(5)

7

Profit of consolidated and affiliated companies..................................

671

1,494

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

3

-

Profit 1

................................................................... $ 668

 

$ 1,494

 

 

 

Profit per common share..................................................

$ 1.23

$ 2.69

Profit per common share - diluted 2

 ....................................................................$ 1.22

 

$ 2.66

Weighted-average common shares outstanding (millions)

- Basic............................................................

542.3

556.3

- Diluted 2

546.4

561.2

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

 

Table of Contents

Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)

 

Three Months Ended September 30

2020 2019

Profit of consolidated and affiliated companies.......................................

$ 671

$ 1,494

Other comprehensive income (loss), net of tax:

 

 

Foreign currency translation, net of tax (provision)/benefit of: 2020- $21; 2019 - $(21)..............

291

(263)

Pension and other postretirement benefits:

 

 

Current year prior service credit (cost), net of tax (provision)/benefit of: 2020 - $1; 2019 - $0......

(1)

-

Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2020 - $2; 2019 - $2.....

(7)

(8)

Derivative financial instruments:

 

 

Gains (losses) deferred, net of tax (provision)/benefit of: 2020 - $(2); 2019 - $(16)..............

3

59

(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2020 - $(20); 2019 - $20.....

73

(76)

Available-for-sale securities:

 

 

Gains (losses) deferred, net of tax (provision)/benefit of: 2020 - $0; 2019 - $(2)...............

8

4

Total other comprehensive income (loss), net of tax.....................................

367

(284)

Comprehensive income........................................................

1,038

1,210

Less: comprehensive income attributable to the noncontrolling interests........................

3

-

Comprehensive income attributable to shareholders..................................

$ 1,035

$ 1,210

 

See accompanying notes to Consolidated Financial Statements.

 

4

 

Table of Contents

Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)

Sales and revenues:

Nine Months Ended September 30

2020 2019

 

 

Sales of Machinery, Energy & Transportation....................................

$ 28,452

$ 38,369

Revenues of Financial Products.............................................

2,061

2,287

Total sales and revenues..................................................

30,513

40,656

Operating costs:

 

 

Cost of goods sold......................................................

21,298

27,513

Selling, general and administrative expenses.....................................

3,426

3,879

Research and development expenses..........................................

1,041

1,307

Interest expense of Financial Products.........................................

461

571

Other operating (income) expenses...........................................

1,114

946

Total operating costs....................................................

27,340

34,216

Operating profit.........................................................

3,173

6,440

Interest expense excluding Financial Products....................................

384

309

Other income (expense)..................................................

265

316

Consolidated profit before taxes..............................................

3,054

6,447

Provision (benefit) for income taxes..........................................

839

1,470

Profit of consolidated companies............................................

2,215

4,977

Equity in profit (loss) of unconsolidated affiliated companies..........................

8

20

Profit of consolidated and affiliated companies....................................

2,223

4,997

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

5

2

Profit 1

..................................................................... $ 2,218

 

$ 4,995

 

 

 

Profit per common share...................................................

$ 4.08

$ 8.84

Profit per common share - diluted 2

..................................................................... $ 4.05

 

$ 8.75

Weighted-average common shares outstanding (millions)

- Basic.............................................................

543.9

565.2

- Diluted 2

547.8

570.8

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.

 

5

 

Table of Contents

Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)

 

Nine Months Ended September 30

2020 2019

Profit of consolidated and affiliated companies.......................................

$ 2,223

$ 4,997

Other comprehensive income (loss), net of tax:

 

 

Foreign currency translation, net of tax (provision)/benefit of: 2020 - $20; 2019 - $(19).............

106

(186)

Pension and other postretirement benefits:

 

 

Current year prior service credit (cost), net of tax (provision)/benefit of: 2020 - $1; 2019 - $0......

1

-

Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2020 - $7; 2019 - $8.....

(21)

(22)

Derivative financial instruments:

 

 

Gains (losses) deferred, net of tax (provision)/benefit of: 2020 - $21; 2019 - $(15)..............

(72)

53

(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2020 - $(22); 2019 - $23.....

76

(86)

Available-for-sale securities:

 

 

Gains (losses) deferred, net of tax (provision)/benefit of: 2020 - $(9); 2019 - $(10)..............

29

34

Total other comprehensive income (loss), net of tax.....................................

119

(207)

Comprehensive income........................................................

2,342

4,790

Less: comprehensive income attributable to the noncontrolling interests........................

5

2

Comprehensive income attributable to shareholders..................................

$ 2,337

$ 4,788

 

See accompanying notes to Consolidated Financial Statements.

 

6

 

Table of Contents

Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Dollars in millions)

Assets

Current assets:

September 30,

2020

December 31,

2019

 

 

Cash and short-term investments.........................................

$ 9,315

$ 8,284

Receivables - trade and other...........................................

6,969

8,568

Receivables - finance................................................

8,966

9,336

Prepaid expenses and other current assets...................................

1,831

1,739

Inventories.......................................................

11,453

11,266

Total current assets...................................................

38,534

39,193

Property, plant and equipment - net.........................................

12,232

12,904

Long-term receivables - trade and other.....................................

1,149

1,193

Long-term receivables - finance...........................................

12,209

12,651

Noncurrent deferred and refundable income taxes................................

1,440

1,411

Intangible assets......................................................

1,363

1,565

Goodwill..........................................................

6,304

6,196

Other assets........................................................

3,510

3,340

Total assets............................................................

$ 76,741

$ 78,453

Liabilities

 

 

Current liabilities:

 

 

Short-term borrowings:

 

 

Machinery, Energy & Transportation...................................

$ -

$ 5

Financial Products...............................................

2,660

5,161

Accounts payable...................................................

5,193

5,957

Accrued expenses...................................................

3,510

3,750

Accrued wages, salaries and employee benefits................................

1,069

1,629

Customer advances.................................................

1,209

1,187

Dividends payable...................................................

-

567

Other current liabilities...............................................

1,978

2,155

Long-term debt due within one year:

 

 

Machinery, Energy & Transportation...................................

1,397

16

Financial Products...............................................

7,962

6,194

Total current liabilities.................................................

24,978

26,621

Long-term debt due after one year:

 

 

Machinery, Energy & Transportation...................................

9,742

9,141

Financial Products...............................................

16,365

17,140

Liability for postemployment benefits.......................................

6,254

6,599

Other liabilities......................................................

4,408

4,323

Total liabilities.........................................................

61,747

63,824

Commitments and contingencies (Notes 11 and 14)

 

 

Shareholders' equity

 

 

Common stock of $1.00 par value:

 

 

Authorized shares: 2,000,000,000

 

 

Issued shares: (9/30/20 and 12/31/19 - 814,894,624) at paid-in amount.................

6,204

5,935

Treasury stock (9/30/20 - 271,636,341 shares; 12/31/19 - 264,812,014 shares) at cost.......

(25,315)

(24,217)

Profit employed in the business............................................

35,508

34,437

Accumulated other comprehensive income (loss)................................

(1,448)

(1,567)

Noncontrolling interests................................................

45

41

Total shareholders' equity................................................

14,994

14,629

Total liabilities and shareholders' equity.......................................

$ 76,741

$ 78,453

 

See accompanying notes to Consolidated Financial Statements.

 

7

 

Table of Contents

Caterpillar Inc.
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
(Dollars in millions)

Three Months Ended September 30, 2019

Common stock

Treasury
stock

Profit employed in the business

Accumulated
other
comprehensive
income (loss)

Noncontrolling interests

Total

 

 

 

 

 

 

 

Balance at June 30, 2019...........................

$ 5,822

$ (22,467)

$ 32,981

$ (1,499)

$

41

$ 14,878

Profit of consolidated and affiliated companies...........

-

-

1,494

-

 

-

1,494

Foreign currency translation, net of tax................

-

-

-

(263)

 

-

(263)

Pension and other postretirement benefits, net of tax.......

-

-

-

(8)

 

-

(8)

Derivative financial instruments, net of tax.............

-

-

-

(17)

 

-

(17)

Available-for-sale securities, net of tax................

-

-

-

4

 

-

4

Common shares issued from treasury stock for stock-based

compensation: 404,606..........................

-

20

-

-

 

-

20

Stock-based compensation expense..................

57

-

-

-

 

-

57

Common shares repurchased: 10,335,410 1

-

(1,246)

-

-

 

-

(1,246)

Other......................................

72

-

2

-

 

-

74

Balance at September 30, 2019.......................

$ 5,951

$ (23,693)

$ 34,477

$ (1,783)

$

41

$ 14,993

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

Balance at June 30, 2020...........................

$ 6,120

$ (25,412)

$ 34,841

$ (1,815)

$

43

$ 13,777

Profit of consolidated and affiliated companies...........

-

-

668

-

 

3

671

Foreign currency translation, net of tax................

-

-

-

291

 

-

291

Pension and other postretirement benefits, net of tax.......

-

-

-

(8)

 

-

(8)

Derivative financial instruments, net of tax.............

-

-

-

76

 

-

76

Available-for-sale securities, net of tax................

-

-

-

8

 

-

8

Common shares issued from treasury stock for stock-based

compensation: 1,751,708.........................

23

97

-

-

 

-

120

Stock-based compensation expense..................

55

-

-

-

 

-

55

Other......................................

6

 

(1)

 

 

(1)

4

Balance at September 30, 2020.......................

$ 6,204

$ (25,315)

$ 35,508

$ (1,448)

$

45

$ 14,994

 

1 See Note 12 for additional information.

See accompanying notes to Consolidated Financial Statements.

 

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Table of Contents

Caterpillar Inc.
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
(Dollars in millions)

Nine Months Ended September 30, 2019

Common stock

Treasury stock

Profit employed in the business

Accumulated
other
comprehensive
income (loss)

Noncontrolling interests

Total

 

 

 

 

 

 

 

Balance at December 31, 2018......................

$ 5,827

$ (20,531)

$ 30,427

$ (1,684)

$

41

$ 14,080

Adjustments to adopt new accounting guidance

 

 

 

 

 

 

 

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.........

-

-

4,995

-

 

2

4,997

Foreign currency translation, net of tax..............

-

-

-

(186)

 

-

(186)

Pension and other postretirement benefits, net of tax......

-

-

-

(22)

 

-

(22)

Derivative financial instruments, net of tax............

-

-

-

(33)

 

-

(33)

Available-for-sale securities, net of tax..............

-

-

-

34

 

-

34

Dividends declared 1

-

-

(1,074)

-

 

-

(1,074)

Distribution to noncontrolling interests..............

 

 

 

 

 

(2)

(2)

Common shares issued from treasury stock for stock-based

compensation: 2,907,710........................

(62)

121

 

 

 

 

59

Stock-based compensation expense.................

170

-

-

-

 

-

170

Common shares repurchased: 25,792,061 2

-

(3,283)

-

-

 

-

(3,283)

Other....................................

16

-

2

-

 

-

18

Balance at September 30, 2019.....................

$ 5,951

$ (23,693)

$ 34,477

$ (1,783)

$

41

$ 14,993

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

Balance at December 31, 2019......................

$ 5,935

$ (24,217)

$ 34,437

$ (1,567)

$

41

$ 14,629

Adjustments to adopt new accounting guidance 3

 

 

 

 

 

 

 

Credit losses...............................

-

-

(25)

-

 

-

(25)

Balance at January 1, 2020........................

5,935

(24,217)

34,412

(1,567)

 

41

14,604

Profit of consolidated and affiliated companies.........

-

-

2,218

-

 

5

2,223

Foreign currency translation, net of tax..............

-

-

-

106

 

-

106

Pension and other postretirement benefits, net of tax......

-

-

-

(20)

 

-

(20)

Derivative financial instruments, net of tax............

-

-

-

4

 

-

4

Available-for-sale securities, net of tax..............

-

-

-

29

 

-

29

Dividends declared 1

-

-

(1,121)

-

 

-

(1,121)

Common shares issued from treasury stock for stock-based

compensation: 3,271,679........................

(43)

153

-

-

 

-

110

Stock-based compensation expense.................

169

-

-

-

 

-

169

Common shares repurchased: 10,096,006 2

-

(1,250)

-

-

 

-

(1,250)

Other....................................

143

(1)

(1)

 

 

(1)

140

Balance at September 30, 2020.....................

$ 6,204

$ (25,315)

$ 35,508

$ (1,448)

$

45

$ 14,994

 

1 Dividends per share of common stock of $2.06 and $1.89 were declared in the nine months ended September 30, 2020 and 2019, respectively.

2 See Note 12 for additional information.

3 See Note 2 for additional information.

See accompanying notes to Consolidated Financial Statements.

 

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Table of Contents

Caterpillar Inc.
Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)

Cash flow from operating activities:

Profit of consolidated and affiliated companies...........................
Adjustments for non-cash items:

Depreciation and amortization....................................

 

Nine Months Ended September 30

2020 2019

$

2,223

1,815

$

4,997

1,933

Net gain on remeasurement of pension obligations......................

 

  1.             

 

-

Provision (benefit) for deferred income taxes..........................

 

(38)

 

(13)

Other....................................................

 

919

 

627

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

 

 

 

 

Receivables - trade and other....................................

 

1,473

 

427

Inventories................................................

 

(139)

 

(676)

Accounts payable............................................

 

(596)

 

(669)

Accrued expenses...........................................

 

(286)

 

114

Accrued wages, salaries and employee benefits........................

 

(547)

 

(858)

Customer advances...........................................

 

13

 

169

Other assets - net............................................

 

(15)

 

19

Other liabilities - net.........................................

 

(512)

 

(1,592)

Net cash provided by (used for) operating activities..........................

 

4,255

 

4,478

Cash flow from investing activities:

 

 

 

 

Capital expenditures - excluding equipment leased to others...................

 

(686)

 

(723)

Expenditures for equipment leased to others..............................

 

(805)

 

(1,133)

Proceeds from disposals of leased assets and property, plant and equipment.........

 

550

 

812

Additions to finance receivables.....................................

 

(9,278)

 

(9,453)

Collections of finance receivables....................................

 

9,656

 

9,144

Proceeds from sale of finance receivables...............................

 

37

 

183

Investments and acquisitions (net of cash acquired).........................

 

(93)

 

(6)

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

 

13

 

3

Proceeds from sale of securities......................................

 

239

 

281

Investments in securities..........................................

 

(512)

 

(425)

Other - net...................................................

 

(80)

 

(37)

Net cash provided by (used for) investing activities...........................

 

(959)

 

(1,354)

Cash flow from financing activities:

 

 

 

 

Dividends paid.................................................

 

(1,683)

 

(1,564)

Common stock issued, including treasury shares reissued.....................

 

110

 

59

Common shares repurchased........................................

 

(1,130)

 

(3,283)

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

 

 

 

 

Machinery, Energy & Transportation...............................

 

1,991

 

1,479

Financial Products...........................................

 

7,427

 

7,348

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

 

 

 

 

Machinery, Energy & Transportation...............................

 

(18)

 

(8)

Financial Products...........................................

 

(6,771)

 

(6,054)

Short-term borrowings - net (original maturities three months or less)............

 

(2,138)

 

(1,006)

Other - net

 

(1)

 

(2)

Net cash provided by (used for) financing activities..........................

 

(2,213)

 

(3,031)

Effect of exchange rate changes on cash..................................

 

  1.  

 

(47)

Increase (decrease) in cash and short-term investments and restricted cash........

 

1,027

 

46

Cash and short-term investments and restricted cash at beginning of period...........

 

8,292

 

7,890

Cash and short-term investments and restricted cash at end of period...............

$

9,319

$

7,936

 

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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Table of Contents

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) - We define ME&T as Caterpillar Inc. and its subsidiaries, excluding Financial Products. ME&T's information relates to the design, manufacturing and marketing of our products.

Financial Products - We define Financial Products as our finance and insurance subsidiaries, primarily Caterpillar Financial Services Corporation (Cat Financial) and Caterpillar Insurance Holdings Inc. (Insurance Services). Financial Products' information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment.

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 nine months ended September 30, 2020 and 2019, (b) the consolidated comprehensive income for the three and nine months ended September 30, 2020 and 2019, (c) the consolidated financial position at September 30, 2020 and December 31, 2019, (d) the consolidated changes in shareholders' equity for the three and nine months ended September 30, 2020 and 2019 and (e) the consolidated cash flow for the nine months ended September 30, 2020 and 2019. 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, 2019 (2019 Form 10-K).

The December 31, 2019 financial position data included herein is derived from the audited consolidated financial statements included in the 2019 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 these VIEs for which we are not the primary beneficiary was $57 million and $133 million as of September 30, 2020 and December 31, 2019, respectively.

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 were evaluated and reflected in our financial statements as part of our overall portfolio of finance receivables and related allowance for credit losses.

 

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2. New accounting guidance

  1.   Adoption of new accounting standards

Credit losses (Accounting Standards Update (ASU) 2016-13) - In June 2016, the Financial Accounting Standards Board (FASB) issued new 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 applies 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 also applies to debt securities and other financial assets measured at fair value through other comprehensive income. The new guidance was effective January 1, 2020. We applied the new guidance using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of January 1, 2020. We have not recast prior period comparative information, which we continue to report under the accounting guidance in effect for those periods. Our adoption of the new guidance did not have a material impact on our financial statements.

We adopted the following ASUs effective January 1, 2020, none of which had a material impact on our financial statements:

ASU     Description

2018-13 Fair value measurement

2018-15 Internal-use software

2018-19 Codification improvements - Credit losses

2019-04 Codification improvements - Credit losses, Derivatives & hedging, and Financial instruments

2019-05 Financial instruments - Credit losses

2019-11 Codification improvements - Credit losses

2019-12 Simplifying accounting for income taxes

2020-02 Financial instruments - Credit losses

2020-03 Codification improvements - Financial instruments
B. Accounting standards issued but not yet adopted

Reference rate reform (ASU 2020-04) - In March 2020, the FASB issued accounting guidance to ease the potential burden in accounting for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and may be elected over time as reference rate reform activities occur between March 12, 2020 through December 31, 2022. We are evaluating the impact of reference rate reform on our contracts and assessing the impacts of adopting this guidance on our financial statements.

We consider the applicability and impact of all ASUs. We assessed ASUs not listed above and determined that they either were not applicable or were not expected 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. We include wholesale inventory receivables 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 $6,048 million, $7,648 million and $7,743 million as of September 30, 2020, December 31, 2019 and December 31, 2018, respectively. We recognize trade receivables from dealers and end users in Receivables - trade and other in the Consolidated Statement of Financial Position. Long-term trade receivables from dealers and end users were $674 million, $693 million and $674 million as of September 30, 2020, December 31, 2019 and December 31, 2018, respectively. We recognize long­term trade receivables from dealers and end users in Long-term receivables - trade and other in the Consolidated Statement of Financial Position.

 

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We invoice in advance of recognizing the sale of certain products. We recognize advanced customer payments as a contract liability in Customer advances and Other liabilities in the Consolidated Statement of Financial Position. Contract liabilities were $1,659 million, $1,654 million and $1,680 million as of September 30, 2020, December 31, 2019 and December 31, 2018, respectively. We reduce the contract liability when revenue is recognized. During the three and nine months ended September 30, 2020, we recognized $144 million and $843 million, respectively, of revenue that was recorded as a contract liability at the beginning of 2020. During the three and nine months ended September 30, 2019, we recognized $101 million and $976 million, respectively, of revenue that was recorded as a contract liability at the beginning of 2019.

As of September 30, 2020, 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 $6.0 billion, of which $2.4 billion is expected to be completed and revenue recognized in the twelve months following September 30, 2020. We have elected the practical expedient not to 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).

We recognized pretax stock-based compensation expense of $55 million and $169 million for the three and nine months ended September 30, 2020, respectively, and $57 million and $170 million for the three and nine months ended September 30, 2019, respectively.

The following table illustrates the type and fair value of the stock-based compensation awards granted during the nine months ended September 30, 2020 and 2019, respectively:

Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019

 Weighted- Weighted- Weighted- Weighted-

 Average Fair Average Grant Average Fair Average Grant

Shares Granted Value Per Share Date Stock Price Shares Granted Value Per Share Date Stock Price

Stock options.........

1,913,888

$ 25.98

$ 127.60

1,499,524

$ 40.98

$ 138.35

RSUs..............

705,287

$ 127.60

$ 127.60

657,389

$ 138.35

$ 138.35

PRSUs.............

371,641

$ 127.60

$ 127.60

342,097

$ 138.35

$ 138.35

 

The following table provides the assumptions used in determining the fair value of the stock-based awards for the nine months ended September 30, 2020 and 2019, respectively:

 

 

Grant Year

2020 2019

Weighted-average dividend yield....................................

2.47%

2.56%

Weighted-average volatility........................................

25.7%

29.1%

Range of volatilities............................................

24.5% -29.7%

25.1% -38.7%

Range of risk-free interest rates.....................................

1.21% -1.39%

2.48% -2.68%

Weighted-average expected lives.....................................

8 years

7 years

 

As of September 30, 2020, the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $170 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 1.8 years.

 

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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. We present at least annually to the Audit Committee of the Board of Directors on our risk management practices, including our use of financial derivative instruments.

We recognize all derivatives at their fair value on the Consolidated Statement of Financial Position. 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. We record in current earnings 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. We record in Accumulated other comprehensive income (loss) (AOCI) changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge, to the extent effective, on the Consolidated Statement of Financial Position until we reclassify them to earnings in the same period or periods during which the hedged transaction affects earnings. We report changes in the fair value of undesignated derivative instruments in current earnings. We classify cash flows from designated derivative financial instruments within the same category as the item being hedged on the Consolidated Statement of Cash Flow. We include cash flows from undesignated derivative financial instruments 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 ME&T 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 September 30, 2020, the maximum term of these outstanding contracts was approximately 60 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, Norwegian Krona, 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. We perform designation on a specific exposure basis to support hedge accounting. The remainder of ME&T foreign currency contracts are undesignated.

 

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As of September 30, 2020, $8 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 over the next twelve months when earnings are affected by the hedged transactions. The actual amount recorded in current earnings 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 ME&T 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 and duration) of Cat Financial's debt portfolio with the interest rate profile of our 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 ME&T and Financial Products. We amortize the gains or losses associated with these contracts at the time of liquidation 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 materials. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials.

Our ME&T 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 were as follows:

(Millions of dollars) Consolidated Statement of Financial Asset (Liability) Fair Value

Position Location September 30, 2020 December 31, 2019

 

Designated derivatives
Foreign exchange contracts

 

 

 

 

 

Machinery, Energy & Transportation.....

Receivables - trade and other.........

$

29

$

18

Machinery, Energy & Transportation.....

Long-term receivables - trade and other..

 

28

 

9

Machinery, Energy & Transportation.....

Accrued expenses.................

 

(40)

 

(20)

Machinery, Energy & Transportation.....

Other liabilities..................

 

(21)

 

-

Financial Products..................

Receivables - trade and other.........

 

16

 

54

Financial Products..................

Long-term receivables - trade and other

 

-

 

13

Financial Products..................

Accrued expenses.................

 

(39)

 

(3)

Interest rate contracts

 

 

 

 

 

Machinery, Energy & Transportation.....

Long-term receivables - trade and other

 

1

 

-

Financial Products..................

Receivables - trade and other.........

 

3

 

-

Financial Products..................

Long-term receivables - trade and other..

 

60

 

5

Financial Products..................

Accrued expenses.................

 

(12)

 

(25)

 

 

$

25

$

51

Undesignated derivatives

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

Machinery, Energy & Transportation.....

Receivables - trade and other.........

$

3

$

1

Financial Products..................

Receivables - trade and other.........

 

57

 

7

Financial Products..................

Long-term receivables - trade and other..

 

12

 

5

Financial Products..................

Accrued expenses.................

 

(18)

 

(22)

Commodity contracts

Machinery, Energy & Transportation.....

Receivables - trade and other.........

 

9

 

4

Machinery, Energy & Transportation.....

Long-term receivables - trade and other

 

1

 

-

Machinery, Energy & Transportation.....

Accrued expenses.................

 

(7)

 

(1)

 

 

$

57

$

(6)

 

 

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

 

(Millions of dollars) September 30, 2020 December 31, 2019

 

Machinery, Energy & Transportation......................................

$

3,479

$

2,563

Financial Products...................................................

$

11,538

$

8,931

 

The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties. We calculate the amounts exchanged by the parties by referencing the notional amounts and by other terms of the derivatives, such as foreign currency exchange rates, interest rates or commodity prices.

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

Cash Flow Hedges

Three Months Ended September 30, 2020

 

(Millions of dollars)

Foreign exchange contracts

Amount of
Gains
(Losses)
Recognized
in AOCI

Recognized in Earnings

 

 

Classification of
Gains (Losses)

Amount of
Gains
(Losses)
Reclassified
from AOCI

Amount of the line items
in the Consolidated
Statement of Results of
Operations

 

 

 

 

 

Machinery, Energy & Transportation....

$ 66

Sales of Machinery, Energy &

Transportation.................

$ (6)

$

9,228

 

 

Cost of goods sold..............

(15)

 

6,919

Financial Products..............

(64)

Interest expense of Financial Products....

8

 

137

 

 

Other income (expense)..........

(63)

 

14

Interest rate contracts

 

 

 

 

 

Machinery, Energy & Transportation....

2

Interest expense excluding Financial

Products.....................

(1)

 

136

Financial Products..............

1

Interest expense of Financial Products....

(16)

 

137

 

$ 5

 

$ (93)

 

 

 

Three Months Ended September 30, 2019

Recognized in Earnings

 

Foreign exchange contracts

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

 

 

 

 

 

 

Machinery, Energy & Transportation....

$ (13)

Sales of Machinery, Energy &

Transportation................

$

3

$

11,974

Financial Products..............

100

Interest expense of Financial Products 

 

9

 

189

 

 

Other income (expense)..........

 

89

 

88

Interest rate contracts

 

 

 

 

 

 

Machinery, Energy & Transportation....

-

Interest expense excluding Financial

Products....................

 

  1.                 

 

103

Financial Products..............

(12)

Interest expense of Financial Products.

 

  1.                 

 

189

 

$ 75 $ 96

 

 

 

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Cash Flow Hedges

Nine Months Ended September 30, 2020

 

(Millions of dollars)

Foreign exchange contracts

Amount of
Gains
(Losses)
Recognized
in AOCI

Recognized in Earnings

 

 

Classification of
Gains (Losses)

Amount of
Gains
(Losses)
Reclassified
from AOCI

Amount of the line items
in the Consolidated
Statement of Results of
Operations

 

 

 

 

 

Machinery, Energy & Transportation...

$ (58)

Sales of Machinery, Energy &

Transportation.................

$ 10

$

28,452

 

 

Cost of goods sold..............

(58)

 

21,298

Financial Products.............

2

Interest expense of Financial Products....

28

 

461

 

 

Other income (expense)..........

(35)

 

265

Interest rate contracts

 

 

 

 

 

Machinery, Energy & Transportation...

(14)

Interest expense excluding Financial

Products.....................

(3)

 

384

Financial Products.............

(23)

Interest expense of Financial Products....

(40)

 

461

 

$ (93)

 

$ (98)

 

 

 

Nine Months Ended September 30, 2019

 

 

Amount of
Gains
(Losses)
Recognized
in AOCI

Recognized in Earnings

 

 

Classification of
Gains (Losses)

Amount of
Gains
(Losses)
Reclassified
from AOCI

Amount of the line
items in the
Consolidated Statement
of Results of
Operations

Foreign exchange contracts

 

 

 

 

 

 

Machinery, Energy & Transportation... $

8

Sales of Machinery, Energy &

Transportation................

$

4

$

38,369

 

 

Cost of goods sold.............

 

(4)

 

27,513

Financial Products.............

132

Interest expense of Financial Products...

 

23

 

571

 

 

Other income (expense)..........

 

91

 

316

Interest rate contracts

Machinery, Energy & Transportation...

-

Interest expense excluding Financial

Products....................

 

(3)

 

309

Financial Products.............

(72)

Interest expense of Financial Products...

 

(2)

 

571

 

$ 68 $ 109

 

 

 

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

(Millions of dollars) Three Months Ended Three Months Ended

Classification of Gains (Losses) September 30, 2020 September 30, 2019

Foreign exchange contracts

Machinery, Energy & Transportation....... Other income (expense)............ $ 8 $ (1)

Financial Products................... Other income (expense) .........................(73) 15
Commodity contracts

Machinery, Energy & Transportation....... Other income (expense) ..........................6 (6)

$ (59) $ 8

 

Foreign exchange contracts

Classification of Gains (Losses)

 

Nine Months Ended September 30, 2020

 

Nine Months Ended September 30, 2019

 

 

 

 

 

Machinery, Energy & Transportation......

Other income (expense)..........

$

21

$

12

Financial Products..................

Other income (expense)..........

 

12

 

(24)

Commodity contracts

Machinery, Energy & Transportation......

Other income (expense)..........

 

(25)

 

10

 

 

$

8

$

(2)

 

We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within ME&T 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 September 30, 2020 and December 31, 2019, no cash collateral was received or pledged under the master netting agreements.

 

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  1.                 Inventories

Inventories (principally using the last-in, first-out (LIFO) method) were comprised of the following:

 

(Millions of dollars)

September 30,

2020

 

December 31,

2019

Raw materials................................................ $

4,093

$

4,263

Work-in-process..............................................

1,113

 

1,147

Finished goods...............................................

5,984

 

5,598

Supplies....................................................

263

 

258

Total inventories............................................... $

11,453

$

11,266

 

  1.                 Intangible assets and goodwill

A. Intangible assets

Intangible assets were comprised of the following:

 

 

 

September 30, 2020

 

(Millions of dollars)

Weighted

Gross

 

 

 

Amortizable

Carrying

Accumulated

 

 

Life (Years)

Amount

Amortization

Net

Customer relationships...............................

15

$ 2,453

$ (1,533)

$ 920

Intellectual property.................................

11

1,522

(1,131)

391

Other...........................................

13

181

(129)

52

Total finite-lived intangible assets........................

14

$ 4,156

$ (2,793)

$ 1,363

 

December 31, 2019

 

Weighted
Amortizable
Life (Years)

Gross
Carrying
Amount

Accumulated
Amortization

Net

Customer relationships...............................

15

$ 2,450

$ (1,406)

$ 1,044

Intellectual property.................................

12

1,510

(1,055)

455

Other...........................................

13

191

(125)

66

Total finite-lived intangible assets........................

14

$ 4,151

$ (2,586)

$ 1,565

 

Amortization expense for the three and nine months ended September 30, 2020 was $78 million and $236 million, respectively. Amortization expense for the three and nine months ended September 30, 2019 was $81 million and $244 million, respectively. Amortization expense related to intangible assets is expected to be:

(Millions of dollars)

Remaining Three Months of 2020

2021

2022

2023

2024

Thereafter

$76

$296

$278

$220

$162

$331

 

B. Goodwill

No goodwill was impaired during the nine months ended September 30, 2020 or 2019.

 

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The changes in carrying amount of goodwill by reportable segment for the nine months ended September 30, 2020 were as follows:

 

(Millions of dollars)

 

December 31,

 

 

Other

 

September 30,

 

 

2019

 

Acquisitions

Adjustments 1

 

2020

Construction Industries

 

 

 

 

 

 

 

Goodwill......................

$

306

$

- $

6

$

312

Impairments....................

 

(22)

 

-

-

 

(22)

Net goodwill....................

 

284

 

-

6

 

290

Resource Industries

 

 

 

 

 

 

 

Goodwill......................

 

4,156

 

-

40

 

4,196

Impairments....................

 

(1,175)

 

-

-

 

(1,175)

Net goodwill....................

 

2,981

 

-

40

 

3,021

Energy & Transportation

Goodwill......................

 

2,875

 

41

19

 

2,935

All Other 2

Goodwill......................

 

56

 

-

2

 

58

Consolidated total

 

 

 

 

 

 

 

Goodwill......................

 

7,393

 

41

67

 

7,501

Impairments....................

 

(1,197)

 

-

-

 

(1,197)

Net goodwill....................

$

6,196

$

41 $

67

$

6,304

 

1 Other adjustments are comprised primarily of foreign currency translation.

2 Includes All Other operating segment (See Note 16).

 

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8. Investments in debt and equity securities

We have investments in certain debt and equity securities, primarily at Insurance Services, which we record at fair value and primarily include in Other assets in the Consolidated Statement of Financial Position.

We classify debt securities as available-for-sale, and we include the unrealized gains and losses arising from the revaluation of these debt securities, net of applicable deferred income taxes, in equity (Accumulated other comprehensive income (loss) in the Consolidated Statement of Financial Position). We include the unrealized gains and losses arising from the revaluation of the equity securities in Other income (expense) in the Consolidated Statement of Results of Operations. We generally determine realized gains and losses on sales of investments using the specific identification method for debt and equity securities and include them in Other income (expense) in the Consolidated Statement of Results of Operations.

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:

 

 

September 30, 2020

December 31, 2019

Unrealized
Pretax Net

Unrealized
Pretax Net

(Millions of dollars)

Cost Gains Fair

Cost Gains Fair

 

Basis (Losses) Value

Basis (Losses) Value

Government debt

 

 

 

 

 

 

U.S. treasury bonds.................

$ 16

$ - $ 16

$ 9

$ - $ 9

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

50

1

51

54

-

54

Corporate bonds

 

 

 

 

 

 

Corporate bonds...................

958

43

1,001

836

20

856

Asset-backed securities..............

156

2

158

62

 

62

Mortgage-backed debt securities

 

 

 

 

 

 

U.S. governmental agency............

351

13

364

327

4

331

Residential......................

5

-

5

6

-

6

Commercial......................

61

4

65

46

1

47

Total debt securities................

$ 1,597

$ 63

$ 1,660

$ 1,340

$ 25

$ 1,365

 

Available-for-sale investments in an unrealized loss position:

September 30, 2020

Less than 12 months 1 12 months or more 1 Total

(Millions of dollars) Fair Unrealized Fair Unrealized Fair Unrealized

Value Losses Value Losses Value Losses

Corporate bonds

Corporate bonds.............. $ 65 $ 2 $ 6 $ - $ 71 $ 2

Total....................... $ 65 $ 2 $ 6 $ - $ 71 $ 2

December 31, 2019

Less than 12 months 1 12 months or more 1 Total

(Millions of dollars) Fair Unrealized Fair Unrealized Fair Unrealized

Value Losses Value Losses Value Losses

Corporate bonds

Corporate bonds.............. $ 58 $ 1 $ 50 $ - $ 108 $ 1

Total....................... $ 58 $ 1 $ 50 $ - $ 108 $ 1

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

 

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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. In addition, we did not expect credit-related losses on these investments as of September 30, 2020.

The cost basis and fair value of the available-for-sale debt securities at September 30, 2020, by contractual maturity, are 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.

 

September 30, 2020

(Millions of dollars) Cost Basis Fair Value

Due in one year or less................................................. $ 134 $ 135

Due after one year through five years ...............................................715 748

Due after five years through ten years ..............................................246 257

Due after ten years ...........................................................85 86

U.S. governmental agency mortgage-backed securities ...................................351 364

Residential mortgage-backed securities .............................................5 5

Commercial mortgage-backed securities .............................................61 65

Total debt securities - available-for-sale.................................... $ 1,597 $ 1,660

Sales of available-for-sale securities:

Three Months Ended Nine Months Ended

September 30 September 30

 

(Millions of dollars) 2020 2019 2020 2019

Proceeds from the sale of available-for-sale securities........ $ 74 $ 92 $ 197 $ 237

Gross gains from the sale of available-for-sale securities ..............- - 1 1
Gross losses from the sale of available-for-sale securities

 

For the three months ended September 30, 2020 and 2019, the net unrealized gains (losses) for equity securities held at September 30, 2020 and 2019 were $9 million and $2 million, respectively. For the nine months ended September 30, 2020 and 2019, the net unrealized gains (losses) for equity securities held at September 30, 2020 and 2019 were $(1) million and $54 million, respectively.

 

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9. Postretirement benefits

A. Pension and postretirement benefit costs

 

Other

U.S. Pension Non-U.S. Pension Postretirement

Benefits Benefits Benefits

(Millions of dollars) September 30 September 30 September 30

2020 2019 2020 2019 2020 2019

For the three months ended:

Components of net periodic benefit cost:

Service cost................................. $...- $ 29 $ 13 $ 20 $ 24 $ 19

Interest cost ....................................120 150 17 23 26 34

Expected return on plan assets .......................(197) (180) (34) (37) (4) (4)

Amortization of prior service cost (credit)

(Gain) loss on remeasurement of pension obligations 1 (2) - 79 - - -

Curtailments, settlements and termination benefits 1 - - 4 - - -

Net periodic benefit cost (benefit) 2................. $ (79) $ (1) $ 79 $ 6 $ 37 $ 39

For the nine months ended:

Components of net periodic benefit cost:

Service cost................................. $ - $ 86 $ 41 $ 61 $ 71 $ 60

Interest cost ....................................362 450 57 70 79 102

Expected return on plan assets ........................(593) (540) (107) (112) (10) (14)
Amortization of prior service cost (credit)

(Gain) loss on remeasurement of pension obligations 1

 

- -

(55) -

- -

 

 

 

Curtailments, settlements and termination benefits 1 - - 25 - - -

Net periodic benefit cost (benefit) 2................. $ (231) $ (4)        $  (39) $ 19     $  112 $ 118

1 Total lump-sum transfers out of certain pension plans exceeded the service and interest cost for 2020, which required us to follow settlement accounting and remeasure the plans' obligations as of March 31, 2020, June 30, 2020 and September 30, 2020.

2 The service cost component is included in Operating costs in the Consolidated Statement of Results of Operations. All other components are included in Other income (expense) in the Consolidated Statement of Results of Operations.

 

We made $47 million and $217 million of contributions to our pension and other postretirement plans during the three and nine months ended September 30, 2020, respectively. We currently anticipate full-year 2020 contributions of approximately $250 million.

B. Defined contribution benefit costs

Total company costs related to our defined contribution plans were as follows:

Three Months Ended September 30 Nine Months Ended September 30

(Millions of dollars) 2020 2019 2020 2019

U.S. Plans............................ $ 103 $ 68 $ 248 $ 298

Non-U.S. Plans ...................................22 22 65 64

$ 125 $ 90 $ 313 $ 362

The decrease in the U.S. defined contribution benefit costs for the nine months ended September 30, 2020 was primarily due to the fair value adjustments related to our non-qualified deferred compensation plans.

 

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  1.              Leases

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 Nine Months Ended

September 30 September 30

 

 

2020

2019

2020

2019

Finance lease revenue..........................

$

125

$ 136

$ 369

$ 390

Operating lease revenue........................

 

249

317

837

941

Total.....................................

$

374

$ 453

$ 1,206

$ 1,331

 

We present revenues net of sales and other related taxes.

  1.                 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.

Supplier consortium performance guarantee

We have provided a guarantee to a customer in Europe related to the performance of contractual obligations by a supplier consortium to which one of our Caterpillar subsidiaries is a member. The guarantee covers potential damages incurred by the customer resulting from the supplier consortium's non-performance. The damages are capped except for failure of the consortium to meet certain obligations outlined in the contract in the normal course of business. The guarantee will expire when the supplier consortium performs all of its contractual obligations, which is expected to be completed in 2022.

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 September 30, 2020 and December 31, 2019, the related recorded liability was $5 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 was as follows:

 

(Millions of dollars)

September 30,

2020

 

December 31,

2019

Caterpillar dealer performance guarantees............................. $

1,139

$

1,150

Supplier consortium performance guarantee..........................

257

 

238

Other guarantees............................................

179

 

221

Total guarantees ..............................................$

1,575

$

1,609

 

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Cat Financial provides guarantees to repurchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a variable interest entity. The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers. This SPC issues commercial paper and uses the proceeds to fund its loan program. Cat Financial has a loan purchase agreement with the SPC that obligates Cat Financial to purchase certain loans that are not paid at maturity. Cat Financial receives a fee for providing this guarantee, which provides a source of liquidity for the SPC. Cat Financial is the primary beneficiary of the SPC as its guarantees result in Cat Financial having both the power to direct the activities that most significantly impact the SPC's economic performance and the obligation to absorb losses, and therefore Cat Financial has consolidated the financial statements of the SPC. As of September 30, 2020 and December 31, 2019, the SPC's assets of $1,098 million and $1,453 million, respectively, were primarily comprised of loans to dealers, and the SPC's liabilities of $1,097 million and $1,452 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.

We determine our product warranty liability by applying historical claim rate experience to the current field population and dealer inventory. Generally, we base historical claim rates on actual warranty experience for each product by machine model/engine size by customer or dealer location (inside or outside North America). We develop specific rates for each product shipment month and update them monthly based on actual warranty claim experience.

(Millions of dollars) 2020

Warranty liability, January 1......................................................... $ 1,541

Reduction in liability (payments) .............................................................(652)

Increase in liability (new warranties) ...........................................................678

Warranty liability, September 30..................................................... $ 1,567

(Millions of dollars) 2019

Warranty liability, January 1......................................................... $              1,391

Reduction in liability (payments) .............................................................(903)

Increase in liability (new warranties)               1,053

Warranty liability, December 31...................................................... $ 1,541

12. Profit per share

 

Computations of profit per share: Three Months Ended Nine Months Ended

September 30 September 30

 

(Dollars in millions except per share data) 2020 2019 2020 2019

Profit for the period (A) 1.................................. $   668 $     1,494 $ 2,218 $      4,995
Determination of shares (in millions):

Weighted-average number of common shares outstanding (B)               542.3              556.3              543.9              565.2
Shares issuable on exercise of stock awards, net of shares assumed to be

purchased out of proceeds at average market price ....................4.1              4.9              3.9              5.6

Average common shares outstanding for fully diluted computation (C) 2                 546.4              561.2              547.8 570.8
Profit per share of common stock:

Assuming no dilution (A/B)............................... $ 1.23 $              2.69 $              4.08 $ 8.84

Assuming full dilution (A/C) 2............................. $ 1.22 $              2.66 $              4.05 $ 8.75

Shares outstanding as of September 30 (in millions)               543.3              552.7

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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For the three and nine months ended September 30, 2020 and 2019, we excluded 4.8 million and 3.0 million of outstanding stock options, respectively, from the computation of diluted earnings per share because the effect would have been antidilutive.

In July 2018, the Board approved a share repurchase authorization (the 2018 Authorization) of up to $10.0 billion of Caterpillar common stock effective January 1, 2019, with no expiration. As of September 30, 2020, approximately $4.8 billion remained available under the 2018 Authorization.

For the three months ended September 30, 2020, we did not repurchase any shares of Caterpillar common stock. For the nine months ended September 30, 2020, we repurchased 10.1 million shares of Caterpillar common stock at an aggregate cost of $1.3 billion. For the three and nine months ended September 30, 2019, we repurchased 10.3 million and 25.8 million shares of Caterpillar common stock, respectively, at an aggregate cost of $1.3 billion and $3.3 billion, respectively. We made these purchases through a combination of accelerated stock repurchase agreements with third-party financial institutions and open market transactions.

13. Accumulated other comprehensive income (loss)

We present comprehensive income and its components 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)

Three Months Ended September 30, 2020

Foreign
currency
translation

Pension and
other
postretirement
benefits

Derivative
financial
instruments

Available-
for-sale
securities

Total

 

 

 

 

 

 

Balance at June 30, 2020.............

$ (1,672)

$

(15)

$ (169) $

41

$ (1,815)

Other comprehensive income (loss) before

reclassifications..................

291

 

(1)

3

8

301

Amounts reclassified from accumulated

other comprehensive (income) loss.....

 

 

  1.  

73

 

66

Other comprehensive income (loss).....

291

 

  1.  

76

8

367

Balance at September 30, 2020.........

$ (1,381)

$

(23)

$ (93) $

49

$ (1,448)

Three Months Ended September 30, 2019

 

 

 

 

 

 

Balance at June 30, 2019.............

$ (1,426)

$

17

$ (105) $

15

$ (1,499)

Other comprehensive income (loss) before

reclassifications..................

(263)

 

-

59

4

(200)

Amounts reclassified from accumulated

other comprehensive (income) loss.....

 

 

(8)

(76)

 

(84)

Other comprehensive income (loss).....

(263)

 

(8)

(17)

4

(284)

Balance at September 30, 2019.........

$ (1,689)

$

9

$ (122) $

19

$ (1,783)

 

 

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Foreign
currency

Pension and
other

postretirement

Derivative
financial

Available-for-sale

 

(Millions of dollars)

translation

benefits

instruments

securities

Total

Nine Months Ended September 30, 2020

 

 

 

 

 

 

Balance at December 31, 2019.........

$ (1,487)

$

(3)

$ (97) $

20

$ (1,567)

Other comprehensive income (loss) before

reclassifications................

84

 

1

(72)

29

42

Amounts reclassified from accumulated

other comprehensive (income) loss...

22

 

  1.             

76

 

77

Other comprehensive income (loss).....

106

 

(20)

4

29

119

Balance at September 30, 2020.........

$ (1,381)

$

  1.             

$ (93) $

49

$ (1,448)

Nine Months Ended September 30, 2019

 

 

 

 

 

 

Balance at December 31, 2018.........

$ (1,601)

$

12

$ (80) $ (15)

$ (1,684)

Adjustment to adopt new accounting guidance related to reclassification of certain tax effects from accumulated other

comprehensive income.............

98

 

19

(9)

 

108

Balance at January 1, 2019.........

(1,503)

 

31

(89)

(15)

(1,576)

Other comprehensive income (loss) before

reclassifications................

(186)

 

 

53

34

(99)

Amounts reclassified from accumulated

other comprehensive (income) loss...

-

 

  1.             

(86)

-

(108)

Other comprehensive income (loss).....

(186)

 

(22)

(33)

34

(207)

Balance at September 30, 2019.........

$ (1,689)

$

9

$ (122) $

19

$ (1,783)

 

 

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

Three Months Ended September 30

(Millions of dollars) Classification of

income (expense) 2020 2019

Pension and other postretirement benefits:

Amortization of prior service credit (cost)..... Other income (expense).... $ 9 $ 10

Tax (provision) benefit .....................................................(2) (2)

Reclassifications net of tax................................... $ 7 $ 8

Derivative financial instruments:

Sales of Machinery,

Foreign exchange contracts.............. Energy & Transportation.. $ (6) $ 3

Foreign exchange contracts.............. Cost of goods sold  (15) -

Foreign exchange contracts.............. Other income (expense).... (63) 89

Foreign exchange contracts...............

Interest rate contracts...................

Interest rate contracts...................

Interest expense of

Financial Products ....................8 9

Interest expense excluding

Financial Products ...................(1) (2)

Interest expense of

Financial Products ..................(16) (3)

 

Reclassifications before tax ................................................(93) 96

Tax (provision) benefit....................................................20              (20)

Reclassifications net of tax..................................... $ (73) $ 76

Total reclassifications from Accumulated other comprehensive income (loss).... $ (66) $ 84

 

 

 

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Table of Contents

 

Nine Months Ended September 30

 

(Millions of dollars)

Classification of

income (expense) 2020 2019

 

 

 

 

 

Foreign currency translation

Gain (loss) on foreign currency translation..... Other income (expense)....$          (22) $            -

Reclassifications net of tax....................................... $ (22) $ -

Pension and other postretirement benefits:

Amortization of prior service credit (cost)...... Other income (expense).... $ 28 $ 30

Tax (provision) benefit......................................................(7)              (8)

Reclassifications net of tax....................................... $ 21 $ 22

Derivative financial instruments:

Sales of Machinery, Energy

Foreign exchange contracts............... & Transportation......... $ 10 $ 4

Foreign exchange contracts ................Cost of goods sold ...................(58) (4)

Foreign exchange contracts............... Other income (expense) .................(35) 91

Foreign exchange contracts...............

Interest rate contracts...................

Interest rate contracts...................

Interest expense of

Financial Products ...................28 23

Interest expense excluding

Financial Products ...................(3) (3)

Interest expense of

Financial Products ...................(40) (2)

 

Reclassifications before tax ..................................................(98) 109

Tax (provision) benefit......................................................22              (23)

Reclassifications net of tax....................................... $ (76) $ 86

Total reclassifications from Accumulated other comprehensive income (loss)... $ (77) $ 108

 

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14. 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, we accrue the investigation, remediation, and operating and maintenance costs against our earnings. We accrue costs 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 27, 2020, the Brazilian Federal Environmental Agency ("IBAMA") issued Caterpillar Brasil Ltda a notice of violation regarding allegations around the requirements for use of imported oils at the Piracicaba, Brazil facility. We have instituted processes to address the allegations. While we are still discussing resolution of these allegations with IBAMA, the initial notice from IBAMA included a proposed fine of approximately $300,000. We do not expect this fine or our response to address the allegations to have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.

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 requested 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 (CSARL) 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 CSARL, 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.

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 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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15. Income taxes

The provision for income taxes for the first nine months of 2020 reflected an estimated annual tax rate of 31 percent, compared with 26 percent for the first nine months of 2019, excluding the discrete items discussed in the following paragraphs. The increase in the estimated annual tax rate was primarily related to changes in the expected geographic mix of profits from a tax perspective for 2020, including the impact of U.S. tax on non-U.S. earnings as a result of U.S. tax reform.

During the first nine months of 2020, we recorded discrete tax benefits of $80 million to adjust prior year U.S. taxes including the impact of regulations received in 2020 and $21 million for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense. In addition, we recorded a $10 million tax charge related to the $55 million of net remeasurement gain resulting from the settlements of pension obligations. We excluded this net remeasurement gain and related tax from the estimated annual tax rate as the future period remeasurement impacts cannot currently be estimated.

During the first nine months of 2019, we recorded discrete tax benefits of $178 million to adjust previously unrecognized tax benefits as a result of receipt of additional guidance related to the calculation of the mandatory deemed repatriation of non-U.S. earnings and $28 million for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense.

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 (CSARL), 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 change to our unrecognized tax benefits for this position 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.

 

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16. Segment information

  1.    Basis for segment information

Our Executive Office is comprised of a Chief Executive Officer (CEO), four Group Presidents, a Chief Financial Officer (CFO), a Chief Legal Officer, General Counsel and Corporate Secretary and a Chief Human Resources Officer. The Group Presidents and CFO are accountable for a related set of end-to-end businesses that they manage. The Chief Legal Officer, General Counsel and Corporate Secretary leads the Law, Security 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/CFO level. As such, the CEO serves as our Chief Operating Decision Maker, and operating segments are primarily based on the Group President/CFO 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 the CFO 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 one smaller operating segment that is included in the All Other operating segment. The Law, Security and Public Policy Division and the Human Resources Organization are cost centers and do not meet the definition of an operating segment.

  1.   Description of segments

We have five 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 segment:

Construction Industries: A segment primarily responsible for supporting customers using machinery in infrastructure 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; motor graders; pipelayers; road reclaimers; 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, heavy construction, quarry and aggregates, waste and material handling applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales, and product support. The product portfolio includes large track-type tractors, large mining trucks, hard rock vehicles, longwall miners, electric rope shovels, draglines, hydraulic shovels, rotary drills, large wheel loaders, off-highway trucks, articulated trucks, wheel tractor scrapers, wheel dozers, landfill compactors, soil compactors, 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. The product portfolio includes 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, and reciprocating engines supplied to the industrial industry as well as Cat machinery. Responsibilities also include the remanufacturing of Caterpillar 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.

 

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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 Caterpillar equipment. The segment also earns revenues from ME&T, 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.

All Other operating segment: Primarily includes activities such as: business strategy; product management and development; manufacturing and sourcing of filters and fluids, undercarriage, ground-engaging tools, fluid transfer products, precision seals, rubber sealing and connecting components primarily for Cat(R) products; parts distribution; integrated logistics solutions; distribution services responsible for dealer development and administration, including one wholly owned dealer in Japan; dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; brand management and marketing strategy; and 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 segment 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:

  • ME&T segment net assets generally include inventories, receivables, property, plant and equipment, goodwill, intangibles, accounts payable and customer advances. Beginning in 2020, we revised how we allocate certain assets between segments. We have recast all prior period amounts to align with the current methodology. We generally manage at the corporate level liabilities other than accounts payable and customer advances, and we do not include these in segment operations. Financial Products Segment assets generally include all categories of assets.
  • We value segment inventories and cost of sales using a current cost methodology.
  • We amortize goodwill allocated to segments using a fixed amount based on a 20-year useful life. This methodology difference only impacts segment assets. We do not include goodwill amortization expense in segment profit. In addition, we have allocated to segments only a portion of goodwill for certain acquisitions made in 2011 or later.
  • We generally manage currency exposures for ME&T at the corporate level and do not include in segment profit the effects of changes in exchange rates on results of operations within the year. We report 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 as a methodology difference.
  • We do not include stock-based compensation expense 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.
  • We determine ME&T segment profit on a pretax basis and exclude interest expense and most other income/ expense items. We determine Financial Products Segment profit on a pretax basis and include other income/ expense items.

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Reconciling items are created based on accounting differences between segment reporting and our consolidated external reporting. Please refer to pages 36 to 39 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: May include 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, which may consist of accelerated depreciation, inventory write-downs, building demolition, 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. Only certain restructuring costs are excluded from segment profit. See Note 20 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, we report certain costs on the cash basis for segment reporting and the accrual basis for consolidated external reporting.

For the three and nine months ended September 30, 2020 and 2019, sales and revenues by geographic region reconciled to consolidated sales and revenues were as follows:

 

Sales and Revenues by Geographic Region

(Millions of dollars)

Three Months Ended September 30, 2020

North America

Latin America

EAME

Asia/
Pacific

External
Sales and
Revenues

Intersegment Total Sales

Sales and and

Revenues Revenues

 

 

 

 

 

 

 

Construction Industries.............

$ 1,781

$ 230

$ 796

$ 1,241

$ 4,048

$

8 $ 4,056

Resource Industries...............

487

269

384

564

1,704

 

112 1,816

Energy & Transportation............

1,584

221

1,113

557

3,475

 

686 4,161

Financial Products Segment..........

448

63

100

113

724 1

 

- 724

Total sales and revenues from reportable

segments........................

4,300

783

2,393

2,475

9,951

 

806 10,757

All Other operating segment.........

10

1

1

13

25

 

81 106

Corporate Items and Eliminations......

(59)

(12)

(10)

(14)

(95)

 

(887) (982)

Total Sales and Revenues............

$ 4,251

$ 772

$ 2,384

$ 2,474

$ 9,881

$

- $ 9,881

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

Construction Industries.............

$ 2,728

$ 413

$ 1,048

$ 1,086

$ 5,275

$

14 $ 5,289

Resource Industries...............

789

349

396

645

2,179

 

131 2,310

Energy & Transportation............

2,129

378

1,224

831

4,562

 

890 5,452

Financial Products Segment..........

560

79

102

124

865 1

 

- 865

Total sales and revenues from reportable

segments........................

6,206

1,219

2,770

2,686

12,881

 

1,035 13,916

All Other operating segment.........

1

6

8

12

27

 

84 111

Corporate Items and Eliminations......

(105)

(14)

(15)

(16)

(150)

 

(1,119) (1,269)

Total Sales and Revenues............

$ 6,102

$ 1,211

$ 2,763

$ 2,682

$ 12,758

$

- $ 12,758

 

1 Includes revenues from Construction Industries, Resource Industries, Energy & Transportation and All Other operating segment of $81 million and $131 million in the three months ended September 30, 2020 and 2019, respectively.

 

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Sales and Revenues by Geographic Region

(Millions of dollars)

Nine Months Ended September 30, 2020

North
America

Latin America

EAME

Asia/
Pacific

External
Sales and
Revenues

Intersegment Total

Sales and Sales and

Revenues Revenues

 

 

 

 

 

 

 

Construction Industries.............

$ 5,470

$ 707

$ 2,618

$ 3,597

$ 12,392

$

18 $ 12,410

Resource Industries...............

1,690

859

1,158

1,686

5,393

 

333 5,726

Energy & Transportation............

5,138

667

3,095

1,734

10,634

 

2,025 12,659

Financial Products Segment..........

1,466

193

298

344

2,301 1

 

- 2,301

Total sales and revenues from reportable

segments........................

13,764

2,426

7,169

7,361

30,720

 

2,376 33,096

All Other operating segment.........

22

4

17

38

81

 

249 330

Corporate Items and Eliminations......

(169)

(36)

(32)

(51)

(288)

 

(2,625) (2,913)

Total Sales and Revenues............

 

 

 

 

 

 

 

 

$ 13,617

$ 2,394

$ 7,154

$ 7,348

$ 30,513

$

- $ 30,513

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

Construction Industries.............

$ 9,206

$ 1,124

$ 3,162

$ 4,081

$ 17,573

$

56 $ 17,629

Resource Industries...............

2,798

1,220

1,310

2,209

7,537

 

344 7,881

Energy & Transportation............

6,577

1,035

3,416

2,291

13,319

 

2,829 16,148

Financial Products Segment..........

1,681

225

306

376

2,588 1

 

- 2,588

Total sales and revenues from reportable

segments........................

20,262

3,604

8,194

8,957

41,017

 

3,229 44,246

All Other operating segment.........

23

7

23

45

98

 

259 357

Corporate Items and Eliminations......

(326)

(37)

(41)

(55)

(459)

 

(3,488) (3,947)

Total Sales and Revenues............

$ 19,959

$ 3,574

$ 8,176

$ 8,947

$ 40,656

$

- $ 40,656

 

1 Includes revenues from Construction Industries, Resource Industries, Energy & Transportation and All Other operating segment of $274 million and $398 million in the nine months ended September 30, 2020 and 2019, respectively.

For the three and nine months ended September 30, 2020 and 2019, Energy & Transportation segment sales by end user application were as follows:

Energy & Transportation External Sales

Three Months Ended September 30

(Millions of dollars) 2020 2019

Oil and gas............................................................ $ 734 $ 1,246

Power generation               1,034              1,123

Industrial ......................................................................730 980

Transportation ..................................................................977 1,213

Energy & Transportation External Sales......................................$              3,475 $          4,562

Nine Months Ended September 30

2020 2019

Oil and gas............................................................ $              2,622 $              3,682

Power generation               2,783              3,180

Industrial               2,209              2,841

Transportation               3,020              3,616

Energy & Transportation External Sales......................................$              10,634 $              13,319

 

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Reconciliation of Consolidated profit before taxes:

(Millions of dollars) Three Months Ended September 30 Nine Months Ended September 30

2020 2019 2020 2019

Profit from reportable segments:

Construction Industries........................ $ 585 $ 940 $              1,743 $ 3,272

Resource Industries ...................................167311 623 1,368

Energy & Transportation ................................4921,021 1,718 2,745

Financial Products Segment ..............................142218 395 622

Total profit from reportable segments ........................1,386 2,490 4,479 8,007

Profit from All Other operating segment ........................27 (21) 31 15

Cost centers ............................................9 (9) 18 32

Corporate costs .......................................(122) (167) (409) (492)

Timing .............................................(39) 6 (90) (118)

Restructuring costs .....................................(87) (20) (211) (162)
Methodology differences:

Inventory/cost of sales ..................................(7)25 (25) 24

Postretirement benefit expense ............................(32)19 253 4

Stock-based compensation expense .........................(55)(57) (169) (170)

Financing costs .....................................(125)(58) (324) (173)

Currency ..........................................(22)(62) (230) (110)

Other income/expense methodology differences ................(72)(124) (244) (374)

Other methodology differences..............................2(17)       (25)           (36)

Total consolidated profit before taxes................ $ 863 $ 2,005 $              3,054 $ 6,447

Reconciliation of Assets:

(Millions of dollars) September 30, 2020 December 31, 2019

Assets from reportable segments:

Construction Industries............................................ $              4,507 $              4,601

Resource Industries               6,188              6,505

Energy & Transportation               8,752              8,548

Financial Products Segment               34,014              35,813

Total assets from reportable segments               53,461              55,467

Assets from All Other operating segment               1,610              1,728

Items not included in segment assets:

Cash and short-term investments               8,512              7,299

Deferred income taxes               1,339              1,294

Goodwill and intangible assets               4,737              4,435

Property, plant and equipment - net and other assets               2,608              2,529

Inventory methodology differences               (2,560)              (2,426)

Liabilities included in segment assets               7,720              8,541

Other.....................................................................(686)            (414)

Total assets...................................................... $              76,741 $ 78,453

 

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Reconciliation of Depreciation and amortization:
(Millions of dollars)

 

 

 

 

 

Three Months Ended

Nine Months Ended

 

 

September 30

September 30

 

 

2020 2019

2020 2019

Depreciation and amortization from reportable segments:

 

 

 

Construction Industries............................

$

61 $ 73

$ 183 $ 220

Resource Industries..............................

 

105 113

312 337

Energy & Transportation..........................

 

147 157

442 464

Financial Products Segment.........................

 

174 209

577 622

Total depreciation and amortization from reportable segments....

 

487 552

1,514 1,643

Items not included in segment depreciation and amortization:

 

 

 

All Other operating segment.........................

 

71 53

196 158

Cost centers....................................

 

31 35

96 100

Other........................................

 

4 5

9 32

Total depreciation and amortization.....................

$

593 $ 645

$ 1,815 $ 1,933

 

 

Reconciliation of Capital expenditures:
(Millions of dollars)

 

 

 

 

 

 

Three Months Ended September 30

 

Nine Months Ended
September 30

 

 

2020 2019

 

2020

2019

Capital expenditures from reportable segments:

 

 

 

 

 

Construction Industries............................

$

37 $

48

$ 85

$ 117

Resource Industries..............................

 

10

31

63

91

Energy & Transportation...........................

 

100

150

331

366

Financial Products Segment.........................

 

280

388

783

1,093

Total capital expenditures from reportable segments...........

 

427

617

1,262

1,667

Items not included in segment capital expenditures:

 

 

 

 

 

All Other operating segment.........................

 

46

34

84

69

Cost centers...................................

 

8

22

23

71

Timing.......................................

 

1

(21)

147

108

Other........................................

 

11

(21)

(25)

(59)

Total capital expenditures............................

$

493 $

631

$ 1,491

$ 1,856

 

 

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17. Cat Financial financing activities

Effective January 1, 2020, we implemented the new credit loss guidance using a modified retrospective approach. Prior period comparative information has not been recast and continues to be reported under the accounting guidance in effect for those periods. See Note 2 for additional information.

Allowance for credit losses

Portfolio segments

A portfolio segment is the level at which Cat Financial develops a systematic methodology for determining its allowance for credit losses. Cat Financial's portfolio segments and related methods for estimating expected credit losses are as follows:

Customer

Cat Financial provides loans and finance leases to end-user customers primarily for the purpose of financing new and used Caterpillar machinery, engines and equipment for commercial use, the majority of which operate in construction-related industries. Cat Financial also provides financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. The average original term of Cat Financial's customer finance receivable portfolio was approximately 48 months with an average remaining term of approximately 23 months as of September 30, 2020.

Cat Financial typically maintains a security interest in financed equipment and requires physical damage insurance coverage on the financed equipment, both of which provide Cat Financial with certain rights and protections. If Cat Financial's collection efforts fail to bring a defaulted account current, Cat Financial generally can repossess the financed equipment, after satisfying local legal requirements, and sell it within the Caterpillar dealer network or through third party auctions.

Cat Financial estimates the allowance for credit losses related to its customer finance receivables based on loss forecast models utilizing probabilities of default and the estimated loss given default based on past loss experience adjusted for current conditions and reasonable and supportable forecasts capturing country and industry-specific macro-economic factors.

Cat Financial's forecasts for the markets in which it operates slightly improved during the three months ended September 30, 2020, but continued to reflect an overall decline in economic conditions resulting from a contracting economy, elevated unemployment rates and an increase in delinquencies due to the COVID-19 pandemic. The company believes the economic forecasts employed represent reasonable and supportable forecasts, followed by a reversion to long term trends.

Dealer

Cat Financial provides financing to Caterpillar dealers in the form of wholesale financing plans. Cat Financial's wholesale financing plans provide assistance to dealers by financing their mostly new Caterpillar equipment inventory and rental fleets on a secured and unsecured basis. In addition, Cat Financial provides unsecured loans to Caterpillar dealers for working capital.

Cat Financial estimates the allowance for credit losses for dealer finance receivables based on historical loss rates with consideration of current economic conditions and reasonable and supportable forecasts.

Although our forecasts continued to indicate a decline in economic conditions, Cat Financial's Dealer portfolio segment has not historically experienced increased credit losses during prior economic downturns due to its close working relationships with the dealers and their financial strength. Therefore, we made no adjustments to historical loss rates during the three and nine months ended September 30, 2020.

Classes of finance receivables

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:

 

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  • North America - Finance receivables originated in the United States and Canada.
  • EAME - 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, Southeast Asia and India.
  • Mining - Finance receivables related to large mining customers worldwide.
  • 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.

Receivable balances, including accrued interest, are written off against the allowance for credit losses when, in the judgment of management, they are considered uncollectible (generally upon repossession of the collateral). The amount of the write-off is determined by comparing the fair value of the collateral, less cost to sell, to the amortized cost. Subsequent recoveries, if any, are credited to the allowance for credit losses when received.

An analysis of the allowance for credit losses was as follows:

 

(Millions of dollars)

 

 

September 30, 2020

 

 

Allowance for Credit Losses:

 

Customer

Dealer

 

Total

Balance at beginning of year........................

$

375

$

45

$

420

Adjustment to adopt new accounting guidance 1

 

12

 

-

 

12

Receivables written off...........................

 

(212)

 

-

 

(212)

Recoveries on receivables previously written off..........

 

27

 

-

 

27

Provision for credit losses.........................

 

213

 

-

 

213

Other.......................................

 

(3)

 

 

 

(3)

Balance at end of period...........................

$

412

$

45

$

457

Individually evaluated............................

$

172

$

39

$

211

Collectively evaluated............................

 

240

 

6

 

246

Ending Balance.................................

$

412

$

45

$

457

Finance Receivables:

 

 

 

 

 

 

Individually evaluated............................

$

612

$

78

$

690

Collectively evaluated............................