filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
| Three Months Ended March 31 | |||||||||||
| 2022 | 2021 | ||||||||||
| Sales and revenues: | |||||||||||
| Sales of Machinery, Energy & Transportation | $ | 12,886 | $ | 11,191 | |||||||
| Revenues of Financial Products | 703 | 696 | |||||||||
| Total sales and revenues | 13,589 | 11,887 | |||||||||
| Operating costs: | |||||||||||
| Cost of goods sold | 9,559 | 8,012 | |||||||||
| Selling, general and administrative expenses | 1,346 | 1,239 | |||||||||
| Research and development expenses | 457 | 374 | |||||||||
| Interest expense of Financial Products | 106 | 125 | |||||||||
| Other operating (income) expenses | 266 | 323 | |||||||||
| Total operating costs | 11,734 | 10,073 | |||||||||
| Operating profit | 1,855 | 1,814 | |||||||||
| Interest expense excluding Financial Products | 109 | 142 | |||||||||
| Other income (expense) | 253 | 325 | |||||||||
| Consolidated profit before taxes | 1,999 | 1,997 | |||||||||
| Provision (benefit) for income taxes | 469 | 475 | |||||||||
| Profit of consolidated companies | 1,530 | 1,522 | |||||||||
| Equity in profit (loss) of unconsolidated affiliated companies | 7 | 9 | |||||||||
| Profit of consolidated and affiliated companies | 1,537 | 1,531 | |||||||||
| Less: Profit (loss) attributable to noncontrolling interests | — | 1 | |||||||||
| Profit 1 | $ | 1,537 | $ | 1,530 | |||||||
| Profit per common share | $ | 2.88 | $ | 2.80 | |||||||
| Profit per common share – diluted 2 | $ | 2.86 | $ | 2.77 | |||||||
| Weighted-average common shares outstanding (millions) | |||||||||||
| – Basic | 534.5 | 546.4 | |||||||||
| – Diluted 2 | 538.3 | 551.4 | |||||||||
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.
Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)
| Three Months Ended March 31 | |||||||||||
| 2022 | 2021 | ||||||||||
| Profit of consolidated and affiliated companies | $ | 1,537 | $ | 1,531 | |||||||
| Other comprehensive income (loss), net of tax (Note 13): | |||||||||||
| Foreign currency translation: | (115) | (347) | |||||||||
| Pension and other postretirement benefits: | (1) | (8) | |||||||||
| Derivative financial instruments: | 23 | (31) | |||||||||
| Available-for-sale securities: | (64) | (16) | |||||||||
| Total other comprehensive income (loss), net of tax | (157) | (402) | |||||||||
| Comprehensive income | 1,380 | 1,129 | |||||||||
| Less: comprehensive income attributable to the noncontrolling interests | — | 1 | |||||||||
| Comprehensive income attributable to shareholders | $ | 1,380 | $ | 1,128 | |||||||
See accompanying notes to Consolidated Financial Statements.
Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Dollars in millions)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 6,526 | $ | 9,254 | |||||||
| Receivables – trade and other | 9,135 | 8,477 | |||||||||
| Receivables – finance | 9,003 | 8,898 | |||||||||
| Prepaid expenses and other current assets | 2,868 | 2,788 | |||||||||
| Inventories | 15,038 | 14,038 | |||||||||
| Total current assets | 42,570 | 43,455 | |||||||||
| Property, plant and equipment – net | 11,932 | 12,090 | |||||||||
| Long-term receivables – trade and other | 1,204 | 1,204 | |||||||||
| Long-term receivables – finance | 12,665 | 12,707 | |||||||||
| Noncurrent deferred and refundable income taxes | 1,973 | 1,840 | |||||||||
| Intangible assets | 967 | 1,042 | |||||||||
| Goodwill | 6,293 | 6,324 | |||||||||
| Other assets | 4,672 | 4,131 | |||||||||
| Total assets | $ | 82,276 | $ | 82,793 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Short-term borrowings: | |||||||||||
| Machinery, Energy & Transportation | $ | — | $ | 9 | |||||||
| Financial Products | 4,501 | 5,395 | |||||||||
| Accounts payable | 8,361 | 8,154 | |||||||||
| Accrued expenses | 3,846 | 3,757 | |||||||||
| Accrued wages, salaries and employee benefits | 1,275 | 2,242 | |||||||||
| Customer advances | 1,388 | 1,087 | |||||||||
| Dividends payable | — | 595 | |||||||||
| Other current liabilities | 2,355 | 2,256 | |||||||||
| Long-term debt due within one year: | |||||||||||
| Machinery, Energy & Transportation | 127 | 45 | |||||||||
| Financial Products | 7,679 | 6,307 | |||||||||
| Total current liabilities | 29,532 | 29,847 | |||||||||
| Long-term debt due after one year: | |||||||||||
| Machinery, Energy & Transportation | 9,636 | 9,746 | |||||||||
| Financial Products | 15,641 | 16,287 | |||||||||
| Liability for postemployment benefits | 5,363 | 5,592 | |||||||||
| Other liabilities | 5,007 | 4,805 | |||||||||
| Total liabilities | 65,179 | 66,277 | |||||||||
| Commitments and contingencies (Notes 11 and 14) | |||||||||||
| Shareholders’ equity | |||||||||||
| Common stock of $1.00 par value: | |||||||||||
| Authorized shares: 2,000,000,000 Issued shares: (3/31/22 and 12/31/21 – 814,894,624) at paid-in amount | 6,281 | 6,398 | |||||||||
| Treasury stock (3/31/22 – 281,541,419 shares; 12/31/21 – 279,006,573 shares) at cost | (28,326) | (27,643) | |||||||||
| Profit employed in the business | 40,820 | 39,282 | |||||||||
| Accumulated other comprehensive income (loss) | (1,710) | (1,553) | |||||||||
| Noncontrolling interests | 32 | 32 | |||||||||
| Total shareholders’ equity | 17,097 | 16,516 | |||||||||
| Total liabilities and shareholders’ equity | $ | 82,276 | $ | 82,793 |
See accompanying notes to Consolidated Financial Statements.
Caterpillar Inc.
Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in millions)
| Common stock | Treasury stock | Profit employed in the business | Accumulated other comprehensive income (loss) | Noncontrolling interests | Total | |||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 6,230 | $ | (25,178) | $ | 35,167 | $ | (888) | $ | 47 | $ | 15,378 | ||||||||||||||||||||||||||
| Profit of consolidated and affiliated companies | — | — | 1,530 | — | 1 | 1,531 | ||||||||||||||||||||||||||||||||
| Foreign currency translation, net of tax | — | — | — | (347) | — | (347) | ||||||||||||||||||||||||||||||||
| Pension and other postretirement benefits, net of tax | — | — | — | (8) | — | (8) | ||||||||||||||||||||||||||||||||
| Derivative financial instruments, net of tax | — | — | — | (31) | — | (31) | ||||||||||||||||||||||||||||||||
| Available-for-sale securities, net of tax | — | — | — | (16) | — | (16) | ||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interests | — | — | — | — | (2) | (2) | ||||||||||||||||||||||||||||||||
| Common shares issued from treasury stock for stock-based compensation: 2,459,683 | (63) | 128 | — | — | — | 65 | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 42 | — | — | — | — | 42 | ||||||||||||||||||||||||||||||||
| Other | 6 | 1 | — | — | (2) | 5 | ||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | 6,215 | $ | (25,049) | $ | 36,697 | $ | (1,290) | $ | 44 | $ | 16,617 | ||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 6,398 | $ | (27,643) | $ | 39,282 | $ | (1,553) | $ | 32 | $ | 16,516 | ||||||||||||||||||||||||||
| Profit of consolidated and affiliated companies | — | — | 1,537 | — | — | 1,537 | ||||||||||||||||||||||||||||||||
| Foreign currency translation, net of tax | — | — | — | (115) | — | (115) | ||||||||||||||||||||||||||||||||
| Pension and other postretirement benefits, net of tax | — | — | — | (1) | — | (1) | ||||||||||||||||||||||||||||||||
| Derivative financial instruments, net of tax | — | — | — | 23 | — | 23 | ||||||||||||||||||||||||||||||||
| Available-for-sale securities, net of tax | — | — | — | (64) | — | (64) | ||||||||||||||||||||||||||||||||
| Dividends declared | — | — | 1 | — | — | 1 | ||||||||||||||||||||||||||||||||
| Common shares issued from treasury stock for stock-based compensation: 1,037,468 | (65) | 37 | — | — | — | (28) | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 40 | — | — | — | — | 40 | ||||||||||||||||||||||||||||||||
| Common shares repurchased: 3,571,684 1 | — | (720) | — | — | — | (720) | ||||||||||||||||||||||||||||||||
| Other | (92) | — | — | — | — | (92) | ||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 6,281 | $ | (28,326) | $ | 40,820 | $ | (1,710) | $ | 32 | $ | 17,097 | ||||||||||||||||||||||||||
1 See Note 12 for additional information.
See accompanying notes to Consolidated Financial Statements.
Caterpillar Inc.
Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
| Three Months Ended March 31 | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flow from operating activities: | |||||||||||
| Profit of consolidated and affiliated companies | $ | 1,537 | $ | 1,531 | |||||||
| Adjustments for non-cash items: | |||||||||||
| Depreciation and amortization | 557 | 586 | |||||||||
| Provision (benefit) for deferred income taxes | (99) | 109 | |||||||||
| Other | (52) | (104) | |||||||||
| Changes in assets and liabilities, net of acquisitions and divestitures: | |||||||||||
| Receivables – trade and other | (372) | (543) | |||||||||
| Inventories | (1,032) | (657) | |||||||||
| Accounts payable | 452 | 733 | |||||||||
| Accrued expenses | (74) | 84 | |||||||||
| Accrued wages, salaries and employee benefits | (965) | 191 | |||||||||
| Customer advances | 311 | 58 | |||||||||
| Other assets – net | 99 | 56 | |||||||||
| Other liabilities – net | (49) | (116) | |||||||||
| Net cash provided by (used for) operating activities | 313 | 1,928 | |||||||||
| Cash flow from investing activities: | |||||||||||
| Capital expenditures – excluding equipment leased to others | (346) | (252) | |||||||||
| Expenditures for equipment leased to others | (333) | (252) | |||||||||
| Proceeds from disposals of leased assets and property, plant and equipment | 269 | 309 | |||||||||
| Additions to finance receivables | (2,988) | (2,629) | |||||||||
| Collections of finance receivables | 2,966 | 2,770 | |||||||||
| Proceeds from sale of finance receivables | 9 | 5 | |||||||||
| Investments and acquisitions (net of cash acquired) | (8) | (386) | |||||||||
| Proceeds from sale of businesses and investments (net of cash sold) | — | 28 | |||||||||
| Proceeds from sale of securities | 571 | 126 | |||||||||
| Investments in securities | (1,438) | (148) | |||||||||
| Other – net | (15) | (48) | |||||||||
| Net cash provided by (used for) investing activities | (1,313) | (477) | |||||||||
| Cash flow from financing activities: | |||||||||||
| Dividends paid | (595) | (562) | |||||||||
| Common stock issued, including treasury shares reissued | (28) | 65 | |||||||||
| Common shares repurchased | (820) | — | |||||||||
| Proceeds from debt issued (original maturities greater than three months): | |||||||||||
| Machinery, Energy & Transportation | — | 494 | |||||||||
| Financial Products | 2,131 | 1,779 | |||||||||
| Payments on debt (original maturities greater than three months): | |||||||||||
| Machinery, Energy & Transportation | (6) | (644) | |||||||||
| Financial Products | (1,381) | (2,243) | |||||||||
| Short-term borrowings – net (original maturities three months or less) | (1,016) | 1,659 | |||||||||
| Other – net | — | (2) | |||||||||
| Net cash provided by (used for) financing activities | (1,715) | 546 | |||||||||
| Effect of exchange rate changes on cash | (16) | (12) | |||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | (2,731) | 1,985 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 9,263 | 9,366 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 6,532 | $ | 11,351 |
Cash equivalents primarily represent short-term, highly liquid investments with original maturities of generally three months or less.
See accompanying notes to Consolidated Financial Statements.
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 months ended March 31, 2022 and 2021, (b) the consolidated comprehensive income for the three months ended March 31, 2022 and 2021, (c) the consolidated financial position at March 31, 2022 and December 31, 2021, (d) the consolidated changes in shareholders’ equity for the three months ended March 31, 2022 and 2021 and (e) the consolidated cash flow for the three months ended March 31, 2022 and 2021. 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, 2021 (2021 Form 10-K).
The December 31, 2021 financial position data included herein is derived from the audited consolidated financial statements included in the 2021 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.
Cat Financial has end-user customers that are variable interest entities (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. See Note 11 for further discussions on a consolidated VIE.
2. New accounting guidance
A. Adoption of new accounting standards
We consider the applicability and impact of all ASUs. We adopted the following ASUs effective January 1, 2022, none of which had a material impact on our financial statements:
| ASU | Description | ||||
| 2020-06 | Debt with conversion and other options and Derivatives and hedging | ||||
| 2021-05 | Lessor - Variable lease payments | ||||
| 2021-10 | Government assistance |
B. Accounting standards issued but not yet adopted
We consider the applicability and impact of all ASUs. We assessed the ASUs 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. We recognize trade receivables from dealers and end users in Receivables – trade and other and Long-term receivables – trade and other in the Consolidated Statement of Financial Position. Trade receivables from dealers and end users were $7,818 million, $7,267 million and $6,310 million as of March 31, 2022, December 31, 2021 and December 31, 2020, respectively. Long-term trade receivables from dealers and end users were $553 million, $624 million and $657 million as of March 31, 2022, December 31, 2021 and December 31, 2020, respectively.
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 $1,869 million, $1,557 million and $1,526 million as of March 31, 2022, December 31, 2021 and December 31, 2020, respectively. We reduce the contract liability when revenue is recognized. During the three months ended March 31, 2022 and 2021, we recognized $437 million and $433 million, respectively, of revenue that was recorded as a contract liability at the beginning of 2022 and 2021, respectively.
As of March 31, 2022, 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 $7.7 billion, with about one-half of the amount expected to be completed and revenue recognized in the twelve months following March 31, 2022. 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 $40 million and $42 million for the three months ended March 31, 2022 and 2021, respectively.
The following table illustrates the type and fair value of the stock-based compensation awards granted during the three months ended March 31, 2022 and 2021, respectively:
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||
| Shares Granted | Weighted-Average Fair Value Per Share | Weighted-Average Grant Date Stock Price | Shares Granted | Weighted-Average Fair Value Per Share | Weighted-Average Grant Date Stock Price | ||||||||||||||||||||||||||||||
| Stock options | 1,029,202 | $ | 51.69 | $ | 196.70 | 1,084,821 | $ | 56.30 | $ | 219.76 | |||||||||||||||||||||||||
| RSUs | 484,025 | $ | 196.70 | $ | 196.70 | 448,311 | $ | 219.76 | $ | 219.76 | |||||||||||||||||||||||||
| PRSUs | 258,900 | $ | 196.70 | $ | 196.70 | 266,894 | $ | 219.76 | $ | 219.76 | |||||||||||||||||||||||||
The following table provides the assumptions used in determining the fair value of the stock-based awards for the three months ended March 31, 2022 and 2021, respectively:
| Grant Year | |||||||||||
| 2022 | 2021 | ||||||||||
| Weighted-average dividend yield | 2.60% | 2.60% | |||||||||
| Weighted-average volatility | 31.7% | 32.9% | |||||||||
| Range of volatilities | 25.3% - 36.8% | 29.2% - 45.8% | |||||||||
| Range of risk-free interest rates | 1.03% - 2.00% | 0.06% - 1.41% | |||||||||
| Weighted-average expected lives | 8 years | 8 years | |||||||||
As of March 31, 2022, the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $299 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 1.8 years.
5. Derivative financial instruments and risk management
Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward, option and cross currency contracts, interest rate contracts and commodity forward and option contracts. Our derivative activities are subject to the management, direction and control of our senior financial officers. 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 approximately five years. As of March 31, 2022, the maximum term of these outstanding contracts at inception was approximately 60 months.
We generally designate as cash flow hedges at inception of the contract any 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.
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.
The location and fair value of derivative instruments reported in the Consolidated Statement of Financial Position were as follows:
| (Millions of dollars) | Fair Value | ||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Assets****1 | Liabilities****2 | Assets****1 | Liabilities****2 | ||||||||||||||||||||
| Designated derivatives | |||||||||||||||||||||||
| Foreign exchange contracts | $ | 242 | $ | (127) | $ | 228 | $ | (64) | |||||||||||||||
| Interest rate contracts | 75 | (87) | 38 | (15) | |||||||||||||||||||
| Total | $ | 317 | $ | (214) | $ | 266 | $ | (79) | |||||||||||||||
| Undesignated derivatives | |||||||||||||||||||||||
| Foreign exchange contracts | $ | 58 | $ | (88) | $ | 46 | $ | (42) | |||||||||||||||
| Commodity contracts | 87 | — | 30 | (9) | |||||||||||||||||||
| Total | $ | 145 | $ | (88) | $ | 76 | $ | (51) | |||||||||||||||
| 1 Assets are classified on the Consolidated Statement of Financial Position as Receivables - trade and other or Long-term receivables - trade and other. | |||||||||||||||||||||||
| 2 Liabilities are classified on the Consolidated Statement of Financial Position as Accrued expenses or Other liabilities. |
The total notional amounts of the derivative instruments as of March 31, 2022 and December 31, 2021 were $20.7 billion and $18.9 billion, respectively. 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.
Gains (Losses) on derivative instruments are categorized as follows:
| (Millions of dollars) | Three Months Ended March 31 | ||||||||||||||||||||||||||||||||||
| Fair Value / Undesignated Hedges | Cash Flow Hedges | ||||||||||||||||||||||||||||||||||
| Gains (Losses) Recognized on the Consolidated Statement of Results of Operations****1 | Gains (Losses) Recognized in AOCI | Gains (Losses) Reclassified from AOCI****2 | |||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | (63) | $ | 78 | $ | (9) | $ | 72 | $ | 26 | $ | 129 | |||||||||||||||||||||||
| Interest rate contracts | 7 | 7 | 56 | 7 | (7) | (11) | |||||||||||||||||||||||||||||
| Commodity contracts | 93 | 20 | — | — | — | — | |||||||||||||||||||||||||||||
| Total | $ | 37 | $ | 105 | $ | 47 | $ | 79 | $ | 19 | $ | 118 | |||||||||||||||||||||||
| 1 Foreign exchange contract and Commodity contract gains (losses) are included in Other income (expense). Interest rate contract gains (losses) are primarily included in Interest expense of Financial Products. | |||||||||||||||||||||||||||||||||||
| 2 Foreign exchange contract gains (losses) are primarily included in Sales of Machinery, Energy & Transportation and Other income (expense) in the Consolidated Statement of Results of Operations. Interest rate contract gains (losses) are primarily included in Interest expense of Financial Products in the Consolidated Statement of Results of Operations. |
The following amounts were recorded on the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges:
| (Millions of dollars) | Carrying Value of the Hedged Liabilities | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Value of the Hedged Liabilities | |||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||
| Long-term debt due within one year | $ | 750 | $ | 755 | $ | — | $ | 5 | |||||||||||||||
| Long-term debt due after one year | 2,419 | 1,304 | (87) | (2) | |||||||||||||||||||
| Total | $ | 3,169 | $ | 2,059 | $ | (87) | $ | 3 | |||||||||||||||
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 March 31, 2022 and December 31, 2021, no cash collateral was received or pledged under the master netting agreements.
The effect of the net settlement provisions of the master netting agreements on our derivative balances upon an event of default or termination event was as follows:
| (Millions of dollars) | March 31, 2022 | December 31, 2021 | |||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||
| Gross Amounts Recognized | $ | 462 | $ | (302) | $ | 342 | $ | (130) | |||||||||||||||
| Financial Instruments Not Offset | (152) | 152 | (114) | 114 | |||||||||||||||||||
| Cash Collateral Received | — | — | — | — | |||||||||||||||||||
| Net Amount | $ | 310 | $ | (150) | $ | 228 | $ | (16) | |||||||||||||||
6. Inventories
Inventories (principally using the last-in, first-out (LIFO) method) were comprised of the following:
| (Millions of dollars) | March 31, 2022 | December 31, 2021 | |||||||||
| Raw materials | $ | 5,924 | $ | 5,528 | |||||||
| Work-in-process | 1,438 | 1,318 | |||||||||
| Finished goods | 7,390 | 6,907 | |||||||||
| Supplies | 286 | 285 | |||||||||
| Total inventories | $ | 15,038 | $ | 14,038 | |||||||
7. Intangible assets and goodwill
A. Intangible assets
Intangible assets were comprised of the following:
| March 31, 2022 | |||||||||||||||||||||||
| (Millions of dollars) | Weighted Amortizable Life (Years) | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||
| Customer relationships | 15 | $ | 2,273 | $ | (1,601) | $ | 672 | ||||||||||||||||
| Intellectual property | 12 | 1,473 | (1,225) | 248 | |||||||||||||||||||
| Other | 16 | 131 | (84) | 47 | |||||||||||||||||||
| Total finite-lived intangible assets | 14 | $ | 3,877 | $ | (2,910) | $ | 967 | ||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Weighted Amortizable Life (Years) | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||
| Customer relationships | 15 | $ | 2,421 | $ | (1,709) | $ | 712 | ||||||||||||||||
| Intellectual property | 12 | 1,472 | (1,192) | 280 | |||||||||||||||||||
| Other | 14 | 156 | (106) | 50 | |||||||||||||||||||
| Total finite-lived intangible assets | 14 | $ | 4,049 | $ | (3,007) | $ | 1,042 | ||||||||||||||||
Amortization expense for the three months ended March 31, 2022 and 2021 was $72 million and $77 million, respectively. Amortization expense related to intangible assets is expected to be:
| (Millions of dollars) | ||||||||||||||||||||||||||||||||
| Remaining Nine Months of 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | |||||||||||||||||||||||||||
| $214 | $227 | $168 | $158 | $87 | $113 | |||||||||||||||||||||||||||
B. Goodwill
No goodwill was impaired during the three months ended March 31, 2022 or 2021.
The changes in carrying amount of goodwill by reportable segment for the three months ended March 31, 2022 were as follows:
| (Millions of dollars) | December 31, 2021 | Other Adjustments 1 | March 31, 2022 | |||||||||||||||||||||||||||||
| Construction Industries | ||||||||||||||||||||||||||||||||
| Goodwill | $ | 302 | $ | (9) | $ | 293 | ||||||||||||||||||||||||||
| Impairments | (22) | — | (22) | |||||||||||||||||||||||||||||
| Net goodwill | 280 | (9) | 271 | |||||||||||||||||||||||||||||
| Resource Industries | ||||||||||||||||||||||||||||||||
| Goodwill | 4,182 | 2 | 4,184 | |||||||||||||||||||||||||||||
| Impairments | (1,175) | — | (1,175) | |||||||||||||||||||||||||||||
| Net goodwill | 3,007 | 2 | 3,009 | |||||||||||||||||||||||||||||
| Energy & Transportation | ||||||||||||||||||||||||||||||||
| Goodwill | 2,985 | (22) | 2,963 | |||||||||||||||||||||||||||||
| All Other 2 | ||||||||||||||||||||||||||||||||
| Goodwill | 52 | (2) | 50 | |||||||||||||||||||||||||||||
| Consolidated total | ||||||||||||||||||||||||||||||||
| Goodwill | 7,521 | (31) | 7,490 | |||||||||||||||||||||||||||||
| Impairments | (1,197) | — | (1,197) | |||||||||||||||||||||||||||||
| Net goodwill | $ | 6,324 | $ | (31) | $ | 6,293 |
1 Other adjustments are comprised primarily of foreign currency translation.
2 Includes All Other operating segment (See Note 16).
8. Investments in debt and equity securities
We have investments in certain debt and equity securities, which we record at fair value and primarily include in Other assets in the Consolidated Statement of Financial Position.
We classify debt securities primarily as available-for-sale. We include the unrealized gains and losses arising from the revaluation of available-for-sale debt securities, net of applicable deferred income taxes, in equity (AOCI 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 available-for-sale 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 available-for-sale debt securities with unrealized gains and losses included in equity (AOCI in the Consolidated Statement of Financial Position) were as follows:
| Available-for-sale debt securities | March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||
| (Millions of dollars) | Cost Basis | Unrealized Pretax Net Gains (Losses) | Fair Value | Cost Basis | Unrealized Pretax Net Gains (Losses) | Fair Value | |||||||||||||||||||||||||||||
| Government debt | |||||||||||||||||||||||||||||||||||
| U.S. treasury bonds | $ | 9 | $ | — | $ | 9 | $ | 10 | $ | — | $ | 10 | |||||||||||||||||||||||
| Other U.S. and non-U.S. government bonds | 61 | (1) | 60 | 61 | — | 61 | |||||||||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||||||||||||||
| Corporate bonds | 2,026 | (38) | 1,988 | 1,027 | 19 | 1,046 | |||||||||||||||||||||||||||||
| Asset-backed securities | 184 | (1) | 183 | 175 | 1 | 176 | |||||||||||||||||||||||||||||
| Mortgage-backed debt securities | |||||||||||||||||||||||||||||||||||
| U.S. governmental agency | 328 | (9) | 319 | 319 | 6 | 325 | |||||||||||||||||||||||||||||
| Residential | 3 | — | 3 | 4 | — | 4 | |||||||||||||||||||||||||||||
| Commercial | 103 | (3) | 100 | 98 | 1 | 99 | |||||||||||||||||||||||||||||
| Total available-for-sale debt securities | $ | 2,714 | $ | (52) | $ | 2,662 | $ | 1,694 | $ | 27 | $ | 1,721 | |||||||||||||||||||||||
| Available-for-sale debt securities in an unrealized loss position: | |||||||||||||||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||||||||||||||
| Less than 12 months 1 | 12 months or more 1 | Total | |||||||||||||||||||||||||||||||||
| (Millions of dollars) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| Government debt | |||||||||||||||||||||||||||||||||||
| Other U.S. and non-U.S. government bonds | $ | 24 | $ | 1 | $ | — | $ | — | $ | 24 | $ | 1 | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||||||||||||||
| Corporate bonds | 1,433 | 37 | 61 | 6 | 1,494 | 43 | |||||||||||||||||||||||||||||
| Asset-backed securities | 109 | 3 | — | — | 109 | 3 | |||||||||||||||||||||||||||||
| Mortgage-backed debt securities | |||||||||||||||||||||||||||||||||||
| U.S. governmental agency | 231 | 8 | 25 | 2 | 256 | 10 | |||||||||||||||||||||||||||||
| Commercial | 98 | 3 | 1 | — | 99 | 3 | |||||||||||||||||||||||||||||
| Total | $ | 1,895 | $ | 52 | $ | 87 | $ | 8 | $ | 1,982 | $ | 60 |
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Less than 12 months 1 | 12 months or more 1 | Total | |||||||||||||||||||||||||||||||||
| (Millions of dollars) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 270 | $ | 4 | $ | 33 | $ | 1 | $ | 303 | $ | 5 | |||||||||||||||||||||||
| Mortgage-backed debt securities | |||||||||||||||||||||||||||||||||||
| U.S. governmental agency | 89 | 1 | 22 | — | 111 | 1 | |||||||||||||||||||||||||||||
| Total | $ | 359 | $ | 5 | $ | 55 | $ | 1 | $ | 414 | $ | 6 | |||||||||||||||||||||||
| 1 Indicates the length of time that individual securities have been in a continuous unrealized loss position. | |||||||||||||||||||||||||||||||||||
The unrealized losses on our investments in government debt, corporate bonds and mortgage-backed debt securities relate to changes in interest rates and credit-related yield spreads since time of purchase. We do not intend to sell the investments, and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis. In addition, we did not expect credit-related losses on these investments as of March 31, 2022.
The cost basis and fair value of available-for-sale debt securities at March 31, 2022, 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.
| March 31, 2022 | |||||||||||
| (Millions of dollars) | Cost Basis | Fair Value | |||||||||
| Due in one year or less | $ | 508 | $ | 507 | |||||||
| Due after one year through five years | 1,369 | 1,341 | |||||||||
| Due after five years through ten years | 327 | 317 | |||||||||
| Due after ten years | 76 | 75 | |||||||||
| U.S. governmental agency mortgage-backed securities | 328 | 319 | |||||||||
| Residential mortgage-backed securities | 3 | 3 | |||||||||
| Commercial mortgage-backed securities | 103 | 100 | |||||||||
| Total debt securities – available-for-sale | $ | 2,714 | $ | 2,662 | |||||||
| Sales of available-for-sale debt securities: | |||||||||||||||||||||||
| Three Months Ended March 31 | |||||||||||||||||||||||
| (Millions of dollars) | 2022 | 2021 | |||||||||||||||||||||
| Proceeds from the sale of available-for-sale securities | $ | 96 | $ | 100 | |||||||||||||||||||
| Gross gains from the sale of available-for-sale securities | — | — | |||||||||||||||||||||
| Gross losses from the sale of available-for-sale securities | — | — | |||||||||||||||||||||
In addition, we had $813 million and $964 million of investments in time deposits classified as held-to-maturity debt securities as of March 31, 2022 and December 31, 2021, respectively. All these investments mature within one year and we include them in Prepaid expenses and other current assets in the Consolidated Statement of Financial Position. We record held-to-maturity debt securities at amortized cost, which approximates fair value. We did not have any unrealized gains or losses on these securities as of March 31, 2022 and December 31, 2021.
For the three months ended March 31, 2022 and 2021, the net unrealized gains (losses) for equity securities held at March 31, 2022 and 2021 were $(12) million and $20 million, respectively.
9. Postretirement benefits
A. Pension and postretirement benefit costs
| U.S. Pension Benefits | Non-U.S. Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||
| (Millions of dollars) | March 31 | March 31 | March 31 | ||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||
| For the three months ended: | |||||||||||||||||||||||||||||||||||
| Components of net periodic benefit cost: | |||||||||||||||||||||||||||||||||||
| Service cost | $ | — | $ | — | $ | 13 | $ | 14 | $ | 25 | $ | 25 | |||||||||||||||||||||||
| Interest cost | 100 | 82 | 18 | 14 | 20 | 16 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (167) | (179) | (34) | (32) | (4) | (2) | |||||||||||||||||||||||||||||
| Amortization of prior service cost (credit) | — | — | — | — | (1) | (10) | |||||||||||||||||||||||||||||
| Net periodic benefit cost (benefit) 1 | $ | (67) | $ | (97) | $ | (3) | $ | (4) | $ | 40 | $ | 29 | |||||||||||||||||||||||
1 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 $210 million of contributions to our pension and other postretirement plans during the three months ended March 31, 2022. We currently anticipate full-year 2022 contributions of approximately $357 million.
B. Defined contribution benefit costs
Total company costs related to our defined contribution plans, which are included in Operating Costs in the Consolidated Statement of Results of Operations, were as follows:
| Three Months Ended March 31 | |||||||||||||||||||||||
| (Millions of dollars) | 2022 | 2021 | |||||||||||||||||||||
| U.S. Plans | $ | 114 | $ | 125 | |||||||||||||||||||
| Non-U.S. Plans | 29 | 26 | |||||||||||||||||||||
| $ | 143 | $ | 151 | ||||||||||||||||||||
The decrease in the U.S. defined contribution benefit costs for the three months ended March 31, 2022 was primarily due to the fair value adjustments related to our non-qualified deferred compensation plans.
10. 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:
| Three Months Ended March 31 | ||||||||||||||||||||||||||
| (Millions of dollars) | 2022 | 2021 | ||||||||||||||||||||||||
| Finance lease revenue | $ | 112 | $ | 125 | ||||||||||||||||||||||
| Operating lease revenue | 278 | 294 | ||||||||||||||||||||||||
| Total | $ | 390 | $ | 419 | ||||||||||||||||||||||
We present revenues net of sales and other related taxes.
11. 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. This guarantee was terminated during the first quarter of 2022. No payments were made under the guarantee.
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 March 31, 2022 and December 31, 2021, the related recorded liability was $4 million and $5 million respectively. 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) | March 31, 2022 | December 31, 2021 | |||||||||
| Caterpillar dealer performance guarantees | $ | 251 | $ | 747 | |||||||
| Supplier consortium performance guarantee | 239 | 242 | |||||||||
| Other guarantees | 165 | 232 | |||||||||
| Total guarantees | $ | 655 | $ | 1,221 | |||||||
Cat Financial provides guarantees to purchase 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 receives a fee for providing this guarantee. 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 March 31, 2022 and December 31, 2021, the SPC’s assets of $839 million and $888 million, respectively, were primarily comprised of loans to dealers, and the SPC’s liabilities of $838 million and $888 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.
The reconciliation of the change in our product warranty liability balances for the quarters ended March 31 was as follows:
| First Three Months | |||||||||||
| (Millions of dollars) | 2022 | 2021 | |||||||||
| Warranty liability, beginning of period | $ | 1,689 | $ | 1,612 | |||||||
| Reduction in liability (payments) | (194) | (225) | |||||||||
| Increase in liability (new warranties) | 168 | 244 | |||||||||
| Warranty liability, end of period | $ | 1,663 | $ | 1,631 | |||||||
12. Profit per share
| Computations of profit per share: | Three Months Ended March 31 | ||||||||||||||||||||||||||||
| (Dollars in millions except per share data) | 2022 | 2021 | |||||||||||||||||||||||||||
| Profit for the period (A) 1 | $ | 1,537 | $ | 1,530 | |||||||||||||||||||||||||
| Determination of shares (in millions): | |||||||||||||||||||||||||||||
| Weighted-average number of common shares outstanding (B) | 534.5 | 546.4 | |||||||||||||||||||||||||||
| Shares issuable on exercise of stock awards, net of shares assumed to be purchased out of proceeds at average market price | 3.8 | 5.0 | |||||||||||||||||||||||||||
| Average common shares outstanding for fully diluted computation (C) 2 | 538.3 | 551.4 | |||||||||||||||||||||||||||
| Profit per share of common stock: | |||||||||||||||||||||||||||||
| Assuming no dilution (A/B) | $ | 2.88 | $ | 2.80 | |||||||||||||||||||||||||
| Assuming full dilution (A/C) 2 | $ | 2.86 | $ | 2.77 | |||||||||||||||||||||||||
| Shares outstanding as of March 31 (in millions) | 533.4 | 547.8 | |||||||||||||||||||||||||||
| 1 Profit attributable to common shareholders. | |||||||||||||||||||||||||||||
| 2 Diluted by assumed exercise of stock-based compensation awards using the treasury stock method. | |||||||||||||||||||||||||||||
For the three months ended March 31, 2022 and 2021, we excluded 2.1 million and 1.1 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 March 31, 2022, approximately $1.4 billion remained available under the 2018 Authorization.
For the three months ended March 31, 2022, we repurchased 3.6 million shares of Caterpillar common stock, at an aggregate cost of $720 million. For the three months ended March 31, 2021, we did not repurchase any shares of Caterpillar common stock. 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 the balances for each component of AOCI were as follows:
| Three Months Ended March 31 | |||||||||||||||||||||||||||||||||||||||||
| (Millions of dollars) | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation: | |||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | (1,508) | $ | (910) | |||||||||||||||||||||||||||||||||||||
| Gains (losses) on foreign currency translation | (104) | (323) | |||||||||||||||||||||||||||||||||||||||
| Less: Tax provision /(benefit) | 11 | 24 | |||||||||||||||||||||||||||||||||||||||
| Net gains (losses) on foreign currency translation | (115) | (347) | |||||||||||||||||||||||||||||||||||||||
| (Gains) losses reclassified to earnings | — | — | |||||||||||||||||||||||||||||||||||||||
| Less: Tax provision /(benefit) | — | — | |||||||||||||||||||||||||||||||||||||||
| Net (gains) losses reclassified to earnings | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (115) | (347) | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | (1,623) | $ | (1,257) | |||||||||||||||||||||||||||||||||||||
| Pension and other postretirement benefits | |||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | (62) | $ | (32) | |||||||||||||||||||||||||||||||||||||
| Current year prior service credit (cost) | — | — | |||||||||||||||||||||||||||||||||||||||
| Less: Tax provision /(benefit) | — | — | |||||||||||||||||||||||||||||||||||||||
| Net current year prior service credit (cost) | — | — | |||||||||||||||||||||||||||||||||||||||
| Amortization of prior service (credit) cost | (1) | (10) | |||||||||||||||||||||||||||||||||||||||
| Less: Tax provision /(benefit) | — | (2) | |||||||||||||||||||||||||||||||||||||||
| Net amortization of prior service (credit) cost | (1) | (8) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (1) | (8) | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | (63) | $ | (40) | |||||||||||||||||||||||||||||||||||||
| Derivative financial instruments | |||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | (3) | $ | — | |||||||||||||||||||||||||||||||||||||
| Gains (losses) deferred | 47 | 79 | |||||||||||||||||||||||||||||||||||||||
| Less: Tax provision /(benefit) | 10 | 16 | |||||||||||||||||||||||||||||||||||||||
| Net gains (losses) deferred | 37 | 63 | |||||||||||||||||||||||||||||||||||||||
| (Gains) losses reclassified to earnings | (19) | (118) | |||||||||||||||||||||||||||||||||||||||
| Less: Tax provision /(benefit) | (5) | (24) | |||||||||||||||||||||||||||||||||||||||
| Net (gains) losses reclassified to earnings | (14) | (94) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 23 | (31) | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 20 | $ | (31) | |||||||||||||||||||||||||||||||||||||
| Available-for-sale securities | |||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 20 | $ | 54 | |||||||||||||||||||||||||||||||||||||
| Gains (losses) deferred | (79) | (21) | |||||||||||||||||||||||||||||||||||||||
| Less: Tax provision /(benefit) | (15) | (5) | |||||||||||||||||||||||||||||||||||||||
| Net gains (losses) deferred | (64) | (16) | |||||||||||||||||||||||||||||||||||||||
| (Gains) losses reclassified to earnings | — | — | |||||||||||||||||||||||||||||||||||||||
| Less: Tax provision /(benefit) | — | — | |||||||||||||||||||||||||||||||||||||||
| Net (gains) losses reclassified to earnings | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (64) | (16) | |||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | (44) | $ | 38 | |||||||||||||||||||||||||||||||||||||
| Total AOCI Ending Balance at March 31 | $ | (1,710) | $ | (1,290) | |||||||||||||||||||||||||||||||||||||
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 in the Consolidated Statement of Financial Position. We believe there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all the sites in the aggregate, will be required.
On January 7, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena 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.
15. Income taxes
The provision for income taxes for the first three months of 2022 reflected an estimated annual tax rate of 24 percent, compared with 26 percent for the first three months of 2021, excluding the discrete items discussed in the following paragraph. The comparative tax rate for full-year 2021 was approximately 23 percent. The increase in the estimated annual tax rate from full-year 2021 was primarily related to changes in the expected geographic mix of profits from a tax perspective for 2022.
In addition, a discrete tax benefit of $12 million was recorded in the first three months of 2022, compared with a $43 million benefit in the first three months of 2021, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense.
In Revenue Agent’s Reports issued at the end of the field examinations of our U.S. income tax returns for 2007 to 2012 including the impact of a loss carryback to 2005, the Internal Revenue Service has proposed to tax in the United States profits earned from certain parts transactions by Caterpillar SARL (CSARL) based on the 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.
16. Segment information
A. 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 and General Counsel 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 and General Counsel 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.
Segment information for 2021 has been recast due to a methodology change related to how we assign intersegment sales and segment profit from our technology products and services to Construction Industries, Resource Industries and Energy & Transportation. This methodology change did not have a material impact on our segment results.
B. 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; 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 and quarry and aggregates. 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, autonomous machine capabilities, safety services and mining performance solutions. Resource Industries also manages areas that provide services to other parts of the company, including strategic procurement, lean center of excellence, integrated manufacturing, research and development for hydraulic systems, automation, electronics and software for Cat machines and engines. 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 services 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, development and testing manufacturing, marketing and sales and product support. The product and services portfolio includes turbines, centrifugal gas compressors, and turbine-related services; reciprocating engine-powered generator sets; integrated systems and solutions used in the electric power generation industry; reciprocating engines, drivetrain and integrated systems and solutions for the marine and oil and gas industries; reciprocating engines, drivetrain and integrated systems and solutions supplied to the industrial industry as well as Cat machinery; and diesel-electric locomotives and components and other rail-related products and services, including remanufacturing and leasing. Responsibilities also include the remanufacturing of Caterpillar reciprocating engines and components and remanufacturing services for other companies; and product support of on-highway vocational trucks for North America. Inter-segment sales are a source of revenue for this segment.
Financial Products Segment: Provides financing alternatives to customers and dealers around the world for Caterpillar products and services, 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, repair/rebuild financing, 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 and maintenance plans 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® products; parts distribution; integrated logistics solutions; distribution services responsible for dealer development and administration, including a wholly owned dealer in Japan; dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; 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. 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.
Reconciling items are created based on accounting differences between segment reporting and our consolidated external reporting. Please refer to pages 26 to 28 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. 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 months ended March 31, 2022 and 2021, sales and revenues by geographic region reconciled to consolidated sales and revenues were as follows:
| Sales and Revenues by Geographic Region | ||||||||||||||||||||||||||||||||||||||||||||
| (Millions of dollars) | North****America | Latin****America | EAME | **Asia/**Pacific | External Sales and Revenues | Intersegment Sales and Revenues | Total Sales and Revenues | |||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Construction Industries | $ | 2,720 | $ | 627 | $ | 1,277 | $ | 1,462 | $ | 6,086 | $ | 29 | $ | 6,115 | ||||||||||||||||||||||||||||||
| Resource Industries | 1,018 | 399 | 594 | 748 | 2,759 | 71 | 2,830 | |||||||||||||||||||||||||||||||||||||
| Energy & Transportation | 1,938 | 310 | 1,184 | 600 | 4,032 | 1,006 | 5,038 | |||||||||||||||||||||||||||||||||||||
| Financial Products Segment | 503 | 73 | 96 | 111 | 783 | 1 | — | 783 | ||||||||||||||||||||||||||||||||||||
| Total sales and revenues from reportable segments | 6,179 | 1,409 | 3,151 | 2,921 | 13,660 | 1,106 | 14,766 | |||||||||||||||||||||||||||||||||||||
| All Other operating segment | 18 | — | 5 | 16 | 39 | 79 | 118 | |||||||||||||||||||||||||||||||||||||
| Corporate Items and Eliminations | (60) | (16) | (11) | (23) | (110) | (1,185) | (1,295) | |||||||||||||||||||||||||||||||||||||
| Total Sales and Revenues | $ | 6,137 | $ | 1,393 | $ | 3,145 | $ | 2,914 | $ | 13,589 | $ | — | $ | 13,589 | ||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Construction Industries | $ | 2,126 | $ | 392 | $ | 1,081 | $ | 1,842 | $ | 5,441 | $ | 18 | $ | 5,459 | ||||||||||||||||||||||||||||||
| Resource Industries | 657 | 405 | 474 | 561 | 2,097 | 81 | 2,178 | |||||||||||||||||||||||||||||||||||||
| Energy & Transportation | 1,782 | 256 | 1,093 | 527 | 3,658 | 849 | 4,507 | |||||||||||||||||||||||||||||||||||||
| Financial Products Segment | 476 | 62 | 100 | 123 | 761 | 1 | — | 761 | ||||||||||||||||||||||||||||||||||||
| Total sales and revenues from reportable segments | 5,041 | 1,115 | 2,748 | 3,053 | 11,957 | 948 | 12,905 | |||||||||||||||||||||||||||||||||||||
| All Other operating segment | 13 | — | 3 | 22 | 38 | 92 | 130 | |||||||||||||||||||||||||||||||||||||
| Corporate Items and Eliminations | (63) | (11) | (8) | (26) | (108) | (1,040) | (1,148) | |||||||||||||||||||||||||||||||||||||
| Total Sales and Revenues | $ | 4,991 | $ | 1,104 | $ | 2,743 | $ | 3,049 | $ | 11,887 | $ | — | $ | 11,887 | ||||||||||||||||||||||||||||||
1 Includes revenues from Construction Industries, Resource Industries, Energy & Transportation and All Other operating segment of $100 million and $84 million in the three months ended March 31, 2022 and 2021, respectively.
For the three months ended March 31, 2022 and 2021, Energy & Transportation segment sales by end user application were as follows:
| Energy & Transportation External Sales | ||||||||||||||||||||||||||
| Three Months Ended March 31 | ||||||||||||||||||||||||||
| (Millions of dollars) | 2022 | 2021 | ||||||||||||||||||||||||
| Oil and gas | $ | 948 | $ | 915 | ||||||||||||||||||||||
| Power generation | 1,012 | 963 | ||||||||||||||||||||||||
| Industrial | 1,020 | 813 | ||||||||||||||||||||||||
| Transportation | 1,052 | 967 | ||||||||||||||||||||||||
| Energy & Transportation External Sales | $ | 4,032 | $ | 3,658 | ||||||||||||||||||||||
| Reconciliation of Consolidated profit before taxes: | |||||||||||||||||||||||
| (Millions of dollars) | Three Months Ended March 31 | ||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Profit from reportable segments: | |||||||||||||||||||||||
| Construction Industries | $ | 1,057 | $ | 1,042 | |||||||||||||||||||
| Resource Industries | 361 | 312 | |||||||||||||||||||||
| Energy & Transportation | 538 | 675 | |||||||||||||||||||||
| Financial Products Segment | 238 | 244 | |||||||||||||||||||||
| Total profit from reportable segments | 2,194 | 2,273 | |||||||||||||||||||||
| Profit from All Other operating segment | 3 | 3 | |||||||||||||||||||||
| Cost centers | 10 | 21 | |||||||||||||||||||||
| Corporate costs | (198) | (185) | |||||||||||||||||||||
| Timing | (98) | (66) | |||||||||||||||||||||
| Restructuring costs | (13) | (64) | |||||||||||||||||||||
| Methodology differences: | |||||||||||||||||||||||
| Inventory/cost of sales | 168 | — | |||||||||||||||||||||
| Postretirement benefit expense | 81 | 68 | |||||||||||||||||||||
| Stock-based compensation expense | (40) | (42) | |||||||||||||||||||||
| Financing costs | (100) | (130) | |||||||||||||||||||||
| Currency | 106 | 186 | |||||||||||||||||||||
| Other income/expense methodology differences | (81) | (49) | |||||||||||||||||||||
| Other methodology differences | (33) | (18) | |||||||||||||||||||||
| Total consolidated profit before taxes | $ | 1,999 | $ | 1,997 | |||||||||||||||||||
| Reconciliation of Assets: | |||||||||||
| (Millions of dollars) | March 31, 2022 | December 31, 2021 | |||||||||
| Assets from reportable segments: | |||||||||||
| Construction Industries | $ | 5,019 | $ | 4,547 | |||||||
| Resource Industries | 5,717 | 5,962 | |||||||||
| Energy & Transportation | 9,480 | 9,253 | |||||||||
| Financial Products Segment | 35,108 | 34,860 | |||||||||
| Total assets from reportable segments | 55,324 | 54,622 | |||||||||
| Assets from All Other operating segment | 2,568 | 1,678 | |||||||||
| Items not included in segment assets: | |||||||||||
| Cash and cash equivalents | 5,662 | 8,428 | |||||||||
| Deferred income taxes | 1,862 | 1,735 | |||||||||
| Goodwill and intangible assets | 4,842 | 4,859 | |||||||||
| Property, plant and equipment – net and other assets | 3,149 | 4,056 | |||||||||
| Inventory methodology differences | (2,901) | (2,656) | |||||||||
| Liabilities included in segment assets | 11,378 | 10,777 | |||||||||
| Other | 392 | (706) | |||||||||
| Total assets | $ | 82,276 | $ | 82,793 | |||||||
| Reconciliation of Depreciation and amortization: | |||||||||||||||||||||||
| (Millions of dollars) | |||||||||||||||||||||||
| Three Months Ended March 31 | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Depreciation and amortization from reportable segments: | |||||||||||||||||||||||
| Construction Industries | $ | 58 | $ | 59 | |||||||||||||||||||
| Resource Industries | 92 | 99 | |||||||||||||||||||||
| Energy & Transportation | 134 | 142 | |||||||||||||||||||||
| Financial Products Segment | 188 | 196 | |||||||||||||||||||||
| Total depreciation and amortization from reportable segments | 472 | 496 | |||||||||||||||||||||
| Items not included in segment depreciation and amortization: | |||||||||||||||||||||||
| All Other operating segment | 58 | 62 | |||||||||||||||||||||
| Cost centers | 21 | 26 | |||||||||||||||||||||
| Other | 6 | 2 | |||||||||||||||||||||
| Total depreciation and amortization | $ | 557 | $ | 586 | |||||||||||||||||||
| Reconciliation of Capital expenditures: | |||||||||||||||||||||||
| (Millions of dollars) | |||||||||||||||||||||||
| Three Months Ended March 31 | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Capital expenditures from reportable segments: | |||||||||||||||||||||||
| Construction Industries | $ | 32 | $ | 28 | |||||||||||||||||||
| Resource Industries | 22 | 23 | |||||||||||||||||||||
| Energy & Transportation | 177 | 81 | |||||||||||||||||||||
| Financial Products Segment | 241 | 228 | |||||||||||||||||||||
| Total capital expenditures from reportable segments | 472 | 360 | |||||||||||||||||||||
| Items not included in segment capital expenditures: | |||||||||||||||||||||||
| All Other operating segment | 16 | 15 | |||||||||||||||||||||
| Cost centers | 9 | 19 | |||||||||||||||||||||
| Timing | 192 | 124 | |||||||||||||||||||||
| Other | (10) | (14) | |||||||||||||||||||||
| Total capital expenditures | $ | 679 | $ | 504 | |||||||||||||||||||
17. Cat Financial financing activities
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 50 months with an average remaining term of approximately 27 months as of March 31, 2022.
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 economic factors.
During the three months ended March 31, 2022, Cat Financial's forecasts for the markets in which it operates reflected a continuation of the trend of a growing economy, improved unemployment rates and relatively low delinquencies. However, an increase in inflation, exacerbated by an increase in commodity prices, dampened the expectations of global economic growth. 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 a variety of secured and unsecured loans to Caterpillar dealers.
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.
In general, Cat Financial's Dealer portfolio segment has not historically experienced large increases or decreases in credit losses based on changes in economic conditions due to its close working relationships with the dealers and their financial strength. Therefore, Cat Financial made no adjustments to historical loss rates during the three months ended March 31, 2022.
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. Cat Financial's classes, which align with management reporting for credit losses, are as follows:
-
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) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||
| Customer | Dealer | Total | Customer | Dealer | Total | ||||||||||||||||||||||||||||||
| Beginning balance | $ | 251 | $ | 82 | $ | 333 | $ | 431 | $ | 44 | $ | 475 | |||||||||||||||||||||||
| Write-offs | (20) | — | (20) | (34) | — | (34) | |||||||||||||||||||||||||||||
| Recoveries | 12 | — | 12 | 10 | — | 10 | |||||||||||||||||||||||||||||
| Provision for credit losses | 26 | 1 | (1) | 25 | (10) | — | (10) | ||||||||||||||||||||||||||||
| Other | 2 | — | 2 | (4) | — | (4) | |||||||||||||||||||||||||||||
| Ending balance | $ | 271 | $ | 81 | $ | 352 | $ | 393 | $ | 44 | $ | 437 | |||||||||||||||||||||||
| Finance Receivables | $ | 20,289 | $ | 1,722 | $ | 22,011 | $ | 19,103 | $ | 2,633 | $ | 21,736 | |||||||||||||||||||||||
| 1 Included a higher reserve for the Russia and Ukraine portfolios. |
Credit quality of finance receivables
At origination, Cat Financial evaluates credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit ratings, loan-to-value ratios, probabilities of default, industry trends, macroeconomic factors and other internal metrics. On an ongoing basis, Cat Financial monitors credit quality based on past-due status as there is a meaningful correlation between the past-due status of customers and the risk of loss. In determining past-due status, Cat Financial considers the entire finance receivable past due when any installment is over 30 days past due.
Customer
The tables below summarize the aging category of Cat Financial's amortized cost of finance receivables in the Customer portfolio segment by origination year:
| (Millions of dollars) | March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Finance Receivables | Total Finance Receivables | ||||||||||||||||||||||||||||||||||||||||||||||
| North America | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | $ | 1,204 | $ | 4,442 | $ | 2,323 | $ | 1,213 | $ | 503 | $ | 154 | $ | 188 | $ | 10,027 | |||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 5 | 29 | 22 | 15 | 7 | 3 | 6 | 87 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | 8 | 4 | 4 | 2 | 1 | 2 | 21 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 10 | 13 | 10 | 11 | 8 | 5 | 57 | |||||||||||||||||||||||||||||||||||||||||||||
| EAME | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 307 | 1,369 | 739 | 496 | 295 | 136 | — | 3,342 | |||||||||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 1 | 12 | 6 | 5 | 1 | — | — | 25 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | 4 | 4 | 1 | 1 | 1 | — | 11 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 4 | 11 | 3 | 2 | 2 | — | 22 | |||||||||||||||||||||||||||||||||||||||||||||
| Asia/Pacific | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 333 | 1,145 | 667 | 225 | 53 | 13 | — | 2,436 | |||||||||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 1 | 14 | 18 | 9 | 1 | — | — | 43 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | 4 | 8 | 5 | 1 | — | — | 18 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 7 | 9 | 7 | 2 | — | — | 25 | |||||||||||||||||||||||||||||||||||||||||||||
| Mining | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 195 | 780 | 312 | 274 | 167 | 167 | 48 | 1,943 | |||||||||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 1 | 1 | 8 | 12 | 8 | — | 30 | |||||||||||||||||||||||||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 204 | 607 | 270 | 137 | 45 | 29 | — | 1,292 | |||||||||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | — | 6 | 7 | 5 | 16 | — | — | 34 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | 5 | 1 | 1 | 1 | — | — | 8 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 9 | 14 | 9 | 5 | 18 | — | 55 | |||||||||||||||||||||||||||||||||||||||||||||
| Caterpillar Power Finance | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 12 | 105 | 144 | 92 | 65 | 236 | 115 | 769 | |||||||||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 2 | — | — | — | — | — | — | 2 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | — | — | — | — | 42 | — | 42 | |||||||||||||||||||||||||||||||||||||||||||||
| Totals by Aging Category | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | $ | 2,255 | $ | 8,448 | $ | 4,455 | $ | 2,437 | $ | 1,128 | $ | 735 | $ | 351 | $ | 19,809 | |||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 9 | 61 | 53 | 34 | 25 | 3 | 6 | 191 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | 21 | 17 | 11 | 5 | 2 | 2 | 58 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 31 | 48 | 37 | 32 | 78 | 5 | 231 | |||||||||||||||||||||||||||||||||||||||||||||
| Total Customer | $ | 2,264 | $ | 8,561 | $ | 4,573 | $ | 2,519 | $ | 1,190 | $ | 818 | $ | 364 | $ | 20,289 | |||||||||||||||||||||||||||||||||||||
| (Millions of dollars) | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Finance Receivables | Total Finance Receivables | ||||||||||||||||||||||||||||||||||||||||||||||
| North America | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | $ | 4,792 | $ | 2,596 | $ | 1,426 | $ | 630 | $ | 182 | $ | 32 | $ | 182 | $ | 9,840 | |||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 27 | 32 | 20 | 12 | 4 | 1 | 5 | 101 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 7 | 8 | 5 | 3 | 1 | 1 | 5 | 30 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | 9 | 17 | 12 | 13 | 5 | 4 | 5 | 65 | |||||||||||||||||||||||||||||||||||||||||||||
| EAME | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 1,499 | 836 | 577 | 352 | 140 | 26 | — | 3,430 | |||||||||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 5 | 4 | 3 | 1 | 1 | — | — | 14 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 3 | 3 | 3 | 1 | — | — | — | 10 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | 3 | 11 | 2 | 2 | — | 2 | — | 20 | |||||||||||||||||||||||||||||||||||||||||||||
| Asia/Pacific | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 1,271 | 803 | 307 | 71 | 16 | 2 | — | 2,470 | |||||||||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 10 | 14 | 10 | 2 | — | — | — | 36 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 3 | 7 | 4 | 1 | — | — | — | 15 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | 2 | 10 | 10 | 3 | — | — | — | 25 | |||||||||||||||||||||||||||||||||||||||||||||
| Mining | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 851 | 347 | 307 | 193 | 36 | 161 | 36 | 1,931 | |||||||||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 6 | — | — | — | — | — | — | 6 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 1 | — | — | — | 4 | — | — | 5 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 1 | 8 | 9 | 3 | 1 | — | 22 | |||||||||||||||||||||||||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 617 | 299 | 160 | 70 | 17 | 18 | — | 1,181 | |||||||||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 4 | 7 | 3 | 3 | 1 | — | — | 18 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 3 | 3 | 1 | 1 | — | — | — | 8 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | 4 | 9 | 9 | 7 | 7 | 14 | — | 50 | |||||||||||||||||||||||||||||||||||||||||||||
| Caterpillar Power Finance | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 117 | 145 | 97 | 70 | 180 | 104 | 101 | 814 | |||||||||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | — | — | — | — | 44 | — | 44 | |||||||||||||||||||||||||||||||||||||||||||||
| Totals by Aging Category | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | $ | 9,147 | $ | 5,026 | $ | 2,874 | $ | 1,386 | $ | 571 | $ | 343 | $ | 319 | $ | 19,666 | |||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 52 | 57 | 36 | 18 | 6 | 1 | 5 | 175 | |||||||||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 17 | 21 | 13 | 6 | 5 | 1 | 5 | 68 | |||||||||||||||||||||||||||||||||||||||||||||
| 91+ days past due | 18 | 48 | 41 | 34 | 15 | 65 | 5 | 226 | |||||||||||||||||||||||||||||||||||||||||||||
| Total Customer | $ | 9,234 | $ | 5,152 | $ | 2,964 | $ | 1,444 | $ | 597 | $ | 410 | $ | 334 | $ | 20,135 | |||||||||||||||||||||||||||||||||||||
Finance receivables in the Customer portfolio segment are substantially secured by collateral, primarily in the form of Caterpillar and other machinery. For those contracts where the borrower is experiencing financial difficulty, repayment of the outstanding amounts is generally expected to be provided through the operation or repossession and sale of the machinery.
Dealer
As of March 31, 2022, Cat Financial's total amortized cost of finance receivables within the Dealer portfolio segment was current, with the exception of $74 million. Of these past due receivables, $73 million were 91+ days past due in Latin America and were originated in 2017. As of December 31, 2021, Cat Financial's total amortized cost of finance receivables within the Dealer portfolio segment was current, with the exception of $78 million that was 91+ days past due in Latin America, all of which was originated in 2017.
Non-accrual finance receivables
Recognition of income is suspended and the finance receivable is placed on non-accrual status when management determines that collection of future income is not probable. Contracts on non-accrual status are generally more than 120 days past due or have been restructured in a troubled debt restructuring (TDR). Recognition is resumed and previously suspended income is recognized when collection is considered probable. Payments received while the finance receivable is on non-accrual status are applied to interest and principal in accordance with the contractual terms. Interest earned but uncollected prior to the receivable being placed on non-accrual status is written off through Provision for credit losses when, in the judgment of management, it is considered uncollectible.
In Cat Financial's Customer portfolio segment, finance receivables which were on non-accrual status and finance receivables over 90 days past due and still accruing income were as follows:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Amortized Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Millions of dollars) | Non-accrual With an Allowance | Non-accrual Without an Allowance | 91+ Still Accruing | Non-accrual With an Allowance | Non-accrual Without an Allowance | 91+ Still Accruing | |||||||||||||||||||||||||||||||||||||||||||||||
| North America | $ | 43 | $ | 6 | $ | 13 | $ | 47 | $ | 9 | $ | 12 | |||||||||||||||||||||||||||||||||||||||||
| EAME | 20 | 1 | 2 | 18 | 1 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Asia/Pacific | 13 | — | 13 | 19 | — | 7 | |||||||||||||||||||||||||||||||||||||||||||||||
| Mining | 28 | 1 | 1 | 8 | 1 | 14 | |||||||||||||||||||||||||||||||||||||||||||||||
| Latin America | 51 | — | 1 | 52 | 4 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||
| Caterpillar Power Finance | 31 | 12 | — | 40 | 11 | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 186 | $ | 20 | $ | 30 | $ | 184 | $ | 26 | $ | 36 | |||||||||||||||||||||||||||||||||||||||||
There was $1 million and $3 million of interest income recognized during the three months ended March 31, 2022 and 2021, respectively, for customer finance receivables on non-accrual status.
As of March 31, 2022 and December 31, 2021, finance receivables in Cat Financial's Dealer portfolio segment on non-accrual status were $73 million and $78 million, respectively, all of which was in Latin America. There were no finance receivables in Cat Financial's Dealer portfolio segment more than 90 days past due and still accruing income as of March 31, 2022 and December 31, 2021 and no interest income was recognized on dealer finance receivables on non-accrual status during the three months ended March 31, 2022 and 2021.
Troubled debt restructurings
A restructuring of a finance receivable constitutes a TDR when the lender grants a concession it would not otherwise consider to a borrower experiencing financial difficulties. Concessions granted may include extended contract maturities, inclusion of interest only periods, below market interest rates, payment deferrals and reduction of principal and/or accrued interest. Cat Financial individually evaluates TDR contracts and establishes an allowance based on the present value of expected future cash flows discounted at the receivable's effective interest rate, the fair value of the collateral for collateral-dependent receivables or the observable market price of the receivable.
There were no finance receivables modified as TDRs during the three months ended March 31, 2022 and 2021 for the Dealer portfolio segment. Cat Financial’s finance receivables in the Customer portfolio segment modified as TDRs were as follows:
| (Millions of dollars) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||||||||||||||||
| Pre-TDR Amortized Cost | Post-TDR Amortized Cost | Pre-TDR Amortized Cost | Post-TDR Amortized Cost | ||||||||||||||||||||
| Customer | |||||||||||||||||||||||
| EAME | $ | 1 | $ | 1 | $ | — | $ | — | |||||||||||||||
| Mining | — | — | 11 | 5 | |||||||||||||||||||
| Caterpillar Power Finance | 6 | 6 | — | — | |||||||||||||||||||
| Total | $ | 7 | $ | 7 | $ | 11 | $ | 5 | |||||||||||||||
The Post-TDR amortized costs in the Customer portfolio segment with a payment default (defined as 91+ days past due) which had been modified within twelve months prior to the default date, were as follows:
| (Millions of dollars) | Three Months Ended March 31 | ||||||||||||||||||||||
| Customer | 2022 | 2021 | |||||||||||||||||||||
| North America | $ | — | $ | 1 | |||||||||||||||||||
| Asia/Pacific | — | 4 | |||||||||||||||||||||
| Mining | 5 | — | |||||||||||||||||||||
| Caterpillar Power Finance | — | 5 | |||||||||||||||||||||
| Total | $ | 5 | $ | 10 | |||||||||||||||||||
18. Fair value disclosures
A. Fair value measurements
The guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. In accordance with this guidance, fair value measurements are classified under the following hierarchy:
-
Level 1** – Quoted prices for identical instruments in active markets.
-
Level 2** – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.
-
Level 3** – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
When available, we use quoted market prices to determine fair value, and we classify such measurements within Level 1. In some cases where market prices are not available, we make use of observable market based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon valuations in which one or more significant inputs are unobservable, including internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.
We classify fair value measurements according to the lowest level input or value-driver that is significant to the valuation. We may therefore classify a measurement within Level 3 even though there may be significant inputs that are readily observable.
Fair value measurement includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or Caterpillar) will not be fulfilled. For financial assets traded in an active market (Level 1 and certain Level 2), the nonperformance risk is included in the market price. For certain other financial assets and liabilities (certain Level 2 and Level 3), our fair value calculations have been adjusted accordingly.
Investments in debt and equity securities
We have investments in certain debt and equity securities that are recorded at fair value. Fair values for our U.S. treasury bonds and large capitalization value and smaller company growth equity securities are based upon valuations for identical instruments in active markets. Fair values for other government bonds, corporate bonds and mortgage-backed debt securities are based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.
We also have investments in time deposits classified as held-to-maturity debt securities. The fair value of these investments is based upon valuations observed in less active markets than Level 1. These investments have a maturity of less than one year and are recorded at amortized costs, which approximate fair value.
In addition, Insurance Services has an equity investment in a real estate investment trust (REIT) which is recorded at fair value based on the net asset value (NAV) of the investment and is not classified within the fair value hierarchy.
See Note 8 for additional information on our investments in debt and equity securities.
Derivative financial instruments
The fair value of interest rate contracts is primarily based on a standard industry accepted valuation model that utilizes the appropriate market-based forward swap curves and zero-coupon interest rates to determine discounted cash flows. The fair value of foreign currency and commodity forward, option and cross currency contracts is based on standard industry accepted valuation models that discount cash flows resulting from the differential between the contract price and the market-based forward rate.
See Note 5 for additional information.
Assets and liabilities measured on a recurring basis at fair value included in our Consolidated Statement of Financial Position as of March 31, 2022 and December 31, 2021 were as follows:
| March 31, 2022 | |||||||||||||||||||||||||||||
| (Millions of dollars) | Level 1 | Level 2 | Level 3 | Measured at NAV | Total Assets / Liabilities, at Fair Value | ||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Debt securities | |||||||||||||||||||||||||||||
| Government debt | |||||||||||||||||||||||||||||
| U.S. treasury bonds | $ | 9 | $ | — | $ | — | $ | — | $ | 9 | |||||||||||||||||||
| Other U.S. and non-U.S. government bonds | — | 60 | — | — | 60 | ||||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||||||||
| Corporate bonds | — | 1,988 | — | — | 1,988 | ||||||||||||||||||||||||
| Asset-backed securities | — | 183 | — | — | 183 | ||||||||||||||||||||||||
| Mortgage-backed debt securities | |||||||||||||||||||||||||||||
| U.S. governmental agency | — | 319 | — | — | 319 | ||||||||||||||||||||||||
| Residential | — | 3 | — | — | 3 | ||||||||||||||||||||||||
| Commercial | — | 100 | — | — | 100 | ||||||||||||||||||||||||
| Total debt securities | 9 | 2,653 | — | — | 2,662 | ||||||||||||||||||||||||
| Equity securities | |||||||||||||||||||||||||||||
| Large capitalization value | 214 | — | — | — | 214 | ||||||||||||||||||||||||
| Smaller company growth | 72 | — | — | — | 72 | ||||||||||||||||||||||||
| REIT | — | — | — | 185 | 185 | ||||||||||||||||||||||||
| Total equity securities | 286 | — | — | 185 | 471 | ||||||||||||||||||||||||
| Derivative financial instruments - assets | |||||||||||||||||||||||||||||
| Foreign currency contracts - net | — | 85 | — | — | 85 | ||||||||||||||||||||||||
| Commodity contracts - net | — | 87 | — | — | 87 | ||||||||||||||||||||||||
| Total assets | $ | 295 | $ | 2,825 | $ | — | $ | 185 | $ | 3,305 | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Derivative financial instruments - liabilities | |||||||||||||||||||||||||||||
| Interest rate contracts - net | $ | — | $ | 12 | $ | — | $ | — | $ | 12 | |||||||||||||||||||
| Total liabilities | $ | — | $ | 12 | $ | — | $ | — | $ | 12 | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| (Millions of dollars) | Level 1 | Level 2 | Level 3 | Measured at NAV | Total Assets / Liabilities, at Fair Value | ||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Debt securities | |||||||||||||||||||||||||||||
| Government debt | |||||||||||||||||||||||||||||
| U.S. treasury bonds | $ | 10 | $ | — | $ | — | $ | — | $ | 10 | |||||||||||||||||||
| Other U.S. and non-U.S. government bonds | — | 61 | — | — | 61 | ||||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||||||||
| Corporate bonds | — | 1,046 | — | — | 1,046 | ||||||||||||||||||||||||
| Asset-backed securities | — | 176 | — | — | 176 | ||||||||||||||||||||||||
| Mortgage-backed debt securities | |||||||||||||||||||||||||||||
| U.S. governmental agency | — | 325 | — | — | 325 | ||||||||||||||||||||||||
| Residential | — | 4 | — | — | 4 | ||||||||||||||||||||||||
| Commercial | — | 99 | — | — | 99 | ||||||||||||||||||||||||
| Total debt securities | 10 | 1,711 | — | — | 1,721 | ||||||||||||||||||||||||
| Equity securities | |||||||||||||||||||||||||||||
| Large capitalization value | 217 | — | — | — | 217 | ||||||||||||||||||||||||
| Smaller company growth | 98 | — | — | — | 98 | ||||||||||||||||||||||||
| REIT | — | — | — | 167 | 167 | ||||||||||||||||||||||||
| Total equity securities | 315 | — | — | 167 | 482 | ||||||||||||||||||||||||
| Derivative financial instruments - assets | |||||||||||||||||||||||||||||
| Foreign currency contracts - net | — | 168 | — | — | 168 | ||||||||||||||||||||||||
| Interest rate contracts - net | — | 23 | — | — | 23 | ||||||||||||||||||||||||
| Commodity contracts - net | — | 21 | — | — | 21 | ||||||||||||||||||||||||
| Total Assets | $ | 325 | $ | 1,923 | $ | — | $ | 167 | $ | 2,415 | |||||||||||||||||||
In addition to the amounts above, certain Cat Financial loans are subject to measurement at fair value on a nonrecurring basis and are classified as Level 3 measurements. A loan is measured at fair value when management determines that collection of contractual amounts due is not probable and the loan is individually evaluated. In these cases, an allowance for credit losses may be established based either on the present value of expected future cash flows discounted at the receivables’ effective interest rate, the fair value of the collateral for collateral-dependent receivables, or the observable market price of the receivable. In determining collateral value, Cat Financial estimates the current fair market value of the collateral less selling costs. Cat Financial had loans carried at fair value of $108 million and $100 million as of March 31, 2022 and December 31, 2021, respectively.
B. Fair values of financial instruments
In addition to the methods and assumptions we use to record the fair value of financial instruments as discussed in the Fair value measurements section above, we use the following methods and assumptions to estimate the fair value of our financial instruments:
Cash and cash equivalents
Carrying amount approximates fair value. We classify cash and cash equivalents as Level 1. See Consolidated Statement of Financial Position.
Restricted cash and short-term investments
Carrying amount approximates fair value. We include restricted cash and short-term investments in Prepaid expenses and other current assets in the Consolidated Statement of Financial Position. We classify these instruments as Level 1 except for time deposits which are Level 2. See Note 8 for additional information.
Finance receivables
We estimate fair value by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.
Wholesale inventory receivables
We estimate fair value by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.
Short-term borrowings
Carrying amount approximates fair value. We classify short-term borrowings as Level 1. See Consolidated Statement of Financial Position.
Long-term debt
We estimate fair value for fixed and floating rate debt based on quoted market prices.
Guarantees
The fair value of guarantees is based upon our estimate of the premium a market participant would require to issue the same guarantee in a stand-alone arms-length transaction with an unrelated party. If quoted or observable market prices are not available, fair value is based upon internally developed models that utilize current market-based assumptions. We classify guarantees as Level 3. See Note 11 for additional information.
Our financial instruments not carried at fair value were as follows:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| (Millions of dollars) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Levels | Reference | ||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
| Finance receivables – net (excluding finance leases 1 ) | $ | 14,077 | $ | 13,848 | $ | 13,837 | $ | 13,836 | 3 | Note 17 | ||||||||||||||||||||||||||||
| Wholesale inventory receivables – net (excluding finance leases 1) | 714 | 690 | 773 | 753 | 3 | |||||||||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||||||||
| Long-term debt (including amounts due within one year) | ||||||||||||||||||||||||||||||||||||||
| Machinery, Energy & Transportation | 9,763 | 11,127 | 9,791 | 12,420 | 2 | |||||||||||||||||||||||||||||||||
| Financial Products | 23,320 | 23,010 | 22,594 | 22,797 | 2 |
1 Represents finance leases and failed sale leasebacks of $7,895 million and $8,083 million at March 31, 2022 and December 31, 2021, respectively.
19. Other income (expense)
| Three Months Ended March 31 | ||||||||||||||||||||||||||
| (Millions of dollars) | 2022 | 2021 | ||||||||||||||||||||||||
| Investment and interest income | $ | 21 | $ | 23 | ||||||||||||||||||||||
| Foreign exchange gains (losses) 1 | 47 | 95 | ||||||||||||||||||||||||
| License fee income | 32 | 25 | ||||||||||||||||||||||||
| Net periodic pension and OPEB income (cost), excluding service cost | 68 | 111 | ||||||||||||||||||||||||
| Gains (losses) on securities | (12) | 25 | ||||||||||||||||||||||||
| Miscellaneous income (loss) | 97 | 46 | ||||||||||||||||||||||||
| Total | $ | 253 | $ | 325 |
1 Includes gains (losses) from foreign exchange derivative contracts. See Note 5 for further details.
20. Restructuring costs
Our accounting for employee separations is dependent upon how the particular program is designed. For voluntary programs, we recognize eligible separation costs at the time of employee acceptance unless the acceptance requires explicit approval by the company. For involuntary programs, we recognize eligible costs when management has approved the program, the affected employees have been properly notified and the costs are estimable.
Restructuring costs for the three months ended March 31, 2022 and 2021 were as follows:
| (Millions of dollars) | Three Months Ended March 31 | |||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Employee separations 1 | $ | 5 | $ | 45 | ||||||||||||||||||||||
| Long-lived asset impairments 1 | — | 11 | ||||||||||||||||||||||||
| Other 2 | 8 | 8 | ||||||||||||||||||||||||
| Total restructuring costs | $ | 13 | $ | 64 | ||||||||||||||||||||||
| 1 Recognized in Other operating (income) expenses. | ||||||||||||||||||||||||||
| 2 Represents costs related to our restructuring programs, primarily for accelerated depreciation, project management, equipment relocation and inventory write-downs, all of which are primarily included in Cost of goods sold. | ||||||||||||||||||||||||||
For both the three months ended March 31, 2022 and 2021, the restructuring costs were primarily related to actions across the company including strategic actions to address a small number of products.
In 2022 and 2021, all restructuring costs are excluded from segment profit.
The following table summarizes the 2022 and 2021 employee separation activity:
| (Millions of dollars) | Three Months Ended March 31 | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Liability balance, beginning of period | $ | 61 | $ | 164 | ||||||||||
| Increase in liability (separation charges) | 5 | 45 | ||||||||||||
| Reduction in liability (payments) | (19) | (55) | ||||||||||||
| Liability balance, end of period | $ | 47 | $ | 154 | ||||||||||
Most of the liability balance at March 31, 2022 is expected to be paid in 2022.
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