CATERPILLAR INC.
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Caterpillar Inc.: Files Form 10-Q FQE 30 Sept 2019

  • 73

Caterpillar Inc.
Caterpillar Inc.: Files Form 10-Q FQE 30 Sept 2019

31-Oct-2019 / 17:38 CET/CEST
Information réglementaire transmise par EQS Group.
Le contenu de ce communiqué est de la responsabilité de l'émetteur.


Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

ACT OF 1934

For the quarterly period ended September 30, 2019

OR

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

ACT OF 1934

For the transition period from to
Commission File Number: 1-768

CATERPILLAR INC.

(Exact name of registrant as specified in its charter)

Delaware 37-0602744

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

 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (224) 551-4000

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol (s) Name of each exchange on which registered

 

Common Stock ($1.00 par value) CAT New York Stock Exchange

9 3/8% Debentures due March 15, 2021 CAT21 New York Stock Exchange

8% Debentures due February 15, 2023 CAT23 New York Stock Exchange

5.3% Debentures due September 15, 2035 CAT35 New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for

the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

Large accelerated filer  Accelerated filer

Non-accelerated filer  Smaller reporting company

Emerging growth company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No At September 30, 2019, 552,658,387 shares of common stock of the registrant were outstanding.

 

Table of Contents

Table of Contents

Part I. Financial Information

Item 1. Financial Statements 3

Item 2. Management's Discussion and Analysis of Financial Condition and Results of 67

Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk 96

Item 4. Controls and Procedures 96

Part II. Other Information

Item 1. Legal Proceedings 97

Item 1A. Risk Factors *

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 97

Item 3. Defaults Upon Senior Securities *

Item 4. Mine Safety Disclosures *

Item 5. Other Information *

Item 6. Exhibits 98

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

2

 

Table of Contents

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

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

Sales and revenues:

Three Months Ended September 30

2019 2018

 

 

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

$ 11,974

$ 12,763

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

784

747

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

12,758

13,510

Operating costs:

 

 

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

8,569

9,022

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

1,251

1,299

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

431

479

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

189

185

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

298

390

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

10,738

11,375

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

2,020

2,135

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

103

102

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

88

102

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

2,005

2,135

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

518

415

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

1,487

1,720

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

7

7

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

1,494

1,727

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

-

-

Profit 1

.................................................................. $ 1,494

 

$ 1,727

 

 

 

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

$ 2.69

$ 2.92

Profit per common share - diluted 2

.................................................................. $ 2.66

 

$ 2.88

Weighted-average common shares outstanding (millions)

 

 

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

556.3

592.1

- Diluted 2

561.2

599.4

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.

3

 

Table of Contents

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

 

Three Months Ended September 30

2019 2018

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

$ 1,494

$ 1,727

Other comprehensive income (loss), net of tax:

 

 

Foreign currency translation, net of tax (provision)/benefit of: 2019 - $(21); 2018 - $(3)............

(263)

(65)

Pension and other postretirement benefits:

 

 

Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2019 - $2; 2018 - $2....

(8)

(7)

Derivative financial instruments:

 

 

Gains (losses) deferred, net of tax (provision)/benefit of: 2019 - $(16); 2018 - $(9)..............

59

32

(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2019 - $20; 2018 - $8 ......

(76)

(31)

Available-for-sale securities:

 

 

Gains (losses) deferred, net of tax (provision)/benefit of: 2019 - $(2); 2018 - $0...............

4

(1)

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

(284)

(72)

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

1,210

1,655

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

-

-

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

$ 1,210

$ 1,655

 

See accompanying notes to Consolidated Financial Statements.

 

4

 

Table of Contents

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

Sales and revenues:

Nine Months Ended
September 30

2019 2018

 

 

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

$ 38,369

$ 38,192

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

2,287

2,188

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

40,656

40,380

Operating costs:

 

 

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

27,513

27,010

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

3,879

4,015

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

1,307

1,384

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

571

533

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

946

1,028

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

34,216

33,970

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

6,440

6,410

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

309

305

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

316

350

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

6,447

6,455

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

1,470

1,377

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

4,977

5,078

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

20

21

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

4,997

5,099

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

2

 

Profit 1

.................................................................. $ 4,995

 

$ 5,099

 

 

 

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

$ 8.84

$ 8.57

Profit per common share - diluted 2

.................................................................. $ 8.75

 

$ 8.45

Weighted-average common shares outstanding (millions)

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

565.2

595.3

- Diluted 2

570.8

603.8

1 Profit attributable to common shareholders.

 

 

2 Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.

 

 

 

See accompanying notes to Consolidated Financial Statements.

 

5

 

Table of Contents

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

 

Nine Months Ended September 30

2019 2018

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

$ 4,997

$ 5,099

Other comprehensive income (loss), net of tax:

 

 

Foreign currency translation, net of tax (provision)/benefit of: 2019 - $(19); 2018 - $(18)............

(186)

(292)

Pension and other postretirement benefits:

 

 

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

-

(2)

Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2019 - $8; 2018 - $5....

(22)

(21)

Derivative financial instruments:

 

 

Gains (losses) deferred, net of tax (provision)/benefit of: 2019 - $(15); 2018 - $(23).............

53

73

(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2019 - $23; 2018 - $32.....

(86)

(109)

Available-for-sale securities:

 

 

Gains (losses) deferred, net of tax (provision)/benefit of: 2019 - $(10); 2018 - $3 ..............

34

(14)

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

(207)

(365)

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

4,790

4,734

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

2

-

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

$ 4,788

$ 4,734

 

See accompanying notes to Consolidated Financial Statements.

 

6

 

Table of Contents

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

Assets

Current assets:

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

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

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

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

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

 

September 30,

2019

 

December 31,

2018

$

7,906 8,275 9,192 1,607 12,180

$

7,857 8,802 8,650 1,765 11,529

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

 

39,160

 

38,603

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

 

12,842

 

13,574

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

 

1,193

 

1,161

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

 

12,412

 

13,286

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

 

1,372

 

1,439

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

 

1,630

 

1,897

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

 

6,142

 

6,217

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

 

3,242

 

2,332

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

$

77,993

$

78,509

Liabilities

 

 

 

 

Current liabilities:

 

 

 

 

Short-term borrowings:

 

 

 

 

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

$

-

$

-

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

 

4,268

 

5,723

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

 

6,141

 

7,051

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

 

3,727

 

3,573

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

 

1,518

 

2,384

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

 

1,309

 

1,243

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

 

-

 

495

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

 

2,188

 

1,919

Long-term debt due within one year:

 

 

 

 

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

 

25

 

10

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

 

8,025

 

5,820

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

 

27,201

 

28,218

Long-term debt due after one year:

 

 

 

 

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

 

9,134

 

8,005

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

 

16,454

 

16,995

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

 

5,900

 

7,455

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

 

4,311

 

3,756

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

 

63,000

 

64,429

Commitments and contingencies (Notes 11 and 14)

 

 

 

 

Shareholders' equity

 

 

 

 

Common stock of $1.00 par value:

 

 

 

 

Authorized shares: 2,000,000,000

 

 

 

 

Issued shares: (9/30/19 and 12/31/18 - 814,894,624) at paid-in amount............

 

5,951

 

5,827

Treasury stock (9/30/19 - 262,236,237 shares; 12/31/18 - 239,351,886 shares) at cost..

 

(23,693)

 

(20,531)

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

 

34,477

 

30,427

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

 

(1,783)

 

(1,684)

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

 

41

 

41

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

 

14,993

 

14,080

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

$

77,993

$

78,509

 

See accompanying notes to Consolidated Financial Statements.

 

7

 

Table of Contents

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

Three Months Ended September 30, 2018

Common stock

Treasury stock

Profit employed in the business

Accumulated
other
comprehensive
income (loss)

Noncontrolling interests

Total

 

 

 

 

 

 

 

Balance at June 30, 2018..........................

$ 5,746

$ (18,028)

$ 28,657

$ (1,496)

$

63

$ 14,942

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

-

-

1,727

-

 

-

1,727

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

-

-

-

(65)

 

-

(65)

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

-

-

-

(7)

 

-

(7)

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

-

-

-

1

 

-

1

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

 

 

 

(1)

 

-

(1)

Change in ownership from noncontrolling interests.......

(27)

 

 

 

 

(13)

(40)

Common shares issued from treasury stock for stock-based

compensation: 555,936.........................

7

29

-

-

 

-

36

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

52

-

-

-

 

-

52

Common shares repurchased: 4,774,613 1

-

(682)

-

-

 

-

(682)

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

(63)

-

-

-

 

(10)

(73)

Balance at September 30, 2018......................

$ 5,715

$ (18,681)

$ 30,384

$ (1,568)

$

40

$ 15,890

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

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

$ 5,822

$ (22,467)

$ 32,981

$ (1,499)

$

41

$ 14,878

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

-

-

1,494

-

 

-

1,494

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

-

-

-

(263)

 

-

(263)

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

-

-

-

(8)

 

-

(8)

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

-

-

-

(17)

 

-

(17)

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

-

-

-

4

 

-

4

Common shares issued from treasury stock for stock-based

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

-

20

-

-

 

-

20

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

57

-

-

-

 

-

57

Common shares repurchased: 10,335,410 1

-

(1,246)

-

-

 

-

(1,246)

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

72

-

2

-

 

-

74

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

$ 5,951

$ (23,693)

$ 34,477

$ (1,783)

$

41

$ 14,993

 

1 See Note 12 for additional information.

See accompanying notes to Consolidated Financial Statements.

 

8

 

Table of Contents

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

Nine Months Ended September 30, 2018

Common stock

Treasury stock

Profit employed in the business

Accumulated
other
comprehensive
income (loss)

Noncontrolling interests

Total

 

 

 

 

 

 

 

Balance at December 31, 2017......................

$ 5,593

$ (17,005)

$ 26,301

$ (1,192)

$

69

$ 13,766

Adjustments to adopt new accounting guidance

 

 

 

 

 

 

 

Revenue recognition..........................

-

-

(12)

-

 

-

(12)

Tax accounting for intra-entity asset transfers..........

-

-

(35)

-

 

-

  1.  

Recognition and measurement of financial assets and liabilities 

-

-

11

(11)

 

-

-

Balance at January 1, 2018........................

5,593

(17,005)

26,265

(1,203)

 

69

13,719

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

-

-

5,099

-

 

-

5,099

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

-

-

-

(292)

 

-

(292)

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

-

-

-

(23)

 

-

(23)

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

-

-

-

(36)

 

-

  1.  

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

-

-

-

(14)

 

-

(14)

Change in ownership from noncontrolling interests.......

(25)

-

-

-

 

(18)

(43)

Dividends declared 1

-

-

(980)

-

 

-

(980)

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

 

 

 

 

 

(1)

(1)

Common shares issued from treasury stock for stock-based

compensation: 5,284,974........................

36

256

 

 

 

 

292

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

164

-

-

-

 

-

164

Common shares repurchased: 12,804,035 2

-

(1,932)

-

-

 

-

(1,932)

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

(53)

-

-

-

 

(10)

(63)

Balance at September 30, 2018......................

$ 5,715

$ (18,681)

$ 30,384

$ (1,568)

$

40

$ 15,890

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

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

$ 5,827

$ (20,531)

$ 30,427

$ (1,684)

$

41

$ 14,080

Adjustments to adopt new accounting guidance3

 

 

 

 

 

 

 

Lease accounting............................

-

-

235

-

 

-

235

Reclassification of certain tax effects from accumulated other

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

 

 

(108)

108

 

 

 

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

5,827

(20,531)

30,554

(1,576)

 

41

14,315

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

-

-

4,995

-

 

2

4,997

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

-

-

-

(186)

 

-

(186)

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

-

-

-

(22)

 

-

(22)

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

-

-

-

(33)

 

-

(33)

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

-

-

-

34

 

-

34

Dividends declared 1

-

-

(1,074)

-

 

-

(1,074)

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

 

 

 

 

 

(2)

(2)

Common shares issued from treasury stock for stock-based

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

(62)

121

 

 

 

 

59

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

170

-

-

-

 

-

170

Common shares repurchased: 25,792,061 2

-

(3,283)

-

-

 

-

(3,283)

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

16

-

2

-

 

-

18

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

$ 5,951

$ (23,693)

$ 34,477

$ (1,783)

$

41

$ 14,993

 

1 Dividends per share of common stock of $1.89 and $1.64 were declared in the nine months ended September 30, 2019 and 2018, respectively.

2 See Note 12 for additional information.

3 See Note 2 for additional information.

See accompanying notes to Consolidated Financial Statements.

 

9

 

Table of Contents

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

 

Nine Months Ended
September 30

2019 2018

Cash flow from operating activities:

 

 

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

$ 4,997

$ 5,099

Adjustments for non-cash items:

 

 

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

1,933

2,065

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

627

630

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

 

 

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

427

(725)

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

(676)

(1,822)

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

(669)

496

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

114

(32)

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

(858)

(418)

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

169

59

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

3

394

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

(1,589)

(1,271)

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

4,478

4,475

Cash flow from investing activities:

 

 

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

(723)

(921)

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

(1,133)

(1,208)

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

812

732

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

(9,453)

(9,092)

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

9,144

8,032

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

183

416

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

(6)

(357)

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

3

14

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

281

363

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

(425)

(417)

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

(37)

24

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

(1,354)

(2,414)

Cash flow from financing activities:

 

 

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

(1,564)

(1,444)

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

59

292

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

(3,283)

(2,000)

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

 

 

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

1,479

47

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

7,348

7,026

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

 

 

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

(8)

(6)

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

(6,054)

(5,636)

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

(1,006)

(465)

Other - net

(2)

(32)

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

(3,031)

(2,218)

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

(47)

(117)

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

46

(274)

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

7,890

8,320

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

$ 7,936

$ 8,046

 

All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents.

See accompanying notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. A. Nature of operations

Information in our financial statements and related commentary are presented in the following categories:

Machinery, Energy & Transportation (ME&T) - Represents the aggregate total of Construction Industries, Resource Industries, Energy & Transportation and the All Other operating segment and related corporate items and eliminations.

Financial Products - Primarily includes the company's Financial Products Segment. This category includes Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings Inc. (Insurance Services) and their respective subsidiaries.

B. Basis of presentation

In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated results of operations for the three and nine months ended September 30, 2019 and 2018, (b) the consolidated comprehensive income for the three and nine months ended September 30, 2019 and 2018, (c) the consolidated financial position at September 30, 2019 and December 31, 2018, (d) the consolidated changes in shareholders' equity for the three and nine months ended September 30, 2019 and 2018 and (e) the consolidated cash flow for the nine months ended September 30, 2019 and 2018. The financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our company's annual report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K).

The December 31, 2018 financial position data included herein is derived from the audited consolidated financial statements included in the 2018 Form 10-K but does not include all disclosures required by U.S. GAAP. Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation.

Unconsolidated Variable Interest Entities (VIEs)

We have affiliates, suppliers and dealers that are VIEs of which we are not the primary beneficiary. Although we have provided financial support, we do not have the power to direct the activities that most significantly impact the economic performance of each entity. Our maximum exposure to loss from VIEs for which we are not the primary beneficiary was $138 million and $131 million as of September 30, 2019 and December 31, 2018, respectively.

In addition, Cat Financial has end-user customers that are VIEs of which we are not the primary beneficiary. Although we have provided financial support to these entities and therefore have a variable interest, we do not have the power to direct the activities that most significantly impact their economic performance. Our maximum exposure to loss from our involvement with these VIEs is limited to the credit risk inherently present in the financial support that we have provided. These risks are evaluated and reflected in our financial statements as part of our overall portfolio of finance receivables and related allowance for credit losses.

 

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2. New accounting guidance

A. Adoption of new accounting standards

Lease accounting (Accounting Standards Update (ASU) 2016-02) - In February 2016, the Financial Accounting Standards Board (FASB) issued accounting guidance that revises the accounting for leases. Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability for substantially all leases. The new guidance will continue to classify leases as either financing or operating, with classification affecting the pattern of expense recognition. The accounting applied by a lessor under the new guidance will be substantially equivalent to current lease accounting guidance. The new guidance was effective January 1, 2019 and was applied using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of January 1, 2019. The prior period comparative information has not been recasted and continues to be reported under the accounting guidance in effect for those periods.

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

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

In March 2019, the FASB issued Leases - Codification improvements (ASU 2019-01) which amended the new leasing guidance. Under these amendments, lessors that are not manufacturers or dealers will use their cost, less any discounts that may apply, as the fair value of the underlying asset, and lessors within the scope of Financial Services-Depository and Lending guidance will present all principal payments received under leases within investment activities on the statement of cash flows. We adopted the new guidance effective January 1, 2019, and the adoption did not have a material impact to our financial statements.

See Note 10 for additional information.

 

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The cumulative effect of initially applying the new lease guidance to our consolidated financial statements on January

1, 2019 was as follows:

 

 

 

Consolidated Statement of Financial Position

 

 

 

 

 

Cumulative

 

 

Balance as of

Impact from

 

 

December 31,

Adopting New

Balance as of

(Millions of dollars)

2018

Lease Guidance

January 1, 2019

Assets

 

 

 

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

$ 1,765

$ (17)

$ 1,748

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

$ 13,574

$ (26)

$ 13,548

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

$ 1,439

$ (77)

$ 1,362

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

$ 2,332

$ 713

$ 3,045

Liabilities

 

 

 

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

$ 3,573

$ (27)

$ 3,546

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

$ 1,919

$ 209

$ 2,128

Long-term debt due after one year.......................

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

$ 8,005

$ (362)

$ 7,643

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

$ 3,756

$ 538

$ 4,294

Shareholders' equity

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

$ 30,427

$ 235

$ 30,662

We adopted the following ASUs effective January 1, 2019, none of which had a material impact on our financial statements:

ASU Description

2017-08 Premium amortization on purchased callable debt securities

2017-12 Derivatives and hedging - Targeted improvements

2018-02 Reclassification of certain tax effects from accumulated other comprehensive income B. Accounting standards issued but not yet adopted

Credit losses (ASU 2016-13) - In June 2016, the FASB issued accounting guidance to introduce a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new guidance will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. The new guidance will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. We will adopt the new guidance effective January 1, 2020. An implementation team is continuing to work on the design of new processes and controls as well as assessing the effects of the new guidance. While we are still evaluating the impact of the new guidance, we do not expect a material impact to our financial statements.

We consider the applicability and impact of all ASUs. ASUs not listed above were assessed and either determined to be not applicable or 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. Wholesale inventory receivables are included in Receivables - trade and other and Long-term receivables - trade and other in the Consolidated Statement of Financial Position. Trade receivables from dealers and end users were $7,156 million and $7,743 million as of September 30, 2019 and December 31, 2018, respectively, and are recognized in Receivables - trade and other in the Consolidated Statement of Financial Position. Long-term trade receivables from dealers and end users were $670 million and $674 million as of September 30, 2019 and December 31, 2018, respectively, and are recognized in Long-term receivables - trade and other in the Consolidated Statement of Financial Position.

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We invoice in advance of recognizing the sale of certain products. We recognize advanced customer payments as a contract liability in Customer advances and Other liabilities in the Consolidated Statement of Financial Position. Long­term customer advances recognized in Other Liabilities in the Consolidated Statement of Financial Position were $519 million and $437 million as of September 30, 2019 and December 31, 2018, respectively. We reduce the contract liability when revenue is recognized. During the three and nine months ended September 30, 2019, we recognized $101 million and $976 million, respectively, of revenue that was recorded as a contract liability at the beginning of 2019.

As of September 30, 2019, we have entered into contracts with dealers and end users for which sales have not been recognized as we have not satisfied our performance obligations and transferred control of the products. The dollar amount of unsatisfied performance obligations for contracts with an original duration greater than one year is $6.1 billion, of which $2.4 billion is expected to be completed and revenue recognized in the twelve months following September 30, 2019. 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).

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

We recognized pretax stock-based compensation expense of $57 million and $170 million for the three and nine months ended September 30, 2019, respectively, and $52 million and $164 million for the three and nine months ended September 30, 2018, respectively.

The following table illustrates the type and fair value of the stock-based compensation awards granted during the nine months ended September 30, 2019 and 2018, respectively:

 

Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018

Weighted- Weighted- Weighted- Weighted-

Average Fair Average Grant Average Fair Average Grant

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

 

Stock options               1,499,524 $              40.98 $              138.35              1,605,220 $              46.11 $              150.90

RSUs               657,389 $              138.35 $              138.35              722,521 $              150.64 $              150.64

PRSUs               342,097 $              138.35 $              138.35              344,866 $              150.93 $              150.93

 

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The following table provides the assumptions used in determining the fair value of the stock-based awards for the nine months ended September 30, 2019 and 2018, respectively:

 

 

Grant Year

2019 2018

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

2.56%

2.70%

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

29.1%

30.2%

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

25.1-38.7%

21.5-33.0%

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

2.48-2.68%

2.02-2.87%

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

7 years

8 years

 

As of September 30, 2019, the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $201 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 1.6 years.

5. Derivative financial instruments and risk management

Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward, option and cross currency contracts, interest rate contracts and commodity forward and option contracts. Our derivative activities are subject to the management, direction and control of our senior financial officers. Risk management practices, including the use of financial derivative instruments, are presented to the Audit Committee of the Board of Directors at least annually.

All derivatives are recognized on the Consolidated Statement of Financial Position at their fair value. On the date the derivative contract is entered into, we designate the derivative as (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flow (cash flow hedge) or (3) an undesignated instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk, are recorded in current earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in Accumulated other comprehensive income (loss) (AOCI), to the extent effective, on the Consolidated Statement of Financial Position until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of undesignated derivative instruments are reported in current earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged on the Consolidated Statement of Cash Flow. Cash flows from undesignated derivative financial instruments are included in the investing category on the Consolidated Statement of Cash Flow.

We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Consolidated Statement of Financial Position and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

We also formally assess, both at the hedge's inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items. When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, we discontinue hedge accounting prospectively, in accordance with the derecognition criteria for hedge accounting.

Foreign Currency Exchange Rate Risk

Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies. Movements in foreign currency rates also affect our competitive position as these changes may affect business practices and/or pricing strategies of non-U.S.-based competitors. Additionally, we have balance sheet positions denominated in foreign currencies, thereby creating exposure to movements in exchange rates.

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Our Machinery, Energy & Transportation operations purchase, manufacture and sell products in many locations around the world. As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to five years. As of September 30, 2019, the maximum term of these outstanding contracts was approximately 51 months.

We generally designate as cash flow hedges at inception of the contract any Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, Indian rupee, Japanese yen, Mexican peso, Singapore dollar or Thailand baht forward or option contracts that meet the requirements for hedge accounting and the maturity extends beyond the current quarter-end. Designation is performed on a specific exposure basis to support hedge accounting. The remainder of Machinery, Energy & Transportation foreign currency contracts are undesignated.

As of September 30, 2019, $10 million of deferred net losses, net of tax, included in equity (AOCI in the Consolidated Statement of Financial Position), are expected to be reclassified to current earnings (Other income (expense) in the Consolidated Statement of Results of Operations) over the next twelve months when earnings are affected by the hedged transactions. The actual amount recorded in Other income (expense) will vary based on exchange rates at the time the hedged transactions impact earnings.

In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions and future transactions denominated in foreign currencies. Our policy allows the use of foreign currency forward, option and cross currency contracts to offset the risk of currency mismatch between our assets and liabilities and exchange rate risk associated with future transactions denominated in foreign currencies. Our foreign currency forward and option contracts are primarily undesignated. We designate fixed-to-fixed cross currency contracts as cash flow hedges to protect against movements in exchange rates on foreign currency fixed-rate assets and liabilities.

Interest Rate Risk

Interest rate movements create a degree of risk by affecting the amount of our interest payments and the value of our fixed-rate debt. Our practice is to use interest rate contracts to manage our exposure to interest rate changes.

Our Machinery, Energy & Transportation operations generally use fixed-rate debt as a source of funding. Our objective is to minimize the cost of borrowed funds. Our policy allows us to enter into fixed-to-floating interest rate contracts and forward rate agreements to meet that objective. We designate fixed-to-floating interest rate contracts as fair value hedges at inception of the contract, and we designate certain forward rate agreements as cash flow hedges at inception of the contract.

Financial Products operations has a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate) of Cat Financial's debt portfolio with the interest rate profile of 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 Machinery, Energy & Transportation and Financial Products. The gains or losses associated with these contracts at the time of liquidation are amortized into earnings over the original term of the previously designated hedged item.

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Commodity Price Risk

Commodity price movements create a degree of risk by affecting the price we must pay for certain raw material. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials.

Our Machinery, Energy & Transportation operations purchase base and precious metals embedded in the components we purchase from suppliers. Our suppliers pass on to us price changes in the commodity portion of the component cost. In addition, we are subject to price changes on energy products such as natural gas and diesel fuel purchased for operational use.

Our objective is to minimize volatility in the price of these commodities. Our policy allows us to enter into commodity forward and option contracts to lock in the purchase price of a portion of these commodities within a five-year horizon. All such commodity forward and option contracts are undesignated.

The location and fair value of derivative instruments reported in the Consolidated Statement of Financial Position are as follows:

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

Position Location September 30, 2019 December 31, 2018

 

Designated derivatives
Foreign exchange contracts

 

 

 

 

 

Machinery, Energy & Transportation.....

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

$

23

$

16

Machinery, Energy & Transportation.....

Long-term receivables - trade and other

 

1

 

-

Machinery, Energy & Transportation.....

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

 

(35)

 

(26)

Machinery, Energy & Transportation.....

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

 

-

 

(9)

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

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

 

59

 

53

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

Long-term receivables - trade and other

 

59

 

35

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

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

 

(6)

 

(9)

Interest rate contracts

 

 

 

 

 

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

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

 

-

 

1

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

Long-term receivables - trade and other

 

7

 

3

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

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

 

(61)

 

(40)

 

 

$

47

$

24

Undesignated derivatives

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

Machinery, Energy & Transportation.....

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

$

2

$

2

Machinery, Energy & Transportation.....

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

 

(1)

 

(21)

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

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

 

22

 

15

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

Long-term receivables - trade and other

 

6

 

5

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

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

 

(14)

 

(14)

Commodity contracts

 

 

 

 

 

Machinery, Energy & Transportation.....

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

 

2

 

1

Machinery, Energy & Transportation.....

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

 

(9)

 

(31)

 

 

$

8

$

(43)

 

 

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

(Millions of dollars) September 30, 2019 December 31, 2018

 

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

$

2,177

$

1,834

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

$

8,639

$

10,210

 

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

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

Cash Flow Hedges

Three Months Ended September 30, 2019

(Millions of dollars)

Foreign exchange contracts

Machinery, Energy & Transportation

Amount of
Gains
(Losses)
Recognized
in AOCI

Recognized in Earnings

 

 

Classification of
Gains (Losses)

Amount of
Gains
(Losses)
Reclassified
from AOCI

Amount of the line items
in the Consolidated
Statement of Results of
Operations containing
hedging gains (losses)

  $ (13)

 

 

 

 

 

 

 

Sales of Machinery, Energy & Transportation 

$

3

$

11,974

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

100

 

 

 

 

 

 

 

Interest expense of Financial Products ...

 

9

$

189

 

 

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

 

89

$

88

Interest rate contracts

 

 

 

 

 

 

Machinery, Energy & Transportation

 

-Interest

expense excluding Financial

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

 

  1.                 

$

103

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

(12)

Interest expense of Financial Products ...

 

  1.                 

$

189

 

$ 75 $ 96

Three Months Ended September 30, 2018

Recognized in Earnings

 

Foreign exchange contracts

Amount of Gains
(Losses) Recognized
in AOCI
(Effective Portion)

Classification of
Gains (Losses)

 

Amount of
Gains
(Losses)
Reclassified
from AOCI

Recognized in
Earnings
(Ineffective
Portion)

 

 

 

 

 

 

Machinery, Energy & Transportation.

$

(15)

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

$

(17)

$

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

 

53

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

 

51

 

 

 

 

Interest expense of Financial Products ..

 

5

 

Interest rate contracts

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

 

3

Interest expense of Financial Products ....

 

 

 

 

$

41

 

$

39

$

 

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Cash Flow Hedges

Nine Months Ended September 30, 2019

(Millions of dollars)

Foreign exchange contracts

Machinery, Energy & Transportation

Amount of
Gains
(Losses)
Recognized
in AOCI

Recognized in Earnings

 

 

Classification of
Gains (Losses)

Amount of
Gains
(Losses)
Reclassified
from AOCI

Amount of the line items
in the Consolidated
Statement of Results of
Operations containing
hedging gains (losses)

  $ 8

 

 

 

 

 

 

 

Sales of Machinery, Energy & Transportation 

$

4

$

38,369

 

 

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

 

(4)

$

27,513

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

132

 

 

 

 

 

 

 

Interest expense of Financial Products ...

 

23

$

571

 

 

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

 

91

$

316

Interest rate contracts

 

 

 

 

 

 

Machinery, Energy & Transportation

 

-Interest

expense excluding Financial

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

 

(3)

$

309

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

(72)

Interest expense of Financial Products ...

 

(2)

$

571

$ 68 $ 109

Nine Months Ended September 30, 2018

Recognized in Earnings

 

Foreign exchange contracts

Amount of Gains
(Losses) Recognized
in AOCI
(Effective Portion)

Classification of
Gains (Losses)

 

Amount of
Gains
(Losses)
Reclassified
from AOCI

Recognized in
Earnings
(Ineffective
Portion)

 

 

 

 

 

 

Machinery, Energy & Transportation.

$

(55)

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

$

(12)

$

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

 

143

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

 

141

 

 

 

 

Interest expense of Financial Products ..

 

13

 

Interest rate contracts

 

 

 

 

 

 

Machinery, Energy & Transportation.

 

 

-Interest

expense excluding Financial

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

 

(2)

 

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

 

8

Interest expense of Financial Products ....

 

1

 

 

$

96

 

$

141

$

 

 

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

(Millions of dollars) Three Months Ended Three Months Ended

Classification of Gains (Losses) September 30, 2019 September 30, 2018

Foreign exchange contracts

Machinery, Energy & Transportation...... Other income (expense)............ $ (1) $ (5)

Financial Products.................. Other income (expense) ..........................15 13
Commodity contracts

Machinery, Energy & Transportation...... Other income (expense) ..........................(6) (5)

$ 8 $ 3

 

Foreign exchange contracts

Classification of Gains (Losses)

 

Nine Months Ended September 30, 2019

 

Nine Months Ended September 30, 2018

 

 

 

 

 

Machinery, Energy & Transportation......

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

$

12

$

(43)

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

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

 

(24)

 

29

Commodity contracts

Machinery, Energy & Transportation......

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

 

10

 

(5)

 

 

$

(2)

$

(19)

 

We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within Machinery, Energy & Transportation and Financial Products that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.

Collateral is generally not required of the counterparties or of our company under the master netting agreements. As of September 30, 2019 and December 31, 2018, no cash collateral was received or pledged under the master netting agreements.

 

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The effect of the net settlement provisions of the master netting agreements on our derivative balances upon an event of default or termination event is as follows:

 

 

 

 

 

Gross Amounts Not Offset in
the Statement of Financial

 

September 30, 2019

 

 

 

Position

 

 

 

Gross Amounts

Net Amount of

 

 

 

Gross

Offset in the

Assets Presented

 

 

(Millions of dollars)

Amount of

Statement of

in the Statement

Cash

Net

 

Recognized

Financial

of Financial

Financial Collateral

Amount of

 

Assets

Position

Position

Instruments Received

Assets

Derivatives

 

 

 

 

 

Machinery, Energy &

Transportation.......

Financial Products......

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

September 30, 2019

(Millions of dollars)

Derivatives

$ 28

153

$ - $ 28

-153

$ (25) $ - $ 3

(39) -114

$ 181

$ - $ 181

$ (64) $ - $ 117

Gross Amount of Recognized Liabilities

Gross Amounts
Offset in the
Statement of

Financial

Position

Net Amount of
Liabilities
Presented in the
Statement of
Financial
Position

Gross Amounts Not Offset in
the Statement of Financial
Position

Net

Amount of
Liabilities

Cash

Financial Collateral

Instruments Pledged

 

 

 

 

 

Machinery, Energy &

Transportation........

$ (45) $

- $

(45) $

25

$ - $ (20)

Financial Products........

(81)

-(81)

 

39

-(42)

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

$ (126) $

- $

(126) $

64

$ - $ (62)

                             

 

 

 

 

 

Gross Amounts Not Offset in
the Statement of Financial

 

December 31, 2018

 

 

 

Position

 

 

 

Gross Amounts

Net Amount of

 

 

 

Gross

Offset in the

Assets Presented

 

 

(Millions of dollars)

Amount of

Statement of

in the Statement

Cash

Net

 

Recognized

Financial

of Financial

Financial Collateral

Amount of

 

Assets

Position

Position

Instruments Received

Assets

Derivatives

 

 

 

 

 

Machinery, Energy &

Transportation.......

Financial Products......

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

December 31, 2018

(Millions of dollars)

Derivatives

$ 19

112

$ - $ 19

-112

$ (19) $ - $ -

(34) -78

$ 131

$ - $ 131

$ (53) $ - $ 78

Gross Amount of Recognized Liabilities

Gross Amounts
Offset in the
Statement of

Financial

Position

Net Amount of
Liabilities
Presented in the
Statement of
Financial
Position

Gross Amounts Not Offset in
the Statement of Financial
Position

Net

Amount of
Liabilities

Cash

Financial Collateral

Instruments Pledged

 

 

 

 

 

Machinery, Energy &

 

 

 

 

 

Transportation.........

$ (87) $

- $

(87) $

19

$ - $ (68)

Financial Products........

(63)

-(63)

 

34

-(29)

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

$ (150) $

- $

(150) $

53

$ - $ (97)

                             

 

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  1.               Inventories

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

 

(Millions of dollars)

September 30,

2019

 

December 31,

2018

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

4,424

$

4,477

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

1,335

 

1,259

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

6,177

 

5,562

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

244

 

231

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

12,180

$

11,529

 

During the third quarter of 2019, changes were made to the classification of inventories primarily related to purchased parts between Raw materials, Work-in-process and Finished goods. The prior year amounts have been retrospectively adjusted to conform to the current-year classification.

  1.               Intangible assets and goodwill

A. Intangible assets

Intangible assets are comprised of the following:

 

 

 

September 30, 2019

 

(Millions of dollars)

Weighted

Gross

 

 

 

Amortizable

Carrying

Accumulated

 

 

Life (Years)

Amount

Amortization

Net

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

15

$ 2,426

$ (1,352)

$ 1,074

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

12

1,500

(1,015)

485

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

13

190

(119)

71

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

14

$ 4,116

$ (2,486)

$ 1,630

 

December 31, 2018

 

Weighted
Amortizable
Life (Years)

Gross
Carrying
Amount

Accumulated Amortization

Net

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

15

$ 2,463

$ (1,249)

$ 1,214

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

11

1,557

(965)

592

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

13

199

(108)

91

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

14

$ 4,219

$ (2,322)

$ 1,897

 

Amortization expense for the three and nine months ended September 30, 2019 was $81 million and $244 million, respectively. Amortization expense for the three and nine months ended September 30, 2018 was $82 million and $248 million, respectively. Amortization expense related to intangible assets is expected to be:

(Millions of dollars)

Remaining Three Months of 2019

2020

2021

2022

2023

Thereafter

$80

$307

$289

$271

$214

$469

 

B. Goodwill

No goodwill was impaired during the nine months ended September 30, 2019 or 2018.

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The changes in carrying amount of goodwill by reportable segment for the nine months ended September 30, 2019 were as follows:

 

(Millions of dollars)

 

December 31,

Other

September 30,

 

 

2018

Adjustments 1

2019

Construction Industries

 

 

 

 

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

$

304

$ 2

$ 306

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

 

(22)

 

(22)

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

 

282

2

284

Resource Industries

 

 

 

 

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

 

4,172

(50)

4,122

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

 

(1,175)

 

(1,175)

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

 

2,997

(50)

2,947

Energy & Transportation

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

 

2,882

(28)

2,854

All Other 2

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

 

56

1

57

Consolidated total

 

 

 

 

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

 

7,414

(75)

7,339

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

 

(1,197)

 

(1,197)

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

$

6,217

$ (75)

$ 6,142

 

1 Other adjustments are comprised primarily of foreign currency translation.

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

8. Investments in debt and equity securities

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

Debt securities have been classified as available-for-sale, and the unrealized gains and losses arising from the revaluation of these debt securities are included, net of applicable deferred income taxes, in equity (Accumulated other comprehensive income (loss) in the Consolidated Statement of Financial Position). The unrealized gains and losses arising from the revaluation of the equity securities are included in Other income (expense) in the Consolidated Statement of Results of Operations. Realized gains and losses on sales of investments are generally determined using the specific identification method for debt and equity securities and are included in Other income (expense) in the Consolidated Statement of Results of Operations.

 

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

September 30, 2019 December 31, 2018

 

 

Government debt

 

 

 

 

 

 

 

 

 

 

 

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

$ 9

$ - $ 9

$ 9

$ - $ 9

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

47

1

48

42

-

42

Corporate bonds

 

 

 

 

 

 

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

823

17

840

735

(15)

720

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

53

 

53

63

 

63

Mortgage-backed debt securities

 

 

 

 

 

 

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

326

5

331

301

(4)

297

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

6

 

6

7

-

7

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

40

1

41

14

(1)

13

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

$ 1,304

$ 24

$ 1,328

$ 1,171

$ (20)

$ 1,151

                                   

 

Available-for-sale investments in an unrealized loss position that are not other-than-temporarily impaired:

September 30, 2019

Less than 12 months 1 12 months or more 1 Total

Fair

(Millions of dollars) Unrealized Fair Unrealized Fair Unrealized

Value Losses Value Losses Value Losses

Corporate bonds

Corporate bonds............... $ 33 $ 1 $ 29 $ 1 $ 62 $ 2

Total....................... $ 33 $ 1 $ 29 $ 1 $ 62 $ 2

December 31, 2018

Less than 12 months 1 12 months or more 1 Total

Fair

(Millions of dollars) Unrealized Fair Unrealized Fair Unrealized

Value Losses Value Losses Value Losses

Corporate bonds

Corporate bonds................ $ 280 $ 3 $ 391 $ 11 $ 671 $ 14

Asset-backed securities ..................6 - 38 1 44 1
Mortgage-backed debt securities

U.S. governmental agency ................52 - 223 5 275 5
Commercial

Total....................... $ 338 $ 3 $ 666 $ 18 $ 1,004 $ 21

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

 

Corporate Bonds. The unrealized losses on our investments in corporate bonds relate to changes in interest rates and credit-related yield spreads since time of purchase. We do not intend to sell the investments, and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of September 30, 2019.

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The cost basis and fair value of the available-for-sale debt securities at September 30, 2019, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.

 

September 30, 2019

(Millions of dollars) Cost Basis Fair Value

Due in one year or less................................................. $ 74 $ 73

Due after one year through five years ...............................................703 716

Due after five years through ten years ...............................................137 142

Due after ten years ............................................................18 19

U.S. governmental agency mortgage-backed securities ...................................326 331

Residential mortgage-backed securities ...............................................6 6

Commercial mortgage-backed securities ..............................................40 41

Total debt securities - available-for-sale.................................... $ 1,304 $ 1,328

Sales of available-for-sale securities:

Three Months Ended Nine Months Ended

September 30 September 30

 

(Millions of dollars) 2019 2018 2019 2018

Proceeds from the sale of available-for-sale securities........ $ 92 $ 41 $ 237 $ 181

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

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

For the three and nine months ended September 30, 2019, the net unrealized gains (losses) for equity securities held at September 30, 2019 were $2 million and $54 million, respectively. For the three and nine months ended September 30, 2018, the net unrealized gains (losses) for equity securities held at September 30, 2018 were $18 million and $20 million, respectively.

 

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Table of Contents

9. Postretirement benefits

A. Pension and postretirement benefit costs

 

 

 

 

 

 

 

U.S. Pension
Benefits

Non-U.S. Pension
Benefits

Other

Postretirement
Benefits

(Millions of dollars)

September 30

September 30

September 30

 

2019

2018

2019

2018

2019

2018

For the three months ended:

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

Service cost................................

$ 29

$ 31

$ 20

$ 22

$ 19

$ 22

Interest cost................................

150

134

23

25

34

31

Expected return on plan assets....................

(180)

(202)

(37)

(55)

(4)

(9)

Amortization of prior service cost (credit)............

-

-

-

-

(10)

(9)

Net periodic benefit cost (benefit) 1

 .................................................$ (1)

 

$ (37)

$ 6

$ (8)

$ 39

$ 35

For the nine months ended:

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

Service cost................................

$ 86

$ 94

$ 61

$ 67

$ 60

$ 64

Interest cost................................

450

401

70

74

102

93

Expected return on plan assets....................

(540)

(607)

(112)

(167)

(14)

  1.             

Amortization of prior service cost (credit)............

-

-

-

-

(30)

  1.  

Net periodic benefit cost (benefit) 1

 .................................................$ (4)

 

$ (112)

$ 19

$ (26)

$ 118

$ 106

 

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 $1,573 million and $1,771 million of contributions to our pension and other postretirement plans during the three and nine months ended September 30, 2019, respectively. The 2019 contributions include a $1.5 billion discretionary U.S. pension plan contribution made in September 2019. We currently anticipate full-year 2019 contributions of approximately $1,830 million.

B. Defined contribution benefit costs

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

 

(Millions of dollars)

 

Three Months Ended September 30

Nine Months Ended
September 30

 

2019

2018

2019

2018

U.S. Plans....................................

$

68

$ 97

$ 298

$ 247

Non-U.S. Plans................................

 

22

21

64

64

 

$

90

$ 118

$ 362

$ 311

 

 

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10. Leases

A. Lessee arrangements

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

Our finance leases are not significant and therefore are not included in the following disclosures. The components of lease costs were as follows:

(Millions of dollars)

Three Months Ended Nine Months Ended

September 30 September 30

2019

Operating lease cost........................................ $ 59 $ 177

Short-term lease cost........................................ $ 11 $ 43

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

Supplemental information related to leases was as follows:

(Millions of dollars)

September 30, 2019 January 1, 2019

Operating Leases

Other assets............................................... $ 632 $ 713

Other current liabilities....................................... $ 178 $ 209

Other liabilities............................................ $ 462 $ 511

Weighted average remaining lease term

Operating leases ......................................................7 years 7 years

Weighted average discount rates

Operating leases ........................................................2% 2%

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Table of Contents

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

 

(Millions of dollars)
Amounts Due In

 

September 30, 2019

 

 

Remaining three months of 2019...........................................

$

47

2020..............................................................

 

165

2021..............................................................

 

124

2022..............................................................

 

77

2023..............................................................

 

59

Thereafter..........................................................

 

205

Total lease payments...................................................

 

677

Less: Imputed interest..................................................

 

(37)

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

$

640

 

 

December 31, 2018

Amounts Due In

 

 

2019..............................................................

$

205

2020..............................................................

 

154

2021..............................................................

 

111

2022..............................................................

 

67

2023..............................................................

 

50

Thereafter..........................................................

 

185

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

$

772

 

Supplemental cash flow information related to leases was as follows:

(Millions of dollars)

Nine Months Ended September 30

2019

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases..................................... $ 170
Right-of-use assets obtained in exchange for lease obligations:

Operating leases....................................................... $ 87

B. Lessor arrangements

We lease Caterpillar machinery, engines and other equipment to customers and dealers around the world, primarily through Cat Financial. Cat Financial leases to customers primarily through sales-type (non-tax) leases, where the lessee for tax purposes is considered to be the owner of the equipment during the term of the lease. Cat Financial also offers tax leases that are classified as either operating or direct finance leases for financial accounting purposes, depending on the characteristics of the lease. For tax purposes, Cat Financial is considered the owner of the equipment. Our lease agreements may include options for the lessee to purchase the underlying asset at the end of the lease term for either a stated fixed price or fair market value.

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Table of Contents

 

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

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

 

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Table of Contents

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

 

(Millions of dollars)

 

 

September 30, 2019

 

 

 

 

Retail

Wholesale

 

 

Amounts Due In

 

Leases 1

Leases 2

 

Total

Remaining three months of 2019......................

$

889

$ 30

$

919

2020........................................

 

2,798

59

 

2,857

2021........................................

 

1,733

43

 

1,776

2022........................................

 

857

27

 

884

2023........................................

 

366

17

 

383

Thereafter.....................................

 

176

25

 

201

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

 

6,819

201

 

7,020

Guaranteed residual value..........................

 

375

49

 

424

Unguaranteed residual value.........................

 

793

37

 

830

Less: Unearned income............................

 

(650)

(34)

 

(684)

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

$

7,337

$ 253

$

7,590

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

Retail

Wholesale

 

 

Amounts Due In

 

Leases 1

Leases 2

 

Total

2019........................................

$

2,981

$ 70

$

3,051

2020........................................

 

2,026

48

 

2,074

2021........................................

 

1,073

30

 

1,103

2022........................................

 

453

16

 

469

2023........................................

 

166

6

 

172

Thereafter.....................................

 

56

3

 

59

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

 

6,755

173

 

6,928

Guaranteed residual value..........................

 

392

66

 

458

Unguaranteed residual value.........................

 

822

35

 

857

Less: Unearned income............................

 

(628)

(16)

 

(644)

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

$

7,341

$ 258

$

7,599

 

1 Included in Receivables - finance and Long-term receivables - finance on the Consolidated Statement of Financial Position.

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

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

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

 

(Millions of dollars)

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

Equipment leased to others - at original cost.....................

$

6,313

$

6,015

Less: Accumulated depreciation.............................

 

(2,021)

 

(1,744)

Equipment leased to others - net.............................

$

4,292

$

4,271

 

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

(Millions of dollars)
September 30, 2019

Remaining Three

 

 

 

 

 

 

Months of 2019

2020

2021

2022

2023

Thereafter

Total

$276

$827

$486

$250

$117

$111

$2,067

December 31, 2018

 

 

 

 

 

 

2019

2020

2021

2022

2023

Thereafter

Total

$896

$574

$314

$158

$71

$69

$2,082

 

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

(Millions of dollars)

Three Months Ended Nine Months Ended

September 30 September 30

 

 

2019

 

 

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

$

136

$

390

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

 

317

 

941

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

$

453

$

1,331

 

Revenues are presented net of sales and other related taxes.

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.

Customer loan guarantees

We provide loan guarantees to third-party lenders for financing associated with machinery purchased by customers. These guarantees have varying terms and are secured by the machinery. In addition, Cat Financial participates in standby letters of credit issued to third parties on behalf of their customers. These standby letters of credit have varying terms and beneficiaries and are secured by customer assets.

 

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Supplier consortium performance guarantees

We have provided guarantees to a customer in Brazil and a customer in Europe related to the performance of contractual obligations by supplier consortiums to which our Caterpillar subsidiaries are members. The guarantees cover potential damages incurred by the customers resulting from the supplier consortiums' non-performance. The damages are capped except for failure of the consortiums to meet certain obligations outlined in the contract in the normal course of business. The guarantee for the customer in Europe will expire when the supplier consortium performs all of its contractual obligations, which are expected to be completed in 2022. The agreement with the customer in Brazil was terminated during the second quarter of 2019. No payments were made under the guarantee.

Third-party logistics business lease guarantees

We have provided guarantees to third-party lessors for certain properties leased by a third-party logistics business, formerly Caterpillar Logistics Services LLC, in which we sold our equity interest in 2015. The guarantees are for the possibility that the third-party logistics business would default on real estate lease payments. The guarantees were granted at lease inception and generally will expire at the end of the lease terms.

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 September 30, 2019 and December 31, 2018, the related liability was $6 million and $8 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 are as follows:

 

(Millions of dollars)

September 30,

2019

 

December 31,

2018

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

1,275

$

1,244

Customer loan guarantees......................................

11

 

31

Supplier consortium performance guarantees..........................

239

 

527

Third party logistics business lease guarantees.........................

54

 

60

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

130

 

116

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

1,709

$

1,978

 

Cat Financial provides guarantees to repurchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a variable interest entity. The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers. This SPC issues commercial paper and uses the proceeds to fund its loan program. Cat Financial has a loan purchase agreement with the SPC that obligates Cat Financial to purchase certain loans that are not paid at maturity. Cat Financial receives a fee for providing this guarantee, which provides a source of liquidity for the SPC. Cat Financial is the primary beneficiary of the SPC as its guarantees result in Cat Financial having both the power to direct the activities that most significantly impact the SPC's economic performance and the obligation to absorb losses, and therefore Cat Financial has consolidated the financial statements of the SPC. As of September 30, 2019 and December 31, 2018, the SPC's assets of $1,387 million and $1,149 million, respectively, were primarily comprised of loans to dealers, and the SPC's liabilities of $1,386 million and $1,148 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.

Our product warranty liability is determined by applying historical claim rate experience to the current field population and dealer inventory. Generally, historical claim rates are based on actual warranty experience for each product by machine model/engine size by customer or dealer location (inside or outside North America). Specific rates are developed for each product shipment month and are updated monthly based on actual warranty claim experience.

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(Millions of dollars) 2019

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

Reduction in liability (payments) .............................................................(667)

Increase in liability (new warranties) ...........................................................759

Warranty liability, September 30..................................................... $ 1,483

(Millions of dollars) 2018

Warranty liability, January 1......................................................... $ 1,419

Reduction in liability (payments) ............................................................(783)

Increase in liability (new warranties) ...........................................................755

Warranty liability, December 31...................................................... $ 1,391

12. Profit per share

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

September 30 September 30

(Dollars in millions except per share data) 2019 2018 2019 2018

Profit for the period (A) 1.................................... $ 1,494 $ 1,727 $ 4,995 $ 5,099

Determination of shares (in millions):

Weighted-average number of common shares outstanding (B)               556.3              592.1              565.2              595.3

Shares issuable on exercise of stock awards, net of shares assumed to be

purchased out of proceeds at average market price               4.9              7.3              5.6              8.5

Average common shares outstanding for fully diluted computation (C) 2 561.2 599.4              570.8 603.8

Profit per share of common stock:

Assuming no dilution (A/B)................................. $ 2.69 $ 2.92 $              8.84 $ 8.57

Assuming full dilution (A/C) 2............................... $ 2.66 $ 2.88 $              8.75 $ 8.45

Shares outstanding as of September 30 (in millions)               552.7              590.1

1 Profit attributable to common shareholders.

2 Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.

Stock options to purchase 2,962,190 and 1,471,071 common shares were outstanding for the three and nine months ended September 30, 2019 and 2018, respectively. These stock options were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

In July 2018, the Board approved a share repurchase authorization of up to $10.0 billion of Caterpillar common stock effective January 1, 2019, with no expiration (the 2018 Authorization). As of September 30, 2019, approximately $6.7 billion remained available under the 2018 Authorization.

For the three and nine months ended September 30, 2019, we repurchased 10.3 million and 25.8 million shares of our common stock, respectively, at an aggregate cost of $1.3 billion and $3.3 billion, respectively. These purchases were made through a combination of accelerated stock repurchase agreements with third-party financial institutions and open market transactions. For the three and nine months ended September 30, 2018, we repurchased 4.8 million and 12.8 million shares of our common stock, respectively, at an aggregate cost of $750 million and $2.0 billion, respectively.

 

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13. Accumulated other comprehensive income (loss)

Comprehensive income and its components are presented in the Consolidated Statement of Comprehensive Income. Changes in Accumulated other comprehensive income (loss), net of tax, included in the Consolidated Statement of Changes in Shareholders' Equity, consisted of the following:

 

(Millions of dollars)

Three Months Ended September 30, 2019

Foreign
currency
translation

Pension and
other
postretirement
benefits

Derivative
financial
instruments

Available-
for-sale
securities

Total

 

 

 

 

 

 

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

$ (1,426)

$

17

$ (105)

$ 15

$ (1,499)

Other comprehensive income (loss) before

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

(263)

 

-

59

4

(200)

Amounts reclassified from accumulated

other comprehensive (income) loss.....

 

 

(8)

(76)

 

(84)

Other comprehensive income (loss).....

(263)

 

(8)

(17)

4

(284)

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

$ (1,689)

$

9

$ (122)

$ 19

$ (1,783)

Three Months Ended September 30, 2018

 

 

 

 

 

 

Balance at June 30, 2018.............

$ (1,432)

$

30

$ (78)

$ (16)

$ (1,496)

Other comprehensive income (loss) before

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

(65)

 

 

32

(1)

(34)

Amounts reclassified from accumulated

other comprehensive (income) loss.....

-

 

(7)

(31)

 

(38)

Other comprehensive income (loss).....

(65)

 

(7)

1

(1)

(72)

Balance at September 30, 2018.........

$ (1,497)

$

23

$ (77)

$ (17)

$ (1,568)

 

 

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

 

Three Months Ended September 30

Classification of

(Millions of dollars) income (expense) 2019 2018

Pension and other postretirement benefits:

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

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

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

Derivative financial instruments:

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

Foreign exchange contracts.............. Other income (expense).... 89 34

Interest expense of

Foreign exchange contracts.............. Financial Products .....................9 5

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

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

Interest expense excluding

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

Interest expense of

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

-

-

 

 

Reclassifications before tax .................................................96 39

Tax (provision) benefit ....................................................(20) (8)

Reclassifications net of tax................................... $ 76 $ 31

Total reclassifications from Accumulated other comprehensive income (loss) .... $ 84 $ 38

 

 

 

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Nine Months Ended September 30

Classification of

(Millions of dollars) income (expense) 2019 2018

Foreign currency translation

Gain (loss) on foreign currency translation.. Other income (expense).... $ - $ (1)

Reclassifications net of tax................................... $ - $ (1)

Pension and other postretirement benefits:

Amortization of prior service credit (cost).... Other income (expense).... $ 30 $ 26

Tax (provision) benefit ....................................................(8) (5)

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

Derivative financial instruments:

Sales of Machinery,

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

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

Foreign exchange contracts.............. Other income (expense).... 91 129

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

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

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

Interest expense of

Financial Products ...................23 13

Interest expense excluding

Financial Products ...................(3) (2)

Interest expense of

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

 

 

 

 

 

Reclassifications before tax ................................................109 141

Tax (provision) benefit ...................................................(23) (32)

Reclassifications net of tax................................... $ 86 $ 109

Total reclassifications from Accumulated other comprehensive income (loss) .... $ 108 $ 129

 

 

 

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, the investigation, remediation, and operating and maintenance costs are accrued against our earnings. Costs are accrued based on consideration of currently available data and information with respect to each individual site, including available technologies, current applicable laws and regulations, and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. Where multiple potentially responsible parties are involved, we consider our proportionate share of the probable costs. In formulating the estimate of probable costs, we do not consider amounts expected to be recovered from insurance companies or others. We reassess these accrued amounts on a quarterly basis. The amount recorded for environmental remediation is not material and is included in Accrued expenses. We believe there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all the sites in the aggregate, will be required.

 

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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.

On March 20, 2014, Brazil's Administrative Council for Economic Defense (CADE) published a Technical Opinion which named 18 companies and over 100 individuals as defendants, including two subsidiaries of Caterpillar Inc., MGE - Equipamentos e Serviços Ferroviários Ltda. (MGE) and Caterpillar Brasil Ltda (CBL). The publication of the Technical Opinion opened CADE's official administrative investigation into allegations that the defendants participated in anticompetitive bid activity for the construction and maintenance of metro and train networks in Brazil. While companies cannot be held criminally liable for anticompetitive conduct in Brazil, criminal charges have been brought against one current employee of MGE and two former employees of MGE involving the same conduct alleged by CADE. On July 8, 2019, CADE found MGE, one of its current employees and two of its former employees liable for anticompetitive conduct. CBL was dismissed from the proceeding without any finding of liability. MGE intends to appeal CADE's findings. 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 nine months of 2019 reflected an estimated annual tax rate of 26 percent, compared with 24 percent for the first nine months of 2018, excluding the discrete items discussed in the following paragraph. The increase was largely driven by the application of U.S. tax reform provisions to the earnings of certain non-U.S. subsidiaries, which do not have a calendar fiscal year-end. These provisions did not apply to these subsidiaries in 2018.

As a result of final regulations received in 2019 providing additional guidance related to the calculation of the mandatory deemed repatriation of non-U.S. earnings due to U.S. tax reform, we recorded a discrete tax benefit of $178 million in the first nine months of 2019 to adjust unrecognized tax benefits. In addition, a discrete tax benefit of $28 million was recorded in the first nine months of 2019, compared with $52 million for the first nine months of 2018, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense.

The provision for income taxes for the first nine months of 2018 also included:

 

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  • a $154 million benefit to revise the estimated impact of the write-down of U.S. net deferred tax assets to reflect the reduction in the U.S. corporate tax rate from 35 percent to 21 percent. This benefit primarily related to the decision to make an additional discretionary pension contribution of $1.0 billion to U.S. pension plans in 2018 which was treated as deductible on the 2017 U.S. tax return.
  • a $59 million charge to correct for an error which resulted in an understatement of the valuation allowance offsetting deferred tax assets for prior years. Management has concluded that the error was not material to any period presented.
  • a $25 million benefit for the release of a valuation allowance against the deferred tax assets of a non-U.S. subsidiary.

On January 31, 2018, we received a Revenue Agent's Report from the Internal Revenue Service (IRS) indicating the end of the field examination of our U.S. income tax returns for 2010 to 2012. In the audits of 2007 to 2012 including the impact of a loss carryback to 2005, the IRS has proposed to tax in the United States profits earned from certain parts transactions by Caterpillar SARL (CSARL), based on the IRS examination team's application of the "substance-over-form" or "assignment-of-income" judicial doctrines. We are vigorously contesting the proposed increases to tax and penalties for these years of approximately $2.3 billion. We believe that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines. We have filed U.S. income tax returns on this same basis for years after 2012. Based on the information currently available, we do not anticipate a significant change to our unrecognized tax benefits for this position within the next 12 months. We currently believe the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.

16. Segment information

  1. Basis for segment information

Our Executive Office is comprised of a Chief Executive Officer (CEO), four Group Presidents, a Chief Financial Officer (CFO), a General Counsel & Corporate Secretary and a Chief Human Resources Officer. The Group Presidents and CFO are accountable for a related set of end-to-end businesses that they manage. The General Counsel & Corporate Secretary leads the Law, Security and Public Policy Division. The Chief Human Resources Officer leads the Human Resources Organization. The CEO allocates resources and manages performance at the Group President/CFO level. As such, the CEO serves as our Chief Operating Decision Maker, and operating segments are primarily based on the Group President/ CFO reporting structure.

Three of our operating segments, Construction Industries, Resource Industries and Energy & Transportation, are led by Group Presidents. One operating segment, Financial Products, is led by the CFO who also has responsibility for Corporate Services. Corporate Services is a cost center primarily responsible for the performance of certain support functions globally and to provide centralized services; it does not meet the definition of an operating segment. One Group President leads one smaller operating segment that is included in the All Other operating segment. The Law, Security and Public Policy Division and the Human Resources Organization are cost centers and do not meet the definition of an operating segment.

  1. Description of segments

We have five operating segments, of which four are reportable segments. Following is a brief description of our reportable segments and the business activities included in the All Other operating segment:

Construction Industries: A segment primarily responsible for supporting customers using machinery in infrastructure, forestry 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; forestry excavators; feller bunchers; harvesters; knuckleboom loaders; motor graders; pipelayers; road reclaimers; skidders; skid steer loaders; telehandlers; small and medium track-type tractors; track-type loaders; utility vehicles; wheel excavators; compact, small and medium wheel loaders; and related parts and work tools. Inter-segment sales are a source of revenue for this segment.

 

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Resource Industries: A segment primarily responsible for supporting customers using machinery in mining, quarry and aggregates, waste and material handling applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large track-type tractors, large mining trucks, hard rock vehicles, longwall miners, electric rope shovels, draglines, hydraulic shovels, rotary drills, large wheel loaders, off-highway trucks, articulated trucks, wheel tractor scrapers, wheel dozers, landfill compactors, soil compactors, hard rock continuous mining systems, select work tools, machinery components, electronics and control systems and related parts. In addition to equipment, Resource Industries also develops and sells technology products and services to provide customers fleet management, equipment management analytics and autonomous machine capabilities. Resource Industries also manages areas that provide services to other parts of the company, including integrated manufacturing and research and development. Inter-segment sales are a source of revenue for this segment.

Energy & Transportation: A segment primarily responsible for supporting customers using reciprocating engines, turbines, diesel-electric locomotives and related parts across industries serving Oil and Gas, Power Generation, Industrial and Transportation applications, including marine and rail-related businesses. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support of turbine machinery and integrated systems and solutions and turbine-related services; reciprocating engine-powered generator sets; integrated systems used in the electric power generation industry; reciprocating engines and integrated systems and solutions for the marine and oil and gas industries; reciprocating engines supplied to the industrial industry as well as Cat machinery; the remanufacturing of Caterpillar engines and components and remanufacturing services for other companies; the business strategy, product design, product management and development, manufacturing, remanufacturing, leasing and service of diesel-electric locomotives and components and other rail-related products and services; and product support of on-highway vocational trucks for North America. Inter-segment sales are a source of revenue for this segment.

Financial Products Segment: Provides financing alternatives to customers and dealers around the world for Caterpillar products, as well as financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The segment also provides insurance and risk management products and services that help customers and dealers manage their business risk. Insurance and risk management products offered include physical damage insurance, inventory protection plans, extended service coverage for machines and engines, and dealer property and casualty insurance. The various forms of financing, insurance and risk management products offered to customers and dealers help support the purchase and lease of our equipment. The segment also earns revenues from Machinery, Energy & Transportation, but the related costs are not allocated to operating segments.

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; 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:

  • Machinery, Energy & Transportation segment net assets generally include inventories, receivables, property, plant and equipment, goodwill, intangibles, accounts payable and customer advances. Beginning in 2019, operating lease right-of-use assets are included in segment assets. In 2018, the present value of future lease payments for certain Machinery, Energy and Transportation operating leases was included in segment assets while the estimated financing component of the lease payments was excluded. Liabilities other than accounts payable and customer advances are generally managed at the corporate level and are not included in segment operations. Financial Products Segment assets generally include all categories of assets.
  •                   Segment inventories and cost of sales are valued using a current cost methodology. 40
 

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  • Goodwill allocated to segments is amortized using a fixed amount based on a 20 year useful life. This methodology difference only impacts segment assets; no goodwill amortization expense is included in segment profit. In addition, only a portion of goodwill for certain acquisitions made in 2011 or later has been allocated to segments.
  • Currency exposures for Machinery, Energy & Transportation are generally managed at the corporate level and the effects of changes in exchange rates on results of operations within the year are not included in segment profit. 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 is reported as a methodology difference.
  • Stock-based compensation expense is not included 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.
  • Machinery, Energy & Transportation segment profit is determined on a pretax basis and excludes interest expense and most other income/expense items. Financial Products Segment profit is determined on a pretax basis and includes other income/expense items.

Reconciling items are created based on accounting differences between segment reporting and our consolidated external reporting. Please refer to pages 44 to 52 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. Beginning in 2019, only certain restructuring costs are excluded from segment profit. A table, Reconciliation of Restructuring costs on page 49, has been included to illustrate how segment profit would have been impacted by the restructuring costs. 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, certain costs are reported on the cash basis for segment reporting and the accrual basis for consolidated external reporting.
 

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Reportable Segments

Three Months Ended September 30
(Millions of dollars)

 

Construction Industries.....

Resource Industries.......

Energy & Transportation...

Machinery, Energy &

Transportation.......

Financial Products Segment.

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

 

 

 

2019

 

 

 

External
sales and
revenues

Inter-segment sales and revenues

Total sales
and
revenues

Depreciation
and

amortization

Segment
profit

Segment
assets at
September 30

Capital expenditures

$ 5,275

2,179

4,562

$ 14

132

890

$ 5,289

2,311

5,452

$ 80

106

158

$ 940

311

1,021

$ 5,226

6,396

8,779

$ 48

31

150

12,016

865

1,036

1 -

13,052

865

344

209

2,272

218

20,401

35,993

229

388

$ 12,881

$ 1,036

$ 13,917

$ 553

$ 2,490

$ 56,394

$ 617

 

 

 

2018

 

 

 

External
sales and
revenues

Inter-segment sales and revenues

Total sales
and
revenues

Depreciation
and

amortization

Segment
profit

Segment
assets at
December 31

Capital expenditures

Construction Industries.....

$ 5,654

$ 29

$ 5,683

$

93

$ 1,058

$ 4,902

$ 58

Resource Industries.......

2,538

100

2,638

 

115

414

6,442

49

Energy & Transportation...

4,577

978

5,555

 

159

973

8,386

161

Machinery, Energy &

Transportation.......

12,769

1,107

13,876

 

367

2,445

19,730

268

Financial Products Segment.

845

1 -

845

 

212

201

36,002

298

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

$ 13,614

$ 1,107

$ 14,721

$

579

$ 2,646

$ 55,732

$ 566

                     

 

1 Includes revenues from Machinery, Energy & Transportation of $131 million and $122 million in the three months ended September 30, 2019 and 2018, respectively.

 

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Reportable Segments

Nine Months Ended September 30

(Millions of dollars)

 

 

 

 

 

2019

 

 

 

External
sales and
revenues

Inter-segment sales and revenues

Total sales
and
revenues

Depreciation
and

amortization

Segment
profit

Segment
assets at
September 30

Capital expenditures

Construction Industries.....

$ 17,573

$ 56

$ 17,629

$ 241

$ 3,272

$ 5,226

$ 117

Resource Industries.......

7,537

344

7,881

315

1,368

6,396

91

Energy & Transportation...

13,319

2,829

16,148

465

2,745

8,779

366

Machinery, Energy &

Transportation.......

38,429

3,229

41,658

1,021

7,385

20,401

574

Financial Products Segment.

2,588 1

-

2,588

622

622

35,993

1,093

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

$ 41,017

$ 3,229

$ 44,246

$ 1,643

$ 8,007

$ 56,394

$ 1,667

 

 

 

 

 

2018

 

 

 

External
sales and
revenues

Inter-segment sales and revenues

Total sales
and
revenues

Depreciation
and

amortization

Segment
profit

Segment
assets at
December 31

Capital expenditures

Construction Industries.....

$ 17,450

$ 82

$ 17,532

$ 272

$ 3,329

$ 4,902

$ 162

Resource Industries.......

7,177

296

7,473

346

1,203

6,442

111

Energy & Transportation...

13,567

2,931

16,498

474

2,859

8,386

463

Machinery, Energy &

Transportation.......

38,194

3,309

41,503

1,092

7,391

19,730

736

Financial Products Segment.

2,467 1

-

2,467

627

476

36,002

1,192

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

$ 40,661

$ 3,309

$ 43,970

$ 1,719

$ 7,867

$ 55,732

$ 1,928

 

1 Includes revenues from Machinery, Energy & Transportation of $398 million and $345 million in the nine months ended September 30, 2019 and 2018, respectively.

 

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For the three and nine months ending September 30, 2019 and 2018, sales and revenues by geographic region reconciled to consolidated sales and revenues were as follows:

 

Sales and Revenues by Geographic Region

(Millions of dollars)

Three Months Ended September 30, 2019

North
America

Latin
America

EAME

Asia/
Pacific

External
Sales and
Revenues

 

 

 

 

 

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

$ 2,728

$ 413

$ 1,048

$ 1,086

$ 5,275

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

789

349

396

645

2,179

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

2,129

378

1,224

831

4,562

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

1

6

8

12

27

Corporate Items and Eliminations

(62)

1

  1.                 

(1)

(69)

Machinery, Energy & Transportation Sales

5,585

1,147

2,669

2,573

11,974

Financial Products Segment

560

79

102

124

865 1

Corporate Items and Eliminations

(43)

(15)

  1.                 

(15)

(81)

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

517

64

94

109

784

Consolidated Sales and Revenues.......................

$ 6,102

$ 1,211

$ 2,763

$ 2,682

$ 12,758

Three Months Ended September 30, 2018

 

 

 

 

 

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

$ 2,646

$ 369

$ 1,109

$ 1,530

$ 5,654

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

849

427

574

688

2,538

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

2,309

330

1,180

758

4,577

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

15

-

4

18

37

Corporate Items and Eliminations

(40)

1

  1.                 

1

(43)

Machinery, Energy & Transportation Sales

5,779

1,127

2,862

2,995

12,763

Financial Products Segment

559

68

101

117

845 1

Corporate Items and Eliminations

(62)

(12)

  1.                 

(18)

(98)

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

497

56

95

99

747

Consolidated Sales and Revenues.......................

$ 6,276

$ 1,183

$ 2,957

$ 3,094

$ 13,510

 

1 Includes revenues from Machinery, Energy & Transportation of $131 million and $122 million in the three months ended September 30, 2019 and 2018, respectively.

 

44

 

Table of Contents

 

 

 

 

 

Sales and Revenues by Geographic Region

(Millions of dollars)

Nine Months Ended September 30, 2019

North
America

Latin
America

EAME

Asia/
Pacific

External
Sales and
Revenues

 

 

 

 

 

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

$ 9,206

$ 1,124

$ 3,162

$ 4,081

$ 17,573

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

2,798

1,220

1,310

2,209

7,537

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

6,577

1,035

3,416

2,291

13,319

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

23

7

23

45

98

Corporate Items and Eliminations

(142)

 

(15)

(1)

(158)

Machinery, Energy & Transportation Sales

18,462

3,386

7,896

8,625

38,369

Financial Products Segment

1,681

225

306

376

2,588 1

Corporate Items and Eliminations

(184)

(37)

(26)

(54)

(301)

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

1,497

188

280

322

2,287

Consolidated Sales and Revenues......................

$ 19,959

$ 3,574

$ 8,176

$ 8,947

$ 40,656

Nine Months Ended September 30, 2018

 

 

 

 

 

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

$ 8,005

$ 1,105

$ 3,347

$ 4,993

$ 17,450

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

2,451

1,181

1,663

1,882

7,177

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

7,116

897

3,425

2,129

13,567

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

47

1

12

55

115

Corporate Items and Eliminations

(108)

(1)

(8)

 

(117)

Machinery, Energy & Transportation Sales

17,511

3,183

8,439

9,059

38,192

Financial Products Segment

1,608

213

303

343

2,467 1

Corporate Items and Eliminations

(168)

(36)

(18)

(57)

(279)

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

1,440

177

285

286

2,188

Consolidated Sales and Revenues......................

$ 18,951

$ 3,360

$ 8,724

$ 9,345

$ 40,380

 

1 Includes revenues from Machinery, Energy & Transportation of $398 million and $345 million in the nine months ended September 30, 2019 and 2018, respectively.

 

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For the three and nine months ending September 30, 2019 and 2018, Energy & Transportation segment sales by end user application were as follows:

 

Energy & Transportation External Sales

Three Months Ended September 30

(Millions of dollars) 2019 2018

Oil and gas............................................................ $              1,246 $ 1,362

Power generation               1,123              1,102

Industrial ......................................................................980 863

Transportation               1,213              1,250

Energy & Transportation External Sales.................................... $ 4,562 $ 4,577

Nine Months Ended September 30

2019 2018

Oil and gas............................................................ $              3,682 $              4,044

Power generation               3,180              3,063

Industrial               2,841              2,738

Transportation               3,616              3,722

Energy & Transportation External Sales.................................... $ 13,319 $ 13,567

 

 

 

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Reconciliation of Consolidated profit before taxes:

 

 

Machinery,

 

 

 

 

(Millions of dollars)

Energy &

 

Financial

 

Consolidated

 

Transportation

 

Products

 

Total

Three Months Ended September 30, 2019

 

 

 

 

 

Total profit from reportable segments...........................

$ 2,272

$

218

$

2,490

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

(21)

 

-

 

(21)

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

(9)

 

-

 

(9)

Corporate costs..........................................

(168)

 

1

 

(167)

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

6

 

-

 

6

Restructuring costs.......................................

  1.             

 

-

 

(20)

Methodology differences:

 

 

 

 

 

Inventory/cost of sales....................................

25

 

-

 

25

Postretirement benefit expense..............................

19

 

-

 

19

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

(55)

 

(2)

 

  1.             

Financing costs........................................

(58)

 

-

 

  1.  

Currency............................................

(62)

 

-

 

(62)

Other income/expense methodology differences...................

(124)

 

 

 

(124)

Other methodology differences..............................

(47)

 

30

 

(17)

Total consolidated profit before taxes...........................

$ 1,758

$

247

$

2,005

Three Months Ended September 30, 2018

 

 

 

 

 

Total profit from reportable segments...........................

$ 2,445

$

201

$

2,646

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

(10)

 

-

 

(10)

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

29

 

 

 

29

Corporate costs..........................................

(134)

 

-

 

(134)

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

(18)

 

-

 

(18)

Restructuring costs.......................................

(96)

 

(14)

 

(110)

Methodology differences:

 

 

 

 

 

Inventory/cost of sales....................................

(20)

 

-

 

(20)

Postretirement benefit expense..............................

58

 

-

 

58

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

(50)

 

(2)

 

(52)

Financing costs........................................

(56)

 

-

 

(56)

Currency............................................

(96)

 

-

 

(96)

Other income/expense methodology differences...................

(88)

 

-

 

(88)

Other methodology differences..............................

  1.             

 

5

 

(14)

Total consolidated profit before taxes...........................

$ 1,945

$

190

$

2,135

 

 

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Reconciliation of Consolidated profit before taxes:

 

Machinery,

 

 

 

 

(Millions of dollars)

Energy &

 

Financial

 

Consolidated

 

Transportation

 

Products

 

Total

Nine Months Ended September 30, 2019

 

 

 

 

 

Total profit from reportable segments...........................

$ 7,385

$

622

$

8,007

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

15

 

 

 

15

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

32

 

 

 

32

Corporate costs..........................................

(487)

 

  1.                 

 

(492)

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

(118)

 

 

 

(118)

Restructuring costs.......................................

(131)

 

(31)

 

(162)

Methodology differences:

 

 

 

 

 

Inventory/cost of sales....................................

24

 

 

 

24

Postretirement benefit expense..............................

4

 

 

 

4

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

(164)

 

  1.                 

 

(170)

Financing costs........................................

(173)

 

 

 

(173)

Currency............................................

(110)

 

 

 

(110)

Other income/expense methodology differences...................

(374)

 

 

 

(374)

Other methodology differences..............................

(71)

 

35

 

(36)

Total consolidated profit before taxes........................... $ 5,832 $ 615 $ 6,447

Nine Months Ended September 30, 2018

Total profit from reportable segments............................ $ 7,391$ 476 $ 7,867

All Other operating segment ............................................70 70

Cost centers .......................................................55 55

Corporate costs ...................................................(480) (480)

Timing ........................................................(168) (168)

Restructuring costs  (278) (15) (293)

 

 

 

Financing costs  (203) (203)

Currency .....................................................(145) (145)

Other income/expense methodology differences ...........................(261) (261)

Other methodology differences

Total consolidated profit before taxes........................... $ 5,992 $ 463 $ 6,455

 

 

 

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Reconciliation of Restructuring costs:

As noted above, certain restructuring costs are a reconciling item between Segment profit and Consolidated profit before taxes. Had we included the amounts in the segments' results, the profit would have been as shown below:

 

Reconciliation of Restructuring costs:

 

 

 

 

 

 

 

 

Segment profit

(Millions of dollars)

 

Segment

 

Restructuring with

 

 

profit

 

costs restructuring costs

Three Months Ended September 30, 2019

 

 

 

 

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

$

940

$

- $ 940

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

 

311

 

(11) 300

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

 

1,021

 

(7) 1,014

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

 

218

 

218

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

 

(21)

 

(2) (23)

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

$

2,469

$

(20) $ 2,449

Three Months Ended September 30, 2018

 

 

 

 

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

$

1,058

$

(19) $ 1,039

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

 

414

 

  1.                                          361

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

 

973

 

(31) 942

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

 

201

 

201

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

 

(10)

 

(4) (14)

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

$

2,636

$

(107) $ 2,529

 

 

Reconciliation of Restructuring costs:

 

 

 

 

 

 

 

 

 

 

Segment profit

(Millions of dollars)

 

Segment

 

Restructuring

with

 

 

profit

 

costs

restructuring costs

Nine Months Ended September 30, 2019

 

 

 

 

 

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

$

3,272

$

  1.  

$ 3,218

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

 

1,368

 

(40)

1,328

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

 

2,745

 

(59)

2,686

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

 

622

 

 

622

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

 

15

 

(8)

7

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

$

8,022

$

(161)

$ 7,861

Nine Months Ended September 30, 2018

 

 

 

 

 

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

$

3,329

$

(62)

$ 3,267

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

 

1,203

 

(149)

1,054

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

 

2,859

 

(60)

2,799

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

 

476

 

(1)

475

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

 

70

 

(13)

57

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

$

7,937

$

(285)

$ 7,652

 

 

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Reconciliation of Assets:
(Millions of dollars)
September 30, 2019

Machinery,
Energy &
Transportation

Financial
Products

Consolidating Adjustments

Consolidated Total

 

 

 

 

Total assets from reportable segments....................

$ 20,401

$ 35,993

$ - $ 56,394

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

1,321

-

-

1,321

Items not included in segment assets:

 

 

 

 

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

6,380

-

-

6,380

Intercompany receivables..........................

919

-

(919)

-

Investment in Financial Products.....................

3,968

-

(3,968)

-

Deferred income taxes............................

1,927

-

(673)

1,254

Goodwill and intangible assets.......................

4,361

-

-

4,361

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

2,213

-

-

2,213

Inventory methodology differences.....................

(2,415)

-

-

(2,415)

Liabilities included in segment assets....................

9,025

-

-

9,025

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

(471)

76

(145)

(540)

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

$ 47,629

$ 36,069

$ (5,705)

$ 77,993

December 31, 2018

 

 

 

 

Total assets from reportable segments....................

$ 19,730

$ 36,002

$ - $ 55,732

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

1,279

-

-

1,279

Items not included in segment assets:

 

 

 

 

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

6,968

-

-

6,968

Intercompany receivables..........................

1,633

-

(1,633)

-

Investment in Financial Products.....................

3,672

-

(3,672)

-

Deferred income taxes............................

2,015

-

(692)

1,323

Goodwill and intangible assets.......................

4,279

-

-

4,279

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

1,802

-

-

1,802

Inventory methodology differences.....................

(2,503)

-

-

(2,503)

Liabilities included in segment assets....................

9,766

-

-

9,766

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

(166)

66

(37)

(137)

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

$ 48,475

$ 36,068

$ (6,034)

$ 78,509

 

 

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Reconciliations of Depreciation and amortization:

(Millions of dollars)

Three Months Ended September 30, 2019

Machinery,
Energy &
Transportation

 

Financial Products

Consolidated
Total

 

 

 

 

 

 

Total depreciation and amortization from reportable segments................

$

344

$

209

$

553

Items not included in segment depreciation and amortization:

 

 

 

 

 

 

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

 

53

 

-

 

53

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

 

35

 

-

 

35

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

 

(4)

 

8

 

4

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

$

428

$

217

$

645

Three Months Ended September 30, 2018

 

 

 

 

 

 

Total depreciation and amortization from reportable segments................

$

367

$

212

$

579

Items not included in segment depreciation and amortization:

 

 

 

 

 

 

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

 

55

 

-

 

55

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

 

33

 

-

 

33

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

 

22

 

9

 

31

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

$

477

$

221

$

698

 

 

Reconciliations of Depreciation and amortization:

(Millions of dollars)

Nine Months Ended September 30, 2019

Machinery,
Energy &
Transportation

 

Financial Products

Consolidated
Total

 

 

 

 

 

Total depreciation and amortization from reportable segments...............

$

1,021

$

622

$ 1,643

Items not included in segment depreciation and amortization:

 

0

 

0

 

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

 

158

 

-

158

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

 

100

 

-

100

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

 

4

 

28

32

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

$

1,283

$

650

$ 1,933

Nine Months Ended September 30, 2018

 

 

 

 

 

Total depreciation and amortization from reportable segments...............

$

1,092

$

627

$ 1,719

Items not included in segment depreciation and amortization:

 

 

 

 

 

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

 

170

 

-

170

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

 

96

 

-

96

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

 

52

 

28

80

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

$

1,410

$

655

$ 2,065

 

 

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Reconciliations of Capital expenditures:

(Millions of dollars)

Machinery, Energy & Transportation

Financial
Products

Consolidating
Adjustments

Consolidated Total

 

Three Months Ended September 30, 2019

Total capital expenditures from reportable segments........... $ 229 $ 388 $ - $ 617
Items not included in segment capital expenditures:

All Other operating segment ..................................34 - - 34

Cost centers .............................................22 - - 22

Timing

Other ................................................(26) 41 (36) (21)

Total capital expenditures........................... $ 238 $ 429 $ (36) $ 631

Three Months Ended September 30, 2018

Total capital expenditures from reportable segments........... $ 268 $ 298 $ - $ 566
Items not included in segment capital expenditures:

All Other operating segment ..................................63 - - 63

Cost centers .............................................30 - - 30

Timing

Other ................................................(65) 45 (33) (53)

Total capital expenditures........................... $ 291 $ 343 $ (33) $ 601

 

Reconciliations of Capital expenditures:

(Millions of dollars)

Machinery, Energy & Transportation

Financial
Products

Consolidating
Adjustments

Consolidated Total

 

Nine Months Ended September 30, 2019

Total capital expenditures from reportable segments........... $ 574$ 1,093 $ - $ 1,667
Items not included in segment capital expenditures:

All Other operating segment ..................................69- - 69

Cost centers .............................................71- - 71

Timing ...............................................108 - - 108

Other (92) 72 (39) (59)

Total capital expenditures........................... $ 730 $ 1,165 $ (39) $ 1,856

Nine Months Ended September 30, 2018

Total capital expenditures from reportable segments........... $ 736 $ 1,192 $ - $ 1,928
Items not included in segment capital expenditures:

All Other operating segment .................................101 - - 101

Cost centers .............................................70 - - 70

Timing ...............................................152 - - 152

Other  (214) 165 (73) (122)

Total capital expenditures........................... $ 845 $ 1,357 $ (73) $ 2,129

 

 

 

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17. Cat Financial financing activities
Allowance for credit losses

The allowance for credit losses is an estimate of the losses inherent in Cat Financial's finance receivable portfolio and includes consideration of accounts that have been individually identified as impaired, as well as pools of finance receivables where it is probable that certain receivables in the pool are impaired but the individual accounts cannot yet be identified. In identifying and measuring impairment, management takes into consideration past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of underlying collateral and current economic conditions.

Accounts are identified for individual review based on past-due status and information available about the customer, such as financial statements, news reports and published credit ratings, as well as general information regarding industry trends and the economic environment in which Cat Financial's customers operate. The allowance for credit losses attributable to finance receivables that are individually evaluated and determined to be impaired is based 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 also considers credit enhancements such as additional collateral and contractual third-party guarantees. The allowance for credit losses attributable to the remaining accounts not yet individually identified as impaired is estimated based on loss forecast models utilizing probabilities of default, our estimate of the loss emergence period and the estimated loss given default. In addition, qualitative factors not able to be fully captured in the loss forecast models including industry trends, macroeconomic factors and model imprecision are considered in the evaluation of the adequacy of the allowance for credit losses. These qualitative factors are subjective and require a degree of management judgment.

Cat Financial's allowance for credit losses is segregated into two portfolio segments:

  • Customer - Finance receivables with retail customers.
  • Dealer - Finance receivables with Caterpillar dealers.

A portfolio segment is the level at which the company develops a systematic methodology for determining its allowance for credit losses.

Cat Financial further evaluates portfolio segments by the class of finance receivables, which is defined as a level of information (below a portfolio segment) in which the finance receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk. Typically, Cat Financial's finance receivables within a geographic area have similar credit risk profiles and methods for assessing and monitoring credit risk. Cat Financial's classes, which align with management reporting for credit losses, are as follows:

  • North America - Finance receivables originated in the United States or 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.
 

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

 

(Millions of dollars)

Allowance for Credit Losses:

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

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

 

 

September 30, 2019

 

 

 

Customer

Dealer

 

Total

$

486

(238)

$

21

-

$

507

(238)

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

 

31

 

-

 

31

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

 

120

 

24

 

144

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

 

(14)

 

 

 

(14)

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

$

385

$

45

$

430

Individually evaluated for impairment..................

$

182

$

39

$

221

Collectively evaluated for impairment..................

 

203

 

6

 

209

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

$

385

$

45

$

430

Recorded Investment in Finance Receivables:

 

 

 

 

 

 

Individually evaluated for impairment..................

$

665

$

78

$

743

Collectively evaluated for impairment..................

 

17,622

 

3,656

 

21,278

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

$

18,287

$

3,734

$

22,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

 

 

December 31, 2018

 

 

Allowance for Credit Losses:

 

Customer

Dealer

 

Total

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

$

353

$

9

$

362

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

 

(235)

 

-

 

(235)

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

 

46

 

-

 

46

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

 

337

 

12

 

349

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

 

(15)

 

 

 

(15)

Balance at end of year.............................

$

486

$

21

$

507

Individually evaluated for impairment..................

$

288

$

14

$

302

Collectively evaluated for impairment..................

 

198

 

7

 

205

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

$

486

$

21

$

507

Recorded Investment in Finance Receivables:

 

 

 

 

 

 

Individually evaluated for impairment..................

$

858

$

78

$

936

Collectively evaluated for impairment..................

 

18,152

 

3,338

 

21,490

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

$

19,010

$

3,416

$

22,426

 

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-rating agency ratings, loan-to-value ratios and other internal metrics. On an ongoing basis, Cat Financial monitors credit quality based on past-due status and collection experience 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 recorded investment in finance receivables past due when any installment is over 30 days past due. The tables below summarize the recorded investment in finance receivables by aging category.

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(Millions of dollars) Customer

 

 

 

September 30, 2019

 

 

31-60
Days
Past Due

61-90
Days
Past Due

91+
Days
Past Due

Total Past Due

Current

Recorded
Investment in
Finance
Receivables

91+ Still
Accruing

 

 

 

 

 

 

 

North America........

$ 73

$ 16

$ 48

$ 137

$ 7,773

$ 7,910

$ 15

EAME.............

33

10

136

179

2,853

3,032

4

Asia Pacific..........

36

21

24

81

2,437

2,518

6

Mining.............

1

24

19

44

1,810

1,854

-

Latin America........

43

29

93

165

1,110

1,275

1

Caterpillar Power Finance 

1

1

241

243

1,455

1,698

14

Dealer

 

 

 

 

 

 

 

North America........

-

-

-

-

2,109

2,109

-

EAME.............

-

-

-

-

346

346

-

Asia Pacific..........

-

-

-

-

434

434

-

Mining.............

-

-

-

-

4

4

-

Latin America........

-

-

81

81

759

840

-

Caterpillar Power Finance 

-

-

-

-

1

1

-

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

$ 187

$ 101

$ 642

$ 930

$ 21,091

$ 22,021

$ 40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

Recorded

 

(Millions of dollars)

31-60
Days

61-90
Days

91+
Days

Total Past

 

Investment in
Finance

91+ Still

 

Past Due

Past Due

Past Due

Due

Current

Receivables

Accruing

Customer

 

 

 

 

 

 

 

North America........

$ 65

$ 18

$ 84

$ 167

$ 7,825

$ 7,992

$ 14

EAME.............

19

9

153

181

2,850

3,031

5

Asia Pacific..........

24

9

8

41

2,409

2,450

5

Mining.............

28

1

9

38

1,642

1,680

-

Latin America........

38

29

71

138

1,421

1,559

-

Caterpillar Power Finance.

10

1

384

395

1,903

2,298

-

Dealer

 

 

 

 

 

 

 

North America........

-

-

-

-

1,895

1,895

-

EAME.............

-

-

-

-

333

333

-

Asia Pacific..........

-

-

-

-

466

466

-

Mining.............

-

-

-

-

4

4

-

Latin America........

-

-

78

78

638

716

-

Caterpillar Power Finance.

-

-

-

-

2

2

-

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

$ 184

$ 67

$ 787

$ 1,038

$ 21,388

$ 22,426

$ 24

 

Impaired finance receivables

For all classes, a finance receivable is considered impaired, based on current information and events, if it is probable that Cat Financial will be unable to collect all amounts due according to the contractual terms. Impaired finance receivables include finance receivables that have been restructured and are considered to be troubled debt restructurings.

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There were $78 million of impaired finance receivables with a related allowance of $39 million and $14 million as of September 30, 2019 and December 31, 2018, respectively, for the Dealer portfolio segment, all of which was in Latin America. Cat Financial's recorded investment in impaired finance receivables and the related unpaid principal balances and allowance for the Customer portfolio segment were as follows:

September 30, 2019 December 31, 2018

 

(Millions of dollars)

Impaired Finance Receivables With No

Recorded Investment

Unpaid
Principal
Balance

Related Recorded

Allowance Investment

Unpaid
Principal
Balance

Related
Allowance

 

 

 

 

 

Allowance Recorded

North America.................

$ 9

$ 9

$ - $ 10

$ 10

$

EAME......................

-

-

- 1

1

 

Asia Pacific...................

-

-

- -

-

 

Mining......................

23

23

- 33

33

 

Latin America.................

25

25

- 29

29

 

Caterpillar Power Finance.........

71

113

- 69

83

 

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

$ 128

$ 170

$ - $ 142

$ 156

$

Impaired Finance Receivables With An

 

 

 

 

 

Allowance Recorded

 

 

 

 

 

North America.................

$ 31

$ 30

$ 9 $ 40

$ 41

$ 14

EAME......................

60

60

27 92

92

57

Asia Pacific...................

10

10

4 4

4

2

Mining......................

61

59

18 56

55

26

Latin America.................

66

64

22 75

75

25

Caterpillar Power Finance.........

309

322

102 449

455

164

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

$ 537

$ 545

$ 182 $ 716

$ 722

$ 288

Total Impaired Finance Receivables

 

 

 

 

 

North America.................

$ 40

$ 39

$ 9 $ 50

$ 51

$ 14

EAME......................

60

60

27 93

93

57

Asia Pacific...................

10

10

4 4

4

2

Mining......................

84

82

18 89

88

26

Latin America.................

91

89

22 104

104

25

Caterpillar Power Finance.........

380

435

102 518

538

164

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

$ 665

$ 715

$ 182 $ 858

$ 878

$ 288

 

 

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Three Months Ended September 30,

2019

 

Three Months Ended September 30,

2018

Average Recorded

(Millions of dollars) Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Impaired Finance Receivables With

$

- $

19 $

-

No Allowance Recorded

North America..............$ 10

EAME ...............................................15

 ......................................................-

 

 

4

-

Asia Pacific ............................................... -

 ......................................................-

 

 

29

1

Mining...............................................26

 ......................................................-

 

 

35

-

Latin America............................................... 22

 

-

37

1

Caterpillar Power Finance............................................... 57

 

1

94

2

Total.....................$ 130

$

1 $

218 $

4

Impaired Finance Receivables With

 

 

 

 

An Allowance Recorded

 

 

 

 

North America..............$ 30

$

- $

47 $

-

EAME ...............................................80

 .......................................................1

 

 

59

-

Asia Pacific ...............................................12

 .......................................................1

 

 

2

-

Mining...............................................65

 .......................................................1

 

 

60

1

Latin America............................................... 69

 

1

51

1

Caterpillar Power Finance............................................... 376

 

1

374

4

Total.....................$ 632

$

5 $

593 $

6

Total Impaired Finance Receivables

 

 

 

 

North America..............$ 40

$

- $

66 $

-

EAME ...............................................95

 .......................................................1

 

 

63

-

Asia Pacific ...............................................12

 .......................................................1

 

 

31

1

Mining...............................................91

 .......................................................1

 

 

95

1

Latin America............................................... 91

 

1

88

2

Caterpillar Power Finance............................................... 433

 

2

468

6

Total.....................$ 762

$

6 $

811 $

10

 

 

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Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018

(Millions of dollars)

Impaired Finance Receivables With

Average Recorded
Investment

Interest Income
Recognized

Average Recorded
Investment

Interest Income
Recognized

 

 

 

 

 

 

 

 

No Allowance Recorded

Customer

North America..............

$

10

$

- $

17

$

1

EAME...................

 

7

 

-

 

17

 

-

Asia Pacific................

 

-

 

-

 

30

 

2

Mining...................

 

29

 

1

 

65

 

2

Latin America..............

 

22

 

1

 

41

 

2

Caterpillar Power Finance.......

 

53

 

2

 

149

 

5

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

$

121

$

4

$

319

$

12

Impaired Finance Receivables With

 

 

 

 

 

 

 

 

An Allowance Recorded

 

 

 

 

 

 

 

 

Customer

 

 

 

 

 

 

 

 

North America..............

$

36

$

1

$

51

$

1

EAME...................

 

88

 

2

 

41

 

1

Asia Pacific................

 

9

 

1

 

4

 

-

Mining...................

 

49

 

2

 

43

 

2

Latin America..............

 

73

 

4

 

69

 

3

Caterpillar Power Finance.......

 

422

 

8

 

364

 

8

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

$

677

$

18

$

572

$

15

Total Impaired Finance Receivables

 

 

 

 

 

 

 

 

Customer

 

 

 

 

 

 

 

 

North America..............

$

46

$

1

$

68

$

2

EAME...................

 

95

 

2

 

58

 

1

Asia Pacific................

 

9

 

1

 

34

 

2

Mining...................

 

78

 

3

 

108

 

4

Latin America..............

 

95

 

5

 

110

 

5

Caterpillar Power Finance.......

 

475

 

10

 

513

 

13

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

$

798

$

22

$

891

$

27

 

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 (generally after 120 days past due). Recognition is resumed and previously suspended income is recognized when the finance receivable becomes current and collection of remaining amounts 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.

As of September 30, 2019 and December 31, 2018, there were $81 million and $78 million, respectively, in finance receivables on non-accrual status for the Dealer portfolio segment, all of which was in Latin America. The recorded investment in customer finance receivables on non-accrual status was as follows:

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(Millions of dollars)

September 30, 2019

December 31, 2018

North America...........................................

$

38

$

77

EAME................................................

 

168

 

154

Asia Pacific.............................................

 

19

 

4

Mining................................................

 

44

 

50

Latin America...........................................

 

103

 

106

Caterpillar Power Finance...................................

 

372

 

416

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

$

744

$

807

 

Troubled Debt Restructurings

A restructuring of a finance receivable constitutes a troubled debt restructuring (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, extended skip payment periods and reduction of principal and/or accrued interest.

As of September 30, 2019 and December 31, 2018, there were no additional funds committed to lend to a borrower whose terms have been modified in a TDR.

There were no finance receivables modified as TDRs during the three and nine months ended September 30, 2019 or 2018 for the Dealer portfolio segment. Cat Financial's investment in finance receivables in the Customer portfolio segment modified as TDRs during the three and nine months ended September 30, 2019 and 2018 was as follows:

Three Months Ended September 30, 2019 Three Months Ended September 30, 2018

Number Pre-TDR Post-TDR Number Pre-TDR Post-TDR

(Millions of dollars) of Recorded Recorded of Recorded Recorded

Contracts Investment Investment Contracts Investment Investment

North America...........

4

$ - $

-

4

$

- $ -

Caterpillar Power Finance....

4

56

55

2

 

40 40

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

8

$ 56 $

55

6

$

40 $ 40

 

 

Nine Months Ended September 30, 2019

Nine Months Ended September 30, 2018

Number
of

Contracts

Pre-TDR
Recorded
Investment

Post-TDR
Recorded
Investment

Number
of

Contracts

Pre-TDR
Recorded
Investment

Post-TDR
Recorded
Investment

North America...........

12

$

5

$ 4

34

$

13

$ 13

EAME................

21

 

21

17

-

 

-

-

Mining................

1

 

6

6

1

 

29

29

Latin America...........

4

 

2

2

1

 

3

3

Caterpillar Power Finance....

19

 

154

152

7

 

93

60

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

57

$ 188

$ 181

43

$ 138

$ 105

 

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TDRs 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:

Three Months Ended September 30, 2019 Three Months Ended September 30, 2018

Post-TDR Post-TDR

(Millions of dollars) Number of Recorded Number of Recorded

Contracts Investment Contracts Investment

Customer

 

 

 

 

 

 

 

North America ..................-

Latin America ..................-

Caterpillar Power Finance ..........-

$

- 7

- 1

- 3

$

9

-

33

Total ...........................-

$

- 11

$

42

 

Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018

Post-TDR Post-TDR

Number of Recorded Number of Recorded

Contracts Investment Contracts Investment

Customer

 

 

 

 

 

 

 

North America ..................-

Latin America ...................-

Caterpillar Power Finance ...........-

$

- 10

- 3

- 3

$

10

1

33

Total ...........................-

$

- 16

$

44

 

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.

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

 

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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, primarily at Insurance Services, 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.

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.

 

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Derivative financial instruments

The fair value of interest rate contracts is primarily based on models that utilize 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 a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.

Assets and liabilities measured on a recurring basis at fair value, primarily related to Financial Products, included in our Consolidated Statement of Financial Position as of September 30, 2019 and December 31, 2018 are summarized below:

 

(Millions of dollars)

Assets

Debt securities

Government debt

 

September 30, 2019

 

Level 1

Level 2 Level 3

Total

Measured Assets / Liabilities,

at NAV at Fair Value

 

 

 

 

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

$ 9

$ - $ - $ - $

9

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

-

48 -

-

48

Corporate bonds

 

 

 

 

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

-

840 -

-

840

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

-

53 -

-

53

Mortgage-backed debt securities

 

 

 

 

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

-

331 -

-

331

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

-

6 -

-

6

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

 

41 -

-

41

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

9

1,319 -

-

1,328

Equity securities

 

 

 

 

Large capitalization value...........

310

- -

-

310

Smaller company growth............

47

- 8

-

55

REIT.........................

 

 

124

124

Total equity securities..................

357

- 8

124

489

Derivative financial instruments, net........

-

55 -

-

55

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

$ 366

$ 1,374 $ 8

$ 124 $

1,872

 

 

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(Millions of dollars)

Assets

Debt securities

Government debt

 

 

December 31, 2018

 

 

Level 1

Level 2

Level 3

Measured at NAV

Total

Assets / Liabilities, at Fair Value

 

 

 

 

 

 

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

$ 9

$

$

$

$

9

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

 

 

 

 

 

 

 

 

42

 

 

 

42

Corporate bonds

 

 

 

 

 

 

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

 

720

 

 

 

720

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

 

63

 

 

 

63

Mortgage-backed debt securities

 

 

 

 

 

 

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

 

297

 

 

 

297

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

 

7

 

 

 

7

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

 

13

 

 

 

13

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

9

1,142

 

 

 

1,151

Equity securities

 

 

 

 

 

 

Large capitalization value.............

260

 

 

 

 

260

Smaller company growth.............

46

 

 

 

 

46

REIT..........................

 

 

 

119

 

119

Total equity securities....................

306

 

 

119

 

425

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

$ 315

$ 1,142

$

$ 119

$

1,576

Liabilities

 

 

 

 

 

 

Derivative financial instruments, net..........

$

$ 19

$

$

$

19

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

$

$ 19

$

$

$

19

 

In addition to the amounts above, Cat Financial impaired loans are subject to measurement at fair value on a nonrecurring basis and are classified as Level 3 measurements. A loan is considered impaired when management determines that collection of contractual amounts due is not probable. 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 impaired loans with a fair value of $373 million and $469 million as of September 30, 2019 and December 31, 2018, 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 used the following methods and assumptions to estimate the fair value of our financial instruments:

Cash and short-term investments

Carrying amount approximated fair value.

Restricted cash and short-term investments

Carrying amount approximated fair value. Restricted cash and short-term investments are included in Prepaid expenses

and other current assets in the Consolidated Statement of Financial Position.

Finance receivables

Fair value was estimated by discounting the future cash flows using current rates, representative of receivables with

similar remaining maturities.

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Wholesale inventory receivables

Fair value was estimated by discounting the future cash flows using current rates, representative of receivables with

similar remaining maturities.

Short-term borrowings

Carrying amount approximated fair value.

Long-term debt

Fair value for fixed and floating rate debt was estimated 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.

Please refer to the table below for the fair values of our financial instruments.

Fair Value of Financial Instruments

(Millions of dollars)
Assets

September 30, 2019

December 31, 2018

Fair
Value
Levels

 

Reference

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

 

 

 

 

 

 

 

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

$ 7,906

$ 7,906

$ 7,857

$ 7,857

1

 

 

Restricted cash and short-term investments.

$ 30

$ 30

$ 33

$ 33

1

 

 

Investments in debt and equity securities...

$ 1,817

$ 1,817

$ 1,576

$ 1,576

1, 2 &

3

Note 8

Finance receivables - net (excluding finance

leases 1)................................

$ 14,218

$ 14,351

$ 14,714

$ 14,798

3

 

Note 17

Wholesale inventory receivables - net

(excluding finance leases 1) .............

$ 1,118

$ 1,090

$ 1,050

$ 1,025

3

 

 

Foreign currency contracts - net........

$ 116

$ 116

$ 47

$ 47

2

 

Note 5

Liabilities

 

 

 

 

 

 

 

Short-term borrowings...............

$ 4,268

$ 4,268

$ 5,723

$ 5,723

1

 

 

Long-term debt (including amounts due within one year)

 

 

 

 

 

 

 

Machinery, Energy & Transportation...

$ 9,159

$ 11,412

$ 8,015

$ 9,046

2

 

 

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

$ 24,479

$ 24,798

$ 22,815

$ 22,684

2

 

 

Interest rate contracts - net............

$ 54

$ 54

$ 36

$ 36

2

 

Note 5

Commodity contracts - net............

$ 7

$ 7

$ 30

$ 30

2

 

Note 5

Guarantees......................

$ 6

$ 6

$ 8

$ 8

3

 

Note 11

 

1 Represents finance leases and failed sales leasebacks of $7,668 million at September 30, 2019 and finance leases of $7,463 million at December 31, 2018, respectively.

 

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  1.              Other income (expense)

 

 

 

 

 

Three Months Ended September 30

Nine Months Ended September 30

(Millions of dollars)

2019

2018

2019

2018

Investment and interest income................................

$ 50

$ 59

$ 156

$ 139

Foreign exchange gains (losses) 1

(5)

(81)

(34)

(160)

License fee income........................................

31

29

87

96

Net periodic pension and OPEB income (cost), excluding service cost......

24

85

74

257

Gains (losses) on securities..................................

2

13

55

18

Miscellaneous income (loss).................................

(14)

(3)

(22)

-

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

$ 88

$ 102

$ 316

$ 350

 

1 Includes gains (losses) from foreign exchange derivative contracts. See Note 5 for further details.

  1.                      Restructuring costs

Our accounting for employee separations is dependent upon how the particular program is designed. For voluntary programs, eligible separation costs are recognized at the time of employee acceptance unless the acceptance requires explicit approval by the company. For involuntary programs, eligible costs are recognized when management has approved the program, the affected employees have been properly notified and the costs are estimable.

Restructuring costs for the three and nine months ended September 30, 2019 and 2018 were as follows:

(Millions of dollars) Three Months Ended September 30

2019 2018

Employee separations 1............................................. $ 8 $ 44

Long-lived asset impairments 1 3 18

Other 2 13 48

Total restructuring costs.......................................... $ 24 $ 110

Nine Months Ended September 30

2019 2018

Employee separations 1............................................. $ 33 $ 121

Long-lived asset impairments 1 39 49

Other 2 110 123

Total restructuring costs.......................................... $ 182 $         293

1 Recognized in Other operating (income) expenses.

2 Represents costs related to our restructuring programs, primarily for inventory write-downs, project management costs, accelerated depreciation, building demolition and equipment relocation, all of which are primarily included in Cost of goods sold.

For the nine months ended September 30, 2019, the restructuring costs were primarily related to restructuring actions in Construction Industries and Energy & Transportation. For the nine months ended September 30, 2018, the restructuring costs were primarily related to ongoing facility closures across the company.

Certain restructuring costs are a reconciling item between Segment profit and Consolidated profit before taxes. See Note 16 for more information.

 

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The following table summarizes the 2018 and 2019 employee separation activity:

 

(Millions of dollars)

 

 

Liability balance at December 31, 2017................................................

$

249

Increase in liability (separation charges)..............................................

 

112

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

 

(276)

Liability balance at December 31, 2018................................................

 

85

Increase in liability (separation charges)..............................................

 

33

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

 

(73)

Liability balance at September 30, 2019...............................................

$

45

 

Most of the liability balance at September 30, 2019 is expected to be paid in 2019 and 2020.

In September 2015, we announced a large scale restructuring plan (the Plan) including a voluntary retirement enhancement program for qualifying U.S. employees, several voluntary separation programs outside of the United States, additional involuntary programs throughout the company and manufacturing facility consolidations and closures that occurred through 2018. The largest action among those included in the Plan was related to our European manufacturing footprint, which led to the Gosselies, Belgium, facility closure. In the first nine months of 2019, we incurred $30 million of restructuring costs related to the Plan. Total restructuring costs incurred since the inception of the Plan were $1,818 million. The remaining costs of approximately $20 million related to the Plan are expected to be recognized in 2019.

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview

Third-quarter 2019 sales and revenues were $12.758 billion, a decrease of $752 million, or 6 percent, compared with $13.510 billion in the third quarter of 2018. The decline was due to lower sales volume driven by the unfavorable impact from changes in dealer inventories, partially offset by higher end-user demand across the three primary segments. Dealers decreased machine and engine inventories about $400 million during the third quarter of 2019, compared with an increase of about $800 million during the third quarter of 2018. Sales decreased across the three primary segments and in all regions except for Latin America, which was about flat. Unfavorable currency impacts were offset by favorable price realization and higher Financial Products' revenues.

Third-quarter 2019 profit per share was $2.66, a decrease of $0.22, or 8 percent, compared with $2.88 profit per share in the third quarter of 2018. Profit was $1.494 billion in the third quarter of 2019, a decrease of $233 million, or 13 percent, compared with $1.727 billion in the third quarter of 2018. The decrease was primarily due to lower sales volume. This decrease was partially offset by favorable price realization and lower selling, general and administrative (SG&A) and research and development (R&D) expenses. Lower SG&A/R&D expenses were mostly due to a reduction in short-term incentive compensation expense. In addition, the favorable impact of Financial Products' profit and favorable other operating (income) expense were mostly offset by higher manufacturing costs and unfavorable currency impacts. Favorable price continued to offset manufacturing costs in the quarter.

Sales and revenues for the nine months ended September 30, 2019, were $40.656 billion, an increase of $276 million, or 1 percent, from $40.380 billion for the nine months ended September 30, 2018. Profit per share for the nine months ended September 30, 2019, was $8.75, an increase of $0.30, or 4 percent, from $8.45 for the same period last year. Profit was $4.995 billion for the nine months ended September 30, 2019, down $104 million, or 2 percent, from $5.099 billion for the nine months ended September 30, 2018.

Highlights for the third quarter of 2019 include:

  • Third-quarter sales and revenues were $12.758 billion, compared with $13.510 billion in the third quarter of 2018. Sales decreased across the three primary segments, while Financial Products' revenues increased. The decline was due to lower sales volume driven by the unfavorable impact from changes in dealer inventories, partially offset by higher end-user demand. Dealers decreased machine and engine inventories about $400 million during the third quarter of 2019, compared with an increase of about $800 million during the third quarter of 2018.
  • Operating profit as a percent of sales and revenues was 15.8 percent for both the third quarters of 2019 and 2018.
  • Profit per share was $2.66 in the third quarter of 2019, compared with $2.88 in the third quarter of 2018.
  • During the third quarter of 2019, the company made a $1.5 billion discretionary pension contribution financed from proceeds of a debt issuance. As a result, Machinery, Energy & Transportation (ME&T) operating cash flow was negative $188 million. The company also repurchased $1.2 billion of Caterpillar common stock and paid dividends of $0.6 billion in the third quarter of 2019. The enterprise cash balance at the end of the third quarter of 2019 was $7.9 billion.

Highlights for the nine months ended September 30, 2019, include:

  • Sales and revenues for the nine months ended September 30, 2019, were $40.656 billion, compared with $40.380 billion for the nine months ended September 30, 2018. Sales increased in Resource Industries and Construction Industries, while Energy & Transportation decreased. Financial Products' revenues also increased.
  • Operating profit as a percent of sales and revenues was 15.8 percent for the nine months ended September 30, 2019, compared with 15.9 percent for the nine months ended September 30, 2018.
  • Profit per share was $8.75 for the nine months ended September 30, 2019, compared with $8.45 for the nine months ended September 30, 2018.
  • ME&T operating cash flow was $2.632 billion for the nine months ended September 30, 2019, compared to $3.880 billion for the nine months ended September 30, 2018.

Notes:

  • Glossary of terms is included on pages 79 - 81; first occurrence of terms shown in bold italics.
  • Information on non-GAAP financial measures is included on page 86.
 

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Consolidated Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30,  2018

CONSOLIDATED SALES AND REVENUES

 

The chart above graphically illustrates reasons for the change in consolidated sales and revenues between the third quarter of 2018 (at left) and the third quarter of 2019 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.

Total sales and revenues in the third quarter of 2019 were $12.758 billion, a decrease of $752 million, or 6 percent, compared with $13.510 billion in the third quarter of 2018. The decline was due to lower sales volume driven by the unfavorable impact from changes in dealer inventories, partially offset by higher end-user demand across the three primary segments. Dealers decreased machine and engine inventories about $400 million during the third quarter of 2019, compared with an increase of about $800 million during the third quarter of 2018, led by Construction Industries and Resource Industries. Unfavorable currency impacts were offset by favorable price realization and higher Financial Products' revenues. Sales decreased across the three primary segments, while Financial Products' revenues increased.

North America sales declined 3 percent driven by the unfavorable impact from changes in dealer inventories, partially offset by higher end-user demand and favorable price realization. Dealers increased inventories during the third quarter of 2018, compared with a decrease during the third quarter of 2019.

Sales increased 2 percent in Latin America due to improved demand in a few countries, while the region remains at low levels.

EAME sales decreased 7 percent driven by the unfavorable impact from changes in dealer inventories and unfavorable currency impacts, partially offset by higher end-user demand. The unfavorable currency impacts were due to a weaker euro and British pound. Dealers increased inventories during the third quarter of 2018 and were about flat during the third quarter of 2019.

Asia/Pacific sales decreased 14 percent driven by lower demand across several countries in the region, including unfavorable changes in dealer inventories. Dealers increased inventories during the third quarter of 2018, compared with a decrease during the third quarter of 2019. The lower demand was primarily in China amid continued competitive pressures.

 

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Sales and Revenues by Segment

(Millions of dollars)

Third
Quarter

2018

Sales
Volume

Price Realization

Currency

Inter-
Segment /
Other

Third
Quarter

2019

$

Change

% Change

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

$ 5,683

$ (358)

$ 26

$ (47)

$ (15)

$ 5,289

$ (394)

(7%)

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

2,638

(389)

50

(20)

32

2,311

(327)

(12%)

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

5,555

31

11

(57)

(88)

5,452

(103)

(2%)

All Other Segment..................

113

(9)

 

(1)

8

111

(2)

(2%)

Corporate Items and Eliminations.......

(1,226)

(26)

(1)

1

63

(1,189)

37

 

Machinery, Energy & Transportation Sales.

12,763

(751)

86

(124)

-

11,974

(789)

(6%)

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

845

-

-

-

20

865

20

2%

Corporate Items and Eliminations........

(98)

-

-

-

17

(81)

17

 

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

747

-

-

-

37

784

37

5%

Consolidated Sales and Revenues.......

$ 13,510

$ (751)

$ 86

$ (124)

$ 37

$ 12,758

$ (752)

(6%)

 

Sales and Revenues by Geographic Region

External Sales and Total Sales and

North America Latin America EAME Asia/Pacific Revenues Inter-Segment Revenues

(Millions of dollars)

Third Quarter 2019

$

% Chg

$

% Chg

$

% Chg

$

% Chg

$

% Chg

$

% Chg

$

% Chg

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction Industries.........

$ 2,728

3%

$ 413

12%

$ 1,048

(6%)

$ 1,086

(29%)

$ 5,275

(7%)

$ 14

(52%)

$ 5,289

(7%)

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

789

(7%)

349

(18%)

396

(31%)

645

(6%)

2,179

(14%)

132

32%

2,311

(12%)

Energy & Transportation........

2,129

(8%)

378

15%

1,224

4%

831

10%

4,562

-%

890

(9%)

5,452

(2%)

All Other Segment............

1

(93%)

6

-%

8

100%

12

(33%)

27

(27%)

84

11%

111

(2%)

Corporate Items and Eliminations...

(62)

 

1

 

  1.  

 

(1)

 

(69)

 

(1,120)

 

(1,189)

 

Machinery, Energy &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation Sales..........

5,585

(3%)

1,147

2%

2,669

(7%)

2,573

(14%)

11,974

(6%)

-

-

11,974

(6%)

Financial Products Segment......

560

-%

79

16%

102

1%

124

6%

865 1

2%

-

-

865

2%

Corporate Items and Eliminations...

(43)

 

(15)

 

  1.  

 

(15)

 

(81)

 

-

 

(81)

 

Financial Products Revenues....

517

4%

64

14%

94

(1%)

109

10%

784

5%

-

-

784

5%

Consolidated Sales and Revenues .

$ 6,102

(3%)

$ 1,211

2%

$ 2,763

(7%)

$ 2,682

(13%)

$ 12,758

(6%)

$ -

-

$ 12,758

(6%)

Third Quarter 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction Industries.........

$ 2,646

 

$ 369

 

$ 1,109

 

$ 1,530

 

$ 5,654

 

$ 29

 

$ 5,683

 

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

849

 

427

 

574

 

688

 

2,538

 

100

 

2,638

 

Energy & Transportation........

2,309

 

330

 

1,180

 

758

 

4,577

 

978

 

5,555

 

All Other Segment............

15

 

-

 

4

 

18

 

37

 

76

 

113

 

Corporate Items and Eliminations...

(40)

 

1

 

  1.  

 

1

 

(43)

 

(1,183)

 

(1,226)

 

Machinery, Energy &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation Sales..........

5,779

 

1,127

 

2,862

 

2,995

 

12,763

 

-

 

12,763

 

Financial Products Segment......

559

 

68

 

101

 

117

 

845 1

 

-

 

845

 

Corporate Items and Eliminations...

(62)

 

(12)

 

  1.  

 

(18)

 

(98)

 

-

 

(98)

 

Financial Products Revenues....

497

 

56

 

95

 

99

 

747

 

-

 

747

 

Consolidated Sales and Revenues .

$ 6,276

 

$ 1,183

 

$ 2,957

 

$ 3,094

 

$ 13,510

 

$ -

 

$ 13,510

 

 

1 Includes revenues from Machinery, Energy & Transportation of $131 million and $122 million in the third quarter of 2019 and 2018, respectively.

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CONSOLIDATED OPERATING PROFIT

 

The chart above graphically illustrates reasons for the change in consolidated operating profit between the third quarter of 2018 (at left) and the third quarter of 2019 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees. The bar titled Other includes consolidating adjustments and Machinery, Energy & Transportation's other operating (income) expenses.

Operating profit for the third quarter of 2019 was $2.020 billion, a decrease of $115 million, or 5 percent, compared with $2.135 billion in the third quarter of 2018. The decrease was primarily due to lower sales volume. This decrease was partially offset by favorable price realization and lower selling, general and administrative (SG&A) and research and development (R&D) expenses.

Favorable price realization continued to offset manufacturing costs. The increase in manufacturing costs was primarily due to higher warranty expense, and unfavorable cost absorption, partially offset by lower period manufacturing costs primarily due to lower short-term incentive compensation expense. Cost absorption was unfavorable as inventory increased more significantly in the third quarter of 2018, than in the third quarter of 2019. Lower SG&A/R&D expenses were mostly due to a reduction in short-term incentive compensation expense.

Short-term incentive compensation expense was about $130 million in the third quarter of 2019, compared with about $350 million in the third quarter of 2018.

Operating profit margin was 15.8 percent for the third quarters of both 2019 and 2018.

 

Profit (Loss) by Segment
(Millions of dollars)

Third Quarter 2019

Third Quarter 2018

 

$

Change

%
Change

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

$

940

$

1,058

$

(118)

(11%)

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

 

311

 

414

 

(103)

(25%)

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

 

1,021

 

973

 

48

5%

All Other Segment............................

 

(21)

 

(10)

 

(11)

(110%)

Corporate Items and Eliminations..................

 

(363)

 

(371)

 

8

 

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

 

1,888

 

2,064

 

(176)

(9%)

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

 

218

 

201

 

17

8%

Corporate Items and Eliminations..................

 

21

 

(30)

 

51

 

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

 

239

 

171

 

68

40%

Consolidating Adjustments.......................

 

(107)

 

(100)

 

(7)

 

Consolidated Operating Profit...................

$

2,020

$

2,135

$

(115)

(5%)

 

 

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Other Profit/Loss and Tax Items

 

 

Interest expense excluding Financial Products in the third quarter of 2019 was $103 million, compared with $102 million in the third quarter of 2018.

Other income/expense in the third quarter of 2019 was income of $88 million, compared with income of $102 million in the third quarter of 2018.

The provision for income taxes for the third quarter of 2019 reflected an estimated annual tax rate of 26 percent, compared with 24 percent for the third quarter of 2018, excluding the discrete item discussed in the following paragraph. The increase was largely driven by the application of U.S. tax reform provisions to the earnings of certain non-U.S. subsidiaries, which do not have a calendar fiscal year-end. These provisions did not apply to these subsidiaries in 2018.

The provision for income taxes in the third quarter of 2018 also included a $95 million net benefit to adjust deferred tax balances. See Note 15 of Part 1, Item 1 of this Form 10-Q for more information.

 

Construction Industries

Construction Industries' total sales were $5.289 billion in the third quarter of 2019, a decrease of $394 million, or 7 percent, compared with $5.683 billion in the third quarter of 2018. The decrease was due to lower sales volume driven by the unfavorable impact from changes in dealer inventories, partially offset by higher end-user demand for construction equipment. Dealers increased inventories during the third quarter of 2018, compared with a decrease during the third quarter of 2019.

In North America, sales increased primarily due to favorable price realization and higher demand for equipment, mostly to support road and non-residential building construction activities.

Sales were higher in Latin America, but construction activities remained at low levels.

In EAME, the sales decrease was primarily due to currency impacts related to the euro. Unfavorable price realization and lower sales volume also contributed to the decrease.

Sales in Asia/Pacific were lower across most of the region primarily due to lower demand in China, including unfavorable changes in dealer inventories, amid continued competitive pressures.

Construction Industries' profit was $940 million in the third quarter of 2019, a decrease of $118 million, or 11 percent, compared with $1.058 billion in the third quarter of 2018. The decrease was primarily due to lower sales volume, partially offset by lower SG&A/R&D expenses and favorable price realization. Lower SG&A/R&D expenses were primarily due to lower short-term incentive compensation expense.

Construction Industries' profit as a percent of total sales was 17.8 percent in the third quarter of 2019, compared with 18.6 percent in the third quarter of 2018.

Resource Industries

Resource Industries' total sales were $2.311 billion in the third quarter of 2019, a decrease of $327 million, or 12 percent, compared with $2.638 billion in the third quarter of 2018. The decrease was due to lower sales volume driven by the unfavorable impact from changes in dealer inventories, partially offset by higher end-user demand for equipment and favorable price realization. Dealers decreased inventories during the third quarter of 2019, compared with an increase during the third quarter of 2018. While commodity prices are generally supportive of reinvestment, the company believes mining customers are cautious due to economic uncertainty. Mining sales were also impacted by lower thermal coal prices. In addition, sales decreased for equipment supporting non-residential construction and quarry and aggregates driven by a reduction in dealer inventories.

Resource Industries' profit was $311 million in the third quarter of 2019, a decrease of $103 million, or 25 percent, compared with $414 million in the third quarter of 2018. The decrease was primarily due to lower sales volume, partially offset by favorable price realization. Manufacturing costs were about flat as higher warranty expense was offset by lower period manufacturing costs, primarily due to lower short-term incentive compensation expense.

Resource Industries' profit as a percent of total sales was 13.5 percent in the third quarter of 2019, compared with 15.7 percent in the third quarter of 2018.

 

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Energy & Transportation

 

Sales by Application
(Millions of dollars)

Third
Quarter

2019

Third
Quarter

2018

$

Change

%
Change

Oil and Gas................................................

$ 1,246

$ 1,362

$ (116)

(9%)

Power Generation............................................

1,123

1,102

21

2%

Industrial.................................................

980

863

117

14%

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

1,213

1,250

(37)

(3%)

External Sales..............................................

4,562

4,577

(15)

-%

Inter-segment.........................................

890

978

(88)

(9%)

Total Sales................................................

$ 5,452

$ 5,555

$ (103)

(2%)

 

Energy & Transportation's total sales were $5.452 billion in the third quarter of 2019, a decrease of $103 million, or 2 percent, compared with $5.555 billion in the third quarter of 2018. Sales decreased primarily due to lower inter-segment engine sales.

Oil and Gas - Sales decreased for reciprocating engines in North America primarily due to lower demand in well servicing applications. This was partially offset by higher sales of turbines and turbine-related services.

Power Generation - Sales increased mostly due to higher deliveries in North America for large diesel reciprocating engines and turbines, partially offset by lower sales of reciprocating engines in EAME.

Industrial - Sales improved primarily in EAME and Asia/Pacific driven by higher end-user demand. Transportation - Sales were lower primarily due to timing of locomotive deliveries.

Energy & Transportation's profit was $1.021 billion in the third quarter of 2019, an increase of $48 million, or 5 percent, compared with $973 million in the third quarter of 2018. Lower sales volume, including an unfavorable mix of products, was more than offset by favorable other operating income/expense and SG&A/R&D expenses mostly due to a reduction in short-term incentive compensation expense.

Energy & Transportation's profit as a percent of total sales was 18.7 percent in the third quarter of 2019, compared with 17.5 percent in the third quarter of 2018.

Financial Products Segment

Financial Products' segment revenues were $865 million in the third quarter of 2019, an increase of $20 million, or 2 percent, from the third quarter of 2018. The increase was primarily due to higher average financing rates in North America and Asia/Pacific, partially offset by an unfavorable impact due to the absence of fees associated with an intercompany credit facility in North America.

Financial Products' segment profit was $218 million in the third quarter of 2019, up 8 percent compared with $201 million in the third quarter of 2018. The favorable change was primarily due to an increase in net yield on average earning assets and a decrease in the provision for credit losses at Cat Financial, partially offset by unfavorable impacts from higher SG&A expenses, the mark-to-market on equity securities in Insurance Services and the absence of the intercompany credit facility.

At the end of the third quarter of 2019, past dues at Cat Financial were 3.19 percent, compared with 3.47 percent at the end of the third quarter of 2018. Write-offs, net of recoveries, were $103 million for the third quarter of 2019, compared with $40 million for the third quarter of 2018. The increase in write-offs, net of recoveries, was primarily driven by Caterpillar Power Finance, concentrated in the marine portfolio, and EAME, mostly in the Middle East. As of September 30, 2019, Cat Financial's allowance for credit losses totaled $434 million, or 1.57 percent of finance receivables, compared with $523 million, or 1.81 percent of finance receivables at June 30, 2019. The allowance for credit losses at year-end 2018 was $511 million, or 1.80 percent of finance receivables.

Corporate Items and Eliminations

Expense for corporate items and eliminations was $342 million in the third quarter of 2019, a decrease of $59 million from the third quarter of 2018, primarily due to lower restructuring costs, partially offset by methodology differences.

 

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NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2018 CONSOLIDATED SALES AND REVENUES

 

The chart above graphically illustrates reasons for the change in consolidated sales and revenues between the nine months ended September 30, 2018 (at left) and the nine months ended September 30, 2019 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.

Total sales and revenues were $40.656 billion for the nine months ended September 30, 2019, an increase of $276 million, or 1 percent, compared with $40.380 billion for the nine months ended September 30, 2018. The increase was primarily due to favorable price realization, mostly offset by unfavorable currency impacts, primarily from a weaker euro, Australian dollar and Chinese yuan. Sales increased in Resource Industries and Construction Industries, while Energy & Transportation decreased. Financial Products' revenues also increased.

North America sales improved 5 percent driven by higher demand, including a favorable impact from changes in dealer inventories, and favorable price realization. Dealers increased inventories more significantly during the nine months ended September 30, 2019, than during the nine months ended September 30, 2018.

Sales increased 6 percent in Latin America due to improved demand in a few countries, while the region remains at low levels.

EAME sales decreased 6 percent primarily driven by the unfavorable impact from changes in dealer inventories and unfavorable currency impacts, partially offset by favorable price realization. The unfavorable currency impacts were due to a weaker euro and British pound. Dealers increased inventories more significantly during the nine months ended September 30, 2018, than during the nine months ended September 30, 2019.

Asia/Pacific sales decreased 5 percent mostly due to unfavorable currency impacts and lower demand, including unfavorable changes in dealer inventories, partially offset by favorable price realization. The unfavorable currency impacts were due to a weaker Australian dollar and Chinese yuan. Dealers increased inventories more during the nine months ended September 30, 2018, than during the nine months ended September 30, 2019. The lower demand was primarily in China due to continued competitive pressures, which was partially offset by higher demand in other countries in the region.

During the nine months ended September 30, 2018, dealer machine and engine inventories increased about $2.1 billion, compared to an increase of about $1.4 billion during the nine months ended September 30, 2019. Dealers are independent, and there could be many reasons for changes in their inventory levels, including their expectations of future demand and product delivery times. Dealers' demand expectations take into account seasonal changes, macroeconomic conditions, machine rental rates and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers. Based on current dealer inventory levels and global economic uncertainty, we now expect dealer inventories will increase for the full year by about $500 million compared to prior year end.

 

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Sales and Revenues by Segment

Nine
Months

 

 

 

 

Nine
Months

 

 

 

Ended

 

 

 

Inter-

Ended

 

 

 

September

Sales

Price

 

Segment /

September

$

%

(Millions of dollars)

30, 2018

Volume

Realization

Currency

Other

30, 2019

Change

Change

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

$ 17,532

$ 5

$ 435

$ (317)

$ (26)

$ 17,629

$ 97

1%

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

7,473

170

289

(99)

48

7,881

408

5%

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

16,498

(91)

82

(239)

(102)

16,148

(350)

(2%)

All Other Segment..................

353

  1.     

-

(3)

21

357

4

1 %

Corporate Items and Eliminations........

(3,664)

(41)

(1)

1

59

(3,646)

18

 

Machinery, Energy & Transportation Sales.

38,192

29

805

(657)

-

38,369

177

-%

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

2,467

-

-

-

121

2,588

121

5%

Corporate Items and Eliminations........

(279)

-

-

-

(22)

(301)

(22)

 

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

2,188

-

-

-

99

2,287

99

5%

Consolidated Sales and Revenues.......

$ 40,380

$ 29

$ 805

$ (657)

$ 99

$ 40,656

$ 276

1%

 

Sales and Revenues by Geographic Region

(Millions of dollars)

Nine Months Ended September 30,

North America

Latin America

EAME

 

Asia/Pacific

External Sales and Revenues

Inter-Segment

Total Sales and
Revenues

$

% Chg

$

% Chg

$

% Chg

$

% Chg

$

% Chg

$

% Chg

$

% Chg

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

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

$ 9,206

15%

$ 1,124

2%

$ 3,162

(6%)

$ 4,081

(18%)

$ 17,573

1%

$ 56

(32%)

$ 17,629

1%

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

2,798

14%

1,220

3%

1,310

(21%)

2,209

17%

7,537

5%

344

16%

7,881

5%

Energy & Transportation........

6,577

(8%)

1,035

15%

3,416

-%

2,291

8%

13,319

(2%)

2,829

(3%)

16,148

(2%)

All Other Segment.............

23

(51%)

7

600%

23

92%

45

(18%)

98

(15%)

259

9%

357

1%

Corporate Items and Eliminations...

(142)

 

-

 

  1.  

 

(1)

 

(158)

 

(3,488)

 

(3,646)

 

Machinery, Energy &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation Sales..........

18,462

5%

3,386

6%

7,896

(6%)

8,625

(5%)

38,369

-%

-

-%

38,369

-%

Financial Products Segment.......

1,681

5%

225

6%

306

1%

376

10%

2,588 1

5%

-

-%

2,588

5%

Corporate Items and Eliminations...

(184)

 

(37)

 

(26)

 

(54)

 

(301)

 

-

 

(301)

 

Financial Products Revenues.....

1,497

4%

188

6%

280

(2%)

322

13%

2,287

5%

-

-%

2,287

5%

Consolidated Sales and Revenues..

$ 19,959

5%

$ 3,574

6%

$ 8,176

(6%)

$ 8,947

(4%)

$ 40,656

1%

$ -

-%

$ 40,656

1%

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$ 8,005

 

$ 1,105

 

$ 3,347

 

$ 4,993

 

$ 17,450

 

$ 82

 

$ 17,532

 

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

2,451

 

1,181

 

1,663

 

1,882

 

7,177

 

296

 

7,473

 

Energy & Transportation........

7,116

 

897

 

3,425

 

2,129

 

13,567

 

2,931

 

16,498

 

All Other Segment.............

47

 

1

 

12

 

55

 

115

 

238

 

353

 

Corporate Items and Eliminations...

(108)

 

(1)

 

(8)

 

-

 

(117)

 

(3,547)

 

(3,664)

 

Machinery, Energy &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation Sales..........

17,511

 

3,183

 

8,439

 

9,059

 

38,192

 

-

 

38,192

 

Financial Products Segment.......

1,608

 

213

 

303

 

343

 

2,467 1

 

-

 

2,467

 

Corporate Items and Eliminations...

(168)

 

(36)

 

(18)

 

(57)

 

(279)

 

-

 

(279)

 

Financial Products Revenues.....

1,440

 

177

 

285

 

286

 

2,188

 

-

 

2,188

 

Consolidated Sales and Revenues..

$ 18,951

 

$ 3,360

 

$ 8,724

 

$ 9,345

 

$ 40,380

 

$ -

 

$ 40,380

 

 

1 Includes revenues from Machinery, Energy & Transportation of $398 million and $345 million in the nine months ended September 30, 2019 and 2018, respectively.

 

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CONSOLIDATED OPERATING PROFIT

 

The chart above graphically illustrates reasons for the change in consolidated operating profit between the nine months ended September 30, 2018 (at left) and the nine months ended September 30, 2019 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees. The bar titled Other includes consolidating adjustments and Machinery, Energy & Transportation's other operating (income) expenses.

Operating profit for the nine months ended September 30, 2019, was $6.440 billion, compared with $6.410 billion for the nine months ended September 30, 2018. The increase of $30 million was primarily due to favorable price realization mostly offset by higher manufacturing costs. In addition, lower SG&A/R&D expenses, higher Financial Products' operating profit and favorable other operating (income) expense were more than offset by lower sales volume and unfavorable currency impacts.

The lower sales volume was the result of an unfavorable mix of products primarily within Construction Industries and Energy & Transportation partially offset by favorable sales volume in Resource Industries.

The increase in manufacturing costs was primarily due to higher variable labor and burden, warranty expense and material costs. SG&A/R&D expenses were lower primarily due to lower short-term incentive compensation expense, partially offset by increased targeted investments and timing of corporate-level expenses.

Short-term incentive compensation expense is directly related to financial and operational performance, measured against targets set annually. Expense for the nine months ended September 30, 2019, was about $560 million, compared with about $1.070 billion for the nine months ended September 30, 2018. For 2019, short-term incentive compensation expense is expected to be about $750 million, compared with $1.4 billion in 2018.

 

Profit by Segment
(Millions of dollars)

Nine Months Ended September 30, 2019

Nine Months Ended
September 30, 2018

 

$

Change

%
Change

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

$

3,272

$

3,329

$

(57)

(2)%

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

 

1,368

 

1,203

 

165

14 %

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

 

2,745

 

2,859

 

(114)

(4)%

All Other Segment..........................

 

15

 

70

 

(55)

(79)%

Corporate Items and Eliminations................

 

(1,179)

 

(1,208)

 

29

 

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

 

6,221

 

6,253

 

(32)

(1)%

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

 

622

 

476

 

146

31 %

Corporate Items and Eliminations................

 

(75)

 

(37)

 

(38)

 

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

 

547

 

439

 

108

25 %

Consolidating Adjustments.....................

 

(328)

 

(282)

 

(46)

 

Consolidated Operating Profit.................

$

6,440

$

6,410

$

30

- %

 

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Other Profit/Loss and Tax Items

Interest expense excluding Financial Products for the nine months ended September 30, 2019, was $309 million, compared with $305 million for the nine months ended September 30, 2018.

Other income/expense for the nine months ended September 30, 2019, was income of $316 million, compared with income of $350 million for the nine months ended September 30, 2018. The unfavorable change was primarily a result of the impact from pension and other postemployment benefits (OPEB) plans, mostly offset by lower currency translation and hedging net losses.

The provision for income taxes for the first nine months of 2019 reflected an estimated annual tax rate of 26 percent, compared with 24 percent for the first nine months of 2018, excluding the discrete items discussed in the following paragraph. The increase was largely driven by the application of U.S. tax reform provisions to the earnings of certain non-U.S. subsidiaries, which do not have a calendar fiscal year-end. These provisions did not apply to these subsidiaries in 2018.

As a result of final regulations received in 2019 providing additional guidance related to the calculation of the mandatory deemed repatriation of non-U.S. earnings due to U.S. tax reform, we recorded a discrete tax benefit of $178 million in the first nine months of 2019 to adjust unrecognized tax benefits. In addition, a discrete tax benefit of $28 million was recorded in the first nine months of 2019, compared with $52 million for the first nine months of 2018, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense. The provision for income taxes for the first nine months of 2018 also included a $120 million net benefit to adjust deferred tax balances. See Note 15 of Part 1, Item 1 of this Form 10-Q for more information.

Construction Industries

Construction Industries' total sales were $17.629 billion for the nine months ended September 30, 2019, an increase of $97 million, or 1 percent, compared with $17.532 billion for the nine months ended September 30, 2018. The increase was mostly due to favorable price realization, partially offset by unfavorable currency impacts, primarily from a weaker euro, Chinese yuan and Australian dollar.

  • Sales volume was about flat as higher end-user demand for construction equipment was offset by unfavorable changes in dealer inventories. Dealer inventories increased significantly more during the nine months ended September 30, 2018, than during the nine months ended September 30, 2019.

Sales increased in North America and Latin America, and decreased in Asia/Pacific and EAME.

  • In North America, the sales increase was primarily due to higher demand for construction equipment, including favorable changes in dealer inventories, and favorable price realization. Dealer inventories increased significantly more in the nine months ended September 30, 2019, than during the nine months ended September 30, 2018.
  • Sales were higher in Latin America, but construction activities remained at low levels.
  • Sales decreased in EAME primarily due to unfavorable currency impacts, mostly from a weaker euro, and lower sales volume partially offset by favorable price realization. Sales volume declined primarily due to unfavorable impacts of changes in dealer inventories, partially offset by higher end-user demand. Dealer inventories increased more significantly during the nine months ended September 30, 2018, than during the nine months ended September 30, 2019.
  • Sales in Asia/Pacific decreased mostly due to lower demand, including unfavorable changes in dealer inventories and unfavorable currency impacts. The unfavorable currency impacts were due to a weaker Chinese yuan and Australian dollar. Dealers increased inventories during the nine months ended September 30, 2018 and decreased inventories during the nine months ended September 30, 2019. The lower demand was primarily in China due to continued competitive pressures.

Construction Industries' profit was $3.272 billion for the nine months ended September 30, 2019, a decrease of $57 million, or 2 percent, compared with $3.329 billion for the nine months ended September 30, 2018. The decrease was primarily due to favorable price realization and lower SG&A/R&D expenses, which were more than offset by higher manufacturing costs and lower sales volume, including an unfavorable mix of products. Manufacturing costs increased primarily due to unfavorable variable labor and burden and higher material costs. Lower SG&A/R&D expenses were due to lower short-term incentive compensation expense, partially offset by increased targeted investments.

Construction Industries' profit as a percent of total sales was 18.6 percent for the nine months ended September 30, 2019, compared with 19.0 percent for the nine months ended September 30, 2018.

 

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Resource Industries

Resource Industries' total sales were $7.881 billion for the nine months ended September 30, 2019, an increase of $408 million, or 5 percent, compared with $7.473 billion from the nine months ended September 30, 2018. The increase was primarily due to higher equipment end-user demand and favorable price realization, partially offset by unfavorable changes in dealer inventories. Higher sales were driven by increased capital investment by mining customers to support ongoing mine site operations. In addition, sales increased for our non-residential construction and quarry and aggregate customers. Dealers increased inventories more significantly during the nine months ended September 30, 2018, than during the nine months ended September 30, 2019.

Resource Industries' profit was $1.368 billion for the nine months ended September 30, 2019, an increase $165 million, or 14 percent, compared with $1.203 billion for the nine months ended September 30, 2018. The improvement was mostly due to favorable price realization and higher sales volume, partially offset by higher manufacturing costs. Manufacturing costs increased due to higher warranty expense, variable labor and burden and material costs.

Resource Industries' profit as a percent of total sales was 17.4 percent for the nine months ended September 30, 2019, compared with 16.1 percent for the nine months ended September 30, 2018.

Energy & Transportation

 

Sales by Application

 

 

 

 

 

 

(Millions of dollars)

Nine Months

Nine Months

 

 

 

Ended September

Ended September

$

%

 

30, 2019

30, 2018

Change

Change

Oil and Gas......................................

$

3,682

$

4,044

$ (362)

(9%)

Power Generation..................................

 

3,180

 

3,063

117

4%

Industrial.......................................

 

2,841

 

2,738

103

4%

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

 

3,616

 

3,722

(106)

(3%)

External Sales....................................

 

13,319

 

13,567

(248)

(2%)

Inter-Segment................................

 

2,829

 

2,931

(102)

(3%)

Total Sales.................................

$

16,148

$

16,498

$ (350)

(2%)

 

Energy & Transportation's total sales were $16.148 billion for the nine months ended September 30, 2019, a decrease of $350 million, or 2 percent, compared with $16.498 billion for the nine months ended September 30, 2018. The decrease was primarily due to unfavorable currency impacts and lower sales volume, including inter-segment sales, partially offset by favorable price realization.

Oil and Gas - Sales decreased in North America primarily due to lower new equipment demand for well servicing and timing of turbine project deliveries that occurred in the nine months ended September 30, 2018. Lower sales in North America were partially offset by increases in all other regions.

Power Generation - Sales increased mostly due to higher deliveries in North America for both diesel reciprocating engines and turbines. The increase was partially offset by lower diesel reciprocating engine sales in EAME driven by gas power generation applications and unfavorable currency impacts.

Industrial - Sales improved primarily in Asia/Pacific and North America driven by higher end-user demand. Transportation - Sales were slightly lower primarily due to the timing of locomotive deliveries.

Energy & Transportation's profit was $2.745 billion for the nine months ended September 30, 2019, a decrease of $114 million, or 4 percent, compared with $2.859 billion for the nine months ended September 30, 2018. The decrease was mostly due to lower sales volumes, including an unfavorable mix of applications, and higher manufacturing costs. This was partially offset by favorable price realization, lower SG&A/R&D expenses and favorable other operating income/expense. Manufacturing costs increased due to higher variable labor and burden, targeted investments, material costs and warranty expense, partially offset by lower short-term incentive compensation expense. Lower SG&A/R&D expenses were primarily due to lower short-term incentive compensation expense, partially offset by increased targeted investments.

Energy & Transportation's profit as a percent of total sales was 17.0 percent for the nine months ended September 30, 2019, compared with 17.3 percent for the nine months ended September 30, 2018.

 

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Financial Products Segment

Financial Products' segment revenues were $2.588 billion for the nine months ended September 30, 2019, an increase of $121 million, or 5 percent, compared with $2.467 billion for the nine months ended September 30, 2018. The increase was primarily due to higher average financing rates in North America and Asia/Pacific, higher average earning assets in North America and a favorable impact from Insurance Services revenues across all regions. These favorable impacts were partially offset by the absence of fees associated with an intercompany credit facility in North America.

Financial Products' segment profit was $622 million for the nine months ended September 30, 2019, up 31 percent compared with $476 million for the nine months ended September 30, 2018. The favorable change was primarily due to a decrease in the provision for credit losses at Cat Financial, an increase in net yield on average earning assets, and favorable impacts from the mark-to-market on equity securities in Insurance Services and Insurance Services margin. These favorable impacts were partially offset by higher SG&A expenses and the absence of the intercompany credit facility.

Corporate Items and Eliminations

Expense for corporate items and eliminations was $1.254 billion for the nine months ended September 30, 2019, compared with $1.245 billion for the nine months ended September 30, 2018.

RESTRUCTURING COSTS

Restructuring costs for the three and nine months ended September 30, 2019 and 2018 were as follows:

 

(Millions of dollars)

 

Three Months Ended September 30

 

2019 2018

 

Employee separations 1

 ...................................................................$

 

8 $

44

Long-lived asset impairments 1

 

3

18

Other 2

 

13

48

Total restructuring costs................................................

$

24 $

110

 

 

Nine Months Ended September 30

 

 

2019 2018

 

Employee separations 1

 ...................................................................$

 

33 $

121

Long-lived asset impairments 1

 

39

49

Other 2

 

110

123

Total restructuring costs................................................

$

182 $

293

 

1 Recognized in Other operating (income) expenses.

2 Represents costs related to our restructuring programs, primarily for inventory write-downs, project management costs, accelerated depreciation, building demolition and equipment relocation, all of which are primarily included in Cost of goods sold.

For the nine months ended September 30, 2019, the restructuring costs were primarily related to restructuring actions in Construction Industries and Energy & Transportation. For the nine months ended September 30, 2018, the restructuring costs were primarily related to ongoing facility closures across the company.

Certain restructuring costs are a reconciling item between Segment profit and Consolidated profit before taxes. The following table summarizes the 2018 and 2019 employee separation activity:

 

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(Millions of dollars)

 

 

Liability balance at December 31, 2017......................................................

$

249

Increase in liability (separation charges)....................................................

 

112

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

 

(276)

Liability balance at December 31, 2018......................................................

 

85

Increase in liability (separation charges)....................................................

 

33

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

 

(73)

Liability balance at September 30, 2019......................................................

$

45

 

Most of the liability balance at September 30, 2019 is expected to be paid in 2019 and 2020.

In September 2015, we announced a large scale restructuring plan (the Plan) including a voluntary retirement enhancement program for qualifying U.S. employees, several voluntary separation programs outside of the United States, additional involuntary programs throughout the company and manufacturing facility consolidations and closures that occurred through 2018. The largest action among those included in the Plan was related to our European manufacturing footprint, which led to the Gosselies, Belgium, facility closure. In the first nine months of 2019, we incurred $30 million of restructuring costs related to the Plan. Total restructuring costs incurred since the inception of the Plan were $1,818 million. The remaining costs of approximately $20 million related to the Plan are expected to be recognized in 2019.

We expect that restructuring actions will result in an incremental benefit to operating costs, primarily Cost of goods sold and SG&A expenses of about $300 million in 2019 compared with 2018.

GLOSSARY OF TERMS

  1. All Other Segment - Primarily includes activities such as: business strategy, product management and development, manufacturing and sourcing of filters and fluids, undercarriage, ground-engaging tools, fluid transfer products, precision seals, rubber sealing and connecting components primarily for Cat(R) products; parts distribution; integrated logistics solutions, distribution services responsible for dealer development and administration including a wholly owned dealer in Japan, dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; 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.
  2. Consolidating Adjustments - Elimination of transactions between Machinery, Energy & Transportation and Financial Products.
  3. Construction Industries - A segment primarily responsible for supporting customers using machinery in infrastructure, forestry 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; forestry excavators; feller bunchers; harvesters; knuckleboom loaders; motor graders; pipelayers; road reclaimers; skidders; skid steer loaders; telehandlers; small and medium track-type tractors; track-type loaders; utility vehicles; wheel excavators; compact, small and medium wheel loaders; and related parts and work tools.
  4. Corporate Items and Eliminations - Includes corporate-level expenses; timing differences, as some expenses are reported in segment profit on a cash basis; methodology differences between segment and consolidated external reporting; restructuring costs; and inter-segment eliminations.
  5. Currency - With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to operating profit, currency represents the net translation impact on sales and operating costs resulting from changes in foreign currency exchange rates versus the U.S. dollar. Currency only includes the impact on sales and operating profit for the Machinery, Energy & Transportation lines of business; currency impacts on Financial Products' revenues and operating profit are included in the Financial Products' portions of the respective analyses. With respect to other income/expense, currency represents the effects of forward and option contracts entered into by the company to reduce the risk of fluctuations in exchange rates (hedging) and the net effect of changes in foreign currency exchange rates on our foreign currency assets and liabilities for consolidated results (translation).
  6. EAME - A geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States (CIS).
  7. Earning Assets - Assets consisting primarily of total finance receivables net of unearned income, plus equipment on operating leases, less accumulated depreciation at Cat Financial.

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  1. Energy & Transportation - A segment primarily responsible for supporting customers using reciprocating engines, turbines,
    diesel-electric locomotives and related parts across industries serving Oil and Gas, Power Generation, Industrial and Transportation applications, including marine and rail-related businesses. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support of turbine machinery and integrated systems and solutions and turbine-related services; reciprocating engine-powered generator sets; integrated systems used in the electric power generation industry; reciprocating engines and integrated systems and solutions for the marine and oil and gas industries; reciprocating engines supplied to the industrial industry as well as Cat machinery; the remanufacturing of Caterpillar engines and components and remanufacturing services for other companies; the business strategy, product design, product management and development, manufacturing, remanufacturing, leasing and service of diesel-electric locomotives and components and other rail-related products and services; and product support of on-highway vocational trucks for North America.
  1. Financial Products Segment - Provides financing alternatives to customers and dealers around the world for Caterpillar products, as well as financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The segment also provides insurance and risk management products and services that help customers and dealers manage their business risk. Insurance and risk management products offered include physical damage insurance, inventory protection plans, extended service coverage for machines and engines, and dealer property and casualty insurance. The various forms of financing, insurance and risk management products offered to customers and dealers help support the purchase and lease of our equipment. The segment also earns revenues from Machinery, Energy & Transportation, 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.
  2. Latin America - A geographic region including Central and South American countries and Mexico.
  3. Machinery, Energy & Transportation (ME&T) - Represents the aggregate total of Construction Industries, Resource Industries, Energy & Transportation, All Other Segment and related corporate items and eliminations.
  4. Machinery, Energy & Transportation's Other Operating (Income) Expenses - Comprised primarily of gains/losses on disposal of long-lived assets, gains/losses on divestitures and legal settlements and accruals.
  5. Manufacturing Costs - Manufacturing costs exclude the impacts of currency and represent the volume-adjusted change for variable costs and the absolute dollar change for period manufacturing costs. Variable manufacturing costs are defined as having a direct relationship with the volume of production. This includes material costs, direct labor and other costs that vary directly with production volume such as freight, power to operate machines and supplies that are consumed in the manufacturing process. Period manufacturing costs support production but are defined as generally not having a direct relationship to short-term changes in volume. Examples include machinery and equipment repair, depreciation on manufacturing assets, facility support, procurement, factory scheduling, manufacturing planning and operations management.
  6. Price Realization - The impact of net price changes excluding currency and new product introductions. Price realization includes geographic mix of sales, which is the impact of changes in the relative weighting of sales prices between geographic regions.
  7. Resource Industries - A segment primarily responsible for supporting customers using machinery in mining, quarry and aggregates, waste and material handling applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large track-type tractors, large mining trucks, hard rock vehicles, longwall miners, electric rope shovels, draglines, hydraulic shovels, rotary drills, large wheel loaders, off-highway trucks, articulated trucks, wheel tractor scrapers, wheel dozers, landfill compactors, soil compactors, hard rock continuous mining systems, select work tools, machinery components, electronics and control systems and related parts. In addition to equipment, Resource Industries also develops and sells technology products and services to provide customers fleet management, equipment management analytics and autonomous machine capabilities. Resource Industries also manages areas that provide services to other parts of the company, including integrated manufacturing and research and development.
  8. 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.
  9. Sales Volume - With respect to sales and revenues, sales volume represents the impact of changes in the quantities sold for Machinery, Energy & Transportation as well as the incremental sales impact of new product introductions, including emissions-

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related product updates. With respect to operating profit, sales volume represents the impact of changes in the quantities sold for Machinery, Energy & Transportation combined with product mix as well as the net operating profit impact of new product introductions, including emissions-related product updates. Product mix represents the net operating profit impact of changes in the relative weighting of Machinery, Energy & Transportation sales with respect to total sales. The impact of sales volume on segment profit includes inter-segment sales.

18. Services - Enterprise services include, but are not limited to, aftermarket parts, Financial Products' revenues and other service-related revenues. Machinery, Energy & Transportation segments exclude Financial Products' revenues.

LIQUIDITY AND CAPITAL RESOURCES 
Sources of funds

We generate significant capital resources from operating activities, which are the primary source of funding for our ME&T operations. Funding for these businesses is also available from commercial paper and long-term debt issuances. Financial Products' operations are funded primarily from commercial paper, term debt issuances and collections from its existing portfolio. During the first nine months of 2019, we experienced favorable global liquidity conditions in both our ME&T and Financial Products' operations. On a consolidated basis, we ended the first nine months of 2019 with $7.91 billion of cash, an increase of $49 million from year-end 2018. We intend to maintain a strong cash and liquidity position.

Consolidated operating cash flow for the first nine months of 2019 was $4.48 billion, which was the same as the first nine months of 2018. Compared to the first nine months of 2018, we experienced favorable changes in working capital in 2019, which were offset by lower profit excluding accruals for short-term incentive compensation, a higher discretionary pension contribution and higher cash payments for income taxes. Within working capital, changes to accounts receivable, inventories, accrued expenses and customer advances favorably impacted cash flow, but were partially offset by changes in accounts payable. See further discussion of operating cash flow under ME&T and Financial Products.

Total debt as of September 30, 2019 was $37.91 billion, an increase of $1.35 billion from year-end 2018. Debt related to Financial Products increased $209 million. Debt related to ME&T increased $1.14 billion in the first nine months of 2019, primarily due to the issuance of debt to finance a discretionary pension contribution, which was partially offset by the impact of new accounting guidance on a previously failed sale-leaseback transaction in Japan. In the first nine months of 2019, we repurchased $3.28 billion of Caterpillar common stock.

We have three global credit facilities with a syndicate of banks totaling $10.50 billion (Credit Facility) available in the aggregate to both Caterpillar and Cat Financial for general liquidity purposes. Based on management's allocation decision, which can be revised from time to time, the portion of the Credit Facility available to ME&T as of September 30, 2019 was $2.75 billion. Information on our Credit Facility is as follows:

  • In September 2019, we entered into a new 364-day facility. The 364-day facility of $3.15 billion (of which $0.82 billion is available to ME&T) expires in September 2020.
  • In September 2019, we amended and restated the 2015 three-year facility (as amended and restated, the "three-year facility"). The three-year facility of $2.73 billion (of which $0.72 billion is available to ME&T) expires in September 2022.
  • In September 2019, we amended and restated the 2015 five-year facility (as amended and restated, the "five-year facility"). The five-year facility of $4.62 billion (of which $1.21 billion is available to ME&T) expires in September 2024.

At September 30, 2019, Caterpillar's consolidated net worth was $14.98 billion, which was above the $9.00 billion required under the Credit Facility. The consolidated net worth is defined as the consolidated shareholders' equity including preferred stock but excluding the pension and other postretirement benefits balance within Accumulated other comprehensive income (loss).

At September 30, 2019, Cat Financial's covenant interest coverage ratio was 1.62 to 1. This is above the 1.15 to 1 minimum ratio calculated as (1) profit excluding income taxes, interest expense and net gain/(loss) from interest rate derivatives to (2) interest expense calculated at the end of each calendar quarter for the rolling four quarter period then most recently ended, required by the Credit Facility.

In addition, at September 30, 2019, Cat Financial's six-month covenant leverage ratio was 8.01 to 1. This is below the maximum ratio of debt to net worth of 10 to 1, calculated (1) on a monthly basis as the average of the leverage ratios determined on the last day of each of the six preceding calendar months and (2) at each December 31, required by the Credit Facility.

 

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In the event Caterpillar or Cat Financial does not meet one or more of their respective financial covenants under the Credit Facility in the future (and are unable to obtain a consent or waiver), the syndicate of banks may terminate the commitments allocated to the party that does not meet its covenants. Additionally, in such event, certain of Cat Financial's other lenders under other loan agreements where similar financial covenants or cross default provisions are applicable may, at their election, choose to pursue remedies under those loan agreements, including accelerating the repayment of outstanding borrowings. At September 30, 2019, there were no borrowings under the Credit Facility.

Our total credit commitments and available credit as of September 30, 2019 were:

September 30, 2019

(Millions of dollars)
Credit lines available:

 

Consolidated

Machinery,
Energy &
Transportation

Financial
Products

 

 

 

 

Global credit facilities.....................................

$

10,500 $

2,751

$ 7,749

Other external...........................................

 

4,685

-

4,685

Total credit lines available...................................

 

15,185

2,751

12,434

Less: Commercial paper outstanding............................

 

(3,444)

-

(3,444)

Less: Utilized credit.......................................

 

(1,059)

-

(1,059)

Available credit..........................................

$

10,682 $

2,751

$ 7,931

 

The other external consolidated credit lines with banks as of September 30, 2019 totaled $4.69 billion. These committed and uncommitted credit lines, which may be eligible for renewal at various future dates or have no specified expiration date, are used primarily by our subsidiaries for local funding requirements. Caterpillar or Cat Financial may guarantee subsidiary borrowings under these lines.

We receive debt ratings from the major credit rating agencies. Moody's currently rates our debt as "low-A", while Fitch and S&P maintain a "mid-A" debt rating. To date, this split rating has not had a material impact on our borrowing costs or our overall financial health. However, a downgrade of our credit ratings by any of the major credit rating agencies would result in increased borrowing costs and could make access to certain credit markets more difficult. In the event economic conditions deteriorate such that access to debt markets becomes unavailable, ME&T's operations would rely on cash flow from operations, use of existing cash balances, borrowings from Cat Financial and access to our Credit Facility. Our Financial Products' operations would rely on cash flow from its existing portfolio, existing cash balances, access to our Credit Facility and other credit line facilities of Cat Financial and potential borrowings from Caterpillar. In addition, we maintain a support agreement with Cat Financial, which requires Caterpillar to remain the sole owner of Cat Financial and may, under certain circumstances, require Caterpillar to make payments to Cat Financial should Cat Financial fail to maintain certain financial ratios.

Machinery, Energy & Transportation

Net cash provided by operating activities was $2.63 billion in the first nine months of 2019, compared with $3.88 billion for the same period in 2018. The decrease was primarily due to lower profit excluding accruals for short-term incentive compensation expense, higher cash payments for income taxes and a higher discretionary pension contribution, which was partially offset by favorable working capital. Within working capital, inventory grew at a slower rate during the first nine months of 2019 compared to the same period of 2018, which positively impacted cash flow. However, during the third quarter of 2019, material purchases have declined due to our inventory reduction efforts resulting in lower accounts payable. In addition, changes to accrued expenses, customer advances and accounts receivable favorably impacted cash flow.

Net cash provided by investing activities in the first nine months of 2019 was $138 million, compared with net cash used of $836 million in the first nine months of 2018. The change was primarily due to decreased ME&T lending activity with Financial Products during 2019 and the acquisitions of ECM S.p.A. and Downer Freight Rail in the first nine months of 2018.

Net cash used for financing activities during the first nine months of 2019 was $3.32 billion, compared with net cash used of $3.13 billion in the same period of 2018. In the first nine months of 2019, we repurchased $3.28 billion of Caterpillar common stock, an increase of $1.28 billion compared to the first nine months of 2018. Additionally, proceeds from common stock issued from stock options exercised decreased $230 million and dividends paid increased $120 million in the first nine months of 2019 compared to the prior period. This activity was mostly offset by an increase in debt proceeds of $1.43 billion to finance a discretionary pension contribution in the first nine months of 2019.

 

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While our short-term priorities for the use of cash may vary from time to time as business needs and conditions dictate, our long­term cash deployment strategy is focused on the following priorities. Our top priority is to maintain a strong financial position in support of a mid-A rating. Next, we intend to fund operational requirements and commitments. Then, we intend to fund priorities that profitably grow the company and return capital to shareholders through dividend growth and share repurchases. Additional information on cash deployment is as follows:

Strong financial position - Our top priority is to maintain a strong financial position in support of a mid-A rating. We track a diverse group of financial metrics that focus on liquidity, leverage, cash flow and margins which align with our cash deployment actions and the various methodologies used by the major credit rating agencies.

Operational excellence and commitments - Capital expenditures were $730 million during the first nine months of 2019, compared to $845 million for the same period in 2018. We expect ME&T's capital expenditures in 2019 to be about $1.2 billion. We made $1.77 billion of contributions to our pension and other postretirement benefit plans during the first nine months of 2019, including a $1.5 billion discretionary U.S. pension plan contribution made in September 2019. We currently anticipate full-year 2019 contributions of approximately $1.83 billion. In comparison, we made $1.29 billion of contributions to our pension and other postretirement benefit plans during the first nine months of 2018, including a $1.0 billion discretionary contribution made to our U.S. pension plans in September 2018.

Fund strategic growth initiatives and return capital to shareholders - We intend to utilize our liquidity and debt capacity to fund targeted investments that drive long-term profitable growth focused in the areas of expanded offerings and services, including acquisitions.

As part of our new capital allocation strategy, ME&T free cash flow is a liquidity measure we will use going forward to determine the cash generated and available for financing activities including debt repayments, dividends and share repurchases. We define ME&T free cash flow as cash from ME&T operations excluding discretionary pension and other postretirement benefit plan contributions less capital expenditures. A goal of our new capital allocation strategy is to return substantially all ME&T free cash flow to shareholders in the form of dividends and share repurchases, while maintaining our mid-A rating.

Our share repurchase plans are subject to the company's cash deployment priorities and are evaluated on an ongoing basis considering the financial condition of the company and the economic outlook, corporate cash flow, the company's liquidity needs, and the health and stability of global credit markets. The timing and amount of future repurchases may vary depending on market conditions and investing priorities. In July 2018, the Board of Directors approved an authorization to repurchase up to $10 billion of Caterpillar common stock (the 2018 Authorization) effective January 1, 2019, with no expiration. In the first nine months of 2019, we repurchased $3.28 billion of Caterpillar common stock, with $6.72 billion remaining under the 2018 Authorization as of September 30, 2019. Our basic shares outstanding as of September 30, 2019 were approximately 553 million.

Each quarter, our Board of Directors reviews the company's dividend for the applicable quarter. The Board evaluates the financial condition of the company and considers the economic outlook, corporate cash flow, the company's liquidity needs, and the health and stability of global credit markets to determine whether to maintain or change the quarterly dividend. Dividends totaled $1.56 billion in the first nine months of 2019, representing 86 cents per share paid in each of the first and second quarters and $1.03 per share paid in the third quarter.

Financial Products

Financial Products operating cash flow was $1.18 billion in the first nine months of 2019, compared with $1.08 billion for the same period a year ago. Net cash used for investing activities was $101 million for the first nine months of 2019, compared with cash used of $2.00 billion for the same period in 2018. The change was primarily due to the impact of net intercompany purchased receivables and higher collections of finance receivables. Net cash used for financing activities was $433 million for the first nine months of 2019, compared with cash provided by financing activities of $846 million for the same period in 2018. The change was primarily due to lower portfolio funding requirements.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements, see Part I, Item 1. Note 2 - "New accounting guidance." CRITICAL ACCOUNTING POLICIES

For a discussion of the company's critical accounting policies, see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K. There have been no significant changes to our critical accounting policies since our 2018 Annual Report on Form 10-K.

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OTHER MATTERS

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, the investigation, remediation, and operating and maintenance costs are accrued against our earnings. Costs are accrued based on consideration of currently available data and information with respect to each individual site, including available technologies, current applicable laws and regulations, and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. Where multiple potentially responsible parties are involved, we consider our proportionate share of the probable costs. In formulating the estimate of probable costs, we do not consider amounts expected to be recovered from insurance companies or others. We reassess these accrued amounts on a quarterly basis. The amount recorded for environmental remediation is not material and is included in Accrued expenses. We believe there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all the sites in the aggregate, will be required.

On January 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.

On March 20, 2014, Brazil's Administrative Council for Economic Defense (CADE) published a Technical Opinion which named 18 companies and over 100 individuals as defendants, including two subsidiaries of Caterpillar Inc., MGE - Equipamentos e Serviços Ferroviários Ltda. (MGE) and Caterpillar Brasil Ltda. The publication of the Technical Opinion opened CADE's official administrative investigation into allegations that the defendants participated in anticompetitive bid activity for the construction and maintenance of metro and train networks in Brazil. While companies cannot be held criminally liable for anticompetitive conduct in Brazil, criminal charges have been brought against one current employee of MGE and two former employees of MGE involving the same conduct alleged by CADE. On July 8, 2019, CADE found MGE, one of its current employees and two of its former employees liable for anticompetitive conduct. CBL was dismissed from the proceeding without any finding of liability. MGE intends to appeal CADE's findings. We currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.

In addition, we are involved in other unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability (including claimed asbestos exposure), contracts, employment issues, environmental matters, intellectual property rights, taxes (other than income taxes) and securities laws. The aggregate range of reasonably possible losses in excess of accrued liabilities, if any, associated with these unresolved legal actions is not material. In some cases, we cannot reasonably estimate a range of loss because there is insufficient information regarding the matter. However, we believe there is no more than a remote chance that any liability arising from these matters would be material. Although it is not possible to predict with certainty the outcome of these unresolved legal actions, we believe that these actions will not individually or in the aggregate have a material adverse effect on our consolidated results of operations, financial position or liquidity.

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Retirement Benefits

We recognize mark-to-market gains and losses immediately through earnings upon the remeasurement of our pension and OPEB plans. Mark-to-market gains and losses represent the effects of actual results differing from our assumptions and the effects of changing assumptions. We will record a mark-to-market adjustment as of the measurement date, December 31, 2019. Based on market conditions as of September 30, 2019, we would recognize a decrease to the funded status of our plans of approximately $1.3 billion. This would result in an increase in our Liability for postemployment benefits and the recognition of a net mark-to-market loss in earnings of approximately $1.3 billion pre-tax, $1.0 billion net of tax or $1.83 per share. The loss would be primarily due to lower discount rates at September 30, 2019 (approximately 3.1 percent for our U.S. pension plans) as compared to the discount rates used at December 31, 2018 (approximately 4.2 percent for our U.S. pension plans), partially offset by gains resulting from higher than expected returns on plan assets. It is difficult to predict the December 31, 2019 adjustment amount, as it is dependent on several factors including the discount rate, actual returns on plan assets and other actuarial assumptions.

Order Backlog

At the end of the third quarter of 2019, the dollar amount of backlog believed to be firm was approximately $14.6 billion, about $400 million lower than the second quarter of 2019. The order backlog decreased in Resource Industries and Construction Industries, while Energy & Transportation was about flat. We believe that dealers have placed fewer machine orders as we expect dealers to reduce their inventory levels based on global economic uncertainty. Compared with the third quarter of 2018, the order backlog decreased about $2.7 billion with decreases across the three primary segments. Of the total backlog at September 30, 2019, approximately $3.8 billion was not expected to be filled in the following twelve months.

 

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NON-GAAP FINANCIAL MEASURES

The following definitions are provided for the non-GAAP financial measures used in this report. These non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP and therefore are unlikely to be comparable to the calculation of similar measures for other companies. Management does not intend for these items to be considered in isolation or as a substitute for the related GAAP measures.

We believe it is important to separately quantify the profit impact of several significant items in order for our results to be meaningful to our readers. These items consist of (i) a discrete tax benefit related to U.S. tax reform in the first quarter of 2019, (ii) 2018 restructuring costs, which were incurred to generate longer-term benefits and (iii) a net tax benefit to adjust deferred tax balances in the third quarter of 2018. We do not consider these items indicative of earnings from ongoing business activities and believe the non-GAAP measures will provide investors with useful perspective on underlying business results and trends and aids with assessing our period-over-period results. In addition, we provide a calculation of ME&T free cash flow as we believe it is an important measure for investors to determine the cash generation available for financing activities including debt repayments, dividends and share repurchases.

Reconciliations of adjusted operating profit margin to the most directly comparable GAAP measure, operating profit as a percent of sales and revenues are as follows:

 

 

Three Months Ended September

30


Nine Months Ended September

30

 

 

 

2019

2018

2019

2018

Operating profit as a percent of total sales and revenues.....

15.8%

15.8%

15.8%

15.9%

Restructuring costs 1

-

0.8%

-

0.7%

Adjusted operating profit margin....................

15.8%

16.6%

15.8%

16.6%

 

1 2019 restructuring costs are not material.

Reconciliations of adjusted profit per share to the most directly comparable GAAP measure, profit per share - diluted are as follows:

 

 

 

Three Months Ended Nine Months Ended September

September 30 30

 

2019 2018

2019 2018

Profit per share - diluted..........................

$

2.66 $ 2.88 $

8.75 $ 8.45

Per share U.S. tax reform impact.....................

$

- $ - $

(0.31) $ -

Per share restructuring costs1

 .............................................$

 

- $ 0.14 $

- $ 0.37

Per share deferred tax balance adjustment...............

$

- $ (0.16) $

- $ (0.16)

Adjusted profit per share..........................

$

2.66 $ 2.86 $

8.44 $ 8.66

 

1 At estimated annual tax rate of 24 percent. 2019 restructuring costs are not material.

Reconciliations of ME&T free cash flow to the most directly comparable GAAP measure, net cash provided by operating activities are as follows:

 

 

Nine Months Ended

Millions of dollars

September 30

 

2019

2018

ME&T net cash provided by operating activities 1

 ........................................................................$ 2,632

 

$ 3,880

ME&T discretionary pension contributions........................................

$ 1,500

$ 1,000

ME&T capital expenditures..................................................

$ (730)

$ (845)

ME&T free cash flow......................................................

$ 3,402

$ 4,035

 

1 See reconciliation of ME&T net cash provided by operating activities to consolidated net cash provided by operating activities on pages 94-95.

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Supplemental Consolidating Data

We are providing supplemental consolidating data for the purpose of additional analysis. The data has been grouped as follows:

Consolidated - Caterpillar Inc. and its subsidiaries.

Machinery, Energy & Transportation - Caterpillar defines Machinery, Energy & Transportation as it is presented in the supplemental data as Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. Machinery, Energy & Transportation information relates to the design, manufacturing and marketing of our products. Financial Products' information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment. The nature of these businesses is different, especially with regard to the financial position and cash flow items. Caterpillar management utilizes this presentation internally to highlight these differences. We also believe this presentation will assist readers in understanding our business.

Financial Products - Our finance and insurance subsidiaries, primarily Cat Financial and Insurance Services.

Consolidating Adjustments - Eliminations of transactions between Machinery, Energy & Transportation and Financial Products.

Pages 88 to 95 reconcile Machinery, Energy & Transportation with Financial Products on the equity basis to Caterpillar Inc. consolidated financial information.

 

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Caterpillar Inc.
Supplemental Data for Results of Operations
For the Three Months Ended September 30, 2019
(Unaudited)
(Millions of dollars)

Sales and revenues:

Consolidated

Supplemental Consolidating Data

Machinery,
Energy &
Transportation 1

Financial
Products

Consolidating Adjustments

 

 

 

 

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

$ 11,974

$ 11,974

$ - $

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

784

-

920

(136) 2

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

12,758

11,974

920

(136)

Operating costs:

 

 

 

 

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

8,569

8,569

-

 

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

1,251

1,095

163

(7) 3

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

431

431

-

 

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

189

-

198

(9) 4

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

298

(9)

320

(13) 3

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

10,738

10,086

681

(29)

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

2,020

1,888

239

(107)

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

103

103

 

 

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

88

(27)

8

107 5

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

2,005

1,758

247

 

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

518

457

61

 

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

1,487

1,301

186

 

Equity in profit (loss) of unconsolidated affiliated companies 

7

7

 

 

Equity in profit of Financial Products' subsidiaries.......

-

180

 

(180) 6

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

1,494

1,488

186

(180)

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

 

(6)

6

-

Profit 7

............................................ $ 1,494

 

$ 1,494

$ 180

$ (180)

 

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2 Elimination of Financial Products' revenues earned from Machinery, Energy & Transportation.

3 Elimination of net expenses recorded by Machinery, Energy & Transportation paid to Financial Products.

4 Elimination of interest expense recorded between Financial Products and Machinery, Energy & Transportation.

5 Elimination of discount recorded by Machinery, Energy & Transportation on receivables sold to Financial Products and of interest earned between Machinery, Energy & Transportation and Financial Products.

6 Elimination of Financial Products' profit due to equity method of accounting.

7 Profit attributable to common shareholders.

 

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Caterpillar Inc.
Supplemental Data for Results of Operations
For the Nine Months Ended September 30, 2019
(Unaudited)
(Millions of dollars)

Sales and revenues:

Consolidated

Supplemental Consolidating Data

Machinery,
Energy &
Transportation 1

Financial Consolidating

Products Adjustments

 

 

 

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

$ 38,369

$ 38,369

$ - $

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

2,287

-

2,684 (397) 2

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

40,656

38,369

2,684 (397)

Operating costs:

 

 

 

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

27,513

27,515

(2) 3

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

3,879

3,324

564 (9) 3

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

1,307

1,307

- -

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

571

-

599 (28) 4

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

946

2

974 (30) 3

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

34,216

32,148

2,137 (69)

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

6,440

6,221

547 (328)

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

309

318

- (9) 4

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

316

(71)

68 319 5

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

6,447

5,832

615

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

1,470

1,294

176

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

4,977

4,538

439

Equity in profit (loss) of unconsolidated affiliated companies 

20

20

 

Equity in profit of Financial Products' subsidiaries.......

-

422

(422) 6

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

4,997

4,980

439 (422)

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

2

(15)

17 -

Profit 7

............................................ $ 4,995

 

$ 4,995

$ 422 $ (422)

 

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2 Elimination of Financial Products' revenues earned from Machinery, Energy & Transportation.

3 Elimination of net expenses recorded by Machinery, Energy & Transportation paid to Financial Products.

4 Elimination of interest expense recorded between Financial Products and Machinery, Energy & Transportation.

5 Elimination of discount recorded by Machinery, Energy & Transportation on receivables sold to Financial Products and of interest earned between Machinery, Energy & Transportation and Financial Products.

6 Elimination of Financial Products' profit due to equity method of accounting.

7 Profit attributable to common shareholders.

 

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Caterpillar Inc.
Supplemental Data for Results of Operations
For the Three Months Ended September 30, 2018
(Unaudited)
(Millions of dollars)

Sales and revenues:

Consolidated

Supplemental Consolidating Data

Machinery,
Energy &
Transportation 1

Financial
Products

Consolidating Adjustments

 

 

 

 

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

$ 12,763

$ 12,763

$ - $

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

747

-

867

(120) 2

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

13,510

12,763

867

(120)

Operating costs:

 

 

 

 

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

9,022

9,022

-

 

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

1,299

1,135

169

  1. 3

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

479

479

 

 

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

185

-

194

(9) 4

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

390

63

333

  1. 3

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

11,375

10,699

696

(20)

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

2,135

2,064

171

(100)

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

102

114

-

(12) 4

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

102

  1.                

19

88 5

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

2,135

1,945

190

 

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

415

376

39

 

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

1,720

1,569

151

 

Equity in profit (loss) of unconsolidated affiliated companies 

7

7

 

 

Equity in profit of Financial Products' subsidiaries.......

-

145

 

(145) 6

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

1,727

1,721

151

(145)

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

 

  1.                

6

-

Profit 7

............................................ $ 1,727

 

$ 1,727

$ 145

$ (145)

 

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2 Elimination of Financial Products' revenues earned from Machinery, Energy & Transportation.

3 Elimination of net expenses recorded by Machinery, Energy & Transportation paid to Financial Products.

4 Elimination of interest expense recorded between Financial Products and Machinery, Energy & Transportation.

5 Elimination of discount recorded by Machinery, Energy & Transportation on receivables sold to Financial Products and of interest earned between Machinery, Energy & Transportation and Financial Products.

6 Elimination of Financial Products' profit due to equity method of accounting.

7 Profit attributable to common shareholders.

 

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Caterpillar Inc.
Supplemental Data for Results of Operations
For the Nine Months Ended September 30, 2018
(Unaudited)
(Millions of dollars)

Sales and revenues:

Consolidated

Supplemental Consolidating Data

Machinery,
Energy &
Transportation 1

Financial
Products

Consolidating Adjustments

 

 

 

 

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

$ 38,192

$ 38,192

$ - $

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

2,188

-

2,527

(339) 2

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

40,380

38,192

2,527

(339)

Operating costs:

 

 

 

 

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

27,010

27,010

-

 

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

4,015

3,445

581

(11) 3

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

1,384

1,384

-

-

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

533

-

558

(25) 4

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

1,028

100

949

(21) 3

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

33,970

31,939

2,088

(57)

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

6,410

6,253

439

(282)

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

305

337

-

4

(32)

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

350

76

24

250 5

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

6,455

5,992

463

 

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

1,377

1,274

103

 

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

5,078

4,718

360

 

Equity in profit (loss) of unconsolidated affiliated companies 

21

21

 

 

Equity in profit of Financial Products' subsidiaries.......

-

345

 

(345) 6

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

5,099

5,084

360

(345)

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

 

(15)

15

-

Profit 7

............................................ $ 5,099

 

$ 5,099

$ 345

$ (345)

 

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2 Elimination of Financial Products' revenues earned from Machinery, Energy & Transportation.

3 Elimination of net expenses recorded by Machinery, Energy & Transportation paid to Financial Products.

4 Elimination of interest expense recorded between Financial Products and Machinery, Energy & Transportation.

5 Elimination of discount recorded by Machinery, Energy & Transportation on receivables sold to Financial Products and of interest earned between Machinery, Energy & Transportation and Financial Products.

6 Elimination of Financial Products' profit due to equity method of accounting.

7 Profit attributable to common shareholders.

 

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Caterpillar Inc.
Supplemental Data for Financial Position
At September 30, 2019
(Unaudited)
(Millions of dollars)

Assets

Current assets:

Consolidated

Supplemental Consolidating Data

 

Machinery,
Energy &
Transportation 1

Financial
Products

Consolidating Adjustments

 

 

 

 

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

$ 7,906

$ 6,380

$ 1,526

$ -

 

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

8,275

3,787

487

4,001

2,3

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

9,192

-

14,107

(4,915)

3

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

1,607

1,226

448

(67)

4

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

12,180

12,180

-

-

 

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

39,160

23,573

16,568

(981)

 

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

12,842

8,499

4,343

-

 

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

1,193

313

212

668

2,3

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

12,412

-

13,091

(679)

3

Investments in Financial Products subsidiaries................

-

3,968

-

(3,968)

5

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

1,372

1,927

118

(673)

6

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

1,630

1,630

-

-

 

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

6,142

6,142

-

-

 

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

3,242

1,577

1,737

(72)

7

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

$ 77,993

$ 47,629

$ 36,069

$ (5,705)

 

Liabilities

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings.............................

$ 4,268

$ - $ 4,268

$ -

 

Short-term borrowings with consolidated companies.........

-

- 779

(779)

8

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

6,141

6,083

193

(135)

9

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

3,727

3,337

390

-

 

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

1,518

1,477

41

-

 

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

1,309

1,309

-

-

 

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

-

-

-

-

 

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

2,188

1,734

536

(82)

6,10

Long-term debt due within one year....................

8,050

25

8,025

-

 

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

27,201

13,965

14,232

(996)

 

 

 

 

 

 

8

Long-term debt due after one year........................

25,588

9,145

16,454

(11)

 

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

5,900

5,900

-

-

 

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

4,311

3,626

1,415

(730)

6

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

63,000

32,636

32,101

(1,737)

 

Commitments and contingencies

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

Common stock.....................................

5,951

5,951

919

(919)

5

Treasury stock.....................................

(23,693)

(23,693)

-

-

 

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

34,477

34,477

3,869

(3,869)

5

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

(1,783)

(1,783)

(985)

985

5

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

41

41

165

(165)

5

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

14,993

14,993

3,968

(3,968)

 

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

$ 77,993

$ 47,629

$ 36,069

$ (5,705)

 

 

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2 Elimination of receivables between Machinery, Energy & Transportation and Financial Products.

3 Reclassification of Machinery, Energy & Transportation's trade receivables purchased by Financial Products and Financial Products' wholesale inventory receivables.

4 Elimination of Machinery, Energy & Transportation's insurance premiums that are prepaid to Financial Products.

5 Elimination of Financial Products' equity which is accounted for by Machinery, Energy & Transportation on the equity basis.

6 Reclassification reflecting required netting of deferred tax assets / liabilities by taxing jurisdiction.

7 Elimination of other intercompany assets between Machinery, Energy & Transportation and Financial Products.

8 Elimination of debt between Machinery, Energy & Transportation and Financial Products.

9 Elimination of payables between Machinery, Energy & Transportation and Financial Products.

10 Elimination of prepaid insurance in Financial Products' other liabilities.

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Caterpillar Inc.
Supplemental Data for Financial Position
At December 31, 2018
(Unaudited)
(Millions of dollars)

Assets

Current assets:

Consolidated

 

Supplemental Consolidating Data

Machinery,
Energy &
Transportation 1

Financial
Products

Consolidating Adjustments

 

 

 

 

 

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

$ 7,857

$

6,968

$ 889

$ -

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

8,802

 

4,677

401

2,3

3,724

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

8,650

 

-

13,989

3

(5,339)

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

1,765

 

1,227

583

4

(45)

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

11,529

 

11,529

-

-

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

38,603

 

24,401

15,862

(1,660)

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

13,574

 

9,085

4,489

-

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

1,161

 

302

204

2,3

655

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

13,286

 

-

13,951

3

(665)

Investments in Financial Products subsidiaries...................

-

 

3,672

-

5

(3,672)

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

1,439

 

2,015

116

6

(692)

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

1,897

 

1,897

-

-

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

6,217

 

6,217

-

-

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

2,332

 

886

1,446

-

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

$ 78,509

$

48,475

$ 36,068

$ (6,034)

Liabilities

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings................................

$ 5,723

$

- $ 5,723

$ -

Short-term borrowings with consolidated companies.............

-

 

- 1,500

7

(1,500)

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

7,051

 

6,972

194

8

(115)

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

3,573

 

3,212

361

-

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

2,384

 

2,350

34

-

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

1,243

 

1,243

-

-

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

495

 

495

-

-

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

1,919

 

1,532

433

6,9

(46)

Long-term debt due within one year........................

5,830

 

10

5,820

-

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

28,218

 

15,814

14,065

(1,661)

 

 

 

 

 

7

Long-term debt due after one year............................

25,000

 

8,015

16,995

(10)

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

7,455

 

7,455

-

-

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

3,756

 

3,111

1,336

6

(691)

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

64,429

 

34,395

32,396

(2,362)

Commitments and contingencies

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

Common stock........................................

5,827

 

5,827

919

5

(919)

Treasury stock........................................

(20,531)

 

(20,531)

-

-

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

30,427

 

30,427

3,543

5

(3,543)

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

(1,684)

 

(1,684)

(943)

5

943

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

41

 

41

153

5

(153)

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

14,080

 

14,080

3,672

(3,672)

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

$ 78,509

$

48,475

$ 36,068

$ (6,034)

 

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2 Elimination of receivables between Machinery, Energy & Transportation and Financial Products.

3 Reclassification of Machinery, Energy & Transportation's trade receivables purchased by Financial Products and Financial Products' wholesale inventory receivables.

4 Elimination of Machinery, Energy & Transportation's insurance premiums that are prepaid to Financial Products.

5 Elimination of Financial Products' equity which is accounted for by Machinery, Energy & Transportation on the equity basis.

6 Reclassification reflecting required netting of deferred tax assets / liabilities by taxing jurisdiction.

7 Elimination of debt between Machinery, Energy & Transportation and Financial Products.

8 Elimination of payables between Machinery, Energy & Transportation and Financial Products.

9 Elimination of prepaid insurance in Financial Products' other liabilities.

 

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Caterpillar Inc.
Supplemental Data for Cash Flow
For the Nine Months Ended September 30, 2019
(Unaudited)
(Millions of dollars)

 

Cash flow from operating activities:

Consolidated

 

Supplemental Consolidating Data

Machinery,
Energy &
Transportation 1

Financial
Products

Consolidating Adjustments

 

 

 

 

 

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

$ 4,997

$

4,980

$ 439

2

$ (422)

Adjustments for non-cash items:

 

 

 

 

 

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

1,933

 

1,283

650

-

Undistributed profit of Financial Products....................

-

 

(422)

-

3

422

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

627

 

395

(111)

4

343

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

 

 

 

 

 

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

427

 

125

(16)

4,

318

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

(676)

 

(702)

-

4

26

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

(669)

 

(651)

6

4

(24)

 

 

 

 

 

4

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

114

 

105

11

(2)

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

(858)

 

(865)

7

 

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

169

 

171

-

4

(2) 4

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

3

 

(47)

47

3

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

(1,589)

 

(1,740)

144

4

7

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

4,478

 

2,632

1,177

669

Cash flow from investing activities:

 

 

 

 

 

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

(723)

 

(709)

(14)

-

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

(1,133)

 

(21)

(1,151)

4

39

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

812

 

149

766

4

(103)

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

(9,453)

 

-

(10,633)

5

1,180

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

9,144

 

-

10,166

5

(1,022)

Net intercompany purchased receivables........................

-

 

-

763

5

(763)

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

183

 

-

183

-

Net intercompany borrowings...............................

-

 

721

1

6

(722)

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

(6)

 

(6)

-

-

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

3

 

3

-

-

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

281

 

16

265

-

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

(425)

 

(16)

(409)

-

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

(37)

 

1

(38)

-

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

(1,354)

 

138

(101)

(1,391)

Cash flow from financing activities:

 

 

 

 

 

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

(1,564)

 

(1,564)

 

 

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

59

 

59

 

 

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

(3,283)

 

(3,283)

 

 

Net intercompany borrowings...............................

 

 

(1)

(721)

6

722

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

8,827

 

1,479

7,348

-

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

(6,062)

 

(8)

(6,054)

-

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

(1,006)

 

-

(1,006)

-

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

(2)

 

(2)

-

-

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

(3,031)

 

(3,320)

(433)

722

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

(47)

 

(38)

(9)

-

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

cash.................................................

46

 

(588)

634

-

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

7,890

 

6,994

896

-

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

$ 7,936

$

6,406

$ 1,530

$ -

 

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2 Elimination of Financial Products' profit after tax due to equity method of accounting.

3 Elimination of non-cash adjustment for the undistributed earnings from Financial Products.

4 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.

5 Reclassification of Financial Products' cash flow activity from investing to operating for receivables that arose from the sale of inventory.

6 Elimination of net proceeds and payments to/from Machinery, Energy & Transportation and Financial Products.

 

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Caterpillar Inc.
Supplemental Data for Cash Flow
For the Nine Months Ended September 30, 2018
(Unaudited)
(Millions of dollars)

Cash flow from operating activities:

Consolidated

 

Supplemental Consolidating Data

 

Machinery,
Energy &
Transportation 1

Financial
Products

Consolidating Adjustments

 

 

 

 

 

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

$ 5,099

$

5,084

$ 360

$ (345)

2

Adjustments for non-cash items:

 

 

 

 

 

 

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

2,065

 

1,410

655

-

 

Undistributed profit of Financial Products....................

-

 

(345)

-

345

3

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

630

 

327

36

267

4

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

 

 

 

 

 

 

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

(725)

 

19

(33)

(711)

4, 5

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

(1,822)

 

(1,774)

-

(48)

4

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

496

 

544

(55)

7

4

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

(32)

 

(63)

31

-

 

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

(418)

 

(403)

(15)

-

 

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

59

 

59

-

-

 

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

394

 

343

(9)

60

4

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

(1,271)

 

(1,321)

110

(60)

4

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

4,475

 

3,880

1,080

(485)

 

Cash flow from investing activities:

 

 

 

 

 

 

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

(921)

 

(822)

(99)

-

 

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

(1,208)

 

(23)

(1,258)

73

4

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

732

 

122

632

(22)

4

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

(9,092)

 

-

(10,151)

1,059

5, 7

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

8,032

 

-

9,135

(1,103)

5

Net intercompany purchased receivables.......................

-

 

-

(484)

484

5

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

416

 

-

416

-

 

Net intercompany borrowings..............................

-

 

66

-

(66)

6

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

(357)

 

(357)

-

-

 

 

 

 

 

 

 

7

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

14

 

20

-

(6)

 

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

363

 

154

209

-

 

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

(417)

 

(21)

(396)

-

 

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

24

 

25

(2)

1

8

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

(2,414)

 

(836)

(1,998)

420

 

Cash flow from financing activities:

 

 

 

 

 

 

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

(1,444)

 

(1,444)

-

 

 

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

292

 

292

1

(1)

8

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

(2,000)

 

(2,000)

-

-

 

Net intercompany borrowings..............................

-

 

-

(66)

66

6

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

7,073

 

47

7,026

-

 

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

(5,642)

 

(6)

(5,636)

-

 

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

(465)

 

14

(479)

-

 

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

(32)

 

(32)

-

-

 

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

(2,218)

 

(3,129)

846

65

 

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

(117)

 

(106)

(11)

-

 

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

cash................................................

(274)

 

(191)

(83)

-

 

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

8,320

 

7,416

904

-

 

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

$ 8,046

$

7,225

$ 821

$ -

 

 

1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2 Elimination of Financial Products'profit after tax due to equity method of accounting.

3 Elimination of non-cash adjustment for the undistributed earnings from Financial Products.

4 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.

5 Reclassification of Financial Products' cash flow activity from investing to operating for receivables that arose from the sale of inventory.

6 Elimination of net proceeds and payments to/from Machinery, Energy & Transportation and Financial Products.

7 Elimination of proceeds received from Financial Products related to Machinery, Energy & Transportation's sale of businesses and investments.

8 Elimination of change in investment and common stock related to Financial Products.

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Forward-looking Statements

Certain statements in this Form 10-Q relate to future events and expectations and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believe," "estimate," "will be," "will," "would," "expect," "anticipate," "plan," "forecast," "target," "guide," "project," "intend," "could," "should" or other similar words or expressions often identify forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, without limitation, statements regarding our outlook, projections, forecasts or trend descriptions. These statements do not guarantee future performance and speak only as of the date they are made, and we do not undertake to update our forward-looking statements.

Caterpillar's actual results may differ materially from those described or implied in our forward-looking statements based on a number of factors, including, but not limited to: (i) global and regional economic conditions and economic conditions in the industries we serve; (ii) commodity price changes, material price increases, fluctuations in demand for our products or significant shortages of material; (iii) government monetary or fiscal policies; (iv) political and economic risks, commercial instability and events beyond our control in the countries in which we operate; (v) international trade policies and their impact on demand for our products and our competitive position, including the imposition of new tariffs or changes in existing tariff rates; (vi) our ability to develop, produce and market quality products that meet our customers' needs; (vii) the impact of the highly competitive environment in which we operate on our sales and pricing; (viii) information technology security threats and computer crime; (ix) inventory management decisions and sourcing practices of our dealers and our OEM customers; (x) a failure to realize, or a delay in realizing, all of the anticipated benefits of our acquisitions, joint ventures or divestitures; (xi) union disputes or other employee relations issues; (xii) adverse effects of unexpected events including natural disasters; (xiii) disruptions or volatility in global financial markets limiting our sources of liquidity or the liquidity of our customers, dealers and suppliers; (xiv) failure to maintain our credit ratings and potential resulting increases to our cost of borrowing and adverse effects on our cost of funds, liquidity, competitive position and access to capital markets; (xv) our Financial Products segment's risks associated with the financial services industry; (xvi) changes in interest rates or market liquidity conditions; (xvii) an increase in delinquencies, repossessions or net losses of Cat Financial's customers; (xviii) currency fluctuations; (xix) our or Cat Financial's compliance with financial and other restrictive covenants in debt agreements; (xx) increased pension plan funding obligations; (xxi) alleged or actual violations of trade or anti-corruption laws and regulations; (xxii) additional tax expense or exposure, including the impact of U.S. tax reform; (xxiii) significant legal proceedings, claims, lawsuits or government investigations; (xxiv) new regulations or changes in financial services regulations; (xxv) compliance with environmental laws and regulations; and (xxvi) other factors described in more detail in Caterpillar's Forms 10-Q, 10-K and other filings with the Securities and Exchange Commission.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this Item is incorporated by reference from Note 5 - "Derivative financial instruments and risk management" included in Part I, Item 1 and Management's Discussion and Analysis included in Part I, Item 2 of this Form 10-Q.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

An evaluation was performed under the supervision and with the participation of the company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the company's disclosure controls and procedures, as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report. Based on that evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in internal control over financial reporting

During the third quarter of 2019, there has been no change in the company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.

 

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings

The information required by this Item is incorporated by reference from Note 14 - "Environmental and legal matters" included in Part I, Item 1 of this Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities

 

 

 

 

 

 

Approximate Dollar

 

Total Number

 

 

Total Number
of Shares Purchased

Value of Shares that
may yet be Purchased

 

of Shares

Average Price

as Part of Publicly

under the Program

Period

Purchased2,3,4

Paid per Share2,3,4

Announced Program

(in billions)1

July 1-31, 2019......................

6,619,309

$

126.20

6,619,309

$ 7.128

August 1-31, 2019....................

2,437,000

$

119.45

2,437,000

$ 6.837

September 1-30, 2019.................

1,279,101

$

124.72

1,279,101

$ 6.677

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

10,335,410

$

124.43

10,335,410

 

 

1 In July 2018, the Board approved a share repurchase authorization of up to $10.0 billion of Caterpillar common stock effective January 1, 2019, with no expiration (the 2018 Authorization). As of September 30, 2019, approximately $6.7 billion remained available under the 2018 Authorization.

2 During the second quarter of 2019, we entered into an accelerated stock repurchase (ASR) with a third-party financial institution to purchase $750 million of our common stock. In July 2019, upon final settlement of the ASR, we received an additional 0.8 million shares at an average price per share of $128.29.

3 During the third quarter of 2019, we entered into an ASR with a third-party financial institution to purchase $500 million of our common stock. In July

2019, upon payment of the $500 million to the financial institution, we received 3.4 million shares. In August 2019, upon final settlement of the ASR, we received an additional 0.8 million shares. In total, we repurchased 4.2 million shares under this ASR at an average price per share of $119.23.

4 In July, August and September of 2019, we repurchased 2.4 million, 1.6 million and 1.3 million shares, respectively, for an aggregate of $678 million in open market transactions at an average price per share of $135.46, $119.56 and $124.72, respectively.

Non-U.S. Employee Stock Purchase Plans

As of September 30, 2019, we had 26 employee stock purchase plans (the "EIP Plans") that are administered outside the United States for our non-U.S. employees, which had approximately 12,000 active participants in the aggregate. During the third quarter of 2019, approximately 107,000 shares of Caterpillar common stock were purchased by the EIP Plans pursuant to the terms of such plans.

 

97

 

Table of Contents

Item 6. Exhibits

4.1 Form of 2.600% Senior Note due 2029 (incorporated by reference from Exhibit 4.1 to the Company's Current Report on Form 8-K filed September 19, 2019).

4.2 Form of 3.250% Senior Note due 2049 (incorporated by reference from Exhibit 4.2 to the Company's Current Report on Form 8-K filed September 19, 2019).

10.1 364-Day Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 10, 2019).

10.2 Local Currency Addendum to the 364-Day Credit Agreement (incorporated by reference from Exhibit 10.2 to the Company's Current Report on Form 8-K filed September 10, 2019).

10.3 Japan Local Currency Addendum to the 364-Day Credit Agreement (incorporated by reference from Exhibit 10.3 to the Company's Current Report on Form 8-K filed September 10, 2019).

10.4 Second Amended and Restated Three-Year Credit Agreement (incorporated by reference from Exhibit 10.4 to the Company's Current Report on Form 8-K filed September 10, 2019).

10.5 Local Currency Addendum to the Second Amendment and Restated Three-Year Credit Agreement (incorporated by reference from Exhibit 10.5 to the Company's Current Report on Form 8-K filed September 10, 2019).

10.6 Japan Local Currency Addendum to the Second Amended and Restated Three-Year Credit Agreement

(incorporated by reference from Exhibit 10.6 to the Company's Current Report on Form 8-K filed September 10, 2019).

10.7 Second Amended and Restated Five-Year Credit Agreement (incorporated by reference from Exhibit 10.7 to the Company's Current Report on Form 8-K filed September 10, 2019).

10.8 Local Currency Addendum to the Second Amended and Restated Five-Year Credit Agreement (incorporated by
reference from Exhibit 10.8 to the Company's Current Report on Form 8-K filed September 10, 2019).

10.9 Japan Local Currency Addendum to the Second Amended and Restated Five-Year Credit Agreement (incorporated
by reference from Exhibit 10.9 to the Company's Current Report on Form 8-K filed September 10, 2019).

31.1 Certification of D. James Umpleby III, Chief Executive Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Andrew R.J. Bonfield, Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certification of D. James Umpleby III, Chief Executive Officer of Caterpillar Inc. and Andrew R.J. Bonfield, Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

104 Cover Page Interactive File (embedded within the Inline XBRL document and included in Exhibit 101)

 

98

 

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CATERPILLAR INC.

October 31, 2019 /s/ D. James Umpleby III Chairman & Chief Executive Officer

 

October 31, 2019

October 31, 2019

October 31, 2019


D. James Umpleby III

/s/ Andrew R.J. Bonfield

Andrew R.J. Bonfield

/s/ Suzette M. Long

Suzette M. Long

/s/ G. Michael Marvel

G. Michael Marvel


Chief Financial Officer

General Counsel & Corporate Secretary

Chief Accounting Officer

 

EXHIBIT 31.1

SECTION 302 CERTIFICATION

I, D. James Umpleby III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Caterpillar Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  1. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  2. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  3. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  4. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

  1. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

October 31, 2019 /s/ D. James Umpleby III Chief Executive Officer

D. James Umpleby III

 

EXHIBIT 31.2

SECTION 302 CERTIFICATION

I, Andrew R.J. Bonfield, certify that:

              1. I have reviewed this quarterly report on Form 10-Q of Caterpillar Inc.;

              2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material

fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

              3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly

present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

              4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and

procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  1. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  2. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  3. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  4. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

              5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control

over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

  1. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

October 31, 2019 /s/ Andrew R.J. Bonfield Chief Financial Officer

Andrew R.J. Bonfield

 

EXHIBIT 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Caterpillar Inc. (the "Company") on Form 10-Q for the period ending September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

  1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

October 31, 2019 /s/ D. James Umpleby III Chief Executive Officer

D. James Umpleby III

October 31, 2019 /s/ Andrew R.J. Bonfield Chief Financial Officer

Andrew R.J. Bonfield

A signed original of this written statement required by Section 906 has been provided to Caterpillar Inc. and will be retained by Caterpillar Inc. and furnished to the Securities and Exchange Commission or its staff upon request.


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Titre du document : Caterpillar Inc.: Files Form 10-Q FQE 30 Sept 2019
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Langue : Français
Entreprise : Caterpillar Inc.
510 Lake Cook Road, Suite 100
60015 Deerfield, Illinois
États-Unis
Téléphone : 224-551-4000
Internet : www.caterpillar.com
ISIN : US1491231015
Ticker Euronext : CATR
Catégorie AMF : Informations réglementées supplémentaires devant être rendues publiques en vertu de la législation d'un état membre / Information financière du troisième trimestre
EQS News ID : 902263
 
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