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 March 31, 2023
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.) | |||||||||||||
| 5205 N. O'Connor Boulevard, | Suite 100, | Irving, | Texas | 75039 | ||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
Registrant’s telephone number, including area code: (972) 891-7700
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol (s) | Name of each exchange on which registered | |||||||||
| Common Stock ($1.00 par value) | CAT | New York Stock Exchange | ¹ | ||||||||
| 5.3% Debentures due September 15, 2035 | CAT35 | New York Stock Exchange | |||||||||
¹ In addition to the New York Stock Exchange, Caterpillar common stock is also listed on stock exchanges in France and Switzerland.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At March 31, 2023, 515,920,061 shares of common stock of the registrant were outstanding.
Table of Contents
| Item 3. | Defaults Upon Senior Securities | * | ||||||
| Item 4. | Mine Safety Disclosures | * | ||||||
| Item 5. | Other Information | * | ||||||
* Item omitted because no answer is called for or item is not applicable.
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
| Three Months Ended March 31 | |||||||||||
| 2023 | 2022 | ||||||||||
| Sales and revenues: | |||||||||||
| Sales of Machinery, Energy & Transportation | $ | 15,099 | $ | 12,886 | |||||||
| Revenues of Financial Products | 763 | 703 | |||||||||
| Total sales and revenues | 15,862 | 13,589 | |||||||||
| Operating costs: | |||||||||||
| Cost of goods sold | 10,103 | 9,559 | |||||||||
| Selling, general and administrative expenses | 1,463 | 1,346 | |||||||||
| Research and development expenses | 472 | 457 | |||||||||
| Interest expense of Financial Products | 217 | 106 | |||||||||
| Other operating (income) expenses | 876 | 266 | |||||||||
| Total operating costs | 13,131 | 11,734 | |||||||||
| Operating profit | 2,731 | 1,855 | |||||||||
| Interest expense excluding Financial Products | 129 | 109 | |||||||||
| Other income (expense) | 32 | 253 | |||||||||
| Consolidated profit before taxes | 2,634 | 1,999 | |||||||||
| Provision (benefit) for income taxes | 708 | 469 | |||||||||
| Profit of consolidated companies | 1,926 | 1,530 | |||||||||
| Equity in profit (loss) of unconsolidated affiliated companies | 16 | 7 | |||||||||
| Profit of consolidated and affiliated companies | 1,942 | 1,537 | |||||||||
| Less: Profit (loss) attributable to noncontrolling interests | (1) | — | |||||||||
Profit 1 | $ | 1,943 | $ | 1,537 | |||||||
| Profit per common share | $ | 3.76 | $ | 2.88 | |||||||
Profit per common share – diluted 2 | $ | 3.74 | $ | 2.86 | |||||||
| Weighted-average common shares outstanding (millions) | |||||||||||
| – Basic | 516.2 | 534.5 | |||||||||
– Diluted 2 | 519.4 | 538.3 | |||||||||
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
Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)
| Three Months Ended March 31 | |||||||||||
| 2023 | 2022 | ||||||||||
| Profit of consolidated and affiliated companies | $ | 1,942 | $ | 1,537 | |||||||
| Other comprehensive income (loss), net of tax (Note 13): | |||||||||||
| Foreign currency translation: | 607 | (115) | |||||||||
| Pension and other postretirement benefits: | (2) | (1) | |||||||||
| Derivative financial instruments: | 84 | 23 | |||||||||
| Available-for-sale securities: | 22 | (64) | |||||||||
| Total other comprehensive income (loss), net of tax | 711 | (157) | |||||||||
| Comprehensive income | 2,653 | 1,380 | |||||||||
| Less: comprehensive income attributable to the noncontrolling interests | (1) | — | |||||||||
| Comprehensive income attributable to shareholders | $ | 2,654 | $ | 1,380 | |||||||
See accompanying notes to Consolidated Financial Statements.
4
Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Dollars in millions)
| March 31, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 6,789 | $ | 7,004 | |||||||
| Receivables – trade and other | 9,230 | 8,856 | |||||||||
| Receivables – finance | 9,119 | 9,013 | |||||||||
| Prepaid expenses and other current assets | 2,889 | 2,642 | |||||||||
| Inventories | 17,633 | 16,270 | |||||||||
| Total current assets | 45,660 | 43,785 | |||||||||
| Property, plant and equipment – net | 11,973 | 12,028 | |||||||||
| Long-term receivables – trade and other | 1,209 | 1,265 | |||||||||
| Long-term receivables – finance | 11,845 | 12,013 | |||||||||
| Noncurrent deferred and refundable income taxes | 2,405 | 2,213 | |||||||||
| Intangible assets | 694 | 758 | |||||||||
| Goodwill | 5,309 | 5,288 | |||||||||
| Other assets | 4,554 | 4,593 | |||||||||
| Total assets | $ | 83,649 | $ | 81,943 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Short-term borrowings: | |||||||||||
| Machinery, Energy & Transportation | $ | — | $ | 3 | |||||||
| Financial Products | 5,841 | 5,954 | |||||||||
| Accounts payable | 8,951 | 8,689 | |||||||||
| Accrued expenses | 4,121 | 4,080 | |||||||||
| Accrued wages, salaries and employee benefits | 1,368 | 2,313 | |||||||||
| Customer advances | 2,202 | 1,860 | |||||||||
| Dividends payable | — | 620 | |||||||||
| Other current liabilities | 3,035 | 2,690 | |||||||||
| Long-term debt due within one year: | |||||||||||
| Machinery, Energy & Transportation | 37 | 120 | |||||||||
| Financial Products | 6,287 | 5,202 | |||||||||
| Total current liabilities | 31,842 | 31,531 | |||||||||
| Long-term debt due after one year: | |||||||||||
| Machinery, Energy & Transportation | 9,558 | 9,498 | |||||||||
| Financial Products | 15,315 | 16,216 | |||||||||
| Liability for postemployment benefits | 4,069 | 4,203 | |||||||||
| Other liabilities | 4,695 | 4,604 | |||||||||
| Total liabilities | 65,479 | 66,052 | |||||||||
| Commitments and contingencies (Notes 11 and 14) | |||||||||||
| Shareholders’ equity | |||||||||||
Common stock of $1.00 par value: | |||||||||||
Authorized shares: 2,000,000,000 Issued shares: (3/31/23 and 12/31/22 – 814,894,624) at paid-in amount | 6,546 | 6,560 | |||||||||
Treasury stock: (3/31/23 – 298,974,563 shares; 12/31/22 – 298,549,134 shares) at cost | (32,108) | (31,748) | |||||||||
| Profit employed in the business | 45,457 | 43,514 | |||||||||
| Accumulated other comprehensive income (loss) | (1,746) | (2,457) | |||||||||
| Noncontrolling interests | 21 | 22 | |||||||||
| Total shareholders’ equity | 18,170 | 15,891 | |||||||||
| Total liabilities and shareholders’ equity | $ | 83,649 | $ | 81,943 | |||||||
See accompanying notes to Consolidated Financial Statements.
5
Caterpillar Inc.
Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in millions)
| Common stock | Treasury stock | Profit employed in the business | Accumulated other comprehensive income (loss) | Noncontrolling interests | Total | ||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 6,398 | $ | (27,643) | $ | 39,282 | $ | (1,553) | $ | 32 | $ | 16,516 | |||||||||||||||||||||||
| Profit of consolidated and affiliated companies | — | — | 1,537 | — | — | 1,537 | |||||||||||||||||||||||||||||
| Foreign currency translation, net of tax | — | — | — | (115) | — | (115) | |||||||||||||||||||||||||||||
| Pension and other postretirement benefits, net of tax | — | — | — | (1) | — | (1) | |||||||||||||||||||||||||||||
| Derivative financial instruments, net of tax | — | — | — | 23 | — | 23 | |||||||||||||||||||||||||||||
| Available-for-sale securities, net of tax | — | — | — | (64) | — | (64) | |||||||||||||||||||||||||||||
Dividends declared | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||||
Common shares issued from treasury stock for stock-based compensation: 1,037,468 | (65) | 37 | — | — | — | (28) | |||||||||||||||||||||||||||||
| Stock-based compensation expense | 40 | — | — | — | — | 40 | |||||||||||||||||||||||||||||
Common shares repurchased: 3,571,684 1 | — | (720) | — | — | — | (720) | |||||||||||||||||||||||||||||
| Other | (92) | — | — | — | — | (92) | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | 6,281 | $ | (28,326) | $ | 40,820 | $ | (1,710) | $ | 32 | $ | 17,097 | |||||||||||||||||||||||
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | 6,560 | $ | (31,748) | $ | 43,514 | $ | (2,457) | $ | 22 | $ | 15,891 | |||||||||||||||||||||||
| Profit of consolidated and affiliated companies | — | — | 1,943 | — | (1) | 1,942 | |||||||||||||||||||||||||||||
| Foreign currency translation, net of tax | — | — | — | 607 | — | 607 | |||||||||||||||||||||||||||||
| Pension and other postretirement benefits, net of tax | — | — | — | (2) | — | (2) | |||||||||||||||||||||||||||||
| Derivative financial instruments, net of tax | — | — | — | 84 | — | 84 | |||||||||||||||||||||||||||||
| Available-for-sale securities, net of tax | — | — | — | 22 | — | 22 | |||||||||||||||||||||||||||||
Common shares issued from treasury stock for stock-based compensation: 1,276,331 | (66) | 41 | — | — | — | (25) | |||||||||||||||||||||||||||||
| Stock-based compensation expense | 44 | — | — | — | — | 44 | |||||||||||||||||||||||||||||
Common shares repurchased: 1,701,760 1 | — | (400) | — | — | — | (400) | |||||||||||||||||||||||||||||
| Other | 8 | (1) | — | — | — | 7 | |||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | 6,546 | $ | (32,108) | $ | 45,457 | $ | (1,746) | $ | 21 | $ | 18,170 | |||||||||||||||||||||||
1 See Note 12 for additional information.
See accompanying notes to Consolidated Financial Statements.
6
Caterpillar Inc.
Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
| Three Months Ended March 31 | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flow from operating activities: | |||||||||||
| Profit of consolidated and affiliated companies | $ | 1,942 | $ | 1,537 | |||||||
| Adjustments for non-cash items: | |||||||||||
| Depreciation and amortization | 532 | 557 | |||||||||
| Provision (benefit) for deferred income taxes | (191) | (99) | |||||||||
| Loss on divestiture | 572 | — | |||||||||
| Other | 117 | (52) | |||||||||
| Changes in assets and liabilities, net of acquisitions and divestitures: | |||||||||||
| Receivables – trade and other | (329) | (372) | |||||||||
| Inventories | (1,403) | (1,032) | |||||||||
| Accounts payable | 477 | 452 | |||||||||
| Accrued expenses | 38 | (74) | |||||||||
| Accrued wages, salaries and employee benefits | (950) | (965) | |||||||||
| Customer advances | 365 | 311 | |||||||||
| Other assets – net | 107 | 99 | |||||||||
| Other liabilities – net | 296 | (49) | |||||||||
| Net cash provided by (used for) operating activities | 1,573 | 313 | |||||||||
| Cash flow from investing activities: | |||||||||||
| Capital expenditures – excluding equipment leased to others | (422) | (346) | |||||||||
| Expenditures for equipment leased to others | (328) | (333) | |||||||||
| Proceeds from disposals of leased assets and property, plant and equipment | 184 | 269 | |||||||||
| Additions to finance receivables | (3,020) | (2,988) | |||||||||
| Collections of finance receivables | 3,169 | 2,966 | |||||||||
| Proceeds from sale of finance receivables | 24 | 9 | |||||||||
| Investments and acquisitions (net of cash acquired) | (5) | (8) | |||||||||
| Proceeds from sale of businesses and investments (net of cash sold) | (14) | — | |||||||||
| Proceeds from sale of securities | 239 | 571 | |||||||||
| Investments in securities | (536) | (1,438) | |||||||||
| Other – net | 26 | (15) | |||||||||
| Net cash provided by (used for) investing activities | (683) | (1,313) | |||||||||
| Cash flow from financing activities: | |||||||||||
| Dividends paid | (620) | (595) | |||||||||
| Common stock issued, including treasury shares reissued | (25) | (28) | |||||||||
| Common shares repurchased | (400) | (820) | |||||||||
| Proceeds from debt issued (original maturities greater than three months): | |||||||||||
| Machinery, Energy & Transportation | — | — | |||||||||
| Financial Products | 1,517 | 2,131 | |||||||||
| Payments on debt (original maturities greater than three months): | |||||||||||
| Machinery, Energy & Transportation | (90) | (6) | |||||||||
| Financial Products | (1,385) | (1,381) | |||||||||
| Short-term borrowings – net (original maturities three months or less) | (103) | (1,016) | |||||||||
| Net cash provided by (used for) financing activities | (1,106) | (1,715) | |||||||||
| Effect of exchange rate changes on cash | (1) | (16) | |||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | (217) | (2,731) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 7,013 | 9,263 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 6,796 | $ | 6,532 | |||||||
Cash equivalents primarily represent short-term, highly liquid investments with original maturities of generally three months or less.
See accompanying notes to Consolidated Financial Statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. A. Nature of operations
Information in our financial statements and related commentary are presented in the following categories:
Machinery, Energy & Transportation (ME&T) – We define ME&T as Caterpillar Inc. and its subsidiaries, excluding Financial Products. ME&T’s information relates to the design, manufacturing and marketing of our products.
Financial Products – We define Financial Products as our finance and insurance subsidiaries, primarily Caterpillar Financial Services Corporation (Cat Financial) and Caterpillar Insurance Holdings Inc. (Insurance Services). Financial Products’ information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment.
B. Basis of presentation
In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated results of operations for the three months ended March 31, 2023 and 2022, (b) the consolidated comprehensive income for the three months ended March 31, 2023 and 2022, (c) the consolidated financial position at March 31, 2023 and December 31, 2022, (d) the consolidated changes in shareholders’ equity for the three months ended March 31, 2023 and 2022 and (e) the consolidated cash flow for the three months ended March 31, 2023 and 2022. 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, 2022 (2022 Form 10-K).
The December 31, 2022 financial position data included herein is derived from the audited consolidated financial statements included in the 2022 Form 10-K but does not include all disclosures required by U.S. GAAP. Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation.
Cat Financial has end-user customers and dealers that are variable interest entities (VIEs) of which we are not the primary beneficiary. 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. Credit risk was evaluated and reflected in our financial statements as part of our overall portfolio of finance receivables and related allowance for credit losses. See Note 11 for further discussions on a consolidated VIE.
2. New accounting guidance
A. Adoption of new accounting standards
Supplier finance programs (ASU 2022-04) - In September 2022, the Financial Accounting Standards Board (FASB) issued guidance to enhance the transparency of supplier finance programs. The new standard requires annual disclosure of the key terms of the program, a description of where in the financial statements amounts outstanding under the program are presented, a rollforward of such amounts, and interim disclosure of amounts outstanding as of the end of each period. The guidance does not affect recognition, measurement, or financial statement presentation of supplier finance programs. The ASU was effective on January 1, 2023, except for the rollforward, which is effective on January 1, 2024. Our adoption of this guidance results in the following disclosures relating to our supplier finance programs and related obligations.
8
We facilitate voluntary supplier finance programs (the “Programs”) through participating financial institutions. The Programs are available to a wide range of suppliers and allow them the option to manage their cash flow. We are not a party to the agreements between the participating financial institutions and the suppliers in connection with the Programs. The range of payment terms, typically 60-90 days, we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the Programs. The amount of obligations outstanding that are confirmed as valid to the participating financial institutions for suppliers who voluntarily participate in the Programs, included in Accounts payable in the Consolidated Statement of Financial Position, were $970 million and $862 million at March 31, 2023 and December 31, 2022, respectively.
We consider the applicability and impact of all ASUs. We adopted the following ASUs effective January 1, 2023, none of which had a material impact on our financial statements:
| ASU | Description | ||||
| 2021-08 | Business combinations | ||||
| 2022-02 | Financial instruments - Credit losses | ||||
| 2022-06 | Reference rate reform | ||||
B. Accounting standards issued but not yet adopted
We consider the applicability and impact of all ASUs. We assessed the ASUs and determined that they either were not applicable or were not expected to have a material impact on our financial statements.
3. Sales and revenue contract information
Trade receivables represent amounts due from dealers and end users for the sale of our products, and include amounts due from wholesale inventory financing provided by Cat Financial for a dealer’s purchase of inventory. We recognize trade receivables from dealers and end users in Receivables – trade and other and Long-term receivables – trade and other in the Consolidated Statement of Financial Position. Trade receivables from dealers and end users were $7,854 million, $7,551 million and $7,267 million as of March 31, 2023, December 31, 2022 and December 31, 2021, respectively. Long-term trade receivables from dealers and end users were $472 million, $506 million and $624 million as of March 31, 2023, December 31, 2022 and December 31, 2021, respectively.
For certain contracts, we invoice for payment when contractual milestones are achieved. We recognize a contract asset when a sale is recognized prior to invoicing. We reduce the contract asset when we invoice for payment and recognize a corresponding trade receivable. Contract assets are included in Prepaid expenses and other current assets in the Consolidated Statement of Financial Position. Contract assets were $195 million, $247 million and $187 million as of March 31, 2023, December 31, 2022 and December 31, 2021, respectively.
We invoice in advance of recognizing the sale of certain products. We recognize advanced customer payments as a contract liability in Customer advances and Other liabilities in the Consolidated Statement of Financial Position. Contract liabilities were $2,664 million, $2,314 million and $1,557 million as of March 31, 2023, December 31, 2022 and December 31, 2021, respectively. We reduce the contract liability when revenue is recognized. During the three months ended March 31, 2023 and 2022, we recognized $737 million and $437 million, respectively, of revenue that was recorded as a contract liability at the beginning of 2023 and 2022.
As of March 31, 2023, 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 $12.6 billion, with about one-half of the amount expected to be completed and revenue recognized in the twelve months following March 31, 2023. 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.
9
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 consists of stock options, restricted stock units (RSUs) and performance-based restricted stock units (PRSUs).
We recognized pretax stock-based compensation expense of $44 million and $40 million for the three months ended March 31, 2023 and 2022, respectively.
The following table illustrates the type and fair value of the stock-based compensation awards granted during the three months ended March 31, 2023 and 2022, respectively:
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||
| Shares Granted | Weighted-Average Fair Value Per Share | Weighted-Average Grant Date Stock Price | Shares Granted | Weighted-Average Fair Value Per Share | Weighted-Average Grant Date Stock Price | ||||||||||||||||||||||||||||||
| Stock options | 777,275 | $ | 75.79 | $ | 253.98 | 1,029,202 | $ | 51.69 | $ | 196.70 | |||||||||||||||||||||||||
| RSUs | 379,426 | $ | 253.98 | $ | 253.98 | 484,025 | $ | 196.70 | $ | 196.70 | |||||||||||||||||||||||||
| PRSUs | 221,869 | $ | 253.98 | $ | 253.98 | 258,900 | $ | 196.70 | $ | 196.70 | |||||||||||||||||||||||||
The following table provides the assumptions used in determining the fair value of the stock-based awards for the three months ended March 31, 2023 and 2022, respectively:
| Grant Year | |||||||||||
| 2023 | 2022 | ||||||||||
| Weighted-average dividend yield | 2.60% | 2.60% | |||||||||
| Weighted-average volatility | 31.0% | 31.7% | |||||||||
| Range of volatilities | 28.5% - 35.5% | 25.3% - 36.8% | |||||||||
| Range of risk-free interest rates | 3.92% - 5.03% | 1.03% - 2.00% | |||||||||
| Weighted-average expected lives | 7 years | 8 years | |||||||||
As of March 31, 2023, the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $305 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 1.8 years.
5. Derivative financial instruments and risk management
Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward, option and cross currency contracts, interest rate contracts and commodity forward and option contracts. Our derivative activities are subject to the management, direction and control of our senior financial officers. We present at least annually to the Audit Committee of the Board of Directors on our risk management practices, including our use of financial derivative instruments.
10
We recognize all derivatives at their fair value on the Consolidated Statement of Financial Position. On the date the derivative contract is entered into, we designate the derivative as (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flow (cash flow hedge) or (3) an undesignated instrument. We record in current earnings changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk. We record in AOCI changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge, to the extent effective, on the Consolidated Statement of Financial Position until we reclassify them to earnings in the same period or periods during which the hedged transaction affects earnings. We report changes in the fair value of undesignated derivative instruments in current earnings. We classify cash flows from designated derivative financial instruments within the same category as the item being hedged on the Consolidated Statement of Cash Flow. We include cash flows from undesignated derivative financial instruments in the investing category on the Consolidated Statement of Cash Flow.
We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Consolidated Statement of Financial Position and linking cash flow hedges to specific forecasted transactions or variability of cash flow.
We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items. When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, we discontinue hedge accounting prospectively, in accordance with the derecognition criteria for hedge accounting.
Foreign Currency Exchange Rate Risk
Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies. Movements in foreign currency rates also affect our competitive position as these changes may affect business practices and/or pricing strategies of non-U.S.-based competitors. Additionally, we have balance sheet positions denominated in foreign currencies, thereby creating exposure to movements in exchange rates.
Our ME&T operations purchase, manufacture and sell products in many locations around the world. As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to approximately five years. As of March 31, 2023, the maximum term of these outstanding contracts at inception was approximately 60 months.
We generally designate as cash flow hedges at inception of the contract any foreign currency forward or option contracts that meet the requirements for hedge accounting and the maturity extends beyond the current quarter-end. We perform designation on a specific exposure basis to support hedge accounting. The remainder of ME&T foreign currency contracts are undesignated.
In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions and future transactions denominated in foreign currencies. Our policy allows the use of foreign currency forward, option and cross currency contracts to offset the risk of currency mismatch between our assets and liabilities and exchange rate risk associated with future transactions denominated in foreign currencies. Our foreign currency forward and option contracts are primarily undesignated. We designate fixed-to-fixed cross currency contracts as cash flow hedges to protect against movements in exchange rates on foreign currency fixed-rate assets and liabilities.
Interest Rate Risk
Interest rate movements create a degree of risk by affecting the amount of our interest payments and the value of our fixed-rate debt. Our practice is to use interest rate contracts to manage our exposure to interest rate changes.
11
Our ME&T operations generally use fixed-rate debt as a source of funding. Our objective is to minimize the cost of borrowed funds. Our policy allows us to enter into fixed-to-floating interest rate contracts and forward rate agreements to meet that objective. We designate fixed-to-floating interest rate contracts as fair value hedges at inception of the contract, and we designate certain forward rate agreements as cash flow hedges at inception of the contract.
Financial Products operations has a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate and duration) of Cat Financial’s debt portfolio with the interest rate profile of our receivables portfolio within predetermined ranges on an ongoing basis. In connection with that policy, we use interest rate derivative instruments to modify the debt structure to match assets within the receivables portfolio. This matched funding reduces the volatility of margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move.
Our policy allows us to use fixed-to-floating, floating-to-fixed and floating-to-floating interest rate contracts to meet the match-funding objective. We designate fixed-to-floating interest rate contracts as fair value hedges to protect debt against changes in fair value due to changes in the benchmark interest rate. We designate most floating-to-fixed interest rate contracts as cash flow hedges to protect against the variability of cash flows due to changes in the benchmark interest rate.
We have, at certain times, liquidated fixed-to-floating and floating-to-fixed interest rate contracts at both ME&T and Financial Products. We amortize the gains or losses associated with these contracts at the time of liquidation into earnings over the original term of the previously designated hedged item.
Commodity Price Risk
Commodity price movements create a degree of risk by affecting the price we must pay for certain raw materials. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials.
Our ME&T operations purchase base and precious metals embedded in the components we purchase from suppliers. Our suppliers pass on to us price changes in the commodity portion of the component cost. In addition, we are subject to price changes on energy products such as natural gas and diesel fuel purchased for operational use.
Our objective is to minimize volatility in the price of these commodities. Our policy allows us to enter into commodity forward and option contracts to lock in the purchase price of a portion of these commodities within a five-year horizon. All such commodity forward and option contracts are undesignated.
The location and fair value of derivative instruments reported in the Consolidated Statement of Financial Position were as follows:
12
The total notional amounts of the derivative instruments as of March 31, 2023 and December 31, 2022 were $22.8 billion and $24.3 billion, respectively. The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties. We calculate the amounts exchanged by the parties by referencing the notional amounts and by other terms of the derivatives, such as foreign currency exchange rates, interest rates or commodity prices.
Gains (Losses) on derivative instruments are categorized as follows:
13
The following amounts were recorded on the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges:
| (Millions of dollars) | Carrying Value of the Hedged Liabilities | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Value of the Hedged Liabilities | |||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | ||||||||||||||||||||
| Long-term debt due within one year | $ | 194 | $ | — | $ | (6) | $ | — | |||||||||||||||
| Long-term debt due after one year | 4,115 | 4,173 | (189) | (280) | |||||||||||||||||||
| Total | $ | 4,309 | $ | 4,173 | $ | (195) | $ | (280) | |||||||||||||||
We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within ME&T and Financial Products that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements may 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 typically not required of the counterparties or of our company under the master netting agreements. As of March 31, 2023 and December 31, 2022, no cash collateral was received or pledged under the master netting agreements.
The effect of the net settlement provisions of the master netting agreements on our derivative balances upon an event of default or termination event was as follows:
| (Millions of dollars) | March 31, 2023 | December 31, 2022 | |||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||
| Gross Amounts Recognized | $ | 595 | $ | (404) | $ | 644 | $ | (496) | |||||||||||||||
| Financial Instruments Not Offset | (164) | 164 | (233) | 233 | |||||||||||||||||||
| Net Amount | $ | 431 | $ | (240) | $ | 411 | $ | (263) | |||||||||||||||
6. Inventories
Inventories (principally using the last-in, first-out (LIFO) method) were comprised of the following:
| (Millions of dollars) | March 31, 2023 | December 31, 2022 | |||||||||
| Raw materials | $ | 6,776 | $ | 6,370 | |||||||
| Work-in-process | 1,656 | 1,452 | |||||||||
| Finished goods | 8,868 | 8,138 | |||||||||
| Supplies | 333 | 310 | |||||||||
| Total inventories | $ | 17,633 | $ | 16,270 | |||||||
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7. Intangible assets and goodwill
A. Intangible assets
Intangible assets were comprised of the following:
| March 31, 2023 | |||||||||||||||||||||||
| (Millions of dollars) | Weighted Amortizable Life (Years) | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||
| Customer relationships | 16 | $ | 2,241 | $ | (1,717) | $ | 524 | ||||||||||||||||
| Intellectual property | 13 | 1,470 | (1,345) | 125 | |||||||||||||||||||
| Other | 17 | 121 | (76) | 45 | |||||||||||||||||||
| Total finite-lived intangible assets | 15 | $ | 3,832 | $ | (3,138) | $ | 694 | ||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Weighted Amortizable Life (Years) | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||
| Customer relationships | 16 | $ | 2,233 | $ | (1,675) | $ | 558 | ||||||||||||||||
| Intellectual property | 12 | 1,473 | (1,320) | 153 | |||||||||||||||||||
| Other | 16 | 132 | (85) | 47 | |||||||||||||||||||
| Total finite-lived intangible assets | 14 | $ | 3,838 | $ | (3,080) | $ | 758 | ||||||||||||||||
Amortization expense for the three months ended March 31, 2023 and 2022 was $66 million and $72 million, respectively. Amortization expense related to intangible assets is expected to be:
| (Millions of dollars) | ||||||||||||||||||||||||||||||||
| Remaining Nine Months of 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | |||||||||||||||||||||||||||
| $151 | $171 | $161 | $91 | $27 | $93 | |||||||||||||||||||||||||||
B. Goodwill
No goodwill was impaired during the three months ended March 31, 2023 or 2022.
15
The changes in carrying amount of goodwill by reportable segment for the three months ended March 31, 2023 were as follows:
| (Millions of dollars) | December 31, 2022 | Other Adjustments 1 | March 31, 2023 | |||||||||||||||||
| Construction Industries | ||||||||||||||||||||
| Goodwill | $ | 287 | $ | (3) | $ | 284 | ||||||||||||||
| Impairments | (22) | — | (22) | |||||||||||||||||
| Net goodwill | 265 | (3) | 262 | |||||||||||||||||
| Resource Industries | ||||||||||||||||||||
| Goodwill | 4,130 | 18 | 4,148 | |||||||||||||||||
| Impairments | (1,175) | — | (1,175) | |||||||||||||||||
| Net goodwill | 2,955 | 18 | 2,973 | |||||||||||||||||
| Energy & Transportation | ||||||||||||||||||||
| Goodwill | 2,947 | 6 | 2,953 | |||||||||||||||||
| Impairments | (925) | — | (925) | |||||||||||||||||
| Net goodwill | 2,022 | 6 | 2,028 | |||||||||||||||||
All Other 2 | ||||||||||||||||||||
| Goodwill | 46 | — | 46 | |||||||||||||||||
| Impairments | — | — | — | |||||||||||||||||
| Net goodwill | 46 | — | 46 | |||||||||||||||||
| Consolidated total | ||||||||||||||||||||
| Goodwill | 7,410 | 21 | 7,431 | |||||||||||||||||
| Impairments | (2,122) | — | (2,122) | |||||||||||||||||
| Net goodwill | $ | 5,288 | $ | 21 | $ | 5,309 | ||||||||||||||
1 Other adjustments are comprised primarily of foreign currency translation.
2 Includes All Other operating segment (See Note 16).
8. Investments in debt and equity securities
We have investments in certain debt and equity securities, which we record at fair value and primarily include in Other assets in the Consolidated Statement of Financial Position.
We classify debt securities primarily as available-for-sale. We include the unrealized gains and losses arising from the revaluation of available-for-sale debt securities, net of applicable deferred income taxes, in equity (AOCI in the Consolidated Statement of Financial Position). We include the unrealized gains and losses arising from the revaluation of the equity securities in Other income (expense) in the Consolidated Statement of Results of Operations. We generally determine realized gains and losses on sales of investments using the specific identification method for available-for-sale debt and equity securities and include them in Other income (expense) in the Consolidated Statement of Results of Operations.
The cost basis and fair value of available-for-sale debt securities with unrealized gains and losses included in equity (AOCI in the Consolidated Statement of Financial Position) were as follows:
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Available-for-sale debt securities | March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||
| (Millions of dollars) | Cost Basis | Unrealized Pretax Net Gains (Losses) | Fair Value | Cost Basis | Unrealized Pretax Net Gains (Losses) | Fair Value | |||||||||||||||||||||||||||||
| Government debt securities | |||||||||||||||||||||||||||||||||||
| U.S. treasury bonds | $ | 10 | $ | (1) | $ | 9 | $ | 9 | $ | — | $ | 9 | |||||||||||||||||||||||
| Other U.S. and non-U.S. government bonds | 61 | (4) | 57 | 60 | (5) | 55 | |||||||||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||||||||||||||
| Corporate bonds and other debt securities | 2,594 | (75) | 2,519 | 2,561 | (95) | 2,466 | |||||||||||||||||||||||||||||
| Asset-backed securities | 189 | (5) | 184 | 187 | (5) | 182 | |||||||||||||||||||||||||||||
| Mortgage-backed debt securities | |||||||||||||||||||||||||||||||||||
| U.S. governmental agency | 366 | (25) | 341 | 364 | (31) | 333 | |||||||||||||||||||||||||||||
| Residential | 3 | (1) | 2 | 3 | (1) | 2 | |||||||||||||||||||||||||||||
| Commercial | 135 | (10) | 125 | 127 | (10) | 117 | |||||||||||||||||||||||||||||
| Total available-for-sale debt securities | $ | 3,358 | $ | (121) | $ | 3,237 | $ | 3,311 | $ | (147) | $ | 3,164 | |||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
Less than 12 months 1 | 12 months or more 1 | Total | |||||||||||||||||||||||||||||||||
| (Millions of dollars) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| Government debt securities | |||||||||||||||||||||||||||||||||||
| Other U.S. and non-U.S. government bonds | $ | 19 | $ | 1 | $ | 20 | $ | 4 | $ | 39 | $ | 5 | |||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||||||||||||||
| Corporate bonds | 1,815 | 46 | 357 | 50 | 2,172 | 96 | |||||||||||||||||||||||||||||
| Asset-backed securities | 75 | 2 | 55 | 3 | 130 | 5 | |||||||||||||||||||||||||||||
| Mortgage-backed debt securities | |||||||||||||||||||||||||||||||||||
| U.S. governmental agency | 229 | 16 | 98 | 15 | 327 | 31 | |||||||||||||||||||||||||||||
| Residential | 2 | — | 1 | 1 | 3 | 1 | |||||||||||||||||||||||||||||
| Commercial | 63 | 5 | 54 | 5 | 117 | 10 | |||||||||||||||||||||||||||||
| Total | $ | 2,203 | $ | 70 | $ | 585 | $ | 78 | $ | 2,788 | $ | 148 | |||||||||||||||||||||||
1 Indicates the length of time that individual securities have been in a continuous unrealized loss position. | |||||||||||||||||||||||||||||||||||
17
The unrealized losses on our investments in government debt securities, corporate debt securities, and mortgage-backed debt securities relate to changes in interest rates and credit-related yield spreads since time of purchase. We do not intend to sell the investments, and it is not likely that we will be required to sell the investments before recovery of their respective amortized cost basis. In addition, we did not expect credit-related losses on these investments as of March 31, 2023.
The cost basis and fair value of available-for-sale debt securities at March 31, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.
| March 31, 2023 | |||||||||||
| (Millions of dollars) | Cost Basis | Fair Value | |||||||||
| Due in one year or less | $ | 961 | $ | 950 | |||||||
| Due after one year through five years | 1,571 | 1,511 | |||||||||
| Due after five years through ten years | 257 | 245 | |||||||||
| Due after ten years | 65 | 63 | |||||||||
| U.S. governmental agency mortgage-backed securities | 366 | 341 | |||||||||
| Residential mortgage-backed securities | 3 | 2 | |||||||||
| Commercial mortgage-backed securities | 135 | 125 | |||||||||
| Total debt securities – available-for-sale | $ | 3,358 | $ | 3,237 | |||||||
In addition, we had $250 million of investments in time deposits classified as held-to-maturity debt securities as of March 31, 2023. We did not have any investments classified as held-to-maturity debt securities as of December 31, 2022. All these investments mature within one year and we include them in Prepaid expenses and other current assets in the Consolidated Statement of Financial Position. We record held-to-maturity debt securities at amortized cost, which approximates fair value.
For the three months ended March 31, 2023 and 2022, the net unrealized gains (losses) for equity securities held at March 31, 2023 and 2022 were $(8) million and $(12) million, respectively.
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9. Postretirement benefits
A. Pension and postretirement benefit costs
U.S. Pension Benefits | Non-U.S. Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||
| March 31 | March 31 | March 31 | |||||||||||||||||||||||||||||||||
| (Millions of dollars) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| For the three months ended: | |||||||||||||||||||||||||||||||||||
| Components of net periodic benefit cost: | |||||||||||||||||||||||||||||||||||
| Service cost | $ | — | $ | — | $ | 10 | $ | 13 | $ | 17 | $ | 25 | |||||||||||||||||||||||
| Interest cost | 164 | 100 | 31 | 18 | 36 | 20 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (172) | (167) | (40) | (34) | (3) | (4) | |||||||||||||||||||||||||||||
| Amortization of prior service cost (credit) | — | — | — | — | (3) | (1) | |||||||||||||||||||||||||||||
Net periodic benefit cost (benefit) 1 | $ | (8) | $ | (67) | $ | 1 | $ | (3) | $ | 47 | $ | 40 | |||||||||||||||||||||||
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 $208 million of contributions to our pension and other postretirement plans during the three months ended March 31, 2023. We currently anticipate full-year 2023 contributions of approximately $372 million.
B. Defined contribution benefit costs
Total company costs related to our defined contribution plans, which are included in Operating Costs in the Consolidated Statement of Results of Operations, were as follows:
| Three Months Ended March 31 | |||||||||||
| (Millions of dollars) | 2023 | 2022 | |||||||||
| U.S. Plans | $ | 149 | $ | 114 | |||||||
| Non-U.S. Plans | 29 | 29 | |||||||||
| $ | 178 | $ | 143 | ||||||||
The increase in the U.S. defined contribution benefit costs for the three months ended March 31, 2023 was primarily due to the fair value adjustments related to our non-qualified deferred compensation plans.
10. Leases
Revenues from finance and operating leases, primarily included in on the Consolidated Statement of Results of Operations, were as follows:
| Three Months Ended March 31 | |||||||||||
| (Millions of dollars) | 2023 | 2022 | |||||||||
| Finance lease revenue | $ | 104 | $ | 112 | |||||||
| Operating lease revenue | 275 | 278 | |||||||||
| Total | $ | 379 | $ | 390 | |||||||
We present revenues net of sales and other related taxes.
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11. Guarantees and product warranty
Caterpillar dealer performance guarantees
Dealer performance guarantees mainly consists of 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 have dealer performance guarantees and third-party performance guarantees that do not limit potential payment to end users related to indemnities and other commercial contractual obligations. In addition, we have entered into contracts involving industry standard indemnifications that do not limit potential payment. For these unlimited guarantees, we are unable to estimate a maximum potential amount of future payments that could result from claims made.
No significant loss has been experienced or is anticipated under any of these guarantees. At March 31, 2023 and December 31, 2022, the related recorded liability was $4 million and $2 million, respectively. The maximum potential amount of future payments that we can estimate (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) and we could be required to make under the guarantees was as follows:
| (Millions of dollars) | March 31, 2023 | December 31, 2022 | |||||||||
| Caterpillar dealer performance guarantees | $ | 191 | $ | 188 | |||||||
| Other guarantees | 381 | 323 | |||||||||
| Total guarantees | $ | 572 | $ | 511 | |||||||
Cat Financial provides guarantees to purchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a variable interest entity. The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers. This SPC issues commercial paper and uses the proceeds to fund its loan program. Cat Financial receives a fee for providing this guarantee. Cat Financial is the primary beneficiary of the SPC as its guarantees result in Cat Financial having both the power to direct the activities that most significantly impact the SPC’s economic performance and the obligation to absorb losses, and therefore Cat Financial has consolidated the financial statements of the SPC. As of March 31, 2023 and December 31, 2022, the SPC’s assets of $1.13 billion and $971 million, respectively, were primarily comprised of loans to dealers, and the SPC’s liabilities of $1.13 billion and $970 million, respectively, were primarily comprised of commercial paper. The assets of the SPC are not available to pay Cat Financial’s creditors. Cat Financial may be obligated to perform under the guarantee if the SPC experiences losses. No loss has been experienced or is anticipated under this loan purchase agreement.
We determine our product warranty liability by applying historical claim rate experience to the current field population and dealer inventory. Generally, we base historical claim rates on actual warranty experience for each product by machine model/engine size by customer or dealer location (inside or outside North America). We develop specific rates for each product shipment month and update them monthly based on actual warranty claim experience.
The reconciliation of the change in our product warranty liability balances for the quarters ended March 31 was as follows:
First Three Months | |||||||||||
| (Millions of dollars) | 2023 | 2022 | |||||||||
| Warranty liability, beginning of period | $ | 1,761 | $ | 1,689 | |||||||
| Reduction in liability (payments) | (213) | (194) | |||||||||
| Increase in liability (new warranties) | 246 | 168 | |||||||||
| Warranty liability, end of period | $ | 1,794 | $ | 1,663 | |||||||
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12. Profit per share
| Computations of profit per share: | Three Months Ended March 31 | ||||||||||||||||
| (Dollars in millions except per share data) | 2023 | 2022 | |||||||||||||||
Profit for the period (A) 1 | $ | 1,943 | $ | 1,537 | |||||||||||||
| Determination of shares (in millions): | |||||||||||||||||
| Weighted-average number of common shares outstanding (B) | 516.2 | 534.5 | |||||||||||||||
| Shares issuable on exercise of stock awards, net of shares assumed to be purchased out of proceeds at average market price | 3.2 | 3.8 | |||||||||||||||
Average common shares outstanding for fully diluted computation (C) 2 | 519.4 | 538.3 | |||||||||||||||
| Profit per share of common stock: | |||||||||||||||||
| Assuming no dilution (A/B) | $ | 3.76 | $ | 2.88 | |||||||||||||
Assuming full dilution (A/C) 2 | $ | 3.74 | $ | 2.86 | |||||||||||||
| Shares outstanding as of March 31 (in millions) | 515.9 | 533.4 | |||||||||||||||
1 Profit attributable to common shareholders. | |||||||||||||||||
2 Diluted by assumed exercise of stock-based compensation awards using the treasury stock method. | |||||||||||||||||
For the three months ended March 31, 2023 and 2022, we excluded 0.8 million and 2.1 million of outstanding stock options, respectively, from the computation of diluted earnings per share because the effect would have been antidilutive.
For the three months ended March 31, 2023 and 2022, we repurchased 1.7 million and 3.6 million shares of Caterpillar common stock, respectively, at an aggregate cost of $400 million and $720 million, respectively. We made these purchases through open market transactions in 2023 and the combination of an accelerated stock repurchase agreement with a third-party financial institution and open market transactions in 2022.
13. Accumulated other comprehensive income (loss)
We present comprehensive income and its components in the Consolidated Statement of Comprehensive Income. Changes in the balances for each component of AOCI were as follows:
21
| Three Months Ended March 31 | |||||||||||
| (Millions of dollars) | 2023 | 2022 | |||||||||
| Foreign currency translation: | |||||||||||
| Beginning balance | $ | (2,328) | $ | (1,508) | |||||||
| Gains (losses) on foreign currency translation | 103 | (104) | |||||||||
| Less: Tax provision /(benefit) | (10) | 11 | |||||||||
| Net gains (losses) on foreign currency translation | 113 | (115) | |||||||||
| (Gains) losses reclassified to earnings | 494 | — | |||||||||
| Less: Tax provision /(benefit) | — | — | |||||||||
| Net (gains) losses reclassified to earnings | 494 | — | |||||||||
| Other comprehensive income (loss), net of tax | 607 | (115) | |||||||||
| Ending balance | $ | (1,721) | $ | (1,623) | |||||||
| Pension and other postretirement benefits | |||||||||||
| Beginning balance | $ | (39) | $ | (62) | |||||||
| Current year prior service credit (cost) | — | — | |||||||||
| Less: Tax provision /(benefit) | — | — | |||||||||
| Net current year prior service credit (cost) | — | — | |||||||||
| Amortization of prior service (credit) cost | (3) | (1) | |||||||||
| Less: Tax provision /(benefit) | (1) | — | |||||||||
| Net amortization of prior service (credit) cost | (2) | (1) | |||||||||
| Other comprehensive income (loss), net of tax | (2) | (1) | |||||||||
| Ending balance | $ | (41) | $ | (63) | |||||||
| Derivative financial instruments | |||||||||||
| Beginning balance | $ | 28 | $ | (3) | |||||||
| Gains (losses) deferred | 56 | 47 | |||||||||
| Less: Tax provision /(benefit) | 12 | 10 | |||||||||
| Net gains (losses) deferred | 44 | 37 | |||||||||
| (Gains) losses reclassified to earnings | 52 | (19) | |||||||||
| Less: Tax provision /(benefit) | 12 | (5) | |||||||||
| Net (gains) losses reclassified to earnings | 40 | (14) | |||||||||
| Other comprehensive income (loss), net of tax | 84 | 23 | |||||||||
| Ending balance | $ | 112 | $ | 20 | |||||||
| Available-for-sale securities | |||||||||||
| Beginning balance | $ | (118) | $ | 20 | |||||||
| Gains (losses) deferred | 26 | (79) | |||||||||
| Less: Tax provision /(benefit) | 4 | (15) | |||||||||
| Net gains (losses) deferred | 22 | (64) | |||||||||
| (Gains) losses reclassified to earnings | — | — | |||||||||
| Less: Tax provision /(benefit) | — | — | |||||||||
| Net (gains) losses reclassified to earnings | — | — | |||||||||
| Other comprehensive income (loss), net of tax | 22 | (64) | |||||||||
| Ending balance | $ | (96) | $ | (44) | |||||||
| Total AOCI Ending Balance at March 31 | $ | (1,746) | $ | (1,710) | |||||||
22
14. Environmental and legal matters
The Company is regulated by federal, state and international environmental laws governing its use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and other operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. We have made, and will continue to make, significant research and development and capital expenditures to comply with these emissions standards.
We are engaged in remedial activities at a number of locations, often with other companies, pursuant to federal and state laws. When it is probable we will pay remedial costs at a site, and those costs can be reasonably estimated, we accrue the investigation, remediation, and operating and maintenance costs against our earnings. We accrue costs based on consideration of currently available data and information with respect to each individual site, including available technologies, current applicable laws and regulations, and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. Where multiple potentially responsible parties are involved, we consider our proportionate share of the probable costs. In formulating the estimate of probable costs, we do not consider amounts expected to be recovered from insurance companies or others. We reassess these accrued amounts on a quarterly basis. The amount recorded for environmental remediation is not material and is included in Accrued expenses. We believe there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all the sites in the aggregate, will be required.
On January 7, 2015, the U.S. Attorney’s Office for the Central District of Illinois issued a grand jury subpoena to the Company and thereafter issued additional subpoenas; these subpoenas sought information regarding, among other things, movements of cash among U.S. and non-U.S. Caterpillar subsidiaries, the purchase and resale of replacement parts by Caterpillar Inc. and non-U.S. Caterpillar subsidiaries, and Caterpillar SARL (CSARL) and related structures. On March 2-3, 2017, federal agents executed search and seizure warrants, which concerned both tax and export activities, at three facilities of the Company in the Peoria, Illinois area, including its former corporate headquarters. The Tax Division of the U.S. Department of Justice conducted a review of the grand jury investigation and informed the Company on November 28, 2022 that it does not have a pending criminal tax matter involving the Company. In January 2023, the government began returning to the Company the documents and information seized under the search warrants, which, as noted, related to both tax and export issues, as well as the documents and information the Company produced under the grand jury subpoenas.
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 effective tax rate for the three months ended March 31, 2023 was 26.9 percent compared to 23.4 percent for the three months ended March 31, 2022.
The provision for income taxes for the three months ended March 31, 2023, reflected an estimated annual tax rate of 23 percent, compared with 24 percent for the three months ended March 31, 2022, excluding the discrete items discussed below. The comparative tax rate for full-year 2022 was approximately 23.2 percent.
The estimated annual tax rate excludes the impact of the nondeductible loss of $586 million related to the divestiture of the company's Longwall business in the three months ended March 31, 2023. In addition, the company recorded a discrete tax benefit of $32 million for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense, compared with a $12 million benefit for the three months ended March 31, 2022.
23
16. Segment information
A. Basis for segment information
Our Executive Office is comprised of a Chief Executive Officer (CEO), four Group Presidents, a Chief Financial Officer (CFO), a Chief Legal Officer and General Counsel and a Chief Human Resources Officer. The Group Presidents and CFO are accountable for a related set of end-to-end businesses that they manage. The Chief Legal Officer and General Counsel leads the Law, Security and Public Policy Division. The Chief Human Resources Officer leads the Human Resources Organization. The CEO allocates resources and manages performance at the Group President/CFO level. As such, the CEO serves as our Chief Operating Decision Maker, and operating segments are primarily based on the Group President/CFO reporting structure.
Three of our operating segments, Construction Industries, Resource Industries and Energy & Transportation are led by Group Presidents. One operating segment, Financial Products, is led by the CFO who also has responsibility for Corporate Services. Corporate Services is a cost center primarily responsible for the performance of certain support functions globally and to provide centralized services; it does not meet the definition of an operating segment. One Group President leads one smaller operating segment that is included in the All Other operating segment. The Law, Security and Public Policy Division and the Human Resources Organization are cost centers and do not meet the definition of an operating segment.
B. Description of segments
We have five operating segments, of which four are reportable segments. Following is a brief description of our reportable segments and the business activities included in the All Other operating segment:
Construction Industries: A segment primarily responsible for supporting customers using machinery in infrastructure and building construction applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes asphalt pavers; backhoe loaders; cold planers; compactors; compact track loaders; forestry machines; material handlers; motor graders; pipelayers; road reclaimers; skid steer loaders; telehandlers; track-type loaders; track-type tractors (small, medium); track excavators (mini, small, medium, large); wheel excavators; wheel loaders (compact, small, medium); and related parts and work tools. Inter-segment sales are a source of revenue for this segment.
Resource Industries: A segment primarily responsible for supporting customers using machinery in mining, heavy construction and quarry and aggregates. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large track-type tractors; large mining trucks; hard rock vehicles; longwall miners; electric rope shovels; draglines; hydraulic shovels; rotary drills; large wheel loaders; off-highway trucks; articulated trucks; wheel tractor scrapers; wheel dozers; landfill compactors; soil compactors; select work tools; machinery components; electronics and control systems and related parts. In addition to equipment, Resource Industries also develops and sells technology products and services to provide customers fleet management, equipment management analytics, autonomous machine capabilities, safety services and mining performance solutions. Resource Industries also manages areas that provide services to other parts of the company, including strategic procurement, lean center of excellence, integrated manufacturing, research and development for hydraulic systems, automation, electronics and software for Cat machines and engines. Inter-segment sales are a source of revenue for this segment.
24
Energy & Transportation: A segment primarily responsible for supporting customers using reciprocating engines, turbines, diesel-electric locomotives and related services across industries serving Oil and Gas, Power Generation, Industrial and Transportation applications, including marine- and rail-related businesses. Responsibilities include business strategy, product design, product management, development and testing, manufacturing, marketing and sales and product support. The product and services portfolio includes turbines, centrifugal gas compressors, and turbine-related services; reciprocating engine-powered generator sets; integrated systems and solutions used in the electric power generation industry; reciprocating engines, drivetrain and integrated systems and solutions for the marine and oil and gas industries; reciprocating engines, drivetrain and integrated systems and solutions supplied to the industrial industry as well as Cat machinery; electrified powertrain and zero-emission power sources and service solutions development; and diesel-electric locomotives and components and other rail-related products and services, including remanufacturing and leasing. Responsibilities also include the remanufacturing of Caterpillar reciprocating engines and components and remanufacturing services for other companies; and product support of on-highway vocational trucks for North America. Inter-segment sales are a source of revenue for this segment.
Financial Products Segment: Provides financing alternatives to customers and dealers around the world for Caterpillar products and services, as well as financing for power generation facilities that, in most cases, incorporate Caterpillar products. Financing plans include operating and finance leases, revolving charge accounts, installment sale contracts, repair/rebuild financing, working capital loans and wholesale financing plans. The segment also provides insurance and risk management products and services that help customers and dealers manage their business risk. Insurance and risk management products offered include physical damage insurance, inventory protection plans, extended service coverage and maintenance plans for machines and engines, and dealer property and casualty insurance. The various forms of financing, insurance and risk management products offered to customers and dealers help support the purchase and lease of Caterpillar equipment. The segment also earns revenues from ME&T, but the related costs are not allocated to operating segments. Financial Products’ segment profit is determined on a pretax basis and includes other income/expense items.
All Other operating segment: Primarily includes activities such as: business strategy; product management and development; manufacturing and sourcing of filters and fluids, undercarriage, ground-engaging tools, fluid transfer products, precision seals, rubber sealing and connecting components primarily for Cat® products; parts distribution; integrated logistics solutions; distribution services responsible for dealer development and administration, including a wholly owned dealer in Japan; dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; brand management and marketing strategy; and digital investments for new customer and dealer solutions that integrate data analytics with state-of-the-art digital technologies while transforming the buying experience. Results for the All Other operating segment are included as a reconciling item between reportable segments and consolidated external reporting.
C. Segment measurement and reconciliations
There are several methodology differences between our segment reporting and our external reporting. The following is a list of the more significant methodology differences:
•ME&T segment net assets generally include inventories, receivables, property, plant and equipment, goodwill, intangibles, accounts payable and customer advances. We generally manage at the corporate level liabilities other than accounts payable and customer advances, and we do not include these in segment operations. Financial Products Segment assets generally include all categories of assets.
•We value segment inventories and cost of sales using a current cost methodology.
•We amortize goodwill allocated to segments using a fixed amount based on a 20-year useful life. This methodology difference only impacts segment assets. We do not include goodwill amortization expense in segment profit. In addition, we have allocated to segments only a portion of goodwill for certain acquisitions made in 2011 or later.
•We generally manage currency exposures for ME&T at the corporate level and do not include in segment profit the effects of changes in exchange rates on results of operations within the year. We report the net difference created in the translation of revenues and costs between exchange rates used for U.S. GAAP reporting and exchange rates used for segment reporting as a methodology difference.
•We do not include stock-based compensation expense in segment profit.
25
•Postretirement benefit expenses are split; segments are generally responsible for service costs, with the remaining elements of net periodic benefit cost included as a methodology difference.
•We determine ME&T segment profit on a pretax basis and exclude interest expense and most other income/expense items. We determine Financial Products Segment profit on a pretax basis and include other income/expense items.
Reconciling items are created based on accounting differences between segment reporting and our consolidated external reporting. Please refer to pages 27 to 29 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, contract terminations and divestiture impacts. These costs are included in Other operating (income) expenses except for defined-benefit plan curtailment losses and special termination benefits, which are included in Other income (expense). Restructuring costs also include other exit-related costs, which may consist of accelerated depreciation, inventory write-downs, building demolition, equipment relocation and project management costs and LIFO inventory decrement benefits from inventory liquidations at closed facilities, all of which are primarily included in Cost of goods sold. See Note 20 for more information.
•Methodology differences: See previous discussion of significant accounting differences between segment reporting and consolidated external reporting.
•Timing: Timing differences in the recognition of costs between segment reporting and consolidated external reporting. For example, we report certain costs on the cash basis for segment reporting and the accrual basis for consolidated external reporting.
26
For the three months ended March 31, 2023 and 2022, sales and revenues by geographic region reconciled to consolidated sales and revenues were as follows:
| Sales and Revenues by Geographic Region | ||||||||||||||||||||||||||||||||||||||||||||
| (Millions of dollars) | North America | Latin America | EAME | Asia/ Pacific | External Sales and Revenues | Intersegment Sales and Revenues | Total Sales and Revenues | |||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Construction Industries | $ | 3,608 | $ | 599 | $ | 1,336 | $ | 1,161 | $ | 6,704 | $ | 42 | $ | 6,746 | ||||||||||||||||||||||||||||||
| Resource Industries | 1,308 | 474 | 599 | 978 | 3,359 | 68 | 3,427 | |||||||||||||||||||||||||||||||||||||
| Energy & Transportation | 2,572 | 380 | 1,384 | 719 | 5,055 | 1,199 | 6,254 | |||||||||||||||||||||||||||||||||||||
| Financial Products Segment | 575 | 104 | 114 | 109 | 902 | 1 | — | 902 | ||||||||||||||||||||||||||||||||||||
| Total sales and revenues from reportable segments | 8,063 | 1,557 | 3,433 | 2,967 | 16,020 | 1,309 | 17,329 | |||||||||||||||||||||||||||||||||||||
| All Other operating segment | 18 | — | 4 | 13 | 35 | 76 | 111 | |||||||||||||||||||||||||||||||||||||
| Corporate Items and Eliminations | (131) | (18) | (19) | (25) | (193) | (1,385) | (1,578) | |||||||||||||||||||||||||||||||||||||
| Total Sales and Revenues | $ | 7,950 | $ | 1,539 | $ | 3,418 | $ | 2,955 | $ | 15,862 | $ | — | $ | 15,862 | ||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Construction Industries | $ | 2,720 | $ | 627 | $ | 1,277 | $ | 1,462 | $ | 6,086 | $ | 29 | $ | 6,115 | ||||||||||||||||||||||||||||||
| Resource Industries | 1,018 | 399 | 594 | 748 | 2,759 | 71 | 2,830 | |||||||||||||||||||||||||||||||||||||
| Energy & Transportation | 1,938 | 310 | 1,184 | 600 | 4,032 | 1,006 | 5,038 | |||||||||||||||||||||||||||||||||||||
| Financial Products Segment | 503 | 73 | 96 | 111 | 783 | 1 | — | 783 | ||||||||||||||||||||||||||||||||||||
| Total sales and revenues from reportable segments | 6,179 | 1,409 | 3,151 | 2,921 | 13,660 | 1,106 | 14,766 | |||||||||||||||||||||||||||||||||||||
| All Other operating segment | 18 | — | 5 | 16 | 39 | 79 | 118 | |||||||||||||||||||||||||||||||||||||
| Corporate Items and Eliminations | (60) | (16) | (11) | (23) | (110) | (1,185) | (1,295) | |||||||||||||||||||||||||||||||||||||
| Total Sales and Revenues | $ | 6,137 | $ | 1,393 | $ | 3,145 | $ | 2,914 | $ | 13,589 | $ | — | $ | 13,589 | ||||||||||||||||||||||||||||||
1 Includes revenues from Construction Industries, Resource Industries, Energy & Transportation and All Other operating segment of $162 million and $100 million in the three months ended March 31, 2023 and 2022, respectively.
For the three months ended March 31, 2023 and 2022, Energy & Transportation segment sales by end user application were as follows:
| Energy & Transportation External Sales | ||||||||||||||
| Three Months Ended March 31 | ||||||||||||||
| (Millions of dollars) | 2023 | 2022 | ||||||||||||
| Oil and gas | $ | 1,314 | $ | 948 | ||||||||||
| Power generation | 1,284 | 1,012 | ||||||||||||
| Industrial | 1,255 | 1,020 | ||||||||||||
| Transportation | 1,202 | 1,052 | ||||||||||||
| Energy & Transportation External Sales | $ | 5,055 | $ | 4,032 | ||||||||||
27
| Reconciliation of Consolidated profit before taxes: | |||||||||||
| (Millions of dollars) | Three Months Ended March 31 | ||||||||||
| 2023 | 2022 | ||||||||||
| Profit from reportable segments: | |||||||||||
| Construction Industries | $ | 1,790 | $ | 1,057 | |||||||
| Resource Industries | 764 | 361 | |||||||||
| Energy & Transportation | 1,057 | 538 | |||||||||
| Financial Products Segment | 232 | 238 | |||||||||
| Total profit from reportable segments | 3,843 | 2,194 | |||||||||
| Profit from All Other operating segment | 11 | 3 | |||||||||
| Cost centers | 30 | 10 | |||||||||
| Corporate costs | (238) | (198) | |||||||||
| Timing | (206) | (98) | |||||||||
| Restructuring costs | (611) | (13) | |||||||||
| Methodology differences: | |||||||||||
| Inventory/cost of sales | 126 | 168 | |||||||||
| Postretirement benefit expense | (31) | 81 | |||||||||
| Stock-based compensation expense | (44) | (40) | |||||||||
| Financing costs | (50) | (100) | |||||||||
| Currency | (26) | 106 | |||||||||
| Other income/expense methodology differences | (146) | (81) | |||||||||
| Other methodology differences | (24) | (33) | |||||||||
| Total consolidated profit before taxes | $ | 2,634 | $ | 1,999 | |||||||
| Reconciliation of Assets: | |||||||||||
| (Millions of dollars) | March 31, 2023 | December 31, 2022 | |||||||||
| Assets from reportable segments: | |||||||||||
| Construction Industries | $ | 5,584 | $ | 5,168 | |||||||
| Resource Industries | 5,719 | 5,775 | |||||||||
| Energy & Transportation | 9,513 | 9,455 | |||||||||
| Financial Products Segment | 34,591 | 34,269 | |||||||||
| Total assets from reportable segments | 55,407 | 54,667 | |||||||||
| Assets from All Other operating segment | 1,795 | 1,828 | |||||||||
| Items not included in segment assets: | |||||||||||
| Cash and cash equivalents | 6,017 | 6,042 | |||||||||
| Deferred income taxes | 2,287 | 2,098 | |||||||||
| Goodwill and intangible assets | 4,437 | 4,248 | |||||||||
| Property, plant and equipment – net and other assets | 4,523 | 4,234 | |||||||||
| Inventory methodology differences | (3,441) | (3,063) | |||||||||
| Liabilities included in segment assets | 13,118 | 12,519 | |||||||||
| Other | (494) | (630) | |||||||||
| Total assets | $ | 83,649 | $ | 81,943 | |||||||
28
| Reconciliation of Depreciation and amortization: | |||||||||||
| (Millions of dollars) | |||||||||||
| Three Months Ended March 31 | |||||||||||
| 2023 | 2022 | ||||||||||
| Depreciation and amortization from reportable segments: | |||||||||||
| Construction Industries | $ | 54 | $ | 58 | |||||||
| Resource Industries | 87 | 92 | |||||||||
| Energy & Transportation | 129 | 134 | |||||||||
| Financial Products Segment | 178 | 188 | |||||||||
| Total depreciation and amortization from reportable segments | 448 | 472 | |||||||||
| Items not included in segment depreciation and amortization: | |||||||||||
| All Other operating segment | 57 | 58 | |||||||||
| Cost centers | 20 | 21 | |||||||||
| Other | 7 | 6 | |||||||||
| Total depreciation and amortization | $ | 532 | $ | 557 | |||||||
17. Cat Financial financing activities
Allowance for credit losses
Portfolio segments
A portfolio segment is the level at which Cat Financial develops a systematic methodology for determining its allowance for credit losses. Cat Financial's portfolio segments and related methods for estimating expected credit losses are as follows:
Customer
Cat Financial provides loans and finance leases to end-user customers primarily for the purpose of financing new and used Caterpillar machinery, engines and equipment for commercial use. Cat Financial also provides financing for power generation facilities that, in most cases, incorporate Caterpillar products. The average original term of Cat Financial's customer finance receivable portfolio was approximately 51 months with an average remaining term of approximately 28 months as of March 31, 2023.
29
Cat Financial typically maintains a security interest in financed equipment and requires physical damage insurance coverage on the financed equipment, both of which provide Cat Financial with certain rights and protections. If Cat Financial's collection efforts fail to bring a defaulted account current, Cat Financial generally can repossess the financed equipment, after satisfying local legal requirements, and sell it within the Caterpillar dealer network or through third-party auctions.
Cat Financial estimates the allowance for credit losses related to its customer finance receivables based on loss forecast models utilizing probabilities of default and the estimated loss given default based on past loss experience adjusted for current conditions and reasonable and supportable forecasts capturing country and industry-specific economic factors.
During the three months ended March 31, 2023, Cat Financial's forecasts for the markets in which it operates reflected a continuation of the trend of relatively low unemployment rates and delinquencies. However, delinquencies show an increasing trend as persistently high inflation rates and consequent central bank actions are weakening global economic growth. The company believes the economic forecasts employed represent reasonable and supportable forecasts, followed by a reversion to long-term trends.
Dealer
Cat Financial provides financing to Caterpillar dealers in the form of wholesale financing plans. Cat Financial's wholesale financing plans provide assistance to dealers by financing their mostly new Caterpillar equipment inventory and rental fleets on a secured and unsecured basis. In addition, Cat Financial provides a variety of secured and unsecured loans to Caterpillar dealers.
Cat Financial estimates the allowance for credit losses for dealer finance receivables based on historical loss rates with consideration of current economic conditions and reasonable and supportable forecasts.
In general, Cat Financial's Dealer portfolio segment has not historically experienced large increases or decreases in credit losses based on changes in economic conditions due to its close working relationships with the dealers and their financial strength. Therefore, Cat Financial made no adjustments to historical loss rates during the three months ended March 31, 2023.
Classes of finance receivables
Cat Financial further evaluates portfolio segments by the class of finance receivables, which is defined as a level of information (below a portfolio segment) in which the finance receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk. Cat Financial's classes, which align with management reporting for credit losses, are as follows:
•North America - Finance receivables originated in the United States and Canada.
•EAME - Finance receivables originated in Europe, Africa, the Middle East and the Commonwealth of Independent States.
•Asia/Pacific - Finance receivables originated in Australia, New Zealand, China, Japan, Southeast Asia and India.
•Mining - Finance receivables related to large mining customers worldwide.
•Latin America - Finance receivables originated in Mexico and Central and South American countries.
•Power Finance - Finance receivables originated worldwide related to Caterpillar electrical power generation, gas compression and co-generation systems and non-Caterpillar equipment that is powered by these systems.
Receivable balances, including accrued interest, are written off against the allowance for credit losses when, in the judgment of management, they are considered uncollectible (generally upon repossession of the collateral). The amount of the write-off is determined by comparing the fair value of the collateral, less cost to sell, to the amortized cost. Subsequent recoveries, if any, are credited to the allowance for credit losses when received.
30
An analysis of the allowance for credit losses was as follows:
Gross write-offs by origination year for the Customer portfolio segment were as follows:
| (Millions of dollars) | March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Finance Receivables | Total | ||||||||||||||||||||||||||||||||||||||||
| North America | $ | — | $ | 3 | $ | 3 | $ | — | $ | — | $ | — | $ | 4 | 10 | ||||||||||||||||||||||||||||||||
| EAME | — | 1 | — | 1 | — | — | — | 2 | |||||||||||||||||||||||||||||||||||||||
| Asia/Pacific | — | — | 2 | 1 | 1 | — | — | 4 | |||||||||||||||||||||||||||||||||||||||
| Latin America | — | — | 1 | 2 | 1 | — | — | 4 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | — | $ | 4 | $ | 6 | $ | 4 | $ | 2 | $ | — | $ | 4 | $ | 20 | |||||||||||||||||||||||||||||||
Credit quality of finance receivables
At origination, Cat Financial evaluates credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit ratings, loan-to-value ratios, probabilities of default, industry trends, macroeconomic factors and other internal metrics. On an ongoing basis, Cat Financial monitors credit quality based on past-due status as there is a meaningful correlation between the past-due status of customers and the risk of loss. In determining past-due status, Cat Financial considers the entire finance receivable past due when any installment is over 30 days past due.
31
Customer
The tables below summarize the aging category of Cat Financial's amortized cost of finance receivables in the Customer portfolio segment by origination year:
| (Millions of dollars) | March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Finance Receivables | Total Finance Receivables | ||||||||||||||||||||||||||||||||||||||||
| North America | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | $ | 886 | $ | 3,585 | $ | 2,931 | $ | 1,308 | $ | 525 | $ | 168 | $ | 255 | $ | 9,658 | |||||||||||||||||||||||||||||||
| 31-60 days past due | 3 | 29 | 30 | 18 | 8 | 2 | 3 | 93 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | 11 | 8 | 5 | 2 | 1 | 2 | 29 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 12 | 19 | 12 | 5 | 5 | 3 | 56 | |||||||||||||||||||||||||||||||||||||||
| EAME | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | 310 | 1,198 | 864 | 423 | 234 | 189 | — | 3,218 | |||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 2 | 15 | 12 | 4 | 2 | 1 | — | 36 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | 7 | 5 | 3 | 2 | — | — | 17 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 8 | 23 | 14 | 3 | 2 | — | 50 | |||||||||||||||||||||||||||||||||||||||
| Asia/Pacific | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | 248 | 896 | 568 | 230 | 48 | 14 | — | 2,004 | |||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | — | 9 | 12 | 9 | 2 | — | — | 32 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | 4 | 4 | 3 | 1 | — | — | 12 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 4 | 6 | 5 | 3 | 1 | — | 19 | |||||||||||||||||||||||||||||||||||||||
| Mining | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | 318 | 837 | 520 | 186 | 137 | 98 | 56 | 2,152 | |||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | — | 5 | — | 4 | 1 | — | — | 10 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | — | 1 | — | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | 182 | 716 | 339 | 124 | 51 | 28 | — | 1,440 | |||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | — | 17 | 32 | 4 | 9 | 9 | — | 71 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | 4 | 4 | 1 | — | 3 | — | 12 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 5 | 14 | 8 | 2 | 1 | — | 30 | |||||||||||||||||||||||||||||||||||||||
| Power Finance | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | 12 | 76 | 78 | 140 | 32 | 159 | 133 | 630 | |||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | — | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | — | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Totals by Aging Category | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | $ | 1,956 | $ | 7,308 | $ | 5,300 | $ | 2,411 | $ | 1,027 | $ | 656 | $ | 444 | $ | 19,102 | |||||||||||||||||||||||||||||||
| 31-60 days past due | 5 | 75 | 86 | 39 | 22 | 14 | 3 | 244 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | 26 | 21 | 12 | 5 | 5 | 2 | 71 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | 29 | 63 | 39 | 13 | 9 | 3 | 156 | |||||||||||||||||||||||||||||||||||||||
| Total Customer | $ | 1,961 | $ | 7,438 | $ | 5,470 | $ | 2,501 | $ | 1,067 | $ | 684 | $ | 452 | $ | 19,573 | |||||||||||||||||||||||||||||||
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| (Millions of dollars) | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Finance Receivables | Total Finance Receivables | ||||||||||||||||||||||||||||||||||||||||
| North America | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | $ | 3,915 | $ | 3,276 | $ | 1,525 | $ | 653 | $ | 206 | $ | 34 | $ | 240 | $ | 9,849 | |||||||||||||||||||||||||||||||
| 31-60 days past due | 25 | 26 | 18 | 12 | 4 | 1 | 4 | 90 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 9 | 15 | 7 | 3 | 1 | — | 3 | 38 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | 11 | 16 | 12 | 6 | 4 | 3 | 4 | 56 | |||||||||||||||||||||||||||||||||||||||
| EAME | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | 1,270 | 953 | 477 | 280 | 155 | 68 | — | 3,203 | |||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 10 | 12 | 7 | 1 | 1 | — | — | 31 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 8 | 4 | 3 | 1 | — | — | — | 16 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | 6 | 25 | 16 | 4 | 1 | 1 | — | 53 | |||||||||||||||||||||||||||||||||||||||
| Asia/Pacific | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | 1,033 | 684 | 313 | 69 | 18 | 2 | — | 2,119 | |||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 10 | 12 | 8 | 1 | 1 | — | — | 32 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 2 | 5 | 4 | 2 | — | — | — | 13 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | 2 | 6 | 6 | 4 | — | — | — | 18 | |||||||||||||||||||||||||||||||||||||||
| Mining | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | 863 | 575 | 220 | 171 | 93 | 108 | 80 | 2,110 | |||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | — | 1 | — | — | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | — | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Latin America | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | 770 | 400 | 150 | 69 | 26 | 20 | — | 1,435 | |||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | 7 | 8 | 4 | 2 | — | 1 | — | 22 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 2 | 5 | 1 | 1 | — | — | — | 9 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | 2 | 13 | 11 | 2 | 1 | — | — | 29 | |||||||||||||||||||||||||||||||||||||||
| Power Finance | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | 78 | 85 | 142 | 33 | 18 | 161 | 125 | 642 | |||||||||||||||||||||||||||||||||||||||
| 31-60 days past due | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | — | — | — | — | — | 5 | — | 5 | |||||||||||||||||||||||||||||||||||||||
| Totals by Aging Category | |||||||||||||||||||||||||||||||||||||||||||||||
| Current | $ | 7,929 | $ | 5,973 | $ | 2,827 | $ | 1,275 | $ | 516 | $ | 393 | $ | 445 | $ | 19,358 | |||||||||||||||||||||||||||||||
| 31-60 days past due | 52 | 59 | 37 | 16 | 6 | 2 | 4 | 176 | |||||||||||||||||||||||||||||||||||||||
| 61-90 days past due | 21 | 29 | 15 | 7 | 1 | — | 3 | 76 | |||||||||||||||||||||||||||||||||||||||
| 91+ days past due | 21 | 60 | 45 | 16 | 6 | 10 | 4 | 162 | |||||||||||||||||||||||||||||||||||||||
| Total Customer | $ | 8,023 | $ | 6,121 | $ | 2,924 | $ | 1,314 | $ | 529 | $ | 405 | $ | 456 | $ | 19,772 | |||||||||||||||||||||||||||||||
Finance receivables in the Customer portfolio segment are substantially secured by collateral, primarily in the form of Caterpillar and other equipment. For those contracts where the borrower is experiencing financial difficulty, repayment of the outstanding amounts is generally expected to be provided through the operation or repossession and sale of the equipment.
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Dealer
As of March 31, 2023 and December 31, 2022, Cat Financial's total amortized cost of finance receivables within the Dealer portfolio segment was current, with the exception of $58 million that were 91+ days past due in Latin America, all of which were originated in 2017.
Non-accrual finance receivables
Recognition of income is suspended and the finance receivable is placed on non-accrual status when management determines that collection of future income is not probable. Contracts on non-accrual status are generally more than 120 days past due. Recognition is resumed and previously suspended income is recognized when collection is considered probable. Payments received while the finance receivable is on non-accrual status are applied to interest and principal in accordance with the contractual terms. Interest earned but uncollected prior to the receivable being placed on non-accrual status is written off through Provision for credit losses when, in the judgment of management, it is considered uncollectible.
In Cat Financial's Customer portfolio segment, finance receivables which were on non-accrual status and finance receivables over 90 days past due and still accruing income were as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Amortized Cost | Amortized Cost | ||||||||||||||||||||||||||||||||||
(Millions of dollars) | Non-accrual With an Allowance | Non-accrual Without an Allowance | 91+ Still Accruing | Non-accrual With an Allowance | Non-accrual Without an Allowance | 91+ Still Accruing | |||||||||||||||||||||||||||||
| North America | $ | 48 | $ | — | $ | 12 | $ | 52 | $ | 4 | $ | 11 | |||||||||||||||||||||||
| EAME | 44 | — | 6 | 43 | — | 10 | |||||||||||||||||||||||||||||
| Asia/Pacific | 12 | — | 7 | 11 | — | 7 | |||||||||||||||||||||||||||||
| Mining | 2 | — | — | — | 1 | — | |||||||||||||||||||||||||||||
| Latin America | 77 | — | — | 45 | — | — | |||||||||||||||||||||||||||||
| Power Finance | 8 | — | — | 5 | 11 | — | |||||||||||||||||||||||||||||
| Total | $ | 191 | $ | — | $ | 25 | $ | 156 | $ | 16 | $ | 28 | |||||||||||||||||||||||
Interest income recognized for customer finance receivables on non-accrual status was not material during the three months ended March 31, 2023 and 2022.
There were $58 million in finance receivables in Cat Financial's Dealer portfolio segment on non-accrual status as of March 31, 2023 and December 31, 2022, all of which was in Latin America.
Modifications
Cat Financial periodically modifies loan terms in response to borrowers’ financial difficulty. Typically, the types of modifications granted are payment deferrals, interest only payment periods and/or term extensions. During the three months ended March 31, 2023, loan modifications granted to borrowers experiencing financial difficulty were not material.
The effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses based on the methodologies used to estimate the allowance; therefore, a change to the allowance for credit losses is generally not recorded upon modification. On rare occasions when principal forgiveness is provided, the amount forgiven is written off against the allowance for credit losses.
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18. Fair value disclosures
A. Fair value measurements
The guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. In accordance with this guidance, fair value measurements are classified under the following hierarchy:
•Level 1 – Quoted prices for identical instruments in active markets.
•Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.
•Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
When available, we use quoted market prices to determine fair value, and we classify such measurements within Level 1. In some cases where market prices are not available, we make use of observable market based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon valuations in which one or more significant inputs are unobservable, including internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.
We classify fair value measurements according to the lowest level input or value-driver that is significant to the valuation. We may therefore classify a measurement within Level 3 even though there may be significant inputs that are readily observable.
Fair value measurement includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or Caterpillar) will not be fulfilled. For financial assets traded in an active market (Level 1 and certain Level 2), the nonperformance risk is included in the market price. For certain other financial assets and liabilities (certain Level 2 and Level 3), our fair value calculations have been adjusted accordingly.
Investments in debt and equity securities
We have investments in certain debt and equity securities that are recorded at fair value. Fair values for our U.S. treasury bonds and large capitalization value and smaller company growth equity securities are based upon valuations for identical instruments in active markets. Fair values for other government debt securities, corporate debt securities and mortgage-backed debt securities are based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.
We also have investments in time deposits classified as held-to-maturity debt securities. The fair value of these investments is based upon valuations observed in less active markets than Level 1. These investments have a maturity of less than one year and are recorded at amortized costs, which approximate fair value.
In addition, Insurance Services has an equity investment in a real estate investment trust (REIT) which is recorded at fair value based on the net asset value (NAV) of the investment and is not classified within the fair value hierarchy.
See Note 8 for additional information on our investments in debt and equity securities.
Derivative financial instruments
The fair value of interest rate contracts is primarily based on a standard industry accepted valuation model that utilizes the appropriate market-based forward swap curves and zero-coupon interest rates to determine discounted cash flows. The fair value of foreign currency and commodity forward, option and cross currency contracts is based on standard industry accepted valuation models that discount cash flows resulting from the differential between the contract price and the market-based forward rate.
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See Note 5 for additional information.
Assets and liabilities measured on a recurring basis at fair value included in our Consolidated Statement of Financial Position as of March 31, 2023 and December 31, 2022 were as follows:
| March 31, 2023 | |||||||||||||||||||||||||||||
(Millions of dollars) | Level 1 | Level 2 | Level 3 | Measured at NAV | Total Assets / Liabilities, at Fair Value | ||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Debt securities | |||||||||||||||||||||||||||||
| Government debt securities | |||||||||||||||||||||||||||||
| U.S. treasury bonds | $ | 9 | $ | — | $ | — | $ | — | $ | 9 | |||||||||||||||||||
| Other U.S. and non-U.S. government bonds | — | 57 | — | — | 57 | ||||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||||||||
| Corporate bonds and other debt securities | — | 2,469 | 50 | — | 2,519 | ||||||||||||||||||||||||
| Asset-backed securities | — | 184 | — | — | 184 | ||||||||||||||||||||||||
| Mortgage-backed debt securities | |||||||||||||||||||||||||||||
| U.S. governmental agency | — | 341 | — | — | 341 | ||||||||||||||||||||||||
| Residential | — | 2 | — | — | 2 | ||||||||||||||||||||||||
| Commercial | — | 125 | — | — | 125 | ||||||||||||||||||||||||
| Total debt securities | 9 | 3,178 | 50 | — | 3,237 | ||||||||||||||||||||||||
| Equity securities | |||||||||||||||||||||||||||||
| Large capitalization value | 200 | — | — | — | 200 | ||||||||||||||||||||||||
| Smaller company growth | 32 | — | — | — | 32 | ||||||||||||||||||||||||
| REIT | — | — | — | 200 | 200 | ||||||||||||||||||||||||
| Total equity securities | 232 | — | — | 200 | 432 | ||||||||||||||||||||||||
| Derivative financial instruments - assets | |||||||||||||||||||||||||||||
| Foreign currency contracts - net | — | 309 | — | — | 309 | ||||||||||||||||||||||||
| Commodity contracts - net | — | 17 | — | — | 17 | ||||||||||||||||||||||||
| Total assets | $ | 241 | $ | 3,504 | $ | 50 | $ | 200 | $ | 3,995 | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Derivative financial instruments - liabilities | |||||||||||||||||||||||||||||
| Interest rate contracts - net | $ | — | $ | 135 | $ | — | $ | — | $ | 135 | |||||||||||||||||||
| Total liabilities | $ | — | $ | 135 | $ | — | $ | — | $ | 135 | |||||||||||||||||||
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| December 31, 2022 | |||||||||||||||||||||||||||||
(Millions of dollars) | Level 1 | Level 2 | Level 3 | Measured at NAV | Total Assets / Liabilities, at Fair Value | ||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Debt securities | |||||||||||||||||||||||||||||
| Government debt securities | |||||||||||||||||||||||||||||
| U.S. treasury bonds | $ | 9 | $ | — | $ | — | $ | — | $ | 9 | |||||||||||||||||||
| Other U.S. and non-U.S. government bonds | — | 55 | — | — | 55 | ||||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||||||||
| Corporate bonds and other debt securities | — | 2,416 | 50 | — | 2,466 | ||||||||||||||||||||||||
| Asset-backed securities | — | 182 | — | — | 182 | ||||||||||||||||||||||||
| Mortgage-backed debt securities | |||||||||||||||||||||||||||||
| U.S. governmental agency | — | 333 | — | — | 333 | ||||||||||||||||||||||||
| Residential | — | 2 | — | — | 2 | ||||||||||||||||||||||||
| Commercial | — | 117 | — | — | 117 | ||||||||||||||||||||||||
| Total debt securities | 9 | 3,105 | 50 | — | 3,164 | ||||||||||||||||||||||||
| Equity securities | |||||||||||||||||||||||||||||
| Large capitalization value | 203 | — | — | — | 203 | ||||||||||||||||||||||||
| Smaller company growth | 31 | — | — | — | 31 | ||||||||||||||||||||||||
| REIT | — | — | — | 207 | 207 | ||||||||||||||||||||||||
| Total equity securities | 234 | — | — | 207 | 441 | ||||||||||||||||||||||||
| Derivative financial instruments - assets | |||||||||||||||||||||||||||||
| Foreign currency contracts - net | — | 328 | — | — | 328 | ||||||||||||||||||||||||
| Commodity contracts - net | — | 15 | — | — | 15 | ||||||||||||||||||||||||
| Total Assets | $ | 243 | $ | 3,448 | $ | 50 | $ | 207 | $ | 3,948 | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Derivative financial instruments - liabilities | |||||||||||||||||||||||||||||
| Interest rate contracts - net | $ | — | $ | 195 | $ | — | $ | — | $ | 195 | |||||||||||||||||||
| Total liabilities | $ | — | $ | 195 | $ | — | $ | — | $ | 195 | |||||||||||||||||||
In addition to the amounts above, certain Cat Financial loans are subject to measurement at fair value on a nonrecurring basis and are classified as Level 3 measurements. A loan is measured at fair value when management determines that collection of contractual amounts due is not probable and the loan is individually evaluated. In these cases, an allowance for credit losses may be established based either on the present value of expected future cash flows discounted at the receivables’ effective interest rate, the fair value of the collateral for collateral-dependent receivables, or the observable market price of the receivable. In determining collateral value, Cat Financial estimates the current fair market value of the collateral less selling costs. Cat Financial had loans carried at fair value of $61 million and $68 million as of March 31, 2023 and December 31, 2022, respectively.
B. Fair values of financial instruments
In addition to the methods and assumptions we use to record the fair value of financial instruments as discussed in the Fair value measurements section above, we use the following methods and assumptions to estimate the fair value of our financial instruments:
Cash and cash equivalents
Carrying amount approximates fair value. We classify cash and cash equivalents as Level 1. See Consolidated Statement of Financial Position.
Restricted cash and short-term investments
Carrying amount approximates fair value. We include restricted cash and short-term investments in Prepaid expenses and other current assets in the Consolidated Statement of Financial Position. We classify these instruments as Level 1 except for time deposits which are Level 2, and certain corporate debt securities which are Level 3. See Note 8 for additional information.
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Finance receivables
We estimate fair value by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.
Wholesale inventory receivables
We estimate fair value by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.
Short-term borrowings
Carrying amount approximates fair value. We classify short-term borrowings as Level 1. See Consolidated Statement of Financial Position.
Long-term debt
We estimate fair value for fixed and floating rate debt based on quoted market prices.
Guarantees
The fair value of guarantees is based upon our estimate of the premium a market participant would require to issue the same guarantee in a stand-alone arms-length transaction with an unrelated party. If quoted or observable market prices are not available, fair value is based upon internally developed models that utilize current market-based assumptions. We classify guarantees as Level 3. See Note 11 for additional information.
Our financial instruments not carried at fair value were as follows:
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| (Millions of dollars) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Fair Value Levels | Reference | ||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||
Finance receivables – net (excluding finance leases 1 ) | $ | 14,010 | $ | 13,488 | $ | 13,965 | $ | 13,377 | 3 | Note 17 | ||||||||||||||||||||||||||||
Wholesale inventory receivables – net (excluding finance leases 1) | 1,024 | 967 | 827 | 778 | 3 | |||||||||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||||||||
Long-term debt (including amounts due within one year) | ||||||||||||||||||||||||||||||||||||||
| Machinery, Energy & Transportation | 9,595 | 9,542 | 9,618 | 9,240 | 2 | |||||||||||||||||||||||||||||||||
| Financial Products | 21,602 | 21,066 | 21,418 | 20,686 | 2 | |||||||||||||||||||||||||||||||||
1 Represents finance leases and failed sale leasebacks of $7,198 million and $7,325 million at March 31, 2023 and December 31, 2022, respectively.
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19. Other income (expense)
| Three Months Ended March 31 | |||||||||||
| (Millions of dollars) | 2023 | 2022 | |||||||||
| Investment and interest income | $ | 93 | $ | 21 | |||||||
Foreign exchange gains (losses) 1 | (72) | 47 | |||||||||
| License fee income | 31 | 32 | |||||||||
| Net periodic pension and OPEB income (cost), excluding service cost | (13) | 68 | |||||||||
| Gains (losses) on securities | (11) | (12) | |||||||||
| Miscellaneous income (loss) | 4 | 97 | |||||||||
| Total | $ | 32 | $ | 253 | |||||||
1 Includes gains (losses) from foreign exchange derivative contracts. See Note 5 for further details.
20. Restructuring costs
Our accounting for employee separations is dependent upon how the particular program is designed. For voluntary programs, we recognize eligible separation costs at the time of employee acceptance unless the acceptance requires explicit approval by the company. For involuntary programs, we recognize eligible costs when management has approved the program, the affected employees have been properly notified and the costs are estimable.
Restructuring costs for the three months ended March 31, 2023 and 2022 were as follows:
| (Millions of dollars) | Three Months Ended March 31 | ||||||||||
| 2023 | 2022 | ||||||||||
Employee separations 1 | $ | 12 | $ | 5 | |||||||
Longwall divestiture 1 | 586 | — | |||||||||
Other 2 | 13 | 8 | |||||||||
| Total restructuring costs | $ | 611 | $ | 13 | |||||||
1 Recognized in Other operating (income) expenses. | |||||||||||
2 Represents costs related to our restructuring programs, primarily for accelerated depreciation, project management, equipment relocation and inventory write-downs, all of which are primarily included in Cost of goods sold. | |||||||||||
The restructuring costs for the three months ended March 31, 2023 were primarily related to the divestiture of the company's Longwall business within Resource Industries. The divestiture closed on February 1, 2023 and resulted in a pre-tax loss of approximately $586 million, primarily a non-cash item driven by the release of $494 million of accumulated foreign currency translation. The transaction is subject to certain post-closing adjustments. For the three months ended March 31, 2022, the restructuring costs were primarily related to actions across the company including strategic actions to address a small number of products.
In 2023 and 2022, all restructuring costs are excluded from segment profit.
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The following table summarizes the 2023 and 2022 employee separation activity:
| (Millions of dollars) | Three Months Ended March 31 | |||||||||||||
| 2023 | 2022 | |||||||||||||
| Liability balance, beginning of period | $ | 39 | $ | 61 | ||||||||||
| Increase in liability (separation charges) | 12 | 5 | ||||||||||||
| Reduction in liability (payments) | (28) | (19) | ||||||||||||
| Liability balance, end of period | $ | 23 | $ | 47 | ||||||||||
Most of the liability balance at March 31, 2023 is expected to be paid in 2023.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide information that will assist the reader in understanding the company’s Consolidated Financial Statements, the changes in certain key items in those financial statements between select periods and the primary factors that accounted for those changes. In addition, we discuss how certain accounting principles, policies and critical estimates affect our Consolidated Financial Statements. Our discussion also contains certain forward-looking statements related to future events and expectations as well as a discussion of the many factors that we believe may have an impact on our business on an ongoing basis. This MD&A should be read in conjunction with our discussion of cautionary statements and significant risks to the company’s business under Part I, Item 1A. Risk Factors of the 2022 Form 10-K.
Highlights for the first quarter of 2023 include:
•Total sales and revenues for the first quarter of 2023 were $15.862 billion, an increase of $2.273 billion, or 17 percent, compared with $13.589 billion in the first quarter of 2022. Sales were higher across the three primary segments.
•Operating profit margin was 17.2 percent for the first quarter of 2023, compared with 13.7 percent for the first quarter of 2022. Adjusted operating profit margin was 21.1 percent for the first quarter of 2023, compared with 13.7 percent for the first quarter of 2022.
•First-quarter 2023 profit per share was $3.74, and excluding the items in the table below, adjusted profit per share was $4.91. First-quarter 2022 profit per share was $2.86, and excluding the items in the table below, adjusted profit per share was $2.88.
•Caterpillar ended the first quarter of 2023 with $6.8 billion of enterprise cash.
•Enterprise operating cash flow was $1.6 billion in the first quarter of 2023.
•In order for our results to be more meaningful to our readers, we have separately quantified the impact of several significant items. A detailed reconciliation of GAAP to non-GAAP financial measures is included on page 55.
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||||||||||||
| (Dollars in millions except per share data) | Profit Before Taxes | Profit Per Share | Profit Before Taxes | Profit Per Share | |||||||||||||
| Profit | $ | 2,634 | $ | 3.74 | $ | 1,999 | $ | 2.86 | |||||||||
Restructuring costs - Longwall divestiture | 586 | 1.13 | — | — | |||||||||||||
| Other restructuring costs | 25 | 0.04 | 13 | 0.02 | |||||||||||||
| Adjusted profit | $ | 3,245 | $ | 4.91 | $ | 2,012 | $ | 2.88 | |||||||||
Overview
Total sales and revenues for the first quarter of 2023 were $15.862 billion, an increase of $2.273 billion, or 17 percent, compared with $13.589 billion in the first quarter of 2022. The increase was due to favorable price realization and higher sales volume, partially offset by unfavorable currency impacts primarily related to the euro, Japanese yen and Australian dollar. The increase in sales volume was driven by higher sales of equipment to end users, partially offset by lower services volume. Sales were higher across the three primary segments.
First-quarter 2023 profit per share was $3.74, compared with $2.86 profit per share in the first quarter of 2022. In the first quarter of 2023 and 2022, profit per share included restructuring costs. First-quarter 2023 restructuring costs included the impact of the divestiture of the company's Longwall business. Profit for the first quarter of 2023 was $1.943 billion, an increase of $406 million, or 26 percent compared with $1.537 billion for the first quarter of 2022. The increase was primarily due to favorable price realization, higher sales volume and higher investment and interest income, partially offset by the impact of the divestiture of the company's Longwall business, higher manufacturing costs and unfavorable impacts from foreign currency exchange, commodity hedges and pension and other postemployment benefit (OPEB) plan costs.
41
Trends and Economic Conditions
Outlook for Key End Markets
In Construction Industries, we see positive momentum in 2023 for North America. We expect non-residential construction in North America to grow due to the positive impact of government-related infrastructure investments and a healthy pipeline of construction projects. Although residential construction housing starts have softened, the growth rate of our residential construction equipment remains positive as the supply chain pressures alleviate. In Asia Pacific, excluding China, we expect growth due to public infrastructure spending and supportive commodity prices. We expect continued weakness in China in the excavator industry above 10-tons, which we anticipate to remain below 2022 levels due to low construction activity. In EAME, business activity is now expected increase versus 2022 based on healthy construction project activity, particularly strong construction demand in the Middle East. Although uncertain economic conditions remain in Europe, it is more resilient than we previously anticipated. Construction activity in Latin America is expected to be slightly down versus a strong 2022 performance.
In Resource Industries, we expect healthy mining demand to continue as commodity prices remain above investment thresholds; however, customers continue to remain capital disciplined. We anticipate production and utilization levels will remain elevated. We expect the aging of the fleet and a lower level of parked trucks to support future demand for our equipment and services. The energy transition is expected to support increased commodity demand, expanding our total addressable market and providing opportunities for long-term profitable growth. In heavy construction and quarry and aggregates, we anticipate continued growth supported by infrastructure and major non-residential construction projects.
In Energy & Transportation, we expect sales growth to follow our normal seasonal pattern with higher sales in the second half of 2023 versus the first half of 2023. In Oil & Gas reciprocating engines, although customers remain disciplined, we are encouraged by continued strength in demand for both well servicing and gas compression. Power Generation reciprocating engine demand is expected to remain healthy, including data center strength. New equipment orders and services for turbines and turbine-related services in both Oil & Gas and Power Generation are robust. Industrial remains healthy. In Transportation, we anticipate strength in high-speed marine as customers continue to upgrade aging fleets.
Company Trends and Expectations
For the full-year 2023, we expect a strong top line supported by price realization and higher sales of equipment to end users. We do not anticipate a significant change in dealer inventory at year-end 2023 versus year-end 2022. The environment remains positive with improving supply chain dynamics, a strong backlog and healthy underlying end markets.
We expect higher sales in the second quarter of 2023, compared to the second quarter of 2022 on strong sales of equipment to end users and favorable price realization. Following typical seasonality, we expect higher sales in the second quarter of 2023, compared to the first quarter of 2023. In the second quarter of 2022, we saw a decrease in dealer inventory of $400 million. We expect a smaller decrease in the second quarter of 2023.
We expect operating profit to increase in 2023, compared to 2022. We expect price realization to continue to be favorable in 2023. Throughout 2023, we expect to see moderation of price realization and input cost inflation. Increases in selling, general and administrative (SG&A) and research and development (R&D) expenses are expected throughout 2023 as we continue to invest in strategic initiatives such as services growth and technology, including digital, electrification and autonomy. We continue to anticipate higher pension expense within other income (expense) in 2023, compared to 2022, due to higher interest costs from higher interest rates. The change is estimated to be just over $300 million for the full year as compared to 2022, or about $80 million per quarter. Second quarter 2023 operating profit is expected to be substantially stronger than the second quarter of 2022 on favorable price realization and sales volume. We expect the year-over-year benefit of price realization in the second quarter of 2023 to moderate compared to the benefit we saw in the first quarter of 2023 as we lap prior price year increases.
Global Business Conditions
We continue to monitor a variety of external factors around the world, such as supply chain disruptions, inflationary cost and labor pressures. Areas of particular focus include certain components, transportation and raw materials. Transportation shortages have resulted in delays and increased costs. In addition, our suppliers are dealing with availability issues and freight delays, which could impact production in our facilities. Contingency plans have been developed and continue to be modified to minimize supply chain challenges that may impact our ability to meet increasing customer demand. We continue to assess the environment and are taking appropriate price actions in response to rising costs.
Risk Factors
Risk factors are disclosed within Item 1A. Risk Factors of the 2022 Form 10-K.
42
Notes:
•Glossary of terms is included on pages 49 - 51; first occurrence of terms shown in bold italics.
•Information on non-GAAP financial measures is included on page 55.
•Certain amounts may not add due to rounding.
43
Consolidated Results of Operations
THREE MONTHS ENDED MARCH 31, 2023 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2022
CONSOLIDATED SALES AND REVENUES
The chart above graphically illustrates reasons for the change in consolidated sales and revenues between the first quarter of 2022 (at left) and the first quarter of 2023 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company’s board of directors and employees.
Total sales and revenues for the first quarter of 2023 were $15.862 billion, an increase of $2.273 billion, or 17 percent, compared with $13.589 billion in the first quarter of 2022. The increase was due to favorable price realization and higher sales volume, partially offset by unfavorable currency impacts primarily related to the euro, Japanese yen and Australian dollar. The increase in sales volume was driven by higher sales of equipment to end users, partially offset by lower services sales volume.
Sales were higher across the three primary segments.
North America sales increased 32 percent due to favorable price realization, higher sales of equipment to end users and the impact from changes in dealer inventories, partially offset by lower services sales volume. Dealer inventory increased more during the first quarter of 2023 than during the first quarter of 2022.
Sales increased 9 percent in Latin America due to favorable price realization, partially offset by the impact from changes in dealer inventories. Dealer inventory increased during the first quarter of 2022, compared with a decrease during the first quarter of 2023.
EAME sales increased 9 percent due to higher sales of equipment to end users and favorable price realization, partially offset by the impact from changes in dealer inventories, unfavorable currency impacts, primarily related to the euro and British pound, and lower services sales volume. Dealer inventory increased more during the first quarter of 2022 than during the first quarter of 2023.
Asia/Pacific sales increased 2 percent driven by favorable price realization and higher services sales volume, partially offset by unfavorable currency impacts, related to the Japanese yen, Australian dollar and Chinese yuan, the impact from changes in dealer inventories and lower sales of equipment to end users. Dealer inventory increased more during the first quarter of 2022 than the first quarter of 2023.
Dealer inventory increased by $1.4 billion during the first quarter of 2023, compared with an increase of $1.3 billion during the first quarter of 2022. Dealers are independent, and the reasons for changes in their inventory levels vary, including their expectations of future demand and product delivery times. Dealers’ demand expectations take into account seasonal changes, macroeconomic conditions, machine rentals and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers. We expect dealer inventories to be about flat in 2023 compared to 2022.
44
| Sales and Revenues by Segment | |||||||||||||||||||||||||||||||||||||||||||||||
| (Millions of dollars) | First Quarter 2022 | Sales Volume | Price Realization | Currency | Inter-Segment / Other | First Quarter 2023 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||
| Construction Industries | $ | 6,115 | $ | (173) | $ | 942 | $ | (151) | $ | 13 | $ | 6,746 | $ | 631 | 10 | % | |||||||||||||||||||||||||||||||
| Resource Industries | 2,830 | 157 | 472 | (29) | (3) | 3,427 | 597 | 21 | % | ||||||||||||||||||||||||||||||||||||||
| Energy & Transportation | 5,038 | 621 | 480 | (78) | 193 | 6,254 | 1,216 | 24 | % | ||||||||||||||||||||||||||||||||||||||
| All Other Segment | 118 | (2) | — | (1) | (4) | 111 | (7) | (6 | %) | ||||||||||||||||||||||||||||||||||||||
| Corporate Items and Eliminations | (1,215) | (26) | — | 1 | (199) | (1,439) | (224) | ||||||||||||||||||||||||||||||||||||||||
Machinery, Energy & Transportation Sales | 12,886 | 577 | 1,894 | (258) | — | 15,099 | 2,213 | 17 | % | ||||||||||||||||||||||||||||||||||||||
| Financial Products Segment | 783 | — | — | — | 119 | 902 | 119 | 15 | % | ||||||||||||||||||||||||||||||||||||||
| Corporate Items and Eliminations | (80) | — | — | — | (59) | (139) | (59) | ||||||||||||||||||||||||||||||||||||||||
Financial Products Revenues | 703 | — | — | — | 60 | 763 | 60 | 9 | % | ||||||||||||||||||||||||||||||||||||||
| Consolidated Sales and Revenues | $ | 13,589 | $ | 577 | $ | 1,894 | $ | (258) | $ | 60 | $ | 15,862 | $ | 2,273 | 17 | % | |||||||||||||||||||||||||||||||
| Sales and Revenues by Geographic Region | ||
| North America | Latin America | EAME | Asia/Pacific | External Sales and Revenues | Inter-Segment | Total Sales and Revenues | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Millions of dollars) | $ | % Chg | $ | % Chg | $ | % Chg | $ | % Chg | $ | % Chg | $ | % Chg | $ | % Chg | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| First Quarter 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction Industries | $ | 3,608 | 33 | % | $ | 599 | (4 | %) | $ | 1,336 | 5 | % | $ | 1,161 | (21 | %) | $ | 6,704 | 10 | % | $ | 42 | 45 | % | $ | 6,746 | 10 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Resource Industries | 1,308 | 28 | % | 474 | 19 | % | 599 | 1 | % | 978 | 31 | % | 3,359 | 22 | % | 68 | (4 | %) | 3,427 | 21 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Energy & Transportation | 2,572 | 33 | % | 380 | 23 | % | 1,384 | 17 | % | 719 | 20 | % | 5,055 | 25 | % | 1,199 | 19 | % | 6,254 | 24 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All Other Segment | 18 | — | % | — | — | % | 4 | (20 | %) | 13 | (19 | %) | 35 | (10 | %) | 76 | (4 | %) | 111 | (6 | %) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate Items and Eliminations | (48) | — | (1) | (5) | (54) | (1,385) | (1,439) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Machinery, Energy & Transportation Sales | 7,458 | 32 | % | 1,453 | 9 | % | 3,322 | 9 | % | 2,866 | 2 | % | 15,099 | 17 | % | — | — | % | 15,099 | 17 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Financial Products Segment | 575 | 14 | % | 104 | 42 | % | 114 | 19 | % | 109 | (2 | %) | 902 | 1 | 15 | % | — | — | % | 902 | 15 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate Items and Eliminations | (83) | (18) | (18) | (20) | (139) | — | (139) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Financial Products Revenues | 492 | 5 | % | 86 | 54 | % | 96 | 10 | % | 89 | (4 | %) | 763 | 9 | % | — | — | % | 763 | 9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Sales and Revenues | $ | 7,950 | 30 | % | $ | 1,539 | 10 | % | $ | 3,418 | 9 | % | $ | 2,955 | 1 | % | $ | 15,862 | 17 | % | $ | — | — | % | $ | 15,862 | 17 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| First Quarter 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction Industries | $ | 2,720 | $ | 627 | $ | 1,277 | $ | 1,462 | $ | 6,086 | $ | 29 | $ | 6,115 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Resource Industries | 1,018 | 399 | 594 | 748 | 2,759 | 71 | 2,830 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Energy & Transportation | 1,938 | 310 | 1,184 | 600 | 4,032 | 1,006 | 5,038 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All Other Segment | 18 | — | 5 | 16 | 39 | 79 | 118 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate Items and Eliminations | (24) | 1 | (2) | (5) | (30) | (1,185) | (1,215) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Machinery, Energy & Transportation Sales | 5,670 | 1,337 | 3,058 | 2,821 | 12,886 | — | 12,886 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Financial Products Segment | 503 | 73 | 96 | 111 | 783 | 1 | — | 783 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate Items and Eliminations | (36) | (17) | (9) | (18) | (80) | — | (80) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Financial Products Revenues | 467 | 56 | 87 | 93 | 703 | — | 703 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated Sales and Revenues | $ | 6,137 | $ | 1,393 | $ | 3,145 | $ | 2,914 | $ | 13,589 | $ | — | $ | 13,589 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1 Includes revenues from Machinery, Energy & Transportation of $162 million and $100 million in the first quarter of 2023 and 2022, respectively.
45
CONSOLIDATED OPERATING PROFIT
The chart above graphically illustrates reasons for the change in consolidated operating profit between the first quarter of 2022 (at left) and the first quarter of 2023 (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 first quarter of 2023 was $2.731 billion, an increase of $876 million, or 47 percent, compared with $1.855 billion in the first quarter of 2022. The increase was primarily due to favorable price realization and higher sales volume, partially offset by the impact of the divestiture of the company's Longwall business and higher manufacturing costs. Unfavorable manufacturing costs largely reflected higher material costs.
In the first quarter of 2023, the divestiture of the company’s Longwall business was finalized, resulting in an unfavorable impact to operating profit of $586 million, primarily a non-cash item driven by the release of accumulated foreign currency translation.
Operating profit margin was 17.2 percent for the first quarter of 2023, compared with 13.7 percent for the first quarter of 2022.
| Profit by Segment | |||||||||||||||||||||||
| (Millions of dollars) | First Quarter 2023 | First Quarter 2022 | $ Change | % Change | |||||||||||||||||||
| Construction Industries | $ | 1,790 | $ | 1,057 | $ | 733 | 69 | % | |||||||||||||||
| Resource Industries | 764 | 361 | 403 | 112 | % | ||||||||||||||||||
| Energy & Transportation | 1,057 | 538 | 519 | 96 | % | ||||||||||||||||||
| All Other Segment | 11 | 3 | 8 | 267 | % | ||||||||||||||||||
| Corporate Items and Eliminations | (1,008) | (244) | (764) | ||||||||||||||||||||
| Machinery, Energy & Transportation | 2,614 | 1,715 | 899 | 52 | % | ||||||||||||||||||
| Financial Products Segment | 232 | 238 | (6) | (3 | %) | ||||||||||||||||||
| Corporate Items and Eliminations | 25 | (17) | 42 | ||||||||||||||||||||
| Financial Products | 257 | 221 | 36 | 16 | % | ||||||||||||||||||
| Consolidating Adjustments | (140) | (81) | (59) | ||||||||||||||||||||
| Consolidated Operating Profit | $ | 2,731 | $ | 1,855 | $ | 876 | 47 | % | |||||||||||||||
46
Other Profit/Loss and Tax Items
▪Interest expense excluding Financial Products in the first quarter of 2023 was $129 million, compared with $109 million in the first quarter of 2022. The increase was due to higher average borrowing rates.
▪Other income (expense) in the first quarter of 2023 was income of $32 million, compared with income of $253 million in the first quarter of 2022. The change was primarily driven by unfavorable impacts from foreign currency exchange, commodity hedges and pension and OPEB plan costs, all partially offset by higher investment and interest income.
▪The provision for income taxes for the first quarter of 2023 reflected an estimated annual tax rate of 23 percent, compared with 24 percent for the first quarter of 2022, excluding the discrete items discussed below. The comparative tax rate for full-year 2022 was 23.2 percent.
The estimated annual tax rate excludes the impact of the nondeductible loss of $586 million related to the divestiture of the company’s Longwall business in the first quarter of 2023. In addition, a discrete tax benefit of $32 million was recorded in the first quarter of 2023, compared with a $12 million benefit in the first quarter of 2022, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense.
Construction Industries
Construction Industries’ total sales were $6.746 billion in the first quarter of 2023, an increase of $631 million, or 10 percent, compared with $6.115 billion in the first quarter of 2022. The increase was due to favorable price realization, partially offset by lower sales volume and unfavorable currency impacts primarily related to the Japanese yen, euro and Chinese yuan. The decrease in sales volume was driven by the impact from changes in dealer inventories. Dealer inventory increased more during the first quarter of 2022 than during the first quarter of 2023.
▪In North America, sales increased due to favorable price realization and higher sales volume. Higher sales volume was driven by the impact from changes in dealer inventories. Dealer inventory increased more during the first quarter of 2023 than during the first quarter of 2022.
▪Sales decreased in Latin America primarily due to lower sales volume, partially offset by favorable price realization. Lower sales volume was driven by the impact from changes in dealer inventories. Dealer inventory increased during the first quarter of 2022, compared with a decrease during the first quarter of 2023.
▪In EAME, sales increased primarily due to favorable price realization, partially offset by unfavorable currency impacts, mainly related to the euro.
▪Sales decreased in Asia/Pacific primarily due to lower sales volume and unfavorable currency impacts, primarily related to the Japanese yen and Chinese yuan, partially offset by favorable price realization. Lower sales volume was driven by the impact from changes in dealer inventories and lower sales of equipment to end users. Dealer inventory increased more during the first quarter of 2022 than during the first quarter of 2023.
Construction Industries’ profit was $1.790 billion in the first quarter of 2023, an increase of $733 million, or 69 percent, compared with $1.057 billion in the first quarter of 2022. The increase was mainly due to favorable price realization, partially offset by lower sales volume, including an unfavorable mix of products, and unfavorable manufacturing costs. Unfavorable manufacturing costs largely reflected higher material costs.
Construction Industries’ profit as a percent of total sales was 26.5 percent in the first quarter of 2023, compared with 17.3 percent in the first quarter of 2022.
Resource Industries
Resource Industries’ total sales were $3.427 billion in the first quarter of 2023, an increase of $597 million, or 21 percent, compared with $2.830 billion in the first quarter of 2022. The increase was primarily due to favorable price realization and higher sales volume. The increase in sales volume was due to higher sales of equipment to end users, partially offset by lower aftermarket parts sales volume.
Resource Industries’ profit was $764 million in the first quarter of 2023, an increase of $403 million, or 112 percent, compared with $361 million in the first quarter of 2022. The increase was mainly due to favorable price realization and higher sales volume, partially offset by unfavorable manufacturing costs. Unfavorable manufacturing costs largely reflected higher material costs.
Resource Industries’ profit as a percent of total sales was 22.3 percent in the first quarter of 2023, compared with 12.8 percent in the first quarter of 2022.
47
Energy & Transportation
| Sales by Application | ||||||||||||||||||||||||||
| (Millions of dollars) | First Quarter 2023 | First Quarter 2022 | $ Change | % Change | ||||||||||||||||||||||
| Oil and Gas | $ | 1,314 | $ | 948 | $ | 366 | 39 | % | ||||||||||||||||||
| Power Generation | 1,284 | 1,012 | 272 | 27 | % | |||||||||||||||||||||
| Industrial | 1,255 | 1,020 | 235 | 23 | % | |||||||||||||||||||||
| Transportation | 1,202 | 1,052 | 150 | 14 | % | |||||||||||||||||||||
| External Sales | 5,055 | 4,032 | 1,023 | 25 | % | |||||||||||||||||||||
| Inter-segment | 1,199 | 1,006 | 193 | 19 | % | |||||||||||||||||||||
| Total Sales | $ | 6,254 | $ | 5,038 | $ | 1,216 | 24 | % | ||||||||||||||||||
Energy & Transportation’s total sales were $6.254 billion in the first quarter of 2023, an increase of $1.216 billion, or 24 percent, compared with $5.038 billion in the first quarter of 2022. Sales increased across all applications and inter-segment sales. The increase in sales was primarily due to higher sales volume and favorable price realization.
▪Oil and Gas – Sales increased for reciprocating engine aftermarket parts and engines used in well servicing and gas compression applications. Turbines and turbine-related services increased as well.
▪Power Generation – Sales increased in large reciprocating engines, primarily data center applications, and small reciprocating engines. Turbines and turbine-related services increased as well.
▪Industrial – Sales were up across all regions.
▪Transportation – Sales increased in rail services and marine. International locomotive deliveries were also higher.
Energy & Transportation’s profit was $1.057 billion in the first quarter of 2023, an increase of $519 million, or 96 percent, compared with $538 million in the first quarter of 2022. The increase was mainly due to favorable price realization and higher sales volume, partially offset by unfavorable manufacturing costs and higher SG&A/R&D expenses. Unfavorable manufacturing costs were driven by higher material costs. The increase in SG&A/R&D expenses was primarily driven by investments aligned with strategic initiatives.
Energy & Transportation’s profit as a percent of total sales was 16.9 percent in the first quarter of 2023, compared with 10.7 percent in the first quarter of 2022.
Financial Products Segment
Financial Products’ segment revenues were $902 million in the first quarter of 2023, an increase of $119 million, or 15 percent, compared with $783 million in the first quarter of 2022. The increase was primarily due to higher average financing rates across all regions.
Financial Products’ segment profit was $232 million in the first quarter of 2023, a decrease of $6 million, or 3 percent, compared with $238 million in the first quarter of 2022. The decrease was mainly due to unfavorable impacts from equity securities, currency exchange losses and mark-to-market adjustments on derivative contracts. These unfavorable impacts were partially offset by higher net yield on average earning assets and lower provision for credit losses at Cat Financial.
At the end of the first quarter of 2023, past dues at Cat Financial were 2.00 percent, compared with 2.05 percent at the end of the first quarter of 2022. Write-offs, net of recoveries, were $10 million for the first quarter of 2023, compared with $8 million for the first quarter of 2022. As of March 31, 2023, Cat Financial's allowance for credit losses totaled $348 million, or 1.27 percent of finance receivables, compared with $346 million, or 1.29 percent of finance receivables at December 31, 2022.
Corporate Items and Eliminations
Expense for corporate items and eliminations was $983 million in the first quarter of 2023, an increase of $722 million from the first quarter of 2022, primarily driven by the divestiture of the company's Longwall business and increased expenses due to timing differences.
In the first quarter of 2023, the divestiture of the company’s Longwall business was finalized, resulting in an unfavorable impact to operating profit of $586 million, primarily a non-cash item driven by the release of accumulated foreign currency translation. This impact was included in total restructuring costs.
48
RESTRUCTURING COSTS
In 2023, we expect to incur about $700 million of restructuring costs, which include a pre-tax loss of approximately $586 million from the divestiture of our Longwall business within Resource Industries on February 1, 2023. In addition, we expect to incur about $100 million of restructuring costs this year primarily related to strategic actions to address a small number of products. We expect that prior restructuring actions will result in an incremental benefit to operating costs, primarily Cost of goods sold and SG&A expenses of about $100 million in 2023 compared with 2022.
Additional information related to restructuring costs is included in Note 20 - "Restructuring Costs" of Part I, Item 1 "Financial Statements".
GLOSSARY OF TERMS
1.Adjusted Operating Profit Margin – Operating profit excluding restructuring costs, which include the divestiture of the company’s Longwall business, as a percent of sales and revenues.
2.Adjusted Profit Per Share – Profit per share excluding restructuring costs, which include the divestiture of the company’s Longwall business.
3.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® products; parts distribution; integrated logistics solutions; distribution services responsible for dealer development and administration, including a wholly owned dealer in Japan; dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; brand management and marketing strategy; and digital investments for new customer and dealer solutions that integrate data analytics with state-of-the-art digital technologies while transforming the buying experience.
4.Consolidating Adjustments – Elimination of transactions between Machinery, Energy & Transportation and Financial Products.
5.Construction Industries – A segment primarily responsible for supporting customers using machinery in infrastructure and building construction applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes asphalt pavers; backhoe loaders; cold planers; compactors; compact track loaders; forestry machines; material handlers; motor graders; pipelayers; road reclaimers; skid steer loaders; telehandlers; track-type loaders; track-type tractors (small, medium); track excavators (mini, small, medium, large); wheel excavators; wheel loaders (compact, small, medium); and related parts and work tools.
6.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, certain restructuring costs and inter-segment eliminations.
7.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 line 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).
8.Dealer Inventories – Represents dealer machine and engine inventories, excluding aftermarket parts.
9.EAME – A geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States (CIS).
10.Earning Assets – Assets consisting primarily of total finance receivables net of unearned income, plus equipment on operating leases net of accumulated depreciation at Cat Financial.
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11.Energy & Transportation – A segment primarily responsible for supporting customers using reciprocating engines, turbines, diesel-electric locomotives and related services across industries serving Oil and Gas, Power Generation, Industrial and Transportation applications, including marine- and rail-related businesses. Responsibilities include business strategy, product design, product management, development and testing, manufacturing, marketing and sales and product support. The product and services portfolio includes turbines, centrifugal gas compressors, and turbine-related services; reciprocating engine-powered generator sets; integrated systems and solutions used in the electric power generation industry; reciprocating engines, drivetrain and integrated systems and solutions for the marine and oil and gas industries; reciprocating engines, drivetrain and integrated systems and solutions supplied to the industrial industry as well as Cat machinery; electrified powertrain and zero-emission power sources and service solutions development; and diesel-electric locomotives and components and other rail-related products and services, including remanufacturing and leasing. Responsibilities also include the remanufacturing of Caterpillar reciprocating engines and components and remanufacturing services for other companies; and product support of on-highway vocational trucks for North America.
12.Financial Products – The company defines Financial Products as our finance and insurance subsidiaries, primarily Caterpillar Financial Services Corporation (Cat Financial) and Caterpillar Insurance Holdings Inc. (Insurance Services). Financial Products’ information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment.
13.Financial Products Segment – Provides financing alternatives to customers and dealers around the world for Caterpillar products and services, as well as financing for power generation facilities that, in most cases, incorporate Caterpillar products. Financing plans include operating and finance leases, revolving charge accounts, installment sale contracts, repair/rebuild financing, working capital loans and wholesale financing plans. The segment also provides insurance and risk management products and services that help customers and dealers manage their business risk. Insurance and risk management products offered include physical damage insurance, inventory protection plans, extended service coverage and maintenance plans for machines and engines, and dealer property and casualty insurance. The various forms of financing, insurance and risk management products offered to customers and dealers help support the purchase and lease of Caterpillar equipment. The segment also earns revenues from 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.
14.Latin America – A geographic region including Central and South American countries and Mexico.
15.Machinery, Energy & Transportation (ME&T) – The company defines ME&T as Caterpillar Inc. and its subsidiaries, excluding Financial Products. ME&T’s information relates to the design, manufacturing and marketing of its products.
16.Machinery, Energy & Transportation Other Operating (Income) Expenses – Comprised primarily of gains/losses on disposal of long-lived assets, gains/losses on divestitures and legal settlements and accruals.
17.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.
18.Mark-to-market gains/losses – Represents the net gain or loss of actual results differing from the company’s assumptions and the effects of changing assumptions for our defined benefit pension and OPEB plans. These gains and losses are immediately recognized through earnings upon the annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.
19.Pension and Other Postemployment Benefits (OPEB) – The company’s defined-benefit pension and postretirement benefit plans.
20.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.
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21.Resource Industries – A segment primarily responsible for supporting customers using machinery in mining, heavy construction and quarry and aggregates. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large track-type tractors; large mining trucks; hard rock vehicles; longwall miners; electric rope shovels; draglines; hydraulic shovels; rotary drills; large wheel loaders; off-highway trucks; articulated trucks; wheel tractor scrapers; wheel dozers; landfill compactors; soil compactors; select work tools; machinery components; electronics and control systems and related parts. In addition to equipment, Resource Industries also develops and sells technology products and services to provide customers fleet management, equipment management analytics, autonomous machine capabilities, safety services and mining performance solutions. Resource Industries also manages areas that provide services to other parts of the company, including strategic procurement, lean center of excellence, integrated manufacturing, research and development for hydraulic systems, automation, electronics and software for Cat machines and engines.
22.Restructuring Costs – May include costs for employee separation, long-lived asset impairments, contract terminations and divestiture impacts. 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.
23.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-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.
24.Services – Enterprise services include, but are not limited to, aftermarket parts, Financial Products revenues and other service-related revenues. Machinery, Energy & Transportation segments exclude most 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. On a consolidated basis, we had positive operating cash flow in the first three months of 2023 and ended the first quarter with $6.79 billion of cash, a decrease of $215 million from year-end 2022. In addition, ME&T has invested in available-for-sale debt securities that are considered highly liquid and are available for current operations. These securities are included in Prepaid expenses and other current assets and Other assets in the Consolidated Statement of Financial Position and were $1.76 billion at the end of March 31, 2023. We intend to maintain a strong cash and liquidity position.
Consolidated operating cash flow for the first three months of 2023 was $1.57 billion, up $1.26 billion compared to the same period a year ago. The increase was primarily due to higher profit before taxes adjusted for non-cash items, including the loss on divestiture of the company's Longwall business.
Total debt as of March 31, 2023 was $37.04 billion, an increase of $45 million from year-end 2022. Debt related to ME&T decreased $26 million in the first three months of 2023 while debt related to Financial Products increased $71 million.
As of March 31, 2023, we had 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 March 31, 2023 was $2.75 billion. Information on our Credit Facility is as follows:
•The 364-day facility of $3.15 billion (of which $825 million is available to ME&T) expires in August 2023.
•The three-year facility, as amended and restated in September 2022, of $2.73 billion (of which $715 million is available to ME&T) expires in August 2025.
•The five-year facility, as amended and restated in September 2022, of $4.62 billion (of which $1.21 billion is available to ME&T) expires in September 2027.
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At March 31, 2023, Caterpillar’s consolidated net worth was $18.21 billion, which was above the $9.00 billion required under the Credit Facility. The consolidated net worth is defined in the Credit Facility as the consolidated shareholders’ equity including preferred stock but excluding the pension and other postretirement benefits balance within Accumulated other comprehensive income (loss).
At March 31, 2023, Cat Financial’s covenant interest coverage ratio was 2.15 to 1. This was 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 March 31, 2023, Cat Financial’s six-month covenant leverage ratio was 7.16 to 1. This was 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.
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 March 31, 2023, there were no borrowings under the Credit Facility.
Our total credit commitments and available credit as of March 31, 2023 were:
| March 31, 2023 | |||||||||||||||||
| (Millions of dollars) | Consolidated | Machinery, Energy & Transportation | Financial Products | ||||||||||||||
| Credit lines available: | |||||||||||||||||
| Global credit facilities | $ | 10,500 | $ | 2,750 | $ | 7,750 | |||||||||||
| Other external | 4,158 | 586 | 3,572 | ||||||||||||||
| Total credit lines available | 14,658 | 3,336 | 11,322 | ||||||||||||||
| Less: Commercial paper outstanding | (5,289) | — | (5,289) | ||||||||||||||
| Less: Utilized credit | (1,050) | — | (1,050) | ||||||||||||||
| Available credit | $ | 8,319 | $ | 3,336 | $ | 4,983 | |||||||||||
The other external consolidated credit lines with banks as of March 31, 2023 totaled $4.16 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, Fitch and S&P maintain a “mid-A” debt rating. A downgrade of our credit ratings by any of the major credit rating agencies could 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 committed credit facilities. Our Financial Products’ operations would rely on cash flow from its existing portfolio, existing cash balances, access to our committed credit facilities 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.
We facilitate voluntary supplier finance programs (the “Programs”) through participating financial institutions. We account for payments made under the Programs, the same as our other accounts payable, as a reduction to our cash flows from operations. We do not believe that changes in the availability of supplier financing will have a significant impact on our liquidity. Additional information related to the Programs is included in Note 2 - "New accounting guidance" of Part I, Item 1 "Financial Statements".
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Machinery, Energy & Transportation
Net cash provided by operating activities was $1.78 billion in the first three months of 2023, compared with net cash used of $78 million for the same period in 2022. The increase was primarily due to higher profit before taxes adjusted for non-cash items, including the loss on divestiture of the company's Longwall business and lower working capital requirements. Within working capital, changes in receivables, accounts payable, customer advances and accrued expenses favorably impacted cash flow, but were partially offset by changes in inventories.
Net cash used by investing activities in the first three months of 2023 was $670 million, compared with net cash used of $1.09 billion in the first three months of 2022. The change was primarily due to decreases in net investment activity.
Net cash used for financing activities during the first three months of 2023 was $1.14 billion, compared with net cash used of $1.57 billion in the same period of 2022. The change was primarily due to lower share repurchases in the first three months of 2023.
While our short-term priorities for the use of cash may vary from time to time as business needs and conditions dictate, our long-term 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 $414 million during the first three months of 2023, compared to $348 million for the same period in 2022. We expect ME&T’s capital expenditures in 2023 to be about $1.5 billion. We made $208 million of contributions to our pension and other postretirement benefit plans during the first three months of 2023. We currently anticipate full-year 2023 contributions of approximately $372 million. In comparison, we made $210 million of contributions to our pension and other postretirement benefit plans during the first three months of 2022.
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 capital allocation strategy, ME&T free cash flow is a liquidity measure we use 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 less capital expenditures, excluding discretionary pension and other postretirement benefit plan contributions and cash payments related to settlements with the U.S. Internal Revenue Service. A goal of our capital allocation strategy is to return substantially all ME&T free cash flow to shareholders over time 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 approved a share repurchase authorization (the 2018 Authorization) of up to $10.0 billion of Caterpillar common stock effective January 1, 2019, with no expiration. In May 2022, the Board approved a share repurchase authorization (the 2022 Authorization) of up to $15.0 billion of Caterpillar common stock effective August 1, 2022, with no expiration. The Company commenced utilization of the 2022 Authorization for all share repurchases on August 1, 2022, leaving approximately $70 million unutilized under the 2018 Authorization as of March 31, 2023. The Company does not intend to repurchase any additional shares under the 2018 Authorization.
In the first three months of 2023, we repurchased $400 million of Caterpillar common stock, with $12.40 billion remaining under the 2022 Authorization as of March 31, 2023. Our basic shares outstanding as of March 31, 2023 were approximately 516 million.
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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. In April 2023, the Board of Directors approved maintaining our quarterly dividend representing $1.20 per share, and we continue to expect our strong financial position to support the dividend. Dividends paid totaled $620 million in the first three months of 2023.
Financial Products
Financial Products operating cash flow was $302 million in the first three months of 2023, compared with $393 million for the same period in 2022. Net cash used for investing activities was $444 million for the first three months of 2023, compared with net cash used of $221 million for the same period in 2022. The change was primarily due to portfolio related activity. Net cash used for financing activities was $43 million for the first three months of 2023 compared with net cash used of $142 million for the same period in 2022. The change was primarily due to higher portfolio funding requirements related to net intercompany purchased receivables.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, see Part I, Item 1. Note 2 - “New accounting guidance”.
CRITICAL ACCOUNTING ESTIMATES
For a discussion of the company’s critical accounting estimates, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K. There have been no significant changes to our critical accounting estimates since our 2022 Annual Report on Form 10-K.
OTHER MATTERS
Information related to legal proceedings appears in Note 14—Environmental and Legal Matters of Part II, Item 8 “Financial Statements and Supplementary Data.”
Order Backlog
At the end of the first quarter of 2023, the dollar amount of backlog believed to be firm was approximately $30.4 billion, which was about flat to the fourth quarter of 2022. Of the total backlog at March 31, 2023, approximately $5.6 billion was not expected to be filled in the following twelve months.
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NON-GAAP FINANCIAL MEASURES
We provide the following definitions 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 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 two significant items in order for our results to be meaningful to our readers. These items consist of (i) restructuring costs related to the divestiture of the company's Longwall business and (ii) other restructuring costs. We do not consider these items indicative of earnings from ongoing business activities and believe the non-GAAP measure provides 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 results to the most directly comparable GAAP measures are as follows:
| (Dollars in millions except per share data) | Operating Profit | Operating Profit Margin | Profit Before Taxes | Provision (Benefit) for Income Taxes | Effective Tax Rate | Profit | Profit per Share | |||||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2023- U.S. GAAP | $ | 2,731 | 17.2 | % | $ | 2,634 | $ | 708 | 26.9 | % | $ | 1,943 | $ | 3.74 | ||||||||||||||||||||||||||||||
| Restructuring costs - Longwall divestiture | 586 | 3.7 | % | 586 | — | — | % | 586 | 1.13 | |||||||||||||||||||||||||||||||||||
| Other restructuring costs | 25 | 0.2 | % | 25 | 5 | 20.0 | % | 20 | 0.04 | |||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2023 - Adjusted | $ | 3,342 | 21.1 | % | $ | 3,245 | $ | 713 | 22.0 | % | $ | 2,549 | $ | 4.91 | ||||||||||||||||||||||||||||||
Three Months Ended March 31, 2022 - U.S. GAAP | $ | 1,855 | 13.7 | % | $ | 1,999 | $ | 469 | 23.4 | % | $ | 1,537 | $ | 2.86 | ||||||||||||||||||||||||||||||
| Restructuring costs | 13 | 0.1 | % | 13 | 2 | 13.0 | % | 11 | 0.02 | |||||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2022 - Adjusted | $ | 1,868 | 13.7 | % | $ | 2,012 | $ | 471 | 23.4 | % | $ | 1,548 | $ | 2.88 | ||||||||||||||||||||||||||||||
Reconciliations of ME&T free cash flow to the most directly comparable GAAP measure, net cash provided by operating activities are as follows:
| (Millions of dollars) | Three Months Ended March 31 | ||||||||||
| 2023 | 2022 | ||||||||||
ME&T net cash provided by operating activities 1 | $ | 1,779 | $ | (78) | |||||||
| ME&T capital expenditures | (414) | (348) | |||||||||
| ME&T free cash flow | $ | 1,365 | $ | (426) | |||||||
1 See reconciliation of ME&T net cash provided by operating activities to consolidated net cash provided by operating activities on pages 61 - 62. | |||||||||||
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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 – We define ME&T as it is presented in the supplemental data as Caterpillar Inc. and its subsidiaries, excluding Financial Products. ME&T’s information relates to the design, manufacturing and marketing of our products.
Financial Products – We define Financial Products as it is presented in the supplemental data as our finance and insurance subsidiaries, primarily Caterpillar Financial Services Corporation (Cat Financial) and Caterpillar Insurance Holdings Inc. (Insurance Services). Financial Products’ information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment.
Consolidating Adjustments – Eliminations of transactions between ME&T and Financial Products.
The nature of the ME&T and Financial Products 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 believe this presentation will assist readers in understanding our business.
Pages 57 to 62 reconcile ME&T and Financial Products to Caterpillar Inc. consolidated financial information. Certain amounts for prior periods have been reclassified to conform to the current period presentation.
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Caterpillar Inc.
Supplemental Data for Results of Operations
For the Three Months Ended March 31, 2023
(Unaudited)
(Millions of dollars)
| Supplemental Consolidating Data | ||||||||||||||||||||||||||
| Consolidated | Machinery, Energy & Transportation | Financial Products | Consolidating Adjustments | |||||||||||||||||||||||
| Sales and revenues: | ||||||||||||||||||||||||||
| Sales of Machinery, Energy & Transportation | $ | 15,099 | $ | 15,099 | $ | — | $ | — | ||||||||||||||||||
| Revenues of Financial Products | 763 | — | 935 | (172) | 1 | |||||||||||||||||||||
| Total sales and revenues | 15,862 | 15,099 | 935 | (172) | ||||||||||||||||||||||
| Operating costs: | ||||||||||||||||||||||||||
| Cost of goods sold | 10,103 | 10,104 | — | (1) | 2 | |||||||||||||||||||||
| Selling, general and administrative expenses | 1,463 | 1,320 | 158 | (15) | 2 | |||||||||||||||||||||
| Research and development expenses | 472 | 472 | — | — | ||||||||||||||||||||||
| Interest expense of Financial Products | 217 | — | 217 | — | ||||||||||||||||||||||
| Other operating (income) expenses | 876 | 589 | 303 | (16) | 2 | |||||||||||||||||||||
| Total operating costs | 13,131 | 12,485 | 678 | (32) | ||||||||||||||||||||||
| Operating profit | 2,731 | 2,614 | 257 | (140) | ||||||||||||||||||||||
| Interest expense excluding Financial Products | 129 | 129 | — | — | ||||||||||||||||||||||
| Other income (expense) | 32 | (14) | (19) | 65 | 3 | |||||||||||||||||||||
| Consolidated profit before taxes | 2,634 | 2,471 | 238 | (75) | ||||||||||||||||||||||
| Provision (benefit) for income taxes | 708 | 648 | 60 | — | ||||||||||||||||||||||
| Profit of consolidated companies | 1,926 | 1,823 | 178 | (75) | ||||||||||||||||||||||
| Equity in profit (loss) of unconsolidated affiliated companies | 16 | 19 | — | (3) | 4 | |||||||||||||||||||||
| Profit of consolidated and affiliated companies | 1,942 | 1,842 | 178 | (78) | ||||||||||||||||||||||
| Less: Profit (loss) attributable to noncontrolling interests | (1) | — | 2 | (3) | 5 | |||||||||||||||||||||
Profit 6 | $ | 1,943 | $ | 1,842 | $ | 176 | $ | (75) | ||||||||||||||||||
1Elimination of Financial Products’ revenues earned from ME&T.
2Elimination of net expenses recorded by ME&T paid to Financial Products.
3Elimination of discount recorded by ME&T on receivables sold to Financial Products and of interest earned between ME&T and Financial Products as well as dividends paid by Financial Products to ME&T.
4Elimination of equity profit (loss) earned from Financial Products’ subsidiaries partially owned by ME&T subsidiaries.
5Elimination of noncontrolling interest profit (loss) recorded by Financial Products for subsidiaries partially owned by ME&T subsidiaries.
6Profit attributable to common shareholders.
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Caterpillar Inc.
Supplemental Data for Results of Operations
For the Three Months Ended March 31, 2022
(Unaudited)
(Millions of dollars)
| Supplemental Consolidating Data | ||||||||||||||||||||||||||
| Consolidated | Machinery, Energy & Transportation | Financial Products | Consolidating Adjustments | |||||||||||||||||||||||
| Sales and revenues: | ||||||||||||||||||||||||||
| Sales of Machinery, Energy & Transportation | $ | 12,886 | $ | 12,886 | $ | — | $ | — | ||||||||||||||||||
| Revenues of Financial Products | 703 | — | 813 | (110) | 1 | |||||||||||||||||||||
| Total sales and revenues | 13,589 | 12,886 | 813 | (110) | ||||||||||||||||||||||
| Operating costs: | ||||||||||||||||||||||||||
| Cost of goods sold | 9,559 | 9,560 | — | (1) | 2 | |||||||||||||||||||||
| Selling, general and administrative expenses | 1,346 | 1,182 | 172 | (8) | 2 | |||||||||||||||||||||
| Research and development expenses | 457 | 457 | — | — | ||||||||||||||||||||||
| Interest expense of Financial Products | 106 | — | 106 | — | ||||||||||||||||||||||
| Other operating (income) expenses | 266 | (28) | 314 | (20) | 2 | |||||||||||||||||||||
| Total operating costs | 11,734 | 11,171 | 592 | (29) | ||||||||||||||||||||||
| Operating profit | 1,855 | 1,715 | 221 | (81) | ||||||||||||||||||||||
| Interest expense excluding Financial Products | 109 | 109 | — | — | ||||||||||||||||||||||
| Other income (expense) | 253 | 157 | 15 | 81 | 3 | |||||||||||||||||||||
| Consolidated profit before taxes | 1,999 | 1,763 | 236 | — | ||||||||||||||||||||||
| Provision (benefit) for income taxes | 469 | 412 | 57 | — | ||||||||||||||||||||||
| Profit of consolidated companies | 1,530 | 1,351 | 179 | — | ||||||||||||||||||||||
| Equity in profit (loss) of unconsolidated affiliated companies | 7 | 8 | — | (1) | 4 | |||||||||||||||||||||
| Profit of consolidated and affiliated companies | 1,537 | 1,359 | 179 | (1) | ||||||||||||||||||||||
| Less: Profit (loss) attributable to noncontrolling interests | — | — | 1 | (1) | 5 | |||||||||||||||||||||
Profit 6 | $ | 1,537 | $ | 1,359 | $ | 178 | $ | — | ||||||||||||||||||
1Elimination of Financial Products’ revenues earned from ME&T.
2Elimination of net expenses recorded by ME&T paid to Financial Products.
3Elimination of discount recorded by ME&T on receivables sold to Financial Products and of interest earned between ME&T and Financial Products as well as dividends paid by Financial Products to ME&T.
4Elimination of equity profit (loss) earned from Financial Products’ subsidiaries partially owned by ME&T subsidiaries.
5Elimination of noncontrolling interest profit (loss) recorded by Financial Products for subsidiaries partially owned by ME&T subsidiaries.
6Profit attributable to common shareholders.
58
Caterpillar Inc.
Supplemental Data for Financial Position
At March 31, 2023
(Unaudited)
(Millions of dollars)
| Supplemental Consolidating Data | ||||||||||||||||||||||||||
| Consolidated | Machinery, Energy & Transportation | Financial Products | Consolidating Adjustments | |||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 6,789 | $ | 6,017 | $ | 772 | $ | — | ||||||||||||||||||
| Receivables – trade and other | 9,230 | 3,481 | 477 | 5,272 | 1,2 | |||||||||||||||||||||
| Receivables – finance | 9,119 | — | 14,655 | (5,536) | 2 | |||||||||||||||||||||
| Prepaid expenses and other current assets | 2,889 | 2,629 | 289 | (29) | 3 | |||||||||||||||||||||
| Inventories | 17,633 | 17,633 | — | — | ||||||||||||||||||||||
| Total current assets | 45,660 | 29,760 | 16,193 | (293) | ||||||||||||||||||||||
| Property, plant and equipment – net | 11,973 | 8,090 | 3,883 | — | ||||||||||||||||||||||
| Long-term receivables – trade and other | 1,209 | 463 | 276 | 470 | 1,2 | |||||||||||||||||||||
| Long-term receivables – finance | 11,845 | — | 12,346 | (501) | 2 | |||||||||||||||||||||
| Noncurrent deferred and refundable income taxes | 2,405 | 2,923 | 118 | (636) | 4 | |||||||||||||||||||||
| Intangible assets | 694 | 694 | — | — | ||||||||||||||||||||||
| Goodwill | 5,309 | 5,309 | — | — | ||||||||||||||||||||||
| Other assets | 4,554 | 3,795 | 1,940 | (1,181) | 5 | |||||||||||||||||||||
| Total assets | $ | 83,649 | $ | 51,034 | $ | 34,756 | $ | (2,141) | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||
| Short-term borrowings | $ | 5,841 | $ | — | $ | 5,841 | $ | — | ||||||||||||||||||
| Accounts payable | 8,951 | 8,893 | 342 | (284) | 6,7 | |||||||||||||||||||||
| Accrued expenses | 4,121 | 3,646 | 461 | 14 | 7 | |||||||||||||||||||||
| Accrued wages, salaries and employee benefits | 1,368 | 1,341 | 27 | — | ||||||||||||||||||||||
| Customer advances | 2,202 | 2,196 | — | 6 | 7 | |||||||||||||||||||||
| Other current liabilities | 3,035 | 2,400 | 687 | (52) | 4,8 | |||||||||||||||||||||
| Long-term debt due within one year | 6,324 | 37 | 6,287 | — | ||||||||||||||||||||||
| Total current liabilities | 31,842 | 18,513 | 13,645 | (316) | ||||||||||||||||||||||
| Long-term debt due after one year | 24,873 | 9,589 | 15,315 | (31) | 9 | |||||||||||||||||||||
| Liability for postemployment benefits | 4,069 | 4,069 | — | — | ||||||||||||||||||||||
| Other liabilities | 4,695 | 3,786 | 1,601 | (692) | 4 | |||||||||||||||||||||
| Total liabilities | 65,479 | 35,957 | 30,561 | (1,039) | ||||||||||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||||||||
| Shareholders’ equity | ||||||||||||||||||||||||||
| Common stock | 6,546 | 6,546 | 905 | (905) | 10 | |||||||||||||||||||||
| Treasury stock | (32,108) | (32,108) | — | — | ||||||||||||||||||||||
| Profit employed in the business | 45,457 | 41,277 | 4,169 | 11 | 10 | |||||||||||||||||||||
| Accumulated other comprehensive income (loss) | (1,746) | (657) | (1,089) | — | ||||||||||||||||||||||
| Noncontrolling interests | 21 | 19 | 210 | (208) | 10 | |||||||||||||||||||||
| Total shareholders’ equity | 18,170 | 15,077 | 4,195 | (1,102) | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 83,649 | $ | 51,034 | $ | 34,756 | $ | (2,141) | ||||||||||||||||||
1 Elimination of receivables between ME&T and Financial Products.
2 Reclassification of ME&T’s trade receivables purchased by Financial Products and Financial Products’ wholesale inventory receivables.
3 Elimination of ME&T’s insurance premiums that are prepaid to Financial Products.
4 Reclassification reflecting required netting of deferred tax assets/liabilities by taxing jurisdiction.
5 Elimination of other intercompany assets between ME&T and Financial Products.
6 Elimination of payables between ME&T and Financial Products.
7 Reclassification of Financial Products' payables to accrued expenses or customer advances.
8 Elimination of prepaid insurance in Financial Products’ other liabilities.
9 Elimination of debt between ME&T and Financial Products.
10 Eliminations associated with ME&T’s investments in Financial Products’ subsidiaries.
59
Caterpillar Inc.
Supplemental Data for Financial Position
At December 31, 2022
(Unaudited)
(Millions of dollars)
| Supplemental Consolidating Data | ||||||||||||||||||||||||||
| Consolidated | Machinery, Energy & Transportation | Financial Products | Consolidating Adjustments | |||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 7,004 | $ | 6,042 | $ | 962 | $ | — | ||||||||||||||||||
| Receivables – trade and other | 8,856 | 3,710 | 519 | 4,627 | 1,2 | |||||||||||||||||||||
| Receivables – finance | 9,013 | — | 13,902 | (4,889) | 2 | |||||||||||||||||||||
| Prepaid expenses and other current assets | 2,642 | 2,488 | 290 | (136) | 3 | |||||||||||||||||||||
| Inventories | 16,270 | 16,270 | — | — | ||||||||||||||||||||||
| Total current assets | 43,785 | 28,510 | 15,673 | (398) | ||||||||||||||||||||||
| Property, plant and equipment – net | 12,028 | 8,186 | 3,842 | — | ||||||||||||||||||||||
| Long-term receivables – trade and other | 1,265 | 418 | 339 | 508 | 1,2 | |||||||||||||||||||||
| Long-term receivables – finance | 12,013 | — | 12,552 | (539) | 2 | |||||||||||||||||||||
| Noncurrent deferred and refundable income taxes | 2,213 | 2,755 | 115 | (657) | 4 | |||||||||||||||||||||
| Intangible assets | 758 | 758 | — | — | ||||||||||||||||||||||
| Goodwill | 5,288 | 5,288 | — | — | ||||||||||||||||||||||
| Other assets | 4,593 | 3,882 | 1,892 | (1,181) | 5 | |||||||||||||||||||||
| Total assets | $ | 81,943 | $ | 49,797 | $ | 34,413 | $ | (2,267) | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||
| Short-term borrowings | $ | 5,957 | $ | 3 | $ | 5,954 | $ | — | ||||||||||||||||||
| Accounts payable | 8,689 | 8,657 | 294 | (262) | 6 | |||||||||||||||||||||
| Accrued expenses | 4,080 | 3,687 | 393 | — | ||||||||||||||||||||||
| Accrued wages, salaries and employee benefits | 2,313 | 2,264 | 49 | — | ||||||||||||||||||||||
| Customer advances | 1,860 | 1,860 | — | — | ||||||||||||||||||||||
| Dividends payable | 620 | 620 | — | — | ||||||||||||||||||||||
| Other current liabilities | 2,690 | 2,215 | 635 | (160) | 4,7 | |||||||||||||||||||||
| Long-term debt due within one year | 5,322 | 120 | 5,202 | — | ||||||||||||||||||||||
| Total current liabilities | 31,531 | 19,426 | 12,527 | (422) | ||||||||||||||||||||||
| Long-term debt due after one year | 25,714 | 9,529 | 16,216 | (31) | 8 | |||||||||||||||||||||
| Liability for postemployment benefits | 4,203 | 4,203 | — | — | ||||||||||||||||||||||
| Other liabilities | 4,604 | 3,677 | 1,638 | (711) | 4 | |||||||||||||||||||||
| Total liabilities | 66,052 | 36,835 | 30,381 | (1,164) | ||||||||||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||||||||
| Shareholders’ equity | ||||||||||||||||||||||||||
| Common stock | 6,560 | 6,560 | 905 | (905) | 9 | |||||||||||||||||||||
| Treasury stock | (31,748) | (31,748) | — | — | ||||||||||||||||||||||
| Profit employed in the business | 43,514 | 39,435 | 4,068 | 11 | 9 | |||||||||||||||||||||
| Accumulated other comprehensive income (loss) | (2,457) | (1,310) | (1,147) | — | ||||||||||||||||||||||
| Noncontrolling interests | 22 | 25 | 206 | (209) | 9 | |||||||||||||||||||||
| Total shareholders’ equity | 15,891 | 12,962 | 4,032 | (1,103) | ||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 81,943 | $ | 49,797 | $ | 34,413 | $ | (2,267) | ||||||||||||||||||
1 Elimination of receivables between ME&T and Financial Products.
2 Reclassification of ME&T’s trade receivables purchased by Financial Products and Financial Products’ wholesale inventory receivables.
3 Elimination of ME&T’s insurance premiums that are prepaid to Financial Products.
4 Reclassification reflecting required netting of deferred tax assets/liabilities by taxing jurisdiction.
5 Elimination of other intercompany assets between ME&T and Financial Products.
6 Elimination of payables between ME&T and Financial Products.
7 Elimination of prepaid insurance in Financial Products' other liabilities.
8 Elimination of debt between ME&T and Financial Products.
9 Eliminations associated with ME&T’s investments in Financial Products’ subsidiaries.
60
Caterpillar Inc.
Supplemental Data for Cash Flow
For the Three Months Ended March 31, 2023
(Unaudited)
(Millions of dollars)
| Supplemental Consolidating Data | ||||||||||||||||||||||||||
| Consolidated | Machinery, Energy & Transportation | Financial Products | Consolidating Adjustments | |||||||||||||||||||||||
| Cash flow from operating activities: | ||||||||||||||||||||||||||
| Profit of consolidated and affiliated companies | $ | 1,942 | $ | 1,842 | $ | 178 | $ | (78) | 1,5 | |||||||||||||||||
| Adjustments for non-cash items: | ||||||||||||||||||||||||||
| Depreciation and amortization | 532 | 342 | 190 | — | ||||||||||||||||||||||
| Provision (benefit) for deferred income taxes | (191) | (169) | (22) | — | ||||||||||||||||||||||
| Loss on divestiture | 572 | 572 | — | — | ||||||||||||||||||||||
| Other | 117 | 124 | (143) | 136 | 2 | |||||||||||||||||||||
| Changes in assets and liabilities, net of acquisitions and divestitures: | ||||||||||||||||||||||||||
| Receivables – trade and other | (329) | 205 | 14 | (548) | 2,3 | |||||||||||||||||||||
| Inventories | (1,403) | (1,402) | — | (1) | 2 | |||||||||||||||||||||
| Accounts payable | 477 | 465 | 34 | (22) | 2 | |||||||||||||||||||||
| Accrued expenses | 38 | 6 | 32 | — | ||||||||||||||||||||||
| Accrued wages, salaries and employee benefits | (950) | (928) | (22) | — | ||||||||||||||||||||||
| Customer advances | 365 | 365 | — | — | ||||||||||||||||||||||
| Other assets – net | 107 | 223 | 4 | (120) | 2 | |||||||||||||||||||||
| Other liabilities – net | 296 | 134 | 37 | 125 | 2 | |||||||||||||||||||||
| Net cash provided by (used for) operating activities | 1,573 | 1,779 | 302 | (508) | ||||||||||||||||||||||
| Cash flow from investing activities: | ||||||||||||||||||||||||||
| Capital expenditures – excluding equipment leased to others | (422) | (414) | (9) | 1 | 2 | |||||||||||||||||||||
| Expenditures for equipment leased to others | (328) | — | (330) | 2 | 2 | |||||||||||||||||||||
| Proceeds from disposals of leased assets and property, plant and equipment | 184 | 7 | 179 | (2) | 2 | |||||||||||||||||||||
| Additions to finance receivables | (3,020) | — | (3,462) | 442 | 3 | |||||||||||||||||||||
| Collections of finance receivables | 3,169 | — | 3,437 | (268) | 3 | |||||||||||||||||||||
| Net intercompany purchased receivables | — | — | (258) | 258 | 3 | |||||||||||||||||||||
| Proceeds from sale of finance receivables | 24 | — | 24 | — | ||||||||||||||||||||||
| Net intercompany borrowings | — | — | 2 | (2) | 4 | |||||||||||||||||||||
| Investments and acquisitions (net of cash acquired) | (5) | (5) | — | — | ||||||||||||||||||||||
| Proceeds from sale of businesses and investments (net of cash sold) | (14) | (14) | — | — | ||||||||||||||||||||||
| Proceeds from sale of securities | 239 | 162 | 77 | — | ||||||||||||||||||||||
| Investments in securities | (536) | (433) | (103) | — | ||||||||||||||||||||||
| Other – net | 26 | 27 | (1) | — | ||||||||||||||||||||||
| Net cash provided by (used for) investing activities | (683) | (670) | (444) | 431 | ||||||||||||||||||||||
| Cash flow from financing activities: | ||||||||||||||||||||||||||
| Dividends paid | (620) | (620) | (75) | 75 | 5 | |||||||||||||||||||||
| Common stock issued, including treasury shares reissued | (25) | (25) | — | — | ||||||||||||||||||||||
| Common shares repurchased | (400) | (400) | — | — | ||||||||||||||||||||||
| Net intercompany borrowings | — | (2) | — | 2 | 4 | |||||||||||||||||||||
| Proceeds from debt issued (original maturities greater than three months) | 1,517 | — | 1,517 | — | ||||||||||||||||||||||
| Payments on debt (original maturities greater than three months) | (1,475) | (90) | (1,385) | — | ||||||||||||||||||||||
| Short-term borrowings – net (original maturities three months or less) | (103) | (3) | (100) | — | ||||||||||||||||||||||
| Net cash provided by (used for) financing activities | (1,106) | (1,140) | (43) | 77 | ||||||||||||||||||||||
| Effect of exchange rate changes on cash | (1) | 4 | (5) | — | ||||||||||||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | (217) | (27) | (190) | — | ||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 7,013 | 6,049 | 964 | — | ||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 6,796 | $ | 6,022 | $ | 774 | $ | — | ||||||||||||||||||
1 Elimination of equity profit earned from Financial Products' subsidiaries partially owned by ME&T subsidiaries.
2 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.
3 Reclassification of Financial Products’ cash flow activity from investing to operating for receivables that arose from the sale of inventory.
4 Elimination of net proceeds and payments to/from ME&T and Financial Products.
5 Elimination of dividend activity between Financial Products and ME&T.
61
Caterpillar Inc.
Supplemental Data for Cash Flow
For the Three Months Ended March 31, 2022
(Unaudited)
(Millions of dollars)
| Supplemental Consolidating Data | ||||||||||||||||||||||||||
| Consolidated | Machinery, Energy & Transportation | Financial Products | Consolidating Adjustments | |||||||||||||||||||||||
| Cash flow from operating activities: | ||||||||||||||||||||||||||
| Profit of consolidated and affiliated companies | $ | 1,537 | $ | 1,359 | $ | 179 | $ | (1) | 1 | |||||||||||||||||
| Adjustments for non-cash items: | ||||||||||||||||||||||||||
| Depreciation and amortization | 557 | 358 | 199 | — | ||||||||||||||||||||||
| Provision (benefit) for deferred income taxes | (99) | (83) | (16) | — | ||||||||||||||||||||||
| Other | (52) | (46) | (89) | 83 | 2 | |||||||||||||||||||||
| Changes in assets and liabilities, net of acquisitions and divestitures: | ||||||||||||||||||||||||||
| Receivables – trade and other | (372) | (257) | (7) | (108) | 2,3 | |||||||||||||||||||||
| Inventories | (1,032) | (1,030) | — | (2) | 2 | |||||||||||||||||||||
| Accounts payable | 452 | 393 | 40 | 19 | 2 | |||||||||||||||||||||
| Accrued expenses | (74) | (1) | (73) | — | ||||||||||||||||||||||
| Accrued wages, salaries and employee benefits | (965) | (940) | (25) | — | ||||||||||||||||||||||
| Customer advances | 311 | 311 | — | — | ||||||||||||||||||||||
| Other assets – net | 99 | 137 | (17) | (21) | 2 | |||||||||||||||||||||
| Other liabilities – net | (49) | (279) | 202 | 28 | 2 | |||||||||||||||||||||
| Net cash provided by (used for) operating activities | 313 | (78) | 393 | (2) | ||||||||||||||||||||||
| Cash flow from investing activities: | ||||||||||||||||||||||||||
| Capital expenditures – excluding equipment leased to others | (346) | (344) | (3) | 1 | 2 | |||||||||||||||||||||
| Expenditures for equipment leased to others | (333) | (4) | (335) | 6 | 2 | |||||||||||||||||||||
| Proceeds from disposals of leased assets and property, plant and equipment | 269 | 33 | 241 | (5) | 2 | |||||||||||||||||||||
| Additions to finance receivables | (2,988) | — | (3,139) | 151 | 3 | |||||||||||||||||||||
| Collections of finance receivables | 2,966 | — | 3,159 | (193) | 3 | |||||||||||||||||||||
| Net intercompany purchased receivables | — | — | (42) | 42 | 3 | |||||||||||||||||||||
| Proceeds from sale of finance receivables | 9 | — | 9 | — | ||||||||||||||||||||||
| Net intercompany borrowings | — | — | 1 | (1) | 4 | |||||||||||||||||||||
| Investments and acquisitions (net of cash acquired) | (8) | (8) | — | — | ||||||||||||||||||||||
| Proceeds from sale of securities | 571 | 478 | 93 | — | ||||||||||||||||||||||
| Investments in securities | (1,438) | (1,266) | (172) | — | ||||||||||||||||||||||
| Other – net | (15) | 18 | (33) | — | ||||||||||||||||||||||
| Net cash provided by (used for) investing activities | (1,313) | (1,093) | (221) | 1 | ||||||||||||||||||||||
| Cash flow from financing activities: | ||||||||||||||||||||||||||
| Dividends paid | (595) | (595) | — | — | ||||||||||||||||||||||
| Common stock issued, including treasury shares reissued | (28) | (28) | — | — | ||||||||||||||||||||||
| Common shares repurchased | (820) | (820) | — | — | ||||||||||||||||||||||
| Net intercompany borrowings | — | (1) | — | 1 | 4 | |||||||||||||||||||||
| Proceeds from debt issued (original maturities greater than three months) | 2,131 | — | 2,131 | — | ||||||||||||||||||||||
| Payments on debt (original maturities greater than three months) | (1,387) | (6) | (1,381) | — | ||||||||||||||||||||||
| Short-term borrowings – net (original maturities three months or less) | (1,016) | (124) | (892) | — | ||||||||||||||||||||||
| Net cash provided by (used for) financing activities | (1,715) | (1,574) | (142) | 1 | ||||||||||||||||||||||
| Effect of exchange rate changes on cash | (16) | (21) | 5 | — | ||||||||||||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | (2,731) | (2,766) | 35 | — | ||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 9,263 | 8,433 | 830 | — | ||||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 6,532 | $ | 5,667 | $ | 865 | $ | — | ||||||||||||||||||
1 Elimination of equity profit earned from Financial Products' subsidiaries partially owned by ME&T subsidiaries.
2 Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.
3 Reclassification of Financial Products’ cash flow activity from investing to operating for receivables that arose from the sale of inventory.
4 Elimination of net proceeds and payments to/from ME&T and Financial Products.
62
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; (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; (xxvi) catastrophic events, including global pandemics such as the COVID-19 pandemic; and (xxvii) other factors described in more detail under the section entitled "Part I - Item 1A. Risk Factors" of Caterpillar's Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as such factors may be updated from time to time in Caterpillar's periodic 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 first quarter of 2023, 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.
63
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 1A. Risk Factors
There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
| Period | Total Number of Shares Purchased2 | Average Price Paid per Share2 | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares that May Yet be Purchased under the Program (in billions)1 | ||||||||||||||||||||||
| January 1-31, 2023 | 400,159 | $ | 249.89 | 400,159 | $ | 12.699 | ||||||||||||||||||||
| February 1-28, 2023 | 385,071 | $ | 246.68 | 385,071 | $ | 12.604 | ||||||||||||||||||||
| March 1-31, 2023 | 916,530 | $ | 223.67 | 916,530 | $ | 12.399 | ||||||||||||||||||||
| Total | 1,701,760 | $ | 235.04 | 1,701,760 | ||||||||||||||||||||||
1 In May 2022, the Board approved a share repurchase authorization (the 2022 Authorization) of up to $15.0 billion of Caterpillar common stock effective August 1, 2022, with no expiration. As of March 31, 2023, $12.4 billion remained available under the 2022 Authorization. | ||||||||||||||||||||||||||
2 In January, February and March of 2023, we repurchased 0.4 million, 0.4 million and 0.9 million shares respectively, for an aggregate of $400 million in open market transactions at an average price per share of $249.89, $246.68 and $223.67, respectively. | ||||||||||||||||||||||||||
Non-U.S. Employee Stock Purchase Plans
As of March 31, 2023, we had 28 employee stock purchase plans (the “EIP Plans”) that are administered outside the United States for our non-U.S. employees, which had approximately 14,000 active participants in the aggregate. During the first quarter of 2023, approximately 66,000 shares of Caterpillar common stock were purchased by the EIP Plans pursuant to the terms of such plans.
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Item 6. Exhibits
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101.INS | Inline 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 | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive File (embedded within the Inline XBRL document and included in Exhibit 101) | |||||||
*Management contracts and compensatory plans and arrangements required to be filed as exhibits pursuant to Item 6 of this report.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
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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. | ||||||||
| May 3, 2023 | /s/ D. James Umpleby III | Chairman of the Board and Chief Executive Officer | ||||||
| D. James Umpleby III | ||||||||
| May 3, 2023 | /s/ Andrew R.J. Bonfield | Chief Financial Officer | ||||||
| Andrew R.J. Bonfield | ||||||||
| May 3, 2023 | /s/ Suzette M. Long | Chief Legal Officer and General Counsel | ||||||
| Suzette M. Long | ||||||||
| May 3, 2023 | /s/ William E. Schaupp | Vice President and Chief Accounting Officer | ||||||
| William E. Schaupp | ||||||||
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