NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Operations and summary of significant accounting policies
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.
We sell our products primarily under the brands “Caterpillar,” “CAT,” design versions of “CAT” and “Caterpillar,” “EMD,” “FG Wilson,” “MaK,” “MWM,” “Perkins,” “Progress Rail,” “SEM” and “Solar Turbines.”
We conduct operations in our ME&T line of business under highly competitive conditions, including intense price competition. We place great emphasis on the high quality and performance of our products and our dealers’ service support. Although no one competitor is believed to produce all of the same types of equipment that we do, there are numerous companies, large and small, which compete with us in the sale of each of our products.
We distribute our machines principally through a worldwide organization of dealers (dealer network), 43 located in the United States and 113 located outside the United States, serving 192 countries. We sell reciprocating engines principally through the dealer network and to other manufacturers for use in products. We also sell some of the reciprocating engines manufactured by our subsidiary Perkins Engines Company Limited through its worldwide network of 88 distributors covering 185 countries. We sell the FG Wilson branded electric power generation systems through its worldwide network of 110 distributors covering 109 countries. We also sell some of the large, medium speed reciprocating engines under the MaK brand through a worldwide network of 20 distributors covering 130 countries. Our dealers do not deal exclusively with our products; however, in most cases sales and servicing of our products are the dealers’ principal business. We sell some products, primarily turbines and locomotives, to end customers through sales forces employed by the company. At times, these employees are assisted by independent sales representatives.
The Financial Products line of business also conducts operations under highly competitive conditions. Financing for users of Caterpillar products is available through a variety of competitive sources, principally commercial banks and finance and leasing companies. We offer various financing, insurance and risk management products designed to support sales of our products and generate financing income for our company. We conduct a significant portion of Financial Products activity in North America, with additional offices in Latin America, Asia/Pacific, Europe, Africa and the Middle East.
B. Basis of presentation
The consolidated financial statements include the accounts of Caterpillar Inc. and its subsidiaries where we have a controlling financial interest.
Investments in companies where our ownership exceeds 20 percent and we do not have a controlling interest or where the ownership is less than 20 percent and for which we have a significant influence are accounted for by the equity method.
We consolidate all variable interest entities (VIEs) where Caterpillar Inc. is the primary beneficiary. For VIEs, we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs. The primary beneficiary of a VIE is the party that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. See Note 21 for further discussion on a consolidated VIE.
Cat Financial has end-user customers and dealers that are 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.
We include shipping and handling costs in Cost of goods sold in Statement 1. Other operating (income) expenses primarily include Cat Financial’s depreciation on equipment leased to others, Insurance Services’ underwriting expenses, (gains) losses on disposal of long-lived assets, long-lived asset impairment charges, legal settlements and accruals, contract termination costs and employee separation charges.
Prepaid expenses and other current assets in Statement 3 primarily include investments in debt and equity securities, prepaid insurance, contract assets, right of return assets, prepaid and refundable income taxes, assets held for sale, core to be returned for remanufacturing, restricted cash and other short-term investments.
Certain amounts for prior years have been reclassified to conform with the current-year financial statement presentation.
C. Inventories
We state inventories at the lower of cost or net realizable value. We principally determine cost using the last-in, first-out (LIFO) method. The value of inventories on the LIFO basis represented about 65 percent and 60 percent of total inventories at December 31, 2022 and 2021, respectively.
If the FIFO (first-in, first-out) method had been in use, inventories would have been $3,321 million and $2,599 million higher than reported at December 31, 2022 and 2021, respectively.
D. Depreciation and amortization
We compute depreciation of plant and equipment principally using accelerated methods. We compute depreciation on equipment leased to others, primarily for Financial Products, using the straight-line method over the term of the lease. The depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term. In 2022, 2021 and 2020, Cat Financial depreciation on equipment leased to others was $718 million, $755 million and $758 million, respectively, which we include in Other operating (income) expenses in Statement 1. In 2022, 2021 and 2020, consolidated depreciation expense was $1,937 million, $2,050 million and $2,122 million, respectively. We compute amortization of purchased finite-lived intangibles principally using the straight-line method, generally not to exceed a period of 20 years.
E. Foreign currency translation
The functional currency for most of our ME&T consolidated subsidiaries is the U.S. dollar. The functional currency for most of our Financial Products consolidated subsidiaries is the respective local currency. We include gains and losses resulting from the remeasurement of foreign currency amounts to the functional currency in Other income (expense) in Statement 1. We include gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars in Accumulated other comprehensive income (loss) (AOCI) in Statement 3.
F. Derivative financial instruments
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. All derivatives are recorded at fair value. See Note 4 for more information.
G. Income taxes
We determine the provision for income taxes using the asset and liability approach taking into account guidance related to uncertain tax positions. Tax laws require items to be included in tax filings at different times than the items are reflected in the financial statements. We recognize a current liability for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. We adjust deferred taxes for enacted changes in tax rates and tax laws. We record valuation allowances to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. See Note 6 for further discussion.
H. Goodwill
For acquisitions accounted for as a business combination, goodwill represents the excess of the cost over the fair value of the net assets acquired. We are required to test goodwill for impairment, at the reporting unit level, annually and when events or circumstances make it more likely than not that an impairment may have occurred. A reporting unit is an operating segment or one level below an operating segment (referred to as a component) to which goodwill is assigned when initially recorded. We assign goodwill to reporting units based on our integration plans and the expected synergies resulting from the acquisition. Because Caterpillar is a highly integrated company, the businesses we acquire are sometimes combined with or integrated into existing reporting units. When changes occur in the composition of our operating segments or reporting units, we reassign goodwill to the affected reporting units based on their relative fair values.
We perform our annual goodwill impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. We review goodwill for impairment utilizing either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the quantitative goodwill impairment test, we compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, we do not consider the goodwill impaired. If the carrying value is higher than the fair value, we would recognize the difference as an impairment loss. See Note 10 for further details.
I. Estimates in financial statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts. The more significant estimates include: residual values for leased assets; fair values for goodwill impairment tests; warranty liability and reserves for product liability and insurance losses, postretirement benefits, post-sale discounts, credit losses and income taxes.
J. New accounting guidance
A. Adoption of new accounting standards
We consider the applicability and impact of all ASUs. We adopted the following ASUs effective January 1, 2022, none of which had a material impact on our financial statements:
| | | | | |
| ASU | Description |
| 2020-06 | Debt with conversion and other options and derivatives and hedging |
| 2021-05 | Lessor - Variable lease payments |
| 2021-10 | Government assistance |
B. Accounting standards issued but not yet adopted
We consider the applicability and impact of all ASUs. We assessed ASUs and determined that they either were not applicable or were not expected to have a material impact on our financial statements.
2. Sales and revenue recognition
A. Sales of Machinery, Energy & Transportation
We recognize sales of ME&T when all the following criteria are satisfied: (i) a contract with an independently owned and operated dealer or an end user exists which has commercial substance; (ii) it is probable we will collect the amount charged to the dealer or end user; and (iii) we have completed our performance obligation whereby the dealer or end user has obtained control of the product. A contract with commercial substance exists once we receive and accept a purchase order under a dealer sales agreement, or once we enter into a contract with an end user. If collectibility is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Control of our products typically transfers when title and risk of ownership of the product has transferred to the dealer or end user. Typically, where product is produced and sold in the same country, title and risk of ownership transfer when we ship the product. Products that are exported from a country for sale typically transfer title and risk of ownership at the border of the destination country.
Our remanufacturing operations are primarily focused on the remanufacture of Cat engines and components and rail related products. In this business, we inspect, clean and remanufacture used engines and related components (core). In connection with the sale of our remanufactured product to dealers, we collect a deposit that is repaid if the dealer returns an acceptable core within a specified time period. Caterpillar owns and has title to the cores when they are returned from dealers. The rebuilt engine or component (the core plus any new content) is then sold as a remanufactured product to dealers and end users. We recognize revenue pursuant to the same transfer of control criteria as ME&T sales noted above. At the time of sale, we recognize the deposit in Other current liabilities in Statement 3, and we recognize the core to be returned as an asset in Prepaid expenses and other current assets in Statement 3 at the estimated replacement cost (based on historical experience with usable cores). Upon receipt of an acceptable core, we repay the deposit and relieve the liability. We then transfer the returned core asset into inventory. In the event that the deposit is forfeited (i.e., upon failure by the dealer to return an acceptable core in the specified time period), we recognize the core deposit and the cost of the core in Sales and Cost of goods sold, respectively.
We provide discounts to dealers through merchandising programs. We have numerous programs that are designed to promote the sale of our products. The most common dealer programs provide a discount when the dealer sells a product to a targeted end user. Generally, we estimate the cost of these discounts for each product by model by geographic region based on historical experience and known changes in merchandising programs. We report the cost of these discounts as a reduction to the transaction price when we recognize the product sale. We accrue a corresponding post-sale discount reserve in Statement 3, which represents discounts we expect to pay on units sold. If discounts paid differ from those estimated, we report the difference as a change in the transaction price.
Except for replacement parts, no right of return exists on the sale of our products. We estimate replacement part returns based on historical experience and recognize a parts return asset in Prepaid expenses and other current assets in Statement 3, which represents our right to recover replacement parts we expect will be returned. We also recognize a refund liability in Other current liabilities in Statement 3 for the refund we expect to pay for returned parts. If actual replacement part returns differ from those estimated, we recognize the difference in the estimated replacement part return asset and refund liability in Cost of goods sold and Sales, respectively.
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. See Note 7 for further information. We recognize trade receivables from dealers and end users in Receivables - trade and other and Long-term receivables trade and other in Statement 3. Trade receivables from dealers and end users were $7,551 million, $7,267 million and $6,310 million as of December 31, 2022, 2021 and 2020, respectively. Long-term trade receivables from dealers and end users were $506 million, $624 million and $657 million as of December 31, 2022, 2021 and 2020, respectively.
Our standard dealer invoice terms are established by marketing region. Our invoice terms for end user sales are established by the responsible business unit. Payments from dealers are due shortly after the time of sale. When we make a sale to a dealer, the dealer is responsible for payment even if the product is not sold to an end user. Dealers and end users must make payment within the established invoice terms to avoid potential interest costs. Interest at or above prevailing market rates may be charged on any past due balance, and generally our practice is to not forgive this interest. Our allowance for credit losses is not significant for ME&T receivables.
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 Statement 3. Contract assets were $247 million, $187 million and $187 million as of December 31, 2022, 2021 and 2020, respectively.
We invoice in advance of recognizing the sale of certain products. We recognize advanced customer payments as a contract liability in Customer advances and Other liabilities in Statement 3. Contract liabilities were $2,314 million, $1,557 million and $1,526 million as of December 31, 2022, 2021 and 2020, respectively. We reduce the contract liability when we recognize revenue. During 2022, we recognized $902 million of revenue that was recorded as a contract liability at the beginning of 2022. During 2021, we recognized $903 million of revenue that was recorded as a contract liability at the beginning of 2021.
We have elected the practical expedient to not adjust the amount of revenue to be recognized under a contract with a dealer or end user for the effects of time value of money when the timing difference between receipt of payment and recognition of revenue is less than one year.
As of December 31, 2022, we have entered into contracts with dealers and end users for which sales have not been recognized as we have not satisfied our performance obligations and transferred control of the products. The dollar amount of unsatisfied performance obligations for contracts with an original duration greater than one year is $12.2 billion, with about one-half of the amount expected to be completed and revenue recognized in the twelve months following December 31, 2022. We have elected the practical expedient to not 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.
We exclude sales and other related taxes from the transaction price. We account for shipping and handling costs associated with outbound freight after control over a product has transferred as a fulfillment cost which is included in Cost of goods sold.
We provide a standard manufacturer’s warranty of our products at no additional cost. At the time we recognize a sale, we record estimated future warranty costs. See Note 21 for further discussion of our product warranty liabilities.
See Note 23 for further disaggregated sales and revenues information.
B. Revenues of Financial Products
Revenues of Financial Products are generated primarily from finance revenue on finance receivables and rental payments on operating leases. We record finance revenue over the life of the related finance receivables using the interest method, including the accretion of certain direct origination costs that are deferred. We recognize revenue from rental payments received on operating leases on a straight-line basis over the term of the lease.
We suspend recognition of finance revenue and operating lease revenue and place the account on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due). We resume recognition of revenue, and recognize previously suspended income, when we consider collection of remaining amounts to be probable. We write off interest earned but uncollected prior to the receivables being placed on non-accrual status through Provision for credit losses when, in the judgment of management, we consider it to be uncollectible. See Note 7 for more information.
3. Stock-based compensation
Our stock-based compensation plans primarily provide for the granting of stock options, restricted stock units (RSUs) and performance-based restricted stock units (PRSUs) to Officers and other key employees, as well as non-employee Directors. Stock options permit a holder to buy Caterpillar stock at the stock’s price when the option was granted. RSUs are agreements to issue shares of Caterpillar stock at the time of vesting. PRSUs are similar to RSUs and include performance conditions in the vesting terms of the award.
Our long-standing practices and policies specify that the Compensation Committee (the Committee) of the Board of Directors approve all stock-based compensation awards. The award approval process specifies the grant date, value and terms of the award. We consistently apply the same terms and conditions to all employee grants, including Officers. The Committee approves all individual Officer grants. We determine the number of stock-based compensation award units included in an individual’s award based on the methodology approved by the Committee. The exercise price methodology approved by the Committee is the closing price of the Company stock on the date of the grant. In June of 2014, shareholders approved the Caterpillar Inc. 2014 Long-Term Incentive Plan (the Plan) under which all new stock-based compensation awards are granted. In June of 2017, shareholders amended and restated the Plan. The Plan initially provided that up to 38,800,000 Common Shares would be reserved for future issuance under the Plan, subject to adjustment in certain events. Subsequent to the shareholder approval of the amendment and restatement of the Plan, an additional 36,000,000 Common Shares became available for all awards under the Plan.
Common stock issued from Treasury stock under the plans totaled 2,340,887 for 2022, 3,571,503 for 2021 and 5,317,243 for 2020. The total number of shares authorized for equity awards under the amended and restated Caterpillar Inc. 2014 Long-Term Incentive Plan is 74,800,000, of which 31,334,705 shares remained available for issuance as of December 31, 2022.
Stock option and RSU awards generally vest according to a three-year graded vesting schedule. One-third of the award will become vested on the first anniversary of the grant date, one-third of the award will become vested on the second anniversary of the grant date and one-third of the award will become vested on the third anniversary of the grant date. PRSU awards generally have a three-year performance period and cliff vest at the end of the period based upon achievement of performance targets established at the time of grant.
Upon separation from service, if the participant is 55 years of age or older with more than five years of service, the participant meets the criteria for a “Long Service Separation.” Award terms for stock option and RSU grants allow for continued vesting as of each vesting date specified in the award document for employees who meet the criteria for a “Long Service Separation” and fulfill a requisite service period of six months. We recognize compensation expense for eligible employees for the grants over the period from the grant date to the end date of the six-month requisite service period. For employees who become eligible for a “Long Service Separation” subsequent to the end date of the six-month requisite service period and prior to the completion of the vesting period, we recognized compensation expense over the period from the grant date to the date eligibility is achieved.
Award terms for PRSU grants allow for continued vesting upon achievement of the performance target specified in the award document for employees who meet the criteria for a “Long Service Separation” and fulfill a requisite service period of six months. We recognize compensation expense for the PRSU grants with respect to employees who have met the criteria for a “Long Service Separation” over the period from the grant date to the end of the six-month requisite service period. For employees who become eligible for a “Long Service Separation” subsequent to the end date of the six-month requisite service period and prior to the completion of the vesting period, we recognize compensation expense over the period from the grant date to the date eligibility is achieved.
At grant, option awards have a term life of ten years. For awards granted prior to 2016, if the “Long Service Separation” criteria are met, the vested options have a life that is the lesser of ten years from the original grant date or five years from the separation date. For awards granted beginning in 2016, the vested options have a life equal to ten years from the original grant date.
Accounting guidance on share-based payments requires companies to estimate the fair value of options on the date of grant using an option-pricing model. The fair value of our option grants was estimated using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model considers a range of assumptions related to volatility, risk-free interest rate and historical employee behavior. Expected volatility was based on historical Caterpillar stock price movement and current implied volatilities from traded options on Caterpillar stock. The risk-free interest rate was based on U.S. Treasury security yields at the time of grant. The weighted-average dividend yield was based on historical information. We determine the expected life from the actual historical employee exercise behavior. The following table provides the assumptions used in determining the fair value of the Option awards for the years ended December 31, 2022, 2021 and 2020, respectively.
| | | | | | | | | | | | | | | | | |
| | | | | |
| | Grant Year |
| | 2022 | | 2021 | | 2020 |
| Weighted-average dividend yield | 2.6 | % | | 2.6 | % | | 2.5 | % |
| Weighted-average volatility | 31.7 | % | | 32.9 | % | | 25.7 | % |
| Range of volatilities | 25.3%-36.8% | | 29.2%-45.8% | | 24.5%- 29.7% |
| Range of risk-free interest rates | 1.03%-2% | | 0.06%-1.41% | | 1.21%-1.39% |
| Weighted-average expected lives | 8 years | | 8 years | | 8 years |
| | | | | |
Beginning with the 2018 grant, we credit RSU and PRSU awards with dividend equivalent units on each date that we pay a cash dividend to holders of Common stock. We determine the fair value of the RSU and PRSU awards granted in 2022, 2021 and 2020 as the closing stock price on the date of the grant.
Please refer to Tables I and II below for additional information on our stock-based compensation awards.
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| TABLE I — Financial Information Related to Stock-based Compensation |
| | | | | |
| | Stock options | | RSUs | | PRSUs |
| | Shares | | Weighted-
Average
Exercise
Price | | Shares | | Weighted-
Average
Grant Date Fair Value | | Shares | | Weighted-
Average
Grant Date Fair Value |
| | | | | | | | | | | |
Outstanding at January 1, 2022 | 7,722,420 | | | $ | 127.52 | | | 1,100,181 | | | $ | 166.50 | | | 645,373 | | | $ | 165.74 | |
| Granted to officers and key employees | 1,029,202 | | | $ | 196.70 | | | 507,284 | | | $ | 196.06 | | | 277,192 | | | $ | 195.17 | |
| Exercised | (1,888,557) | | | $ | 108.40 | | | — | | | $ | — | | | — | | | $ | — | |
| Vested | — | | | $ | — | | | (581,132) | | | $ | 154.77 | | | (375,773) | | | $ | 127.60 | |
| Forfeited / expired | (61,739) | | | $ | 182.24 | | | (35,530) | | | $ | 183.91 | | | (22,052) | | | $ | 170.75 | |
Outstanding at December 31, 2022 | 6,801,326 | | | $ | 142.85 | | | 990,803 | | | $ | 187.88 | | | 524,740 | | | $ | 208.39 | |
Exercisable at December 31, 2022 | 4,481,546 | | | $ | 120.77 | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options outstanding and exercisable as of December 31, 2022: |
| | | | |
| | | Outstanding | | Exercisable |
| Exercise Prices | | Shares Outstanding at 12/31/2022 | | Weighted-
Average
Remaining
Contractual Life (Years) | | Weighted-
Average
Exercise Price | | Aggregate Intrinsic Value 1 | | Shares Outstanding at 12/31/2022 | | Weighted-
Average
Remaining
Contractual Life (Years) | | Weighted-
Average
Exercise Price | | Aggregate Intrinsic Value 1 |
$74.77-$88.51 | | 1,254,848 | | | 2.75 | | $ | 78.54 | | | $ | 202 | | | 1,254,848 | | | 2.75 | | $ | 78.54 | | | $ | 202 | |
$89.75-$110.09 | | 812,203 | | | 3.47 | | $ | 95.50 | | | 117 | | | 811,698 | | | 3.47 | | $ | 95.50 | | | 117 | |
$127.60 | | 1,167,848 | | | 7.27 | | $ | 127.72 | | | 131 | | | 555,435 | | | 7.27 | | $ | 127.60 | | | 62 | |
$138.35-$151.12 | | 1,517,053 | | | 5.78 | | $ | 144.36 | | | 144 | | | 1,517,053 | | | 5.78 | | $ | 144.36 | | | 144 | |
$196.70-$219.76 | | 2,049,374 | | | 8.79 | | $ | 208.49 | | | 64 | | | 342,512 | | | 8.28 | | $ | 219.76 | | | 7 | |
| | | 6,801,326 | | | | | $ | 142.85 | | | $ | 658 | | | 4,481,546 | | | | | $ | 120.77 | | | $ | 532 | |
1 The difference between a stock award’s exercise price and the underlying stock’s closing market price at December 31, 2022, for awards with market price greater than the exercise price. Amounts are in millions of dollars.
The computations of weighted-average exercise prices and aggregate intrinsic values are not applicable to RSUs or PRSUs since these awards represent an agreement to issue shares of stock at the time of vesting. At December 31, 2022, there were 990,803 outstanding RSUs with a weighted average remaining contractual life of 1.4 years and 524,740 outstanding PRSUs with a weighted-average remaining contractual life of 1.5 years.
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| TABLE II— Additional Stock-based Award Information |
| | | | | | |
| (Dollars in millions except per share data) | | 2022 | | 2021 | | 2020 |
| Stock options activity: | | | | | | |
| Weighted-average fair value per share of stock awards granted | | $ | 51.69 | | | $ | 56.30 | | | $ | 25.98 | |
| Intrinsic value of stock awards exercised | | $ | 217 | | | $ | 374 | | | $ | 386 | |
Fair value of stock awards vested 1 | | $ | 56 | | | $ | 59 | | | $ | 64 | |
| Cash received from stock awards exercised | | $ | 123 | | | $ | 212 | | | $ | 282 | |
| | | | | | |
| RSUs activity: | | | | | | |
| Weighted-average fair value per share of stock awards granted | | $ | 196.06 | | | $ | 216.50 | | | $ | 128.07 | |
Fair value of stock awards vested 2 | | $ | 105 | | | $ | 136 | | | $ | 87 | |
| | | | | | |
| PRSUs activity: | | | | | | |
| Weighted-average fair value per share of stock awards granted | | $ | 195.17 | | | $ | 215.45 | | | $ | 128.41 | |
Fair value of stock awards vested 2 | | $ | 90 | | | $ | 74 | | | $ | 59 | |
1 Based on the grant date fair value.
2 Based on the underlying stock’s closing market price on the vesting date.
In accordance with guidance on share-based payments, stock-based compensation expense is based on the grant date fair value and is classified within Cost of goods sold, Selling, general and administrative expenses and Research and development expenses corresponding to the same line item as the cash compensation paid to respective employees, officers and non-employee directors. We recognize stock-based compensation expense on a straight-line basis over the requisite service period for awards with terms that specify cliff or graded vesting and contain only service conditions. Stock-based compensation expense for PRSUs is based on the probable number of shares expected to vest and is recognized primarily on a straight-line basis.
Before tax, stock-based compensation expense for 2022, 2021 and 2020 was $193 million, $200 million and $202 million, respectively, with a corresponding income tax benefit of $32 million, $23 million and $34 million, respectively.
The amount of stock-based compensation expense capitalized for the years ended December 31, 2022, 2021 and 2020 did not have a significant impact on our financial statements.
At December 31, 2022, there was $140 million of total unrecognized compensation cost from stock-based compensation arrangements granted under the plans, which is related to non-vested stock-based awards. We expect to recognize the compensation expense over a weighted-average period of approximately 1.7 years.
We currently use shares in Treasury stock to satisfy share award exercises.
The cash tax benefits realized from stock awards exercised for 2022, 2021 and 2020 were $63 million, $102 million and $108 million, respectively. We use the direct only method and tax law ordering approach to calculate the tax effects of stock-based compensation.
4. Derivative financial instruments and risk management
Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward, option and cross currency contracts, interest rate contracts and commodity forward and option contracts. Our derivative activities are subject to the management, direction and control of our senior financial officers. We present at least annually to the Audit Committee of the Board of Directors on our risk management practices, including our use of financial derivative instruments.
We recognize all derivatives at their fair value in Statement 3. 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, in Statement 3 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 Statement 5. We include cash flows from undesignated derivative financial instruments in the investing category on Statement 5.
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 in Statement 3 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.
A.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 December 31, 2022, the maximum term of these outstanding contracts at inception was approximately 60 months.
We generally designate as cash flow hedges at inception of the contract any 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.
B.Interest rate risk
Interest rate movements create a degree of risk by affecting the amount of our interest payments and the value of our fixed-rate debt. Our practice is to use interest rate contracts to manage our exposure to interest rate changes.
Our ME&T operations generally use fixed-rate debt as a source of funding. Our objective is to minimize the cost of borrowed funds. Our policy allows us to enter into fixed-to-floating interest rate contracts and forward rate agreements to meet that objective. We designate fixed-to-floating interest rate contracts as fair value hedges at inception of the contract, and we designate certain forward rate agreements as cash flow hedges at inception of the contract.
Financial Products operations has a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate and duration) of Cat Financial’s debt portfolio with the interest rate profile of our receivables portfolio within predetermined ranges on an ongoing basis. In connection with that policy, we use interest rate derivative instruments to modify the debt structure to match assets within the receivables portfolio. This matched funding reduces the volatility of margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move.
Our policy allows us to use fixed-to-floating, floating-to-fixed and floating-to-floating interest rate contracts to meet the match-funding objective. We designate fixed-to-floating interest rate contracts as fair value hedges to protect debt against changes in fair value due to changes in the benchmark interest rate. We designate most floating-to-fixed interest rate contracts as cash flow hedges to protect against the variability of cash flows due to changes in the benchmark interest rate.
We have, at certain times, liquidated fixed-to-floating and floating-to-fixed interest rate contracts at both ME&T and Financial Products. We amortize the gains or losses associated with these contracts at the time of liquidation into earnings over the original term of the previously designated hedged item.
C.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 Statement 3 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (Millions of dollars) | Fair Value |
| December 31, 2022 | | December 31, 2021 |
| Assets1 | | Liabilities2 | | Assets1 | | Liabilities2 |
| Designated derivatives | | | | | | | |
| Foreign exchange contracts | $ | 462 | | | $ | (152) | | | $ | 228 | | | $ | (64) | |
| Interest rate contracts | 93 | | | (288) | | | 38 | | | (15) | |
| Total | $ | 555 | | | $ | (440) | | | $ | 266 | | | $ | (79) | |
| | | | | | | |
| Undesignated derivatives | | | | | | | |
| Foreign exchange contracts | $ | 65 | | | $ | (47) | | | $ | 46 | | | $ | (42) | |
| Commodity contracts | 24 | | | (9) | | | 30 | | | (9) | |
| Total | $ | 89 | | | $ | (56) | | | $ | 76 | | | $ | (51) | |
| | | | | | | |
1 Assets are classified in Statement 3 as Receivables - trade and other or Long-term receivables - trade and other. |
2 Liabilities are classified in Statement 3 as Accrued expenses or Other liabilities. |
The total notional amounts of the derivative instruments as of December 31, 2022 and 2021 were $24.3 billion and $18.9 billion, respectively. The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties. We calculate the amounts exchanged by the parties by referencing the notional amounts and by other terms of the derivatives, such as foreign currency exchange rates, interest rates or commodity prices.
Gains (Losses) on derivative instruments are categorized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Millions of dollars) | Years ended December 31 |
| Fair Value / Undesignated Hedges | | Cash Flow Hedges |
| Gains (Losses) Recognized in Statement 11 | | Gains (Losses) Recognized in AOCI | | Gains (Losses) Reclassified from AOCI2 |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Foreign exchange contracts | $ | (57) | | | $ | 104 | | | $ | (74) | | | $ | 264 | | | $ | 169 | | | $ | (82) | | | $ | 329 | | | $ | 227 | | | $ | (185) | |
| Interest rate contracts | (6) | | | 24 | | | 15 | | | 111 | | | 26 | | | (34) | | | 11 | | | (31) | | | (56) | |
| Commodity contracts | 51 | | | 56 | | | 11 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | (12) | | | $ | 184 | | | $ | (48) | | | $ | 375 | | | $ | 195 | | | $ | (116) | | | $ | 340 | | | $ | 196 | | | $ | (241) | |
| | | | | | | | | | | | | | | | | |
1 Foreign exchange contract and Commodity contract gains (losses) are included in Other income (expense). Interest rate contract gains (losses) are primarily included in Interest expense of Financial Products. |
2 Foreign exchange contract gains (losses) are primarily included in Other income (expense) in Statement 1. Interest rate contract gains (losses) are primarily included in Interest expense of Financial Products in Statement 1. |
The following amounts were recorded in Statement 3 related to cumulative basis adjustments for fair value hedges:
| | | | | | | | | | | | | | | | | | | | | | | |
| (Millions of dollars) | Years ended December 31 |
| Carrying Value of the Hedged Liabilities | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Value of the Hedged Liabilities |
| 2022 | | 2021 | | 2022 | | 2021 |
| Long-term debt due within one year | $ | — | | | $ | 755 | | | $ | — | | | $ | 5 | |
| Long-term debt due after one year | 4,173 | | | 1,304 | | | (280) | | | (2) | |
| Total | $ | 4,173 | | | $ | 2,059 | | | $ | (280) | | | $ | 3 | |
| | | | | | | |
We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within ME&T and Financial Products that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements 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 December 31, 2022 and 2021, no cash collateral was received or pledged under the master netting agreements.
The effect of the net settlement provisions of the master netting agreements on our derivative balances upon an event of default or termination event was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (Millions of dollars) | December 31, 2022 | | December 31, 2021 |
| Assets | | Liabilities | | Assets | | Liabilities |
| Gross Amounts Recognized | $ | 644 | | | $ | (496) | | | $ | 342 | | | $ | (130) | |
| Financial Instruments Not Offset | (233) | | | 233 | | | (114) | | | 114 | |
| Cash Collateral Received | — | | | — | | | — | | | — | |
| Net Amount | $ | 411 | | | $ | (263) | | | $ | 228 | | | $ | (16) | |
| | | | | | | |
5. Other income (expense)
| | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | |
| (Millions of dollars) | | 2022 | | 2021 | | 2020 | |
| Investment and interest income | | $ | 167 | | | $ | 80 | | | $ | 112 | | |
Foreign exchange gains (losses) 1 | | 104 | | | 110 | | | (193) | | |
| License fee income | | 142 | | | 123 | | | 104 | | |
| Gains (losses) on securities | | (56) | | | 134 | | | 37 | | |
Net periodic pension and OPEB income (cost), excluding service cost | | 868 | |
| 1,279 | | | (90) | | |
| Miscellaneous income (loss) | | 66 | | | 88 | | | (14) | | |
| Total | | $ | 1,291 | | | $ | 1,814 | | | $ | (44) | | |
| | | | | | | |
1 Includes gains (losses) from foreign exchange derivative contracts. See Note 4 for further details. | |
| | | | | | | |
| | | | | | | |
| |
6. Income taxes
Reconciliation of the U.S. federal statutory rate to effective rate:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| (Millions of dollars) | | 2022 | | 2021 | | 2020 |
| Taxes at U.S. statutory rate | | $ | 1,838 | | | 21.0 | % | | $ | 1,723 | | | 21.0 | % | | $ | 839 | | | 21.0 | % |
| (Decreases) increases resulting from: | | | | | | | | | | | | |
| Non-U.S. subsidiaries taxed at other than the U.S. rate | | 237 | | | 2.7 | % | | 211 | | | 2.6 | % | | 285 | | | 7.1 | % |
State and local taxes, net of federal 1 | | 89 | | | 1.0 | % | | 28 | | | 0.3 | % | | 32 | | | 0.8 | % |
Interest and penalties, net of tax 1 | | 44 | | | 0.5 | % | | 45 | | | 0.6 | % | | 28 | | | 0.7 | % |
| U.S. tax incentives | | (166) | | | (1.9) | % | | (123) | | | (1.5) | % | | (52) | | | (1.3) | % |
| | | | | | | | | | | | |
| Net excess tax benefits from stock-based compensation | | (33) | | | (0.4) | % | | (63) | | | (0.8) | % | | (49) | | | (1.2) | % |
| Prior year tax and interest adjustments | | (90) | | | (1.0) | % | | (36) | | | (0.4) | % | | (80) | | | (2.0) | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Nondeductible goodwill | | 159 | | | 1.8 | % | | — | | | — | % | | — | | | — | % |
| Other—net | | (11) | | | (0.1) | % | | (43) | | | (0.6) | % | | 3 | | | 0.1 | % |
| Provision (benefit) for income taxes | | $ | 2,067 | | | 23.6 | % | | $ | 1,742 | | | 21.2 | % | | $ | 1,006 | | | 25.2 | % |
| | | | | | | | | | | | |
1 Excludes amounts included in other line items. | | |
|
The negative impact on the effective rate from the portion of the goodwill impairment not deductible for tax purposes is reported in the effective tax rate reconciliation line item above labeled "Nondeductible goodwill." Included in the line item above labeled “Non-U.S. subsidiaries taxed at other than the U.S. rate” are the effects of local and U.S. taxes related to earnings of non-U.S. subsidiaries, changes in the amount of unrecognized tax benefits associated with these earnings, losses at non-U.S. subsidiaries without local tax benefits due to valuation allowances and other permanent differences between tax and U.S. GAAP results.
Distributions of profits from non-U.S. subsidiaries are not expected to cause a significant incremental U.S. tax impact in the future. However, these distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions. Undistributed profits of non-U.S. subsidiaries of approximately $16 billion are considered indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested profits is not feasible primarily due to our legal entity structure and the complexity of U.S. and local tax laws.
| | | | | | | | | | | | | | | | | | | | |
| The components of profit (loss) before taxes were: | | | | | | |
| | | Years ended December 31, |
| (Millions of dollars) | | 2022 | | 2021 | | 2020 |
| U.S. | | $ | 2,962 | | | $ | 2,740 | | | $ | 590 | |
| Non-U.S. | | 5,790 | | | 5,464 | | | 3,405 | |
| | | $ | 8,752 | | | $ | 8,204 | | | $ | 3,995 | |
| | | | | | |
Profit before taxes, as shown above, is based on the location of the entity to which such earnings are attributable. Where an entity’s earnings are subject to taxation, however, may not correlate solely to where an entity is located. Thus, the income tax provision shown below as U.S. or non-U.S. may not correspond to the earnings shown above.
| | | | | | | | | | | | | | | | | | | | |
| The components of the provision (benefit) for income taxes were: | | | | | | |
| | | Years ended December 31, |
| (Millions of dollars) | | 2022 | | 2021 | | 2020 |
| Current tax provision (benefit): | | | | | | |
U.S.1 | | $ | 1,055 | | | $ | 766 | | | $ | 18 | |
| Non-U.S. | | 1,255 | | | 1,283 | | | 1,031 | |
| State (U.S.) | | 134 | | | 76 | | | 31 | |
| | | 2,444 | | | 2,125 | | | 1,080 | |
| | | | | | |
| Deferred tax provision (benefit): | | | | | | |
U.S.1 | | (404) | | | (387) | | | (44) | |
| Non-U.S. | | 50 | | | 54 | | | (34) | |
| State (U.S.) | | (23) | | | (50) | | | 4 | |
| | | (377) | | | (383) | | | (74) | |
| Total provision (benefit) for income taxes | | $ | 2,067 | | | $ | 1,742 | | | $ | 1,006 | |
1 Includes U.S. taxes related to non-U.S. earnings. We account for U.S. taxes on global intangible low-taxed income as a period cost. |
We paid net income tax and related interest of $3,076 million, $1,759 million and $1,311 million in 2022, 2021 and 2020, respectively.
Accounting for income taxes under U.S. GAAP requires that individual tax-paying entities of the company offset all deferred tax liabilities and assets within each particular tax jurisdiction and present them as a noncurrent deferred tax liability or asset in the Consolidated Financial Position. Amounts in different tax jurisdictions cannot be offset against each other. The amount of deferred income taxes at December 31, included on the following lines in Statement 3, were as follows:
| | | | | | | | | | | | | | | | |
| | | December 31, |
| (Millions of dollars) | | 2022 | | 2021 | | |
| Assets: | | | | | | |
| | | | | | |
| Noncurrent deferred and refundable income taxes | | $ | 2,047 | | | $ | 1,669 | | | |
| | | | | | |
| Liabilities: | | | | | | |
| | | | | | |
| Other liabilities | | 471 | | | 412 | | | |
| Deferred income taxes—net | | $ | 1,576 | | | $ | 1,257 | | | |
| | | | | | |
| | | | | | | | | | | | | | |
| The components of deferred tax assets and liabilities were: | | | | |
| | | December 31, |
| (Millions of dollars) | | 2022 | | 2021 |
| Deferred income tax assets: | | | | |
| Tax carryforwards | | $ | 1,349 | | | $ | 1,380 | |
| Research expenditures | | 949 | | | 415 | |
| Postemployment benefits | | 728 | | | 959 | |
| Employee compensation and benefits | | 459 | | | 464 | |
| Warranty reserves | | 282 | | | 266 | |
| Post sale discounts | | 159 | | | 143 | |
| Inventory valuation | | 147 | | | 40 | |
| Lease obligations | | 144 | | | 159 | |
| Intercompany prepayments | | 121 | | | 280 | |
| Allowance for credit losses | | 113 | | | 106 | |
| | | | |
| | | | |
| Other—net | | 255 | | | 268 | |
| | | 4,706 | | | 4,480 | |
| | | | |
| Deferred income tax liabilities: | | | | |
| Capital and intangible assets, including lease basis differences | | (1,401) | | | (1,530) | |
| Other outside basis differences | | (264) | | | (264) | |
| Translation | | (219) | | | (188) | |
| Undistributed profits of non-U.S. subsidiaries | | (125) | | | (101) | |
| Bond discount | | (107) | | | (112) | |
| | | (2,116) | | | (2,195) | |
| Valuation allowance for deferred tax assets | | (1,014) | | | (1,028) | |
| Deferred income taxes—net | | $ | 1,576 | | | $ | 1,257 | |
| | | | |
At December 31, 2022, approximately $690 million of U.S. state tax net operating losses and $110 million of U.S. state tax credit carryforwards were available. These carryforwards primarily expire over the next fifteen years, with some having an unlimited carryforward period.
At December 31, 2022, approximately $730 million of capital losses and $60 million of U.S. foreign tax credits were available to carryforward on the U.S. federal tax return. These losses will expire in 2027, while the credits have a ten-year carryforward period and begin to expire in 2029.
At December 31, 2022, net operating loss and interest carryforwards in various non-U.S. taxing jurisdictions were approximately $4,517 million. Of these, $996 million expire between 2023 and 2043. The remaining carryforwards do not expire.
At December 31, 2022, non-U.S. entities that have not yet demonstrated consistent and/or sustainable profitability to support the realization of net deferred tax assets have recorded valuation allowances of $745 million, including certain entities in Luxembourg.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, follows.
| | | | | | | | | | | | | | | | | | | | |
Reconciliation of unrecognized tax benefits: 1 | | | | | | |
| | | Years ended December 31, |
| (Millions of dollars) | | 2022 | | 2021 | | 2020 |
| Beginning balance | | $ | 1,886 | | | $ | 1,759 | | | $ | 1,778 | |
| | | | | | |
| Additions for tax positions related to current year | | 72 | | | 141 | | | 44 | |
| Additions for tax positions related to prior years | | 91 | | | 43 | | | 46 | |
| Reductions for tax positions related to prior years | | (66) | | | (30) | | | (12) | |
Reductions for settlements 2 | | (840) | | | (24) | | | (94) | |
| Reductions for expiration of statute of limitations | | (3) | | | (3) | | | (3) | |
| | | | | | |
| Ending balance | | $ | 1,140 | | | $ | 1,886 | | | $ | 1,759 | |
| | | | | | |
| Amount that, if recognized, would impact the effective tax rate | | $ | 874 | | | $ | 1,688 | | | $ | 1,657 | |
1Foreign currency impacts are included within each line as applicable.
2Includes cash payment or other reduction of assets to settle liability.
We classify interest and penalties on income taxes as a component of the provision for income taxes. We recognized a net provision for interest and penalties of $49 million, $54 million and $38 million during the years ended December 31, 2022, 2021 and 2020, respectively. The total amount of interest and penalties accrued was $95 million and $297 million as of December 31, 2022 and 2021, respectively.
On September 8, 2022, the company reached a settlement with the U.S. Internal Revenue Service (IRS) that resolves all issues for tax years 2007 through 2016, without any penalties. The company's settlement includes, among other issues, the resolution of disputed tax treatment of profits earned by Caterpillar SARL (CSARL) from certain parts transactions. We vigorously contested the IRS's application of the "substance-over-form" or "assignment-of-income" judicial doctrines and its proposed increases to tax and imposition of accuracy related penalties. The settlement does not include any increases to tax in the United States based on those judicial doctrines and does not include any penalties. The final tax assessed by the IRS for all issues under the settlement was $490 million for the ten-year period. This amount was primarily paid in 2022 along with associated interest of $250 million. The settlement was within the total amount of gross unrecognized tax benefits for uncertain tax positions and enables us to avoid the costs and burdens of further disputes with the IRS. As a result of the settlement, we recorded a tax benefit of $41 million in 2022 to reflect changes in estimates of prior years' taxes and related interest, net of tax.
We are subject to the continuous examination of our U.S. federal income tax returns by the IRS, and tax years 2017 to 2019 are currently under examination. In our major non-U.S. jurisdictions including Australia, Brazil, China, Germany, India, Japan, Mexico, Switzerland, Singapore and the U.K., tax years are typically subject to examination for three to ten years. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible change in unrecognized tax benefits in the next 12 months.
7. Cat Financial Financing Activities
A.Wholesale inventory receivables
Wholesale inventory receivables are receivables of Cat Financial that arise when Cat Financial provides financing for a dealer’s purchase of inventory and were $1,102 million and $1,098 million, at December 31, 2022 and 2021, respectively. We include these receivables in Receivables—trade and other and Long-term receivables—trade and other in Statement 3.
| | | | | | | | | | | | | | | | | | | | | | |
| Contractual maturities of outstanding wholesale inventory receivables: |
| (Millions of dollars) | | December 31, 2022 |
| Amounts Due In | | Wholesale
Loans | | Wholesale
Leases | | | | Total |
| 2023 | | $ | 547 | | | $ | 44 | | | | | $ | 591 | |
| 2024 | | 166 | | | 35 | | | | | 201 | |
| 2025 | | 118 | | | 27 | | | | | 145 | |
| 2026 | | 54 | | | 12 | | | | | 66 | |
| 2027 | | 14 | | | 4 | | | | | 18 | |
| Thereafter | | 2 | | | — | | | | | 2 | |
| Total | | 901 | | | 122 | | | | | 1,023 | |
Guaranteed residual value 1 | | 57 | | | 22 | | | | | 79 | |
Unguaranteed residual value 1 | | 2 | | | 25 | | | | | 27 | |
| Less: Unearned income | | (12) | | | (15) | | | | | (27) | |
| Total | | $ | 948 | | | $ | 154 | | | | | $ | 1,102 | |
| | | | | | | | |
1 For Wholesale loans, represents residual value on failed sale leasebacks. |
| | | | | | | | |
Cat Financial’s wholesale inventory receivables generally may be repaid or refinanced without penalty prior to contractual maturity.
Please refer to Note 18 for fair value information.
B.Finance receivables
Finance receivables are receivables of Cat Financial and are reported in Statement 3 net of an allowance for credit losses.
| | | | | | | | | | | | | | | | | | | | | | |
| Contractual maturities of outstanding finance receivables: |
| (Millions of dollars) | | December 31, 2022 |
| Amounts Due In | | Retail
Loans | | Retail
Leases | | | | Total |
| 2023 | | $ | 6,317 | | | $ | 2,814 | | | | | $ | 9,131 | |
| 2024 | | 3,772 | | | 1,775 | | | | | 5,547 | |
| 2025 | | 2,671 | | | 994 | | | | | 3,665 | |
| 2026 | | 1,482 | | | 532 | | | | | 2,014 | |
| 2027 | | 533 | | | 171 | | | | | 704 | |
| Thereafter | | 116 | | | 39 | | | | | 155 | |
| Total | | 14,891 | | | 6,325 | | | | | 21,216 | |
Guaranteed residual value 1 | | 12 | | | 378 | | | | | 390 | |
Unguaranteed residual value 1 | | 2 | | | 638 | | | | | 640 | |
| Less: Unearned income | | (335) | | | (554) | | | | | (889) | |
| Total | | $ | 14,570 | | | $ | 6,787 | | | | | $ | 21,357 | |
| | | | | | | | |
1 For Retail loans, represents residual value on failed sale leasebacks. |
| | | | | | | | |
Cat Financial’s finance receivables generally may be repaid or refinanced without penalty prior to contractual maturity.
Please refer to Note 18 for fair value information.
C.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 vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. The average original term of Cat Financial's customer finance receivable portfolio was approximately 50 months with an average remaining term of approximately 27 months as of December 31, 2022.
Cat Financial typically maintains a security interest in financed equipment and requires physical damage insurance coverage on the financed equipment, both of which provide Cat Financial with certain rights and protections. If Cat Financial's collection efforts fail to bring a defaulted account current, Cat Financial generally can repossess the financed equipment, after satisfying local legal requirements, and sell it within the Caterpillar dealer network or through third-party auctions.
Cat Financial estimates the allowance for credit losses related to its customer finance receivables based on loss forecast models utilizing probabilities of default and the estimated loss given default based on past loss experience adjusted for current conditions and reasonable and supportable forecasts capturing country and industry-specific economic factors.
During the year ended December 31, 2022, 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, 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 year ended December 31, 2022.
Classes of finance receivables
Cat Financial further evaluates portfolio segments by the class of finance receivables, which is defined as a level of information (below a portfolio segment) in which the finance receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk. Cat Financial's classes, which align with management reporting for credit losses, are as follows:
•North America - Finance receivables originated in the United States and Canada.
•EAME - Finance receivables originated in Europe, Africa, the Middle East and the Commonwealth of Independent States.
•Asia/Pacific - Finance receivables originated in Australia, New Zealand, China, Japan, Southeast Asia and India.
•Mining - Finance receivables related to large mining customers worldwide.
•Latin America - Finance receivables originated in Mexico and Central and South American countries.
•Caterpillar Power Finance - Finance receivables originated worldwide related to marine vessels with Caterpillar engines and Caterpillar electrical power generation, gas compression and co-generation systems and non-Caterpillar equipment that is powered by these systems.
Receivable balances, including accrued interest, are written off against the allowance for credit losses when, in the judgment of management, they are considered uncollectible (generally upon repossession of the collateral). Generally, the amount of the write-off is determined by comparing the fair value of the collateral, less cost to sell, to the amortized cost. Subsequent recoveries, if any, are credited to the allowance for credit losses when received.
An analysis of the allowance for credit losses was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Millions of dollars) | | December 31, 2022 | | December 31, 2021 |
| | Customer | | Dealer | | Total | | Customer | | Dealer | | Total |
| Allowance for Credit Losses: | | | | | | | | | | | | |
| Beginning balance | | $ | 251 | | | $ | 82 | | | $ | 333 | | | $ | 431 | | | $ | 44 | | | $ | 475 | |
| | | | | | | | | | | | |
| Write-offs | | (108) | | | — | | | (108) | | | (256) | | | — | | | (256) | |
| Recoveries | | 62 | | | — | | | 62 | | | 51 | | | — | | | 51 | |
| Provision for credit losses | | 75 | | | (17) | | | 58 | | | 30 | | | 38 | | | 68 | |
| Other | | (3) | | | — | | | (3) | | | (5) | | | — | | | (5) | |
| Ending balance | | $ | 277 | | | $ | 65 | | | $ | 342 | | | $ | 251 | | | $ | 82 | | | $ | 333 | |
| | | | | | | | | | | | |
| Finance Receivables | | $ | 19,772 | | | $ | 1,585 | | | $ | 21,357 | | | $ | 20,135 | | | $ | 1,793 | | | $ | 21,928 | |
| | | | | | | | | | | | |
| | | | | | |
Credit quality of finance receivables
At origination, Cat Financial evaluates credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit ratings, loan-to-value ratios, probabilities of default, industry trends, macroeconomic factors and other internal metrics. On an ongoing basis, Cat Financial monitors credit quality based on past-due status as there is a meaningful correlation between the past-due status of customers and the risk of loss. In determining past-due status, Cat Financial considers the entire finance receivable past due when any installment is over 30 days past due.
Customer
The tables below summarize the aging category of Cat Financial's amortized cost of finance receivables in the Customer portfolio segment by origination year:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| (Millions of dollars) | 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 | |
| | | | | | | | | | | | | | | | | |
| Caterpillar 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 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| (Millions of dollars) | December 31, 2021 |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving
Finance
Receivables | | | | Total Finance Receivables |
| North America | | | | | | | | | | | | | | | | | |
| Current | $ | 4,792 | | | $ | 2,596 | | | $ | 1,426 | | | $ | 630 | | | $ | 182 | | | $ | 32 | | | $ | 182 | | | | | $ | 9,840 | |
| 31-60 days past due | 27 | | | 32 | | | 20 | | | 12 | | | 4 | | | 1 | | | 5 | | | | | 101 | |
| 61-90 days past due | 7 | | | 8 | | | 5 | | | 3 | | | 1 | | | 1 | | | 5 | | | | | 30 | |
| 91+ days past due | 9 | | | 17 | | | 12 | | | 13 | | | 5 | | | 4 | | | 5 | | | | | 65 | |
| | | | | | | | | | | | | | | | | |
| EAME | | | | | | | | | | | | | | | | | |
| Current | 1,499 | | | 836 | | | 577 | | | 352 | | | 140 | | | 26 | | | — | | | | | 3,430 | |
| 31-60 days past due | 5 | | | 4 | | | 3 | | | 1 | | | 1 | | | — | | | — | | | | | 14 | |
| 61-90 days past due | 3 | | | 3 | | | 3 | | | 1 | | | — | | | — | | | — | | | | | 10 | |
| 91+ days past due | 3 | | | 11 | | | 2 | | | 2 | | | — | | | 2 | | | — | | | | | 20 | |
| | | | | | | | | | | | | | | | | |
| Asia/Pacific | | | | | | | | | | | | | | | | | |
| Current | 1,271 | | | 803 | | | 307 | | | 71 | | | 16 | | | 2 | | | — | | | | | 2,470 | |
| 31-60 days past due | 10 | | | 14 | | | 10 | | | 2 | | | — | | | — | | | — | | | | | 36 | |
| 61-90 days past due | 3 | | | 7 | | | 4 | | | 1 | | | — | | | — | | | — | | | | | 15 | |
| 91+ days past due | 2 | | | 10 | | | 10 | | | 3 | | | — | | | — | | | — | | | | | 25 | |
| | | | | | | | | | | | | | | | | |
| Mining | | | | | | | | | | | | | | | | | |
| Current | 851 | | | 347 | | | 307 | | | 193 | | | 36 | | | 161 | | | 36 | | | | | 1,931 | |
| 31-60 days past due | 6 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | 6 | |
| 61-90 days past due | 1 | | | — | | | — | | | — | | | 4 | | | — | | | — | | | | | 5 | |
| 91+ days past due | — | | | 1 | | | 8 | | | 9 | | | 3 | | | 1 | | | — | | | | | 22 | |
| | | | | | | | | | | | | | | | | |
| Latin America | | | | | | | | | | | | | | | | | |
| Current | 617 | | | 299 | | | 160 | | | 70 | | | 17 | | | 18 | | | — | | | | | 1,181 | |
| 31-60 days past due | 4 | | | 7 | | | 3 | | | 3 | | | 1 | | | — | | | — | | | | | 18 | |
| 61-90 days past due | 3 | | | 3 | | | 1 | | | 1 | | | — | | | — | | | — | | | | | 8 | |
| 91+ days past due | 4 | | | 9 | | | 9 | | | 7 | | | 7 | | | 14 | | | — | | | | | 50 | |
| | | | | | | | | | | | | | | | | |
| Caterpillar Power Finance | | | | | | | | | | | | | | | | | |
| Current | 117 | | | 145 | | | 97 | | | 70 | | | 180 | | | 104 | | | 101 | | | | | 814 | |
| 31-60 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| 61-90 days past due | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
| 91+ days past due | — | | | — | | | — | | | — | | | — | | | 44 | | | — | | | | | 44 | |
| | | | | | | | | | | | | | | | | |
| Totals by Aging Category | | | | | | | | | | | | | | | | | |
| Current | 9,147 | | | 5,026 | | | 2,874 | | | 1,386 | | | 571 | | | 343 | | | 319 | | | | | 19,666 | |
| 31-60 days past due | 52 | | | 57 | | | 36 | | | 18 | | | 6 | | | 1 | | | 5 | | | | | 175 | |
| 61-90 days past due | 17 | | | 21 | | | 13 | | | 6 | | | 5 | | | 1 | | | 5 | | | | | 68 | |
| 91+ days past due | 18 | | | 48 | | | 41 | | | 34 | | | 15 | | | 65 | | | 5 | | | | | 226 | |
| Total Customer | $ | 9,234 | | | $ | 5,152 | | | $ | 2,964 | | | $ | 1,444 | | | $ | 597 | | | $ | 410 | | | $ | 334 | | | | | $ | 20,135 | |
| | | | | | | | | | | | | | | | | |
Finance receivables in the Customer portfolio segment are substantially secured by collateral, primarily in the form of Caterpillar and other 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.
Dealer
As of December 31, 2022 and 2021, Cat Financial's total amortized cost of finance receivables within the Dealer portfolio segment was current, with the exception of $58 million and $78 million, respectively, that was 91+ days past due in Latin America, all of which was originated in 2017.
Non-accrual finance receivables
Recognition of income is suspended and the finance receivable is placed on non-accrual status when management determines that collection of future income is not probable. Contracts on non-accrual status are generally more than 120 days past due or have been restructured in a troubled debt restructuring (TDR). Recognition is resumed and previously suspended income is recognized when the collection of remaining amounts is considered probable. Payments received while the finance receivable is on non-accrual status are applied to interest and principal in accordance with the contractual terms. 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | Amortized Cost | | Amortized Cost |
(Millions of dollars) | Non-accrual
With an
Allowance | | Non-accrual
Without an
Allowance | | 91+ Still
Accruing | | Non-accrual
With an
Allowance | | Non-accrual
Without an
Allowance | | 91+ Still
Accruing |
| | | | | | | | | | | |
| North America | $ | 52 | | | $ | 4 | | | $ | 11 | | | $ | 47 | | | $ | 9 | | | $ | 12 | |
| EAME | 43 | | | — | | | 10 | | | 18 | | | 1 | | | 2 | |
| Asia/Pacific | 11 | | | — | | | 7 | | | 19 | | | — | | | 7 | |
| Mining | — | | | 1 | | | — | | | 8 | | | 1 | | | 14 | |
| Latin America | 45 | | | — | | | — | | | 52 | | | 4 | | | 1 | |
| Caterpillar Power Finance | 5 | | | 11 | | | — | | | 40 | | | 11 | | | — | |
| Total | $ | 156 | | | $ | 16 | | | $ | 28 | | | $ | 184 | | | $ | 26 | | | $ | 36 | |
| | | | | | | | | | | |
There was $17 million, $12 million and $12 million of interest income recognized during the years ended December 31, 2022, 2021 and 2020, respectively, for customer finance receivables on non-accrual status.
As of December 31, 2022 and 2021, finance receivables in Cat Financial's Dealer portfolio segment on non-accrual status were $58 million and $78 million, respectively, all of which was in Latin America.
Troubled debt restructurings
A restructuring of a finance receivable constitutes a TDR when the lender grants a concession it would not otherwise consider to a borrower experiencing financial difficulties. Concessions granted may include extended contract maturities, inclusion of interest only periods, below market interest rates, payment deferrals and reduction of principal and/or accrued interest. Cat Financial individually evaluates TDR contracts and establishes an allowance based on the present value of expected future cash flows discounted at the receivable's effective interest rate, the fair value of the collateral for collateral-dependent receivables or the observable market price of the receivable.
There were no finance receivables modified as TDRs during the years ended December 31, 2022, 2021 and 2020 for the Dealer portfolio segment. Cat Financial’s finance receivables in the Customer portfolio segment modified as TDRs for the years ended December 31, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| (Millions of dollars) | Year ended December 31, 2022 | | Year ended December 31, 2021 | | Year ended December 31, 2020 |
| Pre-TDR
Amortized Cost | | Post-TDR
Amortized Cost | | Pre-TDR
Amortized Cost | | Post-TDR
Amortized Cost | | Pre-TDR
Amortized Cost | | Post-TDR
Amortized Cost |
| Customer | | | | | | | | | | | |
| North America | $ | 6 | | | $ | 6 | | | $ | 6 | | | $ | 6 | | | $ | 13 | | | $ | 13 | |
| EAME | 1 | | | 1 | | | 3 | | | 3 | | | — | | | — | |
| Asia/Pacific | — | | | — | | | 4 | | | 4 | | | 12 | | | 12 | |
| Mining | 16 | | | 16 | | | 11 | | | 5 | | | 35 | | | 35 | |
| Latin America | 22 | | | 22 | | | 12 | | | 12 | | | 45 | | | 45 | |
| Caterpillar Power Finance | 20 | | | 19 | | | 26 | | | 22 | | | 115 | | | 115 | |
| Total | $ | 65 | | | $ | 64 | | | $ | 62 | | | $ | 52 | | | $ | 220 | | | $ | 220 | |
| | | | | | | | | | | |
The Post-TDR amortized costs in the Customer portfolio segment with a payment default (defined as 91+ days past due) which had been modified within twelve months prior to the default date, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| (Millions of dollars) | | Years ended December 31, |
| Customer | | 2022 | | 2021 | | 2020 |
| North America | | $ | — | | | $ | 1 | | | $ | 8 | |
| EAME | | — | | | — | | | 10 | |
| Asia/Pacific | | — | | | 6 | | | 2 | |
| Mining | | 5 | | | — | | | 10 | |
| Latin America | | — | | | 15 | | | 1 | |
| Caterpillar Power Finance | | — | | | 7 | | | 18 | |
| Total | | $ | 5 | | | $ | 29 | | | $ | 49 | |
| | | | | | |
8. Inventories
Inventories (principally using the LIFO method) are comprised of the following:
| | | | | | | | | | | | | | |
| | | December 31, |
| (Millions of dollars) | | 2022 | | 2021 |
| Raw materials | | $ | 6,370 | | | $ | 5,528 | |
| Work-in-process | | 1,452 | | | 1,318 | |
| Finished goods | | 8,138 | | | 6,907 | |
| Supplies | | 310 | | | 285 | |
| Total inventories | | $ | 16,270 | | | $ | 14,038 | |
| | | | |
9. Property, plant and equipment
| | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, |
| (Millions of dollars) | | Useful
Lives (Years) | | 2022 | | 2021 |
| Land | | — | | $ | 622 | | | $ | 648 | |
| Buildings and land improvements | | 20-45 | | 7,016 | | | 7,113 | |
| Machinery, equipment and other | | 2-10 | | 12,282 | | | 12,868 | |
| Software | | 3-7 | | 1,556 | | | 1,697 | |
| Equipment leased to others | | 1-7 | | 5,568 | | | 5,733 | |
| Construction-in-process | | — | | 1,020 | | | 812 | |
| Total property, plant and equipment, at cost | | | | 28,064 | | | 28,871 | |
| Less: Accumulated depreciation | | | | (16,036) | | | (16,781) | |
| Property, plant and equipment–net | | | | $ | 12,028 | | | $ | 12,090 | |
| | | | | | |
10. Intangible assets and goodwill
A.Intangible assets
Intangible assets were comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2022 |
| (Millions of dollars) | | 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 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | December 31, 2021 |
| | Weighted
Amortizable
Life (Years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net |
| Customer relationships | | 15 | | $ | 2,421 | | | $ | (1,709) | | | $ | 712 | |
| Intellectual property | | 12 | | 1,472 | | | (1,192) | | | 280 | |
| Other | | 14 | | 156 | | | (106) | | | 50 | |
| Total finite-lived intangible assets | | 14 | | $ | 4,049 | | | $ | (3,007) | | | $ | 1,042 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | |
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| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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| | | | | | | | |
Finite-lived intangible assets are amortized over their estimated useful lives and tested for impairment if events or changes in circumstances indicate that the asset may be impaired.
Amortization expense related to intangible assets was $284 million, $302 million and $311 million for 2022, 2021 and 2020, respectively.
As of December 31, 2022, amortization expense related to intangible assets is expected to be:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Millions of dollars) |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| $226 | | $168 | | $159 | | $88 | | $25 | | $92 |
| | | | | | | | | | |
B.Goodwill
Our annual impairment tests completed in the fourth quarter of 2022 indicated the fair value of each reporting unit was substantially above its respective carrying value, including goodwill, with the exception of our Rail reporting unit.
The Rail reporting unit is a part of our Energy & Transportation segment. Rail’s product portfolio includes diesel-electric locomotives and other rail-related products and services. The annual impairment test completed in the fourth quarter of 2022 indicated that the fair value of Rail was below its carrying value. Accordingly, we recognized a goodwill impairment charge of $925 million, resulting in a full impairment of Rail’s goodwill balance as of October 1, 2022. There was a $36 million tax benefit associated with this impairment charge. The valuation of the Rail reporting unit was based on estimates of future cash flows, which assumed a reduced demand forecast, lower margins due to continued inflationary cost pressures, and a discount rate approximately 140 basis points higher than utilized in the prior year valuation. The reduction in the demand forecast in the fourth quarter of 2022 was primarily driven by fourth quarter commercial developments, resulting in a lower outlook for the Company’s locomotive offerings.
There were no goodwill impairments during 2021 or 2020.
The changes in carrying amount of goodwill by reportable segment for the years ended December 31, 2022 and 2021 were as follows:
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| (Millions of dollars) | | December 31, 2021 | | Acquisitions | | | | Impairment Loss | | Other Adjustments 1 | | December 31, 2022 |
| Construction Industries | | | | | | | | | | | | |
| Goodwill | | $ | 302 | | | $ | — | | | | | $ | — | | | $ | (15) | | | $ | 287 | |
| Impairments | | (22) | | | — | | | | | — | | | — | | | (22) | |
| Net goodwill | | 280 | | | — | | | | | — | | | (15) | | | 265 | |
| Resource Industries | | | | | | | | | | | | |
| Goodwill | | 4,182 | | | — | | | | | — | | | (52) | | | 4,130 | |
| Impairments | | (1,175) | | | — | | | | | — | | | — | | | (1,175) | |
| Net goodwill | | 3,007 | | | — | | | | | — | | | (52) | | | 2,955 | |
| Energy & Transportation | | | | | | | | | | | | |
| Goodwill | | 2,985 | | | 25 | | | | | — | | | (63) | | | 2,947 | |
| Impairment | | — | | | — | | | | | (925) | | | — | | | (925) | |
| Net goodwill | | 2,985 | | | 25 | | | | | (925) | | | (63) | | | 2,022 | |
All Other 2 | | | | | | | | | | | | — | |
| Goodwill | | 52 | | | — | | | | | — | | | (6) | | | 46 | |
| Impairment | | — | | | — | | | | | — | | | — | | | — | |
| Net goodwill | | 52 | | | — | | | | | — | | | (6) | | | 46 | |
| Consolidated total | | | | | | | | | | | | |
| Goodwill | | 7,521 | | | 25 | | | | | — | | | (136) | | | 7,410 | |
| Impairments | | (1,197) | | | — | | | | | (925) | | | — | | | (2,122) | |
| Net goodwill | | $ | 6,324 | | | $ | 25 | | | | | $ | (925) | | | $ | (136) | | | $ | 5,288 | |
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| | December 31, 2020 | | Acquisitions | | | | Impairment Loss | | Other Adjustments 1 | | December 31, 2021 |
| Construction Industries | | | | | | | | | | | | |
| Goodwill | | $ | 320 | | | $ | 4 | | | | | $ | — | | | $ | (22) | | | $ | 302 | |
| Impairments | | (22) | | | — | | | | | — | | | — | | | (22) | |
| Net goodwill | | 298 | | | 4 | | | | | — | | | (22) | | | 280 | |
| Resource Industries | | | | | | | | | | | | |
| Goodwill | | 4,253 | | | 22 | | | | | — | | | (93) | | | 4,182 | |
| Impairments | | (1,175) | | | — | | | | | — | | | — | | | (1,175) | |
| Net goodwill | | 3,078 | | | 22 | | | | | — | | | (93) | | | 3,007 | |
| Energy & Transportation | | | | | | | | | | | | |
| Goodwill | | 2,959 | | | 49 | | | | | — | | | (23) | | | 2,985 | |
All Other 2 | | | | | | | | | | | | |
| Goodwill | | 59 | | | — | | | | | — | | | (7) | | | 52 | |
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| Consolidated total | | | | | | | | | | | | |
| Goodwill | | 7,591 | | | 75 | | | | | — | | | (145) | | | 7,521 | |
| Impairments | | (1,197) | | | — | | | | | — | | | — | | | (1,197) | |
| Net goodwill | | $ | 6,394 | | | $ | 75 | | | | | $ | — | | | $ | (145) | | | $ | 6,324 | |
1 Other adjustments are comprised primarily of foreign currency translation. 2 Includes All Other operating segment (See Note 23). |
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11.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 Statement 3.
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 Statement 3). We include the unrealized gains and losses arising from the revaluation of the equity securities in Other income (expense) in Statement 1. 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 Statement 1.
The cost basis and fair value of available-for-sale debt securities with unrealized gains and losses included in equity (AOCI in Statement 3) were as follows:
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| Available-for-sale debt securities | | December 31, 2022 | | December 31, 2021 |
| (Millions of dollars) | | Cost
Basis | | Unrealized
Pretax Net
Gains
(Losses) | | Fair
Value | | Cost
Basis | | Unrealized
Pretax Net
Gains
(Losses) | | Fair
Value |
| Government debt securities | | | | | | | | | | | | |
| U.S. treasury bonds | | $ | 9 | | | $ | — | | | $ | 9 | | | $ | 10 | | | $ | — | | | $ | 10 | |
Other U.S. and non-U.S. government bonds | | 60 | | | (5) | | | 55 | | | 61 | | | — | | | 61 | |
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| Corporate debt securities | | | | | | | | | | | | |
| Corporate bonds and other debt securities | | 2,561 | | | (95) | | | 2,466 | | | 1,027 | | | 19 | | | 1,046 | |
| Asset-backed securities | | 187 | | | (5) | | | 182 | | | 175 | | | 1 | | | 176 | |
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Mortgage-backed debt securities | | | | | | | | | | | | |
U.S. governmental agency | | 364 | | | (31) | | | 333 | | | 319 | | | 6 | | | 325 | |
Residential | | 3 | | | (1) | | | 2 | | | 4 | | | — | | | 4 | |
Commercial | | 127 | | | (10) | | | 117 | | | 98 | | | 1 | | | 99 | |
| Total available-for-sale debt securities | | $ | 3,311 | | | $ | (147) | | | $ | 3,164 | | | $ | 1,694 | | | $ | 27 | | | $ | 1,721 | |
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| Available-for-sale debt securities in an unrealized loss position: |
| |
| | 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 | |
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| Corporate debt securities | | | | | | | | | | | |
| Corporate bonds | 1,815 | | | 46 | | | 357 | | | 50 | | | 2,172 | | | 96 | |
| Asset-backed securities | 75 | | | 2 | | | 55 | | | 3 | | | 130 | | | 5 | |
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| 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 | |
| $ | 2,203 | | | $ | 70 | | | $ | 585 | | | $ | 78 | | | $ | 2,788 | | | $ | 148 | |
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| | December 31, 2021 |
| | Less than 12 months 1 | | 12 months or more 1 | | Total |
| (Millions of dollars) | Fair Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses |
| Corporate debt securities | | | | | | | | | | | |
| Corporate bonds | $ | 270 | | | $ | 4 | | | $ | 33 | | | $ | 1 | | | $ | 303 | | | $ | 5 | |
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| Mortgage-backed debt securities | | | | | | | | | | | |
| U.S. governmental agency | 89 | | | 1 | | | 22 | | | — | | | 111 | | | 1 | |
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| Total | $ | 359 | | | $ | 5 | | | $ | 55 | | | $ | 1 | | | $ | 414 | | | $ | 6 | |
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1 Indicates the length of time that individual securities have been in a continuous unrealized loss position. |
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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 December 31, 2022.
The cost basis and fair value of available-for-sale debt securities at December 31, 2022, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.
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| | December 31, 2022 |
| (Millions of dollars) | | Cost Basis | | Fair Value |
| Due in one year or less | | $ | 844 | | | $ | 834 | |
| Due after one year through five years | | 1,642 | | | 1,568 | |
| Due after five years through ten years | | 260 | | | 241 | |
| Due after ten years | | 71 | | | 69 | |
| U.S. governmental agency mortgage-backed securities | | 364 | | | 333 | |
| Residential mortgage-backed securities | | 3 | | | 2 | |
| Commercial mortgage-backed securities | | 127 | | | 117 | |
| Total debt securities – available-for-sale | | $ | 3,311 | | | $ | 3,164 | |
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| Sales of available-for-sale debt securities: | | | | | | |
| | | Years Ended December 31, |
| (Millions of dollars) | | 2022 | | 2021 | | 2020 |
| Proceeds from the sale of available-for-sale securities | | $ | 767 | | | $ | 454 | | | $ | 290 | |
| Gross gains from the sale of available-for-sale securities | | $ | — | | | $ | 4 | | | $ | 2 | |
| Gross losses from the sale of available-for-sale securities | | $ | 5 | | | $ | — | | | $ | 1 | |
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We did not have any investments classified as held-to-maturity debt securities as of December 31, 2022. We had $964 million of investments in time deposits classified as held-to-maturity debt securities as of December 31, 2021. All these investments mature within one year and we include them in Prepaid expenses and other current assets in Statement 3. We record held-to-maturity debt securities at amortized cost, which approximates fair value.
For the years ended December 31 2022 and 2021, the net unrealized gains (losses) for equity securities held at December 31, 2022 and 2021 were $(49) million and $105 million, respectively.
12.Postemployment benefit plans
We provide defined benefit pension plans, defined contribution plans and/or other postretirement benefit plans (retirement health care and life insurance) to employees in many of our locations throughout the world. Our defined benefit pension plans provide a benefit based on years of service and/or the employee’s average earnings near retirement. Our defined contribution plans allow employees to contribute a portion of their salary to help save for retirement, and in most cases, we provide a matching contribution. The benefit obligation related to our non-U.S. defined benefit pension plans are for employees located primarily in Europe, Japan and Brazil. For other postretirement benefits (OPEB), substantially all of our benefit obligation is for employees located in the United States.
A. Obligations, assets and funded status
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| | | U.S. Pension Benefits | | Non-U.S.
Pension Benefits | | Other Postretirement
Benefits |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Weighted-average assumptions used to determine benefit obligation, end of year: | | | | | | | | | | | | |
| Discount rate | | 5.4 | % | | 2.8 | % | | 4.3 | % | | 1.8 | % | | 5.4 | % | | 2.7 | % |
Rate of compensation increase 1 | | — | % | | — | % | | 2.3 | % | | 2.0 | % | | 4.0 | % | | 4.0 | % |
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1 All U.S. pension benefits are frozen, and accordingly this assumption is no longer applicable. |
We use the assumed discount rate to discount future benefit obligations back to today’s dollars. The U.S. discount rate is based on a benefit cash flow-matching approach and represents the rate at which our benefit obligations could effectively be settled as of our measurement date, December 31. The benefit cash flow-matching approach involves analyzing Caterpillar’s projected cash flows against a high quality bond yield curve, calculated using a wide population of corporate Aa bonds available on the measurement date. We use a similar process to determine the assumed discount rate for our most significant non-U.S. plans. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase our obligation and expense.
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| | | U.S. Pension Benefits | | Non-U.S.
Pension Benefits | | Other Postretirement
Benefits |
| (Millions of dollars) | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Accumulated benefit obligation, end of year | | $ | 13,069 | | | $ | 17,895 | | | $ | 2,859 | | | $ | 4,311 | | | | | |
| Change in benefit obligation: | | | | | | | | | | | | |
Benefit obligation, beginning of year | | $ | 17,895 | | | $ | 19,177 | | | $ | 4,436 | | | $ | 4,847 | | | $ | 3,736 | | | $ | 4,051 | |
Service cost 1 | | — | | | — | | | 50 | | | 57 | | | 99 | | | 100 | |
| Interest cost | | 401 | | | 330 | | | 69 | | | 53 | | | 80 | | | 64 | |
| Plan amendments | | — | | | — | | | — | | | — | | | (29) | | | — | |
Actuarial losses (gains) 2 | | (4,231) | | | (610) | | | (1,084) | | | (142) | | | (779) | | | (211) | |
| Foreign currency exchange rates | | — | | | — | | | (333) | | | (154) | | | — | | | (15) | |
| Participant contributions | | — | | | — | | | 5 | | | 4 | | | 43 | | | 48 | |
| Benefits paid - gross | | (995) | | | (996) | | | (179) | | | (184) | | | (292) | | | (310) | |
Less: federal subsidy on benefits paid | | — | | | — | | | — | | | — | | | 8 | | | 9 | |
Curtailments, settlements and termination benefits | | (1) | | | (6) | | | (8) | | | (45) | | | — | | | — | |
| Benefit obligation, end of year | | $ | 13,069 | | | $ | 17,895 | | | $ | 2,956 | | | $ | 4,436 | | | $ | 2,866 | | | $ | 3,736 | |
| Change in plan assets: | | | | | | | | | | | | |
Fair value of plan assets, beginning of year | | $ | 17,227 | | | $ | 17,589 | | | $ | 4,552 | | | $ | 4,731 | | | $ | 130 | | | $ | 147 | |
| Actual return on plan assets | | (3,821) | | | 595 | | | (852) | | | 99 | | | (25) | | | 34 | |
Foreign currency exchange rates | | — | | | — | | | (328) | | | (139) | | | — | | | — | |
| Company contributions | | 46 | | | 45 | | | 54 | | | 84 | | | 246 | | | 211 | |
| Participant contributions | | — | | | — | | | 5 | | | 4 | | | 43 | | | 48 | |
| Benefits paid | | (995) | | | (996) | | | (179) | | | (184) | | | (292) | | | (310) | |
Settlements and termination benefits | | (1) | | | (6) | | | (8) | | | (43) | | | — | | | — | |
Fair value of plan assets, end of year | | $ | 12,456 | | | $ | 17,227 | | | $ | 3,244 | | | $ | 4,552 | | | $ | 102 | | | $ | 130 | |
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Over (under) funded status | | $ | (613) | | | $ | (668) | | | $ | 288 | | | $ | 116 | | | $ | (2,764) | | | $ | (3,606) | |
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| Components of net amount recognized in financial position: | | | | | | | | | | | | |
| Other assets (non-current asset) | | $ | 256 | | | $ | 592 | | | $ | 615 | | | $ | 538 | | | $ | — | | | $ | — | |
Accrued wages, salaries and employee benefits (current liability) | | (48) | | | (45) | | | (18) | | | (16) | | | (224) | | | (240) | |
Liability for postemployment benefits (non-current liability) 3 | | (821) | | | (1,215) | | | (309) | | | (406) | | | (2,540) | | | (3,366) | |
| Net (liability) asset recognized | | $ | (613) | | | $ | (668) | | | $ | 288 | | | $ | 116 | | | $ | (2,764) | | | $ | (3,606) | |
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| Amounts recognized in Accumulated other comprehensive income (pre-tax) consist of: | | | | | | | | | | | | |
| Prior service cost (credit) | | $ | — | | | $ | — | | | $ | 20 | | | $ | 23 | | | $ | (29) | | | $ | (5) | |
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1 All U.S. pension benefits are frozen, and accordingly there is no longer any service cost.
2 For 2022, Actuarial loss (gain) impacting the benefit obligation was primarily due to higher discount rates at the end of 2022 compared to the end of 2021. For 2021, Actuarial loss (gain) impacting the benefit obligation was primarily due to higher discount rates at the end of 2021 compared to the end of 2020.
3 The Liability for postemployment benefits reported in Statement 3 includes our liability for other postemployment benefits and our liability for non-qualified deferred compensation plans. For 2022, these liabilities were $58 million and $475 million, respectively. For 2021, these liabilities were $67 million and $538 million, respectively.
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| | | U.S. Pension Benefits | | Non-U.S.
Pension Benefits | | |
| (Millions of dollars) | | 2022 | | 2021 | | 2022 | | 2021 | | | | |
| Pension plans with projected benefit obligation in excess of plan assets: | | | | | | | | | | | | |
| Projected benefit obligation | | $ | 10,413 | | | $ | 14,403 | | | $ | 606 | | | $ | 743 | | | | | |
| Fair value of plan assets | | $ | 9,544 | | | $ | 13,143 | | | $ | 280 | | | $ | 319 | | | | | |
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| Pension plans with accumulated benefit obligation in excess of plan assets: | | | | | | | | | | | | |
| Accumulated benefit obligation | | $ | 10,413 | | | $ | 14,403 | | | $ | 482 | | | $ | 603 | | | | | |
| Fair value of plan assets | | $ | 9,544 | | | $ | 13,143 | | | $ | 202 | | | $ | 234 | | | | | |
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The accumulated postretirement benefit obligation exceeds plan assets for all of our other postretirement benefit plans for all years presented.
B. Net periodic benefit cost
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| | | U.S. Pension Benefits | | Non-U.S. Pension Benefits | | Other Postretirement Benefits |
| (Millions of dollars) | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Components of net periodic benefit cost: | | | | | | | | | | | | | | | | | | |
Service cost 1 | | $ | — | | | $ | — | | | $ | — | | | $ | 50 | | | $ | 57 | | | $ | 55 | | | $ | 99 | | | $ | 100 | | | $ | 94 | |
| Interest cost | | 401 | | | 330 | | | 483 | | | 69 | | | 53 | | | 68 | | | 80 | | | 64 | | | 103 | |
| Expected return on plan assets | | (669) | | | (718) | | | (791) | | | (130) | | | (128) | | | (135) | | | (12) | | | (6) | | | (12) | |
| Curtailments, settlements and termination benefits | | — | | | — | | | (1) | | | 1 | | | (1) | | | 30 | | | — | | | — | | | — | |
| Amortization of prior service cost (credit) | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (40) | | | (38) | |
Actuarial loss (gain) 2 | | 259 | | | (487) | | | 162 | | | (132) | | | (115) | | | 32 | | | (733) | | | (231) | | | 189 | |
Net Periodic benefit cost (benefit) 3 | | $ | (9) | | | $ | (875) | | | $ | (147) | | | $ | (142) | | | $ | (134) | | | $ | 50 | | | $ | (572) | | | $ | (113) | | | $ | 336 | |
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| Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax): | | | | | | | | | | | | | | | | | | |
Current year prior service cost (credit) | | $ | — | | | $ | — | | | $ | — | | | $ | (3) | | | $ | — | | | $ | 8 | | | $ | (30) | | | $ | — | | | $ | (7) | |
| Amortization of prior service (cost) credit | | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 40 | | | 38 | |
Total recognized in other comprehensive income | | — | | | — | | | — | | | (3) | | | — | | | 8 | | | (24) | | | 40 | | | 31 | |
Total recognized in net periodic cost and other comprehensive income | | $ | (9) | | | $ | (875) | | | $ | (147) | | | $ | (145) | | | $ | (134) | | | $ | 58 | | | $ | (596) | | | $ | (73) | | | $ | 367 | |
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| Weighted-average assumptions used to determine net periodic benefit cost: | | | | | | | | | | | | | | | | | | |
Discount rate used to measure service cost 1 | | — | % | | — | % | | — | % | | 1.7 | % | | 1.4 | % | | 1.5 | % | | 2.8 | % | | 2.5 | % | | 3.2 | % |
Discount rate used to measure interest cost | | 2.3 | % | | 1.8 | % | | 2.8 | % | | 1.7 | % | | 1.2 | % | | 1.7 | % | | 2.2 | % | | 1.6 | % | | 2.8 | % |
Expected rate of return on plan assets 4 | | 4.0 | % | | 4.2 | % | | 5.1 | % | | 3.1 | % | | 2.9 | % | | 3.3 | % | | 6.9 | % | | 6.5 | % | | 7.0 | % |
Rate of compensation increase 1 | | — | % | | — | % | | — | % | | 2.0 | % | | 2.0 | % | | 2.0 | % | | 4.0 | % | | 4.0 | % | | 4.0 | % |
1 All U.S. pension benefits are frozen, and accordingly there is no longer any service cost and certain assumptions are no longer applicable.
2 Actuarial loss (gain) represents the effects of actual results differing from our assumptions and the effects of changing assumptions. We recognize actuarial loss (gain) immediately through earnings upon the annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.
3 The service cost component is included in Operating costs and all other components are included in Other income (expense) in Statement 1.
4 The weighted-average rates for 2023 are 5.8 percent and 5.2 percent for U.S. and non-U.S. pension plans, respectively.
The discount rates used in the determination of our service and interest cost components utilize a full yield curve approach which applies specific spot rates along the yield curve used in the calculation of the benefit obligation to the relevant projected cash flows.
Our expected long-term rate of return on U.S. plan assets is based on our estimate of long-term passive returns for equities and fixed income securities weighted by the allocation of our pension assets. Based on historical performance, we increase the passive returns due to our active management of the plan assets. To arrive at our expected long-term return, the amount added for active management was 0.30 percent for 2022, 0.35 percent for 2021 and 0.40 percent 2020. We use a similar process to determine this rate for our non-U.S. plans.
The assumed health care trend rate represents the rate at which health care costs are assumed to increase. We assumed a weighted-average increase of 5.6 percent in our calculation of 2022 benefit expense. We expect a weighted-average increase of 6.5 percent during 2023. The 2023 rates are assumed to decrease gradually to the ultimate health care trend rate of 4.7 percent in 2030.
C. Expected contributions and Benefit payments
The following table presents information about expected contributions and benefit payments for pension and other postretirement benefit plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Millions of dollars) | | 2023 | | | | | | | | | | | | |
| Expected employer contributions: | | | | | | | | | | | | | | |
| U.S. Pension Benefits | | $ | 47 | | | | | | | | | | | | | |
| Non-U.S. Pension Benefits | | $ | 69 | | | | | | | | | | | | | |
| Other Postretirement Benefits | | $ | 256 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Expected benefit payments: | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028-
2032 | | Total |
| U.S. Pension Benefits | | $ | 1,010 | | | $ | 1,000 | | | $ | 1,000 | | | $ | 1,000 | | | $ | 995 | | | $ | 4,820 | | | $ | 9,825 | |
| Non-U.S. Pension Benefits | | $ | 195 | | | $ | 170 | | | $ | 175 | | | $ | 185 | | | $ | 190 | | | $ | 1,020 | | | $ | 1,935 | |
| Other Postretirement Benefits | | $ | 265 | | | $ | 265 | | | $ | 260 | | | $ | 260 | | | $ | 255 | | | $ | 1,240 | | | $ | 2,545 | |
| | | | | | | | | | | | | | |
| Expected Medicare Part D subsidy: | | $ | 6 | | | $ | 5 | | | $ | 5 | | | $ | 5 | | | $ | 5 | | | $ | 20 | | | $ | 46 | |
| | | | | | | | | | | | | | |
The above table reflects the total expected employer contributions and expected benefits to be paid from the plan or from company assets and does not include the participants’ share of the cost. The expected benefit payments for our other postretirement benefits include payments for prescription drug benefits. The above table also includes Medicare Part D subsidy amounts expected to be received by the company which will offset other postretirement benefit payments.
D. Plan assets
In general, our strategy for both the U.S. and non-U.S. pensions includes ongoing alignment of our investments to our liabilities, while reducing risk in our portfolio. The current U.S. pension target asset allocation is 85 percent fixed income and 15 percent equities. We will revise this target allocation periodically to ensure it reflects our overall objectives. The non-U.S. pension weighted-average target allocations are 79 percent fixed income, 12 percent equities, 5 percent real estate and 4 percent other. The target allocations for each plan vary based upon local statutory requirements, demographics of plan participants and funded status. We primarily invest the non-U.S. plan assets in non-U.S. securities.
Our target allocation for the other postretirement benefit plans is 70 percent equities and 30 percent fixed income.
We rebalance the U.S. plans to within the appropriate target asset allocation ranges on a monthly basis. The frequency of rebalancing for the non-U.S. plans varies depending on the plan. As a result of our diversification strategies, there are no significant concentrations of risk within the portfolio of investments.
We permit the use of certain derivative instruments where appropriate and necessary for achieving overall investment policy objectives. The plans do not use derivative contracts for speculative purposes.
The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3). Certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. See Note 18 for a discussion of the fair value hierarchy.
We determine fair values as follows:
•Equity securities are primarily based on valuations for identical instruments in active markets.
•Fixed income securities are primarily based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.
•Real estate is stated at the fund’s net asset value or at appraised value.
•Cash, short-term instruments and other are based on the carrying amount, which approximates fair value, or the fund’s net asset value.
The fair value of the pension and other postretirement benefit plan assets by category is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| (Millions of dollars) | | Level 1 | | Level 2 | | Level 3 | | Measured at NAV | | Total Assets at Fair Value |
| U.S. Pension | | | | | | | | | | |
| Equity securities: | | | | | | | | | | |
| U.S. equities | | $ | 1,098 | | | $ | 20 | | | $ | 26 | | | $ | 99 | | | $ | 1,243 | |
| Non-U.S. equities | | 948 | | | — | | | 2 | | | — | | | 950 | |
| | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. corporate bonds | | — | | | 5,460 | | | 40 | | | 37 | | | 5,537 | |
| Non-U.S. corporate bonds | | — | | | 1,244 | | | — | | | — | | | 1,244 | |
| U.S. government bonds | | — | | | 2,904 | | | — | | | — | | | 2,904 | |
| U.S. governmental agency mortgage-backed securities | | — | | | 19 | | | — | | | — | | | 19 | |
| Non-U.S. government bonds | | — | | | 118 | | | — | | | — | | | 118 | |
| | | | | | | | | | |
| Real estate | | — | | | — | | | 8 | | | — | | | 8 | |
| | | | | | | | | | |
| Cash, short-term instruments and other | | 108 | | | 14 | | | 2 | | | 309 | | | 433 | |
| Total U.S. pension assets | | $ | 2,154 | | | $ | 9,779 | | | $ | 78 | | | $ | 445 | | | $ | 12,456 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| (Millions of dollars) | | Level 1 | | Level 2 | | Level 3 | | Measured at NAV | | Total Assets at Fair Value |
| U.S. Pension | | | | | | | | | | |
| Equity securities: | | | | | | | | | | |
| U.S. equities | | $ | 1,644 | | | $ | 25 | | | $ | 23 | | | $ | 149 | | | $ | 1,841 | |
| Non-U.S. equities | | 1,398 | | | — | | | 2 | | | — | | | 1,400 | |
| | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. corporate bonds | | — | | | 7,289 | | | 40 | | | 37 | | | 7,366 | |
| Non-U.S. corporate bonds | | — | | | 1,569 | | | — | | | — | | | 1,569 | |
| U.S. government bonds | | — | | | 4,341 | | | — | | | — | | | 4,341 | |
| U.S. governmental agency mortgage-backed securities | | — | | | 24 | | | — | | | — | | | 24 | |
| Non-U.S. government bonds | | — | | | 172 | | | — | | | — | | | 172 | |
| | | | | | | | | | |
| Real estate | | — | | | — | | | 7 | | | — | | | 7 | |
| | | | | | | | | | |
| Cash, short-term instruments and other | | 228 | | | 60 | | | — | | | 219 | | | 507 | |
| Total U.S. pension assets | | $ | 3,270 | | | $ | 13,480 | | | $ | 72 | | | $ | 405 | | | $ | 17,227 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| (Millions of dollars) | | Level 1 | | Level 2 | | Level 3 | | Measured at NAV | | Total Assets at Fair Value |
| Non-U.S. Pension | | | | | | | | | | |
| Equity securities: | | | | | | | | | | |
| U.S. equities | | $ | 61 | | | $ | — | | | $ | — | | | $ | — | | | $ | 61 | |
| Non-U.S. equities | | 208 | | | 28 | | | — | | | 21 | | | 257 | |
Global equities 1 | | 26 | | | 10 | | | — | | | 17 | | | 53 | |
| | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. corporate bonds | | — | | | 186 | | | — | | | — | | | 186 | |
| Non-U.S. corporate bonds | | — | | | 631 | | | — | | | — | | | 631 | |
| U.S. government bonds | | — | | | 66 | | | — | | | — | | | 66 | |
| Non-U.S. government bonds | | — | | | 1,273 | | | — | | | — | | | 1,273 | |
Global fixed income 1 | | — | | | 82 | | | — | | | 248 | | | 330 | |
| | | | | | | | | | |
| Real estate | | — | | | 198 | | | — | | | — | | | 198 | |
| | | | | | | | | | |
Cash, short-term instruments and other 2 | | 72 | | | 117 | | | — | | | — | | | 189 | |
| Total non-U.S. pension assets | | $ | 367 | | | $ | 2,591 | | | $ | — | | | $ | 286 | | | $ | 3,244 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| (Millions of dollars) | | Level 1 | | Level 2 | | Level 3 | | Measured at NAV | | Total Assets at Fair Value |
| Non-U.S. Pension | | | | | | | | | | |
| Equity securities: | | | | | | | | | | |
| U.S. equities | | $ | 72 | | | $ | — | | | $ | — | | | $ | — | | | $ | 72 | |
| Non-U.S. equities | | 266 | | | 32 | | | — | | | 37 | | | 335 | |
Global equities 1 | | 31 | | | 15 | | | — | | | 46 | | | 92 | |
| | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. corporate bonds | | — | | | 327 | | | — | | | — | | | 327 | |
| Non-U.S. corporate bonds | | — | | | 889 | | | — | | | — | | | 889 | |
| U.S. government bonds | | — | | | 152 | | | — | | | — | | | 152 | |
| Non-U.S. government bonds | | — | | | 1,752 | | | — | | | — | | | 1,752 | |
Global fixed income 1 | | — | | | 88 | | | — | | | 297 | | | 385 | |
| | | | | | | | | | |
| Real estate | | — | | | 225 | | | — | | | — | | | 225 | |
| | | | | | | | | | |
Cash, short-term instruments and other 2 | | 56 | | | 267 | | | — | | | — | | | 323 | |
| Total non-U.S. pension assets | | $ | 425 | | | $ | 3,747 | | | $ | — | | | $ | 380 | | | $ | 4,552 | |
| | | | | | | | | | |
1 Includes funds that invest in both U.S. and non-U.S. securities. |
2 Includes funds that invest in multiple asset classes, hedge funds and other. |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| (Millions of dollars) | | Level 1 | | Level 2 | | Level 3 | | Measured at NAV | | Total Assets at Fair Value |
| Other Postretirement Benefits | | | | | | | | | | |
| Equity securities: | | | | | | | | | | |
| U.S. equities | | $ | 41 | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 43 | |
| Non-U.S. equities | | 16 | | | — | | | — | | | 3 | | | 19 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Cash, short-term instruments and other | | 3 | | | — | | | — | | | 37 | | | 40 | |
| Total other postretirement benefit assets | | $ | 60 | | | $ | — | | | $ | — | | | $ | 42 | | | $ | 102 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| (Millions of dollars) | | Level 1 | | Level 2 | | Level 3 | | Measured at NAV | | Total Assets at Fair Value |
| Other Postretirement Benefits | | | | | | | | | | |
| Equity securities: | | | | | | | | | | |
| U.S. equities | | $ | 49 | | | $ | — | | | $ | — | | | $ | — | | | $ | 49 | |
| Non-U.S. equities | | 17 | | | — | | | — | | | — | | | 17 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Cash, short-term instruments and other | | — | | | 2 | | | — | | | 62 | | | 64 | |
| Total other postretirement benefit assets | | $ | 66 | | | $ | 2 | | | $ | — | | | $ | 62 | | | $ | 130 | |
| | | | | | | | | | |
The activity attributable to U.S. pension assets measured at fair value using Level 3 inputs for the years ended December 31, 2022 and 2021 was insignificant. We valued these instruments using pricing models that, in management’s judgment, reflect the assumptions a market participant would use.
E. Defined contribution plans
We have both U.S. and non-U.S. employee defined contribution plans to help employees save for retirement. Our primary U.S. 401(k) plan allows eligible employees to contribute a portion of their cash compensation to the plan on a tax-deferred basis. Employees are eligible for matching contributions equal to 100 percent of employee contributions to the plan up to 6 percent of cash compensation and an annual employer contribution that ranges from 3 to 5 percent of cash compensation (depending on years of service and age).
These 401(k) plans include various investment funds, including a non-leveraged employee stock ownership plan (ESOP). As of December 31, 2022 and 2021, the ESOP held 12.0 million and 12.4 million shares, respectively. We allocate all of the shares held by the ESOP to participant accounts. Dividends paid to participants are automatically reinvested into company shares unless the participant elects to have all or a portion of the dividend paid to the participant. Various other U.S. and non-U.S. defined contribution plans generally allow eligible employees to contribute a portion of their cash compensation to the plans, and in most cases, we provide a matching contribution to the funds.
Total company costs related to U.S. and non-U.S. defined contribution plans were as follows:
| | | | | | | | | | | | | | | | | | | | |
| (Millions of dollars) | | 2022 | | 2021 | | 2020 |
| U.S. plans | | $ | 392 | | | $ | 440 | | | $ | 384 | |
| Non-U.S. plans | | 114 | | | 114 | | | 89 | |
| | | $ | 506 | | | $ | 554 | | | $ | 473 | |
| | | | | | |
13.Short-term borrowings
| | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (Millions of dollars) | | 2022 | | 2021 | | |
| Machinery, Energy & Transportation: | | | | | | |
| Notes payable to banks | | $ | 3 | | | $ | 9 | | | |
| | | | | | |
| | | | | | |
| | | 3 | | | 9 | | | |
| Financial Products: | | | | | | |
| Notes payable to banks | | 234 | | | 213 | | | |
| Commercial paper | | 5,455 | | | 4,896 | | | |
| Demand notes | | 265 | | | 286 | | | |
| | | 5,954 | | | 5,395 | | | |
| Total short-term borrowings | | $ | 5,957 | | | $ | 5,404 | | | |
| | | | | | |
The weighted-average interest rates on short-term borrowings outstanding were:
| | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 | | |
| Notes payable to banks | | 11.3 | % | | 4.4 | % | | |
| Commercial paper | | 4.2 | % | | 0.1 | % | | |
| Demand notes | | 3.4 | % | | 0.2 | % | | |
| | | | | | |
Please refer to Note 18 for fair value information on short-term borrowings.
14. Long-term debt
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, | |
| (Millions of dollars) | Effective Yield to Maturity 1 | | 2022 | | 2021 | |
| Machinery, Energy & Transportation: | | | | | | |
Notes—$759 million of 5.200% due 2041 2 | 5.27% | | $ | 752 | | | $ | 752 | | |
| | | | | | |
Debentures—$82 million of 8.000% due 2023 | 8.06% | | — | | | 82 | | |
Debentures—$1,000 million of 3.400% due 2024 | 3.46% | | 999 | | | 999 | | |
Debentures—$193 million of 6.625% due 2028 2 | 6.68% | | 192 | | | 192 | | |
Debentures—$500 million of 2.600% due 2029 2 | 2.67% | | 498 | | | 498 | | |
Debentures—$800 million of 2.600% due 2030 2 | 2.72% | | 794 | | | 793 | | |
Debentures—$500 million of 1.900% due 2031 2 | 2.04% | | 495 | | | 495 | | |
Debentures—$242 million of 7.300% due 2031 2 | 7.38% | | 240 | | | 240 | | |
Debentures—$307 million of 5.300% due 2035 2 | 8.64% | | 229 | | | 226 | | |
Debentures—$460 million of 6.050% due 2036 2 | 6.12% | | 456 | | | 456 | | |
Debentures—$65 million of 8.250% due 2038 2 | 8.38% | | 64 | | | 64 | | |
Debentures—$160 million of 6.950% due 2042 2 | 7.02% | | 158 | | | 158 | | |
Debentures—$1,722 million of 3.803% due 2042 2 | 6.39% | | 1,336 | | | 1,316 | | |
Debentures—$500 million of 4.300% due 2044 | 4.39% | | 493 | | | 493 | | |
Debentures—$1,000 million of 3.250% due 2049 2 | 3.34% | | 983 | | | 983 | | |
Debentures—$1,200 million of 3.250% due 2050 2 | 3.32% | | 1,186 | | | 1,185 | | |
Debentures—$500 million of 4.750% due 2064 | 4.81% | | 494 | | | 494 | | |
Debentures—$246 million of 7.375% due 2097 2 | 7.51% | | 241 | | | 241 | | |
Finance lease obligations & other 3 | | | (112) | | | 79 | | |
| Total Machinery, Energy & Transportation | | | 9,498 | | | 9,746 | | |
| Financial Products: | | | | | | |
| | | | | | |
| Medium-term notes | | | 15,940 | | | 16,127 | | |
| Other | | | 276 | | | 160 | | |
| Total Financial Products | | | 16,216 | | | 16,287 | | |
| Total long-term debt due after one year | | | $ | 25,714 | | | $ | 26,033 | | |
1 Effective yield to maturity includes the impact of discounts, premiums and debt issuance costs.
2 Redeemable at our option in whole or in part at any time at a redemption price equal to the greater of (i) 100% of the principal amount or (ii) the discounted present value of the notes or debentures, calculated in accordance with the terms of such notes or debentures.
3 Includes $(168) million of mark-to-market adjustments related to fair value interest rate swap contracts entered into throughout 2022.
All outstanding notes and debentures are unsecured and rank equally with one another.
On March 12, 2021 we issued $500 million of 1.900% Senior Notes due 2031.
Cat Financial’s medium-term notes are offered by prospectus and are issued through agents at fixed and floating rates. Medium-term notes due after one year have a weighted average interest rate of 2.3% with remaining maturities up to 5 years at December 31, 2022.
The aggregate amounts of maturities of long-term debt during each of the years 2023 through 2027, including amounts due within one year and classified as current, are:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (Millions of dollars) | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
| Machinery, Energy & Transportation | | $ | 120 | | | $ | 1,012 | | | $ | 10 | | | $ | 6 | | | $ | 4 | |
| Financial Products | | 5,202 | | | 7,398 | | | 4,511 | | | 2,469 | | | 1,948 | |
| | | $ | 5,322 | | | $ | 8,410 | | | $ | 4,521 | | | $ | 2,475 | | | $ | 1,952 | |
| | | | | | | | | | |
The above table includes $14 million of medium-term notes that can be called at par.
Medium-term notes of $900 million maturing in the first quarter of 2023 were excluded from the current maturities of long-term debt in Statement 3 as of December 31, 2022 due to a $900 million issuance of medium-term notes on January 6, 2023 which mature in 2026. The preceding maturity table reflects the reclassification of $900 million from maturities in 2023 to 2026.
Interest paid on short-term and long-term borrowings for 2022, 2021 and 2020 was $959 million, $920 million and $1,089 million, respectively.
Please refer to Note 18 for fair value information on long-term debt.
15.Credit commitments
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| (Millions of dollars) | | Consolidated | | Machinery,
Energy &
Transportation | | Financial
Products |
| Credit lines available: | | | | | | |
| Global credit facilities | | $ | 10,500 | | | $ | 2,750 | | | $ | 7,750 | |
| Other external | | 3,649 | | | 158 | | | 3,491 | |
| Total credit lines available | | 14,149 | | | 2,908 | | | 11,241 | |
| Less: Commercial paper outstanding | | (5,455) | | | — | | | (5,455) | |
| Less: Utilized credit | | (982) | | | (3) | | | (979) | |
| Available credit | | $ | 7,712 | | | $ | 2,905 | | | $ | 4,807 | |
| | | | | | |
We have three global credit facilities with a syndicate of banks totaling $10.50 billion (Credit Facility) available in the aggregate to both Caterpillar and Cat Financial for general liquidity purposes. Based on management's allocation decision, which can be revised from time to time, the portion of the Credit Facility available to ME&T as of December 31, 2022 was $2.75 billion. Information on our Credit Facility is as follows:
•In September 2022, we entered into a new 364-day facility. The 364-day facility of $3.15 billion (of which $825 million is available to ME&T) expires in August 2023.
•In September 2022, we amended and restated the three-year facility (as amended and restated, the "three-year facility"). The three-year facility of $2.73 billion (of which $715 million is available to ME&T) expires in August 2025.
•In September 2022, we amended and restated the five-year facility (as amended and restated, the "five-year facility") The five-year facility of $4.62 billion (of which $1.21 billion is available to ME&T) expires in September 2027.
Other consolidated credit lines with banks as of December 31, 2022 totaled $3.65 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.
At December 31, 2022, Caterpillar’s consolidated net worth was $15.93 billion, which was above the $9.00 billion required under the Credit Facility. The consolidated net worth is defined as the consolidated shareholders’ equity including preferred stock but excluding the pension and other postretirement benefits balance within AOCI.
At December 31, 2022, Cat Financial’s covenant interest coverage ratio was 2.36 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 December 31, 2022, Cat Financial’s six-month covenant leverage ratio was 7.05 to 1 and year-end covenant leverage ratio was 7.21 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 December 31, 2022, there were no borrowings under the Credit Facility.
16.Profit per share
| | | | | | | | | | | | | | | | | | | | |
| Computations of profit per share: | | | | | | |
| (Dollars in millions except per share data) | | 2022 | | 2021 | | 2020 |
Profit for the period (A) 1 | | $ | 6,705 | | | $ | 6,489 | | | $ | 2,998 | |
| Determination of shares (in millions): | | | | | | |
| Weighted average number of common shares outstanding (B) | | 526.9 | | | 544.0 | | | 544.1 | |
Shares issuable on exercise of stock awards, net of shares assumed to be purchased out of proceeds at average market price | | 3.5 | | | 4.5 | | | 4.5 | |
Average common shares outstanding for fully diluted computation (C) 2 | | 530.4 | | | 548.5 | | | 548.6 | |
| Profit per share of common stock: | | | | | | |
| Assuming no dilution (A/B) | | $ | 12.72 | | | $ | 11.93 | | | $ | 5.51 | |
Assuming full dilution (A/C) 2 | | $ | 12.64 | | | $ | 11.83 | | | $ | 5.46 | |
| Shares outstanding as of December 31 (in millions) | | 516.3 | | | 535.9 | | | 545.3 | |
1Profit attributable to common shareholders.
2Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
For the year ended December 31, 2022, 2021 and 2020, we excluded 2.0 million, 1.1 million and 4.6 million outstanding stock options, respectively, from the computation of diluted earnings per share because the effect would have been antidilutive.
In July 2018, the Board approved a share repurchase authorization (the 2018 Authorization) of up to $10.0 billion of Caterpillar common stock effective January 1, 2019, with no expiration. In May 2022, the Board approved a new share repurchase authorization (the 2022 Authorization) of up to $15.0 billion of Caterpillar common stock effective August 1, 2022, with no expiration. Utilization of the 2022 Authorization for all share repurchases commenced on August 1, 2022, leaving $70 million unutilized under the 2018 Authorization. As of December 31, 2022, approximately $12.8 billion remained available under the 2022 Authorization.
During 2022, 2021 and 2020, we repurchased 21.9 million, 13.0 million and 10.1 million shares of Caterpillar common stock, respectively, at an aggregate cost of $4.2 billion, $2.7 billion and $1.3 billion respectively. We made these purchases through a combination of accelerated stock repurchase agreements with third-party financial institutions and open market transactions.
17.Accumulated other comprehensive income (loss)
We present comprehensive income and its components in Statement 2. Changes in the balances for each component of Accumulated other comprehensive income (loss) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| (Millions of dollars) | | | | | |
| 2022 | | 2021 | | 2020 | | | | |
| Foreign currency translation: | | | | | | | | | |
| Beginning balance | $ | (1,508) | | | $ | (910) | | | $ | (1,487) | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Gains (losses) on foreign currency translation | (794) | | | (559) | | | 513 | | | | | |
| Less: Tax provision /(benefit) | 26 | | | 41 | | | (42) | | | | | |
| Net gains (losses) on foreign currency translation | (820) | | | (600) | | | 555 | | | | | |
| (Gains) losses reclassified to earnings | — | | | 2 | | | 22 | | | | | |
| Less: Tax provision /(benefit) | — | | | — | | | — | | | | | |
| Net (gains) losses reclassified to earnings | — | | | 2 | | | 22 | | | | | |
| Other comprehensive income (loss), net of tax | (820) | | | (598) | | | 577 | | | | | |
| Ending balance | $ | (2,328) | | | $ | (1,508) | | | $ | (910) | | | | | |
| | | | | | | | | |
| Pension and other postretirement benefits | | | | | | | | | |
| Beginning balance | $ | (62) | | | $ | (32) | | | $ | (3) | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Current year prior service credit (cost) | 33 | | | — | | | (1) | | | | | |
| Less: Tax provision /(benefit) | 5 | | | — | | | — | | | | | |
| Net current year prior service credit (cost) | 28 | | | — | | | (1) | | | | | |
| Amortization of prior service (credit) cost | (6) | | | (40) | | | (38) | | | | | |
| Less: Tax provision /(benefit) | (1) | | | (10) | | | (10) | | | | | |
| Net amortization of prior service (credit) cost | (5) | | | (30) | | | (28) | | | | | |
| Other comprehensive income (loss), net of tax | 23 | | | (30) | | | (29) | | | | | |
| Ending balance | $ | (39) | | | $ | (62) | | | $ | (32) | | | | | |
| | | | | | | | | |
| Derivative financial instruments | | | | | | | | | |
| Beginning balance | $ | (3) | | | $ | — | | | $ | (97) | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Gains (losses) deferred | 375 | | | 195 | | | (116) | | | | | |
| Less: Tax provision /(benefit) | 86 | | | 21 | | | (25) | | | | | |
| Net gains (losses) deferred | 289 | | | 174 | | | (91) | | | | | |
| (Gains) losses reclassified to earnings | (340) | | | (196) | | | 241 | | | | | |
| Less: Tax provision /(benefit) | (82) | | | (19) | | | 53 | | | | | |
| Net (gains) losses reclassified to earnings | (258) | | | (177) | | | 188 | | | | | |
| Other comprehensive income (loss), net of tax | 31 | | | (3) | | | 97 | | | | | |
| Ending balance | $ | 28 | | | $ | (3) | | | $ | — | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Available-for-sale securities | | | | | | | | | |
| Beginning balance | $ | 20 | | | $ | 54 | | | $ | 20 | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Gains (losses) deferred | (179) | | | (39) | | | 45 | | | | | |
| Less: Tax provision /(benefit) | (37) | | | (8) | | | 10 | | | | | |
| Net gains (losses) deferred | (142) | | | (31) | | | 35 | | | | | |
| (Gains) losses reclassified to earnings | 5 | | | (4) | | | (1) | | | | | |
| Less: Tax provision /(benefit) | 1 | | | (1) | | | — | | | | | |
| Net (gains) losses reclassified to earnings | 4 | | | (3) | | | (1) | | | | | |
| Other comprehensive income (loss), net of tax | (138) | | | (34) | | | 34 | | | | | |
| Ending balance | $ | (118) | | | $ | 20 | | | $ | 54 | | | | | |
| | | | | | | | | |
| Total AOCI Ending Balance at December 31 | $ | (2,457) | | | $ | (1,553) | | | $ | (888) | | | | | |
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 11 for additional information on our investments in debt and equity securities.
Derivative financial instruments
The fair value of interest rate contracts is primarily based on a standard industry accepted valuation model that utilizes the appropriate market-based forward swap curves and zero-coupon interest rates to determine discounted cash flows. The fair value of foreign currency and commodity forward, option and cross currency contracts is based on standard industry accepted valuation models that discount cash flows resulting from the differential between the contract price and the market-based forward rate.
See Note 4 for additional information.
Assets and liabilities measured on a recurring basis at fair value included in Statement 3 as of December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| (Millions of dollars) | | Level 1 | | Level 2 | | Level 3 | | Measured at NAV | | Total
Assets / Liabilities,
at Fair Value |
| Assets | | | | | | | | | | |
| Debt securities | | | | | | | | | | |
| Government debt securities | | | | | | | | | | |
| U.S. treasury bonds | | $ | 10 | | | $ | — | | | $ | — | | | $ | — | | | $ | 10 | |
| Other U.S. and non-U.S. government bonds | | — | | | 61 | | | — | | | — | | | 61 | |
| | | | | | | | | | |
| Corporate debt securities | | | | | | | | | | |
| Corporate bonds and other debt securities | | — | | | 1,046 | | | — | | | — | | | 1,046 | |
| Asset-backed securities | | — | | | 176 | | | — | | | — | | | 176 | |
| | | | | | | | | | |
| Mortgage-backed debt securities | | | | | | | | | | |
| U.S. governmental agency | | — | | | 325 | | | — | | | — | | | 325 | |
| Residential | | — | | | 4 | | | — | | | — | | | 4 | |
| Commercial | | — | | | 99 | | | — | | | — | | | 99 | |
| Total debt securities | | 10 | | | 1,711 | | | — | | | — | | | 1,721 | |
| Equity securities | | | | | | | | | | |
| Large capitalization value | | 217 | | | — | | | — | | | — | | | 217 | |
| Smaller company growth | | 98 | | | — | | | — | | | — | | | 98 | |
| REIT | | — | | | — | | | — | | | 167 | | | 167 | |
| Total equity securities | | 315 | | | — | | | — | | | 167 | | | 482 | |
| Derivative financial instruments - assets | | | | | | | | | | |
| Foreign currency contracts - net | | — | | | 168 | | | — | | | — | | | 168 | |
| Interest rate contracts - net | | — | | | 23 | | | — | | | — | | | 23 | |
| Commodity contracts - net | | — | | | 21 | | | — | | | — | | | 21 | |
| Total Assets | | $ | 325 | | | $ | 1,923 | | | $ | — | | | $ | 167 | | | $ | 2,415 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
In addition to the amounts above, certain Cat Financial loans are subject to measurement at fair value on a nonrecurring basis and are classified as Level 3 measurements. A loan is measured at fair value when management determines that collection of contractual amounts due is not probable and the loan is individually evaluated. In these cases, an allowance for credit losses may be established based either on the present value of expected future cash flows discounted at the receivables’ effective interest rate, the fair value of the collateral for collateral-dependent receivables, or the observable market price of the receivable. In determining collateral value, Cat Financial estimates the current fair market value of the collateral less selling costs. Cat Financial had loans carried at fair value of $68 million and $100 million as of December 31, 2022 and 2021, respectively.
B.Fair values of financial instruments
In addition to the methods and assumptions we use to record the fair value of financial instruments as discussed in the Fair value measurements section above, we use the following methods and assumptions to estimate the fair value of our financial instruments:
Cash and cash equivalents
Carrying amount approximates fair value. We classify cash and cash equivalents as Level 1. See Statement 3.
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 Statement 3. 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 11 for additional information.
Finance receivables
We estimate fair value by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.
Wholesale inventory receivables
We estimate fair value by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.
Short-term borrowings
Carrying amount approximates fair value. We classify short-term borrowings as Level 1. See Note 13 for additional information.
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 21 for additional information.
Our financial instruments not carried at fair value were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | 2022 | | 2021 | | | | | | |
| (Millions of dollars) | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value | | | | | | Fair Value Levels | | Reference |
| Assets at December 31, | | | | | | | | | | | | | | | | |
Finance receivables–net (excluding finance leases 1) | | $ | 13,965 | | | $ | 13,377 | | | $ | 13,837 | | | $ | 13,836 | | | | | | | 3 | | Notes 7 & 19 |
Wholesale inventory receivables–net (excluding finance leases 1) | | 827 | | | 778 | | | 773 | | | 753 | | | | | | | 3 | | Notes 7 & 19 |
| | | | | | | | | | | | | | | | |
| Liabilities at December 31, | | | | | | | | | | | | | | | | |
Long-term debt (including amounts due within one year): | | | | | | | | | | | | | | | | |
| Machinery, Energy & Transportation | | 9,618 | | | 9,240 | | | 9,791 | | | 12,420 | | | | | | | 2 | | Note 14 |
| Financial Products | | 21,418 | | | 20,686 | | | 22,594 | | | 22,797 | | | | | | | 2 | | Note 14 |
1Represents finance leases and failed sale leasebacks of $7,325 million and $8,083 million at December 31, 2022 and 2021, respectively.
19.Concentration of credit risk
Financial instruments with potential credit risk consist primarily of trade and finance receivables and short-term and long-term investments. Additionally, to a lesser extent, we have a potential credit risk associated with counterparties to derivative contracts.
Trade receivables are primarily short-term receivables from independently owned and operated dealers and customers which arise in the normal course of business. We perform regular credit evaluations of our dealers and customers. Collateral generally is not required, and the majority of our trade receivables are unsecured. We do, however, when deemed necessary, make use of various devices such as security agreements and letters of credit to protect our interests. No single dealer or customer represents a significant concentration of credit risk.
Finance receivables and wholesale inventory receivables primarily represent receivables under installment sales contracts, receivables arising from leasing transactions and notes receivable. We typically maintain a security interest in retail financed equipment and, in some instances, wholesale financed equipment. We also typically require physical damage insurance coverage on financed equipment. No single customer or dealer represented a significant concentration of credit risk.
Short-term and long-term investments are held with high quality institutions and, by policy, the amount of credit exposure to any one institution is limited. Long-term investments, primarily included in Other assets in Statement 3, are comprised primarily of available-for-sale debt securities and equity securities.
For derivative contracts, collateral is generally not required of the counterparties or of our company. The company generally enters 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. Our exposure to credit loss in the event of nonperformance by the counterparties is limited to only those gains that we have recorded, but for which we have not yet received cash payment. The master netting agreements reduce the amount of loss the company would incur should the counterparties fail to meet their obligations. At December 31, 2022 and 2021, the maximum exposure to credit loss was $644 million and $342 million, respectively, before the application of any master netting agreements.
Please refer to Note 18 above for fair value information.
20.Leases
A. Lessee arrangements
We lease certain property, information technology equipment, warehouse equipment, vehicles and other equipment through operating leases. We recognize a lease liability and corresponding right-of-use asset based on the present value of lease payments. To determine the present value of lease payments for most of our leases, we use our incremental borrowing rate based on information available on the lease commencement date. For certain property and information technology equipment leases, we have elected to separate payments for lease components from non-lease components. For all other leases, we have elected not to separate payments for lease and non-lease components. Our lease agreements may include options to extend or terminate the lease. When it is reasonably certain that we will exercise that option, we have included the option in the recognition of right-of-use assets and lease liabilities. We have elected not to recognize right-of-use assets or lease liabilities for leases with a term of twelve months or less.
Our finance leases are not significant and therefore are not included in the following disclosures.
The components of lease costs were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | |
| (Millions of dollars) | | | | | | |
| Years Ended December 31, |
| 2022 | | | 2021 | | 2020 |
| Operating lease cost | $ | 187 | | | | $ | 214 | | | $ | 204 | |
| Short-term lease cost | $ | 59 | | | | $ | 46 | | | $ | 50 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
We recognize operating lease right-of-use assets in Other assets in Statement 3. We recognize the operating lease liabilities in Other current liabilities and Other liabilities.
Supplemental information related to leases was as follows:
| | | | | | | | | | | | | | |
| | | | |
| (Millions of dollars) | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Operating Leases | | | | |
| Other assets | | $ | 564 | | | $ | 625 | |
| Other current liabilities | | $ | 151 | | | $ | 158 | |
| Other liabilities | | $ | 428 | | | $ | 484 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Weighted average remaining lease term | | | | |
| Operating leases | | 7 years | | 7 years |
| | | | |
| | | | |
| Weighted average discount rates | | | | |
| Operating leases | | 2 | % | | 2 | % |
| | | | |
| | | | |
Maturities of operating lease liabilities were as follows:
| | | | | | | | | | |
| | | | |
| (Millions of dollars) | | December 31, 2022 | | |
| | | | |
| Amounts Due In | | | | |
| 2023 | | $ | 161 | | | |
| 2024 | | 120 | | | |
| 2025 | | 88 | | | |
| 2026 | | 65 | | | |
| 2027 | | 47 | | | |
| Thereafter | | 146 | | | |
| Total lease payments | | 627 | | | |
| Less: Imputed interest | | (48) | | | |
| Total | | $ | 579 | | | |
| | | | |
| | | | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| (Millions of dollars) | | | | | | |
| | Years ended December 31 |
| | 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
| Operating cash flows from operating leases | | $ | 178 | | | $ | 206 | | | $ | 201 | |
| | | | | | |
| | | | | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | | |
| Operating leases | | $ | 123 | | | $ | 238 | | | $ | 178 | |
| | | | | | |
| | | | | | |
B. Lessor arrangements
We lease Caterpillar machinery, engines and other equipment to customers and dealers around the world, primarily through Cat Financial. Cat Financial leases to customers primarily through sales-type (non-tax) leases, where the lessee for tax purposes is considered to be the owner of the equipment during the term of the lease. Cat Financial also offers tax leases that are classified as either operating or direct finance leases for financial accounting purposes, depending on the characteristics of the lease. For tax purposes, Cat Financial is considered the owner of the equipment. Our lease agreements may include options for the lessee to purchase the underlying asset at the end of the lease term for either a stated fixed price or fair market value.
We determine the residual value of Cat Financial’s leased equipment based on its estimated end-of-term market value. We estimate the residual value of leased equipment at the inception of the lease based on a number of factors, including historical wholesale market sales prices, past remarketing experience and any known significant market/product trends. We also consider the following critical factors in our residual value estimates: lease term, market size and demand, total expected hours of usage, machine configuration, application, location, model changes, quantities, third-party residual guarantees and contractual customer purchase options.
During the term of our leases, we monitor residual values. For operating leases, we record adjustments to depreciation expense reflecting changes in residual value estimates prospectively on a straight-line basis. For finance leases, we recognize residual value adjustments through a reduction of finance revenue over the remaining lease term.
See Note 7 for contractual maturities of finance lease receivables (sales-type and direct finance leases).
The carrying amount of equipment leased to others, included in Property, plant and equipment - net in Statement 3, under operating leases was as follows:
| | | | | | | | | | | | | | |
| | | | |
| | December 31, |
| (Millions of dollars) | | 2022 | | 2021 |
| Equipment leased to others - at original cost | | $ | 5,568 | | | $ | 5,733 | |
| Less: Accumulated depreciation | | (1,790) | | | (1,870) | |
| Equipment leased to others - net | | $ | 3,778 | | | $ | 3,863 | |
| | | | |
Payments due for operating leases as of December 31, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| (Millions of dollars) | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| $801 | | $526 | | $287 | | $129 | | $43 | | $26 | | $1,812 |
| | | | | | | | | | | | |
Revenues from finance and operating leases, primarily included in Revenues of Financial Products on Statement 1, were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | |
| (Millions of dollars) | | | | | | |
| Year ended December 31 |
| 2022 | | | 2021 | | 2020 |
| Finance lease revenue | $ | 430 | | | | $ | 485 | | | $ | 492 | |
| Operating lease revenue | 1,085 | | | | 1,128 | | | 1,124 | |
| Total | $ | 1,515 | | | | $ | 1,613 | | | $ | 1,616 | |
| | | | | | |
We present revenues net of sales and other related taxes.
21.Guarantees and product warranty
Caterpillar dealer performance guarantees
We have provided an indemnity to a third-party insurance company for potential losses related to performance bonds issued on behalf of Caterpillar dealers. The bonds have varying terms and are issued to insure governmental agencies against nonperformance by certain dealers. We also provided guarantees to third-parties related to the performance of contractual obligations by certain Caterpillar dealers. These guarantees have varying terms and cover potential financial losses incurred by the third parties resulting from the dealers’ nonperformance.
In 2016, we provided a guarantee to an end user related to the performance of contractual obligations by a Caterpillar dealer. Under the guarantee, which was set to expire in 2025, non-performance by the Caterpillar dealer could require Caterpillar to satisfy the contractual obligations by providing goods, services or financial compensation to the end user up to an annual designated cap. This guarantee was terminated during the first quarter of 2022. No payments were made under the guarantee.
Supplier consortium performance guarantee
We provided a guarantee to a customer in Europe related to the performance of contractual obligations by a supplier consortium to which one of our Caterpillar subsidiaries was a member. The guarantee covered potential damages incurred by the customer resulting from the supplier consortium's non-performance. The damages were capped except for failure of the consortium to meet certain obligations outlined in the contract in the normal course of business. The guarantee expired during the second quarter of 2022.
We have dealer performance guarantees and third-party performance guarantees that do not limit potential payment to end users related to indemnities and other commercial contractual obligations. In addition, we have entered into contracts involving industry standard indemnifications that do not limit potential payment. For these unlimited guarantees, we are unable to estimate a maximum potential amount of future payments that could result from claims made.
No significant loss has been experienced or is anticipated under any of these guarantees. At December 31, 2022 and 2021, the related recorded liability was $2 million and $5 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 at December 31 was as follows:
| | | | | | | | | | | | | | |
| (Millions of dollars) | | 2022 | | 2021 |
| Caterpillar dealer performance guarantees | | $ | 188 | | | $ | 747 | |
| | | | |
| Supplier consortium performance guarantee | | 17 | | | 242 | |
| | | | |
| | | | |
| Other guarantees | | 306 | | | 232 | |
| Total guarantees | | $ | 511 | | | $ | 1,221 | |
| | | | |
Cat Financial provides guarantees to purchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a variable interest entity. The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers. This SPC issues commercial paper and uses the proceeds to fund its loan program. Cat Financial receives a fee for providing this guarantee. Cat Financial is the primary beneficiary of the SPC as its guarantees result in Cat Financial having both the power to direct the activities that most significantly impact the SPC’s economic performance and the obligation to absorb losses, and therefore Cat Financial has consolidated the financial statements of the SPC. As of December 31, 2022 and 2021, the SPC’s assets of $971 million and $888 million, respectively, were primarily comprised of loans to dealers, and the SPC’s liabilities of $970 million and $888 million, respectively, were primarily comprised of commercial paper. The assets of the SPC are not available to pay Cat Financial’s creditors. Cat Financial may be obligated to perform under the guarantee if the SPC experiences losses. No loss has been experienced or is anticipated under this loan purchase agreement.
Cat Financial has commitments to extend credit to customers and Caterpillar dealers through lines of credit and other pre-approved credit arrangements. Cat Financial applies the same credit policies and approval process for these commitments to extend credit as we do for other financing. Collateral is not required for these commitments, but if credit is extended, collateral may be required upon funding. The amount of unused commitments to extend credit to Caterpillar dealers was $11.31 billion at December 31, 2022. Cat Financial generally has the right to unconditionally cancel, alter, or amend the terms of these dealer commitments at any time. The amount of unused commitments to extend credit to customers was $888 million at December 31, 2022. A portion of these commitments is not expected to be fully drawn upon; therefore, the total commitment amounts do not represent a future cash requirement.
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 years ended December 31 was as follows:
| | | | | | | | | | | | | | |
| (Millions of dollars) | | 2022 | | 2021 |
| Warranty liability, beginning of period | | $ | 1,689 | | | $ | 1,612 | |
| Reduction in liability (payments) | | (778) | | | (854) | |
| Increase in liability (new warranties) | | 850 | | | 931 | |
| Warranty liability, end of period | | $ | 1,761 | | | $ | 1,689 | |
| | | | |
22. Environmental and legal matters
The Company is regulated by federal, state and international environmental laws governing its use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and other operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. We have made, and will continue to make, significant research and development and capital expenditures to comply with these emissions standards.
We are engaged in remedial activities at a number of locations, often with other companies, pursuant to federal and state laws. When it is probable we will pay remedial costs at a site, and those costs can be reasonably estimated, we accrue the investigation, remediation, and operating and maintenance costs against our earnings. We accrue costs based on consideration of currently available data and information with respect to each individual site, including available technologies, current applicable laws and regulations, and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. Where multiple potentially responsible parties are involved, we consider our proportionate share of the probable costs. In formulating the estimate of probable costs, we do not consider amounts expected to be recovered from insurance companies or others. We reassess these accrued amounts on a quarterly basis. The amount recorded for environmental remediation is not material and is included in Accrued expenses. We believe there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all the sites in the aggregate, will be required.
On January 27, 2020, the Brazilian Federal Environmental Agency (“IBAMA”) issued Caterpillar Brasil Ltda a notice of violation regarding allegations around the requirements for use of imported oils at the Piracicaba, Brazil facility. We have instituted processes to address the allegations. While we are still discussing resolution of these allegations with IBAMA, the initial notice from IBAMA included a proposed fine of approximately $300,000. We do not expect this fine or our response to address the allegations to have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.
On January 7, 2015, the 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.
23. Segment information
A. Basis for segment information
Our Executive Office is comprised of a Chief Executive Officer (CEO), four Group Presidents, a Chief Financial Officer (CFO), a Chief Legal Officer and General Counsel and a Chief Human Resources Officer. The Group Presidents and CFO are accountable for a related set of end-to-end businesses that they manage. The Chief Legal Officer and General Counsel leads the Law, Security and Public Policy Division. The Chief Human Resources Officer leads the Human Resources Organization. The CEO allocates resources and manages performance at the Group President/CFO level. As such, the CEO serves as our Chief Operating Decision Maker, and operating segments are primarily based on the Group President/CFO reporting structure.
Three of our operating segments, Construction Industries, Resource Industries and Energy & Transportation are led by Group Presidents. One operating segment, Financial Products, is led by the CFO who also has responsibility for Corporate Services. Corporate Services is a cost center primarily responsible for the performance of certain support functions globally and to provide centralized services; it does not meet the definition of an operating segment. One Group President leads one smaller operating segment that is included in the All Other operating segment. The Law, Security and Public Policy Division and the Human Resources Organization are cost centers and do not meet the definition of an operating segment.
Segment information for 2021 and 2020 has been recast due to a methodology change related to how we assign intersegment sales and segment profit from our technology products and services to Construction Industries, Resource Industries and Energy & Transportation. This methodology change did not have a material impact on our segment results.
B. Description of segments
We have five operating segments, of which four are reportable segments. Following is a brief description of our reportable segments and the business activities included in the All Other operating segment:
Construction Industries: A segment primarily responsible for supporting customers using machinery in infrastructure and building construction applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes asphalt pavers; backhoe loaders; compactors; cold planers; compact track and multi-terrain loaders; mini, small, medium and large track excavators; forestry machines; material handlers; motor graders; pipelayers; road reclaimers; skid steer loaders; telehandlers; small and medium track-type tractors; track-type loaders; wheel excavators; compact, small and medium wheel loaders; and related parts and work tools. Inter-segment sales are a source of revenue for this segment.
Resource Industries: A segment primarily responsible for supporting customers using machinery in mining, heavy construction and quarry and aggregates. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large track-type tractors; large mining trucks; hard rock vehicles; longwall miners; electric rope shovels; draglines; hydraulic shovels; rotary drills; large wheel loaders; off-highway trucks; articulated trucks; wheel tractor scrapers; wheel dozers; landfill compactors; soil compactors; select work tools; machinery components; electronics and control systems and related parts. In addition to equipment, Resource Industries also develops and sells technology products and services to provide customers fleet management, equipment management analytics, autonomous machine capabilities, safety services and mining performance solutions. Resource Industries also manages areas that provide services to other parts of the company, including strategic procurement, lean center of excellence, integrated manufacturing, research and development for hydraulic systems, automation, electronics and software for Cat machines and engines. Inter-segment sales are a source of revenue for this segment.
Energy & Transportation: A segment primarily responsible for supporting customers using reciprocating engines, turbines, diesel-electric locomotives and related services across industries serving Oil and Gas, Power Generation, Industrial and Transportation applications, including marine- and rail-related businesses. Responsibilities include business strategy, product design, product management, development and testing manufacturing, marketing and sales and product support. The product and services portfolio includes turbines, centrifugal gas compressors, and turbine-related services; reciprocating engine-powered generator sets; integrated systems and solutions used in the electric power generation industry; reciprocating engines, drivetrain and integrated systems and solutions for the marine and oil and gas industries; reciprocating engines, drivetrain and integrated systems and solutions supplied to the industrial industry as well as Cat machinery; 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 vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. Financing plans include operating and finance leases, installment sale contracts, repair/rebuild financing, working capital loans and wholesale financing plans. The segment also provides insurance and risk management products and services that help customers and dealers manage their business risk. Insurance and risk management products offered include physical damage insurance, inventory protection plans, extended service coverage and maintenance plans for machines and engines, and dealer property and casualty insurance. The various forms of financing, insurance and risk management products offered to customers and dealers help support the purchase and lease of Caterpillar equipment. The segment also earns revenues from ME&T, but the related costs are not allocated to operating segments. Financial Products’ segment profit is determined on a pretax basis and includes other income/expense items.
All Other operating segment: Primarily includes activities such as: business strategy; product management and development; manufacturing and sourcing of filters and fluids, undercarriage, ground-engaging tools, fluid transfer products, precision seals, rubber sealing and connecting components primarily for Cat® products; parts distribution; integrated logistics solutions; distribution services responsible for dealer development and administration, including one wholly owned dealer in Japan; dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; brand management and marketing strategy; and digital investments for new customer and dealer solutions that integrate data analytics with state-of-the-art digital technologies while transforming the buying experience. Results for the All Other operating segment are included as a reconciling item between reportable segments and consolidated external reporting.
C. Segment measurement and reconciliations
There are several methodology differences between our segment reporting and our external reporting. The following is a list of the more significant methodology differences:
•ME&T segment net assets generally include inventories, receivables, property, plant and equipment, goodwill, intangibles, accounts payable and customer advances. We generally manage at the corporate level liabilities other than accounts payable and customer advances, and we do not include these in segment operations. Financial Products Segment assets generally include all categories of assets.
•We value segment inventories and cost of sales using a current cost methodology.
•We amortize goodwill allocated to segments using a fixed amount based on a 20-year useful life. This methodology difference only impacts segment assets. We do not include goodwill amortization expense in segment profit. In addition, we have allocated to segments only a portion of goodwill for certain acquisitions made in 2011 or later.
•We generally manage currency exposures for ME&T at the corporate level and do not include in segment profit the effects of changes in exchange rates on results of operations within the year. We report the net difference created in the translation of revenues and costs between exchange rates used for U.S. GAAP reporting and exchange rates used for segment reporting as a methodology difference.
•We do not include stock-based compensation expense in segment profit.
•Postretirement benefit expenses are split; segments are generally responsible for service costs, with the remaining elements of net periodic benefit cost included as a methodology difference.
•We determine ME&T segment profit on a pretax basis and exclude interest expense and most other income/expense items. We determine Financial Products Segment profit on a pretax basis and include other income/expense items.
Reconciling items are created based on accounting differences between segment reporting and our consolidated external reporting. Please refer to pages 118 to 120 for financial information regarding significant reconciling items. Most of our reconciling items are self-explanatory given the above explanations. For the reconciliation of profit, we have grouped the reconciling items as follows:
•Corporate costs: These costs are related to corporate requirements primarily for compliance and legal functions for the benefit of the entire organization.
•Restructuring costs: May include costs for employee separation, long-lived asset impairments and contract terminations. These costs are included in Other operating (income) expenses except for defined-benefit plan curtailment losses and special termination benefits, which are included in Other income (expense). Restructuring costs also include other exit-related costs, which may consist of accelerated depreciation, inventory write-downs, building demolition, equipment relocation and project management costs and LIFO inventory decrement benefits from inventory liquidations at closed facilities, all of which are primarily included in Cost of goods sold. Only certain restructuring costs in 2020 were excluded from segment profit. See Note 25 for more information.
•Methodology differences: See previous discussion of significant accounting differences between segment reporting and consolidated external reporting.
•Timing: Timing differences in the recognition of costs between segment reporting and consolidated external reporting. For example, we report certain costs on the cash basis for segment reporting and the accrual basis for consolidated external reporting.
For the years ended December 31, 2022, 2021 and 2020, 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 |
| 2022 | | | | | | | | | | | | | | |
| Construction Industries | | $ | 12,367 | | | $ | 2,843 | | | $ | 5,099 | | | $ | 4,818 | | | $ | 25,127 | | | $ | 142 | | | $ | 25,269 | |
| Resource Industries | | 4,531 | | | 1,840 | | | 2,205 | | | 3,437 | | | $ | 12,013 | | | 301 | | | 12,314 | |
| Energy & Transportation | | 9,175 | | | 1,784 | | | 5,232 | | | 3,146 | | | $ | 19,337 | | | 4,415 | | | 23,752 | |
| Financial Products Segment | | 2,078 | | | 348 | | | 396 | | | 431 | | | $ | 3,253 | | 1 | — | | | 3,253 | |
| Total sales and revenues from reportable segments | | 28,151 | | | 6,815 | | | 12,932 | | | 11,832 | | | 59,730 | | | 4,858 | | | 64,588 | |
| All Other operating segment | | 64 | | | 2 | | | (66) | | | 145 | | | 145 | | | 305 | | | 450 | |
| Corporate Items and Eliminations | | (234) | | | (79) | | | (52) | | | (83) | | | (448) | | | (5,163) | | | (5,611) | |
| Total Sales and Revenues | | $ | 27,981 | | | $ | 6,738 | | | $ | 12,814 | | | $ | 11,894 | | | $ | 59,427 | | | $ | — | | | $ | 59,427 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 2021 | | | | | | | | | | | | | | |
| Construction Industries | | $ | 9,676 | | | $ | 1,913 | | | $ | 4,858 | | | $ | 5,547 | | | $ | 21,994 | | | $ | 112 | | | $ | 22,106 | |
| Resource Industries | | 2,987 | | | 1,724 | | | 1,987 | | | 2,804 | | | 9,502 | | | 308 | | | 9,810 | |
| Energy & Transportation | | 7,611 | | | 1,233 | | | 4,908 | | | 2,918 | | | 16,670 | | | 3,617 | | | 20,287 | |
| Financial Products Segment | | 1,935 | | | 265 | | | 402 | | | 471 | | | 3,073 | | 1 | — | | | 3,073 | |
| Total sales and revenues from reportable segments | | 22,209 | | | 5,135 | | | 12,155 | | | 11,740 | | | 51,239 | | | 4,037 | | | 55,276 | |
| All Other operating segment | | 56 | | | 2 | | | 18 | | | 69 | | | 145 | | | 366 | | | 511 | |
| Corporate Items and Eliminations | | (242) | | | (51) | | | (36) | | | (84) | | | (413) | | | (4,403) | | | (4,816) | |
| Total Sales and Revenues | | $ | 22,023 | | | $ | 5,086 | | | $ | 12,137 | | | $ | 11,725 | | | $ | 50,971 | | | $ | — | | | $ | 50,971 | |
| | | | | | | | | | | | | | |
| 2020 | | | | | | | | | | | | | | |
| Construction Industries | | $ | 7,365 | | | $ | 1,031 | | | $ | 3,466 | | | $ | 5,014 | | | $ | 16,876 | | | $ | 42 | | | $ | 16,918 | |
| Resource Industries | | 2,286 | | | 1,253 | | | 1,570 | | | 2,337 | | | 7,446 | | | 460 | | | 7,906 | |
| Energy & Transportation | | 6,843 | | | 932 | | | 4,448 | | | 2,441 | | | 14,664 | | | 2,806 | | | 17,470 | |
| Financial Products Segment | | 1,930 | | | 257 | | | 392 | | | 465 | | | 3,044 | | 1 | — | | | 3,044 | |
| Total sales and revenues from reportable segments | | 18,424 | | | 3,473 | | | 9,876 | | | 10,257 | | | 42,030 | | | 3,308 | | | 45,338 | |
| All Other operating segment | | 27 | | | 4 | | | 26 | | | 56 | | | 113 | | | 354 | | | 467 | |
| Corporate Items and Eliminations | | (237) | | | (45) | | | (44) | | | (69) | | | (395) | | | (3,662) | | | (4,057) | |
| Total Sales and Revenues | | $ | 18,214 | | | $ | 3,432 | | | $ | 9,858 | | | $ | 10,244 | | | $ | 41,748 | | | $ | — | | | $ | 41,748 | |
| | | | | | | | | | | | | | |
1 Includes revenues from Construction Industries, Resource Industries, Energy & Transportation and All Other operating segment of $478 million , $351 million and $362 million in the years ended December 31, 2022, 2021 and 2020, respectively.
For the years ended December 31, 2022, 2021 and 2020, Energy & Transportation segment sales by end user application were as follows: | | | | | | | | | | | | | | | | | | | | |
| Energy & Transportation External Sales | | | | | | |
| | | | | | |
| (Millions of dollars) | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Oil and gas | | $ | 5,330 | | | $ | 4,460 | | | $ | 3,701 | |
| Power generation | | 4,940 | | | 4,292 | | | 3,963 | |
| Industrial | | 4,426 | | | 3,612 | | | 2,945 | |
| Transportation | | 4,641 | | | 4,306 | | | 4,055 | |
| Energy & Transportation External Sales | | $ | 19,337 | | | $ | 16,670 | | | $ | 14,664 | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | |
| Reconciliation of Consolidated profit before taxes: | | | | | |
| (Millions of dollars) | | | | | |
| 2022 | | 2021 | | 2020 |
| Profit from reportable segments: | | | | | |
| Construction Industries | $ | 4,743 | | | $ | 3,732 | | | $ | 2,399 | |
| Resource Industries | 1,827 | | | 1,229 | | | 838 | |
| Energy & Transportation | 3,309 | | | 2,804 | | | 2,437 | |
| Financial Products Segment | 864 | | | 908 | | | 590 | |
| Total profit from reportable segments | 10,743 | | | 8,673 | | | 6,264 | |
| Profit from All Other operating segment | (11) | | | (14) | | | 28 | |
| Cost centers | (13) | | | (4) | | | (4) | |
| Corporate costs | (751) | | | (699) | | | (517) | |
| Timing | (309) | | | (263) | | | (106) | |
| Restructuring costs | (299) | | | (90) | | | (241) | |
| Methodology differences: | | | | | |
| Inventory/cost of sales | 413 | | | 122 | | | 4 | |
| Postretirement benefit income (expense) | 916 | | | 1,171 | | | (173) | |
| Stock-based compensation expense | (193) | | | (199) | | | (202) | |
| Financing costs | (331) | | | (449) | | | (444) | |
| Currency | 23 | | | 258 | | | (266) | |
| Goodwill impairment charge | (925) | | | — | | | — | |
| Other income/expense methodology differences | (409) | | | (267) | | | (322) | |
| Other methodology differences | (102) | | | (35) | | | (26) | |
| Total consolidated profit before taxes | $ | 8,752 | | | $ | 8,204 | | | $ | 3,995 | |
| | | | | |
| | | | | | | | | | | |
| Reconciliation of Assets: | | | |
| (Millions of dollars) | December 31, |
| 2022 | | 2021 |
| Assets from reportable segments: | | | |
| Construction Industries | $ | 5,168 | | | $ | 4,547 | |
| Resource Industries | 5,775 | | | 5,962 | |
| Energy & Transportation | 9,455 | | | 9,253 | |
| Financial Products Segment | 34,269 | | | 34,860 | |
| Total assets from reportable segments | 54,667 | | | 54,622 | |
| Assets from All Other operating segment | 1,828 | | | 1,678 | |
| Items not included in segment assets: | | | |
| Cash and cash equivalents | 6,042 | | | 8,428 | |
| | | |
| | | |
| Deferred income taxes | 2,098 | | | 1,735 | |
| Goodwill and intangible assets | 4,248 | | | 4,859 | |
| Property, plant and equipment – net and other assets | 4,234 | | | 4,056 | |
| Inventory methodology differences | (3,063) | | | (2,656) | |
| Liabilities included in segment assets | 12,519 | | | 10,777 | |
| Other | (630) | | | (706) | |
| Total assets | $ | 81,943 | | | $ | 82,793 | |
|
| | | | | | | | | | | | | | | | | |
| Reconciliation of Depreciation and amortization: | | | | | |
| (Millions of dollars) | | | | | |
| 2022 | | 2021 | | 2020 |
| Depreciation and amortization from reportable segments: | | | | | |
| Construction Industries | $ | 231 | | | $ | 237 | | | $ | 245 | |
| Resource Industries | 368 | | | 403 | | | 418 | |
| Energy & Transportation | 547 | | | 571 | | | 593 | |
| Financial Products Segment | 734 | | | 772 | | | 773 | |
| Total depreciation and amortization from reportable segments | 1,880 | | | 1,983 | | | 2,029 | |
| Items not included in segment depreciation and amortization: | | | | | |
| All Other operating segment | 229 | | | 243 | | | 267 | |
| Cost centers | 84 | | | 98 | | | 126 | |
| Other | 26 | | | 28 | | | 10 | |
| Total depreciation and amortization | $ | 2,219 | | | $ | 2,352 | | | $ | 2,432 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Reconciliation of Capital expenditures: | | | | | |
| (Millions of dollars) | | | | | |
| 2022 | | 2021 | | 2020 |
| Capital expenditures from reportable segments: | | | | | |
| Construction Industries | $ | 271 | | | $ | 255 | | | $ | 213 | |
| Resource Industries | 237 | | | 199 | | | 125 | |
| Energy & Transportation | 756 | | | 627 | | | 495 | |
| Financial Products Segment | 1,141 | | | 1,218 | | | 1,100 | |
| Total capital expenditures from reportable segments | 2,405 | | | 2,299 | | | 1,933 | |
| Items not included in segment capital expenditures: | | | | | |
| All Other operating segment | 219 | | | 182 | | | 156 | |
| Cost centers | 76 | | | 56 | | | 47 | |
| Timing | (54) | | | (74) | | | 19 | |
| Other | (47) | | | 9 | | | (40) | |
| Total capital expenditures | $ | 2,599 | | | $ | 2,472 | | | $ | 2,115 | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Enterprise-wide Disclosures: | | | | | | | | | | |
| Information about Geographic Areas: | | | | | | | | |
| | | | | | | | | Property, plant and equipment - net |
| | | External sales and revenues 1 | | December 31, |
| (Millions of dollars) | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
| Inside United States | | $ | 24,368 | | | $ | 19,298 | | | $ | 16,269 | | | $ | 7,042 | | | $ | 7,035 | |
| Outside United States | | 35,059 | | | 31,673 | | | 25,479 | | | 4,986 | | | 5,055 | |
| Total | | $ | 59,427 | | | $ | 50,971 | | | $ | 41,748 | | | $ | 12,028 | | | $ | 12,090 | |
| | | | | | | | | | |
1 Sales of ME&T are based on dealer or customer location. Revenues from services provided are based on where service is rendered. |
| | | | | | | | | | |
24. Acquisitions
SPM Oil & Gas
On February 1, 2021, Caterpillar completed the acquisition of varying equity interests and assets of the Weir Group PLC, collectively known as SPM Oil & Gas (SPM). Headquartered near Fort Worth, Texas, SPM Oil & Gas produces a full line of pumps, flow iron, consumable parts, wellhead and pressure control products that are offered via an extensive global network of service centers. This acquisition, included in the Energy & Transportation segment, is consistent with our strategy of providing our customers expanded offerings and services which will now be one of the broadest in the well service industry. The purchase price, net of $22 million of acquired cash, was approximately $359 million.
We financed the transaction with available cash. Tangible assets as of the acquisition date were $520 million, recorded at their fair values, and primarily included cash of $22 million, receivables of $106 million, inventories of $159 million, leased assets of $105 million, and property, plant, and equipment of $117 million. Finite-lived intangible assets acquired of $23 million included developed technology and trade names and will be amortized on a straight-line basis over a weighted-average amortization period of approximately 8 years. Liabilities assumed as of the acquisition date were $192 million, recorded at their fair values, and primarily included lease liabilities of $105 million and accounts payable of $33 million. Goodwill of $30 million represented the excess of the consideration transferred over the net assets acquired. Assuming this transaction had been made at the beginning of any period presented, the consolidated pro forma results would not be materially different from reported results.
25. 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 2022, 2021 and 2020 were as follows:
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| (Millions of dollars) | | 2022 | | 2021 | | 2020 |
Employee separations 1 | | $ | 77 | | | $ | 92 | | | $ | 271 | |
Contract terminations 1 | | 1 | | | 2 | | | 2 | |
Long-lived asset impairments 1 | | 6 | | | (63) | | | 38 | |
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Other 2 | | 215 | | | 59 | | | 43 | |
| Total restructuring costs | | $ | 299 | | | $ | 90 | | | $ | 354 | |
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1 Recognized in Other operating (income) expenses. | | | | | | |
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2 Represents costs related to our restructuring programs, primarily for inventory write-downs, accelerated depreciation, equipment relocation, project management and building demolition, all of which are primarily included in Cost of goods sold. |
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The restructuring costs in 2022 were primarily related to actions across the company, including $193 million related to the Rail division that was primarily inventory write-downs, and other strategic actions to address a small number of products. The inventory write-downs were included in "Other" in the table above. The restructuring costs in 2021 were primarily related to actions across the company including strategic actions to address a small number of products, which were partially offset by a gain on the sale of a manufacturing facility that had been closed. The restructuring costs in 2020 were primarily related to various voluntary and involuntary employee separation programs implemented across the company and strategic actions to address a small number of products, which were partially offset by a gain on the sale of a manufacturing facility that had been closed. Both the gains in 2021 and 2020 were included in Long-lived asset impairments in the table above.
On February 1, 2023, we closed on the divestiture of our Longwall business. As a result, we recorded a pre-tax loss of approximately $600 million, of which $494 million was related to the release of accumulated foreign currency translation associated with this divestiture. This loss, primarily non-cash, will be included in our first quarter 2023 restructuring costs and is subject to the finalization of post-closing procedures.
In 2022 and 2021, all restructuring costs were excluded from segment profit. In 2020, only certain restructuring costs were excluded from segment profit. Restructuring costs included in segment profit were as follows:
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| (Millions of dollars) | | | | | | 2020 |
| Construction Industries | | | | | | $ | 13 | |
| Resource Industries | | | | | | 19 | |
| Energy & Transportation | | | | | | 55 | |
| Financial Products Segment | | | | | | — | |
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The following table summarizes the 2022 and 2021 employee separation activity:
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| (Millions of dollars) | 2022 | | 2021 |
| Liability balance, beginning of period | $ | 61 | | | $ | 164 | |
| Increase in liability (separation charges) | 77 | | | 92 | |
| Reduction in liability (payments) | (99) | | | (195) | |
| Liability balance, end of period | $ | 39 | | | $ | 61 | |
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Most of the remaining liability balance as of December 31, 2022 is expected to be paid in 2023.