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CAT Caterpillar

Filed: 4 Nov 20, 10:29am
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
cat-20200930_g1.jpg
 FORM 10-Q 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to
Commission File Number:  1-768
CATERPILLAR INC.
(Exact name of registrant as specified in its charter)
Delaware37-0602744
(State or other jurisdiction of incorporation)(IRS Employer I.D. No.)
510 Lake Cook Road,Suite 100,Deerfield,Illinois60015
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (224) 551-4000 
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol (s)Name of each exchange on which registered
Common Stock ($1.00 par value)CATNew York Stock Exchange¹
9 3/8% Debentures due March 15, 2021CAT21New York Stock Exchange
8% Debentures due February 15, 2023CAT23New York Stock Exchange
5.3% Debentures due September 15, 2035CAT35New York Stock Exchange
¹    In addition to the New York Stock Exchange, Caterpillar common stock is also listed on stock exchanges in France and Switzerland.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No

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


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

2

Part I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements
Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
 Three Months Ended September 30
 20202019
Sales and revenues:  
Sales of Machinery, Energy & Transportation$9,228 $11,974 
Revenues of Financial Products653 784 
Total sales and revenues9,881 12,758 
Operating costs:  
Cost of goods sold6,919 8,569 
Selling, general and administrative expenses1,126 1,251 
Research and development expenses344 431 
Interest expense of Financial Products137 189 
Other operating (income) expenses370 298 
Total operating costs8,896 10,738 
Operating profit985 2,020 
Interest expense excluding Financial Products136 103 
Other income (expense)14 88 
Consolidated profit before taxes863 2,005 
Provision (benefit) for income taxes187 518 
Profit of consolidated companies676 1,487 
Equity in profit (loss) of unconsolidated affiliated companies(5)
Profit of consolidated and affiliated companies671 1,494 
Less: Profit (loss) attributable to noncontrolling interests
Profit 1
$668 $1,494 
Profit per common share$1.23 $2.69 
Profit per common share – diluted 2
$1.22 $2.66 
Weighted-average common shares outstanding (millions)  
– Basic542.3 556.3 
– Diluted 2
546.4 561.2 
 
1    Profit attributable to common shareholders.
2   Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
 
See accompanying notes to Consolidated Financial Statements.
3

Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)
 Three Months Ended September 30
 20202019
Profit of consolidated and affiliated companies$671 $1,494 
Other comprehensive income (loss), net of tax:
   Foreign currency translation, net of tax (provision)/benefit of: 2020- $21; 2019 - $(21)291 (263)
   Pension and other postretirement benefits:
        Current year prior service credit (cost), net of tax (provision)/benefit of: 2020 - $1; 2019 - $0(1)
        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2020 - $2; 2019 - $2(7)(8)
   Derivative financial instruments:
        Gains (losses) deferred, net of tax (provision)/benefit of: 2020 - $(2); 2019 - $(16)59 
        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2020 - $(20); 2019 - $2073 (76)
   Available-for-sale securities:
        Gains (losses) deferred, net of tax (provision)/benefit of: 2020 - $0; 2019 - $(2)
Total other comprehensive income (loss), net of tax367 (284)
Comprehensive income1,038 1,210 
Less: comprehensive income attributable to the noncontrolling interests
Comprehensive income attributable to shareholders$1,035 $1,210 

See accompanying notes to Consolidated Financial Statements.

4

Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
 Nine Months Ended September 30
 20202019
Sales and revenues:  
Sales of Machinery, Energy & Transportation$28,452 $38,369 
Revenues of Financial Products2,061 2,287 
Total sales and revenues30,513 40,656 
Operating costs:  
Cost of goods sold21,298 27,513 
Selling, general and administrative expenses3,426 3,879 
Research and development expenses1,041 1,307 
Interest expense of Financial Products461 571 
Other operating (income) expenses1,114 946 
Total operating costs27,340 34,216 
Operating profit3,173 6,440 
Interest expense excluding Financial Products384 309 
Other income (expense)265 316 
Consolidated profit before taxes3,054 6,447 
Provision (benefit) for income taxes839 1,470 
Profit of consolidated companies2,215 4,977 
Equity in profit (loss) of unconsolidated affiliated companies20 
Profit of consolidated and affiliated companies2,223 4,997 
Less: Profit (loss) attributable to noncontrolling interests
Profit 1
$2,218 $4,995 
Profit per common share$4.08 $8.84 
Profit per common share – diluted 2
$4.05 $8.75 
Weighted-average common shares outstanding (millions) 
– Basic543.9 565.2 
– Diluted 2
547.8 570.8 

1    Profit attributable to common shareholders.
2   Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
 
See accompanying notes to Consolidated Financial Statements.

5

Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)
 Nine Months Ended September 30
 20202019
Profit of consolidated and affiliated companies$2,223 $4,997 
Other comprehensive income (loss), net of tax:
   Foreign currency translation, net of tax (provision)/benefit of: 2020 - $20; 2019 - $(19)106 (186)
   Pension and other postretirement benefits:
        Current year prior service credit (cost), net of tax (provision)/benefit of: 2020 - $1; 2019 - $0
        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2020 - $7; 2019 - $8(21)(22)
   Derivative financial instruments:
        Gains (losses) deferred, net of tax (provision)/benefit of: 2020 - $21; 2019 - $(15)(72)53 
        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2020 - $(22); 2019 - $2376 (86)
   Available-for-sale securities:
        Gains (losses) deferred, net of tax (provision)/benefit of: 2020 - $(9); 2019 - $(10)29 34 
Total other comprehensive income (loss), net of tax119 (207)
Comprehensive income2,342 4,790 
Less: comprehensive income attributable to the noncontrolling interests
Comprehensive income attributable to shareholders$2,337 $4,788 

See accompanying notes to Consolidated Financial Statements.



6

Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Dollars in millions) 
 September 30,
2020
December 31,
2019
Assets  
Current assets:  
Cash and short-term investments$9,315 $8,284 
Receivables – trade and other6,969 8,568 
Receivables – finance8,966 9,336 
Prepaid expenses and other current assets1,831 1,739 
Inventories11,453 11,266 
Total current assets38,534 39,193 
Property, plant and equipment – net12,232 12,904 
Long-term receivables – trade and other1,149 1,193 
Long-term receivables – finance12,209 12,651 
Noncurrent deferred and refundable income taxes1,440 1,411 
Intangible assets1,363 1,565 
Goodwill6,304 6,196 
Other assets3,510 3,340 
Total assets$76,741 $78,453 
Liabilities  
Current liabilities:  
Short-term borrowings:  
Machinery, Energy & Transportation$$
Financial Products2,660 5,161 
Accounts payable5,193 5,957 
Accrued expenses3,510 3,750 
Accrued wages, salaries and employee benefits1,069 1,629 
Customer advances1,209 1,187 
Dividends payable567 
Other current liabilities1,978 2,155 
Long-term debt due within one year:  
Machinery, Energy & Transportation1,397 16 
Financial Products7,962 6,194 
Total current liabilities24,978 26,621 
Long-term debt due after one year:  
Machinery, Energy & Transportation9,742 9,141 
Financial Products16,365 17,140 
Liability for postemployment benefits6,254 6,599 
Other liabilities4,408 4,323 
Total liabilities61,747 63,824 
Commitments and contingencies (Notes 11 and 14)
Shareholders’ equity  
Common stock of $1.00 par value:  
Authorized shares: 2,000,000,000
Issued shares: (9/30/20 and 12/31/19 – 814,894,624) at paid-in amount
6,204 5,935 
Treasury stock (9/30/20 – 271,636,341 shares; 12/31/19 – 264,812,014 shares) at cost(25,315)(24,217)
Profit employed in the business35,508 34,437 
Accumulated other comprehensive income (loss)(1,448)(1,567)
Noncontrolling interests45 41 
Total shareholders’ equity14,994 14,629 
Total liabilities and shareholders’ equity$76,741 $78,453 
 
See accompanying notes to Consolidated Financial Statements.
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Caterpillar Inc.
Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in millions) 
 Common
stock
Treasury
stock
Profit
employed
in the
business
Accumulated
other
comprehensive
income (loss)
Noncontrolling
interests
Total
Three Months Ended September 30, 2019      
Balance at June 30, 2019$5,822 $(22,467)$32,981 $(1,499)$41 $14,878 
Profit of consolidated and affiliated companies1,494 1,494 
Foreign currency translation, net of tax(263)(263)
Pension and other postretirement benefits, net of tax(8)(8)
Derivative financial instruments, net of tax(17)(17)
Available-for-sale securities, net of tax
Common shares issued from treasury stock for stock-based compensation: 404,60620 20 
Stock-based compensation expense57 57 
Common shares repurchased: 10,335,410 1
(1,246)(1,246)
Other72 74 
Balance at September 30, 2019$5,951 $(23,693)$34,477 $(1,783)$41 $14,993 
Three Months Ended September 30, 2020      
Balance at June 30, 2020$6,120 $(25,412)$34,841 $(1,815)$43 $13,777 
Profit of consolidated and affiliated companies668 671 
Foreign currency translation, net of tax291 291 
Pension and other postretirement benefits, net of tax(8)(8)
Derivative financial instruments, net of tax76 76 
Available-for-sale securities, net of tax
Common shares issued from treasury stock for stock-based compensation: 1,751,70823 97 120 
Stock-based compensation expense55 55 
Other(1)(1)
Balance at September 30, 2020$6,204 $(25,315)$35,508 $(1,448)$45 $14,994 

1 See Note 12 for additional information.
  

See accompanying notes to Consolidated Financial Statements.

8

Caterpillar Inc.
Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in millions) 
 Common
stock
Treasury
stock
Profit
employed
in the
business
Accumulated
other
comprehensive
income (loss)
Noncontrolling
interests
Total
Nine Months Ended September 30, 2019      
Balance at December 31, 2018$5,827 $(20,531)$30,427 $(1,684)$41 $14,080 
Adjustments to adopt new accounting guidance
Lease accounting235 235 
Reclassification of certain tax effects from accumulated other comprehensive income(108)108 
Balance at January 1, 20195,827 (20,531)30,554 (1,576)41 14,315 
Profit of consolidated and affiliated companies4,995 4,997 
Foreign currency translation, net of tax(186)(186)
Pension and other postretirement benefits, net of tax(22)(22)
Derivative financial instruments, net of tax(33)(33)
Available-for-sale securities, net of tax34 34 
Dividends declared 1
(1,074)(1,074)
Distribution to noncontrolling interests(2)(2)
Common shares issued from treasury stock for stock-based compensation: 2,907,710(62)121 59 
Stock-based compensation expense170 170 
Common shares repurchased: 25,792,061 2
(3,283)(3,283)
Other16 18 
Balance at September 30, 2019$5,951 $(23,693)$34,477 $(1,783)$41 $14,993 
Nine Months Ended September 30, 2020      
Balance at December 31, 2019$5,935 $(24,217)$34,437 $(1,567)$41 $14,629 
Adjustments to adopt new accounting guidance 3
Credit losses(25)(25)
Balance at January 1, 20205,935 (24,217)34,412 (1,567)41 14,604 
Profit of consolidated and affiliated companies2,218 2,223 
Foreign currency translation, net of tax106 106 
Pension and other postretirement benefits, net of tax(20)(20)
Derivative financial instruments, net of tax
Available-for-sale securities, net of tax29 29 
Dividends declared 1
(1,121)(1,121)
Common shares issued from treasury stock for stock-based compensation: 3,271,679(43)153 110 
Stock-based compensation expense169 169 
Common shares repurchased: 10,096,006 2
(1,250)(1,250)
Other143 (1)(1)(1)140 
Balance at September 30, 2020$6,204 $(25,315)$35,508 $(1,448)$45 $14,994 

1 Dividends per share of common stock of $2.06 and $1.89 were declared in the nine months ended September 30, 2020 and 2019, respectively.
2 See Note 12 for additional information.
3 See Note 2 for additional information.

See accompanying notes to Consolidated Financial Statements.

9

Caterpillar Inc.
Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
 Nine Months Ended September 30
 20202019
Cash flow from operating activities:  
Profit of consolidated and affiliated companies$2,223 $4,997 
Adjustments for non-cash items:  
Depreciation and amortization1,815 1,933 
Net gain on remeasurement of pension obligations(55)
Provision (benefit) for deferred income taxes(38)(13)
Other919 627 
Changes in assets and liabilities, net of acquisitions and divestitures:  
Receivables – trade and other1,473 427 
Inventories(139)(676)
Accounts payable(596)(669)
Accrued expenses(286)114 
Accrued wages, salaries and employee benefits(547)(858)
Customer advances13 169 
Other assets – net(15)19 
Other liabilities – net(512)(1,592)
Net cash provided by (used for) operating activities4,255 4,478 
Cash flow from investing activities:  
Capital expenditures – excluding equipment leased to others(686)(723)
Expenditures for equipment leased to others(805)(1,133)
Proceeds from disposals of leased assets and property, plant and equipment550 812 
Additions to finance receivables(9,278)(9,453)
Collections of finance receivables9,656 9,144 
Proceeds from sale of finance receivables37 183 
Investments and acquisitions (net of cash acquired)(93)(6)
Proceeds from sale of businesses and investments (net of cash sold)13 
Proceeds from sale of securities239 281 
Investments in securities(512)(425)
Other – net(80)(37)
Net cash provided by (used for) investing activities(959)(1,354)
Cash flow from financing activities:  
Dividends paid(1,683)(1,564)
Common stock issued, including treasury shares reissued110 59 
Common shares repurchased(1,130)(3,283)
Proceeds from debt issued (original maturities greater than three months):  
        Machinery, Energy & Transportation1,991 1,479 
        Financial Products7,427 7,348 
Payments on debt (original maturities greater than three months):  
        Machinery, Energy & Transportation(18)(8)
        Financial Products(6,771)(6,054)
Short-term borrowings – net (original maturities three months or less)(2,138)(1,006)
Other – net(1)(2)
Net cash provided by (used for) financing activities(2,213)(3,031)
Effect of exchange rate changes on cash(56)(47)
Increase (decrease) in cash and short-term investments and restricted cash1,027 46 
Cash and short-term investments and restricted cash at beginning of period8,292 7,890 
Cash and short-term investments and restricted cash at end of period$9,319 $7,936 

 All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents.
See accompanying notes to Consolidated Financial Statements.
10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.     A.  Nature of operations
 
Information in our financial statements and related commentary are presented in the following categories:
 
Machinery, Energy & Transportation (ME&T) – We define ME&T as Caterpillar Inc. and its subsidiaries, excluding Financial Products. ME&T’s information relates to the design, manufacturing and marketing of our products.
 
Financial Products – We define Financial Products as our finance and insurance subsidiaries, primarily Caterpillar Financial Services Corporation (Cat Financial) and Caterpillar Insurance Holdings Inc. (Insurance Services). Financial Products’ information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment.

B.  Basis of presentation
 
In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated results of operations for the three and nine months ended September 30, 2020 and 2019, (b) the consolidated comprehensive income for the three and nine months ended September 30, 2020 and 2019, (c) the consolidated financial position at September 30, 2020 and December 31, 2019, (d) the consolidated changes in shareholders’ equity for the three and nine months ended September 30, 2020 and 2019 and (e) the consolidated cash flow for the nine months ended September 30, 2020 and 2019.  The financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our company’s annual report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K).
 
The December 31, 2019 financial position data included herein is derived from the audited consolidated financial statements included in the 2019 Form 10-K but does not include all disclosures required by U.S. GAAP. Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation.

Unconsolidated Variable Interest Entities (VIEs)

We have affiliates, suppliers and dealers that are VIEs of which we are not the primary beneficiary. Although we have provided financial support, we do not have the power to direct the activities that most significantly impact the economic performance of each entity. Our maximum exposure to loss from these VIEs for which we are not the primary beneficiary was $57 million and $133 million as of September 30, 2020 and December 31, 2019, respectively.

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

11

2.                                   New accounting guidance

A. Adoption of new accounting standards

Credit losses (Accounting Standards Update (ASU) 2016-13) – In June 2016, the Financial Accounting Standards Board (FASB) issued new accounting guidance to introduce a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new guidance applies to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. The new guidance also applies to debt securities and other financial assets measured at fair value through other comprehensive income. The new guidance was effective January 1, 2020. We applied the new guidance using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of January 1, 2020. We have not recast prior period comparative information, which we continue to report under the accounting guidance in effect for those periods. Our adoption of the new guidance did not have a material impact on our financial statements.

We adopted the following ASUs effective January 1, 2020, none of which had a material impact on our financial statements:
ASUDescription
2018-13Fair value measurement
2018-15Internal-use software
2018-19Codification improvements - Credit losses
2019-04Codification improvements - Credit losses, Derivatives & hedging, and Financial instruments
2019-05Financial instruments - Credit losses
2019-11Codification improvements - Credit losses
2019-12Simplifying accounting for income taxes
2020-02Financial instruments - Credit losses
2020-03Codification improvements - Financial instruments

B. Accounting standards issued but not yet adopted

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

We consider the applicability and impact of all ASUs. We assessed ASUs not listed above and determined that they either were not applicable or were not expected to have a material impact on our financial statements.

3.     Sales and revenue contract information

Trade receivables represent amounts due from dealers and end users for the sale of our products. In addition, Cat Financial provides wholesale inventory financing for a dealer’s purchase of inventory. We include wholesale inventory receivables in Receivables – trade and other and Long-term receivables – trade and other in the Consolidated Statement of Financial Position. Trade receivables from dealers and end users were $6,048 million, $7,648 million and $7,743 million as of September 30, 2020, December 31, 2019 and December 31, 2018, respectively. We recognize trade receivables from dealers and end users in Receivables – trade and other in the Consolidated Statement of Financial Position. Long-term trade receivables from dealers and end users were $674 million, $693 million and $674 million as of September 30, 2020, December 31, 2019 and December 31, 2018, respectively. We recognize long-term trade receivables from dealers and end users in Long-term receivables – trade and other in the Consolidated Statement of Financial Position.

12

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

As of September 30, 2020, we have entered into contracts with dealers and end users for which sales have not been recognized as we have not satisfied our performance obligations and transferred control of the products. The dollar amount of unsatisfied performance obligations for contracts with an original duration greater than one year is $6.0 billion, of which $2.4 billion is expected to be completed and revenue recognized in the twelve months following September 30, 2020. We have elected the practical expedient not to disclose unsatisfied performance obligations with an original contract duration of one year or less. Contracts with an original duration of one year or less are primarily sales to dealers for machinery, engines and replacement parts.

See Note 16 for further disaggregated sales and revenues information.

4.                                    Stock-based compensation
 
Accounting for stock-based compensation requires that the cost resulting from all stock-based payments be recognized in the financial statements based on the grant date fair value of the award.  Our stock-based compensation primarily consists of stock options, restricted stock units (RSUs) and performance-based restricted stock units (PRSUs).

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

The following table illustrates the type and fair value of the stock-based compensation awards granted during the nine months ended September 30, 2020 and 2019, respectively:
 Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
 Shares GrantedWeighted-Average Fair Value Per ShareWeighted-Average Grant Date Stock PriceShares GrantedWeighted-Average Fair Value Per ShareWeighted-Average Grant Date Stock Price
Stock options1,913,888 $25.98 $127.60 1,499,524 $40.98 $138.35 
RSUs705,287 $127.60 $127.60 657,389 $138.35 $138.35 
PRSUs371,641 $127.60 $127.60 342,097 $138.35 $138.35 
 
The following table provides the assumptions used in determining the fair value of the stock-based awards for the nine months ended September 30, 2020 and 2019, respectively:
 
 Grant Year
 20202019
Weighted-average dividend yield2.47%2.56%
Weighted-average volatility25.7%29.1%
Range of volatilities24.5% -29.7%25.1% -38.7%
Range of risk-free interest rates1.21% -1.39%2.48% -2.68%
Weighted-average expected lives8 years7 years
 
As of September 30, 2020, the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $170 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 1.8 years.
 
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5.                                     Derivative financial instruments and risk management
 
Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices.  Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures.  Our policy specifies that derivatives are not to be used for speculative purposes.  Derivatives that we use are primarily foreign currency forward, option and cross currency contracts, interest rate contracts and commodity forward and option contracts.  Our derivative activities are subject to the management, direction and control of our senior financial officers.  We present at least annually to the Audit Committee of the Board of Directors on our risk management practices, including our use of financial derivative instruments.
 
We recognize all derivatives at their fair value on the Consolidated Statement of Financial Position. On the date the derivative contract is entered into, we designate the derivative as (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flow (cash flow hedge) or (3) an undesignated instrument. We record in current earnings changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk. We record in Accumulated other comprehensive income (loss) (AOCI) changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge, to the extent effective, on the Consolidated Statement of Financial Position until we reclassify them to earnings in the same period or periods during which the hedged transaction affects earnings.  We report changes in the fair value of undesignated derivative instruments in current earnings. We classify cash flows from designated derivative financial instruments within the same category as the item being hedged on the Consolidated Statement of Cash Flow.  We include cash flows from undesignated derivative financial instruments in the investing category on the Consolidated Statement of Cash Flow.
 
We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions.  This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Consolidated Statement of Financial Position and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items.  When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, we discontinue hedge accounting prospectively, in accordance with the derecognition criteria for hedge accounting.
 
Foreign Currency Exchange Rate Risk
 
Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies. Movements in foreign currency rates also affect our competitive position as these changes may affect business practices and/or pricing strategies of non-U.S.-based competitors. Additionally, we have balance sheet positions denominated in foreign currencies, thereby creating exposure to movements in exchange rates.
 
Our ME&T operations purchase, manufacture and sell products in many locations around the world. As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to five years. As of September 30, 2020, the maximum term of these outstanding contracts was approximately 60 months.
 
We generally designate as cash flow hedges at inception of the contract any Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, Indian rupee, Japanese yen, Mexican peso, Norwegian Krona, Singapore dollar or Thailand baht forward or option contracts that meet the requirements for hedge accounting and the maturity extends beyond the current quarter-end. We perform designation on a specific exposure basis to support hedge accounting. The remainder of ME&T foreign currency contracts are undesignated.  
 
14

As of September 30, 2020, $8 million of deferred net losses, net of tax, included in equity (AOCI in the Consolidated Statement of Financial Position), are expected to be reclassified to current earnings over the next twelve months when earnings are affected by the hedged transactions.  The actual amount recorded in current earnings will vary based on exchange rates at the time the hedged transactions impact earnings.
 
In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions and future transactions denominated in foreign currencies. Our policy allows the use of foreign currency forward, option and cross currency contracts to offset the risk of currency mismatch between our assets and liabilities and exchange rate risk associated with future transactions denominated in foreign currencies. Our foreign currency forward and option contracts are primarily undesignated. We designate fixed-to-fixed cross currency contracts as cash flow hedges to protect against movements in exchange rates on foreign currency fixed-rate assets and liabilities.
 
Interest Rate Risk
 
Interest rate movements create a degree of risk by affecting the amount of our interest payments and the value of our fixed-rate debt. Our practice is to use interest rate contracts to manage our exposure to interest rate changes.
 
Our ME&T operations generally use fixed-rate debt as a source of funding.  Our objective is to minimize the cost of borrowed funds.  Our policy allows us to enter into fixed-to-floating interest rate contracts and forward rate agreements to meet that objective. We designate fixed-to-floating interest rate contracts as fair value hedges at inception of the contract, and we designate certain forward rate agreements as cash flow hedges at inception of the contract.

Financial Products operations has a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate and duration) of Cat Financial’s debt portfolio with the interest rate profile of our receivables portfolio within predetermined ranges on an ongoing basis. In connection with that policy, we use interest rate derivative instruments to modify the debt structure to match assets within the receivables portfolio. This matched funding reduces the volatility of margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move.
 
Our policy allows us to use fixed-to-floating, floating-to-fixed and floating-to-floating interest rate contracts to meet the match-funding objective.  We designate fixed-to-floating interest rate contracts as fair value hedges to protect debt against changes in fair value due to changes in the benchmark interest rate.  We designate most floating-to-fixed interest rate contracts as cash flow hedges to protect against the variability of cash flows due to changes in the benchmark interest rate.
 
We have, at certain times, liquidated fixed-to-floating and floating-to-fixed interest rate contracts at both ME&T and Financial Products. We amortize the gains or losses associated with these contracts at the time of liquidation into earnings over the original term of the previously designated hedged item.
 
Commodity Price Risk
 
Commodity price movements create a degree of risk by affecting the price we must pay for certain raw materials. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials.
 
Our ME&T operations purchase base and precious metals embedded in the components we purchase from suppliers.  Our suppliers pass on to us price changes in the commodity portion of the component cost. In addition, we are subject to price changes on energy products such as natural gas and diesel fuel purchased for operational use.
 
Our objective is to minimize volatility in the price of these commodities. Our policy allows us to enter into commodity forward and option contracts to lock in the purchase price of a portion of these commodities within a five-year horizon. All such commodity forward and option contracts are undesignated.
 
15



The location and fair value of derivative instruments reported in the Consolidated Statement of Financial Position were as follows:
 
 (Millions of dollars)
Consolidated Statement of FinancialAsset (Liability) Fair Value
 Position LocationSeptember 30, 2020December 31, 2019
Designated derivatives   
Foreign exchange contracts   
Machinery, Energy & TransportationReceivables – trade and other$29 $18 
Machinery, Energy & TransportationLong-term receivables – trade and other28 
Machinery, Energy & TransportationAccrued expenses(40)(20)
Machinery, Energy & TransportationOther liabilities(21)
Financial ProductsReceivables – trade and other16 54 
Financial ProductsLong-term receivables – trade and other13 
Financial ProductsAccrued expenses(39)(3)
Interest rate contracts 
Machinery, Energy & TransportationLong-term receivables – trade and other
Financial ProductsReceivables – trade and other
Financial ProductsLong-term receivables – trade and other60 
Financial ProductsAccrued expenses(12)(25)
  $25 $51 
Undesignated derivatives   
Foreign exchange contracts   
Machinery, Energy & TransportationReceivables – trade and other$$
Financial ProductsReceivables – trade and other57 
Financial ProductsLong-term receivables – trade and other12 
Financial ProductsAccrued expenses(18)(22)
Commodity contracts  
Machinery, Energy & TransportationReceivables – trade and other
Machinery, Energy & TransportationLong-term receivables – trade and other
Machinery, Energy & TransportationAccrued expenses(7)(1)
  $57 $(6)

16

The total notional amounts of the derivative instruments were as follows:
(Millions of dollars)September 30, 2020December 31, 2019
Machinery, Energy & Transportation$3,479 $2,563 
Financial Products$11,538 $8,931 

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

The effect of derivatives designated as hedging instruments on the Consolidated Statement of Results of Operations was as follows:
Cash Flow Hedges    
 Three Months Ended September 30, 2020
  Recognized in Earnings
 (Millions of dollars)
Amount of Gains
(Losses) Recognized
in AOCI
Classification of
Gains (Losses)
Amount of Gains
(Losses) Reclassified
from AOCI
Amount of the line items in the Consolidated Statement of Results of Operations
Foreign exchange contracts    
Machinery, Energy & Transportation$66 Sales of Machinery, Energy & Transportation$(6)$9,228 
Cost of goods sold(15)6,919 
Financial Products(64)Interest expense of Financial Products137 
Other income (expense)(63)14 
Interest rate contracts
Machinery, Energy & TransportationInterest expense excluding Financial Products(1)136 
Financial ProductsInterest expense of Financial Products(16)137 
 $ $(93)
 Three Months Ended September 30, 2019
  Recognized in Earnings
 Amount of Gains
(Losses) Recognized
in AOCI
Classification of
Gains (Losses)
Amount of Gains
(Losses) Reclassified
from AOCI
Amount of the line items in the Consolidated Statement of Results of Operations
Foreign exchange contracts    
Machinery, Energy & Transportation$(13)Sales of Machinery, Energy & Transportation$$11,974 
Financial Products100 Interest expense of Financial Products189 
Other income (expense)89 88 
Interest rate contracts  
Machinery, Energy & TransportationInterest expense excluding Financial Products(2)103 
Financial Products(12)Interest expense of Financial Products(3)189 
 $75 $96 

17


Cash Flow Hedges    
 Nine Months Ended September 30, 2020
  Recognized in Earnings
 (Millions of dollars)
Amount of Gains
(Losses) Recognized
in AOCI
Classification of
Gains (Losses)
Amount of Gains
(Losses) Reclassified
from AOCI
Amount of the line items in the Consolidated Statement of Results of Operations
Foreign exchange contracts    
Machinery, Energy & Transportation$(58)Sales of Machinery, Energy & Transportation$10 $28,452 
Cost of goods sold(58)21,298 
Financial ProductsInterest expense of Financial Products28 461 
Other income (expense)(35)265 
Interest rate contracts
Machinery, Energy & Transportation(14)Interest expense excluding Financial Products(3)384 
Financial Products(23)Interest expense of Financial Products(40)461 
 $(93) $(98)
 Nine Months Ended September 30, 2019
  Recognized in Earnings
 Amount of Gains
(Losses) Recognized
in AOCI
Classification of
Gains (Losses)
Amount of Gains
(Losses) Reclassified
from AOCI
Amount of the line items in the Consolidated Statement of Results of Operations
Foreign exchange contracts    
Machinery, Energy & Transportation$Sales of Machinery, Energy & Transportation$$38,369 
Cost of goods sold(4)27,513 
Financial Products132 Interest expense of Financial Products23 571 
 Other income (expense)91 316 
Interest rate contracts
Machinery, Energy & TransportationInterest expense excluding Financial Products(3)309 
Financial Products(72)Interest expense of Financial Products(2)571 
 $68 $109 
18

The effect of derivatives not designated as hedging instruments on the Consolidated Statement of Results of Operations was as follows: 
 (Millions of dollars)
Classification of Gains (Losses)Three Months Ended September 30, 2020Three Months Ended September 30, 2019
Foreign exchange contracts  
Machinery, Energy & TransportationOther income (expense)$$(1)
Financial ProductsOther income (expense)(73)15 
Commodity contracts  
Machinery, Energy & TransportationOther income (expense)(6)
  $(59)$
 Classification of Gains (Losses)Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
Foreign exchange contracts  
Machinery, Energy & TransportationOther income (expense)$21 $12 
Financial ProductsOther income (expense)12 (24)
Commodity contracts 
Machinery, Energy & TransportationOther income (expense)(25)10 
  $$(2)
 
We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within ME&T and Financial Products that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.

Collateral is generally not required of the counterparties or of our company under the master netting agreements. As of September 30, 2020 and December 31, 2019, no cash collateral was received or pledged under the master netting agreements.

19

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:
September 30, 2020Gross Amounts Not Offset in the Statement of Financial Position
(Millions of dollars)Gross Amount of Recognized AssetsGross Amounts Offset in the Statement of Financial PositionNet Amount of Assets Presented in the Statement of Financial PositionFinancial InstrumentsCash Collateral ReceivedNet Amount of Assets
Derivatives
Machinery, Energy & Transportation$71 $$71 $(55)$$16 
Financial Products148 148 (37)111 
 Total$219 $$219 $(92)$$127 
September 30, 2020Gross Amounts Not Offset in the Statement of Financial Position
(Millions of dollars)Gross Amount of Recognized LiabilitiesGross Amounts Offset in the Statement of Financial PositionNet Amount of Liabilities Presented in the Statement of Financial PositionFinancial InstrumentsCash Collateral PledgedNet Amount of Liabilities
Derivatives
Machinery, Energy & Transportation$(68)$$(68)$55 $$(13)
Financial Products(69)(69)37 (32)
 Total$(137)$$(137)$92 $$(45)
December 31, 2019Gross Amounts Not Offset in the Statement of Financial Position
(Millions of dollars)Gross Amount of Recognized AssetsGross Amounts Offset in the Statement of Financial PositionNet Amount of Assets Presented in the Statement of Financial PositionFinancial InstrumentsCash Collateral ReceivedNet Amount of Assets
Derivatives
Machinery, Energy & Transportation$32 $$32 $(13)$$19 
Financial Products84 84 (21)63 
 Total$116 $$116 $(34)$$82 
December 31, 2019Gross Amounts Not Offset in the Statement of Financial Position
(Millions of dollars)Gross Amount of Recognized LiabilitiesGross Amounts Offset in the Statement of Financial PositionNet Amount of Liabilities Presented in the Statement of Financial PositionFinancial InstrumentsCash Collateral PledgedNet Amount of Liabilities
Derivatives
Machinery, Energy & Transportation$(21)$$(21)$13 $$(8)
Financial Products(50)(50)21 (29)
 Total$(71)$$(71)$34 $$(37)

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6.                                     Inventories
 
Inventories (principally using the last-in, first-out (LIFO) method) were comprised of the following:
 
(Millions of dollars)September 30,
2020
December 31,
2019
Raw materials$4,093 $4,263 
Work-in-process1,113 1,147 
Finished goods5,984 5,598 
Supplies263 258 
Total inventories$11,453 $11,266 

    

7.                                     Intangible assets and goodwill
 
A.  Intangible assets
 
Intangible assets were comprised of the following:
 
  September 30, 2020
(Millions of dollars)Weighted
Amortizable
Life (Years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Customer relationships15$2,453 $(1,533)$920 
Intellectual property111,522 (1,131)391 
Other13181 (129)52 
Total finite-lived intangible assets14$4,156 $(2,793)$1,363 
  December 31, 2019
Weighted
Amortizable
Life (Years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Customer relationships15$2,450 $(1,406)$1,044 
Intellectual property121,510 (1,055)455 
Other13191 (125)66 
Total finite-lived intangible assets14$4,151 $(2,586)$1,565 

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

(Millions of dollars)
Remaining Three Months of 20202021202220232024Thereafter
$76$296$278$220$162$331
 
B.  Goodwill
 
NaN goodwill was impaired during the nine months ended September 30, 2020 or 2019.


 
21

The changes in carrying amount of goodwill by reportable segment for the nine months ended September 30, 2020 were as follows: 
(Millions of dollars)December 31,
2019
Acquisitions
Other Adjustments 1
September 30,
2020
Construction Industries
Goodwill$306 $— $$312 
Impairments(22)— — (22)
Net goodwill284 — 290 
Resource Industries
Goodwill4,156 — 40 4,196 
Impairments(1,175)— — (1,175)
Net goodwill2,981 — 40 3,021 
Energy & Transportation
Goodwill2,875 41 19 2,935 
All Other 2
Goodwill56 — 58 
Consolidated total
Goodwill7,393 41 67 7,501 
Impairments(1,197)— — (1,197)
Net goodwill$6,196 $41 $67 $6,304 


1 Other adjustments are comprised primarily of foreign currency translation.
2 Includes All Other operating segment (See Note 16).

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

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

The cost basis and fair value of debt securities with unrealized gains and losses included in equity (Accumulated other comprehensive income (loss) in the Consolidated Statement of Financial Position) were as follows:
 September 30, 2020December 31, 2019
(Millions of dollars)
Cost
Basis
Unrealized Pretax Net Gains
(Losses)
Fair
Value
Cost
Basis
Unrealized Pretax Net Gains
(Losses)
Fair
Value
Government debt      
U.S. treasury bonds$16 $$16 $$$
Other U.S. and non-U.S. government bonds50 51 54 54 
Corporate bonds      
Corporate bonds958 43 1,001 836 20 856 
Asset-backed securities156 158 62 62 
Mortgage-backed debt securities  
U.S. governmental agency351 13 364 327 331 
Residential
Commercial61 65 46 47 
Total debt securities$1,597 $63 $1,660 $1,340 $25 $1,365 
Available-for-sale investments in an unrealized loss position:
 September 30, 2020
 
Less than 12 months 1
12 months or more 1
Total
(Millions of dollars)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Corporate bonds      
Corporate bonds$65 $$$$71 $
Total$65 $$$$71 $
 December 31, 2019
 
Less than 12 months 1
12 months or more 1
Total
(Millions of dollars)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Corporate bonds      
Corporate bonds$58 $$50 $$108 $
Total$58 $$50 $$108 $
1 Indicates the length of time that individual securities have been in a continuous unrealized loss position.
23

Corporate Bonds The unrealized losses on our investments in corporate bonds relate to changes in interest rates and credit-related yield spreads since time of purchase. We do not intend to sell the investments, and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis. In addition, we did not expect credit-related losses on these investments as of September 30, 2020.

The cost basis and fair value of the available-for-sale debt securities at September 30, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.        
September 30, 2020
(Millions of dollars)Cost BasisFair Value
Due in one year or less$134 $135 
Due after one year through five years715 748 
Due after five years through ten years246 257 
Due after ten years85 86 
U.S. governmental agency mortgage-backed securities351 364 
Residential mortgage-backed securities
Commercial mortgage-backed securities61 65 
Total debt securities – available-for-sale$1,597 $1,660 
  
Sales of available-for-sale securities:  
 Three Months Ended September 30Nine Months Ended September 30
(Millions of dollars)2020201920202019
Proceeds from the sale of available-for-sale securities$74 $92 $197 $237 
Gross gains from the sale of available-for-sale securities
Gross losses from the sale of available-for-sale securities
For the three months ended September 30, 2020 and 2019, the net unrealized gains (losses) for equity securities held at September 30, 2020 and 2019 were $9 million and $2 million, respectively. For the nine months ended September 30, 2020 and 2019, the net unrealized gains (losses) for equity securities held at September 30, 2020 and 2019 were $(1) million and $54 million, respectively.
24

9.                                     Postretirement benefits
 
A.  Pension and postretirement benefit costs    
U.S. Pension
Benefits
Non-U.S. Pension
Benefits
Other
Postretirement
Benefits
(Millions of dollars)

September 30September 30September 30
 202020192020201920202019
For the three months ended:      
Components of net periodic benefit cost:      
Service cost$$29 $13 $20 $24 $19 
Interest cost120 150 17 23 26 34 
Expected return on plan assets(197)(180)(34)(37)(4)(4)
Amortization of prior service cost (credit)(9)(10)
(Gain) loss on remeasurement of pension obligations 1
(2)79 
Curtailments, settlements and termination benefits 1
Net periodic benefit cost (benefit) 2
$(79)$(1)$79 $$37 $39 
For the nine months ended:
Components of net periodic benefit cost:
Service cost$$86 $41 $61 $71 $60 
Interest cost362 450 57 70 79 102 
Expected return on plan assets(593)(540)(107)(112)(10)(14)
Amortization of prior service cost (credit)(28)(30)
(Gain) loss on remeasurement of pension obligations 1
(55)
Curtailments, settlements and termination benefits 1
25 
Net periodic benefit cost (benefit) 2
$(231)$(4)$(39)$19 $112 $118 
1    Total lump-sum transfers out of certain pension plans exceeded the service and interest cost for 2020, which required us to follow settlement accounting and remeasure the plans' obligations as of March 31, 2020, June 30, 2020 and September 30, 2020.
2    The service cost component is included in Operating costs in the Consolidated Statement of Results of Operations. All other components are included in Other income (expense) in the Consolidated Statement of Results of Operations.

We made $47 million and $217 million of contributions to our pension and other postretirement plans during the three and nine months ended September 30, 2020, respectively. We currently anticipate full-year 2020 contributions of approximately $250 million.
 
B.  Defined contribution benefit costs
 
Total company costs related to our defined contribution plans were as follows:
 
 Three Months Ended September 30Nine Months Ended September 30
(Millions of dollars)2020201920202019
U.S. Plans$103 $68 $248 $298 
Non-U.S. Plans22 22 65 64 
 $125 $90 $313 $362 

The decrease in the U.S. defined contribution benefit costs for the nine months ended September 30, 2020 was primarily due to the fair value adjustments related to our non-qualified deferred compensation plans.
 
25

10.       Leases

Revenues from finance and operating leases, primarily included in Revenues of Financial Products on the Consolidated Statement of Results of Operations, were as follows:
(Millions of dollars)
Three Months Ended September 30Nine Months Ended September 30
2020201920202019
Finance lease revenue$125 $136 $369 $390 
Operating lease revenue249 317 837 941 
Total$374 $453 $1,206 $1,331 
We present revenues net of sales and other related taxes.

11.                              Guarantees and product warranty
 
Caterpillar dealer performance guarantees
We have provided an indemnity to a third-party insurance company for potential losses related to performance bonds issued on behalf of Caterpillar dealers.  The bonds have varying terms and are issued to insure governmental agencies against nonperformance by certain dealers.  We also provided guarantees to third-parties related to the performance of contractual obligations by certain Caterpillar dealers. These guarantees have varying terms and cover potential financial losses incurred by the third parties resulting from the dealers’ nonperformance.

In 2016, we provided a guarantee to an end user related to the performance of contractual obligations by a Caterpillar dealer. Under the guarantee, which expires in 2025, non-performance by the Caterpillar dealer could require Caterpillar to satisfy the contractual obligations by providing goods, services or financial compensation to the end user up to an annual designated cap.
 
Supplier consortium performance guarantee
We have provided a guarantee to a customer in Europe related to the performance of contractual obligations by a supplier consortium to which one of our Caterpillar subsidiaries is a member. The guarantee covers potential damages incurred by the customer resulting from the supplier consortium's non-performance. The damages are capped except for failure of the consortium to meet certain obligations outlined in the contract in the normal course of business. The guarantee will expire when the supplier consortium performs all of its contractual obligations, which is expected to be completed in 2022.

We have dealer performance guarantees and third-party performance guarantees that do not limit potential payment to end users related to indemnities and other commercial contractual obligations. In addition, we have entered into contracts involving industry standard indemnifications that do not limit potential payment. For these unlimited guarantees, we are unable to estimate a maximum potential amount of future payments that could result from claims made.

No significant loss has been experienced or is anticipated under any of these guarantees.  At both September 30, 2020 and December 31, 2019, the related recorded liability was $5 million. The maximum potential amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) we could be required to make under the guarantees was as follows:
 
(Millions of dollars)September 30,
2020
December 31,
2019
Caterpillar dealer performance guarantees$1,139 $1,150 
Supplier consortium performance guarantee257 238 
Other guarantees179 221 
Total guarantees$1,575 $1,609 
26

 
Cat Financial provides guarantees to repurchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a variable interest entity.  The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers.  This SPC issues commercial paper and uses the proceeds to fund its loan program.  Cat Financial has a loan purchase agreement with the SPC that obligates Cat Financial to purchase certain loans that are not paid at maturity.  Cat Financial receives a fee for providing this guarantee, which provides a source of liquidity for the SPC.  Cat Financial is the primary beneficiary of the SPC as its guarantees result in Cat Financial having both the power to direct the activities that most significantly impact the SPC’s economic performance and the obligation to absorb losses, and therefore Cat Financial has consolidated the financial statements of the SPC.  As of September 30, 2020 and December 31, 2019, the SPC’s assets of $1,098 million and $1,453 million, respectively, were primarily comprised of loans to dealers, and the SPC’s liabilities of $1,097 million and $1,452 million, respectively, were primarily comprised of commercial paper.  The assets of the SPC are not available to pay Cat Financial’s creditors. Cat Financial may be obligated to perform under the guarantee if the SPC experiences losses. No loss has been experienced or is anticipated under this loan purchase agreement.

We determine our product warranty liability by applying historical claim rate experience to the current field population and dealer inventory.  Generally, we base historical claim rates on actual warranty experience for each product by machine model/engine size by customer or dealer location (inside or outside North America).  We develop specific rates for each product shipment month and update them monthly based on actual warranty claim experience.  
(Millions of dollars)2020
Warranty liability, January 1$1,541 
Reduction in liability (payments)(652)
Increase in liability (new warranties)678 
Warranty liability, September 30$1,567 
  
(Millions of dollars)2019
Warranty liability, January 1$1,391 
Reduction in liability (payments)(903)
Increase in liability (new warranties)1,053 
Warranty liability, December 31$1,541 

12.                              Profit per share
 
Computations of profit per share:Three Months Ended September 30Nine Months Ended September 30
(Dollars in millions except per share data)2020201920202019
Profit for the period (A) 1
$668 $1,494 $2,218 $4,995 
Determination of shares (in millions): 
Weighted-average number of common shares outstanding (B)542.3556.3543.9 565.2 
Shares issuable on exercise of stock awards, net of shares assumed to be purchased out of proceeds at average market price4.14.93.9 5.6 
Average common shares outstanding for fully diluted computation (C) 2
546.4561.2547.8 570.8 
Profit per share of common stock:  
Assuming no dilution (A/B)$1.23 $2.69 $4.08 $8.84 
Assuming full dilution (A/C) 2
$1.22 $2.66 $4.05 $8.75 
Shares outstanding as of September 30 (in millions)543.3 552.7 
1 Profit attributable to common shareholders.
2 Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.

27

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

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

For the three months ended September 30, 2020, we did 0t repurchase any shares of Caterpillar common stock. For the nine months ended September 30, 2020, we repurchased 10.1 million shares of Caterpillar common stock at an aggregate cost of $1.3 billion. For the three and nine months ended September 30, 2019, we repurchased 10.3 million and 25.8 million shares of Caterpillar common stock, respectively, at an aggregate cost of $1.3 billion and $3.3 billion, respectively. We made these purchases through a combination of accelerated stock repurchase agreements with third-party financial institutions and open market transactions.


13.                         Accumulated other comprehensive income (loss)

We present comprehensive income and its components in the Consolidated Statement of Comprehensive Income. Changes in Accumulated other comprehensive income (loss), net of tax, included in the Consolidated Statement of Changes in Shareholders’ Equity, consisted of the following:
(Millions of dollars)Foreign currency translationPension and other postretirement benefitsDerivative financial instrumentsAvailable-for-sale securitiesTotal
Three Months Ended September 30, 2020
Balance at June 30, 2020$(1,672)$(15)$(169)$41 $(1,815)
Other comprehensive income (loss) before reclassifications291 (1)301 
Amounts reclassified from accumulated other comprehensive (income) loss(7)73 66 
Other comprehensive income (loss)291 (8)76 367 
Balance at September 30, 2020$(1,381)$(23)$(93)$49 $(1,448)
Three Months Ended September 30, 2019
Balance at June 30, 2019$(1,426)$17 $(105)$15 $(1,499)
Other comprehensive income (loss) before reclassifications(263)59 (200)
Amounts reclassified from accumulated other comprehensive (income) loss(8)(76)(84)
Other comprehensive income (loss)(263)(8)(17)(284)
Balance at September 30, 2019$(1,689)$$(122)$19 $(1,783)
28

(Millions of dollars)Foreign currency translationPension and other postretirement benefitsDerivative financial instrumentsAvailable-for-sale securitiesTotal
Nine Months Ended September 30, 2020
Balance at December 31, 2019$(1,487)$(3)$(97)$20 $(1,567)
Other comprehensive income (loss) before reclassifications84 (72)29 42 
Amounts reclassified from accumulated other comprehensive (income) loss22 (21)76 77 
Other comprehensive income (loss)106 (20)29 119 
Balance at September 30, 2020$(1,381)$(23)$(93)$49 $(1,448)
Nine Months Ended September 30, 2019
Balance at December 31, 2018$(1,601)$12 $(80)$(15)$(1,684)
Adjustment to adopt new accounting guidance related to reclassification of certain tax effects from accumulated other comprehensive income98 19 (9)108 
Balance at January 1, 2019(1,503)31 (89)(15)(1,576)
Other comprehensive income (loss) before reclassifications(186)53 34 (99)
Amounts reclassified from accumulated other comprehensive (income) loss(22)(86)(108)
Other comprehensive income (loss)(186)(22)(33)34 (207)
Balance at September 30, 2019$(1,689)$$(122)$19 $(1,783)
29

The effect of the reclassifications out of Accumulated other comprehensive income (loss) on the Consolidated Statement of Results of Operations was as follows:
Three Months Ended September 30
(Millions of dollars)Classification of
income (expense)
20202019
Pension and other postretirement benefits:
Amortization of prior service credit (cost)Other income (expense)$$10 
Tax (provision) benefit(2)(2)
Reclassifications net of tax$$
Derivative financial instruments:
Foreign exchange contractsSales of Machinery, Energy & Transportation$(6)$
Foreign exchange contractsCost of goods sold(15)
Foreign exchange contractsOther income (expense)(63)89 
Foreign exchange contractsInterest expense of Financial Products
Interest rate contractsInterest expense excluding Financial Products(1)(2)
Interest rate contractsInterest expense of Financial Products(16)(3)
Reclassifications before tax(93)96 
Tax (provision) benefit20 (20)
Reclassifications net of tax$(73)$76 
Total reclassifications from Accumulated other comprehensive income (loss)$(66)$84 
30

Nine Months Ended September 30
(Millions of dollars)Classification of
income (expense)
20202019
Foreign currency translation
Gain (loss) on foreign currency translationOther income (expense)$(22)$
Reclassifications net of tax$(22)$
Pension and other postretirement benefits:
Amortization of prior service credit (cost)Other income (expense)$28 $30 
Tax (provision) benefit(7)(8)
Reclassifications net of tax$21 $22 
Derivative financial instruments:
Foreign exchange contractsSales of Machinery, Energy & Transportation$10 $
Foreign exchange contractsCost of goods sold(58)(4)
Foreign exchange contractsOther income (expense)(35)91 
Foreign exchange contractsInterest expense of Financial Products28 23 
Interest rate contractsInterest expense excluding Financial Products(3)(3)
Interest rate contractsInterest expense of Financial Products(40)(2)
Reclassifications before tax(98)109 
Tax (provision) benefit22 (23)
Reclassifications net of tax$(76)$86 
Total reclassifications from Accumulated other comprehensive income (loss)$(77)$108 

31

14.                              Environmental and legal matters

The Company is regulated by federal, state and international environmental laws governing its use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and other operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. We have made, and will continue to make, significant research and development and capital expenditures to comply with these emissions standards.

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

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

On January 7, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requested documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company has received additional subpoenas relating to this investigation requesting additional documents and information relating to, among other things, the purchase and resale of replacement parts by Caterpillar Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL (CSARL) and related structures. On March 2-3, 2017, agents with the Department of Commerce, the Federal Deposit Insurance Corporation and the Internal Revenue Service executed search and seizure warrants at 3 facilities of the Company in the Peoria, Illinois area, including its former corporate headquarters. The warrants identify, and agents seized, documents and information related to, among other things, the export of products from the United States, the movement of products between the United States and Switzerland, the relationship between Caterpillar Inc. and CSARL, and sales outside the United States. It is the Company’s understanding that the warrants, which concern both tax and export activities, are related to the ongoing grand jury investigation. The Company is continuing to cooperate with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.

In addition, we are involved in other unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability (including claimed asbestos exposure), contracts, employment issues, environmental matters, intellectual property rights, taxes (other than income taxes) and securities laws. The aggregate range of reasonably possible losses in excess of accrued liabilities, if any, associated with these unresolved legal actions is not material. In some cases, we cannot reasonably estimate a range of loss because there is insufficient information regarding the matter. However, we believe there is no more than a remote chance that any liability arising from these matters would be material. Although it is not possible to predict with certainty the outcome of these unresolved legal actions, we believe that these actions will not individually or in the aggregate have a material adverse effect on our consolidated results of operations, financial position or liquidity.

32

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

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

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

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

33

16.                              Segment information
 
A.    Basis for segment information
 
Our Executive Office is comprised of a Chief Executive Officer (CEO), 4 Group Presidents, a Chief Financial Officer (CFO), a Chief Legal Officer, General Counsel and Corporate Secretary and a Chief Human Resources Officer. The Group Presidents and CFO are accountable for a related set of end-to-end businesses that they manage.  The Chief Legal Officer, General Counsel and Corporate Secretary leads the Law, Security and Public Policy Division. The Chief Human Resources Officer leads the Human Resources Organization. The CEO allocates resources and manages performance at the Group President/CFO level.  As such, the CEO serves as our Chief Operating Decision Maker, and operating segments are primarily based on the Group President/CFO reporting structure.
 
NaN of our operating segments, Construction Industries, Resource Industries and Energy & Transportation are led by Group Presidents.  NaN 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. NaN Group President leads 1 smaller operating segment that is included in the All Other operating segment.  The Law, Security and Public Policy Division and the Human Resources Organization are cost centers and do not meet the definition of an operating segment.

B.    Description of segments
 
We have 5 operating segments, of which 4 are reportable segments. Following is a brief description of our reportable segments and the business activities included in the All Other operating segment:
 
Construction Industries: A segment primarily responsible for supporting customers using machinery in infrastructure and building construction applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes asphalt pavers; backhoe loaders; compactors; cold planers; compact track and multi-terrain loaders; mini, small, medium and large track excavators; motor graders; pipelayers; road reclaimers; skid steer loaders; telehandlers; small and medium track-type tractors; track-type loaders; utility vehicles; wheel excavators; compact, small and medium wheel loaders; and related parts and work tools. Inter-segment sales are a source of revenue for this segment.

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

Energy & Transportation:  A segment primarily responsible for supporting customers using reciprocating engines, turbines, diesel-electric locomotives and related parts across industries serving Oil and Gas, Power Generation, Industrial and Transportation applications, including marine- and rail-related businesses. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales, and product support. The product portfolio includes turbine machinery and integrated systems and solutions and turbine-related services, reciprocating engine-powered generator sets, integrated systems used in the electric power generation industry, reciprocating engines and integrated systems and solutions for the marine and oil and gas industries, and reciprocating engines supplied to the industrial industry as well as Cat machinery. Responsibilities also include the remanufacturing of Caterpillar engines and components and remanufacturing services for other companies; the business strategy, product design, product management and development, manufacturing, remanufacturing, leasing and service of diesel-electric locomotives and components and other rail-related products and services; and product support of on-highway vocational trucks for North America. Inter-segment sales are a source of revenue for this segment.
 
34

Financial Products Segment:  Provides financing alternatives to customers and dealers around the world for Caterpillar products, as well as financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The segment also provides insurance and risk management products and services that help customers and dealers manage their business risk. Insurance and risk management products offered include physical damage insurance, inventory protection plans, extended service coverage for machines and engines, and dealer property and casualty insurance. The various forms of financing, insurance and risk management products offered to customers and dealers help support the purchase and lease of Caterpillar equipment. The segment also earns revenues from ME&T, but the related costs are not allocated to operating segments. Financial Products’ segment profit is determined on a pretax basis and includes other income/expense items.
 
All Other operating segment: Primarily includes activities such as: business strategy; product management and development; manufacturing and sourcing of filters and fluids, undercarriage, ground-engaging tools, fluid transfer products, precision seals, rubber sealing and connecting components primarily for Cat® products; parts distribution; integrated logistics solutions; distribution services responsible for dealer development and administration, including 1 wholly owned dealer in Japan; dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; brand management and marketing strategy; and digital investments for new customer and dealer solutions that integrate data analytics with state-of-the-art digital technologies while transforming the buying experience. Results for the All Other operating segment are included as a reconciling item between reportable segments and consolidated external reporting.
 
C.    Segment measurement and reconciliations
 
There are several methodology differences between our segment reporting and our external reporting.  The following is a list of the more significant methodology differences:
 
ME&T segment net assets generally include inventories, receivables, property, plant and equipment, goodwill, intangibles, accounts payable and customer advances.  Beginning in 2020, we revised how we allocate certain assets between segments. We have recast all prior period amounts to align with the current methodology. We generally manage at the corporate level liabilities other than accounts payable and customer advances, and we do not include these in segment operations.  Financial Products Segment assets generally include all categories of assets.
 
We value segment inventories and cost of sales using a current cost methodology.

We amortize goodwill allocated to segments using a fixed amount based on a 20-year useful life.  This methodology difference only impacts segment assets. We do not include goodwill amortization expense in segment profit. In addition, we have allocated to segments only a portion of goodwill for certain acquisitions made in 2011 or later.

We generally manage currency exposures for ME&T at the corporate level and do not include in segment profit the effects of changes in exchange rates on results of operations within the year.  We report the net difference created in the translation of revenues and costs between exchange rates used for U.S. GAAP reporting and exchange rates used for segment reporting as a methodology difference.

We do not include stock-based compensation expense in segment profit.

Postretirement benefit expenses are split; segments are generally responsible for service costs, with the remaining elements of net periodic benefit cost included as a methodology difference.

We determine ME&T segment profit on a pretax basis and exclude interest expense and most other income/expense items.  We determine Financial Products Segment profit on a pretax basis and include other income/expense items.
35

Reconciling items are created based on accounting differences between segment reporting and our consolidated external reporting. Please refer to pages 36 to 39 for financial information regarding significant reconciling items.  Most of our reconciling items are self-explanatory given the above explanations.  For the reconciliation of profit, we have grouped the reconciling items as follows:
 
Corporate costs:  These costs are related to corporate requirements primarily for compliance and legal functions for the benefit of the entire organization.

Restructuring costs: May include costs for employee separation, long-lived asset impairments and contract terminations. These costs are included in Other operating (income) expenses except for defined-benefit plan curtailment losses and special termination benefits, which are included in Other income (expense). Restructuring costs also include other exit-related costs, which may consist of accelerated depreciation, inventory write-downs, building demolition, equipment relocation and project management costs and LIFO inventory decrement benefits from inventory liquidations at closed facilities, all of which are primarily included in Cost of goods sold. Only certain restructuring costs are excluded from segment profit. See Note 20 for more information.

Methodology differences:  See previous discussion of significant accounting differences between segment reporting and consolidated external reporting.

Timing:   Timing differences in the recognition of costs between segment reporting and consolidated external reporting. For example, we report certain costs on the cash basis for segment reporting and the accrual basis for consolidated external reporting.
For the three and nine months ended September 30, 2020 and 2019, sales and revenues by geographic region reconciled to consolidated sales and revenues were as follows:
Sales and Revenues by Geographic Region
(Millions of dollars)
North
America
Latin
America
EAME
Asia/
Pacific
External Sales and RevenuesIntersegment Sales and RevenuesTotal Sales and Revenues
Three Months Ended September 30, 2020    
Construction Industries$1,781 $230 $796 $1,241 $4,048 $$4,056 
Resource Industries487 269 384 564 1,704 112 1,816 
Energy & Transportation1,584 221 1,113 557 3,475 686 4,161 
Financial Products Segment448 63 100 113 724 1724 
Total sales and revenues from reportable segments4,300 783 2,393 2,475 9,951 806 10,757 
All Other operating segment10 13 25 81 106 
Corporate Items and Eliminations(59)(12)(10)(14)(95)(887)(982)
Total Sales and Revenues$4,251 $772 $2,384 $2,474 $9,881 $$9,881 
Three Months Ended September 30, 2019    
Construction Industries$2,728 $413 $1,048 $1,086 $5,275 $14 $5,289 
Resource Industries789 349 396 645 2,179 131 2,310 
Energy & Transportation2,129 378 1,224 831 4,562 890 5,452 
Financial Products Segment560 79 102 124 865 1865 
Total sales and revenues from reportable segments6,206 1,219 2,770 2,686 12,881 1,035 13,916 
All Other operating segment12 27 84 111 
Corporate Items and Eliminations(105)(14)(15)(16)(150)(1,119)(1,269)
Total Sales and Revenues$6,102 $1,211 $2,763 $2,682 $12,758 $$12,758 

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

36

Sales and Revenues by Geographic Region
(Millions of dollars)
North
America
Latin
America
EAME
Asia/
Pacific
External Sales and RevenuesIntersegment Sales and RevenuesTotal Sales and Revenues
Nine Months Ended September 30, 2020    
Construction Industries$5,470 $707 $2,618 $3,597 $12,392 $18 $12,410 
Resource Industries1,690 859 1,158 1,686 5,393 333 5,726 
Energy & Transportation5,138 667 3,095 1,734 10,634 2,025 12,659 
Financial Products Segment1,466 193 298 344 2,301 12,301 
Total sales and revenues from reportable segments13,764 2,426 7,169 7,361 30,720 2,376 33,096 
All Other operating segment22 17 38 81 249 330 
Corporate Items and Eliminations(169)(36)(32)(51)(288)(2,625)(2,913)
Total Sales and Revenues$13,617 $2,394 $7,154 $7,348 $30,513 $$30,513 
Nine Months Ended September 30, 2019    
Construction Industries$9,206 $1,124 $3,162 $4,081 $17,573 $56 $17,629 
Resource Industries2,798 1,220 1,310 2,209 7,537 344 7,881 
Energy & Transportation6,577 1,035 3,416 2,291 13,319 2,829 16,148 
Financial Products Segment1,681 225 306 376 2,588 12,588 
Total sales and revenues from reportable segments20,262 3,604 8,194 8,957 41,017 3,229 44,246 
All Other operating segment23 23 45 98 259 357 
Corporate Items and Eliminations(326)(37)(41)(55)(459)(3,488)(3,947)
Total Sales and Revenues$19,959 $3,574 $8,176 $8,947 $40,656 $$40,656 
1 Includes revenues from Construction Industries, Resource Industries, Energy & Transportation and All Other operating segment of $274 million and $398 million in the nine months ended September 30, 2020 and 2019, respectively.

For the three and nine months ended September 30, 2020 and 2019, Energy & Transportation segment sales by end user application were as follows:
Energy & Transportation External Sales
Three Months Ended September 30
(Millions of dollars)20202019
Oil and gas$734 $1,246 
Power generation1,034 1,123 
Industrial730 980 
Transportation977 1,213 
Energy & Transportation External Sales$3,475 $4,562 
Nine Months Ended September 30
20202019
Oil and gas$2,622 $3,682 
Power generation2,783 3,180 
Industrial2,209 2,841 
Transportation3,020 3,616 
Energy & Transportation External Sales$10,634 $13,319 
37

Reconciliation of Consolidated profit before taxes:  
(Millions of dollars)Three Months Ended September 30Nine Months Ended September 30
2020201920202019
Profit from reportable segments:
Construction Industries$585 $940 $1,743 $3,272 
Resource Industries167 311 623 1,368 
Energy & Transportation492 1,021 1,718 2,745 
Financial Products Segment142 218 395 622 
Total profit from reportable segments1,386 2,490 4,479 8,007 
Profit from All Other operating segment27 (21)31 15 
Cost centers(9)18 32 
Corporate costs(122)(167)(409)(492)
Timing(39)(90)(118)
Restructuring costs(87)(20)(211)(162)
Methodology differences:
Inventory/cost of sales(7)25 (25)24 
Postretirement benefit expense(32)19 253 
Stock-based compensation expense(55)(57)(169)(170)
Financing costs(125)(58)(324)(173)
Currency(22)(62)(230)(110)
Other income/expense methodology differences(72)(124)(244)(374)
Other methodology differences(17)(25)(36)
Total consolidated profit before taxes$863 $2,005 $3,054 $6,447 

Reconciliation of Assets:
(Millions of dollars)September 30, 2020December 31, 2019
Assets from reportable segments:
Construction Industries$4,507 $4,601 
Resource Industries6,188 6,505 
Energy & Transportation8,752 8,548 
Financial Products Segment34,014 35,813 
Total assets from reportable segments53,461 55,467 
Assets from All Other operating segment1,610 1,728 
Items not included in segment assets:  
Cash and short-term investments8,512 7,299 
Deferred income taxes1,339 1,294 
Goodwill and intangible assets4,737 4,435 
Property, plant and equipment – net and other assets2,608 2,529 
Inventory methodology differences(2,560)(2,426)
Liabilities included in segment assets7,720 8,541 
Other(686)(414)
Total assets$76,741 $78,453 
38

Reconciliation of Depreciation and amortization:
(Millions of dollars)
Three Months Ended September 30Nine Months Ended September 30
2020201920202019
Depreciation and amortization from reportable segments:
   Construction Industries$61 $73 $183 $220 
   Resource Industries105 113 312 337 
   Energy & Transportation147 157 442 464 
   Financial Products Segment174 209 577 622 
Total depreciation and amortization from reportable segments487 552 1,514 1,643 
Items not included in segment depreciation and amortization:  
All Other operating segment71 53 196 158 
Cost centers31 35 96 100 
Other32 
Total depreciation and amortization$593 $645 $1,815 $1,933 

Reconciliation of Capital expenditures:    
(Millions of dollars)
Three Months Ended September 30Nine Months Ended September 30
2020201920202019
Capital expenditures from reportable segments:
Construction Industries$37 $48 $85 $117 
Resource Industries10 31 63 91 
Energy & Transportation100 150 331 366 
Financial Products Segment280 388 783 1,093 
Total capital expenditures from reportable segments427 617 1,262 1,667 
Items not included in segment capital expenditures:    
All Other operating segment46 34 84 69 
Cost centers22 23 71 
Timing(21)147 108 
Other11 (21)(25)(59)
Total capital expenditures$493 $631 $1,491 $1,856 

39

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

Allowance for credit losses

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

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

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

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

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

Dealer
Cat Financial provides financing to Caterpillar dealers in the form of wholesale financing plans. Cat Financial's wholesale financing plans provide assistance to dealers by financing their mostly new Caterpillar equipment inventory and rental fleets on a secured and unsecured basis. In addition, Cat Financial provides unsecured loans to Caterpillar dealers for working capital.
    
Cat Financial estimates the allowance for credit losses for dealer finance receivables based on historical loss rates with consideration of current economic conditions and reasonable and supportable forecasts.

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

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

40

North America - Finance receivables originated in the United States and Canada.
EAME - Finance receivables originated in Europe, Africa, the Middle East and the Commonwealth of Independent States.
Asia/Pacific - Finance receivables originated in Australia, New Zealand, China, Japan, Southeast Asia and India.
Mining - Finance receivables related to large mining customers worldwide.
Latin America - Finance receivables originated in Mexico and Central and South American countries.
Caterpillar Power Finance - Finance receivables originated worldwide related to marine vessels with Caterpillar engines and Caterpillar electrical power generation, gas compression and co-generation systems and non-Caterpillar equipment that is powered by these systems.

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

An analysis of the allowance for credit losses was as follows:
   
 (Millions of dollars)
September 30, 2020
Allowance for Credit Losses:CustomerDealerTotal
Balance at beginning of year$375 $45 $420 
Adjustment to adopt new accounting guidance 1
12 12 
Receivables written off(212)(212)
Recoveries on receivables previously written off27 27 
Provision for credit losses213 213 
Other(3)(3)
Balance at end of period$412 $45 $457 
   
Individually evaluated$172 $39 $211 
Collectively evaluated240 246 
Ending Balance$412 $45 $457 
Finance Receivables:   
Individually evaluated$612 $78 $690 
Collectively evaluated17,967 2,975 20,942 
Ending Balance$18,579 $3,053 $21,632 
1 See Note 2 regarding new accounting guidance related to credit losses.
41

   
 (Millions of dollars)
December 31, 2019
Allowance for Credit Losses:CustomerDealerTotal
Balance at beginning of year$486 $21 $507 
Receivables written off(281)(281)
Recoveries on receivables previously written off44 44 
Provision for credit losses138 24 162 
Other(12)(12)
Balance at end of year$375 $45 $420 
Individually evaluated$178 $39 $217 
Collectively evaluated197 203 
Ending Balance$375 $45 $420 
Finance Receivables:   
Individually evaluated$594 $78 $672 
Collectively evaluated18,093 3,632 21,725 
Ending Balance$18,687 $3,710 $22,397 

Credit quality of finance receivables

At origination, Cat Financial evaluates credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit-rating agency ratings, loan-to-value ratios, 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.





























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Customer
The table below summarizes the aging category of Cat Financial's amortized cost of finance receivables in the Customer portfolio segment by origination year:
      
 (Millions of dollars)September 30, 2020
20202019201820172016PriorRevolving
Finance
Receivables
Total Finance Receivables
North America      
Current$2,697 $2,711 $1,588 $660 $288 $59 $89 $8,092 
31-60 days past due41 57 39 21 171 
61-90 days past due12 24 21 13 75 
91+ days past due29 30 20 98 
EAME
Current903 1,049 684 313 92 28 3,069 
31-60 days past due25 
61-90 days past due11 
91+ days past due13 40 43 118 
Asia/Pacific
Current1,027 835 403 86 13 2,369 
31-60 days past due24 23 64 
61-90 days past due23 
91+ days past due21 12 38 
Mining
Current315 615 334 180 104 159 160 1,867 
31-60 days past due
61-90 days past due
91+ days past due11 24 45 
Latin America
Current402 393 182 64 18 38 1,097 
31-60 days past due
61-90 days past due
91+ days past due13 45 25 95 
Caterpillar Power Finance
Current149 232 138 274 97 132 129 1,151 
31-60 days past due18 21 
61-90 days past due
91+ days past due29 90 130 
Total Customer$5,585 $6,049 $3,564 $1,717 $712 $572 $380 $18,579 
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Finance receivables in the Customer portfolio segment are substantially secured by collateral, primarily in the form of Caterpillar and other machinery. For those contracts where the borrower is experiencing financial difficulty, repayment of the outstanding amounts is generally expected to be provided through the operation or repossession and sale of the machinery.

Dealer
As of September 30, 2020, Cat Financial's total amortized cost of finance receivables within the Dealer portfolio segment was current, with the exception of $78 million that was 91+ days past due in Latin America. These past due receivables were originated in 2017.

The table below summarizes Cat Financial's recorded investment in finance receivables by aging category.
      
 December 31, 2019
 (Millions of dollars)
31-60
Days
Past Due
61-90
Days
Past Due
91+
Days
Past Due
Total Past
Due
CurrentTotal Finance
Receivables
Customer      
North America$72 $23 $55 $150 $8,002 $8,152 
EAME30 31 141 202 2,882 3,084 
Asia/Pacific40 14 29 83 2,181 2,264 
Mining19 24 2,266 2,290 
Latin America41 23 80 144 1,089 1,233 
Caterpillar Power Finance10 10 225 245 1,419 1,664 
Dealer      
North America2,136 2,136 
EAME342 342 
Asia/Pacific437 437 
Mining
Latin America78 78 712 790 
Caterpillar Power Finance
Total$198 $101 $627 $926 $21,471 $22,397 


Impaired finance receivables

A finance receivable is considered impaired, based on current information and events, if it is probable that Cat Financial will be unable to collect all amounts due according to the contractual terms.  Impaired finance receivables include finance receivables that have been restructured and are considered to be troubled debt restructures.


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In Cat Financial’s Customer portfolio segment, impaired finance receivables and the related unpaid principal balances and allowance were as follows: 
 
December 31, 2019
(Millions of dollars)Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Impaired Finance Receivables With No Allowance Recorded   
North America$$$
EAME
Asia/Pacific
Mining22 22 
Latin America
Caterpillar Power Finance58 58 
Total$94 $94 $
Impaired Finance Receivables With An Allowance Recorded   
North America$30 $30 $11 
EAME61 61 29 
Asia/Pacific
Mining37 36 
Latin America58 58 20 
Caterpillar Power Finance306 319 107 
Total$500 $512 $178 
Total Impaired Finance Receivables   
North America$36 $36 $11 
EAME61 61 29 
Asia/Pacific
Mining59 58 
Latin America66 66 20 
Caterpillar Power Finance364 377 107 
Total$594 $606 $178 
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 Three Months Ended September 30, 2019Nine Months Ended September 30, 2019
(Millions of dollars)Average Recorded
Investment
Interest Income
Recognized
Average Recorded
Investment
Interest Income
Recognized
Impaired Finance Receivables With No Allowance Recorded    
North America$10 $$10 $
EAME15 
Asia/Pacific
Mining26 29 
Latin America22 22 
Caterpillar Power Finance57 53 
Total$130 $$121 $
Impaired Finance Receivables With An Allowance Recorded    
North America$30 $$36 $
EAME80 88 
Asia/Pacific12 
Mining65 49 
Latin America69 73 
Caterpillar Power Finance376 422 
Total$632 $$677 $18 
Total Impaired Finance Receivables    
North America$40 $$46 $
EAME95 95 
Asia/Pacific12 
Mining91 78 
Latin America91 95 
Caterpillar Power Finance433 475 10 
Total$762 $$798 $22 
There were $78 million in impaired finance receivables with a related allowance of $39 million as of December 31, 2019 for the Dealer portfolio segment, all of which was in Latin America. 

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 finance receivable becomes current and collection of remaining amounts is considered probable. Payments received while the finance receivable is on non-accrual status are applied to interest and principal in accordance with the contractual terms. 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.
46

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:
   
September 30, 2020
 Amortized Cost
 (Millions of dollars)
Non-accrual
With an
Allowance
Non-accrual
Without an
Allowance
91+ Still
Accruing
   
North America$82 $$28 
EAME137 
Asia/Pacific26 13 
Mining38 10 
Latin America95 
Caterpillar Power Finance207 17 
Total$585 $21 $52 

There was $2 million and $8 million of interest income recognized during the three and nine months ended September 30, 2020 for customer finance receivables on non-accrual status.
 (Millions of dollars)
December 31, 2019
Recorded Investment
Non-accrual Finance Receivables91+ Still Accruing
North America$44 $15 
EAME165 
Asia/Pacific21 
Mining47 
Latin America89 
Caterpillar Power Finance361 
Total$727 $29 

As of September 30, 2020 and December 31, 2019, there were $78 million in finance receivables on non-accrual status in Cat Financial's Dealer portfolio segment, all of which was in Latin America. There were 0 finance receivables in Cat Financial's Dealer portfolio segment more than 90 days past due and still accruing income as of September 30, 2020 and 0 interest income was recognized on dealer finance receivables on non-accrual status during the three and nine months ended September 30, 2020.


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.


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There were 0 finance receivables modified as TDRs during the three and nine months ended September 30, 2020 and 2019 for the Dealer portfolio segment. Cat Financial’s finance receivables in the Customer portfolio segment modified as TDRs were as follows:
   
 Three Months Ended September 30, 2020Three Months Ended September 30, 2019
  (Dollars in millions)
Number
of
Contracts
Pre-TDR
Amortized Cost
Post-TDR
Amortized Cost
Number
of
Contracts
Pre-TDR
Recorded
Investment
Post-TDR
Recorded
Investment
North America$$$$
Asia/Pacific79
Mining12
Latin America316 16 
Caterpillar Power Finance850 50 56 55 
Total105$76 $76 $56 $55 
 Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
 
Number
of
Contracts
Pre-TDR
Amortized Cost
Post-TDR
Amortized Cost
Number
of
Contracts
Pre-TDR
Recorded
Investment
Post-TDR
Recorded
Investment
North America13$10 $10 12 $$
EAME019 17 17 
Asia/Pacific(1)
18312 12 
Mining(2)
5222 22 
Latin America918 18 
Caterpillar Power Finance14 87 87 19 154 152 
Total 
271 $149 $149 55 $184 $181 
(1) During the nine months ended September 30, 2020, 183 contracts with a pre-TDR and post-TDR amortized cost of $12 million were related to seven customers.
(2) During the nine months ended September 30, 2020, 52 contracts with a pre-TDR and post-TDR amortized cost of $22 million were related to three customers.

TDRs in the Customer portfolio segment with a payment default (defined as 91+ days past due) which had been modified within twelve months prior to the default date, were as follows:
   
Three Months Ended September 30, 2020Three Months Ended September 30, 2019
  (Dollars in millions)
Number of
Contracts
Post-TDR
Amortized Cost
Number of
Contracts
Post-TDR
Recorded
Investment
North America$$
Mining
Caterpillar Power Finance18 
Total$25 $
Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
 Number of
Contracts
Post-TDR
Amortized Cost
Number of
Contracts
Post-TDR
Recorded
Investment
North America$$
EAME10 
Mining
Latin America
Caterpillar Power Finance18 
Total10 $36 $

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18.                              Fair value disclosures
 
    A. Fair value measurements
 
The guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques.  Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.  In accordance with this guidance, fair value measurements are classified under the following hierarchy:
 
Level 1 Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

When available, we use quoted market prices to determine fair value, and we classify such measurements within Level 1.  In some cases where market prices are not available, we make use of observable market based inputs to calculate fair value, in which case the measurements are classified within Level 2.  If quoted or observable market prices are not available, fair value is based upon valuations in which one or more significant inputs are unobservable, including internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates.  These measurements are classified within Level 3.
 
We classify fair value measurements according to the lowest level input or value-driver that is significant to the valuation.  We may therefore classify a measurement within Level 3 even though there may be significant inputs that are readily observable.

Fair value measurement includes the consideration of nonperformance risk.  Nonperformance risk refers to the risk that an obligation (either by a counterparty or Caterpillar) will not be fulfilled.  For financial assets traded in an active market (Level 1 and certain Level 2), the nonperformance risk is included in the market price.  For certain other financial assets and liabilities (certain Level 2 and Level 3), our fair value calculations have been adjusted accordingly.
 
Investments in debt and equity securities
We have investments in certain debt and equity securities, primarily at Insurance Services, that are recorded at fair value.  Fair values for our U.S. treasury bonds and large capitalization value and smaller company growth equity securities are based upon valuations for identical instruments in active markets.  Fair values for other government bonds, corporate bonds and mortgage-backed debt securities are based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.
 
In addition, Insurance Services has an equity investment in a real estate investment trust (REIT) which is recorded at fair value based on the net asset value (NAV) of the investment and is not classified within the fair value hierarchy.

See Note 8 for additional information on our investments in debt and equity securities.

Derivative financial instruments
The fair value of interest rate contracts is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine discounted cash flows.  The fair value of foreign currency and commodity forward, option and cross currency contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.

49

Assets and liabilities measured on a recurring basis at fair value, primarily related to Financial Products, included in our Consolidated Statement of Financial Position as of September 30, 2020 and December 31, 2019 were as follows:
September 30, 2020
 (Millions of dollars)
Level 1Level 2Level 3Measured at NAVTotal
Assets / Liabilities,
at Fair Value
Assets    
Debt securities    
Government debt    
U.S. treasury bonds$16 $— $— $— $16 
Other U.S. and non-U.S. government bonds— 51 — — 51 
Corporate bonds    
Corporate bonds— 1,001 — — 1,001 
Asset-backed securities— 158 — — 158 
Mortgage-backed debt securities    
U.S. governmental agency— 364 — — 364 
Residential— — — 
Commercial— 65 — — 65 
Total debt securities16 1,644 — — 1,660 
Equity securities    
Large capitalization value173 — — — 173 
Smaller company growth32 — — — 32 
REIT— — — 139 139 
Total equity securities205 — — 139 344 
Derivative financial instruments, net— 82 — — 82 
Total assets$221 $1,726 $— $139 $2,086 
 
December 31, 2019
 (Millions of dollars)
Level 1Level 2Level 3Measured at NAVTotal
Assets / Liabilities,
at Fair Value
Assets    
Debt securities    
Government debt    
U.S. treasury bonds$$— $— $— $
Other U.S. and non-U.S. government bonds— 54 — — 54 
Corporate bonds    
Corporate bonds— 856 — — 856 
Asset-backed securities— 62 — — 62 
Mortgage-backed debt securities   
U.S. governmental agency— 331 — — 331 
Residential— — — 
Commercial— 47 — — 47 
Total debt securities1,356 — — 1,365 
Equity securities    
Large capitalization value187 — — — 187 
Smaller company growth29 — — 33 
REIT— — — 126 126 
Total equity securities216 — 126 346 
Derivative financial instruments, net— 45 — — 45 
Total assets$225 $1,401 $$126 $1,756 

50

In addition to the amounts above, Cat Financial impaired loans are subject to measurement at fair value on a nonrecurring basis and are classified as Level 3 measurements. A loan is considered impaired when management determines that collection of contractual amounts due is not probable.  In these cases, an allowance for credit losses may be established based either on the present value of expected future cash flows discounted at the receivables’ effective interest rate, the fair value of the collateral for collateral-dependent receivables, or the observable market price of the receivable.  In determining collateral value, Cat Financial estimates the current fair market value of the collateral less selling costs. Cat Financial had impaired loans with a fair value of $269 million and $343 million as of September 30, 2020 and December 31, 2019, 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 short-term investments
Carrying amount approximates fair value.
 
Restricted cash and short-term investments
Carrying amount approximates fair value.  We include restricted cash and short-term investments in Prepaid expenses and other current assets in the Consolidated Statement of Financial Position.
 
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.
 
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.
51


Fair values of our financial instruments were as follows:
 
Fair Value of Financial Instruments
 September 30, 2020December 31, 2019 
(Millions of dollars)
Carrying
��Amount
Fair
 Value
Carrying
 Amount
Fair
 Value
Fair Value LevelsReference
Assets     
Cash and short-term investments$9,315 $9,315 $8,284 $8,284 1 
Restricted cash and short-term investments1 
Investments in debt and equity securities2,004 2,004 1,711 1,711 1, 2 & 3Note 8
Finance receivables – net (excluding finance leases 1)
13,817 14,145 14,473 14,613 3Note 17
Wholesale inventory receivables – net (excluding finance leases 1)
1,000 975 1,105 1,076 3
Foreign currency contracts – net27 27 62 62 2Note 5
Interest rate contracts – net52 52 2Note 5
Commodity contracts – net2Note 5
Liabilities     
Short-term borrowings2,660 2,660 5,166 5,166 1 
Long-term debt (including amounts due within one year)    
Machinery, Energy & Transportation11,139 14,200 9,157 11,216 2 
Financial Products24,327 24,982 23,334 23,655 2 
Interest rate contracts – net20 20 2Note 5
Guarantees3Note 11

1    Represents finance leases and failed sales leasebacks of $7,644 million and $7,800 million at September 30, 2020 and December 31, 2019, respectively.

19.                        Other income (expense)
 Three Months Ended September 30Nine Months Ended September 30
(Millions of dollars)2020201920202019
Investment and interest income$21 $50 $91 $156 
Foreign exchange gains (losses) 1
(43)(5)(122)(34)
License fee income27 31 75 87 
Net periodic pension and OPEB income (cost), excluding service cost 2
24 270 74 
Gains (losses) on sale of securities and affiliated companies(12)55 
Miscellaneous income (loss)(14)(37)(22)
Total$14 $88 $265 $316 
1 Includes gains (losses) from foreign exchange derivative contracts. See Note 5 for further details.
2 Includes a net remeasurement loss of $(77) million and a net remeasurement gain of $55 million for the three and nine months ended September 30, 2020, respectively, from the settlements of certain pension obligations. See Note 9 for further details.

20.                              Restructuring costs

Our accounting for employee separations is dependent upon how the particular program is designed. For voluntary programs, we recognize eligible separation costs at the time of employee acceptance unless the acceptance requires explicit approval by the company. For involuntary programs, we recognize eligible costs when management has approved the program, the affected employees have been properly notified and the costs are estimable.

52

Restructuring costs for the three and nine months ended September 30, 2020 and 2019 were as follows:
(Millions of dollars)Three Months Ended September 30
20202019
Employee separations 1
$98 $
Long-lived asset impairments 1
Other 2
12 13 
Total restructuring costs$112 $24 
Nine Months Ended September 30
20202019
Employee separations 1
$232 $33 
Contract terminations 1
Long-lived asset impairments 1
25 39 
Other 2
36 110 
Total restructuring costs$296 $182 
1 Recognized in Other operating (income) expenses.
2 Represents costs related to our restructuring programs, primarily for inventory write-downs, equipment relocation, project management, accelerated depreciation and building demolition, all of which are primarily included in Cost of goods sold.

For the nine months ended September 30, 2020, the restructuring costs were primarily related to various voluntary and involuntary employee separation programs implemented across the company and strategic actions to address certain product lines, which were partially offset by a gain on the sale of a manufacturing facility that had been closed. For the nine months ended September 30, 2019, the restructuring costs were primarily related to restructuring actions in Construction Industries and Energy & Transportation.
The following table summarizes the 2019 and 2020 employee separation activity:
(Millions of dollars)
Liability balance at December 31, 2018$85 
Increase in liability (separation charges)48 
Reduction in liability (payments)(85)
Liability balance at December 31, 201948 
Increase in liability (separation charges)232 
Reduction in liability (payments)(131)
Liability balance at September 30, 2020$149 

Most of the liability balance at September 30, 2020 is expected to be paid in 2020 and 2021.
53

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited financial statements and related notes included elsewhere in this report and our discussion of significant risks to the company’s business under Part I, Item 1A. Risk Factors of the 2019 Form 10-K as supplemented by Part II, Item 1A. Risk Factors of the company's Quarterly Report on Form 10-Q filed on August 5, 2020.

Overview
Total sales and revenues for the third quarter of 2020 were $9.881 billion, a decrease of $2.877 billion, or 23 percent, compared with $12.758 billion in the third quarter of 2019. The decline was due to lower sales volume driven by lower end-user demand for equipment and services. Sales were lower across all regions and in the three primary segments. Third-quarter 2020 profit per share was $1.22, compared with $2.66 profit per share in the third quarter of 2019. Profit per share in the third quarter of 2020 included a pre-tax net remeasurement loss of $77 million, or $0.12 per share, resulting from the settlements of pension obligations. Profit for the third quarter of 2020 was $668 million, a decrease of $826 million, or 55 percent, compared with $1.494 billion for the third quarter of 2019. The decrease was due to lower sales volume. Lower selling, general and administrative (SG&A) and research and development (R&D) expenses were mostly offset by unfavorable price realization and lower profit from Financial Products.
Total sales and revenues were $30.513 billion for the nine months ended September 30, 2020, a decrease of $10.143 billion, or 25 percent, compared with $40.656 billion for the nine months ended September 30, 2019. Profit per share for the nine months ended September 30, 2020, was $4.05, a decrease of $4.70, or 54 percent, compared with $8.75 for the nine months ended September 30, 2019. Profit per share for the nine months ended September 30, 2020, included a pre-tax net remeasurement gain of $55 million, or $0.08 per share, resulting from the settlements of pension obligations. Profit per share for the nine months ended September 30, 2019, included a discrete tax benefit related to U.S. tax reform of $178 million, or $0.31 per share. Profit for the nine months ended September 30, 2020, was $2.218 billion, a decrease of $2.777 billion, or 56 percent, compared with $4.995 billion for the nine months ended September 30, 2019.
Highlights for the third quarter of 2020 include:
Total sales and revenues for the third quarter of 2020 were $9.881 billion, a decrease of $2.877 billion, or 23 percent, compared with $12.758 billion in the third quarter of 2019. The decline was due to lower sales volume driven by lower end-user demand for equipment and services. Sales were lower across all regions and in the three primary segments.
Operating profit margin was 10.0 percent for the third quarter of 2020, compared with 15.8 percent for the third quarter of 2019.
Third-quarter 2020 profit per share was $1.22, compared with $2.66 profit per share in the third quarter of 2019. Profit per share in the third quarter of 2020 included a pre-tax net remeasurement loss of $77 million, or $0.12 per share, resulting from the settlements of pension obligations.
Enterprise operating cash flow was $1.734 billion in the third quarter of 2020. Caterpillar ended the third quarter with $9.3 billion of enterprise cash and more than $14 billion of available liquidity sources.
Highlights for the nine months ended September 30, 2020, include:
Total sales and revenues were $30.513 billion for the nine months ended September 30, 2020, a decrease of $10.143 billion, or 25 percent, compared with $40.656 billion for the nine months ended September 30, 2019.
Operating profit margin was 10.4 percent for the nine months ended September 30, 2020, compared with 15.8 percent for the nine months ended September 30, 2019.
Profit per share for the nine months ended September 30, 2020, was $4.05, a decrease of $4.70, or 54 percent, compared with $8.75 for the nine months ended September 30, 2019. Profit per share for the nine months ended September 30, 2020, included a pre-tax net remeasurement gain of $55 million, or $0.08 per share, resulting from the settlements of pension obligations. Profit per share for the nine months ended September 30, 2019, included a discrete tax benefit related to U.S. tax reform of $178 million, or $0.31 per share.
Enterprise operating cash flow was $4.255 billion for the nine months ended September 30, 2020.


54

Response to COVID-19 and Global Business Conditions:
Operational Status
Caterpillar continues to implement safeguards in its facilities to protect team members, including increased frequency of cleaning and disinfecting, social distancing practices and other measures consistent with specific regulatory requirements and guidance from health authorities.
As of mid-October 2020, globally and across Caterpillar’s three primary segments, nearly all of the company’s primary production facilities continued to operate. This continues to fluctuate as conditions warrant, including the pace of economic recovery and the potential for additional COVID-related temporary shutdowns.
The company has continued to take actions to reduce costs and prioritize its spending to provide for investment in services and expanded offerings, key elements of its strategy for profitable growth, which was introduced in 2017.
Notes:
Glossary of terms is included on pages 68 - 70; first occurrence of terms shown in bold italics.
Information on non-GAAP financial measures is included on page 76.
55

Consolidated Results of Operations
 
THREE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2019

CONSOLIDATED SALES AND REVENUES
cat-20200930_g2.jpg
The chart above graphically illustrates reasons for the change in consolidated sales and revenues between the third quarter of 2019 (at left) and the third quarter of 2020 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees.
Total sales and revenues for the third quarter of 2020 were $9.881 billion, a decrease of $2.877 billion, or 23 percent, compared with $12.758 billion in the third quarter of 2019. The decline was mostly due to lower sales volume driven by lower end-user demand for equipment and services and the impact from changes in dealer inventories. Dealers decreased inventories more during the third quarter of 2020 than during the third quarter of 2019.
Sales were lower across all regions and the three primary segments.
North America sales declined 31 percent driven by lower end-user demand for equipment and services.
Sales decreased 37 percent in Latin America due to lower demand in most countries across the region and unfavorable currency impacts from a weaker Brazilian real.
EAME sales decreased 14 percent due to lower sales volume in most countries across the region, driven by lower end-user demand and the impact from changes in dealer inventories. Dealers decreased inventories more during the third quarter of 2020 than during the third quarter of 2019.
Asia/Pacific sales decreased 8 percent due to lower end-user demand and unfavorable price realization, partially offset by the impact from changes in dealer inventories. Dealers decreased inventories during the third quarter of 2019, compared with an increase during the third quarter of 2020. Sales were lower across the region, partially offset by higher sales in China driven by higher demand.
Dealers decreased machine and engine inventories about $600 million during the third quarter of 2020, compared with a decrease of about $400 million during the third quarter of 2019. Dealers are independent, and the reasons for changes in their inventory levels vary, including their expectations of future demand and product delivery times. Dealers’ demand expectations take into account seasonal changes, macroeconomic conditions, machine rental rates and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers. We expect dealers to reduce their inventories by about $2.5 billion for the full-year 2020.
56

Sales and Revenues by Segment
(Millions of dollars)Third Quarter 2019Sales
Volume
Price
Realization
CurrencyInter-Segment / OtherThird Quarter 2020$
Change
%
Change
Construction Industries$5,289 $(1,150)$(60)$(17)$(6)$4,056 $(1,233)(23 %)
Resource Industries2,310 (425)(46)(4)(19)1,816 (494)(21 %)
Energy & Transportation5,452 (1,086)(16)15 (204)4,161 (1,291)(24 %)
All Other Segment111 (3)— (3)106 (5)(5 %)
Corporate Items and Eliminations(1,188)45 — — 232 (911)277  
Machinery, Energy & Transportation Sales
11,974 (2,619)(121)(6)— 9,228 (2,746)(23 %)
Financial Products Segment865 — — — (141)724 (141)(16 %)
Corporate Items and Eliminations(81)— — — 10 (71)10  
Financial Products Revenues784 — — — (131)653 (131)(17 %)
Consolidated Sales and Revenues$12,758 $(2,619)$(121)$(6)$(131)$9,881 $(2,877)(23 %)

Sales and Revenues by Geographic Region
North AmericaLatin AmericaEAMEAsia/PacificExternal Sales and RevenuesInter-SegmentTotal Sales and Revenues
(Millions of dollars)$% Chg$% Chg$% Chg$% Chg$% Chg$% Chg$% Chg
Third Quarter 2020          
Construction Industries$1,781 (35 %)$230 (44 %)$796 (24 %)$1,241 14 %$4,048 (23 %)$(43 %)$4,056 (23 %)
Resource Industries487 (38 %)269 (23 %)384 (3 %)564 (13 %)1,704 (22 %)112 (15 %)1,816 (21 %)
Energy & Transportation1,584 (26 %)221 (42 %)1,113 (9 %)557 (33 %)3,475 (24 %)686 (23 %)4,161 (24 %)
All Other Segment10 900 %(83 %)(88 %)13 %25 (7 %)81 (4 %)106 (5 %)
Corporate Items and Eliminations(22)(2)— — (24)(887)(911)
Machinery, Energy & Transportation Sales3,840 (31 %)719 (37 %)2,294 (14 %)2,375 (8 %)9,228 (23 %)— — 9,228 (23 %)
Financial Products Segment448 (20 %)63 (20 %)100 (2 %)113 (9 %)724 1(16 %)— — 724 (16 %)
Corporate Items and Eliminations(37)(10)(10)(14)(71)— (71)
Financial Products Revenues411 (21 %)53 (17 %)90 (4 %)99 (9 %)653 (17 %)— — 653 (17 %)
Consolidated Sales and Revenues$4,251 (30 %)$772 (36 %)$2,384 (14 %)$2,474 (8 %)$9,881 (23 %)$— — $9,881 (23 %)
Third Quarter 2019              
Construction Industries$2,728 $413 $1,048 $1,086  $5,275 $14  $5,289 
Resource Industries789 349 396 645  2,179 131  2,310 
Energy & Transportation2,129 378 1,224 831  4,562 890  5,452 
All Other Segment12  27 84  111 
Corporate Items and Eliminations(62)(7)(1)(69)(1,119)(1,188)
Machinery, Energy & Transportation Sales5,585  1,147  2,669  2,573  11,974  —  11,974  
Financial Products Segment560 79 102 124  865 1—  865 
Corporate Items and Eliminations(43)(15)(8)(15) (81)—  (81)
Financial Products Revenues517  64  94  109  784  —  784  
Consolidated Sales and Revenues$6,102  $1,211  $2,763  $2,682  $12,758  $—  $12,758  

1 Includes revenues from Machinery, Energy & Transportation of $81 million and $131 million in the third quarter of 2020 and 2019, respectively.
57

CONSOLIDATED OPERATING PROFIT
cat-20200930_g3.jpg
The chart above graphically illustrates reasons for the change in consolidated operating profit between the third quarter of 2019 (at left) and the third quarter of 2020 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees. The bar titled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.
Operating profit for the third quarter of 2020 was $985 million, a decrease of $1.035 billion, or 51 percent, compared with $2.020 billion in the third quarter of 2019. The decrease was primarily due to lower sales volume. Favorable selling, general and administrative (SG&A) and research and development (R&D) expenses were mostly offset by unfavorable price realization and lower profit from Financial Products.
SG&A/R&D expenses benefited from reduced short-term incentive compensation expense and other cost reductions related to lower sales volumes.
Short-term incentive compensation expense is directly related to financial and operational performance, measured against targets set annually. In the first quarter, in response to the continued global economic uncertainty due to the COVID-19 pandemic, Caterpillar suspended 2020 short-term incentive compensation plans for many employees and all senior executives. As a result, no short-term incentive compensation expense was recognized in the third quarter of 2020, compared with about $130 million in the third quarter of 2019.
Operating profit margin was 10.0 percent for the third quarter of 2020, compared with 15.8 percent for the third quarter of 2019.
Profit (Loss) by Segment
(Millions of dollars)Third Quarter 2020Third Quarter 2019$
Change
%
 Change
Construction Industries$585 $940 $(355)(38 %)
Resource Industries167 311 (144)(46 %)
Energy & Transportation492 1,021 (529)(52 %)
All Other Segment27 (21)48 n/a
Corporate Items and Eliminations(346)(363)17  
Machinery, Energy & Transportation925 1,888 (963)(51 %)
Financial Products Segment142 218 (76)(35 %)
Corporate Items and Eliminations(15)21 (36) 
Financial Products127 239 (112)(47 %)
Consolidating Adjustments(67)(107)40  
Consolidated Operating Profit$985 $2,020 $(1,035)(51 %)

58


Other Profit/Loss and Tax Items
Interest expense excluding Financial Products in the third quarter of 2020 was $136 million, compared with $103 million in the third quarter of 2019. The increase was due to higher average debt outstanding during the third quarter of 2020, compared with the third quarter of 2019.
Other income (expense) in the third quarter of 2020 was income of $14 million, compared with income of $88 million in the third quarter of 2019. The change was primarily due to the unfavorable impacts from foreign currency exchange gains (losses) and lower investment and interest income.
The provision for income taxes for the third quarter of 2020 reflected an estimated annual tax rate of 31 percent, excluding the discrete items discussed below, compared with 26 percent for the third quarter of 2019. The increase in the estimated annual tax rate was primarily related to changes in the expected geographic mix of profits from a tax perspective for 2020, including the impact of U.S. tax on non-U.S. earnings as a result of U.S. tax reform.
In the third quarter of 2020, we recorded discrete tax benefits of $80 million to adjust prior year U.S. taxes including the impact of regulations received in 2020 and $13 million for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense. In addition, we recorded a $12 million tax benefit related to the $77 million of net remeasurement loss resulting from the settlements of pension obligations. We excluded this net remeasurement loss and related tax benefit from the estimated annual tax rate as the future period remeasurement impacts cannot currently be estimated.
Construction Industries
Construction Industries’ total sales were $4.056 billion in the third quarter of 2020, a decrease of $1.233 billion, or 23 percent, compared with $5.289 billion in the third quarter of 2019. The decrease was due to lower sales volume, driven by lower end-user demand and the impact from changes in dealer inventories. During the third quarter of 2020, dealers decreased inventories in all regions except for Asia/Pacific where dealers increased inventories, compared with the third quarter of 2019 when dealer inventories were about flat in all regions except for Asia/Pacific where dealers decreased inventories. Overall, dealers decreased inventories more during the third quarter of 2020 than during the third quarter of 2019.
In North America, sales decreased mostly due to lower sales volume driven by lower end-user demand and the impact from changes in dealer inventories. The lower end-user demand was driven primarily by pipeline and road construction.
Sales declined in Latin America primarily due to the impact from changes in dealer inventories and unfavorable currency impacts from a weaker Brazilian real.
In EAME, sales decreased mostly because of lower sales volume across the region, driven by lower end-user demand and the impact from changes in dealer inventories.
Sales increased in Asia/Pacific primarily due to the impact of changes in dealer inventories, partially offset by unfavorable price realization. The increase in sales was primarily driven by China demand, which was partially offset by lower sales in the rest of the region.
Construction Industries’ profit was $585 million in the third quarter of 2020, a decrease of $355 million, or 38 percent, compared with $940 million in the third quarter of 2019. The decrease was mainly due to lower sales volume and unfavorable price realization, partially offset by favorable manufacturing costs and lower SG&A/R&D expenses. Favorable manufacturing costs were driven by lower period manufacturing costs and favorable variable labor and burden. SG&A/R&D expenses and period manufacturing costs both benefited from cost reductions related to lower sales volumes.
Construction Industries’ profit as a percent of total sales was 14.4 percent in the third quarter of 2020, compared with 17.8 percent in the third quarter of 2019.
Resource Industries
Resource Industries’ total sales were $1.816 billion in the third quarter of 2020, a decrease of $494 million, or 21 percent, compared with $2.310 billion in the third quarter of 2019. The decrease was due to lower sales volume driven by lower end-user demand for equipment and aftermarket parts, partially offset by the impact of changes in dealer inventories. Dealers decreased inventories more during the third quarter of 2019 than during the third quarter of 2020. End-user demand was lower across non-residential construction and quarry and aggregates and mining, primarily in North America.
59

Resource Industries’ profit was $167 million in the third quarter of 2020, a decrease of $144 million, or 46 percent, compared with $311 million in the third quarter of 2019. The decrease was mainly because of lower sales volume and unfavorable price realization, partially offset by favorable manufacturing costs and lower SG&A/R&D expenses. Favorable manufacturing costs were driven by lower period manufacturing costs, favorable material costs and lower warranty expense, partially offset by unfavorable cost absorption. Cost absorption was unfavorable as inventory increased in the third quarter of 2019, compared with a decrease in the third quarter of 2020. SG&A/R&D expenses, along with period manufacturing costs, benefited from lower short-term incentive compensation expense, other cost-reduction actions implemented in response to lower sales volumes and benefits from prior restructuring programs.
Resource Industries’ profit as a percent of total sales was 9.2 percent in the third quarter of 2020, compared with 13.5 percent in the third quarter of 2019.
Energy & Transportation
Sales by Application
(Millions of dollars)Third Quarter 2020Third Quarter 2019$
Change
%
 Change
Oil and Gas$734 $1,246 $(512)(41 %)
Power Generation1,034 1,123 (89)(8 %)
Industrial730 980 (250)(26 %)
Transportation977 1,213 (236)(19 %)
External Sales3,475 4,562 (1,087)(24 %)
Inter-segment686 890 (204)(23 %)
Total Sales$4,161 $5,452 $(1,291)(24 %)
Energy & Transportation’s total sales were $4.161 billion in the third quarter of 2020, a decrease of $1.291 billion, or 24 percent, compared with $5.452 billion in the third quarter of 2019. Sales declined across all applications and inter-segment engine sales.
Oil and Gas – Sales decreased mainly due to lower demand in North America for reciprocating engines used in gas compression and decreased sales of engine aftermarket parts. In addition, sales were lower for turbines and turbine-related services.
Power Generation – Sales decreased primarily due to lower sales volume in engine aftermarket parts, and small reciprocating engine applications, as well as turbines and turbine-related services. The sales decrease was partially offset by an increase in large reciprocating engine applications, mainly for data centers.
Industrial – Sales decreased due to lower demand across all regions.
Transportation – Sales declined in rail due to lower deliveries of locomotives and related services, primarily in North America, and in marine due to lower sales of engine aftermarket parts, primarily in EAME.
Energy & Transportation’s profit was $492 million in the third quarter of 2020, a decrease of $529 million, or 52 percent, compared with $1.021 billion in the third quarter of 2019. The decrease was due to lower sales volume, partially offset by lower SG&A/R&D expenses and period manufacturing costs. SG&A/R&D expenses and period manufacturing costs were mostly impacted by a reduction in short-term incentive compensation expense and other cost-reduction actions implemented in response to lower sales volumes. In addition, segment profit was unfavorably impacted by other operating income/expense and higher inventory write-downs during the third quarter of 2020.
Energy & Transportation’s profit as a percent of total sales was 11.8 percent in the third quarter of 2020, compared with 18.7 percent in the third quarter of 2019.
Financial Products Segment
Financial Products’ segment revenues were $724 million in the third quarter of 2020, a decrease of $141 million, or 16 percent, from the third quarter of 2019. The decrease was primarily because of lower average financing rates across all regions and lower average earning assets primarily in North America.
60

Financial Products’ segment profit was $142 million in the third quarter of 2020, compared with $218 million in the third quarter of 2019. The decrease was due to higher provision for credit losses, lower net yield on average earning assets and lower average earning assets at Cat Financial. These unfavorable impacts were partially offset by a reduction in SG&A expenses primarily due to lower short-term incentive compensation and employee benefit expenses.
At the end of the third quarter of 2020, past dues at Cat Financial were 3.81 percent, compared with 3.19 percent at the end of the third quarter of 2019. Past dues increased primarily due to the impacts of the COVID-19 pandemic, partially offset by decreases in the Caterpillar Power Finance and Latin American portfolios. Write-offs, net of recoveries, were $125 million for the third quarter of 2020, compared with $103 million for the third quarter of 2019. As of September 30, 2020, Cat Financial's allowance for credit losses totaled $460 million, or 1.74 percent of finance receivables, compared with $515 million, or 1.92 percent of finance receivables at June 30, 2020. The decrease in the allowance for credit losses was primarily driven by write-offs of previously reserved accounts in the Caterpillar Power Finance portfolio. The allowance for credit losses at year-end 2019 was $424 million, or 1.50 percent of finance receivables.
Corporate Items and Eliminations
Expense for corporate items and eliminations was $361 million in the third quarter of 2020, an increase of $19 million from the third quarter of 2019, primarily due to higher restructuring costs and an unfavorable change in fair value adjustments related to deferred compensation plans, partially offset by lower corporate costs and segment reporting methodology differences.

61


NINE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2019

CONSOLIDATED SALES AND REVENUES
cat-20200930_g4.jpg
The chart above graphically illustrates reasons for the change in consolidated sales and revenues between the nine months ended September 30, 2019 (at left) and the nine months ended September 30, 2020 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees.
Total sales and revenues were $30.513 billion for the nine months ended September 30, 2020, a decrease of $10.143 billion, or 25 percent, compared with $40.656 billion for the nine months ended September 30, 2019. The decline was due to lower sales volume driven by lower end-user demand for equipment and services and the impact from changes in dealer inventories. Dealers decreased machine and engine inventories about $1.8 billion during the nine months ended September 30, 2020, compared with an increase of about $1.4 billion during the nine months ended September 30, 2019. The changes in dealer inventories came primarily in Construction Industries and Resource Industries.
Sales were lower across all regions and in the three primary segments.
North America sales declined 33 percent driven by lower end-user demand and the impact from changes in dealer inventories. Dealers decreased inventories during the nine months ended September 30, 2020, compared with an increase during the nine months ended September 30, 2019.
Sales decreased 34 percent in Latin America due to lower demand in most countries across the region, driven by lower end-user demand and the impact from changes in dealer inventories. Dealers decreased inventories during the nine months ended September 30, 2020, compared with dealer inventories that were about flat during the nine months ended September 30, 2019.
EAME sales decreased 13 percent due to lower sales volume in most countries across the region, driven by lower end-user demand and the impact from changes in dealer inventories. Dealers increased inventories during the nine months ended September 30, 2019, compared with dealer inventories that were about flat during the nine months ended September 30, 2020.
Asia/Pacific sales decreased 18 percent due to lower demand across the region. Lower demand was driven by the impact from changes in dealer inventories and lower end-user demand. Dealers decreased inventories during the nine months ended September 30, 2020, compared with dealer inventories that were about flat during the nine months ended September 30, 2019.
Dealers decreased machine and engine inventories about $1.8 billion during the nine months ended September 30, 2020, compared with an increase of about $1.4 billion during the nine months ended September 30, 2019. Dealers are independent, and the reasons for changes in their inventory levels vary, including their expectations of future demand and product delivery times. Dealers’ demand expectations take into account seasonal changes, macroeconomic conditions, machine rental rates and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers. We expect dealers to reduce their inventories by about $2.5 billion for the full-year 2020.
62

Sales and Revenues by Segment
(Millions of dollars)Nine Months Ended September 30, 2019Sales
Volume
Price
Realization
CurrencyInter-Segment / OtherNine Months Ended September 30, 2020$
Change
%
Change
Construction Industries$17,629 $(4,628)$(396)$(157)$(38)$12,410 $(5,219)(30 %)
Resource Industries7,881 (1,967)(88)(89)(11)5,726 (2,155)(27 %)
Energy & Transportation16,148 (2,630)31 (86)(804)12,659 (3,489)(22 %)
All Other Segment357 (17)(1)(10)330 (27)(8 %)
Corporate Items and Eliminations(3,646)110 — — 863 (2,673)973  
Machinery, Energy & Transportation Sales38,369 (9,132)(452)(333)— 28,452 (9,917)(26 %)
Financial Products Segment2,588 — — — (287)2,301 (287)(11 %)
Corporate Items and Eliminations(301)— — — 61 (240)61  
Financial Products Revenues2,287 — — — (226)2,061 (226)(10 %)
Consolidated Sales and Revenues$40,656 $(9,132)$(452)$(333)$(226)$30,513 $(10,143)(25 %)
Sales and Revenues by Geographic Region
North AmericaLatin AmericaEAMEAsia/PacificExternal Sales and RevenuesInter-SegmentTotal Sales and Revenues
(Millions of dollars)$% Chg$% Chg$% Chg$% Chg$% Chg$% Chg$% Chg
Nine Months Ended September 30, 2020          
Construction Industries$5,470 (41 %)$707 (37 %)$2,618 (17 %)$3,597 (12 %)$12,392 (29 %)$18 (68 %)$12,410 (30 %)
Resource Industries1,690 (40 %)859 (30 %)1,158 (12 %)1,686 (24 %)5,393 (28 %)333 (3 %)5,726 (27 %)
Energy & Transportation5,138 (22 %)667 (36 %)3,095 (9 %)1,734 (24 %)10,634 (20 %)2,025 (28 %)12,659