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Caterpillar Financial Services

Filed: 5 May 21, 10:53am

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
cfsc-20210331_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 March 31, 2021
Commission File No. 001-11241
CATERPILLAR FINANCIAL SERVICES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware37-1105865
(State of incorporation)(IRS Employer I.D. No.)
2120 West End Ave., Nashville, Tennessee37203-0001
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (615) 341-1000
Securities registered pursuant to Section 12(b) of the Act:
 
 Title of each class
 
Trading 
Symbol(s)
Name of each exchange
  on which registered 
 Medium-Term Notes, Series H,
3.300% Notes Due 2024
CAT/24New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the 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 ☒

As of May 5, 2021, 1 share of common stock of the registrant was outstanding, which is owned by Caterpillar Inc.

The registrant is a wholly owned subsidiary of Caterpillar Inc. and meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q, and is therefore filing this form with the reduced disclosure format.


UNAUDITED

PART I. FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In addition to the accompanying unaudited consolidated financial statements for Caterpillar Financial Services Corporation (together with its subsidiaries, “Cat Financial,” “the Company,” “we,” “us” or “our”), we suggest that you read our 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 17, 2021. The Company files electronically with the SEC required reports on Form 8-K, Form 10-Q, Form 10-K; registration statements on Form S-3; and other forms or reports as required.  The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished with the SEC are available free of charge through Caterpillar’s website (www.caterpillar.com/secfilings) as soon as reasonably practicable after filing with the SEC.  In addition, the public may obtain more detailed information about our parent company, Caterpillar, by visiting its website (www.caterpillar.com).  None of the information contained at any time on our website or Caterpillar’s website is incorporated by reference into this document.


2

UNAUDITED

Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF PROFIT
(Unaudited)
(Dollars in Millions)
Three Months Ended
March 31,
 20212020
  
Revenues:
Retail finance$303 $329 
Operating lease244 257 
Wholesale finance78 99 
Other, net14 10 
Total revenues639 695 
Expenses:  
Interest125 175 
Depreciation on equipment leased to others192 201 
General, operating and administrative121 108 
Provision for credit losses(10)61 
Other13 
Total expenses435 558 
Other income (expense)(8)(10)
Profit before income taxes196 127 
Provision for income taxes53 33 
Profit of consolidated companies143 94 
Less:  Profit attributable to noncontrolling interests
Profit(1)
$140 $90 
(1) Profit attributable to Caterpillar Financial Services Corporation.

See Notes to Consolidated Financial Statements (Unaudited).

3

UNAUDITED

Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Millions)
Three Months Ended
March 31,
 20212020
  
Profit of consolidated companies$143 $94 
Other comprehensive income (loss), net of tax (Note 5):
Foreign currency translation(121)(307)
Derivative financial instruments11 
Total Other comprehensive income (loss), net of tax(110)(301)
Comprehensive income (loss)33 (207)
Less: Comprehensive income (loss) attributable to the noncontrolling interests
Comprehensive income (loss) attributable to Caterpillar Financial Services Corporation$32 $(210)
See Notes to Consolidated Financial Statements (Unaudited).

4

UNAUDITED

Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(Dollars in Millions, except share data)
March 31,
2021
December 31,
2020
Assets:  
Cash and cash equivalents$735 $411 
Finance receivables, net of Allowance for credit losses of $441 and $47926,500 26,575 
Notes receivable from Caterpillar331 356 
Equipment on operating leases, net3,237 3,366 
Other assets1,280 1,283 
Total assets$32,083 $31,991 
Liabilities and shareholder’s equity:  
Payable to dealers and others$148 $144 
Payable to Caterpillar - borrowings and other96 1,087 
Accrued expenses259 400 
Short-term borrowings3,625 2,005 
Current maturities of long-term debt6,898 7,729 
Long-term debt16,605 16,250 
Other liabilities928 885 
Total liabilities28,559 28,500 
Commitments and contingent liabilities (Note 7)00
Common stock - $1 par value 
Authorized:  2,000 shares; Issued and  
outstanding: 1 share (at paid-in amount)745 745 
Additional paid-in capital
Retained earnings3,282 3,142 
Accumulated other comprehensive income (loss)(703)(595)
Noncontrolling interests198 197 
Total shareholder’s equity3,524 3,491 
Total liabilities and shareholder’s equity$32,083 $31,991 
See Notes to Consolidated Financial Statements (Unaudited).

5

UNAUDITED

Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY
(Unaudited)
(Dollars in Millions)
Three Months Ended March 31, 2020Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Noncontrolling
interests
Total
Balance at December 31, 2019$745 $$3,162 $(845)$172 $3,236 
Profit of consolidated companies90 94 
Foreign currency translation, net of tax(306)(1)(307)
Derivative financial instruments, net of tax
Adjustment to adopt new accounting guidance(1)
(13)(13)
Balance at March 31, 2020$745 $$3,239 $(1,145)$175 $3,016 
Three Months Ended March 31, 2021
Balance at December 31, 2020$745 $$3,142 $(595)$197 $3,491 
Profit of consolidated companies140 143 
Foreign currency translation, net of tax(119)(2)(121)
Derivative financial instruments, net of tax11 11 
Balance at March 31, 2021$745 $$3,282 $(703)$198 $3,524 
(1) Adjustment to adopt new accounting guidance related to credit losses.

See Notes to Consolidated Financial Statements (Unaudited).

6

UNAUDITED

Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
Three Months Ended
March 31,
 20212020
Cash flows from operating activities:  
Profit of consolidated companies$143 $94 
Adjustments for non-cash items:  
Depreciation and amortization195 205 
Accretion of Caterpillar purchased receivable revenue(74)(91)
Provision for credit losses(10)61 
Other, net23 150 
Changes in assets and liabilities:  
Other assets(12)(42)
Payable to dealers and others13 35 
Accrued expenses28 (17)
Other payables with Caterpillar
Other liabilities23 (3)
Net cash provided by operating activities335 401 
Cash flows from investing activities:  
Expenditures for equipment on operating leases(224)(246)
Capital expenditures - excluding equipment on operating leases(4)(1)
Proceeds from disposals of equipment244 155 
Additions to finance receivables(2,867)(3,213)
Collections of finance receivables3,062 3,422 
Net changes in Caterpillar purchased receivables(411)376 
Proceeds from sales of receivables31 
Net change in variable lending to Caterpillar19 
Additions to other notes receivable with Caterpillar(23)
Collections on other notes receivable with Caterpillar28 
Settlements of undesignated derivatives(51)35 
Other, net
Net cash provided by (used for) investing activities(221)565 
Cash flows from financing activities:  
Net change in variable lending from Caterpillar(1,000)(596)
Proceeds from debt issued (original maturities greater than three months)1,779 2,126 
Payments on debt issued (original maturities greater than three months)(2,243)(2,460)
Short-term borrowings, net (original maturities three months or less)1,669 (35)
Net cash provided by (used for) financing activities205 (965)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(22)
Increase (decrease) in cash, cash equivalents and restricted cash319 (21)
Cash, cash equivalents and restricted cash at beginning of year(1)
425 695 
Cash, cash equivalents and restricted cash at end of period(1)
$744 $674 
(1) As of March 31, 2021 and December 31, 2020, restricted cash, which is included in Other assets in the Consolidated Statements of Financial Position, was $9 million and $14 million, respectively. Restricted cash primarily includes cash related to syndication activities.

See Notes to Consolidated Financial Statements (Unaudited).

7

UNAUDITED

Notes to Consolidated Financial Statements
(Unaudited)

1.Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated profit for the three months ended March 31, 2021 and 2020, (b) the consolidated comprehensive income for the three months ended March 31, 2021 and 2020, (c) the consolidated financial position at March 31, 2021 and December 31, 2020, (d) the consolidated changes in shareholder’s equity for the three months ended March 31, 2021 and 2020 and (e) the consolidated cash flows for the three months ended March 31, 2021 and 2020. The preparation of financial statements, in conformity with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), requires management to make estimates and assumptions that affect the reported amounts. Significant estimates include residual values for leased assets, allowance for credit losses and income taxes. Actual results may differ from these estimates.

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 consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2020 (2020 Form 10-K). The December 31, 2020 financial position data included herein was derived from the audited consolidated financial statements included in the 2020 Form 10-K but does not include all disclosures required by generally accepted accounting principles.

We consolidate all variable interest entities (VIEs) where we are the primary beneficiary. For VIEs, we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs. The primary beneficiary of a VIE is the party that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. Please refer to Note 7 for more information.

We have customers and dealers 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. Credit risk was evaluated and reflected in our financial statements as part of our overall portfolio of finance receivables and related allowance for credit losses.
2.New Accounting Pronouncements
 
A.Adoption of New Accounting Standards

Reference rate reform (Accounting Standards Update (ASU) 2020-04) – In March 2020, the Financial Accounting Standards Board (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. In January 2021, we elected to adopt optional expedients impacting our derivative instruments. We continue to evaluate the impact of reference rate reform on our other contracts and assess the impacts of adopting this guidance on our financial statements.

We adopted the following ASUs effective January 1, 2021, none of which had a material impact on our financial statements:
ASUDescription
2020-08Codification improvements – Receivables – Nonrefundable fees and other costs
2021-01Reference rate reform – Scope

B.Accounting Standards Issued But Not Yet Adopted

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

8

UNAUDITED

3.Finance Receivables

A summary of finance receivables included in the Consolidated Statements of Financial Position was as follows:
(Millions of dollars)March 31,
2021
December 31,
2020
Retail loans, net(1)
$14,698 $15,037 
Retail leases, net7,734 7,812 
Caterpillar purchased receivables, net4,065 3,646 
Wholesale loans, net(1)
423 533 
Wholesale leases, net21 26 
Total finance receivables26,941 27,054 
Less: Allowance for credit losses(441)(479)
Total finance receivables, net$26,500 $26,575 
(1) Includes failed sale leasebacks.

Finance leases
Revenues from finance leases were $122 million and $125 million for the three months ended March 31, 2021 and 2020, respectively, and are included in retail and wholesale finance revenue in the Consolidated Statements of Profit. The residual values for finance leases are included in Finance receivables, net in the Consolidated Statements of Financial Position. Residual value adjustments are recognized through a reduction of finance revenue over the remaining lease term.

Allowance for credit losses 

Portfolio segments
A portfolio segment is the level at which we develop a systematic methodology for determining our allowance for credit losses. Our portfolio segments and related methods for estimating expected credit losses are as follows:

Customer
We provide 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. We also provide financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. The average original term of our customer finance receivable portfolio was approximately 48 months with an average remaining term of approximately 26 months as of March 31, 2021.

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

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

During the three months ended March 31, 2021, our forecasts for the markets in which we operate reflected an overall rebound in economic conditions, which had deteriorated due to the COVID-19 pandemic, resulting from a growing economy, improved unemployment rates and a decrease in delinquencies. We believe the economic forecasts employed represent reasonable and supportable forecasts, followed by a reversion to long-term trends.

9

UNAUDITED


Dealer
We provide financing to Caterpillar dealers in the form of wholesale financing plans. Our 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, we provide a variety of secured and unsecured loans to Caterpillar dealers.
    
We estimate the allowance for credit losses for dealer finance receivables based on historical loss rates with consideration of current economic conditions and reasonable and supportable forecasts.

In general, our Dealer portfolio segment has not historically experienced large increases or decreases in credit losses based on changes in economic conditions due to our close working relationships with the dealers and their financial strength. Therefore, we made no adjustments to historical loss rates during the three months ended March 31, 2021.

Caterpillar Purchased Receivables
We purchase receivables from Caterpillar, primarily related to the sale of equipment and parts to dealers. Caterpillar purchased receivables are non-interest-bearing short-term trade receivables that are purchased at a discount.

We estimate the allowance for credit losses for Caterpillar purchased receivables based on historical loss rates with consideration of current economic conditions and reasonable and supportable forecasts.

In general, our Caterpillar Purchased Receivables portfolio segment has not historically experienced large increases or decreases in credit losses based on changes in economic conditions due to the short-term maturities of the receivables and our close working relationships with the dealers and their financial strength. Therefore, we made no adjustments to historical loss rates during the three months ended March 31, 2021.

Classes of finance receivables
We further evaluate our 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, our finance receivables within a geographic area have similar credit risk profiles and methods for assessing and monitoring credit risk. Our classes, which align with management reporting for credit losses, are as follows:

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


10

UNAUDITED

An analysis of the allowance for credit losses was as follows:
(Millions of dollars)March 31, 2021
Allowance for Credit Losses:CustomerDealerCaterpillar
Purchased
Receivables
Total
Balance at beginning of year$431 $44 $$479 
Receivables written off(34)(34)
Recoveries on receivables previously written off10 10 
Provision for credit losses(10)(10)
Foreign currency translation adjustment(4)(4)
Balance at end of period$393 $44 $$441 
Individually evaluated$185 $39 $$224 
Collectively evaluated208 217 
Ending Balance$393 $44 $$441 
Finance Receivables:    
Individually evaluated$579 $78 $$657 
Collectively evaluated19,219 3,000 4,065 26,284 
Ending Balance$19,798 $3,078 $4,065 $26,941 
.
(Millions of dollars)December 31, 2020
Allowance for Credit Losses:CustomerDealerCaterpillar
Purchased
Receivables
Total
Balance at beginning of year$375 $45 $$424 
Adjustment to adopt new accounting guidance(1)
12 12 
Receivables written off(263)(263)
Recoveries on receivables previously written off41 41 
Provision for credit losses262 (1)261 
Foreign currency translation adjustment
Balance at end of year$431 $44 $$479 
Individually evaluated$187 $39 $$226 
Collectively evaluated244 253 
Ending Balance$431 $44 $$479 
Finance Receivables:    
Individually evaluated$594 $78 $$672 
Collectively evaluated19,333 3,403 3,646 26,382 
Ending Balance$19,927 $3,481 $3,646 $27,054 
(1) Adjustment to adopt new accounting guidance related to credit losses.


11

UNAUDITED

Credit quality of finance receivables
At origination, we evaluate credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit ratings, loan-to-value ratios, probabilities of default, industry trends, macroeconomic factors and other internal metrics. On an ongoing basis, we monitor 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, we consider the entire finance receivable past due when any installment is over 30 days past due.

Customer
The tables below summarize the aging category of our amortized cost of finance receivables in the Customer portfolio segment by origination year.
(Millions of dollars)March 31, 2021
20212020201920182017PriorRevolving
Finance
Receivables
Total
Finance
Receivables
North America
Current$1,149 $3,551 $2,192 $1,156 $425 $166 $61 $8,700 
31-60 days past due34 30 18 103 
61-90 days past due14 35 
91+ days past due18 35 22 16 10 102 
EAME
Current459 1,307 811 419 164 56 3,216 
31-60 days past due18 
61-90 days past due
91+ days past due12 81 112 
Asia/Pacific
Current448 1,431 775 297 85 25 34 3,095 
31-60 days past due16 16 10 43 
61-90 days past due27 
91+ days past due12 12 34 
Mining
Current230 473 567 315 109 206 86 1,986 
31-60 days past due
61-90 days past due
91+ days past due
Latin America
Current124 490 264 106 35 23 1,042 
31-60 days past due21 
61-90 days past due13 27 
91+ days past due10 22 10 54 
Caterpillar Power Finance
Current219 175 102 214 207 112 1,035 
31-60 days past due
61-90 days past due
91+ days past due25 93 123 
Total$2,427 $7,603 $4,929 $2,539 $1,105 $900 $295 $19,798 


12

UNAUDITED

(Millions of dollars)December 31, 2020
20202019201820172016PriorRevolving
Finance
Receivables
Total
Finance
Receivables
North America
Current$3,780 $2,423 $1,344 $522 $212 $27 $89 $8,397 
31-60 days past due52 49 33 16 159 
61-90 days past due22 25 16 75 
91+ days past due14 35 31 20 115 
EAME
Current1,605 931 501 203 60 18 3,318 
31-60 days past due15 25 
61-90 days past due
91+ days past due12 39 43 112 
Asia/Pacific
Current1,583 933 412 115 32 32 3,113 
31-60 days past due13 23 13 55 
61-90 days past due11 26 
91+ days past due10 26 
Mining
Current515 574 289 181 92 151 137 1,939 
31-60 days past due11 
61-90 days past due
91+ days past due11 22 
Latin America
Current561 348 151 48 13 34 1,155 
31-60 days past due16 
61-90 days past due19 
91+ days past due14 11 24 60 
Caterpillar Power Finance
Current217 199 111 273 99 117 119 1,135 
31-60 days past due
61-90 days past due
91+ days past due20 25 79 129 
Total$8,399 $5,622 $2,994 $1,440 $597 $495 $380 $19,927 

Finance receivables in the Customer portfolio segment are substantially secured by collateral, primarily in the form of Caterpillar and other machinery. For those contracts where the borrower is experiencing financial difficulty, repayment of the outstanding amounts is generally expected to be provided through the operation or repossession and sale of the machinery.

Dealer
As of March 31, 2021, our total amortized cost of finance receivables within the Dealer portfolio segment was current, with the exception of $78 million that was 91+ days past due in Latin America, all of which was originated in 2017. As of December 31, 2020, our total amortized cost of finance receivables within the Dealer portfolio segment was current, with the exception of $81 million that was 91+ days past due in Latin America. Of these past due receivables, $78 million were originated in 2017 and $3 million were originated prior to 2016.


13

UNAUDITED

Caterpillar Purchased Receivables
The tables below summarize the aging category of our amortized cost of finance receivables in the Caterpillar Purchased Receivables portfolio segment.
(Millions of dollars)      
 March 31, 2021
 31-60
Days
Past Due
61-90
Days
Past Due
91+
Days
Past Due
Total
Past Due
Current
Total Finance
Receivables
North America$$$$13 $2,070 $2,083 
EAME777 778 
Asia/Pacific802 807 
Mining
Latin America392 392 
Caterpillar Power Finance
Total$$$$19 $4,046 $4,065 

(Millions of dollars)      
 December 31, 2020
 31-60
Days
Past Due
61-90
Days
Past Due
91+
Days
Past Due
Total
Past Due
Current
Total Finance
Receivables
North America$14 $11 $$31 $1,889 $1,920 
EAME632 634 
Asia/Pacific581 585 
Mining
Latin America501 501 
Caterpillar Power Finance
Total$17 $12 $$37 $3,609 $3,646 

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.
 



14

UNAUDITED

In our 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:
(Millions of dollars)March 31, 2021December 31, 2020
Amortized CostAmortized Cost
Non-accrual
With an
Allowance
Non-accrual
Without an
Allowance
91+ Still
Accruing
Non-accrual
With an
Allowance
Non-accrual
Without an
Allowance
91+ Still
Accruing
North America$76 $$27 $86 $$34 
EAME109 113 
Asia/Pacific20 14 13 13 
Mining21 
Latin America57 63 
Caterpillar Power Finance147 11 170 17 
Total$416 $15 $47 $466 $20 $49 
    
There was $3 million and less than $1 million of interest income recognized during the three months ended March 31, 2021 and 2020, respectively, for customer finance receivables on non-accrual status.

As of March 31, 2021 and December 31, 2020, finance receivables in our Dealer portfolio segment on non-accrual status were $78 million and $81 million, respectively, all of which was in Latin America. There were 0 finance receivables in our Dealer portfolio segment more than 90 days past due and still accruing income as of March 31, 2021 and December 31, 2020 and 0 interest income was recognized on dealer finance receivables on non-accrual status during the three months ended March 31, 2021 and 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. We individually evaluate TDR contracts and establish an allowance based on the present value of expected future cash flows discounted at the receivable’s effective interest rate, the fair value of the collateral for collateral-dependent receivables or the observable market price of the receivable.

There were 0 finance receivables modified as TDRs during the three months ended March 31, 2021 and 2020 for the Dealer or Caterpillar Purchased Receivables portfolio segments. Finance receivables in the Customer portfolio segment modified as TDRs were as follows:
(Millions of dollars)Three Months Ended
March 31, 2021
Three Months Ended
March 31, 2020
 Pre-TDR
Amortized
Cost
Post-TDR
Amortized
Cost
Pre-TDR
Amortized
Cost
Post-TDR
Amortized
Cost
Mining$11 $$$
Latin America
Total$11 $$$


15

UNAUDITED

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:
(Millions of dollars)Three Months Ended
March 31, 2021
Three Months Ended
March 31, 2020
 Post-TDR
Amortized
Cost
Post-TDR
Amortized
Cost
North America$$
EAME10 
Asia/Pacific
Latin America
Caterpillar Power Finance
Total$10 $11 

4.Derivative Financial Instruments and Risk Management
     
Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates and interest rates.  Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate and interest rate 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 and interest rate contracts.  Our derivative activities are subject to the management, direction and control of our senior financial officers.  We present at least annually to our Board of Directors and the Audit Committee of the Caterpillar Inc. 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 Statements 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 Statements 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 Statements of Cash Flows.  We include cash flows from undesignated derivative financial instruments in the investing category on the Consolidated Statements of Cash Flows.
 
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 Statements 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 value 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 derecognition criteria for hedge accounting.

Foreign currency exchange rate risk
We have balance sheet positions and expected future transactions denominated in foreign currencies, thereby creating exposure to movements in exchange rates. In managing foreign currency risk, 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.
 

16

UNAUDITED

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.
 
We have a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate and duration) of our debt portfolio with the interest rate profile of our finance receivable 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 finance receivable 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.

As of March 31, 2021, the cumulative amount of fair value hedging adjustments related to our fixed-to-floating interest rate contracts included in the carrying amount of Long-term debt was $31 million. Fair value gains and losses on these interest rate contracts and the related hedged items generally offset within interest expense. We have, at certain times, liquidated fixed-to-floating interest rate contracts that resulted in deferred gains at the time of liquidation. The deferred gains associated with these interest rate contracts are included in Long-term debt in the Consolidated Statements of Financial Position and are being amortized to Interest expense over the remaining term of the previously designated hedged item.

The location and fair value of derivative instruments reported in the Consolidated Statements of Financial Position were as follows:
(Millions of dollars) Asset (Liability) Fair Value
 Consolidated Statements of
Financial Position Location
March 31,
2021
December 31,
2020
Designated derivatives   
Interest rate contractsOther assets$41 $59 
Interest rate contractsAccrued expenses(10)(5)
Cross currency contractsOther assets34 
Cross currency contractsAccrued expenses(64)(148)
  $$(92)
Undesignated derivatives   
Foreign exchange contractsOther assets$60 $17 
Foreign exchange contractsAccrued expenses(15)(107)
Cross currency contractsOther assets
Cross currency contractsAccrued expenses
  $52 $(83)
The total notional amount of our derivative instruments was $10.64 billion and $11.26 billion as of March 31, 2021 and December 31, 2020, respectively. The notional amounts of 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 and interest rates.


17

UNAUDITED

The effect of derivatives designated as hedging instruments on the Consolidated Statements of Profit was as follows:
Cash Flow Hedges
(Millions of dollars)Three Months Ended March 31, 2021
Recognized in Earnings
 Amount of
Gains (Losses)
Recognized
in AOCI
ClassificationAmount of
Gains (Losses)
Reclassified
from AOCI
Amount of the line
items in the
Consolidated
Statements of Profit
Interest rate contracts$Interest expense$(10)$125 
Cross currency contracts119 Other income (expense)112 (8)
Interest expense125 
 $119  $104 
Three Months Ended March 31, 2020
 Recognized in Earnings
 Amount of
Gains (Losses)
Recognized
in AOCI
ClassificationAmount of
Gains (Losses)
Reclassified
from AOCI
Amount of the line
items in the
Consolidated
Statements of Profit
Interest rate contracts$(15)Interest expense$(5)$175 
Cross currency contracts101 Other income (expense)71 (10)
Interest expense11 175 
 $86  $77 

As of March 31, 2021, $2 million of deferred net losses, net of tax, included in equity (AOCI in the Consolidated Statements of Financial Position), related to our cash flow hedges, are expected to be reclassified to earnings over the next twelve months.  The actual amount recorded in earnings will vary based on interest rates and exchange rates at the time the hedged transactions impact earnings.

The effect of derivatives not designated as hedging instruments on the Consolidated Statements of Profit was as follows:
(Millions of dollars) Three Months Ended March 31,
 Classification20212020
Foreign exchange contractsOther income (expense)$85 $99 
Cross currency contractsOther income (expense)
  $86 $108 



18

UNAUDITED

We enter into International Swaps and Derivatives Association master netting agreements that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits us 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 us under the master netting agreements. As of March 31, 2021 and December 31, 2020, no cash collateral was received or pledged under the master netting agreements.
    
The effect of net settlement provisions of the master netting agreements on our derivative balances upon an event of default or a termination event was as follows:
(Millions of dollars)March 31,
2021
December 31,
2020
Derivative Assets
Gross Amount of Recognized Assets$142 $85 
Gross Amounts Offset
Net Amount of Assets(1)
142 85 
Gross Amounts Not Offset(55)(57)
Net Amount$87 $28 
Derivative Liabilities
Gross Amount of Recognized Liabilities$(89)$(260)
Gross Amounts Offset
Net Amount of Liabilities(1)
(89)(260)
Gross Amounts Not Offset55 57 
Net Amount$(34)$(203)
(1) As presented in the Consolidated Statements of Financial Position.


19

UNAUDITED

5.Accumulated Other Comprehensive Income (Loss)
 
We present Comprehensive income (loss) and its components in the Consolidated Statements of Comprehensive Income. Changes in Accumulated other comprehensive income (loss), net of tax, included in the Consolidated Statements of Changes in Shareholder’s Equity, consisted of the following:
(Millions of dollars)Three Months Ended
March 31,
20212020
Foreign currency translation
Balance at beginning of period$(551)$(777)
Gains (losses) on foreign currency translation(94)(294)
Less: Tax provision/(benefit)25 12 
Net gains (losses) on foreign currency translation(119)(306)
Other comprehensive income (loss), net of tax(119)(306)
Balance at end of period$(670)$(1,083)
Derivative financial instruments
Balance at beginning of period$(44)$(68)
Gains (losses) deferred119 86 
Less: Tax provision/(benefit)25 19 
Net gains (losses) deferred94 67 
(Gains) losses reclassified to earnings(104)(77)
Less: Tax (provision)/benefit(21)(16)
Net (gains) losses reclassified to earnings(83)(61)
Other comprehensive income (loss), net of tax11 
Balance at end of period$(33)$(62)
Total Accumulated other comprehensive income (loss) at end of period$(703)$(1,145)

The effect of the reclassifications out of Accumulated other comprehensive income (loss) on the Consolidated Statements of Profit was as follows:
(Millions of dollars)Three Months Ended
March 31,
Derivative financial instrumentsClassification of
income (expense)
20212020
Cross currency contractsOther income (expense)$112 $71 
Cross currency contractsInterest expense11 
Interest rate contractsInterest expense(10)(5)
Reclassifications before tax104 77 
Tax (provision) benefit(21)(16)
Total reclassifications from Accumulated other comprehensive income (loss)$83 $61 


20

UNAUDITED

6.Segment Information

A.     Basis for Segment Information

We report information internally for operating segments based on management responsibility. Our operating segments provide financing alternatives to customers and dealers around the world for Caterpillar products and vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. Financing plans include operating and finance leases, retail loans, working capital loans to Caterpillar dealers and wholesale financing plans within each of the operating segments. Certain operating segments also purchase short-term trade receivables from Caterpillar.

B.     Description of Segments

We have six operating segments that offer financing services. Following is a brief description of our segments:

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

C.     Segment Measurement and Reconciliations

Cash, debt and other expenses are allocated to our segments based on their respective portfolios. The related Interest expense is calculated based on the amount of allocated debt and the rates associated with that debt. The performance of each segment is assessed based on a consistent leverage ratio. The Provision for credit losses is based on each segment’s respective finance receivable portfolio. Capital expenditures include expenditures for equipment on operating leases and other miscellaneous capital expenditures.

Reconciling items are created based on accounting differences between segment reporting and consolidated external reporting. For the reconciliation of Profit before income taxes, we have grouped the reconciling items as follows:

Unallocated - This item is related to corporate requirements and strategies that are considered to be for the benefit of the entire organization. Also included are the consolidated results of the special purpose corporation (see Note 7 for additional information) and other miscellaneous items.
Timing - Timing differences in the recognition of costs between segment reporting and consolidated external reporting.
Methodology - Methodology differences between segment reporting and consolidated external reporting are as follows:
Segment assets include off-balance sheet managed assets for which we maintain servicing responsibilities.
The impact of differences between the actual leverage and the segment leverage ratios.
Interest expense includes realized forward points on foreign currency forward contracts.
The net gain or loss from interest rate derivatives is excluded from segment reporting.


21

UNAUDITED

Supplemental segment data and reconciliations to consolidated external reporting for the three months ended March 31 was as follows:
(Millions of dollars)


 
2021
External
Revenues
Profit
before
income
taxes
Interest
Expense
Depreciation
on equipment
leased to
others
Provision
for
credit
losses
Assets at
March 31,
2021
Capital
expenditures
North America$347 $99 $69 $137 $$14,928 $178 
EAME67 30 15 (4)4,947 10 
Asia/Pacific92 51 23 4,902 
Latin America47 16 14 2,504 
Caterpillar Power Finance13 11 (7)1,184 
Mining71 18 10 35 (3)2,582 26 
Total Segments637 225 125 192 (10)31,047 224 
Unallocated(72)50 1,373 
Timing(3)12 
Methodology42 (50)(107)
Inter-segment Eliminations (1)
(242)
Total$639 $196 $125 $192 $(10)$32,083 $228 
2020External
Revenues
Profit
before
income
taxes
Interest
Expense
Depreciation
on equipment
leased to
others
Provision
for
credit
losses
Assets at
December 31,
2020
Capital
expenditures
North America$382 $75 $94 $144 $22 $14,749 $220 
EAME70 16 13 16 4,981 
Asia/Pacific86 36 27 4,585 
Latin America53 23 2,621 
Caterpillar Power Finance20 1,308 
Mining81 17 36 13 2,575 16 
Total Segments692 142 182 201 61 30,819 246 
Unallocated(70)56 1,576 
Timing(6)(1)12 
Methodology56 (63)(152)
Inter-segment Eliminations (1)
(264)
Total$695 $127 $175 $201 $61 $31,991 $247 
 (1) Elimination is primarily related to intercompany loans.

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UNAUDITED

7.Commitments and Contingent Liabilities
 
Guarantees
We provide loan guarantees to third-party lenders for financing associated with machinery purchased by customers.  These guarantees have varying terms and are secured by the machinery being financed. We also provide residual value guarantees to third-party lenders associated with machinery leased to customers. These guarantees have varying terms. In addition, we participate in standby letters of credit issued to third parties on behalf of our customers.  These standby letters of credit have varying terms and beneficiaries and are secured by customer assets.

No significant loss has been experienced or is anticipated under any of these guarantees. At March 31, 2021 and December 31, 2020, the related recorded liability was less than $1 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 $40 million at March 31, 2021 and December 31, 2020.

We provide guarantees to repurchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a VIE (see Note 1 for additional information regarding the accounting guidance on the consolidation of VIEs).  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.  We have a loan purchase agreement with the SPC that obligates us to purchase certain loans that are not paid at maturity.  We receive a fee for providing this guarantee, which provides a source of liquidity for the SPC.  We are the primary beneficiary of the SPC as our guarantees result in us 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 we have consolidated the financial statements of the SPC. As of March 31, 2021 and December 31, 2020, the SPC’s assets of $841 million and $1.03 billion, respectively, were primarily comprised of loans to dealers, which are included in Finance receivables, net in the Consolidated Statements of Financial Position, and the SPC’s liabilities of $840 million and $1.03 billion, respectively, were primarily comprised of commercial paper, which is included in Short-term borrowings in the Consolidated Statements of Financial Position.  The assets of the SPC are not available to pay our creditors. We 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.

Litigation and claims
We are involved in unresolved legal actions that arise in the normal course of business. Although it is not possible to predict with certainty the outcome of our unresolved legal actions, we believe that these unresolved legal actions will neither individually nor in the aggregate have a material adverse effect on our consolidated results of operations, financial position or liquidity.


23

UNAUDITED

8.Fair Value Measurements
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 us) will not be fulfilled.  For financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price.  For certain other financial assets and liabilities (Level 2 and 3), our fair value calculations have been adjusted accordingly.

Derivative financial instruments
The fair value of interest rate contracts is primarily based on a standard industry accepted valuation model that utilizes the appropriate market-based forward swap curves and zero-coupon interest rates to determine discounted cash flows.  The fair value of foreign currency forward and cross currency contracts is based on standard industry accepted valuation models that discount cash flows resulting from the differential between the contract price and the market-based forward rate.
 
Derivative financial instruments are measured on a recurring basis at fair value and are classified as Level 2 measurements. We had derivative financial instruments included in our Consolidated Statements of Financial Position in a net asset position of $53 million and a net liability position of $175 million as of March 31, 2021 and December 31, 2020, respectively.

Loans measured at fair value
Certain loans are subject to measurement at fair value on a nonrecurring basis and are classified as Level 3 measurements. A loan is measured at fair value when management determines that collection of contractual amounts due is not probable and the loan is individually evaluated. In these cases, an allowance for credit losses may be established based either on the present value of expected future cash flows discounted at the receivables’ effective interest rate, the fair value of the collateral for collateral-dependent receivables or the observable market price of the receivable. In determining collateral value, we estimate the current fair market value of the collateral less selling costs. We had loans carried at fair value of $232 million and $243 million as of March 31, 2021 and December 31, 2020, respectively.

24

UNAUDITED

B.Fair Values of Financial Instruments
In addition to the methods and assumptions we use to record the fair value of financial instruments as discussed in the Fair Value Measurements section above, we use the following methods and assumptions to estimate the fair value of our financial instruments:

Cash and cash equivalents – carrying amount approximates fair value. 
Restricted cash and cash equivalents – carrying amount approximates fair value. 
Finance receivables, net – 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.

Fair values of our financial instruments were as follows:
(Millions of dollars)March 31, 2021December 31, 2020
 Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Fair Value
Levels
Reference
Cash and cash equivalents$735 $735 $411 $411 1
Restricted cash and cash equivalents(1)
$$$14 $14 1
Finance receivables, net (excluding finance leases(2))
$18,580 $18,844 $18,599 $18,910 3Note 3
Interest rate contracts:
In a receivable position$41 $41 $59 $59 2Note 4
In a payable position$(10)$(10)$(5)$(5)2Note 4
Cross currency contracts:
In a receivable position$41 $41 $$2Note 4
In a payable position$(64)$(64)$(148)$(148)2Note 4
Foreign exchange contracts:
In a receivable position$60 $60 $17 $17 2Note 4
In a payable position$(15)$(15)$(107)$(107)2Note 4
Short-term borrowings$(3,625)$(3,625)$(2,005)$(2,005)1
Long-term debt$(23,503)$(23,960)$(23,979)$(24,614)2
(1) Included in Other assets in the Consolidated Statements of Financial Position.
(2) Represents finance leases and failed sale leasebacks of $7.92 billion and $7.98 billion as of March 31, 2021 and December 31, 2020, respectively.

9.Income Taxes 

The provision for income taxes reflected an estimated annual tax rate of 27 percent in the first quarter of 2021, compared with 26 percent in the first quarter of 2020. The increase in the estimated annual tax rate was primarily due to changes in the geographic mix of profits.


25

UNAUDITED

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 2020 Form 10-K.

OVERVIEW

We reported first-quarter 2021 revenues of $639 million, a decrease of $56 million, or 8 percent, compared with the first quarter of 2020. First-quarter 2021 profit was $140 million, a $50 million, or 56 percent, increase from the first quarter of 2020.

The decrease in revenues was primarily due to a $40 million unfavorable impact from lower average financing rates and a $19 million unfavorable impact from lower average earning assets.

First-quarter 2021 profit before income taxes was $196 million, a $69 million, or 54 percent, increase from the first quarter of 2020. The increase was primarily due to a $71 million decrease in provision for credit losses, partially offset by a $13 million increase in general, operating and administrative expenses, primarily due to higher incentive compensation. The impact of lower average financing rates was offset by lower interest expense.

The provision for income taxes reflected an estimated annual tax rate of 27 percent in the first quarter of 2021, compared with 26 percent in the first quarter of 2020.

During the first quarter of 2021, retail new business volume was $2.81 billion, an increase of $497 million, or 21 percent, from the first quarter of 2020. The increase was driven by higher volume in Asia/Pacific, North America, Mining and EAME, partially offset by a decrease in Latin America.

At the end of the first quarter of 2021, past dues were 2.90 percent, compared with 4.13 percent at the end of the first quarter of 2020. Past dues decreased across all portfolio segments as global markets generally improved. Write-offs, net of recoveries, were $24 million for the first quarter of 2021, compared with $30 million for the first quarter of 2020. As of March 31, 2021, the allowance for credit losses totaled $441 million, or 1.64 percent of finance receivables, compared with $479 million, or 1.77 percent of finance receivables at December 31, 2020.

Response to COVID-19 and Global Business Conditions
We continue to implement safeguards in our facilities to protect team members, including increased frequency of cleaning and disinfecting, social distancing practices and other measures consistent with specific governmental requirements and guidance from health authorities and continue to monitor the situation closely. We remain focused on portfolio health and continue to provide qualified customers and dealers with new loans and leases to support their current and future business needs.

26

UNAUDITED

FIRST QUARTER 2021 COMPARED WITH FIRST QUARTER 2020

Consolidated Total Revenues

cfsc-20210331_g2.jpg
The chart above graphically illustrates reasons for the change in consolidated total revenues between first quarter 2020 (at left) and first quarter 2021 (at right). Items favorably impacting total revenues appear as upward stair steps with corresponding dollar amounts above each bar, while items negatively impacting total revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Management utilizes these charts internally to visually communicate results.

Retail revenue for the first quarter of 2021 was $303 million, a decrease of $26 million from the same period in 2020. The decrease was primarily due to a $25 million unfavorable impact from lower interest rates on retail finance receivables. For the quarter ended March 31, 2021, retail average earning assets were $22.63 billion, a decrease of $34 million from the same period in 2020. The annualized average yield was 5.36 percent for the first quarter of 2021, compared with 5.80 percent for the first quarter of 2020.

Operating lease revenue for the first quarter of 2021 was $244 million, a decrease of $13 million from the same period in 2020. The decrease was primarily due to a $14 million unfavorable impact from lower average earning assets.

Wholesale revenue for the first quarter of 2021 was $78 million, a decrease of $21 million from the same period in 2020. The decrease was due to a $14 million unfavorable impact from lower average earning assets and a $7 million unfavorable impact from lower interest rates on wholesale finance receivables. For the quarter ended March 31, 2021, wholesale average earning assets were $4.16 billion, a decrease of $663 million from the same period in 2020. The annualized average yield was 7.51 percent for the first quarter of 2021, compared with 8.22 percent for the first quarter of 2020.

Other revenue, net items were as follows:
(Millions of dollars)
 
Three Months Ended
March 31,
 20212020Change
Finance receivable and operating lease fees (including late charges)$13 $13 $— 
Interest income on Notes receivable from Caterpillar
Net loss on returned or repossessed equipment(6)(9)
Miscellaneous other revenue, net— 
Total Other revenue, net$14 $10 $

There was a $9 million favorable impact from currency on revenues in the first quarter of 2021. Currency represents the net translation impact resulting from changes in foreign currency exchange rates versus the U.S. dollar and is included in all financial statement line items and each of the items included in the above analysis.


27

UNAUDITED

Consolidated Profit Before Income Taxes

cfsc-20210331_g3.jpg
(1) Analysis excludes $5 million in offsetting revenues and expenses for property taxes on operating leases for both the first quarter of 2021 and 2020.
The chart above graphically illustrates reasons for the change in consolidated profit before income taxes between first quarter 2020 (at left) and first quarter 2021 (at right). Items favorably impacting profit before income taxes appear as upward stair steps with corresponding dollar amounts above each bar, while items negatively impacting profit before income taxes appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Management utilizes these charts internally to visually communicate results.

First-quarter 2021 profit before income taxes was $196 million, compared with $127 million for the first quarter of 2020. The increase was primarily due to a $71 million decrease in provision for credit losses, partially offset by a $13 million increase in general, operating and administrative expenses, primarily due to higher incentive compensation. The impact of lower average financing rates was offset by lower interest expense.

There was a $5 million favorable impact from currency on profit before income taxes in the first quarter of 2021. Currency represents the net translation impact resulting from changes in foreign currency exchange rates versus the U.S. dollar and is included in all financial statement line items and each of the items included in the above analysis.

Provision for Income Taxes
The provision for income taxes reflected an estimated annual tax rate of 27 percent in the first quarter of 2021, compared with 26 percent in the first quarter of 2020.








28

UNAUDITED

Finance Receivables and Equipment on Operating Leases

New Business Volume
(Millions of dollars)Three Months Ended
March 31,
20212020Change
New retail financing$2,579 $2,060 $519 
New operating lease activity230 252 (22)
New wholesale financing9,638 8,833 805 
Total$12,447 $11,145 $1,302��

New retail financing increased due to higher volume in North America, Asia/Pacific, Mining and EAME, partially offset by a decrease in Latin America. New wholesale financing increased primarily due to higher purchases of trade receivables from Caterpillar.

Total Managed Portfolio
We define total portfolio as Finance receivables, net plus Equipment on operating leases, net. We also manage and service receivables and leases that have been sold by us to third parties with limited or no recourse in order to mitigate our concentration of credit risk with certain customers.  These assets are not available to pay our creditors. Total managed portfolio was as follows:  
(Millions of dollars)
March 31,
2021
December 31,
2020
Change
Finance receivables, net$26,500 $26,575 $(75)
Equipment on operating leases, net3,237 3,366 (129)
Total portfolio$29,737 $29,941 $(204)
Retail loans, net$125 $139 $(14)
Retail leases, net44 56 (12)
Operating leases23 24 (1)
Total off-balance sheet managed assets$192 $219 $(27)
Total managed portfolio$29,929 $30,160 $(231)

Total Portfolio Metrics
At the end of the first quarter of 2021, past dues were 2.90 percent, compared with 4.13 percent at the end of the first quarter of 2020. Past dues decreased across all portfolio segments as global markets generally improved. Total non-performing finance receivables, which represent finance receivables currently on non-accrual status, were $509 million and $567 million at March 31, 2021 and December 31, 2020, respectively. Total non-performing finance receivables as a percentage of our finance receivables were 1.89 percent and 2.10 percent at March 31, 2021 and December 31, 2020, respectively.

Our allowance for credit losses as of March 31, 2021 was $441 million, or 1.64 percent of finance receivables, compared with $479 million, or 1.77 percent, as of December 31, 2020. The allowance is subject to an ongoing evaluation based on many quantitative and qualitative factors, including past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and economic forecasts. We believe our allowance is sufficient to provide for losses over the remaining life of our finance receivable portfolio as of March 31, 2021.

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CAPITAL RESOURCES AND LIQUIDITY
 
Capital resources and liquidity provide us with the ability to meet our financial obligations on a timely basis.  Maintaining and managing adequate capital and liquidity resources includes management of funding sources and their utilization based on current, future and contingent needs. Throughout the first quarter of 2021, we experienced favorable liquidity conditions. We ended the first quarter of 2021 with $735 million of cash, an increase of $324 million from year-end 2020. Our cash balances are held in numerous locations throughout the world with approximately $322 million held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use and could be used in the U.S. without incurring significant additional U.S. taxes. We expect to meet our U.S. funding needs without repatriating undistributed profits that are indefinitely reinvested outside the U.S.
 
BORROWINGS
Borrowings consist primarily of medium-term notes and commercial paper, the combination of which is used to manage interest rate risk and funding requirements.

We receive debt ratings from the major credit rating agencies. In April 2021, Moody’s upgraded our debt rating to “mid A”, while Fitch and S&P maintain a “mid-A” debt rating. A downgrade of our debt ratings by any of the major credit rating agencies would result in increased borrowing costs and could make access to certain credit markets more difficult. In the event economic conditions deteriorate such that access to debt markets becomes unavailable, we would rely on cash flows from our existing portfolio, existing cash balances, access to our committed credit facilities and other credit line facilities, and potential borrowings from Caterpillar. In addition, Caterpillar maintains a support agreement with us, which requires Caterpillar to remain our sole owner and may, under certain circumstances, require Caterpillar to make payments to us should we fail to maintain certain financial ratios.

Total borrowings outstanding as of March 31, 2021 were $27.15 billion, an increase of $144 million over December 31, 2020. Outstanding borrowings were as follows:
(Millions of dollars)
 
March 31,
2021
December 31,
2020
Medium-term notes, net$23,100 $23,550 
Commercial paper, net of unamortized discount2,895 1,321 
Bank borrowings and other – long-term403 429 
Bank borrowings and other – short-term360 307 
Variable denomination floating rate demand notes370 377 
Notes payable to Caterpillar22 1,022 
Total outstanding borrowings$27,150 $27,006 

Medium-term notes
We issue medium-term unsecured notes through securities dealers or underwriters in the U.S., Canada, Europe, Australia, Japan, Hong Kong, and China to both retail and institutional investors. These notes are offered in several currencies and with a variety of maturities. These notes are senior unsecured obligations of the Company. Medium-term notes issued totaled $1.75 billion and redeemed totaled $2.17 billion for the three months ended March 31, 2021. Medium-term notes, net outstanding as of March 31, 2021 mature as follows: 
(Millions of dollars) 
2021$5,384 
20226,478 
20235,140 
20242,654 
20251,612 
Thereafter1,801 
Fair value adjustments31 
Total$23,100 



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Commercial paper
We issue unsecured commercial paper in the U.S., Europe and other international capital markets.  These short-term promissory notes are issued on a discounted basis and are payable at maturity. As of March 31, 2021, there was $2.90 billion outstanding in commercial paper.
 
Revolving credit facilities
As of March 31, 2021, we had three global credit facilities with a syndicate of banks totaling $10.50 billion (Credit Facility) available in the aggregate to both Caterpillar and us for general liquidity purposes.  Based on management’s allocation decision, which can be revised from time to time, the portion of the Credit Facility available to us as of March 31, 2021 was $7.75 billion. Information on our Credit Facility is as follows:

The 364-day facility of $3.15 billion (of which $2.33 billion is available to us) expires in September 2021.
The three-year facility, as amended and restated in September 2019, of $2.73 billion (of which $2.01 billion is available to us) expires in September 2022.
The five-year facility, as amended and restated in September 2019, of $4.62 billion (of which $3.41 billion is available to us) expires in September 2024.

At March 31, 2021, Caterpillar’s consolidated net worth was $16.66 billion, which was above the $9.00 billion required under the Credit Facility.  The consolidated net worth is defined in the Credit Facility as the consolidated shareholders’ equity including preferred stock but excluding the pension and other postretirement benefits balance within Accumulated other comprehensive income (loss).

At March 31, 2021, our covenant interest coverage ratio was 1.93 to 1. This was above the 1.15 to 1 minimum ratio, calculated as (1) profit excluding income taxes, interest expense and net gain/(loss) from interest rate derivatives to (2) interest expense, calculated at the end of each calendar quarter for the rolling four quarter period then most recently ended, required by the Credit Facility.

In addition, at March 31, 2021, our six-month covenant leverage ratio was 6.80 to 1.  This was below the maximum ratio of debt to net worth of 10 to 1, calculated (1) on a monthly basis as the average of the leverage ratios determined on the last day of each of the six preceding calendar months and (2) at each December 31, required by the Credit Facility.

In the event that either Caterpillar or we do not meet one or more of our respective financial covenants under the Credit Facility in the future (and are unable to obtain a consent or waiver), the syndicate of banks may terminate the commitments allocated to the party that does not meet its covenants.  Additionally, in such event, certain of our other lenders under other loan agreements where similar financial covenants or cross default provisions are applicable, may, at their election, choose to pursue remedies under those loan agreements, including accelerating the repayment of outstanding borrowings. At March 31, 2021, there were no borrowings under the Credit Facility.

Bank borrowings
Available credit lines with banks as of March 31, 2021 totaled $2.96 billion.  These committed and uncommitted credit lines, which may be eligible for renewal at various future dates or have no specified expiration date, are used primarily by our non-U.S. subsidiaries for local funding requirements. We may guarantee subsidiary borrowings under these lines. As of March 31, 2021, we had $757 million outstanding against these credit lines and were in compliance with all debt covenants under these credit lines. The remaining available credit commitments may be withdrawn any time at the lenders’ discretion.
  
Variable denomination floating rate demand notes
We obtain funding from the sale of variable denomination floating rate demand notes, which may be redeemed at any time at the option of the holder without any material restriction.  We do not hold reserves to fund the payment of the demand notes.  The notes are offered on a continuous basis. As of March 31, 2021, there were $370 million of variable denomination floating rate demand notes outstanding. The maximum amount of variable denomination floating rate demand notes that we may have outstanding at any time may not exceed $1.25 billion.



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Notes receivable from/payable to Caterpillar
Under our variable amount and term lending agreements and other notes receivable with Caterpillar, we may borrow up to $2.41 billion from Caterpillar and Caterpillar may borrow up to $1.74 billion from us.  The variable amount lending agreements are in effect for indefinite periods of time and may be changed or terminated by either party with 30 days notice.  The term lending agreements have remaining maturities ranging up to ten years. We had notes payable of $22 million and notes receivable of $331 million outstanding under these agreements as of March 31, 2021.

OFF-BALANCE SHEET ARRANGEMENTS
We have potential payment exposure for guarantees issued to third parties totaling $40 million as of March 31, 2021.

CASH FLOWS
Operating cash flow was $335 million in the first three months of 2021, compared with $401 million for the same period in 2020. Net cash used for investing activities was $221 million for the first three months of 2021, compared with net cash provided of $565 million for the same period in 2020. The change was primarily due to Caterpillar purchased receivables portfolio activity. Net cash provided by financing activities was $205 million for the first three months of 2021, compared with net cash used of $965 million for the same period in 2020. The change was primarily due to higher portfolio funding requirements related to Caterpillar purchased receivables.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements, see Part I, Item 1. Note 2 - New Accounting Pronouncements.

CRITICAL ACCOUNTING ESTIMATES
 
For a discussion of the Company’s critical accounting estimates, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K. There have been no significant changes to our critical accounting estimates since our 2020 Form 10-K.


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
Certain statements in this Form 10-Q relate to future events and expectations and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believe,” “estimate,” “will be,” “will,” “would,” “expect,” “anticipate,” “plan,” “project,” “intend,” “could,” “should” or other similar words or expressions often identify forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, without limitation, statements regarding our outlook, projections, forecasts, trend descriptions or any statement concerning our future response to or the expected effects on our business of the continuing global coronavirus pandemic. These statements do not guarantee future performance and speak only as of the date they are made, and we do not undertake to update our forward-looking statements.

Cat Financial’s actual results may differ materially from those described or implied in our forward-looking statements based on a number of factors, including, but not limited to: (i) government monetary or fiscal policies; (ii) political and economic risks, commercial instability and events beyond our control in the countries in which we operate; (iii) demand for Caterpillar products; (iv) our ability to develop, produce and market quality products that meet our customers’ needs; (v) information technology security threats and computer crime; (vi) disruptions or volatility in global financial markets limiting our sources of liquidity or the liquidity of our customers, dealers and suppliers; (vii) failure to maintain our credit ratings and potential resulting increases to our cost of borrowing and adverse effects on our cost of funds, liquidity, competitive position and access to capital markets; (viii) changes in interest rates, currency fluctuations or market liquidity conditions; (ix) an increase in delinquencies, repossessions or net losses of our customers; (x) our compliance with financial and other restrictive covenants in debt agreements; (xi) alleged or actual violations of trade or anti-corruption laws and regulations; (xii) additional tax expense or exposure; (xiii) new regulations or changes in financial services regulations; (xiv) residual values of leased equipment; (xv) marketing, operational or administrative support received from Caterpillar; (xvi) changes in accounting guidance; (xvii) the ongoing global coronavirus pandemic; and (xviii) other factors described in more detail in Cat Financial’s Forms 10-Q, 10-K and other filings with the Securities and Exchange Commission.

ITEM 4. CONTROLS AND PROCEDURES 

Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the first quarter of 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
 
We are involved in unresolved legal actions that arise in the normal course of business. Although it is not possible to predict with certainty the outcome of our unresolved legal actions, we believe that these unresolved legal actions will neither individually nor in the aggregate have a material adverse effect on our consolidated results of operations, financial position or liquidity.


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ITEM 1A.  RISK FACTORS
 
For a discussion of risks and uncertainties that may affect our business, please see Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 17, 2021. There has been no material change in this information for the current quarter.

ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable.

ITEM 5.  OTHER INFORMATION
 
Disclosure Required Pursuant to Section 13(r) of the Securities Exchange Act of 1934. During the first quarter ended March 31, 2021, Caterpillar Eurasia LLC, one of our affiliates, engaged in limited transactions or dealings with the Federal Security Service of Russia (the “FSB”). Specifically, Caterpillar Eurasia LLC, from time to time, directly or indirectly, makes required submissions to and receives regulatory authorizations from the FSB related to the importation of software used in the on-board telematics and control systems of Caterpillar machines that are imported into Russia. Caterpillar Eurasia LLC did not generate any net revenue or net profits from such approval activity and does not make any sales to or have other dealings with the FSB. Caterpillar Eurasia LLC plans to continue these activities as long as it remains lawful to do so.

ITEM 6.  EXHIBITS
Exhibit
No.
Description of Exhibit
31.1
31.2
32
101.INSInline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive File (embedded within the Inline XBRL document and included in Exhibit 101)

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Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 Caterpillar Financial Services Corporation
 
Date:May 5, 2021/s/David T. Walton
 David T. Walton, President, Director and Chief Executive
Officer

Date:May 5, 2021/s/Patrick T. McCartan
 Patrick T. McCartan, Executive Vice President and Chief
Financial Officer

Date:May 5, 2021/s/Jennifer K. Schott
 Jennifer K. Schott, Secretary

Date:May 5, 2021/s/Jeffry D. Everett
 Jeffry D. Everett, Controller



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