Guarantees and Product Warranty

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Guarantees and product warranty

Caterpillar dealer performance guarantees

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

In 2016, we provided a guarantee to an end user related to the performance of contractual obligations by a Caterpillar dealer. Under the guarantee, which expires in 2025, non-performance by the Caterpillar dealer could require Caterpillar to satisfy the contractual obligations by providing goods, services or financial compensation to the end user up to an annual designated cap.

Customer loan guarantees

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

Supplier consortium performance guarantees

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

Third-party logistics business lease guarantees

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

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

No significant loss has been experienced or is anticipated under any of these guarantees. At September 30, 2019 and December 31, 2018, the related liability was $6 million and $8 million, respectively. The maximum potential amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) we could be required to make under the guarantees are as follows:



(Millions of dollars)	September 30, 2019		December 31, 2018
Caterpillar dealer performance guarantees	$	1,275	$	1,244
Customer loan guarantees	11		31
Supplier consortium performance guarantees	239		527
Third party logistics business lease guarantees	54		60
Other guarantees	130		116
Total guarantees	$	1,709	$	1,978

Cat Financial provides guarantees to repurchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a variable interest entity. The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers. This SPC issues commercial paper and uses the proceeds to fund its loan program. Cat Financial has a loan purchase agreement with the SPC that obligates Cat Financial to purchase certain loans that are not paid at maturity. Cat Financial receives a fee for providing this guarantee, which provides a source of liquidity for the SPC. Cat Financial is the primary beneficiary of the SPC as its guarantees result in Cat Financial having both the power to direct the activities that most significantly impact the SPC’s economic performance and the obligation to absorb losses, and therefore Cat Financial has consolidated the financial statements of the SPC. As of September 30, 2019 and December 31, 2018, the SPC’s assets of $1,387 million and $1,149 million, respectively, were primarily comprised of loans to dealers, and the SPC’s liabilities of $1,386 million and $1,148 million, respectively, were primarily comprised of commercial paper. The assets of the SPC are not available to pay Cat Financial’s creditors. Cat Financial may be obligated to perform under the guarantee if the SPC experiences losses. No loss has been experienced or is anticipated under this loan purchase agreement.

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



(Millions of dollars)	2019
Warranty liability, January 1	$	1,391
Reduction in liability (payments)	(667		)
Increase in liability (new warranties)	759
Warranty liability, September 30	$	1,483



(Millions of dollars)	2018
Warranty liability, January 1	$	1,419
Reduction in liability (payments)	(783		)
Increase in liability (new warranties)	755
Warranty liability, December 31	$	1,391