Guarantees and Product Warranty

9 Months Ended

Sep. 30, 2023

Guarantees and Product Warranties [Abstract]

Guarantees and Product Warranty

Guarantees and product warranty

Caterpillar dealer performance guarantees

Dealer performance guarantees mainly consists of an indemnity to a third-party insurance company for potential losses related to performance bonds issued on behalf of Caterpillar dealers.  The bonds have varying terms and are issued to insure governmental agencies against nonperformance by certain dealers. The guarantees began to expire during the third quarter of 2023. No payments were made under the guarantees.

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, 2023 and December 31, 2022, the related recorded liability was $4 million and $2 million, respectively. The maximum potential amount of future payments that we can estimate (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) and we could be required to make under the guarantees was as follows:

(Millions of dollars)	September 30, 2023		December 31, 2022
Caterpillar dealer performance guarantees	$	42	$	188
Other guarantees	341		323
Total guarantees	$	383	$	511

Cat Financial provides guarantees to purchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a variable interest entity.  The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers.  This SPC issues commercial paper and uses the proceeds to fund its loan program. Cat Financial receives a fee for providing this guarantee.  Cat Financial is the primary beneficiary of the SPC as its guarantees result in Cat Financial having both the power to direct the activities that most significantly impact the SPC’s economic performance and the obligation to absorb losses, and therefore Cat Financial has consolidated the financial statements of the SPC.  As of September 30, 2023 and December 31, 2022, the SPC’s assets of $1.54 billion and $971 million, respectively, were primarily comprised of loans to dealers, and the SPC’s liabilities of $1.54 billion and $970 million, respectively, were primarily comprised of commercial paper.  The assets of the SPC are not available to pay Cat Financial’s creditors. Cat Financial may be obligated to perform under the guarantee if the SPC experiences losses. No loss has been experienced or is anticipated under this loan purchase agreement.

We determine our product warranty liability by applying historical claim rate experience to the current field population and dealer inventory.  Generally, we base historical claim rates on actual warranty experience for each product by

machine model/engine size by customer or dealer location (inside or outside North America).  We develop specific rates for each product shipment month and update them monthly based on actual warranty claim experience.  

The reconciliation of the change in our product warranty liability balances for the nine months ended September 30 was as follows:

	First Nine Months
(Millions of dollars)	2023		2022
Warranty liability, beginning of period	$	1,761	$	1,689
Reduction in liability (payments)	(617)		(589)
Increase in liability (new warranties)	724		562
Warranty liability, end of period	$	1,868	$	1,662