Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
https://cdn.kscope.io/777e00ba6dd34377857a4fac8cccdba6-catfincolor3a10.jpg
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
Commission File No. 001-11241
CATERPILLAR FINANCIAL SERVICES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
37-1105865
(State of incorporation)
(IRS Employer I.D. No.)
 
 
2120 West End Ave.
Nashville, Tennessee
37203-0001
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (615) 341-1000

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 [ü ] 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 [ü ] 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 filer
[    ]
 
Accelerated filer
[    ]
Non-accelerated filer
[ü ]
 
Smaller 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 [
ü ]

As of October 31, 2018, one 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 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 15, 2018. The Company files electronically with the SEC required reports on Form 8-K, Form 10-Q, Form 10-K and 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 report 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 Inc.’s website (www.caterpillar.com/secfilings) as soon as reasonably practicable after filing with the SEC.  Copies may also be obtained free of charge by writing to:  Legal Dept., Caterpillar Financial Services Corporation, 2120 West End Ave., Nashville, Tennessee 37203-0001.  In addition, the public may obtain more detailed information about our parent company, Caterpillar Inc., by visiting its website (www.caterpillar.com).  None of the information contained at any time on our website, Caterpillar’s website or the SEC’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
September 30,
 
Nine Months Ended
September 30,
 
2018

2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
Retail finance
$
330

 
$
309

 
$
975

 
$
924

Operating lease
259

 
247

 
760

 
737

Wholesale finance
108

 
79

 
304

 
222

Other, net
38

 
38

 
109

 
128

Total revenues
735

 
673

 
2,148

 
2,011

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 

 
 

Interest
194

 
169

 
558

 
499

Depreciation on equipment leased to others
208

 
201

 
616

 
608

General, operating and administrative
109

 
113

 
326

 
319

Provision for credit losses
47

 
48

 
218

 
82

Other
11

 
12

 
28

 
36

Total expenses
569

 
543

 
1,746

 
1,544

 
 
 
 
 
 
 
 
Other income (expense)
(3
)
 
(4
)
 
(15
)
 
(10
)
 
 
 
 
 
 
 
 
Profit before income taxes
163

 
126

 
387

 
457

 
 
 
 
 
 
 
 
Provision for income taxes
32

 
38

 
85

 
137

 
 
 
 
 
 
 
 
Profit of consolidated companies
131

 
88

 
302

 
320

 
 
 
 
 
 
 
 
Less:  Profit attributable to noncontrolling interests
6

 
2

 
15

 
5

 
 
 
 
 
 
 
 
Profit 1
$
125

 
$
86

 
$
287

 
$
315

 
 
 
 
 
 
 
 
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
September 30,
 
Nine Months Ended
September 30,
 
2018

2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Profit of consolidated companies
$
131

 
$
88

 
$
302

 
$
320

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation, net of tax (expense)/benefit of:
2018 $(3) three months, $(18) nine months;
2017 $30 three months, $94 nine months
(50
)
 
154

 
(241
)
 
395

Derivative financial instruments:
 
 
 
 
 
 
 
Gains (losses) deferred, net of tax (expense)/benefit of:
2018 $(14) three months, $(36) nine months;
2017 $8 three months, $22 nine months
42

 
(14
)
 
115

 
(41
)
(Gains) losses reclassified to earnings, net of tax expense/(benefit) of:
2018 $14 three months, $37 nine months;
2017 $(7) three months, $(23) nine months
(42
)
 
11

 
(118
)
 
41

Available-for-sale securities:
 
 
 
 
 
 
 
Gains (losses) deferred, net of tax (expense)/benefit of:
2018 $0 three months, $0 nine months;
2017 $0 three months, $0 nine months

 
(1
)
 

 

(Gains) losses reclassified to earnings, net of tax expense/(benefit) of:
2018 $0 three months, $0 nine months;
2017 $0 three months, $0 nine months

 

 

 

Total Other comprehensive income (loss), net of tax
(50
)
 
150

 
(244
)
 
395

 


 
 
 
 
 
 
Comprehensive income (loss)
81

 
238

 
58

 
715

 
 
 
 
 
 
 
 
Less: Comprehensive income (loss) attributable to the noncontrolling
interests

 
5

 
7

 
11

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Caterpillar Financial
Services Corporation
$
81

 
$
233

 
$
51

 
$
704

 
 
 
 
 
 
 
 
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)
 
September 30,
2018
 
December 31,
2017
Assets:
 
 
 
Cash and cash equivalents
$
676

 
$
708

Finance receivables, net
27,512

 
27,126

Notes receivable from Caterpillar
667

 
559

Equipment on operating leases,
 

 
 

less accumulated depreciation
3,594

 
3,568

Deferred and refundable income taxes
205

 
174

Other assets
1,183

 
1,025

Total assets
$
33,837

 
$
33,160

 
 
 
 
Liabilities and shareholder’s equity:
 

 
 

Payable to dealers and others
$
145

 
$
190

Payable to Caterpillar - other
68

 
85

Accrued expenses
248

 
274

Income taxes payable
145

 
158

Payable to Caterpillar - borrowings
1,565

 
1,638

Short-term borrowings
4,462

 
4,836

Current maturities of long-term debt
5,801

 
6,188

Long-term debt
17,450

 
15,918

Deferred income taxes and other liabilities
631

 
609

Total liabilities
30,515

 
29,896

 
 
 
 
Commitments and contingent liabilities (Notes 7 and 9)


 


 
 
 
 
Common stock - $1 par value
 
 
 

Authorized:  2,000 shares; Issued and
 

 
 

outstanding: one share (at paid-in amount)
745

 
745

Additional paid-in capital
2

 
2

Retained earnings
3,256

 
2,969

Accumulated other comprehensive income/(loss)
(828
)
 
(592
)
Noncontrolling interests
147

 
140

Total shareholder’s equity
3,322

 
3,264

 
 
 
 
Total liabilities and shareholder’s equity
$
33,837

 
$
33,160

 
 
 
 
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)
Nine Months Ended
September 30, 2017
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income/(loss)
 
Noncontrolling
interests
 
Total
Balance at December 31, 2016
$
745

 
$
2

 
$
3,108

 
$
(995
)
 
$
125

 
$
2,985

Profit of consolidated companies
 

 
 

 
315

 
 

 
5

 
320

Foreign currency translation, net of tax
 

 
 

 
 

 
389

 
6

 
395

Derivative financial instruments, net of tax
 

 
 

 
 

 

 
 

 

Balance at September 30, 2017
$
745

 
$
2

 
$
3,423

 
$
(606
)
 
$
136

 
$
3,700

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
September 30, 2018
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2017
$
745

 
$
2

 
$
2,969

 
$
(592
)
 
$
140

 
$
3,264

Profit of consolidated companies
 

 
 

 
287

 
 

 
15

 
302

Foreign currency translation, net of tax
 

 
 

 
 

 
(233
)
 
(8
)
 
(241
)
Derivative financial instruments, net of tax
 

 
 

 
 

 
(3
)
 
 

 
(3
)
Balance at September 30, 2018
$
745

 
$
2

 
$
3,256

 
$
(828
)
 
$
147

 
$
3,322

 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements (unaudited).

6

UNAUDITED


Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Profit of consolidated companies
$
302

 
$
320

Adjustments for non-cash items:
 

 
 

Depreciation and amortization
626

 
616

Amortization of receivables purchase discount
(274
)
 
(180
)
Provision for credit losses
218

 
82

Other, net
93

 
16

Changes in assets and liabilities:
 

 
 

Receivables from others
(11
)
 
69

Other receivables/payables with Caterpillar
(19
)
 
1

Payable to dealers and others
(32
)
 
(31
)
Accrued interest payable
22

 
3

Accrued expenses and other liabilities, net
11

 
(4
)
Income taxes payable
(67
)
 
38

Settlements of designated derivatives
13

 
(7
)
Net cash provided by operating activities
882

 
923

 
 
 
 
Cash flows from investing activities:
 

 
 

Expenditures for equipment on operating leases
(1,093
)
 
(1,012
)
Capital expenditures - excluding equipment on operating leases
(99
)
 
(6
)
Proceeds from disposals of equipment
619

 
753

Additions to finance receivables
(10,151
)
 
(9,765
)
Collections of finance receivables
9,132

 
10,192

Net changes in Caterpillar purchased receivables
(484
)
 
(161
)
Proceeds from sales of receivables
416

 
98

Net change in variable lending to Caterpillar
(18
)
 
(1,051
)
Additions to other notes receivable with Caterpillar
(390
)
 
(53
)
Collections on other notes receivable with Caterpillar
300

 
56

Proceeds from sale of securities

 
4

Settlements of undesignated derivatives
(2
)
 
23

Net cash provided by (used for) investing activities
(1,770
)
 
(922
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net change in variable lending from Caterpillar
(63
)
 
(105
)
Payments on borrowings with Caterpillar

 
(49
)
Proceeds from debt issued (original maturities greater than three months)
7,026

 
6,972

Payments on debt issued (original maturities greater than three months)
(5,636
)
 
(5,718
)
Short-term borrowings, net (original maturities three months or less)
(479
)
 
(2,207
)
Net cash provided by (used for) financing activities
848

 
(1,107
)
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(13
)
 
23

 
 
 
 
Increase/(decrease) in cash, cash equivalents and restricted cash
(53
)
 
(1,083
)
Cash, cash equivalents and restricted cash at beginning of year(1)
732

 
1,824

Cash, cash equivalents and restricted cash at end of period(1)
$
679

 
$
741

 
 
 
 
(1) As of September 30, 2018 and December 31, 2017, restricted cash, which is included in Other assets in the Consolidated Statements of Financial Position, was $3 million and $24 million, respectively. Restricted cash includes cash related to syndication activities and certain tax deferred transactions which were discontinued in 2018 due to U.S. tax reform legislation.
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 and nine months ended September 30, 2018 and 2017, (b) the consolidated comprehensive income for the three and nine months ended September 30, 2018 and 2017, (c) the consolidated financial position as of September 30, 2018 and December 31, 2017, (d) the consolidated changes in shareholder's equity for the nine months ended September 30, 2018 and 2017 and (e) the consolidated cash flows for the nine months ended September 30, 2018 and 2017. The preparation of financial statements, in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), requires management to make estimates and assumptions that affect 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, 2017 (2017 Form 10-K) filed with the SEC on February 15, 2018. The December 31, 2017 financial position data included herein was derived from the audited consolidated financial statements included in the 2017 Form 10-K, but does not include all disclosures required by U.S. GAAP. Certain amounts for prior periods have been reclassified to conform with current period financial statement presentation.

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. These risks are 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
 
Revenue recognition – In May 2014, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance to provide a single, comprehensive revenue recognition model for all contracts with customers. Under the new guidance, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. A five step model has been introduced for an entity to apply when recognizing revenue. The new guidance also includes enhanced disclosure requirements. The guidance was effective January 1, 2018, and was applied on a modified retrospective basis. The adoption did not have a material impact on our financial statements.

Recognition and measurement of financial assets and financial liabilities – In January 2016, the FASB issued accounting guidance that affects the accounting for equity investments, financial liabilities accounted for under the fair value option and the presentation and disclosure requirements for financial instruments. Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification for equity securities with readily determinable fair values. For financial liabilities when the fair value option has been elected, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance was effective January 1, 2018, and was applied on a modified retrospective basis. The adoption did not have a material impact on our financial statements.


8

UNAUDITED


Lease accounting – In February 2016, the FASB issued accounting guidance that revises the accounting for leases. Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability for substantially all leases. The new guidance will continue to classify leases as either financing or operating, with classification affecting the pattern of expense recognition. The accounting applied by a lessor under the new guidance will be substantially equivalent to current lease accounting guidance except for certain targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model. Entities have the option to adopt the new guidance using a modified retrospective approach through a cumulative effect adjustment to retained earnings applied either to the beginning of the earliest period presented or the beginning of the period of adoption. We will adopt the new guidance effective January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption.

The new guidance provides a number of optional practical expedients in transition. We plan to elect the "package of practical expedients", which allows us not to reassess under the new guidance our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of-hindsight practical expedient. In addition, the new guidance provides practical expedients for an entity’s ongoing accounting that we are still evaluating such as whether or not to separate lease and non-lease components. We plan to elect the short-term lease recognition exemption for all leases that qualify which means we will not recognize right-of-use assets or lease liabilities for these leases.

We are currently designing new processes and controls, cataloging and entering our leases into a recently implemented software solution and evaluating our population of leased assets to assess the effect of the new guidance on our financial statements. While we continue to assess the effects of adoption, we believe the most significant effects relate to the recognition of right-of-use assets and lease liabilities on our balance sheet and providing new disclosures about our leasing activities. We also have a team evaluating the impact of the changes to lessor accounting.

Measurement of credit losses on financial instruments – In June 2016, the FASB issued accounting guidance to introduce a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new guidance will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. The new guidance will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. The new guidance is effective January 1, 2020, with early adoption permitted beginning January 1, 2019. We are in the process of evaluating the effect of the new guidance on our financial statements.

Classification for certain cash receipts and cash payments – In August 2016, the FASB issued accounting guidance related to the presentation and classification of certain transactions in the statement of cash flows where diversity in practice exists. The guidance was effective January 1, 2018, and was applied on a retrospective basis. The adoption did not have a material impact on our financial statements.

Classification of restricted cash – In November 2016, the FASB issued accounting guidance related to the presentation and classification of changes in restricted cash on the statement of cash flows where diversity in practice exists. The guidance was effective January 1, 2018, and was applied on a retrospective basis. The adoption did not have a material impact on our financial statements.

Derivatives and hedging – In August 2017, the FASB issued accounting guidance to better align hedge accounting with a company’s risk management activities, simplify the application of hedge accounting and improve the disclosures of hedging arrangements. The new guidance is required to be applied on a modified retrospective basis, resulting in a cumulative-effect adjustment to opening retained earnings in the period of adoption. We will adopt the new guidance effective January 1, 2019. We have completed the evaluation of the impact of the new standard and do not expect the adoption to have a material impact on our financial statements.

Reclassification of certain tax effects from accumulated other comprehensive income – In February 2018, the FASB issued accounting guidance to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. tax reform legislation. The new guidance is required to be applied either in the period of adoption or retrospectively to each period affected by U.S. tax reform legislation. The guidance is effective January 1, 2019, with early adoption permitted. We are in the process of evaluating the effect of the new guidance on our financial statements.


9

UNAUDITED


3.
Finance Receivables

A summary of finance receivables included in the Consolidated Statements of Financial Position was as follows:
(Millions of dollars)
 
September 30,
2018
 
December 31,
2017
Finance leases and installment sale contracts – Retail
 
$
15,544

 
$
14,647

Retail notes receivable
 
8,382

 
9,417

Wholesale notes receivable
 
4,781

 
4,161

Finance leases and installment sale contracts – Wholesale
 
147

 
119

 
 
28,854

 
28,344

Less: Unearned income
 
(926
)
 
(853
)
Recorded investment in finance receivables
 
27,928

 
27,491

Less: Allowance for credit losses
 
(416
)
 
(365
)
Total finance receivables, net
 
$
27,512


$
27,126

 
 
 
 
 


Allowance for Credit Losses 
The allowance for credit losses is an estimate of the losses inherent in our finance receivable portfolio and includes consideration of accounts that have been individually identified as impaired, as well as pools of finance receivables where it is probable that certain receivables in the pool are impaired but the individual accounts cannot yet be identified.   In identifying and measuring impairment, management takes into consideration 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 current economic conditions.  

Accounts are identified for individual review based on past-due status and information available about the customer, such as financial statements, news reports and published credit ratings, as well as general information regarding industry trends and the economic environment in which our customers operate. The allowance for credit losses attributable to finance receivables that are individually evaluated and determined to be impaired is based 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 also consider credit enhancements such as additional collateral and contractual third-party guarantees. The allowance for credit losses attributable to the remaining accounts not yet individually identified as impaired is estimated based on loss forecast models utilizing probabilities of default, our estimate of the loss emergence period and the estimated loss given default.  In addition, qualitative factors not able to be fully captured in our loss forecast models including industry trends, macroeconomic factors and model imprecision are considered in the evaluation of the adequacy of the allowance for credit losses.  These qualitative factors are subjective and require a degree of management judgment.
 
Our allowance for credit losses is segregated into three portfolio segments:

Customer - Finance receivables with retail customers.
Dealer - Finance receivables with Caterpillar dealers.
Caterpillar Purchased Receivables - Trade receivables purchased from Caterpillar entities.

A portfolio segment is the level at which the Company develops a systematic methodology for determining its allowance for credit losses.


10

UNAUDITED


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.
Europe - 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 and Southeast Asia.
Mining - Finance receivables related to large mining customers worldwide and project financing in various countries.
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.

Our allowance for credit losses as of September 30, 2018 was $416 million or 1.49 percent of our recorded investment in finance receivables compared with $365 million or 1.33 percent as of December 31, 2017. An analysis of the allowance for credit losses was as follows:
(Millions of dollars)
 
 
 
 
 
 
 
 
September 30, 2018
Allowance for Credit Losses:
Customer
 
Dealer
 
Caterpillar
Purchased
Receivables
 
Total
Balance at beginning of year
$
353

 
$
9

 
$
3

 
$
365

Receivables written off
(181
)
 

 

 
(181
)
Recoveries on receivables previously written off
31

 

 

 
31

Provision for credit losses
216

 
(2
)
 
1

 
215

Adjustment due to sale of receivables
(6
)
 

 

 
(6
)
Foreign currency translation adjustment
(8
)
 

 

 
(8
)
Balance at end of period
$
405

 
$
7

 
$
4

 
$
416

 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
229

 
$

 
$

 
$
229

Collectively evaluated for impairment
176

 
7

 
4

 
187

Ending Balance
$
405

 
$
7

 
$
4

 
$
416

 
 
 
 
 
 
 
 
Recorded Investment in Finance Receivables:
 

 
 

 
 

 
 

Individually evaluated for impairment
$
803

 
$

 
$

 
$
803

Collectively evaluated for impairment
18,771

 
4,338

 
4,016

 
27,125

Ending Balance
$
19,574

 
$
4,338

 
$
4,016

 
$
27,928

 
 
 
 
 
 
 
 


11

UNAUDITED


(Millions of dollars)
 
 
 
 
 
 
 
 
December 31, 2017
Allowance for Credit Losses:
Customer
 
Dealer
 
Caterpillar
Purchased
Receivables
 
Total
Balance at beginning of year
$
331

 
$
10

 
$
2

 
$
343

Receivables written off
(157
)
 

 

 
(157
)
Recoveries on receivables previously written off
43

 

 

 
43

Provision for credit losses
129

 
(1
)
 
1

 
129

Adjustment due to sale of receivables
(1
)
 

 

 
(1
)
Foreign currency translation adjustment
8

 

 

 
8

Balance at end of year
$
353

 
$
9

 
$
3

 
$
365

 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
149

 
$

 
$

 
$
149

Collectively evaluated for impairment
204

 
9

 
3

 
216

Ending Balance
$
353

 
$
9

 
$
3

 
$
365

 
 
 
 
 
 
 
 
Recorded Investment in Finance Receivables:
 

 
 

 
 

 
 

Individually evaluated for impairment
$
942

 
$

 
$

 
$
942

Collectively evaluated for impairment
18,847

 
4,241

 
3,461

 
26,549

Ending Balance
$
19,789

 
$
4,241

 
$
3,461

 
$
27,491

 
 
 
 
 
 
 
 

12

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-rating agency ratings, loan-to-value ratios and other internal metrics. On an ongoing basis, we monitor credit quality based on past-due status and collection experience 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 recorded investment in finance receivables past due when any installment is over 30 days past due. The tables below summarize our recorded investment in finance receivables by aging category.
(Millions of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
31-60
Days
Past Due
 
61-90
Days
Past Due
 
91+
Days
Past Due
 
Total
Past Due
 
Current
 
Recorded
Investment in
Finance
Receivables
 
91+ Still
Accruing
Customer
 

 
 

 
 

 
 
 
 
 
 
 
 
North America
$
74

 
$
17

 
$
46

 
$
137

 
$
7,921

 
$
8,058

 
$
7

Europe
19

 
9

 
122

 
150

 
2,848

 
2,998

 
6

Asia/Pacific
31

 
14

 
8

 
53

 
2,885

 
2,938

 
5

Mining
5

 

 
9

 
14

 
1,623

 
1,637

 

Latin America
35

 
15

 
84

 
134

 
1,385

 
1,519

 

Caterpillar Power Finance
116

 
45

 
298

 
459

 
1,965

 
2,424

 
8

Dealer
 

 
 

 
 

 
 
 
 
 
 
 
 
North America

 

 

 

 
2,435

 
2,435

 

Europe

 

 

 

 
580

 
580

 

Asia/Pacific

 

 

 

 
502

 
502

 

Mining

 

 

 

 
4

 
4

 

Latin America

 

 
79

 
79

 
734

 
813

 

Caterpillar Power Finance

 

 

 

 
4

 
4

 

Caterpillar Purchased Receivables(1)
 

 
 

 
 

 
 
 
 
 
 
 
 
North America
17

 
10

 
11

 
38

 
2,618

 
2,656

 
 
Europe
1

 

 
2

 
3

 
448

 
451

 
 
Asia/Pacific
2

 

 
1

 
3

 
588

 
591

 
 
Mining

 

 

 

 

 

 
 
Latin America

 

 

 

 
314

 
314

 
 
Caterpillar Power Finance
1

 

 

 
1

 
3

 
4

 
 
Total
$
301

 
$
110

 
$
660

 
$
1,071

 
$
26,857

 
$
27,928

 
$
26

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Caterpillar Purchased Receivables are non-interest bearing trade receivables purchased at a discount.

13

UNAUDITED


(Millions of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
31-60
Days
Past Due
 
61-90
Days
Past Due
 
91+
Days
Past Due
 
Total
Past Due
 
Current
 
Recorded
Investment in
Finance
Receivables
 
91+ Still
Accruing
Customer
 

 
 

 
 

 
 
 
 
 
 
 
 
North America
$
71

 
$
15

 
$
42

 
$
128

 
$
8,040

 
$
8,168

 
$
8

Europe
21

 
10

 
46

 
77

 
2,718

 
2,795

 
13

Asia/Pacific
18

 
7

 
14

 
39

 
2,520

 
2,559

 
5

Mining
3

 
1

 
60

 
64

 
1,751

 
1,815

 
9

Latin America
37

 
55

 
142

 
234

 
1,546

 
1,780

 

Caterpillar Power Finance
20

 
32

 
144

 
196

 
2,476

 
2,672

 
1

Dealer
 

 
 

 
 

 
 
 
 
 
 
 
 
North America

 

 

 

 
2,394

 
2,394

 

Europe

 

 

 

 
417

 
417

 

Asia/Pacific

 

 

 

 
578

 
578

 

Mining

 

 

 

 
5

 
5

 

Latin America

 
72

 

 
72

 
773

 
845

 

Caterpillar Power Finance

 

 

 

 
2

 
2

 

Caterpillar Purchased Receivables(1)
 

 
 

 
 

 
 
 
 
 
 
 
 
North America
24

 
5

 
2

 
31

 
2,010

 
2,041

 
 
Europe
1

 
2

 
1

 
4

 
344

 
348

 
 
Asia/Pacific

 

 

 

 
630

 
630

 
 
Mining

 

 

 

 

 

 
 
Latin America

 

 

 

 
437

 
437

 
 
Caterpillar Power Finance

 

 

 

 
5

 
5

 
 
Total
$
195

 
$
199

 
$
451

 
$
845

 
$
26,646

 
$
27,491

 
$
36

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Caterpillar Purchased Receivables are non-interest bearing trade receivables purchased at a discount.

14

UNAUDITED



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

There were no impaired finance receivables as of September 30, 2018 and December 31, 2017, for the Dealer and Caterpillar Purchased Receivables portfolio segments. Our recorded investment in impaired finance receivables and the related unpaid principal balances and allowance for the Customer portfolio segment were as follows:
(Millions of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2018
 
As of December 31, 2017
Impaired Finance Receivables With
No Allowance Recorded
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
North America
$
17

 
$
17

 
$

 
$
19

 
$
19

 
$

Europe
2

 
1

 

 
45

 
45

 

Asia/Pacific
29

 
29

 

 
34

 
33

 

Mining
34

 
34

 

 
121

 
121

 

Latin America
31

 
31

 

 
45

 
45

 

Caterpillar Power Finance
61

 
74

 

 
160

 
172

 

Total
$
174

 
$
186

 
$

 
$
424

 
$
435

 
$

Impaired Finance Receivables With
An Allowance Recorded
 

 
 

 
 

 
 

 
 

 
 

North America
$
41

 
$
39

 
$
18

 
$
44

 
$
43

 
$
17

Europe
66

 
66

 
36

 
9

 
8

 
5

Asia/Pacific
2

 
2

 
1

 
8

 
8

 
2

Mining
58

 
58

 
22

 

 

 

Latin America
61

 
61

 
34

 
95

 
106

 
42

Caterpillar Power Finance
401

 
408

 
118

 
362

 
365

 
83

Total
$
629

 
$
634

 
$
229

 
$
518

 
$
530

 
$
149

Total Impaired Finance Receivables
 

 
 

 
 

 
 

 
 

 
 

North America
$
58

 
$
56

 
$
18

 
$
63

 
$
62

 
$
17

Europe
68

 
67

 
36

 
54

 
53

 
5

Asia/Pacific
31

 
31

 
1

 
42

 
41

 
2

Mining
92

 
92

 
22

 
121

 
121

 

Latin America
92

 
92

 
34

 
140

 
151

 
42

Caterpillar Power Finance
462

 
482

 
118

 
522

 
537

 
83

Total
$
803

 
$
820

 
$
229

 
$
942

 
$
965

 
$
149

 
 
 
 
 
 
 
 
 
 
 
 
 

15

UNAUDITED


(Millions of dollars)
 
 
 
 
 
 
 
 
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
Impaired Finance Receivables With
No Allowance Recorded
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
North America
$
19

 
$

 
$
14

 
$
1

Europe
4

 

 
47

 

Asia/Pacific
30

 
1

 
30

 
1

Mining
35

 

 
128

 
1

Latin America
37

 
1

 
68

 
1

Caterpillar Power Finance
94

 
2

 
171

 
1

Total
$
219

 
$
4

 
$
458

 
$
5

Impaired Finance Receivables With
An Allowance Recorded
 

 
 

 
 

 
 

North America
$
47

 
$

 
$
44

 
$

Europe
59

 

 
6

 

Asia/Pacific
2

 

 
28

 
1

Mining
60

 
1

 

 

Latin America
51

 
1

 
102

 
1

Caterpillar Power Finance
374

 
4

 
251

 
3

Total
$
593

 
$
6

 
$
431

 
$
5

Total Impaired Finance Receivables
 

 
 

 
 

 
 

North America
$
66

 
$

 
$
58

 
$
1

Europe
63

 

 
53

 

Asia/Pacific
32

 
1

 
58

 
2

Mining
95

 
1

 
128

 
1

Latin America
88

 
2

 
170

 
2

Caterpillar Power Finance
468

 
6

 
422

 
4

Total
$
812

 
$
10

 
$
889

 
$
10

 
 
 
 
 
 
 
 


16

UNAUDITED


(Millions of dollars)
 
 
 
 
 
 
 
 
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
Impaired Finance Receivables With
No Allowance Recorded
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
North America
$
17

 
$
1

 
$
12

 
$
1

Europe
17

 

 
48

 
1

Asia/Pacific
31

 
2

 
22

 
2

Mining
65

 
2

 
128

 
5

Latin America
41

 
2

 
69

 
2

Caterpillar Power Finance
149

 
5

 
233

 
7

Total
$
320

 
$
12

 
$
512

 
$
18

Impaired Finance Receivables With
An Allowance Recorded
 

 
 

 
 

 
 

North America
$
51

 
$
1

 
$
52

 
$
1

Europe
41

 
1

 
6

 

Asia/Pacific
5

 

 
35

 
2

Mining
43

 
2

 

 

Latin America
69

 
3

 
101

 
3

Caterpillar Power Finance
364

 
8

 
141

 
4

Total
$
573

 
$
15

 
$
335

 
$
10

Total Impaired Finance Receivables
 

 
 

 
 

 
 

North America
$
68

 
$
2

 
$
64

 
$
2

Europe
58

 
1

 
54

 
1

Asia/Pacific
36

 
2

 
57

 
4

Mining
108

 
4

 
128

 
5

Latin America
110

 
5

 
170

 
5

Caterpillar Power Finance
513

 
13

 
374

 
11

Total
$
893

 
$
27

 
$
847

 
$
28

 
 
 
 
 
 
 
 

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 (generally after 120 days past due). 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.
 
As of September 30, 2018, there were $79 million in finance receivables on non-accrual status for the Dealer portfolio segment, all of which was in Latin America. As of December 31, 2017, there were no finance receivables on non-accrual status for the Dealer portfolio segment. The recorded investment in Customer finance receivables on non-accrual status was as follows: 
(Millions of dollars)
September 30,
2018
 
December 31,
2017
North America
$
44

 
$
38

Europe
124

 
37

Asia/Pacific
4

 
10

Mining
10

 
63

Latin America
118

 
192

Caterpillar Power Finance
451

 
343

Total
$
751

 
$
683

 
 
 
 


17

UNAUDITED


Troubled debt restructurings
A restructuring of a finance receivable constitutes a troubled debt restructuring (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, extended skip payment periods and reduction of principal and/or accrued interest.

As of September 30, 2018 and December 31, 2017, there were no additional funds committed to lend to a borrower whose terms have been modified in a TDR.

There were no finance receivables modified as TDRs during the three and nine months ended September 30, 2018 and 2017 for the Dealer or Caterpillar Purchased Receivables portfolio segments. Our recorded investment in finance receivables in the Customer portfolio segment modified as TDRs were as follows:
(Dollars in millions)
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
 
Number of
Contracts
 
Pre-TDR
Recorded
Investment
 
Post-TDR
Recorded
Investment
 
Number of
Contracts
 
Pre-TDR
Recorded
Investment
 
Post-TDR
Recorded
Investment
North America
4

 
$

 
$

 
11

 
$
4

 
$
5

Europe

 

 

 
1

 

 

Latin America

 

 

 
3

 
21

 
22

Caterpillar Power Finance
2

 
40

 
40

 
5

 
51

 
44

Total
6

 
$
40

 
$
40

 
20

 
$
76

 
$
71