## Facts

- Caterpillar Inc. filed a 1989 Form 10-K and a 1990 first-quarter Form 10-Q containing MD&A disclosures subject to Item 303 of Regulation S-K.
- Caterpillar Brasil, S.A. (CBSA), a wholly owned subsidiary, generated an unusually large portion of consolidated profitability in 1989 (about one quarter of net profits).
- Before filing the 1989 Form 10-K, management knew CBSA’s future performance was difficult to predict due to Brazil’s volatility and that this uncertainty could significantly reduce projected 1990 results.
- In March 1990, a new Brazilian administration implemented major economic changes that management expected to negatively affect CBSA’s sales and profits, with profits projected to be substantially lower than in 1989.
- After reviewing early 1990 results, Caterpillar concluded CBSA could suffer significant losses in 1990.
- The MD&A in the filings did not disclose (i) CBSA’s disproportionate contribution to 1989 earnings or (ii) management’s known uncertainty and risk of materially lower consolidated earnings in 1990 tied to CBSA and Brazilian conditions.

## Issues

1. Whether Caterpillar’s MD&A omitted disclosure of known trends, events, or uncertainties required by Item 303 of Regulation S-K.
2. Whether those omissions caused violations of Exchange Act § 13(a) and Rules 13a-1 and 13a-13 governing annual and quarterly reporting.
3. What analytical standard governs management’s duty to disclose known uncertainties when likelihood cannot be determined.

## Decision

- The SEC found Caterpillar failed to comply with Item 303 MD&A requirements in its 1989 Form 10-K and 1990 first-quarter Form 10-Q.
- The SEC held that the failures constituted violations of Exchange Act § 13(a) and Rules 13a-1 and 13a-13.
- The SEC entered a cease-and-desist order under Exchange Act § 21C directing Caterpillar to refrain from future violations.

## Legal Principles

- MD&A must present management’s analysis of the business, not only historical financial results, enabling investors to assess results and prospects through management’s view.
- Under Item 303, management must disclose known trends, events, or uncertainties reasonably expected to have a material effect on financial condition or results of operations.
- The disclosure analysis requires: (i) identifying the known trend or uncertainty; (ii) assessing whether it is likely to occur; and (iii) if likelihood cannot be determined, assuming it will occur and evaluating whether the resulting impact would be material—if so, disclosure (and, when reasonably practicable, quantification) is required.
- A material concentration of earnings in a subsidiary, coupled with known volatility and expected adverse changes affecting that subsidiary, can require MD&A disclosure of the concentration, the uncertainty, and the potential consolidated impact.

## Conclusion

The SEC concluded that Caterpillar’s MD&A was deficient because management knew a key subsidiary had generated an unusually large share of earnings and faced substantial, known uncertainty that could materially reduce consolidated results, yet the filings did not communicate that risk analysis; the SEC therefore found reporting violations and ordered Caterpillar to cease and desist.


In re Caterpillar Inc., Exchange Act Release No. 34-30532 (S.E.C. 1992)