Edgar Filing: CATERPILLAR INC

form10q_1q08.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

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 March 31, 2008 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________
Commission File Number: 1-768
CATERPILLAR INC. (Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation)	37-0602744 (IRS Employer I.D. No.)
100 NE Adams Street, Peoria, Illinois (Address of principal executive offices)	61629 (Zip Code)
Registrant's telephone number, including area code: (309) 675-1000

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 [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer”, “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

Large accelerated filer	X	Accelerated filer

Non-accelerated filer		Smaller Reporting Company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

At March 31, 2008, 614,769,392 shares of common stock of the Registrant were outstanding.

Page 1

Table of Contents

Part I. Financial Information
	Item 1.	Financial Statements
	Item 2.	Management’s Discussion and Analysis
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures

Part II. Other Information
	Item 1.	Legal Proceedings
	Item 1A.	Risk Factors
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities *
	Item 4.	Submission of Matters to a Vote of Security Holders *
	Item 5.	Other Information *
	Item 6.	Exhibits

* Item omitted because no answer is called for or item is not applicable.

Page 2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Caterpillar Inc. Consolidated Statement of Results of Operations (Unaudited) (Dollars in millions except per share data)
		Three Months Ended
		March 31,
		2008		2007
Sales and revenues:
	Sales of Machinery and Engines	$	10,979	$	9,321
	Revenues of Financial Products		817		695
	Total sales and revenues		11,796		10,016

Operating costs:
	Cost of goods sold		8,609		7,136
	Selling, general and administrative expenses		959		890
	Research and development expenses		369		340
	Interest expense of Financial Products		284		271
	Other operating expenses		282		239
	Total operating costs		10,503		8,876

Operating profit			1,293		1,140

	Interest expense excluding Financial Products		74		79
	Other income (expense)		112		111

Consolidated profit before taxes			1,331		1,172

	Provision for income taxes		420		375
	Profit of consolidated companies		911		797

	Equity in profit (loss) of unconsolidated affiliated companies		11		19

Profit		$	922	$	816


Profit per common share		$	1.49	$	1.27

Profit per common share – diluted 1		$	1.45	$	1.23

Weighted-average common shares outstanding (millions)
	- Basic		617.5		643.9
	- Diluted 1		637.9		665.2

Cash dividends declared per common share		$	—	$	—

1	Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
See accompanying notes to Consolidated Financial Statements.

Page 3

Caterpillar Inc. Consolidated Statement of Financial Position (Unaudited) (Dollars in millions)
				March 31, 2008			December 31, 2007
Assets
	Current assets:
		Cash and short-term investments		$	777		$	1,122
		Receivables – trade and other			9,021			8,249
		Receivables – finance			7,810			7,503
		Deferred and refundable income taxes			671			816
		Prepaid expenses and other current assets			546			583
		Inventories			8,082			7,204
	Total current assets				26,907			25,477

	Property, plant and equipment – net				10,050			9,997
	Long-term receivables – trade and other				565			685
	Long-term receivables – finance				14,134			13,462
	Investments in unconsolidated affiliated companies				563			598
	Noncurrent deferred and refundable income taxes				1,582			1,553
	Intangible assets				454			475
	Goodwill				1,963			1,963
	Other assets				1,986			1,922
Total assets				$	58,204		$	56,132

Liabilities
	Current liabilities:
		Short-term borrowings:
			Machinery and Engines	$	331		$	187
			Financial Products		6,321			5,281
		Accounts payable			5,156			4,723
		Accrued expenses			3,378			3,178
		Accrued wages, salaries and employee benefits			799			1,126
		Customer advances			1,651			1,442
		Dividends payable			—			225
		Other current liabilities			1,181			951
		Long-term debt due within one year:
			Machinery and Engines		173			180
			Financial Products		5,326			4,952
	Total current liabilities				24,316			22,245

	Long-term debt due after one year:
		Machinery and Engines			3,640			3,639
		Financial Products			14,014			14,190
	Liability for postemployment benefits				4,954			5,059
	Other liabilities				2,062			2,116
Total liabilities					48,986			47,249
Commitments and contingencies (Notes 10 and 12)
Stockholders' equity
	Common stock of $1.00 par value:
		Authorized shares: 900,000,000 Issued shares: (3/31/08 and 12/31/07 – 814,894,624) at paid-in amount			2,754			2,744
	Treasury stock (3/31/08 – 200,125,232; 12/31/07 – 190,908,490) at cost				(10,115	)		(9,451	)
	Profit employed in the business				18,289			17,398
	Accumulated other comprehensive income (loss)				(1,710	)		(1,808	)
Total stockholders' equity					9,218			8,883
Total liabilities and stockholders' equity				$	58,204		$	56,132

See accompanying notes to Consolidated Financial Statements.

Page 4

Caterpillar Inc.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
(Dollars in millions)
												Accumulated other comprehensive income (loss)
Three Months Ended March 31, 2007			Common stock			Treasury stock			Profit employed in the business			Foreign currency translation		Pension & other post- retirement benefits (1)			Derivative financial instruments and other			Available-for-sale securities			Total
Balance at December 31, 2006			$	2,465		$	(7,352	)	$	14,593		$	471	$	(3,376	)	$	48		$	10		$	6,859
Adjustment to adopt FIN 48				—			—			141			—		—			—			—			141
Balance at January 1, 2007				2,465			(7,352	)		14,734			471		(3,376	)		48			10			7,000
Profit				—			—			816			—		—			—			—			816
Foreign currency translation				—			—			—			16		—			—			—			16
Pension and other postretirement benefits
	Amortization of actuarial (gain) loss, net of tax of $31			—			—			—			—		57			—			—			57
	Amortization of prior service cost, net of tax of $2			—			—			—			—		5			—			—			5
Derivative financial instruments
	Gains (losses) deferred, net of tax of $1			—			—			—			—		—			2			—			2
	(Gains) losses reclassified to earnings, net of tax of $12			—			—			—			—		—			(22	)		—			(22	)
Available-for-sale securities
	Gains (losses) deferred, net of tax of $2			—			—			—			—		—			—			4			4
	(Gains) losses reclassified to earnings, net of tax of $1			—			—			—			—		—			—			(2	)		(2	)
		Comprehensive income (loss)																						876
Common shares issued from treasury stock for stock-based compensation: 2,645,723				(1	)		74			—			—		—			—			—			73
Stock-based compensation expense				27			—			—			—		—			—			—			27
Tax benefits from stock-based compensation				27			—			—			—		—			—			—			27
Shares repurchased: 8,058,000				—			(511	)		—			—		—			—			—			(511	)
Balance at March 31, 2007			$	2,518		$	(7,789	)	$	15,550		$	487	$	(3,314	)	$	28		$	12		$	7,492


Three Months Ended March 31, 2008
Balance at December 31, 2007			$	2,744		$	(9,451	)	$	17,398		$	749	$	(2,594	)	$	19		$	18		$	8,883
Adjustment to adopt measurement date provisions of FAS 158, net of tax (2)				—			—			(33	)		—		17			—			—			(16	)
Balance at January 1, 2008				2,744			(9,451	)		17,365			749		(2,577	)		19			18			8,867
Profit				—			—			922			—		—			—			—			922
Foreign currency translation				—			—			—			101		—			—			—			101
Pension and other postretirement benefits
	Amortization of actuarial (gain) loss, net of tax of $21			—			—			—			—		37			—			—			37
Derivative financial instruments
	Gains (losses) deferred, net of tax of $5			—			—			—			—		—			(8	)		—			(8	)
	(Gains) losses reclassified to earnings, net of tax of $13			—			—			—			—		—			(25	)		—			(25	)
Available-for-sale securities
	Gains (losses) deferred, net of tax of $12			—			—			—			—		—			—			(23	)		(23	)
	(Gains) losses reclassified to earnings, net of tax of $0			—			—			—			—		—			—			(1	)		(1	)
		Comprehensive income (loss)																						1,003
Dividends declared				—			—			2			—		—			—			—			2
Common shares issued from treasury stock for stock-based compensation: 1,043,284				(1	)		28			—			—		—			—			—			27
Stock-based compensation expense				37			—			—			—		—			—			—			37
Tax benefits from stock-based compensation				12			—			—			—		—			—			—			12
Shares repurchased: 10,260,026				—			(692	)		—			—		—			—			—			(692	)
Stock repurchase derivative contracts				(38	)		—			—			—		—			—			—			(38	)
Balance at March 31, 2008			$	2,754		$	(10,115	)	$	18,289		$	850	$	(2,540	)	$	(14	)	$	(6	)	$	9,218

1	Pension and other postretirement benefits includes net adjustments for unconsolidated companies of $1 million and $0 million for the three months ended March 31, 2008 and 2007, respectively. The ending balances were $53 million and $43 million at March 31, 2008 and 2007, respectively.
2	Adjustments to profit employed in the business and pension and other post employment benefits were net of tax of ($17) million and $9 million, respectively.
See accompanying notes to Consolidated Financial Statements.

Page 5

Caterpillar Inc. Consolidated Statement of Cash Flow (Unaudited) (Millions of dollars)
			Three Months Ended
			March 31,
			2008			2007
Cash flow from operating activities:
	Profit		$	922		$	816
	Adjustments for non-cash items:
		Depreciation and amortization		472			412
		Other		128			1
	Changes in assets and liabilities:
		Receivables – trade and other		(455	)		739
		Inventories		(864	)		(734	)
		Accounts payable and accrued expenses		463			(141	)
		Customer advances		165			165
		Other assets – net		78			(71	)
		Other liabilities – net		(203	)		162
Net cash provided by (used for) operating activities				706			1,349

Cash flow from investing activities:
	Capital expenditures – excluding equipment leased to others			(343	)		(252	)
	Expenditures for equipment leased to others			(302	)		(252	)
	Proceeds from disposals of property, plant and equipment			122			106
	Additions to finance receivables			(3,062	)		(2,553	)
	Collections of finance receivables			2,301			2,359
	Proceeds from sales of finance receivables			46			40
	Investments and acquisitions (net of cash acquired)			(19	)		(153	)
	Proceeds from sale of available-for-sale securities			104			62
	Investments in available-for-sale securities			(160	)		(124	)
	Other – net			192			140
Net cash provided by (used for) investing activities				(1,121	)		(627	)

Cash flow from financing activities:
	Dividends paid			(223	)		(193	)
	Common stock issued, including treasury shares reissued			27			73
	Payment for stock repurchase derivative contracts			(38	)		—
	Treasury shares purchased			(692	)		(511	)
	Excess tax benefit from stock-based compensation			13			26
	Proceeds from debt issued (original maturities greater than three months):
	– Machinery and Engines			62			26
	– Financial Products			3,858			1,849
	Payments on debt (original maturities greater than three months):
	– Machinery and Engines			(98	)		(28	)
	– Financial Products			(3,422	)		(3,000	)
	Short-term borrowings – net (original maturities three months or less)			554			1,107
Net cash provided by (used for) financing activities				41			(651	)
Effect of exchange rate changes on cash				29			6
Increase (decrease) in cash and short-term investments				(345	)		77

Cash and short-term investments at beginning of period				1,122			530
Cash and short-term investments at end of period			$	777		$	607

All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents.
See accompanying notes to Consolidated Financial Statements.

Page 6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A. Basis of Presentation

In the opinion of management, the accompanying financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated results of operations for the three month periods ended March 31, 2008 and 2007, (b) the consolidated financial position at March 31, 2008 and December 31, 2007, (c) the consolidated changes in stockholders' equity for the three month periods ended March 31, 2008 and 2007, and (d) the consolidated statement of cash flow for the three month periods ended March 31, 2008 and 2007. The financial statements have been prepared 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). Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation.

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 financial statements and notes thereto included in our Company's annual report on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K).

Comprehensive income is comprised of profit, as well as adjustments for foreign currency translation, derivative instruments designated as cash flow hedges, available-for-sale securities and pension and other postretirement benefits. Total comprehensive income for the three months ended March 31, 2008 and 2007 was $1,003 million and $876 million, respectively.

The December 31, 2007 financial position data included herein is derived from the audited consolidated financial statements included in the 2007 Form 10-K.

	B. Nature of Operations We operate in three principal lines of business:
	(1)	Machinery— A principal line of business which includes the design, manufacture, marketing and sales of construction, mining and forestry machinery—track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, skid steer loaders and related parts. Also includes logistics services for other companies and the design, manufacture, remanufacture, maintenance and services of rail-related products.
	(2)	Engines— A principal line of business including the design, manufacture, marketing and sales of engines for Caterpillar machinery; electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Also includes remanufacturing of Caterpillar engines and a variety of Caterpillar machine and engine components and remanufacturing services for other companies. Reciprocating engines meet power needs ranging from 5 to 21,500 horsepower (4 to over 16 000 kilowatts). Turbines range from 1,600 to 30,000 horsepower (1 200 to 22 000 kilowatts).
	(3)	Financial Products— A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance), Caterpillar Power Ventures Corporation (Cat Power Ventures) and their respective subsidiaries. Cat Financial provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, Solar gas turbines as well as other equipment and marine vessels. Cat Financial also extends loans to customers and dealers. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. Cat Power Ventures is an investor in independent power projects using Caterpillar power generation equipment and services.
	Our Machinery and Engines operations are highly integrated. Throughout the Notes, Machinery and Engines represents the aggregate total of these principal lines of business.

Page 7

New Accounting Pronouncements

FIN 48 – In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies that a tax position must be more likely than not of being sustained before being recognized in the financial statements. As required, we adopted the provisions of FIN 48 as of January 1, 2007. The following table summarizes the effect of the initial adoption of FIN 48.

Initial adoption of FIN 48
(Millions of dollars)	January 1, 2007 Prior to FIN 48 Adjustment		FIN 48 Adjustment			January 1, 2007 Post FIN 48 Adjustment
Deferred and refundable income taxes	$	733	$	82		$	815
Noncurrent deferred and refundable income taxes		1,949		211			2,160
Other current liabilities		1,145		(530	)		615
Other liabilities		1,209		682			1,891
Profit employed in the business		14,593		141			14,734

SFAS 157 – In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements.” SFAS 157 provides a common definition of fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it. In addition, the Statement expands disclosures about fair value measurements. In February 2008, the FASB issued final Staff Positions that (1) deferred the effective date of this Statement for one year for certain nonfinancial assets and nonfinancial liabilities (see below) and (2) removed certain leasing transactions from the scope of the Statement. We applied this new accounting standard to all other fair value measurements effective January 1, 2008. The adoption of SFAS 157 did not have a material impact on our financial statements. See Note 14 for additional information.

FSP 157-2 – In February 2008, the FASB issued FASB Staff Position on Statement 157 "Effective Date of FASB Statement No. 157" (FSP 157-2). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed on a recurring basis, to fiscal years beginning after November 15, 2008. Our significant nonfinancial assets and liabilities that could be impacted by this deferral include assets and liabilities initially measured at fair value in a business combination and goodwill tested annually for impairment. The adoption of FSP 157-2 is not expected to have a significant impact on our financial statements.

SFAS 158 – In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (SFAS 158), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS 158 requires recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Also, the measurement date – the date at which the benefit obligation and plan assets are measured – is required to be the company’s fiscal year-end. We adopted the balance sheet recognition provisions at December 31, 2006, and adopted the year-end measurement date effective January 1, 2008 using the “one measurement” approach. Under the one measurement approach, net periodic benefit cost for the period between any early measurement date and the end of the fiscal year that the measurement provisions are applied are allocated proportionately between amounts to be recognized as an adjustment of retained earnings and net periodic benefit cost for the fiscal year. Previously, we used a November 30th measurement date for our U.S. pension and other postretirement benefit plans and September 30th for our non-U.S. plans. The following summarizes the effect of adopting the year-end measurement date provisions as of January 1, 2008. See Note 9 for additional information.

Adoption of SFAS 158 year-end measurement date	January 1, 2008						January 1, 2008
(Millions of dollars)	Prior to SFAS 158 Adjustment			SFAS 158 Adjustment			Post SFAS 158 Adjustment
Noncurrent deferred and refundable income taxes	$	1,553		$	8		$	1,561
Liability for postemployment benefits		5,059			24			5,083
Accumulated other comprehensive income (loss)		(1,808	)		17			(1,791	)
Profit employed in the business		17,398			(33	)		17,365

Page 8

SFAS 159 – In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of SFAS No. 115.” SFAS 159 creates a fair value option under which an entity may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities on a contract by contract basis, with changes in fair values recognized in earnings as these changes occur. SFAS 159 becomes effective for fiscal years beginning after November 15, 2007. We adopted this new accounting standard on January 1, 2008. The adoption of SFAS 159 did not have a material impact on our financial statements.

SFAS 141R & SFAS 160 – In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) (SFAS 141R), “Business Combinations,” and No. 160 (SFAS 160), “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS 141R requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed. Further, SFAS 141R also changes the accounting for acquired in-process research and development assets, contingent consideration, partial acquisitions and transaction costs. Under SFAS 160, all entities are required to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. In addition, transactions between an entity and noncontrolling interests will be treated as equity transactions. SFAS 141R and SFAS 160 will become effective for fiscal years beginning after December 15, 2008. We will adopt these new accounting standards on January 1, 2009. We are currently reviewing the impact of SFAS 141R and SFAS 160 on our financial statements and expect to complete this evaluation in 2008.

SFAS 161 – In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (SFAS 161), “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS 161 expands disclosures for derivative instruments by requiring entities to disclose the fair value of derivative instruments and their gains or losses in tabular format. SFAS 161 also requires disclosure of information about credit risk-related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments. SFAS 161 will become effective for fiscal years beginning after November 15, 2008. We will adopt this new accounting standard on January 1, 2009. We do not expect the adoption to have a material impact on our financial statements.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), requires that the cost resulting from all stock–based payments be recognized in the financial statements based on the grant date fair value of the award. Stock-based compensation primarily consists of stock options, stock-settled stock appreciation rights (SARs) and restricted stock units (RSUs). We recognized pretax stock-based compensation cost of $37 million and $27 million in the first quarter of 2008 and 2007, respectively.

The following table illustrates the type and fair market value of the stock-based compensation awards granted during the first quarter of 2008 and 2007, respectively:

	2008				2007
	# Granted		Fair Value Per Award		# Granted		Fair Value Per Award
SARs		4,476,095	$	22.32		4,193,401	$	20.73
Stock options		410,506		22.32		231,615		20.73
RSUs		1,511,523		69.17		1,282,020		59.94

The following table provides the assumptions used in determining the fair value of the stock-based awards for the three month periods ended March 31, 2008 and 2007, respectively:

	Grant Year
	2008		2007
Weighted-average dividend yield		1.89%		1.68%
Weighted-average volatility		27.14%		26.04%
Range of volatilities		27.13-28.99%		26.03-26.62%
Range of risk-free interest rates		1.60-3.64%		4.40-5.16%
Weighted-average expected lives		8 years		8 years

Page 9

As of March 31, 2008, the total remaining unrecognized compensation cost related to nonvested stock-based compensation awards was $295 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 2.4 years.

Our long-standing practices and policies specify all stock-based compensation awards are approved by the Compensation Committee (the Committee) of the Board of Directors on the date of grant. The stock-based award approval process specifies the number of awards granted, the terms of the award and the grant date. The same terms and conditions are consistently applied to all employee grants, including Officers. The Committee approves all individual Officer grants. The number of stock-based compensation awards included in an individual’s award is determined based on the methodology approved by the Committee. In 2007, under the terms of the Caterpillar Inc. 2006 Long-Term Incentive Plan (approved by stockholders in June of 2006), the Committee approved the exercise price methodology to be the closing price of the Company stock on the date of grant.

4.	Derivative Instruments and Hedging Activities

Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices. In addition, the amount of Caterpillar stock that can be repurchased under our stock repurchase program is impacted by movements in the price of the stock. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate, commodity price and Caterpillar stock price exposures. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward and option contracts, interest rate swaps and commodity forward and option contracts. Our derivative activities are subject to the management, direction and control of our senior financial officers. Risk management practices, including the use of financial derivative instruments, are presented to the Audit Committee of the Board of Directors at least annually.

Foreign Currency Exchange Rate Risk

Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies. Movements in foreign currency rates also affect our competitive position as these changes may affect business practices and/or pricing strategies of non-U.S.-based competitors. Additionally, we have balance sheet positions denominated in foreign currency, thereby creating exposure to movements in exchange rates.

Our Machinery and Engines operations purchase, manufacture and sell products in many locations around the world. As we have diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to five years.

We generally designate as cash flow hedges at inception of the contract any Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, euro, Japanese yen, Mexican peso, Singapore dollar, New Zealand dollar or Swiss franc forward or option contracts that meet the requirements for hedge accounting. Designation is performed on a specific exposure basis to support hedge accounting. The remainder of Machinery and Engines foreign currency contracts are undesignated. We designate as fair value hedges specific euro forward contracts used to hedge firm commitments.

As of March 31, 2008, $21 million of deferred net gains (net of tax) included in equity (“Accumulated other comprehensive income (loss)” in the Consolidated Statement of Financial Position), are expected to be reclassified to current earnings (“Other income (expense)” in the Consolidated Statement of Results of Operations) over the next twelve months when earnings are affected by the hedged transactions. The actual amount recorded in “Other income (expense)” will vary based on exchange rates at the time the hedged transactions impact earnings.

In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions. Our policy allows the use of foreign currency forward and option contracts to offset the risk of currency mismatch between our receivables and debt. All such foreign currency forward and option contracts are undesignated.

Page 10

Gains (losses) included in current earnings [Other income (expense)] on undesignated contracts:
		Three Months Ended March 31,
(Millions of dollars)		2008			2007
Machinery and Engines:
	On undesignated contracts	$	7		$	4

Financial Products:
	On undesignated contracts		(87	)		(6	)
		$	(80	)	$	(2	)

Gains and losses on the Financial Products contracts above are substantially offset by balance sheet translation gains and losses.

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 swap agreements to manage our exposure to interest rate changes and, in some cases, lower the cost of borrowed funds.

Machinery and Engines operations generally use fixed rate debt as a source of funding. Our objective is to minimize the cost of borrowed funds. Our policy allows us to enter into fixed-to-floating interest rate swaps and forward rate agreements to meet that objective with the intent to designate as fair value hedges at inception of the contract all fixed-to-floating interest rate swaps.

Since 2006, we entered into $400 million (notional amount) of interest rate swaps designated as fair value hedges of our fixed rate long-term debt. During the first quarter 2008, our Machinery and Engines operations liquidated all of these fixed-to-floating interest rate swaps. The gain ($20 million remaining at March 31, 2008) is being amortized to earnings ratably over the remaining life of the hedged debt.

Financial Products operations have a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate) of Cat Financial’s debt portfolio with the interest rate profile of their receivables portfolio within predetermined ranges on an on-going basis. In connection with that policy, we use interest rate derivative instruments to modify the debt structure to match assets within the receivables portfolio. This match-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 swaps to meet the match-funding objective. To support hedge accounting, we designate fixed-to-floating interest rate swaps as fair value hedges of the fair value of our fixed-rate debt at the inception of the contract. Financial Products' practice is to designate most floating-to-fixed interest rate swaps as cash flow hedges of the variability of future cash flows at the inception of the swap contract.

Financial Products liquidated fixed-to-floating interest rate swaps during 2006, 2005 and 2004, which resulted in deferred net gains. These gains ($5 million remaining at March 31, 2008) are being amortized to earnings ratably over the remaining life of the hedged debt.

Gains (losses) included in current earnings [Other income (expense)]:
			Three Months Ended March 31,
(Millions of dollars)			2008			2007
Fixed-to-floating interest rate swaps
	Machinery and Engines:
		Gain (loss) on designated interest rate derivatives	$	18		$	—
		Gain (loss) on hedged debt		(9	)		(1	)
		Gain (loss) on liquidated swaps – included in interest expense		1			1

	Financial Products:
		Gain (loss) on designated interest rate derivatives		126			12
		Gain (loss) on hedged debt		(126	)		(12	)
			$	10		$	—

Page 11

As of March 31, 2008, $24 million of deferred net losses included in equity ("Accumulated other comprehensive income (loss)" in the Consolidated Statement of Financial Position), related to Financial Products floating-to-fixed interest rate swaps, are expected to be reclassified to current earnings ("Interest expense of Financial Products" in the Consolidated Statement of Results of Operations) over the next 12 months.

Commodity Price Risk

Commodity price movements create a degree of risk by affecting the price we must pay for certain raw material. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials.

Our Machinery and Engines operations purchase aluminum, copper and nickel embedded in the components we purchase from suppliers. Our suppliers pass on to us price changes in the commodity portion of the component cost. In addition, we are also subject to price changes on natural gas purchased for operational use.

Our objective is to minimize volatility in the price of these commodities. Our policy allows us to enter into commodity forward and option contracts to lock in the purchase price of a portion of these commodities within a four-year horizon. All such commodity forward and option contracts are undesignated. There were no net gains or losses on undesignated contracts for the three months ended March 31, 2007, and no contracts were outstanding during 2008.

Stock Repurchase Risk

In February 2007, the Board of Directors authorized a $7.5 billion stock repurchase program, expiring on December 31, 2011. The amount of Caterpillar stock that can be repurchased under the authorization is impacted by movements in the price of the stock. In August 2007, the Board of Directors authorized the use of derivative contracts to reduce stock repurchase price volatility.

In connection with our stock repurchase program, we entered into capped call transactions (“call”) with a major bank for an aggregate 6.0 million shares. Through March 31, 2008, we have paid the bank $94 million for the establishment of the calls (of which $38 million was paid in the first quarter 2008 for 2.5 million shares), which was accounted for as a reduction to stockholders’ equity. A call permits us to reduce share repurchase price volatility by providing a floor and cap on the price at which the 6.0 million shares can be repurchased. The floor, cap and strike prices for the calls were based upon the average purchase price paid by the bank to purchase our common stock to hedge these transactions. Each call will mature and be exercisable within one year after the call was established. If we exercise a call, we can elect to settle the transaction with the bank by physical settlement (paying cash and receiving shares), cash settlement (receiving a net amount of cash) or net share settlement (receiving a net amount of shares). We will continue to use open market purchases in conjunction with the capped call transactions to repurchase our stock.

As of March 31, 2008, no shares have been repurchased pursuant to this capped call program.

5.	Inventories Inventories (principally using the "last-in, first-out" method) are comprised of the following:

(Millions of dollars)	March 31,		December 31,
	2008		2007
Raw materials	$	2,837	$	2,474
Work-in-process		1,422		1,215
Finished goods		3,535		3,230
Supplies		288		285
Total inventories	$	8,082	$	7,204

6.	Investments in Unconsolidated Affiliated Companies
	Our investments in affiliated companies accounted for by the equity method consist primarily of a 50 percent interest in Shin Caterpillar Mitsubishi Ltd. (SCM) located in Japan. Combined financial information of the unconsolidated affiliated companies accounted for by the equity method (generally on a three month lag, e.g., SCM results reflect the periods ending December 31) was as follows:

Page 12

Results of Operations of unconsolidated affiliated companies:	Three Months Ended
(Millions of dollars)	March 31,
	2008		2007
Sales	$	1,088	$	1,022
Cost of sales		900		823
Gross profit	$	188	$	199

Profit (loss)	$	17	$	50

Caterpillar's profit (loss)	$	11	$	19

Sales from SCM to Caterpillar for the three months ended March 31, 2008 and March 31, 2007 of approximately $443 million and $379 million, respectively, are included in the affiliated company sales. In addition, SCM purchased $73 million and $65 million of products from Caterpillar during the three months ended March 31, 2008 and March 31, 2007, respectively.

Financial Position of unconsolidated affiliated companies:		March 31,		December 31,
(Millions of dollars)		2008		2007
Assets:
	Current assets	$	1,981	$	2,062
	Property, plant and equipment – net		1,270		1,286
	Other assets		134		173
			3,385		3,521
Liabilities:
	Current liabilities		1,618		1,546
	Long-term debt due after one year		235		269
	Other liabilities		421		393
			2,274		2,208
Ownership		$	1,111	$	1,313

Caterpillar's investments in unconsolidated affiliated companies:
(Millions of dollars)
	Investments in equity method companies	$	547	$	582
	Plus: Investments in cost method companies		16		16
	Total investments in unconsolidated affiliated companies	$	563	$	598

In March 2008, Caterpillar, Mitsubishi Heavy Industries Ltd. and SCM signed definitive agreements that include a share redemption plan, which will result in Caterpillar owning 67 percent of SCM. Subject to completion of certain conditions contained in the definitive agreements, we expect the first phase of the share redemption plan will close in the third quarter of 2008.

In February 2008, we sold our 23 percent equity investment in A.S.V. Inc. (ASV) resulting in a $60 million pretax gain. Accordingly, the March 31, 2008 financial position and equity investment amounts noted above do not include ASV.

7.	Intangible Assets and Goodwill
	A. Intangible assets Intangible assets are comprised of the following:

Page 13

(Dollars in millions)	Weighted Amortizable Life (Years)	March 31, 2008			December 31, 2007
Customer relationships	19	$	366		$	366
Intellectual property	10		172			195
Other	12		90			81
Total finite-lived intangible assets – gross	15		628			642
Less: Accumulated amortization			(174	)		(167	)
Intangible assets – net		$	454		$	475

Amortization expense for the three months ended March 31, 2008 and March 31, 2007 was $20 million and $11 million, respectively. Amortization expense related to intangible assets is expected to be:

(Millions of dollars)
2008		2009		2010		2011		2012		Thereafter
$	54	$	45	$	40	$	29	$	25	$	261

B. Goodwill

On an annual basis, we test goodwill for impairment in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." Goodwill is tested for impairment between annual tests whenever events or circumstances make it more likely than not that an impairment may have occurred.

No goodwill was acquired, impaired or disposed of during the first quarter of 2008. The carrying amount of the goodwill by reportable segment for the quarter ended March 31, 2008 was as follows:

(Millions of dollars)		Building Construction Products		EAME Operations		Electric Power		Heavy Construction & Mining		Industrial Power Systems		Infrastructure Development		Large Power Systems(2)		Marine & Petroleum Power(2)		All Other(1)		Consolidated Total
Balance at March 31, 2008		$	4	$	51	$	203	$	14	$	478	$	33	$	569	$	60	$	551	$	1,963

1	All Other includes operating segments included in “All Other” category (See Note 13).
2	As discussed in Note 13, our reportable segments were changed in the first quarter of 2008. As a result, goodwill of $60 million was reallocated from the Large Power Systems reportable segment to the newly formed Marine & Petroleum Power reportable segment.

Available-For-Sale Securities

Financial Products, primarily Cat Insurance, has investments in certain debt and equity securities that have been classified as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115) and recorded at fair value based upon quoted market prices. These fair values are included in "Other assets" in the Consolidated Statement of Financial Position. Unrealized gains and losses arising from the revaluation of available-for-sale securities are included, net of applicable deferred income taxes, in equity ("Accumulated other comprehensive income (loss)" in the Consolidated Statement of Financial Position). Realized gains and losses on sales of investments are generally determined using the FIFO ("first-in, first-out") method for debt instruments and the specific identification method for equity securities. Realized gains and losses are included in "Other income (expense)" in the Consolidated Statement of Results of Operations.

	March 31, 2008							December 31, 2007
			Unrealized							Unrealized
			Pretax Net							Pretax Net
(Millions of dollars)	Cost Basis		Gains (Losses)			Fair Value		Cost Basis		Gains (Losses)			Fair Value
Government debt	$	309	$	4		$	313	$	319	$	1		$	320
Corporate bonds		822		(19	)		803		775		(4	)		771
Equity securities		177		3			180		168		28			196
Total	$	1,308	$	(12	)	$	1,296	$	1,262	$	25		$	1,287

Page 14

Investments in an unrealized loss position that are not other-than-temporarily impaired:
	March 31, 2008
	Less than 12 months (1)				12 months or more (1)				Total
(Millions of dollars)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Government debt	$	14	$	—	$	20	$	—	$	34	$	—
Corporate bonds		342		16		117		11		459		27
Equity securities		81		13		2		1	&#