Edgar Filing: CATERPILLAR INC

form10q_1q09.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, 2009 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 definitions 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, 2009, 601,709,681 shares of common stock of the Registrant were outstanding.

Page 1

Table of Contents
			Page
Part I. Financial Information
	Item 1.	Financial Statements	3
	Item 2.	Management’s Discussion and Analysis	35
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61
	Item 4.	Controls and Procedures	62

Part II. Other Information
	Item 1.	Legal Proceedings	62
	Item 1A.	Risk Factors	*
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
	Item 3.	Defaults Upon Senior Securities	*
	Item 4.	Submission of Matters to a Vote of Security Holders	*
	Item 5.	Other Information	*
	Item 6.	Exhibits	63

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

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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,
		2009			2008
Sales and revenues:
	Sales of Machinery and Engines	$	8,510		$	10,979
	Revenues of Financial Products		715			817
	Total sales and revenues		9,225			11,796

Operating costs:
	Cost of goods sold		7,027			8,609
	Selling, general and administrative expenses		882			959
	Research and development expenses		388			369
	Interest expense of Financial Products		279			284
	Other operating (income) expenses		824			282
	Total operating costs		9,400			10,503

Operating profit (loss)			(175	)		1,293

	Interest expense excluding Financial Products		101			74
	Other income (expense)		64			122

Consolidated profit (loss) before taxes			(212	)		1,341

	Provision (benefit) for income taxes		(80	)		420
	Profit (loss) of consolidated companies		(132	)		921

	Equity in profit (loss) of unconsolidated affiliated companies		1			11

Profit (loss) of consolidated and affiliated companies			(131	)		932

Less: Profit (loss) attributable to noncontrolling interests			(19	)		10

Profit (loss) 1		$	(112	)	$	922


Profit (loss) per common share		$	(0.19	)	$	1.49

Profit (loss) per common share – diluted 2		$	(0.19	)	$	1.45

Weighted-average common shares outstanding (millions)
	- Basic		602.1			617.5
	- Diluted 2		602.1			637.9

Cash dividends declared per common share		$	—		$	—

1	Profit (loss) attributable to common stockholders.
2	2008 diluted by assumed exercise of stock-based compensation awards using the treasury stock method. In 2009, the assumed exercise of stock-based compensation awards was not considered because the impact would be anti-dilutive.
See accompanying notes to Consolidated Financial Statements.

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Caterpillar Inc. Consolidated Statement of Financial Position (Unaudited) (Dollars in millions)
				March 31, 2009			December 31, 2008
Assets
	Current assets:
		Cash and short-term investments		$	3,566		$	2,736
		Receivables – trade and other			7,779			9,397
		Receivables – finance			8,287			8,731
		Deferred and refundable income taxes			1,300			1,223
		Prepaid expenses and other current assets			748			765
		Inventories			7,992			8,781
	Total current assets				29,672			31,633
	Property, plant and equipment – net				12,342			12,524
	Long-term receivables – trade and other				1,035			1,479
	Long-term receivables – finance				13,597			14,264
	Investments in unconsolidated affiliated companies				92			94
	Noncurrent deferred and refundable income taxes				3,219			3,311
	Intangible assets				492			511
	Goodwill				2,256			2,261
	Other assets				1,735			1,705
Total assets				$	64,440		$	67,782

Liabilities
	Current liabilities:
		Short-term borrowings:
			Machinery and Engines	$	1,174		$	1,632
			Financial Products		4,887			5,577
		Accounts payable			3,340			4,827
		Accrued expenses			3,799			4,121
		Accrued wages, salaries and employee benefits			827			1,242
		Customer advances			1,700			1,898
		Dividends payable			—			253
		Other current liabilities			998			1,027
		Long-term debt due within one year:
			Machinery and Engines		469			456
			Financial Products		4,895			5,036
	Total current liabilities				22,089			26,069
	Long-term debt due after one year:
		Machinery and Engines			5,705			5,736
		Financial Products			17,761			17,098
	Liability for postemployment benefits				9,755			9,975
	Other liabilities				2,281			2,190
Total liabilities					57,591			61,068
Commitments and contingencies (Notes 10 and 12)
Redeemable noncontrolling interest					513			524
Stockholders' equity
	Common stock of $1.00 par value:
		Authorized shares: 900,000,000 Issued shares: (3/31/09 and 12/31/08 – 814,894,624) at paid-in amount			3,086			3,057
	Treasury stock (3/31/09 – 213,184,943; 12/31/08 – 213,367,983) at cost				(11,214	)		(11,217	)
	Profit employed in the business				19,694			19,826
	Accumulated other comprehensive income				(5,332	)		(5,579	)
	Noncontrolling interests				102			103
Total stockholders' equity					6,336			6,190
Total liabilities, redeemable noncontrolling interest and stockholders’ equity				$	64,440		$	67,782

See accompanying notes to Consolidated Financial Statements.

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Caterpillar Inc.

Consolidated Statement of Changes in Stockholders' Equity

(Unaudited)

(Dollars in millions)

			Common			Treasury			Profit employed in the			Accumulated other comprehensive			Noncontrolling						Comprehensive
Three Months Ended March 31, 2008			stock			stock			business			income (loss) 1			interests			Total			income (loss)
Balance at December 31, 2007			$	2,744		$	(9,451	)	$	17,398		$	(1,808	)	$	113		$	8,996
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			(1,791	)		113			8,980
Profit (loss)				—			—			922			—			10			932		$	932
Foreign currency translation				—			—			—			101			—			101			101
Pension and other postretirement benefits
	Amortization of actuarial (gain) loss,
		net of tax of $21		—			—			—			37			—			37			37
Derivative financial instruments and other
	Gains (losses) deferred, net of tax of $5			—			—			—			(8	)		—			(8	)		(8	)
	(Gains) losses reclassified to earnings,
		net of tax of $13		—			—			—			(25	)		—			(25	)		(25	)
Available-for-sale securities
	Gains (losses) deferred, net of tax of $12			—			—			—			(23	)		—			(23	)		(23	)
	(Gains) losses reclassified to earnings,
		net of tax of $0		—			—			—			(1	)		—			(1	)		(1	)
Change in ownership for noncontrolling interests				—			—			—			—			(17	)		(17	)		—
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		$	(1,710	)	$	106		$	9,324		$	1,013


Three Months Ended March 31, 2009
Balance at December 31, 2008			$	3,057		$	(11,217	)	$	19,826		$	(5,579	)	$	103		$	6,190
Profit (loss)				—			—			(112)			—			(19	)		(131	)	$	(131	)
Foreign currency translation, net of tax of $38				—			—			—			(120	)		(3	)		(123	)		(123	)
Pension and other postretirement benefits
	Current year actuarial gain (loss), net of tax of $83 3			—			—			—			50			—			50			50
	Amortization of actuarial (gain) loss, net of tax of $30			—			—			—			50			2			52			52
	Current year prior service cost, net of tax of $197 3			—			—			—			236			—			236			236
	Amortization of prior service cost, net of tax of $3			—			—			—			6			—			6			6
Derivative financial instruments and other
	(Gains) losses reclassified to earnings,
		net of tax of $12		—			—			—			22			(1	)		21			21
Available-for-sale securities
	Gains (losses) deferred, net of tax of $4			—			—			—			(8	)		—			(8	)		(8	)
	(Gains) losses reclassified to earnings,
		net of tax of $6		—			—			—			11			—			11			11
Common shares issued from treasury stock
	for stock-based compensation: 183,040			(3	)		3			—			—			—			—			—
Stock-based compensation expense				32			—			—			—			—			32			—
Cat Japan share redemption 4				—			—			(20)			—			20			—			—
Balance at March 31, 2009			$	3,086		$	(11,214	)	$	19,694		$	(5,332	)	$	102		$	6,336		$	114

1	Pension and other postretirement benefits include net adjustments for Cat Japan, while they were an unconsolidated affiliate, of ($1) million for the three months ended March 31, 2008. The ending balance was ($53) million at March 31, 2008.
2	Adjustments to profit employed in the business and pension and other postretirement benefits were net of tax of ($17) million and $9 million, respectively. See Note 2 for additional information.
3	Changes in amounts due to plan re-measurements. See Note 9 for additional information.
4	See Note 15 regarding the Cat Japan share redemption.
	See accompanying notes to Consolidated Financial Statements.

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Caterpillar Inc. Consolidated Statement of Cash Flow (Unaudited) (Millions of dollars)
			Three Months Ended
			March 31,
			2009			2008
Cash flow from operating activities:
	Profit (loss)		$	(112	)	$	922
	Adjustments for non-cash items:
		Depreciation and amortization		534			472
		Other		87			128
	Changes in assets and liabilities:
		Receivables – trade and other		1,622			(455	)
		Inventories		764			(864	)
		Accounts payable and accrued expenses		(1,727	)		463
		Customer advances		(179	)		165
		Other assets – net		48			78
		Other liabilities – net		(142	)		(203	)
Net cash provided by (used for) operating activities				895			706

Cash flow from investing activities:
	Capital expenditures – excluding equipment leased to others			(224	)		(343	)
	Expenditures for equipment leased to others			(221	)		(302	)
	Proceeds from disposals of property, plant and equipment			208			122
	Additions to finance receivables			(1,789	)		(3,062	)
	Collections of finance receivables			2,450			2,301
	Proceeds from sales of finance receivables			27			46
	Investments and acquisitions (net of cash acquired)			—			(19	)
	Proceeds from sale of available-for-sale securities			87			104
	Investments in available-for-sale securities			(58	)		(160	)
	Other – net			23			192
Net cash provided by (used for) investing activities				503			(1,121	)

Cash flow from financing activities:
	Dividends paid			(253	)		(223	)
	Common stock issued, including treasury shares reissued			—			27
	Payment for stock repurchase derivative contracts			—			(38	)
	Treasury shares purchased			—			(692	)
	Excess tax benefit from stock-based compensation			—			13
	Proceeds from debt issued (original maturities greater than three months):
	– Machinery and Engines			121			62
	– Financial Products			4,697			3,858
	Payments on debt (original maturities greater than three months):
	– Machinery and Engines			(205	)		(98	)
	– Financial Products			(3,116	)		(3,422	)
	Short-term borrowings – net (original maturities three months or less)			(1,779	)		554
Net cash provided by (used for) financing activities				(535	)		41
Effect of exchange rate changes on cash				(33	)		29
Increase (decrease) in cash and short-term investments				830			(345	)

Cash and short-term investments at beginning of period				2,736			1,122
Cash and short-term investments at end of period			$	3,566		$	777

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.

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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, 2009 and 2008, (b) the consolidated financial position at March 31, 2009 and December 31, 2008, (c) the consolidated changes in stockholders' equity for the three month periods ended March 31, 2009 and 2008, and (d) the consolidated cash flow for the three month periods ended March 31, 2009 and 2008. 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, 2008 (2008 Form 10-K).

Comprehensive income (loss) is comprised of profit (loss), as well as adjustments for foreign currency translation, derivative instruments designated as cash flow hedges, available-for-sale securities, pension and other postretirement benefits and noncontrolling interests. Total comprehensive income for the three months ended March 31, 2009 and 2008 was $114 million and $1,013 million, respectively.

The December 31, 2008 financial position data included herein is derived from the audited consolidated financial statements included in the 2008 Form 10-K but does not include all disclosures required by U.S. GAAP.

	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, underground mining and tunnel boring equipment and related parts. Also includes logistics services for other companies and the design, manufacture, remanufacture, maintenance and service 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 10 to 21,700 horsepower (8 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) 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.
	Our Machinery and Engines operations are highly integrated. Throughout the Notes, Machinery and Engines represents the aggregate total of these principal lines of business.

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New Accounting Pronouncements

SFAS 157 – In September 2006, the Financial Accounting Standards Board (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 delayed 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 include those initially measured at fair value in a business combination and goodwill tested annually for impairment. We adopted this new accounting standard on January 1, 2009. The adoption of FSP 157-2 did not have a material impact on our financial statements.

FSP 157-3 – In October 2008, the FASB issued FASB Staff Position on Statement 157, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies how SFAS 157 should be applied when valuing securities in markets that are not active by illustrating key considerations in determining fair value. It also reaffirms the notion of fair value as the exit price as of the measurement date. FSP 157-3 was effective upon issuance, which included periods for which financial statements have not yet been issued. We adopted this new accounting standard effective July 1, 2008. The adoption of FSP 157-3 did not have a material 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		(1,808	)		17			(1,791	)
Profit employed in the business		17,398			(33	)		17,365

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. We adopted this new accounting standard on January 1, 2008. We have not elected to measure any financial assets or financial liabilities at fair value which were not previously required to be measured at fair value. Therefore, the adoption of SFAS 159 did not have a material impact on our financial statements.

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SFAS 141R and 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. We adopted these new accounting standards on January 1, 2009. As required, SFAS 160 was adopted through retrospective application, and all prior period information has been adjusted accordingly. The adoption of SFAS 141R and SFAS 160 did not have a material impact on our financial statements.

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. We adopted this new accounting standard on January 1, 2009. The adoption of SFAS 161 did not have a material impact on our financial statements. See Note 4 for additional information.

SFAS 162 – In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (SFAS 162), “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS 162 was effective November 16, 2008. This Statement did not result in a change in our current practice.

SFAS 163 – In May 2008, the FASB issued Statement of Financial Accounting Standards No. 163 (SFAS 163), “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60.” SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. It also requires disclosure about (1) the risk-management activities used by an insurance enterprise to evaluate credit deterioration in its insured financial obligations and (2) the insurance enterprise’s surveillance or watch list. We adopted this new accounting standard on January 1, 2009. The adoption of SFAS 163 did not have a material impact on our financial statements.

FSP FAS 140-4 and FIN 46R-8 – In December 2008, the FASB issued FASB Staff Position on Statement 140 and FIN 46R, "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities" (FSP FAS 140-4 and FIN 46R-8). This FSP expands the disclosure requirements in SFAS 140 and FIN 46R by requiring additional information about companies’ involvement with variable interest entities (VIEs) and their continuing involvement with transferred financial assets. This new accounting standard was adopted for our financial statements ended December 31, 2008. The adoption of FSP FAS 140-4 and FIN 46R-8 did not have a material impact on our financial statements.

FSP FAS 132R-1 – In December 2008, the FASB issued FASB Staff Position on Statement 132R, "Employers’ Disclosures about Postretirement Benefit Plan Assets" (FSP FAS 132R-1). This FSP expands the disclosure set forth in SFAS 132R by adding required disclosures about (1) how investment allocation decisions are made by management, (2) major categories of plan assets, and (3) significant concentration of risk. Additionally, the FSP requires an employer to disclose information about the valuation of plan assets similar to that required under SFAS 157. We will adopt this new accounting standard for our financial statements ending December 31, 2009. We do not expect the adoption of FSP FAS 132R-1 will have a material impact on our financial statements.

FSP EITF 99-20-1 – In January 2009, the FASB issued FASB Staff Position on EITF Issue No. 99-20, "Amendments to the Impairment Guidance of EITF Issue No. 99-20" (FSP EITF 99-20-1). FSP EITF 99-20-1 aligns the impairment guidance in EITF Issue No. 99-20 with that in Statement of Financial Accounting Standards No. 115 (SFAS 115), “Accounting for Certain Investments in Debt and Equity Securities.” It changes how companies determine whether an other-than-temporary impairment exists for certain beneficial interests by allowing management to exercise more judgment. This new accounting standard was adopted for our financial statements ended December 31, 2008. The adoption of FSP EITF 99-20-1 did not have a material impact on our financial statements.

FSP FAS 107-1 and APB 28-1 – In April 2009, the FASB issued FASB Staff Position on FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" (FSP FAS 107-1 and APB 28-1). This FSP requires that the fair value disclosures required by SFAS 107 “Disclosures about Fair Value of Financial Instruments” be included for interim reporting periods. We will adopt this new accounting standard effective April 1, 2009. We do not expect the adoption of FSP FAS 107-1 and APB 28-1 will have a material impact on our financial statements.

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FSP FAS 115-2 and FAS 124-2 – In April 2009, the FASB issued FASB Staff Position on FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). This FSP amends the impairment guidance relating to certain debt securities and will require a company to assess the likelihood of selling the security prior to recovering its cost basis. Additionally, when a company meets the criteria for impairment, the impairment charges related to credit losses would be recognized in earnings, while non-credit losses would be reflected in other comprehensive income. We will adopt this new accounting standard effective April 1, 2009. We do not expect the adoption of FSP FAS 115-2 and FAS 124-2 will have a material impact on our financial statements.

FSP FAS 157-4 – In April 2009, the FASB issued FASB Staff Position on FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 provides guidance on determining when the trading volume and activity for an asset or liability has significantly decreased, which may indicate an inactive market, and on measuring the fair value of an asset or liability in inactive markets. We will adopt this new accounting standard effective April 1, 2009. We do not expect the adoption of FSP FAS 157-4 will have a material impact on our financial statements.

FSP FAS 141R-1 – In April 2009, the FASB issued FASB Staff Position on FAS 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (FSP FAS 141R-1). FSP FAS 141R-1 requires that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of the asset or liability can be determined during the measurement period. We adopted this new accounting standard on January 1, 2009. The adoption of FSP FAS 140R-1 did not 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-settled stock appreciation rights (SARs), restricted stock units (RSUs) and stock options. We recognized pretax stock-based compensation cost of $32 million and $37 million in the first quarter of 2009 and 2008, respectively.

The following table illustrates the type and fair market value of the stock-based compensation awards granted during the first quarter of 2009 and 2008, respectively:

	2009				2008
	# Granted		Fair Value Per Award		# Granted		Fair Value Per Award
SARs		6,260,647	$	7.10		4,476,095	$	22.32
RSUs		2,185,674		20.22		1,511,523		69.17
Stock options		562,580		7.10		410,506		22.32

The stock price on the date of grant was $22.17 and $73.20 for 2009 and 2008, respectively.

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, 2009 and 2008, respectively:

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	Grant Year
	2009		2008
Weighted-average dividend yield		3.07%		1.89%
Weighted-average volatility		36.02%		27.14%
Range of volatilities		35.75-61.02%		27.13-28.99%
Range of risk-free interest rates		0.17-2.99%		1.60-3.64%
Weighted-average expected lives		8 years		8 years

As of March 31, 2009, the total remaining unrecognized compensation cost related to nonvested stock-based compensation awards was $194 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 2.2 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.

All derivatives are recognized on the Consolidated Statement of Financial Position at their fair value. On the date the derivative contract is entered, we designate the derivative as (1) a hedge of the fair value of a recognized asset or liability ("fair value" hedge), (2) a hedge of a forecasted transaction or the variability of cash flow to be paid ("cash flow" hedge), or (3) an "undesignated" instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged liability that is attributable to the hedged risk, are recorded in current earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in Accumulated other comprehensive income (AOCI) in the Consolidated Statement of Financial Position until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings. Cash flow from designated derivative financial instruments are classified within the same category as the item being hedged on the Consolidated Statement of Cash Flow. Cash flow from undesignated derivative financial instruments are included in the investing category on the Consolidated Statement of Cash Flow.

We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Consolidated Statement of Financial Position and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

We also formally assess, both at the hedge's inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items. When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer likely to occur, we discontinue hedge accounting prospectively, in accordance with Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities."

We adopted SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities” as of January 1, 2009. See Note 2 for additional information.

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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 a 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 and the maturity extends beyond the current quarter-end. Designation is performed on a specific exposure basis to support hedge accounting. The remainder of Machinery and Engines foreign currency contracts are undesignated. We also designate as fair value hedges specific euro forward contracts used to hedge firm commitments.

As of March 31, 2009, $75 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.

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 derivatives 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. Designation as a hedge of the fair value of our fixed rate debt is performed to support hedge accounting.

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. We designate fixed-to-floating interest rate swaps as fair value hedges to protect debt against changes in fair value due to changes in the benchmark interest rate. We designate most floating-to-fixed interest rate swaps as cash flow hedges to protect against the variability of cash flows due to changes in the benchmark interest rate.

As of March 31, 2009, $59 million of deferred net losses, net of tax, 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 twelve months.

We have, at certain times, liquidated fixed-to-floating and floating-to-fixed swaps at both Machinery and Engines and Financial Products. The gains or losses associated with these swaps at the time of liquidation are amortized into earnings over the original term of the underlying hedged item.

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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 five-year horizon. All such commodity forward and option contracts are undesignated. There were no contracts outstanding for the three months ended March 31, 2009 or 2008.

The location and fair value of derivative instruments reported in the Statement of Financial Position are as follows:

(Millions of dollars)			March 31, 2009
			Statement of Financial Position Location	Asset (Liability) Fair Value
Designated derivatives
	Foreign exchange contracts
		Machinery and Engines	Receivables – trade and other	$	119
		Machinery and Engines	Long-term receivables – trade and other		133
		Machinery and Engines	Accrued expenses		(51	)
	Interest rate contracts
		Financial Products	Receivables – trade and other		2
		Financial Products	Long-term receivables – trade and other		239
		Financial Products	Accrued expenses		(106	)
				$	336

Undesignated derivatives
	Foreign exchange contracts
		Machinery and Engines	Receivables – trade and other	$	55
		Machinery and Engines	Long-term receivables – trade and other		62
		Machinery and Engines	Accrued expenses		(1	)
		Financial Products	Receivables – trade and other		60
		Financial Products	Accrued expenses		(81	)
	Interest rate contracts
		Machinery and Engines	Accrued expenses		(5	)
		Financial Products	Receivables – trade and other		5
		Financial Products	Long-term receivables – trade and other		5
		Financial Products	Accrued expenses		(13	)
				$	87

The effect of derivatives designated as hedging instruments on the Statement of Results of Operations is as follows:

Fair Value Hedges (Millions of dollars)
			Three Months Ended March 31, 2009
		Classification	Gains (Losses) on Derivative			Gains (Losses) on Borrowings
Interest rate contracts
	Financial Products	Other income (expense)	$	(60	)	$	79
			$	(60	)	$	79

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Cash Flow Hedges (Millions of dollars)
		Three Months Ended March 31, 2009
						Recognized in Earnings
		Classification	Recognized in AOCI (Effective Portion)			Classification of Gains (Losses)	Reclassified from AOCI (Effective Portion)			Recognized in Earnings (Ineffective Portion)

Foreign exchange contracts
	Machinery and Engines	AOCI	$	58		Other income (expense)	$	8		$	(6	)
Interest rate contracts
	Machinery and Engines	AOCI		(29	)	Other income (expense)		(1	)		—
	Financial Products	AOCI		(13	)	Interest expense of Financial Products		(20	)		1	1
			$	16			$	(13	)	$	(5	)

	1	The classification of the ineffective portion recognized in earnings is included in Other income (expense).

The effect of derivatives not designated as hedging instruments on the Statement of Results of Operations is as follows:

(Millions of dollars)
		Classification of Gains or (Losses)	Three Months Ended March 31, 2009
Foreign exchange contracts
	Machinery and Engines	Other income (expense)	$	21
	Financial Products	Other income (expense)		15
Interest rate contracts
	Machinery and Engines	Other income (expense)		(2	)
	Financial Products	Other income (expense)		(3	)
			$	31

Stock Repurchase Risk

Payments for stock repurchase derivatives are accounted for as a reduction in stockholders’ equity. 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 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 matured and was exercisable within one year after the call was established. If we exercised a call, we could 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).

During the three months ended March 31, 2009 and 2008, no shares were repurchased pursuant to calls exercised under this program. All outstanding calls under this program expired in 2008.

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

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(Millions of dollars)	March 31,		December 31,
	2009		2008
Raw materials	$	2,572	$	2,678
Work-in-process		1,174		1,508
Finished goods		3,981		4,316
Supplies		265		279
Total inventories	$	7,992	$	8,781

Investments in Unconsolidated Affiliated Companies

Our investments in affiliated companies accounted for by the equity method have historically consisted primarily of a 50 percent interest in Shin Caterpillar Mitsubishi Ltd. (SCM) located in Japan. On August 1, 2008, SCM redeemed half of Mitsubishi Heavy Industries Ltd.’s (MHI’s) shares in SCM. As a result, Caterpillar now owns 67 percent of the renamed entity, Caterpillar Japan Ltd. (Cat Japan) and consolidates its financial statements. 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, 2009 and December 31, 2008 financial position and equity investment amounts noted below do not include ASV or Cat Japan.

Combined financial information of the unconsolidated affiliated companies accounted for by the equity method (generally on a lag of 3 months or less) was as follows:

Results of Operations of unconsolidated affiliated companies:	Three Months Ended
(Millions of dollars)	March 31,
	2009		2008
Sales	$	123	$	1,088
Cost of sales		91		900
Gross profit	$	32	$	188

Profit (loss)	$	2	$	17

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

Financial Position of unconsolidated affiliated companies:		March 31,		December 31,
(Millions of dollars)		2009		2008
Assets:
	Current assets	$	197	$	209
	Property, plant and equipment – net		226		227
	Other assets		23		26
			446		462
Liabilities:
	Current liabilities		246		173
	Long-term debt due after one year		40		110
	Other liabilities		35		35
			321		318
Ownership		$	125	$	144

Caterpillar's investments in unconsolidated affiliated companies:
(Millions of dollars)