Edgar Filing: CATERPILLAR INC

CAT_10Q_9.30.2012

Table of Contents

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 September 30, 2012

[ ] 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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	o

Non-accelerated filer	o	Smaller reporting company	o

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

At September 30, 2012, 653,933,672 shares of common stock of the registrant were outstanding.

Table of Contents



Part I. Financial Information
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	92
Item 4.	Controls and Procedures	92

Part II. Other Information
Item 1.	Legal Proceedings	93
Item 1A.	Risk Factors	*
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	93
Item 3.	Defaults Upon Senior Securities	*
Item 4.	Mine Safety Disclosures	93
Item 5.	Other Information	*
Item 6.	Exhibits	94

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

Table of Contents

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 September 30,
	2012			2011
Sales and revenues:
Sales of Machinery and Power Systems	$	15,739		$	15,023
Revenues of Financial Products	706			693
Total sales and revenues	16,445			15,716

Operating costs:
Cost of goods sold	11,639			11,455
Selling, general and administrative expenses	1,471			1,360
Research and development expenses	634			584
Interest expense of Financial Products	197			211
Other operating (income) expenses	(92		)	347
Total operating costs	13,849			13,957

Operating profit	2,596			1,759

Interest expense excluding Financial Products	129			112
Other income (expense)	(17		)	(13		)

Consolidated profit before taxes	2,450			1,634

Provision for income taxes	753			474
Profit of consolidated companies	1,697			1,160

Equity in profit (loss) of unconsolidated affiliated companies	5			(6		)

Profit of consolidated and affiliated companies	1,702			1,154

Less: Profit attributable to noncontrolling interests	3			13

Profit ¹	$	1,699		$	1,141

Profit per common share	$	2.60		$	1.76

Profit per common share — diluted ²	$	2.54		$	1.71

Weighted-average common shares outstanding (millions)
– Basic	653.6			646.6
– Diluted²	668.7			666.0

Cash dividends declared per common share	$	—		$	—

¹ Profit attributable to common stockholders.

² Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.

See accompanying notes to Consolidated Financial Statements.

Table of Contents

Caterpillar Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

(Dollars in millions)



	Three Months Ended September 30,
	2012			2011

Profit of consolidated and affiliated companies	$	1,702		$	1,154
Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax (expense)/benefit of: 2012 - $11; 2011 - ($69)	193			(534		)

Pension and other postretirement benefits:
Current year actuarial gain (loss), net of tax (expense)/benefit of: 2012 - $91; 2011 - $0	(155		)	—
Amortization of actuarial (gain) loss, net of tax (expense)/benefit of: 2012 - ($61); 2011 - ($46)	114			92
Current year prior service credit (cost), net of tax (expense)/benefit of: 2012 - ($3); 2011 - $0	4			—
Amortization of prior service (credit) cost, net of tax (expense)/benefit of: 2012 - $4; 2011 - $3	(8		)	(5		)
Amortization of transition (asset) obligation, net of tax (expense)/benefit of: 2012 - $0; 2011 - ($1)	1			—

Derivative financial instruments:
Gains (losses) deferred, net of tax (expense)/benefit of: 2012 - $5; 2011 - ($21)	(7		)	37
(Gains) losses reclassified to earnings, net of tax (expense)/benefit of: 2012 - ($5); 2011 - $14	9			(25		)

Available-for-sale securities:
Gains (losses) deferred, net of tax (expense)/benefit of: 2012 - ($8); 2011 - $13	12			(20		)
(Gains) losses reclassifed to earnings, net of tax (expense)/benefit of: 2012 - $0; 2011 - $0	(1		)	(1		)

Total other comprehensive income (loss), net of tax	162			(456		)
Comprehensive income	1,864			698
Less: comprehensive income attributable to the noncontrolling interests	(3		)	(32		)
Comprehensive income attributable to the company	$	1,861		$	666

See accompanying notes to Consolidated Financial Statements.

Table of Contents

Caterpillar Inc.

Consolidated Statement of Results of Operations

(Unaudited)

(Dollars in millions except per share data)



	Nine Months Ended September 30,
	2012		2011
Sales and revenues:
Sales of Machinery and Power Systems	$	47,711	$	40,835
Revenues of Financial Products	2,089		2,060
Total sales and revenues	49,800		42,895

Operating costs:
Cost of goods sold	35,156		30,815
Selling, general and administrative expenses	4,328		3,716
Research and development expenses	1,853		1,693
Interest expense of Financial Products	599		623
Other operating (income) expenses	329		855
Total operating costs	42,265		37,702

Operating profit	7,535		5,193

Interest expense excluding Financial Products	352		289
Other income (expense)	141		(157		)

Consolidated profit before taxes	7,324		4,747

Provision for income taxes	2,314		1,304
Profit of consolidated companies	5,010		3,443

Equity in profit (loss) of unconsolidated affiliated companies	12		(24		)

Profit of consolidated and affiliated companies	5,022		3,419

Less: Profit attributable to noncontrolling interests	38		38

Profit ¹	$	4,984	$	3,381

Profit per common share	$	7.64	$	5.25

Profit per common share — diluted ²	$	7.44	$	5.08

Weighted-average common shares outstanding (millions)
– Basic	652.0		644.3
– Diluted²	669.7		666.1

Cash dividends declared per common share	$	0.98	$	0.90

¹ Profit attributable to common stockholders.

² Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.

See accompanying notes to Consolidated Financial Statements.

Table of Contents

Caterpillar Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

(Dollars in millions)



	Nine Months Ended September 30,
	2012			2011

Profit of consolidated and affiliated companies	$	5,022		$	3,419
Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax (expense)/benefit of: 2012 - ($5); 2011 - $15	35			(212		)

Pension and other postretirement benefits:
Current year actuarial gain (loss), net of tax (expense)/benefit of: 2012 - $83; 2011 - $0	(140		)	—
Amortization of actuarial (gain) loss, net of tax (expense)/benefit of: 2012 - ($181); 2011 - ($158)	340			299
Current year prior service credit (cost), net of tax (expense)/benefit of: 2012 - ($1); 2011 - $0	1			—
Amortization of prior service (credit) cost, net of tax (expense)/benefit of: 2012 - $12; 2011 - $9	(23		)	(15		)
Amortization of transition (asset) obligation, net of tax (expense)/benefit of: 2012 - $0; 2011 - ($1)	2			1

Derivative financial instruments:
Gains (losses) deferred, net of tax (expense)/benefit of: 2012 - $21; 2011 - ($15)	(35		)	24
(Gains) losses reclassified to earnings, net of tax (expense)/benefit of: 2012 - ($6); 2011 - $14	10			(21		)

Available-for-sale securities:
Gains (losses) deferred, net of tax (expense)/benefit of: 2012 - ($13); 2011 - $8	28			(11		)
(Gains) losses reclassifed to earnings, net of tax (expense)/benefit of: 2012 - $0; 2011 - $0	(3		)	(2		)

Total other comprehensive income (loss), net of tax	215			63
Comprehensive income	5,237			3,482
Less: comprehensive income attributable to the noncontrolling interests	(20		)	(69		)
Comprehensive income attributable to the company	$	5,217		$	3,413

See accompanying notes to Consolidated Financial Statements.

Table of Contents

Caterpillar Inc.

Consolidated Statement of Financial Position

(Unaudited)

(Dollars in millions)



	September 30, 2012			December 31, 2011
Assets
Current assets:
Cash and short-term investments	$	5,689		$	3,057
Receivables – trade and other	9,814			10,285
Receivables – finance	8,865			7,668
Deferred and refundable income taxes	1,633			1,580
Prepaid expenses and other current assets	1,088			994
Inventories	17,550			14,544
Total current assets	44,639			38,128
Property, plant and equipment – net	15,509			14,395
Long-term receivables – trade and other	1,422			1,130
Long-term receivables – finance	13,156			11,948
Investments in unconsolidated affiliated companies	199			133
Noncurrent deferred and refundable income taxes	1,873			2,157
Intangible assets	4,166			4,368
Goodwill	7,372			7,080
Other assets	2,205			2,107
Total assets	$	90,541		$	81,446

Liabilities
Current liabilities:
Short-term borrowings:
Machinery and Power Systems	$	607		$	93
Financial Products	4,460			3,895
Accounts payable	7,978			8,161
Accrued expenses	3,568			3,386
Accrued wages, salaries and employee benefits	1,764			2,410
Customer advances	3,035			2,691
Dividends payable	—			298
Other current liabilities	2,075			1,967
Long-term debt due within one year:
Machinery and Power Systems	1,266			558
Financial Products	6,993			5,102
Total current liabilities	31,746			28,561
Long-term debt due after one year:
Machinery and Power Systems	9,010			8,415
Financial Products	17,516			16,529
Liability for postemployment benefits	10,708			10,956
Other liabilities	3,625			3,583
Total liabilities	72,605			68,044
Commitments and contingencies (Notes 10 and 12)
Redeemable noncontrolling interest	—			473
Stockholders’ equity
Common stock of $1.00 par value:
Authorized shares: 2,000,000,000 Issued shares: (9/30/12 and 12/31/11 – 814,894,624) at paid-in amount	4,449			4,273
Treasury stock (9/30/12 – 160,960,952 shares; 12/31/11 – 167,361,280 shares) at cost	(10,118		)	(10,281		)
Profit employed in the business	29,541			25,219
Accumulated other comprehensive income (loss)	(5,988		)	(6,328		)
Noncontrolling interests	52			46
Total stockholders’ equity	17,936			12,929
Total liabilities, redeemable noncontrolling interest and stockholders’ equity	$	90,541		$	81,446

See accompanying notes to Consolidated Financial Statements.

Table of Contents

Caterpillar Inc.

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

(Dollars in millions)



	Common stock			Treasury stock			Profit employed in the business			Accumulated other comprehensive income (loss)			Noncontrolling interests			Total
Nine Months Ended September 30, 2011
Balance at December 31, 2010	$	3,888		$	(10,397	)	$	21,384		$	(4,051	)	$	40		$	10,864
Profit of consolidated and affiliated companies	—			—			3,381			—			38			3,419
Foreign currency translation, net of tax	—			—			—			(244		)	32			(212		)
Pension and other postretirement benefits, net of tax	—			—			—			286			(1		)	285
Derivative financial instruments, net of tax	—			—			—			3			—			3
Available-for-sale securities, net of tax	—			—			—			(13		)	—			(13		)
Change in ownership from noncontrolling interests	—			—			—			—			4			4
Dividends declared	—			—			(581		)	—			—			(581		)
Distribution to noncontrolling interests	—			—			—			—			(3		)	(3		)
Common shares issued from treasury stock for stock-based compensation: 7,797,655	12			98			—			—			—			110
Stock-based compensation expense	163			—			—			—			—			163
Net excess tax benefits from stock-based compensation	166			—			—			—			—			166
Cat Japan share redemption¹	—			—			67			—			(59		)	8
Balance at September 30, 2011	$	4,229		$	(10,299	)	$	24,251		$	(4,019	)	$	51		$	14,213

Nine Months Ended September 30, 2012
Balance at December 31, 2011	$	4,273		$	(10,281	)	$	25,219		$	(6,328	)	$	46		$	12,929
Profit of consolidated and affiliated companies	—			—			4,984			—			38			5,022
Foreign currency translation, net of tax	—			—			—			59			(24		)	35
Pension and other postretirement benefits, net of tax	—			—			—			175			5			180
Derivative financial instruments, net of tax	—			—			—			(25		)	—			(25		)
Available-for-sale securities, net of tax	—			—			—			24			1			25
Change in ownership from noncontrolling interests	—			—			—			—			1			1
Dividends declared	—			—			(639		)	—			—			(639		)
Distribution to noncontrolling interests	—			—			—			—			(5		)	(5		)
Common shares issued from treasury stock for stock-based compensation: 6,400,328	(122		)	163			—			—			—			41
Stock-based compensation expense	208			—			—			—			—			208
Net excess tax benefits from stock-based compensation	164			—			—			—			—			164
Cat Japan share redemption¹	(74		)	—			(23		)	107			(10		)	—
Balance at September 30, 2012	$	4,449		$	(10,118	)	$	29,541		$	(5,988	)	$	52		$	17,936

¹See Notes 1 and 16 regarding the Cat Japan share redemption.

See accompanying notes to Consolidated Financial Statements.

Table of Contents

Caterpillar Inc.

Consolidated Statement of Cash Flow

(Unaudited)

(Millions of dollars)



	Nine Months Ended September 30,
	2012			2011
Cash flow from operating activities:
Profit of consolidated and affiliated companies	$	5,022		$	3,419
Adjustments for non-cash items:
Depreciation and amortization	2,070			1,832
Other	(267		)	558
Changes in assets and liabilities, net of acquisitions and divestitures:
Receivables – trade and other	136			(254		)
Inventories	(3,118		)	(2,716		)
Accounts payable	(334		)	1,308
Accrued expenses	76			134
Accrued wages, salaries and employee benefits	(643		)	275
Customer advances	306			333
Other assets – net	(20		)	(74		)
Other liabilities – net	34			700
Net cash provided by (used for) operating activities	3,262			5,515

Cash flow from investing activities:
Capital expenditures – excluding equipment leased to others	(2,270		)	(1,515		)
Expenditures for equipment leased to others	(1,256		)	(984		)
Proceeds from disposals of leased assets and property, plant and equipment	840			922
Additions to finance receivables	(8,835		)	(7,091		)
Collections of finance receivables	6,567			6,503
Proceeds from sale of finance receivables	109			106
Investments and acquisitions (net of cash acquired)	(542		)	(7,413		)
Proceeds from sale of businesses and investments (net of cash sold)	1,009			21
Proceeds from sale of available-for-sale securities	243			180
Investments in available-for-sale securities	(299		)	(216		)
Other – net	82			37
Net cash provided by (used for) investing activities	(4,352		)	(9,450		)

Cash flow from financing activities:
Dividends paid	(937		)	(862		)
Distribution to noncontrolling interests	(5		)	(3		)
Common stock issued, including treasury shares reissued	41			110
Excess tax benefit from stock-based compensation	165			169
Acquisitions of redeemable noncontrolling interests	(444		)	—
Proceeds from debt issued (original maturities greater than three months):
Machinery and Power Systems	2,015			4,544
Financial Products	9,617			8,703
Payments on debt (original maturities greater than three months):
Machinery and Power Systems	(485		)	(2,203		)
Financial Products	(6,283		)	(6,080		)
Short-term borrowings – net (original maturities three months or less)	163			(766		)
Net cash provided by (used for) financing activities	3,847			3,612
Effect of exchange rate changes on cash	(125		)	(40		)
Increase (decrease) in cash and short-term investments	2,632			(363		)
Cash and short-term investments at beginning of period	3,057			3,592
Cash and short-term investments at end of period	$	5,689		$	3,229

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.

Non-cash activities: In 2012, $1,325 million of debentures with varying interest rates and maturity dates were exchanged for $1,722 million of 3.803% debentures due in 2042 and $179 million of cash. The $179 million of cash paid is included in Other liabilities – net in the operating activities section of the Consolidated Statement of Cash Flow.

See accompanying notes to Consolidated Financial Statements.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. 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 and nine month periods ended September 30, 2012 and 2011, (b) the consolidated comprehensive income for the three and nine month periods ended September 30, 2012 and 2011, (c) the consolidated financial position at September 30, 2012 and December 31, 2011, (d) the consolidated changes in stockholders’ equity for the nine month periods ended September 30, 2012 and 2011, and (e) the consolidated cash flow for the nine month periods ended September 30, 2012 and 2011. 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. 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, 2011 (2011 Form 10-K).

The December 31, 2011 financial position data included herein is derived from the audited consolidated financial statements included in the 2011 Form 10-K but does not include all disclosures required by U.S. GAAP.

B. Nature of Operations

Information in our financial statements and related commentary are presented in the following categories:

Machinery and Power Systems – Represents the aggregate total of Construction Industries, Resource Industries, Power Systems, and All Other segments and related corporate items and eliminations.

Financial Products – Primarily includes the company’s Financial Products Segment. This category includes Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings Inc. (Cat Insurance) and their respective subsidiaries.

C. Accumulated Other Comprehensive Income (Loss)

Comprehensive income and its components are presented in the Consolidated Statement of Comprehensive Income. Accumulated other comprehensive income (loss), net of tax, included in the Consolidated Statement of Changes in Stockholders’ Equity, consisted of the following:



(Millions of dollars)	September 30, 2012				September 30, 2011
Foreign currency translation	$	432			$	307
Pension and other postretirement benefits	(6,454		)		(4,409		)
Derivative financial instruments	(35		)		48
Available-for-sale securities	69				35
Total accumulated other comprehensive income (loss)	$	(5,988	)	¹	$	(4,019	)

In conjunction with the Cat Japan share redemption, to reflect the increase in our ownership interest in Cat Japan from 67 percent to 100 percent, $107 million was reclassified to Accumulated other comprehensive income (loss) from other components of stockholders' equity and was not included in Comprehensive income during the second quarter of 2012. The amount was comprised of foreign currency translation of $167 million, pension and other postretirement benefits of $(61) million and available-for-sale securities of $1 million.

2. New Accounting Guidance

Disclosures about the credit quality of financing receivables and the allowance for credit losses – In July 2010, the Financial Accounting Standards Board (FASB) issued accounting guidance on disclosures about the credit quality of

Table of Contents

financing receivables and the allowance for credit losses. The guidance expands disclosures for the allowance for credit losses and financing receivables by requiring entities to disclose information at disaggregated levels. It also requires disclosure of credit quality indicators, past due information and modifications of financing receivables. Also, in April 2011, the FASB issued guidance clarifying when a restructuring of a receivable should be considered a troubled debt restructuring by providing additional guidance for determining whether the creditor has granted a concession and whether the debtor is experiencing financial difficulties. For end of period balances, the new disclosures were effective December 31, 2010 and did not have a material impact on our financial statements. For activity during a reporting period, the disclosures were effective January 1, 2011 and did not have a material impact on our financial statements. The disclosures related to modifications of financing receivables, as well as the guidance clarifying when a restructured receivable should be considered a troubled debt restructuring were effective July 1, 2011 and did not have a material impact on our financial statements. See Note 15 for additional information.

Presentation of comprehensive income – In June 2011, the FASB issued accounting guidance on the presentation of comprehensive income. The guidance provides two options for presenting net income and other comprehensive income. The total of comprehensive income, the components of net income, and the components of other comprehensive income may be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. We elected to present two separate statements. This guidance was effective January 1, 2012.

Goodwill impairment testing – In September 2011, the FASB issued accounting guidance on the testing of goodwill for impairment. The guidance allows entities testing goodwill for impairment the option of performing a qualitative assessment to determine the likelihood of goodwill impairment and whether it is necessary to perform the two-step impairment test currently required. This guidance was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted. We elected to early adopt this guidance for the year ended December 31, 2011 and the guidance did not have a material impact on our financial statements. See Note 7 for additional information.

Disclosures about offsetting assets and liabilities – In December 2011, the FASB issued accounting guidance on disclosures about offsetting assets and liabilities. The guidance requires entities to disclose both gross and net information about instruments and transactions that are offset in the statement of financial position, as well as instruments and transactions that are subject to an enforceable master netting arrangement or similar agreement. This guidance is effective January 1, 2013, with retrospective application required. We are currently reviewing the impact of this guidance on our financial statements and expect to complete this evaluation in 2012.

Indefinite-lived intangible assets impairment testing – In July 2012, the FASB issued accounting guidance on the testing of indefinite-lived intangible assets for impairment. The guidance allows entities to first perform a qualitative assessment to determine the likelihood of an impairment for an indefinite-lived intangible asset and whether it is necessary to perform the quantitative impairment assessment currently required. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. We do not expect the adoption to have a material impact on our financial statements.

3. Stock-Based Compensation

Accounting for stock-based compensation 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, restricted stock units (RSUs) and stock-settled stock appreciation rights (SARs). We recognized pretax stock-based compensation cost in the amount of $69 million and $204 million for the three and nine months ended September 30, 2012, respectively; and $52 million and $163 million for the three and nine months ended September 30, 2011, respectively.

The following table illustrates the type and fair value of the stock-based compensation awards granted during the nine month periods ended September 30, 2012 and 2011, respectively:

Table of Contents



	2012			2011
	# Granted	Fair Value Per Award		# Granted	Fair Value Per Award
Stock options	3,224,203	$	39.20	237,906	$	36.73
RSUs	1,429,939	$	104.61	1,082,032	$	97.51
SARs	—	$	—	2,722,689	$	36.73

The stock price on the date of grant was $110.09 and $102.13 for 2012 and 2011, respectively.

The following table provides the assumptions used in determining the fair value of the stock-based awards for the nine month periods ended September 30, 2012 and 2011, respectively:



	Grant Year
	2012	2011
Weighted-average dividend yield	2.16%	2.22%
Weighted-average volatility	35.0%	32.7%
Range of volatilities	33.3-40.4%	20.9-45.4%
Range of risk-free interest rates	0.17-2.00%	0.25-3.51%
Weighted-average expected lives	7 years	8 years

As of September 30, 2012, the total remaining unrecognized compensation cost related to nonvested stock-based compensation awards was $218 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 2.0 years.

4. Derivative Financial Instruments and Risk Management

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, commodity forward and option contracts, and stock repurchase 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 into, 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 recognized asset or 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 (loss) (AOCI), to the extent effective, on 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 is 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

Table of Contents

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 probable, we discontinue hedge accounting prospectively, in accordance with the derecognition criteria for hedge accounting.

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 currencies, thereby creating exposure to movements in exchange rates.

Our Machinery and Power Systems 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, Indian rupee, Japanese yen, Mexican peso, Singapore 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 Power Systems foreign currency contracts are undesignated, including any hedges designed to protect our competitive exposure.

As of September 30, 2012, $9 million of deferred net losses, net of tax, included in equity (AOCI 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.

Our Machinery and Power Systems 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 has 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 ongoing 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 matched 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.

Table of Contents

As of September 30, 2012, $3 million of deferred net losses, net of tax, included in equity (AOCI 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. The actual amount recorded in Interest expense of Financial Products will vary based on interest rates at the time the hedged transactions impact earnings.

We have, at certain times, liquidated fixed-to-floating and floating-to-fixed interest rate swaps at both Machinery and Power Systems 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 previously designated hedged item.

In anticipation of issuing debt for the planned acquisition of Bucyrus International, Inc., we entered into interest rate swaps to manage our exposure to interest rate changes. For the nine months ended September 30, 2011, we recognized a net loss of $149 million, included in Other income (expense) in the Consolidated Statement of Results of Operations. The contracts were liquidated in conjunction with the debt issuance in May 2011, therefore, there were no gains or losses for the three months ended September 30, 2011. These contracts were not designated as hedging instruments, and therefore, did not receive hedge accounting treatment.

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 Power Systems operations purchase base and precious metals embedded in the components we purchase from suppliers. Our suppliers pass on a share of the price changes in the commodity portion of the component cost. In addition, we are subject to price changes on energy products such as natural gas and diesel fuel 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.

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

Table of Contents



(Millions of dollars)
	Consolidated Statement of Financial	Asset (Liability) Fair Value
	Position Location	September 30, 2012			December 31, 2011
Designated derivatives
Foreign exchange contracts
Machinery and Power Systems	Receivables – trade and other	$	48		$	54
Machinery and Power Systems	Long-term receivables – trade and other	1			19
Machinery and Power Systems	Accrued expenses	(63		)	(73		)
Machinery and Power Systems	Other liabilities	(10		)	(10		)
Interest rate contracts
Financial Products	Receivables – trade and other	28			15
Financial Products	Long-term receivables – trade and other	224			233
Financial Products	Accrued expenses	(11		)	(6		)
		$	217		$	232
Undesignated derivatives
Foreign exchange contracts
Machinery and Power Systems	Receivables – trade and other	$	14		$	27
Machinery and Power Systems	Accrued expenses	(58		)	(12		)
Machinery and Power Systems	Other liabilities	(18		)	(85		)
Financial Products	Receivables – trade and other	9			7
Financial Products	Accrued expenses	(7		)	(16		)
Interest rate contracts
Financial Products	Accrued expenses	(2		)	(1		)
Commodity contracts
Machinery and Power Systems	Receivables – trade and other	2			2
Machinery and Power Systems	Accrued expenses	(1		)	(9		)
		$	(61	)	$	(87	)

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



Fair Value Hedges (Millions of dollars)
		Three Months Ended September 30, 2012					Nine Months Ended September 30, 2012
	Classification	Gains (Losses) on Derivatives		Gains (Losses) on Borrowings			Gains (Losses) on Derivatives		Gains (Losses) on Borrowings
Interest rate contracts
Financial Products	Other income (expense)	$	7	$	(3	)	$	4	$	7
		$	7	$	(3	)	$	4	$	7



		Three Months Ended September 30, 2011					Nine Months Ended September 30, 2011
	Classification	Gains (Losses) on Derivatives		Gains (Losses) on Borrowings			Gains (Losses) on Derivatives			Gains (Losses) on Borrowings
Interest rate contracts
Machinery and Power Systems	Other income (expense)	$	—	$	—		$	(1	)	$	1
Financial Products	Other income (expense)	70		(77		)	59			(65		)
		$	70	$	(77	)	$	58		$	(64	)

Table of Contents



Cash Flow Hedges (Millions of dollars)
	Three Months Ended September 30, 2012
				Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)			Classification of Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$	(6	)	Other income (expense)	$	(14	)	$	—
Interest rate contracts	—
Machinery and Power Systems	—			Other income (expense)	1			—
Financial Products	(6		)	Interest expense of Financial Products	(1		)	—
	$	(12	)		$	(14	)	$	—



	Three Months Ended September 30, 2011
				Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)			Classification of Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$	62		Other income (expense)	$	43		$	—
Interest rate contracts
Machinery and Power Systems	—			Other income (expense)	(1		)	—
Financial Products	(4		)	Interest expense of Financial Products	(3		)	(2		)	¹
	$	58			$	39		$	(2	)



	Nine Months Ended September 30, 2012
				Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)			Classification of Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$	(48	)	Other income (expense)	$	(13	)	$	—
Interest rate contracts
Machinery and Power Systems	—			Other income (expense)	—			—
Financial Products	(8		)	Interest expense of Financial Products	(3		)	(1		)	¹
	$	(56	)		$	(16	)	$	(1	)



	Nine Months Ended September 30, 2011
				Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)			Classification of Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$	44		Other income (expense)	$	52		$	—
Interest rate contracts
Machinery and Power Systems	—			Other income (expense)	(2		)	—
Financial Products	(5		)	Interest expense of Financial Products	(15		)	(1		)	¹
	$	39			$	35		$	(1	)

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

Table of Contents

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



(Millions of dollars)
	Classification of Gains (Losses)	Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
Foreign exchange contracts
Machinery and Power Systems	Other income (expense)	$	(9	)	$	21
Financial Products	Other income (expense)	5			7
Commodity contracts
Machinery and Power Systems	Other income (expense)	3			3
		$	(1	)	$	31




	Classification of Gains (Losses)	Three Months Ended September 30, 2011			Nine Months Ended September 30, 2011
Foreign exchange contracts
Machinery and Power Systems	Other income (expense)	$	(1	)	$	46
Financial Products	Other income (expense)	(10		)	(12		)
Interest rate contracts
Machinery and Power Systems	Other income (expense)	—			(149		)
Commodity contracts
Machinery and Power Systems	Other income (expense)	(23		)	(21		)
		$	(34	)	$	(136	)

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. In December 2011, the Board of Directors extended the $7.5 billion stock repurchase program through December 31, 2015. 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. There were no stock repurchase derivatives outstanding for the three and nine months ended September 30, 2012 or 2011.

5. Inventories

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



(Millions of dollars)	September 30, 2012		December 31, 2011
Raw materials	$	4,018	$	3,766
Work-in-process	3,488		2,959
Finished goods	9,775		7,562
Supplies	269		257
Total inventories	$	17,550	$	14,544

6. Investments in Unconsolidated Affiliated Companies

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:

Table of Contents



Results of Operations of unconsolidated affiliated companies: (Millions of dollars)
	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
Sales	$	253	$	302		$	625	$	741
Cost of sales	206		257			492		616
Gross profit	$	47	$	45		$	133	$	125

Profit (loss)	$	17	$	(12	)	$	39	$	(46	)



Financial Position of unconsolidated affiliated companies: (Millions of dollars)	September 30, 2012		December 31, 2011
Assets:
Current assets	$	569	$	345
Property, plant and equipment – net	523		200
Other assets	558		9
	1,650		554
Liabilities:
Current liabilities	342		220
Long-term debt due after one year	724		72
Other liabilities	182		17
	1,248		309
Equity	$	402	$	245



Caterpillar’s investments in unconsolidated affiliated companies: (Millions of dollars)	September 30, 2012		December 31, 2011
Investments in equity method companies	$	183	$	111
Plus: Investments in cost method companies	16		22
Total investments in unconsolidated affiliated companies	$	199	$	133

The increase in financial position and equity investments amounts noted above primarily relate to the sale of a majority interest in Caterpillar's third party logistics business, which occurred on July 31, 2012. Under the terms of the agreement, Caterpillar retained a 35 percent equity interest. See Note 19 for additional details.

Table of Contents

7. Intangible Assets and Goodwill

A. Intangible assets

Intangible assets are comprised of the following:



		September 30, 2012
(Millions of dollars)	Weighted Amortizable Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	15	$	2,827	$	(330	)	$	2,497
Intellectual property	12	1,744		(303		)	1,441
Other	10	300		(90		)	210
Total finite-lived intangible assets	14	4,871		(723		)	4,148
Indefinite-lived intangible assets - In-process research & development		18		—			18
Total intangible assets		$	4,889	$	(723	)	$	4,166



		December 31, 2011
	Weighted Amortizable Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	15	$	2,811	$	(213	)	$	2,598
Intellectual property	11	1,794		(244		)	1,550
Other	11	299		(97		)	202
Total finite-lived intangible assets	13	4,904		(554		)	4,350
Indefinite-lived intangible assets - In-process research & development		18		—			18
Total intangible assets		$	4,922	$	(554	)	$	4,368

During the second quarter of 2012, we acquired finite-lived intangible assets of $194 million due to the purchase of ERA Mining Machinery Limited. During the first quarter of 2012, we acquired finite-lived intangible assets of $8 million due to the purchase of Cat Tohoku. See Note 18 for details on these business combinations.

Customer relationship intangibles of $100 million, net of accumulated amortization of $4 million, were reclassified from Intangible assets to held for sale during 2012, primarily related to the divestiture of portions of the Bucyrus distribution business, and are not included in the September 30, 2012 balances in the table above. See Note 19 for additional information on assets held for sale.

Customer relationship intangibles of $51 million, net of accumulated amortization of $29 million, from the All Other segment were impaired during the second quarter of 2012. Fair value of the intangibles was determined using an income approach based on the present value of discounted cash flows. The impairment of $22 million was recognized in Other operating (income) expenses on the Consolidated Statement of Results of Operations and included in the All Other segment.

Amortization expense for the three and nine months ended September 30, 2012 was $101 million and $294 million, respectively. Amortization expense for the three and nine months ended September 30, 2011 was $91 million and $135 million, respectively. Amortization expense related to intangible assets is expected to be:



(Millions of dollars)
2012	2013	2014	2015	2016	Thereafter
$390	$383	$377	$372	$364	$2,574

B. Goodwill

During 2012, we recorded goodwill of $476 million related to the acquisition of ERA Mining Machinery Limited and

Table of Contents

$19 million related to the acquisition of Cat Tohoku. See Note 18 for details on these business combinations.

Goodwill of $152 million was reclassified to held for sale during 2012, primarily related to the divestiture of portions of the Bucyrus distribution business, and is not included in the September 30, 2012 balance in the table below. See Note 19 for additional information on assets held for sale.

We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred. We perform our annual goodwill impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. Goodwill is reviewed for impairment utilizing a qualitative assessment or a two-step process. We have an option to make a qualitative assessment of a reporting unit's goodwill for impairment. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the two-step process, the first step requires us to compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, there is an indication that an impairment may exist and the second step is required. In step two, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment loss. No goodwill for reporting units was impaired during the three and nine months ended September 30, 2012 or 2011. See Note 19 for goodwill impairments relating to assets held for sale.

The changes in the carrying amount of the goodwill by reportable segment for the nine months ended September 30, 2012 were as follows:



(Millions of dollars)
	Construction Industries			Resource Industries			Power Systems			Other		Consolidated Total
Balance at December 31, 2011	$	378		$	4,099		$	2,486		$	117	$	7,080
Business acquisitions ¹	19			476			—			—		495
Held for sale and business divestitures ²	—			(152		)	—			—		(152		)
Other adjustments ³	(3		)	(28		)	(20		)	—		(51		)
Balance at September 30, 2012	$	394		$	4,395		$	2,466		$	117	$	7,372

¹ See Note 18 for additional details.

² See Note 19 for additional details.

³ Other adjustments are comprised primarily of foreign currency translation.

8. Available-For-Sale Securities

We have investments in certain debt and equity securities, primarily at Cat Insurance, that have been classified as available-for-sale and recorded at fair value based upon quoted market prices. These investments are primarily 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.

Table of Contents



	September 30, 2012							December 31, 2011
(Millions of dollars)	Cost Basis		Unrealized Pretax Net Gains (Losses)			Fair Value		Cost Basis		Unrealized Pretax Net Gains (Losses)			Fair Value
Government debt
U.S. treasury bonds	$	10	$	—		$	10	$	10	$	—		$	10
Other U.S. and non-U.S. government bonds	116		2			118		90		2			92

Corporate bonds
Corporate bonds	630		42			672		542		30			572
Asset-backed securities	94		—			94		112		(1		)	111

Mortgage-backed debt securities
U.S. governmental agency	288		10			298		297		13			310
Residential	28		(1		)	27		33		(3		)	30
Commercial	123		8			131		142		3			145

Equity securities
Large capitalization value	140		37			177		127		21			148
Smaller company growth	22		12			34		22		7			29
Total	$	1,451	$	110		$	1,561	$	1,375	$	72		$	1,447

During the three months ended September 30, 2012, there were no charges for other-than-temporary declines in the market value of securities. During the nine months ended September 30, 2012, charges for other-than-temporary declines in the market value of securities were $1 million. During the three and nine months ended September 30, 2011, charges for other-than-temporary declines in the market value of securities were $4 million. These charges were accounted for as realized losses and were included in Other income (expense) in the Consolidated Statement of Results of Operations. The cost basis of the impacted securities was adjusted to reflect these charges.

Table of Contents



Investments in an unrealized loss position that are not other-than-temporarily impaired:

	September 30, 2012
	Less than 12 months¹				12 months or more ¹				Total
(Millions of dollars)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Corporate bonds
Asset-backed securities	$	—	$	—	$	20	$	3	$	20	$	3
Mortgage-backed debt securities
U.S. governmental agency	74		1		4		—		78		1
Residential	—		—		15