Edgar Filing: CATERPILLAR INC

CAT_10Q_3.31.2013

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 March 31, 2013

[ ] 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 March 31, 2013, 657,484,946 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	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69
Item 4.	Controls and Procedures	69

Part II. Other Information
Item 1.	Legal Proceedings	70
Item 1A.	Risk Factors	*
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3.	Defaults Upon Senior Securities	*
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	*
Item 6.	Exhibits	71

* 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 March 31,
	2013		2012
Sales and revenues:
Sales of Machinery and Power Systems	$	12,484	$	15,288
Revenues of Financial Products	726		693
Total sales and revenues	13,210		15,981

Operating costs:
Cost of goods sold	9,639		11,237
Selling, general and administrative expenses	1,390		1,340
Research and development expenses	562		587
Interest expense of Financial Products	189		204
Other operating (income) expenses	212		290
Total operating costs	11,992		13,658

Operating profit	1,218		2,323

Interest expense excluding Financial Products	120		113
Other income (expense)	29		88

Consolidated profit before taxes	1,127		2,298

Provision (benefit) for income taxes	246		689
Profit of consolidated companies	881		1,609

Equity in profit (loss) of unconsolidated affiliated companies	1		2

Profit of consolidated and affiliated companies	882		1,611

Less: Profit (loss) attributable to noncontrolling interests	2		25

Profit ¹	$	880	$	1,586

Profit per common share	$	1.34	$	2.44

Profit per common share – diluted ²	$	1.31	$	2.37

Weighted-average common shares outstanding (millions)
– Basic	656.2		650.0
– Diluted²	671.6		670.2

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 March 31,
	2013			2012

Profit of consolidated and affiliated companies	$	882		$	1,611
Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax (provision)/benefit of: 2013 - $(21); 2012 - $17	(366		)	181

Pension and other postretirement benefits:
Current year actuarial gain (loss), net of tax (provision)/benefit of: 2013 - $(10); 2012 - $(6)	15			10
Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2013 - $(67); 2012 - $(60)	129			113
Current year prior service credit (cost), net of tax (provision)/benefit of: 2013 - $0; 2012 - $2	—			(3		)
Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2013 - $5; 2012 - $4	(9		)	(8		)
Amortization of transition (asset) obligation, net of tax (provision)/benefit of: 2013 - $0; 2012 - $0	1			1

Derivative financial instruments:
Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $18; 2012 - $16	(31		)	(26		)
(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $(7); 2012 - $1	11			(2		)

Available-for-sale securities:
Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $(8); 2012 - $(9)	15			21
(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $0; 2012 - $0	(1		)	(2		)

Total other comprehensive income (loss), net of tax	(236		)	285
Comprehensive income	646			1,896
Less: comprehensive income attributable to the noncontrolling interests	(2		)	(15		)
Comprehensive income attributable to stockholders	$	644		$	1,881

See accompanying notes to Consolidated Financial Statements.

Table of Contents

Caterpillar Inc.

Consolidated Statement of Financial Position

(Unaudited)

(Dollars in millions)



	March 31, 2013			December 31, 2012
Assets
Current assets:
Cash and short-term investments	$	5,982		$	5,490
Receivables – trade and other	9,843			10,092
Receivables – finance	8,830			8,860
Deferred and refundable income taxes	1,486			1,547
Prepaid expenses and other current assets	930			988
Inventories	15,074			15,547
Total current assets	42,145			42,524

Property, plant and equipment – net	16,276			16,461
Long-term receivables – trade and other	1,171			1,316
Long-term receivables – finance	14,320			14,029
Investments in unconsolidated affiliated companies	270			272
Noncurrent deferred and refundable income taxes	2,112			2,011
Intangible assets	3,875			4,016
Goodwill	6,840			6,942
Other assets	1,734			1,785
Total assets	$	88,743		$	89,356

Liabilities
Current liabilities:
Short-term borrowings:
Machinery and Power Systems	$	667		$	636
Financial Products	4,315			4,651
Accounts payable	6,221			6,753
Accrued expenses	3,572			3,667
Accrued wages, salaries and employee benefits	1,150			1,911
Customer advances	2,920			2,978
Other current liabilities	1,865			2,055
Long-term debt due within one year:
Machinery and Power Systems	1,111			1,113
Financial Products	7,153			5,991
Total current liabilities	28,974			29,755
Long-term debt due after one year:
Machinery and Power Systems	8,668			8,666
Financial Products	18,572			19,086
Liability for postemployment benefits	10,999			11,085
Other liabilities	3,212			3,182
Total liabilities	70,425			71,774
Commitments and contingencies (Notes 10 and 13)
Stockholders’ equity
Common stock of $1.00 par value:
Authorized shares: 2,000,000,000 Issued shares: (3/31/13 and 12/31/12 – 814,894,624) at paid-in amount	4,510			4,481
Treasury stock (3/31/13 – 157,409,678 shares; 12/31/12 – 159,846,131 shares) at cost	(10,005		)	(10,074		)
Profit employed in the business	30,438			29,558
Accumulated other comprehensive income (loss)	(6,669		)	(6,433		)
Noncontrolling interests	44			50
Total stockholders’ equity	18,318			17,582
Total liabilities and stockholders’ equity	$	88,743		$	89,356

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
Three Months Ended March 31, 2012
Balance at December 31, 2011	$	4,273		$	(10,281	)	$	25,219	$	(6,328	)	$	46		$	12,929
Profit of consolidated and affiliated companies	—			—			1,586		—			25			1,611
Foreign currency translation, net of tax	—			—			—		195			(14		)	181
Pension and other postretirement benefits, net of tax	—			—			—		110			3			113
Derivative financial instruments, net of tax	—			—			—		(28		)	—			(28		)
Available-for-sale securities, net of tax	—			—			—		18			1			19
Distribution to noncontrolling interests	—			—			—		—			(4		)	(4		)
Common shares issued from treasury stock for stock-based compensation: 4,804,576	(110		)	117			—		—			—			7
Stock-based compensation expense	47			—			—		—			—			47
Net excess tax benefits from stock-based compensation	141			—			—		—			—			141
Cat Japan share redemption ¹	—			—			10		—			(10		)	—
Balance at March 31, 2012	$	4,351		$	(10,164	)	$	26,815	$	(6,033	)	$	47		$	15,016

Three Months Ended March 31, 2013
Balance at December 31, 2012	$	4,481		$	(10,074	)	$	29,558	$	(6,433	)	$	50		$	17,582
Profit of consolidated and affiliated companies	—			—			880		—			2			882
Foreign currency translation, net of tax	—			—			—		(366		)	—			(366		)
Pension and other postretirement benefits, net of tax	—			—			—		136			—			136
Derivative financial instruments, net of tax	—			—			—		(20		)	—			(20		)
Available-for-sale securities, net of tax	—			—			—		14			—			14
Distribution to noncontrolling interests	—			—			—		—			(8		)	(8		)
Common shares issued from treasury stock for stock-based compensation: 2,436,453	(61		)	69			—		—			—			8
Stock-based compensation expense	49			—			—		—			—			49
Net excess tax benefits from stock-based compensation	41			—			—		—			—			41
Balance at March 31, 2013	$	4,510		$	(10,005	)	$	30,438	$	(6,669	)	$	44		$	18,318

¹See Note 17 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)



	Three Months Ended March 31,
	2013			2012
Cash flow from operating activities:
Profit of consolidated and affiliated companies	$	882		$	1,611
Adjustments for non-cash items:
Depreciation and amortization	723			661
Other	98			(18		)
Changes in assets and liabilities, net of acquisitions and divestitures:
Receivables – trade and other	223			150
Inventories	308			(2,038		)
Accounts payable	118			517
Accrued expenses	(121		)	22
Accrued wages, salaries and employee benefits	(742		)	(1,053		)
Customer advances	(61		)	224
Other assets – net	41			160
Other liabilities – net	(45		)	79
Net cash provided by (used for) operating activities	1,424			315

Cash flow from investing activities:
Capital expenditures – excluding equipment leased to others	(896		)	(844		)
Expenditures for equipment leased to others	(336		)	(285		)
Proceeds from disposals of leased assets and property, plant and equipment	176			245
Additions to finance receivables	(2,715		)	(2,727		)
Collections of finance receivables	2,219			2,072
Proceeds from sale of finance receivables	66			39
Investments and acquisitions (net of cash acquired)	—			(63		)
Proceeds from sale of businesses and investments (net of cash sold)	98			—
Proceeds from sale of available-for-sale securities	98			112
Investments in available-for-sale securities	(123		)	(123		)
Other – net	(46		)	38
Net cash provided by (used for) investing activities	(1,459		)	(1,536		)

Cash flow from financing activities:
Dividends paid	—			(298		)
Distribution to noncontrolling interests	(8		)	(4		)
Common stock issued, including treasury shares reissued	8			7
Excess tax benefit from stock-based compensation	41			141
Proceeds from debt issued (original maturities greater than three months):
Machinery and Power Systems	54			147
Financial Products	2,665			2,355
Payments on debt (original maturities greater than three months):
Machinery and Power Systems	(26		)	(126		)
Financial Products	(2,576		)	(2,087		)
Short-term borrowings – net (original maturities three months or less)	387			856
Net cash provided by (used for) financing activities	545			991
Effect of exchange rate changes on cash	(18		)	37
Increase (decrease) in cash and short-term investments	492			(193		)
Cash and short-term investments at beginning of period	5,490			3,057
Cash and short-term investments at end of period	$	5,982		$	2,864

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.

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 month periods ended March 31, 2013 and 2012, (b) the consolidated comprehensive income for the three month periods ended March 31, 2013 and 2012, (c) the consolidated financial position at March 31, 2013 and December 31, 2012, (d) the consolidated changes in stockholders’ equity for the three month periods ended March 31, 2013 and 2012, and (e) the consolidated cash flow for the three month periods ended March 31, 2013 and 2012. 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.

We have revised previously reported cash flows from operating and financing activities for the three month period ended March 31, 2012 to correct for the impact of interest payments on certain Cat Financial bank borrowings. Cash provided by operating activities decreased from the amounts previously reported by $15 million for the three month period ended March 31, 2012, and cash provided by financing activities increased by the same amount. Revisions will be made to previously reported amounts in future filings. Cash provided by operating activities will decrease by $57 million and $53 million for the years ended December 31, 2012 and 2011, respectively, and the unaudited cash flows from operating activities will decrease by $29 million and $44 million for the six and nine month periods ended June 30 and September 30, 2012, respectively. Cash provided by financing activities will increase by the same amounts for the respective periods. Management has concluded that the impact was not material to any quarterly or annual period.

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, 2012 (2012 Form 10-K).

The December 31, 2012 financial position data included herein is derived from the audited consolidated financial statements included in the 2012 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.

2. New Accounting Guidance

Disclosures about offsetting assets and liabilities – In December 2011, the Financial Accounting Standards Board (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. In January 2013, the FASB issued guidance clarifying the scope of the disclosures to apply only to derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements, and securities lending and securities borrowing transactions. This guidance was effective January 1, 2013, with retrospective application required. The guidance did not have a material impact on our financial statements. See Note 4 for additional information.

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

Table of Contents

to perform the quantitative impairment assessment currently required. This guidance was effective January 1, 2013 and did not have a material impact on our financial statements.

Reporting of amounts reclassified out of accumulated other comprehensive income – In February 2013, the FASB issued accounting guidance on the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount is reclassified to net income in its entirety in the same reporting period. For other amounts not required to be reclassified in their entirety to net income in the same reporting period, a cross reference to other disclosures that provide additional detail about the reclassification amounts is required. This guidance was effective January 1, 2013 and did not have a material impact on our financial statements. See Note 12 for additional information.

Joint and several liability arrangements – In February 2013, the FASB issued accounting guidance on the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements. The guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The entity is also required to disclose the nature and amount of the obligation as well as any other information about those obligations. This guidance is effective January 1, 2014, with retrospective application required. We do not expect the adoption to have a material impact on our financial statements.

Parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity – In March 2013, the FASB issued accounting guidance on the parent's accounting for the cumulative translation adjustment (CTA) upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The new standard clarifies existing guidance regarding when CTA should be released into earnings upon various deconsolidation and consolidation transactions. This guidance is effective January 1, 2014. 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 $49 million and $47 million for the three months ended March 31, 2013 and 2012, respectively.

The following table illustrates the type and fair value of the stock-based compensation awards granted during the three month periods ended March 31, 2013 and 2012, respectively:



	2013			2012
	Shares Granted	Fair Value Per Award		Shares Granted	Fair Value Per Award
Stock options	4,276,060	$	28.34	3,224,203	$	39.20
RSUs	1,614,870	$	84.05	1,429,939	$	104.61

The stock price on the date of grant was $89.75 and $110.09 for 2013 and 2012, 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, 2013 and 2012, respectively:

Table of Contents



	Grant Year
	2013	2012
Weighted-average dividend yield	2.13%	2.16%
Weighted-average volatility	30.6%	35.0%
Range of volatilities	23.4-40.6%	33.3-40.4%
Range of risk-free interest rates	0.16-1.88%	0.17-2.00%
Weighted-average expected lives	8 years	7 years

As of March 31, 2013, the total remaining unrecognized compensation cost related to nonvested stock-based compensation awards was $384 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 2.4 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. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward, option, and cross currency 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 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 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 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

Table of Contents

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 March 31, 2013, $44 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, and future transactions denominated in foreign currencies. Our policy allows the use of foreign currency forward, option and cross currency contracts to offset the risk of currency mismatch between our receivables and debt, and exchange rate risk associated with future transactions denominated in foreign currencies. Substantially all such foreign currency forward, option and cross currency 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.

As of March 31, 2013, $4 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.

Table of Contents

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 to us 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:



(Millions of dollars)
	Consolidated Statement of Financial	Asset (Liability) Fair Value
	Position Location	March 31, 2013			December 31, 2012
Designated derivatives
Foreign exchange contracts
Machinery and Power Systems	Receivables – trade and other	$	19		$	28
Machinery and Power Systems	Accrued expenses	(89		)	(66		)
Interest rate contracts
Financial Products	Receivables – trade and other	14			17
Financial Products	Long-term receivables – trade and other	184			209
Financial Products	Accrued expenses	(8		)	(8		)
		$	120		$	180
Undesignated derivatives
Foreign exchange contracts
Machinery and Power Systems	Receivables – trade and other	$	67		$	31
Machinery and Power Systems	Accrued expenses	(99		)	(63		)
Financial Products	Receivables – trade and other	9			10
Financial Products	Accrued expenses	(20		)	(6		)
Interest rate contracts
Financial Products	Receivables – trade and other	1			2
Financial Products	Accrued expenses	(1		)	(1		)
Commodity contracts
Machinery and Power Systems	Receivables – trade and other	—			1
		$	(43	)	$	(26	)

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 March 31, 2013					Three Months Ended March 31, 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)	$	(29	)	$	30	$	(9	)	$	15
		$	(29	)	$	30	$	(9	)	$	15

Table of Contents



Cash Flow Hedges (Millions of dollars)
	Three Months Ended March 31, 2013
				Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)			Classification of Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI to Earnings				Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$	(49	)	Other income (expense)	$	(17	)	¹	$	—
Interest rate contracts
Financial Products	—			Interest expense of Financial Products	(1		)		—
	$	(49	)		$	(18	)		$	—



	Three Months Ended March 31, 2012
				Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)			Classification of Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI to Earnings			Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$	(42	)	Other income (expense)	$	5		$	—
Interest rate contracts
Machinery and Power Systems	—			Other income (expense)	(1		)	—
Financial Products	—			Interest expense of Financial Products	(1		)	—
	$	(42	)		$	3		$	—


¹	Includes $3 million loss reclassified from AOCI to Other income (expense) in 2013 as certain derivatives were dedesignated as the related transactions are no longer probable to occur.

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 March 31, 2013			Three Months Ended March 31, 2012
Foreign exchange contracts
Machinery and Power Systems	Other income (expense)	$	(20	)	$	65
Financial Products	Other income (expense)	(15		)	7
Commodity contracts
Machinery and Power Systems	Other income (expense)	(1		)	6
		$	(36	)	$	78

We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within Machinery & Power Systems and Financial Products that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.

Table of Contents

Collateral is generally not required of the counterparties or of our company under the master netting agreements. As of March 31, 2013 and December 31, 2012, no cash collateral was received or pledged under the master netting agreements.

The effect of the net settlement provisions of the master netting agreements on our derivative balances upon an event of default or termination event is as follows:



March 31, 2013							Gross Amounts Not Offset in the Statement of Financial Position
(Millions of dollars)	Gross Amount of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amount of Assets Presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received		Net Amount of Assets
Derivatives
Machinery & Power Systems	$	86	$	—	$	86	$	(84	)	$	—	$	2
Financial Products	208		—		208		(19		)	—		189
Total	$	294	$	—	$	294	$	(103	)	$	—	$	191



March 31, 2013									Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amount of Recognized Liabilities			Gross Amounts Offset in the Statement of Financial Position		Net Amount of Liabilities Presented in the Statement of Financial Position			Financial Instruments		Cash Collateral Pledged		Net Amount of Liabilities
Derivatives
Machinery & Power Systems	$	(188	)	$	—	$	(188	)	$	84	$	—	$	(104	)
Financial Products	(29		)	—		(29		)	19		—		(10		)
Total	$	(217	)	$	—	$	(217	)	$	103	$	—	$	(114	)



December 31, 2012							Gross Amounts Not Offset in the Statement of Financial Position
(Millions of dollars)	Gross Amount of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amount of Assets Presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received		Net Amount of Assets
Derivatives
Machinery & Power Systems	$	60	$	—	$	60	$	(59	)	$	—	$	1
Financial Products	238		—		238		(12		)	—		226
Total	$	298	$	—	$	298	$	(71	)	$	—	$	227



December 31, 2012									Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amount of Recognized Liabilities			Gross Amounts Offset in the Statement of Financial Position		Net Amount of Liabilities Presented in the Statement of Financial Position			Financial Instruments		Cash Collateral Pledged		Net Amount of Liabilities
Derivatives
Machinery & Power Systems	$	(129	)	$	—	$	(129	)	$	59	$	—	$	(70	)
Financial Products	(15		)	—		(15		)	12		—		(3		)
Total	$	(144	)	$	—	$	(144	)	$	71	$	—	$	(73	)

Table of Contents

5. Inventories

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



(Millions of dollars)	March 31, 2013		December 31, 2012
Raw materials	$	3,536	$	3,573
Work-in-process	2,906		2,920
Finished goods	8,345		8,767
Supplies	287		287
Total inventories	$	15,074	$	15,547

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:



Results of Operations of unconsolidated affiliated companies: (Millions of dollars)	Three Months Ended March 31,
	2013			2012
Sales	$	258		$	166
Cost of sales	205			126
Gross profit	$	53		$	40

Profit (loss)	$	(3	)	$	10



Financial Position of unconsolidated affiliated companies: (Millions of dollars)	March 31, 2013		December 31, 2012
Assets:
Current assets	$	655	$	715
Property, plant and equipment – net	649		529
Other assets	505		616
	1,809		1,860
Liabilities:
Current liabilities	392		443
Long-term debt due after one year	717		708
Other liabilities	191		170
	1,300		1,321
Equity	$	509	$	539



Caterpillar’s investments in unconsolidated affiliated companies: (Millions of dollars)	March 31, 2013		December 31, 2012
Investments in equity method companies	$	255	$	256
Plus: Investments in cost method companies	15		16
Total investments in unconsolidated affiliated companies	$	270	$	272

The change in the results of operations amounts for the three months ended March 31, 2013 as compared to March 31, 2012 primarily relates to the third party logistics business, in which Caterpillar sold a majority interest on July 31, 2012. Under the terms of the agreement, Caterpillar retained a 35 percent equity interest.

Table of Contents

7. Intangible Assets and Goodwill

A. Intangible assets

Intangible assets are comprised of the following:



		March 31, 2013
(Millions of dollars)	Weighted Amortizable Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	15	$	2,715	$	(419	)	$	2,296
Intellectual property	11	1,754		(376		)	1,378
Other	10	295		(112		)	183
Total finite-lived intangible assets	13	4,764		(907		)	3,857
Indefinite-lived intangible assets - In-process research & development		18		—			18
Total intangible assets		$	4,782	$	(907	)	$	3,875



		December 31, 2012
	Weighted Amortizable Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	15	$	2,756	$	(377	)	$	2,379
Intellectual property	12	1,767		(342		)	1,425
Other	10	299		(105		)	194
Total finite-lived intangible assets	13	4,822		(824		)	3,998
Indefinite-lived intangible assets - In-process research & development		18		—			18
Total intangible assets		$	4,840	$	(824	)	$	4,016

Customer relationship intangibles of $9 million, net of accumulated amortization of $1 million, were reclassified from Intangible assets to held for sale and/or divested during 2013, primarily related to the divestiture of portions of the Bucyrus distribution business, and are not included in the March 31, 2013 balances in the table above. See Note 19 for additional information on assets held for sale.

Amortization expense for both the three months ended March 31, 2013 and 2012 was $94 million. Amortization expense related to intangible assets is expected to be:



(Millions of dollars)
2013	2014	2015	2016	2017	Thereafter
$376	$370	$369	$360	$356	$2,138

B. Goodwill

Goodwill of $18 million was reclassified to held for sale and/or divested during 2013, primarily related to the divestiture of portions of the Bucyrus distribution business and the sale of certain Power Systems assets that were accounted for as a business, and is not included in the March 31, 2013 balance in the table below. See Note 19 for additional information on divestitures and 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

Table of Contents

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 months ended March 31, 2013 or 2012.

The changes in the carrying amount of the goodwill by reportable segment for the three months ended March 31, 2013 were as follows:



(Millions of dollars)
	December 31, 2012			Held for Sale and Business Divestitures ¹			Other Adjustments ²			March 31, 2013
Construction Industries
Goodwill	$	382		$	—		$	(30	)	$	352
Resource Industries
Goodwill	4,559			(8		)	(38		)	4,513
Impairments	(602		)	—			—			(602		)
Net goodwill	3,957			(8		)	(38		)	3,911
Power Systems
Goodwill	2,486			(10		)	(16		)	2,460
All Other ³
Goodwill	117			—			—			117
Consolidated total
Goodwill	7,544			(18		)	(84		)	7,442
Impairments	(602		)	—			—			(602		)
Net goodwill	$	6,942		$	(18	)	$	(84	)	$	6,840

¹ See Note 19 for additional details.

² Other adjustments are comprised primarily of foreign currency translation.

³ Includes All Other operating segment (See Note 15).

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



	March 31, 2013						December 31, 2012
(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	120		2		122		144		2			146

Corporate bonds
Corporate bonds	638		36		674		626		38			664
Asset-backed securities	94		—		94		96		—			96

Mortgage-backed debt securities
U.S. governmental agency	336		7		343		291		8			299
Residential	24		—		24		26		(1		)	25
Commercial	101		9		110		117		10			127

Equity securities
Large capitalization value	151		58		209		147		38			185
Smaller company growth	21		17		38		22		12			34
Total	$	1,495	$	129	$	1,624	$	1,479	$	107		$	1,586

During the three months ended March 31, 2013 and 2012, there were no charges for other-than-temporary declines in the market value of securities.

Table of Contents



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

	March 31, 2013
	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	$	—	$	—	$	21	$	2	$	21	$	2
Mortgage-backed debt securities
U.S. governmental agency	122		2		12		—		134		2
Residential	—		—		10		1		10		1
Equity securities
Large capitalization value	10		1		7		1		17		2
Total	$	132	$	3	$	50	$	4	$	182	$	7



	December 31, 2012
	Less than 12 months ¹				12 months or more ¹				Total
(Millions of dollars)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Corporate bonds
Asset-backed securities	$	—	$	—	$	20	$	3	$	20	$	3
Mortgage-backed debt securities
U.S. governmental agency	84		1		15		—		99		1
Residential	—		—		14		1		14		1
Equity securities
Large capitalization value	25		2		10		1		35		3
Total	$	109	$	3	$	59	$	5	$	168	$	8

¹ Indicates length of time that individual securities have been in a continuous unrealized loss position.

Corporate Bonds. The unrealized losses on our investments in asset-backed securities relate primarily to changes in interest rates and credit-related yield spreads since time of purchase. We do not intend to sell the investments and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of March 31, 2013.

Mortgage-Backed Debt Securities. The unrealized losses on our investments in mortgage-backed securities and mortgage-related asset-backed securities relate primarily to the continuation of elevated housing delinquencies and default rates, risk aversion and credit-related yield spreads since time of purchase. We do not intend to sell the investments and it is not likely that we will be required to sell these investments before recovery of their amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of March 31, 2013.

Equity Securities. Cat Insurance maintains a well-diversified equity portfolio consisting of two specific mandates: large capitalization value stocks and smaller company growth stocks. The unrealized losses on our investments in equity securities relate primarily to uneven sector participation in the market recovery. U.S. equity valuations were generally higher for the first quarter of 2013 on growing consumer confidence and a steady recovery in housing. We do not consider these investments to be other-than-temporarily impaired as of March 31, 2013.

The cost basis and fair value of the available-for-sale debt securities at March 31, 2013, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.

Table of Contents



	March 31, 2013
(Millions of dollars)	Cost Basis		Fair Value
Due in one year or less	$	181	$	183
Due after one year through five years	588		618
Due after five years through ten years	58		65
Due after ten years	35		34
U.S. governmental agency mortgage-backed securities	336		343
Residential mortgage-backed securities	24		24
Commercial mortgage-backed securities	101		110
Total debt securities – available-for-sale	$	1,323	$	1,377



Sales of Securities
	Three Months Ended March 31,
(Millions of dollars)	2013		2012
Proceeds from the sale of available-for-sale securities	$	98	$	112
Gross gains from the sale of available-for-sale securities	$	1	$	2
Gross losses from the sale of available-for-sale securities	$	—	$	—

9. Postretirement Benefits

A. Pension and postretirement benefit costs

In February 2012, we announced the closure of the Electro-Motive Diesel facility located in London, Ontario. As a result of the closure, we recognized a $37 million other postretirement benefits curtailment gain. This excludes a $21 million loss of a third-party receivable for other postretirement benefits that was eliminated due to the closure. In addition, a $10 million special termination benefit expense was recognized related to statutory pension benefits required to be paid to certain affected employees. As a result, a net gain of $6 million related to the facility closure was recognized in Other operating (income) expenses in the Consolidated Statement of Results of Operations for the three months ended March 31, 2012.

Table of Contents



(Millions of dollars)	U.S. Pension Benefits						Non-U.S. Pension Benefits						Other Postretirement Benefits
	March 31,						March 31,						March 31,
	2013			2012			2013			2012			2013			2012
For the three months ended:
Components of net periodic benefit cost:
Service cost	$	49		$	46		$	31		$	28		$	24		$	24
Interest cost	145			154			43			45			49			55
Expected return on plan assets	(208		)	(203		)	(59		)	(54		)	(14		)	(16		)
Amortization of:
Transition obligation (asset)	—			—			—			—			1			1
Prior service cost (credit) ¹