Edgar Filing: CATERPILLAR INC

CAT_10Q_9.30.2013

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 September 30, 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 September 30, 2013, 636,355,991 shares of common stock of the registrant were outstanding.

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Part I. Financial Information
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	57
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	91
Item 4.	Controls and Procedures	91

Part II. Other Information
Item 1.	Legal Proceedings	92
Item 1A.	Risk Factors	*
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	92
Item 3.	Defaults Upon Senior Securities	*
Item 4.	Mine Safety Disclosures	93
Item 5.	Other Information	*
Item 6.	Exhibits	93

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

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Caterpillar Inc.

Consolidated Statement of Results of Operations

(Unaudited)

(Dollars in millions except per share data)



	Three Months Ended September 30,
	2013			2012
Sales and revenues:
Sales of Machinery and Power Systems	$	12,678		$	15,739
Revenues of Financial Products	745			706
Total sales and revenues	13,423			16,445

Operating costs:
Cost of goods sold	9,774			11,639
Selling, general and administrative expenses	1,319			1,471
Research and development expenses	469			634
Interest expense of Financial Products	178			197
Other operating (income) expenses	282			(92		)
Total operating costs	12,022			13,849

Operating profit	1,401			2,596

Interest expense excluding Financial Products	116			129
Other income (expense)	(24		)	(17		)

Consolidated profit before taxes	1,261			2,450

Provision (benefit) for income taxes	310			753
Profit of consolidated companies	951			1,697

Equity in profit (loss) of unconsolidated affiliated companies	(1		)	5

Profit of consolidated and affiliated companies	950			1,702

Less: Profit (loss) attributable to noncontrolling interests	4			3

Profit ¹	$	946		$	1,699

Profit per common share	$	1.48		$	2.60

Profit per common share – diluted ²	$	1.45		$	2.54

Weighted-average common shares outstanding (millions)
– Basic	639.3			653.6
– Diluted²	651.9			668.7

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.

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Caterpillar Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

(Dollars in millions)



	Three Months Ended September 30,
	2013			2012

Profit of consolidated and affiliated companies	$	950		$	1,702
Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax (provision)/benefit of: 2013 - $33; 2012 - $11	291			193

Pension and other postretirement benefits:
Current year actuarial gain (loss), net of tax (provision)/benefit of: 2013 - $2; 2012 - $91	(3		)	(155		)
Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2013 - $(67); 2012 - $(61)	129			114
Current year prior service credit (cost), net of tax (provision)/benefit of: 2013 - $0; 2012 - $(3)	—			4
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 - $(1); 2012 - $0	—			1

Derivative financial instruments:
Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $(15); 2012 - $5	26			(7		)
(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $(5); 2012 - $(5)	9			9

Available-for-sale securities:
Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $(6); 2012 - $(8)	9			12
(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $0; 2012 - $0	(1		)	(1		)

Total other comprehensive income (loss), net of tax	451			162
Comprehensive income	1,401			1,864
Less: comprehensive income attributable to the noncontrolling interests	(4		)	(3		)
Comprehensive income attributable to stockholders	$	1,397		$	1,861

See accompanying notes to Consolidated Financial Statements.

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Caterpillar Inc.

Consolidated Statement of Results of Operations

(Unaudited)

(Dollars in millions except per share data)



	Nine Months Ended September 30,
	2013			2012
Sales and revenues:
Sales of Machinery and Power Systems	$	39,048		$	47,711
Revenues of Financial Products	2,206			2,089
Total sales and revenues	41,254			49,800

Operating costs:
Cost of goods sold	30,186			35,156
Selling, general and administrative expenses	4,130			4,328
Research and development expenses	1,579			1,853
Interest expense of Financial Products	552			599
Other operating (income) expenses	631			329
Total operating costs	37,078			42,265

Operating profit	4,176			7,535

Interest expense excluding Financial Products	356			352
Other income (expense)	(79		)	141

Consolidated profit before taxes	3,741			7,324

Provision (benefit) for income taxes	943			2,314
Profit of consolidated companies	2,798			5,010

Equity in profit (loss) of unconsolidated affiliated companies	(1		)	12

Profit of consolidated and affiliated companies	2,797			5,022

Less: Profit (loss) attributable to noncontrolling interests	11			38

Profit ¹	$	2,786		$	4,984

Profit per common share	$	4.30		$	7.64

Profit per common share – diluted ²	$	4.21		$	7.44

Weighted-average common shares outstanding (millions)
– Basic	647.6			652.0
– Diluted²	661.3			669.7

Cash dividends declared per common share	$	1.12		$	0.98

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.

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Caterpillar Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

(Dollars in millions)



	Nine Months Ended September 30,
	2013			2012

Profit of consolidated and affiliated companies	$	2,797		$	5,022
Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax (provision)/benefit of: 2013 - $41; 2012 - $(5)	(255		)	35

Pension and other postretirement benefits:
Current year actuarial gain (loss), net of tax (provision)/benefit of: 2013 - $(14); 2012 - $83	24			(140		)
Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2013 - $(201); 2012 - $(181)	388			340
Current year prior service credit (cost), net of tax (provision)/benefit of: 2013 - $0; 2012 - $(1)	—			1
Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2013 - $14; 2012 - $12	(27		)	(23		)
Amortization of transition (asset) obligation, net of tax (provision)/benefit of: 2013 - $(1); 2012 - $0	1			2

Derivative financial instruments:
Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $(2); 2012 - $21	2			(35		)
(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $(24); 2012 - $(6)	42			10

Available-for-sale securities:
Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $(8); 2012 - $(13)	14			28
(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $0; 2012 - $0	(1		)	(3		)

Total other comprehensive income (loss), net of tax	188			215
Comprehensive income	2,985			5,237
Less: comprehensive income attributable to the noncontrolling interests	(13		)	(20		)
Comprehensive income attributable to stockholders	$	2,972		$	5,217

See accompanying notes to Consolidated Financial Statements.

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Caterpillar Inc.

Consolidated Statement of Financial Position

(Unaudited)

(Dollars in millions)



	September 30, 2013			December 31, 2012
Assets
Current assets:
Cash and short-term investments	$	6,357		$	5,490
Receivables – trade and other	8,649			10,092
Receivables – finance	9,161			8,860
Deferred and refundable income taxes	1,541			1,547
Prepaid expenses and other current assets	988			988
Inventories	13,392			15,547
Total current assets	40,088			42,524

Property, plant and equipment – net	16,588			16,461
Long-term receivables – trade and other	1,329			1,316
Long-term receivables – finance	14,585			14,029
Investments in unconsolidated affiliated companies	278			272
Noncurrent deferred and refundable income taxes	1,985			2,011
Intangible assets	3,718			4,016
Goodwill	6,968			6,942
Other assets	1,733			1,785
Total assets	$	87,272		$	89,356

Liabilities
Current liabilities:
Short-term borrowings:
Machinery and Power Systems	$	290		$	636
Financial Products	5,557			4,651
Accounts payable	6,280			6,753
Accrued expenses	3,373			3,667
Accrued wages, salaries and employee benefits	1,391			1,911
Customer advances	2,699			2,978
Other current liabilities	1,854			2,055
Long-term debt due within one year:
Machinery and Power Systems	1,110			1,113
Financial Products	6,565			5,991
Total current liabilities	29,119			29,755
Long-term debt due after one year:
Machinery and Power Systems	7,951			8,666
Financial Products	18,064			19,086
Liability for postemployment benefits	10,785			11,085
Other liabilities	3,176			3,182
Total liabilities	69,095			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: (9/30/13 and 12/31/12 – 814,894,624) at paid-in amount	4,657			4,481
Treasury stock (9/30/13 – 178,538,633 shares; 12/31/12 – 159,846,131 shares) at cost	(11,914		)	(10,074		)
Profit employed in the business	31,614			29,558
Accumulated other comprehensive income (loss)	(6,247		)	(6,433		)
Noncontrolling interests	67			50
Total stockholders’ equity	18,177			17,582
Total liabilities and stockholders’ equity	$	87,272		$	89,356

See accompanying notes to Consolidated Financial Statements.

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Caterpillar Inc.

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

(Dollars in millions)



	Common stock			Treasury stock			Profit employed in the business			Accumulated other comprehensive income (loss)			Noncontrolling interests			Total
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 redemption ¹	(74		)	—			(23		)	107			(10		)	—
Balance at September 30, 2012	$	4,449		$	(10,118	)	$	29,541		$	(5,988	)	$	52		$	17,936

Nine Months Ended September 30, 2013
Balance at December 31, 2012	$	4,481		$	(10,074	)	$	29,558		$	(6,433	)	$	50		$	17,582
Profit of consolidated and affiliated companies	—			—			2,786			—			11			2,797
Foreign currency translation, net of tax	—			—			—			(257		)	2			(255		)
Pension and other postretirement benefits, net of tax	—			—			—			386			—			386
Derivative financial instruments, net of tax	—			—			—			44			—			44
Available-for-sale securities, net of tax	—			—			—			13			—			13
Change in ownership from noncontrolling interests	(6		)	—			—			—			14			8
Dividends declared	—			—			(730		)	—			—			(730		)
Distribution to noncontrolling interests	—			—			—			—			(10		)	(10		)
Common shares issued from treasury stock for stock-based compensation: 4,792,341	(83		)	160			—			—			—			77
Stock-based compensation expense	196			—			—			—			—			196
Net excess tax benefits from stock-based compensation	69			—			—			—			—			69
Common shares repurchased: 23,484,843 ²	—			(2,000		)	—			—			—			(2,000		)
Balance at September 30, 2013	$	4,657		$	(11,914	)	$	31,614		$	(6,247	)	$	67		$	18,177


¹	See Notes 12 and 17 regarding the Cat Japan share redemption.


²	See Note 11 regarding shares repurchased.

See accompanying notes to Consolidated Financial Statements.

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Caterpillar Inc.

Consolidated Statement of Cash Flow

(Unaudited)

(Millions of dollars)



	Nine Months Ended September 30,
	2013			2012
Cash flow from operating activities:
Profit of consolidated and affiliated companies	$	2,797		$	5,022
Adjustments for non-cash items:
Depreciation and amortization	2,263			2,070
Other	377			(267		)
Changes in assets and liabilities, net of acquisitions and divestitures:
Receivables – trade and other	1,165			136
Inventories	1,911			(3,118		)
Accounts payable	41			(334		)
Accrued expenses	(227		)	32
Accrued wages, salaries and employee benefits	(500		)	(643		)
Customer advances	(287		)	306
Other assets – net	(74		)	(20		)
Other liabilities – net	145			34
Net cash provided by (used for) operating activities	7,611			3,218

Cash flow from investing activities:
Capital expenditures – excluding equipment leased to others	(1,862		)	(2,270		)
Expenditures for equipment leased to others	(1,301		)	(1,256		)
Proceeds from disposals of leased assets and property, plant and equipment	593			840
Additions to finance receivables	(8,339		)	(8,835		)
Collections of finance receivables	6,790			6,567
Proceeds from sale of finance receivables	110			109
Investments and acquisitions (net of cash acquired)	(193		)	(542		)
Proceeds from sale of businesses and investments (net of cash sold)	168			1,009
Proceeds from sale of available-for-sale securities	297			243
Investments in available-for-sale securities	(312		)	(299		)
Other – net	(29		)	82
Net cash provided by (used for) investing activities	(4,078		)	(4,352		)

Cash flow from financing activities:
Dividends paid	(730		)	(937		)
Distribution to noncontrolling interests	(10		)	(5		)
Common stock issued, including treasury shares reissued	77			41
Treasury shares purchased	(2,000		)	—
Excess tax benefit from stock-based compensation	70			165
Acquisitions of redeemable noncontrolling interests	—			(444		)
Proceeds from debt issued (original maturities greater than three months):
Machinery and Power Systems	145			2,015
Financial Products	6,854			9,617
Payments on debt (original maturities greater than three months):
Machinery and Power Systems	(1,134		)	(485		)
Financial Products	(7,636		)	(6,242		)
Short-term borrowings – net (original maturities three months or less)	1,736			166
Net cash provided by (used for) financing activities	(2,628		)	3,891
Effect of exchange rate changes on cash	(38		)	(125		)
Increase (decrease) in cash and short-term investments	867			2,632
Cash and short-term investments at beginning of period	5,490			3,057
Cash and short-term investments at end of period	$	6,357		$	5,689

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.

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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, 2013 and 2012, (b) the consolidated comprehensive income for the three and nine month periods ended September 30, 2013 and 2012, (c) the consolidated financial position at September 30, 2013 and December 31, 2012, (d) the consolidated changes in stockholders’ equity for the nine month periods ended September 30, 2013 and 2012, and (e) the consolidated cash flow for the nine month periods ended September 30, 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 nine month period ended September 30, 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 $44 million for the nine month period ended September 30, 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. 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 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.

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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 the 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.

Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists – In July 2013, the FASB issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward in the financial statements if available under the applicable tax jurisdiction. The 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 $64 million and $196 million for the three and nine months ended September 30, 2013, respectively; and $69 million and $204 million for the three and nine months ended September 30, 2012, 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, 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 nine month periods ended September 30, 2013 and 2012, respectively:

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	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 September 30, 2013, the total remaining unrecognized compensation cost related to nonvested stock-based compensation awards was $232 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 1.9 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

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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, 2013, $15 million of deferred net gains, 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 September 30, 2013, $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.

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Commodity Price Risk

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

Our Machinery and 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	September 30, 2013			December 31, 2012
Designated derivatives
Foreign exchange contracts
Machinery and Power Systems	Receivables – trade and other	$	49		$	28
Machinery and Power Systems	Long-term receivables – trade and other	1			—
Machinery and Power Systems	Accrued expenses	(24		)	(66		)
Interest rate contracts
Financial Products	Receivables – trade and other	12			17
Financial Products	Long-term receivables – trade and other	130			209
Financial Products	Accrued expenses	(6		)	(8		)
		$	162		$	180
Undesignated derivatives
Foreign exchange contracts
Machinery and Power Systems	Receivables – trade and other	$	42		$	31
Machinery and Power Systems	Accrued expenses	(31		)	(63		)
Financial Products	Receivables – trade and other	13			10
Financial Products	Long-term receivables – trade and other	8			—
Financial Products	Accrued expenses	(7		)	(6		)
Interest rate contracts
Financial Products	Receivables – trade and other	—			2
Financial Products	Accrued expenses	—			(1		)
Commodity contracts
Machinery and Power Systems	Receivables – trade and other	—			1
Machinery and Power Systems	Accrued expenses	(1		)	—
		$	24		$	(26	)

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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, 2013					Three 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)	$	(9	)	$	12	$	7	$	(3	)
		$	(9	)	$	12	$	7	$	(3	)

		Nine Months Ended September 30, 2013					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)	$	(87	)	$	92	$	4	$	7
		$	(87	)	$	92	$	4	$	7

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Cash Flow Hedges (Millions of dollars)
	Three Months Ended September 30, 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	$	44		Other income (expense)	$	(12	)	$	—
Interest rate contracts
Machinery and Power Systems	—			Other income (expense)	(1		)	—
Financial Products	(3		)	Interest expense of Financial Products	(1		)	—
	$	41			$	(14	)	$	—



	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 to Earnings			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	)	$	—



	Nine Months Ended September 30, 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	$	4		Other income (expense)	$	(60	)	²	$	—
Interest rate contracts
Machinery and Power Systems	—			Other income (expense)	(2		)		—
Financial Products	—			Interest expense of Financial Products	(4		)		—
	$	4			$	(66	)		$	—

	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 to Earnings				Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$	(48	)	Other income (expense)	$	(13	)		$	—
Interest rate contracts
Financial Products	(8		)	Interest expense of Financial Products	(3		)		(1		)	¹
	$	(56	)		$	(16	)		$	(1	)


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


²	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.

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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, 2013			Three Months Ended September 30, 2012
Foreign exchange contracts
Machinery and Power Systems	Other income (expense)	$	15		$	(9	)
Financial Products	Other income (expense)	3			5
Interest rate contracts
Financial Products	Other income (expense)	(1		)	—
Commodity contracts
Machinery and Power Systems	Other income (expense)	2			3
		$	19		$	(1	)

	Classification of Gains (Losses)	Nine Months Ended September 30, 2013			Nine Months Ended September 30, 2012
Foreign exchange contracts
Machinery and Power Systems	Other income (expense)	$	7		$	21
Financial Products	Other income (expense)	4			7
Interest rate contracts
Financial Products	Other income (expense)	(1		)	—
Commodity contracts
Machinery and Power Systems	Other income (expense)	(2		)	3
		$	8		$	31

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.

Collateral is generally not required of the counterparties or of our company under the master netting agreements. As of September 30, 2013 and December 31, 2012, no cash collateral was received or pledged under the master netting agreements.

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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:



September 30, 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	$	92	$	—	$	92	$	(52	)	$	—	$	40
Financial Products	163		—		163		(9		)	—		154
Total	$	255	$	—	$	255	$	(61	)	$	—	$	194



September 30, 2013									Gross Amounts Not Offset in the Statement of Financial Position
(Millions of dollars)	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	$	(56	)	$	—	$	(56	)	$	52	$	—	$	(4	)
Financial Products	(13		)	—		(13		)	9		—		(4		)
Total	$	(69	)	$	—	$	(69	)	$	61	$	—	$	(8	)



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
(Millions of dollars)	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	)

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5. Inventories

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



(Millions of dollars)	September 30, 2013		December 31, 2012
Raw materials	$	3,138	$	3,573
Work-in-process	2,749		2,920
Finished goods	7,221		8,767
Supplies	284		287
Total inventories	$	13,392	$	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 September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Sales	$	349		$	253	$	916		$	625
Cost of sales	284			206		722			492
Gross profit	$	65		$	47	$	194		$	133

Profit (loss)	$	(6	)	$	17	$	(31	)	$	39



Financial Position of unconsolidated affiliated companies: (Millions of dollars)	September 30, 2013		December 31, 2012
Assets:
Current assets	$	707	$	715
Property, plant and equipment – net	714		529
Other assets	498		616
	1,919		1,860
Liabilities:
Current liabilities	450		443
Long-term debt due after one year	887		708
Other liabilities	167		170
	1,504		1,321
Equity	$	415	$	539



Caterpillar’s investments in unconsolidated affiliated companies: (Millions of dollars)	September 30, 2013		December 31, 2012
Investments in equity method companies	$	268	$	256
Plus: Investments in cost method companies	10		16
Total investments in unconsolidated affiliated companies	$	278	$	272

The change in the results of operations amounts for the three and nine months ended September 30, 2013 as compared to September 30, 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.

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7. Intangible Assets and Goodwill

A. Intangible assets

Intangible assets are comprised of the following:



		September 30, 2013
(Millions of dollars)	Weighted Amortizable Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	15	$	2,685	$	(497	)	$	2,188
Intellectual property	11	1,816		(455		)	1,361
Other	10	282		(131		)	151
Total finite-lived intangible assets	13	4,783		(1,083		)	3,700
Indefinite-lived intangible assets - In-process research & development		18		—			18
Total intangible assets		$	4,801	$	(1,083	)	$	3,718



		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

During the third quarter of 2013, we acquired finite-lived intangible assets of $66 million due to the purchase of Johan Walter Berg AB. See Note 19 for details on this business combination.

Gross customer relationship intangibles of $123 million and related accumulated amortization of $17 million were reclassified from Intangible assets to assets held for sale and/or divested during the nine months ended September 30, 2013, and are not included in the September 30, 2013 balances in the table above. These transactions were related to the divestiture of portions of the Bucyrus distribution business. See Note 20 for additional information on divestitures and assets held for sale.

Amortization expense for the three and nine months ended September 30, 2013 was $91 million and $276 million, respectively. Amortization expense for the three and nine months ended September 30, 2012 was $101 million and $294 million, respectively. Amortization expense related to intangible assets is expected to be:



(Millions of dollars)
2013	2014	2015	2016	2017	Thereafter
$369	$374	$372	$360	$358	$2,161

B. Goodwill

During the third quarter of 2013, we recorded goodwill of $109 million related to the acquisition of Johan Walter Berg AB. See Note 19 for details on this business combination.

Goodwill of $47 million was reclassified to assets held for sale and/or divested during the nine months ended September 30, 2013, and is not included in the September 30, 2013 balance in the table below. These transactions were 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. See Note 20 for additional information on divestitures and assets held for sale.

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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, 2013 or 2012.

The changes in the carrying amount of the goodwill by reportable segment for the nine months ended September 30, 2013 were as follows:



(Millions of dollars)
	December 31, 2012			Acquisitions ¹		Held for Sale and Business Divestitures ²			Other Adjustments ³			September 30, 2013
Construction Industries
Goodwill	$	382		$	—	$	—		$	(46	)	$	336
Resource Industries
Goodwill	4,559			—		(37		)	1			4,523
Impairments	(602		)	—		—			—			(602		)
Net goodwill	3,957			—		(37		)	1			3,921
Power Systems
Goodwill	2,486			109		(10		)	9			2,594
All Other ⁴
Goodwill	117			—		—			—			117
Consolidated total
Goodwill	7,544			109		(47		)	(36		)	7,570
Impairments	(602		)	—		—			—			(602		)
Net goodwill	$	6,942		$	109	$	(47	)