10-Q
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, 2015
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to
Commission File Number:  1-768
CATERPILLAR INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
 
37-0602744
(IRS Employer I.D. No.)
 
 
 
100 NE Adams Street, Peoria, Illinois
(Address of principal executive offices)
 
61629
(Zip Code)
 
Registrant’s telephone number, including area code:
(309) 675-1000 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No  ¨
Indicate by check mark whether the registrant 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, 2015, 582,233,801 shares of common stock of the registrant were outstanding.
 

Table of Contents

Table of Contents
 
 
 
 
 
 
 
 
Item 1A.
Risk Factors
*
Item 3.
Defaults Upon Senior Securities
*
Item 4.
Mine Safety Disclosures
*
Item 5.
Other Information
*
 
* Item omitted because no answer is called for or item is not applicable.


2
Table of Contents

Part I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements
Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
 
Three Months Ended
September 30,
 
2015
 
2014
Sales and revenues:
 
 
 
Sales of Machinery, Energy & Transportation
$
10,285

 
$
12,758

Revenues of Financial Products
677

 
791

Total sales and revenues
10,962

 
13,549

 
 
 
 
Operating costs:
 

 
 

Cost of goods sold
7,954

 
9,634

Selling, general and administrative expenses
1,225

 
1,446

Research and development expenses
534

 
533

Interest expense of Financial Products
142

 
157

Other operating (income) expenses
394

 
387

Total operating costs
10,249

 
12,157

 
 
 
 
Operating profit
713

 
1,392

 
 
 
 
Interest expense excluding Financial Products
127

 
128

Other income (expense)
(68
)
 
117

 
 
 
 
Consolidated profit before taxes
518

 
1,381

 
 
 
 
Provision (benefit) for income taxes
144

 
364

Profit of consolidated companies
374

 
1,017

 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
(3
)
 
4

 
 
 
 
Profit of consolidated and affiliated companies
371

 
1,021

 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
3

 
4

 
 
 
 
Profit 1
$
368

 
$
1,017

 
 
 
 
Profit per common share
$
0.63

 
$
1.66

 
 
 
 
Profit per common share – diluted 2
$
0.62

 
$
1.63

 
 
 
 
Weighted-average common shares outstanding (millions)
 

 
 

– Basic
588.4

 
611.5

– Diluted 2
594.8

 
622.8

 
 
 
 
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.

3
Table of Contents

Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)
 
Three Months Ended
September 30,
 
2015
 
2014
 
 
 
 
Profit of consolidated and affiliated companies
$
371

 
$
1,021

Other comprehensive income (loss), net of tax:
 
 
 
   Foreign currency translation, net of tax (provision)/benefit of: 2015 - $(5); 2014 - $(44)
(235
)
 
(710
)
 
 
 
 
   Pension and other postretirement benefits:

 
 
        Current year actuarial gain (loss), net of tax (provision)/benefit of: 2015 - $(21); 2014 - $(2)
44

 
4

        Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2015 - $(56); 2014 - $(44)
108

 
86

        Current year prior service credit (cost), net of tax (provision)/benefit of: 2015 - $(1); 2014 - $(1)
1

 
—

        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2015 - $5; 2014 - $3
(8
)
 
(6
)
 
 
 
 
   Derivative financial instruments:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2015 - $7; 2014 - $17
(12
)
 
(30
)
        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2015 - $(11); 2014 - $1
20

 
—

 
 
 
 
   Available-for-sale securities:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2015 - $10; 2014 - $5
(15
)
 
(5
)
        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2015 - $9; 2014 - $7
(18
)
 
(13
)
 
 
 
 
Total other comprehensive income (loss), net of tax
(115
)
 
(674
)
Comprehensive income
256

 
347

Less: comprehensive income attributable to the noncontrolling interests
(2
)
 
(4
)
Comprehensive income attributable to stockholders
$
254

 
$
343

 
 
 
 

See accompanying notes to Consolidated Financial Statements.


4
Table of Contents

Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
 
Nine Months Ended
September 30,
 
2015
 
2014
Sales and revenues:
 
 
 
Sales of Machinery, Energy & Transportation
$
33,829

 
$
38,642

Revenues of Financial Products
2,152

 
2,298

Total sales and revenues
35,981

 
40,940

 
 
 
 
Operating costs:
 

 
 

Cost of goods sold
25,559

 
29,268

Selling, general and administrative expenses
3,932

 
4,175

Research and development expenses
1,612

 
1,557

Interest expense of Financial Products
440

 
470

Other operating (income) expenses
1,068

 
1,205

Total operating costs
32,611

 
36,675

 
 
 
 
Operating profit
3,370

 
4,265

 
 
 
 
Interest expense excluding Financial Products
381

 
358

Other income (expense)
76

 
236

 
 
 
 
Consolidated profit before taxes
3,065

 
4,143

 
 
 
 
Provision (benefit) for income taxes
870

 
1,201

Profit of consolidated companies
2,195

 
2,942

 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
1

 
6

 
 
 
 
Profit of consolidated and affiliated companies
2,196

 
2,948

 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
7

 
10

 
 
 
 
Profit 1
$
2,189

 
$
2,938

 
 
 
 
Profit per common share
$
3.66

 
$
4.73

 
 
 
 
Profit per common share – diluted 2
$
3.62

 
$
4.64

 
 
 
 
Weighted-average common shares outstanding (millions)
 
 
 

– Basic
597.9

 
620.6

– Diluted 2
605.3

 
632.7

 
 
 
 
Cash dividends declared per common share
$
1.47

 
$
1.30


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.


5
Table of Contents

Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)
 
Nine Months Ended
September 30,
 
2015
 
2014
 
 
 
 
Profit of consolidated and affiliated companies
$
2,196

 
$
2,948

Other comprehensive income (loss), net of tax:
 
 
 
   Foreign currency translation, net of tax (provision)/benefit of: 2015 - $(60); 2014 - $(52)
(810
)
 
(643
)
 
 
 
 
   Pension and other postretirement benefits:
 
 
 
        Current year actuarial gain (loss), net of tax (provision)/benefit of: 2015 - $(35); 2014 - $(7)
68

 
14

        Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2015 - $(168); 2014 - $(132)
326

 
258

        Current year prior service credit (cost), net of tax (provision)/benefit of: 2015 - $(1); 2014 - $(1)
1

 
1

        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2015 - $14; 2014 - $10
(26
)
 
(18
)
 
 
 
 
   Derivative financial instruments:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2015 - $9; 2014 - $33
(15
)
 
(57
)
        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2015 - $(40); 2014 - $7
69

 
(10
)
 
 
 
 
   Available-for-sale securities:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2015 - $10; 2014 - $(6)
(13
)
 
18

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2015 - $10; 2014 - $11
(21
)
 
(23
)
 
 
 
 
Total other comprehensive income (loss), net of tax
(421
)
 
(460
)
Comprehensive income
1,775

 
2,488

Less: comprehensive income attributable to the noncontrolling interests
2

 
(9
)
Comprehensive income attributable to stockholders
$
1,777

 
$
2,479

 
 
 
 

See accompanying notes to Consolidated Financial Statements.




6
Table of Contents

Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Dollars in millions) 
 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 

 
 

Cash and short-term investments
$
6,046

 
$
7,341

Receivables – trade and other
6,783

 
7,737

Receivables – finance
8,862

 
9,027

Deferred and refundable income taxes
1,446

 
1,739

Prepaid expenses and other current assets
993

 
818

Inventories
11,150

 
12,205

Total current assets
35,280

 
38,867

 
 
 
 
Property, plant and equipment – net
15,955

 
16,577

Long-term receivables – trade and other
1,266

 
1,364

Long-term receivables – finance
13,551

 
14,644

Investments in unconsolidated affiliated companies
231

 
257

Noncurrent deferred and refundable income taxes
1,559

 
1,404

Intangible assets
2,841

 
3,076

Goodwill
6,546

 
6,694

Other assets
1,740

 
1,798

Total assets
$
78,969

 
$
84,681

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Short-term borrowings:
 

 
 

Machinery, Energy & Transportation
$
12

 
$
9

Financial Products
6,068

 
4,699

Accounts payable
5,206

 
6,515

Accrued expenses
3,306

 
3,548

Accrued wages, salaries and employee benefits
1,678

 
2,438

Customer advances
1,610

 
1,697

Dividends payable
—

 
424

Other current liabilities
1,698

 
1,754

Long-term debt due within one year:
 

 
 

Machinery, Energy & Transportation
516


510

Financial Products
5,739

 
6,283

Total current liabilities
25,833

 
27,877

 
 
 
 
Long-term debt due after one year:
 

 
 

Machinery, Energy & Transportation
8,997

 
9,493

Financial Products
16,211

 
18,291

Liability for postemployment benefits
8,638

 
8,963

Other liabilities
3,322

 
3,231

Total liabilities
63,001

 
67,855

Commitments and contingencies (Notes 10 and 13)


 


Stockholders’ equity
 

 
 

Common stock of $1.00 par value:
 

 
 

Authorized shares: 2,000,000,000
Issued shares: (9/30/15 and 12/31/14 – 814,894,624) at paid-in amount
5,190

 
5,016

Treasury stock (9/30/15 – 232,660,823 shares; 12/31/14 – 208,728,065 shares) at cost
(17,642
)
 
(15,726
)
Profit employed in the business
35,191

 
33,887

Accumulated other comprehensive income (loss)
(6,843
)
 
(6,431
)
Noncontrolling interests
72

 
80

Total stockholders’ equity
15,968

 
16,826

Total liabilities and stockholders’ equity
$
78,969

 
$
84,681

 
See accompanying notes to Consolidated Financial Statements.

7
Table of Contents

Caterpillar Inc.
Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)
(Dollars in millions) 
 
Common
stock
 
Treasury
stock
 
Profit
employed
in the
business
 
Accumulated
other
comprehensive
income (loss)
 
Noncontrolling
interests
 
Total
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
4,709

 
$
(11,854
)
 
$
31,854

 
$
(3,898
)
 
$
67

 
$
20,878

Profit of consolidated and affiliated companies
—

 
—

 
2,938

 
—

 
10

 
2,948

Foreign currency translation, net of tax
—

 
—

 
—

 
(642
)
 
(1
)
 
(643
)
Pension and other postretirement benefits, net of tax
—

 
—

 
—

 
255

 
—

 
255

Derivative financial instruments, net of tax
—

 
—

 
—

 
(67
)
 
—

 
(67
)
Available-for-sale securities, net of tax
—

 
—

 
—

 
(5
)
 
—

 
(5
)
Change in ownership from noncontrolling interests
—

 
—

 
—

 
—

 
4

 
4

Dividends declared
—

 
—

 
(815
)
 
—

 
—

 
(815
)
Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
(7
)
 
(7
)
Common shares issued from treasury stock for stock-based compensation:  9,338,857
(109
)
 
327

 
—

 
—

 
—

 
218

Stock-based compensation expense
207

 
—

 
—

 
—

 
—

 
207

Net excess tax benefits from stock-based compensation
161

 
—

 
—

 
—

 
—

 
161

Common shares repurchased: 41,762,325 1
—

 
(4,238
)
 
—

 
—

 
—

 
(4,238
)
Balance at September 30, 2014
$
4,968

 
$
(15,765
)
 
$
33,977

 
$
(4,357
)
 
$
73

 
$
18,896

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2014
$
5,016

 
$
(15,726
)
 
$
33,887

 
$
(6,431
)
 
$
80

 
$
16,826

Profit of consolidated and affiliated companies
—

 
—

 
2,189

 
—

 
7

 
2,196

Foreign currency translation, net of tax
—

 
—

 
—

 
(801
)
 
(9
)
 
(810
)
Pension and other postretirement benefits, net of tax
—

 
—

 
—

 
369

 
—

 
369

Derivative financial instruments, net of tax
—

 
—

 
—

 
54

 
—

 
54

Available-for-sale securities, net of tax
—

 
—

 
—

 
(34
)
 
—

 
(34
)
Dividends declared
—

 
—

 
(885
)
 
—

 
—

 
(885
)
Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
(7
)
 
(7
)
Common shares issued from treasury stock for stock-based compensation: 2,843,506
(75
)
 
109

 
—

 
—

 
—

 
34

Stock-based compensation expense
240

 
—

 
—

 
—

 
—

 
240

Net excess tax benefits from stock-based compensation
7

 
—

 
—

 
—

 
—

 
7

Common shares repurchased: 25,841,608 1
—

 
(2,025
)
 
—

 
—

 
—

 
(2,025
)
Other
2

 
—

 
—

 
—

 
1

 
3

Balance at September 30, 2015
$
5,190

 
$
(17,642
)
 
$
35,191

 
$
(6,843
)
 
$
72

 
$
15,968

 
1 
See Note 11 regarding shares repurchased.
 
See accompanying notes to Consolidated Financial Statements.


8
Table of Contents

Caterpillar Inc.
Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
 
Nine Months Ended
September 30,
 
2015
 
2014
Cash flow from operating activities:
 
 
 
Profit of consolidated and affiliated companies
$
2,196

 
$
2,948

Adjustments for non-cash items:
 

 
 

Depreciation and amortization
2,272

 
2,368

Other
354

 
327

Changes in assets and liabilities, net of acquisitions and divestitures:
 

 
 

Receivables – trade and other
614

 
393

Inventories
840

 
(859
)
Accounts payable
(893
)
 
518

Accrued expenses
(25
)
 
(44
)
Accrued wages, salaries and employee benefits
(704
)
 
648

Customer advances
(36
)
 
(132
)
Other assets – net
(108
)
 
(104
)
Other liabilities – net
354

 
123

Net cash provided by (used for) operating activities
4,864

 
6,186

 
 
 
 
Cash flow from investing activities:
 

 
 

Capital expenditures – excluding equipment leased to others
(946
)
 
(1,072
)
Expenditures for equipment leased to others
(1,251
)
 
(1,310
)
Proceeds from disposals of leased assets and property, plant and equipment
473

 
681

Additions to finance receivables
(7,099
)
 
(8,464
)
Collections of finance receivables
6,849

 
7,264

Proceeds from sale of finance receivables
101

 
154

Investments and acquisitions (net of cash acquired)
(140
)
 
(18
)
Proceeds from sale of businesses and investments (net of cash sold)
174

 
196

Proceeds from sale of securities
238

 
347

Investments in securities
(296
)
 
(769
)
Other – net
(76
)
 
(12
)
Net cash provided by (used for) investing activities
(1,973
)
 
(3,003
)
 
 
 
 
Cash flow from financing activities:
 

 
 

Dividends paid
(1,309
)
 
(1,197
)
Distribution to noncontrolling interests
(7
)
 
(7
)
Contribution from noncontrolling interests
—

 
2

Common stock issued, including treasury shares reissued
34

 
218

Treasury shares purchased
(2,025
)
 
(4,238
)
Excess tax benefit from stock-based compensation
20

 
162

Proceeds from debt issued (original maturities greater than three months):
 

 
 

        Machinery, Energy & Transportation
3

 
1,991

        Financial Products
4,079

 
7,112

Payments on debt (original maturities greater than three months):
 

 
 

        Machinery, Energy & Transportation
(513
)
 
(779
)
        Financial Products
(6,259
)
 
(7,114
)
Short-term borrowings – net (original maturities three months or less)
1,922

 
791

Net cash provided by (used for) financing activities
(4,055
)
 
(3,059
)
Effect of exchange rate changes on cash
(131
)
 
(123
)
Increase (decrease) in cash and short-term investments
(1,295
)
 
1

Cash and short-term investments at beginning of period
7,341

 
6,081

Cash and short-term investments at end of period
$
6,046

 
$
6,082


 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.

9
Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
A.  Nature of operations
 
Information in our financial statements and related commentary are presented in the following categories:
 
Machinery, Energy & Transportation – Represents the aggregate total of Construction Industries, Resource Industries, Energy & Transportation and All Other operating 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 Financial Insurance Services (Insurance Services) and their respective subsidiaries.

B.  Basis of presentation
 
In the opinion of management, the accompanying unaudited 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, 2015 and 2014, (b) the consolidated comprehensive income for the three and nine month periods ended September 30, 2015 and 2014, (c) the consolidated financial position at September 30, 2015 and December 31, 2014, (d) the consolidated changes in stockholders’ equity for the nine month periods ended September 30, 2015 and 2014 and (e) the consolidated cash flow for the nine month periods ended September 30, 2015 and 2014.  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.
 
As previously disclosed, in connection with the preparation of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, we concluded that certain non-cash transactions should be excluded from both changes in Receivables-trade and other and Accounts payable when preparing our Consolidated Statement of Cash Flow. Accordingly, we prepared our Consolidated Statement of Cash Flow for the nine months ended September 30, 2014 on that basis. We subsequently concluded that our prior policy of including those transactions in the changes in Receivables-trade and other and Accounts payable is acceptable. Accordingly, we prepared our Consolidated Statement of Cash Flow for the year ended December 31, 2014 using our prior policy. We have revised our Consolidated Statement of Cash Flow to increase Receivables-trade and other and decrease Accounts payable by $149 million for the nine months ended September 30, 2014. The revisions did not impact net cash provided by operating activities.

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, 2014 (2014 Form 10-K).
 
The December 31, 2014 financial position data included herein is derived from the audited consolidated financial statements included in the 2014 Form 10-K but does not include all disclosures required by U.S. GAAP. 

Unconsolidated Variable Interest Entities (VIEs)

We have affiliates, suppliers and dealers that are VIEs of which we are not the primary beneficiary. Although we have provided financial support, we do not have the power to direct the activities that most significantly impact the economic performance of each entity.


10
Table of Contents

Our maximum exposure to loss from VIEs for which we are not the primary beneficiary was as follows:
 
 
 
 
 
 
(Millions of dollars)
 
September 30, 2015
 
December 31, 2014
 
Receivables - trade and other
 
$
48

 
$
36

 
Receivables - finance
 
492

 
216

 
Long-term receivables - finance
 
63

 
285

 
Investments in unconsolidated affiliated companies
 
28

 
83

 
Guarantees
 
98

 
129

 
Total
 
$
729

 
$
749

 
 
 
 
 
 
 

2.                                    New accounting guidance
 
Reporting discontinued operations and disclosures of disposals of components of an entity – In April 2014, the Financial Accounting Standards Board (FASB) issued accounting guidance for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This guidance was effective January 1, 2015 and did not have a material impact on our financial statements.

Revenue recognition – In May 2014, the FASB issued new revenue recognition guidance to provide a single, comprehensive revenue recognition model for all contracts with customers. Under the new guidance, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. A five step model has been introduced for an entity to apply when recognizing revenue. The new guidance also includes enhanced disclosure requirements, and is effective January 1, 2018, with early adoption permitted for January 1, 2017. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented, or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Consolidated Statement of Changes in Stockholders' Equity. We are in the process of evaluating the application and implementation of the new guidance.

Variable interest entities (VIE) – In February 2015, the FASB issued accounting guidance on the consolidation of VIEs. The new guidance revises previous guidance by establishing an analysis for determining whether a limited partnership or similar entity is a VIE and whether outsourced decision-maker fees are considered variable interests. In addition, the new guidance revises how a reporting entity evaluates economics and related parties when assessing who should consolidate a VIE. This guidance is effective January 1, 2016. We do not expect the adoption to have a material impact on our financial statements.

Presentation of debt issuance costs – In April 2015, the FASB issued accounting guidance which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Prior to the issuance of the new guidance, debt issuance costs were required to be presented in the balance sheet as an asset. This guidance is effective January 1, 2016. We do not expect the adoption to have a material impact on our financial statements.

Fair value disclosures for investments in certain entities that calculate net asset value per share – In May 2015, the FASB issued accounting guidance which removes the requirement to categorize within the fair value hierarchy investments measured at net asset value (or its equivalent) as a practical expedient for fair value. The new guidance requires that the amount of these investments continue to be disclosed to reconcile the fair value hierarchy disclosure to the balance sheet. The guidance is effective January 1, 2016 and will be applied retrospectively with early adoption permitted. We do not expect the adoption to have a material impact on our financial statements.

Simplifying the measurement of inventory – In July 2015, the FASB issued accounting guidance which requires that inventory be measured at the lower of cost or net realizable value. Prior to the issuance of the new guidance, inventory was measured at the lower of cost or market. Replacing the concept of market with the single measurement of net realizable value is intended to create efficiencies for preparers. Inventory measured using the last-in, first-out (LIFO) method and the retail inventory method are not impacted by the new guidance. The guidance is effective January 1, 2017. We do not expect the adoption to have a material impact on our financial statements.

11
Table of Contents


Simplifying the accounting for measurement-period adjustments – In September 2015, the FASB issued accounting guidance which eliminates the requirement for an acquirer in a business combination to restate prior period financial statements for measurement period adjustments. An acquirer in a business combination is required to report provisional amounts when measurements are incomplete at the end of the reporting period covering the business combination. Prior to the issuance of the new guidance, an acquirer was required to adjust such provisional amounts by restating prior period financial statements. Under the new guidance, the acquirer will recognize the measurement-period adjustment in the period the adjustment is determined. The guidance is effective January 1, 2016 and will be applied prospectively with early adoption permitted. We do not expect the adoption to have a material impact on our financial statements.

3.                                     Stock-based compensation
 
Accounting for stock-based compensation requires that the cost resulting from all stock-based payments be recognized in the financial statements based on the grant date fair value of the award.  Stock-based compensation primarily consists of stock options, restricted stock units (RSUs) and stock-settled stock appreciation rights (SARs).  Stock-based compensation awards granted prior to 2015 will vest three years after the date of grant (cliff vesting). The awards granted in 2015 will vest according to a three-year graded vesting schedule. One-third of the award will become vested on the first anniversary of the grant date, one-third of the award will become vested on the second anniversary of the grant date and one-third of the award will become vested on the third anniversary of the grant date. Stock-based compensation expense will be recognized on a straight-line basis over the requisite service period for awards with terms that specify cliff or graded vesting and contain only service conditions.

Upon separation from service, if the participant is 55 years of age or older with more than five years of service, the participant meets the criteria for a "Long Service Separation". Prior to 2015, our stock-based compensation award terms allowed for the immediate vesting upon separation for employees who met the criteria for a "Long Service Separation" and fulfilled a requisite service period of six months. For these employees, compensation expense was recognized over the period from the grant date to the end date of the six-month requisite service period. Our stock-based compensation award terms for the 2015 grant allowed for the immediate vesting upon separation for employees who met the criteria for a "Long Service Separation" with no requisite service period. For these employees, compensation expense for the 2015 grant was recognized immediately on the grant date. For employees who become eligible for immediate vesting under a "Long Service Separation" subsequent to the grant date and prior to the completion of the vesting period, compensation expense is recognized over the period from grant date to the date eligibility is achieved. If the "Long Service Separation" criteria are met, the vested options/SARs will have a life that is the lesser of ten years from the original grant date or five years from the separation date.

We recognized pretax stock-based compensation expense in the amount of $48 million and $240 million for the three and nine months ended September 30, 2015, respectively; and $70 million and $207 million for the three and nine months ended September 30, 2014, respectively. The change in stock-based compensation expense for the third quarter was primarily due to the change in award terms for participants that met the criteria for a "Long Service Separation", as the removal of the six-month requisite service period results in higher expense in the first quarter (period of grant) and lower expense over the following two quarters.

The following table illustrates the type and fair value of the stock-based compensation awards granted during the nine month periods ended September 30, 2015 and 2014, respectively:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
Shares Granted
 
Weighted-Average Fair Value Per Share
 
Weighted-Average Grant Date Stock Price
 
Shares Granted
 
Weighted-Average Fair Value Per Share
 
Weighted-Average Grant Date Stock Price
Stock options
7,939,497

 
$
23.61

 
$
83.34

 
4,448,218

 
$
29.52

 
$
96.31

RSUs
1,822,729

 
$
77.54

 
$
83.01

 
1,429,512

 
$
89.18

 
$
96.31

 
 
 
 
 
 
 
 
 
 
 
 
 

12
Table of Contents

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, 2015 and 2014, respectively:
 
 
 
 
 
 
Grant Year
 
2015
 
2014
Weighted-average dividend yield
2.27%
 
2.15%
Weighted-average volatility
28.4%
 
28.2%
Range of volatilities
19.9-35.9%
 
18.4-36.2%
Range of risk-free interest rates
0.22-2.08%
 
0.12-2.60%
Weighted-average expected lives
8 years
 
8 years
 
 
 
 
 
As of September 30, 2015, the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $261 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 2.0 years.
 
4.                                     Derivative financial instruments and risk management
 
Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices.  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.

13
Table of Contents

 
Our Machinery, Energy & Transportation operations purchase, manufacture and sell products in many locations around the world. As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to five years. As of September 30, 2015, the maximum term of these outstanding contracts was approximately 15 months.
 
We generally designate as cash flow hedges at inception of the contract any Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, Indian rupee, Japanese yen, Mexican peso, Norwegian krona, 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, Energy & Transportation foreign currency contracts are undesignated.  
 
As of September 30, 2015, $19 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.
 
Our Machinery, Energy & Transportation 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. We designate fixed-to-floating interest rate swaps as fair value hedges at inception of the contract, and we designate certain forward rate agreements as cash flow hedges at inception of the contract.

As of September 30, 2015, $4 million of deferred net losses, net of tax, included in equity (AOCI in the Consolidated Statement of Financial Position), related to Machinery, Energy & Transportation forward rate agreements, are expected to be reclassified to current earnings (Interest expense excluding Financial Products in the Consolidated Statement of Results of Operations) over the next twelve months.

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, 2015, $1 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

14
Table of Contents

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, Energy & Transportation 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.
 
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, Energy & Transportation 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, 2015
 
December 31, 2014
Designated derivatives
 
 
 
 
 
Foreign exchange contracts
 
 
 

 
 

Machinery, Energy & Transportation
Receivables – trade and other
 
$
16

 
$
25

Machinery, Energy & Transportation
Accrued expenses
 
(47
)
 
(134
)
Machinery, Energy & Transportation
Other liabilities
 
(2
)
 
—

Interest rate contracts
 
 
 
 
 

Financial Products
Receivables – trade and other
 
1

 
6

Financial Products
Long-term receivables – trade and other
 
65

 
73

Financial Products
Accrued expenses
 
(4
)
 
(8
)
 
 
 
$
29

 
$
(38
)
Undesignated derivatives
 
 
 

 
 

Foreign exchange contracts
 
 
 

 
 

Machinery, Energy & Transportation
Receivables – trade and other
 
$
6

 
$
2

Machinery, Energy & Transportation
Accrued expenses
 
(11
)
 
(43
)
Financial Products
Receivables – trade and other
 
3

 
5

Financial Products
Long-term receivables – trade and other
 
35

 
17

Financial Products
Accrued expenses
 
(5
)
 
(15
)
Commodity contracts
 
 
 
 
 

Machinery, Energy & Transportation
Accrued expenses
 
(12
)
 
(14
)
 
 
 
$
16

 
$
(48
)
 
 
 
 
 
 

The total notional amounts of the derivative instruments are as follows:

 
 
 
 
 
(Millions of dollars)
 
September 30, 2015
 
December 31, 2014
 
 
 
 
 
Machinery, Energy & Transportation
 
$
2,198

 
$
3,128

Financial Products
 
$
3,785

 
$
5,249

 
 
 
 
 


15
Table of Contents

The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties. The amounts exchanged by the parties are calculated by reference to the notional amounts and by other terms of the derivatives, such as foreign currency exchange rates, interest rates or commodity prices.

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

Fair Value Hedges
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30, 2015
 
Three Months Ended
September 30, 2014
 
 (Millions of dollars)
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)
 
$
3

 
$
(3
)
 
$
(19
)
 
$
1

 
 
 
 
$
3

 
$
(3
)
 
$
(19
)
 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2014
 
 
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)
 
$
(11
)
 
$
10

 
$
(38
)
 
$
24

 
 
 
 
$
(11
)
 
$
10

 
$
(38
)
 
$
24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



16
Table of Contents

 
 
 
 
 
 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
 
 
Recognized in Earnings
 
 (Millions of dollars)
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, Energy & Transportation
$
(18
)
 
Other income (expense)
 
$
(29
)
 
$
—

 
Interest rate contracts
 
 
 
 
 
 
 
 
Machinery, Energy & Transportation
—

 
Interest expense excluding Financial Products
 
(1
)
 
—

 
Financial Products
(1
)
 
Interest expense of Financial Products
 
(1
)
 
—


 
$
(19
)
 
 
 
$
(31
)
 
$
—

 
 
Three Months Ended September 30, 2014
 
 
 
 
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, Energy & Transportation
$
(45
)
 
Other income (expense)
 
$
4

 
$
—

 
Interest rate contracts
 

 
 
 
 

 
 

 
Machinery, Energy & Transportation
—

 
Interest expense excluding Financial Products
 
(1
)
 
—

 
Financial Products
(2
)
 
Interest expense of Financial Products
 
(2
)
 
—


 
$
(47
)
 
 
 
$
1

 
$
—

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
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, Energy & Transportation
$
(25
)
 
Other income (expense)
 
$
(101
)

$
—

 
Interest rate contracts
 
 
 
 
 

 
 

 
Machinery, Energy & Transportation
—

 
Interest expense excluding Financial Products
 
(4
)
 
—

 
Financial Products
1

 
Interest expense of Financial Products
 
(4
)
 
—


 
$
(24
)
 
 
 
$
(109
)
 
$
—

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
 
 
 
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, Energy & Transportation
$
(20
)
 
Other income (expense)
 
$
24


$
—

 
Interest rate contracts
 

 
 
 
 

 
 

 
Machinery, Energy & Transportation
(63
)
 
Interest expense excluding Financial Products
 
(3
)
 
—

 
Financial Products
(7
)
 
Interest expense of Financial Products
 
(4
)
 
—


 
$
(90
)
 
 
 
$
17

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


17
Table of Contents

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

 
 
 (Millions of dollars)
Classification of Gains (Losses)
 
Three Months Ended
September 30, 2015
 
Three Months Ended
September 30, 2014
Foreign exchange contracts
 
 
 
 
 
Machinery, Energy & Transportation
Other income (expense)
 
$
7

 
$
(44
)
Financial Products
Other income (expense)
 
6

 
(19
)
Commodity contracts
 
 
 

 
 
Machinery, Energy & Transportation
Other income (expense)
 
(8
)
 
(6
)
 
 
 
$
5

 
$
(69
)
 
 
 
 
 
 
 
Classification of Gains (Losses)
 
Nine Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2014
Foreign exchange contracts
 
 
 
 
 
Machinery, Energy & Transportation
Other income (expense)
 
$
(22
)
 
$
(35
)
Financial Products
Other income (expense)
 
(18
)
 
(36
)
Commodity contracts
 
 
 
 
 
Machinery, Energy & Transportation
Other income (expense)
 
(15
)
 
(3
)
 
 
 
$
(55
)
 
$
(74
)
 
 
 
 
 
 
 
We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within Machinery, Energy & Transportation 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, 2015 and December 31, 2014, no cash collateral was received or pledged under the master netting agreements.


18
Table of Contents

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, 2015
 
 
 
 
 
 
 
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, Energy & Transportation
 
$
22

 
$
—

 
$
22

 
$
(20
)
 
$
—

 
$
2

Financial Products
 
104

 
—

 
104

 
(7
)
 
—

 
97

 Total
 
$
126

 
$
—

 
$
126

 
$
(27
)
 
$
—

 
$
99

September 30, 2015
 
 
 
 
 
 
 
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, Energy & Transportation
 
$
(72
)
 
$
—

 
$
(72
)
 
$
20

 
$
—

 
$
(52
)
Financial Products
 
(9
)
 
—

 
(9
)
 
7

 
—

 
(2
)
 Total
 
$
(81
)
 
$
—

 
$
(81
)
 
$
27

 
$
—

 
$
(54
)
December 31, 2014
 
 
 
 
 
 
 
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, Energy & Transportation
 
$
27

 
$
—

 
$
27

 
$
(27
)
 
$
—

 
$
—

Financial Products
 
101

 
—

 
101

 
(8
)
 
—

 
93

 Total
 
$
128

 
$
—

 
$
128

 
$
(35
)
 
$
—

 
$
93

December 31, 2014
 
 
 
 
 
 
 
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, Energy & Transportation
 
$
(191
)
 
$
—

 
$
(191
)
 
$
27

 
$
—

 
$
(164
)
Financial Products
 
(23
)
 
—

 
(23
)
 
8

 
—

 
(15
)
 Total
 
$
(214
)
 
$
—

 
$
(214
)
 
$
35

 
$
—

 
$
(179
)
 
 
 
 
 
 
 
 
 
 
 
 
 


19
Table of Contents

5.                                     Inventories
 
Inventories are valued at the lower of cost or market, principally using the last-in, first-out (LIFO) method, and are comprised of the following:
 
 
 
 
 
(Millions of dollars)
September 30,
2015
 
December 31,
2014
Raw materials
$
2,862

 
$
2,986

Work-in-process
1,987

 
2,455

Finished goods
6,042

 
6,504

Supplies
259

 
260

Total inventories
$
11,150

 
$
12,205

 
 
 
 

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,
 
2015
 
2014
 
2015
 
2014
Sales
$
205

 
$
453

 
$
558

 
$
1,253

Cost of sales
166

 
357

 
437

 
974

Gross profit
$
39

 
$
96

 
$
121

 
$
279

 
 
 
 
 
 
 
 
Profit (loss)
$
(10
)
 
$
(7
)
 
$
(2
)
 
$
(17
)
 
 
 
 
 
 
 
 

 
 
 
 
Financial Position of unconsolidated affiliated companies: 
(Millions of dollars)
September 30,
2015
 
December 31,
2014
Assets:
 

 
 

Current assets
$
506

 
$
716

Property, plant and equipment – net
187

 
653

Other assets
198

 
557

 
891

 
1,926

Liabilities:
 

 
 

Current liabilities
298

 
518

Long-term debt due after one year
206

 
867

Other liabilities
13

 
215

 
517

 
1,600

Equity
$
374

 
$
326

 
 
 
 

 
 
 
 
Caterpillar’s investments in unconsolidated affiliated companies: 
(Millions of dollars)
September 30,
2015
 
December 31,
2014
Investments in equity method companies
$
188

 
$
248

Plus: Investments in cost method companies
43

 
9

Total investments in unconsolidated affiliated companies
$
231

 
$
257

 
 
 
 

The changes in the 2015 results of operations, financial position and investments in equity method companies noted above are primarily related to the sale of Caterpillar's 35 percent equity interest in the third party logistics business, formerly Caterpillar Logistics Services LLC. In February 2015, we sold our interest to an affiliate of The Goldman Sachs Group,

20
Table of Contents

Inc. and investment funds affiliated with Rhône Capital LLC for $177 million, which was comprised of $167 million in cash and a $10 million note receivable included in Long-term receivables - trade and other in the Consolidated Statement of Financial Position. As a result of the sale, we recognized a pretax gain of $120 million (included in Other income (expense)) and derecognized the carrying value of our noncontrolling interest of $57 million, which was previously included in Investments in unconsolidated affiliated companies in the Consolidated Statement of Financial Position. The gain on the disposal is included as a reconciling item between Segment profit and Consolidated profit before taxes. The sale of this investment supports Caterpillar's increased focus on growth opportunities in its core businesses.

7.                                     Intangible assets and goodwill
 
A.  Intangible assets
 
Intangible assets are comprised of the following:
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
(Millions of dollars)
Weighted
Amortizable
Life (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
15
 
$
2,427

 
$
(773
)
 
$
1,654

Intellectual property
11
 
1,720

 
(645
)
 
1,075

Other
13
 
187

 
(75
)
 
112

Total finite-lived intangible assets
14
 
$
4,334

 
$
(1,493
)
 
$
2,841

 
 
 
 
December 31, 2014
 
Weighted
Amortizable
Life (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
15
 
$
2,489

 
$
(669
)
 
$
1,820

Intellectual property
11
 
1,724

 
(578
)
 
1,146

Other
11
 
239

 
(129
)
 
110

Total finite-lived intangible assets
14
 
$
4,452

 
$
(1,376
)
 
$
3,076

 
 
 
 
 
 
 
 

Amortization expense for the three and nine months ended September 30, 2015 was $81 million and $255 million, respectively. Amortization expense for the three and nine months ended September 30, 2014 was $91 million and $276 million, respectively. Amortization expense related to intangible assets is expected to be:
(Millions of dollars)
Remaining Three Months of 2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
$88
 
$327
 
$325
 
$319
 
$317
 
$1,465
 
 
 
 
 
 
 
 
 
 
 
 
B.  Goodwill
 
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,

21
Table of Contents

the difference is recognized as an impairment loss. No goodwill was impaired during the nine months ended September 30, 2015 or 2014.
 
During 2015, we acquired net assets with related goodwill of $21 million in the Energy & Transportation segment.

The changes in carrying amount of goodwill by reportable segment for the nine months ended September 30, 2015 were as follows: 
 
 
 
 
 
 
 
 
 
(Millions of dollars)
 
December 31,
2014
 
Acquisitions
 
Other Adjustments 1
 
September 30,
2015
Construction Industries
 
 
 
 
 
 
 


Goodwill
 
$
275

 
$
—

 
$
(10
)
 
$
265

Resource Industries