Edgar Filing: CATERPILLAR INC

10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-768

CATERPILLAR INC.

(Exact name of registrant as specified in its charter)



Delaware (State or other jurisdiction of incorporation)		37-0602744 (IRS Employer I.D. No.)

100 NE Adams Street, Peoria, Illinois (Address of principal executive offices)		61629 (Zip Code)

Registrant’s telephone number, including area code:

(309) 675-1000

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x	Accelerated filer	o

Non-accelerated filer	o	Smaller reporting company	o

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

At March 31, 2016, 583,868,746 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	51
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74
Item 4.	Controls and Procedures	74

Part II. Other Information
Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	*
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 3.	Defaults Upon Senior Securities	*
Item 4.	Mine Safety Disclosures	*
Item 5.	Other Information	*
Item 6.	Exhibits	76

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

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Caterpillar Inc.

Consolidated Statement of Results of Operations

(Unaudited)

(Dollars in millions except per share data)



	Three Months Ended March 31
	2016			2015
Sales and revenues:
Sales of Machinery, Energy & Transportation	$	8,780		$	11,961
Revenues of Financial Products	681			741
Total sales and revenues	9,461			12,702

Operating costs:
Cost of goods sold	6,822			8,760
Selling, general and administrative expenses	1,088			1,249
Research and development expenses	508			524
Interest expense of Financial Products	152			150
Other operating (income) expenses	397			317
Total operating costs	8,967			11,000

Operating profit	494			1,702

Interest expense excluding Financial Products	129			129
Other income (expense)	—			194

Consolidated profit before taxes	365			1,767

Provision (benefit) for income taxes	92			521
Profit of consolidated companies	273			1,246

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

Profit of consolidated and affiliated companies	272			1,248

Less: Profit (loss) attributable to noncontrolling interests	1			3

Profit ¹	$	271		$	1,245

Profit per common share	$	0.46		$	2.06

Profit per common share – diluted ²	$	0.46		$	2.03

Weighted-average common shares outstanding (millions)
– Basic	582.8			604.9
– Diluted²	587.7			612.7

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 March 31
	2016			2015

Profit of consolidated and affiliated companies	$	272		$	1,248
Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax (provision)/benefit of: 2016 - $32; 2015 - $(85)	408			(786		)

Pension and other postretirement benefits:
Current year prior service credit (cost), net of tax (provision)/benefit of: 2016 - $(69); 2015 - $0	118			—
Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2016 - $5; 2015 - $4	(10		)	(9		)

Derivative financial instruments:
Gains (losses) deferred, net of tax (provision)/benefit of: 2016 - $(6); 2015 - $9	9			(14		)
(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2016 - $(5); 2015 - $(14)	9			24

Available-for-sale securities:
Gains (losses) deferred, net of tax (provision)/benefit of: 2016 - $(5); 2015 - $(4)	6			8
(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2016 - $(1); 2015 - $1	2			(2		)

Total other comprehensive income (loss), net of tax	542			(779		)
Comprehensive income	814			469
Less: comprehensive income attributable to the noncontrolling interests	(1		)	(3		)
Comprehensive income attributable to stockholders	$	813		$	466

See accompanying notes to Consolidated Financial Statements.

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Caterpillar Inc.

Consolidated Statement of Financial Position

(Unaudited)

(Dollars in millions)



	March 31, 2016			December 31, 2015
Assets
Current assets:
Cash and short-term investments	$	5,886		$	6,460
Receivables – trade and other	6,856			6,695
Receivables – finance	9,310			8,991
Prepaid expenses and other current assets	1,847			1,662
Inventories	9,849			9,700
Total current assets	33,748			33,508

Property, plant and equipment – net	15,935			16,090
Long-term receivables – trade and other	1,159			1,170
Long-term receivables – finance	13,527			13,651
Noncurrent deferred and refundable income taxes	2,486			2,489
Intangible assets	2,741			2,821
Goodwill	6,710			6,615
Other assets	2,001			1,998
Total assets	$	78,307		$	78,342

Liabilities
Current liabilities:
Short-term borrowings:
Machinery, Energy & Transportation	$	13		$	9
Financial Products	7,804			6,958
Accounts payable	5,101			5,023
Accrued expenses	3,142			3,116
Accrued wages, salaries and employee benefits	1,158			1,994
Customer advances	1,328			1,146
Dividends payable	—			448
Other current liabilities	1,593			1,671
Long-term debt due within one year:
Machinery, Energy & Transportation	568			517
Financial Products	5,508			5,360
Total current liabilities	26,215			26,242

Long-term debt due after one year:
Machinery, Energy & Transportation	8,914			8,960
Financial Products	15,556			16,209
Liability for postemployment benefits	8,600			8,843
Other liabilities	3,269			3,203
Total liabilities	62,554			63,457
Commitments and contingencies (Notes 10 and 13)
Stockholders’ equity
Common stock of $1.00 par value:
Authorized shares: 2,000,000,000 Issued shares: (3/31/16 and 12/31/15 – 814,894,624) at paid-in amount	5,247			5,238
Treasury stock (3/31/16 – 231,025,878 shares; 12/31/15 – 232,572,734 shares) at cost	(17,595		)	(17,640		)
Profit employed in the business	29,517			29,246
Accumulated other comprehensive income (loss)	(1,493		)	(2,035		)
Noncontrolling interests	77			76
Total stockholders’ equity	15,753			14,885
Total liabilities and stockholders’ equity	$	78,307		$	78,342

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
Three Months Ended March 31, 2015
Balance at December 31, 2014	$	5,016		$	(15,726	)	$	28,515	$	(1,059	)	$	80		$	16,826
Profit of consolidated and affiliated companies	—			—			1,245		—			3			1,248
Foreign currency translation, net of tax	—			—			—		(786		)	—			(786		)
Pension and other postretirement benefits, net of tax	—			—			—		(9		)	—			(9		)
Derivative financial instruments, net of tax	—			—			—		10			—			10
Available-for-sale securities, net of tax	—			—			—		6			—			6
Distribution to noncontrolling interests	—			—			—		—			(7		)	(7		)
Common shares issued from treasury stock for stock-based compensation: 2,257,067	(58		)	90			—		—			—			32
Stock-based compensation expense	135			—			—		—			—			135
Net excess tax benefits from stock-based compensation	8			—			—		—			—			8
Common shares repurchased: 4,779,963 ¹	—			(400		)	—		—			—			(400		)
Balance at March 31, 2015	$	5,101		$	(16,036	)	$	29,760	$	(1,838	)	$	76		$	17,063

Three Months Ended March 31, 2016
Balance at December 31, 2015	$	5,238		$	(17,640	)	$	29,246	$	(2,035	)	$	76		$	14,885
Profit of consolidated and affiliated companies	—			—			271		—			1			272
Foreign currency translation, net of tax	—			—			—		408			—			408
Pension and other postretirement benefits, net of tax	—			—			—		108			—			108
Derivative financial instruments, net of tax	—			—			—		18			—			18
Available-for-sale securities, net of tax	—			—			—		8			—			8
Distribution to noncontrolling interests	—			—			—		—			(1		)	(1		)
Common shares issued from treasury stock for stock-based compensation: 1,546,856	(90		)	45			—		—			—			(45		)
Stock-based compensation expense	101			—			—		—			—			101
Net excess tax benefits from stock-based compensation	(6		)	—			—		—			—			(6		)
Other	4			—			—		—			1			5
Balance at March 31, 2016	$	5,247		$	(17,595	)	$	29,517	$	(1,493	)	$	77		$	15,753


¹	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)



	Three Months Ended March 31
	2016			2015
Cash flow from operating activities:
Profit of consolidated and affiliated companies	$	272		$	1,248
Adjustments for non-cash items:
Depreciation and amortization	740			753
Other	269			(88		)
Changes in assets and liabilities, net of acquisitions and divestitures:
Receivables – trade and other	14			6
Inventories	(74		)	(89		)
Accounts payable	211			228
Accrued expenses	33			35
Accrued wages, salaries and employee benefits	(852		)	(1,027		)
Customer advances	174			25
Other assets – net	(145		)	365
Other liabilities – net	(153		)	(186		)
Net cash provided by (used for) operating activities	489			1,270

Cash flow from investing activities:
Capital expenditures – excluding equipment leased to others	(357		)	(437		)
Expenditures for equipment leased to others	(383		)	(389		)
Proceeds from disposals of leased assets and property, plant and equipment	173			167
Additions to finance receivables	(2,014		)	(2,122		)
Collections of finance receivables	2,047			2,241
Proceeds from sale of finance receivables	10			43
Investments and acquisitions (net of cash acquired)	(12		)	(29		)
Proceeds from sale of businesses and investments (net of cash sold)	—			167
Proceeds from sale of securities	49			83
Investments in securities	(62		)	(70		)
Other – net	(23		)	(38		)
Net cash provided by (used for) investing activities	(572		)	(384		)

Cash flow from financing activities:
Dividends paid	(448		)	(424		)
Distribution to noncontrolling interests	(1		)	(7		)
Common stock issued, including treasury shares reissued	(45		)	32
Treasury shares purchased	—			(400		)
Excess tax benefit from stock-based compensation	1			17
Proceeds from debt issued (original maturities greater than three months):
Machinery, Energy & Transportation	1			2
Financial Products	1,210			1,527
Payments on debt (original maturities greater than three months):
Machinery, Energy & Transportation	(3		)	(6		)
Financial Products	(1,703		)	(2,313		)
Short-term borrowings – net (original maturities three months or less)	486			950
Net cash provided by (used for) financing activities	(502		)	(622		)
Effect of exchange rate changes on cash	11			(42		)
Increase (decrease) in cash and short-term investments	(574		)	222
Cash and short-term investments at beginning of period	6,460			7,341
Cash and short-term investments at end of period	$	5,886		$	7,563

All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents.

See accompanying notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


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 months ended March 31, 2016 and 2015, (b) the consolidated comprehensive income for the three months ended March 31, 2016 and 2015, (c) the consolidated financial position at March 31, 2016 and December 31, 2015, (d) the consolidated changes in stockholders’ equity for the three months ended March 31, 2016 and 2015 and (e) the consolidated cash flow for the three months ended March 31, 2016 and 2015. 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.

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, 2015 (2015 Form 10-K).

The December 31, 2015 financial position data included herein is derived from the audited consolidated financial statements included in the 2015 Form 10-K but does not include all disclosures required by U.S. GAAP. Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation. See Note 1C., Note 2, Note 7 and Note 15 for more information.

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.

Our maximum exposure to loss from VIEs for which we are not the primary beneficiary was as follows:




(Millions of dollars)	March 31, 2016		December 31, 2015
Receivables - trade and other	$	31	$	19
Receivables - finance	463		466
Long-term receivables - finance	68		62
Other assets	34		35
Guarantees	192		175
Total	$	788	$	757

C. Change in Accounting Principle

Effective January 1, 2016, we changed our accounting principle for recognizing actuarial gains and losses and expected return on plan assets for our defined benefit pension and other postretirement benefit plans. Prior to 2016, actuarial gains and losses were recognized as a component of Accumulated other comprehensive income (loss) and were generally

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amortized into earnings in future periods. Under the new principle, actuarial gains and losses will be immediately recognized through net benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement. In addition, we have changed our policy for recognizing the expected returns on plan assets from a market-related value method (based on a three-year smoothing of asset returns) to a fair value method. We believe these changes are preferable as they accelerate the recognition of changes in fair value of plan assets and actuarial gains and losses in our Consolidated Statement of Results of Operations, provide greater transparency of our economic obligations in accounting results and better align with the fair value principles by recognizing the effects of economic and interest rate changes on pension and other postretirement benefit assets and liabilities in the year in which the gains and losses are incurred. These changes have been applied retrospectively to prior years. As of January 1, 2015, the cumulative effect of the change resulted in a decrease of $5 billion in Profit employed in the business and a corresponding increase of $5 billion in Accumulated other comprehensive income (loss).

Following are the changes to financial statement line items as a result of the accounting principle change for the periods presented in the accompanying unaudited consolidated financial statements:




Consolidated Statement of Results of Operations
(Dollars in millions except per share data)
	Three Months Ended March 31, 2016							Three Months Ended March 31, 2015
	As Reported		Previous Accounting Method		Effect of Accounting Change			Recast		Previously Reported		Effect of Accounting Change
Cost of goods sold	$	6,822	$	6,881	$	(59	)	$	8,760	$	8,843	$	(83	)
Selling, general and administrative expenses	$	1,088	$	1,124	$	(36	)	$	1,249	$	1,318	$	(69	)
Research and development expenses	$	508	$	518	$	(10	)	$	524	$	546	$	(22	)
Other operating (income) expenses	$	397	$	397	$	—		$	317	$	318	$	(1	)
Total operating costs	$	8,967	$	9,072	$	(105	)	$	11,000	$	11,175	$	(175	)
Operating profit	$	494	$	389	$	105		$	1,702	$	1,527	$	175
Other income (expense)	$	—	$	4	$	(4	)	$	194	$	157	$	37
Consolidated profit before taxes	$	365	$	264	$	101		$	1,767	$	1,555	$	212
Provision for income taxes	$	92	$	61	$	31		$	521	$	443	$	78
Profit of consolidated companies	$	273	$	203	$	70		$	1,246	$	1,112	$	134
Profit of consolidated and affiliated companies	$	272	$	202	$	70		$	1,248	$	1,114	$	134
Profit	$	271	$	201	$	70		$	1,245	$	1,111	$	134
Profit per common share	$	0.46	$	0.34	$	0.12		$	2.06	$	1.84	$	0.22
Profit per common share - diluted	$	0.46	$	0.34	$	0.12		$	2.03	$	1.81	$	0.22

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Consolidated Statement of Financial Position
(Dollars in millions)
	March 31, 2016
	As Reported			Previous Accounting Method			Effect of Accounting Change
Noncurrent deferred and refundable income taxes	$	2,486		$	2,476		$	10
Liability for postemployment benefits	$	8,600		$	8,581		$	19
Profit employed in the business	$	29,517		$	34,409		$	(4,892	)
Accumulated other comprehensive income (loss)	$	(1,493	)	$	(6,376	)	$	4,883

	December 31, 2015
	Recast			Previously Reported			Effect of Accounting Change
Profit employed in the business	$	29,246		$	34,208		$	(4,962	)
Accumulated other comprehensive income (loss)	$	(2,035	)	$	(6,997	)	$	4,962




Consolidated Statement of Cash Flow
(Millions of dollars)
	Three Months Ended March 31, 2016									Three Months Ended March 31, 2015
Cash flow from operating activities:	As Reported			Previous Accounting Method			Effect of Accounting Change			Recast			Previously Reported			Effect of Accounting Change
Profit of consolidated and affiliated companies	$	272		$	202		$	70		$	1,248		$	1,114		$	134
Adjustments for non-cash items: Other	$	269		$	265		$	4		$	(88	)	$	(51	)	$	(37	)
Other assets – net	$	(145	)	$	(176	)	$	31		$	365		$	288		$	77
Other liabilities – net	$	(153	)	$	(48	)	$	(105	)	$	(186	)	$	(12	)	$	(174	)

2. New accounting guidance

Revenue recognition – In May 2014, the Financial Accounting Standards Board (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 plan to adopt the new guidance effective January 1, 2018 and are in the process of evaluating the effect of the new guidance on our financial statements.

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. The guidance was effective January 1, 2016 and did not 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

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asset. The guidance was effective January 1, 2016 and was applied retrospectively. The adoption did not 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 was effective January 1, 2016 and was applied retrospectively. The adoption did not 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.

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 was effective January 1, 2016 and was applied prospectively. The adoption did not have a material impact on our financial statements.

Balance sheet classification of deferred taxes - In November 2015, the FASB issued accounting guidance that requires all deferred tax assets and liabilities, along with any related valuation allowance, to be classified as noncurrent on the Consolidated Statement of Financial Position. Previous guidance requires the deferred taxes for each jurisdiction to be presented as a net current asset or liability and net noncurrent asset or liability. As a result of the new guidance, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that only permits offsetting deferred tax assets and liabilities within a single jurisdiction. We had the option to apply the new guidance prospectively or retrospectively. The new guidance is effective January 1, 2017, with early adoption permitted. We adopted the new guidance effective January 1, 2016 and applied it retrospectively. The adoption resulted in the reclassification of current deferred tax assets and liabilities to noncurrent assets and liabilities on the Consolidated Statement of Financial Position. For the year ended December 31, 2015, Deferred and refundable income taxes were reduced by $910 million (the remaining balance of $616 million was reclassified to Prepaid expenses and other current assets), Noncurrent deferred and refundable income taxes were increased by $835 million, Other current liabilities were reduced by $59 million and Other liabilities were reduced by $16 million.

Recognition and measurement of financial assets and financial liabilities - In January 2016, the FASB issued accounting guidance that affects the accounting for equity investments, financial liabilities accounted for under the fair value option and the presentation and disclosure requirements for financial instruments. Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification for equity securities with readily determinable fair values. For financial liabilities when the fair value option has been elected, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new guidance is effective January 1, 2018, with the cumulative effect adjustment from initially applying the new guidance recognized in the Consolidated Statement of Financial Position as of the beginning of the year of adoption. The impact on our financial statements at the time of adoption will primarily be based on changes in the fair value of our available-for-sale equity securities subsequent to January 1, 2018, which will be recorded through earnings.

Lease accounting - In February 2016, the FASB issued accounting guidance that revises the accounting for leases. Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability for all leases. The new guidance will continue to classify leases as either financing or operating, with classification affecting the pattern of expense recognition. The accounting applied by a lessor under the new guidance will be substantially equivalent to current lease

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accounting guidance. The new guidance is effective January 1, 2019 with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented and provides for certain practical expedients. We are in the process of evaluating the effect of the new guidance on our financial statements.

Stock-based compensation - In March 2016, the FASB issued accounting guidance to simplify several aspects of the accounting for share-based payments. The new guidance changes how reporting entities account for certain aspects of share-based payments, including the accounting for income taxes and the classification of the tax impact on the Consolidated Statement of Cash Flow. The new guidance is effective January 1, 2017 with early adoption permitted. We are in the process of evaluating the effect of the new guidance 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. Our stock-based compensation primarily consists of stock options, restricted stock units (RSUs), performance-based restricted stock units (PRSUs) and stock-settled stock appreciation rights (SARs). Awards granted prior to 2015 generally vest three years after the date of grant (cliff vesting). The awards granted in 2015 and 2016 generally vest according to a three-year graded vesting schedule. Beginning in 2015, PRSUs were granted. PRSUs generally have a three-year performance period and cliff vest at the end of the period based upon achievement of performance targets established at the time of grant.

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" and all outstanding stock options, SARs and RSUs will vest. Outstanding PRSUs granted to employees with a "Long Service Separation" will vest at the end of the performance period based upon achievement of the performance target. For awards granted prior to 2016, 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. For awards granted in 2016, the vested options/SARs will have a life equal to ten years from the original grant date.

We recognized pretax stock-based compensation expense in the amount of $101 million and $135 million for the three months ended March 31, 2016 and 2015, respectively.

The following table illustrates the type and fair value of the stock-based compensation awards granted during the three months ended March 31, 2016 and 2015, respectively:




	Three Months Ended March 31, 2016					Three Months Ended March 31, 2015
	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	4,243,272	$	20.64	$	74.77	7,939,497	$	23.61	$	83.34
RSUs	1,085,505	$	68.04	$	74.77	1,690,661	$	77.55	$	83.02
PRSUs	614,347	$	64.71	$	74.77	132,068	$	77.47	$	82.90

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The following table provides the assumptions used in determining the fair value of the stock-based awards for the three months ended March 31, 2016 and 2015, respectively:




	Grant Year
	2016	2015
Weighted-average dividend yield	3.23%	2.27%
Weighted-average volatility	31.1%	28.4%
Range of volatilities	22.5-33.4%	19.9-35.9%
Range of risk-free interest rates	0.62-1.73%	0.22-2.08%
Weighted-average expected lives	8 years	8 years

As of March 31, 2016, the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $308 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 2.2 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 flows from designated derivative financial instruments are classified within the same category as the item being hedged on the Consolidated Statement of Cash Flow. Cash flows 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.

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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 March 31, 2016, 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, euro, Indian rupee, Japanese yen, Mexican peso, Norwegian krona, Singapore dollar, Swiss franc or Thailand baht 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 March 31, 2016, $8 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.

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 March 31, 2016, $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 March 31, 2016, less than $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

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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	March 31, 2016			December 31, 2015
Designated derivatives
Foreign exchange contracts
Machinery, Energy & Transportation	Receivables – trade and other	$	39		$	12
Machinery, Energy & Transportation	Accrued expenses	(26		)	(25		)
Interest rate contracts
Financial Products	Receivables – trade and other	1			1
Financial Products	Long-term receivables – trade and other	54			51
Financial Products	Accrued expenses	(3		)	(4		)
		$	65		$	35
Undesignated derivatives
Foreign exchange contracts
Machinery, Energy & Transportation	Receivables – trade and other	$	9		$	2
Machinery, Energy & Transportation	Accrued expenses	—			(9		)
Financial Products	Receivables – trade and other	22			3
Financial Products	Long-term receivables – trade and other	32			36
Financial Products	Accrued expenses	(10		)	(6		)
Commodity contracts
Machinery, Energy & Transportation	Receivables – trade and other	1			—
Machinery, Energy & Transportation	Accrued expenses	(8		)	(12		)
		$	46		$	14

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




(Millions of dollars)	March 31, 2016		December 31, 2015

Machinery, Energy & Transportation	$	1,841	$	2,040
Financial Products	$	3,945	$	3,539

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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 March 31, 2016					Three Months Ended March 31, 2015
(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	$	(4	)	$	(1	)	$	1
		$	3	$	(4	)	$	(1	)	$	1




Cash Flow Hedges
	Three Months Ended March 31, 2016
				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	$	16		Other income (expense)	$	(10	)	$	—
Interest rate contracts
Machinery, Energy & Transportation	—			Interest expense excluding Financial Products	(2		)	—
Financial Products	(1		)	Interest expense of Financial Products	(2		)	—
	$	15			$	(14	)	$	—



	Three Months Ended March 31, 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)	$	(35	)	$	—
Interest rate contracts
Machinery, Energy & Transportation	—			Interest expense excluding Financial Products	(2		)	—
Financial Products	2			Interest expense of Financial Products	(1		)	—
	$	(23	)		$	(38	)	$	—

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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 March 31, 2016			Three Months Ended March 31, 2015
Foreign exchange contracts
Machinery, Energy & Transportation	Other income (expense)	$	22		$	(55	)
Financial Products	Other income (expense)	(4		)	(28		)
Commodity contracts
Machinery, Energy & Transportation	Other income (expense)	—			(6		)
		$	18		$	(89	)

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 March 31, 2016 and December 31, 2015, 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:




March 31, 2016							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	$	49	$	—	$	49	$	(26	)	$	—	$	23
Financial Products	109		—		109		(5		)	—		104
Total	$	158	$	—	$	158	$	(31	)	$	—	$	127



March 31, 2016									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	$	(34	)	$	—	$	(34	)	$	26	$	—	$	(8	)
Financial Products	(13		)	—		(13		)	5		—		(8		)
Total	$	(47	)	$	—	$	(47	)	$	31	$	—	$	(16	)



December 31, 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	$	14	$	—	$	14	$	(14	)	$	—	$	—
Financial Products	91		—		91		(5		)	—		86
Total	$	105	$	—	$	105	$	(19	)	$	—	$	86



December 31, 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	$	(46	)	$	—	$	(46	)	$	14	$	—	$	(32	)
Financial Products	(10		)	—		(10		)	5		—		(5		)
Total	$	(56	)	$	—	$	(56	)	$	19	$	—	$	(37	)

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5. Inventories

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




(Millions of dollars)	March 31, 2016		December 31, 2015
Raw materials	$	2,500	$	2,467
Work-in-process	1,897		1,857
Finished goods	5,205		5,122
Supplies	247		254
Total inventories	$	9,849	$	9,700

6. Investments in unconsolidated affiliated companies

Investments in unconsolidated affiliated companies, included in Other assets in the Consolidated Statement of Financial Position, were as follows:




Caterpillar’s investments in unconsolidated affiliated companies:
(Millions of dollars)	March 31, 2016		December 31, 2015
Investments in equity method companies	$	200	$	203
Plus: Investments in cost method companies	46		43
Total investments in unconsolidated affiliated companies	$	246	$	246

In February 2015, we sold our 35 percent equity interest in the third party logistics business, formerly Caterpillar Logistics Services LLC, to an affiliate of The Goldman Sachs Group, 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 Other assets 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.

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7. Intangible assets and goodwill

A. Intangible assets

Intangible assets are comprised of the following:




		March 31, 2016
(Millions of dollars)	Weighted Amortizable Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	15	$	2,525	$	(859	)	$	1,666
Intellectual property	11	1,629		(663		)	966
Other	14	176		(67		)	109
Total finite-lived intangible assets	14	$	4,330	$	(1,589	)	$	2,741



		December 31, 2015
	Weighted Amortizable Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	15	$	2,489	$	(809	)	$	1,680
Intellectual property	11	1,660		(626		)	1,034
Other	12	174		(67		)	107
Total finite-lived intangible assets	14	$	4,323	$	(1,502	)	$	2,821

Amortization expense for the three months ended March 31, 2016 and 2015 was $82 million and $87 million, respectively. Amortization expense related to intangible assets is expected to be:



(Millions of dollars)
Remaining Nine Months of 2016	2017	2018	2019	2020	Thereafter
$247	$330	$321	$320	$312	$1,211

B. Goodwill

No goodwill was impaired during the three months ended March 31, 2016 or 2015.

As discussed in Note 15, effective January 1, 2016, we revised our reportable segments in line with the changes to our organization structure. As a result of these changes, $118 million of goodwill was reassigned to Energy & Transportation from All Other segments.

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The changes in carrying amount of goodwill by reportable segment for the three months ended March 31, 2016 were as follows:




(Millions of dollars)	December 31, 2015			Acquisitions		Other Adjustments ¹		March 31, 2016
Construction Industries
Goodwill	$	285		$	—	$	15	$	300
Impairments	(22		)	—		—		(22		)
Net goodwill	263			—		15		278
Resource Industries
Goodwill	4,145			—		57		4,202
Impairments	(580		)	—		—		(580		)
Net goodwill	3,565			—		57		3,622
Energy & Transportation
Goodwill	2,738			—		18		2,756
All Other ²
Goodwill	49			—		5		54
Consolidated total
Goodwill	7,217			—		95		7,312
Impairments	(602		)	—		—		(602		)
Net goodwill	$	6,615		$	—	$	95	$	6,710

¹ Other adjustments are comprised primarily of foreign currency translation.

²Includes All Other operating segments (See Note 15).

8. Investments in debt and equity securities

We have investments in certain debt and equity securities, primarily at Insurance Services, that have been classified as available-for-sale and recorded at fair value. In addition, Insurance Services has an equity security investment in a real estate investment trust (REIT) which is recorded at fair value based on the net asset value (NAV) of the investment. These investments are primarily included in Other assets in the Consolidated Statement of Financial Position. Unrealized gains and losses arising from the revaluation of debt and equity securities are included, net of applicable deferred income taxes, in equity (Accumulated other comprehensive income (loss) in the Consolidated Statement of Financial Position). Realized gains and losses on sales of investments are generally determined using the specific identification method for debt and equity securities and are included in Other income (expense) in the Consolidated Statement of Results of Operations.

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The cost basis and fair value of debt and equity securities were as follows:



	March 31, 2016						December 31, 2015
(Millions of dollars)	Cost Basis		Unrealized Pretax Net Gains (Losses)		Fair Value		Cost Basis		Unrealized Pretax Net Gains (Losses)		Fair Value
Government debt
U.S. treasury bonds	$	12	$	—	$	12	$	9	$	—	$	9
Other U.S. and non-U.S. government bonds	72		—		72		71		1		72