EX-13 8 a12-2184_1ex13.htm EX-13

EXHIBIT 13

 

CATERPILLAR INC.

GENERAL AND FINANCIAL INFORMATION

2011

 

A-1



 

TABLE OF CONTENTS

 

Management’s Report on Internal Control Over Financial Reporting

 

Report of Independent Registered Public Accounting Firm

 

Consolidated Financial Statements and Notes

 

Five-year Financial Summary

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

 

Overview

 

2011 Compared with 2010

 

Fourth Quarter 2011 Compared with Fourth Quarter 2010

 

2010 Compared with 2009

 

Glossary of Terms

 

Liquidity and Capital Resources

 

Critical Accounting Policies

 

Global Workforce

 

Other Matters

 

Non-GAAP Financial Measures

 

Supplemental Stockholder Information

 

Directors and Officers

 

A-2



 

MANAGEMENT’S REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of Caterpillar Inc. (company) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined under Exchange Act Rule 13a-15(f).  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2011. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment we concluded that, as of December 31, 2011, the company’s internal control over financial reporting was effective based on those criteria.

 

Management has excluded Bucyrus International, Inc. (Bucyrus) and MWM Holding GmbH (MWM) from our assessment of internal control over financial reporting as of December 31, 2011 because we acquired Bucyrus in July 2011 and MWM in October 2011.  Bucyrus and MWM are wholly owned subsidiaries of Caterpillar Inc. whose combined total assets and total revenues represent approximately 17% and 4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2011.

 

The effectiveness of the company’s internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report appears on page A-4.

 

 

 

/s/ Douglas R. Oberhelman

 

 

Douglas R. Oberhelman

 

 

Chairman of the Board

 

 

and Chief Executive Officer

 

 

 

 

 

 

 

 

/s/ Edward J. Rapp

 

 

Edward J. Rapp

 

 

Group President

 

 

and Chief Financial Officer

 

 

 

 

 

 

 

 

February 21, 2012

 

 

A-3



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Caterpillar Inc.:

 

In our opinion, the accompanying consolidated statement of financial position and the related consolidated statements of results of operations, changes in stockholders’ equity, and of cash flow, including pages A-5 through A-80, present fairly, in all material respects, the financial position of Caterpillar Inc. and its subsidiaries at December 31, 2011, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing on page A-3.  Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Bucyrus International, Inc. (Bucyrus) and MWM Holding GmbH (MWM) from its assessment of internal control over financial reporting as of December 31, 2011 because Bucyrus and MWM were acquired by the Company in July 2011 and October 2011, respectively.  We have also excluded Bucyrus and MWM from our audit of internal control over financial reporting. Bucyrus and MWM are wholly owned subsidiaries of Caterpillar Inc. whose combined total assets and total revenues represent approximately 17% and 4%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2011.

 

/s/ PricewaterhouseCoopers LLP

 

Peoria, Illinois

February 21, 2012

 

A-4



 

STATEMENT 1

 

Caterpillar Inc.

Consolidated Results of Operations for the Years Ended December 31

(Dollars in millions except per share data)

 

 

 

2011

 

2010

 

2009

 

Sales and revenues:

 

 

 

 

 

 

 

Sales of Machinery and Power Systems

 

$

57,392

 

$

39,867

 

$

29,540

 

Revenues of Financial Products

 

2,746

 

2,721

 

2,856

 

Total sales and revenues

 

60,138

 

42,588

 

32,396

 

 

 

 

 

 

 

 

 

Operating costs:

 

 

 

 

 

 

 

Cost of goods sold

 

43,578

 

30,367

 

23,886

 

Selling, general and administrative expenses

 

5,203

 

4,248

 

3,645

 

Research and development expenses

 

2,297

 

1,905

 

1,421

 

Interest expense of Financial Products

 

826

 

914

 

1,045

 

Other operating (income) expenses

 

1,081

 

1,191

 

1,822

 

Total operating costs

 

52,985

 

38,625

 

31,819

 

 

 

 

 

 

 

 

 

Operating profit

 

7,153

 

3,963

 

577

 

 

 

 

 

 

 

 

 

Interest expense excluding Financial Products

 

396

 

343

 

389

 

Other income (expense)

 

(32

)

130

 

381

 

 

 

 

 

 

 

 

 

Consolidated profit before taxes

 

6,725

 

3,750

 

569

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

1,720

 

968

 

(270

)

Profit of consolidated companies

 

5,005

 

2,782

 

839

 

 

 

 

 

 

 

 

 

Equity in profit (loss) of unconsolidated affiliated companies

 

(24

)

(24

)

(12

)

 

 

 

 

 

 

 

 

Profit of consolidated and affiliated companies

 

4,981

 

2,758

 

827

 

 

 

 

 

 

 

 

 

Less: Profit (loss) attributable to noncontrolling interests

 

53

 

58

 

(68

)

 

 

 

 

 

 

 

 

Profit1 

 

$

4,928

 

$

2,700

 

$

895

 

 

 

 

 

 

 

 

 

Profit per common share

 

$

7.64

 

$

4.28

 

$

1.45

 

 

 

 

 

 

 

 

 

Profit per common share — diluted 2 

 

$

7.40

 

$

4.15

 

$

1.43

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding (millions)

 

 

 

 

 

 

 

- Basic

 

645.0

 

631.5

 

615.2

 

- Diluted 2 

 

666.1

 

650.4

 

626.0

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

1.82

 

$

1.74

 

$

1.68

 

 

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.

 

A-5



 

STATEMENT 2

 

Caterpillar Inc.

Consolidated Financial Position at December 31

(Dollars in millions)

 

 

 

2011

 

2010

 

2009

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and short-term investments

 

$

3,057

 

$

3,592

 

$

4,867

 

Receivables - trade and other

 

10,285

 

8,494

 

5,611

 

Receivables - finance

 

7,668

 

8,298

 

8,301

 

Deferred and refundable income taxes

 

1,580

 

931

 

1,216

 

Prepaid expenses and other current assets

 

994

 

908

 

862

 

Inventories

 

14,544

 

9,587

 

6,360

 

Total current assets

 

38,128

 

31,810

 

27,217

 

 

 

 

 

 

 

 

 

Property, plant and equipment - net

 

14,395

 

12,539

 

12,386

 

Long-term receivables - trade and other

 

1,130

 

793

 

971

 

Long-term receivables - finance

 

11,948

 

11,264

 

12,279

 

Investments in unconsolidated affiliated companies

 

133

 

164

 

105

 

Noncurrent deferred and refundable income taxes

 

2,157

 

2,493

 

2,714

 

Intangible assets

 

4,368

 

805

 

465

 

Goodwill

 

7,080

 

2,614

 

2,269

 

Other assets

 

2,107

 

1,538

 

1,632

 

Total assets

 

$

81,446

 

$

64,020

 

$

60,038

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term borrowings:

 

 

 

 

 

 

 

Machinery and Power Systems

 

$

93

 

$

204

 

$

433

 

Financial Products

 

3,895

 

3,852

 

3,650

 

Accounts payable

 

8,161

 

5,856

 

2,993

 

Accrued expenses

 

3,386

 

2,880

 

2,641

 

Accrued wages, salaries and employee benefits

 

2,410

 

1,670

 

797

 

Customer advances

 

2,691

 

1,831

 

1,217

 

Dividends payable

 

298

 

281

 

262

 

Other current liabilities

 

1,967

 

1,521

 

1,281

 

Long-term debt due within one year:

 

 

 

 

 

 

 

Machinery and Power Systems

 

558

 

495

 

302

 

Financial Products

 

5,102

 

3,430

 

5,399

 

Total current liabilities

 

28,561

 

22,020

 

18,975

 

Long-term debt due after one year:

 

 

 

 

 

 

 

Machinery and Power Systems

 

8,415

 

4,505

 

5,652

 

Financial Products

 

16,529

 

15,932

 

16,195

 

Liability for postemployment benefits

 

10,956

 

7,584

 

7,420

 

Other liabilities

 

3,583

 

2,654

 

2,496

 

Total liabilities

 

68,044

 

52,695

 

50,738

 

Commitments and contingencies (Notes 20 and 21)

 

 

 

 

 

 

 

Redeemable noncontrolling interest (Note 24)

 

473

 

461

 

477

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock of $1.00 par:

 

 

 

 

 

 

 

Authorized shares: 2,000,000,000 Issued shares: (2011, 2010 and 2009 – 814,894,624) at paid-in amount

 

4,273

 

3,888

 

3,439

 

Treasury stock: (2011 – 167,361,280 shares; 2010 – 176,071,910 shares; and 2009 – 190,171,905 shares) at cost

 

(10,281

)

(10,397

)

(10,646

)

Profit employed in the business

 

25,219

 

21,384

 

19,711

 

Accumulated other comprehensive income (loss)

 

(6,328

)

(4,051

)

(3,764

)

Noncontrolling interests

 

46

 

40

 

83

 

Total stockholders’ equity

 

12,929

 

10,864

 

8,823

 

Total liabilities, redeemable noncontrolling interest and stockholders’ equity

 

$

81,446

 

$

64,020

 

$

60,038

 

 

See accompanying notes to Consolidated Financial Statements.

 

A-6



 

STATEMENT 3

 

Caterpillar Inc.

Changes in Consolidated Stockholders’ Equity for the Years Ended December 31

(Dollars in millions)

 

 

 

Common
stock

 

Treasury
stock

 

Profit
employed
in the
business

 

Accumulated
other
comprehensive
income (loss)

 

Noncontrolling
interests

 

Total

 

Comprehensive
income (loss)

 

Balance at January 1, 2009

 

$

3,057

 

$

(11,217

)

$

19,826

 

$

(5,579

)

$

103

 

$

6,190

 

 

 

Profit of consolidated and affiliated companies

 

 

 

895

 

 

(68

)

827

 

$

827

 

Foreign currency translation, net of tax of $37

 

 

 

 

342

 

21

 

363

 

363

 

Pension and other postretirement benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year actuarial gain (loss), net of tax of $401

 

 

 

 

924

 

1

 

925

 

925

 

Amortization of actuarial (gain) loss, net of tax of $113

 

 

 

 

187

 

 

187

 

187

 

Current year prior service credit (cost), net of tax of $249

 

 

 

 

300

 

 

300

 

300

 

Amortization of prior service (credit) cost, net of tax of $8

 

 

 

 

(2

)

 

(2

)

(2

)

Amortization of transition (asset) obligation, net of tax of $1

 

 

 

 

1

 

 

1

 

1

 

Derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) deferred, net of tax of $16

 

 

 

 

19

 

 

19

 

19

 

(Gains) losses reclassified to earnings, net of tax of $36

 

 

 

 

(54

)

(2

)

(56

)

(56

)

Retained interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) deferred, net of tax of $9 4 

 

 

 

 

(16

)

 

(16

)

(16

)

(Gains) losses reclassified to earnings, net of tax of $11

 

 

 

 

20

 

 

20

 

20

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) deferred, net of tax of $47

 

 

 

 

86

 

 

86

 

86

 

(Gains) losses reclassified to earnings, net of tax of $5

 

 

 

 

8

 

 

8

 

8

 

Dividends declared

 

 

 

(1,038

)

 

 

(1,038

)

 

Distributions to noncontrolling interests

 

 

 

 

 

(10

)

(10

)

 

Change in ownership for noncontrolling interests

 

(3

)

 

 

 

(15

)

(18

)

 

Common shares issued from treasury stock for stock-based compensation: 3,571,268

 

(14

)

103

 

 

 

 

89

 

 

Common shares issued from treasury stock for benefit plans: 19,624,810 1 

 

250

 

468

 

 

 

 

718

 

 

Stock-based compensation expense

 

132

 

 

 

 

 

132

 

 

Net excess tax benefits from stock-based compensation

 

17

 

 

 

 

 

17

 

 

Cat Japan share redemption 3 

 

 

 

28

 

 

53

 

81

 

 

Balance at December 31, 2009

 

$

3,439

 

$

(10,646

)

$

19,711

 

$

(3,764

)

$

83

 

$

8,823

 

$

2,662

 

Adjustment to adopt consolidation of variable interest entities2 

 

 

 

(6

)

3

 

 

(3

)

 

 

Balance at January 1, 2010

 

$

3,439

 

$

(10,646

)

$

19,705

 

$

(3,761

)

$

83

 

$

8,820

 

 

 

Profit of consolidated and affiliated companies

 

 

 

2,700

 

 

58

 

2,758

 

$

2,758

 

Foreign currency translation, net of tax of $73

 

 

 

 

(52

)

18

 

(34

)

(34

)

Pension and other postretirement benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year actuarial gain (loss), net of tax of $214

 

 

 

 

(539

)

(1

)

(540

)

(540

)

Amortization of actuarial (gain) loss, net of tax of $173

 

 

 

 

307

 

3

 

310

 

310

 

Current year prior service credit (cost), net of tax of $3

 

 

 

 

(8

)

 

(8

)

(8

)

Amortization of prior service (credit) cost, net of tax of $12

 

 

 

 

(17

)

 

(17

)

(17

)

Amortization of transition (asset) obligation, net of tax of $1

 

 

 

 

1

 

 

1

 

1

 

Derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) deferred, net of tax of $29

 

 

 

 

(50

)

 

(50

)

(50

)

(Gains) losses reclassified to earnings, net of tax of $18

 

 

 

 

35

 

 

35

 

35

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) deferred, net of tax of $25

 

 

 

 

37

 

 

37

 

37

 

(Gains) losses reclassified to earnings, net of tax of $2

 

 

 

 

(4

)

 

(4

)

(4

)

Dividends declared

 

 

 

(1,103

)

 

 

(1,103

)

 

Change in ownership for noncontrolling interests

 

(69

)

 

 

 

(66

)

(135

)

 

Common shares issued from treasury stock for stock-based compensation: 12,612,514

 

74

 

222

 

 

 

 

296

 

 

Common shares issued from treasury stock for benefit plans: 1,487,481 1 

 

67

 

27

 

 

 

 

94

 

 

Stock-based compensation expense

 

226

 

 

 

 

 

226

 

 

Net excess tax benefits from stock-based compensation

 

151

 

 

 

 

 

151

 

 

Cat Japan share redemption 3 

 

 

 

82

 

 

(55

)

27

 

 

Balance at December 31, 2010

 

$

3,888

 

$

(10,397

)

$

21,384

 

$

(4,051

)

$

40

 

$

10,864

 

$

2,488

 

 

(Continued)

 

A-7



 

STATEMENT 3

 

Caterpillar Inc.

Changes in Consolidated Stockholders’ Equity for the Years Ended December 31

(Dollars in millions)

 

 

 

Common
stock

 

Treasury
stock

 

Profit
employed
in the
business

 

Accumulated
other
comprehensive
income (loss)

 

Noncontrolling
interests

 

Total

 

Comprehensive
income (loss)

 

Balance at December 31, 2010

 

$

3,888

 

$

(10,397

)

$

21,384

 

$

(4,051

)

$

40

 

$

10,864

 

 

 

Profit (loss) of consolidated and affiliated companies

 

 

 

4,928

 

 

53

 

4,981

 

$

4,981

 

Foreign currency translation, net of tax of $3

 

 

 

 

(345

)

33

 

(312

)

(312

)

Pension and other postretirement benefits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year actuarial gain (loss), net of tax of $1,276

 

 

 

 

(2,358

)

(6

)

(2,364

)

(2,364

)

Amortization of actuarial (gain) loss, net of tax of $221

 

 

 

 

410

 

2

 

412

 

412

 

Current year prior service credit (cost), net of tax of $51

 

 

 

 

95

 

 

95

 

95

 

Amortization of prior service (credit) cost, net of tax of $11

 

 

 

 

(21

)

 

(21

)

(21

)

Amortization of transition (asset) obligation, net of tax of $1

 

 

 

 

1

 

 

1

 

1

 

Derivative financial instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) deferred, net of tax of $12

 

 

 

 

(21

)

 

(21

)

(21

)

(Gains) losses reclassified to earnings, net of tax of $21

 

 

 

 

(34

)

 

(34

)

(34

)

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) deferred, net of tax of $2

 

 

 

 

(5

)

 

(5

)

(5

)

(Gains) losses reclassified to earnings, net of tax of $1

 

 

 

 

1

 

 

1

 

1

 

Change in ownership from noncontrolling interests

 

(1

)

 

 

 

(7

)

(8

)

 

Dividends declared

 

 

 

(1,176

)

 

 

(1,176

)

 

Distribution to noncontrolling interests

 

 

 

 

 

(3

)

(3

)

 

Common shares issued from treasury stock for stock-based compensation:  8,710,630

 

7

 

116

 

 

 

 

123

 

 

Stock-based compensation expense

 

193

 

 

 

 

 

193

 

 

Net excess tax benefits from stock-based compensation

 

186

 

 

 

 

 

186

 

 

Cat Japan share redemption3 

 

 

 

83

 

 

(66

)

17

 

 

Balance at December 31, 2011

 

$

4,273

 

$

(10,281

)

$

25,219

 

$

(6,328

)

$

46

 

$

12,929

 

$

2,733

 

 

1                   See Note 12 regarding shares issued for benefit plans.

2                   See Note 6 for additional information.

3                   See Note 24 regarding the Cat Japan share redemption.

4                   Includes noncredit component of other-than-temporary impairment losses on retained interests of $(8) million, net of tax of $4 million, for the twelve months ended December 31, 2009.   See Note 6 and 17 for additional information.

 

See accompanying notes to Consolidated Financial Statements.

 

A-8



 

STATEMENT 4

 

Caterpillar Inc.

Consolidated Statement of Cash Flow for the Years Ended December 31

(Millions of dollars)

 

 

 

2011

 

2010

 

2009

 

Cash flow from operating activities:

 

 

 

 

 

 

 

Profit of consolidated and affiliated companies

 

$

4,981

 

$

2,758

 

$

827

 

Adjustments for non-cash items:

 

 

 

 

 

 

 

Depreciation and amortization

 

2,527

 

2,296

 

2,336

 

Other

 

457

 

469

 

137

 

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

 

 

 

 

 

 

 

Receivables - trade and other

 

(1,345

)

(2,320

)

4,014

 

Inventories

 

(2,927

)

(2,667

)

2,501

 

Accounts payable

 

1,555

 

2,570

 

(1,878

)

Accrued expenses

 

308

 

117

 

(505

)

Accrued wages, salaries and employee benefits

 

619

 

847

 

(534

)

Customer advances

 

173

 

604

 

(646

)

Other assets - net

 

(91

)

358

 

235

 

Other liabilities - net

 

753

 

(23

)

12

 

Net cash provided by (used for) operating activities

 

7,010

 

5,009

 

6,499

 

 

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

 

 

Capital expenditures - excluding equipment leased to others

 

(2,515

)

(1,575

)

(1,504

)

Expenditures for equipment leased to others

 

(1,409

)

(1,011

)

(968

)

Proceeds from disposals of leased assets and property, plant and equipment

 

1,354

 

1,469

 

1,242

 

Additions to finance receivables

 

(10,001

)

(8,498

)

(7,107

)

Collections of finance receivables

 

8,874

 

8,987

 

9,288

 

Proceeds from sale of finance receivables

 

207

 

16

 

100

 

Investments and acquisitions (net of cash acquired)

 

(8,184

)

(1,126

)

(19

)

Proceeds from sale of businesses and investments (net of cash sold)

 

376

 

 

 

Proceeds from sale of available-for-sale securities

 

247

 

228

 

291

 

Investments in available-for-sale securities

 

(336

)

(217

)

(349

)

Other - net

 

(40

)

132

 

(128

)

Net cash provided by (used for) investing activities

 

(11,427

)

(1,595

)

846

 

 

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

(1,159

)

(1,084

)

(1,029

)

Distribution to noncontrolling interests

 

(3

)

 

(10

)

Common stock issued, including treasury shares reissued

 

123

 

296

 

89

 

Excess tax benefit from stock-based compensation

 

189

 

153

 

21

 

Acquisitions of noncontrolling interests

 

(8

)

(132

)

(6

)

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

 

 

 

 

 

 

 

- Machinery and Power Systems

 

4,587

 

216

 

458

 

- Financial Products

 

10,873

 

8,108

 

11,833

 

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

 

 

 

 

 

 

 

- Machinery and Power Systems

 

(2,269

)

(1,298

)

(918

)

- Financial Products

 

(8,324

)

(11,163

)

(11,769

)

Short-term borrowings - net (original maturities three months or less)

 

(43

)

291

 

(3,884

)

Net cash provided by (used for) financing activities

 

3,966

 

(4,613

)

(5,215

)

Effect of exchange rate changes on cash

 

(84

)

(76

)

1

 

Increase (decrease) in cash and short-term investments

 

(535

)

(1,275

)

2,131

 

Cash and short-term investments at beginning of period

 

3,592

 

4,867

 

2,736

 

Cash and short-term investments at end of period

 

$

3,057

 

$

3,592

 

$

4,867

 

 

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

Non-cash activities:

During 2010 and 2009, we contributed 1.5 million and 19.6 million shares of company stock with a fair value of $94 million and $718 million, respectively, to our U.S. benefit plans. See Note 12  for further discussion.

 

See accompanying notes to Consolidated Financial Statements.

 

A-9



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.    Operations and summary of significant accounting policies

 

A.   Nature of operations

 

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

 

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

 

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

 

As discussed in Note 22 — Segment Information, during the first quarter of 2011, we revised our reportable segments in line with the changes to our organizational structure that were announced during 2010.  The 2009 and 2010 financial information has been retrospectively revised to reflect the change in reportable segments.

 

Our products are sold primarily under the brands “Caterpillar,” “CAT,” design versions of “CAT” and “Caterpillar,” “Electro-Motive,” “FG Wilson,” “MaK,” “MWM,” “Olympian,” “Perkins,” “Progress Rail,” “SEM” and “Solar Turbines”.

 

We conduct operations in our Machinery and Power Systems lines of business under highly competitive conditions, including intense price competition. We place great emphasis on the high quality and performance of our products and our dealers’ service support. Although no one competitor is believed to produce all of the same types of machines and engines that we do, there are numerous companies, large and small, which compete with us in the sale of each of our products.

 

Machines are distributed principally through a worldwide organization of dealers (dealer network), 50 located in the United States and 141 located outside the United States. Worldwide, these dealers serve 182 countries and operate 3,504 places of business, including 1,332 dealer rental outlets.  Reciprocating engines are sold principally through the dealer network and to other manufacturers for use in products manufactured by them. Some of the reciprocating engines manufactured by Perkins are also sold through a worldwide network of 118 distributors located in 183 countries. The FG Wilson branded electric power generation systems are sold through a worldwide network of 168 distributors located in 179 countries.  Some of the large, medium speed reciprocating engines are also sold under the MaK brand through a worldwide network of 19 distributors located in 130 countries.  Our dealers do not deal exclusively with our products; however, in most cases sales and servicing of our products are the dealers’ principal business. Turbines, locomotives and certain global mining products are sold through sales forces employed by the company. At times, these employees are assisted by independent sales representatives.

 

The Financial Products line of business also conducts operations under highly competitive conditions. Financing for users of Caterpillar products is available through a variety of competitive sources, principally commercial banks and finance and leasing companies. We emphasize prompt and responsive service to meet customer requirements and offer various financing plans designed to increase the opportunity for sales of our products and generate financing income for our company. Financial Products activity is conducted primarily in North America, with additional offices in Asia/Pacific, Europe and Latin America.

 

B.    Basis of presentation

 

The consolidated financial statements include the accounts of Caterpillar Inc. and its subsidiaries where we have a controlling financial interest.

 

We consolidate all variable interest entities (VIEs) where Caterpillar Inc. is the primary beneficiary.  For VIEs, we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs.  The primary beneficiary of a VIE is the party that has both the power to direct the activities that most significantly impact the entity’s economic performance, and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.  We adopted the consolidation of variable interest entities guidance issued in June 2009 effective January 1, 2010.  See Note 1K for additional information.

 

Investments in companies that are owned 20% to 50% or are less than 20% owned and for which we have significant influence are accounted for by the equity method.  See Note 9 for further discussion.

 

Certain amounts for prior years have been reclassified to conform with the current-year financial statement presentation.

 

A-10



 

Shipping and handling costs are included in Cost of goods sold in Statement 1.  Other operating (income) expenses primarily include Cat Financial’s depreciation of equipment leased to others, Cat Insurance’s underwriting expenses, gains (losses) on disposal of long-lived assets and business divestitures, long-lived asset impairment charges, employee separation charges and benefit plan curtailment, settlement and special termination benefits.

 

Prepaid expenses and other current assets in Statement 2 include core to be returned for remanufacturing, prepaid rent, prepaid insurance, assets held for sale and other prepaid items.

 

C.            Sales and revenue recognition

 

Sales of Machinery and Power Systems are recognized and earned when all the following criteria are satisfied:  (a) persuasive evidence of a sales arrangement exists; (b) price is fixed and determinable; (c) collectability is reasonably assured; and (d) delivery has occurred.  Persuasive evidence of an arrangement and a fixed or determinable price exist once we receive an order or contract from a customer or independently owned and operated dealer.  We assess collectability at the time of the sale and if collectability is not reasonably assured, the sale is deferred and not recognized until collectability is probable or payment is received.  Typically, where product is produced and sold in the same country, title and risk of ownership transfer when the product is shipped.  Products that are exported from a country for sale typically pass title and risk of ownership at the border of the destination country.

 

Sales of certain turbine machinery units, draglines, large shovels and long wall roof supports are recognized under accounting for construction-type contracts, primarily using the percentage-of-completion method.  Revenue is recognized based upon progress towards completion, which is estimated and continually updated over the course of construction.  We provide for any loss that we expect to incur on these contracts when that loss is probable.

 

Our remanufacturing operations are primarily focused on the remanufacture of Cat engines and components and rail related products.  In this business, used engines and related components (core) are inspected, cleaned and remanufactured.  In connection with the sale of most of our remanufactured product, we collect a deposit from the dealer that is repaid if the dealer returns an acceptable core within a specified time period.  Caterpillar owns and has title to the cores when they are returned from dealers.  The rebuilt engine or component (the core plus any new content) is then sold as a remanufactured product to dealers and customers.  Revenue is recognized pursuant to the same criteria as machinery and engine sales noted above (title to the entire remanufactured product passes to the dealer upon sale).  At the time of sale, the deposit is recognized in Other current liabilities in Statement 2.  In addition, the core to be returned is recognized as an asset in Prepaid expenses and other current assets in Statement 2 at the estimated replacement cost (based on historical experience with useable cores).  Upon receipt of an acceptable core, we repay the deposit and relieve the liability.  The returned core is then included in inventory.  In the event that the deposit is forfeited (i.e. upon failure by the dealer to return an acceptable core in the specified time period), we recognize the core deposit and the cost of the core in revenue and expense, respectively.

 

No right of return exists on sales of equipment.  Replacement part returns are estimable and accrued at the time a sale is recognized.

 

We provide discounts to dealers through merchandising programs.  We have numerous programs that are designed to promote the sale of our products.  The most common dealer programs provide a discount when the dealer sells a product to a targeted end user.  The cost of these discounts is estimated based on historical experience and known changes in merchandising programs and is reported as a reduction to sales when the product sale is recognized.

 

Our standard invoice terms are established by marketing region. When a sale is made to a dealer, the dealer is responsible for payment even if the product is not sold to an end customer and must make payment within the standard terms to avoid interest costs. Interest at or above prevailing market rates is charged on any past due balance. Our policy is to not forgive this interest.  In 2011, terms were extended to not more than one year for $341 million of receivables, which represents less than 1% of consolidated sales.  In 2010, terms were extended to not more than one year for $221 million of receivables, which represents less than 1% of consolidated sales.  In 2009, terms were extended to not more than one year for $312 million of receivables which represents approximately 1% of consolidated sales.

 

We establish a bad debt allowance for Machinery and Power Systems receivables when it becomes probable that the receivable will not be collected.  Our allowance for bad debts is not significant.

 

Revenues of Financial Products primarily represent the following Cat Financial revenues:

 

·                  Retail finance revenue on finance leases and installment sale contracts is recognized over the term of the contract at a constant rate of return on the scheduled outstanding principal balance.  Revenue on retail notes is recognized based on the daily balance of retail receivables outstanding and the applicable effective interest rate.

 

A-11



 

·                  Operating lease revenue is recorded on a straight-line basis in the period earned over the life of the contract.

 

·                  Wholesale finance revenue on installment sale contracts and finance leases is recognized over the term of the contract at a constant rate of return on the scheduled outstanding principal balance.  Revenue on wholesale notes is recognized based on the daily balance of wholesale receivables outstanding and the applicable effective interest rate.

 

·                  Loan origination and commitment fees are deferred and then amortized to revenue using the interest method over the life of the finance receivables.

 

Recognition of income is suspended when management determines that collection of future income is not probable. Accrual is resumed, and previously suspended income is recognized, when the receivable becomes contractually current and/or collection doubts are removed. Cat Financial provides wholesale inventory financing to dealers. See Note 6 for more information.

 

Sales and revenues are presented net of sales and other related taxes.

 

D.            Inventories

 

Inventories are stated at the lower of cost or market. Cost is principally determined using the last-in, first-out (LIFO) method. The value of inventories on the LIFO basis represented about 65% of total inventories at December 31, 2011, and about 70% of total inventories at December 31, 2010 and 2009.

 

If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,422 million, $2,575 million and $3,022 million higher than reported at December 31, 2011, 2010 and 2009, respectively.

 

E.            Securitized receivables

 

Cat Financial periodically transfers certain finance receivables relating to retail installment sale contracts and finance leases to special purpose entities (SPEs) as part of their asset-backed securitization program.  When finance receivables are securitized, Cat Financial retains interests in the receivables in the form of subordinated certificates, an interest in future cash flows (excess), reserve accounts and servicing rights. In accordance with the consolidation accounting guidance adopted January 1, 2010, these SPEs were concluded to be VIEs.  Cat Financial determined that it was the primary beneficiary based on its power to direct activities through its role as servicer and its obligation to absorb losses and right to receive benefits and therefore consolidated the entities using the carrying amounts of the SPEs’ assets and liabilities. Prior to January 1, 2010, the retained interests were recorded in Other assets at fair value. Cat Financial estimated fair value and cash flows using a valuation model and key assumptions for credit losses, prepayment rates and discount rates. See Note 6 and Note 17 for more information.

 

F.             Depreciation and amortization

 

Depreciation of plant and equipment is computed principally using accelerated methods. Depreciation on equipment leased to others, primarily for Financial Products, is computed using the straight-line method over the term of the lease. The depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term. In 2011, 2010 and 2009, Cat Financial depreciation on equipment leased to others was $690 million, $690 million and $713 million, respectively, and was included in Other operating (income) expenses in Statement 1. In 2011, 2010 and 2009, consolidated depreciation expense was $2,211 million, $2,202 million and $2,254 million, respectively. Amortization of purchased finite-lived intangibles is computed principally using the straight-line method, generally not to exceed a period of 20 years.

 

G.           Foreign currency translation

 

The functional currency for most of our Machinery and Power Systems consolidated companies is the U.S. dollar. The functional currency for most of our Financial Products and affiliates accounted for under the equity method is the respective local currency.  Gains and losses resulting from the remeasurement of foreign currency amounts to the functional currency are included in Other income (expense) in Statement 1. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in Accumulated other comprehensive income (loss) in Statement 2.

 

H.         Derivative financial instruments

 

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, commodity price and Caterpillar stock price exposures and not for the purpose of creating speculative positions.  Derivatives that we use are primarily foreign currency forward and option contracts,

 

A-12



 

interest rate swaps, commodity forward and option contracts and stock repurchase contracts. All derivatives are recorded at fair value.  See Note 3 for more information.

 

I.                Income taxes

 

The provision for income taxes is determined using the asset and liability approach.  Tax laws require items to be included in tax filings at different times than the items are reflected in the financial statements.  A current liability is recognized for the estimated taxes payable for the current year.  Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid.  Deferred taxes are adjusted for enacted changes in tax rates and tax laws.  Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

 

J.              Estimates in financial statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts. The more significant estimates include: residual values for leased assets, fair values for goodwill impairment tests, impairment of available-for-sale securities, warranty liability, stock-based compensation and reserves for product liability and insurance losses, postretirement benefits, post-sale discounts, credit losses and income taxes.

 

K.           New accounting guidance

 

Fair value measurements - In January 2010, the FASB issued accounting guidance that requires the gross presentation of activity within the Level 3 fair value measurement roll forward and details of transfers in and out of Level 1 and 2 fair value measurements.  It also clarifies existing disclosure requirements regarding the level of disaggregation of fair value measurements and disclosures on inputs.  We adopted this new accounting guidance for the quarterly period ended March 31, 2010.  The adoption of this guidance did not have a material impact on our financial statements.  See Note 17 for additional information.

 

Accounting for transfers of financial assets - In June 2009, the FASB issued accounting guidance on accounting for transfers of financial assets.  This guidance amends previous guidance by including: the elimination of the qualifying special-purpose entity (QSPE) concept; a new participating interest definition that must be met for transfers of portions of financial assets to be eligible for sale accounting; clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale; and a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor.  Additionally, the guidance requires extensive new disclosures regarding an entity’s involvement in a transfer of financial assets.  Finally, existing QSPEs (prior to the effective date of this guidance) must be evaluated for consolidation by reporting entities in accordance with the applicable consolidation guidance upon the elimination of this concept.  We adopted this new guidance on January 1, 2010.  The adoption of this guidance did not have a material impact on our financial statements.

 

Consolidation of variable-interest entities - In June 2009, the FASB issued accounting guidance on the consolidation of VIEs.  This new guidance revises previous guidance by eliminating the exemption for QSPEs, by establishing a new approach for determining who should consolidate a VIE and by changing when it is necessary to reassess who should consolidate a VIE.  We adopted this new guidance on January 1, 2010.  The adoption of this guidance resulted in the consolidation of QSPEs related to Cat Financial’s asset-backed securitization program that were previously not recorded on our consolidated financial statements.  The restricted assets (Receivables-finance, Long-term receivables-finance, Prepaid expenses and other current assets, and Other assets) of the consolidated QSPEs totaled $324 million at January 1, 2010.  The liabilities (Accrued expenses, Long-term debt due within one year-Financial Products and Long-term debt due after one year-Financial Products) of the consolidated QSPEs totaled $327 million at January 1, 2010.  See Note 6 for additional information.

 

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

 

A-13



 

restructured receivable should be considered a troubled debt restructuring were effective July 1, 2011 and did not have a material impact on our financial statements.  See Note 6 for additional information.

 

Presentation of comprehensive income — In June 2011, the FASB issued accounting guidance on the presentation of comprehensive income.  The guidance provides two options for presenting net income and other comprehensive income.  The total of comprehensive income, the components of net income, and the components of other comprehensive income may be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance will be effective January 1, 2012 and we do not expect the adoption to have a material impact on our financial statements.

 

Goodwill impairment testing —  In September 2011, the FASB issued accounting guidance on the testing of goodwill for impairment.  The guidance allows entities testing goodwill for impairment the option of performing a qualitative assessment to determine the likelihood of goodwill impairment and whether it is necessary to perform the two-step impairment test currently required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted.  We have elected to early adopt this guidance for the year ended December 31, 2011 and the guidance did not have a material impact on our financial statements.  See Note 10 for additional information.

 

L.            Goodwill

 

Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired.  We are required to test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate the fair value of a reporting unit may be below its carrying value.  A reporting unit is an operating segment or one level below an operating segment (referred to as a component) to which goodwill is assigned when initially recorded. We assign goodwill to reporting units based on our integration plans and the expected synergies resulting from the business combination.   Because Caterpillar is a highly integrated company, the businesses we acquire are sometimes combined with or integrated into existing reporting units.  When changes occur in the composition of our operating segments or reporting units, goodwill is reassigned to the affected reporting units based on their relative fair values.

 

We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred.  We perform our annual goodwill impairment test as of October 1 and monitor for interim triggering events on an ongoing basis.  Goodwill is reviewed for impairment utilizing a qualitative assessment or a two-step process.  We have an option to make a qualitative assessment of a reporting unit’s goodwill for impairment.  If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary.  For reporting units where we perform the two-step process, the first step requires us to compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill.  If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired.  If the carrying value is higher than the fair value, there is an indication that an impairment may exist and the second step is required.  In step two, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities.  If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment loss.  See Note 10 for further details.

 

M.   Accumulated other comprehensive income (loss)

 

Comprehensive income (loss) and its components are presented in Statement 3.  Accumulated other comprehensive income (loss), net of tax, consisted of the following at December 31:

 

 

 

December 31,

 

(Millions of dollars)

 

2011

 

2010

 

2009

 

Foreign currency translation

 

$

206

 

$

551

 

$

603

 

Pension and other postretirement benefits

 

(6,568

)

(4,695

)

(4,439

)

Derivative financial instruments

 

(10

)

45

 

60

 

Retained interests

 

 

 

(3

)

Available-for-sale securities

 

44

 

48

 

15

 

Total accumulated other comprehensive income (loss)

 

$

(6,328

)

$

(4,051

)

$

(3,764

)

 

A-14



 

N.            Assets held for sale

 

For those businesses where management has committed to a plan to divest, which is typically demonstrated by approval from the Board of Directors, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. The fair values are estimated using accepted valuation techniques such as a discounted cash flow model, valuations performed by third parties, or indicative bids, when available. A number of significant estimates and assumptions are involved in the application of these techniques, including the forecasting of markets and market share, sales volumes and prices, costs and expenses, and multiple other factors. Management considers historical experience and all available information at the time the estimates are made; however, the fair values that are ultimately realized upon the sale of the businesses to be divested may differ from the estimated fair values reflected in the Consolidated Financial Statements.

 

2.    Stock-based compensation

 

Our stock-based compensation plans primarily provide for the granting of stock options, stock-settled stock appreciation rights (SARs) and restricted stock units (RSUs) to Officers and other key employees, as well as non-employee Directors. Stock options permit a holder to buy Caterpillar stock at the stock’s price when the option was granted. SARs permit a holder the right to receive the value in shares of the appreciation in Caterpillar stock that occurred from the date the right was granted up to the date of exercise.  A restricted stock unit (RSU) is an agreement to issue shares of Caterpillar stock at the time of vesting.

 

Our long-standing practices and policies specify all stock-based compensation awards are approved by the Compensation Committee (the Committee) of the Board of Directors on the date of grant.  The stock-based award approval process specifies the number of awards granted, the terms of the award and the grant date.  The same terms and conditions are consistently applied to all employee grants, including Officers. The Committee approves all individual Officer grants.  The number of stock-based compensation awards included in an individual’s award is determined based on the methodology approved by the Committee.  In 2007, under the terms of the Caterpillar Inc. 2006 Long-Term Incentive Plan (approved by stockholders in June of 2006), the Compensation Committee approved the exercise price methodology to be the closing price of the Company stock on the date of the grant.

 

Common stock issued from Treasury stock under the plans totaled 8,710,630 for 2011, 12,612,514 for 2010 and 3,571,268 for 2009.

 

The 2011, 2010 and 2009 awards generally vest three years after the date of grant.  At grant, SARs and option awards have a term life of ten years.  Upon separation from service for the 2009 and 2010 awards, if the participant is 55 years of age or older with more than ten years of service, the participant meets the criteria for a “Long Service Separation.”  For the 2011 awards, 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”.  If the “Long Service Separation” criteria are met, the vested options/SARs will have a life that is the lesser of 10 years from the original grant date or five years from the separation date.

 

Our stock-based compensation plans allow for the immediate vesting upon separation for employees who meet the criteria for a “Long Service Separation” and who have fulfilled the requisite service period of six months.  Compensation expense is recognized over the period from the grant date to the end date of the requisite service period for employees who meet the immediate vesting upon retirement requirements.  For those employees who become eligible for immediate vesting upon retirement subsequent to the requisite service period 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.

 

Accounting guidance on share-based payments requires companies to estimate the fair value of options/SARs on the date of grant using an option-pricing model.  The fair value of the option/SAR grant was estimated using a lattice-based option-pricing model.  The lattice-based option-pricing model considers a range of assumptions related to volatility, risk-free interest rate and historical employee behavior.  Expected volatility was based on historical and current implied volatilities from traded options on our stock. The risk-free rate was based on U.S. Treasury security yields at the time of grant.  The weighted-average dividend yield was based on historical information.  The expected life was determined from the lattice-based model. The lattice-based model incorporated exercise and post vesting forfeiture assumptions based on analysis of historical data. The following table provides the assumptions used in determining the fair value of the stock-based awards for the years ended December 31, 2011, 2010 and 2009, respectively.

 

A-15



 

 

 

Grant Year

 

 

 

2011

 

2010

 

2009

 

Weighted-average dividend yield

 

2.2%

 

2.3%

 

3.1%

 

Weighted-average volatility

 

32.7%

 

36.4%

 

36.0%

 

Range of volatilities

 

20.9-45.4%

 

35.2-51.8%

 

35.8-61.0%

 

Range of risk-free interest rates

 

0.25-3.51%

 

0.32-3.61%

 

0.17-2.99%

 

Weighted-average expected lives

 

8 years

 

7 years

 

8 years

 

 

The fair value of the RSU grant was determined by reducing the stock price on the day of grant by the present value of the estimated dividends to be paid during the vesting period.  The estimated dividends are based on Caterpillar’s weighted-average dividend yield.

 

The amount of stock-based compensation expense capitalized for the years ended December 31, 2011, 2010 and 2009 did not have a significant impact on our financial statements.

 

At December 31, 2011, there was $155 million of total unrecognized compensation cost from stock-based compensation arrangements granted under the plans, which is related to non-vested stock-based awards.  The compensation expense is expected to be recognized over a weighted-average period of approximately 1.8 years.

 

Please refer to Tables I and II below for additional information on our stock-based awards.

 

TABLE I—Financial Information Related to Stock-based Compensation

 

 

 

2011

 

2010

 

2009

 

 

 

Shares

 

Weighted-
Average
Exercise
Price

 

Shares

 

Weighted-
Average
Exercise
Price

 

Shares

 

Weighted-
Average
Exercise
Price

 

Stock options/SARs activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

57,882,998

 

$

48.50

 

63,082,787

 

$

44.24

 

60,398,074

 

$

45.68

 

Granted to officers and key employees1 

 

2,960,595

 

$

102.13

 

7,556,481

 

$

57.85

 

6,823,227

 

$

22.17

 

Exercised

 

(10,149,476

)

$

41.78

 

(12,568,232

)

$

32.83

 

(3,906,785

)

$

28.13

 

Forfeited / expired

 

(321,126

)

$

48.02

 

(188,038

)

$

43.64

 

(231,729

)

$

38.05

 

Outstanding at end of year

 

50,372,991

 

$

53.01

 

57,882,998

 

$

48.50

 

63,082,787

 

$

44.24

 

Exercisable at year-end

 

35,523,057

 

$

52.66

 

41,658,033

 

$

48.23

 

48,256,847

 

$

43.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

4,650,241

 

 

 

4,531,545

 

 

 

2,673,474

 

 

 

Granted to officers and key employees

 

1,082,032

 

 

 

1,711,771

 

 

 

2,185,674

 

 

 

Vested

 

(1,382,539

)

 

 

(1,538,047

)

 

 

(286,413

)

 

 

Forfeited

 

(68,244

)

 

 

(55,028

)

 

 

(41,190

)

 

 

Outstanding at end of year

 

4,281,490

 

 

 

4,650,241

 

 

 

4,531,545

 

 

 

 

Stock options/SARs outstanding and exercisable:

 

 

 

Outstanding

 

Exercisable

 

Exercise

 

#
Outstanding

 

Weighted-
Average
Remaining
Contractual

 

Weighted-
Average
Exercise

 

Aggregate
Intrinsic

 

#
Outstanding

 

Weighted-
Average
Remaining
Contractual

 

Weighted-
Average
Exercise

 

Aggregate
Intrinsic

 

Prices

 

at 12/31/11

 

Life (Years)

 

Price

 

Value2

 

at 12/31/11

 

Life (Years)

 

Price

 

Value2

 

$22.17 – 26.03

 

7,058,743

 

6.14

 

$

22.66

 

$

482

 

1,799,303

 

3.13

 

$

24.11

 

$

120

 

$27.14 – 38.63

 

9,867,938

 

2.10

 

$

34.79

 

554

 

9,867,938

 

2.10

 

$

34.79

 

554

 

$40.64 – 45.64

 

7,430,542

 

3.14

 

$

45.59

 

337

 

7,430,542

 

3.14

 

$

45.59

 

337

 

$57.85 – 66.77

 

11,142,739

 

7.17

 

$

59.60

 

349

 

4,441,851

 

5.65

 

$

62.24

 

127

 

$72.05 – 102.13

 

14,873,029

 

5.73

 

$

78.26

 

188

 

11,983,423

 

4.90

 

$

72.51

 

220

 

 

 

50,372,991

 

 

 

$

53.01

 

$

1,910

 

35,523,057

 

 

 

$

52.66

 

$

1,358

 

 

1

 

Of the 2,960,595 awards granted during the year ended December 31, 2011, 2,722,689 were SARs. Of the 7,556,481 awards granted during the year ended December 31, 2010, 7,125,210 were SARs. Of the 6,823,227 awards granted during the year ended December 31, 2009, 6,260,647 were SARs.

2

 

The difference between a stock award’s exercise price and the underlying stock’s market price at December 31, 2011, for awards with market price greater than the exercise price. Amounts are in millions of dollars.

 

A-16



 

The computations of weighted-average exercise prices and aggregate intrinsic values are not applicable to RSUs since an RSU represents an agreement to issue shares of stock at the time of vesting.  At December 31, 2011, there were 4,281,490 outstanding RSUs with a weighted average remaining contractual life of 1.0 years.

 

TABLE II— Additional Stock-based Award Information

 

(Dollars in millions except per share data)

 

2011

 

2010

 

2009

 

Stock Options/SARs activity:

 

 

 

 

 

 

 

Weighted-average fair value per share of stock awards granted

 

$

36.73

 

$

22.31

 

$

7.10

 

Intrinsic value of stock awards exercised

 

$

618

 

$

518

 

$

77

 

Fair value of stock awards vested

 

$

96

 

$

124

 

$

213

 

Cash received from stock awards exercised

 

$

161

 

$

325

 

$

89

 

 

 

 

 

 

 

 

 

RSUs activity:

 

 

 

 

 

 

 

Weighted-average fair value per share of stock awards granted

 

$

97.51

 

$

53.35

 

$

20.22

 

Fair value of stock awards vested

 

$

143

 

$

99

 

$

10

 

 

Before tax, stock-based compensation expense for 2011, 2010 and 2009 was $193 million, $226 million and $132 million, respectively, with a corresponding income tax benefit of $61 million, $73 million and $42 million, respectively. Included in the 2010 pre-tax stock-based compensation expense was $19 million relating to the modification of awards resulting from separations due to the streamlining of our corporate structure as announced in the second quarter 2010.

 

In accordance with guidance on share-based payments, we classify stock-based compensation within cost of goods sold, selling, general and administrative expenses and research and development expenses corresponding to the same line item as the cash compensation paid to respective employees, officers and non-employee directors.

 

We currently use shares in treasury stock to satisfy share award exercises.

 

The cash tax benefits realized from stock awards exercised for December 31, 2011, 2010 and 2009 were $235 million, $188 million and $26 million, respectively. We use the direct only method and tax law ordering approach to calculate the tax effects of stock-based compensation.  In certain jurisdictions, tax deductions for exercises of stock-based awards did not generate a cash benefit.  A tax benefit of approximately $34 million will be recorded in APIC when these deductions reduce our future income taxes payable.

 

3.              Derivative financial instruments and risk management

 

Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices.  In addition, the amount of Caterpillar stock that can be repurchased under our stock repurchase program is impacted by movements in the price of the stock.  Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate, commodity price and Caterpillar stock price exposures.  Our policy specifies that derivatives are not to be used for speculative purposes.  Derivatives that we use are primarily foreign currency forward and option contracts, interest rate swaps, commodity forward and option contracts, and stock repurchase contracts.  Our derivative activities are subject to the management, direction and control of our senior financial officers.  Risk management practices, including the use of financial derivative instruments, are presented to the Audit Committee of the Board of Directors at least annually.

 

All derivatives are recognized in Statement 2 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) in Statement 2 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 Statement 4.  Cash flow from undesignated derivative financial instruments are included in the investing category on Statement 4.

 

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

 

A-17



 

designated as fair value hedges to specific assets and liabilities in Statement 2 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.

 

A.            Foreign currency exchange rate risk

 

Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies. Movements in foreign currency rates also affect our competitive position as these changes may affect business practices and/or pricing strategies of non-U.S.-based competitors. Additionally, we have balance sheet positions denominated in foreign currencies, thereby creating exposure to movements in exchange rates.

 

Our Machinery and Power Systems operations purchase, manufacture and sell products in many locations around the world. As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to five years.

 

We generally designate as cash flow hedges at inception of the contract any Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, euro, Indian rupee, Japanese yen, Mexican peso, Singapore dollar, or Swiss franc forward or option contracts that meet the requirements for hedge accounting and the maturity extends beyond the current quarter-end. Designation is performed on a specific exposure basis to support hedge accounting. The remainder of Machinery and Power Systems foreign currency contracts are undesignated, including any designed to protect our competitive exposure.

 

As of December 31, 2011, $1 million of deferred net gains, net of tax, included in equity (Accumulated other comprehensive income (loss) in Statement 2), are expected to be reclassified to current earnings (Other income (expense) in Statement 1) over the next twelve months when earnings are affected by the hedged transactions.  The actual amount recorded in Other income (expense) will vary based on exchange rates at the time the hedged transactions impact earnings.

 

In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions. Our policy allows the use of foreign currency forward and option contracts to offset the risk of currency mismatch between our receivables and debt. All such foreign currency forward and option contracts are undesignated.

 

B.  Interest rate risk

 

Interest rate movements create a degree of risk by affecting the amount of our interest payments and the value of our fixed-rate debt. Our practice is to use interest rate derivatives to manage our exposure to interest rate changes and, in some cases, lower the cost of borrowed funds.

 

Our Machinery and Power Systems operations generally use fixed rate debt as a source of funding.  Our objective is to minimize the cost of borrowed funds.  Our policy allows us to enter into fixed-to-floating interest rate swaps and forward rate agreements to meet that objective with the intent to designate as fair value hedges at inception of the contract all fixed-to-floating interest rate swaps.  Designation as a hedge of the fair value of our fixed rate debt is performed to support hedge accounting.

 

Financial Products operations has a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate) of Cat Financial’s debt portfolio with the interest rate profile of their receivables portfolio within predetermined ranges on an ongoing basis. In connection with that policy, we use interest rate derivative instruments to modify the debt structure to match assets within the receivables portfolio. This match-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.

 

A-18



 

As of December 31, 2011, $4 million of deferred net losses, net of tax, included in equity (Accumulated other comprehensive income (loss) in Statement 2), related to Financial Products floating-to-fixed interest rate swaps, are expected to be reclassified to current earnings (Interest expense of Financial Products in Statement 1) 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 swaps at both Machinery and Power Systems and Financial Products.  The gains or losses associated with these swaps at the time of liquidation are amortized into earnings over the original term of the previously designated hedged item.

 

In anticipation of issuing debt for the planned acquisition of Bucyrus International, Inc., we entered into interest rate swaps to manage our exposure to interest rate changes.  For the year ended December 31, 2011, we recognized a net loss of $149 million, included in Other income (expense) in the Consolidated Statement of Results of Operations.  The contracts were liquidated in conjunction with the debt issuance in May 2011.  These contracts were not designated as hedging instruments, and therefore, did not receive hedge accounting treatment.

 

C.  Commodity price risk

 

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

 

Our Machinery and Power Systems operations purchase aluminum, copper, lead, nickel and rolled coil steel 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 also subject to price changes on 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.

 

A-19



 

The location and fair value of derivative instruments reported in Statement 2 are as follows:

 

Consolidated Statement of Financial Position Location

 

 

 

 

 

Asset (Liability) Fair Value

 

 

 

 

 

Years ended December 31,

 

 

 

 

 

2011

 

2010

 

2009

 

Designated derivatives

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

Machinery and Power Systems

 

Receivables — trade and other

 

$

54

 

$

65

 

$

27

 

Machinery and Power Systems

 

Long-term receivables — trade and other

 

19

 

52

 

125

 

Machinery and Power Systems

 

Accrued expenses

 

(73

)

(66

)

(22

)

Machinery and Power Systems

 

Other liabilities

 

(10

)

(1

)

(3

)

Interest rate contracts

 

 

 

 

 

 

 

 

 

Machinery and Power Systems

 

Receivables — trade and other

 

 

1

 

1

 

Machinery and Power Systems

 

Accrued expenses

 

 

 

(1

)

Financial Products

 

Receivables — trade and other

 

15

 

14

 

18

 

Financial Products

 

Long-term receivables — trade and other

 

233

 

197

 

127

 

Financial Products

 

Accrued expenses

 

(6

)

(18

)

(100

)

 

 

 

 

$

232

 

$

244

 

$

172

 

 

 

 

 

 

 

 

 

 

 

Undesignated derivatives

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

Machinery and Power Systems

 

Receivables — trade and other

 

$

27

 

$

120

 

$

 

Machinery and Power Systems

 

Long-term receivables — trade and other

 

 

 

66

 

Machinery and Power Systems

 

Accrued expenses

 

(12

)

(46

)

 

Machinery and Power Systems

 

Other liabilities

 

(85

)

(58

)

(3

)

Financial Products

 

Receivables — trade and other

 

7

 

6

 

20

 

Financial Products

 

Accrued expenses

 

(16

)

(9

)

(18

)

Interest rate contracts

 

 

 

 

 

 

 

 

 

Machinery and Power Systems

 

Accrued expenses

 

 

(6

)

(7

)

Financial Products

 

Receivables — trade and other

 

 

 

1

 

Financial Products

 

Long-term receivables — trade and other

 

 

 

1

 

Financial Products

 

Accrued expenses

 

(1

)

(1

)

(6

)

Commodity contracts

 

 

 

 

 

 

 

 

 

Machinery and Power Systems

 

Receivables — trade and other

 

2

 

17

 

10

 

Machinery and Power Systems

 

Accrued expenses

 

(9

)

 

 

 

 

 

 

$

(87

)

$

23

 

$

64

 

 

A-20



 

The effect of derivatives designated as hedging instruments on Statement 1 is as follows:

 

Fair Value Hedges

 

 

 

 

 

Year ended December 31, 2011

 

(Millions of dollars)

 

Classification

 

Gains (Losses)
on Derivatives

 

Gains (Losses)
on Borrowings

 

Interest rate contracts

 

 

 

 

 

 

 

Machinery and Power Systems

 

Other income (expense)

 

$

(1

)

$

1

 

Financial Products

 

Other income (expense)

 

39

 

(44

)

 

 

 

 

$

38

 

$

(43

)

 

 

 

 

 

Year ended December 31, 2010

 

 

 

Classification

 

Gains (Losses)
on Derivatives

 

Gains (Losses)
on Borrowings

 

Interest rate contracts

 

 

 

 

 

 

 

Financial Products

 

Other income (expense)

 

$

107

 

$

(98

)

 

 

 

 

$

107

 

$

(98

)

 

 

 

 

 

Year ended December 31, 2009

 

 

 

Classification

 

Gains (Losses)
on Derivatives

 

Gains (Losses)
on Borrowings

 

Interest rate contracts

 

 

 

 

 

 

 

Machinery and Power Systems

 

Other income (expense)

 

$

1

 

$

(1

)

Financial Products

 

Other income (expense)

 

(205

)

220

 

 

 

 

 

$

(204

)

$

219

 

 

A-21



 

Cash Flow Hedges

 

 

 

Year ended December 31, 2011

 

 

 

 

 

Recognized in Earnings

 

(Millions of dollars)

 

Recognized in
AOCI - Effective
Portion

 

Classification of
Gains (Losses)

 

Reclassified from
AOCI - Effective
Portion

 

Recognized in
Earnings -
Ineffective
Portion

 

Foreign exchange contracts