EX-13 7 ex_13.htm EX. 13 - GENERAL AND FINANCIAL INFORMATION 2006 Ex. 13 - General and Financial Information 2006
 
EXHIBIT 13


 
CATERPILLAR INC.
GENERAL AND FINANCIAL INFORMATION
2006
 
 
 
A-1

 
 
 
A-2


 
INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 

 
The management of Caterpillar Inc. (company) is responsible for establishing and maintaining adequate internal control over financial reporting. 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, 2006. 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, 2006, the company's internal control over financial reporting was effective based on those criteria.
 
Management has excluded Progress Rail Services from our assessment of internal control over financial reporting as of December 31, 2006 because we acquired Progress Rail Services on June 19, 2006. Progress Rail Services is a wholly owned subsidiary of Caterpillar Inc. whose total assets and total revenues represent 3% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2006.

Our management's assessment of the effectiveness of the company's internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report appears on page A-4.
 
 
 
 
 
 
 
 
 
/s/ James W. Owens
 
 
 
 
 
 
James W. Owens
Chairman of the Board and
Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
/s/ David B. Burritt
 
 
 
 
 
 
David B. Burritt
Vice President and
Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
February 22, 2007
 
 
 
 
 
 
 
A-3

 
 

 
To the Board of Directors and Stockholders of Caterpillar Inc.:
 
We have completed integrated audits of Caterpillar Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
 
Consolidated financial statements
In our opinion, the accompanying consolidated statement of financial position and the related statements of consolidated results of operations, changes in stockholders' equity, and cash flow, including pages A-5 through A-38, present fairly, in all material respects, the financial position of Caterpillar Inc. and its subsidiaries at December 31, 2006, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes 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. We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 1L to the consolidated financial statements, the Company changed the manner in which it accounts for stock-based compensation and the manner in which it accounts for defined benefit pension and other postretirement plans in 2006.
 
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing on page A-3, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides 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 Progress Rail Services from its assessment of internal control over financial reporting as of December 31, 2006 because Progress Rail Services was acquired by Caterpillar Inc. in a purchase business combination during 2006. We have also excluded Progress Rail Services from our audit of internal control over financial reporting. Progress Rail Services is a wholly owned subsidiary of Caterpillar Inc. whose total assets and total revenues represent 3% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2006.
 
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Peoria, Illinois
February 22, 2007
 
 
A-4

 

Caterpillar Inc.
Consolidated Results of Operations for the Years Ended December 31
(Dollars in millions except per share data)

 
2006
 
2005
 
2004
 

 

 

Sales and revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Sales of Machinery and Engines 
$
38,869
 
 
$
34,006
 
 
$
28,336
 
 
Revenues of Financial Products 
 
2,648
 
 
 
2,333
 
 
 
1,970
 
 
 



 



 



 
Total sales and revenues 
 
41,517
 
 
 
36,339
 
 
 
30,306
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating costs:
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold 
 
29,549
 
 
 
26,558
 
 
 
22,497
 
 
Selling, general and administrative expenses 
 
3,706
 
 
 
3,190
 
 
 
2,926
 
 
Research and development expenses 
 
1,347
 
 
 
1,084
 
 
 
928
 
 
Interest expense of Financial Products 
 
1,023
 
 
 
768
 
 
 
524
 
 
Other operating expenses 
 
971
 
 
 
955
 
 
 
747
 
 
 



 



 



 
Total operating costs 
 
36,596
 
 
 
32,555
 
 
 
27,622
 
 
 



 



 



Operating profit 
 
4,921
 
 
 
3,784
 
 
 
2,684
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense excluding Financial Products 
 
274
 
 
 
260
 
 
 
230
 
 
Other income (expense) 
 
214
 
 
 
377
 
 
 
253
 
 
 



 



 



Consolidated profit before taxes 
 
4,861
 
 
 
3,901
 
 
 
2,707
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes 
 
1,405
 
 
 
1,120
 
 
 
731
 
 
 



 



 



 
Profit of consolidated companies 
 
3,456
 
 
 
2,781
 
 
 
1,976
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies 
 
81
 
 
 
73
 
 
 
59
 
 
 



 



 



Profit 
$
3,537
 
 
$
2,854
 
 
$
2,035
 
 



 



 
















Profit per common share 
$
5.37
 
 
$
4.21
 
 
$
2.97
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit per common share - diluted 1 
$
5.17
 
 
$
4.04
 
 
$
2.88
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (millions)
 
 
 
 
 
 
 
 
 
 
 
 
- Basic 
 
658.7
 
 
 
678.4
 
 
 
684.5
 
 
- Diluted 1 
 
683.8
 
 
 
705.8
 
 
 
707.4
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share 
$
1.15
 
 
$
.96
 
 
$
.80
 
   
1
Diluted by assumed exercise of stock options and SARs, 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)

 
2006
 
2005
 
2004
 

 

 

Assets
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments
$
530
 
 
$
1,108
 
 
$
445
 
 
 
Receivables - trade and other
 
8,168
 
 
 
7,526
 
 
 
7,463
 
 
 
Receivables - finance
 
6,804
 
 
 
6,442
 
 
 
5,182
 
 
 
Deferred and refundable income taxes
 
733
 
 
 
255
 
 
 
330
 
 
 
Prepaid expenses and other current assets
 
507
 
 
 
2,146
 
 
 
1,369
 
 
 
Inventories
 
6,351
 
 
 
5,224
 
 
 
4,675
 
 
 
 



 



 



 
Total current assets
 
23,093
 
 
 
22,701
 
 
 
19,464
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment - net
 
8,851
 
 
 
7,988
 
 
 
7,682
 
 
Long-term receivables - trade and other
 
860
 
 
 
1,037
 
 
 
764
 
 
Long-term receivables - finance
 
11,531
 
 
 
10,301
 
 
 
9,903
 
 
Investments in unconsolidated affiliated companies
 
562
 
 
 
565
 
 
 
517
 
 
Deferred income taxes
 
1,949
 
 
 
857
 
 
 
742
 
 
Intangible assets
 
387
 
 
 
424
 
 
 
315
 
 
Goodwill
 
1,904
 
 
 
1,451
 
 
 
1,450
 
 
Other assets
 
1,742
 
 
 
1,745
 
 
 
2,258
 
 
 



 



 



Total assets
$
50,879
 
 
$
47,069
 
 
$
43,095
 
 



 



 



Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Machinery and Engines
$
165
 
 
$
871
 
 
$
93
 
 
 
 
Financial Products
 
4,990
 
 
 
4,698
 
 
 
4,064
 
 
 
Accounts payable
 
4,085
 
 
 
3,412
 
 
 
3,524
 
 
 
Accrued expenses
 
2,923
 
 
 
2,617
 
 
 
2,261
 
 
 
Accrued wages, salaries and employee benefits
 
938
 
 
 
1,601
 
 
 
1,543
 
 
 
Customer advances
 
921
 
 
 
454
 
 
 
503
 
 
 
Dividends payable
 
194
 
 
 
168
 
 
 
141
 
 
 
Deferred and current income taxes payable  
 
575
 
 
 
528
 
 
 
259
 
 
 
Long-term debt due within one year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Machinery and Engines
 
418
 
 
 
340
 
 
 
6
 
 
 
 
Financial Products
 
4,043
 
 
 
4,159
 
 
 
3,525
 
 
 
 
 



 



 



 
Total current liabilities
 
19,252
 
 
 
18,848
 
 
 
15,919
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt due after one year:
 
 
 
 
 
 
 
 
 
 
 
 
 
Machinery and Engines
 
3,694
 
 
 
2,717
 
 
 
3,663
 
 
 
Financial Products
 
13,986
 
 
 
12,960
 
 
 
12,174
 
 
Liability for postemployment benefits
 
5,879
 
 
 
3,161
 
 
 
3,126
 
 
Deferred income taxes and other liabilities
 
1,209
 
 
 
951
 
 
 
746
 
 
 



 



 



Total liabilities
 
44,020
 
 
 
38,637
 
 
 
35,628
 
 



 



 



Commitments and contingencies (Notes 22 and 23)
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
 
Common stock of $1.00 par:
 
 
 
 
 
 
 
 
 
 
 
 
 
Authorized shares: 900,000,000
Issued shares: (2006, 2005 and 2004 - 814,894,624) at paid-in amount
 
2,465
 
 
 
1,859
 
 
 
1,231
 
 
Treasury stock (2006 - 169,086,448 shares; 2005 - 144,027,405 shares
and 2004 - 129,020,726 shares) at cost
 
(7,352
)
 
 
(4,637
)
 
 
(3,277
)
 
Profit employed in the business
 
14,593
 
 
 
11,808
 
 
 
9,937
 
 
Accumulated other comprehensive income
 
(2,847
)
 
 
(598
)
 
 
(424
)
 
 



 



 



Total stockholders’ equity
 
6,859
 
 
 
8,432
 
 
 
7,467
 
 



 



 



Total liabilities and stockholders’ equity
$
50,879
 
 
$
47,069
 
 
$
43,095
 
 



 



 



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)

 
 
 
 
 
 
 
Accumulated other comprehensive income
 
 
 
 
 
 
 
 
 

 
 
 
Common stock

 
 
Treasury stock

 
 
Profit employed in the business

 
 
Foreign currency translation

 
 
Pension & other post- retirement
benefits1

 
 
Derivative financial instruments

 
 
Available-for-sale securities

 
 
Total

 
Balance at December 31, 2003
$
1,059
 
 
$
(2,914
)
 
$
8,450
 
 
$
348
 
 
$
(982
)
 
$
104
 
 
$
13
 
 
$
6,078
 
 



 



 



 



 



 



 



 



Profit
 
 
 
 
 
 
 
2,035
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,035
 
Foreign currency translation
 
 
 
 
 
 
 
 
 
 
141
 
 
 
 
 
 
 
 
 
 
 
 
141
 
Minimum pension liability adjustment,
net of tax of $25
 
 
 
 
 
 
 
 
 
 
 
 
 
(59
)
 
 
 
 
 
 
 
 
(59
)
Derivative financial instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) deferred, net of tax of $60
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
111
 
 
 
 
 
 
111
 
 
(Gains) losses reclassified to earnings, net of tax of $56
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(105
)
 
 
 
 
 
(105
)
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) deferred, net of tax of $3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6
 
 
 
6
 
 
(Gains) losses reclassified to earnings,
net of tax of $1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1
)
 
 
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
 
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,128
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Dividends declared
 
 
 
 
 
 
 
(548
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(548
)
Common shares issued from treasury stock
for stock-based compensation: 12,216,618
 
94
 
 
 
176
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
270
 
Tax benefits from stock-based compensation
 
78
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
78
 
Shares repurchased: 13,866,800
 
 
 
 
(539
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(539
)
 



 



 



 



 



 



 



 



Balance at December 31, 2004
 
1,231
 
 
 
(3,277
)
 
 
9,937
 
 
 
489
 
 
 
(1,041
)
 
 
110
 
 
 
18
 
 
 
7,467
 
 



 



 



 



 



 



 



 



Profit
 
 
 
 
 
 
 
2,854
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,854
 
Foreign currency translation
 
 
 
 
 
 
 
 
 
 
(187
)
 
 
 
 
 
 
 
 
 
 
 
(187
)
Minimum pension liability adjustment,
net of tax of $36
 
 
 
 
 
 
 
 
 
 
 
 
 
107
 
 
 
 
 
 
 
 
 
107
 
Derivative financial instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) deferred, net of tax of $1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(3
)
 
 
 
 
 
(3
)
 
(Gains) losses reclassified to earnings,
net of tax of $46
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(89
)
 
 
 
 
 
(89
)
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) deferred, net of tax of $3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
3
 
 
(Gains) losses reclassified to earnings,
net of tax of $1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5
)
 
 
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
 
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,680
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Dividends declared
 
 
 
 
 
 
 
(645
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(645
)
Common shares issued from treasury stock for
stock-based compensation: 18,912,521
 
156
 
 
 
324
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
480
 
Tax benefits from stock-based compensation
 
134
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
134
 
Shares repurchased: 33,919,200
 
 
 
 
(1,684
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,684
)
Impact of 2 - for - 1 stock split
 
338
 
 
 
 
 
 
(338
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 



 



 



 



 



 



 



Balance at December 31, 2005
 
1,859
 
 
 
(4,637
)
 
 
11,808
 
 
 
302
 
 
 
(934)
 
 
 
18
 
 
 
16
 
 
 
8,432
 
 



 



 



 



 



 



 



 



Profit
 
 
 
 
 
 
 
3,537
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,537
 
Foreign currency translation
 
 
 
 
 
 
 
 
 
 
169
 
 
 
 
 
 
 
 
 
 
 
 
169
 
Minimum pension liability adjustment,
net of tax of $97
 
 
 
 
 
 
 
 
 
 
 
 
 
229
 
 
 
 
 
 
 
 
 
229
 
Derivative financial instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) deferred, net of tax of $40
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
73
 
 
 
 
 
 
73
 
 
(Gains) losses reclassified to earnings,
net of tax of $26
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(43
)
 
 
 
 
 
(43
)
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) deferred, net of tax of $8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17
 
 
 
17
 
 
(Gains) losses reclassified to earnings,
net of tax of $12
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(23
)
 
 
(23
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
 
Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,959
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Incremental adjustment to adopt SFAS 158,
net of tax of $1,494
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,671
)
 
 
 
 
 
 
 
 
(2,671
)
Dividends declared
 
 
 
 
 
 
 
(752
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(752
)
Common shares issued from treasury stock
for stock-based compensation: 15,207,055
 
73
 
 
 
341
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
414
 
Stock-based compensation expense
 
137
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
137
 
Tax benefits from stock-based compensation
 
170
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
170
 
Shares repurchased: 45,608,000
 
 
 
 
(3,208
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(3,208
)
Shares issued for Progress Rail Services, Inc.
acquisition: 5,341,902
 
226
 
 
 
152
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
378
 
 



 



 



 



 



 



 



 



Balance at December 31, 2006
$
2,465
 
 
$
(7,352
)
 
$
14,593
 
 
$
471
 
 
$
(3,376
)
 
$
48
 
 
$
10
 
 
$
6,859
 
 



 



 



 



 



 



 



 



1
Pension and other postretirement benefits includes the aggregate adjustment for minimum pension liability for unconsolidated companies of $(6) million, $11 million and $0 million and the ending balances of $(43) million, $(37) million and $(48) million for the years 2006, 2005 and 2004, respectively.
 
See accompanying notes to Consolidated Financial Statements.
 
A-7


 
STATEMENT 4
Caterpillar Inc.
Consolidated Statement of Cash Flow for the Years Ended December 31
(Millions of dollars)

 
2006
 
2005
 
2004
 

 

 

Cash flow from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit 
$
3,537
 
 
$
2,854
 
 
$
2,035
 
 
 
Adjustments for non-cash items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization 
 
1,602
 
 
 
1,477
 
 
 
1,397
 
 
 
 
 
Other 
 
197
 
 
 
(20
)
 
 
(113
)
 
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Receivables - trade and other 
 
(89
)
 
 
(908
)
 
 
(7,616
)
 
 
 
 
Inventories 
 
(827
)
 
 
(568
)
 
 
(1,391
)
 
 
 
 
Accounts payable and accrued expenses 
 
670
 
 
 
532
 
 
 
1,457
 
 
 
 
 
Other assets - net 
 
(235
)
 
 
(866
)
 
 
337
 
 
 
 
 
Other liabilities - net 
 
944
 
 
 
612
 
 
 
(97
)
 
 
 
 
 



 



 



Net cash provided by (used for) operating activities 
 
5,799
 
 
 
3,113
 
 
 
(3,991
)
 



 



 



Cash flow from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures - excluding equipment leased to others 
 
(1,593
)
 
 
(1,201
)
 
 
(926
)
 
 
Expenditures for equipment leased to others 
 
(1,082
)
 
 
(1,214
)
 
 
(1,188
)
 
 
Proceeds from disposals of property, plant and equipment 
 
572
 
 
 
637
 
 
 
486
 
 
 
Additions to finance receivables 
 
(10,522
)
 
 
(10,334
)
 
 
(8,930
)
 
 
Collections of finance receivables 
 
8,094
 
 
 
7,057
 
 
 
6,216
 
 
 
Proceeds from sale of finance receivables 
 
1,067
 
 
 
900
 
 
 
700
 
 
 
Collections of retained interests in securitized trade receivables 
 
 
 
 
 
 
 
5,722
 
 
 
Investments and acquisitions (net of cash acquired) 
 
(513
)
 
 
(13
)
 
 
(290
)
 
 
Proceeds from sale of partnership investment 
 
 
 
 
 
 
 
290
 
 
 
Proceeds from release of security deposit 
 
 
 
 
530
 
 
 
 
 
 
Proceeds from sale of available-for-sale securities 
 
539
 
 
 
257
 
 
 
408
 
 
 
Investments in available-for-sale securities 
 
(681
)
 
 
(338
)
 
 
(609
)
 
 
Other - net  
 
323
 
 
 
194
 
 
 
198
 
 
 
 



 



 



Net cash provided by (used for) investing activities 
 
(3,796
)
 
 
(3,525
)
 
 
2,077
 
 



 



 



Cash flow from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid 
 
(726
)
 
 
(618
)
 
 
(534
)
 
 
Common stock issued, including treasury shares reissued 
 
414
 
 
 
482
 
 
 
317
 
 
 
Treasury shares purchased 
 
(3,208
)
 
 
(1,684
)
 
 
(539
)
 
 
Excess tax benefit from stock-based compensation 
 
169
 
 
 
 
 
 
 
 
 
Proceeds from debt issued (original maturities greater than three months):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
— Machinery and Engines 
 
1,445
 
 
 
574
 
 
 
55
 
 
 
 
— Financial Products 
 
9,824
 
 
 
14,000
 
 
 
10,435
 
 
 
Payments on debt (original maturities greater than three months):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
— Machinery and Engines 
 
(839
)
 
 
(654
)
 
 
(78
)
 
 
 
— Financial Products 
 
(9,536
)
 
 
(10,966
)
 
 
(8,612
)
 
 
Short-term borrowings (original maturities three months or less) - net 
 
(136
)
 
 
19
 
 
 
830
 
 
 
 



 



 



Net cash provided by (used for) financing activities 
 
(2,593
)
 
 
1,153
 
 
 
1,874
 
 



 



 



Effect of exchange rate changes on cash 
 
12
 
 
 
(78
)
 
 
143
 
 



 



 



Increase (decrease) in cash and short-term investments 
 
(578
)
 
 
663
 
 
 
103
 
Cash and short-term investments at beginning of period 
 
1,108
 
 
 
445
 
 
 
342
 
 



 



 



Cash and short-term investments at end of period 
$
530
 
 
$
1,108
 
 
$
445
 
 



 



 



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:
 
On June 19, 2006, Caterpillar acquired 100 percent of the equity in Progress Rail Services, Inc. A portion of the acquisition was financed with 5.3 million shares of Caterpillar stock with a fair value of $379 million as of the acquisition date. See Note 25 for further discussion.
 
In 2005, $116 million of 9.375% debentures due in 2021 and $117 million of 8.00% debentures due in 2023 were exchanged for $307 million of 5.300% debentures due in 2035 and $23 million of cash. The $23 million of cash is included in payments on debt.
 
Trade receivables of $6,786 million were exchanged for retained interests in securitized trade receivables in 2004. See Note 6 for further discussion.
 
See accompanying notes to Consolidated Financial Statements.
 
 
A-8




1.
Operations and summary of significant accounting policies

A.
 
Nature of Operations
 
 
We operate in three principal lines of business:
 
(1)
 
Machinery— A principal line of business which includes the design, manufacture, marketing and sales of construction, mining and forestry machinery—track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telehandlers, skid steer loaders and related parts. Also includes logistics services for other companies and the design, manufacture, remanufacture, maintenance and services of rail-related products.
 
 
(2)
 
Engines A principal line of business including the design, manufacture, marketing and sales of engines for Caterpillar machinery; electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Also includes remanufacturing of Caterpillar engines and a variety of Caterpillar machine and engine components and remanufacturing services for other companies. Reciprocating engines meet power needs ranging from 5 to 21,500 horsepower (4 to over 16 000 kilowatts). Turbines range from 1,600 to 20,500 horsepower (1 200 to 15 000 kilowatts).
 
 
(3)
 
Financial Products A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance), Caterpillar Power Ventures Corporation (Cat Power Ventures) and their respective subsidiaries. Cat Financial provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, Solar gas turbines as well as other equipment and marine vessels. Cat Financial also extends loans to customers and dealers. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. Cat Power Ventures is an investor in independent power projects using Caterpillar power generation equipment and services.
 
 
Our Machinery and Engines operations are highly integrated. Throughout the Notes, Machinery and Engines represents the aggregate total of these principal lines of business.
 
Our products are sold primarily under the brands "Caterpillar," "Cat," "Solar Turbines," "MaK," "Perkins," "FG Wilson" and "Olympian."
 
We conduct operations in our Machinery and Engines 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), 54 located in the United States and 128 located outside the United States. Worldwide, these dealers serve 182 countries and operate 3,576 places of business, including 1,639 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 132 distributors located in 181 countries along with 3,500 supporting dealers. Most of the electric power generation systems manufactured by FG Wilson are sold through a worldwide network of 200 dealers located in 180 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 and large marine reciprocating engines are sold through sales forces employed by the company. At times, these employees are assisted by independent sales representatives.
 
Manufacturing activities of the Machinery and Engines lines of business are conducted in 74 plants in the United States; twelve in the United Kingdom; nine in Italy; eight in Mexico; seven in China; four each in Canada and France; three each in Australia, Brazil, India, Northern Ireland, and Poland; two each in Germany, Indonesia, Japan, and The Netherlands; and one each in Belgium, Hungary, Malaysia, Nigeria, Russia, Scotland, South Africa, Switzerland and Tunisia. Thirteen parts distribution centers are located in the United States and 14 are located outside the United States.
 
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 the United States, with additional offices in Asia, Australia, Canada, Europe and Latin America.
 
B.
 
Basis of consolidation
 
The financial statements include the accounts of Caterpillar Inc. and its subsidiaries. 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 11). We consolidate all variable interest entities where Caterpillar Inc. is the primary beneficiary.
 
Certain amounts for prior years have been reclassified to conform with the current-year financial statement presentation.
 
Shipping and handling costs are included in Cost of goods sold in Statement 1.  Other operating expense primarily includes Cat Financial's depreciation of equipment leased to others, Cat Insurance’s underwriting expenses, gains (losses) on disposal of long-lived assets and long-lived asset impairment charges.
 
Prepaid expenses and other current assets in Statement 2 include prepaid rent, prepaid insurance and other prepaid items. In addition, at December 31, 2006, this line includes a security deposit of $249 million related to a deposit obligation due in 2007 (see Note 16 for further discussion.) At December 31, 2005 and 2004 prepaid expenses related to our pension plans of $1.95 billion and $1.13 billion, respectively, were also included in this line. No such prepaid pension asset existed at December 31, 2006 as a result of our adoption of SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" (See Notes 1L and 14 for further discussion).
 
C.
 
Sales and revenue recognition
 
Sales of Machinery and Engines are generally recognized when title transfers and the risks and rewards of ownership have passed to customers or independently owned and operated dealers. 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.
 
A-9

 
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 and original equipment manufacturers (OEM) through merchandising programs that are administered by our marketing profit centers. 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. OEM programs provide discounts designed to encourage the use of our engines. 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 2006, 2005 and 2004, terms were extended to not more than one year for $49 million, $287 million and $15 million of receivables, respectively. For 2006, 2005 and 2004, these amounts represent less than 1% of consolidated sales.
 
 
Sales with payment terms of two months or more were as follows:
     
(Dollars in millions)
     
2006
 
2005
 
2004
     
 
 
 
Payment Terms (months)
 
Sales
 
Percent
of Sales
 
Sales
 
Percent
of Sales
 
Sales
 
Percent
of Sales
 
 
 
 
 
 
 
 
2
 
$
1,481
     
3.8
%
 
$
261
     
0.8
%
 
$
96
     
0.3
%
 
3
   
636
     
1.6
%
   
548
     
1.6
%
   
175
     
0.6
%
 
4
   
336
     
0.9
%
   
262
     
0.8
%
   
117
     
0.4
%
 
5
   
1,228
     
3.2
%
   
916
     
2.7
%
   
750
     
2.6
%
 
6
   
8,516
     
21.9
%
   
8,147
     
23.9
%
   
6,172
     
21.9
%
 
7-12
   
272
     
0.7
%
   
345
     
1.0
%
   
831
     
2.9
%
     


 


 


 


 


 


     
$
12,469
     
32.1
%
 
$
10,479
     
30.8
%
 
$
8,141
     
28.7
%
     


 


 


 


 


 


 
























 
 
We establish a bad debt allowance for Machinery and Engines receivables when it becomes probable that the receivable will not be collected. Our allowance for bad debts is not significant. In 2006, we wrote off approximately $70 million of receivables in conjunction with settlement of various legal disputes with Navistar International Corporation. No significant write-offs of Machinery and Engines receivables were made during 2005 or 2004.
 
 
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 interest rate.
 
·  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 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.
 
 
Recognition of income is suspended when 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 Notes 7 and 8 for more information.
 
Sales and revenue recognition items 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 75% of total inventories at December 31, 2006 and about 80% of total inventories at December 31, 2005 and 2004.
 
If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,403 million, $2,345 million and $2,124 million higher than reported at December 31, 2006, 2005 and 2004, respectively.
 
E.
 
Securitized receivables
 
We periodically sell finance receivables in securitization transactions. When finance receivables are securitized, we retain interests in the receivables in the form of interest-only strips, servicing rights, cash reserve accounts and subordinated certificates. The retained interests are recorded in “Other assets” at fair value. We estimate fair value based on the present value of future expected cash flows using key assumptions for credit losses, prepayment speeds and discount rates. See Note 8 for more information.
 
Prior to June 2005, we securitized trade receivables. We retained interests in the receivables in the form of certificates. The fair value of the certificated retained interests approximated carrying value due to their short-term nature. See Note 6 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 2006, 2005 and 2004, Cat Financial depreciation on equipment leased to others was $631 million, $615 million and $575 million, respectively, and was included in "Other operating expenses" in Statement 1. In 2006, 2005 and 2004 consolidated depreciation expense was $1,554 million, $1,444 million and $1,366 million, respectively. Amortization of purchased intangibles is computed using the straight-line method, generally not to exceed a period of 20 years. Accumulated amortization was $139 million, $107 million and $91 million at December 31, 2006, 2005 and 2004, respectively.
 
G.
 
Foreign currency translation
 
The functional currency for most of our Machinery and Engines consolidated companies is the U.S. dollar. The functional currency for most of our Financial Products and equity basis companies is the respective local currency. Gains and losses resulting from the translation 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" in Statement 2.
 
A-10

 
 
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 and commodity price exposure. 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 and commodity forward and option contracts. Our derivative activities are subject to the management, direction and control of our 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 Financial Position at their fair value. On the date the derivative contract is entered, we designate the derivative as (1) a hedge of the fair value of a recognized 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 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 other comprehensive income until earnings are affected by the forecasted transaction or the variability of cash flow and are then reported in current 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 liabilities on the Consolidated 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 derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively, in accordance with Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." See Note 3 for more information.
 
I.
 
Impairment of available-for-sale securities
 
Available-for-sale securities are reviewed monthly to identify market values below cost of 20% or more. If a decline for a debt security is in excess of 20% for six months, the investment is evaluated to determine if the decline is due to general declines in the marketplace or if the investment has been impaired and should be written down to market value pursuant to Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." After the six-month period, debt securities with declines from cost in excess of 20% are evaluated monthly for impairment. For equity securities, if a decline from cost of 20% or more continues for a 12-month period, an other than temporary impairment is recognized without continued analysis.
 
J.
 
Income taxes
 
The provision for income taxes is determined using the asset and liability approach for accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." 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.
 
K.
 
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 market values for goodwill impairment tests, warranty liability, stock-based compensation and reserves for product liability and insurance losses, postemployment benefits, post-sale discounts, credit losses and income taxes.
 
L.
 
New accounting standards
 
SFAS 151 - In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151 (SFAS 151), “Inventory Costs—an amendment of ARB No. 43, Chapter 4.” SFAS 151 discusses the general principles applicable to the pricing of inventory. Paragraph 5 of ARB 43, Chapter 4 provides guidance on allocating certain costs to inventory. This Statement amends ARB 43, Chapter 4, to clarify that abnormal amount of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of production facilities. As required by SFAS 151, we adopted this new accounting standard on January 1, 2006. The adoption of SFAS 151 did not have a material impact on our financial statements.
 
SFAS 123R - In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), (SFAS 123R) “Share-Based Payment.” SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123R also establishes fair value as the measurement method in accounting for share-based payments. The FASB required the provisions of SFAS 123R be adopted for interim or annual periods beginning after June 15, 2005. In April 2005, the SEC adopted a new rule amending the compliance dates for SFAS 123R for public companies. In accordance with this rule, we adopted SFAS 123R effective January 1, 2006 using the modified prospective transition method. We did not modify the terms of any previously granted options in anticipation of the adoption of SFAS 123R.
 
A-11

 
The application of the expensing provisions of SFAS 123R resulted in pretax expense of $137 million in 2006. As a result of the vesting decisions discussed in Note 2, a full complement of expense related to stock-based compensation will not be recognized in our results of operations until 2009.
 
See Notes 2 and 1N for additional information regarding stock-based compensation.
 
SFAS 154 - In June 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS 154), “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement requires retrospective applications to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. In addition, this Statement requires that a change in depreciation, amortization or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. This new accounting standard was effective January 1, 2006. The adoption of SFAS 154 did not have a material impact on our financial statements.
 
SFAS 155 - In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (SFAS 155), “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140.” SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole, eliminating the need to separate the derivative from its host, if the holder elects to account for the whole instrument on a fair value basis. This new accounting standard is effective January 1, 2007. The adoption of SFAS 155 is not expected to have a material impact on our financial statements.
 
SFAS 156 - In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 (SFAS 156), “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140.” SFAS 156 requires that all separately recognized servicing rights be initially measured at fair value, if practicable. In addition, this Statement permits an entity to choose between two measurement methods (amortization method or fair value measurement method) for each class of separately recognized servicing assets and liabilities. This new accounting standard is effective January 1, 2007. The adoption of SFAS 156 is not expected to have a material impact on our financial statements.
 
FIN 48 - In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies that a tax position must be more likely than not of being sustained before being recognized in the financial statements. As required, we will adopt FIN 48 effective January 1, 2007. The cumulative effect of adopting FIN 48 will be recorded in profit employed and will also result in various reclassifications on the statement of financial position. We do not expect that the adoption of FIN 48 will have a material impact on our financial position.
 
SFAS 157 - In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements.” SFAS 157 provides a common definition of fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it. In addition, the Statement expands disclosures about fair value measurements. As required by SFAS 157, we will adopt this new accounting standard effective January 1, 2008. We are currently reviewing the impact of SFAS 157 on our financial statements. We expect to complete this evaluation in 2007.
 
 
SFAS 158 - In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (SFAS 158), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132R.” SFAS 158 requires recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. Also, the measurement date - the date at which the benefit obligation and plan assets are measured - is required to be the company’s fiscal year-end. As required by SFAS 158, we adopted the balance sheet recognition provisions at December 31, 2006 and will adopt the year-end measurement date in 2008. Additionally SFAS 87 required the recognition of an additional minimum liability (AML) if the market value of plan assets was less than the accumulated benefit obligation at the end of the measurement date. The AML was eliminated upon the adoption of SFAS 158. The following summarizes the effect of the required changes in the AML, as well as the impact of the initial adoption of SFAS 158, as of December 31, 2006 (See Note 14 for additional information regarding postemployment benefits).

 
Initial adoption of SFAS 158:
 
(Millions of dollars)
December 31, 2006
Prior to AML and SFAS 158 Adjustments
 
AML Adjustment
per SFAS 87
 
SFAS 158 Adjustment
 
December 31, 2006
Post AML and SFAS 158 Adjustments
 
 

 

 

 

 
Prepaid expenses and other current assets
$
2,336
 
 
$
 
 
$
(1,829
)
 
$
507
 
 
Investments in unconsolidated affiliated companies
 
568
 
 
 
 
 
 
(6
)
 
 
562
 
 
Deferred income taxes
 
552
 
 
 
(97
)
 
 
1,494
 
 
 
1,949
 
 
Intangible assets
 
639
 
 
 
(60
)
 
 
(192
)
 
 
387
 
 
Accrued wages, salaries and employee benefits
 
1,440
 
 
 
 
 
 
(502
)
 
 
938
 
 
Liability for postemployment benefits
 
3,625
 
 
 
(386
)
 
 
2,640
 
 
 
5,879
 
 
Accumulated other comprehensive income
 
(405
)
 
 
229
 
 
 
(2,671
)
 
 
(2,847
)