EX-13 9 ex_13.htm GENERAL AND FINANCIAL INFORMATION FOR 2009 ex_13.htm
EXHIBIT 13


 
CATERPILLAR INC.
GENERAL AND FINANCIAL INFORMATION
2009



 
 
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, 2009. 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, 2009, the company's internal control over financial reporting was effective based on those criteria.
 
The effectiveness of the company's internal control over financial reporting as of December 31, 2009 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 19, 2010
    

 
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 financial position and the related consolidated statements of results of operations, changes in stockholders' equity, and cash flow, including pages A-5 through A-62, present fairly, in all material respects, the financial position of Caterpillar Inc. and its subsidiaries at December 31, 2009, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 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, 2009, 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.
 
As discussed in Note 1K to the consolidated financial statements, the Company changed the manner in which it measures certain assets and liabilities at fair value in 2008 and the manner in which it accounts for uncertainty in income taxes in 2007.

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.




/s/ PricewaterhouseCoopers LLP
Peoria, Illinois
February 19, 2010
 
A-4
 
 
STATEMENT 1
Caterpillar Inc.
Consolidated Results of Operations for the Years Ended December 31
(Dollars in millions except per share data)
 
2009
  
2008
  
2007
Sales and revenues:
                      
 
Sales of Machinery and Engines
$
29,540
    
$
48,044
    
$
41,962
  
 
Revenues of Financial Products
 
2,856
      
3,280
      
2,996
  
 
Total sales and revenues
 
32,396
      
51,324
      
44,958
  
                         
Operating costs:
                      
 
Cost of goods sold
 
23,886
      
38,415
      
32,626
  
 
Selling, general and administrative expenses
 
3,645
      
4,399
      
3,821
  
 
Research and development expenses
 
1,421
      
1,728
      
1,404
  
 
Interest expense of Financial Products
 
1,045
      
1,153
      
1,132
  
 
Other operating (income) expenses
 
1,822
      
1,181
      
1,054
  
 
Total operating costs
 
31,819
      
46,876
      
40,037
  
                         
Operating profit
 
577
      
4,448
      
4,921
  
                         
 
Interest expense excluding Financial Products
 
389
      
274
      
288
  
 
Other income (expense)
 
381
      
327
      
357
  
                         
Consolidated profit before taxes
 
569
      
4,501
      
4,990
  
                         
 
Provision (benefit) for income taxes
  
(270
)
    
953
      
1,485
  
 
Profit of consolidated companies
  
839
      
3,548
      
3,505
  
                         
 
Equity in profit (loss) of unconsolidated affiliated companies
  
(12
)
    
37
      
73
  
                       
Profit of consolidated and affiliated companies
 
827
      
3,585
      
3,578
  
                       
Less: Profit (loss) attributable to noncontrolling interests
 
(68
)
    
28
      
37
  
                       
Profit1
$
895
    
$
3,557
    
$
3,541
  
                         
                       
Profit per common share
$
1.45
    
$
5.83
    
$
5.55
  
                         
Profit per common share – diluted 2
$
1.43
    
$
5.66
    
$
5.37
  
                         
Weighted-average common shares outstanding (millions)
                      
 
- Basic
 
615.2
      
610.5
      
638.2
  
 
- Diluted 2
 
626.0
      
627.9
      
659.5
  
                       
Cash dividends declared per common share
$
1.68
    
$
1.62
    
$
1.38
  
 
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)
 
2009
  
2008
  
2007
Assets
                      
 
Current assets:
                      
   
Cash and short-term investments
$
4,867
    
$
2,736
    
$
1,122
  
   
Receivables - trade and other
 
5,611
      
9,397
      
8,249
  
   
Receivables - finance
 
8,301
      
8,731
      
7,503
  
   
Deferred and refundable income taxes
 
1,216
      
1,223
      
816
  
   
Prepaid expenses and other current assets
 
434
      
765
      
583
  
   
Inventories
 
6,360
      
8,781
      
7,204
  
 
Total current assets
 
26,789
      
31,633
      
25,477
  
                         
 
Property, plant and equipment - net
 
12,386
      
12,524
      
9,997
  
 
Long-term receivables - trade and other
 
971
      
1,479
      
685
  
 
Long-term receivables - finance
 
12,279
      
14,264
      
13,462
  
 
Investments in unconsolidated affiliated companies
 
105
      
94
      
598
  
 
Noncurrent deferred and refundable income taxes
 
2,714
      
3,311
      
1,553
  
 
Intangible assets
 
465
      
511
      
475
  
 
Goodwill
 
2,269
      
2,261
      
1,963
  
 
Other assets
 
2,060
      
1,705
      
1,922
  
Total assets
$
60,038
    
$
67,782
    
$
56,132
  
                       
Liabilities
                      
 
Current liabilities:
                      
   
Short-term borrowings:
                      
     
Machinery and Engines
$
433
    
$
1,632
    
$
187
  
     
Financial Products
 
3,650
      
5,577
      
5,281
  
   
Accounts payable
 
2,993
      
4,827
      
4,723
  
   
Accrued expenses
 
3,351
      
4,121
      
3,178
  
   
Accrued wages, salaries and employee benefits
 
797
      
1,242
      
1,126
  
   
Customer advances
 
1,217
      
1,898
      
1,442
  
   
Dividends payable
 
262
      
253
      
225
  
   
Other current liabilities
 
888
      
1,027
      
951
  
   
Long-term debt due within one year:
                      
     
Machinery and Engines
 
302
      
456
      
180
  
     
Financial Products
 
5,399
      
5,036
      
4,952
  
 
Total current liabilities
 
19,292
      
26,069
      
22,245
  
 
Long-term debt due after one year:
                      
   
Machinery and Engines
 
5,652
      
5,736
      
3,639
  
   
Financial Products
 
16,195
      
17,098
      
14,190
  
 
Liability for postemployment benefits
 
7,420
      
9,975
      
5,059
  
 
Other liabilities
 
2,179
      
2,190
      
2,003
  
Total liabilities
 
50,738
      
61,068
      
47,136
  
Commitments and contingencies (Notes 22 and 23)
                      
Redeemable noncontrolling interest (Note 26)
 
477
      
524
      
—
  
Stockholders' equity
                      
 
Common stock of $1.00 par:
                      
   
Authorized shares: 900,000,000
Issued shares: (2009, 2008 and 2007 - 814,894,624) at paid-in amount
  
3,439
      
3,057
      
2,744
  
 
Treasury stock: (2009 - 190,171,905 shares; 2008 - 213,367,983 shares
and 2007 - 190,908,490 shares) at cost
  
(10,646
)
    
(11,217
)
    
(9,451
)
 
Profit employed in the business
 
19,711
      
19,826
      
17,398
  
 
Accumulated other comprehensive income (loss)
 
(3,764
)
    
(5,579
)
    
(1,808
)
 
Noncontrolling interests
 
83
      
103
      
113
  
Total stockholders' equity
 
8,823
      
6,190
      
8,996
  
Total liabilities, redeemable noncontrolling interest and stockholders' equity
$
60,038
    
$
67,782
    
$
56,132
  
 
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) 1
  
Noncontrolling
interests
  
Total
  
Comprehensive
income (loss)
Balance at December 31, 2006
$
2,465
    
$
(7,352
)
  
$
14,593
    
$
(2,847
)
  
$
78
    
$
6,937
    
$
3,990
  
Adjustment to adopt accounting for uncertainty in income taxes
  
—
      
—
      
141
      
—
      
—
      
141
          
Balance at January 1, 2007
$
2,465
    
$
(7,352
)
  
$
14,734
    
$
(2,847
)
  
$
78
    
$
7,078
          
Profit of consolidated and affiliated companies
  
—
      
—
      
3,541
      
—
      
37
      
3,578
    
$
3,578
  
Foreign currency translation
 
—
      
—
      
—
      
278
      
1
      
279
      
279
  
Pension and other postretirement benefits
                                                      
 
Current year actuarial gain (loss), net of tax of $271
  
—
      
—
      
—
      
537
      
—
      
537
      
537
  
 
Amortization of actuarial (gain) loss, net of tax of $123
  
—
      
—
      
—
      
228
      
—
      
228
      
228
  
 
Current year prior service cost, net of tax of $1
  
—
      
—
      
—
      
(2
)
    
—
      
(2
)
    
(2
)
 
Amortization of prior service cost, net of tax of $10
  
—
      
—
      
—
      
17
      
—
      
17
      
17
  
 
Amortization of transition (asset) obligation, net of tax of $1
 
—
      
—
      
—
      
2
      
—
      
2
      
2
  
Derivative financial instruments
                                                      
 
Gains (losses) deferred, net of tax of $25
  
—
      
—
      
—
      
48
      
—
      
48
      
48
  
 
(Gains) losses reclassified to earnings, net of tax of $41
 
—
      
—
      
—
      
(74
)
    
—
      
(74
)
    
(74
)
Retained interests
                                                      
 
Gains (losses) deferred, net of tax of $2
  
—
      
—
      
—
      
3
      
—
      
3
      
3
  
 
(Gains) losses reclassified to earnings, net of tax of $4
  
—
      
—
      
—
      
(6
)
    
—
      
(6
)
    
(6
)
Available-for-sale securities
                                                      
 
Gains (losses) deferred, net of tax of $8
  
—
      
—
      
—
      
14
      
—
      
14
      
14
  
 
(Gains) losses reclassified to earnings, net of tax of $3
 
—
      
—
      
—
      
(6
)
    
—
      
(6
)
    
(6
)
Dividends declared
 
—
      
—
      
(877
)
    
—
      
—
      
(877
)
    
—
  
Distributions to noncontrolling interests
  
—
      
—
      
—
      
—
      
(20
)
    
(20
)
    
—
  
Change in ownership for noncontrolling interests
  
—
      
—
      
—
      
—
      
17
      
17
      
—
  
Common shares issued from treasury stock
for stock-based compensation: 11,710,958
  
22
      
306
      
—
      
—
      
—
      
328
      
—
  
Stock-based compensation expense
  
146
      
—
      
—
      
—
      
—
      
146
      
—
  
Excess tax benefits from stock-based compensation
  
167
      
—
      
—
      
—
      
—
      
167
      
—
  
Shares repurchased: 33,533,000
  
—
      
(2,405
)
    
—
      
—
      
—
      
(2,405
)
    
—
  
Shares repurchase derivative contracts
  
(56
)
    
—
      
—
      
—
      
—
      
(56
)
    
—
  
Balance at December 31, 2007
$
2,744
    
$
(9,451
)
  
$
17,398
    
$
(1,808
)
  
$
113
    
$
8,996
    
$
4,618
  
Adjustment to adopt postretirement benefit measurement
date provisions, net of tax 2
  
—
      
—
      
(33
)
    
17
      
—
      
(16
)
        
Balance at January 1, 2008
$
2,744
    
$
(9,451
)
  
$
17,365
    
$
(1,791
)
  
$
113
    
$
8,980
          
Profit of consolidated and affiliated companies
  
—
      
—
      
3,557
      
—
      
28
      
3,585
    
$
3,585
  
Foreign currency translation, net of tax of $133
  
—
      
—
      
—
      
(488
)
    
23
      
(465
)
    
(465
)
Pension and other postretirement benefits
                                                      
 
Current year actuarial gain (loss), net of tax of $1,854
  
—
      
—
      
—
      
(3,415
)
    
(30
)
    
(3,445
)
    
(3,445
)
 
Amortization of actuarial (gain) loss, net of tax of $84
  
—
      
—
      
—
      
150
      
1
      
151
      
151
  
 
Current year prior service cost, net of tax of $5
  
—
      
—
      
—
      
(9
)
    
—
      
(9
)
    
(9
)
 
Amortization of transition (asset) obligation, net of tax of $1
  
—
      
—
      
—
      
2
      
—
      
2
      
2
  
Derivative financial instruments
                                                      
 
Gains (losses) deferred, net of tax of $67
  
—
      
—
      
—
      
100
      
—
      
100
      
100
  
 
(Gains) losses reclassified to earnings, net of tax of $14
  
—
      
—
      
—
      
(22
)
    
2
      
(20
)
    
(20
)
Retained interests
                                                      
 
Gains (losses) deferred, net of tax of $13
  
—
      
—
      
—
      
(22
)
    
—
      
(22
)
    
(22
)
 
(Gains) losses reclassified to earnings, net of tax of $8
  
—
      
—
      
—
      
13
      
—
      
13
      
13
  
Available-for-sale securities
                                                      
 
Gains (losses) deferred, net of tax of $67
  
—
      
—
      
—
      
(125
)
    
—
      
(125
)
    
(125
)
 
(Gains) losses reclassified to earnings, net of tax of $15
  
—
      
—
      
—
      
28
      
—
      
28
      
28
  
Dividends declared
 
—
      
—
      
(981
)
    
—
      
—
      
(981
)
    
—
  
Distributions to noncontrolling interests
  
—
      
—
      
—
      
—
      
(10
)
    
(10
)
    
—
  
Change in ownership for noncontrolling interests
  
—
      
—
      
—
      
—
      
(26
)
    
(26
)
    
—
  
Common shares issued from treasury stock for
stock-based compensation: 4,807,533
  
7
      
128
      
—
      
—
      
—
      
135
      
—
  
Stock-based compensation expense
  
194
      
—
      
—
      
—
      
—
      
194
      
—
  
Excess tax benefits from stock-based compensation
  
56
      
—
      
—
      
—
      
—
      
56
      
—
  
Shares repurchased: 27,267,026 3
  
—
      
(1,894
)
    
—
      
—
      
—
      
(1,894
)
    
—
  
Stock repurchase derivative contracts
  
56
      
—
      
—
      
—
      
—
      
56
      
—
  
Cat Japan share redemption 4
 
—
      
—
      
(115
)
    
—
      
2
      
(113
)
    
—
  
Balance at December 31, 2008
$
3,057
    
$
(11,217
)
  
$
19,826
    
$
(5,579
)
  
$
103
    
$
6,190
    
$
(207
)
 
(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) 1
  
Noncontrolling
interests
  
Total
  
Comprehensive
income (loss)
Balance at December 31, 2008
$
3,057
    
$
(11,217
)
  
$
19,826
    
$
(5,579
)
  
$
103
    
$
6,190
    
$
(207
)
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 cost, net of tax of $249  
—
      
—
      
—
      
300
      
—
      
300
      
300
  
  Amortization of prior service 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 5
  
—
      
—
      
—
      
(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 6
  
250
      
468
      
—
      
—
      
—
      
718
      
—
  
Stock-based compensation expense
  
132
      
—
      
—
      
—
      
—
      
132
      
—
  
Excess tax benefits from stock-based compensation
  
17
      
—
      
—
      
—
      
—
      
17
      
—
  
Cat Japan share redemption 4
 
—
      
—
      
28
      
—
      
53
      
81
      
—
  
Balance at December 31, 2009
$
3,439
    
$
(10,646
)
  
$
19,711
    
$
(3,764
)
  
$
83
    
$
8,823
    
$
2,662
  
 
1
Pension and other postretirement benefits include net adjustments for Cat Japan Ltd, while they were an unconsolidated affiliate, of $(9) million in 2007.   The ending balance is $(52) million as of December 31, 2007.  See Notes 25 and 26 regarding the Cat Japan share redemption.
2
Adjustments were made to adopt the measurement date provision of the accounting standard on employers' accounting for defined benefits pension and other postretirement plans.  Adjustments to Profit employed in the business and pension and other postemployment benefits were net of tax of $(17) million and $9 million, respectively.  See Note 1K for additional information.
3
Amount consists of $1,800 million of cash-settled purchases and $94 million of derivative contracts.
4
See Notes 25 and 26 regarding the Cat Japan share redemption.
5
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 8 and 19 for additional information.
6
See Note 14 regarding shares issued for benefit plans.
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)
 
2009
  
2008
  
2007
Cash flow from operating activities:
                      
   
Profit of consolidated and affiliated companies
$
827
    
$
3,585
    
$
3,578
  
   
Adjustments for non-cash items:
                      
       
Depreciation and amortization
 
2,336
      
1,980
      
1,797
  
       
Other
 
137
      
355
      
162
  
   
Changes in assets and liabilities:
                      
       
Receivables - trade and other
 
4,014
      
(545
)
    
899
  
       
Inventories
 
2,501
      
(833
)
    
(745
)
       
Accounts payable
 
(2,034
)
    
(4
)
    
387
  
       
Accrued expenses
 
(505
)
    
660
      
231
  
       
Customer advances
 
(646
)
    
286
      
576
  
       
Other assets - net
 
235
      
(470
)
    
66
  
       
Other liabilities - net
 
(522
)
    
(217
)
    
1,004
  
Net cash provided by (used for) operating activities
 
6,343
      
4,797
      
7,955
  
                       
Cash flow from investing activities:
                      
   
Capital expenditures - excluding equipment leased to others
  
(1,348
)
    
(2,445
)
    
(1,700
)
   
Expenditures for equipment leased to others
 
(968
)
    
(1,566
)
    
(1,340
)
   
Proceeds from disposals of property, plant and equipment
  
1,242
      
982
      
408
  
   
Additions to finance receivables
 
(7,107
)
    
(14,031
)
    
(13,946
)
   
Collections of finance receivables
 
9,288
      
9,717
      
10,985
  
   
Proceeds from sale of finance receivables
 
100
      
949
      
866
  
   
Investments and acquisitions (net of cash acquired)
 
(19
)
    
(117
)
    
(229
)
   
Proceeds from release of security deposit
 
—
      
—
      
290
  
   
Proceeds from sale of available-for-sale securities
 
291
      
357
      
282
  
   
Investments in available-for-sale securities
 
(349
)
    
(339
)
    
(485
)
   
Other - net
 
(128
)
    
197
      
461
  
Net cash provided by (used for) investing activities
 
1,002
      
(6,296
)
    
(4,408
)
                       
Cash flow from financing activities:
                      
   
Dividends paid
 
(1,029
)
    
(953
)
    
(845
)
   
Distribution to noncontrolling interests
 
(10
)
    
(10
)
    
(20
)
   
Common stock issued, including treasury shares reissued
  
89
      
135
      
328
  
   
Payment for stock repurchase derivative contracts
 
—
      
(38
)
    
(56
)
   
Treasury shares purchased
 
—
      
(1,800
)
    
(2,405
)
   
Excess tax benefit from stock-based compensation
 
21
      
56
      
155
  
   
Acquisitions of noncontrolling interests
  
(6
)
    
—
      
—
  
   
Proceeds from debt issued (original maturities greater than three months):
                      
      - Machinery and Engines  
458
      
1,673
      
224
  
      - Financial Products  
11,833
      
16,257
      
10,815
  
   
Payments on debt (original maturities greater than three months):
                      
      - Machinery and Engines  
(918
)
    
(296
)
    
(598
)
      - Financial Products  
(11,769
)
    
(14,143
)
    
(10,290
)
   
Short-term borrowings (original maturities three months or less) - net
  
(3,884
)
    
2,074
      
(297
)
Net cash provided by (used for) financing activities
 
(5,215
)
    
2,955
      
(2,989
)
Effect of exchange rate changes on cash
 
1
      
158
      
34
  
Increase (decrease) in cash and short-term investments
  
2,131
      
1,614
      
592
  
Cash and short-term investments at beginning of period
 
2,736
      
1,122
      
530
  
Cash and short-term investments at end of period
$
4,867
    
$
2,736
    
$
1,122
  
 
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 2009, we contributed 19.6 million shares of company stock with a fair value of $718 million to our U.S. benefit plans. See Note 14 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
 
 
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, skid steer loaders, underground mining equipment, tunnel boring equipment 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, 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 10 to 21,800 horsepower (8 to over 16 000 kilowatts).  Turbines range from 1,600 to 30,000 horsepower (1 200 to 22 000 kilowatts).
 
 
(3)
 
Financial Products - A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance) 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.
 
 
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," design versions of "CAT" and "Caterpillar," "Solar Turbines," “MaK," "Perkins," "FG Wilson," "Olympian" and “Progress Rail.”
 
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), 51 located in the United States and 127 located outside the United States. Worldwide, these dealers serve 182 countries and operate 3,518 places of business, including 1,407 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 129 distributors located in 165 countries. The FG Wilson branded electric power generation systems are sold through a worldwide network of 157 dealers located in 180 countries.  Some of the large, medium speed reciprocating engines are also sold  under the MaK brand through a worldwide network of 19 dealers 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 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 96 plants in the United States; 16 in the United Kingdom; nine in Italy; eight each in China and Mexico; five each in Canada and France; four in Brazil; three each in Australia, India, and Poland; two each in Germany, Indonesia, Japan and the Netherlands; and one each in Belgium, Hungary, Malaysia, Nigeria, Russia, Switzerland and Tunisia. Twelve parts distribution centers are located in the United States and 17 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 for further discussion.
 
A-10
 
 
 
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 absorbs a majority of the entity's expected losses, receives a majority of its expected residual returns, or both.
 
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 (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, 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 prepaid rent, prepaid insurance and other prepaid items.  In addition, at December 31, 2008, this line included a security deposit of $232 million related to a deposit obligation due in 2009.  See Note 16 for further discussion.
 
We have performed a review of subsequent events through February 19, 2010, the date the financial statements were issued, and concluded there were no events or transactions occurring during this period that required recognition or disclosure in our financial statements.
 
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.
 
Sales of certain turbine machinery units 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.
 
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 2009 and 2008, terms were extended to not more than one year for $312 million and $544 million of receivables, respectively, which represent approximately 1% of consolidated sales.   In 2007, terms were extended to not more than one year for $219 million of receivables, which represent less than 1% of consolidated sales.
 
 
Sales with payment terms of two months or more were as follows:
 
     
(Dollars in millions)
     
2009
  
2008
  
2007
 
Payment Terms (months)
  
Sales
  
Percent
of Sales
  
Sales
  
Percent
of Sales
  
Sales
  
Percent
of Sales
 
2
  
$
3,087
      
10.5
%
  
$
4,130
      
8.6
%
  
$
2,830
      
6.8
%
 
3
    
978
      
3.3
%
    
2,786
      
5.8
%
    
2,067
      
4.9
%
 
4
    
674
      
2.3
%
    
866
      
1.8
%
    
526
      
1.3
%
 
5
    
53
      
0.2
%
    
1,062
      
2.2
%
    
965
      
2.3
%
 
6
    
73
      
0.2
%
    
561
      
1.2
%
    
4,549
      
10.8
%
 
7-12
    
478
      
1.6
%
    
4,469
      
9.3
%
    
293
      
0.7
%
     
$
5,343
      
18.1
%
  
$
13,874
      
28.9
%
  
$
11,230
      
26.8
%
   
 
 
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.
 
A-11
 
 
 
Revenues of Financial Products primarily represent the following Cat Financial revenues:
 
 
·
Retail (end-customer) 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.
 
 
·
Operating lease revenue is recorded on a straight-line basis in the period earned over the life of the contract.
 
 
·
Wholesale (dealer) 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.
 
 
·
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 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 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 70% of total inventories at December 31, 2009 and 2008, and about 75% of total inventories at December 31, 2007.
 
If the FIFO (first-in, first-out) method had been in use, inventories would have been $3,003 million, $3,183 million and $2,617 million higher than reported at December 31, 2009, 2008 and 2007, respectively.
 
E.
 
Securitized receivables
 
Cat Financial periodically sells finance receivables in securitization transactions. 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. The retained interests are recorded in Other assets at fair value. Cat Financial estimates fair value and cash flows using a valuation model and key assumptions for credit losses, prepayment rates and discount rates. See Note 8 and Note 19 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 2009, 2008 and 2007, Cat Financial depreciation on equipment leased to others was $713 million, $724 million and $671 million, respectively, and was included in Other operating (income) expenses in Statement 1. In 2009, 2008 and 2007, consolidated depreciation expense was $2,254 million, $1,907 million and $1,725 million, respectively. Amortization of purchased 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 Engines 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 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 (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, 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.
 
A-12
 
 
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, postemployment benefits, post-sale discounts, credit losses and income taxes.
 
K.
 
New accounting guidance
 
Accounting for uncertainty in income taxes – In June 2006, the Financial Accounting Standards Board (FASB) issued accounting guidance to create a single model to address accounting for uncertainty in tax positions.  This guidance clarifies that a tax position must be more likely than not of being sustained before being recognized in the financial statements. As required, we adopted the provisions of this guidance as of January 1, 2007.  The following table summarizes the effect of the initial adoption of this guidance. See Note 5 for additional information.
 
 
Initial adoption of accounting for uncertainty in income taxes
          
 
(Millions of dollars)
January 1, 2007
Prior to adoption
  
Adjustment
  
January 1, 2007
Post adoption
 
Deferred and refundable income taxes
$
733
    
$
82
    
$
815
  
 
Noncurrent deferred and refundable income taxes
 
1,949
      
211
      
2,160
  
 
Other current liabilities
 
1,145
      
(530
)
    
615
  
 
Other liabilities
 
1,131
      
682
      
1,813
  
 
Profit employed in the business
 
14,593
      
141
      
14,734
  

 
 
Fair value measurements - In September 2006, the FASB issued accounting guidance on fair value measurements, which 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, this guidance expands disclosures about fair value measurements. In February 2008, the FASB issued additional guidance that (1) deferred the effective date of the original guidance for one year for certain nonfinancial assets and nonfinancial liabilities and (2) removed certain leasing transactions from the scope of the original guidance.  We applied this new guidance to financial assets and liabilities effective January 1, 2008 and nonfinancial assets and liabilities effective January 1, 2009. The adoption of this guidance did not have a material impact on our financial statements.  See Note 19 for additional information.
 
 
Employers' accounting for defined benefit pension and other postretirement plans - In September 2006, the FASB issued accounting guidance on employers' accounting for defined benefit pension and other postretirement plans. This guidance requires recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet.  Under this guidance, gains and losses, prior service costs and credits and any remaining transition amounts under previous guidance that have not yet been recognized through net periodic benefit cost are recognized in Accumulated other comprehensive income (loss), net of tax effects, until they are amortized as a component of net periodic benefit 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.
 
 
We adopted the balance sheet recognition provisions at December 31, 2006. We adopted the year-end measurement date effective January 1, 2008 using the “one measurement” approach.  Under the one measurement approach, net periodic benefit cost for the period between any early measurement date and the end of the fiscal year that the measurement provisions are applied is allocated proportionately between amounts to be recognized as an adjustment of Profit employed in the business and net periodic benefit cost for the fiscal year.  Previously, we used a November 30th measurement date for our U.S. pension and other postretirement benefit plans and September 30th for our non-U.S. plans.  The following summarizes the effect of adopting the year-end measurement date provisions as of January 1, 2008.  See Note 14 for additional information.
 
A-13
 
 
 
 
Adoption of postretirement benefit year-end measurement date
   
January 1, 2008
      
January 1, 2008
 
(Millions of dollars)
Prior to adoption
  
Adjustment
  
Post adoption
 
Noncurrent deferred and refundable income taxes
$
1,553
    
$
8
    
$
1,561
  
 
Liability for postemployment benefits
 
5,059
      
24
      
5,083
  
 
Accumulated other comprehensive income (loss) 
  
(1,808
)
    
17
      
(1,791
)
 
Profit employed in the business
 
17,398
      
(33
)
    
17,365
  

 
Business combinations and noncontrolling interests in consolidated financial statements - In December 2007, the FASB issued accounting guidance on business combinations and noncontrolling interests in consolidated financial statements.  The guidance on business combinations requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed. Further, it changes the accounting for acquired in-process research and development assets, contingent consideration, partial acquisitions and transaction costs.  Under the guidance on noncontrolling interests, all entities are required to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. In addition, transactions between an entity and noncontrolling interests are treated as equity transactions.  We adopted this new guidance on January 1, 2009.  As required, the guidance on noncontrolling interests was adopted through retrospective application, and all prior period information has been adjusted accordingly. The adoption of this guidance did not have a material impact on our financial statements.  See Note 25 for further details.
 
 
Disclosures about derivative instruments and hedging activities - In March 2008, the FASB issued accounting guidance on disclosures about derivative instruments and hedging activities.  This guidance expands disclosures for derivative instruments by requiring entities to disclose the fair value of derivative instruments and their gains or losses in tabular format.  It also requires disclosure of information about credit risk-related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments.  We adopted this new guidance on January 1, 2009.  The adoption of this guidance did not have a material impact on our financial statements.  See Note 3 for additional information.
 
 
Employers' disclosures about postretirement benefit plan assets - In December 2008, the FASB issued accounting guidance on employers' disclosures about postretirement benefit plan assets. This guidance expands the disclosure set forth in previous guidance by adding required disclosures about (1) how investment allocation decisions are made by management, (2) major categories of plan assets, and (3) significant concentration of risk. Additionally, this guidance requires an employer to disclose information about the valuation of plan assets similar to that required under the accounting guidance on fair value measurements.  We adopted this guidance for our financial statements for the annual period ending December 31, 2009.  The adoption of this guidance did not have a material impact on our financial statements. See Note 14 for additional information.
 
 
Recognition and presentation of other-than-temporary impairments - In April 2009, the FASB issued accounting guidance on the recognition and presentation of other-than-temporary impairments.  This new guidance amends the existing impairment guidance relating to certain debt securities and requires a company to assess the likelihood of selling the security prior to recovering its cost basis.  When a security meets the criteria for impairment, the impairment charges related to credit losses would be recognized in earnings, while noncredit losses would be reflected in other comprehensive income.  Additionally, it requires a more detailed, risk-oriented breakdown of major security types and related information. We adopted this guidance on April 1, 2009.  The adoption of this guidance did not have a material impact on our financial statements.  See Notes 8 and 13 for additional information.
 
 
Subsequent events - In May 2009, the FASB issued accounting guidance on subsequent events that establishes standards of accounting for and disclosure of subsequent events.  In addition, it requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.  This new guidance was adopted for our financial statements for the quarterly period ending June 30, 2009.  The adoption of this guidance did not have a material impact on our financial statements.  See Note 1B 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 will adopt this new guidance effective January 1, 2010.  We do not expect the adoption of this guidance will have a material impact on our financial statements.
 
A-14
 
 
 
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 qualifying special purpose entities, 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 will adopt this new guidance effective January 1, 2010.  The adoption of this guidance will result in the consolidation of certain QSPEs related to Cat Financial's asset-backed securitization program that are currently not recorded on our consolidated financial statements.  See Note 8 for additional information.  We do not expect the adoption of this guidance will have a material impact on our financial statements.
 
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 sub-segment 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 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 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 12 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)
2009
  
2008
  
2007
   
Foreign currency translation
$
603
    
$
261
    
$
749
  
   
Pension and other postretirement benefits
  
(4,439
)
    
(5,849
)
    
(2,594
)
   
Derivative financial instruments
  
60
      
95
      
17
  
   
Retained interests
  
(3
)
    
(7
)
    
2
  
   
Available-for-sale securities
  
15
      
(79
)
    
18
  
 
Total accumulated other comprehensive income (loss)
$
(3,764
)
  
$
(5,579
)
  
$
(1,808
)
   


2.
 
Stock-based compensation
 
 
On January 1, 2006, we adopted accounting guidance for share-based payments using the modified prospective transition method.  Under the modified prospective transition method, we were required to record stock-based compensation expense for all awards granted after the date of adoption.  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.
 
A-15
 
 
 
Common stock issued from Treasury stock under the plans totaled 3,571,268 for 2009, 4,807,533 for 2008 and 11,710,958 for 2007.
 
In 2007, in order to align our stock award program with the overall market, we adjusted our 2007 grant by reducing the overall number of employee awards and utilizing RSUs in addition to the SARs and option awards.  The 2009, 2008 and 2007 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, 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."  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.  With the adoption of guidance on share-based payments, 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, 2009, 2008 and 2007, respectively.

   
Grant Year
   
2009
  
2008
  
2007
 
Weighted-average dividend yield
 
3.07
%
    
1.89
%
    
1.68
%
 
Weighted-average volatility
 
36.02
%
    
27.14
%
    
26.04
%
 
Range of volatilities
 
35.75-61.02
%
    
27.13-28.99
%
    
26.03-26.62
%
 
Range of risk-free interest rates
 
0.17-2.99
%
    
1.60-3.64
%
    
4.40-5.16
%
 
Weighted-average expected lives
 
8 years
    
8 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, 2009, 2008 and 2007 did not have a significant impact on our financial statements.
 
At December 31, 2009, there was $94 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 1.6 years.
 
Please refer to Tables I and II below for additional information on our stock-based awards.
 
 
A-16
 
 
 
TABLE I—Financial Information Related to Stock-based Compensation
   
2009
  
2008
  
2007
   
Shares
  
Weighted-
Average
Exercise
Price
  
Shares
  
Weighted-
Average
Exercise
Price
  
Shares
  
Weighted-
Average
Exercise
Price
 
Stock options/SARs activity:
                                              
   
Outstanding at beginning of year
  
60,398,074
    
$
45.68
      
60,855,854
    
$
42.18
      
68,880,667
    
$
38.60
  
   
Granted to officers and key employees1
  
6,823,227
    
$
22.17
      
4,886,601
    
$
73.20
      
4,350,974
    
$
63.04
  
   
Granted to outside directors1
 
—
    
$
—
      
—
    
$
—
      
75,829
    
$
63.04
  
   
Exercised
 
(3,906,785
)
  
$
28.13
      
(5,006,435
)
  
$
30.04
      
(12,062,847
)
  
$
29.41
  
   
Forfeited / expired
 
(231,729
)
  
$
38.05
      
(337,946
)
  
$
46.45
      
(388,769
)
  
$
41.64
  
   
Outstanding at end of year
 
63,082,787
    
$
44.24
      
60,398,074
    
$
45.68
      
60,855,854
    
$
42.18
  
   
Exercisable at year-end
 
48,256,847
    
$
43.14
      
43,083,319
    
$
35.81
      
47,533,561
    
$
34.65
  
                                                   
 
RSUs activity:
   
Outstanding at beginning of year
  
2,673,474
              
1,253,326
              
N/A
2
        
   
Granted to officers and key employees
  
2,185,674
              
1,490,645
              
1,282,020
          
   
Granted to outside directors
 
—
              
20,878
              
—
          
   
Vested
 
(286,413
)
            
(61,158
)
            
(9,715
)
        
   
Forfeited
 
(41,190
)
            
(30,217
)
            
(18,979
)
        
   
Outstanding at end of year
 
4,531,545
              
2,673,474
              
1,253,326
          
                                                   

 
 
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 12/31/09
  
Life (Years)
  
Price
  
Value3
  
at 12/31/09
  
Life (Years)
  
Price
  
Value3
 
$
19.20 - 22.76
  
7,726,819
    
8.09
    
$
21.83
  
$
275
    
1,110,335
    
1.63
    
$
19.78
    
$
42
  
 
$
25.36 - 26.77
  
6,630,928
    
2.09
    
$
25.89
    
209
    
6,630,928
    
2.09
    
$
25.89
      
209
  
 
$
27.14 - 29.43
  
7,854,606
    
3.43
    
$
27.15
    
238
    
7,854,606
    
3.43
    
$
27.15
      
238
  
 
$
38.63 - 45.64
  
22,292,881
    
4.76
    
$
41.85
    
348
    
22,292,881
    
4.76
    
$
41.85
      
348
  
 
$
63.04 - 73.20
  
18,577,553
    
6.91
    
$
70.21
    
—
    
10,368,097
    
6.27
    
$
71.53
      
—
  
       
63,082,787
          
$
44.24
  
$
1,070
    
48,256,847
          
$
43.14
    
$
837
  
 
 
1
Of the 6,823,227 awards granted during the year ended December 31, 2009, 6,260,647 were SARs. Of the 4,886,601 awards granted during the year ended December 31, 2008, 4,476,095 were SARs. Of the 4,426,803 awards granted during the year ended December 31, 2007, 4,195,188 were SARs.
 
2
2007 was the first year stock-based compensation awards included RSUs.
 
3
The difference between a stock award's exercise price and the underlying stock's market price at December 31, 2009, for awards with market price greater than the exercise price. Amounts are in millions of dollars.
 

 
 
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, 2009, there were 4,531,545 outstanding RSUs with a weighted average remaining contractual life of 1.4 years.

 
TABLE II— Additional Stock-based Award Information
   
 
(Dollars in millions except per share data)
2009
  
2008
  
2007
  
 
Stock Options/SARs activity:
                        
 
Weighted-average fair value per share of stock awards granted
$
7.10
    
$
22.32
    
$
20.73
    
 
Intrinsic value of stock awards exercised
$
77
    
$
232
    
$
547
    
 
Fair value of stock awards vested
$
241
    
$
30
    
$
14
    
 
Cash received from stock awards exercised
$
89
    
$
130
    
$
322
    
                           
 
RSUs activity:
                        
 
Weighted-average fair value per share of stock awards granted
$
20.22
    
$
69.17
    
$
59.94
    
 
Fair value of stock awards vested
$
10
    
$
4
    
$
1
    
                           

 
Before tax stock-based compensation expense for 2009, 2008 and 2007 was $132 million, $194 million and $146 million, respectively, with a corresponding income tax benefit of $42 million, $62 million and $48 million, respectively.
 
A-17
 
 
 
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 that have been repurchased through our stock repurchase program to satisfy share award exercises.
 
The cash tax benefits realized from stock awards exercised for December 31, 2009, 2008 and 2007 were $26 million, $60 million and $167 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 $25 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, 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 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 (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 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 Engines 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, Japanese yen, Mexican peso, Singapore dollar, New Zealand 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 Engines foreign currency contracts are undesignated.  We also designate as fair value hedges specific euro forward contracts used to hedge firm commitments.
 
A-18
 
 
 
As of December 31, 2009, $5 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.
 
 
Machinery and Engines 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 have 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.
 
 
As of December 31, 2009, $32 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 Engines 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 underlying hedged item.
 
  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 Engines operations purchase aluminum, copper, lead and nickel 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.
 
 
The location and fair value of derivative instruments reported in Statement 2 are as follows:
 
A-19
 
 
 
(Millions of dollars)
December 31, 2009
   
Consolidated Statement of Financial Position Location
  
Asset (Liability)
Fair Value
 
Designated derivatives
          
   
Foreign exchange contracts
          
     
Machinery and Engines
Receivables – trade and other
 
$
27
  
     
Machinery and Engines
Long-term receivables – trade and other
    
125
  
     
Machinery and Engines
Accrued expenses
   
(22
)
     
Machinery and Engines
Other liabilities
   
(3
)
   
Interest rate contracts
          
     
Machinery and Engines
Receivables – trade and other
   
1
  
     
Machinery and Engines
Accrued expenses
   
(1
)
     
Financial Products
Receivables – trade and other
   
18
  
     
Financial Products
Long-term receivables – trade and other
    
127
  
     
Financial Products
Accrued expenses
   
(100
)
         
$
172
  
               
 
Undesignated derivatives
          
   
Foreign exchange contracts
          
     
Machinery and Engines
Long-term receivables – trade and other
  
$
66
  
     
Machinery and Engines
Other liabilities
   
(3
)
     
Financial Products
Receivables – trade and other
   
20
  
     
Financial Products
Accrued expenses
   
(18
)
   
Interest rate contracts
          
     
Machinery and Engines
Accrued expenses
   
(7
)
     
Financial Products
Receivables – trade and other
   
1
  
     
Financial Products
Long-term receivables – trade and other
    
1
  
     
Financial Products
Accrued expenses
   
(6
)
   
Commodity contracts
          
     
Machinery and Engines
Receivables – trade and other
   
10
  
         
$
64
  
               

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

 
Fair Value Hedges
(Millions of dollars)
         
Year ended December 31, 2009
     
Classification
  
Gains (Losses)
on Derivatives
  
Gains (Losses)
on Borrowings
 
Interest rate contracts
                    
   
Machinery and Engines
  
Other income (expense)
 
$
1
    
$
(1
)
   
Financial Products
 
Other income (expense)
   
(205
)
    
220
  
         
$
(204
)
  
$
219
  
                       

 
Cash Flow Hedges
 
(Millions of dollars)
  
Year ended December 31, 2009
       
Recognized in Earnings
 
 
  
Recognized in AOCI - Effective Portion
  
Classification of
Gains (Losses)
  
Reclassified from AOCI - Effective Portion
  
Recognized in Earnings -
 Ineffective Portion
 
Foreign exchange contracts
                              
   
Machinery and Engines
  
$
102
    
Other income (expense)
  
$
176
    
$
2
    
 
Interest rate contracts
                              
   
Machinery and Engines
    
(30
)
  
Other income (expense)
    
(3
)
    
—
    
   
Financial Products
    
(37
)
  
Interest expense of Financial Products
    
(83
)
    
9
1
  
       
$
35
        
$
90
    
$
11
    
 

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

 
The effect of derivatives not designated as hedging instruments on Statement 1 is as follows:
 
A-20
 
 
           
 
(Millions of dollars)
  
Classification of Gains or (Losses)
  
Year ended December 31, 2009
 
Foreign exchange contracts
            
   
Machinery and Engines
 
Other income (expense)
 
$
35
  
   
Financial Products
 
Other income (expense)
   
(134
)
 
Interest rate contracts
            
   
Machinery and Engines
 
Other income (expense)
   
(3
)
   
Financial Products
 
Other income (expense)
   
3
  
 
Commodity contracts
           
   
Machinery and Engines
 
Other income (expense)
   
10
  
         
$
(89
)
               

D.
 
Stock repurchase risk
 
Payments for stock repurchase derivatives are accounted for as a reduction in stockholders' equity.  In February 2007, the Board of Directors authorized a $7.5 billion stock repurchase program, expiring on December 31, 2011.  The amount of Caterpillar stock that can be repurchased under the authorization is impacted by movements in the price of the stock.  In August 2007, the Board of Directors authorized the use of derivative contracts to reduce stock repurchase price volatility.
 
In connection with our stock repurchase program, we entered into capped call transactions (“call”) with a major bank for an aggregate of 6.0 million shares.  A call permits us to reduce share repurchase price volatility by providing a floor and cap on the price at which the shares can be repurchased.  During 2007, we paid the bank premiums of $56 million for the establishment of calls for 3.5 million shares, which was accounted for as a reduction to stockholders' equity.  During 2008, we paid the bank premiums of $38 million for the establishment of calls for 2.5 million shares.  The floor, cap and strike prices for the calls were based upon the average purchase price paid by the bank to purchase our common stock to hedge these transactions.  Each call matured and was exercised within one year after the call was established.  If we exercised a call, we could elect to settle the transaction with the bank by physical settlement (paying cash and receiving shares), cash settlement (receiving a net amount of cash) or net share settlement (receiving a net amount of shares).
 
 
For the year ended December 31, 2008, $268 million of cash was used to repurchase 5.0 million shares pursuant to calls exercised under this program. Premiums previously paid associated with these exercised calls were $78 million.  In December 2008, a call for 1.0 million shares matured, but was not exercised.  Premiums previously paid associated with this unexercised call were $16 million.  All outstanding calls under this program expired in 2008.
 

4.
Other income (expense)
   
Years ended December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Investment and interest income
$
98
    
$
101
    
$
99
  
 
Foreign exchange gains (losses)1
 
184
      
100
      
21
  
 
License fee income
 
49
      
73
      
66
  
 
Gains (losses) on sale of securities and affiliated companies
 
(2
 )    
55
      
70
  
 
Impairment of available-for-sale securities
 
(12
)
    
(37
)
    
—
  
 
Miscellaneous income (loss)
 
64
      
35
      
101
  
   
$
381
    
$
327
    
$
357
  
 
 
1
  Includes gains (losses) from foreign exchange derivative contracts.  See Note 3 for further details.
   

 
5.
Income taxes
 
The components of profit (loss) before taxes were:
   
Years ended December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
U.S.
$
(648
)
  
$
2,146
    
$
2,155
  
 
Non-U.S.
 
1,217
      
2,355
      
2,835
  
   
$
569
    
$
4,501
    
$
4,990
  
                         

 
 
Profit (loss) before taxes, as shown above, is based on the location of the entity to which such earnings are attributable. Where an entity's earnings are subject to taxation, however, may not correlate solely to where an entity is located.  Thus, the income tax provision shown below as U.S. or non-U.S. may not correspond to the earnings shown above.
 
A-21
 
 
 
 
The components of the provision (benefit) for income taxes were:
   
Years ended December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Current tax provision (benefit):
                      
   
U.S.
$
(443
)
  
$
673
    
$
515
  
   
Non-U.S.
 
350
      
446
      
464
  
   
State (U.S.)
 
(13
)
    
41
      
92
  
     
(106
)
    
1,160
      
1,071
  
                         
 
Deferred tax provision (benefit):
                      
   
U.S.
 
1
      
(335
)
    
403
  
   
Non-U.S.
 
(149
)
    
99
      
21
  
   
State (U.S.)
 
(16
)
    
29
      
(10
)
     
(164
)
    
(207
)
    
414
  
 
Total provision (benefit) for income taxes
$
(270
)
  
$
953
    
$
1,485
  
                         

 
We received net income tax and related interest refunds of $136 million in 2009 compared to income taxes paid of $1,318 million and $821 million in 2008 and 2007, respectively.
 
 
 
Reconciliation of the U.S. federal statutory rate to effective rate:
   
Years ended December 31,
   
2009
  
2008
  
2007
 
Taxes at U.S. statutory rate
$
199
  
35.0
  
%
  
$
1,575
  
35.0
  
%
  
$
1,747
  
35.0
  
%
 
(Decreases) increases in taxes resulting from:
                                        
   
Non-U.S. subsidiaries taxed at other than 35%
  
(261
)
(46.0
)
%
    
(124
)
(2.8
)
%
    
(248
)
(4.9
)
%
   
State and local taxes, net of federal
 
(19
)
(3.3
)
%
    
46
  
1.0
  
%
    
53
  
1.0
  
%
   
Interest and penalties, net of tax
 
20
  
3.5
  
%
    
11
  
0.2
  
%
    
24
  
0.5
  
%
   
U.S. tax credits
 
(47
)
(8.2
)
%
    
(40
)
(0.8
)
%
    
(37
)
(0.7
)
%
   
Other—net
 
(29
)
(5.1
)
%
    
(59
)
(1.3
)
%
    
(54
)
(1.1
)
%
     
(137
)
(24.1
)
%
    
1,409
  
31.3
  
%
    
1,485
  
29.8
  
%
                                           
   
Prior year tax and interest adjustments
 
(133
)
(23.4
)
%
    
—
  
—
      
—
  
—
    
   
Non-U.S. earnings reinvestment changes
  
—
  
—
        
(456
)
(10.1
)
%
    
—
  
—
    
 
Provision (benefit) for income taxes
$
(270
)
(47.5
)
%
  
$
953
  
21.2
  
%
  
$
1,485
  
29.8
  
%
   

 
 
The prior year tax benefits recorded in 2009 of $133 million primarily resulted from the U.S. settlement of tax years 1995 to 1999 and the true-up of estimated amounts used in the 2008 tax provision to the U.S. tax return as filed.  The settlement with the U.S. Internal Revenue Service (IRS) for tax years 1995 through 1999 resulted in a $46 million tax benefit related primarily to the true-up of estimated credits, a $14 million tax benefit to remeasure previously unrecognized tax benefits related to foreign sales corporation (FSC) commissions, and a $25 million benefit to adjust related interest, net of tax.
 
The provision for income taxes for 2008 includes tax benefits of $456 million related to changes in the reinvestment status of earnings of certain non-U.S. subsidiaries.  Repatriation of non-U.S. earnings resulted in a tax benefit of $409 million due to available foreign tax credits in excess of the U.S. tax liability on the dividend.  A benefit of $47 million was also recorded due to a change in tax status of a non-U.S. subsidiary allowing indefinite reinvestment of undistributed profits and reversal of U.S. tax previously recorded.
 
We have recorded income tax expense at U.S. tax rates on all profits, except for undistributed profits of non-U.S. subsidiaries of approximately $9 billion which are considered indefinitely reinvested.  Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested profits is not feasible.  If management intentions or U.S. tax law changes in the future, there may be a significant negative impact on the provision for income taxes in the period the change occurs.
 
The provision for income taxes would also be negatively impacted in the future if U.S. healthcare legislation was enacted and made government subsidies received for Medicare-equivalent prescription drug (Medicare Part D) coverage taxable.
 
Accounting for income taxes under U.S. GAAP guidance requires that individual tax-paying entities of the company offset all current deferred tax liabilities and assets within each particular tax jurisdiction and present them as a single amount in the Consolidated Financial Position. A similar procedure is followed for all noncurrent deferred tax liabilities and assets. Amounts in different tax jurisdictions cannot be offset against each other. The amount of deferred income taxes at December 31, included on the following lines in Statement 2, are as follows:
 
A-22
 
 

   
December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Assets:
                      
   
Deferred and refundable income taxes
$
802
    
$
785
    
$
612
  
   
Noncurrent deferred and refundable income taxes
 
2,704
      
3,298
      
1,539
  
     
3,506
      
4,083
      
2,151
  
 
Liabilities:
                      
   
Other current liabilities
 
11
      
9
      
8
  
   
Other liabilities
 
138
      
130
      
107
  
 
Deferred income taxes—net
$
3,357
    
$
3,944
    
$
2,036
  
                         

 
Deferred income tax assets and liabilities:
   
December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Deferred income tax assets:
                      
   
Pension
$
1,207
    
$
1,888
    
$
270
  
   
Postemployment benefits other than pensions
 
1,362
      
1,530
      
1,490
  
   
Tax carryforwards
 
1,185
      
712
      
366
  
   
Warranty reserves
 
243
      
312
      
266
  
   
Unrealized profit excluded from inventories
 
229
      
275
      
210
  
   
Stock based compensation
 
182
      
148
      
93
  
   
Post sale discounts
 
112
      
140
      
116
  
   
Allowance for credit losses
 
102
      
134
      
102
  
   
Deferred compensation
 
95
      
78
      
104
  
   
Other—net
 
300
      
294
      
327
  
     
5,017
      
5,511
      
3,344
  
                           
 
Deferred income tax liabilities:
                      
   
Capital and intangible assets
 
(1,185
)
    
(1,233
)
    
(938
)
   
Undistributed profits of non-U.S. subs
 
—
      
—
      
(113
)
     
(1,185
)
    
(1,233
)
    
(1,051
)
 
Valuation allowance for deferred tax assets
 
(475
)
    
(334
)
    
(257
)
 
Deferred income taxes—net
$
3,357
    
$
3,944
    
$
2,036
  
                         

 
At December 31, 2009, approximately $632 million of U.S. state tax net operating losses (NOLs) and $160 million of U.S. state tax credit carryforwards were available. Of the NOLs, over three-fourths expire after 2019. The state tax credit carryforwards expire over the next ten years. We established a valuation allowance of $179 million for those NOLs and credit carryforwards likely to expire prior to utilization.
 
At December 31, 2009, amounts and expiration dates of net operating loss carryforwards in various non-U.S. taxing jurisdictions were:

 
(Millions of dollars)
 
2010
  
2011
  
2012
  
2013
  
2014-2024
  
Unlimited
  
Total
 
$
4
    
$
3
    
$
6
    
$
16
    
$
775
    
$
817
    
$
1,621
  
                                                       

 
A valuation allowance of $296 million has been recorded at certain non-U.S. entities that have not yet demonstrated consistent and/or sustainable profitability to support the recognition of net deferred tax assets.  If global recessionary conditions continue, it is reasonably possible that increases in valuation allowances against deferred tax assets of certain non-U.S. entities may be required in the next twelve months.
 
At December 31, 2009, we had U.S. research and development credits of approximately $25 million to carry forward for up to twenty years.
 
 
At December 31, 2009, amounts and expiration dates of U.S. foreign tax credits available to carry forward were:
 
A-23
 
 
 
(Millions of dollars)
 
2010-2016
  
2017
  
2018
  
2019
  
2020
  
Total
 
$
—
    
$
—
    
$
—
    
$
354
    
$
69
    
$
423
  
                                               

 
We adopted the guidance on accounting for uncertainty in income taxes as of January 1, 2007. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, follows.

 
Reconciliation of unrecognized tax benefits: 1
   
Years ended December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
  Balance at January 1,
$
803
    
$
703
    
$
742
  
                           
     
Additions for tax positions related to current year
  
37
      
126
      
62
  
     
Additions for tax positions related to prior years
  
43
      
38
      
24
  
     
Reductions for tax positions related to prior years
  
(45
)
    
(48
)
    
(109
)
     
Reductions for settlements 2
 
(61
)
    
(4
)
    
(7
)
     
Reductions for expiration of statute of limitations
  
(16
)
    
(12
)
    
(9
)
                           
  Balance at December 31,
$
761
    
$
803
    
$
703
  
                         
  Amount that, if recognized, would impact the effective tax rate
$
593
    
$
646
    
$
537
  

 
 
1
Foreign currency translation amounts are included within each line as applicable.
 
2
Includes cash payment or other reduction of assets to settle liability.

 
At adoption, the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $486 million.
 
We classify interest and penalties on income taxes as a component of the provision for income taxes. We recognized interest and penalties of ($13) million, $18 million and $36 million during the years ended December 31, 2009, 2008 and 2007, respectively.  The 2009 amount includes a benefit from adjustments for the 1995 through 1999 settlement as discussed above.  The total amount of interest and penalties accrued was $170 million, $116 million and $98 million as of December 31, 2009, 2008 and 2007, respectively.
 
It is reasonably possible that the amount of unrecognized tax benefits will change in the next 12 months.  However, we do not expect the change to have a significant impact on our results of operations or financial position.

 
The Internal Revenue Service (IRS) is currently examining U.S. tax returns for 2005 and 2006 and has completed its field examination of our tax returns for 1992 to 2004.  For tax years 1992 to 1994, we expect to litigate the unagreed adjustments related to transfer pricing.  In 2009, we reached a settlement with the IRS for tax years 1995 to 1999. For tax years 2000 to 2004, we are in the appeals process for unagreed adjustments primarily related to export tax benefits.   In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.
 
In our major non-U.S. jurisdictions, tax years are typically subject to examination for three to six years.


6.
Sales and servicing of trade receivables
 
 
Our Machinery and Engines operations generate trade receivables from the sale of inventory to dealers and customers. Certain of these receivables are sold to Cat Financial.
 
Cat Financial has sold interests in a certain pool of trade receivables through a revolving structure to third-party commercial paper conduits, which are asset-backed commercial paper issuers that are special purpose entities (SPEs) of the sponsor bank and are not consolidated by Cat Financial.  Cat Financial services the sold trade receivables and receives an annual servicing fee of approximately 0.5% of the average outstanding principal balance. Consolidated expenses of $4 million, $10 million and $15 million related to the sale of trade receivables were recognized during 2009, 2008 and 2007, respectively, and are included in Other income (expense) in Statement 1.
 
A-24
 
 
 
As of December 31, 2009, there were no trade receivables sold to the third-party commercial paper conduits.  As of December 31, 2008 and 2007, the outstanding principal balance of the sold trade receivables was $240 million. Cat Financial's remaining interest in the pool of trade receivables as of December 31, 2008 and 2007 of $1,432 million and $1,233 million, respectively, is included in Receivables-trade and other in Statement 2.
 
The cash collections from this pool of trade receivables are first applied to satisfy any obligations of Cat Financial to the third-party commercial paper conduits. The third-party commercial paper conduits have no recourse to Cat Financial's assets, other than the remaining interest, for failure of debtors to pay when due.
 
 
Cash flows from sale of trade receivables:
   
Years ended December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Cash proceeds from sales of receivables to the conduits
$
887
    
$
1,510
    
$
1,512
 
Servicing fees received
$
1
    
$
1
    
$
1
 
Cash flows received on the interests that continue to be held
$
7,548
    
$
11,270
    
$
13,680
                       


7.
 
Wholesale inventory receivables
 
 
Wholesale inventory receivables are receivables of Cat Financial that arise when Cat Financial provides financing for a dealer's purchase of inventory. These receivables are included in Receivables—trade and other and Long-term receivables—trade and other in Statement 2 and were $937 million, $1,555 million, and $1,496 million at December 31, 2009, 2008 and 2007, respectively. Please refer to Note 19 and Table IV for fair value information.

 
Contractual maturities of outstanding wholesale inventory receivables:
 
(Millions of dollars)
  
December 31, 2009
 
Amounts Due In
  
Wholesale
Installment
Contracts
  
Wholesale
Finance
Leases
  
Wholesale
Notes
  
Total
 
2010
 
$
170
    
$
87
    
$
236
    
$
493
  
 
2011
   
15
      
52
      
159
      
226
  
 
2012
   
10
      
28
      
65
      
103
  
 
2013
   
8
      
9
      
5
      
22
  
 
2014
   
—
      
7
      
2
      
9
  
 
Thereafter
   
—
      
1
      
1
      
2
  
       
203
      
184
      
468
      
855
  
                                   
 
Guaranteed residual value
   
—
      
119
      
—
      
119
  
 
Less: Unearned income
   
(7
)
    
(26
)
    
(4
)
    
(37
)
 
Total
 
$
196
    
$
277
    
$
464
    
$
937
  
                                   


8.
 
Finance receivables
 
 
Finance receivables are receivables of Cat Financial, which generally can be repaid or refinanced without penalty prior to contractual maturity. Total finance receivables reported in Statement 2 are net of an allowance for credit losses.
 
We consider an account past due if any portion of an installment is due and unpaid for more than 30 days.  Recognition of income is suspended when management determines that collection of future income is not probable (generally after 120 days past due). Accrual is resumed, and previously suspended income is recognized, when the receivable becomes contractually current and/or collection doubts are removed. Cash receipts on impaired loans or finance leases are recorded against the receivable and then to any unrecognized income. Investment in loans/finance leases on nonaccrual status were $678 million, $422 million and $232 million and past due over 90 days and still accruing were $134 million, $119 million and $47 million as of December 31, 2009, 2008 and 2007, respectively.

 
A-25
 
 
 
Cat Financial provides financing only when acceptable criteria are met. Credit decisions are based on, among other things, the customer's credit history, financial strength and intended use of equipment. Cat Financial typically maintains a security interest in retail financed equipment and requires physical damage insurance coverage on financed equipment.
 
Please refer to Table III for additional finance receivables information and Note 19 and Table IV for fair value information.
 
 
Securitized Retail Installment Sale Contracts and Finance Leases
Cat Financial periodically sells certain finance receivables relating to retail installment sale contracts and finance leases to SPEs as part of their asset-backed securitization program.  The SPEs have limited purposes and generally are only permitted to purchase the finance receivables, issue asset-backed securities and make payments on the securities.  The SPEs only issue a single series of securities and generally are dissolved when those securities have been paid in full.  The SPEs, typically trusts, are considered to be qualifying special-purpose entities (QSPEs) and are not consolidated.  The QSPEs issue debt to pay for the finance receivables they acquire from Cat Financial.  The primary source for repayment of the debt is the cash flows generated from the finance receivables owned by the QSPEs.  The assets of the QSPEs are legally isolated and are not available to pay the creditors of Cat Financial.  For bankruptcy analysis purposes, Cat Financial has sold the finance receivables to the QSPEs in a true sale and the QSPEs are separate legal entities.  The investors and the securitization trusts have no recourse to any of Cat Financial's other assets for failure of debtors to pay when due.
 
Cat Financial retains interests in the retail finance receivables that are sold through their asset-backed securitization program.  Retained interests include subordinated certificates, an interest in future cash flows (excess) and reserve accounts.  Retained interests in securitized assets are classified as available-for-sale securities and are included in Other assets in Statement 2 at fair value.  Cat Financial estimates fair value and cash flows using a valuation model and key assumptions for credit losses, prepayment rates and discount rates.  These assumptions are based on historical experience, market trends and anticipated performance relative to the particular assets securitized. Cat Financial periodically evaluates for impairment and recognizes the credit component of an other-than-temporary impairment in Profit and the noncredit component in Accumulated other comprehensive income (loss) for those retained interests in which Cat Financial does not intend to sell and it is not likely that they will be required to sell prior to recovery.
 
 
During 2008 and 2007, Cat Financial sold certain finance receivables relating to retail installment sale contracts and finance leases to  SPEs as part of their asset-backed securitization program.  Net gains of $12 million and $4 million were recorded in Revenues of Financial Products in Statement 1 in 2008 and 2007, respectively and were based on the estimated fair value of the assets sold and retained and liabilities incurred, net of transaction costs.  For 2008, subordinated retained interests included certificates with an initial fair value of $27 million, an interest in certain future cash flow (excess) with an initial fair value of $8 million and a reserve account with an initial fair value of $9 million. For 2007, subordinated retained interests included certificates with an initial fair value of zero, an interest in certain future cash flow (excess) with an initial fair value of $2 million and a reserve account with an initial fair value of $9 million.
 
Significant assumptions used to estimate the fair value of the retained interests at the time of the transaction were:

   
2008
  
2007
 
Discount rate
7.2
%
  
8.4
%
 
Weighted-average prepayment rate
14.5
%
  
14.0
%
 
Expected credit losses
1.6
%
  
1.5
%
             

 
To maintain competitiveness in the capital markets and to have effective and efficient use of alternative funding sources, Cat Financial may from time to time provide additional reserve support to previously issued asset-backed securitizations.  During the second quarter of 2009 and third quarter of 2008, Cat Financial deposited $80 million and $19 million, respectively, into supplemental reserve accounts for the securitization transactions to maintain the credit ratings assigned to the transactions, as loss experiences have been higher than anticipated primarily due to the adverse economic conditions in the U.S.  Due to the significant value of the deposit in second quarter of 2009, written consent was obtained from the third-party beneficial interest holders of the securitization transactions.  The QSPE conditions were reviewed and the trusts continue to maintain QSPE status.  These deposits resulted in an increase in Cat Financial's retained interests.
 
As of December 31, 2009, 2008 and 2007, the fair value of the retained interests in all securitizations of retail finance receivables outstanding totaled $102 million (cost basis of $107 million), $52 million (cost basis of $62 million) and $49 million (cost basis of $46 million), respectively.  The fair value of the retained interests as of December 31, 2009 that have been in a continuous unrealized loss position for twelve months or longer totaled $102 million (cost basis of $107 million). As of December 31, 2008 and 2007, there were no retained interests in a continuous unrealized loss position for twelve months or longer. Key assumptions used to determine the fair value of the retained interests as of such dates were:
 
A-26
 
 

   
December 31,
2009
  
December 31,
2008
  
December 31,
2007
 
Cash flow weighted average discount rates on retained interests
7.7% to 12.4
%
  
16.7% to 23.3
%
  
8.3% to 11.5
%
 
Weighted-average maturity in months
22
    
28
    
30
  
 
Expected prepayment rate
18.0
%
  
19.0
%
  
14.0
%
 
Expected credit losses
4.7% to 4.8
%
  
1.7% to 3.1
%
  
0.6% to 1.3
%
                   

 
To estimate the impact on income due to changes to the key economic assumptions used to estimate the fair value of residual cash flows in retained interests from retail finance receivable securitizations, Cat Financial performs a sensitivity analysis of the fair value of the retained interests by applying a 10 percent and 20 percent adverse change to the individual assumptions.  This estimate does not adjust for other variations that may occur should one of the assumptions actually change.  Accordingly, no assurance can be given that actual results would be consistent with the results of the estimate.  The effect of a variation in a particular assumption on the fair value of residual interest in securitization transactions was calculated without changing any other assumptions and changes in one factor may result in changes in another.  Cat Financial's sensitivity analysis indicated that the impact of a 20 percent adverse change in individual assumptions used to calculate the fair value of all retained interests as of December 31, 2009, 2008 and 2007 would be $11 million or less, $8 million or less and $2 million or less, respectively.
 
 
During 2009 and 2008, the assumptions used to determine the expected cash flows for Cat Financial's securitization transactions were revised, which resulted in other-than-temporary impairments.  The impairments recognized in earnings were primarily driven by an increase in the credit loss assumption due to the continuing adverse economic conditions in the U.S.  The noncredit related component recorded in Accumulated other comprehensive income (loss) was primarily driven by changes in discount rates.

   
Years ended December 31,
 
(Millions of dollars)
2009
  
2008
 
Total other-than-temporary impairment losses
$
46
    
$
27
  
 
Portion of losses recognized in Accumulated other comprehensive income (loss) before taxes 1
 
(12
)
    
—
  
 
Net impairment losses recognized in earnings 2
$
34
    
$
27
  

 
1
Balance excludes $7 million of gross gains recorded in OCI related to the securitization retained interest for the year ended December 31, 2009.
 
2
Recorded in Revenues of Financial Products in Statement 1.

 
The following table presents a roll-forward of the balance of the credit-related impairment losses on Cat Financials' securitized retained interests for which a portion of the other-than-temporary impairment was recognized in Accumulated other comprehensive income (loss):

 
(Millions of dollars)
  
   
2009
 
Cumulative credit loss as of January 1, 2009
$
—
  
 
Credit losses for which an other-than-temporary impairment was previously recognized
  
11
  
 
Cumulative credit loss as of December 31, 2009
$
11
  
         

 
Cat Financial also retained servicing responsibilities and received a servicing fee of approximately one percent of the remaining value of the finance receivables.
 
See Table III for additional securitization information.
 
A-27
 
 
 
TABLE III—Finance Receivables Information (Millions of dollars)
 
Contractual maturities of outstanding finance receivables:
     
December 31, 2009
 
Amounts Due In
  
Retail Installment
Contracts
  
Retail Finance
Leases
  
Retail
Notes
    
Total
 
2010
 
$
2,366
    
$
3,189
    
$
3,180
      
$
8,735
  
 
2011
   
1,532
      
2,146
      
1,695
        
5,373
  
 
2012
   
917
      
1,124
      
1,084
        
3,125
  
 
2013
   
412
      
458
      
967
        
1,837
  
 
2014
   
177
      
193
      
797
        
1,167
  
 
Thereafter
   
46
      
154
      
776
        
976
  
       
5,450
      
7,264
      
8,499
        
21,213
  
 
Residual value
   
—
      
1,181
      
—
        
1,181
  
 
Less: Unearned income
   
(498
)
    
(817
)
    
(123
)
      
(1,438
)
 
Total
 
$
4,952
    
$
7,628
    
$
8,376
      
$
20,956
  
                                     
 
 
Impaired loans and leases:
2009
  
2008
  
2007
 
Average recorded investment
$
425
    
$
306
    
$
200
  
                         
 
At December 31:
                      
   
Recorded investment
$
513
    
$
479
    
$
219
  
   
Impaired loans/finance leases for which there is a related allowance for credit losses
  
448
1
    
258
1
    
166
  
   
Related allowance for credit losses on impaired loans/finance leases
  
117
 
    
59
 
    
35
  
   
Impaired loans/finance leases for which there is no related allowance for credit losses
  
65
      
221
      
53
  
                         
 
 
Allowance for credit loss activity:
2009
  
2008
  
2007
 
Balance at beginning of year
$
391
    
$
351
    
$
315
  
 
Provision for credit losses
 
225
      
192
      
97
  
 
Receivables written off
 
(281
)
    
(144
)
    
(91
)
 
Recoveries on receivables previously written off
 
28
      
23
      
23
  
 
Other—net
 
13
      
(31
)
    
7
  
 
Balance at end of year
$
376
    
$
391
    
$
351
  
                         
 
In estimating the allowance for credit losses, we review accounts that are past due, non-performing or in bankruptcy.
 

 
Cat Financial's net retail finance leases:
December 31,
   
2009
  
2008
  
2007
 
Total minimum lease payments receivable
$
7,264
    
$
8,325
    
$
7,756
  
 
Estimated residual value of leased assets:
                      
   
Guaranteed
 
560
      
658
      
638
  
   
Unguaranteed
 
621
      
729
      
746
  
       
8,445
      
9,712
      
9,140
  
 
Less: Unearned income
 
(817
)
    
(953
)
    
(938
)
 
Net retail finance leases
$
7,628
    
$
8,759
    
$
8,202
  
 
 
 
Cash flows from retail securitizations:
   
Years ended December 31,
   
2009
  
2008
  
2007
 
Cash proceeds from initial sales of receivables
$
—
    
$
600
    
$
650
  
 
Purchases of contracts through clean-up calls
 
95
      
81
      
64
  
 
Servicing fees received
  
6
      
12
      
11
  
 
Other cash flows received on retained interests
  
10
      
25
      
35
  
 
 
 
Characteristics of securitized retail receivables:
  
   
Years ended December 31,
   
2009
  
2008
  
2007
 
Total securitized principal balance at December 31,
$
346
    
$
909
    
$
1,159
  
 
Average securitized principal balance for the year ended December 31,
  
583
      
1,147
      
1,064
  
 
Loans > 30 days past due at year ended December 31,
 
62
      
98
      
65
  
 
Net credit losses during the year
 
36
      
23
      
9
  
 
 
1
Includes impaired loans of $208 million and $108 million as of December 31, 2009 and 2008, respectively, primarily reflecting the fair value of the loan's associated collateral.  See Note 19 for more information.
 
A-28
 
 
9.
 
Inventories
 

 
Inventories (principally using the LIFO method) are comprised of the following:

   
December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Raw materials
$
1,979
    
$
2,678
    
$
2,240
  
 
Work-in-process
 
656
      
1,508
      
1,206
  
 
Finished goods
 
3,465
      
4,316
      
3,512
  
 
Supplies
 
260
      
279
      
246
  
 
Total inventories
$
6,360
    
$
8,781
    
$
7,204
  
                         

 
We had long-term material purchase obligations of approximately $299 million at December 31, 2009.

 
During 2009 inventory quantities were reduced.  This reduction resulted in a liquidation of LIFO inventory layers carried at lower costs prevailing in prior years as compared with current costs.  In 2009, the effect of this reduction of inventory decreased Cost of goods sold in Statement 1 by approximately $300 million and increased Profit by approximately $240 million or $0.39 per share.


10.
Property, plant and equipment

   
December 31,
 
(Millions of dollars)
Useful
Lives (Years)
  
2009
  
2008
  
2007
 
Land
 
—
    
$
639
    
$
575
    
$
189
  
 
Buildings and land improvements
 
20-45
      
4,914
      
4,647
      
3,625
  
 
Machinery, equipment and other
 
3-10
      
12,917
      
12,173
      
9,756
  
 
Equipment leased to others
 
1-10
      
4,717
      
4,561
      
4,556
  
 
Construction-in-process
 
—
      
1,034
      
1,531
      
1,082
  
                                 
 
Total property, plant and equipment, at cost
          
24,221
      
23,487
      
19,208
  
 
Less: Accumulated depreciation
         
(11,835
)
    
(10,963
)
    
(9,211
)
 
Property, plant and equipment—net
       
$
12,386
    
$
12,524
    
$
9,997
  
                                 

 
We had commitments for the purchase or construction of capital assets of approximately $459 million at December 31, 2009.

 
Assets recorded under capital leases 1:
          
   
December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Gross capital leases 2, 3
$
493
    
$
565
    
$
96
  
 
Less: Accumulated depreciation 3
 
(258
)
    
(221
)
    
(75
)
 
Net capital leases
$
235
    
$
344
    
$
21
  
                         
 
1
Included in Property, plant and equipment table above.
 
2
Consists primarily of machinery and equipment.
 
3
Increase in 2008 due to consolidation of Cat Japan. See Note 25 for additional details.

 
At December 31, 2009, scheduled minimum rental payments on assets recorded under capital leases were:

 
(Millions of dollars)
 
2010
  
2011
  
2012
  
2013
  
2014
  
Thereafter
 
$
128
    
$
94
    
$
32
    
$
37
    
$
8
    
$
40
  
                                               
 
A-29
 
 
 
Equipment leased to others (primarily by Cat Financial):
          
   
December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Equipment leased to others—at original cost
$
4,717
    
$
4,561
    
$
4,556
  
 
Less: Accumulated depreciation
 
(1,616
)
    
(1,416
)
    
(1,487
)
 
Equipment leased to others—net
$
3,101
    
$
3,145
    
$
3,069
  
                         

 
At December 31, 2009, scheduled minimum rental payments to be received for equipment leased to others were:

 
(Millions of dollars)
 
2010
  
2011
  
2012
  
2013
  
2014
  
Thereafter
 
$
801
    
$
498
    
$
319
    
$
172
    
$
59
    
$
30
  
                                               

 
11.
 
Investments in unconsolidated affiliated companies
 

 
Our investments in affiliated companies accounted for by the equity method have historically consisted primarily of a 50 percent interest in Shin Caterpillar Mitsubishi Ltd. (SCM) located in Japan.  On August 1, 2008, SCM redeemed half of Mitsubishi Heavy Industries Ltd.'s (MHI's) shares in SCM.  As a result, Caterpillar now owns 67 percent of the renamed entity, Caterpillar Japan Ltd. (Cat Japan) and consolidates its financial statements.  See Note 25 for additional information.  In February 2008, we sold our 23 percent equity investment in A.S.V. Inc. (ASV) resulting in a $60 million pretax gain, recognized in Other income (expense) in Statement 1.  Accordingly, the December 31, 2009 and December 31, 2008 financial position and equity investment amounts noted below do not include ASV or Cat Japan.
 
Combined financial information of the unconsolidated affiliated companies accounted for by the equity method (generally on a lag of 3 months or less) was as follows:

 
Results of Operations of unconsolidated affiliated companies:
  
   
Years ended December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Results of Operations:
                      
   
Sales
$
569
    
$
3,727
    
$
4,007
  
   
Cost of sales
 
434
      
3,082
      
3,210
  
   
Gross profit
$
135
    
$
645
    
$
797
  
                           
   
Profit (loss)
$
(39
)
  
$
55
    
$
157
  
                           

 
Sales from SCM, while an unconsolidated affiliate, to Caterpillar of approximately $1.67 billion in both 2008 and 2007, are included in the affiliated company sales.  In addition, SCM purchases of Caterpillar product, while an unconsolidated affiliate, were $353 million and $268 million in 2008 and 2007, respectively.

 
Financial Position of unconsolidated affiliated companies:
  
   
December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Financial Position:
                      
   
Assets:
                      
     
Current assets
$
223
    
$
209
    
$
2,062
  
     
Property, plant and equipment—net
 
219
      
227
      
1,286
  
     
Other assets
 
5
      
26
      
173
  
         
447
      
462
      
3,521
  
   
Liabilities:
                      
     
Current liabilities
 
250
      
173
      
1,546
  
     
Long-term debt due after one year
 
41
      
110
      
269
  
     
Other liabilities
 
17
      
35
      
393
  
         
308
      
318
      
2,208
  
   
Equity
$
139
    
$
144
    
$
1,313
  
                           
 
 
A-30
 
 
 
Caterpillar's investments in unconsolidated affiliated companies:
   
December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Investments in equity method companies
$
70
    
$
66
    
$
582
  
 
Plus: Investments in cost method companies
 
35
      
28
      
16
  
 
Total investments in unconsolidated affiliated companies
$
105
    
$
94
    
$
598
  
                         

 
At December 31, 2009, consolidated Profit employed in the business in Statement 2 included $6 million representing undistributed profits of the unconsolidated affiliated companies.


12.
 
Intangible assets and goodwill
 

A.
Intangible assets
   
 
Intangible assets are comprised of the following:
   
   
Weighted
Amortizable
Life (Years)
  
December 31, 2009
 
(Millions of dollars)
  
Gross Carrying Amount
  
Accumulated Amortization
  
Net
 
Customer relationships
 
18
    
$
396
    
$
(75
)
  
$
321
  
 
Intellectual property
 
10
      
211
      
(143
)
    
68
  
 
Other
 
11
      
130
      
(54
)
    
76
  
 
Total intangible assets
 
15
    
$
737
    
$
(272
)
  
$
465
  
                                 

 
   
Weighted
Amortizable
Life (Years)
  
December 31, 2008
     
Gross Carrying Amount
  
Accumulated Amortization
  
Net
 
Customer relationships
 
18
    
$
388
    
$
(50
)
  
$
338
  
 
Intellectual property
 
10
      
210
      
(122
)
    
88
  
 
Other
 
11
      
122
      
(37
)
    
85
  
 
Total intangible assets
 
15
    
$
720
    
$
(209
)
  
$
511
  
                                 

 
   
Weighted
Amortizable
Life (Years)
  
December 31, 2007
     
Gross Carrying Amount
  
Accumulated Amortization
  
Net
 
Customer relationships
 
19
    
$
356
    
$
(27
)
  
$
329
  
 
Intellectual property
 
10
      
195
      
(120
)
    
75
  
 
Other
 
12
      
92
      
(21
)
    
71
  
 
Total intangible assets
 
16
    
$
643
    
$
(168
)
  
$
475
  
                                 

 
During 2008, the Cat Japan share redemption resulted in additional finite-lived intangible assets of $54 million.  In 2008, we acquired finite-lived intangible assets of $17 million due to the purchase of Lovat Inc.  See Note 25 for details on these business combinations.  Also in 2008, we acquired finite-lived intangible assets of $32 million from other acquisitions.
 
During 2007, we acquired finite-lived intangible assets of $89 million as part of the purchase of Franklin Power Products.  In 2007, we also acquired finite-lived intangible assets of $24 million due to the purchase of the Forestry Division of Blount International, Inc.  See Note 25 for details on the acquisition of these assets.
 
Amortization expense related to intangible assets was $61 million, $61 million and $52 million for 2009, 2008 and 2007, respectively.
 
Amortization expense related to intangible assets is expected to be:

 
(Millions of dollars)
 
2010
  
2011
  
2012
  
2013
  
2014
  
Thereafter
 
$
60
    
$
52
    
$
46
    
$
40
    
$
37
    
$
230
  
                                               

 
A-31
 
 
B.
 
Goodwill
 
During 2008, the Cat Japan share redemption resulted in $206 million of goodwill.  In 2008, we acquired net assets with related goodwill of $41 million as part of the purchase of Gremada Industries, Inc.  In 2008, we also acquired net assets with related goodwill of $22 million as part of the purchase of Lovat Inc.  See Note 25 for details on these business combinations.  Also during 2008, we acquired net assets with related goodwill of $8 million from other acquisitions.
 
During 2007, we acquired net assets with related goodwill of $37 million as part of the purchase of Franklin Power Products.  In 2007, we also acquired net assets with related goodwill of $22 million as part of the purchase of the Forestry Division of Blount International, Inc.  See Note 25 for details on the acquisition of these assets.
 
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 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 greater 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.

The 2009 annual impairment test, completed in the fourth quarter, indicated the fair value of each of our reporting units was well above its respective carrying value with the exception of our Forest Products reporting unit, a component of the Building Construction Products reportable segment.  Because the carrying value of Forest Products exceeded its fair value, step two in the impairment test process was required.  We allocated the fair value to the unit's assets and liabilities and determined the implied fair value of the goodwill was insignificant.  Accordingly, a goodwill impairment charge of $22 million for Forest Products was recognized in Other operating (income) expense in Statement 1.  The primary factor contributing to the impairment was the historic decline in demand for purpose built forest product machines caused by the significant reduction in U.S. housing construction, lower prices for pulp, paper, and wood product commodities, and reduced capital availability in the forest products industry.  No goodwill was impaired or disposed of during the years ended December 31, 2008 or 2007.
 
 
 
 
The changes in carrying amount of goodwill by reportable segment for the years ended December 31, 2009, 2008 and 2007 were as follows:

   
Building
Construction
  
Cat
      
Electric
      
Large
Power
  
Marine &
Petroleum
      
All
  
Consolidated
 
(Millions of dollars)
Products
  
Japan
  
Earthmoving
  
Power
  
Excavation
  
Systems
  
Power
  
Mining
  
Other1
  
Total
 
Balance at January 1, 2007
$
4
    
$
—
    
$
43
    
$
203
    
$
39
    
$
569
    
$
60
    
$
8
    
$
978
    
$
1,904
  
 
Business combinations
  
22
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
37
      
59
  
 
Balance at December 31, 2007
  
26
      
—
      
43
      
203
      
39
      
569
      
60
      
8
      
1,015
      
1,963
  
 
Business combinations
  
—
      
206
      
—
      
—
      
—
      
—
      
—
      
22
      
49
      
277
  
 
Other adjustments2
 
—
      
27
      
—
      
—
      
—
      
—
      
—
      
(3
)
    
(3
)
    
21
  
 
Balance at December 31, 2008
  
26
      
233
      
43
      
203
      
39
      
569
      
60
      
27
      
1,061
      
2,261
  
 
Impairments
  
(22
)
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
(22
)
 
Other adjustments2
 
—
      
23
      
—
      
—
      
—
      
—
      
—
      
3
      
4
      
30
  
 
Balance at December 31, 2009
$
4
    
$
256
    
$
43
    
$
203
    
$
39
    
$
569
    
$
60
    
$
30
    
$
1,065
    
$
2,269
  

 
1
Includes all other operating segments (See Note 24).
 
2
Other adjustments are comprised primarily of foreign currency translation.

 
As discussed in Note 24, our reportable segments were changed in the first quarter of 2009.  As a result of these changes, the newly formed Earthmoving, Excavation and Mining reportable segments have been allocated goodwill of $43 million, $39 million and $30 million, respectively.  The goodwill was reallocated primarily from the former reportable segments of EAME Operations, Heavy Construction & Mining and Infrastructure Development.  Additionally, goodwill of $22 million was reallocated to Building Construction Products from the All Other category, while goodwill of $478 million was reallocated to the All Other category from the former Industrial Power Systems reportable segment.  Goodwill associated with the newly formed Cat Japan reportable segment was previously included in the All Other category.


13.
 
Available-for-sale securities
 
 
We have investments in certain debt and equity securities, primarily at Cat Insurance, that have been classified as available-for-sale and recorded at fair value based upon quoted market prices.  These fair values are primarily included in Other assets in Statement 2.  Unrealized gains and losses arising from the revaluation of available-for-sale securities are included, net of applicable deferred income taxes, in equity (Accumulated other comprehensive income (loss) in Statement 2).  Realized gains and losses on sales of investments are generally determined using the FIFO (first-in, first-out) method for debt instruments and the specific identification method for equity securities.  Realized gains and losses are included in Other income (expense) in Statement 1.
 
A-32
 
 
 
Effective April 1, 2009, we adopted the new accounting and disclosure requirements regarding recognition and presentation of other-than-temporary impairments.  See Note 1K for additional information.
 
   
December 31, 2009
  
December 31, 2008
  
December 31, 2007
 
(Millions of dollars)
Cost
Basis
  
Unrealized
Pretax Net
Gains (Losses)
  
Fair
Value
  
Cost
Basis
  
Unrealized
Pretax Net
Gains (Losses)
  
Fair
Value
  
Cost
Basis
  
Unrealized
Pretax Net
Gains (Losses)
  
Fair
Value
 
Government debt
                                                                      
   
U.S. treasury bonds
$
14
    
$
—
    
$
14
    
$
14
    
$
1
    
$
15
    
$
10
    
$
—
    
$
10
  
   
Other U.S. and non-U.S. government bonds
  
65
      
—
      
65
      
15
      
(1
)
    
14
      
37
      
—
      
37
  
                                                                           
 
Corporate bonds
                                                                      
   
Corporate bonds
  
455
      
20
      
475
      
343
      
(22
)
    
321
      
356
      
—
      
356
  
   
Asset-backed securities
  
141
      
(7
)
    
134
      
165
      
(27
)
    
138
      
177
      
(2)
      
175
  
                                                                           
 
Mortgage-backed debt securities
                                                                      
   
U.S. governmental agency mortgage-backed securities
  
295
      
13
      
308
      
319
      
5
      
324
      
272
      
1
      
273
  
   
Residential mortgage-backed securities
  
61
      
(10
)
    
51
      
79
      
(19
)
    
60
      
92
      
(2)
      
90
  
   
Commercial mortgage-backed securities
  
175
      
(13
)
    
162
      
176
      
(47
)
    
129
      
150
      
—
      
150
  
                                                                           
 
Equity securities
                                                                      
   
Large capitalization value
  
76
      
13
      
89
      
126
      
(13
)
    
113
      
150
      
24
      
174
  
   
Smaller company growth
  
19
      
5
      
24
      
20
      
(2
)
    
18
      
18
      
4
      
22
  
 
Total
$
1,301
    
$
21
    
$
1,322
    
$
1,257
    
$
(125
)
  
$
1,132
    
$
1,262
    
$
25
    
$
1,287
  
                                                                         
 
 
 
During 2009 and 2008, we recognized pretax charges for other-than-temporary declines in the market values of equity securities in the Cat Insurance investment portfolios of $12 million and $37 million, respectively.  These charges were accounted for as a realized loss and were included in Other income (expense) in Statement 1.  The cost basis of the impacted securities was adjusted to reflect these charges.  During 2007, there were no charges for other-than-temporary declines in the market value of securities.
 
 
 
Investments in an unrealized loss position that are not other-than-temporarily impaired:
 
   
December 31, 2009
   
Less than 12 months 1
  
12 months or more 1
  
Total
 
(Millions of dollars)
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
 
Government debt
                                              
   
U.S. treasury bonds
$
4
    
$
—
    
$
—
    
$
—
    
$
4
    
$
—
  
   
Other U.S. and non-U.S. government bonds
  
14
      
—
      
2
      
—
      
16
      
—
  
                                                   
 
Corporate bonds
                                              
   
Corporate bonds
  
25
      
—
      
10
      
1
      
35
      
1
  
   
Asset-backed securities
  
4
      
1
      
44
      
10
      
48
      
11
  
                                                   
 
Mortgage-backed debt securities
                                              
   
U.S. governmental agency mortgage- backed securities
  
—
      
—
      
3
      
—
      
3
      
—
  
   
Residential mortgage-backed securities
  
—
      
—
      
49
      
10
      
49
      
10
  
   
Commercial mortgage-backed securities
  
24
      
—
      
73
      
14
      
97
      
14
  
                                                   
 
Equity securities
                                              
   
Large capitalization value
  
2
      
—
      
23
      
3
      
25
      
3
  
   
Smaller company growth
  
1
      
—
      
2
      
—
      
3
      
—
  
 
Total
$
74
    
$
1
    
$
206
    
$
38
    
$
280
    
$
39
  
 
 
1
Indicates length of time that individual securities have been in a continuous unrealized loss position.
   
 
A-33
 
 
 
Investments in an unrealized loss position that are not other-than-temporarily impaired:
 
   
December 31, 2008
   
Less than 12 months 1
  
12 months or more 1
  
Total
 
(Millions of dollars)
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
 
Government debt
                                              
   
Other U.S. and non-U.S. government bonds
$
—
    
$
—
    
$
8
    
$
1
    
$
8
    
$
1
  
                                                   
 
Corporate bonds
                                              
   
Corporate bonds
  
176
      
18
      
33
      
5
      
209
      
23
  
   
Asset-backed securities
  
101
      
16
      
30
      
11
      
131
      
27
  
                                                   
 
Mortgage-backed debt securities
                                              
   
U.S. governmental agency mortgage-backed securities
  
7
      
—
      
19
      
1
      
26
      
1
  
   
Residential mortgage-backed securities
  
32
      
6
      
27
      
14
      
59
      
20
  
   
Commercial mortgage-backed securities
  
71
      
15
      
59
      
32
      
130
      
47
  
                                                   
 
Equity securities
                                              
   
Large capitalization value
  
60
      
13
      
5
      
2
      
65
      
15
  
   
Smaller company growth
  
7
      
2
      
—
      
—
      
7
      
2
  
 
Total
$
454
    
$
70
    
$
181
    
$
66
    
$
635
    
$
136
  
 
 
1
Indicates length of time that individual securities have been in a continuous unrealized loss position.
   
 
 
 
Investments in an unrealized loss position that are not other-than-temporarily impaired:
 
   
December 31, 2007
   
Less than 12 months 1
  
12 months or more 1
  
Total
 
(Millions of dollars)
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
 
Government debt
                                              
   
Other U.S. and non-U.S. government bonds
$
—
    
$
—
    
$
13
    
$
—
    
$
13
    
$
—
  
                                                   
 
Corporate bonds
                                              
   
Corporate bonds
  
85
      
1
      
79
      
1
      
164
      
2
  
   
Asset-backed securities
  
86
      
1
      
42
      
1
      
128
      
2
  
                                                   
 
Mortgage-backed debt securities
                                              
   
U.S. governmental agency mortgage-backed securities
  
22
      
—
      
83
      
1
      
105
      
1
  
   
Residential mortgage-backed securities
  
43
      
1
      
33
      
2
      
76
      
3
  
   
Commercial mortgage-backed securities
  
55
      
1
      
9
      
—
      
64
      
1
  
                                                   
 
Equity securities
                                              
   
Large capitalization value
  
50
      
5
      
1
      
—
      
51
      
5
  
   
Smaller company growth
  
5
      
—
      
—
      
—
      
5
      
—
  
 
Total
$
346
    
$
9
    
$
260
    
$
5
    
$
606
    
$
14
  
 
 
1
Indicates length of time that individual securities have been in a continuous unrealized loss position.
   

 
Government Debt.  The unrealized losses on our investments in other U.S. and non-U.S. government bonds are the result of changes in interest rates since time of purchase.  We do not intend to sell the investments and it is not likely that we will be required to sell these investments before recovery of their amortized cost basis.  We do not consider these investments to be other-than-temporarily impaired as of December 31, 2009.

 
Corporate Bonds.  The unrealized losses on our investments in corporate bonds and asset-backed securities relate primarily to an increase in credit-related yield spreads, risk aversion and heightened volatility in the financial markets since initial purchase.  We do not intend to sell the investments and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis.  We do not consider these investments to be other-than-temporarily impaired as of December 31, 2009.
 
A-34
 
 
 
Mortgage-Backed Debt Securities.  The unrealized losses on our investments in mortgage-backed securities relate primarily to an increase in housing delinquencies and default rates, credit-related yield spreads, risk aversion and heightened volatility in the financial markets.  Continued weakness and lack of liquidity in the commercial sector continues to impact valuations.  We do not intend to sell the investments and it is not likely that we will be required to sell these investments before recovery of their amortized cost basis.  We do not consider these investments to be other-than-temporarily impaired as of December 31, 2009.
 
 
Equity Securities.  Cat Insurance maintains a well-diversified equity portfolio consisting of two specific mandates:  large capitalization value stocks and smaller company growth stocks.  Despite continued strengthening in equity returns during the second half of 2009, the remaining unrealized losses in both the large and smaller company portfolios can be attributed to the weak economic conditions over the last 12 to 18 months.  In each case where unrealized losses exist, the respective company's management is taking corrective action to increase shareholder value.   We do not consider these investments to be other-than-temporarily impaired as of December 31, 2009.
 
 
The fair value of the available-for-sale debt securities at December 31, 2009, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.

     
 
(Millions of dollars)
Fair Value
 
Due in one year or less
$
43
  
 
Due after one year through five years
$
415
  
 
Due after five years through ten years
$
222
  
 
Due after ten years
$
529
  
         

 
Proceeds from sale of available-for-sale securities during 2009, 2008 and 2007 were $291 million, $357 million and $282 million, respectively. Gross gains of $9 million, $17 million and $16 million and gross losses of $10 million, $23 million and $7 million have been included in current earnings as a result of these sales for 2009, 2008 and 2007, respectively.


14.
 
Postemployment benefit plans
 
 
We have both U.S. and non-U.S. pension plans covering substantially all of our U.S. employees and a portion of our non-U.S. employees, primarily in our European and Japanese facilities. Our defined benefit plans provide a benefit based on years of service and/or the employee's average earnings near retirement. Our defined contribution plans allow employees to contribute a portion of their salary to help save for retirement, and in certain cases, we provide a matching contribution. We also have defined-benefit retirement health care and life insurance plans covering substantially all of our U.S. employees.
 
As discussed in Note 1K, we adopted the balance sheet recognition provisions of the guidance on employers' accounting for defined benefit pension and other postretirement plans at December 31, 2006, and adopted the year-end measurement date effective January 1, 2008 using the “one measurement” approach.  Under the one measurement approach, net periodic benefit cost for the period between any early measurement date and the end of the fiscal year that the measurement provisions are applied is allocated proportionately between amounts to be recognized as an adjustment of Profit employed in the business and net periodic benefit cost for the fiscal year.  Previously, we used a November 30th measurement date for our U.S. pension and other postretirement benefit plans and September 30th for our non-U.S. plans.  Year-end asset and obligation amounts are disclosed as of the plan measurement dates.
 
 
As discussed in Note 27, during 2009 voluntary and involuntary separation programs impacted employees participating in certain U.S. and non-U.S. pension and other postretirement benefit plans.  Due to the significance of these events, certain plans were re-measured as follows:
 
 
 
   
U.S. Voluntary Separation Program – Plan re-measurements as of January 31, 2009 resulted in curtailment losses to the U.S. support and management pension and other postretirement benefit plans of $80 million and $45 million, respectively.
 
 
 
   
Other U.S. Separation Programs – Certain plans were re-measured as of March 31, 2009 and December 31, 2009, resulting in net curtailment losses of $47 million to pension and $10 million to other postretirement benefit plans.  Early retirement pension benefit costs of $6 million were also recognized.
 
 
   
Non-U.S. Separation Programs – Certain plans were re-measured as of March 31, 2009 and December 31, 2009, resulting in pension settlement losses of $34 million, special termination benefits of $2 million to pension and curtailment losses of $1 million to other postretirement benefit plans.
 
 
 
A-35
 
 
 
In March 2009, we amended our U.S. support and management other postretirement benefit plan.  Beginning in 2010, certain retirees age 65 and older will enroll in individual health plans that work with Medicare and will no longer participate in a Caterpillar-sponsored group health plan.  In addition, Caterpillar will fund a tax-advantaged Health Reimbursement Arrangement (HRA) to assist the retirees with medical expenses.  The plan amendment required a plan re-measurement as of March 31, 2009, which resulted in a decrease in our Liability for postretirement benefits of $432 million and an increase in Accumulated other comprehensive income (loss) of $272 million after-tax.  The plan was further amended in December 2009 to define the HRA benefit that active employees will receive once they are retired and reach age 65.  The plan was re-measured at year-end and the December amendment resulted in a decrease in our Liability for postretirement benefits of $101 million and an increase in Accumulated other comprehensive income (loss) of $64 million after-tax.  These decreases will be amortized into earnings on a straight-line basis over approximately 7 years, the average remaining service period of active employees in the plan.  The March 2009 amendment reduced other postretirement benefits expense by approximately $60 million for 2009.

A.
Benefit Obligations
   
U.S. Pension Benefits
  
Non-U.S. Pension Benefits
  
Other Postretirement Benefits
 
(Millions of dollars)
2009
  
2008
  
2007
  
2009
  
2008
  
2007
  
2009
  
2008
  
2007
 
Change in benefit obligation:
                                                                      
   
Benefit obligation, beginning of year
$
11,493
    
$
11,132
    
$
11,174
    
$
3,219
    
$
3,012
    
$
2,719
    
$
5,017
    
$
5,455
    
$
5,661
  
   
Effect of eliminating early measurement date1
  
N/A
      
11
      
N/A
      
N/A
      
26
      
N/A
      
N/A
      
—
      
N/A
  
   
Service cost
  
176
      
199
      
187
      
86
      
92
      
80
      
70
      
87
      
101
  
   
Interest cost
  
688
      
629
      
595
      
146
      
156
      
139
      
280
      
307
      
295
  
   
Plan amendments
  
—
      
13
      
—
      
—
      
—
      
1
      
(549
)
    
—
      
2
  
   
Actuarial losses (gains)
  
380
      
222
      
(146
)
    
45
      
(18
)
    
(118
)
    
(58
)
    
(522
)
    
(294
)
   
Foreign currency exchange rates
  
—
      
—
      
—
      
322
      
(534
)
    
246
      
29
      
(19
)
    
4
  
   
Participant contributions
  
—
      
—
      
—
      
10
      
14
      
14
      
51
      
41
      
35
  
   
Benefits paid - gross
  
(796
)
    
(713
)
    
(722
)
    
(212
)
    
(155
)
    
(126
)
    
(390
)
    
(351
)
    
(369
)
   
Less: federal subsidy on benefits paid
  
—
      
—
      
—
      
—
      
—
      
—
      
21
      
19
      
15
  
   
Curtailments, settlements and special termination benefits
  
123
      
—
      
—
      
(74
)
    
—
      
—
      
66
      
—
      
—
  
   
Acquisitions / other2
 
—
      
—
      
—
      
—
      
626
      
57
      
—
      
—
      
5
  
   
Adjustment for subsidiary pension plan3
  
—
      
—
      
44
      
—
      
—
      
—
      
—
      
—
      
—
  
   
Benefit obligation, end of year
$
12,064
    
$
11,493
    
$
11,132
    
$
3,542
    
$
3,219
    
$
3,012
    
$
4,537
    
$
5,017
    
$
5,455
  
   
Accumulated benefit obligation, end of year
$
11,357
    
$
10,681
    
$
10,460
    
$
3,082
    
$
2,938
    
$
2,629
                          
                                                                         
 
Weighted-average assumptions used to
determine benefit obligation:
                                                                      
   
Discount rate 4
 
5.7
%
    
6.1
%
    
5.8
%
    
4.8
%
    
4.5
%
    
5.3
%
    
5.6
%
    
6.0
%
    
5.8
%
   
Rate of compensation increase 4
  
4.5
%
    
4.5
%
    
4.5
%
    
4.2
%
    
3.8
%
    
4.1
%
    
4.4
%
    
4.4
%
    
4.4
%
 
 
1
Change in benefit obligation during the period from the early measurement date to December 31, 2007.
 
2
See Note 25 regarding the 2008 Cat Japan share redemption.
 
3
2007 charge to recognize previously unrecorded liabilities related to a subsidiary pension plan.
 
4
End of year rates are used to determine net periodic cost for the subsequent year. See Note 14E.

 
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

 
(Millions of dollars)
One-percentage-
point increase
  
One-percentage-
point decrease
 
Effect on 2009 service and interest cost components of other postretirement benefit cost
$
23
    
$
(20
)
 
Effect on accumulated postretirement benefit obligation
$
220
    
$
(186
)
                 
 
A-36
 
 
B.
Plan Assets
   
U.S. Pension Benefits
  
Non-U.S. Pension Benefits
  
Other Postretirement Benefits
 
(Millions of dollars)
2009
  
2008
  
2007
  
2009
  
2008
  
2007
  
2009
  
2008
  
2007
 
Change in plan assets:
                                                                      
   
Fair value of plan assets, beginning of year
$
6,745
    
$
10,441
    
$
10,087
    
$
2,175
    
$
2,773
    
$
2,304
    
$
1,042
    
$
1,584
    
$
1,509
  
   
Effect of eliminating early measurement date1
  
N/A
      
17
      
N/A
      
N/A
      
23
      
N/A
      
N/A
      
15
      
N/A
  
   
Actual return on plan assets
  
2,194
      
(3,288
)
    
1,064
      
390
      
(751
)
    
290
      
266
      
(587
)
    
158
  
   
Foreign currency exchange rates
 
—
      
—
      
—
      
243
      
(407
)
    
208
      
—
      
—
      
—
  
   
Company contributions2
  
886
      
288
      
12
      
263
      
134
      
46
      
94
      
340
      
251
  
   
Participant contributions
  
—
      
—
      
—
      
10
      
14
      
14
      
51
      
41
      
35
  
   
Benefits paid
 
(796
)
    
(713
)
    
(722
)
    
(212
)
    
(155
)
    
(126
)
    
(390
)
    
(351
)
    
(369
)
   
Settlements and special termination benefits
  
—
      
—
      
—
      
(72
)
    
—
      
—
      
—
      
—
      
—
  
   
Acquisitions / other3
  
—
      
—
      
—
      
—
      
544
      
37
      
—
      
—
      
—
  
   
Fair value of plan assets, end of year
$
9,029
    
$
6,745
    
$
10,441
    
$
2,797
    
$
2,175
    
$
2,773
    
$
1,063
    
$
1,042
    
$
1,584
  
 
 
1
Change in plan assets during the period from the early measurement date to December 31, 2007.
 
2
Includes $650 million of Caterpillar stock contributed to U.S. pension plans in 2009.
 
3
See Note 25 regarding the 2008 Cat Japan share redemption.

 
As discussed in Note 1K, we adopted the accounting guidance on employers' disclosures about postretirement benefit plan assets for the annual period ending December 31, 2009.  The guidance expands the disclosure set forth in the previous guidance by adding required disclosures about (1) how investment allocation decisions are made by management, (2) major categories of plan assets, and (3) significant concentrations of risk.  Additionally, this guidance requires an employer to disclose information about the valuation of plan assets similar to that required under the accounting guidance on fair value measurements.
 
Our U.S. pension target asset allocations reflect our investment strategy of maximizing the long-term rate of return on plan assets and the resulting funded status, within an appropriate level of risk.  Our target allocations for the U.S. pension plans are 70% equities, 25% debt securities and 5% real estate.  Within equity securities, approximately two-thirds include investments in U.S. large and small-cap companies.  The remaining portion is invested in international companies, including emerging markets, and private equity.  Fixed income securities primarily include corporate bonds, mortgage backed securities and U.S. Treasuries.
 
In general, our non-U.S. pension target asset allocations reflect our investment strategy of maximizing the long-term rate of return on plan assets and the resulting funded status, within an appropriate level of risk.  The weighted-average target allocations for the non-U.S. pension plans are 55% equities, 35% debt securities, 6% real estate and 4% other.  The target allocations for each plan varies based upon local statutory requirements, demographics of plan participants and funded status.  Plan assets are primarily invested in non-U.S. securities.
 
Our target allocations for the other postretirement benefit plans are 80% equities and 20% debt securities.  Within equity securities, approximately two-thirds include investments in U.S. large and small-cap companies.  The remaining portion is invested in international companies, including emerging markets.  Fixed income securities primarily include corporate bonds, mortgage backed securities and U.S. Treasuries.
 
The U.S. plans are rebalanced to plus or minus five percentage points of the target asset allocation ranges on a monthly basis.  The frequency of rebalancing for the non-U.S. plans varies depending on the plan. As a result of our diversification strategies, there are no significant concentrations of risk within the portfolio of investments except for the holdings in Caterpillar stock as discussed below.
 
The use of certain derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives.  The U.S. plans utilize futures contracts to offset current equity positions in order to rebalance the total portfolio to the target asset allocation.  During 2008 and 2007, approximately 5% and 10%, respectively, of the U.S. pension plans' assets were rebalanced from equity to fixed income positions through the use of futures contracts. The plans do not engage in futures contracts for speculative purposes.
 
The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3).  See Note 19 for a discussion of the fair value hierarchy.
 
Fair values are determined as follows:
 
 
·
 
Equity securities are primarily based on valuations for identical instruments in active markets.
 
 
·
 
Fixed income securities are primarily based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.
 
A-37
 
 
·
Real estate is stated at the fund's net asset value or at appraised value.
 
·
Cash, short-term instruments and other are based on the carrying amount, which approximated fair value, or at the fund's net asset value.
 
 
The fair value of the pension and other postretirement benefit plan assets by category is summarized below:

 
(Millions of dollars)
December 31, 2009
 
U.S. Pension
Level 1
  
Level 2
  
Level 3
  
Total Assets,
at Fair Value
   
Equity securities:
                              
     
U.S. equities
$
4,634
    
$
2
    
$
17
    
$
4,653
  
     
Non-U.S. equities
 
1,803
      
—
      
34
      
1,837
  
                                     
   
Fixed income securities:
                              
     
U.S. corporate bonds
 
—
      
1,179
      
56
      
1,235
  
     
Non-U.S. corporate bonds
 
—
      
70
      
1
      
71
  
     
U.S. government bonds
 
—
      
323
      
—
      
323
  
     
U.S. governmental agency mortgage-backed securities
 
—
      
562
      
—
      
562
  
     
Non-U.S. government bonds
  
—
      
9
      
—
      
9
  
                                     
   
Real estate
  
—
      
—
      
10
      
10
  
                                     
   
Cash, short-term instruments and other
  
113
      
216
      
—
      
329
  
 
Total U.S. pension assets
$
6,550
    
$
2,361
    
$
118
    
$
9,029
  
                                   

 
 
(Millions of dollars)
December 31, 2009
 
Non-U.S. Pension
Level 1
  
Level 2
  
Level 3
  
Total Assets,
at Fair Value
   
Equity securities:
                              
     
U.S. equities
$
330
    
$
—
    
$
—
    
$
330
  
     
Non-U.S. equities
 
863
      
84
      
5
      
952
  
     
Global equities 1
 
144
      
14
      
—
      
158
  
                                     
   
Fixed income securities:
                              
     
U.S. corporate bonds
 
—
      
22
      
1
      
23
  
     
Non-U.S. corporate bonds
 
—
      
355
      
11
      
366
  
     
U.S. government bonds
 
—
      
1
      
—
      
1
  
     
Non-U.S. government bonds
  
—
      
156
      
2
      
158
  
     
Global fixed income 1
 
—
      
361
      
—
      
361
  
                                     
   
Real estate
  
—
      
80
      
71
      
151
  
                                     
   
Other:
                              
     
Cash and short-term instruments
  
104
      
4
      
—
      
108
  
     
Other 2
 
3
      
135
      
51
      
189
  
 
Total non-U.S. pension assets
$
1,444
    
$
1,212
    
$
141
    
$
2,797
  
 
 
1
Includes funds that invest in both U.S. and non-U.S. securities.
 
2
Includes funds that invest in multiple asset classes, hedge funds and other.
   

 
(Millions of dollars)
December 31, 2009
 
Other postretirement benefits
Level 1
  
Level 2
  
Level 3
  
Total Assets,
at Fair Value
   
Equity securities:
                              
     
U.S. equities
$
531
    
$
—
    
$
—
    
$
531
  
     
Non-U.S. equities
 
273
      
6
      
—
      
279
  
                                     
   
Fixed income securities:
                              
     
U.S. corporate bonds
 
—
      
95
      
—
      
95
  
     
Non-U.S. corporate bonds
 
—
      
8
      
—
      
8
  
     
U.S. government bonds
 
—
      
24
      
—
      
24
  
     
U.S. governmental agency mortgage-backed securities
 
—
      
54
      
—
      
54
  
     
Non-U.S. government bonds
  
—
      
1
      
—
      
1
  
                                     
   
Cash, short-term instruments and other
  
19
      
52
      
—
      
71
  
 
Total other postretirement benefit assets
$
823
    
$
240
    
$
—
    
$
1,063
  
                                   
 
A-38
 
 
 
Below are roll-forwards of assets measured at fair value using Level 3 inputs for the year ended December 31, 2009.  These instruments were valued using pricing models that, in management's judgment, reflect the assumptions a marketplace participant would use.

 
(Millions of dollars)
Equities
  
Fixed Income
  
Real Estate
  
Other
 
U.S. Pension
                              
   
Balance at December 31, 2008
$
16
    
$
73
    
$
9
    
$
—
  
     
Unrealized gains (losses)
 
3
      
34
      
1
      
—
  
     
Realized gains (losses)
 
—
      
(2
)
    
—
      
—
  
     
Purchases, issuances and settlements
  
31
      
(12
)
    
—
      
—
  
     
Transfers in and/or out of Level 3
  
1
      
(36
)
    
—
      
—
  
   
Balance at December 31, 2009
$
51
    
$
57
    
$
10
    
$
—
  
                                     
 
Non-U.S. Pension
                              
   
Balance at December 31, 2008
$
—
    
$
5
    
$
61
    
$
67
  
     
Unrealized gains (losses)
 
2
      
1
      
10
      
63
  
     
Realized gains (losses)
 
—
      
—
      
—
      
(41
)
     
Purchases, issuances and settlements
  
3
      
6
      
—
      
(38
)
     
Transfers in and/or out of Level 3
  
—
      
2
      
—
      
—
  
   
Balance at December 31, 2009
$
5
    
$
14
    
$
71
    
$
51
  
                                   

 
Equity securities within plan assets include Caterpillar Inc. common stock in the amounts of:
 
   
U.S. Pension Benefits1
  
Non-U.S. Pension Benefits
  
Other Postretirement Benefits
 
(Millions of dollars)
20092
  
2008
  
2007
  
2009
  
2008
  
2007
  
2009
  
2008
  
2007
 
Caterpillar Inc. common stock
$
1,016
    
$
11
    
$
24
    
$
1
    
$
1
    
$
2
    
$
1
    
$
2
    
$
3
  
 
 
1
Amounts represent 11% of total plan assets for 2009, and less than 1% of total plan assets for 2008 and 2007.
 
2
Includes $650 million of Caterpillar stock contributed to U.S. pension plans in 2009.

 
C.
Funded status
 
The funded status of the plans, reconciled to the amount reported on Statement 2, is as follows:
   
U.S. Pension Benefits
  
Non-U.S. Pension Benefits
  
Other Postretirement Benefits
 
(Millions of dollars)
2009
  
2008
  
2007
  
2009
  
2008
  
2007
  
2009
  
2008
  
2007
 
End of Year
                                                                      
 
Fair value of plan assets
$
9,029
    
$
6,745
    
$
10,441
    
$
2,797
    
$
2,175
    
$
2,773
    
$
1,063
    
$
1,042
    
$
1,584
  
 
Benefit obligations
 
12,064
      
11,493
      
11,132
      
3,542
      
3,219
      
3,012
      
4,537
      
5,017
      
5,455
  
 
Over (under) funded status
  
(3,035
)
    
(4,748
)
    
(691
)
    
(745
)
    
(1,044
)
    
(239
)
    
(3,474
)
    
(3,975
)
    
(3,871
)
 
Amounts not yet recognized:
                                                                      
   
Contributions made after measurement date
  
N/A
      
N/A
      
1
      
N/A
      
N/A
      
3
      
N/A
      
N/A
      
37
  
 
Net amount recognized in financial position
$
(3,035
)
  
$
(4,748
)
  
$
(690
)
  
$
(745
)
  
$
(1,044
)
  
$
(236
)
  
$
(3,474
)
  
$
(3,975
)
  
$
(3,834
)
                                                                         
 
Components of net amount recognized in financial position:
                                                                      
 
Other assets (non-current asset)
$
—
    
$
—
    
$
—
    
$
22
    
$
—
    
$
—
    
$
—
    
$
—
    
$
—
  
 
Accrued wages, salaries and employee benefits (current liability)
  
(17
)
    
(14
)
    
(2
)
    
(18
)
    
(2
)
    
—
      
(113
)
    
(29
)
    
(14
)
 
Liability for postemployment benefits (non-current liability)
  
(3,018
)
    
(4,734
)
    
(688
)
    
(749
)
    
(1,042
)
    
(236
)
    
(3,361
)
    
(3,946
)
    
(3,820
)
 
Net liability recognized
$
(3,035
)
  
$
(4,748
)
  
$
(690
)
  
$
(745
)
  
$
(1,044
)
  
$
(236
)
  
$
(3,474
)
  
$
(3,975
)
  
$
(3,834
)
                                                                         
 
Amounts recognized in Accumulated other comprehensive income (pre-tax) consist of:
                                                                      
 
Net actuarial loss (gain)
$
5,132
    
$
6,419
    
$
2,172
    
$
1,200
    
$
1,319
    
$
544
    
$
659
    
$
881
    
$
759
  
 
Prior service cost (credit)
  
132
      
170
      
191
      
8
      
13
      
22
      
(177
)
    
320
      
282
  
 
Transition obligation (asset)
  
—
      
—
      
—
      
—
      
—
      
1
      
9
      
10
      
12
  
 
Total
$
5,264
    
$
6,589
    
$
2,363
    
$
1,208
    
$
1,332
    
$
567
    
$
491
    
$
1,211
    
$
1,053
  
 
 
N/A (Not Applicable): The adoption of the year-end measurement date provisions of the guidance on employers' accounting for defined benefit pension and other postretirement plans (see Note 1K) eliminated contributions between the measurement date and the end of the fiscal year.
 
A-39
 
 
 
The estimated amounts that will be amortized from Accumulated other comprehensive income (loss) at December 31, 2009 into net periodic benefit cost (pre-tax) in 2010 are as follows:
 
(Millions of dollars)
U.S. Pension
  
Non-U.S. Pension
  
Other
Postretirement Benefits
 
Actuarial loss (gain)
$
350
    
$
68
    
$
33
  
 
Prior service cost (credit)
 
28
      
1
      
(55
)
 
Transition obligation (asset)
 
—
      
—
      
2
  
 
Total
$
378
    
$
69
    
$
(20
)
                         

 
The following amounts relate to our pension plans with projected benefit obligations in excess of plan assets:
   
U.S. Pension Benefits
  
Non-U.S. Pension Benefits
   
at Year-end
  
at Year-end
 
(Millions of dollars)
2009
  
2008
  
2007
  
2009
  
2008
  
2007
 
Projected benefit obligation
$
(12,064
)
  
$
(11,493
)
  
$
(10,862
)
  
$
(3,350
)
  
$
(3,194
)
  
$
(2,792
)
 
Accumulated benefit obligation
$
(11,357
)
  
$
(10,681
)
  
$
(10,197
)
  
$
(2,933
)
  
$
(2,917
)
  
$
(2,442
)
 
Fair value of plan assets
$
9,029
    
$
6,745
    
$
10,159
    
$
2,584
    
$
2,151
    
$
2,548
  

 
The following amounts relate to our pension plans with accumulated benefit obligations in excess of plan assets:
   
U.S. Pension Benefits
  
Non-U.S. Pension Benefits
   
at Year-end
  
at Year-end
 
(Millions of dollars)
2009
  
2008
  
2007
  
2009
  
2008
  
2007
 
Projected benefit obligation
$
(12,064
)
  
$
(11,493
)
  
$
(3,982
)
  
$
(1,594
)
  
$
(3,040
)
  
$
(146
)
 
Accumulated benefit obligation
$
(11,357
)
  
$
(10,681
)
  
$
(3,967
)
  
$
(1,503
)
  
$
(2,796
)
  
$
(128
)
 
Fair value of plan assets
$
9,029
    
$
6,745
    
$
3,580
    
$
1,145
    
$
2,022
    
$
28
  

 
The accumulated postretirement benefit obligation exceeds plan assets for all of our other postretirement benefit plans.
 
 
D.
Expected cash flow
 
Information about the expected cash flow for the pension and other postretirement benefit plans is as follows:
 
(Millions of dollars)
U.S. Pension
Benefits
  
Non-U.S. Pension
Benefits
  
Other
Postretirement
Benefits
 
Employer contributions:
                      
   
2010 (expected)
$
920
    
$
80
    
$
120
  
                         
 
Expected benefit payments:
                      
   
2010
$
810
    
$
190
    
$
370
  
   
2011
 
830
      
200
      
380
  
   
2012
 
860
      
200
      
380
  
   
2013
 
880
      
190
      
390
  
   
2014
 
900
      
200
      
390
  
   
2015-2019
 
4,730
      
980
      
2,000
  
   
Total
$
9,010
    
$
1,960
    
$
3,910
  
                         
 
 
The above table reflects the total employer contributions and benefits expected to be paid from the plan or from company assets and does not include the participants' share of the cost. The expected benefit payments for our other postretirement benefits include payments for prescription drug benefits. Medicare Part D subsidy amounts expected to be received by the company which will offset other postretirement benefit payments are as follows:

                             
 
(Millions of dollars)
2010
  
2011
  
2012
  
2013
  
2014
  
2015-2019
  
Total
 
Other postretirement benefits
$
20
    
$
20
    
$
20
    
$
20
    
$
20
    
$
140
    
$
240
  
                                                         
 
A-40
 
 
E.
Net periodic cost
   
U.S. Pension Benefits
  
Non-U.S. Pension Benefits
  
Other Postretirement Benefits
 
(Millions of dollars)
2009
  
2008
  
2007
  
2009
  
2008
  
2007
  
2009
  
2008
  
2007
 
Components of net periodic benefit cost:
                                                                      
   
Service cost
$
176
    
$
199
    
$
187
    
$
86
    
$
92
    
$
80
    
$
70
    
$
87
    
$
101
  
   
Interest cost
 
688
      
629
      
595
      
146
      
156
      
139
      
280
      
307
      
295
  
   
Expected return on plan assets
  
(777
)
    
(882
)
    
(841
)
    
(181
)
    
(201
)
    
(178
)
    
(111
)
    
(138
)
    
(130
)
   
Curtailments, settlements and special termination benefits 1
  
133
      
—
      
—
      
36
      
1
      
1
      
56
      
—
      
—
  
   
Amortization of:
                                                                      
     
Transition obligation (asset)
  
—
      
—
      
—
      
—
      
1
      
1
      
2
      
2
      
2
  
     
Prior service cost (credit) 2
  
29
      
32
      
58
      
1
      
3
      
5
      
(40
)
    
(35
)
    
(36
)
     
Net actuarial loss (gain)
  
248
      
134
      
214
      
35
      
36
      
56
      
20
      
64
      
79
  
   
Adjustment for subsidiary pension plan 3
  
—
      
—
      
44
      
—
      
—
      
—
      
—
      
—
      
—
  
   
Total cost included in operating profit
$
497
    
$
112
    
$
257
    
$
123
    
$
88
    
$
104
    
$
277
    
$
287
    
$
311
  
                                                                         
 
Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax):
                                                                      
   
Effect of eliminating early measurement date 4
$
N/A
      
(14
)
    
N/A
    
$
N/A
      
(9
)
    
N/A
    
$
N/A
      
(3
)
    
N/A
  
   
Current year actuarial loss (gain)
  
(1,037
)
    
4,401
      
(368
)
    
(88
)
    
696
      
(131
)
    
(200
)
    
172
      
(320
)
   
Amortization of actuarial (loss) gain
  
(248
)
    
(134
)
    
(214
)
    
(32
)
    
(36
)
    
(56
)
    
(20
)
    
(64
)
    
(79
)
   
Current year prior service cost (credit)
  
(10
)
    
16
      
—
      
(2
)
    
1
      
1
      
(537
)
    
(3
)
    
2
  
   
Amortization of prior service (cost) credit
  
(29
)
    
(32
)
    
(58
)
    
(1
)
    
(3
)
    
(5
)
    
40
      
35
      
36
  
   
Amortization of transition (obligation) asset
  
—
      
—
      
—
      
—
      
(1
)
    
(1
)
    
(2
)
    
(2
)
    
(2
)
   
Total recognized in other comprehensive income
  
(1,324
)
    
4,237
      
(640
)
    
(123
)
    
648
      
(192
)
    
(719
)
    
135
      
(363
)
   
Total recognized in net periodic cost and other comprehensive income
$
(827
)
   $
4,349
    
$
(383
)
  
$
—
     $ 
736
    
$
(88
)
  
$
(442
)
  
$
422
    
$
(52
)
                                                                         
 
Weighted-average assumptions used to determine net cost:
                                                                      
   
Discount rate
 
6.3
%
    
5.8
%
    
5.5
%
    
4.7
%
    
5.3
%
    
4.7
%
    
6.3
%
    
5.8
%
    
5.5
%
   
Expected return on plan assets 5
  
8.5
%
    
9.0
%
    
9.0
%
    
6.6
%
    
7.6
%
    
7.7
%
    
8.5
%
    
9.0
%
    
9.0
%
   
Rate of compensation increase
  
4.5
%
    
4.5
%
    
4.0
%
    
3.8
%
    
4.0
%
    
4.0
%
    
4.4
%
    
4.4
%
    
4.0
%
 
 
1
2009 curtailments, settlements and special termination benefits were recognized in Other operating (income) expenses in Statement 1.
 
2
Prior service costs for both pension and other postretirement benefits are generally amortized using the straight-line method over the average remaining service period to the full retirement eligibility date of employees expected to receive benefits from the plan amendment. For other postretirement benefit plans in which all or almost all of the plan's participants are fully eligible for benefits under the plan, prior service costs are amortized using the straight-line method over the remaining life expectancy of those participants.
 
3
2007 charge to recognize previously unrecorded liabilities related to a subsidiary pension plan.
 
4
Amortization during the period from the early measurement date to December 31, 2007.
 
5
The weighted-average rates for 2010 are 8.5% and 7.0% for U.S. and non-U.S. plans, respectively.

 
 
The assumed discount rate is used to discount future benefit obligations back to today's dollars.  For 2009 and 2008, the U.S. discount rate was based on a benefit cash flow-matching approach and represents the rate at which our benefit obligations could effectively be settled as of our measurement date, December 31.  The benefit cash flow-matching approach involves analyzing Caterpillar's projected cash flows against a high quality bond yield curve, calculated using a wide population of corporate Aa bonds available on the measurement date.  The very highest and lowest yielding bonds (top and bottom 10%) are excluded from the analysis.  For 2007, we used the Moody's Aa bond yield as of our measurement date, November 30, and validated the discount rate using the benefit cash flow-matching approach.  A similar change was made in determining the assumed discount rate for our most significant non-U.S. plans. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase our obligation and future expense.
 
Our U.S. expected long-term rate of return on plan assets is based on our estimate of long-term passive returns for equities and fixed income securities weighted by the allocation of our pension assets. Based on historical performance, we increase the passive returns due to our active management of the plan assets. To arrive at our expected long-term return, the amount added for active management was 1% for 2009, 2008 and 2007.  A similar process is used to determine this rate for our non-U.S. plans.
 
A-41
 
 
 
The assumed health care trend rate represents the rate at which health care costs are assumed to increase. To calculate the 2009 benefit expense, we assumed an increase of 7.4% for 2009.  We expect an increase of 7.0% during 2010.  The 2009 and 2010 rates are assumed to decrease gradually to the ultimate health care trend rate of 5.0% in 2016. This rate represents 3.0% general inflation plus 2.0% additional health care inflation.
 
We determined that most of our U.S. retiree health care plans are at least actuarially equivalent to Medicare Part D and will qualify for the federal subsidy.

F.
Other postemployment benefit plans
 
We offer long-term disability benefits, continued health care for disabled employees, survivor income benefit insurance and supplemental unemployment benefits to substantially all eligible U.S. employees.

G.
Defined contribution plans
 
We have both U.S. and non-U.S. employee defined contribution plans to help employees save for retirement. Our U.S. 401(k) plan allows eligible employees to contribute a portion of their salary to the plan on a tax-deferred basis, and we provide a matching contribution equal to 100% of employee contributions to the plan up to 6% of their compensation. Various other U.S. and non-U.S. defined contribution plans allow eligible employees to contribute a portion of their salary to the plans, and in some cases, we provide a matching contribution to the funds.
 
Beginning in June 2009, we began funding our employer matching contribution for certain U.S. defined contribution plans in Caterpillar stock, held as treasury stock. In 2009, we made $68 million (1.4 million shares) of matching contributions in Caterpillar stock.
 
Total company costs related to U.S. and non-U.S. defined contribution plans were as follows:
   
 
(Millions of dollars)
2009
  
2008
  
2007
 
U.S. plans
$
206
    
$
107
    
$
172
  
 
Non-U.S. plans
 
29
      
34
      
30
  
   
$
235
    
$
141
    
$
202
  
                         

H.
Summary of long-term liability:
   
December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Pensions:
                      
   
U.S. pensions
$
3,018
    
$
4,734
    
$
688
  
   
Non-U.S. pensions
 
749
      
1,042
      
236
  
 
Total pensions
 
3,767
      
5,776
      
924
  
 
Postretirement benefits other than pensions
 
3,361
      
3,946
      
3,820
  
 
Other postemployment benefits
 
63
      
73
      
72
  
 
Defined contribution
 
229
      
180
      
243
  
   
$
7,420
    
$
9,975
    
$
5,059
  
                         


15.
 
Short-term borrowings
 

   
December 31,
 
(Millions of dollars)
2009
  
2008
  
2007
 
Machinery and Engines:
                      
   
Notes payable to banks1
$
260
    
$
668
    
$
187
  
   
Commercial paper
 
173
      
964
      
—
  
     
433
      
1,632
      
187
  
 
Financial Products: