EXHIBIT 13

CATERPILLAR INC.

GENERAL AND FINANCIAL INFORMATION

2012

A-1

TABLE OF CONTENTS

Management’s Report on Internal Control Over Financial Reporting	A-3
Report of Independent Registered Public Accounting Firm	A-4
Consolidated Financial Statements and Notes	A-5
Five-year Financial Summary	A-98
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)	A-99
Overview	A-99
2012 Compared with 2011	A-100
Fourth Quarter 2012 Compared with Fourth Quarter 2011	A-105
2011 Compared with 2010	A-110
Acquisitions and Divestitures	A-115
Glossary of Terms	A-121
Liquidity and Capital Resources	A-122
Critical Accounting Policies	A-126
Global Workforce	A-130
Other Matters	A-131
Non-GAAP Financial Measures	A-134
Supplemental Stockholder Information	A-139
Directors and Officers	A-142

A-2

MANAGEMENT’S REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Caterpillar Inc. (company) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act.  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, 2012. 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, 2012, the company’s internal control over financial reporting was effective based on those criteria.

Management has excluded ERA Mining Machinery Limited, including its wholly-owned subsidiary Zhengzhou Siwei Mechanical Manufacturing Co., Ltd., commonly known as Siwei, from our assessment of internal control over financial reporting as of December 31, 2012 because we acquired Siwei in May 2012.  Siwei is a wholly owned subsidiary of Caterpillar Inc. whose total assets and total sales and revenues represent approximately 1 percent and less than 1 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2012.

The effectiveness of the company’s internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report appears on page A-4.

/s/Douglas R. Oberhelman

Douglas R. Oberhelman

Chairman of the Board

and Chief Executive Officer

/s/Bradley M. Halverson

Bradley M. Halverson

Group President

and Chief Financial Officer

February 19, 2013

A-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the accompanying consolidated statement of financial position and the related consolidated statements of results of operations, comprehensive income, changes in stockholders' equity, and of cash flow, including pages A-5 through A-97, present fairly, in all material respects, the financial position of Caterpillar Inc. and its subsidiariesat December 31, 2012, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012in 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, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing on page A-3. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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

As described in Management's Report on Internal Control Over Financial Reporting, management has excluded ERA Mining Machinery Limited, including its wholly-owned subsidiary Zhengzhou Siwei Mechanical Manufacturing Co., Ltd., commonly known as Siwei, from its assessment of internal control over financial reporting as of December 31, 2012 because Siwei was acquired by the Company in May 2012. We have also excluded Siwei from our audit of internal control over financial reporting. Siwei is a wholly owned subsidiary of Caterpillar Inc. whose total assets and total sales and revenues represent approximately 1 percent and less than 1 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2012.

/s/PricewaterhouseCoopers LLP

Peoria, Illinois

February 19, 2013

A-4

STATEMENT 1			Caterpillar Inc.
Consolidated Results of Operations for the Years Ended December 31
(Dollars in millions except per share data)
	2012		2011			2010
Sales and revenues:
Sales of Machinery and Power Systems	$	63,068	$	57,392		$	39,867
Revenues of Financial Products	2,807		2,746			2,721
Total sales and revenues	65,875		60,138			42,588
Operating costs:
Cost of goods sold	47,055		43,578			30,367
Selling, general and administrative expenses	5,919		5,203			4,248
Research and development expenses	2,466		2,297			1,905
Interest expense of Financial Products	797		826			914
Goodwill impairment charge	580		—			—
Other operating (income) expenses	485		1,081			1,191
Total operating costs	57,302		52,985			38,625
Operating profit	8,573		7,153			3,963
Interest expense excluding Financial Products	467		396			343
Other income (expense)	130		(32		)	130
Consolidated profit before taxes	8,236		6,725			3,750
Provision (benefit) for income taxes	2,528		1,720			968
Profit of consolidated companies	5,708		5,005			2,782
Equity in profit (loss) of unconsolidated affiliated companies	14		(24		)	(24		)
Profit of consolidated and affiliated companies	5,722		4,981			2,758
Less: Profit (loss) attributable to noncontrolling interests	41		53			58
Profit 1	$	5,681	$	4,928		$	2,700
Profit per common share	$	8.71	$	7.64		$	4.28
Profit per common share — diluted2	$	8.48	$	7.40		$	4.15
Weighted-average common shares outstanding (millions)
- Basic	652.6		645.0			631.5
- Diluted 2	669.6		666.1			650.4
Cash dividends declared per common share	$	2.02	$	1.82		$	1.74

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 Comprehensive Income for the Years Ended December 31
(Millions of dollars)
	2012			2011			2010
Profit of consolidated and affiliated companies	$	5,722		$	4,981		$	2,758
Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax (expense)/benefit of: 2012 - $9; 2011 - $3; 2010 - ($73)	60			(312		)	(34		)
Pension and other postretirement benefits:
Current year actuarial gain (loss), net of tax (expense)/benefit of: 2012 - $372; 2011 - $1,276; 2010 - $214	(731		)	(2,364		)	(540		)
Amortization of actuarial (gain) loss, net of tax (expense)/benefit of: 2012 - ($243); 2011 - ($221); 2010 - ($173)	458			412			310
Current year prior service credit (cost), net of tax (expense)/benefit of: 2012 - ($12); 2011 - ($51); 2010 - $3	23			95			(8		)
Amortization of prior service (credit) cost, net of tax (expense)/benefit of: 2012 - $17; 2011 - $11; 2010 - $12	(31		)	(21		)	(17		)
Amortization of transition (asset) obligation, net of tax (expense)/benefit of: 2012 - ($1); 2011 - ($1); 2010 - ($1)	1			1			1
Derivative financial instruments:
Gains (losses) deferred, net of tax (expense)/benefit of: 2012 - $29; 2011 - $12; 2010 - $29	(48		)	(21		)	(50		)
(Gains) losses reclassified to earnings, net of tax (expense)/benefit of: 2012 - ($10); 2011 - $21; 2010 - ($18)	16			(34		)	35
Available-for-sale securities:
Gains (losses) deferred, net of tax (expense)/benefit of: 2012 - ($13); 2011 - $2; 2010 - ($25)	26			(5		)	37
(Gains) losses reclassified to earnings, net of tax (expense)/benefit of: 2012 - $1; 2011 - ($1); 2010 - $2	(3		)	1			(4		)
Total other comprehensive income (loss), net of tax	(229		)	(2,248		)	(270		)
Comprehensive income	5,493			2,733			2,488
Less: comprehensive income attributable to the noncontrolling interests	(24		)	(82		)	(78		)
Comprehensive income attributable to stockholders	$	5,469		$	2,651		$	2,410

See accompanying notes to Consolidated Financial Statements.

A-6

STATEMENT 3				Caterpillar Inc.
Consolidated Financial Position at December 31
(Dollars in millions)
	2012			2011			2010
Assets
Current assets:
Cash and short-term investments	$	5,490		$	3,057		$	3,592
Receivables - trade and other	10,092			10,285			8,494
Receivables - finance	8,860			7,668			8,298
Deferred and refundable income taxes	1,547			1,580			931
Prepaid expenses and other current assets	988			994			908
Inventories	15,547			14,544			9,587
Total current assets	42,524			38,128			31,810
Property, plant and equipment - net	16,461			14,395			12,539
Long-term receivables - trade and other	1,316			1,130			793
Long-term receivables - finance	14,029			11,948			11,264
Investments in unconsolidated affiliated companies	272			133			164
Noncurrent deferred and refundable income taxes	2,011			2,157			2,493
Intangible assets	4,016			4,368			805
Goodwill	6,942			7,080			2,614
Other assets	1,785			2,107			1,538
Total assets	$	89,356		$	81,446		$	64,020
Liabilities
Current liabilities:
Short-term borrowings:
Machinery and Power Systems	$	636		$	93		$	204
Financial Products	4,651			3,895			3,852
Accounts payable	6,753			8,161			5,856
Accrued expenses	3,667			3,386			2,880
Accrued wages, salaries and employee benefits	1,911			2,410			1,670
Customer advances	2,978			2,691			1,831
Dividends payable	—			298			281
Other current liabilities	2,055			1,967			1,521
Long-term debt due within one year:
Machinery and Power Systems	1,113			558			495
Financial Products	5,991			5,102			3,430
Total current liabilities	29,755			28,561			22,020
Long-term debt due after one year:
Machinery and Power Systems	8,666			8,415			4,505
Financial Products	19,086			16,529			15,932
Liability for postemployment benefits	11,085			10,956			7,584
Other liabilities	3,182			3,583			2,654
Total liabilities	71,774			68,044			52,695
Commitments and contingencies (Notes 20 and 21)
Redeemable noncontrolling interest (Note 24)	—			473			461
Stockholders’ equity
Common stock of $1.00 par:
Authorized shares: 2,000,000,000 Issued shares: (2012, 2011 and 2010 – 814,894,624) at paid-in amount	4,481			4,273			3,888
Treasury stock: (2012 – 159,846,131; 2011 – 167,361,280 shares; and 2010 – 176,071,910 shares) at cost	(10,074		)	(10,281		)	(10,397		)
Profit employed in the business	29,558			25,219			21,384
Accumulated other comprehensive income (loss)	(6,433		)	(6,328		)	(4,051		)
Noncontrolling interests	50			46			40
Total stockholders’ equity	17,582			12,929			10,864
Total liabilities, redeemable noncontrolling interest and stockholders’ equity	$	89,356		$	81,446		$	64,020

See accompanying notes to Consolidated Financial Statements.

A-7

STATEMENT 4				Caterpillar Inc.
Changes in Consolidated Stockholders’ Equity for the Years Ended December 31
(Dollars in millions)
	Common stock				Treasury stock			Profit employed in the business			Accumulated other comprehensive income (loss)			Noncontrolling interests			Total
Balance at January 1, 2010	$	3,439			$	(10,646	)	$	19,705		$	(3,761	)	$	83		$	8,820
Profit of consolidated and affiliated companies	—				—			2,700			—			58			2,758
Foreign currency translation, net of tax	—				—			—			(52		)	18			(34		)
Pension and other postretirement benefits, net of tax	—				—			—			(256		)	2			(254		)
Derivative financial instruments, net of tax	—				—			—			(15		)	—			(15		)
Available-for-sale securities, net of tax	—				—			—			33			—			33
Change in ownership from noncontrolling interests	(69		)		—			—			—			(66		)	(135		)
Dividends declared	—				—			(1,103		)	—			—			(1,103		)
Common shares issued from treasury stock for stock-based compensation: 12,612,514	74				222			—			—			—			296
Common shares issued from treasury stock for benefit plans: 1,487,481 1	67				27			—			—			—			94
Stock-based compensation expense	226				—			—			—			—			226
Net excess tax benefits from stock-based compensation	151				—			—			—			—			151
Cat Japan share redemption 2	—				—			82			—			(55		)	27
Balance at December 31, 2010	$	3,888			$	(10,397	)	$	21,384		$	(4,051	)	$	40		$	10,864
Profit of consolidated and affiliated companies	—				—			4,928			—			53			4,981
Foreign currency translation, net of tax	—				—			—			(345		)	33			(312		)
Pension and other postretirement benefits, net of tax	—				—			—			(1,873		)	(4		)	(1,877		)
Derivative financial instruments, net of tax	—				—			—			(55		)	—			(55		)
Available-for-sale securities, net of tax	—				—			—			(4		)	—			(4		)
Change in ownership from noncontrolling interests	(1		)		—			—			—			(7		)	(8		)
Dividends declared	—				—			(1,176		)	—			—			(1,176		)
Distribution to noncontrolling interests	—				—			—			—			(3		)	(3		)
Common shares issued from treasury stock for stock-based compensation:  8,710,630	7				116			—			—			—			123
Stock-based compensation expense	193				—			—			—			—			193
Net excess tax benefits from stock-based compensation	186				—			—			—			—			186
Cat Japan share redemption 2	—				—			83			—			(66		)	17
Balance at December 31, 2011	$	4,273			$	(10,281	)	$	25,219		$	(6,328	)	$	46		$	12,929

(Continued)

A-8

STATEMENT 4				Caterpillar Inc.
Changes in Consolidated Stockholders’ Equity for the Years Ended December 31
(Dollars in millions)
	Common stock				Treasury stock			Profit employed in the business			Accumulated other comprehensive income (loss)			Noncontrolling interests			Total
Balance at December 31, 2011	$	4,273			$	(10,281	)	$	25,219		$	(6,328	)	$	46		$	12,929
Profit of consolidated and affiliated companies	—				—			5,681			—			41			5,722
Foreign currency translation, net of tax	—				—			—			83			(23		)	60
Pension and other postretirement benefits, net of tax	—				—			—			(285		)	5			(280		)
Derivative financial instruments, net of tax	—				—			—			(32		)	—			(32		)
Available-for-sale securities, net of tax	—				—			—			22			1			23
Change in ownership from noncontrolling interests	—				—			—			—			(4		)	(4		)
Dividends declared	—				—			(1,319		)	—			—			(1,319		)
Distribution to noncontrolling interests	—				—			—			—			(6		)	(6		)
Common shares issued from treasury stock for stock-based compensation:  7,515,149	(155		)		207			—			—			—			52
Stock-based compensation expense	245				—			—			—			—			245
Net excess tax benefits from stock-based compensation	192				—			—			—			—			192
Cat Japan share redemption 2	(74		)		—			(23		)	107			(10		)	—
Balance at December 31, 2012	$	4,481			$	(10,074	)	$	29,558		$	(6,433	)	$	50		$	17,582

¹  See Note 12 regarding shares issued for benefit plans.

²  See Note 24 regarding the Cat Japan share redemption.

See accompanying notes to Consolidated Financial Statements.

A-9

STATEMENT 5				Caterpillar Inc.
Consolidated Statement of Cash Flow for the Years Ended December 31
(Millions of dollars)
	2012				2011			2010
Cash flow from operating activities:
Profit of consolidated and affiliated companies	$	5,722			$	4,981		$	2,758
Adjustments for non-cash items:
Depreciation and amortization	2,813				2,527			2,296
Net gain from sale of businesses and investments	(630		)		(128		)	—
Goodwill impairment charge	580				—			—
Other	439				585			469
Changes in assets and liabilities, net of acquisitions and divestitures:
Receivables - trade and other	(173		)		(1,345		)	(2,320		)
Inventories	(1,149		)		(2,927		)	(2,667		)
Accounts payable	(1,868		)		1,555			2,570
Accrued expenses	183				308			117
Accrued wages, salaries and employee benefits	(490		)		619			847
Customer advances	241				173			604
Other assets - net	252				(91		)	358
Other liabilities - net	(679		)		753			(23		)
Net cash provided by (used for) operating activities	5,241				7,010			5,009
Cash flow from investing activities:
Capital expenditures - excluding equipment leased to others	(3,350		)		(2,515		)	(1,575		)
Expenditures for equipment leased to others	(1,726		)		(1,409		)	(1,011		)
Proceeds from disposals of leased assets and property, plant and equipment	1,117				1,354			1,469
Additions to finance receivables	(12,010		)		(10,001		)	(8,498		)
Collections of finance receivables	8,995				8,874			8,987
Proceeds from sale of finance receivables	132				207			16
Investments and acquisitions (net of cash acquired)	(618		)		(8,184		)	(1,126		)
Proceeds from sale of businesses and investments (net of cash sold)	1,199				376			—
Proceeds from sale of available-for-sale securities	306				247			228
Investments in available-for-sale securities	(402		)		(336		)	(217		)
Other - net	167				(40		)	132
Net cash provided by (used for) investing activities	(6,190		)		(11,427		)	(1,595		)
Cash flow from financing activities:
Dividends paid	(1,617		)		(1,159		)	(1,084		)
Distribution to noncontrolling interests	(6		)		(3		)	—
Common stock issued, including treasury shares reissued	52				123			296
Excess tax benefit from stock-based compensation	192				189			153
Acquisitions of redeemable noncontrolling interests	(444		)		—			—
Acquisitions of noncontrolling interests	(5		)		(8		)	(132		)
Proceeds from debt issued (original maturities greater than three months):
- Machinery and Power Systems	2,209				4,587			216
- Financial Products	13,806				10,873			8,108
Payments on debt (original maturities greater than three months):
- Machinery and Power Systems	(1,107		)		(2,269		)	(1,298		)
- Financial Products	(9,992		)		(8,324		)	(11,163		)
Short-term borrowings - net (original maturities three months or less)	461				(43		)	291
Net cash provided by (used for) financing activities	3,549				3,966			(4,613		)
Effect of exchange rate changes on cash	(167		)		(84		)	(76		)
Increase (decrease) in cash and short-term investments	2,433				(535		)	(1,275		)
Cash and short-term investments at beginning of period	3,057				3,592			4,867
Cash and short-term investments at end of period	$	5,490			$	3,057		$	3,592

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

Non-cash activities: During 2010, we contributed 1.5 million shares of company stock with a fair value of $94 million to our U.S. benefit plans. See Note 12 for further discussion. In 2012, $1,325 million of debentures with varying interest rates and maturity dates were exchanged for $1,722 million of 3.803% debentures due in 2042 and $179 million of cash. The $179 million of cash paid is included in Other liabilities – net in the operating activities section of the Consolidated Statement of Cash Flow.

See accompanying notes to Consolidated Financial Statements.

A-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Operations and summary of significant accounting policies

A. Nature of operations

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

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

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

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

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

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

Machines are distributed principally through a worldwide organization of dealers (dealer network), 48 located in the United States and 141 located outside the United States. Worldwide, these dealers serve 182 countries and operate 3,494 places of business, including 1,249 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 107 distributors located in 189 countries. Most of the FG Wilson branded electric power generation systems are sold through a worldwide network of 172 distributors located in 116 countries.  Some of the large, medium speed reciprocating engines are also sold under the MaK brand through a worldwide network of 19 distributors located in 130 countries.  Our dealers do not deal exclusively with our products; however, in most cases sales and servicing of our products are the dealers’ principal business. Turbines, locomotives and certain global mining products are sold through sales forces employed by the company. At times, these employees are assisted by independent sales representatives.

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

B. Basis of presentation

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

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

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

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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 and business divestitures, long-lived asset impairment charges, employee separation charges and benefit plan curtailment, settlement and special termination benefits.

Prepaid expenses and other current assets in Statement 3 include prepaid rent, prepaid insurance, assets held for sale, core to be returned for remanufacturing, restricted cash and other short-term investments, and other prepaid items.

C. Sales and revenue recognition

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

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

Our remanufacturing operations are primarily focused on the remanufacture of Cat engines and components and rail related products.  In this business, used engines and related components (core) are inspected, cleaned and remanufactured.  In connection with the sale of most of our remanufactured product, we collect a deposit from the dealer that is repaid if the dealer returns an acceptable core within a specified time period.  Caterpillar owns and has title to the cores when they are returned from dealers.  The rebuilt engine or component (the core plus any new content) is then sold as a remanufactured product to dealers and customers.  Revenue is recognized pursuant to the same criteria as machinery and engine sales noted above (title to the entire remanufactured product passes to the dealer upon sale).  At the time of sale, the deposit is recognized in Other current liabilities in Statement 3.  In addition, the core to be returned is recognized as an asset in Prepaid expenses and other current assets in Statement 3 at the estimated replacement cost (based on historical experience with useable cores).  Upon receipt of an acceptable core, we repay the deposit and relieve the liability.  The returned core is then included in inventory.  In the event that the deposit is forfeited (i.e. upon failure by the dealer to return an acceptable core in the specified time period), we recognize the core deposit and the cost of the core in revenue and expense, respectively.

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

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

Our standard invoice terms are established by marketing region. When a sale is made to a dealer, the dealer is responsible for payment even if the product is not sold to an end customer and must make payment within the standard terms to avoid interest costs. Interest at or above prevailing market rates is charged on any past due balance. Our policy is to not forgive this interest.  Terms were extended to not more than one year for $354 million, $341 million and $221 million of receivables in 2012, 2011 and 2010, respectively. These term extensions represent less than 1 percent of consolidated sales for all years presented.

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

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

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

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

• Cat Financial provides wholesale inventory financing to dealers. Wholesale finance revenue on installment sale contracts and finance leases is recognized over the term of the contract at a constant rate of return on the scheduled outstanding principal balance.  Revenue on wholesale notes is recognized based on the daily balance of wholesale receivables outstanding and the applicable effective interest rate.

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

Recognition of income is suspended when management determines that collection of future income is not probable (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. See Note 6 for more information.

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

D. Inventories

Inventories are stated at the lower of cost or market. Cost is principally determined using the last-in, first-out (LIFO) method. The value of inventories on the LIFO basis represented about 60 percent of total inventories at December 31, 2012, about 65 percent of total inventories at December 31, 2011, and about 70 percent at December 31, 2010.

If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,750 million, $2,422 million and $2,575 million higher than reported at December 31, 2012, 2011 and 2010, respectively.

E. 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 2012, 2011 and 2010, Cat Financial depreciation on equipment leased to others was $688 million, $690 million and $690 million, respectively, and was included in Other operating (income) expenses in Statement 1. In 2012, 2011 and 2010, consolidated depreciation expense was $2,421 million, $2,240 million and $2,202 million, respectively. Amortization of purchased finite-lived intangibles is computed principally using the straight-line method, generally not to exceed a period of 20 years.

F. Foreign currency translation

The functional currency for most of our Machinery and Power Systems consolidated companies is the U.S. dollar. The functional currency for most of our Financial Products and affiliates accounted for under the equity method is the respective local currency.  Gains and losses resulting from the remeasurement of foreign currency amounts to the functional currency are included in Other income (expense) in Statement 1. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in Accumulated other comprehensive income (loss) in Statement 3.

G. Derivative financial instruments

Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices.  Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures and not for the purpose of creating speculative positions.  Derivatives that we use are primarily foreign currency forward, option and cross currency contracts, interest rate swaps and commodity forward and option contracts. All derivatives are recorded at fair value.  See Note 3 for more information.

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H. Income taxes

The provision for income taxes is determined using the asset and liability approach taking into account guidance related to uncertain tax positions.  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.

I. Estimates in financial statements

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

J. New accounting guidance

Disclosures about the credit quality of financing receivables and the allowance for credit losses– In July 2010, the Financial Accounting Standards Board (FASB) issued accounting guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses.  The guidance expands disclosures for the allowance for credit losses and financing receivables by requiring entities to disclose information at disaggregated levels.  It also requires disclosure of credit quality indicators, past due information and modifications of financing receivables.  Also, in April 2011, the FASB issued guidance clarifying when a restructuring of a receivable should be considered a troubled debt restructuring by providing additional guidance for determining whether the creditor has granted a concession and whether the debtor is experiencing financial difficulties.  For end of period balances, the new disclosures were effective December 31, 2010 and did not have a material impact on our financial statements.  For activity during a reporting period, the disclosures were effective January 1, 2011 and did not have a material impact on our financial statements.  The disclosures related to modifications of financing receivables, as well as the guidance clarifying when a restructured receivable should be considered a troubled debt restructuring were effective July 1, 2011 and did not have a material impact on our financial statements.  See Note 6 for additional information.

Presentation of comprehensive income – In June 2011, the FASB issued accounting guidance on the presentation of comprehensive income.  The guidance provides two options for presenting net income and other comprehensive income.  The total of comprehensive income, the components of net income, and the components of other comprehensive income may be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. We elected to present two separate statements. This guidance was effective January 1, 2012.

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

Disclosures about offsetting assets and liabilities – In December 2011, the FASB issued accounting guidance on disclosures about offsetting assets and liabilities. The guidance requires entities to disclose both gross and net information about instruments and transactions that are offset in the statement of financial position, as well as instruments and transactions that are subject to an enforceable master netting arrangement or similar agreement. In January 2013, the FASB issued guidance clarifying the scope of the disclosures to apply only to derivatives, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements, and securities lending and securities borrowing transactions. This guidance is effective January 1, 2013, with retrospective application required. We do not expect the adoption to have a material impact on our financial statements.

Indefinite-lived intangible assets impairment testing– In July 2012, the FASB issued accounting guidance on the testing of indefinite-lived intangible assets for impairment. The guidance allows entities to first perform a qualitative assessment to determine the likelihood of an impairment for an indefinite-lived intangible asset and whether it is necessary to perform the quantitative impairment assessment currently required. This guidance is effective for annual and interim impairment tests

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performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. We do not expect the adoption to have a material impact on our financial statements.

Reporting of amounts reclassified out of accumulated other comprehensive income – In February 2013, the FASB issued accounting guidance on the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount is reclassified to net income in its entirety in the same reporting period. For other amounts not required to be reclassified in their entirety to net income in the same reporting period, a cross reference to other disclosures that provide additional detail about the reclassification amounts is required. This guidance is effective January 1, 2013. We do not expect the adoption to have a material impact on our financial statements.

K. Goodwill

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

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

L. Accumulated other comprehensive income (loss)

Comprehensive income and its components are presented in Statement 2.  Accumulated other comprehensive income (loss), net of tax, included in Statement 4, consisted of the following at December 31:

	December 31,
(Millions of dollars)	2012				2011			2010
Foreign currency translation	$	456			$	206		$	551
Pension and other postretirement benefits	(6,914		)		(6,568		)	(4,695		)
Derivative financial instruments	(42		)		(10		)	45
Available-for-sale securities	67				44			48
Total accumulated other comprehensive income (loss)	$	(6,433	)	1	$	(6,328	)	$	(4,051	)

¹  In conjunction with the Cat Japan share redemption, to reflect the increase in our ownership interest in Cat Japan from 67 percent to 100 percent, $107 million was reclassified to Accumulated other comprehensive income (loss) from other components of stockholders' equity and was not included in Comprehensive income during 2012. The amount was comprised of foreign currency translation of $167 million, pension and other postretirement benefits of $(61) million and available-for-sale securities of $1 million.

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M. Assets held for sale

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

2. Stock-based compensation

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

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

Common stock issued from Treasury stock under the plans totaled 7,515,149 for 2012, 8,710,630 for 2011 and 12,612,514 for 2010.

Awards generally vest three years after the date of grant.  At grant, SARs and option awards have a term life of ten years.  Upon separation from service for the 2010 awards, if the participant is 55 years of age or older with more than ten years of service, the participant meets the criteria for a “Long Service Separation.”  For the 2011 and 2012 awards, upon separation from service, if the participant is 55 years of age or older with more than five years of service, the participant meets the criteria for a “Long Service Separation”.  If the “Long Service Separation” criteria are met, the vested options/SARs will have a life that is the lesser of ten years from the original grant date or five years from the separation date.

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

Accounting guidance on share-based payments requires companies to estimate the fair value of options/SARs on the date of grant using an option-pricing model.  The fair value of the option/SAR grant was estimated using a lattice-based option-pricing model.  The lattice-based option-pricing model considers a range of assumptions related to volatility, risk-free interest rate and historical employee behavior.  Expected volatility was based on historical and current implied volatilities from traded options on our stock. The risk-free rate was based on U.S. Treasury security yields at the time of grant.  The weighted-average dividend yield was based on historical information.  The expected life was determined from the lattice-based model. The lattice-based model incorporated exercise and post vesting forfeiture assumptions based on analysis of historical data. The following table provides the assumptions used in determining the fair value of the stock-based awards for the years ended December 31, 2012, 2011 and 2010, respectively.

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	Grant Year
	2012		2011		2010
Weighted-average dividend yield	2.2	%	2.2	%	2.3	%
Weighted-average volatility	35.0	%	32.7	%	36.4	%
Range of volatilities	33.3-40.4%		20.9-45.4%		35.2-51.8%
Range of risk-free interest rates	0.17-2.00%		0.25-3.51%		0.32-3.61%
Weighted-average expected lives	7 years		8 years		7 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, 2012, 2011 and 2010 did not have a significant impact on our financial statements.

At December 31, 2012, there was $181 million of total unrecognized compensation cost from stock-based compensation arrangements granted under the plans, which is related to non-vested stock-based awards.  The compensation expense is expected to be recognized over a weighted-average period of approximately 1.8 years.

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

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TABLE I — Financial Information Related to Stock-based Compensation
	2012				2011				2010
	Shares		Weighted-  Average  Exercise  Price		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Stock options/SARs activity:
Outstanding at beginning of year	50,372,991		$	53.01	57,882,998		$	48.50	63,082,787		$	44.24
Granted to officers and key employees 1	3,318,188		$	110.09	2,960,595		$	102.13	7,556,481		$	57.85
Exercised	(7,708,343	)	$	38.73	(10,149,476	)	$	41.78	(12,568,232	)	$	32.83
Forfeited / expired	(155,237	)	$	67.50	(321,126	)	$	48.02	(188,038	)	$	43.64
Outstanding at end of year	45,827,599		$	59.45	50,372,991		$	53.01	57,882,998		$	48.50
Exercisable at year-end	33,962,000		$	51.75	35,523,057		$	52.66	41,658,033		$	48.23
RSUs activity:
Outstanding at beginning of year	4,281,490				4,650,241				4,531,545
Granted to officers and key employees	1,429,939				1,082,032				1,711,771
Vested	(2,077,485	)			(1,382,539	)			(1,538,047	)
Forfeited	(53,724	)			(68,244	)			(55,028	)
Outstanding at end of year	3,580,220				4,281,490				4,650,241

Stock options/SARs outstanding and exercisable:
	Outstanding						Exercisable
Exercise Prices	Shares Outstanding at 12/31/12	Weighted-  Average  Remaining  Contractual Life (Years)	Weighted-  Average  Exercise Price		Aggregate  Intrinsic Value2		Shares  Outstanding at 12/31/12	Weighted-  Average  Remaining Contractual Life (Years)	Weighted-  Average  Exercise Price		Aggregate  Intrinsic Value2
$22.17 – 27.14	6,759,589	4.75	$	23.36	$	439	6,759,589	4.75	$	23.36	$	439
$38.63 – 45.64	11,099,949	1.81	$	42.38	509		11,099,949	1.81	$	42.38	509
$57.85 – 66.77	10,654,464	6.16	$	59.54	306		4,597,874	4.84	$	61.77	122
$72.05 – 86.77	11,246,820	3.90	$	72.60	176		11,152,835	3.89	$	72.48	176
$102.13 – 110.09	6,066,777	8.71	$	106.30	—		351,753	8.49	$	104.55	—
	45,827,599		$	59.45	$	1,430	33,962,000		$	51.75	$	1,246

¹  Of the 3,318,188 awards granted during the year ended December 31, 2012, none were SARs. Of the 2,960,595 awards granted during the year ended December 31, 2011, 2,722,689 were SARs. Of the 7,556,481 awards granted during the year ended December 31, 2010, 7,125,210 were SARs.

²  The difference between a stock award’s exercise price and the underlying stock’s market price at December 31, 2012, 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, 2012, there were 3,580,220 outstanding RSUs with a weighted average remaining contractual life of 1.2 years.

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TABLE II— Additional Stock-based Award Information
(Dollars in millions except per share data)	2012		2011		2010
Stock Options/SARs activity:
Weighted-average fair value per share of stock awards granted	$	39.20	$	36.73	$	22.31
Intrinsic value of stock awards exercised	$	488	$	618	$	518
Fair value of stock awards vested	$	66	$	96	$	124
Cash received from stock awards exercised	$	112	$	161	$	325
RSUs activity:
Weighted-average fair value per share of stock awards granted	$	104.61	$	97.51	$	53.35
Fair value of stock awards vested	$	229	$	143	$	99

Before tax, stock-based compensation expense for 2012, 2011 and 2010 was $245 million, $193 million and $226 million, respectively, with a corresponding income tax benefit of $78 million, $61 million and $73 million, respectively. Included in the 2010 pre-tax stock-based compensation expense was $19 million relating to the modification of awards resulting from separations due to the streamlining of our corporate structure as announced in the second quarter 2010.

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

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

The cash tax benefits realized from stock awards exercised for December 31, 2012, 2011 and 2010 were $217 million, $235 million and $188 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 $40 million will be recorded in additional paid-in capital 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.  Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures.  Our policy specifies that derivatives are not to be used for speculative purposes.  Derivatives that we use are primarily foreign currency forward, option and cross currency contracts, interest rate swaps and commodity forward and option contracts.  Our derivative activities are subject to the management, direction and control of our senior financial officers.  Risk management practices, including the use of financial derivative instruments, are presented to the Audit Committee of the Board of Directors at least annually.

All derivatives are recognized in Statement 3 at their fair value. On the date the derivative contract is entered into, we designate the derivative as (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flow to be paid (cash flow hedge), or (3) an undesignated instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk, are recorded in current earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in Accumulated other comprehensive income (loss) (AOCI), to the extent effective, in Statement 3 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 5.  Cash flow from undesignated derivative financial instruments are included in the investing category on Statement 5.

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

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designated as fair value hedges to specific assets and liabilities in Statement 3 and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items.  When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, we discontinue hedge accounting prospectively, in accordance with the derecognition criteria for hedge accounting.

A. Foreign currency exchange rate risk

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

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

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

As of December 31, 2012, $24 million of deferred net losses, net of tax, included in equity (AOCI in Statement 3), 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, and future transactions denominated in foreign currencies. Our policy allows the use of foreign currency forward, option and cross currency contracts to offset the risk of currency mismatch between our receivables and debt, and exchange rate risk associated with future transactions denominated in foreign currencies. Substantially all such foreign currency forward, option and cross currency contracts are undesignated.

B. Interest rate risk

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

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

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

Our policy allows us to use fixed-to-floating, floating-to-fixed, and floating-to-floating interest rate swaps to meet the match-funding objective.  We designate fixed-to-floating interest rate swaps as fair value hedges to protect debt against changes in

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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, 2012, $3 million of deferred net losses, net of tax, included in equity (AOCI in Statement 3), 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 interest rate swaps at both Machinery and Power Systems and Financial Products.  The gains or losses associated with these swaps at the time of liquidation are amortized into earnings over the original term of the previously designated hedged item.

In anticipation of issuing debt for the planned acquisition of Bucyrus International, Inc., we entered into interest rate swaps to manage our exposure to interest rate changes.  For the year ended December 31, 2011, we recognized a net loss of $149 million, included in Other income (expense) in Statement 1.  The contracts were liquidated in conjunction with the debt issuance in May 2011.  These contracts were not designated as hedging instruments, and therefore, did not receive hedge accounting treatment.

C. Commodity price risk

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

Our Machinery and Power Systems operations purchase base and precious metals embedded in the components we purchase from suppliers.  Our suppliers pass on to us price changes in the commodity portion of the component cost. In addition, we are subject to price changes on energy products such as natural gas and diesel fuel purchased for operational use.

Our objective is to minimize volatility in the price of these commodities. Our policy allows us to enter into commodity forward and option contracts to lock in the purchase price of a portion of these commodities within a five-year horizon. All such commodity forward and option contracts are undesignated.

The location and fair value of derivative instruments reported in Statement 3 are as follows:

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(Millions of dollars)	Consolidated Statement of Financial Position Location	Asset (Liability) Fair Value
		Years ended December 31,
		2012			2011			2010
Designated derivatives
Foreign exchange contracts
Machinery and Power Systems	Receivables — trade and other	$	28		$	54		$	65
Machinery and Power Systems	Long-term receivables — trade and other	—			19			52
Machinery and Power Systems	Accrued expenses	(66		)	(73		)	(66		)
Machinery and Power Systems	Other liabilities	—			(10		)	(1		)
Interest rate contracts
Machinery and Power Systems	Receivables — trade and other	—			—			1
Financial Products	Receivables — trade and other	17			15			14
Financial Products	Long-term receivables — trade and other	209			233			197
Financial Products	Accrued expenses	(8		)	(6		)	(18		)
		$	180		$	232		$	244
Undesignated derivatives
Foreign exchange contracts
Machinery and Power Systems	Receivables — trade and other	$	31		$	27		$	120
Machinery and Power Systems	Accrued expenses	(63		)	(12		)	(46		)
Machinery and Power Systems	Other liabilities	—			(85		)	(58		)
Financial Products	Receivables — trade and other	10			7			6
Financial Products	Accrued expenses	(6		)	(16		)	(9		)
Interest rate contracts
Machinery and Power Systems	Accrued expenses	—			—			(6		)
Financial Products	Receivables — trade and other	2			—			—
Financial Products	Accrued expenses	(1		)	(1		)	(1		)
Commodity contracts
Machinery and Power Systems	Receivables — trade and other	1			2			17
Machinery and Power Systems	Accrued expenses	—			(9		)	—
		$	(26	)	$	(87	)	$	23

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

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Fair Value Hedges		Year ended December 31, 2012
(Millions of dollars)	Classification	Gains (Losses) on Derivatives			Gains (Losses) on Borrowings
Interest rate contracts
Financial Products	Other income (expense)	$	(20	)	$	36
		$	(20	)	$	36
		Year ended December 31, 2011
	Classification	Gains (Losses)  on Derivatives			Gains (Losses)  on Borrowings
Interest rate contracts
Machinery and Power Systems	Other income (expense)	$	(1	)	$	1
Financial Products	Other income (expense)	39			(44		)
		$	38		$	(43	)
		Year ended December 31, 2010
	Classification	Gains (Losses)  on Derivatives			Gains (Losses)  on Borrowings
Interest rate contracts
Financial Products	Other income (expense)	$	107		$	(98	)
		$	107		$	(98	)

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Cash Flow Hedges
(Millions of dollars)	Year ended December 31, 2012
				Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)			Classification of Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI to Earnings				Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$	(78	)	Other income (expense)	$	(30	)	2	$	—
Interest rate contracts
Financial Products	1			Interest expense of Financial Products	4				(1		)	1
	$	(77	)		$	(26	)		$	(1	)
	Year ended December 31, 2011
				Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)			Classification of Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI to Earnings				Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$	34		Other income (expense)	$	70			$	—
Interest rate contracts
Machinery and Power Systems	—			Other income (expense)	(3		)		—
Financial Products	(1		)	Interest expense of Financial Products	(12		)		(2		)	1
	$	33			$	55			$	(2	)
	Year ended December 31, 2010
				Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)			Classification of  Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI to Earnings				Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$	(72	)	Other income (expense)	$	(1	)		$	2
Interest rate contracts
Machinery and Power Systems	—			Other income (expense)	(3		)		—
Financial Products	(7		)	Interest expense of Financial Products	(49		)		(1		)	1
	$	(79	)		$	(53	)		$	1

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

² Includes $7 million loss reclassified from AOCI to Other income (expense) in 2012 as certain derivatives were dedesignated as the related transactions are no longer probable to occur.

 The effect of derivatives not designated as hedging instruments on Statement 1 is as follows:

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		Years ended December 31,
(Millions of dollars)	Classification of Gains (Losses)	2012		2011			2010
Foreign exchange contracts
Machinery and Power Systems	Other income (expense)	$	62	$	62		$	(45	)
Financial Products	Other income (expense)	6		(15		)	16
Interest rate contracts
Machinery and Power Systems	Other income (expense)	2		(149		)	(8		)
Financial Products	Other income (expense)	—		—			2
Commodity contracts
Machinery and Power Systems	Other income (expense)	2		(17		)	15
		$	72	$	(119	)	$	(20	)

4. Other income (expense)

	Years ended December 31,
(Millions of dollars)	2012			2011				2010
Investment and interest income	$	82		$	85			$	86
Foreign exchange gains (losses) 1	(116		)	21				(55		)
License fee income	99			80				54
Gains (losses) on sale of securities and affiliated companies	4			17				9
Impairment of available-for-sale securities	(2		)	(5		)		(3		)
Miscellaneous income (loss)	63			(230		)	2	39
	$	130		$	(32	)		$	130

¹ Includes gains (losses) from foreign exchange derivative contracts.  See Note 3 for further details.

² Miscellaneous income (loss) in 2011 includes forward starting swap costs of $149 million (see Note 3) and bridge financing

costs of $54 million (see Note 23), both related to the acquisition of Bucyrus.

5. Income taxes

The components of profit before taxes were:
	Years ended December 31,
(Millions of dollars)	2012		2011		2010
U.S.	$	4,090	$	2,250	$	778
Non-U.S.	4,146		4,475		2,972
	$	8,236	$	6,725	$	3,750

Profit 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.

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The components of the provision (benefit) for income taxes were:
	Years ended December 31,
(Millions of dollars)	2012			2011			2010
Current tax provision (benefit):
U.S.	$	971		$	750		$	247
Non-U.S.	1,250			1,014			645
State (U.S.)	56			72			44
	2,277			1,836			936
Deferred tax provision (benefit):
U.S.	332			2			103
Non-U.S.	(89		)	(92		)	(75		)
State (U.S.)	8			(26		)	4
	251			(116		)	32
Total provision (benefit) for income taxes	$	2,528		$	1,720		$	968

We paid net income tax and related interest of $2,396 million, $1,369 million and $264 million in 2012, 2011 and 2010, respectively.

Reconciliation of the U.S. federal statutory rate to effective rate:

(Millions of dollars)	Years ended December 31,
	2012					2011					2010
Taxes at U.S. statutory rate	$	2,882		35.0	%	$	2,354		35.0	%	$	1,313		35.0	%
(Decreases) increases in taxes resulting from:
Non-U.S. subsidiaries taxed at other than 35%	(342		)	(4.2	)%	(467		)	(6.9	)%	(339		)	(9.0	)%
State and local taxes, net of federal	55			0.7	%	30			0.4	%	27			0.7	%
Interest and penalties, net of tax	22			0.3	%	25			0.4	%	16			0.4	%
U.S. research and production incentives	(80		)	(1.0	)%	(152		)	(2.3	)%	(74		)	(2.0	)%
Other—net	(27		)	(0.3	)%	(7		)	(0.1	)%	(5		)	(0.1	)%
	2,510			30.5	%	1,783			26.5	%	938			25.0	%
Prior year tax and interest adjustments	(300		)	(3.7	)%	41			0.6	%	(34		)	(0.9	)%
Nondeductible goodwill	318			3.9	%	33			0.5	%	—			—	%
Release of valuation allowances	—			—	%	(24		)	(0.3	)%	(26		)	(0.7	)%
Non-U.S. earnings reinvestment changes	—			—	%	(113		)	(1.7	)%	—			—	%
Tax law change related to Medicare subsidies	—			—	%	—			—	%	90			2.4	%
Provision (benefit) for income taxes	$	2,528		30.7	%	$	1,720		25.6	%	$	968		25.8	%

The provision for income taxes for 2012 included a $300 million benefit for adjusting prior year taxes and interest primarily to reflect a settlement reached with the U.S. Internal Revenue Service (IRS) for tax years 2000 to 2006. The largest drivers of the settlement benefit were a $188 million benefit to remeasure and recognize previously unrecognized tax benefits and a $96 million benefit to adjust related interest and penalties, net of tax. This benefit was offset by a negative impact from nondeductible goodwill of $203 million related to the ERA Mining Machinery Limited (Siwei) goodwill impairment and $115 million related to the divestiture of portions of the Bucyrus distribution business. See Note 10 and Note 25 for more information.

The provision for income taxes for 2011 included a $113 million benefit due to repatriation of non-U.S. earnings with available foreign tax credits in excess of the U.S. tax liability on the dividends and a $24 million benefit for the release of a valuation allowance against the deferred tax assets of certain non-U.S. entities due to tax planning actions implemented in 2011.  These benefits were offset by a charge of $41 million due to an increase in prior year unrecognized tax benefits and a negative impact

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of $33 million from nondeductible goodwill primarily related to the divestiture of a portion of the Bucyrus distribution business.

The provision for income taxes for 2010 included a deferred tax charge of $90 million due to the enactment of U.S. healthcare legislation effectively making government subsidies received for Medicare equivalent prescription drug coverage taxable. This deferred tax charge was offset by a $34 million benefit related to the recognition of refund claims for prior tax years and a $26 million benefit for the release of a valuation allowance against the deferred tax assets of certain non-U.S. entities due to tax planning actions implemented in 2010.

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 $15 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 to record an incremental tax liability in the period the change occurs.

Accounting for income taxes under U.S. GAAP 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 3, are as follows:

	December 31,
(Millions of dollars)	2012		2011		2010
Assets:
Deferred and refundable income taxes	$	979	$	1,044	$	579
Noncurrent deferred and refundable income taxes	1,863		2,005		2,337
	2,842		3,049		2,916
Liabilities:
Other current liabilities	66		69		8
Other liabilities	484		559		141
Deferred income taxes—net	$	2,292	$	2,421	$	2,767

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Deferred income tax assets and liabilities:
	December 31,
(Millions of dollars)	2012			2011			2010
Deferred income tax assets:
Pension	$	2,100		$	2,130		$	1,065
Postemployment benefits other than pensions	1,678			1,622			1,501
Tax carryforwards	663			821			1,117
Warranty reserves	358			338			253
Stock-based compensation	281			232			215
Inventory	195			148			32
Allowance for credit losses	170			131			111
Post sale discounts	141			141			142
Deferred compensation	110			102			106
Other—net	491			537			404
	6,187			6,202			4,946
Deferred income tax liabilities:
Capital and intangible assets	(2,759		)	(2,866		)	(1,560		)
Bond discount	(249		)	(37		)	(38		)
Translation	(173		)	(193		)	(169		)
Undistributed profits of non-U.S. subsidiaries	(128		)	(215		)	—
	(3,309		)	(3,311		)	(1,767		)
Valuation allowance for deferred tax assets	(586		)	(470		)	(412		)
Deferred income taxes—net	$	2,292		$	2,421		$	2,767

At December 31, 2012, approximately $633 million of U.S. state tax net operating losses (NOLs) and $139 million of U.S. state tax credit carryforwards were available. The state NOLs primarily expire between 2015 and 2031.  The state tax credit carryforwards primarily expire over the next five to ten years.  We established a valuation allowance of $144 million for those state NOLs and credit carryforwards that are more likely than not to expire prior to utilization.

At December 31, 2012, amounts and expiration dates of net operating loss carryforwards in various non-U.S. taxing jurisdictions were:

(Millions of dollars)
2013		2014		2015		2016		2017-2033		Unlimited		Total
$	6	$	11	$	10	$	8	$	576	$	1,135	$	1,746

At December 31, 2012 a valuation allowance of $442 million has been recorded at certain non-U.S. entities that have not yet demonstrated consistent and/or sustainable profitability to support the realization of net deferred tax assets.

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.

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Reconciliation of unrecognized tax benefits: 1
	Years ended December 31,
(Millions of dollars)	2012			2011			2010
Balance at January 1,	$	958		$	789		$	761
Additions for tax positions related to current year	64			118			21
Additions for tax positions related to prior years	178			108			59
Reductions for tax positions related to prior years	(266		)	(30		)	(49		)
Reductions for settlements 2	(191		)	—			—
Reductions for expiration of statute of limitations	(28		)	(27		)	(3		)
Balance at December 31,	$	715		$	958		$	789
Amount that, if recognized, would impact the effective tax rate	$	669		$	835		$	667

¹  Foreign currency translation amounts are included within each line as applicable.

²  Includes cash payment or other reduction of assets to settle liability.

We classify interest and penalties on income taxes as a component of the provision for income taxes. We recognized a net benefit for interest and penalties of $114 million in 2012 including the impact of the 2000 through 2006 settlement discussed previously. This compares to an expense of $39 million and $27 million during the years ended December 31, 2011 and 2010, respectively. The total amount of interest and penalties accrued was $134 million, $240 million and $201 million as of December 31, 2012, 2011 and 2010, respectively.

It is reasonably possible that the amount of unrecognized tax benefits will change in the next 12 months.  The IRS is currently examining our U.S. tax returns for 2007 to 2009. In our major non-U.S. jurisdictions, tax years are typically subject to examination for three to eight years. 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. Due to the uncertainty related to the timing and potential outcome of these matters, we can not estimate the range of reasonably possible change in unrecognized tax benefits in the next 12 months.

6. Cat Financial Financing Activities

A. 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 3 and were $2,152 million, $1,990 million, and $1,361 million at December 31, 2012, 2011 and 2010, respectively.

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Contractual maturities of outstanding wholesale inventory receivables:
(Millions of dollars)	December 31, 2012
Amounts Due In	Wholesale Installment Contracts			Wholesale Finance Leases			Wholesale Notes			Total
2013	$	398		$	146		$	727		$	1,271
2014	96			100			167			363
2015	58			74			181			313
2016	28			42			13			83
2017	12			14			6			32
Thereafter	2			—			—			2
	594			376			1,094			2,064
Guaranteed residual value	—			102			—			102
Unguaranteed residual value	—			35			—			35
Less: Unearned income	(7		)	(35		)	(7		)	(49		)
Total	$	587		$	478		$	1,087		$	2,152

Please refer to Note 17 and Table III for fair value information.

B. 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 3 are net of an allowance for credit losses.

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.

Contractual maturities of outstanding finance receivables:
(Millions of dollars)	December 31, 2012
Amounts Due In	Retail Installment Contracts			Retail Finance Leases			Retail Notes			Total
2013	$	1,819		$	3,192		$	4,068		$	9,079
2014	1,357			2,144			1,836			5,337
2015	911			1,225			1,714			3,850
2016	466			600			1,175			2,241
2017	171			241			1,454			1,866
Thereafter	29			125			861			1,015
	4,753			7,527			11,108			23,388
Guaranteed residual value	—			374			—			374
Unguaranteed residual value	—			462			—			462
Less: Unearned income	(67		)	(762		)	(87		)	(916		)
Total	$	4,686		$	7,601		$	11,021		$	23,308

Please refer to Note 17 and Table III for fair value information.

C. Credit quality of financing receivables and allowance for credit losses

Cat Financial applies a systematic methodology to determine the allowance for credit losses for finance receivables.  Based upon Cat Financial’s analysis of credit losses and risk factors, portfolio segments are as follows:

• Customer - Finance receivables with retail customers.

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• Dealer - Finance receivables with Caterpillar dealers.

Cat Financial further evaluates portfolio segments by the class of finance receivables, which is defined as a level of information (below a portfolio segment) in which the finance receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk.  Typically, Cat Financial’s finance receivables within a geographic area have similar credit risk profiles and methods for assessing and monitoring credit risk.  Cat Financial’s classes, which align with management reporting for credit losses, are as follows:

• North America - Finance receivables originated in the United States or Canada.

• Europe - Finance receivables originated in Europe, Africa, Middle East and the Commonwealth of Independent States.

• Asia Pacific - Finance receivables originated in Australia, New Zealand, China, Japan, South Korea and Southeast Asia.

• Mining - Finance receivables related to large mining customers worldwide.

• Latin America - Finance receivables originated in Central and South American countries and Mexico.

• Caterpillar Power Finance - Finance receivables related to marine vessels with Caterpillar engines worldwide and Caterpillar electrical power generation, gas compression and co-generation systems and non-Caterpillar equipment that is powered by these systems worldwide.

Impaired loans and finance leases

For all classes, a loan or finance lease is considered impaired, based on current information and events, if it is probable that Cat Financial will be unable to collect all amounts due according to the contractual terms of the loan or finance lease.  Loans and finance leases reviewed for impairment include loans and finance leases that are past due, non-performing or in bankruptcy. Recognition of income is suspended and the loan or finance lease is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or in instances in which relevant information is known that warrants placing the loan or finance lease on non-accrual status).  Accrual is resumed, and previously suspended income is recognized, when the loan or finance lease 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.

At December 31, 2012, 2011 and 2010, there were no impaired loans or finance leases for the Dealer portfolio segment.  The average recorded investment for impaired loans and finance leases within the dealer portfolio segment was zero during 2012 and 2011 and $19 million during 2010. 

Individually impaired loans and finance leases for the customer portfolio segment were as follows:

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	December 31, 2012
(Millions of dollars)	Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired Loans and Finance Leases With No Allowance Recorded
Customer
North America	$	28	$	27	$	—
Europe	45		45		—
Asia Pacific	2		2		—
Mining	1		1		—
Latin America	7		7		—
Caterpillar Power Finance	295		295		—
Total	$	378	$	377	$	—
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	47	$	43	$	10
Europe	40		37		14
Asia Pacific	35		35		8
Mining	23		23		5
Latin America	43		43		12
Caterpillar Power Finance	116		112		24
Total	$	304	$	293	$	73
Total Impaired Loans and Finance Leases
Customer
North America	$	75	$	70	$	10
Europe	85		82		14
Asia Pacific	37		37		8
Mining	24		24		5
Latin America	50		50		12
Caterpillar Power Finance	411		407		24
Total	$	682	$	670	$	73

A-32

	December 31, 2011
(Millions of dollars)	Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired Loans and Finance Leases With No Allowance Recorded
Customer
North America	$	83	$	80	$	—
Europe	47		46		—
Asia Pacific	4		4		—
Mining	8		8		—
Latin America	9		9		—
Caterpillar Power Finance	175		170		—
Total	$	326	$	317	$	—
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	69	$	64	$	15
Europe	36		33		12
Asia Pacific	13		13		3
Mining	13		13		4
Latin America	25		25		6
Caterpillar Power Finance	93		92		16
Total	$	249	$	240	$	56
Total Impaired Loans and Finance Leases
Customer
North America	$	152	$	144	$	15
Europe	83		79		12
Asia Pacific	17		17		3
Mining	21		21		4
Latin America	34		34		6
Caterpillar Power Finance	268		262		16
Total	$	575	$	557	$	56

A-33

	December 31, 2010
(Millions of dollars)	Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired Loans and Finance Leases With No Allowance Recorded
Customer
North America	$	87	$	87	$	—
Europe	6		4		—
Asia Pacific	5		5		—
Mining	8		8		—
Latin America	3		3		—
Caterpillar Power Finance	174		174		—
Total	$	283	$	281	$	—
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	191	$	185	$	44
Europe	62		57		15
Asia Pacific	27		27		7
Mining	—		—		—
Latin America	44		43		9
Caterpillar Power Finance	34		33		4
Total	$	358	$	345	$	79
Total Impaired Loans and Finance Leases
Customer
North America	$	278	$	272	$	44
Europe	68		61		15
Asia Pacific	32		32		7
Mining	8		8		—
Latin America	47		46		9
Caterpillar Power Finance	208		207		4
Total	$	641	$	626	$	79

A-34

	Years ended December 31,
	2012				2011				2010
(Millions of dollars)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Loans and Finance Leases With No Allowance Recorded
Customer
North America	$	50	$	3	$	91	$	4	$	39	$	2
Europe	45		1		11		—		7		—
Asia Pacific	3		—		5		—		6		—
Mining	8		—		8		1		3		—
Latin America	6		—		9		1		5		—
Caterpillar Power Finance	220		2		221		6		92		—
Total	$	332	$	6	$	345	$	12	$	152	$	2
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	58	$	1	$	142	$	5	$	271	$	11
Europe	43		2		50		2		85		4
Asia Pacific	27		2		17		1		34		3
Mining	38		2		6		—		6		—
Latin America	43		2		39		2		39		3
Caterpillar Power Finance	99		—		83		—		17		—
Total	$	308	$	9	$	337	$	10	$	452	$	21
Total Impaired Loans and Finance Leases
Customer
North America	$	108	$	4	$	233	$	9	$	310	$	13
Europe	88		3		61		2		92		4
Asia Pacific	30		2		22		1		40		3
Mining	46		2		14		1		9		—
Latin America	49		2		48		3		44		3
Caterpillar Power Finance	319		2		304		6		109		—
Total	$	640	$	15	$	682	$	22	$	604	$	23

Non-accrual and past due loans and finance leases

For all classes, Cat Financial considers a loan or finance lease past due if any portion of a contractual payment is due and unpaid for more than 30 days.  Recognition of income is suspended and the loan or finance lease is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or in instances in which relevant information is known that warrants placing the loan or finance lease on non-accrual status).  Accrual is resumed, and previously suspended income is recognized, when the loan or finance lease becomes contractually current and/or collection doubts are removed.

As of December 31, 2012, 2011 and 2010, there were no loans or finance leases on non-accrual status for the Dealer portfolio segment.

The investment in customer loans and finance leases on non-accrual status was as follows:

A-35

	December 31,
(Millions of dollars)	2012		2011		2010
Customer
North America	$	59	$	112	$	217
Europe	38		58		89
Asia Pacific	36		24		24
Mining	12		12		7
Latin America	148		108		139
Caterpillar Power Finance	220		158		163
Total	$	513	$	472	$	639

Aging related to loans and finance leases was as follows:

(Millions of dollars)	December 31, 2012
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	35	$	8	$	52	$	95	$	5,872	$	5,967	$	—
Europe	23		9		36		68		2,487		2,555		6
Asia Pacific	53		19		54		126		2,912		3,038		18
Mining	—		1		12		13		1,960		1,973		—
Latin America	62		19		138		219		2,500		2,719		—
Caterpillar Power Finance	15		14		126		155		3,017		3,172		4
Dealer
North America	—		—		—		—		2,063		2,063		—
Europe	—		—		—		—		185		185		—
Asia Pacific	—		—		—		—		751		751		—
Mining	—		—		—		—		1		1		—
Latin America	—		—		—		—		884		884		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Total	$	188	$	70	$	418	$	676	$	22,632	$	23,308	$	28

A-36

(Millions of dollars)	December 31, 2011
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	74	$	39	$	111	$	224	$	5,378	$	5,602	$	9
Europe	27		11		57		95		2,129		2,224		10
Asia Pacific	47		23		38		108		2,769		2,877		14
Mining	—		—		12		12		1,473		1,485		—
Latin America	32		15		99		146		2,339		2,485		—
Caterpillar Power Finance	14		16		125		155		2,765		2,920		25
Dealer
North America	—		—		—		—		1,689		1,689		—
Europe	—		—		—		—		57		57		—
Asia Pacific	—		—		—		—		161		161		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		480		480		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Total	$	194	$	104	$	442	$	740	$	19,240	$	19,980	$	58

(Millions of dollars)	December 31, 2010
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	139	$	44	$	228	$	411	$	6,037	$	6,448	$	27
Europe	27		12		106		145		2,365		2,510		26
Asia Pacific	63		17		37		117		2,537		2,654		12
Mining	—		—		—		—		875		875		—
Latin America	44		16		144		204		2,222		2,426		1
Caterpillar Power Finance	18		17		54		89		2,978		3,067		25
Dealer
North America	—		—		—		—		1,291		1,291		—
Europe	—		—		—		—		41		41		—
Asia Pacific	—		—		—		—		151		151		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		457		457		—
Caterpillar Power Finance	—		—		—		—		3		3		—
Total	$	291	$	106	$	569	$	966	$	18,957	$	19,923	$	91

Allowance for credit loss activity

In estimating the allowance for credit losses, Cat Financial reviews loans and finance leases that are past due, non-performing or in bankruptcy. An analysis of the allowance for credit losses during 2012, 2011 and 2010 was as follows:

A-37

(Millions of dollars)	December 31, 2012
	Customer			Dealer		Total
Allowance for Credit Losses:
Balance at beginning of year	$	360		$	6	$	366
Receivables written off	(149		)	—		(149		)
Recoveries on receivables previously written off	47			—		47
Provision for credit losses	157			3		160
Other	(1		)	—		(1		)
Balance at end of year	$	414		$	9	$	423
Individually evaluated for impairment	$	73		$	—	$	73
Collectively evaluated for impairment	341			9		350
Ending Balance	$	414		$	9	$	423
Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	682		$	—	$	682
Collectively evaluated for impairment	18,742			3,884		22,626
Ending Balance	$	19,424		$	3,884	$	23,308

(Millions of dollars)	December 31, 2011
	Customer			Dealer		Total
Allowance for Credit Losses:
Balance at beginning of year	$	357		$	5	$	362
Receivables written off	(210		)	—		(210		)
Recoveries on receivables previously written off	52			—		52
Provision for credit losses	167			1		168
Other	(6		)	—		(6		)
Balance at end of year	$	360		$	6	$	366
Individually evaluated for impairment	$	56		$	—	$	56
Collectively evaluated for impairment	304			6		310
Ending Balance	$	360		$	6	$	366
Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	575		$	—	$	575
Collectively evaluated for impairment	17,018			2,387		19,405
Ending Balance	$	17,593		$	2,387	$	19,980

A-38

(Millions of dollars)	December 31, 2010
Allowance for Credit Losses:
Balance at beginning of year	$	376
Receivables written off	(288		)
Recoveries on receivables previously written off	51
Provision for credit losses	205
Adjustment to adopt consolidation of variable-interest entities	18
Other–net	—
Balance at end of year	$	362

(Millions of dollars)	December 31, 2010
	Customer		Dealer		Total
Individually evaluated for impairment	$	79	$	—	$	79
Collectively evaluated for impairment	278		5		283
Ending Balance	$	357	$	5	$	362
Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	641	$	—	$	641
Collectively evaluated for impairment	17,339		1,943		19,282
Ending Balance	$	17,980	$	1,943	$	19,923

Credit quality of finance receivables

The credit quality of finance receivables is reviewed on a monthly basis.  Credit quality indicators include performing and non-performing.  Non-performing is defined as finance receivables currently over 120 days past due and/or on non-accrual status or in bankruptcy.  Finance receivables not meeting the criteria listed above are considered performing.  Non-performing receivables have the highest probability for credit loss.  The allowance for credit losses attributable to non-performing receivables is based on the most probable source of repayment, which is normally the liquidation of collateral.  In determining collateral value, Cat Financial estimates the current fair market value of the collateral. In addition, Cat Financial considers credit enhancements such as additional collateral and contractual third-party guarantees in determining the allowance for credit losses attributable to non-performing receivables.

The recorded investment in performing and non-performing finance receivables was as follows:

A-39

(Millions of dollars)	December 31, 2012
	Customer		Dealer		Total
Performing
North America	$	5,908	$	2,063	$	7,971
Europe	2,517		185		2,702
Asia Pacific	3,002		751		3,753
Mining	1,961		1		1,962
Latin America	2,571		884		3,455
Caterpillar Power Finance	2,952		—		2,952
Total Performing	$	18,911	$	3,884	$	22,795
Non-Performing
North America	$	59	$	—	$	59
Europe	38		—		38
Asia Pacific	36		—		36
Mining	12		—		12
Latin America	148		—		148
Caterpillar Power Finance	220		—		220
Total Non-Performing	$	513	$	—	$	513
Performing & Non-Performing
North America	$	5,967	$	2,063	$	8,030
Europe	2,555		185		2,740
Asia Pacific	3,038		751		3,789
Mining	1,973		1		1,974
Latin America	2,719		884		3,603
Caterpillar Power Finance	3,172		—		3,172
Total	$	19,424	$	3,884	$	23,308

A-40

(Millions of dollars)	December 31, 2011
	Customer		Dealer		Total
Performing
North America	$	5,490	$	1,689	$	7,179
Europe	2,166		57		2,223
Asia Pacific	2,853		161		3,014
Mining	1,473		—		1,473
Latin America	2,377		480		2,857
Caterpillar Power Finance	2,762		—		2,762
Total Performing	$	17,121	$	2,387	$	19,508
Non-Performing
North America	$	112	$	—	$	112
Europe	58		—		58
Asia Pacific	24		—		24
Mining	12		—		12
Latin America	108		—		108
Caterpillar Power Finance	158		—		158
Total Non-Performing	$	472	$	—	$	472
Performing & Non-Performing
North America	$	5,602	$	1,689	$	7,291
Europe	2,224		57		2,281
Asia Pacific	2,877		161		3,038
Mining	1,485		—		1,485
Latin America	2,485		480		2,965
Caterpillar Power Finance	2,920		—		2,920
Total	$	17,593	$	2,387	$	19,980

A-41

(Millions of dollars)	December 31, 2010
	Customer		Dealer		Total
Performing
North America	$	6,231	$	1,291	$	7,522
Europe	2,421		41		2,462
Asia Pacific	2,630		151		2,781
Mining	868		—		868
Latin America	2,287		457		2,744
Caterpillar Power Finance	2,904		3		2,907
Total Performing	$	17,341	$	1,943	$	19,284
Non-Performing
North America	$	217	$	—	$	217
Europe	89		—		89
Asia Pacific	24		—		24
Mining	7		—		7
Latin America	139		—		139
Caterpillar Power Finance	163		—		163
Total Non-Performing	$	639	$	—	$	639
Performing & Non-Performing
North America	$	6,448	$	1,291	$	7,739
Europe	2,510		41		2,551
Asia Pacific	2,654		151		2,805
Mining	875		—		875
Latin America	2,426		457		2,883
Caterpillar Power Finance	3,067		3		3,070
Total	$	17,980	$	1,943	$	19,923

Troubled Debt Restructurings

A restructuring of a loan or finance lease receivable constitutes a troubled debt restructuring (TDR) when the lender grants a concession it would not otherwise consider to a borrower experiencing financial difficulties.  Concessions granted may include extended contract maturities, inclusion of interest only periods, below market interest rates, and extended skip payment periods.

TDRs are reviewed along with other receivables as part of management’s ongoing evaluation of the adequacy of the allowance for credit losses.  The allowance for credit losses attributable to TDRs is based on the most probable source of repayment, which is normally the liquidation of collateral.  In determining collateral value, Cat Financial estimates the current fair market value of the collateral. In addition, Cat Financial factors in credit enhancements such as additional collateral and contractual third-party guarantees in determining the allowance for credit losses attributable to TDRs.

There were no loans or finance lease receivables modified as TDRs during the years ended December 31, 2012 and 2011 for the Dealer portfolio segment.

Loan and finance lease receivables in the customer portfolio segment modified as TDRs during the years ended December 31, 2012 and 2011, were as follows:

A-42

(Dollars in millions)	Year ended December 31, 2012					Year ended December 31, 2011
	Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment		Number  of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment
Customer
North America	98	$	15	$	15	71	$	13	$	13
Europe 1	21	8		8		7	44		44
Asia Pacific	12	3		3		—	—		—
Mining	—	—		—		—	—		—
Latin America	41	5		5		12	10		10
Caterpillar Power Finance 2,3	27	253		253		35	117		117
Total 4	199	$	284	$	284	125	$	184	$	184

¹  One customer comprises $43 million of the $44 million pre-TDR and post-TDR outstanding recorded investment for the year ended December 31, 2011.

²  Ten customers comprise $248 million of the $253 million pre-TDR and post-TDR outstanding recorded investment for the year ended December 31, 2012. Three customers comprise $104 million of the $117 million pre-TDR and post-TDR outstanding recorded investment for the year ended December 31, 2011.

³  During the years ended December 31, 2012 and 2011, $24 million and $15 million, respectively, of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The $24 million and $15 million of additional funds are not reflected in the table above as no incremental modifications have been made with the borrower during the periods presented. At December 31, 2012, remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR were $1 million.

⁴  Modifications include extended contract maturities, inclusion of interest only periods, below market interest rates, and extended skip payment periods.

TDRs in the customer portfolio segment with a payment default during the years ended December 31, 2012 and 2011, which had been modified within twelve months prior to the default date, were as follows:

(Dollars in millions)	Year ended December 31, 2012			Year ended December 31, 2011
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	49	$	4	48	$	26
Europe	—	—		1	1
Asia Pacific	2	1		—	—
Mining	—	—		—	—
Latin America	—	—		7	4
Caterpillar Power Finance 1	16	21		14	70
Total	67	$	26	70	$	101

¹  Two customers comprise $19 million of the $21 million post-TDR recorded investment for the year ended December 31, 2012. Two customers comprise $65 million of the $70 million post-TDR recorded investment for the year ended December 31, 2011.

D. Securitized Retail Installment Sale Contracts and Finance Leases

Cat Financial has periodically transfered certain finance receivables relating to their retail installment sale contracts and finance leases to special-purpose entities (SPEs) as part of their asset-backed securitization program.  These SPEs were concluded to be VIEs. Cat Financial determined that they were the primary beneficiary based on their power to direct activities through their role as servicer and their obligation to absorb losses and right to receive benefits and therefore consolidated these securitization SPEs.

On April 25, 2011, Cat Financial exercised a clean-up call on their only outstanding asset-backed securitization transaction. 

A-43

As a result, Cat Financial had no assets or liabilities related to their securitization program as of  December 31, 2012 or 2011.  The restricted assets (Receivables-finance, Long-term receivables-finance, Prepaid expenses and other current assets, and Other assets) of the consolidated SPEs totaled $136 million at December 31, 2010.  The liabilities (Accrued expenses and Long-term debt due within one year-Financial Products) of the consolidated SPEs totaled $73 million at December 31, 2010.

7. Inventories

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

	December 31,
(Millions of dollars)	2012		2011		2010
Raw materials	$	3,573	$	3,766	$	2,766
Work-in-process	2,920		2,959		1,483
Finished goods	8,767		7,562		5,098
Supplies	287		257		240
Total inventories	$	15,547	$	14,544	$	9,587

We had long-term material purchase obligations of approximately $2,421 million at December 31, 2012.

8. Property, plant and equipment

		December 31,
(Millions of dollars)	Useful Lives (Years)	2012			2011			2010
Land	—	$	723		$	753		$	682
Buildings and land improvements	20-45	6,214			5,857			5,174
Machinery, equipment and other	3-10	16,073			14,435			13,414
Equipment leased to others	1-10	4,658			4,285			4,444
Construction-in-process	—	2,264			1,996			1,192
Total property, plant and equipment, at cost		29,932			27,326			24,906
Less: Accumulated depreciation		(13,471		)	(12,931		)	(12,367		)
Property, plant and equipment–net		$	16,461		$	14,395		$	12,539

We had commitments for the purchase or construction of capital assets of approximately $569 million at December 31, 2012.

Assets recorded under capital leases: 1
	December 31,
(Millions of dollars)	2012			2011			2010
Gross capital leases 2	$	134		$	131		$	251
Less: Accumulated depreciation	(58		)	(75		)	(134		)
Net capital leases	$	76		$	56		$	117

¹  Included in Property, plant and equipment table above.

²  Consists primarily of machinery and equipment.

At December 31, 2012, scheduled minimum rental payments on assets recorded under capital leases were:

A-44

(Millions of dollars)
2013		2014		2015		2016		2017		Thereafter
$	15	$	10	$	7	$	18	$	4	$	34

Equipment leased to others (primarily by Cat Financial):
	December 31,
(Millions of dollars)	2012			2011			2010
Equipment leased to others–at original cost	$	4,658		$	4,285		$	4,444
Less: Accumulated depreciation	(1,383		)	(1,406		)	(1,533		)
Equipment leased to others–net	$	3,275		$	2,879		$	2,911

At December 31, 2012, scheduled minimum rental payments to be received for equipment leased to others were:

(Millions of dollars)
2013		2014		2015		2016		2017		Thereafter
$	798	$	551	$	337	$	187	$	74	$	35

9. Investments in unconsolidated affiliated companies

Combined financial information of the unconsolidated affiliated companies accounted for by the equity method (generally on a lag of 3 months or less) was as follows: 

Results of Operations of unconsolidated affiliated companies:
	Years ended December 31,
(Millions of dollars)	2012		2011			2010
Results of Operations:
Sales	$	1,084	$	966		$	812
Cost of sales	872		797			627
Gross profit	$	212	$	169		$	185
Profit (loss)	$	28	$	(46	)	$	(36	)

Financial Position of unconsolidated affiliated companies:
	December 31,
(Millions of dollars)	2012		2011		2010
Financial Position:
Assets:
Current assets	$	715	$	345	$	414
Property, plant and equipment–net	529		200		196
Other assets	616		9		39
	1,860		554		649
Liabilities:
Current liabilities	443		220		274
Long-term debt due after one year	708		72		72
Other liabilities	170		17		40
	1,321		309		386
Equity	$	539	$	245	$	263

A-45

Caterpillar’s investments in unconsolidated affiliated companies:
	December 31,
(Millions of dollars)	2012		2011		2010
Investments in equity method companies	$	256	$	111	$	135
Plus: Investments in cost method companies	16		22		29
Total investments in unconsolidated affiliated companies	$	272	$	133	$	164

The increase in the 2012 financial position and equity investments amounts relate to the sale of a majority interest in Caterpillar's third party logistics business, which occurred on July 31, 2012. Under the terms of the agreement, Caterpillar retained a 35 percent equity interest. The increase is also related to the acquisition of an equity interest in Black Horse LLC, which occurred on December 5, 2012.

The decrease in the 2011 financial position and equity investments amounts from 2010 primarily relate to the sale of our ownership in NC² Global LLC (NC²), which occurred on September 29, 2011.

At December 31, 2012, consolidated Profit employed in the business in Statement 3 included no net undistributed profits of the unconsolidated affiliated companies.

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10.  Intangible assets and goodwill

A. Intangible assets

Intangible assets are comprised of the following:

		December 31, 2012
(Millions of dollars)	Weighted Amortizable Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	15	$	2,756	$	(377	)	$	2,379
Intellectual property	12	1,767		(342		)	1,425
Other	10	299		(105		)	194
Total finite-lived intangible assets	13	4,822		(824		)	3,998
Indefinite-lived intangible assets - In-process research & development		18		—			18
Total intangible assets		$	4,840	$	(824	)	$	4,016
		December 31, 2011
	Weighted Amortizable Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	15	$	2,811	$	(213	)	$	2,598
Intellectual property	11	1,794		(244		)	1,550
Other	11	299		(97		)	202
Total finite-lived intangible assets	13	4,904		(554		)	4,350
Indefinite-lived intangible assets - In-process research & development		18		—			18
Total intangible assets		$	4,922	$	(554	)	$	4,368
		December 31, 2010
	Weighted Amortizable Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net
Customer relationships	17	$	630	$	(108	)	$	522
Intellectual property	9	306		(166		)	140
Other	13	197		(72		)	125
Total finite-lived intangible assets	14	1,133		(346		)	787
Indefinite-lived intangible assets - In-process research & development		18		—			18
Total intangible assets		$	1,151	$	(346	)	$	805

During 2012, we acquired finite-lived intangible assets aggregating $120 million due to purchases of Siwei ($112 million) and Caterpillar Tohoku Ltd. (Cat Tohoku) ($8 million). See Note 23 for details on these acquisitions.

Customer relationship intangibles of $207 million, net of accumulated amortization of $93 million, were reclassified from Intangible assets to held for sale and/or divested during 2012, primarily related to the divestiture of portions of the Bucyrus distribution business and our third party logistics business, and are not included in the December 31, 2012 balances in the table above. See Note 25 for additional information on assets held for sale.

Customer relationship intangibles of $51 million, net of accumulated amortization of $29 million, from the All Other segment were impaired during 2012. Fair value of the intangibles was determined using an income approach based on the present value of discounted cash flows. The impairment of $22 million was recognized in Other operating (income) expenses in Statement 1 and included in the All Other segment.

During 2011, we acquired finite-lived intangible assets aggregating $4,167 million primarily due to purchases of Bucyrus

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International, Inc. (Bucyrus) ($3,901 million), Pyroban Group Ltd. (Pyroban) ($41 million) and MWM Holding GmbH (MWM) ($221 million).  See Note 23 for details on these acquisitions.

As described in Note 25, we sold customer relationship intangibles of $63 million associated with the divestiture of a portion of the Bucyrus distribution business in December 2011.  Additionally, $186 million of customer relationship intangibles were classified as held for sale at December 31, 2011, and are not included in the table above.

During 2010, we acquired finite-lived intangible assets aggregating $409 million primarily due to purchases of Electro-Motive Diesel, Inc. (EMD) ($329 million), GE Transportation’s Inspection Products business ($28 million), JCS Company, Ltd. (JCS) ($12 million) and FCM Rail Ltd. (FCM) ($10 million).  Also, associated with the purchase of EMD, we acquired $18 million of indefinite-lived intangible assets.  See Note 23 for details on these acquisitions.

Finite-lived intangible assets are amortized over their estimated useful lives and tested for impairment if events or changes in circumstances indicate that the asset may be impaired.  Indefinite-lived intangible assets are tested for impairment at least annually.

Amortization expense related to intangible assets was $387 million, $233 million and $76 million for 2012, 2011 and 2010, respectively.

As of December 31, 2012, amortization expense related to intangible assets is expected to be:

(Millions of dollars)
2013		2014		2015		2016		2017		Thereafter
$	380	$	375	$	371	$	365	$	359	$	2,166

B. Goodwill

As discussed in Note 23, we recorded goodwill of $625 million related to our May 2012 acquisition of Siwei. In November 2012, Caterpillar became aware of inventory accounting discrepancies at Siwei which led to an internal investigation. Caterpillar's investigation determined that Siwei had engaged in accounting misconduct prior to Caterpillar's acquisition of Siwei in mid-2012. The accounting misconduct included inappropriate accounting practices involving improper cost allocation that resulted in overstated profit and improper revenue recognition practices involving early and, at times unsupported, revenue recognition.

Because of the accounting misconduct identified in the fourth quarter of 2012, Siwei's goodwill was tested for impairment as of November 30, 2012. We determined the carrying value of Siwei, which is a separate reporting unit, exceeded its fair value at the measurement date, requiring step two in the impairment test process.  The fair value of the Siwei reporting unit was determined primarily using an income approach based on the present value of discounted cash flows. We assigned the fair value to the reporting unit's assets and liabilities and determined the implied fair value of goodwill was substantially below the carrying value of the reporting unit's goodwill.  Accordingly, we recognized a $580 million goodwill impairment charge, which resulted in goodwill of $45 million remaining for Siwei as of December 31, 2012. The goodwill impairment was a result of changes in the assumptions used to determine the fair value resulting from the accounting misconduct that occurred before the acquisition. There was no tax benefit associated with this impairment charge. The Siwei goodwill impairment charge is reported in the Resource Industries segment.

Additionally, during 2012, we recorded goodwill of $22 million related to the acquisition of Cat Tohoku and finalized the allocation of the Bucyrus and MWM purchase prices to identifiable assets and liabilities, adjusting goodwill from our December 31, 2011 preliminary allocation for Bucyrus and MWM by a reduction of $28 million and an increase of $9 million, respectively. See Note 23 for details on these acquisitions.

During 2011, we acquired net assets with related goodwill aggregating $5,026 million primarily due to purchases of Bucyrus ($4,616 million), Pyroban ($23 million) and MWM ($387 million).  See Note 23 for details on these acquisitions.

During 2010, we acquired net assets with related goodwill of $286 million as part of the purchase of EMD.  In 2010, we also acquired net assets with related goodwill as part of the purchases of FCM ($17 million), GE Transportation’s Inspection Products business ($15 million), JCS ($8 million) and other acquisitions ($8 million).  See Note 23 for details on these acquisitions.

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Goodwill of $181 million and $409 million was reclassified to held for sale and/or divested during 2012 and 2011, respectively, primarily related to the divestiture of portions of the Bucyrus distribution business, and is not included in the December 31, 2012 and 2011 respective balances in the table below. No goodwill was disposed of or held for sale in 2010. See Note 25 for additional information on divestitures and assets held for sale.

As discussed in Note 22 – Segment Information, during 2011, we revised our reportable segments in line with the changes to our organizational structure that were announced during 2010.  Our reporting units did not significantly change as a result of the changes to our reportable segments.

The changes in carrying amount of goodwill by reportable segment for the years ended December 31, 2012, 2011 and 2010 were as follows:

A-49

(Millions of dollars)	December 31, 2011			Acquisitions		Held for Sale and Business Divestitures 1			Impairment Loss			Other Adjustments 2			December 31, 2012
Construction Industries
Goodwill	$	378		$	22	$	—		$	—		$	(18	)	$	382
Resource Industries
Goodwill	4,121			597		(181		)	—			22			4,559
Impairments	(22		)	—		—			(580		)	—			(602		)
Net goodwill	4,099			597		(181		)	(580		)	22			3,957
Power Systems
Goodwill	2,486			9		—			—			(9		)	2,486
All Other 3
Goodwill	117			—		—			—			—			117
Consolidated total
Goodwill	7,102			628		(181		)	—			(5		)	7,544
Impairments	(22		)	—		—			(580		)	—			(602		)
Net goodwill	$	7,080		$	628	$	(181	)	$	(580	)	$	(5	)	$	6,942
	December 31, 2010			Acquisitions		Held for Sale and Business Divestitures 1			Impairment Loss			Other Adjustments 2			December 31, 2011
Construction Industries
Goodwill	$	357		$	—	$	—		$	—		$	21		$	378
Resource Industries
Goodwill	73			4,616		(397		)	—			(171		)	4,121
Impairments	(22		)	—		—			—			—			(22		)
Net goodwill	51			4,616		(397		)	—			(171		)	4,099
Power Systems
Goodwill	2,077			410		—			—			(1		)	2,486
All Other 3
Goodwill	129			—		(12		)	—			—			117
Consolidated total
Goodwill	2,636			5,026		(409		)	—			(151		)	7,102
Impairments	(22		)	—		—			—			—			(22		)
Net goodwill	$	2,614		$	5,026	$	(409	)	$	—		$	(151	)	$	7,080
	December 31, 2009			Acquisitions		Held for Sale and Business Divestitures 1			Impairment Loss			Other Adjustments 2			December 31, 2010
Construction Industries
Goodwill	$	342		$	5	$	—		$	—		$	10		$	357
Resource Industries
Goodwill	69			3		—			—			1			73
Impairments	(22		)	—		—			—			—			(22		)
Net goodwill	47			3		—			—			1			51
Power Systems
Goodwill	1,751			326		—			—			—			2,077
All Other 3
Goodwill	129			—		—			—			—			129
Consolidated total
Goodwill	2,291			334		—			—			11			2,636
Impairments	(22		)	—		—			—			—			(22		)
Net goodwill	$	2,269		$	334	$	—		$	—		$	11		$	2,614

¹  See Note 25 for additional information.

²  Other adjustments are comprised primarily of foreign currency translation.

³  Includes All Other operating segment (See Note 22).

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11. 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 investments are primarily included in Other assets in Statement 3.  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 3).  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.

	December 31, 2012							December 31, 2011							December 31, 2010
(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	$	10	$	—		$	10	$	10	$	—		$	10	$	12	$	—		$	12
Other U.S. and non-U.S. government bonds	144		2			146		90		2			92		76		1			77
Corporate bonds
Corporate bonds	626		38			664		542		30			572		481		30			511
Asset-backed securities	96		—			96		112		(1		)	111		136		—			136
Mortgage-backed debt securities
U.S. governmental agency	291		8			299		297		13			310		258		15			273
Residential	26		(1		)	25		33		(3		)	30		43		(3		)	40
Commercial	117		10			127		142		3			145		164		4			168
Equity securities
Large capitalization value	147		38			185		127		21			148		100		22			122
Smaller company growth	22		12			34		22		7			29		23		8			31
Total	$	1,479	$	107		$	1,586	$	1,375	$	72		$	1,447	$	1,293	$	77		$	1,370

During 2012, 2011 and 2010, charges for other-than-temporary declines in the market values of securities were $2 million, $5 million and $3 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.

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Investments in an unrealized loss position that are not other-than-temporarily impaired:
	December 31, 2012
	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
Corporate bonds
Asset-backed securities	$	—	$	—	$	20	$	3	$	20	$	3
Mortgage-backed debt securities
U.S. governmental agency	84		1		15		—		99		1
Residential	—		—		14		1		14		1
Equity securities
Large capitalization value	25		2		10		1		35		3
Total	$	109	$	3	$	59	$	5	$	168	$	8

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, 2011
	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
Corporate bonds
Corporate bonds	$	54	$	1	$	1	$	—	$	55	$	1
Asset-backed securities	1		—		20		5		21		5
Mortgage-backed debt securities
U.S. governmental agency	51		1		—		—		51		1
Residential	3		—		18		3		21		3
Commercial	15		—		8		1		23		1
Equity securities
Large capitalization value	36		5		6		1		42		6
Smaller company growth	4		1		—		—		4		1
Total	$	164	$	8	$	53	$	10	$	217	$	18

¹  Indicates length of time that individual securities have been in a continuous unrealized loss position.

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Investments in an unrealized loss position that are not other-than-temporarily impaired:
	December 31, 2010
	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
Corporate bonds
Asset-backed securities	$	19	$	—	$	19	$	4	$	38	$	4
Mortgage-backed debt securities
Residential	2		—		25		4		27		4
Commercial	3		—		14		1		17		1
Equity securities
Large capitalization value	14		1		12		2		26		3
Total	$	38	$	1	$	70	$	11	$	108	$	12

¹  Indicates length of time that individual securities have been in a continuous unrealized loss position.

Corporate Bonds.  The unrealized losses on our investments in asset-backed securities relate primarily to changes in interest rates and credit-related yield spreads since time of 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, 2012.

Mortgage-Backed Debt Securities.  The unrealized losses on our investments in mortgage-backed securities and mortgage-related asset-backed securities relate primarily to the continuation of elevated housing delinquencies and default rates, risk aversion and credit-related yield spreads 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, 2012.

Equity Securities.  Cat Insurance maintains a well-diversified equity portfolio consisting of two specific mandates:  large capitalization value stocks and smaller company growth stocks.  Overall U.S. equity valuations were marginally lower for the fourth quarter of 2012 as concerns over economic growth and the fiscal budget outweighed strong earnings and stimulus measures. We do not consider these investments to be other-than-temporarily impaired as of December 31, 2012.

The cost basis and fair value of the available-for-sale debt securities at December 31, 2012, 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.

	December 31, 2012
(Millions of dollars)	Cost Basis		Fair Value
Due in one year or less	$	161	$	162
Due after one year through five years	595		623
Due after five years through ten years	78		90
Due after ten years	42		41
U.S. governmental agency mortgage-backed securities	291		299
Residential mortgage-backed securities	26		25
Commercial mortgage-backed securities	117		127
Total debt securities – available-for-sale	$	1,310	$	1,367

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Sales of Securities:
	Years Ended December 31,
(Millions of dollars)	2012		2011		2010
Proceeds from the sale of available-for-sale securities	$	306	$	247	$	228
Gross gains from the sale of available-for-sale securities	$	6	$	4	$	10
Gross losses from the sale of available-for-sale securities	$	—	$	1	$	1

12. 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, located primarily in Europe, Japan and Brazil. 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 announced in August 2010, on January 1, 2011, our retirement benefits for U.S. support and management employees began transitioning from defined benefit pension plans to defined contribution plans.  The transition date was determined for each employee based upon age and years of service or proximity to retirement.  Pension benefit accruals were frozen for certain employees on December 31, 2010, and will freeze for remaining employees on December 31, 2019. On the respective transition dates employees move to a retirement benefit that provides a frozen pension benefit and a 401(k) plan that provides an annual employer contribution. The plan change required a re-measurement as of August 31, 2010, which resulted in an increase in our Liability for postemployment benefits of $1.32 billion and a decrease in Accumulated other comprehensive income (loss) of $831 million net of tax.  The increase in the liability was due to a decline in the discount rate and lower than expected asset returns at the re-measurement date.  Curtailment expense of $28 million was also recognized in 2010 as a result of the plan change.

In February 2012, we announced the closure of the Electro-Motive Diesel facility located in London, Ontario. As a result of the closure, we recognized a $37 million other postretirement benefits curtailment gain. This excludes a $21 million loss of a third-party receivable for other postretirement benefits that was eliminated due to the closure. In addition, a $10 million special termination benefit expense was recognized related to statutory pension benefits required to be paid to certain affected employees. As a result, a net gain of $6 million related to the facility closure was recognized in Other operating (income) expenses in Statement 1.

In August 2012, we announced changes to our U.S. hourly pension plan, which impacted certain hourly employees. For impacted employees, pension benefit accruals will freeze on January 1, 2013 or January 1, 2016, at which time employees will become eligible for various provisions of company sponsored 401(k) plans including a matching contribution and an annual employer contribution. The plan changes resulted in a curtailment and required a remeasurement as of August 31, 2012. The curtailment and the remeasurement resulted in a net increase in our Liability for postemployment benefits of $243 million and a net loss of $153 million, net of tax, recognized in Accumulated other comprehensive income (loss). The increase in the liability was primarily due to a decline in the discount rate. Also, the curtailment resulted in expense of $7 million which was recognized in Other operating (income) expenses in Statement 1.

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A. Benefit obligations

	U.S. Pension Benefits									Non-U.S. Pension Benefits									Other Postretirement  Benefits
(Millions of dollars)	2012			2011			2010			2012			2011			2010			2012			2011			2010
Change in benefit obligation:
Benefit obligation, beginning of year	$	14,782		$	13,024		$	12,064		$	4,299		$	3,867		$	3,542		$	5,381		$	5,184		$	4,537
Service cost	185			158			210			108			115			92			92			84			68
Interest cost	609			651			652			182			182			162			221			253			245
Plan amendments	—			1			4			12			(24		)	35			(38		)	(121		)	—
Actuarial losses (gains)	1,168			1,635			1,140			385			312			153			186			306			602
Foreign currency exchange rates	—			—			—			49			(32		)	34			(11		)	(19		)	14
Participant contributions	—			—			—			9			9			9			48			44			45
Benefits paid - gross	(831		)	(823		)	(820		)	(190		)	(187		)	(168		)	(394		)	(388		)	(379		)
Less: federal subsidy on benefits paid	—			—			—			—			—			—			16			14			15
Curtailments, settlements and special termination benefits	—			(3		)	(235		)	(67		)	(83		)	(52		)	(48		)	(6		)	—
Acquisitions, divestitures and other 1	—			139			9			(50		)	140			60			—			30			37
Benefit obligation, end of year	$	15,913		$	14,782		$	13,024		$	4,737		$	4,299		$	3,867		$	5,453		$	5,381		$	5,184
Accumulated benefit obligation, end of year	$	15,132		$	14,055		$	12,558		$	4,329		$	3,744		$	3,504
Weighted-average assumptions used todetermine benefit obligation:
Discount rate 2	3.7		%	4.3		%	5.1		%	3.7		%	4.3		%	4.6		%	3.7		%	4.3		%	5.0		%
Rate of compensation increase 2	4.5		%	4.5		%	4.5		%	3.9		%	3.9		%	4.2		%	4.4		%	4.4		%	4.4		%

¹  See Note 23 regarding the acquisitions of Electro-Motive Diesel in 2010 and Bucyrus International in 2011. See Note 25 regarding the divestiture of the third party logistics business in 2012.

²  End of year rates are used to determine net periodic cost for the subsequent year. See Note 12E.

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 2012 service and interest cost components of other postretirement benefit cost	$	27	$	(22	)
Effect on accumulated postretirement benefit obligation	$	343	$	(285	)

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B. Plan assets

	U.S. Pension Benefits									Non-U.S. Pension Benefits									Other Postretirement  Benefits
(Millions of dollars)	2012			2011			2010			2012			2011			2010			2012			2011			2010
Change in plan assets:
Fair value of plan assets, beginning of year	$	9,997		$	10,760		$	9,029		$	2,818		$	2,880		$	2,797		$	814		$	996		$	1,063
Actual return on plan assets	1,235			(270		)	1,628			368			(83		)	193			117			(45		)	129
Foreign currency exchange rates	—			—			—			47			(1		)	17			—			—			—
Company contributions	580			212			919			446			234			58			204			207			138
Participant contributions	—			—			—			9			9			9			48			44			45
Benefits paid	(831		)	(823		)	(820		)	(190		)	(187		)	(168		)	(394		)	(388		)	(379		)
Settlements and special termination benefits	—			—			—			(72		)	(41		)	(51		)	—			—			—
Acquisitions / other 1	—			118			4			—			7			25			—			—			—
Fair value of plan assets, end of year	$	10,981		$	9,997		$	10,760		$	3,426		$	2,818		$	2,880		$	789		$	814		$	996

¹  See Note 23 regarding the acquisitions of Electro-Motive Diesel in 2010 and Bucyrus International in 2011.

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. In August 2012, as part of our pension de-risking strategy, we revised our U.S. investment policy to better align assets with liabilities and reduce risk in our portfolio. Our current target allocations for the U.S. pension plans are 70 percent equities and 30 percent fixed income.  Within equity securities, approximately 65 percent includes investments in U.S. large cap, small cap and private 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. While target allocation percentages will vary over time, our current strategy is to gradually reduce our equity allocation. Target allocation policies will be revisited periodically to ensure they reflect the overall objectives of the fund.

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 58 percent equities, 31 percent fixed income, 7 percent real estate and 4 percent other.  The target allocations for each plan vary 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 percent equities and 20 percent fixed income.  Within equity securities, approximately two-thirds include investments in U.S. large cap 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 5 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 plans do not engage in derivative 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 17 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.

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• 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.

• 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 approximates 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:

	December 31, 2012
(Millions of dollars)	Level 1		Level 2		Level 3		Total Assets, at Fair Value
U.S. Pension
Equity securities:
U.S. equities	$	4,460	$	3	$	98	$	4,561
Non-U.S. equities	2,691		2		—		2,693
Fixed income securities:
U.S. corporate bonds	—		1,490		23		1,513
Non-U.S. corporate bonds	—		231		10		241
U.S. government bonds	—		694		8		702
U.S. governmental agency mortgage-backed securities	—		794		1		795
Non-U.S. government bonds	—		33		3		36
Real estate	—		—		8		8
Cash, short-term instruments and other	13		419		—		432
Total U.S. pension assets	$	7,164	$	3,666	$	151	$	10,981

	December 31, 2011
(Millions of dollars)	Level 1		Level 2		Level 3		Total Assets, at Fair Value
U.S. Pension
Equity securities:
U.S. equities	$	4,314	$	—	$	77	$	4,391
Non-U.S. equities	2,366		—		—		2,366
Fixed income securities:
U.S. corporate bonds	—		1,178		35		1,213
Non-U.S. corporate bonds	—		143		6		149
U.S. government bonds	—		462		7		469
U.S. governmental agency mortgage-backed securities	—		891		3		894
Non-U.S. government bonds	—		31		—		31
Real estate	—		—		8		8
Cash, short-term instruments and other	48		428		—		476
Total U.S. pension assets	$	6,728	$	3,133	$	136	$	9,997

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	December 31, 2010
(Millions of dollars)	Level 1		Level 2		Level 3		Total Assets,  at Fair Value
U.S. Pension
Equity securities:
U.S. equities	$	4,975	$	1	$	46	$	5,022
Non-U.S. equities	2,884		—		4		2,888
Fixed income securities:
U.S. corporate bonds	—		1,412		38		1,450
Non-U.S. corporate bonds	—		92		1		93
U.S. government bonds	—		299		5		304
U.S. governmental agency mortgage-backed securities	—		634		4		638
Non-U.S. government bonds	—		22		—		22
Real estate	—		—		10		10
Cash, short-term instruments and other	70		263		—		333
Total U.S. pension assets	$	7,929	$	2,723	$	108	$	10,760

	December 31, 2012
(Millions of dollars)	Level 1		Level 2		Level 3		Total Assets, at Fair Value
Non-U.S. Pension
Equity securities:
U.S. equities	$	436	$	2	$	—	$	438
Non-U.S. equities	1,038		118		—		1,156
Global equities 1	244		27		—		271
Fixed income securities:
U.S. corporate bonds	—		37		3		40
Non-U.S. corporate bonds	—		494		2		496
U.S. government bonds	—		3		—		3
Non-U.S. government bonds	—		169		—		169
Global fixed income 1	—		403		—		403
Real estate	—		114		104		218
Cash, short-term instruments and other 2	185		47		—		232
Total non-U.S. pension assets	$	1,903	$	1,414	$	109	$	3,426

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	December 31, 2011
(Millions of dollars)	Level 1		Level 2		Level 3		Total Assets, at Fair Value
Non-U.S. Pension
Equity securities:
U.S. equities	$	356	$	1	$	—	$	357
Non-U.S. equities	822		84		—		906
Global equities 1	198		40		—		238
Fixed income securities:
U.S. corporate bonds	—		16		4		20
Non-U.S. corporate bonds	—		395		5		400
U.S. government bonds	—		3		—		3
Non-U.S. government bonds	—		200		—		200
Global fixed income 1	—		363		—		363
Real estate	—		100		97		197
Cash, short-term instruments and other 2	109		25		—		134
Total non-U.S. pension assets	$	1,485	$	1,227	$	106	$	2,818

	December 31, 2010
(Millions of dollars)	Level 1		Level 2		Level 3		Total Assets,  at Fair Value
Non-U.S. Pension
Equity securities:
U.S. equities	$	359	$	—	$	—	$	359
Non-U.S. equities	916		90		1		1,007
Global equities 1	153		37		—		190
Fixed income securities:
U.S. corporate bonds	—		18		2		20
Non-U.S. corporate bonds	—		374		5		379
U.S. government bonds	—		5		—		5
Non-U.S. government bonds	—		163		1		164
Global fixed income 1	—		374		—		374
Real estate	—		89		90		179
Cash, short-term instruments and other 2	61		107		35		203
Total non-U.S. pension assets	$	1,489	$	1,257	$	134	$	2,880

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.

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	December 31, 2012
(Millions of dollars)	Level 1		Level 2		Level 3		Total Assets, at Fair Value
Other Postretirement Benefits
Equity securities:
U.S. equities	$	387	$	—	$	—	$	387
Non-U.S. equities	194		—		—		194
Fixed income securities:
U.S. corporate bonds	—		70		—		70
Non-U.S. corporate bonds	—		11		—		11
U.S. government bonds	—		27		—		27
U.S. governmental agency mortgage-backed securities	—		33		—		33
Non-U.S. government bonds	—		2		—		2
Cash, short-term instruments and other	18		47		—		65
Total other postretirement benefit assets	$	599	$	190	$	—	$	789

	December 31, 2011
(Millions of dollars)	Level 1		Level 2		Level 3		Total Assets,  at Fair Value
Other Postretirement Benefits
Equity securities:
U.S. equities	$	410	$	—	$	—	$	410
Non-U.S. equities	191		—		—		191
Fixed income securities:
U.S. corporate bonds	—		67		—		67
Non-U.S. corporate bonds	—		8		—		8
U.S. government bonds	—		21		—		21
U.S. governmental agency mortgage-backed securities	—		47		—		47
Non-U.S. government bonds	—		1		—		1
Cash, short-term instruments and other	4		65		—		69
Total other postretirement benefit assets	$	605	$	209	$	—	$	814

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	December 31, 2010
(Millions of dollars)	Level 1		Level 2		Level 3		Total Assets, at Fair Value
Other Postretirement Benefits
Equity securities:
U.S. equities	$	512	$	—	$	—	$	512
Non-U.S. equities	289		—		—		289
Fixed income securities:
U.S. corporate bonds	—		79		—		79
Non-U.S. corporate bonds	—		6		—		6
U.S. government bonds	—		14		—		14
U.S. governmental agency mortgage-backed securities	—		43		—		43
Non-U.S. government bonds	—		1		—		1
Cash, short-term instruments and other	19		33		—		52
Total other postretirement benefit assets	$	820	$	176	$	—	$	996

Below are roll-forwards of assets measured at fair value using Level 3 inputs for the years ended December 31, 2012, 2011 and 2010.  These instruments were valued using pricing models that, in management’s judgment, reflect the assumptions a marketplace participant would use.

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(Millions of dollars)	Equities			Fixed Income			Real Estate			Other
U.S. Pension
Balance at December 31, 2009	$	51		$	57		$	10		$	—
Unrealized gains (losses)	11			1			—			—
Realized gains (losses)	(1		)	3			—			—
Purchases, issuances and settlements, net	32			(9		)	—			—
Transfers in and/or out of Level 3	(43		)	(4		)	—			—
Balance at December 31, 2010	$	50		$	48		$	10		$	—
Unrealized gains (losses)	(4		)	(2		)	(2		)	—
Realized gains (losses)	1			—			—			—
Purchases, issuances and settlements, net	30			17			—			—
Transfers in and/or out of Level 3	—			(12		)	—			—
Balance at December 31, 2011	$	77		$	51		$	8		$	—
Unrealized gains (losses)	(4		)	—			—			(1		)
Realized gains (losses)	4			2			—			—
Purchases, issuances and settlements, net	21			(4		)	—			1
Transfers in and/or out of Level 3	—			(4		)	—			—
Balance at December 31, 2012	$	98		$	45		$	8		$	—
Non-U.S. Pension
Balance at December 31, 2009	$	5		$	14		$	71		$	51
Unrealized gains (losses)	(1		)	—			7			1
Realized gains (losses)	1			—			—			5
Purchases, issuances and settlements, net	(2		)	(3		)	12			(22		)
Transfers in and/or out of Level 3	(2		)	(3		)	—			—
Balance at December 31, 2010	$	1		$	8		$	90		$	35
Unrealized gains (losses)	—			1			7			—
Realized gains (losses)	—			—			—			3
Purchases, issuances and settlements, net	(1		)	—			—			(38		)
Transfers in and/or out of Level 3	—			—			—			—
Balance at December 31, 2011	$	—		$	9		$	97		$	—
Unrealized gains (losses)	—			—			8			—
Realized gains (losses)	—			—			—			—
Purchases, issuances and settlements, net	—			(1		)	(1		)	—
Transfers in and/or out of Level 3	—			(3		)	—			—
Balance at December 31, 2012	$	—		$	5		$	104		$	—

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)	2012		2011		2010		2012		2011		2010		2012		2011		2010
Caterpillar Inc. common stock	$	597	$	653	$	779	$	1	$	1	$	2	$	1	$	1	$	3

¹  Amounts represent 5 percent of total plan assets for 2012 and 7 percent of total plan assets for 2011 and 2010.

C. Funded status

The funded status of the plans, reconciled to the amount reported on Statement 3, is as follows:

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	U.S. Pension Benefits									Non-U.S. Pension Benefits									Other Postretirement Benefits
(Millions of dollars)	2012			2011			2010			2012			2011			2010			2012			2011			2010
End of Year
Fair value of plan assets	$	10,981		$	9,997		$	10,760		$	3,426		$	2,818		$	2,880		$	789		$	814		$	996
Benefit obligations	15,913			14,782			13,024			4,737			4,299			3,867			5,453			5,381			5,184
Over (under) funded status recognized in financial position	$	(4,932	)	$	(4,785	)	$	(2,264	)	$	(1,311	)	$	(1,481	)	$	(987	)	$	(4,664	)	$	(4,567	)	$	(4,188	)
Components of net amount recognized in financial position:
Other assets (non-current asset)	$	—		$	—		$	—		$	30		$	3		$	4		$	—		$	—		$	—
Accrued wages, salaries and employee benefits (current liability)	(23		)	(21		)	(18		)	(27		)	(26		)	(18		)	(169		)	(171		)	(171		)
Liability for postemployment benefits (non-current liability)	(4,909		)	(4,764		)	(2,246		)	(1,314		)	(1,458		)	(973		)	(4,495		)	(4,396		)	(4,017		)
Net liability recognized	$	(4,932	)	$	(4,785	)	$	(2,264	)	$	(1,311	)	$	(1,481	)	$	(987	)	$	(4,664	)	$	(4,567	)	$	(4,188	)
Amounts recognized in Accumulated other comprehensive income (pre-tax) consist of:
Net actuarial loss (gain)	$	7,286		$	7,044		$	4,795		$	1,907		$	1,712		$	1,273		$	1,528		$	1,495		$	1,195
Prior service cost (credit)	36			63			83			22			15			43			(159		)	(188		)	(122		)
Transition obligation (asset)	—			—			—			—			—			—			3			5			7
Total	$	7,322		$	7,107		$	4,878		$	1,929		$	1,727		$	1,316		$	1,372		$	1,312		$	1,080

The estimated amounts that will be amortized from Accumulated other comprehensive income (loss) at December 31, 2012 into net periodic benefit cost (pre-tax) in 2013 are as follows:

(Millions of dollars)	U.S. Pension Benefits		Non-U.S. Pension Benefits		Other Postretirement Benefits
Net actuarial loss (gain)	$	546	$	133	$	108
Prior service cost (credit)	18		1		(73		)
Transition obligation (asset)	—		—		2
Total	$	564	$	134	$	37

The following amounts relate to our pension plans with projected benefit obligations in excess of plan assets:

	U.S. Pension Benefits at Year-end						Non-U.S. Pension Benefits at Year-end
(Millions of dollars)	2012		2011		2010		2012		2011		2010
Projected benefit obligation	$	15,913	$	14,782	$	13,024	$	4,310	$	4,293	$	3,846
Accumulated benefit obligation	$	15,132	$	14,055	$	12,558	$	3,903	$	3,738	$	3,485
Fair value of plan assets	$	10,981	$	9,997	$	10,760	$	2,969	$	2,809	$	2,855

The following amounts relate to our pension plans with accumulated benefit obligations in excess of plan assets:

	U.S. Pension Benefits at Year-end						Non-U.S. Pension Benefits at Year-end
(Millions of dollars)	2012		2011		2010		2012		2011		2010
Projected benefit obligation	$	15,913	$	14,782	$	13,024	$	4,107	$	4,112	$	3,452
Accumulated benefit obligation	$	15,132	$	14,055	$	12,558	$	3,752	$	3,600	$	3,179
Fair value of plan assets	$	10,981	$	9,997	$	10,760	$	2,806	$	2,661	$	2,514

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The accumulated postretirement benefit obligation exceeds plan assets for all of our other postretirement benefit plans for all years presented.

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:
2013 (expected)	$	160	$	320	$	200
Expected benefit payments:
2013	$	850	$	220	$	350
2014	870		210		350
2015	880		220		360
2016	900		230		370
2017	910		220		370
2018-2022	4,680		1,120		1,890
Total	$	9,090	$	2,220	$	3,690

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)	2013		2014		2015		2016		2017		2018-2022		Total
Other postretirement benefits	$	15	$	20	$	20	$	20	$	20	$	110	$	205

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E. Net periodic cost

	U.S. Pension Benefits									Non-U.S. Pension Benefits									Other Postretirement Benefits
(Millions of dollars)	2012			2011			2010			2012			2011			2010			2012			2011			2010
Components of net periodic benefit cost:
Service cost	$	185		$	158		$	210		$	108		$	115		$	92		$	92		$	84		$	68
Interest cost	609			651			652			182			182			162			221			253			245
Expected return on plan assets	(812		)	(798		)	(773		)	(215		)	(210		)	(192		)	(63		)	(70		)	(93		)
Curtailments, settlements and special termination benefits 1	7			—			28			38			19			22			(40		)	—			—
Amortization of:
Transition obligation (asset)	—			—			—			—			—			—			2			2			2
Prior service cost (credit) 2	19			20			25			1			3			1			(68		)	(55		)	(55		)
Net actuarial loss (gain)	504			451			385			97			74			65			100			108			33
Total cost included in operating profit	$	512		$	482		$	527		$	211		$	183		$	150		$	244		$	322		$	200
Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax):
Current year actuarial loss (gain)	$	745		$	2,700		$	47		$	225		$	526		$	136		$	133		$	408		$	570
Amortization of actuarial (loss) gain	(504		)	(451		)	(385		)	(97		)	(72		)	(62		)	(100		)	(108		)	(33		)
Current year prior service cost (credit)	(7		)	—			(24		)	10			(25		)	35			(38		)	(121		)	—
Amortization of prior service (cost) credit	(19		)	(20		)	(25		)	(1		)	(3		)	(1		)	68			55			55
Amortization of transition (obligation) asset	—			—			—			—			—			—			(2		)	(2		)	(2		)
Total recognized in other comprehensive income	215			2,229			(387		)	137			426			108			61			232			590
Total recognized in net periodic cost and other comprehensive income	$	727		$	2,711		$	140		$	348		$	609		$	258		$	305		$	554		$	790
Weighted-average assumptions used to determine net cost:
Discount rate	4.3		%	5.1		%	5.4		%	4.3		%	4.6		%	4.8		%	4.3		%	5.0		%	5.6		%
Expected return on plan assets 3	8.0		%	8.5		%	8.5		%	7.1		%	7.1		%	7.0		%	8.0		%	8.5		%	8.5		%
Rate of compensation increase	4.5		%	4.5		%	4.5		%	3.9		%	4.1		%	4.2		%	4.4		%	4.4		%	4.4		%

¹  Curtailments, settlements and special termination benefits were recognized in Other operating (income) expenses in Statement 1.

²  Prior service cost (credit) and net actuarial loss (gain) 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. 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 cost (credit) and net actuarial loss (gain) are amortized using the straight-line method over the remaining life expectancy of those participants.

³  The weighted-average rates for 2013 are 7.8 percent and 6.7 percent for U.S. and non-U.S. pension plans, respectively.

The assumed discount rate is used to discount future benefit obligations back to today’s dollars.  The U.S. discount rate is 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 percent) are excluded from the analysis.  A similar process is used to determine 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.

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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 percent for 2012, 2011 and 2010.  A similar process is used to determine this rate for our non-U.S. plans.

The assumed health care trend rate represents the rate at which health care costs are assumed to increase. We assumed a weighted-average increase of 7.4 percent in our calculation of 2012 benefit expense.  We expect a weighted-average increase of 7.1 percent during 2013.  The 2012 and 2013 rates are assumed to decrease gradually to the ultimate health care trend rate of 5 percent in 2019. This rate represents 3 percent general inflation plus 2 percent additional health care inflation.

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 percent of employee contributions to the plan up to 6 percent of 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.

On January 1, 2011, matching contributions to our U.S. 401(k) plan changed for certain employees that are still accruing benefits under a defined benefit pension plan.  Matching contributions changed from 100 percent of employee contributions to the plan up to 6 percent of compensation to 50 percent of employee contributions up to 6 percent of compensation.  For employees whose defined benefit pension accruals were frozen as of December 31, 2010, we began providing a new annual employer contribution in 2011, which ranges from 3 to 5 percent of compensation, depending on years of service and age.

From June 2009 to October 2010, we funded our employer matching contribution for certain U.S. defined contribution plans in Caterpillar stock, held as treasury stock.  In 2010, we made $94 million (1.5 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)	2012		2011		2010
U.S. plans	$	260	$	219	$	231
Non-U.S. plans	60		54		39
	$	320	$	273	$	270

H. Summary of long-term liability:

	December 31,
(Millions of dollars)	2012		2011		2010
Pensions:
U.S. pensions	$	4,909	$	4,764	$	2,246
Non-U.S. pensions	1,314		1,458		973
Total pensions	6,223		6,222		3,219
Postretirement benefits other than pensions	4,495		4,396		4,017
Other postemployment benefits	81		73		69
Defined contribution	286		265		279
	$	11,085	$	10,956	$	7,584

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13. Short-term borrowings

	December 31,
(Millions of dollars)	2012		2011		2010
Machinery and Power Systems:
Notes payable to banks	$	484	$	93	$	204
Notes payable to certain former shareholders of Siwei	152		—		—
Commercial paper	—		—		—
	636		93		204
Financial Products:
Notes payable to banks	418		527		479
Commercial paper	3,654		2,818		2,710
Demand notes	579		550		663
	4,651		3,895		3,852
Total short-term borrowings	$	5,287	$	3,988	$	4,056

The weighted-average interest rates on short-term borrowings outstanding were:

	December 31,
	2012		2011		2010
Notes payable to banks	5.8	%	7.2	%	4.1	%
Commercial paper	0.6	%	1.0	%	1.5	%
Demand notes	0.8	%	0.9	%	1.1	%

The notes payable to certain former shareholders of Siwei do not bear interest. Please refer to Note 23 for more information. Please refer to Note 17 and Table III for fair value information on short-term borrowings.

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14. Long-term debt

	December 31,
(Millions of dollars)	2012		2011		2010
Machinery and Power Systems:
Notes—Floating Rate (Three-month USD LIBOR plus 0.17%) due 2013	$	—	$	750	$	—
Notes—1.375% due 2014	750		750		—
Notes—5.700% due 2016	508		510		512
Notes—3.900% due 2021	1,245		1,245		—
Notes—5.200% due 2041	757		1,247		—
Debentures—7.000% due 2013	—		350		350
Debentures—0.950% due 2015	500		—		—
Debentures—1.500% due 2017	499		—		—
Debentures—7.900% due 2018	899		899		899
Debentures—9.375% due 2021	120		120		120
Debentures—2.600% due 2022	498		—		—
Debentures—8.000% due 2023	82		82		82
Debentures—6.625% due 2028	193		299		299
Debentures—7.300% due 2031	241		349		349
Debentures—5.300% due 2035 1	208		206		205
Debentures—6.050% due 2036	459		748		748
Debentures—8.250% due 2038	65		248		248
Debentures—6.950% due 2042	160		250		249
Debentures—3.803% due 2042 2	1,149		—		—
Debentures—7.375% due 2097	244		297		297
Capital lease obligations	73		46		81
Other	16		19		66
Total Machinery and Power Systems	8,666		8,415		4,505
Financial Products:
Medium-term notes	18,036		15,701		14,993
Other	1,050		828		939
Total Financial Products	19,086		16,529		15,932
Total long-term debt due after one year	$	27,752	$	24,944	$	20,437

¹ Debentures due in 2035 have a face value of $307 million and an effective yield to maturity of 8.55%.

² Debentures due in 2042 have a face value of $1,722 million and an effective yield to maturity of 6.29%.

All outstanding notes and debentures are unsecured and rank equally with one another.

On June 26, 2012 we issued $500 million of 0.950% Senior Notes due 2015, $500 million of 1.500% Senior Notes due 2017, and $500 million of 2.600% Senior Notes due 2022.

On August 15, 2012 and August 27, 2012, we exchanged $1.72 billion of newly issued 3.803% Debentures due 2042 and $179 million of cash for $1.33 billion of several series of our outstanding debentures of varying interest rates and maturity dates. This exchange met the requirements to be accounted for as a debt modification.

On May 24, 2011, we issued $500 million of Floating Rate Senior Notes (Three-month USD LIBOR plus 0.10%) due in 2012 and $750 million of Floating Rate Senior Notes (Three-month USD LIBOR plus 0.17%) due in 2013. The interest rates for the Floating Rate Senior Notes will be reset quarterly. We also issued $750 million of 1.375% Senior Notes due in 2014, $1.25 billion of 3.900% Senior Notes due in 2021, and $1.25 billion of 5.200% Senior Notes due in 2041.

We may redeem the 1.375%, 5.700%, 3.900% and 5.200% notes and the 6.625%, 7.300%, 5.300%, 6.050%, 6.950% and

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7.375% debentures in whole or in part at our option at any time at a redemption price equal to the greater of 100% of the principal amount or the sum of the present value of the remaining scheduled payments of principal and interest of the notes or debentures to be redeemed. We may redeem some or all of the 0.950% debentures and the 1.500% debentures at our option at any time, and some or all of the 2.600% debentures at any time prior to March 26, 2022 (three months prior to the maturity date of the 2022 debentures), in each case at a redemption price equal to the greater of 100% of the principal amount of the notes being redeemed or at the discounted present value of the notes, calculated in accordance with the terms of the relevant notes. We may redeem some or all of the 3.803% debentures at any time at a redemption price equal to the greater of 100% of the principal amount of the debentures being redeemed or at a make-whole price calculated in accordance with the terms of the debentures. The terms of other notes and debentures do not specify a redemption option prior to maturity.

Cat Financial's medium term notes are offered by prospectus and are issued through agents at fixed and floating rates. These notes have a weighted average interest rate of 3.2% with remaining maturities up to 10 years at December 31, 2012.

The aggregate amounts of maturities of long-term debt during each of the years 2013 through 2017, including amounts due within one year and classified as current, are:

	December 31,
(Millions of dollars)	2013		2014		2015		2016		2017
Machinery and Power Systems	$	1,113	$	762	$	507	$	533	$	505
Financial Products	5,991		6,559		4,648		2,027		2,693
	$	7,104	$	7,321	$	5,155	$	2,560	$	3,198

Interest paid on short-term and long-term borrowings for 2012, 2011 and 2010 was $1,404 million, $1,208 million and $1,247 million, respectively.

Please refer to Note 17 and Table III for fair value information on long-term debt.

15. Credit commitments

	December 31, 2012
(Millions of dollars)	Consolidated			Machinery and Power Systems			Financial Products
Credit lines available:
Global credit facilities	$	10,000		$	2,750		$	7,250
Other external	5,125			728			4,397
Total credit lines available	15,125			3,478			11,647
Less: Commercial paper outstanding	(3,654		)	—			(3,654		)
Less: Utilized credit	(2,501		)	(481		)	(2,020		)
Available credit	$	8,970		$	2,997		$	5,973

We have three global credit facilities with a syndicate of banks totaling $10.00 billion (Credit Facility) available in the aggregate to both Caterpillar and Cat Financial for general liquidity purposes.  Based on management's allocation decision, which can be revised from time to time, the portion of the Credit Facility available to Machinery and Power Systems as of December 31, 2012 was $2.75 billion.

• The 364-day facility of $3.00 billion (of which $0.82 billion is available to Machinery and Power Systems) expires in September 2013.

• The 2010 four-year facility of $2.60 billion (of which $0.72 billion is available to Machinery and Power Systems) expires in September 2015.

• The 2011 five-year facility of $4.40 billion (of which $1.21 billion is available to Machinery and Power Systems) expires in September 2017.

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Other consolidated credit lines with banks as of December 31, 2012 totaled $5.13 billion. These committed and uncommitted credit lines, which may be eligible for renewal at various future dates or have no specified expiration date, are used primarily by our subsidiaries for local funding requirements.  Caterpillar or Cat Financial may guarantee subsidiary borrowings under these lines.

At December 31, 2012, Caterpillar's consolidated net worth was $24.50 billion, which was above the $9.00 billion required under the Credit Facility.  The consolidated net worth is defined as the consolidated stockholder's equity including preferred stock but excluding the pension and other postretirement benefits balance within Accumulated other comprehensive income (loss).

At December 31, 2012, Cat Financial's covenant interest coverage ratio was 1.70 to 1.  This is above the 1.15 to 1 minimum ratio calculated as (1) profit excluding income taxes, interest expense and net gain/(loss) from interest rate derivatives to (2) interest expense calculated at the end of each calendar quarter for the rolling four quarter period then most recently ended, required by the Credit Facility.

In addition, at December 31, 2012, Cat Financial's six-month covenant leverage ratio was 8.70 to 1 and year-end covenant leverage ratio was 8.74 to 1.  This is below the maximum ratio of debt to net worth of 10 to 1, calculated (1) on a monthly basis as the average of the leverage ratios determined on the last day of each of the six preceding calendar months and (2) at each December 31 required by the Credit Facility.

In the event Caterpillar or Cat Financial does not meet one or more of their respective financial covenants under the Credit Facility in the future (and are unable to obtain a consent or waiver), the bank group may terminate the commitments allocated to the party that does not meet its covenants.  Additionally, in such event, certain of Cat Financial's other lenders under other loan agreements where similar financial covenants or cross default provisions are applicable, may, at their election, choose to pursue remedies under those loan agreements, including accelerating the repayment of outstanding borrowings.  At December 31, 2012, there were no borrowings under the Credit Facility.

In 2010, we entered into a bridge facility commitment letter related to the planned acquisition of Bucyrus. The commitment letter provided for an aggregate principal amount of $8.6 billion under a one-year unsecured term loan credit facility (Bridge Facility). Also in 2010, we entered into a Bridge Loan Agreement that contains the negotiated terms and conditions originally contemplated in the commitment letter. The Bridge Loan Agreement was terminated on July 8, 2011, to coincide with the closing date of the Bucyrus acquisition. During 2011 we paid $18 million in customary fees and expenses, compared with total payments of $46 million in 2010.

16. Profit per share

Computations of profit per share:
(Dollars in millions except per share data)	2012		2011		2010
Profit for the period (A) 1	$	5,681	$	4,928	$	2,700
Determination of shares (in millions):
Weighted average number of common shares outstanding (B)	652.6		645.0		631.5
Shares issuable on exercise of stock awards, net of shares assumed to be purchased out of proceeds at average market price	17.0		21.1		18.9
Average common shares outstanding for fully diluted computation (C)	669.6		666.1		650.4
Profit per share of common stock:
Assuming no dilution (A/B)	$	8.71	$	7.64	$	4.28
Assuming full dilution (A/C)	$	8.48	$	7.40	$	4.15
Shares outstanding as of December 31 (in millions)	655.0		647.5		638.8

¹  Profit attributable to common stockholders.

SARs and stock options to purchase 6,066,777, 2,902,533 and 5,228,763 common shares were outstanding in 2012, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share because the effect would have been antidilutive.

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17. Fair value disclosures

A. Fair value measurements

The guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques.  Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.  In accordance with this guidance, fair value measurements are classified under the following hierarchy:

• Level 1 –Quoted prices for identical instruments in active markets.

• Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.

• Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

When available, we use quoted market prices to determine fair value, and we classify such measurements within Level 1.  In some cases where market prices are not available, we make use of observable market based inputs to calculate fair value, in which case the measurements are classified within Level 2.  If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates.  These measurements are classified within Level 3.

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation.  A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

Fair value measurement includes the consideration of nonperformance risk.  Nonperformance risk refers to the risk that an obligation (either by a counterparty or Caterpillar) will not be fulfilled.  For financial assets traded in an active market (Level 1 and certain Level 2), the nonperformance risk is included in the market price.  For certain other financial assets and liabilities (certain Level 2 and Level 3), our fair value calculations have been adjusted accordingly.

Available-for-sale securities

Our available-for-sale securities, primarily at Cat Insurance, include a mix of equity and debt instruments (see Note 11 for additional information).  Fair values for our U.S. treasury bonds and equity securities are based upon valuations for identical instruments in active markets.  Fair values for other government bonds, corporate bonds and mortgage-backed debt securities are based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.

Derivative financial instruments

The fair value of interest rate swap derivatives is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine discounted cash flows.  The fair value of foreign currency and commodity forward, option and cross currency contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.

Guarantees

The fair value of guarantees is based on our estimate of the premium a market participant would require to issue the same guarantee in a stand-alone arms-length transaction with an unrelated party. If quoted or observable market prices are not available, fair value is based upon internally developed models that utilize current market-based assumptions.

Assets and liabilities measured on a recurring basis at fair value, primarily related to Financial Products, included in Statement 3 as of December 31, 2012, 2011 and 2010 are summarized below:

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	December 31, 2012
(Millions of dollars)	Level 1		Level 2		Level 3		Total Assets / Liabilities, at Fair Value
Assets
Available-for-sale securities
Government debt
U.S. treasury bonds	$	10	$	—	$	—	$	10
Other U.S. and non-U.S. government bonds	—		146		—		146
Corporate bonds
Corporate bonds	—		664		—		664
Asset-backed securities	—		96		—		96
Mortgage-backed debt securities
U.S. governmental agency	—		299		—		299
Residential	—		25		—		25
Commercial	—		127		—		127
Equity securities
Large capitalization value	185		—		—		185
Smaller company growth	34		—		—		34
Total available-for-sale securities	229		1,357		—		1,586
Derivative financial instruments, net	—		154		—		154
Total Assets	$	229	$	1,511	$	—	$	1,740
Liabilities
Guarantees	$	—	$	—	$	14	$	14
Total Liabilities	$	—	$	—	$	14	$	14

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	December 31, 2011
(Millions of dollars)	Level 1		Level 2		Level 3		Total  Assets / Liabilities,  at Fair Value
Assets
Available-for-sale securities
Government debt
U.S. treasury bonds	$	10	$	—	$	—	$	10
Other U.S. and non-U.S. government bonds	—		92		—		92
Corporate bonds
Corporate bonds	—		572		—		572
Asset-backed securities	—		111		—		111
Mortgage-backed debt securities
U.S. governmental agency	—		310		—		310
Residential	—		30		—		30
Commercial	—		145		—		145
Equity securities
Large capitalization value	148		—		—		148
Smaller company growth	29		—		—		29
Total available-for-sale securities	187		1,260		—		1,447
Derivative financial instruments, net	—		145		—		145
Total Assets	$	187	$	1,405	$	—	$	1,592
Liabilities
Guarantees	$	—	$	—	$	7	$	7
Total Liabilities	$	—	$	—	$	7	$	7

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	December 31, 2010
(Millions of dollars)	Level 1		Level 2		Level 3		Total  Assets / Liabilities,  at Fair Value
Assets
Available-for-sale securities
Government debt
U.S. treasury bonds	$	12	$	—	$	—	$	12
Other U.S. and non-U.S. government bonds	—		77		—		77
Corporate bonds
Corporate bonds	—		511		—		511
Asset-backed securities	—		136		—		136
Mortgage-backed debt securities
U.S. governmental agency	—		273		—		273
Residential	—		40		—		40
Commercial	—		168		—		168
Equity securities
Large capitalization value	122		—		—		122
Smaller company growth	31		—		—		31
Total available-for-sale securities	165		1,205		—		1,370
Derivative financial instruments, net	—		267		—		267
Total Assets	$	165	$	1,472	$	—	$	1,637
Liabilities
Guarantees	$	—	$	—	$	10	$	10
Total Liabilities	$	—	$	—	$	10	$	10

Below are roll-forwards of liabilities measured at fair value using Level 3 inputs for the years ended December 31, 2012, 2011 and 2010.  These instruments were valued using pricing models that, in management’s judgment, reflect the assumptions of a marketplace participant.

(Millions of dollars)	Guarantees
Balance at December 31, 2009	$	17
Valuation adjustment	(6		)
Issuance of guarantees	7
Expiration of guarantees	(8		)
Balance at December 31, 2010	$	10
Issuance of guarantees	4
Expiration of guarantees	(7		)
Balance at December 31, 2011	$	7
Acquisitions	6
Issuance of guarantees	7
Expiration of guarantees	(6		)
Balance at December 31, 2012	$	14

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There were no unrealized losses on guarantees recognized in earnings for the years ended December 31, 2012, 2011 or 2010 related to liabilities still held at December 31, 2012, 2011 or 2010, respectively.

In addition to the amounts above, Cat Financial impaired loans are subject to measurement at fair value on a nonrecurring basis. A loan is considered impaired when management determines that collection of contractual amounts due is not probable.  In these cases, an allowance for credit losses may be established based primarily on the fair value of associated collateral.  As the collateral’s fair value is based on observable market prices and/or current appraised values, the impaired loans are classified as Level 2 measurements. Cat Financial had impaired loans with a fair value of $161 million, $141 million and $171 million for the years ended December 31, 2012, 2011 and 2010, respectively.  

B. Fair values of financial instruments

In addition to the methods and assumptions we use to record the fair value of financial instruments as discussed in the Fair value measurements section above, we used the following methods and assumptions to estimate the fair value of our financial instruments:

Cash and short-term investments

Carrying amount approximated fair value.

Restricted cash and short-term investments

Carrying amount approximated fair value.  Restricted cash and short-term investments are included in Prepaid expenses and other current assets in Statement 3.

Finance receivables

Fair value was estimated by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.

Wholesale inventory receivables

Fair value was estimated by discounting the future cash flows using current rates, representative of receivables with similar remaining maturities.

Short-term borrowings

Carrying amount approximated fair value.

Long-term debt

Fair value for fixed and floating rate debt was estimated based on quoted market prices.

Please refer to the table below for the fair values of our financial instruments.

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TABLE III—Fair Values of Financial Instruments
	2012				2011				2010
(Millions of dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value		Fair Value Levels	Reference
Assets at December 31,
Cash and short-term investments	$	5,490	$	5,490	$	3,057	$	3,057	$	3,592	$	3,592	1	Statement 3
Restricted cash and short-term investments	53		53		87		87		91		91		1	Statement 3
Available-for-sale securities	1,586		1,586		1,447		1,447		1,370		1,370		1 & 2	Notes 11 & 18
Finance receivables–net (excluding finance leases 1)	15,404		15,359		12,689		12,516		12,568		12,480		2	Note 6
Wholesale inventory receivables–net (excluding finance leases 1)	1,674		1,609		1,591		1,505		1,062		1,017		2	Note 6
Foreign currency contracts–net	—		—		—		—		63		63		2	Notes 3 & 18
Interest rate swaps–net	219		219		241		241		187		187		2	Notes 3 & 18
Commodity contracts–net	1		1		—		—		17		17		2	Notes 3 & 18
Liabilities at December 31,
Short-term borrowings	5,287		5,287		3,988		3,988		4,056		4,056		1	Note 13
Long-term debt (including amounts due within one year):
Machinery and Power Systems	9,779		11,969		8,973		10,737		5,000		5,968		2	Note 14
Financial Products	25,077		26,063		21,631		22,674		19,362		20,364		2	Note 14
Foreign currency contracts–net	66		66		89		89		—		—		2	Notes 3 & 18
Commodity contracts–net	—		—		7		7		—		—		2	Notes 3 & 18
Guarantees	14		14		7		7		10		10		3	Note 20

¹  Total excluded items have a net carrying value at December 31, 2012, 2011 and 2010 of $7,959 million, $7,324 million and $7,292 million, respectively.

18. Concentration of credit risk

Financial instruments with potential credit risk consist primarily of trade and finance receivables and short-term and long-term investments. Additionally, to a lesser extent, we have a potential credit risk associated with counterparties to derivative contracts.

Trade receivables are primarily short-term receivables from independently owned and operated dealers and customers which arise in the normal course of business. We perform regular credit evaluations of our dealers and customers. Collateral generally is not required, and the majority of our trade receivables are unsecured. We do, however, when deemed necessary, make use of various devices such as security agreements and letters of credit to protect our interests. No single dealer or customer represents a significant concentration of credit risk.

Finance receivables and wholesale inventory receivables primarily represent receivables under installment sales contracts, receivables arising from leasing transactions and notes receivable. We generally maintain a secured interest in the equipment financed. No single customer or dealer represents a significant concentration of credit risk.

Short-term and long-term investments are held with high quality institutions and, by policy, the amount of credit exposure to any one institution is limited. Long-term investments, primarily included in Other assets in Statement 3, are comprised primarily of available-for-sale securities at Cat Insurance.

For derivative contracts, collateral is generally not required of the counterparties or of our company.  The company generally enters into International Swaps and Derivatives Association (ISDA) master netting agreements which permit the net settlement of amounts owed.  Our exposure to credit loss in the event of nonperformance by the counterparties is limited to only those gains that we have recorded, but for which we have not yet received cash payment. The master netting agreements reduce the amount of loss the company would incur should the counterparties fail to meet their obligations.  At December 31, 2012, 2011 and 2010, the maximum exposure to credit loss was $366 million, $443 million and $576 million, respectively, before the application of any master netting agreements.  Please refer to Note 17 and Table III above for fair value information.

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19. Operating leases

We lease certain computer and communications equipment, transportation equipment and other property through operating leases. Total rental expense for operating leases was $474 million, $429 million, and $359 million for 2012, 2011 and 2010, respectively.

Minimum payments for operating leases having initial or remaining non-cancelable terms in excess of one year are:

Years ended December 31,
(Millions of dollars)
2013		2014		2015		2016		2017		Thereafter		Total
$	254	$	193	$	139	$	104	$	74	$	239	$	1,003

20. Guarantees and product warranty

We have provided an indemnity to a third-party insurance company for potential losses related to performance bonds issued on behalf of Caterpillar dealers.  The bonds are issued to insure governmental agencies against nonperformance by certain dealers.  We also provided guarantees to a third-party related to the performance of contractual obligations by certain Caterpillar dealers. The guarantees cover potential financial losses incurred by the third-party resulting from the dealers’ nonperformance.

We provide loan guarantees to third-party lenders for financing associated with machinery purchased by customers. These guarantees have varying terms and are secured by the machinery. In addition, Cat Financial participates in standby letters of credit issued to third parties on behalf of their customers. These standby letters of credit have varying terms and beneficiaries and are secured by customer assets.

Cat Financial provided a limited indemnity to a third-party bank resulting from the assignment of certain leases to that bank.  The indemnity was for the possibility that the insurers of these leases would become insolvent.  The indemnity expired December 15, 2012.

We have provided guarantees to third-party lessors for certain properties leased by Cat Logistics Services, LLC, in which we sold a 65 percent equity interest in the third quarter of 2012. See Note 25 for further discussion on this divestiture. The guarantees are for the possibility that the third party logistics business would default on real estate lease payments. The guarantees were granted at lease inception, which was prior to the divestiture, and generally will expire at the end of the lease terms.

No loss has been experienced or is anticipated under any of these guarantees. At December 31, 2012, 2011 and 2010, the related liability was $14 million, $7 million and $10 million, respectively. The maximum potential amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) we could be required to make under the guarantees at December 31 are as follows:

(Millions of dollars)	2012		2011		2010
Caterpillar dealer guarantees	$	180	$	140	$	185
Customer guarantees	167		186		170
Limited indemnity	—		11		17
Third party logistics business guarantees	176		—		—
Other guarantees	53		28		48
Total guarantees	$	576	$	365	$	420

Cat Financial provides guarantees to repurchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a variable interest entity.  The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers.  This SPC issues commercial paper and uses the proceeds to fund its loan program.  Cat Financial has a loan purchase agreement with the SPC that obligates Cat Financial to purchase certain loans that are not paid at maturity.  Cat Financial

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receives a fee for providing this guarantee, which provides a source of liquidity for the SPC.  Cat Financial is the primary beneficiary of the SPC as their guarantees result in Cat Financial having both the power to direct the activities that most significantly impact the SPC’s economic performance and the obligation to absorb losses, and therefore Cat Financial has consolidated the financial statements of the SPC.  As of December 31, 2012, 2011 and 2010, the SPC’s assets of $927 million, $586 million and $365 million, respectively, are primarily comprised of loans to dealers, and the SPC’s liabilities of $927 million, $586 million and $365 million, respectively, are primarily comprised of commercial paper.  The assets of the SPC are not available to pay Cat Financial's creditors. Cat Financial may be obligated to perform under the guarantee if the SPC experiences losses. No loss has been experienced or is anticipated under this loan purchase agreement.

Cat Financial is party to agreements in the normal course of business with selected customers and Caterpillar dealers in which we commit to provide a set dollar amount of financing on a pre-approved basis.  We also provide lines of credit to selected customers and Caterpillar dealers, of which a portion remains unused as of the end of the period.  Commitments and lines of credit generally have fixed expiration dates or other termination clauses. It has been our experience that not all commitments and lines of credit will be used. Management applies the same credit policies when making commitments and granting lines of credit as it does for any other financing.

Cat Financial does not require collateral for these commitments/lines, but if credit is extended, collateral may be required upon funding.  The amount of the unused commitments and lines of credit for dealers as of December 31, 2012, 2011 and 2010 was $10,863 million, $6,469 million and $6,408 million, respectively.  The amount of the unused commitments and lines of credit for customers as of December 31, 2012, 2011 and 2010 was $4,690 million, $2,785 million and $2,613 million, respectively.

Our product warranty liability is determined by applying historical claim rate experience to the current field population and dealer inventory.  Generally, historical claim rates are based on actual warranty experience for each product by machine model/engine size.  Specific rates are developed for each product build month and are updated monthly based on actual warranty claim experience.

(Millions of dollars)	2012			2011			2010
Warranty liability, January 1	$	1,308		$	1,035		$	1,049
Reduction in liability (payments)	(920		)	(926		)	(855		)
Increase in liability (new warranties)	1,089			1,199			841
Warranty liability, December 31	$	1,477		$	1,308		$	1,035

During 2011, the increase in liability (new warranties) included $182 million due to the purchase of Bucyrus.

21. Environmental and legal matters

The company is regulated by federal, state and international environmental laws governing our use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and other operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. We have made, and will continue to make, significant research and development and capital expenditures to comply with these emissions standards.

We are engaged in remedial activities at a number of locations, often with other companies, pursuant to federal and state laws.  When it is probable we will pay remedial costs at a site and those costs can be reasonably estimated, the costs are accrued against our earnings.  In formulating that estimate, we do not consider amounts expected to be recovered from insurance companies or others.  The amount recorded for environmental remediation is not material and is included in Accrued expenses in Statement 3.

We cannot reasonably estimate costs at sites in the very early stages of remediation.  Currently, we have a few sites in the very early stages of remediation, and there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all sites in the aggregate, will be required.

We are also involved in unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability (including claimed asbestos and welding fumes exposure), contracts, employment issues, environmental matters or intellectual property rights. 

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The aggregate range of reasonably possible losses in excess of accrued liabilities, if any, associated with these unresolved legal actions is not material.  In some cases, we cannot reasonably estimate a range of loss because there is insufficient information regarding the matter.  However, there is no more than a remote chance that any liability arising from these matters would be material.  Although it is not possible to predict with certainty the outcome of these unresolved legal actions, we believe that these actions will not individually or in the aggregate have a material adverse effect on our consolidated results of operations, financial position or liquidity.

22. Segment information

A. Basis for segment information

In the first quarter of 2011, we implemented revised internal financial measurements in line with changes to our organizational structure that were announced during 2010.  Our previous structure used a matrix organization comprised of multiple profit and cost center divisions.  There were twenty-five operating segments, twelve of which were reportable segments.  These segments were led by vice-presidents that were managed by Caterpillar’s Executive Office (comprised of our CEO and Group Presidents), which served as our Chief Operating Decision Maker.  As part of the strategy revision, Group Presidents were given accountability for a related set of end-to-end businesses that they manage, a significant change for the company.  The CEO allocates resources and manages performance at the Group President level.  As such, the CEO now serves as our Chief Operating Decision Maker and operating segments are primarily based on the Group President reporting structure.

Three of our operating segments, Construction Industries, Resource Industries and Power Systems, are led by Group Presidents.  One operating segment, Financial Products, is led by a Group President who has responsibility for Corporate Services.  Corporate Services is a cost center primarily responsible for the performance of certain support functions globally and to provide centralized services; it does not meet the definition of an operating segment.  One Group President leads the All Other operating segment. 

In 2012, a portion of goodwill assets, related to recent acquisitions, that was allocated to Machinery and Power Systems operating segments is now a methodology difference between segment and external reporting. The segment information for 2011 has been retrospectively adjusted to conform to the 2012 presentation. The segment information for 2010 was not affected by this methodology change.

B.Description of segments

We have five operating segments, of which four are reportable segments.  Following is a brief description of our reportable segments and the business activities included in the All Other operating segment:

Construction Industries:  A segment primarily responsible for supporting customers using machinery in infrastructure and building construction applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing, and sales and product support. The product portfolio includes backhoe loaders, small wheel loaders, small track-type tractors, skid steer loaders, multi-terrain loaders, mini excavators, compact wheel loaders, select work tools, small, medium and large track excavators, wheel excavators, medium wheel loaders, medium track-type tractors, track-type loaders, motor graders, pipelayers and related parts. In addition, Construction Industries has responsibility for Power Systems and components in Japan and an integrated manufacturing cost center that supports Machinery and Power Systems businesses. Inter-segment sales are a source of revenue for this segment.

Resource Industries: A segment primarily responsible for supporting customers using machinery in mining and quarrying applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large track-type tractors, large mining trucks, underground mining equipment, tunnel boring equipment, large wheel loaders, off-highway trucks, articulated trucks, wheel tractor scrapers, wheel dozers, compactors, select work tools, forestry products, paving products, machinery components and electronics and control systems. In addition, Resource Industries manages areas that provide services to other parts of the company, including integrated manufacturing, research and development and coordination of the Caterpillar Production System. During the third quarter of 2011, the acquisition of Bucyrus was completed. This added the responsibility for business strategy, product design, product management and development, manufacturing, marketing and sales and product support for electric rope shovels, draglines, hydraulic shovels, drills, highwall miners and electric drive off-highway trucks to Resource Industries. In addition, segment profit includes Bucyrus acquisition-related costs and the impact from divestiture of a portion of the Bucyrus distribution business. During the second quarter of 2012, the acquisition of Siwei was completed. Siwei primarily designs, manufactures, sells and supports underground coal mining equipment in China. See Note 23 for information on these acquisitions. Inter-segment sales are a source of revenue for this segment.

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Power Systems:  A segment primarily responsible for supporting customers using reciprocating engines, turbines and related parts across industries serving electric power, industrial, petroleum and marine applications as well as rail-related businesses. Responsibilities include business strategy, product design, product management, development, manufacturing, marketing, sales and product support of reciprocating engine powered generator sets, integrated systems used in the electric power generation industry, reciprocating engines and integrated systems and solutions for the marine and petroleum industries; reciprocating engines supplied to the industrial industry as well as Caterpillar machinery; the business strategy, product design, product management, development, manufacturing, marketing, sales and product support of turbines and turbine-related services; the development, manufacturing, remanufacturing, maintenance, leasing and service of diesel-electric locomotives and components and other rail-related products and services. Inter-segment sales are a source of revenue for this segment.

Financial Products Segment:  Provides financing to customers and dealers for the purchase and lease of Caterpillar and other equipment, as well as some financing for Caterpillar sales to dealers.  Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The segment also provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment.

All Other: Primarily includes activities such as: the remanufacturing of Cat engines and components and remanufacturing services for other companies as well as the business strategy, product management, development, manufacturing, marketing and product support of undercarriage, specialty products, hardened bar stock components and ground engaging tools primarily for Caterpillar products; logistics services; the product management, development, marketing, sales and product support of on-highway vocational trucks for North America (U.S. and Canada only); distribution services responsible for dealer development and administration, dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; and the 50/50 joint venture with Navistar (NC²) until it became a wholly owned subsidiary of Navistar effective September 29, 2011. On July 31, 2012, we sold a majority interest in Caterpillar's third party logistics business. Inter-segment sales are a source of revenue for this segment. Results for the All Other operating segment are included as a reconciling item between reportable segments and consolidated external reporting.

C.Segment measurement and reconciliations

There are several methodology differences between our segment reporting and our external reporting.  The following is a list of the more significant methodology differences:

▪ Machinery and Power Systems segment net assets generally include inventories, receivables, property, plant and equipment, goodwill, intangibles and accounts payable.  Liabilities other than accounts payable are generally managed at the corporate level and are not included in segment operations.  Financial Products Segment assets generally include all categories of assets.

▪ Segment inventories and cost of sales are valued using a current cost methodology.

▪ Goodwill allocated to segments is amortized using a fixed amount based on a 20 year useful life.  This methodology difference only impacts segment assets; no goodwill amortization expense is included in segment profit.

▪ The present value of future lease payments for certain Machinery and Power Systems operating leases is included in segment assets.  The estimated financing component of the lease payments is excluded.

▪ Currency exposures for Machinery and Power Systems are generally managed at the corporate level and the effects of changes in exchange rates on results of operations within the year are not included in segment profit.  The net difference created in the translation of revenues and costs between exchange rates used for U.S. GAAP reporting and exchange rates used for segment reporting are recorded as a methodology difference.

▪ Postretirement benefit expenses are split; segments are generally responsible for service and prior service costs, with the remaining elements of net periodic benefit cost included as a methodology difference.

▪ Machinery and Power Systems segment profit is determined on a pretax basis and excludes interest expense, gains and losses on interest rate swaps and other income/expense items.  Financial Products Segment profit is determined on a pretax basis and includes other income/expense items.

Reconciling items are created based on accounting differences between segment reporting and our consolidated external reporting. Please refer to pages A-82 to A-86 for financial information regarding significant reconciling items.  Most of our

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reconciling items are self-explanatory given the above explanations.  For the reconciliation of profit, we have grouped the reconciling items as follows:

▪ Corporate costs:  These costs are related to corporate requirements and strategies that are considered to be for the benefit of the entire organization.

▪ Methodology differences:  See previous discussion of significant accounting differences between segment reporting and consolidated external reporting.

▪ Timing:   Timing differences in the recognition of costs between segment reporting and consolidated external reporting.

Table IV — Segment Information
(Millions of dollars)
Reportable Segments
	External sales and revenues		Inter- segment sales and revenues		Total sales and revenues		Depreciation and amortization		Segment profit		Segment assets at December 31		Capital expenditures
2012
Construction Industries	$	19,334	$	470	$	19,804	$	565	$	1,789	$	10,393	$	1,045
Resource Industries	21,158		1,117		22,275		694		4,318		13,455		1,143
Power Systems	21,122		2,407		23,529		604		3,434		9,323		960
Machinery and Power Systems	$	61,614	$	3,994	$	65,608	$	1,863	$	9,541	$	33,171	$	3,148
Financial Products Segment	3,090		—		3,090		708		763		36,563		1,660
Total	$	64,704	$	3,994	$	68,698	$	2,571	$	10,304	$	69,734	$	4,808
2011
Construction Industries	$	19,667	$	575	$	20,242	$	526	$	2,056	$	7,942	$	915
Resource Industries	15,629		1,162		16,791		463		3,334