EX-13 10 cat_exx13x12312013.htm EX-13 CAT_EX_13_12.31.2013


EXHIBIT 13
 
CATERPILLAR INC.
GENERAL AND FINANCIAL INFORMATION
2013


A-1


TABLE OF CONTENTS
 






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, 2013. 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 (1992). Based on our assessment we concluded that, as of December 31, 2013, the company’s internal control over financial reporting was effective based on those criteria.
 
The effectiveness of the company’s internal control over financial reporting as of December 31, 2013 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 18, 2014
 

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-101, present fairly, in all material respects, the financial position of Caterpillar Inc. and its subsidiaries at December 31, 2013, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) 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.

 

/s/PricewaterhouseCoopers LLP

Peoria, Illinois
February 18, 2014

A-4



STATEMENT 1
 
 
Caterpillar Inc.
 
Consolidated Results of Operations for the Years Ended December 31
 
 
 
 
 
(Dollars in millions except per share data)
 
 
 
 
 
 
2013
 
2012
 
2011
Sales and revenues:
 

 
 

 
 

Sales of Machinery and Power Systems
$
52,694

 
$
63,068

 
$
57,392

Revenues of Financial Products
2,962

 
2,807

 
2,746

Total sales and revenues
55,656

 
65,875

 
60,138

 
 
 
 
 
 
Operating costs:
 

 
 

 
 

Cost of goods sold
40,727

 
47,055

 
43,578

Selling, general and administrative expenses
5,547

 
5,919

 
5,203

Research and development expenses
2,046

 
2,466

 
2,297

Interest expense of Financial Products
727

 
797

 
826

Goodwill impairment charge
—

 
580

 
—

Other operating (income) expenses
981

 
485

 
1,081

Total operating costs
50,028

 
57,302

 
52,985

 
 
 
 
 
 
Operating profit
5,628

 
8,573

 
7,153

 
 
 
 
 
 
Interest expense excluding Financial Products
465

 
467

 
396

Other income (expense)
(35
)
 
130

 
(32
)
 
 
 
 
 
 
Consolidated profit before taxes
5,128

 
8,236

 
6,725

 
 
 
 
 
 
Provision (benefit) for income taxes
1,319

 
2,528

 
1,720

Profit of consolidated companies
3,809

 
5,708

 
5,005

 
 
 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
(6
)
 
14

 
(24
)
 
 
 
 
 
 
Profit of consolidated and affiliated companies
3,803

 
5,722

 
4,981

 
 
 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
14

 
41

 
53

 
 
 
 
 
 
Profit 1 
$
3,789

 
$
5,681

 
$
4,928

 
 
 
 
 
 
Profit per common share
$
5.87

 
$
8.71

 
$
7.64

 
 
 
 
 
 
Profit per common share — diluted 2 
$
5.75

 
$
8.48

 
$
7.40

 
 
 
 
 
 
Weighted-average common shares outstanding (millions)
 

 
 

 
 

- Basic
645.2

 
652.6

 
645.0

- Diluted 2 
658.6

 
669.6

 
666.1

 
 
 
 
 
 
Cash dividends declared per common share
$
2.32

 
$
2.02

 
$
1.82

 
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)
 
 
 
 
 
 
2013
 
2012
 
2011
 
 
 
 
 
 
Profit of consolidated and affiliated companies
$
3,803

 
$
5,722

 
$
4,981

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation, net of tax (provision)/benefit of: 2013 - $57; 2012 - $9; 2011 - $3
(277
)
 
60

 
(312
)
 
 
 
 
 
 
Pension and other postretirement benefits:
 
 
 
 
 
Current year actuarial gain (loss), net of tax (provision)/benefit of: 2013 - $(1,232); 2012 - $372; 2011 - $1,276
2,277

 
(731
)
 
(2,364
)
Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2013 - $(265); 2012 - $(243); 2011 - $(221)
516

 
458

 
412

Current year prior service credit (cost), net of tax (provision)/benefit of: 2013 - $(2); 2012 - $(12); 2011 - $(51)
3

 
23

 
95

Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2013 - $19; 2012 - $17; 2011 - $11
(35
)
 
(31
)
 
(21
)
Amortization of transition (asset) obligation, net of tax (provision)/benefit of: 2013 - $(1); 2012 - $(1); 2011 - $(1)
1

 
1

 
1

 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $2; 2012 - $29; 2011 - $12
(4
)
 
(48
)
 
(21
)
(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $(25); 2012 - $(10); 2011 - $21
41

 
16

 
(34
)
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $(15); 2012 - $(13); 2011 - $2
29

 
26

 
(5
)
(Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $6; 2012 - $1; 2011 - $(1)
(13
)
 
(3
)
 
1

Total other comprehensive income (loss), net of tax
2,538

 
(229
)
 
(2,248
)
Comprehensive income
6,341

 
5,493

 
2,733

Less: comprehensive income attributable to the noncontrolling interests
(17
)
 
(24
)
 
(82
)
Comprehensive income attributable to stockholders
$
6,324

 
$
5,469

 
$
2,651

 
 
 
 
 
 


See accompanying notes to Consolidated Financial Statements.


A-6


STATEMENT 3
 
 
Caterpillar Inc.
 
Consolidated Financial Position at December 31
 
 
 
 
 
(Dollars in millions)
 
 
 
 
 
 
2013
 
2012
 
2011
Assets
 

 
 

 
 

Current assets:
 

 
 

 
 

Cash and short-term investments
$
6,081

 
$
5,490

 
$
3,057

Receivables - trade and other
8,413

 
9,706

 
10,057

Receivables - finance
8,763

 
8,860

 
7,668

Deferred and refundable income taxes
1,553

 
1,547

 
1,580

Prepaid expenses and other current assets
900

 
988

 
994

Inventories
12,625

 
15,547

 
14,544

Total current assets
38,335

 
42,138

 
37,900

 
 
 
 
 
 
Property, plant and equipment - net
17,075

 
16,461

 
14,395

Long-term receivables - trade and other
1,397

 
1,316

 
1,130

Long-term receivables - finance
14,926

 
14,029

 
11,948

Investments in unconsolidated affiliated companies
272

 
272

 
133

Noncurrent deferred and refundable income taxes
594

 
2,011

 
2,157

Intangible assets
3,596

 
4,016

 
4,368

Goodwill
6,956

 
6,942

 
7,080

Other assets
1,745

 
1,785

 
2,107

Total assets
$
84,896

 
$
88,970

 
$
81,218

 
 
 
 
 
 
Liabilities
 

 
 

 
 

Current liabilities:
 

 
 

 
 

Short-term borrowings:
 

 
 

 
 

Machinery and Power Systems
$
16

 
$
636

 
$
93

Financial Products
3,663

 
4,651

 
3,895

Accounts payable
6,560

 
6,753

 
8,161

Accrued expenses
3,493

 
3,667

 
3,386

Accrued wages, salaries and employee benefits
1,622

 
1,911

 
2,410

Customer advances
2,360

 
2,638

 
2,487

Dividends payable
382

 
—

 
298

Other current liabilities
1,849

 
2,055

 
1,967

Long-term debt due within one year:
 

 
 

 
 

Machinery and Power Systems
760

 
1,113

 
558

Financial Products
6,592

 
5,991

 
5,102

Total current liabilities
27,297

 
29,415

 
28,357

Long-term debt due after one year:
 

 
 

 
 

Machinery and Power Systems
7,999

 
8,666

 
8,415

Financial Products
18,720

 
19,086

 
16,529

Liability for postemployment benefits
6,973

 
11,085

 
10,956

Other liabilities
3,029

 
3,136

 
3,559

Total liabilities
64,018

 
71,388

 
67,816

Commitments and contingencies (Notes 21 and 22)


 


 


Redeemable noncontrolling interest (Note 25)
—

 
—

 
473

Stockholders’ equity
 

 
 

 
 

Common stock of $1.00 par:
 

 
 

 
 

Authorized shares: 2,000,000,000
Issued shares: (2013, 2012 and 2011 – 814,894,624) at paid-in amount
4,709

 
4,481

 
4,273

Treasury stock: (2013 – 177,072,282; 2012 – 159,846,131 shares; and 2011 – 167,361,280 shares) at cost
(11,854
)
 
(10,074
)
 
(10,281
)
Profit employed in the business
31,854

 
29,558

 
25,219

Accumulated other comprehensive income (loss)
(3,898
)
 
(6,433
)
 
(6,328
)
Noncontrolling interests
67

 
50

 
46

Total stockholders’ equity
20,878

 
17,582

 
12,929

Total liabilities, redeemable noncontrolling interest and stockholders’ equity
$
84,896

 
$
88,970

 
$
81,218

 
 
 
 
 
 
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, 2011
$
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 1 
—

 
—

 
83

 
—

 
(66
)
 
17

 
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 1 
(74
)
 
—

 
(23
)
 
107

 
(10
)
 
—

 
Balance at December 31, 2012
$
4,481

 
$
(10,074
)
 
$
29,558

 
$
(6,433
)
 
$
50

 
$
17,582

 

(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, 2012
$
4,481

 
$
(10,074
)
 
$
29,558

 
$
(6,433
)
 
$
50

 
$
17,582

 
Profit of consolidated and affiliated companies
—

 
—

 
3,789

 
—

 
14

 
3,803

 
Foreign currency translation, net of tax
—

 
—

 
—

 
(280
)
 
3

 
(277
)
 
Pension and other postretirement benefits, net of tax
—

 
—

 
—

 
2,762

 
—

 
2,762

 
Derivative financial instruments, net of tax
—

 
—

 
—

 
37

 
—

 
37

 
Available-for-sale securities, net of tax
—

 
—

 
—

 
16

 
—

 
16

 
Change in ownership from noncontrolling interests
(6
)
 
—

 
—

 
—

 
13

 
7

 
Dividends declared
—

 
—

 
(1,493
)
 
—

 
—

 
(1,493
)
 
Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
(13
)
 
(13
)
 
Common shares issued from treasury stock for stock-based compensation:  6,258,692
(92
)
 
220

 
—

 
—

 
—

 
128

 
Stock-based compensation expense
231

 
—

 
—

 
—

 
—

 
231

 
Net excess tax benefits from stock-based compensation
95

 
—

 
—

 
—

 
—

 
95

 
Common shares repurchased: 23,484,843 2
—

 
(2,000
)
 
—

 
—

 
—

 
(2,000
)
 
Balance at December 31, 2013
$
4,709

 
$
(11,854
)
 
$
31,854

 
$
(3,898
)
 
$
67

 
$
20,878

 

1 
See Note 25 regarding the Cat Japan share redemption.
2 
See Note 16 regarding shares repurchased.


                                                                    
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)
 
 
 
 
 
 
2013
 
2012
 
2011
Cash flow from operating activities:
 

 
 

 
 

Profit of consolidated and affiliated companies
$
3,803

 
$
5,722

 
$
4,981

Adjustments for non-cash items:
 

 
 

 
 

Depreciation and amortization
3,087

 
2,813

 
2,527

Net gain from sale of businesses and investments
(68
)
 
(630
)
 
(128
)
Goodwill impairment charge
—

 
580

 
—

Other
550

 
439

 
585

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

 
 

 
 

Receivables - trade and other
835

 
(15
)
 
(1,409
)
Inventories
2,658

 
(1,149
)
 
(2,927
)
Accounts payable
134

 
(1,868
)
 
1,555

Accrued expenses
(108
)
 
126

 
255

Accrued wages, salaries and employee benefits
(279
)
 
(490
)
 
619

Customer advances
(301
)
 
83

 
237

Other assets - net
(49
)
 
252

 
(91
)
Other liabilities - net
(71
)
 
(679
)
 
753

Net cash provided by (used for) operating activities
10,191

 
5,184

 
6,957

 
 
 
 
 
 
Cash flow from investing activities:
 

 
 

 
 

Capital expenditures - excluding equipment leased to others
(2,522
)
 
(3,350
)
 
(2,515
)
Expenditures for equipment leased to others
(1,924
)
 
(1,726
)
 
(1,409
)
Proceeds from disposals of leased assets and property, plant and equipment
844

 
1,117

 
1,354

Additions to finance receivables
(11,422
)
 
(12,010
)
 
(10,001
)
Collections of finance receivables
9,567

 
8,995

 
8,874

Proceeds from sale of finance receivables
220

 
132

 
207

Investments and acquisitions (net of cash acquired)
(195
)
 
(618
)
 
(8,184
)
Proceeds from sale of businesses and investments (net of cash sold)
365

 
1,199

 
376

Proceeds from sale of available-for-sale securities
449

 
306

 
247

Investments in available-for-sale securities
(402
)
 
(402
)
 
(336
)
Other - net
(26
)
 
167

 
(40
)
Net cash provided by (used for) investing activities
(5,046
)
 
(6,190
)
 
(11,427
)
 
 
 
 
 
 
Cash flow from financing activities:
 

 
 

 
 

Dividends paid
(1,111
)
 
(1,617
)
 
(1,159
)
Distribution to noncontrolling interests
(13
)
 
(6
)
 
(3
)
Common stock issued, including treasury shares reissued
128

 
52

 
123

Treasury shares purchased
(2,000
)
 
—

 
—

Excess tax benefit from stock-based compensation
96

 
192

 
189

Acquisitions of redeemable noncontrolling interests
—

 
(444
)
 
—

Acquisitions of noncontrolling interests
—

 
(5
)
 
(8
)
Proceeds from debt issued (original maturities greater than three months):
 

 
 

 
 

- Machinery and Power Systems
195

 
2,209

 
4,587

- Financial Products
9,133

 
13,806

 
10,873

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

 
 

 
 

- Machinery and Power Systems
(1,769
)
 
(1,107
)
 
(2,269
)
- Financial Products
(9,101
)
 
(9,940
)
 
(8,277
)
Short-term borrowings - net (original maturities three months or less)
(69
)
 
466

 
(37
)
Net cash provided by (used for) financing activities
(4,511
)
 
3,606

 
4,019

Effect of exchange rate changes on cash
(43
)
 
(167
)
 
(84
)
Increase (decrease) in cash and short-term investments
591

 
2,433

 
(535
)
Cash and short-term investments at beginning of period
5,490

 
3,057

 
3,592

Cash and short-term investments at end of period
$
6,081

 
$
5,490

 
$
3,057

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: 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 the All Other segment and related corporate items and eliminations.
 
Financial Products – Primarily includes the company’s Financial Products Segment.  This category includes Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Financial Insurance Services (Insurance Services) and their respective subsidiaries.
 
Our products are sold primarily under the brands “Caterpillar,” “CAT,” design versions of “CAT” and “Caterpillar,” “Electro-Motive,” “FG Wilson,” “MaK,” “MWM,” “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.
 
Our machines are distributed principally through a worldwide organization of dealers (dealer network), 48 located in the United States and 130 located outside the United States, serving 182 countries and operating 3,454 places of business, including 1,202 dealer rental outlets.  Reciprocating engines are sold principally through the dealer network and to other manufacturers for use in products. Some of the reciprocating engines manufactured by our subsidiary Perkins Engines Company Limited, are also sold through a worldwide network of 100 distributors located in 180 countries. Most of the electric power generation systems manufactured by our subsidiary Caterpillar Northern Ireland Limited, formerly known as F.G. Wilson Engineering Limited, are sold through its worldwide network of 264 distributors located in 145 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 directly to end customers 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.
 
Certain amounts for prior years have been reclassified to conform with the current-year financial statement presentation.


A-11


We have revised previously reported cash flows from operating and financing activities on Statement 5 for the years ended December 31, 2012 and 2011 to correct for the impact of interest payments on certain Cat Financial bank borrowings. Cash provided by operating activities decreased from the amounts previously reported by $57 million and $53 million for the years ended December 31, 2012 and 2011, respectively. Cash provided by financing activities increased by the same amounts for the respective periods. Management has concluded that the impact was not material to any annual period.

We have also revised previously reported balances on Statement 3 as of December 31, 2012 and 2011 to correct for customer advances invoiced but not yet paid. Receivables - trade and other decreased from the amounts previously reported by $386 million and $228 million as of December 31, 2012 and 2011, respectively. Customer advances decreased from the amounts previously reported by $340 million and $204 million as of December 31, 2012 and 2011, respectively. Other (long-term) liabilities also decreased from the amounts previously reported by $46 million and $24 million as of December 31, 2012 and 2011, respectively. Although the revision did not impact Net cash provided by (used for) operating activities on Statement 5, we have revised the impacted operating cash flow line items for the years ended December 31, 2012 and 2011. Management has concluded that the impact was not material to any period presented.

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, Insurance Services’ underwriting expenses, gains (losses) on disposal of long-lived assets and business divestitures, long-lived asset impairment charges, legal settlements, employee separation charges and benefit plan curtailment, settlement and contractual 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 power systems 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 Sales and Cost of goods sold, 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.

A-12


 
Our standard dealer invoice terms are established by marketing region. Our invoice terms for end-user customer sales are established by the responsible business unit. 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. Dealers and customers must make payment within the established invoice terms to avoid potential interest costs. Interest at or above prevailing market rates may be charged on any past due balance, and generally our practice is to not forgive this interest. In 2013, terms were extended to not more than one year for $706 million of receivables, which represent approximately 1 percent of consolidated sales. In 2012 and 2011, terms were extended to not more than one year for $354 million and $341 million of receivables, respectively, which represent less than 1 percent of consolidated sales.
 
We establish a bad debt allowance for Machinery and Power Systems receivables when it becomes probable that the receivable will not be collected.  Our allowance for bad debts is not significant.
 
Revenues of Financial Products primarily represent the following Cat Financial revenues:
 
•
Retail finance revenue on finance leases and installment sale contracts is recognized over the term of the contract at a constant rate of return on the scheduled outstanding principal balance.  Revenue on retail notes is recognized based on the daily balance of retail receivables outstanding and the applicable effective interest rate.

•
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 related to financing dealer inventory and rental fleets 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 amortized to revenue using the interest method over the life of the finance receivables.
 
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 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 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, 2013 and 2012, and about 65 percent at December 31, 2011.
 
If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,504 million, $2,750 million and $2,422 million higher than reported at December 31, 2013, 2012 and 2011, 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 2013, 2012 and 2011, Cat Financial depreciation on equipment leased to others was $768 million, $688 million and $690 million, respectively, and was included in Other operating (income) expenses in Statement 1. In 2013, 2012 and 2011, consolidated depreciation expense was $2,710 million, $2,421 million and $2,240 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.
 

A-13


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. 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. All derivatives are recorded at fair value.  See Note 3 for more information.

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
 
Presentation of comprehensive income – In June 2011, the Financial Accounting Standards Board (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.

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 was effective January 1, 2013, with retrospective application required. The guidance did not have a material impact on our financial statements. See Note 3 for additional information.


A-14


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 was effective January 1, 2013 and did not 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 was effective January 1, 2013 and did not have a material impact on our financial statements. See Note 17 for additional information.

Joint and several liability arrangements – In February 2013, the FASB issued accounting guidance on the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements. The guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The entity is also required to disclose the nature and amount of the obligation as well as any other information about those obligations. This guidance is effective January 1, 2014, with retrospective application required. We do not expect the adoption to have a material impact on our financial statements.

Parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity – In March 2013, the FASB issued accounting guidance on the parent's accounting for the cumulative translation adjustment (CTA) upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The new standard clarifies existing guidance regarding when the CTA should be released into earnings upon various deconsolidation and consolidation transactions. This guidance is effective January 1, 2014. We do not expect the adoption to have a material impact on our financial statements.

Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists – In July 2013, the FASB issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward in the financial statements if available under the applicable tax jurisdiction. The guidance is effective January 1, 2014. We do not expect the adoption to have a material impact on our financial statements.


A-15


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.
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 or Group President, 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 6,258,692 for 2013, 7,515,149 for 2012 and 8,710,630 for 2011.
 

A-16


Awards generally vest three years after the date of grant.  At grant, SARs and option awards have a term life of ten years.  Upon separation from service, if the participant is 55 years of age or older with more than 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, 2013, 2012 and 2011, respectively.
 
 
 
 
 
 
 
Grant Year
 
2013
 
2012
 
2011
Weighted-average dividend yield
2.1
%
 
2.2
%
 
2.2
%
Weighted-average volatility
30.6
%
 
35.0
%
 
32.7
%
Range of volatilities
23.4-40.6%

 
33.3-40.4%

 
20.9-45.4%

Range of risk-free interest rates
0.16-1.88%

 
0.17-2.00%

 
0.25-3.51%

Weighted-average expected lives
8 years

 
7 years

 
8 years

 
 
 
 
 
 
 
The fair value of the RSU grant was determined by reducing the stock price on the day of grant by the present value of the estimated dividends to be paid during the vesting period.  The estimated dividends are based on Caterpillar’s weighted-average dividend yield.
 
The amount of stock-based compensation expense capitalized for the years ended December 31, 2013, 2012 and 2011 did not have a significant impact on our financial statements.
 
At December 31, 2013, there was $193 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.
  

A-17


TABLE I — Financial Information Related to Stock-based Compensation
 
2013
 
2012
 
2011
 
Shares
 
Weighted-
 Average
 Exercise
 Price
 
Shares
 
Weighted-
Average
Exercise
Price
 
Shares
 
Weighted-
Average
Exercise
Price
Stock options/SARs activity:
 

 
 

 
 

 
 

 
 

 
 

Outstanding at beginning of year
45,827,599

 
$
59.45

 
50,372,991

 
$
53.01

 
57,882,998

 
$
48.50

Granted to officers and key employees 1 
4,276,060

 
$
89.75

 
3,318,188

 
$
110.09

 
2,960,595

 
$
102.13

Exercised
(6,476,082
)
 
$
41.10

 
(7,708,343
)
 
$
38.73

 
(10,149,476
)
 
$
41.78

Forfeited / expired
(251,830
)
 
$
84.64

 
(155,237
)
 
$
67.50

 
(321,126
)
 
$
48.02

Outstanding at end of year
43,375,747

 
$
65.03

 
45,827,599

 
$
59.45

 
50,372,991

 
$
53.01

Exercisable at year-end
34,200,054

 
$
55.93

 
33,962,000

 
$
51.75

 
35,523,057

 
$
52.66

 
 
 
 
 
 
 
 
 
 
 
 
RSUs activity:
 

 
 

 
 

 
 

 
 

 
 

Outstanding at beginning of year
3,580,220

 
 

 
4,281,490

 
 

 
4,650,241

 
 

Granted to officers and key employees
1,614,870

 
 

 
1,429,939

 
 

 
1,082,032

 
 

Vested
(1,286,934
)
 
 

 
(2,077,485
)
 
 

 
(1,382,539
)
 
 

Forfeited
(84,828
)
 
 

 
(53,724
)
 
 

 
(68,244
)
 
 

Outstanding at end of year
3,823,328

 
 

 
3,580,220

 
 

 
4,281,490

 
 

 
Stock options/SARs outstanding and exercisable:
 
 
Outstanding
 
Exercisable
Exercise Prices
 
Shares Outstanding at 12/31/13
 
Weighted-
 Average
 Remaining
 Contractual Life (Years)
 
Weighted-
 Average
 Exercise Price
 
Aggregate
 Intrinsic Value 2
 
Shares Outstanding at 12/31/13
 
Weighted-
 Average
 Remaining
Contractual Life (Years)
 
Weighted-
 Average
 Exercise Price
 
Aggregate
 Intrinsic Value 2
$22.17 – 38.63
 
7,775,953

 
3.20
 
$
29.03

 
$
481

 
7,775,953

 
3.20
 
$
29.03

 
$
481

$40.64 – 57.85
 
11,656,943

 
4.06
 
$
52.71

 
444

 
11,656,943

 
4.06
 
$
52.71

 
444

$63.04 – 72.05
 
9,687,583

 
2.48
 
$
69.05

 
211

 
9,687,583

 
2.48
 
$
69.05

 
211

$73.20 – 89.75
 
8,280,894

 
6.69
 
$
81.70

 
75

 
4,174,124

 
4.37
 
$
73.86

 
71

$102.13 – 110.09
 
5,974,374

 
7.71
 
$
106.28

 
—

 
905,451

 
7.62
 
$
105.59

 
—

 
 
43,375,747

 
 
 
$
65.03

 
$
1,211

 
34,200,054

 
 
 
$
55.93

 
$
1,207


1 
No SARS were granted during the years ended December 31, 2013 or 2012. Of the 2,960,595 awards granted during the year ended December 31, 2011, 2,722,689 were SARs.
2 
The difference between a stock award’s exercise price and the underlying stock’s market price at December 31, 2013, 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, 2013, there were 3,823,328 outstanding RSUs with a weighted average remaining contractual life of 1.3 years.
 


A-18


TABLE II— Additional Stock-based Award Information
 
 
 
 
 
 
 
(Dollars in millions except per share data)
 
2013
 
2012
 
2011
Stock Options/SARs activity:
 
 

 
 

 
 

Weighted-average fair value per share of stock awards granted
 
$
28.34

 
$
39.20

 
$
36.73

Intrinsic value of stock awards exercised
 
$
312

 
$
488

 
$
618

Fair value of stock awards vested
 
$
167

 
$
66

 
$
96

Cash received from stock awards exercised
 
$
152

 
$
112

 
$
161

 
 
 
 
 
 
 
RSUs activity:
 
 

 
 

 
 

Weighted-average fair value per share of stock awards granted
 
$
84.05

 
$
104.61

 
$
97.51

Fair value of stock awards vested
 
$
117

 
$
229

 
$
143

 
 
 
 
 
 
 
 
Before tax, stock-based compensation expense for 2013, 2012 and 2011 was $231 million, $245 million and $193 million, respectively, with a corresponding income tax benefit of $73 million, $78 million and $61 million, respectively.
 
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 2013, 2012 and 2011 were $127 million, $217 million and $235 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 $39 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 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.
 

A-19


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, 2013, $9 million of deferred net gains, 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 fair value due to changes in the benchmark interest rate.  We designate most floating-to-fixed interest rate swaps as cash flow hedges to protect against the variability of cash flows due to changes in the benchmark interest rate.


A-20


As of December 31, 2013, $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:
 
 

A-21


(Millions of dollars)
Consolidated Statement of Financial Position Location
 
Asset (Liability) Fair Value
 
 
 
Years ended December 31,
 
 
 
2013
 
2012
 
2011
Designated derivatives
 
 
 

 
 

 
 

Foreign exchange contracts
 
 
 

 
 

 
 

Machinery and Power Systems
Receivables — trade and other
 
$
54

 
$
28

 
$
54

Machinery and Power Systems
Long-term receivables — trade and other
 
—

 
—

 
19

Machinery and Power Systems
Accrued expenses
 
(39
)
 
(66
)
 
(73
)
Machinery and Power Systems
Other liabilities
 
—

 
—

 
(10
)
Interest rate contracts
 
 
 

 
 

 
 

Financial Products
Receivables — trade and other
 
7

 
17

 
15

Financial Products
Long-term receivables — trade and other
 
115

 
209

 
233

Financial Products
Accrued expenses
 
(6
)
 
(8
)
 
(6
)
 
 
 
$
131

 
$
180

 
$
232

 
 
 
 
 
 
 
 
Undesignated derivatives
 
 
 

 
 

 
 

Foreign exchange contracts
 
 
 

 
 

 
 

Machinery and Power Systems
Receivables — trade and other
 
$
19

 
$
31

 
$
27

Machinery and Power Systems
Accrued expenses
 
(1
)
 
(63
)
 
(12
)
Machinery and Power Systems
Other liabilities
 
—

 
—

 
(85
)
Financial Products
Receivables — trade and other
 
7

 
10

 
7

Financial Products
Accrued expenses
 
(4
)
 
(6
)
 
(16
)
Financial Products
Long-term receivables — trade and other
 
9

 
—

 
—

Interest rate contracts
 
 
 

 
 

 
 

Financial Products
Receivables — trade and other
 
—

 
2

 
—

Financial Products
Accrued expenses
 
—

 
(1
)
 
(1
)
Commodity contracts
 
 
 

 
 

 
 

Machinery and Power Systems
Receivables — trade and other
 
—

 
1

 
2

Machinery and Power Systems
Accrued expenses
 
—

 
—

 
(9
)
 
 
 
$
30

 
$
(26
)
 
$
(87
)
 
 
 
 
 
 
 
 

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


A-22


Fair Value Hedges
 
 
 
Year ended December 31, 2013
(Millions of dollars)
 
Classification
 
Gains (Losses)
 on Derivatives
 
Gains (Losses)
 on Borrowings
Interest rate contracts
 
 
 
 

 
 

Financial Products
 
Other income (expense)
 
$
(107
)
 
$
114

 
 
 
 
$
(107
)
 
$
114

 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2012
 
 
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
)
 
 
 
 
 
 
 




A-23


Cash Flow Hedges
 
 
 
 
 
 
 
 
 
(Millions of dollars)
 
Year ended December 31, 2013
 
 
 
 
 
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
 
$
(4
)
 
Other income (expense)
 
$
(57
)
2 
$
—

 
Interest rate contracts
 
 

 
 
 
 

 
 

 
Machinery and Power Systems
 
—

 
Other income (expense)
 
(3
)
 
—

 
Financial Products
 
(2
)
 
Interest expense of Financial Products
 
(6
)
 
1

1 
 
 
$
(6
)
 
 
 
$
(66
)
 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
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
)
 
 
 
 
 
 
 
 
 
 
 
1
The ineffective portion recognized in earnings is included in Other income (expense).
2
Includes $3 million and $7 million of losses reclassified from AOCI to Other income (expense) in 2013 and 2012, respectively 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:
 

A-24


 
 
 
 
Years ended December 31,
(Millions of dollars)
 
Classification of Gains (Losses)
 
2013
 
2012
 
2011
Foreign exchange contracts
 
 
 
 

 
 

 
 

Machinery and Power Systems
 
Other income (expense)
 
$
17

 
$
62

 
$
62

Financial Products
 
Other income (expense)
 
8

 
6

 
(15
)
Interest rate contracts
 
 
 
 

 
 

 
 

Machinery and Power Systems
 
Other income (expense)
 
(1
)
 
2

 
(149
)
Financial Products
 
Other income (expense)
 
(3
)
 
—

 
—

Commodity contracts
 
 
 
 

 
 

 
 

Machinery and Power Systems
 
Other income (expense)
 
(3
)
 
2

 
(17
)
 
 
 
 
$
18

 
$
72

 
$
(119
)
 
 
 
 
 
 
 
 
 
 
We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within Machinery & Power Systems and Financial Products that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.

Collateral is generally not required of the counterparties or of our company under the master netting agreements. As of December 31, 2013, 2012 and 2011, no cash collateral was received or pledged under the master netting agreements.

A-25


The effect of the net settlement provisions of the master netting agreements on our derivative balances upon an event of default or termination event is as follows:
December 31, 2013
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
 
(Millions of dollars)
 
Gross Amount of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amount of Assets Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount of Assets
 
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
Machinery & Power Systems
 
$
73

 
$
—

 
$
73

 
$
(32
)
 
$
—

 
$
41

 
Financial Products
 
138

 
—

 
138

 
(9
)
 
—

 
129

 
 Total
 
$
211

 
$
—

 
$
211

 
$
(41
)
 
$
—

 
$
170

 
December 31, 2013
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
 
(Millions of dollars)
 
Gross Amount of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amount of Liabilities Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount of Liabilities
 
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
Machinery & Power Systems
 
$
(40
)
 
$
—

 
$
(40
)
 
$
32

 
$
—

 
$
(8
)
 
Financial Products
 
(10
)
 
—

 
(10
)
 
9

 
—

 
(1
)
 
 Total
 
$
(50
)
 
$
—

 
$
(50
)
 
$
41

 
$
—

 
$
(9
)
 
December 31, 2012
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
 
(Millions of dollars)
 
Gross Amount of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amount of Assets Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount of Assets
 
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
Machinery & Power Systems
 
$
60

 
$
—

 
$
60

 
$
(59
)
 
$
—

 
$
1

 
Financial Products
 
238

 
—

 
238

 
(12
)
 
—

 
226

 
 Total
 
$
298

 
$
—

 
$
298

 
$
(71
)
 
$
—

 
$
227

 
December 31, 2012
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
 
(Millions of dollars)
 
Gross Amount of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amount of Liabilities Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount of Liabilities
 
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
Machinery & Power Systems
 
$
(129
)
 
$
—

 
$
(129
)
 
$
59

 
$
—

 
$
(70
)
 
Financial Products
 
(15
)
 
—

 
(15
)
 
12

 
—

 
(3
)
 
 Total
 
$
(144
)
 
$
—

 
$
(144
)
 
$
71

 
$
—

 
$
(73
)
 

A-26



December 31, 2011
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
 
(Millions of dollars)
 
Gross Amount of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amount of Assets Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount of Assets
 
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
Machinery & Power Systems
 
$
102

 
$
—

 
$
102

 
$
(102
)
 
$
—

 
$
—

 
Financial Products
 
255

 
—

 
255

 
(11
)
 
—

 
244

 
 Total
 
$
357

 
$
—

 
$
357

 
$
(113
)
 
$
—

 
$
244

 
December 31, 2011
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
 
(Millions of dollars)
 
Gross Amount of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amount of Liabilities Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount of Liabilities
 
Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
Machinery & Power Systems
 
$
(189
)
 
$
—

 
$
(189
)
 
$
102

 
$
—

 
$
(87
)
 
Financial Products
 
(23
)
 
—

 
(23
)
 
11

 
—

 
(12
)
 
 Total
 
$
(212
)
 
$
—

 
$
(212
)
 
$
113

 
$
—

 
$
(99
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


A-27


4.
Other income (expense)
 
 
 
Years ended December 31,
 
(Millions of dollars)
 
2013
 
2012
 
2011
 
Investment and interest income
 
$
84

 
$
82

 
$
85

 
Foreign exchange gains (losses) 1 
 
(254
)
 
(116
)
 
21

 
License fee income
 
114

 
99

 
80

 
Gains (losses) on sale of securities and affiliated companies
 
21

 
4

 
17

 
Impairment of available-for-sale securities
 
(1
)
 
(2
)
 
(5
)
 
Miscellaneous income (loss)
 
1

 
63


(230
)
2 
 
 
$
(35
)
 
$
130

 
$
(32
)
 
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 24), both related to the acquisition of Bucyrus.
 
 
 
 
 

5.
Income taxes
 
The components of profit before taxes were: 
 
 
 
 
 
 
 
 
Years ended December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
U.S.
 
$
1,938

 
$
4,090

 
$
2,250

Non-U.S.
 
3,190

 
4,146

 
4,475

 
 
$
5,128

 
$
8,236

 
$
6,725

 
 
 
 
 
 
 
 
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.
 
The components of the provision (benefit) for income taxes were:
 
 
 
 
 
 
 
 
Years ended December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Current tax provision (benefit):
 
 

 
 

 
 

U.S.
 
$
407

 
$
971

 
$
750

Non-U.S.
 
805

 
1,250

 
1,014

State (U.S.)
 
33

 
56

 
72

 
 
1,245

 
2,277

 
1,836

 
 
 
 
 
 
 
Deferred tax provision (benefit):
 
 

 
 

 
 

U.S.
 
79

 
332

 
2

Non-U.S.
 
(7
)
 
(89
)
 
(92
)
State (U.S.)
 
2

 
8

 
(26
)
 
 
74

 
251

 
(116
)
Total provision (benefit) for income taxes
 
$
1,319

 
$
2,528

 
$
1,720

 
 
 
 
 
 
 
 
We paid net income tax and related interest of $1,544 million, $2,396 million and $1,369 million in 2013, 2012 and 2011, respectively.


A-28


Reconciliation of the U.S. federal statutory rate to effective rate:
 
(Millions of dollars)
 
Years ended December 31,
 
 
2013
 
2012
 
2011
Taxes at U.S. statutory rate
 
$
1,795

 
35.0
 %
 
$
2,882

 
35.0
 %
 
$
2,354

 
35.0
 %
(Decreases) increases in taxes resulting from:
 
 

 
 

 
 

 
 

 
 

 
 

Non-U.S. subsidiaries taxed at other than 35%
 
(268
)
 
(5.2
)%
 
(342
)
 
(4.2
)%
 
(467
)
 
(6.9
)%
State and local taxes, net of federal
 
23

 
0.4
 %
 
55

 
0.7
 %
 
30

 
0.4
 %
Interest and penalties, net of tax
 
4

 
0.1
 %
 
22

 
0.3
 %
 
25

 
0.4
 %
U.S. research and production incentives
 
(91
)
 
(1.8
)%
 
(80
)
 
(1.0
)%
 
(152
)
 
(2.3
)%
Other—net
 
(2
)
 
—
 %
 
(27
)
 
(0.3
)%
 
(7
)
 
(0.1
)%
 
 
1,461

 
28.5
 %
 
2,510

 
30.5
 %
 
1,783

 
26.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior year tax and interest adjustments
 
(55
)
 
(1.1
)%
 
(300
)
 
(3.7
)%
 
41

 
0.6
 %
Nondeductible goodwill
 
—

 
—
 %
 
318

 
3.9
 %
 
33

 
0.5
 %
Release of valuation allowances
 
—

 
—
 %
 
—

 
—
 %
 
(24
)
 
(0.3
)%
Non-U.S. earnings reinvestment changes
 
—

 
—
 %
 
—

 
—
 %
 
(113
)
 
(1.7
)%
Tax law changes

(87
)

(1.7
)%

—


—
 %

—


—
 %
Provision (benefit) for income taxes
 
$
1,319

 
25.7
 %
 
$
2,528

 
30.7
 %
 
$
1,720

 
25.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The provision for income taxes for 2013 included a $87 million benefit primarily related to the research and development tax credit that was retroactively extended in 2013 for 2012 and a benefit of $55 million resulting from true-up of estimated amounts used in the tax provision to the 2012 U.S. tax return as filed in September 2013.

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

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 $17 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:
 

A-29


 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Assets:
 
 

 
 

 
 

Deferred and refundable income taxes
 
$
877

 
$
979

 
$
1,044

Noncurrent deferred and refundable income taxes
 
456

 
1,863

 
2,005

 
 
1,333

 
2,842

 
3,049

Liabilities:
 
 

 
 

 
 

Other current liabilities
 
86

 
66

 
69

Other liabilities
 
447

 
484

 
559

Deferred income taxes—net
 
$
800

 
$
2,292

 
$
2,421

 
 
 
 
 
 
 
 
Deferred income tax assets and liabilities:
 
 
 
 
 
 
 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Deferred income tax assets:
 
 

 
 

 
 

Pension
 
$
903

 
$
2,100

 
$
2,130

Postemployment benefits other than pensions
 
1,435

 
1,678

 
1,622

Tax carryforwards
 
760

 
663

 
821

Warranty reserves
 
313

 
358

 
338

Stock-based compensation
 
320

 
281

 
232

Inventory
 
112

 
195

 
148

Allowance for credit losses
 
184

 
170

 
131

Post sale discounts
 
146

 
141

 
141

Deferred compensation
 
126

 
110

 
102

Other—net
 
524

 
491

 
537

 
 
4,823

 
6,187

 
6,202

 
 
 
 
 
 
 
Deferred income tax liabilities:
 
 

 
 

 
 

Capital and intangible assets
 
(2,815
)
 
(2,759
)
 
(2,866
)
Bond discount
 
(240
)
 
(249
)
 
(37
)
Translation
 
(133
)
 
(173
)
 
(193
)
Undistributed profits of non-U.S. subsidiaries
 
(90
)
 
(128
)
 
(215
)
 
 
(3,278
)
 
(3,309
)
 
(3,311
)
Valuation allowance for deferred tax assets
 
(745
)
 
(586
)
 
(470
)
Deferred income taxes—net
 
$
800

 
$
2,292

 
$
2,421

 
 
 
 
 
 
 
 
At December 31, 2013, approximately $707 million of U.S. state tax net operating losses (NOLs) and $169 million of U.S. state tax credit carryforwards were available. The state NOLs primarily expire between 2014 and 2033.  The state tax credit carryforwards primarily expire over the next five to fifteen years.  We established a valuation allowance of $188 million for those state NOLs and credit carryforwards that are more likely than not to expire prior to utilization.
 
At December 31, 2013, amounts and expiration dates of net operating loss carryforwards in various non-U.S. taxing jurisdictions were:
 
(Millions of dollars)
2014
 
2015
 
2016
 
2017
 
2018-2034
 
Unlimited
 
Total
$
9

 
$
10

 
$
13

 
$
15

 
$
760

 
$
1,192

 
$
1,999

 

A-30


At December 31, 2013 a valuation allowance of $557 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.
 
Reconciliation of unrecognized tax benefits: 1
 
 
 
 
 
 
 
 
Years ended December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Balance at January 1,
 
$
715

 
$
958

 
$
789

 
 
 
 
 
 
 
Additions for tax positions related to current year
 
63

 
64

 
118

Additions for tax positions related to prior years
 
52

 
178

 
108

Reductions for tax positions related to prior years
 
(31
)
 
(266
)
 
(30
)
Reductions for settlements 2 
 
(15
)
 
(191
)
 
—

Reductions for expiration of statute of limitations
 
(25
)
 
(28
)
 
(27
)
 
 
 
 
 
 
 
Balance at December 31,
 
$
759

 
$
715

 
$
958

 
 
 
 
 
 
 
Amount that, if recognized, would impact the effective tax rate
 
$
726

 
$
669

 
$
835

 
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 provision (benefit) for interest and penalties of $7 million, $(114) million and $39 million during the years ended December 31, 2013, 2012 and 2011, respectively. The 2012 amount includes a benefit from adjustments for the 2000 through 2006 settlement discussed previously. The total amount of interest and penalties accrued was $59 million, $134 million and $240 million as of December 31, 2013, 2012 and 2011, 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 including the impact of a loss carryback to 2005. While we have not yet received a Revenue Agent's Report generally issued at the end of the field examination process, we have received Notices of Proposed Adjustment from the IRS relating to U.S. taxation of certain non-U.S. operations and foreign tax credits. We disagree with these proposed adjustments, and to the extent that adjustments are assessed upon completion of the field examination relating to these matters, we would vigorously contest the adjustments in appeals. The completion of the field examination for this audit is expected in 2014. 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 $1,945 million, $2,152 million, and $1,990 million at December 31, 2013, 2012 and 2011, respectively.
 

A-31


 
Contractual maturities of outstanding wholesale inventory receivables:
(Millions of dollars)
 
December 31, 2013
Amounts Due In
 
Wholesale
Installment
Contracts
 
Wholesale
Finance
Leases
 
Wholesale
Notes
 
Total
2014
 
$
258

 
$
125

 
$
636

 
$
1,019

2015
 
106

 
95

 
231

 
432

2016
 
77

 
58

 
150

 
285

2017
 
39

 
31

 
18

 
88

2018
 
17

 
13

 
5

 
35

Thereafter
 
3

 
—

 
—

 
3

 
 
500

 
322

 
1,040

 
1,862

Guaranteed residual value
 
—

 
90

 
—

 
90

Unguaranteed residual value
 
—

 
35

 
—

 
35

Less: Unearned income
 
(8
)
 
(31
)
 
(3
)
 
(42
)
Total
 
$
492

 
$
416

 
$
1,037

 
$
1,945

 
 
 
 
 
 
 
 
 
 
Please refer to Note 18 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, 2013
Amounts Due In
 
Retail
Installment
Contracts
 
Retail Finance
Leases
 
Retail
Notes
 
Total
2014
 
$
2,105

 
$
3,234

 
$
3,627

 
$
8,966

2015
 
1,627

 
2,183

 
2,263

 
6,073

2016
 
1,093

 
1,292

 
1,758

 
4,143

2017
 
590

 
581

 
1,475

 
2,646

2018
 
198

 
203

 
669

 
1,070

Thereafter
 
26

 
139

 
1,070

 
1,235

 
 
5,639

 
7,632

 
10,862

 
24,133

Guaranteed residual value
 
—

 
354

 
—

 
354

Unguaranteed residual value
 
—

 
486

 
—

 
486

Less: Unearned income
 
(93
)
 
(730
)
 
(89
)
 
(912
)
Total
 
$
5,546

 
$
7,742

 
$
10,773

 
$
24,061

 
 
 
 
 
 
 
 
 
 
Please refer to Note 18 and Table III for fair value information.
 

A-32


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.

•
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.
 
During 2013, Cat Financial changed the classification of certain loans and finance leases previously reported as impaired. While these loans and finance leases had been incorrectly reported as impaired, the related allowance for these loans and finance leases was appropriately measured; therefore, this change had no impact on the allowance for credit losses. The impact of incorrectly reporting these loans and finance leases as impaired was not considered material to previously issued financial statements; however, prior period impaired loan and finance lease balances have been revised throughout Notes 6 and 18.

At December 31, 2013, 2012 and 2011, 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 2013, 2012 and 2011. 

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


A-33


 
December 31, 2013
(Millions of dollars)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Impaired Loans and Finance Leases With No Allowance Recorded
 

 
 

 
 

Customer
 

 
 

 
 

North America
$
23

 
$
22

 
$
—

Europe
48

 
47

 
—

Asia Pacific
7

 
7

 
—

Mining
134

 
134

 
—

Latin America
11

 
11

 
—

Caterpillar Power Finance
223

 
222

 
—

Total
$
446

 
$
443

 
$
—

 
 
 
 
 
 
Impaired Loans and Finance Leases With An Allowance Recorded
 

 
 

 
 

Customer
 

 
 

 
 

North America
$
13

 
$
13

 
$
4

Europe
20

 
19

 
7

Asia Pacific
16

 
16

 
2

Mining
—

 
—

 
—

Latin America
23

 
23

 
6

Caterpillar Power Finance
110

 
106

 
51

Total
$
182

 
$
177

 
$
70

 
 
 
 
 
 
Total Impaired Loans and Finance Leases
 

 
 

 
 

Customer
 

 
 

 
 

North America
$
36

 
$
35

 
$
4

Europe
68

 
66

 
7

Asia Pacific
23

 
23

 
2

Mining
134

 
134

 
—

Latin America
34

 
34

 
6

Caterpillar Power Finance
333

 
328

 
51

Total
$
628

 
$
620

 
$
70

 
 
 
 
 
 





A-34


 
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
$
25

 
$
23

 
$
7

Europe
28

 
26

 
11

Asia Pacific
19

 
19

 
4

Mining
—

 
—

 
—

Latin America
30

 
30

 
8

Caterpillar Power Finance
113

 
109

 
24

Total
$
215

 
$
207

 
$
54

 
 
 
 
 
 
Total Impaired Loans and Finance Leases
 

 
 

 
 

Customer
 

 
 

 
 

North America
$
53

 
$
50

 
$
7

Europe
73

 
71

 
11

Asia Pacific
21

 
21

 
4

Mining
1

 
1

 
—

Latin America
37

 
37

 
8

Caterpillar Power Finance
408

 
404

 
24

Total
$
593

 
$
584

 
$
54

 
 
 
 
 
 





A-35


 
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
$
23

 
$
20

 
$
6

Europe
22

 
21

 
8

Asia Pacific
9

 
9

 
3

Mining
—

 
—

 
—

Latin America
19

 
19

 
4

Caterpillar Power Finance
85

 
85

 
13

Total
$
158

 
$
154

 
$
34

 
 
 
 
 
 
Total Impaired Loans and Finance Leases
 

 
 

 
 

Customer
 

 
 

 
 

North America
$
106

 
$
100

 
$
6

Europe
69

 
67

 
8

Asia Pacific
13

 
13

 
3

Mining
8

 
8

 
—

Latin America
28

 
28

 
4

Caterpillar Power Finance
260

 
255

 
13

Total
$
484

 
$
471

 
$
34

 
 
 
 
 
 






A-36


 
 
Years ended December 31,
 
 
2013
 
2012
 
2011
(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
 
$
25

 
$
3

 
$
50

 
$
3

 
$
91

 
$
4

Europe
 
49

 
1

 
45

 
1

 
11

 
—

Asia Pacific
 
4

 
—

 
3

 
—

 
5

 
—

Mining
 
61

 
3

 
8

 
—

 
8

 
1

Latin America
 
11

 
—

 
6

 
—

 
9

 
1

Caterpillar Power Finance
 
271

 
5

 
220

 
2

 
221

 
6

Total
 
$
421

 
$
12

 
$
332

 
$
6

 
$
345

 
$
12

 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired Loans and Finance Leases With An Allowance Recorded
 
 

 
 

 
 

 
 

 
 
 
 
Customer
 
 

 
 

 
 

 
 

 
 
 
 
North America
 
$
18

 
$
1

 
$
25

 
$
1

 
$
56

 
$
2

Europe
 
22

 
1

 
27

 
1

 
20

 
—

Asia Pacific
 
18

 
1

 
15

 
1

 
11

 
1

Mining
 
1

 
—

 
—

 
—

 
—

 
—

Latin America
 
44

 
2

 
27

 
2

 
11

 
—

Caterpillar Power Finance
 
135

 
1

 
94

 
—

 
61

 
—

Total
 
$
238

 
$
6

 
$
188

 
$
5

 
$
159

 
$
3

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Impaired Loans and Finance Leases
 
 

 
 

 
 

 
 

 
 
 
 
Customer
 
 

 
 

 
 

 
 

 
 
 
 
North America
 
$
43

 
$
4

 
$
75

 
$
4

 
$
147

 
$
6

Europe
 
71

 
2

 
72

 
2

 
31

 
—

Asia Pacific
 
22

 
1

 
18

 
1

 
16

 
1

Mining
 
62

 
3

 
8

 
—

 
8

 
1

Latin America
 
55

 
2

 
33

 
2

 
20

 
1

Caterpillar Power Finance
 
406

 
6

 
314

 
2

 
282

 
6

Total
 
$
659

 
$
18

 
$
520

 
$
11

 
$
504

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2013, 2012 and 2011, 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-37


 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Customer
 
 
 
 

 
 

North America
 
$
26

 
$
59

 
$
112

Europe
 
28

 
38

 
58

Asia Pacific
 
50

 
36

 
24

Mining
 
23

 
12

 
12

Latin America
 
179

 
148

 
108

Caterpillar Power Finance
 
119

 
220

 
158

Total
 
$
425

 
$
513

 
$
472

 
 
 
 
 
 
 
 
Aging related to loans and finance leases was as follows:
 
(Millions of dollars)
 
December 31, 2013
 
 
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
 
$
37

 
$
12

 
$
24

 
$
73

 
$
6,508

 
$
6,581

 
$
—

Europe
 
26

 
15

 
29

 
70

 
2,805

 
2,875

 
6

Asia Pacific
 
54

 
23

 
59

 
136

 
2,752

 
2,888

 
11

Mining
 
3

 
—

 
12

 
15

 
2,128

 
2,143

 
—

Latin America
 
54

 
25

 
165

 
244

 
2,474

 
2,718

 
5

Caterpillar Power Finance
 
55

 
30

 
60

 
145

 
2,946

 
3,091

 
—

Dealer
 
 

 
 

 
 

 


 
 

 


 
 

North America
 
—

 
—

 
—

 
—

 
2,283

 
2,283

 
—

Europe
 
—

 
—

 
—

 
—

 
150

 
150

 
—

Asia Pacific
 
—

 
—

 
—

 
—

 
583

 
583

 
—

Mining
 
—

 
—

 
—

 
—

 
1

 
1

 
—

Latin America
 
—

 
—

 
—

 
—

 
748

 
748

 
—

Caterpillar Power Finance
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
229

 
$
105

 
$
349

 
$
683

 
$
23,378

 
$
24,061

 
$
22

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

A-38


(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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
(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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Allowance for credit loss activity
 
The allowance for credit losses as of December 31, 2013 was $375 million compared with $423 million as of December 31, 2012.  The overall decrease of $48 million in the allowance for credit losses during the year reflects a $55 million decrease associated with the lower allowance rate, partially offset by a $7 million increase due to an increase in Cat Financial's net finance receivables portfolio. The lower allowance rate reflects write-offs taken in 2013, primarily related to Cat Financial's European marine portfolio that had been previously provided for in the allowance for credit losses, favorable changes in Cat Financial's estimated probabilities of default (due to improved financial health of Cat Financial's customers), continued refinements of estimated loss emergence periods and general improvement in the economic conditions of the industries Cat Financial serves.


A-39


The allowance for credit losses as of December 31, 2012 was $423 million compared with $366 million as of December 31, 2011. The overall increase of $57 million in allowance for credit losses during the year reflects a $51 million increase in allowance due to an increase in Cat Financial’s net finance receivables portfolio and a $6 million increase associated with the higher allowance rate.

An analysis of the allowance for credit losses during 2013, 2012 and 2011 was as follows:
(Millions of dollars)
 
December 31, 2013
 
 
Customer
 
Dealer
 
Total
Allowance for Credit Losses:
 
 

 
 

 
 

Balance at beginning of year
 
$
414

 
$
9

 
$
423

Receivables written off
 
(179
)
 
—

 
(179
)
Recoveries on receivables previously written off
 
56

 
—

 
56

Provision for credit losses
 
83

 
1

 
84

Other
 
(9
)
 
—

 
(9
)
Balance at end of year
 
$
365

 
$
10

 
$
375

 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
70

 
$
—

 
$
70

Collectively evaluated for impairment
 
295

 
10

 
305

Ending Balance
 
$
365

 
$
10

 
$
375

 
 
 
 
 
 
 
Recorded Investment in Finance Receivables:
 
 

 
 

 
 

Individually evaluated for impairment
 
$
628

 
$
—

 
$
628

Collectively evaluated for impairment
 
19,668

 
3,765

 
23,433

Ending Balance
 
$
20,296

 
$
3,765

 
$
24,061

 
 
 
 
 
 
 
 
(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
 
$
54

 
$
—

 
$
54

Collectively evaluated for impairment
 
360

 
9

 
369

Ending Balance
 
$
414

 
$
9

 
$
423

 
 
 
 
 
 
 
Recorded Investment in Finance Receivables:
 
 

 
 

 
 

Individually evaluated for impairment
 
$
593

 
$
—

 
$
593

Collectively evaluated for impairment
 
18,831

 
3,884

 
22,715

Ending Balance
 
$
19,424

 
$
3,884

 
$
23,308

 
 
 
 
 
 
 








A-40


(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
 
$
34

 
$
—

 
$
34

Collectively evaluated for impairment
 
326

 
6

 
332

Ending Balance
 
$
360

 
$
6

 
$
366

 
 
 
 
 
 
 
Recorded Investment in Finance Receivables:
 
 
 
 
 
 
Individually evaluated for impairment
 
$
484

 
$
—

 
$
484

Collectively evaluated for impairment
 
17,109

 
2,387

 
19,496

Ending Balance
 
$
17,593

 
$
2,387

 
$
19,980

 
 
 
 
 
 
 
 
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 less selling costs. 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-41


(Millions of dollars)
 
December 31, 2013
 
 
Customer
 
Dealer
 
Total
Performing
 
 

 
 

 
 

North America
 
$
6,555

 
$
2,283

 
$
8,838

Europe
 
2,847

 
150

 
2,997

Asia Pacific
 
2,838

 
583

 
3,421

Mining
 
2,120

 
1

 
2,121

Latin America
 
2,539

 
748

 
3,287

Caterpillar Power Finance
 
2,972

 
—

 
2,972

Total Performing
 
$
19,871

 
$
3,765

 
$
23,636

 
 
 
 
 
 
 
Non-Performing
 
 

 
 

 
 

North America
 
$
26

 
$
—

 
$
26

Europe
 
28

 
—

 
28

Asia Pacific
 
50

 
—

 
50

Mining
 
23

 
—

 
23

Latin America
 
179

 
—

 
179

Caterpillar Power Finance
 
119

 
—

 
119

Total Non-Performing
 
$
425

 
$
—

 
$
425

 
 
 
 
 
 
 
Performing & Non-Performing
 
 

 
 

 
 

North America
 
$
6,581

 
$
2,283

 
$
8,864

Europe
 
2,875

 
150

 
3,025

Asia Pacific
 
2,888

 
583

 
3,471

Mining
 
2,143

 
1

 
2,144

Latin America
 
2,718

 
748

 
3,466

Caterpillar Power Finance
 
3,091

 
—

 
3,091

Total
 
$
20,296

 
$
3,765

 
$
24,061

 
 
 
 
 
 
 
 
 

A-42


(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-43


(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

 
 
 
 
 
 
 

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 less selling costs. 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, 2013, 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, 2013, 2012, and 2011 were as follows:
 

A-44


(Millions of dollars)
 
Year ended December 31, 2013
 
 
 
Number
 of Contracts
 
Pre-TDR
Outstanding 
Recorded
Investment
 
Post-TDR
Outstanding 
Recorded
Investment
 
Customer
 
 

 
 

 
 

 
North America
 
62

 
$
9

 
$
9

 
Europe 
 
51

 
7

 
7

 
Asia Pacific
 
3

 
1

 
1

 
Mining
 
45

 
123

 
123

 
Latin America
 
16

 
2

 
2

 
Caterpillar Power Finance 1 
 
17

 
153

 
157

 
Total 2 
 
194

 
$
295

 
$
299

 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2012
 
 
 
Number
 of Contracts
 
Pre-TDR
Outstanding 
Recorded
Investment
 
Post-TDR
Outstanding 
Recorded
Investment
 
Customer
 
 
 
 
 
 
 
North America
 
98

 
$
15

 
$
15

 
Europe 
 
21

 
8

 
8

 
Asia Pacific
 
12

 
3

 
3

 
Mining
 
—

 
—

 
—

 
Latin America
 
41

 
5

 
5

 
Caterpillar Power Finance 1 
 
27

 
253

 
253

 
Total 2 
 
199

 
$
284

 
$
284

 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2011
 
 
 
Number
 of Contracts
 
Pre-TDR
Outstanding 
Recorded
Investment
 
Post-TDR
Outstanding 
Recorded
Investment
 
Customer
 
 
 
 
 
 
 
North America
 
71

 
$
13

 
$
13

 
Europe 
 
7

 
44

 
44

 
Asia Pacific
 
—

 
—

 
—

 
Mining
 
—

 
—

 
—

 
Latin America
 
12

 
10

 
10

 
Caterpillar Power Finance 1 
 
35

 
117

 
117

 
Total 2 
 
125

 
$
184

 
$
184

 
 
 
 
 
 
 
 
 

1 
During the years ended December 31, 2013, 2012 and 2011, $25 million, $24 million and $15 million, respectively, of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The $25 million, $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, 2013, remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR were $6 million.
2 
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, 2013, 2012, and 2011 which had been modified within twelve months prior to the default date, were as follows:
 

A-45


(Millions of dollars)
 
Year ended December 31, 2013
 
Year ended December 31, 2012
 
Year ended December 31, 2011
 
 
 
Number
of Contracts
 
Post-TDR
Recorded
Investment
 
Number
of Contracts
 
Post-TDR
Recorded
Investment
 
Number
of Contracts
 
Post-TDR
Recorded
Investment
 
Customer
 
 

 
 

 
 
 
 
 
 
 
 
 
North America
 
19

 
$
4

 
49

 
$
4

 
48

 
$
26

 
Europe
 
5

 
—

 
—

 
—

 
1

 
1

 
Asia Pacific
 
—

 
—

 
2

 
1

 
—

 
—

 
Mining
 
—

 
—

 
—

 
—

 
—

 
—

 
Latin America
 
—

 
—

 
—

 
—

 
7

 
4

 
Caterpillar Power Finance
 
2

 
3

 
16

 
21

 
14

 
70

 
Total
 
26

 
$
7

 
67

 
$
26

 
70

 
$
101

 
 
 
 
 
 

D.
Securitized Retail Installment Sale Contracts and Finance Leases
 
Cat Financial has periodically transferred 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.  As a result, Cat Financial had no assets or liabilities related to their securitization program as of  December 31, 2013, 2012 or 2011.
 
7.
Inventories
 
Inventories (principally using the LIFO method) are comprised of the following:
 
 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Raw materials
 
$
2,966

 
$
3,573

 
$
3,766

Work-in-process
 
2,589

 
2,920

 
2,959

Finished goods
 
6,785

 
8,767

 
7,562

Supplies
 
285

 
287

 
257

Total inventories
 
$
12,625

 
$
15,547

 
$
14,544

 
 
 
 
 
 
 
 
We had long-term material purchase obligations of approximately $1,568 million at December 31, 2013.

During 2013 inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory layers carried at lower costs prevailing in prior years as compared with current costs. In 2013, the effect of this reduction of inventory decreased Cost of goods sold by approximately $115 million and increased Profit by approximately $81 million or $0.12 per share.




 

A-46


8.
Property, plant and equipment
 
 
 
 
 
December 31,
(Millions of dollars)
 
Useful
Lives (Years)
 
2013
 
2012
 
2011
Land
 
—
 
$
688

 
$
723

 
$
753

Buildings and land improvements
 
20-45
 
6,928

 
6,214

 
5,857

Machinery, equipment and other
 
3-10
 
16,793

 
16,073

 
14,435

Equipment leased to others
 
1-10
 
5,365

 
4,658

 
4,285

Construction-in-process
 
—
 
1,542

 
2,264

 
1,996

Total property, plant and equipment, at cost
 
 
 
31,316

 
29,932

 
27,326

Less: Accumulated depreciation
 
 
 
(14,241
)
 
(13,471
)
 
(12,931
)
Property, plant and equipment–net
 
 
 
$
17,075

 
$
16,461

 
$
14,395

 
 
 
 
 
 
 
 
 
 
We had commitments for the purchase or construction of capital assets of approximately $269 million at December 31, 2013.
 
Assets recorded under capital leases: 1
 
 
 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Gross capital leases 2 
 
$
125

 
$
134

 
$
131

Less: Accumulated depreciation
 
(50
)
 
(58
)
 
(75
)
Net capital leases
 
$
75

 
$
76

 
$
56

 
1 
Included in Property, plant and equipment table above.
2 
Consists primarily of machinery and equipment.
 
 
 
 
 
 
At December 31, 2013, scheduled minimum rental payments on assets recorded under capital leases were:
 
(Millions of dollars)
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
$
10

 
$
14

 
$
22

 
$
7

 
$
7

 
$
47

 
Equipment leased to others (primarily by Cat Financial):
 
 
 
 
 
 
 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Equipment leased to others–at original cost
 
$
5,365

 
$
4,658

 
$
4,285

Less: Accumulated depreciation
 
(1,521
)
 
(1,383
)
 
(1,406
)
Equipment leased to others–net
 
$
3,844

 
$
3,275

 
$
2,879

 
 
 
 
 
 
 
 
At December 31, 2013, scheduled minimum rental payments to be received for equipment leased to others were:
 
(Millions of dollars)
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
$
916

 
$
626

 
$
379

 
$
191

 
$
95

 
$
45



A-47


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)
 
2013
 
2012
 
2011
Results of Operations:
 
 

 
 

 
 

Sales
 
$
1,336

 
$
1,084

 
$
966

Cost of sales
 
1,048

 
872

 
797

Gross profit
 
$
288

 
$
212

 
$
169

 
 
 
 
 
 
 
Profit (loss)
 
$
(28
)
 
$
28

 
$
(46
)
 
 
 
 
 
 
 
  
Financial Position of unconsolidated affiliated companies:
 
 
 
 
 
 
 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Financial Position:
 
 

 
 

 
 

Assets:
 
 

 
 

 
 

Current assets
 
$
683

 
$
715

 
$
345

Property, plant and equipment–net
 
710

 
529

 
200

Other assets
 
608

 
616

 
9

 
 
2,001

 
1,860

 
554

Liabilities:
 
 

 
 

 
 

Current liabilities
 
437

 
443

 
220

Long-term debt due after one year
 
900

 
708

 
72

Other liabilities
 
262

 
170

 
17

 
 
1,599

 
1,321

 
309

Equity
 
$
402

 
$
539

 
$
245

 
 
 
 
 
 
 

Caterpillar’s investments in unconsolidated affiliated companies:
 
 
 
 
 
 
 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Investments in equity method companies
 
$
262

 
$
256

 
$
111

Plus: Investments in cost method companies
 
10

 
16

 
22

Total investments in unconsolidated affiliated companies
 
$
272

 
$
272

 
$
133

 
 
 
 
 
 
 
 
The increase in the 2012 financial position and equity investments amounts from 2011 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.




A-48


10.  Intangible assets and goodwill

A.
Intangible assets
 
Intangible assets are comprised of the following:
 
 
 
 
 
December 31, 2013
(Millions of dollars)
 
Weighted
Amortizable
Life (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
 
15
 
$
2,653

 
$
(539
)
 
$
2,114

Intellectual property
 
11
 
1,821

 
(495
)
 
1,326

Other
 
10
 
274

 
(136
)
 
138

Total finite-lived intangible assets
 
13
 
4,748

 
(1,170
)
 
3,578

Indefinite-lived intangible assets - In-process research & development
 
 
 
18

 
—

 
18

Total intangible assets
 
 
 
$
4,766

 
$
(1,170
)
 
$
3,596

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
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

 
 
 
 
 
 
 
 
 
 
During 2013, we acquired finite-lived intangible assets aggregating $70 million due to the purchase of Johan Walter Berg AB (Berg). See Note 24 for details on this acquisition.

Gross customer relationship intangibles of $168 million and related accumulated amortization of $25 million were reclassified from Intangible assets to assets held for sale and/or divested during 2013, and are not included in the December 31, 2013 balances in the table above. These transactions were related to the divestiture of portions of the Bucyrus distribution business. See Note 26 for additional information on divestitures and assets held for sale.

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 24 for details on these acquisitions.

Gross customer relationship intangibles of $207 million and related accumulated amortization of $93 million were reclassified from Intangible assets to held for sale and/or divested during 2012, and are not included in the December 31, 2012 balances in the table above. These transactions primarily related to the divestiture of portions of the Bucyrus distribution business and our third party logistics business. See Note 26 for additional information on divestitures and assets held for sale.

A-49



Gross customer relationship intangibles of $51 million and related 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 International, Inc. (Bucyrus) ($3,901 million), Pyroban Group Ltd. (Pyroban) ($41 million) and MWM Holding GmbH (MWM) ($221 million).  See Note 24 for details on these acquisitions.
 
As described in Note 26, 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.
 
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 $371 million, $387 million and $233 million for 2013, 2012 and 2011, respectively.

As of December 31, 2013, amortization expense related to intangible assets is expected to be:
 
(Millions of dollars)
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
$
365

 
$
354

 
$
333

 
$
331

 
$
327

 
$
1,886

 
 
 
 
 
 
 
 
 
 
 
 
B.
Goodwill
 
During 2013, we acquired net assets with related goodwill of $106 million due to the purchase of Berg. See Note 24 for details on this acquisition.

As discussed in Note 24, 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 24 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 24 for details on these acquisitions.

A-50


 
Goodwill of $65 million, $181 million and $409 million was reclassified to held for sale and/or divested during 2013, 2012 and 2011, respectively, and is not included in the December 31, 2013, 2012 and 2011 respective balances in the table below. The reclassified/divested amount in 2013 was related to the divestiture of portions of the Bucyrus distribution business and the sale of certain Power Systems assets that were accounted for as a business. The reclassified/divested amounts in 2012 and 2011 primarily related to the divestiture of portions of the Bucyrus distribution business. See Note 26 for additional information on divestitures and assets held for sale.
 
The changes in carrying amount of goodwill by reportable segment for the years ended December 31, 2013, 2012 and 2011 were as follows:
 

A-51


(Millions of dollars)
 
December 31, 2012
 
Acquisitions 1
 
Held for Sale and Business Divestitures 2
 
Impairment Loss
 
Other Adjustments 3
 
December 31, 2013
Construction Industries
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
$
382

 
$
—

 
$
—

 
$
—

 
$
(56
)
 
$
326

Resource Industries
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
4,559

 
—

 
(55
)
 
—

 
11

 
4,515

Impairments
 
(602
)
 
—

 
—

 
—

 
—

 
(602
)
Net goodwill
 
3,957

 
—

 
(55
)
 
—

 
11

 
3,913

Power Systems
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
2,486

 
106

 
(10
)
 
—

 
18

 
2,600

All Other 4
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
117

 
—

 
—

 
—

 
—

 
117

Consolidated total
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
7,544

 
106

 
(65
)
 
—

 
(27
)
 
7,558

Impairments
 
(602
)
 
—

 
—

 
—

 
—

 
(602
)
Net goodwill
 
$
6,942

 
$
106

 
$
(65
)
 
$
—

 
$
(27
)
 
$
6,956

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Acquisitions 1
 
Held for Sale and Business Divestitures 2
 
Impairment Loss
 
Other Adjustments 3
 
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 4
 
 
 
 
 
 
 
 
 
 
 
 
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 1
 
Held for Sale and Business Divestitures 2
 
Impairment Loss
 
Other Adjustments 3
 
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 4
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
1 
See Note 24 for additional information.
2 
See Note 26 for additional information.
3 
Other adjustments are comprised primarily of foreign currency translation.
4 
Includes All Other operating segment (See Note 23).
 
 
 
 
 


A-52


11.
Available-for-sale securities
 
We have investments in certain debt and equity securities, primarily at Insurance Services, that have been classified as available-for-sale and recorded at fair value 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, 2013
 
December 31, 2012
 
December 31, 2011
(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

 
$
10

 
$
—

 
$
10

Other U.S. and non-U.S. government bonds
 
119

 
1

 
120

 
144

 
2

 
146

 
90

 
2

 
92

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate bonds
 
612

 
21

 
633

 
626

 
38

 
664

 
542

 
30

 
572

Asset-backed securities
 
72

 
—

 
72

 
96

 
—

 
96

 
112

 
(1
)
 
111

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed debt securities
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. governmental agency
 
322

 
(1
)
 
321

 
291

 
8

 
299

 
297

 
13

 
310

Residential
 
18

 
—

 
18

 
26

 
(1
)
 
25

 
33

 
(3
)
 
30

Commercial
 
87

 
6

 
93

 
117

 
10

 
127

 
142

 
3

 
145

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Large capitalization value
 
173

 
81

 
254

 
147

 
38

 
185

 
127

 
21

 
148

Smaller company growth
 
25

 
24

 
49

 
22

 
12

 
34

 
22

 
7

 
29

Total
 
$
1,438

 
$
132

 
$
1,570

 
$
1,479

 
$
107

 
$
1,586

 
$
1,375

 
$
72

 
$
1,447

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

During 2013, 2012 and 2011, charges for other-than-temporary declines in the market values of securities were $1 million, $2 million and $5 million, respectively.  These charges were accounted for as realized losses and were included in Other income (expense) in Statement 1.  The cost basis of the impacted securities was adjusted to reflect these charges.

 

A-53


Investments in an unrealized loss position that are not other-than-temporarily impaired:
 
 
 
 
 
December 31, 2013
 
 
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
 
$
159

 
$
2

 
$
1

 
$
—

 
$
160

 
$
2

Asset-backed securities
 
6

 
—

 
20

 
1

 
26

 
1

 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed debt securities
 
 

 
 

 
 

 
 

 
 

 
 

U.S. governmental agency
 
140

 
4

 
65

 
2

 
205

 
6

Total
 
$
305

 
$
6

 
$
86

 
$
3

 
$
391

 
$
9

 
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, 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.
 
 
 
 
 



A-54


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.
 
 
 
 
 

Corporate Bonds.  The unrealized losses on our investments in corporate bonds and asset-backed securities relate 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, 2013.
 
Mortgage-Backed Debt Securities.  The unrealized losses on our investments in mortgage-backed securities are a function of higher delinquencies, default rates and underlying market yields 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, 2013.
 
The cost basis and fair value of the available-for-sale debt securities at December 31, 2013, 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, 2013
(Millions of dollars)
 
Cost Basis
 
Fair Value
Due in one year or less
 
$
187

 
$
188

Due after one year through five years
 
572

 
592

Due after five years through ten years
 
24

 
25

Due after ten years
 
30

 
30

U.S. governmental agency mortgage-backed securities
 
322

 
321

Residential mortgage-backed securities
 
18

 
18

Commercial mortgage-backed securities
 
87

 
93

Total debt securities – available-for-sale
 
$
1,240

 
$
1,267

 
 
 
 
 
  

A-55


 
 
 
 
 
 
 
Sales of Securities:
 
 
 
 
 
 
 
 
Years Ended December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Proceeds from the sale of available-for-sale securities
 
$
449

 
$
306

 
$
247

Gross gains from the sale of available-for-sale securities
 
$
22

 
$
6

 
$
4

Gross losses from the sale of available-for-sale securities
 
$
2

 
$
—

 
$
1

 
 
 
 
 
 
 
 
12.
Postemployment benefit plans
 
We provide defined benefit pension plans, defined contribution plans and/or other postretirement benefit plans (retirement health care and life insurance) to employees in many of our locations throughout the world. Our defined benefit pension 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. The benefit obligation related to our non-U.S. defined benefit pension plans are for employees located primarily in Europe, Japan and Brazil. For other postretirement benefits, substantially all of our benefit obligation is for employees located in the United States.
  
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 contractual 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 the impacted employees, pension benefit accruals were frozen on January 1, 2013 or will freeze 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.
 

A-56


A.
Benefit obligations
 
 
 
U.S. Pension Benefits
 
Non-U.S. Pension Benefits
 
Other Postretirement 
Benefits
(Millions of dollars)
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Change in benefit obligation:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Benefit obligation, beginning of year
 
$
15,913

 
$
14,782

 
$
13,024

 
$
4,737

 
$
4,299

 
$
3,867

 
$
5,453

 
$
5,381

 
$
5,184

Service cost
 
196

 
185

 
158

 
120

 
108

 
115

 
108

 
92

 
84

Interest cost
 
581

 
609

 
651

 
166

 
182

 
182

 
195

 
221

 
253

Plan amendments
 
—

 
—

 
1

 
—

 
12

 
(24
)
 
1

 
(38
)
 
(121
)
Actuarial losses (gains)
 
(1,450
)
 
1,168

 
1,635

 
(41
)
 
385

 
312

 
(658
)
 
186

 
306

Foreign currency exchange rates
 
—

 
—

 
—

 
(81
)
 
49

 
(32
)
 
(19
)
 
(11
)
 
(19
)
Participant contributions
 
—

 
—

 
—

 
10

 
9

 
9

 
57

 
48

 
44

Benefits paid - gross
 
(845
)
 
(831
)
 
(823
)
 
(254
)
 
(190
)
 
(187
)
 
(339
)
 
(394
)
 
(388
)
Less: federal subsidy on benefits paid
 
—

 
—

 
—

 
—

 
—

 
—

 
8

 
16

 
14

Curtailments, settlements and termination benefits
 
(7
)
 
—

 
(3
)
 
(56
)
 
(67
)
 
(83
)
 
—

 
(48
)
 
(6
)
Acquisitions, divestitures and other 1
 
31

 
—

 
139

 
8

 
(50
)
 
140

 
(22
)
 
—

 
30

Benefit obligation, end of year
 
$
14,419

 
$
15,913

 
$
14,782

 
$
4,609

 
$
4,737

 
$
4,299

 
$
4,784

 
$
5,453

 
$
5,381

Accumulated benefit obligation, end of year
 
$
14,056

 
$
15,132

 
$
14,055

 
$
4,247

 
$
4,329

 
$
3,744

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average assumptions used to determine benefit obligation:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Discount rate 2 
 
4.6
%
 
3.7
%
 
4.3
%
 
4.1
%
 
3.7
%
 
4.3
%
 
4.6
%
 
3.7
%
 
4.3
%
Rate of compensation increase 2 
 
4.0
%
 
4.5
%
 
4.5
%
 
4.2
%
 
3.9
%
 
3.9
%
 
4.0
%
 
4.4
%
 
4.4
%
 
1 
In 2013, charge to recognize a previously unrecorded liability related to a subsidiary's pension plans and an adjustment to other postretirement benefits related to certain other benefits. See Note 26 regarding the divestiture of the third party logistics business in 2012 and Note 24 for the acquisition of Bucyrus International in 2011.
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 2013 service and interest cost components of other postretirement benefit cost
 
$
26

 
$
(22
)
Effect on accumulated postretirement benefit obligation
 
$
274

 
$
(230
)


A-57


B.
Plan assets

 
 
U.S. Pension Benefits
 
Non-U.S. Pension Benefits
 
Other Postretirement 
Benefits
(Millions of dollars)
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Change in plan assets:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fair value of plan assets, beginning of year
 
$
10,981

 
$
9,997

 
$
10,760

 
$
3,426

 
$
2,818

 
$
2,880

 
$
789

 
$
814

 
$
996

Actual return on plan assets
 
1,722

 
1,235

 
(270
)
 
535

 
368

 
(83
)
 
158

 
117

 
(45
)
Foreign currency exchange rates
 
—

 
—

 
—

 
(41
)
 
47

 
(1
)
 
—

 
—

 
—

Company contributions
 
541

 
580

 
212

 
303

 
446

 
234

 
157

 
204

 
207

Participant contributions
 
—

 
—

 
—

 
10

 
9

 
9

 
57

 
48

 
44

Benefits paid
 
(845
)
 
(831
)
 
(823
)
 
(254
)
 
(190
)
 
(187
)
 
(339
)
 
(394
)
 
(388
)
Settlements and termination benefits
 
(4
)
 
—

 
—

 
(30
)
 
(72
)
 
(41
)
 
—

 
—

 
—

Acquisitions / other 1 
 
—

 
—

 
118

 
—

 
—

 
7

 
—

 
—

 
—

Fair value of plan assets, end of year
 
$
12,395

 
$
10,981

 
$
9,997

 
$
3,949

 
$
3,426

 
$
2,818

 
$
822

 
$
789

 
$
814

 
1 
See Note 24 regarding Bucyrus International in 2011.
 
 
 
 
 

Our current U.S. pension target asset allocations are 60 percent equities and 40 percent fixed income.  Our strategy includes further aligning our investments to our liabilities, while reducing risk in our portfolio. 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 59 percent equities, 32 percent fixed income, 7 percent real estate and 2 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 70 percent equities and 30 percent fixed income. 
 
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 18 for a discussion of the fair value hierarchy.
 
Fair values are determined as follows:
 
•
Equity securities are primarily based on valuations for identical instruments in active markets.
•
Fixed income securities are primarily based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.
•
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 the fund’s net asset value.

The fair value of the pension and other postretirement benefit plan assets by category is summarized below:
 

A-58


 
 
December 31, 2013
(Millions of dollars)
 
Level 1
 
Level 2
 
Level 3
 
Total Assets,
at Fair Value
U.S. Pension
 
 

 
 

 
 

 
 

Equity securities:
 
 

 
 

 
 

 
 

U.S. equities
 
$
4,337

 
$
—

 
$
129

 
$
4,466

Non-U.S. equities
 
3,058

 
—

 
—

 
3,058

 
 
 
 
 
 
 
 
 
Fixed income securities:
 
 

 
 

 
 

 
 

U.S. corporate bonds
 
—

 
2,123

 
34

 
2,157

Non-U.S. corporate bonds
 
—

 
327

 
20

 
347

U.S. government bonds
 
—

 
774

 
—

 
774

U.S. governmental agency mortgage-backed securities
 
—

 
905

 
—

 
905

Non-U.S. government bonds
 
—

 
52

 
—

 
52

 
 
 
 
 
 
 
 
 
Real estate
 
—

 
—

 
8

 
8

 
 
 
 
 
 
 
 
 
Cash, short-term instruments and other
 
22

 
606

 
—

 
628

Total U.S. pension assets
 
$
7,417

 
$
4,787

 
$
191

 
$
12,395

 
 
 
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

 

A-59


 
 
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

 
 
 
 
 
 
 
 
 

 
 
December 31, 2013
(Millions of dollars)
 
Level 1
 
Level 2
 
Level 3
 
Total Assets,
 at Fair Value
Non-U.S. Pension
 
 

 
 

 
 

 
 

Equity securities:
 
 

 
 

 
 

 
 

U.S. equities
 
$
607

 
$
1

 
$
—

 
$
608

Non-U.S. equities
 
1,022

 
160

 
—

 
1,182

Global equities 1 
 
235

 
54

 
—

 
289

 
 
 
 
 
 
 
 
 
Fixed income securities:
 
 

 
 

 
 

 
 

U.S. corporate bonds
 
—

 
84

 
9

 
93

Non-U.S. corporate bonds
 
—

 
534

 
12

 
546

U.S. government bonds
 
—

 
3

 
—

 
3

Non-U.S. government bonds
 
—

 
418

 
—

 
418

Global fixed income 1 
 
—

 
397

 
—

 
397

 
 
 
 
 
 
 
 
 
Real estate
 
—

 
136

 
111

 
247

 
 
 
 
 
 
 
 
 
Cash, short-term instruments and other 2 
 
141

 
25

 
—

 
166

Total non-U.S. pension assets
 
$
2,005

 
$
1,812

 
$
132

 
$
3,949

 

A-60


 
 
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

 
 
 
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

 
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.
 
 
 
 
 


A-61


 
 
December 31, 2013
(Millions of dollars)
 
Level 1
 
Level 2
 
Level 3
 
Total Assets,
at Fair Value
Other Postretirement Benefits
 
 

 
 

 
 

 
 

Equity securities:
 
 

 
 

 
 

 
 

U.S. equities
 
$
388

 
$
—

 
$
—

 
$
388

Non-U.S. equities
 
189

 
—

 
—

 
189

 
 
 
 
 
 
 
 
 
Fixed income securities:
 
 

 
 

 
 

 
 

U.S. corporate bonds
 
—

 
101

 
—

 
101

Non-U.S. corporate bonds
 
—

 
17

 
—

 
17

U.S. government bonds
 
—

 
23

 
—

 
23

U.S. governmental agency mortgage-backed securities
 
—

 
49

 
—

 
49

Non-U.S. government bonds
 
—

 
2

 
—

 
2

 
 
 
 
 
 
 
 
 
Cash, short-term instruments and other
 
8

 
45

 
—

 
53

Total other postretirement benefit assets
 
$
585

 
$
237

 
$
—

 
$
822

 
 
 
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


A-62


 
 
 
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

 
 
 
 
 

Below are roll-forwards of assets measured at fair value using Level 3 inputs for the years ended December 31, 2013, 2012 and 2011.  These instruments were valued using pricing models that, in management’s judgment, reflect the assumptions a market participant would use.
 

A-63


(Millions of dollars)
 
Equities
 
Fixed Income
 
Real Estate
 
Other
U.S. Pension
 
 

 
 

 
 

 
 

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

 
$
—

Unrealized gains (losses)
 
10

 
(1
)
 
—

 
—

Realized gains (losses)
 
4

 
—

 
—

 
—

Purchases, issuances and settlements, net
 
17

 
12

 
—

 
—

Transfers in and/or out of Level 3
 
—

 
(2
)
 
—

 
—

Balance at December 31, 2013
 
$
129

 
$
54

 
$
8

 
$
—

 
 
 
 
 
 
 
 
 
Non-U.S. Pension
 
 

 
 

 
 

 
 

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

 
$
—

Unrealized gains (losses)
 
—

 
—

 
7

 
—

Realized gains (losses)
 
—

 
—

 
—

 
—

Purchases, issuances and settlements, net
 
—

 
16

 
—

 
—

Transfers in and/or out of Level 3
 
—

 
—

 
—

 
—

Balance at December 31, 2013
 
$
—

 
$
21

 
$
111

 
$
—

 
 
 
 
 
 
 
 
 
 
Equity securities within plan assets include Caterpillar Inc. common stock in the amounts of:
 
 
 
U.S. Pension Benefits 1
 
Non-U.S. Pension Benefits
 
Other Postretirement
Benefits
(Millions of dollars)
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Caterpillar Inc. common stock
 
$
495

 
$
597

 
$
653

 
$
—

 
$
1

 
$
1

 
$
—

 
$
1

 
$
1

 
1 
Amounts represent 4 percent, 5 percent and 7 percent of total plan assets for 2013, 2012 and 2011, respectively.
 
 
 
 
 


A-64


C.
Funded status
 
The funded status of the plans, reconciled to the amount reported on Statement 3, is as follows:
 
 
 
U.S. Pension Benefits
 
Non-U.S. Pension Benefits
 
Other Postretirement Benefits
(Millions of dollars)
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
End of Year
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fair value of plan assets
 
$
12,395

 
$
10,981

 
$
9,997

 
$
3,949

 
$
3,426

 
$
2,818

 
$
822

 
$
789

 
$
814

Benefit obligations
 
14,419

 
15,913

 
14,782

 
4,609

 
4,737

 
4,299

 
4,784

 
5,453

 
5,381

Over (under) funded status recognized in financial position
 
$
(2,024
)
 
$
(4,932
)
 
$
(4,785
)
 
$
(660
)
 
$
(1,311
)
 
$
(1,481
)
 
$
(3,962
)
 
$
(4,664
)
 
$
(4,567
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Components of net amount recognized in financial position:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other assets (non-current asset)
 
$
5

 
$
—

 
$
—

 
$
123

 
$
30

 
$
3

 
$
—

 
$
—

 
$
—

Accrued wages, salaries and employee benefits (current liability)
 
(26
)
 
(23
)
 
(21
)
 
(29
)
 
(27
)
 
(26
)
 
(169
)
 
(169
)
 
(171
)
Liability for postemployment benefits (non-current liability)
 
(2,003
)
 
(4,909
)
 
(4,764
)
 
(754
)
 
(1,314
)
 
(1,458
)
 
(3,793
)
 
(4,495
)
 
(4,396
)
Net liability recognized
 
$
(2,024
)
 
$
(4,932
)
 
$
(4,785
)
 
$
(660
)
 
$
(1,311
)
 
$
(1,481
)
 
$
(3,962
)
 
$
(4,664
)
 
$
(4,567
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts recognized in Accumulated other comprehensive income (pre-tax) consist of:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net actuarial loss (gain)
 
$
4,396

 
$
7,286

 
$
7,044

 
$
1,373

 
$
1,907

 
$
1,712

 
$
662

 
$
1,528

 
$
1,495

Prior service cost (credit)
 
19

 
36

 
63

 
13

 
22

 
15

 
(84
)
 
(159
)
 
(188
)
Transition obligation (asset)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3

 
5

Total
 
$
4,415

 
$
7,322

 
$
7,107

 
$
1,386

 
$
1,929

 
$
1,727

 
$
578

 
$
1,372

 
$
1,312

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The estimated amounts that will be amortized from Accumulated other comprehensive income (loss) at December 31, 2013 into net periodic benefit cost (pre-tax) in 2014 are as follows:
 
(Millions of dollars)
 
U.S.
Pension Benefits
 
Non-U.S.
Pension Benefits
 
Other
Postretirement
Benefits
Net actuarial loss (gain)
 
$
392

 
$
86

 
$
41

Prior service cost (credit)
 
17

 
1

 
(54
)
Transition obligation (asset)
 
—

 
—

 
—

Total
 
$
409

 
$
87

 
$
(13
)
 
 
 
 
 
 
 
 
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)
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Projected benefit obligation
 
$
14,352

 
$
15,913

 
$
14,782

 
$
4,177

 
$
4,310

 
$
4,293

Accumulated benefit obligation
 
$
13,989

 
$
15,132

 
$
14,055

 
$
3,820

 
$
3,903

 
$
3,738

Fair value of plan assets
 
$
12,323

 
$
10,981

 
$
9,997

 
$
3,394

 
$
2,969

 
$
2,809

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

A-65


 
 
U.S. Pension Benefits at Year-end
 
Non-U.S. Pension Benefits at Year-end
(Millions of dollars)
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Projected benefit obligation
 
$
14,352

 
$
15,913

 
$
14,782

 
$
1,436

 
$
4,107

 
$
4,112

Accumulated benefit obligation
 
$
13,989

 
$
15,132

 
$
14,055

 
$
1,374

 
$
3,752

 
$
3,600

Fair value of plan assets
 
$
12,323

 
$
10,981

 
$
9,997

 
$
797

 
$
2,806

 
$
2,661

 
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:
 
 

 
 

 
 

2014 (expected)
 
$
240

 
$
270

 
$
210

 
 
 
 
 
 
 
Expected benefit payments:
 
 

 
 

 
 

2014
 
$
890

 
$
250

 
$
340

2015
 
900

 
210

 
350

2016
 
910

 
220

 
350

2017
 
930

 
220

 
360

2018
 
940

 
220

 
360

2019-2023
 
4,810

 
1,200

 
1,850

Total
 
$
9,380

 
$
2,320

 
$
3,610

 
 
 
 
 
 
 
 
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)
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019-2023
 
Total
Other postretirement benefits
 
$
20

 
$
20

 
$
20

 
$
20

 
$
20

 
$
115

 
$
215

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


A-66


E.
Net periodic cost
 
 
 
U.S. Pension Benefits
 
Non-U.S. Pension Benefits
 
Other Postretirement Benefits
(Millions of dollars)
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
 
2013
 
2012
 
2011
Components of net periodic benefit cost:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
196

 
$
185

 
$
158

 
$
120

 
$
108

 
$
115

 
$
108

 
$
92

 
$
84

Interest cost
 
581

 
609

 
651

 
166

 
182

 
182

 
195

 
221

 
253

Expected return on plan assets 1
 
(832
)
 
(812
)
 
(798
)
 
(225
)
 
(215
)
 
(210
)
 
(56
)
 
(63
)
 
(70
)
Other adjustments 2
 
31

 
—

 
—

 
—

 
—

 
—

 
(22
)
 
—

 
—

Curtailments, settlements and termination benefits 3 
 
—

 
7

 
—

 
2

 
38

 
19

 
—

 
(40
)
 
—

Amortization of:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Transition obligation (asset)
 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
2

 
2

Prior service cost (credit) 4 
 
18

 
19

 
20

 
1

 
1

 
3

 
(73
)
 
(68
)
 
(55
)
Net actuarial loss (gain) 5
 
546

 
504

 
451

 
128

 
97

 
74

 
107

 
100

 
108

Total cost included in operating profit
 
$
540

 
$
512

 
$
482

 
$
192

 
$
211

 
$
183

 
$
261

 
$
244

 
$
322

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other changes in plan assets and benefit obligations recognized in other comprehensive income (pre-tax):
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Current year actuarial loss (gain)
 
$
(2,344
)
 
$
745

 
$
2,700

 
$
(406
)
 
$
225

 
$
526

 
$
(759
)
 
$
133

 
$
408

Amortization of actuarial (loss) gain
 
(546
)
 
(504
)
 
(451
)
 
(128
)
 
(97
)
 
(72
)
 
(107
)
 
(100
)
 
(108
)
Current year prior service cost (credit)
 
—

 
(7
)
 
—

 
(7
)
 
10

 
(25
)
 
2

 
(38
)
 
(121
)
Amortization of prior service (cost) credit
 
(18
)
 
(19
)
 
(20
)
 
(1
)
 
(1
)
 
(3
)
 
73

 
68

 
55

Amortization of transition (obligation) asset
 
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
 
(2
)
Total recognized in other comprehensive income
 
(2,908
)
 
215

 
2,229

 
(542
)
 
137

 
426

 
(793
)
 
61

 
232

Total recognized in net periodic cost and other comprehensive income
 
$
(2,368
)
 
$
727

 
$
2,711

 
$
(350
)
 
$
348

 
$
609

 
$
(532
)
 
$
305

 
$
554

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average assumptions used to determine net cost:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Discount rate
 
3.7
%
 
4.3
%
 
5.1
%
 
3.7
%
 
4.3
%
 
4.6
%
 
3.7
%
 
4.3
%
 
5.0
%
Expected rate of return on plan assets 6 
 
7.8
%
 
8.0
%
 
8.5
%
 
6.8
%
 
7.1
%
 
7.1
%
 
7.8
%
 
8.0
%
 
8.5
%
Rate of compensation increase
 
4.5
%
 
4.5
%
 
4.5
%
 
3.9
%
 
3.9
%
 
4.1
%
 
4.4
%
 
4.4
%
 
4.4
%
1 
Expected return on plan assets developed using calculated market-related value of plan assets which recognizes differences in expected and actual returns over a three-year period.
2 
Charge to recognize a previously unrecorded liability related to a subsidiary's pension plans and an adjustment to other postretirement benefits related to certain other benefits.
3 
Curtailments, settlements and termination benefits were recognized in Other operating (income) expenses in Statement 1.
4 
Prior service cost (credit) for both pension and other postretirement benefits are generally amortized using the straight-line method over the average remaining service period of active employees expected to receive benefits from the plan. For pension plans in which all or almost all of the plan's participants are inactive and 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) are amortized using the straight-line method over the remaining life expectancy of those participants.
5 
Net actuarial loss (gain) for pension and other postretirement benefit plans are generally amortized using the straight-line method over the average remaining service period of active employees expected to receive benefits from the plan. For plans in which all or almost all of the plan’s participants are inactive, net actuarial loss (gain) are amortized using the straight-line method over the remaining life expectancy of the inactive participants.
6 
The weighted-average rates for 2014 are 7.8 percent and 6.9 percent for U.S. and non-U.S. pension plans, respectively.
 
 
 
 
 


A-67


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.
 
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 2013, 2012 and 2011.  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 7.1 percent in our calculation of 2013 benefit expense.  We expect a weighted-average increase of 6.6 percent during 2014.  The 2013 and 2014 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 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 primary U.S. 401(k) plan allows eligible employees to contribute a portion of their cash compensation to the plan on a tax-deferred basis. Employees with frozen defined benefit pension accruals are eligible for matching contributions equal to 100 percent of employee contributions to the plan up to 6 percent of cash compensation and an annual employer contribution that ranges from 3 to 5 percent of cash compensation (depending on years of service and age). Employees that are still accruing benefits under a defined benefit pension plan are eligible for matching contributions equal to 50 percent of employee contributions up to 6 percent of cash 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.
 
Total company costs related to U.S. and non-U.S. defined contribution plans were as follows:
 
(Millions of dollars)
 
2013
 
2012
 
2011
U.S. plans
 
$
308

 
$
260

 
$
219

Non-U.S. plans
 
64

 
60

 
54

 
 
$
372

 
$
320

 
$
273

 
 
 
 
 
 
 


A-68


H.
Summary of long-term liability:
 
 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Pensions:
 
 

 
 

 
 

U.S. pensions
 
$
2,003

 
$
4,909

 
$
4,764

Non-U.S. pensions
 
754

 
1,314

 
1,458

Total pensions
 
2,757

 
6,223

 
6,222

Postretirement benefits other than pensions
 
3,793

 
4,495

 
4,396

Other postemployment benefits
 
99

 
81

 
73

Defined contribution
 
324

 
286

 
265

 
 
$
6,973

 
$
11,085

 
$
10,956

 
 
 
 
 
 
 

13.
Short-term borrowings
 
 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
Machinery and Power Systems:
 
 

 
 

 
 

Notes payable to banks
 
$
16

 
$
484

 
$
93

Notes payable to certain former shareholders of Siwei
 
—

 
152

 
—

Commercial paper
 
—

 
—

 
—

 
 
16

 
636

 
93

Financial Products:
 
 

 
 

 
 

Notes payable to banks
 
545

 
418

 
527

Commercial paper
 
2,502

 
3,654

 
2,818

Demand notes
 
616

 
579

 
550

 
 
3,663

 
4,651

 
3,895

Total short-term borrowings
 
$
3,679

 
$
5,287

 
$
3,988

 
 
 
 
 
 
 
 
The weighted-average interest rates on short-term borrowings outstanding were:
 
 
 
December 31,
 
 
2013
 
2012
 
2011
Notes payable to banks
 
6.3
%
 
5.8
%
 
7.2
%
Commercial paper
 
0.5
%
 
0.6
%
 
1.0
%
Demand notes
 
0.8
%
 
0.8
%
 
0.9
%
 
 
 
 
 
 
 
 
The notes payable to certain former shareholders of Siwei did not bear interest and were settled during the second quarter of 2013. Please refer to Note 26 for more information. Please refer to Note 18 and Table III for fair value information on short-term borrowings.


A-69


14.
Long-term debt
 
 
 
December 31,
(Millions of dollars)
 
2013
 
2012
 
2011
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
 
506

 
508

 
510

Notes—3.900% due 2021
 
1,246

 
1,245

 
1,245

Notes—5.200% due 2041
 
757

 
757

 
1,247

Debentures—7.000% due 2013
 
—

 
—

 
350

Debentures—0.950% due 2015
 
500

 
500

 
—

Debentures—1.500% due 2017
 
500

 
499

 
—

Debentures—7.900% due 2018
 
899

 
899

 
899

Debentures—9.375% due 2021
 
120

 
120

 
120

Debentures—2.600% due 2022
 
498

 
498

 
—

Debentures—8.000% due 2023
 
82

 
82

 
82

Debentures—6.625% due 2028
 
193

 
193

 
299

Debentures—7.300% due 2031
 
241

 
241

 
349

Debentures—5.300% due 2035 1
 
209

 
208

 
206

Debentures—6.050% due 2036
 
459

 
459

 
748

Debentures—8.250% due 2038
 
65

 
65

 
248

Debentures—6.950% due 2042
 
160

 
160

 
250

Debentures—3.803% due 2042 2
 
1,168

 
1,149

 
—

Debentures—7.375% due 2097
 
244

 
244

 
297

Capital lease obligations
 
97

 
73

 
46

Other
 
55

 
16

 
19

Total Machinery and Power Systems
 
7,999

 
8,666

 
8,415

Financial Products:
 
 

 
 

 
 

Medium-term notes
 
17,856

 
18,036

 
15,701

Other
 
864

 
1,050

 
828

Total Financial Products
 
18,720

 
19,086

 
16,529

Total long-term debt due after one year
 
$
26,719

 
$
27,752

 
$
24,944


1 
Debentures due in 2035 have a face value of $307 million and an effective yield to maturity of 8.69%.
2 
Debentures due in 2042 have a face value of $1,722 million and an effective yield to maturity of 6.33%.
 
 
 
 
 

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 $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 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

A-70


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 2.8% with remaining maturities up to 12 years at December 31, 2013.
 
The aggregate amounts of maturities of long-term debt during each of the years 2014 through 2018, including amounts due within one year and classified as current, are:
 
 
December 31,
(Millions of dollars)
 
2014
 
2015
 
2016
 
2017
 
2018
Machinery and Power Systems
 
$
760

 
$
514

 
$
538

 
$
507

 
$
906

Financial Products
 
6,592

 
6,446

 
4,796

 
2,747

 
2,350

 
 
$
7,352

 
$
6,960

 
$
5,334

 
$
3,254

 
$
3,256

 
 
 
 
 
 
 
 
 
 
 
 
Interest paid on short-term and long-term borrowings for 2013, 2012 and 2011 was $1,141 million, $1,404 million and $1,208 million, respectively.
 
Please refer to Note 18 and Table III for fair value information on long-term debt.

15.
Credit commitments
 
 
 
December 31, 2013
(Millions of dollars)
 
Consolidated
 
Machinery
and Power
Systems
 
Financial
Products
Credit lines available:
 
 

 
 

 
 

Global credit facilities
 
$
10,000

 
$
2,750

 
$
7,250

Other external
 
4,508

 
229

 
4,279

Total credit lines available
 
14,508

 
2,979

 
11,529

Less: Commercial paper outstanding
 
(2,502
)
 
—

 
(2,502
)
Less: Utilized credit
 
(2,044
)
 
(16
)
 
(2,028
)
Available credit
 
$
9,962

 
$
2,963

 
$
6,999

 
 
 
 
 
 
 
 
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, 2013 was $2.75 billion. Our three Global Credit Facilities are:
 
•
The 364-day facility of $3.00 billion (of which $0.82 billion is available to Machinery and Power Systems) expires in September 2014.
•
The 2010 four-year facility, as amended in September 2013, of $2.60 billion (of which $0.72 billion is available to Machinery and Power Systems) expires in September 2016.
•
The 2011 five-year facility, as amended in September 2013, of $4.40 billion (of which $1.21 billion is available to Machinery and Power Systems) expires in September 2018.

Other consolidated credit lines with banks as of December 31, 2013 totaled $4.51 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

A-71


by our subsidiaries for local funding requirements.  Caterpillar or Cat Financial may guarantee subsidiary borrowings under these lines.

At December 31, 2013, Caterpillar's consolidated net worth was $25.03 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, 2013, Cat Financial's covenant interest coverage ratio was 1.96 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, 2013, Cat Financial's six-month covenant leverage ratio was 8.14 to 1 and year-end covenant leverage ratio was 7.99 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 syndicate of banks 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, 2013, there were no borrowings under the Credit Facility.
 
16.
Profit per share
 
Computations of profit per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions except per share data)
 
2013
 
2012
 
2011
Profit for the period (A) 1 
 
$
3,789

 
$
5,681

 
$
4,928

Determination of shares (in millions):
 
 

 
 

 
 

Weighted average number of common shares outstanding (B)
 
645.2

 
652.6

 
645.0

Shares issuable on exercise of stock awards, net of shares assumed to be purchased out of proceeds at average market price
 
13.4

 
17.0

 
21.1

Average common shares outstanding for fully diluted computation (C) 2
 
658.6

 
669.6

 
666.1

Profit per share of common stock:
 
 

 
 

 
 

Assuming no dilution (A/B)
 
$
5.87

 
$
8.71

 
$
7.64

Assuming full dilution (A/C) 2
 
$
5.75

 
$
8.48

 
$
7.40

Shares outstanding as of December 31 (in millions)
 
637.8

 
655.0

 
647.5

 
1 
Profit attributable to common stockholders.
2 
Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
 
 
 
 
 

SARs and stock options to purchase 10,152,448, 6,066,777 and 2,902,533 common shares were outstanding in 2013, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share because the effect would have been antidilutive.

In February 2007, the Board of Directors authorized the repurchase of $7.5 billion of Caterpillar stock, and in December 2011, the authorization was extended through December 31, 2015. In April 2013, we entered into a definitive agreement with Citibank, N.A. to purchase shares of our common stock under an accelerated stock repurchase transaction (April ASR Agreement), which was completed in June 2013. In accordance with the terms of the April ASR Agreement, a total of 11.5 million shares of our common stock were repurchased at an aggregate cost to Caterpillar of $1.0 billion.


A-72


In July 2013, we entered into a definitive agreement with Société Générale to purchase shares of our common stock under an accelerated stock repurchase transaction (July ASR Agreement), which was completed in September 2013. In accordance with the terms of the July ASR Agreement, a total of 11.9 million shares of our common stock were repurchased at an aggregate cost to Caterpillar of $1.0 billion.

In January 2014, we completed the current $7.5 billion stock repurchase program as we entered into a definitive agreement with Citibank, N.A. to purchase shares of our common stock under an accelerated stock repurchase transaction (January ASR Agreement). Pursuant to the terms of the January ASR Agreement, we have agreed to repurchase approximately $1.7 billion of our common stock from Citibank, N.A., with an immediate delivery of approximately 17.7 million shares. The final number of shares to be repurchased and the aggregate cost to Caterpillar will be based on Caterpillar's volume-weighted average stock price during the term of the transaction, which is expected to be completed in March 2014.

In addition, in January 2014, the Board authorized the repurchase of $10 billion of Caterpillar stock, which will expire on December 31, 2018.
 
17.
Accumulated other comprehensive income (loss)

Comprehensive income and its components are presented in Statement 2. Changes in Accumulated other comprehensive income (loss), net of tax, included in Statement 4, consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
(Millions of dollars)
 
Foreign currency translation
 
Pension and other postretirement benefits
 
Derivative financial instruments
 
Available-for-sale securities
 
Total
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
 
$
206

 
$
(6,568
)
 
$
(10
)
 
$
44

 
$
(6,328
)
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012 1
 
$
456

 
$
(6,914
)
 
$
(42
)
 
$
67

 
$
(6,433
)
Other comprehensive income (loss) before reclassifications
 
(280
)
 
2,280

 
(4
)
 
29

 
2,025

Amounts reclassified from accumulated other comprehensive (income) loss
 
—

 
482

 
41

 
(13
)
 
510

Other comprehensive income (loss)
 
(280
)
 
2,762

 
37

 
16

 
2,535

Balance at December 31, 2013
 
$
176

 
$
(4,152
)
 
$
(5
)
 
$
83

 
$
(3,898
)
    
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 the second quarter of 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.
 
 
 
 
 


A-73


The effect of the reclassifications out of Accumulated other comprehensive income (loss) on Statement 1 is as follows:
 
 
 
 
 
 
(Millions of dollars)
 
Classification of income (expense)
 
Year ended December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefits:
 
 
 
 
 
Amortization of actuarial gain (loss)
 
Note 12 1
 
$
(781
)
 
Amortization of prior service credit (cost)
 
Note 12 1
 
54

 
Amortization of transition asset (obligation)
 
Note 12 1
 
(2
)
 
Reclassifications before tax
 
(729
)
 
Tax (provision) benefit
 
247

 
Reclassifications net of tax
 
$
(482
)
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
Foreign exchange contracts
 
Other income (expense)
 
$
(57
)
 
Interest rate contracts
 
Other income (expense)
 
(3
)
 
Interest rate contracts
 
Interest expense of Financial Products
 
(6
)
 
Reclassifications before tax
 
(66
)
 
Tax (provision) benefit
 
25

 
Reclassifications net of tax
 
$
(41
)
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
Realized gain (loss) on sale of securities
 
Other income (expense)
 
$
19

 
Tax (provision) benefit
 
(6
)
 
Reclassifications net of tax
 
$
13

 
 
 
 
 
 
 
Total reclassifications from Accumulated other comprehensive income (loss)
 
$
(510
)
 

1    Amounts are included in the calculation of net periodic benefit cost. See Note 12 for additional information.
 
 
 
 
 

18.
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.
 

A-74


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 Insurance Services, 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, 2013, 2012 and 2011 are summarized below:


A-75


 
 
December 31, 2013
(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
 
—

 
120

 
—

 
120

 
 
 
 
 
 
 
 
 
Corporate bonds
 
 

 
 
 
 

 
 

Corporate bonds
 
—

 
633

 
—

 
633

Asset-backed securities
 
—

 
72

 
—

 
72

 
 
 
 
 
 
 
 
 
Mortgage-backed debt securities
 
 

 
 
 
 

 
 

U.S. governmental agency
 
—

 
321

 
—

 
321

Residential
 
—

 
18

 
—

 
18

Commercial
 
—

 
93

 
—

 
93

 
 
 
 
 
 
 
 
 
Equity securities
 
 

 
 

 
 

 
 

Large capitalization value
 
254

 
—

 
—

 
254

Smaller company growth
 
49

 
—

 
—

 
49

Total available-for-sale securities
 
313

 
1,257

 
—

 
1,570

 
 
 
 
 
 
 
 
 
Derivative financial instruments, net
 
—

 
161

 
—

 
161

Total Assets
 
$
313

 
$
1,418

 
$
—

 
$
1,731

 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

Guarantees
 
$
—

 
$
—

 
$
13

 
$
13

Total Liabilities
 
$
—

 
$
—

 
$
13

 
$
13

 
 
 
 
 
 
 
 
 
 

A-76


 
 
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

 
 
 
 
 
 
 
 
 

A-77


 
 
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

 
 
 
 
 
 
 
 
 
 
Below are roll-forwards of liabilities measured at fair value using Level 3 inputs for the years ended December 31, 2013, 2012 and 2011.  These instruments were valued using pricing models that, in management’s judgment, reflect the assumptions of a market participant.
 
(Millions of dollars)
 
Guarantees
Balance at December 31, 2010
 
$
10