10-Q 1 cat_10qx9302014.htm 10-Q CAT_10Q_9.30.2014
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
 FORM 10-Q 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to
Commission File Number:  1-768
CATERPILLAR INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
 
37-0602744
(IRS Employer I.D. No.)
 
 
 
100 NE Adams Street, Peoria, Illinois
(Address of principal executive offices)
 
61629
(Zip Code)
 
Registrant’s telephone number, including area code:
(309) 675-1000 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
At September 30, 2014, 605,398,874 shares of common stock of the registrant were outstanding.
 



Table of Contents
 
 
* Item omitted because no answer is called for or item is not applicable.


2


Part I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements

Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
 
 
Three Months Ended
September 30,
 
2014
 
2013
Sales and revenues:
 
 
 
Sales of Machinery, Energy & Transportation
$
12,758

 
$
12,678

Revenues of Financial Products
791

 
745

Total sales and revenues
13,549

 
13,423

 
 
 
 
Operating costs:
 

 
 

Cost of goods sold
9,634

 
9,774

Selling, general and administrative expenses
1,446

 
1,319

Research and development expenses
533

 
469

Interest expense of Financial Products
157

 
178

Other operating (income) expenses
387

 
282

Total operating costs
12,157

 
12,022

 
 
 
 
Operating profit
1,392

 
1,401

 
 
 
 
Interest expense excluding Financial Products
128

 
116

Other income (expense)
117

 
(24
)
 
 
 
 
Consolidated profit before taxes
1,381

 
1,261

 
 
 
 
Provision (benefit) for income taxes
364

 
310

Profit of consolidated companies
1,017

 
951

 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
4

 
(1
)
 
 
 
 
Profit of consolidated and affiliated companies
1,021

 
950

 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
4

 
4

 
 
 
 
Profit 1
$
1,017

 
$
946

 
 
 
 
Profit per common share
$
1.66

 
$
1.48

 
 
 
 
Profit per common share – diluted 2
$
1.63

 
$
1.45

 
 
 
 
Weighted-average common shares outstanding (millions)
 

 
 

– Basic
611.5

 
639.3

– Diluted 2
622.8

 
651.9

 
 
 
 
Cash dividends declared per common share
$

 
$

 
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.


3



Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)
 
Three Months Ended
September 30,
 
2014
 
2013
 
 
 
 
Profit of consolidated and affiliated companies
$
1,021

 
$
950

Other comprehensive income (loss), net of tax:
 
 
 
   Foreign currency translation, net of tax (provision)/benefit of: 2014 - $(44); 2013 - $33
(710
)
 
291

 
 
 
 
   Pension and other postretirement benefits:

 
 
        Current year actuarial gain (loss), net of tax (provision)/benefit of: 2014 - $(2); 2013 - $2
4

 
(3
)
        Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2014 - $(44); 2013 - $(67)
86

 
129

        Current year prior service credit (cost), net of tax (provision)/benefit of: 2014 - $(1); 2013 - $0

 

        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2014 - $3; 2013 - $5
(6
)
 
(9
)
        Amortization of transition (asset) obligation, net of tax (provision)/benefit of: 2014 - $0; 2013 - $(1)

 

 
 
 
 
   Derivative financial instruments:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2014 - $17; 2013 - $(15)
(30
)
 
26

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2014 - $1; 2013 - $(5)

 
9

 
 
 
 
   Available-for-sale securities:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2014 - $5; 2013 - $(6)
(5
)
 
9

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2014 - $7; 2013 - $0
(13
)
 
(1
)
 
 
 
 
Total other comprehensive income (loss), net of tax
(674
)
 
451

Comprehensive income
347

 
1,401

Less: comprehensive income attributable to the noncontrolling interests
(4
)
 
(4
)
Comprehensive income attributable to stockholders
$
343

 
$
1,397

 
 
 
 

See accompanying notes to Consolidated Financial Statements.



4



Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
 

 
Nine Months Ended
September 30,
 
2014
 
2013
Sales and revenues:
 
 
 
Sales of Machinery, Energy & Transportation
$
38,642

 
$
39,048

Revenues of Financial Products
2,298

 
2,206

Total sales and revenues
40,940

 
41,254

 
 
 
 
Operating costs:
 

 
 

Cost of goods sold
29,268

 
30,186

Selling, general and administrative expenses
4,175

 
4,130

Research and development expenses
1,557

 
1,579

Interest expense of Financial Products
470

 
552

Other operating (income) expenses
1,205

 
631

Total operating costs
36,675

 
37,078

 
 
 
 
Operating profit
4,265

 
4,176

 
 
 
 
Interest expense excluding Financial Products
358

 
356

Other income (expense)
236

 
(79
)
 
 
 
 
Consolidated profit before taxes
4,143

 
3,741

 
 
 
 
Provision (benefit) for income taxes
1,201

 
943

Profit of consolidated companies
2,942

 
2,798

 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
6

 
(1
)
 
 
 
 
Profit of consolidated and affiliated companies
2,948

 
2,797

 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
10

 
11

 
 
 
 
Profit 1
$
2,938

 
$
2,786

 
 
 
 
Profit per common share
$
4.73

 
$
4.30

 
 
 
 
Profit per common share – diluted 2
$
4.64

 
$
4.21

 
 
 
 
Weighted-average common shares outstanding (millions)
 
 
 

– Basic
620.6

 
647.6

– Diluted 2
632.7

 
661.3

 
 
 
 
Cash dividends declared per common share
$
1.30

 
$
1.12


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.



5



Caterpillar Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
(Dollars in millions)
 
Nine Months Ended
September 30,
 
2014
 
2013
 
 
 
 
Profit of consolidated and affiliated companies
$
2,948

 
$
2,797

Other comprehensive income (loss), net of tax:
 
 
 
   Foreign currency translation, net of tax (provision)/benefit of: 2014 - $(52); 2013 - $41
(643
)
 
(255
)
 
 
 
 
   Pension and other postretirement benefits:
 
 
 
        Current year actuarial gain (loss), net of tax (provision)/benefit of: 2014 - $(7); 2013 - $(14)
14

 
24

        Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2014 - $(132); 2013 - $(201)
258

 
388

        Current year prior service credit (cost), net of tax (provision)/benefit of: 2014 - $(1); 2013 - $0
1

 

        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2014 - $10; 2013 - $14
(18
)
 
(27
)
        Amortization of transition (asset) obligation, net of tax (provision)/benefit of: 2014 - $0; 2013 - $(1)

 
1

 
 
 
 
   Derivative financial instruments:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2014 - $33; 2013 - $(2)
(57
)
 
2

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2014 - $7; 2013 - $(24)
(10
)
 
42

 
 
 
 
   Available-for-sale securities:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2014 - $(6); 2013 - $(8)
18

 
14

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2014 - $11; 2013 - $0
(23
)
 
(1
)
 
 
 
 
Total other comprehensive income (loss), net of tax
(460
)
 
188

Comprehensive income
2,488

 
2,985

Less: comprehensive income attributable to the noncontrolling interests
(9
)
 
(13
)
Comprehensive income attributable to stockholders
$
2,479

 
$
2,972

 
 
 
 

See accompanying notes to Consolidated Financial Statements.





6



Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Dollars in millions) 
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 

 
 

Cash and short-term investments
$
6,082

 
$
6,081

Receivables – trade and other
7,705

 
8,413

Receivables – finance
9,307

 
8,763

Deferred and refundable income taxes
1,370

 
1,553

Prepaid expenses and other current assets
1,250

 
900

Inventories
13,328

 
12,625

Total current assets
39,042

 
38,335

 
 
 
 
Property, plant and equipment – net
16,431

 
17,075

Long-term receivables – trade and other
1,473

 
1,397

Long-term receivables – finance
14,691

 
14,926

Investments in unconsolidated affiliated companies
265

 
272

Noncurrent deferred and refundable income taxes
761

 
594

Intangible assets
3,210

 
3,596

Goodwill
6,801

 
6,956

Other assets
1,814

 
1,745

Total assets
$
84,488

 
$
84,896

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Short-term borrowings:
 

 
 

Machinery, Energy & Transportation
$
7

 
$
16

Financial Products
4,429

 
3,663

Accounts payable
6,778

 
6,560

Accrued expenses
3,466

 
3,493

Accrued wages, salaries and employee benefits
2,230

 
1,622

Customer advances
2,165

 
2,360

Dividends payable

 
382

Other current liabilities
1,848

 
1,849

Long-term debt due within one year:
 

 
 

Machinery, Energy & Transportation
509

 
760

Financial Products
6,157

 
6,592

Total current liabilities
27,589

 
27,297

Long-term debt due after one year:
 

 
 

Machinery, Energy & Transportation
9,498

 
7,999

Financial Products
18,682

 
18,720

Liability for postemployment benefits
6,539

 
6,973

Other liabilities
3,284

 
3,029

Total liabilities
65,592

 
64,018

Commitments and contingencies (Notes 10 and 13)


 


Stockholders’ equity
 

 
 

Common stock of $1.00 par value:
 

 
 

Authorized shares: 2,000,000,000
Issued shares: (9/30/14 and 12/31/13 – 814,894,624) at paid-in amount
4,968

 
4,709

Treasury stock (9/30/14 – 209,495,750 shares; 12/31/13 – 177,072,282 shares) at cost
(15,765
)
 
(11,854
)
Profit employed in the business
33,977

 
31,854

Accumulated other comprehensive income (loss)
(4,357
)
 
(3,898
)
Noncontrolling interests
73

 
67

Total stockholders’ equity
18,896

 
20,878

Total liabilities and stockholders’ equity
$
84,488

 
$
84,896

 
See accompanying notes to Consolidated Financial Statements.

7



Caterpillar Inc.
Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)
(Dollars in millions) 
 
Common
stock
 
Treasury
stock
 
Profit
employed
in the
business
 
Accumulated
other
comprehensive
income (loss)
 
Noncontrolling
interests
 
Total
Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
4,481

 
$
(10,074
)
 
$
29,558

 
$
(6,433
)
 
$
50

 
$
17,582

Profit of consolidated and affiliated companies

 

 
2,786

 

 
11

 
2,797

Foreign currency translation, net of tax

 

 

 
(257
)
 
2

 
(255
)
Pension and other postretirement benefits, net of tax

 

 

 
386

 

 
386

Derivative financial instruments, net of tax

 

 

 
44

 

 
44

Available-for-sale securities, net of tax

 

 

 
13

 

 
13

Change in ownership from noncontrolling interests
(6
)
 

 

 

 
14

 
8

Dividends declared

 

 
(730
)
 

 

 
(730
)
Distribution to noncontrolling interests

 

 

 

 
(10
)
 
(10
)
Common shares issued from treasury stock for stock-based compensation:  4,792,341
(83
)
 
160

 

 

 

 
77

Stock-based compensation expense
196

 

 

 

 

 
196

Net excess tax benefits from stock-based compensation
69

 

 

 

 

 
69

Common shares repurchased: 23,484,843 1

 
(2,000
)
 

 

 

 
(2,000
)
Balance at September 30, 2013
$
4,657

 
$
(11,914
)
 
$
31,614

 
$
(6,247
)
 
$
67

 
$
18,177

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2013
$
4,709

 
$
(11,854
)
 
$
31,854

 
$
(3,898
)
 
$
67

 
$
20,878

Profit of consolidated and affiliated companies

 

 
2,938

 

 
10

 
2,948

Foreign currency translation, net of tax

 

 

 
(642
)
 
(1
)
 
(643
)
Pension and other postretirement benefits, net of tax

 

 

 
255

 

 
255

Derivative financial instruments, net of tax

 

 

 
(67
)
 

 
(67
)
Available-for-sale securities, net of tax

 

 

 
(5
)
 

 
(5
)
Change in ownership from noncontrolling interests

 

 

 

 
4

 
4

Dividends declared

 

 
(815
)
 

 

 
(815
)
Distribution to noncontrolling interests

 

 

 

 
(7
)
 
(7
)
Common shares issued from treasury stock for stock-based compensation: 9,338,857
(109
)
 
327

 

 

 

 
218

Stock-based compensation expense
207

 

 

 

 

 
207

Net excess tax benefits from stock-based compensation
161

 

 

 

 

 
161

Common shares repurchased: 41,762,325 1

 
(4,238
)
 

 

 

 
(4,238
)
Balance at September 30, 2014
$
4,968

 
$
(15,765
)
 
$
33,977

 
$
(4,357
)
 
$
73

 
$
18,896

 
1 
See Note 11 regarding shares repurchased.
 
See accompanying notes to Consolidated Financial Statements.



8



Caterpillar Inc.
Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
 
Nine Months Ended
September 30,
 
2014
 
2013
Cash flow from operating activities:
 
 
 
Profit of consolidated and affiliated companies
$
2,948

 
$
2,797

Adjustments for non-cash items:
 

 
 

Depreciation and amortization
2,368

 
2,263

Other
327

 
377

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

 
 

Receivables – trade and other
244

 
992

Inventories
(859
)
 
1,911

Accounts payable
667

 
157

Accrued expenses
(44
)
 
(227
)
Accrued wages, salaries and employee benefits
648

 
(500
)
Customer advances
(132
)
 
(230
)
Other assets – net
(104
)
 
(74
)
Other liabilities – net
123

 
145

Net cash provided by (used for) operating activities
6,186

 
7,611

 
 
 
 
Cash flow from investing activities:
 

 
 

Capital expenditures – excluding equipment leased to others
(1,072
)
 
(1,862
)
Expenditures for equipment leased to others
(1,310
)
 
(1,301
)
Proceeds from disposals of leased assets and property, plant and equipment
681

 
593

Additions to finance receivables
(8,464
)
 
(8,339
)
Collections of finance receivables
7,264

 
6,790

Proceeds from sale of finance receivables
154

 
110

Investments and acquisitions (net of cash acquired)
(18
)
 
(193
)
Proceeds from sale of businesses and investments (net of cash sold)
196

 
168

Proceeds from sale of securities
347

 
297

Investments in securities
(769
)
 
(312
)
Other – net
(12
)
 
(29
)
Net cash provided by (used for) investing activities
(3,003
)
 
(4,078
)
 
 
 
 
Cash flow from financing activities:
 

 
 

Dividends paid
(1,197
)
 
(730
)
Distribution to noncontrolling interests
(7
)
 
(10
)
Contribution from noncontrolling interests
2

 

Common stock issued, including treasury shares reissued
218

 
77

Treasury shares purchased
(4,238
)
 
(2,000
)
Excess tax benefit from stock-based compensation
162

 
70

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

 
 

        Machinery, Energy & Transportation
1,991

 
145

        Financial Products
7,112

 
6,854

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

 
 

        Machinery, Energy & Transportation
(779
)
 
(1,134
)
        Financial Products
(7,114
)
 
(7,636
)
Short-term borrowings – net (original maturities three months or less)
791

 
1,736

Net cash provided by (used for) financing activities
(3,059
)
 
(2,628
)
Effect of exchange rate changes on cash
(123
)
 
(38
)
Increase (decrease) in cash and short-term investments
1

 
867

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

 
5,490

Cash and short-term investments at end of period
$
6,082

 
$
6,357


 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.

See accompanying notes to Consolidated Financial Statements.

9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
A.  Basis of Presentation
 
In the opinion of management, the accompanying financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated results of operations for the three and nine month periods ended September 30, 2014 and 2013, (b) the consolidated comprehensive income for the three and nine month periods ended September 30, 2014 and 2013, (c) the consolidated financial position at September 30, 2014 and December 31, 2013, (d) the consolidated changes in stockholders’ equity for the nine month periods ended September 30, 2014 and 2013, and (e) the consolidated cash flow for the nine month periods ended September 30, 2014 and 2013.  The financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation.

We have revised previously reported amounts on the Consolidated Statement of Cash Flow for the nine months ended September 30, 2013 to correct for customer advances invoiced but not yet paid and to correct for certain non-cash transactions impacting Receivables - trade and other and Accounts payable. Although these revisions did not impact Net cash provided by operating activities, cash provided by Receivables - trade and other decreased by $173 million, cash provided by Accounts payable increased by $116 million and cash used for Customer advances decreased by $57 million from the amounts previously reported for the nine month period ended September 30, 2013. Management has concluded that the impact was not material to any period presented.
 
Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our Company’s annual report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K).
 
The December 31, 2013 financial position data included herein is derived from the audited consolidated financial statements included in the 2013 Form 10-K but does not include all disclosures required by U.S. GAAP.
 
B.  Nature of Operations
 
Information in our financial statements and related commentary are presented in the following categories:
 
Machinery, Energy & Transportation – Represents the aggregate total of Construction Industries, Resource Industries, Energy & Transportation, and All Other operating segments and related corporate items and eliminations.
 
Financial Products – Primarily includes the company’s Financial Products Segment.  This category includes Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Financial Insurance Services (Insurance Services) and their respective subsidiaries. 

2.                                    New Accounting Guidance
 
Joint and several liability arrangements – In February 2013, the Financial Accounting Standards Board (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 was effective January 1, 2014, with retrospective application required. The guidance did not 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

10


transactions. This guidance was effective January 1, 2014. The guidance did not 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 was effective January 1, 2014. The guidance did not have a material impact on our financial statements.

Reporting discontinued operations and disclosures of disposals of components of an entity – In April 2014, the FASB issued accounting guidance for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This guidance is effective January 1, 2015. We do not expect the adoption to have a material impact on our financial statements.

Revenue recognition – In May 2014, the FASB issued new revenue recognition guidance to provide a single, comprehensive revenue recognition model for all contracts with customers. Under the new guidance, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. A five step model has been introduced for an entity to apply when recognizing revenue. The new guidance also includes enhanced disclosure requirements, and is effective January 1, 2017. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented, or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Consolidated Statement of Changes in Stockholders' Equity. We are in the process of evaluating the application and implementation of the new guidance.

3.                                     Stock-Based Compensation
 
Accounting for stock-based compensation requires that the cost resulting from all stock-based payments be recognized in the financial statements based on the grant date fair value of the award.  Stock-based compensation primarily consists of stock options, restricted stock units (RSUs) and stock-settled stock appreciation rights (SARs).  We recognized pretax stock-based compensation cost in the amount of $70 million and $207 million for the three and nine months ended September 30, 2014, respectively; and $64 million and $196 million for the three and nine months ended September 30, 2013, respectively.

The following table illustrates the type and fair value of the stock-based compensation awards granted during the nine month periods ended September 30, 2014 and 2013, respectively:
 
 
2014
 
2013
 
Shares Granted
 
Fair Value
Per Award
 
Shares Granted
 
Fair Value
Per Award
Stock options
4,448,218

 
$
29.52

 
4,276,060

 
$
28.34

RSUs
1,429,512

 
$
89.18

 
1,614,870

 
$
84.05

 
The stock price on the date of grant was $96.31 and $89.75 for 2014 and 2013, respectively.
 
The following table provides the assumptions used in determining the fair value of the stock-based awards for the nine month periods ended September 30, 2014 and 2013, respectively:
 

11


 
Grant Year
 
2014
 
2013
Weighted-average dividend yield
2.15%
 
2.13%
Weighted-average volatility
28.2%
 
30.6%
Range of volatilities
18.4-36.2%
 
23.4-40.6%
Range of risk-free interest rates
0.12-2.60%
 
0.16-1.88%
Weighted-average expected lives
8 years
 
8 years
 
As of September 30, 2014, the total remaining unrecognized compensation cost related to nonvested stock-based compensation awards was $236 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 1.9 years.
 
4.                                     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 on the Consolidated Statement of Financial Position 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, on the Consolidated Statement of Financial Position 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 the Consolidated Statement of Cash Flow.  Cash flow from undesignated derivative financial instruments are included in the investing category on the Consolidated Statement of Cash Flow.
 
We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions.  This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Consolidated Statement of Financial Position and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the 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.
 
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, Energy & Transportation 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

12


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, Energy & Transportation foreign currency contracts are undesignated, including any hedges designed to protect our competitive exposure.  
 
As of September 30, 2014, $17 million of deferred net losses, net of tax, included in equity (AOCI in the Consolidated Statement of Financial Position), are expected to be reclassified to current earnings (Other income (expense) in the Consolidated Statement of Results of Operations) 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.
 
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, Energy & Transportation 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. We designate fixed-to-floating interest rate swaps as fair value hedges at inception of the contract, and we designate certain forward rate agreements as cash flow hedges at inception of the contract.

As of September 30, 2014, $4 million of deferred net losses, net of tax, included in equity (AOCI in the Consolidated Statement of Financial Position), related to Machinery, Energy & Transportation forward rate agreements, are expected to be reclassified to current earnings (Interest expense excluding Financial Products in the Consolidated Statement of Results of Operations) over the next twelve months.

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.

As of September 30, 2014, $4 million of deferred net losses, net of tax, included in equity (AOCI in the Consolidated Statement of Financial Position), related to Financial Products floating-to-fixed interest rate swaps, are expected to be reclassified to current earnings (Interest expense of Financial Products in the Consolidated Statement of Results of Operations) 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.
 

13


We have, at certain times, liquidated fixed-to-floating and floating-to-fixed interest rate swaps at both Machinery, Energy & Transportation 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.
 
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, Energy & Transportation 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 the Consolidated Statement of Financial Position are as follows:
 
(Millions of dollars)
 
 
 
 
 
 
Consolidated Statement of Financial
 
Asset (Liability) Fair Value
 
Position Location
 
September 30, 2014
 
December 31, 2013
Designated derivatives
 
 
 
 
 
Foreign exchange contracts
 
 
 

 
 

Machinery, Energy & Transportation
Receivables – trade and other
 
$
36

 
$
54

Machinery, Energy & Transportation
Long-term receivables – trade and other
 
2

 

Machinery, Energy & Transportation
Accrued expenses
 
(63
)
 
(39
)
Machinery, Energy & Transportation
Other liabilities
 
(4
)
 

Interest rate contracts
 
 
 
 
 

Financial Products
Receivables – trade and other
 
12

 
7

Financial Products
Long-term receivables – trade and other
 
71

 
115

Financial Products
Accrued expenses
 
(9
)
 
(6
)
 
 
 
$
45

 
$
131

Undesignated derivatives
 
 
 

 
 

Foreign exchange contracts
 
 
 

 
 

Machinery, Energy & Transportation
Receivables – trade and other
 
$
3

 
$
19

Machinery, Energy & Transportation
Accrued expenses
 
(41
)
 
(1
)
Financial Products
Receivables – trade and other
 
10

 
7

Financial Products
Long-term receivables – trade and other
 
12

 
9

Financial Products
Accrued expenses
 
(22
)
 
(4
)
Commodity contracts
 
 
 
 
 

Machinery, Energy & Transportation
Receivables – trade and other
 
1

 

Machinery, Energy & Transportation
Accrued expenses
 
(4
)
 

Machinery, Energy & Transportation
Other liabilities
 
(1
)
 

 
 
 
$
(42
)
 
$
30

 
 
 
 
 
 

The total notional amounts of the derivative instruments are as follows:


14


(Millions of dollars)
 
 
 
 
 
 
September 30, 2014
 
December 31, 2013
 
 
 
 
 
Machinery, Energy & Transportation
 
$
4,178

 
$
3,565

Financial Products
 
$
5,573

 
$
6,743

 
 
 
 
 

The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties. The amounts exchanged by the parties are calculated by reference to the notional amounts and by other terms of the derivatives, such as foreign currency exchange rates, interest rates, or commodity prices.

The effect of derivatives designated as hedging instruments on the Consolidated Statement of Results of Operations is as follows: 

Fair Value Hedges
(Millions of dollars)
 
 
 
 
 
 
 
 
Three Months Ended
September 30, 2014
 
Three Months Ended
September 30, 2013
 
Classification
 
Gains (Losses) 
on Derivatives
 
Gains (Losses) 
on Borrowings
 
Gains (Losses) 
on Derivatives
 
Gains (Losses) 
on Borrowings
Interest rate contracts
 
 
 
 
 
 
 
 
 

Financial Products
Other income (expense)
 
$
(19
)
 
$
1

1 

$
(9
)
 
$
12

 
 
 
$
(19
)
 
$
1

 
$
(9
)
 
$
12

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2013
 
Classification
 
Gains (Losses) 
on Derivatives
 
Gains (Losses) 
on Borrowings
 
Gains (Losses) 
on Derivatives
 
Gains (Losses) 
on Borrowings
Interest rate contracts
 
 
 
 
 
 
 
 
 
Financial Products
Other income (expense)
 
$
(38
)
 
$
24

1 

$
(87
)
 
$
92

 
 
 
$
(38
)
 
$
24

 
$
(87
)
 
$
92

 
 
 
 
 
 
 
 
 
 
1 
The Other income (expense) line has been reduced by $18 million and $14 million for the three and nine months ended September 30, 2014, respectively, for the cumulative correction of immaterial errors related to prior periods, of which $14 million related to prior years.
 
 
 
 
 


15



Cash Flow Hedges
(Millions of dollars)
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2014
 
 
 
 
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, Energy & Transportation
$
(45
)
 
Other income (expense)
 
$
4


$

 
Interest rate contracts
 
 
 
 
 
 
 
 
Machinery, Energy & Transportation

 
Interest expense excluding Financial Products
 
(1
)
 

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


 
$
(47
)
 
 
 
$
1

 
$

 
 
Three Months Ended September 30, 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, Energy & Transportation
$
44

 
Other income (expense)
 
$
(12
)

$

 
Interest rate contracts
 

 
 
 
 

 
 

 
Machinery, Energy & Transportation

 
Other income (expense)
 
(1
)
 

 
Financial Products
(3
)
 
Interest expense of Financial Products
 
(1
)
 


 
$
41

 
 
 
$
(14
)
 
$

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
 
 
 
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, Energy & Transportation
$
(20
)
 
Other income (expense)
 
$
24


$

 
Interest rate contracts
 
 
 
 
 

 
 

 
Machinery, Energy & Transportation
(63
)
 
Interest expense excluding Financial Products
 
(3
)
 

 
Financial Products
(7
)
 
Interest expense of Financial Products
 
(4
)
 


 
$
(90
)
 
 
 
$
17

 
$

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 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, Energy & Transportation
$
4

 
Other income (expense)
 
$
(60
)
1 

$

 
Interest rate contracts
 

 
 
 
 

 
 

 
Machinery, Energy & Transportation

 
Other income (expense)
 
(2
)
 

 
Financial Products

 
Interest expense of Financial Products
 
(4
)
 


 
$
4

 
 
 
$
(66
)
 
$

 
 
 
 
 
 
 
 
 
 
1 
Includes $3 million loss reclassified from AOCI to Other income (expense) in 2013 as certain derivatives were dedesignated as the related transactions are no longer probable to occur.
 
 
 
 
 

16



The effect of derivatives not designated as hedging instruments on the Consolidated Statement of Results of Operations is as follows: 
 
(Millions of dollars)
 
 
 

 
 
 
Classification of Gains (Losses)
 
Three Months Ended
September 30, 2014
 
Three Months Ended
September 30, 2013
Foreign exchange contracts
 
 
 
 
 
Machinery, Energy & Transportation
Other income (expense)
 
$
(44
)
 
$
15

Financial Products
Other income (expense)
 
(19
)
 
3

Interest rate contracts
 
 
 

 
 
Financial Products
Other income (expense)
 

 
(1
)
Commodity contracts
 
 
 

 
 
Machinery, Energy & Transportation
Other income (expense)
 
(6
)
 
2

 
 
 
$
(69
)
 
$
19

 
 
 
 
 
 
 
Classification of Gains (Losses)
 
Nine Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2013
Foreign exchange contracts
 
 
 
 
 
Machinery, Energy & Transportation
Other income (expense)
 
$
(35
)
 
$
7

Financial Products
Other income (expense)
 
(36
)
 
4

Interest rate contracts
 
 
 
 
 
Financial Products
Other income (expense)
 

 
(1
)
Commodity contracts
 
 
 
 
 
Machinery, Energy & Transportation
Other income (expense)
 
(3
)
 
(2
)
 
 
 
$
(74
)
 
$
8

 
 
 
 
 
 
 
We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within Machinery, Energy & Transportation 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 September 30, 2014 and December 31, 2013, no cash collateral was received or pledged under the master netting agreements.

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:

17


September 30, 2014
 
 
 
 
 
 
 
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, Energy & Transportation
 
$
42

 
$

 
$
42

 
$
(42
)
 
$

 
$

Financial Products
 
105

 

 
105

 
(15
)
 

 
90

 Total
 
$
147

 
$

 
$
147

 
$
(57
)
 
$

 
$
90

September 30, 2014
 
 
 
 
 
 
 
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, Energy & Transportation
 
$
(113
)
 
$

 
$
(113
)
 
$
42

 
$

 
$
(71
)
Financial Products
 
(31
)
 

 
(31
)
 
15

 

 
(16
)
 Total
 
$
(144
)
 
$

 
$
(144
)
 
$
57

 
$

 
$
(87
)
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, Energy & Transportation
 
$
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, Energy & Transportation
 
$
(40
)
 
$

 
$
(40
)
 
$
32

 
$

 
$
(8
)
Financial Products
 
(10
)
 

 
(10
)
 
9

 

 
(1
)
 Total
 
$
(50
)
 
$

 
$
(50
)
 
$
41

 
$

 
$
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
 


18


5.                                     Inventories
 
Inventories (principally using the last-in, first-out (LIFO) method) are comprised of the following:
 
(Millions of dollars)
September 30,
2014
 
December 31,
2013
Raw materials
$
3,221

 
$
2,966

Work-in-process
2,983

 
2,589

Finished goods
6,832

 
6,785

Supplies
292

 
285

Total inventories
$
13,328

 
$
12,625

 
 
 
 

6.                                     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:
(Millions of dollars)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Sales
$
453

 
$
349

 
$
1,253

 
$
916

Cost of sales
357

 
284

 
974

 
722

Gross profit
$
96

 
$
65

 
$
279

 
$
194

 
 
 
 
 
 
 
 
Profit (loss)
$
(7
)
 
$
(6
)
 
$
(17
)
 
$
(31
)
 
 
 
 
 
 
 
 

Financial Position of unconsolidated affiliated companies: 
(Millions of dollars)
September 30,
2014
 
December 31,
2013
Assets:
 

 
 

Current assets
$
707

 
$
683

Property, plant and equipment – net
673

 
710

Other assets
580

 
608

 
1,960

 
2,001

Liabilities:
 

 
 

Current liabilities
502

 
437

Long-term debt due after one year
872

 
900

Other liabilities
229

 
262

 
1,603

 
1,599

Equity
$
357

 
$
402

 
 
 
 

Caterpillar’s investments in unconsolidated affiliated companies: 
(Millions of dollars)
September 30,
2014
 
December 31,
2013
Investments in equity method companies
$
255

 
$
262

Plus: Investments in cost method companies
10

 
10

Total investments in unconsolidated affiliated companies
$
265

 
$
272

 
 
 
 




19


7.                                     Intangible Assets and Goodwill
 
A.  Intangible assets
 
Intangible assets are comprised of the following:
 
 
 
 
September 30, 2014
(Millions of dollars)
Weighted
Amortizable
Life (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
15
 
$
2,525

 
$
(635
)
 
$
1,890

Intellectual property
11
 
1,732

 
(545
)
 
1,187

Other
11
 
238

 
(123
)
 
115

Total finite-lived intangible assets
14
 
4,495

 
(1,303
)
 
3,192

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

 

 
18

Total intangible assets
 
 
$
4,513

 
$
(1,303
)
 
$
3,210

 
 
 
 
December 31, 2013
 
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

 
 
 
 
 
 
 
 
 
Gross customer relationship intangibles of $46 million and related accumulated amortization of $9 million were reclassified from Intangible assets to assets held for sale and/or divested during 2014, and are not included in the September 30, 2014 balances in the table above. These transactions were related to the divestiture of portions of the Bucyrus distribution business. See Note 19 for additional information on divestitures.

Amortization expense for the three and nine months ended September 30, 2014 was $91 million and $276 million, respectively. Amortization expense for the three and nine months ended September 30, 2013 was $91 million and $276 million, respectively. Amortization expense related to intangible assets is expected to be:
(Millions of dollars)
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
$356
 
$348
 
$326
 
$325
 
$320
 
$1,811
 
 
 
 
 
 
 
 
 
 
 
 
B.  Goodwill
 
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,

20


the difference is recognized as an impairment loss. No goodwill for reporting units was impaired during the three and nine months ended September 30, 2014 or 2013.
 
As discussed in Note 15, effective January 1, 2014, we revised our reportable segments in line with the changes to our organizational structure. Our reporting units did not significantly change as a result of the changes to our reportable segments. The segment information for 2013 has been retrospectively adjusted to conform to the 2014 presentation.

The changes in carrying amount of goodwill by reportable segment for the nine months ended September 30, 2014 were as follows: 
(Millions of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
2013
 
Acquisitions
 
Held for Sale and Business Divestitures 1
 
Other Adjustments 2
 
September 30,
2014
Construction Industries
 
 
 
 
 
 
 
 
 


Goodwill
 
$
291

 
$

 
$

 
$
7

 
$
298

Resource Industries
 
 
 
 
 
 
 
 
 
 
Goodwill
 
4,468

 

 
(15
)
 
(109
)
 
4,344

Impairments
 
(580
)
 

 

 

 
(580
)
Net goodwill
 
3,888

 

 
(15
)
 
(109
)
 
3,764

Energy & Transportation
 
 
 
 
 
 
 
 
 
 
Goodwill
 
2,600

 
7

 

 
(45
)
 
2,562

All Other 3
 
 
 
 
 
 
 
 
 
 
Goodwill
 
199

 

 

 

 
199

Impairments
 
(22