10-Q
CATERPILLAR INC filed this Form 10-Q on 08/02/2013
Entire Document
 
CAT_10Q_6.30.2013
 
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 June 30, 2013
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 June 30, 2013, 647,615,068 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
June 30,
 
2013
 
2012
Sales and revenues:
 
 
 
Sales of Machinery and Power Systems
$
13,886

 
$
16,684

Revenues of Financial Products
735

 
690

Total sales and revenues
14,621

 
17,374

 
 
 
 
Operating costs:
 

 
 

Cost of goods sold
10,773

 
12,280

Selling, general and administrative expenses
1,421

 
1,517

Research and development expenses
548

 
632

Interest expense of Financial Products
185

 
198

Other operating (income) expenses
137

 
131

Total operating costs
13,064

 
14,758

 
 
 
 
Operating profit
1,557

 
2,616

 
 
 
 
Interest expense excluding Financial Products
120

 
110

Other income (expense)
(84
)
 
70

 
 
 
 
Consolidated profit before taxes
1,353

 
2,576

 
 
 
 
Provision (benefit) for income taxes
387

 
872

Profit of consolidated companies
966

 
1,704

 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies
(1
)
 
5

 
 
 
 
Profit of consolidated and affiliated companies
965

 
1,709

 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
5

 
10

 
 
 
 
Profit 1
$
960

 
$
1,699

 
 
 
 
Profit per common share
$
1.48

 
$
2.60

 
 
 
 
Profit per common share – diluted 2
$
1.45

 
$
2.54

 
 
 
 
Weighted-average common shares outstanding (millions)
 

 
 

– Basic
649.9

 
652.9

– Diluted 2
662.7

 
669.6

 
 
 
 
Cash dividends declared per common share
$
1.12

 
$
0.98

 
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
June 30,
 
2013
 
2012
 
 
 
 
Profit of consolidated and affiliated companies
$
965

 
$
1,709

Other comprehensive income (loss), net of tax:
 
 
 
   Foreign currency translation, net of tax (provision)/benefit of: 2013 - $29; 2012 - $(33)
(180
)
 
(339
)
 
 
 
 
   Pension and other postretirement benefits:

 
 
        Current year actuarial gain (loss), net of tax (provision)/benefit of: 2013 - $(6); 2012 - $(2)
12

 
5

        Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2013 - $(67); 2012 - $(60)
130

 
113

        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2013 - $4; 2012 - $4
(9
)
 
(7
)
 
 
 
 
   Derivative financial instruments:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $(5); 2012 - $0
7

 
(2
)
        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $(12); 2012 - $(2)
22

 
3

 
 
 
 
   Available-for-sale securities:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $6; 2012 - $4
(10
)
 
(5
)
        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $0; 2012 - $0
1

 

 
 
 
 
Total other comprehensive income (loss), net of tax
(27
)
 
(232
)
Comprehensive income
938

 
1,477

Less: comprehensive income attributable to the noncontrolling interests
(7
)
 
(2
)
Comprehensive income attributable to stockholders
$
931

 
$
1,475

 
 
 
 

See accompanying notes to Consolidated Financial Statements.



4



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

 
Six Months Ended
June 30,
 
2013
 
2012
Sales and revenues:
 
 
 
Sales of Machinery and Power Systems
$
26,370

 
$
31,972

Revenues of Financial Products
1,461

 
1,383

Total sales and revenues
27,831

 
33,355

 
 
 
 
Operating costs:
 

 
 

Cost of goods sold
20,412

 
23,517

Selling, general and administrative expenses
2,811

 
2,857

Research and development expenses
1,110

 
1,219

Interest expense of Financial Products
374

 
402

Other operating (income) expenses
349

 
421

Total operating costs
25,056

 
28,416

 
 
 
 
Operating profit
2,775

 
4,939

 
 
 
 
Interest expense excluding Financial Products
240

 
223

Other income (expense)
(55
)
 
158

 
 
 
 
Consolidated profit before taxes
2,480

 
4,874

 
 
 
 
Provision (benefit) for income taxes
633

 
1,561

Profit of consolidated companies
1,847

 
3,313

 
 
 
 
Equity in profit (loss) of unconsolidated affiliated companies

 
7

 
 
 
 
Profit of consolidated and affiliated companies
1,847

 
3,320

 
 
 
 
Less: Profit (loss) attributable to noncontrolling interests
7

 
35

 
 
 
 
Profit 1
$
1,840

 
$
3,285

 
 
 
 
Profit per common share
$
2.82

 
$
5.04

 
 
 
 
Profit per common share – diluted 2
$
2.76

 
$
4.90

 
 
 
 
Weighted-average common shares outstanding (millions)
 
 
 

– Basic
652.4

 
651.3

– Diluted 2
666.6

 
669.9

 
 
 
 
Cash dividends declared per common share
$
1.12

 
$
0.98


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)
 
Six Months Ended
June 30,
 
2013
 
2012
 
 
 
 
Profit of consolidated and affiliated companies
$
1,847

 
$
3,320

Other comprehensive income (loss), net of tax:
 
 
 
   Foreign currency translation, net of tax (provision)/benefit of: 2013 - $8; 2012 - $(16)
(546
)
 
(158
)
 
 
 
 
   Pension and other postretirement benefits:
 
 
 
        Current year actuarial gain (loss), net of tax (provision)/benefit of: 2013 - $(16); 2012 - $(8)
27

 
15

        Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2013 - $(134); 2012 - $(120)
259

 
226

        Current year prior service credit (cost), net of tax (provision)/benefit of: 2013 - $0; 2012 - $2

 
(3
)
        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2013 - $9; 2012 - $8
(18
)
 
(15
)
        Amortization of transition (asset) obligation, net of tax (provision)/benefit of: 2013 - $0; 2012 - $0
1

 
1

 
 
 
 
   Derivative financial instruments:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $13; 2012 - $16
(24
)
 
(28
)
        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $(19); 2012 - $(1)
33

 
1

 
 
 
 
   Available-for-sale securities:
 
 
 
        Gains (losses) deferred, net of tax (provision)/benefit of: 2013 - $(2); 2012 - $(5)
5

 
16

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2013 - $0; 2012 - $0

 
(2
)
 
 
 
 
Total other comprehensive income (loss), net of tax
(263
)
 
53

Comprehensive income
1,584

 
3,373

Less: comprehensive income attributable to the noncontrolling interests
(9
)
 
(17
)
Comprehensive income attributable to the stockholders
$
1,575

 
$
3,356

 
 
 
 

See accompanying notes to Consolidated Financial Statements.





6



Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Dollars in millions) 
 
June 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 

 
 

Cash and short-term investments
$
6,110

 
$
5,490

Receivables – trade and other
9,396

 
10,092

Receivables – finance
8,946

 
8,860

Deferred and refundable income taxes
1,540

 
1,547

Prepaid expenses and other current assets
924

 
988

Inventories
13,889

 
15,547

Total current assets
40,805

 
42,524

 
 
 
 
Property, plant and equipment – net
16,352

 
16,461

Long-term receivables – trade and other
1,230

 
1,316

Long-term receivables – finance
14,240

 
14,029

Investments in unconsolidated affiliated companies
288

 
272

Noncurrent deferred and refundable income taxes
2,153

 
2,011

Intangible assets
3,764

 
4,016

Goodwill
6,814

 
6,942

Other assets
1,729

 
1,785

Total assets
$
87,375

 
$
89,356

 
 
 
 
Liabilities
 

 
 

Current liabilities:
 

 
 

Short-term borrowings:
 

 
 

Machinery and Power Systems
$
392

 
$
636

Financial Products
5,119

 
4,651

Accounts payable
6,343

 
6,753

Accrued expenses
3,501

 
3,667

Accrued wages, salaries and employee benefits
1,296

 
1,911

Customer advances
2,738

 
2,978

Dividends payable
388

 

Other current liabilities
1,782

 
2,055

Long-term debt due within one year:
 

 
 

Machinery and Power Systems
1,112

 
1,113

Financial Products
7,248

 
5,991

Total current liabilities
29,919

 
29,755

Long-term debt due after one year:
 

 
 

Machinery and Power Systems
7,949

 
8,666

Financial Products
17,731

 
19,086

Liability for postemployment benefits
10,866

 
11,085

Other liabilities
3,232

 
3,182

Total liabilities
69,697

 
71,774

Commitments and contingencies (Notes 10 and 13)


 


Stockholders’ equity
 

 
 

Common stock of $1.00 par value:
 

 
 

Authorized shares: 2,000,000,000
Issued shares: (6/30/13 and 12/31/12 – 814,894,624) at paid-in amount
4,591

 
4,481

Treasury stock (6/30/13 – 167,279,556 shares; 12/31/12 – 159,846,131 shares) at cost
(10,940
)
 
(10,074
)
Profit employed in the business
30,668

 
29,558

Accumulated other comprehensive income (loss)
(6,698
)
 
(6,433
)
Noncontrolling interests
57

 
50

Total stockholders’ equity
17,678

 
17,582

Total liabilities and stockholders’ equity
$
87,375

 
$
89,356

 
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
Six Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
4,273

 
$
(10,281
)
 
$
25,219

 
$
(6,328
)
 
$
46

 
$
12,929

Profit of consolidated and affiliated companies

 

 
3,285

 

 
35

 
3,320

Foreign currency translation, net of tax

 

 

 
(134
)
 
(24
)
 
(158
)
Pension and other postretirement benefits, net of tax

 

 

 
219

 
5

 
224

Derivative financial instruments, net of tax

 

 

 
(27
)
 

 
(27
)
Available-for-sale securities, net of tax

 

 

 
13

 
1

 
14

Change in ownership from noncontrolling interests

 

 

 

 
7

 
7

Dividends declared

 

 
(639
)
 

 

 
(639
)
Distribution to noncontrolling interests

 

 

 

 
(5
)
 
(5
)
Common shares issued from treasury stock for stock-based compensation:  5,735,352
(117
)
 
142

 

 

 

 
25

Stock-based compensation expense
135

 

 

 

 

 
135

Net excess tax benefits from stock-based compensation
156

 

 

 

 

 
156

Cat Japan share redemption 1
(74
)
 

 
(23
)
 
107

 
(10
)
 

Balance at June 30, 2012
$
4,373

 
$
(10,139
)
 
$
27,842

 
$
(6,150
)
 
$
55

 
$
15,981

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2012
$
4,481

 
$
(10,074
)
 
$
29,558

 
$
(6,433
)
 
$
50

 
$
17,582

Profit of consolidated and affiliated companies

 

 
1,840

 

 
7

 
1,847

Foreign currency translation, net of tax

 

 

 
(548
)
 
2

 
(546
)
Pension and other postretirement benefits, net of tax

 

 

 
269

 

 
269

Derivative financial instruments, net of tax

 

 

 
9

 

 
9

Available-for-sale securities, net of tax

 

 

 
5

 

 
5

Change in ownership from noncontrolling interests
(6
)
 

 

 

 
6

 

Dividends declared

 

 
(730
)
 

 

 
(730
)
Distribution to noncontrolling interests

 

 

 

 
(8
)
 
(8
)
Common shares issued from treasury stock for stock-based compensation: 4,108,681
(78
)
 
134

 

 

 

 
56

Stock-based compensation expense
132

 

 

 

 

 
132

Net excess tax benefits from stock-based compensation
62

 

 

 

 

 
62

Common shares repurchased: 11,542,106 2

 
(1,000
)
 

 

 

 
(1,000
)
Balance at June 30, 2013
$
4,591

 
$
(10,940
)
 
$
30,668

 
$
(6,698
)
 
$
57

 
$
17,678

 
1 
See Notes 12 and 17 regarding the Cat Japan share redemption.
2 
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)
 
Six Months Ended
June 30,
 
2013
 
2012
Cash flow from operating activities:
 
 
 
Profit of consolidated and affiliated companies
$
1,847

 
$
3,320

Adjustments for non-cash items:
 

 
 

Depreciation and amortization
1,484

 
1,350

Other
236

 
(59
)
Changes in assets and liabilities, net of acquisitions and divestitures:
 

 
 

Receivables – trade and other
431

 
37

Inventories
1,364

 
(2,939
)
Accounts payable
222

 
299

Accrued expenses
(129
)
 
86

Accrued wages, salaries and employee benefits
(580
)
 
(753
)
Customer advances
(212
)
 
434

Other assets – net
(100
)
 
63

Other liabilities – net
30

 
140

Net cash provided by (used for) operating activities
4,593

 
1,978

 
 
 
 
Cash flow from investing activities:
 

 
 

Capital expenditures – excluding equipment leased to others
(1,387
)
 
(1,508
)
Expenditures for equipment leased to others
(810
)
 
(787
)
Proceeds from disposals of leased assets and property, plant and equipment
358

 
543

Additions to finance receivables
(5,544
)
 
(5,942
)
Collections of finance receivables
4,548

 
4,298

Proceeds from sale of finance receivables
89

 
85

Investments and acquisitions (net of cash acquired)
(26
)
 
(517
)
Proceeds from sale of businesses and investments (net of cash sold)
100

 
308

Proceeds from sale of available-for-sale securities
207

 
177

Investments in available-for-sale securities
(267
)
 
(199
)
Other – net
(68
)
 
38

Net cash provided by (used for) investing activities
(2,800
)
 
(3,504
)
 
 
 
 
Cash flow from financing activities:
 

 
 

Dividends paid
(342
)
 
(598
)
Distribution to noncontrolling interests
(8
)
 
(5
)
Common stock issued, including treasury shares reissued
56

 
25

Treasury shares purchased
(1,000
)
 

Excess tax benefit from stock-based compensation
62

 
156

Acquisitions of redeemable noncontrolling interests

 
(444
)
Proceeds from debt issued (original maturities greater than three months):
 

 
 

        Machinery and Power Systems
119

 
1,662

        Financial Products
5,067

 
7,357

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

 
 

        Machinery and Power Systems
(1,003
)
 
(211
)
        Financial Products
(5,300
)
 
(4,794
)
Short-term borrowings – net (original maturities three months or less)
1,217

 
553

Net cash provided by (used for) financing activities
(1,132
)
 
3,701

Effect of exchange rate changes on cash
(41
)
 
(129
)
Increase (decrease) in cash and short-term investments
620

 
2,046

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

 
3,057

Cash and short-term investments at end of period
$
6,110

 
$
5,103


 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 six month periods ended June 30, 2013 and 2012, (b) the consolidated comprehensive income for the three and six month periods ended June 30, 2013 and 2012, (c) the consolidated financial position at June 30, 2013 and December 31, 2012, (d) the consolidated changes in stockholders’ equity for the six month periods ended June 30, 2013 and 2012, and (e) the consolidated cash flow for the six month periods ended June 30, 2013 and 2012.  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 cash flows from operating and financing activities for the six month period ended June 30, 2012 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 $29 million for the six month period ended June 30, 2012, and cash provided by financing activities increased by the same amount. Revisions will be made to previously reported amounts in future filings. Cash provided by operating activities will decrease by $57 million and $53 million for the years ended December 31, 2012 and 2011, respectively, and the unaudited cash flows from operating activities will decrease by $44 million for the nine month period ended September 30, 2012. Cash provided by financing activities will increase by the same amounts for the respective periods. Management has concluded that the impact was not material to any quarterly or annual period.

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, 2012 (2012 Form 10-K).
 
The December 31, 2012 financial position data included herein is derived from the audited consolidated financial statements included in the 2012 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 and Power Systems – Represents the aggregate total of Construction Industries, Resource Industries, Power Systems, and All Other segments and related corporate items and eliminations.
 
Financial Products – Primarily includes the company’s Financial Products Segment.  This category includes Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings Inc. (Cat Insurance) and their respective subsidiaries. 

2.                                    New Accounting Guidance
 
Disclosures about offsetting assets and liabilities – In December 2011, the Financial Accounting Standards Board (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 4 for additional information.

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

10


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 12 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.

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 $83 million and $132 million for the three and six months ended June 30, 2013, respectively; and $88 million and $135 million for the three and six months ended June 30, 2012, respectively.

The following table illustrates the type and fair value of the stock-based compensation awards granted during the six month periods ended June 30, 2013 and 2012, respectively:
 
 
2013
 
2012
 
Shares Granted
 
Fair Value
Per Award
 
Shares Granted
 
Fair Value
Per Award
Stock options
4,276,060

 
$
28.34

 
3,224,203

 
$
39.20

RSUs
1,614,870

 
$
84.05

 
1,429,939

 
$
104.61

 
The stock price on the date of grant was $89.75 and $110.09 for 2013 and 2012, respectively.
 

11


The following table provides the assumptions used in determining the fair value of the stock-based awards for the six month periods ended June 30, 2013 and 2012, respectively:
 
 
Grant Year
 
2013
 
2012
Weighted-average dividend yield
2.13%
 
2.16%
Weighted-average volatility
30.6%
 
35.0%
Range of volatilities
23.4-40.6%
 
33.3-40.4%
Range of risk-free interest rates
0.16-1.88%
 
0.17-2.00%
Weighted-average expected lives
8 years
 
7 years
 
As of June 30, 2013, the total remaining unrecognized compensation cost related to nonvested stock-based compensation awards was $301 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 2.2 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.
 

12


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 June 30, 2013, $19 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 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.

As of June 30, 2013, $3 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 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.
 
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 the Consolidated Statement of Financial Position are as follows:
 
(Millions of dollars)
 
 
 
 
 
 
Consolidated Statement of Financial
 
Asset (Liability) Fair Value
 
Position Location
 
June 30, 2013
 
December 31, 2012
Designated derivatives
 
 
 
 
 
Foreign exchange contracts
 
 
 

 
 

Machinery and Power Systems
Receivables – trade and other
 
$
27

 
$
28

Machinery and Power Systems
Accrued expenses
 
(57
)
 
(66
)
Interest rate contracts
 
 
 
 
 

Financial Products
Receivables – trade and other
 
19

 
17

Financial Products
Long-term receivables – trade and other
 
134

 
209

Financial Products
Accrued expenses
 
(6
)
 
(8
)
 
 
 
$
117

 
$
180

Undesignated derivatives
 
 
 

 
 

Foreign exchange contracts
 
 
 

 
 

Machinery and Power Systems
Receivables – trade and other
 
$
65

 
$
31

Machinery and Power Systems
Accrued expenses
 
(71
)
 
(63
)
Financial Products
Receivables – trade and other
 
14

 
10

Financial Products
Accrued expenses
 
(3
)
 
(6
)
Interest rate contracts
 
 
 
 
 

Financial Products
Receivables – trade and other
 
3

 
2

Financial Products
Accrued expenses
 

 
(1
)
Commodity contracts
 
 
 
 
 

Machinery and Power Systems
Receivables – trade and other
 

 
1

Machinery and Power Systems
Accrued expenses
 
(3
)
 

 
 
 
$
5

 
$
(26
)
 
 
 
 
 
 


14


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
June 30, 2013
 
Three Months Ended
June 30, 2012
 
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)
 
$
(49
)
 
$
50

 
$
6

 
$
(5
)
 
 
 
$
(49
)
 
$
50

 
$
6

 
$
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
June 30, 2013
 
Six Months Ended
June 30, 2012
 
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)
 
$
(78
)
 
$
80

 
$
(3
)
 
$
10

 
 
 
$
(78
)
 
$
80

 
$
(3
)
 
$
10

 
 
 
 
 
 
 
 
 
 


15


Cash Flow Hedges
(Millions of dollars)
 
 
 
 
 
 
 
 
 
Three Months Ended June 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 and Power Systems
$
9

 
Other income (expense)
 
$
(31
)

$

 
Interest rate contracts
 
 
 
 
 
 
 
 
Machinery and Power Systems

 
Other income (expense)
 
(1
)
 

 
Financial Products
3

 
Interest expense of Financial Products
 
(2
)
 


 
$
12

 
 
 
$
(34
)
 
$

 
 
Three Months Ended June 30, 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
$

 
Other income (expense)
 
$
(4
)
 
$

 
Interest rate contracts
 

 
 
 
 

 
 

 
Financial Products
(2
)
 
Interest expense of Financial Products
 
(1
)
 
(1
)
1 
 
$
(2
)
 
 
 
$
(5
)
 
$
(1
)
 
 
Six Months Ended June 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 and Power Systems
$
(40
)
 
Other income (expense)
 
$
(48
)
2 
$

 
Interest rate contracts
 
 
 
 
 

 
 

 
Machinery and Power Systems

 
Other income (expense)
 
(1
)
 

 
Financial Products
3

 
Interest expense of Financial Products
 
(3
)
 


 
$
(37
)
 
 
 
$
(52
)
 
$

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 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
$
(42
)
 
Other income (expense)
 
$
1

 
$

 
Interest rate contracts
 

 
 
 
 

 
 

 
Machinery and Power Systems

 
Other income (expense)
 
(1
)
 

 
Financial Products
(2
)
 
Interest expense of Financial Products
 
(2
)
 
(1
)
1 
 
$
(44
)
 
 
 
$
(2
)
 
$
(1
)
 
 
 
 
 
 
 
 
 
 
1 
The ineffective portion recognized in earnings is included in Other income (expense).
2 
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
June 30, 2013
 
Three Months Ended
June 30, 2012
Foreign exchange contracts
 
 
 
 
 
Machinery and Power Systems
Other income (expense)
 
$
12

 
$
(35
)
Financial Products
Other income (expense)
 
16

 
(5
)
Commodity contracts
 
 
 

 
 
Machinery and Power Systems
Other income (expense)
 
(3
)
 
(6
)
 
 
 
$
25

 
$
(46
)
 
 
 
 
 
 
 
Classification of Gains (Losses)
 
Six Months Ended
June 30, 2013
 
Six Months Ended
June 30, 2012
Foreign exchange contracts
 
 
 
 
 
Machinery and Power Systems
Other income (expense)
 
$
(8
)
 
$
30

Financial Products
Other income (expense)
 
1

 
2

Commodity contracts
 
 
 
 
 
Machinery and Power Systems
Other income (expense)
 
(4
)
 

 
 
 
$
(11
)
 
$
32

 
 
 
 
 
 
 
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 June 30, 2013 and December 31, 2012, no cash collateral was received or pledged under the master netting agreements.


17


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:
June 30, 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
 
$
92

 
$

 
$
92

 
$
(84
)
 
$

 
$
8

Financial Products
 
170

 

 
170

 
(8
)
 

 
162

 Total
 
$
262

 
$

 
$
262

 
$
(92
)
 
$

 
$
170

June 30, 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
 
$
(131
)
 
$

 
$
(131
)
 
$
84

 
$

 
$
(47
)
Financial Products
 
(9
)
 

 
(9
)
 
8

 

 
(1
)
 Total
 
$
(140
)
 
$

 
$
(140
)
 
$
92

 
$

 
$
(48
)
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
)
 
 
 
 
 
 
 
 
 
 
 
 
 


18


5.                                     Inventories
 
Inventories (principally using the last-in, first-out (LIFO) method) are comprised of the following:
 
(Millions of dollars)
June 30,
2013
 
December 31,
2012
Raw materials
$
3,310

 
$
3,573

Work-in-process
2,606

 
2,920

Finished goods
7,697

 
8,767

Supplies
276

 
287

Total inventories
$
13,889

 
$
15,547

 
 
 
 

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
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Sales
$
309

 
$
206

 
$
567

 
$
372

Cost of sales
233

 
160

 
438

 
286

Gross profit
$
76

 
$
46

 
$
129

 
$
86

 
 
 
 
 
 
 
 
Profit (loss)
$
(22
)
 
$
12

 
$
(25
)
 
$
22

 
 
 
 
 
 
 
 

Financial Position of unconsolidated affiliated companies: 
(Millions of dollars)
June 30,
2013
 
December 31,
2012
Assets:
 

 
 

Current assets
$
672

 
$
715

Property, plant and equipment – net
723

 
529

Other assets
499

 
616

 
1,894

 
1,860

Liabilities:
 

 
 

Current liabilities
422

 
443

Long-term debt due after one year
869

 
708

Other liabilities
157

 
170

 
1,448

 
1,321

Equity
$
446

 
$
539

 
 
 
 

Caterpillar’s investments in unconsolidated affiliated companies: 
(Millions of dollars)
June 30,
2013
 
December 31,
2012
Investments in equity method companies
$
278

 
$
256

Plus: Investments in cost method companies
10

 
16

Total investments in unconsolidated affiliated companies
$
288

 
$
272

 
 
 
 

The change in the results of operations amounts for the three and six months ended June 30, 2013 as compared to June 30, 2012 primarily relates to the third party logistics business, in which Caterpillar sold a majority interest on July 31, 2012. Under the terms of the agreement, Caterpillar retained a 35 percent equity interest.


19


7.                                     Intangible Assets and Goodwill
 
A.  Intangible assets
 
Intangible assets are comprised of the following:
 
 
 
 
June 30, 2013
(Millions of dollars)
Weighted
Amortizable
Life (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
15
 
$
2,700

 
$
(457
)
 
$
2,243

Intellectual property
11
 
1,762

 
(415
)
 
1,347

Other
10
 
277

 
(121
)
 
156

Total finite-lived intangible assets
14
 
4,739

 
(993
)
 
3,746

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

 

 
18

Total intangible assets
 
 
$
4,757

 
$
(993
)
 
$
3,764

 
 
 
 
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

 
 
 
 
 
 
 
 
 
Customer relationship intangibles of $54 million, net of accumulated amortization of $7 million, were reclassified from Intangible assets to held for sale and/or divested during 2013, primarily related to the divestiture of portions of the Bucyrus distribution business, and are not included in the June 30, 2013 balances in the table above. See Note 20 for additional information on assets held for sale.

Amortization expense for both the three and six months ended June 30, 2013 was $91 million and $185 million, respectively. Amortization expense for the three and six months ended June 30, 2012 was $99 million and $193 million, respectively. Amortization expense related to intangible assets is expected to be:
(Millions of dollars)
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
$367
 
$365
 
$364
 
$354
 
$351
 
$2,148
 
 
 
 
 
 
 
 
 
 
 
 
B.  Goodwill
 
Goodwill of $29 million was reclassified to held for sale and/or divested during the six months ended June 30, 2013, primarily 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, and is not included in the June 30, 2013 balance in the table below. See Note 20 for additional information on divestitures and assets held for sale.
 
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

20


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. No goodwill for reporting units was impaired during the three and six months ended June 30, 2013 or 2012.
 
The changes in the carrying amount of the goodwill by reportable segment for the six months ended June 30, 2013 were as follows: 
 
(Millions of dollars)
 
 
 
 
 
 
 
 
 
 
December 31,
2012
 
Held for Sale and Business Divestitures 1
 
Other Adjustments 2
 
June 30,
2013
Construction Industries
 
 
 
 
 
 
 


Goodwill
 
$
382

 
$

 
$
(51
)
 
$
331

Resource Industries
 
 
 
 
 
 
 
 
Goodwill
 
4,559

 
(19
)
 
(41
)
 
4,499

Impairments
 
(602
)
 

 

 
(602
)
Net goodwill
 
3,957

 
(19
)
 
(41
)
 
3,897

Power Systems
 
 
 
 
 
 
 
 
Goodwill
 
2,486

 
(10
)
 
(7
)
 
2,469

All Other 3
 
 
 
 
 
 
 
 
Goodwill
 
117

 

 

 
117

Consolidated total
 
 
 
 
 
 
 
 
Goodwill
 
7,544

 
(29
)
 
(99
)
 
7,416

Impairments
 
(602
)
 

 

 
(602
)
Net goodwill
 
$
6,942

 
$
(29
)
 
$
(99
)
 
$
6,814


1  See Note 20 for additional details.
Other adjustments are comprised primarily of foreign currency translation.
3  Includes All Other operating segment (See Note 15).
 
 
 
 
 

8.                                     Available-For-Sale Securities
 
We have investments in certain debt and equity securities, primarily at Cat Insurance, that have been classified as available-for-sale and recorded at fair value based upon quoted market prices. These investments are primarily included in Other assets in the Consolidated Statement of Financial Position. 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 the Consolidated Statement of Financial Position).  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 the Consolidated Statement of Results of Operations.

21


 
 
June 30, 2013
 
December 31, 2012
(Millions of dollars)
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

 
$

 
$