The Quarterly
CAT Q2 2015 10-Q

Caterpillar Inc (CAT) SEC Quarterly Report (10-Q) for Q3 2015

CAT 2015 10-K
CAT Q2 2015 10-Q CAT 2015 10-K

Table of Contents


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, 2015

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, 2015 , 582,233,801 shares of common stock of the registrant were outstanding.


Table of Contents


Table of Contents

Part I. Financial Information

Item 1.

Financial Statements

3

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

59

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

90

Item 4.

Controls and Procedures

90

Part II. Other Information

Item 1.

Legal Proceedings

91

Item 1A.

Risk Factors

*

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

91

Item 3.

Defaults Upon Senior Securities

*

Item 4.

Mine Safety Disclosures

*

Item 5.

Other Information

*

Item 6.

Exhibits

92

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



2

Table of Contents


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,

2015

2014

Sales and revenues:

Sales of Machinery, Energy & Transportation

$

10,285


$

12,758


Revenues of Financial Products

677


791


Total sales and revenues

10,962


13,549


Operating costs:



Cost of goods sold

7,954


9,634


Selling, general and administrative expenses

1,225


1,446


Research and development expenses

534


533


Interest expense of Financial Products

142


157


Other operating (income) expenses

394


387


Total operating costs

10,249


12,157


Operating profit

713


1,392


Interest expense excluding Financial Products

127


128


Other income (expense)

(68

)

117


Consolidated profit before taxes

518


1,381


Provision (benefit) for income taxes

144


364


Profit of consolidated companies

374


1,017


Equity in profit (loss) of unconsolidated affiliated companies

(3

)

4


Profit of consolidated and affiliated companies

371


1,021


Less: Profit (loss) attributable to noncontrolling interests

3


4


Profit 1

$

368


$

1,017


Profit per common share

$

0.63


$

1.66


Profit per common share – diluted 2

$

0.62


$

1.63


Weighted-average common shares outstanding (millions)



– Basic

588.4


611.5


– Diluted  2

594.8


622.8


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

Table of Contents


Caterpillar Inc .

Consolidated Statement of Comprehensive Income

(Unaudited)

(Dollars in millions)

Three Months Ended
September 30,

2015

2014

Profit of consolidated and affiliated companies

$

371


$

1,021


Other comprehensive income (loss), net of tax:

   Foreign currency translation, net of tax (provision)/benefit of: 2015 - $(5); 2014 - $(44)

(235

)

(710

)

   Pension and other postretirement benefits:


        Current year actuarial gain (loss), net of tax (provision)/benefit of: 2015 - $(21); 2014 - $(2)

44


4


        Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2015 - $(56); 2014 - $(44)

108


86


        Current year prior service credit (cost), net of tax (provision)/benefit of: 2015 - $(1); 2014 - $(1)

1


-


        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2015 - $5; 2014 - $3

(8

)

(6

)

   Derivative financial instruments:

        Gains (losses) deferred, net of tax (provision)/benefit of: 2015 - $7; 2014 - $17

(12

)

(30

)

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2015 - $(11); 2014 - $1

20


-


   Available-for-sale securities:

        Gains (losses) deferred, net of tax (provision)/benefit of: 2015 - $10; 2014 - $5

(15

)

(5

)

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2015 - $9; 2014 - $7

(18

)

(13

)

Total other comprehensive income (loss), net of tax

(115

)

(674

)

Comprehensive income

256


347


Less: comprehensive income attributable to the noncontrolling interests

(2

)

(4

)

Comprehensive income attributable to stockholders

$

254


$

343



See accompanying notes to Consolidated Financial Statements.



4

Table of Contents


Caterpillar Inc.

Consolidated Statement of Results of Operations

(Unaudited)

(Dollars in millions except per share data)

Nine Months Ended
September 30,

2015

2014

Sales and revenues:

Sales of Machinery, Energy & Transportation

$

33,829


$

38,642


Revenues of Financial Products

2,152


2,298


Total sales and revenues

35,981


40,940


Operating costs:



Cost of goods sold

25,559


29,268


Selling, general and administrative expenses

3,932


4,175


Research and development expenses

1,612


1,557


Interest expense of Financial Products

440


470


Other operating (income) expenses

1,068


1,205


Total operating costs

32,611


36,675


Operating profit

3,370


4,265


Interest expense excluding Financial Products

381


358


Other income (expense)

76


236


Consolidated profit before taxes

3,065


4,143


Provision (benefit) for income taxes

870


1,201


Profit of consolidated companies

2,195


2,942


Equity in profit (loss) of unconsolidated affiliated companies

1


6


Profit of consolidated and affiliated companies

2,196


2,948


Less: Profit (loss) attributable to noncontrolling interests

7


10


Profit 1

$

2,189


$

2,938


Profit per common share

$

3.66


$

4.73


Profit per common share – diluted 2

$

3.62


$

4.64


Weighted-average common shares outstanding (millions)


– Basic

597.9


620.6


– Diluted  2

605.3


632.7


Cash dividends declared per common share

$

1.47


$

1.30



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

Table of Contents


Caterpillar Inc .

Consolidated Statement of Comprehensive Income

(Unaudited)

(Dollars in millions)

Nine Months Ended
September 30,

2015

2014

Profit of consolidated and affiliated companies

$

2,196


$

2,948


Other comprehensive income (loss), net of tax:

   Foreign currency translation, net of tax (provision)/benefit of: 2015 - $(60); 2014 - $(52)

(810

)

(643

)

   Pension and other postretirement benefits:

        Current year actuarial gain (loss), net of tax (provision)/benefit of: 2015 - $(35); 2014 - $(7)

68


14


        Amortization of actuarial (gain) loss, net of tax (provision)/benefit of: 2015 - $(168); 2014 - $(132)

326


258


        Current year prior service credit (cost), net of tax (provision)/benefit of: 2015 - $(1); 2014 - $(1)

1


1


        Amortization of prior service (credit) cost, net of tax (provision)/benefit of: 2015 - $14; 2014 - $10

(26

)

(18

)

   Derivative financial instruments:

        Gains (losses) deferred, net of tax (provision)/benefit of: 2015 - $9; 2014 - $33

(15

)

(57

)

        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2015 - $(40); 2014 - $7

69


(10

)

   Available-for-sale securities:

        Gains (losses) deferred, net of tax (provision)/benefit of: 2015 - $10; 2014 - $(6)

(13

)

18


        (Gains) losses reclassified to earnings, net of tax (provision)/benefit of: 2015 - $10; 2014 - $11

(21

)

(23

)

Total other comprehensive income (loss), net of tax

(421

)

(460

)

Comprehensive income

1,775


2,488


Less: comprehensive income attributable to the noncontrolling interests

2


(9

)

Comprehensive income attributable to stockholders

$

1,777


$

2,479



See accompanying notes to Consolidated Financial Statements.





6

Table of Contents


Caterpillar Inc .

Consolidated Statement of Financial Position

(Unaudited)

(Dollars in millions)

September 30,
2015

December 31,
2014

Assets

Current assets:



Cash and short-term investments

$

6,046


$

7,341


Receivables – trade and other

6,783


7,737


Receivables – finance

8,862


9,027


Deferred and refundable income taxes

1,446


1,739


Prepaid expenses and other current assets

993


818


Inventories

11,150


12,205


Total current assets

35,280


38,867


Property, plant and equipment – net

15,955


16,577


Long-term receivables – trade and other

1,266


1,364


Long-term receivables – finance

13,551


14,644


Investments in unconsolidated affiliated companies

231


257


Noncurrent deferred and refundable income taxes

1,559


1,404


Intangible assets

2,841


3,076


Goodwill

6,546


6,694


Other assets

1,740


1,798


Total assets

$

78,969


$

84,681


Liabilities



Current liabilities:



Short-term borrowings:



Machinery, Energy & Transportation

$

12


$

9


Financial Products

6,068


4,699


Accounts payable

5,206


6,515


Accrued expenses

3,306


3,548


Accrued wages, salaries and employee benefits

1,678


2,438


Customer advances

1,610


1,697


Dividends payable

-


424


Other current liabilities

1,698


1,754


Long-term debt due within one year:



Machinery, Energy & Transportation

516



510


Financial Products

5,739


6,283


Total current liabilities

25,833


27,877


Long-term debt due after one year:



Machinery, Energy & Transportation

8,997


9,493


Financial Products

16,211


18,291


Liability for postemployment benefits

8,638


8,963


Other liabilities

3,322


3,231


Total liabilities

63,001


67,855


Commitments and contingencies (Notes 10 and 13)





Stockholders' equity



Common stock of $1.00 par value:



Authorized shares: 2,000,000,000
Issued shares: (9/30/15 and 12/31/14 – 814,894,624) at paid-in amount

5,190


5,016


Treasury stock (9/30/15 – 232,660,823 shares; 12/31/14 – 208,728,065 shares) at cost

(17,642

)

(15,726

)

Profit employed in the business

35,191


33,887


Accumulated other comprehensive income (loss)

(6,843

)

(6,431

)

Noncontrolling interests

72


80


Total stockholders' equity

15,968


16,826


Total liabilities and stockholders' equity

$

78,969


$

84,681


See accompanying notes to Consolidated Financial Statements.


7

Table of Contents


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, 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


Nine Months Ended September 30, 2015







Balance at December 31, 2014

$

5,016


$

(15,726

)

$

33,887


$

(6,431

)

$

80


$

16,826


Profit of consolidated and affiliated companies

-


-


2,189


-


7


2,196


Foreign currency translation, net of tax

-


-


-


(801

)

(9

)

(810

)

Pension and other postretirement benefits, net of tax

-


-


-


369


-


369


Derivative financial instruments, net of tax

-


-


-


54


-


54


Available-for-sale securities, net of tax

-


-


-


(34

)

-


(34

)

Dividends declared

-


-


(885

)

-


-


(885

)

Distribution to noncontrolling interests

-


-


-


-


(7

)

(7

)

Common shares issued from treasury stock for stock-based compensation: 2,843,506

(75

)

109


-


-


-


34


Stock-based compensation expense

240


-


-


-


-


240


Net excess tax benefits from stock-based compensation

7


-


-


-


-


7


Common shares repurchased: 25,841,608 1

-


(2,025

)

-


-


-


(2,025

)

Other

2


-


-


-


1


3


Balance at September 30, 2015

$

5,190


$

(17,642

)

$

35,191


$

(6,843

)

$

72


$

15,968


1

See Note 11 regarding shares repurchased.

See accompanying notes to Consolidated Financial Statements.



8

Table of Contents


Caterpillar Inc.

Consolidated Statement of Cash Flow

(Unaudited)

(Millions of dollars)

Nine Months Ended
September 30,

2015

2014

Cash flow from operating activities:

Profit of consolidated and affiliated companies

$

2,196


$

2,948


Adjustments for non-cash items:



Depreciation and amortization

2,272


2,368


Other

354


327


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



Receivables – trade and other

614


393


Inventories

840


(859

)

Accounts payable

(893

)

518


Accrued expenses

(25

)

(44

)

Accrued wages, salaries and employee benefits

(704

)

648


Customer advances

(36

)

(132

)

Other assets – net

(108

)

(104

)

Other liabilities – net

354


123


Net cash provided by (used for) operating activities

4,864


6,186


Cash flow from investing activities:



Capital expenditures – excluding equipment leased to others

(946

)

(1,072

)

Expenditures for equipment leased to others

(1,251

)

(1,310

)

Proceeds from disposals of leased assets and property, plant and equipment

473


681


Additions to finance receivables

(7,099

)

(8,464

)

Collections of finance receivables

6,849


7,264


Proceeds from sale of finance receivables

101


154


Investments and acquisitions (net of cash acquired)

(140

)

(18

)

Proceeds from sale of businesses and investments (net of cash sold)

174


196


Proceeds from sale of securities

238


347


Investments in securities

(296

)

(769

)

Other – net

(76

)

(12

)

Net cash provided by (used for) investing activities

(1,973

)

(3,003

)

Cash flow from financing activities:



Dividends paid

(1,309

)

(1,197

)

Distribution to noncontrolling interests

(7

)

(7

)

Contribution from noncontrolling interests

-


2


Common stock issued, including treasury shares reissued

34


218


Treasury shares purchased

(2,025

)

(4,238

)

Excess tax benefit from stock-based compensation

20


162


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



        Machinery, Energy & Transportation

3


1,991


        Financial Products

4,079


7,112


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



        Machinery, Energy & Transportation

(513

)

(779

)

        Financial Products

(6,259

)

(7,114

)

Short-term borrowings – net (original maturities three months or less)

1,922


791


Net cash provided by (used for) financing activities

(4,055

)

(3,059

)

Effect of exchange rate changes on cash

(131

)

(123

)

Increase (decrease) in cash and short-term investments

(1,295

)

1


Cash and short-term investments at beginning of period

7,341


6,081


Cash and short-term investments at end of period

$

6,046


$

6,082



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

Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

A.  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.


B.  Basis of presentation

In the opinion of management, the accompanying unaudited 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, 2015 and 2014 , (b) the consolidated comprehensive income for the three and nine month periods ended September 30, 2015 and 2014 , (c) the consolidated financial position at September 30, 2015 and December 31, 2014 , (d) the consolidated changes in stockholders' equity for the nine month periods ended September 30, 2015 and 2014 and (e) the consolidated cash flow for the nine month periods ended September 30, 2015 and 2014 .  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.

As previously disclosed, in connection with the preparation of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, we concluded that certain non-cash transactions should be excluded from both changes in Receivables-trade and other and Accounts payable when preparing our Consolidated Statement of Cash Flow. Accordingly, we prepared our Consolidated Statement of Cash Flow for the nine months ended September 30, 2014 on that basis. We subsequently concluded that our prior policy of including those transactions in the changes in Receivables-trade and other and Accounts payable is acceptable. Accordingly, we prepared our Consolidated Statement of Cash Flow for the year ended December 31, 2014 using our prior policy. We have revised our Consolidated Statement of Cash Flow to increase Receivables-trade and other and decrease Accounts payable by $149 million for the nine months ended September 30, 2014. The revisions did not impact net cash provided by operating activities.


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, 2014 ( 2014 Form 10-K).

The December 31, 2014 financial position data included herein is derived from the audited consolidated financial statements included in the 2014 Form 10-K but does not include all disclosures required by U.S. GAAP. 


Unconsolidated Variable Interest Entities (VIEs)


We have affiliates, suppliers and dealers that are VIEs of which we are not the primary beneficiary. Although we have provided financial support, we do not have the power to direct the activities that most significantly impact the economic performance of each entity.



10

Table of Contents


Our maximum exposure to loss from VIEs for which we are not the primary beneficiary was as follows:

(Millions of dollars)

September 30, 2015

December 31, 2014

Receivables - trade and other

$

48


$

36


Receivables - finance

492


216


Long-term receivables - finance

63


285


Investments in unconsolidated affiliated companies

28


83


Guarantees

98


129


Total

$

729


$

749



2. New accounting guidance

Reporting discontinued operations and disclosures of disposals of components of an entity – In April 2014, the Financial Accounting Standards Board (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 was effective January 1, 2015 and did not 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, 2018, with early adoption permitted for 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.


Variable interest entities (VIE) – In February 2015, the FASB issued accounting guidance on the consolidation of VIEs. The new guidance revises previous guidance by establishing an analysis for determining whether a limited partnership or similar entity is a VIE and whether outsourced decision-maker fees are considered variable interests. In addition, the new guidance revises how a reporting entity evaluates economics and related parties when assessing who should consolidate a VIE. This guidance is effective January 1, 2016. We do not expect the adoption to have a material impact on our financial statements.


Presentation of debt issuance costs – In April 2015, the FASB issued accounting guidance which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Prior to the issuance of the new guidance, debt issuance costs were required to be presented in the balance sheet as an asset. This guidance is effective January 1, 2016. We do not expect the adoption to have a material impact on our financial statements.


Fair value disclosures for investments in certain entities that calculate net asset value per share – In May 2015, the FASB issued accounting guidance which removes the requirement to categorize within the fair value hierarchy investments measured at net asset value (or its equivalent) as a practical expedient for fair value. The new guidance requires that the amount of these investments continue to be disclosed to reconcile the fair value hierarchy disclosure to the balance sheet. The guidance is effective January 1, 2016 and will be applied retrospectively with early adoption permitted. We do not expect the adoption to have a material impact on our financial statements.


Simplifying the measurement of inventory – In July 2015, the FASB issued accounting guidance which requires that inventory be measured at the lower of cost or net realizable value. Prior to the issuance of the new guidance, inventory was measured at the lower of cost or market. Replacing the concept of market with the single measurement of net realizable value is intended to create efficiencies for preparers. Inventory measured using the last-in, first-out (LIFO) method and the retail inventory method are not impacted by the new guidance. The guidance is effective January 1, 2017. We do not expect the adoption to have a material impact on our financial statements.


11

Table of Contents



Simplifying the accounting for measurement-period adjustments – In September 2015, the FASB issued accounting guidance which eliminates the requirement for an acquirer in a business combination to restate prior period financial statements for measurement period adjustments. An acquirer in a business combination is required to report provisional amounts when measurements are incomplete at the end of the reporting period covering the business combination. Prior to the issuance of the new guidance, an acquirer was required to adjust such provisional amounts by restating prior period financial statements. Under the new guidance, the acquirer will recognize the measurement-period adjustment in the period the adjustment is determined. The guidance is effective January 1, 2016 and will be applied prospectively with early adoption permitted. 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).  Stock-based compensation awards granted prior to 2015 will vest three years after the date of grant (cliff vesting). The awards granted in 2015 will vest according to a three -year graded vesting schedule. One-third of the award will become vested on the first anniversary of the grant date, one-third of the award will become vested on the second anniversary of the grant date and one-third of the award will become vested on the third anniversary of the grant date. Stock-based compensation expense will be recognized on a straight-line basis over the requisite service period for awards with terms that specify cliff or graded vesting and contain only service conditions.


Upon separation from service, if the participant is 55 years of age or older with more than five years of service, the participant meets the criteria for a "Long Service Separation". Prior to 2015, our stock-based compensation award terms allowed for the immediate vesting upon separation for employees who met the criteria for a "Long Service Separation" and fulfilled a requisite service period of six months . For these employees, compensation expense was recognized over the period from the grant date to the end date of the six -month requisite service period. Our stock-based compensation award terms for the 2015 grant allowed for the immediate vesting upon separation for employees who met the criteria for a "Long Service Separation" with no requisite service period. For these employees, compensation expense for the 2015 grant was recognized immediately on the grant date. For employees who become eligible for immediate vesting under a "Long Service Separation" subsequent to the grant date and prior to the completion of the vesting period, compensation expense is recognized over the period from grant date to the date eligibility is achieved. If the "Long Service Separation" criteria are met, the vested options/SARs will have a life that is the lesser of ten years from the original grant date or five years from the separation date.


We recognized pretax stock-based compensation expense in the amount of $48 million and $240 million for the three and nine months ended September 30, 2015 , respectively; and $70 million and $207 million for the three and nine months ended September 30, 2014 , respectively. The change in stock-based compensation expense for the third quarter was primarily due to the change in award terms for participants that met the criteria for a "Long Service Separation", as the removal of the six -month requisite service period results in higher expense in the first quarter (period of grant) and lower expense over the following two quarters.


The following table illustrates the type and fair value of the stock-based compensation awards granted during the nine month periods ended September 30, 2015 and 2014 , respectively:

2015

2014

Shares Granted

Weighted-Average Fair Value Per Share

Weighted-Average Grant Date Stock Price

Shares Granted

Weighted-Average Fair Value Per Share

Weighted-Average Grant Date Stock Price

Stock options

7,939,497


$

23.61


$

83.34


4,448,218


$

29.52


$

96.31


RSUs

1,822,729


$

77.54


$

83.01


1,429,512


$

89.18


$

96.31



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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, 2015 and 2014 , respectively:

Grant Year

2015

2014

Weighted-average dividend yield

2.27%

2.15%

Weighted-average volatility

28.4%

28.2%

Range of volatilities

19.9-35.9%

18.4-36.2%

Range of risk-free interest rates

0.22-2.08%

0.12-2.60%

Weighted-average expected lives

8 years

8 years

As of September 30, 2015 , the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $261 million , which will be amortized over the weighted-average remaining requisite service periods of approximately 2.0 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.


13

Table of Contents


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 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. As of September 30, 2015 , the maximum term of these outstanding contracts was approximately 15 months .

We generally designate as cash flow hedges at inception of the contract any Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, Indian rupee, Japanese yen, Mexican peso, Norwegian krona, 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.  

As of September 30, 2015 , $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.

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, 2015 , $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, 2015 , $1 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


14

Table of Contents


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.

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, 2015

December 31, 2014

Designated derivatives

Foreign exchange contracts



Machinery, Energy & Transportation

Receivables – trade and other

$

16


$

25


Machinery, Energy & Transportation

Accrued expenses

(47

)

(134

)

Machinery, Energy & Transportation

Other liabilities

(2

)

-


Interest rate contracts


Financial Products

Receivables – trade and other

1


6


Financial Products

Long-term receivables – trade and other

65


73


Financial Products

Accrued expenses

(4

)

(8

)

$

29


$

(38

)

Undesignated derivatives



Foreign exchange contracts



Machinery, Energy & Transportation

Receivables – trade and other

$

6


$

2


Machinery, Energy & Transportation

Accrued expenses

(11

)

(43

)

Financial Products

Receivables – trade and other

3


5


Financial Products

Long-term receivables – trade and other

35


17


Financial Products

Accrued expenses

(5

)

(15

)

Commodity contracts


Machinery, Energy & Transportation

Accrued expenses

(12

)

(14

)

$

16


$

(48

)


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


(Millions of dollars)

September 30, 2015

December 31, 2014

Machinery, Energy & Transportation

$

2,198


$

3,128


Financial Products

$

3,785


$

5,249




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Table of Contents


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

Three Months Ended
September 30, 2015

Three Months Ended
September 30, 2014

(Millions of dollars)

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)

$

3


$

(3

)

$

(19

)

$

1


$

3


$

(3

)

$

(19

)

$

1


Nine Months Ended
September 30, 2015

Nine Months Ended
September 30, 2014

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)

$

(11

)

$

10


$

(38

)

$

24


$

(11

)

$

10


$

(38

)

$

24





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Table of Contents


Cash Flow Hedges

Three Months Ended September 30, 2015

Recognized in Earnings

(Millions of dollars)

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

$

(18

)

Other income (expense)

$

(29

)

$

-


Interest rate contracts

Machinery, Energy & Transportation

-


Interest expense excluding Financial Products

(1

)

-


Financial Products

(1

)

Interest expense of Financial Products

(1

)

-



$

(19

)

$

(31

)

$

-


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


$

-


Nine Months Ended September 30, 2015

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

$

(25

)

Other income (expense)

$

(101

)


$

-


Interest rate contracts



Machinery, Energy & Transportation

-


Interest expense excluding Financial Products

(4

)

-


Financial Products

1


Interest expense of Financial Products

(4

)

-



$

(24

)

$

(109

)

$

-


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


$

-




17

Table of Contents


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, 2015

Three Months Ended
September 30, 2014

Foreign exchange contracts

Machinery, Energy & Transportation

Other income (expense)

$

7


$

(44

)

Financial Products

Other income (expense)

6


(19

)

Commodity contracts


Machinery, Energy & Transportation

Other income (expense)

(8

)

(6

)

$

5


$

(69

)

Classification of Gains (Losses)

Nine Months Ended
September 30, 2015

Nine Months Ended
September 30, 2014

Foreign exchange contracts

Machinery, Energy & Transportation

Other income (expense)

$

(22

)

$

(35

)

Financial Products

Other income (expense)

(18

)

(36

)

Commodity contracts

Machinery, Energy & Transportation

Other income (expense)

(15

)

(3

)

$

(55

)

$

(74

)

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, 2015 and December 31, 2014 , no cash collateral was received or pledged under the master netting agreements.



18

Table of Contents


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:

September 30, 2015

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

$

22


$

-


$

22


$

(20

)

$

-


$

2


Financial Products

104


-


104


(7

)

-


97


 Total

$

126


$

-


$

126


$

(27

)

$

-


$

99


September 30, 2015

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

$

(72

)

$

-


$

(72

)

$

20


$

-


$

(52

)

Financial Products

(9

)

-


(9

)

7


-


(2

)

 Total

$

(81

)

$

-


$

(81

)

$

27


$

-


$

(54

)

December 31, 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

$

27


$

-


$

27


$

(27

)

$

-


$

-


Financial Products

101


-


101


(8

)

-


93


 Total

$

128


$

-


$

128


$

(35

)

$

-


$

93


December 31, 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

$

(191

)

$

-


$

(191

)

$

27


$

-


$

(164

)

Financial Products

(23

)

-


(23

)

8


-


(15

)

 Total

$

(214

)

$

-


$

(214

)

$

35


$

-


$

(179

)



19

Table of Contents


5. Inventories

Inventories are valued at the lower of cost or market, principally using the last-in, first-out (LIFO) method, and are comprised of the following:

(Millions of dollars)

September 30,
2015

December 31,
2014

Raw materials

$

2,862


$

2,986


Work-in-process

1,987


2,455


Finished goods

6,042


6,504


Supplies

259


260


Total inventories

$

11,150


$

12,205



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,

2015

2014

2015

2014

Sales

$

205


$

453


$

558


$

1,253


Cost of sales

166


357


437


974


Gross profit

$

39


$

96


$

121


$

279


Profit (loss)

$

(10

)

$

(7

)

$

(2

)

$

(17

)


Financial Position of unconsolidated affiliated companies:

( Millions of dollars )

September 30,
2015

December 31,
2014

Assets:



Current assets

$

506


$

716


Property, plant and equipment – net

187


653


Other assets

198


557


891


1,926


Liabilities:



Current liabilities

298


518


Long-term debt due after one year

206


867


Other liabilities

13


215


517


1,600


Equity

$

374


$

326



Caterpillar's investments in unconsolidated affiliated companies:

(Millions of dollars)

September 30,
2015

December 31,
2014

Investments in equity method companies

$

188


$

248


Plus: Investments in cost method companies

43


9


Total investments in unconsolidated affiliated companies

$

231


$

257



The changes in the 2015 results of operations, financial position and investments in equity method companies noted above are primarily related to the sale of Caterpillar's 35 percent equity interest in the third party logistics business, formerly Caterpillar Logistics Services LLC. In February 2015, we sold our interest to an affiliate of The Goldman Sachs Group,


20

Table of Contents


Inc. and investment funds affiliated with Rhône Capital LLC for $177 million , which was comprised of $167 million in cash and a $10 million note receivable included in Long-term receivables - trade and other in the Consolidated Statement of Financial Position. As a result of the sale, we recognized a pretax gain of $120 million (included in Other income (expense)) and derecognized the carrying value of our noncontrolling interest of $57 million , which was previously included in Investments in unconsolidated affiliated companies in the Consolidated Statement of Financial Position. The gain on the disposal is included as a reconciling item between Segment profit and Consolidated profit before taxes. The sale of this investment supports Caterpillar's increased focus on growth opportunities in its core businesses.


7. Intangible assets and goodwill

A.  Intangible assets

Intangible assets are comprised of the following:

September 30, 2015

(Millions of dollars)

Weighted

Amortizable

Life (Years)

Gross

Carrying

Amount

Accumulated

Amortization

Net

Customer relationships

15

$

2,427


$

(773

)

$

1,654


Intellectual property

11

1,720


(645

)

1,075


Other

13

187


(75

)

112


Total finite-lived intangible assets

14

$

4,334


$

(1,493

)

$

2,841


December 31, 2014

Weighted

Amortizable

Life (Years)

Gross

Carrying

Amount

Accumulated

Amortization

Net

Customer relationships

15

$

2,489


$

(669

)

$

1,820


Intellectual property

11

1,724


(578

)

1,146


Other

11

239


(129

)

110


Total finite-lived intangible assets

14

$

4,452


$

(1,376

)

$

3,076



Amortization expense for the three and nine months ended September 30, 2015 was $81 million and $255 million , respectively. Amortization expense for the three and nine months ended September 30, 2014 was $91 million and $276 million , respectively. Amortization expense related to intangible assets is expected to be:

(Millions of dollars)

Remaining Three Months of 2015

2016

2017

2018

2019

Thereafter

$88

$327

$325

$319

$317

$1,465

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,


21

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the difference is recognized as an impairment loss. No goodwill was impaired during the nine months ended September 30, 2015 or 2014 .

During 2015, we acquired net assets with related goodwill of $21 million in the Energy & Transportation segment.


The changes in carrying amount of goodwill by reportable segment for the nine months ended September 30, 2015 were as follows: 

(Millions of dollars)

December 31,
2014

Acquisitions

Other Adjustments 1

September 30,
2015

Construction Industries



Goodwill

$

275


$

-


$

(10

)

$

265


Resource Industries

Goodwill

4,287


-


(119

)

4,168


Impairments

(580

)

-


-


(580

)

Net goodwill

3,707


-


(119

)

3,588


Energy & Transportation

Goodwill

2,542


21


(38

)

2,525


All Other 2

Goodwill

192


-


(2

)

190


Impairments

(22

)

-


-


(22

)

Net goodwill

170


-


(2

)

168


Consolidated total

Goodwill

7,296


21


(169

)

7,148


Impairments

(602

)

-


-


(602

)

Net goodwill

$

6,694


$

21


$

(169

)

$

6,546



1 Other adjustments are comprised primarily of foreign currency translation.

2 Includes All Other operating segments (See Note 15).


8. Available-for-sale securities

We have investments in certain debt and equity securities, primarily at Insurance Services, that have been classified as available-for-sale and recorded at fair value. 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 specific identification method for debt and equity securities and are included in Other income (expense) in the Consolidated Statement of Results of Operations.



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Table of Contents


The cost basis and fair value of available-for-sale securities were as follows:

September 30, 2015

December 31, 2014

(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

$

13


$

-


$

13


$

10


$

-


$

10


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

82


1


83


94


-


94


Corporate bonds






Corporate bonds

700


13


713


677


16


693


Asset-backed securities

96


1


97


103


2


105


Mortgage-backed debt securities




U.S. governmental agency

270


4


274


292


2


294


Residential

13


-


13


15


-


15


Commercial

59


3


62


63


4


67


Equity securities




Large capitalization value

212


38


250


150


83


233


Real estate investment trust (REIT)

8


-


8


-


-


-


Smaller company growth

31


19


50


17


26


43


Total

$

1,484


$

79


$

1,563


$

1,421


$

133


$

1,554



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Table of Contents


Investments in an unrealized loss position that are not other-than-temporarily impaired:

September 30, 2015

Less than 12 months 1

12 months or more 1

Total

(Millions of dollars)

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Corporate bonds

Corporate bonds

$

155


$

2


$

23


$

-


$

178


$

2


Mortgage-backed debt securities

U.S. governmental agency

15


-


60


1


75


1


Equity securities

Large capitalization value

84


8


1


-


85


8


Small company growth

13


2


-


-


13


2


Total

$

267


$

12


$

84


$

1


$

351


$

13


December 31, 2014

Less than 12 months 1

12 months or more 1

Total

(Millions of dollars)

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Corporate bonds

Corporate bonds

$

195


$

1


$

32


$

-


$

227


$

1


Mortgage-backed debt securities







U.S. governmental agency

34


-


140


3


174


3


Equity securities







Large capitalization value

15


2


1


-


16


2


Total

$

244


$

3


$

173


$

3


$

417


$

6


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


Corporate Bonds. The unrealized losses on our investments in corporate bonds relate to changes in interest rates and credit-related yield spreads since time of purchase. We do not intend to sell the investments and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of September 30, 2015 .


Mortgage-Backed Debt Securities.   The unrealized losses on our investments in mortgage-backed securities relate to changes in interest rates and credit-related yield spreads since time of purchase.  We do not intend to sell the investments and it is not likely that we will be required to sell these investments before recovery of their amortized cost basis.  We do not consider these investments to be other-than-temporarily impaired as of September 30, 2015 .

Equity Securities.   The unrealized losses on our investments in equity securities relate to inherent risks of individual holdings and/or their respective sectors. We do not consider these investments to be other-than-temporarily impaired as of September 30, 2015 .


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Table of Contents


The cost basis and fair value of the available-for-sale debt securities at September 30, 2015 , by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have the right to call obligations.


September 30, 2015

(Millions of dollars)

Cost Basis

Fair Value

Due in one year or less

$

102


$

102


Due after one year through five years

739


752


Due after five years through ten years

21


22


Due after ten years

29


30


U.S. governmental agency mortgage-backed securities

270


274


Residential mortgage-backed securities

13


13


Commercial mortgage-backed securities

59


62


Total debt securities – available-for-sale

$

1,233


$

1,255



Sales of Securities:

Three Months Ended
September 30,

Nine Months Ended
September 30,

(Millions of dollars)

2015

2014

2015

2014

Proceeds from the sale of available-for-sale securities

$

110


$

125


$

238


$

347


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

$

32


$

22


$

38


$

36


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

$

1


$

1


$

2


$

1



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Table of Contents


9. Postretirement benefits

A.  Pension and postretirement benefit costs


U.S. Pension

Benefits

Non-U.S. Pension

Benefits

Other

Postretirement

Benefits

(Millions of dollars)


September 30,

September 30,

September 30,

2015

2014

2015

2014

2015

2014

For the three months ended:

Components of net periodic benefit cost:

Service cost

$

45


$

39


$

28


$

28


$

26


$

19


Interest cost

151


162


37


47


46


54


Expected return on plan assets 1

(220

)

(221

)

(66

)

(66

)

(13

)

(13

)

Amortization of:




Prior service cost (credit) 2

1


5


-


-


(14

)

(14

)

Net actuarial loss (gain) 3

126


98


25


22


13


10


Net periodic benefit cost

103


83


24


31


58


56


Curtailments, settlements and termination benefits 4

-


-


7


5


-


-


Total cost included in operating profit

$

103


$

83


$

31


$

36


$

58


$

56


For the nine months ended:

Components of net periodic benefit cost:

Service cost

$

136


$

118


$

85


$

83


$

76


$

62


Interest cost

454


486


115


139


138


160


Expected return on plan assets 1

(659

)

(664

)

(199

)

(195

)

(39

)

(39

)

Amortization of:




Prior service cost (credit) 2

1


13


-


-


(41

)

(41

)

Net actuarial loss (gain) 3

380


294


75


65


39


31


Net periodic benefit cost

312


247


76


92


173


173


Curtailments, settlements and termination benefits 4

-


-


10


12


-


-


Total cost included in operating profit

$

312


$

247


$

86


$

104


$

173


$

173


Weighted-average assumptions used to determine net cost:

Discount rate

3.8

%

4.6

%

3.3

%

4.1

%

3.9

%

4.6

%

Expected rate of return on plan assets

7.4

%

7.8

%

6.8

%

6.9

%

7.8

%

7.8

%

Rate of compensation increase

4.0

%

4.0

%

4.0

%

4.2

%

4.0

%

4.0

%

1

Expected return on plan assets developed using calculated market-related value of plan assets which recognizes differences in expected and actual returns over a three-year period.

2

Prior service cost (credit) for both pension and other postretirement benefits are generally amortized using the straight-line method over the average remaining service period of active employees expected to receive benefits from the plan. For pension plans in which all or almost all of the plan's participants are inactive and other postretirement benefit plans in which all or almost all of the plan's participants are fully eligible for benefits under the plan, prior service cost (credit) are amortized using the straight-line method over the remaining life expectancy of those participants.

3

Net actuarial loss (gain) for pension and other postretirement benefit plans are generally amortized using the straight-line method over the average remaining service period of active employees expected to receive benefits from the plan. For plans in which all or almost all of the plan's participants are inactive, net actuarial loss (gain) are amortized using the straight-line method over the remaining life expectancy of the inactive participants.

4

Curtailments, settlements and termination benefits were recognized in Other operating (income) expenses in the Consolidated Statement of Results of Operations.


We made $36 million and $149 million of contributions to our pension plans during the three and nine months ended September 30, 2015 , respectively. We currently anticipate full-year 2015 contributions of approximately $180 million , all of which are required. We made $68 million and $455 million of contributions to our pension plans during the three and nine months ended September 30, 2014 , respectively.


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Table of Contents


B.  Defined contribution benefit costs

Total company costs related to our defined contribution plans were as follows:

Three Months Ended
September 30,

Nine Months Ended
September 30,

(Millions of dollars)

2015

2014

2015

2014

U.S. Plans

$

31


$

62


$

188


$

232


Non-U.S. Plans

19


21


58


62


$

50


$

83


$

246


$

294


The decrease in the U.S. defined contribution benefit costs for the three and nine months ended September 30, 2015 is primarily due to fair value adjustments related to our non-qualified deferred compensation plans.


10. Guarantees and product warranty

Caterpillar dealer performance guarantees

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

Customer loan guarantees

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

Supplier consortium performance guarantee

We have provided a guarantee to one of our customers in Brazil related to the performance of contractual obligations by a supplier consortium to which one of our Caterpillar subsidiaries is a member. The guarantee covers potential damages (some of them capped) incurred by the customer resulting from the supplier consortium's non-performance. The guarantee will expire when the supplier consortium performs all its contractual obligations, which is expected to be completed in 2025.


Third party logistics business lease guarantees

We have provided guarantees to third-party lessors for certain properties leased by a third party logistics business, formerly Caterpillar Logistics Services LCC, in which we sold our 35 percent equity interest in the first quarter of 2015 (see Note 6). The guarantees are for the possibility that the third party logistics business would default on real estate lease payments. The guarantees were granted at lease inception and generally will expire at the end of the lease terms.


No significant loss has been experienced or is anticipated under any of these guarantees.  At September 30, 2015 and December 31, 2014 , the related liability was $13 million and $12 million , respectively. The maximum potential amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) we could be required to make under the guarantees are as follows:


27

Table of Contents


(Millions of dollars)

September 30,
2015

December 31,
2014

Caterpillar dealer performance guarantees

$

220


$

209


Customer loan guarantees

58


49


Supplier consortium performance guarantee

294


321


Third party logistics business lease guarantees

112


129


Other guarantees

23


32


Total guarantees

$

707


$

740


Cat Financial provides guarantees to repurchase certain loans of Caterpillar dealers from a special-purpose corporation (SPC) that qualifies as a variable interest entity.  The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers.  This SPC issues commercial paper and uses the proceeds to fund its loan program.  Cat Financial has a loan purchase agreement with the SPC that obligates Cat Financial to purchase certain loans that are not paid at maturity.  Cat Financial receives a fee for providing this guarantee, which provides a source of liquidity for the SPC.  Cat Financial is the primary beneficiary of the SPC as its guarantees result in Cat Financial having both the power to direct the activities that most significantly impact the SPC's economic performance and the obligation to absorb losses, and therefore Cat Financial has consolidated the financial statements of the SPC.  As of  September 30, 2015 and December 31, 2014 , the SPC's assets of $1,289 million and $1,086 million , respectively, are primarily comprised of loans to dealers and the SPC's liabilities of $1,288 million and $1,085 million , respectively, are primarily comprised of commercial paper.  The assets of the SPC are not available to pay Cat Financial's creditors. Cat Financial may be obligated to perform under the guarantee if the SPC experiences losses. No loss has been experienced or is anticipated under this loan purchase agreement.


Our product warranty liability is determined by applying historical claim rate experience to the current field population and dealer inventory.  Generally, historical claim rates are based on actual warranty experience for each product by machine model/engine size by customer or dealer location (inside or outside North America).  Specific rates are developed for each product shipment month and are updated monthly based on actual warranty claim experience.  


(Millions of dollars)

2015

Warranty liability, January 1

$

1,426


Reduction in liability (payments)

(650

)

Increase in liability (new warranties)

604


Warranty liability, September 30

$

1,380




(Millions of dollars)

2014

Warranty liability, January 1

$

1,367


Reduction in liability (payments)

(1,071

)

Increase in liability (new warranties)

1,130


1

Warranty liability, December 31

$

1,426



1 The increase in liability includes approximately $170 million for changes in estimates for pre-existing warranties due to higher than expected actual warranty claim experience.



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Table of Contents


11. Profit per share

Computations of profit per share:

Three Months Ended
September 30,

Nine Months Ended
September 30,

(Dollars in millions except per share data)

2015

2014

2015

2014

Profit for the period (A) 1

$

368


$

1,017


$

2,189


$

2,938


Determination of shares (in millions):


Weighted-average number of common shares outstanding (B)

588.4


611.5


597.9


620.6


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

6.4


11.3


7.4


12.1


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

594.8


622.8


605.3


632.7


Profit per share of common stock:



Assuming no dilution (A/B)

$

0.63


$

1.66


$

3.66


$

4.73


Assuming full dilution (A/C)  2

$

0.62


$

1.63


$

3.62


$

4.64


Shares outstanding as of September 30 (in millions)

582.2



605.4



1

Profit attributable to common stockholders.

2

Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.


SARs and stock options to purchase 22,281,448 common shares were outstanding for the three and nine months ended September 30, 2015 , which were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. For the three and nine months ended September 30, 2014 , there were outstanding SARs and stock options to purchase 7,494,204 and 10,288,573 common shares which were anti-dilutive.


In February 2007, the Board of Directors authorized the repurchase of $7.5 billion of Caterpillar common stock (the 2007 Authorization), and in December 2011, the 2007 Authorization was extended through December 2015. In January 2014, we completed the 2007 Authorization and entered into a definitive agreement with Citibank, N.A. to purchase shares of our common stock under an accelerated stock repurchase transaction (January 2014 ASR Agreement), which was completed in March 2014. In accordance with the terms of the January 2014 ASR Agreement, a total of approximately 18.1 million shares of our common stock were repurchased at an aggregate cost to Caterpillar of approximately $1.7 billion .


In January 2014, the Board approved a new authorization to repurchase up to $10.0 billion of Caterpillar common stock, which will expire on December 31, 2018. In July 2014, we entered into definitive agreements with Société Générale to purchase shares of our common stock under accelerated stock repurchase transactions (July 2014 ASR Agreements) which were completed in September 2014. In accordance with the terms of the July 2014 ASR Agreements, a total of approximately 23.7 million shares of our common stock were repurchased at an aggregate cost to Caterpillar of $2.5 billion .


In July 2015, we entered into a definitive agreement with Citibank, N.A. to purchase shares of our common stock under an accelerated stock repurchase transaction (July 2015 ASR Agreement), which was completed in September 2015. Pursuant to the terms of the July 2015 ASR Agreement, a total of approximately 19.6 million shares of our common stock were repurchased at an aggregate cost to Caterpillar of $1.5 billion . For the nine months ended September 30, 2015 , a total of 25.8 million shares of our common stock were repurchased at an aggregate cost to Caterpillar of $2.0 billion . Through the end of the third quarter of 2015, approximately $4.5 billion of the $10.0 billion authorization was spent.



29

Table of Contents


12.  Accumulated other comprehensive income (loss)


Comprehensive income and its components are presented in the Consolidated Statement of Comprehensive Income. Changes in Accumulated other comprehensive income (loss), net of tax, included in the Consolidated Statement of Changes in Stockholders' Equity, consisted of the following:


(Millions of dollars)

Foreign currency translation

Pension and other postretirement benefits

Derivative financial instruments

Available-for-sale securities

Total

Three Months Ended September 30, 2015

Balance at June 30, 2015

$

(1,555

)

$

(5,183

)

$

(73

)

$

82


$

(6,729

)

Other comprehensive income (loss) before reclassifications

(234

)

45


(12

)

(15

)

(216

)

Amounts reclassified from accumulated other comprehensive (income) loss

-


100


20


(18

)

102


Other comprehensive income (loss)

(234

)

145


8


(33

)

(114

)

Balance at September 30, 2015

$

(1,789

)

$

(5,038

)

$

(65

)

$

49


$

(6,843

)

Three Months Ended September 30, 2014

Balance at June 30, 2014

$

244


$

(3,981

)

$

(42

)

$

96


$

(3,683

)

Other comprehensive income (loss) before reclassifications

(710

)

4


(30

)

(5

)

(741

)

Amounts reclassified from accumulated other comprehensive (income) loss

-


80


-


(13

)

67


Other comprehensive income (loss)

(710

)

84


(30

)

(18

)

(674

)

Balance at September 30, 2014

$

(466

)

$

(3,897

)

$

(72

)

$

78


$

(4,357

)


(Millions of dollars)

Foreign currency translation

Pension and other postretirement benefits

Derivative financial instruments

Available-for-sale securities

Total

Nine Months Ended September 30, 2015

Balance at December 31, 2014

$

(988

)

$

(5,407

)

$

(119

)

$

83


$

(6,431

)

Other comprehensive income (loss) before reclassifications

(801

)

69


(15

)

(13

)

(760

)

Amounts reclassified from accumulated other comprehensive (income) loss

-


300


69


(21

)

348


Other comprehensive income (loss)

(801

)

369


54


(34

)

(412

)

Balance at September 30, 2015

$

(1,789

)

$

(5,038

)

$

(65

)

$

49


$

(6,843

)

Nine Months Ended September 30, 2014

Balance at December 31, 2013

$

176


$

(4,152

)

$

(5

)

$

83


$

(3,898

)

Other comprehensive income (loss) before reclassifications

(642

)

15


(57

)

18


(666

)

Amounts reclassified from accumulated other comprehensive (income) loss

-


240


(10

)

(23

)

207


Other comprehensive income (loss)

(642

)

255


(67

)

(5

)

(459

)

Balance at September 30, 2014

$

(466

)

$

(3,897

)

$

(72

)

$

78


$

(4,357

)


30

Table of Contents


The effect of the reclassifications out of Accumulated other comprehensive income (loss) on the Consolidated Statement of Results of Operations is as follows:

Three Months Ended September 30,

(Millions of dollars)

Classification of

income (expense)

2015


2014

Pension and other postretirement benefits:

Amortization of actuarial gain (loss)

Note 9 1

$

(164

)

$

(130

)

Amortization of prior service credit (cost)

Note 9 1

13


9


Reclassifications before tax

(151

)

(121

)

Tax (provision) benefit

51


41


Reclassifications net of tax

$

(100

)

$

(80

)

Derivative financial instruments:

Foreign exchange contracts

Other income (expense)

$

(29

)

$

4


Interest rate contracts

Interest expense excluding Financial Products

(1

)

(1

)

Interest rate contracts

Interest expense of Financial Products

(1

)

(2

)

Reclassifications before tax

(31

)

1


Tax (provision) benefit

11


(1

)

Reclassifications net of tax

$

(20

)

$

-


Available-for-sale securities:

Realized gain (loss)

Other income (expense)

$

27


$

20


Tax (provision) benefit

(9

)

(7

)

Reclassifications net of tax

$

18


$

13


Total reclassifications from Accumulated other comprehensive income (loss)

$

(102

)

$

(67

)


1     Amounts are included in the calculation of net periodic benefit cost. See Note 9 for additional information.


31

Table of Contents


Nine Months Ended September 30,

(Millions of dollars)

Classification of

income (expense)

2015

2014

Pension and other postretirement benefits:

Amortization of actuarial gain (loss)

Note 9 1

$

(494

)

$

(390

)

Amortization of prior service credit (cost)

Note 9 1

40


28


Reclassifications before tax

(454

)

(362

)

Tax (provision) benefit

154


122


Reclassifications net of tax

$

(300

)

$

(240

)

Derivative financial instruments:

Foreign exchange contracts

Other income (expense)

$

(101

)

$

24


Interest rate contracts

Interest expense excluding Financial Products

(4

)

(3

)

Interest rate contracts

Interest expense of Financial Products

(4

)

(4

)

Reclassifications before tax

(109

)

17


Tax (provision) benefit

40


(7

)

Reclassifications net of tax

$

(69

)

$

10


Available-for-sale securities:

Realized gain (loss)

Other income (expense)

$

31


$

34


Tax (provision) benefit

(10

)

(11

)

Reclassifications net of tax

$

21


$

23


Total reclassifications from Accumulated other comprehensive income (loss)

$

(348

)

$

(207

)

1     Amounts are included in the calculation of net periodic benefit cost. See Note 9 for additional information.


13. Environmental and legal matters


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

We are engaged in remedial activities at a number of locations, often with other companies, pursuant to federal and state laws.  When it is probable we will pay remedial costs at a site, and those costs can be reasonably estimated, the investigation, remediation, and operating and maintenance costs are accrued against our earnings.  Costs are accrued based on consideration of currently available data and information with respect to each individual site, including available technologies, current applicable laws and regulations, and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. Where multiple potentially responsible parties are involved, we consider our proportionate share of the probable costs. In formulating the estimate of probable costs, we do not consider amounts expected to be recovered from insurance companies or others.  We reassess these accrued amounts on a quarterly basis. The amount recorded for environmental remediation is not material and is included in Accrued expenses in the Consolidated Statement of Financial Position. We believe there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all the sites in the aggregate, will be required.


On January 8, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial


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information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company has received additional subpoenas relating to this investigation requesting additional documents and information relating to, among other things, the purchase and resale of replacement parts by Caterpillar Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL and related structures. The Company is cooperating with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.


On September 12, 2014, the SEC notified the Company that it was conducting an informal investigation relating to Caterpillar SARL and related structures. The SEC asked the Company to preserve relevant documents and, on a voluntary basis, the Company made a presentation to the staff of the SEC on these topics and is producing documents responsive to a voluntary request made by the SEC. The Company is cooperating with the SEC regarding this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.

On September 10, 2014, the SEC issued to Caterpillar a subpoena seeking information concerning the Company's accounting for the goodwill relating to its acquisition of Bucyrus International Inc. in 2011 and related matters. The Company has received additional subpoenas relating to this investigation, and the Company is cooperating with the SEC regarding its ongoing investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.


On March 20, 2014, Brazil's Administrative Council for Economic Defense (CADE) published a Technical Opinion which named 18 companies and over 100 individuals as defendants, including two subsidiaries of Caterpillar Inc., MGE - Equipamentos e Serviços Ferroviários Ltda. (MGE) and Caterpillar Brasil Ltda. The publication of the Technical Opinion opened CADE's official administrative investigation into allegations that the defendants participated in anticompetitive bid activity for the construction and maintenance of metro and train networks in Brazil. While companies cannot be held criminally liable for anticompetitive conduct in Brazil, criminal charges have been brought against two current employees of MGE and one former employee of MGE involving the same conduct alleged by CADE. The Company has responded to all requests for information from the authorities. The Company is unable to predict the outcome or reasonably estimate the potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.


On October 24, 2013, Progress Rail received a grand jury subpoena from the U.S. District Court for the Central District of California. The subpoena requests documents and information from Progress Rail, United Industries Corporation, a wholly-owned subsidiary of Progress Rail, and Caterpillar Inc. relating to allegations that Progress Rail conducted improper or unnecessary railcar inspections and repairs and improperly disposed of parts, equipment, tools and other items. In connection with this subpoena, Progress Rail was informed by the U.S. Attorney for the Central District of California that it is a target of a criminal investigation into potential violations of environmental laws and alleged improper business practices. The Company is cooperating with the authorities and is currently in discussions regarding a potential resolution of the matter. Although the Company believes a loss is probable, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.


In addition, we are involved in other unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability (including claimed asbestos and welding fumes exposure), contracts, employment issues, environmental matters or intellectual property rights.  The aggregate range of reasonably possible losses in excess of accrued liabilities, if any, associated with these unresolved legal actions is not material.  In some cases, we cannot reasonably estimate a range of loss because there is insufficient information regarding the matter.  However, we believe there is no more than a remote chance that any liability arising from these matters would be material.  Although it is not possible to predict with certainty the outcome of these unresolved legal actions, we believe that these actions will not individually or in the aggregate have a material adverse effect on our consolidated results of operations, financial position or liquidity.



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14. Income taxes

The provision for income taxes for the first nine months of 2015 reflects an estimated annual tax rate of 27 percent compared with 29.5 percent for the first nine months of 2014 , excluding the items discussed below. The decrease is primarily due to a more favorable expected geographic mix of profits from a tax perspective in 2015, including the impact of restructuring costs primarily at higher U.S. tax rates. The impact of the U.S. research and development tax credit is not included in either the first nine months of 2015 or 2014 as it was renewed for 2014 in the fourth quarter of 2014 and has not been renewed for 2015.


The provision for income taxes for the first nine months of 2015 also includes a $42 million net charge to increase unrecognized tax benefits by $68 million as discussed below, offset by a benefit of $26 million to record U.S. refund claims related to prior tax years currently under examination. The provision for income taxes for the first nine months of 2014 also included a net benefit of $21 million to adjust prior years' U.S. taxes and interest.


On January 30, 2015, we received a Revenue Agent's Report (RAR) from the IRS indicating the end of the field examination of our U.S. tax returns for 2007 to 2009 including the impact of a loss carryback to 2005. The RAR proposed tax increases and penalties for these years of approximately $1 billion primarily related to two significant areas that we are vigorously contesting through the IRS Appeals process. In the first area, the IRS has proposed to tax in the United States profits earned from certain parts transactions by one of our non-U.S. subsidiaries, Caterpillar SARL (CSARL), based on the IRS examination team's application of the "substance-over-form" or "assignment-of-income" judicial doctrines. We believe that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines. We have filed U.S. tax returns on this same basis for years after 2009. Based on the information currently available, we do not anticipate a significant increase or decrease to our unrecognized tax benefits for this matter within the next 12 months. We currently believe the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.


In the second area, the IRS disallowed approximately $125 million of foreign tax credits that arose as a result of certain financings unrelated to CSARL. As previously disclosed, we have been monitoring several court cases involving other taxpayers relating to the disallowance of their foreign tax credits. In the third quarter of 2015, decisions of the U.S. Court of Appeals for the Second Circuit involving other taxpayers caused us to conclude the benefits of this uncertain tax position are no longer more likely than not to be sustained based on technical merits. As tax benefits related to this tax position can no longer be recognized in the financial statements, we increased unrecognized tax benefits by $68 million . We will continue to monitor ongoing court cases involving other taxpayers for information that may impact our analysis of this tax position.


15. Segment information

A.

Basis for segment information

Our Executive Office is comprised of five Group Presidents, a Senior Vice President, an Executive Vice President and a CEO. Group Presidents are accountable for a related set of end-to-end businesses that they manage.  The Senior Vice President leads the Caterpillar Enterprise System Group and the Executive Vice President leads the Law and Public Policy Division. The CEO allocates resources and manages performance at the Group President level.  As such, the CEO serves as our Chief Operating Decision Maker and operating segments are primarily based on the Group President reporting structure.

Three of our operating segments, Construction Industries, Resource Industries and Energy & Transportation are led by Group Presidents.  One operating segment, Financial Products, is led by a Group President who also has responsibility for Corporate Services.  Corporate Services is a cost center primarily responsible for the performance of certain support functions globally and to provide centralized services; it does not meet the definition of an operating segment. One Group President leads three smaller operating segments that are included in the All Other operating segments.  The Caterpillar Enterprise System Group and Law and Public Policy Division are cost centers and do not meet the definition of an operating segment.

Effective January 1, 2015, responsibility for product management for certain components moved from Resource Industries to Energy & Transportation. Segment information for 2014 has been retrospectively adjusted to conform to the 2015 presentation.



34

Table of Contents


B.

Description of segments

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

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


Resource Industries : A segment primarily responsible for supporting customers using machinery in mining and quarrying applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large track-type tractors, large mining trucks, hard rock vehicles, longwall miners, electric rope shovels, draglines, hydraulic shovels, drills, highwall miners, large wheel loaders, off-highway trucks, articulated trucks, wheel tractor scrapers, wheel dozers, select work tools, machinery components and electronics and control systems. Resource Industries also manages areas that provide services to other parts of the company, including integrated manufacturing and research and development. In addition, segment profit includes the impact from divestiture of portions of the Bucyrus distribution business. Inter-segment sales are a source of revenue for this segment.


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

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

All Other operating segments : Primarily includes activities such as: the remanufacturing of Cat® engines and components and remanufacturing services for other companies as well as the business strategy, product management, development, manufacturing, marketing and product support of undercarriage, specialty products, hardened bar stock components and ground engaging tools primarily for Cat products, paving products, forestry products and industrial and waste products; the product management, development, marketing, sales and product support of on-highway vocational trucks for North America; parts distribution; distribution services responsible for dealer development and administration including a wholly-owned dealer in Japan, dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts. Results for the All Other operating segments are included as a reconciling item between reportable segments and consolidated external reporting.

C.

Segment measurement and reconciliations

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

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


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Table of Contents


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


Goodwill allocated to segments is amortized using a fixed amount based on a 20 year useful life.  This methodology difference only impacts segment assets; no goodwill amortization expense is included in segment profit. In addition, only a portion of goodwill for certain acquisitions made in 2011 or later has been allocated to segments.


The present value of future lease payments for certain Machinery, Energy & Transportation operating leases is included in segment assets.  The estimated financing component of the lease payments is excluded.


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


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


Machinery, Energy & Transportation segment profit is determined on a pretax basis and excludes interest expense and other income/expense items.  Financial Products Segment profit is determined on a pretax basis and includes other income/expense items.


Reconciling items are created based on accounting differences between segment reporting and our consolidated external reporting. Please refer to pages 39 to 45 for financial information regarding significant reconciling items.  Most of our reconciling items are self-explanatory given the above explanations.  For the reconciliation of profit, we have grouped the reconciling items as follows:

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


Restructuring and related costs: Primarily costs for employee separations, long-lived asset impairments and contract terminations. Beginning in the third quarter of 2015, restructuring costs also include other exit-related costs associated with the consolidation of manufacturing facilities as we expect these costs to be significant as we implement the restructuring plan that was announced on September 24, 2015. Other exit-related costs are primarily for equipment relocation and accelerated depreciation. A table, Reconciliation of Restructuring and related costs on page 42, has been included to illustrate how segment profit would have been impacted by the restructuring and related costs. See Note 18 for more information.


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


Timing:    Timing differences in the recognition of costs between segment reporting and consolidated external reporting. For example, certain costs are reported on the cash basis for segment reporting and the accrual basis for consolidated external reporting.


36

Table of Contents


Reportable Segments

Three Months Ended September 30,

(Millions of dollars)

2015

External

sales and

revenues

Inter-

segment

sales and

revenues

Total sales

and

revenues

Depreciation

and

amortization

Segment

profit

Segment

assets at

September 30

Capital

expenditures

Construction Industries

$

3,792


$

34


$

3,826


$

118


$

378


$

5,712


$

54


Resource Industries

1,796


93


1,889


158


(68

)

8,682


66


Energy & Transportation

4,213


417


4,630


161


635


8,670


160


Machinery, Energy & Transportation

$

9,801


$

544


$

10,345


$

437


$

945


$

23,064


$

280


Financial Products Segment

752


-


752


210


207


35,414


359


Total

$

10,553


$

544


$

11,097


$

647


$

1,152


$

58,478


$

639


2014

External

sales and

revenues

Inter-

segment

sales and

revenues

Total sales

and

revenues

Depreciation

and

amortization

Segment

profit

Segment

assets at

December 31

Capital

expenditures

Construction Industries

$

4,471


$

67


$

4,538


$

129


$

483


$

6,596


$

82


Resource Industries

2,172


105


2,277


172


122


9,497


65


Energy & Transportation

5,585


570


6,155


165


1,151


8,470


146


Machinery, Energy & Transportation

$

12,228


$

742


$

12,970


$

466


$

1,756


$

24,563


$

293


Financial Products Segment

851


-


851


229


220


37,011


427


Total

$

13,079


$

742


$

13,821


$

695


$

1,976


$

61,574


$

720



37

Table of Contents


Reportable Segments

Nine Months Ended September 30,

(Millions of dollars)

2015

External

sales and

revenues

Inter-

segment

sales and

revenues

Total sales

and

revenues

Depreciation

and

amortization

Segment

profit

Segment
assets at
September 30

Capital

expenditures

Construction Industries

$

12,928


$

130


$

13,058


$

359


$

1,705


$

5,712


$

139


Resource Industries

5,715


268


5,983


482


17


8,682


134


Energy & Transportation

13,519


1,418


14,937


477


2,527


8,670


527


Machinery, Energy & Transportation

$

32,162


$

1,816


$

33,978


$

1,318


$

4,249


$

23,064


$

800


Financial Products Segment

2,332


-


2,332


638


618


35,414


995


Total

$

34,494


$

1,816


$

36,310


$

1,956


$

4,867


$

58,478


$

1,795


2014

External

sales and

revenues

Inter-

segment

sales and

revenues

Total sales

and

revenues

Depreciation

and

amortization

Segment

profit

Segment

assets at

December 31

Capital

expenditures

Construction Industries

$

14,942


$

198


$

15,140


$

394


$

1,845


$

6,596


$

225


Resource Industries

6,536


318


6,854


514


379


9,497


165


Energy & Transportation

15,536


1,706


17,242


483


3,012


8,470


317


Machinery, Energy & Transportation

$

37,014


$

2,222


$

39,236


$

1,391


$

5,236


$

24,563


$

707


Financial Products Segment

2,502


-


2,502


665


704


37,011


1,206


Total

$

39,516


$

2,222


$

41,738


$

2,056


$

5,940


$

61,574


$

1,913



38

Table of Contents


Reconciliation of Sales and revenues:

(Millions of dollars)

Machinery,

Energy &

Transportation

Financial

Products

Consolidating

Adjustments

Consolidated

Total

Three Months Ended September 30, 2015

Total external sales and revenues from reportable segments

$

9,801


$

752


$

-


$

10,553


All Other operating segments

506


-


-


506


Other

(22

)

20


(95

)

1

(97

)

Total sales and revenues

$

10,285


$

772


$

(95

)

$

10,962


Three Months Ended September 30, 2014





Total external sales and revenues from reportable segments

$

12,228


$

851


$

-


$

13,079


All Other operating segments

583


-


-


583


Other

(53

)

24


(84

)

1

(113

)

Total sales and revenues

$

12,758


$

875


$

(84

)

$

13,549


1   Elimination of Financial Products revenues from Machinery, Energy & Transportation.


Reconciliation of Sales and revenues:

(Millions of dollars)

Machinery,

Energy &

Transportation

Financial

Products

Consolidating

Adjustments

Consolidated

Total

Nine Months Ended September 30, 2015

Total external sales and revenues from reportable segments

$

32,162


$

2,332


$

-


$

34,494


All Other operating segments

1,729


-


-


1,729


Other

(62

)

58


(238

)

1

(242

)

Total sales and revenues

$

33,829


$

2,390


$

(238

)

$

35,981


Nine Months Ended September 30, 2014





Total external sales and revenues from reportable segments

$

37,014


$

2,502


$

-


$

39,516


All Other operating segments

1,720


-


-


1,720


Other

(92

)

55


(259

)

1

(296

)

Total sales and revenues

$

38,642


$

2,557


$

(259

)

$

40,940


1   Elimination of Financial Products revenues from Machinery, Energy & Transportation.


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Table of Contents


Reconciliation of Consolidated profit before taxes:

(Millions of dollars)

Machinery,

Energy &

Transportation

Financial

Products

Consolidated

Total

Three Months Ended September 30, 2015

Total profit from reportable segments

$

945


$

207


$

1,152


All Other operating segments

196


-


196


Cost centers

58


-


58


Corporate costs

(376

)

-


(376

)

Timing

38


-


38


Restructuring and related costs

(101

)

-


(101

)

Methodology differences:




Inventory/cost of sales

(22

)

-


(22

)

Postretirement benefit expense

(78

)

-


(78

)

Financing costs

(128

)

-


(128

)

Equity in (profit) loss of unconsolidated affiliated companies

4


-


4


Currency

(157

)

-


(157

)

Other income/expense methodology differences

(51

)

-


(51

)

Other methodology differences

(16

)

(1

)

(17

)

Total consolidated profit before taxes

$

312


$

206


$

518


Three Months Ended September 30, 2014




Total profit from reportable segments

$

1,756


$

220


$

1,976


All Other operating segments

228


-


228


Cost centers

31


-


31


Corporate costs

(408

)

-


(408

)

Timing

(125

)

-


(125

)

Restructuring costs

(81

)

-


(81

)

Methodology differences:



Inventory/cost of sales

6


-


6


Postretirement benefit expense

(84

)

-


(84

)

Financing costs

(136

)

-


(136

)

Equity in (profit) loss of unconsolidated affiliated companies

(4

)

-


(4

)

Currency

39


-


39


Other income/expense methodology differences

(55

)

-


(55

)

Other methodology differences

(9

)

3


(6

)

Total consolidated profit before taxes

$

1,158


$

223


$

1,381



40

Table of Contents


Reconciliation of Consolidated profit before taxes:

(Millions of dollars)

Machinery,

Energy &

Transportation

Financial

Products

Consolidated

Total

Nine Months Ended September 30, 2015

Total profit from reportable segments

$

4,249


$

618


$

4,867


All Other operating segments

638


-


638


Cost centers

139


-


139


Corporate costs

(1,307

)

-


(1,307

)

Timing

15


-


15


Restructuring and related costs

(226

)

-


(226

)

Methodology differences:



Inventory/cost of sales

(30

)

-


(30

)

Postretirement benefit expense

(301

)

-


(301

)

Financing costs

(394

)

-


(394

)

Equity in (profit) loss of unconsolidated affiliated companies

-


-


-


Currency

(257

)

-


(257

)

Other income/expense methodology differences

(48

)

-


(48

)

Other methodology differences

(33

)

2


(31

)

Total consolidated profit before taxes

$

2,445


$

620


$

3,065


Nine Months Ended September 30, 2014




Total profit from reportable segments

$

5,236


$

704


$

5,940


All Other operating segments

686


-


686


Cost centers

105


-


105


Corporate costs

(1,201

)

-


(1,201

)

Timing

(205

)

-


(205

)

Restructuring costs

(344

)

-


(344

)

Methodology differences:

Inventory/cost of sales

29


-


29


Postretirement benefit expense

(304

)

-


(304

)

Financing costs

(373

)

-


(373

)

Equity in (profit) loss of unconsolidated affiliated companies

(6

)

-


(6

)

Currency

16


-


16


Other income/expense methodology differences

(186

)

-


(186

)

Other methodology differences

(13

)

(1

)

(14

)

Total consolidated profit before taxes

$

3,440


$

703


$

4,143




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Table of Contents


Reconciliation of Restructuring and related costs:


As noted above, restructuring and related costs are a reconciling item between Segment profit and Consolidated profit before taxes. Had we included the amounts in the segments' results, the profit would have been as shown below:

Reconciliation of Restructuring and related costs:

(Millions of dollars)

Segment

profit

Restructuring and related costs

Segment profit with

restructuring and related costs

Three Months Ended September 30, 2015

Construction Industries

$

378


$

(22

)

$

356


Resource Industries

(68

)

(40

)

(108

)

Energy & Transportation

635


(10

)

625


Financial Products Segment

207


-


207


All Other operating segments

196


(16

)

180


Total

$

1,348


$

(88

)

$

1,260


Three Months Ended September 30, 2014

Construction Industries

$

483


$

(30

)

$

453


Resource Industries

122


(31

)

91


Energy & Transportation

1,151


(5

)

1,146


Financial Products Segment

220


-


220


All Other operating segments

228


(12

)

216


Total

$

2,204


$

(78

)

$

2,126



Reconciliation of Restructuring and related costs:

(Millions of dollars)

Segment

profit

Restructuring and related costs

Segment profit with

restructuring and related costs

Nine Months Ended September 30, 2015

Construction Industries

$

1,705


$

(61

)

$

1,644


Resource Industries

17


(83

)

(66

)

Energy & Transportation

2,527


(24

)

2,503


Financial Products Segment

618


-


618


All Other operating segments

638


(35

)

603


Total

$

5,505


$

(203

)

$

5,302


Nine Months Ended September 30, 2014

Construction Industries

$

1,845


$

(257

)

$

1,588


Resource Industries

379


(52

)

327


Energy & Transportation

3,012


(11

)

3,001


Financial Products Segment

704


-


704


All Other operating segments

686


(18

)

668


Total

$

6,626


$

(338

)

$

6,288



42

Table of Contents


Reconciliation of Assets:

(Millions of dollars)

Machinery,

Energy &

Transportation

Financial

Products

Consolidating

Adjustments

Consolidated

Total

September 30, 2015

Total assets from reportable segments

$

23,064


$

35,414


$

-


$

58,478


All Other operating segments

2,675


-


-


2,675


Items not included in segment assets:





Cash and short-term investments

4,808


-


-


4,808


Intercompany receivables

1,172


-


(1,172

)

-


Investment in Financial Products

4,160


-


(4,160

)

-


Deferred income taxes

3,552


-


(700

)

2,852


Goodwill and intangible assets

3,583


-


-


3,583


Property, plant and equipment – net and other assets

1,221


-


-


1,221


Operating lease methodology difference

(211

)

-


-


(211

)

Liabilities included in segment assets

8,608


-


-


8,608


Inventory methodology differences

(2,629

)

-


-


(2,629

)

Other

(357

)

-


(59

)

(416

)

Total assets

$

49,646


$

35,414


$

(6,091

)

$

78,969


December 31, 2014





Total assets from reportable segments

$

24,563


$

37,011


$

-


$

61,574


All Other operating segments

2,810


-


-


2,810


Items not included in segment assets:





Cash and short-term investments

6,317


-


-


6,317


Intercompany receivables

1,185


-


(1,185

)

-


Investment in Financial Products

4,488


-


(4,488

)

-


Deferred income taxes

3,627


-


(674

)

2,953


Goodwill and intangible assets

3,492


-


-


3,492


Property, plant and equipment – net and other assets

1,174


-


-


1,174


Operating lease methodology difference

(213

)

-


-


(213

)

Liabilities included in segment assets

9,837


-


-


9,837


Inventory methodology differences

(2,697

)

-


-


(2,697

)

Other

(395

)

(102

)

(69

)

(566

)

Total assets

$

54,188


$

36,909


$

(6,416

)

$

84,681



43

Table of Contents


Reconciliations of Depreciation and amortization:

(Millions of dollars)

Machinery,

Energy &

Transportation

Financial

Products

Consolidated

Total

Three Months Ended September 30, 2015

Total depreciation and amortization from reportable segments

$

437


$

210


$

647


Items not included in segment depreciation and amortization:




All Other operating segments

68


-


68


Cost centers

39


-


39


Other

(6

)

10


4


Total depreciation and amortization

$

538


$

220


$

758


Three Months Ended September 30, 2014




Total depreciation and amortization from reportable segments

$

466


$

229


$

695


Items not included in segment depreciation and amortization:




All Other operating segments

70


-


70


Cost centers

37


-


37


Other

(10

)

6


(4

)

Total depreciation and amortization

$

563


$

235


$

798



Reconciliations of Depreciation and amortization:

(Millions of dollars)

Machinery,

Energy &

Transportation

Financial

Products

Consolidated

Total

Nine Months Ended September 30, 2015

Total depreciation and amortization from reportable segments

$

1,318


$

638


$

1,956


Items not included in segment depreciation and amortization:


All Other operating segments

202


-


202


Cost centers

115


-


115


Other

(27

)

26


(1

)

Total depreciation and amortization

$

1,608


$

664


$

2,272


Nine Months Ended September 30, 2014




Total depreciation and amortization from reportable segments

$

1,391


$

665


$

2,056


Items not included in segment depreciation and amortization:


All Other operating segments

209


-


209


Cost centers

111


-


111


Other

(26

)

18


(8

)

Total depreciation and amortization

$

1,685


$

683


$

2,368



44

Table of Contents


Reconciliations of Capital expenditures:

(Millions of dollars)

Machinery,

Energy &

Transportation

Financial

Products

Consolidating

Adjustments

Consolidated

Total

Three Months Ended September 30, 2015





Total capital expenditures from reportable segments

$

280


$

359


$

-


$

639


Items not included in segment capital expenditures:





All Other operating segments

68


-


-


68


Cost centers

52


-


-


52


Timing

(35

)

-


-


(35

)

Other

(29

)

35


(4

)

2


Total capital expenditures

$

336


$

394


$

(4

)

$

726


Three Months Ended September 30, 2014





Total capital expenditures from reportable segments

$

293


$

427


$

-


$

720


Items not included in segment capital expenditures:





All Other operating segments

93


-


-


93


Cost centers

17


-


-


17


Timing

10


-


-


10


Other

(18

)

37


(12

)

7


Total capital expenditures

$

395


$

464


$

(12

)

$

847



Reconciliations of Capital expenditures:

(Millions of dollars)

Machinery,

Energy &

Transportation

Financial

Products

Consolidating

Adjustments

Consolidated

Total

Nine Months Ended September 30, 2015





Total capital expenditures from reportable segments

$

800


$

995


$

-


$

1,795


Items not included in segment capital expenditures:



All Other operating segments

159


-


-


159


Cost centers

98


-


-


98


Timing

199


-


-


199


Other

(161

)

130


(23

)

(54

)

Total capital expenditures

$

1,095


$

1,125


$

(23

)

$

2,197


Nine Months Ended September 30, 2014





Total capital expenditures from reportable segments

$

707


$

1,206


$

-


$

1,913


Items not included in segment capital expenditures:



All Other operating segments

187


-


-


187


Cost centers

66


-


-


66


Timing

239


-


-


239


Other

(66

)

89


(46

)

(23

)

Total capital expenditures

$

1,133


$

1,295


$

(46

)

$

2,382




45

Table of Contents


16. Cat Financial financing activities

Credit quality of finance receivables and allowance for credit losses

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


Customer – Finance receivables with retail customers.

Dealer – Finance receivables with Caterpillar dealers.

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

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

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

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

Mining – Finance receivables related to large mining customers worldwide.

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

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

Impaired finance receivables

For all classes, a finance receivable is considered impaired, based on current information and events, if it is probable that Cat Financial will be unable to collect all amounts due according to the contractual terms of the finance receivable.  Finance receivables reviewed for impairment include those that are past due, non-performing or in bankruptcy. Recognition of income is suspended and the finance receivable is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or in instances in which relevant information is known that warrants placing the finance receivable on non-accrual status).  Accrual is resumed, and previously suspended income is recognized, when the finance receivable becomes contractually current and/or collection doubts are removed.  Cash receipts on impaired finance receivables are recorded against the receivable and then to any unrecognized income.


There were no impaired finance receivables as of September 30, 2015 or December 31, 2014 , for the Dealer portfolio segment.  The average recorded investment for impaired finance receivables within the Dealer portfolio segment was zero for the three and nine months ended September 30, 2015 and 2014 .


46

Table of Contents


Individually impaired finance receivables for the Customer portfolio segment were as follows: 


September 30, 2015

December 31, 2014

(Millions of dollars)

Recorded

Investment

Unpaid

Principal

Balance

Related

Allowance

Recorded

Investment

Unpaid

Principal

Balance

Related

Allowance

Impaired Finance Receivables With No Allowance Recorded







Customer







North America

$

10


$

10


$

-


$

14


$

14


$

-


Europe

43


42


-


44


43


-


Asia Pacific

2


1


-


1


1


-


Mining

56


56


-


29


29


-


Latin America

31


31


-


34


34


-


Caterpillar Power Finance

191


191


-


129


128


-


Total

$

333


$

331


$

-


$

251


$

249


$

-


Impaired Finance Receivables With An Allowance Recorded







Customer







North America

$

13


$

13


$

3


$

6


$

6


$

1


Europe

9


8


4


12


12


4


Asia Pacific

36


36


5


29


29


8


Mining

13


13


5


138


137


9


Latin America

60


60


22


42


42


12


Caterpillar Power Finance

89


88


39


135


134


41


Total

$

220


$

218


$

78


$

362


$

360


$

75


Total Impaired Finance Receivables







Customer







North America

$

23


$

23


$

3


$

20


$

20



$

1


Europe

52


50


4


56


55



4


Asia Pacific

38


37


5


30


30



8


Mining

69


69


5


167


166


9


Latin America

91


91


22


76


76



12


Caterpillar Power Finance

280


279


39


264


262



41


Total

$

553


$

549


$

78


$

613


$

609


$

75




47

Table of Contents


Three Months Ended
September 30, 2015

Three Months Ended
September 30, 2014

(Millions of dollars)

Average Recorded

Investment

Interest Income

Recognized

Average Recorded

Investment

Interest Income

Recognized

Impaired Finance Receivables With No Allowance Recorded





Customer





North America

$

10


$

1


$

19


$

-


Europe

43


-


47


1


Asia Pacific

1


-


-


-


Mining

63


-


29


-


Latin America

32


-


37


-


Caterpillar Power Finance

165


1


143


1


Total

$

314


$

2


$

275


$

2


Impaired Finance Receivables With An Allowance Recorded





Customer





North America

$

10


$

-


$

10


$

-


Europe

15


-


24


1


Asia Pacific

41


-


26


-


Mining

9


-


127


2


Latin America

69


1


27


1


Caterpillar Power Finance

125


2


100


1


Total

$

269


$

3


$

314


$

5


Total Impaired Finance Receivables





Customer





North America

$

20


$

1


$

29


$

-


Europe

58


-


71


2


Asia Pacific

42


-


26


-


Mining

72


-


156


2


Latin America

101


1


64


1


Caterpillar Power Finance

290


3


243


2


Total

$

583


$

5


$

589


$

7



48

Table of Contents


Nine Months Ended
September 30, 2015

Nine Months Ended
September 30, 2014

(Millions of dollars)

Average Recorded

Investment

Interest Income

Recognized

Average Recorded

Investment

Interest Income

Recognized

Impaired Loans and Finance Leases With No Allowance Recorded





Customer





North America

$

12


$

1


$

22


$

1


Europe

43


-


47


1


Asia Pacific

2


-


4


-


Mining

80


3


82


3


Latin America

32


-


29


-


Caterpillar Power Finance

157


3


174


4


Total

$

326


$

7


$

358


$

9


Impaired Loans and Finance Leases With An Allowance Recorded





Customer





North America

$

7


$

-


$

10


$

-


Europe

15


1


21


1


Asia Pacific

33


1


18


1


Mining

47


1


75


4


Latin America

56


2


24


1


Caterpillar Power Finance

128


3


84


2


Total

$

286


$

8


$

232


$

9


Total Impaired Loans and Finance Leases





Customer





North America

$

19


$

1


$

32


$

1


Europe

58


1


68


2


Asia Pacific

35


1


22


1


Mining

127


4


157


7


Latin America

88


2


53


1


Caterpillar Power Finance

285


6


258


6


Total

$

612


$

15


$

590


$

18


Non-accrual and past due finance receivables

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

As of September 30, 2015 and December 31, 2014 , there were no finance receivables on non-accrual status for the Dealer portfolio segment.


49

Table of Contents


The investment in customer finance receivables on non-accrual status was as follows:

(Millions of dollars)

September 30, 2015

December 31, 2014

Customer



North America

$

30


$

27


Europe

46


28


Asia Pacific

25


54


Mining

133


62


Latin America

260


201


Caterpillar Power Finance

114


96


Total

$

608


$

468



Aging related to finance receivables was as follows:

September 30, 2015

(Millions of dollars)

31-60

Days

Past Due

61-90

Days

Past Due

91+

Days

Past Due

Total Past

Due

Current

Total

Finance

Receivables

91+ Still

Accruing

Customer








North America

$

46


$

18


$

29


$

93


$

7,562


$

7,655


$

4


Europe

29


11


48


88


2,399


2,487


7


Asia Pacific

45


23


34


102


1,745


1,847


10


Mining

18


1


58


77


1,771


1,848


-


Latin America

42


42


204


288


1,919


2,207


-


Caterpillar Power Finance

6


-


47


53


3,119


3,172


6


Dealer










North America

-


-


-


-


2,283


2,283


-


Europe

-


-


-


-


149


149


-


Asia Pacific

-


-


-


-


525


525


-


Mining

-


-


-


-


4


4


-


Latin America

-


-


-


-


559


559


-


Caterpillar Power Finance

-


-


-


-


3


3


-


Total

$

186


$

95


$

420


$

701


$

22,038


$

22,739


$

27



December 31, 2014

(Millions of dollars)

31-60

Days

Past Due

61-90

Days

Past Due

91+

Days

Past Due

Total Past

Due

Current

Total

Finance

Receivables

91+ Still

Accruing

Customer








North America

$

46


$

8


$

27


$

81


$

7,192


$

7,273


$

4


Europe

16


23


29


68


2,607


2,675


6


Asia Pacific

29


22


69


120


2,316


2,436


16


Mining

28


-


11


39


2,084


2,123


-


Latin America

55


23


196


274


2,583


2,857


8


Caterpillar Power Finance

1


4


64


69


3,079


3,148


1


Dealer








North America

-


-


-


-


2,189


2,189


-


Europe

-


-


-


-


153


153


-


Asia Pacific

-


-


-


-


566


566


-


Mining

-


-


-


-


-


-


-


Latin America

-


-


-


-


646


646


-


Caterpillar Power Finance

-


-


-


-


-


-


-


Total

$

175


$

80


$

396


$

651


$

23,415


$

24,066


$

35



50

Table of Contents




Allowance for credit loss activity


An analysis of the allowance for credit losses was as follows:

(Millions of dollars)

September 30, 2015

Allowance for Credit Losses:

Customer

Dealer

Total

Balance at beginning of year

$

388


$

10


$

398


Receivables written off

(151

)

-


(151

)

Recoveries on receivables previously written off

32


-


32


Provision for credit losses

89


(1

)

88


Other

(22

)

-


(22

)

Balance at end of period

$

336


$

9


$

345





Individually evaluated for impairment

$

78


$

-


$

78


Collectively evaluated for impairment

258


9


267


Ending Balance

$

336


$

9


$

345


Recorded Investment in Finance Receivables:




Individually evaluated for impairment

$

553


$

-


$

553


Collectively evaluated for impairment

18,663


3,523


22,186


Ending Balance

$

19,216


$

3,523


$

22,739



(Millions of dollars)

December 31, 2014

Allowance for Credit Losses:

Customer

Dealer

Total

Balance at beginning of year

$

365


$

10


$

375


Receivables written off

(151

)

-


(151

)

Recoveries on receivables previously written off

47


-


47


Provision for credit losses

150


-


150


Other

(23

)

-


(23

)

Balance at end of year

$

388


$

10


$

398


Individually evaluated for impairment

$

75


$

-


$

75


Collectively evaluated for impairment

313


10


323


Ending Balance

$

388


$

10


$

398


Recorded Investment in Finance Receivables:




Individually evaluated for impairment

$

613


$

-


$

613


Collectively evaluated for impairment

19,899


3,554


23,453


Ending Balance

$

20,512


$

3,554


$

24,066


Credit quality of finance receivables

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



51

Table of Contents


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

September 30, 2015

December 31, 2014

(Millions of dollars)

Customer

Dealer

Total

Customer

Dealer

Total

Performing







North America

$

7,625


$

2,283


$

9,908


$

7,246


$

2,189


$

9,435


Europe

2,441


149


2,590


2,647


153


2,800


Asia Pacific

1,822


525


2,347


2,382


566


2,948


Mining

1,715


4


1,719


2,061


-


2,061


Latin America

1,947


559


2,506


2,656


646


3,302


Caterpillar Power Finance

3,058


3


3,061


3,052


-


3,052


Total Performing

$

18,608


$

3,523


$

22,131


$

20,044


$

3,554


$

23,598


Non-Performing







North America

$

30


$

-


$

30


$

27


$

-


$

27


Europe

46


-


46


28


-


28


Asia Pacific

25


-


25


54


-


54


Mining

133


-


133


62


-


62


Latin America

260


-


260


201


-


201


Caterpillar Power Finance

114


-


114


96


-


96


Total Non-Performing

$

608


$

-


$

608


$

468


$

-


$

468


Performing & Non-Performing







North America

$

7,655


$

2,283


$

9,938


$

7,273


$

2,189


$

9,462


Europe

2,487


149


2,636


2,675


153


2,828


Asia Pacific

1,847


525


2,372


2,436


566


3,002


Mining

1,848


4


1,852


2,123


-


2,123


Latin America

2,207


559


2,766


2,857


646


3,503


Caterpillar Power Finance

3,172


3


3,175


3,148


-


3,148


Total

$

19,216


$

3,523


$

22,739


$

20,512


$

3,554


$

24,066



Troubled Debt Restructurings

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

TDRs are reviewed along with other finance receivables as part of management's ongoing evaluation of the adequacy of the allowance for credit losses.  The allowance for credit losses attributable to TDRs is based on the most probable source of repayment, which is normally the liquidation of collateral.  In determining collateral value, Cat Financial estimates the current fair market value of the collateral less selling costs. In addition, Cat Financial considers credit enhancements such as additional collateral and contractual third-party guarantees in determining the allowance for credit losses attributable to TDRs. There were no remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR as of September 30, 2015 and December 31, 2014.

There were no finance receivables modified as TDRs during the three and nine months ended September 30, 2015 or 2014 for the Dealer portfolio segment.


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Finance receivables in the Customer portfolio segment modified as TDRs during the three and nine months ended September 30, 2015 and 2014 , were as follows:

Three Months Ended September 30, 2015

Three Months Ended September 30, 2014

(Millions of dollars)

Number

of

Contracts

Pre-TDR

Recorded

Investment

Post-TDR

Recorded

Investment

Number

of

Contracts

Pre-TDR

Recorded

Investment

Post-TDR

Recorded

Investment

Customer






North America

6


$

-


$

-


20


$

9


$

3


Europe

4


-


-


-


-


-


Asia Pacific

1


1


1


-


-


-


Mining

2


15


14


45


122


124


Latin America

10


1


2


45


3


3


Caterpillar Power Finance

8


93


79


7


44


46


Total 1

31


$

110


$

96


117


$

178


$

176


Nine Months Ended September 30, 2015

Nine Months Ended September 30, 2014

Number

of

Contracts

Pre-TDR

Recorded

Investment

Post-TDR

Recorded

Investment

Number

of

Contracts

Pre-TDR

Recorded

Investment

Post-TDR

Recorded

Investment

Customer






North America

10


$

1


$

1


24


$

11


$

5


Europe

23


2


2


8


7


7


Asia Pacific

19


1


1


-


-


-


Mining

2


15


14


47


165


157


Latin America

10


1


2


47


32


31


Caterpillar Power Finance

12


197


180


13


80


81


Total 1

76


$

217


$

200


139


$

295


$

281


1

Modifications include extended contract maturities, inclusion of interest only periods, below market interest rates, extended skip payment periods and reduction of principal and/or accrued interest.


TDRs in the Customer portfolio segment with a payment default during the three and nine months ended September 30, 2015 and 2014 , which had been modified within twelve months prior to the default date, were as follows: 

Three Months Ended September 30, 2015

Three Months Ended September 30, 2014

(Millions of dollars)

Number of

Contracts

Post-TDR

Recorded

Investment

Number of

Contracts

Post-TDR

Recorded

Investment

Customer



North America

5


$

-


3


$

-


Europe

-


-


5


1


Total

5


$

-


8


$

1


Nine Months Ended September 30, 2015

Nine Months Ended September 30, 2014

Number of

Contracts

Post-TDR

Recorded

Investment

Number of

Contracts

Post-TDR

Recorded

Investment

Customer



North America

10


$

1


10


$

1


Europe

-


-


12


2


Latin America

1


-


-


-


Total

11


$

1


22


$

3




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Table of Contents


17. Fair value disclosures

A. Fair value measurements

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

Level 1 Quoted prices for identical instruments in active markets.


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


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


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

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

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

Available-for-sale securities

Our available-for-sale securities, primarily at Insurance Services, include a mix of equity and debt instruments (see Note 8 for additional information).  Fair values for our U.S. treasury bonds and large capitalization value and smaller company growth equity securities are based upon valuations for identical instruments in active markets.  The fair value of our investment in a real estate investment trust (REIT) is based on the net asset value (NAV) of the investment. Fair values for other government bonds, corporate bonds and mortgage-backed debt securities are based upon models that take into consideration such market-based factors as recent sales, risk-free yield curves and prices of similarly rated bonds.

Derivative financial instruments

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



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Assets and liabilities measured on a recurring basis at fair value, primarily related to Financial Products, included in our Consolidated Statement of Financial Position as of September 30, 2015 and December 31, 2014 are summarized below:

September 30, 2015

(Millions of dollars)

Level 1

Level 2

Level 3

Total

Assets / Liabilities,

at Fair Value

Assets





Available-for-sale securities





Government debt





U.S. treasury bonds

$

13


$

-


$

-


$

13


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

-


83


-


83


Corporate bonds





Corporate bonds

-


713


-


713


Asset-backed securities

-


97


-


97


Mortgage-backed debt securities





U.S. governmental agency

-


274


-


274


Residential

-


13


-


13


Commercial

-


62


-


62


Equity securities





Large capitalization value

250


-


-


250


REIT

-


-


8


8


Smaller company growth

50


-


-


50


Total available-for-sale securities

313


1,242


8


1,563


Derivative financial instruments, net

-


45


-


45


Total Assets

$

313


$

1,287


$

8


$

1,608


December 31, 2014

(Millions of dollars)

Level 1

Level 2

Level 3

Total

Assets / Liabilities,

at Fair Value

Assets





Available-for-sale securities





Government debt





U.S. treasury bonds

$

10


$

-


$

-


$

10


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

-


94


-


94


Corporate bonds





Corporate bonds

-


693


-


693


Asset-backed securities

-


105


-


105


Mortgage-backed debt securities





U.S. governmental agency

-


294


-


294


Residential

-


15


-


15


Commercial

-


67


-


67


Equity securities





Large capitalization value

233


-


-


233


Smaller company growth

43


-


-


43


Total available-for-sale securities

286


1,268


-


1,554


Total Assets

$

286


$

1,268


$

-


$

1,554


Liabilities





Derivative financial instruments, net

$

-


$

86


$

-


$

86


Total Liabilities

$

-


$

86


$

-


$

86




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Table of Contents


 The fair value of our REIT investment is measured based on NAV, which is considered a Level 3 input. A roll-forward of our REIT investment for the nine months ended September 30, 2015 is as follows:

(Millions of dollars)

REIT

Balance at December 31, 2014

$

-


Purchases of securities

8


Sale of securities

-


Gains (losses) included in Accumulated other comprehensive income (loss)

-


Balance at September 30, 2015

$

8


In addition to the amounts above, Cat Financial impaired loans are subject to measurement at fair value on a nonrecurring basis. A loan is considered impaired when management determines that collection of contractual amounts due is not probable.  In these cases, an allowance for credit losses may be established based primarily on the fair value of associated collateral.  As the collateral's fair value is based on observable market prices and/or current appraised values, the impaired loans are classified as Level 2 measurements. Cat Financial had impaired loans with a fair value of $94 million and $248 million as of September 30, 2015 and December 31, 2014 , respectively.  

B. Fair values of financial instruments

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


Cash and short-term investments

Carrying amount approximated fair value.

Restricted cash and short-term investments

Carrying amount approximated fair value.  Restricted cash and short-term investments are included in Prepaid expenses and other current assets in the Consolidated Statement of Financial Position.

Finance receivables

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

Wholesale inventory receivables

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

Short-term borrowings

Carrying amount approximated fair value.

Long-term debt

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


Guarantees

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


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Table of Contents



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

Fair Value of Financial Instruments

September 30, 2015

December 31, 2014

(Millions of dollars)

Carrying

Amount

Fair

Value

Carrying

Amount

Fair

Value

Fair Value Levels

Reference

Assets





Cash and short-term investments

$

6,046


$

6,046


$

7,341


$

7,341


1

Restricted cash and short-term investments

44


44


62


62


1

Available-for-sale securities

1,563


1,563


1,554


1,554


1, 2 & 3

Note 8

Finance receivables – net (excluding finance leases 1 )

16,153


15,995


16,426


16,159


3

Note 16

Wholesale inventory receivables – net (excluding finance leases 1 )

1,885


1,816


1,774


1,700


3

Note 16

Interest rate swaps – net

62


62


71


71


2

Note 4


Liabilities





Short-term borrowings

6,080


6,080


4,708


4,708


1

Long-term debt (including amounts due within one year)





Machinery, Energy & Transportation

9,513


10,838


10,003


11,973


2

Financial Products

21,950


22,311


24,574


25,103


2

Foreign currency contracts – net

5


5


143


143


2

Note 4

Commodity contracts – net

12


12


14


14


2

Note 4

Guarantees

13


13


12


12


3

Note 10


1

Total excluded items have a net carrying value at September 30, 2015 and December 31, 2014 of $6,670 million and $7,638 million , respectively.


18. Restructuring costs


Our accounting for employee separations is dependent upon how the particular program is designed. For voluntary programs, eligible separation costs are recognized at the time of employee acceptance unless the acceptance requires explicit approval by the Company. For involuntary programs, eligible costs are recognized when management has approved the program, the affected employees have been properly notified and the costs are estimable.


For the three and nine months ended September 30, 2015 , we recognized $89 million and $214 million , respectively, of restructuring costs in Other operating (income) expenses in the Consolidated Statement of Results of Operations, which included $60 million of employee separation costs and $29 million of long-lived asset impairments and other restructuring costs for the three months ended September 30, 2015 and $180 million of employee separation costs and $34 million of long-lived asset impairments and other restructuring costs for the nine months ended September 30, 2015 . The restructuring costs in 2015 were primarily related to several restructuring programs across the company. For the three and nine months ended September 30, 2014 , we recognized $81 million and $344 million , respectively, of restructuring costs, which included $46 million of employee separation costs and $35 million of long-lived asset impairments and other restructuring costs for the three months ended September 30, 2014 and $295 million of employee separation costs and $49 million of long-lived asset impairments and other restructuring costs for the nine months ended September 30, 2014. For the first nine months of 2014 , the restructuring costs were primarily related to a reduction in workforce at our Gosselies, Belgium, facility.


Restructuring costs for the year ended December 31, 2014 were $441 million which included $382 million of employee separation costs, $33 million of long-lived asset impairments and $26 million of other restructuring costs. The restructuring costs in 2014 were primarily related to a reduction in workforce at our Gosselies, Belgium, facility.



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Table of Contents


Restructuring costs are a reconciling item between Segment profit and Consolidated profit before taxes. See Note 15 for more information.


The following table summarizes the 2014 and 2015 employee separation activity:

(Millions of dollars)

Total

Liability balance at December 31, 2013

$

89


Increase in liability (separation charges)

382


Reduction in liability (payments and other adjustments)

(289

)

Liability balance at December 31, 2014

$

182


Increase in liability (separation charges)

180


Reduction in liability (payments and other adjustments)

(197

)

Liability balance at September 30, 2015

$

165



The remaining liability balance as of September 30, 2015 represents costs for employees who have either not yet separated from the Company or whose full severance has not yet been paid. The majority of these remaining costs are expected to be paid in 2015 and 2016.


In December 2013, we announced a restructuring plan for our Gosselies, Belgium, facility. This restructuring plan was designed to improve the competitiveness of our European manufacturing footprint and achieve competitiveness in our European operations by refocusing our current Gosselies operations on final machine assembly, test and paint with limited component and fabrication operations. This action includes reshaping our supply base for more efficient sourcing, improving factory efficiencies and workforce reductions and was approved by the Belgian Minister of Employment in February 2014. In 2014, we recognized $273 million of these separation-related charges. For the nine months ended September 30, 2015, we recognized $24 million , of employee separation costs relating to this restructuring plan, none of which were incurred in the three months ended September 30, 2015. We do not expect any further costs associated with this program. The employee separation liability balance as of September 30, 2015 includes $49 million related to this restructuring plan, the majority of which we expect will be paid in 2015.


On September 24, 2015, we announced significant restructuring and cost reduction actions to lower our operating costs in response to current economic and business conditions. As part of that announcement, we offered a voluntary retirement enhancement program to qualifying U.S. employees and more than 2,000 participants are in the program. After employee acceptance, this program required Company approval, which occurred in the fourth quarter of 2015. We expect to incur approximately $400 million in restructuring costs in the fourth quarter of 2015 related to this program. We have also offered several voluntary separation programs outside the United States and expect further reductions in 2015 from involuntary employee separation programs throughout the company. For the full year, we expect restructuring costs will be approximately $800 million , which includes costs for ongoing programs as well as the recently announced employee separation programs. Additional restructuring actions are being contemplated and are expected to occur through 2018.



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Table of Contents



Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations


Overview

Third-quarter 2015 sales and revenues were $10.962 billion, a 19 percent decrease from third-quarter 2014 sales and revenues of $13.549 billion. Profit per share for the third quarter of 2015 was $0.62, a 62 percent decrease from third-quarter 2014 profit per share of $1.63. Profit was $368 million in the third quarter of 2015, a decrease of 64 percent from $1.017 billion in the third quarter of 2014.


Sales and revenues for the nine months ended September 30, 2015, were $35.981 billion, down $4.959 billion, or 12 percent, from $40.940 billion for the nine months ended September 30, 2014. Profit per share for the nine months ended September 30, 2015, was $3.62, a 22 percent decrease from profit per share of $4.64 for the same period last year. Profit was $2.189 billion for the nine months ended September 30, 2015, a decrease of 25 percent from $2.938 billion for the nine months ended September 30, 2014.


Highlights for the third quarter of 2015 include:


Third-quarter sales and revenues were $10.962 billion, compared with $13.549 billion in the third quarter of 2014. Sales decreased in Energy & Transportation, Construction Industries and Resource Industries . Financial Products' revenues were down as well.


Restructuring costs were $101 million in the third quarter of 2015 with an after-tax impact of $0.13 per share, compared with restructuring costs of $81 million in the third quarter of 2014 with an after-tax impact of $0.09 per share.


Profit per share was $0.62 in the third quarter of 2015 and excluding restructuring costs of $0.13 per share was $0.75 per share. Profit in the third quarter of 2014 was $1.63 per share and excluding restructuring costs of $0.09 per share was $1.72 per share.


Machinery, Energy & Transportation (ME&T) operating cash flow was $766 million in the third quarter of 2015, compared to $1.442 billion in the third quarter of 2014.


ME&T debt-to-capital ratio was 37.4 percent at September 30, 2015, the same as the end of 2014.


Highlights for the nine months ended September 30, 2015, include:

Sales and revenues for the nine months ended September 30, 2015, were $35.981 billion, compared with $40.940 billion for the nine months ended September 30, 2014. Sales decreased in Energy & Transportation, Construction Industries and Resource Industries. Financial Products' revenues decreased as well.


Restructuring costs were $226 million for the nine months ended September 30, 2015, with an after-tax impact of $0.27 per share, compared with restructuring costs of $344 million for the nine months ended September 30, 2014, with an after-tax impact of $0.39 per share.


Profit per share was $3.62 for the nine months ended September 30, 2015, and excluding restructuring costs of $0.27 per share was $3.89 per share. Profit per share was $4.64 for the nine months ended September 30, 2014, and excluding restructuring costs of $0.39 per share was $5.03 per share.


ME&T operating cash flow was $3.446 billion for the nine months ended September 30, 2015, compared with $5.384 billion for the nine months ended September 30, 2014.


Restructuring Costs


On September 24, 2015, we announced significant restructuring and cost reduction actions. We anticipate restructuring costs will be about $800 million in 2015. During the first nine months of 2015, we incurred $226 million in restructuring costs. In 2014, we incurred $441 million in restructuring charges.





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Table of Contents


Notes:

Effective January 1, 2015, responsibility for product management for certain components moved from Resource Industries to Energy & Transportation. Segment information for 2014 has been retrospectively adjusted to conform to the 2015 presentation.

Glossary of terms is included on pages 75-76; first occurrence of terms shown in bold italics.

Information on non-GAAP financial measures is included on page 81.



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Table of Contents


Consolidated Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2015 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2014


CONSOLIDATED SALES AND REVENUES

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the third quarter of 2014 (at left) and the third quarter of 2015 (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.


Sales and Revenues

Total sales and revenues were $10.962 billion in the third quarter of 2015, compared with $13.549 billion in the third quarter of 2014, a decline of $2.587 billion, or 19 percent. The decrease was primarily due to lower sales volume and the unfavorable impact of currency due to continued strengthening of the U.S. dollar against most currencies, with the largest impact from the euro. While sales for both new equipment and aftermarket parts declined in all segments, most of the decrease was for new equipment. Dealer machine and engine inventories decreased about $600 million in both the third quarter of 2015 and the third quarter of 2014.

Sales declined in all regions. In North America, sales decreased 17 percent, primarily due to lower end-user demand across all the Energy & Transportation applications and for construction equipment. Asia/Pacific sales declined 25 percent, primarily due to lower end-user demand for mining equipment, products used in oil and gas applications and construction equipment. In addition, the impact of currency was unfavorable as sales, mostly in Australian dollars and Japanese yen, translated into fewer U.S. dollars. Sales decreased 31 percent in Latin America, primarily due to widespread economic weakness across the region, which had a negative impact on demand for construction equipment and spending. The most significant decrease was in Brazil. In EAME , sales declined 13 percent, mostly due to the unfavorable impact of currency, as sales in euros translated into fewer U.S. dollars, and lower end-user demand for products used in mining equipment and power generation applications.

Sales decreased in all segments. Energy & Transportation's sales declined 25 percent as sales decreased across all of the applications and the impact of currency was unfavorable. Construction Industries' sales decreased 15 percent, primarily due to lower end-user demand and the unfavorable impact of currency. Resource Industries' sales declined 17 percent, mostly due to lower end-user demand. Financial Products' segment revenues were down 12 percent, primarily due to lower average earning assets and lower average financing rates.


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Table of Contents



CONSOLIDATED OPERATING PROFIT

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the third quarter of 2014 (at left) and the third quarter of 2015 (at right). Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses .


Operating profit for the third quarter of 2015 was $713 million, a decline of $679 million from the third quarter of 2014. The decrease in profit was primarily due to lower sales volume reflecting weak market conditions in most of the industries we serve.

The unfavorable price realization resulted from competitive market conditions and an unfavorable geographic mix of sales.

Although the stronger U.S. dollar had a negative impact to our sales, our sizable manufacturing presence outside of the United States resulted in a favorable impact to operating profit. The majority of the favorability for the quarter was due to the Japanese yen, as we are a net exporter from Japan.

Manufacturing costs were favorable due to lower incentive compensation expense and improved material costs, partially offset by the unfavorable impact of cost absorption and manufacturing inefficiencies driven by declining production volume. The unfavorable cost absorption resulted from a significant decrease in inventory in the third quarter of 2015, compared to an increase in the third quarter of 2014.

SG&A and R&D expenses were favorable due to lower incentive compensation expense, partially offset by new product introduction programs.

Restructuring costs of $101 million in the third quarter of 2015, included in corporate items, were related to the Resource Industries' segment and other restructuring programs across the company. In the third quarter of 2014, restructuring costs were $81 million.

Short-term incentive compensation expense related to the third quarter of 2015, was about $120 million, and we expect the full year will be about $720 million. Short-term incentive compensation expense related to the third quarter of 2014, was about $390 million, and full-year 2014 was about $1.3 billion. The short-term incentive compensation expense is directly related to financial and operational performance measured against targets set annually.


Other Profit/Loss Items

Other income/expense in the third quarter of 2015 was expense of $68 million, compared with income of $117 million in the third quarter of 2014. The unfavorable change of $185 million was primarily due to the net impact from currency translation and hedging gains and losses. The third quarter of 2015 included net losses related to currency translation and hedging, compared to net gains in the third quarter of 2014. Net losses in the third quarter of 2015 were primarily due to the Brazilian real and the Chinese yuan. Net gains in the third quarter of 2014 were primarily due to the euro.




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Table of Contents


The provision for income taxes for the third quarter of 2015 reflects an estimated annual tax rate of 27 percent compared with 29.5 percent for the third quarter of 2014, excluding the items discussed below. The decrease is mostly due to a more favorable expected geographic mix of profits from a tax perspective in 2015, including the impact of restructuring costs primarily at higher U.S. tax rates.

The provision for income taxes for the third quarter of 2015 also includes a $42 million net charge to increase unrecognized tax benefits by $68 million partially offset by a benefit of $26 million to record U.S. refund claims related to prior tax years currently under examination. Our consideration of recent decisions of the U.S. Court of Appeals for the Second Circuit involving other taxpayers caused us to increase our unrecognized tax benefits related to foreign tax credits that arose as a result of certain financings. This net charge is offset by a benefit of $38 million related to the decrease from the second-quarter estimated annual tax rate of 28.5 percent, primarily due to a more favorable expected geographic mix of profits from a tax perspective, including the impact of restructuring costs primarily at higher U.S. tax rates.

The provision for income taxes for the third quarter of 2014 also included a benefit of $43 million to adjust the prior year's U.S. taxes.


Segment Information

Sales and Revenues by Geographic Region

(Millions of dollars)

Total

%

Change

North

America

%

Change

Latin

America

%

Change

EAME

%

Change

Asia/

Pacific

%

Change

Third Quarter 2015











Construction Industries 1

$

3,792


(15

)%

$

1,820


(5

)%

$

340


(43

)%

$

930


(7

)%

$

702


(27

)%

Resource Industries 2

1,796


(17

)%

672


(11

)%

311


(16

)%

418


(16

)%

395


(29

)%

Energy & Transportation 3

4,213


(25

)%

1,755


(31

)%

368


(23

)%

1,300


(18

)%

790


(19

)%

All Other Segments 4

506


(13

)%

365


(3

)%

26


(59

)%

76


(7

)%

39


(36

)%

Corporate Items and Eliminations

(22

)

-


(24

)

1


-


1


Machinery, Energy & Transportation Sales

10,285


(19

)%

4,588


(17

)%

1,046


(31

)%

2,724


(13

)%

1,927


(25

)%

Financial Products Segment

752


(12

)%

453


2

 %

91


(30

)%

101


(20

)%

107


(28

)%

Corporate Items and Eliminations

(75

)

(52

)

(9

)

(6

)

(8

)

Financial Products Revenues

677


(14

)%

401


(4

)%

82


(29

)%

95


(21

)%

99


(27

)%

Consolidated Sales and Revenues

$

10,962


(19

)%

$

4,989


(16

)%

$

1,128


(31

)%

$

2,819


(13

)%

$

2,026


(25

)%

Third Quarter 2014











Construction Industries 1

$

4,471


$

1,913


$

599


$

997


$

962



Resource Industries 2

2,172


752


369


495


556



Energy & Transportation 3

5,585


2,541


481


1,582


981



All Other Segments 4

583


376


64


82


61



Corporate Items and Eliminations

(53

)

(27

)

-


(26

)

-


Machinery, Energy & Transportation Sales

12,758



5,555



1,513



3,130



2,560



Financial Products Segment

851


446


130


127


148



Corporate Items and Eliminations

(60

)

(28

)

(14

)

(6

)

(12

)


Financial Products Revenues

791



418



116



121



136



Consolidated Sales and Revenues

$

13,549



$

5,973



$

1,629



$

3,251



$

2,696



1

Does not include inter-segment sales of $34 million and $67 million in third quarter 2015 and 2014 , respectively.

2

Does not include inter-segment sales of $93 million and $105 million in third quarter 2015 and 2014 , respectively.

3

Does not include inter-segment sales of $417 million and $570 million in third quarter 2015 and 2014 , respectively.

4

Does not include inter-segment sales of $780 million and $875 million in third quarter 2015 and 2014 , respectively.




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Sales and Revenues by Segment

(Millions of dollars)

Third Quarter 2014

Sales

Volume

Price

Realization

Currency

Other

Third Quarter 2015

$

Change

%

Change

Construction Industries

$

4,471


$

(414

)

$

(44

)

$

(221

)

$

-


$

3,792


$

(679

)

(15

)%

Resource Industries

2,172


(311

)

(18

)

(47

)

-


1,796


(376

)

(17

)%

Energy & Transportation

5,585


(1,193

)

4


(183

)

-


4,213


(1,372

)

(25

)%

All Other Segments

583


(59

)

(3

)

(15

)

-


506


(77

)

(13

)%

Corporate Items and Eliminations

(53

)

30


1


-


-


(22

)

31



Machinery, Energy & Transportation Sales

12,758


(1,947

)

(60

)

(466

)

-


10,285


(2,473

)

(19

)%

Financial Products Segment

851


-


-


-


(99

)

752


(99

)

(12

)%

Corporate Items and Eliminations

(60

)

-


-


-


(15

)

(75

)

(15

)


Financial Products Revenues

791


-


-


-


(114

)

677


(114

)

(14

)%

Consolidated Sales and Revenues

$

13,549


$

(1,947

)

$

(60

)

$

(466

)

$

(114

)

$

10,962


$

(2,587

)

(19

)%

Operating Profit / (Loss) by Segment

(Millions of dollars)

Third Quarter 2015

Third Quarter 2014

$

Change

%

Change

Construction Industries

$

378


$

483


$

(105

)

(22

)%

Resource Industries

(68

)

122


(190

)

(156

)%

Energy & Transportation

635


1,151


(516

)

(45

)%

All Other Segments

196


228


(32

)

(14

)%

Corporate Items and Eliminations

(551

)

(740

)

189



Machinery, Energy & Transportation

590


1,244


(654

)

(53

)%

Financial Products Segment

207


220


(13

)

(6

)%

Corporate Items and Eliminations

(22

)

(1

)

(21

)


Financial Products

185


219


(34

)

(16

)%

Consolidating Adjustments

(62

)

(71

)

9



Consolidated Operating Profit / (Loss)

$

713


$

1,392


$

(679

)

(49

)%


Construction Industries

Construction Industries' sales were $3.792 billion in the third quarter of 2015, a decrease of $679 million, or 15 percent, from the third quarter of 2014. The decrease in sales was mostly due to lower volume and the unfavorable impact of currency. While sales declined for both new equipment and aftermarket parts, most of the decrease was for new equipment.

Sales volume declined primarily due to lower deliveries to end users.

The unfavorable impact of currency was largely due to the euro, Japanese yen and Brazilian real.

Sales decreased in all regions.

In Asia/Pacific, the sales decline was primarily due to lower sales in China and Japan. In China, the lower sales resulted mostly from continued weak residential and non-residential construction activity. In Japan, the weaker yen contributed to the decline as sales in yen translated into fewer U.S. dollars.

In Latin America, dealer deliveries were down in most countries in the region, primarily in Brazil, due to continued weak construction activity resulting from depressed economic conditions. In addition, sales declined slightly due to the unfavorable impact of currency from the Brazilian real.

Sales declined slightly in North America as weakness in oil and gas-related construction was largely offset by stronger activity in residential and non-residential building construction.

Sales declined in EAME due to the unfavorable impact of currency, as sales in euros translated into fewer U.S. dollars. Lower end-user demand, primarily in Russia as a recession and sanctions slowed construction activity, was more than offset by the favorable changes in dealer inventories, which were about flat in third quarter of 2015, compared to a decrease in the third quarter of 2014.


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Construction Industries' profit was $378 million in the third quarter of 2015, compared with $483 million in the third quarter of 2014. The decrease in profit was primarily due to lower sales volume and unfavorable price realization resulting from competitive market conditions and an unfavorable geographic mix of sales. The decline was partially offset by favorable manufacturing costs and lower SG&A and R&D expenses. The reduction in manufacturing costs and SG&A and R&D expenses was primarily due to lower incentive compensation expense.


Resource Industries

Resource Industries' sales were $1.796 billion in the third quarter of 2015, a decrease of $376 million, or 17 percent, from the third quarter of 2014. The decline was primarily due to lower sales volume and the unfavorable impact of currency. Sales were lower for both new equipment and aftermarket parts. We believe some mining companies are continuing to delay maintenance and rebuild activities.

The sales decrease was primarily due to lower end-user demand across all regions. In Asia/Pacific, the unfavorable impact of currency due to the Australian dollar also contributed to the decline. Commodity prices remained weak, and mining customers continued to focus on improving productivity in existing mines and reducing their total capital expenditures, as they have for the last several years. As a result, sales and new orders in Resource Industries are continuing to weaken.

Resource Industries incurred a loss of $68 million in the third quarter of 2015, compared with profit of $122 million in the third quarter of 2014. The unfavorable change was primarily the result of lower sales volume and higher spending for new product introductions, partially offset by favorable warranty, lower incentive compensation expense and improved material costs.


Energy & Transportation

Energy & Transportation's sales were $4.213 billion in the third quarter of 2015, a decrease of $1.372 billion, or 25 percent, from the third quarter of 2014. The decrease was primarily the result of lower sales volume and the unfavorable impact of currency, mostly from the euro. Sales decreased in all applications.

Oil and Gas - Sales decreased in much of the world due to substantially lower oil prices. The decline was most pronounced in equipment used for well servicing and drilling, with the most significant impact in North America, our largest market for well servicing. Demand for reciprocating engines used in gas compression applications was also down, but not as sharply. In Asia/Pacific, lower sales were primarily due to lower end-user demand for equipment used in drilling and well servicing applications in addition to the absence of large projects. Latin America sales were lower primarily due to the absence of a large project. Sales were about flat in EAME.

Transportation - Sales decreased in North America and were about flat in all other geographic regions. In North America, sales weakened primarily due to the absence of a Tier IV locomotive offering.

Power Generation - Sales decreased in EAME and North America and were about flat in Asia/Pacific and Latin America. In EAME, sales decreased primarily due to lower end-user demand resulting from weak economic conditions and political instability in the region and the negative impact of currency. In North America, sales decreased largely because of unfavorable changes in dealer inventories as dealers increased inventories in the third quarter of 2014 and decreased inventories in the third quarter of 2015.

Industrial - Sales were lower in all regions. Lower sales in EAME were mostly the result of lower demand and the unfavorable impact of currency. In North America, Asia/Pacific and Latin America, the decline in sales was primarily due to lower end-user demand for most industrial applications.

Energy & Transportation's profit was $635 million in the third quarter of 2015, compared with $1.151 billion in the third quarter of 2014. The decrease was due to lower sales volume. Lower incentive compensation expense was about offset by the unfavorable impact of cost absorption and variable manufacturing inefficiencies driven by declining production volume. The unfavorable cost absorption resulted from a decrease in inventory in the third quarter of 2015, compared to an increase in the third quarter of 2014.


Financial Products Segment

Financial Products' revenues were $752 million in the third quarter of 2015, a decrease of $99 million, or 12 percent, from the third quarter of 2014. The decline was primarily due to lower average earning assets and lower average financing rates. Average earning assets were down in Asia/Pacific, Latin America and EAME, partially offset by higher average earning assets in North America. Average financing rates were lower across all geographic regions.

Financial Products' profit was $207 million in the third quarter of 2015, compared with $220 million in the third quarter of 2014. The decrease was primarily due to a $26 million decrease in net yield on average earning assets and a $21 million unfavorable impact from lower average earning assets, partially offset by the absence of $32 million of unfavorable out-of-period adjustments in the third quarter of 2014 related to interest rate swap contracts and the provision for credit losses.

The provision for credit losses was $22 million for the third quarter of 2015, compared with $52 million for the same period in 2014. The decrease was primarily due to a favorable impact from changes in the allowance rate driven by changes in certain assumptions within the allowance for credit loss model. During the third quarter of 2015, as a result of management's review, the


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Table of Contents


loss emergence period and loss given default assumptions were updated and resulted in a decrease to the allowance for credit losses of $45 million. The decrease in the provision for credit losses was also due to the absence of a $14 million out-of-period adjustment in the third quarter of 2014 (included in the discussion above). These changes were partially offset by an unfavorable impact from changes in the credit quality of Cat Financial's portfolio.

At the end of the third quarter of 2015, past dues at Cat Financial were 2.68 percent, compared with 2.81 percent at the end of the third quarter of 2014. Write-offs, net of recoveries, were $69 million for the third quarter of 2015, compared with $22 million for the third quarter of 2014. The increase in write-offs, net of recoveries, was primarily driven by the mining and marine portfolios.

As of September 30, 2015, Cat Financial's allowance for credit losses totaled $348 million, or 1.26 percent of net finance receivables, compared with $405 million, or 1.37 percent of net finance receivables at September 30, 2014. The allowance for credit losses at year-end 2014 was $401 million, or 1.36 percent of net finance receivables.


Corporate Items and Eliminations

Expense for corporate items and eliminations was $573 million in the third quarter of 2015, a decrease of $168 million from the third quarter of 2014. Corporate items and eliminations include: corporate-level expenses; restructuring costs; timing differences, as some expenses are reported in segment profit on a cash basis; retirement benefit costs other than service cost; currency differences for ME&T, as segment profit is reported using annual fixed exchange rates; and inter-segment eliminations.

The decrease in expense from the third quarter of 2014 was primarily due to timing differences.


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Table of Contents


NINE MONTHS ENDED SEPTEMBER 30, 2015 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2014

CONSOLIDATED SALES AND REVENUES

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the nine months ended September 30, 2014 (at left) and the nine months ended September 30, 2015 (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees.


Total sales and revenues were $35.981 billion in the nine months ended September 30, 2015, down $4.959 billion, or 12 percent, from the nine months ended September 30, 2014. The decrease was largely due to lower sales volume, primarily in Energy & Transportation and Construction Industries. Sales volume was also lower in Resource Industries. Currency had an unfavorable impact of $1.3 billion due to continued strengthening of the U.S. dollar against most currencies, with the largest impact from the euro. Price realization was slightly favorable. While sales for both new equipment and aftermarket parts declined in Energy & Transportation, Construction Industries and Resource Industries, most of the decrease was for new equipment.

The decrease in sales volume was primarily the result of lower end-user demand due to weak economic conditions globally. The decline was partially offset by the impact of changes in dealer machine and engine inventories across all regions. In total, dealer inventories were about flat during the nine months ended September 30, 2015, and decreased about $600 million in the nine months ended September 30, 2014. Following seasonal patterns and lower end-user demand, we believe dealers will decrease inventories in the fourth quarter of 2015, resulting in lower dealer inventories compared to year-end 2014. Dealers are independent, and there could be many reasons for changes in their inventory levels. In general, dealers adjust inventory based on their expectations of future demand and product delivery times. Dealers' demand expectations take into account seasonal changes, macroeconomic conditions and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers.

Sales declined in all regions. In Asia/Pacific, sales declined 20 percent, primarily due to lower end-user demand for construction equipment and the unfavorable impact of currency, as our sales in Japanese yen and Australian dollars translated into fewer U.S. dollars. Sales in Latin America decreased 25 percent, primarily due to lower end-user demand. The decline was due to continued widespread economic weakness across the region and the absence of a large government order in Brazil. In EAME, sales declined 12 percent, primarily due to the unfavorable impact of currency, as our sales in euros translated into fewer U.S. dollars, and lower end-user demand primarily for mining equipment. Sales in North America declined 6 percent, primarily due to lower end-user demand for rail applications, slightly offset by improved price realization.

Sales decreased in Energy & Transportation, Construction Industries and Resource Industries. Both Energy & Transportation's and Construction Industries' sales declined 13 percent, primarily due to lower end-user demand and the unfavorable impact of currency. Resource Industries' sales also declined 13 percent, primarily due to weaker demand for mining products, partially offset by the favorable impact of changes in dealer inventories, as dealer inventories decreased more in the nine months ended September


67

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30, 2014 than in the nine months ended September 30, 2015. Financial Products' segment revenues decreased 7 percent, primarily due to lower average earning assets and lower average financing rates.

The decline in oil prices has resulted in a decrease in sales during 2015, primarily in drilling and well servicing with some impact to machinery for oil and gas-related construction. Order rates began to decline in the second half of 2014 and have continued into 2015. Sales in the first half of 2015 benefited from a strong order backlog that was in place when the year started. We expect the more significant declines that are occurring in the second half of 2015 to continue into 2016.

Sales in our turbine business are expected to decline in 2016. Based on the current backlog and recent quotation activity, decreases in sales related to oil projects are expected to more than offset increases in sales related to gas compression.


CONSOLIDATED OPERATING PROFIT

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the nine months ended September 30, 2014 (at left) and the nine months ended September 30, 2015 (at right). Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.


Operating profit for the nine months ended September 30, 2015, was $3.370 billion, a decrease of $895 million from the nine months ended September 30, 2014. The decrease was primarily the result of lower sales volume partially offset by the favorable impact of currency, improved price realization, lower restructuring costs and lower manufacturing costs .

SG&A and R&D expenses were about flat. Higher spending for new product introduction and information technology programs were mostly offset by lower incentive compensation expense.

The favorable impact of currency was primarily due to the strengthening of the U.S. dollar in relation to the Japanese yen and the British pound, as we are a net exporter from Japan and the United Kingdom.

Restructuring costs of $226 million in the nine months ended September 30, 2015, included in corporate items, were primarily related to the Resource Industries' segment and other restructuring programs across the company. In the nine months ended September 30, 2014, restructuring costs were $344 million, primarily related to a workforce reduction at the Gosselies, Belgium, facility.

Manufacturing costs were lower primarily due to improved material costs and lower incentive compensation expense. Favorable material costs were due to declines in commodity prices and a focus on reducing the cost of components in our products. These lower costs were partially offset by the unfavorable impact of cost absorption and variable manufacturing inefficiencies driven by costs decreasing at a lower rate than production volume. The unfavorable impact of cost absorption resulted from an increase in inventory during the nine months ended September 30, 2014, compared to a decrease in the nine months ended September 30, 2015. We are expecting additional declines in inventory during the remainder of 2015 due to our continued focus on operational improvements, expected seasonality and lower sales expectations, but the anticipated decline will likely not be as significant as the decline in the fourth quarter of 2014 of more than $1 billion.


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Table of Contents


Short-term incentive compensation expense related to the nine months ended September 30, 2015, was about $540 million, and we expect the full year will be about $720 million. Short-term incentive compensation expense related to the nine months ended September 30, 2014, was about $1.0 billion, and full-year 2014 was about $1.3 billion. The short-term incentive compensation expense is directly related to financial and operational performance measured against targets set annually.

We believe profit in the fourth quarter of 2015 will be lower than the third quarter primarily due to significantly higher restructuring costs.


Other Profit/Loss Items

Other income/expense was income of $76 million in the nine months ended September 30, 2015, compared with income of $236 million in the nine months ended September 30, 2014. The change was primarily due to the unfavorable net impact of currency translation and hedging gains and losses, partially offset by a gain of $120 million on the sale of the remaining 35 percent interest in our former third party logistics business. The nine months ended September 30, 2015, included net losses of $192 million related to translation and hedging, compared to $86 million of net gains during the nine months ended September 30, 2014. Net losses in the nine months ended September 30, 2015, were primarily due to the Brazilian real. Net gains in the nine months ended September 30, 2014, were primarily due to the euro.

The provision for income taxes for the first nine months of 2015 reflects an estimated annual tax rate of 27 percent compared with 29.5 percent for the first nine months of 2014, excluding the items discussed below. The decrease is primarily due to a more favorable expected geographic mix of profits from a tax perspective in 2015, including the impact of restructuring costs primarily at higher U.S. tax rates. The impact of the U.S. research and development tax credit is not included in either the first nine months of 2015 or 2014 as it was renewed for 2014 in the fourth quarter of 2014 and has not been renewed for 2015.

The provision for income taxes for the first nine months of 2015 also includes a $42 million net charge to increase unrecognized tax benefits by $68 million partially offset by a benefit of $26 million to record U.S. refund claims related to prior tax years currently under examination. Our consideration of recent decisions of the U.S. Court of Appeals for the Second Circuit involving other taxpayers caused us to increase our unrecognized tax benefits related to foreign tax credits that arose as a result of certain financings.

The provision for income taxes for the first nine months of 2014 also included a net benefit of $21 million to adjust prior years' U.S. taxes and interest.

Income taxes are based on the statutory tax rate of the jurisdiction where earnings are subject to taxation which may differ from the jurisdiction where that entity is incorporated. Taxes are paid in the jurisdictions where earnings are subject to taxation. The effective tax rate differs from the U.S. statutory rate in part due to results of non-U.S. subsidiaries being subject to statutory tax rates which are generally lower than the U.S. rate of 35 percent. The indefinitely reinvested profits of Caterpillar SARL (CSARL), primarily taxable in Switzerland, contribute the most significant amount of this difference. On January 30, 2015, we received a Revenue Agent's Report (RAR) from the Internal Revenue Service (IRS) indicating the end of the field examination of our U.S. tax returns for 2007 to 2009 including the impact of a loss carryback to 2005. The IRS has proposed to tax in the United States profits earned from certain parts transactions by CSARL based on the IRS examination team's application of "substance-over-form" or "assignment-of-income" judicial doctrines. We are vigorously contesting this adjustment through the IRS appeals process. We believe that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines. The purchase of parts by CSARL from unrelated parties and the subsequent sale of those parts to unrelated dealers outside the United States have substantial legal, commercial, and economic consequences for the parties involved. We have filed U.S. tax returns on this same basis for years after 2009. We currently believe the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.


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Segment Information

Sales and Revenues by Geographic Region

(Millions of dollars)

Total

%

Change

North

America

%

Change

Latin

America

%

Change

EAME

%

Change

Asia/

Pacific

%

Change

Nine Months Ended September 30, 2015










Construction Industries 1

$

12,928


(13

)%

$

6,420


-

 %

$

1,169


(38

)%

$

2,895


(13

)%

$

2,444


(26

)%

Resource Industries 2

5,715


(13

)%

2,234


(5

)%

942


(15

)%

1,292


(17

)%

1,247


(18

)%

Energy & Transportation 3

13,519


(13

)%

5,907


(14

)%

1,226


(14

)%

3,864


(10

)%

2,522


(13

)%

All Other Segments 4

1,729


1

 %

1,238


14

 %

115


(39

)%

232


(13

)%

144


(20

)%

Corporate Items and Eliminations

(62

)

(68

)

2


-


4


Machinery, Energy & Transportation Sales

33,829


(12

)%

15,731


(6

)%

3,454


(25

)%

8,283


(12

)%

6,361


(20

)%

Financial Products Segment

2,332


(7

)%

1,360


2

 %

303


(15

)%

311


(18

)%

358


(18

)%

Corporate Items and Eliminations

(180

)

(105

)

(29

)

(17

)

(29

)

Financial Products Revenues

2,152


(6

)%

1,255


3

 %

274


(14

)%

294


(18

)%

329


(17

)%

Consolidated Sales and Revenues

$

35,981


(12

)%

$

16,986


(5

)%

$

3,728


(25

)%

$

8,577


(12

)%

$

6,690


(20

)%

Nine Months Ended September 30, 2014










Construction Industries 1

$

14,942


$

6,407


$

1,896


$

3,333


$

3,306



Resource Industries 2

6,536


2,343


1,113


1,550


1,530



Energy & Transportation 3

15,536


6,882


1,422


4,317


2,915



All Other Segments 4

1,720


1,082


190


268


180



Corporate Items and Eliminations

(92

)

(59

)

(1

)

(31

)

(1

)

Machinery, Energy & Transportation Sales

38,642



16,655



4,620



9,437



7,930



Financial Products Segment

2,502


1,331


356


379


436



Corporate Items and Eliminations

(204

)

(108

)

(38

)

(20

)

(38

)


Financial Products Revenues

2,298



1,223



318



359



398



Consolidated Sales and Revenues

$

40,940



$

17,878



$

4,938



$

9,796



$

8,328



1

Does not include inter-segment sales of $130 million and $198 million for the nine months ended September 30, 2015 and 2014 , respectively.

2

Does not include inter-segment sales of $268 million and $318 million for the nine months ended September 30, 2015 and 2014 , respectively.

3

Does not include inter-segment sales of $1,418 million and $1,706 million for the nine months ended September 30, 2015 and 2014 , respectively.

4

Does not include inter-segment sales of $2,393 million and $2,597 million for the nine months ended September 30, 2015 and 2014 , respectively.




70

Table of Contents


Sales and Revenues by Segment

(Millions of dollars)

Nine Months Ended September 30, 2014

Sales

Volume

Price

Realization

Currency

Other

Nine Months Ended September 30, 2015

$

Change

%

Change

Construction Industries

$

14,942


$

(1,495

)

$

112


$

(631

)

$

-


$

12,928


$

(2,014

)

(13

)%

Resource Industries

6,536


(636

)

(58

)

(127

)

-


5,715


(821

)

(13

)%

Energy & Transportation

15,536


(1,575

)

62


(504

)

-


13,519


(2,017

)

(13

)%

All Other Segments

1,720


33


12


(36

)

-


1,729


9


1

 %

Corporate Items and Eliminations

(92

)

31


1


(2

)

-


(62

)

30



Machinery, Energy & Transportation Sales

38,642


(3,642

)

129


(1,300

)

-


33,829


(4,813

)

(12

)%

Financial Products Segment

2,502


-


-


-


(170

)

2,332


(170

)

(7

)%

Corporate Items and Eliminations

(204

)

-


-


-


24


(180

)

24



Financial Products Revenues

2,298


-


-


-


(146

)

2,152


(146

)

(6

)%

Consolidated Sales and Revenues

$

40,940


$

(3,642

)

$

129


$

(1,300

)

$

(146

)

$

35,981


$

(4,959

)

(12

)%

Operating Profit by Segment

(Millions of dollars)

Nine Months Ended
September 30, 2015

Nine Months Ended
September 30, 2014

$

Change

%

Change

Construction Industries

$

1,705


$

1,845


$

(140

)

(8

)%

Resource Industries

17


379


(362

)

(96

)%

Energy & Transportation

2,527


3,012


(485

)

(16

)%

All Other Segments

638


686


(48

)

(7

)%

Corporate Items and Eliminations

(1,919

)

(2,122

)

203



Machinery, Energy & Transportation

2,968


3,800


(832

)

(22

)%

Financial Products Segment

618


704


(86

)

(12

)%

Corporate Items and Eliminations

(20

)

(28

)

8



Financial Products

598


676


(78

)

(12

)%

Consolidating Adjustments

(196

)

(211

)

15



Consolidated Operating Profit

$

3,370


$

4,265


$

(895

)

(21

)%


Construction Industries

Construction Industries' sales were $12.928 billion in the nine months ended September 30, 2015, a decrease of $2.014 billion, or 13 percent, from the nine months ended September 30, 2014. The sales decrease was primarily due to lower sales volume and the unfavorable impact of currency slightly offset by favorable price realization. While sales for both new equipment and aftermarket parts declined, most of the decrease was for new equipment.

The decrease in sales volume was primarily due to lower deliveries to end users caused by widespread economic weakness.

The unfavorable currency impact was primarily from a weaker euro, Japanese yen and Brazilian real, as sales in these currencies translated into fewer U.S. dollars.

Sales decreased in all geographic regions except North America, where they were about flat.

In Asia/Pacific, the sales decline was primarily due to lower sales in China and Japan. In China, the lower sales resulted primarily from continued weak residential and non-residential construction activity. Sales in Japan declined due to a weaker Japanese yen, as sales in yen translated into fewer U.S. dollars, and lower end-user demand due to weaker economic conditions.

Decreases in Latin America were primarily related to lower demand due to continued weak construction activity and the absence of a large government order in Brazil that occurred during the nine months ended September 30, 2014. In addition, sales in Brazil declined due to a weaker Brazilian real, as sales in real translated into fewer U.S. dollars.

Sales declined in EAME primarily due to the unfavorable impact of currency, as sales in euros translated into fewer U.S. dollars.


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Sales in North America were about flat. Improved price realization and the impact of favorable changes in dealer inventories, as dealers increased inventories more during the nine months ended September 30, 2015, than in the nine months ended September 30, 2014, were about offset by lower end-user demand as weakness in oil and gas-related construction was largely offset by stronger activity in residential and non-residential building construction.

We expect that sales in the fourth quarter of 2015 and 2016 will continue to be negatively impacted by weak residential and non-residential construction activity in China and low oil prices. We support the oil and gas industry with construction equipment for drill site preparation and infrastructure development. Construction industries also has a variety of indirect exposures to oil and gas, as countries that depend on oil revenues may reduce expenditures for roads and other infrastructure projects.

Construction Industries' profit was $1.705 billion in the nine months ended September 30, 2015, compared with $1.845 billion in the nine months ended September 30, 2014. The decrease in profit was primarily due to lower sales volume, partially offset by the favorable impact of currency, lower incentive compensation expense and improved price realization.


Resource Industries

Resource Industries' sales were $5.715 billion for the nine months ended September 30, 2015, a decrease of $821 million, or 13 percent, from the nine months ended September 30, 2014, primarily due to lower sales volume and the unfavorable impact of currency, primarily due to the euro and Australian dollar. Price realization was slightly unfavorable, resulting from a competitive pricing environment. Sales declined for both new equipment and aftermarket parts. We believe some mining companies are continuing to delay maintenance and rebuild activities.

The sales volume decrease was primarily the result of continued weak end-user demand worldwide due to weakened commodity prices and a reduction in capital expenditures by miners, partially offset by the favorable impact of changes in dealer inventories. While dealers continued to reduce inventories during the nine months ended September 30, 2015, the reductions were less significant than in the nine months ended September 30, 2014.

Commodity prices remained weak, and mining customers continued to focus on improving productivity in existing mines and reducing their total capital expenditures as they have for the last several years. We believe most customers currently have a sufficient supply of equipment. As a result, sales and new orders in Resource Industries are continuing to weaken. The mining industry remains weak and we are not expecting any improvements in sales volume during the fourth quarter of 2015 or in 2016.

Sales decreased in all geographic regions.

Sales declined in Asia/Pacific primarily due to lower end-user demand and the unfavorable impact of currency, mostly due to the Australian dollar, as sales translated into fewer U.S. dollars.

In EAME, the sales decline was primarily due to lower end-user demand and the unfavorable impact of currency due to a weaker euro, as sales in euro translated into fewer U.S. dollars, partially offset by the favorable impact of changes in dealer inventories. While dealers continued to reduce inventories during the nine months ended September 30, 2015, the reductions were less significant than in the nine months ended September 30, 2014.

Decreases in Latin America were primarily related to continued weak mining activity and slightly unfavorable price realization, resulting from a competitive pricing environment. The decline was partially offset by the favorable impact of changes in dealer inventories. While dealers continued to reduce inventories during the nine months ended September 30, 2015, the reductions were less significant than in the nine months ended September 30, 2014.

In North America, the sales decline was primarily due to lower sales of mining equipment partially offset by increases in sales of equipment used to support the quarry and aggregate industry and the favorable impact of changes in dealer inventories. While dealers continued to reduce inventories during the nine months ended September 30, 2015, the reductions were less significant than in the nine months ended September 30, 2014.


Resource Industries' profit was $17 million for the nine months ended September 30, 2015, compared with $379 million for the nine months ended September 30, 2014. The decrease was primarily the result of lower sales volume, higher spending for new product introductions and unfavorable price realization, partially offset by improved material costs.


Energy & Transportation

Energy & Transportation's sales were $13.519 billion for the nine months ended September 30, 2015, a decrease of $2.017 billion, or 13 percent, from the nine months ended September 30, 2014. The sales decrease was primarily due to lower sales volume and the unfavorable impact of currency, primarily from a weaker euro. Price realization was slightly favorable. Sales decreased in all geographic regions and across all applications.

Oil and Gas - The sales decrease was driven by lower end-user demand as low oil prices continued. Sales in the first half of 2015 benefited from a strong order backlog that was in place when the year started. As we have worked off this backlog, we started to see more significant declines in our oil-related sales in the third quarter of 2015 that we expect will continue in the fourth quarter of 2015 and into 2016. Based on the current backlog and recent quotation activity, sales in our turbine business


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are expected to decline in 2016. While sales related to oil projects are down, sales related to gas compression are expected to remain strong with a supportive backlog and increase in 2016.

Sales decreased in all regions except for EAME where they were about flat. Sales declined in Asia/Pacific resulting primarily from lower end-user demand for equipment used in drilling applications, the absence of large projects and the unfavorable impact of changes in dealer inventories as inventories decreased during the nine months ended September 30, 2015 and increased during the nine months ended September 30, 2014. In Latin America, sales were lower primarily due to the absence of a large project that occurred in the nine months ended September 30, 2014. In North America, sales were lower primarily due to end-user demand for equipment used in drilling and well servicing applications.

Transportation - Sales decreased in North America and were about flat in all other geographic regions. In North America, sales into rail applications decreased primarily due to the absence of a Tier IV locomotive offering and lower sales of recyclable materials. The decline of recyclable materials was driven primarily by the year-over-year decrease in scrap prices and the lower volume of railcars available to scrap.

Industrial - Sales decreased in all regions except Latin America which was about flat. In EAME, sales decreased primarily due to lower end-user demand for engines used by original equipment manufacturers for agriculture and construction applications, and the unfavorable impact of currency. In both Asia/Pacific and North America, lower demand for most industrial applications contributed to the sales decrease.

Power Generation - Sales decreased in EAME and were about flat in all other regions. In EAME, the sales decline was primarily due to the negative impact of currency and lower end-user demand resulting from weak economic conditions and political instability in the region.

Energy & Transportation's profit was $2.527 billion for the nine months ended September 30, 2015, compared with $3.012 billion for the nine months ended September 30, 2014. The decrease was primarily due to lower sales volume, which includes a favorable mix of products, partially offset by favorable price realization.

Manufacturing costs were about flat as improved material costs and lower incentive compensation expense were about offset by the unfavorable impact of cost absorption and variable manufacturing inefficiencies driven by costs decreasing at a lower rate than production volume. The unfavorable impact of cost absorption resulted from a decrease in inventory during the nine months ended September 30, 2015, compared to a significant increase in inventory during the nine months ended September 30, 2014.

SG&A and R&D expenses were about flat as lower incentive compensation expense was about offset by increases in program spending including for new product introductions.


Financial Products Segment

Financial Products' revenues were $2.332 billion for the nine months ended September 30, 2015, a decrease of $170 million, or 7 percent, from the nine months ended September 30, 2014. The decline was primarily due to lower average earning assets and lower average financing rates. Average earning assets were down in Asia/Pacific, Latin America and EAME, partially offset by higher average earning assets in North America. Average financing rates decreased primarily in North America and EAME.

Financial Products' profit was $618 million in the nine months ended September 30, 2015, compared with $704 million in the nine months ended September 30, 2014. The decrease was primarily due to a $58 million decrease in net yield on average earning assets and a $38 million unfavorable impact from lower average earning assets, partially offset by the absence of $27 million of unfavorable out-of-period adjustments in 2014 related to interest rate swap contracts and the provision for credit losses.

The provision for credit losses was $89 million for the first nine months of 2015, compared with $120 million for the same period in 2014. The decrease was primarily due to a favorable impact from changes in the allowance rate driven by changes in certain assumptions within the allowance for credit loss model. During 2015, as a result of management's review, the loss emergence period and loss given default assumptions were updated and resulted in a decrease to the allowance for credit losses of $66 million. The decrease in the provision for credit losses was also due to the absence of a $14 million out-of-period adjustment in the third quarter of 2014 (included in the discussion above). These changes were partially offset by an unfavorable impact from changes in the credit quality of Cat Financial's portfolio.


Corporate Items and Eliminations

Expense for corporate items and eliminations was $1.939 billion in the nine months ended September 30, 2015, a decrease of $211 million from the nine months ended September 30, 2014. Corporate items and eliminations include: corporate-level expenses; restructuring costs; timing differences, as some expenses are reported in segment profit on a cash basis; retirement benefit costs other than service cost; currency differences for ME&T, as segment profit is reported using annual fixed exchange rates and inter-segment eliminations.

The decrease in expense from the nine months ended September 30, 2014, was primarily due to timing differences and lower restructuring costs, partially offset by higher spending for information technology-related programs.


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RESTRUCTURING COSTS


For the three and nine months ended September 30, 2015 , we recognized $89 million and $214 million, respectively, of restructuring costs, which included $60 million of employee separation costs and $29 million of long-lived asset impairments and other restructuring costs for the three months ended September 30, 2015 and $180 million of employee separation costs and $34 million of long-lived asset impairments and other restructuring costs for the nine months ended September 30, 2015 . In addition we incurred $12 million of restructuring related costs for the three and nine months ended September 30, 2015 . The restructuring costs in 2015 were primarily related to several restructuring programs across the company. For the three and nine months ended September 30, 2014 , we recognized $81 million and $344 million, respectively, of restructuring costs, which included $46 million of employee separation costs and $35 million of long-lived asset impairments and other restructuring costs for the three months ended September 30, 2014 and $295 million of employee separation costs and $49 million of long-lived asset impairments and other restructuring costs for the nine months ended September 30, 2014 . For the first nine months of 2014 , the restructuring costs were primarily related to a reduction in workforce at our Gosselies, Belgium, facility.


Restructuring costs for the year ended December 31, 2014 were $441 million which included $382 million of employee separation costs, $33 million of long-lived asset impairments and $26 million of other restructuring costs. The restructuring costs in 2014 were primarily related to a reduction in workforce at our Gosselies, Belgium, facility.


Restructuring costs are a reconciling item between Segment profit and Consolidated profit before taxes.


The following table summarizes the 2014 and 2015 employee separation activity:

(Millions of dollars)

Total

Liability balance at December 31, 2013

$

89


Increase in liability (separation charges)

382


Reduction in liability (payments and other adjustments)

(289

)

Liability balance at December 31, 2014

$

182


Increase in liability (separation charges)

180


Reduction in liability (payments and other adjustments)

(197

)

Liability balance at September 30, 2015

$

165



The remaining liability balance as of September 30, 2015 represents costs for employees who have either not yet separated from the Company or whose full severance has not yet been paid. The majority of these remaining costs are expected to be paid in 2015 and 2016.


In December 2013, we announced a restructuring plan for our Gosselies, Belgium, facility. This restructuring plan was designed to improve the competitiveness of our European manufacturing footprint and achieve competitiveness in our European operations by refocusing our current Gosselies operations on final machine assembly, test and paint with limited component and fabrication operations. This action includes reshaping our supply base for more efficient sourcing, improving factory efficiencies and workforce reductions and was approved by the Belgian Minister of Employment in February 2014. In 2014, we recognized $273 million of these separation-related charges. For the nine months ended September 30, 2015, we recognized $24 million, of employee separation costs relating to this restructuring plan, none of which were incurred in the three months ended September 30, 2015. We do not expect any further costs associated with this program. The employee separation liability balance as of September 30, 2015 includes $49 million related to this restructuring plan, the majority of which we expect will be paid in 2015.


On September 24, 2015, we announced significant restructuring and cost reduction actions to lower our operating costs in response to current economic and business conditions. As part of that announcement, we offered a voluntary retirement enhancement program to qualifying U.S. employees and more than 2,000 participants are in the program. After employee acceptance, this program required Company approval, which occurred in the fourth quarter of 2015. We expect to incur approximately $400 million in restructuring costs in the fourth quarter of 2015 related to this program. We have also offered several voluntary separation programs outside the United States and expect further reductions in 2015 from involuntary employee separation programs throughout the company. For the full year, we expect restructuring costs will be approximately $800 million, or $0.90 per share, which includes costs for ongoing programs as well as the recently announced employee separation programs. We expect that restructuring actions will result in a benefit to operating costs of about $750 million in 2016. Additional restructuring actions are being contemplated and are expected to occur through 2018.


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GLOSSARY OF TERMS

1.

All Other Segments - Primarily includes activities such as: the remanufacturing of Cat® engines and components and remanufacturing services for other companies as well as the business strategy, product management, development, manufacturing, marketing and product support of undercarriage, specialty products, hardened bar stock components and ground engaging tools primarily for Cat products, paving products, forestry products and industrial and waste products; the product management, development, marketing, sales and product support of on-highway vocational trucks for North America; parts distribution; distribution services responsible for dealer development and administration including a wholly owned dealer in Japan, dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts.


2.

Consolidating Adjustments - Elimination of transactions between Machinery, Energy & Transportation and Financial Products.


3.

Construction Industries - A segment primarily responsible for supporting customers using machinery in infrastructure and building construction applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes backhoe loaders, small wheel loaders, small track-type tractors, skid steer loaders, multi-terrain loaders, mini excavators, compact wheel loaders, telehandlers, select work tools, small, medium and large track excavators, wheel excavators, medium wheel loaders, compact track loaders, medium track-type tractors, track-type loaders, motor graders, pipelayers and mid-tier soil compactors. In addition, Construction Industries has responsibility for an integrated manufacturing cost center.


4.

Currency - With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency exchange rates versus the U.S. dollar. With respect to operating profit, currency represents the net translation impact on sales and operating costs resulting from changes in foreign currency exchange rates versus the U.S. dollar. Currency includes the impact on sales and operating profit for the Machinery, Energy & Transportation lines of business only; currency impacts on Financial Products' revenues and operating profit are included in the Financial Products' portions of the respective analyses. With respect to other income/expense, currency represents the effects of forward and option contracts entered into by the company to reduce the risk of fluctuations in exchange rates (hedging) and the net effect of changes in foreign currency exchange rates on our foreign currency assets and liabilities for consolidated results (translation).


5.

Debt-to-Capital Ratio - A key measure of Machinery, Energy & Transportation's financial strength used by both management and our credit rating agencies. The metric is defined as Machinery, Energy & Transportation's short-term borrowings, long-term debt due within one year and long-term debt due after one year (debt) divided by the sum of Machinery, Energy & Transportation's debt and stockholders' equity. Debt also includes Machinery, Energy & Transportation's borrowings from Financial Products.


6.

EAME - A geographic region including Europe, Africa, the Middle East and the Commonwealth of Independent States (CIS).


7.

Earning Assets - Assets consisting primarily of total finance receivables net of unearned income, plus equipment on operating leases, less accumulated depreciation at Cat Financial.


8.

Energy & Transportation - A segment primarily responsible for supporting customers using reciprocating engines, turbines, diesel-electric locomotives and related parts across industries serving power generation, industrial, oil and gas and transportation applications, including marine and rail-related businesses. Responsibilities include business strategy, product design, product management, development, manufacturing, marketing, sales and product support of turbines and turbine-related services, reciprocating engine powered generator sets, integrated systems used in the electric power generation industry, reciprocating engines and integrated systems and solutions for the marine and oil and gas industries; reciprocating engines supplied to the industrial industry as well as Cat machinery; the business strategy, product design, product management, development, manufacturing, remanufacturing, leasing and service of diesel-electric locomotives and components and other rail-related products and services.


9.

Financial Products Segment - Provides financing to customers and dealers for the purchase and lease of Cat and other equipment, as well as some financing for Caterpillar sales to dealers. Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The segment also provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. Financial Products Segment profit is determined on a pretax basis and includes other income/expense items.



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10.

Latin America - A geographic region including Central and South American countries and Mexico.


11.

Machinery, Energy & Transportation (ME&T) - Represents the aggregate total of Construction Industries, Resource Industries, Energy & Transportation and All Other Segments and related corporate items and eliminations.


12.

Machinery, Energy & Transportation Other Operating (Income) Expenses - Comprised primarily of gains/losses on disposal of long-lived assets, gains/losses on divestitures, long-lived asset impairment charges and legal settlements. Restructuring costs, which are classified as other operating expenses on the Results of Operations, are presented separately on the Operating Profit Comparison.


13.

Manufacturing Costs - Manufacturing costs exclude the impacts of currency and represent the volume-adjusted change for variable costs and the absolute dollar change for period manufacturing costs. Variable manufacturing costs are defined as having a direct relationship with the volume of production. This includes material costs, direct labor and other costs that vary directly with production volume such as freight, power to operate machines and supplies that are consumed in the manufacturing process. Period manufacturing costs support production but are defined as generally not having a direct relationship to short-term changes in volume. Examples include machinery and equipment repair, depreciation on manufacturing assets, facility support, procurement, factory scheduling, manufacturing planning and operations management.


14.

Price Realization - The impact of net price changes excluding currency and new product introductions. Price realization includes geographic mix of sales, which is the impact of changes in the relative weighting of sales prices between geographic regions.


15.

Resource Industries - A segment primarily responsible for supporting customers using machinery in mining and quarrying applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large track-type tractors, large mining trucks, hard rock vehicles, longwall miners, electric rope shovels, draglines, hydraulic shovels, drills, highwall miners, large wheel loaders, off-highway trucks, articulated trucks, wheel tractor scrapers, wheel dozers, select work tools, machinery components and electronics and control systems. Resource Industries also manages areas that provide services to other parts of the company, including integrated manufacturing and research and development. In addition, segment profit includes the impact from divestiture of portions of the Bucyrus distribution business.


16.

Restructuring Costs - Primarily costs for employee separations, long-lived asset impairments and contract terminations. Beginning in the third quarter of 2015, restructuring costs also include other exit-related costs associated with the consolidation of manufacturing facilities as we expect these costs to be significant as we implement the restructuring plan that was announced on September 24. Other exit-related costs are primarily for equipment relocation and accelerated depreciation.


17.

Sales Volume - With respect to sales and revenues, sales volume represents the impact of changes in the quantities sold for Machinery, Energy & Transportation as well as the incremental revenue impact of new product introductions, including emissions-related product updates. With respect to operating profit, sales volume represents the impact of changes in the quantities sold for Machinery, Energy & Transportation combined with product mix as well as the net operating profit impact of new product introductions, including emissions-related product updates. Product mix represents the net operating profit impact of changes in the relative weighting of Machinery, Energy & Transportation sales with respect to total sales.


LIQUIDITY AND CAPITAL RESOURCES

Sources of funds

We generate significant capital resources from operating activities, which are the primary source of funding for our Machinery, Energy & Transportation operations. Funding for these businesses is also available from commercial paper and long-term debt issuances. Financial Products' operations are funded primarily from commercial paper, term debt issuances and collections from the existing portfolio. Throughout the first nine months of 2015 , we experienced favorable liquidity conditions globally in both our Machinery, Energy & Transportation and Financial Products' operations. On a consolidated basis, we ended the first nine months of 2015 with $6.05 billion of cash, a decrease of $1.30 billion from year-end 2014 . We intend to maintain a strong cash and liquidity position. Our cash balances are held in numerous locations throughout the world with approximately $4.8 billion held by our non-U.S. subsidiaries. Amounts held by non-U.S. subsidiaries are available for general corporate use; however, if all of the cash held by non-U.S. subsidiaries were repatriated to the United States, additional U.S. tax would be payable.

Consolidated operating cash flow for the first nine months of 2015 was $4.86 billion, down from $6.19 billion for the same period last year. The decrease was primarily due to unfavorable changes to accounts payable (primarily due to decreased material


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purchases) as well as higher short-term incentive compensation payments in 2015. In addition, lower profit in 2015, which includes lower accruals for short-term incentive compensation payments, unfavorably impacted operating cash flow. Partially offsetting these items were favorable changes to inventory. During the first nine months of 2015, inventory decreased in conjunction with lower demand levels, while during the first nine months of 2014 inventory increased. We expect additional declines in inventory during the remainder of 2015 as a result of our continued focus on operational improvements and lower sales expectations for 2016. See further discussion of operating cash flow under Machinery, Energy & Transportation and Financial Products.

Total debt as of September 30, 2015 was $37.54 billion, a decrease of $1.74 billion from year-end 2014 . Debt related to Financial Products decreased $1.26 billion, reflecting decreasing portfolio balances. Debt related to Machinery, Energy & Transportation decreased $487 million in the first nine months of 2015, primarily due to the maturity of a long-term debt issuance.

We have three global credit facilities with a syndicate of banks totaling $10.50 billion (Credit Facility) available in the aggregate to both Caterpillar and Cat Financial for general liquidity purposes.  Based on management's allocation decision, which can be revised from time to time, the portion of the Credit Facility available to Machinery, Energy & Transportation as of September 30, 2015 was $2.75 billion. Our three Global Credit Facilities are:

In September 2015, we entered into a 364-day facility. The 364-day facility of $3.15 billion (of which $0.82 billion is available to Machinery, Energy, & Transportation) expires in September 2016.

In September 2015, we amended and restated the 2010 four-year facility (as amended and restated, the "three-year facility"). The three-year facility of $2.73 billion (of which $0.72 billion is available to Machinery, Energy & Transportation) now expires in September 2018.

In September 2015, we amended and restated the 2011 five-year facility (as amended and restated, the "five-year facility"). The five-year facility of $4.62 billion (of which $1.21 billion is available to Machinery, Energy & Transportation) now expires in September 2020.

At September 30, 2015 , Caterpillar's consolidated net worth was $21.01 billion, which was above the $9.00 billion required under the Credit Facility.  The consolidated net worth is defined as the consolidated stockholders' equity including preferred stock but excluding the pension and other postretirement benefits balance within Accumulated other comprehensive income (loss).

At September 30, 2015 , Cat Financial's covenant interest coverage ratio was 2.09 to 1.  This is above the 1.15 to 1 minimum ratio calculated as (1) profit excluding income taxes, interest expense and net gain/(loss) from interest rate derivatives to (2) interest expense calculated at the end of each calendar quarter for the rolling four quarter period then most recently ended, required by the Credit Facility.

In addition, at September 30, 2015 , Cat Financial's covenant leverage ratio was 7.49 to 1. This is below the maximum ratio of debt to net worth of 10 to 1, calculated (1) on a monthly basis as the average of the leverage ratios determined on the last day of each of the six preceding calendar months and (2) at each December 31, required by the Credit Facility.

In the event Caterpillar or Cat Financial does not meet one or more of their respective financial covenants under the Credit Facility in the future (and are unable to obtain a consent or waiver), the syndicate of banks may terminate the commitments allocated to the party that does not meet its covenants.  Additionally, in such event, certain of Cat Financial's other lenders under other loan agreements where similar financial covenants or cross default provisions are applicable, may, at their election, choose to pursue remedies under those loan agreements, including accelerating the repayment of outstanding borrowings. At September 30, 2015 , there were no borrowings under the Credit Facility.

Our total credit commitments and available credit as of September 30, 2015 were:

September 30, 2015

(Millions of dollars)

Consolidated

Machinery,

Energy &

Transportation

Financial

Products

Credit lines available:




Global credit facilities

$

10,500


$

2,750


$

7,750


Other external

3,796


179


3,617


Total credit lines available

14,296


2,929


11,367


Less: Commercial paper outstanding

(5,162

)

-


(5,162

)

Less: Utilized credit

(1,302

)

(12

)

(1,290

)

Available credit

$

7,832


$

2,917


$

4,915


The other external consolidated credit lines with banks as of September 30, 2015 totaled $3.80 billion. These committed and uncommitted credit lines, which may be eligible for renewal at various future dates or have no specified expiration date, are used


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

In the event that Caterpillar or Cat Financial, or any of their debt securities, experiences a credit rating downgrade, it would likely result in an increase in our borrowing costs and make access to certain credit markets more difficult. In the event economic conditions deteriorate such that access to debt markets becomes unavailable, our Machinery, Energy & Transportation's operations would rely on cash flow from operations, use of existing cash balances, borrowings from Cat Financial and access to our Credit Facility. Our Financial Products' operations would rely on cash flow from its existing portfolio, existing cash balances, access to our Credit Facility and other credit line facilities of Cat Financial and potential borrowings from Caterpillar. In addition, we maintain a support agreement with Cat Financial, which requires Caterpillar to remain the sole owner of Cat Financial and may, under certain circumstances, require Caterpillar to make payments to Cat Financial should Cat Financial fail to maintain certain financial ratios.


Machinery, Energy & Transportation

Net cash provided by operating activities was $3.45 billion in the first nine months of 2015 , compared with $5.38 billion for the same period in 2014 . The decrease was primarily due to unfavorable changes to accounts payable (primarily due to decreased material purchases) as well as higher short-term incentive compensation payments in 2015. In addition, lower profit in 2015, which includes lower accruals for short-term incentive compensation payments, unfavorably impacted operating cash flow. Partially offsetting these items were favorable changes to inventory. During the first nine months of 2015, inventory decreased in conjunction with lower demand levels, while during the first nine months of 2014 inventory increased. We expect additional declines in inventory during the remainder of 2015 as a result of our continued focus on operational improvements and lower sales expectations for 2016.

Net cash used for investing activities in the first nine months of 2015 was $1.06 billion, compared with net cash used of $1.27 billion in the first nine months of 2014. The favorable change was primarily due to lower investments in held-to-maturity securities during the first nine months of 2015.

Net cash used for financing activities during the first nine months of 2015 was $3.79 billion, compared with net cash used of $3.85 billion in the first nine months of 2014. The favorable change was primarily due to lower share repurchases in the first nine months of 2015 compared to the same period a year ago. Partially offsetting this item was the issuance of long-term debt in May of 2014.

Our priorities for the use of cash are to maintain a strong financial position in support of our credit rating, provide capital to support growth, appropriately fund employee benefit plans, pay dividends and repurchase common stock.

Strong financial position A key measure of Machinery, Energy & Transportation's financial strength used by both management and our credit rating agencies is Machinery, Energy & Transportation's debt-to-capital ratio. Debt-to-capital is defined as short-term borrowings, long-term debt due within one year and long-term debt due after one year (debt) divided by the sum of debt and stockholders' equity. Debt also includes Machinery, Energy & Transportation borrowings from Financial Products. The debt-to-capital ratio for Machinery, Energy & Transportation was 37.4 percent at September 30, 2015 , within our target range of 30 to 45 percent. The Machinery, Energy & Transportation's debt-to-capital ratio was also 37.4 percent at December 31, 2014 .

Capital to support growth Capital expenditures were $1.10 billion during the first nine months of 2015 , compared to $1.13 billion for the same period in 2014 . We expect capital expenditures in 2015 to be about the same as 2014 capital expenditures of $1.6 billion.

Appropriately funded employee benefit plans We made $149 million of contributions to our pension plans during the first nine months of 2015. We currently anticipate full-year 2015 contributions of approximately $180 million, all of which are required. We made $455 million of contributions to our pension plans during the first nine months of 2014.

Paying dividends Dividends paid totaled $1.31 billion in the first nine months of 2015 , representing 70 cents per share paid in the first and second quarters and 77 cents per share paid in the third quarter. Each quarter, our Board of Directors reviews the company's dividend for the applicable quarter. The Board evaluates the financial condition of the company and considers the economic outlook, corporate cash flow, the company's liquidity needs, and the health and stability of global credit markets to determine whether to maintain or change the quarterly dividend.

Common stock repurchases In January 2014, the Board of Directors approved an authorization to repurchase up to $10 billion of Caterpillar common stock (the 2014 Authorization), which will expire on December 31, 2018. As of January 1, 2015, $7.5 billion remained available under the 2014 Authorization. In the first nine months of 2015, we repurchased $2.03 billion of Caterpillar common stock, leaving approximately $5.5 billion available under the 2014 Authorization. Caterpillar's basic shares outstanding as of September 30, 2015 were approximately 582 million.


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Financial Products

Financial Products' operating cash flow was $1.10 billion in the first nine months of 2015, compared with $1.14 billion for the same period a year ago. Net cash used for investing activities was $365 million for the first nine months of 2015, compared with $1.81 billion for the same period in 2014. The change was primarily due to lower levels of new financing at Cat Financial. Net cash used by financing activities was $492 million for the first nine months of 2015, compared with $524 million net cash provided by financing activities for the same period in 2014. The change was primarily due to lower funding requirements.


CRITICAL ACCOUNTING POLICIES

For a discussion of the Company's critical accounting policies, see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2014 Annual Report on Form 10-K.


GLOBAL WORKFORCE


Caterpillar worldwide, full-time employment was 108,922 at the end of the third quarter of 2015 compared with 114,352 at the end of the third quarter of 2014 , a decrease of 5,430 full-time employees. The flexible workforce decreased by 2,658 for a total decrease in the global workforce of 8,088. The decrease was primarily the result of restructuring programs and lower production volumes.


OTHER MATTERS

Environmental and Legal Matters

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


We are engaged in remedial activities at a number of locations, often with other companies, pursuant to federal and state laws. When it is probable we will pay remedial costs at a site, and those costs can be re