Edgar Filing: CATERPILLAR INC

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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 March 31, 2011

[ ] 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). Yesx 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 March 31, 2011, 644,452,020 shares of common stock of the registrant were outstanding.

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Part I. Financial Information
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63
Item 4.	Controls and Procedures	63

Part II. Other Information
Item 1.	Legal Proceedings	64
Item 1A.	Risk Factors	*
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3.	Defaults Upon Senior Securities	*
Item 4.	Removed and Reserved	*
Item 5.	Other Information	*
Item 6.	Exhibits	65

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

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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 March 31,
	2011	2010
Sales and revenues:
Sales of Machinery and Power Systems	$12,277	$7,551
Revenues of Financial Products	672	687
Total sales and revenues	12,949	8,238

Operating costs:
Cost of goods sold	9,057	5,894
Selling, general and administrative expenses	1,099	932
Research and development expenses	525	402
Interest expense of Financial Products	203	233
Other operating (income) expenses	232	269
Total operating costs	11,116	7,730

Operating profit (loss)	1,833	508

Interest expense excluding Financial Products	87	102
Other income (expense)	17	63

Consolidated profit (loss) before taxes	1,763	469

Provision (benefit) for income taxes	512	231
Profit (loss) of consolidated companies	1,251	238

Equity in profit (loss) of unconsolidated affiliated companies	(8)	(2)

Profit (loss) of consolidated and affiliated companies	1,243	236

Less: Profit (loss) attributable to noncontrolling interests	18	3

Profit (loss) 1	$1,225	$233

Profit (loss) per common share	$1.91	$0.37

Profit (loss) per common share — diluted 2	$1.84	$0.36

Weighted-average common shares outstanding (millions)
- Basic	641.4	626.4
- Diluted 2	664.9	643.5

Cash dividends declared per common share	$—	$—

1 Profit (loss) 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.

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Caterpillar Inc.

Consolidated Statement of Financial Position

(Unaudited)

(Dollars in millions)

	March 31, 2011	December 31, 2010
Assets
Current assets:
Cash and short-term investments	$4,869	$3,592
Receivables – trade and other	8,830	8,494
Receivables – finance	8,458	8,298
Deferred and refundable income taxes	895	931
Prepaid expenses and other current assets	880	908
Inventories	10,676	9,587
Total current assets	34,608	31,810
Property, plant and equipment – net	12,219	12,539
Long-term receivables – trade and other	486	793
Long-term receivables – finance	11,574	11,264
Investments in unconsolidated affiliated companies	140	164
Noncurrent deferred and refundable income taxes	2,412	2,493
Intangible assets	794	805
Goodwill	2,608	2,614
Other assets	1,546	1,538
Total assets	$66,387	$64,020

Liabilities
Current liabilities:
Short-term borrowings:
Machinery and Power Systems	$119	$204
Financial Products	5,218	3,852
Accounts payable	5,990	5,856
Accrued expenses	2,863	2,880
Accrued wages, salaries and employee benefits	1,250	1,670
Customer advances	1,728	1,831
Dividends payable	—	281
Other current liabilities	1,625	1,521
Long-term debt due within one year:
Machinery and Power Systems	420	495
Financial Products	3,934	3,430
Total current liabilities	23,147	22,020
Long-term debt due after one year:
Machinery and Power Systems	4,467	4,505
Financial Products	15,428	15,932
Liability for postemployment benefits	7,514	7,584
Other liabilities	2,700	2,654
Total liabilities	53,256	52,695
Commitments and contingencies (Notes 10 and 12)
Redeemable noncontrolling interest	459	461
Stockholders’ equity
Common stock of $1.00 par value:
Authorized shares: 2,000,000,000 Issued shares: (3/31/11 and 12/31/10 – 814,894,624) at paid-in amount	4,044	3,888
Treasury stock (3/31/11 – 170,442,604 shares; 12/31/10 – 176,071,910 shares) at cost	(10,331)	(10,397)
Profit employed in the business	22,640	21,384
Accumulated other comprehensive income (loss)	(3,724)	(4,051)
Noncontrolling interests	43	40
Total stockholders’ equity	12,672	10,864
Total liabilities, redeemable noncontrolling interest and stockholders’ equity	$66,387	$64,020

See accompanying notes to Consolidated Financial Statements.

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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	Comprehensive income (loss)
Three Months Ended March 31, 2010
Balance at December 31, 2009	$3,439	$(10,646)	$19,711	$(3,764)	$83	$8,823
Adjustment to adopt consolidation of variable interest entities1	—	—	(6)	3	—	(3)
Balance at January 1, 2010	$3,439	$(10,646)	$19,705	$(3,761)	$83	$8,820
Profit (loss) of consolidated and affiliated companies	—	—	233	—	3	236	$236
Foreign currency translation, net of tax of $64	—	—	—	(165)	(5)	(170)	(170)
Pension and other postretirement benefits
Amortization of actuarial (gain) loss, net of tax of $46	—	—	—	77	4	81	81
Amortization of prior service (credit) cost, net of tax of $4	—	—	—	(2)	—	(2)	(2)
Derivative financial instruments
Gains (losses) deferred, net of tax of $40	—	—	—	(65)	—	(65)	(65)
(Gains) losses reclassified to earnings, net of tax of $9	—	—	—	16	—	16	16
Available-for-sale securities
Gains (losses) deferred, net of tax of $9	—	—	—	14	—	14	14
Change in ownership for noncontrolling interest	(17)	—	—	—	(11)	(28)	—
Common shares issued from treasury stock for stock-based compensation: 2,489,804	(14)	40	—	—	—	26	—
Common shares issued from treasury stock for benefit plans: 532,871	18	11	—	—	—	29	—
Stock-based compensation expense	42	—	—	—	—	42	—
Net excess tax benefits from stock-based compensation	14	—	—	—	—	14	—
Cat Japan share redemption2	—	—	3	—	6	9	—
Balance at March 31, 2010	$3,482	$(10,595)	$19,941	$(3,886)	$80	$9,022	$110

Three Months Ended March 31, 2011
Balance at December 31, 2010	$3,888	$(10,397)	$21,384	$(4,051)	$40	$10,864
Profit (loss) of consolidated and affiliated companies	—	—	1,225	—	18	1,243	$1,243
Foreign currency translation, net of tax of $63	—	—	—	217	8	225	225
Pension and other postretirement benefits
Amortization of actuarial (gain) loss, net of tax of $53	—	—	—	99	—	99	99
Amortization of prior service (credit) cost, net of tax of $3	—	—	—	(5)	—	(5)	(5)
Amortization of transition (asset) obligation, net of tax of $0	—	—	—	1	—	1	1
Derivative financial instruments
Gains (losses) deferred, net of tax of $10	—	—	—	17	—	17	17
(Gains) losses reclassified to earnings, net of tax of $5	—	—	—	(7)	—	(7)	(7)
Available-for-sale securities
Gains (losses) deferred, net of tax of $3	—	—	—	5	—	5	5
Common shares issued from treasury stock for stock-based compensation: 5,629,306	(8)	66	—	—	—	58	—
Stock-based compensation expense	44	—	—	—	—	44	—
Net excess tax benefits from stock-based compensation	120	—	—	—	—	120	—
Cat Japan share redemption2	—	—	31	—	(23)	8	—
Balance at March 31, 2011	$4,044	$(10,331)	$22,640	$(3,724)	$43	$12,672	$1,578

1 See Note 15 for additional information.

2 See Note 16 regarding the Cat Japan share redemption.

See accompanying notes to Consolidated Financial Statements.

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Caterpillar Inc.

Consolidated Statement of Cash Flow

(Unaudited)

(Millions of dollars)

	Three Months Ended March 31,
	2011	2010
Cash flow from operating activities:
Profit (loss) of consolidated and affiliated companies	$1,243	$236
Adjustments for non-cash items:
Depreciation and amortization	575	554
Other	95	94
Changes in assets and liabilities, net of acquisitions and divestitures:
Receivables – trade and other	(17)	(373)
Inventories	(1,185)	(644)
Accounts payable	364	698
Accrued expenses	(57)	(65)
Accrued wages, salaries and employee benefits	(429)	114
Customer advances	(120)	140
Other assets – net	63	109
Other liabilities – net	233	(147)
Net cash provided by (used for) operating activities	765	716

Cash flow from investing activities:
Capital expenditures – excluding equipment leased to others	(543)	(369)
Expenditures for equipment leased to others	(217)	(169)
Proceeds from disposals of leased assets and property, plant and equipment	302	353
Additions to finance receivables	(2,008)	(1,757)
Collections of finance receivables	1,962	1,956
Proceeds from sale of finance receivables	33	2
Investments and acquisitions (net of cash acquired)	(8)	(103)
Proceeds from sale of businesses and investments (net of cash sold)	21	—
Proceeds from sale of available-for-sale securities	66	45
Investments in available-for-sale securities	(72)	(46)
Other – net	30	33
Net cash provided by (used for) investing activities	(434)	(55)

Cash flow from financing activities:
Dividends paid	(281)	(262)
Common stock issued, including treasury shares reissued	58	26
Excess tax benefit from stock-based compensation	123	13
Acquisitions of noncontrolling interests	—	(26)
Proceeds from debt issued (original maturities greater than three months):
– Machinery and Power Systems	44	54
– Financial Products	1,261	1,264
Payments on debt (original maturities greater than three months):
– Machinery and Power Systems	(151)	(607)
– Financial Products	(1,624)	(2,729)
Short-term borrowings – net (original maturities three months or less)	1,460	331
Net cash provided by (used for) financing activities	890	(1,936)
Effect of exchange rate changes on cash	56	(54)
Increase (decrease) in cash and short-term investments	1,277	(1,329)

Cash and short-term investments at beginning of period	3,592	4,867
Cash and short-term investments at end of period	$4,869	$3,538

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. A. Basis of Presentation

In the opinion of management, the accompanying financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated results of operations for the three month periods ended March 31, 2011 and 2010, (b) the consolidated financial position at March 31, 2011 and December 31, 2010, (c) the consolidated changes in stockholders’ equity for the three month periods ended March 31, 2011 and 2010, and (d) the consolidated statement of cash flow for the three month periods ended March 31, 2011 and 2010. 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 (SEC). Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation.

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, 2010 (2010 Form 10-K).

The company revised previously reported cash flows from operating and investing activities for the three month period ended March 31, 2010 to adjust for the impact of accrued but unpaid capital expenditures. Cash provided by operating activities increased from the amount previously reported by $165 million for the three month period ended March 31, 2010, and cash flow from investing activities decreased by the same amount. Management has concluded that the impact was not material to the quarterly period.

The December 31, 2010 financial position data included herein is derived from the audited consolidated financial statements included in the 2010 Form 10-K but does not include all disclosures required by U.S. GAAP.

B. Nature of Operations

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

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

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

As discussed in Note 14 – Segment Information, during the first quarter of 2011, we revised our reportable segments in line with the changes to our organizational structure that were announced during 2010. The first quarter 2010 financial information has been retrospectively adjusted to conform to the 2011 presentation.

C. Accumulated Other Comprehensive Income (Loss)

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


(Millions of dollars)	March 31, 2011	March 31, 2010
Foreign currency translation	$768	$438
Pension and other postretirement benefits	(4,600)	(4,364)
Derivative financial instruments	55	11
Available-for-sale securities	53	29
Total accumulated other comprehensive income (loss)	$(3,724)	$(3,886)

2. New Accounting Guidance

Fair value measurements - In January 2010, the FASB issued accounting guidance that requires the gross presentation of activity within the Level 3 fair value measurement roll forward and details of transfers in and out of Level 1 and 2 fair value measurements. It also clarifies existing disclosure requirements regarding the level of disaggregation of fair value

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measurements and disclosures on inputs. We adopted this new accounting guidance for the quarterly period ended March 31, 2010. The adoption of this guidance did not have a material impact on our financial statements. See Note 17 for additional information.

Accounting for transfers of financial assets - In June 2009, the FASB issued accounting guidance on accounting for transfers of financial assets. This guidance amends previous guidance and includes: the elimination of the qualifying special-purpose entity (QSPE) concept; a new participating interest definition that must be met for transfers of portions of financial assets to be eligible for sale accounting; clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale; and a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor. Additionally, the guidance requires extensive new disclosures regarding an entity’s involvement in a transfer of financial assets. Finally, existing QSPEs (prior to the effective date of this guidance) must be evaluated for consolidation by reporting entities in accordance with the applicable consolidation guidance upon the elimination of this concept. We adopted this new guidance on January 1, 2010. The adoption of this guidance did not have a material impact on our financial statements. See Note 15 for additional information.

Consolidation of variable interest entities - In June 2009, the FASB issued accounting guidance on the consolidation of VIEs. This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a VIE and by changing when it is necessary to reassess who should consolidate a VIE. We adopted this new guidance on January 1, 2010. The adoption of this guidance resulted in the consolidation of QSPEs related to Cat Financial’s asset-backed securitization program that were previously not recorded on our consolidated financial statements. The restricted assets (Receivables-finance, Long-term receivables-finance, Prepaid expenses and other current assets, and Other assets) of the consolidated QSPEs totaled $324 million at January 1, 2010. The liabilities (Accrued expenses, Long-term debt due within one year-Financial Products and Long-term debt due after one year-Financial Products) of the consolidated QSPEs totaled $327 million at January 1, 2010. See Note 15 for additional information.

Disclosures about the credit quality of financing receivables and the allowance for credit losses - In July 2010, the FASB issued accounting guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses. The guidance expands disclosures for the allowance for credit losses and financing receivables by requiring entities to disclose information at disaggregated levels. It also requires disclosure of credit quality indicators, past due information and modifications of financing receivables. Also, in April 2011, the FASB issued guidance clarifying when a restructuring of a receivable should be considered a troubled debt restructuring by providing additional guidance for determining whether the creditor has granted a concession and whether the debtor is experiencing financial difficulties. For end of period balances, the new disclosures were effective December 31, 2010 and did not have a material impact on our financial statements. For activity during a reporting period, the disclosures were effective January 1, 2011 and did not have a material impact on our financial statements. The disclosures related to modifications of financing receivables, as well as the guidance clarifying when a restructured receivable should be considered a troubled debt restructuring will be effective July 1, 2011 and we do not expect the adoption to have a material impact on our financial statements. See Note 15 for additional information.

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-settled stock appreciation rights (SARs), restricted stock units (RSUs) and stock options. We recognized pretax stock-based compensation cost in the amount of $44 million and $42 million in the first quarter of 2011 and 2010, respectively.

The following table illustrates the type and fair value of the stock-based compensation awards granted during the three month periods ended March 31, 2011 and 2010, respectively:

	2011		2010
	# Granted	Fair Value Per Award	# Granted	Fair Value Per Award
SARs	2,722,689	$36.73	7,125,210	$22.31
RSUs	1,082,032	97.51	1,711,771	53.35
Stock options	237,906	36.73	431,271	22.31

The stock price on the date of grant was $102.13 and $57.85 for 2011 and 2010, respectively.

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The following table provides the assumptions used in determining the fair value of the stock-based awards for the three month periods ended March 31, 2011 and 2010, respectively:

	Grant Year
	2011	2010
Weighted-average dividend yield	2.22%	2.32%
Weighted-average volatility	32.7%	36.4%
Range of volatilities	20.9-45.4%	35.2-51.8%
Range of risk-free interest rates	0.25-3.51%	0.32-3.61%
Weighted-average expected lives	8 years	7 years

As of March 31, 2011, the total remaining unrecognized compensation cost related to nonvested stock-based compensation awards was $307 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 2.5 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. In addition, the amount of Caterpillar stock that can be repurchased under our stock repurchase program is impacted by movements in the price of the stock. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate, commodity price and Caterpillar stock price exposures. Our policy specifies that derivatives are not to be used for speculative purposes. Derivatives that we use are primarily foreign currency forward and option contracts, interest rate swaps, commodity forward and option contracts, and stock repurchase 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) 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 is classified within the same category as the item being hedged on the Consolidated Statement of Cash Flow. Cash flow from undesignated derivative financial instruments is included in the investing category on the Consolidated Statement of Cash Flow.

We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Consolidated Statement of Financial Position and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

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

Foreign Currency Exchange Rate Risk

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

Our Machinery and Power Systems operations purchase, manufacture and sell products in many locations around the world. As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis.

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We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to five years.

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

As of March 31, 2011, $57 million of deferred net gains, net of tax, included in equity (Accumulated other comprehensive income (loss) 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. Our policy allows the use of foreign currency forward and option contracts to offset the risk of currency mismatch between our receivables and debt. All such foreign currency forward and option contracts are undesignated.

Interest Rate Risk

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

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

Financial Products operations have 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 March 31, 2011, $8 million of deferred net losses, net of tax, included in equity (Accumulated other comprehensive income (loss) in the Consolidated Statement of Financial Position), related to Financial Products floating-to-fixed interest rate swaps, are expected to be reclassified to current earnings (Interest expense of Financial Products in the Consolidated Statement of Results of Operations) over the next twelve months. The actual amount recorded in Interest expense of Financial Products will vary based on interest rates at the time the hedged transactions impact earnings.

We have, at certain times, liquidated fixed-to-floating and floating-to-fixed interest rate swaps at both Machinery and Power Systems and Financial Products. The gains or losses associated with these swaps at the time of liquidation are amortized into earnings over the original term of the underlying hedged item.

In anticipation of issuing debt for the planned acquisition of Bucyrus International, Inc., we entered into interest rate swaps to manage our exposure to interest rate changes. For the three months ended March 31, 2011, we recognized a net loss of $25 million included in Other income (expense) in the Consolidated Statement of Results of Operations. These contracts were not designated as hedging instruments, and therefore, did not receive hedge accounting treatment.

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Commodity Price Risk

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

Our Machinery and Power Systems operations purchase aluminum, copper, lead, nickel and rolled coil steel 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 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)
		Asset (Liability) Fair Value
	Statement of Financial Position Location	March 31, 2011	December 31, 2010
Designated derivatives
Foreign exchange contracts
Machinery and Power Systems	Receivables – trade and other	$74	$65
Machinery and Power Systems	Long-term receivables – trade and other	40	52
Machinery and Power Systems	Accrued expenses	(49)	(66)
Machinery and Power Systems	Other liabilities	(8)	(1)
Interest rate contracts
Machinery and Power Systems	Receivables – trade and other	—	1
Financial Products	Receivables – trade and other	14	14
Financial Products	Long-term receivables – trade and other	156	197
Financial Products	Accrued expenses	(21)	(18)
		$206	$244
Undesignated derivatives
Foreign exchange contracts
Machinery and Power Systems	Receivables – trade and other	$131	$120
Machinery and Power Systems	Accrued expenses	(55)	(46)
Machinery and Power Systems	Other liabilities	(38)	(58)
Financial Products	Receivables – trade and other	8	6
Financial Products	Accrued expenses	(5)	(9)
Interest rate contracts
Machinery and Power Systems	Accrued expenses	(40)	(6)
Financial Products	Accrued expenses	—	(1)
Commodity contracts
Machinery and Power Systems	Receivables – trade and other	17	17
		$18	$23

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

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Fair Value Hedges
(Millions of dollars)
		Three Months Ended March 31, 2011
	Classification	Gains (Losses) on Derivatives	Gains (Losses) on Borrowings
Interest rate contracts
Machinery and Power Systems	Other income (expense)	$(1)	$1
Financial Products	Other income (expense)	(53)	52
		$(54)	$53

		Three Months Ended March 31, 2010
	Classification	Gains (Losses) on Derivatives	Gains (Losses) on Borrowings
Interest rate contracts
Machinery and Power Systems	Other income (expense)	$1	$(1)
Financial Products	Other income (expense)	53	(51)
		$54	$(52)

Cash Flow Hedges
(Millions of dollars)
	Three Months Ended March 31, 2011
		Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)	Classification of Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI (Effective Portion)	Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$27	Other income (expense)	$18	$—
Interest rate contracts
Financial Products	—	Interest expense of Financial Products	(6)	11
	$27		$12	$1

	Three Months Ended March 31, 2010
		Recognized in Earnings
	Amount of Gains (Losses) Recognized in AOCI (Effective Portion)	Classification of Gains (Losses)	Amount of Gains (Losses) Reclassified from AOCI (Effective Portion)	Recognized in Earnings (Ineffective Portion)
Foreign exchange contracts
Machinery and Power Systems	$(99)	Other income (expense)	$(8)	$1
Interest rate contracts
Financial Products	(6)	Interest expense of Financial Products	(17)	11
	$(105)		$(25)	$2

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

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

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(Millions of dollars)
	Classification of Gains (Losses)	Three Months Ended March 31, 2011
Foreign exchange contracts
Machinery and Power Systems	Other income (expense)	$32
Interest rate contracts
Machinery and Power Systems	Other income (expense)	(25)
Commodity contracts
Machinery and Power Systems	Other income (expense)	4
		$11

	Classification of Gains (Losses)	Three Months Ended March 31, 2010
Foreign exchange contracts
Machinery and Power Systems	Other income (expense)	$11
Financial Products	Other income (expense)	23
Interest rate contracts
Machinery and Power Systems	Other income (expense)	(2)
Financial Products	Other income (expense)	1
Commodity contracts
Machinery and Power Systems	Other income (expense)	4
		$37

Stock Repurchase Risk

Payments for stock repurchase derivatives are accounted for as a reduction in stockholders’ equity. In February 2007, the Board of Directors authorized a $7.5 billion stock repurchase program, expiring on December 31, 2011. The amount of Caterpillar stock that can be repurchased under the authorization is impacted by movements in the price of the stock. In August 2007, the Board of Directors authorized the use of derivative contracts to reduce stock repurchase price volatility. There were no stock repurchase derivatives outstanding for the three months ended March 31, 2011 or 2010.

5. Inventories

Inventories (principally using the last-in, first-out (LIFO) method) are comprised of the following:

(Millions of dollars)	March 31, 2011	December 31, 2010
Raw materials	$3,066	$2,766
Work-in-process	1,740	1,483
Finished goods	5,628	5,098
Supplies	242	240
Total inventories	$10,676	$9,587

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 March 31,
	2011	2010
Sales	$198	$162
Cost of sales	161	120
Gross profit	$37	$42

Profit (loss)	$(17)	$(2)

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Financial Position of unconsolidated affiliated companies: (Millions of dollars)	March 31, 2011	December 31, 2010
Assets:
Current assets	$378	$414
Property, plant and equipment — net	178	196
Other assets	36	39
	592	649
Liabilities:
Current liabilities	255	274
Long-term debt due after one year	68	72
Other liabilities	33	40
	356	386
Equity	$236	$263

Caterpillar’s investments in unconsolidated affiliated companies:
(Millions of dollars)
Investments in equity method companies	$120	$135
Plus: Investments in cost method companies	20	29
Total investments in unconsolidated affiliated companies	$140	$164

7. Intangible Assets and Goodwill

A. Intangible assets

Intangible assets are comprised of the following:

		March 31, 2011
(Millions of dollars)	Weighted Amortizable Life (Years)	Gross Carrying Amount	Accumulated Amortization	Net
Customer relationships	17	$632	$(119)	$513
Intellectual property	9	312	(170)	142
Other	13	198	(77)	121
Total finite-lived intangible assets	14	1,142	(366)	776
Indefinite-lived intangible assets - In-process research & development		18	—	18
Total intangible assets		$1,160	$(366)	$794

		December 31, 2010
(Millions of dollars)	Weighted Amortizable Life (Years)	Gross Carrying Amount	Accumulated Amortization	Net
Customer relationships	17	$630	$(108)	$522
Intellectual property	9	306	(166)	140
Other	13	197	(72)	125
Total finite-lived intangible assets	14	1,133	(346)	787
Indefinite-lived intangible assets - In-process research & development		18	—	18
Total intangible assets		$1,151	$(346)	$805

Amortization expense for the three months ended March 31, 2011 and March 31, 2010 was $22 million and $15 million, respectively. Amortization expense related to intangible assets is expected to be:

(Millions of dollars)
2011	2012	2013	2014	2015	Thereafter
$86	$82	$75	$72	$66	$435

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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 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 greater than the fair value, there is an indication that an impairment may exist and the second step is required. Additionally, if the carrying amount of a reporting unit is zero or negative, the second step of the goodwill impairment test is also required if an analysis of qualitative factors indicates it more likely than not that a goodwill impairment exists. In step two, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment loss. No goodwill was impaired during the first quarter of 2011 or 2010.

As discussed in Note 14 – Segment Information, during the first quarter of 2011, we revised our reportable segments in line with the changes to our organizational structure that were announced during 2010. Our reporting units did not change as a result of the changes to our reportable segments.

The changes in the carrying amount of the goodwill by reportable segment for the first quarter of 2011 were as follows:

(Millions of dollars)
	Construction Industries	Resource Industries	Power Systems	Other	Consolidated Total
Balance at December 31, 2010	$357	$51	$2,077	$129	$2,614
Business divestitures1	—	—	—	(12)	(12)
Other adjustments2	5	1	—	—	6
Balance at March 31, 2011	$362	$52	$2,077	$117	$2,608

1 Sale of Carter Machinery. See Note 18 for additional details.
2 Other adjustments are comprised primarily of foreign currency translation.

8. Available-For-Sale Securities

We have investments in certain debt and equity securities, primarily at Cat Insurance, that have been classified as available-for-sale and recorded at fair value based upon quoted market prices. These fair values are primarily included in Other assets in the Consolidated Statement of Financial Position. Unrealized gains and losses arising from the revaluation of available-for-sale securities are included, net of applicable deferred income taxes, in equity (Accumulated other comprehensive income (loss) in the Consolidated Statement of Financial Position). Realized gains and losses on sales of investments are generally determined using the FIFO (first-in, first-out) method for debt instruments and the specific identification method for equity securities. Realized gains and losses are included in Other income (expense) in the Consolidated Statement of Results of Operations.

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	March 31, 2011			December 31, 2010
		Unrealized			Unrealized
		Pretax Net			Pretax Net
(Millions of dollars)	Cost Basis	Gains (Losses)	Fair Value	Cost Basis	Gains (Losses)	Fair Value
Government debt
U.S. treasury bonds	$13	$—	$13	$12	$—	$12
Other U.S. and non-U.S. government bonds	80	1	81	76	1	77

Corporate bonds
Corporate bonds	491	29	520	481	30	511
Asset-backed securities	129	(1)	128	136	—	136

Mortgage-backed debt securities
U.S. governmental agency mortgage-backed securities	259	14	273	258	15	273
Residential mortgage-backed securities	40	(3)	37	43	(3)	40
Commercial mortgage-backed securities	161	5	166	164	4	168

Equity securities
Large capitalization value	107	28	135	100	22	122
Smaller company growth	23	12	35	23	8	31
Total	$1,303	$85	$1,388	$1,293	$77	$1,370

During the three months ended March 31, 2011 and 2010, there were no charges for other-than-temporary declines in the market value of securities.

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

	March 31, 2011
	Less than 12 months 1		12 months or more 1		Total
(Millions of dollars)	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Corporate bonds
Asset-backed securities	$19	$—	$19	$4	$38	$4

Mortgage-backed debt securities
Residential mortgage-backed securities	2	—	23	4	25	4
Commercial mortgage-backed securities	3	—	9	1	12	1

Equity securities
Large capitalization value	15	1	11	1	26	2
Total	$39	$1	$62	$10	$101	$11

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

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

	December 31, 2010
	Less than 12 months 1		12 months or more 1		Total
(Millions of dollars)	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Corporate bonds
Asset-backed securities	$19	$—	$19	$4	$38	$4

Mortgage-backed debt securities
Residential mortgage-backed securities	2	—	25	4	27	4
Commercial mortgage-backed securities	3	—	14	1	17	1

Equity securities
Large capitalization value	14	1	12	2	26	3
Total	$38	$1	$70	$11	$108	$12

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

Corporate Bonds. The unrealized losses on our investments in corporate bonds and asset-backed securities relate primarily to changes in interest rates and credit-related yield spreads since time of purchase. We do not intend to sell the investments and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of March 31, 2011.

Mortgage-Backed Debt Securities. The unrealized losses on our investments in mortgage-backed securities and mortgage-related asset-backed securities relate primarily to the continuation of elevated housing delinquencies and default rates, risk aversion and credit-related yield spreads since time of purchase. We do not intend to sell the investments and it is not likely that we will be required to sell these investments before recovery of their amortized cost basis. We do not consider these investments to be other-than-temporarily impaired as of March 31, 2011.

Equity Securities. Cat Insurance maintains a well-diversified equity portfolio consisting of two specific mandates: large capitalization value stocks and smaller company growth stocks. U.S. equity valuations were generally higher during the three months ended March 31, 2011 as the U.S. economy emerges from recession. In each case where unrealized losses exist, the respective company’s management is taking corrective action in order to increase shareholder value. We do not consider these investments to be other-than-temporarily impaired as of March 31, 2011.

The fair value of the available-for-sale debt securities at March 31, 2011, 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.

(Millions of dollars)		Fair Value
Due in one year or less		$72
Due after one year through five years		$444
Due after five years through ten years		$223
Due after ten years		$479

Proceeds from sale of available-for-sale securities during the three months ended March 31, 2011 and March 31, 2010 were $66 million and $45 million, respectively. Gross gains of $1 million and gross losses of $1 million were included in current earnings for the three months ended March 31, 2011. There were no gross gains or gross losses for the three months ended March 31, 2010.

9. Postretirement Benefits

A. Pension and postretirement benefit costs

As announced in August 2010, on January 1, 2011, our retirement benefits for U.S. support and management employees began transitioning from defined benefit pension plans to defined contribution plans. The transition date was determined for each employee based upon age and years of service or proximity to retirement. Pension benefit accruals were frozen for

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certain employees on December 31, 2010, and will freeze for remaining employees on December 31, 2019. As of these dates employees will move to the new retirement benefit that will provide a frozen pension benefit and a 401(k) plan that will include a matching contribution and a new annual employer contribution. The plan change required a re-measurement as of August 31, 2010, which resulted in an increase in our Liability for postretirement benefits of $1.32 billion and a decrease in Accumulated other comprehensive income (loss) of $831 million net of tax. The increase in the liability was due to a decline in the discount rate and lower than expected asset returns at the re-measurement date. Curtailment expense of $28 million was also recognized for the three and nine months ended September 30, 2010 as a result of the plan change.

In March 2010, the Patient Protection and Affordable Care Act (the PPACA) and the Health Care and Education Reconciliation Act of 2010 (H.R. 4872) which amends certain provisions of the PPACA were signed into law. As discussed in Note 13, the Medicare Part D retiree drug subsidies effectively become taxable beginning in 2013.

(Millions of dollars)	U.S. Pension Benefits		Non-U.S. Pension Benefits		Other Postretirement Benefits
	March 31,		March 31,		March 31,
	2011	2010	2011	2010	2011	2010
For the three months ended:
Components of net periodic benefit cost:
Service cost	$39	$49	$27	$23	$21	$16
Interest cost	162	166	43	42	63	61
Expected return on plan assets	(199)	(191)	(50)	(49)	(18)	(23)
Amortization of:
Transition obligation (asset)	—	—	—	—	1	1
Prior service cost (credit) 1	5	7	1	—	(14)	(14)
Net actuarial loss (gain)	113	88	18	17	27	8
Net periodic benefit cost	120	119	39	33	80	49
Curtailments, settlements and special termination benefits 2	—	—	—	4	—	—
Total cost included in operating profit	$120	$119	$39	$37	$80	$49

Weighted-average assumptions used to determine net cost:
Discount rate	5.1%	5.7%	4.6%	4.8%	5.0%	5.6%
Expected return on plan assets	8.5%	8.5%	7.1%	7.0%	8.5%	8.5%
Rate of compensation increase	4.5%	4.5%	4.2%	4.2%	4.4%	4.4%

1 Prior service costs for both pension and other postretirement benefits are generally amortized using the straight-line method over the average remaining service period to the full retirement eligibility date of employees expected to receive benefits from the plan amendment. For other postretirement benefit plans in which all or almost all of the plan’s participants are fully eligible for benefits under the plan, prior service costs are amortized using the straight-line method over the remaining life expectancy of those participants.

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

We made $131 million of contributions to our U.S. and non-U.S. pension plans during the three months ended March 31, 2011. We currently anticipate full-year 2011 contributions of approximately $1 billion, most of which are voluntary contributions. We made $248 million of contributions to our U.S. and non-U.S. pension plans during the three months ended March 31, 2010.

B. Defined contribution benefit costs

From June 2009 to October 2010, we funded our employer matching contribution for certain U.S. defined contribution plans in Caterpillar stock, held as treasury stock. For the three months ended March 31, 2010, we made $29 million (0.5 million shares) of matching contributions in Caterpillar stock.

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

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Total company costs related to U.S. and non-U.S. defined contribution plans were as follows:

	Three Months Ended March 31,
(Millions of dollars)	2011	2010
U.S. Plans