form10q_1q08.htm
 

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, 2008
 
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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition 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
     
                 
 
Non-accelerated filer
     
Smaller Reporting Company
     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [   ] No [ X ]
 
At March 31, 2008, 614,769,392 shares of common stock of the Registrant were outstanding.

Page 1



Table of Contents
 
 
 
 
Financial Statements 
 
Management’s Discussion and Analysis
 
Quantitative and Qualitative Disclosures About Market Risk
 
Controls and Procedures 
       
 
 
Legal Proceedings
 
Risk Factors  
 
Unregistered Sales of Equity Securities and Use of Proceeds 
 
Item 3.
Defaults Upon Senior Securities *
 
Item 4.
Submission of Matters to a Vote of Security Holders *
 
Item 5.
Other Information *
 
Exhibits 
       
 * Item omitted because no answer is called for or item is not applicable.

Page 2


Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
Caterpillar Inc.
Consolidated Statement of Results of Operations
(Unaudited)
(Dollars in millions except per share data)
 
Three Months Ended
 
March 31,
 
2008
 
2007
Sales and revenues:
             
 
Sales of Machinery and Engines
$
10,979
   
$
9,321
 
 
Revenues of Financial Products
 
817
     
695
 
 
Total sales and revenues
 
11,796
     
10,016
 
                 
Operating costs:
             
 
Cost of goods sold 
 
8,609
     
7,136
 
 
Selling, general and administrative expenses
 
959
     
890
 
 
Research and development expenses
 
369
     
340
 
 
Interest expense of Financial Products
 
284
     
271
 
 
Other operating expenses 
 
282
     
239
 
 
Total operating costs
 
10,503
     
8,876
 
                 
Operating profit                                                                                                  
 
1,293
     
1,140
 
                 
 
Interest expense excluding Financial Products
 
74
     
79
 
 
Other income (expense)
 
112
     
111
 
                 
Consolidated profit before taxes
 
1,331
     
1,172
 
                 
 
Provision for income taxes 
 
420
     
375
 
 
Profit of consolidated companies
 
911
     
797
 
                 
 
Equity in profit (loss) of unconsolidated affiliated companies 
 
11
     
19
 
               
Profit
$
922
   
$
816
 
                 
               
Profit per common share
$
1.49
   
$
1.27
 
                 
Profit per common share – diluted 1
$
1.45
   
$
1.23
 
                 
Weighted-average common shares outstanding (millions)
             
 
- Basic
 
617.5
     
643.9
 
 
- Diluted 1 
 
637.9
     
665.2
 
               
Cash dividends declared per common share
$
   
$
 
                 
1
Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
See accompanying notes to Consolidated Financial Statements.
 
Page 3

 
Caterpillar Inc.
Consolidated Statement of Financial Position
(Unaudited)
(Dollars in millions)
 
March 31,
2008
 
December 31,
2007
Assets
             
 
Current assets:
             
   
Cash and short-term investments
$
777
   
$
1,122
 
   
Receivables – trade and other 
 
9,021
     
8,249
 
   
Receivables – finance
 
7,810
     
7,503
 
   
Deferred and refundable income taxes
 
671
     
816
 
   
Prepaid expenses and other current assets 
 
546
     
583
 
   
Inventories 
 
8,082
     
7,204
 
 
Total current assets
 
26,907
     
25,477
 
                 
 
Property, plant and equipment – net 
 
10,050
     
9,997
 
 
Long-term receivables – trade and other 
 
565
     
685
 
 
Long-term receivables – finance 
 
14,134
     
13,462
 
 
Investments in unconsolidated affiliated companies
 
563
     
598
 
 
Noncurrent deferred and refundable income taxes
 
1,582
     
1,553
 
 
Intangible assets 
 
454
     
475
 
 
Goodwill  
 
1,963
     
1,963
 
 
Other assets 
 
1,986
     
1,922
 
Total assets 
$
58,204
   
$
56,132
 
               
Liabilities
             
 
Current liabilities:
             
   
Short-term borrowings:
             
     
Machinery and Engines
$
331
   
$
187
 
     
Financial Products 
 
6,321
     
5,281
 
   
Accounts payable 
 
5,156
     
4,723
 
   
Accrued expenses
 
3,378
     
3,178
 
   
Accrued wages, salaries and employee benefits
 
799
     
1,126
 
   
Customer advances
 
1,651
     
1,442
 
   
Dividends payable 
 
     
225
 
   
Other current liabilities
 
1,181
     
951
 
   
Long-term debt due within one year:
             
     
Machinery and Engines  
 
173
     
180
 
     
Financial Products 
 
5,326
     
4,952
 
 
Total current liabilities  
 
24,316
     
22,245
 
                     
 
Long-term debt due after one year:
             
   
Machinery and Engines
 
3,640
     
3,639
 
   
Financial Products 
 
14,014
     
14,190
 
 
Liability for postemployment benefits
 
4,954
     
5,059
 
 
Other liabilities 
 
2,062
     
2,116
 
Total liabilities
 
48,986
     
47,249
 
Commitments and contingencies (Notes 10 and 12)
             
Stockholders' equity
             
 
Common stock of $1.00 par value:
             
   
Authorized shares:  900,000,000
Issued shares:  (3/31/08 and 12/31/07 – 814,894,624) at paid-in amount
 
2,754
     
2,744
 
 
Treasury stock (3/31/08 – 200,125,232; 12/31/07 – 190,908,490) at cost
 
(10,115
)
   
(9,451
)
 
Profit employed in the business
 
18,289
     
17,398
 
 
Accumulated other comprehensive income (loss)
 
(1,710
)
   
(1,808
)
Total stockholders' equity 
 
9,218
     
8,883
 
Total liabilities and stockholders' equity 
$
58,204
   
$
56,132
 
 
See accompanying notes to Consolidated Financial Statements.
 
 
Page 4

 
Caterpillar Inc.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
(Dollars in millions)
             

Accumulated other comprehensive income (loss)
   
Three Months Ended March 31, 2007
Common stock
 
Treasury stock
 
Profit employed in the business
 
Foreign currency translation
 
Pension & other post- retirement benefits (1)
 
Derivative financial instruments and other
 
Available-for-sale securities
 
Total
Balance at December 31, 2006
$
2,465
 
 
$
(7,352
)
 
$
14,593
   
$
471
   
$
(3,376
)
 
$
48
   
$
10
   
$
6,859
 
Adjustment to adopt FIN 48
 
 
 
 
     
141
     
     
     
     
     
141
 
Balance at January 1, 2007
 
2,465
 
   
(7,352
)
   
14,734
     
471
     
(3,376
)
   
48
     
10
     
7,000
 
Profit
 
 
   
     
816
     
     
     
     
     
816
 
Foreign currency translation
 
 
   
     
     
16
     
     
     
     
16
 
Pension and other postretirement benefits
   
 
                                                       
 
Amortization of actuarial (gain) loss, net of tax of $31
 
     
     
     
     
57
     
     
     
57
 
 
Amortization of prior service cost, net of tax of $2
 
     
     
     
     
5
     
     
     
5
 
Derivative financial instruments
                                                             
 
Gains (losses) deferred, net of tax of $1
 
     
     
     
     
     
2
     
     
2
 
 
(Gains) losses reclassified to earnings, net of tax of $12
 
     
     
     
     
     
(22
)
   
     
(22
)
Available-for-sale securities
                                                             
 
Gains (losses) deferred, net of tax of $2
 
     
     
     
     
     
     
4
     
4
 
 
(Gains) losses reclassified to earnings, net of tax of $1
 
     
     
     
     
     
     
(2
)
   
(2
)
   
Comprehensive income (loss)
                                                         
876
 
Common shares issued from treasury stock for stock-based compensation:  2,645,723
 
(1
)
   
74
     
     
     
     
     
     
73
 
Stock-based compensation expense
 
27
     
     
     
     
     
     
     
27
 
Tax benefits from stock-based compensation
 
27
     
     
     
     
     
     
     
27
 
Shares repurchased:  8,058,000
 
     
(511
)
   
     
     
     
     
     
(511
)
Balance at March 31, 2007
$
2,518
   
$
(7,789
)
 
$
15,550
   
$
487
   
$
(3,314
)
 
$
28
   
$
12
   
$
7,492
 
                                                                 
                                                               
Three Months Ended March 31, 2008
                                                             
Balance at December 31, 2007
$
2,744
   
$
(9,451
)
 
$
17,398
   
$
749
   
$
(2,594
)
 
$
19
   
$
18
   
$
8,883
 
Adjustment to adopt measurement date provisions of FAS 158, net of tax (2)
 
     
     
(33
)
   
     
17
     
     
     
(16
)
Balance at January 1, 2008
 
2,744
     
(9,451
)
   
17,365
     
749
     
(2,577
)
   
19
     
18
     
8,867
 
Profit
 
     
     
922
     
     
     
     
     
922
 
Foreign currency translation
 
     
     
     
101
     
     
     
     
101
 
Pension and other postretirement benefits
                                                             
 
Amortization of actuarial (gain) loss, net of tax of $21
 
     
     
     
     
37
     
     
     
37
 
Derivative financial instruments
                                                             
 
Gains (losses) deferred, net of tax of $5
 
     
     
     
     
     
(8
)
   
     
(8
)
 
(Gains) losses reclassified to earnings, net of tax of $13
 
     
     
     
     
     
(25
)
   
     
(25
)
Available-for-sale securities
                                                             
 
Gains (losses) deferred, net of tax of $12
 
     
     
     
     
     
     
(23
)
   
(23
)
 
(Gains) losses reclassified to earnings, net of tax of $0
 
     
     
     
     
     
     
(1
)
   
(1
)
   
Comprehensive income (loss)
                                                         
1,003
 
Dividends declared
 
     
     
2
     
     
     
     
     
2
 
Common shares issued from treasury stock for stock-based compensation:  1,043,284
 
(1
)
   
28
     
     
     
     
     
     
27
 
Stock-based compensation expense
 
37
     
     
     
     
     
     
     
37
 
Tax benefits from stock-based compensation
 
12
     
     
     
     
     
     
     
12
 
Shares repurchased:  10,260,026
 
     
(692
)
   
     
     
     
     
     
(692
)
Stock repurchase derivative contracts
 
(38
)
   
     
     
     
     
     
     
(38
)
Balance at March 31, 2008
$
2,754
   
$
(10,115
)
 
$
18,289
   
$
850
   
$
(2,540
)
 
$
(14
)
 
$
(6
)
 
$
9,218
 
   
1
Pension and other postretirement benefits includes net adjustments for unconsolidated companies of $1 million and $0 million for the three months ended March 31, 2008 and 2007, respectively.  The ending balances were $53 million and $43 million at March 31, 2008 and 2007, respectively.
2
Adjustments to profit employed in the business and pension and other post employment benefits were net of tax of ($17) million and $9 million, respectively.
See accompanying notes to Consolidated Financial Statements.
 
Page 5

 
Caterpillar Inc.
Consolidated Statement of Cash Flow
(Unaudited)
(Millions of dollars)
   
Three Months Ended
   
March 31,
   
2008
 
2007
Cash flow from operating activities:
             
 
Profit                                                                                                   
$
922
   
$
816
 
 
Adjustments for non-cash items:
             
   
Depreciation and amortization  
 
472
     
412
 
   
Other
 
128
     
1
 
 
Changes in assets and liabilities:
             
   
Receivables – trade and other  
 
(455
)
   
739
 
   
Inventories  
 
(864
)
   
(734
)
   
Accounts payable and accrued expenses 
 
463
     
(141
)
   
Customer advances  
 
165
     
165
 
   
Other assets – net    
 
78
     
(71
)
   
Other liabilities – net  
 
(203
)
   
162
 
Net cash provided by (used for) operating activities
 
706
     
1,349
 
                 
Cash flow from investing activities:
             
 
Capital expenditures – excluding equipment leased to others 
 
(343
)
   
(252
)
 
Expenditures for equipment leased to others
 
(302
)
   
(252
)
 
Proceeds from disposals of property, plant and equipment  
 
122
     
106
 
 
Additions to finance receivables      
 
(3,062
)
   
(2,553
)
 
Collections of finance receivables 
 
2,301
     
2,359
 
 
Proceeds from sales of finance receivables
 
46
     
40
 
 
Investments and acquisitions (net of cash acquired)
 
(19
)
   
(153
)
 
Proceeds from sale of available-for-sale securities 
 
104
     
62
 
 
Investments in available-for-sale securities 
 
(160
)
   
(124
)
 
Other – net  
 
192
     
140
 
Net cash provided by (used for) investing activities 
 
(1,121
)
   
(627
)
                 
Cash flow from financing activities:
             
 
Dividends paid  
 
(223
)
   
(193
)
 
Common stock issued, including treasury shares reissued
 
27
     
73
 
 
Payment for stock repurchase derivative contracts
 
(38
)
   
 
 
Treasury shares purchased   
 
(692
)
   
(511
)
 
Excess tax benefit from stock-based compensation  
 
13
     
26
 
 
Proceeds from debt issued (original maturities greater than three months):
             
 
 – Machinery and Engines 
 
62
     
26
 
 
 – Financial Products
 
3,858
     
1,849
 
 
Payments on debt (original maturities greater than three months):
             
 
 – Machinery and Engines
 
(98
)
   
(28
)
 
 – Financial Products
 
(3,422
)
   
(3,000
)
 
Short-term borrowings – net (original maturities three months or less)
 
554
     
1,107
 
Net cash provided by (used for) financing activities
 
41
     
(651
)
Effect of exchange rate changes on cash
 
29
     
6
 
Increase (decrease) in cash and short-term investments
 
(345
)
   
77
 
               
Cash and short-term investments at beginning of period 
 
1,122
     
530
 
Cash and short-term investments at end of period
$
777
   
$
607
 
               
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.
 
Page 6

 

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, 2008 and 2007, (b) the consolidated financial position at March 31, 2008 and December 31, 2007, (c) the consolidated changes in stockholders' equity for the three month periods ended March 31, 2008 and 2007, and (d) the consolidated statement of cash flow for the three month periods ended March 31, 2008 and 2007.  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, 2007 (2007 Form 10-K).
 
Comprehensive income is comprised of profit, as well as adjustments for foreign currency translation, derivative instruments designated as cash flow hedges, available-for-sale securities and pension and other postretirement benefits.  Total comprehensive income for the three months ended March 31, 2008 and 2007 was $1,003 million and $876 million, respectively.
 
The December 31, 2007 financial position data included herein is derived from the audited consolidated financial statements included in the 2007 Form 10-K.

 
B.  Nature of Operations
 
We operate in three principal lines of business:
 
 
(1)
Machinery A principal line of business which includes the design, manufacture, marketing and sales of construction, mining and forestry machinery—track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, skid steer loaders and related parts. Also includes logistics services for other companies and the design, manufacture, remanufacture, maintenance and services of rail-related products.
 
 
(2)
Engines A principal line of business including the design, manufacture, marketing and sales of engines for Caterpillar machinery; electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts.  Also includes remanufacturing of Caterpillar engines and a variety of Caterpillar machine and engine components and remanufacturing services for other companies.  Reciprocating engines meet power needs ranging from 5 to 21,500 horsepower (4 to over 16 000 kilowatts).  Turbines range from 1,600 to 30,000 horsepower (1 200 to 22 000 kilowatts).
 
 
(3)
Financial Products A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance), Caterpillar Power Ventures Corporation (Cat Power Ventures) and their respective subsidiaries.  Cat Financial provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, Solar gas turbines as well as other equipment and marine vessels.  Cat Financial also extends loans to customers and dealers.  Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment.  Cat Power Ventures is an investor in independent power projects using Caterpillar power generation equipment and services.
 
 
Our Machinery and Engines operations are highly integrated.  Throughout the Notes, Machinery and Engines represents the aggregate total of these principal lines of business.
 
Page 7

 

2.
New Accounting Pronouncements
 
 
FIN 48 – In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies that a tax position must be more likely than not of being sustained before being recognized in the financial statements. As required, we adopted the provisions of FIN 48 as of January 1, 2007.  The following table summarizes the effect of the initial adoption of FIN 48.

 
Initial adoption of FIN 48
         
   
(Millions of dollars)
January 1, 2007
Prior to FIN 48 Adjustment
 
FIN 48 Adjustment
 
January 1, 2007
Post FIN 48 Adjustment
 
Deferred and refundable income taxes 
$
733
   
$
82
   
$
815
 
 
Noncurrent deferred and refundable income taxes 
 
1,949
     
211
     
2,160
 
 
Other current liabilities 
 
1,145
     
(530
)
   
615
 
 
Other liabilities                                                                                  
 
1,209
     
682
     
1,891
 
 
Profit employed in the business
 
14,593
     
141
     
14,734
 

 
SFAS 157 – In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements.” SFAS 157 provides a common definition of fair value and a framework for measuring assets and liabilities at fair values when a particular standard prescribes it. In addition, the Statement expands disclosures about fair value measurements. In February 2008, the FASB issued final Staff Positions that (1) deferred the effective date of this Statement for one year for certain nonfinancial assets and nonfinancial liabilities (see below) and (2) removed certain leasing transactions from the scope of the Statement.  We applied this new accounting standard to all other fair value measurements effective January 1, 2008. The adoption of SFAS 157 did not have a material impact on our financial statements. See Note 14 for additional information.
 
FSP 157-2 In February 2008, the FASB issued FASB Staff Position on Statement 157 "Effective Date of FASB Statement No. 157" (FSP 157-2).  FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed on a recurring basis, to fiscal years beginning after November 15, 2008.  Our significant nonfinancial assets and liabilities that could be impacted by this deferral include assets and liabilities initially measured at fair value in a business combination and goodwill tested annually for impairment.  The adoption of FSP 157-2 is not expected to have a significant impact on our financial statements.
 
SFAS 158 – In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (SFAS 158), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R).”  SFAS 158 requires recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet.  Also, the measurement date – the date at which the benefit obligation and plan assets are measured – is required to be the company’s fiscal year-end.  We adopted the balance sheet recognition provisions at December 31, 2006, and adopted the year-end measurement date effective January 1, 2008 using the “one measurement” approach.  Under the one measurement approach, net periodic benefit cost for the period between any early measurement date and the end of the fiscal year that the measurement provisions are applied are allocated proportionately between amounts to be recognized as an adjustment of retained earnings and net periodic benefit cost for the fiscal year.  Previously, we used a November 30th measurement date for our U.S. pension and other postretirement benefit plans and September 30th for our non-U.S. plans.  The following summarizes the effect of adopting the year-end measurement date provisions as of January 1, 2008.  See Note 9 for additional information.
 
 
Adoption of SFAS 158 year-end measurement date
January 1, 2008
     
January 1, 2008
   
(Millions of dollars)
Prior to SFAS 158 Adjustment
 
SFAS 158 Adjustment
 
Post SFAS 158 Adjustment
 
Noncurrent deferred and refundable income taxes
$
1,553
   
$
8
   
$
1,561
 
 
Liability for postemployment benefits 
 
5,059
     
24
     
5,083
 
 
Accumulated other comprehensive income (loss)
 
(1,808
)
   
17
     
(1,791
)
 
Profit employed in the business 
 
17,398
     
(33
)
   
17,365
 
 
Page 8

 

 
SFAS 159 – In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of SFAS No. 115.” SFAS 159 creates a fair value option under which an entity may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities on a contract by contract basis, with changes in fair values recognized in earnings as these changes occur. SFAS 159 becomes effective for fiscal years beginning after November 15, 2007. We adopted this new accounting standard on January 1, 2008.  The adoption of SFAS 159 did not have a material impact on our financial statements.
 
SFAS 141R & SFAS 160 – In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) (SFAS 141R), “Business Combinations,” and No. 160 (SFAS 160), “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS 141R requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed. Further, SFAS 141R also changes the accounting for acquired in-process research and development assets, contingent consideration, partial acquisitions and transaction costs.  Under SFAS 160, all entities are required to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. In addition, transactions between an entity and noncontrolling interests will be treated as equity transactions. SFAS 141R and SFAS 160 will become effective for fiscal years beginning after December 15, 2008. We will adopt these new accounting standards on January 1, 2009.  We are currently reviewing the impact of SFAS 141R and SFAS 160 on our financial statements and expect to complete this evaluation in 2008.
 
SFAS 161 – In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (SFAS 161), “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” SFAS 161 expands disclosures for derivative instruments by requiring entities to disclose the fair value of derivative instruments and their gains or losses in tabular format.  SFAS 161 also requires disclosure of information about credit risk-related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments.   SFAS 161 will become effective for fiscal years beginning after November 15, 2008.  We will adopt this new accounting standard on January 1, 2009.  We do not expect the adoption to have a material impact on our financial statements.


3.
 
Stock-Based Compensation
 
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), 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, stock-settled stock appreciation rights (SARs) and restricted stock units (RSUs).  We recognized pretax stock-based compensation cost of $37 million and $27 million in the first quarter of 2008 and 2007, respectively.

 
The following table illustrates the type and fair market value of the stock-based compensation awards granted during the first quarter of 2008 and 2007, respectively:

   
2008
 
2007
   
# Granted
 
Fair Value
Per Award
 
# Granted
 
Fair Value
Per Award
 
SARs
 
4,476,095
   
$
22.32
     
4,193,401
   
$
20.73
 
 
Stock options
 
410,506
     
22.32
     
231,615
     
20.73
 
 
RSUs
 
1,511,523
     
69.17
     
1,282,020
     
59.94
 
   
 

 
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, 2008 and 2007, respectively:

   
Grant Year
   
2008
 
2007
 
Weighted-average dividend yield
 
1.89%
     
1.68%
 
 
Weighted-average volatility
 
27.14%
     
26.04%
 
 
Range of volatilities
 
27.13-28.99%
     
26.03-26.62%
 
 
Range of risk-free interest rates
 
1.60-3.64%
     
4.40-5.16%
 
 
Weighted-average expected lives
 
8 years
     
8 years
 
                 
 
Page 9

 
 
As of March 31, 2008, the total remaining unrecognized compensation cost related to nonvested stock-based compensation awards was $295 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 2.4 years.

 
Our long-standing practices and policies specify all stock-based compensation awards are approved by the Compensation Committee (the Committee) of the Board of Directors on the date of grant.  The stock-based award approval process specifies the number of awards granted, the terms of the award and the grant date.  The same terms and conditions are consistently applied to all employee grants, including Officers. The Committee approves all individual Officer grants.  The number of stock-based compensation awards included in an individual’s award is determined based on the methodology approved by the Committee.  In 2007, under the terms of the Caterpillar Inc. 2006 Long-Term Incentive Plan (approved by stockholders in June of 2006), the  Committee approved the exercise price methodology to be the closing price of the Company stock on the date of grant.
 
4.
Derivative Instruments and Hedging Activities

 
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 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.

 
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 currency, thereby creating exposure to movements in exchange rates.
 
Our Machinery and Engines operations purchase, manufacture and sell products in many locations around the world. As we have diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis. We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow. Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. Our policy allows for managing anticipated foreign currency cash flow for up to five years.
 
We generally designate as cash flow hedges at inception of the contract any Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, euro, Japanese yen, Mexican peso, Singapore dollar, New Zealand dollar or Swiss franc forward or option contracts that meet the requirements for hedge accounting. Designation is performed on a specific exposure basis to support hedge accounting. The remainder of Machinery and Engines foreign currency contracts are undesignated. We designate as fair value hedges specific euro forward contracts used to hedge firm commitments.
 
As of March 31, 2008, $21 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.
 
Page 10


 
Gains (losses) included in current earnings [Other income (expense)] on undesignated contracts:
 
   
Three Months Ended
March 31,
 
(Millions of dollars)
2008
 
2007
 
Machinery and Engines:
             
   
On undesignated contracts 
$
7
   
$
4
 
                     
 
Financial Products:
             
   
On undesignated contracts
 
(87
)
   
(6
)
     
$
(80
)
 
$
(2
)
                   

 
Gains and losses on the Financial Products contracts above are substantially offset by balance sheet translation gains and losses.
 
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 swap agreements to manage our exposure to interest rate changes and, in some cases, lower the cost of borrowed funds.
 
 
Machinery and Engines 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.
 
Since 2006, we entered into $400 million (notional amount) of interest rate swaps designated as fair value hedges of our fixed rate long-term debt.  During the first quarter 2008, our Machinery and Engines operations liquidated all of these fixed-to-floating interest rate swaps.  The gain ($20 million remaining at March 31, 2008) is being amortized to earnings ratably over the remaining life of the hedged debt.
 
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 on-going 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 match-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. To support hedge accounting, we designate fixed-to-floating interest rate swaps as fair value hedges of the fair value of our fixed-rate debt at the inception of the contract. Financial Products' practice is to designate most floating-to-fixed interest rate swaps as cash flow hedges of the variability of future cash flows at the inception of the swap contract.
 
Financial Products liquidated fixed-to-floating interest rate swaps during 2006, 2005 and 2004, which resulted in deferred net gains.  These gains ($5 million remaining at March 31, 2008) are being amortized to earnings ratably over the remaining life of the hedged debt.
 
 
 
Gains (losses) included in current earnings [Other income (expense)]:
 
   
Three Months Ended
March 31,
 
(Millions of dollars)
2008
 
2007
 
Fixed-to-floating interest rate swaps
             
   
Machinery and Engines:
 
 
         
     
Gain (loss) on designated interest rate derivatives
$
18
   
$
 
     
Gain (loss) on hedged debt   
 
(9
)
   
(1
)
     
Gain (loss) on liquidated swaps – included in interest expense 
 
1
     
1
 
         
 
         
   
Financial Products:
 
 
         
     
Gain (loss) on designated interest rate derivatives
 
126
     
12
 
     
Gain (loss) on hedged debt   
 
(126
)
   
(12
)
       
$
10
   
$
 
         
 
         
 
Page 11

 
 
 
As of March 31, 2008, $24 million of deferred net losses 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 12 months.

 
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 Engines operations purchase aluminum, copper and nickel 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 also subject to price changes on natural gas 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 four-year horizon. All such commodity forward and option contracts are undesignated.  There were no net gains or losses on undesignated contracts for the three months ended March 31, 2007, and no contracts were outstanding during 2008.
 
 
Stock Repurchase Risk
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.
 
In connection with our stock repurchase program, we entered into capped call transactions (“call”) with a major bank for an aggregate 6.0 million shares. Through March 31, 2008, we have paid the bank $94 million for the establishment of the calls (of which $38 million was paid in the first quarter 2008 for 2.5 million shares), which was accounted for as a reduction to stockholders’ equity. A call permits us to reduce share repurchase price volatility by providing a floor and cap on the price at which the 6.0 million shares can be repurchased.  The floor, cap and strike prices for the calls were based upon the average purchase price paid by the bank to purchase our common stock to hedge these transactions.  Each call will mature and be exercisable within one year after the call was established.  If we exercise a call, we can elect to settle the transaction with the bank by physical settlement (paying cash and receiving shares), cash settlement (receiving a net amount of cash) or net share settlement (receiving a net amount of shares).  We will continue to use open market purchases in conjunction with the capped call transactions to repurchase our stock.
 
As of March 31, 2008, no shares have been repurchased pursuant to this capped call program.


5.
Inventories
 
Inventories (principally using the "last-in, first-out" method) are comprised of the following:

 
(Millions of dollars)
March 31,
 
December 31,
   
2008
 
2007
 
Raw materials                                                                                      
$
2,837
   
$
2,474
 
 
Work-in-process                                                                                      
 
1,422
     
1,215
 
 
Finished goods                                                                                      
 
3,535
     
3,230
 
 
Supplies                                                                                      
 
288
     
285
 
 
Total inventories                                                                                      
$
8,082
   
$
7,204
 
                 


6.
Investments in Unconsolidated Affiliated Companies
 
 
Our investments in affiliated companies accounted for by the equity method consist primarily of a 50 percent interest in Shin Caterpillar Mitsubishi Ltd. (SCM) located in Japan. Combined financial information of the unconsolidated affiliated companies accounted for by the equity method (generally on a three month lag, e.g., SCM results reflect the periods ending December 31) was as follows:
 
Page 12


 
Results of Operations of unconsolidated affiliated companies:
Three Months Ended
 
(Millions of dollars)
March 31,
   
2008
 
2007
 
Sales
$
1,088
   
$
1,022
 
 
Cost of sales                                                                                               
 
900
     
823
 
 
Gross profit                                                                                               
$
188
   
$
199
 
                 
 
Profit (loss)                                                                                               
$
17
   
$
50
 
                 
 
Caterpillar's profit (loss)                                                                                               
$
11
   
$
19
 
                 

 
Sales from SCM to Caterpillar for the three months ended March 31, 2008 and March 31, 2007 of approximately $443 million and $379 million, respectively, are included in the affiliated company sales.  In addition, SCM purchased $73 million and $65 million of products from Caterpillar during the three months ended March 31, 2008 and March 31, 2007, respectively.
 
 
Financial Position of unconsolidated affiliated companies:
March 31,
 
December 31,
 
(Millions of dollars)
2008
 
2007
 
Assets:
     
   
Current assets
$
1,981
   
$
2,062
 
   
Property, plant and equipment – net
 
1,270
     
1,286
 
   
Other assets
 
134
     
173
 
     
3,385
     
3,521
 
 
Liabilities:
             
   
Current liabilities
 
1,618
     
1,546
 
   
Long-term debt due after one year
 
235
     
269
 
   
Other liabilities
 
421
     
393
 
     
2,274
     
2,208
 
 
Ownership                                                                                                
$
1,111
   
$
1,313
 
                 
 
Caterpillar's investments in unconsolidated affiliated companies:
 
(Millions of dollars)
             
   
Investments in equity method companies
$
547
   
$
582
 
   
Plus: Investments in cost method companies
 
16
     
16
 
   
Total investments in unconsolidated affiliated companies
$
563
   
$
598
 
             

 
In March 2008, Caterpillar, Mitsubishi Heavy Industries Ltd. and SCM signed definitive agreements that include a share redemption plan, which will result in Caterpillar owning 67 percent of SCM. Subject to completion of certain conditions contained in the definitive agreements, we expect the first phase of the share redemption plan will close in the third quarter of 2008.

 
In February 2008, we sold our 23 percent equity investment in A.S.V. Inc. (ASV) resulting in a $60 million pretax gain.  Accordingly, the March 31, 2008 financial position and equity investment amounts noted above do not include ASV.


7.
Intangible Assets and Goodwill
 
 
A. Intangible assets
 
Intangible assets are comprised of the following:
 
Page 13


 
 
(Dollars in millions)
Weighted Amortizable Life (Years)
 
March 31,
2008
 
December 31,
2007
 
Customer relationships   
19
 
$
366
   
$
366
 
 
Intellectual property
10
   
172
     
195
 
 
Other
12
   
90
     
81
 
 
Total finite-lived intangible assets – gross
15
   
628
     
642
 
 
Less: Accumulated amortization  
     
(174
)
   
(167
)
 
Intangible assets – net 
   
$
454
   
$
475
 
                     

 
Amortization expense for the three months ended March 31, 2008 and March 31, 2007 was $20 million and $11 million, respectively.  Amortization expense related to intangible assets is expected to be:

 
(Millions of dollars)
 
2008
 
2009
 
2010
 
2011
 
2012
 
Thereafter
 
$
54
   
$
45
   
$
40
   
$
29
   
$
25
   
$
261
 
                                               

 
 
B.  Goodwill
 
 
On an annual basis, we test goodwill for impairment in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets."  Goodwill is tested for impairment between annual tests whenever events or circumstances make it more likely than not that an impairment may have occurred.
 
No goodwill was acquired, impaired or disposed of during the first quarter of 2008.  The carrying amount of the goodwill by reportable segment for the quarter ended March 31, 2008 was as follows:

  
(Millions of dollars)
Building Construction Products
 
EAME Operations
 
Electric Power
 
Heavy Construction & Mining
 
Industrial Power
Systems
 
Infrastructure Development
 
Large
Power Systems(2)
 
Marine & Petroleum
Power(2)
 
All
Other(1)
 
Consolidated Total
 
Balance at March 31, 2008
$
4
   
$
51
   
$
203
   
$
14
   
$
478
   
$
33
   
$
569
   
$
60
   
$
551
   
$
1,963
 
                                                                                 
 
1
All Other includes operating segments included in “All Other” category (See Note 13).
 
2
As discussed in Note 13, our reportable segments were changed in the first quarter of 2008.  As a result, goodwill of $60 million was reallocated from the Large Power Systems reportable segment to the newly formed Marine & Petroleum Power reportable segment.


8.
Available-For-Sale Securities
 
 
Financial Products, primarily Cat Insurance, has investments in certain debt and equity securities that have been classified as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115) and recorded at fair value based upon quoted market prices. These fair values are 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.

   
March 31, 2008
 
December 31, 2007
       
Unrealized
         
Unrealized
   
       
Pretax Net
         
Pretax Net
   
 
(Millions of dollars)
Cost
Basis
 
Gains
(Losses)
 
Fair
Value
 
Cost
Basis
 
Gains
(Losses)
 
Fair
Value
 
Government debt
$
309
   
$
4
   
$
313
   
$
319
   
$
1
   
$
320
 
 
Corporate bonds
 
822
     
(19
)
   
803
     
775
     
(4
)
   
771
 
 
Equity securities
 
177
     
3
     
180
     
168
     
28
     
196
 
 
Total
$
1,308
   
$
(12
)
 
$
1,296
   
$
1,262
   
$
25
   
$
1,287
 
                                                 
 
Page 14


 
Investments in an unrealized loss position that are not other-than-temporarily impaired:
 
   
March 31, 2008
   
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
 
Government debt  
$
14
   
$
   
$
20
   
$
   
$
34
   
$
 
 
Corporate bonds
 
342
     
16
     
117
     
11
     
459
     
27
 
 
Equity securities
 
81
     
13
     
2
     
1