As the caterpillar moves, air is pumped into the trachea, causing oxygen to be taken in and carbon dioxide to be pushed out. Caterpillars do not actually breathe as we do, but air is exhanged by the compression and extension of each segment. It's not really known if caterpillars can hear. They make no noise other than chewing. Yes, it is their response to feeling threatened.
Caterpillars go through several stages, called 'instars', in which they change their skin.
To break through the old skin, which they've outgrown, some caterpillars arch their backs.