Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our discussion of cautionary statements and significant risks to the company’s business under Item 1A. Risk Factors of the 2019 Form 10-K.

OVERVIEW

Our sales and revenues for 2019 were $53.800 billion, a 2 percent decrease from 2018 sales and revenues of $54.722 billion. The decrease was primarily due to lower sales volume*.* The sales volume decline was mostly due to changes in dealer inventories, partially offset by higher end-user demand. Sales were lower in EAME and Asia/Pacific, while North America and Latin America were about flat. Sales declined in Energy & Transportation and Construction Industries, while Resource Industries was about flat. Profit per share for 2019 was $10.74, compared to profit per share of $10.26 in 2018. Profit was $6.093 billion in 2019, compared with $6.147 billion in 2018. The decrease was primarily due to higher tax expense as operating profit was about flat. Operating profit was about flat as favorable price realization, lower selling, general and administrative (SG&A) and research and development (R&D) expenses and higher Financial Products’ profit were offset by higher manufacturing costs, lower sales volume and unfavorable currency impacts.

Fourth-quarter 2019 sales and revenues were $13.144 billion, down $1.198 billion, or 8 percent, from $14.342 billion in the fourth quarter of 2018. Fourth-quarter 2019 profit was $1.97 per share, compared with $1.78 per share in the fourth quarter of 2018. Fourth-quarter 2019 profit was $1.098 billion, compared with $1.048 billion in 2018.

Highlights for 2019 include:

•	Sales and revenues in 2019 were $53.800 billion, down 2 percent from 2018. Sales declined in Energy & Transportation and Construction Industries, while Resource Industries was about flat.

•	Operating profit as a percent of sales and revenues was 15.4 percent in 2019, compared with 15.2 percent in 2018.

•	Profit was $10.74 per share for 2019, and excluding the items in the table below, adjusted profit per share was $11.06. For 2018 profit was $10.26 per share, and excluding the items in the table below, adjusted profit per share was $11.22.

•	In order for our results to be more meaningful to our readers, we have separately quantified the impact of several significant items:

	Full Year 2019								Full Year 2018
(Dollars in millions except per share data)	Profit Before Taxes				Profit Per Share				Profit Before Taxes				Profit Per Share
Profit	$	7,812			$	10.74			$	7,822			$	10.26
Mark-to-market losses1	468				0.64				495				0.64
U.S. tax reform impact	—				(0.31		)		—				(0.17		)
Restructuring costs****2	—				—				386				0.50
Deferred tax valuation allowance adjustments	—				—				—				(0.01		)
Adjusted profit	$	8,280			$	11.06			$	8,703			$	11.22
1 Profit per share at statutory tax rates.
2 Profit per share for 2018 restructuring costs were at statutory tax rates. 2019 restructuring costs were not material.

•	Enterprise operating cash flow for 2019 was about $6.9 billion, compared with about $6.6 billion in 2018. Machinery, Energy & Transportation (ME&T) operating cash flow for 2019 was about $4.9 billion, more than sufficient to cover capital expenditures and dividends. ME&T operating cash flow for 2018 was about $6.3 billion.

Notes:

•	Glossary of terms included on pages 44-46; first occurrence of terms shown in bold italics.

•	Information on non-GAAP financial measures is included on pages 58-59.

•	Some amounts within this report are rounded to the millions or billions and may not add. In addition, the sum of the components reported across periods may not equal the total amount reported year-to-date due to rounding.

2019 COMPARED WITH 2018

CONSOLIDATED SALES AND REVENUES

The chart above graphically illustrates reasons for the change in consolidated sales and revenues between 2018 (at left) and 2019 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees.

Total sales and revenues were $53.800 billion in 2019, a decrease of $922 million, or 2 percent, compared with $54.722 billion in 2018. The decrease was mostly due to lower sales volume driven by changes in dealer inventories, partially offset by higher end-user demand. Unfavorable currency impacts, primarily from a weaker euro, Australian dollar, Chinese yuan and Brazilian real, were mostly offset by favorable price realization. Sales decreased in Energy & Transportation and Construction Industries, while Resource Industries was about flat. Sales decreased in EAME and Asia/Pacific, while North America and Latin America were about flat.

North America sales were about flat compared with prior year as favorable price realization was mostly offset by lower sales volume. Sales volume declined primarily due to changes in dealer inventories as dealers increased inventories more during 2018 than 2019, partially offset by higher end-user demand.

Sales were about flat in Latin America as higher sales volume was offset by an unfavorable currency impact from a weaker Brazilian real. Sales volume increased due to higher end-user demand which was mostly offset by changes in dealer inventories as dealers increased inventories more during 2018 than 2019.

EAME sales decreased 6 percent primarily due to lower sales volume and the unfavorable impact of a weaker euro, partially offset by higher price realization. The decrease in sales volume was primarily due to changes in dealer inventories. Dealers increased inventories during 2018 and decreased inventories during 2019.

Asia/Pacific sales declined 4 percent primarily due to unfavorable currency impacts of a weaker Australian dollar and Chinese yuan and lower sales volume. Sales volume decreased due to changes in dealer inventories, partially offset by higher end-user demand. Dealer inventories increased more during 2018 than 2019.

Dealer machine and engine inventories increased about $2.3 billion in 2018, compared with an increase of about $800 million in 2019. Dealers are independent, and the reasons for changes in their inventory levels vary, including their expectations of future demand and product delivery times. Dealers’ demand expectations take into account seasonal changes, macroeconomic conditions, machine rental rates and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers. We expect dealer inventories to decline about $1.0 to $1.5 billion during 2020.

Sales and Revenues by Segment
(Millions of dollars)		2018				Sales Volume				Price Realization				Currency				Inter-Segment / Other				2019				$ Change				% Change
Construction Industries		$	23,237			$	(560	)		$	349			$	(349	)		$	(28	)		$	22,649			$	(588	)		(3	%)
Resource Industries		10,270				(260		)		306				(121		)		81				10,276				6				—	%
Energy & Transportation		22,785				(116		)		55				(286		)		(341		)		22,097				(688		)		(3	%)
All Other Segment		482				(24		)		—				(3		)		45				500				18				4	%
Corporate Items and Eliminations		(4,952		)		(57		)		—				(1		)		243				(4,767		)		185
Machinery, Energy & Transportation		51,822				(1,017		)		710				(760		)		—				50,755				(1,067		)		(2	%)
Financial Products Segment		3,279				—				—				—				155				3,434				155				5	%
Corporate Items and Eliminations		(379		)		—				—				—				(10		)		(389		)		(10		)
Financial Products Revenues		2,900				—				—				—				145				3,045				145				5	%
Consolidated Sales and Revenues		$	54,722			$	(1,017	)		$	710			$	(760	)		$	145			$	53,800			$	(922	)		(2	%)

Sales and Revenues by Geographic Region
	North America						Latin America						EAME						Asia/Pacific						External Sales and Revenues						Inter-Segment						Total Sales and Revenues
(Millions of dollars)	$				% Chg		$				% Chg		$				% Chg		$				% Chg		$				% Chg		$				% Chg		$				% Chg
2019
Construction Industries	$	11,455			7%		$	1,533			4%		$	4,012			(9%)		$	5,556			(14%)		$	22,556			(2%)		$	93			(23%)		$	22,649			(3	%)
Resource Industries	3,632				8%		1,533				(7%)		1,836				(17%)		2,812				5%		9,813				(1%)		463				21%		10,276				—	%
Energy & Transportation	8,864				(8%)		1,389				4%		4,994				1%		3,238				12%		18,485				(2%)		3,612				(9%)		22,097				(3	%)
All Other Segment	25				(60%)		7				133%		28				56%		67				(4%)		127				(18%)		373				14%		500				4	%
Corporate Items and Eliminations	(192		)				—						(20		)				(14		)				(226		)				(4,541		)				(4,767		)
Machinery, Energy & Transportation	23,784				—%		4,462				—%		10,850				(6%)		11,659				(4%)		50,755				(2%)		—				—%		50,755				(2	%)
Financial Products Segment	2,235				4%		299				6%		408				5%		492				7%		3,434			1	5%		—				—%		3,434				5	%
Corporate Items and Eliminations	(234		)				(51		)				(35		)				(69		)				(389		)				—						(389		)
Financial Products Revenues	2,001				4%		248				6%		373				3%		423				10%		3,045				5%		—				—%		3,045				5	%
Consolidated Sales and Revenues	$	25,785			1%		$	4,710			—%		$	11,223			(6%)		$	12,082			(3%)		$	53,800			(2%)		$	—			—%		$	53,800			(2	%)
2018
Construction Industries	$	10,754					$	1,479					$	4,410					$	6,473					$	23,116					$	121					$	23,237
Resource Industries	3,357						1,647						2,217						2,667						9,888						382						10,270
Energy & Transportation	9,685						1,331						4,934						2,882						18,832						3,953						22,785
All Other Segment	63						3						18						70						154						328						482
Corporate Items and Eliminations	(155		)				—						(11		)				(2		)				(168		)				(4,784		)				(4,952		)
Machinery, Energy & Transportation	23,704						4,460						11,568						12,090						51,822						—						51,822
Financial Products Segment	2,153						281						387						458						3,279			1			—						3,279
Corporate Items and Eliminations	(234		)				(46		)				(26		)				(73		)				(379		)				—						(379		)
Financial Products Revenues	1,919						235						361						385						2,900						—						2,900
Consolidated Sales and Revenues	$	25,623					$	4,695					$	11,929					$	12,475					$	54,722					$	—					$	54,722
1 Includes revenues from Machinery, Energy & Transportation of $524 million and $470 million in 2019 and 2018, respectively.

CONSOLIDATED OPERATING PROFIT

The chart above graphically illustrates reasons for the change in consolidated operating profit between 2018 (at left) and 2019 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.

Operating profit was $8.290 billion in 2019, about flat with $8.293 billion in 2018. Favorable price realization mostly offset higher manufacturing costs. Lower sales volume offset favorable selling, general and administrative (SG&A) and research and development (R&D) expenses and higher profit from Financial Products.

Manufacturing costs increased due to higher warranty expense, increased variable labor and burden, unfavorable cost absorption, and higher material costs. Cost absorption was unfavorable as inventory increased during 2018, compared with a decrease during 2019. The increase was partially offset by lower period manufacturing costs driven by lower short-term incentive compensation expense and the favorable impact of restructuring and cost-reduction actions.

SG&A/R&D expenses decreased due to lower short-term incentive compensation expense, partially offset by investments aligned with the company’s strategic growth initiatives.

Short-term incentive compensation expense is directly related to financial and operational performance, measured against targets set annually. Short-term incentive compensation expense in 2018 was about $1.4 billion, compared with about $700 million in 2019.

For 2020, we expect short-term incentive compensation expense will be about $800 million. We also expect lower manufacturing costs.

Operating profit margin was 15.4 percent in 2019, compared with 15.2 percent in 2018.

Profit by Segment
(Millions of dollars)		2019				2018				$ Change				% Change
Construction Industries		$	3,931			$	4,174			$	(243	)		(6	%)
Resource Industries		1,629				1,603				26				2	%
Energy & Transportation		3,910				3,938				(28		)		(1	%)
All Other Segment		4				23				(19		)		(83	%)
Corporate Items and Eliminations		(1,504		)		(1,583		)		79
Machinery, Energy & Transportation		7,970				8,155				(185		)		(2	%)
Financial Products Segment		832				505				327				65	%
Corporate Items and Eliminations		(81		)		17				(98		)
Financial Products		751				522				229				44	%
Consolidating Adjustments		(431		)		(384		)		(47		)
Consolidated Operating Profit		$	8,290			$	8,293			$	(3	)		—	%

Other Profit/Loss and Tax Items

•	Interest expense excluding Financial Products in 2019 was $421 million, compared with $404 million in 2018. The increase was due to higher average debt outstanding during 2019 than 2018.

•	Other income (expense) in 2019 was expense of $57 million, compared with expense of $67 million in 2018. The decrease was due to a lower expected return on pension and other postretirement benefit (OPEB) plan assets more than offset by lower foreign exchange losses, unrealized and realized gains on marketable securities at Insurance Services and the favorable impact of commodity hedges.

•

The provision for income taxes for 2019 reflected an annual effective tax rate of 25.2 percent, compared with 24.1 percent for 2018, excluding the discrete items discussed in the following paragraph. The increase from 2018 was largely driven by the application of U.S. tax reform provisions to the earnings of certain non-U.S. subsidiaries, which do not have a calendar fiscal year-end. These provisions did not apply to these subsidiaries in 2018.

The provision for income taxes also included the following:

◦	A tax benefit of $178 million to adjust previously unrecognized tax benefits as a result of receipt of additional guidance in 2019 related to the calculation of the mandatory deemed repatriation of non-U.S. earnings due to U.S. tax reform. In 2018, the mandatory deemed repatriation estimate increased by $50 million.

◦	A tax benefit of $41 million in 2019, compared with $56 million in 2018, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense.

◦	A net benefit of $183 million in 2018 to adjust deferred tax balances. (See Note – 6 “Income Taxes” of Part II, Item 8 “Financial Statements and Supplementary Data” for more information.)

Construction Industries

Construction Industries’ total sales were $22.649 billion for 2019, a decrease of $588 million, or 3 percent, compared with $23.237 billion for 2018. The decrease was primarily due to lower sales volume driven by changes in dealer inventories, partially offset by higher end-user demand. Dealer inventories increased significantly more during 2018 than during 2019. Favorable price realization was offset by unfavorable currency impacts from a weaker euro, Chinese yuan and Australian dollar.

Sales increased in North America and Latin America, and decreased in Asia/Pacific and EAME.

•	In North America, the sales increase was primarily due to higher demand for construction equipment and favorable price realization.

•	Sales were higher in Latin America. While construction activities remained at low levels, the increase was driven by road and non-residential construction activities.

•	Sales decreased in EAME primarily due to changes in dealer inventories and the unfavorable impact of a weaker euro, partially offset by favorable price realization. Dealer inventories increased during 2018, compared with a decrease during 2019.

•

Sales in Asia/Pacific decreased mostly due to lower demand, including changes in dealer inventories, and unfavorable currency impacts. The unfavorable currency impacts were due to a weaker Chinese yuan and Australian dollar. Dealers increased inventories during 2018 and decreased inventories during 2019. The lower demand was primarily in China due to continued competitive pressures. In addition, demand was lower across the region.

Construction Industries’ profit was $3.931 billion in 2019, a decrease of $243 million, or 6 percent, compared with $4.174 billion in 2018. The decrease was primarily due to lower sales volume, including an unfavorable mix of products, and higher manufacturing costs, which were partially offset by favorable price realization and lower SG&A/R&D expenses. Manufacturing costs increased primarily due to unfavorable variable labor and burden. Lower SG&A/R&D expenses were due to lower short-term incentive compensation expense, partially offset by investments aligned with the company’s strategic growth initiatives.

Construction Industries’ profit as a percent of total sales was 17.4 percent in 2019, compared with 18.0 percent in 2018.

Resource Industries

Resource Industries’ total sales were $10.276 billion in 2019, about flat with $10.270 billion in 2018. Higher end-user demand for equipment and favorable price realization were offset by changes in dealer inventories and unfavorable currency impacts, primarily the weaker Australian dollar and euro. Higher end-user demand was driven by increased capital investment by mining customers to support ongoing mine site operations. End-user demand also increased for our non-residential construction and quarry and aggregate customers. Dealers increased inventories more significantly during 2018 than during 2019.

Resource Industries’ profit was $1.629 billion in 2019, an increase of $26 million, or 2 percent, compared with $1.603 billion in 2018. The improvement was mostly due to favorable price realization, partially offset by higher manufacturing costs. Manufacturing costs increased due to higher warranty expense, unfavorable cost absorption, increased variable labor and burden and higher material costs, partially offset by the favorable period manufacturing costs due to the impact of restructuring and cost-reduction actions and lower short-term incentive compensation expense. Cost absorption was unfavorable as inventory increased more during 2018 than 2019.

Resource Industries’ profit as a percent of total sales was 15.9 percent in 2019, compared with 15.6 percent in 2018.

Energy & Transportation

Sales by Application
(Millions of dollars)		2019				2018				$ Change				% Change
Oil and Gas		$	5,205			$	5,763			$	(558	)		(10	%)
Power Generation		4,474				4,334				140				3	%
Industrial		3,749				3,640				109				3	%
Transportation		5,057				5,095				(38		)		(1	%)
External Sales		18,485				18,832				(347		)		(2	%)
Inter-Segment		3,612				3,953				(341		)		(9	%)
Total Sales		$	22,097			$	22,785			$	(688	)		(3	%)

Energy & Transportation’s total sales were $22.097 billion in 2019, compared with $22.785 billion in 2018. Sales declined primarily due to lower inter-segment engine sales and unfavorable currency impacts, primarily from the weaker euro and Australian dollar.

▪	Oil and Gas – Sales decreased in North America primarily due to lower new equipment demand for well servicing and the timing of turbine project deliveries for gas compression and production. Lower sales in North America were partially offset by increases in all other regions, primarily Asia/Pacific.

▪	Power Generation – Sales increased mostly due to higher deliveries of diesel reciprocating engines in North America and higher turbine sales across all regions. The increase was partially offset by lower diesel reciprocating engine sales in EAME and Asia/Pacific driven by unfavorable currency impacts and lower volume.

▪	Industrial – Sales improved primarily in North America and Asia/Pacific driven by higher end-user demand.

▪	Transportation – Sales were about flat as lower locomotive sales were offset by stronger marine demand.

Energy & Transportation’s profit was $3.910 billion for 2019, a decrease of $28 million, or 1 percent, compared with $3.938 billion for 2018. The decrease was mostly due to lower sales volumes, partially offset by lower SG&A/R&D expenses. Lower SG&A/R&D expenses were primarily due to lower short-term incentive compensation expense. Higher manufacturing costs were more than offset by favorable price realization and favorable other operating (income) expenses.

Energy & Transportation’s profit as a percent of total sales was 17.7 percent in 2019, compared with 17.3 percent in 2018.

Financial Products Segment

Financial Products’ segment revenues were $3.434 billion, an increase of $155 million, or 5 percent, from 2018. The increase was primarily due to higher average financing rates in North America and Asia/Pacific, an increase in earned premiums from Insurance Services across all regions and higher average earning assets in North America. These favorable impacts were partially offset by the absence of fees associated with an intercompany credit facility in North America.

Financial Products’ segment profit was $832 million in 2019, compared with $505 million in 2018. Most of the increase was due to lower provision for credit losses at Cat Financial, driven by a lower allowance rate compared with 2018. The lower allowance rate was due to write-offs of accounts in 2019 that were reserved for in 2018, primarily in the Cat Power Finance portfolio. In addition, there was a favorable impact from an increase in net yield on average earning assets and a favorable impact from equity securities in Insurance Services. These favorable impacts were partially offset by higher SG&A expenses and the absence of the intercompany credit facility.

At the end of 2019, past dues at Cat Financial were 3.14 percent, compared with 3.55 percent at the end 2018. Write-offs, net of recoveries, were $237 million for 2019, an increase from $189 million for 2018, primarily due to Mining, Caterpillar Power Finance and EAME, partially offset by a decrease in Latin America. The increase in Mining was due to a small number of customer balances written off in 2019, while the increases in Caterpillar Power Finance and EAME were concentrated in the marine portfolio and the Middle East, respectively. As of December 31, 2019, Cat Financial’s allowance for credit losses totaled $424 million, or 1.50 percent of finance receivables, compared with $511 million, or 1.80 percent of finance receivables, at December 31, 2018.

Corporate Items and Eliminations

Expense for corporate items and eliminations was $1.585 billion in 2019, an increase of $19 million from 2018. The increase was primarily due to methodology differences, mostly offset by lower restructuring costs and timing differences.

FOURTH QUARTER 2019 COMPARED WITH FOURTH QUARTER 2018

CONSOLIDATED SALES AND REVENUES

The chart above graphically illustrates reasons for the change in consolidated sales and revenues between the fourth quarter of 2018 (at left) and the fourth quarter of 2019 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees.

Total sales and revenues of $13.144 billion in the fourth quarter of 2019 decreased $1.198 billion, or 8 percent, compared with $14.342 billion in the fourth quarter of 2018. The decline was due to lower sales volume driven by the impact from changes in dealer inventories and lower end-user demand, primarily in Construction Industries and Resource Industries. Dealers decreased machine and engine inventories about $700 million during the fourth quarter of 2019, compared with an increase of about $200 million during the fourth quarter of 2018.

The largest sales decrease was in North America, which declined 14 percent due to lower demand, including changes in dealer inventories. Dealer inventories increased during the fourth quarter of 2018, compared with a decrease during the fourth quarter of 2019.

Sales decreased 16 percent in Latin America due to lower demand across the region.

EAME sales decreased 6 percent primarily due to changes in dealer inventories and unfavorable currency impacts, primarily from the weaker euro. Dealer inventories decreased more during the fourth quarter of 2019 than the fourth quarter of 2018.

Asia/Pacific sales were about flat as higher sales volume was offset by unfavorable price realization and currency impacts, primarily from the weaker Australian dollar. Sales volume was higher as improved end-user demand was partially offset by changes in dealer inventories. Dealer inventories increased more during the fourth quarter of 2018 than the fourth quarter of 2019.

Dealers decreased machine and engine inventories about $700 million during the fourth quarter of 2019, compared with an increase of about $200 million during the fourth quarter of 2018. Dealers are independent, and the reasons for changes in their inventory levels vary, including their expectations of future demand and product delivery times. Dealers’ demand expectations take into account seasonal changes, macroeconomic conditions, machine rental rates and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers.

Sales and Revenues by Segment
(Millions of dollars)		Fourth Quarter 2018				Sales Volume				Price Realization				Currency				Inter-Segment / Other				Fourth Quarter 2019				$ Change				% Change
Construction Industries		$	5,705			$	(565	)		$	(86	)		$	(32	)		$	(2	)		$	5,020			$	(685	)		(12	%)
Resource Industries		2,797				(430		)		17				(22		)		33				2,395				(402		)		(14	%)
Energy & Transportation		6,287				(25		)		(27		)		(47		)		(239		)		5,949				(338		)		(5	%)
All Other Segment		129				(10		)		—				—				24				143				14				11	%
Corporate Items and Eliminations		(1,288		)		(16		)		1				(2		)		184				(1,121		)		167
Machinery, Energy & Transportation		13,630				(1,046		)		(95		)		(103		)		—				12,386				(1,244		)		(9	%)
Financial Products Segment		812				—				—				—				34				846				34				4	%
Corporate Items and Eliminations		(100		)		—				—				—				12				(88		)		12
Financial Products Revenues		712				—				—				—				46				758				46				6	%
Consolidated Sales and Revenues		$	14,342			$	(1,046	)		$	(95	)		$	(103	)		$	46			$	13,144			$	(1,198	)		(8	%)

Sales and Revenues by Geographic Region
	North America						Latin America						EAME						Asia/Pacific						External Sales and Revenues						Inter-Segment						Total Sales and Revenues
(Millions of dollars)	$				% Chg		$				% Chg		$				% Chg		$				% Chg		$				% Chg		$				% Chg		$				% Chg
Fourth Quarter 2019
Construction Industries	$	2,249			(18%)		$	409			9%		$	850			(20%)		$	1,475			—%		$	4,983			(12%)		$	37			(5%)		$	5,020			(12	%)
Resource Industries	834				(8%)		313				(33%)		526				(5%)		603				(23%)		2,276				(16%)		119				38%		2,395				(14	%)
Energy & Transportation	2,287				(11%)		354				(18%)		1,578				5%		947				26%		5,166				(2%)		783				(23%)		5,949				(5	%)
All Other Segment	2				(88%)		—				—%		5				(17%)		22				47%		29				(26%)		114				27%		143				11	%
Corporate Items and Eliminations	(50		)				—						(5		)				(13		)				(68		)				(1,053		)				(1,121		)
Machinery, Energy & Transportation	5,322				(14%)		1,076				(16%)		2,954				(6%)		3,034				—%		12,386				(9%)		—				—%		12,386				(9	%)
Financial Products Segment	554				2%		74				9%		102				21%		116				1%		846			1	4%		—				—%		846				4	%
Corporate Items and Eliminations	(50		)				(14		)				(9		)				(15		)				(88		)				—						(88		)
Financial Products Revenues	504				5%		60				3%		93				22%		101				2%		758				6%		—				—%		758				6	%
Consolidated Sales and Revenues	$	5,826			(13%)		$	1,136			(15%)		$	3,047			(5%)		$	3,135			—%		$	13,144			(8%)		$	—			—%		$	13,144			(8	%)
Fourth Quarter 2018
Construction Industries	$	2,749					$	374					$	1,063					$	1,480					$	5,666					$	39					$	5,705
Resource Industries	906						466						554						785						2,711						86						2,797
Energy & Transportation	2,569						434						1,509						753						5,265						1,022						6,287
All Other Segment	16						2						6						15						39						90						129
Corporate Items and Eliminations	(47		)				1						(3		)				(2		)				(51		)				(1,237		)				(1,288		)
Machinery, Energy & Transportation	6,193						1,277						3,129						3,031						13,630						—						13,630
Financial Products Segment	545						68						84						115						812			1			—						812
Corporate Items and Eliminations	(66		)				(10		)				(8		)				(16		)				(100		)				—						(100		)
Financial Products Revenues	479						58						76						99						712						—						712
Consolidated Sales and Revenues	$	6,672					$	1,335					$	3,205					$	3,130					$	14,342					$	—					$	14,342
1 Includes revenues from Machinery, Energy & Transportation of $126 million and $125 million in the three months ended December 30, 2019 and 2018, respectively.

CONSOLIDATED OPERATING PROFIT

The chart above graphically illustrates reasons for the change in consolidated operating profit between the fourth quarter of 2018 (at left) and the fourth quarter of 2019 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.

Operating profit for the fourth quarter of 2019 was $1.850 billion, a decrease of $33 million, or 2 percent, compared with $1.883 billion in the fourth quarter of 2018. The decrease was primarily due to lower sales volume, mostly offset by lower SG&A and R&D expenses and higher profit from Financial Products.

Lower SG&A/R&D expenses were mostly due to a reduction in short-term incentive compensation expense and timing of R&D expenses.

Financial Products’ operating profit was higher, primarily due to lower provisions for credit losses related to the Cat Power Finance portfolio compared with the fourth quarter of 2018.

In addition, favorable manufacturing costs were mostly offset by unfavorable price realization. Manufacturing costs decreased primarily due to lower period manufacturing and material costs, partially offset by higher warranty expense. Period manufacturing costs declined mainly due to lower short-term incentive compensation and the favorable impact of restructuring and cost-reduction actions.

Short-term incentive compensation expense was about $120 million in the fourth quarter of 2019, compared with about $310 million in the fourth quarter of 2018.

Operating profit margin in the fourth quarter of 2019 was 14.1 percent, compared with 13.1 percent in the fourth quarter of 2018.

Profit (Loss) by Segment
(Millions of dollars)		Fourth Quarter 2019				Fourth Quarter 2018				$ Change				% Change
Construction Industries		$	659			$	845			$	(186	)		(22	%)
Resource Industries		261				400				(139		)		(35	%)
Energy & Transportation		1,165				1,079				86				8	%
All Other Segment		(11		)		(47		)		36				77	%
Corporate Items and Eliminations		(325		)		(375		)		50
Machinery, Energy & Transportation		1,749				1,902				(153		)		(8	%)
Financial Products Segment		210				29				181				624	%
Corporate Items and Eliminations		(6		)		54				(60		)
Financial Products		204				83				121				146	%
Consolidating Adjustments		(103		)		(102		)		(1		)
Consolidated Operating Profit		$	1,850			$	1,883			$	(33	)		(2	%)

Other Profit/Loss and Tax Items

•	Interest expense excluding Financial Products in the fourth quarter of 2019 was $112 million, compared with $99 million in the fourth quarter of 2018. The increase was due to higher average debt outstanding during the fourth quarter of 2019, compared with the fourth quarter of 2018.

•	Other income (expense) in the fourth quarter of 2019 was expense of $373 million, compared with expense of $417 million in the fourth quarter of 2018. The decrease in expense was due to the favorable impact of commodity hedges, higher realized gains and lower unrealized losses on marketable securities at Insurance Services, which were partially offset by unfavorable pension and OPEB costs.

•

The provision for income taxes in the fourth quarter reflected an annual effective tax rate of 25.2 percent, compared with 24.1 percent for the full year of 2018, excluding discrete items discussed in the following paragraph. The increase from 2018 was largely driven by the application of U.S. tax reform provisions to the earnings of certain non-U.S. subsidiaries, which do not have a calendar fiscal year-end. These provisions did not apply to these subsidiaries in 2018.

The provision for income taxes also included the following:

◦	The change from the third-quarter estimated annual tax rate of 26 percent to the annual effective tax rate of 25.2 percent resulted in a $54 million tax benefit in the fourth quarter of 2019.

◦	A tax benefit of $13 million in the fourth quarter of 2019, compared to $4 million in the fourth quarter of 2018, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense.

◦	A net tax benefit of $13 million in the fourth quarter of 2018 for other discrete items.

Construction Industries

Construction Industries’ total sales were $5.020 billion in the fourth quarter of 2019, a decrease of $685 million, or 12 percent, compared with $5.705 billion in the fourth quarter of 2018. The decrease was due to lower sales volume, driven mostly by the impact from changes in dealer inventories. Dealers decreased inventories during the fourth quarter of 2019, compared with dealer inventories that were about flat during the fourth quarter of 2018. Unfavorable price realization also contributed to the decline in sales.

•	In North America, sales decreased due to lower demand driven by the impact from changes in dealer inventories, while end-user demand was about flat. Dealers decreased inventories during the fourth quarter of 2019, compared with an increase during the fourth quarter of 2018.

•	Sales were higher in Latin America. While construction activities remained at low levels, the increase was driven by road and residential construction activities.

•	In EAME, the sales decrease was primarily due to the impact from changes in dealer inventories and lower end-user demand across most of the region. Dealers decreased inventories more during the fourth quarter of 2019 than during the fourth quarter of 2018.

•	Sales in Asia/Pacific were about flat as unfavorable price realization was mostly offset by a few countries’ higher sales volume.

Construction Industries’ profit was $659 million in the fourth quarter of 2019, a decrease of $186 million, or 22 percent, compared with $845 million in the fourth quarter of 2018. The decrease was primarily due to lower sales volume.

In addition, favorable manufacturing costs were mostly offset by unfavorable price realization. Manufacturing costs decreased due to lower period manufacturing and material costs. Period manufacturing costs declined mainly due to the favorable impact of restructuring and cost-reduction actions as well as lower short-term incentive compensation.

Construction Industries’ profit as a percent of total sales was 13.1 percent in the fourth quarter of 2019, compared with 14.8 percent in the fourth quarter of 2018.

Resource Industries

Resource Industries’ total sales were $2.395 billion in the fourth quarter of 2019, a decrease of $402 million, or 14 percent, compared with $2.797 billion in the fourth quarter of 2018. The decrease was due to lower sales volume, driven by changes in dealer inventories and lower end-user demand. Dealers increased inventories during the fourth quarter of 2018, compared with a decrease during the fourth quarter of 2019. While commodity prices are generally supportive of reinvestment, the company continues to believe mining customers remained disciplined in their capital expenditures due to economic uncertainty, resulting in lower sales in the quarter. In addition, end-user demand decreased for equipment supporting non-residential construction.

Resource Industries’ profit was $261 million in the fourth quarter of 2019, a decrease of $139 million, or 35 percent, compared with $400 million in the fourth quarter of 2018. The decrease was mainly due to lower sales volume, partially offset by lower SG&A/R&D expenses and favorable price realization. The decrease in SG&A/R&D expenses reflected a reduction in short-term incentive compensation expense and timing of R&D expenses.

Resource Industries’ profit as a percent of total sales was 10.9 percent in the fourth quarter of 2019, compared with 14.3 percent in the fourth quarter of 2018.

Energy & Transportation

Sales by Application
(Millions of dollars)		Fourth Quarter 2019				Fourth Quarter 2018				$ Change				% Change
Oil and Gas		$	1,523			$	1,719			$	(196	)		(11	%)
Power Generation		1,294				1,271				23				2	%
Industrial		908				902				6				1	%
Transportation		1,441				1,373				68				5	%
External Sales		5,166				5,265				(99		)		(2	%)
Inter-Segment		783				1,022				(239		)		(23	%)
Total Sales		$	5,949			$	6,287			$	(338	)		(5	%)

Energy & Transportation’s total sales were $5.949 billion in the fourth quarter of 2019, a decrease of $338 million, or 5 percent, compared with $6.287 billion in the fourth quarter of 2018. Sales declined primarily due to lower inter-segment engine sales and unfavorable currency impacts.

•	Oil and Gas - Sales were lower mainly in North America. The sales decline was largely due to lower demand for reciprocating engines used in gas compression and lower turbine project deliveries.

•	Power Generation - Sales increased slightly primarily due to higher deliveries for turbines in EAME.

•	Industrial - Sales were about flat as slightly higher sales in North America were partially offset by lower sales in Latin America and EAME.

•	Transportation - Sales were higher mainly due to stronger marine demand in EAME.

Energy & Transportation’s profit was $1.165 billion in the fourth quarter of 2019, an increase of $86 million, or 8 percent, compared with $1.079 billion in the fourth quarter of 2018. The increase was mostly due to lower SG&A/R&D expenses, primarily due to a reduction in short-term incentive compensation expense and lower R&D project expenses. Lower manufacturing costs were mostly offset by lower sales volume.

Energy & Transportation’s profit as a percent of total sales was 19.6 percent in the fourth quarter of 2019, compared with 17.2 percent in the fourth quarter of 2018.

Financial Products Segment

Financial Products’ segment revenues were $846 million in the fourth quarter of 2019, an increase of $34 million, or 4 percent, from the fourth quarter of 2018. The increase was primarily due to a favorable impact from returned or repossessed equipment in Europe and higher average financing rates in North America.

Financial Products’ segment profit was $210 million in the fourth quarter of 2019, compared with $29 million in the fourth quarter of 2018. Most of the increase was due to lower provision for credit losses at Cat Financial, driven by a lower allowance rate compared with 2018. The lower allowance rate was due to write-offs of accounts in 2019 that were reserved for in 2018, primarily in the Cat Power Finance portfolio. In addition, there was a favorable impact from equity securities in Insurance Services, as well as favorable impacts from an increase in net yield on average earning assets and returned or repossessed equipment. These favorable impacts were partially offset by higher SG&A expenses.

Corporate Items and Eliminations

Expense for corporate items and eliminations was $331 million in the fourth quarter of 2019, an increase of $10 million from the fourth quarter of 2018. The increase was primarily due to methodology differences, offset by timing differences and lower restructuring costs.

2018 COMPARED WITH 2017

CONSOLIDATED SALES AND REVENUES

The chart above graphically illustrates reasons for the change in consolidated sales and revenues between 2017 (at left) and 2018 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees.

Total sales and revenues were $54.722 billion in 2018, an increase of $9.260 billion, or 20 percent, compared with $45.462 billion in 2017. The increase was primarily due to higher sales volume driven by improved demand for equipment across the three primary segments, including changes in dealer inventories. Favorable price realization across the three primary segments also contributed to the sales improvement. In addition, sales were higher due to currency impacts, primarily from a stronger euro. Financial Products’ revenues increased slightly.

Sales increased in all regions, with the largest sales increase in North America, which improved 23 percent as strong economic conditions in key end markets drove higher demand. Also contributing to higher sales was an increase in dealer inventories during 2018, compared with dealer inventories that were about flat in 2017.

Sales increased 13 percent in Latin America primarily due to stabilizing economic conditions in several countries in the region that resulted in improved demand from low levels.

EAME sales increased 16 percent primarily due to higher demand, including changes in dealer inventories. The improvement in demand was primarily in Europe. The impact of a stronger euro and favorable price realization also contributed to higher sales. Dealer inventories increased more significantly in 2018 than in 2017.

Asia/Pacific sales increased 28 percent primarily due to higher demand in several countries across the region, including changes in dealer inventories and favorable price realization. Dealer inventories increased during 2018 as compared with dealer inventories that were about flat in 2017.

Dealer machine and engine inventories increased about $2.3 billion in 2018, compared with an increase of about $100 million in 2017. Dealers are independent, and the reasons for changes in their inventory levels vary, including their expectations of future demand and product delivery times. Dealers’ demand expectations take into account seasonal changes, macroeconomic conditions, machine rental rates and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers.

Sales and Revenues by Segment
(Millions of dollars)		2017				Sales Volume				Price Realization				Currency				Inter-Segment / Other				2018				$ Change				% Change
Construction Industries		$	19,240			$	3,663			$	122			$	198			$	14			$	23,237			$	3,997			21	%
Resource Industries		7,861				2,082				316				(14		)		25				10,270				2,409				31	%
Energy & Transportation		19,382				2,637				163				68				535				22,785				3,403				18	%
All Other Segment		570				(26		)		(1		)		3				(64		)		482				(88		)		(15	)%
Corporate Items and Eliminations		(4,377		)		(65		)		1				(1		)		(510		)		(4,952		)		(575		)
Machinery, Energy & Transportation		42,676				8,291				601				254				—				51,822				9,146				21	%
Financial Products Segment		3,093				—				—				—				186				3,279				186				6	%
Corporate Items and Eliminations		(307		)		—				—				—				(72		)		(379		)		(72		)
Financial Products Revenues		2,786				—				—				—				114				2,900				114				4	%
Consolidated Sales and Revenues		$	45,462			$	8,291			$	601			$	254			$	114			$	54,722			$	9,260			20	%

Sales and Revenues by Geographic Region
	North America						Latin America						EAME						Asia/Pacific						External Sales and Revenues						Inter-Segment						Total Sales and Revenues
(Millions of dollars)	$				% Chg		$				% Chg		$				% Chg		$				% Chg		$				% Chg		$				% Chg		$				% Chg
2018
Construction Industries	$	10,754			23%		$	1,479			6%		$	4,410			17%		$	6,473			24%		$	23,116			21%		$	121			13%		$	23,237			21%
Resource Industries	3,357				30%		1,647				29%		2,217				25%		2,667				43%		9,888				32%		382				7%		10,270				31%
Energy & Transportation	9,685				22%		1,331				6%		4,934				11%		2,882				25%		18,832				18%		3,953				16%		22,785				18%
All Other Segment	63				(10%)		3				—%		18				(67%)		70				37%		154				(13%)		328				(16%)		482				(15%)
Corporate Items and Eliminations	(155		)				—						(11		)				(2		)				(168		)				(4,784		)				(4,952		)
Machinery, Energy & Transportation	23,704				23%		4,460				13%		11,568				16%		12,090				28%		51,822				21%		—				—%		51,822				21%
Financial Products Segment	2,153				7%		281				(8%)		387				(7%)		458				26%		3,279				6%		—				—%		3,279				6%
Corporate Items and Eliminations	(234		)				(46		)				(26		)				(73		)				(379		)				—						(379		)
Financial Products Revenues	1,919				6%		235				(10%)		361				(10%)		385				24%		2,900				4%		—				—%		2,900				4%
Consolidated Sales and Revenues	$	25,623			22%		$	4,695			12%		$	11,929			15%		$	12,475			28%		$	54,722			20%		$	—			—%		$	54,722			20%
2017
Construction Industries	$	8,742					$	1,396					$	3,760					$	5,235					$	19,133					$	107					$	19,240
Resource Industries	2,582						1,281						1,775						1,866						7,504						357						7,861
Energy & Transportation	7,959						1,261						4,431						2,313						15,964						3,418						19,382
All Other Segment	70						3						54						51						178						392						570
Corporate Items and Eliminations	(97		)				(1		)				(6		)				1						(103		)				(4,274		)				(4,377		)
Machinery, Energy & Transportation	19,256						3,940						10,014						9,466						42,676						—						42,676
Financial Products Segment	2,006						306						418						363						3,093						—						3,093
Corporate Items and Eliminations	(190		)				(46		)				(19		)				(52		)				(307		)				—						(307		)
Financial Products Revenues	1,816						260						399						311						2,786						—						2,786
Consolidated Sales and Revenues	$	21,072					$	4,200					$	10,413					$	9,777					$	45,462					$	—					$	45,462

CONSOLIDATED OPERATING PROFIT

The chart above graphically illustrates reasons for the change in consolidated operating profit between 2017 (at left) and 2018 (at right). Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.

Operating profit was $8.293 billion in 2018, an increase of $3.833 billion, or 86 percent, compared with $4.460 billion in 2017. The increase was primarily due to higher sales volume and lower restructuring costs. Higher manufacturing costs and increased SG&A/R&D expenses were mostly offset by favorable price realization.

Manufacturing costs were higher due to increased material and freight costs, partially offset by lower warranty expense. Material costs were higher primarily due to increases in steel prices. The impact of tariffs on material costs was about $110 million during 2018. Freight costs were unfavorable primarily due to supply chain inefficiencies as the industry responds to strong global demand.

SG&A/R&D expenses increased primarily due to investments aligned with the company’s strategic growth initiatives.

Restructuring costs were $394 million in 2018, related to restructuring actions across the company. In 2017, we incurred $1.227 billion of restructuring costs with about half related to the closure of the facility in Gosselies, Belgium, and the remainder related to other restructuring actions across the company.

Short-term incentive compensation expense is directly related to financial and operational performance, measured against targets set annually. Short-term incentive compensation expense in 2018 was about $1.4 billion, nearly the same as 2017.

Profit (Loss) by Segment
(Millions of dollars)		2018				2017				$ Change				% Change
Construction Industries		$	4,174			$	3,255			$	919			28	%
Resource Industries		1,603				698				905				130	%
Energy & Transportation		3,938				2,856				1,082				38	%
All Other Segment		23				(44		)		67				152	%
Corporate Items and Eliminations		(1,583		)		(2,659		)		1,076
Machinery, Energy & Transportation		8,155				4,106				4,049				99	%
Financial Products Segment		505				792				(287		)		(36	)%
Corporate Items and Eliminations		17				(116		)		133
Financial Products		522				676				(154		)		(23	)%
Consolidating Adjustments		(384		)		(322		)		(62		)
Consolidated Operating Profit		$	8,293			$	4,460			$	3,833			86	%

Other Profit/Loss and Tax Items

•

Other income/expense in 2018 was expense of $67 million, compared with income of $153 million in 2017. The unfavorable change was primarily a result of an unfavorable impact from equity securities in Insurance Services. Effective January 1, 2018, we adopted a new U.S. GAAP accounting rule that requires our equity securities to be measured at fair value through earnings. Previously, the fair value adjustments for these securities were reported in equity until the securities were sold or an impairment was recognized. We adopted the standard using the modified retrospective approach, with no change to prior year financial statements. During 2018, we recognized a loss of $33 million related to fair value adjustments. During 2017, we recognized gains on sales of securities of $104 million. In addition, the absence of a 2017 pretax gain of $85 million on the sale of Caterpillar’s equity investment in IronPlanet contributed to the unfavorable change.

•	The provision for income taxes for 2018 reflects an annual effective tax rate of 24.1 percent, compared with 27.7 percent for the full year of 2017, excluding the items discussed below. The decrease was primarily due to the reduction in the U.S. corporate tax rate beginning January 1, 2018, along with other changes in the geographic mix of profits from a tax perspective.

We have completed our accounting for the income tax effects of U.S. tax reform legislation and included measurement period adjustments in 2018 of $104 million to reduce the provisionally estimated charge of $2.371 billion recognized in 2017. A $154 million benefit revised the estimated impact of the write-down of U.S. net deferred tax assets to reflect the reduction in the U.S. corporate tax rate from 35 percent to 21 percent. This benefit primarily related to the decision to make an additional discretionary pension contribution of $1.0 billion to U.S. pension plans in 2018 which was treated as deductible on the 2017 U.S. tax return. A $50 million charge revised the provisionally estimated cost of a mandatory deemed repatriation of non-U.S. earnings, including changes in the deferred tax liability related to the amount of earnings considered not indefinitely reinvested as well as the amount of unrecognized tax benefits and state tax liabilities associated with these tax positions.

The provision for income taxes in 2018 and 2017 also included non-cash benefits of $63 million and $111 million, respectively, from reductions in the valuation allowance against U.S. state deferred tax assets due to improved profits in the United States. An additional benefit of $25 million was included in 2018 due to the release of a valuation allowance for a certain non-U.S. subsidiary. The provision for income taxes in 2018 also included a charge of $59 million to correct for an error which resulted in an understatement of the valuation allowance offsetting deferred tax assets for prior years. This error had the effect of overstating profit by $17 million and $33 million for 2017 and 2016, respectively. Management has concluded that the error was not material to any period presented. In addition, a tax benefit of $56 million was recorded in 2018, compared with $64 million in 2017, for the settlement of stock-based compensation awards with associated tax deductions in excess of cumulative U.S. GAAP compensation expense.

Construction Industries

Construction Industries’ total sales were $23.237 billion in 2018, compared with $19.240 billion in 2017. The increase was mostly due to higher sales volume for construction equipment. Sales were also higher due to currency impacts, primarily from a stronger euro.

▪	Sales volume increased primarily due to higher demand for construction equipment and changes in dealer inventories. Dealer inventories increased significantly more during 2018 than during 2017.

Sales increased in all regions.

▪	In North America, the sales increase was primarily due to higher demand for construction equipment, primarily to support oil and gas activities, including pipelines, non-residential building construction and infrastructure activities. In addition, sales increased due to changes in dealer inventories, which increased during 2018, compared with a slight decrease during 2017.

▪	Although construction activities remained weak in Latin America, sales were higher in the region.

▪	Sales increased in EAME primarily due to higher demand and the favorable impact of currency, mostly from a stronger euro. Higher demand was driven by increased construction activities across several countries in the region. Favorable price realization also contributed to the sales increase.

▪	Sales in Asia/Pacific were higher in several countries in the region, most significantly in China, stemming from increased building construction and infrastructure investment. Changes in dealer inventories contributed to the sales improvement as dealer inventories increased in 2018 and were about flat in 2017.

Construction Industries’ profit was $4.174 billion in 2018, compared with $3.255 billion in 2017. The increase in profit was a result of higher sales volume and favorable price realization, partially offset by higher material and freight costs, and increased SG&A/R&D expenses, partially due to spending for strategic growth initiatives.

Construction Industries’ profit as a percent of total sales was 18.0 percent in 2018, compared with 16.9 percent in 2017.

Resource Industries

Resource Industries’ total sales were $10.270 billion in 2018, an increase of $2.409 billion from 2017. The increase was primarily due to higher demand for both mining and heavy construction equipment, including aftermarket parts. Favorable commodity price levels and increased mining production contributed to higher mining equipment sales. In addition, increased sales to heavy construction, quarry and aggregate customers were driven by positive global economic growth. Resource Industries’ customers globally continue to focus on improving productivity and efficiency of existing machine assets, thereby extending equipment life cycles and lowering operating costs. Rebuild, overhaul and maintenance activity was robust, resulting in higher aftermarket parts sales. Favorable price realization also contributed to the sales improvement.

Resource Industries’ profit was $1.603 billion in 2018, compared with $698 million in 2017. The improvement was mostly due to higher sales volume and favorable price realization, partially offset by increased manufacturing costs and unfavorable currency impacts. Manufacturing costs were unfavorable as lower warranty expense was more than offset by higher freight and material costs.

Resource Industries’ profit as a percent of total sales was 15.6 percent in 2018, compared with 8.9 percent in 2017.

Energy & Transportation

Sales by Application
(Millions of dollars)		2018				2017				$ Change				% Change
Oil and Gas		$	5,763			$	4,424			$	1,339			30	%
Power Generation		4,334				3,551				783				22	%
Industrial		3,640				3,445				195				6	%
Transportation		5,095				4,544				551				12	%
External Sales		18,832				15,964				2,868				18	%
Inter-Segment		3,953				3,418				535				16	%
Total Sales		$	22,785			$	19,382			$	3,403			18	%

Energy & Transportation’s total sales were $22.785 billion in 2018, compared with $19.382 billion in 2017. The increase was primarily due to higher sales volume across all applications. Favorable price realization also contributed to the increase in sales.

•	Oil and Gas – Sales increased due to higher demand in North America for well servicing and gas compression applications. Growth in U.S. onshore oil and gas drove increased sales for reciprocating engines and related aftermarket parts. Sales of turbines and turbine-related services were higher for production applications.

•	Power Generation – Sales improved across all regions, with the largest increase in North America, primarily for reciprocating engine applications including data centers, and for aftermarket parts. In addition, sales increased in EAME from reciprocating engine projects, turbines and turbine-related services and favorable currency.

•	Industrial – Sales were higher in Asia/Pacific and North America, primarily due to improving economic conditions supporting higher engine sales into industrial applications. Sales in EAME were about flat as economic uncertainty in a few countries in the Middle East was mostly offset by favorable currency impacts.

•	Transportation – Sales were higher for rail services driven by acquisitions in Asia/Pacific and EAME and increased rail traffic in North America. Marine sales were higher in Asia/Pacific, led by increased activity in the ferry sector.

Energy & Transportation’s profit was $3.938 billion in 2018, compared with $2.856 billion in 2017. The improvement was due to higher sales volume and favorable price realization. This was partially offset due to increased spending for strategic growth initiatives and higher freight costs.

Energy & Transportation’s profit as a percent of total sales was 17.3 percent in 2018, compared with 14.7 percent in 2017.

Financial Products Segment

Financial Products’ segment revenues were $3.279 billion, an increase of $186 million, or 6 percent, from 2017. The increase was primarily due to higher average financing rates and higher average earning assets in North America and Asia/Pacific. These favorable impacts were partially offset by lower intercompany lending activity in North America, lower average earning assets in Latin America and lower average financing rates in Europe.

Financial Products’ segment profit was $505 million in 2018, compared with $792 million in 2017. The decrease was primarily due to an increase in the provision for credit losses at Cat Financial, an unfavorable impact from equity securities in Insurance Services and lower intercompany lending activity. These unfavorable impacts were partially offset by higher average earning assets and an increase in net yield on average earning assets.

At the end of 2018, past dues at Cat Financial were 3.55 percent, compared with 2.78 percent at the end of 2017. Write-offs, net of recoveries, were $189 million for 2018, compared with $114 million for 2017. As of December 31, 2018, Cat Financial’s allowance for credit losses totaled $511 million, or 1.80 percent of finance receivables, compared with $365 million, or 1.33 percent of finance receivables at December 31, 2017. The increase in past dues, write-offs and allowance for credit losses was primarily due to weakening in the Cat Power Finance portfolio.

Corporate Items and Eliminations

Expense for corporate items and eliminations was $1.566 billion in 2018, a decrease of $1.209 billion from 2017. The decrease in expense was mostly due to lower restructuring costs and methodology differences. Restructuring costs were $394 million in 2018. In 2017, restructuring costs impacting operating profit were $1.227 billion with about half related to the closure of the facility in Gosselies, Belgium and the remainder related to other restructuring actions across the company.

RESTRUCTURING COSTS

Restructuring costs for 2019, 2018, and 2017 were as follows:

(Millions of dollars)		2019				2018				2017
Employee separations 1		$	48			$	112			$	525
Contract terminations 1		1				7				183
Long-lived asset impairments 1		65				93				346
Defined benefit plan curtailments and termination benefits 2		—				(8		)		29
Other 3		122				182				173
Total restructuring costs		$	236			$	386			$	1,256
1 Recognized in Other operating (income) expenses.
2 Recognized in Other income (expense).
3 Represents costs related to our restructuring programs, primarily for project management, inventory write-downs, accelerated depreciation and equipment relocation, and also LIFO inventory decrement benefits from inventory liquidations at closed facilities, all of which are primarily included in Cost of goods sold.

The restructuring costs in 2019 were primarily related to restructuring actions across the company. The restructuring costs in 2018 were primarily related to ongoing facility closures across the company. In 2017, about half of the restructuring costs were related to the closure of the facility in Gosselies, Belgium, within Construction Industries, and the remainder was related to other restructuring actions across the company.

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

The following table summarizes the 2018 and 2019 employee separation activity:

(Millions of dollars)
Liability balance at December 31, 2017	$	249
Increase in liability (separation charges)	112
Reduction in liability (payments)	(276		)
Liability balance at December 31, 2018	$	85
Increase in liability (separation charges)	48
Reduction in liability (payments)	(85		)
Liability balance at December 31, 2019	$	48

Most of the remaining liability balance as of December 31, 2019 is expected to be paid in 2020.

In March 2017, Caterpillar informed Belgian authorities of the decision to proceed to a collective dismissal, which led to the closure of the Gosselies site, impacting about 2,000 employees. Production of Caterpillar products at the Gosselies site ended during the second quarter of 2017. The other operations and functions at the Gosselies site were phased out by the end of the second quarter of 2018. The program concluded in 2018, and we incurred a total of $647 million of restructuring costs (primarily in 2017) under this program. These costs were primarily related to employee separation costs, long-lived asset impairments and other costs which were partially offset by a LIFO inventory decrement benefit.

In September 2015, we announced a large scale restructuring plan (the Plan) including a voluntary retirement enhancement program for qualifying U.S. employees, several voluntary separation programs outside of the United States, additional involuntary programs throughout the company and manufacturing facility consolidations and closures. The largest action among those included in the Plan was related to our European manufacturing footprint which led to the Gosselies, Belgium, facility closure as discussed above. We incurred $43 million, $121 million and $817 million of restructuring costs associated with these actions in 2019, 2018 and 2017, respectively. The Plan concluded in 2019, and total restructuring costs incurred since the inception of the Plan were $1,831 million.

In 2020, we expect to incur about $300 - $400 million of restructuring costs, about half for restructuring actions across the company and the remainder for strategic actions to address a small number of products. We expect that prior restructuring actions will result in an incremental benefit to operating costs, primarily Costs of goods sold and SG&A expenses of about $200 million in 2020 compared with 2019.

GLOSSARY OF TERMS

1.	Adjusted Profit Per Share - For 2019, profit per share excluding pension and OPEB mark-to-market losses and a discrete tax benefit related to U.S. tax reform. For 2018, profit per share excluding pension and OPEB mark-to-market losses, restructuring costs, certain deferred tax valuation allowance adjustments and the impact of U.S. tax reform.

2.

All Other Segment - Primarily includes activities such as: business strategy, product management and development, manufacturing and sourcing of filters and fluids, undercarriage, ground engaging tools, fluid transfer products, precision seals, rubber sealing and connecting components primarily for Cat® products; parts distribution; integrated logistics solutions, distribution services responsible for dealer development and administration including a wholly owned dealer in Japan, dealer portfolio management and ensuring the most efficient and effective distribution of machines, engines and parts; and digital investments for new customer and dealer solutions that integrate data analytics with state-of-the-art digital technologies while transforming the buying experience.

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

4.

Construction Industries - A segment primarily responsible for supporting customers using machinery in infrastructure, forestry and building construction applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes asphalt pavers; backhoe loaders; compactors; cold planers; compact track and multi-terrain loaders; mini, small, medium and large track excavators; forestry excavators; feller bunchers; harvesters; knuckleboom loaders; motor graders; pipelayers; road reclaimers; skidders; skid steer loaders; telehandlers; small and medium track-type tractors; track-type loaders; utility vehicles; wheel excavators; compact, small and medium wheel loaders; and related parts and work tools.

5.	Corporate Items and Eliminations - Includes corporate-level expenses; timing differences, as some expenses are reported in segment profit on a cash basis; methodology differences between segment and consolidated external reporting; certain restructuring costs; and inter-segment eliminations.

6.

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

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

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

9.

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

10.

Financial Products Segment - Provides financing alternatives to customers and dealers around the world for Caterpillar products, as well as financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. Financing plans include operating and finance leases, installment sale contracts, working capital loans and wholesale financing plans. The segment also provides insurance and risk management products and services that help customers and dealers manage their business risk. Insurance and risk management products offered include physical damage insurance, inventory protection plans, extended service coverage for machines and engines, and dealer property and casualty insurance. The various forms of financing, insurance and risk management products offered to customers and dealers help support the purchase and lease of our equipment. The segment also earns revenues from Machinery, Energy & Transportation, but the related costs are not allocated to operating segments. Financial Products’ segment profit is determined on a pretax basis and includes other income/expense items.

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

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

13.	Machinery, Energy & Transportation (ME&T) Other Operating (Income) Expenses - Comprised primarily of gains/losses on disposal of long-lived assets, gains/losses on divestitures and legal settlements and accruals.

14.

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

15.	Mark-to-market gains/losses - Represents the net gain or loss of actual results differing from our assumptions and the effects of changing assumptions for our defined benefit pension and OPEB plans. These gains and losses are immediately recognized through earnings upon the annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.

16.	Pension and Other Postemployment Benefit (OPEB) - The company’s defined-benefit pension and postemployment benefit plans.

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

18.

Resource Industries - A segment primarily responsible for supporting customers using machinery in mining, heavy construction, quarry and aggregates, waste and material handling applications. Responsibilities include business strategy, product design, product management and development, manufacturing, marketing and sales and product support. The product portfolio includes large track-type tractors; large mining trucks; autonomous ready vehicles and solutions; hard rock vehicles; longwall miners; electric rope shovels; draglines; hydraulic shovels; rotary drills; large wheel loaders; off-highway trucks; articulated trucks; wheel tractor scrapers; wheel dozers; landfill compactors; soil compactors; hard rock continuous mining systems; select work tools; machinery components and related parts. In addition to equipment, Resource Industries also develops and sells technology products and services to provide customers fleet management, equipment management analytics and autonomous machine capabilities. Resource Industries also manages areas that provide services to other parts of the company, including integrated manufacturing and research and development.

19.

Restructuring Costs - May include costs for employee separation, long-lived asset impairments and contract terminations. These costs are included in Other operating (income) expenses except for defined-benefit plan curtailment losses and special termination benefits, which are included in Other income (expense). Restructuring costs also include other exit-related costs which may consist of accelerated depreciation, inventory write-downs, building demolition, equipment relocation and project management costs and LIFO inventory decrement benefits from inventory liquidations at closed facilities, all of which are primarily included in Cost of goods sold.

20.

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

21.	Services - Enterprise services include, but are not limited to, aftermarket parts, Financial Products’ revenues and other service-related revenues. Machinery, Energy & Transportation segments exclude most Financial Products’ revenues.

LIQUIDITY AND CAPITAL RESOURCES

Sources of funds

We generate significant capital resources from operating activities, which are the primary source of funding for our ME&T operations. Funding for these businesses is also available from commercial paper and long-term debt issuances. Financial Products’ operations are funded primarily from commercial paper, term debt issuances and collections from its existing portfolio. During 2019, we experienced favorable liquidity conditions globally in both our ME&T and Financial Products' operations. On a consolidated basis, we ended 2019 with $8.28 billion of cash, an increase of $427 million from year-end 2018. We intend to maintain a strong cash and liquidity position.

Consolidated operating cash flow for 2019 was $6.91 billion, up from $6.56 billion in 2018. The increase was due to favorable changes in working capital in 2019, mostly offset by lower profit adjusted for non-cash items, which included lower accruals for short-term incentive compensation payments, and a larger discretionary pension contribution. Within working capital, changes to inventories, accounts receivable, customer advances and accrued expenses favorably impacted cash flow but were partially offset by changes in accounts payable. See further discussion of operating cash flow under ME&T and Financial Products.

Total debt as of December 31, 2019 was $37.66 billion, an increase of $1.10 billion from year-end 2018. Debt related to Financial Products decreased $43 million. Debt related to ME&T increased $1.15 billion in 2019, primarily due to the issuance of debt to finance a discretionary pension contribution, which was partially offset by the impact of new accounting guidance on a previously failed sale-leaseback transaction in Japan. On September 19, 2019, we issued $1.0 billion of 3.250% Senior Notes due 2049 and $500 million of 2.600% Senior Notes due 2029. During 2019, we repurchased $4.05 billion of Caterpillar common stock.

We have three global credit facilities with a syndicate of banks totaling $10.50 billion (Credit Facility) available in the aggregate to both Caterpillar and Cat Financial for general liquidity purposes. Based on management’s allocation decision, which can be revised from time to time, the portion of the Credit Facility available to ME&T as of December 31, 2019 was $2.75 billion. Information on our Credit Facility is as follows:

•	The 364-day facility of $3.15 billion (of which $0.82 billion is available to ME&T) expires in September 2020.

•	The three-year facility, as amended and restated in September 2019, of $2.73 billion (of which $0.72 billion is available to ME&T) expires in September 2022.

•	The five-year facility, as amended and restated in September 2019, of $4.62 billion (of which $1.21 billion is available to ME&T) expires in September 2024.

At December 31, 2019, Caterpillar’s consolidated net worth was $14.63 billion, which was above the $9.00 billion required under the Credit Facility. The consolidated net worth is defined as the consolidated shareholder’s equity including preferred stock but excluding the pension and other postretirement benefits balance within Accumulated other comprehensive income (loss).

At December 31, 2019, Cat Financial’s covenant interest coverage ratio was 1.77 to 1. This is above the 1.15 to 1 minimum ratio, calculated as (1) profit excluding income taxes, interest expense and net gain/(loss) from interest rate derivatives to (2) interest expense calculated at the end of each calendar quarter for the rolling four quarter period then most recently ended, required by the Credit Facility.

In addition, at December 31, 2019, Cat Financial’s six-month covenant leverage ratio was 7.65 to 1 and year-end covenant leverage ratio was 7.46 to 1. This is below the maximum ratio of debt to net worth of 10 to 1, calculated (1) on a monthly basis as the average of the leverage ratios determined on the last day of each of the six preceding calendar months and (2) at each December 31, required by the Credit Facility.

In the event Caterpillar or Cat Financial does not meet one or more of their respective financial covenants under the Credit Facility in the future (and are unable to obtain a consent or waiver), the syndicate of banks may terminate the commitments allocated to the party that does not meet its covenants. Additionally, in such event, certain of Cat Financial's other lenders under other loan agreements where similar financial covenants or cross default provisions are applicable, may, at their election, choose to pursue remedies under those loan agreements, including accelerating the repayment of outstanding borrowings. At December 31, 2019, there were no borrowings under the Credit Facility.

Our total credit commitments and available credit as of December 31, 2019 were:

		December 31, 2019
(Millions of dollars)		Consolidated				Machinery, Energy & Transportation				Financial Products
Credit lines available:
Global credit facilities		$	10,500			$	2,751			$	7,749
Other external		4,999				194				4,805
Total credit lines available		15,499				2,945				12,554
Less: Commercial paper outstanding		(4,168		)		—				(4,168		)
Less: Utilized credit		(1,247		)		—				(1,247		)
Available credit		$	10,084			$	2,945			$	7,139

The other consolidated credit lines with banks as of December 31, 2019 totaled $5.00 billion. These committed and uncommitted credit lines, which may be eligible for renewal at various future dates or have no specified expiration date, are used primarily by our subsidiaries for local funding requirements. Caterpillar or Cat Financial may guarantee subsidiary borrowings under these lines.

We receive debt ratings from the major credit rating agencies. Moody’s rates our debt as “low-A”, while Fitch and S&P maintain a “mid-A” debt rating. This split rating has not had a material impact on our borrowing costs or our overall financial health. However, a downgrade of our credit ratings by any of the major credit rating agencies would result in increased borrowing costs and could make access to certain credit markets more difficult. In the event economic conditions deteriorate such that access to debt markets becomes unavailable, ME&T’s operations would rely on cash flow from operations, use of existing cash balances, borrowings from Cat Financial and access to our Credit Facility. Our Financial Products’ operations would rely on cash flow from its existing portfolio, existing cash balances, access to our Credit Facility and other credit line facilities of Cat Financial and potential borrowings from Caterpillar. In addition, we maintain a support agreement with Cat Financial, which requires Caterpillar to remain the sole owner of Cat Financial and may, under certain circumstances, require Caterpillar to make payments to Cat Financial should Cat Financial fail to maintain certain financial ratios.

Machinery, Energy & Transportation

Net cash provided by operating activities was $4.87 billion in 2019, compared with $6.35 billion in 2018. The decrease was primarily due to lower profit in 2019 adjusted for non-cash items, which included lower accruals for short-term compensation payments, and a larger discretionary pension contribution partially offset by favorable changes in working capital. Within working capital, changes to inventories, accounts receivable, customer advances and accrued expenses favorably impacted cash flow but were partially offset by changes in accounts payable.

Net cash used for investing activities in 2019 was $48 million, compared with net cash used of $1.19 billion in 2018. The change was primarily due to decreased ME&T lending with Financial Products during 2019 and the acquisitions of ECM S.p.A. and Downer Freight Rail in 2018.

Net cash used for financing activities during 2019 was $4.48 billion, compared with net cash used of $5.47 billion in 2018. The change was primarily due to the issuance of $1.5 billion of long-term debt used to fund a discretionary pension contribution. This was partially offset by an increase in repurchases of Caterpillar common stock of $249 million and an increase in dividends paid of $181 million.

While our short-term priorities for the use of cash may vary from time to time as business needs and conditions dictate, our long-term cash deployment strategy is focused on the following priorities. Our top priority is to maintain a strong financial position in support of a Mid-A rating. Next, we intend to fund operational requirements and commitments. Then, we intend to fund priorities that profitably grow the company and return capital to shareholders through dividend growth and share repurchases. Additional information on cash deployment is as follows:

Strong financial position — Our top priority is to maintain a strong financial position in support of a mid-A rating. We track a diverse group of financial metrics that focus on liquidity, leverage, cash flow and margins which align with our cash deployment actions and the various methodologies used by the major credit rating agencies.

Operational excellence and commitments — Capital expenditures were $1.07 billion during 2019, compared to $1.22 billion in 2018. We expect ME&T’s capital expenditures in 2020 to be about $1.2 billion. We made $1.81 billion of contributions to our pension and other postretirement benefit plans during 2019, including a $1.5 billion discretionary U.S. pension plan contribution. By comparison, we made $1.35 billion of contributions to our pension and other postretirement plans in 2018, including a $1.0 billion discretionary contribution made to our U.S. pension plans. We expect to make approximately $280 million of contributions to our pension and OPEB plans in 2020.

Fund strategic growth initiatives and return capital to shareholders — We intend to utilize our liquidity and debt capacity to fund targeted investments that drive long-term profitable growth focused in the areas of expanded offerings and services, including acquisitions.

As part of our new capital allocation strategy, ME&T free cash flow is a liquidity measure we will use going forward to determine the cash generated and available for financing activities including debt repayments, dividends and share repurchases. We define ME&T free cash flow as cash from ME&T operations excluding discretionary pension and other postretirement benefit plan contributions less capital expenditures. A goal of our new capital allocation strategy is to return substantially all ME&T free cash flow to shareholders in the form of dividends and share repurchases, while maintaining our mid-A rating.

Our share repurchase plans are subject to the company’s cash deployment priorities and are evaluated on an ongoing basis considering the financial condition of the company and the economic outlook, corporate cash flow, the company's liquidity needs and the health and stability of global credit markets. The timing and amount of future repurchases may vary depending on market conditions and investing priorities. In July 2018, the Board of Directors approved an authorization to repurchase up to $10 billion of Caterpillar common stock (the 2018 Authorization) effective January 1, 2019, with no expiration. In 2019, we repurchased $4.05 billion of Caterpillar common stock, with $5.95 billion remaining under the 2018 Authorization as of December 31, 2019. Caterpillar's basic shares outstanding as of December 31, 2019 were approximately 550 million.

Each quarter, our Board of Directors reviews the company's dividend for the applicable quarter. The Board evaluates the financial condition of the company and considers the economic outlook, corporate cash flow, the company's liquidity needs, and the health and stability of global credit markets to determine whether to maintain or change the quarterly dividend. Dividends totaled $2.13 billion in 2019, representing 86 cents per share paid in each of the first and second quarters and $1.03 per share paid in each of the third and fourth quarters.

Financial Products

Financial Products operating cash flow was $1.50 billion in 2019, compared with $1.52 billion in 2018. Net cash used for investing activities was $414 million in 2019, compared with $2.78 billion in 2018. The change was primarily due to the impact of net intercompany purchased receivables and higher collections of finance receivables. Net cash used for financing activities in 2019 was $991 million, compared with net cash provided by financing activities of $1.26 billion in 2018. The change was primarily due to lower portfolio funding requirements and lower net intercompany borrowings, partially offset by a lower dividend payment to ME&T.

Contractual obligations

The company has committed cash outflow related to long-term debt, operating lease agreements, postretirement benefit obligations, purchase obligations, interest on long-term debt and other long-term contractual obligations. As of December 31, 2019, minimum payments for these obligations were:

(Millions of dollars)		2020				2021-2022				2023-2024				After 2024				Total
Long-term debt:
Machinery, Energy & Transportation		$	16			$	1,919			$	1,102			$	6,716			$	9,753
Financial Products		6,198				12,508				4,334				341				23,381
Total long-term debt 1		6,214				14,427				5,436				7,057				33,134
Operating leases		185				225				110				175				695
Postretirement benefit obligations 2		280				705				745				1,860				3,590
Purchase obligations:
Accounts payable 3		5,957				—				—				—				5,957
Purchase orders 4		5,103				3				—				—				5,106
Other contractual obligations 5		160				87				26				—				273
Total purchase obligations		11,220				90				26				—				11,336
Interest on long-term debt 6		909				1,291				834				6,362				9,396
Other long-term obligations 7		685				546				159				90				1,480
Total contractual obligations		$	19,493			$	17,284			$	7,310			$	15,544			$	59,631

1	Amounts exclude unamortized discounts, debt issuance costs, and fair value adjustments.

2	Amounts represent expected contributions to our pension and other postretirement benefit plans through 2029, offset by expected Medicare Part D subsidy receipts.

3	Amount represents invoices received and recorded as liabilities in 2019, but scheduled for payment in 2020. These represent short-term obligations made in the ordinary course of business.

4	Amount represents contractual obligations for material and services on order at December 31, 2019 but not yet delivered. These represent short-term obligations made in the ordinary course of business.

5	Amounts represent long-term commitments entered into with key suppliers for minimum purchases quantities.

6	Amounts represent estimated contractual interest payments on long-term debt, including finance lease interest payments.

7	Amounts represent contractual obligations primarily for logistics services agreements related to our former third party logistics business, software license and development contracts and IT consulting contracts and outsourcing contracts for benefit plan administration and software system support.

The total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $1,778 million at December 31, 2019. Payment of these obligations would result from settlements with taxing authorities. Due to the difficulty in determining the timing of settlements, these obligations are not included in the table above. We do not expect to make a tax payment related to these obligations within the next year that would significantly impact liquidity.

Off-balance sheet arrangements

We are a party to certain off-balance sheet arrangements, primarily in the form of guarantees. Information related to guarantees appears in Note 21 – “Guarantees and product warranty” of Part II, Item 8 “Financial Statements and Supplementary Data”.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting pronouncements, see Note 1J — “New accounting guidance” of Part II, Item 8 “Financial Statements and Supplementary Data.”

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts. The more significant estimates include: residual values for leased assets, fair values for goodwill impairment tests, warranty liability, reserves for product liability and insurance losses, postretirement benefits, post-sale discounts, credit losses and income taxes. We have incorporated many years of data into the determination of each of these estimates and we have not historically experienced significant adjustments. These assumptions are reviewed at least annually with the Audit Committee of the Board of Directors. Following are the methods and assumptions used in determining our estimates and an indication of the risks inherent in each.

Residual values for leased assets – The residual value of Cat Financial’s leased equipment is determined based on its estimated end-of-term market value. We estimate the residual value of leased equipment at the inception of the lease based on a number of factors, including historical wholesale market sales prices, past remarketing experience and any known significant market/product trends. The following critical factors are also considered in our residual value estimates: lease term, market size and demand, total expected hours of usage, machine configuration, application, location, model changes, quantities, third-party residual guarantees and contractual customer purchase options.

Upon termination of the lease, the equipment is either purchased by the lessee or sold to a third party, in which case we may record a gain or a loss for the difference between the estimated residual value and the sale price.

During the term of our leases, we monitor residual values. For operating leases, adjustments to depreciation expense reflecting changes in residual value estimates are recorded prospectively on a straight-line basis. For finance leases, residual value adjustments are recognized through a reduction of finance revenue over the remaining lease term.

We evaluate the carrying value of equipment on operating leases for potential impairment when we determine a triggering event has occurred. When a triggering event occurs, a test for recoverability is performed by comparing projected undiscounted future cash flows to the carrying value of the equipment on operating leases. If the test for recoverability identifies a possible impairment, the fair value of the equipment on operating leases is measured in accordance with the fair value measurement framework. An impairment charge is recognized for the amount by which the carrying value of the equipment on operating leases exceeds its estimated fair value.

At December 31, 2019, the aggregate residual value of equipment on operating leases was $2.15 billion. Without consideration of other factors such as third-party residual guarantees or contractual customer purchase options, a 10 percent non-temporary decrease in the market value of our equipment subject to operating leases would reduce residual value estimates and result in the recognition of approximately $80 million of additional annual depreciation expense.

Fair values for goodwill impairment tests – We test goodwill for impairment annually, at the reporting unit level, and whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell all or a portion of a reporting unit. 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 either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the quantitative goodwill impairment test, we compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.

The impairment test process requires valuation of the respective reporting unit, which we primarily determine using an income approach based on a discounted five year forecasted cash flow with a year-five residual value. The residual value is computed using the constant growth method, which values the forecasted cash flows in perpetuity. The income approach is supported by a reconciliation of our calculated fair value for Caterpillar to the company’s market capitalization. The assumptions about future cash flows and growth rates are based on each reporting unit's long-term forecast and are subject to review and approval by senior management. A reporting unit’s discount rate is a risk-adjusted weighted average cost of capital, which we believe approximates the rate from a market participant’s perspective. The estimated fair value could be impacted by changes in market conditions, interest rates, growth rates, tax rates, costs, pricing and capital expenditures. The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

Our annual impairment tests completed in the fourth quarter of 2019 indicated the fair value of each reporting unit was substantially above its respective carrying value, including goodwill. Caterpillar’s market capitalization has remained significantly above the net book value of the Company.

An unfavorable change in our expectations for the financial performance of our reporting units, particularly long-term growth and profitability, would reduce the fair value of our reporting units. The demand for our equipment and related parts is highly cyclical and significantly impacted by commodity prices, although the impact may vary by reporting unit. The energy and mining industries are major users of our products, including the coal, iron ore, gold, copper, oil and natural gas industries. Decisions to purchase our products are dependent upon the performance of those industries, which in turn are dependent in part on commodity prices. Lower commodity prices or industry specific circumstances that have a negative impact to the valuation assumptions may reduce the fair value of our reporting units. Should such events occur and it becomes more likely than not that a reporting unit’s fair value has fallen below its carrying value, we will perform an interim goodwill impairment test(s), in addition to the annual impairment test. Future impairment tests may result in a goodwill impairment, depending on the outcome of the quantitative impairment test. A goodwill impairment would be reported as a non-cash charge to earnings.

Warranty liability – At the time a sale is recognized, we record estimated future warranty costs. The warranty liability is determined by applying historical claim rate experience to the current field population and dealer inventory. Generally, historical claim rates are based on actual warranty experience for each product by machine model/engine size by customer or dealer location (inside or outside North America). Specific rates are developed for each product shipment month and are updated monthly based on actual warranty claim experience. Warranty costs may differ from those estimated if actual claim rates are higher or lower than our historical rates.

Product liability and insurance loss reserve – We determine these reserves based upon reported claims in process of settlement and actuarial estimates for losses incurred but not reported. Loss reserves, including incurred but not reported reserves, are based on estimates and ultimate settlements may vary significantly from such estimates due to increased claims frequency or severity over historical levels.

Postretirement benefits – We sponsor defined benefit pension plans and/or other postretirement benefit plans (retirement healthcare and life insurance) to employees in many of our locations throughout the world. There are assumptions used in the accounting for these defined benefit plans that include discount rate, expected return on plan assets, expected rate of compensation increase, the future health care trend rate, mortality and other economic and demographic assumptions. The actuarial assumptions we use may change or differ significantly from actual results, which may result in a material impact to our consolidated financial statements.

The effects of actual results differing from our assumptions and the effects of changing assumptions are considered actuarial gains or losses. We utilize a mark-to-market approach in recognizing actuarial gains or losses immediately through earnings upon the annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.

Primary actuarial assumptions were determined as follows:

•

The assumed discount rate is used to discount future benefit obligations back to today’s dollars. The U.S. discount rate is based on a benefit cash flow-matching approach and represents the rate at which our benefit obligations could effectively be settled as of our measurement date, December 31. The benefit cash flow-matching approach involves analyzing Caterpillar’s projected cash flows against a high quality bond yield curve, calculated using a wide population of corporate Aa bonds available on the measurement date. A similar approach is used to determine the assumed discount rate for our most significant non-U.S. plans. In estimating the service and interest cost components of net periodic benefit cost, we utilize a full yield curve approach in determining a discount rate. This approach applies the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.

Discount rates are sensitive to changes in interest rates. A decrease in the discount rate would increase our obligation and future expense.

•

The expected long-term rate of return on plan assets is based on our estimate of long-term passive returns for equities and fixed income securities weighted by the allocation of our plan assets. Based on historical performance, we increase the passive returns due to our active management of the plan assets. This rate is impacted by changes in general market conditions, but because it represents a long-term rate, it is not significantly impacted by short-term market swings. Changes in our allocation of plan assets would also impact this rate. For example, a shift to more fixed income securities would lower the rate. A decrease in the rate would increase our expense. The expected return on plan assets is calculated using the fair value of plan assets as of our measurement date, December 31.

•	The expected rate of compensation increase is used to develop benefit obligations using projected pay at retirement. It represents average long-term salary increases. This rate is influenced by our long-term compensation policies. An increase in the rate would increase our obligation and expense.

•

The assumed health care trend rate represents the rate at which health care costs are assumed to increase and is based on historical and expected experience. Changes in our projections of future health care costs due to general economic conditions and those specific to health care (e.g., technology driven cost changes) will impact this trend rate. An increase in the trend rate would increase our obligation and expense.

•	The mortality assumption is used to estimate the life expectancy of plan participants. An increase in the life expectancy of plan participants will result in an increase in our obligation and expense.

Postretirement Benefit Plan Actuarial Assumptions Sensitivity

The effects of a one percentage-point change in certain actuarial assumptions on 2019 pension and OPEB costs and obligations are as follows:

		2019 Benefit Cost								Year-end Benefit Obligation
(Millions of dollars)		One percentage- point increase				One percentage- point decrease				One percentage- point increase				One percentage- point decrease
U.S. Pension benefits:
Assumed discount rate		$	54			$	(71	)		$	(1,893	)		$	2,305
Expected rate of compensation increase		2				(2		)		—				—
Expected long-term rate of return on plan assets		(122		)		122				—				—
Non-U.S. Pension benefits:
Assumed discount rate		7				(10		)		(634		)		610
Expected rate of compensation increase		5				(4		)		41				(35		)
Expected long-term rate of return on plan assets		(39		)		39				—				—
Other postretirement benefits:
Assumed discount rate		8				(10		)		(366		)		437
Expected rate of compensation increase		—				—				1				(1		)
Expected long-term rate of return on plan assets		(3		)		3				—				—
Assumed health care cost trend rate		13				(11		)		158				(133		)

Actuarial Assumptions

		U.S. Pension Benefits									Non-U.S. Pension Benefits									Other Postretirement Benefits
		2019			2018			2017			2019			2018			2017			2019			2018			2017
Weighted-average assumptions used to determine benefit obligation, end of year:
Discount rate		3.2	%		4.2	%		3.5	%		1.9	%		2.5	%		2.4	%		3.2	%		4.2	%		3.6	%
Rate of compensation increase 1		—	%		4.0	%		4.0	%		2.0	%		3.0	%		4.0	%		4.0	%		4.0	%		4.0	%
Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate used to measure service cost		4.3	%		3.7	%		4.2	%		2.5	%		2.3	%		2.4	%		4.1	%		3.5	%		3.9	%
Discount rate used to measure interest cost		3.9	%		3.2	%		3.3	%		2.3	%		2.2	%		2.3	%		3.9	%		3.2	%		3.3	%
Expected rate of return on plan assets		5.9	%		6.3	%		6.7	%		3.8	%		5.2	%		5.9	%		7.2	%		7.5	%		7.5	%
Rate of compensation increase		4.0	%		4.0	%		4.0	%		3.0	%		4.0	%		4.0	%		4.1	%		4.0	%		4.0	%
Health care cost trend rates at year-end:
Health care trend rate assumed for next year																				6.1	%		6.1	%		6.1	%
Rate that the cost trend rate gradually declines to																				5.0	%		5.0	%		5.0	%
Year that the cost trend rate reaches ultimate rate																				2025			2025			2022
1 Effective December 31, 2019, all U.S. pension benefits were frozen, and accordingly this assumption is no longer applicable.

See Note 12 - “Postemployment benefit plans” of Part II, Item 8 “Financial Statement and Supplemental Data” for further information regarding the accounting for postretirement benefits.

Post-sale discount reserve – We provide discounts to dealers through merchandising programs. We have numerous programs that are designed to promote the sale of our products. The most common dealer programs provide a discount when the dealer sells a product to a targeted end user. The amount of accrued post-sale discounts was $1.7 billion and $1.5 billion as of December 31, 2019 and 2018, respectively. The reserve represents discounts that we expect to pay on previously sold units and is reviewed at least quarterly. The reserve is adjusted if discounts paid differ from those estimated. Historically, those adjustments have not been material.

Credit loss reserve – The allowance for credit losses is an estimate of the losses inherent in our finance receivable portfolio and includes consideration of accounts that have been individually identified as impaired, as well as pools of finance receivables where it is probable that certain receivables in the pool are impaired but the individual accounts cannot yet be identified. In identifying and measuring impairment, management takes into consideration past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and current economic conditions.

Accounts are identified for individual review based on past-due status and information available about the customer, such as financial statements, news reports and published credit ratings, as well as general information regarding industry trends and the economic environment in which our customers operate. The allowance for credit losses attributable to finance receivables that are individually evaluated and determined to be impaired is based on the present value of expected future cash flows discounted at the receivables’ effective interest rate, the fair value of the collateral for collateral-dependent receivables or the observable market price of the receivable. In determining collateral value, we estimate the current fair market value of the collateral less selling costs. We also consider credit enhancements such as additional collateral and contractual third-party guarantees. The allowance for credit losses attributable to the remaining accounts not yet individually identified as impaired is estimated based on loss forecast models utilizing probabilities of default, our estimate of the loss emergence period and the estimated loss given default. In addition, qualitative factors not able to be fully captured in our loss forecast models including industry trends, macroeconomic factors and model imprecision are considered in the evaluation of the adequacy of the allowance for credit losses. These qualitative factors are subjective and require a degree of management judgment.

While management believes it has exercised prudent judgment and applied reasonable assumptions, there can be no assurance that in the future, changes in economic conditions or other factors would not cause changes in the financial health of our customers. If the financial health of our customers deteriorates, the timing and level of payments received could be impacted and therefore, could result in a change to our estimated losses.

Income taxes – We are subject to the income tax laws of the many jurisdictions in which we operate. These tax laws are complex, and the manner in which they apply to our facts is sometimes open to interpretation. In establishing the provision for income taxes, we must make judgments about the application of these inherently complex tax laws. Our income tax positions and analysis are based on currently enacted tax law. Future changes in tax law or related interpretations could significantly impact the provision for income taxes, the amount of taxes payable, and the deferred tax asset and liability balances. Changes in tax law are reflected in the period of enactment with related interpretations considered in the period received.

Despite our belief that our tax return positions are consistent with applicable tax laws, we believe that taxing authorities could challenge certain positions. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. We record tax benefits for uncertain tax positions based upon management’s evaluation of the information available at the reporting date. To be recognized in the financial statements, a tax benefit must be at least more likely than not of being sustained based on technical merits. The benefit for positions meeting the recognition threshold is measured as the largest benefit more likely than not of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Significant judgment is required in making these determinations and adjustments to unrecognized tax benefits may be necessary to reflect actual taxes payable upon settlement. Adjustments related to positions impacting the effective tax rate affect the provision for income taxes. Adjustments related to positions impacting the timing of deductions impact deferred tax assets and liabilities. For tax years 2007 to 2012 including the impact of a loss carryback to 2005, the IRS has proposed to tax in the United States profits earned from certain parts transactions by Caterpillar SARL (CSARL), based on the IRS examination team’s application of “substance-over-form” or “assignment-of-income” judicial doctrines. CSARL is primarily taxable locally in Switzerland. We are vigorously contesting the proposed increases to tax and penalties for these years of approximately $2.3 billion. We believe that the relevant transactions complied with applicable tax laws and did not violate judicial doctrines. The purchase of parts by CSARL from unrelated parties and the subsequent sale of those parts to unrelated dealers outside the United States have substantial legal, commercial, and economic consequences for the parties involved. Therefore, we have concluded that the largest amount of benefit that is more likely than not to be sustained related to this position is the entire benefit. As a result, no amount related to these IRS adjustments is reflected in unrecognized tax benefits. We have filed U.S. income tax returns on this same basis for years after 2012. We currently believe the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.

Deferred tax assets generally represent tax benefits for tax deductions or credits available in future tax returns. Certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes the trend of U.S. GAAP earnings and estimates the impact of future taxable income, reversing temporary differences and available prudent and feasible tax planning strategies. We give less weight in this analysis to mark-to-market adjustments to remeasure our pension and OPEB plans as we do not consider these adjustments indicative of ongoing earnings trends. Should a change in facts or circumstances lead to a change in judgment about the ultimate realizability of a deferred tax asset, we record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in the provision for income taxes.

Additional information related to income taxes is included in Note 6 - “Income taxes” of Part II, Item 8 “Financial statements and Supplementary Data.”

OTHER MATTERS

ENVIRONMENTAL AND LEGAL MATTERS

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

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

On January 27, 2020, the Brazilian Federal Environmental Agency (“IBAMA”) issued Caterpillar Brasil Ltda a notice of violation regarding allegations around the requirements for use of imported oils at the Piracicaba, Brazil facility. We have instituted processes to address the allegations. While we are still discussing resolution of these allegations with IBAMA, the initial notice from IBAMA included a proposed fine of approximately $370,000. We do not expect this fine or our response to address the allegations to have a material adverse effect on the Company's consolidated results of operations, financial position or liquidity.

On January 7, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company has received additional subpoenas relating to this investigation requesting additional documents and information relating to, among other things, the purchase and resale of replacement parts by Caterpillar Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL and related structures. On March 2-3, 2017, agents with the Department of Commerce, the Federal Deposit Insurance Corporation and the Internal Revenue Service executed search and seizure warrants at three facilities of the Company in the Peoria, Illinois area, including its former corporate headquarters. The warrants identify, and agents seized, documents and information related to, among other things, the export of products from the United States, the movement of products between the United States and Switzerland, the relationship between Caterpillar Inc. and Caterpillar SARL, and sales outside the United States. It is the Company’s understanding that the warrants, which concern both tax and export activities, are related to the ongoing grand jury investigation. The Company is continuing to cooperate with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.

On March 20, 2014, Brazil’s Administrative Council for Economic Defense (CADE) published a Technical Opinion which named 18 companies and over 100 individuals as defendants, including two subsidiaries of Caterpillar Inc., MGE - Equipamentos e Serviços Ferroviários Ltda. (MGE) and Caterpillar Brasil Ltda. The publication of the Technical Opinion opened CADE’s official administrative investigation into allegations that the defendants participated in anticompetitive bid activity for the construction and maintenance of metro and train networks in Brazil. While companies cannot be held criminally liable for anticompetitive conduct in Brazil, criminal charges have been brought against one current employee of MGE and two former employees of MGE involving the same conduct alleged by CADE. On July 8, 2019, CADE found MGE, one of its current employees and two of its former employees liable for anticompetitive conduct. CBL was dismissed from the proceeding without any finding of liability. MGE intends to appeal CADE's findings. We currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.

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

RETIREMENT BENEFITS

We recognize mark-to-market gains and losses immediately through earnings upon the remeasurement of our pension and OPEB plans. Mark-to-market gains and losses represent the effects of actual results differing from our assumptions and the effects of changing assumptions. Changes in discount rates and differences between the actual return on plan assets and the expected return on plan assets generally have the largest impact on mark-to-market gains and losses.

The table below summarizes the amounts of net periodic benefit cost recognized for 2019, 2018 and 2017, respectively, and includes expected cost for 2020.

(Millions of dollars)		2020 Expected				2019				2018				2017
U.S. Pension Benefits		$	(308	)		$	(7	)		$	(149	)		$	(85	)
Non-U.S. Pension Benefits		(4		)		19				(69		)		(22		)
Other Postretirement Benefits		150				158				138				148
Mark-to-market loss (gain)		—			1	468				495				301
Total net periodic benefit cost (benefit)		$	(162	)		$	638			$	415			$	342

1 Expected net periodic benefit cost (benefit) does not include an estimate for mark-to-market gains or losses.

•

Expected decrease in expense in 2020 compared to 2019 - Excluding the impact of mark-to-market gains and losses, our net periodic benefit cost is expected to decrease $332 million in 2020. This decrease is primarily due to lower interest cost as a result of lower discount rates at year-end 2019, elimination of service cost for our U.S. pension plans freezing benefit accruals and higher expected return on plan assets due to a higher asset base at year-end 2019.

•	Increase in expense in 2019 compared to 2018 - Primarily due to lower expected return on plan assets (U.S. pension plans had an expected rate of return of 5.9 percent in 2019 compared to 6.3 percent in 2018) and higher interest costs due to higher discount rates at year-end 2018.

•	Increase in expense in 2018 compared to 2017 - Primarily due to higher net mark-to-market losses in 2018 compared to 2017. This was partially offset by a higher expected return on plan assets and curtailment gains compared to curtailment and termination charges in 2017.

The primary factors that resulted in mark-to-market losses for 2019, 2018 and 2017 are described below. The net mark-to-market losses were included in Other income (expense) in the Results of Operations.

•	2019 net mark-to-market loss of $468 million - Primarily due to lower discount rates at the end of 2019 compared to the end of 2018. This was partially offset by a higher actual return on plan assets compared to the expected return on plan assets (U.S. pension plans had an actual rate of return of 22.3 percent compared to an expected rate of return of 5.9 percent).

•	2018 net mark-to-market loss of $495 million - Primarily due to the difference between the actual return on plan assets compared to the expected return on plan assets (U.S. pension plans had an actual rate of return of negative 5.4 percent compared to an expected rate of return of 6.3 percent). This was partially offset by higher discount rates at the end of 2018 compared to the end of 2017.

•

2017 net mark-to-market loss of $301 million - Primarily due to lower discount rates at the end of 2017 compared to the end of 2016 and changes in our mortality assumption (discussed below). This was partially offset by the difference between the actual return on plan assets compared to the expected return on plan assets (U.S. pension plans had an actual rate of return of 15.5 percent compared to an expected rate of return of 6.7 percent).

In the fourth quarter of 2017, the company reviewed and made changes to the mortality assumptions primarily for our U.S. pension plans which resulted in an overall increase in the life expectancy of plan participants. As of December 31, 2017 these changes resulted in an increase in our Liability for postemployment benefits of approximately $290 million.

In the first quarter of 2017, we announced the closure of our Gosselies, Belgium facility. This announcement impacted certain employees that participated in a defined benefit pension plan and resulted in a net loss of $20 million in the first quarter of 2017 for curtailment and termination benefits.

SENSITIVITY

Foreign Exchange Rate Sensitivity

ME&T operations 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 approximately five years. Based on the anticipated and firmly committed cash inflow and outflow for our ME&T operations for the next 12 months and the foreign currency derivative instruments in place at year-end, a hypothetical 10 percent weakening of the U.S. dollar relative to all other currencies would adversely affect our expected 2020 cash flow for our ME&T operations by approximately $225 million. Last year similar assumptions and calculations yielded a potential $250 million adverse impact on 2019 cash flow. We determine our net exposures by calculating the difference in cash inflow and outflow by currency and adding or subtracting outstanding foreign currency derivative instruments. We multiply these net amounts by 10 percent to determine the sensitivity.

In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions and future transactions denominated in foreign currencies. Since our policy allows the use of foreign currency forward, option and cross currency contracts to offset the risk of currency mismatch between our assets and liabilities and exchange rate risk associated with future transactions denominated in foreign currencies, a 10 percent change in the value of the U.S. dollar relative to all other currencies would not have a material effect on our consolidated financial position, results of operations or cash flow. Neither our policy nor the effect of a 10 percent change in the value of the U.S. dollar has changed from that reported at the end of last year.

The effect of the hypothetical change in exchange rates ignores the effect this movement may have on other variables, including competitive risk. If it were possible to quantify this competitive impact, the results would probably be different from the sensitivity effects shown above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the U.S. dollar. In reality, some currencies may weaken while others may strengthen. Our primary exposure (excluding competitive risk) is to exchange rate movements in the Swiss franc, Chinese yuan, Japanese yen, Indian rupee, and Australian dollar.

Interest Rate Sensitivity

For our ME&T operations, we have the option to use interest rate contracts to lower the cost of borrowed funds by attaching fixed-to-floating interest rate contracts to fixed-rate debt, and by entering into forward rate agreements on future debt issuances. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would have a minimal impact to the 2020 pre-tax earnings of ME&T. Last year, similar assumptions and calculations yielded a minimal impact to 2019 pre-tax earnings.

For our Financial Products operations, we use interest rate derivative instruments primarily to meet our match-funding objectives and strategies. We have a match-funding policy that addresses the interest rate risk by aligning the interest rate profile (fixed or floating rate and duration) of our debt portfolio with the interest rate profile of our finance receivable portfolio within predetermined range 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 finance receivable portfolio. Match funding reduces the volatility of margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move.

In order to properly manage sensitivity to changes in interest rates, Financial Products measures the potential impact of different interest rate assumptions on pre-tax earnings. All on-balance sheet positions, including derivative financial instruments, are included in the analysis. The primary assumptions included in the analysis are that there are no new fixed rate assets or liabilities, the proportion of fixed rate debt to fixed rate assets remains unchanged and the level of floating rate assets and debt remain constant. An analysis of the December 31, 2019 balance sheet, using these assumptions, estimates the impact of a 100 basis point immediate and sustained adverse change in interest rates to have a minimal impact on 2020 pre-tax earnings. Last year, similar assumptions and calculations yielded a minimal impact to 2019 pre-tax earnings.

This analysis does not necessarily represent our current outlook of future market interest rate movement, nor does it consider any actions management could undertake in response to changes in interest rates. Accordingly, no assurance can be given that actual results would be consistent with the results of our estimate.

NON-GAAP FINANCIAL MEASURES

The following definitions are provided for the non-GAAP financial measures used in this report. These non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP and therefore are unlikely to be comparable to the calculation of similar measures for other companies. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures.

We believe it is important to separately quantify the profit impact of several significant items in order for our results to be meaningful to our readers. These items consist of (i) pension and OPEB mark-to-market losses resulting from plan remeasurements, (ii) U.S. tax reform impact, (iii) restructuring costs in 2018, which were incurred to generate longer-term benefits and (iv) certain deferred tax valuation allowance adjustments. We do not consider these items indicative of earnings from ongoing business activities and believe the non-GAAP measures will provide investors with useful perspective on underlying business results and trends and aid with assessing our period-over-period results. In addition, we provide a calculation of ME&T free cash flow as we believe it is an important measure for investors to determine the cash generation available for financing activities including debt repayments, dividends and share repurchases.

Reconciliations of adjusted operating profit margin to the most directly comparable GAAP measure, operating profit as a percent of sales and revenues are as follows:

		Three Months Ended December 31,						Twelve Months Ended December 31,
		2019			2018			2019			2018
Operating profit as a percent of total sales and revenues		14.1	%		13.1	%		15.4	%		15.2	%
Restructuring costs 1		—	%		0.7	%		—	%		0.7	%
Adjusted operating profit margin		14.1	%		13.8	%		15.4	%		15.9	%
1 2019 Restructuring costs were not material.

Reconciliations of adjusted profit before taxes to the most directly comparable GAAP measure, consolidated profit before taxes, are as follows:

		Three Months Ended December 31,								Twelve Months Ended December 31,
(millions of dollars)		2019				2018				2019				2018
Profit before taxes		$	1,365			$	1,367			$	7,812			$	7,822
Mark-to-market losses		$	468			$	495			$	468			$	495
Restructuring costs		$	—			$	93			$	—			$	386
Adjusted profit before taxes		$	1,833			$	1,955			$	8,280			$	8,703

Reconciliations of adjusted profit per share to the most directly comparable GAAP measure, profit per share - diluted, are as follows:

		Three Months Ended December 31,								Twelve Months Ended December 31,
		2019				2018				2019				2018
Profit per share - diluted		$	1.97			$	1.78			$	10.74			$	10.26
Per share mark-to-market losses 1		$	0.65			$	0.66			$	0.64			$	0.64
Per share U.S. tax reform impact		$	—			$	0.09			$	(0.31	)		$	(0.17	)
Per share restructuring costs 2		$	—			$	0.13			$	—			$	0.50
Per share deferred tax valuation allowance adjustments		$	—			$	(0.11	)		$	—			$	(0.01	)
Adjusted profit per share		$	2.63			$	2.55			$	11.06			$	11.22
1 At statutory tax rates.
2 2018 restructuring costs were at statutory tax rates. 2019 restructuring costs were not material.

Reconciliations of ME&T free cash flow to the most directly comparable GAAP measure, net cash provided by operating activities are as follows:

Millions of dollars		Twelves Months Ended December 31,
		2019				2018
ME&T net cash provided by operating activities 1		$	4,871			$	6,347
ME&T discretionary pension contributions		$	1,500			$	1,000
ME&T capital expenditures		$	(1,074	)		$	(1,221	)
ME&T free cash flow		$	5,297			$	6,126
1 See reconciliation of ME&T net cash provided by operating activities to consolidated net cash provided by operating activities on page 63.

Supplemental Consolidating Data

We are providing supplemental consolidating data for the purpose of additional analysis. The data has been grouped as follows:

Consolidated – Caterpillar Inc. and its subsidiaries.

Machinery, Energy & Transportation – Caterpillar defines Machinery, Energy & Transportation as it is presented in the supplemental data as Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. Machinery, Energy & Transportation information relates to the design, manufacturing and marketing of our products. Financial Products’ information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment. The nature of these businesses is different, especially with regard to the financial position and cash flow items. Caterpillar management utilizes this presentation internally to highlight these differences. We also believe this presentation will assist readers in understanding our business.

Financial Products – Our finance and insurance subsidiaries, primarily Cat Financial and Insurance Services.

Consolidating Adjustments – Eliminations of transactions between Machinery, Energy & Transportation and Financial Products.

Pages 61 to 63 reconcile Machinery, Energy & Transportation with Financial Products on the equity basis to Caterpillar Inc. consolidated financial information.

Supplemental Data for Results of Operations
For The Years Ended December 31
														Supplemental consolidating data
		Consolidated												Machinery, Energy & Transportation 1												Financial Products												Consolidating Adjustments
(Millions of dollars)		2019				2018				2017				2019				2018				2017				2019				2018				2017				2019				2018				2017
Sales and revenues:
Sales of Machinery, Energy & Transportation		$	50,755			$	51,822			$	42,676			$	50,755			$	51,822			$	42,676			$	—			$	—			$	—			$	—			$	—			$	—
Revenues of Financial Products		3,045				2,900				2,786				—				—				—				3,571				3,362				3,167				(526		)	2	(462		)	2	(381		)	2
Total sales and revenues		53,800				54,722				45,462				50,755				51,822				42,676				3,571				3,362				3,167				(526		)		(462		)		(381		)
Operating costs:
Cost of goods sold		36,630				36,997				31,260				36,634				36,998				31,261				—				—				—				(4		)	3	(1		)	3	(1		)	3
Selling, general and administrative expenses		5,162				5,478				4,999				4,444				4,675				4,411				737				825				604				(19		)	3	(22		)	3	(16		)	3
Research and development expenses		1,693				1,850				1,842				1,693				1,850				1,842				—				—				—				—				—				—
Interest expense of Financial Products		754				722				646				—				—				—				786				756				667				(32		)	4	(34		)	4	(21		)	4
Other operating (income) expenses		1,271				1,382				2,255				14				144				1,056				1,297				1,259				1,220				(40		)	3	(21		)	3	(21		)	3
Total operating costs		45,510				46,429				41,002				42,785				43,667				38,570				2,820				2,840				2,491				(95		)		(78		)		(59		)
Operating profit		8,290				8,293				4,460				7,970				8,155				4,106				751				522				676				(431		)		(384		)		(322		)
Interest expense excluding Financial Products		421				404				531				429				448				622				—				—				—				(8		)	4	(44		)	4	(91		)	4
Other income (expense)		(57		)		(67		)		153				(560		)		(391		)		(170		)		80				(16		)		92				423			5	340			5	231			5
Consolidated profit before taxes		7,812				7,822				4,082				6,981				7,316				3,314				831				506				768				—				—				—
Provision (benefit) for income taxes		1,746				1,698				3,339				1,512				1,574				3,317				234				124				22				—				—				—
Profit (loss) of consolidated companies		6,066				6,124				743				5,469				5,742				(3		)		597				382				746				—				—				—
Equity in profit (loss) of unconsolidated affiliated companies		28				24				16				28				24				16				—				—				—				—				—				—
Equity in profit of Financial Products’ subsidiaries		—				—				—				575				362				738				—				—				—				(575		)	6	(362		)	6	(738		)	6
Profit of consolidated and affiliated companies		6,094				6,148				759				6,072				6,128				751				597				382				746				(575		)		(362		)		(738		)
Less: Profit (loss) attributable to noncontrolling interests		1				1				5				(21		)		(19		)		(3		)		22				20				8				—				—				—
Profit 7		$	6,093			$	6,147			$	754			$	6,093			$	6,147			$	754			$	575			$	362			$	738			$	(575	)		$	(362	)		$	(738	)

1	Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2	Elimination of Financial Products’ revenues earned from Machinery, Energy & Transportation.

3	Elimination of net expenses recorded by Machinery, Energy & Transportation paid to Financial Products.

4	Elimination of interest expense recorded between Financial Products and Machinery, Energy & Transportation.

5	Elimination of discount recorded by Machinery, Energy & Transportation on receivables sold to Financial Products and of interest earned between Machinery, Energy & Transportation and Financial Products.

6	Elimination of Financial Products’ profit due to equity method of accounting.

7	Profit attributable to common shareholders.

Supplemental Data for Financial Position
At December 31										Supplemental consolidating data
		Consolidated								Machinery, Energy & Transportation 1								Financial Products								Consolidating Adjustments
(Millions of dollars)		2019				2018				2019				2018				2019				2018				2019				2018
Assets
Current assets:
Cash and short-term investments		$	8,284			$	7,857			$	7,299			$	6,968			$	985			$	889			$	—			$	—
Receivables - trade and other		8,568				8,802				3,737				4,677				451				401				4,380			2,3	3,724			2,3
Receivables - finance		9,336				8,650				—				—				14,489				13,989				(5,153		)	3	(5,339		)	3
Prepaid expenses and other current assets		1,739				1,765				1,290				1,227				529				583				(80		)	4	(45		)	4
Inventories		11,266				11,529				11,266				11,529				—				—				—				—
Total current assets		39,193				38,603				23,592				24,401				16,454				15,862				(853		)		(1,660		)
Property, plant and equipment - net		12,904				13,574				8,606				9,085				4,298				4,489				—				—
Long-term receivables - trade and other		1,193				1,161				348				302				152				204				693			2,3	655			2,3
Long-term receivables - finance		12,651				13,286				—				—				13,354				13,951				(703		)	3	(665		)	3
Investments in Financial Products subsidiaries		—				—				4,260				3,672				—				—				(4,260		)	5	(3,672		)	5
Noncurrent deferred and refundable income taxes		1,411				1,439				2,002				2,015				117				116				(708		)	6	(692		)	6
Intangible assets		1,565				1,897				1,565				1,897				—				—				—				—
Goodwill		6,196				6,217				6,196				6,217				—				—				—				—
Other assets		3,340				2,332				1,868				886				1,572				1,446				(100		)	7	—
Total assets		$	78,453			$	78,509			$	48,437			$	48,475			$	35,947			$	36,068			$	(5,931	)		$	(6,034	)
Liabilities
Current liabilities:
Short-term borrowings		$	5,166			$	5,723			$	5			$	—			$	5,161			$	5,723			$	—			$	—
Short-term borrowings with consolidated companies		—				—				—				—				600				1,500				(600		)	8	(1,500		)	8
Accounts payable		5,957				7,051				5,918				6,972				212				194				(173		)	9	(115		)	9
Accrued expenses		3,750				3,573				3,415				3,212				335				361				—				—
Accrued wages, salaries and employee benefits		1,629				2,384				1,580				2,350				49				34				—				—
Customer advances		1,187				1,243				1,187				1,243				—				—				—				—
Dividends payable		567				495				567				495				—				—				—				—
Other current liabilities		2,155				1,919				1,689				1,532				566				433				(100		)	6,10	(46		)	6,10
Long-term debt due within one year		6,210				5,830				16				10				6,194				5,820				—				—
Total current liabilities		26,621				28,218				14,377				15,814				13,117				14,065				(873		)		(1,661		)
Long-term debt due after one year		26,281				25,000				9,151				8,015				17,140				16,995				(10		)	8	(10		)	8
Liability for postemployment benefits		6,599				7,455				6,599				7,455				—				—				—				—
Other liabilities		4,323				3,756				3,681				3,111				1,430				1,336				(788		)	6	(691		)	6
Total liabilities		63,824				64,429				33,808				34,395				31,687				32,396				(1,671		)		(2,362		)
Commitments and contingencies
Shareholders’ equity
Common stock		5,935				5,827				5,935				5,827				919				919				(919		)	5	(919		)	5
Treasury stock		(24,217		)		(20,531		)		(24,217		)		(20,531		)		—				—				—				—
Profit employed in the business		34,437				30,427				34,437				30,427				3,997				3,543				(3,997		)	5	(3,543		)	5
Accumulated other comprehensive income (loss)		(1,567		)		(1,684		)		(1,567		)		(1,684		)		(828		)		(943		)		828			5	943			5
Noncontrolling interests		41				41				41				41				172				153				(172		)	5	(153		)	5
Total shareholders’ equity		14,629				14,080				14,629				14,080				4,260				3,672				(4,260		)		(3,672		)
Total liabilities and shareholders’ equity		$	78,453			$	78,509			$	48,437			$	48,475			$	35,947			$	36,068			$	(5,931	)		$	(6,034	)

1	Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2	Elimination of receivables between Machinery, Energy & Transportation and Financial Products.

3	Reclassification of Machinery, Energy & Transportation’s trade receivables purchased by Financial Products and Financial Products’ wholesale inventory receivables.

4	Elimination of Machinery, Energy & Transportation’s insurance premiums that are prepaid to Financial Products.

5	Elimination of Financial Products’ equity which is accounted for by Machinery, Energy & Transportation on the equity basis.

6	Reclassification reflecting required netting of deferred tax assets/liabilities by taxing jurisdiction.

7	Elimination of other intercompany assets between Machinery, Energy & Transportation and Financial Products.

8	Elimination of debt between Machinery, Energy & Transportation and Financial Products.

9	Elimination of payables between Machinery, Energy & Transportation and Financial Products.

10	Elimination of prepaid insurance in Financial Products’ other liabilities.

Supplemental Data for Statement of Cash Flow
For the Years Ended December 31										Supplemental consolidating data
		Consolidated								Machinery, Energy & Transportation 1								Financial Products								Consolidating Adjustments
(Millions of dollars)		2019				2018				2019				2018				2019				2018				2019				2018
Cash flow from operating activities:
Profit (loss) of consolidated and affiliated companies		$	6,094			$	6,148			$	6,072			$	6,128			$	597			$	382			$	(575	)	2	$	(362	)	2
Adjustments for non-cash items:																						0
Depreciation and amortization		2,577				2,766				1,713				1,895				864				871				—				—
Undistributed profit of Financial Products		—				—				(550		)		—				—				—				550			3	—
Actuarial (gain) loss on pension and postretirement benefits		468				495				468				495				—				—				—				—
Provision (benefit) for deferred income taxes		28				220				15				149				13				71				—				—
Other		675				1,006				456				434				(215		)		178				434			4	394			4
Financial Products' dividend in excess of profit		—				—				—				57				—				—				—				(57		)	5
Changes in assets and liabilities, net of acquisitions and divestitures:
Receivables - trade and other		171				(1,619		)		4				(396		)		15				6				152			4,6	(1,229		)	4,6
Inventories		274				(1,579		)		250				(1,528		)		—				—				24			4	(51		)	4
Accounts payable		(1,025		)		709				(983		)		771				20				(55		)		(62		)	4	(7		)	4
Accrued expenses		172				101				187				71				(13		)		30				(2		)	4	—
Accrued wages, salaries and employee benefits		(757		)		(162		)		(772		)		(141		)		15				(21		)		—				—
Customer advances		(10		)		(183		)		(8		)		(183		)		—				—				(2		)	4	—
Other assets—net		(93		)		41				(166		)		16				38				(14		)		35			4	39			4
Other liabilities—net		(1,662		)		(1,385		)		(1,815		)		(1,421		)		169				75				(16		)	4	(39		)	4
Net cash provided by (used for) operating activities		6,912				6,558				4,871				6,347				1,503				1,523				538				(1,312		)
Cash flow from investing activities:
Capital expenditures—excluding equipment leased to others		(1,056		)		(1,276		)		(1,036		)		(1,168		)		(20		)		(108		)		—				—
Expenditures for equipment leased to others		(1,613		)		(1,640		)		(38		)		(53		)		(1,616		)		(1,667		)		41			4	80			4
Proceeds from disposals of leased assets and property, plant and equipment		1,153				936				164				152				1,092				811				(103		)	4	(27		)	4
Additions to finance receivables		(12,777		)		(12,183		)		—				—				(14,270		)		(13,595		)		1,493			6	1,412			6,7
Collections of finance receivables		12,183				10,901				—				—				13,537				12,513				(1,354		)	6	(1,612		)	6
Net intercompany purchased receivables		—				—				—				—				640				(1,046		)		(640		)	6	1,046			6
Proceeds from sale of finance receivables		235				477				—				—				235				477				—				—
Net intercompany borrowings		—				—				900				112				3				31				(903		)	8	(143		)	8
Investments and acquisitions (net of cash acquired)		(47		)		(392		)		(47		)		(392		)		—				—				—				—
Proceeds from sale of businesses and investments (net of cash sold)		41				16				3				22				38				—				—				(6		)	7
Proceeds from sale of securities		529				442				32				162				497				280				—				—
Investments in securities		(552		)		(506		)		(27		)		(24		)		(525		)		(482		)		—				—
Other—net		(24		)		13				1				2				(25		)		10				—				1			9
Net cash provided by (used for) investing activities		(1,928		)		(3,212		)		(48		)		(1,187		)		(414		)		(2,776		)		(1,466		)		751
Cash flow from financing activities:
Dividends paid		(2,132		)		(1,951		)		(2,132		)		(1,951		)		(25		)		(419		)		25			10	419			10
Common stock issued, including treasury shares reissued		238				313				238				313				—				1				—				(1		)	9
Common shares repurchased		(4,047		)		(3,798		)		(4,047		)		(3,798		)		—				—				—				—
Net intercompany borrowings		—				—				(3		)		(31		)		(900		)		(112		)		903			8	143			8
Proceeds from debt issued (original maturities greater than three months)		9,841				8,907				1,479				57				8,362				8,850				—				—
Payments on debt (original maturities greater than three months)		(8,297		)		(7,829		)		(12		)		(7		)		(8,285		)		(7,822		)		—				—
Short-term borrowings - net (original maturities three months or less)		(138		)		762				5				—				(143		)		762				—				—
Other—net		(3		)		(54		)		(3		)		(54		)		—				—				—				—
Net cash provided by (used for) financing activities		(4,538		)		(3,650		)		(4,475		)		(5,471		)		(991		)		1,260				928				561
Effect of exchange rate changes on cash		(44		)		(126		)		(40		)		(111		)		(4		)		(15		)		—				—
Increase (decrease) in cash and short-term investments and restricted cash		402				(430		)		308				(422		)		94				(8		)		—				—
Cash and short-term investments and restricted cash at beginning of period		7,890				8,320				6,994				7,416				896				904				—				—
Cash and short-term investments and restricted cash at end of period		$	8,292			$	7,890			$	7,302			$	6,994			$	990			$	896			$	—			$	—

1	Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

2	Elimination of Financial Products’ profit after tax due to equity method of accounting.

3	Elimination of non-cash adjustment for the undistributed earnings from Financial Products.

4	Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.

5	Elimination of Financial Products’ dividend to Machinery, Energy & Transportation in excess of Financial Products’ profit.

6	Reclassification of Financial Products’ cash flow activity from investing to operating for receivables that arose from the sale of inventory.

7	Elimination of proceeds received from Financial Products related to Machinery, Energy & Transportation’s sale of businesses and investments.

8	Elimination of net proceeds and payments to/from Machinery, Energy & Transportation and Financial Products.

9	Elimination of change in investment and common stock related to Financial Products.

10	Elimination of dividend from Financial Products to Machinery, Energy & Transportation.