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Learn Moreabout how Caterpillar is helping customers
build a better world:®

2018 Sustainability Reportcaterpillar.com/sustainability-report2018 ANNUAL REPORT2018 Annual Reportcaterpillar.com/annual-report2018 | Annual Report© 2019 Caterpillar Inc. All Rights Reserved.
Caterpillar: Nonconfidential®

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CORPORATE PROFILE
Whether paving roads, mining essential commodities or extracting
the fuels to satisfy global energy demand, Caterpillar products,
services and solutions help improve the lives of people around theworld. Customers use our products to build the basic infrastructurethat enables higher standards of living so that people have accessto water, electricity, roads, bridges, hospitals, schools and so muchmore. In short, our solutions help our customers build a better world.

104,000
Full-time
employees

4 Million+
Products working
around the world

168
Global Cat® dealers~850,000
Connected assets$1.85 Billion

19 Years
Dow Jones Sustainability
Index member$27 Million
Caterpillar Foundation investments
in global communities in 2018

Research and development
funding

Our Strategy for Profitable Growth

Cover_CAT AR.indd 2

Services

Operational Excellence

Expanded Offerings

Growing digitalenabled solutions andaftermarket offerings
to deliver unmatchedvalue to customers.

Building upon corecompetencies – safety,
quality, Lean and costdiscipline – to deliver strong
operational performance.

Enabling customer successthrough integrated anddifferentiated solutions.

© 2019 Caterpillar. All Rights Reserved. CAT, CATERPILLAR, LET’S DO THE WORK, theirrespective logos, “Caterpillar Yellow”, the “Power Edge” and Cat “Modern Hex” trade dress
as well as corporate and product identity used herein, are trademarks of Caterpillar andmay not be used without permission.

4/24/19 4:40 PM

“The Caterpillar team extended our legacy ofmore than 90 years by introducing innovative
products and services, executing our strategy
to deliver long-term profitable growth andshareholder value, and – ultimately – making
our customers more successful.”
Jim Umpleby
Chairman & CEO

DEAR FELLOW SHAREHOLDERS
Caterpillar’s outstanding performance in 2018 can be summed up by one number: 104,000. That’s thesize of our dedicated global team who spent the year innovating and providing solutions that help ourcustomers build a better world. In the process, our team is also building a better Caterpillar.
They extended Caterpillar’s legacy of more than 90 years
by introducing innovative products and services,
executing our strategy to deliver long-term profitable
growth and shareholder value, and – ultimately –making our customers more successful. Their efforts
executing our strategy and serving our customers
drove 2018’s record levels of profitability, increased
sales and delivered strong operational performance.

dividends to shareholders – earning Caterpillar aspot on the elite Dividend Aristocrats list. In addition,
we generated Machinery, Engine & Transportation
operating cash flow of $6.3 billion, due in part to ourdisciplined use of the Operating & Execution (O&E)
Model – a strategic framework that allocates resources
to the areas of the business that have the best potential
for profitable growth.

The team achieved a number of key financial milestones
in 2018: record profit per share of $10.26, a 63 percent
increase in adjusted profit per share to the highest
levels in our company’s history, a 20 percent increasein sales and revenues and an 86 percent improvementin our operating profit. Both the overall enterprise andour three primary business segments achieved or
exceeded the operating margin targets we announced
during Investor Day in 2017.

EXECUTING OUR ENTERPRISE STRATEGYThis performance allowed us to return $5.8 billion ofcapital to shareholders by repurchasing $3.8 billion inshares of stock and raising the dividend by 10 percent.
2018 marked the 25th consecutive year of higher

The core components of our enterprise strategy
remain the same: expanded offerings, services andoperational excellence. In 2018, this strategy tookfirm hold, providing momentum for our team todeliver significant results in each of these areas.

DELIVERING A SUPERIOR CUSTOMEREXPERIENCE
Our services strategy is to deliver a superior customer
experience focused on value-added offerings –transforming traditional product support. And we’rewell on our way. An increase in the number of products
sold with customer value agreements is expected2018 | Annual Report

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to strengthen our presence in the aftermarket. We continue to invest in digital and technology solutions, fromconnected fleets and autonomous machines, to e-commerce options and equipment management mobile apps –and nearly everything in between. Connected fleets are the industry’s future and have strong implications forour customers, allowing them to make informed decisions that improve productivity and boost profits.
When it comes to automation technology for mining, six different mining companies now use Cat ® MineStar™
Command for hauling at seven sites in Australia, North America and South America. By the end of 2018, trucks
using MineStar had autonomously moved more than 1 billion tonnes of material.

DEVELOPING DIFFERENTIATED PRODUCTS
Expanded offerings means developing the right differentiated product solutions to meet the needs of ourglobal customer base, ensuring their success and long-term loyalty. We introduced the 20-ton class of Next
Generation excavators, with features that increase operating efficiency, reduce fuel use and lower maintenancecosts, helping our customers achieve their productivity and cost targets. We also launched our Next Generation
D6 dozer, which has 35 percent better fuel efficiency and increased agility compared to prior models. Our
team is continuing to develop exciting new offerings, which promise to further drive customer loyalty andprofitable growth.

INVESTING IN OPERATIONAL EXCELLENCE
Finally, we are investing in operational excellence –particularly focusing on safety, quality and Lean
manufacturing. We’ll never relent on our commitment
to safety, because we want every person to go homesafely every day. That’s why we focus on preventing
injuries before they occur. In 2018, we continued toreduce lost time injuries with a 6 percent improvement
over 2017 and a 95 percent improvement since our2003 baseline.

OPERATIONAL
EXCELLENCE

EXPANDED
OFFERINGSSERVICES

Lean delivers strong bottom-line results anddrives profitability through the ups and downs ofbusiness cycles. We continue to refine Lean in our
manufacturing operations and are also applying
Lean end-to-end through product development,
order to delivery and transactional work. We havea continuous improvement mindset, built on thefoundation of 6 Sigma, to stay customer focused,stop defects, improve processes and eliminate waste.

A BETTER WORLD IS A SUSTAINABLE ONE
For Caterpillar, focusing on sustainability is an
important part of building a better world. Sustainability
is part of who we are and what we do every single
day. You can learn more about our efforts in the2018 Sustainability Report. Our team’s work resulted
in Caterpillar being named to the 2018 Dow Jones
Sustainability Indices for the 19th time, which is atestament to our deep commitment to sustainability.
We are also proud to have been named to Fortune’s
World’s Most Admired Companies for 2018.

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2018 | Annual Report

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“These external accolades combinedwith our 2018 performance are proofof the power of Caterpillar’s strategy.
Quite simply – it’s working.”
These external accolades combined with our 2018
performance are proof of the power of Caterpillar’s
strategy. Quite simply – it’s working. For us, it’s alsoa reminder that anything worth doing is worth doingright. At Caterpillar, we want to win – but we only want
to win in the right way – by remaining dedicated toour customers and living Our Values in Action.
In summary, 2018 was an excellent year for Caterpillar
that demonstrates the power – and the potential – ofour strategy. We achieved record profit per share,

returned significant capital to shareholders andcontinued investment in expanded offerings andservices to drive long-term profitable growth.
None of this would be possible without our team –the people who put our strategy into action daily.
We are excited about the tremendous opportunities
that lie before us.
Thank you for sharing this journey with us.

Jim Umpleby
Chairman & CEO2018 | Annual Report

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4/25/19 9:52 AMPERFORMANCE
AT-A-GLANCE
Caterpillar delivered an outstanding performance in2018. Profit per share was the best in company history
with sales and revenues growth of 20 percent over2017. We returned capital to shareholders throughthe repurchase of $3.8 billion in shares of stock anda 10 percent increase in the annual dividend. This
increase marked the 25th consecutive year we havedeclared higher dividends to shareholders, earning us

SERVICES

Operating Profit

Sales and Revenues(in billions)(in millions)(in millions)2018 SALES BY REGION
2016(in millions)

$45.5

2018

Operating Profit

Sales by Region

$38.5

2017

EXPANDED
OFFERINGS

recognition as a member of the Dividend Aristocrats
list. In total, we returned $5.8 billion in capital toCaterpillar shareholders. The company delivered theseresults due in part to the relentless execution of ourenterprise strategy for profitable growth using the
Operating & Execution Model with a focus on services,
operational excellence and expanded offerings.

Sales & Revenues

2016

OPERATIONAL
EXCELLENCE$54.7$1,162

North America – $25,623$4,4602017
Asia/Pacific – $12,475
Dividends Declared
Europe, Africa, Middle2018
East – $11,929
2018 SALES BY REGION
Latin
America–$4,695(in millions)$8,293

North America – $25,623
Asia/Pacific – $12,475
Europe, Africa, Middle East – $11,929
Latin America – $4,695

Profit Per Share

Adjusted Profit Per ShareProfit (Loss) Per Share

Adjusted Profit Per ShareDividends Declared

2016

2016 $3.42

2016

$3.08

2017

$3.11

2018

$3.36

(in dollars)

2017
2018

($.11)(in dollars)

2017

$1.26
$10.262018$6.88$11.22(per share)

A reconciliation of adjusted profit per share to
U.S. GAAP can be found in our press releases
describing financial results for the fourth-quarterand full-year 2018 and fourth-quarter and full-year2017, which are available on our website atwww.caterpillar.com/earnings.

42018 | Annual Report

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2018 End Market Highlights

Construction
Industries

Energy &Transportation

Resource
Industries

A strong U.S. economy supported
Increased mining production
higher demand for oil and gas
and commodity prices supported
activities, including the buildout of
increased capital expenditures forpipelines, non-residential building
mining customers and reinvestment
construction and infrastructurein equipment. Positive global
activities. Asia/Pacific sales were
economic growth drove increased
also higher in several countries in Dividends
salesDeclaredfor heavy construction, quarry
the region, most significantly inand aggregate equipment.
China, stemming from increased
building construction andinfrastructure investment.

Growth in North American oil andgas drove higher demand for wellservicing and gas compression
applications. Power generation
continued positive momentum.
Transportation sales also increased
due to higher rail services fromacquisitions and increased rail traffic.

Total Cumulative Shareholder Return for Five-Year PeriodEnding December 31, 2018

$163.44$150.33$144.76

$100

2013

2014

Caterpillar Inc.

2015
S&P 500 Index

2016

2017

2018

S&P 500 Machinery Index

The graph shows the cumulative shareholder return assuming an investmentof $100.00 on December 31, 2013, and reinvestment of dividends issued thereafter.

2018 | Annual Report

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DOING THE
WORK WITH
NEXT GENEXCAVATORSThe first comprehensive redesign of our hydraulic excavators (HEX) in 25 years
began with a simple goal: help customers work better than ever. The Caterpillar
product team started by doing its homework and interviewing more than 1,000
customers worldwide. The result was a line of next-generation hydraulic excavators(NGH) that maintains the strength and productivity customers expect fromCat ® products with added technology to meet a variety of needs.
Operator safety was a top consideration. NGH excavators offer improved visibility
from the cab with cameras that provide 360-degree visibility and e-fence features,setting parameters for how wide, high and low an excavator’s boom and front
linkage can swing. The NGH also leverages a common global platform with modular
add-ons – making it easier for customers to get machines and parts quickly.
E-fence works in many applications. For example, when working next to roads
and under utilities, the technology parameters help keep the public and operators
safe. Australian customer Black Cat Civil finds the Cat Next Gen excavators to
be a perfect match for their technology-focused business model. More standard
technology options, including 3D capabilities and e-fence, are helping them worksafer while also providing increased accuracy, resulting in less rework and waste.
These features, along with improved fuel efficiency, increased operator comfort
and reduced maintenance costs, are helping Black Cat realize a better return on
its investment with Next Gen excavators.

62018 | Annual Report

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CONSTRUCTION INDUSTRIES
Helping our customers build what the world needs.
SERVICES
Construction sites generate an incredible amount ofdata that can hold keys to working more efficiently,
intelligently and safely. But to unlock these benefits,
raw data must be turned into actionable insights.
Cat ® Connect has a growing suite of technology andservices that help customers run more profitable
operations. For example, Cat Payload can reduce
cycle times up to 10 percent compared to loading
systems with traditional scales by moving morematerial, more accurately. By making it easy to monitor
individual machines, whole fleets or entire jobsites,
Cat Link telematics technology helps operators get
more out of every working minute. These services
extend to our growing rental and used business as
customer demand shifts from ownership to usership.

OPERATIONAL EXCELLENCE
Construction Industries continues to build a strong
operational foundation on our core competencies ofsafety, Lean, quality, cost flexibility and organizational
agility. This includes providing industry-leading quality
and striving for zero injuries. Recent examples ofour dedication to operational excellence can be seen
across the globe. In 2016, our China team anticipateddoubling production over two years in this competitiveenvironment for excavation products. To ensurestable quality, cost and delivery targets, the businessneeded to transform to meet customer demand.
Caterpillar Xuzhou Limited (CXL) implemented
robust strategic inventory buffers (SIB) for long leadtime components and different models based on market
analysis to ensure material and product availability.
These actions helped CXL achieve a record production
volume in 2018. Because of CXL’s success using SIBs,
other Caterpillar excavation facilities are replicating
the practice.

EXPANDED OFFERINGS
We continue to introduce new products to meetcustomers’ diverse construction needs. These
include new 1- to 2-ton and 7- to 10-ton Cat hydraulicexcavator models, each providing outstanding
performance, versatility, safety, operator convenienceand affordability in each respective class. To meetchanging customer needs for reliable, durable,
powerful machines that are lower cost and easy tooperate, we expanded our portfolio of GC models
with the introduction of the 330 GC and 336 GC.
Both offer productivity features with reduced fuelconsumption and maintenance costs, resulting inhigh reliability and low-cost-per-hour performance.
Caterpillar offers a wide range of machines forcustomers with new D6 models, available in a broad
choice of configurations and updated technologies
for ultimate versatility and performance. The Cat D6
XE is the world’s first high-drive electric drive dozer,
offering up to 35 percent better fuel efficiency thanits D6T predecessor and faster cycle times, making
electric drive the top choice to achieve the high levelsof productivity and fuel efficiency.

CONSTRUCTION INDUSTRIES
Segment Sales & Revenues

CONSTRUCTION INDUSTRIES
Segment Profit

Segment Sales*

Segment Profit(in millions)

2016
2017

(in millions)$15,690$19,240

2018$23,237

2016$1,6392017$3,2552018$4,174*Includes inter-segment sales

2018 | Annual Report

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RESOURCE INDUSTRIES

Enabling customers to mine resources profitably and sustainably.
SERVICES
We’re focused on being a partner beyond the iron,helping our customers optimize operations at every
level – from machines to individual sites to the complete
mining enterprise. We collaborate with customers anddevelop solutions that combine products, technologies,
analytics and other services, helping them work more
efficiently, boosting productivity and keeping people
safe. Miners are looking for new ways to optimize
operations, and automation is a key value-driver in
reducing variability and increasing productivity.

Caterpillar can assist in the transition to an automatedoperation through the integration of people, processes
and technology. We believe one of the essential
contributors to the success of the system is theexpertise that goes along with its deployment. We
have experienced teams that work with Cat® dealers
to implement the system, as well as on-site personnel
who help customers run their autonomous operations.
Autonomous haulage fleets improve productivity
by 30 percent or more compared to best-in-classmanned sites.

RESOURCE INDUSTRIES
Segment Sales & Revenues

RESOURCE INDUSTRIES
Segment Profit

Segment Sales*

Segment Profit

2016

2016
2016 ($1,045)(in millions)

2017
2018

(in millions)$6,010$7,861$10,270

2017
2017

$698

2018
2018

$1,603*Includes inter-segment sales

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2018 | Annual Report

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OPERATIONAL EXCELLENCE
Caterpillar’s Resource Industries business drives
operational excellence with a focus on Lean
manufacturing and a competitive and flexible cost
structure. In 2018 we reached a significant operational
excellence milestone as our 40,000th large dozer
rolled off the production line in East Peoria, Illinois,
USA. With industry leading quality and performance,
the D11 dozer was put to work by our customer Teck
Resources Limited (“Teck”). Teck has purchased
more than 160 D11 dozers over the last 10 years —more than any other large dozer customer. During acelebration of the milestone, Teck’s representatives
acknowledged Caterpillar and our employees at thedozer facility for their manufacturing excellence.

EXPANDED OFFERINGS
Large mining trucks continue to be foundational for
Resource Industries, and customers want solutions
based on application. In 2018, the team launched two
new electric-drive trucks – the 360-ton 796 AC andthe 410-ton 798 AC – which fill payload gaps andallow Caterpillar to offer the most comprehensive
truck lineup in the mining industry. We also madesignificant investments in our hard rock undergroundbusiness. We launched the completely revamped
R1700 underground load-haul-dump loader, our firstground-up machine in nearly two decades, and a
new underground truck model, the AD22, expanding
the Cat® underground truck product lineup into a newsize class. In addition, we developed a new battery
electric machine and battery equipment charging
system, providing an emissions-free solution forunderground mining.

WORKING TO MAKE OURPRODUCTS SAFER AND
MORE PRODUCTIVE
Caterpillar remains the leader in mining automation
as we continue to expand offerings for both surface
and underground mining operations. Cat® MineStar™
Command technologies enable different levels of
automation, working on haul trucks, dozers, drills
and underground loaders.
Our Command for hauling system, which enables
fully autonomous haulage, continues to set records.
We have more than 150 autonomous trucks inservice, and in 2018 achieved over 1 billion tonnes
hauled. These trucks have traveled over 35 million
kilometers without a single lost-time injury.
The system continues to set records in termsof value as well. Our customers have reported
productivity increases nearing 30 percent andreductions in the frequency of safety incidents
by as much as 50 percent.
Our flagship autonomous operation, the Fortescue
Metals Group (Fortescue) Solomon iron ore minein Western Australia, has continued to add trucks
to its autonomous fleet, and Fortescue is in theprocess of retrofitting the system on both Cat andcompetitive truck models at its Chichester Hub.
We’ve also increased our focus on interoperability –making it possible for Cat technologies to be usedon any brand of equipment, work on Cat machines
already in the field, and integrate with mines’
enterprise systems and processes.
Technology solutions like Command for haulingare growing rapidly, and the speed at which they
are being implemented continues to improve.
Our first implementation took several years, andour most recent took just a few months. We combine
our technology with proven processes that allow
us to quickly get the system up and running so ourcustomers can start reaping the benefits.

2018 | Annual Report

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ENERGY & TRANSPORTATION
Meeting the world’s growing needs for power and transport.
SERVICESOPERATIONAL EXCELLENCE

Caterpillar is more than just a prime productmanufacturer. We provide expanded services thatenhance product life cycles such as aftermarket
parts, remote monitoring and remanufacturing.
Within rail services, we go beyond the moving train to
the surrounding infrastructure. Caterpillar made two
acquisitions in 2018 to increase service capabilities
for rail customers: ECM and Downer Freight Rail.
ECM is an international provider of signal solutions
and technologies devoted to the safety, control andenhancement of railway infrastructure. Downer
Freight Rail, based in Australia, provides a full suiteof rolling stock aftermarket parts and services thatcomplement Progress Rail’s rolling stock services
portfolio. An increasing number of products soldwith customer value agreements will accelerate ourservices strategy and give more customers accessto these offerings.

The Cat ® G3600 A4 gas compression engine,
manufactured exclusively at Caterpillar’s large engine
facility in Lafayette, Indiana, is an industry-leading
product in gas compression and transmission.
In 2018, Caterpillar saw elevated demand for Cat G3600
engines due to pipeline development in North America,
especially in the Permian Basin in West Texas and
New Mexico. This increased demand required theLafayette facility to dramatically increase production
while maintaining quality performance and ensuringa safe work environment. Using Lean methodology, across-functional team identified a solution to increase
capacity for both engines and parts by streamlining
assembly and test processes and improving component
planning. Rapid improvement workshops helped
improve agility on the 3600 line, resulting in significant
reduction of sub-assembly process times and anincrease in production with only modest immediate
capital investment. As G3600 demand remains high,Lafayette’s Lean execution continues to improve
service to customers.

ENERGY & TRANSPORTATION
Segment Sales & Revenues

Segment Sales*(in millions)

2016
2016
2017
2017

$16,951$19,382

ENERGY20182018 & TRANSPORTATION$22,785
Segment Profit*Includes inter-segment sales

Segment Profit(in millions)

2016

10

$2,1872017$2,8562018$3,9382018 | Annual Report

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EXPANDED OFFERINGS
Caterpillar’s customers need generator sets thatprovide maximum value with engines that deliver
more power and with lower emissions. In 2018, ourreciprocating engine business responded to theseneeds with the CG Series of generator sets, which
increase power output, offer high reliability andreduce costs by operating on natural gas and biogas.
We also completed a series of strategic acquisitions thatbring us closer to serving as an end-to-end supplierfor customers in key industries. For example, ouracquisition of Kemper Valve & Fittings Corp. expands
our well service offerings from the pump to thewellhead. In addition to expanded offerings, thesepurchases are expected to improve our customer
loyalty, cost structure, reliability, quality and delivery
performance.

WORKING TO GENERATE CLEAN POWER
Provo Power, a member of the Utah Municipal
Power Agency (UMPA), operated a power plantthat had served their community for more than
75 years. However, the plant was contributing
to air quality issues in the Utah Valley. Provo,
Utah’s third-largest city, needed a solution thatwould help reduce emissions for its more than
1 million residents.
Opting for a fresh start, Provo Power teamed
up with Cat ® dealer Wheeler Power Systems tocreate a new, state-of-the-art plant. Poweredby five Cat G3520H generator sets, the plant
yields more power (13 MW) annually than theprevious structure and is considered the cleanest
burning, natural-gas-fired power plant in thestate. The plant allows for peak shaving, reducing
power consumption and costs between 10 and
30 percent during periods of maximum demand.
Wheeler ensures that generator sets are always
ready to run, delivering continual maintenanceand technical support.

“UMPA made a commitment to use the cleanest
emission control technology and install the mostefficient generating equipment to meet customer
needs,” says Kevin Garlick, UMPA power resource
manager. “Overall, the new plant reduced emissions
by 97 percent, representing a quantum leap fromthe former facility.”

2018 | Annual Report

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SERVICES, DISTRIBUTION& DIGITAL
Enabling customer success through services.
SERVICES
The growth of services is a core focus area of ourstrategy and speaks to the value we can provide tocustomers associated with our products – fromaftermarket parts to analytics and beyond. Customers
receive this in a variety of ways, including through ourglobal dealer network, a relationship with an accountrepresentative, a customer value agreement or bymachine performance insights gained through producttechnology – to name a few.
Caterpillar is also expanding services beyond the
traditional definition of providing repair and support.
Our goal is to further transform how we deliver value
to customers throughout the lifecycle of our products
by providing digital solutions. The Cat App is one way
we are making it easier for customers to own andoperate our equipment and bring them closer to dealers
to continue strengthening relationships and offer

12

additional fleet management solutions. Customers
can request parts and service and start the machine
without a key from the app. We’re also investing inother critical digital solutions, such as an online retailchannel, to enable our products and services businessand provide a differentiated customer experience.

OPERATIONAL EXCELLENCEThe Caterpillar Product Support & Logistics Division(PSLD) prioritizes operational excellence. Utilizing
Lean methodology, such as the engineered value
chain (EVC) principles, we strive to efficiently serve
our customers by eliminating waste. Every month,
Caterpillar’s worldwide parts distribution centers
distribute millions of aftermarket parts, which
originate from an extensive network of suppliers
and internal manufacturing plants, to our dealers.
Our integrated logistics and procurement teams
work systematically to optimize freight cost, locally2018 | Annual Report

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DOING THE WORKWITH MORE INSIGHTS
source where practical, shorten transit times andreduce cost for our customers around the world.

EXPANDED OFFERINGS
Our goal is to offer customers choices by providing
multiple repair and rebuild solutions. Repair and rebuild
options help our customers manage lifecycle costs
by providing suggested price points for the major
components on Cat® machines and engines. Many ofthese options are designed to maximize return on
investment by extending the component’s expected
service life. Our Yellowmark™ offering provides aval­ue-priced alternative that complements Cat Genuine
Parts and Cat Reman Parts.

With a fleet consisting of 80 pieces of Cat mining
equipment, the management team at CM Energy(CM) was looking for the next step in efficiency andmachine health. They met with Carter Machinery
Company, a Virginia-based Cat dealer, to discuss
what solutions could provide the necessary insights
to realize these goals.
One concern about the feasibility of deploying
digital-enabled services was cellular connectivity.
At the coal mine site, located in southern West
Virginia, cellular-enabled tools can be difficult to
deploy. With a mix of cellular and satellite
Product Link devices, CM Energy is now adding thebenefits of machine health recommendations andutilization through the Caterpillar Fleet Monitoring
Center to their world-class maintenance program.
The CM Energy maintenance team leverages
all elements of condition monitoring, including
electronic data, Cat® S•O•SSM Services , inspections,repair history and site condition analysis. These
services, coupled with a dedicated Cat Condition
Monitoring advisor based in Peoria, Illinois, allow thecustomer to maintain 90 percent fleet availability
to meet production demands. CM typically moves
30 million yards of material annually, uncoveringsome of the world’s highest-quality metallurgicalcoal used in the steel-making process.

2018 | Annual Report

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FINANCIAL PRODUCTS
The global Cat Financial team is focused on strategy
execution to help Caterpillar customers and dealers
succeed through financial services solutions. Cat
Financial’s core asset portfolio grew and performed
well in 2018, despite portfolio challenges concentratedin Latin America and Cat Power Finance.
Digital is an enabler for all aspects of our business,
including equipment leasing and financing through Cat
Financial. Cat Financial is investing in digital solutions
for Cat® dealers and customers to drive speed, simplicity
and an exceptional customer experience.
We continue to launch programs to drive growth inaftermarket services. In 2018, we relaunched the Cat
Card Program with Citibank in North America. Plans
areplace to expand this product globally with other
CATinFINANCIAL
regional
in 2019. Our extended protection
Segmentpartners
Revenues

solutions for machines and engines continue to help
drive higher parts and service revenues.
Emerging markets, where financing can mean
the difference between buying Caterpillar or thecompetition, is also an important growth area for
Cat Financial. In the last year, we opened our newest
office in Johannesburg, South Africa, and establisheda legal entity in Bangalore, India, with the office on
track to open in 2019. We are committed to expanding
digital services as appropriate to grow in these markets.
In total, Cat Financial has offices in 40 countries
and cross-border financing in another 55 markets.
Upon the opening of the Bangalore office, Cat
Financial will be able to provide financing solutions
to 94 percent of the geographies where machine
retaildeliveries occur.
CAT FINANCIAL

Segment Profit

Segment Revenues*

Segment Profit

2016$2,9932016

2017$3,09320172018$3,2792018(in millions)(in millions)

$702
$792
$505

*Includes revenues from Machinery,
Energy & Transportation142018 | Annual Report

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MILESTONES
10,000th

60 years

The state-of-the-art facility inVictoria, Texas, produced its 10,000th
excavator since its opening in 2011.

The SEM
brandcelebrated
its 60-year
milestone.

TM

D10

A Caterpillar Brand

One of the world’s
most iconic dozers,
the Cat® D10, turned
40 years old.

Introduced the Cat
Modern Hex trade dress.

Three Cat dealerscelebrated

35 years

over
90 years.

Progress Railcelebrated its
35th anniversary.

1,000

th

Celebrated the
manufactureof the 1,000th Cat
797 Mining Truck.

50 years

The Cat D5,
a smalltrack-typebulldozer,celebrated its 50-year milestone.

50,000thCaterpillar’s strong performancein the articulated truck category
was celebrated with the deliveryof the 50,000th unit from ourPeterlee, U.K., facility.

793

Completed theassembly of
the 5,000th Cat
793 Mining Truck.

40,000th

Introduced just over
40 years ago, theCat large dozer
celebrated its
40,000th milestone.

Taurus 70

Our Solar Turbines TaurusTM
70 program reached serial
number 1,000.

2018 | Annual Report

15

CORPORATE GOVERNANCE
Caterpillar’s governance structure provides leadership, accountability and transparency to managementof the company and its businesses. Our corporate governance framework serves the interests ofshareholders with the highest standards of responsibility, integrity and commitment to enhance shareholder
value over the long term. These standards are developed and implemented by our Board of Directors andthe Executive Office, who oversee the company’s performance and governance policies. Learn more atwww.caterpillar.com/governance.

Board of Directors
Kelly A. Ayotte
Former U.S. Senator
representing New
Hampshire
David L. Calhoun
Senior Managing
Director and Head ofPortfolio Operations
The Blackstone Group;
Presiding Director of theCaterpillar Board
Daniel M. Dickinson
Managing Partner
HCI Equity Partners
Juan Gallardo
Former CEO
Organización CULTIBA,
S.A.B de C.V.
Dennis A. Muilenburg
Chairman, President
and CEO
The Boeing Company

Officers
Debra L. Reed-Klages
Former Chairman and CEO
Sempra Energy
Edward B. Rust, Jr.
Former Chairman and CEO
State Farm Mutual
Automobile Insurance
Company
Susan C. Schwab
Professor
University of Maryland
School of Public Policy
D. James Umpleby III
Chairman and CEO
Caterpillar Inc.
Miles D. White
Chairman and CEO
Abbott Laboratories

Chairman and CEO
D. James Umpleby III
Group Presidents
William P. Ainsworth
Bob De Lange
Denise C. Johnson
Ramin Younessi
Chief Financial Officer
Andrew R.J. Bonfield
Chief Legal Officer,
General Counsel andCorporate Secretary
Suzette M. Long
Chief Human
Resources Officer
Cheryl H. Johnson

Rayford Wilkins, Jr.
Former CEO
Diversified Businesses
AT&T Inc.

William A. Osborn
Former Chairman and CEO
Northern Trust Corporation
and The Northern Trust
Company
As of April 1, 2019

Learn More about our corporate governance framework and voting on matters for the annual meetingin Caterpillar’s Proxy Statement: caterpillar.com/proxy16

2018 | Annual Report

Front Matter_CAT AR.indd 16

4/25/19 9:53 AM

UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
Commission File No. 1-768

CATERPILLAR INC.

(Exact name of Registrant as specified in its charter)
DELAWARE
37-0602744(State or other jurisdiction of incorporation)(IRS Employer I.D. No.)
510 Lake Cook Road, Suite 100, Deerfield, Illinois
60015(Address of principal executive offices)(Zip Code)(224) 551-4000(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class
Common Stock ($1.00 par value)(1)9 3/8% Debentures due March 15, 2021
8% Debentures due February 15, 2023
5.3% Debentures due September 15, 2035

Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange(1) In addition to the New York Stock Exchange, Caterpillar common stock is also listed on stock exchanges in France and Switzerland.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:NONE

Indicate by check mark

YES

NO

•• if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
•• if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
•• whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
•• whether the Registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or forsuch shorter period that the registrant was required to submit such files).
•• if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
•• whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitionsof “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company•• If an emerging growth company, indicate by check mark if the registrant has elected not to use theextended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
•• whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

As of June 30, 2018, there were 594,325,388 shares of common stock of the Registrant outstanding, and the aggregate market valueof the voting stock held by non-affiliates of the Registrant (assuming only for purposes of this computation that directors and executive
officers may be affiliates) was approximately $81.2 billion.
As of December 31, 2018, there were 575,542,738 shares of common stock of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the documents listed below have been incorporated by reference into the indicated parts of this Form 10-K, as specified in
the responses to the item numbers involved.
Part III2019 Annual Meeting Proxy Statement (Proxy Statement) to be filed with the Securities and Exchange Commission (SEC)
within 120 days after the end of the calendar year.

TABLE OF CONTENTSPART I

PART IIPART III

Business

1

Item 1A. Risk Factors

6

Item 1B. Unresolved Staff Comments

12

Item 1.

Item 1C.

Executive Officers of the Registrant

12

Item 2.

Properties

12

Item 3.

Legal Proceedings

14

Item 4.

Mine Safety Disclosures

14

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15

Item 6.

Selected Financial Data

17

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk

47

Item 8.

Financial Statements and Supplementary Data

48

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

106

Item 9A. Controls and Procedures

106

Item 9B. Other Information

106

Item 10.

Directors, Executive Officers and Corporate Governance

107

Item 11.

Executive Compensation

107

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

107

Item 13.

Certain Relationships and Related Transactions, and Director Independence

108

Item 14.

Principal Accountant Fees and Services

108

PART IITEM 1.

Business.
Construction Industries

GeneralOriginally organized as Caterpillar Tractor Co. in 1925 in the State ofCalifornia, our company was reorganized as Caterpillar Inc. in 1986
in the State of Delaware. As used herein, the term “Caterpillar,”“we,” “us,” “our” or “the company” refers to Caterpillar Inc. and its
subsidiaries unless designated or identified otherwise.

Overview
With 2018 sales and revenues of $54.722 billion, Caterpillar is
the world’s leading manufacturer of construction and mining
equipment, diesel and natural gas engines, industrial gas turbinesand diesel-electric locomotives. The company principally operates
through its three primary segments - Construction Industries,
Resource Industries and Energy & Transportation - and also provides
financing and related services through its Financial Products
segment. Caterpillar is also a leading U.S. exporter. Through a
global network of independent dealers and direct sales of certain
products, Caterpillar builds long-term relationships with customers
around the world.
Currently, we have six operating segments, of which four arereportable segments and are described below.

Categories of Business Organization
1. Machinery, Energy & Transportation – Represents theaggregate total of Construction Industries, Resource Industries,
Energy & Transportation and All Other operating segments andrelated corporate items and eliminations.
2. Financial Products – Primarily includes the company’s Financial
Products Segment. This category includes Caterpillar Financial
Services Corporation (Cat Financial), Caterpillar Insurance
Holdings Inc. (Insurance Services) and their respective
subsidiaries.
Other information about our operations in 2018, including certain
risks associated with our operations, is included in Part II, Item 7“Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”

Our Construction Industries segment is primarily responsible forsupporting customers using machinery in infrastructure, forestry
and building construction. The majority of machine sales in thissegment are made in the heavy and general construction, rental,
quarry and aggregates markets and mining.
The nature of customer demand for construction machinery varies
around the world. Customers in developing economies often
prioritize purchase price in making their investment decisions, whilecustomers in developed economies generally weigh productivity
and other performance criteria that contribute to lower owning andoperating costs over the lifetime of the machine. To meet customer
expectations in developing economies, Caterpillar developed
differentiated product offerings that target customers in thosemarkets, including our SEM brand machines. We believe that thesecustomer-driven product innovations enable us to compete more
effectively in developing economies. The majority of Construction
Industries’ research and development spending in 2018 focusedon the next generation of construction machines.
The competitive environment for construction machinery is
characterized by some global competitors and many regional andspecialized local competitors. Examples of global competitors
include CASE (part of CNH Industrial N.V.), Deere Construction &Forestry (part of Deere & Company), Doosan Infracore Co., Ltd.,
Hitachi Construction Machinery Co., Ltd., Hyundai Construction
Equipment Co., Ltd., J.C. Bamford Excavators Ltd., Kobelco
Construction Machinery (part of Kobe Steel, Ltd), Komatsu Ltd.,
Kubota Farm & Industrial Machinery (part of Kubota Corporation),and Volvo Construction Equipment (part of the Volvo Group). As
an example of regional and local competitors, our competitors in
China also include Guangxi LiuGong Machinery Co., Ltd., Longking
Holdings Ltd., Sany Heavy Industry Co., Ltd., XCMG Group,
Shandong Lingong Construction Machinery Co., Ltd. (SDLG, partof the Volvo Group) and Shantui Construction Machinery Co.,
Ltd., (part of Shandong Heavy Industry Group Co.). Each of thesecompanies has varying product lines that compete with Caterpillar
products, and each has varying degrees of regional focus.

The Construction Industries product portfolio includes the following machines and related parts and work tools:
zz asphalt pavers

zz harvesters

zz telehandlers

zz backhoe loaderszz knuckleboom loaderszz small and medium track-type tractors

zz compactors

zz motorgraders

zz track-type loaders

zz cold planers

zz pipelayers

zz wheel excavators

zz compact track and multi-terrain loaders

zz road reclaimers

zz compact, small and medium wheel loaders

zz mini, small, medium and large excavators

zz site prep tractors

zz utility vehicles

zz forestry excavators

zz skidders

zz feller bunchers

zz skid steer loaders

Resource Industries
The Resource Industries segment is primarily responsible forsupporting customers using machinery in mining, quarry andaggregates, heavy construction, waste and material handling

applications. Caterpillar offers a broad product range and services
to deliver comprehensive solutions for our mining customers.
We manufacture high productivity equipment for both surface
and underground mining operations around the world. Our
equipment is used to extract and haul copper, iron ore, coal, oil2018 FORM 10-K

1

sands, aggregates, gold and other minerals and ores. In addition toequipment, Resource Industries also develops and sells technology
products and services to provide customers fleet management
systems, equipment management analytics and autonomousmachine capabilities.
Customers in most markets place an emphasis on equipment thatis highly productive, reliable and provides the lowest total costof ownership over the life of the equipment. In some developing
markets, customers often prioritize purchase price in making
their investment decisions. We believe our ability to control the
integration and design of key machine components represents
a competitive advantage. Our research and development efforts
remain focused on providing customers the lowest total cost ofownership enabled through the highest quality, most productive
products and services in the industry.
The competitive environment for Resource Industries consists of afew larger global competitors that compete in several of the markets
that we serve and a substantial number of smaller companies thatcompete in a more limited range of products, applications, andregional markets. Our global surface competitors include Deere
Construction & Forestry (part of Deere & Company), Epiroc AB,
Hitachi Construction Machinery Co., Ltd., Komatsu Ltd., LiebherrInternational AG, Sandvik AB, and Volvo Construction Equipment.
Our global underground competitors include Epiroc AB, KomatsuLtd., Sandvik AB and Zhengzhou Coal Mining Machinery Group
Co., Ltd.

The Resource Industries product portfolio includes the following machines and related parts:
zz electric rope shovels

zz longwall miners

zz soil compactors

zz draglines

zz large wheel loaderszz machinery components

zz hydraulic shovels

zz off-highway trucks

zz electronics and control systems

zz rotary drills

zz articulated trucks

zz select work tools

zz hard rock vehicles

zz wheel tractor scrapers

zz hard rock continuous mining systems

zz large track-type tractors

zz wheel dozers

zz large mining trucks

zz landfill compactors

Energy & Transportation
Our Energy & Transportation segment supports customers in oil
and gas, power generation, marine, rail and industrial applications,
including Cat® machines. The product and services portfolio includes
reciprocating engines, generator sets, marine propulsion systems,
gas turbines and turbine-related services, the remanufacturing ofCaterpillar engines and components and remanufacturing services
for other companies, diesel-electric locomotives and other railrelated products and services and product support of on-highway
vocational trucks for North America.
Regulatory emissions standards require us to continue to makeinvestments as new products and new regulations are introduced.
On-going compliance with these regulations remains a focus.
Emissions compliance in developing markets is complex due torapidly evolving and unique requirements where enforcement
processes can often vary. We employ robust product development
and manufacturing processes to help us comply with theseregulations.
The competitive environment for reciprocating engines in marine,
oil and gas, industrial and electric power generation systems alongwith turbines in oil and gas and electric power generation consistsof a few larger global competitors that compete in a variety ofmarkets that Caterpillar serves, and a substantial number ofsmaller companies that compete in a limited-size product range,
geographic region and/or application. Principal global competitors
include Cummins Inc., Deutz AG, GE Power, Rolls-Royce Power
Systems, Siemens Power and Gas, and Wärtsilä Corp. Other
competitors, such as Baker Hughes, a GE company, CNH
Industrial Powertrain, INNIO, MAN Energy Solutions, Mitsubishi
Heavy Industries Ltd., Volvo Penta, Weichai Power Co., Ltd.,andother emerging market competitors compete in certain markets
in which Caterpillar competes. An additional set of competitors,
including Aggreko plc, Generac Power Systems, Inc., Kohler Co.,
Inc., and others, are primarily packagers who source engines and/or other components from domestic and international suppliers
and market products regionally and internationally through avariety of distribution channels. In rail-related businesses, ourglobal competitors include Alstom Transport SA, Bombardier
Transportation, GE Transportation, Greenbrier, Siemens AG,
Voestalpine AG, Vossloh, and Wabtec Freight. We also competewith other companies on a more limited range of products,
services and/or geographic regions.
22018 FORM 10-K

The Energy & Transportation portfolio includes the following
products and related parts:
zz reciprocating engine powered generator sets
zz reciprocating engines supplied to the industrial industry as well

as Caterpillar machineryzz integrated systems used in the electric power generation industry
zz turbines, centrifugal gas compressors and related services
zz reciprocating engines and integrated systems and solutions forthe marine and oil and gas industries

zz remanufactured reciprocating engines and components
zz diesel-electric locomotives and components and other rail-related

products and services

Financial Products Segment
The business of our Financial Products segment is primarily
conducted by Cat Financial, a wholly owned finance subsidiaryof Caterpillar. Cat Financial’s primary business is to provide retail
and wholesale financing alternatives for Caterpillar products
to customers and dealers around the world. Retail financing is
primarily comprised of the financing of Caterpillar equipment,machinery and engines. Cat Financial also provides financing forvehicles, power generation facilities and marine vessels that, inmost cases, incorporate Caterpillar products. In addition to retailfinancing, Cat Financial provides wholesale financing to Caterpillar
dealers and purchases short-term trade receivables from Caterpillar
and its subsidiaries. The various financing plans offered by Cat
Financial are primarily designed to increase the opportunity forsales of Caterpillar products and generate financing income for
Cat Financial. A significant portion of Cat Financial’s activity is
conducted in North America, with additional offices and subsidiaries
in Latin America, Asia/Pacific, Europe, Africa and Middle East.
For over 35 years, Cat Financial has been providing financing in
the various markets in which it participates, contributing to its
knowledge of asset values, industry trends, product structuring
and customer needs.
In certain instances, Cat Financial’s operations are subject tosupervision and regulation by state, federal and various foreign
governmental authorities, and may be subject to various laws andjudicial and administrative decisions imposing various requirements
and restrictions which, among other things, (i) regulate credit

granting activities and the administration of loans, (ii) establish
maximum interest rates, finance charges and other charges,(iii) require disclosures to customers and investors, (iv) govern
secured transactions, (v) set collection, foreclosure, repossession
and other trade practices and (vi) regulate the use and reporting of
information related to a borrower’s credit experience. Cat Financial’s
ability to comply with these and other governmental and legal
requirements and restrictions affects its operations.
Cat Financial’s retail loans (totaling 49 percent*) include:zz Loans that allow customers and dealers to use their Caterpillar

equipment or other assets as collateral to obtain financing (26percent*).

zz Installment sale contracts, which are equipment loans thatenable customers to purchase equipment with a down payment
or trade-in and structure payments over time (23 percent*).

Cat Financial’s retail leases (totaling 34 percent*) include:
zz Tax leases that are classified as either operating or financeleases for financial accounting purposes, depending on thecharacteristics of the lease. For tax purposes, Cat Financial isconsidered the owner of the equipment (12 percent*).

zz Finance (non-tax) leases, where the lessee for tax purposes

is considered to be the owner of the equipment during theterm of the lease, that either require or allow the customer topurchase the equipment for a fixed price at the end of the term
(21 percent*).

zz Governmental lease-purchase plans in the U.S. that offer

low interest rates and flexible terms to qualified non-federal
government agencies (1 percent*).

Cat Financial’s wholesale loans and leases (2 percent*) include
inventory/rental programs, which provide assistance to dealers byfinancing their new Caterpillar inventory and rental fleets.
Cat Financial also purchases short-term receivables from Caterpillar
at a discount (15 percent*).
Cat Financial operates in a highly competitive environment, withfinancing for users of Caterpillar equipment available through avariety of sources, principally commercial banks and finance andleasing companies. Cat Financial’s competitors include Wells
Fargo Equipment Finance Inc. and various other banks and financecompanies. In addition, many of our manufacturing competitors
own financial subsidiaries, such as John Deere Capital Corporation,
Komatsu Financial L.P. and Volvo Financial Services, which utilize
below-market interest rate programs (funded by the manufacturer)
to assist machine sales. Caterpillar and Cat Financial work together
to provide a broad array of financial merchandising programs aroundthe world to meet these competitive offers.
Cat Financial’s financial results are largely dependent upon theability of Caterpillar dealers to sell equipment and customers’
willingness to enter into financing or leasing agreements. It is also
affected by, among other things, the availability of funds from its
financing sources, general economic conditions such as inflationand market interest rates and its cost of funds relative to its
competitors.
Cat Financial has a match-funding policy that addresses interest
rate risk by aligning the interest rate profile (fixed or floating rate)of its debt portfolio with the interest rate profile of its receivables
portfolio within predetermined ranges on an ongoing basis.
In connection with that policy, Cat Financial uses interest rate
derivative instruments to modify the debt structure to match assets
within the receivables portfolio. This matched funding reduces thevolatility of margins between interest-bearing assets and interest*

bearing liabilities, regardless of which direction interest rates move.
For more information regarding match funding, please see Note 4— “Derivative financial instruments and risk management” of Part
II, Item 8 “Financial Statements and Supplementary Data.” Seealso the risk factors associated with our financial products businessincluded in Item 1 A. of this Form 10-K.
In managing foreign currency risk for Cat Financial’s operations,the objective is to minimize earnings volatility resulting fromconversion and the remeasurement of net foreign currency balance
sheet positions, and future transactions denominated in foreign
currencies. This policy allows the use of foreign currency forward,
option and cross currency contracts to offset the risk of currency
mismatch between the assets and liabilities, and exchange raterisk associated with future transactions denominated in foreign
currencies.
Cat Financial provides financing only when certain criteria aremet. Credit decisions are based on a variety of credit quality
factors including prior payment experience, customer financial
information, credit-rating agency ratings, loan-to-value ratios andother internal metrics. Cat Financial typically maintains a security
interest in retail-financed equipment and requires physical damage
insurance coverage on financed equipment. Cat Financial finances
a significant portion of Caterpillar dealers’ sales and inventoryof Caterpillar equipment throughout the world. Cat Financial’scompetitive position is improved by marketing programs offered inconjunction with Caterpillar and/or Caterpillar dealers. Under these
programs, Caterpillar, or the dealer, funds an amount at the outsetof the transaction, which Cat Financial then recognizes as revenue
over the term of the financing. We believe that these marketing
programs provide Cat Financial a significant competitive advantage
in financing Caterpillar products.
Caterpillar Insurance Company, a wholly owned subsidiary ofCaterpillar Insurance Holdings Inc., is a U.S. insurance company
domiciled in Missouri and primarily regulated by the Missouri
Department of Insurance. Caterpillar Insurance Company is licensed
to conduct property and casualty insurance business in 50 states,
the District of Columbia and Guam, and as such, is also regulated inthose jurisdictions. The State of Missouri acts as the lead regulatory
authority and monitors Caterpillar Insurance Company’s financial
status to ensure that it is in compliance with minimum solvency
requirements, as well as other financial ratios prescribed by the
National Association of Insurance Commissioners. Caterpillar
Insurance Company is also licensed to conduct insurance businessthrough a branch in Zurich, Switzerland and, as such, is regulatedby the Swiss Financial Market Supervisory Authority.
Caterpillar Life Insurance Company, a wholly owned subsidiaryof Caterpillar, is a U.S. insurance company domiciled in Missouri
and primarily regulated by the Missouri Department of Insurance.
Caterpillar Life Insurance Company is licensed to conduct life
and accident and health insurance business in 26 states andthe District of Columbia and, as such, is also regulated in thosejurisdictions. The State of Missouri acts as the lead regulatory
authority and it monitors the financial status to ensure that it is incompliance with minimum solvency requirements, as well as otherfinancial ratios prescribed by the National Association of InsuranceCommissioners. Caterpillar Life Insurance Company provides stop
loss insurance protection to a Missouri Voluntary Employees’
Beneficiary Association (VEBA) trust used to fund medical claimsof salaried retirees of Caterpillar under the VEBA.
Caterpillar Insurance Co. Ltd., a wholly owned subsidiary ofCaterpillar Insurance Holdings Inc., is a captive insurance company
domiciled in Bermuda and regulated by the Bermuda Monetary

Indicates the percentage of Cat Financial’s total portfolio at December 31, 2018. We define total portfolio as total finance receivables (net of unearned income and allowance for credit
losses) plus equipment on operating leases, less accumulated depreciation. For more information on the above and Cat Financial’s concentration of credit risk, please refer to Note 7 —“Cat Financial Financing Activities” of Part II, Item 8 “Financial Statements and Supplementary Data.”2018 FORM 10-K

3

Authority. Caterpillar Insurance Co. Ltd. is a Class 2 insurer (asdefined by the Bermuda Insurance Amendment Act of 1995), whichprimarily insures its parent and affiliates. The Bermuda Monetary
Authority requires an Annual Financial Filing for purposes ofmonitoring compliance with solvency requirements.
Caterpillar Product Services Corporation (CPSC), a wholly owned
subsidiary of Caterpillar, is a warranty company domiciled in
Missouri. CPSC previously conducted a machine extended
service contract program in Germany and France by providing
machine extended warranty reimbursement protection to dealersin Germany and France. The program was discontinued effective
January 1, 2013, though CPSC continues to provide extended
warranty reimbursement protection under existing contracts.
Caterpillar Insurance Services Corporation, a wholly owned
subsidiary of Caterpillar Insurance Holdings Inc., is a Tennessee
insurance brokerage company licensed in all 50 states, the Districtof Columbia and Guam. It provides brokerage services for allproperty and casualty and life and health lines of business.
Caterpillar’s insurance group provides protection for claims under
the following programs:zz Contractual Liability Insurance to Caterpillar and its affiliates,

Caterpillar dealers and original equipment manufacturers (OEMs)for extended service contracts (parts and labor) offered byCaterpillar, third party dealers and OEMs.

zz Cargo insurance for the worldwide cargo risks of Caterpillar

made either to Caterpillar specifications or to supplier developed
specifications. We machine and assemble some of the components
used in our machines, engines and power generation units andto support our after-market dealer parts sales. We also purchasevarious goods and services used in production, logistics, offices
and product development processes. We maintain global strategic
sourcing models to meet our global facilities’ production needs
while building long-term supplier relationships and leveraging
enterprise spend. We expect our suppliers to maintain, at all times,
industry-leading levels of quality and the ability to timely deliver raw
materials and component products for our machine and engine
products. However, increases in demand have led to parts andcomponents constraints across some products. We use a variety
of agreements with suppliers to protect our intellectual property
and processes to monitor and mitigate risks of the supply basecausing a business disruption. The risks monitored include supplierfinancial viability, the ability to increase or decrease productionlevels, business continuity, quality and delivery.

Patents and Trademarks
We own a number of patents and trademarks, which have beenobtained over a period of years and relate to the products wemanufacture and the services we provide. These patents andtrademarks are generally considered beneficial to our business.
We do not regard our business as being dependent upon any single
patent or group of patents.

products.

zz Contractors’ Equipment Physical Damage Insurance for

equipment manufactured by Caterpillar or OEMs, which is leased,
rented or sold by third party dealers to customers.

zz General liability, employer’s liability, auto liability and property

insurance for Caterpillar.

zz Retiree Medical Stop Loss Insurance for medical claims under

the VEBA.

zz Brokerage services for property and casualty and life and healthbusiness.

The dollar amount of backlog believed to be firm was approximately$16.5 billion at December 31, 2018 and $15.8 billion at December 31,
2017. Compared with year-end 2017, the order backlog increased
about $0.7 billion. The increase was in Energy & Transportation
and Construction Industries, partially offset by a decrease in
Resource Industries. Of the total backlog at December 31, 2018,
approximately $3.3 billion was not expected to be filled in 2019.

Dealers and Distributors

Acquisitions
Information related to acquisitions appears in Note 24 —“Acquisitions” of Part II, Item 8 “Financial Statements andSupplementary Data.”

Competitive Environment
Caterpillar products and product support services are soldworldwide into a variety of highly competitive markets. In all
markets, we compete on the basis of product performance,
customer service, quality and price. From time to time, the intensityof competition results in price discounting in a particular industry
or region. Such price discounting puts pressure on margins andcan negatively impact operating profit. Outside the United States,
certain competitors enjoy competitive advantages inherent tooperating in their home countries or regions.

Raw Materials and Component Products
We source our raw materials and manufactured components fromsuppliers both domestically and internationally. These purchases
include unformed materials and rough and finished parts. Unformedmaterials include a variety of steel products, which are then cut
or formed to shape and machined in our facilities. Rough parts
include various sized steel and iron castings and forgings, which
are machined to final specification levels inside our facilities.
Finished parts are ready to assemble components, which are
4

Order Backlog

2018 FORM 10-K

Our machines are distributed principally through a worldwide
organization of dealers (dealer network), 47 located in the UnitedStates and 121 located outside the United States, serving 193
countries. Reciprocating engines are sold principally through thedealer network and to other manufacturers for use in products.
Some of the reciprocating engines manufactured by our subsidiary
Perkins Engines Company Limited are also sold through its
worldwide network of 90 distributors covering 177 countries. The
FG Wilson branded electric power generation systems primarily
manufactured by our subsidiary Caterpillar Northern Ireland Limited
are sold through its worldwide network of 150 distributors covering
109 countries. Some of the large, medium speed reciprocating
engines are also sold under the MaK brand through a worldwide
network of 20 distributors covering 130 countries.
Our dealers do not deal exclusively with our products; however,in most cases sales and servicing of our products are the dealers’principal business. Some products, primarily turbines andlocomotives, are sold directly to end customers through sales
forces employed by the company. At times, these employees are
assisted by independent sales representatives.
While the large majority of our worldwide dealers are independently
owned and operated, we own and operate a dealership in Japan thatcovers approximately 80% of the Japanese market: Nippon Caterpillar
Division. We are currently operating this Japanese dealer directly andits results are reported in the All Other operating segments. There
are also three independent dealers in the Southern Region of Japan.

For Caterpillar branded products, the company’s relationshipwith each of its independent dealers is memorialized in standard
sales and service agreements. Pursuant to these agreements,
the company grants the dealer the right to purchase and sell its
products and to service the products in a specified geographic
service territory. Prices to dealers are established by the company
after receiving input from dealers on transactional pricing in themarketplace. The company also agrees to defend its intellectual
property and to provide warranty and technical support to thedealer. The agreement further grants the dealer a non-exclusive
license to use the company’s trademarks, service marks and brandnames. In some instances, a separate trademark agreement exists
between the company and a dealer.
In exchange for these rights, the agreement obligates the dealer todevelop and promote the sale of the company’s products to current
and prospective customers in the dealer’s service territory. Eachdealer agrees to employ adequate sales and support personnel tomarket, sell and promote the company’s products, demonstrate andexhibit the products, perform the company’s product improvement
programs, inform the company concerning any features that might
affect the safe operation of any of the company’s products andmaintain detailed books and records of the dealer’s financial
condition, sales and inventories and make these books and records
available at the company’s reasonable request.
These sales and service agreements are terminable at will by either
party primarily upon 90 days written notice.

Employment
As of December 31, 2018, we employed about 104,000 full-time
persons of whom approximately 59,400 were located outside theUnited States. In the United States, we employed approximately
44,600 employees, most of whom are at-will employees and,
therefore, not subject to any type of employment contract oragreement. At select business units, certain highly specialized
employees have been hired under employment contracts thatspecify a term of employment, pay and other benefits.
Full-Time Employees at Year-End
2018

2017

44,60042,200Outside U.S.

59,40056,200

Total

104,000

98,400

North America

44,90042,400EAME

18,00018,100Latin America

17,30015,000Asia/Pacific23,80022,900

Total

104,000

98,400Inside U.S.

By Region:

As of December 31, 2018, there were approximately 9,560 U.S.
hourly production employees who were covered by collective
bargaining agreements with various labor unions, including The
United Automobile, Aerospace and Agricultural Implement Workersof America (UAW), The International Association of Machinists and
The United Steelworkers. Approximately 7,980 of such employees
are covered by collective bargaining agreements with the UAW
that expire on December 17, 2020 and March 1, 2023. Outside
the United States, the company enters into employment contracts
and agreements in those countries in which such relationships
are mandatory or customary. The provisions of these agreements
generally correspond in each case with the required or customaryterms in the subject jurisdiction.

Environmental 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 ourmanufacturing and other operations, these laws often impact thedevelopment of our products, including, but not limited to, requiredcompliance with air emissions standards applicable to internal
combustion engines. We have made, and will continue to make,significant research and development and capital expenditures tocomply with these emissions standards.
We are engaged in remedial activities at a number of locations, oftenwith 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, andoperating and maintenance costs of the remedial action are accrued
against our earnings. Costs are accrued based on considerationof currently available data and information with respect to eachindividual site, including available technologies, current applicablelaws and regulations, and prior remediation experience. Whereno 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 orothers. We reassess these accrued amounts on a quarterly basis.
The amount recorded for environmental remediation is not material
and is included in the line item “Accrued expenses” in Statement 3— “Consolidated Financial Position at December 31” of Part II, Item
8 “Financial Statements and Supplementary Data.” There is no morethan 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.

Available Information
The company files electronically with the Securities and Exchange
Commission (SEC) required reports on Form 8-K, Form 10-Q,
Form 10-K and Form 11-K; proxy materials; ownership reports
for insiders as required by Section 16 of the Securities Exchange
Act of 1934 (Exchange Act); registration statements on Forms S-3
and S-8, as necessary; and other forms or reports as required.
The SEC maintains a website (www.sec.gov) that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The
company maintains a website (www.Caterpillar.com) and copies
of our annual report on Form 10-K, quarterly reports on Form 10Q, current reports on Form 8-K and any amendments to thesereports filed or furnished with the SEC are available free of charge
through our website (www.Caterpillar.com/secfilings) as soon
as reasonably practicable after filing with the SEC. Copies of ourboard committee charters, our board’s Guidelines on Corporate
Governance Issues, Worldwide Code of Conduct and othercorporate governance information are available on our website(www.Caterpillar.com/governance). The information containedon the company’s website is not included in, or incorporated byreference into, this annual report on Form 10-K.
Additional company information may be obtained as follows:

Current information zz view additional financial information on-line at www.caterpillar.

com/en/investors/financial-information.html

zz request, view or download materials on-line or register for email

alerts at www.Caterpillar.com/materialsrequest

Historical information zz view/download on-line at www.Caterpillar.com/historical2018 FORM 10-K

5

ITEM 1A. Risk Factors.
The statements in this section describe the most significant risks
to our business and should be considered carefully in conjunction
with Part II, Item 7 “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and the “Notes toConsolidated Financial Statements” of Part II, Item 8 “Financial
Statements and Supplementary Data” to this Form 10-K. In addition,
the statements in this section and other sections of this Form 10-K,
including in Part II, Item 7 “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” include “forwardlooking statements” as that term is defined in the Private Securities
Litigation Reform Act of 1995 and involve uncertainties that could
significantly impact results. Forward-looking statements give current
expectations or forecasts of future events about the company or
our outlook. You can identify forward-looking statements by the fact
they do not relate to historical or current facts and by the use ofwords such as “believe,” “expect,” “estimate,” “anticipate,” “will be,”“should,” “plan,” “forecast,” “target,” “guide,” “project,” “intend,”“could” and similar words or expressions.
Forward-looking statements are based on assumptions and on
known risks and uncertainties. Although we believe we havebeen prudent in our assumptions, any or all of our forwardlooking statements may prove to be inaccurate, and we canmake no guarantees about our future performance. Should
known or unknown risks or uncertainties materialize or underlying
assumptions prove inaccurate, actual results could materially differ
from past results and/or those anticipated, estimated or projected.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future eventsor otherwise. You should, however, consult any subsequent
disclosures we make in our filings with the SEC on Form 10-Q or
Form 8-K.
The following is a cautionary discussion of risks, uncertainties
and assumptions that we believe are significant to our business.
In addition to the factors discussed elsewhere in this report, thefollowing are some of the important factors that, individually orin the aggregate, we believe could make our actual results differ
materially from those described in any forward-looking statements.
It is impossible to predict or identify all such factors and, as a result,
you should not consider the following factors to be a complete
discussion of risks, uncertainties and assumptions.

MACROECONOMIC RISKS
Our business and the industries we serve are highly sensitive to global
and regional economic conditions.
Our results of operations are materially affected by economic
conditions globally and regionally and in the particular industries
we serve. The demand for our products and services tends to be
cyclical and can be significantly reduced in periods of economic
weakness characterized by lower levels of government and business
investment, lower levels of business confidence, lower corporate
earnings, high real interest rates, lower credit activity or tighter
credit conditions, perceived or actual industry overcapacity, higher
unemployment and lower consumer spending. A prolonged periodof economic weakness may also result in increased expenses due
to higher allowances for doubtful accounts and potential goodwill
and asset impairment charges. Economic conditions vary acrossregions and countries, and demand for our products and services
generally increases in those regions and countries experiencing
economic growth and investment. Slower economic growth or achange in the global mix of regions and countries experiencing
economic growth and investment could have an adverse effect on
our business, results of operations and financial condition.
62018 FORM 10-K

The energy, transportation and mining industries are major usersof our products, including the coal, iron ore, gold, copper, oil andnatural gas industries. Customers in these industries frequently
base their decisions to purchase our products and services on the
expected future performance of these industries, which in turn are
dependent in part on commodity prices. Prices of commodities inthese industries are frequently volatile and can change abruptly
and unpredictably in response to general economic conditions
and trends, government actions, regulatory actions, commodity
inventories, production and consumption levels, technologicalinnovations, commodity substitutions, market expectations and any
disruptions in production or distribution or changes in consumption.
Economic conditions affecting the industries we serve may in the
future also lead to reduced capital expenditures by our customers.
Reduced capital expenditures by our customers are likely to leadto a decrease in the demand for our products and services andmay also result in a decrease in demand for aftermarket parts ascustomers are likely to extend preventative maintenance schedules
and delay major overhauls when possible.
The rates of infrastructure spending, commercial construction
and housing starts also play a significant role in our results. Our
products are an integral component of these activities, and as these
activities decrease, demand for our products may be significantly
impacted, which could negatively impact our results.
Commodity price changes, material price increases, fluctuations indemand for our products, significant disruptions to our supply chainsor significant shortages of material may adversely impact our financial
results or our ability to meet commitments to customers.
We are a significant user of steel and many other commodities
required for the manufacture of our products. Increases in theprices of such commodities would increase our costs, negatively
impacting our business, results of operations and financial condition
if we are unable to fully offset the effect of these increased costs
through price increases, productivity improvements or cost
reduction programs.
We rely on suppliers to produce or secure material required
for the manufacture of our products. Production challenges
at suppliers, a disruption in deliveries to or from suppliers or
decreased availability of raw materials or commodities could
have an adverse effect on our ability to meet our commitments
to customers or increase our operating costs. The increase indemand in 2018 has led to challenges for certain products due
to supplier constraints. Despite improvements in material flows,parts and components constraints remain across some products,
which could impact our sales in 2019 as global suppliers continue
to increase production to meet demand. On the other hand, incircumstances where demand for our products is less than we
expect, we may experience excess inventories and be forced
to incur additional costs and our profitability may suffer. Our
business, competitive position, results of operations or financial
condition could be negatively impacted if supply is insufficientfor our operations, if we experience excess inventories or if weare unable to adjust our production schedules or our purchasesfrom suppliers to reflect changes in customer demand and market
fluctuations on a timely basis.
Changes in government monetary or fiscal policies may negatively
impact our results.
Most countries where our products and services are sold haveestablished central banks to regulate monetary systems andinfluence economic activities, generally by adjusting interest
rates. Interest rate changes affect overall economic growth, whichaffects demand for residential and nonresidential structures, aswell as energy and mined products, which in turn affects sales ofour products and services that serve these activities. Interest ratechanges may also affect our customers’ ability to finance machinepurchases, can change the optimal time to keep machines in a fleet
and can impact the ability of our suppliers to finance the productionof parts and components necessary to manufacture and support
our products. Increases in interest rates could negatively impact
sales and create supply chain inefficiencies.
Central banks and other policy arms of many countries may takeactions to vary the amount of liquidity and credit available in an
economy. The impact from a change in liquidity and credit policies
could negatively affect the customers and markets we serve or our
suppliers, which could adversely impact our business, results ofoperations and financial condition.
Changes in monetary and fiscal policies, along with other factors,
may cause currency exchange rates to fluctuate. Actions that leadthe currency exchange rate of a country where we manufacture
products to increase relative to other currencies could reduce thecompetitiveness of products made in that country, which could
adversely affect our competitive position, results of operations andfinancial condition.
Government policies on taxes and spending also affect ourbusiness. Throughout the world, government spending finances
a significant portion of infrastructure development, such as
highways, airports, sewer and water systems and dams. Tax
regulations determine asset depreciation lives and impact the aftertax returns on business activity and investment, both of which
influence investment decisions. Unfavorable developments, suchas decisions to reduce public spending or increase taxes, could
negatively impact our results.
Our global operations are exposed to political and economic risks,commercial instability and global events beyond our control in the
countries in which we operate.
Our global operations are dependent upon products manufactured,purchased and sold in the U.S. and internationally, including incountries with political and economic instability or uncertainty.
This includes, for example, the uncertainty related to the United
Kingdom’s withdrawal from the European Union (commonly known
as “Brexit”). Some countries have greater political and economic
volatility and greater vulnerability to infrastructure and labor
disruptions than others. Our business could be negatively impacted
by adverse fluctuations in freight costs, limitations on shipping andreceiving capacity, and other disruptions in the transportation andshipping infrastructure at important geographic points of exit andentry for our products. Operating in different regions and countries
exposes us to a number of risks, including:zz multiple and potentially conflicting laws, regulations and policies

that are subject to change;

zz imposition of currency restrictions, restrictions on repatriation of

earnings or other restraints;

zz imposition of new or additional tariffs or quotas;
zz withdrawal from or modification of trade agreements or thenegotiation of new trade agreements;

zz imposition of new or additional trade and economic sanctions

laws imposed by the U.S. or foreign governments;

zz war or terrorist acts; andzz political and economic instability or civil unrest that may severely

disrupt economic activity in affected countries.

The occurrence of one or more of these events may negatively
impact our business, results of operations and financial condition.

OPERATIONAL RISKS
The success of our business depends on our ability to develop, produce
and market quality products that meet our customers’ needs.
Our business relies on continued global demand for our brands
and products. To achieve business goals, we must develop and sell
products that appeal to our dealers, OEMs and end-user customers.
This is dependent on a number of factors, including our ability tomaintain key dealer relationships, our ability to produce productsthat meet the quality, performance and price expectations of ourcustomers and our ability to develop effective sales, advertising andmarketing programs. In addition, our continued success in selling
products that appeal to our customers is dependent on leadingedge innovation, with respect to both products and operations,and on the availability and effectiveness of legal protection for ourinnovations. Failure to continue to deliver high quality, innovative,competitive products to the marketplace, to adequately protect our
intellectual property rights, to supply products that meet applicableregulatory requirements, including engine exhaust emission
requirements, or to predict market demands for, or gain market
acceptance of, our products, could have a negative impact on ourbusiness, results of operations and financial condition.
We operate in a highly competitive environment, which could
adversely affect our sales and pricing.
We operate in a highly competitive environment. We compete on thebasis of a variety of factors, including product performance, customer
service, quality and price. There can be no assurance that our
products will be able to compete successfully with other companies’
products. Thus, our share of industry sales could be reduced due toaggressive pricing or product strategies pursued by competitors,
unanticipated product or manufacturing difficulties, our failure to priceour products competitively, our failure to produce our products at
a competitive cost or an unexpected buildup in competitors’ newmachine or dealer-owned rental fleets, which could lead to downward
pressure on machine rental rates and/or used equipment prices.
Lack of customer acceptance of price increases we announce
from time to time, changes in customer requirements for pricediscounts, changes in our customers’ behavior or a weak pricing
environment could have an adverse impact on our business, resultsof operations and financial condition.
In addition, our results and ability to compete may be impacted
negatively by changes in our geographic and product mix of sales.
Increased information technology security threats and moresophisticated computer crime pose a risk to our systems, networks,
products and services.
We rely upon information technology systems and networks, someof which are managed by third parties, in connection with a varietyof business activities. Additionally, we collect and store data thatis sensitive to Caterpillar. Operating these information technology
systems and networks and processing and maintaining this data,
in a secure manner, are critical to our business operations andstrategy. Data we collect, store and process is subject to a varietyof U.S. and international laws and regulations, such as the European
Union’s General Data Protection Regulation that became effective in
May 2018, which carry, in many cases, significant potential penalties
for noncompliance. Information technology security threats – fromuser error to cybersecurity attacks designed to gain unauthorizedaccess to our systems, networks and data – are increasing infrequency and sophistication. Cybersecurity attacks may range
from random attempts to coordinated and targeted attacks,
including sophisticated computer crime and advanced persistent
threats. These threats pose a risk to the security of our systems
and networks and the confidentiality, availability and integrity ofour data. Cybersecurity attacks could also include attacks targeting2018 FORM 10-K

7

customer data or the security, integrity and/or reliability of the
hardware and software installed in our products. While, to date,no cybersecurity attack has had a material impact on our financial
condition, results of operations or liquidity, we have experienced
cybersecurity attacks that have resulted in unauthorized parties
gaining access to our information technology systems andnetworks, and we could in the future experience similar or more
serious attacks. While we actively manage information technology
security risks within our control, such actions may not be sufficient
to mitigate all potential risks to our systems, networks and data.
Further, the amount of insurance coverage we maintain may beinadequate to cover claims or liabilities relating to a cybersecurity
attack. The potential consequences of a material cybersecurity
attack include reputational damage, litigation with third parties,
government enforcement actions, penalties, disruption tosystems, unauthorized release of confidential or other wise
protected information, corruption of data, diminution in the valueof our investment in research, development and engineering, andincreased cybersecurity protection and remediation costs, which
in turn could adversely affect our competitiveness, results ofoperations and financial condition.
Our business is subject to the inventory management decisions andsourcing practices of our dealers and our OEM customers.
We sell finished products primarily through an independent dealer
network and directly to OEMs and are subject to risks relating totheir inventory management decisions and operational and sourcing
practices. Both carry inventories of finished products as part ofongoing operations and adjust those inventories based on theirassessments of future needs and market conditions, including
levels of used equipment inventory and machine rental usage rates.
Such adjustments may impact our results positively or negatively. If
the inventory levels of our dealers and OEM customers are higher
than they desire, they may postpone product purchases from us,which could cause our sales to be lower than the end-user demandfor our products and negatively impact our results. Similarly, ourresults could be negatively impacted through the loss of timesensitive sales if our dealers and OEM customers do not maintaininventory levels sufficient to meet customer demand.
We may not realize all of the anticipated benefits of our acquisitions,joint ventures or divestitures, or these benefits may take longer torealize than expected.
In pursuing our business strategy, we routinely evaluate targets
and enter into agreements regarding possible acquisitions,divestitures and joint ventures. We often compete with others forthe same opportunities. To be successful, we conduct due diligenceto identify valuation issues and potential loss contingencies,
negotiate transaction terms, complete complex transactions andmanage post-closing matters such as the integration of acquired
businesses. Further, while we seek to mitigate risks and liabilities
of such transactions through, among other things, due diligence,
there may be risks and liabilities that such due diligence efforts failto discover, that are not accurately or completely disclosed to us orthat we inadequately assess. We may incur unanticipated costs or
expenses following a completed acquisition, including post-closing
asset impairment charges, expenses associated with eliminating
duplicate facilities, litigation, and other liabilities. Risks associatedwith our past or future acquisitions also include the following:zz the business culture of the acquired business may not match

well with our culture;zz technological and product synergies, economies of scale andcost reductions may not occur as expected;

zz unforeseen expenses, delays or conditions may be imposed upon

the acquisition, including due to required regulatory approvals
or consents;

82018 FORM 10-K

zz we may acquire or assume unexpected liabilities or be subject to

unexpected penalties or other enforcement actions;zz faulty assumptions may be made regarding the macroeconomic

environment or the integration process;zz unforeseen difficulties may arise in integrating operations,processes and systems;

zz higher than expected investments may be required to implement

necessary compliance processes and related systems, including
IT systems, accounting systems and internal controls overfinancial reporting;zz we may fail to retain, motivate and integrate key management

and other employees of the acquired business;zz higher than expected costs may arise due to unforeseen changes

in tax, trade, environmental, labor, safety, payroll or pension
policies in any jurisdiction in which the acquired businessconducts its operations; andzz we may experience problems in retaining customers andintegrating customer bases.

Many of these factors will be outside of our control and any oneof them could result in increased costs, decreases in the amountof expected revenues and diversion of management’s time andattention. They may also delay the realization of the benefits weanticipate when we enter into a transaction.
In order to conserve cash for operations, we may undertake
acquisitions financed in part through public offerings or private
placements of debt or equity securities, or other arrangements.
Such acquisition financing could result in a decrease in our earnings
and adversely affect other leverage measures. If we issue equity
securities or equity-linked securities, the issued securities may have adilutive effect on the interests of the holders of our common shares.
Failure to implement our acquisition strategy, including successfully
integrating acquired businesses, could have an adverse effect on ourbusiness, financial condition and results of operations. Furthermore,
we make strategic divestitures from time to time. In the case ofdivestitures, we may agree to indemnify acquiring parties for certain
liabilities arising from our former businesses. These divestitures
may also result in continued financial involvement in the divested
businesses, including through guarantees or other financial
arrangements, following the transaction. Lower performance by
those divested businesses could affect our future financial results.
Union disputes or other labor matters could adversely affect ouroperations and financial results.
Some of our employees are represented by labor unions in a numberof countries under various collective bargaining agreements withvarying durations and expiration dates. There can be no assurance
that any current or future issues with our employees will be resolvedor that we will not encounter future strikes, work stoppages orother types of conflicts with labor unions or our employees. We
may not be able to satisfactorily renegotiate collective bargaining
agreements in the United States and other countries when they
expire. If we fail to renegotiate our existing collective bargaining
agreements, we could encounter strikes or work stoppages orother types of conflicts with labor unions. In addition, existingcollective bargaining agreements may not prevent a strike or work
stoppage at our facilities in the future. We may also be subject
to general country strikes or work stoppages unrelated to ourbusiness or collective bargaining agreements. A work stoppage orother limitations on production at our facilities for any reason could
have an adverse effect on our business, results of operations andfinancial condition. In addition, many of our customers and suppliers
have unionized work forces. Strikes or work stoppages experienced
by our customers or suppliers could have an adverse effect on ourbusiness, results of operations and financial condition.

Unexpected events, including natural disasters, may increase our costof doing business or disrupt our operations.
The occurrence of one or more unexpected events, including war,
terrorist acts or violence, civil unrest, fires, tornadoes, tsunamis,
hurricanes, earthquakes, floods and other forms of severe weather
in the United States or in other countries in which we operate
or in which our suppliers are located could adversely affect ouroperations and financial performance. Natural disasters, pandemic
illness, equipment failures, power outages or other unexpected
events could result in physical damage to and complete or partial
closure of one or more of our manufacturing facilities or distribution
centers, temporary or long-term disruption in the supply ofcomponent products from some local and international suppliers,
disruption in the transport of our products to dealers and end-users
and delay in the delivery of our products to our distribution centers.
Existing insurance coverage may not provide protection for all of
the costs that may arise from such events.

FINANCIAL RISKS
Disruptions or volatility in global financial markets could limit oursources of liquidity, or the liquidity of our customers, dealers andsuppliers.
Continuing to meet our cash requirements over the long-term
requires substantial liquidity and access to varied sources offunds, including capital and credit markets. Global economic
conditions may cause volatility and disruptions in the capital andcredit markets. Market volatility, changes in counterparty credit
risk, the impact of government intervention in financial markets
and general economic conditions may also adversely impact ourability to access capital and credit markets to fund operating needs.
Global or regional economic downturns could cause financial
markets to decrease the availability of liquidity, credit and credit
capacity for certain issuers, including certain customers, dealersand suppliers. An inability to access capital and credit markets
may have an adverse effect on our business, results of operations,financial condition and competitive position. Furthermore, changes
in global economic conditions, including material cost increases anddecreases in economic activity in key markets we serve, and thesuccess of plans to manage cost increases, inventory and otherimportant elements of our business may significantly impact ourability to generate funds from operations.
In addition, demand for our products generally depends oncustomers’ ability to pay for our products, which, in turn, depends
on their access to funds. Changes in global economic conditions
may result in customers experiencing increased difficulty ingenerating funds from operations. Capital and credit market
volatility and uncertainty may cause financial institutions to revise
their lending standards, resulting in customers’ decreased accessto capital. If capital and credit market volatility occurs, customers’liquidity may decline which, in turn, would reduce their ability topurchase our products.
Failure to maintain our credit ratings would increase our cost of
borrowing and could adversely affect our cost of funds, liquidity,
competitive position and access to capital markets.
Each of Caterpillar’s and Cat Financial’s costs of borrowing andtheir respective ability to access the capital markets are affected
not only by market conditions but also by the short- and longterm credit ratings assigned to their respective debt by the major
credit rating agencies. These ratings are based, in significant
part, on each of Caterpillar’s and Cat Financial’s performanceas measured by financial metrics such as net worth, interest
coverage and leverage ratios, as well as transparency withrating agencies and timeliness of financial reporting. Therecan be no assurance that Caterpillar or Cat Financial will beable to maintain their credit ratings. We receive debt ratingsfrom the major credit rating agencies. Moody’s long- andshort-term ratings of Caterpillar and Cat Financial are A3 andPrime-2 (“low-A”), while other major credit rating agencies
maintain a “mid-A” debt rating. A downgrade of our credit ratingby any of the major credit rating agencies would result in increased
borrowing costs and could adversely affect Caterpillar’s and Cat
Financial’s liquidity, competitive position and access to the capital
markets, including restricting, in whole or in part, access to thecommercial paper market. There can be no assurance that thecommercial paper market will continue to be a reliable sourceof short-term financing for Cat Financial or an available source ofshort-term financing for Caterpillar. An inability to access the capital
markets could have an adverse effect on our cash flow, results ofoperations and financial condition.
Our Financial Products segment is subject to risks associated with thefinancial services industry.
Cat Financial is significant to our operations and provides financing
support to a significant share of our global sales. The inability of Cat
Financial to access funds to support its financing activities to ourcustomers could have an adverse effect on our business, resultsof operations and financial condition.
Continuing to meet Cat Financial’s cash requirements over the
long-term could require substantial liquidity and access to sourcesof funds, including capital and credit markets. Cat Financial has
continued to maintain access to key global medium term noteand commercial paper markets, but there can be no assurance
that such markets will continue to represent a reliable source offinancing. If global economic conditions were to deteriorate, Cat
Financial could face materially higher financing costs, become
unable to access adequate funding to operate and grow its
business and/or meet its debt service obligations as they mature,and be required to draw upon contractually committed lending
agreements and/or seek other funding sources. However, there
can be no assurance that such agreements and other funding
sources would be available or sufficient under extreme market
conditions. Any of these events could negatively impact Cat
Financial’s business, as well as our and Cat Financial’s results ofoperations and financial condition.
Market disruption and volatility may also lead to a number of otherrisks in connection with these events, including but not limited to:zz Market developments that may affect customer confidence levels

and cause declines in the demand for financing and adversechanges in payment patterns, causing increases in delinquencies
and default rates, which could impact Cat Financial’s write-offs
and provision for credit losses.

zz The process Cat Financial uses to estimate losses inherent in

its credit exposure requires a high degree of management’s
judgment regarding numerous subjective qualitative factors,
including forecasts of economic conditions and how economic
predictors might impair the ability of its borrowers to repay theirloans. Financial market disruption and volatility may impact theaccuracy of these judgments.

zz Cat Financial’s ability to engage in routine funding transactions

or borrow from other financial institutions on acceptable terms
or at all could be adversely affected by disruptions in the capital
markets or other events, including actions by rating agencies anddeteriorating investor expectations.

zz As Cat Financial’s lending agreements are primarily with financial

institutions, their ability to perform in accordance with any of its
underlying agreements could be adversely affected by market
volatility and/or disruptions in financial markets.

2018 FORM 10-K

9

Changes in interest rates or market liquidity conditions could adversely
affect Cat Financial’s and our earnings and/or cash flow.
Changes in interest rates and market liquidity conditions could
have an adverse impact on Cat Financial’s and our earnings andcash flows. Because a significant number of the loans made by
Cat Financial are made at fixed interest rates, its business results
are subject to fluctuations in interest rates. Certain loans made by
Cat Financial and financing extended to Cat Financial are made atvariable rates that use LIBOR as a benchmark for establishing theinterest rate. LIBOR is the subject of recent proposals for reform.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority
announced that it intends to stop persuading or compelling banks
to submit LIBOR rates after 2021. These reforms may cause
LIBOR to cease to exist, new methods of calculating LIBOR to beestablished or the establishment of an alternative reference rate(s).
These consequences cannot be entirely predicted and could havean adverse impact on the market value for or value of LIBOR-linked
securities, loans, and other financial obligations or extensions ofcredit held by or due to Cat Financial. Changes in market interest
rates may influence Cat Financial’s financing costs, returns on
financial investments and the valuation of derivative contracts andcould reduce its and our earnings and cash flows. Cat Financial
manages interest rate and market liquidity risks through a variety
of techniques that include a match funding program, the selective
use of derivatives and a broadly diversified funding program. Therecan be no assurance, however, that fluctuations in interest rates andmarket liquidity conditions will not have an adverse impact on its
and our earnings and cash flows. If any of the variety of instruments
and strategies Cat Financial uses to hedge its exposure to thesetypes of risk is ineffective, we may have an adverse impact on
our earnings and cash flows. With respect to Insurance Services’
investment activities, changes in the equity and bond markets could
result in a decline in value of its investment portfolio, resulting inan unfavorable impact to earnings.
An increase in delinquencies, repossessions or net losses of Cat
Financial customers could adversely affect its results.
Inherent in the operation of Cat Financial is the credit risk associatedwith its customers. The creditworthiness of each customer and therate of delinquencies, repossessions and net losses on customer
obligations are directly impacted by several factors, including
relevant industry and economic conditions, the availability of capital,
the experience and expertise of the customer’s management team,commodity prices, political events and the sustained value of theunderlying collateral. Any increase in delinquencies, repossessions
and net losses on customer obligations could have a material
adverse effect on Cat Financial’s and our earnings and cash
flows. In addition, although Cat Financial evaluates and adjusts its
allowance for credit losses related to past due and non-performing
receivables on a regular basis, adverse economic conditions orother factors that might cause deterioration of the financial healthof its customers could change the timing and level of payments
received and necessitate an increase in Cat Financial’s estimatedlosses, which could also have a material adverse effect on Cat
Financial’s and our earnings and cash flows.
Currency exchange rate fluctuations affect our results of operations.
We conduct operations in many countries involving transactions
denominated in a variety of currencies. We are subject to currency
exchange rate risk to the extent that our costs are denominated incurrencies other than those in which we earn revenues. Fluctuations
in currency exchange rates have had, and will continue to have, animpact on our results as expressed in U.S. dollars. There can be noassurance that currency exchange rate fluctuations will not adversely
affect our results of operations, financial condition and cash flows.
While the use of currency hedging instruments may provide us with
10

2018 FORM 10-K

protection from adverse fluctuations in currency exchange rates, byutilizing these instruments we potentially forego the benefits thatmight result from favorable fluctuations in currency exchange rates.
In addition, our outlooks do not assume fluctuations in currency
exchange rates. Adverse fluctuations in currency exchange rates
from the date of our outlooks could cause our actual results todiffer materially from those anticipated in our outlooks and adversely
impact our business, results of operations and financial condition.
We also face risks arising from the imposition of exchange controls
and currency devaluations. Exchange controls may limit our ability toconvert foreign currencies into U.S. dollars or to remit dividends andother payments by our foreign subsidiaries or businesses locatedin or conducted within a country imposing controls. Currency
devaluations result in a diminished value of funds denominated in
the currency of the country instituting the devaluation.
Restrictive covenants in our debt agreements could limit our financial
and operating flexibility.
We maintain a number of credit facilities to support general
corporate purposes (facilities) and have issued debt securities
to manage liquidity and fund operations (debt securities). The
agreements relating to a number of the facilities and the debt
securities contain certain restrictive covenants applicable to us
and certain subsidiaries, including Cat Financial. These covenants
include maintaining a minimum consolidated net worth (definedas the consolidated shareholder’s equity including preferred stock
but excluding the pension and other post-retirement benefitsbalance within accumulated other comprehensive income (loss)),
limitations on the incurrence of liens and certain restrictions on
consolidation and merger. Cat Financial has also agreed undercertain of these agreements not to exceed a certain leverage ratio(consolidated debt to consolidated net worth, calculated (1) on amonthly basis as the average of the leverage ratios determined on
the last day of each of the six preceding calendar months and (2) ateach December 31), to maintain a minimum interest coverage ratio(profit excluding income taxes, interest expense and net gain/(loss)
from interest rate derivatives to interest expense, calculated at theend of each calendar quarter for the rolling four quarter period thenmost recently ended) and not to terminate, amend or modify its
support agreement with us.
A breach of one or more of the covenants could result in adverse
consequences that could negatively impact our business, resultsof operations and financial condition. These consequences may
include the acceleration of amounts outstanding under certain of
the facilities, triggering of an obligation to redeem certain debt
securities, termination of existing unused commitments by ourlenders, refusal by our lenders to extend further credit under one ormore of the facilities or to enter into new facilities or the loweringor modification of our credit ratings or those of one or more of our
subsidiaries.
Sustained increases in funding obligations under our pension plans
may impair our liquidity or financial condition.
We maintain certain defined benefit pension plans for our
employees, which impose on us certain funding obligations. In
determining our future payment obligations under the plans, we
assume certain rates of return on the plan assets and a certain
level of future benefit payments. Significant adverse changes incredit or capital markets could result in actual rates of return beingmaterially lower than projected and result in increased contribution
requirements. Our assumptions for future benefit payments may
also change over time and could be materially higher than originallyprojected. We are expecting to make contributions to our pension
plans in the future, and may be required to make contributions that
could be material. We may fund contributions through the use of
cash on hand, the proceeds of borrowings, shares of our common

stock or a combination of the foregoing, as permitted by applicablelaw. Our assumptions for future benefit payments may also bematerially higher than projected. These factors could significantly
increase our payment obligations under the plans, and as a result,adversely affect our business and overall financial condition.

LEGAL & REGULATORY RISKS
Our global operations are subject to extensive trade and anticorruption laws and regulations.
Due to the international scope of our operations, we are subject to acomplex system of import- and export-related laws and regulations,
including U.S. regulations issued by Customs and Border Protection,
the Bureau of Industry and Security, the Office of Antiboycott
Compliance, the Directorate of Defense Trade Controls and the
Office of Foreign Assets Control, as well as the counterparts ofthese agencies in other countries. Any alleged or actual violations
may subject us to government scrutiny, investigation and civil andcriminal penalties, and may limit our ability to import or export
our products or to provide services outside the United States.
Furthermore, embargoes and sanctions imposed by the U.S.
and other governments restricting or prohibiting sales to specificpersons or countries or based on product classification may expose
us to potential criminal and civil sanctions. We cannot predict thenature, scope or effect of future regulatory requirements to which
our operations might be subject or in certain locations the mannerin which existing laws might be administered or interpreted.
In addition, the U.S. Foreign Corrupt Practices Act and similar
foreign anti-corruption laws generally prohibit companies andtheir intermediaries from making improper payments or providing
anything of value to improperly influence foreign government officials
for the purpose of obtaining or retaining business, or obtaining an
unfair advantage. Recent years have seen a substantial increasein the global enforcement of anti-corruption laws. Our operations
outside the United States, including in developing countries, could
increase the risk of such violations. Violations of anti-corruption
laws or regulations by our employees, by intermediaries acting on
our behalf, or by our joint venture partners may result in severe
criminal or civil sanctions, could disrupt our business, and resultin an adverse effect on our reputation, business and results ofoperations or financial condition.
International trade policies may impact demand for our products andour competitive position.
Government policies on international trade and investment suchas import quotas, capital controls or tariffs, whether adopted
by individual governments or addressed by regional trade blocs,
can affect the demand for our products and services, impact thecompetitive position of our products or prevent us from being able
to sell products in certain countries. The implementation of more
restrictive trade policies, such as more detailed inspections, higher
tariffs or new barriers to entry, in countries where we sell large
quantities of products and services could negatively impact ourbusiness, results of operations and financial condition. For example,
a government’s adoption of “buy national” policies or retaliation byanother government against such policies could have a negative
impact on our results of operations.
We may incur additional tax expense or become subject to additionaltax exposure.
We are subject to income taxes in the United States and numerous otherjurisdictions. Our future results of operations could be adversely affectedby changes in the effective tax rate as a result of a change in the mix ofearnings between U.S. and non-U.S. jurisdictions or among jurisdictions
with differing statutory tax rates, changes in our overall profitability,changes in tax laws or treaties or in their application or interpretation,changes in tax rates, changes in generally accepted accounting
principles, changes in the valuation of deferred tax assets and liabilities,changes in the amount of earnings indefinitely reinvested in certain nonU.S. jurisdictions, the results of audits and examinations of previously
filed tax returns and continuing assessments of our tax exposures.
We are also subject to the continuous examination of our income tax
returns by the U.S. Internal Revenue Service and other tax authorities.
We regularly assess the likelihood of an adverse outcome resulting fromthese examinations. If our effective tax rates were to increase, or if theultimate determination of our taxes owed is for an amount in excess
of amounts previously accrued, our operating results, cash flows andfinancial condition could be adversely affected. For information regarding
additional legal matters related to our taxes, please see Note 6 — “Income
taxes” and Note 22 — “Environmental and legal matters” of Part II,
Item 8 “Financial Statements and Supplementary Data” to this Annual
Report on Form 10-K.
Costs associated with lawsuits or investigations or adverse rulings inenforcement or other legal proceedings may have an adverse effect on
our results of operations.
We are subject to a variety of legal proceedings and legal compliancerisks in virtually every part of the world. We face risk of exposure tovarious types of claims, lawsuits and government investigations.
We are involved in various claims and lawsuits related to productdesign, manufacture and performance liability (including claimed
asbestos and welding fumes exposure), contracts, employment
issues, environmental matters, intellectual property rights, tax,
securities and other legal proceedings that arise in and outside of
the ordinary course of our business. The industries in which we
operate are also periodically reviewed or investigated by regulators,
which could lead to enforcement actions, fines and penalties or theassertion of private litigation claims. It is not possible to predict
with certainty the outcome of claims, investigations and lawsuits,
and we could in the future incur judgments, fines or penalties orenter into settlements of lawsuits and claims that could have an
adverse effect on our business, results of operations and financial
condition in any particular period.
The global and diverse nature of our operations means that legal
and compliance risks will continue to exist and additional legal
proceedings and other contingencies, the outcome of which cannot
be predicted with certainty, may arise from time to time. In addition,subsequent developments in legal proceedings may affect ourassessment and estimates of loss contingencies recorded as areserve and require us to make payments in excess of our reserves,which could have an adverse effect on our results of operations
and financial condition.
New regulations or changes in financial services regulation could
adversely impact Caterpillar and Cat Financial.
Cat Financial’s operations are highly regulated by governmental
authorities in the locations where it operates, which can impose
significant additional costs and/or restrictions on its business. In the
U.S., for example, certain Cat Financial activities are subject to the
U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act(Dodd-Frank), which includes extensive provisions regulating thefinancial services industry. Certain aspects of Dodd-Frank remain
to be implemented under the rulemaking and regulatory authorityof the SEC, the CFTC and federal banking regulators. As such, Cat
Financial has become and could continue to become subject toadditional regulatory costs that could be significant and have an
adverse effect on Cat Financial’s and our results of operations andfinancial condition. Changes in regulations or additional regulationsin the U.S. or internationally impacting the financial services
industry could also add significant cost or operational constraints
that might have an adverse effect on Cat Financial’s and our resultsof operations and financial condition.
2018 FORM 10-K

11

We are subject to stringent environmental laws and regulations that
impose significant compliance costs.

acquired operations or under present laws and regulations or thosethat may be adopted or imposed in the future.

Our facilities, operations and products are subject to increasingly
stringent environmental laws and regulations globally, includinglaws and regulations governing emissions to noise, air, releases tosoil and discharges to water and the generation, handling, storage,transportation, treatment and disposal of non-hazardous andhazardous waste materials. Some environmental laws impose strict,retroactive and joint and several liability for the remediation of therelease of hazardous substances, even for conduct that was lawfulat the time it occurred, or for the conduct of, or conditions causedby, prior operators, predecessors or other third parties. Failure tocomply with environmental laws could expose us to penalties orclean-up costs, civil or criminal liability and sanctions on certain of
our activities, as well as damage to property or natural resources.
The potential liabilities, sanctions, damages and remediation efforts
related to any non-compliance with such laws and regulations could
negatively impact our ability to conduct our operations and ourfinancial condition and results of operations. In addition, there
can be no assurances that we will not be adversely affected bycosts, liabilities or claims with respect to existing or subsequently

Environmental laws and regulations may change from time totime, as may related interpretations and other guidance. Changes
in environmental laws or regulations could result in higher expenses
and payments, and uncertainty relating to environmental laws or
regulations may also affect how we conduct our operations andstructure our investments and could limit our ability to enforce
our rights. Changes in environmental and climate change laws or
regulations, including laws relating to greenhouse gas emissions,
could lead to new or additional investment in product designs
and could increase environmental compliance expenditures.
Changes in climate change concerns, or in the regulation of suchconcerns, including greenhouse gas emissions, could subject us
to additional costs and restrictions, including increased energy andraw materials costs. If environmental laws or regulations are either
changed or adopted and impose significant operational restrictions
and compliance requirements upon us or our products, they could
negatively impact our business, capital expenditures, results ofoperations, financial condition and competitive position.

ITEM 1B. Unresolved Staff Comments.
None.

ITEM 1C. Executive Officers of the Registrant.
Present Caterpillar Inc. positionand date of initial election

Name and age
D. James Umpleby, III (60)

Chairman of the Board (2018) and Chief Executive
Officer (2017)

Group President (2013-2016)

Andrew R.J. Bonfield (56)

Chief Financial Officer (2018)

Group Chief Financial Officer for a multinational
electricity and gas utility company (2010-2018)

Bob De Lange (49)Group President (2017)

Vice President (2015-2016), Worldwide ProductManager, Medium Wheel Loaders, (2013-2014)

Denise C. Johnson (52)Group President (2016)

Vice President (2012-2016)

Thomas A. Pellette (56)Group President (2015)

Vice President (2013-2015)

Ramin Younessi (54)Group President (2018)

Vice President (2013-2018)

Suzette M. Long (53)General Counsel and Corporate Secretary (2017)

Interim Executive Vice President, Law and Public
Policy (2017), Deputy General Counsel (2013-2017)

Cheryl C. Johnson (58)

Chief Human Resources Officer (2017)

Executive Vice President of Human Resources fora global multi-industry aerospace, defense andindustrial manufacturing company (2012-2017)

Jananne A. Copeland (56)

Chief Accounting Officer (2007)

ITEM 2.

Properties.

General Information
Caterpillar’s operations are highly integrated. Although the
majority of our plants are involved primarily in production
relating to our Construction Industries, Resource Industries orEnergy & Transportation segments, several plants are involvedin manufacturing relating to more than one business segment.
In addition, several plants reported in our financial statements
under the All Other segments are involved in the manufacturing ofcomponents that are used in the assembly of products for morethan one business segment. Caterpillar’s parts distribution centers
12

Principal positions held during the past five years
if other than Caterpillar Inc. position currently held

2018 FORM 10-K

are involved in the storage and distribution of parts for Construction
Industries, Resource Industries and Energy & Transportation. The
research and development activities carried on at our TechnicalCenter in Mossville, Illinois involve products for Construction
Industries, Resource Industries and Energy & Transportation.
We believe the properties we own to be generally well maintained
and adequate for present use. Through planned capital expenditures,
we expect these properties to remain adequate for future needs.
Properties we lease are covered by leases expiring over terms ofgenerally one to ten years. We do not anticipate any difficulty inretaining occupancy of any leased facilities, either by renewing
leases prior to expiration or by replacing them with equivalentleased facilities.

Headquarters and Other Key Offices
Our corporate headquarters are in leased offices located in
Deerfield, Illinois. Our Financial Products business is headquarteredin offices in Nashville, Tennessee. Additional key offices are locatedinside and outside the United States.

Technical Center, Training Centers, Demonstration
Areas and Proving Grounds
We operate Technical Centers located in Mossville, Illinois; Wuxi,
China; and Chennai, India. Our demonstration centers are locatedTinaja Hills, Arizona; Edwards, Illinois; Chichibu, Japan and Malaga,
Spain. We have various other technical and training centers,
demonstration areas and proving grounds located both inside andoutside the United States.

Parts Distribution Centers
Distribution of our parts is conducted from parts distribution
centers inside and outside the United States. We operate parts
distribution centers in the following locations: Arvin, California;
Denver, Colorado; Miami, Florida; Atlanta, Georgia; Morton, Illinois;
St. Paul, Minnesota; Clayton, Ohio; York, Pennsylvania; Waco, Texas;
Spokane, Washington; Melbourne, Australia; Queensland, Australia;
Grimbergen, Belgium; Piracicaba, Brazil; Shanghai, China; Sagami,
Japan; San Luis Potosi, Mexico; Singapore, Republic of Singapore;
Moscow, Russia; Johannesburg, South Africa; and Dubai, United
Arab Emirates. We also own or lease other facilities that support
our distribution activities.

Remanufacturing and Components
Remanufacturing of our products is reported in our Energy &Transportation segment and is conducted primarily at the facilities
in the following locations: Franklin, Indiana; Corinth, Mississippi;
Prentiss County, Mississippi; West Fargo, North Dakota; Piracicaba,
Brazil; Shanghai, China; Nuevo Laredo, Mexico; and Shrewsbury,
United Kingdom.
Component manufacturing is reported in the All Other segments
and is conducted primarily at facilities in the following locations:
East Peoria, Illinois; Mapleton, Illinois; Peoria, Illinois; Menominee,
Michigan; Boonville, Missouri; West Plains, Missouri; Goldsboro,
North Carolina; Sumter, South Carolina; Tianjin, China; Xuzhou,
China; Atessa, Italy; Bazzano, Italy; Frosinone, Italy; San Eusebio,
Italy; Ramos Arizpe, Mexico; Pyeongtaek, South Korea; andSkinningrove, United Kingdom.
We also lease or own other facilities that support ourremanufacturing and component manufacturing activities.

Manufacturing
Manufacturing of products for our Construction Industries,
Resource Industries and Energy & Transportation segments is
conducted primarily at the locations listed below. These facilities are
believed to be suitable for their intended purposes, with adequate
capacities for current and projected needs for existing products.

2018 FORM 10-K

13

Our principal manufacturing facilities include those used by the following segments in the following locations:
Segment

U.S. Facilities

Facilities Outside the U.S.

Construction Industries

Arkansas: North Little RockBrazil: Campo Largo, Piracicaba

Georgia: Athens, LaGrange

China: Suzhou, Wujiang, Xuzhou, Qingzhou

Illinois: Decatur, East Peoria

France: Grenoble, Echirolles

Kansas: Wamego

Hungary: Godollo

Minnesota: Brooklyn Park

India: Thiruvallar

North Carolina: Clayton, SanfordIndonesia: Jakarta

Texas: Victoria, Waco

Italy: Minerbio
Japan: Akashi
Mexico: Torreon
Netherlands: Den Bosch
Poland: Janow, Sosnowiec
Thailand: Rayong
United Kingdom: Desford, Stockton

Resource Industries

Illinois: Aurora, Decatur, East Peoria, Joliet

China: Wuxi

South Carolina: Sumter

Germany: Dortmund, Lunen

Tennessee: Dyersburg

India: Thiruvallur

Texas: DenisonIndonesia: Batam

Wisconsin: South Milwaukee

Italy: Jesi
Mexico: Acuna, Monterrey, Reynosa
Russia: Tosno
Thailand: Rayong
United Kingdom: Peterlee, Springvale

Energy & Transportation

Alabama: Albertville, Montgomery

Australia: Cardiff, Perth, Redbank, Revesby

California: San Diego

Brazil: Curitiba, Hortolandia, Piracicaba, Sete Lagoas

Georgia: Griffin

China: Tianjin, Wuxi

Illinois: Island Lake, LaGrange, Mossville,
Mapleton, Pontiac

Czech Republic: Zatec, Zebrak

Indiana: Lafayette, Muncie

Germany: Kiel, Mannheim, Rostock

Kentucky: Decoursey, Mayfield

India: Aurangabad, Hosur

Oklahoma: Broken Arrow

Italy: Pistoria

North Carolina: Winston-Salem

Mexico: San Luis Potosi, Tijuana

Texas: Channelview, DeSoto, Mabank,
San Antonio, Schertz, Seguin, Sherman

Republic of Singapore: Singapore
Sweden: Ockero Islands
United Kingdom: Larne, Peterborough, Sandiacre,
South Queensferry, Stafford, Wimborne

ITEM 3.

Legal Proceedings.

Certain legal proceedings in which we are involved are discussed in Note 22 — “Environmental and legal matters” of Part II, Item 8“Financial Statements and Supplementary Data” and should be considered an integral part of Part I, Item 3 “Legal Proceedings.”

ITEM 4.

Mine Safety Disclosures.

Not applicable.

14

2018 FORM 10-K

PART IIITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities.

Common Stock (NYSE: CAT)
Listing Information: Caterpillar common stock is listed on the New York Stock Exchange in the United States, and on stock exchanges
in France and Switzerland.
Number of Shareholders: Shareholders of record at the end of 2018 totaled 26,938, compared with 27,992 at the end of 2017.

Performance Graph: Total Cumulative Shareholder Return for Five-Year Period Ending December 31, 2018
The graph below shows the cumulative shareholder return assuming an investment of $100 on December 31, 2013, and reinvestment
of dividends issued thereafter.

225

Dollars

175

125

75
2013

2014

2015

2016

2018

2017

Fiscal Year Ended December 31

Caterpillar Inc.

S&P 500 Index
2013

S&P 500 Machinery Index

2014

2015

2016

2017

2018

Caterpillar Inc.

$

100.00$103.48

$

79.70

$

113.26$198.25$163.44

S&P 500$

100.00$113.69$115.26$129.05$157.22$150.33

S&P 500 Machinery$

100.00$104.42

$

88.98

$

119.18$169.59$144.76

Non-U.S. Employee Stock Purchase Plans
As of December 31, 2018, we had 23 employee stock purchase plans (the “EIP Plans”) administered outside the United States for our
non-U.S. employees, which had approximately 11,000 active participants in the aggregate. During the fourth quarter of 2018, approximately
123,000 shares of Caterpillar common stock were purchased by the EIP Plans pursuant to the terms of such plans.

2018 FORM 10-K

15

Issuer Purchases of Equity Securities

Total Numberof Shares
Purchased2,3,4

PeriodApproximate Dollar
Value of Shares thatMay Yet be Purchased
under the Program(in billions)1

October 1-31, 2018

7,492,531$

124.66

7,492,531

$

2.609

November 1-30, 2018

5,622,285$

125.895,622,285

$

1.901

December 1-31, 2018

1,754,824$

126.191,754,824

$

1.680

14,869,640$

125.3014,869,640

Total
1
2

3

4

In January 2014, the Board of Directors authorized the repurchase of up to $10.0 billion of Caterpillar common stock, which expired on December 31, 2018 (the 2014 Authorization). In
July 2018, the Board approved a new share repurchase authorization of up to $10.0 billion of Caterpillar common stock effective January 1, 2019, with no expiration.
During the third quarter of 2018, we entered into an accelerated stock repurchase (ASR) with a third-party financial institution to purchase $750 million of our common stock. In
August 2018, upon payment of the $750 million to the financial institution, we received 4.8 million shares. In October 2018, upon final settlement of the August 2018 ASR, we received
0.4 million shares at an average price of $143.31.
During the fourth quarter of 2018, we entered into an ASR with a third-party financial institution to purchase $750 million of our common stock. In October 2018, upon payment of$750 million to the financial institution, we received 6.0 million shares. In December 2018, upon final settlement of the ASR, we received an additional 0.1 million shares. In total, we
repurchased 6.1 million shares under this ASR at an average price per share of $124.40.
In October, November, and December of 2018, we repurchased 1.1 million, 5.6 million, and 1.7 million additional shares respectively, for an aggregate of $1.0 billion in open market
transactions at an average price per share of $118.28, $125.89, and $126.29, respectively. Some purchases made during the fourth quarter of 2018 were made pursuant to a tradingplan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934.

Share repurchases in the table above are reported based on the trade dates.

16

Average Price
Paid perShare2,3,4

Total Numberof Shares Purchased
as Part of Publicly
Announced Program

2018 FORM 10-K

ITEM 6.

Selected Financial Data.

Five-year Financial Summary
2018(Dollars in millions except per share data)

2017

2016

2015

2014

Years ended December 31,
Sales and revenues$

54,722$

45,462$

38,537$47,011

Percent inside the United States

41%

41%

41%

41%

Percent outside the United States

59%

59%

59%

59%

Sales

$

51,822$

42,676$35,773$44,147$55,18438%
62%$52,142

Revenues

$

2,900

$

2,786

$

2,764

$

2,864

$

3,042

Profit (loss)1

$

6,147

$

754

$

(67)

$

2,512

$

2,452

Profit (loss) per common share2

$

10.39

$

1.27

$

(0.11)

$

4.23

$

3.97

Profit (loss) per common share–diluted3

$
$

10.26
3.36

$
$

1.26
3.11

$
$

(0.11)
3.08

$
$

4.18
3.01

$
$

3.90
2.70

Dividends declared per share of common stock

44.1%

Return on average common shareholders’ equity4

5.6%(0.5%)

15.8%

13.0%

Capital expenditures:
Property, plant and equipment

$

1,276

$

898

$

1,109

$

1,388

$

1,539
1,840

Equipment leased to others

$

1,640

$

1,438

$

1,819

$

1,873

$

Depreciation and amortization

$

2,766

$

2,877

$

3,034

$

3,046

$

3,163

Research and development expenses5

$

1,850

$

1,842

$

1,853

$

2,134

$

2,107

3.4%

As a percent of sales and revenues

4.1%

101,500

Average number of employees

4.8%

96,0004.5%

99,5003.8%

110,800

115,600

December 31,$

78,509Consolidated$

Machinery, Energy & Transportation$

Financial Products$

76,96225,000

$

8,005

$

$

16,995

Consolidated$

Machinery, Energy & Transportation
Financial Products

Total assets$

74,704$78,342$

84,49823,847

$

7,929

$

22,818

$

8,436

$

25,169$27,696

8,960

$

9,445

$

15,918$14,382$

16,209$18,251

36,553$34,878$36,783$38,013$39,195

$

8,015

$

28,538

$

7,936

$

26,942

$

9,152

$

9,486

$

9,964

$

27,631$

28,527$

29,231Long-term debt due after one year:

Total debt:

1
2
3
4
5

Profit (loss) attributable to common shareholders.
Computed on weighted-average number of shares outstanding.
Computed on weighted-average number of shares outstanding diluted by assumed exercise of stock-based compensation awards, using the treasury stock method. In 2016, theassumed exercise of stock-based compensation awards was not considered because the impact would be antidilutive.
Represents profit (loss) divided by average shareholders’ equity (beginning of year shareholders’ equity plus end of year shareholders’ equity divided by two).
Effective January 1, 2018, we adopted new accounting guidance issued by the FASB related to the presentation of net periodic pension costs and net periodic postretirement benefit
costs. The change was applied retrospectively to prior years. For further information see Note 1J - “Operations and summary of significant accounting policies - New Accounting
Guidance” of Part II, Item 8 “Financial Statements and Supplementary Data”.

Additional information required by Item 6 is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”

2018 FORM 10-K

17

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results ofOperations.

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 2018 Form 10-K.
2017. Fourth-quarter 2018 profit was $1.048 billion, compared witha loss of $1.299 billion in 2017.

OVERVIEW
Our sales and revenues for 2018 were $54.722 billion, a 20 percent
increase from 2017 sales and revenues of $45.462 billion. The
increase was primarily due to higher sales volume, mostly due toimproved demand across all regions and across the three primary
segments. Profit per share for 2018 was $10.26, compared to profit
per share of $1.26 in 2017. Profit was $6.147 billion in 2018, comparedwith $754 million in 2017. The increase was primarily due to lower
tax expense, higher sales volume, decreased restructuring costs
and improved price realization. The increase was partially offset byhigher manufacturing costs and selling, general and administrative(SG&A) and research and development (R&D) expenses and lower
profit from the Financial Products Segment.
Fourth-quarter 2018 sales and revenues were $14.342 billion, up$1.446 billion, or 11 percent, from $12.896 billion in the fourth
quarter of 2017. Fourth-quarter 2018 profit was $1.78 per share,compared with a loss of $2.18 per share in the fourth quarter ofHighlights for 2018 include:zz Sales and revenues in 2018 were $54.722 billion, up 20 percent

from 2017. Sales improved in all regions and across the three
primary segments.
zz Operating profit as a percent of sales and revenues was
15.2 percent in 2018, compared with 9.8 percent in 2017.
Adjusted operating profit margin was 15.9 percent in 2018,
compared with 12.5 percent in 2017.
zz Profit was $10.26 per share for 2018, and excluding the items in

the table below, adjusted profit per share was $11.22. For 2017
profit was $1.26 per share, and excluding the items in the tablebelow, adjusted profit per share was $6.88.

zz In order for our results to be more meaningful to our readers, wehave separately quantified the impact of several significant items:
Full Year 2018

(Millions of dollars)ProfitPer Share

Profit Before
Taxes

ProfitPer Share

Profit

$

$

$

$

7,822

Restructuring costs

386

10.26

4,082

0.50

1,256

1.26
1.68

Mark-to-market losses

495

0.64

301

0.26

Deferred tax valuation allowance adjustments—(0.01)—(0.18)

U.S. tax reform impact—(0.17)—

3.95—

Gain on sale of equity investment$

Adjusted profit

8,703

—
$

11.22

(85)
$

5,554

(0.09)$

6.88

zz Machinery, Energy & Transportation (ME&T) operating cash

facility in Gosselies, Belgium, and the remainder related to otherrestructuring actions across the company. Although we expect
restructuring to continue as part of ongoing business activities,
restructuring costs should be lower in 2019 than 2018.

Restructuring Costs

Notes:

flow for 2018 was about $6.3 billion, more than sufficient to covercapital expenditures and dividends. ME&T operating cash flowfor 2017 was about $5.5 billion.

In recent years, we have incurred substantial restructuring costs toachieve a flexible and competitive cost structure. During 2018, we
incurred $386 million of restructuring costs related to restructuring
actions across the company. During 2017, we incurred $1.256 billionof restructuring costs with about half related to the closure of the18

Full Year 2017

Profit Before
Taxes

2018 FORM 10-K

zz Glossary of terms included on pages 33-34; first occurrence ofterms shown in bold italics.

zz Information on non-GAAP financial measures is included on

pages 42-43.

2018 COMPARED WITH 2017
CONSOLIDATED SALES AND REVENUES

Consolidated Sales and Revenues Comparison
Full Year 2018 vs. Full Year 2017

$60,000$50,000

8,291

601

254

114

54,722

Sales Volume

Price Realization

Currency

Financial Products
Revenues

Full Year 2018
Sales & Revenues

45,462Millions of $$40,000$30,000$20,000$10,000$0

Full Year 2017
Sales & Revenues

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between 2017 (at left) and 2018 (at right). Items favorably impacting sales and revenues
appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts
reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees.

EAME sales increased 16 percent primarily due to higher demand,
including favorable 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. The
impact of changes in dealer inventories was favorable as dealer
inventories increased more significantly in 2018 than in 2017.

Total sales and revenues were $54.722 billion in 2018, an increaseof $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 favorable changes in dealer inventories.
Favorable price realization across the three primary segments
also contributed to the sales improvement. In addition, sales werehigher due to currency impacts, primarily from a stronger euro.
Financial Products’ revenues increased slightly.

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

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.

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 productdelivery times. Dealers’ demand expectations take into accountseasonal 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 increased 13 percent in Latin America primarily due tostabilizing economic conditions in several countries in the region
that resulted in improved demand from low levels.

Sales and Revenues by Segment(Millions of dollars)

2017

Price
Realization

Currency

InterSegment/
Other

$

$

$

$

3,663

122

198

14

$
Change2018$

23,237$%
Change3,997

21%Resource Industries

7,861

2,082

316

(14)

25

10,2702,409

31%Energy & Transportation

19,382

2,637

163

68

535

22,785

3,403

18%
(15%)

Construction Industries$ 19,240

Sales
Volume

570

(26)

(1)

3

(64)

482

(88)

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%

All Other Segments

Corporate Items and Eliminations

(307)

—

—

—

(72)

(379)

(72)

Financial Products Revenues

2,786

—

—

—

114

2,900

114

4%

9,260

20%

Consolidated Sales and Revenues$ 45,462

$

8,291

$

601

$

254

$

114

$

54,722$2018 FORM 10-K

19

Sales and Revenues by Geographic Region
North America(Millions of dollars)

%
Chg

$

Latin America
%
Chg

$

EAME

Asia/Pacific
%
Chg

$

%
Chg

$

External Sales
and Revenues$

Inter-Segment

%
Chg

%
Chg

$

Total Sales andRevenues
$

%
Chg

2018
Construction
Industries

23% $ 1,479

6% $ 4,410

17% $ 6,473

24% $ 23,116

21% $

121

13% $ 23,237

21%Resource Industries$ 10,754
3,357

30%

1,647

29%

2,217

25%

2,667

43%

9,888

32%

382

7%

10,27031%

Energy &Transportation

9,685

22%

1,331

6%

4,934

11%

2,882

25%

18,832

18%

3,953

16%

22,785

18%

63

(10%)

3

—%

18

(67%)

70

37%

154

(13%)

328

(16%)

All Other Segments
Corporate Items
and Eliminations

(155)

—

(11)

(2)

(168)

(4,784)482 (15%)(4,952)

Machinery, Energy& Transportation

23,704

23%

4,460

13%

11,56816%

12,09028%

51,822

21%——%

51,82221%

Financial Products
Segment

2,153

7%

281

(8%)

387

(7%)

458

26%

3,279

6%

—

—%

3,279

6%

Corporate Items
and Eliminations(234)

Financial Products
Revenues

1,919

Consolidated
Sales and
Revenues

(46)
6%

235

(26)
(10%)

361

(73)
(10%)

385

(379)
24%

2,900

—

(379)

4%

—

—%

2,900

4%

—

—% $ 54,722

20%$ 25,623

22% $ 4,695

12% $ 11,929

15% $ 12,475

28% $ 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

19,382All Other Segments

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

$ 21,072$ 4,200$ 10,413$ 9,777$ 45,462—$ 45,462

Consolidated
Sales and
Revenues

20

2018 FORM 10-K$

CONSOLIDATED OPERATING PROFIT

Consolidated Operating Profit Comparison
Full Year 2018 vs. Full Year 2017

$9,000601
3,310$8,000

(444)

(249)

(81)

(141)

Currency

Financial
Products

833

4

8,293

Restructuring
Costs

Other

Full Year 2018
Operating Profit

Millions of $$7,000$6,000$5,0004,460$4,000$3,000$2,000$1,000-

Manufacturing SG&A / R&D
Full Year 2017 Sales Volume
Price
Costs
Operating Profit
Realization

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between 2017 (at left) and 2018 (at right). Items favorably impacting operating profit appear as
upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflectedin parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees. The bar entitled Other
includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.

Operating profit 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 andfreight costs, partially offset by lower warranty expense. Material
costs were higher primarily due to increases in steel prices. The
impact of recently imposed tariffs on material costs was about $110
million during 2018. We expect higher expense in 2019 due to thefull-year impact of tariffs. 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 investmentsaligned with the company’s strategic growth initiatives.
Restructuring costs were $394 million in 2018, related torestructuring actions across the company. In 2017, we incurred$1.227 billion of restructuring costs with about half related to theclosure 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 tofinancial 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.

For 2019, we expect short-term incentive compensation expense will be significantly lower than 2018. We also expect favorable pricerealization to about offset higher costs, excluding short-term incentive compensation expense.

Profit (Loss) by Segment
2018(Millions of dollars)

Construction Industries
Resource Industries
Energy & Transportation
All Other Segments
Corporate Items and Eliminations
Machinery, Energy & Transportation
Financial Products Segment
Corporate Items and Eliminations
Financial Products
Consolidating Adjustments
Consolidated Operating Profit$$

Other Profit/Loss Items
zz Other income/expense in 2018 was expense of $67 million,

compared with income of $153 million in 2017. The unfavorable
change was primarily a result of an unfavorable impact from equity
securities in Insurance Services. Effective January 1, 2018, we
adopted a new U.S. GAAP accounting rule that requires ourequity securities to be measured at fair value through earnings.
Previously, the fair value adjustments for these securities were$
Change2017

4,174 $
1,603
3,938
23
(1,583)
8,155
505
17
522
(384)
8,293 $

3,255 $
698
2,856
(44)
(2,659)
4,106
792
(116)
676
(322)
4,460 $

919
905
1,082
67
1,076
4,049
(287)
133
(154)
(62)
3,833

%
Change
28%
130%
38%
152%
99%
(36%)
(23%)
86%

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 a2017 pretax gain of $85 million on the sale of Caterpillar’s equity
investment in IronPlanet contributed to the unfavorable change.
2018 FORM 10-K

21

zz 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 effectsof U.S. tax reform legislation and included measurement period
adjustments in 2018 of $104 million to reduce the provisionallyestimated charge of $2.371 billion recognized in 2017. A$154 million benefit revised the estimated impact of the writedown 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 provisionallyestimated cost of a mandatory deemed repatriation of non-U.S.
earnings, including changes in the deferred tax liability related tothe amount of earnings considered not indefinitely reinvested aswell 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 noncash benefits of $63 million and $111 million, respectively, fromreductions 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 avaluation allowance for a certain non-U.S. subsidiary. The provision
for income taxes in 2018 also included a charge of $59 million tocorrect for an error which resulted in an understatement of thevaluation 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.
We expect the annual effective tax rate will be higher in 2019.
The anticipated increase primarily relates to the application of
U.S. tax reform provisions to earnings of non-U.S. subsidiaries
which do not have a calendar fiscal year end. Certain provisions
did not apply to these subsidiaries in 2018.

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.
zz Sales volume increased primarily due to higher demand forconstruction equipment and the impact of favorable changes
in dealer inventories. Dealer inventories increased significantly
more during 2018 than during 2017.

Sales increased in all regions.
zz In North America, the sales increase was primarily due to higher

demand for construction equipment, primarily to support oil

222018 FORM 10-K

and gas activities, including pipelines, non-residential building
construction and infrastructure activities. In addition, sales
increased due to the favorable impact of dealer inventories, which
increased during 2018, compared with a slight decrease during2017. We believe the strength of the U.S. economy, continued
pipeline construction and state and local funding for infrastructuredevelopment will be favorable to sales in 2019.
zz Although construction activities remained weak in Latin America,

sales were higher in the region.

zz Sales increased in EAME primarily due to higher demand andthe 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.

zz Sales in Asia/Pacific were higher in several countries in the region,

most significantly in China, stemming from increased building
construction and infrastructure investment. Favorable changes
in dealer inventories contributed to the sales improvement as
dealer inventories increased in 2018 and were about flat in 2017.
In 2019, we expect demand in China to be about flat after two
years of significant growth.

Construction Industries’ profit was $4.174 billion in 2018, comparedwith $3.255 billion in 2017. The increase in profit was a result ofhigher 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 andincreased 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 tofocus on improving productivity and efficiency of existing machineassets, thereby extending equipment life cycles and lowering
operating costs. Rebuild, overhaul and maintenance activity wasrobust, resulting in higher aftermarket parts sales. Favorable pricerealization also contributed to the sales improvement. In 2019, we
believe commodity market fundamentals will remain supportive
for investment and mining companies will increase their capital
expenditures. We expect demand for heavy construction, quarry
and aggregate equipment will remain strong in 2019.
Resource Industries’ profit was $1.603 billion in 2018, comparedwith $698 million in 2017. The improvement was mostly due tohigher 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
2018(Millions of dollars)

Oil and Gas
Power Generation
Industrial
Transportation
External Sales
Inter-Segment
Total Sales

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 pricerealization also contributed to the increase in sales.
zz 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 forreciprocating engines and related aftermarket parts. Sales ofturbines and turbine-related services were higher for production
applications.

zz Power Generation – Sales improved across all regions, withthe 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 andfavorable currency.

zz 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 wereabout flat as economic uncertainty in a few countries in the
Middle East was mostly offset by favorable currency impacts.

zz Transportation – Sales were higher for rail services driven byacquisitions in Asia/Pacific and EAME and increased rail trafficin 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 waspartially 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.

$$

5,763 $
4,334
3,640
5,095
18,832
3,953
22,785 $2017
4,424 $
3,551
3,445
4,544
15,964
3,418
19,382 $$ Change
1,339
783
195
551
2,868
535
3,403

% Change
30%
22%
6%
12%
18%
16%
18%

Financial Products Segment
Financial Products’ segment revenues were $3.279 billion, an
increase of $186 million, or 6 percent, from 2017. The increase wasprimarily 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, comparedwith $792 million in 2017. The decrease was primarily due to an increasein 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, which are not expected
to recur in 2019, 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, netof recoveries, were $189 million for 2018, compared with $114
million for 2017. As of December 31, 2018, Cat Financial’s allowancefor credit losses totaled $511 million, or 1.80 percent of financereceivables, compared with $365 million, or 1.33 percent of financereceivables at December 31, 2017. The increase in past dues, writeoffs 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 decreasein expense was mostly due to lower restructuring costs andmethodology 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.

2018 FORM 10-K

23

FOURTH QUARTER 2018 COMPARED WITH FOURTH QUARTER 2017
CONSOLIDATED SALES AND REVENUES

Consolidated Sales and Revenues Comparison
Fourth Quarter 2018 vs. Fourth Quarter 2017

$16,000$14,000

1,447

179

(190)

10

14,342

Sales Volume

Price Realization

Currency

Financial Products
Revenues

4th Qtr 2018
Sales & Revenues

12,896

Millions of $$12,000$10,000$8,000$6,000$4,000$2,000$0

4th Qtr 2017
Sales & Revenues

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the fourth quarter of 2017 (at left) and the fourth quarter of 2018 (at right). Items
favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear
as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company’s
Board of Directors and employees.

Total sales and revenues were $14.342 billion in the fourth quarterof 2018, an increase of $1.446 billion, or 11 percent, compared with
$12.896 billion in the fourth quarter of 2017. The increase was due tohigher sales volume driven by improved demand across all regions
and in the three primary segments. Favorable price realization,
primarily in Construction Industries, also contributed to the sales
improvement. The increase was partially offset by unfavorable
currency impacts due to a stronger U.S. dollar.
Sales increased in all regions. The largest sales increase was inNorth America, which improved 13 percent as strong economic
conditions in key end markets drove higher demand, including
favorable changes in dealer inventories. Dealer inventories
increased more significantly during the fourth quarter of 2018 thanduring the fourth quarter of 2017.
Sales increased 11 percent in Latin America primarily due tostabilizing economic conditions in several countries in the region
that resulted in improved demand from low levels.
EAME sales increased 14 percent primarily due to higher demandas economic conditions improved in Europe; however, this waspartially offset by economic uncertainty in a few countries in the
Middle East.
Asia/Pacific sales increased 7 percent mostly due to higher
demand, including favorable changes in dealer inventories, inseveral countries across the region. This was partially offset bylower demand in China following two years of significant growth.
Dealer inventories increased during the fourth quarter of 2018 andwere about flat during the fourth quarter of 2017. Favorable pricerealization also contributed to the sales improvement. The increasein sales was partially offset by unfavorable currency impacts.
Dealer machine and engine inventories increased about $200 million
during the fourth quarter of 2018 and remained about flat during thefourth quarter of 2017. Dealers are independent, and the reasons forchanges in their inventory levels vary, including their expectationsof 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
FourthQuarter
2017(Millions of dollars)

$

382

$

111

Currency$

InterSegment/
Other

FourthQuarter
2018
$

5,705

$
Change$%Change(85) $

2

410

8%

2,308

504

34

(32)

(17)

2,797

489

21%

Energy & Transportation

5,640

599

33

(73)

88

6,287

647

11%
(17%)

155

(13)

—

—

(13)

129

(26)

Corporate Items and Eliminations(1,204)

(25)

1

—

(60)

(1,288)(84)

Machinery, Energy & Transportation

All Other Segments

12,194

1,447

179

(190)

—

13,6301,436

12%Financial Products Segment

783

—

—

—

29

812

29

4%

Corporate Items and Eliminations

(81)

—

—

—

(19)

(100)

(19)

702

Financial Products Revenues
Consolidated Sales and Revenues

24

5,295

Price
Realization

Resource Industries

Construction Industries

$

Sales
Volume2018 FORM 10-K$

12,896

—
$

1,447

—
$

179

$

—

10

(190) $

10712$

14,342

$

10

1%

1,446

11%

Sales and Revenues by Geographic Region
North America(Millions of dollars)

Latin America

%
Chg

$

EAME

%
Chg

$

%
Chg

$

External Sales
and Revenues

Asia/Pacific
%
Chg

$

Inter-Segment

%
Chg

$

%
Chg

$

Total Sales andRevenues$%
Chg

Fourth Quarter 2018
Construction
Industries
Resource Industries
Energy &Transportation$ 2,749
906

17% $

374

(5%) $ 1,063

9% $ 1,480(4%) $ 5,666

8% $

39

15%

466

21%

554

17%

785

41%

2,711

23%

86

434

2,569

10%

All Other Segments

16

(27%)

Corporate Items
and Eliminations(47)

5% $ 5,705
2,797

21%

6,287

11%

16%

1,509

17%

753

5%

5,265

12%

1,022

9%

2 100%

6

(57%)

15

—%

39

(25%)

90

(13%)

1

(3)

(2)

(51)

8%

(17%)

(1,237)129 (17%)(1,288)

Machinery, Energy &Transportation

6,193

13%

1,277

11%

3,129

14%

3,031

7%

13,63012%——%

13,63012%

Financial Products
Segment

545

8%

68

(15%)

84

(21%)

115

26%

812

4%

—

—%

812

4%

Corporate Items
and Eliminations(66)

Financial Products
Revenues

479

Consolidated
Sales and
Revenues

(10)
5%

58

(8)
(15%)

76

$ 6,672

13% $ 1,335

10% $ 3,205$ 2,346

$

$

(16)
(25%)

99

(100)
27%

712

—

(100)

1%

—

—%

712

1%

11%

12% $ 3,130

8% $14,342

11% $

—

—% $ 14,342

976$ 1,544$ 5,258$37$ 5,295

Fourth Quarter 2017
Construction
Industries

392

791

384

475

555

2,205

103

2,308

2,327

374

1,286

719

4,706

934

5,640

All Other Segments

22

1

14

15

52

103

155

Corporate Items
and Eliminations

Resource Industries
Energy &Transportation

(27)

—

—

—

(27)

(1,177)(1,204)

Machinery, Energy &Transportation

5,459

1,151

2,751

2,833

12,194—

12,194

Financial Products
Segment

505

80

107

91

783

—

783

Corporate Items
and Eliminations

(50)

(12)

(6)

(13)

(81)

—

(81)

Financial Products
Revenues

455

68

101

78

702

—

702

$ 5,914$ 1,219$ 2,852

2,911$12,896—$ 12,896

Consolidated
Sales and
Revenues$$

2018 FORM 10-K

25

CONSOLIDATED OPERATING PROFIT

Consolidated Operating Profit Comparison
Fourth Quarter 2018 vs. Fourth Quarter 2017

$2,500179

Millions of $$2,000475$1,500

(182)
(33)

9

(73)

144

(23)

1,883

Financial
Products

Restructuring
Costs

Other

4th Qtr 2018
Operating Profit

1,387$1,000$500-

Manufacturing SG&A / R&D
4th Qtr 2017 Sales Volume
Price
Costs
Operating Profit
Realization

Currency

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the fourth quarter of 2017 (at left) and the fourth quarter of 2018 (at right). Items
favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward
stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors
and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.

Operating profit for the fourth quarter of 2018 was $1.883 billion,
compared with $1.387 billion in the fourth quarter of 2017. The
increase of $496 million was mostly due to higher sales volume.
Favorable price realization and lower restructuring costs were
mostly offset by higher manufacturing costs and lower profit from
Financial Products.
Manufacturing costs were higher due to increased material andfreight costs, partially offset by lower warranty expense. Material
costs were higher primarily due to increases in steel prices andtariffs. Freight costs were unfavorable primarily due to continued
supply chain inefficiencies.
Financial Products’ operating profit was lower primarily due to anincrease in the provision for credit losses, which was mostly driven

by a $72 million unfavorable impact from an increase in allowance
rate and an increase in write-offs of $13 million, due to continued
weakening in the Cat Power Finance portfolio. This was partially
offset by higher average earning assets.
Restructuring costs were $101 million in the fourth quarter of 2018,
compared with $245 million in the fourth quarter of 2017.
Short-term incentive compensation expense was about $310 million
in the fourth quarter of 2018, compared with about $350 million in
the fourth quarter of 2017.
Operating profit margin for the fourth quarter of 2018 was
13.1 percent, compared with 10.8 percent in the fourth quarterof 2017.

Profit (Loss) by Segment
Fourth Quarter
2018(Millions of dollars)

Construction Industries$

Resource Industries
Energy & Transportation
All Other Segments

$

837

$
Change$%Change
8

1%

400

210

190

90%

1,079

874

205

23%

(47)

(16)

(31)

(194)%

Corporate Items and Eliminations

(375)

(588)

213

Machinery, Energy & Transportation

1,902

1,317

585

44%

29

233

(204)

(88)%

Financial Products Segment
Corporate Items and Eliminations

54

(77)

131

Financial Products

83

156

(73)

(102)

Consolidating Adjustments
Consolidated Operating Profit

Other Profit/Loss Itemszz Interest expense excluding Financial Products in the fourth

quarter of 2018 was $99 million, a decrease of $70 million
primarily due to an early debt retirement in the fourth quarterof 2017.

26

845

Fourth Quarter20172018 FORM 10-K

$

1,883

(86)
$

1,387

(47)%

(16)
$

496

36%

zz Other income/expense in the fourth quarter of 2018 was a lossof $417 million, compared with a loss of $107 million in the fourth
quarter of 2017. The unfavorable change was primarily a resultof an increase in mark-to-market losses related to pension andother postemployment benefit (OPEB) plans and an unfavorable
impact from equity securities.

zz The provision for income taxes in the fourth quarter of 2018reflects an annual effective tax rate of 24.1 percent, comparedwith 27.7 percent for the full year of 2017, excluding the items
discussed below. The decrease was primarily due to the reductionin the U.S. corporate tax rate beginning January 1, 2018, alongwith other changes in the geographic mix of profits from a tax
perspective.
The provision for income taxes in the fourth quarter of 2018 and2017 also included non-cash benefits of $63 million and $111
million, respectively, from reductions in the valuation allowanceagainst U.S. state deferred tax assets due to improved profits in
the United States. The provision for income taxes in the fourth
quarter of 2018 also included a $50 million increase related to the$2.371 billion charge recorded in the fourth quarter of 2017 dueto the enactment of U.S. tax reform legislation. In addition, a tax
benefit of $4 million was recorded in the fourth quarter of 2018,
compared with $19 million in the fourth quarter of 2017, for thesettlement of stock-based compensation awards with associatedtax deductions in excess of cumulative U.S. GAAP compensation
expense. The provision for income taxes in the fourth quarter of2018 and 2017 also included a $8 million charge and a $130 million
benefit, respectively, related to the change from the third-quarter
estimated annual tax rate.

Construction Industries
Construction Industries’ total sales were $5.705 billion in the fourth
quarter of 2018, compared with $5.295 billion in the fourth quarterof 2017. The increase was mostly due to higher sales volume forconstruction equipment. Favorable price realization was mostly
offset by unfavorable currency impacts due to a stronger U.S. dollar.
zz In North America, the sales increase was driven by higher demand

for new equipment, with about half due to an increase in dealer
inventories. The increase in demand was primarily to support oil
and gas activities, including pipelines, and non-residential building
construction activities. Favorable price realization also contributed
to the sales improvement.

zz Construction activities remained at low levels in Latin America.
zz Sales increased in EAME as infrastructure, road and non-residentialbuilding construction activities drove higher demand in Europe,
partially offset by weakness in the Middle East.

zz Sales in Asia/Pacific declined due to lower demand in China,

partially offset by higher demand in a few other countries in
the region. Unfavorable currency impacts also contributed to thesales decline.

Construction Industries’ profit was $845 million in the fourth quarterof 2018, compared with $837 million in the fourth quarter of 2017.
The increase in profit was a result of favorable price realizationand higher sales volume, mostly offset by higher manufacturingcosts, including material, freight, labor costs and the absence ofBrazil incentives.
Construction Industries’ profit as a percent of total sales was 14.8
percent in the fourth quarter of 2018, compared with 15.8 percent
in the fourth quarter of 2017.

Resource Industries
Resource Industries’ total sales were $2.797 billion in the fourth
quarter of 2018, an increase of $489 million from the fourth quarterof 2017. The increase was primarily due to higher demand for bothmining and heavy construction equipment, including quarry andaggregate. Mining activities were robust as commodity market
fundamentals remained positive, and increased non-residential
construction activities drove higher sales.
Resource Industries’ profit was $400 million in the fourth quarter of
2018, compared with $210 million in the fourth quarter of 2017. The
improvement was mostly due to higher sales volume and favorable
price realization, partially offset by higher material and freight costs.
Resource Industries’ profit as a percent of total sales was 14.3
percent in the fourth quarter of 2018, compared with 9.1 percent
in the fourth quarter of 2017.

Energy & Transportation
Sales by Application(Millions of dollars)

Fourth Quarter2018

Oil and Gas

$

1,719

Fourth Quarter
2017
$

1,271

Power Generation

1,497

$
Change$1,060%
Change
222

15%

211

20%

902

899

3

—%

Transportation

1,373

1,250

123

10%

External Sales

5,265

4,706

559

12%

Inter-Segment

1,022

934

88

9%

647

11%

Industrial

Total Sales$

Energy & Transportation’s total sales were $6.287 billion in the
fourth quarter of 2018, compared with $5.640 billion in the fourth
quarter of 2017. The increase was primarily due to higher sales
volume across all applications except Industrial, which was flat.

zz Industrial – Sales were flat, with increases in Asia/Pacific andzz Oil and Gas – Sales increased due to higher demand forreciprocating engines in North America for gas compression andwell servicing applications. Sales of turbines and turbine-related
services were about flat.

zz Power Generation – Sales improved across all regions, withthe largest increases in North America and EAME primarily forreciprocating engine applications, including data centers andother large power generation projects.

6,287

$

5,640

$

North America about offset by lower sales in EAME and Latin
America.

zz Transportation – Sales were higher primarily due to rail services,driven by acquisitions.

Energy & Transportation’s profit was $1.079 billion in the fourth
quarter of 2018, compared with $874 million in the fourth quarterof 2017. The improvement was mostly due to higher sales volume.
The increase was partially offset by higher manufacturing costs,
including freight costs.
Energy & Transportation’s profit as a percent of total sales was 17.2
percent in the fourth quarter of 2018, compared with 15.5 percent
in the fourth quarter of 2017.
2018 FORM 10-K

27

Financial Products Segment
Financial Products’ segment revenues were $812 million in the
fourth quarter of 2018, an increase of $29 million, or 4 percent, fromthe fourth quarter of 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 an unfavorable impact from returned or repossessed
equipment in Europe and Latin America.
Financial Products’ segment profit was $29 million in the fourth
quarter of 2018, compared with $233 million in the fourth quarter of
2017. About half of the decrease was due to an unfavorable impact
from equity securities in Insurance Services, which was driven by
the absence of investment gains from the fourth quarter of 2017and an unfavorable impact from mark-to-market in the fourth quarterof 2018. In addition, an increase in the provision for credit losses
at Cat Financial also contributed to lower profit. This increase wasdriven by a higher allowance rate and an increase in write-offs, due
to continued weakening in the Cat Power Finance portfolio.

Corporate Items and Eliminations
Expense for corporate items and eliminations was $321 million
in the fourth quarter of 2018, a decrease of $344 million from thefourth quarter of 2017, primarily due to methodology differences andlower restructuring costs. Restructuring costs were $101 million
in the fourth quarter of 2018, compared with $245 million in the
fourth quarter of 2017.

2017 COMPARED WITH 2016
CONSOLIDATED SALES AND REVENUES

Consolidated Sales and Revenues Comparison
Full Year 2017 vs. Full Year 2016

$50,000$45,000$40,000

6,055

827

21

22

45,462

Sales Volume

Price Realization

Currency

Financial Products
Revenues

Full Year 2017
Sales & Revenues

38,537

Millions of $$35,000$30,000$25,000$20,000$15,000$10,000$5,000$0

Full Year 2016
Sales & Revenues

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between 2016 (at left) and 2017 (at right). Items favorably impacting sales and revenues
appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts
reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees.

Total sales and revenues were $45.462 billion in 2017, an increaseof $6.925 billion, or 18 percent, compared with $38.537 billion in
2016. The increase was primarily due to higher sales volume, mostly
due to improved end-user demand. In addition, favorable changes
in dealer inventories contributed to increased sales volume. The
improvement in end-user demand was across all regions andmost end markets. The favorable change in dealer inventories
was primarily due to a decrease in 2016, compared with dealer
inventories that were about flat in 2017. Dealer machine and engine
inventories increased about $100 million in 2017, compared with adecrease of about $1.6 billion during 2016. 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.
By segment, the largest sales volume increase was in Construction
Industries mostly due to higher end-user demand for construction
equipment. Resource Industries sales volume increased due tohigher end-user demand for aftermarket parts and equipment
and a favorable impact of changes in dealer inventories. Energy &Transportation’s sales volume was higher mostly due to increased28

2018 FORM 10-K

demand for equipment and aftermarket parts for oil and gas
and industrial applications. Favorable price realization, mostly inConstruction Industries, also contributed to the sales improvement.
Financial Products’ revenues were about flat.
Sales increased in all regions. In North America, sales increased
19 percent primarily due to higher end-user demand mostly foron-shore oil and gas applications and construction equipment, thefavorable impact of changes in dealer inventories and favorable pricerealization, primarily in Construction Industries. Asia/Pacific sales
increased 23 percent primarily due to an increase in construction
equipment sales, mostly in China resulting from increased building
construction and infrastructure investment. EAME sales increased
16 percent primarily due to higher end-user demand for equipment
and aftermarket parts in Resource Industries and favorable changes
in dealer inventories, as dealers decreased inventories in 2016 andinventories were about flat in 2017. In addition, price realization
was favorable, primarily in Construction Industries. Sales increased
25 percent in Latin America primarily due to stabilizing economic
conditions in several countries in the region that resulted in
improved end-user demand from low levels and the favorable
impact of changes in dealer inventories as inventories decreased
in 2016 and increased in 2017.

Sales and Revenues by Segment
Sales
Volume2016(Millions of dollars)

$

Price
Realization

Currency

15,690 $2,810 $

751 $Resource Industries

6,010

1,638

118

22

Energy & Transportation

16,951

1,556

(42)

39

544

39

—

—

Corporate Items and Eliminations(3,422)

12——

Machinery, Energy & Transportation

35,773

6,055

827

Financial Products Segment

2,993

—

—

Corporate Items and Eliminations

(229)

—

—

Construction Industries

All Other Segments

Financial Products Revenues
Consolidated Sales and Revenues$

InterSegment/
Other(40) $$
Change

2017

29 $

%
Change19,240 $

3,550

23%

73

7,861

1,851

31%

878

19,382

2,431

14%

(13)

570

26

5%

(967)

(4,377)

(955)

21

—

42,676

6,903

19%

—

100

3,093

100

3%

—

(78)

(307)

(78)

2,764

—

—

—

22

2,786

22

1%

38,537 $

6,055 $

827 $

21 $

22 $

45,462 $

6,925

18%

EAME

Asia/Pacific

Sales and Revenues by Geographic Region
North America(Millions of dollars)

%
Chg

$

Latin America
%
Chg

$

%
Chg

$

%
Chg

$

External Sales
and Revenues$

Inter-Segment

%
Chg

%
Chg

$

Total Sales andRevenues
$

%
Chg

2017
Construction
Industries

16% $ 1,396

32% $ 3,760

15% $ 5,235

39% $ 19,133

23% $

107

37% $ 19,240

23%

Resource Industries$ 8,742
2,582

25%

1,281

28%

1,775

51%

1,866

26%

31%

357

26%

7,861

31%

Energy &Transportation(5%) 15,964

11%

3,418

35%

19,382

14%

(18%)

28%

392

(3%)

570

5%

7,504

7,959

19%

1,261

14%

4,431

5%

2,313

All Other Segments

70

52%

3

—%

54

93%

51

Corporate Items andEliminations(97)

Machinery, Energy& Transportation

19,256

19%

3,940

25%

10,014

16%

9,466

23%

42,676

19%——%

42,67619%

Financial Products
Segment

2,006

8%

306

(9%)

418

4%

363

(8%)

3,093

3%

—

—%

3,093

3%

Corporate Items andEliminations(190)

Financial Products
Revenues

1,816

Consolidated Sales
and Revenues$ 21,072

(1)

(6)

(46)
5%

260

1

(19)
(11%)

399

(103)

(52)
4%

311

178

(4,274)

(307)
(12%)

2,786

(4,377)

—

(307)

1%

—

—%

2,786

1%

—

—% $ 45,462

18%

17% $ 4,200

22% $ 10,413

15% $ 9,777

21% $ 45,462

18% $

$

2016
Construction
Industries$ 7,529$ 1,059$ 3,270$ 3,754$ 15,612

78$ 15,690

Resource Industries

2,068

1,001

1,179

1,478

5,726

284

6,010

Energy &Transportation

6,680

1,104

4,201

2,426

14,411

2,540

16,951All Other Segments

46

3

28

62

139

405

544

Corporate Items andEliminations

(98)

(3)

(9)

(5)

(115)

(3,307)(3,422)

Machinery, Energy& Transportation

16,225

3,164

8,669

7,715

35,773—35,773Financial Products
Segment

1,862

336

401

394

2,993

—

2,993

Corporate Items andEliminations

(125)

(45)

(17)

(42)

(229)

—

(229)

Financial Products
Revenues

1,737

291

384

352

2,764

—

2,764

Consolidated Sales
and Revenues$ 17,962$ 3,455$ 9,053$ 8,067$ 38,537—$ 38,537$

2018 FORM 10-K

29

CONSOLIDATED OPERATING PROFIT

Consolidated Operating Profit Comparison
Full Year 2017 vs. Full Year 2016

$5,000827$4,500

121

(568)

595
107

$4,000

(117)

4,460

(237)

25

2,545

Millions of $$3,500$3,000$2,500$2,000$1,500

1,162$1,000$500
Full Year 2016
Sales
Operating Profit Volume

Price Manufacturing SG&A / R&D Currency
Costs
Realization

Financial Restructuring Goodwill
Products
Costs
Impairment

Other

Full Year 2017
Operating Profit

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between 2016 (at left) and 2017 (at right). Items favorably impacting operating profit appear as
upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflectedin parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company’s Board of Directors and employees. The bar entitled Other
includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses.

Operating profit for 2017 was $4.460 billion, compared with $1.162
billion in 2016. The increase of $3.298 billion was primarily due tohigher sales volume, improved price realization and the absenceof a goodwill impairment charge in Resource Industries in 2016.
An increase in SG&A/R&D expenses and restructuring costs waspartially offset by lower manufacturing costs.
SG&A/R&D expenses increased primarily due to higher
short-term incentive compensation expense, partially offset by
the favorable impact of restructuring and cost reduction actions.
These actions primarily impacted research and development (R&D)
expenses.
Short-term incentive compensation expense is directly related tofinancial and operational performance, measured against targets set
annually. Short-term incentive compensation expense was about$1.4 billion in 2017, significantly above targeted levels, comparedwith about $250 million in 2016.
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 thecompany. In 2016, restructuring costs were $1.012 billion, primarily
related to Resource Industries and Energy & Transportation.
Manufacturing costs were lower primarily due to the favorable
impact from cost absorption and efficiencies, partially offset byhigher short-term incentive compensation expense. Cost absorption
was favorable as inventory increased in 2017, and decreased in2016. Material costs were slightly unfavorable in 2017, as higher
steel costs were partially offset by cost reduction actions.

Profit (Loss) by Segment
2017(Millions of dollars)

Construction Industries$

Resource Industries
Energy & Transportation

3,255

$

1,639

$

%
Change

1,616

99%

698

(1,045)

1,743

n/a

2,856

2,187

669

31%
48%

(44)

(85)

41

Corporate Items and Eliminations(2,659)(1,943)(716)

Machinery, Energy & Transportation

All Other Segments

4,106

753

3,353

445%

Financial Products Segment

792

702

90

13%

Corporate Items and Eliminations

(116)

(53)

(63)

Financial Products

676

649

27

Consolidating Adjustments

(322)

(240)

(82)

$

Other Profit/Loss Items

of Caterpillar’s equity investment in IronPlanet, gains on saleof securities and an increase in interest income. The favorable
change was partially offset by an unfavorable net impact fromcurrency translation and hedging gains and losses. Currencytranslation and hedging net losses in 2017 were significantly
higher than the net losses in 2016.

compared with a loss of $518 million in 2016. The improvement
was primarily due to a decrease in mark-to-market losses
related to pension and OPEB plans, a pretax gain on the sale2018 FORM 10-K

4,460

$

1,162

$

3,298

4%

Consolidated Operating Profit

zz Other income/expense in 2017 was income of $153 million,

30$
Change2016284%

zz The provision for income taxes for 2017 reflects an annual effective

tax rate of 27.7 percent, compared with 36.4 percent for the fullyear 2016, excluding the items discussed below. The effective tax
rate related to 2017 full-year adjusted profit before tax, excluding a
discrete benefit from stock-based compensation awards, was 27
percent, compared with 26 percent in 2016.
The provision for income taxes for 2017 also included a chargeof $2.371 billion due to the enactment of U.S. tax reform
legislation on December 22, 2017. The provisionally estimatedcharge included a $596 million write-down of net deferred tax
assets to reflect the reduction in the U.S. corporate tax rate from35 percent to 21 percent beginning January 1, 2018, with theremainder primarily related to the cost of a mandatory deemed
repatriation of non-U.S. earnings. The 2017 provision for income
taxes also included the following:zz A non-cash benefit of $111 million, net of U.S. federal tax at

35 percent, from reductions in the valuation allowance against
U.S. state deferred tax assets due to improved profits in the
United States.

zz A tax benefit of $64 million for the settlement of stock-based

compensation awards with associated tax deductions inexcess of cumulative U.S. GAAP compensation expense.

zz A charge of $15 million for an increase in prior year taxes

related to the Gosselies, Belgium, facility restructuring costs.

The provision for income taxes for 2016 also included a non-cash
charge of $141 million, net of U.S. federal tax at 35 percent, forincreases in the valuation allowance against U.S. state deferred
tax assets.

Construction Industries
Construction Industries’ total sales were $19.240 billion in 2017,
compared with $15.690 billion in 2016. The increase was due tohigher sales volume and favorable price realization.
zz Sales volume increased due to higher end-user demand, primarily

for equipment in Asia/Pacific and North America. In addition, sales
volume increased due to favorable changes in dealer inventories,
as inventories decreased in 2016 and increased in 2017.

zz Although market conditions remained competitive, pricerealization was favorable due to a particularly weak pricing
environment in 2016, and previously implemented price increases
impacting 2017.

Sales increased across all regions with the largest increases in Asia/
Pacific and North America.

Construction Industries’ profit was $3.255 billion in 2017, comparedwith $1.639 billion in 2016. The increase in profit was primarily due
to higher sales volume and favorable price realization. SG&A/R&D
expenses were unfavorable primarily due to higher short-term
incentive compensation expense.
Construction Industries’ profit as a percent of total sales was 16.9
percent in 2017, compared with 10.4 percent in 2016.

Resource Industries
Resource Industries’ total sales were $7.861 billion in 2017, anincrease of $1.851 billion, or 31 percent, from 2016. Sales increased
due to higher end-user demand for aftermarket parts and equipment
and the favorable impact of changes in dealer inventories. Positive
commodity price trends in 2017 drove improved market conditions
and better financial health of mining companies. After a number ofyears of low investment, miners began to increase capital expendituresin 2017, reflecting more confidence in their end markets. Idle mining
trucks on customer sites also decreased in 2017. These changes
resulted in higher sales for aftermarket parts to support increased
mining activity as well as maintenance and rebuild activities and, by
the second half of 2017, resulted in higher end-user demand for mining
equipment. Dealer inventories increased in 2017, compared with asignificant decrease in 2016.
Resource Industries’ profit was $698 million in 2017, compared witha loss of $1.045 billion in 2016. The improvement was partially due
to the absence of a goodwill impairment charge of $595 million in
2016. Higher sales volume, lower manufacturing costs and favorable
price realization also contributed to increased profit. Manufacturingcosts were lower primarily due to a favorable impact from costabsorption, lower period manufacturing costs and efficiencies.
Cost absorption was favorable as inventory increased in 2017, to
support higher production volumes and decreased in 2016. Period
manufacturing costs were lower primarily due to the favorable
impact of restructuring and cost reduction actions, partially offset
by an increase in short-term incentive compensation expense.
Resource Industries’ profit as a percent of total sales was
8.9 percent in 2017, compared with a loss as a percent of total
sales of 17.4 percent in 2016.

Energy & Transportation
Energy & Transportation’s total sales were $19.382 billion in 2017,
compared with $16.951 billion in 2016. The increase was primarily
due to higher sales in oil and gas and industrial applications.
zz Oil and Gas – Sales increased in North America due to higher

zz Sales in Asia/Pacific were higher as a result of an increase in

end-user demand, primarily in China, stemming from increased
building construction and infrastructure investment.

sales of reciprocating engines and aftermarket parts used in onshore gas compression and well servicing applications. Sales inremaining regions were about flat.

zz In North America, sales increased primarily due to higher end-zz Industrial – Sales were higher in all regions, reflecting increaseduser demand for construction equipment, mostly due to improved
oil and gas, residential and nonresidential construction activities.
Also contributing to higher sales was the impact of favorable
changes in dealer inventories, as inventories decreased more in2016 than in 2017, and favorable price realization.

zz Sales in EAME increased due to favorable changes in dealer

inventories and favorable price realization. The favorable impact
of change in dealer inventories resulted from a decrease in 2016
and an increase in 2017.

zz Although construction activity remained weak in Latin America,

sales were higher as end-user demand increased from low levels
due to stabilizing economic conditions in several countries in
the region. In addition, sales volume increased due to favorable
changes in dealer inventories, as dealer inventories increased in2017 and decreased in 2016.

sales for equipment across end-user applications and aftermarket
parts.

zz Transportation – Sales were higher primarily in North America

for rail services driven by increased rail traffic.

zz Power Generation – Sales were about flat in all regions as theindustry remains challenged.

Energy & Transportation’s profit was $2.856 billion in 2017, comparedwith $2.187 billion in 2016. The increase was primarily due to higher
sales volume, partially offset by higher SG&A/R&D expenses andmanufacturing costs. The increase in SG&A/R&D expenses wasprimarily due to higher short-term incentive compensation expense.
Manufacturing costs were higher primarily due to higher shortterm incentive compensation expense, partially offset by favorable
impact from cost absorption and improved material costs. Costabsorption was favorable as inventory increased in 2017, comparedwith a decrease in 2016.
2018 FORM 10-K

31

Energy & Transportation’s profit as a percent of total sales was 14.7
percent in 2017, compared with 12.9 percent in 2016.

Financial Products Segment
Financial Products’ segment revenues were $3.093 billion, an
increase of $100 million, or 3 percent, from 2016. The increase
was primarily due to higher average financing rates in North
America, a favorable impact from intercompany lending activity inNorth America and higher average earning assets in EAME. Thesefavorable impacts were partially offset by lower average financing
rates in Asia/Pacific and lower average earning assets in North
America and Latin America.
Financial Products’ segment profit was $792 million in 2017,
compared with $702 million in 2016. The increase was primarily
due to higher gains on sales of securities at Insurance Services,
an increase in net yield on average earning assets and increased
intercompany lending activity. These favorable impacts werepartially offset by an increase in SG&A expenses due to higher
short-term incentive compensation expense.
At the end of 2017, past dues at Cat Financial were 2.78 percent,compared with 2.38 percent at the end of 2016. Write-offs, net ofrecoveries, were $114 million for the full year of 2017, comparedwith $123 million for the full year of 2016.
As of December 31, 2017, Cat Financial’s allowance for credit
losses totaled $365 million, or 1.33 percent of finance receivables,
compared with $343 million, or 1.29 percent of finance receivables
at year-end 2016.

Corporate Items and Eliminations
Expense for corporate items and eliminations was $2.775 billion in2017, which was an increase of $779 million compared with 2016.
The increase in expense was a result of higher restructuring costs,
methodology differences, timing differences and an increase in
short-term incentive compensation expense.

RESTRUCTURING COSTS
Restructuring costs for 2018, 2017 and 2016 were as follows:
2018(Millions of dollars)

Employee separations

$

1

2017
112

$

2016
525

$

297

7

183

62

1

Long-lived asset impairments

93

346

391

Defined benefit plan curtailments and termination benefits2

(8)

29

7

182

173

262

Contract terminations1

Other3$

Total restructuring costs
1
2
3

386

$

1,256

$

1,019

Recognized in Other operating (income) expenses.
Recognized in Other income (expense).
Represents costs related to our restructuring programs, primarily for accelerated depreciation, project management costs, equipment relocation and inventory write-downs, 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 2018 were primarily related to ongoingfacility closures across the company. In 2017, about half of therestructuring costs were related to the closure of the facility in
Gosselies, Belgium, within Construction Industries, and theremainder was related to other restructuring actions across thecompany. The restructuring costs in 2016 were primarily related toactions in Resource Industries in response to continued weakness
in the mining industry. In addition, costs in 2016 resulted from ourdecision to discontinue production of on-highway vocational trucks
within Energy & Transportation and other restructuring actions
across the company. Restructuring costs are a reconciling item
between Segment profit and Consolidated profit before taxes.

The following table summarizes the 2017 and 2018 employee separation activity:(Millions of dollars)

Liability balance at December 31, 2016

147

Increase in liability (separation charges)

525

Reduction in liability (payments)(423)

Liability balance at December 31, 2017$249

Increase in liability (separation charges)

112

Reduction in liability (payments)(276)

Liability balance at December 31, 2018

Most of the remaining liability balance as of December 31, 2018 is
expected to be paid in 2019.
In March 2017, Caterpillar informed Belgian authorities of the decision
to proceed to a collective dismissal, which led to the closure of theGosselies site, impacting about 2,000 employees. Production ofCaterpillar products at the Gosselies site ended during the second

32$2018 FORM 10-K$

85

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.

business strategy, product design, product management anddevelopment, manufacturing, marketing and sales and productsupport. The product portfolio includes asphalt pavers, backhoe
loaders, compactors, cold planers, compact track and multiterrain loaders, mini, small, medium and large track excavators,
forestry excavators, feller bunchers, harvesters, knuckleboom
loaders, motor graders, pipelayers, road reclaimers, site prep
tractors, skidders, skid steer loaders, telehandlers, small andmedium track-type tractors, track-type loaders, utility vehicles,
wheel excavators, compact, small and medium wheel loaders
and related parts and work tools.

Restructuring costs for the year ended December 31, 2016
were $1,019 million. Throughout 2016, we initiated the following
restructuring plans:zz In February 2016, we made the decision to discontinue productionof on-highway vocational trucks. Based on the business climate
in the truck industry and a thorough evaluation of the business,the company decided it would withdraw from this market. We
recognized $104 million of restructuring costs, primarily related
to long-lived asset impairments and sales discounts.

zz In the second half of 2016, we took additional restructuring

actions in Resource Industries, including ending the productionof track drills; pursuing strategic alternatives related to roomand pillar products; consolidation of two product development
divisions; and additional actions in response to ongoing weakness
in the mining industry. For the year ended December 31, 2016,
we incurred $369 million of restructuring costs for these plans
primarily related to long-lived asset impairments, employee
separation costs and inventory write-downs.

In September 2015, we announced a large scale restructuring plan(the Plan) including a voluntary retirement enhancement programfor qualifying U.S. employees, several voluntary separation programs
outside of the U.S., additional involuntary programs throughout thecompany and manufacturing facility consolidations and closures that
occurred through 2018. 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 $121 million, $817 million and $281 million of restructuringcosts associated with these actions in 2018, 2017 and 2016,
respectively. Total restructuring costs incurred since the inception of
the Plan were $1,788 million. The remaining costs of approximately$50 million related to the Plan are expected to be recognized in 2019.
Although we expect restructuring to continue as part of ongoing
business activities, restructuring costs are anticipated to be lower
in 2019 than 2018. We are expecting about $300 million of cost
reduction in 2019 from lower operating costs, primarily SG&A

expenses and Cost of goods sold primarily resulting from 2018
restructuring actions.

GLOSSARY OF TERMS
1. Adjusted Operating Profit Margin – Operating profit excluding
restructuring costs as a percent of sales and revenues.
2. Adjusted Profit Per Share – Profit per share excluding restructuringcosts, pension and OPEB mark-to-market losses, certain deferred
tax valuation allowance adjustments and the impact of the U.S. tax
reform. For 2017, adjusted profit per share also excludes a gain on
the sale of an equity investment in IronPlanet.
3. All Other Segments – Primarily includes activities such as:

business strategy, product management and development,
manufacturing of filters and fluids, undercarriage, groundengaging 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 themost efficient and effective distribution of machines, engines
and parts; digital investments for new customer and dealer
solutions that integrate data analytics with state-of-the-art
digital technologies while transforming the buying experience.

4. Consolidating Adjustments – Elimination of transactions
between Machinery, Energy & Transportation and Financial
Products.
5. Construction Industries – A segment primarily responsible forsupporting customers using machinery in infrastructure, forestry
and building construction applications. Responsibilities include

6. Corporate Items and Eliminations – Includes restructuringcosts; 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; and inter-segment eliminations.
7.

Currency – With respect to sales and revenues, currency
represents the translation impact on sales resulting fromchanges 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 andoperating profit for the Machinery, Energy & Transportation linesof business excluding restructuring costs; currency impacts on
Financial Products’ revenues and operating profit are includedin 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 thecompany 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).

8. EAME – A geographic region including Europe, Africa, the Middle
East and the Commonwealth of Independent States (CIS).
9. Earning Assets – Assets consisting primarily of total financereceivables net of unearned income, plus equipment on
operating leases, less accumulated depreciation at Cat Financial.
10. Energy & Transportation – A segment primarily responsible
for supporting customers using reciprocating engines,
turbines, diesel-electric locomotives and related parts acrossindustries serving Oil and Gas, Power Generation, Industrial
and Transportation applications, including marine and rail-related
businesses. Responsibilities include business strategy, productdesign, product management and development, manufacturing,marketing and sales and product support of turbine machineryand integrated systems and solutions and turbine-related
services, reciprocating engine-powered generator sets,
integrated systems used in the electric power generationindustry, reciprocating engines and integrated systems andsolutions 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 andcomponents and remanufacturing services for other companies;
the business strategy, product design, product managementand development, manufacturing, remanufacturing, leasing andservice of diesel-electric locomotives and components andother rail-related products and services and product supportof on-highway vocational trucks for North America.
11. 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 andfinance 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
2018 FORM 10-K

33

and risk management products offered include physical damage
insurance, inventory protection plans, extended service coveragefor 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.
12. Latin America – A geographic region including Central andSouth American countries and Mexico.
13. Machinery, Energy & Transportation (ME&T) – Represents
the aggregate total of Construction Industries, Resource
Industries, Energy & Transportation, All Other Segments andrelated corporate items and eliminations.
14. Machinery, Energy & Transportation Other Operating(Income) Expenses – Comprised primarily of gains/losses on
disposal of long-lived assets, gains/losses on divestitures andlegal settlements and accruals. Restructuring costs classified
as other operating expenses on the Results of Operations arepresented separately on the Operating Profit Comparison.
15. Manufacturing Costs – Manufacturing costs exclude theimpacts of currency and restructuring costs (see definition
below) and represent the volume-adjusted change for variable
costs and the absolute dollar change for period manufacturingcosts. 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 directlywith production volume such as freight, power to operatemachines and supplies that are consumed in the manufacturing
process. Period manufacturing costs support production but
are defined as generally not having a direct relationship toshort-term changes in volume. Examples include machineryand equipment repair, depreciation on manufacturing assets,
facility support, procurement, factory scheduling, manufacturing
planning and operations management.
16. Mark-to-market gains/losses – Represents the net gain orloss of actual results differing from our assumptions and theeffects of changing assumptions for our defined benefit pension
and OPEB plans. These gains and losses are immediately
recognized through earnings upon the annual remeasurementin the fourth quarter, or on an interim basis as triggering events
warrant remeasurement.
17. Pension and Other Postemployment Benefit (OPEB) – The
company’s defined-benefit pension and postretirement benefit
plans.
18. 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 ofchanges in the relative weighting of sales prices between
geographic regions.
19. Resource Industries – A segment primarily responsible forsupporting customers using machinery in mining, 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, hardrock 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, electronics
and control systems 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.
34

2018 FORM 10-K

Resource Industries also manages areas that provide services toother parts of the company, including integrated manufacturing
and research and development.
20. Restructuring Costs – Primarily 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 primarily for accelerated depreciation, inventory writedowns, 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.
21. 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 theincremental sales impact of new product introductions, including
emissions-related product updates. With respect to operating
profit, sales volume represents the impact of changes in thequantities sold for Machinery, Energy & Transportation combinedwith product mix as well as the net operating profit impact of
new product introductions, including emissions-related productupdates. 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 ofsales volume on segment profit includes inter-segment sales.

LIQUIDITY AND CAPITAL RESOURCES
Sources of funds
We generate significant capital resources from operating activities,
which are the primary source of funding for our 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 andcollections from its existing portfolio. During 2018, we experienced
favorable liquidity conditions globally in both our ME&T and Financial
Products’ operations. On a consolidated basis, we ended 2018 with
$7.86 billion of cash, a decrease of $404 million from year-end 2017.
We intend to maintain a strong cash and liquidity position.
Our cash balances are held in numerous locations throughout
the world with approximately $6.9 billion held by our non-U.S.
subsidiaries. As a result of U.S. tax reform legislation enacted in
December 2017, we expect to be able to use cash held by non-U.S.
subsidiaries in the United States in the future with minimal tax
consequences.
Consolidated operating cash flow for 2018 was $6.56 billion, up
from $5.71 billion in 2017. The increase was due to higher profit
in 2018 adjusted for non-cash items. Profit in 2017 included a
non-cash charge related to U.S. tax reform legislation enacted in
December 2017. The most significant driver of higher profit was anincrease in sales volume in 2018. This improvement was mostly
offset by higher working capital requirements to support increasing
production volumes and higher short-term incentive compensation
payments. See further discussion of operating cash flow under
ME&T and Financial Products.
Total debt as of December 31, 2018 was $36.55 billion, an increaseof $1.68 billion from year-end 2017. Debt related to Financial Products
increased $1.60 billion, primarily due to increased portfolio funding
requirements. Debt related to ME&T increased $79 million in 2018.
During 2018, we repurchased $3.80 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 canbe revised from time to time, the portion of the Credit Facility

available to ME&T as of December 31, 2018 was $2.75 billion.
Information on our Credit Facility is as follows:
zz The 364-day facility of $3.15 billion (of which $0.82 billion isavailable to ME&T) expires in September 2019.

zz The three-year facility, as amended in September 2018, of $2.73

billion (of which $0.72 billion is available to ME&T) expires in
September 2021.

zz The five-year facility, as amended in September 2018, of $4.62

billion (of which $1.21 billion is available to ME&T) expires in
September 2023.

At December 31, 2018, Caterpillar’s consolidated net worth was$14.07 billion, which was above the $9.00 billion required under
the Credit Facility. The consolidated net worth is defined as theconsolidated shareholder’s equity including preferred stock but
excluding the pension and other postretirement benefits balance
within Accumulated other comprehensive income (loss).
At December 31, 2018, Cat Financial’s covenant interest coverage
ratio was 1.56 to 1. This is above the 1.15 to 1 minimum ratio,
calculated as (1) profit excluding income taxes, interest expenseand 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, 2018, Cat Financial’s six-monthcovenant leverage ratio was 7.69 to 1 and year-end covenant
leverage ratio was 8.33 to 1. This is below the maximum ratio ofdebt to net worth of 10 to 1, calculated (1) on a monthly basis as theaverage of the leverage ratios determined on the last day of eachof 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 moreof their respective financial covenants under the Credit Facility
in the future (and are unable to obtain a consent or waiver), thesyndicate of banks may terminate the commitments allocated tothe 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 therepayment of outstanding borrowings. At December 31, 2018, there
were no borrowings under the Credit Facility.

Our total credit commitments and available credit as of December 31, 2018 were:
December 31, 2018
Machinery,
Energy &Transportation

Consolidated(Millions of dollars)

Financial
Products

Credit lines available:
Global credit facilities$

10,500

$

2,750

$

7,750

Other external

4,577

—

4,577

Total credit lines available

15,0772,750

12,327

Less: Commercial paper outstanding(4,759)—(4,759)Less: Utilized credit(1,172)—Available credit

The other consolidated credit lines with banks as of December 31,
2018 totaled $4.58 billion. These committed and uncommitted
credit lines, which may be eligible for renewal at various futuredates 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, adowngrade 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 andother credit line facilities of Cat Financial and potential borrowings
from Caterpillar. In addition, we maintain a support agreement withCat Financial, which requires Caterpillar to remain the sole ownerof 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 $6.35 billion in 2018,
compared with $5.46 billion in 2017. The increase was primarily

$

9,146

$

2,750

(1,172)$

6,396

due to higher profit in 2018 adjusted for non-cash items. Profit
in 2017 included a non-cash charge related to U.S. tax reform
legislation enacted in December 2017. The most significant driverof higher profit was an increase in sales volume during 2018.
This improvement was mostly offset by higher working capitalrequirements to support increasing production volumes and higher
short-term incentive compensation payments. Within working
capital, changes to accounts payable, inventories and customer
advances unfavorably impacted cash flow, but were partially offset
by changes to accounts receivable.
Net cash used for investing activities in 2018 was $1.19 billion,
compared with net cash used of $727 million in 2017. The change
was primarily due to the acquisition of ECM S.p.A. and Downer
Freight Rail in 2018 and increased capital expenditures.
Net cash used for financing activities during 2018 was $5.47 billion,
compared with net cash used of $2.58 billion in 2017. The change
was primarily due to the repurchase of $3.80 billion of Caterpillar
common stock in 2018, partially offset by lower payments on debt
in 2018, as 2017 included the early retirement of $900 million ofdebt due in December 2018 and a long-term debt maturity of $500
million.
Our priorities for cash deployment have not changed. While ourshort-term priorities for the use of cash may vary from time totime 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 ofa Mid-A rating. Next, we intend to fund operational requirements
and commitments. Then, we intend to fund priorities that profitably
2018 FORM 10-K

35

first and second quarter, and 86 cents per share paid in the third
quarter and fourth quarter. In January 2014, the Board of Directors
approved an authorization to repurchase up to $10 billion ofCaterpillar common stock (the 2014 Authorization), which expired
on December 31, 2018. As of January 1, 2018, $5.47 billion
remained available under the 2014 Authorization, and in 2018,
we repurchased $3.80 billion of Caterpillar common stock. In July
2018, the Board of Directors approved a new share repurchaseauthorization of up to $10 billion of Caterpillar common stock
effective January 1, 2019, with no expiration. Our share
repurchase plans are subject to the company’s cash deployment
priorities and are evaluated on an ongoing basis; however, weplan to consistently repurchase common stock with the intent
to, at a minimum, offset the impact of dilution over time. The
timing and amount of future repurchases may vary depending on
operating cash flow, market conditions and investing priorities.
Caterpillar’s basic shares outstanding as of December 31, 2018
were approximately 576 million.

grow the company and return capital to shareholders throughdividend 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 aligned with our cash deployment actions andthe various methodologies used by the major credit rating agencies.
Operational excellence and commitments — Capital
expenditures were $1.22 billion during 2018, compared to $916
million in 2017. We expect ME&T’s capital expenditures in 2019 to
be about $1.4 billion. Contributions to our pension and OPEB plans
were $1.35 billion and $1.61 billion in 2018 and 2017, respectively.
Both years included a $1.0 billion discretionary contribution to
our U.S. pension plans. We expect to make approximately $315
million of contributions to our pension and OPEB plans in 2019.
Fund strategic growth initiatives and return capital toshareholders — We intend to fund initiatives that drive longterm profitable growth that will be focused in the areas of
expanded offerings and services, including acquisitions. In 2018,
we acquired ECM S.p.A. and Downer Freight Rail. Each quarter,
our Board of Directors reviews the company’s dividend for theapplicable quarter. The Board evaluates the financial conditionof the company and considers the economic outlook, corporate
cash flow, the company’s liquidity needs, and the health andstability of global credit markets to determine whether tomaintain or change the quarterly dividend. Dividends paid totaled$1.95 billion in 2018, representing 78 cents per share paid in the

Financial Products
Financial Products operating cash flow was $1.52 billion in 2018,
compared with $1.35 billion in 2017. Net cash used for investing
activities was $2.78 billion in 2018, compared with $596 million in2017. The change was primarily due to the impact of portfolio related
activity. Net cash provided by financing activities in 2018 was $1.26
billion, compared with net cash used for financing activities of $1.82
billion in 2017. The change was primarily due to higher portfolio
funding requirements and a lower dividend payment to Machinery,
Energy & Transportation.

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, 2018, minimum payments
for these obligations were:2019(Millions of dollars)

2020-2021

2022-2023

After 2023

Total

Long-term debt:
Machinery, Energy & Transportation(excluding capital leases)

$

2

$

8

Machinery, Energy & Transportation-capital leases

1,374

$

63

588

$

6,189

16

32

$

8,153
119

Financial Products

5,823

11,330

4,224

1,490

22,867

Total long-term debt1

5,833

12,767

4,828

7,711

31,139

205

265

117

185

772

315

680

1,200

2,850

5,045

Accounts payable3

7,051

—

—

—

7,051

Purchase orders4

6,451

—

—

—

6,451

Operating leases
Postretirement benefit obligations

2

Purchase obligations:

267

41

—

—

308

Total purchase obligations

13,76941——

13,810Interest on long-term debt6

921

1,399

878

5,792

8,990

Other long-term obligations7

564

819

416

362

2,161

Other contractual obligations

Total contractual obligations
1
2
3
4
5
6
7

36

5

$

21,607$

15,971

$

7,439

$

16,900$61,917

Amounts exclude unamortized discounts, a non-cash settlement for a capital lease, debt issuance costs, and fair value adjustments.
Amounts represent expected contributions to our pension and other postretirement benefit plans through 2028, offset by expected Medicare Part D subsidy receipts.
Amount represents invoices received and recorded as liabilities in 2018, but scheduled for payment in 2019. These represent short-term obligations made in the ordinary course ofbusiness.
Amount represents contractual obligations for material and services on order at December 31, 2018 but not yet delivered. These represent short-term obligations made in the ordinary
course of business.
Amounts represent long-term commitments entered into with key suppliers for minimum purchases quantities.
Amounts represent estimated contractual interest payments on long-term debt, including capital lease interest payments.
Amounts represent contractual obligations primarily for logistics services agreements related to our former third party logistics business, software license and development
contracts, IT consulting contracts and outsourcing contracts for benefit plan administration and software system support, and estimated income tax payments for mandatory deemed
repatriation as a result of U.S. tax reform.
2018 FORM 10-K

The total amount of gross unrecognized tax benefits for uncertain
tax positions, including positions impacting only the timing of tax
benefits, was $1,796 million at December 31, 2018. Paymentof these obligations would result from settlements with taxing
authorities. Due to the difficulty in determining the timing ofsettlements, these obligations are not included in the table
above. We do not expect to make a tax payment related to theseobligations 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”.

CRITICAL ACCOUNTING POLICIESThe preparation of financial statements in conformity with generally
accepted accounting principles requires management to makeestimates and assumptions that affect reported amounts. The moresignificant estimates include: residual values for leased assets,fair values for goodwill impairment tests, warranty liability, stockbased compensation, 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 nothistorically experienced significant adjustments. These assumptions
are reviewed at least annually with the Audit Committee of theBoard 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 values for Cat
Financial’s leased assets, which are an estimate of the market valueof leased equipment at the end of the lease term, are based on an
analysis of historical wholesale market sales prices, projected forward
on a level trend line without consideration for inflation or possible
future pricing action. At the inception of the lease, residual values are
estimated with consideration of the following critical factors: market
size and demand, any known significant market/product trends,
total expected hours of usage, machine configuration, application,
location, model changes, quantities, past remarketing experience,
third-party residual guarantees and contractual customer purchase
options. Many of these factors are gathered in an application surveythat is completed prior to quotation. The lease agreement also clearly
defines applicable return conditions and remedies for noncompliance, to ensure that the leased equipment will be in good
operating condition upon return. Model changes and updates, aswell as market strength and product acceptance, are monitored andadjustments are made to residual values in accordance with thesignificance of any such changes. Remarketing sales staff works
closely with customers and dealers to manage the sale of lease
returns and the recovery of residual exposure.
During the term of the equipment on operating leases, we evaluate
our depreciation on a regular basis taking into consideration expected
residual values at lease termination. Adjustments to depreciation
expense reflecting revised estimates of expected residual values
at the end of the lease terms are recorded prospectively on astraight-line basis. For finance leases, residual value adjustments
are recognized through a reduction of finance revenue.
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, thefair value of the equipment on operating leases is measured inaccordance with the fair value measurement framework. An
impairment charge is recognized for the amount by which thecarrying value of the equipment on operating leases exceeds
its estimated fair value.
At December 31, 2018, the aggregate residual value ofequipment on operating leases was $2.21 billion. Without
consideration of other factors such as third-party residual
guarantees or contractual customer purchase options, a 10%
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 millionof 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 adversechange in the business climate or a decision to sell all or a portionof 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 thequantitative goodwill impairment test, we compare the fair value ofeach reporting unit, which we primarily determine using an income
approach based on the present value of discounted cash flows, tothe respective carrying value, which includes goodwill. If the fairvalue of the reporting unit exceeds its carrying value, the goodwill
is not considered impaired. Beginning in 2017, if the carrying value
is higher than the fair value, the difference would be recognized as
an impairment loss. Prior to 2017, a two-step process was used. For
reporting units where we performed the two-step process, the firststep required us to compare the fair value of each reporting unit,
which we primarily determined using an income approach basedon the present value of discounted cash flows, to the respective
carrying value, which includes goodwill. If the fair value of thereporting unit exceeded its carrying value, the goodwill was notconsidered impaired. If the carrying value was higher than the fairvalue, there was an indication that an impairment may have existed
and the second step was required. In step two, the implied fairvalue of goodwill was calculated as the excess of the fair valueof a reporting unit over the fair values assigned to its assets andliabilities. If the implied fair value of goodwill was less than the
carrying value of the reporting unit’s goodwill, the difference wasrecognized 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 bya reconciliation of our calculated fair value for Caterpillar to thecompany’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 bysenior management. A reporting unit’s discount rate is arisk-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.

2018 FORM 10-K

37

Our annual impairment tests completed in the fourth quarter of2018 indicated the fair value of each reporting unit was substantiallyabove its respective carrying value, including goodwill. Caterpillar’smarket capitalization has remained significantly above the net bookvalue of the Company.
An unfavorable change in our expectations for the financial
performance of our reporting units, particularly long-term growthand 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 performanceof those industries, which in turn are dependent in part oncommodity prices. Lower commodity prices or industry specificcircumstances 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 thata reporting unit’s fair value has fallen below its carrying value, wewill perform an interim goodwill impairment test(s), in addition to
the annual impairment test. Future impairment tests may resultin a goodwill impairment, depending on the outcome of thequantitative impairment test. A goodwill impairment would bereported as a non-cash charge to earnings.
Warranty liability – At the time a sale is recognized, werecord estimated future warranty costs. The warranty liability
is determined by applying historical claim rate experience to thecurrent field population and dealer inventory. Generally, historicalclaim rates are based on actual warranty experience for eachproduct by machine model/engine size by customer or dealer
location (inside or outside North America). Specific rates aredeveloped 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 arehigher or lower than our historical rates.
Stock-based compensation – We use a lattice-based option-pricing
model to calculate the fair value of our stock options and stock
appreciation rights (SARs). The calculation of the fair value of theawards using the lattice-based option-pricing model is affectedby our stock price on the date of grant as well as assumptions
regarding the following:zz Volatility is a measure of the amount by which the stock price is

expected to fluctuate each year during the expected term of theaward and is based on historical Caterpillar stock price movement
and current implied volatilities from traded options on Caterpillar
stock. The implied volatilities from traded options are impacted bychanges in market conditions. An increase in the volatility would
result in an increase in our expense.

zz The expected term represents the period of time that awards

granted are expected to be outstanding and is an output of thelattice-based option-pricing model. In determining the expected
term of the award, future exercise and forfeiture patterns are
estimated from Caterpillar employee historical exercise behavior.
These patterns are also affected by the vesting conditions of theaward. Changes in the future exercise behavior of employees orin the vesting period of the award could result in a change in the
expected term. An increase in the expected term would resultin an increase to our expense.

zz The weighted-average dividend yield is based on Caterpillar’shistorical dividend yields. As holders of stock options and SARs
do not receive dividend payments, this could result in employees
retaining the award for a longer period of time if dividend yields
decrease or exercising the award sooner if dividend yields
increase. A decrease in the dividend yield would result in an
increase in our expense.

38

2018 FORM 10-K

zz The risk-free interest rate is based on the U.S. Treasury yield

curve in effect at time of grant. As the risk-free interest rateincreases, the expected term increases, resulting in an increasein our expense.

Beginning in 2018, the fair value of Restricted Stock Units (RSUs) andPerformance-based Restricted Stock Units (PRSUs) is determinedas the closing stock price on the date of grant, as holders of theseawards are credited with dividend equivalent units on each date thata cash dividend is paid to holders of Common Stock. Prior to 2018,
RSUs and PRSUs were not credited dividend equivalent units andthe fair value was determined by reducing the stock price on thedate of grant by the present value of the estimated dividends to be
paid during the vesting period. The estimated dividends were basedon Caterpillar’s quarterly dividend per share at the time of grant.
Stock-based compensation expense is recognized based on the
grant date fair value. Forfeitures are accounted for in the period
they occur as a reduction to expense. Stock-based compensation
expense for PRSUs is based on the probable number of shares
expected to vest. Changes in the expected probability of achieving
performance targets in future periods may result in an increase or
decrease in our expense.
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 basedon estimates and ultimate settlements may vary significantly fromsuch estimates due to increased claims frequency or severity overhistorical levels.
Postretirement benefits – Primary actuarial assumptions were
determined as follows:
zz The assumed discount rate is used to discount future benefit

obligations back to today’s dollars. The U.S. discount rate is basedon a benefit cash flow-matching approach and represents therate 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 projectedcash flows against a high quality bond yield curve, calculatedusing a wide population of corporate Aa bonds available on themeasurement date. A similar approach is used to determine theassumed 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 indetermining a discount rate. This approach applies the specificspot rates along the yield curve used in the determination of thebenefit 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 andfuture expense.

zz The expected long-term rate of return on plan assets is based on

our estimate of long-term passive returns for equities and fixedincome 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 byshort-term market swings. Changes in our allocation of plan assets
would also impact this rate. For example, a shift to more fixedincome securities would lower the rate. A decrease in the ratewould 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.

zz 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 ourlong-term compensation policies. An increase in the rate would
increase our obligation and expense.

zz 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 projectionsof future health care costs due to general economic conditions
and those specific to health care (e.g., technology driven costchanges) will impact this trend rate. An increase in the trend ratewould increase our obligation and expense.

The effects of actual results differing from our assumptions and theeffects of changing assumptions are considered actuarial gains orlosses. We recognize actuarial gains or losses immediately throughearnings upon the annual remeasurement in the fourth quarter, oron an interim basis as triggering events warrant remeasurement.
See Note 12 for further information regarding the accounting for
postretirement benefits.
Post-sale discount reserve – We provide discounts to dealersthrough merchandising programs. We have numerous programs
that are designed to promote the sale of our products. The mostcommon dealer programs provide a discount when the dealer sells
a product to a targeted end user. The amount of accrued post-salediscounts was $1,544 million and $1,426 million as of December
31, 2018 and 2017, 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 notbeen 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 inthe portfolio, adverse situations that may affect the borrower’s
ability to repay, estimated value of underlying collateral andcurrent 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 theeconomic environment in which our customers operate. The
allowance for credit losses attributable to finance receivables thatare individually evaluated and determined to be impaired is basedon the present value of expected future cash flows discounted
at the receivables’ effective interest rate, the fair value of thecollateral for collateral-dependent receivables or the observable
market price of the receivable. In determining collateral value, weestimate 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 allowancefor 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 ourloss 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 andlevel 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 themany jurisdictions in which we operate. These tax laws arecomplex, and the manner in which they apply to our facts issometimes open to interpretation. In establishing the provision forincome taxes, we must make judgments about the application ofthese inherently complex tax laws. Our income tax positions andanalysis are based on currently enacted tax law. Future changes
in tax law or related interpretations could significantly impact theprovision for income taxes, the amount of taxes payable, and thedeferred tax asset and liability balances. Changes in tax law arereflected in the period of enactment with related interpretations
considered in the period received. On January 15, 2019, the U.S.
Treasury issued final regulations providing additional guidance
related to the calculation of the mandatory deemed repatriationof non-U.S. earnings. We are currently evaluating the impact ofthese regulations and will recognize any resulting adjustments inthe first quarter of 2019.
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 resultin 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 evaluationof the information available at the reporting date. To be recognizedin 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 uponultimate settlement with a taxing authority that has full knowledgeof all relevant information. Significant judgment is required in
making these determinations and adjustments to unrecognizedtax 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 theimpact of a loss carryback to 2005, the IRS has proposed to tax inthe United States profits earned from certain parts transactions byCaterpillar 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 andpenalties for these years of approximately $2.3 billion. We believethat the relevant transactions complied with applicable tax laws anddid not violate judicial doctrines. The purchase of parts by CSARL
from unrelated parties and the subsequent sale of those parts tounrelated 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 positionis 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 nothave 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 estimatesand 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 theimpact 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 to2018 FORM 10-K

39

remeasure our pension and OPEB plans as we do not consider theseadjustments indicative of ongoing earnings trends. Should a change
in facts or circumstances lead to a change in judgment about theultimate realizability of a deferred tax asset, we record or adjust therelated 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.

OTHER MATTERSENVIRONMENTAL 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 ourmanufacturing and other operations, these laws often impact thedevelopment of our products, including, but not limited to, requiredcompliance with air emissions standards applicable to internal
combustion engines. We have made, and will continue to make,significant research and development and capital expenditures tocomply 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 thosecosts can be reasonably estimated, the investigation, remediation,and operating and maintenance costs are accrued against ourearnings. Costs are accrued based on consideration of currently
available data and information with respect to each individual
site, including available technologies, current applicable laws andregulations, and prior remediation experience. Where no amountwithin 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 notmaterial and is included in Accrued expenses. We believe there is
no more than a remote chance that a material amount for remedialactivities at any individual site, or at all the sites in the aggregate,
will be required.
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, thepurchase and resale of replacement parts by Caterpillar Inc. and nonU.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 theCompany 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 grandjury investigation. The Company is continuing to cooperate withthis investigation. The Company is unable to predict the outcome
or reasonably estimate any potential loss; however, we currently

40

2018 FORM 10-K

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 publicationof the Technical Opinion opened CADE’s official administrative
investigation into allegations that the defendants participated in
anticompetitive bid activity for the construction and maintenance ofmetro and train networks in Brazil. While companies cannot be held
criminally liable for anticompetitive conduct in Brazil, criminal charges
have been brought against two current employees of MGE and one
former employee of MGE involving the same conduct alleged by
CADE. The Company has responded to all requests for informationfrom the authorities. The Company is unable to predict the outcome
or reasonably estimate the potential loss; however, we currently
believe that this matter will not have a material adverse effect on
the Company’s consolidated results of operations, financial position
or liquidity.
In addition, we are involved in other unresolved legal actions
that arise in the normal course of business. The most prevalentof these unresolved actions involve disputes related to productdesign, manufacture and performance liability (including claimed
asbestos and welding fumes 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 remotechance that any liability arising from these matters would bematerial. Although it is not possible to predict with certainty theoutcome of these unresolved legal actions, we believe that theseactions 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 effectsof actual results differing from our assumptions and the effects ofchanging assumptions. Changes in discount rates and differences
between the actual return on plan assets and the expected returnon plan assets generally have the largest impact on mark-to-market
gains and losses.
We recognized expense of $415 million, $342 million and $957
million in 2018, 2017 and 2016, respectively, related to our defined
benefit pension and OPEB plans. The increase in expense in 2018
compared to 2017 was 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 comparedto curtailment and termination charges in 2017. The decrease in
expense in 2017 compared to 2016 was primarily due to lower net
mark-to-market losses in 2017 compared to 2016. This was partially
offset by an unfavorable change in amortization of prior service
credits, curtailment and termination charges and a lower expected
return on plan assets.
The primary factors that resulted in mark-to-market losses for
2018, 2017 and 2016 are described below. The net mark-to-market
losses were included in Other income (expense) in the Results ofOperations.

is primarily due to a lower expected return on plan assets(U.S. pension plans have an expected rate of return of 5.9 percent
in 2019 compared to 6.3 percent in 2018).

zz 2018 net mark-to-market loss of $495 million – Primarily due tothe difference between the actual return on plan assets comparedto 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 theend of 2017.

In general, our strategy for both the U.S. and the non-U.S. pensions
includes ongoing alignment of our investments to our liabilities,
while reducing risk in our portfolio. For our U.S. pension plans,
our year-end 2018 asset allocation was 70 percent fixed income,27 percent equities and 3 percent other. Our current U.S. pension
target asset allocation is 70 percent fixed income and 30 percent
equities. The target allocation is revisited periodically to ensure it
reflects our overall objectives. The U.S. plans are rebalanced towithin the appropriate target asset allocation ranges on a monthly
basis.

zz 2017 net mark-to-market loss of $301 million – Primarily due tolower discount rates at the end of 2017 compared to the end of2016 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).

The year-end 2018 asset allocation for our non-U.S. pension plans
was 78 percent fixed income, 13 percent equities, 5 percent realestate and 4 percent other. The 2018 weighted-average target
allocation for our non-U.S. pension plans was also 78 percent fixedincome, 13 percent equities, 5 percent real estate and 4 percent
other. The target allocations for each plan vary based upon local
statutory requirements, demographics of the plan participants andfunded status. The frequency of rebalancing for the non-U.S. plansvaries depending on the plan.

zz 2016 net mark-to-market loss of $985 million – Primarily due

to lower discount rates at the end of 2016 compared to the endof 2015 and changes in our U.S. mortality assumption (discussed
below). This was partially offset by the difference between theactual return on plan assets compared to the expected return onplan assets (U.S. pension plans had an actual rate of return of 7.8
percent compared to an expected rate of return of 6.9 percent).

In the fourth quarter of 2017, the company reviewed and madechanges to the mortality assumptions primarily for our U.S. pension
plans which resulted in an overall increase in the life expectancyof plan participants. As of December 31, 2017 these changes
resulted in an increase in our Liability for postemployment benefitsof approximately $290 million. In the fourth quarter of 2016, thecompany adopted new mortality improvement scales released by
the Society of Actuaries for our U.S. pension and OPEB plans. As
of December 31, 2016, this resulted in an increase in our Liability
for postemployment benefits of approximately $200 million.

Contributions to our pension and OPEB plans were $1.4 billion and$1.6 billion in 2018 and 2017, respectively. Both years included a$1.0 billion discretionary contribution to our U.S. pension plans. We
expect to make approximately $315 million of contributions to ourpension and OPEB plans in 2019. We believe we have adequate
resources to fund both pension and OPEB plans.
Effective January 1, 2018, we adopted new accounting guidanceissued by the FASB related to the presentation of net periodic
pension costs and net periodic postretirement benefit costs. Thechange in presentation was applied retrospectively to prior years.
For further information see Note 1J — “Operations and summaryof significant accounting policies — New Accounting Guidance”
of Part II, Item 8 “Financial Statements and Supplementary Data.”

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

Actuarial assumptions have a significant impact on both pension
and OPEB expenses. The effects of a one percentage point change
in our primary actuarial assumptions on 2018 benefit costs andyear-end obligations are included in the table below.

We expect our total defined benefit pension and OPEB expense(excluding the impact of mark-to-market gains and losses)
to increase approximately $260 million in 2019. This increase

Postretirement Benefit Plan Actuarial Assumptions Sensitivity
The effects of a one percentage-point change in our primary actuarial assumptions on 2018 pension and OPEB costs and obligations are as
follows:
2018 Benefit Cost
Year-end Benefit Obligation(Millions of dollars)

One percentagepoint increase

One percentagepoint decrease

One percentagepoint increase

One percentagepoint decrease

$

$

$

$

U.S. Pension benefits:
Assumed discount rate

64

(85)

(1,625)

1,970

1

(2)

5

(5)

(129)

129

—

—

Assumed discount rate

7

(11)

(560)

720

Expected rate of compensation increase

7

(6)

41

(36)

(42)

42

—

—

Assumed discount rate

9

(12)

(318)

377

Expected rate of compensation increase
Expected long-term rate of return on plan assets
Non-U.S. Pension benefits:

Expected long-term rate of return on plan assets
Other postretirement benefits:
Expected rate of compensation increase

—

—

—

—

Expected long-term rate of return on plan assets

(4)

4

—

—

Assumed health care cost trend rate

14

(11)

138

(117)

2018 FORM 10-K

41

Primary Actuarial Assumptions
U.S. Pension Benefits

Weighted-average assumptions used todetermine benefit obligations, end of year:
Discount rate
Rate of compensation increase
Weighted-average assumptions used todetermine net cost:
Discount rate used to measure service cost
Discount rate used to measure interest cost
Expected rate of return on plan assets
Rate of compensation increase
Health care cost trend rates at year-end:
Health care trend rate assumed for next year
Rate that the cost trend rate gradually declines toYear that the cost trend rate reaches ultimate rate

Non-U.S. Pension Benefits

Other Postretirement Benefits

2018

2017

2016

2018

2017

2016

2018

2017

2016

4.2%
4.0%

3.5%
4.0%

4.0%
4.0%

2.5%
3.0%

2.4%
4.0%

2.5%
4.0%

4.2%
4.0%

3.6%
4.0%

4.0%
4.0%

3.7%
3.2%
6.3%
4.0%

4.2%
3.3%
6.7%
4.0%

4.5%
3.4%
6.9%
4.0%

2.3%
2.2%
5.2%
4.0%

2.4%
2.3%
5.9%
4.0%

2.9%
2.8%
6.1%
3.6%

3.5%
3.2%
7.5%
4.0%

3.9%
3.3%
7.5%
4.0%

4.2%
3.3%
7.5%
4.0%

6.1%
5.0%
2025

6.1%
5.0%
2022

6.6%
5.0%
2022

SENSITIVITY

Interest Rate Sensitivity

Foreign Exchange Rate Sensitivity

For our Machinery, Energy & Transportation operations, we have theoption to use interest rate contracts to lower the cost of borrowed
funds by attaching fixed-to-floating interest rate contracts to fixedrate debt, and by entering into forward rate agreements on future
debt issuances. A hypothetical 100 basis point adverse move ininterest rates along the entire interest rate yield curve would havea minimal impact to the 2019 pre-tax earnings of Machinery, Energy& Transportation. Last year, similar assumptions and calculations
yielded a minimal impact to 2018 pre-tax earnings.

Machinery, Energy & Transportation operations use foreign
currency forward and option contracts to manage unmatchedforeign currency cash inflow and outflow. Our objective is tominimize the risk of exchange rate movements that would
reduce the U.S. dollar value of our foreign currency cash flow.
Our policy allows for managing anticipated foreign currency cash
flow for up to five years. Based on the anticipated and firmly
committed cash inflow and outflow for our Machinery, Energy& Transportation operations for the next 12 months and theforeign currency derivative instruments in place at year-end, ahypothetical 10 percent weakening of the U.S. dollar relative to allother currencies would adversely affect our expected 2019 cash
flow for our Machinery, Energy & Transportation operations byapproximately $250 million. Last year similar assumptions andcalculations yielded a potential $200 million adverse impact on
2018 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 thesensitivity.
Since our policy for Financial Products operations is to hedge theforeign exchange risk when the currency of our debt portfolio
does not match the currency of our receivable portfolio, a 10
percent change in the value of the U.S. dollar relative to all othercurrencies 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 valueof the U.S. dollar has changed from that reported at the endof 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 Japanese yen, British pound, Indian rupee,
Swiss franc and Australian dollar.

For our Financial Products operations, we use interest rate derivative
instruments primarily to meet our match-funding objectives andstrategies. We have a match-funding policy whereby the interest
rate profile (fixed or floating rate) of our debt portfolio is matchedto the interest rate profile of our earning asset portfolio (financereceivables and operating leases) within certain parameters.
In connection with that policy, we use interest rate derivative
instruments to modify the debt structure. Match funding assists us
in maintaining our interest rate spreads, regardless of the 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 arethat there are no new fixed rate assets or liabilities, the proportionof fixed rate debt to fixed rate assets remains unchanged and thelevel of floating rate assets and debt remain constant. An analysisof the December 31, 2018 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 2019pre-tax earnings. Last year, similar assumptions and calculations
yielded a minimal impact to 2018 pre-tax earnings.
This analysis does not necessarily represent our current outlookof future market interest rate movement, nor does it consider any
actions management could undertake in response to changes ininterest rates. Accordingly, no assurance can be given that actual
results would be consistent with the results of our estimate.

NON-GAAP FINANCIAL MEASURESThe 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

42

2018 FORM 10-K

mark-to-market losses resulting from plan remeasurements,(iii) certain deferred tax valuation allowance adjustments,(iv) U.S. tax reform impact and (v) a gain on the sale of anequity investment. We do not consider these items indicativeof earnings from ongoing business activities and believe the
non-GAAP measures will provide useful perspective on underlying
business results and trends, and a means to assess our periodover-period results.

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) restructuring costs, which are incurred in the current year
to generate longer term benefits, (ii) pension and OPEB

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,
Operating profit as a percent of total sales and revenues

Twelve Months Ended
December 31,

2018

2017

2018

2017

13.1%

10.8%

15.2%

9.8%

Restructuring costs

0.7%

1.9%

0.7%

2.7%

Adjusted operating profit margin

13.8%

12.7%

15.9%

12.5%

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,
2018(millions of dollars)

Twelve Months Ended
December 31,

2017

2018

2017

Profit before taxes

$

1,367

$

1,111

$

7,822

$

4,082

Restructuring costs

$

93

$

245

$

386

$

1,256

Mark-to-market losses

$

495

$

301

$

495

$

301

Gain on sale of equity investment

$

—

$

—

$

—

$

(85)

Adjusted profit before taxes

$

1,955

$

1,657

$

8,703

$

5,554

Reconciliations of adjusted profit per share to the most directly comparable GAAP measure, diluted profit per share, are as follows:
Three Months Ended
December 31,
2018

Twelve Months Ended
December 31,

2017

2018

2017

Profit (Loss) per share - diluted

$

1.78

$

(2.18)

$

10.26

$

1.26

Per share restructuring costs

$

0.13

$

0.31

$

0.50

$

1.68

$

0.66

$

0.26

$

0.64

$

0.26

Per share deferred tax valuation allowance adjustments$(0.11)$(0.18)$(0.01)$(0.18)Per share U.S. tax reform impact

$

0.09

$

3.91

$

(0.17)$

3.95

1

Per share mark-to-market losses2

Per share gain on sale of equity investment

2

Adjusted profit per share
1
2

$

—

$

—

$

—

$

(0.09)

$

2.55

$

2.16

$

11.22

$

6.88

At statutory tax rates. 2017 is prior to consideration of U.S. tax reform. Full year 2017 also includes $15 million increase to prior year taxes related to non-U.S. restructuring costs.
At statutory tax rates. 2017 is prior to consideration of U.S. tax reform.
Per share amounts computed using fully diluted shares outstanding except for consolidated loss per share, which was computed using basic shares outstanding.

Supplemental Consolidating Data
We are providing supplemental consolidating data for the purposeof 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 withFinancial 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 forthe 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 44 to 46 reconcile Machinery, Energy & Transportation
with Financial Products on the equity basis to Caterpillar Inc.
consolidated financial information.

2018 FORM 10-K

43

Supplemental Data for Results of Operations
For The Years Ended December 31
Supplemental consolidating data
Machinery, Energy &Transportation1

Consolidated
2018(Millions of dollars)

Financial Products

2017

2016

2018

2017

2016

2018

$ 42,676$ 35,773$ 51,822$ 42,676$ 35,773

2017

Consolidating Adjustments

2016

2018

2017

2016

Sales and revenues:
Sales of Machinery, Energy &Transportation$ 51,822

$

—

$

—

$

—

$

—

$

—

$

—

Revenues of Financial
Products

2,900

2,786

2,764

—

—

—

3,362

3,167

3,065

(462)2(381)2(301)2

Total sales and revenues

54,722

45,462

38,537

51,822

42,67635,773

3,362

3,167

3,065

(462)

(381)

(301)

Cost of goods sold

36,99731,26028,04436,99831,261

28,046

—

—

—

(1)3

(1)3

(2)3

Selling, general andadministrative expenses

5,478

4,999

4,383

4,675

4,411

3,826

825

604

573

(22)3

(16)3

(16)3

Research and development
expenses

1,850

1,842

1,853

1,850

1,842

1,853

—

—

—

—

—

—

Interest expense of Financial
Products

722

646

596

—

—

—

756

667

611

(34)4

(21)4

(15)4

Goodwill impairment charge

Operating costs:

—

—

595

—

—

595

—

—

—

—

—

—

Other operating (income)expenses

1,382

2,255

1,904

144

1,056

700

1,259

1,220

1,232

(21)3

(21)3

(28)3

Total operating costs

46,42941,00237,37543,667

38,57035,020

2,840

2,491

2,416

(78)

(59)

(61)

Operating profit

8,293

4,460

1,162

8,155

4,106

753

522

676

649

(384)

(322)

(240)

Interest expense excluding
Financial Products

404

531

505

448

622

553

—

—

—

(44)4

(91)4

(48)4

Other income (expense)

(67)

153

(518)

(391)

(170)

(753)

(16)

92

43

340

231

1925

Consolidated profit (loss)
before taxes

7,822

4,082

139

7,316

3,314

(553)

506

768

692

—

—

—

Provision (benefit) for income
taxes

1,698

3,339

192

1,574

3,317

(24)

124

22

216

—

—

—

Profit (loss) of consolidated
companies

6,124

743

(53)

5,742

(3)

(529)

382

746

476

—

—

—

Equity in profit (loss) ofunconsolidated affiliatedcompanies

24

16

(6)

24

16

(6)

—

—

—

—

—

—

Equity in profit of Financial
Products’ subsidiaries

—

—

—

362

738

470

—

—

—

(362)6(738)6(470)6

Profit (loss) of consolidated
and affiliated companies

6,148

759

(59)

6,128

751

(65)

382

746

476

(362)

(738)

(470)

Less: Profit (loss) attributable
to noncontrolling interests

1

5

8

(19)

(3)

2

20

8

6

—

—

—

(67) $

6,147

470$ (362)$ (738)$ (470)

Profit (loss)

7

1
2
3
4
5
6
7

44

$

6,147

$

754

$

$

754

$

(67)

$

362

$

738

$

5

5

Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
Elimination of Financial Products’ revenues earned from Machinery, Energy & Transportation.
Elimination of net expenses recorded by Machinery, Energy & Transportation paid to Financial Products.
Elimination of interest expense recorded between Financial Products and Machinery, Energy & Transportation.
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.
Elimination of Financial Products’ profit due to equity method of accounting.
Profit (loss) attributable to common shareholders.

2018 FORM 10-K

Supplemental Data for Financial Position
At December 31
Supplemental consolidating data
Machinery,
Energy & Transportation1

Consolidated
2018(Millions of dollars)

2017

2018

Financial
Products

2017

2018

Consolidating
Adjustments

2017

2018

2017

AssetsCurrent assets:
Cash and short-term investments

$

7,857

$

8,261

Receivables -­trade and other

8,802

7,436

Receivables - finance

8,650

8,757

Prepaid expenses and other current assets

1,765

1,772

Inventories

11,52910,018

$

6,968

$

4,677

7,381

$

889

$

880

$

—

$

—

4,596

401

343

3,7242,3

2,4972,3——

13,98912,985(5,339)3(4,228)3

1,227

1,099

583

679

(45)4

(6)4

11,52910,018————(1,737)

Total current assets

38,60336,244

24,401

23,094

15,862

14,887(1,660)Property, plant and equipment - net

13,574

14,155

9,085

9,823

4,489

4,332

—

—

Long-term receivables ‑ trade and other

1,161

990

302

229

204

162

6552,35992,3Long-term receivables - finance

13,286

13,542——

13,951

14,170(665)3(628)3

—

—

3,672

4,064

—

—

(3,672)5(4,064)5

Noncurrent deferred and refundable income taxes

1,439

1,693

2,015

2,166

116

101

(692)6(574)6

Intangible assets

1,897

2,111

1,897

2,106

—

5

—

—

Goodwill

6,217

6,200

6,217

6,183

—

17

—

—

Investments in Financial Products subsidiaries

2,332

Other assets
Total assets

886

2,027

1,446

822

—

1,205

—

$

78,509$76,962$

48,475$48,487$36,068$34,879$(6,034)$(6,404)

$

5,723

$

4,837

$

—

$

1

$

5,723

$

4,836

$

—

$

—

Liabilities
Current liabilities:
Short-term borrowings
Short-term borrowings with consolidated
companies

—

—

—

—

1,500

1,623

(1,500)7(1,623)7

Accounts payable

7,051

6,487

6,972

6,330

194

265

(115)

(108)8

Accrued expenses

3,573

3,220

3,212

2,880

361

340

—

—

Accrued wages, salaries and employee benefits

2,384

2,559

2,350

2,504

34

55

—

—

Customer advances

1,243

1,426

1,243

1,426

—

—

—

—

Dividends payable

495

466

495

466

—

—

—

—

Other current liabilities

1,919

1,742

1,532

1,327

433

423

(46)6,9(8)6,9Long-term debt due within one year

5,830

6,194

10

6

5,820

6,188

—

—

8

Total current liabilities

28,21826,931

15,814

14,94014,065

13,730(1,661)(1,739)Long-term debt due after one year

25,00023,847

8,015

7,958

16,995

15,918

(10)7

(29)7

Liability for postemployment benefits

7,455

8,365

7,455

8,365

—

—

—

—

Other liabilities

3,756

4,053

3,111

3,458

1,336

1,167

(691)6(572)6

Total liabilities

64,42963,19634,39534,721

32,39630,815(2,362)(2,340)Common stock

5,827

5,593

5,827

5,593

919

918

(919)5(918)5

Treasury stock(20,531)(17,005)(20,531)(17,005)

—

—

—

—

Profit employed in the business

30,42726,30130,42726,301

3,543

3,598

(3,543)5(3,598)5

Accumulated other comprehensive income (loss)(1,684)(1,192)(1,684)(1,192)

(943)

(592)

9435

5925

41

69

41

69

153

140

(153)5(140)5

Commitments and contingencies
Shareholders’ equity

Noncontrolling interests

14,080Total shareholders’ equity
Total liabilities and shareholders’ equity

1
2
3
4
5
6
7
8
9

$

78,50914,08013,766$76,962$

48,475

3,672

13,766$48,487$36,068(3,672)

4,064$

34,879$(6,034)(4,064)$(6,404)

Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
Elimination of receivables between Machinery, Energy & Transportation and Financial Products.
Reclassification of Machinery, Energy & Transportation’s trade receivables purchased by Financial Products and Financial Products’ wholesale inventory receivables.
Elimination of Machinery, Energy & Transportation’s insurance premiums that are prepaid to Financial Products.
Elimination of Financial Products’ equity which is accounted for by Machinery, Energy & Transportation on the equity basis.
Reclassification reflecting required netting of deferred tax assets/liabilities by taxing jurisdiction.
Elimination of debt between Machinery, Energy & Transportation and Financial Products.
Elimination of payables between Machinery, Energy & Transportation and Financial Products.
Elimination of prepaid insurance in Financial Products’ other liabilities.

2018 FORM 10-K

45

Supplemental Data for Statement of Cash Flow
For the Years Ended December 31
Supplemental consolidating data

(Millions of dollars)

2018

Cash flow from operating activities:
Profit (loss) of consolidated and affiliated companies$ 6,148
Adjustments for non-cash items:
Depreciation and amortization
2,766
Undistributed profit of Financial Products—
Actuarial (gain) loss on pension and postretirement benefits
495
Provision (benefit) for deferred income taxes
220
Other
1,006
Financial Products' dividend in excess of profit—
Changes in assets and liabilities, net of acquisitions anddivestitures:
Receivables - trade and other(1,619)Inventories(1,579)Accounts payable709
Accrued expenses
101
Accrued wages, salaries and employee benefits(162)
Customer advances(183)
Other assets—net
41
Other liabilities—net(1,385)
Net cash provided by (used for) operating activities
6,558
Cash flow from investing activities:
Capital expenditures—excluding equipment leased to others(1,276)
Expenditures for equipment leased to others(1,640)
Proceeds from disposals of leased assets and property, plantand equipment
936
Additions to finance receivables(12,183)
Collections of finance receivables
10,901
Net intercompany purchased receivables—
Proceeds from sale of finance receivables
477
Net intercompany borrowings—
Investments and acquisitions (net of cash acquired)(392)
Proceeds from sale of businesses and investments(net of cash sold)$16
Proceeds from sale of securities
442
Investments in securities(506)
Other—net
13
Net cash provided by (used for) investing activities(3,212)
Cash flow from financing activities:
Dividends paid
(1,951)
Common stock issued, including treasury shares reissued
313
Common shares repurchased(3,798)Net intercompany borrowings—
Proceeds from debt issued (original maturities greaterthan three months)
8,907
Payments on debt (original maturities greater than three months)(7,829)
Short-term borrowings - net (original maturities three months
or less)
762
Other—net(54)
Net cash provided by (used for) financing activities(3,650)Effect of exchange rate changes on cash
(126)
Increase (decrease) in cash and short-term investments andrestricted cash
(430)
Cash and short-term investments and restricted cash at beginningof period
8,320
Cash and short-term investments and restricted cash at
end of period$ 7,890

1
2
3
4
5
6
7
8
9
10

46

2017
$

$

$

Financial
Products

Machinery,
Energy & Transportation1

Consolidated

759

2018
$

6,128

2017
$

751

2018
$

2017

382

$

746

2018
$

2017

(362)2$(738)2

2,877
—
301
1,213
750
—

1,895
—
495
149
434
57

2,016
(13)
301
1,500
673
—

871
—
—
71
178
—

861
—
—
(285)
(175)
—

—
—
—
—
3944
(57)5

—
133
—
(2)4
2524
—

(1,151)(1,295)
1,478
175
1,187
(8)
(192)
(388)
5,706

(396)
(1,528)
771
71
(141)
(183)
16
(1,421)
6,347

(649)
(1,282)
1,588
169
1,160
(8)
(186)
(561)
5,459

6
—
(55)
30
(21)
—
(14)
75
1,523

90
—
(85)
6
27
—
8
157
1,350

(1,229)4,6
(51)4
(7)4
—
—
—
394
(39)4
(1,312)(592)4,6
(13)4
(25)4
—
—
—
(14)4
164
(1,103)(898)(1,438)(1,168)
(53)

(889)
(27)

(108)
(1,667)(10)(1,443)

—
804

14
324

1,164
(11,953)
12,018
—
127
—
(59)

152
—
—
—
—
112
(392)

192
—
—
—
—
21
(59)

811
(13,595)
12,513(1,046)
477
31
—

987
(13,920)
14,357
(732)
127
—
—

(27)4
1,4126,7(1,612)6
1,0466—(143)8—(15)4
1,9676(2,339)6
7326
—
(21)8
—

100 $
932
(1,048)
89
(966)

22 $
162
(24)
2
(1,187)

100
79
(198)
54
(727)

(1,831)566——(1,951)313(3,798)(31)(1,831)
566
—
—

(419)
1
—
(112)

(725)
—
—
(21)

41910
(1)9
—
1438

72510
—
—
218

9,063
(8,388)

57
(7)

361
(1,465)8,850(7,822)

8,702(6,923)————(3,058)(9)(3,657)38—(54)(5,471)
(111)

(204)
(9)
(2,582)
7

762
—
1,260
(15)

(2,854)—(1,821)
31

—
—
561
—

—
—
746
—

1,121

(422)

2,157

(8)

(1,036)

—

—

7,199

7,416

5,259

904

1,940

—

—

8,320

$

6,994

$

7,416

$

$

—
280
(482)
10
(2,776)896$$

Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.
Elimination of Financial Products’ profit after tax due to equity method of accounting.
Elimination of non-cash adjustment for the undistributed earnings from Financial Products.
Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.
Elimination of Financial Products’ dividend to Machinery, Energy & Transportation in excess of Financial Products’ profit.
Reclassification of Financial Products’ cash flow activity from investing to operating for receivables that arose from the sale of inventory.
Elimination of proceeds received from Financial Products related to Machinery, Energy & Transportation’s sale of businesses and investments.
Elimination of net proceeds and payments to/from Machinery, Energy & Transportation and Financial Products.
Elimination of change in investment and common stock related to Financial Products.
Elimination of dividend from Financial Products to Machinery, Energy & Transportation.

2018 FORM 10-K

Consolidating
Adjustments

—
853
(850)
35
(596)

904

$

$

(6)7
—
—
19
751

—

$

$

—
—
—
—
357

—

ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk.
Information required by Item 7A appears in Note 1 — “Operations and summary of significant accounting policies,” Note 4 — “Derivative
financial instruments and risk management,” Note 18 — “Fair value disclosures” and Note 19 — “Concentration of credit risk” of Part II,
Item 8 “Financial Statements and Supplementary Data.” Other information required by Item 7A is included in Part II, Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”

2018 FORM 10-K

47

ITEM 8.

Financial Statements and Supplementary Data.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Caterpillar Inc. (company) is responsible for establishing and maintaining adequate internal control over financial
reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendituresof the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assetsthat could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2018. In making
this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework (2013). Based on our assessment we concluded that, as of December 31, 2018, the company’s
internal control over financial reporting was effective based on those criteria.
The effectiveness of the company’s internal control over financial reporting as of December 31, 2018 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report appears on page 49.
/s/ D. James Umpleby, III
D. James Umpleby, III
Chief Executive Officer/s/ Andrew R.J. Bonfield
Andrew R.J. Bonfield
Chief Financial Officer

February 14, 201948

2018 FORM 10-K

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Caterpillar Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statement of financial position of Caterpillar Inc. and its subsidiaries (the “Company”)
as of December 31, 2018 and 2017, and the related consolidated statements of results of operations, comprehensive income (loss),changes in shareholders’ equity and cash flow for each of the three years in the period ended December 31, 2018, including the related
notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control overfinancial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due toerror or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of theconsolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating theoverall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detectionof unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/PricewaterhouseCoopers LLP
Peoria, Illinois
February 14, 2019

We have served as the Company’s auditor since 1925.

2018 FORM 10-K

49

Caterpillar Inc.

STATEMENT 1
Consolidated Results of Operations for the Years Ended December 31
2018(Dollars in millions except per share data)

2017

2016

Sales and revenues:
Sales of Machinery, Energy & Transportation$

51,822$

42,676$35,773

Revenues of Financial Products

2,900

2,786

2,764

Total sales and revenues

54,722

45,462

38,537

Operating costs:
Cost of goods sold

36,99731,26028,044

Selling, general and administrative expenses

5,478

4,999

4,383

Research and development expenses

1,850

1,842

1,853

Interest expense of Financial Products

722

646

596

—

—

595

Other operating (income) expenses

1,382

2,255

1,904

Total operating costs

46,42941,00237,375

Operating profit

8,293

4,460

1,162

404

531

505

Goodwill impairment charge

Interest expense excluding Financial Products

(67)

153

(518)

7,822

4,082

139

Provision (benefit) for income taxes

1,698

3,339

192

Profit (loss) of consolidated companies

6,124

743

(53)

Other income (expense)
Consolidated profit before taxes

24

16

(6)

6,148

759

(59)

Equity in profit (loss) of unconsolidated affiliated companies
Profit (loss) of consolidated and affiliated companies

1

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

1

Profit (loss) per common share
Profit (loss) per common share — diluted

2,3

5

8

$

6,147

$

754

$

(67)

$

10.39

$

1.27

$

(0.11)

$

10.26

$

1.26

$

(0.11)

Weighted-average common shares outstanding (millions)- Basic- Diluted
1
2
3

2,3

591.8

584.3

599.4

599.3

584.3

Profit (loss) attributable to common shareholders.
Diluted by assumed exercise of stock-based compensation awards, using the treasury stock method.
In 2016, the assumed exercise of stock-based compensation awards was not considered because the impact would be antidilutive.

See accompanying notes to Consolidated Financial Statements.

50

591.4

2018 FORM 10-K

Caterpillar Inc.

STATEMENT 2
Consolidated Comprehensive Income (Loss) for the Years Ended December 31
2018(Millions of dollars)Profit (loss) of consolidated and affiliated companies

$

2017

6,148

$

2016
759

$

(59)

Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax (provision)/benefit of:2018 - $(24); 2017 - $96; 2016 - $(30)

(396)

765

(17)

Current year prior service credit (cost), net of tax (provision)/benefit of:2018 - $(6); 2017 - $(26); 2016 - $(69)

(6)

48

118

Amortization of prior service (credit) cost, net of tax (provision)/benefit of:2018 - $8; 2017 - $9; 2016 - $21

(28)

(16)

(35)

Gains (losses) deferred, net of tax (provision)/benefit of: 2018 - $(19);2017 - $2; 2016 - $33

61

(3)

(62)

(Gains) losses reclassified to earnings, net of tax (provision)/benefit of:2018 - $31; 2017 - $(44); 2016 - $2

(100)

77

(3)

Gains (losses) deferred, net of tax (provision)/benefit of:2018 - $3; 2017 - $(23); 2016 - $(12)

(12)

41

26

(Gains) losses reclassified to earnings, net of tax (provision)/benefit of:2018 - $0; 2017 - $35; 2016 - $15

—

(65)

(31)

Pension and other postretirement benefits:

Derivative financial instruments:

Available-for-sale securities:

Total other comprehensive income (loss), net of tax

(481)

847

(4)

Comprehensive income (loss)

5,667

1,606

(63)

1

Less: comprehensive income attributable to the noncontrolling interests
Comprehensive income (loss) attributable to shareholders

$

5,666

5
$

1,601

8
$

(71)

See accompanying notes to Consolidated Financial Statements.

2018 FORM 10-K

51

Caterpillar Inc.

STATEMENT 3
Consolidated Financial Position at December 31
2018(Dollars in millions)

2017

AssetsCurrent assets:$

Cash and short-term investments

7,857

$

8,261

Receivables – trade and other

8,802

7,436

Receivables – finance

8,650

8,757

Prepaid expenses and other current assets

1,765

1,772

Inventories

11,52910,018

Total current assets

38,60336,244

Property, plant and equipment – net

13,574

14,155Long-term receivables – trade and other

1,161

990

Long-term receivables – finance

13,286

13,542

Noncurrent deferred and refundable income taxes

1,439

1,693

Intangible assets

1,897

2,111

Goodwill

6,217

6,200

Other assets

2,332

2,027

$

Total assets

78,509$—$76,962

Liabilities
Current liabilities:
Short-term borrowings:$

Machinery, Energy & Transportation

1

Financial Products

5,723

4,836

Accounts payable

7,051

6,487

Accrued expenses

3,573

3,220

Accrued wages, salaries and employee benefits

2,384

2,559

Customer advances

1,243

1,426

Dividends payable

495

466

1,919

1,742

Other current liabilities
Long-term debt due within one year:

10

6

Financial Products

5,820

6,188

Total current liabilities

28,21826,931

Machinery, Energy & Transportation

Long-term debt due after one year:
Machinery, Energy & Transportation

8,005

7,929

Financial Products

16,995

15,918

7,455

8,365

Liability for postemployment benefits
Other liabilities

3,756

4,053

Total liabilities

64,42963,196

Commitments and contingencies (Notes 21 and 22)
Shareholders’ equity
Common stock of $1.00 par value:
Authorized shares: 2,000,000,000
Issued shares: (2018 and 2017 – 814,894,624 shares) at paid-in amount

5,827

5,593

Treasury stock: (2018 – 239,351,886 shares; and 2017 - 217,268,852 shares) at cost

(20,531)(17,005)

Profit employed in the business

30,42726,301

Accumulated other comprehensive income (loss)(1,684)(1,192)

Noncontrolling interests
Total shareholders’ equity$

Total liabilities and shareholders’ equity
See accompanying notes to Consolidated Financial Statements.

52

2018 FORM 10-K

41

69

14,08013,76678,509$76,962Caterpillar Inc.

STATEMENT 4
Changes in Consolidated Shareholders’ Equity for the Years Ended December 31

Commonstock(Dollars in millions)

Balance at January 1, 2016$

Profitemployedin thebusiness

Treasury
stock

5,238

$

(17,640) $Accumulated
othercomprehensive
income (loss)

29,246$

Noncontrollinginterests

Total(2,035) $76$

14,885

Profit (loss) of consolidated and affiliatedcompanies

—

—

(67)

—

8

(59)

Foreign currency translation, net of tax

—

—

—

(17)

—

(17)

Pension and other postretirement benefits,
net of tax

—

—

—

83

—

83

Derivative financial instruments, net of tax

—

—

—

(65)

—

(65)

Available-for-sale securities, net of tax

—

(5)

—

(5)

—

—

Change in ownership from noncontrollinginterests

(2)

—

—

—

2

—

Dividends declared——(1,802)——(1,802)Distribution to noncontrolling interests

(10)

—

—

—

—

(10)

Common shares issued from treasury stock
for stock-based compensation: 4,164,134

(185)

162

—

—

—

(23)

Stock-based compensation expense

218

—

—

—

—

218

Net excess tax benefits fromstock-based compensation

(6)

—

—

—

—

(6)

Other

14

—

—

—

—

14

$

(2,039) $

76

—

—

$

(2,039) $76

Balance at December 31, 2016

$

5,277

$

5,277

Adjustment to adopt stock-based
compensation guidance1
Balance at January 1, 2017$(17,478) $$(17,478) $27,392——

27,377
15$

13,213$

13,228

15

Profit (loss) of consolidated and affiliatedcompanies

—

—

754

—

5

759

Foreign currency translation, net of tax

—

—

—

765

—

765

Pension and other postretirement benefits,
net of tax

—

—

—

32

—

32

Derivative financial instruments, net of tax

—

—

—

74

—

74

Available-for-sale securities, net of tax

—

(24)

—

(24)

—

—

Change in ownership from noncontrollinginterests

4

—

—

—

(3)

1

Dividends declared——(1,845)——(1,845)Distribution to noncontrolling interests

(9)

—

—

—

—

(9)

Common shares issued from treasury stock
for stock-based compensation: 11,139,748

93

473

—

—

—

566

Stock-based compensation expense

206

—

—

—

—

206

—

—

(1,192) $

69

13

Other
Balance at December 31, 2017

$

5,593

—
$

(17,005) $—26,301$

13$

13,766(Continued)

2018 FORM 10-K

53

Caterpillar Inc.

STATEMENT 4
Changes in Consolidated Shareholders’ Equity for the Years Ended December 31

Commonstock(Dollars in millions)

Balance at December 31, 2017$

Profitemployedin thebusiness

Treasury
stock

5,593

$

(17,005) $Accumulated
othercomprehensive
income (loss)

26,301$

Noncontrollinginterests

Total(1,192) $69$

13,766

Adjustments to adopt new accounting
guidance1
Revenue recognition

—

—

(12)

—

—

(12)

Tax accounting for intra-entity
asset transfers

—

—

(35)

—

—

(35)

Recognition and measurement of financial
assets and liabilities

—

—

11

(11)

—

—

(1,203) $69

Balance at January 1, 2018

$

5,593

$

(17,005) $26,265$

13,719Profit (loss) of consolidated and affiliatedcompanies

—

—

6,147

—

1

6,148

Foreign currency translation, net of tax

—

—

—

(396)

—

(396)

Pension and other postretirement benefits,
net of tax

—

—

—

(34)

—

(34)

Derivative financial instruments, net of tax

—

—

—

(39)

—

(39)

Available-for-sale securities, net of tax

—

—

—

(12)

—

(12)

Change in ownership from noncontrollinginterests

(25)

—

—

—

(28)

(53)

Dividends declared——(1,985)——(1,985)Distribution to noncontrolling interests

—

—

—

—

(1)

(1)

Common shares issued from treasury stock
for stock-based compensation: 5,590,641

41

272

—

—

—

313

Stock-based compensation expense

197

—

—

—

—

197

Common shares repurchased: 27,673,6752—(3,798)———(3,798)21

Other
Balance at December 31, 2018
1
2

$

5,827

—
$

(20,531) $—30,427$

See Note 1J regarding new accounting guidance.
See Note 16 regarding shares repurchased.

See accompanying notes to Consolidated Financial Statements.

54$

2018 FORM 10-K——

(1,684) $

41

21
$

14,080Caterpillar Inc.

STATEMENT 5
Consolidated Statement of Cash Flow for the Years Ended December 31
2018(Millions of dollars)

2017

2016

Cash flow from operating activities:
Profit (loss) of consolidated and affiliated companies

$

6,148

$

759

$

(59)

Adjustments for non-cash items:
2,766

2,877

Actuarial (gain) loss on pension and postretirement benefits

495

301

985

Provision (benefit) for deferred income taxes

220

1,213

(431)

Depreciation and amortization

3,034

—

—

595

1,006

750

859

Receivables – trade and other(1,619)(1,151)

829

Inventories(1,579)(1,295)

1,109

Accounts payable

709

1,478

(200)

Accrued expenses

101

175

(201)

Accrued wages, salaries and employee benefits

(162)

1,187

(708)

Customer advances

(183)

(8)

(41)

Other assets – net

41

(192)

224

Other liabilities – net(1,385)

(388)

(356)

6,558

5,706

5,639

Goodwill impairment charge
Other
Changes in assets and liabilities, net of acquisitions and divestitures:

Net cash provided by (used for) operating activities
Cash flow from investing activities:
Capital expenditures – excluding equipment leased to others(1,276)(898)(1,109)

Expenditures for equipment leased to others(1,640)(1,438)(1,819)

936

1,164

899

Additions to finance receivables(12,183)(11,953)(9,339)Collections of finance receivables

9,369

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

10,901

12,018Proceeds from sale of finance receivables

477

127

127

Investments and acquisitions (net of cash acquired)

(392)

(59)

(191)

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

16

100

—

Proceeds from sale of securities

442

932

694

Investments in securities(506)(1,048)

(391)

13

89

(20)

(3,212)(966)(1,780)(1,951)(1,831)(1,799)

313

566

(23)

(3,798)——Other – net
Net cash provided by (used for) investing activities
Cash flow from financing activities:
Dividends paid
Common stock issued, including treasury shares reissued
Common shares repurchased
Proceeds from debt issued (original maturities greater than three months):- Machinery, Energy & Transportation- Financial Products

57

361

6

8,850

8,702

5,109

Payments on debt (original maturities greater than three months):(7)(1,465)(533)(7,822)(6,923)(6,035)

Short-term borrowings – net (original maturities three months or less)762(3,058)140

Other – net

(54)

(9)

(8)

(3,650)(3,657)(3,143)- Machinery, Energy & Transportation- Financial Products

Net cash provided by (used for) financing activities
Effect of exchange rate changes on cash

(126)

38

(28)

Increase (decrease) in cash and short-term investments and restricted cash

(430)

1,121

688

Cash and short-term investments and restricted cash at beginning of period

8,320

7,199

6,511

Cash and short-term investments and restrictedcash at end of period

$

7,890

$

8,320

$

7,199

All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered tobe cash equivalents.
Non-cash activities: In September 2016, $381 million of medium-term notes with varying interest rates and maturity dates were exchanged for$366 million of 1.93% medium-term notes due in 2021 and $15 million of cash. In addition, a debt exchange premium of $33 million was paid andis included in the operating activities section of the Consolidated Statement of Cash Flow.
See accompanying notes to Consolidated Financial Statements.
2018 FORM 10-K

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and summary of significant accounting policies
A.

Nature of operations

Information in our financial statements and related commentary
are presented in the following categories:
Machinery, Energy & Transportation (ME&T) – Represents
the aggregate total of Construction Industries, Resource
Industries, Energy & Transportation and All Other operating
segments and related corporate items and eliminations.
Financial Products – Primarily includes the company’s
Financial Products Segment. This category includes Caterpillar
Financial Services Corporation (Cat Financial), Caterpillar
Insurance Holdings Inc. (Insurance Services) and theirrespective subsidiaries.
Our products are sold primarily under the brands “Caterpillar,” “CAT,”
design versions of “CAT” and “Caterpillar,” “EMD,” “FG Wilson,”“MaK,” “MWM,” “Perkins,” “Progress Rail,” “SEM” and “Solar
Turbines”.
We conduct operations in our Machinery, Energy & Transportationlines of business under highly competitive conditions, including
intense price competition. We place great emphasis on the highquality and performance of our products and our dealers’ service
support. Although no one competitor is believed to produce allof the same types of equipment that we do, there are numerous
companies, large and small, which compete with us in the sale ofeach of our products.
Our machines are distributed principally through a worldwide
organization of dealers (dealer network), 47 located in the UnitedStates and 121 located outside the United States, serving 193
countries. Reciprocating engines are sold principally through the dealer
network and to other manufacturers for use in products. Some of thereciprocating engines manufactured by our subsidiary Perkins Engines
Company Limited, are also sold through its worldwide network of 90
distributors covering 177 countries. The FG Wilson branded electric
power generation systems primarily manufactured by our subsidiary
Caterpillar Northern Ireland Limited are sold through its worldwide
network of 150 distributors covering 109 countries. Some of the large,
medium speed reciprocating engines are also sold under the MaK
brand through a worldwide network of 20 distributors covering 130
countries. Our dealers do not deal exclusively with our products;
however, in most cases sales and servicing of our products are thedealers’ principal business. Some products, primarily turbines andlocomotives, are sold directly to end customers through sales forces
employed by the company. At times, these employees are assisted
by independent sales representatives.
The Financial Products line of business also conducts operations
under highly competitive conditions. Financing for users of Caterpillar
products is available through a variety of competitive sources,
principally commercial banks and finance and leasing companies. We
offer various financing plans designed to increase the opportunity forsales of our products and generate financing income for our company.
A significant portion of Financial Products activity is conducted in
North America, with additional offices in Latin America, Asia/Pacific,
Europe, Africa and Middle East.

B.

Basis of presentation

The consolidated financial statements include the accounts ofCaterpillar Inc. and its subsidiaries where we have a controlling
financial interest.
Investments in companies where our ownership exceeds
20 percent and we do not have a controlling interest or where56

2018 FORM 10-K

the ownership is less than 20 percent and for which we have asignificant influence are accounted for by the equity method.
We consolidate all variable interest entities (VIEs) where Caterpillar
Inc. is the primary beneficiary. For VIEs, we assess whether we are
the primary beneficiary as prescribed by the accounting guidanceon the consolidation of VIEs. The primary beneficiary of a VIE isthe party that has both the power to direct the activities that mostsignificantly impact the entity’s economic performance and theobligation to absorb losses or the right to receive benefits that
could potentially be significant to the VIE. See Note 21 for further
discussion on a consolidated VIE.
We have affiliates, suppliers and dealers that are VIEs of which
we are not the primary beneficiary. Although we have provided
financial support, we do not have the power to direct the activities
that most significantly impact the economic performance of each
entity. Our maximum exposure to loss from VIEs for which we are
not the primary beneficiary was as follows:
December 31,
Receivables – trade and other

2017

2018

(Millions of dollars)

$

31 $

34

Receivables – finance45

42

Long-term receivables – finance26

38

Investments in unconsolidated affiliatedcompanies

29

39

Guarantees1

—

259

131 $

412

Total
1

$

Related contract was terminated during the first quarter of 2018. No payments weremade under the guarantee.

In addition, Cat Financial has end-user customers that are VIEs
of which we are not the primary beneficiary. Although we haveprovided financial support to these entities and therefore have avariable interest, we do not have the power to direct the activities
that most significantly impact their economic performance. Our
maximum exposure to loss from our involvement with these VIEs
is limited to the credit risk inherently present in the financial support
that we have provided. These risks are evaluated and reflected in
our financial statements as part of our overall portfolio of financereceivables and related allowance for credit losses.
Shipping and handling costs are included in Cost of goods soldin Statement 1. Other operating (income) expenses primarily
include Cat Financial’s depreciation of equipment leased to others,
Insurance Services’ underwriting expenses, (gains) losses on
disposal of long-lived assets, long-lived asset impairment charges,
legal settlements and accruals, contract termination costs andemployee separation charges.
Prepaid expenses and other current assets in Statement 3 primarily
include prepaid rent, prepaid insurance, contract assets, right ofreturn assets, prepaid and refundable income tax, assets held for
sale, core to be returned for remanufacturing, restricted cash andother short-term investments.
Certain amounts for prior years have been reclassified to conformwith the current-year financial statement presentation. See Note 1Jfor more information. In addition, deferred revenue of $233 million
was reclassified from Other current liabilities to Customer advancesin Statement 3 as of December 31, 2017 to conform to the current
period presentation.

C.

Inventories

Inventories are stated at the lower of cost or net realizable value.
Cost is principally determined using the last-in, first-out (LIFO)
method. The value of inventories on the LIFO basis represented
about 65 percent of total inventories at December 31, 2018 and 2017.
If the FIFO (first-in, first-out) method had been in use, inventories
would have been $2,009 million and $1,934 million higher thanreported at December 31, 2018 and 2017, respectively.

D.

Depreciation and amortization

Depreciation of plant and equipment is computed principally using
accelerated methods. Depreciation on equipment leased to others,
primarily for Financial Products, is computed using the straight-line
method over the term of the lease. The depreciable basis is theoriginal cost of the equipment less the estimated residual valueof the equipment at the end of the lease term. In 2018, 2017 and2016, Cat Financial depreciation on equipment leased to others
was $819 million, $810 million and $841 million, respectively, andwas included in Other operating (income) expenses in Statement
1. In 2018, 2017 and 2016, consolidated depreciation expense was$2,435 million, $2,555 million and $2,707 million, respectively.
Amortization of purchased finite-lived intangibles is computed
principally using the straight-line method, generally not to exceed
a period of 20 years.

E.

Foreign currency translation

The functional currency for most of our Machinery, Energy &Transportation consolidated companies is the U.S. dollar. The
functional currency for most of our Financial Products and affiliates
accounted for under the equity method is the respective local
currency. Gains and losses resulting from the remeasurement offoreign currency amounts to the functional currency are included in
Other income (expense) in Statement 1. Gains and losses resulting
from translating assets and liabilities from the functional currency
to U.S. dollars are included in Accumulated other comprehensive
income (loss) in Statement 3.

F.

Derivative financial instruments

Our earnings and cash flow are subject to fluctuations due to changes
in foreign currency exchange rates, interest rates and commodity
prices. Our Risk Management Policy (policy) allows for the use ofderivative financial instruments to prudently manage foreign currency
exchange rate, interest rate and commodity price exposures. Ourpolicy specifies that derivatives are not to be used for speculative
purposes. Derivatives that we use are primarily foreign currency
forward, option and cross currency contracts, interest rate contracts
and commodity forward and option contracts. All derivatives arerecorded at fair value. See Note 4 for more information.

G.

Income taxes

The provision for income taxes is determined using the asset andliability approach taking into account guidance related to uncertain
tax positions. Tax laws require items to be included in tax filingsat different times than the items are reflected in the financial
statements. A current liability is recognized for the estimated taxes
payable for the current year. Deferred taxes represent the future
tax consequences expected to occur when the reported amountsof assets and liabilities are recovered or paid. Deferred taxes areadjusted for enacted changes in tax rates and tax laws. Valuation
allowances are recorded to reduce deferred tax assets when it ismore likely than not that a tax benefit will not be realized.

H.

Goodwill

For acquisitions accounted for as a business combination, goodwill
represents the excess of the cost over the fair value of the net
assets acquired. We are required to test goodwill for impairment, at

the reporting unit level, annually and when events or circumstances
make it more likely than not that an impairment may have occurred.
A reporting unit is an operating segment or one level below an
operating segment (referred to as a component) to which goodwill
is assigned when initially recorded. We assign goodwill to reporting
units based on our integration plans and the expected synergies
resulting from the acquisition. Because Caterpillar is a highly
integrated company, the businesses we acquire are sometimes
combined with or integrated into existing reporting units. Whenchanges occur in the composition of our operating segments orreporting units, goodwill is reassigned to the affected reporting
units based on their relative fair values.
We perform our annual goodwill impairment test as of October 1 andmonitor 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 aqualitative assessment and determine the fair value more likely thannot 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.
Beginning in 2017, if the carrying value is higher than the fair value, thedifference would be recognized as an impairment loss. Prior to 2017, a
two-step process was used. For reporting units where we performed
the two-step process, the first step required us to compare the fairvalue of each reporting unit, which we primarily determined 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 exceeded its carrying value, thegoodwill was not considered impaired. If the carrying value washigher than the fair value, there was an indication that an impairment
may have existed and the second step was required. In step two, theimplied fair value of goodwill was calculated as the excess of the fairvalue of a reporting unit over the fair values assigned to its assets
and liabilities. If the implied fair value of goodwill was less than the
carrying value of the reporting unit’s goodwill, the difference wasrecognized as an impairment loss. See Note 10 for further details.

I.

Estimates in financial statements

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States ofAmerica 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; stock-based compensation andreserves for product liability and insurance losses, postretirement
benefits, post-sale discounts, credit losses and income taxes.

J.

New accounting guidance

Revenue recognition – In May 2014, the Financial AccountingStandards Board (FASB) issued new revenue recognition guidance
to provide a single, comprehensive revenue recognition model for
all contracts with customers. Under the new guidance, an entity
will recognize revenue to depict the transfer of promised goods orservices to customers at an amount that the entity expects to beentitled to in exchange for those goods or services. A five step model
has been introduced for an entity to apply when recognizing revenue.
The new guidance also includes enhanced disclosure requirements.
The guidance was effective January 1, 2018, and was applied tocontracts that were not completed at the date of initial application
on a modified retrospective basis through a cumulative effectadjustment to retained earnings as of January 1, 2018. The prior period
comparative information has not been recasted and continues to bereported under the accounting guidance in effect for those periods.
2018 FORM 10-K

57

Under the new guidance, sales of certain turbine machinery units
changed to a point-in-time recognition model. Under previous
guidance, we accounted for these sales under an over-time model
following the percentage-of-completion method as the product was
manufactured. In addition, under the new guidance we began torecognize an asset for the value of expected replacement part

returns and discontinued lease accounting treatment for certain
product sales containing residual value guarantees.
See Note 2 for additional information.
The cumulative effect of initially applying the new revenue
recognition guidance to our consolidated financial statements on
January 1, 2018 was as follows:

Consolidated Statement of Financial Position
Cumulative Impact
from Adopting New
Revenue Guidance

Balance as ofDecember 31, 2017

(Millions of dollars)

Balance as ofJanuary 1, 2018

Assets
Receivables – trade and other

$

7,436

$

(66)

$

7,370

Prepaid expenses and other current assets

$

1,772

$

327

$

2,099

Inventories$

10,018$4$

10,022

Property, plant and equipment – net$

14,155

$

(190)

$

13,965

Noncurrent deferred and refundable income taxes

$

1,693

$

2

$

1,695

Liabilities
Accrued expenses

$

3,220

$

226

$

3,446

Customer advances

$

1,426

$

46

$

1,472

Other current liabilities

$

1,742

$

(17)

$

1,725

Other liabilities

$

4,053

$

(166)

$

3,887

$

26,301$(12)$

26,289

Shareholders’ equity
Profit employed in the business

The impact from adopting the new revenue recognition guidance on our consolidated financial statements was as follows:

Consolidated Statement of Results of Operations
Year Ended December 31, 2018

Sales of Machinery, Energy & Transportation$

As Reported
51,822$Previous
Accounting
Guidance
51,814

Cost of goods sold$

36,997$37,007$

Other operating (income) expenses

$

1,382

$

1,388

$

(6)

Operating profit

$

8,293

$

8,269

$

24
24

(Millions of dollars)

Impact from
Adopting New
Revenue Guidance
$
8
(10)

Consolidated profit before taxes

$

7,822

$

7,798

$

Provision (benefit) for income taxes

$

1,698

$

1,693

$

5

Profit of consolidated companies

$

6,124

$

6,105

$

19

Profit of consolidated and affiliated companies

$

6,148

$

6,129

$

19

Profit

$

6,147

$

6,128

$

19

Consolidated Statement of Financial Position
December 31, 2018
Previous
Accounting
Guidance

As Reported(Millions of dollars)

Impact from
Adopting New
Revenue Guidance

Assets
Receivables - trade and other

$

8,802

$

8,865

$

(63)

Prepaid expenses and other current assets

$

1,765

$

1,405

$

360

Inventories$

11,529$11,523$

6

Noncurrent deferred and refundable income taxes

$

1,439

$

1,442

$

(3)

Liabilities
Accrued expenses

$

3,573

$

3,341

$

232

Customer advances

$

1,243

$

1,182

$

61

$

30,427$30,420$7

Shareholders’ equity
Profit employed in the business

Simplifying the measurement of inventory – In July 2015, the
FASB issued accounting guidance which requires that inventory
be measured at the lower of cost or net realizable value. Prior
to the issuance of the new guidance, inventory was measured
58

2018 FORM 10-K

at the lower of cost or market. Replacing the concept of market
with the single measurement of net realizable value is intended
to create efficiencies for preparers. Inventory measured using thelast-in, first-out (LIFO) method and the retail inventory method arenot impacted by the new guidance. The guidance was effective
January 1, 2017, and was applied prospectively. The adoption did
not have a material impact on our financial statements.
Recognition and measurement of financial assets and financial
liabilities – In January 2016, the FASB issued accounting guidance
that affects the accounting for equity investments, financial liabilities
accounted for under the fair value option and the presentation anddisclosure requirements for financial instruments. Under the new
guidance, all equity investments in unconsolidated entities (otherthan those accounted for using the equity method of accounting)will generally be measured at fair value through earnings. There will
no longer be an available-for-sale classification for equity securities
with readily determinable fair values. For financial liabilities when
the fair value option has been elected, changes in fair value due to
instrument-specific credit risk will be recognized separately in othercomprehensive income. In addition, the FASB clarified guidance
related to the valuation allowance assessment when recognizing
deferred tax assets resulting from unrealized losses on availablefor-sale debt securities. The guidance was effective January 1,
2018, and was applied on a modified retrospective basis through acumulative effect adjustment to retained earnings as of January 1,
2018. The adoption did not have a material impact on our financial
statements.
Lease accounting – In February 2016, the FASB issued accounting
guidance that revises the accounting for leases. Under the new
guidance, lessees are required to recognize a right-of-use asset
and a lease liability for substantially all leases. The new guidance
will continue to classify leases as either financing or operating,with classification affecting the pattern of expense recognition.
The accounting applied by a lessor under the new guidance will
be substantially equivalent to current lease accounting guidance.
Entities have the option to adopt the new guidance using a modified
retrospective approach through a cumulative effect adjustment toretained earnings applied either to the beginning of the earliest
period presented or the beginning of the period of adoption. The
new guidance was effective January 1, 2019 and will be applied
using a modified retrospective approach through a cumulative effectadjustment to retained earnings as of January 1, 2019.
The new guidance provides a number of optional practical
expedients in transition. We elected the “package of practical
expedients,” which allows us not to reassess under the new
guidance our prior conclusions about lease identification, leaseclassification and initial direct costs. We did not elect the useof-hindsight practical expedient. In addition, the new guidance
provides practical expedients for an entity’s ongoing lessee
accounting. We have elected to not separate lease and non-lease
components for the majority of our asset classes. We have elected
the short-term lease recognition exemption for all leases that qualify
which means we will not recognize right-of-use assets or leaseliabilities for these leases.
The most significant effects of adoption relate to the recognitionof right-of-use assets and lease liabilities on our balance sheet for
operating leases and providing new disclosures about our leasing
activities. We currently expect the right-of-use assets and leaseliabilities as of January 1, 2019 will be approximately $750 million. In
addition, we will derecognize about $135 million of existing assets
and $360 million of debt obligations for a sale-leaseback transactionthat qualifies for sale accounting under the new guidance. The
gain associated with this change in accounting will be recognizedthrough opening retained earnings as of January 1, 2019. We do
not expect the new guidance to have a material impact on our
results of operations.
Stock-based compensation – In March 2016, the FASB issued
accounting guidance to simplify several aspects of the accounting forshare-based payments. The new guidance changes how reporting
entities account for certain aspects of share-based payments,

including the accounting for income taxes and the classificationof the tax impact on the Consolidated Statement of Cash Flow.
Under the new guidance, all excess tax benefits and deficiencies
during the period are recognized in income (rather than equity)
on a prospective basis. The guidance removes the requirement todelay recognition of excess tax benefits until it reduces income
taxes currently payable. This change was required to be applied
on a modified retrospective basis, resulting in a cumulative-effectadjustment to opening retained earnings in the period of adoption.
In addition, Cash flows related to excess tax benefits are now
included in Cash provided by operating activities and will no longer
be separately classified as a financing activity. This change wasadopted retrospectively. The guidance was effective January 1,
2017, and did not have a material impact on our financial statements.
Measurement of credit losses on financial instruments – In June
2016, the FASB issued accounting guidance to introduce a newmodel for recognizing credit losses on financial instruments basedon an estimate of current expected credit losses. The new guidance
will apply to loans, accounts receivable, trade receivables, otherfinancial assets measured at amortized cost, loan commitments
and other off-balance sheet credit exposures. The new guidance will
also apply to debt securities and other financial assets measured
at fair value through other comprehensive income. The new
guidance is effective January 1, 2020, with early adoption permitted
beginning January 1, 2019. We plan to adopt the new guidance
effective January 1, 2020. We are in the process of evaluating theeffect of the new guidance on our financial statements.
Classification for certain cash receipts and cash payments –In August 2016, the FASB issued accounting guidance related tothe presentation and classification of certain transactions in thestatement of cash flows where diversity in practice exists. The
guidance was effective January 1, 2018, and was applied on aretrospective basis. The adoption did not have a material impact on
our financial statements.
Tax accounting for intra-entity asset transfers – In
October 2016, the FASB issued accounting guidance that
requires the recognition of tax expense from the sales of
intra-entity assets in the seller’s tax jurisdiction at the time oftransfer. The new guidance does not apply to intra-entity transfers of
inventory. Under previous guidance, the tax effects of these assets
were deferred until the transferred asset was sold to a third partyor otherwise recovered through use. The guidance was effective
January 1, 2018, and was applied on a modified retrospective basis
through a cumulative effect adjustment to retained earnings as ofJanuary 1, 2018. The adoption did not have a material impact on
our financial statements.
Classification of restricted cash – In November 2016, the FASB
issued accounting guidance related to the presentation andclassification of changes in restricted cash on the statement of cash
flows where diversity in practice exists. The guidance was effective
January 1, 2018, and was applied on a retrospective basis. The
adoption did not have a material impact on our financial statements.
Clarification on the definition of a business – In January 2017,
the FASB issued accounting guidance to clarify the definition of abusiness with the objective of adding guidance to assist entities
with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. The guidance
was effective January 1, 2018, with early adoption permitted. We
adopted the guidance effective January 1, 2017, and the adoption
did not have a material impact on our financial statements.
Simplifying the measurement for goodwill – In January 2017,
the FASB issued guidance to simplify the accounting for goodwill
impairment. The guidance removes Step 2 of the goodwill
impairment test, which requires a hypothetical purchase priceallocation. A goodwill impairment will now be the amount by which2018 FORM 10-K

59

a reporting unit’s carrying value exceeds its fair value, not to exceed
the carrying amount of goodwill. The new guidance will be applied
prospectively and is effective January 1, 2020, with early adoption
permitted beginning January 1, 2017. We adopted the guidance
effective January 1, 2017. The adoption did not have a material
impact on our financial statements.
Presentation of net periodic pension costs and net periodic
postretirement benefit costs – In March 2017, the FASB issued
accounting guidance that requires an employer to disaggregate theservice cost component from the other components of net periodic
benefit cost. Service cost is required to be reported in the same line

item or items as other compensation costs arising from services
rendered by the pertinent employees during the period. The othercomponents of net periodic benefit cost are required to be reported
outside the subtotal for income from operations. Additionally,
only the service cost component of net periodic benefit costs iseligible for capitalization. The guidance was effective January 1,
2018. We applied the presentation changes retrospectively and thecapitalization change prospectively. The adoption primarily resulted
in the reclassification of other components of net periodic benefit
cost outside of Operating profit in the Consolidated Statement ofResults of Operations.

Consolidated Statement of Results of Operations
Year Ended December 31, 2017
Previously
EffectAs Revised
Reportedof Change(Millions of dollars)

Cost of goods sold$

31,260$31,049$211

Selling, general and administrative expenses

$

4,999

$

5,177

$

(178)

Research and development expenses

$

1,842

$

1,905

$

(63)

Other operating (income) expenses

$

2,255

$

2,279

$

(24)

Total operating costs$

41,002$

41,056$(54)

Operating profit

$

4,460

$

4,406

$

54

Other income (expense)

$

153

$

207

$

(54)

Year Ended December 31, 2016
Previously
Reported

As Revised
Cost of goods sold$28,044$28,309$(265)

Selling, general and administrative expenses

$

4,383

$

4,686

$

(303)

Research and development expenses

$

1,853

$

1,951

$

(98)

Other operating (income) expenses

$

1,904

$

1,902

$

2

Total operating costs$

37,375$38,039$(664)

Operating profit

$

1,162

$

498

$

664

Other income (expense)

$

(518)

$

146

$

(664)

Premium amortization on purchased callable debt securities –In March 2017, the FASB issued accounting guidance related
to the amortization period for certain purchased callable debt
securities held at a premium. Securities held at a premium will be
required to be amortized to the earliest call date rather than thematurity date. The new standard was effective January 1, 2019,
and will be applied on a modified retrospective basis through acumulative-effect adjustment to retained earnings as of January
1, 2019. We do not expect the adoption to have a material impact
on our financial statements.
Clarification on stock-based compensation – In May 2017, the
FASB issued accounting guidance to clarify which changes to theterms or conditions of a share-based payment award require an
entity to apply modification accounting. The guidance was effective
January 1, 2018, and was applied prospectively. The adoption did
not have a material impact on our financial statements.
Derivatives and hedging – In August 2017, the FASB issued
accounting guidance to better align hedge accounting with acompany’s risk management activities, simplify the applicationof hedge accounting and improve the disclosures of hedging
arrangements. The new guidance was effective January 1, 2019,
and will be applied using a modified retrospective approach througha cumulative effect adjustment to retained earnings as of January 1,
2019. The impact on our financial statements at the time of adoption
will primarily be reclassification of our gains (losses) for designated
ME&T foreign exchange contracts from Other income (expense) tocomponents of Operating profit in Statement 1. We do not expect
the adoption to have a material impact on our financial statements.
60

Effectof Change

2018 FORM 10-K

Reclassification of certain tax effects from accumulated othercomprehensive income – In February 2018, the FASB issued
accounting guidance to allow a reclassification from accumulated
other comprehensive income to retained earnings for stranded tax
effects resulting from U.S. tax reform legislation. The guidance was
effective January 1, 2019, and we will make the reclassification in
the period of adoption. We do not expect the adoption to have amaterial impact on our financial statements.
Defined benefit plan disclosures – In August 2018, the FASB
issued accounting guidance that revises the annual disclosure
requirements for employers by removing and adding certain
disclosures for these plans. The applicable requirements thatwere removed include the disclosure of the amount of priorservice cost (credit) that will be amortized from Accumulated
other comprehensive income (loss) into net periodic benefit costfor the next fiscal year and the effect of a one-percentage-pointchange in the assumed health care cost trend rates on the service
and interest cost components of other postretirement benefit
cost and on the accumulated postretirement benefit obligations.
The new disclosure requirements include the weighted averageinterest crediting rates for cash balance plans and other plans
with promised interest crediting rates and narrative descriptionof the reasons for significant actuarial gains and losses related
to changes in benefit plan obligations or assets for the period.
The new guidance is required to be applied on a retrospective
basis. The guidance is effective January 1, 2020, with early
adoption permitted. We plan to adopt the new guidance effective
January 1, 2020, and do not expect the adoption to have a material
impact on our financial statements.

2. Sales and revenue recognition
A.

Sales of Machinery, Energy & Transportation

Sales of Machinery, Energy & Transportation are recognizedwhen all the following criteria are satisfied: (i) a contract with anindependently owned and operated dealer or an end user exists
which has commercial substance; (ii) it is probable we will collect
the amount charged to the dealer or end user; and (iii) we havecompleted our performance obligation whereby the dealer or end
user has obtained control of the product. A contract with commercial
substance exists once we receive and accept a purchase order undera dealer sales agreement, or once we enter into a contract with anend user. If collectibility is not probable, the sale is deferred andnot recognized until collection is probable or payment is received.
Control of our products typically transfers when title and risk ofownership of the product has transferred to the dealer or end user.
Typically, where product is produced and sold in the same country,
title and risk of ownership transfer when the product is shipped.
Products that are exported from a country for sale typically transfer
title and risk of ownership at the border of the destination country.
Our remanufacturing operations are primarily focused on theremanufacture of Cat engines and components and rail related
products. In this business, used engines and related components(core) are inspected, cleaned and remanufactured. In connection
with the sale of our remanufactured product to dealers, we collecta deposit that is repaid if the dealer returns an acceptable core
within a specified time period. Caterpillar owns and has title tothe cores when they are returned from dealers. The rebuilt engine
or component (the core plus any new content) is then sold asa remanufactured product to dealers and end users. Revenue isrecognized pursuant to the same transfer of control criteria as
Machinery, Energy & Transportation sales noted above. At thetime of sale, the deposit is recognized in Other current liabilities
in Statement 3, and the core to be returned is recognized as an
asset in Prepaid expenses and other current assets in Statement 3
at the estimated replacement cost (based on historical experience
with usable cores). Upon receipt of an acceptable core, we repay
the deposit and relieve the liability. The returned core asset is thentransferred into inventory. In the event that the deposit is forfeited(i.e., upon failure by the dealer to return an acceptable core in thespecified time period), we recognize the core deposit and the costof the core in Sales and Cost of goods sold, respectively.
We provide discounts to dealers through merchandising programs.
We have numerous programs that are designed to promote thesale of our products. The most common dealer programs provide
a discount when the dealer sells a product to a targeted end user.
Generally, the cost of these discounts is estimated for each product bymodel by geographic region based on historical experience and known
changes in merchandising programs. The cost of these discounts isreported as a reduction to the transaction price when the product saleis recognized. A corresponding post-sale discount reserve is accruedin Statement 3, which represents discounts we expect to pay on
previously sold units. If discounts paid differ from those estimated,the difference is reported as a change in the transaction price.
Except for replacement parts, no right of return exists on the saleof our products. We estimate replacement part returns based on
historical experience and recognize a parts return asset in Prepaid
expenses and other current assets in Statement 3, which represents
our right to recover replacement parts we expect will be returned.
We also recognize a refund liability in Other current liabilities inStatement 3 for the refund we expect to pay for returned parts.
If actual replacement part returns differ from those estimated, thedifference in the estimated replacement part return asset and refund
liability is recognized in Cost of goods sold and Sales, respectively.
Our standard dealer invoice terms are established by marketing
region. Our invoice terms for end user sales are established by the

responsible business unit. Payments from dealers are due shortly
after the time of sale. When a sale is made to a dealer, the dealer is
responsible for payment even if the product is not sold to an end user.
Dealers and end users must make payment within the establishedinvoice terms to avoid potential interest costs. Interest at or above
prevailing market rates may be charged on any past due balance,and generally our practice is to not forgive this interest. In addition,
Cat Financial provides wholesale inventory financing for a dealer’spurchase of inventory. Wholesale inventory receivables have varying
payment terms and are included in Receivables – trade and other andLong-term receivables – trade and other in Statement 3. See Note 7 forfurther information. Trade receivables from dealers and end users were
$7,743 million and $6,399 million as of December 31, 2018 and January
1, 2018, respectively, and are recognized in Receivables – trade andother in Statement 3. Long-term trade receivables from dealers andend users were $674 million and $639 million as of December 31, 2018
and January 1, 2018, respectively, and are recognized in Long-term
receivables – trade and other in Statement 3.
We establish a bad debt allowance for Machinery, Energy &Transportation receivables when it becomes probable that thereceivable will not be collected. Our allowance for bad debts is
not significant.
We invoice in advance of recognizing the sale of certain products.
Advanced customer payments are recognized as a contract liability
in Customer advances and Other liabilities in Statement 3. Long-term
customer advances recognized in Other liabilities in Statement 3 were$437 million and $396 million as of December 31, 2018 and January
1, 2018, respectively. We reduce the contract liability when revenue
is recognized. During 2018, we recognized $1,294 million of revenue
that was recorded as a contract liability at the beginning of 2018.
We have elected the practical expedient to not adjust the amount ofrevenue to be recognized under a contract with a dealer or end user forthe effects of time value of money when the timing difference between
receipt of payment and recognition of revenue is less than one year.
As of December 31, 2018, we have entered into contracts withdealers and end users for which sales have not been recognized
as we have not satisfied our performance obligations andtransferred control of the products. The dollar amount of unsatisfied
performance obligations for contracts with an original duration
greater than one year is $5.8 billion, of which $2.5 billion is expected
to be completed and revenue recognized in the twelve months
following December 31, 2018. We have elected the practical
expedient to not disclose unsatisfied performance obligations withan original contract duration of one year or less. Contracts with an
original duration of one year or less are primarily sales to dealers
for machinery, engines and replacement parts.
Sales and other related taxes are excluded from the transaction
price. Shipping and handling costs associated with outbound freightafter control over a product has transferred are accounted for as afulfillment cost and are included in Cost of goods sold.
We provide a standard manufacturer’s warranty of our products
at no additional cost. At the time a sale is recognized, we record
estimated future warranty costs. See Note 21 for further discussionof our product warranty liabilities.
See Note 23 for further disaggregated sales and revenues
information.

B.

Revenues of Financial Products

Revenues of Financial Products are generated primarily fromfinance revenue on finance receivables and rental payments on
operating leases. Finance revenue is recorded over the life of therelated finance receivable using the interest method, including
the accretion of certain direct origination costs that are deferred.
Revenue from rental payments received on operating leases isrecognized on a straight-line basis over the term of the lease.
2018 FORM 10-K

61

Recognition of finance revenue and rental revenue is suspended
and the account is placed on non-accrual status when management
determines that collection of future income is not probable(generally after 120 days past due). Recognition is resumed, andpreviously suspended income is recognized, when the accountbecomes current and collection of remaining amounts is considered
probable. See Note 7 for more information.
Revenues are presented net of sales and other related taxes.

3. Stock-Based Compensation
Our stock-based compensation plans primarily provide for the
granting of stock options, stock-settled stock appreciation rights(SARs), restricted stock units (RSUs) and performance-based
restricted stock units (PRSUs) to Officers and other key employees,
as well as non-employee Directors. Stock options permit a holder
to buy Caterpillar stock at the stock’s price when the option was
granted. SARs permit a holder the right to receive the value inshares of the appreciation in Caterpillar stock that occurred fromthe date the right was granted up to the date of exercise. RSUs
are agreements to issue shares of Caterpillar stock at the timeof vesting. PRSUs are similar to RSUs and include performance
conditions in the vesting terms of the award.
Our long-standing practices and policies specify that all stockbased compensation awards are approved by the Compensation
Committee (the Committee) of the Board of Directors. The award
approval process specifies the grant date, value and terms of theaward. The same terms and conditions are consistently applied toall employee grants, including Officers. The Committee approves all
individual Officer grants. The number of stock-based compensation
award units included in an individual’s award is determined basedon the methodology approved by the Committee. The exercise
price methodology approved by the Committee is the closing priceof the Company stock on the date of the grant. In June of 2014,
shareholders approved the Caterpillar Inc. 2014 Long-Term Incentive
Plan (the Plan) under which all new stock-based compensation
awards are granted. In June of 2017, the Plan was amended
and restated. The Plan initially provided that up to 38,800,000
Common Shares would be reserved for future issuance under thePlan, subject to adjustment in certain events. Subsequent to theshareholder approval of the amendment and restatement of thePlan, an additional 36,000,000 Common Shares became available
for all awards under the Plan.
Common stock issued from Treasury stock under the plans totaled
5,590,641 for 2018, 11,139,748 for 2017 and 4,164,134 for 2016.
The total number of shares authorized for equity awards under theamended and restated Caterpillar Inc. 2014 Long-Term Incentive
Plan is 74,800,000, of which 44,139,162 shares remained available
for issuance as of December 31, 2018.
Stock option and RSU awards generally vest according to a threeyear graded vesting schedule. One-third of the award will become
vested on the first anniversary of the grant date, one-third of theaward will become vested on the second anniversary of the grant
date and one-third of the award will become vested on the third
anniversary of the grant date. PRSU awards generally have a threeyear performance period and cliff vest at the end of the period
based upon achievement of performance targets established at
the time of grant.

Upon separation from service, if the participant is 55 years ofage or older with more than five years of service, the participant
meets the criteria for a “Long Service Separation.” Award terms
for awards granted in 2016 allow for immediate vesting upon
separation of all outstanding options and RSUs with no requisite
service period for employees who meet the criteria for a “Long
Service Separation.” Compensation expense for the 2016 grant
was fully recognized immediately on the grant date for these
employees. Award terms for the 2018 and 2017 grants allow
for continued vesting as of each vesting date specified in theaward document for employees who meet the criteria for a “Long
Service Separation” and fulfill a requisite service period of six
months. Compensation expense for eligible employees for the2018 and 2017 grants was recognized over the period from the
grant date to the end date of the six-month requisite service
period. For employees who become eligible for a “Long Service
Separation” subsequent to the end date of the six-month requisite
service period and prior to the completion of the vesting period,
compensation expense is recognized over the period from the
grant date to the date eligibility is achieved.
At grant, SARs and option awards have a term life of ten years. Forawards granted prior to 2016, if the “Long Service Separation” criteria
are met, the vested options/SARs have a life that is the lesser of ten
years from the original grant date or five years from the separation
date. For awards granted in 2018, 2017, and 2016, the vested options
have a life equal to ten years from the original grant date.
Prior to 2017, all outstanding PRSU awards granted to employees
eligible for a “Long Service Separation” may vest at the end of theperformance period based upon achievement of the performancetarget. Compensation expense for the 2016 PRSU grant was fullyrecognized immediately on the grant date for these employees. For
PRSU awards granted in 2018 and 2017, only a prorated number ofshares may vest at the end of the performance period based uponachievement of the performance target, with the proration based
upon the number of months of continuous employment during thethree-year performance period. Employees with a “Long Service
Separation” must also fulfill a six-month requisite service period inorder to be eligible for the prorated vesting of outstanding PRSU
awards granted in 2018 and 2017. Compensation expense for the2018 and 2017 PRSU grants is being recognized on a straight-line
basis over the three-year performance period for all participants.
Accounting guidance on share-based payments requires companies
to estimate the fair value of options/SARs on the date of grant using
an option-pricing model. The fair value of our option/SAR grants wasestimated using a lattice-based option-pricing model. The latticebased option-pricing model considers a range of assumptions
related to volatility, risk-free interest rate and historical employee
behavior. Expected volatility was based on historical Caterpillar stock
price movement and current implied volatilities from traded options
on Caterpillar stock. The risk-free interest rate was based on U.S.
Treasury security yields at the time of grant. The weighted-average
dividend yield was based on historical information. The expected
life was determined from the lattice-based model. The latticebased model incorporated exercise and post vesting forfeitureassumptions based on analysis of historical data. The following
table provides the assumptions used in determining the fair valueof the Option/SAR awards for the years ended December 31, 2018,2017 and 2016, respectively.
Grant Year2018

Range of risk-free interest rates

2.7%
30.2%
21.5-33.0%
2.02-2.87%

Weighted-average expected lives

8 years

Weighted-average dividend yield
Weighted-average volatility
Range of volatilities

622018 FORM 10-K

2017

2016
3.4%

3.2%

29.2%

31.1%

22.1-33.0%

22.5-33.4%

0.81-2.35%

0.62-1.73%

8 years

8 years

Beginning with the 2018 grant, RSU and PRSU awards are
credited with dividend equivalent units on each date that a cash
dividend is paid to holders of Common Stock. The fair value of
the RSU and PRSU awards granted in 2018 was determinedas the closing stock price on the date of the grant. Prior to2018, RSU and PRSU awards were not credited with dividend
equivalent units and the fair value was determined by reducing

the stock price on the date of the grant by the present valueof the estimated dividends to be paid during the vesting period. The
estimated dividends were based on Caterpillar’s quarterly divided
per share at the time of the grant.
Please refer to Tables I and II below for additional information on
our stock-based compensation awards.

TABLE I—Financial Information Related to Stock-based Compensation
Stock options / SARs

RSUs

PRSUs

Shares

WeightedAverage
Grant Date
Fair Value

Outstanding at January 1, 2018

21,499,895

$

86.86

1,964,517

$

80.04

1,006,991

$

74.06

Granted to officers and key employees1

1,605,220$

150.85

734,732$150.58350,724$150.98Exercised(5,156,489)

$

87.90

—

$

—

—

$

—

—

$

—

(1,065,853)

$

78.11

(549,330)$

127.07(106,957)$

151.13(67,326)$113.29(73,086)$

100.30

Outstanding at December 31, 2018

17,841,669

$

91.93

1,566,070$

112.99735,299$

115.18Exercisable at December 31, 201813,858,401

$

86.05

Shares

VestedForfeited/expired

WeightedAverage
Exercise
Price

Shares

WeightedAverage
Grant Date
Fair Value

Stock options/SARs outstanding and exercisable as of December 31, 2018:
Outstanding

Exercisable

SharesOutstandingat 12/31/18

WeightedAverage
Remaining
Contractual
Life (Years)$22.17–57.85

973,032

1.04$

53.08 $

72

973,0320.96$

53.08 $

72

$74.77–89.75

8,954,712

6.27

$

81.25

410

8,186,590

6.17

$

81.86

370

$95.66–96.31

4,573,457

6.90

$

95.96

142

2,856,943

6.06

$

96.13

88

$102.13–110.09

1,840,740

2.75$

106.3838

1,840,740

2.75$

106.3838$138.51–151.12

1,499,728

9.32$

150.84

—

1,096

9.30

$

151.12—$91.93 $

662

13,858,401$

86.05 $

568

Exercise Prices

17,841,669
1
2

WeightedAverage
Exercise
Price

Aggregate
Intrinsic
Value2

SharesOutstanding at
12/31/18

WeightedAverage
Remaining
Contractual
Life (Years)

WeightedAverage
Exercise Price

Aggregate
Intrinsic Value2

No SARs were granted during the year ended December 31, 2018.
The difference between a stock award’s exercise price and the underlying stock’s closing market price at December 31, 2018, for awards with market price greater than the exercise
price. Amounts are in millions of dollars.

The computations of weighted-average exercise prices and aggregate intrinsic values are not applicable to RSUs or PRSUs since theseawards represent an agreement to issue shares of stock at the time of vesting. At December 31, 2018, there were 1,566,070 outstanding
RSUs with a weighted average remaining contractual life of 1.4 years and 735,299 outstanding PRSUs with a weighted-average remaining
contractual life of 1.5 years.

TABLE II—Additional Stock-based Award Information
2017

2018

(Dollars in millions except per share data)

2016

Stock options/SARs activity:
Weighted-average fair value per share of stock awards granted

$

46.09

$

25.01

$

Intrinsic value of stock awards exercised

$

348

$

504

$

185

Fair value of stock awards vested1

$

86

$

191

$

163

Cash received from stock awards exercised

$

370

$

629

$

30

Weighted-average fair value per share of stock awards granted$

150.58

$

90.11

$

68.04

Fair value of stock awards vested2

$

180

$

189

$

162

Weighted-average fair value per share of stock awards granted$

150.98

$

86.78

$

64.71

Fair value of stock awards vested

$

70

$

20

$

—

20.64

RSUs activity:

PRSUs activity:2

1
2

Based on the grant date fair value.
Based on the underlying stock’s closing market price on the vesting date.

In accordance with guidance on share-based payments, stockbased compensation expense is based on the grant date fairvalue and is classified within Cost of goods sold, Selling, generaland administrative expenses and Research and development

expenses corresponding to the same line item as the cash
compensation paid to respective employees, officers and nonemployee directors. Stock-based compensation expense isrecognized on a straight-line basis over the requisite service
2018 FORM 10-K

63

period for awards with terms that specify cliff or gradedvesting and contain only ser vice conditions. Stock-based
compensation expense for PRSUs is based on the probable numberof shares expected to vest and is recognized primarily on a straightline basis.
Before tax, stock-based compensation expense for 2018, 2017 and2016 was $197 million, $206 million and $218 million, respectively,
with a corresponding income tax benefit of $36 million, $40 million
and $61 million, respectively.
The amount of stock-based compensation expense capitalized forthe years ended December 31, 2018, 2017 and 2016 did not havea significant impact on our financial statements.
At December 31, 2018, there was $180 million of total unrecognizedcompensation cost from stock-based compensation arrangements
granted under the plans, which is related to non-vested stock-based
awards. The compensation expense is expected to be recognizedover a weighted-average period of approximately 1.8 years.
We currently use shares in treasury stock to satisfy share award
exercises.
The cash tax benefits realized from stock awards exercised for 2018,2017 and 2016 were $103 million, $205 million and $104 million,
respectively. We use the direct only method and tax law ordering
approach to calculate the tax effects of stock-based compensation.

4. Derivative financial instruments and risk management
Our earnings and cash flow are subject to fluctuations due tochanges in foreign currency exchange rates, interest rates andcommodity prices. Our Risk Management Policy (policy) allows
for the use of derivative financial instruments to prudently manage
foreign currency exchange rate, interest rate and commodity priceexposures. Our policy specifies that derivatives are not to be used for
speculative purposes. Derivatives that we use are primarily foreign
currency forward, option and cross currency contracts, interest
rate contracts and commodity forward and option contracts. Ourderivative activities are subject to the management, direction andcontrol of our senior financial officers. Risk management practices,
including the use of financial derivative instruments, are presented
to the Audit Committee of the Board of Directors at least annually.
All derivatives are recognized in Statement 3 at their fair value.
On the date the derivative contract is entered into, we designate
the derivative as (1) a hedge of the fair value of a recognizedasset or liability (fair value hedge), (2) a hedge of a forecasted
transaction or the variability of cash flow (cash flow hedge) or (3) an
undesignated instrument. Changes in the fair value of a derivativethat is qualified, designated and highly effective as a fair value
hedge, along with the gain or loss on the hedged recognized asset
or liability that is attributable to the hedged risk, are recorded incurrent earnings. Changes in the fair value of a derivative that isqualified, designated and highly effective as a cash flow hedge
are recorded in Accumulated other comprehensive income (loss)(AOCI), to the extent effective, in Statement 3 until they arereclassified to earnings in the same period or periods during which
the hedged transaction affects earnings. Changes in the fair value of
undesignated derivative instruments and the ineffective portion ofdesignated derivative instruments are reported in current earnings.
Cash flows from designated derivative financial instruments areclassified within the same category as the item being hedged on
Statement 5. Cash flows from undesignated derivative financial
instruments are included in the investing category on Statement 5.
We formally document all relationships between hedging
instruments and hedged items, as well as the risk-management
objective and strategy for undertaking various hedge transactions.
This process includes linking all derivatives that are designated asfair value hedges to specific assets and liabilities in Statement 3
642018 FORM 10-K

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

A.

Foreign currency exchange rate risk

Foreign currency exchange rate movements create a degree of risk
by affecting the U.S. dollar value of sales made and costs incurred inforeign currencies. Movements in foreign currency rates also affectour competitive position as these changes may affect businesspractices and/or pricing strategies of non-U.S.-based competitors.
Additionally, we have balance sheet positions denominated inforeign currencies, thereby creating exposure to movements in
exchange rates.
Our Machinery, Energy & Transportation operations purchase,manufacture and sell products in many locations around the world.
As we have a diversified revenue and cost base, we manage our
future foreign currency cash flow exposure on a net basis. We
use foreign currency forward and option contracts to manage
unmatched foreign currency cash inflow and outflow. Our objective
is to minimize the risk of exchange rate movements that would
reduce the U.S. dollar value of our foreign currency cash flow. Ourpolicy allows for managing anticipated foreign currency cash flow
for up to five years. As of December 31, 2018, the maximum termof these outstanding contracts was approximately 51 months.
We generally designate as cash flow hedges at inception of thecontract any Australian dollar, Brazilian real, British pound, Canadiandollar, Chinese yuan, Indian rupee, Japanese yen, Mexican peso,
Singapore dollar or Thailand baht forward or option contracts thatmeet the requirements for hedge accounting and the maturity
extends beyond the current quarter-end. Designation is performed
on a specific exposure basis to support hedge accounting. The
remainder of Machinery, Energy & Transportation foreign currency
contracts are undesignated.
As of December 31, 2018, $8 million of deferred net losses, netof tax, included in equity (AOCI in Statement 3), are expected tobe reclassified to current earnings (Other income (expense) inStatement 1) over the next twelve months when earnings areaffected by the hedged transactions. The actual amount recorded
in Other income (expense) will vary based on exchange rates at
the time the hedged transactions impact earnings.
In managing foreign currency risk for our Financial Products
operations, our objective is to minimize earnings volatility resulting
from conversion and the remeasurement of net foreign currency
balance sheet positions, and future transactions denominated inforeign currencies. Our policy allows the use of foreign currency
forward, option and cross currency contracts to offset the risk ofcurrency mismatch between our assets and liabilities, and exchange
rate risk associated with future transactions denominated in foreign
currencies. Our foreign currency forward and option contracts areprimarily undesignated. We designate fixed-to-fixed cross currency
contracts as cash flow hedges to protect against movements in
exchange rates on foreign currency fixed rate assets and liabilities.

B.

Interest rate risk

Interest rate movements create a degree of risk by affecting theamount of our interest payments and the value of our fixed-rate
debt. Our practice is to use interest rate contracts to manage our
exposure to interest rate changes.

Our Machinery, Energy & Transportation operations generally use
fixed-rate debt as a source of funding. Our objective is to minimize
the cost of borrowed funds. Our policy allows us to enter into fixedto-floating interest rate contracts and forward rate agreements tomeet that objective. We designate fixed-to-floating interest rate
contracts as fair value hedges at inception of the contract, and wedesignate certain forward rate agreements as cash flow hedges
at inception of the contract.

We have, at certain times, liquidated fixed-to-floating and floatingto-fixed interest rate contracts at both Machinery, Energy &Transportation and Financial Products. The gains or losses
associated with these contracts at the time of liquidation areamortized into earnings over the original term of the previously
designated hedged item.

Financial Products operations has a match-funding policy that
addresses interest rate risk by aligning the interest rate profile (fixed
or floating rate) of Cat Financial’s debt portfolio with the interest rate
profile of their receivables portfolio within predetermined ranges on
an ongoing basis. In connection with that policy, we use interest rate
derivative instruments to modify the debt structure to match assets
within the receivables portfolio. This matched funding reduces thevolatility of margins between interest-bearing assets and interestbearing liabilities, regardless of which direction interest rates move.

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

Our policy allows us to use fixed-to-floating, floating-to-fixed andfloating-to-floating interest rate contracts to meet the match-funding
objective. We designate fixed-to-floating interest rate contracts asfair value hedges to protect debt against changes in fair value due
to changes in the benchmark interest rate. We designate most
floating-to-fixed interest rate contracts as cash flow hedges toprotect against the variability of cash flows due to changes in thebenchmark interest rate.

C.

Commodity price risk

Our Machinery, Energy & Transportation operations purchase baseand precious metals embedded in the components we purchasefrom suppliers. Our suppliers pass on to us price changes in thecommodity portion of the component cost. In addition, we aresubject to price changes on energy products such as natural gas
and diesel fuel purchased for operational use.
Our objective is to minimize volatility in the price of thesecommodities. Our policy allows us to enter into commodity forward
and option contracts to lock in the purchase price of a portion ofthese commodities within a five-year horizon. All such commodity
forward and option contracts are undesignated.

The location and fair value of derivative instruments reported in Statement 3 are as follows:
Consolidated
Statement of Financial Position Location

Asset (Liability) Fair ValueYears ended December 31,
2017

2018

(Millions of dollars)

Designated derivatives
Foreign exchange contracts
Machinery, Energy & Transportation

Receivables — trade and other

$

16

$

8

Machinery, Energy & Transportation

Long-term receivables — trade and other—4

Machinery, Energy & Transportation

Accrued expenses

(26)

(14)

Machinery, Energy & Transportation

Other liabilities

(9)

(2)

Financial ProductsReceivables — trade and other53—

Financial Products

Long-term receivables — trade and other35

7

Financial Products

Accrued expenses

(9)

(57)

Financial ProductsReceivables — trade and other1—

Financial Products

Long-term receivables — trade and other

Financial Products

Accrued expenses

Interest rate contracts

$

3

3

(40)

(2)

24

$

(53)

2

$

19

Undesignated derivatives
Foreign exchange contracts$

Machinery, Energy & Transportation

Receivables — trade and otherMachinery, Energy & Transportation

Accrued expenses

(21)

(9)

Financial ProductsReceivables — trade and other15

12

Financial Products

Long-term receivables — trade and other

5—

Financial Products

Accrued expenses

(14)

(9)

1

21

Commodity contracts
Machinery, Energy & Transportation

Receivables — trade and otherMachinery, Energy & Transportation

Accrued expenses
$

(31)

—

(43) $

34

2018 FORM 10-K

65

The total notional amounts of the derivative instruments are as follows:
Years ended December 31,
2017

2018

(Millions of dollars)

Machinery, Energy & Transportation

$

1,834

$

3,190

Financial Products$

10,210$3,691

The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties. The amounts exchangedby the parties are calculated by reference to the notional amounts and by other terms of the derivatives, such as foreign currency exchange
rates, interest rates or commodity prices.
The effect of derivatives designated as hedging instruments on Statement 1 is as follows:

Cash Flow Hedges
Year ended December 31, 2018
Recognized in Earnings
Amount ofGains (Losses)
Recognized in
AOCI (Effective
Portion)(Millions of dollars)

Amountof Gains(Losses)
Reclassified
from AOCI to
Earnings

Classification of
Gains (Losses)

Recognizedin Earnings(Ineffective
Portion)Foreign exchange contracts(47)

Other income (expense)(33) $—

Financial Products

165

Other income (expense)

148—

Financial Products—Interest expense of Financial Products

19—

Machinery, Energy & Transportation—

Interest expense excluding Financial Products(3)—

Financial Products(38)Interest expense of Financial Products—

Machinery, Energy & Transportation$$

Interest rate contracts

$

80

$

131

—
$

—

Year ended December 31, 2017
Recognized in Earnings
Amount ofGains (Losses)
Recognized in
AOCI (Effective
Portion)Amount ofGains (Losses)
Reclassified
from AOCI to
Earnings

Classification of
Gains (Losses)

Recognizedin Earnings(Ineffective
Portion)Foreign exchange contracts
72

Other income (expense)

Financial Products(77)

Other income (expense)

Financial Products—Interest expense of Financial Products

Machinery, Energy & Transportation—

Financial Products—

Machinery, Energy & Transportation$$(40) $

—

(81)

—

6

—

Interest expense excluding Financial Products(9)—Interest expense of Financial Products

3—(121) $—

Interest rate contracts

$

(5)

$
Year ended December 31, 2016
Recognized in Earnings

Amount ofGains (Losses)
Recognized in
AOCI (Effective
Portion)Amount ofGains (Losses)
Reclassified
from AOCI to
Earnings

Classification of
Gains (Losses)

Recognizedin Earnings(Ineffective
Portion)Foreign exchange contracts
Machinery, Energy & Transportation$

Financial Products(118)

Other income (expense)(14) $—

15

Other income (expense)

$

28

—

—

Interest expense excluding Financial Products

(6)

—

8

Interest expense of Financial ProductsInterest rate contracts
Machinery, Energy & Transportation
Financial Products$

662018 FORM 10-K

(95)

(3)
$

5

—
$

—

The effect of derivatives not designated as hedging instruments on Statement 1 is as follows:
Years ended December 31,
Classification of Gains (Losses)(Millions of dollars)

2017

2018

2016

Foreign exchange contracts
Machinery, Energy & Transportation

Other income (expense)(54) $

72

Financial Products

Other income (expense)

$

19

9

(24)

Other income (expense)

—

—

2

Other income (expense)

(39)

30

16

(74) $

111

$

(4)

Interest rate contracts
Machinery, Energy & Transportation
Commodity contracts
Machinery, Energy & Transportation$

We enter into International Swaps and Derivatives Association(ISDA) master netting agreements within Machinery, Energy &Transportation and Financial Products that permit the net settlementof amounts owed under their respective derivative contracts. Under
these master netting agreements, net settlement generally permits
the company or the counterparty to determine the net amountpayable for contracts due on the same date and in the same
currency for similar types of derivative transactions. The master

$

(10)

netting agreements generally also provide for net settlement of all
outstanding contracts with a counterparty in the case of an eventof default or a termination event.
Collateral is generally not required of the counterparties or of
our company under the master netting agreements. As of
December 31, 2018 and 2017, no cash collateral was received orpledged under the master netting agreements.

The effect of the net settlement provisions of the master netting agreements on our derivative balances upon an event of default or
termination event is as follows:

December 31, 2018

(Millions of dollars)

Net Amountof Assets
Presented
in theStatementof Financial
Position

Gross
Amounts
Offset in theStatementof Financial
Position

Gross Amountof Recognized
AssetsGross Amounts Not Offset in theStatement of Financial Position
Cash
Financial
Collateral
Instruments
Received

Net Amountof Assets

Derivatives
Machinery, Energy & Transportation

$

19

$

131

—

$

—

112

Financial Products
Total

$

$

19

$

131

—

$

(19) $(34)—$(53) $

—

112

—

$

—

$

78

78

December 31, 2018

(Millions of dollars)

Gross Amountof RecognizedLiabilities

Net Amountof Liabilities
Presented
in theStatementof Financial
Position

Gross Amounts
Offset in theStatementof Financial
Position

Gross Amounts Not Offset in theStatement of Financial Position
Financial
Cash Collateral
Instruments
PledgedNet Amountof Liabilities

Derivatives
Machinery, Energy & Transportation$

Financial Products
Total

$

(87) $—(63)—(150) $—$$

(87) $

19

(63)

34

(150) $

53

$

—

$

(68)

$

(97)

—
$

—

(29)

December 31, 2017

(Millions of dollars)

Gross Amountof Recognized
AssetsGross Amounts
Offset in theStatementof Financial
Position

$

52

$

—

$

74

$

—

Net Amountof Assets
Presented
in theStatementof Financial
Position

Derivatives
Machinery, Energy & Transportation

22

Financial Products
Total

$

52

$

74

—

Gross Amounts Not Offset in theStatement of Financial Position
Financial
Instruments

Cash Collateral
Received$(22) $(10)—$(32) $—

22—

Net Amountof Assets
$

30

$

42

12

2018 FORM 10-K

67

December 31, 2017

Gross Amountof RecognizedLiabilities(Millions of dollars)

Net Amountof Liabilities
Presented
in theStatementof Financial
Position

Gross
Amounts
Offset in theStatementof Financial
Position

Gross Amounts Not Offset in theStatement of Financial Position
Financial
Instruments

Cash Collateral
PledgedNet Amountof Liabilities

Derivatives
Machinery, Energy & Transportation$

Financial Products
$

Total

(25) $—(68)—(93) $—$$(25) $

22

(68)

10

(93) $

32

$

—

$

(3)

—
$

—

(58)
$

(61)

5. Other income (expense)
Years ended December 31,
2017

2018

(Millions of dollars)

Investment and interest income
Foreign exchange gains (losses)

$

195

1

License fee income
Gains (losses) on sale of securities and affiliated companies

$

2016
122

$

74

(201)

(213)

(57)

125

100

92

4

187

2

47

(54)

(664)

Net periodic pension and OPEB income (cost), excluding service cost

(118)

Gains (losses) on equity securities measured at fair value3

(33)

—

—

Miscellaneous income (loss)

(39)

11

(10)

(67) $

153

$

Total
1
2
3

$

(518)

Includes gains (losses) from foreign exchange derivative contracts. See Note 4 for further details.
Includes pretax gain of $85 million related to the sale of Caterpillar’s equity interest in Iron Planet Holdings Inc.
Beginning January 1, 2018, the unrealized gains and losses arising from the revaluation of equity securities are included in Other income (expense) in Statement 1. See Note 1J for
additional information.

6. Income taxes

Reconciliation of the U.S. federal statutory rate to effective rate:Years ended December 31,
2017

2018

(Millions of dollars)

$

1,643

21.0%

Non-U.S. subsidiaries taxed at other than the U.S. rate

282

State and local taxes, net of federal

22

Taxes at U.S. statutory rate

$

2016

1,429

35.0%

3.6%

(282)

0.3%

27

$

49

35.0%

(6.9)%(119)(85.6)%

0.7%(1)(0.7)%(Decreases) increases resulting from:
1

33

0.4%

28

0.7%

24

17.2%

U.S. tax incentives(106)(1.3)%(52)(1.3)%(52)(37.4)%ESOP dividend tax benefit(12)(0.2)%(21)(0.5)%(27)(19.4)%Net excess tax benefits from stock-based compensation(56)(0.7)%(64)(1.6)%——%

U.S. deferred tax rate changeInterest and penalties, net of tax(154)(2.0)%

596

14.6%

—

—%

Mandatory deemed repatriation of non-U.S. earnings

50

0.7%

1,775

43.5%

—

—%

Valuation allowances(29)(0.4)%(111)(2.7)%

141

101.4%

Nondeductible goodwill2

—

—%

—

—%

191

137.4%

Other—net

Provision (benefit) for income taxes
1
2

68

$

25

0.3%

1,698

21.7%

$

14

0.3%

3,339

81.8%

Excludes amounts included in valuation allowances and mandatory deemed repatriation of non-U.S. earnings.
Portion of Surface Mining & Technology goodwill impairment not deductible for tax purposes. See Note 10 for further discussion.

2018 FORM 10-K

$

(14)

(10.1)%

192

137.8%

Included in the line item above labeled “Non-U.S. subsidiaries taxed
at other than the U.S. rate” are the effects of local and U.S. taxes
related to earnings of non-U.S. subsidiaries, changes in the amountof unrecognized tax benefits associated with these earnings, losses
at non-U.S. subsidiaries without local tax benefits due to valuation
allowances, and other permanent differences between tax and U.S.
GAAP results. Although not individually significant by jurisdiction,
pre-tax permanent differences due to nondeductible net foreignexchange gains/losses of non-U.S. subsidiaries were approximately$180 million of net losses in 2018, $160 million of net gains in 2017,and $130 million of net losses in 2016.
Included in the line item above labeled “Valuation Allowances”
for 2018 is a decrease in the valuation allowance for U.S. statedeferred tax assets resulting in a $63 million non-cash benefit,
net of federal deferred tax adjustment at 21 percent, along witha decrease in the valuation allowance for a non-U.S. subsidiaryof $25 million. The primar y driver of the decrease in the
U.S. state valuation allowance was improved U.S. GAAP profits
expected to recur in certain state jurisdictions. This compares toa decrease of $111 million in 2017 and an increase of $141 million
in 2016 to the provision for income taxes related to changes inthe valuation allowance for U.S. state deferred tax assets, net offederal deferred tax adjustment at 35 percent. Also included wasa charge of $59 million to correct for an error which resulted in anunderstatement 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 the years ended December 31,
2017 and 2016, respectively. Management has concluded that theerror was not material to any period presented.
We have completed our accounting for the income tax effectsof U.S. tax reform legislation and included measurement period
adjustments in 2018 of $104 million to reduce the provisionallyestimated charge of $2.371 billion recognized during the fourth
quarter of 2017. A $154 million benefit revised the estimated impactof 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 the2017 U.S. tax return. A $50 million charge revised the estimatedcost of a mandatory deemed repatriation of non-U.S. earnings,
including changes in the deferred tax liability related to the amountof earnings considered not indefinitely reinvested as well as theamount of unrecognized tax benefits and state tax liabilities
associated with these tax positions.
The impacts of U.S. tax reform on the financial statements
were based on enacted law and related guidance received asof December 31, 2018. On January 15, 2019, the U.S. Treasury
issued final regulations providing additional guidance related tothe calculation of the mandator y deemed repatriation of
non-U.S. earnings. We are currently evaluating the impact of theseregulations and will recognize any resulting adjustments in the firstquarter of 2019.
As a result of U.S. tax reform legislation, distributions of profits
from non-U.S. subsidiaries are not expected to cause a significant
incremental U.S. tax impact in the future. However, these
distributions may be subject to non-U.S. withholding taxes if
profits are distributed from certain jurisdictions. Undistributed
profits of non-U.S. subsidiaries of approximately $14 billion are
considered indefinitely reinvested. Determination of the amount of
unrecognized deferred tax liability related to indefinitely reinvested
profits is not feasible primarily due to our legal entity structure andthe complexity of U.S. and local tax laws.

The components of profit (loss) before taxes were:Years ended December 31,
U.S.

2017

2018

(Millions of dollars)

$

2,131

$

5,691

Non-U.S.
$

7,822

2016
240

$

(2,053)

3,842
$

4,082

2,192
$

139

Profit before taxes, as shown above, is based on the location of the entity to which such earnings are attributable. Where an entity’s
earnings are subject to taxation, however, may not correlate solely to where an entity is located. Thus, the income tax provision shown
below as U.S. or non-U.S. may not correspond to the earnings shown above.

The components of the provision (benefit) for income taxes were:Years ended December 31,
2017

2018

(Millions of dollars)

2016

Current tax provision (benefit):
U.S.1

$

Non-U.S.
State (U.S.)

179

$

963

$

(90)

1,291

1,124

718

8

39

(5)

1,478

2,126

623

Deferred tax provision (benefit):
298

1,385

(544)

Non-U.S.

4

(17)

(108)

State (U.S.)

(82)

(155)

221

U.S.1

220
Total provision (benefit) for income taxes
1

$

1,698

1,213
$

3,339

(431)
$

192

Includes U.S. taxes related to non-U.S. earnings. We account for U.S. taxes on global intangible low-taxed income as a period cost.

2018 FORM 10-K

69

We paid net income tax and related interest of $1,429 million,$1,404 million and $522 million in 2018, 2017 and 2016, respectively.
Accounting for income taxes under U.S. GAAP requires that
individual tax-paying entities of the company offset all deferred
tax liabilities and assets within each particular tax jurisdiction

and present them as a noncurrent deferred tax liability or asset
in the Consolidated Financial Position. Amounts in different tax
jurisdictions cannot be offset against each other. The amount ofdeferred income taxes at December 31, included on the following
lines in Statement 3, are as follows:

December 31,
2017

2018

(Millions of dollars)

Assets:$Noncurrent deferred and refundable income taxes

1,363

$

1,569

Liabilities:
331

Other liabilities$

Deferred income taxes—net

281

1,032

$

1,288

Deferred income tax assets and liabilities:
December 31,
2017

2018

(Millions of dollars)

Deferred income tax assets:$

Tax carryforwards

1,312

$

1,286

Pension

785

980

Postemployment benefits other than pensions

793

841

Warranty reserves

237

226

Stock-based compensation

121

135

Allowance for credit losses

155

149

Post sale discounts

158

160

Other employee compensation and benefits

186

203

Other—net

298

302

4,045

4,282

Deferred income tax liabilities:(1,381)(1,360)Bond discount

(127)

(133)

Translation

(190)

(165)

Other outside basis differences

(271)

(205)

Capital and intangible assets

Undistributed profits of non-U.S. subsidiaries

(129)

(138)

(2,098)(2,001)(915)

Valuation allowance for deferred tax assets$

Deferred income taxes—net

At December 31, 2018, approximately $1,804 million of U.S.
state tax net operating losses (NOLs) and $134 million of U.S.
state tax credit carryforwards were available. The state NOLs
primarily expire over the next twenty years. The state tax credit
carryforwards primarily expire over the next fifteen years. In total,
we have established a valuation allowance of $192 million related
to certain of these carryforwards.

(993)

1,032

$

1,288

At December 31, 2018, approximately $500 million of U.S. foreign
tax credits were available for carryforward. These credits expire
in 2028.

At December 31, 2018, amounts and expiration dates of net operating loss carryforwards in various non-U.S. taxing jurisdictions were:(Millions of dollars)

2019
$

2020
23

$

2021
124

$

2022-202492$

2025-2039
147$

Unlimited
506

$

3,597

Total
$

4,489

At December 31, 2018, non-U.S. entities that have not yet demonstrated consistent and/or sustainable profitability to support the realizationof net deferred tax assets have recorded valuation allowances of $723 million, including certain entities in Luxembourg.
70

2018 FORM 10-K

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for uncertain tax positions, including positions
impacting only the timing of tax benefits, follows.

Reconciliation of unrecognized tax benefits:1
Years ended December 31,
2017

2018

(Millions of dollars)$

Balance at January 1,

1,286

$

2016
1,032

$

968

Additions for tax positions related to current year

61

Additions for tax positions related to prior years

461

20

55

Reductions for tax positions related to prior years

(5)

(27)

(36)

Reductions for settlements2

(6)

(9)

(24)

270

(1)

Reductions for expiration of statute of limitations

73

—

(4)

Balance at December 31,

$

1,796

$

1,286

$

1,032

Amount that, if recognized, would impact the effective tax rate

$

1,716

$

1,209

$

963

1
2

Foreign currency impacts are included within each line as applicable.
Includes cash payment or other reduction of assets to settle liability.

We classify interest and penalties on income taxes as acomponent of the provision for income taxes. We recognizeda net provision for interest and penalties of $42 million, $38 million
and $34 million during the years ended December 31, 2018, 2017and 2016, respectively. The total amount of interest and penalties
accrued was $190 million and $157 million as of December 31,
2018 and 2017, respectively.
On January 31, 2018, we received a Revenue Agent’s Report fromthe IRS indicating the end of the field examination of our U.S. income
tax returns for 2010 to 2012. In the audits of 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 the “substance-over-form” or “assignment-of-income”
judicial doctrines. 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 withapplicable tax laws and did not violate judicial doctrines. We have
filed U.S. income tax returns on this same basis for years after 2012.
Based on the information currently available, we do not anticipate asignificant change to our unrecognized tax benefits for this position

within the next 12 months. We currently believe the ultimate
disposition of this matter will not have a material adverse effect on
our consolidated financial position, liquidity or results of operations.
With the exception of a loss carryback to 2005, tax years prior to2007 are generally no longer subject to U.S. tax assessment. In
our major non-U.S. jurisdictions including Australia, Brazil, China,
Germany, Japan, Mexico, Switzerland, Singapore and the U.K., tax
years are typically subject to examination for three to ten years. Dueto the uncertainty related to the timing and potential outcome ofaudits, we cannot estimate the range of reasonably possible change
in unrecognized tax benefits in the next 12 months.

7. Cat Financial Financing Activities
A.

Wholesale inventory receivables

Wholesale inventory receivables are receivables of Cat Financial thatarise when Cat Financial provides financing for a dealer’s purchaseof inventory. These receivables are included in Receivables—tradeand other and Long-term receivables—trade and other in Statement
3 and were $1,308 million and $1,398 million, at December 31,
2018 and 2017, respectively.

Contractual maturities of outstanding wholesale inventory receivables:
December 31, 2018
Wholesale
Loans(Millions of dollars)

Wholesale
LeasesTotal

Amounts Due In
2019

$

564

$

70

$

634

2020

229

48

277

2021

157

30

187

2022

71

16

87

2023

21

6

27

16

3

19

1,058

173

1,231

Guaranteed residual value

—

66

66

Unguaranteed residual value

—

35

35

Less: Unearned income

(8)

(16)

(24)

Thereafter
Total

Total

$

1,050

$

258

$

1,308

Cat Financial’s wholesale inventory receivables generally may be repaid or refinanced without penalty prior to contractual maturity.
Accordingly, this presentation should not be regarded as a forecast of future cash collections.
Please refer to Note 18 and Table III for fair value information.
2018 FORM 10-K

71

B.

Finance receivables

Finance receivables are receivables of Cat Financial and are reported in Statement 3 net of an allowance for credit losses.

Contractual maturities of outstanding finance receivables:
December 31, 2018
RetailLoans(Millions of dollars)

RetailLeasesTotal

Amounts Due In
$

2019

$

2,981

$

8,750

2020

3,742

2,026

5,768

2021

2,560

1,073

3,633

2022

1,750

453

2,203

2023

833

166

999

683

56

739

15,337

6,755

22,092

Guaranteed residual value

—

392

392

Unguaranteed residual value

—

822

822

Thereafter
Total

(252)

Less: Unearned income
$

Total

15,085

(628)
$

7,341

(880)
$

22,426Cat Financial’s finance receivables generally may be repaid orrefinanced without penalty prior to contractual maturity. Accordingly,
this presentation should not be regarded as a forecast of future
cash collections.

industry trends, macroeconomic factors and model imprecision
are considered in the evaluation of the adequacy of the allowancefor credit losses. These qualitative factors are subjective and requirea degree of management judgment.

Please refer to Note 18 and Table III for fair value information.

Cat Financial’s allowance for credit losses is segregated into two
portfolio segments:

C.

Allowance for credit losses

The allowance for credit losses is an estimate of the losses
inherent in Cat Financial’s finance receivable portfolio and includes
consideration of accounts that have been individually identified
as impaired, as well as pools of finance receivables where it isprobable that certain receivables in the pool are impaired but theindividual accounts cannot yet be identified. In identifying andmeasuring impairment, management takes into consideration pastloss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower’s ability to repay, estimatedvalue 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 andthe economic environment in which Cat Financial’s customers
operate. The allowance for credit losses attributable to financereceivables 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 fairvalue of the collateral for collateral-dependent receivables or theobservable market price of the receivable. In determining collateralvalue, Cat Financial estimates the current fair market value of thecollateral less selling costs. Cat Financial also considers credit
enhancements such as additional collateral and contractual thirdparty 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 probabilitiesof default, our estimate of the loss emergence period and theestimated loss given default. In addition, qualitative factors notable to be fully captured in the loss forecast models including

72

5,769

2018 FORM 10-K

zz Customer – Finance receivables with end-user customers.
zz Dealer – Finance receivables with Caterpillar dealers.

A portfolio segment is the level at which the Company develops
a systematic methodology for determining its allowance for credit
losses.
Cat Financial further evaluates portfolio segments by the classof finance receivables, which is defined as a level of information(below a portfolio segment) in which the finance receivables havethe same initial measurement attribute and a similar method forassessing and monitoring credit risk. Typically, Cat Financial’s
finance receivables within a geographic area have similar credit
risk profiles and methods for assessing and monitoring credit risk.
Cat Financial’s classes, which align with management reporting for
credit losses, are as follows:
zz North America – Finance receivables originated in the UnitedStates and Canada.

zz Europe – Finance receivables originated in Europe, Africa, Middle

East and the Commonwealth of Independent States.

zz Asia Pacific – Finance receivables originated in Australia, New

Zealand, China, Japan, Southeast Asia and India.

zz Mining – Finance receivables related to large mining customers

worldwide and project financing in various countries.

zz Latin America – Finance receivables originated in Mexico, Central

and South American countries.

zz Caterpillar Power Finance – Finance receivables related to marine

vessels with Caterpillar engines worldwide and Caterpillar
electrical power generation, gas compression and co-generation
systems and non-Caterpillar equipment that is powered by thesesystems worldwide.

An analysis of the allowance for credit losses was as follows:
December 31, 2018
DealerCustomer(Millions of dollars)

Allowance for Credit Losses:
Balance at beginning of year
Receivables written off
Recoveries on receivables previously written off
Provision for credit losses
Other
Balance at end of year
Individually evaluated for impairment
Collectively evaluated for impairment
Ending Balance
Recorded Investment in Finance Receivables:
Individually evaluated for impairment
Collectively evaluated for impairment
Ending Balance

$

353
(235)
46
337
(15)
486
288
198
486

$

858
18,152
19,010

$

$
$
$
$
$

Allowance for Credit Losses:
Balance at beginning of year
Receivables written off
Recoveries on receivables previously written off
Provision for credit losses
Other
Balance at end of year
Individually evaluated for impairment
Collectively evaluated for impairment
Ending Balance
Recorded Investment in Finance Receivables:
Individually evaluated for impairment
Collectively evaluated for impairment$

At origination, Cat Financial evaluates credit risk based on avariety of credit quality factors including prior payment experience,customer financial information, credit-rating agency ratings, loanto-value ratios and other internal metrics. On an ongoing basis,
Cat Financial monitors credit quality based on past-due status and

78
3,338
3,416

$

$

$

942

$

—

$

18,226
19,168

$

3,464
3,464

$

Credit quality of finance receivables

$

$

331
(157)
43
129
7
353
149
204
353

$
$

Ending Balance

$

9
—
—
12
—
21
14
7
21

362
(235)
46
349
(15)
507
302
205
507

$
$
$

936
21,49022,426$

December 31, 2017
DealerCustomer(Millions of dollars)

$
$

Total

10
—
—
(1)
—
9
—
9
9

$
$
$

Total
$

341
(157)
43
128
7
362
149
213
362

$
$
$
$

942

$

21,69022,632collection experience as there is a meaningful correlation between
the past-due status of customers and the risk of loss.
In determining past-due status, Cat Financial considers the entire
recorded investment in finance receivable past due when any
installment is over 30 days past due. The tables below summarize
the recorded investment of finance receivables by aging category.
December 31, 201831-60 Days
Past Due(Millions of dollars)Customer
North America
EuropeAsia Pacific
MiningLatin America
Caterpillar Power Finance
DealerNorth America
EuropeAsia Pacific
MiningLatin America
Caterpillar Power Finance
Total

$

$

65
19
24
28
38
10
—
—
—
—
—
—
184

91+
Days Past
Due

61-90 Days
Past Due
$

$

18
9
9
1
29
1
—
—
—
—
—
—
67

$

$

84
153
8
9
71
384
—
—
—
—
78
—
787

Total Past
Due
$

$

Current
167
181
41
38
138
395

—
—
—
—
78
—
1,038

$

$

7,825
2,850
2,409
1,642
1,421
1,903
1,895
333
466
4
638
2
21,388

Total
Finance
Receivables
$

$

7,992
3,031
2,450
1,680
1,559
2,298
1,895
333
466
4
716
2
22,42691+ Still
Accruing
$

$

14
5
5
—
—
—
—
—
—
—
—
—
24

2018 FORM 10-K

73

December 31, 201731-60 Days
Past Due(Millions of dollars)

91+
Days Past
Due

61-90 Days
Past Due

Total Past
Due

Total
Finance
Receivables

Current

91+ Still
Accruing

Customer
North America

$

71

$

15

Europe21

10Asia Pacific13

Mining3

Latin America
Caterpillar Power Finance

$

42

$

128

$

7,950

$

8,078

$

8

46

77

2,718

2,795

13

7

14

34

2,009

2,043

5

1

60

64

1,751

1,815

9

37

55

142

234

1,531

1,765

—

20

32

144

196

2,476

2,672

1

North America

—

—

—

—

1,920

1,920

—

Europe

—

—

—

—

222

222

—

Asia Pacific

—

—

—

—

553

553

—

Mining

—

—

—

—

4

4

—

Latin America

—

72

—

72

691

763

—

Caterpillar Power Finance

—

—

—

—

2

2

—

Dealer

Total

$

165

$

192

448

$

$

805

$

21,827

For all classes, a finance receivable is considered impaired, basedon current information and events, if it is probable that Cat Financial
will be unable to collect all amounts due according to the contractual
terms. Impaired finance receivables include finance receivables thathave been restructured and are considered to be troubled debt
restructurings.

$

36

December 31, 2017

December 31, 2018

(Millions of dollars)

22,632

There were $78 million in impaired finance receivables as ofDecember 31, 2018 for the Dealer portfolio segment. There were no
impaired finance receivables as of December 31, 2017 and 2016 forthe Dealer portfolio segment. Cat Financial’s recorded investment
in impaired finance receivables and the related unpaid principalbalances and allowance for the Customer portfolio segment wereas follows:

Impaired finance receivables

UnpaidPrincipal
Balance

Recorded
Investment$

UnpaidPrincipal
Balance

Recorded
Investment

RelatedAllowance

RelatedAllowance

Impaired Finance Receivables With
No Allowance Recorded
North America

$

10

$

10

$

—

$

19

$

19

$

—

Europe

1

1

—

45

45

Asia Pacific

—

—

—

34

33

—

Mining

33

33

—

121

121

—

Latin America

29

29

—

45

45

—

Caterpillar Power Finance

69

83

—

160

172

Total

—

—

$

142

$

156

$

—

$

424

$

435

$

—

$

40

$

41

$

14

$

44

$

43

$

17

Impaired Finance Receivables With
An Allowance Recorded
North America
Europe

92

92

57

9

8

Asia Pacific

4

4

2

8

8

2

Mining

56

55

26

—

—

—

5

Latin America

75

75

25

95

106

42

Caterpillar Power Finance

449

455

164

362

365

83

Total

$

716

$

722

$

288

$

518

$

530

$

149

$

50

$

51

$

14

$

63

$

62

$

17

Total Impaired Finance Receivables
North America
Europe

93

93

57

54

53

Asia Pacific

4

4

2

42

41

2

Mining

89

88

26

121

121

—

Latin America

104

104

25

140

151

42

Caterpillar Power Finance

518

538

164

522

537

$

Total

74

2018 FORM 10-K

858

$

878

$

288

$

942

$

965

5

83
$

149

Years ended December 31,
2017

2018
Average
Recorded
Investment(Millions of dollars)

Average
Recorded
Investment

Interest
IncomeRecognized2016
Interest
IncomeRecognized

Average
Recorded
Investment

Interest
IncomeRecognizedImpaired Finance Receivables With
No Allowance Recorded
North America

$

16

$

1

$

13

$

1

$

18

$

1

Europe

14

—

48

1

46

1

Asia Pacific

27

3

24

2

2

—

Mining

57

2

126

7

98

4

Latin America

38

2

64

3

47

1

Caterpillar Power Finance

130

7

221

9

270

11

Total

$

282

$

15

$

496

$

23

$

481

$

18

$

49

$

2

$

49

$

1

$

34

$

—

Impaired Finance Receivables With
An Allowance Recorded
North America
Europe

53

2

6

—

11

Asia Pacific

4

—

31

2

37

3

Mining

46

3

—

—

13

—

1

Latin America

67

3

99

4

66

2

Caterpillar Power Finance

378

12

180

6

50

1

Total

$

597

$

65

$

22

$

365

$

13

$

211

$

7

3

$

62

$

2

$

52

$

1

Total Impaired Finance Receivables
North America$

Europe

67

2

54

1

57

2

Asia Pacific

31

3

55

4

39

3

Mining

103

5

126

7

111

4

Latin America

105

5

163

7

113

3

Caterpillar Power Finance

508

19

401

15

320

12

Total

$

879

$

Recognition of income is suspended and the finance receivable isplaced on non-accrual status when management determines thatcollection of future income is not probable (generally after 120
days past due). Recognition is resumed and previously suspended
income is recognized when the finance receivable becomes current
and collection of remaining amounts is considered probable.
Payments received while the finance receivable is on non-accrual

37

$

861

$

36

$

692

$

25

status are applied to interest and principal in accordance with thecontractual terms.
As of December 31, 2018, there were $78 million in financereceivables on non-accrual status for the Dealer portfolio segment.
As of December 31, 2017, there were no finance receivables on nonaccrual status for the Dealer portfolio segment.

The recorded investment in Customer finance receivable on non-accrual status was as follows:
December 31,
North America

2017

2018

(Millions of dollars)$

EuropeAsia Pacific

77

$

38

154

37

4

10

Mining50

63

Latin America

106

192

416

Caterpillar Power Finance
Total

Troubled Debt Restructurings
A restructuring of a finance receivable constitutes a troubled
debt restructuring (TDR) when the lender grants a concession it
would not otherwise consider to a borrower experiencing financial
difficulties. Concessions granted may include extended contract
maturities, inclusion of interest only periods, below market interest

$

807

343
$

683

rates, extended skip payment periods and reduction of principal
and/or accrued interest.
As of December 31, 2018 and 2017, there were no additional funds
committed to lend to a borrower whose terms have been modified
in a TDR.
2018 FORM 10-K

75

There were no finance receivables modified as TDRs during the years ended December 31, 2018, 2017 or 2016 for the Dealer portfolio
segment. Cat Financial’s recorded investment in finance receivables in the Customer portfolio segment modified as TDRs during the years
ended December 31, 2018, 2017 and 2016 were as follows:Year ended December 31, 2018
Pre-TDR
Recorded
Investment

Post-TDR
Recorded
Investment$$(Millions of dollars)

Numberof Contracts

North America

38

Europe——Asia Pacific

—

—

—

Mining

1

29

29

21

21
—

Latin America

1

3

3

Caterpillar Power Finance

12

133

99

Total

52

$

186

$

152

Year ended December 31, 2017
Numberof Contracts
North America

43

Europe4

Asia Pacific
Mining

Pre-TDR
Recorded
Investment

Post-TDR
Recorded
Investment

$

$

34

35

1

1

10

39

31

2

57

56

Latin America

17

26

27

Caterpillar Power Finance1

68

422

407

Total

144

$

579

$

557

Year ended December 31, 2016
Numberof Contracts

Post-TDR
Recorded
Investment$$

North America

25

Europe43

129Asia Pacific

31

29

28

4

74

66

437

118

82

MiningLatin America2
Caterpillar Power Finance

34

Total

574

1
2

Pre-TDR
Recorded
Investment
25

196
$

454

25

177
$

387

In Caterpillar Power Finance, 48 contracts with a pre-TDR recorded investment of $265 million and a post-TDR recorded investment of $258 million were related to six customers.
In Latin America, 321 contracts with a pre-TDR recorded investment of $94 million and a post-TDR recorded investment of $64 million were related to four customers.

TDRs in the Customer portfolio segment with a payment default (defined as 91+ days past due) during the years ended December 31,
2018, 2017 and 2016 which had been modified within twelve months prior to the default date, were as follows:Year ended December 31, 2017

Year ended December 31, 2018

(Millions of dollars)

10

10

4

Europe——1Asia Pacific

—

—

4

Latin America1

3

1

243

Caterpillar Power Finance

3
16

$

Post-TDR
Recorded
Investment

Numberof Contracts

North America

Total
1

76

Post-TDR
Recorded
Investment

Numberof Contracts$

Year ended December 31, 2016

33

—

44

252

$

$

Post-TDR
Recorded
Investment

Numberof Contracts
3

5

—

5

2

1

1

—

17

4

1

—

—

21

15

In Latin America, 238 contracts with a post-TDR recorded investment of $16 million were related to two customers for the year ended December 31, 2017.
2018 FORM 10-K

$

2

—
$

5

8. Inventories
Inventories (principally using the LIFO method) are comprised of the following:
December 31,
2017

2018

(Millions of dollars)$

Raw materials

3,382

$

2,802

Work-in-process

2,674

2,254

Finished goods

5,241

4,761

232

Supplies$

Total inventories

During 2017, closure of our facility in Gosselies, Belgium resulted ina liquidation of LIFO inventory. The liquidated inventory was carriedat lower costs prevailing in prior years as compared with current
costs. The effect of this reduction in inventory decreased Cost of

11,529201$

10,018

goods sold by approximately $66 million and increased Profit byapproximately $49 million or $0.08 per share.
We had long-term material purchase obligations of approximately$310 million at December 31, 2018.

9. Property, plant and equipment
December 31,
UsefulLives (Years)(Millions of dollars)

2017

2018
$

—

Land

671

$

664

Buildings and land improvements

20–45

6,977

7,515

Machinery, equipment and other

2–10

13,733

14,888

Software

3–7

1,703

1,745

Equipment leased to others

1–7

6,015

6,038

Construction-in-process

—

682

688

Total property, plant and equipment, at cost

29,781

31,538Less: Accumulated depreciation(16,207)(17,383)$

Property, plant and equipment–net

13,574$

14,155

We had commitments for the purchase or construction of capital assets of approximately $124 million at December 31, 2018.

Assets recorded under capital leases:1
December 31,
Gross capital leases2

$

129

$

102

$

96

(27)

Less: Accumulated depreciation
Net capital leases
1
2

2017

2018

(Millions of dollars)

(19)
$

77

Included in Property, plant and equipment table above.
Consists primarily of machinery and equipment.

At December 31, 2018, scheduled minimum rental payments on assets recorded under capital leases were:(Millions of dollars)

2019
$

2020
8

$

2021
9

$

2022
29

$

2023
9

$

Thereafter
7$

Equipment leased to others (primarily by Cat Financial):

December 31,
2018(Millions of dollars)

Equipment leased to others–at original cost

$

2017
6,015

$

(1,744)

Less: Accumulated depreciation
Equipment leased to others–net

32

$

4,271

6,038
(1,656)$

4,382

2018 FORM 10-K

77

At December 31, 2018, scheduled minimum rental payments to be received for equipment leased to others were:(Millions of dollars)

2019
$

2020

896

$

574

2021
$

2022

314

$

2023

158

$

Thereafter
71

$

69

10. Intangible assets and goodwill
A.

Intangible assets

Intangible assets are comprised of the following:
December 31, 2018
Weighted
Amortizable
Life (Years)(Millions of dollars)

15

Customer relationships

Gross
Carrying
Amount$Accumulated
Amortization

2,463

$

Net

(1,249) $

1,214
592

Intellectual property

11

1,557

(965)

Other

13

199

(108)

91

Total finite-lived intangible assets

14(2,322) $

1,897

$

4,219

$

December 31, 2017
Weighted
Amortizable
Life (Years)
Customer relationships

15Intellectual property

11

Other

13

Total finite-lived intangible assets

14

During 2018, we acquired finite-lived intangible assets of$112 million and $6 million due to the purchase of ECM S.p.A.
and Downer Freight Rail, respectively. See Note 24 for details onthese acquisitions.
Finite-lived intangible assets are amortized over their estimateduseful lives and tested for impairment if events or changes incircumstances indicate that the asset may be impaired.
In 2016, gross customer relationship intangibles of $96 million
and related accumulated amortization of $27 million as wellas gross intellectual property intangibles of $111 million andrelated accumulated amortization of $48 million from theGrossCarrying
Amount$Accumulated
Amortization

2,441

$

1,538
198
$

4,177

$

Net

(1,122) $

1,319

(851)

687

(93)

105

(2,066) $2,111

Resource Industries segment were impaired. The fair value ofthese intangibles was determined to be insignificant basedon an income approach using expected cash flows. The fairvalue determination is categorized as Level 3 in the fair value
hierarchy due to its use of internal projections and unobservablemeasurement inputs. The total impairment of $132 million was a
result of restructuring activities and is included in Other operating(income) expense in Statement 1. See Note 25 for information
on restructuring costs.
Amortization expense related to intangible assets was $331 million,$323 million and $326 million for 2018, 2017 and 2016, respectively.

As of December 31, 2018, amortization expense related to intangible assets is expected to be:(Millions of dollars)

2019
$

326

B.

Goodwill

2020
$

311

2021
$

293

In 2018, we acquired net assets with related goodwill of $127 million
in the Energy & Transportation segment. We recorded goodwill of$109 million related to the acquisition of ECM S.p.A. and $18 million
related to the acquisition of Downer Freight Rail. See Note 24 fordetails on these acquisitions.
There were no goodwill impairments during 2018 or 2017.
The annual impairment test completed in the fourth quarter of 2016indicated that the fair value of the Surface Mining & Technology
reporting unit was below its carrying value requiring the second
step of the goodwill impairment test process. The fair value of78

2018 FORM 10-K

2022
$

274

2023
$

216

Thereafter$

477

Surface Mining & Technology was determined primarily using an
income approach based on a discounted ten year cash flow. We
assigned the fair value to Surface Mining & Technology’s assets
and liabilities using various valuation techniques that required
assumptions about royalty rates, dealer attrition, technologicalobsolescence and discount rates. The resulting implied fair value of
goodwill was below the carrying value. Accordingly, we recognized
a goodwill impairment charge of $595 million, which resulted ingoodwill of $629 million remaining for Surface Mining & Technology
as of October 1, 2016. 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. There was a$17 million tax benefit associated with this impairment charge.

The changes in carrying amount of goodwill by reportable segment for the years ended December 31, 2018 and 2017 were as follows:(Millions of dollars)

December 31, 2017

Other Adjustments1

Acquisitions

December 31, 2018

Construction Industries
(1) $

304

Impairment

(22)

—

—

(22)

Net goodwill

283

—

(1)

282

Goodwill

4,232

—

(60)

4,172

Impairment(1,175)——(1,175)

Net goodwill

3,057

—

(60)

2,997

2,806

127

(51)

2,882

54

—

2

56

7,397

127

(110)

7,414

—

(1,197)(110) $

6,217

Goodwill

$

305

$

—

$

Resource Industries

Energy & Transportation
Goodwill
All Other

2

Goodwill
Consolidated total
Goodwill(1,197)

Impairment
Net goodwill

$

6,200

—
$

December 31, 2016

127$

Acquisitions

Other Adjustments1

December 31, 2017

Construction Industries
Goodwill

$

296

$

—

$

9

$

305

Impairment

(22)

—

—

(22)

Net goodwill

274

—

9

283

Goodwill

4,110

—

122

4,232

Impairment(1,175)——(1,175)

Net goodwill

2,935

—

122

3,057

2,756

—

50

2,806

55

—

(1)

54

Goodwill

7,217

—

180

7,397

Impairment(1,197)——(1,197)

Resource Industries

Energy & Transportation
Goodwill
All Other

2

Goodwill
Consolidated total

Net goodwill
1
2

$

6,020

$

—

$

180

$

6,200

Other adjustments are comprised primarily of foreign currency translation.
Includes All Other operating segments (See Note 23).

11. Investments in debt and equity securities
We have investments in certain debt and equity securities, primarily
at Insurance Services, which are recorded at fair value and areprimarily included in Other assets in Statement 3.
Debt securities have been classified as available-for-sale and theunrealized gains and losses arising from the revaluation of thesedebt securities are included, net of applicable deferred income
taxes, in equity (Accumulated other comprehensive income(loss) in Statement 3). Realized gains and losses on sales ofdebt investments are generally determined using the specificidentification method and are included in Other income (expense)
in Statement 1.
Beginning January 1, 2018, we adopted new accounting guidanceissued by the FASB resulting in the unrealized gains and losses
arising from the revaluation of these equity securities to be includedin Other income (expense) in Statement 1. Prior to January 1, 2018,the unrealized gains and losses arising from revaluation of theavailable-for-sale equity securities and the Real Estate Investment
Trust were included, net of applicable deferred income taxes,
in equity (Accumulated other comprehensive income (loss) inStatement 3). See Note 1J for additional information.

2018 FORM 10-K

79

The cost basis and fair value of debt and equity securities with unrealized gains and losses included in equity (Accumulated othercomprehensive income (loss) in Statement 3) were as follows:
December 31, 2018
Unrealized
Pretax Net
Gains (Losses)

Cost Basis(Millions of dollars)

Fair Value

December 31, 2017
Unrealized
Pretax Net
Gains (Losses)

Cost BasisFair Value

Government debt
U.S. treasury bonds$

9

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

$

—

$

9

$

10

42

—

42

42

Corporate bonds

735

(15)

720

Asset-backed securities

63

—

63

$

—

$

10

—

42

585

(1)

584

67

—

67
261

Corporate bonds

Mortgage-backed debt securities
U.S. governmental agency

301

(4)

297

265

(4)

Residential

7

—

7

8

—

8

Commercial

14

(1)

13

17

—

17

(20) $

1,151

(5) $

989

Total debt securities

$

1,171

$

$

994

$

Equity securities1
Large capitalization value

287

(3)

284

Real estate investment trust (REIT)

104

6

110

Smaller company growth

40

Total
1

$

431

16
$

19

56
$

450

Beginning January 1, 2018, the unrealized gains and losses arising from the revaluation of the equity securities are included in Other income (expense) in Statement 1. See Note 1J for
additional information.

Available-for-sale investments in an unrealized loss position that are not other-than-temporarily impaired:December 31, 2018
Less than 12 months1
Unrealized
Fair Value
Losses(Millions of dollars)

12 months or more1
Unrealized
Fair Value
Losses

Total
Unrealized
LossesFair Value

Corporate bonds
Corporate bonds$

Asset-backed securities

280

$

3

$

391

$

11

$

671

$

14

6

—

38

1

44

1

U.S. governmental agency

52

—

223

5

275

5

Commercial

—

—

14

1

14

Mortgage-backed debt securities

Total

$

338

$

3

$

666

$

18

$

1,004

1
$

21

December 31, 2017
Less than 12 months1
Unrealized
Fair Value
Losses(Millions of dollars)

12 months or more1
Unrealized
Fair Value
Losses

Total
Unrealized
LossesFair Value

Corporate bonds
Corporate bonds

$

312

$

2

$

38

$

—

$

350

$

2

Mortgage-backed debt securities
U.S. governmental agency

129

1

110

3

239

4

Large capitalization value

129

5

Smaller company growth

17

1

14

2

143

7

1

—

18

1

Equity securities

Total
1

$

587

$

Corporate Bonds. The unrealized losses on our investments incorporate bonds and asset-backed securities relate to changes
in interest rates and credit-related yield spreads since time ofpurchase. We do not intend to sell the investments and it is not

80

9

$

163

$

5

$

750

$

14

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

2018 FORM 10-K

likely that we will be required to sell the investments before
recovery of their amortized cost basis. We do not consider theseinvestments to be other-than-temporarily impaired as of December
31, 2018.

Mortgage-Backed Debt Securities. The unrealized losses on ourinvestments in U.S. governmental agency mortgage-backed securities
and commercial mortgage-backed securities relate to changes ininterest rates and credit-related yield spreads since time of purchase.

We do not intend to sell the investments and it is not likely that wewill be required to sell the investments before recovery of theiramortized cost basis. We do not consider these investments to beother-than-temporarily impaired as of December 31, 2018.

The cost basis and fair value of the available-for-sale debt securities at December 31, 2018, by contractual maturity, is shown below.
Expected maturities will differ from contractual maturities because borrowers may have the right to prepay and creditors may have theright to call obligations.
December 31, 2018
Cost BasisFair Value
$
139 $
139
647
635
46
43
17
17
301
297
7
7
14
13
$
1,171 $
1,151

(Millions of dollars)

Due in one year or lessDue after one year through five years
Due after five years through ten years
Due after ten years
U.S. governmental agency mortgage-backed securities
Residential mortgage-backed securities
Commercial mortgage-backed securities
Total debt securities – available-for-sale

Sales of Securities:
Years Ended December 31,
2017
247 $
930 $
— $
109 $
— $
5 $

20181

(Millions of dollars)

Proceeds from the sale of available-for-sale securities
Gross gains from the sale of available-for-sale securities
Gross losses from the sale of available-for-sale securities
1 Beginning January 1, 2018, equity securities are no longer classified as available-for-sale securities.

$
$
$

2016
694
55
4

As of December 31, 2018, the net unrealized losses for equity securities were $25 million.
Our U.S. defined benefit pension plans for support and management
employees were frozen for certain employees on December 31, 2010,
and will freeze for remaining employees on December 31, 2019. On
the respective transition dates employees move to a retirement benefit
that provides a frozen pension benefit and a 401(k) plan that will include
a matching contribution and a new annual employer contribution.

12. Postemployment benefit plans
We provide defined benefit pension plans, defined contribution plans
and/or other postretirement benefit plans (retirement health careand life insurance) to employees in many of our locations throughout
the world. Our defined benefit pension plans provide a benefit
based on years of service and/or the employee’s average earnings
near retirement. Our defined contribution plans allow employees
to contribute a portion of their salary to help save for retirement,
and in most cases, we provide a matching contribution. The benefit
obligation related to our non-U.S. defined benefit pension plans arefor employees located primarily in Europe, Japan and Brazil. For
other postretirement benefits (OPEB), substantially all of our benefit
obligation is for employees located in the United States.

A.

In the first quarter of 2017, we announced the closure of ourGosselies, Belgium facility. This announcement impacted certain
employees that participated in a defined benefit pension plan andresulted in a net loss of $20 million in the first quarter of 2017 forcurtailment and termination benefits.
All curtailments and termination benefits were recognized in Other
income (expense) in Statement 1.

Benefit obligations
U.S. Pension Benefits
2018
2017

(Millions of dollars)

Change in benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Plan amendments
Actuarial losses (gains)
Foreign currency exchange rates
Participant contributions
Benefits paid - gross
Less: federal subsidy on benefits paid
Curtailments, settlements and termination benefits
Benefit obligation, end of year
Accumulated benefit obligation, end of year
Weighted-average assumptions used to determine
benefit obligation:
Discount rate
Rate of compensation increase$$$

17,326125534—(1,058)
—
—
(971)
—
(3)
15,953
15,877

4.2%
4.0%

$

$
$

Non-U.S. Pension Benefits
2018
2017

16,218
115
525
—
1,439
—
—
(977)
—
6
17,326
17,175

3.5%
4.0%

$

$
$

4,606
89
96
26
(88)
(205)
6
(277)
—
(38)
4,215
4,038

2.5%
3.0%

$

$
$

4,472
95
101
(1)
(75)
312
6
(203)
—
(101)
4,606
4,335

2.4%
4.0%

Other Postretirement Benefits
2018
2017
$

$

4,002
83
125
(25)
(195)
(28)
51
(369)
7
(2)
3,649

4.2%
4.0%

$

$

4,088
78
130
(79)
71
4
59
(361)
10
2
4,002

3.6%
4.0%
2018 FORM 10-K

81

The assumed discount rate is used to discount future benefit
obligations back to today’s dollars. The U.S. discount rate is basedon a benefit cash flow-matching approach and represents the rate
at which our benefit obligations could effectively be settled as of ourmeasurement date, December 31. The benefit cash flow-matchingapproach involves analyzing Caterpillar’s projected cash flowsB.

against a high quality bond yield curve, calculated using a wide
population of corporate Aa bonds available on the measurement
date. A similar process is used to determine the assumed discountrate for our most significant non-U.S. plans. This rate is sensitive
to changes in interest rates. A decrease in the discount rate would
increase our obligation and future expense.

Plan assets
U.S. Pension Benefits
2018(Millions of dollars)

2017

Non-U.S. Pension Benefits

Other Postretirement Benefits

2018

2018

2017

2017

Change in plan assets:
Fair value of plan assets, beginning of year$

13,416

Actual return on plan assets$

11,354

$

4,305

$

$

3,887

504

$

550

(784)

1,692

13

350

(5)

101

—

—

(187)

278

—

—

Company contributions

1,039

1,350

165

107

147

155

Participant contributions

—

—

6

6

51

59

(971)

(977)

(277)

(203)

(369)

(361)

Foreign currency exchange rates

Benefits paid
Settlements and termination benefits
Fair value of plan assets, end of year(3)$

12,697—(3)$

13,416

$

4,025

—

(120)
$

4,305

$

—

328

$

504

In general, our strategy for both the U.S. and non-U.S. pensions
includes ongoing alignment of our investments to our liabilities,
while reducing risk in our portfolio. The current U.S. pension
target asset allocation is 70 percent fixed income and 30 percent
equities. This target allocation will be revisited periodically toensure it reflects our overall objectives. The non-U.S. pension
weighted-average target allocations are 78 percent fixed income,13 percent equities, 5 percent real estate and 4 percent other. The
target allocations for each plan vary based upon local statutory
requirements, demographics of plan participants and funded
status. The non-U.S. plan assets are primarily invested in non-U.S.
securities.

The use of certain derivative instruments is permitted whereappropriate and necessary for achieving overall investment policy
objectives. The plans do not engage in derivative contracts for
speculative purposes.

Our target allocation for the other postretirement benefit plans is
70 percent equities and 30 percent fixed income.

zz Fixed income securities are primarily based upon models that take

The accounting guidance on fair value measurements specifies afair value hierarchy based upon the observability of inputs used in
valuation techniques (Level 1, 2 and 3). See Note 18 for a discussionof the fair value hierarchy.
Fair values are determined as follows:zz Equity securities are primarily based on valuations for identical

instruments in active markets.

into consideration such market-based factors as recent sales, riskfree yield curves and prices of similarly rated bonds.
zz Real estate is stated at the fund’s net asset value or at appraisedvalue.
zz Cash, short-term instruments and other are based on the carrying
amount, which approximates fair value, or the fund’s net asset value.

The U.S. plans are rebalanced to within the appropriate target asset
allocation ranges on a monthly basis. The frequency of rebalancing
for the non-U.S. plans varies depending on the plan. As a result ofour diversification strategies, there are no significant concentrationsof risk within the portfolio of investments.

The fair value of the pension and other postretirement benefit plan assets by category is summarized below:
December 31, 2018
Level 1

(Millions of dollars)

Level 2

Measuredat NAV

Level 3

Total Assets
at Fair Value

U.S. Pension
Equity securities:$

U.S. equities
Non-U.S. equities

1,971

$

—

$

35

$

155

$

2,161

1,279

—

1

—

1,280

—

6,371

61

52

6,484

Fixed income securities:
U.S. corporate bonds
Non-U.S. corporate bonds

—

1,332

—

—

1,332

U.S. government bonds

—

590

—

—

590

U.S. governmental agency mortgage-backed securities

—

384

—

—

384

Non-U.S. government bonds

—

79

—

—

79

Real estate

—

—

10

—

10

Cash, short-term instruments and other

202

9

—

166

377

Total U.S. pension assets

82

2018 FORM 10-K

$

3,452

$

8,765

$

107

$

373

$

12,697

December 31, 2017
Level 1

(Millions of dollars)

Level 2

Measuredat NAV

Level 3

Total Assets
at Fair Value

U.S. Pension
Equity securities:$

U.S. equities

2,745

$

—

1,573

Non-U.S. equities

$

20

$

165

$

2,930

15

—

—

1,588

Fixed income securities:
U.S. corporate bonds

—

5,886

60

49

5,995

Non-U.S. corporate bonds

—

1,165

—

—

1,165

U.S. government bonds

—

793

—

—

793

U.S. governmental agency mortgage-backed securities

—

369

—

—

369

Non-U.S. government bonds

—

68

—

—

68

Real estate

—

—

10

—

10

173

Cash, short-term instruments and other$Total U.S. pension assets

4,491

101
$

8,397

—
$

90

224
$

438

498
$

13,416

December 31, 2018
Level 1

(Millions of dollars)

Level 2

Measuredat NAV

Level 3

Total Assets
at Fair Value

Non-U.S. Pension
Equity securities:$

U.S. equities

43

$

—

$

—

$

—

$

43

Non-U.S. equities

312

28

—

—

340

Global equities1

113

23

—

—

136

U.S. corporate bonds

—

206

—

—

206

Non-U.S. corporate bonds

—

690

—

6

696

U.S. government bonds

—

74

—

—

74

Non-U.S. government bonds

—

1,721

—

—

1,721

Global fixed income1

—

261

—

215

476

Real estate

—

185

—

—

185

Cash, short-term instruments and other2

66

82

—

—

148

Fixed income securities:$

Total non-U.S. pension assets

534

$

3,270

$

—

$

221

$

4,025

December 31, 2017
Level 1

(Millions of dollars)

Level 2

Measuredat NAV

Level 3

Total Assets
at Fair Value

Non-U.S. Pension
Equity securities:$

U.S. equities

55

$

—

$

—

$

137

$

192

Non-U.S. equities

400

34

—

929

1,363

Global equities1

116

33

—

—

149

U.S. corporate bonds

—

156

—

—

156

Non-U.S. corporate bonds

—

363

5

6

374

U.S. government bonds

—

64

—

—

64

Non-U.S. government bonds

—

1,229

—

—

1,229

Global fixed income1

—

250

—

218

468

Real estate

—

186

—

—

186

Fixed income securities:

64

Cash, short-term instruments and other2

Total non-U.S. pension assets
1
2

$

635

60
$

2,375

—
$

5

—
$

1,290

124
$

4,305

Includes funds that invest in both U.S. and non-U.S. securities.
Includes funds that invest in multiple asset classes, hedge funds and other.

2018 FORM 10-K

83

December 31, 2018
Level 1

(Millions of dollars)

Other Postretirement Benefits
Equity securities:
U.S. equities$
Non-U.S. equities
Fixed income securities:
U.S. corporate bonds
Non-U.S. corporate bonds
U.S. government bonds
U.S. governmental agency mortgage-backed securities
Non-U.S. government bonds
Cash, short-term instruments and otherTotal other postretirement benefit assets$

Level 2

151
64
—
—
—
—
—
3
218

$

1
—
45
11
8
25
3
1
94

$

Measured at
NAV

Level 3

$

—
—
—
—
—
—
—
—
—

$

$

Total Assets
at Fair Value

—
—
—
—
—
—
—
16
16

$

$

152
64
45
11
8
25
3
20
328

$

December 31, 2017
Level 1

(Millions of dollars)

Level 2

Measuredat NAV

Level 3

Total Assets
at Fair Value

Other Postretirement Benefits
Equity securities:
U.S. equities$
Non-U.S. equities
Fixed income securities:
U.S. corporate bonds
Non-U.S. corporate bonds
U.S. government bonds
U.S. governmental agency mortgage-backed securities
Non-U.S. government bonds
Cash, short-term instruments and otherTotal other postretirement benefit assets
$

255
103
—
—
—
—
—
—
358

$

1
—
60
15
17
34
4
3
134

$

$

$

—
—
—
—
—
—
—
—
—

$

$

—
—
1
—
—
—
—
11
12

$

256
103
61
15
17
34
4
14
504

$

Below are roll-forwards of assets measured at fair value using Level 3 inputs for the years ended December 31, 2018 and 2017. These
instruments were valued using pricing models that, in management’s judgment, reflect the assumptions a market participant would use.
Equities(Millions of dollars)

U.S. Pension
Balance at December 31, 2016
Unrealized gains (losses)
Realized gains (losses)
Purchases, issuances and settlements, net
Transfers in and/or out of Level 3
Balance at December 31, 2017
Unrealized gains (losses)
Realized gains (losses)
Purchases, issuances and settlements, net
Transfers in and/or out of Level 3
Balance at December 31, 2018
Non-U.S. Pension
Balance at December 31, 2016
Unrealized gains (losses)
Realized gains (losses)
Purchases, issuances and settlements, net
Transfers in and/or out of Level 3
Balance at December 31, 2017
Unrealized gains (losses)
Realized gains (losses)
Purchases, issuances and settlements, net
Transfers in and/or out of Level 3
Balance at December 31, 2018842018 FORM 10-K

$

$

$
$

$

$

Fixed Income

Real Estate

Other

5 $
15
(1)
—
1
20 $
(6)
—
21
1
36 $

31 $
13
—
16
—
60 $
(12)
—
11
2
61 $

10
—
—
—
—
10
—
—
—
—
10

$

—
—
—
—
—
—
—
—
—
—
—

2 $
—
—
2
1
5 $
(2)
—
—
(3)
— $

—
—
—
—
—
—
—
—
—
—
—

$

$

$

$

$

$

$

$

11
—
—
(11)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—

C.

Funded status

The funded status of the plans, reconciled to the amount reported on Statement 3, is as follows:(Millions of dollars)

End of Year
Fair value of plan assets$
Benefit obligations
Over (under) funded status recognizedin financial position$
Components of net amount recognized infinancial position:
Other assets (non-current asset)$
Accrued wages, salaries and employee
benefits (current liability)
Liability for postemployment benefits(non-current liability)
Net liability recognized$
Amounts recognized in Accumulated
other comprehensive income (pre-tax)
consist of:Prior service cost (credit)$

U.S. Pension Benefits
2018
2017
12,697
15,953

Non-U.S. Pension Benefits
2018
2017

Other Postretirement Benefits
2018
2017

$

13,416 $17,326

4,025
4,215

$

4,305 $
4,606

328
3,649

$

504
4,002

(3,256) $(3,910) $(190) $

(301) $

(3,321) $(3,498)

19 $

442

358 $

—

(40)

(38)

(20)

(20)

(173)

(163)

(3,225)(3,256) $(3,891)(3,910) $(612)(190) $

(639)
(301) $

(3,148)(3,321) $(3,335)(3,498)20— $(126) $

(138)

9

—

$

— $

$

$

$

$

—

The estimated amount of prior service cost (credit) that will be amortized from Accumulated other comprehensive income (loss) at
December 31, 2018 into net periodic benefit cost (pre-tax) in 2019 are as follows:
U.S.
PensionBenefits$—(Millions of dollars)

Prior service cost (credit)

Non-U.S.
PensionBenefits$

Other
Postretirement
Benefits$(41)—

The following amounts relate to our pension plans with projected benefit obligations in excess of plan assets:

Projected benefit obligation

U.S. Pension Benefits at Year-end
2018
2017
$
15,614$
16,904

Non-U.S. Pension Benefits at Year-end
2018
2017
$
1,821
$
1,853

Accumulated benefit obligation
Fair value of plan assets

$
$

$
$

(Millions of dollars)

15,541
12,349$$16,761
12,975

1,723
1,189

$
$

1,708
1,194

The following amounts relate to our pension plans with accumulated benefit obligations in excess of plan assets:(Millions of dollars)

Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets

U.S. Pension Benefits at Year-end
2018
2017
$
15,614$
16,904$
15,541$
16,761$
12,349$12,975

Non-U.S. Pension Benefits at Year-end
2018
2017
$
1,655
$
1,720
$
1,603
$
1,641
$
1,047
$
1,107

The accumulated postretirement benefit obligation exceeds plan assets for all of our other postretirement benefit plans for all years presented.

D.

Expected contributions and benefit payments

Information about expected contributions and benefit payments for pension and other postretirement benefit plans is as follows:
U.S.
PensionBenefits(Millions of dollars)

Employer contributions:2019 (expected)
Expected benefit payments:
2019
2020
2021
2022
2023
2024-2028
Total

Non-U.S.
PensionBenefits

Other
Postretirement
Benefits

$

40 $

130 $

145

$

1,000 $
1,000
1,000
1,000
1,000
5,000
10,000 $

240 $
170
170
170
180
990
1,920 $

290
290
290
280
280
1,350
2,780

$

2018 FORM 10-K

85

The above table reflects the total employer contributions and benefits expected to be paid from the plan or from company assets
and does not include the participants’ share of the cost. The expected benefit payments for our other postretirement benefits include
payments for prescription drug benefits. Medicare Part D subsidy amounts expected to be received by the company which will offset
other postretirement benefit payments are as follows:
2019(Millions of dollars)

Other postretirement benefits

E.

$

2020
15

$

2021
15

$

2022
10

$

2023
10

$

2024-2028
10

$

Total

55

$

115

Net periodic cost
U.S. Pension Benefits
2017

2018

(Millions of dollars)

Non-U.S. Pension Benefits

2016

2017

2018

Other Postretirement Benefits

2016

2017

2018

2016

Components of net periodic
benefit cost:$Service cost

125

$

115

$

119

$

89

$

95

$

92

$

83

$

78

$

82

Interest cost

534

525

517

96

101

117

125

130

131

Expected return on plan assets1

(808)

(734)

(757)

(221)

(231)

(227)

(32)

(37)

(44)

Curtailments and termination
benefits

—

9

6

(33)

15

1

(2)

—

(9)

Amortization of prior service cost(credit)2

—

—

—

—

(2)

3

(36)

(23)

(59)

Actuarial loss (gain)

534

3

Net Periodic benefit cost (benefit)4

481

111

664

(195)

(150)

262

15

59

$

385

$

396

$

549

$

42

$

(217)

$

248

$

(12)

$

163

$

160

$

—

$

—

$

—

$

20

$

3

$

(3)

$

(20)

$

(77)

$

(184)

Other changes in plan assets andbenefit obligations recognized inother comprehensive income(pre-tax):
Current year prior service cost(credit)Amortization of prior service(cost) credit

—

—

—

—

2

(3)

36

23

59

Total recognized in othercomprehensive income

—

—

—

20

5

(6)

16

(54)

(125)

Total recognized in net periodic
cost and other comprehensive
income

$

385

$

396

$

549

$

62

$

(212)

$

242

$

4

$

109

$

35

Weighted-average assumptions
used to determine net cost:

1
2

3
4
5

Discount rate used to measureservice cost

3.7%

4.2%

4.5%

2.3%

2.4%

2.9%

3.5%

3.9%

4.2%

Discount rate used to measureinterest cost

3.2%

3.3%

3.4%

2.2%

2.3%

2.8%

3.2%

3.3%

3.3%

Expected rate of return on plan
assets5

6.3%

6.7%

6.9%

5.2%

5.9%

6.1%

7.5%

7.5%

7.5%

Rate of compensation increase

4.0%

4.0%

4.0%

4.0%

4.0%

3.6%

4.0%

4.0%

4.0%

Expected return on plan assets developed using the fair value of plan assets.
Prior service cost (credit) for both pension and other postretirement benefits is generally amortized using the straight-line method over the average remaining service period of active
employees expected to receive benefits from the plan. For pension plans in which all or almost all of the plan’s participants are inactive and other postretirement benefit plans inwhich all or almost all of the plan’s participants are fully eligible for benefits under the plan, prior service cost (credit) is amortized using the straight-line method over the remaining
life expectancy of those participants.
Actuarial loss (gain) represents the effects of actual results differing from our assumptions and the effects of changing assumptions. We recognize actuarial loss (gain) immediately
through earnings upon the annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement.
The service cost component of net periodic pension and other postretirement benefits cost (benefit) is included in Operating costs in Statement 1. All other components of net periodic
pension and other postretirement benefits cost (benefit) are included in Other income (expense) in Statement 1.
The weighted-average rates for 2019 are 5.9 percent and 3.8 percent for U.S. and non-U.S. pension plans, respectively.

The discount rates used in the determination of our service
and interest cost components are determined by utilizing a fullyield curve approach which applies specific spot rates along theyield curve used in the determination of the benefit obligation to
the relevant projected cash flows.
Our U.S. expected long-term rate of return on plan assets is basedon our estimate of long-term passive returns for equities and862018 FORM 10-K

fixed income securities weighted by the allocation of our pension
assets. Based on historical performance, we increase the passive
returns due to our active management of the plan assets. To arriveat our expected long-term return, the amount added for active
management was 0.75 percent for 2018, 0.80 percent for 2017
and 0.90 percent for 2016. A similar process is used to determine
this rate for our non-U.S. plans.

The assumed health care trend rate represents the rate at
which health care costs are assumed to increase. We assumed
a weighted-average increase of 6.1 percent in our calculation of2018 benefit expense. We expect a weighted-average increase of
6.1 percent during 2019. The 2019 rates are assumed to decrease
gradually to the ultimate health care trend rate of 5 percent in

2025. This rate represents 3 percent general inflation plus 2 percent
additional health care inflation.
Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. A one-percentagepoint change in assumed health care cost trend rates would have
had the following effects:
One-percentagepoint increase(Millions of dollars)

One-percentagepoint decrease

Effect on 2018 service and interest cost components of other postretirement benefit cost

$

14 $

(11)

Effect on accumulated postretirement benefit obligation

$

138 $

(117)

F.

Other postemployment benefit plans

We offer long-term disability benefits, continued health carefor disabled employees, survivor income benefit insurance
and supplemental unemployment benefits to substantially all
U.S. employees.

G.

Defined contribution plans

We have both U.S. and non-U.S. employee defined contributionplans to help employees save for retirement. Our primary U.S. 401(k)plan allows eligible employees to contribute a portion of their cash
compensation to the plan on a tax-deferred basis. Employees withfrozen defined benefit pension accruals are eligible for matching
contributions equal to 100 percent of employee contributions to theplan up to 6 percent of cash compensation and an annual employer

contribution that ranges from 3 to 5 percent of cash compensation(depending on years of service and age). Employees that are still
accruing benefits under a defined benefit pension plan are eligible formatching contributions equal to 50 percent of employee contributions
up to 6 percent of cash compensation. These 401(k) plans include
various investment funds, including a non-leveraged employee stock
ownership plan (ESOP). As of December 31, 2018 and December 31,
2017, the ESOP held 17.2 million and 17.7 million shares, respectively.
All of the shares held by the ESOP were allocated to participant
accounts. Dividends paid to participants are automatically reinvested
into company shares unless the participant elects to have all or a
portion of the dividend paid to the participant. Various other U.S. andnon-U.S. defined contribution plans generally allow eligible employees
to contribute a portion of their cash compensation to the plans, and in
most cases, we provide a matching contribution to the funds.

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

H.

2017

2018

(Millions of dollars)

U.S. plans
Non-U.S. plans

271 $
89
360 $

2016
375 $
73
448 $

301
68
369

Summary of long-term liability:
December 31,

Pensions:
U.S. pensions
Non-U.S. pensions
Total pensions
Postretirement benefits other than pensions
Other postemployment benefits
Defined contribution

2017

2018

(Millions of dollars)$

3,225 $
612
3,837
3,148
119
351
7,455 $

$

3,891
639
4,530
3,335
109
391
8,365

13. Short-term borrowings
December 31,
Machinery, Energy & Transportation:
Notes payable to banks$

Financial Products:
Notes payable to banks
Commercial paper
Demand notes
Total short-term borrowings

2017

2018

(Millions of dollars)

$

— $
—

1
1

526
4,759
438
5,723
5,723 $

675
3,680
481
4,836
4,837

2018 FORM 10-K

87

The weighted-average interest rates on short-term borrowings outstanding were:
December 31,
2017

2018
5.3%
2.0%
2.2%

Notes payable to banks
Commercial paper
Demand notes

5.2%
1.1%
1.1%

Please refer to Note 18 and Table III for fair value information on short-term borrowings.

14. Long-term debt
December 31,
Effective Yield
to Maturity1(Millions of dollars)

2017

2018

Machinery, Energy & Transportation:
Notes—$1,250 million of 3.900% due 20212
4.01%$
1,247 $
1,246
Notes—$759 million of 5.200% due 20412
5.27%
751
752
Debentures—$120 million of 9.375% due 2021
9.41%
120
120
Debentures—$500 million of 2.600% due 20222
2.70%
498
498
Debentures—$82 million of 8.000% due 2023
8.06%
82
82
Debentures—$1,000 million of 3.400% due 2024
3.46%
997
997
Debentures—$193 million of 6.625% due 20282
6.68%
192
192
Debentures—$242 million of 7.300% due 20312
7.38%
240
241
Debentures—$307 million of 5.300% due 20352
8.64%
218
216
Debentures—$460 million of 6.050% due 20362
6.12%
456
456
Debentures—$65 million of 8.250% due 20382
8.38%
64
64
Debentures—$160 million of 6.950% due 20422
7.02%
158
159
Debentures—$1,722 million of 3.803% due 20422
6.39%
1,257
1,236
Debentures—$500 million of 4.300% due 2044
4.39%
493
493
Debentures—$500 million of 4.750% due 2064
4.81%
494
494
Debentures—$246 million of 7.375% due 20972
7.51%
241
242
Capital lease obligations3456
437
Other441
4Total Machinery, Energy & Transportation
8,005
7,929
Financial Products:
Medium-term notes
16,592
15,415
Other
403
503
Total Financial Products
16,995
15,918
Total long-term debt due after one year$
25,000 $23,847
1 Effective yield to maturity includes the impact of discounts, premiums and debt issuance costs.
2 Redeemable at our option in whole or in part at any time at a redemption price equal to the greater of (i) 100% of the principal amount or (ii) the discounted present value of the notesor debentures, calculated in accordance with the terms of such notes or debentures.
3 Includes $360 million related to a financing transaction in Japan entered into in 2017.
4 Includes $38 million of financing activity related to a build-to-suit real estate transaction.

All outstanding notes and debentures are unsecured and rank
equally with one another.

2.6% with remaining maturities up to 9 years at December 31,
2018.

Cat Financial’s medium-term notes are offered by prospectus andare issued through agents at fixed and floating rates. Medium-term
notes due after one year have a weighted average interest rate of

The above table includes $238 million of medium-term notes thatcan be called at par.

The aggregate amounts of maturities of long-term debt during each of the years 2019 through 2023, including amounts due within one
year and classified as current, are:2019

(Millions of dollars)

Machinery, Energy & Transportation
Financial Products

$
$

10 $
5,820
5,830 $

December 31,
2021
35 $
1,398 $
6,407
4,884
6,442 $
6,282 $

2020

2022
510 $
2,053
2,563 $

2023
92
2,158
2,250

Interest paid on short-term and long-term borrowings for 2018, 2017 and 2016 was $1,088 million, $1,131 million and $1,075 million,
respectively. Interest paid in 2017 includes a prepayment fee of $58 million related to the early retirement of our 7.90% senior notes due
December 2018.
Please refer to Note 18 and Table III for fair value information on long-term debt.
88

2018 FORM 10-K

15. Credit commitments
December 31, 2018

Consolidated(Millions of dollars)

Credit lines available:
Global credit facilities
Other external
Total credit lines available
Less: Commercial paper outstanding
Less: Utilized credit
Available credit

We have three global credit facilities with a syndicate of banks
totaling $10.50 billion (Credit Facility) available in the aggregate toboth 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, 2018 was $2.75 billion. Information on
our Credit Facility is as follows:
zz The 364-day facility of $3.15 billion (of which $0.82 billion isavailable to ME&T) expires in September 2019.

zz The three-year facility, as amended and restated in September

2018, of $2.73 billion (of which $0.72 billion is available to ME&T)
expires in September 2021.

zz The five-year facility, as amended and restated in September 2018,of $4.62 billion (of which $1.21 billion is available to ME&T)
expires in September 2023.

Other consolidated credit lines with banks as of December 31,
2018 totaled $4.58 billion. These committed and uncommitted
credit lines, which may be eligible for renewal at various futuredates 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.
At December 31, 2018, Caterpillar’s consolidated net worth was$14.07 billion, which was above the $9.00 billion required under
the Credit Facility. The consolidated net worth is defined as theconsolidated shareholder’s equity including preferred stock but$$

Machinery,
Energy &Transportation

10,500 $4,577
15,077(4,759)(1,172)
9,146 $

Financial
Products

2,750
—
2,750
—
—
2,750

$

7,750
4,577
12,327(4,759)(1,172)
6,396$

excluding the pension and other postretirement benefits balance
within Accumulated other comprehensive income (loss).
At December 31, 2018, Cat Financial’s covenant interest coverage
ratio was 1.56 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, 2018, Cat Financial’s six-monthcovenant leverage ratio was 7.69 to 1 and year-end covenant
leverage ratio was 8.33 to 1. This is below the maximum ratio ofdebt to net worth of 10 to 1, calculated (1) on a monthly basis as theaverage of the leverage ratios determined on the last day of eachof 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 moreof their respective financial covenants under the Credit Facility
in the future (and are unable to obtain a consent or waiver), thesyndicate of banks may terminate the commitments allocated tothe 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 therepayment of outstanding borrowings. At December 31, 2018, there
were no borrowings under the Credit Facility.

16. Profit per share
Computations of profit per share:
2018
Profit (loss) for the period (A)1$
6,147
Determination of shares (in millions):
Weighted average number of common shares outstanding (B)591.4
Shares issuable on exercise of stock awards, net of shares assumed to be purchased out
8.0
of proceeds at average market price
Average common shares outstanding for fully diluted computation (C)2,3
599.4
Profit (loss) per share of common stock:
Assuming no dilution (A/B)$
10.39
Assuming full dilution (A/C)2,3$
10.26
Shares outstanding as of December 31 (in millions)575.5
1 Profit (loss) attributable to common shareholders.
2 Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
3 In 2016, the assumed exercise of stock-based compensation awards was not considered because the impact would be antidilutive.

2017(Dollars in millions except per share data)

For the year ended December 31, 2018, 1.5 million outstanding
SARs and stock options were excluded from the computation ofdiluted earnings per share because the effect would have been
antidilutive. For 2017, no outstanding SARs and stock options were
excluded from the computation of diluted earnings per sharebecause all outstanding SARs and stock options had a dilutive
effect. SARs and stock options to purchase 32.1 million common

$

$
$

2016
754

$

(67)

591.8
7.5

584.3
—

599.3

584.3

1.27
1.26
597.6

$
$

(0.11)(0.11)
586.5

shares were outstanding in 2016, which were not included in thecomputation of diluted earnings per share because the effect would
have been antidilutive.
In January 2014, the Board of Directors approved an authorization
to repurchase up to $10.0 billion of Caterpillar common stock, which
expired on December 31, 2018.
2018 FORM 10-K

89

In July 2018, the Board approved a new share repurchaseauthorization of up to $10.0 billion of Caterpillar common stock
effective January 1, 2019, with no expiration.

were made through a combination of accelerated stock repurchaseagreements with third-party financial institutions and open market
transactions.

During 2018, we repurchased 27.7 million shares of Caterpillar
common stock at an aggregate cost of $3.8 billion. These purchases

We did not purchase any Caterpillar common stock during 2017or 2016.

17. Accumulated other comprehensive income (loss)
Comprehensive income and its components are presented in Statement 2. Changes in Accumulated other comprehensive income (loss),
net of tax, included in Statement 4, consisted of the following:(Millions of dollars)

Balance at December 31, 2015
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from accumulated othercomprehensive (income) loss
Other comprehensive income (loss)
Balance at December 31, 2016
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from accumulated othercomprehensive (income) loss
Other comprehensive income (loss)
Balance at December 31, 2017
Adjustment to adopt recognition and measurementof financial assets and liabilities guidance
Balance at January 1, 2018
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from accumulated othercomprehensive (income) loss
Other comprehensive income (loss)
Balance at December 31, 2018

PensionForeignand other
Derivative
currency
postretirement
financial
Available-fortranslation
benefits
instruments
sale securities$(1,953) $(69) $(50) $
37
(34)

$

$

$

$

Total
(2,035)

118

(62)

26

48

17
(17)
(1,970) $

(35)
83
14 $

(3)
(65)
(115) $

(31)
(5)
32 $

(52)
(4)
(2,039)

752

48

(3)

41

838

13
765
(1,205) $

(16)
32
46 $

77
74
(41) $

(65)
(24)
8 $

9
847
(1,192)—(1,205)

—
46

—
(41)

(11)
(3)

(11)
(1,203)

(397)

(6)

61

(12)

(354)

1
(396)
(1,601) $

(28)
(34)
12 $

(100)
(39)
(80) $—(12)(15) $(127)(481)(1,684)The effect of the reclassifications out of Accumulated other comprehensive income (loss) on Statement 1 is as follows:(Millions of dollars)

Foreign currency translation:
Gain (loss) on foreign currency translation
Other income (expense)
Tax (provision) benefit
Reclassifications net of tax
Pension and other postretirement benefits:
Amortization of prior service credit (cost)
Note 121
Tax (provision) benefit
Reclassifications net of tax
Derivative financial instruments:
Foreign exchange contracts
Other income (expense)
Foreign exchange contracts
Interest expense of Financial ProductsInterest rate contracts
Interest expense excluding Financial ProductsInterest rate contracts
Interest expense of Financial Products
Reclassifications before tax
Tax (provision) benefit
Reclassifications net of tax
Available-for-sale securities:
Realized gain (loss) on sale of securities
Other income (expense)
Tax (provision) benefit
Reclassifications net of tax
Total reclassifications from Accumulated othercomprehensive income (loss)
1 Amounts are included in the calculation of net periodic benefit cost. See Note 12 for additional information.

90

2018 FORM 10-K

2018

Classification of income (expense)$

Year ended December 31,
2017
2016

(1) $
—
(1) $

(13) $—(13) $

(17)
—
(17)

36 $
(8)
28 $

25 $
(9)
16 $

56
(21)
35

115 $
19
(3)
—
131
(31)
100 $

(121) $
6
(9)
3
(121)
44
(77) $

14
—
(6)
(3)
5
(2)
3

$

$

—
—
—

$

100 $
(35)
65 $

46
(15)
31

$

127

$

(9) $

52

$
$
$
$

$
$

18. Fair value disclosures
A.

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

Fair value measurements

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

Investments in debt and equity securities
We have investments in certain debt and equity securities, primarily
at Insurance Services, that are recorded at fair value. Fair values for
our U.S. treasury bonds and large capitalization value and smaller
company growth equity securities are based upon valuations
for identical instruments in active markets. Fair values for othergovernment bonds, corporate bonds and mortgage-backed debt
securities are based upon models that take into consideration suchmarket-based factors as recent sales, risk-free yield curves andprices of similarly rated bonds.

zz Level 1 – Quoted prices for identical instruments in active

markets.

zz Level 2 – Quoted prices for similar instruments in active markets;

quoted prices for identical or similar instruments in markets
that are not active; and model-derived valuations in which all
significant inputs or significant value-drivers are observable inactive markets.
zz Level 3 – Model-derived valuations in which one or moresignificant inputs or significant value-drivers are unobservable.

In addition, Insurance Services has an equity investment in areal estate investment trust (REIT) which is recorded at fair value
based on the net asset value (NAV) of the investment. Beginning
January 1, 2018, we adopted new accounting guidance issued by
the FASB which resulted in the fair value of the REIT no longer
being classified within the fair value hierarchy. Prior to January 1,
2018, the fair value was classified as Level 3.

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

See Note 11 for additional information on our investments in debt
and equity securities.
Derivative financial instruments
The fair value of interest rate contracts is primarily based on models
that utilize the appropriate market-based forward swap curves andzero-coupon interest rates to determine discounted cash flows.
The fair value of foreign currency and commodity forward, option
and cross currency contracts is based on a valuation model that
discounts cash flows resulting from the differential between thecontract price and the market-based forward rate.

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

Assets and liabilities measured on a recurring basis at fair value,
primarily related to Financial Products, included in Statement 3 asof December 31, 2018 and 2017 are summarized below:
December 31, 2018

Level 1

(Millions of dollars)

AssetsDebt securities
Government debt
U.S. treasury bonds
Other U.S. and non-U.S. government bonds
Corporate bonds
Corporate bonds
Asset-backed securities
Mortgage-backed debt securities
U.S. governmental agency
Residential
Commercial
Total debt securities
Equity securities
Large capitalization value
Smaller company growth
REIT
Total equity securities
Total Assets
Liabilities
Derivative financial instruments, net
Total Liabilities$

Level 2

9—$

Level 3—42$

Total Assets/
Liabilities,
at Fair Value

Measured at
NAV

—
—

$

—
—

$

9
42

—
—

720
63

—
—

—
—

720
63

—
—
—
9

297
7
13
1,142

—
—
—
—

—
—
—
—

297
7
13
1,151

$

260
46
—
306
315

$

—
—
—
—
1,142

$

—
—
—
—
—

$

—
—
119
119
119

$

260
46
119
425
1,576

$
$

—
—

$
$

19
19

$
$

—
—

$
$

—
—

$
$

19
19
2018 FORM 10-K

91

December 31, 2017

Level 1

(Millions of dollars)

Level 2

Total Assets/
Liabilities, atFair Value

Level 3

AssetsDebt securities
Government debt
U.S. treasury bonds

$

10

$

—

$

—

$

10

—

42

—

42

Corporate bonds

—

584

—

584

Asset-backed securities

—

67

—

67

U.S. governmental agency

—

261

—

261

Residential

—

8

—

8

Commercial

—

17

—

17

10

979

—

989

Large capitalization value

284

—

—

284

Smaller company growth

56

—

—

56

REIT

—

—

110

110

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

Mortgage-backed debt securities

Total debt securities
Equity securities

340

Total equity securities

—

110

450

$

350

$

979

$

110

$

1,439

Derivative financial instruments, net

$

—

$

19

$

—

$

19

Total Liabilities

$

—

$

19

$

—

$

19

Total Assets
Liabilities

In addition to the amounts above, Cat Financial impaired loans are
subject to measurement at fair value on a nonrecurring basis and areclassified as Level 3 measurements. A loan is considered impaired
when management determines that collection of contractual
amounts due is not probable. In these cases, an allowance for credit
losses may be established based either 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, Cat Financial estimates the current fairmarket value of the collateral less selling costs. Cat Financial had
impaired loans with a fair value of $469 million and $341 million
for the years ended December 31, 2018 and 2017, respectively.

Finance receivables

B.

Long-term debt

Fair values of financial instruments

In addition to the methods and assumptions we use to record thefair value of financial instruments as discussed in the Fair value
measurements section above, we used the following methods andassumptions to estimate the fair value of our financial instruments:
Cash and short-term investments
Carrying amount approximated fair value.
Restricted cash and short-term investments
Carrying amount approximated fair value. Restricted cash andshort-term investments are included in prepaid expenses and othercurrent assets in Statement 3.
922018 FORM 10-K

Fair value was estimated by discounting the future cash flows using
current rates, representative of receivables with similar remaining
maturities.
Wholesale inventory receivables
Fair value was estimated by discounting the future cash flows using
current rates, representative of receivables with similar remaining
maturities.
Short-term borrowings
Carrying amount approximated fair value.

Fair value for fixed and floating rate debt was estimated based onquoted market prices.
Guarantees
The fair value of guarantees is based upon our estimate of thepremium a market participant would require to issue the sameguarantee in a stand-alone arms-length transaction with anunrelated party. If quoted or observable market prices are notavailable, fair value is based upon internally developed models thatutilize current market-based assumptions.

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

TABLE III—Fair Values of Financial Instruments
2017

2018
Carrying
Amount(Millions of dollars)

Carrying
AmountFair Value

Fair Value
LevelsFair Value

Reference

Assets at December 31,$

Cash and short-term investments

7,857

$

7,857

33

Restricted cash and short-term investments

$

8,261

33

$

194

8,261

1

Statement 3

194

1

Statement 3

Investments in debt and equity securities

1,576

1,576

1,439

1,439

1, 2 & 3

Notes 11 & 19

Finance receivables–net (excluding finance leases1)

14,714

14,79815,452

15,4383

Notes 7 & 19

Wholesale inventory receivables–net(excluding finance leases1)

1,050

1,025

1,153

1,123

3

Notes 7 & 19

Foreign currency contracts–net

47

47

—

—

2

Notes 4 & 19

Interest rate swaps–net

—

—

1

1

2

Notes 4 & 19

Commodity contracts–net

—

—

21

21

2

Notes 4 & 19

5,723

5,723

4,837

4,837

1

Note 13

Machinery, Energy & Transportation

8,015

9,046

7,935

9,863

2

Note 14

Financial Products

Liabilities at December 31,
Short-term borrowings
Long-term debt (including amounts due within
one year):1

22,81522,684

22,10622,2302Note 14

Foreign currency contracts–net

—

—

41

41

2

Notes 4 & 19

Interest rate swaps–net

36

36

—

—

2

Notes 4 & 19

Commodity contracts–net

30

30

—

—

2

Notes 4 & 19

Guarantees

8

8

8

8

3

Note 21

Total excluded items have a net carrying value at December 31, 2018 and 2017 of $7,463 million and $7,063 million, respectively.

19. Concentration of credit risk
Financial instruments with potential credit risk consist primarilyof trade and finance receivables and short-term and long-term
investments. Additionally, to a lesser extent, we have a potential
credit risk associated with counterparties to derivative contracts.
Trade receivables are primarily short-term receivables fromindependently owned and operated dealers and customers whicharise in the normal course of business. We perform regular credit
evaluations of our dealers and customers. Collateral generally is not
required, and the majority of our trade receivables are unsecured.
We do, however, when deemed necessary, make use of various
devices such as security agreements and letters of credit to protect
our interests. No single dealer or customer represents a significant
concentration of credit risk.
Finance receivables and wholesale inventory receivables primarily
represent receivables under installment sales contracts, receivables
arising from leasing transactions and notes receivable. We generally
maintain a secured interest in the equipment financed. No single
customer or dealer represents a significant concentration of credit
risk.
Short-term and long-term investments are held with high quality
institutions and, by policy, the amount of credit exposure to any one
institution is limited. Long-term investments, primarily included in

Other assets in Statement 3, are comprised primarily of availablefor-sale debt securities and equity securities at Insurance Services.
For derivative contracts, collateral is generally not required of thecounterparties or of our company. The company generally enters
into International Swaps and Derivatives Association (ISDA) masternetting agreements within Machinery, Energy & Transportation and
Financial Products that permit the net settlement of amounts owed
under their respective derivative contracts. Our exposure to credit
loss in the event of nonperformance by the counterparties is limited
to only those gains that we have recorded, but for which we have
not yet received cash payment. The master netting agreements
reduce the amount of loss the company would incur should thecounterparties fail to meet their obligations. At December 31, 2018and 2017, the maximum exposure to credit loss was $131 million
and $74 million, respectively, before the application of any masternetting agreements.
Please refer to Note 18 and Table III above for fair value information.

20. Operating leases
We lease certain property, information technology equipment,
warehouse equipment, vehicles and other equipment throughoperating leases. Total rental expense for operating leases was$322 million, $331 million and $375 million for 2018, 2017 and2016, respectively.

Minimum payments for operating leases having initial or remaining non-cancelable terms in excess of one year are:
Years ended December 31,(Millions of dollars)

2019
$

2020
205

$

2021
154

$

2022
111

$

2023
67

$

Thereafter
50

$

185

Total
$

772

2018 FORM 10-K

93

21. Guarantees and product warranty

Supplier consortium performance guarantees

Caterpillar dealer performance guarantees

We have provided guarantees to a customer in Brazil and a customerin Europe related to the performance of contractual obligations
by supplier consortiums to which our Caterpillar subsidiaries are
members. The guarantees cover potential damages incurred by thecustomers resulting from the supplier consortiums’ non-performance.
The damages are capped except for failure of the consortiums to meetcertain obligations outlined in the contract in the normal course ofbusiness. The guarantees will expire when the supplier consortiums
perform all their contractual obligations, which are expected to becompleted in 2022 for the customer in Europe and 2025 for thecustomer in Brazil.

We have provided an indemnity to a third-party insurance company
for potential losses related to performance bonds issued on behalfof Caterpillar dealers. The bonds have varying terms and are issued
to insure governmental agencies against nonperformance by certain
dealers. We also provided guarantees to third-parties related to theperformance of contractual obligations by certain Caterpillar dealers.
These guarantees have varying terms and cover potential financial
losses incurred by the third-parties resulting from the dealers’nonperformance.
In 2016, we provided a guarantee to an end user related to theperformance of contractual obligations by a Caterpillar dealer. Under
the guarantee, which expires in 2025, non-performance by theCaterpillar dealer could require Caterpillar to satisfy the contractual
obligations by providing goods, services or financial compensation
to the end user up to an annual designated cap.
Customer loan guarantees
We provide loan guarantees to third-party lenders for financing
associated with machinery purchased by customers. These
guarantees have varying terms and are secured by the machinery.
In addition, Cat Financial participates in standby letters of credit
issued to third parties on behalf of their customers. These standby
letters of credit have varying terms and beneficiaries and are
secured by customer assets.

Third party logistics business lease guarantees
We have provided guarantees to third-party lessors for certain
properties leased by a third party logistics business, formerly
Caterpillar Logistics Services LCC, in which we sold our equity
interest in 2015. The guarantees are for the possibility that thethird party logistics business would default on real estate lease
payments. The guarantees were granted at lease inception andgenerally will expire at the end of the lease terms.
We have dealer performance guarantees and third party
performance guarantees that do not limit potential payment to
end users related to indemnities and other commercial contractual
obligations. In addition, we have entered into contracts involving
industry standard indemnifications that do not limit potential
payment. For these unlimited guarantees, we are unable toestimate a maximum potential amount of future payments that
could result from claims made.

No significant loss has been experienced or is anticipated under any of these guarantees. At both December 31, 2018 and 2017, the related
liability was $8 million. The maximum potential amount of future payments (undiscounted and without reduction for any amounts thatmay possibly be recovered under recourse or collateralized provisions) we could be required to make under the guarantees at December
31 are as follows:

Caterpillar dealer performance guarantees

$

1,244

$

1,313

Customer loan guarantees

3140

Supplier consortium performance guarantees

527

565

Third party logistics business lease guarantees

60

69

116

Other guarantees
Total guarantees

Cat Financial provides guarantees to repurchase certain loans ofCaterpillar dealers from a special-purpose corporation (SPC) that
qualifies as a variable interest entity. The purpose of the SPC is
to provide short-term working capital loans to Caterpillar dealers.
This SPC issues commercial paper and uses the proceeds to fund
its loan program. Cat Financial has a loan purchase agreementwith the SPC that obligates Cat Financial to purchase certain
loans that are not paid at maturity. Cat Financial receives a feefor providing this guarantee, which provides a source of liquidity
for the SPC. Cat Financial is the primary beneficiary of the SPC
as its guarantees result in Cat Financial having both the power
to direct the activities that most significantly impact the SPC’s
economic performance and the obligation to absorb losses, andtherefore Cat Financial has consolidated the financial statementsof the SPC. As of December 31, 2018 and 2017, the SPC’s assets
of $1,149 million and $1,107 million, respectively, were primarily
comprised of loans to dealers, and the SPC’s liabilities of $1,148
million and $1,106 million, respectively, were primarily comprisedof commercial paper. The assets of the SPC are not available
to pay Cat Financial’s creditors. Cat Financial may be obligatedto perform under the guarantee if the SPC experiences losses.
94

2017

2018

(Millions of dollars)

2018 FORM 10-K

$

1,978

118
$

2,105

No loss has been experienced or is anticipated under this loanpurchase agreement.
Cat Financial is party to agreements in the normal course ofbusiness with selected customers and Caterpillar dealers in which
they commit to provide a set dollar amount of financing on a preapproved basis. They also provide lines of credit to certain customers
and Caterpillar dealers, of which a portion remains unused as of theend of the period. Commitments and lines of credit generally have
fixed expiration dates or other termination clauses. It has been Cat
Financial’s experience that not all commitments and lines of credit
will be used. Management applies the same credit policies when
making commitments and granting lines of credit as it does for any
other financing.
Cat Financial does not require collateral for these commitments/
lines, but if credit is extended, collateral may be required upon
funding. The amount of the unused commitments and lines ofcredit for dealers as of December 31, 2018 and 2017 was $11,853
million and $10,933 million, respectively. The amount of the unused
commitments for customers as of December 31, 2018 and 2017
was $815 million and $715 million, respectively.

Our product warranty liability is determined by applying historicalclaim 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 sizeby customer or dealer location (inside or outside North America).
Specific rates are developed for each product shipment month andare updated monthly based on actual warranty claim experience.

2017

2018

(Millions of dollars)$

Warranty liability, January 1

1,419

$

1,258

Reduction in liability (payments)

(783)

(860)

Increase in liability (new warranties)

755

1,021

$

Warranty liability, December 31

22. 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 ourmanufacturing and other operations, these laws often impact thedevelopment of our products, including, but not limited to, requiredcompliance with air emissions standards applicable to internal
combustion engines. We have made, and will continue to make,significant research and development and capital expenditures tocomply 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, andthose costs can be reasonably estimated, the investigation,
remediation, and operating and maintenance costs are accrued
against our earnings. Costs are accrued based on considerationof currently available data and information with respect to eachindividual site, including available technologies, current applicablelaws and regulations, and prior remediation experience. Whereno 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 orothers. 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 morethan 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 7, 2015, the Company received a grand jury subpoena fromthe 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 nonU.S. Caterpillar subsidiaries (including undistributed profits of nonU.S. subsidiaries and the movement of cash among U.S. and nonU.S. subsidiaries). The Company has received additional subpoenas
relating to this investigation requesting additional documents
and information relating to, among other things, the purchaseand 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 ofCommerce, the Federal Deposit Insurance Corporation and theInternal 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, themovement of products between the United States and Switzerland,
the relationship between Caterpillar Inc. and Caterpillar SARL, andsales outside the United States. It is the Company’s understandingthat the warrants, which concern both tax and export activities,

1,391

$

1,419

are related to the ongoing grand jury investigation. The Company
is continuing to cooperate with this investigation. The Company isunable to predict the outcome or reasonably estimate any potential
loss; however, we currently believe that this matter will not have amaterial adverse effect on the Company’s consolidated results ofoperations, 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 publicationof the Technical Opinion opened CADE’s official administrative
investigation into allegations that the defendants participated in
anticompetitive bid activity for the construction and maintenanceof metro and train networks in Brazil. While companies cannot beheld criminally liable for anticompetitive conduct in Brazil, criminal
charges have been brought against two current employees of MGE
and one former employee of MGE involving the same conduct
alleged by CADE. The Company has responded to all requests for
information from the authorities. The Company is unable to predict
the outcome or reasonably estimate the potential loss; however, wecurrently 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 prevalentof these unresolved actions involve disputes related to productdesign, manufacture and performance liability (including claimed
asbestos and welding fumes exposure), contracts, employment
issues, environmental matters, intellectual property rights, taxes(other than income taxes) and securities laws. The aggregate rangeof reasonably possible losses in excess of accrued liabilities, ifany, 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 thatany liability arising from these matters would be material. Although
it is not possible to predict with certainty the outcome of theseunresolved 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.

23. Segment information
A.

Basis for segment information

Our Executive Office is comprised of a Chief Executive Officer(CEO), four Group Presidents, a Chief Financial Officer (CFO),
a General Counsel & Corporate Secretary and a Chief Human
Resources Officer. The Group Presidents and CFO are accountable
for a related set of end-to-end businesses that they manage. The
General Counsel & Corporate Secretary leads the Law, Security andPublic Policy Division. The Chief Human Resources Officer leads
the Human Resources Organization. The CEO allocates resources
2018 FORM 10-K

95

and manages performance at the Group President/CFO level. As
such, the CEO serves as our Chief Operating Decision Maker andoperating segments are primarily based on the Group President/
CFO reporting structure.
Three of our operating segments, Construction Industries, Resource
Industries and Energy & Transportation are led by Group Presidents.
One operating segment, Financial Products, is led by the CFO who
also has responsibility for Corporate Services. Corporate Services
is a cost center primarily responsible for the performance of certain
support functions globally and to provide centralized services; itdoes not meet the definition of an operating segment. One Group
President leads two smaller operating segments that are includedin the All Other operating segments. The Law, Security and Public
Policy Division and the Human Resources Organization are costcenters and do not meet the definition of an operating segment.
Segment information for 2017 and 2016 has been recast due to ouradoption of new accounting guidance issued by the FASB related
to the presentation of net periodic pension costs and net periodic
postretirement benefit costs. Prior service cost (credits) is no longer
included in segment profit. See Note 1J for additional information.

B.

Description of segments

We have six operating segments, of which four are reportablesegments. Following is a brief description of our reportablesegments and the business activities included in the All Other
operating segments:
Construction Industries: A segment primarily responsible forsupporting customers using machinery in infrastructure, forestry
and building construction applications. Responsibilities include
business strategy, product design, product management anddevelopment, manufacturing, marketing and sales and productsupport. 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, site prep tractors,
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. Inter-segment sales are a source of revenue for this segment.
Resource Industries: A segment primarily responsible forsupporting customers using machiner y in mining, quarr y
and aggregates, waste and material handling applications.
Responsibilities include business strategy, product design, productmanagement and development, manufacturing, marketing andsales and product support. The product portfolio includes large
track-type tractors, large mining trucks, hard rock vehicles, longwall
miners, electric rope shovels, draglines, hydraulic shovels, 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, electronics and control systems andrelated 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.
Inter-segment sales are a source of revenue for this segment.
Energy & Transportation: A segment primarily responsible forsupporting customers using reciprocating engines, turbines, dieselelectric 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, product96

2018 FORM 10-K

management and development, manufacturing, marketing and sales
and product support of turbine machinery and integrated systems
and solutions and turbine-related services, reciprocating enginepowered 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 andcomponents and remanufacturing services for other companies;
the business strategy, product design, product management anddevelopment, manufacturing, remanufacturing, leasing and serviceof diesel-electric locomotives and components and other railrelated products and services and product support of on-highway
vocational trucks for North America. Inter-segment sales are asource of revenue for this segment.
Financial Products Segment: Provides financing alternatives tocustomers and dealers around the world for Caterpillar products,
as well as financing for vehicles, power generation facilities andmarine 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 protectionplans, extended service coverage for machines and engines,
and dealer property and casualty insurance. The various forms offinancing, insurance and risk management products offered tocustomers 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 tooperating segments.
All Other operating segments: Primarily includes activities suchas: business strategy, product management and development,
manufacturing 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 andensuring the most efficient and effective distribution of machines,
engines and parts; digital investments for new customer and dealer
solutions that integrate data analytics with state-of-the-art digitaltechnologies while transforming the buying experience. Results for
the All Other operating segments are included as a reconciling item
between reportable segments and consolidated external reporting.

C.

Segment measurement and reconciliations

There are several methodology differences between our segment
reporting and our external reporting. The following is a list of themore significant methodology differences:zz Machinery, Energy & Transportation segment net assets

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

zz Segment inventories and cost of sales are valued using a current

cost methodology.

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

reconciliation of profit, we have grouped the reconciling items asfollows:zz The present value of future lease payments for certain Machinery,

Energy & Transportation operating leases is included in segment
assets. The estimated financing component of the lease
payments is excluded.

zz Corporate costs: These costs are related to corporate

requirements primarily for compliance and legal functions forthe benefit of the entire organization.

zz Currency exposures for Machinery, Energy & Transportation

are generally managed at the corporate level and the effects ofchanges in exchange rates on results of operations within theyear are not included in segment profit. The net difference createdin the translation of revenues and costs between exchange
rates used for U.S. GAAP reporting and exchange rates used
for segment reporting is reported as a methodology difference.

zz Restructuring costs: Primarily costs for employee separation, long-

lived asset impairments and contract terminations. These costs areincluded in Other operating (income) expenses except for definedbenefit plan curtailment losses and special termination benefits,
which are included in Other income (expense). Restructuringcosts also include other exit-related costs primarily for accelerated
depreciation, inventory write-downs, equipment relocation andproject management costs and LIFO inventory decrement benefits
from inventory liquidations at closed facilities, all of which areprimarily included in Cost of goods sold. A table, Reconciliation of
Restructuring costs on page 100, has been included to illustrate
how segment profit would have been impacted by the restructuringcosts. See Note 25 for more information.

zz Stock-based compensation expense is not included in segment

profit.

zz Postretirement benefit expenses are split; segments are generally

responsible for service costs, with the remaining elements of
net periodic benefit cost included as a methodology difference.

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

zz Methodology differences: See previous discussion of significant

accounting differences between segment reporting andconsolidated external reporting.

zz Timing: Timing differences in the recognition of costs between

Reconciling items are created based on accounting differences
between segment reporting and our consolidated externalreporting. Please refer to pages 98 to 102 for financial information
regarding significant reconciling items. Most of our reconciling
items are self-explanatory given the above explanations. For thesegment reporting and consolidated external reporting. For
example, certain costs are reported on the cash basis forsegment reporting and the accrual basis for consolidated externalreporting.

Segment Information

Reportable Segments:
Intersegment
sales andrevenues

External
sales andrevenues(Millions of dollars)

Total sales
andrevenues

Depreciation
andamortization

Segment
profit (loss)

Segment
assets at
December 31

Capitalexpenditures

2018
Construction Industries$

23,116$

121 $23,237 $

367 $

4,174

$

4,902 $

266
188

Resource Industries

9,888

382

10,270

462

1,603

6,442

Energy & Transportation

18,832

3,953

22,785

640

3,938

8,386

742

$

4,456 $

56,292 $1,469 $

9,715

19,730 $

1,196

—

3,279

834

505

4,456 $

59,571 $

2,303 $

10,220$$Machinery, Energy & Transportation$

3,2791

Financial Products Segment
Total

51,836$55,115$$

19,133$$36,002

1,559

55,732 $

2,755

4,838 $

228

6,403

183

2017
Construction Industries

7,504

Resource Industries

15,964

Energy & Transportation
Machinery, Energy & Transportation$

19,240 $

400 $

3,255

7,861

514

698

3,418

19,382

653

2,856

$

3,882 $

46,483 $1,567 $

6,809

—

3,093

820

792

3,882 $

49,576 $2,387 $

7,601

$
$

3,0931

Financial Products Segment
Total

42,601

107 $
357

$

45,694$$

15,612

$

$

7,564

527

18,805 $938

34,893

1,373

53,698 $2,311

5,367 $

186

7,135

243

2016
Construction Industries

5,726

Resource Industries

14,411

Energy & Transportation
Machinery, Energy & Transportation

$

1

$

2,9931

Financial Products Segment
Total

35,749$38,742$78 $

15,690 $

458 $

1,639

284

6,010

607

(1,045)

2,540

16,951677

2,187

2,902 $

38,651 $

1,742 $

2,781

—

2,993

849

702

2,902 $

41,644 $2,591 $

3,483

$
$

7,791

519

20,293 $948

35,224

1,638

55,517 $2,586

Includes revenues from Machinery, Energy & Transportation of $470 million, $384 million and $302 million for the years 2018, 2017 and 2016, respectively.

2018 FORM 10-K

97

For the year ended December 31, 2018, sales and revenues by geographic region reconciled to consolidated sales and revenues
were as follows:
Sales and Revenues by Geographic Region
North
America(Millions of dollars)

Latin
America

External
Sales and
Revenues

Asia/
Pacific

EAME

2018
Construction Industries$

10,754

$

1,479

$

4,410

$

6,473

$

23,116

Resource Industries

3,357

1,647

2,217

2,667

$

9,888

Energy & Transportation

9,685

1,331

4,934

2,882

$

18,832

63

3

18

70

$

154

All Other operating segments
Corporate Items and Eliminations

(155)

—

(11)

(2)

Machinery, Energy & Transportation Sales

23,704

4,460

11,56812,090Financial Products Segment

2,153

281

387

458

3,279

Corporate Items and Eliminations

(234)

(46)

(26)

(73)

(379)

Financial Products Revenues

1,919

235

361

385

2,900

Consolidated Sales and Revenues$

25,623

$

4,695

$

11,929$12,475(168)$

51,822$54,722For the year ended December 31, 2018, Energy & Transportation segment sales by end user application were as follows:
Energy & Transportation External Sales
2018(Millions of dollars)

Oil and gas

$

5,763

Power generation

4,334

Industrial

3,640

Transportation

5,095

Energy & Transportation External Sales$

18,832

Reconciliation of Sales and Revenues:
Machinery,
Energy &Transportation(Millions of dollars)

Financial
Products

Consolidating
Adjustments

Consolidated
Total

2017
Total external sales and revenues from reportablesegments$

42,601$

3,093 $—$

45,694All Other operating segments

178

—

—

178

Other

(103)

74

(381)1(410)

Total sales and revenues$

42,676$3,167 $

(381)$

45,462$35,749$2,993 $—$

38,742

2016
Total external sales and revenues from reportablesegments
All Other operating segments

139

—

—

139

Other

(115)

72

(301)1(344)

3,065 $

(301)

Total sales and revenues
1

98

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

2018 FORM 10-K$

35,773$$38,537

Reconciliation of consolidated profit before taxes:
Machinery,
Energy &Transportation(Millions of dollars)

Financial
Products

Consolidated
Total

2018
Total profit from reportable segments

$

9,715

$

505

$

10,220All Other operating segments

23

—

23

Cost centers

2

—

2

Corporate costs

(610)

—

(610)

Timing

(257)

—

(257)

Restructuring costs

(370)

(16)

(386)

51
(124)

—
—

51
(124)

Methodology differences:
Inventory/cost of sales
Postretirement benefit expense
Stock-based compensation expense

(190)

(8)

(198)

Financing costs

(257)

—

(257)

Currency

(219)

—

(219)

Other income/expense methodology differences

(362)

—

(362)

Other methodology differences

(86)

25

Total consolidated profit before taxes

(61)

$

7,316

$

506

$

7,822

$

6,809

$

792

$

7,601

2017
Total profit from reportable segments
All Other operating segments

(44)

—

Cost centers

22

—

(44)
22

Corporate costs

(633)

—

(633)

(151)

—

(151)

(1,253)(3)(1,256)Inventory/cost of sales

(77)

—

(77)

Postretirement benefit expense

(141)

—

(141)

Stock-based compensation expense

(198)

(8)

(206)

Financing costs

(524)

—

(524)

Currency

(218)

—

(218)

Other income/expense methodology differences

(181)

—

(181)

Other methodology differences

(97)

(13)

TimingRestructuring costs
Methodology differences:

Total consolidated profit before taxes

(110)

$

3,314

$

768

$

4,082

$

2,781

$

702

$

3,483

2016
Total profit from reportable segments

(85)

—

Cost centers

1

—

1

Corporate costs

(527)

—

(527)

All Other operating segments

(85)

40

—

40

(1,014)(5)(1,019)———

Postretirement benefit expense

(729)

—

(729)

Stock-based compensation expense

(209)

(9)

(218)

Financing costs

(517)

—

(517)

Currency

(22)

—

(22)

Other income/expense methodology differences

(225)

—

(225)

Other methodology differences

(47)

4

TimingRestructuring costs
Methodology differences:
Inventory/cost of sales

Total consolidated profit before taxes

$

(553)

$

692

(43)
$

139

2018 FORM 10-K

99

Reconciliation of Restructuring costs:
As noted above, restructuring costs are a reconciling item between Segment profit and Consolidated profit before taxes. Had we
included the amounts in the segments’ results, the profit would have been as shown below:
Reconciliation of Restructuring costs:
Segment
profit (loss)(Millions of dollars)

Segment profit(loss) withrestructuring costs

Restructuring
costs

2018
Construction Industries(58) $

4,116

Resource Industries

$

1,603

4,174

$

(191)

1,412

Energy & Transportation

3,938

(84)

3,854

Financial Products Segment

505

(2)

503

All Other operating segments

23

(40)

(17)

Total

$

10,243$(375) $

9,868

$

3,255

$

(719) $

2,536

2017
Construction Industries

698

(276)

422

2,856

(115)

2,741

Resource Industries
Energy & Transportation
Financial Products Segment

792

(3)

789

All Other operating segments

(44)

(39)

(83)

Total

$

7,557

$

(1,152) $

6,405

$

1,639

$

(41) $

1,598

2016
Construction Industries
Resource Industries(1,045)(540)(1,585)

Energy & Transportation

2,187

(248)

1,939

702

(5)

697

Financial Products Segment(85)

All Other operating segments
$

Total

3,398

$

(45)

(130)

(879) $

2,519

Reconciliation of Assets:
Machinery,
Energy &Transportation(Millions of dollars)

Financial
Products

Consolidating
Adjustments

Consolidated
Total

2018
Total assets from reportable segments$

All Other operating segments

19,730$36,002$—$

55,732

1,279

—

—

1,279

Cash and short-term investments

6,968

—

—

6,968

Intercompany receivables

1,633

—

(1,633)—

Investment in Financial Products

3,672

—

(3,672)—

Deferred income taxes

2,015

—

(692)

1,323

Goodwill and intangible assets

4,279

—

—

4,279

Property, plant and equipment – net and other assets

1,998

—

—

1,998

Items not included in segment assets:

(196)

—

—

(196)

Inventory methodology differences(2,503)——(2,503)Liabilities included in segment assets

9,766

—

—

9,766

Other

(166)

66

(37)

(137)

(6,034) $78,509Operating lease methodology difference$

Total assets

100

2018 FORM 10-K

48,475$36,068$

Reconciliation of Assets:
Machinery,
Energy &Transportation(Millions of dollars)

2017
Total assets from reportable segments
All Other operating segments
Items not included in segment assets:
Cash and short-term investments
Intercompany receivables
Investment in Financial Products
Deferred income taxes
Goodwill and intangible assets
Property, plant and equipment – net and other assets
Operating lease methodology difference
Inventory methodology differences
Liabilities included in segment assets
Other
Total assets
2016
Total assets from reportable segments
All Other operating segments
Items not included in segment assets:
Cash and short-term investments
Intercompany receivables
Investment in Financial Products
Deferred income taxes
Goodwill and intangible assets
Property, plant and equipment – net and other assets
Operating lease methodology difference
Inventory methodology differences
Liabilities included in segment assets
Other
Total assets

$

$
$

$

18,805
1,312

Financial
Products$

Consolidating
Adjustments

34,893
—

$

7,381
1,733
4,064
2,166
4,210
2,341
(191)
(2,287)
9,352(399)
48,487 $

—
—
—
—
—
—
—
—
—
(14)
34,879 $20,293
1,381

35,224
—

$

5,257
1,713
3,638
3,648
3,883
1,645
(186)
(2,373)7,400(436)
45,863 $——$53,6981,312—(1,733)(4,064)
(574)
—
—
—
—
—
(33)
(6,404) $

7,381
—
—
1,592
4,210
2,341
(191)
(2,287)9,352(446)
76,962——$55,517
1,381—(1,713)(3,638)
(947)
—
—
—
—
—
(56)
(6,354) $

5,257
—
—
2,701
3,883
1,645
(186)
(2,373)7,400(521)
74,704

$

—
—
—
—
—
—
—
—
—
(29)
35,195 $Consolidated
Total

Reconciliation of Depreciation and amortization:
Machinery,
Energy &Transportation(Millions of dollars)

2018
Total depreciation and amortization from reportable segments
Items not included in segment depreciation and amortization:
All Other operating segments
Cost centers
Other
Total depreciation and amortization2017
Total depreciation and amortization from reportable segments
Items not included in segment depreciation and amortization:
All Other operating segments
Cost centers
Other
Total depreciation and amortization
2016
Total depreciation and amortization from reportable segments
Items not included in segment depreciation and amortization:
All Other operating segments
Cost centers
Other
Total depreciation and amortization

Financial
Products

Consolidated
Total

$

1,469 $

834 $

2,303

$

225
130
71
1,895 $

—
—
37
871 $

225
130
108
2,766

$

1,567 $

820 $

2,387

$

220
143
86
2,016 $

—
—
41
861 $

220
143
127
2,877

$

1,742 $

849 $

2,591

$

219
156
27
2,144 $

—
—
41
890 $

219
156
68
3,034
2018 FORM 10-K

101

Reconciliation of Capital expenditures:
Machinery,
Energy &Transportation(Millions of dollars)

Financial
Products

Consolidating
Adjustments

Consolidated
Total

2018
Total capital expenditures from reportable segments

$

1,196

$

1,559 $

—

$

2,755

Items not included in segment capital expenditures:
All Other operating segments

170

—

—

170

Cost centers

100

—

—

100

Timing

42

—

—

42

Other

(287)

216

(80)

(151)

Total capital expenditures

$

1,221

$

1,775 $

(80) $

2,916

$

938

$

1,373 $

—

2,311

2017
Total capital expenditures from reportable segments$

Items not included in segment capital expenditures:
All Other operating segments

134

—

—

134

Cost centers

84

—

—

84

Timing

(96)

—

—

(96)

Other

(144)

80

(33)

(97)

$

916

$

1,453 $

(33) $

2,336

$

948

$

1,638 $

—

2,586

182

—

—

Cost centers

72

—

—

72

Timing

153

—

—

153

Total capital expenditures
2016
Total capital expenditures from reportable segments$

Items not included in segment capital expenditures:
All Other operating segments

(149)

Other
$

Total capital expenditures

1,206

133
$

182

(49)

1,771 $

(65)(49) $

2,928

Enterprise-wide Disclosures:
Information about Geographic Areas:
Property, plant and equipment – net
External sales and revenues

December 31,

1

2018

(Millions of dollars)

Inside United States$

Outside United States
$

Total
1

2016

2017

2018

22,690 $18,552 $15,956 $32,032

26,91022,581

5,422

6,029

54,722 $45,462 $38,537 $

13,574 $14,155

8,152 $

8,126

Sales of Machinery, Energy & Transportation are based on dealer or customer location. Revenues from services provided are based on where service is rendered.

24. Acquisitions
ECM S.p.A.
On January 2, 2018, we acquired 100 percent of the equity inprivately held ECM S.p.A. (ECM). Headquartered in Pistoia, Italy,
ECM designs, manufactures, sells and services advanced signal
systems for the rail industry. The ECM acquisition was executed
to expand our presence in the international freight and transit
industries through a combination of broad product offerings andstrong reputation in the signaling market. The purchase price forthe acquisition was $225 million, consisting of $249 million paid
at closing, net of $25 million of cash acquired and $1 million ofdebt assumed.
102

2017

2018 FORM 10-K

The transaction was financed with available cash. Tangible assets
as of the acquisition date were $109 million, recorded at their fairvalues, and primarily included cash of $25 million, receivables of$28 million, inventories of $29 million, and property, plant andequipment of $17 million. Finite-lived intangible assets acquiredof $112 million included customer relationships, developed
technology and trade names. The finite lived intangible assets arebeing amortized on a straight-line basis over a weighted-averageamortization period of approximately 13 years. Liabilities assumed
as of the acquisition date were $79 million, recorded at their fairvalues, and primarily included accounts payable of $38 million andnet deferred tax liabilities of $29 million. Goodwill of $109 million,
non-deductible for income tax purposes, represented the excessof the consideration transferred over the net assets recognized andrepresented the estimated future economic benefits arising fromother assets acquired that could not be individually identified andseparately recognized. Factors that contributed to a purchase priceresulting in the recognition of goodwill include ECM’s strategic fit
into our rail product portfolio, the opportunity to provide a complete
line-up of signaling and train control systems and the acquired
assembled workforce. The results of the acquired business for theperiod from the acquisition date are included in the accompanying
consolidated financial statements and reported in the Energy &Transportation segment in Note 23. Assuming this transaction
had been made at the beginning of any period presented, theconsolidated pro forma results would not be materially different
from reported results.

Downer Freight RailOn January 2, 2018, we completed the acquisition of certain assets
and liabilities of the Downer Freight Rail business (Downer FreightRail). Headquartered in North Ryde, Australia, Downer Freight Railprovides a full suite of rolling stock, aftermarket parts and services
throughout Australia. The acquisition was executed to strengthen
our existing Rail footprint in Australia, which currently includes
rolling stock maintenance facilities, as well as infrastructure andsignaling facilities. The purchase price for the acquisition was $97
million.
The transaction was financed with available cash. Tangible assets
as of the acquisition date were $86 million, recorded at their fairvalues, and primarily included receivables of $23 million, inventories
of $40 million, and property, plant and equipment of $15 million.
Finite-lived customer relationship intangible assets acquired were
$6 million. The finite lived intangible assets are being amortizedon a straight-line basis over an amortization period of 15 years.
Liabilities assumed as of the acquisition date were $14 million, which
represented their fair values. Goodwill of $18 million, not expected
to be deducted for income tax purposes, represented the excessof the consideration transferred over the net assets recognized andrepresented the estimated future economic benefits arising fromother assets acquired that could not be individually identified andseparately recognized. Factors that contributed to a purchase priceresulting in the recognition of goodwill include Downer Freight Rail’s
strategic fit into our rail product portfolio, the opportunity to expand
our aftermarket parts and maintenance service portfolio in Australia
and the acquired assembled workforce. The results of the acquired
business for the period from the acquisition date are included in
the accompanying consolidated financial statements and reported
in the Energy & Transportation segment in Note 23. Assuming thistransaction had been made at the beginning of any period presented,
the consolidated pro forma results would not be materially different
from reported results.

Kemper Valve & Fittings Corp.
On December 15, 2016, we acquired 100 percent of the equity inprivately held Kemper Valve & Fittings Corp. (Kemper). Kemper isheadquartered in Island Lake, Illinois and designs, manufactures,
sells, and services high pressure flow iron to the well service
segment of the Oil & Gas industry. This acquisition provides
Caterpillar with a new product offering which complements its
existing products in the Oil & Gas industry. The purchase price,
net of $12 million of acquired cash, consisted of $92 million paid
at closing, $1 million paid in 2017, and $8 million paid in 2018.
In addition, there is contingent consideration with a fair value of$38 million as of the acquisition date which is comprised of two
components: 1) our expected use of a charitable contribution carryforward for U.S. tax purposes acquired from Kemper which has
an estimated maximum payment of $20 million and 2) a specified
industry performance index price target during the period fromJanuary 1, 2017 to December 31, 2021 which is capped at$20 million per year. As of December 31, 2018, $10 million was
paid related to the use of the charitable contribution carry forward
for U.S. tax purposes with an additional $10 million paid in Januaryof 2019. No amounts were paid through 2018 for the contingent
consideration related to the specified industry performance index
price target, which continues to be remeasured each reporting period
at its estimated fair value with any adjustment included in Other
operating (income) expenses in Statement 1.
The transaction was financed with available cash. Tangible assets
as of the acquisition date were $147 million, recorded at their fairvalues, and included cash of $12 million, receivables of $7 million,
short term investments of $3 million, net deferred tax assets of $21
million, inventories of $63 million, and property, plant and equipmentof $41 million. Finite-lived intangible assets acquired of $8 million
included customer relationships, developed technology and trade
names. The finite lived intangible assets are being amortized on astraight-line basis over an amortization period of 10 years. Liabilities
assumed as of the acquisition date were $6 million, which represented
their fair values. Goodwill of $1 million, non-deductible for income tax
purposes, represented the excess of the consideration transferredover the net assets recognized and represented the estimated future
economic benefits arising from other assets acquired that could not
be individually identified and separately recognized. The results of theacquired business for the period from the acquisition date are includedin the accompanying consolidated financial statements and reported
in the Energy & Transportation segment in Note 23. Assuming thistransaction had been made at the beginning of any period presented,
the consolidated pro forma results would not be materially different
from reported results.

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

Restructuring costs for 2018, 2017 and 2016 were as follows:
2018(Millions of dollars)

Employee separations1

$

2017
112

$

2016
525 $

297

Contract terminations1

7

183

62

Long-lived asset impairments1

93

346

391

Defined benefit plan curtailments and termination benefits2

(8)

29

7

182

Other

3

Total restructuring costs
1
2
3

$

386

$

173

262

1,256 $

1,019

Recognized in Other operating (income) expenses.
Recognized in Other income (expense).
Represents costs related to our restructuring programs, primarily for accelerated depreciation, project management costs, equipment relocation and inventory write-downs, and also
LIFO inventory decrement benefits from inventory liquidations at closed facilities, all of which are primarily included in Cost of goods sold.
2018 FORM 10-K

103

The restructuring costs in 2018 were primarily related to ongoingfacility closures across the company. In 2017, about half of therestructuring costs were related to the closure of the facility
in Gosselies, Belgium, within Construction Industries, and theremainder was related to other restructuring actions across thecompany. The restructuring costs in 2016 were primarily related
to actions in Resource Industries in response to continued

weakness in the mining industry. In addition, costs in 2016
resulted from our decision to discontinue production of onhighway vocational trucks within Energy & Transportation andother restructuring actions across the company.
Restructuring costs are a reconciling item between Segment
profit and Consolidated profit before taxes. See Note 23 for more
information.

The following table summarizes the 2017 and 2018 employee separation activity:(Millions of dollars)$

Liability balance at December 31, 2016

147
525

Increase in liability (separation charges)(423)

Reduction in liability (payments)$

Liability balance at December 31, 2017

249
112

Increase in liability (separation charges)(276)

Reduction in liability (payments)$

Liability balance at December 31, 2018

Most of the remaining liability balance as of December 31, 2018 is
expected to be paid in 2019.
In March 2017, Caterpillar informed Belgian authorities of the decision
to proceed to a collective dismissal, which led to the closure of theGosselies site, impacting about 2,000 employees. Production ofCaterpillar 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 the program.
Those 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.
Restructuring costs for the year ended December 31, 2016
were $1,019 million. Throughout 2016, we initiated the following
restructuring plans:zz

In February 2016, we made the decision to discontinue
production of on-highway vocational trucks. Based on
the business climate in the truck industry and a thoroughevaluation of the business, the company decided it would
withdraw from this market. We recognized $104 millionof restructuring costs, primarily related to long-lived asset
impairments and sales discounts.

zz

85

In the second half of 2016, we took additional restructuring
actions in Resource Industries, including ending the
production of track drills; pursuing strategic alternatives
related to room and pillar products; consolidation of two
product development divisions; and additional actions in
response to ongoing weakness in the mining industry. For
the year ended December 31, 2016, we incurred $369 millionof restructuring costs for these plans primarily related to longlived asset impairments, employee separation costs andinventory write-downs.

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 U.S., additional involuntary programs throughout thecompany and manufacturing facility consolidations and closuresthat occurred through 2018. The largest action among thoseincluded in the Plan was related to our European manufacturing
footprint which led to the Gosselies, Belgium, facility, closure as
discussed above. We incurred $121 million, $817 million and $281
million of restructuring costs associated with these actions in 2018,2017 and 2016, respectively. Total restructuring costs incurred since
inception of the Plan were $1,788 million. The remaining costs ofapproximately $50 million related to the Plan are expected to berecognized in 2019.

26. Selected quarterly financial results (unaudited)2018 Quarter
1st(Dollars in millions except per share data)

Sales and revenues$

Less: Revenues

12,859$3rd

14,011$

4th

13,510$14,342

(709)

(732)

(747)

(712)

Sales

12,15013,27912,763

13,630

Cost of goods sold

8,566

9,422

9,022

9,987

Gross margin

104

2nd

3,584

3,857

3,741

3,643

Profit1

$

1,665

$

1,707

$

1,7274$

1,0485,6,7

Profit per common share

$

2.78

$

2.86

$

2.92

$

1.80

Profit per common share–diluted2

$

2.74

$

2.82

$

2.88

$

1.78

2018 FORM 10-K

2017 Quarter
1st
Sales and revenues

$

2nd
9,822

$

3rd

11,331$

4th

11,413$

12,896

Less: Revenues

(692)

(692)

(700)

(702)

Sales

9,130

10,63910,713

12,194

Cost of goods sold

6,801

7,816

7,678

8,965

Gross margin

2,329

2,823

3,035

3,229

Profit (loss)1

$

192

$

802

$

1,059

$

(1,299)5,6,7

Profit (loss) per common share

$

0.33

$

1.36

$

1.79

$

(2.18)

Profit (loss) per common share–diluted2

$

0.32

$

1.35

$

1.77

$

(2.18)3

1
2
3
4

5
6
7

Profit (loss) attributable to common shareholders.
Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
In the fourth quarter of 2017, the assumed exercise of stock-based compensation awards was not considered because the impact would be antidilutive.
The third quarter of 2018 includes a benefit of $154 million due to the revised 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. The third quarter of 2018 also includes a charge of $59 million to increase the valuation allowance against deferred tax assets forprior years. See Note 6 for additional details.
The fourth quarter of 2018 and fourth quarter of 2017 include pre-tax pension and other postretirement benefit plan actuarial losses of $495 million and $301 million, respectively. See
Note 12 for additional information on these costs.
The fourth quarter of 2018 includes a benefit of $63 million from reductions in the valuation allowance against U.S. state deferred tax assets. The fourth quarter of 2017 includes abenefit of $111 million from increases in the valuation allowance against U.S. state deferred tax assets. See Note 6 for additional information.
The fourth quarter of 2018 includes a charge of $50 million due to an increase to the $2,371 million charge in the fourth quarter of 2017 due to the enactment of U.S. tax reform
legislation on December 22, 2017. See Note 6 for additional information.

2018 FORM 10-K

105

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.

Not Applicable.

ITEM 9A. Controls and Procedures.
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the company’s management, including the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the company’s disclosure controls andprocedures, as that term is defined in Rule 13a-15(e) under the Exchange Act, as of the end of the period covered by this annual report.
Based on that evaluation, the CEO and CFO concluded that the company’s disclosure controls and procedures were effective as of theend of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting
Management’s report on the company’s internal control over financial reporting as of December 31, 2018 is included on page 48 of Part
II, Item 8 “Financial Statements and Supplementary Data.” The effectiveness of the company’s internal control over financial reporting asof December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report
appears on page 49 of Part II, Item 8 “Financial Statements and Supplementary Data.”

Changes in Internal Control over Financial Reporting
During the last fiscal quarter, there has been no significant change in the company’s internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.

ITEM 9B. Other Information.
Not Applicable.

1062018 FORM 10-K

PART IIIITEM 10.

Directors, Executive Officers and Corporate Governance.

Identification of Directors and Business Experience

Identification of Audit Committee

Information required by this Item is incorporated by reference fromthe 2019 Proxy Statement.

Information required by this Item is incorporated by reference fromthe 2019 Proxy Statement.

Identification of Executive Officers and Business
Experience

Shareholder Recommendation of Board Nominees

Information required by this Item appears in Item 1C of this Form
10-K.

Information required by this Item is incorporated by reference fromthe 2019 Proxy Statement.

Compliance with Section 16(a) of the Exchange Act

Family Relationships
There are no family relationships between the officers and directorsof the company.

Information required by this Item relating to compliance with
Section 16(a) of the Exchange Act is incorporated by reference
from the 2019 Proxy Statement.

Legal Proceedings Involving Officers and Directors

Code of Ethics

Information required by this Item is incorporated by reference fromthe 2019 Proxy Statement.

Our Worldwide Code of Conduct (Code), first published in 1974 andmost recently updated in 2015, sets a high standard for honesty
and ethical behavior by every employee, including the principal
executive officer, principal financial officer, controller and principal
accounting officer. The Code is posted on our website at www.
Caterpillar.com/code. To obtain a copy of the Code at no charge,
submit a written request to the Corporate Secretary at 510 Lake
Cook Road, Suite 100, Deerfield, IL 60015-4971. We post on our
website at www.Caterpillar.com/code any required amendments
to or waivers granted under our Code pursuant to SEC or New York
Stock Exchange disclosure rules.

Audit Committee Financial Expert
Information required by this Item is incorporated by reference fromthe 2019 Proxy Statement.

ITEM 11.

Executive Compensation.

Information required by this Item is incorporated by reference from the 2019 Proxy Statement.

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.

Information required by this Item relating to security ownershipof certain beneficial owners and management is incorporated byreference from the 2019 Proxy Statement.

Information required by this Item relating to securities authorized
for issuance under equity compensation plans is included in thefollowing table:

Equity Compensation Plan Information (as of December 31, 2018)

Plan category

Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total

(a)
Number of securities tobe issued upon exerciseof outstanding options,warrants and rights
21,212,942(b)Weighted-average
exercise price ofoutstanding options,warrants and rights
$

91.92
N/A

N/A

$

91.92

44,139,162

N/A
21,212,942(c)Number of securities
remaining available
for future issuanceunder equity
compensation plans(excluding securities
reflected in column(a))
44,139,162

2018 FORM 10-K

107

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence.

Information required by this Item is incorporated by reference from the 2019 Proxy Statement.

ITEM 14.

Principal Accountant Fees and Services.

Information required by this Item is incorporated by reference from the 2019 Proxy Statement.

108

2018 FORM 10-K

This page intentionally left blank

CORPORATE PROFILE
Whether paving roads, mining essential commodities or extracting
the fuels to satisfy global energy demand, Caterpillar products,
services and solutions help improve the lives of people around theworld. Customers use our products to build the basic infrastructurethat enables higher standards of living so that people have accessto water, electricity, roads, bridges, hospitals, schools and so muchmore. In short, our solutions help our customers build a better world.

104,000
Full-time
employees

4 Million+
Products working
around the world

168
Global Cat® dealers~850,000
Connected assets$1.85 Billion

19 Years
Dow Jones Sustainability
Index member$27 Million
Caterpillar Foundation investments
in global communities in 2018

Research and development
funding

Our Strategy for Profitable Growth

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Services

Operational Excellence

Expanded Offerings

Growing digitalenabled solutions andaftermarket offerings
to deliver unmatchedvalue to customers.

Building upon corecompetencies – safety,
quality, Lean and costdiscipline – to deliver strong
operational performance.

Enabling customer successthrough integrated anddifferentiated solutions.

© 2019 Caterpillar. All Rights Reserved. CAT, CATERPILLAR, LET’S DO THE WORK, theirrespective logos, “Caterpillar Yellow”, the “Power Edge” and Cat “Modern Hex” trade dress
as well as corporate and product identity used herein, are trademarks of Caterpillar andmay not be used without permission.

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