®

2019 ANNUAL REPORTLEARN MORE
about how Caterpillar is helping
customers build a better world.

2019 ANNUAL REPORT
caterpillar.com/annual-report2019 SUSTAINABILITY REPORT
caterpillar.com/sustainability-report© 2020 Caterpillar. All Rights Reserved.
Caterpillar: Nonconfidential

CAT-050_AR_Covers.indd 1

2019

Annual Report
Executing Our Strategy

CAT, CATERPILLAR, LET’S DO THE WORK, their respective logos,“Caterpillar Corporate Yellow,” the “Power Edge” and Cat“Modern Hex” trade dress as well as corporate and productidentity used herein, are trademarks of Caterpillar and may not
be used without permission.

4/20/20 11:05 AM

CORPORATEPROFILE

Whether paving roads, mining essential commodities or extracting the fuels tosatisfy global energy demand, Caterpillar products are helping to build a betterworld. Since 1925, Caterpillar has been making sustainable progress possible
and driving positive change on every continent.
Services offered throughout the product life cycle, cutting-edge technology
and decades of product expertise set Caterpillar apart, providing exceptional
value to help our customers succeed.

$1.7B

R&D
Funding$53.8B~$30M

Foundation
Investment

Sales& Revenues

4 Million+

Cat® Products at Work
Around the World**Includes discontinued products

1M

Primary
Locations~25

Cat® Dealers

Employees

21

BrandsCountries Where
We Do Business

Sales Outside
the U.S.

Countries

Connected
AssetsAll numbers represent 2019 data

THE WORLD’S LEADINGMANUFACTURER

PRIMARY BUSINESSSEGMENTSCORPORATEHEADQUARTERS

Construction and Mining
Equipment

Construction Industries

Deerfield, Illinois

Resource Industries

STOCK SYMBOL

Diesel and Natural
Gas Engines
Industrial Gas Turbines
Diesel-Electric Locomotives

CAT-050_AR_Covers.indd 2

Energy & Transportation
Financial Products

In 2019, Caterpillar introduced advanced
technology and new products to help ourcustomers get their jobs done. Learn
more about some of our most groundbreaking stories.

165

190+

~150
In

102,300

READ MORE ONLINE

Partnering With Dealers to
Deliver Innovative Services
We’re introducing new ways to support dealers
in helping their customers increase productivity
and lower owning and operating costs.
Creating Value, Anywhere and Everywhere
Over time and throughout the ownershipexperience, customers are discovering thesuperior value of choosing Caterpillar.

The Right Solution for Every
Customer NeedAn expanding product line is helping grow ourbusiness and reach new customers around the world.
Powering the World When It Matters Most
Hospitals and data centers have no margin
for error when it comes to backup power– here’s how we keep them running.

Caterpillar’s Digital Strategy
Learn how we’re applying decades ofmachine expertise to offer innovative
digital solutions for our customers.

Technology That Keeps Operators Alert –and AliveCat® Detect technologies ensure operators
remain focused on their surroundings,
keeping everyone on the job site safer.

Autonomous Solutions in Action
Caterpillar has more than double the autonomous
driving experience of any automotive manufacturer.
See how we’re putting that knowledge to work.

Manufacturing Smarter, Not Harder
By applying Lean, a facility consolidated
two assembly lines into one and assembled
more components in less time.

Digging Deep to Meet Mining
Customers’ Needs
The latest 6060 hydraulic mining shovel
was built to meet customer needs fordurability, reliability and performance.

Remanufacturing: It’s Bigger Than You Think
Reducing, reusing and recycling materials
once destined for a landfill benefits customers,
our company and the environment.

CAT

20 YEARS
ON THE DOW JONESSUSTAINABILITY INDEX

4/22/20 4:37 PM

DEAR FELLOWSHAREHOLDERS

I would like to thank Caterpillar employees
around the world for enabling our customers
to continue providing the critical infrastructure
essential to fight the global pandemic.

As we prepared this year’s Annual Report, COVID-19 became a global pandemic,presenting new challenges around the world. Governments responded withguidance to manage the crisis and, in many instances, classified operations
such as Caterpillar’s as essential activity for support of critical infrastructure.
Customers use our products to provide primary and stand-by power for hospitals,
grocery stores and data centers; transport food and critical supplies in trucks, ships
and locomotives; maintain clean water and sewer systems; mine commodities/ 1 /Along with our dealers and suppliers, Caterpillar is
working to help ensure uninterrupted access to the
products and services that our customers rely uponto support society during these difficult times.

and extract the fuels essential to satisfy global
energy demand. Along with our dealers andsuppliers, Caterpillar is working to help ensure
uninterrupted access to the products and services
that our customers rely upon to support society
during these difficult times.
While we are serving this important need, Caterpillar
remains dedicated to the safety, health and well-beingof our employees. The Caterpillar team achieved ourbest safety performance on record in 2019, and weare leveraging our strong safety culture to manage
through this pandemic.
Employees who can work from home are doing so. In our facilities that remain
open, Caterpillar is taking appropriate precautions and implementing safeguards
to protect our team members. We have increased the frequency of cleaning anddisinfecting facilities with special attention to common areas. We are following
social distancing practices and are implementing other measures consistent withspecific regulatory requirements and guidance from health authorities.
We have introduced a number of enhanced benefits to our employees to help them
deal with the pandemic. These benefits vary by country based on local medicalcare systems and various regulatory
requirements. The Caterpillar
Foundation has also committed$10 million (USD) to directly support
global COVID-19 response activities
and help organizations that havebeen impacted.
In response to the pandemic, wehave taken other decisive actions
to keep our company strong, including
reducing discretionary expenses andsuspending 2020 salary increases andshort-term incentives for many
employees and all senior executives.

/ 2 /2019 ANNUAL REPORTPhoto credit: NYSE

Celebrating 90 Years of Corporate Strength
Of the approximately 2,200 companies listed on the New York Stock Exchange (NYSE), Caterpillar
is among only 3% that have been listed for 90 consecutive years or more. We celebrated the 90th
anniversary of Caterpillar’s listing on the NYSE in December, when Caterpillar Chairman and CEO
Jim Umpleby rang the opening bell.
To mark the occasion, we put a variety of Cat® machines on display in front of the NYSE, including
a wheel loader, wheeled excavator, industrial loader and compact loader, all of which have playeda part in Caterpillar’s historical success.

We continue to execute the strategy for profitable
growth we introduced in 2017 by focusing on operational
excellence, expanded offerings and services.
Caterpillar has faced and overcome many challenges inour 95-year history. As in the past, our employees continue
to rise to the occasion. I would like to thank Caterpillar
employees around the world for enabling our customers
to continue providing the critical infrastructure essential
to fight the global pandemic.
Thank you for your continued support.

Jim Umpleby
Chairman & CEO/ 3 /2019 PERFORMANCE AT-A-GLANCE
Caterpillar delivered strong operational performance despite a 2% decline in sales and revenues forthe year. We remained disciplined and focused on maintaining control of our structural costs, which
helped us achieve an operating profit margin of 15.4%. We generated strong operating cash flow and,as a result, were able to return $6.2 billion to shareholders, including $4.0 billion in share repurchases.
We also raised the dividend by 20% in 2019 and paid dividends of $2.1 billion, maintaining our status
as a Dividend Aristocrat. We achieved our 2019 Investor Day targets for operating margin and returned
substantially all Machinery, Energy & Transportation (ME&T) free cash flow to shareholders.

Sales and Revenues(in billions)$54.7

Sales by Region(in billions)Operating Profit(in billions)

$53.8

$45.5

$8.3

$8.3

‘18

‘19

$4.5

‘17

‘18

‘19

Profit Per Share(in dollars)

North America – $25.8
Asia/Pacific – $12.1
Europe, Africa, Middle East – $11.2
Latin America – $4.7

Adjusted Profit
Per Share‘17

Dividends Paid(per share in dollars)(in dollars)$10.26$11.22$10.74$3.78$11.06
$3.10

$3.28

‘17

‘18

$6.88

$1.26
‘17

‘18

‘19

Amounts in U.S. Dollars/ 4 /2019 ANNUAL REPORT

‘17

‘18

‘19

A reconciliation of adjusted profit per
share to U.S. GAAP can be found in our2019 10-K filing, which is available on our
website at www.caterpillar.com/investors.

‘19

2019 END-MARKET HIGHLIGHTS
Construction Industries
Modest economic expansion and continued growth inconstruction activity in North America, in particular for roadinfrastructure, was offset by weaker demand in Asia/Pacificdue to continued competitive pressures. Lower sales in 2019were driven by changes in dealer inventories, partially offset
by higher end-user demand.

$22.6B* $3.9B
Revenue

Profit$10.3B*$1.6B

Revenue

ProfitResource Industries
Mining customers increased capital expenditures ascommodity prices were generally supportive of investments.
Positive global economic growth drove increased sales forequipment supporting nonresidential construction activities,
as well as quarry and aggregates activities.

Energy & Transportation
Declines in North American oil and gas resulted in weaker
new equipment demand for well servicing and slowed timingof turbine project delivery of gas compression projects. Bothindustrial and power generation applications experienced
moderate growth from higher end-user demand, whiletransportation sales were about flat.

$22.1B* $3.9B
Revenue

Profit* Includes inter-segment sales/ 5 /EXECUTING OUR STRATEGY
Caterpillar continues to execute our strategy for profitable
growth, which has three pillars: operational excellence, expanded
offerings and services. Operational excellence includes the corecompetencies of safety, quality, Lean and a competitive andflexible cost structure. Expanded offerings includes our growing
equipment portfolio that meets a broad range of customer
needs. Services refers to the many ways that we help customers
succeed after purchasing a product, including growing digitalofferings. Successfully executing this strategy allows us to
improve operating profit and free cash flow – while providing
better solutions to customers and creating more opportunities
for our people, partners and shareholders.

OPERATIONAL
EXCELLENCE

EXPANDED
OFFERINGSSERVICESOPERATIONAL EXCELLENCE

Delivered an operating marginof 15.4% on $53.8 billion ofsales and revenues in line withour 2019 Investor Day range.

Continued our Lean manufacturing
journey through synchronization ofvalue chains to reduce lead times,
optimize working capital andincrease availability.

Removed about $2 billion in
structural costs since 2014 bytaking an enterprise view to costmanagement and streamlining ourmanufacturing approach.

Continued focus on improving thecompetitiveness and flexibilityof our cost structure, such as
reducing production levels toreflect dealer order patterns
and targeting lead times.

Continued focus on implementing
defect-free initiatives across thecompany has continued to resultin high-quality machines andpower systems.

Achieved our best safety performance on record.
/ 6 /2019 ANNUAL REPORTEXPANDED OFFERINGS
Invested approximately $3.5 billion
in research and development (R&D)
during the past two years, resulting
in a wide variety of new products
across all our segments.
Launched 11 GC models todate, including six new models
in 2019, which target customers
who prioritize lifecycle value.
Expanded our portfolio to include
a broader range of undergroundmining products. Introduced new
products with fuel-efficiency benefits,
including the D6 XE, the world’s
first high-drive electric drive dozer.

Responded to customers’ needs forreliable engines that are lighter, more
efficient and powerful with two newengine platforms, the Cat C3.6 and C13B.
Introduced the well service 3512E Tier 4
Final Dynamic Gas Blending™ dual fuelengine – the first and only Tier 4 Final wellservice dual-fuel engine in the industry.
Started production of a new single trailer
5MW Solar turbine mobile generator.
Launched the XQP30, XQP60,
XQP100, XQ230, XQP1100 and
XGC1900 family of switchable
electric power rental packages.

SERVICES

Increased Machinery, Energy &Transportation (ME&T) services
revenue 2% in 2019 to approximately$18 billion, working toward ourgoal to double ME&T services
revenue between 2016 and 2026.

Achieved target to connect 1 million
assets, resulting in one of thelargest fleets of connected assets
in the industries we serve.

Continued to expand digital
capabilities, providing actionableinsights for our customers. For
example, the Cat Inspect app is
now being used to provide close
to 100,000 inspections per month.

Helped dealers better forecast
customer demand through advanced
analytics, enabling them to improveparts availability.

Leveraged new capabilities to be
more customer-focused than everbefore, thanks to a renewed focus
on customer value agreements.

Expanded the number of mining trucks
running Caterpillar’s autonomous
solutions to 275 trucks, an increase of
48% over 2018. Caterpillar continues
to have the single largest autonomous
fleet in the world, with customers
reporting benefits in the areas ofsafety, productivity and performance.

/ 7 /CORPORATE GOVERNANCE
Caterpillar’s governance structure provides leadership, accountability and transparency to the
management of the company and its businesses. Our corporate governance framework serves theinterests of shareholders 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 and the Executive Office. Learn more at www.caterpillar.com/governance.

Board of Directors
Kelly A. Ayotte
Former U.S. Senator
Representing New Hampshire
David L. Calhoun
President and CEO
The Boeing Company
Daniel M. Dickinson
Managing Partner
HCI Equity Partners
Juan Gallardo
Chairman and Former CEO
Organización CULTIBA, S.A.B de C.V.
William A. Osborn
Former Chairman and CEO
Northern Trust Corporation and
The Northern Trust Company
Debra L. Reed-Klages
Former Chairman and CEO
Sempra Energy

Officers
Edward B. Rust, Jr.
Former Chairman and CEO
State Farm Mutual Automobile
Insurance Company
Susan C. Schwab
Professor
University of Maryland Schoolof Public Policy and Former
U.S. Trade Representative
D. James Umpleby III
Chairman and CEO
Caterpillar Inc.
Miles D. White
Executive Chairman of the Board
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
and Corporate Secretary
Suzette M. Long
Chief Human Resources Officer
Cheryl H. Johnson

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

As of April 1, 2020

LEARN MORE

about our corporate governance framework and voting on matters for the annual meetingin Caterpillar’s Proxy Statement: https://www.caterpillar.com/en/investors/financial-information/proxy-statement.

/ 8 /2019 ANNUAL REPORT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, 2019
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)
9 3/8% Debentures due March 15, 2021
8% Debentures due February 15, 2023
5.3% Debentures due September 15, 2035

Trading Symbol (s)
CAT
CAT21
CAT23
CAT35

Name of each exchange on which registered
New York Stock Exchange(1)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).
•• whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” inRule 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 28, 2019, there were 562,589,191 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 $76.8 billion.
As of December 31, 2019, there were 550,082,610 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 III2020 Annual Meeting Proxy Statement (Proxy Statement) to be filed with the Securities and Exchange Commission (SEC)
within 120 days after the end of the fiscal 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

13

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

48

Item 8.

Financial Statements and Supplementary Data

49

Item 9.

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

107

Item 9A. Controls and Procedures

107

Item 9B. Other Information

107

Item 10.

Directors, Executive Officers and Corporate Governance

108

Item 11.

Executive Compensation

108

Item 12.

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

108

Item 13.

Certain Relationships and Related Transactions, and Director Independence

109

Item 14.

Principal Accountant Fees and Services109

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 2019 sales and revenues of $53.800 billion, Caterpillar is theworld’s leading manufacturer of construction and mining equipment,
diesel and natural gas engines, industrial gas turbines and dieselelectric locomotives. The company principally operates throughits 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 five 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 segment 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 2019, 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 2019 focused on
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
for supporting customers using machinery in mining, heavy
construction, quarry and aggregates, 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, oilsands, 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.
2019 FORM 10-K

1

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, Komatsu Ltd.,
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 autonomous ready vehicles and solutions

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, INNIO, Rolls-Royce Power
Systems and Wärtsilä Corp. Other competitors, such as Fiat
Industrial SpA (CNHI), GE Power, Kawasaki Heavy Industries
Energy System & Plant Engineering, MAN Energy Solutions (VW),
Mitsubishi Heavy Industries Ltd., Siemens Power and Gas,Volvo
Penta AB, Weichai Power Co., Ltd., and other emerging market
competitors compete in certain markets in which Caterpillar
competes. An additional set of competitors, including Aggrekoplc, Baker Hughes Co., Generac Holdings, Kohler Power Systems,
and others, are primarily packagers who source engines and/or
other components from domestic and international suppliers andmarket products regionally and internationally through a variety
of distribution channels. In rail-related businesses, our global
competitors include Alstom SA, Bombardier Transportation,
CRRC Corp., LTD., The Greenbrier Companies, Siemens Mobility,
Voestalpine AG, Vossloh AG and Wabtec Freight. We also competewith other companies on a more limited range of products,
services and/or geographic regions.

22019 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 conductedby Cat Financial, Insurance Services and their respective subsidiaries.
Cat Financial is a wholly owned finance subsidiary of Caterpillar Inc.
and its primary business is to provide retail and wholesale financing
alternatives for Caterpillar products to customers and dealers aroundthe world. Retail financing is primarily comprised of the financing
of Caterpillar equipment, machinery and engines. Cat Financial
also provides financing for vehicles, power generation facilities andmarine vessels that, in most cases, incorporate Caterpillar products. In
addition to retail financing, Cat Financial provides wholesale financing
to Caterpillar dealers and purchases short-term trade receivables from
Caterpillar. The various financing plans offered by Cat Financial are
primarily designed to increase the opportunity for sales of Caterpillar
products and generate financing income for Cat Financial. A significant
portion of Cat Financial’s activity is conducted in North America, withadditional offices and subsidiaries in Latin America, Asia/Pacific,
Europe, Africa and the 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 to supervisionand regulation by state, federal and various foreign governmental
authorities, and may be subject to various laws and judicial andadministrative decisions imposing various requirements and restrictions
which, among other things, (i) regulate credit granting activities and theadministration of loans, (ii) establish maximum interest rates, financecharges 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 andreporting of information related to a borrower’s credit experience. Cat
Financial’s ability to comply with these and other governmental andlegal requirements and restrictions affects its operations.

For more information regarding match funding, please see Note 4— “Derivative financial instruments and risk management” ofPart II, Item 8 “Financial Statements and Supplementary Data.”
See also the risk factors associated with our financial products
business included in Item 1 A. of this Form 10-K.

Cat Financial’s retail loans (totaling 49 percent*) include:

In managing foreign currency risk for Cat Financial’s operations, theobjective is to minimize earnings volatility resulting from conversion
and the remeasurement of net foreign currency balance sheet
positions, and future transactions denominated in foreign currencies.
This policy allows the use of foreign currency forward, option andcross currency contracts to offset the risk of currency mismatch
between the assets and liabilities, and exchange rate risk associatedwith future transactions denominated in foreign currencies.

zz Loans that allow customers and dealers to use their Caterpillar

equipment or other assets as collateral to obtain financing(24 percent*).

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 (25 percent*).

Cat Financial’s retail leases (totaling 35 percent*) include: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
(22 percent*).

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 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 also purchases short-term receivables from Caterpillar(14 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 operates in a highly competitive environment, withfinancing for users of Caterpillar equipment available through a variety
of sources, principally commercial banks and finance and leasing
companies. Cat Financial’s competitors include, Australia and New
Zealand Banking Group Limited, Banc of America Leasing & Capital
LLC, BNP Paribas Leasing Solutions Limited, Wells Fargo Equipment
Finance Inc. and various other banks and finance companies. In
addition, many of our manufacturing competitors own financial
subsidiaries, such as John Deere Capital Corporation, Komatsu
Financial L.P., Kubota Credit Corporation 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 merchandisingprograms around the 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. Cat
Financial is also affected by, among other things, the availabilityof funds from its financing sources, its cost of funds relative to its
competitors and general economic conditions such as inflation andmarket interest rates.
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 interestbearing liabilities, regardless of which direction interest rates move.
*

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
Authority. Caterpillar Insurance Co. Ltd. is a Class 2 insurer (asdefined by the Bermuda Insurance Amendment Act of 1995), which

Indicates the percentage of Cat Financial’s total portfolio at December 31, 2019. 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.”
2019 FORM 10-K

3

primarily 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.

and power generation units and to support our after-market dealer
parts sales. We also purchase various 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 andleveraging 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 andengine products. However, increases in demand have led to parts andcomponents constraints across some products. We use a variety ofagreements with suppliers to protect our intellectual property andprocesses to monitor and mitigate risks of the supply base causing
a business disruption. The risks monitored include supplier financial
viability, the ability to increase or decrease production levels, 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.

zz Cargo insurance for the worldwide cargo risks of Caterpillar

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.

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 orformed 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 areready to assemble components, which are made either to Caterpillar
specifications or to supplier developed specifications. We machine andassemble some of the components used in our machines, engines
42019 FORM 10-K

Order Backlog
The dollar amount of backlog believed to be firm was approximately$13.7 billion at December 31, 2019 and $16.5 billion at December 31,
2018. Compared with year-end 2018, the order backlog decreased
across the three primary segments. Of the total backlog at
December 31, 2019, approximately $3.8 billion was not expected
to be filled in 2020.

Dealers and Distributors
Our machines are distributed principally through a worldwide
organization of dealers (dealer network), 46 located in the UnitedStates and 119 located outside the United States, serving 191
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 67 distributors covering 178 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 segment. There arealso 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, 2019, we employed about 102,300 full-time
persons of whom approximately 58,700 were located outside theUnited States. In the United States, we employed approximately
43,600 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
Inside U.S.
Outside U.S.
Total

2019

2018

43,60044,60058,70059,400102,300

104,000

By Region:
North America

43,90044,900EAME

18,40018,000Latin America

16,40017,300Asia/Pacific23,60023,800

Total

102,300

104,000

As of December 31, 2019, there were approximately 8,290 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 6,880 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 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.

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 10-Q, current reports on Form
8-K and any amendments to these reports 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 our board committee charters, ourboard’s Guidelines on Corporate Governance Issues, Worldwide
Code of Conduct and other corporate governance information areavailable on our website (www.Caterpillar.com/governance). The
information contained on the company’s website is not included in,
or incorporated by reference 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/historical2019 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.

The energy, transportation and mining industries are major users of
our products, including the coal, iron ore, gold, copper, oil and natural
gas industries. Customers in these industries frequently base theirdecisions 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 in these industries
are frequently volatile and can change abruptly and unpredictably inresponse to general economic conditions and trends, government
actions, regulatory actions, commodity inventories, production
and consumption levels, technological innovations, 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 lead to a decrease in the demand for our
products and services and may also result in a decrease in demand
for aftermarket parts as customers are likely to extend preventative
maintenance schedules and delay major overhauls when possible.

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.

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.

We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events orotherwise. 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.
62019 FORM 10-K

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 the pricesof such commodities would increase our costs, negatively impacting
our business, results of operations and financial condition if we areunable to fully offset the effect of these increased costs through priceincreases, 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. On the other hand, in circumstanceswhere demand for our products is less than we expect, we may
experience excess inventories and be forced to incur additionalcosts and our profitability may suffer. Our business, competitive
position, results of operations or financial condition could be negatively
impacted if supply is insufficient for our operations, if we experience
excess inventories or if we are unable to adjust our production
schedules or our purchases from suppliers to reflect changes incustomer 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, as well as
energy and mined products, which in turn affects sales of our
products and services that support 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, create supply chain inefficiencies and could adversely
impact our business, results of operations and financial condition.
Changes in monetary and fiscal policies, along with other factors,
may cause currency exchange rates to fluctuate. Actions that lead thecurrency exchange rate of a country where we manufacture products toincrease relative to other currencies could reduce the competitivenessof products made in that country, which could adversely affect ourcompetitive position, results of operations and financial condition.
Government policies on taxes and spending also affect ourbusiness. Throughout the world, government spending finances asignificant portion of infrastructure development, such as highways,
rail systems, airports, sewer and water systems, waterways anddams. Tax regulations determine asset depreciation lives and impact
the after-tax returns on business activity and investment, both ofwhich influence investment decisions. Unfavorable developments,
such as decisions to reduce public spending or to increase taxes,
could negatively impact our results.
Our global operations are exposed to political and economic risks,commercial instability and 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 acts of terrorism; 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
the basis 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 othercompanies’ products. Thus, our share of industry sales could be
reduced due to aggressive pricing or product strategies pursued
by competitors, unanticipated product or manufacturing difficulties,
our failure to price our products competitively, our failure to produce
our products at a competitive cost or an unexpected buildup incompetitors’ new machine 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,
some of which are managed by third parties, in connection witha variety of business activities. Additionally, we collect and store
sensitive information relating to our business, customers, dealers,
suppliers and employees. Operating these information technology
systems and networks and processing and maintaining this data
in a secure manner, is critical to our business operations andstrategy. Information technology security threats -- from user
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 targetingcustomer data or the security, integrity and/or reliability of the
hardware and software installed in our products. It is possiblethat our information technology systems and networks, or thosemanaged by third parties, could have vulnerabilities, which could
go unnoticed for a period of time. While various procedures andcontrols have been and are being utilized to mitigate such risks,
there can be no guarantee that the actions and controls we have2019 FORM 10-K

7

implemented and are implementing, or which we cause or havecaused third party service providers to implement, will be sufficient
to protect our systems, information or other property.

zz technological and product synergies, economies of scale andWe have experienced cyber security threats and vulnerabilities inour systems and those of our third party providers, and we haveexperienced viruses and attacks targeting our information technology
systems and networks. Such prior events, to date, have not had amaterial impact on our financial condition, results of operations or
liquidity. However, the potential consequences of a future material
cybersecurity attack include reputational damage, litigation withthird parties, government enforcement actions, penalties, disruption
to systems, unauthorized release of confidential or otherwise
protected information, corruption of data, diminution in the value of ourinvestment in research, development and engineering, and increased
cybersecurity protection and remediation costs, which in turn could
adversely affect our competitiveness, results of operations andfinancial condition. Due to the evolving nature of such security threats,
the potential impact of any future incident cannot be predicted. Further,
the amount of insurance coverage we maintain may be inadequate tocover claims or liabilities relating to a cybersecurity attack.

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

In addition, 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 effectivein May 2018, which may carry significant potential penalties fornoncompliance.
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 of ongoing
operations and adjust those inventories based on their assessments offuture 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 ofour dealers and OEM customers are higher than they desire, they may
postpone product purchases from us, which could cause our sales to belower than the end-user demand for our products and negatively impact
our results. Similarly, our results could be negatively impacted throughthe loss of time-sensitive sales if our dealers and OEM customers do
not maintain inventory 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 due diligence, among other things,
there may be risks and liabilities that our 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 failure to achieve the acquisition’s revenue or profit forecast;zz the business culture of the acquired business may not match

well with our culture;

8

2019 FORM 10-K

cost reductions may not occur as expected;

zz unforeseen expenses, delays or conditions may be imposed uponzz 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
information technology systems, accounting systems and internal
controls over financial 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 havea dilutive effect on the interests of the holders of our commonshares.
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 following the transaction, including through guarantees
or other financial arrangements. Lower performance by thosedivested 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 ina number of countries under various collective bargaining
agreements with varying durations and expiration dates. Therecan be no assurance that any current or future issues with our
employees will be resolved or that we will not encounter future
strikes, work stoppages or other disputes with labor unions or
our employees. We may not be able to satisfactorily renegotiatecollective bargaining agreements in the United States and othercountries when they expire. If we fail to renegotiate our existingcollective bargaining agreements, we could encounter strikes orwork stoppages or other disputes with labor unions. In addition,
existing collective bargaining agreements may not prevent a strikeor work stoppage at our facilities in the future. We may also be
subject to general country strikes or work stoppages unrelated toour business or collective bargaining agreements. A work stoppage

or other limitations on production at our facilities for any reason
could have an adverse effect on our business, results of operations
and financial condition. In addition, many of our customers andsuppliers have unionized work forces. Strikes or work stoppages
experienced by our customers or suppliers could have an adverse
effect on our business, results of operations and financial condition.
Unexpected events may increase our cost of doing business or disrupt
our operations.
The occurrence of one or more unexpected events, including war,
acts of terrorism 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, including the current COVID-19 outbreak, equipment
failures, power outages or other unexpected events could result inphysical damage to and complete or partial closure of one or moreof our manufacturing facilities or distribution centers, temporary
or long-term disruption in the supply of component products fromsome local and international suppliers, and disruption and delay inthe transport of our products to dealers, end-users and 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 on customers’ability to pay for our products, which, in turn, depends on their accessto funds. Changes in global economic conditions may result incustomers experiencing increased difficulty in generating funds fromoperations. Capital and credit market volatility and uncertainty may
cause financial institutions to revise their lending standards, resulting
in customers’ decreased access to capital. If capital and credit market
volatility occurs, customers’ liquidity may decline which, in turn, would
reduce their ability to purchase 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 long-term

credit ratings assigned to their respective debt by the major credit
rating agencies. These ratings are based, in significant part, on eachof Caterpillar’s and Cat Financial’s performance as measured byfinancial metrics such as net worth, interest coverage and leverage
ratios, as well as transparency with rating agencies and timelinessof financial reporting. There can be no assurance that Caterpillar and
Cat Financial will be able to maintain their credit ratings. We receive
debt ratings from the major credit rating agencies. Moody’s longand short-term ratings of Caterpillar and Cat Financial are A3 andPrime-2 (“low-A”), while other major credit rating agencies maintaina “mid-A” debt rating. A downgrade of our credit rating by any ofthe 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 the commercial
paper market. There can be no assurance that the commercial paper
market will continue to be a reliable source of short-term financing
for Cat Financial or an available source of short-term financing forCaterpillar. An inability to access the capital markets could have an
adverse effect on our cash flow, results of operations 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 for 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 note andcommercial paper markets, but there can be no assurance that suchmarkets will continue to represent a reliable source of financing.
If global economic conditions were to deteriorate, Cat Financial
could face materially higher financing costs, become unable toaccess 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 of operations 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.

2019 FORM 10-K

9

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.

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 havean adverse impact on Cat Financial’s and our earnings and cash flows.
Because a significant number of the loans made by Cat Financial
are made at fixed interest rates, its business results are subject tofluctuations in interest rates. Certain loans made by Cat Financial andvarious financing extended to Cat Financial are made at variable rates
that use LIBOR as a benchmark for establishing the interest rate.
LIBOR is the subject of recent proposals for reform. On July 27, 2017,
the United Kingdom’s Financial Conduct Authority announced thatit 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 be established such that LIBOR
continues to exist after 2021 or the establishment of an alternativereference rate(s). Several offerings of securities that include suchan alternative reference rate have now been completed by othercompanies. The consequences of these developments cannot be
entirely predicted and could have an adverse impact on the market
value for or value of LIBOR-linked securities, loans, derivatives, andother financial obligations or extensions of credit held by or due to
Cat Financial, as well as the revenue and expenses associated withthose securities, loans and financial instruments. Cat Financial has
created a cross-functional team that will assess risk across multiple
categories as it relates to the use of LIBOR in securities, loans,derivatives, and other financial obligations or extensions of credit
held by or due to us. The team is also closely monitoring the progressof LIBOR reform and preparing to incorporate appropriate fallback
language for transitioning to an alternative reference rate(s) into newagreements with customers. The team is reviewing how to best
manage those customer agreements that extend beyond 2021 andutilize LIBOR. Other changes in market interest rates may influence
Cat Financial’s borrowing costs and could reduce its and our earnings
and cash flows, returns on financial investments and the valuationof derivative contracts. Cat Financial manages interest rate andmarket liquidity risks through a variety of techniques that include amatch funding strategy, the selective use of derivatives and a broadly
diversified funding program. There can be no assurance, however,that fluctuations in interest rates and market 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 these types of risk is ineffective, this 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 in an 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 or
102019 FORM 10-K

other 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 withprotection 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 expect 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 cashon hand, the proceeds of borrowings, shares of our common stock
or a combination of the foregoing, as permitted by applicable law.
Our assumptions for future benefit payments may change overtime and could be materially higher than projected. These factors
could significantly increase our payment obligations under theplans, and as a result, adversely affect our business and overall
financial condition.

LEGAL & REGULATORY RISKS
Our global operations are subject to a wide-range of 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 increased government scrutiny, investigationand civil and criminal penalties, and may limit our ability to importor export our products or to provide services outside the UnitedStates. 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
increase in the global enforcement of anti-corruption laws. Ouroperations outside the United States, including in developing
countries, expose us to the the risk of such violations. Violations ofanti-corruption laws or regulations by our employees, intermediaries
acting on our behalf, or our joint venture partners may result insevere criminal or civil sanctions, could disrupt our business, andresult in an adverse effect on our reputation, business and resultsof operations 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
other jurisdictions. Our future results of operations could be
adversely affected by changes in the effective tax rate as a resultof a change in the mix of earnings 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 orin their application or interpretation, changes in tax rates, changes ingenerally accepted accounting principles, changes in the valuationof deferred tax assets and liabilities, changes in the amount of
earnings indefinitely reinvested in certain non-U.S. jurisdictions, theresults of audits and examinations of previously filed tax returns andcontinuing 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 from these
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
and financial 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 andSupplementary 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
compliance risks in virtually every part of the world. We face riskof exposure to various types of claims, lawsuits and government
investigations. We are involved in various claims and lawsuits
related to product design, manufacture and performance liability(including claimed asbestos 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 withcertainty the outcome of claims, investigations and lawsuits, andwe could in the future incur judgments, fines or penalties or enter
into settlements of lawsuits and claims that could have an adverse
effect on our reputation, business, results of operations or 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 reputation, business andresults of operations or financial condition.

2019 FORM 10-K

11

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 United States, 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 the financial services industry. As a result, Cat Financial
has become and could continue to become subject to additional
regulatory costs that could be significant and have an adverse
effect on Cat Financial’s and our results of operations and financial
condition. Changes in regulations or additional regulations in the
United States 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.
We are subject to stringent environmental laws and regulations that
impose significant compliance costs.
Our facilities, operations and products are subject to increasingly
stringent environmental laws and regulations globally, includinglaws and regulations governing emissions to noise, air, releases
to soil and discharges to water and the generation, handling,storage, transportation, treatment and disposal of non-hazardousand hazardous waste materials. Some environmental laws impose
strict, retroactive and joint and several liability for the remediationof the release of hazardous substances, even for conduct that was
lawful at the time it occurred, or for the conduct of, or conditions

caused by, prior operators, predecessors or other third parties.
Failure to comply with environmental laws could expose us topenalties or clean-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 andremediation efforts related to any non-compliance with such laws
and regulations could negatively impact our ability to conduct ouroperations and our financial condition and results of operations. In
addition, there can be no assurances that we will not be adversely
affected by costs, liabilities or claims with respect to existingor subsequently acquired operations or under present laws andregulations or those that may be adopted or imposed in the future.
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 reputation, business, capital expenditures,
results of operations, financial condition and competitive position.

ITEM 1B. Unresolved Staff Comments.
None.

ITEM 1C. Executive Officers of the Registrant.
Name and age

12Present Caterpillar Inc. positionand date of initial election

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

D. James Umpleby III (61)Chairman of the Board (2018) and Chief Executive
Officer (2017)

Group President (2013-2016)

Andrew R.J. Bonfield (57)

Chief Financial Officer (2018)

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

Bob De Lange (50)Group President (2017)

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

Denise C. Johnson (53)Group President (2016)

Vice President (2012-2016)

William P. Ainsworth (63)Group President (2019)

President/CEO, Progress Rail & Senior Vice
President and Strategic Advisor to Caterpillar Inc.
(2017-2019), President/CEO, Progress Rail - Vice
President (2014-2017)

Ramin Younessi (55)Group President (2018)

Vice President (2013-2018)

Suzette M. Long (54)

Chief Legal Officer, General Counsel and Corporate
Secretary (2017)

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

Cheryl C. Johnson (59)

Chief Human Resources Officer (2017)

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

G. Michael Marvel (58)

Chief Accounting Officer (2019)

Director of Corporate Financial Reporting (20182019), Chief Financial Officer for Solar Turbines
Incorporated (2013-2018)2019 FORM 10-K

ITEM 2.

Properties.

General Information

Parts Distribution Centers

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 segment are involved in the manufacturing ofcomponents that are used in the assembly of products for morethan one business segment. Caterpillar’s parts distribution centers
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.

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.

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 inretaining occupancy of any leased facilities, either by renewing
leases prior to expiration or by replacing them with equivalentleased facilities.

Remanufacturing of our products is reported in our Energy &Transportation segment and is conducted primarily at the facilities
in the following locations: Franklin, Indiana; Bogor, Indonesia;
Corinth, Mississippi; Prentiss County, Mississippi; West Fargo,
North Dakota; Piracicaba, Brazil; Shanghai, China; Nuevo Laredo,
Mexico; and Shrewsbury, United Kingdom.

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 locatedin Tinaja Hills, Arizona; Edwards, Illinois; Chichibu, Japan andMalaga, Spain. We have various other technical and training centers,
demonstration areas and proving grounds located both inside andoutside the United States.

Remanufacturing and Components

Component manufacturing is reported in the All Other segment
and is conducted primarily at facilities in the following locations:
East Peoria, Illinois; Mapleton, Illinois; Peoria, Illinois; Bogor,
Indonesia; 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; and Skinningrove, 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.

2019 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: Thiruvallur

North Carolina: Clayton, SanfordIndonesia: Jakarta

Texas: Victoria

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.

142019 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 2019 totaled 25,985, compared with 26,938 at the end of 2018.

Performance Graph: Total Cumulative Shareholder Return for Five-Year Period Ending December 31, 2019

Dollars

The graph below shows the cumulative shareholder return assuming an investment of $100 on December 31, 2014, and reinvestment
of dividends issued thereafter.

170

120

70
2014

2015

2016

2017

2018

2019

Fiscal Year Ended December 31

Caterpillar Inc.

S&P 500 Index

2014

2015

S&P 500 Machinery Index

2016

2017

2018

2019

Caterpillar Inc.

$

100.00 $77.03 $

109.46 $191.59 $157.95 $188.77

S&P 500$

100.00 $101.38 $113.51 $138.29 $132.23 $173.86

S&P 500 Machinery$

100.00 $97.47 $

115.85 $140.22 $121.58 $157.29

Non-U.S. Employee Stock Purchase Plans
As of December 31, 2019, we had 24 employee stock purchase plans (the “EIP Plans”) administered outside the United States for our
non-U.S. employees, which had approximately 12,000 active participants in the aggregate. During the fourth quarter of 2019, approximately
87,000 shares of Caterpillar common stock were purchased by the EIP Plans pursuant to the terms of such plans.

2019 FORM 10-K

15

Issuer Purchases of Equity Securities

Total Numberof Shares
Purchased 2,3

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

October 1-31, 2019

4,755,142$

137.65

4,755,142

$

6.022

November 1-30, 201936,414$137.31

36,414

$

6.017

$

6.017

December 1-31, 2019
Total
1

2

3

2,890

$

139.732,890

4,794,446$

137.64

4,794,446

In July 2018, the Board approved a share repurchase authorization of up to $10.0 billion of Caterpillar common stock effective January 1, 2019, with no expiration (the 2018
Authorization). As of December 31, 2019, approximately $6.0 billion remained available under the 2018 Authorization.
During the fourth quarter of 2019, we entered into an accelerated share repurchase agreement (ASR) with a third-party financial institution to purchase $600 million of our common
stock. In October 2019, upon payment of $600 million to the financial institution, we received 3.5 million shares. In January 2020, upon final settlement of the ASR, we received an
additional 0.7 million shares. In total, we repurchased 4.2 million shares under this ASR at an average price per share of $142.48.
In October of 2019, we repurchased 1.3 million shares for $158 million in open market transactions at an average price per share of $124.43. In November and December of 2019, werepurchased a minimal number of shares in open market transactions as illustrated in the above table.

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

16

Average Price
Paid perShare 2,3

Total Numberof Shares Purchased
as Part of Publicly
Announced Program

2019 FORM 10-K

ITEM 6.

Selected Financial Data.

Five-year Financial Summary
2019(Dollars in millions except per share data)

2018

2017

2016

2015

Years ended December 31,
Sales and revenues$

53,800$54,722$

45,462$

38,537$47,011

Percent inside the United States

42%

41%

41%

41%

41%

Percent outside the United States

58%

59%

59%

59%

59%

Sales

$

50,755$51,822$

42,676$35,773$

Revenues

$

3,045

$

2,900

$

2,786

$

2,764

$

2,864

Profit (loss) 1

$

6,093

$

6,147

$

754

$

(67)

$

2,512

Profit (loss) per common share 2

$

10.85

$

10.39

$

1.27

$

(0.11)$

4.23

Profit (loss) per common share–diluted 3

$
$

10.74
3.95

$
$

10.26
3.36

$
$

1.26
3.11

$
$

(0.11)
3.08

$
$

4.18
3.01

Dividends declared per share of common stock

42.4%

Return on average common shareholders’ equity 4

44.1%

5.6%

(0.5)%

44,147

15.8%

Capital expenditures:
Property, plant and equipment

$

1,056

$

1,276

$

898

$

1,109

$

1,388

Equipment leased to others

$

1,613

$

1,640

$

1,438

$

1,819

$

1,873

Depreciation and amortization

$

2,577

$

2,766

$

2,877

$

3,034

$

3,046

Research and development expenses

$

1,693

$

1,850

$

1,842

$

1,853

$

2,134

3.1%

As a percent of sales and revenues

3.4%

103,400

Average number of employees

4.1%

101,500

4.8%

96,0004.5%

99,500110,800

December 31,$

78,453$78,509$76,962

Consolidated$

26,281$

25,000$Machinery, Energy & Transportation

$

9,141

$

8,005

$

Financial Products$

17,140$16,995

Consolidated$

37,657$

Machinery, Energy & Transportation

$

9,162

$

Financial Products$

28,495$

Total assets$

74,704$78,342

23,847

$

7,929

$

22,818$25,169

8,436

$

$

15,9188,960$

14,382$

16,20936,553

$

8,015

$

34,878$36,783$38,013

7,936

$

9,152

$

9,486

28,538$26,942$

27,631$

28,527Long-term debt due after one year:

Total debt:

1
2
3

4

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).

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.”

2019 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 2019 Form 10-K.

OVERVIEW
Our sales and revenues for 2019 were $53.800 billion, a 2 percent
decrease from 2018 sales and revenues of $54.722 billion. The
decrease was primarily due to lower sales volume. The sales volume
decline was mostly due to changes in dealer inventories, partially
offset by higher end-user demand. Sales were lower in EAME andAsia/Pacific, while North America and Latin America were about
flat. Sales declined in Energy & Transportation and Construction
Industries, while Resource Industries was about flat. Profit per
share for 2019 was $10.74, compared to profit per share of $10.26 in2018. Profit was $6.093 billion in 2019, compared with $6.147 billion
in 2018. The decrease was primarily due to higher tax expense as
operating profit was about flat. Operating profit was about flat as
favorable price realization, lower selling, general and administrative(SG&A) and research and development (R&D) expenses and higher
Financial Products’ profit were offset by higher manufacturingcosts, lower sales volume and unfavorable currency impacts.

Fourth-quarter 2019 sales and revenues were $13.144 billion, down
$1.198 billion, or 8 percent, from $14.342 billion in the fourth quarterof 2018. Fourth-quarter 2019 profit was $1.97 per share, comparedwith $1.78 per share in the fourth quarter of 2018. Fourth-quarter2019 profit was $1.098 billion, compared with $1.048 billion in 2018.

Highlights for 2019 include:zz Sales and revenues in 2019 were $53.800 billion, down

2 percent from 2018. Sales declined in Energy & Transportation
and Construction Industries, while Resource Industries was
about flat.

zz Operating profit as a percent of sales and revenues was

15.4 percent in 2019, compared with 15.2 percent in 2018.

zz Profit was $10.74 per share for 2019, and excluding the items in

the table below, adjusted profit per share was $11.06. For 2018
profit was $10.26 per share, and excluding the items in the tablebelow, adjusted profit per share was $11.22.

zz In order for our results to be more meaningful to our readers, wehave separately quantified the impact of several significant items:
Full Year 2019

(Dollars in millions except per share data)

Profit Before
Taxes

Profit$Mark-to-market losses

7,812

1

10.74

ProfitPer Share

$

$

7,822

10.26

0.64

495

0.64

—

(0.31)—(0.17)

—

—

386

0.50

Deferred tax valuation allowance adjustments

—

—

—

(0.01)

$

8,280

$

11.06

$

8,703

$

11.22

Profit per share at statutory tax rates.
Profit per share for 2018 restructuring costs were at statutory tax rates. 2019 restructuring costs were not material.

zz Enterprise operating cash flow for 2019 was about $6.9 billion,

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

Notes:
zz Glossary of terms included on pages 34-35; first occurrence ofterms shown in bold italics.

18$

Profit Before
Taxes

Restructuring costs 2
Adjusted profit
2

ProfitPer Share

468

U.S. tax reform impact

1

Full Year 20182019 FORM 10-K

zz Information on non-GAAP financial measures is included on

pages 43-44.

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

2019 COMPARED WITH 2018
CONSOLIDATED SALES AND REVENUES

Consolidated Sales and Revenues Comparison
Full Year 2019 vs. Full Year 2018

60,00054,722(1,017)

710

(760)

145

53,800

Full Year 2018
Sales & Revenues

Sales Volume

Price Realization

Currency

Financial Products
Revenues

Full Year 2019
Sales & Revenues

50,000Millions of $40,00030,00020,00010,0000

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

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

EAME sales decreased 6 percent primarily due to lower sales
volume and the unfavorable impact of a weaker euro, partially
offset by higher price realization. The decrease in sales volume wasprimarily due to changes in dealer inventories. Dealers increased
inventories during 2018 and decreased inventories during 2019.
Asia/Pacific sales declined 4 percent primarily due to unfavorable
currency impacts of a weaker Australian dollar and Chinese yuan
and lower sales volume. Sales volume decreased due to changes
in dealer inventories, partially offset by higher end-user demand.
Dealer inventories increased more during 2018 than 2019.
Dealer machine and engine inventories increased about $2.3 billion
in 2018, compared with an increase of about $800 million in 2019.
Dealers are independent, and the reasons for changes in theirinventory levels vary, including their expectations of future demandand product delivery times. Dealers’ demand expectations take into
account seasonal changes, macroeconomic conditions, machine
rental rates and other factors. Delivery times can vary basedon availability of product from Caterpillar factories and productdistribution centers. We expect dealer inventories to decline about$1.0 to $1.5 billion during 2020.

Sales and Revenues by Segment(Millions of dollars)

Construction Industries

2018$ 23,237

Sales
Volume$PriceRealization(560) $

349

Currency$

InterSegment/
Other(349) $$
Change2019(28) $ 22,649$%
Change

(588)

(3%)

Resource Industries

10,270

(260)

306

(121)

81

10,276

6—%

Energy & Transportation

22,785

(116)

55

(286)

(341)

22,097

(688)

(3%)

482

(24)

—

(3)

45

500

18

4%

Corporate Items and Eliminations(4,952)

(57)

—

(1)

243

(4,767)

185

Machinery, Energy & Transportation

51,822(1,017)

710

(760)

—

50,755(1,067)(2%)

Financial Products Segment

3,279

—

—

—

155

3,434

155

5%

Corporate Items and Eliminations

(379)

—

—

—

(10)

(389)

(10)

Financial Products Revenues

2,900

—

—

—

145

3,045

145

5%

(760) $

145

$ 53,800

(922)

(2%)

All Other Segment

Consolidated Sales and Revenues$ 54,722$ (1,017) $

710

$

$

2019 FORM 10-K

19

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

%
Chg

$

Latin America
$

EAME

%
Chg

$

4%

$ 4,012

Asia/Pacific
%
Chg

%
Chg

$

External Sales
and Revenues$

Inter-Segment

%
Chg

%
Chg

$

Total Sales andRevenues
%
Chg

$

2019
Construction
Industries$ 11,455

Resource Industries

3,632

Energy &Transportation

7% $ 1,533(14%) $ 22,556

1,533 (7%)

1,836 (17%)

2,812

5%

9,813

1,389

8,864

(8%)

All Other Segment

25

(60%)

Corporate Items andEliminations(192)

Machinery, Energy& Transportation

23,784—%

Financial Products
Segment

2,235

4%

Corporate Items andEliminations(234)

Financial Products
Revenues

2,001

Consolidated Sales
and Revenues$ 25,785(9%) $ 5,556

8%

93 (23%) $ 22,649

(3%)

463

21%

10,276

—%

4%

4,994

1%

3,238

12%

18,485

(2%)

3,612

(9%)

22,097(3%)

7 133%

28

56%

67

(4%)

127

(18%)

373

14%

500

4%

—

(20)

4,462 —%
299

6%

(51)
4%

(2%) $
(1%)

248

(14)

(226)

(4,541)(4,767)

10,850(6%)

11,659(4%)

50,755

(2%)

—

—%

50,755

(2%)

408

5%

492

7%

3,434 1

5%

—

—%

3,434

5%

(35)

(69)

6%

373

3%

423

1% $ 4,710 —%$ 11,223(6%) $ 12,082

(389)
10%

3,045

—

(389)

5%

—

—%

3,045

5%

(3%) $ 53,800(2%) $——%$ 53,800

(2%)

$

2018
Construction
Industries$ 10,754$ 1,479$ 4,410$ 6,473$ 23,116

121$ 23,237

Resource Industries

3,357

1,647

2,217

2,667

9,888

382

10,270

Energy &Transportation

9,685

1,331

4,934

2,882

18,832

3,953

22,785All Other Segment

63

3

18

70

154

328

482

Corporate Items andEliminations

(155)

—

(11)

(2)

(168)

(4,784)(4,952)

Machinery, Energy &Transportation

23,704

4,460

11,56812,09051,822—

51,822Financial Products
Segment

2,153

281

387

458

3,279 1—

3,279

Corporate Items andEliminations

(234)

(46)

(26)

(73)

(379)

—

(379)

Financial Products
Revenues

1,919

235

361

385

2,900

—

2,900

$ 25,623$ 4,695$ 11,929$ 12,475$ 54,722—$ 54,722

Consolidated
Sales and
Revenues
1

20

Includes revenues from Machinery, Energy & Transportation of $524 million and $470 million in 2019 and 2018, respectively.

2019 FORM 10-K$

CONSOLIDATED OPERATING PROFIT

Consolidated Operating Profit Comparison
9,000

8,293

(563)

710

8,000

Full Year 2019 vs. Full Year 2018
(643)
327

(145)

229

82

8,290

Currency

Financial
Products

Other

Full Year 2019
Operating Profit

Millions of $

7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Full Year 2018 Sales Volume
Operating Profit

Price
Realization

Manufacturing
Costs

SG&A / R&D

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

Operating profit was $8.290 billion in 2019, about flat with $8.293
billion in 2018. Favorable price realization mostly offset higher
manufacturing costs. Lower sales volume offset favorable selling,
general and administrative (SG&A) and research and development(R&D) expenses and higher profit from Financial Products.
Manufacturing costs increased due to higher warranty expense,
increased variable labor and burden, unfavorable cost absorption, andhigher material costs. Cost absorption was unfavorable as inventory
increased during 2018, compared with a decrease during 2019. The
increase was partially offset by lower period manufacturing costs
driven by lower short-term incentive compensation expense andthe favorable impact of restructuring and cost-reduction actions.

SG&A/R&D expenses decreased due to lower short-term incentive
compensation expense, partially offset by investments aligned withthe company’s strategic growth initiatives.
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, compared with about $700 million in 2019.
For 2020, we expect short-term incentive compensation expense
will be about $800 million. We also expect lower manufacturingcosts.

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

Profit by Segment
2019(Millions of dollars)

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

3,931 $
1,629
3,910
4
(1,504)
7,970
832
(81)
751
(431)
8,290 $$
Change2018
4,174 $
1,603
3,938
23
(1,583)
8,155
505
17
522
(384)
8,293 $%
Change
(243)
26
(28)
(19)
79
(185)
327
(98)
229
(47)
(3)

(6%)
2%
(1%)
(83%)
(2%)
65%
44%
—%

2019 FORM 10-K

21

Other Profit/Loss and Tax Itemszz Interest expense excluding Financial Products in 2019 was$421 million, compared with $404 million in 2018. The increase
was due to higher average debt outstanding during 2019 than 2018.

zz Other income (expense) in 2019 was expense of $57 million,

compared with expense of $67 million in 2018. The decrease wasdue to a lower expected return on pension and other postretirement
benefit (OPEB) plan assets more than offset by lower foreignexchange losses, unrealized and realized gains on marketablesecurities at Insurance Services and the favorable impact ofcommodity hedges.

zz The provision for income taxes for 2019 reflected an annual

effective tax rate of 25.2 percent, compared with 24.1 percent
for 2018, excluding the discrete items discussed in the following
paragraph. The increase from 2018 was largely driven by theapplication of U.S. tax reform provisions to the earnings of certain
non-U.S. subsidiaries, which do not have a calendar fiscal yearend. These provisions did not apply to these subsidiaries in 2018.
The provision for income taxes also included the following:o A tax benefit of $178 million to adjust previously unrecognizedtax benefits as a result of receipt of additional guidance in2019 related to the calculation of the mandatory deemed
repatriation of non-U.S. earnings due to U.S. tax reform. In
2018, the mandatory deemed repatriation estimate increased
by $50 million.
o A tax benefit of $41 million in 2019, compared with $56 million
in 2018, for the settlement of stock-based compensation
awards with associated tax deductions in excess of
cumulative U.S. GAAP compensation expense.
o A net benefit of $183 million in 2018 to adjust deferred tax
balances. (See Note – 6 “Income Taxes” of Part II, Item 8“Financial Statements and Supplementary Data” for more
information.)

Construction Industries
Construction Industries’ total sales were $22.649 billion for
2019, a decrease of $588 million, or 3 percent, compared with
$23.237 billion for 2018. The decrease was primarily due to lower
sales volume driven by changes in dealer inventories, partially
offset by higher end-user demand. Dealer inventories increased
significantly more during 2018 than during 2019. Favorable pricerealization was offset by unfavorable currency impacts from aweaker euro, Chinese yuan and Australian dollar.
Sales increased in North America and Latin America, and decreasedin Asia/Pacific and EAME.
zz In North America, the sales increase was primarily due tohigher demand for construction equipment and favorable pricerealization.

zz Sales were higher in Latin America. While construction activities

remained at low levels, the increase was driven by road andnon-residential construction activities.

22

2019 FORM 10-K

zz Sales decreased in EAME primarily due to changes in dealer

inventories and the unfavorable impact of a weaker euro, partially
offset by favorable price realization. Dealer inventories increased
during 2018, compared with a decrease during 2019.

zz Sales in Asia/Pacific decreased mostly due to lower demand,

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

Construction Industries’ profit was $3.931 billion in 2019, a decreaseof $243 million, or 6 percent, compared with $4.174 billion in 2018.
The decrease was primarily due to lower sales volume, including
an unfavorable mix of products, and higher manufacturing costs,
which were partially offset by favorable price realization and lower
SG&A/R&D expenses. Manufacturing costs increased primarily
due to unfavorable variable labor and burden. Lower SG&A/R&D
expenses were due to lower short-term incentive compensation
expense, partially offset by investments aligned with the company’s
strategic growth initiatives.
Construction Industries’ profit as a percent of total sales was
17.4 percent in 2019, compared with 18.0 percent in 2018.

Resource Industries
Resource Industries’ total sales were $10.276 billion in 2019,about flat with $10.270 billion in 2018. Higher end-user demandfor equipment and favorable price realization were offset bychanges in dealer inventories and unfavorable currency impacts,
primarily the weaker Australian dollar and euro. Higher end-user
demand was driven by increased capital investment by mining
customers to support ongoing mine site operations. End-user
demand also increased for our non-residential construction andquarry and aggregate customers. Dealers increased inventories
more significantly during 2018 than during 2019.
Resource Industries’ profit was $1.629 billion in 2019, an increaseof $26 million, or 2 percent, compared with $1.603 billion in 2018.
The improvement was mostly due to favorable price realization,
partially offset by higher manufacturing costs. Manufacturingcosts increased due to higher warranty expense, unfavorable costabsorption, increased variable labor and burden and higher material
costs, partially offset by the favorable period manufacturing costs
due to the impact of restructuring and cost-reduction actions andlower short-term incentive compensation expense. Cost absorption
was unfavorable as inventory increased more during 2018 than
2019.
Resource Industries’ profit as a percent of total sales was
15.9 percent in 2019, compared with 15.6 percent in 2018.

Energy & Transportation
Sales by Application
2019(Millions of dollars)

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

Energy & Transportation’s total sales were $22.097 billion in 2019,
compared with $22.785 billion in 2018. Sales declined primarily
due to lower inter-segment engine sales and unfavorable currency
impacts, primarily from the weaker euro and Australian dollar.
zz Oil and Gas – Sales decreased in North America primarily due tolower new equipment demand for well servicing and the timingof turbine project deliveries for gas compression and production.
Lower sales in North America were partially offset by increases
in all other regions, primarily Asia/Pacific.

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

zz Industrial – Sales improved primarily in North America and Asia/

Pacific driven by higher end-user demand.

zz Transportation – Sales were about flat as lower locomotive sales

were offset by stronger marine demand.

Energy & Transportation’s profit was $3.910 billion for 2019, adecrease of $28 million, or 1 percent, compared with $3.938 billion
for 2018. The decrease was mostly due to lower sales volumes,
partially offset by lower SG&A/R&D expenses. Lower SG&A/R&D
expenses were primarily due to lower short-term incentive
compensation expense. Higher manufacturing costs were morethan offset by favorable price realization and favorable otheroperating (income) expenses.
Energy & Transportation’s profit as a percent of total sales was
17.7 percent in 2019, compared with 17.3 percent in 2018.

Financial Products Segment
Financial Products’ segment revenues were $3.434 billion, an
increase of $155 million, or 5 percent, from 2018. The increase wasprimarily due to higher average financing rates in North America$$

5,205 $
4,474
3,749
5,057
18,485
3,612
22,097 $2018
5,763 $
4,334
3,640
5,095
18,832
3,953
22,785 $$ Change
(558)
140
109
(38)
(347)
(341)
(688)

% Change
(10%)
3%
3%
(1%)
(2%)
(9%)
(3%)

and Asia/Pacific, an increase in earned premiums from Insurance
Services across all regions and higher average earning assets inNorth America. These favorable impacts were partially offset by
the absence of fees associated with an intercompany credit facility
in North America.
Financial Products’ segment profit was $832 million in 2019,
compared with $505 million in 2018. Most of the increase wasdue to lower provision for credit losses at Cat Financial, driven by alower allowance rate compared with 2018. The lower allowance rate
was due to write-offs of accounts in 2019 that were reserved for in
2018, primarily in the Cat Power Finance portfolio. In addition, there
was a favorable impact from an increase in net yield on average
earning assets and a favorable impact from equity securities inInsurance Services. These favorable impacts were partially offset
by higher SG&A expenses and the absence of the intercompany
credit facility.
At the end of 2019, past dues at Cat Financial were 3.14 percent,compared with 3.55 percent at the end of 2018. Write-offs, netof recoveries, were $237 million for 2019, an increase from
$189 million for 2018, primarily due to Mining, Caterpillar Power
Finance and EAME, partially offset by a decrease in Latin America.
The increase in Mining was due to a small number of customer
balances written off in 2019, while the increases in Caterpillar Power
Finance and EAME were concentrated in the marine portfolio
and the Middle East, respectively. As of December 31, 2019, Cat
Financial’s allowance for credit losses totaled $424 million, or
1.50 percent of finance receivables, compared with $511 million,
or 1.80 percent of finance receivables, at December 31, 2018.

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

2019 FORM 10-K

23

FOURTH QUARTER 2019 COMPARED WITH FOURTH QUARTER 2018
CONSOLIDATED SALES AND REVENUES

Consolidated Sales and Revenues Comparison
Fourth Quarter 2019 vs. Fourth Quarter 2018

16,00014,342

14,000(1,046)
(95)

(103)

46

13,144

Price Realization

Currency

Financial Products
Revenues

4th Qtr 2019
Sales & Revenues

Millions of $12,00010,000
8,000
6,000
4,000
2,000
0

4th Qtr 2018
Sales & Revenues

Sales Volume

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

Total sales and revenues of $13.144 billion in the fourth quarterof 2019 decreased $1.198 billion, or 8 percent, compared with
$14.342 billion in the fourth quarter of 2018. The decline was due
to lower sales volume driven by the impact from changes in dealer
inventories and lower end-user demand, primarily in Construction
Industries and Resource Industries. Dealers decreased machineand engine inventories about $700 million during the fourth quarterof 2019, compared with an increase of about $200 million during
the fourth quarter of 2018.
The largest sales decrease was in North America, which declined
14 percent due to lower demand, including changes in dealer
inventories. Dealer inventories increased during the fourth quarterof 2018, compared with a decrease during the fourth quarter of 2019.
Sales decreased 16 percent in Latin America due to lower demandacross the region.
EAME sales decreased 6 percent primarily due to changes in dealer
inventories and unfavorable currency impacts, primarily from theweaker euro. Dealer inventories decreased more during the fourth
quarter of 2019 than the fourth quarter of 2018.
Asia/Pacific sales were about flat as higher sales volume was offset
by unfavorable price realization and currency impacts, primarily
from the weaker Australian dollar. Sales volume was higher as
improved end-user demand was partially offset by changes in dealer
inventories. Dealer inventories increased more during the fourth
quarter of 2018 than the fourth quarter of 2019.
Dealers decreased machine and engine inventories about$700 million during the fourth quarter of 2019, compared with anincrease of about $200 million during the fourth quarter of 2018.
Dealers are independent, and the reasons for changes in theirinventory levels vary, including their expectations of future demandand product delivery times. Dealers’ demand expectations take into
account seasonal changes, macroeconomic conditions, machine
rental rates and other factors. Delivery times can vary basedon availability of product from Caterpillar factories and productdistribution centers.

Sales and Revenues by Segment
FourthQuarter
2018(Millions of dollars)

Construction Industries$

Currency

InterSegment/
Other

FourthQuarter
2019$
Change$%Change(565) $(86) $(32) $

(2) $

5,020

(685)

(12%)

2,797

(430)

17

(22)

33

2,395

(402)

(14%)

Energy & Transportation

6,287

(25)

(27)

(47)

(239)

5,949

(338)

(5%)

129

(10)

—

—

24

143

14

11%

Corporate Items and Eliminations(1,288)

(16)

1

(2)

184

(1,121)

167

Machinery, Energy & Transportation

13,630(1,046)

(95)

(103)

—

12,386(1,244)(9%)

Financial Products Segment

812

—

—

—

34

846

34

4%

Corporate Items and Eliminations

(100)

—

—

—

12

(88)

12

Financial Products Revenues
Consolidated Sales and Revenues

24

$

Price
Realization

Resource Industries
All Other Segment

5,705

Sales
Volume2019 FORM 10-K

712$

14,342

$

—

—

—

46

(1,046) $(95) $(103) $

46

758$

13,144$46

6%(1,198)(8%)

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

Latin America

%
Chg

$

%
Chg

$

Asia/
Pacific

EAME
%
Chg

$

External Sales
and Revenues

%
Chg

$

InterSegment

%
Chg

$

%
Chg

$

Total Sales andRevenues%
Chg$

Fourth Quarter 2019
Construction
Industries
Resource
Industries
Energy &Transportation
All Other Segment
Corporate Items
and Eliminations
Machinery, Energy &Transportation$ 2,249 (18%) $

9% $

850 (20%) $ 1,475—% $ 4,983

834

(8%)

313 (33%)

526

(5%)

603 (23%)

2,276

2,287

(11%)

354 (18%)

1,578

2 (88%)

—

(50)

554

Corporate Items
and Eliminations(50)

Financial Products
Revenues

504

—%

—

5,322 (14%)

Financial Products
Segment

Consolidated
Sales and
Revenues

409

1,076 (16%)

2%

74

9%

(14)
5%

60

37

(5%) $ 5,020

(12%)

(16%)

119

38%

2,395

(14%)

5,949

(5%)

143

11%

5%

947

26%

5,166

(2%)

783 (23%)

5 (17%)

22

47%

29

(26%)

114

(5)

(13)

(68)

27%

(1,053)(1,121)

2,954

(6%)

3,034

—%

12,386

(9%)

—

—%

12,386

(9%)

102

21%

116

1%

846 1

4%

—

—%

846

4%

(9)
3%

(12%) $

93

$ 5,826 (13%) $ 1,136 (15%) $ 3,047

(15)
22%

101

(88)
2%

758

—

(88)

6%

—

—%

758

6%

(8%)

(5%) $ 3,135—% $ 13,144(8%) $——% $ 13,144$

39$ 5,705

Fourth Quarter 2018
Construction
Industries
Resource
Industries
Energy &Transportation$ 2,749$374$ 1,063$ 1,480$ 5,666

906

466

554

785

2,711

86

2,797

2,569

434

1,509

753

5,265

1,022

6,287

All Other Segment

16

2

6

15

39

90

129

Corporate Items
and Eliminations

(47)

1

(3)

(2)

(51)

(1,237)(1,288)

Machinery, Energy &Transportation

6,193

1,277

3,129

3,031

13,630—13,630Financial Products
Segment

545

68

84

115

812 1

—

812

Corporate Items
and Eliminations

(66)

(10)

(8)

(16)

(100)

—

(100)

Financial Products
Revenues

479

58

76

99

712

—

712

$ 6,672$ 1,335$ 3,205$ 3,130$ 14,342—$ 14,342

Consolidated
Sales and
Revenues
1$

Includes revenues from Machinery, Energy & Transportation of $126 million and $125 million in the three months ended December 30, 2019 and 2018, respectively.

2019 FORM 10-K

25

CONSOLIDATED OPERATING PROFIT

Consolidated Operating Profit Comparison
2,000

1,883

Fourth Quarter 2019 vs. Fourth Quarter 2018

(337)

1,800
1,600

(95)

114

Price
Realization

Manufacturing
Costs

188

(54)

SG&A / R&D

Currency

121

30

1,850

Financial
Products

Other

4th Qtr 2019
Operating Profit

Millions of $

1,400
1,200
1,000
800
600
400
200
0
Sales Volume
4th Qtr 2018
Operating Profit

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

Operating profit for the fourth quarter of 2019 was $1.850 billion, adecrease of $33 million, or 2 percent, compared with $1.883 billion
in the fourth quarter of 2018. The decrease was primarily due
to lower sales volume, mostly offset by lower SG&A and R&D
expenses and higher profit from Financial Products.
Lower SG&A/R&D expenses were mostly due to a reduction in
short-term incentive compensation expense and timing of R&D
expenses.
Financial Products’ operating profit was higher, primarily due tolower provisions for credit losses related to the Cat Power Financeportfolio compared with the fourth quarter of 2018.

In addition, favorable manufacturing costs were mostly offset
by unfavorable price realization. Manufacturing costs decreased
primarily due to lower period manufacturing and material costs,
partially offset by higher warranty expense. Period manufacturingcosts declined mainly due to lower short-term incentive
compensation and the favorable impact of restructuring and costreduction actions.
Short-term incentive compensation expense was about $120 million
in the fourth quarter of 2019, compared with about $310 million in
the fourth quarter of 2018.
Operating profit margin in the fourth quarter of 2019 was
14.1 percent, compared with 13.1 percent in the fourth quarterof 2018.

Profit (Loss) by Segment
Fourth Quarter
2019(Millions of dollars)

Construction Industries$

Resource Industries
Energy & Transportation
All Other Segment

$

845

$
Change$%Change

(186)

(22%)

261

400

(139)

(35%)

1,165

1,079

86

8%

(11)

(47)

36

77%

Corporate Items and Eliminations

(325)

(375)

50

Machinery, Energy & Transportation

1,749

1,902

(153)

(8%)

210

29

181

624%

Financial Products Segment
Corporate Items and Eliminations
Financial Products
Consolidating Adjustments
Consolidated Operating Profit

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

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

26

659

Fourth Quarter20182019 FORM 10-K

(6)

54

(60)

204

83

121

(103)
$

1,850

(102)
$

1,883

146%

(1)
$

(33)

(2%)

zz Other income (expense) in the fourth quarter of 2019 was

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

zz The provision for income taxes in the fourth quarter reflected anannual effective tax rate of 25.2 percent, compared with 24.1 percent
for the full year of 2018, excluding discrete items discussed in thefollowing paragraph. The increase from 2018 was largely driven by
the application of U.S. tax reform provisions to the earnings of certain
non-U.S. subsidiaries, which do not have a calendar fiscal year-end.
These provisions did not apply to these subsidiaries in 2018.
The provision for income taxes also included the following:o The change from the third-quarter estimated annual tax rateof 26 percent to the annual effective tax rate of 25.2 percent
resulted in a $54 million tax benefit in the fourth quarter of 2019.
o A tax benefit of $13 million in the fourth quarter of 2019,
compared to $4 million in the fourth quarter of 2018, forthe settlement of stock-based compensation awards withassociated tax deductions in excess of cumulative U.S. GAAP
compensation expense.
o A net tax benefit of $13 million in the fourth quarter of 2018 forother discrete items.

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

by the impact from changes in dealer inventories, while end-user
demand was about flat. Dealers decreased inventories during
the fourth quarter of 2019, compared with an increase during
the fourth quarter of 2018.

zz Sales were higher in Latin America. While construction activities

remained at low levels, the increase was driven by road andresidential construction activities.

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

zz Sales in Asia/Pacific were about flat as unfavorable price realization

was mostly offset by a few countries’ higher sales volume.

Construction Industries’ profit was $659 million in the fourth quarterof 2019, a decrease of $186 million, or 22 percent, comparedwith $845 million in the fourth quarter of 2018. The decrease wasprimarily due to lower sales volume.
In addition, favorable manufacturing costs were mostly offset
by unfavorable price realization. Manufacturing costs decreased
due to lower period manufacturing and material costs. Period
manufacturing costs declined mainly due to the favorable impactof restructuring and cost-reduction actions as well as lower shortterm incentive compensation.
Construction Industries’ profit as a percent of total sales was
13.1 percent in the fourth quarter of 2019, compared with
14.8 percent in the fourth quarter of 2018.

Resource Industries
Resource Industries’ total sales were $2.395 billion in the fourth
quarter of 2019, a decrease of $402 million, or 14 percent, comparedwith $2.797 billion in the fourth quarter of 2018. The decrease wasdue to lower sales volume, driven by changes in dealer inventories
and lower end-user demand. Dealers increased inventories during
the fourth quarter of 2018, compared with a decrease during thefourth quarter of 2019. While commodity prices are generally
supportive of reinvestment, the company continues to believe
mining customers remained disciplined in their capital expendituresdue to economic uncertainty, resulting in lower sales in the quarter.
In addition, end-user demand decreased for equipment supporting
non-residential construction.
Resource Industries’ profit was $261 million in the fourth quarterof 2019, a decrease of $139 million, or 35 percent, compared with$400 million in the fourth quarter of 2018. The decrease was mainly
due to lower sales volume, partially offset by lower SG&A/R&D
expenses and favorable price realization. The decrease in SG&A/
R&D expenses reflected a reduction in short-term incentive
compensation expense and timing of R&D expenses.
Resource Industries’ profit as a percent of total sales was
10.9 percent in the fourth quarter of 2019, compared with
14.3 percent in the fourth quarter of 2018.

Energy & Transportation
Sales by Application(Millions of dollars)

Fourth Quarter2019

Oil and Gas$

Power Generation

1,523

Fourth Quarter
2018
$

1,719

$
Change$%Change

(196)

(11%)

1,294

1,271

23

2%

908

902

6

1%

Transportation

1,441

1,373

68

5%

External Sales

5,166

5,265

(99)

(2%)

Inter-Segment

783

1,022

(239)

(23%)

(338)

(5%)

Industrial

Total Sales$

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

zz Power Generation – Sales increased slightly primarily due tozz Oil and Gas – Sales were lower mainly in North America. The

zz Transportation – Sales were higher mainly due to stronger

sales decline was largely due to lower demand for reciprocating
engines used in gas compression and lower turbine projectdeliveries.

5,949

$

6,287

$

higher deliveries for turbines in EAME.

zz Industrial – Sales were about flat as slightly higher sales in North

America were partially offset by lower sales in Latin America
and EAME.
marine demand in EAME.

2019 FORM 10-K

27

Energy & Transportation’s profit was $1.165 billion in the fourth
quarter of 2019, an increase of $86 million, or 8 percent, comparedwith $1.079 billion in the fourth quarter of 2018. The increase wasmostly due to lower SG&A/R&D expenses, primarily due to a
reduction in short-term incentive compensation expense and lower
R&D project expenses. Lower manufacturing costs were mostly
offset by lower sales volume.
Energy & Transportation’s profit as a percent of total sales was 19.6
percent in the fourth quarter of 2019, compared with 17.2 percent
in the fourth quarter of 2018.

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

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

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

2018 COMPARED WITH 2017
CONSOLIDATED SALES AND REVENUES

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

60,00050,000

8,291

601

254

114

54,722

Sales Volume

Price Realization

Currency

Financial Products
Revenues

Full Year 2018
Sales & Revenues

45,462Millions of $40,00030,00020,00010,0000

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). Caterpillar management utilizes these chartsinternally to visually communicate with the company’s Board of Directors and employees.

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 changes in dealer inventories. Favorable pricerealization across the three primary segments also contributed
to the sales improvement. In addition, sales were higher due tocurrency impacts, primarily from a stronger euro. Financial Products’revenues increased slightly.
Sales increased in all regions, with the largest sales increase in
North America, which improved 23 percent as strong economic
conditions in key end markets drove higher demand. Also
contributing to higher sales was an increase in dealer inventories
during 2018, compared with dealer inventories that were about
flat in 2017.
Sales increased 13 percent in Latin America primarily due tostabilizing economic conditions in several countries in the region
that resulted in improved demand from low levels.

28

2019 FORM 10-K

EAME sales increased 16 percent primarily due to higher demand,
including changes in dealer inventories. The improvement indemand was primarily in Europe. The impact of a stronger euro andfavorable price realization also contributed to higher sales. Dealer
inventories increased more significantly in 2018 than in 2017.
Asia/Pacific sales increased 28 percent primarily due to higher
demand in several countries across the region, including changes indealer inventories and favorable price realization. Dealer inventories
increased during 2018 as compared with dealer inventories thatwere 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 theirinventory levels vary, including their expectations of future demandand product delivery times. Dealers’ demand expectations take into
account seasonal changes, macroeconomic conditions, machine
rental rates and other factors. Delivery times can vary basedon availability of product from Caterpillar factories and productdistribution centers.

Sales and Revenues by Segment
Sales
Volume2017(Millions of dollars)

Construction Industries

$

Price
Realization

InterSegment/
Other

Currency$
Change2018%
Change19,240 $3,663 $

122 $

198 $

14 $

23,237 $

3,997

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)%

All Other Segment

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%

Corporate Items and Eliminations

(307)

—

—

—

(72)

(379)

(72)

Financial Products Revenues

2,786

—

—

—

114

2,900

114

4%

45,462 $8,291 $

601 $

254 $

114 $

54,722 $

9,260

20%

EAME

Asia/PacificConsolidated Sales and Revenues$

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

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%

(10%)

3

—%

18

(67%)

70

37%

154

(13%)

328

(16%)

All Other Segment

63

Corporate Items andEliminations(155)

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 andEliminations(234)

Financial Products
Revenues

1,919

Consolidated Sales
and Revenues$ 25,623

—

(11)

(46)
6%

235

(2)

(26)
(10%)

361

(168)

(73)
(10%)

385

(4,784)

(379)
24%

2,900

482 (15%)(4,952)

—

(379)

4%

—

—%

2,900

4%
20%

22% $ 4,695

12% $ 11,929

15% $ 12,475

28% $ 54,722

20% $

—

—% $ 54,722$ 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

2017
Construction
Industries

7,959

1,261

4,431

2,313

15,964

3,418

19,382All Other Segment

70

3

54

51

178

392

570

Corporate Items andEliminations

(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 andEliminations

(190)

(46)

(19)

(52)

(307)

—

(307)

Financial Products
Revenues

1,816

260

399

311

2,786

—

2,786

Consolidated Sales
and Revenues$ 21,072$ 4,200$ 10,413$ 9,777$ 45,462—$ 45,462$

2019 FORM 10-K

29

CONSOLIDATED OPERATING PROFIT

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

9,000

601
3,310

8,000

(444)

(249)

(81)

(141)

Currency

Financial
Products

833

4

8,293

Other

Other

Full Year 2018
Operating Profit

7,000Millions of $

6,000
5,000

4,460

4,000
3,000
2,000
1,000
0

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

The chart above graphically illustrates reasons for the change in consolidated operating profit between 2017 (at left) and 2018 (at right). Caterpillar management utilizes these charts internallyto visually communicate with the company’s Board of Directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation otheroperating (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 pricerealization.
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 tariffs on material costs was about $110 million during
2018. Freight costs were unfavorable primarily due to supply chain
inefficiencies as the industry responds to strong global demand.

SG&A/R&D expenses increased primarily due to 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.

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

Construction Industries

$

4,174

$

3,255

$

%
Change919

28%

Resource Industries

1,603

698

905

130%

Energy & Transportation

3,938

2,856

1,082

38%
152%

All Other Segment

23

(44)

67

Corporate Items and Eliminations(1,583)(2,659)1,076

Machinery, Energy & Transportation

8,155

4,106

4,049

99%

Financial Products Segment

505

792

(287)

(36)%

Corporate Items and Eliminations

17

(116)

133

Financial Products

522

676

(154)

Consolidating Adjustments

(384)

(322)

(62)

Consolidated Operating Profit

30$
Change20172019 FORM 10-K

$

8,293

$

4,460

$

3,833

(23)%

86%

Other Profit/Loss and Tax Items

Construction Industries

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

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.

compared with income of $153 million in 2017. The unfavorable
change was primarily a result of an unfavorable impact fromequity 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 werereported 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, theabsence of a 2017 pretax gain of $85 million on the sale ofCaterpillar’s equity investment in IronPlanet contributed to theunfavorable change.

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 forincome taxes in 2018 also included a charge of $59 million to correct
for an error which resulted in an understatement of the valuation
allowance offsetting deferred tax assets for prior years. This error
had the effect of overstating profit by $17 million and $33 million
for 2017 and 2016, respectively. Management has concluded thatthe 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.

zz Sales volume increased primarily due to higher demand forconstruction equipment and 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
and gas activities, including pipelines, non-residential building
construction and infrastructure activities. In addition, sales
increased due to changes in dealer inventories, which increased
during 2018, compared with a slight decrease during 2017.

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 theregion, most significantly in China, stemming from increased
building construction and infrastructure investment. Changes
in dealer inventories contributed to the sales improvement as
dealer inventories increased in 2018 and were about flat in 2017.

Construction Industries’ profit was $4.174 billion in 2018, 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 to focus
on improving productivity and efficiency of existing machine assets,
thereby extending equipment life cycles and lowering operating
costs. Rebuild, overhaul and maintenance activity was robust,
resulting in higher aftermarket parts sales. Favorable price realization
also contributed to the sales improvement.
Resource Industries’ profit was $1.603 billion in 2018, 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.

2019 FORM 10-K

31

Energy & Transportation
Sales by Application
2018(Millions of dollars)

Oil and Gas

$

5,763

$

4,424

$

%
Change1,339

30%Power Generation

4,334

3,551

783

22%

Industrial

3,640

3,445

195

6%

Transportation

5,095

4,544

551

12%

External Sales

18,832

15,964

2,868

18%

535

16%

3,403

18%

Inter-Segment

3,953

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.

32$
Change20172019 FORM 10-K

22,785

3,418$

19,382$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,
compared with $792 million in 2017. The decrease was primarily
due to an increase in the provision for credit losses at Cat Financial,
an unfavorable impact from equity securities in Insurance Services
and lower intercompany lending activity. These unfavorable impacts
were partially offset by higher average earning assets and anincrease in net yield on average earning assets.
At the end of 2018, past dues at Cat Financial were 3.55 percent,compared with 2.78 percent at the end of 2017. Write-offs, net ofrecoveries, 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.

RESTRUCTURING COSTS
Restructuring costs for 2019, 2018, and 2017 were as follows:
2019(Millions of dollars)

Employee separations

$

1

2018
48

$

2017
112

$

525

Contract terminations 1

1

7

183

Long-lived asset impairments 1

65

93

346

Defined benefit plan curtailments and termination benefits 2

—

(8)

29

Other

122

3

$

Total restructuring costs
1
2
3

236

182
$

386

173
$

1,256

Recognized in Other operating (income) expenses.
Recognized in Other income (expense).
Represents costs related to our restructuring programs, primarily for project management, inventory write-downs, accelerated depreciation and equipment relocation, and also LIFO
inventory decrement benefits from inventory liquidations at closed facilities, all of which are primarily included in Cost of goods sold.

The restructuring costs in 2019 were primarily related torestructuring actions across the company. The restructuring costs
in 2018 were primarily related to ongoing facility closures acrossthe company. In 2017, about half of the restructuring costs wererelated to the closure of the facility in Gosselies, Belgium, within

Construction Industries, and the remainder was related to otherrestructuring actions across the company.
Certain restructuring costs are a reconciling item between Segment
profit and Consolidated profit before taxes.

The following table summarizes the 2018 and 2019 employee separation activity:(Millions of dollars)

Liability balance at December 31, 2017$

Increase in liability (separation charges)

112

Reduction in liability (payments)
Liability balance at December 31, 2018

249

(276)
$

85

Increase in liability (separation charges)

48

Reduction in liability (payments)(85)

Liability balance at December 31, 2019

Most of the remaining liability balance as of December 31, 2019 is
expected to be paid in 2020.
In March 2017, Caterpillar informed Belgian authorities of thedecision to proceed to a collective dismissal, which led to theclosure of the Gosselies site, impacting about 2,000 employees.
Production of Caterpillar products at the Gosselies site ended
during the second quarter of 2017. The other operations andfunctions at the Gosselies site were phased out by the end of
the second quarter of 2018. The program concluded in 2018, andwe incurred a total of $647 million of restructuring costs (primarily
in 2017) under this program. These costs were primarily related
to employee separation costs, long-lived asset impairments
and other costs which were partially offset by a LIFO inventory
decrement benefit.
In September 2015, we announced a large scale restructuring plan(the Plan) including a voluntary retirement enhancement program for
qualifying U.S. employees, several voluntary separation programs$

48

outside of the United States, additional involuntary programs
throughout the company and manufacturing facility consolidations
and closures. The largest action among those included in the Plan
was related to our European manufacturing footprint which led to
the Gosselies, Belgium, facility closure as discussed above. We
incurred $43 million, $121 million and $817 million of restructuringcosts associated with these actions in 2019, 2018 and 2017,
respectively. The Plan concluded in 2019, and total restructuringcosts incurred since the inception of the Plan were $1,831 million.
In 2020, we expect to incur about $300 - $400 million of
restructuring costs, about half for restructuring actions across thecompany and the remainder for strategic actions to address a small
number of products. We expect that prior restructuring actions will
result in an incremental benefit to operating costs, primarily Costsof goods sold and SG&A expenses of about $200 million in 2020
compared with 2019.

2019 FORM 10-K

33

GLOSSARY OF TERMS
1. Adjusted Profit Per Share – For 2019, profit per shareexcluding pension and OPEB mark-to-market losses and adiscrete tax benefit related to U.S. tax reform. For 2018, profit
per share excluding pension and OPEB mark-to-market losses,
restructuring costs, certain deferred tax valuation allowanceadjustments and the impact of U.S. tax reform.
2. All Other Segment – Primarily includes activities such as:
business strategy, product management and development,
manufacturing and sourcing of filters and fluids, undercarriage,
ground engaging tools, fluid transfer products, precision seals,
rubber sealing and connecting components primarily for Cat®
products; parts distribution; integrated logistics solutions,distribution services responsible for dealer development andadministration including a wholly owned dealer in Japan,
dealer portfolio management and ensuring the most efficientand effective distribution of machines, engines and parts; anddigital investments for new customer and dealer solutions that
integrate data analytics with state-of-the-art digital technologies
while transforming the buying experience.
3. Consolidating Adjustments – Elimination of transactions
between Machinery, Energy & Transportation and Financial
Products.
4. Construction Industries – A segment primarily responsible 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 multiterrain loaders; mini, small, medium and large track excavators;
forestry excavators; feller bunchers; harvesters; knuckleboom
loaders; motor graders; pipelayers; road reclaimers; skidders;skid steer loaders; telehandlers; small and medium track-type
tractors; track-type loaders; utility vehicles; wheel excavators;
compact, small and medium wheel loaders; and related parts
and work tools.
5. Corporate Items and Eliminations – Includes corporate-level
expenses; timing differences, as some expenses are reported
in segment profit on a cash basis; methodology differences
between segment and consolidated external reporting; certain
restructuring costs; and inter-segment eliminations.
6. Currency – With respect to sales and revenues, currency
represents the translation impact on sales resulting 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 fromchanges in foreign currency exchange rates versus the U.S. dollar.
Currency only includes the impact on sales and operating profit
for the Machinery, Energy & Transportation lines of business;currency impacts on Financial Products’ revenues and operating
profit are included in the Financial Products’ portions of therespective analyses. With respect to other income/expense,
currency represents the effects of forward and option contracts
entered into by the company to reduce the risk of fluctuations
in exchange rates (hedging) and the net effect of changes inforeign currency exchange rates on our foreign currency assets
and liabilities for consolidated results (translation).
7.

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

8. Earning Assets – Assets consisting primarily of total financereceivables net of unearned income, plus equipment on
operating leases, less accumulated depreciation at Cat Financial.
9. Energy & Transportation – A segment primarily responsible
for supporting customers using reciprocating engines,
turbines, diesel-electric locomotives and related parts acrossindustries serving Oil and Gas, Power Generation, Industrial
34

2019 FORM 10-K

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.
10. Financial Products Segment – Provides financing alternatives
to customers and dealers around the world for Caterpillar
products, as well as financing for vehicles, power generation
facilities and marine vessels that, in most cases, incorporate
Caterpillar products. Financing plans include operating andfinance leases, installment sale contracts, working capitalloans and wholesale financing plans. The segment also provides
insurance and risk management products and services that help
customers and dealers manage their business risk. Insurance
and risk management products offered include physical damage
insurance, inventory protection plans, extended service 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.
11. Latin America – A geographic region including Central andSouth American countries and Mexico.
12. Machinery, Energy & Transportation (ME&T) – Represents
the aggregate total of Construction Industries, Resource
Industries, Energy & Transportation, All Other Segment andrelated corporate items and eliminations.
13. Machinery, Energy & Transportation (ME&T) Other
Operating (Income) Expenses – Comprised primarily ofgains/losses on disposal of long-lived assets, gains/losses ondivestitures and legal settlements and accruals.
14. Manufacturing Costs – Manufacturing costs exclude theimpacts of currency and represent the volume-adjusted change
for variable costs and the absolute dollar change for period
manufacturing costs. Variable manufacturing costs are defined
as having a direct relationship with the volume of production.
This includes material costs, direct labor and other costs thatvary directly with production volume such as freight, power
to operate machines and supplies that are consumed in the
manufacturing process. Period manufacturing costs support
production but are defined as generally not having a direct
relationship to short-term changes in volume. Examples
include machinery and equipment repairs, depreciation
on manufacturing assets, facility support, procurement,
factory scheduling, manufacturing planning and operations
management.
15. Mark-to-market gains/losses – Represents the net gain 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.

16. Pension and Other Postemployment Benefit (OPEB) – The
company’s defined-benefit pension and postemployment
benefit plans.
17. Price Realization – The impact of net price changes excluding
currency and new product introductions. Price realization includes
geographic mix of sales, which is the impact of changes in therelative weighting of sales prices between geographic regions.
18. Resource Industries – A segment primarily responsible forsupporting customers using machinery in mining, heavy
construction, quarry and aggregates, waste and material handling
applications. Responsibilities include business strategy, productdesign, product management and development, manufacturing,marketing and sales and product support. The product portfolio
includes large track-type tractors; large mining trucks; autonomous
ready vehicles and solutions; hard rock vehicles; longwall miners;
electric rope shovels; draglines; hydraulic shovels; rotary drills;
large wheel loaders; off-highway trucks; articulated trucks;
wheel tractor scrapers; wheel dozers; landfill compactors; soil
compactors; hard rock continuous mining systems; select work
tools; machinery components and related parts. In addition
to equipment, Resource Industries also develops and sells
technology products and services to provide customers fleet
management, equipment management analytics and autonomousmachine capabilities. Resource Industries also manages areasthat provide services to other parts of the company, including
integrated manufacturing and research and development.
19. Restructuring Costs – May include costs for employee
separation, long-lived asset impairments and contract
terminations. These costs are included in Other operating(income) expenses except for defined-benefit plan curtailment
losses and special termination benefits, which are included in
Other income (expense). Restructuring costs also include otherexit-related costs which may consist of accelerated depreciation,
inventory write-downs, building demolition, equipment relocationand project management costs and LIFO inventory decrement
benefits from inventory liquidations at closed facilities, all ofwhich are primarily included in Cost of goods sold.
20. Sales Volume – With respect to sales and revenues, sales
volume represents the impact of changes in the quantities
sold for Machinery, Energy & Transportation as well as 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.
21. Services – Enterprise services include, but are not limited
to, aftermarket parts, Financial Products’ revenues and otherservice-related revenues. Machinery, Energy & Transportation
segments exclude most Financial Products’ revenues.

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

Consolidated operating cash flow for 2019 was $6.91 billion, up from$6.56 billion in 2018. The increase was due to favorable changes
in working capital in 2019, mostly offset by lower profit adjusted
for non-cash items, which included lower accruals for short-term
incentive compensation payments, and a larger discretionary
pension contribution. Within working capital, changes to inventories,
accounts receivable, customer advances and accrued expenses
favorably impacted cash flow but were partially offset by changes
in accounts payable. See further discussion of operating cash flow
under ME&T and Financial Products.
Total debt as of December 31, 2019 was $37.66 billion, an increaseof $1.10 billion from year-end 2018. Debt related to Financial
Products decreased $43 million. Debt related to ME&T increased$1.15 billion in 2019, primarily due to the issuance of debt to financea discretionary pension contribution, which was partially offset by
the impact of new accounting guidance on a previously failed saleleaseback transaction in Japan. On September 19, 2019, we issued$1.0 billion of 3.250% Senior Notes due 2049 and $500 millionof 2.600% Senior Notes due 2029. During 2019, we repurchased$4.05 billion of Caterpillar common stock.
We have three global credit facilities with a syndicate of banks
totaling $10.50 billion (Credit Facility) available in the aggregate 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, 2019 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 2020.

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

2019, of $2.73 billion (of which $0.72 billion is available to ME&T)
expires in September 2022.

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

2019, of $4.62 billion (of which $1.21 billion is available to ME&T)
expires in September 2024.

At December 31, 2019, Caterpillar’s consolidated net worth was$14.63 billion, which was above the $9.00 billion required under
the Credit Facility. The consolidated net worth is defined as 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, 2019, Cat Financial’s covenant interest coverage
ratio was 1.77 to 1. This is above the 1.15 to 1 minimum ratio, calculated
as (1) profit excluding income taxes, interest expense and net gain/(loss) from interest rate derivatives to (2) interest expense calculated
at the end of each calendar quarter for the rolling four quarter period
then most recently ended, required by the Credit Facility.
In addition, at December 31, 2019, Cat Financial’s six-monthcovenant leverage ratio was 7.65 to 1 and year-end covenant
leverage ratio was 7.46 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, 2019, there
were no borrowings under the Credit Facility.
2019 FORM 10-K

35

Our total credit commitments and available credit as of December 31, 2019 were:
December 31, 2019
Machinery,
Energy &Transportation

Consolidated(Millions of dollars)

Financial
Products

Credit lines available:
Global credit facilities

10,500

$

2,751

$

7,749

4,999

194

4,805

Total credit lines available

15,4992,945

12,554

Less: Commercial paper outstanding(4,168)—(4,168)Less: Utilized credit(1,247)—Available credit$

10,084$

2,945(1,247)$

7,139

The other consolidated credit lines with banks as of December 31,
2019 totaled $5.00 billion. These committed and uncommitted
credit lines, which may be eligible for renewal at various 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.

priorities. Our top priority is to maintain a strong financial positionin support of a Mid-A rating. Next, we intend to fund operational
requirements and commitments. Then, we intend to fund priorities
that profitably grow the company and return capital to shareholders
through dividend growth and share repurchases. Additional
information on cash deployment is as follows:

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.

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

Machinery, Energy & Transportation
Net cash provided by operating activities was $4.87 billion in 2019,
compared with $6.35 billion in 2018. The decrease was primarily
due to lower profit in 2019 adjusted for non-cash items, which
included lower accruals for short-term compensation payments,
and a larger discretionary pension contribution partially offset
by favorable changes in working capital. Within working capital,changes to inventories, accounts receivable, customer advances
and accrued expenses favorably impacted cash flow but werepartially offset by changes in accounts payable.
Net cash used for investing activities in 2019 was $48 million,
compared with net cash used of $1.19 billion in 2018. The change
was primarily due to decreased ME&T lending with Financial
Products during 2019 and the acquisitions of ECM S.p.A. andDowner Freight Rail in 2018.
Net cash used for financing activities during 2019 was $4.48 billion,
compared with net cash used of $5.47 billion in 2018. The change
was primarily due to the issuance of $1.5 billion of long-term debt
used to fund a discretionary pension contribution. This was partially
offset by an increase in repurchases of Caterpillar common stockof $249 million and an increase in dividends paid of $181 million.
While our short-term priorities for the use of cash may varyfrom time to time as business needs and conditions dictate, ourlong-term cash deployment strategy is focused on the following
36$

Other external

2019 FORM 10-K

Operational excellence and commitments — Capital
expenditures were $1.07 billion during 2019, compared to$1.22 billion in 2018. We expect ME&T’s capital expendituresin 2020 to be about $1.2 billion. We made $1.81 billion ofcontributions to our pension and other postretirement benefit
plans during 2019, including a $1.5 billion discretionary U.S.
pension plan contribution. By comparison, we made $1.35 billionof contributions to our pension and other postretirement plans
in 2018, including a $1.0 billion discretionary contribution madeto our U.S. pension plans. We expect to make approximately$280 million of contributions to our pension and OPEB plans
in 2020.
Fund strategic growth initiatives and return capital toshareholders — We intend to utilize our liquidity and debt
capacity to fund targeted investments that drive long-term
profitable growth focused in the areas of expanded offeringsand services, including acquisitions.
As part of our new capital allocation strategy, ME&T free cash
flow is a liquidity measure we will use going forward to determine
the cash generated and available for financing activities including
debt repayments, dividends and share repurchases. We define
ME&T free cash flow as cash from ME&T operations excluding
discretionary pension and other postretirement benefit plan
contributions less capital expenditures. A goal of our newcapital allocation strategy is to return substantially all ME&T free
cash flow to shareholders in the form of dividends and share
repurchases, while maintaining our mid-A rating.
Our share repurchase plans are subject to the company’s cash
deployment priorities and are evaluated on an ongoing basis
considering the financial condition of the company and theeconomic outlook, corporate cash flow, the company’s liquidity
needs and the health and stability of global credit markets. The
timing and amount of future repurchases may vary dependingon market conditions and investing priorities. In July 2018, theBoard of Directors approved an authorization to repurchase up to$10 billion of Caterpillar common stock (the 2018 Authorization)effective January 1, 2019, with no expiration. In 2019, werepurchased $4.05 billion of Caterpillar common stock, with

$5.95 billion remaining under the 2018 Authorization as ofDecember 31, 2019. Caterpillar’s basic shares outstanding as ofDecember 31, 2019 were approximately 550 million.
Each quarter, our Board of Directors reviews the company’s
dividend for the applicable quarter. The Board evaluates thefinancial condition of the company and considers the economic
outlook, corporate cash flow, the company’s liquidity needs, andthe health and stability of global credit markets to determine
whether to maintain or change the quarterly dividend. Dividends
totaled $2.13 billion in 2019, representing 86 cents per share paidin each of the first and second quarters and $1.03 per share paidin each of the third and fourth quarters.

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

Contractual obligations
The company has committed cash outflow related to long-term debt, operating lease agreements, postretirement benefit obligations,purchase obligations, interest on long-term debt and other long-term contractual obligations. As of December 31, 2019, minimum payments
for these obligations were:
2020(Millions of dollars)

2021-2022

2023-2024

After 2024

Total

Long-term debt:
Machinery, Energy & Transportation

$

16

$

1,919

$

1,102

$

6,716

$

9,753

Financial Products

6,198

12,5084,334

341

23,381

Total long-term debt 1

6,214

14,427

5,436

7,057

33,134

185

225

110

175

695

280

705

745

1,860

3,590

Accounts payable 3

5,957

—

—

—

5,957

Purchase orders 4

5,103

3

—

—

5,106

Operating leases
Postretirement benefit obligations

2

Purchase obligations:

Other contractual obligations

160

87

26

—

273

Total purchase obligations

11,22090

26—

11,336

Interest on long-term debt 6

909

1,291

834

6,362

9,396

Other long-term obligations 7

685

546

159

90

1,480

5

Total contractual obligations
1
2
3

4

5
6
7

$

19,493$

17,284

$

7,310

$

15,544$

59,631

Amounts exclude unamortized discounts, debt issuance costs, and fair value adjustments.
Amounts represent expected contributions to our pension and other postretirement benefit plans through 2029, offset by expected Medicare Part D subsidy receipts.
Amount represents invoices received and recorded as liabilities in 2019, but scheduled for payment in 2020. These represent short-term obligations made in the ordinary course ofbusiness.
Amount represents contractual obligations for material and services on order at December 31, 2019 but not yet delivered. These represent short-term obligations made in the ordinary
course of business.
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 finance 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
and IT consulting contracts and outsourcing contracts for benefit plan administration and software system support.

The total amount of gross unrecognized tax benefits for uncertain
tax positions, including positions impacting only the timing oftax benefits, was $1,778 million at December 31, 2019. 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”.

RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, seeNote 1J — “New accounting guidance” 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, fairvalues for goodwill impairment tests, warranty liability, reserves
for product liability and insurance losses, postretirement benefits,
post-sale discounts, credit losses and income taxes. We haveincorporated many years of data into the determination of each of2019 FORM 10-K

37

these estimates and we have not historically experienced significant
adjustments. These assumptions are reviewed at least annuallywith the Audit Committee of the Board of Directors. Following are
the methods and assumptions used in determining our estimatesand an indication of the risks inherent in each.
Residual values for leased assets – The residual value of Cat
Financial’s leased equipment is determined based on its estimatedend-of-term market value. We estimate the residual value of leased
equipment at the inception of the lease based on a number offactors, including historical wholesale market sales prices, past
remarketing experience and any known significant market/producttrends. The following critical factors are also considered in our
residual value estimates: lease term, market size and demand,
total expected hours of usage, machine configuration, application,
location, model changes, quantities, third-party residual guarantees
and contractual customer purchase options.
Upon termination of the lease, the equipment is either purchasedby the lessee or sold to a third party, in which case we may record
a gain or a loss for the difference between the estimated residual
value and the sale price.
During the term of our leases, we monitor residual values. For
operating leases, adjustments to depreciation expense reflectingchanges in residual value estimates are recorded prospectively ona straight-line basis. For finance leases, residual value adjustments
are recognized through a reduction of finance revenue over theremaining lease term.
We evaluate the carrying value of equipment on operating leases
for potential impairment when we determine a triggering event has
occurred. When a triggering event occurs, a test for recoverability is
performed by comparing projected undiscounted future cash flows
to the carrying value of the equipment on operating leases. If the testfor recoverability identifies a possible impairment, the fair value of theequipment on operating leases is measured in accordance with the fairvalue measurement framework. An impairment charge is recognized
for the amount by which the carrying value of the equipment on
operating leases exceeds its estimated fair value.
At December 31, 2019, the aggregate residual value of equipmenton operating leases was $2.15 billion. Without consideration ofother factors such as third-party residual guarantees or contractual
customer purchase options, a 10 percent non-temporary decreasein the market value of our equipment subject to operating leases
would reduce residual value estimates and result in the recognitionof approximately $80 million of additional annual depreciation
expense.
Fair values for goodwill impairment tests – We test goodwill
for impairment annually, at the reporting unit level, and whenever
events or circumstances make it more likely than not that an
impairment may have occurred, such as a significant 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 wechoose to perform a qualitative assessment and determine thefair 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. If the carrying value is higher than the fairvalue, the difference would be recognized as an impairment loss.

38

2019 FORM 10-K

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 by senior
management. A reporting unit’s discount rate is a risk-adjusted
weighted average cost of capital, which we believe approximates
the rate from a market participant’s perspective. The estimatedfair 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 andunobservable measurement inputs.
Our annual impairment tests completed in the fourth quarter of2019 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 cyclicaland significantly impacted by commodity prices, although theimpact may vary by reporting unit. The energy and mining industries
are major users of our products, including the coal, iron ore, gold,copper, oil and natural gas industries. Decisions to purchase our
products are dependent upon the performance of those industries,
which in turn are dependent in part on commodity prices. Lower
commodity prices or industry specific circumstances that havea negative impact to the valuation assumptions may reduce thefair value of our reporting units. Should such events occur and it
becomes more likely than not that a reporting unit’s fair value has
fallen below its carrying value, we will perform an interim goodwill
impairment test(s), in addition to the annual impairment test. Future
impairment tests may result in a goodwill impairment, dependingon the outcome of the quantitative impairment test. A goodwill
impairment would be reported as a non-cash charge to earnings.
Warranty liability – At the time a sale is recognized, we record
estimated future warranty costs. The warranty liability is determinedby applying historical claim rate experience to the current field
population and dealer inventory. Generally, historical claim rates are
based on actual warranty experience for each product by machinemodel/engine size by customer or dealer location (inside or outside
North America). Specific rates are developed for each productshipment month and are updated monthly based on actual warranty
claim experience. Warranty costs may differ from those estimatedif actual claim rates are higher or lower than our historical rates.
Product liability and insurance loss reserve – We determine
these reserves based upon reported claims in process of settlement
and actuarial estimates for losses incurred but not reported. Loss
reserves, including incurred but not reported reserves, are basedon estimates and ultimate settlements may vary significantly fromsuch estimates due to increased claims frequency or severity overhistorical levels.
Postretirement benefits – We sponsor defined benefit pension
plans and/or other postretirement benefit plans (retirement
healthcare and life insurance) to employees in many of our locations
throughout the world. There are assumptions used in the accounting
for these defined benefit plans that include discount rate, expected
return on plan assets, expected rate of compensation increase,the future health care trend rate, mortality and other economic

and demographic assumptions. The actuarial assumptions we use
may change or differ significantly from actual results, which may
result in a material impact to our consolidated financial statements.

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 impactedby short-term market swings. Changes in our allocation of plan
assets would also impact this rate. For example, a shift to more
fixed income securities would lower the rate. A decrease in therate would increase our expense. The expected return on plan
assets is calculated using the fair value of plan assets as of ourmeasurement date, December 31.

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

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.

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

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

Postretirement Benefit Plan Actuarial Assumptions Sensitivity
The effects of a one percentage-point change in certain actuarial assumptions on 2019 pension and OPEB costs and obligations are as
follows:
2019 Benefit Cost
Year-end Benefit Obligation(Millions of dollars)

One percentage-

One percentage-

One percentage-

One percentage-

point increase

point decrease

point increase

point decrease

$

$

$

U.S. Pension benefits:
Assumed discount rate

$

54

(71)

(1,893)

2,305

2

(2)

—

—

(122)

122

—

—

Assumed discount rate

7

(10)

(634)

610

Expected rate of compensation increase

5

(4)

41

(35)

(39)

39

—

—

Assumed discount rate

8

(10)

(366)

437

Expected rate of compensation increase

—

—

1

(1)

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 long-term rate of return on plan assets

(3)

3

—

—

Assumed health care cost trend rate

13

(11)

158

(133)

2019 FORM 10-K

39

Actuarial Assumptions
U.S. Pension Benefits

Weighted-average assumptions used todetermine benefit obligation, end of year:
Discount rate
Rate of compensation increase 1
Weighted-average assumptions used todetermine net periodic benefit 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
1

Other Postretirement Benefits

2018

2017

2019

2018

2017

2019

2018

2017

3.2%
—%

4.2%
4.0%

3.5%
4.0%

1.9%
2.0%

2.5%
3.0%

2.4%
4.0%

3.2%
4.0%

4.2%
4.0%

3.6%
4.0%

4.3%
3.9%
5.9%
4.0%

3.7%
3.2%
6.3%
4.0%

4.2%
3.3%
6.7%
4.0%

2.5%
2.3%
3.8%
3.0%

2.3%
2.2%
5.2%
4.0%

2.4%
2.3%
5.9%
4.0%

4.1%
3.9%
7.2%
4.1%

3.5%
3.2%
7.5%
4.0%

3.9%
3.3%
7.5%
4.0%

6.1%
5.0%
2025

6.1%
5.0%
2025

6.1%
5.0%
2022

Effective December 31, 2019, all U.S. pension benefits were frozen, and accordingly this assumption is no longer applicable.

See Note 12 – “Postemployment benefit plans” of Part II, Item 8“Financial Statement and Supplemental Data” for further information
regarding the accounting for postretirement benefits.
Post-sale discount reserve – We provide discounts to 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 $1.7 billion and $1.5 billion as of December 31, 2019and 2018, respectively. The reserve represents discounts that we
expect to pay on previously sold units and is reviewed at least
quarterly. The reserve is adjusted if discounts paid differ from thoseestimated. Historically, those adjustments have not been material.
Credit loss reserve – The allowance for credit losses is an estimateof the losses inherent in our finance receivable portfolio andincludes 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 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 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 the collateral
for collateral-dependent receivables or the observable market priceof the receivable. In determining collateral value, we estimate thecurrent fair market value of the collateral less selling costs. We
also consider credit enhancements such as additional collateral andcontractual third-party guarantees. The allowance for credit losses
attributable to the remaining accounts not yet individually identified
as impaired is estimated based on loss forecast models utilizing
probabilities of default, our estimate of the loss emergence period
and the estimated loss given default. In addition, qualitative factors
not able to be fully captured in our loss forecast models including
industry trends, macroeconomic factors and model imprecision are
considered in the evaluation of the adequacy of the allowance for
credit losses. These qualitative factors are subjective and requirea degree of management judgment.
40

Non-U.S. Pension Benefits

20192019 FORM 10-K

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 the many
jurisdictions in which we operate. These tax laws are complex, andthe manner in which they apply to our facts is sometimes open tointerpretation. In establishing the provision for income taxes, we must
make judgments about the application of these inherently complex
tax laws. Our income tax positions and analysis are based on currently
enacted tax law. Future changes in tax law or related interpretations
could significantly impact the provision for income taxes, the amountof taxes payable, and the deferred tax asset and liability balances.
Changes in tax law are reflected in the period of enactment withrelated interpretations considered in the period received.
Despite our belief that our tax return positions are consistent
with applicable tax laws, we believe that taxing authorities could
challenge certain positions. Settlement of any challenge can 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 evaluation of
the information available at the reporting date. To be recognized in
the financial statements, a tax benefit must be at least more likely
than not of being sustained based on technical merits. The benefit
for positions meeting the recognition threshold is measured as thelargest benefit more likely than not of being realized upon ultimate
settlement with a taxing authority that has full knowledge of all
relevant information. Significant judgment is required in making
these determinations and adjustments to unrecognized tax benefits
may be necessary to reflect actual taxes payable upon settlement.
Adjustments related to positions impacting the effective tax rateaffect the provision for income taxes. Adjustments related topositions 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 toremeasure our pension and OPEB plans as we do not consider
these adjustments indicative of ongoing earnings trends. Should achange in facts or circumstances lead to a change in judgment about
the ultimate realizability of a deferred tax asset, we record or adjust
the related valuation allowance in the period that the change in facts
and circumstances occurs, along with a corresponding increase or
decrease in the provision for income taxes.
Additional information related to income taxes is included in
Note 6 - “Income taxes” of Part II, Item 8 “Financial statements
and Supplementary Data.”

OTHER 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, 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 27, 2020, the Brazilian Federal Environmental Agency(“IBAMA”) issued Caterpillar Brasil Ltda a notice of violation
regarding allegations around the requirements for use of imported
oils at the Piracicaba, Brazil facility. We have instituted processes
to address the allegations. While we are still discussing resolutionof these allegations with IBAMA, the initial notice from IBAMA
included a proposed fine of approximately $370,000. We do not
expect this fine or our response to address the allegations to havea material adverse effect on the Company’s consolidated resultsof operations, financial position or liquidity.
On January 7, 2015, the Company received a grand jury subpoena
from the U.S. District Court for the Central District of Illinois. The
subpoena requests documents and information from the Company
relating to, among other things, financial information concerning
U.S. and non-U.S. Caterpillar subsidiaries (including undistributed
profits of non-U.S. subsidiaries and the movement of cash among
U.S. and non-U.S. subsidiaries). The Company has received
additional subpoenas relating to this investigation requesting
additional documents and information relating to, among otherthings, the purchase and resale of replacement parts by Caterpillar
Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions ofcertain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL andrelated structures. On March 2-3, 2017, agents with the Departmentof Commerce, 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,
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
be held criminally liable for anticompetitive conduct in Brazil,
criminal charges have been brought against one current employee
of MGE and two former employees of MGE involving the same
conduct alleged by CADE. On July 8, 2019, CADE found MGE,
one of its current employees and two of its former employees
liable for anticompetitive conduct. CBL was dismissed from theproceeding without any finding of liability. MGE intends to appeal
CADE’s findings. We currently believe that this matter will not havea material adverse effect on the Company’s consolidated results ofoperations, 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 exposure), contracts, employment issues, environmental
matters, intellectual property rights, taxes (other than income taxes)

2019 FORM 10-K

41

and securities laws. The aggregate range of reasonably possible
losses in excess of accrued liabilities, if any, associated with theseunresolved legal actions is not material. In some cases, we cannot
reasonably estimate a range of loss because there is insufficient
information regarding the matter. However, we believe there is no
more than a remote chance that any liability arising from thesematters would be material. Although it is not possible to predict
with certainty the outcome of these unresolved legal actions, we
believe that these actions will not individually or in the aggregate
have a material adverse effect on our consolidated results ofoperations, financial position or liquidity.

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

2020 Expected(Millions of dollars)

U.S. Pension Benefits

$

(308)

2019
$

2018
(7)

$

2017
(149)

$

(85)

(4)

19

(69)

(22)

Other Postretirement Benefits

150

158

138

148

Mark-to-market loss (gain)

—1

468

495

Non-U.S. Pension Benefits

Total net periodic benefit cost (benefit)
1

$

(162)

$

638

$

415

301
$

342

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

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

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).

zz Increase in expense in 2019 compared to 2018 – Primarily

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 expectancy ofplan participants. As of December 31, 2017 these changes resulted
in an increase in our Liability for postemployment benefits ofapproximately $290 million.

zz Increase in expense in 2018 compared to 2017 – Primarily

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.

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

due to higher net mark-to-market losses in 2018 compared to2017. This was partially offset by a higher expected return onplan assets and curtailment gains compared to curtailment andtermination charges in 2017.

The primary factors that resulted in mark-to-market losses for
2019, 2018 and 2017 are described below. The net mark-to-market
losses were included in Other income (expense) in the Results ofOperations.
zz 2019 net mark-to-market loss of $468 million – Primarily due

to lower discount rates at the end of 2019 compared to the endof 2018. This was partially offset by a higher actual return onplan assets compared to the expected return on plan assets(U.S. pension plans had an actual rate of return of 22.3 percent
compared to an expected rate of return of 5.9 percent).

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.

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

42

RETIREMENT BENEFITS

2019 FORM 10-K

SENSITIVITY
Foreign Exchange Rate Sensitivity
ME&T operations use foreign currency for ward and option
contracts to manage unmatched foreign currency cash inflow andoutflow. Our objective is to minimize the risk of exchange rate
movements that would reduce the U.S. dollar value of our foreign
currency cash flow. Our policy allows for managing anticipatedforeign currency cash flow for up to approximately five years.
Based on the anticipated and firmly committed cash inflow andoutflow for our ME&T operations for the next 12 months andthe foreign currency derivative instruments in place at year-end,a hypothetical 10 percent weakening of the U.S. dollar relative
to all other currencies would adversely affect our expected 2020
cash flow for our ME&T operations by approximately $225 million.
Last year similar assumptions and calculations yielded a potential$250 million adverse impact on 2019 cash flow. We determine
our net exposures by calculating the difference in cash inflow andoutflow by currency and adding or subtracting outstanding foreign
currency derivative instruments. We multiply these net amountsby 10 percent to determine the sensitivity.
In managing foreign currency risk for our Financial Products
operations, our objective is to minimize earnings volatility resulting
from conversion and the remeasurement of net foreign currency

balance sheet positions and future transactions denominatedin foreign currencies. Since our policy allows the use of foreign
currency forward, option and cross currency contracts to offset
the risk of currency mismatch between our assets and liabilities
and exchange rate risk associated with future transactions
denominated in foreign currencies, a 10 percent change in thevalue of the U.S. dollar relative to all other currencies would nothave a material effect on our consolidated financial position, resultsof operations or cash flow. Neither our policy nor the effect of a 10
percent change in the value of the U.S. dollar has changed fromthat reported at the end of last year.
The effect of the hypothetical change in exchange rates ignores
the effect this movement may have on other variables, including
competitive risk. If it were possible to quantify this competitive
impact, the results would probably be different from the sensitivity
effects shown above. In addition, it is unlikely that all currencies
would uniformly strengthen or weaken relative to the U.S. dollar. In
reality, some currencies may weaken while others may strengthen.
Our primary exposure (excluding competitive risk) is to exchange
rate movements in the Swiss franc, Chinese yuan, Japanese yen,
Indian rupee, and Australian dollar.

Interest Rate Sensitivity
For our ME&T operations, we have the option to use interest
rate contracts to lower the cost of borrowed funds by attaching
fixed-to-floating interest rate contracts to fixed-rate debt, and byentering into forward rate agreements on future debt issuances.
A hypothetical 100 basis point adverse move in interest rates along
the entire interest rate yield curve would have a minimal impact tothe 2020 pre-tax earnings of ME&T. Last year, similar assumptions
and calculations yielded a minimal impact to 2019 pre-tax earnings.
For our Financial Products operations, we use interest rate derivative
instruments primarily to meet our match-funding objectives andstrategies. We have a match-funding policy that addresses theinterest rate risk by aligning the interest rate profile (fixed or floating
rate and duration) of our debt portfolio with the interest rate profile
of our finance receivable portfolio within predetermined range on an
ongoing basis. In connection with that policy, we use interest rate
derivative instruments to modify the debt structure to match assets
within the finance receivable portfolio. Match funding reduces thevolatility of margins between interest-bearing assets and interestbearing liabilities, regardless of which direction interest rates move.

In order to properly manage sensitivity to changes in interest rates,
Financial Products measures the potential impact of different
interest rate assumptions on pre-tax earnings. All on-balance sheet
positions, including derivative financial instruments, are included in
the analysis. The primary assumptions included in the analysis 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, 2019 balance sheet, using these assumptions,estimates the impact of a 100 basis point immediate and sustained
adverse change in interest rates to have a minimal impact on 2020
pre-tax earnings. Last year, similar assumptions and calculations
yielded a minimal impact to 2019 pre-tax earnings.
This analysis does not necessarily represent our current 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
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 impactof several significant items in order for our results to be meaningful
to our readers. These items consist of (i) pension and OPEB markto-market losses resulting from plan remeasurements, (ii) U.S.
tax reform impact, (iii) restructuring costs in 2018, which wereincurred to generate longer-term benefits and (iv) certain deferred
tax valuation allowance adjustments. We do not consider these
items indicative of earnings from ongoing business activities andbelieve the non-GAAP measures will provide investors with usefulperspective on underlying business results and trends and aid withassessing our period-over-period results. In addition, we provide acalculation of ME&T free cash flow as we believe it is an importantmeasure for investors to determine the cash generation available
for financing activities including debt repayments, dividends andshare repurchases.

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

Operating profit as a percent of total sales and revenues
Restructuring costs 1
Adjusted operating profit margin1

Three Months Ended
December 31,

Twelve Months Ended
December 31,

2019

2018

2019

2018

14.1%

13.1%

15.4%

15.2%

—%

0.7%

—%

0.7%

14.1%

13.8%

15.4%

15.9%

2019 Restructuring costs were not material.

2019 FORM 10-K

43

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,
2019(Millions of dollars)

Twelve Months Ended
December 31,

2018

2019

2018

Profit before taxes

$

1,365

$

1,367

$

7,812

$

7,822

Mark-to-market losses

$

468

$

495

$

468

$

495

Restructuring costs

$

—

$

93

$

—

$

386

Adjusted profit before taxes

$

1,833

$

1,955

$

8,280

$

8,703

Reconciliations of adjusted profit per share to the most directly comparable GAAP measure, profit per share - diluted, are as follows:
Three Months Ended
December 31,
2019
Profit per share - diluted

2

2018

$

1.97

$

2019
1.78

$

2018
10.74

$

10.26

$

0.65

$

0.66

$

0.64

$

0.64

Per share U.S. tax reform impact

$

—

$

0.09

$

(0.31)$(0.17)Per share restructuring costs 2

$

—

$

0.13

$

—

$

0.50

Per share mark-to-market losses

1

Twelve Months Ended
December 31,

1

Per share deferred tax valuation allowance adjustments

$

—

$

(0.11)$—$(0.01)

Adjusted profit per share

$

2.63

$

2.55

$

11.06

$

11.22

At statutory tax rates.
2018 restructuring costs were at statutory tax rates. 2019 restructuring costs were not material.

Reconciliations of ME&T free cash flow to the most directly comparable GAAP measure, net cash provided by operating activities are
as follows:
Twelve Months Ended
December 31,
2019(Millions of dollars)

$

4,871

$

6,347

1,500

$

1,000

ME&T capital expenditures$(1,074)$(1,221)

ME&T free cash flow

$

5,297

$

6,126

ME&T discretionary pension contributions

1

See reconciliation of ME&T net cash provided by operating activities to consolidated net cash provided by operating activities on page 47.

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
for the purchase and lease of Caterpillar and other equipment.

44

2018

$

ME&T net cash provided by operating activities

12019 FORM 10-K

The nature of these businesses is different, especially withregard to the financial position and cash flow items. Caterpillar
management utilizes this presentation internally to highlight thesedifferences. We also believe this presentation will assist readersin 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 45 to 47 reconcile Machinery, Energy & Transportation
with Financial Products on the equity basis to Caterpillar Inc.
consolidated financial information.

Supplemental Data for Results of Operations
For The Years Ended December 31
Supplemental consolidating data
Machinery, Energy &Transportation 1

Consolidated
2019(Millions of dollars)

Financial Products

2018

2017

2019

2018

2017

$ 51,822$ 42,676$ 50,755$ 51,822$ 42,676

2019

2018

Consolidating Adjustments

2017

2019

2018

2017

Sales and revenues:
Sales of Machinery, Energy &Transportation$ 50,755

$

—

$

—

$

—

$

—

$

—

$

—

Revenues of Financial
Products

3,045

2,900

2,786

—

—

—

3,571

3,362

3,167

(526) 2(462) 2(381) 2

Total sales and revenues

53,80054,722

45,46250,75551,822

42,676

3,571

3,362

3,167

(526)

(462)

(381)

Cost of goods sold

36,63036,99731,26036,63436,99831,261

—

—

—

(4) 3

(1) 3

(1) 3

Selling, general andadministrative expenses

5,162

5,478

4,999

4,444

4,675

4,411

737

825

604

(19) 3(22) 3(16) 3

Research and development
expenses

1,693

1,850

1,842

1,693

1,850

1,842

—

—

—

—

—

—

Interest expense of Financial
Products

754

722

646

—

—

—

786

756

667

(32) 4(34) 4(21) 4

Other operating (income)expenses

1,271

1,382

2,255

14

144

1,056

1,297

1,259

1,220

(40) 3(21) 3(21) 3

Total operating costs

45,51046,42941,002

42,78543,667

38,570

2,820

2,840

2,491

(95)

(78)

(59)

Operating profit

Operating costs:

8,290

8,293

4,460

7,970

8,155

4,106

751

522

676

(431)

(384)

(322)

Interest expense excluding
Financial Products

421

404

531

429

448

622

—

—

—

(8) 4

(44) 4(91) 4

Other income (expense)

(57)

(67)

153

(560)

(391)

(170)

80

(16)

92

423

340

231 5

Consolidated profit before
taxes

7,812

7,822

4,082

6,981

7,316

3,314

831

506

768

—

—

—

Provision (benefit) for income
taxes

1,746

1,698

3,339

1,512

1,574

3,317

234

124

22

—

—

—

Profit (loss) of consolidated
companies

6,066

6,124

743

5,469

5,742

(3)

597

382

746

—

—

—

Equity in profit (loss) ofunconsolidated affiliatedcompanies

28

24

16

28

24

16

—

—

—

—

—

—

Equity in profit of Financial
Products’ subsidiaries

—

—

—

575

362

738

—

—

—

(575) 6(362) 6(738) 6

Profit of consolidated andaffiliated companies

6,094

6,148

759

6,072

6,128

751

597

382

746

(575)

(362)

(738)

Less: Profit (loss) attributable
to noncontrolling interests

1

1

5

(21)

(19)

(3)

22

20

8

—

—

—

738

$ (575)$ (362)$ (738)

Profit
1
2
3
4
5

6
7

7

$

6,093

$

6,147

$

754

$

6,093

$

6,147

$

754

$

575

$

362

$

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 attributable to common shareholders.

2019 FORM 10-K

45

Supplemental Data for Financial Position
At December 31
Supplemental consolidating data
Machinery, Energy &Transportation 1

Consolidated
2019(Millions of dollars)

2018

2019

Financial
Products

2018

2019

Consolidating
Adjustments

2018

2019

2018

AssetsCurrent assets:
Cash and short-term investments

$

8,284

$

7,857

Receivables - trade and other

8,568

8,802

Receivables - finance

9,336

8,650

Prepaid expenses and other current assets

1,739

1,765

$

7,299

$

3,737

6,968

$

985

$

889

$

—

$

—

4,677

451

401

4,380 2,3

3,724 2,3——

14,48913,989(5,153) 3(5,339) 3

1,290

1,227

529

583

(80) 4(45) 4Inventories

11,266

11,52911,266

11,529————Total current assets

39,19338,603

23,592

24,401

16,454

15,862(853)(1,660)Property, plant and equipment - net

12,904

13,574

8,606

9,085

4,298

4,489

—

—

Long-term receivables - trade and other

1,193

1,161

348

302

152

204

693 2,3

655 2,3Long-term receivables - finance

12,651

13,286——

13,354

13,951(703) 3(665) 3

5

(3,672) 5(692) 6

—

—

4,260

3,672

—

—

(4,260)Noncurrent deferred and refundable income taxes

1,411

1,439

2,002

2,015

117

116

(708) 6

Intangible assets

1,565

1,897

1,565

1,897

—

—

—

—

Goodwill

6,196

6,217

6,196

6,217

—

—

—

—

Other assets

3,340

2,332

1,868

886

1,572

1,446

Investments in Financial Products subsidiaries

Total assets$

78,453$78,509

$

$

5,166

$

5,723

$

48,437$

5$

48,475$35,947

$

—

$

5,161

$

(100) 736,068

$

5,723

$

—

(5,931)$—$(6,034)

Liabilities
Current liabilities:
Short-term borrowings

—

—

—

—

—

600

1,500

(600) 8(1,500) 8

Accounts payable

5,957

7,051

5,918

6,972

212

194

(173) 9(115) 9Accrued expenses

3,750

3,573

3,415

3,212

335

361

—

—

Accrued wages, salaries and employee benefits

1,629

2,384

1,580

2,350

49

34

—

—

Customer advances

1,187

1,243

1,187

1,243

—

—

—

—

Dividends payable

567

495

567

495

—

—

—

—

Other current liabilities

2,155

1,919

1,689

1,532

566

433

(100) 6,10(46) 6,10

Long-term debt due within one year

6,210

5,830

16

10

6,194

5,820

—

—

Total current liabilities

26,621

28,21814,377

15,814

13,117

14,065(873)(1,661)Long-term debt due after one year

26,281

25,000

9,151

8,015

17,14016,995(10) 8(10) 8

Short-term borrowings with consolidated companies

Liability for postemployment benefits

6,599

7,455

6,599

7,455

—

—

—

—

Other liabilities

4,323

3,756

3,681

3,111

1,430

1,336

(788) 6(691) 6

Total liabilities

63,82464,42933,80834,39531,68732,396(1,671)(2,362)(919) 5

Commitments and contingencies
Shareholders’ equity
Common stock

5,935

5,827

5,935

5,827

919

919

(919) 5

Treasury stock(24,217)(20,531)(24,217)(20,531)

—

—

—

—

Profit employed in the business

34,43730,42734,43730,427

3,997

3,543

(3,997) 5(3,543) 5

Accumulated other comprehensive income (loss)(1,567)(1,684)(1,567)(1,684)

(828)

(943)

828 5

943 5

41

41

41

41

172

153

(172) 5(153) 5

Noncontrolling interests

14,629Total shareholders’ equity
Total liabilities and shareholders’ equity
1
2
3
4
5
6
7
8
9
10

46

$

78,453

14,62914,080$78,509$48,437

4,260

14,080$48,475$35,947(4,260)3,672$

36,068$(5,931)

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

2019 FORM 10-K

(3,672)$(6,034)

Supplemental Data for Statement of Cash Flow
For the Years Ended December 31
Supplemental consolidating data
Consolidated(Millions of dollars)

2019

Cash flow from operating activities:
Profit (loss) of consolidated and affiliated companies$ 6,094
Adjustments for non-cash items:
Depreciation and amortization
2,577
Undistributed profit of Financial Products—
Actuarial (gain) loss on pension and postretirement benefits
468
Provision (benefit) for deferred income taxes
28
Other
675
Financial Products' dividend in excess of profit—
Changes in assets and liabilities, net of acquisitions anddivestitures:
Receivables - trade and other171
Inventories
274
Accounts payable(1,025)
Accrued expenses
172
Accrued wages, salaries and employee benefits(757)
Customer advances(10)
Other assets-net(93)
Other liabilities-net(1,662)
Net cash provided by (used for) operating activities
6,912
Cash flow from investing activities:
Capital expenditures—excluding equipment leased to others(1,056)
Expenditures for equipment leased to others(1,613)
Proceeds from disposals of leased assets and property,
plant and equipment
1,153
Additions to finance receivables(12,777)
Collections of finance receivables
12,183
Net intercompany purchased receivables—
Proceeds from sale of finance receivables
235
Net intercompany borrowings—
Investments and acquisitions (net of cash acquired)(47)
Proceeds from sale of businesses and investments(net of cash sold)
41
Proceeds from sale of securities
529
Investments in securities(552)
Other-net(24)
Net cash provided by (used for) investing activities(1,928)Cash flow from financing activities:
Dividends paid
(2,132)
Common stock issued, including treasury shares reissued
238
Common shares repurchased(4,047)
Net intercompany borrowings—
Proceeds from debt issued (original maturities greaterthan three months)
9,841
Payments on debt (original maturities greater than three months)(8,297)
Short-term borrowings - net (original maturities three months
or less)(138)
Other-net(3)
Net cash provided by (used for) financing activities(4,538)
Effect of exchange rate changes on cash
(44)
Increase (decrease) in cash and short-term investments andrestricted cash
402
Cash and short-term investments and restricted cash at
beginning of period
7,890
Cash and short-term investments and restricted cash at
end of period$ 8,292
1
2
3
4
5
6
7
8
9
10

2018
$

$

Financial
Products

Machinery,
Energy & Transportation 1

6,148

2019
$

6,072

2018
$

6,128

2019
$

597

Consolidating
Adjustments

2018
$

2019

382

$

2018

(575) 2$(362) 2

2,766
—
495
220
1,006
—

1,713
(550)
468
15
456
—

1,895
—
495
149
434
57

864
—
—
13
(215)
—

871
—
—
71
178
—

—
550 3
—
—
434 4
—

—
—
—
—
394 4
(57) 5(1,619)(1,579)
709
101
(162)
(183)
41
(1,385)
6,558

4
250
(983)
187
(772)
(8)
(166)
(1,815)
4,871

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

15
—
20
(13)
15
—
38
169
1,503

6
—
(55)
30
(21)
—
(14)
75
1,523

152 4,6
24 4(62) 4
(2) 4
—
(2) 4
35 4
(16) 4538(1,229) 4,6(51) 4
(7) 4
—
—
—
39 4
(39) 4(1,312)(1,276)(1,640)(1,036)(38)(1,168)(53)(20)(1,616)(108)(1,667)

—
41 4

—
80 4

936
(12,183)
10,901
—
477
—
(392)

164
—
—
—
—
900
(47)

152
—
—
—
—
112
(392)

1,092
(14,270)
13,537
640
235
3
—

811
(13,595)
12,513(1,046)47731—(103) 4
1,493 6
(1,354) 6(640) 6—(903) 8—(27) 4
1,412 6,7
(1,612) 6
1,046 6—(143) 8
—

16
442
(506)
13
(3,212)

3
32
(27)
1
(48)

22
162
(24)
2
(1,187)

38
497
(525)
(25)
(414)

—
280
(482)
10
(2,776)————(1,466)

(6) 7
—
—
19
751

(1,951)313(3,798)—(2,132)238(4,047)(3)(1,951)313(3,798)
(31)

(25)
—
—
(900)

(419)
1
—
(112)

25 10
—
—
903 8

419 10
(1) 9
—
143 8

8,907
(7,829)

1,479
(12)

57
(7)

8,362
(8,285)8,850(7,822)

—
—

—
—

762
(54)
(3,650)
(126)

5
(3)
(4,475)
(40)

—
(54)
(5,471)
(111)

(143)
—
(991)
(4)

762
—
1,260
(15)

—
—
928
—

—
—
561
—

(430)

308

(422)

94

(8)

—

—

8,320

6,994

7,416

896

904

—

—

7,890

$

7,302

$

6,994

$

990

$

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.

2019 FORM 10-K

47

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.”48

2019 FORM 10-K

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, 2019. 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, 2019, 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, 2019 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report appears on pages 50-51.
/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 19, 20202019 FORM 10-K

49

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”) asof December 31, 2019 and 2018, 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, 2019, including the related notes(collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee ofSponsoring 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2019 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, 2019,
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 accordancewith generally 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.

Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statementsthat was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that arematerial to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on theaccounts or disclosures to which it relates.

50

2019 FORM 10-K

Uncertain Tax Position - Caterpillar SARL IRS Examination
As described in Note 6 to the consolidated financial statements, as a result of the audits of the Company’s U.S. 2007 to 2012 income
tax returns, including the impact of a loss carryback to 2005, the Internal Revenue Service (“IRS”) has proposed to tax in the U.S. profits
earned from certain parts transactions by Caterpillar SARL (“CSARL”). This proposal is based on the IRS examination team’s applicationof the “substance-over-form” or “assignment-of-income” judicial doctrines. As described by management, the Company is vigorously
contesting the proposed increases to tax and penalties for these years of approximately $2.3 billion, as management believes that therelevant transactions complied with applicable tax laws and did not violate judicial doctrines. As disclosed by management, the purchaseof parts by CSARL from unrelated parties and the subsequent sale of those parts to unrelated dealers outside the U.S. have substantial
legal, commercial, and economic consequences for the parties involved. Management has concluded that the largest amount of benefit
that is more likely than not to be sustained related to this position is the entire benefit. As a result, no amount related to these IRS
adjustments is reflected in the Company’s unrecognized tax benefits. The Company has filed U.S. income tax returns on this same basis
for years after 2012.
The principal considerations for our determination that performing procedures relating to the uncertain tax position arising from the CSARLIRS Examination is a critical audit matter are there was significant judgment by management in evaluating the amount of the benefit thatis more likely than not to be sustained related to the position, which in turn led to a high degree of auditor judgment, subjectivity andeffort in performing procedures to evaluate whether the position was more likely than not to be sustained. Also, the audit effort involved
the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion
on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the uncertain tax
position arising from the CSARL IRS Examination. These procedures also included, among others, (i) evaluating management’s process
for determining the reasonableness of the uncertain tax position, including reading certain intercompany and third-party agreements
which are relevant to evaluating the legal form and substance of the CSARL transaction flows; (ii) evaluating management’s assessmentof whether the position was more likely than not to produce a tax benefit and the determination by management of the largest amount ofbenefit that is more likely than not to be sustained related to this position; and (iii) evaluating the Revenue Agent Reports (“RARs”) fromthe IRS and management’s protests of the RARs. Professionals with specialized skill and knowledge were used to assist in evaluating
the applicable tax laws and judicial doctrines related to this matter as well as changes in relevant tax regulations, rulings, and case law.

/s/ PricewaterhouseCoopers LLP
Peoria, Illinois
February 19, 2020

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

2019 FORM 10-K

51

STATEMENT 1

Caterpillar Inc.

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

2019

2018

2017

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

50,755$51,822$

42,676

Revenues of Financial Products

3,045

2,900

2,786

Total sales and revenues

53,80054,722

45,462

36,63036,99731,260Operating costs:
Cost of goods soldSelling, general and administrative expenses

5,162

5,478

4,999

Research and development expenses

1,693

1,850

1,842

Interest expense of Financial Products

754

722

646

Other operating (income) expenses

1,271

1,382

2,255

Total operating costs

45,51046,42941,002

Operating profit

8,290

8,293

4,460

421

404

531

Interest expense excluding Financial Products
Other income (expense)
Consolidated profit before taxes

(57)

(67)

153

7,812

7,822

4,082

Provision (benefit) for income taxes

1,746

1,698

3,339

Profit of consolidated companies

6,066

6,124

743

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

Less: Profit (loss) attributable to noncontrolling interests

28

24

16

6,094

6,148

759

1

1

5

$

6,093

$

6,147

$

754

Profit per common share

$

10.85

$

10.39

$

1.27

Profit per common share — diluted 2

$

10.74

$

10.26

$

1.26

Profit1

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

2

Profit attributable to common shareholders.
Diluted by assumed exercise of stock-based compensation awards, using the treasury stock method.

See accompanying notes to Consolidated Financial Statements.

52

2019 FORM 10-K

561.6

591.4

591.8

567.5

599.4

599.3

STATEMENT 2

Caterpillar Inc.

Consolidated Comprehensive Income (Loss) for the Years Ended December 31(Millions of dollars)

2019
Profit (loss) of consolidated and affiliated companies

$

2018

6,094

$

2017

6,148

$

759

Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax (provision)/benefit of:2019 - $(5); 2018 - $(24); 2017 - $96

16

(396)

765

Current year prior service credit (cost), net of tax (provision)/benefit of:2019 - $0; 2018 - $(6); 2017 - $(26)

(4)

(6)

48

Amortization of prior service (credit) cost, net of tax (provision)/benefit of:2019 - $10; 2018 - $8; 2017 - $9

(30)

(28)

(16)

Gains (losses) deferred, net of tax (provision)/benefit of:2019 - $(14); 2018 - $(19); 2017 - $2

43

61

(3)

(Gains) losses reclassified to earnings, net of tax (provision)/benefit of:2019 - $15; 2018 - $31; 2017 - $(44)

(51)

(100)

77

Gains (losses) deferred, net of tax (provision)/benefit of:2019 - $(10); 2018 - $3; 2017 - $(23)

35

(12)

41

(Gains) losses reclassified to earnings, net of tax (provision)/benefit of:2019 - $0; 2018 - $0; 2017 - $35

—

—

(65)

Pension and other postretirement benefits:

Derivative financial instruments:

Available-for-sale securities:

Total other comprehensive income (loss), net of tax
Comprehensive income (loss)
Less: comprehensive income attributable to the noncontrolling interests
Comprehensive income (loss) attributable to shareholders

$

9

(481)

847

6,103

5,667

1,606

1

1

5

6,102

$

5,666

$

1,601

See accompanying notes to Consolidated Financial Statements.

2019 FORM 10-K

53

STATEMENT 3

Caterpillar Inc.

Consolidated Financial Position at December 31(Dollars in millions)

2019

2018

AssetsCurrent assets:$

Cash and short-term investments

8,284

$

7,857

Receivables – trade and other

8,568

8,802

Receivables – finance

9,336

8,650

Prepaid expenses and other current assets

1,739

1,765

Inventories

11,266

11,529Total current assets

39,19338,603

Property, plant and equipment – net

12,904

13,574Long-term receivables – trade and other

1,193

1,161

Long-term receivables – finance

12,651

13,286

Noncurrent deferred and refundable income taxes

1,411

1,439

Intangible assets

1,565

1,897

Goodwill

6,196

6,217

Other assets

3,340

2,332

$

Total assets

78,453$

5$

78,509Liabilities
Current liabilities:
Short-term borrowings:$

Machinery, Energy & Transportation

—

5,161

5,723

Accounts payable

5,957

7,051

Accrued expenses

3,750

3,573

Financial Products

Accrued wages, salaries and employee benefits

1,629

2,384

Customer advances

1,187

1,243

Dividends payable

567

495

2,155

1,919

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

16

10

Financial Products

6,194

5,820

Total current liabilities

26,621

28,218

Machinery, Energy & Transportation

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

9,141

8,005

Financial Products

17,14016,995

Liability for postemployment benefits

6,599

7,455

Other liabilities

4,323

3,756

Total liabilities

63,82464,429Commitments and contingencies (Notes 21 and 22)
Shareholders’ equity
Common stock of $1.00 par value:
Authorized shares: 2,000,000,000
Issued shares: (2019 and 2018 – 814,894,624 shares) at paid-in amount

5,935

5,827

Treasury stock: (2019 - 264,812,014 shares; and 2018 – 239,351,886 shares) at cost

(24,217)(20,531)

Profit employed in the business

34,43730,427

Accumulated other comprehensive income (loss)(1,567)(1,684)41

41

Noncontrolling interests

14,629Total shareholders’ equity$

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

54

2019 FORM 10-K

78,45314,080$78,509STATEMENT 4

Caterpillar Inc.

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

Commonstock(Dollars in millions)

Treasury
stock

—

754

—

5

759

—

—

—

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

Other

13

—

—

—

—

13

(1,192) $69

Balance at December 31, 2017

$

5,593

$

(17,005) $26,301$$(2,039) $

Total

—

Foreign currency translation, net of tax$

Noncontrollinginterests

27,392

Profit (loss) of consolidated and affiliatedcompanies

5,277

Accumulated
othercomprehensive
income (loss)(17,478) $Balance at January 1, 2017$

Profitemployedin thebusiness

76$$

13,22813,766

Adjustments to adopt new accounting
guidance
Revenue recognition

—

—

(12)

—

—

(12)

Tax accounting for intra-entity asset
transfers

—

—

(35)

—

—

(35)

Recognition and measurement of financial
assets and liabilities
Balance at January 1, 2018

—
$

5,593

—
$

11

(17,005) $26,265$(11)—(1,203) $69—$

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: 27,673,675 1—(3,798)———(3,798)

Other
Balance at December 31, 2018

21
$

5,827

—
$

(20,531) $—30,427$——(1,684) $

41

21
$

14,080(Continued)

2019 FORM 10-K

55

STATEMENT 4

Caterpillar Inc.

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

Commonstock(Dollars in millions)

Balance at December 31, 2018$

Profitemployedin thebusiness

Treasury
stock

5,827

$

Accumulated
othercomprehensive
income (loss)(20,531) $30,427$

Noncontrollinginterests

Total(1,684) $41$

14,080Adjustments to adopt new accounting
guidance 2
Lease accounting

—

—

235

—

—

235

Reclassification of certain tax effects
from accumulated other comprehensive
income

—

—

(108)

108

—

—

(1,576) $41

Balance at January 1, 2019

$

5,827

$

(20,531) $30,554$

14,315

Profit (loss) of consolidated and affiliatedcompanies

—

—

6,093

—

1

6,094

Foreign currency translation, net of tax

—

—

—

16

—

16

Pension and other postretirement benefits,
net of tax

—

—

—

(34)

—

(34)

Derivative financial instruments, net of tax

—

—

—

(8)

—

(8)

Available-for-sale securities, net of tax

—

—

—

35

—

35

Dividends declared 3——(2,210)——(2,210)Distribution to noncontrolling interests

—

—

—

—

(3)

(3)

Common shares issued from treasury stock
for stock-based compensation: 5,126,379

(4)

242

—

—

—

238

Stock-based compensation expense

205

—

—

—

—

205

Common shares repurchased: 30,586,507 1—(3,928)———(3,928)

Other

(93)

—

—

—

2

(91)

(1,567) $41

Balance at December 31, 2019
1
2
3

$

5,935

$

(24,217) $34,437$

See Note 16 regarding shares repurchased.
See Note 1J regarding new accounting guidance.
Dividends per share of common stock of $3.95, $3.36 and $3.11 were declared in the years ended December 31, 2019, 2018 and 2017, respectively.

See accompanying notes to Consolidated Financial Statements.

56$

2019 FORM 10-K$

14,629STATEMENT 5

Caterpillar Inc.

Consolidated Statement of Cash Flow for the Years Ended December 31
2019(Millions of dollars)

2018

2017

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

$

6,094

$

6,148

$

759

Adjustments for non-cash items:
2,577

2,766

Actuarial (gain) loss on pension and postretirement benefits

468

495

301

Provision (benefit) for deferred income taxes

28

220

1,213

Other

675

1,006

750

Depreciation and amortization

2,877

Changes in assets and liabilities, net of acquisitions and divestitures:
Receivables – trade and other171(1,619)(1,151)Inventories

274(1,579)(1,295)

Accounts payable(1,025)

709

1,478

Accrued expenses

172

101

175

Accrued wages, salaries and employee benefits

(757)

(162)

1,187

Customer advances

(10)

(183)

(8)

Other assets – net

(93)

41

(192)

Other liabilities – net(1,662)(1,385)

(388)

6,912

6,558

5,706

Capital expenditures – excluding equipment leased to others(1,056)(1,276)(898)

Expenditures for equipment leased to others(1,613)(1,640)(1,438)Net cash provided by (used for) operating activities
Cash flow from investing activities:

1,153

936

1,164

Additions to finance receivables(12,777)(12,183)(11,953)

Collections of finance receivables

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

12,183

10,901

12,018Proceeds from sale of finance receivables

235

477

127

Investments and acquisitions (net of cash acquired)

(47)

(392)

(59)

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

41

16

100

Proceeds from sale of securities

529

442

932

Investments in securities

(552)

(506)

(1,048)Other – net

(24)

13

89

(1,928)(3,212)(966)(2,132)(1,951)(1,831)

238

313

566

(4,047)(3,798)—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

1,479

57

361

- Financial Products

8,362

8,850

8,702

Payments on debt (original maturities greater than three months):
(12)

(7)

(1,465)(8,285)(7,822)(6,923)

(138)

762

(3,058)

(3)

(54)

(9)

(4,538)(3,650)(3,657)

Effect of exchange rate changes on cash

(44)

(126)

38

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

402

(430)

1,121

- Machinery, Energy & Transportation- Financial Products
Short-term borrowings – net (original maturities three months or less)
Other – net
Net cash provided by (used for) financing activities

7,890

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

$

8,292

8,320
$

7,890

7,199
$

8,320

All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered tobe cash equivalents.
See accompanying notes to Consolidated Financial Statements.

2019 FORM 10-K

57

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
segment 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 ME&T lines of business underhighly competitive conditions, including intense price competition.
We place great emphasis on the high quality and performanceof our products and our dealers’ service support. Although noone competitor is believed to produce all of the same types ofequipment that we do, there are numerous companies, large andsmall, which compete with us in the sale of each of our products.
Our machines are distributed principally through a worldwide
organization of dealers (dealer network), 46 located in the UnitedStates and 119 located outside the United States, serving 191
countries. Reciprocating engines are sold principally through thedealer network and to other manufacturers for use in products. Someof the reciprocating engines manufactured by our subsidiary Perkins
Engines Company Limited, are also sold through its worldwide
network of 67 distributors covering 178 countries. The FG Wilson
branded electric power generation systems primarily manufactured
by our subsidiary Caterpillar Northern Ireland Limited are sold throughits worldwide network of 150 distributors covering 109 countries.
Some of the large, medium speed reciprocating engines are also soldunder 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 turbinesand locomotives, 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
for sales of our products and generate financing income for ourcompany. A significant portion of Financial Products activity is
conducted in North America, with additional offices in Latin America,
Asia/Pacific, Europe, Africa and the 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.

58

2019 FORM 10-K

Investments in companies where our ownership exceeds
20 percent and we do not have a controlling interest or where
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 weare not the primary beneficiary. Although we have provided financial
support, we do not have the power to direct the activities that mostsignificantly impact the economic performance of each entity. Our
maximum exposure to loss from these VIEs for which we are not
the primary beneficiary was $133 million and $131 million as ofDecember 31, 2019 and 2018, respectively.
Cat Financial has end-user customers that are VIEs of which we are
not the primary beneficiary. Although we have provided financial
support to these entities and therefore have a variable 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 finance receivables 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 insurance, contract assets, right of return assets,
prepaid and refundable income taxes, assets held for sale, core
to be returned for remanufacturing, restricted cash and othershort-term investments.
Certain amounts for prior years have been reclassified to conformwith the current-year financial statement 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 60 percent and 65 percent of total inventories at December 31,
2019 and 2018, respectively.
If the FIFO (first-in, first-out) method had been in use, inventories
would have been $2,086 million and $2,009 million higher thanreported at December 31, 2019 and 2018, 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 2019, 2018 and2017, Cat Financial depreciation on equipment leased to others
was $813 million, $819 million and $810 million, respectively, andwas included in Other operating (income) expenses in Statement
1. In 2019, 2018 and 2017, consolidated depreciation expense was$2,253 million, $2,435 million and $2,555 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 ME&T consolidated
companies is the U.S. dollar. The functional currency for mostof our Financial Products and affiliates accounted for under theequity method is the respective local currency. Gains and losses
resulting from the remeasurement of foreign currency amounts tothe functional currency are included in Other income (expense) inStatement 1. Gains and losses resulting from translating assets andliabilities from the functional currency to U.S. dollars are included inAccumulated 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
is more likely than not that a tax benefit will not be realized. See
Note 6 for further discussion.

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.
If the carrying value is higher than the fair value, the difference would
be recognized 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 and reserves for product liability
and insurance losses, postretirement benefits, post-sale discounts,
credit losses and income taxes.

J.

New accounting guidance

Adoption of new accounting standards
Lease accounting – (Accounting Standards Update (ASU) 2016-02) - In
February 2016, the Financial Accounting Standards Board (FASB) issued
accounting guidance that revises the accounting for leases. Under
the new guidance, lessees are required to recognize a right-ofuse asset and a lease liability for substantially all leases. The new
guidance continues 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 is substantiallyequivalent to prior lease accounting guidance. The new guidance
was effective January 1, 2019 and was applied using a modified
retrospective approach through a cumulative effect adjustment toretained earnings as of January 1, 2019. The prior period comparative
information has not been recast and continues to be reported under
the accounting guidance in effect for those periods.
The new guidance provides a number of optional practical expedientsin transition. We elected the “package of practical expedients,” whichallows us not to reassess under the new guidance our prior conclusions
about lease identification, lease classification and initial direct costs.
We did not elect the use-of-hindsight practical expedient. In addition,
the new guidance provides practical expedients for an entity’s ongoing
lessee accounting. For certain property and information technology
equipment leases, we have elected to separate payments for lease
components from non-lease components. For all other leases, we haveelected not to separate lease and non-lease components. We haveelected the short-term lease recognition exemption for all leases that
qualify, which means we have not recognized right-of-use assets orlease liabilities for these leases with a term of twelve months or less.
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. In addition, we derecognized existing assets and debt
obligations for a sale-leaseback transaction that qualified for saleaccounting under the new guidance. The gain associated with thischange in accounting was recognized through opening retained
earnings as of January 1, 2019. The adoption did not have a material
impact on our financial statements.
2019 FORM 10-K

59

In March 2019, the FASB issued Leases - Codification improvements(ASU 2019-01) which amended the new leasing guidance. Under
these amendments, lessors that are not manufacturers or dealers
will use their cost, less any discounts that may apply, as the fair valueof the underlying asset, and lessors within the scope of Financial
Services-Depository and Lending guidance will present all principal
payments received under leases within investment activities on thestatement of cash flows. We adopted the new guidance effective

January 1, 2019, and the adoption did not have a material impact toour financial statements.
See Note 20 for additional information.
The cumulative effect of initially applying the new lease guidance
to our consolidated financial statements on January 1, 2019 was asfollows:

Consolidated Statement of Financial Position
Balance as ofDecember 31, 2018

(Millions of dollars)

Cumulative Impact
from Adopting New
Lease Guidance

Balance as ofJanuary 1, 2019

Assets
Prepaid expenses and other current assets

$

1,765

$

(17)

$

1,748

Property, plant and equipment - net$

13,574$(26)$

13,548

Noncurrent deferred and refundable income taxes

$

1,439

$

(77)

$

1,362

Other assets

$

2,332

$

713

$

3,045

Liabilities
Accrued expenses

$

3,573

$

(27)

$

3,546

Other current liabilities

$

1,919

$

209

$

2,128

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

$

8,005

$

(362)

$

7,643

Other liabilities

$

3,756

$

538

$

4,294

$

30,427$

235$

30,662

Shareholders’ equity
Profit employed in the businessWe adopted the following ASUs effective January 1, 2019, none of which had a material impact on our financial statements:
ASU
2017 - 08
2017 - 122018 - 02

Description
Premium amortization on purchased callable debt securities
Derivatives and hedging - Targeted improvements
Reclassification of certain tax effects from accumulated other comprehensive income

Accounting standards issued but not yet adopted
Credit losses (ASU 2016-13) – In June 2016, the FASB issued
accounting guidance to introduce a new model for recognizing
credit losses on financial instruments based on an estimate ofcurrent expected credit losses. The new guidance will apply toloans, accounts receivable, trade receivables, other financial
assets measured at amortized cost, loan commitments and otheroff-balance sheet credit exposures. The new guidance will also
apply to debt securities and other financial assets measured atfair value through other comprehensive income. The new guidance
was effective January 1, 2020. We do not expect the adoption tohave a material impact on our financial statements.
We consider the applicability and impact of all ASUs. ASUs not listed
above were assessed and either determined to be not applicable or
not expected to have a material impact on our financial statements.

2. Sales and revenue recognition
A.

Sales of Machinery, Energy & Transportation

Sales of ME&T are recognized when all the following criteria aresatisfied: (i) a contract with an independently 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 have completed 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 apurchase order under a dealer sales agreement, or once we enter into
a contract with an end user. If collectibility is not probable, the sale isdeferred and not recognized until collection is probable or payment isreceived. Control of our products typically transfers when title and riskof ownership 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. Productsthat are exported from a country for sale typically transfer title and riskof 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
602019 FORM 10-K

(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 as aremanufactured product to dealers and end users. Revenue isrecognized pursuant to the same transfer of control criteria as ME&T
sales noted above. At the time 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 (basedon historical experience with usable cores). Upon receipt of an
acceptable core, we repay the deposit and relieve the liability. The
returned core asset is then transferred into inventory. In the eventthat the deposit is forfeited (i.e., upon failure by the dealer to return
an acceptable core in the specified time period), we recognize thecore deposit and the cost of 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 units
sold. If discounts paid differ from those estimated, the difference isreported 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 basedon 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 in Statement 3 for the refund we expect to pay for
returned parts. If actual replacement part returns differ from thoseestimated, the difference in the estimated replacement part returnasset and refund liability is recognized in Cost of goods sold andSales, 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 otherand Long-term receivables – trade and other in Statement 3. See
Note 7 for further information. Trade receivables from dealers andend users were $7,648 million, $7,743 million and $6,399 million asof December 31, 2019, December 31, 2018 and January 1, 2018,
respectively, and are recognized in Receivables – trade and other inStatement 3. Long-term trade receivables from dealers and end users
were $693 million, $674 million and $639 million as of December 31,
2019, December 31, 2018 and January 1, 2018, respectively, and arerecognized in Long-term receivables – trade and other in Statement 3.
We establish a bad debt allowance for ME&T receivables when it
becomes probable that the receivable will not be collected. Our
allowance for bad debts is not significant.
We invoice in advance of recognizing the sale of certain products.
We recognize advanced customer payments as a contract liability
in Customer advances and Other liabilities in Statement 3. Contract
liabilities were $1,654 million, $1,680 million and $1,868 million asof December 31, 2019, December 31, 2018 and January 1, 2018,
respectively. We reduce the contract liability when revenue isrecognized. During 2019, we recognized $1,171 million of revenue
that was recorded as a contract liability at the beginning of 2019.
During 2018, we recognized $1,294 million of revenue that wasrecorded 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
for the effects of time value of money when the timing difference
between receipt of payment and recognition of revenue is lessthan one year.
As of December 31, 2019, 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 $6.2 billion, of which $2.4 billion is expected
to be completed and revenue recognized in the twelve months
following December 31, 2019. 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.
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 pricemethodology approved by the Committee is the closing price of
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
2019 FORM 10-K

61

and restated. The Plan initially provided that up to 38,800,000
Common Shares would be reserved for future issuance under
the Plan, subject to adjustment in certain events. Subsequent tothe shareholder 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
5,126,379 for 2019, 5,590,641 for 2018 and 11,139,748 for 2017.
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 40,754,720 shares remained available
for issuance as of December 31, 2019.
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 stock option and RSU grants allow for continued vesting as ofeach vesting date specified in the award document for employees
who meet the criteria for a “Long Service Separation” and fulfill arequisite service period of six months. Compensation expense for
eligible employees for the 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-monthrequisite service period and prior to the completion of the vesting
period, compensation expense is recognized over the period fromthe grant date to the date eligibility is achieved.
For PRSU awards granted in 2018 and 2017, only a prorated numberof shares may vest at the end of the performance period based
upon achievement of the performance target, with the proration
based upon the number of months of continuous employment
during the three-year performance period. Employees with a “Long

Service Separation” must also fulfill a six-month requisite service
period in order to be eligible for the prorated vesting of outstanding
PRSU awards granted in 2018 and 2017. Compensation expense forthe 2018 and 2017 PRSU grants is being recognized on a straightline basis over the three-year performance period for all participants.
Award terms for the 2019 PRSU grant allowed for continued
vesting upon achievement of the performance target specified in
the award document for employees who meet the criteria for a“Long Service Separation” and fulfill a requisite service period of
six months. Compensation expense for the 2019 PRSU grant withrespect to employees who have met the criteria for a “Long Service
Separation” is recognized over the period from the grant date to
the end 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 isrecognized over the period from the grant date to the date eligibility
is achieved.
At grant, option awards and SARs have a term life of ten years.
For awards granted prior to 2016, if the “Long Service Separation”
criteria are met, the vested options/SARs have a life that is thelesser of ten years from the original grant date or five years from theseparation date. For awards granted beginning in 2016, the vested
options have a life equal to ten years from the original grant date.
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 awards for the years ended December 31, 2019, 2018and 2017, respectively.
Grant Year
2018

2017
2.7%

3.4%

29.1%

30.2%

29.2%

Range of volatilities

25.1-38.7%

21.5-33.0%

22.1-33.0%

Range of risk-free interest rates

2.48-2.68%

2.02-2.87%

0.81-2.35%

Weighted-average expected lives

7 years

8 years

8 years

Weighted-average dividend yield
Weighted-average volatility

Beginning with the 2018 grant, RSU and PRSU awards are creditedwith 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 2019 and 2018 was determined as theclosing stock price on the date of the grant. Prior to 2018, RSU and
PRSU awards were not credited with dividend equivalent units and

62

2019
2.6%

2019 FORM 10-K

the fair value was determined by reducing the stock price on thedate of the grant by the present value of the estimated dividends
to be paid during the vesting period. The estimated dividends werebased 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

WeightedAverage
Exercise
Price

PRSUs

Shares

WeightedAverage
Grant Date
Fair Value

Outstanding at January 1, 201917,841,669

$

91.93

1,566,070$

112.99735,299$

115.18Granted to officers and key employees 1

1,499,524$

138.35687,294$138.61

359,122$138.67

Exercised(4,808,237) $

83.81

—

Shares—

Forfeited / expired

Shares$—(67,962) $123.36

VestedWeightedAverage
Grant Date
Fair Value

Outstanding at December 31, 201914,464,994

$

99.29

Exercisable at December 31, 201911,154,215

$

89.84

$

—

—

$

—

(820,927) $99.76(399,811)

$

95.66

(63,234) $133.39(24,495)$

125.89132.88670,115$144.46

1,369,203$

Stock options/SARs outstanding and exercisable as of December 31, 2019:
Outstanding

Exercise Prices

SharesOutstandingat 12/31/19

WeightedAverage
Remaining
Contractual
Life (Years)$57.85-83.00

5,775,829

5.52$$89.75-96.31

4,680,238

5.38$$102.13-110.09

1,052,650

1.75$138.35-138.51

1,496,071$141.32-151.12

1,460,206

2

WeightedAverage
Exercise
Price

Aggregate
Intrinsic
Value 2

SharesOutstanding at
12/31/19

78.64 $

399

5,775,829

5.52$

78.64 $

399

94.56

249

3,833,786

4.96

$

94.31

205

$

106.4843

1,052,650

1.75$

106.48

43

9.29

$

138.35

14

5,119

8.71

$

138.51—8.30$

150.97—

486,8318.30$

150.97—$99.29 $

705

11,154,215$

89.84 $

647

14,464,994
1

Exercisable
WeightedAverage
Remaining
Contractual
Life (Years)

WeightedAverage
Exercise Price

Aggregate
Intrinsic
Value 2

No SARs were granted during the year ended December 31, 2019.
The difference between a stock award’s exercise price and the underlying stock’s closing market price at December 31, 2019, 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, 2019, there were 1,369,203 outstanding
RSUs with a weighted average remaining contractual life of 1.5 years and 670,115 outstanding PRSUs with a weighted-average remaining
contractual life of 1.5 years.

TABLE II - Additional Stock-based Award Information
2018

2019

(Dollars in millions except per share data)

2017

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

$

40.98

$

46.09

$

Intrinsic value of stock awards exercised

$

264

$

348

$

504

Fair value of stock awards vested 1

$

100

$

86

$

191

Cash received from stock awards exercised

$

298

$

370

$

629

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

138.61$150.58$

90.11

Fair value of stock awards vested 2

$

110

$

180

$

189

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

138.67$150.98$

86.78

Fair value of stock awards vested 2

$

59

$

70

$

20

25.01

RSUs activity:

PRSUs activity:

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, stock-based
compensation expense is based on the grant date fair value
and is classified within Cost of goods sold, Selling, general andadministrative expenses and Research and development expenses
corresponding to the same line item as the cash compensation
paid to respective employees, officers and non-employee directors.
Stock-based compensation expense is recognized on a straight-line
basis over the requisite service period for awards with terms thatspecify cliff or graded vesting and contain only service conditions.

Stock-based compensation expense for PRSUs is based on theprobable number of shares expected to vest and is recognizedprimarily on a straight-line basis.
Before tax, stock-based compensation expense for 2019, 2018 and2017 was $205 million, $197 million and $206 million, respectively,
with a corresponding income tax benefit of $35 million, $36 million
and $40 million, respectively.

2019 FORM 10-K

63

The amount of stock-based compensation expense capitalized forthe years ended December 31, 2019, 2018 and 2017 did not havea significant impact on our financial statements.
At December 31, 2019, there was $161 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 1.6 years.
We currently use shares in treasury stock to satisfy share award
exercises.
The cash tax benefits realized from stock awards exercised for 2019,2018 and 2017 were $89 million, $103 million and $205 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 thederivative as (1) a hedge of the fair value of a recognized asset or
liability (fair value hedge), (2) a hedge of a forecasted transaction or
the variability of cash flow (cash flow hedge) or (3) an undesignatedinstrument. Changes in the fair value of a derivative that is qualified,designated and highly effective as a fair value hedge, along withthe gain or loss on the hedged recognized asset or liability that is
attributable to the hedged risk, are recorded in current earnings.
Changes in the fair value of a derivative that is qualified, designatedand highly effective as a cash flow hedge are recorded in Accumulated
other comprehensive income (loss) (AOCI), to the extent effective, inStatement 3 until they are reclassified to earnings in the same period
or periods during which the hedged transaction affects earnings.
Changes in the fair value of undesignated derivative instruments arereported in current earnings. Cash flows from designated derivative
financial instruments are classified within the same category as theitem being hedged on Statement 5. Cash flows from undesignatedderivative financial instruments are included in the investing categoryon 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
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.
64

2019 FORM 10-K

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 ME&T operations purchase, manufacture and sell products inmany 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 andoption contracts to manage unmatched foreign currency cash inflow
and outflow. Our objective is to minimize the risk of exchange rate
movements that would reduce the U.S. dollar value of our foreign
currency cash flow. Our policy allows for managing anticipatedforeign currency cash flow for up to approximately five years. As
of December 31, 2019, the maximum term of these outstanding
contracts was approximately 60 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 ME&T foreign currency contracts are undesignated.
As of December 31, 2019, $1 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 ME&T operations generally use fixed-rate debt as a source offunding. Our objective is to minimize the cost of borrowed funds.
Our policy allows us to enter into fixed-to-floating interest rate
contracts and forward rate agreements to meet that objective. We
designate fixed-to-floating interest rate contracts as fair value hedges
at inception of the contract, and we designate certain forward rateagreements as cash flow hedges at inception of the contract.
Financial Products operations has a match-funding policy that
addresses interest rate risk by aligning the interest rate profile(fixed or floating rate and duration) of Cat Financial’s debt portfoliowith the interest rate profile of our receivables portfolio withinpredetermined ranges on an ongoing basis. In connection withthat policy, we use interest rate derivative instruments to modify
the debt structure to match assets within the receivables portfolio.
This matched funding reduces the volatility of margins between
interest-bearing assets and interest-bearing liabilities, regardlessof which direction interest rates move.

C.

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 as fairvalue hedges to protect debt against changes in fair value due tochanges in the benchmark interest rate. We designate most floating-tofixed interest rate contracts as cash flow hedges to protect against thevariability of cash flows due to changes in the benchmark interest rate.

Our ME&T operations purchase base and precious metals
embedded in the components we purchase from suppliers. Our
suppliers pass on to us price changes in the commodity portion of
the component cost. In addition, we are subject to price changes
on energy products such as natural gas and diesel fuel purchasedfor operational use.

We have, at certain times, liquidated fixed-to-floating andfloating-to-fixed interest rate contracts at both ME&T and Financial
Products. The gains or losses associated with these contracts atthe time of liquidation are amortized into earnings over the originalterm of the previously designated hedged item.

Commodity price risk

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

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,
2018

2019

(Millions of dollars)

Designated derivatives
Foreign exchange contracts
Machinery, Energy & Transportation

Receivables — trade and otherMachinery, Energy & Transportation

Long-term receivables — trade and otherMachinery, Energy & Transportation
Machinery, Energy & Transportation

$

18

$

16

9

—

Accrued expenses

(20)

(26)

Other liabilities—(9)

Financial ProductsReceivables — trade and other54

53

Financial Products

Long-term receivables — trade and other13

35

Financial Products

Accrued expenses

(3)

(9)

—

1

Interest rate contracts
Financial ProductsReceivables — trade and other

Financial Products

Long-term receivables — trade and other

Financial Products

Accrued expenses
$

5

3

(25)

(40)

51

$

1

$

24

Undesignated derivatives
Foreign exchange contracts$

Machinery, Energy & Transportation

Receivables — trade and otherMachinery, Energy & Transportation

Accrued expenses

—

(21)

Financial ProductsReceivables — trade and other7

15

Financial Products

Long-term receivables — trade and other

Financial Products

Accrued expenses

2

5

5

(22)

(14)

4

1

(1)

(31)

(6) $

(43)

Commodity contracts
Machinery, Energy & Transportation

Receivables — trade and otherMachinery, Energy & Transportation

Accrued expenses$

The total notional amounts of the derivative instruments are as follows:
Years ended December 31,
2018

2019

(Millions of dollars)

Machinery, Energy & Transportation

$

2,563

$

1,834

Financial Products

$

8,931

$

10,2102019 FORM 10-K

65

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, 2019

(Millions of dollars)

Recognized in Earnings
Amount ofGains (Losses)
Recognized in
AOCI

Amountof Gains(Losses)
Reclassified
from AOCIClassification of
Gains (Losses)

Amountof the line
items inStatement 1

Foreign exchange contracts
Machinery, Energy & Transportation$

34

Sales of Machinery, Energy & Transportation$

Cost of goods sold
93

Financial Products

11$50,755(3)

36,630Interest expense of Financial Products

33

754

Other income (expense)

37

(57)

Interest rate contracts
Machinery, Energy & Transportation—

Interest expense excluding Financial Products

(4)

421

Financial Products(70)Interest expense of Financial Products

(8)

754

$

57

$

66

Year ended December 31, 2018
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(47)

Other income (expense)

165$(33) $—

Other income (expense)

148—

Interest expense of Financial Products

19

—
—

Interest rate contracts
Machinery, Energy & Transportation—

Interest expense excluding Financial Products(3)

Financial Products(38)Interest expense of Financial Products

—

$

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
Machinery, Energy & Transportation$

Financial Products

72

Other income (expense)(77)

Other income (expense)$(40) $—(81)—

Interest expense of Financial Products

6——Interest rate contracts
Machinery, Energy & Transportation—

Interest expense excluding Financial Products(9)

Financial Products—Interest expense of Financial Products

3—(121) $—$

66

2019 FORM 10-K

(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)

2018

2019

2017

Foreign exchange contracts
Machinery, Energy & Transportation

Other income (expense)

Financial Products

Other income (expense)

13

$

$

(37)

(54) $

72

19

9

Commodity contracts
Machinery, Energy & Transportation

Other income (expense)$

We enter into International Swaps and Derivatives Association(ISDA) master netting agreements within ME&T and Financial
Products that permit the net settlement of amounts owed under
their respective derivative contracts. Under these master netting
agreements, net settlement generally permits the company or thecounterparty to determine the net amount payable for contracts
due on the same date and in the same currency for similar typesof derivative transactions. The master netting agreements generally

18

(39)

30

(6) $

(74) $

111

also provide for net settlement of all outstanding contracts witha counterparty in the case of an event of default or a termination
event.
Collateral is generally not required of the counterparties or of ourcompany under the master netting agreements. As of December 31,
2019 and 2018, no cash collateral was received or pledged underthe 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, 2019

(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

$

Total

32

$

84

Financial Products
$

116

—

$

—
$

—

32

$

84
$

116

$

(13) $—(21)—(34) $

—

$

19
63

$

82

December 31, 2019

(Millions of dollars)

Net Amountof Liabilities
Presented
in theStatementof Financial
Position

Gross
Amounts
Offset in theStatementof Financial
Position

Gross Amountof RecognizedLiabilities

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

Derivatives
Machinery, Energy & Transportation$

Financial Products
Total

$

(21) $—(50)—(71) $—$$(21) $

13

(50)

21

(71) $

34

$

—

$

—
$

—

(8)
(29)

$

(37)

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$

Financial Products
Total

19

$

112
$

131

—

$

—
$

—

19

$

112
$

131

$

(19) $—(34)—(53) $

—

$

—
78

$

78

2019 FORM 10-K

67

December 31, 2018

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
Cash
Collateral
PledgedFinancial
Instruments

Net Amountof Liabilities

Derivatives
Machinery, Energy & Transportation$(87) $—(63)—(150) $—

Financial Products
Total

$

$
$

(87) $

19

(63)

34

(150) $

53

$

—

$

(68)

$

(97)

—
$

—

(29)

5. Other income (expense)
Years ended December 31,
2018

2019

(Millions of dollars)$

Investment and interest income

202

$

2017
195

$

122

(67)

(201)

(213)

License fee income

121

125

100

Gains (losses) on sale of securities and affiliated companies

30

4

187 2

(363)

(118)

(54)

Foreign exchange gains (losses)

1

Net periodic pension and OPEB income (cost), excluding service cost
Gains (losses) on equity securities measured at fair value

3

Miscellaneous income (loss)
$

Total
1
2
3

35

(33)

—

(15)

(39)

11

(57) $

(67)

$

153

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.

6. Income taxes

Reconciliation of the U.S. federal statutory rate to effective rate:Years ended December 31,
2018

2019

(Millions of dollars)

1,641

21.0%

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

365

State and local taxes, net of federal 1

59

Taxes at U.S. statutory rate

$

$

2017

1,643

21.0%

4.7%

282

0.8%

22

$

1,429

35.0%

3.6%

(282)

(6.9)%

0.3%

27

0.7%

(Decreases) increases resulting from:Interest and penalties, net of tax
U.S. tax incentives

0.4%

33

0.4%

28

0.7%

(1.9)%(106)(1.3)%(52)(1.3)%Net excess tax benefits from stock-based compensation(41)(0.5)%(56)(0.7)%(64)(1.6)%

Mandatory deemed repatriation of non-U.S. earnings(178)(2.3)%

50

0.7%

1,775

43.5%

U.S. deferred tax rate change

—

—%

(154)

(2.0)%

596

14.6%

Valuation allowances

—

—%

(29)

(0.4)%(111)(2.7)%

Other—net

15

0.2%

13

0.1%

(7)

(0.2)%

1,746

22.4%

1,698

21.7%

3,339

81.8%

Provision (benefit) for income taxes
1

34
(149)

$

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 tovaluation allowances and other permanent differences between
68

$

$

Excludes amounts included in valuation allowances and mandatory deemed repatriation of non-U.S. earnings.

2019 FORM 10-K

tax and U.S. GAAP results. Although not individually significant by
jurisdiction, pre-tax permanent differences due to nondeductible
net foreign exchange gains/losses of non-U.S. subsidiaries wereapproximately $36 million of net losses in 2019, $180 million of net
losses in 2018 and $160 million of net gains in 2017.

Included in the line item above labeled “Valuation allowances”
are decreases in the valuation allowance for U.S. state deferred
tax assets resulting in a $63 million non-cash benefit in 2018, netof federal deferred tax adjustment at 21 percent, compared to a$111 million non-cash benefit in 2017, net of federal deferred tax
adjustment at 35 percent. The primary driver of the decreases in
the U.S. state valuation allowance was improved U.S. GAAP profits
expected to recur in certain state jurisdictions. Also included in2018 was a decrease in the valuation allowance for a non-U.S.
subsidiary of $25 million offset by a charge of $59 million to correct
for an error which resulted in an understatement of the valuation
allowance offsetting deferred tax assets for prior years. This error
had the effect of overstating profit by $17 million for the year ended
December 31, 2017. Management has concluded that the error was
not material to any period presented.
On December 22, 2017, U.S. tax legislation was enacted containing
a broad range of tax reform provisions including a corporate tax rate
reduction and changes in the U.S. taxation of non-U.S. earnings. In
2018, measurement period adjustments of $104 million reduced
the provisionally estimated charge of $2.371 billion recognized
during the fourth quarter of 2017. A $154 million benefit revised
the estimated impact of the write-down of U.S. net deferred tax
assets to reflect the reduction in the U.S. corporate tax rate from35 percent to 21 percent. This benefit primarily related to thedecision to make an additional discretionary pension contributionof $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 estimated cost of a mandatory deemed repatriation of non-U.S.
earnings, including changes in the deferred tax liability related to theamount of earnings considered not indefinitely reinvested as wellas the amount of unrecognized tax benefits and state tax liabilities
associated with these tax positions. During 2019, a $178 million tax
benefit was recorded to adjust previously unrecognized tax benefits
as a result of receipt of additional guidance related to the calculationof the mandatory deemed repatriation of non-U.S. earnings.
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.

2018

2019

(Millions of dollars)

$

2,888

$

4,924

Non-U.S.
$

7,812

2017
2,131

$

240

5,691
$

7,822

3,842
$

4,082

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,
2018

2019

(Millions of dollars)

2017

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

$

405

$

179

$

963

Non-U.S.

1,261

1,291

1,124

State (U.S.)

52

8

39

1,718

1,478

2,126

U.S. 1

17

298

1,385

Non-U.S.

(7)

4

(17)

State (U.S.)

18

(82)

(155)

Deferred tax provision (benefit):

28
Total provision (benefit) for income taxes
1

$

1,746

220
$

1,698

1,213
$

3,339

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.

We paid net income tax and related interest of $1,847 million, $1,429 million and $1,404 million in 2019, 2018 and 2017, respectively.

2019 FORM 10-K

69

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,
2018

2019

(Millions of dollars)

Assets:$Noncurrent deferred and refundable income taxes

1,324

$

1,363

$

1,032

Liabilities:
414

Other liabilities$

Deferred income taxes—net

910

331

The components of deferred tax assets and liabilities were:
December 31,
2018

2019

(Millions of dollars)

Deferred income tax assets:$

Tax carryforwards

1,218

$

1,312

Postemployment benefits other than pensions

876

793

Pension445

785

Warranty reserves

263

237

Research expenditures

219—

Allowance for credit losses

171

155

Post sale discounts

200

158

Other employee compensation and benefits

197

186

Lease obligations

157—

Stock-based compensation

107

121

250

298

4,103

4,045

(1,574)(1,381)

Bond discount

(122)

(127)

Translation

(194)

(190)

Other outside basis differences

(257)

(271)

Undistributed profits of non-U.S. subsidiaries

(118)

(129)

(2,265)(2,098)

(928)

(915)

Other—net
Deferred income tax liabilities:
Capital and intangible assets, including lease basis differences

Valuation allowance for deferred tax assets$

Deferred income taxes—net

At December 31, 2019, approximately $1,320 million of U.S. state
tax net operating losses (NOLs) and $125 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, with some credits having

910

$

1,032

an unlimited carryforward period. In total, we have establisheda valuation allowance of $172 million related to certain of thesecarryforwards.
At December 31, 2019, approximately $264 million of U.S. foreign tax
credits were available for carryforward. These credits expire in 2028.

At December 31, 2019, amounts and expiration dates of net operating loss and interest carryforwards in various non-U.S. taxing jurisdictions were:(Millions of dollars)

2020

2021

2022

2023-2025

2026-2040

Unlimited

Total

$ 104

$ 53

$ 81

$ 59

$ 451

$ 3,627$ 4,375

At December 31, 2019, 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 $750 million, including certain entities in Luxembourg.
70

2019 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,
2018

2019

(Millions of dollars)$

Balance at January 1,

1,796

$

2017
1,286

$

1,032

Additions for tax positions related to current year

72

61

Additions for tax positions related to prior years

112

461

20

Reductions for tax positions related to prior years

(201)

(5)

(27)

Reductions for settlements 2

—

(6)

(9)

Reductions for expiration of statute of limitations

(1)

(1)

—

270

Balance at December 31,

$

1,778

$

1,796

$

1,286

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

$

1,616

$

1,716

$

1,209

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 a componentof the provision for income taxes. We recognized a net provision
for interest and penalties of $43 million, $42 million and $38 million
during the years ended December 31, 2019, 2018 and 2017,
respectively. The total amount of interest and penalties accrued
was $233 million and $190 million as of December 31, 2019 and2018, 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, India, Japan, Mexico, Switzerland, Singapore and the
U.K., tax years are typically subject to examination for three to ten
years. Due to the uncertainty related to the timing and potential
outcome of audits, 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 $1,401 million and $1,308 million, at December 31, 2019and 2018, respectively.

Contractual maturities of outstanding wholesale inventory receivables:
December 31, 2019
Wholesale
Loans(Millions of dollars)

Wholesale
LeasesTotal

Amounts Due In
2020

$

630

$

65

$

695

2021

235

48

283

2022

166

32

198

2023

61

22

83

2024

27

14

41

Thereafter

21

16

37

1,140

197

1,337

Total
Guaranteed residual value 1

25

50

75

Unguaranteed residual value

—

33

33

(10)

Less: Unearned income
Total
1

$

1,155

(34)
$

246

(44)
$

1,401

For Wholesale loans, represents residual value on failed sale leasebacks.

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.
2019 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, 2019
RetailLoans(Millions of dollars)

RetailLeasesTotal

Amounts Due In
$

2020

$

3,134

$

9,414

2021

3,582

2,005

5,587

2022

2,610

1,076

3,686

2023

1,634

472

2,106

2024

622

182

804

Thereafter

417

62

479

15,145

6,931

22,076

53

390

443

Total
Guaranteed residual value 1
Unguaranteed residual value
Less: Unearned income
$

Total
1

—

798

798

(265)

(655)

(920)

14,933

$

7,464

$

22,397For Retail loans, represents residual value on failed sale leasebacks.

Cat 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

6,280

2019 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 EAME – 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.

zz Latin America – Finance receivables originated in Mexico andCentral and South American countries.

zz Caterpillar Power Finance – Finance receivables originatedworldwide related to marine vessels with Caterpillar engines
and Caterpillar electrical power generation, gas compression
and co-generation systems and non-Caterpillar equipment thatis powered by these systems.

An analysis of the allowance for credit losses was as follows:
December 31, 2019
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

$

486
(281)
44
138
(12)
375
178
197
375

$

594
18,093
18,687

$

$
$
$
$
$

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$

Credit quality of finance receivables
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

$

$

$

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

$

78
3,632
3,710

$

507
(281)
44
162
(12)
420
217
203
420

$
$
$

672
21,72522,397

$

$
$

Total
$

$

9
—
—
12
—
21
14
7
21

$

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

858

$

78

$

936

18,152
19,010

$

3,338
3,416

$

21,49022,426$$

Ending Balance

$

21
—
—
24
—
45
39
6
45

December 31, 2018
DealerCustomer(Millions of dollars)

$
$

Total

$
$

$
$

collection 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, 201931-60 Days
Past Due(Millions of dollars)Customer
North America
EAME
Asia Pacific
MiningLatin America
Caterpillar Power Finance
DealerNorth America
EAME
Asia Pacific
MiningLatin America
Caterpillar Power Finance
Total

$

$

72
30
40
5
41
10
—
—
—
—
—
—
198

91+
Days Past
Due

61-90 Days
Past Due
$

$

23
31
14
—
23
10
—
—
—
—
—
—
101

$

$

55
141
29
19
80
225
—
—
—
—
78
—
627

Total Past
Due
$

$

Current
150
202
83
24
144
245
—
—
—
—
78
—
926

$

$

8,038
2,955
2,440
1,851
1,136
1,419
2,136
342
437
4
712
1
21,471

Total
Finance
Receivables
$

$

8,188
3,157
2,523
1,875
1,280
1,664
2,136
342
437
4
790
1
22,39791+ Still
Accruing
$

$

15
4
8
—
2
—
—
—
—
—
—
—
29

2019 FORM 10-K

73

December 31, 201831-60 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

$

65

$

18

$

84

$

167

$

7,825

$

7,992

$

14

EAME

19

9

153

181

2,850

3,031

Asia Pacific

24

9

8

41

2,409

2,450

5

Mining

28

1

9

38

1,642

1,680

—

Latin America

38

29

71

138

1,421

1,559

—

Caterpillar Power Finance

10

1

384

395

1,903

2,298

—

North America

—

—

—

—

1,895

1,895

—

EAME

—

—

—

—

333

333

—

Asia Pacific

—

—

—

—

466

466

—

Mining

—

—

—

—

4

4

—

Latin America

—

—

78

78

638

716

—

Caterpillar Power Finance

—

—

—

—

2

2

5

Dealer

Total

$

184

$

67

787

$

$

1,038

$

21,388For 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.

$

24

December 31, 2018

December 31, 2019

(Millions of dollars)—

22,426

There were $78 million of impaired finance receivables with a related
allowance of $39 million and $14 million as of December 31, 2019and 2018, respectively, for the Dealer portfolio segment, all of which
was in Latin America. There were no impaired finance receivables
as of December 31, 2017 for the Dealer portfolio segment. Cat
Financial’s recorded investment in impaired finance receivables
and the related unpaid principal balances and allowances for the
Customer portfolio segment were as follows:

Impaired finance receivables

UnpaidPrincipal
Balance

Recorded
Investment$

UnpaidPrincipal
Balance

Recorded
Investment

RelatedAllowance

RelatedAllowance

Impaired Finance Receivables With
No Allowance Recorded
North America

$

6

$

—

EAME

6

$

—

—

—

$

10

$

1

10

$

1

—
—

Asia Pacific

—

—

—

—

—

—

Mining

22

22

—

33

33

—

Latin America

8

8

—

29

29

—

Caterpillar Power Finance

58

58

—

69

83

—

Total

$

94

$

94

$

$

30

$

30

$

—

$

142

$

156

$

—

11

$

40

$

41

$

14

Impaired Finance Receivables With
An Allowance Recorded
North America
EAME

61

61

29

92

92

Asia Pacific

8

8

2

4

4

2

Mining

37

36

9

56

55

26

57

Latin America

58

58

20

75

75

25

Caterpillar Power Finance

306

319

107

449

455

164

Total

$

500

$

512

$

$

36

$

36

$

178

$

716

$

722

$

288

11

$

50

$

51

$

14

Total Impaired Finance Receivables
North America
EAME

61

61

29

93

93

Asia Pacific

8

8

2

4

4

2

Mining

59

58

9

89

88

26

Latin America

66

66

20

104

104

25

Caterpillar Power Finance

364

377

107

518

538

164

$

Total

74

57

2019 FORM 10-K

594

$

606

$

178

$

858

$

878

$

288

Years ended December 31,
2018

2019
Average
Recorded
Investment(Millions of dollars)

Average
Recorded
Investment

Interest
IncomeRecognized2017
Interest
IncomeRecognized

Average
Recorded
Investment

Interest
IncomeRecognizedImpaired Finance Receivables With
No Allowance Recorded
North America

$

9

$

—

$

16

$

1

$

13

$

1

EAME

6

—

14

—

48

1

Asia Pacific

—

—

27

3

24

2

Mining

27

1

57

2

126

7

Latin America

21

1

38

2

64

3

Caterpillar Power Finance

54

3

130

7

221

Total

$

117

$

$

34

$

9

5

$

282

$

15

$

496

$

2

$

49

$

2

$

49

$

23

Impaired Finance Receivables With
An Allowance Recorded
North America

812Asia Pacific9

Mining

48

EAME

2

6

1

4

—

31

2

2

46

3

—

—
4

Latin America

72

5

67

3

99

Caterpillar Power Finance

396

11

378

12

180

Total

1

53

—

6

$

640

$

23

$

597

$

22

$

365

$

13

$

43

$

2

$

65

$

3

$

62

$

2

Total Impaired Finance Receivables
North America
EAME

87

2

67

2

54

1

Asia Pacific

9

1

31

3

55

4

Mining

75

3

103

5

126

7

Latin America

93

6

105

5

163

7

Caterpillar Power Finance

450

14

508

19

401

15

Total

$

757

$

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.

28

$

879

$

37

$

861

$

36

Payments received while the finance receivable is on non-accrual
status are applied to interest and principal in accordance with thecontractual terms.
As of December 31, 2019 and 2018, there were $78 million in financereceivables on non-accrual status for the Dealer portfolio segment,
all of which was in Latin America.

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

2018

2019

(Millions of dollars)

$

44

$

77

EAME

165

Asia Pacific21

4Mining47

50

Latin America

89

106

Caterpillar Power Finance

361

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

$

727

154

416
$

807

difficulties. Concessions granted may include extended contract
maturities, inclusion of interest only periods, below market interest
rates, extended skip payment periods and reduction of principal
and/or accrued interest.

2019 FORM 10-K

75

There were no finance receivables modified as TDRs during the years ended December 31, 2019, 2018 or 2017 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, 2019, 2018 and 2017 were as follows:Year ended December 31, 2019

(Millions of dollars)

Numberof Contracts

Pre-TDR
Recorded
Investment

Post-TDR
Recorded
Investment$$

North America

15

EAME

19

17

11

17

Asia Pacific

—

—

—

Mining2

8

8

Latin America

5

5

3

Caterpillar Power Finance

21

Total

62

168
$

209

11

165
$

204

Year ended December 31, 2018
Numberof Contracts
North America

38

Pre-TDR
Recorded
Investment

Post-TDR
Recorded
Investment

$

$

21

21

EAME

—

—

—

Asia Pacific

—

—

—

Mining1

29

29

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

EAME

4

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 Finance 1

68

422

407

Total

144

1

$

579

$

557

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.

TDRs in the Customer portfolio segment with a payment default (defined as 91+ days past due) during the years ended December 31,
2019, 2018 and 2017 which had been modified within twelve months prior to the default date, were as follows:(Millions of dollars)Year ended December 31, 2019Year ended December 31, 2018

Post-TDR
Recorded
Investment

Post-TDR
Recorded
Investment

Numberof Contracts
11

EAME

—

$

Post-TDR
Recorded
Investment

Numberof Contracts

5

10

10

4

—

—

—

1

$

$

3
—

Asia Pacific

—

—

—

—

4

1

Latin America 1

—

—

3

1

243

17

Caterpillar Power Finance

1

Total

12

1

76

North America

Numberof Contracts

Year ended December 31, 2017

$

10

3

15

16

$

33

—

44

252

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.

2019 FORM 10-K

—
$

21

8. Inventories
Inventories (principally using the LIFO method) are comprised of the following:
December 31,
2018

2019

(Millions of dollars)$

Raw materials

4,263

$

4,477

Work-in-process

1,147

1,259

Finished goods

5,598

5,562

258

231

Supplies$

Total inventories

11,266$

11,529During the third quarter of 2019, changes were made to theclassification of inventories primarily related to purchased parts
between Raw materials, Work-in-process and Finished goods. The
prior year amounts have been retrospectively adjusted to conformto the current-year classification.

current costs. The effect of this reduction in inventory decreased
Cost of goods sold by approximately $66 million and increased
Profit by approximately $49 million or $0.08 per share. The impact
of LIFO liquidations during 2019 and 2018 was not significant toStatement 1.

During 2017, closure of our facility in Gosselies, Belgium resulted
in a liquidation of LIFO inventory. The liquidated inventory was
carried at lower costs prevailing in prior years as compared withWe had long-term material purchase obligations of approximately$270 million at December 31, 2019.

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

Land

2018

2019
$

—

664

$

671

Buildings and land improvements

20-45

6,710

6,977

Machinery, equipment and other

2-10

13,287

13,733

Software

3-7

1,728

1,703

Equipment leased to others

1-7

6,208

6,015

Construction-in-process

—

620

682

29,21729,781

Total property, plant and equipment, at cost

(16,313)

Less: Accumulated depreciation$

Property, plant and equipment–net

12,904(16,207)$

13,574

10. Intangible assets and goodwill
A.

Intangible assets

Intangible assets are comprised of the following:
December 31, 2019

(Millions of dollars)

Weighted
Amortizable
Life (Years)

Gross
Carrying
Amount$Accumulated
Amortization

Customer relationships

15(1,406) $1,044

Intellectual property

12

1,510

(1,055)

455

Other

13

191

(125)

66

Total finite-lived intangible assets

14(2,586) $

1,565

$

2,450

4,151

$

Net

$

2019 FORM 10-K

77

December 31, 2018
Weighted
Amortizable
Life (Years)
Customer relationships

15

Gross
Carrying
Amount$Accumulated
Amortization

2,463

$

Net

(1,249) $1,214Intellectual property

11

1,557

(965)

592

Other

13

199

(108)

91

Total finite-lived intangible assets

14(2,322) $1,897

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.

$

4,219

$

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.
Amortization expense related to intangible assets was $324 million,$331 million and $323 million for 2019, 2018 and 2017, respectively.

As of December 31, 2019, amortization expense related to intangible assets is expected to be:(Millions of dollars)

B.

2020

2021

2022

2023

2024

Thereafter

$ 310

$ 292

$ 273

$ 215

$ 158

$ 317

Goodwill

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 for details on these acquisitions.

There were no goodwill impairments during 2019, 2018 or 2017.
The changes in carrying amount of goodwill by reportable segment for the years ended December 31, 2019 and 2018 were as follows:
December 31, 2018

(Millions of dollars)

Acquisitions

Other Adjustments 1

December 31, 2019$$

Construction Industries
Goodwill

$

304

$

—

2

306

Impairments

(22)

—

—

(22)

Net goodwill

282

—

2

284

Goodwill

4,172

—

(16)

4,156

Impairments(1,175)——(1,175)

Net goodwill

2,997

—

(16)

2,981

2,882

—

(7)

2,875

56

—

—

56

Goodwill

7,414

—

(21)

7,393

Impairments(1,197)——(1,197)(21) $

6,196

Resource Industries

Energy & Transportation
Goodwill
All Other 2
Goodwill
Consolidated total$

Net goodwill

78

2019 FORM 10-K

6,217

$

—

$

December 31, 2017

Acquisitions

Other Adjustments 1

December 31, 2018

Construction Industries
Goodwill

(1) $

304

Impairments

$

305
(22)

$

—
—

$

—

(22)

Net goodwill

283

—

(1)

282

Goodwill

4,232

—

(60)

4,172

Impairments(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

Resource Industries

Energy & Transportation
Goodwill
All Other 2
Goodwill
Consolidated total
Goodwill
Impairments(1,197)

Net goodwill
1
2

$

6,200

—
$

127

$

Other adjustments are comprised primarily of foreign currency translation.
Includes All Other operating segment (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). The unrealized gains and losses arisingfrom the revaluation of the equity securities are included in Other
income (expense) in Statement 1. Realized gains and losses onsales of investments are generally determined using the specificidentification method for debt and equity securities and are includedin Other income (expense) in Statement 1.

The cost basis and fair value of debt securities with unrealized gains and losses included in equity (Accumulated other comprehensive
income (loss) in Statement 3) were as follows:

Cost Basis(Millions of dollars)

December 31, 2019
Unrealized
Pretax Net
Gains (Losses)

Fair Value

December 31, 2018
Unrealized
Pretax Net
Gains (Losses)

Cost BasisFair Value

Government debt
U.S. treasury bonds$

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

9

$

—

$

9

$

9

$

—

$

9

54

—

54

42

—

42

Corporate bonds

836

20

856

735

(15)

720

Asset-backed securities

62

—

62

63

—

63
297

Corporate bonds

Mortgage-backed debt securities
U.S. governmental agency

327

4

331

301

(4)

Residential

6

—

6

7

—

7

Commercial

46

1

47

14

(1)

13

(20) $

1,151

Total debt securities

$

1,340

$

25

$

1,365

$

1,171

$

As of December 31 2019 and 2018, the total unrealized loss for available-for-sale investments in an unrealized loss position that are notother-than-temporarily impaired was $1 million and $21 million, respectively.

2019 FORM 10-K

79

The cost basis and fair value of the available-for-sale debt securities at December 31, 2019, 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, 2019
Cost BasisFair Value
$
80 $
80
701
715
148
153
32
33
327
331
6
6
46
47
$
1,340 $
1,365

(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:
2019 1(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.

$$$

Years Ended December 31,
2018 1
260 $
247 $
1 $
— $
1 $
— $

2017
930
109
5

For the years ended December 31 2019 and 2018, the net unrealized gains (losses) for equity securities held at December 31, 2019 and2018 were $29 million and $(25) million, respectively.

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.

Our U.S. defined benefit pension plans for support and management
employees were frozen for certain employees on December 31,
2010 and were frozen for the remaining employees on December 31,
2019. On the respective transition dates employees move to aretirement benefit that provides a frozen pension benefit and a401(k) plan that will include a matching contribution and a new
annual employer contribution.
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.

Obligations, assets and funded status
U.S. Pension Benefits
2019
2018

Non-U.S. Pension Benefits
2019
2018

Weighted-average assumptions used to determine
benefit obligation, end of year:
Discount rate
3.2%
4.2%
1.9%
Rate of compensation increase 1
—%
4.0%
2.0%
1
Effective December 31, 2019, all U.S. pension benefits were frozen, and accordingly this assumption is no longer applicable.

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 flows

80

2019 FORM 10-K

2.5%
3.0%

Other Postretirement Benefits
2019
2018

3.2%
4.0%

4.2%
4.0%

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.

U.S. Pension Benefits
2019(Millions of dollars)

Accumulated benefit obligation, end of year

2018

Non-U.S. Pension Benefits

Other Postretirement Benefits

2019

2019

2018

$

17,773$

15,877

$

4,502

$

4,038

$

15,953$

17,326

$

4,215

$

4,606

2018

Change in benefit obligation:
Benefit obligation, beginning of year

$

3,649

$

4,002

Service cost

115

125

80

89

80

83

Interest cost

600

534

94

96

136

125

Plan amendments

—

—

(5)

26

8

(25)

2,090

(1,058)

424

(88)

350

(195)

Foreign currency exchange rates

—

—

95

(205)

(1)

(28)

Participant contributions

—

—

7

6

46

51

Actuarial losses (gains)

Benefits paid - gross

(982)

(971)

(237)

(277)

(316)

(369)

Less: federal subsidy on benefits paid

—

—

—

—

9

7

Curtailments, settlements and termination
benefits

(3)

(3)

(7)

(38)

(1)

(2)

Benefit obligation, end of year$

17,773$

15,953

$

4,666

$

4,215

$

3,960

$

3,649

$

12,697$

13,416

$

4,025

$

4,305

$

328

$

504

Change in plan assets:
Fair value of plan assets, beginning of year
Actual return on plan assets
Foreign currency exchange rates
Company contributions
Participant contributions
Benefits paid
Settlements and termination benefits

2,740

(784)

482

13

71

(5)

—

—

105

(187)

—

—

1,542

1,039

143

165

127

147

—

—

7

6

46

51

(982)

(971)

(237)

(277)

(316)

(369)

(3)

—

(3)

(1)

—

—

Fair value of plan assets, end of year$

15,994$

12,697

$

4,525

$

4,025

$

255

$

328

Over (under) funded status$(1,779)$(3,256)

$

(141)

$

(190)

$

(3,705)$(3,321)

$

219

$

9

$

485

$

442

$

—

$

—

Components of net amount recognized infinancial position:
Other assets (non-current asset)
Accrued wages, salaries and employee
benefits (current liability)(42)

Liability for postemployment benefits(non-current liability) 1
Net liability recognized

(19)

(40)

(1,956)(607)(3,225)

(161)

(20)

(173)

(3,544)(612)(3,148)$(1,779)$(3,256)

$

(141)

$

(190)

$

(3,705)$(3,321)

$

—

$

—

$

16

$

20

$

(78)

$

(126)

Amounts recognized in Accumulated othercomprehensive income (pre-tax) consist of:Prior service cost (credit)
1

The Liability for postemployment benefits reported in Statement 3 includes our liability for other postemployment benefits and our liability for non-qualified deferred compensationplans. For 2019, these liabilities were $60 million and $432 million, respectively. For 2018, these liabilities were $119 million and $351 million, respectively.

U.S. Pension Benefits
2019(Millions of dollars)

Non-U.S. Pension Benefits
2019

2018

2018

Pension plans with projected benefit obligation in excess of plan assets:
Projected benefit obligation$

14,037$

15,614

$

2,010

$

1,821

Accumulated benefit obligation$

14,037$

15,541

$

1,896

$

1,723

Fair value of plan assets$

12,039$12,349

$

1,384

$

1,189

Projected benefit obligation$

14,037$

15,614

$

1,875

$

1,655

Accumulated benefit obligation$

14,037$

15,541

$

1,799

$

1,603

Fair value of plan assets$

12,039$12,349

$

1,269

$

1,047

Pension plans with accumulated benefit obligation in excess of plan assets:

2019 FORM 10-K

81

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

B.

Net periodic benefit cost
U.S. Pension Benefits
2018

2019

(Millions of dollars)

Non-U.S. Pension Benefits

2017

2018

2019

Other Postretirement Benefits

2017

2018

2019

2017

Components of net periodic
benefit cost:$Service cost

115

$

125

$

115

$

80

$

89

$

95

$

80

$

83

$

78

Interest cost

600

534

525

94

96

101

136

125

130

Expected return on plan assets

(721)

(808)

(734)

(148)

(221)

(231)

(18)

(32)

(37)

Curtailments, settlements andtermination benefits

(1)

—

9

(7)

(33)

15

—

(2)

—

Amortization of prior service cost(credit) 1

—

—

—

—

—

(2)

(40)

(36)

(23)

Actuarial loss (gain) 2

72

534

481

90

111

(195)

306

(150)

15

Net Periodic benefit cost (benefit)

3

$

65

$

385

$

396

$

109

$

42

$

(217)

$

464

$

(12)

$

163

$

—

$

—

$

—

$

(4)

$

20

$

3

$

8

$

(20)

$

(77)

Other changes in plan assets andbenefit obligations recognizedin other comprehensive income(pre-tax):
Current year prior service cost(credit)Amortization of prior service (cost)credit 1

—

—

—

—

—

2

40

36

23

Total recognized in othercomprehensive income

—

—

—

(4)

20

5

48

16

(54)

Total recognized in net periodic costand other comprehensive income $

65

$

385

$

396

$

105

$

62

$

(212)

$

512

$

4

$

109

Weighted-average assumptions
used to determine net periodic
benefit cost:

1

2

3
4

Discount rate used to measureservice cost

4.3%

3.7%

4.2%

2.5%

2.3%

2.4%

4.1%

3.5%

3.9%

Discount rate used to measureinterest cost

3.9%

3.2%

3.3%

2.3%

2.2%

2.3%

3.9%

3.2%

3.3%

Expected rate of return on plan
assets 4

5.9%

6.3%

6.7%

3.8%

5.2%

5.9%

7.2%

7.5%

7.5%

Rate of compensation increase

4.0%

4.0%

4.0%

3.0%

4.0%

4.0%

4.1%

4.0%

4.0%

The estimated amount of prior service cost (credit) that will be amortized from Accumulated other comprehensive income (loss) at December 31, 2019 into net periodic benefit cost(pre-tax) in 2020 is a credit of $38 million for Other Postretirement Benefits.
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 is included in Operating costs and all other components are included in Other income (expense) in Statement 1.
The weighted-average rates for 2020 are 5.1 percent and 3.2 percent for U.S. and non-U.S. pension plans, respectively.

The discount rates used in the determination of our service andinterest cost components are determined by utilizing a full yield
curve approach which applies specific spot rates along the yield
curve used in the determination of the benefit obligation to therelevant 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 andfixed 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 0.40 percent for 2019, 0.75 percent for 2018
and 0.80 percent for 2017. A similar process is used to determine
this rate for our non-U.S. plans.

82

2019 FORM 10-K

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 of2019 benefit expense. We expect a weighted-average increase of
6.1 percent during 2020. The 2020 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 2019 service and interest cost components of other postretirement benefit cost

$

13 $

(11)

Effect on accumulated postretirement benefit obligation

$

158 $

(133)

C.

Expected contributions and benefit payments

Information about expected contributions and benefit payments for pension and other postretirement benefit plans is as follows:
2020(Millions of dollars)

Expected employer
contributions:
U.S. Pension Benefits$

40

Non-U.S. Pension Benefits$

105

Other Postretirement
Benefits

$

135

2020

Expected benefit payments:

2021

2022

2023

2024

2025-2029

Total

U.S. Pension Benefits

$

1,020

$

1,010

$

1,010

$

1,010

$

1,010

$

5,005

$

10,065

Non-U.S. Pension Benefits

$

280

$

175

$

180

$

185

$

190

$

1,055

$

2,065

Other Postretirement
Benefits

$

290

$

285

$

280

$

275

$

270

$

1,340

$

2,740

Expected Medicare Part D
subsidy:

$

9

$

9

$

9

$

8

$

8

$

35

$

78

The above table reflects the total expected employer contributions
and expected benefits 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. The above table also
includes Medicare Part D subsidy amounts expected to be received by
the company which will offset other postretirement benefit payments.

D.

Plan assets

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 to ensure it reflects
our overall objectives. The non-U.S. pension weighted-average target
allocations are 79 percent fixed income, 12 percent equities, 5 percent
real estate and 4 percent other. The target allocations for each planvary 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.
Our target allocation for the other postretirement benefit plans is
70 percent equities and 30 percent fixed income.

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 of ourdiversification strategies, there are no significant concentrations ofrisk within the portfolio of investments.
The use of certain derivative instruments is permitted where appropriate
and necessary for achieving overall investment policy objectives. The
plans do not use derivative contracts for speculative purposes.
The accounting guidance on fair value measurements specifies a fairvalue hierarchy based upon the observability of inputs used in valuation
techniques (Level 1, 2 and 3). See Note 18 for a discussion of the fairvalue hierarchy.
Fair values are determined as follows:zz Equity securities are primarily based on valuations for identical

instruments in active markets.

zz Fixed income securities are primarily based upon models thattake into consideration such market-based factors as recent
sales, risk-free 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.

2019 FORM 10-K

83

The fair value of the pension and other postretirement benefit plan assets by category is summarized below:
December 31, 2019
Level 1

(Millions of dollars)

Level 2

Measured at
NAV

Level 3

Total Assets at
Fair Value

U.S. Pension
Equity securities:$

U.S. equities

2,578

$

—

$

23

$

133

$

2,734

2,068

—

—

—

2,068

U.S. corporate bonds

—

6,577

57

—

6,634

Non-U.S. corporate bonds

—

1,414

—

—

1,414

U.S. government bonds

—

2,220

—

—

2,220

U.S. governmental agency mortgage-backed securities

—

63

—

—

63

Non-U.S. government bonds

—

96

—

—

96

Real estate

—

—

10

—

10

Cash, short-term instruments and other

230

10

—

515

755

Non-U.S. equities
Fixed income securities:

Total U.S. pension assets

$

4,876

$

10,380

$

90

$

648

$

15,994

December 31, 2018
Level 1

(Millions of dollars)

Level 2

Measured at
NAV

Level 3

Total Assets at
Fair Value

U.S. Pension
Equity securities:
U.S. equities$

Non-U.S. equities

1,971

$

—

1,279

$

35

$

155

—

1

—

$

2,161
1,280

Fixed income securities:
U.S. corporate bonds

—

6,371

61

52

6,484

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

$

3,452

$

8,765

$

107

$

373

$

12,697

December 31, 2019
Level 1

(Millions of dollars)

Level 2

Measured at
NAV

Level 3

Total Assets at
Fair Value

Non-U.S. Pension
Equity securities:$

U.S. equities

58

$

—

$

—

$

—

$

58

Non-U.S. equities

346

29

—

65

440

Global equities1

26

16

—

111

153

U.S. corporate bonds

—

253

—

—

253

Non-U.S. corporate bonds

—

808

—

7

815

U.S. government bonds

—

65

—

—

65

Non-U.S. government bonds

—

1,952

—

—

1,952

Fixed income securities:

Global fixed income1

—

182

—

208

390

Real estate

—

211

—

—

211

68

Cash, short-term instruments and other2
Total non-U.S. pension assets

842019 FORM 10-K

$

498

120
$

3,636

—
$

—

—
$

391

188
$

4,525

December 31, 2018
Level 1

(Millions of dollars)

Level 2

Measured at
NAV

Level 3

Total Assets at
Fair Value

Non-U.S. Pension
Equity securities:
U.S. equities

$

43

$

—

$

—

$

—

$

43

Non-U.S. equities

259

28

—

53

340

Global equities 1

23

23

—

90

136

U.S. corporate bonds

—

206

—

—

206

Non-U.S. corporate bonds

—

690

—

6

696

Fixed income securities:

U.S. government bonds

—

74

—

—

74

Non-U.S. government bonds

—

1,721

—

—

1,721

Global fixed income 1

—

261

—

215

476

Real estate

—

185

—

—

185

Cash, short-term instruments and other 2

66

82

—

—

148

Total non-U.S. pension assets
1
2

$

391

$

3,270

$

—

$

364

$

4,025

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.

We have reclassified $143 million from Level 1 to measured at net assets value for 2018. The reclassification did not impact total assets.

December 31, 2019
Level 1

(Millions of dollars)

Level 2

Measured at
NAV

Level 3

Total Assets at
Fair Value

Other Postretirement Benefits
Equity securities:
U.S. equities

$

119

$

—

$

—

$

$

119

56

—

U.S. corporate bonds—

33

Non-U.S. corporate bonds—

6

U.S. government bonds—

9

U.S. governmental agency mortgage-backed securities—

16

Non-U.S. government bonds

—

3

—

—

3

Cash, short-term instruments and other

2

1

—

10

13

Non-U.S. equities

—

—
—

56

—

—

33

—

—

6

—

—

9

—

—

16

Fixed income securities:

Total other postretirement benefit assets

$

177

$

68

$

—

$

10

$

255

December 31, 2018
Level 1

(Millions of dollars)

Level 2

Measured at
NAV

Level 3

Total Assets at
Fair Value

Other Postretirement Benefits
Equity securities:
U.S. equities$

Non-U.S. equities

151

$

1

$

—

$

—

—

$

152

64

—

—

64

U.S. corporate bonds—

45

Non-U.S. corporate bonds

—

11

—

—

45

—

—

U.S. government bonds

—

8

—

—

11
8

U.S. governmental agency mortgage-backed securities

—

25

—

—

25

Non-U.S. government bonds

—

3

—

—

3

Cash, short-term instruments and other

3

1

—

16

20

Fixed income securities:

Total other postretirement benefit assets

$

218

$

94

$

—

$

16

$

328

2019 FORM 10-K

85

Below are roll-forwards of assets measured at fair value using Level 3 inputs for the years ended December 31, 2019 and 2018. These
instruments were valued using pricing models that, in management’s judgment, reflect the assumptions a market participant would use.
Equities(Millions of dollars)

Fixed Income

Real Estate

U.S. Pension
Balance at December 31, 2017

$

$

60

$

10

(6)

(12)

—

Realized gains (losses)

—

—

—

Purchases, issuances and settlements, net

21

11

—

Transfers in and/or out of Level 3

1

2

—

$

Balance at December 31, 2018

36

$

61

$

10

Unrealized gains (losses)

(9)

—

—

Realized gains (losses)

7

—

—

Purchases, issuances and settlements, net

(10)

(4)

—

Transfers in and/or out of Level 3

(1)

—

—

$

Balance at December 31, 2019E.

20

Unrealized gains (losses)

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 werestill accruing benefits under a defined benefit pension plan up to
December 31, 2019 were eligible for matching contributions equal
to 50 percent of employee contributions up to 6 percent of cash
compensation. All our U.S. defined benefit pension plans werefrozen on December 31, 2019 for remaining employees still accruing
a benefit. Starting in 2020, these employees will receive matching
contributions equal to 100 percent of employee contributions to the

23

57

$

10

plan 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).
These 401(k) plans include various investment funds, including
a non-leveraged employee stock ownership plan (ESOP). As of
December 31, 2019 and 2018, the ESOP held 14.9 million and17.2 million shares, respectively. All of the shares held by the
ESOP were allocated to participant accounts. Dividends paid toparticipants 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. and non-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:
2018

2019

(Millions of dollars)$

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

$

$

414 $
83
497 $

2017
271 $
89
360 $

375
73
448

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

862019 FORM 10-K

2018

2019

(Millions of dollars)

$

5 $
5

—
—

605
4,168
388
5,161
5,166 $

526
4,759
438
5,723
5,723

The weighted-average interest rates on short-term borrowings outstanding were:
December 31,
2018

2019
5.0%
1.3%
1.7%

Notes payable to banks
Commercial paper
Demand notes

5.3%
2.0%
2.2%

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

14. Long-term debt
December 31,(Millions of dollars)

Effective Yield
to Maturity 1

2019

2018

Machinery, Energy & Transportation:
Notes—$1,250 million of 3.900% due 2021 2
4.01%$
1,248 $
1,247
Notes—$759 million of 5.200% due 2041 2
5.27%
752
751
Debentures—$120 million of 9.375% due 2021
9.41%
120
120
Debentures—$500 million of 2.600% due 2022 2
2.70%
499
498
Debentures—$82 million of 8.000% due 2023
8.06%
82
82
Debentures—$1,000 million of 3.400% due 2024
3.46%
998
997
Debentures—$193 million of 6.625% due 2028 2
6.68%
192
192
Debentures—$500 million of 2.600% due 2029 2
2.64%
497
—
Debentures—$242 million of 7.300% due 2031 2
7.38%
240
240
Debentures—$307 million of 5.300% due 2035 2
8.64%
220
218
Debentures—$460 million of 6.050% due 2036 2
6.12%
456
456
Debentures—$65 million of 8.250% due 2038 2
8.38%
64
64
Debentures—$160 million of 6.950% due 2042 2
7.02%
158
158
Debentures—$1,722 million of 3.803% due 2042 2
6.39%
1,277
1,257
Debentures—$500 million of 4.300% due 2044
4.39%
493
493
Debentures—$1,000 million of 3.250% due 2049 2
3.37%
982
—
Debentures—$500 million of 4.750% due 2064
4.81%
494
494
Debentures—$246 million of 7.375% due 2097 2
7.51%
241
241
Finance lease obligations & other 3
128
497
Total Machinery, Energy & Transportation
9,141
8,005
Financial Products:
Medium-term notes
16,71916,592
Other
421
403
Total Financial Products
17,14016,995
Total long-term debt due after one year$
26,281 $25,0001
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.
32018 includes $360 million related to a financing transaction in Japan entered into in 2017 that was removed in 2019 due to the new lease accounting guidance adopted January 1,
2019. See Note 1J for additional information.

All outstanding notes and debentures are unsecured and rank
equally with one another.
On September 19, 2019, we issued $1.0 billion of 3.250% SeniorNotes due 2049 and $500 million of 2.600% Senior Notes due
2029.

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 rateof 2.7% with remaining maturities up to 8 years at December 31,
2019.

The above table includes $28.5 million of medium-term notes that can be called at par.

2019 FORM 10-K

87

The aggregate amounts of maturities of long-term debt during each of the years 2020 through 2024, including amounts due within one
year and classified as current, are:

2020

(Millions of dollars)

Machinery, Energy & Transportation
Financial Products$$Interest paid on short-term and long-term borrowings for 2019, 2018and 2017 was $1,057 million, $1,088 million and $1,131 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.
Medium-term notes of $1.50 billion matured January 10, 2020 andwere excluded from Current maturities of long-term debt as of

16 $
6,194
6,210 $

2021
1,403 $
7,732
9,135 $

December 31,
2022
513 $
4,744
5,257 $

2023
93 $
2,167
2,260 $

2024
1,007
2,157
3,164

December 31, 2019 due to an issuance on January 9, 2020 of two$750 million medium-term notes, maturing in 2021 and 2022. The
table above reflects the maturity dates of the new medium-term
notes.
Please refer to Note 18 and Table III for fair value information on
long-term debt.

15. Credit commitments
December 31, 2019

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$

10,500 $4,999
15,499(4,168)(1,247)
10,084 $

2,751
194
2,945
—
—
2,945

Financial
Products

$

$

7,749
4,805
12,554(4,168)(1,247)
7,139

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, 2019 was $2.75 billion. Information on
our Credit Facility is as follows:

At December 31, 2019, Cat Financial’s covenant interest coverage
ratio was 1.77 to 1. This is above the 1.15 to 1 minimum ratio,
calculated as (1) profit excluding income taxes, interest 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.

zz The 364-day facility of $3.15 billion (of which $0.82 billion is

In addition, at December 31, 2019, Cat Financial’s six-monthcovenant leverage ratio was 7.65 to 1 and year-end covenant
leverage ratio was 7.46 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.

available to ME&T) expires in September 2020.

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

2019, of $2.73 billion (of which $0.72 billion is available to ME&T)
expires in September 2022.

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

2019, of $4.62 billion (of which $1.21 billion is available to ME&T)
expires in September 2024.

Other consolidated credit lines with banks as of December 31,
2019 totaled $5.00 billion. These committed and uncommitted
credit lines, which may be eligible for renewal at various 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, 2019, Caterpillar’s consolidated net worth was$14.63 billion, which was above the $9.00 billion required under
the Credit Facility. The consolidated net worth is defined as theconsolidated shareholders’ equity including preferred stock but
excluding the pension and other postretirement benefits balance
within Accumulated other comprehensive income (loss).

88$

Machinery,
Energy &Transportation

2019 FORM 10-K

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, 2019, there
were no borrowings under the Credit Facility.

16. Profit per share

Computations of profit per share:(Dollars in millions except per share data)

Profit for the period (A) 1
Determination of shares (in millions):
Weighted average number of common shares outstanding (B)Shares issuable on exercise of stock awards, net of shares assumed to be purchased out ofproceeds at average market price
Average common shares outstanding for fully diluted computation (C) 2
Profit per share of common stock:
Assuming no dilution (A/B)
Assuming full dilution (A/C)2
Shares outstanding as of December 31 (in millions)
1
Profit attributable to common shareholders.
2
Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.

For the year ended December 31, 2019 and 2018, 3.0 million and1.5 million outstanding stock options, respectively, were excluded
from the computation of diluted earnings per share because theeffect would have been antidilutive. For 2017, no outstanding SARs
and stock options were excluded from the computation of diluted
earnings per share because all outstanding SARs and stock options
had a dilutive effect.
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.

$

$
$

2019
6,093

$

2018
6,147

2017
$

754

561.6
5.9

591.4
8.0

591.8
7.5

567.5

599.4

599.3

10.85
10.74
550.1

$
$

10.39
10.26
575.5

$
$

1.27
1.26
597.6

During 2019 and 2018, we repurchased 30.6 million and 27.7 million
shares of Caterpillar common stock, respectively, at an aggregate
cost of $4.0 billion and $3.8 billion, respectively. These purchases
were made through a combination of accelerated stock repurchaseagreements with third-party financial institutions and open market
transactions.
We did not repurchase any Caterpillar common stock during 2017.

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, 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
Adjustment to adopt new accounting guidance
related to reclassification of certain tax effects fromaccumulated other comprehensive income
Balance at January 1, 2019
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from accumulated othercomprehensive (income) loss
Other comprehensive income (loss)
Balance at December 31, 2019

PensionForeignand othercurrency
postretirementtranslation
benefits$(1,970) $
14

$

$

$

Derivative
financial
Available-forinstruments
sale securities$(115) $
32

$

Total
(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)98(1,503)

19
31

(9)
(89)

—
(15)

108
(1,576)

16

(4)

43

35

90

—
16
(1,487) $

(30)
(34)
(3) $

(51)
(8)
(97) $

—
35
20

(81)
9
(1,567)$The effect of the reclassifications out of Accumulated other comprehensive income (loss) on Statement 1 is as follows:2019 FORM 10-K

89

(Millions of dollars)

Foreign currency translation:
Gain (loss) on foreign currency translation
Tax (provision) benefit
Reclassifications net of tax
Pension and other postretirement benefits:
Amortization of prior service credit (cost)Tax (provision) benefit
Reclassifications net of tax
Derivative financial instruments:
Foreign exchange contracts
Foreign exchange contracts
Foreign exchange contracts
Foreign exchange contracts
Interest rate contracts
Interest rate contracts
Reclassifications before tax
Tax (provision) benefit
Reclassifications net of tax
Available-for-sale securities:
Realized gain (loss) on sale of securities
Tax (provision) benefit
Reclassifications net of tax
Total reclassifications from Accumulated othercomprehensive income (loss)

Classification of income (expense)
Other income (expense)

2019

$

$

(13)
—
(13)

40 $
(10)
30 $

36 $
(8)
28 $

25
(9)
16

11
(3)
37
33
(4)
(8)
66
(15)
51

$
$
$

—
—
115
19
(3)
—
131
(31)
100

$
$
$

—
—
(121)
6
(9)
3
(121)
44
(77)

$
$

—
—
—

$

$

—
—
—

$

100
(35)
65

$

81

$

127

$

(9)

$
$

Sales of Machinery, Energy & Transportation
Cost of goods sold
Other income (expense)
Interest expense of Financial ProductsInterest expense excluding Financial ProductsInterest expense of Financial Products

$
$
$

$

Other income (expense)

—
—
—

(1) $
—
(1) $

$
Other income (expense)

Year ended December 31,
2018
2017

$

$

$

$

18. Fair value disclosures
A.

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:
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.
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.
902019 FORM 10-K

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.
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.
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.
In addition, Insurance Services has an equity investment in a realestate investment trust (REIT) which is recorded at fair value basedon the net asset value (NAV) of the investment and is not classified
within the fair value hierarchy.
See Note 11 for additional information on our investments in debt
and equity securities.

Derivative financial instruments

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.

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.

Assets and liabilities measured on a recurring basis at fair value, primarily related to Financial Products, included in Statement 3 as ofDecember 31, 2019 and 2018 are summarized below:
December 31, 2019

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
Derivative financial instruments, net
Total Assets$$

Level 2

9—$

Level 3—54$

Total Assets/
Liabilities,
at Fair Value

Measured at
NAV

—
—

$

—
—

$

9
54

—
—

856
62

—
—

—
—

856
62

—
—
—
9

331
6
47
1,356

—
—
—
—

—
—
—
—

331
6
47
1,365

187
29
—
216
—
225

—
—
—
—
45
1,401

—
4
—
4
—
4

—
—
126
126
—
126

187
33
126
346
45
1,756

$

$

$

$

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, atFair 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

2019 FORM 10-K

91

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 $343 million and $469 million
for the years ended December 31, 2019 and 2018, respectively.

B.

Finance receivables
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.
Long-term debt

Fair values of financial instruments

Fair value for fixed and floating rate debt was estimated based onquoted market prices.

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:

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.

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.
Fair values of our financial instruments were as follows:

TABLE III—Fair Values of Financial Instruments
2018

2019
Carrying
Amount(Millions of dollars)

Carrying
AmountFair Value

Fair Value
LevelsFair Value

Reference

Assets at December 31,$

Cash and short-term investments

8,284

$

8,284

7,857

1

Statement 3

8

8

33

33

1

Statement 3

1,711

1,711

1,576

1,576

1, 2 & 3

Finance receivables–net (excluding finance leases )14,473

14,613

14,714

14,7983

Notes 7 & 19

Wholesale inventory receivables–net (excluding financeleases 1)

1,105

1,076

1,050

1,025

3

Notes 7 & 19

Foreign currency contracts–net

62

62

47

47

2

Notes 4 & 19

Commodity contracts–net

3

3

—

—

2

Notes 4 & 19

5,166

5,166

5,723

5,723

1

Note 13

Machinery, Energy & Transportation

9,157

11,216

8,015

9,046

2

Note 14

Financial Products

Restricted cash and short-term investments
Investments in debt and equity securities
1

$

7,857

$

Notes 11 & 19

Liabilities at December 31,
Short-term borrowings
Long-term debt (including amounts due within
one year):1

23,33423,655

22,81522,6842Note 14

Interest rate swaps–net

20

20

36

36

2

Notes 4 & 19

Commodity contracts–net

—

—

30

30

2

Notes 4 & 19

Guarantees

5

5

8

8

3

Note 21

Represents finance leases and failed sale leasebacks of $7,800 million at December 31, 2019 and finance leases of $7,463 million at December 31, 2018, 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.

922019 FORM 10-K

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)
master netting agreements within ME&T and Financial Productsthat permit the net settlement of amounts owed under theirrespective derivative contracts. Our exposure to credit loss inthe event of nonperformance by the counterparties is limited toonly 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, 2019and 2018, the maximum exposure to credit loss was $116 million

and $131 million, respectively, before the application of any masternetting agreements.
Please refer to Note 18 and Table III above for fair value information.

20. Leases
A.

Lessee arrangements

We lease certain property, information technology equipment,
warehouse equipment, vehicles and other equipment throughoperating leases. We recognize a lease liability and corresponding
right-of-use asset based on the present value of lease payments.
To determine the present value of lease payments for most of
our leases, we use our incremental borrowing rate based on
information available on the lease commencement date. For certain
property and information technology equipment leases, we haveelected to separate payments for lease components from nonlease components. For all other leases, we have elected not toseparate payments for lease and non-lease components. Our leaseagreements may include options to extend or terminate the lease.
When it is reasonably certain that we will exercise that option, we
have included the option in the recognition of right-of-use assets
and lease liabilities. We have elected not to recognize right-of-use
assets or lease liabilities for leases with a term of twelve months
or less.
Our finance leases are not significant and therefore are not includedin the following disclosures.
The components of lease costs were as follows:Year ended December 31
2019(Millions of dollars)

Operating lease cost$

232

Short-term lease cost$

57

Operating lease right-of-use assets are recognized in Other assets in Statement 3. The operating lease liabilities are recognized in Other
current liabilities and Other liabilities.
Supplemental information related to leases was as follows:
December 31,
2019(Millions of dollars)

January 1,
2019

Operating Leases
Other assets

$

624

$

713

Other current liabilities

$

173

$

209

Other liabilities

$

461

$

511

Weighted average remaining lease term
Operating leases

7 years

7 years

Weighted average discount rates
Operating leases

2%2%2019 FORM 10-K

93

Maturities of operating lease liabilities at December 31, 2019 and minimum payments for operating leases having initial or remaining
non-cancelable terms in excess of one year at December 31, 2018 were as follows:
December 31, 2019

(Millions of dollars)

Amounts Due In
$

2020

185

2021

139

2022

86

2023

64

2024

46

Thereafter

175

Total lease payments

695

Less: Imputed interest

(61)
$

Total

634

December 31, 2018
Amounts Due In
2019

$

205

2020

154

2021

111

2022

67

2023

50

Thereafter

185

Total

$

772

Supplemental cash flow information related to leases was as follows:Year ended
December 31
2019(Millions of dollars)

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases

$

224

$

122

Right-of-use assets obtained in exchange for lease obligations:Operating leases

B.

Lessor arrangements

We lease Caterpillar machinery, engines and other equipment tocustomers and dealers around the world, primarily through Cat
Financial. Cat Financial leases to customers primarily throughsales-type (non-tax) leases, where the lessee for tax purposes is
considered to be the owner of the equipment during the term of thelease. Cat Financial also offers tax leases that are classified as either
operating or direct finance leases for financial accounting purposes,
depending on the characteristics of the lease. For tax purposes,
Cat Financial is considered the owner of the equipment. Our leaseagreements may include options for the lessee to purchase theunderlying asset at the end of the lease term for either a stated
fixed price or fair market value.
The residual value of Cat Financial’s leased equipment is determinedbased on its estimated end-of-term market value. We estimate theresidual value of leased equipment at the inception of the lease942019 FORM 10-K

based on a number of factors, including historical wholesale market
sales prices, past remarketing experience and any known significant
market/product trends. The following critical factors are also
considered in our residual value estimates: lease term, market sizeand demand, total expected hours of usage, machine configuration,
application, location, model changes, quantities, third-party residual
guarantees and contractual customer purchase options.
During the term of our leases, we monitor residual values. For
operating leases, adjustments to depreciation expense reflectingchanges in residual value estimates are recorded prospectively ona straight-line basis. For finance leases, residual value adjustments
are recognized through a reduction of finance revenue over theremaining lease term.
See Note 7 for contractual maturities of finance lease receivables(sales-type and direct finance leases).

The carrying amount of equipment leased to others, included in Property, plant and equipment - net in Statement 3, under operatingleases was as follows:
December 31,
2018

2019

(Millions of dollars)

Equipment leased to others - at original cost$Less: Accumulated depreciation

6,208

$

6,015

(1,960)Equipment leased to others - net

$

4,248

(1,744)$

4,271

Payments due for operating leases at December 31, 2019 and scheduled minimum rental payments for operating leases at December 31,
2018 were as follows:
December 31, 2019
(Millions of dollars)

2020

2021

2022

2023

2024

Thereafter

Total

$ 861

$ 558

$ 299

$ 149

$ 74

$ 70

$ 2,011

December 31, 2018
2019

2020

2021

2022

2023

Thereafter

Total

$ 896

$ 574

$ 314

$ 158

$ 71

$ 69

$ 2,082

Revenues from finance and operating leases, primarily included in Revenues of Financial Products on Statement 1, were as follows:Year ended
December 31
2019(Millions of dollars)

Finance lease revenue

$

1,248

Operating lease revenue
Total

521

$

1,769

Revenues are presented net of sales and other related taxes.

21. Guarantees and product warranty
Caterpillar dealer performance guarantees
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 areissued to insure governmental agencies against nonperformanceby certain dealers. We also provided guarantees to third-parties
related to the performance of contractual obligations by certain
Caterpillar dealers. These guarantees have varying terms and coverpotential financial losses incurred by the third parties resulting fromthe 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.

members. The guarantees cover potential damages incurred by
the customers resulting from the supplier consortiums’ nonperformance. The damages are capped except for failure of theconsortiums to meet certain obligations outlined in the contract in
the normal course of business. The guarantee for the customer inEurope will expire when the supplier consortium performs all of
its contractual obligations, which are expected to be completed in
2022. The agreement with the customer in Brazil was terminatedduring second quarter of 2019. No payments were made under
the guarantee.
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.

Supplier consortium 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 are2019 FORM 10-K95

No significant loss has been experienced or is anticipated under any of these guarantees. At December 31, 2019 and 2018, the related
recorded liability was $5 million and $8 million, respectively. The maximum potential amount of future payments (undiscounted andwithout reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) we could be required tomake under the guarantees at December 31 are as follows:

Caterpillar dealer performance guarantees

$

1,150

$

1,244

Supplier consortium performance guarantees

238

527

Other guarantees

221

207

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 toprovide 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 agreement with
the SPC that obligates Cat Financial to purchase certain loans thatare not paid at maturity. Cat Financial receives a fee for 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 performanceand the obligation to absorb losses, and therefore Cat Financial has
consolidated the financial statements of the SPC. As of December
31, 2019 and 2018, the SPC’s assets of $1,453 million and $1,149
million, respectively, were primarily comprised of loans to dealers,
and the SPC’s liabilities of $1,452 million and $1,148 million,
respectively, were primarily comprised of commercial paper. The
assets of the SPC are not available to pay Cat Financial’s creditors.
Cat Financial may be obligated to perform under the guarantee if
the SPC experiences losses. No loss has been experienced or isanticipated under this loan purchase agreement.

$

1,609

$

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.
2018

2019

Warranty liability, January 1

1,978

Cat Financial has commitments to extend credit to customers andCaterpillar dealers through lines of credit and other pre-approved
credit arrangements. Cat Financial applies the same credit policies
and approval process for these commitments to extend credit
as we do for other financing. Collateral is not required for thesecommitments, but if credit is extended, collateral may be required
upon funding. The amount of unused commitments to extend
credit to Caterpillar dealers was $11,154 million at December 31,
2019. The amount of unused commitments to extend credit tocustomers was $693 million at December 31, 2019. A significant
portion of these commitments is not expected to be fully drawn
upon; therefore, the total commitment amounts do not represent
a future cash requirement. Cat Financial generally has the rightto unconditionally cancel, alter, or amend the terms of thesecommitments at any time.

(Millions of dollars)

$

1,391

$

1,419

Reduction in liability (payments)

(903)

(783)

Increase in liability (new warranties)

1,053

755

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
96

2018

2019

(Millions of dollars)

2019 FORM 10-K

$

1,541

$

1,391

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

On January 7, 2015, the Company received a grand jury subpoena
from the U.S. District Court for the Central District of Illinois. The
subpoena requests documents and information from the Company
relating to, among other things, financial information concerning U.S.
and non-U.S. Caterpillar subsidiaries (including undistributed profits
of non-U.S. subsidiaries and the movement of cash among U.S.
and non-U.S. subsidiaries). The Company has received additional
subpoenas relating to this investigation requesting additional
documents and information relating to, among other things, thepurchase and resale of replacement parts by Caterpillar Inc. andnon-U.S. Caterpillar subsidiaries, dividend distributions of certain
non-U.S. Caterpillar subsidiaries, and Caterpillar SARL (CSARL) andrelated structures. On March 2-3, 2017, agents with the Departmentof Commerce, 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 CSARL, and sales
outside the United States. It is the Company’s understanding thatthe warrants, which concern both tax and export activities, arerelated to the ongoing grand jury investigation. The Company iscontinuing 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 (CBL). The
publication of the Technical Opinion opened CADE’s official
administrative investigation into allegations that the defendants
participated in anticompetitive bid activity for the construction andmaintenance of metro and train networks in Brazil. While companies
cannot be held criminally liable for anticompetitive conduct in Brazil,
criminal charges have been brought against one current employee
of MGE and two former employees of MGE involving the same
conduct alleged by CADE. On July 8, 2019, CADE found MGE,
one of its current employees and two of its former employees
liable for anticompetitive conduct. CBL was dismissed from theproceeding without any finding of liability. MGE intends to appeal
CADE’s findings. We currently believe that this matter will not havea material adverse effect on the Company’s consolidated results ofoperations, 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 Chief Legal
Officer, General Counsel and 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
Chief Legal Officer, General Counsel and Corporate Secretary leads
the Law, Security and Public Policy Division. The Chief Human
Resources Officer leads the Human Resources Organization. The
CEO allocates resources and manages performance at the Group
President/CFO level. As such, the CEO serves as our Chief Operating
Decision Maker, and operating segments are primarily based on theGroup 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 one smaller operating segment that is includedin the All Other operating segment. The Law, Security and Public
Policy Division and the Human Resources Organization are costcenters and do not meet the definition of an operating segment.

B.

Description of segments

We have five 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 segment:
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. Intersegment sales are a source of revenue for this segment.
Resource Industries: A segment primarily responsible for supporting
customers using machinery in mining, heavy construction,
quarry and aggregates, waste and material handling applications.
Responsibilities include business strategy, product design, productmanagement and development, manufacturing, marketing and sales
and product support. The product portfolio includes large tracktype tractors; large mining trucks; autonomous ready vehicles andsolutions; hard rock vehicles; longwall miners; electric rope shovels;
draglines; hydraulic shovels; rotary drills; large wheel loaders; offhighway trucks; articulated trucks; wheel tractor scrapers; wheel
dozers; landfill compactors; soil compactors; hard rock continuous
mining systems; select work tools; machinery components 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.

2019 FORM 10-K

97

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, productmanagement 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 ourequipment. The segment also earns revenues from ME&T, but therelated costs are not allocated to operating segments.
All Other operating segment: Primarily includes activities suchas: business strategy, product management and development,
manufacturing and sourcing of filters and fluids, undercarriage,
ground-engaging tools, fluid transfer products, precision seals,
rubber sealing and connecting components primarily for Cat
products; parts distribution; integrated logistics solutions,distribution services responsible for dealer development andadministration including a wholly owned dealer in Japan, dealer
portfolio management and ensuring the most efficient and effective
distribution of machines, engines and parts; and digital investments
for new customer and dealer solutions that integrate data analytics
with state-of-the-art digital technologies while transforming thebuying experience. Results for the All Other operating segment
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 ME&T segment net assets generally include inventories,

receivables, property, plant and equipment, goodwill, intangibles,
accounts payable and customer advances. Beginning in 2019,
operating lease right-of-use assets are included in segment
assets. In 2018, the present value of future lease payments forcertain ME&T operating leases was included in segment assets
while the estimated financing component of the lease payments

98

2019 FORM 10-K

was excluded. Liabilities other than accounts payable andcustomer 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.

zz Currency exposures for ME&T are generally managed at thecorporate level and the effects of changes in exchange rates on
results of operations within the year are not included in segment
profit. The net difference created in the translation of revenues
and costs between exchange rates used for U.S. GAAP reportingand exchange rates used for segment reporting is reported as amethodology difference.

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 ME&T segment profit is determined on a pretax basis andexcludes interest expense and most other income/expense
items. Financial Products Segment profit is determined on apretax basis and includes other income/expense items.

Reconciling items are created based on accounting differences
between segment reporting and our consolidated external reporting.
Please refer to pages 100 to 104 for financial information regarding
significant reconciling items. Most of our reconciling items are selfexplanatory given the above explanations. For the reconciliation of
profit, we have grouped the reconciling items as follows:
zz Corporate costs: These costs are related to corporate

requirements primarily for compliance and legal functions forthe benefit of the entire organization.

zz Restructuring costs: May include costs for employee separation,

long-lived asset impairments and contract terminations. These
costs are included in Other operating (income) expenses
except for defined-benefit plan curtailment losses and special
termination benefits, which are included in Other income(expense). Restructuring costs also include other exit-related
costs which may consist of accelerated depreciation, inventory
write-downs, building demolition, equipment relocation andproject management costs and LIFO inventory decrement
benefits from inventory liquidations at closed facilities, all ofwhich are primarily included in Cost of goods sold. Beginning in
2019, only certain restructuring costs are excluded from segment
profit. A table, Reconciliation of Restructuring costs on page 102,
has been included to illustrate how segment profit would havebeen impacted by the restructuring costs. See Note 25 for more
information.

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

segment 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
profitSegment
assets at
December 31

Capitalexpenditures

2019
Construction Industries$

22,55618,485

Energy & Transportation
Machinery, Energy & Transportation$

50,85493 $

22,649 $

331 $

3,931

463

10,276

425

1,629

$

3,612

22,097

628

3,910

$

4,168 $

55,022 $

1,384 $

9,470

—

3,434

829

832

4,168 $

58,456 $2,213 $

10,302$$

3,434 1

Financial Products Segment
Total

$

9,813

Resource Industries$

54,288$$

23,116$$

5,219 $

201

6,214

168

8,612

613

20,045 $982

35,813

1,534

55,858 $2,516

4,902 $

266

6,442

188

2018
Construction Industries
Resource Industries
Energy & Transportation
Machinery, Energy & Transportation

18,832$

51,836

Financial Products Segment
Total

121 $

23,237 $

367 $

4,174

382

10,270

462

1,603

3,953

22,785640

3,938

4,456 $

56,292 $1,469 $

9,715

—

3,279

834

505

4,456 $

59,571 $

2,303 $

10,2209,888$

3,279 1$

55,115$$

19,133

$

8,386

742

19,730 $1,196

36,002

1,559$

55,732 $

2,755

$

$

2017
Construction Industries

107 $19,240 $

400 $

3,255

4,838 $

228

Resource Industries

7,504

357

7,861

514

698

6,403

183

Energy & Transportation

15,964

3,418

19,382

653

2,856

7,564

527

3,882 $

46,483 $1,567 $

6,809

—

3,093

820

792

3,882 $

49,576 $2,387 $

7,601

Machinery, Energy & Transportation$

42,601

Financial Products Segment
Total
1

$

3,093 1$45,694$$$18,805 $938

34,893

1,373

53,698 $2,311

Includes revenues from ME&T of $524 million, $470 million and $384 million for the years 2019, 2018 and 2017, respectively.

For the years ended December 31, 2019 and 2018, sales and revenues by geographic region reconciled to consolidated sales andrevenues were as follows:

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

Latin
America

External
Sales and
Revenues

Asia/
Pacific

EAME

2019
Construction Industries$

11,455$

1,533

Resource Industries

3,632

1,533

Energy & Transportation

8,864

1,389

All Other operating segment

$

4,012

$

5,556

$

22,556

1,836

2,812

$

9,813

4,994

3,238

$

18,485

$

25

7

28

67

(192)

—

(20)

(14)

Machinery, Energy & Transportation Sales

23,784

4,462

10,85011,659Financial Products Segment

2,235

299

408

492

Corporate Items and Eliminations

127
(226)

$

50,7553,4341

Corporate Items and Eliminations

(234)

(51)

(35)

(69)

(389)

Financial Products Revenues

2,001

248

373

423

3,045

Consolidated Sales and Revenues$

25,785

$

4,710

$

11,223$12,082$53,8002019 FORM 10-K

99

NorthAmerica

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 segment
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

(168)
$

51,822
3,279 1

Corporate Items and Eliminations

(234)

(46)

(26)

(73)

(379)

Financial Products Revenues

1,919

235

361

385

2,900

Consolidated Sales and Revenues
1$

25,623

$

4,695

$

11,929$12,475$54,722

Includes revenues from ME&T of $524 million and $470 million in the years ended December 31, 2019 and 2018, respectively.

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 $—All Other operating segment

178

—

—

Other

(103)

74

(381)

3,167 $

(381)

Total sales and revenues
1$42,676$$45,694
178
(410)

1

$

45,462Elimination of Financial Products revenues from ME&T.

For the years ended December 31, 2019 and 2018, Energy & Transportation segment sales by end user application were as follows:
Energy & Transportation External Sales
2019(Millions of dollars)

Oil and gas

$

$

5,763

Power generation

4,474

4,334

Industrial

3,749

3,640

Transportation

5,057

5,095

Energy & Transportation External Sales

100

5,205

2018

2019 FORM 10-K$

18,485$

18,832

Reconciliation of consolidated profit before taxes:
Machinery,
Energy &Transportation(Millions of dollars)

Financial
Products

Consolidated
Total

2019
Total profit from reportable segments

$

9,470

$

832

$

10,302All Other operating segment

4

—

4

Cost centers

(6)

—

(6)

Corporate costs

(602)

(5)

(607)

Timing

(93)

—

(93)

Restructuring costs

(163)

(44)

(207)

Postretirement benefit expense

(19)
(401)

—
—

(19)
(401)

Stock-based compensation expense

(198)

(7)

(205)

Financing costs

(248)

—

(248)

Currency

(175)

—

(175)

Other income/expense methodology differences

(481)

—

(481)

Other methodology differences

(107)

55

(52)

Methodology differences:
Inventory/cost of sales

Total consolidated profit before taxes

$

6,981

$

831

$

7,812

$

9,715

$

505

$

10,2202018
Total profit from reportable segments
All Other operating segment

23—

Cost centers

2

—

2

Corporate costs

(610)

—

(610)

Timing

(257)

—

(257)

Restructuring costs

(370)

(16)

(386)

Postretirement benefit expense

51
(124)

—
—

51
(124)

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

(61)

23

Methodology differences:
Inventory/cost of sales

Total consolidated profit before taxes

$

7,316

$

506

$

7,822

$

6,809

$

792

$

7,601

2017
Total profit from reportable segments
All Other operating segment

(44)

—

Cost centers

22

—

22

Corporate costs

(633)

—

(633)

(151)

—

(151)

(1,253)(3)(1,256)

TimingRestructuring costs(44)

Methodology differences:
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)

(110)

Total consolidated profit before taxes

$

3,314

$

768

$

4,082

2019 FORM 10-K

101

Reconciliation of Restructuring costs:
As noted above, certain 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

2019
Construction Industries
Resource Industries
Energy & Transportation

$

3,931

(55) $

3,876

1,629

(56)

1,573

3,910

(82)

3,828

832

—

832

Financial Products Segment
All Other operating segment

$

4

Total

(11)

(7)

$

10,306$(204) $

10,102

$

4,174

$

(58) $

4,116

2018
Construction Industries
Resource Industries

1,603

(191)

1,412

Energy & Transportation

3,938

(84)

3,854

Financial Products Segment

505

(2)

503

All Other operating segment

23

(40)

(17)

Total

$

10,243$(375) $

9,868

$

3,255

$

(719) $

2,536

2017
Construction Industries
Resource Industries
Energy & Transportation

698

(276)

422

2,856

(115)

2,741

Financial Products Segment

792

(3)

789

All Other operating segment

(44)

(39)

(83)

(1,152) $

6,405

Total

$

7,557

$

Reconciliation of Assets:
Machinery,
Energy &Transportation(Millions of dollars)

Financial
Products

Consolidating
Adjustments

Consolidated
Total

2019
Total assets from reportable segments$

20,045$35,813

1,337

—

7,299
758

Investment in Financial Products

$

—

$

55,858

—

1,337

—

—

7,299

—

(758)

—

4,260

—

(4,260)—

Deferred income taxes

2,002

—

(708)

1,294

Goodwill and intangible assets

4,435

—

—

4,435

All Other operating segment
Items not included in segment assets:
Cash and short-term investments
Intercompany receivables

Property, plant and equipment – net and other assets

2,529

—

—

2,529

Inventory methodology differences(2,426)——(2,426)

Liabilities included in segment assets

8,541

—

—

8,541

Other

(343)

134

(205)

(414)

(5,931) $78,453$

Total assets

102

2019 FORM 10-K

48,437$35,947$

Reconciliation of Assets:
Machinery,
Energy &Transportation(Millions of dollars)

Financial
Products

Consolidating
Adjustments

Consolidated
Total

2018
Total assets from reportable segments$

All Other operating segment

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

Items not included in segment assets:

Property, plant and equipment – net and other assets

1,802

—

—

1,802

Inventory methodology differences(2,503)——(2,503)Liabilities included in segment assets

9,766

—

—

9,766

Other
Total assets

(166)
$

48,47566$

36,068

$

(37)

(137)

(6,034) $78,509Reconciliation of Depreciation and amortization:
Machinery,
Energy &Transportation(Millions of dollars)

2019
Total depreciation and amortization from reportable segments
Items not included in segment depreciation and amortization:
All Other operating segment
Cost centers
Other
Total depreciation and amortization2018
Total depreciation and amortization from reportable segments
Items not included in segment depreciation and amortization:
All Other operating segment
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 segment
Cost centers
Other
Total depreciation and amortization

Financial
Products

Consolidated
Total

$

1,384

$

829 $

2,213

$

210
136
(17)
1,713 $

—
—
35
864 $

210
136
18
2,577

$

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

2019 FORM 10-K

103

Reconciliation of Capital expenditures:
Machinery,
Energy &Transportation(Millions of dollars)

Financial
Products

Consolidating
Adjustments

Consolidated
Total

2019
$

Total capital expenditures from reportable segments

982$

1,534 $

—

$

2,516

Items not included in segment capital expenditures:
All Other operating segment

131

—

—

131

Cost centers

101

—

—

101

Timing

(11)

—

—

(11)

Other

(129)

102

(41)

(68)

Total capital expenditures

$

1,074

$

1,636 $

(41) $

2,669

$

1,196

$

1,559 $

—

2,755

—

—

170

2018
Total capital expenditures from reportable segments$

Items not included in segment capital expenditures:
All Other operating segment

170

Cost centers

100

—

—

100

Timing

42

—

—

42

216

Other

(80)

(151)

$

1,221

(287)
$

1,775 $

(80) $

2,916

$

938

$

1,373 $

—

2,311

134

—

—

Cost centers

84

—

—

84

Timing

(96)

—

—

(96)

80

(33)

Total capital expenditures
2017
Total capital expenditures from reportable segments$

Items not included in segment capital expenditures:
All Other operating segment

Other

(144)

Total capital expenditures

$

916

$

1,453 $

134(97)(33) $

2,336

Enterprise-wide Disclosures:
Information about Geographic Areas:
Property, plant and equipment – net
External sales and revenues
2019(Millions of dollars)

Inside United States$

Outside United States
$

Total
1

December 31,
2017

2018

2019

22,806 $22,690 $18,552 $7,568 $

8,152

30,99432,032

26,910

5,336

5,422

53,800 $54,722 $45,462 $12,904 $13,574

Sales of ME&T 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.
104

2018

1

2019 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 rollingstock maintenance facilities, as well as infrastructure and signaling
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.

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 2019, 2018 and 2017 were as follows:
2019(Millions of dollars)$

Employee separations 1
Contract terminations

1

Long-lived asset impairments 1

2018
48

$

2017
112

$

525

1

7

183

65

93

346

Defined benefit plan curtailments and termination benefits 2

—

(8)

29

Other 3

122

182

173

$

Total restructuring costs
1
2
3

236

$

386

$

1,256

Recognized in Other operating (income) expenses.
Recognized in Other income (expense).
Represents costs related to our restructuring programs, primarily for project management, inventory write-downs, accelerated depreciation and equipment relocation, and also LIFO
inventory decrement benefits from inventory liquidations at closed facilities, all of which are primarily included in Cost of goods sold.

The restructuring costs in 2019 were primarily related torestructuring actions across the company. The restructuring costs
in 2018 were primarily related to ongoing facility closures acrossthe company. In 2017, about half of the restructuring costs wererelated to the closure of the facility in Gosselies, Belgium, within

Construction Industries, and the remainder was related to otherrestructuring actions across the company.
Certain 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 2018 and 2019 employee separation activity:(Millions of dollars)

Liability balance at December 31, 2017$

Increase in liability (separation charges)

112

Reduction in liability (payments)
Liability balance at December 31, 2018

(276)
$

85
48

Increase in liability (separation charges)(85)

Reduction in liability (payments)
Liability balance at December 31, 2019

249

$

48

2019 FORM 10-K

105

Most of the remaining liability balance as of December 31, 2019 is
expected to be paid in 2020.
In March 2017, Caterpillar informed Belgian authorities of thedecision to proceed to a collective dismissal, which led to theclosure of the Gosselies site, impacting about 2,000 employees.
Production of Caterpillar products at the Gosselies site ended during
the second quarter of 2017. The other operations and functions
at the Gosselies site were phased out by the end of the second
quarter of 2018. The program concluded in 2018, and we incurreda 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.

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

26. Selected quarterly financial results (unaudited)2019 Quarter
1st(Dollars in millions except per share data)

Sales and revenues$

2nd13,466

Less: Revenues$

3rd

14,432$

4th

12,758$13,144

(742)

(761)

(784)

(758)

Sales

12,724

13,671

11,974

12,386

Cost of goods sold

9,003

9,941

8,569

9,117

Gross margin
Profit 1

$

3,721

3,730

1,881 3 $

1,620

3,405
$

3,269

1,494

$

1,098 5

Profit per common share

$

3.29

$

2.85

$

2.69

$

2.00

Profit per common share–diluted 2

$

3.25

$

2.83

$

2.66

$

1.97

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

3,584

3,857

3,741

Profit1

Profit per common share
Profit per common share–diluted
1
2
3

4

5

6

106

2nd

2

$

1,665

$

1,707

$

1,727

$

2.78

$

2.86

$

$

2.74

$

2.82

$

3,643
$

1,048 3,5,6

2.92

$

1.80

2.88

$

1.78

4

Profit attributable to common shareholders.
Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.
The first quarter of 2019 includes a benefit of $178 million to adjust unrecognized tax benefits due to the receipt of final regulations providing additional guidance related to thecalculation of the mandatory deemed repatriation of non-U.S. earnings due to U.S. tax reform. The fourth quarter of 2018 includes a charge of $50 million due to an estimated increasein the mandatory deemed repatriation of non-U.S. earnings.
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 2019 and fourth quarter of 2018 include pre-tax pension and other postretirement benefit plan actuarial losses of $468 million and $495 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. See Note 6 for additional information.

2019 FORM 10-K

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, 2019 is included on page 49 of Part
II, Item 8 “Financial Statements and Supplementary Data.” The effectiveness of the company’s internal control over financial reporting asof December 31, 2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their report
appears on pages 50-51 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.

2019 FORM 10-K

107

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 2020 Proxy Statement.

Information required by this Item is incorporated by reference fromthe 2020 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 2020 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.

If applicable, information required by this Item relating to compliancewith Section 16(a) of the Exchange Act is incorporated by reference
from the 2020 Proxy Statement.

Legal Proceedings Involving Officers and Directors

Code of Ethics

Information required by this Item is incorporated by reference fromthe 2020 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 director and employee, including theprincipal executive officer, principal financial officer 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 2020 Proxy Statement.

ITEM 11.

Executive Compensation.

Information required by this Item is incorporated by reference from the 2020 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 2020 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, 2019)(a)
Number of securities tobe issued upon exerciseof outstanding options,warrants and rights

Plan category

Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total

108

17,467,057$

N/A
17,467,057

2019 FORM 10-K(b)
Weighted-average
exercise price ofoutstanding options,warrants and rights$(c)
Number of securities
remaining available
for future issuanceunder equity
compensation plans(excluding securities
reflected in column
(a))

99.29

40,754,720

N/A

N/A

99.29

40,754,720

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence.

Information required by this Item is incorporated by reference from the 2020 Proxy Statement.

ITEM 14.

Principal Accountant Fees and Services.

Information required by this Item is incorporated by reference from the 2020 Proxy Statement.

2019 FORM 10-K

109

CORPORATEPROFILE

Whether paving roads, mining essential commodities or extracting the fuels tosatisfy global energy demand, Caterpillar products are helping to build a betterworld. Since 1925, Caterpillar has been making sustainable progress possible
and driving positive change on every continent.
Services offered throughout the product life cycle, cutting-edge technology
and decades of product expertise set Caterpillar apart, providing exceptional
value to help our customers succeed.

$1.7B

R&D
Funding$53.8B~$30M

Foundation
Investment

Sales& Revenues

4 Million+

Cat Products at Work
Around the World*®

*Includes discontinued products

1M

Primary
Locations~25

Cat® Dealers

Employees

21

BrandsCountries Where
We Do Business

Sales Outside
the U.S.

Countries

Connected
AssetsAll numbers represent 2019 data

THE WORLD’S LEADINGMANUFACTURER

PRIMARY BUSINESSSEGMENTSCORPORATEHEADQUARTERS

Construction and Mining
Equipment

Construction Industries

Deerfield, Illinois

Resource Industries

STOCK SYMBOLEnergy & TransportationCATD
 iesel and Natural
Gas Engines
Industrial Gas Turbines
Diesel-Electric Locomotives

Financial Products

In 2019, Caterpillar introduced advanced
technology and new products to help ourcustomers get their jobs done. Learn
more about some of our most groundbreaking stories.

165

190+

~150
In

102,300

READ MORE ONLINE

20 YEARS
ON THE DOW JONESSUSTAINABILITY INDEXPartnering With Dealers to
Deliver Innovative Services
We’re introducing new ways to support dealers
in helping their customers increase productivity
and lower owning and operating costs.
Creating Value, Anywhere and Everywhere
Over time and throughout the ownershipexperience, customers are discovering thesuperior value of choosing Caterpillar.

The Right Solution for Every
Customer NeedAn expanding product line is helping grow ourbusiness and reach new customers around the world.
Powering the World When It Matters Most
Hospitals and data centers have no margin
for error when it comes to backup power– here’s how we keep them running.

Caterpillar’s Digital Strategy
Learn how we’re applying decades ofmachine expertise to offer innovative
digital solutions for our customers.

Technology That Keeps Operators Alert –and Safe
Cat® Detect technologies ensure operators
remain focused on their surroundings,
keeping everyone on the job site safer.

Autonomous Solutions in Action
Caterpillar has more than double the autonomous
driving experience of any automotive manufacturer.
See how we’re putting that knowledge to work.

Manufacturing Smarter, Not Harder
By applying Lean, a facility consolidated
two assembly lines into one and assembled
more components in less time.

Digging Deep to Meet Mining
Customers’ Needs
The latest 6060 hydraulic mining shovel
was built to meet customer needs fordurability, reliability and performance.

Remanufacturing: It’s Bigger Than You Think
Reducing, reusing and recycling materials
once destined for a landfill benefits customers,
our company and the environment.

®

2019 ANNUAL REPORTLEARN MORE
about how Caterpillar is helping
customers build a better world.

2019 ANNUAL REPORT
caterpillar.com/annual-report2019 SUSTAINABILITY REPORT
caterpillar.com/sustainability-report© 2020 Caterpillar. All Rights Reserved.
Caterpillar: Nonconfidential

CAT-050_AR_Covers.indd 1

2019

Annual Report
Executing Our Strategy

CAT, CATERPILLAR, LET’S DO THE WORK, their respective logos,“Caterpillar Corporate Yellow,” the “Power Edge” and Cat“Modern Hex” trade dress as well as corporate and productidentity used herein, are trademarks of Caterpillar and may not
be used without permission.

4/20/20 11:05 AM