News Column

CATERPILLAR INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 1, 2014

Overview

Second-quarter 2014 sales and revenues were $14.150 billion, a 3 percent decrease from second-quarter 2013 sales and revenues of $14.621 billion. Profit per share for the second quarter of 2014 was $1.57, an 8 percent increase from second-quarter 2013 profit per share of $1.45. Profit was $999 million in the quarter, an increase of 4 percent from $960 million in the second quarter of 2013. Sales and revenues for the six months ended June 30, 2014 were $27.391 billion, down $440 million, or 2 percent, from $27.831 billion for the six months ended June 30, 2013. Profit per share for the six months ended June 30, 2014 was $3.00, a 9 percent increase from the six months ended June 30, 2013 profit per share of $2.76. Profit was $1.921 billion in the six months ended June 30, 2014, an increase of 4 percent from $1.840 billion for the six months ended June 30, 2013.



Highlights for the second quarter of 2014 include:

? Second-quarter sales and revenues were $14.150 billion, compared with $14.621

billion in the second quarter of 2013. Decreases in Resource Industries'

sales were partially offset by increases in Construction Industries' sales.

Energy & Transportation's sales and Financial Products' revenues were about

flat.



? Restructuring costs were $114 million in the second quarter of 2014 with an

after-tax impact of $0.12 per share. ? Profit per share was $1.57 in the second quarter of 2014 and excluding



restructuring costs of $0.12 per share was $1.69 per share. Profit in the

second quarter of 2013 was $1.45 per share.



? Machinery, Energy & Transportation (ME&T) operating cash flow was $2.064

billion in the second quarter of 2014, compared with $3.049 billion in the

second quarter of 2013.



? ME&T debt-to-capital ratio was 32.5 percent compared with 29.7 percent at the

end of 2013.



? Caterpillar announced its intention to repurchase $2.5 billion of Caterpillar

common stock during the third quarter of 2014. This repurchase is part of the

$10 billion stock repurchase authorization previously approved by the Board

of Directors in the first quarter of 2014.

Highlights for the six months ended June 30, 2014 include: ? Sales and revenues for the six months ended June 30, 2014 were $27.391

billion, compared with $27.831 billion for the six months ended June 30,

2013. Sales decreases in Resource Industries were nearly offset by increases

in Construction Industries and Energy & Transportation. Financial Products'

revenues were about flat.



? Restructuring costs were $263 million for the six months ended June 30, 2014

with an after-tax impact of $0.30 per share. ? Profit per share was $3.00 for the six months ended June 30, 2014 and



excluding restructuring costs of $0.30 per share was $3.30 per share. Profit

per share was $2.76 for the six months ended June 30, 2013.



? ME&T operating cash flow was $3.942 billion for the six months ended June 30,

2014, compared with $4.138 billion for the six months ended June 30, 2013.

Notes:

• Glossary of terms is included on pages 72-74; first occurrence of terms shown

in bold italics.

• Information on non-GAAP financial measures is included on page 83.

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Consolidated Results of Operations

THREE MONTHS ENDED JUNE 30, 2014 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2013

CONSOLIDATED SALES AND REVENUES

[[Image Removed]] The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the second quarter of 2013 (at left) and the second quarter of 2014 (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees. Sales and Revenues Total sales and revenues were $14.150 billion in the second quarter of 2014, down $471 million or 3 percent from the second quarter of 2013. When reviewing the change in sales and revenues, we focus on the following perspectives: • Reasons for the change: Sales volume decreased $610 million primarily due to



lower volume in Resource Industries, partially offset by higher volume in

Construction Industries. The sales volume decrease was partially offset by

favorable price realization.

The volume decrease was primarily the result of lower end-user demand for mining equipment in Resource Industries, as customers are continuing to reduce their capital expenditures. This decrease was partially offset by the favorable impact of changes in dealer machine and engine inventories, as dealers reduced inventories about $500 million in the second quarter of 2014 compared to a decrease of more than $1 billion in the second quarter of 2013. Dealers are independent, and there could be many reasons for changes in their inventory levels. In general, dealers adjust inventory based on their expectations of future demand and product delivery times. We expect that dealers will continue to decrease inventories for both construction and mining equipment in the third and fourth quarters of 2014, as dealers are satisfying more demand from inventory. Dealers' demand expectations take into account seasonal changes, macroeconomic conditions and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers. Aftermarket parts sales were about flat with the second quarter of 2013. • Sales by geographic region: Sales declines in Asia/Pacific and Latin America



were partially offset by an increase in North America. Asia/Pacific sales

declined 14 percent as a result of weak mining sales across the region,

timing of large Energy & Transportation projects and a slowing construction

equipment industry in China. Sales decreased in Latin America 16 percent,

primarily due to lower end-user demand for mining equipment. In North

America, sales increased 6 percent, primarily due to improving demand for

construction equipment in the United States. Sales into EAME were about flat

as lower end-user demand was about offset by the absence of unfavorable

changes in dealer inventory during the second quarter of 2013. While EAME

sales were about flat, the impact from strengthening economic conditions in

Europe was about offset by sales declines 60



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in the CIS and Africa/Middle East. We believe the sales declines in the CIS were due to the effects of ongoing political unrest on economic activity in the region, and the declines in Africa/Middle East were primarily due to lower mining sales. • Sales by segment: Sales decreases in Resource Industries were partially



offset by increases in Construction Industries' sales. Resource Industries'

sales decreased 29 percent, primarily due to lower end-user demand for mining

equipment. Construction Industries' sales increased 11 percent, primarily due

to the favorable impact of changes in dealer inventories and increases in

dealer deliveries to end users. Energy & Transportation's sales and Financial

Products segment revenues were about flat.

CONSOLIDATED OPERATING PROFIT [[Image Removed]] The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the second quarter of 2013 (at left) and the second quarter of 2014 (at right). Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses. Operating profit for the second quarter of 2014 was $1.475 billion, down $82 million or 5 percent from the second quarter of 2013. Restructuring costs in the second quarter of 2014 were $114 million compared with $28 million in the second quarter of 2013, an increase of $86 million. The second quarter of 2014 restructuring costs were primarily related to a reduction in workforce at our Gosselies, Belgium, facility. Excluding restructuring costs, operating profit was about flat as lower sales volume and the absence of a $135 million gain related to a settlement with previous owners of Caterpillar (Zhengzhou) Ltd. were about offset by lower manufacturing costs and favorable price realization. Manufacturing costs decreased $110 million. The improvement was primarily due to favorable changes in cost absorption as inventory decreased significantly in the second quarter of 2013 compared with a modest increase in the second quarter of 2014. Material costs were also favorable. These items were partially offset by higher period manufacturing costs and increased warranty expense. The increase in period manufacturing costs was primarily driven by higher incentive compensation expense. SG&A and R&D expenses were about flat despite an increase in incentive compensation expense. The second-quarter short-term incentive compensation expense related to 2014 was about $360 million, and we expect the full-year expense will be about $1.2 billion. Short-term incentive compensation expense in the second quarter of 2013 was about $125 million, and the full-year 2013 was about $545 million. Short-term incentive compensation expense is directly related to financial and operational performance measured against targets set annually. Other Profit/Loss Items



• Other income/expense was income of $65 million compared with expense of $84

million in the second quarter of 2013. The change was primarily due to the

favorable net impact from currency translation and hedging gains and losses.

Translation and hedging losses in the second quarter of 2013 totaled $134

million. In the second quarter of 2014, translation and hedging gains were

$17 million. 61



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• The provision for income taxes in the second quarter of 2014 reflects an

estimated annual tax rate of 29.5 percent compared with 29 percent for the

second quarter of 2013. The increase from the full-year 2013 rate of 28.5

percent is primarily due to the expiration of the U.S. research and

development tax credit. Segment Information



Sales and Revenues by Geographic Region

% North % Latin % % Asia/ %



(Millions of dollars) Total Change America Change

America Change EAME Change Pacific Change Second Quarter 2014 Construction Industries 1 $ 5,407 11 % $ 2,402 20 %

$ 711 1 % $ 1,192 14 % $ 1,102 (2 )% Resource Industries 2 2,241 (29 )% 866 (9 )%

342 (40 )% 523 (35 )% 510 (37 )% Energy & Transportation 3 5,175 (2 )% 2,259 2 %

470 (17 )% 1,406 4 % 1,040 (8 )% All Other Segments 4 583 (7 )% 369 - % 71 13 % 83 (26 )% 60 (25 )% Corporate Items and Eliminations (15 ) - (15 ) 1 (2 ) 1 Machinery, Energy & Transportation Sales 13,391 (4 )% 5,881 6 %



1,595 (16 )% 3,202 (3 )% 2,713 (14 )%

Financial Products Segment 834 3 % 448 7 % 117 7 % 121 1 % 148 (7 )% Corporate Items and Eliminations (75 ) (41 ) (13 ) (8 ) (13 ) Financial Products Revenues 759 3 % 407 8 % 104 5 % 113 1 % 135 (8 )% Consolidated Sales and Revenues $ 14,150 (3 )% $ 6,288 7 %



$ 1,699 (15 )% $ 3,315 (3 )% $ 2,848 (13 )%

Second Quarter 2013 Construction Industries 1 $ 4,875$ 2,008$ 701$ 1,045$ 1,121 Resource Industries 2 3,135 948 573 802 812 Energy & Transportation 3 5,263 2,215 568 1,352 1,128 All Other Segments 4 624 369 63 112 80 Corporate Items and Eliminations (11 ) (14 ) 1 1 1 Machinery, Energy & Transportation Sales 13,886 5,526 1,906 3,312 3,142 Financial Products Segment 806 418 109 120 159 Corporate Items and Eliminations (71 ) (41 ) (10 ) (8 ) (12 ) Financial Products Revenues 735 377 99 112 147 Consolidated Sales and Revenues $ 14,621$ 5,903$ 2,005$ 3,424$ 3,289



1 Does not include inter-segment sales of $56 million and $91 million in second

quarter 2014 and 2013, respectively. 2 Does not include inter-segment sales of $145 million and $126 million in second quarter 2014 and 2013, respectively. 3 Does not include inter-segment sales of $586 million and $461 million in second quarter 2014 and 2013, respectively. 4 Does not include inter-segment sales of $890 million and $830 million in second quarter 2014 and 2013, respectively. 62



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Sales and Revenues by Segment

Second Sales Price Second $ %



(Millions of dollars) Quarter 2013 Volume Realization Currency Other Quarter 2014 Change Change

Construction Industries$ 4,875$ 511$ 58$ (37 ) $ - $ 5,407$ 532 11 % Resource Industries

3,135 (875 ) (15 )



(4 ) - 2,241 (894 ) (29 )% Energy & Transportation 5,263 (186 )

48 50 - 5,175 (88 ) (2 )% All Other Segments 624 (55 ) 14 - - 583 (41 ) (7 )% Corporate Items and (11 ) (5 ) 3 (2 ) - (15 ) (4 ) Eliminations Machinery, Energy & Transportation Sales 13,886 (610 ) 108 7 - 13,391 (495 ) (4 )% Financial Products 806 - - - 28 834 28 3 % Segment Corporate Items and (71 ) - - - (4 ) (75 ) (4 ) Eliminations Financial 735 - - - 24 759 24 3 % Products Revenues



Consolidated Sales and $ 14,621$ (610 )$ 108$ 7$ 24$ 14,150$ (471 ) (3 )% Revenues

Operating Profit by Segment

$ % (Millions of dollars) Second Quarter 2014 Second Quarter 2013 Change Change Construction Industries $ 674 $ 368 $ 306 83 % Resource Industries 133 524 (391 ) (75 )% Energy & Transportation 1,009 953 56 6 % All Other Segments 223 208 15 7 % Corporate Items and Eliminations (722 ) (666 ) (56 ) Machinery, Energy & Transportation 1,317 1,387 (70 ) (5 )% Financial Products Segment 244 233 11 5 % Corporate Items and Eliminations (12 ) 8 (20 ) Financial Products 232 241 (9 ) (4 )% Consolidating Adjustments (74 ) (71 ) (3 ) Consolidated Operating Profit $ 1,475 $ 1,557 $ (82 ) (5 )% Construction IndustriesConstruction Industries' sales were $5.407 billion in the second quarter of 2014, an increase of $532 million, or 11 percent, from the second quarter of 2013. The sales increase was primarily due to higher sales volume in North America. Price realization was also favorable. Sales of new equipment increased, and sales of aftermarket parts were about flat. • The sales volume increase was primarily related to favorable changes in



dealer inventories as dealers lowered their inventories more significantly in

the second quarter of 2013 than in the second quarter of 2014. Generally,

dealer inventories decline in the second quarter due to seasonal selling

patterns. Additionally, dealer deliveries to end users increased primarily

due to higher demand in North America, partially offset by lower demand in Asia/Pacific. Sales increased in North America and EAME and were about flat in Latin America and Asia/Pacific. • In North America, the sales increase was primarily due to higher dealer



deliveries to end users resulting from an increase in construction-related

spending in the United States. Although still below the 2006 peak,

construction-related sales are improving in the United States.

• In EAME, higher sales were primarily due to favorable changes in dealer

inventories as dealers increased inventory in the second quarter of 2014 and

decreased inventory in the second quarter of 2013.

• In Asia/Pacific, sales were about flat as lower deliveries to end users due

to weaker economic conditions across the region were about offset by the

favorable impact of changes in dealer inventories.

Construction Industries' profit was $674 million in the second quarter of 2014, compared with $368 million in the second quarter of 2013. The increase in profit was primarily due to higher sales volume, the favorable impact of currency, improved price realization and lower manufacturing costs. 63



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Manufacturing costs improved primarily due to lower material costs and favorable changes in cost absorption resulting from a significantly larger decrease in inventory during the second quarter of 2013 than in the second quarter of 2014. These favorable impacts were partially offset by increased depreciation and incentive compensation expense. SG&A and R&D expenses were about flat despite the increase in sales volume and higher incentive compensation expense. Resource IndustriesResource Industries' sales were $2.241 billion in the second quarter of 2014, a decrease of $894 million, or 29 percent, from the second quarter of 2013. Sales declined in all geographic regions primarily due to lower end-user demand partially offset by the favorable impact of changes in dealer inventories. While dealers continued to reduce machine inventories worldwide during the second quarter of 2014, the reductions were much less significant than in the second quarter of 2013. Although prices of most mined commodities remained above investment thresholds, customers in all geographic regions have reduced spending across the mining industry. We believe that mining companies are increasing productivity at existing mines, rather than investing in expansions or new mine openings, which results in lower demand for our mining products. New orders for mining equipment continued to be weak in the quarter. Aftermarket part sales declined in Asia/Pacific and EAME and were about flat in Latin America and North America. We believe some companies are continuing to delay maintenance and rebuild activities. Resource Industries' sales in the second quarter of 2014 were up slightly for both new equipment and aftermarket parts compared to the first quarter of 2014. We have not yet seen signs that an upturn in mining is going to occur this year. The mining industry remains weak and quoting activity and order rates remain at low levels. While we have not seen evidence of an upturn in the industry, because of the low level of sales of new equipment, we believe the likelihood of a significant decline from current levels is limited. Resource Industries' profit was $133 million in the second quarter of 2014 compared with $524 million in the second quarter of 2013. The decrease was primarily the result of lower sales volume and the absence of a $135 million gain related to the settlement with previous owners of Caterpillar (Zhengzhou) Ltd., partially offset by an improvement in manufacturing costs. The improvement in manufacturing costs was primarily driven by favorable changes in cost absorption as inventory remained about flat during the second quarter of 2014, compared with a decrease in inventory during the second quarter of 2013. Material costs were also favorable. These improvements were partially offset by increased warranty expense. SG&A and R&D expenses were about flat as cost cutting measures offset higher incentive compensation expense. Energy & Transportation Energy & Transportation's sales were $5.175 billion in the second quarter of 2014, about flat with the second quarter of 2013. Sales decreased slightly into power generation applications and were about flat for transportation, industrial and oil and gas applications. While overall sales were about flat, sales of aftermarket parts increased. • Power Generation - Sales decreased in North America and EAME and were about



flat in Latin America and Asia/Pacific. The decline in North America and EAME

was due to lower end-user demand resulting primarily from the timing of large

projects.

• Oil and Gas - Sales were about flat, as increases in North America and EAME

were about offset by decreases in Asia/Pacific and Latin America. In North

America, higher sales were primarily the result of increased demand for gas

compression and well servicing. The increase in sales in EAME, as well as the

declines in Asia/Pacific and Latin America, were primarily due to the timing

of large turbine projects.

• Industrial and Transportation - Sales for both applications were about flat

across all geographic regions.

Due to the large project nature of many of the Energy & Transportation end markets, the timing of these projects can vary causing volatility in our sales. Energy & Transportation's profit was $1.009 billion in the second quarter of 2014, compared with $953 million in the second quarter of 2013. The increase was primarily due to favorable price realization. Manufacturing costs were about flat as the favorable impact of cost absorption and lower material costs were about offset by increased period manufacturing costs, including higher incentive compensation expense. The favorable impact of cost absorption resulted from an increase in inventory in the second quarter of 2014 compared to a decrease in inventory in the second quarter of 2013. SG&A and R&D expenses were about flat as reduced program spending offset higher incentive compensation expense. 64



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Financial Products Segment Financial Products' revenues were $834 million, an increase of $28 million, or 3 percent, from the second quarter of 2013. The increase was primarily due to the favorable impact from higher average earning assets in North America, EAME and Latin America, partially offset by a decrease in Asia/Pacific. Financial Products' profit was $244 million in the second quarter of 2014, compared with $233 million in the second quarter of 2013. The increase was primarily due to the absence of a $23 million currency loss in the second quarter of 2013 and a $17 million favorable impact from higher average earning assets. These increases were partially offset by the absence of $23 million in favorable reserve adjustments in the second quarter of 2013 at Insurance Services. At the end of the second quarter of 2014, past dues at Cat Financial were 2.63 percent compared with 2.44 percent at the end of the first quarter of 2014, 2.37 percent at the end of 2013 and 2.64 percent at the end of the second quarter of 2013. The increase in past dues from the first quarter of 2014 and the end of 2013 reflects higher past dues in Cat Financial's Latin American, Asia/Pacific, and European portfolios. Write-offs, net of recoveries, were $19 million for the second quarter of 2014, compared with $27 million for the second quarter of 2013. As of June 30, 2014, Cat Financial's allowance for credit losses totaled $387 million, or 1.27 percent of net finance receivables, compared with $373 million or 1.25 percent of net finance receivables as of March 31, 2014 and $378 million or 1.30 percent of net finance receivables at year-end 2013. The allowance for credit losses as of June 30, 2013, was $422 million or 1.46 percent of net finance receivables. Corporate Items and Eliminations Expense for corporate items and eliminations was $734 million in the second quarter of 2014, an increase of $76 million from the second quarter of 2013. Corporate items and eliminations include: corporate-level expenses; restructuring costs; timing differences, as some expenses are reported in segment profit on a cash basis; retirement benefit costs other than service cost and currency differences for ME&T, as segment profit is reported using annual fixed exchange rates and inter-segment eliminations. The increase in expense from the second quarter of 2013 was primarily due to restructuring costs and the unfavorable impact of currency. Segment profit for 2014 is based on fixed exchange rates set at the beginning of 2014, while segment profit for 2013 is based on fixed exchange rates set at the beginning of 2013. The difference in actual exchange rates compared with fixed exchange rates is included in corporate items and eliminations and is not reflected in segment profit. These unfavorable items were partially offset by other methodology differences and decreased retirement benefit costs. 65



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SIX MONTHS ENDED JUNE 30, 2014 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2013

CONSOLIDATED SALES AND REVENUES [[Image Removed]] The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the six months ended June 30, 2013 (at left) and the six months ended June 30, 2014 (at right). Items favorably impacting sales and revenues appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting sales and revenues appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees. Total sales and revenues were $27.391 billion in the six months ended June 30, 2014, down $440 million or 2 percent from the six months ended June 30, 2013. When reviewing the change in sales and revenues, we focus on the following perspectives: • Reasons for the change: Sales volume decreased $454 million due to lower



volume in Resource Industries, partially offset by higher volume in

Construction Industries and Energy & Transportation. In addition, currency

was unfavorable $136 million primarily due to the Japanese yen and Brazilian

real, partially offset by the euro. Sales in yen and real translated into

fewer U.S. dollars while the euro translated into more U.S. dollars.

The volume decrease was primarily the result of lower end-user demand for mining equipment in Resource Industries, as customers are continuing to reduce their capital expenditures. This unfavorable impact was partially offset by the favorable impact of changes in dealer machine and engine inventories, as dealers increased inventories about $200 million in the six months ended June 30, 2014 compared to a decrease of nearly $2 billion in the six months ended June 30, 2013. We expect that dealers will decrease inventories for both construction and mining equipment in the third and fourth quarters of 2014, as dealers satisfy more demand from inventory. Dealers are independent, and there could be many reasons for changes in their inventory levels. In general, dealers adjust inventory based on their expectations of future demand and product delivery times. Dealers' demand expectations take into account seasonal changes, macroeconomic conditions and other factors. Delivery times can vary based on availability of product from Caterpillar factories and product distribution centers. Aftermarket parts sales were about flat as declines in Resource Industries were offset by increases in Energy & Transportation. • Sales by geographic region: Sales declines in Asia/Pacific and Latin America



were about offset by sales increases in North America. In Asia/Pacific sales

decreased 13 percent primarily due to lower end user demand for mining equipment partially offset by the favorable impact of changes in dealer inventories. Sales declined 16 percent in Latin America primarily due to



lower end user demand for mining equipment. Sales increases in North America

were primarily due to higher end user demand for construction and oil and gas

equipment and the favorable impact of dealer inventory changes primarily

related to Construction Industries.

Sales were about flat in EAME, as lower end user demand was about offset by the favorable impact of changes in dealer inventories. While sales in EAME were about flat, the impact from strengthening economic conditions in Europe primarily for Construction Industries was about offset by sales declines in the CIS and Africa/Middle East. We believe the sales declines 66



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in the CIS were due to the effects of ongoing political unrest on economic activity in the region, and the declines in Africa/Middle East were primarily due to lower mining sales. The escalation of geo-political events in the region could negatively impact trade overall and the demand for our products. • Sales by segment: Sales decreases in Resource Industries were nearly offset



by increases in Construction Industries and Energy & Transportation. Resource

Industries' sales declined 33 percent, resulting primarily from weaker demand

for mining products, partially offset by the favorable impact of changes in

dealer inventories. Construction Industries' sales increased 15 percent

primarily due to the favorable impact of changes in dealer inventories and

increased end-user demand. Energy & Transportation's sales were 3 percent

higher. Financial Products segment revenues were about flat.

CONSOLIDATED OPERATING PROFIT [[Image Removed]] The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the six months ended June 30, 2013 (at left) and the six months ended June 30, 2014 (at right). Items favorably impacting operating profit appear as upward stair steps with the corresponding dollar amounts above each bar, while items negatively impacting operating profit appear as downward stair steps with dollar amounts reflected in parentheses above each bar. Caterpillar management utilizes these charts internally to visually communicate with the company's Board of Directors and employees. The bar entitled Other includes consolidating adjustments and Machinery, Energy & Transportation other operating (income) expenses. Operating profit for the six months ended June 30, 2014 was $2.873 billion, an increase of $98 million from the six months ended June 30, 2013. The increase was primarily the result of lower manufacturing costs, decreased SG&A and R&D expenses, improved price realization and the favorable impact of currency. These favorable impacts were partially offset by higher restructuring costs, lower sales volume and the absence of a gain related to a settlement with the previous owners of Caterpillar (Zhengzhou) Ltd. Manufacturing costs decreased $340 million. The improvement was primarily due to favorable changes in cost absorption resulting from an increase in inventory during the six months ended June 30, 2014 compared to a significant decrease in the six months ended June 30, 2013, favorable material costs and improved efficiencies. These favorable impacts were partially offset by increased incentive compensation and warranty expenses. Decreases in SG&A and R&D expenses were primarily due to cost reduction measures, partially offset by higher incentive compensation expense. The favorable impact of currency was mostly due to the Japanese yen. We have a sizeable manufacturing presence in Japan, and while some of this production is sold in Japan, we are a net exporter, and therefore, a weaker yen provides a benefit. The unfavorable impact from restructuring costs of $228 million was primarily related to a reduction in workforce at our Gosselies, Belgium, facility. Short-term incentive compensation expense related to the six months ended June 30, 2014 was about $620 million, compared with about $250 million in the six months ended June 30, 2013. 67



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Other Profit/Loss Items

• Other income/expense was income of $119 million in the six months ended June

30, 2014 compared with expense of $55 million in the six months ended June

30, 2013. The change was primarily due to the favorable impact of currency

translation and hedging gains and losses. Translation and hedging losses in

the six months end June 30, 2013, totaled $158 million. In the six months

ended June 30, 2014, translation and hedging gains were $14 million.

• The provision for income taxes for the first six months of 2014 reflects an

estimated annual effective tax rate of 29.5 percent compared with 29 percent

for the first six months of 2013, excluding the items discussed below. The

increase from the full-year 2013 rate of 28.5 percent is primarily due to the

expiration of the U.S. research and development tax credit.

The provision for income taxes for the first six months of 2014 also includes a charge of $22 million related to prior years' taxes and interest. This compares to a benefit of $87 million for the first six months of 2013 primarily related to the U.S. research and development tax credit that was retroactively extended for 2012. Segment Information



Sales and Revenues by Geographic Region

% North % Latin % % Asia/ % (Millions of dollars) Total Change America Change America Change EAME Change Pacific Change Six Months Ended June 30, 2014Construction Industries 1 $ 10,471 15 % $ 4,494 27 % $ 1,297 - % $ 2,336 17 % $ 2,344 4 % Resource Industries 2 4,364 (33 )% 1,591 (11 )% 744 (42 )% 1,055 (37 )% 974 (44 )% Energy & Transportation 3 9,951 3 % 4,341 8 % 941 (5 )% 2,735 6 % 1,934 (6 )% All Other Segments 4 1,137 - % 706 - % 126 13 % 186 (6 )% 119 (7 )% Corporate Items and Eliminations (39 ) (32 ) (1 ) (5 ) (1 ) Machinery, Energy & Transportation Sales 25,884 (2 )% 11,100 11 % 3,107 (16 )% 6,307 (2 )% 5,370 (13 )% Financial Products Segment 1,651 3 % 885 8 % 226 3 % 252 3 % 288 (9 )% Corporate Items and Eliminations (144 ) (80 ) (24 ) (14 ) (26 ) Financial Products Revenues 1,507 3 % 805 8 % 202 - % 238 3 % 262 (8 )% Consolidated Sales and Revenues $ 27,391 (2 )% $ 11,905 10 % $ 3,309 (15 )% $ 6,545 (2 )% $ 5,632 (13 )% Six Months Ended June 30, 2013Construction Industries 1 $ 9,094$ 3,548$ 1,297$ 2,001$ 2,248 Resource Industries 2 6,488 1,787 1,290 1,669 1,742 Energy & Transportation 3 9,668 4,030 993 2,588 2,057 All Other Segments 4 1,141 704 112 197 128 Corporate Items and Eliminations (21 ) (26 ) 1 2 2 Machinery, Energy & Transportation Sales 26,370 10,043 3,693 6,457 6,177 Financial Products Segment 1,601 821 219 245 316 Corporate Items and Eliminations (140 ) (78 ) (16 ) (14 ) (32 ) Financial Products Revenues 1,461 743 203 231 284 Consolidated Sales and Revenues $ 27,831$ 10,786$ 3,896$ 6,688$ 6,461



1 Does not include inter-segment sales of $131 million and $190 million for the

six months ended June 30, 2014 and 2013, respectively.

2 Does not include inter-segment sales of $258 million and $254 million for the

six months ended June 30, 2014 and 2013, respectively.

3 Does not include inter-segment sales of $1,136 million and $857 million for

the six months ended June 30, 2014 and 2013, respectively.

4 Does not include inter-segment sales of $1,722 million and $1,633 million for

the six months ended June 30, 2014 and 2013, respectively. 68



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Sales and Revenues by Segment

Six Months Ended Sales Price Six Months Ended $ % (Millions of dollars) June 30, 2013 Volume Realization Currency Other June 30, 2014 Change Change Construction $ 9,094$ 1,493$ 41$ (157 ) $ - $ 10,471$ 1,377 15 % Industries Resource Industries 6,488 (2,065 ) (36 ) (23 ) - 4,364 (2,124 ) (33 )% Energy & 9,668 155 80 48 - 9,951 283 3 % Transportation All Other Segments 1,141 (18 ) 17 (3 ) - 1,137 (4 ) - % Corporate Items and (21 ) (19 ) 2 (1 ) - (39 ) (18 ) Eliminations Machinery, Energy & Transportation Sales 26,370 (454 ) 104 (136 ) - 25,884 (486 ) (2 )% Financial Products 1,601 - - - 50 1,651 50 3 % Segment Corporate Items and (140 ) - - - (4 ) (144 ) (4 ) Eliminations Financial 1,461 - - - 46 1,507 46 3 % Products Revenues Consolidated Sales $ 27,831$ (454 )$ 104$ (136 )$ 46$ 27,391$ (440 ) (2 )% and Revenues



Operating Profit by Segment

Six Months Ended Six Months Ended $ % (Millions of dollars) June 30, 2014 June 30, 2013 Change Change Construction Industries $ 1,362 $ 596 $ 766 129 % Resource Industries 282 983 (701 ) (71 )% Energy & Transportation 1,836 1,544 292 19 % All Other Segments 458 413 45 11 % Corporate Items and Eliminations (1,382 ) (1,146 ) (236 ) Machinery, Energy & Transportation 2,556 2,390 166 7 % Financial Products Segment 484 506 (22 ) (4 )% Corporate Items and Eliminations (27 ) 17 (44 ) Financial Products 457 523 (66 ) (13 )% Consolidating Adjustments (140 ) (138 ) (2 )



Consolidated Operating Profit $ 2,873 $ 2,775

$ 98 4 % Construction IndustriesConstruction Industries' sales were $10.471 billion in the six months ended June 30, 2014, an increase of $1.377 billion, or 15 percent, from the six months ended June 30, 2013. The sales increase was primarily due to higher sales volume, partially offset by the unfavorable impact of currency. Sales of new equipment increased, and sales of aftermarket parts were about flat. • The increase in sales volume was primarily related to changes in dealer



inventories. Dealer inventories increased in the six months ended June 30,

2014 compared to a decrease in the six months ended June 30, 2013. The

remaining increase in sales volume was primarily due to increased deliveries

to end users in North America.

• The unfavorable currency impact was primarily from a weaker Japanese yen and

Brazilian real, as sales in these currencies translated into fewer U.S.

dollars.

Sales increased in all geographic regions except in Latin America, where they were about flat. • In North America, higher sales were primarily due to higher end-user demand



resulting from an increase in construction-related spending in the United

States. Although still below the 2006 peak, construction-related sales are

improving in the United States. The remaining sales increase was primarily

due to the impact of dealer inventory changes, as dealers increased inventory

more in the six months ended June 30, 2014 than in the six months ended June

30, 2013.

• In EAME, higher sales were primarily due to the impact of dealer inventory

changes. Dealer machine inventory increased in the six months ended June 30,

2014 compared to a decrease in the six months ended June 30, 2013. In

addition, dealer deliveries to end users in Europe increased due to

strengthening economic conditions. These increases were partially offset

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by lower dealer deliveries to end users in Africa/Middle East and the CIS. We believe the declines in these regions were due to the effects of ongoing political unrest on economic activity in the regions. • In Asia/Pacific, sales increased slightly primarily due to favorable changes

in dealer inventories as the decrease in dealer inventories was less

significant in the six months ended June 30, 2014 than in the six months

ended June 30, 2013. These favorable impacts were partially offset by the

unfavorable impact of currency primarily due to the Japanese yen.

• While sales in Latin America were about flat, increases in end-user demand

primarily related to large government orders in Brazil were about offset by

an unfavorable impact of currency from the Brazilian real.

Construction Industries' profit was $1.362 billion in the six months ended June 30, 2014, compared with $596 million in the six months ended June 30, 2013. The increase in profit was primarily due to higher sales volume, favorable manufacturing costs and the favorable impact of currency. Manufacturing costs improved primarily due to favorable changes in cost absorption, material costs and efficiencies, partially offset by higher period manufacturing costs. Favorable changes in cost absorption resulted from a significantly larger decrease in inventory during the six months ended June 30, 2013 compared to the six months ended June 30, 2014. The improvement in efficiencies was primarily due to higher production volume. The increases in period manufacturing costs were primarily due to higher depreciation and incentive compensation expenses. SG&A and R&D expenses were about flat despite the increase in sales volume and higher incentive compensation expense. While margins on Construction Industries' sales in the six months ended June 30, 2014 were strong, lower margins are expected on Construction Industries' sales for the remainder of 2014 primarily due to lower sales volume primarily in developing countries such as China, the CIS and the Africa/Middle East region. The construction industry in China has softened since the end of the first quarter of 2014, and we expect it to continue to be weaker in the second half of 2014, negatively impacting the demand for our products. In addition, the political problems in the CIS and Africa/Middle East could negatively impact trade and the demand for our products. Resource IndustriesResource Industries' sales were $4.364 billion for the six months ended June 30, 2014, a decrease of $2.124 billion, or 33 percent, from the six months ended June 30, 2013 - nearly all from lower sales volume. The sales volume decline was primarily due to lower end-user demand across all geographic regions. Aftermarket part sales also declined, as we believe some companies are delaying maintenance and rebuild activities. These declines were partially offset by favorable changes in dealer machine inventory. While dealers continued to reduce machine inventories worldwide for the six months ended June 30, 2014, the reductions were much less significant than for the six months ended June 30, 2013. We expect that dealers will continue to decrease inventory in the third and fourth quarters of 2014 as dealers are satisfying more customer demand from inventory. Customer demand for mining equipment has not improved, and as a result, dealers need less inventory and are making reductions to align inventory with demand. Although prices of most mined commodities remained above investment thresholds, customers in all geographic regions have reduced spending across the mining industry. We believe that mining companies are increasing productivity at existing mines, rather than investing in expansions or new mine openings, which results in lower demand for our mining products. New orders for mining equipment continued to be weak for the six months ended June 30, 2014. Resource Industries' sales in the second quarter of 2014 were up slightly for both new equipment and aftermarket parts compared to the first quarter of 2014. We have not yet seen signs that an upturn in mining is going to occur this year. The mining industry remains weak and quoting activity and order rates remain at low levels. While we have not seen evidence of an upturn in the industry, because of the low level of sales of new equipment, we believe the likelihood of significant decline from current levels is limited. Resource Industries' profit was $282 million for the six months ended June 30, 2014 compared with $983 million for the six months ended June 30, 2013. The decrease was primarily the result of lower sales volume and the absence of a $135 million gain related to the settlement with previous owners of Caterpillar (Zhengzhou) Ltd., which was partially offset by an improvement in manufacturing costs and lower SG&A and R&D expenses. The decrease in manufacturing costs was primarily driven by favorable changes in cost absorption resulting from an increase in inventory for the six months ended June 30, 2014, compared with a decrease in inventory for the six months ended June 30, 2013. Material costs were also favorable. Despite increased incentive compensation expense, SG&A and R&D expenses were lower primarily due to cost cutting measures implemented in response to lower volumes, including decreased spending for new product introduction programs. In addition, bad debt expense was lower at Caterpillar (Zhengzhou) Ltd. 70



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Energy & Transportation Energy & Transportation's sales were $9.951 billion for the six months ended June 30, 2014, an increase of $283 million, or 3 percent, from the six months ended June 30, 2013. The sales increase was primarily due to higher sales into oil and gas and industrial applications. Sales into transportation and power generation applications were about flat. Sales of aftermarket parts increased. • Oil and Gas - The sales increase was primarily due to favorable changes in



dealer inventories across all regions. Deliveries to end users were about

flat as increases in North America and EAME were about offset by decreases in

Asia/Pacific and Latin America. In North America, the increase in deliveries

was primarily for well servicing and gas compression. The increase in sales

in EAME, as well as the declines in Asia/Pacific and Latin America, were

primarily due to the timing of large projects. Due to the large project

nature of many of the Energy & Transportation end markets, the timing of

these projects can vary causing volatility in our sales.

• Industrial - Sales into industrial applications increased in North America

and Asia/Pacific and were about flat in EAME and Latin America. The increase

in sales was primarily due to higher demand for engines used by original

equipment manufacturers. Energy & Transportation's profit was $1.836 billion for the six months ended June 30, 2014 compared with $1.544 billion for the six months ended June 30, 2013. The increase was primarily due to higher sales volume, favorable price realization and lower manufacturing costs. The decrease in manufacturing costs was primarily due to lower material costs and favorable changes in cost absorption resulting from a more significant increase in inventory for the six months ended June 30, 2014 than for the six months ended June 30, 2013. These favorable items were partially offset by increased incentive compensation expense. SG&A and R&D expenses were about flat as reduced program spending offset higher incentive compensation expense. Financial Products Segment Financial Products' revenues were $1.651 billion for the six months ended June 30, 2014, an increase of $50 million, or 3 percent, from the six months ended June 30, 2013. The increase was primarily due to the favorable impact from higher average earning assets in North America and EAME, partially offset by decreases in Asia/Pacific and Latin America. The increase was partially offset by a decrease in Insurance Services' revenue across all geographic regions except Latin America. Financial Products' profit was $484 million in the six months ended June 30, 2014, compared with $506 million in the six months ended June 30, 2013. The decrease was primarily due to the absence of $68 million in favorable reserve adjustments in the six months ended June 30, 2013 at Insurance Services and a $21 million increase in the provision for credit losses at Cat Financial. These decreases were partially offset by a $27 million favorable impact from higher average earning assets, the absence of a $23 million currency loss in the six months ended June 30, 2013 and an $18 million improvement on net yield on average earning assets. Corporate Items and Eliminations Expense for corporate items and eliminations was $1.409 billion in the six months ended June 30, 2014, an increase of $280 million from the six months ended June 30, 2013. Corporate items and eliminations include: corporate-level expenses; restructuring costs; timing differences, as some expenses are reported in segment profit on a cash basis; retirement benefit costs other than service cost; currency differences for ME&T, as segment profit is reported using annual fixed exchange rates and inter-segment eliminations. The increase in expense from the six month ended June 30, 2013 was primarily due to restructuring costs and the unfavorable impact of currency. Segment profit for 2014 is based on fixed exchange rates set at the beginning of 2014, while segment profit for 2013 is based on fixed exchange rates set at the beginning of 2013. The difference in actual exchange rates compared with fixed exchange rates is included in corporate items and eliminations and is not reflected in segment profit. These unfavorable items were partially offset by decreased retirement benefit costs. RESTRUCTURING COSTS For the three and six months ended June 30, 2014, we recognized $114 million and $263 million, respectively, of restructuring costs, which included $107 million of employee separation costs and $7 million of long-lived asset impairments and other restructuring costs for the three months ended June 30, 2014 and $249 million of employee separation costs and $14 million of long-lived asset impairments and other restructuring costs for the six months ended June 30, 2014. The restructuring costs in 2014 were primarily related to a reduction in workforce at our Gosselies, Belgium facility. For the three and six months ended June 30, 2013, we recognized $28 million and $35 million, respectively, of restructuring costs, which included $16 million of employee separation costs and $12 million of long-lived asset impairments for the three months ended June 30, 2013 and $23 million of 71



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employee separation costs and $12 million of long-lived asset impairments for the six months ended June 30, 2013. For the first six months of 2013, costs primarily related to separation programs in North America and Europe.

Restructuring costs for the year ended December 31, 2013 were $200 million and included $151 million of employee separation costs, $41 million of long-lived asset impairments and $8 million of other restructuring costs. The most significant charges in 2013 were for the restructuring of management and support functions and the closure or downsizing of several facilities related to our mining business.



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

The following table summarizes the 2013 and 2014 employee separation activity: (Millions of dollars)

Total Liability balance at December 31, 2012$ 29 Increase in liability (separation charges) 151



Reduction in liability (payments and other adjustments) (91 ) Liability balance at December 31, 2013

$ 89 Increase in liability (separation charges) 249



Reduction in liability (payments and other adjustments) (114 ) Liability balance at June 30, 2014

$ 224 The remaining liability balances as of June 30, 2014 represent costs for employees who have not yet separated from the Company or whose full severance has not yet been paid. The majority of these remaining costs are expected to be paid in 2014. In December 2013, we announced a restructuring plan for our Gosselies, Belgium facility. This restructuring plan is designed to improve the competitiveness of our European manufacturing footprint and achieve competitiveness in our European operations by refocusing our current Gosselies operations on final machine assembly, test and paint with limited component and fabrication operations. This action will include reshaping our supply base for more efficient sourcing, improving factory efficiencies and workforce reductions and was approved by the Belgian Minister of Employment in February 2014. We estimate the total employee cash separation costs to be about $300 million before tax, which represents substantially all of the restructuring costs to be incurred under the restructuring plan. We expect to recognize substantially all of these separation-related charges throughout 2014. For the three and six months ended June 30, 2014, we recognized $87 million and $215 million, respectively, of employee separation costs relating to this restructuring plan. The majority of these costs will be paid throughout the remainder of 2014. For the full year, we expect total restructuring costs of about $400 million, lower than our previous estimate of $400 to $500 million. We revised our estimate because we expect some of the costs related to 2014 restructuring activities will now be incurred in 2015. Excluding charges related to our Belgium facility, restructuring costs for 2014 are anticipated to be about $100 million and are for a wide range of actions across the company that are part of our ongoing efforts to optimize our cost structure and improve the efficiency of our operations. GLOSSARY OF TERMS



1. All Other Segments - Primarily includes activities such as: the

remanufacturing of Catฎ engines and components and remanufacturing services

for other companies as well as the business strategy, product management,

development, manufacturing, marketing and product support of undercarriage,

specialty products, hardened bar stock components and ground engaging tools

primarily for Cat products, paving products, forestry products, industrial

and waste products and tunnel boring equipment; the product management,

development, marketing, sales and product support of on-highway vocational

trucks for North America; parts distribution; distribution services

responsible for dealer development and administration including three

wholly-owned dealers in Japan, dealer portfolio management and ensuring the

most efficient and effective distribution of machines, engines and parts.

2. Caterpillar (Zhengzhou) Ltd. - A wholly-owned subsidiary (formerly known as

Siwei) which primarily designs, manufactures, sells and supports underground

coal mining equipment in China and is included in our Resource Industries

segment. 72



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3. Consolidating Adjustments - Eliminations of transactions between Machinery,

Energy & Transportation and Financial Products.



4. Construction Industries - A segment primarily responsible for supporting

customers using machinery in infrastructure and building construction

applications. Responsibilities include business strategy, product design,

product management and development, manufacturing, marketing and sales and

product support. The product portfolio includes backhoe loaders, small wheel

loaders, small track-type tractors, skid steer loaders, multi-terrain

loaders, mini excavators, compact wheel loaders, telehandlers, select work

tools, small, medium and large track excavators, wheel excavators, medium

wheel loaders, compact track loaders, medium track-type tractors, track-type

loaders, motor graders and pipe layers. In addition, Construction Industries

has responsibility for an integrated manufacturing cost center. 5. Currency - With respect to sales and revenues, currency represents the translation impact on sales resulting from changes in foreign currency



exchange rates versus the U.S. dollar. With respect to operating profit,

currency represents the net translation impact on sales and operating costs

resulting from changes in foreign currency exchange rates versus the U.S.

dollar. Currency includes the impact on sales and operating profit for the

Machinery, Energy & Transportation lines of business only; currency impacts

on Financial Products revenues and operating profit are included in the

Financial Products portions of the respective analyses. With respect to other

income/expense, currency represents the effects of forward and option

contracts entered into by the company to reduce the risk of fluctuations in

exchange rates (hedging) and the net effect of changes in foreign currency

exchange rates on our foreign currency assets and liabilities for consolidated results (translation).



6. Debt-to-Capital Ratio - A key measure of Machinery, Energy & Transportation's

financial strength used by both management and our credit rating agencies.

The metric is defined as Machinery, Energy & Transportation's short-term

borrowings, long-term debt due within one year and long-term debt due after

one year (debt) divided by the sum of Machinery, Energy & Transportation's

debt and stockholders' equity. Debt also includes Machinery, Energy & Transportation's borrowings from Financial Products.



7. EAME - A geographic region including Europe, Africa, the Middle East and the

Commonwealth of Independent States (CIS).

8. Earning Assets - Assets consisting primarily of total finance receivables net

of unearned income, plus equipment on operating leases, less accumulated

depreciation at Cat Financial. 9. Energy & Transportation (formerly Power Systems) - A segment primarily



responsible for supporting customers using reciprocating engines, turbines,

diesel-electric locomotives and related parts across industries serving power

generation, industrial, oil and gas and transportation applications, including marine and rail-related businesses. Responsibilities include business strategy, product design, product management, development, manufacturing, marketing, sales and product support of turbines and turbine-related services, reciprocating engine powered generator sets, integrated systems used in the electric power generation industry,



reciprocating engines and integrated systems and solutions for the marine and

oil and gas industries; reciprocating engines supplied to the industrial

industry as well as Caterpillar machinery; the business strategy, product

design, product management, development, manufacturing, remanufacturing,

leasing, and service of diesel-electric locomotives and components and other

rail-related products and services.

10. Financial Products Segment - Provides financing to customers and dealers for

the purchase and lease of Caterpillar and other equipment, as well as some

financing for Caterpillar sales to dealers. Financing plans include operating

and finance leases, installment sale contracts, working capital loans and

wholesale financing plans. The segment also provides various forms of

insurance to customers and dealers to help support the purchase and lease of

our equipment.



11. Latin America - Geographic region including Central and South American

countries and Mexico.

12. Machinery, Energy & Transportation (ME&T) - Represents the aggregate total of

Construction Industries, Resource Industries, Energy & Transportation and All

Other Segments and related corporate items and eliminations.

13. Machinery, Energy & Transportation Other Operating (Income) Expenses -

Comprised primarily of gains/losses on disposal of long-lived assets,

gains/losses on divestitures, long-lived asset impairment charges and legal

settlements. Restructuring costs, which are classified as other operating

expenses on the Results of Operations, are presented separately on the Operating Profit Comparison.



14. Manufacturing Costs - Manufacturing costs exclude the impacts of currency and

represent the volume-adjusted change for variable costs and the absolute

dollar change for period manufacturing costs. Variable manufacturing costs

are defined as 73



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having a direct relationship with the volume of production. This includes material costs, direct labor and other costs that vary directly with production volume such as freight, power to operate machines and supplies that are consumed in the manufacturing process. Period manufacturing costs support production but are defined as generally not having a direct relationship to short-term changes in volume. Examples include machinery and equipment repair, depreciation on manufacturing assets, facility support, procurement, factory scheduling, manufacturing planning and operations management.



15. Price Realization - The impact of net price changes excluding currency and

new product introductions. Consolidated price realization includes the impact

of changes in the relative weighting of sales between geographic regions.

16. Resource Industries - A segment primarily responsible for supporting

customers using machinery in mining and quarrying applications.

Responsibilities include business strategy, product design, product

management and development, manufacturing, marketing and sales and product

support. The product portfolio includes large track-type tractors, large

mining trucks, hard rock vehicles, longwall miners, electric rope shovels,

draglines, hydraulic shovels, drills, highwall miners, large wheel loaders,

off-highway trucks, articulated trucks, wheel tractor scrapers, wheel dozers,

select work tools, machinery components and electronics and control systems.

Resource Industries also manages areas that provide services to other parts

of the company, including integrated manufacturing and research and

development. In addition, segment profit includes the impact from divestiture

of portions of the Bucyrus distribution business.

17. Restructuring Costs - Primarily costs for employee separation costs and

long-lived asset impairments.

18. Sales Volume - With respect to sales and revenues, sales volume represents

the impact of changes in the quantities sold for Machinery, Energy &

Transportation as well as the incremental revenue impact of new product

introductions, including emissions-related product updates. With respect to

operating profit, sales volume represents the impact of changes in the

quantities sold for Machinery, Energy & Transportation combined with product

mix as well as the net operating profit impact of new product introductions,

including emissions-related product updates. Product mix represents the net

operating profit impact of changes in the relative weighting of Machinery,

Energy & Transportation sales with respect to total sales.

LIQUIDITY AND CAPITAL RESOURCES

Sources of funds

We generate significant capital resources from operating activities, which are the primary source of funding for our Machinery, Energy & Transportation operations. Funding for these businesses is also available from commercial paper and long-term debt issuances. Financial Products' operations are funded primarily from commercial paper, term debt issuances and collections from the existing portfolio. Throughout the first half of 2014, we experienced favorable liquidity conditions globally in both our Machinery, Energy & Transportation and Financial Products' operations. On a consolidated basis, we ended the first half of 2014 with $7.93 billion of cash, an increase of $1.85 billion from year-end 2013. We intend to maintain a strong cash and liquidity position. Our cash balances are held in numerous locations throughout the world with approximately $5 billion held by our non-U.S. subsidiaries. Amounts held outside the United States are available for general corporate use and could be used in the United States without incurring significant additional U.S. taxes. Consolidated operating cash flow for the first half of 2014 was $4.13 billion, down from $4.59 billion for the same period a year ago. The decrease was primarily due to changes in inventory. During the first half of 2014, inventory increased, while during the first half of 2013, inventory decreased significantly to align with demand levels. Partially offsetting the change in inventory was a slight increase in profit, which included higher accruals for short-term incentive compensation and restructuring costs during the first half of 2014. In addition, we experienced lower short-term incentive compensation payments in 2014 and favorable changes in accounts payable (primarily due to increased material purchases). See further discussion of operating cash flow under Machinery, Energy & Transportation and Financial Products. Total debt as of June 30, 2014 was $40.24 billion, an increase of $2.49 billion from year-end 2013. Debt related to Machinery, Energy & Transportation increased $1.25 billion in the first half of 2014, primarily due to the issuance of $2.0 billion of long-term debt. On May 8, 2014, we issued $1.0 billion of 3.40% Senior Notes due 2024, $500 million of 4.30% Senior Notes due 2044, and $500 million of 4.75% Senior Notes due 2064. The Notes are unsecured obligations of Caterpillar and rank equally with all other unsecured senior indebtedness. This debt was issued for general corporate purposes and to repay certain indebtedness. Debt related to Financial Products increased $1.24 billion, reflecting increasing portfolio balances. We have three global credit facilities with a syndicate of banks totaling $10.00 billion (Credit Facility) available in the aggregate to both Caterpillar and Cat Financial for general liquidity purposes. Based on management's allocation decision, which can be 74



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revised from time to time, the portion of the Credit Facility available to Machinery, Energy & Transportation as of June 30, 2014 was $2.75 billion. Our three Global Credit Facilities are:

• The 364-day facility of $3.00 billion (of which $0.82 billion is available

to Machinery, Energy & Transportation) expires in September 2014. • The 2010 four-year facility, as amended in September 2013, of $2.60 billion (of which $0.72 billion is available to Machinery, Energy & Transportation) expires in September 2016. • The 2011 five-year facility, as amended in September 2013, of $4.40 billion (of which $1.21 billion is available to Machinery, Energy & Transportation) expires in September 2018. At June 30, 2014, Caterpillar's consolidated net worth was $24.90 billion, which was above the $9.00 billion required under the Credit Facility. The consolidated net worth is defined as the consolidated stockholders' equity including preferred stock but excluding the pension and other postretirement benefits balance within Accumulated other comprehensive income (loss). At June 30, 2014, Cat Financial's covenant interest coverage ratio was 2.13 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 June 30, 2014, Cat Financial's covenant leverage ratio was 7.83 to 1. This is below the maximum ratio of debt to net worth of 10 to 1, calculated (1) on a monthly basis as the average of the leverage ratios determined on the last day of each of the six preceding calendar months and (2) at each December 31, required by the Credit Facility.

In the event Caterpillar or Cat Financial does not meet one or more of their respective financial covenants under the Credit Facility in the future (and are unable to obtain a consent or waiver), the syndicate of banks may terminate the commitments allocated to the party that does not meet its covenants. Additionally, in such event, certain of Cat Financial's other lenders under other loan agreements where similar financial covenants or cross default provisions are applicable, may, at their election, choose to pursue remedies under those loan agreements, including accelerating the repayment of outstanding borrowings. At June 30, 2014, there were no borrowings under the Credit Facility.



Our total credit commitments and available credit as of June 30, 2014 were:

June 30, 2014 Machinery, Energy & Financial (Millions of dollars) Consolidated Transportation Products Credit lines available: Global credit facilities $ 10,000$ 2,750$ 7,250 Other external 4,910 234 4,676 Total credit lines available 14,910 2,984 11,926 Less: Commercial paper outstanding (4,348 ) - (4,348 ) Less: Utilized credit (2,213 ) (20 ) (2,193 ) Available credit $ 8,349$ 2,964$ 5,385 The other external consolidated credit lines with banks as of June 30, 2014 totaled $4.91 billion. These committed and uncommitted credit lines, which may be eligible for renewal at various future dates or have no specified expiration date, are used primarily by our subsidiaries for local funding requirements. Caterpillar or Cat Financial may guarantee subsidiary borrowings under these lines. In the event that Caterpillar or Cat Financial, or any of their debt securities, experiences a credit rating downgrade, it would likely result in an increase in our borrowing costs and make access to certain credit markets more difficult. In the event economic conditions deteriorate such that access to debt markets becomes unavailable, our Machinery, Energy & Transportation's operations would rely on cash flow from operations, use of existing cash balances, borrowings from Cat Financial and access to our Credit Facility. Our Financial Products' operations would rely on cash flow from its existing portfolio, existing cash balances, access to our Credit Facility and other credit line facilities of Cat Financial and potential borrowings from Caterpillar. In addition, we maintain a support agreement with Cat Financial, which requires Caterpillar to remain the sole owner of Cat Financial and may, 75



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under certain circumstances, require Caterpillar to make payments to Cat Financial should Cat Financial fail to maintain certain financial ratios.

Machinery, Energy & Transportation Net cash provided by operating activities was $3.94 billion in the first half of 2014, compared with $4.14 billion for the same period in 2013. The decrease was primarily due to changes in inventory. During the first half of 2014, inventory increased, while during the first half of 2013, inventory decreased significantly to align with demand levels. Partially offsetting the change in inventory was a slight increase in profit, which included higher accruals for short-term incentive compensation and restructuring costs during the first half of 2014. In addition, we experienced lower short-term incentive compensation payments in 2014, favorable changes in accounts payable (primarily due to increased material purchases) and receivables, as well as an increase in dividends from Cat Financial. Net cash used for investing activities in the first half of 2014 was $940 million, compared with $1.30 billion for the same period in 2013. The change was primarily due to lower capital expenditures during the first half of 2014 compared to the same period a year ago, partially offset by investments in held-to-maturity securities during the first half of 2014. Net cash used for financing activities in the first half of 2014 was $947 million, compared with $2.15 billion used in the first half of 2013. The change was primarily due to the issuance of long-term debt in May of 2014 and lower payments on debt during the first half of 2014 compared to the same period a year ago. Partially offsetting these items was a larger repurchase of Caterpillar common stock and higher dividend payments during the first half of 2014. The first quarter dividend payment for 2013 was accelerated into the fourth quarter of 2012. Our priorities for the use of cash are to maintain a strong financial position in support of our credit rating, provide capital to support growth, appropriately fund employee benefit plans, pay dividends and repurchase common stock. Strong financial position - A key measure of Machinery, Energy & Transportation's financial strength used by both management and our credit rating agencies is Machinery, Energy & Transportation's debt-to-capital ratio. Debt-to-capital is defined as short-term borrowings, long-term debt due within one year and long-term debt due after one year (debt) divided by the sum of debt and stockholders' equity. Debt also includes Machinery, Energy & Transportation borrowings from Financial Products. The debt-to-capital ratio for Machinery, Energy & Transportation was 32.5 percent at June 30, 2014, within our target range of 30 to 45 percent. The Machinery, Energy & Transportation's debt-to-capital ratio was 29.7 percent at December 31, 2013. The increase in the debt-to-capital ratio was primarily due to the debt issuance during the first half of 2014. Capital to support growth - Capital expenditures were $738 million during the first half of 2014, compared to $1.41 billion for the same period in 2013. We expect capital expenditures for 2014 will be about $2 billion. Appropriately funded employee benefit plans - We made $387 million of contributions to our pension plans during the first half of 2014. We currently anticipate full-year 2014 contributions of approximately $510 million, all of which are required. We made $280 million of contributions to our pension plans during the first half of 2013. Paying dividends - Dividends paid totaled $757 million in the first half of 2014, representing 60 cents per share. Each quarter, our Board of Directors reviews the company's dividend for the applicable quarter. The Board evaluates the financial condition of the company and considers the economic outlook, corporate cash flow, the company's liquidity needs, and the health and stability of global credit markets to determine whether to maintain or change the quarterly dividend. In June 2014, the Board announced a 17 percent increase in the dividend rate to 70 cents per share. Common stock repurchases - In February 2007, the Board of Directors authorized the repurchase of $7.5 billion of Caterpillar common stock (the 2007 Authorization), and in December 2011, the 2007 Authorization was extended through December 2015. During the first quarter of 2014, we repurchased approximately $1.74 billion of Caterpillar common stock, completing the 2007 Authorization. In January 2014, the Board approved a new authorization to repurchase up to $10 billion of Caterpillar common stock, which will expire on December 31, 2018. Caterpillar's basic shares outstanding as of June 30, 2014 were approximately 628 million. In July 2014, we entered into definitive agreements with SociÉtÉ GÉnÉrale to purchase shares of our common stock under accelerated stock repurchase transactions (July 2014 ASR Agreements). Pursuant to the terms of the July 2014 ASR Agreements, we have agreed to repurchase a total of $2.5 billion of our common stock from SociÉtÉ GÉnÉrale, with an immediate delivery of approximately 22 million shares. The final number of shares to be repurchased and the aggregate 76



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cost per share to Caterpillar will be based on Caterpillar's volume-weighted average stock price during the term of the transactions, which are expected to be completed in September 2014. Financial Products Financial Products' operating cash flow was $763 million in the first half of 2014, compared with $569 million for the same period a year ago. Net cash used for investing activities was $1.76 billion for the first half of 2014, compared with $1.48 billion for the same period in 2013. The change was primarily due to more net cash used for finance receivables due to increased growth in Cat Financial's portfolio. Net cash provided by financing activities was $877 million for the first half of 2014, compared with $883 million for the same period in 2013.



CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts. The more significant estimates include: residual values for leased assets, fair values for goodwill impairment tests, impairment of available-for-sale securities, warranty liability, stock-based compensation, reserves for product liability and insurance losses, postretirement benefits, post-sale discounts, credit losses and income taxes. We have incorporated many years of data into the determination of each of these estimates and we have not historically experienced significant adjustments. These assumptions are reviewed at least annually with the Audit Committee of the Board of Directors. Following are the methods and assumptions used in determining our estimates and an indication of the risks inherent in each. Residual values for leased assets - The residual values for Cat Financial's leased assets, which are based upon the estimated wholesale market value of leased equipment at the time of the expiration of the lease, are based on a careful analysis of historical wholesale market sales prices, projected forward on a level trend line without consideration for inflation or possible future pricing action. At the inception of the lease, residual values are derived from consideration of the following critical factors: market size and demand, any known significant market/product trends, total expected hours of usage, machine configuration, application, location, model changes, quantities and past re-marketing experience, third-party residual guarantees and contractual customer purchase options. Many of these factors are gathered in an application survey that is completed prior to quotation. The lease agreement also clearly defines applicable return conditions and remedies for non-compliance, to ensure that the leased equipment will be in good operating condition upon return. Model changes and updates, as well as market strength and product acceptance, are monitored and adjustments are made to residual values in accordance with the significance of any such changes. Remarketing sales staff works closely with customers and dealers to manage the sale of lease returns and the recovery of residual exposure.



During the term of the leases, residual amounts are monitored. If estimated market values reflect a non-temporary impairment due to economic factors, obsolescence or other adverse circumstances, the residuals are adjusted to the lower estimated values by a charge to earnings. For equipment on operating leases, the charge is recognized through depreciation expense. For finance leases, it is recognized through a reduction of finance revenue.

Fair values for goodwill impairment tests - We test goodwill for impairment annually, at the reporting unit level, and whenever events or circumstances make it likely that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell all or a portion of a reporting unit. We perform our annual goodwill impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. Goodwill is reviewed for impairment utilizing a qualitative assessment or a two-step process. We have an option to make a qualitative assessment of a reporting unit's goodwill for impairment. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the two-step process, the first step requires us to 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, there is an indication that an impairment may exist and the second step is required. In step two, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities.



If

the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment loss.

The impairment test process requires valuation of the respective reporting unit, which we primarily determine using an income approach based on a discounted five year forecasted cash flow with a year-five residual value. The residual value is computed using the constant growth method, which values the forecasted cash flows in perpetuity. The income approach is supported by a reconciliation of our calculated fair value for Caterpillar to the company's market capitalization. The assumptions about future 77



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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. The discount rate is a risk-adjusted weighted average cost of capital, which we believe approximates the rate from a market participant's perspective. The estimated fair value could be impacted by changes in market conditions, interest rates, growth rates, tax rates, costs, pricing and capital expenditures.

A prolonged economic downturn resulting in lower long-term growth rates and reduced long-term profitability may reduce the fair value of our reporting units. Industry specific events or circumstances that have a negative impact to the valuation assumptions may also reduce the fair value of our reporting units. Should such events occur and it becomes more likely than not that a reporting unit's fair value has fallen below its carrying value, we will perform an interim goodwill impairment test(s), in addition to the annual impairment test. Future impairment tests may result in a goodwill impairment, depending on the outcome of both step one and step two of the impairment review process. A goodwill impairment would be reported as a non-cash charge to earnings. Impairment of available-for-sale securities - Available-for-sale securities, primarily at Insurance Services, are reviewed at least quarterly to identify fair values below cost which may indicate that a security is impaired and should be written down to fair value. For debt securities, once a security's fair value is below cost we utilize data gathered by investment managers, external sources and internal research to monitor the performance of the security to determine whether an other-than-temporary impairment has occurred. These reviews, which include an analysis of whether it is more likely than not that we will be required to sell the security before its anticipated recovery, consist of both quantitative and qualitative analysis and require a degree of management judgment. Securities in a loss position are monitored and assessed at least quarterly based on severity and timing of loss and may be deemed other-than-temporarily impaired at any time. Once a security's fair value has been 20 percent or more below its original cost for six consecutive months, the security will be other-than-temporarily impaired unless there are sufficient facts and circumstances supporting otherwise. For equity securities in a loss position, determining whether a security is other-than-temporarily impaired requires an analysis of that security's historical sector return as well as the volatility of that return. This information is utilized to estimate a security's future fair value and to assess whether the security has the ability to recover to its original cost over a reasonable period of time. Both historical annualized sector returns and the volatility of those returns are considered over a two year period to arrive at these estimates. For both debt and equity securities, qualitative factors are also considered in determining whether a security is other-than-temporarily impaired. These include reviews of the following: significant changes in the regulatory, economic or technological environment of the investee, significant changes in the general market condition of either the geographic area or the industry in which the investee operates, and length of time and the extent to which the fair value has been less than cost. These qualitative factors are subjective and require a degree of management judgment. Warranty liability - At the time a sale is recognized, we record estimated future warranty costs. The warranty liability is determined by applying historical claim rate experience to the current field population and dealer inventory. Generally, historical claim rates are based on actual warranty experience for each product by machine model/engine size by customer or dealer location (inside or outside North America). Specific rates are developed for each product shipment month and are updated monthly based on actual warranty claim experience. Warranty costs may differ from those estimated if actual claim rates are higher or lower than our historical rates.



Stock-based compensation - We use a lattice-based option-pricing model to calculate the fair value of our stock options and SARs. The calculation of the fair value of the awards using the lattice-based option-pricing model is affected by our stock price on the date of grant as well as assumptions regarding the following:

• Volatility is a measure of the amount by which the stock price is expected

to fluctuate each year during the expected term of the award and is based on historical Caterpillar stock price movement and current implied volatilities from traded options on Caterpillar stock. The implied volatilities from traded options are impacted by changes in market



conditions. An increase in the volatility would result in an increase in

our expense.

• The expected term represents the period of time that awards granted are

expected to be outstanding and is an output of the lattice-based

option-pricing model. In determining the expected term of the award,

future exercise and forfeiture patterns are estimated from Caterpillar

employee historical exercise behavior. These patterns are also affected by

the vesting conditions of the award. Changes in the future exercise

behavior of employees or in the vesting period of the award could result

in a change in the expected term. An increase in the expected term would

result in an increase to our expense. 78



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• The weighted-average dividend yield is based on Caterpillar's historical

dividend yields. As holders of stock options and SARs do not receive

dividend payments, this could result in employees retaining the award for

a longer period of time if dividend yields decrease or exercising the

award sooner if dividend yields increase. A decrease in the dividend yield

would result in an increase in our expense.

• The risk-free interest rate is based on the U.S. Treasury yield curve in

effect at time of grant. As the risk-free interest rate increases, the

expected term increases, resulting in an increase in our expense. The fair value of our RSUs is determined by reducing the stock price on the date of grant by the present value of the estimated dividends to be paid during the vesting period. The estimated dividends are based on Caterpillar's dividend yield at the time of grant. A decrease in the dividend yield would result in an increase in our expense. Stock-based compensation expense recognized during the period is based on the value of the number of awards that are expected to vest. In determining the stock-based compensation expense to be recognized, a forfeiture rate is applied to the fair value of the award. This rate represents the number of awards that are expected to be forfeited prior to vesting and is based on Caterpillar employee historical behavior. Changes in the future behavior of employees could impact this rate. A decrease in this rate would result in an increase in our expense. Product liability and insurance loss reserve - We determine these reserves based upon reported claims in process of settlement and actuarial estimates for losses incurred but not reported. Loss reserves, including incurred but not reported reserves, are based on estimates and ultimate settlements may vary significantly from such estimates due to increased claims frequency or severity over historical levels.



Postretirement benefits - Primary actuarial assumptions were determined as follows:

• The U.S. expected long-term rate of return on plan assets is based on our

estimate of long-term passive returns for equities and fixed income

securities weighted by the allocation of our plan assets. Based on

historical performance, we increase the passive returns due to our active

management of the plan assets. A similar process is used to determine the

rate for our non-U.S. pension plans. This rate is impacted by changes in

general market conditions, but because it represents a long-term rate, it

is not significantly impacted by short-term market swings. Changes in our

allocation of plan assets would also impact this rate. For example, a

shift to more fixed income securities would lower the rate. A decrease in

the rate would increase our expense.

• The assumed discount rate is used to discount future benefit obligations

back to today's dollars. The U.S. discount rate is based on a benefit cash

flow-matching approach and represents the rate at which our benefit

obligations could effectively be settled as of our measurement date,

December 31. The benefit cash flow-matching approach involves analyzing

Caterpillar's projected cash flows against a high quality bond yield

curve, calculated using a wide population of corporate Aa bonds available

on the measurement date. The very highest and lowest yielding bonds (top

and bottom 10 percent) are excluded from the analysis. A similar approach

is used to determine the assumed discount rate 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.

• The expected rate of compensation increase is used to develop benefit

obligations using projected pay at retirement. It represents average long-term salary increases. This rate is influenced by our long-term compensation policies. An increase in the rate would increase our obligation and expense.



• The assumed health care trend rate represents the rate at which health

care costs are assumed to increase and is based on historical and expected

experience. Changes in our projections of future health care costs due to

general economic conditions and those specific to health care (e.g.,

technology driven cost changes) will impact this trend rate. An increase

in the trend rate would increase our obligation and expense.

The effects of actual results differing from our assumptions and the effects of changing assumptions are considered actuarial gains or losses. Actuarial gains or losses are recorded in Accumulated other comprehensive income (loss). When the unamortized actuarial gains or losses for an individual plan exceed 10 percent of the higher of the projected benefit obligation or 10 percent of market-related value of plans assets at the beginning of the year, the excess is amortized as a component of net periodic benefit cost using the straight-line method. The amortization period is generally the average remaining service period of active employees expected to receive benefits from the plan. For plans in which all or almost all of the plan's participants are inactive, actuarial gains or losses are amortized over the remaining life expectancy of the inactive participants. Post-sale discount reserve - We provide discounts to dealers through merchandising programs. We have numerous programs that are designed to promote the sale of our products. The most common dealer programs provide a discount when the dealer sells a product to a targeted end user. The amount of accrued post-sale discounts was $1.32 billion and $1.13 billion as of June 30, 79



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2014 and December 31, 2013, respectively. The reserve represents discounts that we expect to pay on previously sold units and is reviewed at least quarterly. The reserve is adjusted if discounts paid differ from those estimated. Historically, those adjustments have not been material.

Credit loss reserve - The allowance for credit losses is an estimate of the losses inherent in our finance receivable portfolio and includes consideration of accounts that have been individually identified as impaired, as well as pools of finance receivables where it is probable that certain receivables in the pool are impaired but the individual accounts cannot yet be identified. In identifying and measuring impairment, management takes into consideration past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of underlying collateral and current economic conditions. In estimating probable credit losses, we review accounts that are past due, non-performing, in bankruptcy or otherwise identified as at-risk for potential credit loss including accounts which have been modified. Accounts are identified as at-risk for potential credit loss using information available about the customer, such as financial statements, news reports and published credit ratings, as well as general information regarding industry trends and the economic environment in which our customers operate. The allowance for credit losses attributable to specific accounts is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, we estimate the current fair market value of the collateral less selling costs. We also consider credit enhancements such as additional collateral and contractual third-party guarantees. The allowance for credit losses attributable to the remaining accounts not yet individually identified as impaired is estimated utilizing probabilities of default and the estimated loss given default. In addition, qualitative factors not able to be fully captured in previous analysis including industry trends, macroeconomic factors and model imprecision are considered in the evaluation of the adequacy of the allowance for credit losses. These qualitative factors are subjective and require a degree of management judgment. While management believes it has exercised prudent judgment and applied reasonable assumptions, there can be no assurance that in the future, changes in economic conditions or other factors would not cause changes in the financial health of our customers. If the financial health of our customers deteriorates, the timing and level of payments received could be impacted and therefore, could result in a change to our estimated losses. Income taxes - We are subject to the income tax laws of the many jurisdictions in which we operate. These tax laws are complex, and the manner in which they apply to our facts is sometimes open to interpretation. In establishing the provision for income taxes, we must make judgments about the application of these inherently complex tax laws. Despite our belief that our tax return positions are consistent with applicable tax laws, we believe that taxing authorities could challenge certain positions. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. We record tax benefits for uncertain tax positions based upon management's evaluation of the information available at the reporting date. To be recognized in the financial statements, a tax benefit must be at least more likely than not of being sustained based on technical merits. The benefit for positions meeting the recognition threshold is measured as the largest benefit more likely than not of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Significant judgment is required in making these determinations and adjustments to unrecognized tax benefits may be necessary to reflect actual taxes payable upon settlement. Adjustments related to positions impacting the effective tax rate affect the provision for income taxes. Adjustments related to positions impacting the timing of deductions impact deferred tax assets and liabilities. Our income tax positions and analysis are based on currently enacted tax law. Future changes in tax law could significantly impact the provision for income taxes, the amount of taxes payable, and the deferred tax asset and liability balances. Deferred tax assets generally represent tax benefits for tax deductions or credits available in future tax returns. Certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, reversing temporary differences and available prudent and feasible tax planning strategies. Should a change in facts or circumstances lead to a change in judgment about the ultimate realizability of a deferred tax asset, we record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in the provision for income taxes. A provision for U.S. income taxes has not been recorded on undistributed profits of our non-U.S. subsidiaries that we have determined to be indefinitely reinvested outside the U.S. If management intentions or U.S. tax law changes in the future, there may be a significant negative impact on the provision for income taxes to record an incremental tax liability in the period the change occurs. A deferred tax asset is recognized only if we have definite plans to generate a U.S. tax benefit by repatriating earnings in the foreseeable future. 80



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GLOBAL WORKFORCE

Caterpillar worldwide full-time employment was 115,292 at the end of the second quarter of 2014 compared with 122,402 at the end of the second quarter of 2013, a decrease of 7,110 full-time employees. The flexible workforce increased 370 for a total decrease in the global workforce of 6,740. The decrease was primarily the result of restructuring programs.



OTHER MATTERS

Environmental and Legal Matters

The company is regulated by federal, state and international environmental laws governing our use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and other operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. We have made, and will continue to make, significant research and development and capital expenditures to comply with these emissions standards. We are engaged in remedial activities at a number of locations, often with other companies, pursuant to federal and state laws. When it is probable we will pay remedial costs at a site, and those costs can be reasonably estimated, the investigation, remediation, and operating and maintenance costs are accrued against our earnings. Costs are accrued based on consideration of currently available data and information with respect to each individual site, including available technologies, current applicable laws and regulations, and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. Where multiple potentially responsible parties are involved, we consider our proportionate share of the probable costs. In formulating the estimate of probable costs, we do not consider amounts expected to be recovered from insurance companies or others. We reassess these accrued amounts on a quarterly basis. The amount recorded for environmental remediation is not material and is included in Accrued expenses. There is no more than a remote chance that a material amount for remedial activities at any individual site, or at all the sites in the aggregate, will be required. On March 20, 2014, Brazil'sAdministrative Council for Economic Defense (CADE) published a Technical Opinion which named 18 companies and over 100 individuals as defendants, including two subsidiaries of Caterpillar Inc., MGE - Equipamentos e ServiÇos FerroviÁrios Ltda. (MGE) and Caterpillar Brasil Ltda. The publication of the Technical Opinion opened CADE's official administrative investigation into allegations that the defendants participated in anticompetitive bid activity for the construction and maintenance of metro and train networks in Brazil. While companies cannot be held criminally liable for anticompetitive conduct in Brazil, criminal charges have been brought against one current and one former employee of MGE involving the same conduct alleged by CADE. The Company has responded to all requests for information from the authorities. The Company is unable to predict the outcome or reasonably estimate the potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operation, financial position or liquidity. On February 19, 2014, Progress Rail Services Corporation (Progress Rail), a wholly-owned subsidiary of Caterpillar Inc., received information from the California Air Resources Board (CARB) Enforcement Division indicating it is contemplating an enforcement proceeding with potential monetary sanctions in excess of $100,000 in connection with a notice of violation received by Progress Rail on March 15, 2013 alleging violations of air emissions regulations applicable to compression ignition mobile cargo handling equipment operating at California ports or intermodal rail yards. Despite uncertainty regarding the applicability of these regulations, Progress Rail, in coordination with CARB, implemented certain corrective action measures. Progress Rail is cooperating with CARB to resolve this matter. The Company is unable to predict the outcome; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operation, financial position or liquidity. On October 24, 2013, Progress Rail received a grand jury subpoena from the U.S. District Court for the Central District of California. The subpoena requests documents and information from Progress Rail, United Industries Corporation, a wholly-owned subsidiary of Progress Rail, and Caterpillar Inc. relating to allegations that Progress Rail conducted improper or unnecessary railcar inspections and repairs and improperly disposed of parts, equipment, tools and other items. In connection with this subpoena, Progress Rail was informed by the U.S. Attorney for the Central District of California that it is a target of a criminal investigation into potential violations of environmental laws and alleged improper business practices. The Company is cooperating with the authorities. The Company is unable to predict the outcome or reasonably estimate the potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company's consolidated results of operation, financial position or liquidity. In addition, we are involved in other unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability (including claimed asbestos and welding fumes exposure), contracts, employment issues, environmental matters or intellectual property rights. The 81



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



Retirement Benefits

We recognized pension expense of $119 million and $232 million for the three and six months ended June 30, 2014, as compared to $179 million and $353 million for the three and six months ended June 30, 2013. The decrease in expense for the three and six months ended June 30, 2014 is primarily due to lower amortization of net actuarial losses primarily due to higher discount rates at the end of 2013 compared to 2012. Accounting guidance on retirement benefits requires companies to discount future benefit obligations back to today's dollars using a discount rate that is based on high-quality fixed income investments. A decrease in the discount rate increases the pension benefit obligation, while an increase in the discount rate decreases the pension benefit obligation. This increase or decrease in the pension benefit obligation is recognized in Accumulated other comprehensive income (loss) and subsequently amortized into earnings as an actuarial gain or loss. The guidance also requires companies to use an expected long-term rate of return on plan assets for computing current year pension expense. Differences between the actual and expected returns are also recognized in Accumulated other comprehensive income (loss) and subsequently amortized into earnings as actuarial gains and losses. As of June 30, 2014, total actuarial losses, recognized in Accumulated other comprehensive income (loss), related to pensions were $5.52 billion. The majority of the actuarial losses are due to changes in discount rates, losses from demographic assumptions over the past several years and plan asset losses. Other postretirement benefit expense was $60 million and $117 million for the three and six months ended June 30, 2014, as compared to $74 million and $143 million for the three and six months ended June 30, 2013. The decrease in expense for the three and six months ended June 30, 2014 is primarily due to lower amortization of net actuarial losses primarily due to higher discount rates at the end of 2013 compared to 2012. Actuarial losses that were recognized in Accumulated other comprehensive income (loss) for other postretirement benefit plans were $0.64 billion at June 30, 2014. These losses mainly reflect the impact of discount rates, changes in our health care trend assumption, and plan asset losses, partially offset by gains from lower than expected health care costs. Actuarial losses will be impacted in future periods by actual asset returns, actual health care inflation, discount rate changes, actual demographic experience and other factors that impact these expenses. These losses, reported in Accumulated other comprehensive income (loss), will generally be amortized as a component of net periodic benefit cost on a straight-line basis over the average remaining service period of active employees expected to receive benefits from the plan. For plans in which all or almost all of the plan's participants are inactive, actuarial losses are amortized using the straight-line method over the remaining life expectancy of the inactive participants. At the end of 2013, the average remaining service period of active employees or life expectancy for inactive participants was 10 years for our U.S. pension plans, 13 years for non-U.S. pension plans and 9 years for other postretirement benefit plans. We expect our amortization of net actuarial losses to decrease approximately $260 million in 2014 as compared to 2013, primarily due to an increase in discount rates during 2013 and plan asset gains during 2013. We expect our total pension and other postretirement benefits expense to decrease approximately $290 million in 2014 which is primarily due to a decrease in amortization of net actuarial losses. We made $108 million and $387 million of contributions to our pension plans during the three and six months ended June 30, 2014, respectively. We currently anticipate full-year 2014 contributions of approximately $510 million, all of which are required. We made $138 million and $280 million of contributions to our pension plans during the three and six months ended June 30, 2013, respectively.



Order Backlog

The dollar amount of backlog believed to be firm was approximately $19.3 billion at June 30, 2014 and March 31, 2014. Decreases in Resource Industries and Construction Industries were offset by increases in Energy & Transportation. The decline in Resource Industries reflects continuing weakness in mining and the decline in Construction Industries is impacted by seasonality and weakness in developing markets. The dollar amount of backlog believed to be firm was approximately $18.0 billion at December 31, 2013. Of the total backlog, approximately $3.2 billion at June 30, 2014 and March 31, 2014, and $3.0 billion at December 31, 2013 was not expected to be filled in the following twelve months. 82



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NON-GAAP FINANCIAL MEASURES

The following definitions are provided for the non-GAAP financial measures used in this report. These non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP and therefore are unlikely to be comparable to the calculation of similar measures for other companies. Management does not intend these items to be considered in isolation or substituted for the related GAAP measures. We anticipate incurring significant restructuring costs in 2014. We believe it is important to separately quantify the profit-per-share impact of restructuring costs in order for our results for the three and six months ended June 30, 2014 to be meaningful to our readers. Reconciliation of profit per share excluding restructuring costs to the most directly comparable GAAP measure, profit per share - diluted is as follows: Three Months Ended Six Months Ended June 30, 2014 June 30, 2014 Profit per share - diluted $ 1.57 $ 3.00 Per share restructuring costs $ 0.12 $ 0.30 Profit per share excluding restructuring costs $ 1.69 $ 3.30



Supplemental Consolidating Data

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

Consolidated - Caterpillar Inc. and its subsidiaries.

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



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

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

Pages 84 to 91 reconcile Machinery, Energy & Transportation with Financial Products on the equity basis to Caterpillar Inc. consolidated financial information.

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Caterpillar Inc. Supplemental Data for Results of Operations For the Three Months Ended June 30, 2014 (Unaudited) (Millions of dollars)



Supplemental Consolidating Data

Machinery, Energy & Financial Consolidating Consolidated Transportation 1 Products Adjustments Sales and revenues: Sales of Machinery, Energy & Transportation $ 13,391 $ 13,391 $ - $ - Revenues of Financial Products 759 - 851 (92 ) 2 Total sales and revenues 14,150 13,391 851 (92 ) Operating costs: Cost of goods sold 10,197 10,197 - - Selling, general and administrative expenses 1,437 1,284 159 (6 ) 3 Research and development expenses 516 516 - - Interest expense of Financial Products 153 - 155 (2 ) 4 Other operating (income) expenses 372 77 305 (10 ) 3 Total operating costs 12,675 12,074 619 (18 ) Operating profit 1,475 1,317 232 (74 ) Interest expense excluding Financial Products 120 131 - (11 ) 4 Other income (expense) 65 (6 ) 8 63 5 Consolidated profit before taxes 1,420 1,180 240 - Provision (benefit) for income taxes 419 349 70 - Profit of consolidated companies 1,001 831 170 - Equity in profit (loss) of unconsolidated affiliated companies 1 1 - - Equity in profit of Financial Products' subsidiaries - 168 - (168 ) 6 Profit of consolidated and affiliated companies 1,002 1,000 170 (168 ) Less: Profit (loss) attributable to noncontrolling interests 3 1 2 - Profit 7 $ 999 $ 999 $ 168$ (168 )



1 Represents Caterpillar Inc. and its subsidiaries with Financial Products

accounted for on the equity basis.

2 Elimination of Financial Products' revenues earned from Machinery, Energy &

Transportation.

3 Elimination of net expenses recorded by Machinery, Energy & Transportation

paid to Financial Products.

4 Elimination of interest expense recorded between Financial Products and

Machinery, Energy & Transportation.

5 Elimination of discount recorded by Machinery, Energy & Transportation on

receivables sold to Financial Products and of interest earned between

Machinery, Energy & Transportation and Financial Products.

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

7 Profit attributable to common stockholders.

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Caterpillar Inc. Supplemental Data for Results of Operations For the Six Months Ended June 30, 2014 (Unaudited) (Millions of dollars)



Supplemental Consolidating Data

Machinery, Energy & Financial Consolidating Consolidated Transportation 1 Products Adjustments Sales and revenues: Sales of Machinery, Energy & Transportation $ 25,884 $ 25,884 $ - $ - Revenues of Financial Products 1,507 - 1,682 (175 ) 2 Total sales and revenues 27,391 25,884 1,682 (175 ) Operating costs: Cost of goods sold 19,634 19,634 - - Selling, general and administrative expenses 2,729 2,439 305 (15 ) 3 Research and development expenses 1,024 1,024 - - Interest expense of Financial Products 313 - 317 (4 ) 4 Other operating (income) expenses 818 231 603 (16 ) 3 Total operating costs 24,518 23,328 1,225 (35 ) Operating profit 2,873 2,556 457 (140 ) Interest expense excluding Financial Products 230 251 - (21 ) 4 Other income (expense) 119 (23 ) 23 119 5 Consolidated profit before taxes 2,762 2,282 480 - Provision (benefit) for income taxes 837 699 138 - Profit of consolidated companies 1,925 1,583 342 - Equity in profit (loss) of unconsolidated affiliated companies 2 2 - - Equity in profit of Financial Products' subsidiaries - 337 - (337 ) 6 Profit of consolidated and affiliated companies 1,927 1,922 342 (337 ) Less: Profit (loss) attributable to noncontrolling interests 6 1 5 - Profit 7 $ 1,921 $ 1,921 $ 337$ (337 )



1 Represents Caterpillar Inc. and its subsidiaries with Financial Products

accounted for on the equity basis.

2 Elimination of Financial Products' revenues earned from Machinery, Energy &

Transportation.

3 Elimination of net expenses recorded by Machinery, Energy & Transportation

paid to Financial Products.

4 Elimination of interest expense recorded between Financial Products and

Machinery, Energy & Transportation.

5 Elimination of discount recorded by Machinery, Energy & Transportation on

receivables sold to Financial Products and of interest earned between

Machinery, Energy & Transportation and Financial Products.

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

7 Profit attributable to common stockholders.

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Caterpillar Inc. Supplemental Data for Results of Operations For the Three Months Ended June 30, 2013 (Unaudited) (Millions of dollars)



Supplemental Consolidating Data

Machinery, Energy & Financial Consolidating Consolidated Transportation 1 Products Adjustments Sales and revenues: Sales of Machinery, Energy & $ 13,886 $ 13,886 $ - $ -



Transportation

Revenues of Financial Products 735 - 823 (88 ) 2 Total sales and revenues 14,621 13,886 823 (88 ) Operating costs: Cost of goods sold 10,773 10,773 - - Selling, general and administrative 1,421 1,278 150 expenses (7 ) 3 Research and development expenses 548 548 - - Interest expense of Financial Products 185 - 187 (2 ) 4 Other operating (income) expenses 137 (100 ) 245 (8 ) 3 Total operating costs 13,064 12,499 582 (17 ) Operating profit 1,557 1,387 241 (71 ) Interest expense excluding Financial 120 130 - Products (10 ) 4 Other income (expense) (84 ) (134 ) (11 ) 61 5 Consolidated profit before taxes 1,353 1,123 230 - Provision (benefit) for income taxes 387 317 70 - Profit of consolidated companies 966 806 160 - Equity in profit (loss) of (1 ) (1 ) - - unconsolidated affiliated companies Equity in profit of Financial Products' - 157 - subsidiaries (157 ) 6 Profit of consolidated and affiliated 965 962 160 (157 )



companies

Less: Profit (loss) attributable to 5 2 3 - noncontrolling interests Profit 7 $ 960 $ 960 $ 157$ (157 )



1 Represents Caterpillar Inc. and its subsidiaries with Financial Products

accounted for on the equity basis.

2 Elimination of Financial Products' revenues earned from Machinery, Energy &

Transportation.

3 Elimination of net expenses recorded by Machinery, Energy & Transportation

paid to Financial Products.

4 Elimination of interest expense recorded between Financial Products and

Machinery, Energy & Transportation.

5 Elimination of discount recorded by Machinery, Energy & Transportation on

receivables sold to Financial Products and of interest earned between

Machinery, Energy & Transportation and Financial Products.

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

7 Profit attributable to common stockholders.

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Caterpillar Inc. Supplemental Data for Results of Operations For the Six Months Ended June 30, 2013 (Unaudited) (Millions of dollars)



Supplemental Consolidating Data

Machinery, Energy & Financial Consolidating Consolidated Transportation 1 Products Adjustments Sales and revenues: Sales of Machinery, Energy & $ 26,370 $ 26,370 $ - $ -



Transportation

Revenues of Financial Products 1,461 - 1,637 (176 ) 2 Total sales and revenues 27,831 26,370 1,637 (176 ) Operating costs: Cost of goods sold 20,412 20,412 - - Selling, general and administrative 2,811 2,553 279 expenses (21 ) 3 Research and development expenses 1,110 1,110 - - Interest expense of Financial Products 374 - 378 (4 ) 4 Other operating (income) expenses 349 (95 ) 457 (13 ) 3 Total operating costs 25,056 23,980 1,114 (38 ) Operating profit 2,775 2,390 523 (138 ) Interest expense excluding Financial 240 261 - Products (21 ) 4 Other income (expense) (55 ) (169 ) (3 ) 117 5 Consolidated profit before taxes 2,480 1,960 520 - Provision (benefit) for income taxes 633 485 148 - Profit of consolidated companies 1,847 1,475 372 - Equity in profit (loss) of - - - - unconsolidated affiliated companies Equity in profit of Financial Products' - 366 - subsidiaries (366 ) 6 Profit of consolidated and affiliated 1,847 1,841 372 (366 )



companies

Less: Profit (loss) attributable to 7 1 6 - noncontrolling interests Profit 7 $ 1,840 $ 1,840 $ 366$ (366 )



1 Represents Caterpillar Inc. and its subsidiaries with Financial Products

accounted for on the equity basis.

2 Elimination of Financial Products' revenues earned from Machinery, Energy &

Transportation.

3 Elimination of net expenses recorded by Machinery, Energy & Transportation

paid to Financial Products.

4 Elimination of interest expense recorded between Financial Products and

Machinery, Energy & Transportation.

5 Elimination of discount recorded by Machinery, Energy & Transportation on

receivables sold to Financial Products and of interest earned between

Machinery, Energy & Transportation and Financial Products.

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

7 Profit attributable to common stockholders.

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Caterpillar Inc. Supplemental Data for Financial Position At June 30, 2014 (Unaudited) (Millions of dollars)



Supplemental Consolidating Data

Machinery, Energy & Financial Consolidating Consolidated Transportation 1 Products Adjustments Assets Current assets: Cash and short-term investments $ 7,927 $ 6,615 $ 1,312 $ - Receivables - trade and other 8,057 4,495 357 3,205 2,3 Receivables - finance 9,467 - 13,884 (4,417 ) 3 Deferred and refundable income taxes 1,463 1,410 53 - Prepaid expenses and other current assets 1,307 830 490 (13 ) 4 Inventories 13,055 13,055 - - Total current assets 41,276 26,405 16,096 (1,225 ) Property, plant and equipment - net 16,690 12,578 4,112 - Long-term receivables - trade and other 1,548 212 277 1,059 2,3 Long-term receivables - finance 15,118 - 16,210 (1,092 ) 3 Investments in unconsolidated affiliated companies 259 259 - - Investments in Financial Products subsidiaries - 4,934 - (4,934 ) 5 Noncurrent deferred and refundable income taxes 737 1,119 93 (475 ) 6 Intangible assets 3,398 3,391 7 - Goodwill 6,969 6,952 17 - Other assets 1,832 370 1,462 - Total assets $ 87,827$ 56,220$ 38,274$ (6,667 ) Liabilities Current liabilities: Short-term borrowings $ 5,554 $ 20 $ 6,658$ (1,124 ) 7 Accounts payable 6,860 6,759 190 (89 ) 8 Accrued expenses 3,473 3,212 274 (13 ) 9 Accrued wages, salaries and employee benefits 1,910 1,880 30 - Customer advances 2,344 2,344 - - Dividends payable 439 439 - - Other current liabilities 1,779 1,197 593 (11 ) 6 Long-term debt due within one year 7,382 509 6,873 - Total current liabilities 29,741 16,360 14,618 (1,237 ) Long-term debt due after one year 27,307 9,528 17,812 (33 ) 7 Liability for postemployment benefits 6,597 6,597 - - Other liabilities 3,259 2,812 910 (463 ) 6 Total liabilities 66,904 35,297 33,340 (1,733 ) Commitments and contingencies Stockholders' equity Common stock 4,890 4,890 906 (906 ) 5 Treasury stock (13,312 ) (13,312 ) - - Profit employed in the business 32,961 32,961 3,673 (3,673 ) 5 Accumulated other comprehensive income (loss) (3,683 ) (3,683 ) 228 (228 ) 5 Noncontrolling interests 67 67 127 (127 ) 5 Total stockholders' equity 20,923 20,923 4,934 (4,934 ) Total liabilities and stockholders' equity $ 87,827$ 56,220$ 38,274$ (6,667 )



1 Represents Caterpillar Inc. and its subsidiaries with Financial Products

accounted for on the equity basis.

2 Elimination of receivables between Machinery, Energy & Transportation and

Financial Products.

3 Reclassification of Machinery, Energy & Transportation's trade receivables

purchased by Financial Products and Financial Products' wholesale inventory

receivables.

4 Elimination of Machinery, Energy & Transportation's insurance premiums that

are prepaid to Financial Products.

5 Elimination of Financial Products' equity which is accounted for by Machinery,

Energy & Transportation on the equity basis. 6 Reclassification reflecting required netting of deferred tax assets / liabilities by taxing jurisdiction.



7 Elimination of debt between Machinery, Energy & Transportation and Financial

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



9 Elimination of prepaid insurance in Financial Products' accrued expenses.

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Caterpillar Inc. Supplemental Data for Financial Position At December 31, 2013 (Unaudited) (Millions of dollars)



Supplemental Consolidating Data

Machinery, Energy & Financial Consolidating Consolidated Transportation 1 Products Adjustments Assets Current assets: Cash and short-term investments $ 6,081 $ 4,597 $ 1,484 $ - Receivables - trade and other 8,413 5,188 386 2,839 2,3 Receivables - finance 8,763 - 12,886 (4,123 ) 3 Deferred and refundable income taxes 1,553 1,511 42 - Prepaid expenses and other current assets 900 417 496 (13 ) 4 Inventories 12,625 12,625 - - Total current assets 38,335 24,338 15,294 (1,297 ) Property, plant and equipment - net 17,075 13,078 3,997 - Long-term receivables - trade and other 1,397 224 292 881 2,3 Long-term receivables - finance 14,926 - 15,840 (914 ) 3 Investments in unconsolidated affiliated companies 272 272 - - Investments in Financial Products subsidiaries - 4,798 - (4,798 ) 5 Noncurrent deferred and refundable income taxes 594 1,027 92 (525 ) 6 Intangible assets 3,596 3,589 7 - Goodwill 6,956 6,939 17 - Other assets 1,745 439 1,306 - Total assets $ 84,896$ 54,704$ 36,845$ (6,653 ) Liabilities Current liabilities: Short-term borrowings $ 3,679 $ 16 $ 4,781$ (1,118 ) 7 Accounts payable 6,560 6,516 209 (165 ) 8 Accrued expenses 3,493 3,165 341 (13 ) 9 Accrued wages, salaries and employee benefits 1,622 1,589 33 - Customer advances 2,360 2,360 - - Dividends payable 382 382 - - Other current liabilities 1,849 1,425 432 (8 ) 6 Long-term debt due within one year 7,352 760 6,592 - Total current liabilities 27,297 16,213 12,388 (1,304 ) Long-term debt due after one year 26,719 8,033 18,720 (34 ) 7 Liability for postemployment benefits 6,973 6,973 - - Other liabilities 3,029 2,607 939 (517 ) 6 Total liabilities 64,018 33,826 32,047 (1,855 ) Commitments and contingencies Stockholders' equity Common stock 4,709 4,709 906 (906 ) 5 Treasury stock (11,854 ) (11,854 ) - - Profit employed in the business 31,854 31,854 3,586 (3,586 ) 5 Accumulated other comprehensive income (loss) (3,898 ) (3,898 ) 183 (183 ) 5 Noncontrolling interests 67 67 123 (123 ) 5 Total stockholders' equity 20,878 20,878 4,798 (4,798 ) Total liabilities and stockholders' equity $ 84,896$ 54,704$ 36,845$ (6,653 ) 1 Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.



2 Elimination of receivables between Machinery, Energy & Transportation and

Financial Products.

3 Reclassification of Machinery, Energy & Transportation's trade receivables

purchased by Financial Products and Financial Products' wholesale inventory

receivables.

4 Elimination of Machinery, Energy & Transportation's insurance premiums that

are prepaid to Financial Products.

5 Elimination of Financial Products' equity which is accounted for by Machinery,

Energy & Transportation on the equity basis. 6 Reclassification reflecting required netting of deferred tax assets / liabilities by taxing jurisdiction.



7 Elimination of debt between Machinery, Energy & Transportation and Financial

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



9 Elimination of prepaid insurance in Financial Products' accrued expenses.

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Caterpillar Inc. Supplemental Data for Cash Flow For the Six Months Ended June 30, 2014 (Unaudited) (Millions of dollars)



Supplemental Consolidating Data

Machinery, Energy & Financial Consolidating Consolidated Transportation 1 Products Adjustments Cash flow from operating activities: Profit of consolidated and affiliated companies $ 1,927 $ 1,922 $ 342$ (337 ) 2 Adjustments for non-cash items: Depreciation and amortization 1,570 1,122 448 - Undistributed profit of Financial Products - (87 ) - 87 3 Other 240 199 (60 ) 101 4 Changes in assets and liabilities, net of acquisitions and divestitures: Receivables - trade and other 138 594 35 (491 ) 4, 5 Inventories (439 ) (431 ) - (8 ) 4 Accounts payable 551 544 (69 ) 76 4 Accrued expenses 7 81 (74 ) - Accrued wages, salaries and employee benefits 283 286 (3 ) - Customer advances (14 ) (14 ) - - Other assets - net (105 ) (40 ) (15 ) (50 ) 4 Other liabilities - net (24 ) (234 ) 159 51 4 Net cash provided by (used for) operating activities 4,134 3,942 763 (571 ) Cash flow from investing activities: Capital expenditures - excluding equipment leased to others (710 ) (707 ) (3 ) - Expenditures for equipment leased to others (825 ) (31 ) (828 ) 34 4 Proceeds from disposals of leased assets and property, plant and equipment 442 48 398 (4 ) 4 Additions to finance receivables (5,760 ) - (7,223 ) 1,463 5, 8 Collections of finance receivables 4,719 - 5,994 (1,275 ) 5 Net intercompany purchased receivables - - (109 ) 109 5 Proceeds from sale of finance receivables 104 - 107 (3 ) 5 Net intercompany borrowings - - 1 (1 ) 6 Investments and acquisitions (net of cash acquired) (15 ) (15 ) - - Proceeds from sale of businesses and investments (net of cash sold) 139 142 - (3 ) 8 Proceeds from sale of securities 222 12 210 - Investments in securities (673 ) (417 ) (256 ) - Other - net (25 ) 28 (53 ) - Net cash provided by (used for) investing activities (2,382 ) (940 ) (1,762 ) 320 Cash flow from financing activities: Dividends paid (757 ) (757 ) (250 ) 250 7 Distribution to noncontrolling interests (7 ) (7 ) - - Contribution from noncontrolling interests 2 2 - - Common stock issued, including treasury shares reissued 194 194 - - Treasury shares purchased (1,738 ) (1,738 ) - - Excess tax benefit from stock-based compensation 131 131 - - Net intercompany borrowings - (1 ) - 1 6 Proceeds from debt issued (original maturities greater than three months) 6,951 1,990 4,961 - Payments on debt (original maturities greater than three months) (6,344 ) (770 ) (5,574 ) - Short-term borrowings - net (original maturities three months or less) 1,749 9 1,740 - Net cash provided by (used for) financing activities 181 (947 ) 877 251 Effect of exchange rate changes on cash (87 ) (37 ) (50 ) - Increase (decrease) in cash and short-term investments 1,846 2,018 (172 ) - Cash and short-term investments at beginning of period 6,081 4,597 1,484 - Cash and short-term investments at end of period $ 7,927 $ 6,615 $ 1,312 $ -



1 Represents Caterpillar Inc. and its subsidiaries with Financial Products

accounted for on the equity basis.

2 Elimination of Financial Products' profit after tax due to equity method of

accounting.

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

Financial Products.

4 Elimination of non-cash adjustments and changes in assets and liabilities

related to consolidated reporting.

5 Reclassification of Financial Products' cash flow activity from investing to

operating for receivables that arose from the sale of inventory. 6 Elimination of net proceeds and payments to/from Machinery, Energy & Transportation and Financial Products. 7 Elimination of dividend from Financial Products to Machinery, Energy & Transportation.



8 Elimination of proceeds received from Financial Products related to Machinery,

Energy & Transportation's sale of portions of the Bucyrus distribution

business to Cat dealers.

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Caterpillar Inc. Supplemental Data for Cash Flow For the Six Months Ended June 30, 2013 (Unaudited) (Millions of dollars)



Supplemental Consolidating Data

Machinery, Energy & Financial Consolidating Consolidated Transportation 1 Products Adjustments Cash flow from operating activities: Profit of consolidated and affiliated companies $ 1,847 $ 1,841 $ 372$ (366 ) 2 Adjustments for non-cash items: Depreciation and amortization 1,484 1,104 380 - Undistributed profit of Financial Products - (266 ) - 266 3 Other 236 140 (41 ) 137 4 Changes in assets and liabilities, net of acquisitions and divestitures: Receivables - trade and other 231 435 5 (209 ) 4, 5 Inventories 1,364 1,368 - (4 ) 4 Accounts payable 305 287 (44 ) 62 4 Accrued expenses (129 ) (47 ) (82 ) - Accrued wages, salaries and employee benefits (580 ) (569 ) (11 ) - Customer advances (95 ) (95 ) - - Other assets - net (100 ) (71 ) (2 ) (27 ) 4 Other liabilities - net 30 11 (8 ) 27 4 Net cash provided by (used for) operating activities 4,593 4,138 569 (114 ) Cash flow from investing activities: Capital expenditures - excluding equipment leased to others (1,387 ) (1,379 ) (8 ) - Expenditures for equipment leased to others (810 ) (34 ) (811 ) 35 4 Proceeds from disposals of leased assets and property, plant and equipment 358 47 324 (13 ) 4 Additions to finance receivables (5,544 ) - (6,917 ) 1,373 5, 8 Collections of finance receivables 4,548 - 5,966 (1,418 ) 5 Net intercompany purchased receivables - - (63 ) 63 5 Proceeds from sale of finance receivables 89 - 90 (1 ) 5 Net intercompany borrowings - - 35 (35 ) 6 Investments and acquisitions (net of cash acquired) (26 ) (26 ) - - Proceeds from sale of businesses and investments (net of cash sold) 100 125 - (25 ) 8 Proceeds from sale of securities 207 14 193 - Investments in securities (267 ) (11 ) (256 ) - Other - net (68 ) (38 ) (30 ) - Net cash provided by (used for) investing activities (2,800 ) (1,302 ) (1,477 ) (21 ) Cash flow from financing activities: Dividends paid (342 ) (342 ) (100 ) 100 7 Distribution to noncontrolling interests (8 ) (8 ) - - Common stock issued, including treasury shares reissued 56 56 - - Treasury shares purchased (1,000 ) (1,000 ) - - Excess tax benefit from stock-based compensation 62 62 - - Net intercompany borrowings - (35 ) - 35 6 Proceeds from debt issued (original maturities greater than three months) 5,186 119 5,067 - Payments on debt (original maturities greater than three months) (6,303 ) (1,003 ) (5,300 ) - Short-term borrowings - net (original maturities three months or less) 1,217 1 1,216 - Net cash provided by (used for) financing activities (1,132 ) (2,150 ) 883 135 Effect of exchange rate changes on cash (41 ) (18 ) (23 ) - Increase (decrease) in cash and short-term investments 620 668 (48 ) - Cash and short-term investments at beginning of period 5,490 3,306 2,184 - Cash and short-term investments at end of period $ 6,110 $ 3,974 $ 2,136 $ -



1 Represents Caterpillar Inc. and its subsidiaries with Financial Products

accounted for on the equity basis.

2 Elimination of Financial Products' profit after tax due to equity method of

accounting.

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

Financial Products.

4 Elimination of non-cash adjustments and changes in assets and liabilities

related to consolidated reporting.

5 Reclassification of Financial Products' cash flow activity from investing to

operating for receivables that arose from the sale of inventory. 6 Elimination of net proceeds and payments to/from Machinery, Energy & Transportation and Financial Products. 7 Elimination of dividend from Financial Products to Machinery, Energy & Transportation.



8 Elimination of proceeds received from Financial Products related to Machinery,

Energy & Transportation's sale of portions of the Bucyrus distribution business to Cat dealers.



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Forward-looking Statements

Certain statements in this Form 10-Q relate to future events and expectations and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believe," "estimate," "will be," "will," "would," "expect," "anticipate," "plan," "project," "intend," "could," "should" or other similar words or expressions often identify forward-looking statements. All statements other than statements of historical fact are forward-looking statements, including, without limitation, statements regarding our outlook, projections, forecasts or trend descriptions. These statements do not guarantee future performance, and we do not undertake to update our forward-looking statements. Caterpillar's actual results may differ materially from those described or implied in our forward-looking statements based on a number of factors, including, but not limited to: (i) global economic conditions and economic conditions in the industries we serve; (ii) government monetary or fiscal policies and infrastructure spending; (iii) commodity price changes, component price increases, fluctuations in demand for our products or significant shortages of component products; (iv) disruptions or volatility in global financial markets limiting our sources of liquidity or the liquidity of our customers, dealers and suppliers; (v) political and economic risks, commercial instability and events beyond our control in the countries in which we operate; (vi) failure to maintain our credit ratings and potential resulting increases to our cost of borrowing and adverse effects on our cost of funds, liquidity, competitive position and access to capital markets; (vii) our Financial Products segment's risks associated with the financial services industry; (viii) changes in interest rates or market liquidity conditions; (ix) an increase in delinquencies, repossessions or net losses of Cat Financial's customers; (x) new regulations or changes in financial services regulations; (xi) a failure to realize, or a delay in realizing, all of the anticipated benefits of our acquisitions, joint ventures or divestitures; (xii) international trade policies and their impact on demand for our products and our competitive position; (xiii) our ability to develop, produce and market quality products that meet our customers' needs; (xiv) the impact of the highly competitive environment in which we operate on our sales and pricing; (xv) failure to realize all of the anticipated benefits from initiatives to increase our productivity, efficiency and cash flow and to reduce costs; (xvi) additional restructuring costs or a failure to realize anticipated savings or benefits from past or future cost reduction actions; (xvii) inventory management decisions and sourcing practices of our dealers and our OEM customers; (xviii) compliance with environmental laws and regulation; (xix) alleged or actual violations of trade or anti-corruption laws and regulations; (xx) additional tax expense or exposure; (xxi) currency fluctuations; (xxii) our or Cat Financial's compliance with financial covenants; (xxiii) increased pension plan funding obligations; (xxiv) union disputes or other employee relations issues; (xxv) significant legal proceedings, claims, lawsuits or investigations; (xxvi) compliance requirements imposed if additional carbon emissions legislation and/or regulations are adopted; (xxvii) changes in accounting standards; (xxviii) failure or breach of IT security; (xxix) adverse effects of unexpected events including natural disasters; and (xxx) other factors described in more detail under "Item 1A. Risk Factors" in our Form 10-K filed with the SEC on February 18, 2014 for the year ended December 31, 2013, as well as those identified in this report under Part II. Item 1A.


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