Caterpillar Reports Record Sales and Revenues and Profit for 2012; Inventory Reduced $2 Billion in the Fourth Quarter

PEORIA, Ill., Jan. 28, 2013 /PRNewswire/ -- Despite economic and political uncertainty in the United States, continued economic turmoil in much of Europe and slower growth in China, Caterpillar Inc. (NYSE: CAT) today announced record 2012 sales and revenues of $65.875 billion, an increase of 10 percent from $60.138 billion in 2011. Profit per share of $8.48 was also an all-time record, including the impact of the previously announced goodwill impairment charge of $0.87 per share related to Siwei. The 2012 profit per share of $8.48 was up 15 percent from $7.40 in 2011. Profit was $5.681 billion, an increase of 15 percent from $4.928 billion in 2011.

Fourth-quarter 2012 sales and revenues were $16.075 billion, down $1.168 billion from $17.243 billion in the fourth quarter of 2011. The impact of changes in dealer new machine inventories lowered sales by about $1.4 billion as dealers reduced inventories about $600 million in the fourth quarter of 2012, compared with an increase of about $800 million in the fourth quarter of 2011.

Fourth-quarter 2012 profit was $697 million compared with $1.547 billion in the fourth quarter of 2011. Profit was $1.04 per share in the fourth quarter of 2012 compared with profit per share of $2.32 in the fourth quarter of 2011. Fourth-quarter 2012 profit was negatively impacted by the previously announced goodwill impairment charge of $580 million, or $0.87 per share. Lower sales and revenues and the cost impact from sharply lower production and the $2 billion decline in Caterpillar inventory also had a negative impact on fourth-quarter profit. Those impacts were partially offset by a $300 million positive impact related to the settlement of prior-year tax returns.

"From an operational standpoint, 2012 was a very successful year with record sales and profit in a tough economic climate. Considering the weak economy in the United States, along with much of Europe in recession and China slowing, we had a solid year. Our incremental operating profit pull through was very good, we made progress adjusting inventory levels, and our quality and safety indicators continued to improve," said Caterpillar Chairman and Chief Executive Officer Doug Oberhelman.

"I'm extremely pleased with our performance on reducing inventory $2 billion in the fourth quarter. As the world economy began to soften at mid year, we increased our focus on reducing inventory. Cat dealers also worked to lower their inventories, and, as a result, reduced their order rates during the second half of 2012. The result was a substantial reduction in our production levels and inventory. The reductions had a significantly negative impact on fourth-quarter sales and profit. The $2 billion inventory reduction in the fourth quarter was a remarkable effort, but we're not done. Reduced production levels are likely to continue at least through the first quarter of 2013 until inventories and dealer order rates move back in line with end-user demand," Oberhelman added.

2013 Outlook
The outlook for 2013 is sales and revenues in a range of $60 to $68 billion and profit per share of $7.00 to $9.00.

"The range of our 2013 outlook reflects the level of uncertainty we see in the world today. We're encouraged by recent improvements in economic indicators, but remain cautious. While we expect some improvement in the U.S. economy, growth is expected to be relatively weak. We believe China's economy will continue to improve, but not to the growth rates of 2010 and 2011. We also remain concerned about Europe and expect economies in that region will continue to struggle in 2013," said Oberhelman.

"If the recent improvement in economic indicators continues, 2013 could be another record year for Caterpillar. We expect the first half of 2013 will be weaker than the first half of 2012, with better growth in the second half. However, if, like the last two years, growth and confidence decline in the second half, 2013 could be a tough year. Either way, as we demonstrated with inventory reductions in the fourth quarter, our team is prepared to execute and deliver," Oberhelman added.

Notes:

• Glossary of terms is included on pages 18-19; first occurrence of terms shown in bold italics.
• Information on non-GAAP financial measures is included on page 20.

For more than 85 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent. With 2012 sales and revenues of $65.875 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company also is a leading services provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services and Progress Rail Services. More information is available at: http://www.caterpillar.com.

FORWARD-LOOKING STATEMENTS
Certain statements in this Press Release 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 and markets we serve; (ii) government monetary or fiscal policies and infrastructure spending; (iii) commodity or component price increases and/or limited availability of raw materials and component products, including steel; (iv) our and our customers', dealers' and suppliers' ability to access and manage liquidity; (v) political and economic risks and instability, including national or international conflicts and civil unrest; (vi) our and Cat Financial's ability to: maintain credit ratings, avoid material increases in borrowing costs, and access capital markets; (vii) the financial condition and credit worthiness of Cat Financial's customers; (viii) inability to realize expected benefits from acquisitions and divestitures, including the acquisition of Bucyrus International, Inc. and Siwei; (ix) international trade and investment policies; (x) challenges related to Tier 4 emissions compliance; (xi) market acceptance of our products and services; (xii) changes in the competitive environment, including market share, pricing and geographic and product mix of sales; (xiii) successful implementation of capacity expansion projects, cost reduction initiatives and efficiency or productivity initiatives, including the Caterpillar Production System; (xiv) sourcing practices of our dealers or original equipment manufacturers; (xv) compliance with environmental laws and regulations; (xvi) alleged or actual violations of trade or anti-corruption laws and regulations; (xvii) additional tax expense or exposure; (xviii) currency fluctuations; (xix) our or Cat Financial's compliance with financial covenants; (xx) increased pension plan funding obligations; (xxi) union disputes or other employee relations issues; (xxii) significant legal proceedings, claims, lawsuits or investigations; (xxiii) compliance requirements imposed if carbon emissions legislation and/or regulations are adopted; (xxiv) changes in accounting standards; (xxv) failure or breach of IT security; (xxvi) adverse effects of natural disasters; and (xxvii) other factors described in more detail under "Item 1A. Risk Factors" in our Form 10-K filed with the SEC on February 21, 2012 for the year ended December 31, 2011. This filing is available on our website at www.caterpillar.com/secfilings.

2012 Highlights

• 2012 sales and revenues of $65.875 billion and profit per share of $8.48 were both all-time records.
• Inventory was significantly reduced during the fourth quarter of 2012, down about $2 billion from the third quarter of 2012.
• Machinery and Power Systems (M&PS) operating cash flow was $4.198 billion in 2012, compared with $7.972 billion in 2011.
• M&PS debt-to-capital ratio was 37.4 percent, down from 42.7 percent a year earlier.

2013 Outlook

• The outlook for 2013 is sales and revenues in a range of $60 to $68 billion and profit per share of $7.00 to $9.00.
• We expect capital expenditures for 2013 to be slightly below 2012 capital expenditures of $3.4 billion.

CONSOLIDATED RESULTS

Fourth Quarter 2012 vs. Fourth Quarter 2011

Consolidated Sales and Revenues Comparison
Fourth Quarter 2012 vs. Fourth Quarter 2011

To access this chart, go to http://caterpillar.com for the downloadable version of Caterpillar 4Q2012 earnings.

The chart above graphically illustrates reasons for the change in Consolidated Sales and Revenues between the fourth quarter of 2011 (at left) and the fourth quarter of 2012 (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 $16.075 billion in the fourth quarter of 2012, a decrease of $1.168 billion, or 7 percent, from the fourth quarter of 2011. When reviewing the change in sales and revenues, we focus on the following perspectives:

• Reason for the change: Sales volume decreased $1.655 billion, and the impact of currency was unfavorable $82 million. The majority of the sales volume decrease was related to changes in dealer new machine inventories. These decreases were partially offset by increased price realization of $421 million and the favorable net impact of acquisitions and divestitures of $116 million. Financial Products revenues were $32 million higher.
• Sales by geographic region: Excluding acquisitions and divestitures, sales decreased in all geographic regions except Latin America, with the most significant decrease in North America. Within Asia/Pacific, decreases in China and other parts of Asia/Pacific more than offset sales increases in Australia and Japan. Within EAME, lower sales in Europe and CIS were partially offset by increased sales in the Middle East and Africa.
• Segment: The decrease in sales was primarily due to Construction Industries, with sales down 25 percent. Excluding acquisitions and divestitures, Resource Industries' sales improved 16 percent, and Power Systems' sales decreased 9 percent. Financial Products' revenues were up 5 percent.

Consolidated Operating Profit

Consolidated Operating Profit Comparison
Fourth Quarter 2012 vs. Fourth Quarter 2011

To access this chart, go to http://caterpillar.com for the downloadable version of Caterpillar 4Q2012 earnings.

The chart above graphically illustrates reasons for the change in Consolidated Operating Profit between the fourth quarter of 2011 (at left) and the fourth quarter of 2012 (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 and Power Systems other operating (income) expenses.

Operating profit for the fourth quarter of 2012 was $1.038 billion, a decline of $922 million from the fourth quarter of 2011. The most significant item was the goodwill impairment charge related to Siwei of $580 million. The remaining $342 million decline was primarily the result of higher manufacturing costs and lower sales volume (which includes the impact of a favorable mix of products), partially offset by favorable price realization. Manufacturing costs were unfavorable primarily due to inefficiencies driven by lower production and declining inventory in the fourth quarter of 2012.

Other Profit/Loss Items

• Interest expense excluding Financial Products increased $8 million from the fourth quarter of 2011.
• Other income/expense was expense of $11 million compared with income of $125 million in the fourth quarter of 2011. The decrease was due to the unfavorable impact of currency gains and losses.
• The provision for income taxes in the fourth quarter of 2012 reflects an effective tax rate of 30.5 percent compared with 26.5 percent for the fourth quarter of 2011, excluding the items discussed in the next paragraph. The increase from 26.5 percent to 30.5 percent is primarily due to changes in our geographic mix of profits from a tax perspective and the expiration of the U.S. research and development tax credit. While the American Taxpayer Relief Act of 2012 extended the credit, the related benefit will be reported in 2013 results due to the law's enactment in January 2013.
  The 2012 fourth-quarter tax provision includes a benefit of $300 million from a decrease in tax and interest reserves due to a settlement reached with the Internal Revenue Service related to 2000 through 2006 U.S. tax returns. Approximately $200 million of this benefit is related to tax, and $100 million is related to interest. This was offset by a negative impact of $237 million from goodwill not deductible for tax purposes related to the Siwei goodwill impairment and the divestiture of portions of the Bucyrus distribution business. This compares to a $108 million net benefit in the fourth quarter of 2011.
• Profit/loss attributable to noncontrolling interests favorably impacted profit by $12 million compared with the fourth quarter of 2011.

Global Workforce
Caterpillar worldwide full-time employment was 125,341 at the end of 2012 compared with 125,099 at the end of 2011, an increase of 242 full-time employees. The flexible workforce decreased 6,989 for a net decrease in the global workforce of 6,747.

The decrease was the result of divestitures and lower production in the fourth quarter of 2012, partially offset by acquisitions. Divestitures, primarily the sale of a majority interest in our third party logistics business and portions of the Bucyrus distribution business, decreased the global workforce by 7,723. Acquisitions, primarily Siwei, added 4,643 to the global workforce.

Construction Industries
Construction Industries' sales were $4.028 billion in the fourth quarter of 2012, a decrease of $1.327 billion, or 25 percent, from the fourth quarter of 2011. Sales decreased in all geographic regions of the world, driven by dealers reducing new machine inventory levels in the fourth quarter of 2012 compared with dealers increasing inventory levels in the fourth quarter of 2011. Dealer-reported new machine inventory decreased about $950 million during the fourth quarter of 2012 compared with an increase of about $525 million during the fourth quarter of 2011. Dealer deliveries to end users were about the same as the fourth quarter of 2011.

Construction Industries' profit was $26 million in the fourth quarter of 2012 compared with $534 million in the fourth quarter of 2011. The decrease in profit was primarily due to lower sales volume and increased manufacturing costs from inefficiencies driven by lower production and declining inventory in the fourth quarter of 2012.

Resource Industries
Resource Industries' sales were $5.776 billion in the fourth quarter of 2012, an increase of $720 million, or 14 percent, from the fourth quarter of 2011. The sales increase was due to higher volume, improved price realization and an increase in Bucyrus sales of $102 million. New equipment sales increased, while sales for aftermarket parts declined. Sales increased in every region of the world except North America, where declining coal production contributed to lower sales.

As a result of increased production capability, coupled with our existing mining order backlog, sales were higher than the fourth quarter of 2011. However, new orders were well below the fourth quarter of 2011.

Resource Industries' profit was $611 million in the fourth quarter of 2012 compared with $997 million in the fourth quarter of 2011. The decrease was a result of the goodwill impairment charge related to Siwei of $580 million.

Excluding the impairment charge, segment profit improved as a result of favorable price realization and higher sales volume, which included a favorable mix of products. This was partially offset by higher manufacturing costs primarily due to inefficiencies driven by lower production and declining inventory in the fourth quarter of 2012.

See discussion on the impact of Bucyrus on page 16.

Power Systems
Power Systems' sales were $5.307 billion in the fourth quarter of 2012, a decrease of $365 million, or 6 percent, from the fourth quarter of 2011. The decrease was the result of lower sales volume, partially offset by the acquisition of MWM Holding GmbH (MWM) and improved price realization.

Sales decreased in all regions except Asia/Pacific. Excluding acquisitions, sales for petroleum, industrial and electric power applications were lower. Most of the decline was a result of dealers reducing their inventory levels in 2012 compared with dealers increasing inventory levels in 2011. Rail-related sales also declined.

Power Systems' profit was $697 million in the fourth quarter of 2012 compared with $823 million in the fourth quarter of 2011. The decrease was primarily due to lower sales volume (which includes the impact of a favorable mix of products), partially offset by favorable price realization.

MWM, acquired during the fourth quarter of 2011, added sales of $127 million, primarily in EAME, and increased segment profit by $26 million.

Financial Products Segment
Financial Products' revenues were $789 million, an increase of $37 million, or 5 percent, from the fourth quarter of 2011. The increase was primarily due to the favorable impact from higher average earning assets, partially offset by the unfavorable impact from lower average financing rates on new and existing finance receivables and operating leases.

Financial Products' profit was $180 million in the fourth quarter of 2012, compared with $134 million in the fourth quarter of 2011. The increase was primarily due to a $34 million favorable impact from lower claims experience at Cat Insurance and a $32 million favorable impact from higher average earning assets. These increases were partially offset by a $17 million increase in the provision for credit losses at Cat Financial.

During 2012, Cat Financial's overall portfolio quality reflected continued improvement. At the end of 2012, past dues at Cat Financial were 2.26 percent compared with 2.80 percent at the end of the third quarter of 2012 and 2.89 percent at the end of 2011. Write-offs, net of recoveries, were $46 million for the fourth quarter of 2012, up from $38 million for the fourth quarter of 2011. Write-offs, net of recoveries, were $102 million for 2012, down from $158 million for 2011.

As of December 31, 2012, Cat Financial's allowance for credit losses totaled $426 million or 1.49 percent of net finance receivables, compared with $369 million or 1.47 percent of net finance receivables at year-end 2011.

All Other Segment
All Other Segment includes groups that provide services such as component manufacturing, remanufacturing and logistics.

The decrease in sales was primarily due to the absence of our third party logistics business, which was sold in the third quarter of 2012.

The decrease in profit was primarily driven by lower production volume and the absence of our third party logistics business.

Corporate Items and Eliminations
Expense for corporate items and eliminations was $532 million in the fourth quarter of 2012, a decrease of $167 million from the fourth quarter of 2011. Corporate items and eliminations include: corporate-level expenses; timing differences, as some expenses are reported in segment profit on a cash basis; retirement benefit costs other than service cost; currency differences, as segment profit is reported using annual fixed exchange rates; and inter-segment eliminations.

The decrease in expense from the fourth quarter of 2011 was primarily due to the favorable impact of currency and timing differences, partially offset by increased corporate costs. Segment profit for 2012 is based on fixed exchange rates set at the beginning of 2012, while segment profit for 2011 is based on fixed exchange rates set at the beginning of 2011. 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.

2013 Outlook

2013 Economic Outlook
World economic conditions, while improving, are still relatively weak. Indicators improved in many countries in late 2012, suggesting better prospects for economic growth in 2013. In the large economies, we expect some improvement in the United States and China, and a continuation of economic uncertainty in Europe.

Overall, we expect the world economy will begin the year with weak growth and improve as 2013 unfolds. We anticipate overall world economic growth of at least 2.5 percent—a small improvement from our estimate of 2.3 percent for 2012.

Key points related to this outlook include:

• Central banks reduced interest rates over the past 15 months and some further cuts are possible. With inflation low, we expect there will be little pressure to tighten policies in 2013. With the exception of Europe, monetary easing will likely offset much of the impacts of tighter fiscal budgets. Overall, we expect economic policies will be the most favorable for growth since 2010.
• One sign lower interest rates are working is that both manufacturing and service purchasing manager indices improved over the past few months. Both ended 2012 at values that signal growth.
• Another positive sign is that metals prices have improved from their mid-August 2012 lows, and fourth-quarter data for China indicates increased imports of coal, iron ore and copper.
• We expect economic growth will improve demand for most metals in 2013, and average metal prices in 2013 will be higher than 2012. We expect copper will average $3.75 per pound in 2013 and China port iron ore $135 per ton. Those prices will likely be attractive for production and investment.
• Coal prices also improved in late 2012, but are currently 5 to 20 percent below a year ago. We expect that continued relatively low prices for U.S. natural gas will keep pressure on coal prices in 2013. We are expecting Central Appalachian coal will average about $65 per ton, slightly higher than $63 per ton in 2012.
• Average interest rates in developed economies are already below lows reached during the financial crisis, so prospects for lower rates are limited. However, some central banks are adding liquidity in their financial systems as a way to increase economic growth.
• Growth in the developed economies will likely be slow in early 2013 and improve throughout the year. We expect economic growth will average about 1.5 percent this year, slightly above 2012.
• Financial conditions have improved in the United States in response to past U.S. Federal Reserve easing. Credit spreads are down, bank capital ratios are near record highs and banks are easing lending standards. The Fed's plan to increase monthly bond purchases to $85 billion will likely help ease financial conditions and increase lending. We expect the U.S. economy to grow at least 2.5 percent in 2013.
• The underlying fundamentals that support U.S. housing construction continue to improve. Housing affordability is better, the inventory of unsold homes has come down significantly over the past few years and home prices have begun to recover. As a result, we expect housing starts to exceed 1 million units in 2013, which would be the highest year since 2007.
• Nonresidential building construction in the United States improved in 2012, and we expect further growth in 2013. Vacancy rates are down, and property prices are up, both trends that we expect to continue. Infrastructure construction is likely to be higher as we expect state and local government spending to increase in 2013.
• Interest rates in the Eurozone are at record lows, and credit spreads are improving. However, economic policies are less aggressive than in Japan and the United States. As a result, we expect growth in the Eurozone will struggle to match 2012, and we expect that construction activity will decline for the sixth consecutive year, reaching the lowest level since at least 1990.
• We expect the new Japanese government to ease monetary policy and increase infrastructure spending. We expect Japanese economic growth near 1 percent in 2013.
• Developing economies have been lowering interest rates for more than a year, and average rates are close to levels reached during the financial crisis. Low interest rates will likely contribute to better growth. We expect that, in the aggregate, developing economies will grow at more than 5 percent in 2013.
• China's economic slowdown in 2012 unfavorably impacted construction in China and world prices for metals, coal and oil. In the second half of 2012, the Chinese government accelerated credit growth and infrastructure spending, and, as a result, economic data in the fourth quarter improved. Our outlook assumes the Chinese government will maintain pro-growth policies throughout 2013. We expect economic growth near 8.5 percent and a more favorable environment for construction and commodity demand.
• Most other Asian countries also lowered interest rates in 2012, and we expect faster economic growth in 2013 than 2012. Better economic growth is expected to be positive for construction.
• Interest rates in Latin America have also been declining and are at record lows in Brazil. We expect lower interest rates, higher commodity prices and better world economic growth will improve economic growth in the region to about 4 percent in 2013. We also expect construction activity to improve as a result of better economic growth and large infrastructure programs.
• Most countries in Africa/Middle East and CIS have maintained economic policies close to those adopted in the financial crisis, and, as a result, growth has generally been sustained. We expect pro-growth policies will continue throughout 2013, allowing about 4-percent economic growth in Africa/Middle East and in the CIS.

Economic Risks

• Economic policies became more pro-growth in 2012, and, as a result, recent economic data has been more favorable. Overall, we expect policies to become even more stimulative, so upside to our outlook is possible. As in the past, we are concerned that central banks will reverse policies too early once better economic growth becomes apparent.
• A downside risk is Eurozone growth lagging behind the rest of the world. As the disparity becomes more evident, concern about the Eurozone economy and its currency could return.

Sales and Revenues Outlook
We expect 2013 sales and revenues to be in a range of $60 to $68 billion reflecting both upside and downside potential from $65.9 billion of sales and revenues in 2012.

We are optimistic that recent positive economic indicators suggest economic growth in 2013, but we remain cautious about how quickly economic improvement will translate into higher sales and revenues.

Following are key points related to the 2013 sales and revenues outlook:

• At the middle of our outlook range, sales and revenues are expected to be about $2 billion lower than in 2012.
• More than all of the decline in sales and revenues is expected to be in our Resource Industries segment. Mining customers have announced lower capital expenditures in 2013, and mining equipment in dealer inventories is expected to decline in 2013.
• Sales and revenues will be negatively impacted about $200 million per quarter in our All Other segment during the first half of 2013 as a result of the absence of sales from our third party logistics business, which was sold in July of 2012.
• We expect that Construction Industries' sales will be flat to up slightly in 2013 with improving end-user demand largely offset by the impact of dealers lowering inventories in 2013.
• We expect Power Systems' sales to be relatively flat in 2013 compared with 2012.
• We are expecting price realization to improve about 1 percent in 2013.

2013 Profit Outlook

The outlook for 2013 profit is a range of $7.00 to $9.00 per share. Profit in 2012 was $8.48 per share. Absence of the $580 million ($0.87 per share) goodwill impairment related to Siwei is the most significant favorable factor when comparing the 2013 outlook to 2012 results.

Other key points related to our profit outlook for 2013:

• Price realization is expected to be positive to profit in 2013, but the impact is expected to be about offset by higher depreciation and an unfavorable sales mix.
• Negative items include lower sales volume and the absence of the $273 million pre-tax gain on the sale of a majority interest of our third party logistics business in the third quarter of 2012.
• Absence of the $300 million favorable tax benefit from the settlement of prior-year returns in the fourth quarter of 2012 will be negative, but will be partially offset by the expectation of a favorable discrete tax benefit of about $85 million in 2013 related to U.S. tax law changes that were enacted in 2013, but were retroactive to 2012.
• Excluding discrete items, we expect the effective tax rate for 2013 to be near the 30.5 percent rate in 2012.
• Capital expenditures in 2013 are expected to be slightly below the $3.4 billion in 2012.

First Quarter of 2013
While we are not providing a specific sales and revenues and profit outlook for the first quarter of 2013, we are expecting that sales and revenues in the first quarter are likely to be significantly lower than the first quarter of 2012. The middle of our full-year outlook for sales and revenues is about $2 billion below 2012 sales and revenues. We expect that sales and revenues will decline more than $2 billion in the first quarter of 2013 compared with the first quarter of 2012.

Much of the expected decline in first-quarter sales is a result of the continuation of reduced production as dealers are expected to continue to lower their new machine inventories. We expect that dealer inventory reductions will be negative to sales in the first quarter of 2013, while in the first quarter of 2012 dealers increased inventory which benefitted Caterpillar sales.

Profit is also expected to be significantly lower in the first quarter of 2013 than in the first quarter of 2012—a result of lower expected sales and the negative cost impact of continuing low production levels and declining inventory.

NON-GAAP FINANCIAL MEASURES
The following definition is provided for "non-GAAP financial measures" in connection with Regulation G issued by the Securities and Exchange Commission. This non-GAAP financial measure has no standardized meaning prescribed by U.S. GAAP and therefore is unlikely to be comparable to the calculation of similar measures for other companies. Management does not intend this item to be considered in isolation or substituted for the related GAAP measure.

Machinery and Power Systems
Caterpillar defines Machinery and Power Systems as it is presented in the supplemental data as Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis. Machinery and Power Systems 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. Pages 24-29 reconcile Machinery and Power Systems with Financial Products on the equity basis to Caterpillar Inc. consolidated financial information.