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## CONSOLIDATED OPERATING PROFIT 

<img src='content_image/1029516.jpg'>

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

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

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

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

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

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

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

