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Caterpillar Inc.: Files Form 10-Q for the quarter ended March 31, 2022

Caterpillar Inc.
Caterpillar Inc.: Files Form 10-Q for the quarter ended March 31, 2022

04-Mai-2022 / 19:24 CET/CEST
Information réglementaire transmise par EQS Group.
Le contenu de ce communiqué est de la responsabilité de l’émetteur.

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended  March 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to

Commission File Number:  1-768

CATERPILLAR INC.

(Exact name of registrant as specified in its charter)

 

Delaware                                       37-0602744

(State or other jurisdiction of incorporation)                 (IRS Employer I.D. No.)

510 Lake Cook Road,  Suite 100,   Deerfield,   Illinois   60015

(Address of principal executive offices)                 (Zip Code)

 

Registrant’s telephone number, including area code: (224) 551-4000

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: N/A

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class                            Trading Symbol (s)         Name of each exchange on which registered

Common Stock ($1.00 par value)                             CAT                                                     New York Stock Exchange  ¹

8% Debentures due February 15, 2023                       CAT23                                                   New York Stock Exchange

5.3% Debentures due September 15, 2035                    CAT35                                                   New York Stock Exchange

¹                In addition to the New York Stock Exchange, Caterpillar common stock is also listed on stock exchanges in France and Switzerland.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of

Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes

   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and  “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer                                                                                                 Accelerated filer                                                 Non-accelerated filer                                                                                        Smaller reporting company                                         Emerging growth company                                         

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No

 

At March 31, 2022, 533,353,205 shares of common stock of the registrant were outstanding.

 

 

 

 

Table of Contents

 

 

Part I. Financial Information

Item 1.

Financial Statements

3

Item 2.

Management’s Discussion and Analysis of Financial Con

Operations

dition and Results of                   40

Item 3.

Quantitative and Qualitative Disclosures About Market R

isk                                               61

Item 4.

Controls and Procedures

61

 

Part II. Other Information

Item 1.

Legal Proceedings

62

Item 1A.

Risk Factors

62

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

Item 3.

Defaults Upon Senior Securities

*

Item 4. Item 5.

Mine Safety Disclosures

Other Information

*

62

Item 6.

Exhibits

63

 

* Item omitted because no answer is called for or item is not applicable.

 

 

 

Part I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Caterpillar Inc.

Consolidated Statement of Results of Operations

(Unaudited)

(Dollars in millions except per share data)

 

 

 

 

Sales and revenues:


Three Months Ended

March 31

2022           2021

 

Sales of Machinery, Energy & Transportation ........................................................................................

$  12,886

$  11,191

Revenues of Financial Products ..............................................................................................................

703

696

Total sales and revenues ..........................................................................................................................

13,589

11,887

 

Operating costs:

Cost of goods sold ...................................................................................................................................

9,559

8,012

Selling, general and administrative expenses ..........................................................................................

1,346

1,239

Research and development expenses.......................................................................................................

457

374

Interest expense of Financial Products ....................................................................................................

106

125

Other operating (income) expenses .........................................................................................................

266

323

Total operating costs................................................................................................................................

11,734

10,073

 

Operating profit .........................................................................................................................................

 

1,855

 

1,814

 

Interest expense excluding Financial Products........................................................................................

 

109

 

142

Other income (expense)...........................................................................................................................

253

325

 

Consolidated profit before taxes ...............................................................................................................

 

1,999

 

1,997

Provision (benefit) for income taxes .......................................................................................................

469

475

Profit of consolidated companies ............................................................................................................

1,530

1,522

 

Equity in profit (loss) of unconsolidated affiliated companies................................................................

 

7

 

9

 

Profit of consolidated and affiliated companies ......................................................................................

 

1,537

 

1,531

 

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

 

 

1

 

Profit 1 .........................................................................................................................................................

 

$    1,537

 

$    1,530

Profit per common share ...........................................................................................................................

 

$      2.88

 

$      2.80

 

Profit per common share – diluted 2 ........................................................................................................

 

$      2.86

 

$      2.77

 

Weighted-average common shares outstanding (millions)

 

 

– Basic ..................................................................................................................................................

534.5

546.4

– Diluted 2  ............................................................................................................................................

538.3

551.4

 

1     Profit attributable to common shareholders.

2    Diluted by assumed exercise of stock-based compensation awards using the treasury stock method.

See accompanying notes to Consolidated Financial Statements.

 

 

 

 

Caterpillar Inc.

Consolidated Statement of Comprehensive Income

(Unaudited) (Dollars in millions)

 

 

Three Months Ended

March 31

2022            2021

 

 

Profit of consolidated and affiliated companies...............................................................................................  $     1,537    $     1,531

Other comprehensive income (loss), net of tax (Note 13):

Foreign currency translation:.............................................................................................................................          (115)           (347) Pension and other postretirement benefits: ........................................................................................................              (1)               (8) Derivative financial instruments:.......................................................................................................................              23               (31) Available-for-sale securities:                                                                                                                                          (64)             (16)

 

Total other comprehensive income (loss), net of tax ...........................................................................................          (157)           (402) Comprehensive income ........................................................................................................................................         1,380           1,129

Less: comprehensive income attributable to the noncontrolling interests............................................................                                1

Comprehensive income attributable to shareholders .....................................................................................  $     1,380    $     1,128

 

 

 

See accompanying notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

Assets

Current assets:


Caterpillar Inc.

Consolidated Statement of Financial Position

(Unaudited) (Dollars in millions)

 

 

 

 

 

 

March 31,

2022

 

 

 

 

 

 

December 31,

2021

 

Cash and cash equivalents .............................................................................................................

$               6,526

 

$               9,254

Receivables – trade and other ........................................................................................................

9,135

 

8,477

Receivables – finance ....................................................................................................................

9,003

 

8,898

Prepaid expenses and other current assets .....................................................................................

2,868

 

2,788

Inventories......................................................................................................................................

15,038

 

14,038

Total current assets .............................................................................................................................

42,570

 

43,455

Property, plant and equipment – net ...................................................................................................

11,932

 

12,090

Long-term receivables – trade and other ............................................................................................

1,204

 

1,204

Long-term receivables – finance.........................................................................................................

12,665

 

12,707

Noncurrent deferred and refundable income taxes .............................................................................

1,973

 

1,840

Intangible assets ..................................................................................................................................

967

 

1,042

Goodwill .............................................................................................................................................

6,293

 

6,324

Other assets .........................................................................................................................................

4,672

 

4,131

Total assets.................................................................................................................................................

$             82,276

 

$             82,793

Liabilities

Current liabilities:

Short-term borrowings:

Machinery, Energy & Transportation ....................................................................................  $                         $                      9

Financial Products..................................................................................................................                   4,501                      5,395

Accounts payable ...........................................................................................................................                   8,361                      8,154

Accrued expenses...........................................................................................................................                   3,846                      3,757

Accrued wages, salaries and employee benefits ............................................................................                   1,275                      2,242

Customer advances ........................................................................................................................                   1,388                      1,087

Dividends payable..........................................................................................................................                                                 595

Other current liabilities ..................................................................................................................                   2,355                      2,256

Long-term debt due within one year:.............................................................................................

Machinery, Energy & Transportation ....................................................................................                      127                           45

Financial Products..................................................................................................................                   7,679                      6,307

Total current liabilities........................................................................................................................                 29,532                    29,847

 

Long-term debt due after one year:

Machinery, Energy & Transportation ....................................................................................                   9,636                      9,746

Financial Products..................................................................................................................                 15,641                    16,287

Liability for postemployment benefits................................................................................................                   5,363                      5,592

Other liabilities....................................................................................................................................                   5,007                      4,805

Total liabilities...........................................................................................................................................                 65,179                    66,277

Commitments and contingencies (Notes 11 and 14) Shareholders’ equity

Common stock of $1.00 par value: Authorized shares: 2,000,000,000

Issued shares: (3/31/22 and 12/31/21 – 814,894,624) at paid-in amount ...........................................                   6,281                      6,398

Treasury stock (3/31/22 – 281,541,419 shares; 12/31/21 – 279,006,573 shares) at cost ...................                (28,326)                  (27,643) Profit employed in the business ..........................................................................................................                 40,820                    39,282

Accumulated other comprehensive income (loss) ..............................................................................                  (1,710)                    (1,553) Noncontrolling interests......................................................................................................................                        32                           32

Total shareholders’ equity .......................................................................................................................                 17,097                    16,516

Total liabilities and shareholders’ equity ...............................................................................................  $             82,276     $             82,793

 

See accompanying notes to Consolidated Financial Statements.

 

 

 

 

Caterpillar Inc.

Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited) (Dollars in millions)

 

 

 

 

 

Three Months Ended March 31, 2021

 

 

Common stock

 

 

Treasury stock

 

Profit employed in the business

 

Accumulated other comprehensive income (loss)

 

 

Noncontrolling

interests             Total

 

Balance at December 31, 2020 ......................................................  $     6,230    $   (25,178)   $   35,167    $                 (888)   $                   47    $ 15,378

Profit of consolidated and affiliated companies ..............................                                            1,530                                                       1          1,531

Foreign currency translation, net of tax...........................................                                                                         (347)                                     (347) Pension and other postretirement benefits, net of tax......................                                                                             (8)                                         (8) Derivative financial instruments, net of tax.....................................                                                                           (31)                                       (31) Available-for-sale securities, net of tax ...........................................                                                                           (16)                                       (16) Distribution to noncontrolling interests...........................................                                                                                                       (2)              (2)

Common shares issued from treasury stock for stock-based

compensation: 2,459,683 .................................................................             (63)               128                                                                                     65

Stock-based compensation expense.................................................              42                                                                                                       42

Other ................................................................................................                6                    1                                                                       (2)                5

Balance at March 31, 2021............................................................  $     6,215    $   (25,049)   $   36,697    $              (1,290)   $                   44    $ 16,617

 

Three Months Ended March 31, 2022

Balance at December 31, 2021 ......................................................  $     6,398    $   (27,643)   $   39,282    $              (1,553)   $                   32    $ 16,516

Profit of consolidated and affiliated companies ..............................                                            1,537                                                               1,537

Foreign currency translation, net of tax...........................................                                                                         (115)                                     (115) Pension and other postretirement benefits, net of tax......................                                                                             (1)                                         (1) Derivative financial instruments, net of tax.....................................                                                                            23                                         23

Available-for-sale securities, net of tax ...........................................                                                                           (64)                                       (64) Dividends declared .........................................................................                                                   1                                                                      1

Common shares issued from treasury stock for stock-based

compensation: 1,037,468 .................................................................             (65)                 37                                                                                    (28)

Stock-based compensation expense.................................................              40                                                                                                       40

Common shares repurchased: 3,571,684 1 ......................................                             (720)                                                                                 (720) Other ................................................................................................             (92)                                                                                                     (92) Balance at March 31, 2022............................................................  $     6,281    $   (28,326)   $   40,820    $              (1,710)   $                   32    $ 17,097

 

 

1   See Note 12 for additional information.

 

 

See accompanying notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from operating activities:


Caterpillar Inc. Consolidated Statement of Cash Flow (Unaudited)

(Millions of dollars)

 

 

 

 

 

Three Months Ended March 31

2022                             2021

 

Profit of consolidated and affiliated companies ...................................................................  $                     1,537    $                       1,531

Adjustments for non-cash items:

Depreciation and amortization......................................................................................                            557                                 586

Provision (benefit) for deferred income taxes ..............................................................                             (99)                               109

Other .............................................................................................................................                             (52)                              (104) Changes in assets and liabilities, net of acquisitions and divestitures:

Receivables – trade and other.......................................................................................                           (372)                              (543) Inventories ....................................................................................................................                        (1,032)                              (657) Accounts payable..........................................................................................................                            452                                 733

Accrued expenses .........................................................................................................                             (74)                                 84

Accrued wages, salaries and employee benefits...........................................................                           (965)                               191

Customer advances .......................................................................................................                            311                                   58

Other assets – net..........................................................................................................                              99                                   56

Other liabilities – net ....................................................................................................                             (49)                              (116) Net cash provided by (used for) operating activities.................................................................                            313                              1,928

 

Cash flow from investing activities:

Capital expenditures – excluding equipment leased to others..............................................                           (346)                              (252) Expenditures for equipment leased to others........................................................................                           (333)                              (252) Proceeds from disposals of leased assets and property, plant and equipment......................                            269                                 309

Additions to finance receivables...........................................................................................                        (2,988)                           (2,629) Collections of finance receivables........................................................................................                         2,966                              2,770

Proceeds from sale of finance receivables............................................................................                                9                                     5

Investments and acquisitions (net of cash acquired) ............................................................                               (8)                              (386) Proceeds from sale of businesses and investments (net of cash sold) ..................................                                                                 28

Proceeds from sale of securities ...........................................................................................                            571                                 126

Investments in securities.......................................................................................................                        (1,438)                              (148) Other – net ............................................................................................................................                             (15)                                (48) Net cash provided by (used for) investing activities .................................................................                        (1,313)                              (477)

 

Cash flow from financing activities:

Dividends paid......................................................................................................................                           (595)                              (562) Common stock issued, including treasury shares reissued...................................................                             (28)                                 65

Common shares repurchased ................................................................................................                           (820)                                 — Proceeds from debt issued (original maturities greater than three months):

Machinery, Energy & Transportation...........................................................................                                                               494

Financial Products ........................................................................................................                         2,131                              1,779

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

Machinery, Energy & Transportation...........................................................................                               (6)                              (644) Financial Products ........................................................................................................                        (1,381)                           (2,243)

Short-term borrowings – net (original maturities three months or less)...............................                        (1,016)                            1,659

Other – net                                                                                                                                                                                              (2) Net cash provided by (used for) financing activities.................................................................                        (1,715)                               546

Effect of exchange rate changes on cash ...................................................................................                             (16)                                (12)

Increase (decrease) in cash, cash equivalents and restricted cash ......................................                        (2,731)                            1,985

Cash, cash equivalents and restricted cash at beginning of period............................................                         9,263                              9,366

Cash, cash equivalents and restricted cash at end of period......................................................  $                     6,532    $                     11,351

 

Cash equivalents primarily represent short-term, highly liquid investments with original maturities of generally three months or less.

 

See accompanying notes to Consolidated Financial Statements.

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1.           A.  Nature of operations

 

Information in our financial statements and related commentary are presented in the following categories:

 

Machinery, Energy & Transportation (ME&T) – We define ME&T as Caterpillar Inc. and its subsidiaries, excluding Financial Products. ME&T’s information relates to the design, manufacturing and marketing of our products.

 

Financial  Products    We  define  Financial  Products  as  our  finance  and  insurance  subsidiaries,  primarily Caterpillar Financial Services Corporation (Cat Financial) and Caterpillar Insurance Holdings Inc. (Insurance Services).  Financial Products’ information relates to the financing to customers and dealers for the purchase and lease of Caterpillar and other equipment.

 

B.  Basis of presentation

 

In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated results of operations for the three months ended March 31, 2022 and 2021, (b) the consolidated comprehensive income for the three months ended March 31, 2022 and 2021, (c) the consolidated financial position at March 31, 2022 and December 31, 2021, (d) the consolidated changes in shareholders’ equity for the three months ended March 31, 2022 and 2021 and (e) the consolidated cash flow for the three months ended March 31, 2022 and 2021.   The financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

 

Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our company’s annual report on Form 10-K for the year ended December 31, 2021 (2021 Form 10-K).

 

The December 31, 2021 financial position data included herein is derived from the audited consolidated financial statements included in the 2021 Form 10-K but does not include all disclosures required by U.S. GAAP.   Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation.

 

Cat Financial has end-user customers that are variable interest entities (VIEs) of which we are not the primary beneficiary. Although we have provided financial support to these entities and therefore have a variable interest, we do not have the power to direct the activities that most significantly impact their economic performance. Our maximum exposure to loss from our involvement with these VIEs is limited to the credit risk inherently present in the financial support that we have provided. These risks were evaluated and reflected in our financial statements as part of our overall portfolio of finance receivables and related allowance for credit losses. See Note 11 for further discussions on a consolidated VIE.

 

2.          New accounting guidance

 

A.  Adoption of new accounting standards

 

We consider the applicability and impact of all ASUs. We adopted the following ASUs effective January 1, 2022, none of which had a material impact on our financial statements:

 

ASU            Description

2020-06       Debt with conversion and other options and Derivatives and hedging

2021-05       Lessor - Variable lease payments

2021-10       Government assistance

 

 

 

B.  Accounting standards issued but not yet adopted

 

We consider the applicability and impact of all ASUs. We assessed the ASUs and determined that they either were not applicable or were not expected to have a material impact on our financial statements.

 

3.           Sales and revenue contract information

 

Trade receivables represent amounts due from dealers and end users for the sale of our products.   In addition, Cat Financial  provides  wholesale  inventory  financing  for  a  dealer’s  purchase  of  inventory.    We  include  wholesale inventory receivables in Receivables – trade and other and Long-term receivables – trade and other in the Consolidated Statement of Financial Position.  We recognize trade receivables from dealers and end users in Receivables – trade and other and Long-term receivables trade and other in the Consolidated Statement of Financial Position. Trade receivables from dealers and end users were $7,818 million, $7,267 million and $6,310 million as of March 31, 2022, December 31, 2021 and December 31, 2020, respectively.  Long-term trade receivables from dealers and end users were $553 million, $624 million and $657 million as of March 31, 2022, December 31, 2021 and December 31, 2020, respectively.

 

We invoice in advance of recognizing the sale of certain products.  We recognize advanced customer payments as a contract liability in Customer advances and Other liabilities in the Consolidated Statement of Financial Position. Contract liabilities were $1,869 million, $1,557 million and $1,526 million as of March 31, 2022, December 31, 2021 and December 31, 2020, respectively.  We reduce the contract liability when revenue is recognized.  During the three months ended March 31, 2022 and 2021, we recognized $437 million and $433 million, respectively, of revenue that was recorded as a contract liability at the beginning of 2022 and 2021, respectively.

 

As of March 31, 2022, we have entered into contracts with dealers and end users for which sales have not been recognized as we have not satisfied our performance obligations and transferred control of the products.  The dollar amount of unsatisfied performance obligations for contracts with an original duration greater than one year is $7.7 billion, with about one-half of the amount expected to be completed and revenue recognized in the twelve months following  March  31,  2022.    We  have  elected  the  practical  expedient  not  to  disclose  unsatisfied  performance obligations with an original contract duration of one year or less.  Contracts with an original duration of one year or less are primarily sales to dealers for machinery, engines and replacement parts.

 

See Note 16 for further disaggregated sales and revenues information.

 

4.           Stock-based compensation

 

Accounting for stock-based compensation requires that the cost resulting from all stock-based payments be recognized in the financial statements based on the grant date fair value of the award.  Our stock-based compensation primarily consists of stock options, restricted stock units (RSUs) and performance-based restricted stock units (PRSUs).

 

We recognized pretax stock-based compensation expense of $40 million and $42 million for the three months ended

March 31, 2022 and 2021, respectively.

 

The following table illustrates the type and fair value of the stock-based compensation awards granted during the three months ended March 31, 2022 and 2021, respectively:

 

 

Three Months Ended March 31, 2022                  Three Months Ended March 31, 2021

 

 

 

Weighted-

 

Weighted-

 

 

Weighted-

 

Weighted-

Average Fair

Average Grant

 

Average Fair

Average Grant

 

Shares Granted

Value Per Share

Date Stock Price

Shares Granted

Value Per Share

Date Stock Price

Stock options........................

1,029,202

$            51.69

$           196.70

1,084,821

$            56.30

$         219.76

RSUs ....................................

484,025

$          196.70

$           196.70

448,311

$          219.76

$         219.76

PRSUs ..................................

258,900

$          196.70

$           196.70

266,894

$          219.76

$         219.76

 

 

 

The following table provides the assumptions used in determining the fair value of the stock-based awards for the three months ended March 31, 2022 and 2021, respectively:

 

 

Grant Year

 

2022

2021

Weighted-average dividend yield........................................................................................

2.60%

2.60%

Weighted-average volatility ................................................................................................

31.7%

32.9%

Range of volatilities ............................................................................................................

25.3% - 36.8%

29.2% - 45.8%

Range of risk-free interest rates ..........................................................................................

1.03% - 2.00%

0.06% - 1.41%

Weighted-average expected lives........................................................................................

8 years

8 years

 

As of March 31, 2022, the total remaining unrecognized compensation expense related to nonvested stock-based compensation awards was $299 million, which will be amortized over the weighted-average remaining requisite service periods of approximately 1.8 years.

 

5.           Derivative financial instruments and risk management

 

Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates and commodity prices.  Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate and commodity price exposures.  Our policy specifies that derivatives are not to be used for speculative purposes.  Derivatives that we use are primarily foreign currency forward, option and cross currency contracts, interest rate contracts and commodity forward and option contracts.  Our derivative activities are subject to the management, direction and control of our senior financial officers.  We present at least annually to the Audit Committee of the Board of Directors on our risk management practices, including our use of financial derivative instruments.

 

We recognize all derivatives at their fair value on the Consolidated Statement of Financial Position.  On the date the derivative contract is entered into, we designate the derivative as (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flow (cash flow hedge) or (3) an undesignated instrument.   We record in current earnings changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk.  We record in Accumulated other comprehensive income (loss) (AOCI) changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge, to the extent effective, on the Consolidated Statement of Financial Position until we reclassify them to earnings in the same period or periods during which the hedged transaction affects earnings.  We report changes in the fair value of undesignated derivative instruments in current earnings.  We classify cash flows from designated derivative financial instruments within the same category as the item being hedged on the Consolidated Statement of Cash Flow.   We include cash flows from undesignated derivative financial instruments in the investing category on the Consolidated Statement of Cash Flow.

 

We formally document all relationships between hedging instruments and hedged items, as well as the risk- management objective and strategy for undertaking various hedge transactions.   This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Consolidated Statement of Financial Position and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

 

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

 

Foreign Currency Exchange Rate Risk

 

Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of sales made and costs incurred in foreign currencies.  Movements in foreign currency rates also affect our competitive position as these changes may affect business practices and/or pricing strategies of non-U.S.-based competitors.  Additionally, we have balance sheet positions denominated in foreign currencies, thereby creating exposure to movements in exchange rates.

 

 

 

 

Our ME&T operations purchase, manufacture and sell products in many locations around the world.  As we have a diversified revenue and cost base, we manage our future foreign currency cash flow exposure on a net basis.  We use foreign currency forward and option contracts to manage unmatched foreign currency cash inflow and outflow.  Our objective is to minimize the risk of exchange rate movements that would reduce the U.S. dollar value of our foreign currency cash flow. ...

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