XML 26 R13.htm IDEA: XBRL DOCUMENT
v3.25.1

Derivative Financial Instruments and Risk Management | 3 Months Ended
--- | ---
Mar. 31, 2025
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Risk Management | 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, commodity prices, and certain deferred compensation plan liabilities. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate, interest rate, commodity price and certain deferred compensation plan liability 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, commodity forward and option contracts and total return swap 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. For foreign exchange contracts designated as fair value hedges, the interim settlements are excluded from the effectiveness assessment and are recognized under a systematic and rational method over the life of the hedging instrument within Interest expense. We record in 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. Our policy allows for managing anticipated foreign currency cash flow for up to approximately five years. As of March 31, 2025, the maximum term of these outstanding contracts at inception was approximately 60 months. We generally designate as cash flow hedges at inception of the contract any foreign currency forward or option contracts that meet the requirements for hedge accounting and the maturity extends beyond the current quarter-end. We perform designation on a specific exposure basis to support hedge accounting. The remainder of ME&T foreign currency contracts are undesignated. In managing foreign currency risk for our Financial Products operations, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions and future transactions denominated in foreign currencies. Our policy allows the use of foreign currency forward, option and cross currency contracts to offset the risk of currency mismatch between our assets and liabilities and exchange rate risk associated with future transactions denominated in foreign currencies. Our foreign currency forward and option contracts are primarily undesignated. We designate fixed-to-fixed cross currency contracts as cash flow hedges to protect against movements in exchange rates on foreign currency fixed-rate assets and liabilities. We designate float-to-float cross currency contracts as fair value hedges to protect against movements in exchange rates on floating-rate assets and liabilities. Interest rate risk Interest rate movements create a degree of risk by affecting the amount of our interest payments and the value of our fixed-rate debt. Our practice is to use interest rate contracts to manage our exposure to interest rate changes. Our ME&T operations generally use fixed-rate debt as a source of funding. Our objective is to minimize the cost of borrowed funds. Our policy allows us to enter into fixed-to-floating interest rate contracts and forward rate agreements to meet that objective. We designate fixed-to-floating interest rate contracts as fair value hedges at inception of the contract, and we designate certain forward rate agreements as cash flow hedges at inception of the contract. Financial Products operations has a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate and duration) of Cat Financial’s debt portfolio with the interest rate profile of our receivables portfolio within predetermined ranges on an ongoing basis. In connection with that policy, we use interest rate derivative instruments to modify the debt structure to match assets within the receivables portfolio. This matched funding reduces the volatility of margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move. Our policy allows us to use fixed-to-floating, floating-to-fixed and floating-to-floating interest rate contracts to meet the match-funding objective. We designate fixed-to-floating interest rate contracts as fair value hedges to protect debt against changes in fair value due to changes in the benchmark interest rate. We designate most floating-to-fixed interest rate contracts as cash flow hedges to protect against the variability of cash flows due to changes in the benchmark interest rate. We have, at certain times, liquidated fixed-to-floating and floating-to-fixed interest rate contracts at both ME&T and Financial Products. We amortize the gains or losses associated with these contracts at the time of liquidation into earnings over the remaining term of the previously designated hedged item. Commodity price risk Commodity price movements create a degree of risk by affecting the price we must pay for certain raw materials. Our policy is to use commodity forward and option contracts to manage the commodity risk and reduce the cost of purchased materials. Our ME&T operations purchase base and precious metals embedded in the components we purchase from suppliers. Our suppliers pass on to us price changes in the commodity portion of the component cost. In addition, we are subject to price changes on energy products such as natural gas and diesel fuel purchased for operational use. Our objective is to minimize volatility in the price of these commodities. Our policy allows us to enter into commodity forward and option contracts to lock in the purchase price of a portion of these commodities within a five-year horizon. All such commodity forward and option contracts are undesignated. Deferred compensation plan liability risk We are also exposed to variability in compensation expense related to certain non-qualified deferred compensation obligations to employees. We utilize total return swaps to economically hedge this exposure to offset the related compensation expense. All such total return swap contracts are undesignated. The location and fair value of derivative instruments reported in the Consolidated Statement of Financial Position were as follows:
(Millions of dollars) | Fair Value
| March 31, 2025 |  | December 31, 2024
| Assets 1 |  | Liabilities 2 |  | Assets 1 |  | Liabilities 2
Designated derivatives |  |  |  |  |  |  |
Foreign exchange contracts | $ | 266 |  |  | $ | (153) |  |  | $ | 357 |  |  | $ | (275) |
Interest rate contracts | 46 |  |  | (147) |  |  | 10 |  |  | (201) |
Total | $ | 312 |  |  | $ | (300) |  |  | $ | 367 |  |  | $ | (476) |
Undesignated derivatives |  |  |  |  |  |  |
Foreign exchange contracts | $ | 40 |  |  | $ | (44) |  |  | $ | 91 |  |  | $ | (56) |
Commodity contracts | 5 |  |  | (2) |  |  | 4 |  |  | (6) |
Total return swap contracts | — |  |  | (26) |  |  | — |  |  | (33) |
Total | $ | 45 |  |  | $ | (72) |  |  | $ | 95 |  |  | $ | (95) |
1 Assets are classified as Receivables - trade and other or Long-term receivables - trade and other.
2 Liabilities are classified as Accrued expenses or Other liabilities.
The total notional amounts of the derivative instruments as of March 31, 2025 and December 31, 2024 were $26.0 billion and $27.0 billion, respectively. The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties. We calculate the amounts exchanged by the parties by referencing the notional amounts and by other terms of the derivatives, such as foreign currency exchange rates, interest rates, commodity prices or certain deferred compensation plan liabilities. Gains (Losses) on derivative instruments are categorized as follows:
(Millions of dollars) | Three Months Ended March 31,
| Gains (Losses) Recognized on the Consolidated Statement of Results of Operations 1 |  | Gains (Losses) Recognized in AOCI |  | Gains (Losses) Reclassified from AOCI 2
| 2025 |  | 2024 |  | 2025 |  | 2024 |  | 2025 |  | 2024
Cash Flow Hedges |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | $ | — |  |  | $ | — |  |  | $ | 78 |  |  | $ | 95 |  |  | $ | — |  |  | $ | 91 |
Interest rate contracts | — |  |  | — |  |  | (2) |  |  | 11 |  |  | 1 |  |  | 15 |
Fair Value Hedges |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts | (18) |  |  | (36) |  |  | — |  |  | — |  |  | — |  |  | — |
Undesignated Hedges |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts | (14) |  |  | 29 |  |  | — |  |  | — |  |  | — |  |  | — |
Commodity contracts | 8 |  |  | (10) |  |  | — |  |  | — |  |  | — |  |  | — |
Total return swap contracts | (26) |  |  | 30 |  |  | — |  |  | — |  |  | — |  |  | — |
Total | $ | (50) |  |  | $ | 13 |  |  | $ | 76 |  |  | $ | 106 |  |  | $ | 1 |  |  | $ | 106 |
1 Foreign exchange contract, Commodity contract and Total return swap contract gains (losses) are included in Other income (expense). Interest rate contract gains (losses) are included in Interest expense of Financial Products and Interest expense excluding Financial Products.
2 Foreign exchange contract gains (losses) are primarily included in Cost of goods sold, Sales of Machinery, Energy and Transportation, and Other income (expense). Interest rate contract gains (losses) are primarily included in Interest expense of Financial Products.
The following amounts were recorded on the Consolidated Statement of Financial Position related to cumulative basis adjustments for fair value hedges:
(Millions of dollars) | Carrying Value of the Hedged Liabilities |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Value of the Hedged Liabilities
| March 31, 2025 |  | December 31, 2024 |  | March 31, 2025 |  | December 31, 2024
Long-term debt due within one year | $ | 488 |  |  | $ | 483 |  |  | $ | (12) |  |  | $ | (16) |
Long-term debt due after one year | 5,963 |  |  | 5,327 |  |  | (84) |  |  | (170) |
Total | $ | 6,451 |  |  | $ | 5,810 |  |  | $ | (96) |  |  | $ | (186) |
We enter into International Swaps and Derivatives Association (ISDA) master netting agreements within ME&T and Financial Products that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements may also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. Our exposure to credit loss in the event of nonperformance by the counterparties is limited to only those gains that we have recorded, but for which we have not yet received cash payment. Collateral is typically not required of the counterparties or of our company under the master netting agreements. As of March 31, 2025 and December 31, 2024, no cash collateral was received or pledged under the master netting agreements. The effect of the net settlement provisions of the master netting agreements on our derivative balances upon an event of default or termination event was as follows:
(Millions of dollars) | March 31, 2025 |  | December 31, 2024
| Assets |  | Liabilities |  | Assets |  | Liabilities
Gross Amounts Recognized | $ | 357 |  |  | $ | (372) |  |  | $ | 462 |  |  | $ | (571) |
Financial Instruments Not Offset | (192) |  |  | 192 |  |  | (186) |  |  | 186 |
Net Amount | $ | 165 |  |  | $ | (180) |  |  | $ | 276 |  |  | $ | (385) |

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/815/tableOfContent + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration