CATERPILLAR INC [CAT] Filings

10-Q 1 cat-20220331.htm 10-Q cat-20220331

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

☐ 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.

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Part I. Financial Information
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	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.	Mine Safety Disclosures	*
Item 5.	Other Information	62
Item 6.	Exhibits	63

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

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Caterpillar Inc.

Consolidated Statement of Results of Operations

(Unaudited)

(Dollars in millions except per share data)


	Three Months Ended March 31
	2022		2021
Sales and revenues:
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.

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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.

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Caterpillar Inc.

Consolidated Statement of Financial Position

(Unaudited)

(Dollars in millions)


	March 31, 2022		December 31, 2021
Assets
Current assets:
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.

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Caterpillar Inc.

Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)

(Dollars in millions)


	Common stock		Treasury stock		Profit employed in the business		Accumulated other comprehensive income (loss)		Noncontrolling interests		Total
Three Months Ended March 31, 2021
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.

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Caterpillar Inc.

Consolidated Statement of Cash Flow

(Unaudited)

(Millions of dollars)


	Three Months Ended March 31
	2022		2021
Cash flow from operating activities:
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.

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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

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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
	Shares Granted	Weighted-Average Fair Value Per Share		Weighted-Average Grant Date Stock Price		Shares Granted	Weighted-Average Fair Value Per Share		Weighted-Average Grant 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

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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.

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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, 2022, 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 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.

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 original 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.

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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.

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, 2022				December 31, 2021
	Assets1		Liabilities2		Assets1		Liabilities2
Designated derivatives
Foreign exchange contracts	$	242	$	(127)	$	228	$	(64)
Interest rate contracts	75		(87)		38		(15)
Total	$	317	$	(214)	$	266	$	(79)

Undesignated derivatives
Foreign exchange contracts	$	58	$	(88)	$	46	$	(42)
Commodity contracts	87		—		30		(9)
Total	$	145	$	(88)	$	76	$	(51)

1 Assets are classified on the Consolidated Statement of Financial Position as Receivables - trade and other or Long-term receivables - trade and other.
2 Liabilities are classified on the Consolidated Statement of Financial Position as Accrued expenses or Other liabilities.

The total notional amounts of the derivative instruments as of March 31, 2022 and December 31, 2021 were $20.7 billion and $18.9 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 or commodity prices.

Gains (Losses) on derivative instruments are categorized as follows:


(Millions of dollars)	Three Months Ended March 31
	Fair Value / Undesignated Hedges				Cash Flow Hedges
	Gains (Losses) Recognized on the Consolidated Statement of Results of Operations1				Gains (Losses) Recognized in AOCI				Gains (Losses) Reclassified from AOCI2
	2022		2021		2022		2021		2022		2021
Foreign exchange contracts	$	(63)	$	78	$	(9)	$	72	$	26	$	129
Interest rate contracts	7		7		56		7		(7)		(11)
Commodity contracts	93		20		—		—		—		—
Total	$	37	$	105	$	47	$	79	$	19	$	118

1 Foreign exchange contract and Commodity contract gains (losses) are included in Other income (expense). Interest rate contract gains (losses) are primarily included in Interest expense of Financial Products.
2 Foreign exchange contract gains (losses) are primarily included in Sales of Machinery, Energy & Transportation and Other income (expense) in the Consolidated Statement of Results of Operations. Interest rate contract gains (losses) are primarily included in Interest expense of Financial Products in the Consolidated Statement of Results of Operations.

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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, 2022		December 31, 2021		March 31, 2022		December 31, 2021
Long-term debt due within one year	$	750	$	755	$	—	$	5
Long-term debt due after one year	2,419		1,304		(87)		(2)
Total	$	3,169	$	2,059	$	(87)	$	3

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 generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.

Collateral is generally not required of the counterparties or of our company under the master netting agreements. As of March 31, 2022 and December 31, 2021, 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, 2022				December 31, 2021
	Assets		Liabilities		Assets		Liabilities
Gross Amounts Recognized	$	462	$	(302)	$	342	$	(130)
Financial Instruments Not Offset	(152)		152		(114)		114
Cash Collateral Received	—		—		—		—
Net Amount	$	310	$	(150)	$