Transparent Financial Reporting Analysis Manual

8/2/2019 Transparent Financial Reporting Analysis Manual

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Transparent Financ ial Reporting Analys is Manual A.doc,9/8/2006, 11:23 AM

Kater Inc.

Transparent Financial Reporting Analysis Manual

SEC /

Legal Entity

SEC /Legal

Entity /GAAP

Business

UnitsAccountable

Enterprise

ProductProfitability

Focus


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1Transparent Financ ial Reporting Analys is Manual A.doc,9/8/2006, 11:23 AM

Contents

Chapter 1 Introduction ............................................................................................1. Kater Methodologies ................................ .........................................................2. Aggregation Methodologies................................................................ ...............3. Rate/Volume Concept .......................................................................................4. Commentary ................................................................ .....................................5. Roles & Responsibilities................................................................ ....................

Chapter 2 Form M Summary ................................................................ ....................

Chapter 3 Foreign Currency Reconciliation ..........................................................

Chapter 4 Sales Reconciliation ...............................................................................

1. Overview2. Price Realization ...............................................................................................a. Foreign Currencyb. Published Price ......................................................................................c. Sales Discount .......................................................................................d. Warrantye. Transfer Yield ................................ .........................................................f. Physical Sales Volume...........................................................................

3. Base Period Variable Margin Percentage .........................................................4. Volume Impact on Margin ................................................................ .................

Chapter 5 Mix ............................................................................................................1. Overview2. Geographic Mix.................................................................................................3. Country/Region Mix ..........................................................................................................4. Geographic Mix on Transfers ................................................................ ............5. Product Mix Impact on Sales6. Product Mix between Product Lines................................ ..................................7. Product Mix within Product Lines ......................................................................

a. Revenue Salesb. Non-revenue Sales and Transfers

Chapter 6 Variable Cost ...........................................................................................1. Overview .....................................................................................................2. Cost of Sales................................................................ .....................................3. Transfer In/Inter-company Purchases...............................................................4. Inventory Adjustments / RSSMs.......................................................................5. Other Variable Cost................................ ...........................................................

Chapter 7 Period Cost of Sales ...............................................................................

1. Overview .....................................................................................................2. Period Costs Incurred ................................................................ .......................3. Period Costs Inventory Effect............................................................................4. Variable Margin Percentage................................ ..............................................


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Chapter 8 Parts .....................................................................................................

Chapter 9 Period SG&A / R&D ..............................................................................

Chapter 10 Other Income and Expense .................................................................

Chapter 11 The Chunk Chart...................................................................................

Chapter 12 Contact Details .....................................................................................

Chapter 13 Glossary (Analysis) ..............................................................................

Chapter 14 Glossary (TFR)......................................................................................

2


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Introduction: Kater Methodologies

In order to fully leverage the benefits of Transparent Financial Reporting, a comprehensiveprocess for financial analysis was developed. The principles of this new process are:

One tool for all analysis needs

All business unit, product line and consolidatedanalysis will be performed using this process

Highly mechanical Utilizing pre-populated templates and pre-defined calculations,manual input into the model has been minimized

Mandatory and consistent methodologies The prescribed methodologies forcalculations and aggregation must be followed or the mechanical process will notprovide accurate and consistent financial analysis

Kater utilizes the Form M as the model to explain changes in results between comparisonperiods. The Form M explains changes in sales and changes in profit. Major drivers of bothof these changes are i llustrated in the overall structure of the Form M depicted below.

Form M Structure

Change in Corporate Profit

Sales changes Cost changes

Due to

Currency impactsPrice realization:

1) Published price

2) Sales discount3) Warranty

4) Transfer yieldPhysical sales volume

Due to

Currency impactsVariable costsMixPhysical sales volume

Period costsOther income/expense

The primary focus of financial analysis at Kater is to explain actual results both year over year

and vs. plan, as well as RBM (Rolling Business Management) forecasts. Below is a summaryof relevant comparison periods.

YTD vs. YTD YTD vs. Plan

Month vs. Plan Qtr vs. Qtr RBM Analysis (current vs. prior year, current vs. future year, current vs. plan)

This is not an all-inclusiv e list of analysis requirements. For instance to prove that currentmonth results do not contain significant errors it is necessary to compare current month toprevious month actual results.

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4

The final output of the Form M is a graphical depiction of changes in results for both sales andcorporate profit. These charts, commonly referred to as chunk charts, are automaticallycreated and are graphical models inherent in the Form M.

Sales &

Revenues

Operating

Profit

Accountable

Profit

Corporate

Profit

Current Period 1,130,675 198,714 196,017 169,842

Base Period 1,006,675 174,962 172,512 146,337

Change 124,000 23,752 23,505 23,505

300

250

86.6 0.1 (4.3) 3.0 (11.3)(49.9)

200

150

146.3

18.7

(5.0) (12.4)

(3.8) 2.0 (0.0) (0.2) 169.8-

100

50

-

Base Period Vol/Mix Price Real Trans Yld Warr CCY Mat'l Cost Var Cost PCOS SG&A R&D Parts (McFee) Other Oper All Other Corp Burden Current Period

Profit Chunk

Sales &

Revenues

Operating

Profit

Accountable

Profit

Corporate

ProfitCurrent Period 1,130,675 198,714 196,017 169,842

Base Period 1,006,675 174,962 172,512 146,337

Change 124,000 23,752 23,505 23,505

1,200

1,000

1,00732

87 (4) 5 0 - 51,131

800

600

400

200

-

Base Period NS&T Volume Price Realization Warranty Currency Transfer Yield Geographic Mix -

Transfers

Parts (McFee Related) Current Period NS&T

Sales Chunk


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5

The Kater financial analysis process flow is summarized in the following paragraphs and theattached flowchart.

Essbase: The backbone of the analysis tool is Essbase. Essbase is a series of data cubesthat allow for manipulation of significant amounts of data. Essbase collects data from multiplesources and pre-populates the analysis templates with data necessary to complete the FormM. After the monthly closing process is complete, actual data is loaded from the AccountableData Cubes within the General Ledger System (GLS). Prior year actual data, business planand RBM forecast data are loaded via RBM templates. The front end user-interface toEssbase is referred to as Catalyst. Catalyst is an Excel add-in that allows users to send andretrieve data to the Essbase data cubes.

Business Unit Analysis: This analysis is completed by the relevant Business Manager,utilizing the pre-populated templates and supplemental calculations as required. BusinessUnit Form Ms are always subdivided by Product Line (effectively all Business Units will have

a Form M for each Product Line they support as well as a Consolidated Business Unit FormM). Commentary to support the Business Unit analysis is required as well. Once completedBusiness Unit analysis is submitted into Essbase to facilitate the creation of Product LineForm Ms.

Product Line Analysis: After all Business Unit (as well as by Product Line within BusinessUnit) analysis is complete, Essbase creates the Product Line Form Ms. The Business Unitthat houses the Global Product Manager will provide commentary to support the Product Lineanalysis. Once completed this analysis is submitted into Essbase to facilitate the creation ofthe remaining steps of the Product Line Cascade.

Product Category and Sub-Line of Business Analysis: After the Product Line analysis isfinalized the Product Category and Sub-Line of Business analysis will be mechanically

generated.

Principal Line of Business: At the Principal Line of Business level several Corporatevariances that are not assigned at a lower level are added to the analysis; actual foreignexchange gains/losses, actuarial gains/losses on pension assets and LIFO variances, etc.These variances flow through to Consolidated analysis as well. On a forecast basis theseitems will be assigned by CAS.


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6

Overview of the Transparent Financial Reporting Analysis process

AccountableGLS Data Cubes

Business UnitComparison

Period Data

Actual DataReplicated to

Essbase Essbase DataCube

Comparison period

data pre-populated

(ABP, Prior year actual

or RBM)

Loaded via RBMtemplate

Business Unit(By Product Line)

Form Ms with

Commentary

Essbase Data

Cube

Product LineForm Ms with

Commentary

ProductCategory

Form Ms

Sub -Line of

Business

Form Ms

Principal Line ofBusiness

Form Ms

Consolidated

Form M


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Introduction: Rate/Volume Concept

Business Unit Form M (e.g. TTT)

Product Line Form M w/in Business Unit (e.g. Pipelayer w/in TTT)

Product Line Form M w/in Business Unit (e.g. MTT w/in TTT)

Product Line Form M w/in Business Unit (e.g. LTT w/in TTT)

Recalculation



Product Line Form M w/in Business Unit (e.g. MTT w/in TTT) Product Line Form M w/in Business Unit (e.g. MTT w/in TTT)

Product Line Form M w/in Business Unit (e.g. LTT w/in TTT) Product Line Form M w/in Business Unit (e.g. LTT w/in TTT)

Recalculation

AGGREGATIONBusiness Unit Form M

The calculations for the Business Unit Form M can be divided into three categories:

1. Additive Items;2. Business Unit Calculations; and

3. Recalculated Items.

Grouping calculations into these three categories facilitates achieving transparency betweenBusiness Unit analysis and Product Line analysis. These aggregation methodologies arepredefined and cannot be deviated from.

Additive Items: These items (see figure below) for the Business Unit Form M are add-ups ofProduct Line calculations. Calculations will be completed at the Product Line within BusinessUnit level and added together to arrive at the Business Unit total.

Business Unit Calculations: These items (see figure below) for the Business Unit Form Mare to be calculated at an overall Business Unit Level. The total Business Unit Form Mvariance will then be split by the Business Unit between the Product Lines within the BusinessUnit.

Recalculated Items: The sum of total margin impact of physical sales volume and mix fortotal Business Unit and total Product Lines within a Business Unit are equal. However, as youaggregate from Product Lines within a Business Unit to total Business Unit, volume and mixmust be recalculated. The form M calculates volume and mix by Product Line withinBusiness Unit. It then recalculates volume at a Business Unit level. The difference betweenthe additive volumes of the Product Line calculations and the Business Unit calculation isdefined as mix between Product Lines


PriceRealization

Pub lished Price ChangeSale s Variance Rat e Cha nge

Pro duct MixImpact on SalesMix byModel Warranty

In vento ry Adjustments/RSSMsPe riod Cost s

Pa rts Pro fit (McFee ) Other Operating Inc/Exp Othe r

Inco me & ExpenseCorporate Burden Items

Transfer Yie ldCurrencyMaterial

TransfersInVa riable Labor/BurdenOthe r Varia ble Costs

VolumeMix be twee n Pro duct Lines

Additive

Items

BUCalcs.

Recalculation


Product Line Form M w/in Business Unit (e.g. MTT w/in TTT)

Product Line Form M w/in Business Unit (e.g. LTT w/in TTT)

Price Realiza tionPublishe d Price Chan ge Sales Varia nce Rate Cha nge Pro

duct Mix Impact on SalesGe ograph ic Mix

C ountry/RegionMixOth er Sales Var. Rate Chan ge

Mix by Mo delWarranty

In ventoryAdjustments/RSSMsPeriod Costs Parts Prof it(McFee) Othe r Operatin

g Inc/Exp

Other In come & Expe nseCorporate Burd en Items

TransferYieldCurrency Ma

terial

TransfersInVaria ble Labor/Bu rden

OtherVariable Costs

Volume


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VolumeMix

GeographicMix

PriceRealizationPublished PriceChange

Transfer Yield

ProdCuurcretncLy ine Form M w/in Business Unit (e.g. LTT w/in TTT)

Product Line Form M (e.g. LTT)Product Line Form M (e.g. LTT)

Product Line Form M w/in Business Unit (e.g. LTT w/in LACD)Product Line Form M w/in Business Unit (e.g. LTT w/in LACD)

Mixeographic Mix

VolumeMix

GeographicMix

PPrriiccee RReeaalliizzaattiioonnPPPruuobbdlliissuhheecddtPPLrriiccieenCCehhaaFnnggoeerm M w/in Business Unit (e.g. LTT w/in NACD)

TTrraannssffeerr YYiieellddPPrrooddCCuuuucrrcrreettnnLccLyyiinneeFFoorrmmMMww//iinnBBuussiinneessssUUnniitt((ee..gg..LLTTTTww//iinnTTTTTT))

Product Line Form M (e.g. LTT)

Product Line Form M w/in Business Unit (e.g. LTT w/in LACD)

Mixeographic Mix

VolumeMix

GeographicMix

Price RealizationPPruobdlisuhecdtPLricienCehaFngoerm M w/in Business Unit (e.g. LTT w/in NACD)

Transfer YieldPPrrooddCuuucrcrettnLcLyiinneeFFoorrmmMMww//iinnBBuussiinneessssUUnniitt((ee..gg..LLTTTTww//iinnTTTTTT))

Product Line Form M (e.g. LTT)Product Line Form M (e.g. LTT)

Product Line Form M w/in Business Unit (e.g. LTT w/in LACD)Product Line Form M w/in Business Unit (e.g. LTT w/in LACD)

Mixeographic Mix

VolumeMix

GeographicMix

PPrriiccee RReeaalliizzaattiioonnPPPruuobbdlliissuhheecddtPPLrriiccieenCCehhaaFnnggoeerm M w/in Business Unit (e.g. LTT w/in NACD)

TTrraannssffeerr YYiieellddPPrrooddCCuuuucrrcrreettnnLccLyyiinneeFFoorrmmMMww//iinnBBuussiinneessssUUnniitt((ee..gg..LLTTTTww//iinnTTTTTT))

ProTransfer Yield

ct on Sales

AGGREGATIONProduct Line Form M

The calculations for the Product Line Form M are fully mechanical, based on Business Unitinputs, and they can be divided into two categories: Additive Items and Product LineCalculations. Grouping calculations into these two categories facilitates achievingtransparency between Business Unit analysis and Product Line analysis.

Additive Items: These items (see Figure below) for the Product Line Form M are consideredto be add-ups of the Product Line pieces calculated in the Business Unit Form M process.Each Product Line is fed Form M data via Essbase from one or more Business Units. Thevariances in the list below for the Product Line Form M are a summation of the variances fedfrom the Business Unit Form Ms.

Product Line Calculations: Volume, Geographic Mix, and Mix will be completed at anoverall Product Line level. All Product Line calculations are performed mechanically withinthe Form M.

Product Line Form M (e.g. LTT)

Price Realization PublishedPrice Change Sales

Variance RateChangeProduct Mix Impact on Sales

Geographic MixCountry/Region Mix

Other Sales Var. Rate ChangeTransferYieldCurrency Mix

byModelWarranty

Period CostsMaterial

Transfers InVariableLabor/Burden

Other Variable Costs InventoryAdjustments/RSSMs Parts

Profit (McFee)Other OperatingInc/ExpOther Income &ExpenseCorporate Burden Items

Volume

MixGeographicMix

Additive

Items

Product Line Form M w/in Business Unit (e.g. LTT w/in LACD)

Product Line Form M w/in Business Unit (e.g. LTT w/in NACD)Sales Variance Rate Change

Product Line Form M w/in Business Unit (e.g. LTT w/in TTT)Geographic Mix on Transfers

Product MPirxicIemRpaecatliozantiSoanles

PuMbliixshbPeydrMicPeordiRceeelaClihzantigoneSalesPVWuabrailarisrnahcneetdyRParticeeCChhaannggee

SPaelersioVdaCrioasntcse Rate ChangeMduaCctetuMrriraiexlnIcmypa

GeogTraraphnisGcfeMrosixgIrnoanphTicraMnsixfers PVVPVPVaroridaubcletCMLoaixubInomtrr/ypB/auRcredtgeoinonSMaleixsOtOhtehreVrMaSirxaialbebysleMVCaoord.seRtlsateChange

Inventory AdjuWsTtmararernansntfstey/rRYSiSelMdsParts PPreorfiot (dCMCucroFresetnesc)y

Other OperaMMtianitxgebrIinayclM/Eoxdpel

Other IncoTmraen&sWfeEarrxsrpaIennntyseCorpVoarraitaebBleuPLrdearebionodrI/tBCeumorssdtesn

OtherVariMabalteerCiaolsts

InventoryAdjTusratmnsefnetrss/RInSSMs

PaVrtasriParbolefitL(MabcoFre/Beu) rden

OtherOOthpeerraVtainrgiaIbnlec/CExopsts

OInthverntInocryomAdeju&stEmxepnetnss/ReSSMsCorpoPratretsBPurrodfeitn(MItecFmese)

Other OperatingInc/ExpOther Income &ExpenseCorporate Burden Items

Volume

MixGeographicMix

VolumeMix

GeographicMix


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For purposes of variable margin analysis the Form M separates total sales and marginbetween rate and physical sales volume.

The illustration below using sample data highlights the rate/volume concept.

Illustration: Rate/Volume Concept

Net sales & transfers - base 1,000

Net sales & transfers - current 1,200

Total net sales & transfers change 200

less:

Currency movements (20)Published price changes 50Sales discount changes 10 Price Realization

W arranty 30Physical sales volume change 130

Rate of growth of physical sales volume 13% ? (Physical sales volum e

change/ (base) Net sales& transfers x 100)

Margin change

Base Period Current Period

P&L P&L Change

Net sales & transfers 1,000 1,200 200Actualvariablecosts (700) (850) (150)

300 350 50

Base margin 30%

Therefore, change in cost due to change in physical sales volume must be?

Physical sales volume change 130Costs as % of net sales & transfers (base)

Change in variable costs due to

physical sales volume change

70%

(91)

(100% - base m argin, 30%)

Gross variable costs - base period 700Gross variable costs - current period 850

Total variable costs variance (150) -----> Volume change (91)Remaining cost (59)

(150)

Cost Assumption:Base Current

Variable costs 700 850

Variable costs-flexed 700 791 ? based on +13% change in physical sales volume

Change in variable costs due to rate changes (59) [791 - 850]

This is a simplified example to illustrate the rate/volume concept only. For example, mix is

assumed to be neutral for ease of illustration.The example above shows how a change in margin can be separated between rate andphysical sales volume. The total change in margin is $50 (favorable) resulting from a $200favorable change in sales and a $150 increase in associated costs.

At the sales level, the change in physical sales volume is $130 (favorable). The remainder isdue to currency, published price, sales discounts and warranty. The Sales Recon chaptercontains further details on this area.

On costs, the variance resulting from the increase in physical sales volume is a $91 increasein costs and the rate variance is $59 (unfavorable). See the Variable Cost chapter for moredetails.


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Introduction: Commentary

10

The Form M provides significant information on period-to-period change but does not providethe complete story. Critical to supporting the Form M is the business commentary providedby Business Units for both Business Unit and Product Line results. This commentaryprovides the root causes or business reasons which drive the Form M variances. Thecommentary should provide insight that is not evident through the numbers. Business Unitcommentary will be utilized by Corporate Accounting (CAS) as the basis for resultsexplanations that will be provided to the Administrative Council, Executive Office and theBoard of Directors as well as for our external results communications.

Example 1:

Insufficient:

"SG&A decreased by $1 million"

Sufficient:

"SG&A labor cost decreased $4 million due to 6 Sigma-driven headcount reduction of 40heads in process X. This was partially offset by increased local PINS ICP metric of $2,000(base period factor of 0.9 v. current period factor of 1.0) and increased spending of $1,000 onconsulting related to Project Y."

Example 2:

Insufficient:

"Sales discounts increased by 2%"

Sufficient:

"Market price actions from competitor X were resulting in significant PINS losses. Salesprogram A was launched on April 1, 200X to regain lost PINS; this program will expire onJune 30, 200X and we will reassess the situation at that time."

The Form M is the mechanism for Business Units to provide commentary for both BusinessUnit and Product Line results.


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Introduction: Roles & Responsibilities

In order to enable this highly mechanized, disciplined approach to financial analysis, there areclearly defined roles and responsibilities.

Business Unit Analysis: Business Managers are accountable for performing Business Unitanalysis and providing commentary using the methodology described in this manual. As theentire process (Business Unit through Consolidated Results Analysis) is highly dependent onmany different actions, Business Managers are also responsible to ensure all due dates aremet.

Product Line Analysis: Although Product Line Form Ms are completed mechanically,commentary to support the analysis will be required. Business Managers that support aGlobal Product Manager are responsible for completing this commentary and meeting allnecessary due dates.

Inter-company transactions: A necessary step in consistent, mechanical analysis is toensure all transfer yield and transfer cost variances balance. In order for this to occur, it is

necessary for one side of each transaction to have accountability for input into the Form M.Component Product Lines are responsible for populating the Transfer Price Indices for all oftheir respective transfers. Marketing Business Units are responsible for populating theTransfer Price Indices for all of their respective inter-company purchases.


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Form M Summary

Price Realization 20,865Transfer Yield 130W arranty (4,325)Currency 4,950Parts Transfers (McFee) 5,000Physical Sales Volume Change $ 97,380

The next three pages contain a more detailed view of the Form M with summary leveldefinitions of each major line item.

The section on this page explains the sales & transfers impact.

NOTES

SALES & TRANSFERS IMPACT Sales & Transfers Net Sales & Transfers Change: the totalchange in sales, represented by the

difference between current period sales andCurrent Period Sales $ 1,130,675 base period sales. See Ch 4.Base Period Sales 1,006,675

Change $ 124,000 Price Realization: includes the impact ofchanges in published price, sales discounts,country/region, geographic and product mix(currency neutral). See Ch 4, Section 2.

Transfer Yield: the impact from changes tothe internal transfer prices (currencyneutral). See Ch 4, Section 2.e.

Warranty: the impact from changes inwarranty costs (currency neutral). SeeCh 4, Section 2.d.

Currency: the net impact on the currentsales value from currency movements. SeeCh 4, Section 2.a.

Parts Transfer (McFee): the differentialbetween base and current P&L values. SeeCh 9.

Physical Sales Volume Change:represents the currency neutralized changein sales with the impact f rom publishedprice, sales discount rate, transfer yield,warranty and parts transfers to MPCsremoved. See Ch 4, Section 2.f.


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Form M Summary

Transfer Yield 130 country/region, geographic and product mixWarranty - Policy (575) (currency neutral). See Ch 4, Section 2.

The section on this page explains the Business Unit view of corporate profit impact.

CORPORATE PROFIT IMPACT

Current Period Corporate Profit / (Loss)

Total

Corporate

Profit / (Loss)

$ 170,308

NOTES

Corporate Profit Change: the difference incorporate profit between the current andbase P&L values (currency neutral).

Base Period Corporate Profit / (Loss) 146,372 See Ch 4.

Change

Volume/Price/Mix:

$ 23,936 Sales & Transfers Volume: the variablemargin impact explained by the change inphysical sales volume (currency neutral).See Ch 4, Section 4.

Sales & Transfers Volume 41,759

Price Realization 20,865Price Realization: includes the impact ofchanges in published price, sales discounts,

Warranty - Standard (3,750)Mix - Between ProductLines 5,244

Mix - Within Product Lines (bymodel) (6,200)

Manufacturing Cost:

Variable Cost

Material (External Suppliers Only) (4,074)

Transfers in / Intercompany Purchases CostVariance (2,992)

Variable Labor /Burden (2,689)

Inv. Adj.'s / RSSMs -

Other Variable Cost 127

Manufacturing Period Cost of Sales

Period Cost Incurred (13,629)

Period Cost inventory effect 730

Transfer Yield: the impact from changes tothe internal transfer prices (currencyneutral). See Ch 4, Section 2.e.

Warranty: the impact from changes inwarranty costs (currency neutral). SeeCh 4, Section 2.d.

MixBetween Product Lines: representsthe impact on variable margin (base vs.current period) driven by Product Lineweighting of sales and transfers as apercentage of total Business Unit sales andtransfers. See Ch 5, Section 7.

MixWithin Product Lines: representsthe impact on variable margin (base vs.current period) driven by model weighting ofsales and transfers as a percentage of totalProduct Line sales and transfers. See Ch 5,Section 6.

Total Manufacturing Cost

Total Gross Margin Change (Excl Fx & Parts)

Non-Manufacturing Period Costs

$ (22,527)

$ 34,946

Variable Costs: represents the impact ofchanges from period to period in cost ratesapplied to current period volumes (currencyneutral). See Ch 6.

Period Cost of Sales: represents changein overhead costs from both the actual costs

SG&A (11,900)

R&D (2,720)

Total Period Cost Change (14,620)

Parts Profit (McFee) 2,000

OtherOperating(Income) / Expense: -

incurred and the impact of changes inproduction volume on period costs absorbed

into inventory (currency neutral). See Ch 7.

SG&A and R&D: represents the differentialbetween base and current P&L values(currency neutral). See Ch 10.

Parts Profit (McFee): represents thedifferential between base and current P&L

values (currency neutral). See Ch 9.

Other Operating (Income)/Expense:represents the differential between base andcurrent P&L values (currency neutral). SeeCh 11.


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Form M Summary

This section on this page completes the Form M by explaining changes in non-operating andcorporate burden items.

Other (Income) / Expense:

Interest Expense (210)

Net Currency Impact 1,400

Affilitate Income -

Other Income/Expense -

NOTES

Interest Expense: represents thedifferential between base and current P&Lvalues (currency neutral). See Ch 11.

Net Currency Impact: represents theimpact of foreign currency on P&L change

Change

Corporate Burden:

$ 23,516and Business Unit hedging. See Ch 11.

Affiliate Income: represents the differentialbetween base and current P&L. See Ch 11.

Reversal of BU Hedging 50

Reversal of Parts Business Plan Profit Equalization -

Admin & Exempt 500

Other Allocated Operating Costs (150)

Other Allocated Income/Expense Costs 20

Total Corporate Burden 420

Other (Income)/Expense: represents thedifferential between base and current P&Lvalues (currency neutral). See Ch 11.

Corporate Burden: represents thedifferential between base and current P&Lvalues.

Change in Corporate Profit / (Loss): $ 23,936


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Foreign Currency Reconciliation

Overview

Foreign currency impacts all P&L line items for many business units. For internal reporting to

the Executive Office and Board of Directors as well as our external release we remove theforeign currency impacts by line item to achieve currency neutralized changes. Thismethodology enables focus on the drivers behind price and cost changes excluding foreigncurrency impacts. Foreign currency impacts are then aggregated and explained as a singlenet impact.

Calculation Theory

The Form M calculates the foreign currency impact by taking the change in the exchange ratebetween the current period and the base period for the Business Unit and applying thatpercentage change to current sales and costs. Current sales and costs must be used, as thecurrency neutralized current values are used as the starting point in the Sales Reconciliation

(reconciles currency neutralized current sales with base sales).

The simple example shown below illustrates two methods of calculating the impact ofcurrency movements on the Business Units profitability. These currency impacts aremanually inputted into the FXsheet and calculated outside of the Form M.

Illustration: Foreign Currency ImpactGBP Jan'X3 Feb'X3 Mar'X3Current exchange rate 1.610 1.590 1.612Base exchange rate 1.540 1.540 1.540

* GBP has appreciated against USD

[1-(Base exchg. Rate/Currentexchg. rate)] 0.04348 0.03145 0.04451

USD TotalSales $40,000 $40,000 $45,000 $125,000

[(Current sales/Current exchg.

Sales @ base rate rate) x Base exchg. rate] $38,261 $38,742 $42,997

Currency impact on sales $1,739 $1,258 $2,003 $5,000

Material purchases ($17,900) ($18,000) ($14,731) ($50,631)

[(Current material

purchases/Current exchg. rate) xPurchases @ base rate Base exchg. rate] ($17,122) ($17,434) ($14,075)

Currency impact on purchase ($778) ($566) ($656) ($2,000)

Alternatively

Currency impact on sales

[Sales @ current rate x % chg. in

exchg. rate] $1,739 $1,258 $2,003 $5,000

Currency impact on purchases[Purchases @ current rate x %

chg. in exchg. rate] ($778) ($566) ($656) ($2,000)

This example shows how the foreign currency impact on sales and purchases are calculated.Given a strengthening trend in British Pounds (the foreign currency), we expect a favorableimpact on sales as sales denominated in Pounds are translated into more US dollars (value =$5,000) and an unfavorable impact on material purchases (value = $2,000).


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To calculate the change, convert current period sales at the base period exchange rate. InJanX3, current sales are $40,000. When converted at USD 1.54 to 1 GBP (i.e. the baseperiod exchange rate), current sales in base currency terms, becomes $38,261. Thedifference of $1,739 [$40,000 - $38,261] represents foreign currency impact on current periodsales in JanX3.

Alternatively, you may multiply current sales in base currency terms, by the rate of changefrom the base period exchange rate. In JanX3, the exchange rate conversion factor is0.04348. The impact of exchange rate movement on sales is, therefore, $1,739 [0.04348 x$40,000]. Note the results from both methods are the same.

When entering the currency impact into the FXsheet, Business Units need to think of theimpact as either favorable or unfavorable to profits, and not how the impact is affecting theparticular Form M line item. Take the above illustration, for example, the upward movementin British Pounds increases both sales and material purchases. When entering the impactsinto the FXsheet, however, the impact on sales should be entered as a favorable (i.e.

positive) impact while the impact on material purchase should be an unfavorable (i.e. negative)impact.


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17



Application

All foreign currency movements must be manually entered in the FXsheet, using the yellow

shaded input cells in the sheet. Impacts must be entered for the Business Unit in total, andthen split between the Product Lines within the Business Unit.

P&L Change

Currency

Adj

Net Change -

Currency

Neutralized

Product

Line A

Product

Line B

Product

Line C

Gross Revenue Sales Excluding Parts 125,000 - 125,000 - - -Gross Revenue Sales - Parts - - - - - -

Sales Discounts - Revenue Sales - Excluding Parts (1,625) 5,000 (6,625) 3,000 2,000 -

Sales Discounts - Revenue Sales - Parts - - - - - -

Non-Revenue Sales & Transfers (Before Warranty) 5,000 - 5,000 - - -

Total Sales & Transfers $ 128,375 $ 5,000 $ 123,375 $ 3,000 $ 2,000 $ -

Policy Warranty (625) (50) (575) (40) (10) -

Standard Warranty (3,750) - (3,750) - - -

Total Warranty $ (4,375) $ (50) $ (4,325) $ (40) $ (10) $ -

Material (External Suppliers Only) (2,000) (1,500) (500) -

Transfers In / Intercompany Purchases -Variable Labor

Variable Burden

Business

Unit levelinput

- Product

- Line levelinput

- - -

- - -

Inventory Adj/RSSM's - - - -Other - - - -

Total Variable Cost $ (2,000) $ (1,500) $ (500) $ -

Period Cost of Sales (13,629) - (13,629) - - -

Gross Margin Impact $ 2,950 $ 1,460 $ 1,490 $ -

SG&A (12,400) (500) (11,900) (300) (200) -

R&D (3,720) (1,000) (2,720) (600) (400) -

Other Operating (Income)/Expense - - - - -

Net Currency Impact on Operating Profit $ 1,450 $ 560 $ 890 $ -

Other Income/Expense - - - - - -

Net Currency Impact Before Hedging $ 1,450 $ 560 $ 890 $ -

Business Unit Hedging Form M

impact

$ (50) $ (25) $ (25) $ -

Net Currency Impact $ 1,400 $ 535 $ 865 $ -

The example above is an extract from the FXsheet in the Form M. The Business Unit mustmanually enter foreign currency impact by P&L line items as listed in the FXsheet. Note thesum of currency impact across all Product Lines should equal the Business Unit total. Theanalysis file will not submit to Catalyst until all check figures are less than +/-1.

The foreign currency impact on Sales Discount Revenue Sales Excluding Parts is $5,000at the Business Unit level. At the Product Line level, this impact is split into $3,000 and$2,000 for Product Line A and B, respectively. The currency neutralizednet change forSales Discount Revenue Sales Excluding Parts at Business Unit level is, therefore,($6,625) (vs. ($1,625) before adjustment). The currency neutralizedamount represents the

change in currency terms of the base period. The net impact of all foreign currency impact issummed up, together with the Business Unit hedging, at the bottom of the

FXsheet.


19/98

18



The net of all currency impact and Business Unit hedging as shown above is fed directly into

the Form M as a single line item under the Other Income/ Expensesection as the extractfrom the Form M below illustrates.

Other (Income) / Expense:

Interest Expense

Net Currency Impact

Directlyfrom 'FX'sheet

(210) - (210)

1,400 - 1,400

Affilitate Income - - -

Other Income/Expense - - -

The total impact of foreign currency movements on P&L is represented by the caption Net

Currency Impact on the Form M.


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19


Sales Reconciliation: Overview

The first step in analyzing financial results for any comparison period is to explain the changein sales & transfers. The defined Kater methodology is to segregate changes in sales &

transfers between physical sales volume, published price, sales discount, warranty, transferyield and foreign currency variances. This breakdown is summarized in the diagram below.

BREAK DOWN OF CHANGES IN NET SALES & TRANSFERS

Warranty (d)

Tr ans f er Y ield ( e)

Sales Dis count ( c)

Publis hed Pric e (b)

Phys ical SalesVolume (f )

Foreign Cur rency(a)

Parts Transfers are analyzed discretely in the Form M and are therefore omitted from theSales & Transfers analysis.

The Sales Reconsheet in the Form M examines the total change in net sales and transfersin the following way:

1. Calculate the change in net sales & transfers (base and current) from the respectiveP&Ls

2. Remove any currency impact on net sales & transfers (a)

3. Reverse out the published price changes * (b)

4. Account for the impact of changes in sales discount rates * (including product,country/region and geographic mix) (c)

5. Remove the impact of changes in warranty * (d)

6. Remove any impact of transfer yield (e)

7. The remainder is the physical sales volume change (f)

* Note impacts arecurrency neutralized. SeeFXsheet of the Form M for more details.


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20

The next three pages contain a more detailed view of the Sales Reconsheet of the Form M withsummary level definitions of each line item.

NOTES

Net Revenue Sales

Net Revenue

Sales

Non-Revenue

Sales &

TransfersNet Revenue Sales: the total dollarvalue in sales revenue taken from thecurrent and base P&L values. The

Current Period 924,250

Base Period 805,250

change in value represents the totalrevenue sales variance that the Sales

Change

Net Non-Revenue Sales & Transfers

$ 119,000 Reconsheet breaks down into thechunks used in the Chunk Charts. SeeCh 4.

Current Period 206,425

Base Period 201,425Net Non-Revenue Sales & Transfers:represents the value of transfers out and

Change $

Total Net Sales & Transfers

Current Period

Base PeriodChange

Warranty - Policy (575)

Warranty - Standard (3,750)

5,000 non-revenue sales to other BusinessUnits taken from the current and baseP&L values. See Ch 4.

Warranty: the impact from c hanges inwarranty costs (currency neutral). SeeCh 4, Section 2.d.

Currency: the net impact on the currentsales value from currency movements.See Ch 4, Section 2.a.

Currency 4,950 -


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21

NOTES

Price Realization (Currency Neutralized)Price Index - Prime Product/Other (Current Back to Base)

Price Index - Parts (Current Back to Base)

Base Period

Gross Revenue Sales - Excl Parts 850,000

Gross Revenue Sales - Parts -

Sales Discount - Excl Parts 15,000

Sales Discount - Parts -

Current Period

Gross Revenue Sales - Excl Parts (@ base fx) 975,000

Gross Revenue Sales - Parts (@ base fx) -

Sales Discount - Excl Parts (@ base fx) 6,625

Sales Discount - Parts (@ base fx) -

Published Price Change

Published Price Change - Prime Product/Other 16,116

Published Price Change - Parts -

Total Published Price Change 16,116

Sales Discount Rate Change

Base Period Sales Discount Rate

Current Period Sales Discount Rate

Change

Sales Discount - Product Mix 400

Sales Discount - Country/RegionMix 2,500

Sales Discount - Geographic Mix N/A

Sales Discount - Geographic Mix - PSMD & SOLAR ONLY -

Sales Discount - Other 1,849

Sales Discount - Overall Product Line Rate Calc 4,749

Price Realization: includes the impact ofchanges in published price, discounts,country/region, geographic and product mix(currency neutral). See Ch 4, Section 2.

Published Price Change: the dollar valueimpact of the published price changes in thecurrent period over base period. See Ch 4,Section 2.b.

Sales Discount Rate Change: the overallimpact of changes to the sales discountsoffered between periods or the mix of productswith differing discounts within a Product Line.

See Ch 4, Section 2.c.Sales DiscountCountry/Region Mix:represents the mix created when products aresold to different countries or regions within aGeographic Region as defined in the KaterMD&A. See Ch 5, Section 3.

Sales DiscountGeographic Mix:represents the mix created when products aresold to different Geographic Regions asdefined in the Kater MD&A. See Ch 5, Section2.

Sales DiscountOther: changes in salesdiscounts that are not captured by

country/region mix and geographic mix. SeeCh 4.

Sales DiscountProduct Mix: representsthe mix created when sales of different productmodels change within a Product Line. See Ch5, Section 5.


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22

NOTES

Transfer Yield

Total Price Realization 20,865

Parts Transfers to MPC's (McFee Related)

Subtotal - Adjustments to Sales 21,490

Transfer Yield: the impact from changes tothe internal transfer prices (currency neutral).See Ch 4, Section 2.e.

Parts Transfers to MPCs (McFee Related):represents the change in parts transfers toMPCs between base and current P&L values.These transfers are analyzed separately in theParts Profit section of the Form M. See Ch 9.

Physical Sales Volume Change $ 97,510Physical Sales Volume Change: representsthe change in sales with the impact frompublished price and sales discount rateremoved. See Ch 4, Section 2.f.


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23


Sales Reconciliation: Foreign Currency (a)


Sales Dis count (c)War ranty (d )

Publis hed Price ( b)Tr ans f er Y ield ( e)

For eign

Curr e ncy ( a)Phy sical Sales

V olume (f )

Overview

Sales & transfers, sales discounts and warranty for some Business Units may bedenominated in foreign currencies. Changes to the exchange rates will affect the currencyconverted Business Unit value of sales & transfers, sales discounts and warranty changes.

The impact of foreign exchange rates fluctuations on gross sales & transfers, sales discountsand warranty is separately identified and reversed from the current amounts to convert themback to their base period exchange rate.

Before the sales variances are calculated, all foreign currency impacts are removed toachieve currency neutralizedvalues - values expressed in current prices, but in the base U.S.Dollar exchange rate.

Calculation Theory

The Form M calculates the foreign currency impact by taking the change in the exchange ratebetween the current period and the base period for the Business Unit and applying thatpercentage change to current sales and costs. Current sales and costs must be used, as the

currency neutralized current values are used as the starting point in the Sales Reconciliation(reconciles currency neutralized current sales with base sales).

The simple example shown below illustrates two methods of calculating the impact ofcurrency movements on the Business Units profitability. These currency impacts aremanually inputted into the FXsheet in the Form M.

This example shows how the currency impact on sales and purchases is calculated. Given astrengthening trend in British Pounds (the foreign currency), we expect a favorable impact onsales as the overseas prices in Pounds are lowered by the strengthening currency (value =$5,000).


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24






For eign


V olume (f )

Illustration: Foreign Currency Impact on Sales

GBP Jan'X3 Feb'X3 Mar'X3Current exchange rate 1.610 1.590 1.612Base exchange rate 1.540 1.540 1.540

Currency ConversionFactor* GBP has appreciated against USD

[1-(Base exchg. rate/Current

exchg. rate)] 0.04348 0.03145 0.04451

USD Total

Sales $40,000 $40,000 $45,000 $125,000 [(Currentsales/Currentexchg.

Sales @ baserate rate) x Base exchg. rate] $38,261 $38,742 $42,997

Currency impact on sales $1,739 $1,258 $2,003 $5,000

Alternatively

Currency impact onsales

[Sales @ current x % chg. inexchg. rate] $1,739 $1,258 $2,003 $5,000

To calculate the change, convert current period sales at the base period (or peg) exchange rate. InMarX3, current sales are $45,000. When converted at USD 1.54 to 1 GBP (i.e. the base periodexchange rate), current sales in base currency terms, becomes $42,997. The difference of $2,003[$45,000 - $42,997] represents foreign currency impact on current period sales in MarX3.

Alternatively, you may multiply current sales in base currency terms, by the rate of change fromthe base period rate. In MarX3, the exchange rate conversion factor is 0.04451. The impact ofexchange rate movement on sales is, therefore, $2,003 [0.04451 x $45,000]. Note the results fromboth methods are the same.

When entering the currency impact into the FXsheet, Business Units need to think of the impactas either favorable or unfavorable to profits. Take the above illustration, for example. The upwardmovement in British Pounds increases sales dollars, as sales denominated in Pounds translate into

more US dollars. Therefore, when entering the impacts into the

FX

sheet, the impact should beentered as a positive impact.


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For eign


V olume (f )

The second example shows the foreign currency adjustments as they are treated in the FormM once calculated.

Net Revenue

Sales

Currency

Adjustments

Net Change -

Currency

Neutralized

Current Period 975,000 5,000 970,000

Base Period 850,000 - 850,000

Change $ 125,000 $ 5,000 $ 120,000

Position in Sales Recon sheet ---> Net revenue Currency

sales

Represents the sum of the currency

impact on:

- gross revenues

- sales discounts

- warranty (policy and standard)

The foreign currency impact illustrated above is $5,000. This amount is to be manuallyentered onto the FXsheet in the Form M. Note that currency adjustments apply to thecurrent period only, as the intent is to adjust line items from the current period exchange ratesback to the base period exchange rates. Additional commentary on currency impact is shownin the Foreign Exchange Reconciliationchapter above.


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For eign


V olume (f )

Application

All foreign currency movements must be manually entered in the FXsheet, using the yellowshaded input cells in the sheet. Impacts must be entered for the Business Unit in total, and

then split between the Product Lines within the Business Unit.

P&L ChangeCurrency

Adj

Net Change -

Currency

NeutralizedProductLine A

ProductLine B

ProductLine C

Gross Revenue Sales Excluding Parts 125,000 - 125,000 - - -

Gross Revenue Sales - Parts - - - - - -

Sales Discounts - Revenue Sales - Excluding Parts (1,625) 5,000 (6,625) 3,000 2,000 -

Sales Discounts - Revenue Sales - Parts - - - - - -

Non-Revenue Sales & Transfers (Before Warranty) 5,000 - 5,000 - - -

Total Sales & TransfersBusiness

Unit level

$ 128,375 $ 5,000 $ 123,375 $ 3,000 $ 2,000 $ -

Policy Warranty input (625) (50) (575) (40) (10) -

Standard Warranty (3,750) - (3,750) - - -

Total Warranty $ (4,375) $ (50) $ (4,325) $ (40) $ (10) $ -

Material (External Suppliers Only) (2,000)

Transfers In / Intercompany Purchases -

ProductLine levelinput

(1,500) (500) -

Variable Labor - - - -

The example above is an extract from the FXsheet in the Form M. The Business Unit mustmanually enter foreign currency impact by P&L line items as listed in the FXsheet. Note thesum of foreign currency impact across all Product Lines should equal the Business Unit total.The analysis file will not submit to Catalyst until all check figures are less than +/-1.

The foreign currency impact on Sales Discount Revenue Sales Excluding Parts is $5,000at the Business Unit level. At the Product Line level, this impact is split into $3,000 and$2,000 for Product Line A and B, respectively. The currency neutralizednet change forSales Discount Revenue Sales Excluding Parts at Business Unit level is, therefore,($6,625) (vs. ($1,625) before adjustment). The currency neutralizedamount represents thechange in currency, in terms of the base period exchange rate. The net impact of all foreigncurrency impact is summed up, together with the Business Unit Hedging, at the bottom of theFXsheet.


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27


Sales Reconciliation: Published Price (b)


Warr anty (d)Trans f er Y ield (e)


Sales Disc ount (c )

Publis he d Price

( b)

Foreign Curr enc y

(a)

Overview

This section calculates the impact on Sales & Transfers from changes to the Published Pricesfrom the base period to the current period. The calculation converts the current publishedprice to the base price equivalent for each Product Line to isolate this rate variance within thetotal sales revenue variance in the Form M.

Calculation Theory

Price indices are populated in the Form M, based on input received from the Business Unitsat the beginning of each year. A Published Price Index for each Product Line within BusinessUnit is locked throughout the reporting year. Changes required due to mid-year publishedprice changes can only be made by and with the approval of Corporate Accounting. Should amid-year price change occur, contact CAS for further details.

Published price indices are weighted average indices and are entered into the Form M foreach Product Line applicable to the Business Unit. Where a Product Line consists of a seriesof models (e.g. different Large TTTs models) the average published price of the wholeProduct Line is entered into the Form M. Do not include Sales Discounts in these entries asSales Discounts are considered in Section (c) below. Each Product Line has space for an

input for the published price index for both Prime Product and Parts and both should becompleted where applicable.

Where a current published price is $22 and the base published price is $20, the publishedprice adjustment in the Form M (Sales Reconsheet) rolls the current published price back tothe base period price level (i.e. $22/$20 x 100 = 110). This is the number that should beentered in the Form M.

Example:

Published prices remain unchanged from base level Published price index = 100

Published prices fall 10% from base level Published price index = 90

Published prices rise 10% from base level Published price index = 110


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Publis he d Price

( b)

Foreign Curr enc y

(a)

Illustration: Published Price Index Change

Base period gross revenue sales excluding parts $1,100

Current period gross revenue sales excluding parts $1,408CHANGE $308

Base published price $20Current published price $22

Published price index 110.000 [$22/$20 x 100]

Published price index adjusted current gross sales $1,280 [$1,408/(110/100)]

=> Change explained by movementsin the published price $128 [$1,408 less $1,280]

The illustration above shows how current period Gross Sales are converted back to the baseperiod equivalent, being $1,280. The difference between the current period Gross Sales andthe base period equivalent represents the change in Gross Sales due to movement inpublished price. The published price index is locked at the beginning of the period at 110.000.Assuming there is no change to the index during the period, the impact of published pricechange on Gross Sales is $128. This is the difference between the current period GrossSales, $1,408, and the base period equivalent, $1,280.


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Publis he d Price

( b)

Foreign Curr enc y

(a)

Application

Net Revenue

Non-Revenue

Sales& Total Sales & Product Line Product Line Product Line

Sales Transfers Transfers A B C Total

Price Realization (Currency Neutralized) ** Price Index to be calculated atbaseperiod peg ratesPriceIndex - Prime Product/Other (Current Back to Base)

PriceIndex - Parts (Current Back to Base)

Base Period

102 102 98102 102 100

Gross Revenue Sales - ExclParts

Gross Revenue Sales - Parts850,000

-500,000 250,000

100,000

-850,000

-

Sales Discount - Excl PartsSales Discount - Parts

Current Period

- - - - -

Gross Revenue Sales - ExclParts (@base fx)Gross Revenue Sales - Parts (@base fx) - - - - -

Sales Discount - Excl Parts (@base fx)Sales Discount - Parts(@basefx)

ublished Price Change

- - - - -

Published Price Change - PrimeProduct/OtherPublished Price Change - Parts - - - - -Total Published Price Change 16,116 12,745 4,902 (1,531) 16,116

Above is an extract from the Sales Reconsheet in the Form M. The published price indexfor Prime Product/Other of Product Line A, shown on the top left corner (i.e. 102), representsa 2% increase in prices [(102/100 -1] that the Form M uses to adjust the current price back tobase price equivalent. The Form M automatically calculates the impact of published pricechange in the Sales Reconsheet to be $12,745 [$650,000 ($650,000/(102/100)]. TheBusiness Unit impact is calculated by adding up all of the Product Line calculations.
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31/98


Sales Reconciliation: Sales Discount (c)


Phy sic al Sales

V olume (f )Transf er Yield (e)

Foreign Currency(a)

Warranty (d)

Sale s Dis count

(c)Published Pr ice (b)

30

Overview

This section calculates the impact of a change in sales discounts on the sales value.

Calculation Theory

The sales discount rate change represents the overall impact of changes to discount levelsbetween comparison periods. This change in sales discounts is driven by a change incountry/region, geographic, or product mix as well as the general level of discounts offered.

- Sales Discounts Country/region mix on sales represents the mix createdwhen products are sold to different countries or regions within GeographicRegions as defined in the Kater MD&A. Country/region mix is calculated byregion at the model level within Product Line. The Product Line calculationsare then added up to arrive at a Business Unit level Country/Region mix.See the chapter on Mix for further detail on the calculation methodologies.

- Sales Discounts Geographic mix on sales represents the mix created whenproducts are sold to different Geographic Regions as defined in the KaterMD&A and is only appropriate for Business Units with world-wide marketing

responsibilities, such as PSMD and Solar. Geographic mix is calculated byregion at the model level within Product Line and added up to arrive at theBusiness Unit mix amount. See the chapter on Mix for further detail on thecalculation methodologies.

- Sales Discounts Product mix represents the mix created when sales ofdifferent product models change within a Product Line. This mix is calculatedat the Product Line level and added up to arrive at the Business unit mixamount. See the chapter on Mix for further detail on the calculationmethodologies.

- Sales Discounts Other represents the difference between the overall salesdiscount rate calculation and the calculations of country/region, geographicand product mix.

The calculation of the sales discount variance compares:

Current sales discount as a percentage of current sales revenue (adjusted for published pricechanges)

- against -

Base sales discount as a percentage of the base sales revenue.

The change in sales discount rate is applied to current period gross sales adjusted to baseperiod prices.

The sales discount rate calculations are performed at the Product Line level. The ProductLine calculations are then added to arrive at the Business Unit level impact. The illustration

below shows a simplified sales discount variance calculation.


32/98




Phy sic al Sales


Foreign Currency(a)

Warranty (d)

Sale s Dis count


31

Illustration: Sales Discount Variance

BASE

Gross sales value ** $1,100Sale discounts ($110)

Net sales $990

Sales discount rate 10.00% [ $110 / $1,100 ]

CURRENT

Gross sales value ** $1,408

Sale discounts ($220)

Net sales $1,188

Sales discount rate 17.19% [ $220 / $1,280 ** ]

Current sales value (less published $1,280price change) **

Change in sales discount rate -7.2%

Sales discount variance

[ Change in sales discount rate x

Current sales (less published price

change) ]($92) [ -7.2% x $1,280 ]

** The base period sales and current period sales values are continued from the published price index section.

The above example assumes no currency impact (accounted for in part (a) of the pie chart)and illustrates how the change in Net Sales can be explained by sales discount.

The example above shows the discount rate for the base period as 10% [$110/$1,100], beingthe base period sales discount divided by gross sales value. For the current period, the salesdiscount is calculated as current period sales discount divided by current period sales valueminus published price change, 17.19% [$220/$1,280]. The example follows the change insales discount, -7.2%, which is multiplied by current period sales value minus published pricechange to arrive at the impact of change in sales discount, ($92) [-7.2% x $1,280].

Application

The Sales Discount amounts in the Form M are automatically populated. The movement intotal of the discount percentage between the base and current values is also automated.

In the Sales Reconsheet, the sales discount variance is calculated using the methodologythat is illustrated in the Calculation Theory section above. If appropriate, sales discount

should also be split between Country/region, Geographic and product mix.


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Phy sic al Sales


Foreign Currency(a)

Warranty (d)

Sale s Dis count


32

Below is a sample extract from the Sales Reconsheet of the Form M.

Net Revenue

Sales

Non-Revenue

Sales &

Transfers

Total Sales &

Transfers

Product Line

A

Product Line

B

Product Line

C

Price Realization (Currency Neutralized) ** Price Index to be calculated at base period pe

Price Index - Prime Product/Other (Current Back to Base) 102 102 98Price Index - Parts (Current Back to Base) 102 102 100

Base Period

Gross Revenue Sales - Excl Parts 850,000 850,000 500,000 250,000 100,000

Gross Revenue Sales - Parts - - - - -

Sales Discount - Excl Parts 15,000 15,000 7,500 5,000 2,500

Sales Discount - Parts - - - - -

Current Period

Gross Revenue Sales - Excl Parts (@ base fx) 975,000 975,000 650,000 250,000 75,000

Gross Revenue Sales - Parts (@ base fx) - - - - -

Sales Discount - Excl Parts (@ base fx) 6,625 6,625 6,750 3,000 1,875

Sales Discount - Parts (@ base fx) - - - - -

Published Price Change

Published Price Change - Prime Product/Other 16,116 16,116 12,745 4,902 (1,531)Published Price Change - Parts - - - - -

Total Published Price Change 16,116 16,116 12,745 4,902 (1,531)


Base Period Sales Discount Rate


Change

Enter Miximpacts by

Product Line

0.0150 0.0200 0.0250

0.0106 0.0122 0.0245

0.0044 0.0078 0.0005

Sales Discount - Product Mix 400 400 300 300 (200)

Sales Discount - Country/Region Mix 2,500 2,500 1,500 1,000

Sales Discount - Geographic Mix N/A N/A

Sales Discount - Geographic Mix - PSMD & SOLAR ONLY - -

Sales Discount - Other 1,849 1,849 1,009 602 238

Sales Discount - Overall Product Line Rate Calc 4,749 4,749 2,809 1,902 38

The sales discounts feed into the Form M sheet as part of the overall Price Realizationvariance. The change in sales discount rates for Product Line C is 0.0005 and the currentsales adjusted for published price change is $76,531 [being $75,000 ($1,531)]. The FormM automatically calculates the impact of sales discount change for Product Line C to be $38[$76,531 x 0.0005]. The Business Unit impact is calculated by adding up all of the ProductLine calculations. Business Units must also enter, if appropriate, any product mix impact onsales by Product Lines in the yellow shaded cells as shown above.
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Sales Reconciliation: Warranty (d)


Phy sical Sales

V olume (f )Foreign Cur rency

(a)

Transf er Yield (e)Published Pric e (b)

War r anty (d)Sales Discount (c)

Overview

There are two types of warranty: policy warranty and standard warranty.

Policy warranty and standard warranty are calculated at the Product Line level in the Form M(Base P&Land Current P&Lsheets) for the Product Lines relevant to the Business Unit.The total warranty amounts for all Product Lines is summed to arrive at a Business Unit level

amount.

Calculation Theory

The change in warranty impact is calculated by comparing the change in P&L values from thebase period to the current period. This change is further adjusted for impacts of foreignexchange rates fluctuation to arrive at a currency neutralized amount. The warranty changeis adjusted to reflect the exchange rate in the base period.

Application

The total warranty costs are used in the Form M as follows:

a). Base period and current period warranty values are prepopulated at a Product LineLevel in the Base Period and Current Period P&L tabs.

b). Product Line warranty break down is totaled at a Business Unit level on P&L tabs.

c). The total warranty values feed into the FXsheet.

d). The foreign currency impact is removed on both the Business Unit level in total and onan individual Product Line level to obtain currency neutralized warranty values.

e). The currency neutralized values feed into the Sales Recon and Form M.


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Phy sical Sales


(a)



Product Product Product

Line A Line B Line C

650,000 250,000 75,000- - -

- - -

- - -$ 650,000 $ 250,000 $ 75,000

9,750 5,000 1,875

- - -

- - -

- - -$ 9,750 $ 5,000 $ 1,875

4,875 2,500 938

3,250 1,250 375

19,500 7,500 2,250

Both types of warranty are automatically imported into the Base P&Land Current P&Lsheets in the Form M.

Current Period

Gross Revenue Sales (USDN)

Machines 975,000

Engines - Parts -

Other -

Total $ 975,000

Sales Discounts - Revenue Sales

Machines 16,625

Engines - Parts -

Other -

Total $ 16,625

Price Structure (as included above) 8,313

Policy Warranty 4,875

Standard Warranty 29,250

The illustration above is an extract from the Current P&L. Both types of warranty aresummed up across all relevant Product Lines to arrive at the Business Unit level amounts $4,875 and $29,250 for policy warranty and standard warranty, respectively.

The change in warranty is calculated in the FXsheet in the Form M as the differencebetween the current period and the base period P&L values.


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Phy sical Sales


(a)



Product Product Product

Line A Line B Line C

(40) (10) -

- - -$ (40) $ (10) $ -

P&L Change

Currency

Adj

NetChange-

Currency

Neutralized

Policy Warranty (625) (50) (575)

Standard Warranty (3,750) - (3,750)

TotalWarranty $ (4,375) $ (50) $ (4,325)

The example above is an extract from the FXsheet. The changes in policy warranty andstandard warranty are automatically calculated as ($625) and ($3,750), respectively being thedifference between the current period values shown above and the Base Period.

The example also illustrates how the warranty is adjusted for foreign exchange ratesfluctuations (refer to the Foreign Exchange Reconciliation section for more information onforeign currency impact calculations). The foreign currency impact on the policy warrantycosts to Product Line A and Product Line B are ($40) and ($10), respectively.

The warranty costs adjusted for foreign currency impact (currency neutralized) areautomatically linked to the Sales Recon sheet in the Form M.

Net

Revenue

Non-

Revenue

Sales & Total Sales & Product Line Product Line Product Line

Form M

impact

Sales Transfers Transfers A B C

Warranty - Policy (575) (575) (710) 10 125

Warranty - Standard (3,750) (3,750) (4,500) - 750

The above example is an extract from the Sales Reconsheet in the Form M and illustratesthe currency neutralized warranty costs from the FXsheet. These amounts would then flow

from the

Sales Recon

sheet to the Form M as shown below.

CORPORATE PROFIT IMPACT

Total

Corpora te

Profit / (Loss) **6 Sigma**

Change Excluding

6 Sigma Benefits

Volume/Price/Mix:

Sales & Transfers Volume 41,759 - 4 1,759

Price Realiza tion

Transfer Yield

Warranty - Policy

Directly

from 'Sales

Recon'sheet

20,865 - 2 0,865

130 - 130

(575) - (575)

Warranty - Standard (3,750) - (3 ,750)

Mix - Between Product Lin es 5,244 - 5 ,244

Mix - Within Product Lines (by mod el) (6,200) - (6 ,200)


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36


Sales Reconciliation: Transfer Yield (e)


Foreign CurrencyPublis hed Pric e (b)

(a)

Phy sic al SalesV olume (f )Sales Dis count (c)

Trans fe r Yie ld (e )War ranty ( d)

Overview

While the Price Realization calculations cover variances on sales made externally by aBusiness Unit in the Form M, internal transfers and inter-company sales are dealt withseparately in the Transfer Out/Inter-company Sales sections.

Across all Business Units, on a consolidated basis, all transfer yield and transfer cost

variance will total to zero. An individual Business Unit Form M will show a variance that willbe offset in opposite variances by another Business Unit.

Transfer yield represents a portion of the change in non-revenue sales that can be explainedby changes in internal transfer prices charged by a Business Unit on internal sales to otherBusiness Units.

The Form M uses a matrix in the Xfers-Intercosheet to capture the transfer price changesbetween Units. Each Business Unit will have a transfer price index relating to both internalpurchases from, and internal sales to, all other Business Units.

Component Product Lines are responsible for providing the index for all of their respectivesales and transfers. Marketing Business Units are responsible for providing the index for allof their respective inter-company purchases (purchases from product groups).

Each Business Unit will have a transfer price index relating to both internal sales andpurchases.

The transfer yield forms part of the total Price Realization in the Form M.


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37





(a)



Calculation Theory

Step 1: The Transfer Price Matrix

The transfer yield and transfer cost variance calculations center around the matrix in theXfers Intercosheet. This matrix is pre -populated in the Form M and captures all thetransfer price indices between the Business Units. Using a two-dimensional matrix ensuresthat one Business Unit

s yield is another Business Unit

s cost.

A simplified example is shown below using two Business Units.

Illustration: Inter-company Transfers

BUA BUB

BUA 110.00

BUB 103.00

For BUBTransfer Price

Current inter-company sales $ value Index Adj'd value

- to BUA $10,000 103.00 $9,709

$10,000 $9,709 $291For BUA Transfer Price

Current inter-company sales $ value Index Adj'd value

- to BUB $13,000 110.00 $11,818

$13,000 $11,818 $1,182

The indices shown are used by the Form M to roll current transfer prices back to base periodlevels. These transfer price indices are very similar to the factors used in adjusting currentpublished prices to base period published prices. The transfer price index of 110 in theexample shown above converts a current internal sales value of $13,000 to a base periodequivalent of $11,818 [$13,000/(110/100)]. This conversion results in a transfer yield of$1,182 attributable to the internal transfer for BUA. Meanwhile BUB will have a transfer costvariance of $1,182.


39/98


40/98

39





(a)



110.0000 110.0000 110.0000110.0000 110.0000 110.0000110.0000 110.0000 110.0000

BUs

I/Co

PU

RCHASES

Application

Step 1: The Transfer Price Matrix

Shown below is an extract from the Transfer Price Matrix in the Form M. Note that the sheetwill highlight in yellow, the row and column applicable to the facility submitting the analysis. Inthe example below, Business Unit 2 is selected as the submitting facility.

In the calculation of transfer yield, the Form M reads across the highlighted row. For example,assume that Business Unit 2 transfers to Business Unit 1. The Form M will read across theBusiness Unit 2 row, to the column where Business Unit 1 intersects it. The index that will beused is circled below.

* Screenshot from theXfers Intercosheet.

With FacilityBusiness

Unit 1Business

Unit 2Business

Unit 3

Form M Facility

Transfers Out (sales to other BUs)

Business Unit 1

Business Unit 2

Business Unit 3

BUs I/Co SALES


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(a)



40

14

-

64

-

18

-

34--130

Step 2: Current Period Transfers Out / Inter-company Sales

Business Units should enter the Transfers Out/Inter-company Sales into the yellow cells in theTransfers-Interco Yieldsheet. The Transfers Out/Inter-company Sales values shouldbe entered before currency adjustments. The currency impact on Transfers Out/Inter -company Sales is captured on the FXsheet (see detailed description in sub-section (a)

above). This only impacts transactions that are non USD based.Transfer yield calculations for transfers to each relevant Business Unit is defined as:

Current period transfers out[Current period transfers out / (Transfer price index / 100)]

The Business Unit impact is the addition of all transfer yield calculations, adjusted forcurrency movements.

An example is provided below.

* Example screenshot from the Form M: Inter-company sales

Current Period Transfers Out

/ Intercompany Sales

Transfers Out /

Intercompany Sales

Factor Form M Transfer Yield

Articulated Truck 150 110.0Asia Pacific Div Admin - 110.0BCP 700 110.0Carter Machinery - 110.0Cast Metals 200 110.0Cat Log Client Services - 110.0Cat Logistics FT Services 375 110.0Track-Type Tractors - 110.0Central Legal Entity Control - 110.0

Subtotal 1,425

Transfers Within Business Unit - -

Total Per P&L's 1,425

Check (must = 0) -

Currency Adjustment -

Form M

Net Form M Impact Impact 130


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(a)



41

The value circled in red flows into the Form M sheet. It represents the total Business Unit impactfrom changes to the transfer prices charged to other Business Units in the current period. Thisvalue is currency neutralized i.e. all values are adjusted to the base period exchange rate in theFXsheet prior to this transfer price calculation.

Step 3: Transfer Yield split by Product Line

The total transfer yield value calculated by the Business Unit must be manually split byProduct Line according to the Product Line mix of internal transfers, and entered into the

Sales Reconsheet of the Form M.

Net Revenue

Sales

Non-Revenue

Sales &

Transfers

Total Sales &

Transfers

Product Line

A

Product Line

B

Product Line

C


Base Period Sales Discount Rate 0.0150 0.0200 0.0250


Change

EnterTransfer

Yield by Product

Line

0.0106 0.0122 0.0245

0.0044 0.0078 0.0005

Sales Discount - Product Mix 400 400 300 300 (200) Sales

Discount - Country/Region Mix 2,500 2,500 1,500 1,000

Sales Discount - Geographic Mix N/A N/A

Sales Discount - Geographic Mix - PSMD & SOLAR ONLY - -

Sales Discount - Other 1,849 1,849 1,009 602 238

Sales Discount - Overall Product Line Rate Calc 4,749 4,749 2,809 1,902 38

Transfer Yield 130 130 110 10 10


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42


Sales Reconciliation: Physical Sales Volume (f)


Published Price (b)Sales Discount (c)

Foreign Currenc y( a)War ranty ( d)

Phys ical Sale s

Volum e ( f)Transf er Yield (e)

Overview

Physical Sales Volume represents the change in sales with the impact from Published Priceand Sales Discount Rate removed.

Calculation Theory

Illustration: Physical Sales Volume Change

Net sales & transfers - base 1,000Net sales & transfers - current 1,200

Total net sales & transfers change 200

Less:Currency impact (20)Published price change 50Sales discount variance 10 Price Realization

Warranty 30Physical sales volume change 130

In the above example, there is a favorable change in net sales and transfers of $200 [$1,200current period vs. $1,000 in the base period]. The net impact of foreign currency movementsand price realization is a $70 [($20)+$50+$10+$30] favorable impact. The Physical SalesVolume change is $130 [$200 - $70].


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43


Sales Reconciliation: Physical Sales Volume (f)


Published Price (b)Sales Discount (c)

Foreign Currenc y( a)War ranty ( d)

Phys ical Sale s

Volum e ( f)Transf er Yield (e)

Application

The Physical Sales Volume Change is automatically calculated in the Sales Reconsheet inthe Form M.

Net Revenue

Sales

Non-Revenue

Sales &

Transfers

Total Sales &

Transfers

Product Line

A

Product Line

B

Product Line

C

Total Price Realization 20,865 130 20,995 15,664 6,814 (1,482)

Parts Transfers to MPC's (McFee Related) 5,000 5,000 5,000 2,000 (2,000)

Subtotal - Adjustments to Sales 21,490 5,130 26,620 18,414 10,814 (2,607)

Physical Sales Volume Change $ 97,510 $ (130) $ 97,380 $ 129,086 $ (8,814) $ (22,893)

The example above is an extract from the Sales Reconsheet. The following two sectionswill illustrate how Physical Sales Volume Change is used in the calculation of Volume Impacton Margin in the Form M.


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44


Sales Reconciliation: Base Period Variable MarginPercentage

Overview

Once the physical sales volume change is calculated, the base period variable marginpercentage is applied to the change to arrive at the Volume Impact on Margin.

Calculation Theory

The Form M uses base period Net Sales & Transfers and Gross Margin as the starting pointin calculating the base period Variable Margin Percentage that will be applied to the change inphysical sales volume. Several adjustments must be made to each of these figures prior tocalculating the Variable Margin Percentage. Warranty and Parts Transfers to MPC's areremoved from Net Sales & Transfers. Each of these items is analyzed discretely in otherareas of the Form M, and thus should not be included in the calculation of the Variable MarginPercentage. Multiple adjustments are made to gross margin as well. The impact of Warranty,

Inventory Adjustments, RSSM's, Period Cost of Sales, and Parts Margin are all removed fromGross Margin. Once these adjustments are complete, the Variable Margin can be calculated.

It is important to emphasize that the Variable Margin calculated in the Form M has beenadjusted to exclude certain variable items that are analyzed discretely elsewhere in theForm M.

Application

The base period Variable Margin Percentage for the overall Business Unit and for all ProductLines relevant to the Business Unit are calculated automatically in the Volumesheet in theForm M, a screen shot of which is shown below.

Base Period Variable Margin Rate

Base Period

Product

Line A

Product

Line B

Product

Line C

Net Sales & Transfers $ 1,006,675 $ 600,950 $ 286,725 $ 119,000

Add Back:

Warranty 29,750 17,500 8,750 3,500Parts Transfers to MPC's (McFee Related) (200,000) (125,000) (50,000) (25,000)

Net Sales & Transfers before Warranty and Parts Transfers $ 836,425 $ 493,450 $ 245,475 $ 97,500

Base Period Variable MarginBase Period Gross Margin

Total Warranty

$ 326,100

29,750

$ 210,333

17,500

$ 86,018

8,750

$ 29,750

3,500Inventory Adjustments/RSSM's 850 500 300 50Period Cost of Sales Incurred 102,086 58,593 30,106 13,388Period Cost Absorbtion Impact on Margin Rate (110) (220) - 1

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