CATERPILLAR FINANCIAL SERVICES CORP - FORM 10-Q

Attached files

file	filename
EX-12 - EXHIBIT 12 - CATERPILLAR FINANCIAL SERVICES CORP	cfsc-09302014x10qxex12.htm
EX-31.1 - EXHIBIT 31.1 - CATERPILLAR FINANCIAL SERVICES CORP	cfsc-09302014x10qxex311.htm
EX-31.2 - EXHIBIT 31.2 - CATERPILLAR FINANCIAL SERVICES CORP	cfsc-09302014x10qxex312.htm
EX-32 - EXHIBIT 32 - CATERPILLAR FINANCIAL SERVICES CORP	cfsc-09302014x10qxex32.htm
10-Q - PDF COPY OF CFSC 2014 3RD QUARTER 10-Q AND EXHIBITS - CATERPILLAR FINANCIAL SERVICES CORP	cfsc0930201410q.pdf
EXCEL - IDEA: XBRL DOCUMENT - CATERPILLAR FINANCIAL SERVICES CORP	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2014

Commission File No. 001-11241

CATERPILLAR FINANCIAL SERVICES CORPORATION

(Exact name of Registrant as specified in its charter)



Delaware		37-1105865
(State of incorporation)		(IRS Employer I.D. No.)

2120 West End Ave. Nashville, Tennessee		37203-0001
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (615) 341-1000

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 [ü] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [ü ] No [ ]

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

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ü ] Smaller reporting company [ ]

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

As of November 14, 2014, one share of common stock of the registrant was outstanding, which is owned by Caterpillar Inc.

The registrant is a wholly owned subsidiary of Caterpillar Inc. and meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q, and is therefore filing this form with the reduced disclosure format.

UNAUDITED

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

In addition to the accompanying unaudited consolidated financial statements for Caterpillar Financial Services Corporation (together with its subsidiaries, "Cat Financial," "the Company," "we," "us" or "our"), we suggest that you read our amended 2013 Annual Report on Form 10-K/A filed with the Securities and Exchange Commission (SEC) on November 14, 2014. The Company files electronically with the SEC required reports on Form 8-K, Form 10-Q, Form 10-K and registration statements on Form S-3 and other forms or reports as required. The public may read and copy any materials the Company has filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains reports, proxies and information statements and other information regarding issuers that file electronically with the SEC. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished with the SEC are available free of charge through Caterpillar Inc.'s Internet site (www.caterpillar.com/secfilings) as soon as reasonably practicable after filing with the SEC. Copies may also be obtained free of charge by writing to: Legal Dept., Caterpillar Financial Services Corporation, 2120 West End Ave., Nashville, Tennessee 37203-0001. In addition, the public may obtain more detailed information about our parent company, Caterpillar Inc. (together with its subsidiaries, "Caterpillar" or "Cat") by visiting its Internet site (www.caterpillar.com). None of the information contained at any time on our Internet site, Caterpillar’s Internet site or the SEC’s Internet site is incorporated by reference into this document.

UNAUDITED

Caterpillar Financial Services Corporation

CONSOLIDATED STATEMENTS OF PROFIT

(Unaudited)

(Dollars in Millions)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013

Revenues:
Retail finance	$	348		$	343		$	1,031		$	1,042
Operating lease	279			239			797			689
Wholesale finance	78			72			234			229
Other, net	38			45			120			114
Total revenues	743			699			2,182			2,074

Expenses:
Interest	158			179			475			557
Depreciation on equipment leased to others	226			199			653			558
General, operating and administrative	108			106			321			317
Provision for credit losses	38			40			106			91
Other	9			6			24			16
Total expenses	539			530			1,579			1,539

Other income (expense)	(7		)	(5		)	(16		)	(45		)

Profit before income taxes	197			164			587			490

Provision for income taxes	47			44			153			126

Profit of consolidated companies	150			120			434			364

Less: Profit attributable to noncontrolling interests	2			3			7			9

Profit ¹	$	148		$	117		$	427		$	355

¹ Profit attributable to Caterpillar Financial Services Corporation.

See Notes to Consolidated Financial Statements (unaudited).

UNAUDITED

Caterpillar Financial Services Corporation

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in Millions)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013

Profit of consolidated companies	$	150		$	120		$	434		$	364

Other comprehensive income (loss), net of tax:
Foreign currency translation, net of tax (expense)/benefit of: 2014 $(77) three months, $(86) nine months; 2013 $33 three months, $24 nine months	(316		)	118			(280		)	(47		)
Derivative financial instruments:
Gains (losses) deferred, net of tax (expense)/benefit of: 2014 $1 three months, $2 nine months; 2013 $1 three months, $0 nine months	(1		)	(2		)	(5		)	—
(Gains) losses reclassified to earnings, net of tax (expense)/benefit of: 2014 $(1) three months, $(1) nine months; 2013 $0 three months, $(1) nine months	1			1			3			3
Total Other comprehensive income (loss), net of tax	(316		)	117			(282		)	(44		)

Comprehensive income (loss)	(166		)	237			152			320

Less: Comprehensive income attributable to the noncontrolling interests	2			4			6			12

Comprehensive income (loss) attributable to Caterpillar Financial Services Corporation	$	(168	)	$	233		$	146		$	308

See Notes to Consolidated Financial Statements (unaudited).

UNAUDITED

Caterpillar Financial Services Corporation

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited)

(Dollars in Millions, except share data)



	September 30, 2014			December 31, 2013
Assets:
Cash and cash equivalents	$	1,070		$	1,320
Finance receivables
Retail notes receivable	11,121			10,858
Wholesale notes receivable	4,285			4,153
Finance leases and installment sale contracts - Retail	14,669			14,551
Finance leases and installment sale contracts - Wholesale	419			480
	30,494			30,042
Less: Unearned income	(910		)	(976		)
Less: Allowance for credit losses	(405		)	(387		)
Total net finance receivables	29,179			28,679

Notes receivable from Caterpillar	350			345
Equipment on operating leases,
less accumulated depreciation	3,609			3,544
Deferred and refundable income taxes	131			166
Other assets	1,041			1,060
Total assets	$	35,380		$	35,114

Liabilities and stockholder’s equity:
Payable to dealers and others	$	132		$	118
Payable to Caterpillar – other	52			80
Accrued expenses	211			251
Income taxes payable	112			52
Payable to Caterpillar - borrowings	1,116			1,118
Short-term borrowings	4,429			3,663
Current maturities of long-term debt	6,157			6,592
Long-term debt	18,686			18,737
Deferred income taxes and other liabilities	542			512
Total liabilities	31,437			31,123

Commitments and contingent liabilities (Notes 7 and 9)

Common stock - $1 par value
Authorized: 2,000 shares; Issued and
outstanding: one share (at paid-in amount)	745			745
Additional paid-in capital	2			2
Retained earnings	3,231			3,004
Accumulated other comprehensive income/(loss)	(164		)	117
Noncontrolling interests	129			123
Total stockholder’s equity	3,943			3,991

Total liabilities and stockholder’s equity	$	35,380		$	35,114

See Notes to Consolidated Financial Statements (unaudited).

UNAUDITED

Caterpillar Financial Services Corporation

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY

(Unaudited)

(Dollars in Millions)



Nine Months Ended September 30, 2013	Common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income/(loss)			Noncontrolling interests			Total
Balance at December 31, 2012	$	745	$	2	$	2,691		$	176		$	106		$	3,720
Profit of consolidated companies					355						9			364
Dividend paid to Caterpillar					(100		)							(100		)
Foreign currency translation, net of tax								(50		)	3			(47		)
Derivative financial instruments, net of tax								3						3
Balance at September 30, 2013	$	745	$	2	$	2,946		$	129		$	118		$	3,940

Nine Months Ended September 30, 2014
Balance at December 31, 2013	$	745	$	2	$	3,004		$	117		$	123		$	3,991
Profit of consolidated companies					427						7			434
Dividend paid to Caterpillar					(200		)							(200		)
Foreign currency translation, net of tax								(279		)	(1		)	(280		)
Derivative financial instruments, net of tax								(2		)				(2		)
Balance at September 30, 2014	$	745	$	2	$	3,231		$	(164	)	$	129		$	3,943

See Notes to Consolidated Financial Statements (unaudited).

UNAUDITED

Caterpillar Financial Services Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in Millions)



	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Profit of consolidated companies	$	434		$	364
Adjustments for non-cash items:
Depreciation and amortization	663			572
Amortization of receivables purchase discount	(183		)	(175		)
Provision for credit losses	106			91
Gain on sales of receivables	(5		)	(2		)
Other, net	(6		)	72
Changes in assets and liabilities:
Receivables from others	(11		)	8
Other receivables/payables with Caterpillar	4			4
Payable to dealers and others	(17		)	(76		)
Accrued interest payable	(66		)	(65		)
Accrued expenses and other liabilities, net	(14		)	(27		)
Income taxes payable	98			(49		)
Payments on interest rate swaps	—			(2		)
Net cash provided by operating activities	1,003			715

Cash flows from investing activities:
Capital expenditures for equipment on operating leases and other capital expenditures	(1,206		)	(1,260		)
Proceeds from disposals of equipment	566			507
Additions to finance receivables	(10,793		)	(10,386		)
Collections of finance receivables	9,278			8,806
Net changes in Caterpillar purchased receivables	246			600
Proceeds from sales of receivables	157			111
Net change in variable lending to Caterpillar	—			32
Additions to other notes receivable with Caterpillar	(30		)	(22		)
Collections on other notes receivable with Caterpillar	25			20
Restricted cash and cash equivalents activity, net	3			4
Other, net	(23		)	(1		)
Net cash provided by (used for) investing activities	(1,777		)	(1,589		)

Cash flows from financing activities:
Proceeds from debt issued (original maturities greater than three months)	7,112			6,854
Payments on debt issued (original maturities greater than three months)	(7,114		)	(7,636		)
Short-term borrowings, net (original maturities three months or less)	791			1,735
Dividend paid to Caterpillar	(200		)	(100		)
Net cash provided by (used for) financing activities	589			853

Effect of exchange rate changes on cash and cash equivalents	(65		)	(15		)

Increase/(decrease) in cash and cash equivalents	(250		)	(36		)
Cash and cash equivalents at beginning of year	1,320			2,080
Cash and cash equivalents at end of period	$	1,070		$	2,044

See Notes to Consolidated Financial Statements (unaudited).

UNAUDITED

Notes to Consolidated Financial Statements

(Unaudited)


1.	Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated profit for the three and nine months ended September 30, 2014 and 2013, (b) the consolidated comprehensive income for the three and nine months ended September 30, 2014 and 2013, (c) the consolidated financial position as of September 30, 2014 and December 31, 2013, (d) the consolidated changes in stockholder's equity for the nine months ended September 30, 2014 and 2013 and (e) the consolidated cash flows for the nine months ended September 30, 2014 and 2013. The preparation of financial statements, 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), requires management to make estimates and assumptions that affect reported amounts. The most significant estimates include those related to the residual values for leased assets, our Allowance for credit losses and the income tax reserve. Actual results may differ from these estimates.

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 Management's Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and notes thereto included in our amended annual report on Form 10-K/A for the year ended December 31, 2013 filed with the SEC on November 14, 2014.

The December 31, 2013 financial position data included herein was derived from the audited consolidated financial statements included in our amended annual report on Form 10-K/A for the year ended December 31, 2013 filed with the SEC on November 14, 2014, but does not include all disclosures required by U.S. GAAP.

We consolidate all variable-interest entities (VIEs) where we are the primary beneficiary. The primary beneficiary of a VIE is the party that has the power to direct the activities that most significantly impact the performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. Please refer to Note 7 for more information.

Revision of prior period financial statements

In preparing our consolidated financial statements for the quarter ended September 30, 2014, we identified immaterial errors that impacted our previously issued consolidated financial statements for the interim periods ended March 31, 2014 and June 30, 2014 and the interim and annual periods ended December 31, 2013, 2012 and 2011. The prior period errors primarily relate to our Allowance for credit losses and our valuation of debt instruments in fair value hedges. Specifically as relating to our Allowance for credit losses, at one of our international subsidiary locations, an internal audit review during the second quarter 2014 identified certain finance receivables not appropriately evaluated for impairment. As a result, management performed a subsidiary level analysis during the third quarter which discovered one additional international subsidiary that was providing incomplete credit loss reporting. Both errors impacted management’s evaluation of the adequacy of the Allowance for credit losses. With respect to the fair value hedges, when debt instruments in fair value hedge transactions matured in 2014, management controls identified carrying value adjustments associated with the matured debt remaining on the balance sheet. Upon investigation, we learned that an incorrect discount rate was being used to value the hedged debt over the term of the hedge relationship.

We evaluated these errors and concluded that they did not, individually or in the aggregate, result in a material misstatement of our previously issued consolidated financial statements. However, if the entire correction was recorded out-of-period in the third quarter of 2014, the cumulative amount would have been material to estimated Profit for the year ending December 31, 2014 and would have impacted comparisons to prior periods. As such, the revisions for these corrections are reflected in the financial information of the applicable prior periods and will be reflected in future filings containing such financial information.

The following tables present the effect of these revisions for the financial statement line items impacted in the affected periods included within this quarterly financial report.

UNAUDITED

Revised Consolidated Statements of Profit Amounts



(Millions of dollars)	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
	Three Months Ended September 30, 2013									Nine Months Ended September 30, 2013
Operating lease revenue	$	238		$	1		$	239		$	687		$	2		$	689
Total revenues	698			1			699			2,072			2			2,074
Depreciation on equipment leased to others	198			1			199			556			2			558
Provision for credit losses	39			1			40			86			5			91
Total expenses	528			2			530			1,532			7			1,539
Other income (expense)	(5		)	—			(5		)	(30		)	(15		)	(45		)
Profit before income taxes	165			(1		)	164			510			(20		)	490
Provision for income taxes	44			—			44			131			(5		)	126
Profit of consolidated companies	121			(1		)	120			379			(15		)	364
Profit	$	118		$	(1	)	$	117		$	370		$	(15	)	$	355

Revised Consolidated Statements of Comprehensive Income Amounts



(Millions of dollars)	As Previously Reported		Adjustment			As Revised		As Previously Reported		Adjustment			As Revised
	Three Months Ended September 30, 2013							Nine Months Ended September 30, 2013
Profit of consolidated companies	$	121	$	(1	)	$	120	$	379	$	(15	)	$	364
Comprehensive income (loss)	238		(1		)	237		335		(15		)	320
Comprehensive income (loss) attributable to Caterpillar Financial Services Corporation	$	234	$	(1	)	$	233	$	323	$	(15	)	$	308

Revised Consolidated Statements of Financial Position Amounts



(Millions of dollars)	As Previously Reported			Adjustment			As Revised			As Previously Reported			Adjustment			As Revised
	December 31, 2013									September 30, 2013
Retail notes receivable	$	10,863		$	(5	)	$	10,858		$	11,105		$	(4	)	$	11,101
Finance leases and installment sale contracts - Retail	14,582			(31		)	14,551			14,408			(27		)	14,381
Total finance receivables	30,078			(36		)	30,042			29,845			(31		)	29,814
Less: Allowance for credit losses	(378		)	(9		)	(387		)	(404		)	(8		)	(412		)
Total net finance receivables	28,724			(45		)	28,679			28,470			(39		)	28,431
Equipment on operating leases, less accumulated depreciation	3,530			14			3,544			3,279			16			3,295
Deferred and refundable income taxes	160			6			166			161			5			166
Other assets	1,059			1			1,060			1,024			1			1,025
Total assets	$	35,138		$	(24	)	$	35,114		$	35,308		$	(17	)	$	35,291
Payable to Caterpillar - other	$	96		$	(16	)	$	80		$	73		$	(10	)	$	63
Long-term debt	18,720			17			18,737			18,064			15			18,079
Deferred income taxes and other liabilities	517			(5		)	512			521			(4		)	517
Total liabilities	31,127			(4		)	31,123			31,350			1			31,351
Retained earnings	3,024			(20		)	3,004			2,964			(18		)	2,946
Total stockholder's equity	4,011			(20		)	3,991			3,958			(18		)	3,940
Total liabilities and stockholder's equity	$	35,138		$	(24	)	$	35,114		$	35,308		$	(17	)	$	35,291

UNAUDITED

Revised Consolidated Statements of Changes in Stockholder's Equity Amounts



(Millions of dollars)
	As Previously Reported		Adjustment			As Revised
	September 30, 2013
Profit	$	370	$	(15	)	$	355
Retained Earnings - Balance at September 30, 2013	$	2,964	$	(18	)	$	2,946

Revised Consolidated Statements of Cash Flows Amounts



(Millions of dollars)	As Previously Reported			Adjustment			As Revised
	Nine Months Ended September 30, 2013
Profit of consolidated companies	$	379		$	(15	)	$	364
Depreciation and amortization	570			2			572
Provision for credit losses	86			5			91
Other, net	57			15			72
Receivables from others	10			(2		)	8
Other receivables/payables with Caterpillar	2			2			4
Accrued expenses and other liabilities, net	(22		)	(5		)	(27		)
Net cash provided by operating activities	713			2			715
Expenditures for equipment on operating leases and for non-leased equipment	(1,244		)	(16		)	(1,260		)
Additions to finance receivables	(10,400		)	14			(10,386		)
Net cash provided by (used for) investing activities	$	(1,587	)	$	(2	)	$	(1,589	)

The Notes to the Consolidated Financial Statements have been revised to reflect the above revisions for all periods presented.

UNAUDITED


2.	Accumulated Other Comprehensive Income/(Loss)

Comprehensive income/(loss) and its components are presented in the Consolidated Statements of Comprehensive Income. Changes in Accumulated other comprehensive income/(loss), net of tax, included in the Consolidated Statements of Changes in Stockholder's Equity, consisted of the following:



(Millions of dollars)	Foreign currency translation			Derivative financial instruments			Total

Three Months Ended September 30, 2013
Balance at June 30, 2013	$	17		$	(4	)	$	13
Other comprehensive income/(loss) before reclassifications	117			(2		)	115
Amounts reclassified from accumulated other comprehensive income/(loss)	—			1			1
Other comprehensive income/(loss)	117			(1		)	116
Balance at September 30, 2013	$	134		$	(5	)	$	129

Three Months Ended September 30, 2014
Balance at June 30, 2014	$	159		$	(7	)	$	152
Other comprehensive income/(loss) before reclassifications	(316		)	(1		)	(317		)
Amounts reclassified from accumulated other comprehensive income/(loss)	—			1			1
Other comprehensive income/(loss)	(316		)	—			(316		)
Balance at September 30, 2014	$	(157	)	$	(7	)	$	(164	)

Nine Months Ended September 30, 2013
Balance at December 31, 2012	$	184		$	(8	)	$	176
Other comprehensive income/(loss) before reclassifications	(50		)	—			(50		)
Amounts reclassified from accumulated other comprehensive income/(loss)	—			3			3
Other comprehensive income/(loss)	(50		)	3			(47		)
Balance at September 30, 2013	$	134		$	(5	)	$	129

Nine Months Ended September 30, 2014
Balance at December 31, 2013	$	122		$	(5	)	$	117
Other comprehensive income/(loss) before reclassifications	(279		)	(5		)	(284		)
Amounts reclassified from accumulated other comprehensive income/(loss)	—			3			3
Other comprehensive income/(loss)	(279		)	(2		)	(281		)
Balance at September 30, 2014	$	(157	)	$	(7	)	$	(164	)

The effect of the reclassifications out of Accumulated other comprehensive income/(loss) on the Consolidated Statements of Profit was as follows:



(Millions of dollars)		Three Months Ended September 30,						Nine Months Ended September 30,
	Classification of income (expense)	2014			2013			2014			2013
Foreign exchange contracts	Other income (expense)	$	—		$	—		$	—		$	—
Interest rate contracts	Interest expense	(2		)	(1		)	(4		)	(4		)
Reclassifications before tax		(2		)	(1		)	(4		)	(4		)
Tax (provision) benefit		1			—			1			1
Total reclassifications from Accumulated other comprehensive income/(loss)		$	(1	)	$	(1	)	$	(3	)	$	(3	)

UNAUDITED


3.	New Accounting Pronouncements

Joint and several liability arrangements – In February 2013, the Financial Accounting Standards Board (FASB) issued accounting guidance on the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements. The guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The entity is also required to disclose the nature and amount of the obligation as well as any other information about those obligations. This guidance was effective January 1, 2014, with retrospective application required. The guidance did not have a material impact on our financial statements.

Parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity – In March 2013, the FASB issued accounting guidance on the parent's accounting for the cumulative translation adjustment (CTA) upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The new standard clarifies existing guidance regarding when the CTA should be released into earnings upon various deconsolidation and consolidation transactions. The guidance was effective January 1, 2014. The guidance did not have a material impact on our financial statements.

Presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists – In July 2013, the FASB issued accounting guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward in the financial statements if available under the applicable tax jurisdiction. The guidance was effective January 1, 2014. The guidance did not have a material impact on our financial statements.

Reporting discontinued operations and disclosures of disposals of components of an entity – In April 2014, the FASB issued accounting guidance for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This guidance is effective January 1, 2015. We do not expect the adoption to have a material impact on our financial statements.

Revenue recognition – In May 2014, the FASB issued new revenue recognition guidance to provide a single, comprehensive revenue recognition model for all contracts with customers. Under the new guidance, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. A five step model has been introduced for an entity to apply when recognizing revenue. The new guidance also includes enhanced disclosure requirements and is effective January 1, 2017. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented, or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Consolidated Statement of Changes in Stockholder's Equity. We are in the process of evaluating the application and implementation of the new guidance.

UNAUDITED


4.	Financing Activities

A. Credit Quality of Financing Receivables and Allowance for Credit Losses

We apply a systematic methodology to determine the Allowance for credit losses for finance receivables. Based upon our analysis of credit losses and risk factors, our portfolio segments are as follows:


•	Customer - Finance receivables with retail customers.


•	Dealer - Finance receivables with Caterpillar dealers.


•	Caterpillar Purchased Receivables - Trade receivables purchased from Caterpillar entities.

We further evaluate our portfolio segments by the class of finance receivables, which is defined as a level of information (below a portfolio segment) in which the finance receivables have the same initial measurement attribute and a similar method for assessing and monitoring credit risk. Typically, our finance receivables within a geographic area have similar credit risk profiles and methods for assessing and monitoring credit risk. Our classes, which align with management reporting for credit losses, are as follows:


•	North America - Finance receivables originated in the United States or Canada.


•	Europe - Finance receivables originated in Europe, Africa, Middle East and the Commonwealth of Independent States.


•	Asia/Pacific - Finance receivables originated in Australia, New Zealand, China, Japan, South Korea and Southeast Asia.


•	Mining - Finance receivables related to large mining customers worldwide.


•	Latin America - Finance receivables originated in Central and South American countries and Mexico.


•	Caterpillar Power Finance - Finance receivables related to marine vessels with Caterpillar engines worldwide and Caterpillar electrical power generation, gas compression and co-generation systems and non-Caterpillar equipment that is powered by these systems worldwide.

Impaired loans and finance leases

For all classes, a loan or finance lease is considered impaired, based on current information and events, if it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan or finance lease. Loans and finance leases reviewed for impairment include loans and finance leases that are past due, non-performing or in bankruptcy. Recognition of income is suspended and the loan or finance lease is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or instances in which relevant information is known that warrants placing the loan or finance lease on non-accrual status). Accrual is resumed and previously suspended income is recognized, when the loan or finance lease becomes contractually current and/or collection doubts are removed. Cash receipts on impaired loans or finance leases are recorded against the receivable and then to any unrecognized income.

There were no impaired loans or finance leases as of September 30, 2014 and December 31, 2013, for the Dealer and Caterpillar Purchased Receivables portfolio segments. The average recorded investment for impaired loans and finance leases for the Dealer and Caterpillar Purchased Receivables portfolio segments was zero for the three and nine months ended September 30, 2014 and 2013.

UNAUDITED

Individually impaired loans and finance leases for the Customer portfolio segment were as follows:



(Millions of dollars)
	As of September 30, 2014						As of December 31, 2013
Impaired Loans and Finance Leases With No Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Customer
North America	$	15	$	15	$	—	$	23	$	22	$	—
Europe	46		46		—		48		47		—
Asia/Pacific	1		1		—		7		7		—
Mining	10		10		—		134		134		—
Latin America	37		37		—		11		11		—
Caterpillar Power Finance	121		120		—		223		222		—
Total	$	230	$	229	$	—	$	446	$	443	$	—
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	7	$	7	$	2	$	13	$	13	$	4
Europe	33		32		9		20		19		7
Asia/Pacific	22		22		7		17		17		2
Mining	144		142		14		—		—		—
Latin America	43		43		14		33		33		9
Caterpillar Power Finance	137		137		41		110		106		51
Total	$	386	$	383	$	87	$	193	$	188	$	73
Total Impaired Loans and Finance Leases
Customer
North America	$	22	$	22	$	2	$	36	$	35	$	4
Europe	79		78		9		68		66		7
Asia/Pacific	23		23		7		24		24		2
Mining	154		152		14		134		134		—
Latin America	80		80		14		44		44		9
Caterpillar Power Finance	258		257		41		333		328		51
Total	$	616	$	612	$	87	$	639	$	631	$	73

UNAUDITED



(Millions of dollars)
	Three Months Ended September 30, 2014				Three Months Ended September 30, 2013
Impaired Loans and Finance Leases With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Customer
North America	$	19	$	—	$	23	$	—
Europe	47		1		52		—
Asia/Pacific	1		—		3		—
Mining	29		—		96		2
Latin America	37		—		14		—
Caterpillar Power Finance	143		1		280		1
Total	$	276	$	2	$	468	$	3
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	10	$	—	$	14	$	—
Europe	24		1		21		—
Asia/Pacific	26		—		18		—
Mining	127		2		—		—
Latin America	34		1		61		1
Caterpillar Power Finance	100		1		156		1
Total	$	321	$	5	$	270	$	2
Total Impaired Loans and Finance Leases
Customer
North America	$	29	$	—	$	37	$	—
Europe	71		2		73		—
Asia/Pacific	27		—		21		—
Mining	156		2		96		2
Latin America	71		1		75		1
Caterpillar Power Finance	243		2		436		2
Total	$	597	$	7	$	738	$	5

UNAUDITED



(Millions of dollars)
	Nine Months Ended September 30, 2014				Nine Months Ended September 30, 2013
Impaired Loans and Finance Leases With No Allowance Recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Customer
North America	$	22	$	1	$	26	$	3
Europe	47		1		48		—
Asia/Pacific	4		—		4		—
Mining	82		3		40		2
Latin America	29		—		11		—
Caterpillar Power Finance	174		4		285		2
Total	$	358	$	9	$	414	$	7
Impaired Loans and Finance Leases With An Allowance Recorded
Customer
North America	$	10	$	—	$	18	$	—
Europe	21		1		23		1
Asia/Pacific	19		1		18		1
Mining	75		4		1		—
Latin America	33		1		52		2
Caterpillar Power Finance	84		2		143		1
Total	$	242	$	9	$	255	$	5
Total Impaired Loans and Finance Leases
Customer
North America	$	32	$	1	$	44	$	3
Europe	68		2		71		1
Asia/Pacific	23		1		22		1
Mining	157		7		41		2
Latin America	62		1		63		2
Caterpillar Power Finance	258		6		428		3
Total	$	600	$	18	$	669	$	12

Non-accrual and past due loans and finance leases

For all classes, we consider a loan or finance lease past due if any portion of a contractual payment is due and unpaid for more than 30 days. Recognition of income is suspended and the loan or finance lease is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or instances in which relevant information is known that warrants placing the loan or finance lease on non-accrual status). Accrual is resumed and previously suspended income is recognized, when the loan or finance lease becomes contractually current and/or collection doubts are removed.

As of September 30, 2014 and December 31, 2013, there were no loans or finance leases on non-accrual status for the Dealer or Caterpillar Purchased Receivables portfolio segments.

UNAUDITED

The investment in customer loans and finance leases on non-accrual status was as follows:



(Millions of dollars)
	September 30, 2014		December 31, 2013
Customer
North America	$	23	$	26
Europe	38		28
Asia/Pacific	91		50
Mining	40		23
Latin America	241		210
Caterpillar Power Finance	130		119
Total	$	563	$	456

Aging related to loans and finance leases was as follows:



(Millions of dollars)
	September 30, 2014
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	47	$	8	$	24	$	79	$	7,078	$	7,157	$	4
Europe	19		20		36		75		2,722		2,797		8
Asia/Pacific	67		50		107		224		2,924		3,148		18
Mining	4		4		11		19		2,065		2,084		—
Latin America	70		30		239		339		2,551		2,890		16
Caterpillar Power Finance	24		28		95		147		2,947		3,094		—
Dealer
North America	—		—		—		—		3,390		3,390		—
Europe	—		—		—		—		503		503		—
Asia/Pacific	—		—		—		—		654		654		—
Mining	—		—		—		—		7		7		—
Latin America	—		—		—		—		864		864		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	15		3		1		19		1,676		1,695		1
Europe	4		5		1		10		439		449		1
Asia/Pacific	—		—		—		—		377		377		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		461		461		—
Caterpillar Power Finance	—		—		1		1		13		14		1
Total	$	250	$	148	$	515	$	913	$	28,671	$	29,584	$	49

UNAUDITED



(Millions of dollars)
	December 31, 2013
	31-60 Days Past Due		61-90 Days Past Due		91+ Days Past Due		Total Past Due		Current		Total Finance Receivables		91+ Still Accruing
Customer
North America	$	37	$	12	$	24	$	73	$	6,507	$	6,580	$	6
Europe	26		15		29		70		2,805		2,875		8
Asia/Pacific	55		46		59		160		3,158		3,318		11
Mining	3		—		12		15		2,128		2,143		—
Latin America	54		25		196		275		2,438		2,713		5
Caterpillar Power Finance	55		30		60		145		2,946		3,091		—
Dealer
North America	—		—		—		—		3,034		3,034		—
Europe	—		—		—		—		569		569		—
Asia/Pacific	—		—		—		—		706		706		—
Mining	—		—		—		—		5		5		—
Latin America	—		—		—		—		940		940		—
Caterpillar Power Finance	—		—		—		—		—		—		—
Caterpillar Purchased Receivables
North America	26		5		2		33		1,539		1,572		2
Europe	2		1		1		4		423		427		—
Asia/Pacific	—		—		—		—		468		468		—
Mining	—		—		—		—		—		—		—
Latin America	—		—		—		—		616		616		—
Caterpillar Power Finance	—		—		1		1		8		9		1
Total	$	258	$	134	$	384	$	776	$	28,290	$	29,066	$	33

UNAUDITED

Allowance for credit losses

An analysis of the Allowance for credit losses was as follows:



(Millions of dollars)
	September 30, 2014
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	374		$	10	$	3	$	387
Receivables written off	(110		)	—		—		(110		)
Recoveries on receivables previously written off	36			—		—		36
Provision for credit losses	105			—		—		105
Adjustment due to sale of receivables	(2		)	—		—		(2		)
Foreign currency translation adjustment	(11		)	—		—		(11		)
Balance at end of period	$	392		$	10	$	3	$	405

Individually evaluated for impairment	$	87		$	—	$	—	$	87
Collectively evaluated for impairment	305			10		3		318
Ending Balance	$	392		$	10	$	3	$	405

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	616		$	—	$	—	$	616
Collectively evaluated for impairment	20,554			5,418		2,996		28,968
Ending Balance	$	21,170		$	5,418	$	2,996	$	29,584



(Millions of dollars)
	December 31, 2013
Allowance for Credit Losses:	Customer			Dealer		Caterpillar Purchased Receivables		Total
Balance at beginning of year	$	417		$	9	$	3	$	429
Receivables written off	(180		)	—		—		(180		)
Recoveries on receivables previously written off	56			—		—		56
Provision for credit losses	90			1		—		91
Adjustment due to sale of receivables	(3		)	—		—		(3		)
Foreign currency translation adjustment	(6		)	—		—		(6		)
Balance at end of year	$	374		$	10	$	3	$	387

Individually evaluated for impairment	$	73		$	—	$	—	$	73
Collectively evaluated for impairment	301			10		3		314
Ending Balance	$	374		$	10	$	3	$	387

Recorded Investment in Finance Receivables:
Individually evaluated for impairment	$	639		$	—	$	—	$	639
Collectively evaluated for impairment	20,081			5,254		3,092		28,427
Ending Balance	$	20,720		$	5,254	$	3,092	$	29,066

UNAUDITED

Credit quality of finance receivables

The credit quality of finance receivables is reviewed on a monthly basis. Credit quality indicators include performing and non-performing. Non-performing is defined as finance receivables currently over 120 days past due and/or on non-accrual status or in bankruptcy. Finance receivables not meeting the criteria listed above are considered performing. Non-performing receivables have the highest probability for credit loss. The Allowance for credit losses attributable to non-performing receivables is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, we estimate the current fair market value of the collateral less selling costs. In addition, consideration is given to credit enhancements such as additional collateral and contractual third-party guarantees in determining the Allowance for credit losses attributable to non-performing receivables.

The recorded investment in performing and non-performing finance receivables was as follows:



(Millions of dollars)
	September 30, 2014
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	7,134	$	3,390	$	1,695	$	12,219
Europe	2,759		503		449		3,711
Asia/Pacific	3,057		654		377		4,088
Mining	2,044		7		—		2,051
Latin America	2,649		864		461		3,974
Caterpillar Power Finance	2,964		—		14		2,978
Total Performing	$	20,607	$	5,418	$	2,996	$	29,021
Non-Performing
North America	$	23	$	—	$	—	$	23
Europe	38		—		—		38
Asia/Pacific	91		—		—		91
Mining	40		—		—		40
Latin America	241		—		—		241
Caterpillar Power Finance	130		—		—		130
Total Non-Performing	$	563	$	—	$	—	$	563
Total Performing and Non-Performing
North America	$	7,157	$	3,390	$	1,695	$	12,242
Europe	2,797		503		449		3,749
Asia/Pacific	3,148		654		377		4,179
Mining	2,084		7		—		2,091
Latin America	2,890		864		461		4,215
Caterpillar Power Finance	3,094		—		14		3,108
Total	$	21,170	$	5,418	$	2,996	$	29,584

UNAUDITED



(Millions of dollars)
	December 31, 2013
	Customer		Dealer		Caterpillar Purchased Receivables		Total
Performing
North America	$	6,554	$	3,034	$	1,572	$	11,160
Europe	2,847		569		427		3,843
Asia/Pacific	3,268		706		468		4,442
Mining	2,120		5		—		2,125
Latin America	2,503		940		616		4,059
Caterpillar Power Finance	2,972		—		9		2,981
Total Performing	$	20,264	$	5,254	$	3,092	$	28,610
Non-Performing
North America	$	26	$	—	$	—	$	26
Europe	28		—		—		28
Asia/Pacific	50		—		—		50
Mining	23		—		—		23
Latin America	210		—		—		210
Caterpillar Power Finance	119		—		—		119
Total Non-Performing	$	456	$	—	$	—	$	456
Total Performing and Non-Performing
North America	$	6,580	$	3,034	$	1,572	$	11,186
Europe	2,875		569		427		3,871
Asia/Pacific	3,318		706		468		4,492
Mining	2,143		5		—		2,148
Latin America	2,713		940		616		4,269
Caterpillar Power Finance	3,091		—		9		3,100
Total	$	20,720	$	5,254	$	3,092	$	29,066

Troubled debt restructurings

A restructuring of a loan or finance lease receivable constitutes a troubled debt restructuring (TDR) when the lender grants a concession it would not otherwise consider to a borrower experiencing financial difficulties. Concessions granted may include extended contract maturities, inclusion of interest only periods, below market interest rates, extended skip payment periods and reduction of principal and/or accrued interest.

TDRs are reviewed along with other receivables as part of management’s ongoing evaluation of the adequacy of the Allowance for credit losses. The Allowance for credit losses attributable to TDRs is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, we estimate the current fair market value of the collateral less selling costs. In addition, consideration is given to credit enhancements such as additional collateral and contractual third-party guarantees in determining the Allowance for credit losses attributable to TDRs.

There were no loans or finance lease receivables modified as TDRs during the three and nine months ended September 30, 2014 and 2013 for the Dealer or Caterpillar Purchased Receivables portfolio segments.

UNAUDITED

Loans and finance lease receivables in the Customer portfolio segment modified as TDRs were as follows:



(Dollars in millions)	Three Months Ended September 30, 2014					Three Months Ended September 30, 2013
	Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment		Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment
Customer
North America	20	$	9	$	3	14	$	1	$	—
Europe	—	—		—		7	5		5
Mining	45	122		124		45	123		123
Latin America	3	—		—		10	1		1
Caterpillar Power Finance⁽¹⁾	7	44		46		6	65		67
Total⁽²⁾	75	$	175	$	173	82	$	195	$	196

	Nine Months Ended September 30, 2014					Nine Months Ended September 30, 2013
	Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment		Number of Contracts	Pre-TDR Outstanding Recorded Investment		Post-TDR Outstanding Recorded Investment
Customer
North America	24	$	11	$	5	46	$	5	$	5
Europe	8	7		7		15	6		6
Mining	47	165		157		45	123		123
Latin America	31	31		30		20	2		2
Caterpillar Power Finance⁽¹⁾	13	80		81		10	101		104
Total⁽²⁾	123	$	294	$	280	136	$	237	$	240

⁽¹⁾During the three and nine months ended September 30, 2014, there were no additional funds subsequently loaned to a borrower whose terms had been modified in a TDR. During the three and nine months ended September 30, 2013, $13 million and $25 million, respectively, of additional funds were subsequently loaned to a borrower whose terms had been modified in a TDR. The $13 million and $25 million of additional funds are not reflected in the table above as no incremental modifications have been made with the borrower during the periods presented. At September 30, 2014, there were no remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR.

⁽²⁾Modifications include extended contract maturities, inclusion of interest only periods, below market interest rates, extended skip payment periods and reduction of principal and/or accrued interest.

UNAUDITED

TDRs in the Customer portfolio segment with a payment default during the three and nine months ended September 30, 2014 and 2013, which had been modified within twelve months prior to the default date, were as follows:



(Dollars in millions)	Three Months Ended September 30, 2014			Three Months Ended September 30, 2013
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	3	$	—	5	$	1
Europe	5	1		5	—
Latin America	7	—		—	—
Total	15	$	1	10	$	1

	Nine Months Ended September 30, 2014			Nine Months Ended September 30, 2013
	Number of Contracts	Post-TDR Recorded Investment		Number of Contracts	Post-TDR Recorded Investment
Customer
North America	10	$	1	18	$	4
Europe	12	2		5	—
Latin America	7	—		—	—
Caterpillar Power Finance	—	—		2	3
Total	29	$	3	25	$	7


B.	Transfers of Receivables

Certain finance receivables and equipment on operating leases are sold to third parties with limited or no recourse to us to mitigate the concentration of credit risk with certain customers and are generally accounted for as sales. We typically maintain servicing responsibilities for these third-party assets, which totaled $318 million and $322 million as of September 30, 2014 and December 31, 2013, respectively. Because we do not receive a servicing fee for these assets, a servicing liability is recorded. As of September 30, 2014 and December 31, 2013, these liabilities were $1 million and $2 million, respectively. These assets are not available to pay our creditors.


C.	Purchases of Trade Receivables from Caterpillar Entities

We purchase trade receivables from Caterpillar entities at a discount. The discount is an estimate of the amount of financing revenue that would be earned at a market rate on these trade receivables over their expected life. The discount is amortized into revenue on an effective yield basis over the life of the receivables and recognized as Wholesale finance revenue. Amortized discounts for the trade receivables were $60 million and $55 million for the three months ended September 30, 2014 and 2013, respectively, and $183 million and $175 million for the nine months ended September 30, 2014 and 2013, respectively. In the Consolidated Statements of Cash Flows, collection of the discount is included in investing activities as the receivables are collected.

UNAUDITED


5.	Derivative Financial Instruments and Risk Management

Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. Our Risk Management Policy (policy) allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate and interest rate 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 and interest rate swaps. Our derivative activities are subject to the management, direction and control of our senior financial officers. Risk management practices, including the use of financial derivative instruments, are presented to our Board of Directors and the Audit Committee of the Caterpillar Inc. Board of Directors at least annually.

All derivatives are recognized on the Consolidated Statements of Financial Position at their fair value. 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 cash flow variability associated with variable-rate debt (cash flow hedge) or (3) an undesignated instrument. 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, are recorded in current earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in Accumulated other comprehensive income (loss) (AOCI), to the extent effective, on the Consolidated Statements of Financial Position until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged on the Consolidated Statements of Cash Flows. Cash flows from undesignated derivative financial instruments are included in the investing category on the Consolidated Statements of Cash Flows.

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 Statements 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 value 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 derecognition criteria for hedge accounting.

Foreign currency exchange rate risk

We have net foreign currency balance sheet positions and expected future transactions denominated in foreign currencies, thereby creating exposure to movements in foreign exchange rates. In managing foreign currency risk, our objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions and expected 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 receivables and debt and exchange rate risk associated with expected future transactions denominated in foreign currencies. Substantially all such foreign currency forward, option and cross currency contracts are undesignated.

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 swaps to manage our exposure to interest rate changes and, in some cases, to lower the cost of borrowed funds.

We have a match-funding policy that addresses interest rate risk by aligning the interest rate profile (fixed or floating rate) of our 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 swaps to meet the match-funding objective. We designate fixed-to-floating interest rate swaps 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 swaps as cash flow hedges to protect against the variability of cash flows due to changes in the benchmark interest rate.

UNAUDITED

As of September 30, 2014, $4 million of deferred net losses, net of tax, included in equity (AOCI in the Consolidated Statements of Financial Position), related to our floating-to-fixed interest rate swaps, are expected to be reclassified to Interest expense over the next twelve months. The actual amount recorded in Interest expense will vary based on interest rates at the time the hedged transactions impact earnings.

We have, at certain times, liquidated fixed-to-floating interest rate swaps that resulted in deferred gains at the time of liquidation. The deferred gains associated with these interest rate swaps are included in Long-term debt in the Consolidated Statements of Financial Position and are being amortized to Interest expense over the remaining term of the previously designated hedged item.

The location and fair value of derivative instruments reported in the Consolidated Statements of Financial Position were as follows:



(Millions of dollars)
		Asset (Liability) Fair Value
	Consolidated Statements of Financial Position Location	September 30, 2014			December 31, 2013
Designated derivatives
Interest rate contracts	Other assets	$	83		$	122
Interest rate contracts	Accrued expenses	(9		)	(6		)
		$	74		$	116
Undesignated derivatives
Foreign exchange contracts	Other assets	$	10		$	7
Foreign exchange contracts	Accrued expenses	(22		)	(4		)
Cross currency contracts	Other assets	12			9
		$	—		$	12

The total notional amounts of the derivative instruments were $5.57 billion and $6.74 billion as of September 30, 2014 and December 31, 2013, respectively. The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties. The amounts exchanged by the parties are calculated by reference to the notional amounts and by other terms of the derivatives, such as foreign currency exchange rates and interest rates.

For the nine months ended September 30, 2014 and 2013, the deferred gains (losses) recorded in AOCI on the Consolidated Statements of Changes in Stockholder’s Equity associated with our cash flow interest rate contract hedges were as follows:



(Millions of dollars)
Balance as of December 31, 2013, net of tax of $3	$	(5	)
Gains (losses) deferred during the period, net of tax of $2	(5		)
(Gains) losses reclassified to earnings, net of tax of $1	3
Balance as of September 30, 2014, net of tax of $4	$	(7	)



(Millions of dollars)
Balance as of December 31, 2012, net of tax of $4	$	(8	)
Gains (losses) deferred during the period, net of tax of $0	—
(Gains) losses reclassified to earnings, net of tax of $1	3
Balance as of September 30, 2013, net of tax of $3	$	(5	)

UNAUDITED

The effect of derivatives designated as hedging instruments on the Consolidated Statements of Profit was as follows:



Fair Value Hedges
(Millions of dollars)
		Three Months Ended September 30, 2014					Three Months Ended September 30, 2013
	Classification	Gains (Losses) on Derivatives			Gains (Losses) on Borrowings		Gains (Losses) on Derivatives			Gains (Losses) on Borrowings
Interest rate contracts	Other income (expense)	$	(19	)	$	18	$	(9	)	$	13

		Nine Months Ended September 30, 2014					Nine Months Ended September 30, 2013
	Classification	Gains (Losses) on Derivatives			Gains (Losses) on Borrowings		Gains (Losses) on Derivatives			Gains (Losses) on Borrowings
Interest rate contracts	Other income (expense)	$	(38	)	$	37	$	(87	)	$	89



Cash Flow Hedges
(Millions of dollars)
		Three Months Ended September 30, 2014
	Classification	Reclassified from AOCI to Earnings (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contracts	Interest expense	$	(2	)	$	—
Interest rate contracts	Other income (expense)	—			—
		$	(2	)	$	—

		Three Months Ended September 30, 2013
	Classification	Reclassified from AOCI to Earnings (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contracts	Interest expense	$	(1	)	$	—
Interest rate contracts	Other income (expense)	—			—
		$	(1	)	$	—

		Nine Months Ended September 30, 2014
	Classification	Reclassified from AOCI to Earnings (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contracts	Interest expense	$	(4	)	$	—
Interest rate contracts	Other income (expense)	—			—
		$	(4	)	$	—

		Nine Months Ended September 30, 2013
	Classification	Reclassified from AOCI to Earnings (Effective Portion)			Recognized in Earnings (Ineffective Portion)
Interest rate contracts	Interest expense	$	(4	)	$	—
Interest rate contracts	Other income (expense)	—			—
		$	(4	)	$	—

UNAUDITED

The effect of derivatives not designated as hedging instruments on the Consolidated Statements of Profit was as follows:



Undesignated Derivatives
(Millions of dollars)		Three Months Ended September 30,
	Classification	2014			2013
Foreign exchange contracts	Other income (expense)	$	(25	)	$	3
Cross currency contracts	Other income (expense)	6			—
Interest rate contracts	Other income (expense)	—			(1		)
		$	(19	)	$	2

		Nine Months Ended September 30,
	Classification	2014			2013
Foreign exchange contracts	Other income (expense)	$	(35	)	$	(3	)
Cross currency contracts	Other income (expense)	(1		)	7
Interest rate contracts	Other income (expense)	—			(1		)
		$	(36	)	$	3

Balance sheet offsetting

We enter into International Swaps and Derivatives Association (ISDA) master netting agreements that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits us 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 us under the master netting agreements. As of September 30, 2014 and December 31, 2013, 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 a termination event was as follows:



Offsetting of Derivative Assets and Liabilities
(Millions of dollars)
	September 30, 2014			December 31, 2013
Derivative Assets
Gross Amount of Recognized Assets	$	105		$	138
Gross Amounts Offset	—			—
Net Amount of Assets⁽¹⁾	105			138
Gross Amounts Not Offset
Financial Instruments	(15		)	(9		)
Cash Collateral Received	—			—
Net Amount	$	90		$	129

Derivative Liabilities
Gross Amount of Recognized Liabilities	$	(31	)	$	(10	)
Gross Amounts Offset	—			—
Net Amount of Liabilities⁽¹⁾	(31		)	(10		)
Gross Amounts Not Offset
Financial Instruments	15			9
Cash Collateral Pledged	—			—
Net Amount	$	(16	)	$	(1	)

⁽¹⁾ As presented in the Consolidated Statements of Financial Position.

UNAUDITED


6.	Segment Information

A. Description of Segments

Our segment data is based on disclosure requirements of accounting guidance on segment reporting, which requires that financial information be reported on the basis that is used internally for measuring segment performance. Internally, we report information for operating segments based on management responsibility. Our operating segments offer primarily the same types of services within each of the respective segments. The operating segments are as follows:


•	North America - Includes our operations in the United States and Canada that serve local dealers and customers.

•

Europe and Caterpillar Power Finance - This segment includes our operations that serve dealers and customers in Europe, Africa, Middle East and the Commonwealth of Independent States. This segment also includes Caterpillar Power Finance (CPF), which finances marine vessels with Caterpillar engines worldwide and also provides debt financing for Caterpillar electrical power generation, gas compression and co-generation systems, as well as non-Caterpillar equipment that is powered by these systems worldwide.


•	Asia/Pacific - This segment includes our operations in Australia, China, Japan, South Korea and Southeast Asia that serve local dealers and customers.


•	Latin America - Includes our operations in Brazil, Mexico and Chile that serve local dealers and customers in Central and South America.


•	Mining - This segment includes large mining customers worldwide. This segment also provides project financing in various countries.

B. Measurement and Reconciliations

Cash, debt and other expenses are allocated to operating segments based on their respective portfolios. The related Interest expense is calculated based on the amount of allocated debt and the rates associated with that debt. The performance of each segment is assessed based on a consistent leverage ratio. The Provision for credit losses included in each operating segment's profit is based on each operating segment's share of the Company's Allowance for credit losses.

Reconciling items are created based on accounting differences between operating segment reporting and our consolidated external reporting. For the reconciliation of profit before income taxes, we have grouped the reconciling items as follows:


•	Unallocated - This item is related to corporate requirements and strategies that are considered to be for the benefit of the entire organization. Also included are the consolidated results of the special purpose corporation (see Note 7 for additional information) and other miscellaneous items.


•	Timing - Timing differences in the recognition of costs between operating segment reporting and consolidated external reporting.


•	Methodology - Methodology differences between our operating segment reporting and our consolidated external reporting are as follows:


◦	Segment assets include off-balance sheet managed assets for which we typically maintain servicing responsibilities.


◦	The impact of the difference between the actual leverage and the segment leverage ratios is included as a methodology difference.


◦	Interest expense includes realized forward points on foreign currency forward contracts, with the mark-to-market elements of the forward exchange contracts included as a methodology difference.


◦	The net gain or loss from interest rate derivatives is included as a methodology difference.


◦	The profit attributable to noncontrolling interests is considered a component of segment profit.

As noted above, the operating segment information is presented on a management-reporting basis. Unlike financial reporting, there is no authoritative guidance for management reporting equivalent to U.S. GAAP.

UNAUDITED

Supplemental segment data and reconciliations to consolidated external reporting for the three months ended September 30 was as follows:



(Millions of dollars) 2014	Revenues			Segment Profit			Interest Expense			Depreciation on equipment leased to others		Provision for credit losses			Segment Assets at September 30, 2014			Capital expenditures
North America	$	274		$	97		$	61		$	94	$	(4	)	$	13,302		$	308
Europe and CPF	126			30			21			25		18			7,797			41
Asia/Pacific	94			32			30			6		9			4,973			6
Latin America	125			37			34			33		8			4,845			22
Mining	116			18			16			68		6			3,242			50
Total Segments	735			214			162			226		37			34,159			427
Unallocated	15			(22		)	12			—		(1		)	1,623			—
Timing	(7		)	(5		)	—			—		2			28			—
Methodology	—			10			(16		)	—		—			(218		)	—
Inter-segment Eliminations	—			—			—			—		—			(212		)	—
Total	$	743		$	197		$	158		$	226	$	38		$	35,380		$	427

2013	Revenues			Segment Profit			Interest Expense			Depreciation on equipment leased to others		Provision for credit losses			Segment Assets at December 31, 2013			Capital expenditures
North America	$	242		$	77		$	64		$	73	$	(1	)	$	12,160		$	212
Europe and CPF	128			25			26			22		25			8,068			80
Asia/Pacific	97			36			35			6		4			5,251			8
Latin America	100			19			29			24		13			4,947			60
Mining	122			23			20			74		(2		)	3,441			113
Total Segments	689			180			174			199		39			33,867			473
Unallocated	16			(20		)	14			—		3			1,595			—
Timing	(6		)	1			—			—		(2		)	68			—
Methodology	—			3			(9		)	—		—			(189		)	—
Inter-segment Eliminations	—			—			—			—		—			(227		)	—
Total	$	699		$	164		$	179		$	199	$	40		$	35,114		$	473

UNAUDITED

Supplemental segment data and reconciliations to consolidated external reporting for the nine months ended September 30 was as follows:



(Millions of dollars) 2014	Revenues			Segment Profit			Interest Expense			Depreciation on equipment leased to others		Provision for credit losses			Segment Assets at September 30, 2014			Capital expenditures
North America	$	786		$	264		$	176		$	261	$	5		$	13,302		$	786
Europe and CPF	379			105			68			76		37			7,797			105
Asia/Pacific	281			104			88			18		23			4,973			23
Latin America	342			100			98			86		12			4,845			82
Mining	362			51			50			211		27			3,242			208
Total Segments	2,150			624			480			652		104			34,159			1,204
Unallocated	53			(56		)	35			1		2			1,623			1
Timing	(21		)	(7		)	—			—		—			28			1
Methodology	—			26			(40		)	—		—			(218		)	—
Inter-segment Eliminations	—			—			—			—		—			(212		)	—
Total	$	2,182		$	587		$	475		$	653	$	106		$	35,380		$	1,206

2013	Revenues			Segment Profit			Interest Expense			Depreciation on equipment leased to others		Provision for credit losses			Segment Assets at December 31, 2013			Capital expenditures
North America	$	703		$	212		$	195		$	214	$	(4	)	$	12,160		$	527
Europe and CPF	370			92			80			61		51			8,068			180
Asia/Pacific	306			116			103			19		10			5,251			32
Latin America	311			78			102			66		24			4,947			184
Mining	350			61			61			197		12			3,441			335
Total Segments	2,040			559			541			557		93			33,867			1,258
Unallocated	53			(56		)	44			1		1			1,595			1
Timing	(19		)	(29		)	—			—		(3		)	68			1
Methodology	—			16			(28		)	—		—			(189		)	—
Inter-segment Eliminations	—			—			—			—		—			(227		)	—
Total	$	2,074		$	490		$	557		$	558	$	91		$	35,114		$	1,260


7.	Guarantees

We provide loan guarantees to third-party lenders for financing associated with machinery purchased by customers. These guarantees have varying terms and are secured by the machinery being financed. In addition, we participate in standby letters of credit issued to third parties on behalf of our customers. These standby letters of credit have varying terms and beneficiaries and are secured by customer assets.

No significant loss has been experienced or is anticipated under any of these guarantees. At September 30, 2014 and December 31, 2013, the related liability was $1 million. The maximum potential amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) we could be required to make under the guarantees was $56 million and $55 million at September 30, 2014 and December 31, 2013, respectively.

UNAUDITED

We provide guarantees to repurchase certain loans of Caterpillar dealers from a special purpose corporation (SPC) that qualifies as a VIE (see Note 1 for additional information regarding the accounting guidance on the consolidation of VIEs). The purpose of the SPC is to provide short-term working capital loans to Caterpillar dealers. This SPC issues commercial paper and uses the proceeds to fund its loan program. We have a loan purchase agreement with the SPC that obligates us to purchase certain loans that are not paid at maturity. We receive a fee for providing this guarantee, which provides a source of liquidity for the SPC. We are the primary beneficiary of the SPC as our guarantees result in us having both the power to direct the activities that most significantly impact the SPC's economic performance and the obligation to absorb losses and therefore we have consolidated the financial statements of the SPC. As of September 30, 2014 and December 31, 2013, the SPC’s assets of $1.12 billion and $1.01 billion, respectively, are primarily comprised of loans to dealers, which are included in Retail notes receivable in the Consolidated Statements of Financial Position, and the SPC's liabilities of $1.12 billion and $1.01 billion, respectively, are primarily comprised of commercial paper, which is included in Short-term borrowings in the Consolidated Statements of Financial Position. The assets of the SPC are not available to pay our creditors. We may be obligated to perform under the guarantee if the SPC experiences losses. No loss has been experienced or is anticipated under this loan purchase agreement.


8.	Fair Value Measurements


A.	Fair Value Measurements

The guidance on fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. This guidance also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. In accordance with this guidance, fair value measurements are classified under the following hierarchy:


•	Level 1 – Quoted prices for identical instruments in active markets.


•	Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets.


•	Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

When available, we use quoted market prices to determine fair value and we classify such measurements within Level 1. In some cases where market prices are not available, we make use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

Fair value measurement includes the consideration of nonperformance risk. Nonperformance risk refers to the risk that an obligation (either by a counterparty or us) will not be fulfilled. For financial assets traded in an active market (Level 1), the nonperformance risk is included in the market price. For certain other financial assets and liabilities (Level 2 and 3), our fair value calculations have been adjusted accordingly.

Derivative financial instruments

The fair value of interest rate swap derivatives is primarily based on standard industry accepted models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine discounted cash flows. The fair value of foreign currency forward and cross currency contracts is based on a standard industry accepted valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate.

Guarantees

The fair value of guarantees is based on our estimate of the premium a market participant would require to issue the same guarantee in a stand-alone, arms-length transaction with an unrelated party. If quoted or observable market prices are not available, fair value is based upon internally developed models that utilize current market-based assumptions.

UNAUDITED

Assets and liabilities measured on a recurring basis at fair value included in our Consolidated Statements of Financial Position are summarized below:



(Millions of dollars)
	September 30, 2014
	Level 1		Level 2		Level 3		Total Assets/Liabilities, at Fair Value
Assets
Derivative financial instruments, net	$	—	$	74	$	—	$	74
Total Assets	$	—	$	74	$	—	$	74
Liabilities
Guarantees	$	—	$	—	$	1	$	1
Total Liabilities	$	—	$	—	$	1	$	1

	December 31, 2013
	Level 1		Level 2		Level 3		Total Assets/Liabilities, at Fair Value
Assets
Derivative financial instruments, net	$	—	$	128	$	—	$	128
Total Assets	$	—	$	128	$	—	$	128
Liabilities
Guarantees	$	—	$	—	$	1	$	1
Total Liabilities	$	—	$	—	$	1	$	1

Below are roll-forwards of liabilities measured at fair value using Level 3 inputs for the nine months ended September 30, 2014 and 2013. These instruments were valued using pricing models that, in management’s judgment, reflect the assumptions of a marketplace participant.



(Millions of dollars)	Guarantees
Balance as of December 31, 2013	$	1
Issuance of guarantees	—
Expiration of guarantees	—
Balance as of September 30, 2014	$	1



(Millions of dollars)	Guarantees
Balance as of December 31, 2012	$	2
Issuance of guarantees	2
Expiration of guarantees	(1		)
Balance as of September 30, 2013	$	3

Impaired loans

In addition to the amounts above, our impaired loans are subject to measurement at fair value on a nonrecurring basis. A loan is considered impaired when management determines that collection of contractual amounts due is not probable. In these cases, an Allowance for credit losses may be established based primarily on the fair value of associated collateral. As the collateral's fair value is based on observable market prices and/or current appraised values, the impaired loans are classified as Level 2 measurements. We had impaired loans carried at the fair value of the underlying collateral value of $250 million and $88 million as of September 30, 2014 and December 31, 2013, respectively.

UNAUDITED


B.	Fair Values of Financial Instruments

In addition to the methods and assumptions we use to record the fair value of financial instruments as discussed in the Fair Value Measurements section above, we used the following methods and assumptions to estimate the fair value of our financial instruments.

Cash and cash equivalents – carrying amount approximated fair value.

Finance receivables, net – fair value was estimated by discounting the future cash flows using current rates representative of receivables with similar remaining maturities.

Restricted cash and cash equivalents – carrying amount approximated fair value.

Short-term borrowings – carrying amount approximated fair value.

Long-term debt – fair value for fixed and floating-rate debt was estimated based on quoted market prices.

Please refer to the table below for the fair values of our financial instruments.



(Millions of dollars)	September 30, 2014						December 31, 2013
	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Fair Value Levels	Reference
Cash and cash equivalents	$	1,070		$	1,070		$	1,320		$	1,320		1
Foreign currency contracts:
In a receivable position	$	10		$	10		$	7		$	7		2	Note 5
In a payable position	$	(22	)	$	(22	)	$	(4	)	$	(4	)	2	Note 5
Cross currency contracts
In a receivable position	$	12		$	12		$	9		$	9		2	Note 5
Finance receivables, net (excluding finance leases⁽¹⁾)	$	21,201		$	20,803		$	20,657		$	20,459		2	Note 4
Restricted cash and cash equivalents⁽²⁾	$	14		$	14		$	17		$	17		1
Short-term borrowings	$	(4,429	)	$	(4,429	)	$	(3,663	)	$	(3,663	)	1
Long-term debt	$	(24,843	)	$	(25,357	)	$	(25,329	)	$	(25,849	)	2
Interest rate swaps:
In a net receivable position	$	83		$	83		$	122		$	122		2	Note 5
In a net payable position	$	(9	)	$	(9	)	$	(6	)	$	(6	)	2	Note 5
Guarantees	$	(1	)	$	(1	)	$	(1	)	$	(1	)	3	Note 7

⁽¹⁾As of September 30, 2014 and December 31, 2013, represents finance leases with a net carrying value of $7.98 billion and $8.02 billion, respectively.

⁽²⁾Included in Other assets in the Consolidated Statements of Financial Position.


9.	Contingencies

We are involved in unresolved legal actions that arise in the normal course of business. Although it is not possible to predict with certainty the outcome of our unresolved legal actions, we believe that these unresolved legal actions will neither individually nor in the aggregate have a material adverse effect on our consolidated financial position, liquidity or results of operations.


10.	Income Taxes

The Provision for income taxes reflects an estimated annual tax rate of 26 percent in the third quarter of 2014 compared with 27 percent in the third quarter of 2013. The decrease in rate is primarily due to changes in the geographic mix of pre-tax profits. The 2013 estimated annual tax rate of 27 percent excludes a benefit of $7 million, reflecting the impact of the American Taxpayer Relief Act.

UNAUDITED

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion below reflects revisions to the prior period financial statements for the correction of immaterial errors as described in Note 1 to the consolidated financial statements.

OVERVIEW: THIRD QUARTER 2014 VS. THIRD QUARTER 2013

We reported third-quarter 2014 revenues of $743 million, an increase of $44 million, or 6 percent, compared with the third quarter of 2013. Third-quarter 2014 profit after tax was $148 million, a $31 million, or 26 percent, increase from the third quarter of 2013.


•	The increase in revenues was primarily due to a $37 million favorable impact from higher average earning assets.


•	Profit before income taxes was $197 million for the third quarter of 2014, compared with $164 million for the third quarter of 2013. The increase was primarily due to a $23 million improvement on net yield on average earning assets and a $16 million favorable impact from higher average earning assets.


•	The provision for income taxes reflects an estimated annual tax rate of 26 percent in the third quarter of 2014, compared with 27 percent in the third quarter of 2013. The decrease in rate is primarily due to changes in the geographic mix of pre-tax profits.


•	During the third quarter of 2014, retail new business volume was $3.13 billion, a decrease of $38 million, or 1 percent, from the third quarter of 2013. The decrease was primarily related to lower volume in Mining, partially offset by increases in Cat equipment sales in North America.

•


•	As of September 30, 2014, our allowance for credit losses totaled $405 million or 1.37 percent of net finance receivables, compared with $395 million or 1.30 percent of net finance receivables as of June 30, 2014, $387 million or 1.33 percent of net finance receivables at year-end 2013 and $412 million or 1.43 percent of net finance receivables as of September 30, 2013.

UNAUDITED

REVIEW OF CONSOLIDATED STATEMENTS OF PROFIT

THREE MONTHS ENDED SEPTEMBER 30, 2014 VS. THREE MONTHS ENDED SEPTEMBER 30, 2013

REVENUES

Retail revenue for the third quarter of 2014 was $348 million, an increase of $5 million from the same period in 2013. The increase was due to a $13 million favorable impact from higher average earning assets, partially offset by an $8 million unfavorable impact from lower interest rates on new and existing retail finance receivables. For the quarter ended September 30, 2014, retail average earning assets were $25.32 billion, an increase of $1.08 billion from the same period in 2013. The annualized average yield was 5.50 percent for the third quarter of 2014, compared with 5.66 percent for the third quarter of 2013.

Operating lease revenue for the third quarter of 2014 was $279 million, an increase of $40 million from the same period in 2013. The increase was due to a $33 million favorable impact from higher average earning assets and a $7 million favorable impact from higher average financing rates on operating leases.

Wholesale revenue for the third quarter of 2014 was $78 million, an increase of $6 million from the same period in 2013. The increase was due to a favorable impact from higher average earning assets. For the quarter ended September 30, 2014, wholesale average earning assets were $4.77 billion, an increase of $333 million from the same period in 2013. The annualized average yield was 6.59 percent for the third quarter of 2014, compared with 6.52 percent for the third quarter of 2013.

Other revenue, net, items were as follows:



(Millions of dollars)	Three Months Ended September 30,
	2014		2013
Finance receivable and operating lease fees (including late charges)	$	17	$	21
Fees on committed credit facility extended to Caterpillar	10		10
Interest income on Notes Receivable from Caterpillar	4		4
Net gain on returned or repossessed equipment	1		6
Miscellaneous other revenue, net	6		4
Total Other revenue, net	$	38	$	45

EXPENSES

Interest expense for the third quarter of 2014 was $158 million, a decrease of $21 million from the same period in 2013. This decrease was primarily due to a reduction of 32 basis points in the average cost of borrowing to 2.06 percent for the third quarter of 2014, down from 2.38 percent for the third quarter of 2013, partially offset by the impact of a 3 percent increase in average borrowings.

Depreciation expense on equipment leased to others was $226 million, up $27 million from the third quarter of 2013 due to an increase in the average operating lease portfolio.

General, operating and administrative expenses were $108 million for the third quarter of 2014, compared with $106 million for the same period in 2013.

Provision for credit losses was $38 million for the third quarter of 2014, compared with $40 million for the same period in 2013. The decrease was primarily due to a decrease in provision expense for finance receivables due to a decrease in write-offs, net of recoveries, partially offset by an unfavorable impact from changes in the allowance rate and growth in the portfolio. Write-offs, net of recoveries, were $16 million for the third quarter of 2014, compared with $58 million for the third quarter of 2013.

Other expenses were $9 million for the third quarter of 2014, up $3 million from the same period in 2013.

UNAUDITED

Other income (expense) items were as follows:



(Millions of dollars)	Three Months Ended September 30,
	2014			2013
Net gain (loss) from interest rate derivatives	$	(1	)	$	1
Net currency exchange loss, including forward points	(6		)	(6		)
Total Other income (expense)	$	(7	)	$	(5	)

The Provision for income taxes was $47 million for the third quarter of 2014, compared with $44 million for the third quarter of 2013. The Provision for income taxes reflects an estimated annual tax rate of 26 percent in the third quarter of 2014, compared with 27 percent in the third quarter of 2013. The decrease in rate is primarily due to changes in the geographic mix of pre-tax profits.

PROFIT

As a result of the performance discussed above, profit after tax was $148 million for the third quarter of 2014, an increase of $31 million, or 26 percent, from the third quarter of 2013.

NINE MONTHS ENDED SEPTEMBER 30, 2014 VS. NINE MONTHS ENDED SEPTEMBER 30, 2013

REVENUES

Retail revenue for the first nine months of 2014 was $1.03 billion, a decrease of $11 million from the same period in 2013. The decrease was due to a $50 million unfavorable impact from lower interest rates on new and existing retail finance receivables, partially offset by a $39 million favorable impact from higher average earning assets. For the nine months ended September 30, 2014, retail average earning assets were $24.98 billion, an increase of $912 million from the same period in 2013. The annualized average yield was 5.50 percent for the first nine months of 2014, compared with 5.77 percent for the same period in 2013.

Operating lease revenue for the first nine months of 2014 was $797 million, an increase of $108 million from the same period in 2013. The increase was due to a favorable impact from higher average earning assets.

Wholesale revenue for the first nine months of 2014 was $234 million, an increase of $5 million from the same period in 2013. The increase was due to a $6 million favorable impact from higher average earning assets, partially offset by a $1 million unfavorable impact from lower interest rates on new and existing wholesale finance receivables. For the nine months ended September 30, 2014, wholesale average earning assets were $4.77 billion, an increase of $119 million from the same period in 2013. The annualized average yield was 6.56 percent for the first nine months of 2014, compared with 6.59 percent for the same period in 2013.

Other revenue, net, items were as follows:



(Millions of dollars)	Nine Months Ended September 30,
	2014			2013
Finance receivable and operating lease fees (including late charges)	$	56		$	59
Fees on committed credit facility extended to Caterpillar	30			30
Interest income on Notes Receivable from Caterpillar	14			14
Net loss on returned or repossessed equipment	(1		)	(5		)
Miscellaneous other revenue, net	21			16
Total Other revenue, net	$	120		$	114

UNAUDITED

EXPENSES

Interest expense for the first nine months of 2014 was $475 million, a decrease of $82 million from the same period in 2013. This decrease was primarily due to a reduction of 43 basis points in the average cost of borrowing to 2.07 percent for the first nine months of 2014, down from 2.50 percent for the first nine months of 2013, partially offset by the impact of a 3 percent increase in average borrowings.

Depreciation expense on equipment leased to others was $653 million, up $95 million from the first nine months of 2013 due to an increase in the average operating lease portfolio.

General, operating and administrative expenses were $321 million for the first nine months of 2014, compared with $317 million for the same period in 2013.

Provision for credit losses was $106 million for the first nine months of 2014, compared with $91 million for the same period in 2013. The increase was primarily due to an increase in provision expense for finance receivables resulting from an unfavorable impact from changes in the allowance rate and growth in the portfolio, partially offset by a decrease in write-offs, net of recoveries. This increase was partially offset by a decrease in provision expense for miscellaneous receivables.

At the end of the third quarter of 2014, past dues were 2.81 percent, compared with 2.77 percent at the end of the second quarter of 2014, 2.47 percent at the end of 2013 and 2.51 percent at the end of the third quarter of 2013. The increase reflects higher past dues in the Latin American, Asia/Pacific and European portfolios. Write-offs, net of recoveries, were $74 million for the first nine months of 2014, compared with $95 million for the same period in 2013. Total non-performing finance receivables, which represent finance receivables currently over 120 days past due and/or on non-accrual status or in bankruptcy, were $563 million and $456 million at September 30, 2014 and December 31, 2013, respectively. Total non-performing finance receivables as a percentage of total finance receivables were 1.90 percent and 1.57 percent at September 30, 2014 and December 31, 2013, respectively.

Our Allowance for credit losses as of September 30, 2014 was $405 million or 1.37 percent of net finance receivables compared with $387 million or 1.33 percent as of December 31, 2013. The increase is primarily due to an allowance increase tied to adverse political and economic developments in several markets that we currently serve, partially offset by write-offs taken in the first nine months of 2014. The allowance is subject to an ongoing evaluation based on many quantitative and qualitative factors, including past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and current economic conditions. We believe our allowance is sufficient to provide for losses inherent in our existing finance receivable portfolio as of September 30, 2014.

Other expenses were $24 million for the first nine months of 2014, up $8 million from the same period in 2013.

Other income (expense) items were as follows:



(Millions of dollars)	Nine Months Ended September 30,
	2014			2013
Net gain (loss) from interest rate derivatives	$	(4	)	$	2
Net currency exchange loss, including forward points	(12		)	(47		)
Total Other income (expense)	$	(16	)	$	(45	)

The Provision for income taxes was $153 million for the first nine months of 2014, compared with $126 million for the same period in 2013. The Provision for income taxes reflects an estimated annual tax rate of 26 percent for the nine months ended September 30, 2014 compared with 27 percent for the nine months ended September 30, 2013. The decrease in rate is primarily due to changes in the geographic mix of pre-tax profits. The 2013 estimated annual tax rate of 27 percent excludes a benefit of $7 million, reflecting the impact of the American Taxpayer Relief Act.

PROFIT

As a result of the performance discussed above, profit after tax was $427 million for the first nine months of 2014, an increase of $72 million, or 20 percent, from the first nine months of 2013.

UNAUDITED

REVIEW OF CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

ASSETS

Total assets were $35.38 billion as of September 30, 2014, an increase of $266 million, or 1 percent, from December 31, 2013, primarily due to an increase in net finance receivables, partially offset by a decrease in our cash position.

New Business Volume

New retail financing for the nine months ended September 30, 2014 was $8.21 billion, a decrease of $24 million, from the same period in 2013. New operating lease activity (which is substantially related to retail) for the nine months ended September 30, 2014 was $1.20 billion, a decrease of $57 million, or 5 percent, from the same period in 2013. New operating lease activity decreased primarily due to decreased rentals of Cat equipment. New wholesale financing activity for the nine months ended September 30, 2014 was $29.62 billion, an increase of $3.64 billion, or 14 percent, from the same period in 2013. New wholesale financing increased primarily due to increases in purchases of trade receivables from Caterpillar.

Off-Balance Sheet Managed Assets

We manage and service receivables and leases that have been sold to third parties with limited or no recourse to us to mitigate the concentration of credit risk with certain customers. These receivables/leases are not available to pay our creditors.

Off-balance sheet managed assets were as follows:



(Millions of dollars)
	September 30, 2014		December 31, 2013
Retail notes receivable	$	126	$	126
Operating leases	86		61
Retail finance leases	67		103
Retail installment sale contracts	39		32
Total off-balance sheet managed assets	$	318	$	322

UNAUDITED

CAPITAL RESOURCES AND LIQUIDITY

Capital resources and liquidity provide us with the ability to meet our financial obligations on a timely basis. Maintaining and managing adequate capital and liquidity resources includes management of funding sources and their utilization based on current, future and contingent needs. Throughout the third quarter of 2014, we experienced favorable liquidity conditions. We intend to maintain a strong cash and liquidity position. We ended the third quarter of 2014 with $1.07 billion of cash, a decrease of $250 million from year-end 2013. Our cash balances are held in numerous locations throughout the world with approximately $465 million held by our non-U.S. subsidiaries. Amounts held outside the United States are available for general corporate use and could be used in the United States without incurring significant additional U.S. taxes. We expect to meet our United States funding needs without repatriating undistributed profits that are indefinitely reinvested outside the United States. We do not generate material funding through structured finance transactions.

In the event that we, or any of our debt securities, experience a credit rating downgrade it would likely result in an increase in our borrowing costs and make access to certain credit markets more difficult. In the event economic conditions deteriorate such that access to debt markets becomes unavailable, we would rely on cash flows from our existing portfolio, utilization of existing cash balances, access to our revolving credit facilities and our other credit facilities and potential borrowings from Caterpillar. In addition, Caterpillar maintains a support agreement with us, which requires Caterpillar to remain as our sole owner and which may, under certain circumstances, require Caterpillar to make payments to us should we fail to maintain certain financial ratios.

BORROWINGS

Borrowings consist primarily of medium-term notes, commercial paper, bank borrowings and variable denomination floating rate demand notes, the combination of which is used to manage interest rate risk and funding requirements.

Total borrowings outstanding as of September 30, 2014 were $30.39 billion, an increase of $278 million over December 31, 2013, primarily due to increasing portfolio balances. Outstanding borrowings were as follows:



(Millions of dollars)	September 30, 2014		December 31, 2013
Medium-term notes, net of unamortized discount	$	23,327	$	23,846
Commercial paper, net of unamortized discount	3,344		2,502
Bank borrowings – long-term	1,516		1,483
Bank borrowings – short-term	488		545
Variable denomination floating rate demand notes	597		616
Notes payable to Caterpillar	1,116		1,118
Total outstanding borrowings	$	30,388	$	30,110

Medium-term notes

We issue medium-term unsecured notes through securities dealers or underwriters in the U.S., Canada, Europe, Australia, Japan, Hong Kong, Argentina and Mexico to both retail and institutional investors. These notes are offered in several currencies and with a variety of maturities. These notes are senior unsecured obligations of the Company. Medium-term notes outstanding as of September 30, 2014, mature as follows:



(Millions of dollars)
2014	$	932
2015	5,923
2016	5,054
2017	5,090
2018	2,294
Thereafter	4,034
Total	$	23,327

Medium-term notes issued totaled $4.88 billion and redeemed totaled $5.03 billion for the nine months ended September 30, 2014.

UNAUDITED

Commercial paper

We issue unsecured commercial paper in the U.S., Europe and other international capital markets. These short-term promissory notes are issued on a discounted basis and are payable at maturity.

Revolving credit facilities

We have three global credit facilities with a syndicate of banks totaling $10.50 billion (Credit Facility) available in the aggregate to both Caterpillar and us for general liquidity purposes. Based on management's allocation decision, which can be revised from time to time, the portion of the Credit Facility available to us as of September 30, 2014 was $7.75 billion.


•	In September 2014, we renewed the 364-day facility. The 364-day facility of $3.15 billion (of which $2.33 billion is available to us) now expires in September 2015.


•	In September 2014, we amended and extended the 2010 four-year facility. The 2010 four-year facility, as amended, of $2.73 billion (of which $2.01 billion is available to us) now expires in September 2017.


•	In September 2014, we amended and extended the 2011 five-year facility. The 2011 five-year facility, as amended, of $4.62 billion (of which $3.41 billion is available to us) now expires in September 2019.

At September 30, 2014, Caterpillar’s consolidated net worth was $22.79 billion, which was above the $9.00 billion required under the Credit Facility. The consolidated net worth is defined in the Credit Facility as the consolidated stockholders' equity including preferred stock but excluding the pension and other postretirement benefits balance within Accumulated other comprehensive income/(loss).

At September 30, 2014, our covenant interest coverage ratio was 2.21 to 1. This is above the 1.15 to 1 minimum ratio, calculated as (1) profit excluding income taxes, interest expense and net gain/(loss) from interest rate derivatives to (2) interest expense calculated at the end of each calendar quarter for the rolling four quarter period then most recently ended, required by the Credit Facility.

In addition, at September 30, 2014, our covenant leverage ratio was 7.89 to 1. This is below the maximum ratio of debt to net worth of 10 to 1, calculated (1) on a monthly basis as the average of the leverage ratios determined on the last day of each of the six preceding calendar months and (2) at each December 31, required by the Credit Facility.

In the event that either Caterpillar or we do not meet one or more of our respective financial covenants under the Credit Facility in the future (and are unable to obtain a consent or waiver), the syndicate of banks may terminate the commitments allocated to the party that does not meet its covenants. Additionally, in such event, certain of our other lenders under other loan agreements where similar financial covenants or cross default provisions are applicable, may, at their election, choose to pursue remedies under those loan agreements, including accelerating the repayment of outstanding borrowings. At September 30, 2014 and December 31, 2013, there were no borrowings under the Credit Facility.

Bank borrowings

Credit lines with banks as of September 30, 2014 totaled $4.20 billion. These committed and uncommitted credit lines, which may be eligible for renewal at various future dates or have no specified expiration date, are used primarily by our non-U.S. subsidiaries for local funding requirements. The remaining available credit commitments may be withdrawn any time at the lenders' discretion. As of September 30, 2014 and December 31, 2013, we had $2.00 billion and $2.03 billion, respectively, outstanding against these credit lines and were in compliance with all debt covenants under these credit lines.

Variable denomination floating rate demand notes

We obtain funding from the sale of variable denomination floating rate demand notes, which may be redeemed at any time at the option of the holder without any material restriction. We do not hold reserves to fund the payment of the demand notes. The notes are offered on a continuous basis by prospectus only.

Notes receivable from/payable to Caterpillar

Under our variable amount lending agreements and other notes receivable with Caterpillar, we may borrow up to $2.33 billion from Caterpillar and Caterpillar may borrow up to $1.29 billion from us. The agreements are in effect for indefinite periods of time and may be changed or terminated by either party with 30 days notice. We had notes receivable of $350 million and notes payable of $1.12 billion outstanding under these agreements as of September 30, 2014, compared with notes receivable of $345 million and notes payable of $1.12 billion as of December 31, 2013.

UNAUDITED

Committed credit facility

In addition, in 2011, we extended a $2 billion committed credit facility to Caterpillar, which expires in February 2019. We receive a fee from Caterpillar based on amounts drawn under the credit facility and a commitment fee for the undrawn amounts under the credit facility. At September 30, 2014 and December 31, 2013, there were no borrowings under this credit facility.

OFF-BALANCE SHEET ARRANGEMENTS

We lease all of our facilities. In addition, we have potential payment exposure for guarantees issued to third parties totaling $56 million as of September 30, 2014.

CASH FLOWS

Operating cash flow was $1.0 billion in the first nine months of 2014, compared with $715 million for the same period a year ago. Net cash used for investing activities was $1.78 billion for the first nine months of 2014, compared with $1.59 billion for the same period in 2013. The change was primarily due to net intercompany purchased receivables. Net cash provided by financing activities was $589 million for the first nine months of 2014, compared with $853 million for the same period in 2013. The change was primarily due to lower net debt issuances and a higher dividend paid to Caterpillar.

UNAUDITED

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements, in conformity with generally accepted accounting principles in the United States of America, requires management to make estimates and assumptions that affect reported amounts. The most significant estimates include those related to the residual values for leased assets, our Allowance for credit losses and the income tax reserve. Actual results may differ from these estimates.

Residual values for leased assets

Lease residual values, which are based upon the estimated wholesale market value of leased equipment at the time of the expiration of the lease, are based on a careful analysis of historical wholesale market sales prices, projected forward on a level trend line without consideration for inflation or possible future pricing action. At the inception of the lease, residual values are derived from consideration of the following critical factors: market size and demand, any known significant market/product trends, total expected hours of usage, machine configuration, application, location, model changes, quantities and past re-marketing experience, third-party residual guarantees and contractual customer purchase options. Many of these factors are gathered in an application survey that is completed prior to quotation. The lease agreement also clearly defines applicable return conditions and remedies for non-compliance, to ensure that the leased equipment will be in good operating condition upon return. Model changes and updates, as well as market strength and product acceptance, are monitored and adjustments are made to residual values in accordance with the significance of any such changes. Remarketing sales staff works closely with customers and dealers to manage the sale of lease returns and the recovery of residual exposure.

During the term of the leases, residual amounts are monitored. If estimated market values reflect a non-temporary impairment due to economic factors, obsolescence or other adverse circumstances, the residuals are adjusted to the lower estimated values by a charge to earnings. For equipment on operating leases, the charge is recognized through depreciation expense. For finance leases, it is recognized through a reduction of finance revenue.

Allowance for credit losses

The Allowance for credit losses is an estimate of the losses inherent in our finance receivable portfolio and includes consideration of accounts that have been individually identified as impaired, as well as pools of finance receivables where it is probable that certain receivables in the pool are impaired but the individual accounts cannot yet be identified. In identifying and measuring impairment, management takes into consideration past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and current economic conditions. In estimating probable credit losses, we review accounts that are past due, non-performing, in bankruptcy or otherwise identified as at-risk for potential credit loss including accounts which have been modified. Accounts are identified as at-risk for potential credit loss using information available about the customer, such as financial statements, news reports and published credit ratings, as well as general information regarding industry trends and the economic environment in which our customers operate.

The Allowance for credit losses attributable to specific accounts is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, we estimate the current fair market value of the collateral less selling costs. We also consider credit enhancements such as additional collateral and contractual third-party guarantees. The Allowance for credit losses attributable to the remaining accounts not yet individually identified as impaired is estimated utilizing probabilities of default and the estimated loss given default. In addition, qualitative factors not able to be fully captured in previous analysis including industry trends, macroeconomic factors and model imprecision are considered in the evaluation of the adequacy of the Allowance for credit losses. These qualitative factors are subjective and require a degree of management judgment.

While management believes it has exercised prudent judgment and applied reasonable assumptions, there can be no assurance that in the future, changes in economic conditions or other factors would not cause changes in the financial health of our customers. If the financial health of our customers deteriorates, the timing and level of payments received could be impacted and therefore, could result in a change to our estimated losses. Please see Item 4 for discussion of a material weakness in our internal control over financial reporting relating to the Allowance for credit losses and our related remediation plan.

Income taxes

We are subject to the income tax laws of the many jurisdictions in which we operate. These tax laws are complex and the manner in which they apply to our facts is sometimes open to interpretation. In establishing the Provision for income taxes, we must make judgments about the application of these inherently complex tax laws.

UNAUDITED

Despite our belief that our tax return positions are consistent with applicable tax laws, we believe that taxing authorities could challenge certain positions. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. We record tax benefits for uncertain tax positions based upon management's evaluation of the information available at the reporting date. To be recognized in the financial statements, a tax benefit must be at least more likely than not of being sustained based on technical merits. The benefit for positions meeting the recognition threshold is measured as the largest benefit more likely than not of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Significant judgment is required in making these determinations and adjustments to unrecognized tax benefits may be necessary to reflect actual taxes payable upon settlement. Adjustments related to positions impacting the effective tax rate affect the Provision for income taxes. Adjustments related to positions impacting the timing of deductions impact deferred tax assets and liabilities.

Our income tax positions and analysis are based on currently enacted tax law. Future changes in tax law could significantly impact the Provision for income taxes, the amount of taxes payable and the deferred tax asset and liability balances. Deferred tax assets generally represent tax benefits for tax deductions or credits available in future tax returns. Certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, reversing temporary differences and available prudent and feasible tax planning strategies. Should a change in facts or circumstances lead to a change in judgment about the ultimate realizability of a deferred tax asset, we record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in the Provision for income taxes.

A provision for U.S. income taxes has not been recorded on undistributed profits of our non-U.S. subsidiaries that we have determined to be indefinitely reinvested outside the U.S. If management intentions or U.S. tax law changes in the future, there may be a significant negative impact on the Provision for income taxes to record an incremental tax liability in the period the change occurs. A deferred tax asset is recognized only if we have definite plans to generate a U.S. tax benefit by repatriating earnings in the foreseeable future.

UNAUDITED

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q may be considered "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements may relate to future events or our future financial performance, which may involve known and unknown risks and uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by any forward-looking statements. From time to time, we may also provide forward-looking statements in oral presentations to the public or in other materials we issue to the public. Forward-looking statements give current expectations or forecasts of future events about the company. You may identify these statements by the fact that they do not relate to historical or current facts and may use words such as "believes," "expects," "estimates," "anticipates," "will," "should," "plan," "project," "intend," "could" and similar words or phrases. These statements are only predictions. Actual events or results may differ materially due to factors that affect international businesses, including changes in economic conditions and disruptions in the global financial and credit markets and changes in laws and regulations (including regulations implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act) and political stability, as well as factors specific to Cat Financial and the markets we serve, including the market’s acceptance of our products and services, the creditworthiness of our customers, interest rate and currency rate fluctuations and estimated residual values of leased equipment. These risk factors may not be exhaustive. We operate in a continually changing business environment and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the impact, if any, of these new risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Moreover, we do not assume responsibility for the accuracy and completeness of those statements. Forward-looking statements are qualified in their entirety by reference to the factors discussed under the captions "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K/A filed with the Securities and Exchange Commission (SEC) on November 14, 2014 for the year ended December 31, 2013, as supplemented in our Form 10-Q/A filings with the SEC on November 14, 2014 and in this Form 10-Q filing. We do not undertake to update our forward-looking statements.

UNAUDITED

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of September 30, 2014 due to the material weakness in internal control over financial reporting relating to our Allowance for credit losses discussed below. Notwithstanding the material weakness, management has concluded that our consolidated financial statements for the periods covered by and included in this Form 10-Q are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America.

Description of material weakness

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the below material weakness in our internal control over financial reporting as of September 30, 2014.

We did not design and maintain effective internal controls over the accuracy and completeness of information about loans identified as being impaired, which are used in evaluating the adequacy of our Allowance for credit losses. Specifically, we did not design or implement controls necessary to monitor the effectiveness of subsidiary level controls relating to compliance with Company policies and procedures for evaluating loans for impairment.

The material weakness described above resulted in immaterial adjustments to our Allowance for credit losses, deferred tax accounts, Provision for credit losses, and income tax expense, as well as related financial statement disclosures and revisions to our consolidated financial statements and disclosures for the quarter ended September 30, 2014. Accordingly, the material weakness did not result in a material misstatement of our consolidated financial statements and disclosures for the quarter ended September 30, 2014. Additionally, this material weakness could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected.

Changes in Internal Control over Financial Reporting

During the third quarter of 2014, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Remediation plan for material weakness in internal control over financial reporting

In response to the material weakness relating to our Allowance for credit losses, the Company has developed and is executing a remediation plan with the oversight of our Chief Executive Officer and Chief Financial Officer as described below.

The following actions have been taken to strengthen our internal controls and organizational structure:


•	The Company has replaced a member of management responsible for ensuring compliance with Company policies and procedures related to identifying and evaluating loans for impairment at the subsidiary location where the control failure was identified.

•

Cat Financial corporate management performed a subsidiary level review to identify any other subsidiaries not complying with policies and procedures related to identifying and evaluating loans for impairment. As a result of this review, we discovered one additional international subsidiary that was providing incomplete credit loss reporting as a result of a control deficiency at that subsidiary location. The impact of this control deficiency has been included in the evaluation and conclusions documented above. No other such control deficiencies were identified.


•	The Company has conducted training sessions for our local subsidiary management responsible for reinforcing the understanding of our policies and procedures that impact the Allowance for credit losses at the subsidiaries where the control deficiencies were identified.

UNAUDITED

The Company also currently anticipates further improving its policies and procedures by:

•

Strengthening our oversight controls to ensure compliance at the subsidiary level with Company policies and procedures impacting the Allowance for credit losses. Those oversight controls will be designed to operate at a level of precision sufficient to detect an error resulting from a related control failure at the subsidiary level before it results in a material misstatement of our consolidated financial statements; and


•	Strengthening our testing of controls designed to ensure compliance at the subsidiary level with Company policies and procedures impacting the Allowance for credit losses to provide effective and timely identification of control deficiencies.

We believe these additional internal controls will be effective in remediating the material weakness described above and we will continue to devote significant time and attention to these remedial efforts. However, the material weakness cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

For a discussion of risks and uncertainties that may affect our business, please see Part I. Item 1A. Risk Factors in our amended annual report on Form 10-K/A filed with the SEC on November 14, 2014 for the year ended December 31, 2013. There has been no material change in this information for the current quarter.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

UNAUDITED

ITEM 6. EXHIBITS



Exhibit No.	Description of Exhibit

10.1	Credit Agreement (2014 364-Day Credit Agreement), dated as of September 11, 2014, among the Company, Caterpillar Inc., Caterpillar International Finance Limited and Caterpillar Finance Corporation, certain financial institutions named therein, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.1 to the Company’s Current Report on Form 8-K filed September 16, 2014).
10.2	Local Currency Addendum, dated as of September 11, 2014, to the 2014 364-Day Credit Agreement (incorporated by reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K filed September 16, 2014).
10.3	Japan Local Currency Addendum, dated as of September 11, 2014, to the 2014 364-Day Credit Agreement (incorporated by reference from Exhibit 99.3 to the Company’s Current Report on Form 8-K filed September 16, 2014).
10.4	Omnibus Amendment No. 4, dated as of September 11, 2014, to the Credit Agreement (4-Year Facility), dated as of September 16, 2010 and Amendment No. 2 to Local Currency Addendum to the 4-Year Facility, by and among the Company, Caterpillar Inc., Caterpillar International Finance Limited and Caterpillar Finance Corporation, the Banks named therein, Local Currency Banks and Japan Local Currency Banks party thereto, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.4 to the Company’s Current Report on Form 8-K filed September 16, 2014).
10.5	Omnibus Amendment No. 3, dated as of September 11, 2014, to the Credit Agreement (5-Year Facility) and Amendment No. 2 to Local Currency Addendum to the 5-Year Facility, dated as of September 15, 2011, by and among the Company, Caterpillar Inc., Caterpillar International Finance Limited and Caterpillar Finance Corporation, the Banks named therein, Local Currency Banks and Japan Local Currency Banks party thereto, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.5 to the Company’s Current Report on Form 8-K filed September 16, 2014).
12	Computation of Ratio of Profit to Fixed Charges
31.1	Certification of Kent M. Adams, President, Director and Chief Executive Officer of Caterpillar Financial Services Corporation, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of James A. Duensing, Executive Vice President and Chief Financial Officer of Caterpillar Financial Services Corporation, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications of Kent M. Adams, President, Director and Chief Executive Officer of Caterpillar Financial Services Corporation, and James A. Duensing, Executive Vice President and Chief Financial Officer of Caterpillar Financial Services Corporation, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

UNAUDITED

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		Caterpillar Financial Services Corporation
(Registrant)
Date:	November 14, 2014	By:	/s/Jeffry D. Everett
		Jeffry D. Everett, Controller



Date:	November 14, 2014	By:	/s/Kent M. Adams
		Kent M. Adams, President, Director and Chief Executive Officer

UNAUDITED

EXHIBIT INDEX



Exhibit No.	Description of Exhibit

10.1	Credit Agreement (2014 364-Day Credit Agreement), dated as of September 11, 2014, among the Company, Caterpillar Inc., Caterpillar International Finance Limited and Caterpillar Finance Corporation, certain financial institutions named therein, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.1 to the Company’s Current Report on Form 8-K filed September 16, 2014).
10.2	Local Currency Addendum, dated as of September 11, 2014, to the 2014 364-Day Credit Agreement (incorporated by reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K filed September 16, 2014).
10.3	Japan Local Currency Addendum, dated as of September 11, 2014, to the 2014 364-Day Credit Agreement (incorporated by reference from Exhibit 99.3 to the Company’s Current Report on Form 8-K filed September 16, 2014).
10.4	Omnibus Amendment No. 4, dated as of September 11, 2014, to the Credit Agreement (4-Year Facility), dated as of September 16, 2010 and Amendment No. 2 to Local Currency Addendum to the 4-Year Facility, by and among the Company, Caterpillar Inc., Caterpillar International Finance Limited and Caterpillar Finance Corporation, the Banks named therein, Local Currency Banks and Japan Local Currency Banks party thereto, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.4 to the Company’s Current Report on Form 8-K filed September 16, 2014).
10.5	Omnibus Amendment No. 3, dated as of September 11, 2014, to the Credit Agreement (5-Year Facility) and Amendment No. 2 to Local Currency Addendum to the 5-Year Facility, dated as of September 15, 2011, by and among the Company, Caterpillar Inc., Caterpillar International Finance Limited and Caterpillar Finance Corporation, the Banks named therein, Local Currency Banks and Japan Local Currency Banks party thereto, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.5 to the Company’s Current Report on Form 8-K filed September 16, 2014).
12	Computation of Ratio of Profit to Fixed Charges
31.1	Certification of Kent M. Adams, President, Director and Chief Executive Officer of Caterpillar Financial Services Corporation, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of James A. Duensing, Executive Vice President and Chief Financial Officer of Caterpillar Financial Services Corporation, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications of Kent M. Adams, President, Director and Chief Executive Officer of Caterpillar Financial Services Corporation, and James A. Duensing, Executive Vice President and Chief Financial Officer of Caterpillar Financial Services Corporation, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

CATERPILLAR FINANCIAL SERVICES CORP - FORM 10-Q - November 14, 2014

Attached files

CATERPILLAR FINANCIAL SERVICES CORP Reports