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EX-12 - EXHIBIT 12 - CATERPILLAR FINANCIAL SERVICES CORPcfsc-03312015x10qxex12.htm
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EX-31.2 - EXHIBIT 31.2 - CATERPILLAR FINANCIAL SERVICES CORPcfsc-03312015x10qxex312.htm
EX-32 - EXHIBIT 32 - CATERPILLAR FINANCIAL SERVICES CORPcfsc-03312015x10qxex32.htm
10-Q - PDF COPY OF CFSC 2015 1ST QUARTER 10-Q AND EXHIBITS - CATERPILLAR FINANCIAL SERVICES CORPcfsc0331201510q.pdf
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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 March 31, 2015
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 May 1, 2015, 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 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 17, 2015. 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.

2

UNAUDITED


Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF PROFIT
(Unaudited)
(Dollars in Millions)
 
Three Months Ended
March 31,
 
2015

2014
 
 
 
 
Revenues:
 
 
 
Retail finance
$
320

 
$
338

Operating lease
256

 
259

Wholesale finance
73

 
73

Other, net
40

 
41

Total revenues
689

 
711

 
 
 
 
Expenses:
 

 
 

Interest
151

 
162

Depreciation on equipment leased to others
212

 
214

General, operating and administrative
103

 
101

Provision for credit losses
18

 
37

Other
9

 
8

Total expenses
493

 
522

 
 
 
 
Other income (expense)
(9
)
 
(7
)
 
 
 
 
Profit before income taxes
187

 
182

 
 
 
 
Provision for income taxes
52

 
48

 
 
 
 
Profit of consolidated companies
135

 
134

 
 
 
 
Less:  Profit attributable to noncontrolling interests
2

 
3

 
 
 
 
Profit 1
$
133

 
$
131

 
 
 
 
1 Profit attributable to Caterpillar Financial Services Corporation.

See Notes to Consolidated Financial Statements (unaudited).

3

UNAUDITED


Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Millions)

 
Three Months Ended
March 31,
 
2015

2014
 
 
 
 
Profit of consolidated companies
$
135

 
$
134

 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation, net of tax (expense)/benefit of:
2015 $(100); 2014 $0
(402
)
 
4

Derivative financial instruments:
 
 
 
Gains (losses) deferred, net of tax (expense)/benefit of:
2015 $(1); 2014 $0
1

 
(2
)
(Gains) losses reclassified to earnings, net of tax expense/(benefit) of:
2015 $0; 2014 $0
1

 
1

Total Other comprehensive income (loss), net of tax
(400
)
 
3

 


 
 
Comprehensive income (loss)
(265
)
 
137

 
 
 
 
Less: Comprehensive income attributable to the noncontrolling interests
1

 
2

 
 
 
 
Comprehensive income (loss) attributable to Caterpillar Financial Services Corporation
$
(266
)
 
$
135

 
 
 
 
See Notes to Consolidated Financial Statements (unaudited).

4

UNAUDITED


Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(Dollars in Millions, except share data)
 
March 31,
2015
 
December 31,
2014
Assets:
 
 
 
Cash and cash equivalents
$
1,147

 
$
857

Finance receivables
 

 
 

Retail notes receivable
10,685

 
11,005

Wholesale notes receivable
4,285

 
4,514

Finance leases and installment sale contracts - Retail
13,819

 
14,455

Finance leases and installment sale contracts - Wholesale
436

 
384

 
29,225

 
30,358

Less: Unearned income
(816
)
 
(883
)
Less: Allowance for credit losses
(392
)
 
(401
)
Total net finance receivables
28,017

 
29,074

 
 
 
 
Notes receivable from Caterpillar
454

 
414

Equipment on operating leases,
 

 
 

less accumulated depreciation
3,525

 
3,624

Deferred and refundable income taxes
189

 
206

Other assets
1,009

 
1,001

Total assets
$
34,341

 
$
35,176

 
 
 
 
Liabilities and stockholder’s equity:
 

 
 

Payable to dealers and others
$
134

 
$
113

Payable to Caterpillar – other
46

 
69

Accrued expenses
206

 
212

Income taxes payable
38

 
66

Payable to Caterpillar - borrowings
1,100

 
1,108

Short-term borrowings
5,259

 
4,699

Current maturities of long-term debt
6,192

 
6,283

Long-term debt
17,308

 
18,291

Deferred income taxes and other liabilities
769

 
681

Total liabilities
31,052

 
31,522

 
 
 
 
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
3,172

 
3,139

Accumulated other comprehensive income/(loss)
(763
)
 
(364
)
Noncontrolling interests
133

 
132

Total stockholder’s equity
3,289

 
3,654

 
 
 
 
Total liabilities and stockholder’s equity
$
34,341

 
$
35,176

 
 
 
 
See Notes to Consolidated Financial Statements (unaudited).

5

UNAUDITED


Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Unaudited)
(Dollars in Millions)
Three Months Ended
March 31, 2014
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income/(loss)
 
Noncontrolling
interests
 
Total
Balance at December 31, 2013
$
745

 
$
2

 
$
3,004

 
$
117

 
$
123

 
$
3,991

Profit of consolidated companies
 

 
 

 
131

 
 

 
3

 
134

Foreign currency translation, net of tax
 

 
 

 
 

 
5

 
(1
)
 
4

Derivative financial instruments, net of tax
 

 
 

 
 

 
(1
)
 
 

 
(1
)
Balance at March 31, 2014
$
745

 
$
2

 
$
3,135

 
$
121

 
$
125

 
$
4,128

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
March 31, 2015
 

 
 

 
 

 
 

 
 

 
 

Balance at December 31, 2014
$
745

 
$
2

 
$
3,139

 
$
(364
)
 
$
132

 
$
3,654

Profit of consolidated companies
 

 
 

 
133

 
 

 
2

 
135

Dividend paid to Caterpillar
 

 
 

 
(100
)
 
 

 
 

 
(100
)
Foreign currency translation, net of tax
 

 
 

 
 

 
(401
)
 
(1
)
 
(402
)
Derivative financial instruments, net of tax
 

 
 

 
 

 
2

 
 

 
2

Balance at March 31, 2015
$
745

 
$
2

 
$
3,172

 
$
(763
)
 
$
133

 
$
3,289

 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements (unaudited).

6

UNAUDITED


Caterpillar Financial Services Corporation
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
 
Three Months Ended
March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Profit of consolidated companies
$
135

 
$
134

Adjustments for non-cash items:
 

 
 

Depreciation and amortization
215

 
217

Amortization of receivables purchase discount
(58
)
 
(58
)
Provision for credit losses
18

 
37

Gain on sales of receivables

 
(1
)
Other, net
(47
)
 
(2
)
Changes in assets and liabilities:
 

 
 

Receivables from others
(29
)
 
(6
)
Other receivables/payables with Caterpillar
1

 
(12
)
Payable to dealers and others
34

 
(19
)
Accrued interest payable
13

 
(32
)
Accrued expenses and other liabilities, net
(21
)
 
(45
)
Income taxes payable
(16
)
 
63

Other assets, net
2

 

Net cash provided by operating activities
247

 
276

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital expenditures for equipment on operating leases and other capital expenditures
(294
)
 
(269
)
Proceeds from disposals of equipment
159

 
160

Additions to finance receivables
(2,901
)
 
(3,198
)
Collections of finance receivables
2,953

 
2,873

Net changes in Caterpillar purchased receivables
118

 
(339
)
Proceeds from sales of receivables
43

 
23

Additions to other notes receivable with Caterpillar
(50
)
 

Collections on other notes receivable with Caterpillar
11

 
8

Restricted cash and cash equivalents activity, net
(5
)
 
(34
)
Settlements of derivatives
(37
)
 
3

Net cash provided by (used for) investing activities
(3
)
 
(773
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from debt issued (original maturities greater than three months)
1,527

 
2,146

Payments on debt issued (original maturities greater than three months)
(2,313
)
 
(2,773
)
Short-term borrowings, net (original maturities three months or less)
950

 
942

Dividend paid to Caterpillar
(100
)
 

Net cash provided by (used for) financing activities
64

 
315

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(18
)
 
(3
)
 
 
 
 
Increase/(decrease) in cash and cash equivalents
290

 
(185
)
Cash and cash equivalents at beginning of year
857

 
1,320

Cash and cash equivalents at end of period
$
1,147

 
$
1,135

 
 
 
 
See Notes to Consolidated Financial Statements (unaudited).

7

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 months ended March 31, 2015 and 2014, (b) the consolidated comprehensive income for the three months ended March 31, 2015 and 2014, (c) the consolidated financial position as of March 31, 2015 and December 31, 2014, (d) the consolidated changes in stockholder's equity for the three months ended March 31, 2015 and 2014 and (e) the consolidated cash flows for the three months ended March 31, 2015 and 2014. 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 income taxes.  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 annual report on Form 10-K for the year ended December 31, 2014 filed with the SEC on February 17, 2015.

The December 31, 2014 financial position data included herein was derived from the audited consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2014 filed with the SEC on February 17, 2015, 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.

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 March 31, 2014
 
 
 
 
 
Balance at December 31, 2013
$
122

 
$
(5
)
 
$
117

Other comprehensive income/(loss) before reclassifications
5

 
(2
)
 
3

Amounts reclassified from accumulated other comprehensive income/(loss)

 
1

 
1

Other comprehensive income/(loss)
5

 
(1
)
 
4

Balance at March 31, 2014
$
127

 
$
(6
)
 
$
121

 
 
 
 
 
 
Three Months Ended March 31, 2015
 
 
 
 
 
Balance at December 31, 2014
$
(359
)
 
$
(5
)
 
$
(364
)
Other comprehensive income/(loss) before reclassifications
(401
)
 
1

 
(400
)
Amounts reclassified from accumulated other comprehensive income/(loss)

 
1

 
1

Other comprehensive income/(loss)
(401
)
 
2

 
(399
)
Balance at March 31, 2015
$
(760
)
 
$
(3
)
 
$
(763
)
 
 
 
 
 
 


8

UNAUDITED


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 March 31,
 
Classification of
income (expense)
 
2015
 
2014
Foreign exchange contracts
Other income (expense)
 
$

 
$

Interest rate contracts
Interest expense
 
(1
)
 
(1
)
Reclassifications before tax
 
 
(1
)
 
(1
)
Tax (provision) benefit
 
 

 

Total reclassifications from Accumulated
other comprehensive income/(loss)
 
 
$
(1
)
 
$
(1
)
 
 
 
 
 
 

3.
New Accounting Pronouncements
 
Reporting discontinued operations and disclosures of disposals of components of an entity – In April 2014, the Financial Accounting Standards Board (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 was effective January 1, 2015 and did not 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.

Variable interest entities – In February 2015, the FASB issued accounting guidance on the consolidation of VIEs. The new guidance revises previous guidance by establishing an analysis for determining whether a limited partnership or similar entity is a VIE and whether outsourced decision-maker fees are considered variable interests. In addition, the new guidance revises how a reporting entity evaluates economics and related parties when assessing who should consolidate a VIE. This guidance is effective January 1, 2016. We do not expect the adoption to have a material impact on our financial statements.

Presentation of debt issuance costs – In April 2015, the FASB issued accounting guidance which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as an asset. This guidance is effective January 1, 2016. We do not expect the adoption to have a material impact on our financial statements.


9

UNAUDITED


4.
Financing Activities
A. Credit Quality of Finance 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 finance receivables
For all classes, a finance receivable 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 finance receivable. Finance receivables reviewed for impairment include those that are past due, non-performing or in bankruptcy. Recognition of income is suspended and the finance receivable 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 finance receivable on non-accrual status). Accrual is resumed and previously suspended income is recognized, when the finance receivable becomes contractually current and/or collection doubts are removed. Cash receipts on impaired finance receivables are recorded against the receivable and then to any unrecognized income.

There were no impaired finance receivables as of March 31, 2015 and December 31, 2014, for the Dealer and Caterpillar Purchased Receivables portfolio segments. The average recorded investment for impaired finance receivables within the Dealer and Caterpillar Purchased Receivables portfolio segments was zero for the three months ended March 31, 2015 and 2014.


10

UNAUDITED


Individually impaired finance receivables for the Customer portfolio segment were as follows:
(Millions of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2015
 
As of December 31, 2014
Impaired Finance Receivables With
No Allowance Recorded
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Customer
 
 
 
 
 
 
 
 
 
 
 
North America
$
13

 
$
13

 
$

 
$
14

 
$
14

 
$

Europe
43

 
43

 

 
44

 
43

 

Asia/Pacific
6

 
6

 

 
2

 
2

 

Mining
119

 
119

 

 
29

 
29

 

Latin America
32

 
32

 

 
34

 
34

 

Caterpillar Power Finance
189

 
188

 

 
129

 
128

 

Total
$
402

 
$
401

 
$

 
$
252

 
$
250

 
$

Impaired Finance Receivables With
An Allowance Recorded
 

 
 

 
 

 
 

 
 

 
 

Customer
 

 
 

 
 

 
 

 
 

 
 

North America
$
6

 
$
6

 
$
2

 
$
6

 
$
6

 
$
1

Europe
17

 
17

 
4

 
12

 
12

 
4

Asia/Pacific
25

 
24

 
8

 
29

 
29

 
8

Mining
43

 
43

 
6

 
138

 
137

 
9

Latin America
48

 
48

 
16

 
42

 
42

 
12

Caterpillar Power Finance
123

 
123

 
38

 
135

 
134

 
41

Total
$
262

 
$
261

 
$
74

 
$
362

 
$
360

 
$
75

Total Impaired Finance Receivables
 

 
 

 
 

 
 

 
 

 
 

Customer
 

 
 

 
 

 
 

 
 

 
 

North America
$
19

 
$
19

 
$
2

 
$
20

 
$
20

 
$
1

Europe
60

 
60

 
4

 
56

 
55

 
4

Asia/Pacific
31

 
30

 
8

 
31

 
31

 
8

Mining
162

 
162

 
6

 
167

 
166

 
9

Latin America
80

 
80

 
16

 
76

 
76

 
12

Caterpillar Power Finance
312

 
311

 
38

 
264

 
262

 
41

Total
$
664

 
$
662

 
$
74

 
$
614

 
$
610

 
$
75

 
 
 
 
 
 
 
 
 
 
 
 
 

11

UNAUDITED


(Millions of dollars)
 
 
 
 
 
 
 
 
Three Months Ended
March 31, 2015
 
Three Months Ended
March 31, 2014
Impaired Finance Receivables With No Allowance
Recorded
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Customer
 
 
 
 
 
 
 
North America
$
14

 
$

 
$
25

 
$
1

Europe
44

 

 
48

 

Asia/Pacific
4

 

 
6

 

Mining
102

 
2

 
134

 
2

Latin America
32

 

 
17

 

Caterpillar Power Finance
135

 
1

 
205

 
2

Total
$
331

 
$
3

 
$
435

 
$
5

Impaired Finance Receivables With An Allowance
Recorded
 

 
 

 
 

 
 

Customer
 

 
 

 
 

 
 

North America
$
6

 
$

 
$
10

 
$

Europe
14

 

 
19

 

Asia/Pacific
26

 

 
16

 

Mining
63

 
1

 
24

 

Latin America
46

 
1

 
34

 

Caterpillar Power Finance
128

 

 
82

 
1

Total
$
283

 
$
2

 
$
185

 
$
1

Total Impaired Finance Receivables
 

 
 

 
 

 
 

Customer
 

 
 

 
 

 
 

North America
$
20

 
$

 
$
35

 
$
1

Europe
58

 

 
67

 

Asia/Pacific
30

 

 
22

 

Mining
165

 
3

 
158

 
2

Latin America
78

 
1

 
51

 

Caterpillar Power Finance
263

 
1

 
287

 
3

Total
$
614

 
$
5

 
$
620

 
$
6

 
 
 
 
 
 
 
 

Non-accrual and past due finance receivables
For all classes, we consider a finance receivable 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 finance receivable 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 finance receivable on non-accrual status). Accrual is resumed and previously suspended income is recognized, when the finance receivable becomes contractually current and/or collection doubts are removed.

As of March 31, 2015 and December 31, 2014, there were no finance receivables on non-accrual status for the Dealer portfolio segment. As of March 31, 2015 and December 31, 2014, there was $5 million and $4 million, respectively, in finance receivables on non-accrual status for the Caterpillar Purchased Receivables portfolio segment, all of which was in the Europe finance receivable class.


12

UNAUDITED


The investment in customer finance receivables on non-accrual status was as follows: 
(Millions of dollars)
 
 
 
 
March 31,
2015
 
December 31,
2014
Customer
 
 
 
North America
$
31

 
$
27

Europe
43

 
28

Asia/Pacific
44

 
54

Mining
124

 
62

Latin America
213

 
201

Caterpillar Power Finance
143

 
96

Total
$
598

 
$
468

 
 
 
 
 
Aging related to finance receivables was as follows: 
(Millions of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
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

 
$
14

 
$
35

 
$
86

 
$
7,337

 
$
7,423

 
$
9

Europe
26

 
15

 
43

 
84

 
2,335

 
2,419

 
6

Asia/Pacific
73

 
32

 
64

 
169

 
2,518

 
2,687

 
24

Mining
20

 
10

 
76

 
106

 
1,883

 
1,989

 
50

Latin America
100

 
47

 
190

 
337

 
2,181

 
2,518

 

Caterpillar Power Finance
17

 
1

 
87

 
105

 
3,055

 
3,160

 
1

Dealer
 

 
 

 
 

 


 
 
 


 
 
North America

 

 

 

 
3,266

 
3,266

 

Europe

 

 

 

 
463

 
463

 

Asia/Pacific
2

 

 

 
2

 
596

 
598

 

Mining

 

 

 

 
3

 
3

 

Latin America

 

 

 

 
800

 
800

 

Caterpillar Power Finance

 

 

 

 

 

 

Caterpillar Purchased Receivables
 

 
 

 
 

 


 
 
 


 
 
North America
8

 
2

 
1

 
11

 
1,937

 
1,948

 
1

Europe
1

 

 
5

 
6

 
418

 
424

 

Asia/Pacific

 

 

 

 
384

 
384

 

Mining

 

 

 

 

 

 

Latin America

 

 

 

 
311

 
311

 

Caterpillar Power Finance
2

 

 

 
2

 
14

 
16

 

Total
$
286

 
$
121

 
$
501

 
$
908

 
$
27,501

 
$
28,409

 
$
91

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

13

UNAUDITED


(Millions of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
46

 
$
8

 
$
27

 
$
81

 
$
7,291

 
$
7,372

 
$
4

Europe
16

 
23

 
29

 
68

 
2,607

 
2,675

 
6

Asia/Pacific
29

 
22

 
69

 
120

 
2,773

 
2,893

 
16

Mining
28

 

 
11

 
39

 
2,084

 
2,123

 

Latin America
55

 
23

 
196

 
274

 
2,583

 
2,857

 
8

Caterpillar Power Finance
1

 
4

 
64

 
69

 
3,079

 
3,148

 
1

Dealer
 

 
 

 
 

 


 
 
 


 
 
North America

 

 

 

 
3,209

 
3,209

 

Europe

 

 

 

 
467

 
467

 

Asia/Pacific

 

 

 

 
637

 
637

 

Mining

 

 

 

 
3

 
3

 

Latin America

 

 

 

 
853

 
853

 

Caterpillar Power Finance

 

 

 

 

 

 

Caterpillar Purchased Receivables
 

 
 

 
 

 


 
 
 


 
 
North America
23

 
5

 
1

 
29

 
1,916

 
1,945

 
1

Europe
4

 
1

 
5

 
10

 
429

 
439

 
1

Asia/Pacific

 

 

 

 
401

 
401

 

Mining

 

 

 

 

 

 

Latin America
6

 
5

 

 
11

 
420

 
431

 

Caterpillar Power Finance

 

 
1

 
1

 
21

 
22

 
1

Total
$
208

 
$
91

 
$
403

 
$
702

 
$
28,773

 
$
29,475

 
$
38

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

14

UNAUDITED


Allowance for credit losses 
An analysis of the Allowance for credit losses was as follows:
(Millions of dollars)
 
 
 
 
 
 
 
 
March 31, 2015
Allowance for Credit Losses:
Customer
 
Dealer
 
Caterpillar
Purchased
Receivables
 
Total
Balance at beginning of year
$
388

 
$
10

 
$
3

 
$
401

Receivables written off
(23
)
 

 

 
(23
)
Recoveries on receivables previously written off
11

 

 

 
11

Provision for credit losses
18

 
(1
)
 

 
17

Adjustment due to sale of receivables

 

 

 

Foreign currency translation adjustment
(14
)
 

 

 
(14
)
Balance at end of period
$
380

 
$
9

 
$
3

 
$
392

 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
74

 
$

 
$

 
$
74

Collectively evaluated for impairment
306

 
9

 
3

 
318

Ending Balance
$
380

 
$
9

 
$
3

 
$
392

 
 
 
 
 
 
 
 
Recorded Investment in Finance Receivables:
 

 
 

 
 

 
 

Individually evaluated for impairment
$
664

 
$

 
$

 
$
664

Collectively evaluated for impairment
19,532

 
5,130

 
3,083

 
27,745

Ending Balance
$
20,196

 
$
5,130

 
$
3,083

 
$
28,409

 
 
 
 
 
 
 
 
(Millions of dollars)
 
 
 
 
 
 
 
 
December 31, 2014
Allowance for Credit Losses:
Customer
 
Dealer
 
Caterpillar
Purchased
Receivables
 
Total
Balance at beginning of year
$
374

 
$
10

 
$
3

 
$
387

Receivables written off
(146
)
 

 

 
(146
)
Recoveries on receivables previously written off
47

 

 

 
47

Provision for credit losses
136

 

 

 
136

Adjustment due to sale of receivables
(3
)
 

 

 
(3
)
Foreign currency translation adjustment
(20
)
 

 

 
(20
)
Balance at end of year
$
388

 
$
10

 
$
3

 
$
401

 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
75

 
$

 
$

 
$
75

Collectively evaluated for impairment
313

 
10

 
3

 
326

Ending Balance
$
388

 
$
10

 
$
3

 
$
401

 
 
 
 
 
 
 
 
Recorded Investment in Finance Receivables:
 

 
 

 
 

 
 

Individually evaluated for impairment
$
614

 
$

 
$

 
$
614

Collectively evaluated for impairment
20,454

 
5,169

 
3,238

 
28,861

Ending Balance
$
21,068

 
$
5,169

 
$
3,238

 
$
29,475

 
 
 
 
 
 
 
 


15

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 finance receivables have the highest probability for credit loss. The Allowance for credit losses attributable to non-performing finance 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 finance receivables.
 
The recorded investment in performing and non-performing finance receivables was as follows:
(Millions of dollars)
 
 
 
 
 
 
 
 
March 31, 2015
 
Customer
 
Dealer
 
Caterpillar
Purchased
Receivables
 
Total
Performing
 
 
 
 
 
 
 
North America
$
7,392

 
$
3,266

 
$
1,948

 
$
12,606

Europe
2,376

 
463

 
419

 
3,258

Asia/Pacific
2,643

 
598

 
384

 
3,625

Mining
1,865

 
3

 

 
1,868

Latin America
2,305

 
800

 
311

 
3,416

Caterpillar Power Finance
3,017

 

 
16

 
3,033

Total Performing
$
19,598

 
$
5,130

 
$
3,078

 
$
27,806

Non-Performing
 

 
 

 
 

 
 

North America
$
31

 
$

 
$

 
$
31

Europe
43

 

 
5

 
48

Asia/Pacific
44

 

 

 
44

Mining
124

 

 

 
124

Latin America
213

 

 

 
213

Caterpillar Power Finance
143

 

 

 
143

Total Non-Performing
$
598

 
$

 
$
5

 
$
603

Total Performing and Non-Performing
 

 
 

 
 

 
 

North America
$
7,423

 
$
3,266

 
$
1,948

 
$
12,637

Europe
2,419

 
463

 
424

 
3,306

Asia/Pacific
2,687

 
598

 
384

 
3,669

Mining
1,989

 
3

 

 
1,992

Latin America
2,518

 
800

 
311

 
3,629

Caterpillar Power Finance
3,160

 

 
16

 
3,176

Total
$
20,196

 
$
5,130

 
$
3,083

 
$
28,409

 
 
 
 
 
 
 
 


16

UNAUDITED


(Millions of dollars)
 
 
 
 
 
 
 
 
December 31, 2014
 
Customer
 
Dealer
 
Caterpillar
Purchased
Receivables
 
Total
Performing
 
 
 
 
 
 
 
North America
$
7,345

 
$
3,209

 
$
1,945

 
$
12,499

Europe
2,647

 
467

 
435

 
3,549

Asia/Pacific
2,839

 
637

 
401

 
3,877

Mining
2,061

 
3

 

 
2,064

Latin America
2,656

 
853

 
431

 
3,940

Caterpillar Power Finance
3,052

 

 
22

 
3,074

Total Performing
$
20,600

 
$
5,169

 
$
3,234

 
$
29,003

Non-Performing
 

 
 

 
 

 
 

North America
$
27

 
$

 
$

 
$
27

Europe
28

 

 
4

 
32

Asia/Pacific
54

 

 

 
54

Mining
62

 

 

 
62

Latin America
201

 

 

 
201

Caterpillar Power Finance
96

 

 

 
96

Total Non-Performing
$
468

 
$

 
$
4

 
$
472

Total Performing and Non-Performing
 

 
 

 
 

 
 

North America
$
7,372

 
$
3,209

 
$
1,945

 
$
12,526

Europe
2,675

 
467

 
439

 
3,581

Asia/Pacific
2,893

 
637

 
401

 
3,931

Mining
2,123

 
3

 

 
2,126

Latin America
2,857

 
853

 
431

 
4,141

Caterpillar Power Finance
3,148

 

 
22

 
3,170

Total
$
21,068

 
$
5,169

 
$
3,238

 
$
29,475

 
 
 
 
 
 
 
 

Troubled debt restructurings
A restructuring of a finance 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 finance 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 remaining commitments to lend additional funds to a borrower whose terms have been modified in a TDR as of March 31, 2015 and December 31, 2014.

There were no finance receivables modified as TDRs during the three months ended March 31, 2015 and 2014 for the Dealer or Caterpillar Purchased Receivables portfolio segments.


17

UNAUDITED


Finance receivables in the Customer portfolio segment modified as TDRs were as follows:
(Dollars in millions)
Three Months Ended
March 31, 2015
 
Three Months Ended
March 31, 2014
 
Number of
Contracts
 
Pre-TDR
Recorded
Investment
 
Post-TDR
Recorded
Investment
 
Number of
Contracts
 
Pre-TDR
Recorded
Investment
 
Post-TDR
Recorded
Investment
Customer
 
 
 
 
 
 
 
 
 
 
 
North America
3

 
$
1

 
$
1

 
3

 
$
2

 
$
2

Europe

 

 

 
3

 
5

 
5

Mining

 

 

 
1

 
11

 
10

Latin America

 

 

 
10

 
30

 
29

Caterpillar Power Finance
2

 
83

 
80

 
1

 
1

 
1

Total(1)
5

 
$
84

 
$
81

 
18

 
$
49

 
$
47

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 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.

TDRs in the Customer portfolio segment with a payment default during the three months ended March 31, 2015 and 2014, which had been modified within twelve months prior to the default date, were as follows:
(Dollars in millions)
Three Months Ended
March 31, 2015
 
Three Months Ended
March 31, 2014
 
Number of
Contracts
 
Post-TDR
Recorded
Investment
 
Number of
Contracts
 
Post-TDR
Recorded
Investment
Customer
 
 
 
 
 
 
 
North America
4

 
$
1

 
7

 
$
1

Europe

 

 
7

 
1

Latin America
1

 

 

 

Total
5

 
$
1

 
14

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 $331 million and $316 million as of March 31, 2015 and December 31, 2014, respectively. Because we do not receive a servicing fee for these assets, a servicing liability is recorded. As of March 31, 2015 and December 31, 2014, these liabilities were $1 million. 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 $58 million for the three months ended March 31, 2015 and 2014. In the Consolidated Statements of Cash Flows, collection of the discount is included in investing activities as the receivables are collected.


18

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, the derivative instrument is (1) designated as a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) designated as a hedge of a forecasted transaction or the cash flow variability associated with variable-rate debt (cash flow hedge) or (3) undesignated.  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 assets and liabilities 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.


19

UNAUDITED


As of March 31, 2015, $1 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
 
March 31,
2015
 
December 31,
2014
Designated derivatives
 
 
 
 
 
Interest rate contracts
Other assets
 
$
77

 
$
79

Interest rate contracts
Accrued expenses
 
(6
)
 
(8
)
 
 
 
$
71

 
$
71

Undesignated derivatives
 
 
 

 
 
Foreign exchange contracts
Other assets
 
$
8

 
$
5

Foreign exchange contracts
Accrued expenses
 
(18
)
 
(15
)
Cross currency contracts
Other assets
 
27

 
17

 
 
 
$
17

 
$
7

 
 
 
 
 
 

The total notional amounts of the derivative instruments were $4.75 billion and $5.25 billion as of March 31, 2015 and December 31, 2014, 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 three months ended March 31, 2015 and 2014, 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, 2014, net of tax of $3
$
(5
)
Gains (losses) deferred during the period, net of tax of $1
1

(Gains) losses reclassified to earnings, net of tax of $0
1

Balance as of March 31, 2015, net of tax of $2
$
(3
)
 
 


(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 $0
(2
)
(Gains) losses reclassified to earnings, net of tax of $0
1

Balance as of March 31, 2014, net of tax of $3
$
(6
)
 
 



20

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
March 31, 2015
 
Three Months Ended
March 31, 2014
 
Classification
 
Gains
(Losses)
on
Derivatives
 
Gains
(Losses)
on
Borrowings 
 
Gains
(Losses)
on
Derivatives
 
Gains 
(Losses)
on
Borrowings
Interest rate contracts
Other income (expense)
 
$
(1
)
 
$
1

 
$
(13
)
 
$
13

 
 
 
 
 
 
 
 
 
 

Cash Flow Hedges
(Millions of dollars)
 
 
 
Three Months Ended March 31, 2015
 
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
)
 
$

 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014
 
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
)
 
$

 
 
 
 
 
 

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 March 31,
 
Classification
 
2015
 
2014
Foreign exchange contracts
Other income (expense)
 
$
(38
)
 
$
(1
)
Cross currency contracts
Other income (expense)
 
10

 
(4
)
 
 
 
$
(28
)
 
$
(5
)
 
 
 
 
 
 


21

UNAUDITED


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 March 31, 2015 and December 31, 2014, no cash collateral was received or pledged under the master netting agreements.
    
The effect of 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)
 
 
 
 
 
 
March 31,
2015
 
December 31,
2014
Derivative Assets
 
 
 
 
Gross Amount of Recognized Assets
 
$
112

 
$
101

Gross Amounts Offset
 

 

Net Amount of Assets(1)
 
112

 
101

Gross Amounts Not Offset
 
(14
)
 
(8
)
Net Amount
 
$
98

 
$
93

 
 
 
 
 
Derivative Liabilities
 
 
 
 
Gross Amount of Recognized Liabilities
 
$
(24
)
 
$
(23
)
Gross Amounts Offset
 

 

Net Amount of Liabilities(1)
 
(24
)
 
(23
)
Gross Amounts Not Offset
 
14

 
8

Net Amount
 
$
(10
)
 
$
(15
)
 
 
 
 
 
(1) As presented in the Consolidated Statements of Financial Position.

22

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.


23

UNAUDITED


Supplemental segment data and reconciliations to consolidated external reporting for the three months ended March 31 was as follows:
(Millions of dollars)


 
2015
Revenues
 
Segment
Profit
 
Interest
Expense
 
Depreciation
on equipment
leased to
others
 
Provision
for
credit
losses
 
Segment
Assets at
March 31,
2015
 
Capital
expenditures
North America
$
284

 
$
97

 
$
63

 
$
101

 
$
(4
)
 
$
13,818

 
$
176

Europe and CPF
113

 
35

 
17

 
21

 
13

 
7,327

 
20

Asia/Pacific
80

 
20

 
31

 
5

 
9

 
4,586

 
4

Latin America
102

 
24

 
29

 
27

 
6

 
4,181

 
24

Mining
100

 
29

 
14

 
58

 
(10
)
 
3,013

 
69

Total Segments
679

 
205

 
154

 
212

 
14

 
32,925

 
293

Unallocated
18

 
(19
)
 
16

 

 

 
1,748

 

Timing
(8
)
 
(11
)
 

 

 
4

 
103

 
1

Methodology

 
12

 
(19
)
 

 

 
(221
)
 

Inter-segment Eliminations

 

 

 

 

 
(214
)
 

Total
$
689

 
$
187

 
$
151

 
$
212

 
$
18

 
$
34,341

 
$
294

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
Revenues
 
Segment
Profit
 
Interest
Expense
 
Depreciation
on equipment
leased to
others
 
Provision
for
credit
losses
 
Segment
Assets at
December 31,
2014
 
Capital
expenditures
North America
$
247

 
$
77

 
$
60

 
$
80

 
$
3

 
$
13,661

 
$
130

Europe and CPF
130

 
41

 
24

 
26

 
9

 
7,601

 
31

Asia/Pacific
92

 
38

 
28

 
6

 
7

 
4,767

 
10

Latin America
105

 
26

 
32

 
27

 
4

 
4,676

 
35

Mining
123

 
10

 
18

 
75

 
13

 
3,161

 
63

Total Segments
697

 
192

 
162

 
214

 
36

 
33,866

 
269

Unallocated
21

 
(13
)
 
12

 

 

 
1,648

 

Timing
(7
)
 
(2
)
 

 

 
1

 
120

 

Methodology

 
5

 
(12
)
 

 

 
(215
)
 

Inter-segment Eliminations

 

 

 

 

 
(243
)
 

Total
$
711

 
$
182

 
$
162

 
$
214

 
$
37

 
$
35,176

 
$
269

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 March 31, 2015 and December 31, 2014, 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 $52 million and $42 million at March 31, 2015 and December 31, 2014, respectively.


24

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 March 31, 2015 and December 31, 2014, the SPC’s assets of $1.14 billion and $1.09 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 $1.14 billion and $1.08 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.


25

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)
 
 
 
 
 
 
 
 
March 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total Assets/Liabilities,
at Fair Value
Assets
 
 
 
 
 
 
 
Derivative financial instruments, net
$

 
$
88

 
$

 
$
88

Total Assets
$

 
$
88

 
$

 
$
88

Liabilities
 

 
 

 
 

 
 

Guarantees
$

 
$

 
$
1

 
$
1

Total Liabilities
$

 
$

 
$
1

 
$
1

 
 
 
 
 
 
 
 
 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total Assets/Liabilities,
at Fair Value
Assets
 

 
 

 
 

 
 

  Derivative financial instruments, net
$

 
$
78

 
$

 
$
78

Total Assets
$

 
$
78

 
$

 
$
78

Liabilities
 

 
 

 
 

 
 

Guarantees
$

 
$

 
$
1

 
$
1

Total Liabilities
$

 
$

 
$
1

 
$
1

 
 
 
 
 
 
 
 

Below are roll-forwards of liabilities measured at fair value using Level 3 inputs for the three months ended March 31, 2015 and 2014. 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, 2014
$
1

Issuance of guarantees

Expiration of guarantees

Balance as of March 31, 2015
$
1

 
 


(Millions of dollars)
Guarantees
Balance as of December 31, 2013
$
1

Issuance of guarantees

Expiration of guarantees

Balance as of March 31, 2014
$
1

 
 

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 $151 million and $248 million as of March 31, 2015 and December 31, 2014, respectively.

26

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)
March 31, 2015
 
December 31, 2014
 
 
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Fair Value
Levels
 
Reference
Cash and cash equivalents
$
1,147

 
$
1,147

 
$
857

 
$
857

 
1
 
 
Foreign currency contracts:
 
 
 
 
 
 
 
 
 
 
 
In a receivable position
$
8

 
$
8

 
$
5

 
$
5

 
2
 
Note 5
In a payable position
$
(18
)
 
$
(18
)
 
$
(15
)
 
$
(15
)
 
2
 
Note 5
Cross currency contracts
 
 
 
 
 
 
 
 
 
 
 
In a receivable position
$
27

 
$
27

 
$
17

 
$
17

 
2
 
Note 5
Finance receivables, net (excluding finance leases(1))
$
20,918

 
$
20,688

 
$
21,434

 
$
21,093

 
3
 
Note 4
Restricted cash and cash equivalents(2)
$
16

 
$
16

 
$
11

 
$
11

 
1
 
 
Short-term borrowings
$
(5,259
)
 
$
(5,259
)
 
$
(4,699
)
 
$
(4,699
)
 
1
 
 
Long-term debt
$
(23,500
)
 
$
(24,107
)
 
$
(24,574
)
 
$
(25,103
)
 
2
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
In a net receivable position
$
77

 
$
77

 
$
79

 
$
79

 
2
 
Note 5
In a net payable position
$
(6
)
 
$
(6
)
 
$
(8
)
 
$
(8
)
 
2
 
Note 5
Guarantees
$
(1
)
 
$
(1
)
 
$
(1
)
 
$
(1
)
 
3
 
Note 7
 
 
 
 
 
 
 
 
 
 
 
 
(1)As of March 31, 2015 and December 31, 2014, represents finance leases with a net carrying value of $7.10 billion and $7.64 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 results of operations, financial position or liquidity.

10.
Income Taxes 

The Provision for income taxes reflects an estimated annual tax rate of 28 percent in the first quarter of 2015 compared with 26 percent in the first quarter of 2014. The increase in the estimated annual tax rate is primarily due to changes in the geographic mix of pre-tax profits.

27

UNAUDITED


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

OVERVIEW:  FIRST QUARTER 2015 VS. FIRST QUARTER 2014

We reported first-quarter 2015 revenues of $689 million, a decrease of $22 million, or 3 percent, compared with the first quarter of 2014. First-quarter 2015 profit after tax was $133 million, a $2 million, or 2 percent, increase from the first quarter of 2014.

The decrease in revenues was primarily due to a $13 million unfavorable impact from lower average financing rates and a $7 million unfavorable impact from lower average earning assets.

Profit before income taxes was $187 million for the first quarter of 2015, compared with $182 million for the first quarter of 2014. The increase was primarily due to a $19 million decrease in provision for credit losses, partially offset by a $7 million decrease in net yield on average earning assets and a $3 million unfavorable net impact from lower average earning assets.

The provision for income taxes reflects an estimated annual tax rate of 28 percent in the first quarter of 2015, compared with 26 percent in the first quarter of 2014. The increase in the estimated annual tax rate is primarily due to changes in the geographic mix of pre-tax profits.

During the first quarter of 2015, retail new business volume was $2.47 billion, a decrease of $329 million, or 12 percent, from the first quarter of 2014. The decrease was primarily related to lower volume in Latin America, Asia and Mining, partially offset by increases in North America.

At the end of the first quarter of 2015, past dues were 3.08 percent, compared with 2.17 percent at the end of 2014. The increase in past dues compared to year-end 2014 was primarily due to the performance of the Latin American and Mining portfolios and seasonality impacts. At the end of the first quarter of 2014, past dues were 2.56 percent. Write-offs, net of recoveries, were $12 million for the first quarter of 2015, compared with $39 million for the first quarter of 2014.

As of March 31, 2015, our allowance for credit losses totaled $392 million or 1.38 percent of net finance receivables, compared with $401 million or 1.36 percent of net finance receivables at year-end 2014. The allowance for credit losses as of March 31, 2014, was $384 million or 1.29 percent of net finance receivables.

28

UNAUDITED


REVIEW OF CONSOLIDATED STATEMENTS OF PROFIT 
THREE MONTHS ENDED MARCH 31, 2015 VS. THREE MONTHS ENDED MARCH 31, 2014

REVENUES
Retail revenue for the first quarter of 2015 was $320 million, a decrease of $18 million from the same period in 2014. The decrease was due to a $12 million unfavorable impact from lower interest rates on retail finance receivables and a $6 million unfavorable impact from lower average earning assets. For the quarter ended March 31, 2015, retail average earning assets were $24.17 billion, a decrease of $411 million from the same period in 2014. The annualized average yield was 5.30 percent for the first quarter of 2015, compared with 5.50 percent for the first quarter of 2014.

Operating lease revenue for the first quarter of 2015 was $256 million, a decrease of $3 million from the same period in 2014. The decrease was due to an $8 million unfavorable impact from lower average financing rates on operating leases, partially offset by a $5 million favorable impact from higher average earning assets.

Wholesale revenue was $73 million for the first quarter of both 2015 and 2014. The $1 million favorable impact from higher interest rates on wholesale finance receivables was offset by a $1 million unfavorable impact from lower average earning assets. For the quarter ended March 31, 2015, wholesale average earning assets were $4.54 billion, a decrease of $85 million from the same period in 2014. The annualized average yield was 6.47 percent for the first quarter of 2015, compared with 6.34 percent for the first quarter of 2014.

Other revenue, net, items were as follows:
(Millions of dollars)
 
Three Months Ended
March 31,
 
2015

2014
Finance receivable and operating lease fees (including late charges)
$
16


$
16

Fees on committed credit facility extended to Caterpillar
10


10

Interest income on Notes Receivable from Caterpillar
5

 
5

Net gain on returned or repossessed equipment
3

 
4

Miscellaneous other revenue, net
6


6

Total Other revenue, net
$
40


$
41

 
 
 
 

EXPENSES
Interest expense for the first quarter of 2015 was $151 million, a decrease of $11 million from the same period in 2014. This decrease was primarily due to a reduction of 9 basis points in the average cost of borrowing to 2.07 percent for the first quarter of 2015, down from 2.16 percent for the first quarter of 2014 and the impact of a 3 percent decrease in average borrowings.

Depreciation expense on equipment leased to others was $212 million, down $2 million from the first quarter of 2014.

General, operating and administrative expenses were $103 million for the first quarter of 2015, compared with $101 million for the same period in 2014.

Provision for credit losses was $18 million for the first quarter of 2015, compared with $37 million for the same period in 2014. The decrease was primarily due to a decrease in write-offs, net of recoveries, and a favorable impact from changes in portfolio balances, partially offset by an unfavorable impact from changes in the allowance rate.

At the end of the first quarter of 2015, past dues were 3.08 percent, compared with 2.17 percent at the end of 2014. The increase in past dues compared to year-end 2014 was primarily due to the performance of the Latin American and Mining portfolios and seasonality impacts. At the end of the first quarter of 2014, past dues were 2.56 percent. Write-offs, net of recoveries, were $12 million for the first quarter of 2015, compared with $39 million for the first quarter of 2014. 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 $603 million and $472 million at March 31, 2015 and December 31, 2014, respectively. Total non-performing finance receivables as a percentage of total finance receivables were 2.12 percent and 1.60 percent at March 31, 2015 and December 31, 2014, respectively.


29

UNAUDITED


Our Allowance for credit losses as of March 31, 2015 was $392 million or 1.38 percent of net finance receivables compared with $401 million or 1.36 percent of net finance receivables as of December 31, 2014. The overall decrease of $9 million during the first quarter is driven by a decrease in our net finance receivables portfolio, partially offset by an increase in the allowance rate.  The higher allowance rate reflects an unfavorable change in the credit quality metrics of our portfolio during the first quarter, partially offset by a favorable change in our loss given default assumption. 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 March 31, 2015.

Other expenses, consisting primarily of repossession-related expenses, were $9 million for the first quarter of 2015, up $1 million from the same period in 2014.

Other income (expense) items were as follows:
(Millions of dollars)
Three Months Ended
March 31,
 
2015
 
2014
Net loss from interest rate derivatives
$


$
(2
)
Net currency exchange loss, including forward points
(9
)

(5
)
Total Other income (expense)
$
(9
)

$
(7
)
 
 
 
 

The Provision for income taxes was $52 million for the first quarter of 2015, compared with $48 million for the first quarter of 2014. The Provision for income taxes reflects an estimated annual tax rate of 28 percent in the first quarter of 2015, compared with 26 percent in the first quarter of 2014. The increase in the estimated annual tax 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 $133 million for the first quarter of 2015, an increase of $2 million, or 2 percent, from the first quarter of 2014.

REVIEW OF CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
ASSETS
Total assets were $34.34 billion as of March 31, 2015, a decrease of $835 million, or 2 percent, from December 31, 2014, primarily due to a decrease in net finance receivables, partially offset by an increase in our cash position.

New Business Volume
New retail financing for the three months ended March 31, 2015 was $2.18 billion, a decrease of $359 million, or 14 percent, from the same period in 2014. New retail financing decreased primarily due to lower volume in Latin America and Asia. New operating lease activity (which is substantially related to retail) for the three months ended March 31, 2015 was $296 million, an increase of $20 million, or 7 percent, from the same period in 2014. New operating lease activity increased primarily due to higher rentals of Cat equipment in North America, offset by lower rentals of Cat equipment in global markets. New wholesale financing activity for the three months ended March 31, 2015 was $9.64 billion, an increase of $469 million, or 5 percent, from the same period in 2014. New wholesale financing increased primarily due to higher 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:

30

UNAUDITED


(Millions of dollars)
March 31,
2015
 
December 31,
2014
Retail notes receivable
$
138

 
$
121

Operating leases
92

 
93

Retail installment sale contracts
53

 
43

Retail finance leases
48

 
59

Total off-balance sheet managed assets
$
331

 
$
316

 
 
 
 

31

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 first quarter of 2015, we experienced favorable liquidity conditions. We ended the first quarter of 2015 with $1.15 billion of cash, an increase of $290 million from year-end 2014. Our cash balances are held in numerous locations throughout the world with approximately $567 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.
 
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 March 31, 2015 were $29.86 billion, a decrease of $522 million over December 31, 2014, primarily due to decreasing portfolio balances. Outstanding borrowings were as follows:
(Millions of dollars)
 
March 31,
2015
 
December 31,
2014
Medium-term notes, net of unamortized discount
$
22,244

 
$
23,090

Commercial paper, net of unamortized discount
4,365

 
3,688

Bank borrowings – long-term
1,256

 
1,484

Bank borrowings – short-term
286

 
411

Variable denomination floating rate demand notes
608

 
600

Notes payable to Caterpillar
1,100

 
1,108

Total outstanding borrowings
$
29,859

 
$
30,381

 
 
 
 

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 March 31, 2015, mature as follows: 
(Millions of dollars)
 
2015
$
4,162

2016
4,935

2017
5,351

2018
2,412

2019
2,311

Thereafter
3,073

Total
$
22,244

 
 


Medium-term notes issued totaled $1.05 billion and redeemed totaled $1.51 billion for the three months ended March 31, 2015.

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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 March 31, 2015 was $7.75 billion.

The 364-day facility of $3.15 billion (of which $2.33 billion is available to us) expires in September 2015.
The 2010 four-year facility, as amended in September 2014, of $2.73 billion (of which $2.01 billion is available to us) expires in September 2017.
The 2011 five-year facility, as amended in September 2014, of $4.62 billion (of which $3.41 billion is available to us) expires in September 2019.

At March 31, 2015, Caterpillar’s consolidated net worth was $22.34 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 March 31, 2015, our covenant interest coverage ratio was 2.22 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 March 31, 2015, our covenant leverage ratio was 7.69 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 March 31, 2015 and December 31, 2014, there were no borrowings under the Credit Facility.

Bank borrowings
Credit lines with banks as of March 31, 2015 totaled $3.83 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 March 31, 2015 and December 31, 2014, we had $1.54 billion and $1.90 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 $2.29 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 $454 million and notes payable of $1.10 billion outstanding under these agreements as of March 31, 2015, compared with notes receivable of $414 million and notes payable of $1.11 billion as of December 31, 2014.


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Committed credit facility
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 March 31, 2015 and December 31, 2014, there were no borrowings under this credit facility.

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.

OFF-BALANCE SHEET ARRANGEMENTS
We lease all of our facilities. In addition, we have potential payment exposure for guarantees issued to third parties totaling $52 million as of March 31, 2015.

CASH FLOWS
Operating cash flow was $247 million in the first three months of 2015, compared with $276 million for the same period a year ago. Net cash used for investing activities was $3 million for the first three months of 2015, compared with $773 million for the same period in 2014. The change was primarily due to the net impact of intercompany purchased receivables and lower levels of retail financing. Net cash provided by financing activities was $64 million for the first three months of 2015, compared with $315 million for the same period in 2014. The change was primarily due to lower funding requirements.

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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 income taxes.  Actual results may differ from these estimates. 
 
Residual values for leased assets
Lease residual values are an estimate of the market value of leased equipment at the end of the lease term and are based on an 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 estimated with 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 values are monitored.  If estimated end-of-term market values of leased equipment reflect a non-temporary impairment due to economic factors, obsolescence or other adverse circumstances, the residual value of the leased equipment is adjusted so that the carrying value at end of lease term will approximate the estimated end-of-term market value. For equipment on operating leases, adjustments are made on a straight-line basis over the remaining term of the lease through depreciation expense.  For finance leases, adjustments are recognized at the time of assessment 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.


35

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 the technical merits of the position. 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 income or 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 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.

Income taxes are based on the statutory tax rate of the jurisdiction where earnings are subject to taxation which may differ from the jurisdiction where that entity is incorporated. Taxes are paid in the jurisdictions where earnings are subject to taxation. The annual tax rate differs from the U.S. statutory rate primarily due to results of non-U.S. subsidiaries being subject to statutory tax rates which are generally lower than the U.S. rate of 35%.


36

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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 filed with the Securities and Exchange Commission (SEC) on February 17, 2015 for the year ended December 31, 2014, and in this Form 10-Q filing. We do not undertake to update our forward-looking statements.

37

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 March 31, 2015 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.

As previously disclosed in our amended 2013 Annual Report on Form 10-K/A filed on November 14, 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 interim periods ended March 31, 2014, June 30, 2014, March 31, 2013, June 30, 2013, and September 30, 2013 and the annual periods ended December 31, 2013, 2012 and 2011. 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. Management determined that this material weakness continued to exist at March 31, 2015.

Changes in internal control over financial reporting
During the quarter ended March 31, 2015, the Company continued implementing and testing the remediation efforts described below. There have been no changes in the Company's internal control over financial reporting during the first quarter of 2015 that materially affected, or are reasonably likely to materially affect, the Company's 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.

The Company is also in the process of implementing and testing the following:
 
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


38

UNAUDITED


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.
 
While significant progress has been made to enhance the internal controls over financial reporting relating to our Allowance for credit losses as described above, we are still in the process of implementing and testing these processes and procedures and additional time is required to complete implementation and to assess and ensure the sustainability of these procedures. We believe the above actions 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
 
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 results of operations, financial position or liquidity.

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 annual report on Form 10-K filed with the SEC on February 17, 2015 for the year ended December 31, 2014. 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.

ITEM 6.  EXHIBITS
Exhibit
No.
Description of Exhibit
 
 
Computation of Ratio of Profit to Fixed Charges
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.
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.
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

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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:
May 1, 2015
By: 
/s/Jeffry D. Everett
 
 
Jeffry D. Everett, Controller

Date:
May 1, 2015
By: 
/s/Kent M. Adams
 
 
Kent M. Adams, President, Director and Chief Executive
Officer

40