10-K
CATERPILLAR FINANCIAL SERVICES CORP filed this Form 10-K on 02/17/2015
Entire Document
 
CFSC-12.31.2014-10K




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K
 
(Mark One)
 
 
 
[X]
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
 
 
 
 
OR
 
 
[  ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
 
Commission File No. 001-11241 
CATERPILLAR FINANCIAL SERVICES CORPORATION
(Exact name of Registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of incorporation
or organization)
 
37-1105865
(I.R.S. Employer Identification No.)
 
 
2120 West End Ave.,
Nashville, Tennessee
(Address of principal executive offices)
 
37203-0001
(Zip Code)
 
Registrant's telephone number, including area code:  (615) 341-1000

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





 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
 
Name of each exchange
  on which registered 
 
Medium-Term Notes, Series G,
2.05% Notes Due 2016
 
New York Stock Exchange
 
 
Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
Yes [ü]   No [    ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [    ]   No [ü]

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ü]

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 February 17, 2015, one share of common stock of the registrant was outstanding, which is owned by Caterpillar Inc.



2




TABLE OF CONTENTS
 
 
 
Page
Business
4
 
Risk Factors
6
 
Unresolved Staff Comments
11
 
Properties
12
 
Legal Proceedings
12
 
Mine Safety Disclosures
12
Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
12
 
Management's Discussion and Analysis of Financial
Condition and Results of Operations
13
 
Quantitative and Qualitative Disclosures About Market Risk
26
 
Financial Statements and Supplementary Data
26
 
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
26
 
Controls and Procedures
27
 
Other Information
28
Principal Accounting Fees and Services
29
Exhibits and Financial Statement Schedules
30

3



PART I
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
Certain statements contained in this Annual Report on Form 10-K 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.  All of the 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 this Form 10-K and could cause results to differ materially from those projected in the forward-looking statements.  Cat Financial undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You may, however, consult any related disclosures we may make in our subsequent Form 10-Q and Form 8-K reports filed with the SEC.
 
Item 1. 
Business.
 
General

Caterpillar Financial Services Corporation was organized in 1981 in the State of Delaware (together with its subsidiaries, "Cat Financial," "the Company," "we" or "our").  We are a wholly-owned finance subsidiary of Caterpillar Inc. (together with its other subsidiaries, "Caterpillar" or "Cat") and our corporate headquarters is located in Nashville, Tennessee.
 
Nature of Operations

Our primary business is to provide retail and wholesale financing alternatives for Caterpillar products to customers and dealers around the world.  Retail financing is primarily comprised of financing of Caterpillar equipment, machinery and engines.  In addition, we also provide financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products.  We also provide wholesale financing to Caterpillar dealers and purchase short-term receivables from Caterpillar.  The various financing plans offered by Cat Financial are primarily designed to increase the opportunity for sales of Caterpillar products and generate financing income for Cat Financial.  A significant portion of our activities is conducted in North America.  However, we have additional offices and subsidiaries in Asia/Pacific, Europe and Latin America.  We have more than 30 years of experience in providing financing for Caterpillar products, contributing to our knowledge of asset values, industry trends, product structuring and customer needs.


4



The Company’s retail leases and installment sale contracts (totaling 52 percent*) include:
 
Tax leases that are classified as either operating or finance leases for financial accounting purposes, depending on the characteristics of the lease.  For tax purposes, we are considered the owner of the equipment (15 percent*).

Finance (non-tax) leases, where the lessee for tax purposes is considered to be the owner of the equipment during the term of the lease, that either require or allow the customer to purchase the equipment for a fixed price at the end of the term (18 percent*).

Installment sale contracts, which are equipment loans that enable customers to purchase equipment with a down payment or trade-in and structure payments over time (18 percent*).

Governmental lease-purchase plans in the U.S. that offer low interest rates and flexible terms to qualified non-federal government agencies (1 percent*).

The Company’s wholesale notes receivable, finance leases and installment sale contracts (totaling 15 percent*) include:
 
Inventory/rental programs, which provide assistance to dealers by financing their new Caterpillar inventory and rental fleets (5 percent*).

Short-term receivables we purchase from Caterpillar at a discount (10 percent*).

The Company’s retail notes receivable (33 percent*) include:
     
Loans that allow customers and dealers to use their Caterpillar equipment or other assets as collateral to obtain financing.

*Indicates the percentage of total portfolio as of December 31, 2014.  We define total portfolio as total net finance receivables plus equipment on operating leases, less accumulated depreciation.  
 
Competitive Environment
 
We operate in a highly competitive environment, with financing for users of Caterpillar equipment available through a variety of sources, principally commercial banks and finance and leasing companies.  Our competitors include Wells Fargo Equipment Finance Inc., General Electric Capital Corporation and various other banks and finance companies.  In addition, many of the manufacturers that compete with Caterpillar also own financial subsidiaries such as Volvo Financial Services, Komatsu Financial L.P. and John Deere Capital Corporation that utilize below market interest rate programs (funded by the manufacturer) to assist machine sales.  We work with Caterpillar to provide a broad array of financial merchandising programs around the world in order to offer below market interest rates.
 
We provide financing only when acceptable criteria are met.  Credit decisions are based upon, among other factors, the customer's credit history, financial strength and intended use of equipment.  We typically maintain a security interest in retail financed equipment and require physical damage insurance coverage on financed equipment.  We continue to finance a significant portion of Caterpillar dealers' sales and inventory of Caterpillar products throughout the world (see Note 15 of Notes to Consolidated Financial Statements for more information regarding our segments and geographic areas).  We participate in certain marketing programs sponsored by Caterpillar and/or Caterpillar dealers that allow us to offer financing to customers at interest rates that are below market rates.  Under these programs, Caterpillar, or the dealer, funds an amount at the outset of the transaction, which we then recognize as revenue over the term of the financing.  These marketing programs provide us with a significant competitive advantage in financing Caterpillar products.

In certain instances, our operations are subject to supervision and regulation by state, federal and various foreign government authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things, (i) regulate credit granting activities and the administration of loans, (ii) establish maximum interest rates, finance charges and other charges, (iii) require disclosures to customers and investors, (iv) govern secured transactions, (v) set collection, foreclosure, repossession and other trade practices and (vi) regulate the use and reporting of information related to a borrower's credit experience.  Our ability to comply with these and other governmental and legal requirements and restrictions affects our operations.
 

5



We also have agreements with Caterpillar that are significant to our operation.  These agreements provide us with certain types of operational and administrative support from Caterpillar such as the administration of employee benefit plans, financial support, funding support and various forms of corporate services that are integral to the conduct of our business.  For more information on these agreements, please refer to Note 13 of Notes to Consolidated Financial Statements.
 
Employment
 
As of December 31, 2014, the Company had 1,802 full-time employees, an increase of 2 percent from December 31, 2013.
 
Available Information
 
The Company files electronically with the Securities and Exchange Commission ("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’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 by visiting its Internet site (www.caterpillar.com).  None of the information contained at any time on our Internet site, Caterpillar’s or the SEC’s Internet sites is incorporated by reference into this document.

Item 1A. 
Risk Factors.
 
The statements in this section describe the most significant risks to our business and may contain "forward-looking statements" that are subject to the caption "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS" presented prior to Item 1 of this report.  The statements in this section should also be considered carefully in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the "Notes to Consolidated Financial Statements" to this Form 10-K.  The risk factors described below are a cautionary discussion of risks, uncertainties and assumptions that we believe are significant to our business. These are factors that, individually or in the aggregate, we believe could make our actual results differ materially from expected or past results. Because it is impossible to predict or identify all such factors, the following factors should not be considered to be a complete discussion of risks and uncertainties.  
 
Disruptions or volatility in global financial markets could adversely impact the industries and markets in which we serve and operate
Global economic conditions may cause volatility and disruptions in the capital and credit markets. Should global economic conditions deteriorate or access to credit markets be reduced, we could experience reduced levels of liquidity and increased credit spreads in the markets we serve.   Continuing to meet our cash requirements over the long-term could require substantial liquidity and access to sources of funds, including capital and credit markets.  We have continued to maintain access to key global medium-term note and commercial paper markets, but there can be no assurance that such markets will continue to represent a reliable source of financing.  If global economic conditions were to deteriorate, we could face materially higher financing costs, become unable to access adequate funding to operate and grow our business and/or meet our debt service obligations as they mature, and we could be required to draw upon contractually committed lending agreements primarily provided by global banks and/or by seeking other funding sources.  However, under extreme market conditions, there can be no assurance that such agreements and other funding sources would be available or sufficient.  Any of these events could negatively impact our business, results of operations and financial condition.
The extent of any impact on our ability to meet our funding or liquidity needs would depend on several factors, including our operating cash flows, the duration of any market disruptions, changes in counterparty credit risk, the impact of government intervention in financial markets including the effects of any programs or legislation designed to increase or restrict liquidity for certain areas of the market, general credit conditions, the volatility of equity and debt markets, our credit ratings and credit capacity and the cost of financing and other general economic and business conditions.  Market disruption and volatility may also lead to a number of other risks in connection with these events, including but not limited to:

6



Market developments that may affect customer confidence levels and may cause declines in the demand for financing and adverse changes in payment patterns, causing increases in delinquencies and default rates, which could impact our write-offs and provision for credit losses;
The process we use to estimate losses inherent in our credit exposure requires a high degree of management’s judgment regarding numerous subjective, qualitative factors, including forecasts of economic conditions and how economic predictors might impair the ability of our borrowers to repay their loans.  If financial market disruption and volatility is experienced, the accuracy of these judgments may be impacted;
Our ability to engage in routine funding transactions or borrow from other financial institutions on acceptable terms or at all could be adversely affected by disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations; and
Because our counterparties are financial institutions, their ability to perform in accordance with any of our underlying agreements could be adversely affected by market volatility and/or disruptions in the equity and credit markets.

Changes in government monetary or fiscal policies may negatively impact our results
Most countries have established central banks to regulate monetary systems and influence economic activities, generally by adjusting interest rates.  Interest rate changes affect overall economic growth, which in turn affects Caterpillar’s sales and our financing activities.  Interest rate changes also affect customers’ abilities to finance machine purchases, can change the optimal time to keep machines in a fleet and can impact the ability of Caterpillar’s suppliers to finance the production of parts and components necessary to manufacture and support Caterpillar products.  An increase in interest rates could result in lower sales of Caterpillar’s products and adversely impact our business, results of operations and financial condition.
Central banks and other policy arms of many countries may take actions to vary the amount of liquidity and credit available in an economy.  Changes in liquidity and credit policies could impact the customers and markets we serve or our suppliers, which could adversely impact our business, results of operations and financial condition.
Government policies on taxes and spending also affect our business.  Throughout the world, government spending finances a significant portion of infrastructure development, such as highways, airports, sewer and water systems and dams.  Tax regulations determine depreciation lives and the amount of money users of our products can retain, both of which influence investment decisions.  Unfavorable developments, such as declines in government revenues, decisions to reduce public spending or increases in taxes, could negatively impact our results.
Our global operations are exposed to political and economic risks, commercial instability and events beyond our control in the countries in which we operate
Our global operations are dependent upon products manufactured, purchased, sold and financed in the U.S. and internationally, including in countries with political and economic instability.  In some cases, these countries have greater political and economic volatility and greater vulnerability to infrastructure and labor disruptions than in our other markets.  Operating and seeking to expand business in a number of different regions and countries exposes us to a number of risks, including:
Multiple and potentially conflicting legal and regulatory requirements that are subject to change, including but not limited to, those legal and regulatory requirements described in Item 1 of this report under the heading Competitive Environment;
Increased exposure to currency fluctuations and imposition of currency restrictions, restrictions on repatriation of earnings or other similar restraints;
Difficulty of enforcing agreements and collecting receivables through foreign legal systems;
Difficulty in staffing and managing (including ensuring compliance with internal policies and controls) geographically widespread operations and the application of foreign labor regulations;
Natural disasters, embargoes, catastrophic events and national and international conflict, including acts of terrorism; and
Political and economic instability or civil unrest that may severely disrupt economic activity in affected countries, particularly in emerging markets.

The occurrence of one or more of these events may negatively impact our business, results of operations and financial condition.

7



Failure to maintain our credit ratings would increase our cost of borrowing and could adversely affect our access to capital markets
Caterpillar and Cat Financial's costs of borrowing and ability to access the capital markets are affected not only by market conditions but also by the short-term and long-term debt ratings assigned to our respective debt by the major credit rating agencies.  These ratings are based, in significant part, on each of Caterpillar's and Cat Financial's performance as measured by financial metrics such as interest coverage and leverage ratios, as well as transparency with rating agencies and timeliness of financial reporting.   There can be no assurance that Caterpillar or Cat Financial will be able to maintain their credit ratings. Although Caterpillar and Cat Financial have committed credit facilities to provide liquidity, any downgrades of our credit ratings could increase our cost of borrowing and could adversely affect our liquidity, competitive position and access to the capital markets, including restricting, in whole or in part, our access to the commercial paper market.  There can be no assurance that the commercial paper market will continue to be a reliable source of short-term financing for Cat Financial or an available source of short-term financing for Caterpillar.  An inability to access the capital markets could have a material adverse effect on our cash flows, results of operations and financial condition.
Changes in interest rates, foreign currency exchange rates or market liquidity conditions could adversely affect our earnings and/or cash flows
Changes in interest rates, foreign currency exchange rates and market liquidity conditions could have a material adverse effect on our earnings and cash flows. Because our financial results are reported in U.S. dollars, but our operations are conducted internationally, currency exchange rates can have a significant impact on our results.  Additionally, because a significant number of our loans are made at fixed interest rates, our business is subject to fluctuations in interest rates.  Changes in market interest rates may influence our financing costs, returns on financial investments and the valuation of derivative contracts and could reduce our earnings and/or cash flows.  In addition, because we make a significant number of loans in currencies other than the U.S. dollar, fluctuations in foreign currency exchange rates could also reduce our earnings and cash flows.  We also rely on a number of diversified global debt capital markets and funding programs to provide liquidity for our global operations, including commercial paper, medium-term notes, retail notes, variable denomination floating rate demand notes and bank loans.  Significant changes in market liquidity conditions could impact our access to funding and the associated funding cost and reduce our earnings and cash flows.
Although we manage interest rate, foreign currency exchange rate and market liquidity risks with a variety of techniques, including a match funding program, the selective use of derivatives and a broadly diversified funding program, there can be no assurance that fluctuations in interest rates, currency exchange rates and market liquidity conditions will not have a material adverse effect on our earnings and cash flows.  If any of the variety of instruments and strategies we use to hedge our exposure to these various types of risk is ineffective, we may incur losses.
Our business is significantly influenced by the credit risk associated with our customers and an increase in delinquencies, repossessions or net losses could adversely affect our results
Our business is significantly influenced by the credit risk associated with our customers.  The creditworthiness of each customer and the rate of delinquencies, repossessions and net losses on customer obligations are directly impacted by several factors, including, but not limited to, relevant industry and economic conditions and the availability of capital.  Any increase in delinquencies, repossessions and net losses on customer obligations could have a material adverse effect on our earnings and cash flows.
In addition, although we evaluate and adjust our Allowance for credit losses related to past due and non-performing receivables on a regular basis, adverse economic conditions or other factors that might cause deterioration of the financial health of our customers could change the timing and level of payments received and necessitate an increase in our estimated losses, which could also have a material adverse effect on our earnings and cash flows.
A decrease in the residual value of the equipment that we finance could adversely affect our results
Declines in the residual value of equipment financed by us may reduce our earnings.  The residual value of leased equipment is determined based on its estimated end-of-term market value at the time of the expiration of the lease term.  We estimate the residual value of leased equipment at the inception of the lease based on a number of factors, including historical wholesale market sales prices, past remarketing experience and any known significant market/product trends.  If estimated end-of-term market values significantly decline due to economic factors, obsolescence or other adverse circumstances, we may not realize such residual value, which could reduce our earnings, either through an increase in depreciation expense or a decrease in finance revenue.

8



The success of our business depends upon the demand for Caterpillar’s products
Our primary business is to provide retail and wholesale financing alternatives for Caterpillar products to customers and dealers and is therefore largely dependent upon the demand for Caterpillar’s products and customers’ willingness to enter into financing or leasing agreements, which may be negatively affected by challenging global economic conditions.  As a result, a significant or prolonged decrease in demand could have a material adverse effect on our business, financial condition, results of operations and cash flows.  The demand for Caterpillar’s products and our products and services is influenced by a number of factors, including:
General world economic conditions and the level of mining, construction and manufacturing activity;
Changes and uncertainties in the monetary and fiscal policies of various governmental and regulatory entities;
Fluctuations in demand and prices for certain commodities;
Fluctuations in currency exchange rates and interest rates;
Political, economic and legislative changes;
Caterpillar’s ability to produce products that meet customers' needs;
Caterpillar’s ability to maintain key dealer relationships;
The ability of Caterpillar dealers to sell Caterpillar products and their practices regarding inventory control; and
Changes in pricing policies by Caterpillar or its competitors.

Any significant adverse changes to these factors could negatively impact our results.

Changes in the marketing, operational or administrative support that we receive from Caterpillar could adversely affect our results
We participate in certain marketing programs sponsored by Caterpillar and/or Caterpillar dealers that allow us to offer financing to customers at interest rates that are below market rates.  These marketing programs provide us with a significant competitive advantage in financing Caterpillar products.  Any change in these marketing programs or reduction in our ability to offer competitively priced financing to customers could reduce the percentage of Caterpillar products financed by us, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.  Caterpillar also provides us with other types of operational and administrative support, such as the administration of employee benefit plans, which is integral to the conduct of our business.  Any changes in the levels of support from Caterpillar could also negatively impact our results.
The success of our business depends on our ability to develop, produce and market quality products and services that meet our customers’ needs
We operate in a highly competitive environment, with financing for users of Caterpillar equipment available through a variety of sources, principally commercial banks and finance and leasing companies.  Increasing competition may adversely affect our business if we are unable to match the products and services of our competitors.  Also, as noted above, any changes to the marketing programs sponsored by Caterpillar and/or Caterpillar dealers, which allow us to offer financing to customers at interest rates that are below market rates, could have a materially adverse effect on our business.
New regulations or changes in financial services regulation could adversely impact our results of operations and financial condition

Our operations are highly regulated by governmental authorities in the locations where we operate, which can impose significant additional costs and/or restrictions on our business. In the U.S. for example, certain of our activities are subject to the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Dodd-Frank was signed into law in July 2010 and is a comprehensive financial reform act that includes extensive provisions regulating the financial services industry. Certain aspects of Dodd-Frank remain to be implemented under the rulemaking and regulatory authority of the Securities and Exchange Commission, the Commodity Futures Trading Commission and federal banking regulators. As such, we have become and could continue to become subject to additional regulatory costs both directly and indirectly, through increased costs of doing business with market intermediaries that are now subject to extensive regulation pursuant to Dodd-Frank and other regulatory initiatives. For example, derivatives dealers may seek to pass to us the cost of any margin, capital or other regulatory requirements to which they become subject under Dodd-Frank or other regulatory reforms. As the regulatory regime is still developing and the rulemaking process has been progressing slowly, the ultimate costs and impact of Dodd-Frank and other regulatory initiatives on our business remains uncertain and may not be known for years. However, such costs could be significant and could have an adverse effect on our results of operations and financial condition. Additional regulations in the U.S. or internationally impacting the financial services industry could also add significant cost or operational constraints that might have an adverse effect on our results of operations and financial condition.

9




Our global operations are subject to extensive trade and anti-corruption laws and regulations
Due to the international scope of our operations, we are subject to a complex system of laws and regulations, including U.S. regulations issued by the Office of Foreign Assets Control. Any alleged or actual violations may subject us to government scrutiny, investigation and civil and criminal penalties, and may limit our ability to provide financing outside the United States and/or potentially require us to divest portions of our existing portfolio under certain circumstances.  Furthermore, embargoes and sanctions imposed by the U.S. and other governments prohibiting providing financing to specific persons or countries exposes us to criminal and civil sanctions. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted.
In addition, the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws of other countries generally prohibit companies and their intermediaries from making improper payments or providing anything of value to improperly influence foreign government officials for the purpose of obtaining or retaining business, or obtaining an unfair advantage. Recent years have seen a substantial increase in the global enforcement of anti-corruption laws. Our continued operation and expansion outside the United States, including in developing countries, could increase the risk of such violations. Notwithstanding the compliance programs applicable to our international operations, violations of these laws may result in severe criminal or civil sanctions, could disrupt our business, and result in an adverse effect on our reputation, business and results of operations or financial condition.
We may incur additional tax expense or become subject to additional tax exposure
We are subject to income taxes in the United States and numerous foreign jurisdictions, and our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions.  Our Provision for income taxes and related tax payments in the future could be adversely affected by numerous factors, including, but not limited to, income before taxes being lower than anticipated in countries with lower statutory tax rates and higher than anticipated in countries with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws and regulations. For example, our effective tax rate is reduced due to a provision of United States tax law that defers the imposition of United States tax on certain active financial services income until that income is repatriated to the United States as a dividend. This provision, which expired at the end of 2014, has been extended by Congress multiple times since 1999 but there is no assurance that it will continue to be extended. If this provision is not extended, we expect our effective tax rate to increase significantly after 2015. We are also subject to the continuous examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities.  The results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures may have an adverse effect on the Company’s Provision for income taxes and related tax payments.
Restrictive covenants in our debt agreements could limit our financial and operating flexibility
Cat Financial and our subsidiaries have agreements under which we borrow or have the ability to borrow funds for use in our respective businesses that are utilized primarily for general corporate purposes.  Certain of these agreements include covenants relating to our financial performance and financial position.  The two most significant financial covenants included in these agreements are: (1) a leverage ratio covenant that requires us to maintain a ratio of consolidated debt to consolidated net worth of not greater than 10 to 1, calculated (i) 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 (ii) at each December 31; and (2) an interest coverage ratio that requires us to maintain a ratio of (i) profit excluding income taxes, interest expense and net gain/(loss) from interest rate derivatives to (ii) interest expense of not less than 1.15 to 1, in each case, calculated at the end of each calendar quarter for the rolling four-quarter period then most recently ended for us and our subsidiaries on a consolidated basis in accordance with generally accepted accounting principles.  In addition, we are restricted in a number of our agreements from terminating, amending or modifying our support agreement with Caterpillar.  We are also restricted in our ability to incur secured indebtedness or consolidate, merge or sell assets.  Similarly, we are also bound by covenants in various agreements that involve Caterpillar and its obligation to maintain a consolidated net worth of not less than $9 billion at all times during each fiscal year.
Although we do not believe any of these covenants presently materially restrict our operations, our ability to meet any one particular financial covenant may be affected by events that could be beyond our control and could result in material adverse consequences that negatively impact our business, results of operations and financial condition.  These consequences may include the acceleration of repayment of amounts outstanding under certain of our credit agreements, the triggering of an obligation to redeem certain debt securities, the termination of existing unused credit commitments by our lenders, the refusal by our lenders to extend further credit under one or more of our credit agreements or the lowering or modification of our credit ratings, including those of any of our subsidiaries.  We cannot provide assurance that we will continue to comply with each credit covenant, particularly if we were to encounter challenging and volatile market conditions.

10



Changes in accounting guidance could have an adverse effect on our results of operations, as reported in our financial statements
Our consolidated financial statements are subject to the application of generally accepted accounting principles in the United States of America, which is periodically revised and/or expanded.  Accordingly, from time to time we are required to adopt new or revised accounting guidance and related interpretations issued by recognized authoritative bodies, including the Financial Accounting Standards Board and the SEC.  Market conditions have prompted accounting standard setters to issue new guidance, which further interprets or seeks to revise accounting pronouncements related to various transactions, as well as to issue new guidance expanding disclosures.  The impact of accounting pronouncements that have been issued but not yet implemented is disclosed in our annual and quarterly reports on Form 10-K and Form 10-Q.  An assessment of proposed guidance is not provided, as such proposals are subject to change through the exposure process and, therefore, their effects on our financial statements cannot be meaningfully assessed.  It is possible that future accounting guidance we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our business, results of operations and financial condition.
Increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services
We rely upon information technology systems and networks in connection with a variety of business activities, some of which are managed by third parties. Additionally, we collect and store data that is sensitive to us and our customers. The secure operation of these information technology systems and networks, and the processing and maintenance of this data is critical to our business operations and strategy. Information technology security threats -- from user error to attacks designed to gain unauthorized access to our systems, networks and data -- are increasing in frequency and sophistication. Attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. If an attack against us were to succeed it could expose us and our customers, dealers and suppliers to misuse of information or systems, the compromising of confidential information, manipulation and destruction of data, defective products and operations disruptions. The occurrence of any of these events could adversely affect our reputation, competitive position, business and results of operations. In addition, such breaches in security could result in litigation, regulatory action and potential liability and the costs and operational consequences of implementing further data protection measures.
We have determined that a material weakness exists in our internal control over financial reporting which could, if not remediated, have a material adverse impact on our ability to produce timely and accurate financial statements

We are responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As previously reported in our 2013 amended Annual Report on Form 10-K/A and also discussed in Item 9A below, we identified a material weakness in our internal control over financial reporting as of September 30, 2014, which we also concluded existed as of December 31, 2013. As a result of this material weakness, we concluded that our internal controls over financial reporting and our disclosure controls and procedures were not effective as of December 31, 2013.
A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. While we have taken a number of actions and continue to devote significant time and attention to remedy the identified material weakness in internal control over financial reporting (see Item 9A for a description of the identified material weakness and related remediation plan), 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 and we have therefore concluded that our internal controls over financial reporting and our disclosure controls and procedures were not effective as of December 31, 2014. If we do not complete our remediation in a timely manner or if our remediation plan is inadequate, there will continue to be an increased risk of future material misstatements in our annual or interim financial statements.
Item 1B. 
Unresolved Staff Comments.
 
None.


11



Item 2.
Properties.
 
Our corporate headquarters are located in Nashville, Tennessee.  We maintain forty-six offices in total, of which nine are located in North America (eight in the U.S. and one in Canada), twenty-one are located in Europe, one is located in the Middle East, nine are located in Asia/Pacific and six are located in Latin America (see Note 15 of Notes to Consolidated Financial Statements for more information regarding our segments and geographic areas).  All of our offices are leased.

Item 3. 
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 financial position, liquidity or results of operations.

Item 4. 
Mine Safety Disclosures.
 
Not applicable.

PART II
 
Item 5. 
Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.

Our stock is not publicly traded.  Caterpillar Inc. is the owner of our one outstanding share.  Cash dividends of $400 million, $200 million and $250 million were paid to Caterpillar in 2014, 2013 and 2012, respectively.

12



Item 7. 
Management's Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW:  2014 VS. 2013
 
We reported revenues of $2.89 billion for 2014, an increase of $100 million, or 4 percent, compared with 2013. Profit after tax was $535 million, a $22 million, or 4 percent, increase from 2013.
 
The increase in revenues was primarily due to a $110 million favorable impact from higher average earning assets, partially offset by a $20 million unfavorable impact from lower average financing rates.

Profit before income taxes was $753 million for 2014, compared with $694 million for 2013. The increase was primarily due to a $49 million favorable net impact from higher average earning assets and a $40 million improvement in net yield on average earning assets, partially offset by a $38 million increase in provision for credit losses (largely a result of the absence of a favorable adjustment that occurred during the fourth quarter of 2013).

The provision for income taxes reflects an annual tax rate of 28 percent for 2014, compared with 25 percent for 2013. The 2013 annual tax rate of 25 percent excludes a benefit of $7 million, reflecting the impact of the American Taxpayer Relief Act. The increase in the annual tax rate is primarily due to an unfavorable geographic mix of profits from a tax perspective.

Retail new business volume for 2014 was $12.68 billion, a decrease of $414 million, or 3 percent, from 2013. The decrease was primarily related to lower volume in Mining and Asia, partially offset by increases in North America.

At the end of 2014, past dues were 2.17 percent, compared with 2.81 percent at the end of the third quarter of 2014 and 2.47 percent at the end of 2013.

Write-offs, net of recoveries, were $99 million for 2014, compared with $124 million for 2013. Full-year 2014 write-offs, net of recoveries, were 0.35 percent of average annual retail portfolio, compared with 0.46 percent in 2013.

At year-end 2014, our allowance for credit losses totaled $401 million or 1.36 percent of net finance receivables, compared with $387 million or 1.33 percent of net finance receivables at year-end 2013. The overall increase of $14 million in allowance for credit losses during the year reflects a $9 million increase associated with the higher allowance rate and a $5 million increase in allowance due to an increase in our net finance receivables portfolio. The higher allowance rate reflects an allowance increase tied to adverse political and economic developments in several markets that we currently serve, partially offset by write-offs taken in 2014.


13



2014 VS. 2013
 
REVIEW OF CONSOLIDATED STATEMENTS OF PROFIT

REVENUES
Retail revenue for 2014 was $1.37 billion, a decrease of $21 million from 2013.  The decrease was due to a $64 million unfavorable impact from lower interest rates on retail finance receivables, partially offset by a $43 million favorable impact from higher average earning assets.  For the year ended December 31, 2014, retail average earning assets were $24.93 billion, an increase of $752 million from 2013. The annualized average yield was 5.48 percent for 2014, compared with 5.74 percent in 2013.
 
Operating lease revenue for 2014 was $1.06 billion, an increase of $109 million from 2013. The increase in operating lease revenue was due to a $122 million favorable impact from higher average earning assets, partially offset by a $13 million unfavorable impact from lower average financing rates on operating leases.
 
Wholesale revenue for 2014 was $311 million, an increase of $5 million from 2013. The increase was due to a $9 million favorable impact from higher average earning assets, partially offset by a $4 million unfavorable impact from lower interest rates on wholesale finance receivables. For the year ended December 31, 2014, wholesale average earning assets were $4.75 billion, an increase of $127 million from 2013. The annualized average yield was 6.54 percent for 2014, compared with 6.62 percent in 2013.

Other revenue, net, items were as follows: 
(Millions of dollars)
 
 
 
 
 
 
2014
 
2013
Finance receivable and operating lease fees (including late charges)
 
$
74

 
$
76

Fees on committed credit facility extended to Caterpillar
 
41

 
41

Interest income on Notes Receivable from Caterpillar
 
18

 
19

Net loss on returned or repossessed equipment
 
(3
)
 
(14
)
Miscellaneous other revenue, net
 
21

 
22

Total Other revenue, net
 
$
151

 
$
144

 
 
 
 
 
 
EXPENSES
Interest expense for 2014 was $631 million, a decrease of $103 million from 2013.  This decrease was primarily due to a reduction of 38 basis points in the average cost of borrowing to 2.07 percent for 2014, down from 2.45 percent for 2013, partially offset by the impact of a 2 percent increase in average borrowings.
 
Depreciation expense on equipment leased to others was $870 million, up $100 million from 2013 due to an increase in the average operating lease portfolio.
 
General, operating and administrative expenses were $433 million for 2014, compared with $427 million for 2013.

Provision for credit losses was $139 million for 2014 compared with $101 million in 2013. The increase was primarily due to an increase in provision expense for finance receivables, resulting from an unfavorable impact from changes in the allowance rate (largely a result of the absence of a favorable adjustment that occurred during the fourth quarter of 2013) and growth in the portfolio, partially offset by a decrease in write-offs, net of recoveries.  This increase was partially offset by a decrease in provision expense for miscellaneous receivables.

At the end of 2014, past dues were 2.17 percent, compared with 2.81 percent at the end of the third quarter of 2014 and 2.47 percent at the end of 2013. Write-offs, net of recoveries, were $99 million for 2014, compared with $124 million for 2013. Total non-performing finance receivables, which represent finance receivables currently over 120 days past due and/or on non-accrual status or in bankruptcy, were $472 million and $456 million at December 31, 2014 and 2013, respectively. Total non-performing finance receivables as a percentage of total finance receivables were 1.60 percent and 1.57 percent at December 31, 2014 and 2013, respectively.

14



Our Allowance for credit losses as of December 31, 2014 was $401 million or 1.36 percent of net finance receivables compared with $387 million or 1.33 percent as of December 31, 2013. The higher allowance rate reflects an allowance increase tied to adverse political and economic developments in several markets that we currently serve, partially offset by write-offs taken in 2014. The allowance is subject to an ongoing evaluation based on many quantitative and qualitative factors, including past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of underlying collateral and current economic conditions. We believe our allowance is sufficient to provide for losses inherent in our existing finance receivable portfolio as of December 31, 2014.

Other expenses, consisting primarily of repossession-related expenses, were $37 million for 2014, compared with $24 million for 2013.

Other income (expense) items were as follows: 
(Millions of dollars)
 
 
 
 
 
 
2014
 
2013
Net loss from interest rate derivatives
 
$
(6
)
 
$
(2
)
Net currency exchange loss, including forward points
 
(16
)
 
(33
)
Total Other income (expense)
 
$
(22
)
 
$
(35
)
 
 
 
 
 
 
The Provision for income taxes was $209 million for 2014, compared with $167 million for 2013.  The Provision for income taxes reflects an annual tax rate of 28 percent for 2014, compared with 25 percent for 2013. The 2013 annual tax rate of 25 percent excludes a benefit of $7 million, reflecting the impact of the American Taxpayer Relief Act. The increase in the annual tax rate is primarily due to an unfavorable geographic mix of profits from a tax perspective.
 
PROFIT
As a result of the performance discussed above, profit after tax was $535 million for 2014, an increase of $22 million, or 4 percent, from 2013.
 
REVIEW OF CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
ASSETS
Total assets were $35.18 billion as of December 31, 2014, an increase of $62 million from December 31, 2013, primarily due to an increase in net finance receivables and an increase in equipment on operating leases, net, partially offset by a decrease in our cash position.
 
New Business Volume
New retail financing for 2014 was $11.12 billion, a decrease of $247 million, or 2 percent, from 2013. New operating lease activity (which is substantially related to retail) for 2014 was $1.61 billion, a decrease of $209 million, or 11 percent, from 2013. New operating lease activity decreased primarily due to lower rentals of Cat equipment. New wholesale financing activity for 2014 was $39.43 billion, an increase of $4.34 billion, or 12 percent, from 2013. New wholesale financing increased primarily due to higher purchases of trade receivables from Caterpillar.
 
Total 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 as of December 31, were as follows: 
(Millions of dollars)
 
 
 
 
 
 
2014
 
2013
Retail notes receivable
 
$
121

 
$
126

Operating leases
 
93

 
61

Retail finance leases
 
59

 
103

Retail installment sale contracts
 
43

 
32

Total off-balance sheet managed assets
 
$
316

 
$
322

 
 
 
 
 
 

15



FOURTH QUARTER 2014 VS. FOURTH QUARTER 2013
 
CONSOLIDATED STATEMENTS OF PROFIT
(Dollars in Millions)
 
 
 
Three Months Ended
December 31,
 
 
2014
 
2013
Revenues:
 
 
 
 
Retail finance
 
$
335

 
$
345

Operating lease
 
260

 
259

Wholesale finance
 
77

 
77

Other, net
 
31

 
30

Total revenues
 
703

 
711

 
 
 
 
 
Expenses:
 
 

 
 

Interest
 
156

 
177

Depreciation on equipment leased to others
 
217

 
212

General, operating and administrative
 
112

 
110

Provision for credit losses
 
33

 
10

Other
 
13

 
8

Total expenses
 
531

 
517

 
 
 
 
 
Other income (expense)
 
(6
)
 
10

 
 
 
 
 
Profit before income taxes
 
166

 
204

 
 
 
 
 
Provision for income taxes
 
56

 
41

 
 
 
 
 
Profit of consolidated companies
 
110

 
163

 
 
 
 
 
Less:  Profit attributable to noncontrolling interests
 
2

 
5

 
 
 
 
 
Profit1
 
$
108

 
$
158

 
 
 
 
 
 
 
 

 
 

1 Profit attributable to Caterpillar Financial Services Corporation.

 

16



THREE MONTHS ENDED DECEMBER 31, 2014 VS. THREE MONTHS ENDED DECEMBER 31, 2013

REVIEW OF CONSOLIDATED STATEMENTS OF PROFIT

REVENUES
Retail revenue for the fourth quarter of 2014 was $335 million, a decrease of $10 million from the same period in 2013.  The decrease was due to a $14 million unfavorable impact from lower interest rates on retail finance receivables, partially offset by a $4 million favorable impact from higher average earning assets.  For the quarter ended December 31, 2014, retail average earning assets were $24.78 billion, an increase of $246 million from the same period in 2013. The annualized average yield was 5.41 percent for the fourth quarter of 2014, compared with 5.62 percent for the fourth quarter of 2013.
 
Operating lease revenue for the fourth quarter of 2014 was $260 million, an increase of $1 million from the same period in 2013.  The increase was due to a $14 million favorable impact from higher average earning assets, partially offset by a $13 million unfavorable impact from lower average financing rates on operating leases.

Wholesale revenue for the fourth quarters of both 2014 and 2013 was $77 million. The $3 million favorable impact from higher average earning assets was offset by a $3 million unfavorable impact from lower interest rates on wholesale finance receivables. For the quarter ended December 31, 2014, wholesale average earning assets were $4.69 billion, an increase of $212 million from the same period in 2013. The annualized average yield was 6.51 percent for the fourth quarter of 2014, compared with 6.84 percent for the fourth quarter of 2013.
 
Other revenue, net, items were as follows: 
(Millions of dollars)
 
 
Three Months Ended
 December 31,
 
 
2014
 
2013
Finance receivable and operating lease fees (including late charges)
 
$
18

 
$
17

Fees on committed credit facility extended to Caterpillar
 
11

 
11

Interest income on Notes Receivable from Caterpillar
 
4

 
5

Net loss on returned or repossessed equipment
 
(2
)
 
(9
)
Miscellaneous other revenue, net
 

 
6

Total Other revenue, net
 
$
31

 
$
30

 
 
 
 
 
 
EXPENSES
Interest expense for the fourth quarter of 2014 was $156 million, a decrease of $21 million from the same period in 2013.  This decrease was due to a reduction of 26 basis points in the average cost of borrowing to 2.04 percent for the fourth quarter of 2014, down from 2.30 percent for the fourth quarter of 2013.
 
Depreciation expense on equipment leased to others was $217 million, up $5 million from the fourth quarter of 2013.
 
General, operating and administrative expenses were $112 million for the fourth quarter of 2014, compared with $110 million for the same period in 2013.
 
Provision for credit losses was $33 million for the fourth quarter of 2014 compared with $10 million in the fourth quarter of 2013. The increase was primarily due to an increase in provision expense for finance receivables due to an unfavorable impact from changes in the allowance rate (largely a result of the absence of a favorable adjustment that occurred during the fourth quarter of 2013), partially offset by a decrease in write-offs, net of recoveries. Write-offs, net of recoveries, were $25 million for the fourth quarter of 2014, compared with $29 million for the fourth quarter of 2013.
 
Other expenses, consisting primarily of repossession-related expenses, were $13 million for the fourth quarter of 2014, compared with $8 million for the fourth quarter of 2013


17



Other income (expense) items were as follows: 
(Millions of dollars)
 
Three Months Ended
 December 31,
 
 
2014
 
2013
Net loss from interest rate derivatives
 
$
(2
)
 
$
(4
)
Net currency exchange gain (loss), including forward points
 
(4
)
 
14

Total Other income (expense)
 
$
(6
)

$
10

 
 
 
 
 
 
The Provision for income taxes was $56 million for the fourth quarter of 2014, compared with $41 million for the fourth quarter of 2013.  The Provision for income taxes reflects an annual tax rate of 28 percent for the fourth quarter of 2014, compared with 25 percent for 2013. The increase in the annual tax rate is primarily due to an unfavorable geographic mix of profits from a tax perspective.
 
PROFIT
As a result of the performance discussed above, profit after tax was $108 million for the fourth quarter of 2014, a decrease of $50 million, or 32 percent, from the fourth quarter of 2013.


18



2013 VS. 2012
 
REVIEW OF CONSOLIDATED STATEMENTS OF PROFIT

REVENUES
Retail and wholesale revenue for 2013 was $1.69 billion, an increase of $16 million from 2012.  The increase was due to a $139 million favorable impact from higher average earning assets, partially offset by a $123 million unfavorable impact from lower interest rates on retail and wholesale receivables.  The annualized average yield was 5.88 percent for 2013, compared with 6.31 percent in 2012.
 
Operating lease revenue for 2013 was $948 million, an increase of $88 million from 2012. The increase in operating lease revenue was due to a $121 million favorable impact from higher average earning assets, partially offset by a $33 million unfavorable impact from lower average financing rates on operating leases.
 
Other revenue, net, items were as follows:
(Millions of dollars)
 
 
 
 
 
 
2013
 
2012
Finance receivable and operating lease fees (including late charges)
 
$
76

 
$
70

Fees on committed credit facility extended to Caterpillar
 
41

 
41

Interest income on Notes Receivable from Caterpillar
 
19

 
21

Net loss on returned or repossessed equipment
 
(14
)
 

Miscellaneous other revenue, net
 
22

 
24

Total Other revenue, net
 
$
144

 
$
156

 
 
 
 
 
 
EXPENSES
Interest expense for 2013 was $734 million, a decrease of $67 million from 2012.  This decrease was primarily due to a reduction of 48 basis points in the average cost of borrowing to 2.45 percent for 2013, down from 2.93 percent for 2012, partially offset by the impact of a 9 percent increase in average borrowings.
 
Depreciation expense on equipment leased to others was $770 million, up $82 million from 2012 due to an increase in the average operating lease portfolio.
 
General, operating and administrative expenses were $427 million for 2013, compared with $416 million for 2012.  The increase was primarily due to increases in personnel costs. There were 1,767 full-time employees as of December 31, 2013, compared with 1,745 as of December 31, 2012.

The Provision for credit losses was $101 million for 2013 compared with $163 million in 2012. The decrease was primarily due to a reduction in provision expense for finance receivables (the result of a decrease in the allowance rate and slower growth in the portfolio, partially offset by an increase in write-offs, net of recoveries).  The Allowance for credit losses as of December 31, 2013 was 1.33 percent of net finance receivables compared with 1.50 percent as of December 31, 2012.  The lower allowance rate reflects write-offs taken in 2013, primarily related to our European marine portfolio that had been previously provided for in the Allowance for credit losses, favorable changes in our estimated probabilities of default (due to improved financial health of our customers), continued refinements of estimated loss emergence periods and general improvement in the economic conditions of the industries we serve.

Other expenses were $24 million for 2013, compared with $29 million for 2012.

Other income (expense) items were as follows: 
(Millions of dollars)
 
 
 
 
 
 
2013
 
2012
Net gain (loss) from interest rate derivatives
 
$
(2
)
 
$
6

Net currency exchange loss, including forward points
 
(33
)
 
(18
)
Total Other income (expense)
 
$
(35
)
 
$
(12
)
 
 
 
 
 
 

19



The Provision for income taxes was $167 million for 2013, compared with $145 million for 2012.  The Provision for income taxes reflects an annual tax rate of 25 percent for both 2013 and 2012. The 2013 annual tax rate of 25 percent excludes a benefit of $7 million, reflecting the impact of the American Taxpayer Relief Act.
 
PROFIT
As a result of the performance discussed above, we had profit of $513 million for 2013, an increase of $85 million, or 20 percent, from 2012.
 
REVIEW OF CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
ASSETS
Total assets were $35.11 billion as of December 31, 2013, an increase of $379 million, or 1 percent, from December 31, 2012, primarily due to an increase in equipment on operating leases, net and an increase in net finance receivables, partially offset by a decrease in our cash position.
 
During 2013, new retail financing was $13.09 billion, a decrease of $868 million, or 6 percent, from 2012. New retail financing decreased across all operating segments with the exception of North America, which increased.
 
Total 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 as of December 31, were as follows: 
(Millions of dollars)
 
 
 
 
 
 
2013
 
2012
Retail notes receivable
 
$
126

 
$
49

Retail finance leases
 
103

 
116

Operating leases
 
61

 
60

Retail installment sale contracts
 
32

 
66

Total off-balance sheet managed assets
 
$
322

 
$
291

 
 
 
 
 
 
TOTAL PAST DUE FINANCE AND RENTS RECEIVABLE
At the end of 2013, past dues were 2.47 percent, compared with 2.51 percent at the end of the third quarter of 2013 and 2.31 percent at the end of 2012. Write-offs, net of recoveries, were $124 million for 2013, compared with $103 million for 2012. Full-year 2013 write-offs, net of recoveries, were 0.46 percent of average annual retail portfolio, compared with 0.42 percent in 2012. The increase in write-offs was primarily related to our European marine portfolio and was previously provided for in the Allowance for credit losses.




20



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 2014, we experienced favorable liquidity conditions. We ended 2014 with $857 million of cash, a decrease of $463 million from year-end 2013. Our cash balances are held in numerous locations throughout the world with approximately $536 million held by our non-U.S. subsidiaries. Amounts held outside the United States are available for general corporate use and could be used in the United States without incurring significant additional U.S. taxes. We expect to meet our United States funding needs without repatriating undistributed profits that are indefinitely reinvested outside the United States. We do not generate material funding through structured finance transactions.
 
In the event that we, or any of our debt securities, experience a credit rating downgrade it would likely result in an increase in our borrowing costs and make access to certain credit markets more difficult.  In the event economic conditions deteriorate such that access to debt markets becomes unavailable, we would rely on cash flows from our existing portfolio, utilization of existing cash balances, access to our revolving credit facilities and our other credit facilities and potential borrowings from Caterpillar.  In addition, Caterpillar maintains a support agreement with us, which requires Caterpillar to remain as our sole owner and which may, under certain circumstances, require Caterpillar to make payments to us should we fail to maintain certain financial ratios.

BORROWINGS
Borrowings consist primarily of medium-term notes, commercial paper, bank borrowings and variable denomination floating rate demand notes, the combination of which is used to manage interest rate risk and funding requirements.  (Please refer to Notes 6, 7, 8 and 9 of Notes to Consolidated Financial Statements for additional discussion.)

Total borrowings outstanding as of December 31, 2014, were $30.38 billion, an increase of $271 million over December 31, 2013, primarily due to increasing portfolio balances.  Outstanding borrowings as of December 31 were as follows: 
(Millions of dollars) 
 
 
 
 
 
 
2014
 
2013
Medium-term notes, net of unamortized discount
 
$
23,090

 
$
23,846

Commercial paper, net of unamortized discount
 
3,688

 
2,502

Bank borrowings – long-term
 
1,484

 
1,483

Bank borrowings – short-term
 
411

 
545

Variable denomination floating rate demand notes
 
600

 
616

Notes payable to Caterpillar
 
1,108

 
1,118

Total outstanding borrowings
 
$
30,381

 
$
30,110

 
 
 
 
 
 
Medium-term notes
We issue medium-term unsecured notes through securities dealers or underwriters in the U.S., Canada, Europe, Australia, Japan, Hong Kong, Argentina and Mexico to both retail and institutional investors.  These notes are offered in several currencies and with a variety of maturities.  These notes are senior unsecured obligations of the Company.  Medium-term notes outstanding as of December 31, 2014, mature as follows: 
(Millions of dollars)
 
2015
$
5,796

2016
5,010

2017
5,228

2018
2,282

2019
2,318

Thereafter
2,456

Total
$
23,090

 
 

 
Medium-term notes issued totaled $5.84 billion and redeemed totaled $5.96 billion for the year ended December 31, 2014.

21



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 December 31, 2014 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 December 31, 2014, Caterpillar’s consolidated net worth was $22.23 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 December 31, 2014, our covenant interest coverage ratio was 2.19 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 December 31, 2014, our six-month covenant leverage ratio was 7.79 to 1 and our year-end covenant leverage ratio was 7.83 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 December 31, 2014, there were no borrowings under the Credit Facility.
 
Bank borrowings
Credit lines with banks as of December 31, 2014 totaled $4.06 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 December 31, 2014, we had $1.90 billion outstanding against these credit lines compared with $2.03 billion as of December 31, 2013, 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 $2.31 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 $414 million and notes payable of $1.11 billion outstanding under these agreements as of December 31, 2014, compared with notes receivable of $345 million and notes payable of $1.12 billion as of December 31, 2013.
 

22



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 December 31, 2014, there were no borrowings under this credit facility.
 
OFF-BALANCE SHEET ARRANGEMENTS
We lease all of our facilities.  In addition, we have potential payment exposure for guarantees issued to third parties totaling $42 million as of December 31, 2014.  Please refer to Notes 10 and 14 of Notes to Consolidated Financial Statements for further information.
 
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.  In 2014, we received $244 million of cash proceeds from the sale of such assets. We typically maintain servicing responsibilities for these third-party assets.

CONTRACTUAL OBLIGATIONS
We have committed cash outflow related to long-term debt, operating lease agreements and purchase obligations.  Minimum payments for these obligations are: 
(Millions of dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
2016
 
2017
 
2018
 
2019
 
After 2019
 
Total
Long-term debt
 
$
6,283

 
$
5,507

 
$
5,487

 
$
2,411

 
$
2,381

 
$
2,505

 
$
24,574

Operating leases
 
16

 
13

 
12

 
11

 
10

 
21

 
83

Purchase obligations(1)
 
21

 
3

 

 

 

 

 
24

Interest payable on long-term debt
 
496

 
421

 
331

 
241

 
123

 
256

 
1,868

Total contractual obligations
 
$
6,816

 
$
5,944

 
$
5,830

 
$
2,663

 
$
2,514

 
$
2,782

 
$
26,549

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)Represents short-term contractual obligations made in the ordinary course of business for contracted services at December 31, 2014.
 
These contractual obligations do not include unused commitments and lines of credit for dealers and customers discussed in Note 10 of Notes to Consolidated Financial Statements.

CASH FLOWS
Operating cash flow for 2014 was $1.34 billion compared with $1.10 billion for 2013. Net cash used for investing activities in 2014 was $2.56 billion compared with $2.53 billion for 2013. Net cash provided by financing activities in 2014 was $835 million compared with $697 million in 2013. The change is primarily due to higher funding requirements for investing activities resulting from reduced use of existing cash in 2014 as compared to 2013 and an increase in dividends paid to Caterpillar.


23



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.

At December 31, 2014, the aggregate residual value of equipment on operating leases was $1.98 billion. Without consideration of other factors such as third-party residual guarantees or contractual customer purchase options, a 10 percent non-temporary decrease in the market value of our equipment subject to operating leases would reduce residual value estimates and result in recognition of approximately $80 million of additional annual depreciation expense.
 
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 9A 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.


24



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.

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

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

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

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%.



25



Item 7A. 
Quantitative and Qualitative Disclosures About Market Risk.
 
We use derivative financial instruments to prudently manage foreign currency exchange rate and interest rate exposure that we encounter as a part of our normal business.  Our Risk Management Policy prevents us from using these instruments for speculative purposes.
 
Interest rate risk
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 the direction interest rates move.
 
In order to properly manage our sensitivity to changes in interest rates, we measure the potential impact of different interest rate assumptions on pre-tax earnings.  All on-balance sheet positions, including derivative financial instruments, are included in the analysis.  The primary assumptions used in the analysis are that there are no new fixed rate assets or liabilities, the proportion of fixed rate debt to fixed rate assets remains unchanged and the level of floating rate assets and debt remains constant.  An analysis of the December 31, 2014 balance sheet, using these assumptions, estimates the impact of a 100 basis point immediate and sustained adverse change in interest rates to have a potential $5 million adverse impact on pre-tax earnings.  Last year, similar assumptions and calculations yielded a potential minimal impact on pre-tax earnings.
 
This analysis does not necessarily represent our current outlook of future market interest rate movement, nor does it consider any actions management could undertake in response to changes in interest rates.  Accordingly, no assurance can be given that actual results would be consistent with the results of our analysis.
 
Foreign exchange rate risk
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. An analysis of the December 31, 2014 balance sheet estimates the impact of a 10 percent change in the value of the U.S. dollar relative to all other currencies, to have an impact to pre-tax earnings of less than $1 million. A similar analysis performed on the December 31, 2013 balance sheet resulted in an estimated impact to pre-tax earnings of less than $1 million.
 
This analysis does not necessarily represent our current outlook for the U.S. dollar relative to all other currencies, nor does it consider any actions management could undertake in response to changes in the foreign currency markets.  Accordingly, no assurance can be given that actual results would be consistent with the results of our analysis.

Item 8. 
Financial Statements and Supplementary Data.
 
Information required by Item 8 is included following the Report of Independent Registered Public Accounting Firm.

Item 9. 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
 
None.

26



Item 9A.
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 under Exchange Act Rule 13a-15(e), as of December 31, 2014. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of December 31, 2014 due to the material weakness in internal control over financial reporting relating to our Allowance for credit losses discussed below. Notwithstanding the material weakness, management has concluded that our consolidated financial statements for the periods covered by and included in this Form 10-K are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America.

Management’s Report on Internal Control over Financial Reporting
The management of Cat Financial is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Exchange Act Rule 13a-15(f).  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on our assessment, we concluded that the material weakness relating to our Allowance for credit losses still exists as of December 31, 2014 and, as a result, we did not maintain effective internal control over financial reporting as of December 31, 2014.

Description of material weakness
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As previously disclosed in our amended Annual Report on Form 10-K/A for the year ended December 31, 2013, management identified the below material weakness in our internal control over financial reporting which still exists as of December 31, 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 years ended December 31, 2013, 2012, and 2011. Accordingly, the material weakness did not result in a material misstatement of our consolidated financial statements and disclosures for the years ended December 31, 2013, 2012, or 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.

The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm as stated in their report which appears herein.


27



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

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.

Changes in internal control over financial reporting
During the fourth quarter of 2014, in response to the material weakness relating to our Allowance for credit losses, the Company began implementing changes to its internal control over financial reporting as described above. There have been no other changes in the Company’s internal control over financial reporting that occurred during the fourth quarter covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. 
Other Information.
 
None.

28



PART III
 
Item 14. 
Principal Accounting Fees and Services.
 
As a wholly-owned subsidiary of Caterpillar Inc., our principal accounting fees and services are subject to Caterpillar Inc.’s Audit Committee pre-approval policies and procedures described in its Proxy Statement.  This Proxy Statement can be located at Caterpillar Inc.’s Internet site (www.caterpillar.com), under Investors, Financial Information, Proxy Statement.  Other than these policies and procedures, the information contained at that Internet site is not incorporated by reference in this filing.  During 2014, all services provided by the external auditor were pre-approved by Caterpillar’s Audit Committee in accordance with such policy.
 
Fees for professional services provided by our auditors include the following: 
(Millions of dollars)
 
 
 
 
 
 
2014
 
2013
Audit fees(1)
 
$
4.5

 
$
3.9

Audit-related fees(2)
 
.2

 

Tax fees(3)
 
.1

 
.4

Total
 
$
4.8

 
$
4.3

 
 
 
 
 
 (1) "Audit fees" principally includes audit and review of financial statements (including internal control over financial reporting), statutory and subsidiary audits, SEC registration statements, comfort letters and consents.
 (2) "Audit-related fees" principally includes accounting consultations and pre- or post- implementation reviews of processes or systems.
(3) "Tax fees" include, among other things, statutory tax return preparation and review and advising on the impact of changes in local tax laws.



29



PART IV
 
Item 15. 
Exhibits and Financial Statement Schedules.
(a) 
 
The following documents are filed as part of this report.
 
 
1

 
Financial Statements
 
 
 
 
·
 
Report of Independent Registered Public Accounting Firm
 
 
 
 
·
 
Consolidated Statements of Profit
 
 
 
 
·
 
Consolidated Statements of Comprehensive Income
 
 
 
 
·
 
Consolidated Statements of Financial Position
 
 
 
 
·
 
Consolidated Statements of Changes in Stockholder’s Equity
 
 
 
 
·
 
Consolidated Statements of Cash Flows
 
 
 
 
·
 
Notes to Consolidated Financial Statements
(b)
 
Exhibits
3.1
Certificate of Incorporation of the Company, as amended (incorporated by reference from Exhibit 3.1 to the Company’s Form 10 for the year ended December 31, 1984).
3.2
Bylaws of the Company, as amended (incorporated by reference from Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q, for the quarter ended June 30, 2005).
4.1
Indenture, dated as of April 15, 1985, between the Company and Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-3, Commission File No. 33-2246).
4.2
First Supplemental Indenture, dated as of May 22, 1986, amending the Indenture dated as of April 15, 1985, between the Company and Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference from Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q, for the quarter ended June 20, 1986).
4.3
Second Supplemental Indenture, dated as of March 15, 1987, amending the Indenture dated as of April 15, 1985, between the Company and Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference from Exhibit 4.3 to the Company’s Current Report on Form 8-K, dated April 24, 1987).
4.4
Third Supplemental Indenture, dated as of October 2, 1989, amending the Indenture dated as of April 15, 1985, between the Company and Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference from Exhibit 4.3 to the Company’s Current Report on Form 8-K, dated October 16, 1989).
4.5
Fourth Supplemental Indenture, dated as of October 1, 1990, amending the Indenture dated April 15, 1985, between the Company and Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference from Exhibit 4.3 to the Company’s Current Report on Form 8-K, dated October 29, 1990).
4.6
Indenture, dated as of July 15, 1991, between the Company and Continental Bank, National Association, as Trustee (incorporated by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated July 25, 1991).
4.7
First Supplemental Indenture, dated as of October 1, 2005, amending the Indenture dated as of July 15, 1991, between the Company and U.S. Bank Trust National Association (as successor to the former Trustee) (incorporated by reference from Exhibit 4.3 to Amendment No. 5 to the Company’s Registration Statement on Form S-3 filed October 20, 2005, Commission File No. 333-114075).
4.8
Support Agreement, dated as of December 21, 1984, between the Company and Caterpillar (incorporated by reference from Exhibit 10.2 to the Company’s amended Form 10, for the year ended December 31, 1984).
4.9
First Amendment to the Support Agreement dated June 14, 1995, between the Company and Caterpillar (incorporated by reference from Exhibit 4 to the Company’s Current Report on Form 8-K, dated June 14, 1995).
 
The registrant hereby undertakes upon request to furnish the Commission with a copy of any instrument with respect to long-term debt where the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis.
10.1
Tax Sharing Agreement, dated as of June 21, 1984, between the Company and Caterpillar (incorporated by reference from Exhibit 10.3 to the Company’s amended Form 10, for the year ended December 31, 1984).
10.2
Four-Year Credit Agreement, dated as of September 16, 2010 (2010 Four-Year Credit Agreement), among the Company, Caterpillar, Caterpillar International Finance Limited, Caterpillar Finance Corporation, certain other financial institutions named therein and Citibank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd., Citibank International plc, Banc of America Securities LLC, J.P. Morgan Securities LLC and Citigroup Global Markets Inc. (incorporated by reference from Exhibit 99.4 to the Company’s Current Report on Form 8-K, filed September 21, 2010).

30



10.3
Japan Local Currency Addendum to the 2010 Four-Year Credit Agreement among the Company, Caterpillar Finance Corporation, the Japan Local Currency Banks named therein, Citibank, N.A. and The Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference from Exhibit 99.6 to the Company’s Current Report on Form 8-K, filed September 21, 2010).
10.4
Local Currency Addendum to the 2010 Four-Year Credit Agreement among the Company, Caterpillar International Finance Limited, the Local Currency Banks named therein, Citibank, N.A. and Citibank International plc (incorporated by reference from Exhibit 99.5 to the Company’s Current Report on Form 8-K, filed September 21, 2010).
10.5

Amendment No. 1 to the 2010 Four-Year Credit Agreement among the Company, Caterpillar, Caterpillar Finance Corporation, Caterpillar International Finance Limited, the Banks named therein, the Local Currency Banks, the Japan Local Currency Banks, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Citibank International plc and Citibank, N.A. (incorporated by reference from Exhibit 99.7 to the Company’s Current Report on Form 8-K, filed September 16, 2011).
10.6
Amendment No. 2 to the 2010 Four-Year Credit Agreement among the Company, Caterpillar, Caterpillar Finance Corporation, Caterpillar International Finance Limited, the Banks named therein, the Local Currency Banks, the Japan Local Currency Banks, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Citibank International plc and Citibank, N.A. (incorporated by reference from Exhibit 99.4 to the Company’s Current Report on Form 8-K, filed September 17, 2012).
10.7
Omnibus Amendment No. 3, dated as of September 12, 2013, to the 2010 Four-Year Credit Agreement and Amendment No. 1 to Local Currency Addendum to the 2010 Four-Year Credit Agreement, by and among the Company, Caterpillar, Caterpillar International Finance Limited and Caterpillar Finance Corporation, the Banks named therein, Local Currency Banks and Japan Local Currency Banks party thereto, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.4 to the Company’s Current Report on Form 8-K filed September 17, 2013).
10.8
Omnibus Amendment No. 4, dated as of September 11, 2014, to the 2010 Four-Year Credit Agreement and Amendment No. 2 to Local Currency Addendum to the 2010 Four-Year Credit Agreement, by and among the Company, Caterpillar, Caterpillar International Finance Limited and Caterpillar Finance Corporation, the Banks named therein, Local Currency Banks and Japan Local Currency Banks party thereto, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.4 to the Company’s Current Report on Form 8-K filed September 16, 2014).
10.9
364-Day Credit Agreement dated September 11, 2014 (2014 364-Day Credit Agreement) among the Company, Caterpillar, Caterpillar International Finance Limited, Caterpillar Finance Corporation, certain financial institutions named therein, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed September 16, 2014).
10.10
Local Currency Addendum, dated as of September 11, 2014, to the 2014 364-Day Credit Agreement among the Company, Caterpillar International Finance Limited, the Local Currency Banks named therein, Citibank, N.A. and Citibank International plc (incorporated by reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed September 16, 2014).
10.11
Japan Local Currency Addendum, dated as of September 11, 2014, to the 2014 364-Day Credit Agreement among the Company, Caterpillar Finance Corporation, the Japan Local Currency Banks named therein, Citibank, N.A. and The Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference from Exhibit 99.3 to the Company’s Current Report on Form 8-K, filed September 16, 2014).
10.12
Five-Year Credit Agreement, dated as of September 15, 2011 (2011 Five-Year Credit Agreement), among the Company, Caterpillar, Caterpillar International Finance Limited, Caterpillar Finance Corporation, certain financial institutions named therein, Citibank, N.A., Citibank International plc, The Bank of Tokyo-Mitsubishi UFJ Ltd., Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC (incorporated by reference from Exhibit 99.4 to the Company’s Current Report on Form 8-K, filed September 16, 2011).
10.13
Local Currency Addendum to the 2011 Five-Year Credit Agreement among the Company, Caterpillar International Finance Limited, the Local Currency Banks named therein, Citibank, N.A. and Citibank International plc (incorporated by reference from Exhibit 99.5 to the Company’s Current Report on Form 8-K, filed September 16, 2011).
10.14
Japan Local Currency Addendum to the 2011 Five-Year Credit Agreement among the Company, Caterpillar Finance Corporation, the Japan Local Currency Banks named therein, Citibank, N.A. and The Bank of Tokyo-Mitsubishi UFJ, Ltd. (incorporated by reference from Exhibit 99.6 to the Company’s Current Report on Form 8-K, filed September 16, 2011).
10.15
Amendment No. 1 to the 2011 Five-Year Credit Agreement among the Company, Caterpillar, Caterpillar Finance Corporation, Caterpillar International Finance Limited, the Banks named therein, the Local Currency Banks, the Japan Local Currency Banks, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Citibank International plc and Citibank, N.A. (incorporated by reference from Exhibit 99.5 to the Company’s Current Report on Form 8-K, filed September 17, 2012).
10.16
Omnibus Amendment No. 2, dated as of September 12, 2013, to the 2011 Five-Year Credit Agreement and Amendment No. 1 to Local Currency Addendum to the 2011 Five-Year Credit Agreement dated as of September 15, 2011, by and among the Company, Caterpillar, Caterpillar International Finance Limited and Caterpillar Finance Corporation, the Banks named therein, Local Currency Banks and Japan Local Currency Banks party thereto, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.5 to the Company’s Current Report on Form 8-K filed September 17, 2013).

31



10.17
Omnibus Amendment No. 3, dated as of September 11, 2014, to the 2011 Five-Year Credit Agreement and Amendment No. 2 to Local Currency Addendum to the 2011 Five-Year Credit Agreement dated as of September 15, 2011, by and among the Company, Caterpillar, Caterpillar International Finance Limited and Caterpillar Finance Corporation, the Banks named therein, Local Currency Banks and Japan Local Currency Banks party thereto, Citibank, N.A., as Agent, Citibank International plc, as Local Currency Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Japan Local Currency Agent (incorporated by reference from Exhibit 99.5 to the Company’s Current Report on Form 8-K filed September 16, 2014).
Computation of Ratio of Profit to Fixed Charges.
Consent of Independent Registered Public Accounting Firm.
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



32



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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:
February 17, 2015
By:
/s/Leslie S. Zmugg
 
 
 
Leslie S. Zmugg, Secretary
 
 
 
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Date
 
Signature
 
Title
 
 
 
 
 
February 17, 2015
 
/s/Kent M. Adams
 
President, Director and Chief
Executive Officer
 
 
Kent M. Adams
 
 
 
 
 
 
 
February 17, 2015
 
/s/Bradley M. Halverson
 
Director
 
 
Bradley M. Halverson
 
 
 
 
 
 
 
February 17, 2015
 
/s/James A. Duensing
 
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
 
 
James A. Duensing
 
 
 
 
 
 
 
February 17, 2015
 
/s/Jeffry D. Everett
 
Controller
(Principal Accounting Officer)
 
 
Jeffry D. Everett
 
 
 
 
 
 
 




33



Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholder of Caterpillar Financial Services Corporation:

In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of profit, comprehensive income, changes in stockholder’s equity and cash flows present fairly, in all material respects, the financial position of Caterpillar Financial Services Corporation and its subsidiaries at December 31, 2014, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to 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 existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Peoria, Illinois
February 17, 2015




34



Caterpillar Financial Services Corporation
CONSOLIDATED STATEMENTS OF PROFIT
For the Years Ended December 31,
(Dollars in Millions)
 
 
 
2014
 
2013
 
2012
Revenues:
 
 
 
 
 
 
Retail finance
 
$
1,366

 
$
1,387

 
$
1,342

Operating lease
 
1,057

 
948

 
860

Wholesale finance
 
311

 
306

 
335

Other, net
 
151

 
144

 
156

Total revenues
 
2,885

 
2,785

 
2,693

 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

Interest
 
631

 
734

 
801

Depreciation on equipment leased to others
 
870

 
770

 
688

General, operating and administrative
 
433

 
427

 
416

Provision for credit losses
 
139

 
101

 
163

Other
 
37

 
24

 
29

Total expenses
 
2,110

 
2,056

 
2,097

 
 
 
 
 
 
 
Other income (expense)
 
(22
)
 
(35
)
 
(12
)
 
 
 
 
 
 
 
Profit before income taxes
 
753

 
694

 
584

 
 
 
 
 
 
 
Provision for income taxes
 
209

 
167

 
145

 
 
 
 
 
 
 
Profit of consolidated companies
 
544

 
527

 
439

 
 
 
 
 
 
 
Less:  Profit attributable to noncontrolling interests
 
9

 
14

 
11

 
 
 
 
 
 
 
Profit1
 
$
535

 
$
513

 
$
428

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 1 Profit attributable to Caterpillar Financial Services Corporation.

See Notes to Consolidated Financial Statements.


35



Caterpillar Financial Services Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31,
(Dollars in Millions)

 
 
2014
 
2013
 
2012
 
 
 
 
 
 
 
Profit of consolidated companies
 
$
544

 
$
527

 
$
439

 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Foreign currency translation, net of tax (expense)/benefit of:
2014-$(119); 2013-$41; 2012-$19
 
(481
)
 
(59
)
 
62

Derivative financial instruments:
 
 
 
 
 
 
Gains (losses) deferred, net of tax (expense)/benefit of:
2014-$2; 2013-$1; 2012-$0
 
(4
)
 
(1
)
 
1

(Gains) losses reclassified to earnings, net of tax expense/(benefit) of:
2014-$(2); 2013-$(2); 2012-$1
 
4

 
4

 
(3
)
Total Other comprehensive income (loss), net of tax
 
(481
)
 
(56
)
 
60

 
 
 
 
 
 
 
Comprehensive income (loss)
 
63

 
471

 
499

 
 
 
 
 
 
 
Less: Comprehensive income attributable to the noncontrolling interests
 
9

 
17

 
11

 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Caterpillar Financial Services
Corporation
 
$
54

 
$
454

 
$
488

 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements.

36



Caterpillar Financial Services Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At December 31,
(Dollars in Millions, except share data)
 
 
 
2014
 
2013
 
2012
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
857

 
$
1,320

 
$
2,080

Finance receivables (Note 3)
 
 

 
 

 
 

Retail notes receivable
 
11,005

 
10,858

 
10,990

Wholesale notes receivable
 
4,514

 
4,153

 
4,238

Finance leases and installment sale contracts – Retail
 
14,455

 
14,551

 
13,695

Finance leases and installment sale contracts – Wholesale
 
384

 
480

 
643

 
 
30,358

 
30,042

 
29,566

Less: Unearned income
 
(883
)
 
(976
)
 
(998
)
Less: Allowance for credit losses
 
(401
)
 
(387
)
 
(429
)
Total net finance receivables
 
29,074

 
28,679

 
28,139

 
 
 
 
 
 
 
Notes receivable from Caterpillar (Note 13)
 
414


345


360

Equipment on operating leases,
 
 

 
 

 
 

less accumulated depreciation (Note 4)
 
3,624

 
3,544

 
2,970

Deferred and refundable income taxes (Note 11)
 
206

 
166

 
115

Other assets
 
1,001

 
1,060

 
1,071

Total assets
 
$
35,176

 
$
35,114

 
$
34,735

 
 
 
 
 
 
 
Liabilities and stockholder’s equity:
 
 

 
 

 
 

Payable to dealers and others
 
$
113

 
$
118

 
$
109

Payable to Caterpillar – other
 
69

 
80

 
73

Accrued expenses
 
212

 
251

 
267

Income taxes payable
 
66

 
52

 
70

Payable to Caterpillar – borrowings (Note 13)
 
1,108


1,118


208

Short-term borrowings (Note 7)
 
4,699

 
3,663

 
4,651

Current maturities of long-term debt (Note 8)
 
6,283

 
6,592

 
5,991

Long-term debt (Note 8)
 
18,291

 
18,737

 
19,098

Deferred income taxes and other liabilities (Note 11)
 
681

 
512

 
548

Total liabilities
 
31,522

 
31,123

 
31,015

 
 
 
 
 
 
 
Commitments and contingent liabilities (Note 10)
 


 


 


 
 
 
 
 
 
 
Common stock - $1 par value
 
 

 
 

 
 

Authorized:  2,000 shares; Issued and
 
 

 
 

 
 

outstanding:  one share (at paid-in amount)
 
745

 
745

 
745

Additional paid-in capital
 
2

 
2

 
2

Retained earnings
 
3,139

 
3,004

 
2,691

Accumulated other comprehensive income/(loss)
 
(364
)
 
117

 
176

Noncontrolling interests
 
132

 
123

 
106

Total stockholder’s equity
 
3,654

 
3,991

 
3,720

 
 
 
 
 
 
 
Total liabilities and stockholder’s equity
 
$
35,176

 
$
35,114

 
$
34,735

 
 
 
 
 
 
 
 See Notes to Consolidated Financial Statements.

37



Caterpillar Financial Services Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY
For the Years Ended December 31,
(Dollars in Millions)
 
 
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income/(loss)
 
Noncontrolling
interests
 
Total
Balance at December 31, 2011
 
$
745

 
$
2

 
$
2,513

 
$
116

 
$
95

 
$
3,471

Profit of consolidated companies
 
 

 
 

 
428

 
 

 
11

 
439

Dividend paid to Caterpillar
 
 

 
 

 
(250
)
 
 

 
 

 
(250
)
Foreign currency translation, net of tax
 
 

 
 

 
 

 
62

 

 
62

Derivative financial instruments, net of tax
 
 

 
 

 
 

 
(2
)
 
 
 
(2
)
Balance at December 31, 2012
 
$
745

 
$
2

 
$
2,691

 
$
176

 
$
106

 
$
3,720

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
745

 
$
2

 
$
2,691

 
$
176

 
$
106

 
$
3,720

Profit of consolidated companies
 
 

 
 

 
513

 
 

 
14

 
527

Dividend paid to Caterpillar
 
 

 
 

 
(200
)
 
 

 
 

 
(200
)
Foreign currency translation, net of tax
 
 

 
 

 
 

 
(62
)
 
3

 
(59
)
Derivative financial instruments, net of tax
 
 

 
 

 
 

 
3

 
 

 
3

Balance at December 31, 2013
 
$
745

 
$
2

 
$
3,004

 
$
117

 
$
123

 
$
3,991

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
$
745

 
$
2

 
$
3,004

 
$
117

 
$
123

 
$
3,991

Profit of consolidated companies
 
 

 
 

 
535

 
 
 
9

 
544

Dividend paid to Caterpillar
 
 

 
 

 
(400
)
 
 
 
 
 
(400
)
Foreign currency translation, net of tax
 
 

 
 

 
 
 
(481
)
 

 
(481
)
Derivative financial instruments, net of tax
 
 

 
 

 
 

 

 
 
 

Balance at December 31, 2014
 
$
745

 
$
2

 
$
3,139

 
$
(364
)
 
$
132

 
$
3,654

 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements.

38



Caterpillar Financial Services Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
 (Dollars in Millions)
 
 
2014
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
 
Profit of consolidated companies
 
$
544

 
$
527

 
$
439

Adjustments for non-cash items:
 
 

 
 

 
 

Depreciation and amortization
 
883

 
790

 
707

Amortization of receivables purchase discount
 
(243
)
 
(233
)
 
(241
)
Provision for credit losses
 
139

 
101

 
163

Gain on sales of receivables
 
(5
)
 
(4
)
 
(3
)
Other, net
 
(4
)
 
77

 
1

Changes in assets and liabilities:
 
 

 
 

 
 

Receivables from others
 
10

 
25

 
(22
)
Other receivables/payables with Caterpillar
 
23

 
1

 
11

Payable to dealers and others
 
(26
)
 
(95
)
 
(34
)
Accrued interest payable
 
(60
)
 
(22
)
 
(13
)
Accrued expenses and other liabilities, net
 
108

 
(4
)
 
(18
)
Income taxes payable
 
(33
)
 
(65
)
 
48

Payments on interest rate swaps
 
2

 
(2
)
 
(4
)
Net cash provided by operating activities
 
1,338

 
1,096

 
1,034

Cash flows from investing activities:
 
 

 
 

 
 

Capital expenditures for equipment on operating leases and other capital expenditures
 
(1,627
)
 
(1,822
)
 
(1,660
)
Proceeds from disposals of equipment
 
771

 
681

 
875

Additions to finance receivables
 
(14,396
)
 
(14,075
)
 
(18,750
)
Collections of finance receivables
 
12,608

 
12,256

 
14,789

Net changes in Caterpillar purchased receivables
 
10

 
181

 
250

Proceeds from sales of receivables
 
179

 
227

 
144

Net change in variable lending to Caterpillar
 

 
32

 
(32
)
Additions to other notes receivable with Caterpillar
 
(103
)
 
(45
)
 
(107
)
Collections on other notes receivable with Caterpillar
 
34

 
29

 
103

Restricted cash and cash equivalents activity, net
 
6

 
2

 
45

Other, net
 
(40
)
 
3

 
(4
)
Net cash (used in) provided by investing activities
 
(2,558
)
 
(2,531
)
 
(4,347
)
Cash flows from financing activities:
 
 

 
 

 
 

Net change in variable lending from Caterpillar
 

 
(65
)
 
203

Proceeds from borrowings with Caterpillar
 

 
1,000

 

Proceeds from debt issued (original maturities greater than three months)
 
8,655

 
9,133

 
13,806

Payments on debt issued (original maturities greater than three months)
 
(8,463
)
 
(9,101
)
 
(9,935
)
Short-term borrowings, net (original maturities three months or less)
 
1,043

 
(70
)
 
480

Dividend paid to Caterpillar
 
(400
)
 
(200
)
 
(250
)
Net cash provided by (used in) financing activities
 
835

 
697

 
4,304

Effect of exchange rate changes on cash and cash equivalents
 
(78
)
 
(22
)
 
(87
)
Increase/(decrease) in cash and cash equivalents
 
(463
)
 
(760
)
 
904

Cash and cash equivalents at beginning of period
 
1,320

 
2,080

 
1,176

Cash and cash equivalents at end of period
 
$
857

 
$
1,320

 
$
2,080

 
 
 
 
 
 
 
Cash paid for interest
 
$
674

 
$
713

 
$
797

Cash paid for taxes
 
$
175

 
$
192

 
$
101

All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents.
See Notes to Consolidated Financial Statements.

39



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
A. Nature of Operations
 
Caterpillar Financial Services Corporation, a Delaware corporation organized in 1981 (together with its subsidiaries, "Cat Financial," "the Company," "we" and "our"), is a wholly-owned finance subsidiary of Caterpillar Inc. (together with its other subsidiaries, "Caterpillar" or "Cat").  Our primary business is to provide retail and wholesale financing alternatives for Caterpillar products to customers and dealers around the world.  Retail financing is primarily comprised of financing of Caterpillar equipment, machinery and engines.  In addition, we also provide financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products.  We also provide wholesale financing to Caterpillar dealers and purchase short-term receivables from Caterpillar.

B. Basis of Consolidation
 
The consolidated financial statements include the accounts of Cat Financial.  Investments in companies that are owned 20 percent to 50 percent or are less than 20 percent owned and for which we have significant influence are accounted for by the equity method.  Investments in companies that are less than 20 percent owned and for which we do not have significant influence are accounted for by the cost method.  All material intercompany balances have been eliminated.  
 
We consolidate all variable-interest entities (VIEs) where we are the primary beneficiary. For VIEs, we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs. 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 10 for more information.

C. Recognition of Earned Income
 
Retail finance revenue on finance leases and installment sale contracts is recognized over the term of the contract at a constant rate of return on the scheduled outstanding principal balance.  Revenue on retail notes is recognized based on the daily balance of retail receivables outstanding and the applicable effective interest rate.
Operating lease revenue is recorded on a straight-line basis in the period earned over the life of the contract.
Wholesale finance revenue on finance leases and installment sale contracts related to financing dealer inventory and rental fleets is recognized over the term of the contract at a constant rate of return on the scheduled outstanding principal balance.  Revenue on wholesale notes is recognized based on the daily balance of wholesale receivables outstanding and the applicable effective interest rate.
Loan origination and commitment fees are deferred and amortized to revenue using the interest method over the life of the finance receivables.

Recognition of income is suspended and the loan or finance lease is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due except in locations where local regulatory requirements dictate a different method, or instances in which relevant information is known that warrants placing the loan or finance lease on non-accrual status).  Accrual is resumed, and previously suspended income is recognized, when the loan or finance lease becomes contractually current and/or collection doubts are removed.  Cash receipts on impaired loans or finance leases are recorded against the receivable and then to any unrecognized income. A loan or finance lease is considered impaired, based on current information and events, if it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan or finance lease. We consider a loan or finance lease past due if any portion of a contractual payment is due and unpaid for more than 30 days.
 
Revenues are presented net of sales and other related taxes.
 
D. Depreciation
 
Depreciation for equipment on operating leases is recognized using the straight-line method over the lease term, typically one to seven years.  The depreciable basis is the original cost of the equipment less the estimated residual value of the equipment at the end of the lease term.
 

40



E. Residual Values
 
The residuals for leases classified as operating leases are included in Equipment on operating leases.  The residuals for leases classified as capital leases, in accordance with lease accounting, are included in finance leases and installment sale contracts.
 
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.
 
F. Debt Issuance Costs
  
Debt issuance costs are capitalized and amortized to Interest expense over the term of the debt issue.
 
G. Derivative Financial Instruments
 
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates.  Our Risk Management Policy allows for the use of derivative financial instruments to prudently manage foreign currency exchange rate and interest rate exposures and not for the purpose of creating speculative positions.  Derivatives that we use are primarily foreign currency forward, option, and cross currency contracts and interest rate swaps.  All derivatives are recorded at fair value.  See Note 9 for additional information.
 
H. 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 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.

Uncollectible receivable balances, including accrued interest, are written off against the Allowance for credit losses when the underlying collateral is repossessed or when we determine that it is probable that the receivable balance is uncollectible.  Subsequent recoveries, if any, are credited to the Allowance for credit losses when received.

I. Income Taxes
 
The Provision for income taxes is determined using the asset and liability approach.  Tax laws require items to be included in tax filings at different times than the items are reflected in the financial statements.  A current liability is recognized for the estimated taxes payable for the current year.  Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid.  Deferred taxes are adjusted for enacted changes in tax rates and tax laws.  Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
 

41



We join Caterpillar in the filing of a consolidated U.S. Federal income tax return and certain state income tax returns.  In accordance with our tax sharing agreement with Caterpillar, we generally pay to or receive from Caterpillar our allocated share of income taxes or credits reflected in these consolidated filings. This amount is calculated on a separate return basis by taking taxable income times the applicable statutory tax rate.
 
J. Foreign Currency Translation
 
Assets and liabilities of foreign subsidiaries (the majority of which use the local currency as their functional currency) are translated at current exchange rates.  The effects of translation adjustments are reported as a separate component of Accumulated other comprehensive income entitled "Foreign currency translation."  Gains and losses resulting from the remeasurement of foreign currency amounts to functional currency are included in Other income (expense) on the Consolidated Statements of Profit.
 
K. Use of Estimates in the Preparation of Financial Statements
 
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 the reported amounts.  Significant estimates include the Allowance for credit losses, residual values for leased assets, income taxes and the assumptions used to determine the fair value of derivatives. Actual results may differ from these estimates.

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

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

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

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


42



NOTE 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
 
 
 
 
 
 
Balance at December 31, 2012
$
184

 
$
(8
)
 
$
176

Other comprehensive income/(loss) before reclassifications
(62
)
 
(1
)
 
(63
)
Amounts reclassified from accumulated other comprehensive income/(loss)