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CATERPILLAR FINANCIAL SERVICES CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 2, 2014

OVERVIEW: FIRST QUARTER 2014 VS. FIRST QUARTER 2013

We reported first-quarter 2014 revenues of $713 million, an increase of $33 million, or 5 percent, compared with the first quarter of 2013. First-quarter 2014 profit after tax was $136 million, a $5 million, or 4 percent, decrease from the first quarter of 2013.

• The increase in revenues was primarily due to a $23 million favorable impact from higher average earning assets and an $8 million favorable impact from returned or repossessed equipment. • Profit before income taxes was $188 million for the first quarter of 2014, compared with $187 million for the first quarter of 2013. The increase was primarily due to a $10 million favorable impact from higher average earning assets and an $8 million favorable impact from returned or repossessed equipment, mostly offset by a $17 million increase in provision for credit losses. • The provision for income taxes reflects an estimated annual tax rate of 26 percent in the first quarter of 2014 compared with 27 percent in the first quarter of 2013. The decrease in rate is primarily due to changes in the geographic mix of pre-tax profits. The first-quarter 2013 estimated annual tax rate of 27 percent excludes a benefit of $7 million, reflecting the impact of the American Taxpayer Relief Act. • During the first quarter of 2014, new retail financing was $2.80 billion, a decrease of $102 million, or 4 percent, from the first quarter of 2013. The decrease was primarily related to the Mining and Asia/Pacific operating segments, partially offset by improvements in the North America operating segment. • At the end of the first quarter of 2014, past dues were 2.44 percent, compared with 2.37 percent at the end of 2013. The slight increase in past dues compared to year-end 2013 was primarily due to seasonality impacts. At the end of the first quarter of 2013, past dues were 2.52 percent. Write-offs, net of recoveries, were $38 million for the first quarter of 2014, compared with $10 million for the first quarter of 2013. The increase was primarily related to higher write-offs in the Latin American marine portfolio that were previously provided for in the allowance for credit losses. • As of March 31, 2014, our allowance for credit losses totaled $373 million or 1.25 percent of net finance receivables, compared with $378 million or 1.30 percent of net finance receivables at year-end 2013. The allowance for credit losses as of March 31, 2013, was $429 million or 1.49 percent of net finance receivables. 28



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UNAUDITED REVIEW OF CONSOLIDATED STATEMENTS OF PROFIT THREE MONTHS ENDED MARCH 31, 2014 VS. THREE MONTHS ENDED MARCH 31, 2013



REVENUES

Retail and wholesale revenue for the first quarter of 2014 was $410 million, a decrease of $14 million from the same period in 2013. The decrease was due to a $22 million unfavorable impact from lower interest rates on new and existing retail and wholesale receivables, partially offset by an $8 million favorable impact from higher average earning assets. The annualized average yield was 5.62 percent for the first quarter of 2014, compared with 5.92 percent for the first quarter of 2013.

Operating lease revenue for the first quarter of 2014 was $262 million, an increase of $42 million from the same period in 2013. The increase was due to a $38 million favorable impact from higher average earning assets and a $4 million favorable impact from higher average financing rates on operating leases.

Other revenue, net, items were as follows: (Millions of dollars) Three Months Ended March 31, 2014 2013



Finance receivable and operating lease fees (including late charges)

$ 16 $ 19 Fees on committed credit facility extended to Caterpillar 10 10 Interest income on Notes Receivable from Caterpillar 5 5 Net gain (loss) on returned or repossessed equipment 4 (4 ) Miscellaneous other revenue, net 6 6 Total Other revenue, net $ 41 $ 36 EXPENSES



Interest expense for the first quarter of 2014 was $162 million, a decrease of $29 million from the same period in 2013. This decrease was primarily due to a reduction of 45 basis points in the average cost of borrowing to 2.16 percent for the first quarter of 2014, down from 2.61 percent for the first quarter of 2013, partially offset by the impact of a 3 percent increase in average borrowings.

Depreciation expense on equipment leased to others was $216 million, up $41 million from the first quarter of 2013 due to an increase in the average operating lease portfolio.

General, operating and administrative expenses were $101 million for the first quarter of 2014, compared with $103 million for the same period in 2013.

Provision for credit losses was $33 million for the first quarter of 2014 compared with $16 million for the same period in 2013. The increase was primarily due to an increase in provision expense for finance receivables (the result of an increase in write-offs, net of recoveries, and growth in the portfolio, partially offset by a decrease in the allowance rate).

At the end of the first quarter of 2014, past dues were 2.44 percent, compared with 2.37 percent at the end of 2013. The slight increase in past dues compared to year-end 2013 was primarily due to seasonality impacts. At the end of the first quarter of 2013, past dues were 2.52 percent. Write-offs, net of recoveries, were $38 million for the first quarter of 2014, compared with $10 million for the first quarter of 2013. The increase was primarily related to higher write-offs in the Latin American marine portfolio that were previously provided for in the allowance for credit losses. 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 $385 million and $425 million at March 31, 2014 and December 31, 2013, respectively. Total non-performing finance receivables as a percentage of total finance receivables were 1.29 percent and 1.46 percent at March 31, 2014 and December 31, 2013, respectively.

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UNAUDITED



Our Allowance for credit losses as of March 31, 2014 was $373 million or 1.25 percent of net finance receivables compared with $378 million or 1.30 percent as of December 31, 2013. The lower allowance rate is primarily due to write-offs taken in the first quarter of 2014, partially offset by an allowance increase tied to adverse political and economic developments in a global region that we currently serve. 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 on our existing finance receivable portfolio.

Other expenses were $8 million for the first quarter of 2014, up $3 million from the same period in 2013.

Other income (expense) items were as follows: (Millions of dollars) Three Months Ended March 31, 2014 2013 Net gain from interest rate derivatives $ - $ -



Net currency exchange loss, including forward points (5 ) (3 ) Total Other income (expense)

$ (5 )$ (3 )



The Provision for income taxes was $49 million in the first quarter of 2014, compared with $43 million for the first quarter of 2013. The Provision for income taxes reflects an estimated annual tax rate of 26 percent in the first quarter of 2014 compared with 27 percent in the first quarter of 2013. The decrease in rate is primarily due to changes in the geographic mix of pre-tax profits. The first-quarter 2013 estimated annual tax rate of 27 percent excludes a benefit of $7 million, reflecting the impact of the American Taxpayer Relief Act.

PROFIT

As a result of the performance discussed above, profit after tax was $136 million for the first quarter of 2014, a decrease of $5 million, or 4 percent, from the first quarter of 2013.

REVIEW OF CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

ASSETS

Total assets were $35.59 billion as of March 31, 2014, an increase of $450 million, or 1 percent, from December 31, 2013, primarily due to an increase in net finance receivables, partially offset by a decrease in our cash position.

During the three months ended March 31, 2014, new retail financing was $2.80 billion, a decrease of $102 million, or 4 percent, from the same period in 2013. The decrease was primarily related to the Mining and Asia/Pacific operating segments, partially offset by improvements in the North America operating segment.


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Source: Edgar Glimpses


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