DBRS Confirms Komatsu at A (low) and R-1 (low)

DBRS has today confirmed the A (low) and R-1 (low) ratings for Komatsu Ltd. and its subsidiaries (collectively, Komatsu or the Company). The trends remain Stable. The Company’s operating performance weakened over the past year from very strong levels, with a notable decline in FQ309, but its financial profile remains acceptable for the ratings. Komatsu is one of the largest global capital equipment producers, with a strong market share in its core heavy construction and mining end-markets.

The Company’s operating performance is expected to be under pressure over the near term, with earnings well below peak F2008 (year ending March 31) levels. Continued weakness in global macroeconomic conditions and the expectation that commodity prices will not substantially rebound in 2009 are largely responsible for the outlook. Demand for Komatsu’s mining and construction equipment, which has also been negatively affected by the limited access (or lack thereof) to credit for customers, is expected to be the key driver of weaker financial results. The Company’s mature markets, namely Japan, North America and Europe, are expected to continue to pressure earnings. The global economic slowdown will also limit growth in its emerging markets, which were the main contributors to the strength in Komatsu’s operating results over the prior two fiscal years. A sharper-than-expected deterioration in profitability and cash flow, which would be expected in the event of a longer or more severe deterioration in macroeconomic conditions, is a key risk to the ratings.

Despite the above-noted challenges, DBRS expects Komatsu’s financial profile to be weaker but to remain acceptable over the near term. While the decline from top-of-the-cycle market conditions has been steep, the Company’s financial profile was previously very conservative. This strategy has positioned Komatsu well to manage the current downturn. While debt has increased materially, debt-to-capital in the low-40% range and debt-to-EBITDA in the 2.0 times range remain acceptable for the current rating. In addition, DBRS expects that Komatsu will generate cash flow from working capital over the near term, which should lead to a modest reduction in debt; further share repurchases or large acquisitions are not expected. The Company is also expected to benefit from its strong presence in China, which is likely to remain an important source of future growth.

Notes:
The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporates (Industrials) rating.