DBRS Confirms Caterpillar Ratings at “A”, R-1 (low), Stable Trends

DBRS has today confirmed the ratings of Caterpillar Inc. and Caterpillar Financial Services Limited (collectively, CAT or the Company) at “A” and R-1 (low), respectively. The trends are Stable. DBRS’s confirmation reflects CAT’s above-average business profile, as well as its strong financial profile, notwithstanding the goodwill impairment relating to the Siwei acquisition. CAT is a leading global manufacturer of construction and mining equipment and has also recently broadened its product offering with the acquisition of Bucyrus International Inc. (Bucyrus). During 2012, CAT had record revenue and earnings, which helped to improve its financial profile by elevating the interest-coverage ratios and reducing the debt-to-capital and debt-to-EBITDA ratios. In 2013, DBRS expects softer performance, due to a slowing mining market, a mixed construction outlook and a slowdown in dealer purchasing activity as existing inventory levels are worked down. DBRS expects the ratings to remain stable over the near to medium term, due to CAT’s strong market position, as well as its ability to withstand mild-to-medium-sized revenue impacts.

CAT generated record levels of revenues and earnings in 2012, due to volume and price increases, as well as the completion of the integration of the acquisitions of Bucyrus and Motoren-Werke Mannheim Holding GmbH (MWM). The Resource Industries segment expanded revenues by 24%, whereas construction and power systems segments had flat revenues (with revenue growth figures adjusted for the impact of the acquisitions). In terms of geography, Asia-Pacific and North America had strong revenue performances, while sales growth was lacklustre in Europe, Latin America and China.

Operating earnings improved, due to a favourable product mix and the impact of higher sales outweighing higher costs, given the capital-intensive nature of the operation; however, this was partially offset by the negative impact of slowing manufacturing in the fourth quarter as the Company managed-down its inventory. The Company’s financial profile improved in 2012 compared to 2011, with debt-to-capital improving to 43% from 48%, debt-to-EBITDA declining to 1.23x from 1.33x and a slight improvement in interest-coverage metrics. CAT maintained strong liquidity, with $3.3 billion in cash and approximately $6.3 billion total liquidity at industrial operations as of December 31, 2012.

DBRS expects that 2013 revenues will decline in the range of 5% to 10%, as dealers are forecast to reduce inventory, which CAT estimates will have a negative $2 billion (3% of 2012 sales) impact on revenues. Additionally, some segment specific factors are expected to further contribute to negative revenue growth. In the Resource Industries segment, expected declines in capital expenditures of miners will likely reduce revenues. The construction industries segment has a mixed outlook, with the U.S. housing recovery potentially serving as a growth catalyst, but with stagnant activity in Europe and China serving to potentially offset any growth. Revenues will also be affected by the divestiture of Caterpillar Logistics Services LLC, with the effect on revenues estimated at $400 million.

With an expected decrease in sales, working capital requirements are expected to similarly decline. Free cash flow in 2013 is therefore expected to be higher than in 2012. DBRS does not anticipate any further significant debt repayments outside of maturing obligations, and expects that CAT will maintain an elevated cash balance for liquidity purposes. Based on lower projected earnings and similar debt levels, DBRS expects slightly weaker or similar credit metrics at the end of 2013, and that the financial profile will continue to fall within the current rating, with CAT having good liquidity through the near term.

Overall, DBRS expects the ratings to remain stable over the near to medium term, noting CAT’s strong business profile. The financial profile remains within the current rating range, including the impacts of the recent $580 million goodwill impairment relating to the Siwei acquisition, as well as any mild-to-medium-sized financial impacts from decreased sales in a softer environment.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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