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

DBRS Limited (DBRS) has today confirmed the ratings of Caterpillar Inc. (the Company or CAT) and its subsidiaries at “A” and R-1 (low). All trends are Stable. The Company’s strong business profile, a global leader in most of its businesses with diversified product offerings and geographic markets, is the primary factor supporting the confirmations. Furthermore, a rebound in operating performance in Q1 2017 appears to have halted the declining trend in CAT’s financial profile. The Stable trend reflects DBRS’s expectation of continued strengthening of CAT’s operating profit, supported by improving market conditions, cost savings from recent restructuring actions and the resultant key credit metrics to levels commensurate with the current ratings.

Between 2013 and 2016, continued weakness in CAT’s markets and the associated weak demand for machinery, equipment and aftermarket parts led to lower earnings and weaker key credit metrics. Moreover, the weak results during this period had eroded the cushion in CAT’s financial profile to absorb further poor performances, putting the ratings at risk. Despite better results in Q1 2017, all credit metrics are still at the low end of the rating range. (The last 12 months Q1 2017 debt coverage metrics were weaker than in 2016 because of an increase in debt caused by temporary factors.) More encouragingly, retail sales volume have been rising sequentially for the last few months, lending support to the durability of the improving trend. CAT has raised its forecast for revenue and adjusted profit per share (excluding restructuring costs) to between $38 billion and $41 billion from between $36 billion and $39 billion and to $3.75 per share (about $2.2 billion) from $2.90 per share (about $1.7 billion), respectively.

There are signs that the current market downturn has bottomed and may be at the beginning of an up cycle. Construction activities are on a firmer footing in China and North America and mining companies are showing interest in investing in capital projects again. CAT has improved its operating leverage after rightsizing its operations and lowering production costs and should generate stronger profit in the next upturn. These factors bode well for a sustained recovery of CAT’s financial profile and the stability of the ratings in the foreseeable future. However, any unexpected deterioration in the Company’s operating results and/or a lack of improvement in the key credit metrics would put the long-term ratings at risk.

In addition, the confirmations do not take into account any potential adverse outcome of the investigation by the U.S. government related to CAT’s export activities with certain foreign subsidiaries, which could result in substantial income tax liabilities. DBRS considers the outcome of the investigation as an event and will evaluate the impact on the ratings at its conclusion.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The principal methodologies are Rating Companies in the Industrial Products Industry (February 2017), Global Methodology for Rating Finance Companies (October 2016), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.