DBRS Confirms Long-Term Ratings of Caterpillar Inc. at “A” with Stable Trend, Confirms CP Ratings at R-1 (low), Stable

DBRS Limited (DBRS) confirmed the ratings of Caterpillar Inc. (the Company or CAT) and its subsidiaries at “A” and R-1 (low). All trends are Stable. The confirmation reflects that the Company’s credit profile (a combination of its business risk profile and financial risk profile) continues to be compatible with the current ratings. In addition, DBRS notes that the Company’s financial profile improved meaningfully in 2017 and CAT is better positioned to weather future cyclical downturns and maintain the current ratings. However, the confirmation has not factored in any potential adverse outcome from 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.

CAT continues to maintain a strong business profile. CAT is the global leader in the construction and mining equipment markets, with a wide product portfolio. CAT’s technological capabilities, which drive constant innovations that improve the lifecycle value/utility of its products, and superior global dealer network help solidify its market leadership position.

The Company performed better than DBRS expectations in 2017. Improved market conditions, a buoyant construction sector and a stabilizing mining sector led to stronger end-user demand for equipment and parts and higher sales in most end markets and geographical regions. Benefits from actions to rightsize the manufacturing footprint and lower structural costs have further boosted profit margins. Additionally, CAT has also prepaid some debts. The combination of stronger results and lower debt levels has meaningfully strengthened all key credit metrics, and the financial profile is at the high end of the “A” range. CAT expects market conditions to remain favourable through 2018 and has raised its earnings forecasts. However, developing trade tensions between China and the United States are a concern, and further escalation of trade actions between the world’s two largest economies could impede or even reverse the positive momentum in the global economy. Nevertheless, DBRS notes that CAT’s financial profile has a comfortable cushion, allowing it to weather a downturn and remain within the current rating range.

DBRS expects CAT’s rising earnings momentum to continue based on the current uptrend in the equipment cycle and the ratings to remain stable over the foreseeable future. As stated above, the stability of the ratings is also supported by a strong financial profile. However, DBRS notes that the Company will need to raise its financial profile to the AA range to warrant consideration for positive rating actions, assuming a stable business profile. With no meaningful debt maturity before 2021, maintaining a stable financial profile at the AA range will be challenging. Conversely, a sharp deterioration in the Company’s operating results, although not anticipated, causing the financial profile to drop into the BBB range could lead to negative rating actions.

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

The principal methodology is Rating Companies in the Industrial Products Industry (February 7, 2018). Other applicable methodologies include DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 5, 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 26, 2018), which can be found on dbrs.com under Methodologies.

The primary sources of information used for this rating include company disclosures, internal company documents, discussion with the company and other sources such as regulators and Bloomberg. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

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