Morningstar DBRS Confirms Long-Term Credit Ratings of Caterpillar Inc. and Subsidiaries at “A” and CP Credit Rating at R-1 (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the long-term credit ratings of Caterpillar Inc. (CAT or the Company) and its subsidiaries at "A" and the Commercial Paper credit rating at R-1 (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations acknowledge CAT's strong operating performance in 2023 with revenues, operating margins, and free cash flow (FCF) generation increasing to record levels. The confirmations also build on Morningstar DBRS' expectations of continued solid operational execution in 2024, especially as demand remains strong across most of the Company's end markets. The Stable trends are based on Morningstar DBRS' view that CAT's overall credit risk profile will remain strongly supportive of the current "A" credit rating category.

CREDIT RATING DRIVERS
Morningstar DBRS expects CAT's credit ratings to remain stable over the medium term because of the Company's strong credit risk profile, which is supported by solid financial metrics that remain ahead of its current credit ratings and a robust business risk profile, despite exposure to cyclical end sectors. Morningstar DBRS may consider a positive credit rating action if there was a material strengthening in the business risk profile, reflecting lower volatility in operating and credit metrics through the cycle. Conversely, though highly unlikely, Morningstar DBRS may consider a negative credit rating action if there was a sustained and material deterioration in the Company's business risk profile due to substantially lower demand from its key destination sectors.

EARNINGS OUTLOOK
Morningstar DBRS expects CAT's earning profile to remain solid, with Machinery, Energy & Transportation (ME&T) revenues forecast to marginally grow to above $64 billion in 2024, helped by a supportive pricing environment and stable demand. At the segment level, Construction Industries should reflect strong sales supported by U.S. infrastructure spending and recovering residential construction. The Energy and Transportation segment should enjoy tailwinds from its exposure to the oil and gas sector as well as to the power generation sector, where data centre growth should support demand. Resource Industries should reflect modestly weaker volume demand because of slightly weaker dealer inventory demand and increased capital discipline from customers, but offset by higher service revenues. In line with modest revenue growth, EBITDA (as defined by Morningstar DBRS) should remain above $14 billion in 2024.

FINANCIAL OUTLOOK
Strong EBITDA generation should translate to solid cash flow generation with operating cash flow (as defined by Morningstar DBRS) reaching close to $11.0 billion in 2024. ME&T capital expenditures are forecast to increase to above $2.0 billion for 2024 as the Company seeks to invest in new product development, services and AACE related initiatives (autonomy, alternative fuels, connectivity and digital, and electrification). CAT is also investing in its large engine capacity division and in making its supply chains more resilient. In addition, Morningstar DBRS expects dividends to remain above $2.5 billion in 2024; as a result, ME&T FCF (after dividends but before changes in working capital) should be above $5.7 billion. As such, in line with Morningstar DBRS' expectations, credit metrics should remain marginally ahead of CAT's "A" credit rating profile (i.e., debt-to-EBITDA remaining below 1.0 times in 2024).

CREDIT RATING RATIONALE
CAT's strong business profile is built on its leading position as a manufacturer of construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. The Company's strong technological capabilities, superior product quality, and world-class manufacturing operations also support its leading market position and strong brand recognition. Additionally, CAT's captive finance subsidiary and large global network of independent dealers provide intensive geographic coverage and strong customer relationships. New services growth opportunities and long-term energy transition trends are positive for the Company's business risk profile, but these factors are balanced by CAT's inherent exposure to cyclical industries and volatile input prices.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors 
In the analysis of CAT, the relative weighting of the BRA factors was approximately equal. 

(B) Weighting of FRA Factors 
In the analysis of CAT, the relative weighting of the FRA factors was approximately equal. 

(C) Weighting of the BRA and the FRA 
In the analysis of CAT, the BRA carries greater weight than the FRA. 
 
Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Industrial Products Industry (April 15, 2024),
https://dbrs.morningstar.com/research/431173
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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