DBRS Limited (DBRS Morningstar) confirmed the Long-Term ratings of Caterpillar Inc. (CAT or the Company) and its subsidiaries at "A" and R-1 (low). All trends remain Stable. The rating confirmations are based on CAT's solid operating performance in 2021 as a result of a strong recovery in end-user demand. The Stable trends reflect DBRS Morningstar's expectation that operating results and credit metrics will remain supportive of the current rating category in the near to medium term.
The ratings continue to be supported by CAT's robust business profile as a global leading 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 and superior product quality allow it to maintain a leading market position and strong brand recognition. Furthermore, the Company's captive finance subsidiary and large global network of independent dealers provide intensive geographic coverage and strong customer relationships.
CAT's recent operating performance generally unfolded in line with DBRS Morningstar's expectations. Recovery in end-user demand was very strong throughout 2021, driven by rising commodity prices, resumed capital spending by customers, and increasing construction activities in most regions except some softening in China. Machinery, Energy & Transportation revenues rebounded by 23% to $48 billion in 2021 compared with $39 billion in 2020, only modestly below 2019's $51 billion. The strong revenue generation was a function of both an increase in volumes and a higher price realization, as CAT successfully executed several price increases throughout 2021. Partly offsetting the revenue increase were inflationary pressures related to raw material costs, freight costs, labour costs, and higher incentive compensation expenses, which were suspended in 2020. Additionally, supply chain disruptions intensified during H2 2021, which constrained production. Adjusted EBITDA margin (as per DBRS Morningstar’s calculation) improved moderately to 16.6% in 2021 from 16.0% in 2020, albeit still below the 2018–19 range of 19%–20%. Credit metrics strengthened in 2021, with adjusted debt-to-EBITDA decreasing to 1.3 times (x) from 1.8x in 2020.
DBRS Morningstar expects CAT's net sales to grow by 10%–12% in 2022, driven by strong demand signals from all primary segments and anticipated price realization. The backlog at the end of 2021 increased to $23.1 billion ($14.2 billion at the end of 2020), with the largest increase coming from the Energy & Transportation segment. DBRS Morningstar expects that the price increases implemented throughout 2021 will more than offset the elevated manufacturing costs stemming from the high inflation environment in 2022. As such, the Company’s operating margin is expected to expand moderately in 2022. Cash flow from operations is expected to continue to track operating income. Capex is projected to increase meaningfully to approximately $1.5 billion in 2022 from $1.1 billion in 2021. Dividends are also expected to increase moderately in 2022, in line with the historical payout trend. As a function of the above, DBRS Morningstar forecasts CAT's net free cash flow to be lower in 2022 compared with 2021.
DBRS Morningstar notes that CAT faces some near-term headwinds, including ongoing supply chain shortages and delays and surging inflation. The global supply chain issues are expected to persist throughout 2022 because of the Russia-Ukraine conflict and lockdowns in China and may not begin to ease until late 2022. The U.S. inflation rate reached a 40-year high at 8.5% in March 2022 and hovered above 8.0% in April 2022, and inflationary pressures may persist for a period of time. Even though CAT has proved its capability to increase prices to offset the rising manufacturing costs, there will be a lag in price realization; thus its short-term operating margin could be pressured. On the other hand, the soaring gas prices and commodity prices may drive demand for CAT’s equipment and services from customers in the resource and energy industries.
DBRS Morningstar expects CAT's ratings to remain stable in the short to medium term because of its strong credit metrics being well commensurate with the current ratings. Conversely, although highly unlikely, should CAT's credit profile deteriorate sharply because of a decrease in revenue and/or margin contraction, a negative rating action could result.
There were no environmental, social, or governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Industrial Products Industry (January 28, 2022; https://www.dbrsmorningstar.com/research/391382); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 29, 2021; https://www.dbrsmorningstar.com/research/386615); DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (March 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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