Fitch Ratings has affirmed the following ratings on Caterpillar Inc. (NYSE:CAT), Caterpillar Financial Services Corp. (CAT Financial) and Caterpillar Financial Services Australia LTD.:
Caterpillar Inc. (CAT)
--Issuer Default Rating (IDR) at 'A+';
--Short Term IDR at 'F1';
--Senior unsecured notes at 'A+';
--Commercial Paper at 'F1'.
Caterpillar Financial Services Corporation (CAT Financial)
--IDR at 'A+';
--Short Term IDR at 'F1';
--Senior unsecured notes at 'A+';
--Commercial Paper at 'F1'.
Caterpillar Financial Services Australia
--Short Term IDR at 'F1';
--Commercial Paper at 'F1'.
The Rating Outlook is Stable.
Approximately $4.1 billion of on balance sheet debt at Caterpillar Inc. and approximately $25.7 billion of on balance sheet debt at Caterpillar Financial is covered by Fitch's ratings.
The ratings reflect CAT's consistently strong cash flow generation, competitive products, diversified customer base, global manufacturing footprint and strong international dealer network. The ratings are also supported by CAT's substantial financial flexibility, solid credit metrics and the strength and stability of CAT Financial, all of which give CAT the ability to absorb economic and product cycles. Credit concerns include the cyclical nature of most of the company's business segments, large share repurchases, further weakening in the North American market, production and supply chain inefficiencies, and commodity cost exposure.
Strong markets outside the U.S. continue to support CAT's credit quality. In the first quarter of 2008, CAT's consolidated revenue increased approximately 18% due to significant overseas sales growth especially from the developing world. CAT generated 58% of its revenue outside North America last year and during the latest quarter. First quarter sales were driven by higher volumes, price realization and favorable currency translation. North American sales in the first quarter increased 4%; however end user demand remains weak and sales are expected to decline for the remainder of the year with U.S. dealers unlikely to increase their inventory beyond current levels. The rebound in on-highway U.S. engine sales now looks unlikely to improve until 2009. CAT has not confirmed whether it intends to continue competing in the on-highway truck engine business which Fitch estimates represented approximately $1.2 billion of its sales in 2007. Fitch expects CAT's international first quarter revenue trends to continue, but at a slower pace. International growth rates continue to benefit from strong secular and cyclical demand in developing economies, but in the long term Fitch expects these markets will eventually exhibit cyclical characteristics as growth rates slow or emerging markets begin to falter. The weak U.S. dollar especially against the Euro is also a net benefit to the company.
Operating profit in the first quarter of 2008 was up 10.9% to $1.18 billion versus last year driven by strong performance in CAT's engine business; however operating margins declined to approximately 10.8% in the quarter versus 11.4% first quarter 2007 due mainly to a 20.6% spike in cost of goods sold (COGS). COGS as a percent of revenue increased in 2007 and continued to do so in the first quarter to approximately 75.8%. Operating margins are following a negative trajectory from 2007 when they declined to 10.9% from 12% in 2006. Fitch expects operating profit margins to continue to be under pressure for the remainder of the year with material, labor and overhead costs increasing as well as continued supply chain challenges. CAT's consolidated revenue has grown at a 18.5% compound annual growth rate the last five years and this expansion is challenging CAT's manufacturing capabilities. In the intermediate term production efficiencies could improve with the CAT Production System.
CAT's cash deployment strategy includes share repurchases and increased capital expenditures to support new product programs, add additional capacity and replace and upgrade existing production assets. In February 2007, CAT authorized a five-year $7.5 billion share repurchase program and currently has approximately $5.3 billion of shares left to repurchase under the program. Fitch's ratings for CAT incorporate expectations for substantial cash deployment actions', including share repurchases, but Fitch also expects that share repurchase activity would be reduced or eliminated if end markets deteriorate. The company's cash flow from operations in the first quarter increased 82% to $408 million, but cash deployment actions exceeded this number. In the first quarter CAT repurchased 10.3 million shares for $692 million, increased operating capital expenditures 36.5% to $340 million, paid $223 million in dividends and spent $23 million on acquisitions.
CAT's balance sheet debt decreased in 2007 by $271 million or 6.3% and operating EBITDA increased slightly by $77 million or 1.4% which led to improved leverage metrics. Total Debt-to-EBITDA stood at 0.7 times (x) at year end versus 0.8x year end 2006. Total Adjusted Debt-to-Operating EBITDAR decreased to 1.1x from 1.2x at the end of 2006. Additionally, Operating EBITDA-to-Gross Interest Expense stood at 19.3x at year end versus 19.6x a year earlier. First Quarter LTM credit metrics deteriorated slightly due to modestly higher debt levels and lower profitability due mainly to increased cost of good sold in the first quarter. CAT has indicated that it may increase its ownership in Shin CAT Mitsubishi (SCM) which will increase its operating debt. Fitch expects that even with increased debt levels related to this transaction credit metrics for the year are likely to only weaken modestly from 2007.
CAT's liquidity (excluding CAT Financial) as of March 31, 2008, totaled approximately $1.5 billion consisting of cash and marketable securities totaling $464 million and $1.0 billion of committed unused revolver capacity. CAT has other external credit facilities available which are a combination of committed and non committed facilities. Approximately $173 million of long term debt matures during the remainder of 2008 and $317 million matures in 2009.
Caterpillar Financial Services Corporation (CFSC) debt ratings reflect its close operating and financial relationship with CAT. The financial relationship is governed by a support agreement which requires CAT to maintain 100% ownership of Financial, net worth in excess of $20 million and fixed-charge coverage of 1.15x or higher.
CFSC's operating performance in 2007 was a record year as net income totaled $494 million for the year ended Dec. 31, 2007, a 4% increase over 2006's income of $473 million. The increase in profitability was mainly due to the continued demand for CAT products, especially overseas, and improved operating efficiency. Near term profitability will continue to be driven by the demand for CAT products and corresponding expected loan originations. Fitch believes the international expansion will provide geographic diversity which should result in lowering volatility of earnings.
Asset quality performance continues to be one of CFSC's strengths. Net charge offs as a percentage of average retail receivables for the year ending Dec. 31, 2007 were 0.28% are at the low end of a five year range of 0.20%-0.60%. Near-term asset quality should remain in the historical range as delinquencies (30+ days) to total receivables rose to 2.36% at Dec. 31, 2007 from 1.85% for the comparable period in 2006. Although, delinquencies rose, Fitch believes the level is manageable and driven by construction softening in North America. The increased geographic diversity of CFSC should prevent sharp declines in asset quality.
Capitalization both on an absolute and risk-adjusted basis is good for the rating category. Leverage is expected to rise slightly from current levels but remain below 9.00x. Based on the quality of receivables and consistent performance, Fitch is comfortable with current leverage targets in relation to the current ratings.
CAT is the world's leading manufacturer in construction and mining equipment, diesel and natural gas engines and industrial gas turbines. Other major businesses include Remanufacturing Services, Logistics, and Progress Rail. Through its financial products subsidiary, CAT provides retail-financing to its customers and dealers for the purchase and lease of CAT and non-competitive products. In 2007, 58% of CAT's consolidated sales were outside the U.S.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site
Contacts:
Nathan Spunt, 212-908-0202
Craig
Fraser, 212-908-0310
Mark Oline, 312-368-2073, Chicago (Caterpillar
Inc.)
Peter J. Shimkus, 312-368-2063, Chicago
William Artz,
312-368-2083, Chicago
(Caterpillar Financial)
or
Media
Relations:
Brian Bertsch, 212-908-0549
