Fitch: Weak Spending in Mining Remains Challenge for CAT
CHICAGO & NEW YORK -- April 24, 2013
Reduced global demand for mining equipment put a damper on Caterpillar Inc.'s
1Q13 earnings as the company continues to deal with weak spending in mining,
slowing demand and an inventory correction, according to Fitch Ratings.
Economic uncertainty, including slower growth in China and ongoing challenges
in Europe, will likely pressure CAT's revenue and margins in the near term.
We think capital spending by mining companies could be down well into 2014 as
the mining cycle tends to be long, averaging about 7 years.
Other credit concerns include cyclical end markets, excess industry capacity,
competitive pressure in emerging regions, and CAT's sizable net pension
obligation. Free cash flow (FCF) was negative in 2012, but we estimate FCF
will improve in 2013 and could exceed $2 billion, partly due to inventory
reductions and a possible decline in pension contributions from a high level
Fitch believes the company will be able to fund its planned $1 billion of
share repurchases while controlling debt levels. Current ratings incorporate
CAT's liquidity, financial flexibility, strong operating capabilities and low
leverage. With that said, credit could be negatively affected if financial
results are substantially impaired by weak demand in CAT's machinery end
markets; if there is a material decline in the company's market share in key
product lines or geographic regions; or if aggressive cash deployment results
in higher leverage.
CAT reported 1Q revenue of $13.21 billion versus $15.98 billion recorded
during 1Q12. Mining equipment fell 23% and construction equipment sales
declined 17%. The company also cut its 2013 sales forecast from a range of $60
billion - $68 billion to a range of $58 billion - $61 billion, citing lower
demand for mining equipment.
Additional information is available on www.fitchratings.com.
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