Fitch Ratings affirmed the issuer default ratings (IDR) at ‘A’ and revised the rating outlook to negative from stable for Caterpillar, (CAT), Caterpillar Financial Services (CFSC) and certain of CFSC’s subsidiaries.

The revision to negative reflects the impact of the extended downturn in CAT’s machinery markets and an increased risk that the company could face challenges to rebuild its operating and financial performance to levels that support the current ratings. Fitch continues to view CAT’s operating profile as fundamentally sound including its ability to weather cycles inherent in its markets and a strong competitive position.

A key rating consideration is the strength of an eventual demand recovery and CAT’s future margins and free cash flow (FCF). A slow recovery could impede CAT’s return to stronger credit metrics, and even in a stronger recovery, working capital requirements could constrain FCF if the company does not realize expected operating improvements from restructuring.

These concerns are mitigated by CAT’s comprehensive actions to reduce its cost structure, which should enable it to generate solid financial results when end-market demand improves. Fitch anticipates that EBITDA margins, calculated excluding restructuring, could stabilize in 2017 near 12% compared to a peak level of more than 16% in 2012.

A $2 billion three-year restructuring program was implemented in 2015 which reduced costs by $880 million during the first nine months of 2016. CAT estimated total cost reductions related to the three-year restructuring program would be $1.5 billion annually, not including additional restructuring and other actions taken in 2016, which should also bring down costs and support future margins.

Fitch expects credit metrics may not improve until after 2017, one year later than originally expected, before a possible demand recovery emerges. Fitch estimates FCF will decline toward break-even in 2016 due to lower revenue and margins, lower benefits from inventory reductions, higher pension contributions, higher cash costs for restructuring, and a reduction in dividends from CFSC. CAT plans to make pension and OPEB contributions of $350 million in 2016 and $550 million in 2017 compared to $350 million in 2015. FCF as calculated by Fitch includes recurring dividends from CFSC and is adjusted to exclude the impact of changes in receivables sold to CFSC.

If CAT’s end markets decline further in 2017, Fitch estimates FCF could be near break-even or slightly negative. However, CAT has strengthened its working capital management which, when combined with restructuring, could support stronger FCF than currently estimated. In the event of even a modest recovery, CAT could begin to rebuild credit metrics which could support a return to a Stable Outlook.

The ratings could be downgraded in the event that CAT’s machinery markets do not show signs of material improvement within 12-18 months, together with a clear path to improved FCF and stronger credit metrics.