DBRS Confirms PACCAR at AA (low) and R-1 (middle)

DBRS has today confirmed the AA (low) and R-1 (middle) ratings of PACCAR Inc (PACCAR or the Company) and PACCAR Financial Ltd., as PACCAR’s credit profile remains on track, despite the current downturn in the global trucking industry.

DBRS notes that the Company’s recent results have been adversely affected by the global economic downturn that has contributed to severe trucking industry conditions. While the North American market has been in decline since early 2007, initially this was significantly offset by ongoing strong conditions in Europe through the third quarter of 2008. Subsequently, however, demand also fell alarmingly in Europe, creating very weak conditions in both of the Company’s major markets, which together typically account for close to 80% of total revenues. While earnings have softened in line with the drop in sales, DBRS notes that PACCAR has nonetheless managed to remain at least moderately profitable in this severe environment, benefiting from its considerable operational flexibility. Kenworth and Peterbilt manufacturing facilities in Washington and Tennessee, respectively, have essentially been closed in order to more closely align production levels with demand. Furthermore, DBRS notes that PACCAR has aptly demonstrated through previous business cycles its ability to withstand downturns, having generated positive net income for 70 consecutive years. PACCAR continues to benefit from a very strong financial profile given its consistently conservative financial policy. The Company’s industrial operations have a sizeable net cash position. Dividends and capital expenditures are being significantly curtailed in 2009 to facilitate free cash flow generation despite the significant industry headwinds.

PACCAR’s competitive position has remained intact through the recent downturn. In 2008, market share in the United States and Canada was essentially flat relative to prior year levels, at 26%, while the Company continued to make progressive gains in Europe, with DAF’s market share exceeding 14%. The Company enjoys a strong reputation as a manufacturer of high-quality trucks, giving it considerable pricing power while benefiting from a relatively moderate exposure to low-margin fleet customers.

Additionally, PACCAR’s supplementary businesses, of which the after-market parts and financial services divisions are the most significant, have each posted growth over the past several years. While collection activities and credit losses of the financial services division have substantially increased recently, in line with the difficult conditions in North America and Europe, DBRS notes that such losses remain well manageable. The Company has also benefited from very low exposure to Eastern Europe, which has been particularly hard hit by the financial downturn.

Over the longer term, PACCAR continues to be very well positioned to benefit once industry conditions begin to improve. DBRS notes that a recovery will likely occur initially in North America, where the market has witnessed a protracted downturn. This has resulted in a relatively aged truck fleet and it is likely that there is significant pent-up demand. A slight recovery may begin to emerge in the final quarter of 2009, in line with moderate pre-buy activity, although no material improvement is expected before 2010 as various governmental stimulus programs begin to take effect. In Europe, industry conditions have lagged those of North America; this is expected to remain likewise with respect to an eventual recovery. While DBRS acknowledges PACCAR’s ability to weather the current downturn, should the Company incur significant operating losses such that its financial profile is adversely affected, negative rating implications would result.

Notes:
The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate rating.