DBRS Confirms PACCAR Inc 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. with Stable trends, as PACCAR’s credit profile remains on track, notwithstanding the pronounced downturn in the global trucking industry.

DBRS notes that the Company’s recent results have been adversely affected by the global economic recession that contributed to severe trucking industry conditions. Earnings in 2009 were substantially weaker relative to historical norms in line with sharply lower volumes across all geographic segments. North America and Europe (which combined represent the significant majority of PACCAR’s sales at typically around 80% of total revenues) were particularly hard hit with industry levels falling year-over-year by 27% and 65%, respectively. Despite the severe conditions, the Company, benefitting from its considerable operational flexibility, successfully avoided incurring losses and generated positive net income for the 71st consecutive year, aptly demonstrating PACCAR’s ability to withstand negative cycles.

The Company also continues to benefit from a very strong financial profile given its consistently conservative financial policy. PACCAR’s industrial operations have a sizeable net cash position. Dividends and capital expenditures were significantly curtailed in 2009 through the first half of 2010 to preserve cash amid the significant industry headwinds.

DBRS notes that PACCAR’s competitive position has remained intact through the downturn. In 2009, market share in the United States and Canada decreased slightly to 25.1% (relative to 26% for the prior year). However, the Company continues to make progressive gains in Europe, with trucking subsidiary DAF Trucks N.V.’s (DAF) market share reaching 14.8% in 2009 (vis-à-vis 14.0% in 2008) and increasing through the first half of 2010 to a level above 16%. 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. While North America and Europe remain dominant, PACCAR is expanding its geographic scope; with the Company recently announcing that it will launch DAF vehicles in the South American market.

Through the first two quarters of 2010, results have strengthened somewhat year-over-year amid moderately better industry conditions, although both PACCAR’s profitability and industry volumes remain well below historical norms. It would appear nonetheless that the worst of the downturn has passed. Typical leading indicators, such as parts sales and used truck prices, have shown definitive signs of strengthening. Additionally, after incurring sharply higher credit losses in 2009, the performance of PACCAR’s financial services asset portfolio has also been progressively improving this year.

However, challenges remain in both of the Company’s major geographic market segments. In North America, in addition to ongoing economic headwinds, increased pricing levels (estimated at between $8,000 to $10,000 per unit) resulting from the transition to Environment Protection Agency (EPA) 2010 compliant engines have moderated any growth in demand. In Europe, the fiscal challenges of certain member nations may possibly further undermine economic growth in that continent over the near term. Therefore, while industry volumes should eventually revert to trend levels, the recovery will likely prove protracted. PACCAR continues to be very well positioned to benefit once industry conditions improve materially. DBRS expects the ratings to remain constant, citing PACCAR’s demonstrated ability to weather cyclical downturns; however, should the Company incur significant operating losses such that its financial profile is adversely affected, negative rating implications would result.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on the DBRS website under Methodologies.

PACCAR Financial Ltd.’s ratings are based on the parent, PACCAR Inc.