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. with Stable trends. PACCAR’s credit profile remains on track as the ratings continue to reflect its solid business profile as a leading global truck manufacturer with significant pricing power. The Company also enjoys a very robust financial profile, in particular its balance sheet, which shows nominal levels of indebtedness.

The Company’s recent results have been strengthening significantly, in line with global trucking industry conditions that are meaningfully recovering following a severe downturn that persisted in late 2008 through 2009. DBRS notes, however, that the 2009 results nonetheless demonstrated PACCAR’s considerable operational flexibility and its ability to withstand severe negative cycles, with the Company generating positive net income for 72 consecutive years (including 2010).

Earnings in 2010, while remaining well below historical norms, were significantly higher relative to prior-year levels, with firmer volumes across all geographic segments. Industry volumes were higher in both North America and Europe (which combined represent the significant majority of PACCAR’s sales at typically more than 80% of total revenues). The rebound was stronger in Europe, where truck volumes grew by 41% year-over-year, relative to North America, where volumes increased by 8% year-over-year as the transition to Environment Protection Agency 2010 compliant engines moderated growth early in the year. In addition to the higher truck volumes, performance was further bolstered by strong aftermarket revenues that increased by more than 20% year-over-year.

Through the first quarter of 2011, the momentum of the Company’s improving performance trend increased further, with industrial revenues amounting to $3.0 billion, which is more than 50% higher than the prior-year period. This is attributable to firmer pricing as well as to sharp volume increases in Europe and North America (97% and 38% higher, respectively, vis-à-vis Q1 2010). Additionally, parts and aftermarket revenues attained a record level of $620 million for the quarter. Earnings also continue to increase substantially, with PACCAR’s margins being further bolstered by higher capacity utilization rates across its operations. Going forward, DBRS expects PACCAR’s revenues and earnings to begin approaching historical norms in line with the ongoing recovery of the industry. (DBRS notes that the Company recently released its Q2 2011 results, which were in line with expectations.)

DBRS notes that PACCAR’s competitive position has remained intact. In 2010, market share in the United States and Canada decreased slightly to 24.1% (relative to 25.1% for the prior year). However, the Company continues to make progressive gains in Europe, with the market share of trucking subsidiary DAF Trucks N.V. (DAF) reaching 15.2% in 2010 (vis-à-vis 14.8% in 2009). PACCAR has an eventual market share objective of 20% for the region. 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 announcing that it will launch DAF vehicles in the South American market. The Company is currently looking at prospective sites for a new DAF factory in Brazil, with DAF aiming to have an eventual market share in that country of 10%. PACCAR is also assessing further expansion opportunities in other emerging markets such as China and India.

The Company continues to benefit from a very strong financial profile, given its consistently conservative financial policy. PACCAR’s debt levels remain nominal, with the industrial operations having a sizeable net cash position. While dividends and capital expenditures are projected to increase going forward, in view of PACCAR’s improving performance and expansion objectives, these are expected to be internally funded.

DBRS expects the ratings to remain constant over the medium to long term. Near-term headwinds include higher commodity costs and rising fuel prices (which may affect the purchase decisions of some of the Company’s prospective customers); however, these are expected to be more than offset by PACCAR’s pricing power as well as by the fundamental recovery of the industry. In the longer term, PACCAR remains very well positioned to benefit from the ongoing growth of the industry, with the Company estimating the global truck market above six tonnes to increase from approximately 2.7 million units in 2010 to 3.6 million units by 2015.

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

The ratings of PACCAR Financial Ltd. are based on the parent, PACCAR Inc.

The applicable methodology is Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.