DBRS Confirms PACCAR Inc at AA (low) & R-1 (middle), Trend Remains Stable

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 results have been strengthening progressively over the past two years, in line with recovering global trucking industry conditions (following a severe downturn in late 2008 through 2009). Earnings in 2011 were significantly higher relative to prior-year levels, approaching historical norms. While industry levels were firmer across all geographic segments, DBRS notes that North America, (the largest market for the Company, accounting for approximately half of total truck deliveries), represented by far the most dramatic source of growth, with PACCAR units essentially doubling year-over-year. The increase in North America reflects higher freight volumes, as well as the progressive modernization of the truck fleet (as the average age of the fleet increased significantly through the downturn, with new trucks in turn offering significant benefits in the form of higher fuel efficiency and lower running costs). Company deliveries were also up in Europe by a substantial 64% vis-à-vis 2010, with volumes in PACCAR’s “Mexico, South America, Australia and other” segment growing by 37% year-over-year. In addition to the higher truck volumes, performance was further bolstered by strong after-market revenues that increased by almost 20% year-over-year, to a record level of $2.6 billion.

PACCAR’s higher profitability also incorporated pricing gains. The Company enjoys a strong reputation as a manufacturer of high-quality trucks, giving it considerable pricing power (while benefiting from relatively moderate exposure to low-margin fleet customers). Furthermore, DBRS notes that while PACCAR’s earnings benefited from the ongoing recovery of the trucking industry, performance was also bolstered by significant gains in share achieved by the Company in many of its major markets. In the United States and Canada, market share reached a record level of 28.1% (relative to 24.1% for the prior year) as the Company’s new models with 2010 EPA compliant engines were very well-received. Furthermore, the Company continues to make progressive gains in Europe, as market share of trucking subsidiary DAF Trucks N.V. (DAF) reached a record 15.2% last year, with PACCAR having an eventual market share objective of 20% for the continent.

While North America and Europe remain dominant, PACCAR is expanding its geographic scope. The Company is progressing with the construction of its new DAF facility in Brazil; PACCAR aims to launch DAF vehicles in that market by 2013, with an eventual market share objective of 10%. PACCAR is also continuing to assess further expansion opportunities in other emerging markets, such as China and India.

The Company continues to benefit from a very solid balance sheet and credit metrics, given its consistently conservative financial policy. PACCAR’s debt levels remain nominal, with the industrial operations having a sizable net cash position. DBRS notes that PACCAR’s significantly augmented capital expenditures in 2011 (largely to support the Company’s South American expansion) were easily covered by operating cash flow. While such investments, along with shareholder-friendly activities such as dividends and share repurchases, are projected to continue increasing going forward, DBRS expects these expenditures to remain readily absorbed by PACCAR’s strong financial profile.

DBRS expects the ratings to remain constant over the medium-to-long term. Over the near term, the Company’s earnings are expected to remain in line with strong 2011 levels, as global trucking industry volumes for 2012 are projected to be roughly flat year-over-year. Ongoing growth in North America will likely be offset by some contraction in Europe, given economic headwinds primarily resulting from the sovereign debt crises of various member nations. 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:

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.