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.

PACCAR’s 2012 results were solid as earnings were nominally higher over already-strong 2011 levels, with recent performance well in line with historical norms (following the weaker results of 2009-2010 reflective of the global economic downturn). Truck deliveries increased across all of the Company’s geographic market segments with the exception of Europe, which still faces economic headwinds associated with the sovereign debt crisis. In North America, which continues to represent the majority of PACCAR’s total truck volumes, deliveries increased by 5% year-over-year, with volumes in PACCAR’s Mexico, South America, Australia and Other segment growing by 20% year-over-year. In addition to the higher truck volumes, performance was bolstered by strong aftermarket revenues that attained record revenue levels of $2.7 billion last year. 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 a relatively moderate exposure to low-margin fleet customers.

While North America and Europe remain dominant, PACCAR is expanding its geographic scope. The Company remains on target to complete its new truck assembly facility in Ponta Grossa, Brazil, and commence production of DAF trucks in late 2013; going forward, the Company has an eventual market share objective of 10% in that country. Other markets that PACCAR is targeting for expansion include Russia (where 2012 truck deliveries increased by 80% year-over-year) and China.

The Company continues to benefit from a very solid balance sheet and credit metrics, thanks to its consistent operating performance and very conservative financial policy. DBRS recognizes that the net free cash flow of PACCAR’s industrial operations was moderately negative in 2012; however, this was largely a function of elevated dividend payments and capital expenditures, the latter associated with the Company’s significant product offensive as well as the construction of its forthcoming assembly plant in Brazil. Nonetheless, PACCAR’s debt levels remain nominal, with the industrial operations having a sizeable net cash position. Going forward, capital expenditures are expected to moderate given the effective completion of the Company’s recent product offensive, with investments over the near term focused on the completion of the Brazilian plant. Accordingly, DBRS expects PACCAR’s net free cash flow in 2013 to revert to significantly positive levels, with dividends and share repurchases well absorbed by PACCAR’s strong financial profile. We also note that the Company has previously demonstrated a willingness to curtail such shareholder-friendly activities (as evidenced during the economic downturn).

DBRS expects the ratings to remain constant over the medium to long term. Over the near term, the Company’s earnings are estimated to remain in line with strong 2012 levels as global trucking industry volumes for 2013 are projected to be slightly higher year-over-year. In North America, notwithstanding lacklustre economic growth, sales are likely to be supported by ongoing replacement demand (given a relatively aged vehicle fleet), with increased housing starts possibly spurring higher vocational truck orders, which should bolster margins. In Europe, volumes are also assumed to remain roughly constant with demand (particularly in the second half of the year), likely supported by pre-buy activity in advance of the Euro 6 emissions requirement that becomes effective next year. In Brazil, where the Company will make a significant entry later this year, industry volumes are forecast to increase by up to 10% year-over-year. PACCAR’s entry into this market should also bolster earnings, as Brazil in recent years has typically been the world’s most profitable trucking market. 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 2012 to 3.3 million units by 2017.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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