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., both 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 2013 industrial results were solid, as earnings were nominally higher over already-strong 2012 levels, with recent performance well in line with historical norms. While profit of the core Truck segment was marginally lower, this was more than offset by earnings of PACCAR Parts. Global Truck deliveries decreased slightly year over year as a function of declines across each of the Company’s geographic market segments, with the exception of Europe, where PACCAR unit sales improved by 11% vis-à-vis 2012, with the regional market benefiting from considerable pre-buy activity in advance of the Euro 6 emissions regulations that came into effect this year. Notwithstanding the modest drop in sales, profitability of the Truck segment remained solid, with achieved pricing gains and foreign currency tailwinds representing significant offsets. DBRS notes that the 2013 EBIT margin of the Company’s industrial operations remained solid at a level of 8.3%, with PACCAR’s firm profitability reflecting its 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 continue to represent the majority of sales, PACCAR is expanding its geographic scope. In the fourth quarter of 2013, the Company completed construction of its new truck assembly facility in Ponta Grossa, Brazil, and commenced production of DAF trucks. Brazil represents an important emerging market, with PACCAR estimating the country’s Class 8 truck industry sales in 2014 to total 100,000 units. While market share targets in the immediate future remain modest as PACCAR ramps up production and develops its dealer network, the Company has a long-term share objective in Brazil of approximately 10%. Other markets that PACCAR is targeting for expansion include Russia, Taiwan and China.

Regarding the Company’s Parts business, this segment achieved ongoing growth and generated record revenues of $2.8 billion in 2013. Moreover, PACCAR expects further increases in this business in line with the ongoing growth of its vehicle fleet amid higher utilization rates across most of its customer base. Accordingly, the Company implemented several measures last year to expand its Parts capabilities. These included the completion of a new parts distribution centre (PDC) in Eindhoven, the Netherlands; the establishment of a PDC in Brazil; and increased warehouse space in its Lancaster, Pennsylvania, PDC.

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. PACCAR’s debt levels remain nominal, with the industrial operations having a sizable net cash position. Going forward, capital expenditures are expected to moderate, given the finished construction of the Ponta Grossa assembly facility, as well as the effective completion of the Company’s recent product offensive. While PACCAR did not undertake any share buybacks last year, DBRS notes that the Company had, as of December 31, 2013, approximately $108 million remaining of its share repurchase authorization from December 2011, with PACCAR expected to persist with share repurchases on an opportunistic basis. Regarding dividend payments, these are projected to increase in 2014, albeit mostly as a function of the special dividend declared in 2013 that is payable this year, with regular quarterly dividend payments likely remaining flat or exhibiting moderate, controlled growth. Taking the above into account amid projected ongoing solid earnings generation, DBRS expects PACCAR’s net free cash flow in 2014 to remain at significantly positive levels.

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 2013 levels, as global trucking industry conditions remain reasonable. In North America, industry volumes are projected to remain firm, in line with ongoing replacement demand (given a relatively aged vehicle fleet) amid some expansion of the industry fleet as a function of moderate economic growth; moreover, increased housing starts are likely to spur additional vocational truck orders, which should bolster margins. In Europe, while pre-buy activity in 2013 pulled forward some sales, absent this effect industry conditions are forecast to improve as the continent finally resumes some economic growth subsequent to its protracted downturn. In the event that the Company were to substantially deviate from its conservative financial policy to the extent that its credit metrics were no longer commensurate with the assigned ratings; this could lead to negative rating implications, although DBRS considers such to be highly unlikely. 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 2.8 million units in 2013 to 3.3 million units by 2018.

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

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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