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

DBRS Limited (DBRS) has today confirmed the Issuer Rating of PACCAR Inc at AA (low) and the Senior Unsecured Debt and Commercial Paper ratings of PACCAR Financial Ltd., (together with PACCAR Inc, PACCAR or the Company) at AA (low) and R-1 (middle), respectively. All trends are Stable. The ratings reflect PACCAR’s solid business profile as a leading global truck manufacturer with significant pricing power. The Company also enjoys a very robust financial profile, with PACCAR having only nominal levels of industrial indebtedness.

PACCAR’s 2014 industrial results were strong and materially higher over already solid 2013 levels. Earnings of the core Truck segment benefitted from higher truck deliveries, primarily reflecting significant volume growth in North America, which was only partly offset by declines in other markets, notably Europe, where volumes were moderately weaker as a function of lacklustre regional industry conditions and negative country mix, and with two of PACCAR’s largest regional markets – the United Kingdom and the Netherlands – being adversely affected by the transition from Euro 5 to Euro 6 emissions standards. The Parts Business segment achieved ongoing growth, generating record revenues of $3.1 billion in 2014. Moreover, PACCAR expects further increases in this business in line with the ongoing growth of its vehicle fleet. DBRS notes that the 2014 EBIT margin of the Company’s industrial operations remained solid at 9%. Regarding PACCAR’s financial services business, 2014 pre-tax earnings increased to record levels in line with ongoing growth in average earning asset levels amid higher finance and lease margins.

The Company benefits from a very solid balance sheet and credit metrics, given 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.

DBRS expects the ratings to remain constant. Over the near term, earnings and operating cash flow are estimated to remain in line with 2014 levels, as global trucking industry conditions remain reasonable. Capital expenditures in 2015 are expected to increase slightly year over year, given ongoing product and powertrain development, although investments will remain materially less than prior high levels given the completed construction of the Company’s Brazilian assembly facility in 2013. Share repurchases are expected to persist on an opportunistic basis, with dividend payments likely exhibiting moderate, controlled growth. As such, DBRS projects PACCAR’s net free cash flow in 2015 to remain significantly positive. Longer term, PACCAR remains very well positioned to benefit from the ongoing growth of the industry, with the Company estimating that the global truck market for trucks above six tonnes will increase from approximately 2.7 million units in 2014 to 3.4 million units by 2019. In the event that PACCAR were to substantially deviate from its conservative financial policy to the extent that its credit metrics were no longer commensurate with the assigned ratings, there could be negative rating implications, although DBRS considers such an event to be highly unlikely.

Notes:
The ratings of PACCAR Financial Ltd. are based on parent PACCAR Inc, in line with the existing Keep Well agreement.

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 methodologies are Rating Companies in the Automotive Manufacturing Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, DBRS Criteria: Guarantees and Other Forms of Explicit Support, Global Methodology for Rating Finance Companies, which can be found on our website under Methodologies.