DBRS Confirms PACCAR at AA (low) & R-1 (middle), Trends 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 2015 industrial results were strong, with revenues and earnings of the industrial operations attaining record levels. Earnings of the core Truck segment benefited from higher truck deliveries (attributable to gains in North America and Europe) and firmer pricing, bolstered by material cost reductions. The Company’s Parts business also generated solid results. While segment revenues were technically lower (compared with record 2014 levels), this primarily reflects translation effects from weaker currencies (notably the euro) to the U.S. dollar as demand fundamentals continued to improve. Moreover, PACCAR expects further increases in this business amid ongoing growth of its vehicle fleet, in addition to increasing penetration levels of PACCAR engines across the fleet. DBRS notes that the 2015 EBIT margin of the Company’s industrial operations was strong at 11%. Regarding PACCAR’s Financial Services business, 2015 revenues and pre-tax earnings were nominally lower relative to prior year levels also as a function of the above-cited foreign exchange headwinds and lower yields, although average earning asset levels continued to grow.

The Company continues to benefit 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 notes that the Company recently filed an 8K dated March 24, 2016, regarding a provision of EUR 850 million ($945 million equivalent) to be taken in the quarter ending March 31, 2016. This has no impact on the ratings as DBRS observes that PACCAR’s liquidity is well sufficient to absorb such payment in the event of an associated charge.)

DBRS expects the ratings to remain constant. Over the near term, earnings and operating cash flow are estimated to remain in line with 2015 levels, as global trucking industry conditions remain reasonable. Capital expenditures in 2016 are expected to increase slightly year over year, given ongoing product and powertrain development in addition to increasing the capacity and operating efficiency of PACCAR’s factories and distribution centres; although investments will still 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 2016 to remain significantly positive. Longer term, PACCAR remains very well positioned to benefit from ongoing growth in line with its increasing presence in emerging markets, ongoing expansion of its parts and service capabilities as well as the development of new truck technologies.

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 methodologies are Rating Companies in the Automotive Manufacturing Industry and Global Methodology for Rating Finance Companies, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.