Morningstar DBRS Confirms PACCAR at AA (low); Trend Remains Stable

DBRS Limited (Morningstar DBRS) 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.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings is supported by PACCAR’s strong business risk assessment (BRA) as a global premium truck manufacturer with solid market positions in North America and Europe, strong brands and product quality, as well as high operating efficiencies. Additionally, PACCAR’s financial risk assessment (FRA) is inordinately strong because of its consistent operating performance and exceedingly conservative financial policy, with the Company having essentially no industrial indebtedness.

CREDIT RATING DRIVERS
Consistent with the Stable trends on the ratings, Morningstar DBRS expects PACCAR’s ratings to remain constant over the foreseeable future. Given that the Company’s credit ratings are already at a high level compared with its peers, Morningstar DBRS sees limited potential for a positive rating action in the medium term. Conversely, in the event of a severe industry downturn or a marked shift in the Company’s financial policy, there could be negative rating implications, although Morningstar DBRS deems this unlikely.

EARNINGS OUTLOOK
For 2024, Morningstar DBRS expects PACCAR’s earnings to moderately soften year over year (YOY) from historical highs, albeit while remaining at very solid levels. Morningstar DBRS notes that 2024 global truck conditions, in aggregate, are expected to remain rather favourable, notwithstanding some anticipated normalization in certain markets. The Company’s order book remains strong, providing good visibility through the year. PACCAR anticipates pricing to remain firm, reflective of its refreshed product portfolio that offers high fuel efficiency and reduced operating costs (to the benefit of fleet owners).

Over the medium term, Morningstar DBRS expects PACCAR’s operating performance to remain solid. Morningstar DBRS also recognizes that PACCAR has built up a cushion in its financial profile, which enables it to weather any short-term deterioration in market demand.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates PACCAR’s cash flow from operations in 2024 to moderate YOY in line with a slight reduction in earnings. This notwithstanding, operating cash flow is projected to persist at strong levels. Capital expenditures (capex) are forecast by the Company to moderately increase YOY and approximate $725 million, consistent with increasing investment requirements given tightening emissions regulations. Dividend payments are expected to increase significantly YOY, reflecting PACCAR's very strong 2023 earnings. The higher capex and dividend payments are nonetheless estimated to be readily funded internally. Morningstar DBRS anticipates working capital to remain a use of cash, albeit at a reduced level compared to 2023 in line with lower forecast inventories. In aggregate, despite an anticipated YOY decrease (significantly reflecting the higher dividend payments in 2024), Morningstar DBRS expects the Company's net free cash flow (i.e., after working capital items) to persist at significantly positive levels.

CREDIT RATING RATIONALE
PACCAR’s credit ratings are supported by its solid market position in key markets (notably the United States and Europe), while also reflecting the Company’s very consistent operating performance. Moreover, the parts/aftermarket and financial services segments provide additional diversification benefits. The credit ratings also take into account PACCAR’s exceedingly conservative financial policy, with the Company’s FRA and associated credit metrics remaining very strong, exceeding levels typically commensurate with the current credit ratings.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The following Environmental factor had a relevant effect on the credit analysis: Morningstar DBRS considered that the E factor, specifically costs relating to carbon dioxide (CO2) and greenhouse gas emissions, represents a relevant factor as PACCAR’s trucks and engines are subject to a wide range of regulatory requirements that impose standards on (among other factors) emissions and fuel efficiency, with the Company continuously investing in technologies to reduce greenhouse gas emissions. Although the E factor results in additional costs for PACCAR, these are readily absorbed by the Company's strong financial profile and therefore do not result in any change in the credit ratings or trends assigned to PACCAR. (For further details please refer to the following commentary, The Future is Electric: Climate Change and the Global Automotive Sector at https://dbrs.morningstar.com/research/413419.)

Social (S) Factors
There were no Social factors that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factors) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of PACCAR, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of PACCAR, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of PACCAR, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (11 October 2023), https://dbrs.morningstar.com/research/421716/

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (24 February 2023), https://dbrs.morningstar.com/research/410196/

-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (28 March 2023), https://dbrs.morningstar.com/research/411694/

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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 under Related Documents or by contacting us at [email protected].

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President
Rating Committee Chair: Timothy O'Brien, Managing Director
Initial Rating Date: September 19, 2000

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at [email protected].

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