DBRS Limited (DBRS Morningstar) 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 confirmation of the ratings is supported by PACCAR's strong business risk assessment 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 is inordinately strong because of its consistent operating performance and exceedingly conservative financial policy, with the Company having essentially no industrial indebtedness.
PACCAR’s 2022 industrial revenues and operating profits increased sharply year over year (YOY) to record levels, in line with higher sales and firmer pricing amid favourable demand (supported by pent-up demand, with industry truck production being curtailed for close to three years). While the global semiconductor shortage continued to affect volumes, 2022 truck deliveries nonetheless increased by 14.3% YOY. Additionally, the aftermarket parts business (representing a stable contributor to PACCAR's operating performance) grew meaningfully YOY, benefitting from the high number of the Company's trucks and engines in the market and a global network exceeding 2,300 dealers. Accordingly, the Company's industrial business delivered strong performance, with the 2022 operating margin increasing to 11.3% (from 8.6% in 2021). PACCAR's financial services business also achieved strong results with 2022 pre-tax earnings increasing by 35% YOY, primarily reflecting higher used truck values, with depreciation expense declining significantly as a result.
DBRS Morningstar expects PACCAR’s financial performance to remain strong in 2023, with earnings likely moderately improving over record 2022 levels. While DBRS Morningstar recognizes economic headwinds looming across various regions, these are estimated to be considerably offset by the aforementioned pent-up demand persisting across the industry. The Company has indicated that its backlog provides sales visibility well into Q3 2023; as such, taking into account some potential softening in demand in the latter half of the year, on balance, DBRS Morningstar still anticipates that 2023 industry conditions will remain sound. Moreover, PACCAR’s sales stand to further benefit from its refreshed product portfolio that offers excellent fuel efficiency and reduced operating costs (to the benefit of fleet operators).
Consistent with the Stable trends on the ratings, DBRS Morningstar expects PACCAR’s ratings to remain constant over the foreseeable future. Given that the Company’s ratings are already at a very high level compared with its peers, DBRS Morningstar 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 DBRS Morningstar deems this to be unlikely.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered that the Environmental factor, specifically costs relating to carbon 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 Environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the ratings or the trends on PACCAR’s ratings.
There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022; https://www.dbrsmorningstar.com/research/404042)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
This 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 ratings:
The last rating action on this transaction took place on April 12, 2022, when DBRS Morningstar confirmed PACCAR’s long- and short-term ratings at AA (low) and R-1 (middle), respectively.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar 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, Diversified Industries
Rating Committee Chair: Timothy O’Brien, Managing Director, Global Head of Diversified Industries
Initial Rating Date: September 19, 2000
Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at email@example.com.
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