DBRS Confirms PACCAR at AA (low) and R-1 (middle)

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of PACCAR Inc. (PACCAR, or the Company) and affiliated companies at AA (low) and R-1 (middle). The trends are Stable. The credit profile of PACCAR remains on track for these ratings.

PACCAR’s credit metrics have significantly improved since 2001 and are currently above the commercial truck industry average. Peak medium- and heavy-truck demand conditions in North America and Europe are largely responsible for sharply higher earnings and cash flow, and led to the Company’s significant net cash position for its industrial operations (excluding financial services). The strength in demand for PACCAR trucks, which are generally premium priced (i.e., highly customized), has been driven by favourable economic growth and pre-buying in advance of new U.S. and European engine emission regulations. PACCAR has improved its market share in Europe over the past decade, maintains a solid number two position in the heavy-duty (Class 8) truck market in North America, and continues to expand capacity globally. The Company has also largely offset the impact of higher material costs from suppliers (e.g., steel, aluminum, energy) with price increases to its customers.

DBRS notes that PACCAR’s credit metrics are above levels considered appropriate for the AA (low) and R-1 (middle) ratings. However, they reflect peak market conditions. Earnings are expected to decline in 2007 as truck deliveries soften (as 2006 pre-buying ceases) and economic growth moderates. Truck demand has historically been sensitive to gross domestic product, and is likely to add a degree of earnings volatility as evidenced in past cycles. Mitigating the downside risk to PACCAR is the likelihood that economic growth in its core markets will remain reasonable through 2007. PACCAR’s revenues remain well diversified, with a strong presence outside of the U.S., which adds to earnings stability. Capacity expansion in lower-cost emerging markets (e.g., Mexico, Hungary) will further expand its global business platform and opportunities for its growing after-sale parts and financial services businesses. In addition, new product introductions (e.g., Class 6 trucks in the U.S.) are expected to support market share gains despite high industry competition.

DBRS also notes that the rating is further supported by PACCAR’s significant balance-sheet strength. The Company maintains a large net cash position (excluding its financial services business), and is expected to continue the trend of favourable free cash flow generation. Free cash flow is likely to be used mainly toward share repurchases, and higher dividends are possible. However, the balance sheet is expected to remain very conservative and provide ample support in the event of a sharp industry decline.

Note:
The ratings for PACCAR of Canada Ltd. and PACCAR Financial Ltd. are based on the parent, PACCAR Inc.