Morningstar DBRS Confirms PACCAR Inc 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. The trends on all credit ratings remain Stable.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings is supported by PACCAR's strong business risk profile 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 profile 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 credit 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. Finally, with respect to increasing tariffs globally as a result of trade policies of the Trump administration, Morningstar DBRS notes that PACCAR remains well positioned compared with its immediate peers to withstand such headwinds, with the Company being quite localized, having production capabilities in each of the United States, Canada, and Europe (among other regions). Moreover, DBRS Morningstar notes further that PACCAR's cost position and pricing power are also favourable relative to its competition.

EARNINGS OUTLOOK
For 2025, Morningstar DBRS expects PACCAR's earnings to moderately soften year over year (YOY), albeit while remaining at solid levels. Morningstar DBRS notes that 2025 global truck conditions, in aggregate, are expected to remain rather favourable, notwithstanding some anticipated normalization in certain markets, notably in Europe. 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). Finally, revenues of the Company's Parts segment (that generates materially higher margins relative to the Truck business) are estimated to moderately increase YOY.

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 2025 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 slightly decrease YOY albeit while remaining sizable and ranging from $700 million to $800 million, consistent with ongoing investment requirements given tightening emissions regulations. Dividend payments are expected to remain essentially constant YOY. The high capex and dividend payments are nonetheless estimated to be readily funded internally. In aggregate, despite an anticipated YOY decrease given a slight reduction in earnings amid ongoing sizable capex and dividend payments, Morningstar DBRS expects the Company's net free cash flow (i.e., after working capital, which is estimated to represent a slight use of cash) to persist at significantly positive levels.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): AH/A
PACCAR's CBRA is supported by its solid position in key markets (notably the United States and Europe). The Company's market share in its core North American region is strong, averaging 30% over the past five years, with share in other regions exhibiting consistent long-term growth. Moreover, PACCAR's high operating efficiency and low rate of unionization in its workforce provide it with considerable flexibility in adjusting production to mitigate the earnings impact of reduced demand levels. The Company's operating resilience is further bolstered by its growing parts/aftermarket segment, which generates higher margins than the Truck segment while also being more resilient to cyclical downturns.

Comprehensive Financial Risk Assessment (CFRA): AAA
PACCAR's CFRA reflects its consistently strong operating performance amid an exceedingly conservative financial policy, with the industrial operations having no outstanding indebtedness (apart from nominal operating lease obligations). Additionally, the Company holds a large amount of liquid assets on hand (cash plus marketable securities), with the industrial operations accordingly maintaining a substantial net cash position. As such, the Company's CFRA and associated credit metrics remain inordinately strong, exceeding levels typically commensurate with the current credit ratings.

Intrinsic Assessment (IA): AAL
The IA is based on the CFRA and CBRA. Taking into consideration peer comparisons, among other factors, Morningstar DBRS places PACCAR's IA in the middle of the IA range.

Additional Considerations: None
PACCAR's credit ratings include no further negative or positive adjustments because of additional considerations.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/451611/.

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 environmental factor related 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.

There were no Social or Governance factors that had a significant or relevant 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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in Manufacturing and Production Industries (February 3, 2025)
https://dbrs.morningstar.com/research/447185

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781
-- Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

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/431153.

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 info@dbrsmorningstar.com.

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.

These credit ratings are 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: Anke Rindermann, Managing Director,
Initial Rating Date: September 19, 2000

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577