PACCAR Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are to the corresponding 2022 periods unless otherwise stated. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. PACCAR designs and manufactures Kenworth, Peterbilt and DAF commercial trucks, distributes aftermarket parts, and provides truck financing and leasing.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Worldwide revenues | $8,881.1 | $7,158.7 | $17,354.4 | $13,631.3 |
| Income before taxes | $1,568.5 | $922.1 | $2,487.5 | $1,693.5 |
| Net income | $1,221.1 | $720.4 | $1,955.0 | $1,320.9 |
| Diluted EPS | $2.33 | $1.37 | $3.73 | $2.52 |
| After-tax return on revenues | 13.7% | 10.1% | 11.3% | 9.7% |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $1,660.3 | $1,097.5 |
Q2 revenue increased 24% and net income increased 69%. For the first half, revenue rose 27% and net income rose 48%. Growth was led by truck deliveries and price realization, with higher parts revenue and financial-services portfolio yields also contributing. First-half net income includes a $600 million pre-tax ($446.4 million after-tax) European civil-litigation charge recorded in Q1. Excluding it, management reported non-GAAP adjusted net income of $2,401.4 million, or $4.58 per diluted share, and adjusted after-tax return on revenues of 13.8%.
Segments and operating trends
- Truck: Q2 revenue was $6,827.5 million, up 28%; first-half revenue was $13,241.3 million, up 32%. Deliveries rose 11% in Q2 to 51,900 trucks and 15% for the first half to 103,000. Truck pre-tax income was $948.3 million in Q2 and $1,842.6 million in the first half. Truck gross margin improved to 16.0% in Q2 and 16.1% in the first half, from 10.3% and 9.5%, respectively, reflecting volume and pricing gains, partly offset by higher materials, labor and warranty costs.
- Parts: Q2 revenue was $1,598.9 million, up 11%; first-half revenue was $3,221.9 million, up 14%. Pre-tax income rose 19% in Q2 and 24% in the first half. Gross margin was 31.6% in Q2 and 31.9% in the first half, improving mainly on price realization.
- Financial Services: Revenue increased 18% in Q2 to $439.8 million and 17% for the first half to $863.0 million. Pre-tax income was nearly flat at $144.7 million in Q2 and $293.5 million for the first half. Portfolio growth and higher yields were offset by higher borrowing costs and weaker operating-lease margins. Average portfolio yields and borrowing rates were 6.6% and 3.7% in Q2, versus 4.9% and 1.7% a year earlier.
- Margins and costs: Higher truck prices and deliveries supported profitability, while cost inflation persisted. R&D expense increased to $101.3 million in Q2 and $198.5 million for the first half, from $80.4 million and $158.4 million, respectively.
Cash, debt and liquidity
- Cash and cash equivalents were $5,145.9 million at June 30, 2023, versus $4,690.9 million at year-end 2022. Marketable securities were $1,690.5 million; together with cash, these totaled $6,836.4 million.
- First-half operating cash flow was $1,660.3 million; investing cash outflow was $1,044.7 million and financing cash outflow was $198.6 million. Cash increased $455.0 million during the period. Working-capital uses included higher receivables and inventories.
- Financial Services liabilities included $4,637.0 million of commercial paper and bank loans and $7,953.1 million of term notes, totaling $12,590.1 million. PACCAR reported $3.43 billion unused under $3.94 billion of credit-line arrangements, including $3.00 billion of committed bank facilities; none of the committed facilities was drawn in the first half.
- Stockholders’ equity was $15,079.3 million at June 30, compared with $13,167.1 million at December 31, 2022. The company paid $1,236.0 million of dividends in the first half, including the effect of a higher year-end dividend paid in January.
Outlook, risks and contingencies
- Management forecast 2023 U.S. and Canada heavy-duty truck retail sales of 290,000–320,000 units; European over-16-tonne registrations of 300,000–330,000; and South American heavy-duty registrations of 105,000–115,000.
- PACCAR expected 2023 Parts sales to increase 10%–13% from 2022 and Financial Services average earning assets to increase 7%–10%. Planned 2023 capital investments were $625–$675 million and R&D spending $400–$430 million.
- An industry-wide component shortage was expected to continue affecting truck deliveries in 2023. Other stated risks include weaker industry demand and freight conditions, supplier and labor disruptions, higher input costs, interest- and currency-rate changes, used-truck price declines, higher warranty costs, and regulatory and climate-related risks.
- The $600 million pre-tax European EC-related claims charge reflects settlements and judgments; proceedings remain ongoing, some judgments are under appeal, and the estimate may change materially. Management said it believes it has meritorious defenses. PACCAR also disclosed other legal matters, which it did not expect to have a material effect.
- Management stated that weaker freight conditions could increase past-due accounts, repossessions and credit losses and reduce new financing volume. Worldwide retail loan and lease accounts 30+ days past due were 0.6% at June 30, up from 0.4% at both December 31, 2022 and June 30, 2022.
Important facts for investors to verify
- Progress and potential further financial impact of the European EC-related litigation; the $600 million charge is an estimate subject to revision.
- Whether component availability, truck deliveries, industry demand and the stated 2023 market outlook develop as management expects.
- Truck and parts margin sustainability amid materials, labor, freight and warranty costs, and the effect of price realization.
- Financial Services portfolio performance, borrowing costs, past-due trends, credit losses and used-truck residual values.
- Financial Services funding and refinancing capacity, including unused credit lines, debt maturities and continued access to capital markets.