PACCAR Inc. — Q1 2022 Form 10-Q
Business context and period: Global truck manufacturer and parts distributor, with a financing and leasing business and an industrial winch business. This unaudited filing covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Consolidated sales and revenues | $6.473 billion | $5.846 billion | +10.7% |
| Income before income taxes | $771.4 million | $608.3 million | +26.8% |
| Net income | $600.5 million | $470.8 million | +27.5% |
| Diluted EPS | $1.72 | $1.35 | +27.4% |
| After-tax return on revenues | 9.3% | 8.1% | +1.2 percentage points |
| Operating cash flow | $459.3 million | $536.9 million | −$77.6 million |
Truck, Parts and Other: Revenue was $6.106 billion, up 12.8%; pretax income was $626.9 million, up 19.0%. Truck revenue rose 11% to $4.697 billion, primarily on higher pricing and European deliveries. Truck pretax income increased 2% to $276.7 million; pretax return on truck revenue declined to 5.9% from 6.4%. Truck gross margin fell to 8.5% from 9.3%, as higher material, labor, freight and overhead costs largely offset price realization.
Parts: Revenue increased 20% to a record $1.389 billion and pretax income rose 35% to $340.2 million. Parts gross margin improved to 30.1% from 28.3%, reflecting increased demand, pricing and sales volume, partly offset by higher material and freight costs.
Financial Services: Revenue declined 15% to $366.2 million, mainly due to lower used-truck sales. Pretax income nearly doubled to a record $147.0 million, primarily reflecting improved used-truck results, including $35.2 million of gains on used trucks versus $14.4 million of losses a year earlier. Provision for receivable losses was $0.2 million versus $3.7 million.
Liquidity, debt and cash flow
- Cash and cash equivalents were $3.315 billion and marketable securities were $1.515 billion at March 31, for combined cash and securities of $4.830 billion, down $157.6 million from year-end 2021.
- Financial Services liabilities totaled $12.117 billion, including $3.763 billion of commercial paper and bank loans and $7.097 billion of term notes. These are primarily funding for the finance business.
- PACCAR reported $3.66 billion of credit-line arrangements, of which $3.36 billion was unused. No committed bank-facility borrowings were outstanding during the quarter. Management cited investment-grade ratings of A+/A1 and stated it expects liquidity sources to remain sufficient.
- Operating cash flow was $459.3 million. Investing activities used $406.1 million and financing activities used $156.4 million; cash declined $113.4 million during the quarter. Operating cash flow was pressured by increased wholesale receivables and working-capital movements.
- Cash dividends paid were $639.4 million, versus $353.7 million in Q1 2021, largely due to a higher extra dividend paid in January. Manufacturing capital investments were $113.5 million, versus $94.2 million.
Material changes and unusual items
- Worldwide truck deliveries increased 2% to 43,000. U.S. and Canada deliveries fell 10%, while Europe deliveries rose 18%; management cited semiconductor and component shortages as constraints.
- Higher truck pricing supported sales, but average cost per truck rose $390.1 million year over year, principally from higher raw-material, labor and freight costs.
- Financial Services operating-lease, rental and other revenue decreased with lower used-truck sales; improved used-truck values also reduced impairments and supported gains on returned lease assets.
- Beginning in Q1 2022, PACCAR changed its U.S. inventory accounting from LIFO to FIFO and retrospectively adjusted prior periods. Under the company’s comparison, Q1 2022 net income was $8.5 million, or $0.02 per share, higher than it would have been under LIFO. The filing says the change did not affect operating cash flow.
- Unrealized losses on marketable securities increased as yields rose; the company reported no identified credit-loss indicators and recorded no credit-loss allowance for those securities.
Outlook, commentary and risks
- Management forecast 2022 heavy-duty truck markets of 260,000–290,000 units in the U.S. and Canada, 270,000–300,000 registrations in Europe, and 125,000–135,000 in South America. Semiconductor and component shortages were expected to continue affecting deliveries.
- PACCAR Parts sales were expected to increase 12%–15% in 2022 versus 2021. Financial Services average earning assets were expected to increase 3%–5%.
- 2022 capital investments were forecast at $425–$475 million and R&D at $350–$400 million, including increased investment in clean diesel and electric powertrains, autonomous systems, connected services and manufacturing capabilities.
- The company suspended truck and parts sales in Russia and Belarus following sanctions. It reported no significant Q1 impact on results or cash flows, but future effects depend on the conflict’s severity, duration and broader economic consequences.
- European claims related to the 2016 European Commission truck-manufacturer settlement remain unresolved. PACCAR said it could not reasonably estimate a possible loss; an adverse outcome involving significant DAF truck sales could materially affect results and cash flows.
- Other identified risks include weaker truck demand, supplier interruptions and component shortages, higher input costs, foreign-exchange and interest-rate movements, used-truck values, customer profitability, regulation, litigation and capital-market disruption. Management reported no material change in market risk and no material change to other risk factors during the quarter.
Important facts for investors to verify
- Whether semiconductor and component availability, inflation and pricing affect truck deliveries and truck margins through 2022.
- Whether record Parts profitability and Financial Services’ used-truck gains are sustainable, and how used-truck values affect lease residuals and impairment risk.
- Whether the stated truck-market, Parts, average-earning-asset, capital-investment and R&D outlooks remain achievable.
- Developments and potential exposure from European Commission-related litigation, which PACCAR could not quantify.
- The continuing business and financial effects of suspended Russia and Belarus sales and the broader Ukraine conflict.
- The retrospective FIFO inventory accounting effects when comparing reported results with prior filings and other companies.