PACCAR Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. PACCAR manufactures trucks, distributes aftermarket parts, and provides truck financing and leasing.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Consolidated sales and revenues | $4,413.2 | $5,079.9 | $8,713.2 | $9,912.6 |
| Income (loss) before tax | $646.2 | $652.2 | $216.6 | $1,213.9 |
| Net income (loss) | $481.3 | $447.2 | $(113.3) | $825.6 |
| Diluted earnings (loss) per share | $1.37 | $1.26 | $(0.32) | $2.32 |
| Operating cash flow | — | $1,649.4 | $1,187.1 |
- Second-quarter adjusted net income, a non-GAAP measure excluding the favorable European Commission (EC) charge adjustment, was $371.7 million, or $1.06 per diluted share. First-half adjusted net income excluding the EC charge was $719.7 million, or $2.05 per diluted share.
- GAAP return on revenues was 10.9% in Q2 and (1.3)% for the first half; adjusted return on revenues was 8.4% and 8.3%, respectively. PACCAR reported 8.8% and 8.3% for the comparable 2015 periods.
- Truck and Parts pre-tax income was $329.4 million and $133.4 million in Q2; first-half amounts were $633.5 million and $268.0 million. Truck pre-tax return on revenue was 9.9% in Q2 and 9.6% for the first half; Parts reported 17.6% and 18.2%.
- At June 30, cash and cash equivalents totaled $2.065 billion and marketable debt securities $1.426 billion. Total assets were $21.427 billion and stockholders’ equity $6.710 billion.
- Financial Services liabilities included $2.426 billion of commercial paper and bank loans and $6.018 billion of term notes. PACCAR reported $3.38 billion in credit lines, of which $3.21 billion was unused.
- Operating cash flow rose year over year, with the company citing changes in wholesale receivables and operating assets and liabilities. The $833 million EC charge was non-cash in the period. Investing cash outflow was $786.1 million; financing cash outflow was $841.8 million.
Material changes versus comparable periods
- Q2 consolidated revenue declined 13% year over year; first-half revenue fell 12%. Truck revenue was down 16% in Q2 and 15% in the first half, mainly reflecting lower U.S. and Canadian deliveries. European truck revenue increased.
- Truck deliveries were 36,800 in Q2, down 12%; first-half deliveries were 72,100, down 10%. Q2 Truck segment income fell 22% to $329.4 million. Truck gross margin was 12.7% in Q2, unchanged year over year, and 12.4% for the first half versus 12.0%.
- Parts revenue fell 3% in both Q2 and the first half, primarily due to lower North American demand. Parts pre-tax income fell 8% in Q2 and 6% in the first half; Q2 gross margin decreased to 26.5% from 27.5%.
- Financial Services revenue increased 1% in both periods, but pre-tax income declined 15% in Q2 and 12% in the first half. Management cited lower yields, weaker results on returned lease assets, higher credit-loss provisions, and foreign currency translation, partly offset by higher average earning assets.
- Worldwide retail accounts 30 or more days past due rose to 0.7% at June 30 from 0.5% at December 31, 2015, mainly due to Mexico and Australia. First-half provision for receivable losses increased to $9.4 million from $6.3 million.
Outlook, commentary, risks and unusual items
- For 2016, management projected U.S. and Canadian truck industry retail sales of 220,000–240,000 units, versus 278,400 in 2015; European registrations for trucks over 16 tonnes of 280,000–300,000, versus 269,100; and South American heavy-duty sales of 60,000–70,000, versus 74,000.
- Management expected North American Parts sales to be comparable to 2015 and European aftermarket sales to increase slightly. Financial Services average earning assets were expected to be comparable to 2015 record levels.
- Expected 2016 capital investment was $325–$375 million and R&D spending $240–$260 million. First-half capital investments were $154.4 million and R&D expense was $120.4 million.
- The EC concluded its European truck competition investigation on July 19, 2016, imposing a €752.7 million ($833.0 million) fine. PACCAR had recorded a €850.0 million ($942.6 million) charge in Q1 and reversed €97.3 million ($109.6 million) in Q2 following settlement. The fine is not tax-deductible and is payable by DAF within three months after notification; PACCAR stated DAF had sufficient liquidity to pay it.
- PACCAR warned that European truck purchasers could bring damages claims following the EC settlement; an adverse outcome could materially affect results. Other cited risks include lower truck demand, competition, currency and interest-rate changes, lower used-truck values, supplier or labor disruptions, regulation, warranty costs, and reduced capital-market access. A downturn in freight conditions could raise delinquencies, repossessions and credit losses.
- Management said the regular quarterly dividend would not be affected by the EC charge. The filing reported no material change in market risk and no significant change in internal controls.
Important facts for investors to verify
- Review the EC fine’s payment timing and any subsequent European purchaser claims or other litigation.
- Assess whether adjusted earnings adequately reflect the underlying cost of the EC matter and whether truck demand, especially in North America, tracks management’s outlook.
- Monitor North American Parts demand, Financial Services yields and credit-loss provisions, and the increase in past-due accounts.
- Verify the availability and terms of Financial Services funding, unused credit lines, and debt maturities; the filing notes that market disruption could impair replacement commercial-paper issuance.
- Compare actual capital spending, R&D, dividends and repurchases with stated plans. The filing identifies adjusted earnings as non-GAAP; reported GAAP results remain the primary comparable measures.