PACCAR Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and provides financing and leasing through PACCAR Financial Services (PFS). Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Worldwide revenue | $6,627.9 | $5,805.2 | $13,115.5 | $11,459.2 |
| Income before tax | $814.4 | $719.6 | $1,633.8 | $1,389.0 |
| Net income | $619.7 | $559.6 | $1,248.7 | $1,071.7 |
| Diluted EPS | $1.78 | $1.59 | $3.59 | $3.04 |
| After-tax return on revenue | 9.3% | 9.6% | 9.5% | 9.4% |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $1,189.5 | $1,198.5 |
- Q2 revenue rose 14%, net income 11%, and diluted EPS 12% year over year. First-half revenue rose 14% and net income 17%. Management attributed growth mainly to increased truck deliveries and parts demand, plus higher PFS average earning assets.
- Q2 Truck, Parts and Other revenue was $6,266.5 and pretax income $712.3; PFS revenue was $361.4 and pretax income $80.3. Q2 truck revenue increased 17%, parts revenue 6%, and PFS revenue 7% year over year. Truck pretax return on revenue was 9.8%; Parts was 20.5%.
- Truck gross margin was 12.2% in Q2, unchanged year over year; first-half margin improved to 12.3% from 12.1%. Parts gross margin was 27.7% in Q2 versus 27.5%, and 27.7% for both first-half periods.
- First-half cash from operations was nearly flat year over year. Investing used $1,125.4 versus $745.2; financing used $282.0 versus $278.6. Cash and cash equivalents ended at $3,219.4, down from $3,435.9 at year-end; cash plus marketable debt securities totaled $4,336.7, down $119.6.
- At June 30, total assets were $27,168.2 and stockholders’ equity $9,635.4. Financial Services liabilities included $3,900.0 of commercial paper and bank loans and $6,732.1 of term notes. These borrowings support the finance portfolio; the filing does not present them as general corporate borrowings.
- PFS finance receivables, net, were $11,604.5, up from $10,840.8 at December 31. PFS total assets were $15,409.9. Its allowance for finance-receivable losses was $118.5; 30+ day past-due retail accounts increased to 0.8% from 0.4% at year-end.
Material changes and management commentary
- Truck deliveries rose 13% in Q2 and 14% in the first half. U.S. and Canada deliveries rose 16% in Q2 and 18% in the first half; deliveries in Mexico, South America, Australia and other markets also increased. Currency translation, principally the weaker euro, reduced reported results.
- Higher truck pricing and volumes supported results, while per-truck material and labor costs and factory overhead increased. Parts benefited from volume and pricing, partly offset by higher material costs.
- PFS pretax income increased 11% in Q2 and 17% in the first half. Higher portfolio yields and asset balances lifted finance income, while higher borrowing rates raised funding expense. Used-truck losses excluding repossessions were $11.3 in Q2, compared with $10.5 a year earlier.
- “Other” recorded pretax losses of $9.0 in Q2 and $17.5 in the first half, versus income in the prior-year periods. Management cited higher compensation costs, higher expected costs for certain environmental matters, and lower winch-business results.
- Operating cash flow was affected by lower cash inflows from payables and accrued expenses and lower residual-value-guarantee/deferred-revenue liabilities; offsets included higher net income, lower inventory cash use, and reduced pension contributions. Cash dividends paid rose to $917.0 from $608.5, primarily due to a higher special dividend paid in January 2019.
Liquidity, outlook and risks
- PACCAR reported $3.57 billion of credit-line arrangements, including $3.00 billion in committed bank facilities; $3.22 billion of total lines were unused at June 30. No committed-facility borrowings were outstanding during the first half. Management cited investment-grade ratings of A+/A1 and expected liquidity sources to support funding needs, but warned a ratings downgrade or market disruption could constrain refinancing.
- Management forecast 2019 U.S. and Canada truck retail sales of 300,000–320,000 units; European registrations of 300,000–320,000 units; and South American heavy-duty registrations of 100,000–110,000 units. Parts sales were expected to grow 5%–7%, and PFS average earning assets 6%–8% versus 2018.
- 2019 capital investment guidance was $675–$725 and R&D guidance $320–$340. Investments include new truck models and powertrains, zero-emission and hydrogen technologies, driver-assistance and connectivity, manufacturing capacity, and parts distribution facilities.
- Management said weaker freight or economic conditions could reduce customer profitability and new business, and increase past dues, repossessions and credit losses. Other cited risks include truck demand, competition, fuel and commodity prices, regulation and tariffs, currencies, suppliers, labor, used-truck values, warranty costs, interest rates, and litigation.
- European Commission-related truck cartel claims, including proposed U.K. collective actions, seek unspecified damages. PACCAR said it believes it has meritorious defenses but cannot estimate a possible loss; an adverse outcome could materially affect results.
- Brexit terms remained uncertain, with a possible “Hard Brexit” potentially increasing U.K. truck and parts costs and affecting margins and investment decisions. The filing also identifies LIBOR transition uncertainty; approximately $135 million of customer loans and leases extending beyond 2021 lacked fallback language, and PACCAR planned to seek amendments. The company did not expect LIBOR changes to materially affect results.
- PACCAR adopted the new lease standard on January 1, 2019, with no retained-earnings effect. It reported no material change in market risk and no material change in internal controls; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether truck demand and market-share trends support the full-year volume outlook, particularly as regional markets differ.
- Whether truck and parts pricing can offset higher material, labor, and production costs and continued currency headwinds.
- Whether PFS credit quality remains sound as past-due accounts rose, and whether used-truck residual values and lease returns remain resilient.
- How cash generation, special and ordinary dividends, capital spending, and finance-subsidiary borrowing evolve through year-end.
- Potential exposure from European cartel litigation, environmental matters, Brexit, and the LIBOR transition; the filing provides no estimable loss range for the European claims.