PACCAR Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and provides truck financing and leasing. Unless noted otherwise, amounts are in millions of U.S. dollars.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total net sales and revenues | $4,249.4 | $4,847.2 | $12,962.6 | $14,759.8 |
| Net income | $346.2 | $431.2 | $232.9 | $1,256.8 |
| Diluted earnings per share | $0.98 | $1.21 | $0.66 | $3.53 |
| Income before income taxes | $494.9 | $624.5 | $711.5 | $1,838.4 |
| Return on revenues | 8.1% | 8.9% | 1.8% | 8.5% |
Q3 truck, parts and other revenue was $3,953.2, down from $4,546.2; Financial Services revenue was $296.2 versus $301.0. The nine-month net income comparison includes the $833.0 European Commission (EC) fine recorded in 2016. Excluding that non-recurring, non-tax-deductible charge, adjusted nine-month net income was $1,065.9, or $3.03 per diluted share, and adjusted return on revenues was 8.2% (non-GAAP measures).
Business trends and period-over-period changes
- Trucks: Q3 truck revenue fell 15% to $3,170.7 and segment income before tax fell 27% to $284.9. Nine-month truck revenue fell 15% to $9,782.4. Lower U.S. and Canadian deliveries were the main cause; European truck sales and market share improved. Total truck deliveries declined 11% in Q3 and 10% year to date.
- Parts: Revenue declined 2% in Q3 to $764.8 and 3% year to date to $2,240.7, primarily reflecting weaker North American demand. Q3 parts segment income before tax was $138.3, down 5%; gross margin declined to 26.8% from 27.5%.
- Financial Services: Q3 income before tax decreased 24% to $71.0; nine-month income fell 16% to $228.6. Lower returned-lease asset results, higher borrowing rates and credit-loss provisions, and currency translation weighed on results. Nine-month revenue edged up to $883.0 from $879.5, while new loan and lease volume declined 7% to $3,068.9.
- Margins and credit: Truck pre-tax return on revenue was 9.0% in Q3 versus 10.4%; Parts was 18.1% versus 18.7%. Financial Services’ provision for receivable losses rose to $14.5 year to date from $8.7, with management citing higher losses in the U.S. and Canadian oil and gas sector and larger retail portfolios. Worldwide retail accounts 30+ days past due were 0.6% at September 30, 2016, versus 0.5% at year-end 2015.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1,490.5, down from $1,851.2; investing cash outflow was $921.4 versus $1,401.7, and financing cash outflow was $832.0 versus $24.9 of inflow. Cash and cash equivalents ended the period at $1,787.9, down from $2,016.4 at year-end.
- Cash plus marketable debt securities totaled $2,866.8 at September 30, down $597.7 from December 31, 2015. Marketable debt securities were $1,078.9 versus $1,448.1.
- Financial Services reported $8,530.3 of commercial paper, bank loans and term notes ($2,516.0 and $6,014.3, respectively). Total Financial Services liabilities were $9,836.8. PACCAR reported $3,430 of credit lines, of which $3,260 was unused.
- Stockholders’ equity was $6,978.2, compared with $6,940.4 at December 31, 2015. Cash dividends paid in the first nine months were $745.2; the increase from 2015 was primarily due to the 2015 special dividend paid in January 2016.
Outlook, risks and notable items
- Management projected 2016 U.S. and Canada Class 8 retail sales of 215,000–225,000 units and 2017 sales of 200,000–230,000. European over-16-tonne truck registrations were projected at 290,000–300,000 for 2016 and 260,000–290,000 for 2017. These are industry estimates, not PACCAR revenue or earnings guidance.
- For 2017, PACCAR expected North American parts sales growth of 2%–4% and European aftermarket sales growth of 1%–3%. It forecast 2016 capital investment of $375–$400 and R&D of $240–$250; 2017 capital investment of $375–$425 and R&D of $270–$300.
- Management expected Financial Services average earning assets to be comparable in 2017 to 2016. It cautioned that weaker freight and economic conditions could raise past-due accounts, repossessions and credit losses and reduce new business volume.
- The EC imposed a €752.7 million ($833.0) fine on DAF and PACCAR in July for EU competition-rule infringements; DAF paid it in August. The charge was non-deductible for tax. PACCAR disclosed EC-related claims and a class-action certification petition against DAF and other manufacturers; further claims may be brought, and an adverse outcome could materially affect results.
- Other stated risks include weaker truck demand, competition, fuel and commodity prices, regulation, currency and interest-rate changes, lower used-truck prices, supply or labor disruptions, warranty costs, and capital-market liquidity. Management said market risk had not materially changed and disclosure controls were effective.
Important facts for investors to verify
- Track truck demand, especially North American Class 8 deliveries, and whether European strength offsets weakness elsewhere.
- Assess the underlying earnings trend using the $1,065.9 adjusted nine-month net income, while noting the measure excludes the EC fine and is non-GAAP.
- Monitor used-truck values, lease-return results, receivable-loss provisions, past-due accounts and the exposure to oil and gas customers.
- Review liquidity and refinancing access for Financial Services, including unused bank lines, commercial-paper funding and credit ratings.
- Follow the EC-related litigation and any further claims for potential financial impact.