PACCAR Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. Financial figures are in U.S. dollars; amounts are in millions unless noted. PACCAR manufactures commercial trucks, distributes aftermarket parts, and provides customer and dealer financing and leasing.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Consolidated revenues | $4,936.0 | $6,367.0 | $13,159.9 | $19,482.5 |
| Net income | $385.5 | $607.9 | $892.6 | $1,856.6 |
| Diluted earnings per share | $1.11 | $1.75 | $2.57 | $5.34 |
| After-tax return on revenues | 7.8% | 9.5% | 6.8% | 9.5% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2,192.5 | $1,916.6 |
Segment trends: Truck revenue declined 30% in Q3 and 40% year to date; truck pretax income fell 56% and 77%, respectively. Truck gross margin was 8.4% in Q3 versus 12.3%, and 7.1% year to date versus 12.3%. Parts revenue increased 2% in Q3 but decreased 6% year to date; Parts pretax income was nearly unchanged in Q3 and down 8% year to date. Financial Services revenue rose 10% in Q3 and 6% year to date, while pretax income fell 17% and 31%, respectively.
Cash, liquidity and debt: Cash and marketable debt securities totaled $4,538.6 at September 30, down $798.6 from year-end 2019. Cash and equivalents were $3,344.3. Nine-month investing cash outflow was $1,034.3 and financing cash outflow was $1,988.0. Financial Services commercial paper and bank loans were $2,615.9 and term notes were $7,776.5, totaling $10,392.4, compared with $11,222.7 at year-end 2019. PACCAR reported $3.52 billion of credit lines, $3.30 billion unused; it had not drawn on committed bank facilities during the first nine months.
Cash dividends paid were $1,128.9 in the first nine months, including a higher extra dividend in January. The company repurchased $41.6 of stock and suspended repurchases amid COVID-19-related uncertainty. Manufacturing capital investments were $431.1 year to date; total company capital investment was $438.8.
Changes and notable items
- COVID-19-related factory suspensions began March 24, 2020; production restarted in stages from April and early May. Third-quarter production was close to pre-pandemic rates, subject to demand, supplier availability and public-health directives.
- Worldwide truck deliveries fell 27% in Q3 and 40% year to date. Lower volumes, factory inefficiency and higher product-support accruals reduced truck margins. Parts demand improved quarter over quarter, but year-to-date sales remained lower.
- Financial Services year-to-date provision for receivable losses rose to $27.6 from $11.8. Used-truck losses, excluding repossessions, were $75.2 year to date versus $34.5; used trucks held for sale were $454.1 at quarter-end.
- Loan and lease modifications increased substantially: the reported post-modification balance was $2,820.1 for the first nine months, including $2,505.7 of short-term payment delays. TDR balances were $48.2 at September 30 versus $14.1 at year-end 2019. Management said modifications’ effect on the credit-loss allowance was not significant.
- Parts segment year-to-date pretax income included a $10.2 gain from sale of a former Las Vegas parts distribution facility. Warranty reserve estimates for pre-existing warranties increased by $65.1 year to date.
- Adoption of the expected-credit-loss standard reduced opening retained earnings by $4.6. Management reported no material impact from other accounting standards adopted in 2020.
Outlook, risks and contingencies
- Management forecast 2020 U.S. and Canada truck industry retail sales of 190,000–210,000 units, Europe over-16-tonne registrations of 210,000–230,000, and South America heavy-duty registrations of 75,000–85,000, assuming no significant resurgence of COVID-19 impacts. 2021 ranges were 210,000–250,000, 230,000–270,000 and 95,000–105,000, respectively.
- PACCAR expected Parts sales to decline 4–5% in 2020 and increase 4–7% in 2021. Average Financial Services earning assets were expected to remain similar to 2019 levels in 2020 and 2021. 2020 capital investments were forecast at $570–$600 and R&D at $270–$280; 2021 forecasts were $575–$625 and $330–$360.
- Key risks include renewed pandemic restrictions, production or supplier interruptions, weaker freight activity, lower used-truck values, rising credit losses, and U.K.-EU trade changes. The filing notes that about 10% of 2019 worldwide truck production was in the U.K.; possible tariffs could raise costs and affect sales and margins.
- European truck-industry claims following the European Commission settlement with DAF seek unspecified damages. PACCAR says it has defenses but cannot reasonably estimate a potential loss; an adverse outcome could materially affect results. Management does not expect other proceedings to materially affect the financial statements.
- Management said liquidity sources and investment-grade ratings (A+/A1) support funding access, but a ratings decline or market disruption could make refinancing more difficult. Operating results for the interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether truck demand, factory utilization and supplier capacity support management’s market and production assumptions.
- Whether Financial Services credit modifications, delinquencies, loss provisions and used-truck values worsen as pandemic effects evolve.
- Whether used-truck inventory and loss trends improve, given the increased year-to-date losses and quarter-end inventory held for sale.
- Whether cash generation, debt maturities and available credit facilities remain adequate amid dividends, investment plans and market uncertainty.
- Developments in European truck litigation and U.K.-EU trade arrangements, including any measurable financial exposure.