PACCAR INC quarterly report, Q1 FY2019

PACCAR Inc. Form 10-Q Summary

Reporting period: First quarter ended March 31, 2019; unaudited. PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and provides truck financing and leasing. Financial amounts below are in millions of dollars unless stated otherwise.

Financial results and liquidity

MetricQ1 2019Q1 2018
Total sales and revenues$6,487.6$5,654.0
Income before income taxes$819.4$669.4
Net income$629.0$512.1
Diluted earnings per share$1.81$1.45
After-tax return on revenues9.7%9.1%
Cash provided by operating activities$363.0$525.3
  • Truck, Parts and Other revenue was $6,138.1, up from $5,321.8. Financial Services revenue was $349.5, up from $332.2.
  • Truck segment pretax income was $517.0, with a 10.1% pretax return on revenue versus 9.1%. Truck gross margin rose to 12.5% from 11.9%. Parts pretax income was $207.6; its pretax return on revenue increased to 20.7% from 20.4%, while gross margin eased to 27.7% from 27.9%.
  • Financial Services pretax income increased to $84.0 from $67.5. Its provision for receivable losses fell to $2.2 from $5.9, reflecting stronger recoveries, particularly in Europe.
  • Cash and cash equivalents totaled $2,842.6 at March 31, down from $3,435.9 at year-end; marketable debt securities were $1,081.6. Combined cash and securities declined $532.1 during the quarter.
  • Financial Services liabilities included $3,424.8 of commercial paper and bank loans and $6,771.6 of term notes, compared with $3,540.8 and $6,409.7, respectively, at December 31, 2018. These are segment liabilities, not a measure of all company obligations.
  • Operating cash flow fell $162.3 year over year, largely due to increases in receivables, including wholesale receivables. Investing activities used $400.7; financing activities used $550.3, including $806.1 in dividends paid. A higher special dividend paid in January drove the increase in dividend cash outflow.

Changes versus the prior-year quarter

  • Net revenue increased 15%, net income increased 23%, and diluted EPS rose from $1.45 to $1.81. Truck deliveries increased 16% to 51,500 units, supported by higher deliveries across reported regions.
  • Truck revenue grew 17%, primarily from higher deliveries and prices, partly offset by unfavorable currency translation and higher per-truck costs. Parts revenue grew 7%, led by aftermarket demand and pricing.
  • Financial Services revenue grew 5%, supported by higher average earning assets and yields; higher borrowing costs and unfavorable currency translation partly offset the benefit.
  • Cash from operations declined, while cash used in investing increased, partly reflecting net purchases of marketable securities. Adoption of the new lease standard also moved sales-type lease cash flows from operating to investing activities; management said this reduced reported operating cash flow by $30.0 relative to the prior presentation.

Outlook, commentary and risks

  • For 2019, management forecast U.S. and Canadian truck industry retail sales of 295,000–315,000 units; European registrations of trucks over 16 tonnes of 290,000–320,000; and South American heavy-duty registrations of 105,000–115,000.
  • PACCAR Parts sales were expected to grow 5%–8% in 2019. Financial Services average earning assets were expected to increase 4%–6%.
  • Management forecast 2019 capital investments of $625–$675 and R&D expense of $320–$340. Investments include new truck models, alternative powertrains, driver-assistance and connectivity technologies, and manufacturing and parts-distribution facilities.
  • Management described freight tonnage, freight rates and fleet utilization as strong, supporting customer profitability. A deterioration in economic or freight conditions could increase delinquencies, repossessions and credit losses, and reduce new financing business.
  • Risks include industry demand, competition, fuel and commodity prices, regulation and tariffs, currency and interest-rate changes, supplier or labor disruption, used-truck values, warranty costs and capital-market access. Management noted that a credit-rating decline or market disruption could make refinancing maturing debt more difficult.
  • Pending lawsuits related to the European Commission truck-industry investigation could have a material effect on results if resolved adversely; the company said resolution may take significant time. Other matters include higher expected costs for certain environmental matters, which contributed to Other pretax loss of $8.5 versus income of $4.9 a year earlier; the filing does not provide a clear quantified amount for those expected costs.
  • Brexit terms remained uncertain, with the U.K. exit deadline extended to October 31, 2019. About 10% of PACCAR’s worldwide truck production was manufactured in the U.K. in 2018; a “Hard Brexit” could increase component tariffs and affect costs, sales and margins.

Important facts for investors to verify

  • Whether truck-market demand, deliveries, pricing and segment margins remain consistent with management’s 2019 outlook.
  • Whether operating cash flow improves and whether receivables, Financial Services funding needs and dividend outflows continue to affect liquidity.
  • Trends in past-due accounts, credit-loss provisions, repossessions and used-truck residual values; worldwide retail accounts 30 or more days past due were 0.6% at quarter-end, versus 0.4% at December 31.
  • Developments in European truck-industry litigation, environmental matters and Brexit-related costs or operating disruptions.