PACCAR Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are compared with December 31, 2017. PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, provides truck financing and leasing, and manufactures industrial winches. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total sales and revenues | $5,654.0 | $4,237.9; up 33% |
| Truck, Parts and Other revenue | $5,321.8 | $3,935.7; up 35% |
| Financial Services revenue | $332.2 | $302.2; up 10% |
| Income before taxes | $669.4 | $448.2 |
| Net income / diluted EPS | $512.1 / $1.45 | $310.3 / $0.88 |
| Effective tax rate | 23.5% | 30.8% |
| Operating cash flow | $525.3 | $610.5 |
| Cash and marketable debt securities | $3,550.6 | $3,731.8 at Dec. 31, 2017 |
| Stockholders’ equity | $8,567.3 | $8,050.5 at Dec. 31, 2017 |
- Margins and segments: After-tax return on consolidated revenues was 9.1%, versus 7.3%. Truck pre-tax return on revenue was 9.1% versus 7.4%; Parts was 20.4% versus 19.2%. Financial Services pre-tax income was $67.5, up from $56.8.
- Truck and Parts: Truck revenue rose 39% to $4,353.0 and deliveries increased 27% to 44,500 units. Truck gross margin improved to 11.9% from 10.4%. Parts revenue rose 19% to a record $939.9; Parts gross margin increased to 27.9% from 27.4%.
- Financial Services: Average earning assets increased 11% to $12,666.2; new loan and lease volume rose 37% to $1,100.7. The allowance for credit losses was $121.8 at March 31, up from $117.2 at year-end. Worldwide retail accounts 30 or more days past due were 0.6%, compared with 0.5% at year-end.
- Cash flow and investment: Operating cash flow declined despite higher net income, reflecting working-capital movements and pension contributions. Investing cash use was $56.1, versus $337.0 in Q1 2017; financing cash use was $339.3, including $510.1 of dividends paid. Capital investments were $66.8; the filing separately reports $64.0 of property, plant and equipment payments for Truck, Parts and Other.
- Debt and liquidity: Financial Services commercial paper and bank loans totaled $3,234.2, and term notes totaled $5,895.8, compared with $2,933.9 and $5,945.5, respectively, at year-end. PACCAR reported $3.29 billion of unused credit lines out of $3.54 billion. Management cited investment-grade ratings of A+/A1 and expected continued access to funding; these figures principally relate to Financial Services funding.
Material changes and notable items
- Record truck and parts revenues reflected higher deliveries and aftermarket demand across markets, plus favorable currency translation. Truck income also benefited from higher margins; truck material costs and factory overhead increased.
- Net income growth was supported by higher operating results and the lower effective tax rate following U.S. tax-law changes that reduced the statutory federal rate from 35% to 21%.
- PACCAR adopted the new revenue standard on January 1, 2018. For Q1, it increased reported revenue by $7.6 and net income by $3.3 compared with the prior-standard pro forma. The standard changed accounting for certain European truck sales with residual value guarantees; return assumptions and estimated market values affect recognition.
- The company paid a larger dividend total than in the prior-year quarter, primarily due to a higher special dividend paid in January. It repurchased 248,934 shares under its existing buyback authorization for approximately $13.5.
Outlook, commentary and risks
- Management forecast 2018 U.S. and Canada truck retail sales of 265,000–285,000 units; European registrations for trucks over 16 tonnes of 300,000–320,000; and South American heavy-duty sales of 70,000–80,000.
- For 2018, PACCAR expected Parts sales growth of 10%–12%, Financial Services average earning-asset growth of 6%–8%, capital investments of $425–$475, and R&D spending of $300–$320.
- Management said strong freight tonnage, freight rates and fleet utilization were supporting customers. Weaker economic or freight conditions could increase delinquencies, repossessions and credit losses, and reduce new finance business.
- Risks cited include truck-market contraction, competition and market share, fuel and commodity prices, regulations, currency and interest-rate movements, supplier or labor disruptions, driver shortages, warranty costs, lower used-truck values, and constrained capital-market access. The filing reported no material change in market risks or risk factors during the quarter.
- Claims and lawsuits related to the European Commission truck investigation remain pending. PACCAR said it believes it has meritorious defenses, but an adverse outcome could materially affect results; timing and ultimate exposure are not stated clearly in the filing.
Important facts for investors to verify
- Whether strong truck demand and management’s regional market forecasts persist, and how order volumes translate into deliveries and margins.
- Whether higher materials, overhead and borrowing costs offset pricing, volume and currency benefits.
- Trends in Financial Services delinquencies, credit losses, used-truck residual values, and access to short-term and capital-market funding.
- The assumptions and financial effects of residual-value guarantees, expected truck returns, and the new revenue-recognition standard.
- Developments in European Commission-related litigation and any resulting financial exposure.