PACCAR Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the same 2021 periods unless noted. Amounts are in U.S. dollars. PACCAR manufactures commercial trucks, distributes aftermarket parts, and provides truck financing and leasing.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Worldwide sales and revenues | $7.06 billion | $5.15 billion | $20.69 billion | $16.84 billion |
| Net income | $769.4 million | $380.5 million | $2.09 billion | $1.35 billion |
| Diluted earnings per share | $2.21 | $1.09 | $5.99 | $3.87 |
| After-tax return on revenues | 10.9% | 7.4% | 10.1% | 8.0% |
| Operating cash flow | Not provided for the quarter | $1.78 billion | $1.15 billion |
- Q3 Truck, Parts and Other revenue was $6.69 billion; Financial Services revenue was $371.9 million. Truck revenue was $5.20 billion and Parts revenue was $1.47 billion.
- Q3 Truck gross margin was 10.6%, up from 5.8%; Parts gross margin was 30.4%, up from 28.4%. Higher deliveries, pricing and parts demand supported results, while materials, freight, labor and product-support costs rose.
- Financial Services pretax income increased to $146.2 million from $120.1 million in Q3 and to $437.6 million from $303.0 million year to date. Improved used-truck results and finance and lease margins contributed, despite lower reported segment revenue.
- At September 30, cash and cash equivalents totaled $3.32 billion and marketable securities $1.54 billion, combined $4.87 billion, down $120.0 million from year-end 2021. Nine-month investing cash use was $1.32 billion and financing cash use was $418.9 million.
- Financial Services reported $3.30 billion of commercial paper and bank loans and $7.08 billion of term notes. PACCAR had $3.66 billion in credit-line arrangements, of which $3.36 billion was unused, including $3.00 billion of committed bank facilities. No borrowings were made under those committed facilities during the first nine months.
- Cash dividends paid in the first nine months were $875.9 million, compared with $589.9 million a year earlier; the increase primarily reflected a larger extra dividend paid in January.
Material changes and unusual items
- Truck and Parts performance improved substantially: Q3 truck deliveries rose 35% to 44,400 units, while nine-month deliveries rose 17% to 134,300. Higher unit deliveries and price realization were key revenue drivers; unfavorable foreign-currency translation partly offset growth.
- Financial Services revenue fell 9% in Q3 and 14% year to date, primarily because of lower used-truck sales. Used-truck gains, excluding repossessions, were $34.8 million in Q3 and $104.7 million year to date, versus $15.8 million and $4.7 million, respectively, in 2021.
- PACCAR changed U.S. inventory accounting from LIFO to FIFO in Q1 2022 and retrospectively adjusted prior periods. The change increased Q3 2022 net income by $7.4 million and nine-month net income by $26.9 million versus pro forma LIFO results.
- Nine-month foreign-currency translation losses were $503.4 million; accumulated other comprehensive loss increased to $1.39 billion from $921.1 million at year-end 2021. Marketable debt securities had unrealized losses associated with higher yields; management reported no credit-loss indicators and recorded no credit-loss allowance.
Outlook, commentary and risks
- Management forecast 2022 U.S. and Canada heavy-duty truck retail sales of 265,000–285,000 units and 2023 sales of 260,000–300,000. Europe’s above-16-tonne market was forecast at 275,000–295,000 registrations in 2022 and 260,000–300,000 in 2023. South America’s 2022 and 2023 heavy-duty markets were each projected at 125,000–135,000 units.
- Management expected industry-wide component shortages to constrain deliveries in Q4 2022 and into 2023. Parts sales were forecast to grow 14%–16% in 2022 and 5%–8% in 2023. Average Financial Services earning assets were expected to increase 1%–3% in 2022 and 3%–5% in 2023, including the stated 2022 foreign-exchange impact.
- Expected 2022 capital investments were $475–$500 million and R&D $330–$340 million; 2023 projections were $525–$575 million and $350–$400 million, respectively. Investment priorities include clean diesel and zero-emissions powertrains, autonomous systems, connected services, and manufacturing and distribution capabilities.
- PACCAR suspended truck and parts sales to Russia and Belarus under sanctions. Management said the conflict had not significantly affected results or cash flows to date, but severe constraints on European energy supplies could affect deliveries.
- European truck-market claims related to the European Commission settlement remain in litigation. PACCAR said outcomes and any loss range could not be reasonably estimated; adverse decisions involving significant DAF sales could materially affect results and cash flows.
- Other cited risks include weaker truck demand, supplier and component constraints, higher input costs, interest-rate and currency movements, used-truck values, credit-market disruption, warranty costs, regulation and litigation. Management reported disclosure controls were effective and no material change in internal controls.
Investor verification priorities
- Track whether component availability, deliveries and pricing support the stated truck and parts forecasts, and how cost inflation affects margins.
- Review Financial Services credit quality, especially past-due accounts in Mexico, Australia and other markets; worldwide retail accounts 30+ days past due were 0.4%, versus 0.3% at year-end 2021.
- Monitor used-truck prices, residual-value exposure and the sustainability of Financial Services’ used-truck gains.
- Assess funding and liquidity as rates rise, including finance-subsidiary debt maturities, credit-line availability and access to capital markets.
- Follow developments in European Commission-related litigation and the Russia/Belarus and European energy exposures; potential litigation losses remain unquantified.
- Keep the FIFO accounting change in mind when comparing reported earnings and inventory balances with earlier disclosures or LIFO-based measures.