PACCAR Inc. — Q3 2019 Form 10-Q
Business context and period. PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and provides truck financing and leasing. This unaudited report covers the three and nine months ended September 30, 2019; comparisons are with the same 2018 periods unless stated otherwise. Amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $6.367B | $5.757B | $19.483B | $17.216B |
| Income before taxes | $777.6M | $668.8M | $2.411B | $2.058B |
| Net income | $607.9M | $545.3M | $1.857B | $1.617B |
| Diluted EPS | $1.75 | $1.55 | $5.34 | $4.59 |
| After-tax return on revenue | 9.5% | 9.5% | 9.5% | 9.4% |
- Truck and Parts: Q3 revenue was $6.004B, up 11%; pretax income was $690.0M, up from $573.6M. Truck revenue rose 12% to $4.977B, with truck pretax margin of 9.7% versus 8.8%. Parts revenue rose 4% to $1.001B, with pretax margin of 20.7% versus 19.6%. Higher deliveries, pricing and parts demand supported results; higher material, labor and overhead costs and unfavorable currency translation partly offset gains.
- Financial Services: Q3 revenue reached a record $362.8M, up 7%, but pretax income fell to $66.5M from $78.8M, primarily due to lower lease margins and increased costs. For nine months, revenue was $1.074B and pretax income was $230.8M, up from $218.7M.
- Cash flow: Nine-month operating cash flow was $1.917B, versus $1.927B; investing outflow was $1.557B versus $1.277B; financing outflow was $88.7M versus $63.7M. Cash and cash equivalents increased $233.6M to $3.670B. Operating cash flow was affected by lower inflows from residual-value guarantees and deferred revenues and accounts payable, partly offset by higher net income and lower inventory investment.
- Margins and tax: Consolidated pretax return on revenue was 12.2% in Q3 versus 11.6%, and 12.4% for nine months versus 12.0%. Effective tax rates were 21.8% and 23.0%, respectively, compared with 18.5% and 21.4% in 2018; the prior-year Q3 rate benefited from a one-time tax reduction and higher realized R&D credits.
Balance sheet, liquidity and capital
- At September 30, 2019, cash and marketable debt securities totaled $4.777B, up from $4.456B at year-end 2018. Total assets were $27.768B and stockholders’ equity was $9.963B.
- Financial Services liabilities included $4.140B of commercial paper and bank loans and $6.716B of term notes, totaling $10.856B, compared with $9.951B at year-end. These borrowings fund the finance portfolio; PACCAR’s truck operations also held substantial cash and securities.
- Financial Services assets were $15.615B, including $11.672B of net finance and other receivables. The company reported $3.55B of credit-line arrangements, of which $3.24B was unused; no committed bank-facility borrowings were outstanding during the first nine months.
- Nine-month property, plant and equipment payments were $387.2M in the cash-flow statement; management separately reported Truck, Parts and Other capital investments of $498.0M. Cash dividends paid were $1.028B, including the effect of a higher special dividend paid in January. PACCAR repurchased $110.2M of shares during the period.
Changes, outlook and risks
- Worldwide truck deliveries increased 3% in Q3 to 49,300 and 10% for nine months to 153,100. U.S. and Canada deliveries rose 12% in Q3 and 15% year to date. European deliveries declined 11% in Q3.
- Management forecast 2019 U.S./Canada industry truck retail sales of 310,000–320,000 units and 2020 sales of 230,000–260,000. European registrations above 16 tonnes were forecast at 310,000–320,000 in 2019 and 260,000–290,000 in 2020. South American heavy-duty registrations were projected at 95,000–105,000 in 2019 and 100,000–110,000 in 2020.
- PACCAR Parts sales were expected to grow 5%–7% in 2019 and 4%–7% in 2020. Average Financial Services earning assets were expected to rise 8%–10% in 2019 and remain similar in 2020. Capital investment and R&D guidance was $675M–$725M and $325M–$335M for 2019, and $625M–$675M and $320M–$350M for 2020.
- Management cited strong freight tonnage and customer cash flow, but warned weaker economic conditions could increase past-due accounts, repossessions and credit losses and reduce new business. Worldwide retail loan and lease accounts 30+ days past due rose to 0.7% from 0.4% at year-end, though described as historically low. Used trucks held for sale increased to $398.6M from $226.4M; Financial Services also recorded higher Q3 losses on returned lease assets.
- European truck-price litigation following the European Commission’s DAF settlement remains at an early stage. PACCAR says it cannot estimate potential losses; an adverse outcome could materially affect results. Brexit uncertainty could raise U.K. component and parts costs; approximately 10% of worldwide truck production was manufactured in the U.K. in 2018.
- The company identified LIBOR transition uncertainty. Approximately $165M of retail loan and lease contracts extending beyond 2021 lacked fallback language; PACCAR said it would seek amendments and did not expect the transition to materially affect results. Management stated there were no material changes in market risk and that disclosure controls were effective.
- Adoption of the new lease standard had no retained-earnings effect, but certain Financial Services initial direct costs were expensed immediately, contributing to higher SG&A. The company expected the 2020 credit-loss standard to increase the finance-receivable allowance by approximately $5M, with trade-receivable and securities allowance increases estimated below $1M.
Important facts for investors to verify
- Whether truck-market normalization in 2020 and regional demand trends develop in line with management’s forecasts.
- Whether truck and parts margin gains persist amid higher input costs, currency movements and production investment.
- Whether Financial Services lease margins, used-truck values and delinquency trends stabilize; review returned-lease losses and repossession exposure.
- How finance-portfolio growth is funded and whether liquidity, credit ratings and unused committed facilities remain adequate against debt maturities.
- Developments and potential financial exposure from European truck claims, Brexit-related costs and contracts affected by the LIBOR transition.