PACCAR Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. PACCAR manufactures Kenworth, Peterbilt and DAF commercial trucks, distributes aftermarket parts and provides truck financing and leasing.
Financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $23.50 billion | $19.46 billion |
| Net income | $2.20 billion | $1.68 billion |
| Diluted EPS | $6.24 | $4.75 |
| Operating cash flow | $2.99 billion | $2.72 billion |
| Cash and cash equivalents | $3.44 billion | $2.36 billion |
| Marketable debt securities | $1.02 billion | $1.37 billion |
| Financial Services debt | $9.95 billion | $8.88 billion |
| Stockholders’ equity | $8.59 billion | $8.05 billion |
Truck, Parts and Other revenue was $22.14 billion; Financial Services revenue was $1.36 billion. Truck segment pretax income was $1.67 billion, with a 9.2% pretax return on revenue; Parts pretax income was $768.6 million, with a 20.0% return. Truck gross margin increased to 11.8% from 11.3%, and Parts gross margin to 27.2% from 26.5%. Financial Services pretax income was $305.9 million.
Cash used in investing activities was $1.93 billion and cash provided by financing activities was $71.1 million. Capital investments were $437.1 million; R&D expense was $306.1 million. Total cash and marketable securities were $4.46 billion at year-end. Of $3.50 billion in credit lines, $3.27 billion was unused.
Fourth-quarter results
Q4 2018 net income was $578.1 million, or $1.65 per diluted share. Truck, Parts and Other revenue was $5.93 billion and Financial Services revenue was $347.0 million. Q4 2017 net income was $589.2 million, or $1.67 per diluted share, including a one-time $173.4 million net tax benefit; excluding that benefit, Q4 2017 adjusted net income was $415.8 million, or $1.18 per diluted share.
Material changes and unusual items
- Annual revenue rose 20.8% and net income rose 31.0%. Truck deliveries increased 19% to 189,100 units, led by a 25% increase in U.S. and Canada deliveries. Parts revenue reached a record $3.84 billion.
- Higher truck volume, pricing and gross margins supported Truck results; stronger aftermarket demand and sales volume lifted Parts earnings.
- Financial Services revenue and pretax income increased, reflecting higher average earning assets and portfolio yields. Its finance market share of new PACCAR truck sales declined to 23.9% from 24.9%.
- FY 2017 included a $173.4 million one-time net tax benefit from the Tax Act. On the company’s non-GAAP adjusted basis, 2017 net income was $1.50 billion and diluted EPS was $4.26. FY 2018’s reported results also included a one-time tax-liability reduction related to extended warranty contracts and higher realized R&D tax credits; the filing does not quantify those effects separately.
- FY 2016 included an $833.0 million European Commission charge related to the European truck investigation. Subsequent EC-related claims and lawsuits remain pending; PACCAR says an adverse outcome could materially affect results.
- Revenue recognition changes adopted in 2018 increased reported revenue by $238.1 million and net income by $24.0 million versus the prior accounting standard. Comparisons should account for this change.
Outlook, risks and contingencies
- For 2019, management expected U.S. and Canada truck retail sales of 285,000–315,000 units, European over-16-tonne registrations of 290,000–320,000 units and South American heavy-truck sales of 100,000–110,000 units.
- PACCAR forecast Parts sales growth of 5%–8%, Financial Services average earning-asset growth of 3%–5%, capital investments of $525–$575 million and R&D of $320–$350 million.
- Management cited strong freight tonnage, freight rates and fleet utilization, while warning that weaker economic conditions could raise delinquencies, repossessions and credit losses and reduce new finance business.
- Brexit was a material uncertainty: approximately 10% of worldwide truck production was manufactured in the U.K., with many components sourced from the EU. A hard Brexit could increase tariffs, costs and supply-chain delays.
- Other key exposures include cyclical truck demand, competition, supplier concentration and interruptions, commodity and currency movements, interest rates, cybersecurity, regulation, product liability and used-truck residual values. PACCAR estimated that a sustained 10% decline in used-truck values would add about $69 million in annual depreciation on average over remaining operating-lease terms.
- Financial Services 30+ day past-due accounts were 0.4% of retail loan and lease accounts at year-end, versus 0.5% a year earlier. The allowance for receivable losses was $113.8 million, versus $117.2 million.
Important facts to verify
- Assess truck-market and backlog conversion: year-end production backlog was $14.7 billion, including $4.5 billion scheduled for delivery within 90 days.
- Track Financial Services funding and liquidity, including $5.08 billion of borrowings scheduled to mature within one year and the renewal of a $1.00 billion syndicated facility expiring in June 2019.
- Monitor used-truck values, lease residual estimates, delinquencies and credit-loss reserves as economic and freight conditions change.
- Follow developments in EC-related litigation and Brexit-related tariffs or supply-chain disruption.
- Separate underlying performance from the 2017 Tax Act benefit and the effects of 2018 revenue-standard adoption when comparing periods.