PACCAR Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the same 2017 periods unless stated otherwise. PACCAR manufactures trucks, distributes parts, and provides customer and dealer financing and leasing.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Consolidated net sales and revenues | $5.805 billion | $4.704 billion | $11.459 billion | $8.942 billion |
| Income before income taxes | $719.6 million | $539.0 million | $1.389 billion | $987.2 million |
| Net income | $559.6 million | $373.0 million | $1.072 billion | $683.3 million |
| Diluted earnings per share | $1.59 | $1.06 | $3.04 | $1.94 |
| After-tax return on revenues | 9.6% | 7.9% | 9.4% | 7.6% |
| Cash provided by operating activities | Not presented quarterly | $1.199 billion | $1.185 billion |
- Truck, Parts and Other revenue was $5.467 billion in Q2 and $10.789 billion for the first half. Truck income before tax was $434.0 million and $829.2 million, respectively; Parts income before tax was $194.5 million and $386.3 million.
- Truck gross margin improved to 12.2% in Q2 and 12.1% in the first half, from 11.6% and 11.1%. Parts gross margin rose to 27.5% and 27.7%, from 26.5% and 27.0%.
- Financial Services revenue was $338.0 million in Q2 and $670.2 million in the first half; pretax income was $72.4 million and $139.9 million. Higher earning assets, yields and currency translation supported results, partly offset by higher borrowing costs.
- The effective tax rate fell to 22.2% in Q2 and 22.8% in the first half, from 30.8% in both 2017 periods, primarily reflecting the U.S. tax legislation lowering the federal statutory rate.
Liquidity, cash flow and debt
- At June 30, cash and cash equivalents totaled $2.507 billion and marketable debt securities were $1.033 billion; together they totaled $3.540 billion, down $191.7 million from year-end 2017.
- First-half operating cash flow was $1.199 billion. Net cash used in investing was $745.2 million and net cash used in financing was $278.6 million. Cash increased $142.1 million during the period.
- Financial Services reported $3.131 billion of commercial paper and bank loans and $6.077 billion of term notes at June 30. These are segment liabilities; the filing does not present a single consolidated net-debt measure in the provided text.
- PACCAR had $3.50 billion of credit-line arrangements, of which $3.25 billion was unused. It reported no borrowings under its syndicated bank facilities during the first half. Management cited investment-grade ratings of A+/A1 and expected cash, collections, credit lines and capital-market access to support liquidity.
- Dividends paid totaled $608.5 million in the first half, higher than 2017 primarily because of a larger special dividend paid in January. PACCAR repurchased 1.5 million shares for $94.2 million and completed its prior $300 million authorization; a new authorization of up to $300 million was approved July 9, 2018.
Material changes and management commentary
- Management reported record quarterly worldwide revenue and record first-half revenue and net income. Truck deliveries increased 18% in Q2 and 22% in the first half; stronger demand, higher deliveries, pricing and favorable currency translation lifted truck results. Parts growth reflected higher demand and pricing across markets.
- Truck deliveries increased to 46,400 in Q2 from 39,400 and to 90,900 in the first half from 74,400. First-half heavy-duty market share in the U.S. and Canada was 29.4% versus 29.6%; DAF share in Europe’s over-16-tonne market rose to 16.5% from 15.2%.
- Operating cash flow was nearly flat year over year despite higher earnings, as working-capital outflows included increased receivables and inventories and greater pension contributions.
- Foreign currency translation reduced comprehensive income by $196.7 million in Q2 and $118.9 million for the first half, despite higher net income.
- PACCAR adopted the new revenue standard in 2018. It changed accounting for certain European trucks with residual value guarantees; the filing attributes $2.1 million of Q2 and $5.4 million of first-half net income to the standard. The company also adopted a pension-cost presentation standard, with no net-income impact.
Outlook, risks and contingencies
- For 2018, management expected U.S. and Canada truck retail sales of 265,000–285,000 units; European registrations of over-16-tonne trucks of 300,000–320,000; and South American heavy-duty truck sales of 75,000–85,000.
- PACCAR Parts sales were expected to grow 13%–15% in 2018. Financial Services average earning assets were expected to increase 6%–9%.
- Capital investment guidance was $425–$475 million and R&D guidance was $300–$320 million. Investment priorities included aerodynamic designs, electric, hybrid and hydrogen-fuel-cell powertrains, driver-assistance and connectivity technologies, and manufacturing and parts-distribution facilities.
- Management cautioned that weaker freight and economic conditions could reduce customer profitability, increase delinquencies, repossessions and credit losses, and reduce new financing volume. Other stated risks included lower industry sales, competition, fuel and commodity costs, tariffs and regulation, currency and interest-rate movements, supplier constraints, labor and driver shortages, warranty costs, used-truck values and litigation.
- Claims and lawsuits related to the European Commission truck investigation remain pending. PACCAR said it believes it has meritorious defenses but that an adverse outcome could materially affect results of operations. Other ordinary-course lawsuits were not expected by management to materially affect the business or financial condition.
- Short-term borrowings create liquidity risk if capital markets are disrupted and replacement commercial paper cannot be issued. Management believed available resources and market access were sufficient; a ratings downgrade could impair access or increase borrowing costs.
Important facts for investors to verify
- Whether truck-market, parts-growth and Financial Services asset-growth forecasts were achieved, and whether the strong delivery and margin trends persisted.
- The sustainability of earnings growth apart from the lower tax rate, favorable currency translation and unusually strong demand.
- Working-capital and cash conversion trends, including receivables, inventories and pension contributions.
- Financial Services credit quality, past-due accounts, used-truck residual values, funding costs and refinancing access.
- Developments and potential exposure from European Commission-related claims, plus the effect of the new share-repurchase authorization.
- Effects of revenue-standard accounting and other pending accounting standards on reported results and balance-sheet comparability.