PACCAR Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are to the same periods in 2017 unless noted. Amounts are U.S. dollars; financial statement amounts are in millions, except per-share data.
Business context and reporting period
PACCAR designs and manufactures commercial trucks (Kenworth, Peterbilt and DAF), distributes aftermarket parts, and provides truck financing and leasing through Financial Services. Its other operations include industrial winches. Results were driven primarily by higher truck deliveries and parts demand, while Financial Services benefited from larger earning-asset balances and higher yields.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenues | $5,756.8 | $5,059.7 | $17,216.0 | $14,001.8 |
| Income before taxes | $668.8 | $581.8 | $2,057.8 | $1,569.0 |
| Net income | $545.3 | $402.7 | $1,617.0 | $1,086.0 |
| Diluted EPS | $1.55 | $1.14 | $4.59 | $3.08 |
| After-tax return on revenues | 9.5% | 8.0% | 9.4% | 7.8% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,927.2 | $1,822.5 |
- Revenue and segment trends: Truck, Parts and Other revenue was $5,416.9 in Q3 and $16,205.9 for nine months. Financial Services revenue was $339.9 and $1,010.1, respectively. Q3 truck deliveries rose 19% to 47,800; nine-month deliveries rose 21% to 138,700.
- Segment margins: Truck pretax return on revenue was 8.8% in Q3 (9.0% prior year) and 9.2% for nine months (8.4%). Parts pretax return was 19.6% (18.1%) and 20.0% (18.5%), respectively.
- Cash, investments and capital: Cash and cash equivalents were $2,914.0 at September 30; marketable debt securities were $1,000.3, for combined cash and securities of $3,914.3, up from $3,731.8 at December 31, 2017. Nine-month cash flow from operations was $1,927.2; investing used $1,276.5 and financing used $63.7. Capital investments were $302.0 for nine months versus $275.1.
- Debt and liquidity: Financial Services reported $3,002.2 of commercial paper and bank loans and $6,584.7 of term notes, versus $2,933.9 and $5,945.5 at year-end 2017. PACCAR reported $3.52 billion in credit-line arrangements, of which $3.25 billion was unused; no syndicated-facility borrowings were outstanding during the first nine months. Management cited investment-grade ratings of A+/A1.
- Shareholder returns: Dividends declared were $0.28 per share in Q3 and $0.81 per share for nine months. Cash dividends paid were $706.6 for nine months, including a higher special dividend. The company repurchased 2.4 million shares for $153.2 in the nine-month period; $241.0 remained under the $300 million authorization at September 30.
Material changes versus the prior comparable period
- Nine-month revenue increased to $17.22 billion from $14.00 billion, and net income rose to $1.62 billion from $1.09 billion. Higher truck deliveries, aftermarket parts demand and Financial Services earnings contributed.
- Truck gross margin improved to 11.8% for nine months from 11.3%, reflecting higher volume, pricing and favorable currency effects, partly offset by higher material, labor and factory costs. In Q3, truck gross margin declined to 11.3% from 11.6%, with cost increases and unfavorable currency effects weighing on results.
- Parts gross margin increased to 27.5% for nine months from 26.7%; higher volume and pricing outweighed higher direct and indirect costs.
- The effective tax rate fell to 18.5% in Q3 and 21.4% for nine months, from 30.8% in both 2017 periods. The lower U.S. statutory rate under the 2017 tax law was the primary driver; Q3 also included a one-time tax-liability reduction related to extended warranties and higher realized R&D tax credits.
- Adoption of the new revenue standard affected certain European truck sales subject to residual value guarantees. It added $9.7 to Q3 net income and $15.1 to nine-month net income versus the prior-standard pro forma presentation, primarily by accelerating revenue recognition for qualifying contracts.
Outlook, commentary and risks
- Truck markets: Management estimated 2018 U.S. and Canada industry retail sales of 280,000–290,000 units and projected 280,000–310,000 in 2019. Europe’s over-16-tonne market was estimated at 310,000–320,000 registrations in 2018 and projected at 290,000–320,000 in 2019. South American heavy-duty sales were estimated at 85,000–90,000 in 2018 and projected at 95,000–105,000 in 2019.
- Parts and Financial Services: PACCAR Parts sales were expected to grow 14%–16% in 2018 and 5%–8% in 2019. Average Financial Services earning assets were expected to rise 7%–10% in 2018 and 3%–5% in 2019.
- Investment plans: 2018 capital investments were forecast at $425–$475 and R&D at $300–$310; 2019 forecasts were $525–$575 and $300–$330, respectively. Investment priorities include new trucks, diesel and alternative powertrains, driver-assistance technology, manufacturing and parts-distribution capacity.
- Credit and market risks: Management said weaker freight or economic conditions could reduce customer profitability and new business, and increase past-due accounts, repossessions and credit losses. Other identified risks include truck-market declines, competition, fuel and commodity prices, tariffs and regulation, currency and interest-rate movements, used-truck values, supplier or labor disruptions, warranty costs, and capital-market access.
- Contingencies and unusual items: EC-related claims and lawsuits following the European truck-industry investigation remain unresolved; PACCAR stated it believes it has meritorious defenses but an adverse outcome could materially affect results. The company also cited higher expected costs for certain environmental matters, contributing to a Q3 loss in Other operations. Management reported no material change in market risk or risk factors during the period.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the lower tax rate and Q3 one-time tax items.
- Whether higher truck deliveries and parts demand continue, and how material, labor and factory costs affect truck margins.
- Financial Services portfolio credit quality, including past-due trends, used-truck values, and funding costs as interest rates change.
- The status and potential financial exposure of EC-related litigation and environmental matters; the filing does not provide a clear quantified exposure for these items.
- Execution of the truck-market, Parts, earning-asset, capital-investment and R&D outlooks, which are forward-looking estimates subject to the risks described in the filing.