PACCAR Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. PACCAR manufactures commercial trucks, distributes aftermarket parts, and provides financing and leasing.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total sales and revenues | $4,237.9 | $4,300.0 |
| Net income (loss) | $310.3 | $(594.6) |
| Diluted EPS | $0.88 | $(1.69) |
| Operating cash flow | $610.5 | $795.8 |
| Investing cash flow | $(337.0) | $(292.2) |
| Financing cash flow | $(445.7) | $(722.9) |
- Revenue declined 1%. Truck, Parts and Other revenue was $3,935.7, down from $4,010.6; Financial Services revenue rose to $302.2 from $289.4.
- Truck revenue declined 4% to $3,130.1, primarily on weaker U.S. and Canadian deliveries. Truck pre-tax income fell 21% to $241.7; pre-tax return on revenue was 7.7% versus 9.3%, and gross margin was 10.7% versus 12.1%.
- Parts revenue increased 9% to $786.7, principally on stronger North American aftermarket demand. Pre-tax income rose 13% to $151.7; pre-tax return on revenue improved to 19.3% from 18.7%.
- Financial Services pre-tax income fell 29% to $57.3 despite higher revenue, reflecting weaker results on returned lease assets, higher borrowing rates, and a higher provision for receivable losses. The provision was $5.9 versus $3.4.
- Reported Q1 2016 results included a $942.6 European Commission charge. Excluding it, PACCAR reported prior-year adjusted net income of $348.0, or $0.99 per diluted share, and adjusted after-tax return on revenue of 8.1% (non-GAAP). Q1 2017 after-tax return on revenue was 7.3%.
- Cash and cash equivalents were $1,764.4 at March 31, down from $1,915.7 at year-end; marketable debt securities were $1,206.4, up from $1,140.9. Combined cash and securities totaled $2,970.8, down $85.8 from year-end.
- Financial Services liabilities included $2,516.1 of commercial paper and bank loans and $5,849.4 of term notes. PACCAR reported $3.46 billion of credit lines, with $3.21 billion unused. It had no borrowings under syndicated bank facilities during the quarter.
- Total assets were $21,039.7 and stockholders’ equity was $7,079.3 at March 31. Financial Services assets were $12,266.4, including net finance and other receivables of $8,971.0.
Material changes and cash flows
- Truck deliveries totaled 35,000, nearly unchanged from 35,300. U.S. and Canada deliveries fell 8% to 17,000; Europe deliveries rose 6% to 14,300.
- Worldwide heavy-duty retail sales in the U.S. and Canada fell to 41,800 from 57,200. PACCAR’s heavy-duty share increased to 28.2% from 25.3%. DAF’s European over-16-tonne share decreased to 15.7% from 16.7%.
- Operating cash flow declined year over year, including greater cash use from receivables and wholesale financing. The 2016 comparison included the non-cash EC charge, so headline net income and cash flow comparisons are affected by that unusual item.
- Capital expenditure on property, plant and equipment was $71.3 versus $61.4. Dividends paid were $294.7 versus $576.9, with the comparison affected by a special dividend paid in January 2016. PACCAR made no share repurchases in Q1 2017.
- Used-truck losses excluding repossessions were $12.9 versus $2.4, including $8.5 on multiple-unit transactions. Net losses on returned lease assets and lower used-truck prices pressured Financial Services results.
Outlook, risks and unusual items
- For 2017, management expected U.S. and Canada truck retail sales of 190,000–220,000 units; European registrations for trucks over 16 tonnes of 270,000–300,000; and South American heavy-duty sales of 55,000–65,000.
- PACCAR expected North American Parts sales growth of 4%–6% and European aftermarket sales growth of 1%–2%. Average Financial Services earning assets were expected to be comparable to 2016.
- 2017 capital investment guidance was $375–$425 and R&D guidance was $250–$280. The $110 DAF cab paint facility was scheduled to open in mid-2017.
- Management cited freight tonnage, freight rates and fleet utilization as supportive of customers’ current profitability. Weaker economic or freight conditions could increase delinquencies, repossessions and credit losses and reduce new business volume.
- Claims and a proposed class action followed the European Commission settlement concerning competition rules. DAF paid the €752.7 ($833.0) fine in August 2016; PACCAR said it had meritorious defenses, but could not estimate potential losses from further claims. An adverse outcome could materially affect results.
- Other stated risks include weaker truck demand, competition and market-share changes, fuel and commodity costs, regulation, currency and interest-rate movements, lower used-truck prices, supplier or labor disruptions, and capital-market liquidity. Management reported no material change in risk factors or market risk during the quarter.
- Adoption of an income-tax accounting standard on January 1, 2017 reduced prepaid income taxes and retained earnings by $19.9. The company expected the 2018 revenue-recognition standard to have no material impact on income statement or retained earnings, while changing recognition timing for certain European residual-value-guarantee truck sales.
Investor verification points
- Track truck volumes, pricing and margins, particularly in North America and Europe, against management’s full-year industry outlook.
- Assess whether Parts growth and profitability can offset weaker truck-segment performance.
- Monitor Financial Services used-truck resale values, returned-lease results, delinquencies and credit-loss provisions; worldwide retail accounts 30+ days past due were 0.6%, compared with 0.5% at year-end.
- Review liquidity and refinancing capacity, including financial-services borrowings, unused credit lines, credit ratings and the planned handling of a syndicated facility expiring in June 2017.
- Follow the European competition-related claims and any updates to potential exposure; the filing provides no clear estimate of losses from those claims.
- Interpret year-over-year earnings with the 2016 EC charge in view; the adjusted 2016 figures are non-GAAP and not directly comparable to GAAP results.