PACCAR Inc. — Q2 2017 Form 10-Q
Business context and period. PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and finances and leases vehicles through its Financial Services segment. This summary covers the three and six months ended June 30, 2017; financial amounts are in millions unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $4,704.2 | $4,413.2 | $8,942.1 | $8,713.2 |
| Net income (loss) | $373.0 | $481.3 | $683.3 | $(113.3) |
| Diluted earnings (loss) per share | $1.06 | $1.37 | $1.94 | $(0.32) |
| After-tax return on revenues | 7.9% | 10.9% | 7.6% | (1.3)% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,185.2 | $1,649.4 |
- Q2 revenue rose about 7%; first-half revenue rose about 3%. Q2 net income declined year over year, but Q2 2016 included a $109.6 favorable adjustment to the European Commission (EC) charge. Excluding that item, 2016 adjusted net income was $371.7, versus $373.0 in Q2 2017.
- First-half 2016 included the $833.0 EC charge. Excluding it, 2016 adjusted net income was $719.7 ($2.05 per diluted share), above 2017’s $683.3. PACCAR reported lower truck margins, lower Financial Services results and unfavorable currency effects, partly offset by record Parts sales and profit.
- Truck: Q2 revenue was $3,553.6, up 6%; first-half revenue was $6,683.7, up 1%. Pre-tax return on revenue declined to 9.1% from 9.9% in Q2 and to 8.5% from 9.6% in the first half. Truck gross margin was 11.8% in Q2 and 11.3% for the first half, down from 12.7% and 12.4%, respectively. Higher material and overhead costs and weaker currency translation weighed on margins.
- Parts: Revenue reached records of $823.1 in Q2 and $1,609.8 for the first half, up 9% in both periods. Pre-tax income increased 14% in Q2 and 13% in the first half; return on revenue was 18.5% and 18.9%, respectively.
- Financial Services: Revenue increased 3% in Q2 to $306.3 and 4% in the first half to $608.5, while pre-tax income fell 18% to $63.0 and 24% to $120.3. Higher borrowing rates and weaker results on returned lease assets were key factors. First-half losses on used trucks, excluding repossessions, were $22.9 versus $5.2 a year earlier.
- Dividends declared were $0.25 per share in Q2 and $0.49 per share for the first half.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $1,879.8 at June 30, 2017; marketable debt securities were $1,244.6. Together, these totaled $3,124.4, up $67.8 from December 31, 2016.
- First-half operating cash flow was $1,185.2; investing activities used $770.3 and financing activities used $507.8. Cash and cash equivalents decreased $35.9 during the period. Operating cash flow was affected by higher receivables and inventory and a $176.0 cash use from wholesale receivables, compared with a $226.0 source in the prior-year period.
- Financial Services commercial paper, bank loans and term notes totaled $8,544.1 at June 30, compared with $8,475.2 at year-end. PACCAR reported $3.49 billion in credit-line arrangements, of which $3.27 billion was unused; no syndicated-facility borrowings were outstanding during the first half.
- Management cited investment-grade ratings of A+/A1, cash and investments, receivable collections and credit lines as liquidity support. It cautioned that market disruption could impair replacement commercial-paper issuance and that rating downgrades could raise funding costs or affect liquidity.
Outlook, commentary and risks
- For 2017, management expected U.S. and Canadian truck retail sales of 200,000–220,000 units; European registrations of trucks over 16 tonnes of 290,000–310,000; and South American heavy-duty sales of 55,000–60,000.
- Management expected North American Parts sales growth of 6%–8% and European aftermarket growth of 2%–3% in 2017. Average Financial Services earning assets were expected to be comparable to 2016.
- 2017 capital investment guidance was $375–$425 million and R&D spending $250–$270 million. Planned investments include product technology, manufacturing capacity and parts distribution.
- Management said healthy freight conditions supported customer profitability and cash flow; a deterioration could increase delinquencies, repossessions and credit losses and reduce new business volume. Worldwide retail loan and lease accounts 30+ days past due were 0.6%, versus 0.5% at year-end 2016. The allowance for receivable losses was $119.0 at June 30.
- EC-related claims and a class-action certification petition followed the 2016 settlement. PACCAR said it believes it has meritorious defenses, but the proceedings could take significant time and a loss range cannot be estimated; an adverse outcome could materially affect results.
- Other risks identified include truck-market declines, competition and market-share losses, currency and commodity movements, lower used-truck values, interest rates, supplier or labor disruptions, regulation, warranty costs and litigation. Management reported no material changes in market risk or risk factors during the first half.
- The company expects to adopt the new revenue standard in January 2018. It did not expect a material impact on income or retained earnings; certain European residual-value-guarantee contracts may instead have revenue recognized immediately.
Important facts for investors to verify
- Compare ongoing earnings with the prior-year periods after separating the unusual EC charge and its favorable reversal; first-half adjusted 2016 net income was $719.7.
- Track truck gross margins, delivery volumes, currency effects and the truck-market outlook, alongside the continued growth and profitability of Parts.
- Monitor used-truck resale values and returned-lease performance, borrowing costs, Financial Services earnings, delinquencies and credit-loss provisions.
- Review the potential scale and timing of EC-related follow-on claims; the filing provides no estimable loss range.
- Assess liquidity and refinancing access, including commercial-paper dependence, available credit lines and Financial Services debt maturities.