PACCAR Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. All dollar amounts are in millions except per-share data. PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and provides truck financing and leasing.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Consolidated revenue | $5,059.7 | $4,249.4 | $14,001.8 | $12,962.6 |
| Income before taxes | $581.8 | $494.9 | $1,569.0 | $711.5 |
| Net income | $402.7 | $346.2 | $1,086.0 | $232.9 |
| Diluted EPS | $1.14 | $0.98 | $3.08 | $0.66 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $1,822.5 | $1,490.5 |
Q3 revenue rose about 19% and net income about 16% year over year. Nine-month 2016 results included an $833.0 European Commission (EC) fine. Excluding that non-recurring charge, 2016 adjusted net income was $1,065.9, or $3.03 per diluted share; against that comparison, 2017 net income and EPS were modestly higher. The nine-month GAAP comparison therefore substantially overstates underlying earnings growth.
- Truck: Q3 revenue was $3,867.4, up 22%; pretax income was $357.4 and pretax return on revenue was 9.2%, versus 9.0%. For nine months, revenue was $10,551.1, up 8%, while pretax income was nearly flat at $922.8; pretax return was 8.7%, down from 9.4%. Nine-month truck gross margin fell to 11.5% from 12.2%, reflecting higher direct and factory costs and currency effects.
- Parts: Revenue reached records of $840.0 for Q3 and $2,449.8 for nine months, increases of 10% and 9%. Pretax income rose 11% in Q3 and 12% year to date. Parts pretax return was 18.2% in Q3 and 18.7% year to date.
- Financial Services: Revenue increased 11% in Q3 to $328.2 and 6% year to date to $936.7. Pretax income was $71.2 in Q3, essentially unchanged, but declined 16% year to date to $191.5. Management cited lower results on returned lease assets, higher borrowing rates and increased credit-loss provision.
Consolidated after-tax return on revenue was 8.0% in Q3 versus 8.1%; for nine months it was 7.8% versus 1.8% GAAP, or 8.2% on the company’s adjusted 2016 comparison.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $2,313.3 and marketable debt securities were $1,216.0, totaling $3,529.3, up $472.7 from year-end 2016.
- Nine-month operating cash flow was $1,822.5; investing used $1,139.5 and financing used $369.3. Operating cash flow benefited from earnings and higher payables, partly offset by increased receivables and inventory and cash invested in wholesale receivables.
- Financial Services borrowings included $2,865.1 of commercial paper and bank loans and $5,966.9 of term notes. The filing reports $3,320 of unused credit lines out of $3,550 total; there were no borrowings under syndicated bank facilities during the nine-month period.
- Financial Services assets were $13,061.7. Total finance and other receivables, net, were $9,548.7, compared with $8,837.4 at December 31, 2016. The allowance for credit losses was $119.7.
Material changes, outlook and risks
- Worldwide truck deliveries increased 15% in Q3 and 7% for nine months. U.S. and Canada heavy-duty market share rose to 30.1% for the first nine months from 27.9%; DAF’s European over-16-tonne share declined to 15.1% from 15.6%.
- Used-truck losses excluding repossessions rose to $31.6 for the first nine months from $10.8 a year earlier, including higher losses on multiple-unit sales. Returned-lease-asset results also weighed on Financial Services earnings. Worldwide retail loan and lease accounts 30+ days past due were 0.6%, versus 0.5% at year-end 2016.
- Management forecast 2017 U.S. and Canada truck retail sales of 210,000–220,000 units and 2018 sales of 220,000–250,000. European over-16-tonne registrations were forecast at 300,000–310,000 in 2017 and 280,000–310,000 in 2018; South American heavy-duty sales at 55,000–60,000 and 65,000–70,000, respectively.
- Parts outlook: North America sales were expected to rise 8%–10% in 2017 and 3%–5% in 2018; Europe aftermarket sales were expected to rise 3%–4% and 2%–4%, respectively. Financial Services average earning assets were expected to be comparable to 2016 in 2017 and increase 1%–3% in 2018.
- Capital investment and R&D expectations were $400–$450 and $260–$270, respectively, for 2017, and $425–$475 and $270–$300 for 2018. These are management forecasts, not earnings guidance.
- DAF paid the €752.7 ($833.0) EC fine in 2016. Related claims and a class-action certification petition have been filed; further claims may arise. PACCAR says it has defenses but cannot estimate a potential loss range, and an adverse outcome could materially affect results.
- Management warned that weaker freight and economic conditions could increase delinquencies, repossessions and credit losses and reduce new financing volume. Other stated risks include truck-market weakness, competition, regulatory costs, currency and commodity fluctuations, lower used-truck prices, supplier or labor disruption, warranty costs, litigation and capital-market disruption. Management said current cash, investments, collections, credit lines and investment-grade ratings support liquidity, while a ratings decline could impair funding access and costs.
Important facts for investors to verify
- Track truck gross margins and delivery volumes against the stated market outlook, particularly as costs and foreign-exchange effects change.
- Monitor returned-lease and used-truck sale results, residual values, past-due accounts, credit-loss provisions and repossessions in Financial Services.
- Assess Financial Services funding needs, borrowing costs, unused credit availability and credit ratings, given reliance on capital markets and short-term borrowings.
- Follow EC-related litigation and any disclosed developments in potential claims; the filing provides no estimable loss range.
- Reconcile future earnings comparisons with the 2016 EC charge and review the assumptions behind management’s market, investment and R&D outlooks.