PACCAR Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited quarterly results, including the fourth quarter; it is an annual 10-K, not a standalone quarterly filing. PACCAR designs and manufactures Kenworth, Peterbilt and DAF trucks, distributes aftermarket parts, and finances and leases commercial vehicles.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenues | $17.03 billion | $19.12 billion |
| Truck, Parts and Other sales | $15.85 billion | $17.94 billion |
| Financial Services revenues | $1.19 billion | $1.17 billion |
| Net income | $521.7 million | $1.604 billion |
| Diluted earnings per share | $1.48 | $4.51 |
| Operating cash flow | $2.301 billion | $2.556 billion |
| Cash and cash equivalents | $1.916 billion | $2.016 billion |
| Marketable debt securities | $1.141 billion | $1.448 billion |
| Financial Services debt | $8.475 billion | $8.592 billion |
- GAAP net income includes an $833 million non-deductible European Commission (EC) fine. Excluding it, PACCAR reported adjusted net income of $1.355 billion, or $3.85 per diluted share, and adjusted return on beginning equity of 19.5%. These are non-GAAP measures; 2015 GAAP net income was $1.604 billion.
- Reported after-tax return on revenues was 3.1%, versus 8.4% in 2015; excluding the EC charge, the 2016 adjusted measure was 8.0%.
- Truck segment revenue declined 14% to $12.77 billion; pre-tax income fell 22% to $1.126 billion. Truck gross margin was 11.8%, down from 12.2%.
- Parts revenue declined 2% to $3.006 billion; pre-tax income fell 2% to $543.8 million. Parts gross margin was 26.9%, versus 27.0%.
- Financial Services pre-tax income fell 15% to $306.5 million despite a 1% increase in revenue. The provision for receivable losses rose to $18.4 million from $12.4 million; worldwide retail accounts 30 or more days past due remained 0.5%.
- Cash and marketable securities totaled $3.057 billion, down $407.9 million year over year. PACCAR reported $3.223 billion of unused credit arrangements and investment-grade ratings of A+/A1. Financial Services represented $12.195 billion of total assets; consolidated total assets were $20.639 billion and stockholders’ equity was $6.778 billion.
- Dividends paid were $829.3 million; declared dividends were $1.56 per share, including the year-end extra dividend. Capital investments were $402.7 million, and R&D expense was $247.2 million.
Material changes versus 2015
- Revenue decreased 10.9%, principally because truck deliveries and sales fell in the U.S. and Canada. Total truck deliveries declined 9% to 140,900 units; North American deliveries fell 22%, while European deliveries rose 12%.
- U.S. and Canadian heavy-duty industry retail sales dropped to 215,700 units from 278,400, while PACCAR’s share increased to 28.5% from 27.4%. In Europe, the over-16-tonne market grew and DAF’s share rose to 15.5% from 14.6%.
- Parts sales were lower, primarily reflecting softer North American demand and adverse foreign-currency translation. Financial Services revenue increased modestly, but profits declined due to weaker returned-lease results, higher borrowing rates, currency effects and higher credit-loss provisions.
- Operating cash flow declined $255.2 million, partly due to lower earnings and $185.7 million of pension contributions versus $62.9 million in 2015. Cash dividends paid increased, while share repurchases declined to $70.5 million from $201.6 million.
Outlook, risks and unusual items
- For 2017, management estimated U.S. and Canadian truck industry sales of 190,000–220,000 units, European over-16-tonne registrations of 260,000–290,000, and South American heavy-duty sales of 60,000–70,000 units.
- Management expected North American Parts sales to grow 2%–4% and European aftermarket sales to rise 1%–3%. Financial Services average earning assets were expected to be comparable to 2016.
- Expected 2017 capital investments were $375–$425 million and R&D spending $250–$280 million. Investments include powertrain, driver-assistance and connectivity technologies, manufacturing capacity and parts distribution. A new Belgian cab paint facility was scheduled to open in mid-2017.
- The EC imposed a €752.7 million ($833 million) fine on DAF for EU competition-rule violations; PACCAR paid it in August 2016. Follow-on claims and a class-action certification petition were filed. The company says it has defenses, but proceedings could take significant time and potential losses cannot be estimated; an adverse outcome could materially affect results.
- Key risks include cyclical truck demand, competitive pricing, component supply and commodity costs, foreign-exchange and interest-rate movements, Financial Services funding and credit risks, used-truck residual values, regulation, litigation, and warranty or pension estimates. A 10% sustained decline in used-truck values could increase annual depreciation by about $57.7 million.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the $833 million EC charge and the assumptions behind PACCAR’s adjusted, non-GAAP earnings and returns.
- Track North American and European truck demand, order backlog ($4.8 billion at year-end; $2.1 billion scheduled within 90 days), market share and truck margins.
- Monitor follow-on EC-related litigation, potential exposure and any changes to contingency disclosures.
- Assess Financial Services credit quality, credit-loss reserves, used-truck prices, lease residual values and funding access; verify the refinancing of near-term maturities and credit facilities.
- Compare 2017 market, revenue, capital-investment and R&D outlook with subsequent results, and assess pension funding and the planned pension-accounting change.