PACCAR Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; the filing also provides unaudited quarterly results. PACCAR manufactures Kenworth, Peterbilt and DAF trucks, distributes aftermarket parts, and finances and leases commercial vehicles.
Financial performance and position
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenues | $19.115 billion | $18.997 billion | Up 0.6% |
| Net income | $1.604 billion | $1.359 billion | Up 18.0% |
| Diluted EPS | $4.51 | $3.82 | Up 18.1% |
| Return on revenues | 8.4% | 7.2% | Up 1.2 percentage points |
| Operating cash flow | $2.556 billion | $2.124 billion | Up $432.4 million |
- Truck segment revenue was $14.783 billion, up 1%; pretax income rose 24% to $1.440 billion. Truck gross margin improved to 12.2% from 10.2%.
- Parts revenue was $3.060 billion, down 1%; pretax income increased 12% to $555.6 million. Parts gross margin rose to 27.0% from 25.9%.
- Financial Services revenue declined 3% to $1.172 billion and pretax income declined 2% to $362.6 million. Average earning assets increased 3% to $11.507 billion. The provision for credit losses was $12.4 million, down from $15.4 million.
- Capital investments were $308.4 million and R&D expense was $239.8 million. Cash and marketable debt securities totaled $3.465 billion at year-end, up $454.9 million.
- Financial Services debt was $8.592 billion at year-end. PACCAR reported $3.435 billion of credit arrangements, $3.256 billion unused, and investment-grade credit ratings of A+/A1. The filing says most borrowings relate to Financial Services.
- Dividends declared were $2.32 per share, including a $1.40 year-end extra dividend. The company paid $680.5 million in dividends and repurchased $201.6 million of stock during 2015.
Material changes versus prior periods
- Truck deliveries increased 8% to 154,700 units. Deliveries rose 8% in the U.S. and Canada and 20% in Europe, but fell 14% in Mexico, South America, Australia and other markets.
- Stronger U.S. and European truck demand, higher deliveries, improved truck pricing in Europe, and lower material costs supported earnings. Currency translation, primarily the weaker euro, reduced worldwide truck revenue by $940.0 million and Parts revenue by $193.3 million.
- Parts earnings improved despite slightly lower reported revenue, reflecting stronger underlying demand, better pricing and margins, partly offset by currency effects.
- Financial Services earnings eased amid lower yields and currency effects; finance market share on new PACCAR truck sales declined to 25.9% from 27.7%.
- Operating cash flow increased, while cash used in investing rose to $1.975 billion, mainly due to greater purchases of operating-lease equipment and marketable securities and higher net retail loan originations.
- For the fourth quarter, net income was $347.2 million and diluted EPS was $0.98, versus $394.3 million and $1.11 in fourth-quarter 2014. Truck, Parts and Other revenue was $4.063 billion; Financial Services revenue was $292.8 million.
Outlook, commentary and risks
- Management forecast 2016 U.S. and Canada truck retail sales of 230,000–260,000 units, below 278,400 in 2015. European heavy-truck registrations were projected at 260,000–290,000, versus 269,100 in 2015; South American heavy-truck sales were estimated at 70,000–80,000, versus 74,000.
- For 2016, PACCAR expected Parts sales to grow 3%–5% in North America and Europe. Financial Services average earning assets were expected to be comparable to 2015’s record level. Planned 2016 capital investments were $325–$375 million and R&D was $240–$270 million.
- Management cited strong freight tonnage, freight rates and fleet utilization, while cautioning that weaker economic or freight conditions could increase delinquencies, repossessions and credit losses and reduce new financing volume.
- Key risks include the cyclical truck market, competition and pricing, commodity and supplier constraints, foreign exchange, interest rates and access to capital markets, used-truck residual values, customer credit, regulatory and environmental costs, warranty claims, and cybersecurity. A 10% decline in used-truck values sustained over operating-lease maturities could add about $52.6 million of annual depreciation.
- European Commission investigation: The EC issued a Statement of Objections alleging anticompetitive practices by major European truck manufacturers, including DAF and PACCAR. The company said it could not estimate a potential fine and recorded no accrual at year-end; the EC indicated it would seek significant fines.
- Other contingencies include environmental investigations and cleanup matters; management did not expect these to significantly affect consolidated cash flow, liquidity or financial condition. The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether the 2016 truck-market forecasts and expected Parts growth were achieved, particularly given the projected decline in North American demand.
- Developments, potential penalties and any subsequent accrual related to the EC investigation.
- Financial Services portfolio quality, including past-due accounts, TDRs, credit-loss provisions and used-truck collateral values.
- Financial Services funding and refinancing needs: $4.237 billion of borrowings were scheduled to mature within one year, against reliance on commercial paper, term notes and credit facilities.
- Ongoing effects of foreign currency movements on reported revenue and earnings, and the sensitivity of operating-lease residual estimates to used-truck prices.