PACCAR Inc. — Q2 2015 Form 10-Q
Business context and period: PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and provides truck financing and leasing. This unaudited filing covers the quarter and six months ended June 30, 2015; comparisons are with the same 2014 periods unless stated. Amounts are in millions of dollars except per-share and unit data.
Financial results and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Consolidated revenue | $5,079.9 | $4,569.6 | $9,912.6 | $8,949.5 |
| Income before taxes | $652.2 | $481.0 | $1,213.9 | $887.5 |
| Net income | $447.2 | $319.2 | $825.6 | $593.1 |
| Diluted EPS | $1.26 | $0.90 | $2.32 | $1.67 |
| Return on revenues | 8.8% | 7.0% | 8.3% | 6.6% |
| Operating cash flow | — | $1,187.1 | $840.8 |
- Q2 revenue grew approximately 11% and net income 40%; first-half revenue grew approximately 11% and net income 39%. Management reported record first-half consolidated revenue, truck revenue and net income.
- Truck: Q2 external revenue was $3,983.4, up 15%; pretax income was $420.1, up 62%. Truck gross margin rose to 12.7% from 9.8%. First-half external revenue was $7,752.5, up 14%; pretax income was $759.2, up 61%, and gross margin increased to 12.0% from 9.3%.
- Parts: Q2 revenue was $776.5, roughly flat; pretax income increased 15% to $145.7, with gross margin of 27.5% versus 26.0%. First-half revenue rose 2% to $1,529.2 and pretax income rose 19% to $284.6.
- Financial Services: Q2 revenue fell 3% to $293.8 and pretax income was $90.8 versus $91.7. First-half revenue fell 3% to $578.5, while pretax income rose to $179.8 from $177.2.
- Cash and cash equivalents were $1,963.1 at June 30, including $1,877.7 in Truck, Parts and Other and $85.4 in Financial Services. Marketable debt securities were $1,397.3; combined cash and securities were $3,360.4, up $350.8 from year-end 2014.
- Financial Services borrowings comprised $2,656.4 of commercial paper and bank loans and $5,914.2 of term notes, or $8,570.6 combined, versus $8,230.6 at December 31, 2014. Truck, Parts and Other reported no separate borrowings in the presented balance-sheet liabilities.
- Total assets were $21,415.3 and stockholders’ equity $7,218.6 at June 30. The company had $3.45 billion in credit lines, of which $3.34 billion was unused; there were no borrowings under syndicated bank facilities in the first half.
- First-half investing cash use was $914.7, principally reflecting $733.3 of operating-lease equipment acquisitions. Financing cash flow was a $5.3 inflow; dividends paid were $510.5. Cash increased $225.5 after a $52.2 adverse exchange-rate effect.
Material changes and management commentary
- Truck deliveries increased 23% in Q2 to 41,600 and 22% in the first half to 79,900. U.S. and Canada and European deliveries rose, while deliveries in Mexico, South America, Australia and other markets declined.
- Management attributed stronger truck results to higher deliveries and improved gross margins, supported by lower material costs, lower commodity prices and lower costs of North American MX engine components imported from Europe. The weaker euro reduced first-half truck revenue by $493.5.
- Parts benefited from higher aftermarket demand, pricing and fleet utilization; currency translation reduced first-half parts revenue by $104.9. Financial Services revenue was pressured by weaker currencies and lower yields, partly offset by higher average earning assets and lower borrowing rates.
- Research and development expense increased to $59.3 in Q2 and $115.5 in the first half, from $49.9 and $102.6, respectively. The company cited powertrain and new-vehicle development.
- The effective tax rate declined to 31.4% for Q2 and 32.0% for the first half, primarily because of a more favorable mix of income in lower-tax jurisdictions.
Outlook, risks and contingencies
- For 2015, management estimated U.S. and Canada Class 8 retail sales of 270,000–290,000 units, European registrations of over-16-tonne trucks of 240,000–260,000 units, and South American heavy-duty sales of 70,000–80,000 units.
- Management expected PACCAR Parts sales growth of 6%–9% in North America and delivery growth of 4%–7% in Europe. It cautioned that the U.S.-dollar value of European sales could remain affected by euro weakness.
- Expected 2015 capital investment was $325–$375; expected R&D spending was $225–$250. Financial Services average earning assets were expected to be similar to current levels, with local-currency growth potentially offset by translation.
- Management said current freight demand, freight rates and fleet utilization supported customer profitability and cash flow. A deterioration in transportation conditions could increase past-due accounts, repossessions and credit losses. Worldwide retail finance accounts 30 or more days past due were 0.6%, versus 0.5% at year-end 2014.
- Currency movements, truck-industry demand, competition, fuel and commodity prices, regulations, used-truck values, supply interruptions, interest rates, capital-market access, warranty costs, litigation and cybersecurity were among the cited forward-looking risks. Management reported no material change in market risk during the first half and no material change in risk factors.
- The European Commission antitrust investigation involving DAF and other truck manufacturers remained unresolved. The Commission had indicated it would seek significant fines; PACCAR could not estimate a potential fine and recorded no accrual at June 30, 2015.
- The filing states that interim results are not necessarily indicative of full-year results. Management concluded disclosure controls were effective and reported no significant change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether truck-market and parts-growth assumptions are achieved, particularly given weaker demand in South America and foreign-exchange effects.
- Whether truck gross-margin gains and lower component costs persist as volumes, input costs and currency rates change.
- Financial Services portfolio quality, including past-due trends, credit modifications, repossessions, loss provisions and funding access.
- Financial Services debt refinancing needs, credit-line availability and sensitivity to capital-market disruption or rating changes.
- Developments in the European Commission investigation, any eventual fine and related financial exposure.
- Actual capital investment and R&D spending compared with the stated 2015 ranges, and the resulting cash and liquidity position.