PACCAR Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited interim results; dollars are U.S. dollars. PACCAR manufactures trucks, distributes parts, and provides customer and dealer financing and leasing.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Consolidated revenue | $3.06B | $6.63B | $8.22B | $13.12B |
| Income before tax | $184.0M | $814.4M | $646.2M | $1.63B |
| Net income | $147.7M | $619.7M | $507.1M | $1.25B |
| Diluted EPS | $0.43 | $1.78 | $1.46 | $3.59 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $1.36B | $1.19B |
Consolidated revenue fell 54% in Q2 and 37% in the first half year over year; net income fell 76% and 59%, respectively. First-half after-tax return on revenues was 6.2%, versus 9.5% in 2019. First-half effective tax rate was 21.5%, compared with 23.6%, primarily due to higher R&D tax benefits.
- Truck: Q2 revenue was $1.86B, down 64%; segment pretax result was a $46.2M loss versus $510.7M income. Truck gross margin was 2.6%, versus 12.2%. First-half revenue was $5.62B, down 46%, and pretax income was $136.9M, down from $1.03B.
- Parts: Q2 revenue was $823.7M, down 20%; pretax income was $151.9M, down 28%, and gross margin was 25.3%, versus 27.7%. First-half revenue fell 10% to $1.82B and pretax income fell 12% to $366.6M.
- Financial Services: Q2 revenue was $360.3M, approximately flat, while pretax income declined 31% to $55.5M. First-half revenue rose 5% to $744.0M, but pretax income fell 37% to $103.8M. Higher used-truck sales in Europe supported revenue; lower yields, weaker used-truck results, and higher credit-loss provisions pressured earnings.
Cash, debt and liquidity
- Cash and cash equivalents were $3.13B at June 30, down from $4.18B at year-end 2019. Cash plus marketable debt securities totaled $4.28B, down from $5.34B.
- First-half operating cash flow was $1.36B; investing cash use was $594.1M and financing cash use was $1.78B. Cash declined by $1.05B. Dividends paid were $1.02B.
- Financial Services liabilities included $2.98B of commercial paper and bank loans and $7.42B of term notes, compared with $4.11B and $7.11B, respectively, at year-end. The filing does not present a consolidated total debt figure covering all components.
- PACCAR reported $3.58B of credit lines, of which $3.27B was unused; there were no borrowings under committed bank facilities in Q2. Management cited investment-grade ratings of A+/A1 and stated that available liquidity was expected to support funding needs.
Material changes, outlook and risks
- COVID-19 led to a worldwide production suspension beginning March 24. European and Australian factories restarted April 20; North American and Brazilian production resumed in early May. Lower deliveries, reduced parts demand, factory-restart and inefficiency costs, and weaker margins affected results.
- Worldwide truck deliveries declined 65% in Q2 and 46% in the first half. New Financial Services loan and lease volume fell 41% in Q2 and 25% in the first half.
- Management’s 2020 industry outlook, assuming no significant pandemic resurgence: U.S. and Canada truck sales of 160,000–190,000 units; Europe over-16-tonne registrations of 190,000–220,000; South America heavy-duty registrations of 60,000–80,000. PACCAR provided no specific 2020 Parts sales-growth guidance because of uncertainty.
- Expected 2020 capital investments were $525M–$575M and R&D spending $265M–$295M. Production volumes remain subject to demand, supplier availability, and government directives.
- Financial Services’ receivables-loss provision increased to $24.5M for the first half from $6.2M, reflecting pandemic-related economic conditions and a credit loss on a large U.S. fleet. COVID-related modifications were substantial; management said most were completed by June 30. Worldwide retail accounts 30+ days past due were 0.8%, versus 0.7% at year-end; the filing cautions that modifications can affect reported delinquency measures.
- Used-truck losses excluding repossessions were $51.2M in the first half, versus $18.3M a year earlier. Used trucks held for sale, net of impairments, were $463.4M at June 30, versus $391.4M at year-end.
- European claims related to the European Commission truck investigation seek unspecified damages. PACCAR says it has defenses but cannot estimate a potential loss; an adverse result could materially affect results. The company also identified pandemic-related risks to production, suppliers, demand, credit losses, and used-truck values.
- Other notable items: Parts segment income included a $10.2M gain on sale of its former Las Vegas distribution facility. Warranty estimate changes added $47.6M to warranty reserves in the first half. Share repurchases were temporarily suspended because of economic uncertainty.
Most important facts for investors to verify
- Whether truck production and deliveries recover as assumed, and how the pandemic affects supplier capacity and demand.
- Whether Financial Services delinquencies, credit provisions, payment modifications, and used-truck residual values worsen.
- Whether management’s 2020 truck-market, capital investment, and R&D outlook remains current; no specific Parts sales-growth outlook was provided.
- The potential exposure and timing of European truck-related litigation, for which the company cannot estimate a loss range.
- How cash usage, dividends, debt maturities, and the availability of committed credit facilities evolve under prolonged market weakness.