PACCAR Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 19, 2020. The filing also reports unaudited fourth-quarter results. PACCAR designs and manufactures Kenworth, Peterbilt and DAF trucks, distributes aftermarket parts, and provides customer and dealer financing and leasing.
Financial results and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $25.60 billion | $23.50 billion | +9% |
| Net income | $2.39 billion | $2.20 billion | +9% |
| Diluted EPS | $6.87 | $6.24 | +10% |
| Operating cash flow | $2.86 billion | $2.99 billion | −4% |
| Capital investments | $743.9 million | $437.1 million | +70% |
| Cash and marketable debt securities | $5.34 billion | $4.46 billion | +$880.9 million |
- Truck, Parts and Other revenue was $24.12 billion; Financial Services revenue was $1.48 billion. Truck revenue rose 10%, Parts revenue rose 5%, and Financial Services revenue rose 9%.
- Truck pre-tax income was $1.90 billion, with a 9.5% pre-tax return on revenue; Truck gross margin rose to 12.1% from 11.8%. Parts pre-tax income was $830.8 million, with a 20.6% pre-tax return; Parts gross margin rose to 27.8% from 27.2%.
- Financial Services pre-tax income declined to $298.9 million from $305.9 million. Its average earning assets increased 10% to $14.28 billion; new loan and lease volume increased 8% to $5.63 billion.
- Effective tax rate was 23.0%, versus 21.9%; 2018 benefited from a one-time tax-liability reduction related to extended warranty contracts. After-tax return on revenue was 9.3% in both years; return on beginning equity was 27.8%, versus 27.3%.
- At year-end, total assets were $28.36 billion and stockholders’ equity was $9.71 billion. Financial Services debt was $11.22 billion, up from $9.95 billion; this is segment debt, not a measure of consolidated net debt.
- For Q4 2019, reported net income was $531.3 million, or $1.53 diluted EPS, versus $578.1 million, or $1.65, in Q4 2018. Truck, Parts and Other revenue plus Financial Services revenue totaled approximately $6.12 billion, compared with $6.28 billion in Q4 2018.
Liquidity, cash flow and capital returns
- Cash and cash equivalents were $4.18 billion at year-end; marketable debt securities were $1.16 billion. Operating cash flow was $2.86 billion. Cash used in investing was $2.21 billion; cash provided by financing was $83.4 million.
- Operating cash flow decreased primarily due to lower cash inflows from payables and accrued expenses and lower residual-value-guarantee/deferred-revenue liabilities, partly offset by inventory reductions and higher net income.
- Financial Services borrowings totaled $11.24 billion at contractual principal value, including $4.11 billion of commercial paper and bank loans and $7.11 billion of term notes. The company reported $3.27 billion of unused credit lines, including committed bank facilities; no committed facility borrowings were outstanding at year-end.
- Cash dividends paid were $1.14 billion in 2019. Declared dividends were $3.58 per share, including a $2.30 year-end extra dividend. PACCAR repurchased $110.2 million of shares during 2019; no repurchases occurred in Q4.
Material changes and management commentary
- Worldwide truck deliveries increased 5% to 198,800. U.S. and Canada deliveries rose 11%, while Europe deliveries fell 6%. U.S./Canada heavy-duty share improved to 30.0% from 29.4%; DAF European heavy-duty share declined to 16.2% from 16.6%.
- Truck earnings improved on increased deliveries, pricing and gross margins, partially offset by higher material and labor costs, factory overhead, currency translation, and used-truck/warranty-related costs. Parts results benefited from higher demand and pricing.
- Financial Services earnings were pressured by lower results on returned lease assets and higher expenses, including $12.0 million of initial direct costs expensed on adoption of the new lease standard. Losses on used trucks excluding repossessions rose to $57.5 million from $35.4 million; used trucks held for sale were $391.4 million at year-end.
- Management cited continued investment in product development, manufacturing and aftermarket support. R&D expense was $326.6 million. Investments included connected-vehicle and embedded-software development and testing of battery-electric, hydrogen fuel-cell and hybrid trucks.
Outlook, risks and contingencies
- 2020 outlook: U.S./Canada heavy-duty retail sales estimated at 230,000–260,000 units, versus 308,800 in 2019; European over-16-tonne registrations at 260,000–290,000, versus 320,200; South American heavy-duty sales at 100,000–110,000, versus 105,000. Parts sales were expected to grow 4%–6%; Financial Services average earning assets were expected to remain similar to 2019.
- Planned 2020 capital investments were $625–$675 million and R&D $310–$340 million. Management noted that weaker freight and economic conditions could increase past dues, repossessions and credit losses and reduce new financing volume.
- COVID-19-related supplier work stoppages in China had not caused supply shortages as of February 19, 2020; prolonged or broader disruption could affect production and deliveries. Other stated risks include cyclical truck demand, competition, component supply and commodity costs, used-truck residual values, interest and currency movements, regulation, cybersecurity and access to capital markets.
- DAF faces European Commission-related claims and lawsuits in several jurisdictions, including proposed UK collective actions seeking unspecified damages. PACCAR said it could not reasonably estimate a loss range; an adverse outcome could materially affect results.
- U.K.–EU trade arrangements and the LIBOR transition were identified as uncertainties. Approximately $220 million of PFS retail contracts extending beyond 2021 lacked fallback language; management estimated an unrecovered 10-basis-point benchmark difference could reduce pre-tax income by about $2 million.
- Operating-lease residual values are a significant estimate: a sustained 10% fall in worldwide used-truck values would add an estimated average of about $67 million in annual depreciation. Product warranty liability was $440 million and was identified by the auditor as a critical audit matter. Environmental cleanup matters were not expected by management to significantly affect consolidated cash flow, liquidity or financial condition.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether 2020 truck-market contraction and production schedules align with PACCAR’s stated regional outlook and year-end backlog.
- Used-truck prices, operating-lease residual assumptions, returned-lease results and the Financial Services allowance for credit losses as freight conditions change.
- Progress on the European Commission-related litigation and any subsequent estimate or accrual of potential losses.
- Supplier continuity, particularly COVID-19-related disruption, and progress on U.K.–EU trade arrangements.
- Financial Services funding access, debt maturities and liquidity facilities, alongside the planned investment and dividend commitments.
- Warranty claims and reserve estimates, and the expected impact of adopting the new expected-credit-loss accounting standard in 2020.