PACCAR Inc. — Q3 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 quarterly report covers the three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless otherwise stated. Amounts are in millions of U.S. dollars, except per-share data and unit figures.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $4,847.2 | $4,928.4 | $14,759.8 | $13,877.9 |
| Income before taxes | $624.5 | $552.4 | $1,838.4 | $1,439.9 |
| Net income | $431.2 | $371.4 | $1,256.8 | $964.5 |
| Diluted EPS | $1.21 | $1.04 | $3.53 | $2.71 |
| Return on revenues | 8.9% | 7.5% | 8.5% | 6.9% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,851.2 | $1,601.6 |
- Q3 revenue declined about 2%; nine-month revenue rose about 6%. Net income increased about 16% in Q3 and 30% year to date.
- Truck, Parts and Other pre-tax income was $525.4 in Q3 and $1,549.1 for nine months, versus $449.8 and $1,148.8. Financial Services pre-tax income was $92.9 and $272.7, versus $96.9 and $274.1.
- Truck gross margin improved to 12.8% in Q3 and 12.3% year to date, from 10.7% and 9.8%. Parts gross margin was 27.5% in both 2015 periods, up from 25.9%.
- Nine-month cash from operations increased $249.6. Investing used $1,401.7, principally reflecting increased purchases of equipment for operating leases and marketable securities; financing provided $24.9, compared with $575.8 used in 2014.
- Cash and marketable debt securities totaled $3,524.9 at September 30, up $515.3 from year-end 2014. Financial Services liabilities included $2,536.4 of commercial paper and bank loans and $6,143.7 of term notes. Truck, Parts and Other reported no separate borrowings in the balance-sheet presentation.
- Financial Services finance and other receivables, net, were $9,307.8, versus $9,042.6 at year-end. Its allowance for credit losses was $118.0, down from $122.0 at January 1; the nine-month provision was $8.7, versus $12.5.
- Dividends paid were $595.7 for nine months. The company repurchased $70.7 of shares during the period and approved an additional $300 million repurchase authorization in September.
Material changes and management commentary
- Higher truck deliveries and improved gross margins in the U.S. and Europe drove earnings gains. Nine-month truck deliveries increased 16% to 119,300 units; Q3 deliveries rose 6% to 39,400.
- Currency translation, mainly from the weaker euro, reduced truck revenue by $737.2 for nine months and parts revenue by $155.2. Lower euro-related costs for North American MX engine components partly offset the truck impact.
- Financial Services revenue declined amid currency translation and lower yields, partly offset by higher average earning assets and lower borrowing rates. Finance share of new PACCAR truck sales fell to 25.0% in Q3 from 26.9%, with management citing increased competition.
- Foreign currency translation losses were $409.4 for nine months in other comprehensive income; accumulated other comprehensive loss increased to $958.2 from $579.8 at year-end.
- The effective tax rate declined to 31.0% in Q3 and 31.6% year to date, from 32.8% and 33.0%, primarily because of increased research tax credits.
Outlook, risks and contingencies
- Management forecast 2015 U.S. and Canada Class 8 retail sales of 275,000–285,000 units and 2016 sales of 240,000–270,000. Europe’s above-16-tonne market was forecast at 255,000–265,000 registrations in 2015 and 250,000–280,000 in 2016. South American heavy-duty sales were forecast at 70,000–80,000 in both years.
- Parts sales outlook: 2015 growth of 5%–7% in North America and deliveries growth of 4%–7% in Europe; 2016 aftermarket sales growth of 4%–7% in both regions. Management cautioned that euro weakness could continue to affect reported European sales.
- 2015 capital investment was forecast at $300–$350 and R&D at $235–$245; 2016 forecasts were $325–$375 and $240–$270, respectively. Financial Services average earning assets were expected to be similar to September 2015 levels in 2015 and increase 2%–5% in 2016.
- Management said strong freight demand, freight rates and fleet utilization supported customer profitability. A deterioration in transportation conditions could increase delinquencies, repossessions and credit losses. Other stated risks include weaker truck demand, competition, commodity and currency volatility, lower used-truck values, regulatory costs, supplier or labor disruptions, liquidity-market stress, warranty costs, litigation and cybersecurity risks.
- The European Commission’s commercial-vehicle competition investigation could result in significant fines involving DAF and PACCAR. The company said it could not estimate the potential fine and had recorded no accrual at September 30, 2015.
- Financial Services depends partly on commercial paper and capital markets; a market disruption could make replacement funding difficult. The company reported $3.29 billion of unused credit lines and said its cash, receivable collections, bank lines and investment-grade ratings supported liquidity. It warned that a ratings decline could impair access to funding.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change in market risk or risk factors during the period.
Investor verification priorities
- Review truck order and delivery trends, regional market forecasts, and the extent to which currency movements continue to offset demand and margin gains.
- Monitor Financial Services delinquencies, modifications, repossessions, credit losses and funding access; worldwide retail accounts 30+ days past due were 0.6%, versus 0.5% at year-end.
- Assess the potential financial exposure and timing of the European Commission investigation; no fine estimate or accrual was provided.
- Verify execution and funding of planned capital spending, R&D and share repurchases, and the effects of foreign exchange on reported results and equity.
- Track Financial Services debt maturities, commercial-paper access and replacement of the PACCAR Financial Corp. shelf registration, which was due to expire in November 2015.