PACCAR Inc. Form 10-Q Summary
Reporting period: First quarter ended March 31, 2019; unaudited. PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and provides truck financing and leasing. Financial amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total sales and revenues | $6,487.6 | $5,654.0 |
| Income before income taxes | $819.4 | $669.4 |
| Net income | $629.0 | $512.1 |
| Diluted earnings per share | $1.81 | $1.45 |
| After-tax return on revenues | 9.7% | 9.1% |
| Cash provided by operating activities | $363.0 | $525.3 |
- Truck, Parts and Other revenue was $6,138.1, up from $5,321.8. Financial Services revenue was $349.5, up from $332.2.
- Truck segment pretax income was $517.0, with a 10.1% pretax return on revenue versus 9.1%. Truck gross margin rose to 12.5% from 11.9%. Parts pretax income was $207.6; its pretax return on revenue increased to 20.7% from 20.4%, while gross margin eased to 27.7% from 27.9%.
- Financial Services pretax income increased to $84.0 from $67.5. Its provision for receivable losses fell to $2.2 from $5.9, reflecting stronger recoveries, particularly in Europe.
- Cash and cash equivalents totaled $2,842.6 at March 31, down from $3,435.9 at year-end; marketable debt securities were $1,081.6. Combined cash and securities declined $532.1 during the quarter.
- Financial Services liabilities included $3,424.8 of commercial paper and bank loans and $6,771.6 of term notes, compared with $3,540.8 and $6,409.7, respectively, at December 31, 2018. These are segment liabilities, not a measure of all company obligations.
- Operating cash flow fell $162.3 year over year, largely due to increases in receivables, including wholesale receivables. Investing activities used $400.7; financing activities used $550.3, including $806.1 in dividends paid. A higher special dividend paid in January drove the increase in dividend cash outflow.
Changes versus the prior-year quarter
- Net revenue increased 15%, net income increased 23%, and diluted EPS rose from $1.45 to $1.81. Truck deliveries increased 16% to 51,500 units, supported by higher deliveries across reported regions.
- Truck revenue grew 17%, primarily from higher deliveries and prices, partly offset by unfavorable currency translation and higher per-truck costs. Parts revenue grew 7%, led by aftermarket demand and pricing.
- Financial Services revenue grew 5%, supported by higher average earning assets and yields; higher borrowing costs and unfavorable currency translation partly offset the benefit.
- Cash from operations declined, while cash used in investing increased, partly reflecting net purchases of marketable securities. Adoption of the new lease standard also moved sales-type lease cash flows from operating to investing activities; management said this reduced reported operating cash flow by $30.0 relative to the prior presentation.
Outlook, commentary and risks
- For 2019, management forecast U.S. and Canadian truck industry retail sales of 295,000–315,000 units; European registrations of trucks over 16 tonnes of 290,000–320,000; and South American heavy-duty registrations of 105,000–115,000.
- PACCAR Parts sales were expected to grow 5%–8% in 2019. Financial Services average earning assets were expected to increase 4%–6%.
- Management forecast 2019 capital investments of $625–$675 and R&D expense of $320–$340. Investments include new truck models, alternative powertrains, driver-assistance and connectivity technologies, and manufacturing and parts-distribution facilities.
- Management described freight tonnage, freight rates and fleet utilization as strong, supporting customer profitability. A deterioration in economic or freight conditions could increase delinquencies, repossessions and credit losses, and reduce new financing business.
- Risks include industry demand, competition, fuel and commodity prices, regulation and tariffs, currency and interest-rate changes, supplier or labor disruption, used-truck values, warranty costs and capital-market access. Management noted that a credit-rating decline or market disruption could make refinancing maturing debt more difficult.
- Pending lawsuits related to the European Commission truck-industry investigation could have a material effect on results if resolved adversely; the company said resolution may take significant time. Other matters include higher expected costs for certain environmental matters, which contributed to Other pretax loss of $8.5 versus income of $4.9 a year earlier; the filing does not provide a clear quantified amount for those expected costs.
- Brexit terms remained uncertain, with the U.K. exit deadline extended to October 31, 2019. About 10% of PACCAR’s worldwide truck production was manufactured in the U.K. in 2018; a “Hard Brexit” could increase component tariffs and affect costs, sales and margins.
Important facts for investors to verify
- Whether truck-market demand, deliveries, pricing and segment margins remain consistent with management’s 2019 outlook.
- Whether operating cash flow improves and whether receivables, Financial Services funding needs and dividend outflows continue to affect liquidity.
- Trends in past-due accounts, credit-loss provisions, repossessions and used-truck residual values; worldwide retail accounts 30 or more days past due were 0.6% at quarter-end, versus 0.4% at December 31.
- Developments in European truck-industry litigation, environmental matters and Brexit-related costs or operating disruptions.