PACCAR INC annual report, FY2017

PACCAR Inc. — 2017 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing.

Business context

PACCAR designs and manufactures Kenworth, Peterbilt and DAF commercial trucks; distributes aftermarket parts; and provides truck financing and leasing through PACCAR Financial Services (PFS). In 2017, Truck represented 76% of revenue, Parts 17%, and Financial Services 7%. PFS represented 56% of total assets.

Financial performance and position

Metric20172016
Total revenue$19.46 billion$17.03 billion
Net income$1.675 billion$521.7 million
Diluted EPS$4.75$1.48
Adjusted net income (non-GAAP)$1.502 billion$1.355 billion
Operating cash flow$2.716 billion$2.301 billion
Cash and marketable debt securities$3.732 billion$3.057 billion
Financial Services debt$8.879 billion$8.475 billion
Stockholders’ equity$8.051 billion$6.778 billion
  • Truck revenue increased 16% to $14.775 billion; deliveries rose 13% to 158,900 units. Truck pre-tax income rose 15% to $1.297 billion, while pre-tax return on revenue was unchanged at 8.8%. Truck gross margin declined to 11.5% from 11.8%, reflecting higher material and indirect costs.
  • Parts revenue rose 11% to a record $3.327 billion. Pre-tax income increased 13% to $614.2 million; pre-tax return on revenue improved to 18.5% from 18.1%.
  • PFS revenue increased 7% to $1.269 billion, but pre-tax income fell 14% to $264.0 million. Higher borrowing costs, increased receivable-loss provisions and weaker results on returned lease assets weighed on earnings.
  • Net income includes a $173.4 million one-time net tax benefit from the Tax Act. Excluding it, adjusted net income was $1.502 billion and adjusted diluted EPS was $4.26. The 2016 comparison includes an $833.0 million European Commission (EC) charge; excluding that charge, 2016 adjusted net income was $1.355 billion and adjusted diluted EPS was $3.85.
  • Fourth-quarter 2017 net income was $589.2 million and diluted EPS was $1.67, including the $173.4 million tax benefit; adjusted net income was $415.8 million and adjusted diluted EPS was $1.18.
  • Cash provided by operations increased to $2.716 billion. Investing used $1.965 billion and financing used $394 million. Capital investments were $433.1 million; R&D expense was $264.7 million.
  • Financial Services debt was $8.879 billion at year-end, principally commercial paper, bank loans and term notes. PACCAR reported $3.52 billion of credit-line arrangements, of which $3.307 billion was unused; no borrowing was outstanding under syndicated bank facilities at year-end. Management cited investment-grade ratings of A+/A1.
  • Cash dividends declared were $2.19 per share, including a $1.20 year-end extra dividend. There were no share repurchases in 2017.

Material changes versus prior period

  • Revenue rose 14%, reflecting higher truck deliveries and record Parts sales. Truck deliveries increased in North America, Europe and other markets; North American heavy-duty market share reached a record 30.7%.
  • Reported net income more than tripled, but the comparison is heavily affected by the 2017 tax benefit and the 2016 EC charge. Adjusted net income increased about 11% year over year.
  • PFS earnings weakened despite higher revenue and average earning assets. Used-truck losses excluding repossessions increased to $45.1 million from $16.4 million; the provision for receivable losses rose to $22.3 million from $18.4 million.
  • Total cash and marketable securities increased $675.2 million. Financial Services debt increased approximately $404 million, while stockholders’ equity increased approximately $1.273 billion.
  • The 2017 effective tax rate was 22.9%, versus 53.8% in 2016, when the non-deductible EC charge materially raised the rate.

Outlook, commentary and risks

  • For 2018, management expected U.S. and Canada truck retail sales of 235,000–265,000 units, versus 218,400 in 2017; European registrations for vehicles over 16 tonnes of 290,000–320,000, versus 306,100; and South American heavy-duty sales of 65,000–75,000, versus 68,700.
  • PACCAR Parts sales were expected to grow 5%–8%. Average PFS earning assets were expected to increase 2%–4%. Capital investments were projected at $425–$475 million and R&D at $280–$310 million.
  • Management estimated a 2018 effective tax rate of 23%–25%. The Tax Act calculations were provisional and could change as the law was interpreted and additional information became available.
  • Truck demand is cyclical and sensitive to economic conditions, freight activity, financing availability and competition. Other key risks include commodity and supplier costs or interruptions, foreign-exchange and interest-rate movements, used-truck values and lease residual estimates, credit losses, regulation, warranty or product-liability matters, and cybersecurity or operational disruption.
  • Claims and lawsuits followed the 2016 EC settlement with DAF. PACCAR says it has meritorious defenses, but proceedings could take significant time and an adverse outcome could materially affect results; the filing says a potential-loss range cannot be estimated.
  • A 10% sustained decline in worldwide used-truck values could result in approximately $78.1 million of additional annual depreciation on operating leases. Accounts 30 or more days past due remained 0.5% of the retail loan and lease portfolio at year-end.
  • The company reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Separate underlying operating performance from the $173.4 million Tax Act benefit and the prior-year $833.0 million EC charge; review the company’s non-GAAP reconciliations.
  • Track truck-market demand, delivery volumes, market share, material costs and Truck gross margins against the 2018 outlook.
  • Monitor PFS borrowing costs, returned-lease truck resale values, receivable-loss provisions, past-due accounts and credit performance.
  • Review the final tax accounting for the Tax Act and the stated 23%–25% 2018 effective-tax-rate estimate.
  • Follow EC-related litigation and assess the company’s lease residual-value exposure, purchase and funding commitments, and access to capital markets.