PACCAR Inc. — Q1 2015 Form 10-Q
Business context and period: PACCAR designs and manufactures Kenworth, Peterbilt and DAF commercial trucks, distributes aftermarket parts, and provides customer and dealer financing and leasing. This filing covers the three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Consolidated sales and revenues | $4,832.7 | $4,379.9 |
| Income before income taxes | $561.7 | $406.5 |
| Net income | $378.4 | $273.9 |
| Diluted earnings per share | $1.06 | $0.77 |
| Net cash provided by operating activities | $476.2 | $285.7 |
- Revenue rose approximately 10%; net income increased approximately 38%. Return on revenues was 7.8%, versus 6.3%.
- Truck, Parts and Other revenue was $4,548.0, up from $4,086.2. Truck pre-tax income increased to $339.1 from $212.3; Truck pre-tax return on revenue rose to 9.0% from 6.4%. Truck gross margin increased to 11.3% from 8.9%.
- Parts revenue was $752.7, compared with $726.6. Parts pre-tax income rose to $138.9 from $112.1, and gross margin improved to 27.4% from 25.8%.
- Financial Services revenue declined to $284.7 from $293.7, while pre-tax income increased to $89.0 from $85.5. Lower borrowing rates and higher average earning assets helped earnings; lower yields and foreign currency translation weighed on results.
- Cash and cash equivalents were $1,564.7 at March 31, down from $1,737.6 at year-end. Marketable debt securities were $1,227.2, making cash and securities $2,791.9 combined. Operating cash flow improved, while investing used $332.2 and financing used $239.9. Foreign exchange reduced cash by $77.0.
- Financial Services reported $2,174.6 of commercial paper and bank loans and $6,000.0 of term notes. PACCAR had $3,370.0 of unused credit arrangements. Total stockholders’ equity was $6,731.6, versus $6,753.2 at year-end.
- Dividends declared were $0.22 per share, versus $0.20. Cash dividends paid were $432.4.
Material changes and management commentary
- Truck deliveries increased 20% to 38,300 units, led by a 31% increase in U.S. and Canada deliveries. Truck revenue rose 13%; stronger North American demand, higher deliveries, improved margins and lower SG&A were key drivers.
- Currency translation, primarily the weaker euro, reduced Truck revenue by $231.7 and Parts revenue by $48.7. It also reduced Financial Services revenue by $16.1. Lower costs of North American MX engine components imported from Europe partly offset currency pressure in Truck.
- Parts benefited from stronger aftermarket demand and price realization, especially in North America and Europe. Management cited freight demand, fleet utilization and growth in the North American truck parc.
- Financial Services new loan and lease volume increased 11% to $954.1, including higher operating-lease volume. Its finance share of new PACCAR truck sales fell to 23.8% from 26.8%, reflecting increased competition.
- Other comprehensive income was a loss of $337.5, primarily from $352.9 of foreign currency translation losses. Consequently, comprehensive income was $40.9 despite net income of $378.4; accumulated other comprehensive loss increased to $917.3.
Outlook, risks and contingencies
- Management expected 2015 U.S. and Canada Class 8 retail sales of 260,000–290,000 units, versus 249,400 in 2014; European over-16-tonne registrations of 220,000–250,000, versus 226,900; and South American heavy-duty sales of 90,000–110,000, versus 129,000.
- For 2015, PACCAR Parts sales were expected to grow 6%–10% in North America and deliveries 4%–7% in Europe. Capital investment was forecast at $325–$375 and R&D at $225–$250.
- Financial Services average earning assets were expected to remain near current levels. Management warned that weaker freight or economic conditions could increase past-due accounts, repossessions and credit losses. Worldwide retail loan and lease accounts more than 30 days past due were 0.7%, up from 0.5% at year-end; the filing attributed the increase to Europe, Mexico and Australia.
- Liquidity risks include reliance on capital markets and commercial paper to fund Financial Services; disruption could make replacement borrowing difficult. Management said cash, investments, receivable collections, bank lines and investment-grade ratings (A+/A1) supported liquidity. A ratings downgrade could increase funding costs or impair access.
- DAF and PACCAR were subject to a European Commission antitrust investigation concerning alleged coordination among commercial vehicle manufacturers. The EC indicated it would seek significant fines. PACCAR could not estimate a potential fine and recorded no accrual as of March 31, 2015.
- Other disclosed risks include truck demand and market share, fuel and commodity prices, regulations, used-truck values, supplier and labor disruptions, interest and currency movements, warranty costs, litigation and cybersecurity. Management reported no material change in market risk or risk factors during the quarter.
Investor verification priorities
- Track North American truck demand, factory utilization, delivery volumes and whether the projected 2015 market ranges are achieved.
- Assess the durability of improved Truck and Parts margins, including the effects of pricing, input costs, cost controls and currency movements.
- Monitor Financial Services credit quality, particularly past-due accounts in Europe, Mexico and Australia, and any rise in repossessions or credit-loss provisions.
- Verify funding availability, debt maturities and credit ratings, including replacement plans for bank facilities and the PACCAR Financial Corp. shelf registration expiring in November 2015.
- Follow the European Commission proceeding for any decision, potential fine or change in the currently unaccrued contingency.
- Distinguish operating earnings from currency-driven other comprehensive losses; assess the effects of foreign exchange on reported revenue, equity and cash.