PACCAR Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and provides vehicle financing and leasing.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Consolidated sales and revenues | $4.300 billion | $4.833 billion |
| Net income (loss) | ($594.6 million) | $378.4 million |
| Diluted EPS | ($1.69) | $1.06 |
| Operating cash flow | $795.8 million | $476.2 million |
| Cash and cash equivalents at period end | $1.847 billion | $1.565 billion |
- The reported loss included a $942.6 million (€850 million) European Commission (EC) charge. Excluding it, PACCAR reported non-GAAP adjusted net income of $348.0 million, or $0.99 per diluted share, and adjusted return on revenues of 8.1%, versus 7.8% reported return on revenues in Q1 2015. The charge was not tax deductible.
- Truck, Parts and Other revenue was $4.011 billion, down from $4.548 billion. Financial Services revenue rose to $289.4 million from $284.7 million, while pretax income declined to $80.3 million from $89.0 million.
- Truck revenue fell 13% to $3.271 billion; truck pretax income declined 10% to $304.1 million, with pretax return on revenue improving to 9.3% from 9.0%. Parts revenue fell 4% to $719.5 million; pretax income was $134.6 million, down 3%, and pretax return on revenue was 18.7% versus 18.5%.
- Truck deliveries declined 8% to 35,300 units: U.S. and Canada deliveries fell 24%, while Europe deliveries rose 34%. Parts sales were weaker mainly from lower North American demand. Financial Services’ average earning assets rose 4% to $11.562 billion; lower portfolio yields and currency translation weighed on earnings.
- Operating cash flow was $795.8 million, including a $942.6 million noncash EC charge add-back. Investing activities used $292.2 million and financing activities used $722.9 million; cash decreased $169.1 million during the quarter.
Balance sheet, liquidity and capital
- At March 31, cash and cash equivalents were $1.847 billion and marketable debt securities were $1.466 billion, totaling $3.313 billion, down $151.1 million from year-end 2015.
- Financial Services reported $2.755 billion of commercial paper and bank loans and $5.823 billion of term notes. These are segment liabilities, not a complete measure of consolidated debt.
- PACCAR reported $3.43 billion of credit-line arrangements, of which $3.24 billion was unused. The company said it had no borrowings under the syndicated bank facilities during the quarter and cited investment-grade ratings of A+/A1.
- Cash dividends paid were $576.9 million, including the effect of a higher 2015 special dividend paid in January 2016. PACCAR repurchased 1.12 million shares for $56.3 million in Q1; $107.4 million remained under its $300 million authorization at quarter-end.
Outlook, commentary and risks
- For 2016, management projected U.S. and Canada truck-industry retail sales of 220,000–250,000 units; European registrations for trucks over 16 tonnes of 260,000–290,000; and South American heavy-duty sales of 70,000–80,000.
- PACCAR expected North American Parts sales to increase up to 3% and European aftermarket sales to increase 2%–4%. Financial Services average earning assets were expected to be comparable to 2015 record levels.
- Expected 2016 capital investment was $325–$375 million and R&D spending $240–$260 million. These are forward-looking estimates, not guarantees.
- The EC matter remained unresolved; PACCAR said it would continue evaluating the charge pending final resolution and that DAF Trucks N.V. had sufficient liquidity to fund payment of the recorded amount. Other ordinary-course lawsuits were not expected by management to materially affect the company.
- Management identified risks including weaker truck demand, competition and market share, currency and commodity movements, lower used-truck prices, interest-rate and capital-market disruptions, customer credit deterioration, supplier or labor interruptions, regulation, and warranty costs. Weaker freight conditions could increase delinquencies, repossessions and credit losses.
Most important facts for investors to verify
- Progress and final amount, timing and payment terms of the EC proceeding; the $942.6 million charge is a recorded estimate, not a final resolution.
- The non-GAAP adjusted earnings calculation and its exclusion of the EC charge; reported GAAP results were a net loss of $594.6 million.
- Whether North American truck and parts demand, regional market share and the stated 2016 industry outlook develop as management expected.
- Financial Services credit trends, used-truck residual values, and continued access to funding markets and committed liquidity.