PACCAR Inc. 10-Q Summary
Business context and reporting period
For the three months ended March 31, 2020, PACCAR reported results across its Truck, Parts and Financial Services businesses, with operations in North America, Europe and other markets. The quarter was significantly affected by the COVID-19 pandemic; worldwide truck and engine production was suspended beginning March 24.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Consolidated net sales and revenues | $5.162 billion | $6.488 billion |
| Income before income taxes | $462.2 million | $819.4 million |
| Net income | $359.4 million | $629.0 million |
| Diluted earnings per share | $1.03 | $1.81 |
| After-tax return on revenues | 7.0% | 9.7% |
| Cash provided by operating activities | $425.9 million | $363.0 million |
- Truck, Parts and Other revenues were $4.778 billion, down from $6.138 billion. Truck revenues fell 26% to $3.758 billion; Parts revenues were nearly flat at $998.6 million.
- Truck pre-tax income fell to $183.1 million from $517.0 million; pre-tax return on truck revenues declined to 4.9% from 10.1%. Truck gross margin was 8.0%, compared with 12.5%.
- Parts pre-tax income increased to $214.7 million from $207.6 million, with a 21.5% pre-tax return on revenues versus 20.7%. PACCAR described this as a record first-quarter Parts pre-tax profit.
- Financial Services revenues rose 10% to $383.7 million, but pre-tax income fell 43% to $48.3 million. The provision for losses on receivables increased to $17.0 million from $2.2 million.
- Cash and marketable debt securities totaled $4.420 billion at March 31, down $917.1 million from year-end. Cash and cash equivalents were $3.323 billion. The decrease primarily reflected $907.4 million of dividends paid.
- Financial Services liabilities included $3.913 billion of commercial paper and bank loans and $7.226 billion of term notes. PACCAR reported $3.49 billion in credit lines, of which $3.23 billion was unused; there were no borrowings under committed bank facilities in the quarter.
- Stockholders’ equity was $9.637 billion, compared with $9.706 billion at year-end. Comprehensive income was $75.6 million versus $632.0 million, including a $347.1 million foreign-currency translation loss in Q1 2020.
Material changes versus the prior comparable period
- Worldwide truck deliveries decreased 25% to 38,400 units. Truck sales declined across all reported regions, with the largest revenue declines in Europe and the U.S. and Canada.
- Lower truck deliveries and margins drove most of the decline in consolidated income. PACCAR cited reduced demand, late-quarter production closures, higher product-support costs and unfavorable currency translation.
- Financial Services recorded increased credit-loss provisions amid weakening economic conditions and a loss provision on a large U.S. fleet. Used-truck losses, excluding repossessions, rose to $26.3 million from $7.0 million.
- Operating cash flow improved year over year despite lower net income, partly because trade receivable collections exceeded sales. Investing cash use was $379.8 million; financing cash use was $833.7 million.
Outlook, commentary and risks
- PACCAR did not provide a 2020 truck-market-size estimate or specific Parts sales-growth guidance because of economic uncertainty. Production had begun at selected European and Australian factories on April 20, with selected North American plants expected to resume in early May; initial production rates were expected to be lower than before the shutdown.
- The company reduced projected 2020 capital investments by $100 million to $525–$575 million and R&D by $45 million to $265–$295 million.
- Management warned that prolonged economic weakness could reduce freight volumes, truck and parts demand, and customers’ ability to pay; it could also increase payment-relief requests, past-due accounts, credit provisions and used-truck losses. Supplier availability and renewed restrictions could also affect production.
- Financial Services modification activity increased; payment relief was generally evaluated case by case for creditworthy customers. Worldwide retail loan and lease accounts 30 or more days past due were 0.8% at quarter-end, compared with 0.6% a year earlier.
- PACCAR temporarily suspended share repurchases because of COVID-19 uncertainty. It paid $907.4 million in dividends in the quarter. In April, its U.S. finance subsidiary issued $400 million of medium-term notes.
- European truck-industry-related claims and lawsuits seek unspecified damages. PACCAR said it could not reasonably estimate any potential loss; an adverse outcome could materially affect results. Management did not expect other proceedings and contingencies to have a material effect.
- The company adopted the new credit-loss standard on January 1, 2020, recording a $4.6 million reduction to retained earnings. Management said other newly adopted standards had no material impact.
Important facts for investors to verify
- How the duration of production interruptions, demand weakness and supplier constraints affected subsequent-quarter deliveries and margins.
- Whether higher finance-receivable provisions, modification requests, past-due balances and used-truck losses continued to increase.
- The assumptions behind residual-value guarantees, used-truck valuations, warranty reserves and expected credit losses.
- The eventual financial exposure, if any, from European truck-industry-related litigation and the timing of resolution.
- Liquidity and refinancing capacity, including changes to committed facilities and debt-market access; PACCAR cited investment-grade ratings of A+/A1.