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
| Metric | 2017 | 2016 |
|---|---|---|
| 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.