01—Abstract
Summary
Summary of the 10-K filed February 27, 2008. Cited figures are marked; the original filing is the authoritative source.
PACCAR Inc's 2007 results show a company whose truck business softened sharply in North America while its European and aftermarket operations carried the year.
Consolidated net sales and revenues fell about 7.5% to $15.22 billiona from $16.45 billion, and net income declined 18% to $1.23 billion ($3.29 per diluted share) from $1.50 billion ($3.97). Management called 2007 the second-best result in the company's 102-year history. The decline was concentrated in the U.S. and Canada, where Kenworth and Peterbilt deliveries fell 45% to 53,000 units as the Class 8 market dropped to 175,800 units from a 2006 pre-buy peak of 322,500.
Offsetting this, DAF deliveries in Europe rose 8% to 60,100 units, and aftermarket parts revenue grew 18% to $2.29 billionb. Truck segment pretax income fell to $1.36 billion from $1.85 billion, and gross margin compressed to 14.7% from 15.7% on higher material costs for steel, copper, and crude-linked inputs. The Financial Services segment was a bright spot, with pretax income up 15% to a record $284.1 million on revenue of $1.19 billion.
Average earning assets rose to $10.2 billionc, and PACCAR Financial Services financed 29% of new PACCAR trucks delivered. Investors should note, however, that credit quality softened: 30+ day past-due accounts rose to 2.0% from 1.2%, and net charge-offs nearly doubled to $25.8 million. Management guided that U.S. and Canadian retail truck sales would stay flat to slightly up in 2008, at 175,000 to 215,000 units, with European registrations strong at 330,000 to 350,000.
From a capital allocation standpoint, PACCAR generated $2.06 billiond in operating cash flow, paid $736.7 million in dividends, repurchased $360.5 million of stock, and invested a record $425.7 million in capital expenditures. The company also issued a 50% stock dividend in October 2007 and authorized a $300 million buyback.
Liquidity remained strong, with $2.64 billion in cash and marketable securities and $3.04 billion in unused credit lines, and the company carries an AA- credit rating. The main investor watch items for the year ahead are the depth and duration of the North American downturn, European demand durability, and whether Financial Services credit losses continue to rise.
02—Key points
Key Highlights
- Consolidated net sales and revenues declined 7.5% to $15.22 billion, while net income fell 18% to $1.23 billion ($3.29 diluted EPS), still the second-best year in company history.
- U.S. and Canadian truck deliveries plunged 45% to 53,000 units as the Class 8 market contracted to 175,800 from 322,500 units, though PACCAR's market share rose to 26.4%.
- European truck deliveries grew 8% to 60,100 units, and Europe became 46% of truck segment sales, up from 28% in 2006, cushioning the North American slump.
- Aftermarket parts revenue grew 18% to a record $2.29 billion, reflecting a growing truck population and expanded distribution centers.
- Truck gross margin fell to 14.7% from 15.7% due to weaker U.S./Canada volume and higher commodity-driven material costs.
- Financial Services pretax income rose 15% to a record $284.1 million, but 30+ day delinquencies increased to 2.0% from 1.2% and net charge-offs rose to $25.8 million from $13.9 million.
- Strong cash generation ($2.06 billion operating cash flow) funded $736.7 million in dividends, $360.5 million in buybacks, and record $425.7 million in capital spending, with $3.04 billion in unused credit lines.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 27, 2008Financial Statements
| Net Income | $1.23B |
| EPS (Basic) | $2.21 |
| EPS (Diluted) | $2.19 |
| Shares Outstanding (Basic) | 556.65M |
| Shares Outstanding (Diluted) | 559.95M |
05—Questions
Frequently Asked Questions
Why did PACCAR's earnings decline in 2007 despite record Financial Services results?
The decline was driven by the Truck and Other segment, whose pretax income fell to $1.38 billion from $1.85 billion. U.S. and Canadian truck demand dropped sharply after a 2006 pre-buy ahead of emissions changes and a slowdown in housing and automotive markets, and gross margins compressed on higher material costs. Financial Services grew income by 15%, but it is a much smaller contributor to total profit.
How exposed is PACCAR to the U.S. truck market versus Europe?
The company is now more balanced than before. Europe (through DAF) accounted for 46% of truck segment net sales in 2007, versus 28% in 2006, largely because North American volumes fell. Management guided that U.S. and Canadian retail Class 8 sales would stay in a range of 175,000 to 215,000 units in 2008, with European heavy-duty registrations of 330,000 to 350,000 units.
Is PACCAR's Financial Services credit quality a concern for investors?
It warrants monitoring. Net portfolio charge-offs nearly doubled to $25.8 million, and the share of accounts 30 or more days past due rose to 2.0% from 1.2%, mainly from U.S. and Canadian accounts. The portfolio remains small relative to its $10.7 billion asset base, and management expects U.S. and Canadian asset growth to stay limited until the truck market recovers.
How is PACCAR returning capital to shareholders?
In 2007 PACCAR paid $736.7 million in cash dividends, including a year-end extra of $1.00 per share, and repurchased $360.5 million of stock. It also issued a 50% stock dividend in October 2007 and approved a $300 million share repurchase program, of which 1.28 million shares were bought in November 2007 at an average price of $48.28.
What were the main risks cited in the filing?
The filing highlights demand variability in commercial trucks, which can move more than GDP; competition in financial services from banks and finance companies; credit and residual value risk in leasing; currency and interest rate fluctuations; and geopolitical or supply disruptions. Management also noted that rising crude oil, copper, and steel costs pressured truck margins, and that tighter public debt markets in late 2007 did not materially impair its funding.
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