filings.toolsItem 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW:
PACCAR is a global technology company whose Truck segment includes the design and manufacture of high-quality light-, medium- and heavy-duty commercial trucks. In North America, trucks are sold under the Kenworth and Peterbilt nameplates, in Europe, under the DAF nameplate and in Australia and South America, under the Kenworth and DAF nameplates. The Parts segment includes the distribution of aftermarket parts for trucks and related commercial vehicles. The Company’s Financial Services segment derives its earnings primarily from financing or leasing PACCAR products in North America, Europe, Australia and South America. The Company’s Other business includes the manufacturing and marketing of industrial winches.
Third Quarter Financial Highlights:
Worldwide net sales and revenues were $8.70 billion in 2023 compared to $7.06 billion in 2022, primarily due to higher truck and parts revenues.
Truck revenues were $6.64 billion in 2023 compared to $5.20 billion in 2022, reflecting higher truck deliveries and price realization in all markets.
Parts sales were $1.58 billion in 2023 compared to $1.47 billion in 2022, primarily reflecting higher price realization in the U.S. and Europe.
Financial Services revenues were $464.1 million in 2023 compared to $371.9 million in 2022, primarily due to portfolio growth and higher portfolio yields.
Net income was $1.23 billion ($2.34 per diluted share) in 2023 compared to $769.4 million ($1.47 per diluted share) in 2022 due to higher Truck and Parts operating results.
Capital investments were $174.5 million in 2023 compared to $115.0 million in 2022.
Research and development (R&D) expenses were $103.5 million in 2023 compared to $82.9 million in 2022.
First Nine Months Financial Highlights:
Worldwide net sales and revenues were $26.05 billion in 2023 compared to $20.69 billion in 2022, primarily due to higher truck and parts revenues.
Truck revenues were $19.88 billion in 2023 compared to $15.23 billion in 2022, primarily due to higher truck deliveries and price realization in all markets.
Parts sales were $4.80 billion in 2023 compared to $4.30 billion in 2022 reflecting higher price realization in all markets.
Financial Services revenues were $1.33 billion in 2023 compared to $1.11 billion in 2022, primarily due to portfolio growth and higher portfolio yields.
Net income was $3.18 billion ($6.07 per diluted share) in 2023 compared to $2.09 billion ($3.99 per diluted share) in 2022 due to higher Truck and Parts operating results.
Adjusted net income (non-GAAP), excluding a $446.4 million after-tax non-recurring charge related to civil litigation in Europe in the first quarter of this year, was $3.63 billion ($6.92 per diluted share). See Reconciliation of GAAP to Non-GAAP Financial Measures on page 48.
Capital investments were $486.5 million in 2023 compared to $349.5 million in 2022.
Research and development (R&D) expenses were $302.0 million in 2023 compared to $241.3 million in 2022.
PACCAR has begun construction of a new 240,000 square-foot PACCAR Parts Distribution Center (PDC) to be opened in Massbach, Germany, in 2024. This PDC will improve parts delivery to dealers and customers in the region.
PACCAR, Cummins, Daimler Trucks and EVE Energy are partnering to create state of the art commercial vehicle battery cell production in the United States. The joint venture partners expect growing demand for zero emissions vehicles throughout the decade. The planned battery cell factory will provide cost effective scale and industry leading battery cell technology, which will benefit our commercial vehicle customers. The total investment is expected to be in the range of $2-3 billion, subject to regulatory approval, for
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the 21-gigawatt hour (GWh) factory, of which PACCAR's share is 30%. PACCAR, Cummins and Daimler Truck will each own 30% of the joint venture, which will initially focus on the lithium-iron-phosphate (LFP) battery technology for commercial battery-electric trucks. EVE Energy will serve as the technology partner in the joint venture with 10% ownership and will contribute its industry leading battery cell design and manufacturing expertise.
The PACCAR Financial Services (PFS) group of companies has operations covering four continents and 26 countries. The global breadth of PFS and its rigorous credit application process support a portfolio of loans and leases with total assets of $19.56 billion. PFS issued $2.14 billion in medium-term notes during the first nine months of 2023 to support new business volume and repay maturing debt.
Truck Outlook
Truck industry heavy-duty retail sales in the U.S. and Canada in 2023 are expected to be 295,000 to 315,000 units compared to 283,500 in 2022. Estimates for the U.S. and Canada truck industry retail sales in 2024 are in the range of 260,000 to 300,000 units. In Europe, 2023 truck industry registrations for over 16-tonne vehicles are expected to be 310,000 to 330,000 units compared to 297,500 in 2022. The European truck industry registrations in the above 16-tonne truck market for 2024 are projected to be in a range of 260,000 to 300,000. In South America, heavy-duty truck industry registrations in 2023 are projected to be 105,000 to 115,000 as compared to 137,100 in 2022, and in a similar range in 2024.
The Company has been affected by an industry-wide undersupply of component parts and anticipates the shortages may continue to affect deliveries in 2023.
Parts Outlook
In 2023, PACCAR Parts sales are expected to increase 10-13% compared to 2022 levels reflecting good retail demand. In 2024, PACCAR Parts sales could increase 4-8% from 2023 levels, depending on economic conditions.
Financial Services Outlook
In 2023, average earning assets are expected to increase 8-10% compared to 2022 due to strong new business volume and dealer wholesale financing. If current freight transportation conditions decline due to weaker economic conditions, then past due accounts, truck repossessions and credit losses would likely increase from the current low levels and new business volume would likely decline. In 2024, average earning assets are expected to increase 3-5% compared to 2023.
Capital Investments and R&D Outlook
Capital investments in 2023 are expected to be $650 to $675 million and R&D is expected to be $410 to $420 million. In 2024, capital investments are projected to be $675 to $725 million and R&D is expected to be $470 to $520 million. The Company is increasing its investment in fuel efficient diesel and electric powertrain technologies, autonomous systems, connected vehicle services, and next-generation manufacturing and parts and distribution capabilities.
See the Forward-Looking Statements section of Management’s Discussion and Analysis for factors that may affect these outlooks.
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RESULTS OF OPERATIONS:
The Company’s results of operations for the three and nine months ended September 30, 2023 and 2022 are presented below.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| ($ in millions, except per share amounts) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net sales and revenues: | ||||||||||||||||
| Truck | $ | 6,636.4 | $ | 5,198.2 | $ | 19,877.7 | $ | 15,231.7 | ||||||||
| Parts | 1,582.2 | 1,471.5 | 4,804.1 | 4,295.1 | ||||||||||||
| Other | 13.7 | 17.3 | 41.9 | 52.8 | ||||||||||||
| Truck, Parts and Other | 8,232.3 | 6,687.0 | 24,723.7 | 19,579.6 | ||||||||||||
| Financial Services | 464.1 | 371.9 | 1,327.1 | 1,110.6 | ||||||||||||
| $ | 8,696.4 | $ | 7,058.9 | $ | 26,050.8 | $ | 20,690.2 | |||||||||
| Income before income taxes: | ||||||||||||||||
| Truck | $ | 960.9 | $ | 430.5 | $ | 2,803.5 | $ | 1,129.3 | ||||||||
| Parts | 412.3 | 373.6 | 1,270.2 | 1,067.1 | ||||||||||||
| Other* | 1.6 | 8.0 | (616.6 | ) | 14.9 | |||||||||||
| Truck, Parts and Other | 1,374.8 | 812.1 | 3,457.1 | 2,211.3 | ||||||||||||
| Financial Services | 133.8 | 146.2 | 427.3 | 437.6 | ||||||||||||
| Investment income | 80.8 | 21.4 | 192.5 | 24.3 | ||||||||||||
| Income taxes | (360.9 | ) | (210.3 | ) | (893.4 | ) | (582.9 | ) | ||||||||
| Net income | $ | 1,228.5 | $ | 769.4 | $ | 3,183.5 | $ | 2,090.3 | ||||||||
| Diluted earnings per share | $ | 2.34 | $ | 1.47 | $ | 6.07 | $ | 3.99 | ||||||||
| After-tax return on revenues | 14.1 | % | 10.9 | % | 12.2 | % | 10.1 | % | ||||||||
| After-tax adjusted return on revenues (non-GAAP)** | 13.9 | % |
- In 2023, Other includes a $600.0 million non-recurring charge related to civil litigation in Europe (EC-related claims) in the first quarter 2023.
** See Reconciliation of GAAP to Non-GAAP Financial Measures for 2023 on page 48.
The following provides an analysis of the results of operations for the Company’s three reportable segments - Truck, Parts and Financial Services. Where possible, the Company has quantified the impact of factors identified in the following discussion and analysis. In cases where it is not possible to quantify the impact of factors, the Company lists them in estimated order of importance. Factors for which the Company is unable to specifically quantify the impact include market demand, fuel prices, freight tonnage and economic conditions affecting the Company’s results of operations.
2023 Compared to 2022:
Truck
The Company’s Truck segment accounted for 76% of revenues in the third quarter and first nine months of 2023, respectively, compared to 74% in the third quarter and first nine months of 2022.
The Company’s new truck deliveries are summarized below:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30 | September 30 | ||||||||||||||||||||||
| 2023 | 2022 | % CHANGE | 2023 | 2022 | % CHANGE | ||||||||||||||||||
| U.S. and Canada | 27,500 | 24,400 | 13 | 81,000 | 69,500 | 17 | |||||||||||||||||
| Europe | 14,500 | 13,300 | 9 | 48,300 | 44,800 | 8 | |||||||||||||||||
| Mexico, South America, Australia and other | 8,100 | 6,700 | 21 | 23,800 | 20,000 | 19 | |||||||||||||||||
| Total units | 50,100 | 44,400 | 13 | 153,100 | 134,300 | 14 |
The increase in new truck deliveries worldwide in the third quarter and first nine months of 2023 compared to the same period of 2022 was driven by higher build rates and increased demand in all major markets. The industry-wide undersupply of component parts continues to impact deliveries.
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Market share data discussed below is provided by third-party sources and is measured by either retail sales or registrations for the Company’s dealer network as a percentage of total registrations or retail sales depending on the geographic market. In the U.S. and Canada, market share is based on retail sales. In Europe, market share is based primarily on registrations.
In the first nine months of 2023, industry retail sales in the heavy-duty market in the U.S. and Canada were 225,200 units compared to 201,000 units in the same period of 2022. The Company’s heavy-duty truck retail market share was 28.4% in the first nine months of 2023 compared to 29.4% in the first nine months of 2022. The medium-duty market was 78,400 units in the first nine months of 2023 compared to 64,200 units in the same period of 2022. The Company’s medium-duty market share was 13.5% in the first nine months of 2023 compared to 10.0% in the first nine months of 2022.
The over 16‑tonne truck market in Europe in the first nine months of 2023 was 263,100 units compared to 217,400 units in the first nine months of 2022. DAF over 16‑tonne market share was a 15.9% in the first nine months of 2023 compared to 17.4% in the same period of 2022. The 6 to 16‑tonne market in the first nine months of 2023 was 35,800 units compared to 28,700 units in the same period of 2022. DAF market share in the 6 to 16-tonne market in the first nine months of 2023 was 9.0% compared to 10.1% in the same period of 2022.
The Company’s worldwide truck net sales and revenues are summarized below:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30 | September 30 | ||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | % CHANGE | 2023 | 2022 | % CHANGE | |||||||||||||||||
| Truck net sales and revenues: | |||||||||||||||||||||||
| U.S. and Canada | $ | 4,006.8 | $ | 3,200.8 | 25 | $ | 11,715.0 | $ | 8,948.4 | 31 | |||||||||||||
| Europe | 1,558.8 | 1,239.0 | 26 | 5,155.7 | 4,080.0 | 26 | |||||||||||||||||
| Mexico, South America, Australia and other | 1,070.8 | 758.4 | 41 | 3,007.0 | 2,203.3 | 36 | |||||||||||||||||
| $ | 6,636.4 | $ | 5,198.2 | 28 | $ | 19,877.7 | $ | 15,231.7 | 31 | ||||||||||||||
| Truck income before income taxes | $ | 960.9 | $ | 430.5 | 123 | $ | 2,803.5 | $ | 1,129.3 | 148 | |||||||||||||
| Pre-tax return on revenues | 14.5 | % | 8.3 | % | 14.1 | % | 7.4 | % |
The Company’s worldwide truck net sales and revenues in the third quarter increased to $6.64 billion in 2023 from $5.20 billion in 2022 primarily due to higher truck unit deliveries, improved price realization in all markets and favorable currency translation effects, primarily the euro. Revenues for the first nine months increased to $19.88 billion in 2023 from $15.23 billion in 2022 primarily due to higher truck unit deliveries and improved price realization in all markets.
In the third quarter and first nine months of 2023, Truck segment income before taxes and pretax return on revenues increased to reflect the impact of higher truck unit deliveries and improved margins.
The major factors for the Truck segment changes in net sales and revenues, cost of sales and revenues and gross margin between the three months ended September 30, 2023 and 2022 are as follows:
| NET | COST OF | |||||||||||
| SALES AND | SALES AND | GROSS | ||||||||||
| ($ in millions) | REVENUES | REVENUES | MARGIN | |||||||||
| Three Months Ended September 30, 2022 | $ | 5,198.2 | $ | 4,646.2 | $ | 552.0 | ||||||
| Increase (decrease) | ||||||||||||
| Truck sales volume | 740.2 | 554.8 | 185.4 | |||||||||
| Average truck sales prices | 585.9 | 585.9 | ||||||||||
| Average per truck material, labor and other direct costs | 140.5 | (140.5 | ) | |||||||||
| Factory overhead and other indirect costs | 61.5 | (61.5 | ) | |||||||||
| Extended warranties, operating leases and other | 5.9 | 19.7 | (13.8 | ) | ||||||||
| Currency translation | 106.2 | 98.8 | 7.4 | |||||||||
| Total increase | 1,438.2 | 875.3 | 562.9 | |||||||||
| Three Months Ended September 30, 2023 | $ | 6,636.4 | $ | 5,521.5 | $ | 1,114.9 |
Truck sales volume reflects higher truck deliveries in all major markets.
Average truck sales prices increased sales by $585.9 million, primarily due to higher price realization worldwide reflecting the positive effect of new truck models as well as moderating inflationary cost increases.
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Average cost per truck increased cost of sales by $140.5 million, primarily due to moderately higher raw material, labor and product support costs, mainly warranty expense.
Factory overhead and other indirect costs increased $61.5 million, primarily due to higher labor costs, maintenance and depreciation.
Extended warranties, operating leases and other increased revenues by $5.9 million and increased cost of sales by $19.7 million. The increase in cost of sales was primarily due to higher warranty labor and material costs.
The currency translation effect on sales and cost of sales primarily reflects an increase in the value of the euro relative to the U.S. dollar.
Truck gross margin was 16.8% in the third quarter of 2023 compared to 10.6% in the same period of 2022 due to the factors noted above.
The major factors for the Truck segment changes in net sales and revenues, cost of sales and revenues and gross margin between the nine months ended September 30, 2023 and 2022 are as follows:
| NET | COST OF | |||||||||||
| SALES AND | SALES AND | GROSS | ||||||||||
| ($ in millions) | REVENUES | REVENUES | MARGIN | |||||||||
| Nine Months Ended September 30, 2022 | $ | 15,231.7 | $ | 13,730.7 | $ | 1,501.0 | ||||||
| Increase (decrease) | ||||||||||||
| Truck sales volume | 2,447.7 | 1,914.3 | 533.4 | |||||||||
| Average truck sales prices | 2,216.9 | 2,216.9 | ||||||||||
| Average per truck material, labor and other direct costs | 753.8 | (753.8 | ) | |||||||||
| Factory overhead and other indirect costs | 160.3 | (160.3 | ) | |||||||||
| Extended warranties, operating leases and other | 20.3 | 103.1 | (82.8 | ) | ||||||||
| Currency translation | (38.9 | ) | (31.8 | ) | (7.1 | ) | ||||||
| Total increase | 4,646.0 | 2,899.7 | 1,746.3 | |||||||||
| Nine Months Ended September 30, 2023 | $ | 19,877.7 | $ | 16,630.4 | $ | 3,247.3 |
Truck sales volume reflects higher truck deliveries in all major markets.
Average truck sales prices increased sales by $2.22 billion, primarily due to higher price realization worldwide reflecting the positive effect of new truck models as well as inflationary cost increases.
Average cost per truck increased cost of sales by $753.8 million, primarily reflecting higher raw material, labor, and product support costs, mainly warranty expense.
Factory overhead and other indirect costs increased $160.3 million, primarily due to higher labor costs, maintenance, depreciation and utilities.
Extended warranties, operating leases and other increased revenues by $20.3 million and increased cost of sales by $103.1 million. The increase in cost of sales was primarily due to higher warranty labor and material costs.
The currency translation effect on sales and cost of sales mainly reflects a decline in the value of the Canadian dollar and Australian dollar relative to the U.S. dollar, partially offset by the increase in the value of the euro.
Truck gross margin was 16.3% in the first nine months of 2023 compared to 9.9% in the same period of 2022 due to the factors noted above.
Truck SG&A expense increased in the third quarter of 2023 to $71.5 million from $60.7 million in 2022, and for the first nine months of 2023, Truck SG&A increased to $206.6 million from $201.6 million in 2022. The increase in both periods was primarily due to higher salaries and related expenses and higher travel costs, partially offset by lower professional fees.
As a percentage of sales, Truck SG&A decreased to 1.1% and 1.0% in the third quarter and first nine months of 2023, respectively,
compared to 1.2% and 1.3% in the third quarter and first nine months of 2022, respectively.
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Parts
The Company’s Parts segment accounted for 19% of revenues in the third quarter and first nine months of 2023, respectively, compared to 21% in the third quarter and first nine months of 2022.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30 | September 30 | ||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | % CHANGE | 2023 | 2022 | % CHANGE | |||||||||||||||||
| Parts net sales and revenues: | |||||||||||||||||||||||
| U.S. and Canada | $ | 1,099.8 | $ | 1,065.2 | 3 | $ | 3,348.2 | $ | 3,071.5 | 9 | |||||||||||||
| Europe | 325.1 | 263.3 | 23 | 1,001.5 | 832.5 | 20 | |||||||||||||||||
| Mexico, South America, Australia and other | 157.3 | 143.0 | 10 | 454.4 | 391.1 | 16 | |||||||||||||||||
| $ | 1,582.2 | $ | 1,471.5 | 8 | $ | 4,804.1 | $ | 4,295.1 | 12 | ||||||||||||||
| Parts income before income taxes | $ | 412.3 | $ | 373.6 | 10 | $ | 1,270.2 | $ | 1,067.1 | 19 | |||||||||||||
| Pre-tax return on revenues | 26.1 | % | 25.4 | % | 26.4 | % | 24.8 | % |
The Company’s worldwide parts net sales and revenues for the third quarter increased to $1.58 billion in 2023 from $1.47 billion in 2022 primarily due to higher price realization in all markets and favorable currency translation effects, primarily the euro. For the first nine months, worldwide parts net sales and revenues increased to $4.80 billion in 2023 from $4.30 billion in 2022 primarily due to higher price realization in all markets.
For the third quarter and first nine months of 2023, the increase in Parts segment income before income taxes and pre-tax return on revenues was primarily due to higher price realization.
The major factors for the changes in Parts segment net sales and revenues, cost of sales and revenues and gross margin between the three months ended September 30, 2023 and 2022 are as follows:
| NET | COST OF | |||||||||||
| SALES AND | SALES AND | GROSS | ||||||||||
| ($ in millions) | REVENUES | REVENUES | MARGIN | |||||||||
| Three Months Ended September 30, 2022 | $ | 1,471.5 | $ | 1,023.5 | $ | 448.0 | ||||||
| (Decrease) increase | ||||||||||||
| Aftermarket parts volume | (35.3 | ) | (22.8 | ) | (12.5 | ) | ||||||
| Average aftermarket parts sales prices | 123.6 | 123.6 | ||||||||||
| Average aftermarket parts direct costs | 59.5 | (59.5 | ) | |||||||||
| Warehouse and other indirect costs | 10.6 | (10.6 | ) | |||||||||
| Currency translation | 22.4 | 12.3 | 10.1 | |||||||||
| Total increase | 110.7 | 59.6 | 51.1 | |||||||||
| Three Months Ended September 30, 2023 | $ | 1,582.2 | $ | 1,083.1 | $ | 499.1 |
Aftermarket parts sales volume decreased by $35.3 million and related cost of sales decreased by $22.8 million primarily reflecting lower sales volume in the U.S. and Europe.
Average aftermarket parts sales prices increased sales by $123.6 million primarily due to higher price realization in the U.S. and Europe.
Average aftermarket parts direct costs increased $59.5 million due to higher material and freight costs, primarily in the U.S. and Europe.
Warehouse and other indirect costs increased $10.6 million primarily due to higher salaries and related expenses and higher shipping costs.
The currency translation effect on sales and cost of sales primarily reflects an increase in the value of the euro relative to the U.S. dollar.
Parts gross margins in the third quarter of 2023 increased to 31.5% from 30.4% in the third quarter of 2022 due to the factors noted above.
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The major factors for the changes in Parts segment net sales and revenues, cost of sales and revenues and gross margin between the nine months ended September 30, 2023 and 2022 are as follows:
| NET | COST OF | |||||||||||
| SALES AND | SALES AND | GROSS | ||||||||||
| ($ in millions) | REVENUES | REVENUES | MARGIN | |||||||||
| Nine Months Ended September 30, 2022 | $ | 4,295.1 | $ | 2,997.5 | $ | 1,297.6 | ||||||
| (Decrease) increase | ||||||||||||
| Aftermarket parts volume | (7.0 | ) | (4.1 | ) | (2.9 | ) | ||||||
| Average aftermarket parts sales prices | 522.4 | 522.4 | ||||||||||
| Average aftermarket parts direct costs | 250.1 | (250.1 | ) | |||||||||
| Warehouse and other indirect costs | 37.0 | (37.0 | ) | |||||||||
| Currency translation | (6.4 | ) | (2.1 | ) | (4.3 | ) | ||||||
| Total increase | 509.0 | 280.9 | 228.1 | |||||||||
| Nine Months Ended September 30, 2023 | $ | 4,804.1 | $ | 3,278.4 | $ | 1,525.7 |
Aftermarket parts sales volume decreased by $7.0 million and related cost of sales decreased by $4.1 million primarily reflecting lower sales volume in the U.S., partially offset by higher sales volume in Australia, Brasil and Europe.
Average aftermarket parts sales prices increased sales by $522.4 million primarily due to higher price realization in the U.S. and Europe.
Average aftermarket parts direct costs increased $250.1 million due to higher material and freight costs, primarily in the U.S. and Europe.
Warehouse and other indirect costs increased $37.0 million primarily due to higher salaries and related expenses and higher shipping costs.
The currency translation effect on sales and cost of sales primarily reflects a decrease in the value of the Australian dollar and the Canadian dollar relative to the U.S. dollar, partially offset by an increase in the value of the euro.
Parts gross margins in the first nine months of 2023 increased to 31.8% from 30.2% in the first nine months of 2022 due to the factors noted above.
Parts SG&A expense increased in the third quarter of 2023 to $61.4 million from $52.9 million in 2022, and for the first nine months, Parts SG&A increased to $178.6 million in 2023 from $162.4 million in 2022. The increase in both periods was primarily due to higher salaries and related expenses.
As a percentage of sales, Parts SG&A was 3.9% and 3.7% in the third quarter and first nine months of 2023, respectively, compared to 3.6% and 3.8% in the third quarter and first nine months of 2022.
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Financial Services
The Company’s Financial Services segment accounted for 5% of revenues in the third quarter and first nine months of 2023 and 2022.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30 | September 30 | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | % CHANGE | 2023 | 2022 | % CHANGE | ||||||||||||||||||
| New loan and lease volume: | ||||||||||||||||||||||||
| U.S. and Canada | $ | 1,032.7 | $ | 758.0 | 36 | $ | 2,699.6 | $ | 2,412.0 | 12 | ||||||||||||||
| Europe | 368.6 | 345.7 | 7 | 1,136.9 | 1,043.7 | 9 | ||||||||||||||||||
| Mexico, Australia, Brasil and other | 500.3 | 333.4 | 50 | 1,407.6 | 964.4 | 46 | ||||||||||||||||||
| $ | 1,901.6 | $ | 1,437.1 | 32 | $ | 5,244.1 | $ | 4,420.1 | 19 | |||||||||||||||
| New loan and lease volume by product: | ||||||||||||||||||||||||
| Loans and finance leases | $ | 1,737.3 | $ | 1,190.8 | 46 | $ | 4,768.6 | $ | 3,639.4 | 31 | ||||||||||||||
| Equipment on operating lease | 164.3 | 246.3 | (33 | ) | 475.5 | 780.7 | (39 | ) | ||||||||||||||||
| $ | 1,901.6 | $ | 1,437.1 | 32 | $ | 5,244.1 | $ | 4,420.1 | 19 | |||||||||||||||
| New loan and lease unit volume: | ||||||||||||||||||||||||
| Loans and finance leases | 12,120 | 10,000 | 21 | 34,670 | 29,730 | 17 | ||||||||||||||||||
| Equipment on operating lease | 1,690 | 2,800 | (40 | ) | 5,220 | 8,760 | (40 | ) | ||||||||||||||||
| 13,810 | 12,800 | 8 | 39,890 | 38,490 | 4 | |||||||||||||||||||
| Average earning assets: | ||||||||||||||||||||||||
| U.S. and Canada | $ | 9,644.9 | $ | 8,608.7 | 12 | $ | 9,268.7 | $ | 8,622.6 | 7 | ||||||||||||||
| Europe | 4,445.6 | 3,628.2 | 23 | 4,432.2 | 3,773.0 | 17 | ||||||||||||||||||
| Mexico, Australia, Brasil and other | 3,803.2 | 2,579.6 | 47 | 3,447.8 | 2,475.0 | 39 | ||||||||||||||||||
| $ | 17,893.7 | $ | 14,816.5 | 21 | $ | 17,148.7 | $ | 14,870.6 | 15 | |||||||||||||||
| Average earning assets by product: | ||||||||||||||||||||||||
| Loans and finance leases | $ | 12,250.9 | $ | 10,228.8 | 20 | $ | 11,613.5 | $ | 10,194.7 | 14 | ||||||||||||||
| Dealer wholesale financing | 3,148.6 | 1,870.7 | 68 | 2,933.6 | 1,855.9 | 58 | ||||||||||||||||||
| Equipment on lease and other | 2,494.2 | 2,717.0 | (8 | ) | 2,601.6 | 2,820.0 | (8 | ) | ||||||||||||||||
| $ | 17,893.7 | $ | 14,816.5 | 21 | $ | 17,148.7 | $ | 14,870.6 | 15 | |||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| U.S. and Canada | $ | 190.6 | $ | 170.5 | 12 | $ | 559.9 | $ | 507.4 | 10 | ||||||||||||||
| Europe | 138.2 | 118.1 | 17 | 413.2 | 372.5 | 11 | ||||||||||||||||||
| Mexico, Australia, Brasil and other | 135.3 | 83.3 | 62 | 354.0 | 230.7 | 53 | ||||||||||||||||||
| $ | 464.1 | $ | 371.9 | 25 | $ | 1,327.1 | $ | 1,110.6 | 19 | |||||||||||||||
| Revenues by product: | ||||||||||||||||||||||||
| Loans and finance leases | $ | 205.0 | $ | 135.2 | 52 | $ | 547.0 | $ | 382.4 | 43 | ||||||||||||||
| Dealer wholesale financing | 64.8 | 25.2 | 157 | 169.5 | 61.2 | 177 | ||||||||||||||||||
| Equipment on lease and other | 194.3 | 211.5 | (8 | ) | 610.6 | 667.0 | (8 | ) | ||||||||||||||||
| $ | 464.1 | $ | 371.9 | 25 | $ | 1,327.1 | $ | 1,110.6 | 19 | |||||||||||||||
| Income before income taxes | $ | 133.8 | $ | 146.2 | (8 | ) | $ | 427.3 | $ | 437.6 | (2 | ) |
New loan and lease unit volume was $1.90 billion in the third quarter of 2023 compared to $1.44 billion in the third quarter of 2022, and for the first nine months was $5.24 billion in 2023 and $4.42 billion in 2022. The increase in new loan and finance lease volume reflected higher retail sales of PACCAR trucks and a higher amount financed per truck in all major markets. The decrease in equipment on operating leases new business volume reflected lower market demand, partially offset by a higher amount financed per truck in all major markets.
In the third quarter of 2023, PFS finance market share of new PACCAR truck sales was 23.7% compared to 24.4% in the third quarter of 2022. In the first nine months of 2023, PFS finance market share of new PACCAR truck sales was 23.4% compared to 25.7% in the first nine months of 2022.
In the third quarter of 2023, PFS revenues increased to $464.1 million from $371.9 million in 2022. In the first nine months of 2023, PFS revenues increased to $1.33 billion from $1.11 billion in 2022. The increase for both periods were primarily due to higher interest income driven by higher portfolio yields and portfolio growth. The effects of currency translation increased PFS revenues by $21.9 million and $24.0 million for the third quarter and first nine months of 2023, respectively, primarily due to a stronger Mexican peso and euro relative to the U.S. dollar.
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PFS income before income taxes decreased to $133.8 million in the third quarter of 2023 from $146.2 million in the third quarter of 2022. In the first nine months of 2023, PFS income before income taxes decreased to $427.3 million from $437.6 million in 2022. The decrease in both periods was primarily due to lower operating lease margins, reflecting lower results on returned lease assets, partially offset by higher finance margins. The effects of currency translation increased PFS income before income taxes by $7.5 million and $10.2 million for the third quarter and first nine months of 2023, respectively, primarily due to a stronger Mexican peso relative to the U.S. dollar.
Included in Financial Services “Other assets” on the Company’s Consolidated Balance Sheets are used trucks held for sale, net of impairments, of $288.1 million at September 30, 2023 and $141.7 million at December 31, 2022. These trucks are primarily units returned from matured operating leases in the ordinary course of business, and also include trucks acquired from repossessions or through acquisitions of used trucks in trades related to new truck sales and trucks returned from residual value guarantees (RVGs).
The Company recognized gains on used trucks, excluding repossessions, of $4.3 million in the third quarter of 2023 compared to gains of $34.8 million in the third quarter of 2022, including $3.2 million of losses on multiple unit transactions in the third quarter of 2023 compared to $.1 million in the third quarter of 2022. Used truck losses related to repossessions, which are recognized as credit losses, were not significant for either the third quarter of 2023 or 2022.
The Company recognized gains on used trucks, excluding repossessions, of $51.2 million in the first nine months of 2023 compared to gains of $104.7 million in the first nine months of 2022, including losses on multiple unit transactions of $4.2 million in the first nine months of 2023 compared to $.2 million in the first nine months of 2022. Used truck losses related to repossessions, which are recognized as credit losses, were not significant for the first nine months of 2023 or 2022.
The major factors for the changes in interest and fees, interest and other borrowing expenses and finance margin for the three months ended September 30, 2023 and 2022 are outlined below:
| ($ in millions) | INTEREST AND FEES | INTEREST AND OTHER BORROWING EXPENSES | FINANCE MARGIN | |||||||||
| Three Months Ended September 30, 2022 | $ | 160.4 | $ | 55.8 | $ | 104.6 | ||||||
| Increase (decrease) | ||||||||||||
| Average finance receivables | 52.5 | 52.5 | ||||||||||
| Average debt balances | 22.7 | (22.7 | ) | |||||||||
| Yields | 46.6 | 46.6 | ||||||||||
| Borrowing rates | 55.2 | (55.2 | ) | |||||||||
| Currency translation and other | 10.3 | 4.8 | 5.5 | |||||||||
| Total increase | 109.4 | 82.7 | 26.7 | |||||||||
| Three Months Ended September 30, 2023 | $ | 269.8 | $ | 138.5 | $ | 131.3 |
Average finance receivables increased $3.07 billion (excluding foreign exchange effects) in the third quarter of 2023 primarily due to higher average loan, finance lease and dealer wholesale balances.
Average debt balances increased $2.14 billion (excluding foreign exchange effects) in the third quarter of 2023, reflecting higher funding requirements for the portfolio, which includes loans, finance leases, dealer wholesale and equipment on operating lease.
Higher portfolio yields (7.0% in 2023 compared to 5.3% in 2022) increased interest and fees by $46.6 million. The higher portfolio yields were primarily due to higher market rates in all markets.
Higher borrowing rates (4.2% in 2023 compared to 2.1% in 2022) increased interest and other borrowing expenses by $55.2 million and were primarily due to higher debt market rates in all markets.
The currency translation effects reflect an increase in the value of foreign currencies relative to the U.S. dollar, primarily the Mexican peso and euro.
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The major factors for the changes in interest and fees, interest and other borrowing expenses and finance margin for the nine months ended September 30, 2023 and 2022 are outlined below:
| ($ in millions) | INTEREST AND FEES | INTEREST AND OTHER BORROWING EXPENSES | FINANCE MARGIN | |||||||||
| Nine Months Ended September 30, 2022 | $ | 443.6 | $ | 142.0 | $ | 301.6 | ||||||
| Increase (decrease) | ||||||||||||
| Average finance receivables | 122.9 | 122.9 | ||||||||||
| Average debt balances | 48.0 | (48.0 | ) | |||||||||
| Yields | 139.3 | 139.3 | ||||||||||
| Borrowing rates | 153.9 | (153.9 | ) | |||||||||
| Currency translation and other | 10.7 | 3.9 | 6.8 | |||||||||
| Total increase | 272.9 | 205.8 | 67.1 | |||||||||
| Nine Months Ended September 30, 2023 | $ | 716.5 | $ | 347.8 | $ | 368.7 |
Average finance receivables increased $2.53 billion (excluding foreign exchange effects) in the first nine months of 2023 primarily due to higher average loan, finance lease and dealer wholesale balances.
Average debt balances increased $1.68 billion (excluding foreign exchange effects) in the first nine months of 2023, reflecting higher funding requirements for the portfolio, which includes loans, finance leases, dealer wholesale and equipment on operating lease.
Higher portfolio yields (6.6% in 2023 compared to 4.9% in 2022) increased interest and fees by $139.3 million. The higher portfolio yields were primarily due to higher market rates in all markets.
Higher borrowing rates (3.7% in 2023 compared to 1.8% in 2022) were primarily due to higher debt market rates in all markets.
The currency translation effects reflect an increase in the value of foreign currencies relative to the U.S. dollar, primarily the Mexican peso.
The following table summarizes operating lease, rental and other revenues and depreciation and other expenses:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| ($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Operating lease and rental revenues | $ | 184.1 | $ | 197.3 | $ | 574.9 | $ | 610.4 | ||||||||
| Used truck sales | 3.1 | 8.9 | 15.5 | 42.3 | ||||||||||||
| Insurance, franchise and other revenues | 7.1 | 5.3 | 20.2 | 14.3 | ||||||||||||
| Operating lease, rental and other revenues | $ | 194.3 | $ | 211.5 | $ | 610.6 | $ | 667.0 | ||||||||
| Depreciation of operating lease equipment | $ | 122.2 | $ | 122.7 | $ | 363.0 | $ | 359.2 | ||||||||
| Vehicle operating expenses | 20.0 | 4.6 | 44.2 | 24.0 | ||||||||||||
| Cost of used truck sales | 3.2 | 9.3 | 16.1 | 41.2 | ||||||||||||
| Insurance, franchise and other expenses | 1.5 | .8 | 3.7 | 1.9 | ||||||||||||
| Depreciation and other expenses | $ | 146.9 | $ | 137.4 | $ | 427.0 | $ | 426.3 |
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The major factors for the changes in operating lease, rental and other revenues, depreciation and other expenses and lease margin between the three months ended September 30, 2023 and 2022 are outlined below:
| ($ in millions) | OPERATING LEASE, RENTAL AND OTHER REVENUES | DEPRECIATION AND OTHER EXPENSES | LEASE MARGIN | |||||||||
| Three Months Ended September 30, 2022 | $ | 211.5 | $ | 137.4 | $ | 74.1 | ||||||
| (Decrease) increase | ||||||||||||
| Used truck sales | (6.0 | ) | (6.2 | ) | .2 | |||||||
| Results on returned lease assets | 32.4 | (32.4 | ) | |||||||||
| Average operating lease assets | (37.6 | ) | (31.1 | ) | (6.5 | ) | ||||||
| Revenue and cost per asset | 13.4 | 6.1 | 7.3 | |||||||||
| Currency translation and other | 13.0 | 8.3 | 4.7 | |||||||||
| Total (decrease) increase | (17.2 | ) | 9.5 | (26.7 | ) | |||||||
| Three Months Ended September 30, 2023 | $ | 194.3 | $ | 146.9 | $ | 47.4 |
Lower sales volume and lower market prices of used trucks on trade, primarily in Europe, decreased revenues by $6.0 million and related depreciation and other expenses by $6.2 million.
Results on returned lease assets increased depreciation and other expenses by $32.4 million, primarily due to lower gains on sales of returned units as a result of lower used truck market values.
Average operating lease assets decreased $313.0 million (excluding foreign exchange effects), which decreased revenues by $37.6 million and related depreciation and other expenses by $31.1 million.
Revenue per asset increased $13.4 million primarily due to higher lease rates, reflecting higher average truck values financed and higher market rates. Cost per asset increased $6.1 million due to higher depreciation and operating expenses.
The currency translation effects reflect an increase in the value of foreign currencies relative to the U.S. dollar, primarily the Mexican peso and the euro.
The major factors for the changes in operating lease, rental and other revenues, depreciation and other expenses and lease margin between the nine months ended September 30, 2023 and 2022 are outlined below:
| ($ in millions) | OPERATING LEASE, RENTAL AND OTHER REVENUES | DEPRECIATION AND OTHER EXPENSES | LEASE MARGIN | |||||||||
| Nine Months Ended September 30, 2022 | $ | 667.0 | $ | 426.3 | $ | 240.7 | ||||||
| (Decrease) increase | ||||||||||||
| Used truck sales | (27.0 | ) | (25.2 | ) | (1.8 | ) | ||||||
| Results on returned lease assets | 68.2 | (68.2 | ) | |||||||||
| Average operating lease assets | (87.9 | ) | (72.3 | ) | (15.6 | ) | ||||||
| Revenue and cost per asset | 39.5 | 20.3 | 19.2 | |||||||||
| Currency translation and other | 19.0 | 9.7 | 9.3 | |||||||||
| Total (decrease) increase | (56.4 | ) | .7 | (57.1 | ) | |||||||
| Nine Months Ended September 30, 2023 | $ | 610.6 | $ | 427.0 | $ | 183.6 |
Lower sales volume and lower market prices of used trucks on trade, primarily in Europe, decreased revenues by $27.0 million and related depreciation and other expenses by $25.2 million.
Results on returned lease assets increased depreciation and other expenses by $68.2 million, primarily due to lower gains on sales of returned units as a result of lower used truck market values.
Average operating lease assets decreased $237.3 million (excluding foreign exchange effects), which decreased revenues by $87.9 million and related depreciation and other expenses by $72.3 million.
Revenue per asset increased $39.5 million primarily due to higher lease rates, reflecting higher average truck value financed and higher market rates. Cost per asset increased $20.3 million due to higher depreciation and operating expenses.
The currency translation effects reflect an increase in the value of foreign currencies relative to the U.S. dollar, primarily the Mexican peso.
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Financial Services SG&A for the third quarter of 2023 increased to $38.7 million from $33.3 million in the third quarter of 2022, and for the first nine months of 2023, Financial Services SG&A increased to $110.9 million from $100.9 million in 2022. The increase in both periods was primarily due to higher salaries and related expenses, higher travel costs and unfavorable currency translation effects, primarily the Mexican peso. As an annualized percentage of average earnings assets, Financial Services SG&A was .9% in the third quarter and first nine months of 2023 and 2022.
The following table summarizes the provision for losses on receivables and net charge-offs:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2023 | September 30, 2023 | |||||||||||||||
| ($ in millions) | PROVISION FOR LOSSES ON RECEIVABLES | NET CHARGE- OFFS | PROVISION FOR LOSSES ON RECEIVABLES | NET CHARGE- OFFS | ||||||||||||
| U.S. and Canada | $ | .9 | $ | 1.1 | $ | 2.0 | $ | 3.0 | ||||||||
| Europe | .5 | .6 | 1.5 | 1.6 | ||||||||||||
| Mexico, Australia, Brasil and other | 4.8 | 3.7 | 10.6 | 7.0 | ||||||||||||
| $ | 6.2 | $ | 5.4 | $ | 14.1 | $ | 11.6 |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2022 | September 30, 2022 | |||||||||||||||
| ($ in millions) | PROVISION FOR LOSSES ON RECEIVABLES | NET CHARGE- OFFS | PROVISION FOR LOSSES ON RECEIVABLES | NET CHARGE- OFFS | ||||||||||||
| U.S. and Canada | $ | (1.1 | ) | $ | (.1 | ) | $ | (4.0 | ) | $ | (.8 | ) | ||||
| Europe | (.2 | ) | (.3 | ) | .1 | .2 | ||||||||||
| Mexico, Australia, Brasil and other | .5 | (1.4 | ) | 7.7 | (.1 | ) | ||||||||||
| $ | (.8 | ) | $ | (1.8 | ) | $ | 3.8 | $ | (.7 | ) |
The provision for losses on receivables was $6.2 million in the third quarter of 2023 compared to ($.8) million in 2022, and in the first nine months, the provision for losses on receivables was $14.1 million in 2023 compared to $3.8 million in 2022. The increase in provision for losses for the third quarter and first nine months of 2023 compared to 2022 was driven by portfolio growth, lower recoveries and an increase in charges-offs, primarily Mexico and Brasil.
The Company modifies loans and finance leases as a normal part of its Financial Services operations. The Company may modify loans and finance leases for commercial reasons or for credit reasons. Modifications for commercial reasons are changes to contract terms for customers that are not considered to be in financial difficulty. Insignificant delays are modifications extending terms up to three months for customers experiencing some short-term financial stress, but not considered to be in financial difficulty. Modifications for credit reasons are changes to contract terms for customers considered to be in financial difficulty. The Company’s modifications typically result in granting more time to pay the contractual amounts owed and charging a fee and interest for the term of the modification. When considering whether to modify customer accounts for credit reasons, the Company evaluates the creditworthiness of the customers and modifies those accounts that the Company considers likely to perform under the modified terms.
The post-modification balances of accounts modified during the nine months ended September 30, 2023 and 2022 are summarized below:
| 2023 | 2022 | |||||||||||||||
| ($ in millions) | AMORTIZED COST BASIS | % OF TOTAL PORTFOLIO* | AMORTIZED COST BASIS | % OF TOTAL PORTFOLIO* | ||||||||||||
| Commercial | $ | 134.5 | 1.4 | % | $ | 158.3 | 2.1 | % | ||||||||
| Insignificant delay | 81.8 | .9 | % | 60.8 | .8 | % | ||||||||||
| Credit | 20.0 | .2 | % | 56.0 | .7 | % | ||||||||||
| $ | 236.3 | 2.5 | % | $ | 275.1 | 3.6 | % |
- Amortized cost basis immediately after modification as a percentage of ending retail portfolio, on an annualized basis.
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Modification activity decreased to $236.3 million in the nine months of 2023 from $275.1 million in the same period of 2022. The decrease in modifications for Commercial reasons primarily reflects lower volumes of refinancing. Insignificant delay modifications, which are customers requesting payment relief for up to three months, were a comparable percentage of the total portfolio in the same period in the prior year. The decrease in Credit modifications, primarily reflects lower volumes of contract modifications in Brasil.
The following table summarizes the Company’s 30+ days past due accounts:
| September 30 2023 | December 31 2022 | September 30 2022 | ||||||||||
| Percentage of retail loan and lease accounts 30+ days past due: | ||||||||||||
| U.S. and Canada | .4 | % | .1 | % | .1 | % | ||||||
| Europe | 1.4 | % | .2 | % | .4 | % | ||||||
| Mexico, Australia, Brasil and other | 1.5 | % | 1.6 | % | 1.7 | % | ||||||
| Worldwide | .8 | % | .4 | % | .4 | % |
Accounts 30+ days past due was .8% at September 30, 2023 compared to .4% at December 31, 2022 and .4% at September 30, 2022, primarily due to increases in the U.S. and Europe. The Company continues to focus on maintaining low past due balances.
When the Company modifies a 30+ days past due account, the customer is then generally considered current under the revised contractual terms. The Company modified $21.5 million of accounts worldwide during the third quarter of 2023, $8.9 million during the fourth quarter of 2022 and $16.2 million during the third quarter of 2022 that were 30+ days past due and became current at the time of modification. Had these accounts not been modified and continued to not make payments, the pro forma percentage of retail loan and lease accounts 30+ days past due would have been as follows:
| September 30 2023 | December 31 2022 | September 30 2022 | ||||||||||
| Pro forma percentage of retail loan and lease accounts 30+ days past due: | ||||||||||||
| U.S. and Canada | .4 | % | .1 | % | .1 | % | ||||||
| Europe | 1.4 | % | .2 | % | .4 | % | ||||||
| Mexico, Australia, Brasil and other | 2.1 | % | 2.0 | % | 1.9 | % | ||||||
| Worldwide | .9 | % | .5 | % | .5 | % |
Modifications of accounts in prior quarters that were more than 30 days past due at the time of modification are included in past dues if they were not performing under the modified terms at September 30, 2023, December 31, 2022 and September 30, 2022. The effect on the allowance for credit losses from such modifications was not significant at September 30, 2023, December 31, 2022 and September 30, 2022.
The Company’s annualized pre-tax return on average assets for Financial Services was 2.7% in the third quarter of 2023 compared to 3.6% in the same period of 2022, was 3.1% for the first nine months in 2023 compared to 3.7% in the same period of 2022.
Other
Other includes the winch business as well as sales, income and expenses not attributable to a reportable segment. Other also includes non-service cost components of pension expense and a portion of corporate expense. Other sales represent less than 1% of consolidated net sales and revenues for both the third quarter and first nine months of 2023 and 2022. Other SG&A decreased to $10.7 million for the third quarter of 2023 from $24.1 million for the third quarter of 2022 and decreased to $63.1 million for the first nine months of 2023 compared to $66.6 million for the same period of 2022. The decrease in both periods was primarily due to lower corporate expenses.
For the third quarter, Other income (loss) before income taxes was $1.6 million compared to $8.0 million in 2022 primarily due to higher expenditures related to environmental activities. For the first nine months, Other (loss) income before tax was ($616.6) million compared to $14.9 million in 2022, primarily due to the EC-related charge in the first quarter of 2023 which is discussed in Note M of the consolidated financial statements.
Investment income for the third quarter increased to $80.8 million in 2023 compared to an investment income of $21.4 million in 2022. For the first nine months, investment income increased to $192.5 million in 2023 from $24.3 million in 2022. The higher investment income in the third quarter and the first nine months of 2023 was primarily due to higher market interest rates in all regions, as well as higher investment balances.
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Income Taxes
The effective tax rate for the third quarter of 2023 was 22.7% compared to 21.5% for the third quarter of 2022. The higher effective tax rate in the third quarter of 2023 was primarily due to a higher mix of pre-tax income in jurisdictions with higher tax rates. The effective tax rate for the first nine months of 2023 was 21.9% and is comparable to 21.8% for the first nine months of 2022.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| ($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Domestic income before taxes | $ | 1,026.5 | $ | 623.7 | $ | 2,858.0 | $ | 1,666.1 | ||||||||
| Foreign income before taxes | 562.9 | 356.0 | 1,218.9 | 1,007.1 | ||||||||||||
| Total income before taxes | $ | 1,589.4 | $ | 979.7 | $ | 4,076.9 | $ | 2,673.2 | ||||||||
| Domestic pre-tax return on revenues | 21.4 | % | 15.3 | % | 20.1 | % | 14.6 | % | ||||||||
| Foreign pre-tax return on revenues | 14.4 | % | 11.9 | % | 10.3 | % | 10.9 | % | ||||||||
| Total pre-tax return on revenues | 18.3 | % | 13.9 | % | 15.6 | % | 12.9 | % |
For the third quarter and first nine months of 2023, domestic and foreign income before income taxes and pre-tax return on revenues increased primarily due to the improved results from Truck and Parts operations. In the first nine months of 2023, foreign income before income taxes and pre-tax return on revenues includes a one-time unfavorable adjustment for the EC-related charge of $600.0 million in the first quarter 2023.
LIQUIDITY AND CAPITAL RESOURCES:
| September 30 | December 31 | ||||||
| ($ in millions) | 2023 | 2022 | |||||
| Cash and cash equivalents | $ | 5,906.3 | $ | 4,690.9 | |||
| Marketable securities | 1,743.1 | 1,614.2 | |||||
| $ | 7,649.4 | $ | 6,305.1 |
The Company’s total cash and marketable securities at September 30, 2023 increased $1,344.3 million from the balances at December 31, 2022. Total cash and marketable securities are primarily intended to provide liquidity while preserving capital.
The change in cash and cash equivalents is summarized below:
| ($ in millions) | |||||||
| Nine Months Ended September 30, | 2023 | 2022 | |||||
| Operating activities: | |||||||
| Net income | $ | 3,183.5 | $ | 2,090.3 | |||
| Net income items not affecting cash | 577.4 | 402.2 | |||||
| Changes in operating assets and liabilities, net | (757.6 | ) | (714.3 | ) | |||
| Net cash provided by operating activities | 3,003.3 | 1,778.2 | |||||
| Net cash used in investing activities | (1,931.1 | ) | (1,318.5 | ) | |||
| Net cash provided by (used in) financing activities | 159.5 | (418.9 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (16.3 | ) | (145.6 | ) | |||
| Net increase (decrease) in cash and cash equivalents | 1,215.4 | (104.8 | ) | ||||
| Cash and cash equivalents at beginning of period | 4,690.9 | 3,428.3 | |||||
| Cash and cash equivalents at end of period | $ | 5,906.3 | $ | 3,323.5 |
Operating activities: Cash provided by operations increased by $1,225.1 million to $3,003.3 million in the first nine months of 2023 from $1,778.2 million in 2022. Higher operating cash flows reflects higher net income of $1,093.2 million and higher accruals of $709.8 million, including EC-related charge and product support liabilities. The higher operating cash flows were partially offset by higher cash outflows for income taxes of $392.3 million and higher cash usage of $429.0 million for wholesale receivables.
Investing activities: Cash used in investing activities increased by $612.6 million to $1,931.1 million in the first nine months of 2023 from $1,318.5 million in 2022. Higher net cash used in investing activities reflects higher net originations for retails loans and financing leases of $719.6 million and higher cash used in the acquisition of property, plant and equipment of $103.5 million. The higher net cash usage was partially offset by lower acquisitions of equipment for operating leases of $286.2 million.
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Financing activities: Cash provided by financing activities was $159.5 million for the first nine months of 2023 compared to cash used in financing activities of $418.9 million in 2022. In the first nine months of 2023, the company paid $1.38 billion in dividends in 2023 compared to $875.9 million in 2022, primarily due to a higher year-end dividend paid in January 2023. Cash provided from borrowing activities was $1.50 billion, $1.06 billion higher than the cash provided by borrowing activities of $437.3 million in 2022 reflecting higher funding to support financial services portfolio growth.
Credit Lines and Other
The Company has line of credit arrangements of $3.98 billion, of which $3.51 billion were unused at September 30, 2023. Included in these arrangements are $3.00 billion of committed bank facilities, of which $1.00 billion expires in June 2024, $1.00 billion expires in June 2026 and $1.00 billion expires in June 2028. The Company intends to extend or replace these credit facilities on or before expiration to maintain facilities of similar amounts and duration. These credit facilities are maintained primarily to provide backup liquidity for commercial paper borrowings and maturing medium-term notes. There were no borrowings under the committed bank facilities for the nine months ended September 30, 2023.
On December 4, 2018, PACCAR’s Board of Directors approved the repurchase of up to $500.0 million of the Company’s outstanding common stock. As of September 30, 2023, the Company has repurchased $110.0 million of shares under this plan. There were no repurchases made under this plan during the first nine months of 2023.
Truck, Parts and Other
The Company provides funding for working capital, capital expenditures, R&D, dividends, stock repurchases and other business initiatives and commitments primarily from cash provided by operations. Management expects this method of funding to continue in the future.
Investments for manufacturing property, plant and equipment in the first nine months of 2023 were $471.7 million compared to $339.4 million for the same period of 2022. Over the past decade, the Company’s combined investments in worldwide capital projects and R&D totaled $7.54 billion and have significantly increased the operating capacity and efficiency of its facilities and enhanced the quality and operating efficiency of the Company’s premium products.
In 2023, total capital investments for PACCAR are expected to be $650 to $675 million and R&D is expected to be $410 to $420 million. In 2024, capital investments are projected to be $675 to $725 million and R&D is expected to be $470 to $520 million. The Company is increasing its investment in fuel efficient diesel and electric powertrain technologies, autonomous systems, connected vehicle services, and next-generation manufacturing and parts distribution capabilities.
Financial Services
The Company funds its financial services activities primarily from collections on existing finance receivables and borrowings in the capital markets. The primary sources of borrowings in the capital markets are commercial paper and medium-term notes issued in the public markets and, to a lesser extent, bank loans.
In November 2021, the Company’s U.S. finance subsidiary, PACCAR Financial Corp. (PFC), filed a shelf registration under the Securities Act of 1933. The total amount of medium-term notes outstanding for PFC as of September 30, 2023 was $5.50 billion. The registration expires in November 2024 and does not limit the principal amount of debt securities that may be issued during that period.
As of September 30, 2023, the Company’s European finance subsidiary, PACCAR Financial Europe, had €911.5 million available for issuance under a €2.50 billion medium-term note program listed on the Euro MTF Market of the Luxembourg Stock Exchange. This program has been renewed through the filing of a new listing, which expires in September 2024.
In August 2021, PACCAR Financial Mexico registered a 10.00 billion Mexican peso program with the Comision Nacional Bancaria y de Valores to issue medium-term notes and commercial paper. The registration expires in August 2026 and limits the amount of commercial paper (up to one year) to 5.00 billion Mexican pesos. At September 30, 2023, 6.24 billion Mexican pesos were available for issuance.
In August 2018, the Company’s Australian subsidiary, PACCAR Financial Pty. Ltd. (PFPL Australia), established a medium-term note program. The program does not limit the principal amount of debt securities that may be issued under the program. The total amount of medium-term notes outstanding for PFPL Australia as of September 30, 2023 was 850.0 million Australian dollars.
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In May 2021, the Company’s Canadian subsidiary, PACCAR Financial Ltd. (PFL Canada), established a medium-term note program. The program does not limit the principal amount of debt securities that may be issued under the program. The total amount of medium-term notes outstanding for PFL Canada as of September 30, 2023 was 150.0 million Canadian dollars.
The Company believes its cash balances and investments, collections on existing finance receivables, committed bank facilities and current investment-grade credit ratings of A+/A1 will continue to provide it with sufficient resources and access to capital markets at competitive interest rates and therefore contribute to the Company maintaining its liquidity and financial stability. In the event of a decrease in the Company’s credit ratings or a disruption in the financial markets, the Company may not be able to refinance its maturing debt in the financial markets. In such circumstances, the Company would be exposed to liquidity risk to the degree that the timing of debt maturities differs from the timing of receivable collections from customers. The Company believes its various sources of liquidity, including committed bank facilities, would continue to provide it with sufficient funding resources to service its maturing debt obligations.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES:
This Form 10-Q includes “adjusted net income (non-GAAP)” and “adjusted net income per diluted share (non-GAAP)”, which are financial measures that are not in accordance with U.S. generally accepted accounting principles (“GAAP”), since they exclude a charge for EC-related claims. These measures differ from the most directly comparable measures calculated in accordance with GAAP and may not be comparable to similarly titled non-GAAP financial measures used by other companies.
Adjustment for the EC-related claims relates to a pre-tax charge of $600.0 million ($446.4 million after-tax) for estimable total costs recorded in Interest and other (income) expense, net in the nine months ended September 30, 2023 (recorded in the first quarter 2023).
Management utilizes these non-GAAP measures to evaluate the Company’s performance and believes these measures allow investors and management to evaluate operating trends by excluding a significant non-recurring charge that is not representative of underlying operating trends.
Reconciliations from the most directly comparable GAAP measures to adjusted net income (non-GAAP) and adjusted net income per diluted shares (non-GAAP) are as follows:
| Nine Months Ended | ||||
| ($ in millions, except per share amounts) | September 30, 2023 | |||
| Net income | $ | 3,183.5 | ||
| EC-related claims, net of taxes | 446.4 | |||
| Adjusted net income (non-GAAP) | $ | 3,629.9 | ||
| Per diluted share | ||||
| Net income | $ | 6.07 | ||
| EC-related claims, net of taxes | .85 | |||
| Adjusted net income (non-GAAP) | $ | 6.92 | ||
| After-tax return on revenues | 12.2 | % | ||
| EC-related claims, net of taxes | 1.7 | % | ||
| After-tax adjusted return on revenues (non-GAAP) * | 13.9 | % | ||
| * Calculated using adjusted net income. |
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FORWARD-LOOKING STATEMENTS:
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements relating to future results of operations or financial position and any other statement that does not relate to any historical or current fact. Such statements are based on currently available operating, financial and other information and are subject to risks and uncertainties that may affect actual results. Risks and uncertainties include, but are not limited to: a significant decline in industry sales; competitive pressures; reduced market share; reduced availability of or higher prices for fuel; increased safety, emissions, or other regulations or tariffs resulting in higher costs and/or sales restrictions; currency or commodity price fluctuations; lower used truck prices; insufficient or under-utilization of manufacturing capacity; supplier interruptions; insufficient liquidity in the capital markets; fluctuations in interest rates; changes in the levels of the Financial Services segment new business volume due to unit fluctuations in new PACCAR truck sales or reduced market shares; changes affecting the profitability of truck owners and operators; price changes impacting truck sales prices and residual values; insufficient supplier capacity or access to raw materials and components, including semiconductors; labor disruptions; shortages of commercial truck drivers; increased warranty costs; cybersecurity risks to the Company's information technology systems; pandemics; climate-related risks; global conflicts; litigation, including European Commission (EC) settlement-related claims; or legislative and governmental regulations. A more detailed description of these and other risks is included under the headings Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2022 and in Part II, Item 1, “Legal Proceedings” and Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.
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