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In March, Paccar made Business Week’s list of 50 top-performing companies, with an industry-leading 24% average annual sales and 40% profit growth over the previous three years. A record 108,000 trucks were delivered, compared to 93,800 in 1998. Paccar has made a profit in each of the last 30 years, including continuous distribution of dividends over that same period, however, its stock price has declined from a high of $63 in 1999 to just under $39 in mid-2000. This in the face of first-quarter revenues that came in at $2.2 billion, 7% higher than over the same period in 1999. Was this decline the result of an efficient market system that reacted predictably to bad news? Or was Paccar’s stock decline understandable, in light of the seasonal nature of the heavy truck manufacturing industry? Or was it something more fundamental – a problem uniquely Paccar’s: a weak balance sheet, too much incurred debt, a money-draining subsidiary, slow-moving inventory? Could there be something else? This report will seek to understand this apparent anomaly, by analyzing Paccar’s 1999 annual report, including its audited financials and performing other trend and ratio analyses over a longer period of time. This analysis will also compare and contrast Paccar’s industry performance with other heavy-truck manufacturers. Finally, if applicable, this report, of which only the first segment is hereby presented, will offer recommendations and other concluding remarks. But first, a little history of the company is in order. Paccar has been in business since 1905, when William Pigott, Sr. founded Seattle Car Manufacturing Company, a predecessor of today’s Paccar Inc, to produce railway and logging equipment at its plant in West Seattle. However, it didn’t start making trucks until after its purchase of Kenworth Motor Company in 1945. Since then, it has dabbled in the steel business – the company’s structural steel division fabricated the steel for the construction of the Space Needle for the 1962 Seattle World’s Fair – and, until last year, it operated an auto parts business. In 1958, Paccar greatly expanded its on-road, heavy-duty truck manufacturing capability with its purchase of Peterbilt Motors Company, and its off-road manufacturing capabilities with its acquisition of the mining vehicle maker Dart Truck Company. In 1960 Paccar became an international truck manufacturer. Paccar then known as “Pacific Car and Foundry Company” established a manufacturing plant in Mexico, and in 1966 built another one in Melbourne, Australia. The acquisition of the European truck manufacturers DAF Trucks N.V. in 1996 and Leyland and Foden Trucks in 1998 increased the company’s international heavy-duty truck market share to third place behind DaimlerChrysler’s Freightliner and Sterling divisions and Navistar. Swedish-based Volvo is the world’s fourth-largest heavy truck manufacturer. Paccar Inc now has subsidiaries and manufacturing plants in Canada, the Netherlands, Belgium, United Kingdom, Mexico, Australia, in addition to numerous plants and operations throughout United States. The Statement of Position (Balance Sheet) Overall Paccar exhibits a balance sheet (Table 1) that is well positioned. Cash on hand has grown an average of 38 percent over the four-year period beginning in 1996. Marketable securities have also increased nicely, from $305 million in 1996 to $531 million in 1999. This is directly due to robust sales revenues that have increased about 90 percent or from $4.8 billion in 1995 to $9.0 billion in 1999. While Paccar was investing its increased cash its accounts receivable account remained virtually flat, belying revenue growth. Accounts receivables increased less than 2 percent between 1996 and 1999, or from $561 million to $570 million. Inventory levels, rather than increasing as one might expect of a variable cost, in fact declined. In 1996, Paccar had $406 million in inventory, whereas in 1999, inventory levels had dropped to $385 million. Accounts payable increased, as one would expect as a result of increases in sales volume. Income taxes increased proportionately and other current liabilities edged upwards accordingly. Except for the fact that the current portion of Paccar’s long-term debt increased from $6.2 million in 1996 to $70 million in 1999, every liability account appears reasonable. Stockholders’ equity has seen a reasonable growth, due to increases in retained earnings. Except for the year 1996, where Paccar had 466 million shares outstanding, the period between 1997 and 1999 saw common stock levels being fairly constant at around 78 million shares. It would appear that Paccar released a healthy number of common shares, thereby increasing its capital surplus, or paid-in capital account. No doubt, Paccar was anticipating the need for additional cash, perhaps for a business acquisition or developing a new venture. From a cursory look at the balance sheet, we see that inventory management is of some concern. Perhaps, Paccar began utilizing Just-in-Time inventory management practices. That might explain the decline in inventory levels while truck sales in 1999 broke new volume records. On the other hand, Paccar recently sold its auto parts division. Nevertheless, inventory is an area that requires more careful scrutiny. For one thing, Paccar has two general business divisions: heavy truck manufacturing and vehicle financing and leasing. Although only a conjecture at this point, Paccar may have sold to its financing unit new trucks. These trucks may have been leased to customers, thereby generating monthly leasehold revenues. If the leases were capital leases, then the asset costs (inventory) would have been transferred to the customer. Thus, from a sales perspective, Paccar may be in a win-win situation – it essentially sells its new trucks through leasehold arrangements bringing in monthly revenue, while not being responsible for the added costs of holding the inventory. Table 2 is a composite chart that shows an operating cycle of two years: 1998 and 1999. These two years are analyzed in a vertical and horizontal analysis approach. During those two years, truck sales increased from $7.6 billion to $8.6 billion. Financial service revenue, although important for its business, accounts for only 4%, or $373 million, of total sales. Yet this business unit allows Paccar to weather the cyclical buying patterns of its worldwide customers. When the economy is sluggish, and the cost of money is relatively high, Paccar can provide its customers with leasing opportunities that bring in revenues where none would be possible on a strictly truck sales basis. Customers who could not afford to purchase a $150,000 truck might be able to afford to lease this same truck monthly. When the economy improves, then these same customers would be more likely to afford an outright truck purchase and suspend its leasing arrangements. Nevertheless, Paccar’s income statement shows only good and consistent growth. The lower portion of Table 2 shows a trend analysis that evidences this consistent growth. If we consider 1995 to be the base year, then one can see that between 1995 and 1999, net sales grew by 88 percent. Cost of sales by 56 percent, and gross profit by 170 percent. Thus we can see that gross profit increased at a faster rate than did costs of good sold. Evidently, Paccar managed to become more efficient in building its trucks, thereby lowering its variable production expenses. Table 3, Paccar’s consolidated statement of cash flows, breaks cash flows into cash generated through its normal operating activity; that is, sales of heavy trucks. But it also shows that Paccar generated over $33 million profit when it sold its auto parts division. And as we have come to expect, cash provided by operations increased in line with net sales, and ultimately, net income for the years 1997 through 1999. The second part of the cash flow statement shows how Paccar invested its earned income. From the table, financing receivables originated increased by about $500 million. And except for the $143 million generated from selling the auto parts division, all other investing activities show only a modest increase. Again, the cash flow statement shows that Paccar is trying to grow its financing division into a major player in the leasing and heavy truck financing arena. Paccar also generated roughly $200 million through the acquisition of long-term debt. As a result of its investment in its financing unit, even though net income increased by $167 million, Paccar’s 1999 year-end increase in cash and cash equivalents increased only by $96 million from the same period in 1998. Still, Paccar maintains about a half-billion dollars in cash reserves, in the form of working capital to maintain future business operations. Table 4 is a 5-year (1995 – 1999) ratio analysis of Paccar’s manufacturing operations. Table 5 compares Paccar to four other heavy truck manufacturers: Navistar International, Oshkosh Trucks, Volvo, and DaimlerChrysler AG (Freightliner division). It also compares Paccar to an industry average that is composed of 33 auto and truck manufacturers. From table 4, profitability percentages show nothing but positive ratios. Gross profit and net profit margins both show consistent growth over the years. So do the ratios, return on assets and return on equity. Liquidity ratios also look good. Paccar’s average collection period, is below the industry average, and except for 1996 when collections averaged over 44 days, Paccar’s average collections have declined from the 44.6 days in 1996, to 32 days in 1997, 28 days in 1998 and 23 days in 1999. This shows extremely good effort at managing its receivables. Debt management also looks good. Paccar’s debt ratio and its long-term debt to equity ratio are either at industry norms or considerably below them. The one area that begs further study is inventory turnover. Within the asset management category, Paccar’s inventory turnover ratio has been, not only above, but towers above the industry. With an industry turnover ratio of 6.4 times, Paccar has managed an inventory turnover of 16.5 times in 1995, 9.19 times in 1996, 14.1 times in 1997, 12.6 in 1998 and a phenomenal 18.94 times in 1999. Whatever is causing this tremendous positive inventory ratio figure to occur merits further study and analysis. We have come to the conclusion that Paccar has tremendous fundamentals. However, Paccar’s inventory levels, and its very high inventory turnover ratio, merit further study. From Table 5, one can see that despite Paccar’s robust and consistently above industry average figures, Paccar’s multiples are below industry average. Paccar’s Price to earnings per share figure (P/E) at 7.5 times is well below the industry’s 12.5 times. In fact, this is not just a one-year anomaly. Paccar’s 5-year P/E growth at 0.20 is considerably below the industry's more robust 0.80 figure. Some of this anomaly may be due to the family influence. While keeping it in the family maintains consistency and a long-term vision, the fact that the Pigott family controls over 50% of Paccar’s common stock may have a great deal to do with discouraging the average investor from becoming involved as a corporate shareholder. Because of high fixed manufacturing costs inherent in the heavy truck manufacturing business, size is important. In general, the higher the production rate, the lower per-truck manufacturing costs. Lower per-truck manufacturing costs, as well as brand-name recognition, are big advantages in the highly competitive heavy-duty truck industry. With about 12 heavy-duty truck makers, there is currently an overcapacity within the production plants worldwide. As a result, prices for new trucks have fallen as competition for new customers has increased. The industry is consolidating, with the latest merger rumors involving Volvo’s tentative agreement to buy Renault’s Mack truck division. If the deal were consummated, Volvo would become the second-largest heavy-duty truck maker, bumping Paccar from third to fourth place. Paccar operates in a very cyclical industry. Manufacturing overcapacity, used-truck pricing, fluctuating international economies, fuel prices, currency devaluations, volatile interest rates, and other factors greatly influence sales and earnings. Even now, the industry is undergoing one such cycle. Despite a still booming economy, higher fuel costs and interest rates have caused demand for new heavy-duty trucks to fall by half from last July, to 10,000 a month. To ameliorate and smooth the effects of these inherent cycles, Paccar has embarked on a fourfold plan: (1) outsourcing, (2) maintaining low fixed costs, (3) globalization, and (4) diversification. One key objective for Paccar is focusing on truck design and assembly, leaving production of major components to outside suppliers. Paccar stays lean by purchasing 75% of every Peterbilt and Kenworth truck from outside vendors. This serves the company well when typically volatile demand for heavy trucks tails off during a cyclical downturn. The company has recorded profits in more than 30 straight years, even through some of the worst industry-wide slumps. Labor-intensive assembly plants hold down capital investments, even as it increases labor costs. The company shuns robots and other automated parts assemblies. When orders decline, Paccar chooses to furlough workers – since March, Paccar has cut output by as much as 30% at three big plants and laid off more than 750 workers in shrinking its payroll to 20,000 – rather than idling expensive equipment. “We don’t size up for the peaks,” says President David J. Hovind. “We can take care of it with extra shifts and some selective contracting.” Paccar has increased manufacturing space and set up new production facilities throughout Europe. Its Leyland and DAF facilities were expanded. Dealer networks were increased, and product synergies were coordinated with attention to integrating product development, purchasing, computer system infrastructure and financial services. In Europe, DAF, Foden, and Leyland account for more than 10% of the Continent’s truck market. Paccar earned over 35 percent of its revenue outside the United States, ranking it as the 88th largest company in the United States based on international sales. The company continues to look for quality investments in its core businesses and to expand its overseas medium and heavy truck market share. Recently, Paccar entered the medium-duty truck business, by opening a plant in Ste.-Therese, Quebec. An outgrowth of e-commerce has resulted in an increased demand for medium-duty trucks to deliver just-in-time, single product orders. The $90 million, 425,000 square-foot facility has an annual capacity of 20,000 Class 5-7 trucks. So far, sales of medium-duty trucks account for only 4% of Paccar’s North American market, but through increased plant expansion in Canada and the U.S., this figure is expected to increase. Besides manufacturing heavy and medium-duty trucks, Paccar also manufactures off-road mining vehicles and equipment, trucks parts and winches. Paccar’s product lines are generally grouped into five (5) main divisions. They include information technology, trucks, aftermarket truck parts, winches, and financial services. Recently Paccar spent $10 million purchasing PNV, a Florida company that sells truck stop access to the Internet. Paccar has also developed prototype technology that scans a driver’s index finger before letting the engine start – a guard against unauthorized truck driver starts. In addition, Paccar has developed a number of computer-related products to be used within its company to coordinate e-mail distribution, increase customer responsiveness and service requests, and improve product design. In 1999, Paccar won the prestigious Society of Manufacturing Engineers (SME) LEAD award for “forward thinking and adaptive use of material adhesive bonding, advanced modular designs and the application of robotic assembly processes.” The heart of Paccar’s core businesses, trucks and its related aftermarket truck parts, account for 96% of revenues and 91% of operating income. Paccar makes the following models: · T800 WorkCab (hybrid truck built for the construction market) · 95XF.530 (just-in-time deliveries) · Leyland trucks division produces Class 4-7 distribution trucks sold and marketed exclusively in Europe by DAF trucks; · As of March 2000, Foden trucks will be manufactured at the Leyland plant in Lancashire, England. · DROPS (Demountable Rack Off-Loading Pick-up System) vehicles Paccar Parts (PPD) shipped more than 8.5 million line items and achieved 99.7 percent accuracy during the year. It also led the industry in the development of aftermarket inventory management technology. In 1999, Managed Dealer Inventory (MDI) was introduced to electronically update and manage Kenworth and Peterbilt dealer’s parts stock. A linked system, called Connect, was installed last year to allow dealers to manage their customer’s inventories. These two complementary programs provide a comprehensive parts system management. Both are available to dealers and drivers on a 7-day, 24 hour (7/24) call option. One of Paccar’s oldest divisions, its origins date back to 1934 when Paul Pigott, son of the founder, acquired the American Car and Foundry Company which had merged with the original Seattle Car Manufacturing Company. Under his guidance, the company introduced the Carco line of power winches for use on crawler tractors in the logging industry. This product line later became the basis for Paccar’s winch division that now includes Braden, Carco and Gearmatic winches. PACCAR Financial Corporation (PFC), was formed in 1980 to offer full-service leasing and rental programs through Paccar’s dealer network. Due to increased demand, PFC’s assets surpassed the $3 billion mark for the first time in 1999. Paccar operates 167 leasing centers, including 30 in Mexico. The PacLease fleet increased to over 12,500 vehicles, making Paccar Leasing one of the largest full-service truck rentals and leasing networks in North America. The addition of new Class 5-7 truck products provides an excellent opportunity for PFC to grow its business. PACCAR is a significant player in an automotive industry that has become increasingly more competitive as global consolidation continues. Paccar is committed to building upon its strengths – dedicated employees, quality products, facilities, and systems, excellent distribution networks and a strong balance sheet – by investing for the future. Although the Pigott family controls 40% of company stock, the company understands that it must think globally and continue to develop and push innovations and new technologies forward, both in the marketplace and in running the business. “PACCAR enters the new millennium well positioned to maintain the steady growth its shareholders expect from a company recognized as a leader in the market it serves.” Bibliography: Reference: Note: Most of the above material was liberally extracted from PACCAR’s 1999 annual report. In addition, some current conditions were made available through reading an article entitled “Built For The Long Haul” in Business Week, July 3, 2000, as well as some market reports from CBS MarketWatch, Standard & Poors Stock Reports, and Charles Schwab, Inc. Equity Digest. Word Count: 3070
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