PACCAR Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial amounts are in U.S. dollars; unless stated otherwise, amounts are in millions. PACCAR manufactures and sells commercial trucks, distributes aftermarket parts, and provides truck financing and leasing.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Consolidated revenue | $4,569.6 | $4,300.5 | $8,949.5 | $8,224.8 |
| Income before taxes | $481.0 | $432.9 | $887.5 | $770.1 |
| Net income | $319.2 | $291.6 | $593.1 | $527.7 |
| Diluted EPS | $0.90 | $0.82 | $1.67 | $1.49 |
| Return on revenues | 7.0% | 6.8% | 6.6% | 6.4% |
Truck, Parts and Other revenue was $4,267.0 in Q2 and $8,353.2 in the first half. Financial Services revenue was $302.6 and $596.3, respectively. Truck, Parts and Other income before tax rose to $383.8 in Q2 and $699.0 in the first half; Financial Services income before tax rose to $91.7 and $177.2.
Truck revenue increased mainly on stronger U.S. and Canadian deliveries and higher European pricing for Euro 6 vehicles. Parts revenue grew on higher aftermarket demand, particularly in North America and Europe. Truck gross margin was 9.8% in Q2 versus 10.0%; first-half margin was 9.3% versus 9.6%. Parts gross margin was 26.0% in Q2 versus 26.1%, and 25.9% in the first half versus 25.8%. Financial Services’ improved pretax income reflected higher finance and lease margins and lower credit-loss provisions.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $840.8, down from $1,152.6 a year earlier. Investing used $653.2, while financing used $565.7. Cash and cash equivalents declined $369.8 to $1,380.3.
- Cash plus marketable debt securities totaled $2,715.3 at June 30, down from $3,017.6 at year-end 2013. Marketable securities were $1,335.0.
- Financial Services reported $2,710.3 of commercial paper and bank loans and $5,609.4 of term notes. The filing reports $3.50 billion of credit lines, of which $3.30 billion was unused; there were no borrowings under syndicated bank facilities in the first half.
- Financial Services finance and other receivables, net, were $8,879.6. Its allowance for credit losses was $131.1. Accounts 30 or more days past due were 0.6% worldwide, up from 0.5% at year-end, while the provision for receivable losses fell to $7.7 for the half from $11.8.
- Cash dividends paid were $467.8 in the first half versus $141.4 in 2013, reflecting payment of a special dividend declared in 2013. Dividends declared per share were $0.22 in Q2 and $0.42 for the half.
Changes, outlook and risks
- Management expected 2014 U.S. and Canadian truck industry retail sales of 230,000–250,000 units, versus 212,200 in 2013; European over-16-tonne registrations were forecast at 210,000–230,000, versus 240,800. Parts aftermarket sales were expected to grow 4%–8%.
- Expected 2014 capital investment was $250–$300 and research and development spending $200–$225. Financial Services average earning assets were expected to increase approximately 5%.
- Management cited improving U.S. and Canadian truck demand and strong worldwide Parts and Financial Services results. It also noted weaker truck deliveries in several foreign markets and lower DAF market share in European truck classes, partly associated with Euro 5/Euro 6 transition rules.
- Management warned that weaker freight conditions could reduce customer profitability and increase past-due accounts, repossessions and credit losses. Disclosed risks also include industry demand, competition, market share, fuel and commodity prices, regulation, currency movements, used-truck values, supplier and labor disruptions, capital-market liquidity, interest rates, warranty costs and litigation.
- The filing identifies an ongoing European Commission investigation, begun in 2011, into whether major commercial-vehicle manufacturers coordinated EU commercial policies; PACCAR subsidiaries were cooperating. Management said ordinary-course lawsuits were not expected to materially affect the business or financial condition. No material changes to risk factors or market-risk disclosures were reported.
- The effective tax rate increased to 33.6% in Q2 and 33.2% for the first half, primarily because a greater share of income arose in higher-tax jurisdictions. Management said adoption of the new revenue-recognition standard was under evaluation; it did not expect a material impact from the new stock-compensation guidance.
Important facts for investors to verify
- Whether North American truck demand and the company’s stated industry-sales outlook translated into deliveries, margins and market share, particularly in Europe.
- Whether operating cash flow recovers from its year-over-year decline and how working capital, dividends and debt repayments affect liquidity.
- Whether Financial Services credit quality remains sound, including past-due trends, loss provisions, repossessions and funding access.
- Progress and spending against the 2014 capital-investment and R&D ranges, and any material developments in the EU investigation or other litigation.