PACCAR Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in millions of dollars except per-share data, units and percentages. PACCAR manufactures commercial trucks and distributes aftermarket parts, with financing and leasing operations primarily supporting its truck customers and dealers.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Consolidated revenues | $4,928.4 | $4,300.1 | $13,877.9 | $12,524.9 |
| Income before taxes | $552.4 | $440.0 | $1,439.9 | $1,210.1 |
| Net income | $371.4 | $309.4 | $964.5 | $837.1 |
| Diluted EPS | $1.04 | $0.87 | $2.71 | $2.36 |
| Return on revenues | 7.5% | 7.2% | 6.9% | 6.7% |
- Truck, Parts and Other revenues were $4,622.5 in Q3 and $12,975.7 year to date. Financial Services revenues were $305.9 and $902.2, respectively.
- Truck segment pre-tax income was $330.0 in Q3, up from $242.5; nine-month income was $801.9, up from $645.9. Truck gross margin was 10.7% in Q3 versus 10.1%; nine-month margin was 9.8% in both years.
- Parts revenues reached records of $784.2 in Q3 and $2,288.8 for nine months. Segment pre-tax income rose to $127.9 and $366.7, respectively. Gross margin was 25.9% for both 2014 periods, versus 25.3% and 25.6% in 2013.
- Financial Services pre-tax income increased to $96.9 in Q3 and $274.1 for nine months. Average earning assets rose 6% and 7%, respectively; lower yields were partly offset by lower borrowing rates and higher finance margins.
- Nine-month operating cash flow was $1,601.6, compared with $1,700.3. Investing used $1,082.3, versus $1,464.1; financing used $575.8, compared with $219.9 provided in 2013. Cash and cash equivalents decreased $101.7 during the period.
Financial position and liquidity
- At September 30, cash and cash equivalents were $1,648.4 and marketable debt securities were $1,320.6, totaling $2,969.0, down $48.6 from year-end 2013.
- Total assets were $21,026.1 and stockholders’ equity was $7,162.7. Financial Services liabilities included $2,925.8 of commercial paper and bank loans and $5,292.4 of term notes.
- PACCAR reported $3.52 billion of credit lines, of which $3.39 billion was unused. Management cited cash, securities, receivable collections, credit lines and investment-grade ratings of A+/A1 as support for liquidity and market access.
- Dividends paid were $545.8 in the first nine months, including payment of a special dividend declared in 2013. The company repurchased 581,355 shares in Q3 for $34.1 million; $73.9 million remained under its $300 million authorization at September 30.
Changes, outlook and risks
- Growth was led by U.S. and Canadian truck deliveries, improved truck pricing, and stronger global aftermarket demand. North American truck deliveries rose 29% in Q3; European deliveries fell 23%. Nine-month deliveries were 102,800, up 2% overall.
- Europe truck market share fell to 13.4% for the first nine months from 15.8%, with DAF registrations affected by Euro 5/Euro 6 transition rules, particularly in the U.K. and Netherlands. U.S. and Canadian heavy-duty market share was 27.5%, versus 27.9%.
- Management expected 2014 U.S./Canada truck retail sales of 245,000–255,000 units and 2015 Class 8 sales of 240,000–270,000. European over-16-tonne registrations were projected at 210,000–220,000 in 2014 and 200,000–240,000 in 2015. Aftermarket sales were expected to grow 7%–9% in 2014 and 4%–7% in 2015.
- Expected 2014 capital investment was $225–$250 and R&D spending $205–$215; 2015 estimates were $325–$375 and $200–$250, respectively. Financial Services average earning assets were expected to be slightly higher in Q4 and 2015.
- Higher taxes reduced the benefit of earnings growth: the effective tax rate rose to 32.8% in Q3 and 33.0% year to date, primarily because a greater share of income came from higher-tax jurisdictions.
- Foreign currency translation produced a nine-month OCI loss of $231.4; Q3 comprehensive income was $109.3 despite net income of $371.4. Management said no other-than-temporary impairment was recognized on marketable debt securities.
- Credit indicators remained generally low, but worldwide retail accounts 30+ days past due increased to 0.6% from 0.5% at year-end; the filing cites higher past dues in Europe, Australia and Mexico. Management warned that weaker freight conditions could increase delinquencies, repossessions and credit losses.
- Risks include truck demand, competition and market share, fuel and commodity prices, regulations, currency and interest rates, used-truck values, suppliers, labor, warranty costs, and capital-market liquidity. The EU Competition Commission’s investigation of major European commercial vehicle manufacturers remained ongoing; PACCAR subsidiaries were cooperating. Management said ordinary-course lawsuits were not expected to materially affect the business or financial condition. No material risk-factor changes were reported.
Investor verification priorities
- Assess whether North American truck demand and management’s 2015 market forecasts were borne out, and whether European market-share weakness persisted.
- Track segment margins, particularly the impact of Euro 6 vehicle costs, and Financial Services portfolio yields and lease utilization.
- Review past-due accounts, TDR balances, credit-loss provisions and Australian mining exposure for signs of deterioration.
- Monitor Financial Services funding mix, debt maturities, credit ratings and access to commercial-paper and other capital markets.
- Follow foreign-exchange effects on comprehensive income and the status and potential consequences of the EU competition investigation.