PACCAR Inc. — Q2 2013 Form 10-Q
Business context and period. PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and provides truck financing and leasing. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are with the same 2012 periods unless stated otherwise. Amounts are in millions of dollars except per-share data and truck units.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Consolidated revenue | $4,300.5 | $4,457.2 | $8,224.8 | $9,233.3 |
| Income before tax | $432.9 | $446.3 | $770.1 | $925.3 |
| Net income | $291.6 | $297.2 | $527.7 | $624.5 |
| Diluted EPS | $0.82 | $0.83 | $1.49 | $1.75 |
| Net margin | 6.8% | 6.7% | 6.4% | 6.8% |
| Operating cash flow | Six months: $1,152.6 | Prior-year six months: $444.0 |
Q2 consolidated revenue fell about 4% and net income about 2%; first-half revenue fell about 11% and net income about 16%. The first-half effective tax rate declined to 31.5% from 32.5%, primarily because a greater proportion of income came from lower-tax jurisdictions. Comprehensive income was $377.3 for the first half, down from $607.6, including $178.6 of currency translation losses in other comprehensive income.
- Truck, Parts and Other: Q2 revenue was $4,011.7 versus $4,191.1; first-half revenue was $7,642.9 versus $8,705.8. Income before tax was $343.4 in Q2 and $594.0 in the first half, down from $360.7 and $759.5, respectively.
- Truck: Deliveries declined 8% in Q2 to 34,700 and 16% in the first half to 65,300. Truck revenue fell 6% in Q2 and 15% in the first half. Pre-tax income declined 12% in Q2 and 30% in the first half; truck gross margin was 10.0% and 9.6%, respectively, versus 11.0% and 10.9%.
- Parts: Revenue grew 6% in Q2 to $709.5 and 2% in the first half to $1,376.9. Pre-tax income increased 22% in Q2 and 7% in the first half; gross margins improved to 26.1% and 25.8%, respectively.
- Financial Services: Revenue rose 9% in Q2 to $288.8 and 10% in the first half to $581.9. Pre-tax income rose 5% to $81.5 in Q2 and 9% to $161.6 in the first half. Average earning assets increased 8% in Q2 and 10% for the first half.
Financial position and liquidity
At June 30, 2013, total assets were $19.2 billion and stockholders’ equity was $6.1 billion. Cash and cash equivalents totaled $1.442 billion and marketable debt securities $1.182 billion, together $2.624 billion. PACCAR reported $3.66 billion of credit lines, of which $3.45 billion was unused; it had no borrowings under syndicated bank facilities during the first half.
Six-month investing cash outflow was $938.0, including $269.7 of property and equipment spending and $608.3 of equipment acquired for operating leases. Financing cash flow was a $2.0 outflow. Financial Services liabilities included $2.823 billion of commercial paper and bank loans and $4.938 billion of term notes; Truck, Parts and Other had $300 million of long-term debt, split between current and noncurrent portions. First-half dividends paid were $141.4; no share repurchases were made in the period.
Changes, outlook and risks
- Lower truck deliveries and price realization, especially in the U.S. and Canada, drove the decline in truck earnings; weaker foreign currencies also reduced truck pre-tax income. Higher parts demand, pricing and cost control, along with higher Financial Services finance and lease margins, partly offset the decline.
- Management projected 2013 U.S. and Canada industry truck retail sales of 210,000–230,000 units and European over-16-tonne registrations of 210,000–230,000. Parts aftermarket sales were expected to increase modestly in the U.S. and Canada and remain comparable to 2012 in Europe.
- 2013 capital investment was forecast at $425–$475 million and R&D at $250–$275 million. Construction of the DAF factory in Ponta Grossa, Brazil was on schedule, with production expected to begin in late 2013. Financial Services average earning assets were expected to increase about 5% in 2013.
- Management said weaker freight conditions could increase delinquencies, repossessions and credit losses from low current levels. Worldwide accounts 30 or more days past due were 0.7% at June 30, up from 0.6% at year-end; Europe’s rate rose to 1.8%, primarily due to one large customer. Credit, used-truck residual values, commercial-paper market access, interest and currency rates, industry demand, regulation, suppliers and warranty costs are among the disclosed risks.
- On June 3, PACCAR and its finance subsidiary settled the SEC investigation concerning 2008–2011 financial reporting, without admitting or denying allegations, and agreed to a $225,000 civil penalty. The settlement required no restatement. An EU competition inquiry involving major European truck manufacturers remained ongoing; PACCAR subsidiaries said they were cooperating. Management stated ordinary-course lawsuits were not expected to materially affect the business or financial condition.
Important facts for investors to verify
- Whether truck demand, delivery volumes, price realization and market share recover, particularly in North America.
- Whether the improved Parts and Financial Services results can offset continued weakness in truck earnings and lower portfolio yields.
- Trends in Financial Services delinquencies, credit losses, repossessions and used-truck collateral values, including the European past-due increase.
- Execution and funding of the Brazil factory, the stated capital and R&D plans, and the expected 2013 market outlook.
- Financial Services access to commercial-paper and debt markets, available credit facilities, and the potential effects of rating changes or market disruption.
- Developments in the EU competition inquiry and any consequences of the SEC settlement or other legal matters.