PACCAR Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited interim results; amounts are in millions except per-share data, units, and percentages. PACCAR manufactures commercial trucks and operates a truck-financing and leasing business.
Financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Consolidated revenue | $3,820.2 | $4,257.1 | $13,053.5 | $11,501.4 |
| Income before tax | $345.4 | $394.7 | $1,270.7 | $1,034.2 |
| Net income | $233.6 | $281.6 | $858.1 | $714.6 |
| Diluted EPS | $0.66 | $0.77 | $2.41 | $1.95 |
| Return on revenue | 6.1% | 6.6% | 6.6% | 6.2% |
- Q3 revenue fell about 10% and net income fell about 17% year over year, reflecting fewer truck deliveries in the U.S., Canada and Europe. Nine-month revenue rose about 13% and net income about 20%, primarily on stronger truck sales and Financial Services results.
- Truck segment pretax income was $258.9 in Q3 (down 20%) and $1,022.8 for nine months (up 20%). Truck gross margin was 12.3% in Q3 versus 12.7%; nine-month margin was 12.9% in both years. Lower Q3 volume and fixed-cost absorption pressured margins.
- Financial Services pretax income increased to $80.4 in Q3 from $61.8 and to $229.1 for nine months from $169.0. Growth in finance margins and lower credit-loss provisions contributed. Nine-month provision for receivable losses was $15.2 versus $32.2; net charge-offs were $16.9 versus $31.5.
- Operating cash flow was $916.6 for nine months, down from $1,151.3. Investing used $1,662.2; financing provided $380.0. Cash and equivalents ended at $1,750.5, down from $2,106.7 at year-end 2011.
- Cash plus marketable debt securities totaled $2,706.4, compared with $3,016.8 at year-end. Truck and Other long-term debt was $150.0. Financial Services reported $3,371.3 of commercial paper and bank loans and $4,143.0 of term notes. These financing liabilities support its receivables and leasing portfolio.
- Available credit lines were $3.69 billion, of which $3.44 billion was unused. PACCAR reported investment-grade ratings of A+/A1 and said it expected continued access to funding markets, while noting that a ratings decline or market disruption could impair access or raise funding costs.
Changes, outlook and risks
- Truck deliveries were 31,100 in Q3, down 12% year over year, but 108,700 for nine months, up 12%. Nine-month U.S. and Canada heavy-duty market share reached a reported record 29.0%; Europe heavy-duty share was also a reported record 16.0%.
- Management expected 2012 U.S. and Canada industry retail sales of 210,000–220,000 trucks and European over-16-tonne sales of 215,000–225,000. For 2013, estimates were 210,000–240,000 in the U.S. and Canada and 210,000–250,000 in Europe. These are management estimates, not guaranteed results.
- Expected capital investment: $475–$525 for 2012 and $400–$500 for 2013. Expected R&D: $280–$290 for 2012 and $275–$325 for 2013. The new DAF XF Euro 6 truck was introduced in September 2012; production was planned to begin in 2013.
- Financial Services average earning assets were expected to rise modestly in Q4 2012 and grow approximately 5%–10% in 2013. Management cautioned that weaker freight or economic conditions could increase delinquencies, repossessions and charge-offs from then-low levels.
- Weaker currencies, principally the euro, reduced reported revenue by $122.9 in Q3 and $302.6 for nine months; management said the effect on pretax income was not significant. Effective tax rates rose to 32.4% in Q3 and 32.5% for nine months.
- The SEC notified PACCAR in April 2012 of a formal investigation into financial reporting from 2008–2011, including loan-loss reserves, troubled debt restructurings and segment reporting. PACCAR said it was cooperating. The filing reported no material change in risk factors and described other ordinary-course litigation as not expected to materially affect the company.
- Other disclosed exposures include truck-market cyclicality, customer profitability, used-truck values and residual values, interest and foreign-exchange rates, supplier or labor disruptions, regulation, warranty costs, and Financial Services refinancing risk. PACCAR reported no material change in market risk during the period.
Investor verification points
- Track truck orders, deliveries, market share and gross margins, particularly in Europe and North America, against management’s industry estimates.
- Assess whether Financial Services’ portfolio growth and stronger earnings persist, and monitor delinquencies, TDRs, repossessions, reserves and charge-offs. Q3 worldwide accounts 30+ days past due were 0.9%; management noted one customer represented 0.5% in the U.S. and Canada.
- Review the SEC investigation’s scope and any subsequent findings or accounting effects.
- Monitor cash generation, dividend and repurchase spending, debt issuance, credit-facility renewals and market access for Financial Services funding.
- Verify the effect of currency movements, tax-rate changes, planned capital spending and the Euro 6 product launch on subsequent results.