PACCAR Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited. Amounts are in millions except per-share data, units, and percentages.
Business context and results
PACCAR designs, manufactures and distributes commercial trucks and parts (Kenworth, Peterbilt and DAF), provides truck financing and leasing through PACCAR Financial Services (PFS), and operates an industrial winch business. Management attributed improved results chiefly to higher truck deliveries, stronger demand and increased aftermarket parts sales.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Consolidated revenue | $4,257.1 | $2,542.5 | $11,501.4 | $7,237.3 |
| Income before tax | $394.7 | $176.8 | $1,034.2 | $421.4 |
| Net income | $281.6 | $119.9 | $714.6 | $287.8 |
| Diluted EPS | $0.77 | $0.33 | $1.95 | $0.79 |
| Return on revenues | 6.6% | 4.7% | 6.2% | 4.0% |
Segment performance and period-over-period changes
- Truck: Revenue was $3,961.1 in Q3 (+74%) and $10,653.6 for nine months (+65%). Pretax income was $324.3 (+143%) and $855.3 (+172%), respectively. Deliveries increased 82% in Q3 to 35,500 trucks and 78% year to date to 97,100. Truck-segment gross margin was 12.7% in Q3 versus 12.3%, and 12.9% year to date versus 11.8%.
- Truck improvement reflected higher volume and prices, better fixed-cost absorption, and improved parts volume and pricing. Higher EPA 2010 vehicle content costs, R&D and business-support costs partly offset gains. Aftermarket parts revenue rose 18% in Q3 and 20% year to date.
- PFS: Revenue was $264.1 in Q3 (+11%) and $763.1 year to date (+5%). Pretax income rose to $61.8 (+49%) and $169.0 (+63%). Management cited larger earning-asset balances, lower borrowing costs, higher finance and lease margins, and reduced credit-loss provisions; lower yields partly offset finance-income growth.
- Other income: Investment income increased to $11.0 in Q3 and $28.9 year to date, versus $5.5 and $14.3. Other businesses and unallocated items recorded pretax losses of $2.4 in Q3 and $19.0 year to date.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1,151.3, compared with $1,162.8 in 2010. Investing used $1,785.3, versus $156.8; financing provided $512.3, versus $861.3 used in 2010. Cash and cash equivalents declined $161.2 to $1,879.6 during the period.
- Cash plus marketable debt securities totaled $2,795.3 at September 30, up from $2,491.3 at December 31, 2010. Marketable securities were $915.7, compared with $450.5.
- Total assets were $16,354.3, versus $14,234.1 at year-end 2010. PFS assets grew to $8,834.0 from $7,878.2. Finance and other receivables, net, were $6,652.8.
- Truck and Other reported $150.0 of long-term debt and no current debt balance at quarter-end. PFS liabilities included $3,363.5 of commercial paper and bank loans and $2,613.9 of term notes. Debt increased to fund growth in the PFS portfolio.
- PACCAR had $3.61 billion of credit lines, of which $3.32 billion was unused. Management said cash, investments, bank lines and investment-grade ratings (A+/A1) supported liquidity and access to capital markets.
- Investing outflows included increased marketable-security purchases, loan and lease originations, operating-lease equipment acquisitions and capital spending. Financing included $989.8 of net commercial-paper and short-term bank borrowing, $1,065.5 of long-term debt proceeds, $1,144.1 of long-term debt payments, $250.2 of treasury-stock purchases and $153.1 of dividends paid.
Outlook, risks and notable items
- Management expected 2011 U.S. and Canadian heavy-duty industry retail sales of 185,000–200,000 units, rising to 205,000–230,000 in 2012. European 15-tonne-and-above sales were forecast at 235,000–245,000 in 2011 and 225,000–250,000 in 2012.
- 2011 capital investment was forecast at $450–$500 and R&D at $280–$300. For 2012, capital investment was forecast at $450–$550 and R&D at $275–$325, including investment in a Brazilian factory and product development.
- PFS average earning assets were expected to increase modestly in Q4 2011 and grow approximately 5%–10% in 2012. If freight conditions continued, management expected 2012 past-due accounts, repossessions and net charge-offs to be comparable to or slightly better than 2011.
- Stronger currencies, particularly the euro, increased Q3 revenue by $159.2 and pretax income by $8.2; nine-month revenue by $367.9 and pretax income by $32.6. Currency translation losses reduced Q3 comprehensive income, mainly due to the euro, and nine-month translation losses mainly reflected the Canadian and Australian dollars.
- The effective tax rate declined to 28.7% in Q3 and 30.9% year to date, partly due to new Netherlands tax incentives for research and innovation. The filing stated 2011 results are not necessarily indicative of full-year results.
- PFS worldwide accounts 30+ days past due were 2.1%, improved from 3.8% a year earlier. However, one large customer accounted for 1.0% of the U.S./Canada figure; PFS held $33.2 of specific loss reserves for that customer and other at-risk accounts. TDR balances rose to $25.4 from $6.5 at year-end following adoption of new guidance; management said subsequent defaults did not significantly affect reserves.
- Disclosed risks include weaker truck demand, competition and market-share losses, fuel and commodity prices, regulation, currency and interest-rate movements, used-truck values, supplier or labor disruptions, liquidity-market conditions, warranty costs and litigation. Management reported no material change in market risk or risk factors during the period.
- The NLRB ruled in July 2011 that PACCAR was not required to compensate former Peterbilt Madison employees for losses from the 2009 work stoppage; management considered an adverse outcome remote. PACCAR also entered an agreement to acquire a 19% interest in TATRA a.s.; the investment cost was expected to be immaterial.
Key facts for investors to verify
- Whether truck-industry demand and the company’s delivery, pricing and margin recovery meet management’s market assumptions.
- How PFS portfolio growth, funding costs, credit quality and the large-customer exposure affect earnings and reserves.
- Whether planned capital spending, R&D and Brazilian expansion remain within the stated ranges.
- How currency movements, used-truck values and customer freight conditions affect results, cash generation and the outlook.
- The remaining share-repurchase authorization and the effects of financing-portfolio growth on leverage and liquidity.