PACCAR Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Amounts are in millions of dollars except per-share data, units, and percentages. PACCAR designs, manufactures, and distributes commercial trucks and parts; its Financial Services segment finances and leases PACCAR products. The filing was signed August 8, 2011.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Consolidated revenue | $3,960.7 | $2,464.1 | $7,244.3 | $4,694.8 |
| Income before income taxes | $353.2 | $148.6 | $639.5 | $244.6 |
| Net income | $239.7 | $99.6 | $433.0 | $167.9 |
| Diluted earnings per share | $0.65 | $0.27 | $1.18 | $0.46 |
| Consolidated pretax return on revenue | 8.9% | 6.0% | 8.8% | 5.2% |
- Growth and margins: Revenue increased 61% in Q2 and 54% in the first half. Truck segment revenue rose 67% and 61%, respectively; Truck segment pretax income increased 154% and 194%. Truck segment gross margin was 12.7% in Q2 and 13.1% for the first half, compared with 12.1% and 11.5%. Management attributed improvement primarily to higher deliveries, pricing, parts sales, and better fixed-cost absorption.
- Financial Services: Pretax income was $56.9 in Q2 and $107.2 for the first half, up from $34.0 and $62.1. Results benefited from higher finance and lease margins and lower credit-loss provisions. Segment pretax return on revenue was 22.1% in Q2 and 21.5% for the first half, versus 14.2% and 12.8%.
- Cash flow: First-half operating cash flow was $792.0, compared with $799.5 a year earlier. Investing used $1,401.9, largely reflecting increased investments in marketable securities, finance receivables, and leased equipment. Financing provided $362.7, including a $1,007.7 net increase in commercial paper and short-term bank loans. Cash and cash equivalents declined $168.2 to $1,872.6; cash plus marketable debt securities totaled $2,925.6 at June 30.
- Liquidity and debt: At June 30, Truck and Other debt was $174.4; Financial Services commercial paper and bank loans were $3,475.1 and term notes were $2,233.5. PACCAR had $3.68 billion of credit lines, of which $3.42 billion was unused. Management cited cash, investments, bank facilities, and investment-grade ratings as supporting liquidity.
- Balance sheet and credit: Total assets were $16,301.0 versus $14,234.1 at year-end 2010; stockholders’ equity was $5,914.0 versus $5,357.8. Financial Services assets were $8,688.8. Worldwide PFS accounts more than 30 days past due were 2.3%, down from 3.0% at year-end and 4.0% a year earlier. The filing identifies one large customer as a material concentration within U.S. and Canada past-due accounts.
Material changes and management commentary
- Truck deliveries increased to 34,100 in Q2 from 18,600, and to 61,600 in the first half from 35,100. Higher demand in North America and Europe, stronger parts sales, and an improved used-truck market supported results.
- Foreign currency translation, primarily the stronger euro, added $192.0 to Q2 revenue and $18.7 to pretax income; first-half effects were $208.7 and $24.5, respectively.
- Truck and Other inventories rose to $742.7 from $534.0 at year-end. Product support liabilities rose to $428.0 from $372.2. First-half capital spending on property, plant, and equipment was $117.5, versus $47.8.
- Financial Services new loan and lease volume increased 94% in Q2 and 78% in the first half. The allowance for credit losses was $149.1 at June 30; first-half provision for losses fell to $21.5 from $35.8, and net charge-offs fell to $21.6 from $42.0.
Outlook, risks, contingencies, and unusual items
- Truck outlook: Management expected improving economic conditions to support higher production and parts sales. It forecast 2011 U.S. and Canada heavy-duty industry retail sales of 180,000–200,000 units, up 40%–60% from 2010, and European 15-tonne-and-above sales of 230,000–250,000 units, up 25%–35%. The North American range was lowered because of an uneven recovery and supplier capacity constraints, particularly tires and chassis components.
- Spending and Financial Services outlook: 2011 capital investments were expected to be $400–$500 and R&D spending $275–$300. Average Financial Services earning assets were expected to grow approximately 5%–10% from 2010. Management said continued economic improvement could further reduce delinquencies, repossessions, and charge-offs.
- Key risks: Demand and market-share changes; supplier capacity or raw-material interruptions; fuel, commodity, and currency fluctuations; regulation and emissions-related costs; interest rates and capital-market access; used-truck prices and residual values; customer profitability and credit losses; labor disruption; and warranty costs or litigation. Management noted no material change in risk factors or market risk during the quarter.
- Credit and unusual items: A large customer accounted for 1.1% of the reported 1.6% U.S. and Canada retail-account 30-plus-day past-due rate; excluding it, the worldwide past-due rate would have been 1.7%. PACCAR provided payment relief to $97 of credit-qualified Australian customers affected by Queensland flooding; 96% were less than 30 days past due at June 30. Certain modified accounts in Mexico and Australia affected reported delinquency measures.
- Legal: On July 15, 2011, the NLRB ruled PACCAR need not compensate former Madison, Tennessee plant employees for wage and benefit losses related to a 2009 work stoppage. The company said an adverse outcome was remote, including if the union appealed. Management said ordinary-course lawsuits were not expected to materially affect business or financial condition.
- The filing states that interim results are not necessarily indicative of full-year results. Management reported effective disclosure controls and no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Whether truck demand, production, and supplier capacity support management’s market and delivery outlook.
- Whether truck gross margins and earnings remain resilient as production costs, R&D, and other operating expenses rise.
- Whether Financial Services delinquencies, the large-customer exposure, modified accounts, and used-truck residual values remain manageable.
- How receivables, inventory, lease-asset investment, and marketable-security purchases affect operating cash flow and funding needs.
- Whether debt funding, credit-line availability, foreign-exchange movements, and interest-rate hedges continue to support liquidity and margins.