PACCAR INC quarterly report, Q3 FY2013

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PACCAR Inc. — Q3 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 quarterly report covers the three and nine months ended September 30, 2013; amounts below are in U.S. dollars unless stated otherwise.

Financial performance

  • Revenue: Consolidated sales and revenues were $4.30 billion in Q3, up 12.6% year over year, and $12.52 billion for the first nine months, down 4.1%. Q3 Truck, Parts and Other revenue was $4.01 billion; Financial Services revenue was $293.5 million.
  • Profit and EPS: Q3 net income was $309.4 million, or $0.87 per diluted share, versus $233.6 million and $0.66 a year earlier. Nine-month net income was $837.1 million, or $2.36 per diluted share, versus $858.1 million and $2.41.
  • Margins: Return on consolidated revenues was 7.2% in Q3 versus 6.1%; for nine months it was 6.7% versus 6.6%. Truck gross margin was 10.1% in Q3 versus 9.4%, but 9.8% for nine months versus 10.5%. Parts gross margin improved to 25.3% in Q3 from 25.0% and to 25.6% for nine months from 25.3%.
  • Segment results: Q3 Truck pre-tax income rose 42% to $242.5 million; nine-month Truck pre-tax income fell 13% to $645.9 million. Parts pre-tax income increased 20% in Q3 to $106.5 million and 11% for nine months to $311.2 million. Financial Services pre-tax income rose 10% in Q3 to $88.2 million and 9% for nine months to $249.8 million.
  • Cash flow: Operating cash flow for the first nine months was $1.70 billion, versus $916.6 million; investing cash outflow was $1.46 billion, versus $1.66 billion; financing cash inflow was $219.9 million, versus $380.0 million. Cash and cash equivalents increased $438.0 million to $1.71 billion.
  • Liquidity and debt: Cash plus marketable debt securities totaled $2.91 billion at September 30, up from $2.47 billion at year-end 2012. PACCAR reported $3.42 billion of unused credit lines out of $3.67 billion available. Financial Services had $2.64 billion of commercial paper and bank loans and $5.49 billion of term notes; Truck, Parts and Other reported $150 million current and $150 million long-term debt.

Changes versus comparable periods

  • Q3 truck deliveries increased 14% to 35,400 units, led by higher deliveries in the U.S., Canada and Europe. Nine-month deliveries declined 7% to 100,700, reflecting weaker demand in the U.S., Canada and South America.
  • Aftermarket parts sales reached a Q3 record of $715.3 million, up 10%; nine-month sales were $2.09 billion, up 5%, on stronger worldwide demand.
  • Financial Services average earning assets rose 7% in Q3 and 9% for nine months, while new loan and lease volume declined 7% and 8%, respectively. Lower portfolio yields were partly offset by lower borrowing rates and higher finance margins.
  • Nine-month operating cash flow improved mainly with working-capital changes and $81.7 million lower pension contributions. Cash dividends paid fell to $212.3 million from $455.9 million; the prior-year amount included a special dividend. No treasury stock was repurchased in the first nine months of 2013.

Outlook, commentary and risks

  • Management projected 2013 U.S. and Canada Class 8 retail sales of 205,000–215,000 units and 2014 sales of 210,000–240,000. European over-16-tonne truck registrations were projected at 215,000–225,000 for 2013 and 200,000–230,000 for 2014, with 2014 affected by purchases pulled forward ahead of Euro 6 requirements.
  • Management expected 2014 aftermarket parts industry sales to grow 3%–7%. Planned 2013 capital investment was $425–$475 million and R&D $250–$260 million; 2014 estimates were $350–$400 million and $225–$275 million, respectively.
  • PACCAR began production at its new DAF truck plant in Brazil in October 2013. Management expected Financial Services average earning assets to be slightly higher in Q4 and potentially grow further in 2014.
  • Management cautioned that weaker freight conditions or economic conditions could increase past-due accounts, repossessions and credit losses. Worldwide Financial Services accounts 30+ days past due were 0.7%, versus 0.6% at year-end 2012 and 0.9% a year earlier; the filing notes that modifications can cause past-due accounts to be treated as current under revised terms.
  • Other risks cited include industry sales declines, competition and market-share changes, fuel and commodity prices, foreign exchange, used-truck values, regulation, manufacturing or supplier disruption, capital-market liquidity and interest rates, warranty costs, and labor or driver shortages. Management reported no material change in market risk or risk factors during the period.
  • The SEC investigation into PACCAR’s 2008–2011 financial reporting was resolved by a June 2013 settlement. The company continued cooperating with an EU Competition Commission investigation of major commercial-vehicle manufacturers. Management said ordinary-course lawsuits were not expected to materially affect the business or financial condition; an NLRB proceeding was resolved in the company’s favor.

Most important facts for investors to verify

  • Whether the Q3 improvement in truck deliveries and earnings is sustained, given weaker nine-month truck sales and lower year-to-date Truck segment income.
  • Whether parts growth, margins and the stated 2014 aftermarket outlook hold up across regions.
  • Financial Services credit quality, including past-due trends, loan modifications, repossessions, allowance adequacy and used-truck collateral values.
  • Funding and liquidity resilience, particularly reliance on commercial paper and capital markets, debt maturities, and renewal or replacement of credit facilities.
  • Execution and spending for the Brazil plant, new products and planned capital investment and R&D; also monitor the EU investigation and any material developments in legal matters.