PACCAR Inc. — Q1 2012 Form 10-Q
Period: Three months ended March 31, 2012. Unaudited interim financial statements; amounts are in millions of dollars except per-share data, units and percentages.
Business context and results
PACCAR designs, manufactures and distributes commercial trucks and aftermarket parts, and finances and leases PACCAR products through its Financial Services segment. It also operates an industrial winch business. Consolidated revenue rose 45% to $4,776.1, primarily on stronger truck deliveries and parts sales. Net income increased 69% to $327.3, or $0.91 diluted EPS.
Key financial metrics
- Truck and Other: Revenue was $4,514.7, up 48%; pretax income was $398.8, versus $228.0. Truck deliveries rose 45% to 39,800. U.S. and Canada heavy-duty market share increased to 28.9% from 22.8%.
- Truck margins: Truck segment gross margin was 13.1%, down from 13.5%, reflecting a greater truck-sales mix; truck gross margin improved to 9.2% from 7.8%, while aftermarket parts gross margin was 35.0% versus 35.3%. Aftermarket parts revenue increased 10% to $680.4.
- Financial Services: Revenue increased 8% to $261.4 and pretax income increased 42% to $71.3. Average earning assets grew 20% to $9,185.8. Improved finance and lease margins and lower receivable-loss provisions supported earnings.
- Profitability: Consolidated return on revenue was 6.9%, versus 5.9%; the effective tax rate was 31.7%, versus 32.5%.
- Cash flow: Operating cash flow was $126.3, down from $459.3. Investing cash outflow was $365.1, compared with $850.7; financing provided $22.4, versus a $10.4 outflow. Cash and cash equivalents ended at $1,923.1.
- Liquidity: Cash plus marketable debt securities totaled $2,870.9 at March 31, down from $3,016.8 at year-end. PACCAR reported $3.70 billion of credit lines, $3.44 billion unused.
- Debt and equity: Truck and Other long-term debt was $150.0. Financial Services reported $3,964.8 of commercial paper and bank loans and $2,968.7 of term notes. Stockholders’ equity was $5,719.1.
- Returns to shareholders: Dividends declared were $0.18 per share, versus $0.12. Cash dividends paid were $314.4, versus $43.8; the filing does not explain the payment-period difference in the figures presented here. PACCAR repurchased 399,561 shares during the quarter for $15.6.
Material changes versus Q1 2011
- North American truck deliveries and market share increased substantially; European truck revenue declined 6%, and deliveries edged down 2%.
- Truck pretax income increased 67%, primarily due to higher unit sales, truck margins and aftermarket parts sales. Higher material costs and production-related overhead partly offset gains.
- Financial Services income improved despite lower portfolio yields, as borrowing costs declined and average receivables grew. Provision for receivable losses fell to $7.5 from $10.5; net charge-offs were $7.4 versus $9.3.
- Cash from operations fell chiefly due to growth in finance receivables and inventories, higher pension contributions ($82.7 versus $4.1), and working-capital movements, partly offset by higher net income.
Outlook, risks and notable items
- Management projected 2012 U.S. and Canada truck-industry retail sales of 210,000–240,000 units, up from 197,000 in 2011. The European market for vehicles over 16 tonnes was projected at 210,000–230,000 units, below 2011’s 241,000.
- Expected 2012 capital investment was $450–$550 and R&D spending $275–$300, including product development and construction of a factory in Brazil. Average Financial Services earning assets were expected to grow as new financing exceeded portfolio runoff.
- Management said customers were benefiting from improved freight volumes, rates and fleet utilization; if conditions persisted, past-due accounts, repossessions and net charge-offs could be comparable to or slightly better than current levels.
- Risks cited 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 interruptions, manufacturing capacity, capital-market liquidity, warranty costs and customer profitability.
- SEC investigation: PACCAR reported that on April 24, 2012 it received notice of a formal SEC investigation concerning 2008–2011 financial reporting, including loan-loss reserves, troubled debt restructurings and segment reporting. The company said it was cooperating.
- Other contingencies: A union petitioned for review of an NLRB decision involving former Peterbilt plant employees; management considered an adverse outcome remote. Routine lawsuits were not expected to materially affect the business or financial condition.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Adoption of new fair-value and comprehensive-income presentation guidance did not materially affect the financial statements.
Important facts for investors to verify
- Developments and potential financial-reporting implications of the SEC investigation, particularly its focus on reserves, restructurings and segment reporting.
- Whether truck demand, North American market share and the projected 2012 regional industry markets develop as management expected.
- Financial Services credit quality, including the large customer included in U.S. and Canada past-due accounts; worldwide accounts over 30 days past due were 1.5%, or 1.0% excluding that customer.
- Funding and liquidity: Financial Services debt maturities and reliance on commercial paper, capital markets and credit lines; one $1.0 billion syndicated facility was due to mature in June 2012.
- The reason for the unusually large Q1 cash-dividend payment relative to dividends declared per share, and the timing of related dividend obligations.