PACCAR Inc. — Q1 2010 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three months ended March 31, 2010, with year-over-year comparisons to Q1 2009. PACCAR operates Truck and Financial Services segments; its truck brands include Kenworth, Peterbilt and DAF. Unless stated otherwise, amounts are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 or prior balance |
|---|---|---|
| Total revenue | $2,230.7 | $1,986.2 |
| Net income | $68.3 | $26.3 |
| Diluted EPS | $0.19 | $0.07 |
| Operating cash flow | $285.4 | $90.8 |
| Cash and marketable debt securities, March 31 | $2,101.4 | $2,131.5 at Dec. 31, 2009 |
| Stockholders’ equity, March 31 | $5,092.6 | $5,103.7 at Dec. 31, 2009 |
- Total revenue increased about 12%; net income increased about 160%. Return on revenues improved to 3.1% from 1.3%.
- Truck and Other revenue was $1,984.3, up from $1,730.4; pretax income rose to $63.4 from $13.3. Truck segment revenue from external customers increased 15% to $1,965.7, and truck pretax income rose to $66.6 from $25.4. Truck segment gross margin increased to 10.9% from 9.6%.
- Financial Services revenue decreased to $246.4 from $255.8, while pretax income increased to $28.1 from $15.3. Average earning assets declined 12% to $7,920.4. The receivables-loss provision fell to $21.7 from $25.0; accounts 30 or more days past due declined to 4.0% of the portfolio from 4.9%.
- Operating cash flow was $285.4; investing activities provided $40.5 and financing activities used $350.8. Cash and equivalents decreased $57.3 during the quarter, including a $32.4 adverse foreign-exchange effect.
- Truck and Other long-term debt was $173.1. Financial Services commercial paper and bank loans totaled $2,675.7, and term notes totaled $2,838.2. These reported borrowings totaled approximately $5,687.0, largely associated with Financial Services. The filing reports $3.69 billion of credit lines, of which $3.36 billion was unused at quarter-end.
Material changes and management commentary
- Truck deliveries rose 13% to 16,500. U.S. and Canada deliveries increased 24%; Europe deliveries declined 9%. Management attributed North American gains partly to a modest pre-buy ahead of EPA 2010 engine emissions requirements, and cited stronger parts demand and improved factory utilization.
- Stronger foreign currencies increased Q1 2010 revenue by $112.6 and pretax income by $10.2 versus the prior year. Investment income declined to $4.5 from $8.0.
- Financial Services new loan and lease volume increased 60% to $454.1, while its market share on new PACCAR truck deliveries rose to 26.3% from 18.0%. Lower average debt, borrowing rates and economic-hedge expenses supported segment earnings.
- Net income benefited from an $11.3 favorable tax settlement. The effective tax rate was 28.9%, compared with 28.1% a year earlier.
- Used-truck write-downs totaled $7.6 in the quarter. PACCAR contributed $19.3 to pension plans. No share repurchases occurred; declared dividends were $0.09 per share, versus $0.18 in Q1 2009.
Outlook, risks and contingencies
- Management projected 2010 U.S. and Canada heavy-duty truck sales of 110,000–140,000 units, up slightly from 2009. It expected Western and Central European trucks over 15 tonnes to total 150,000–180,000 units, in line with 2009, amid continued challenging conditions.
- Financial Services earning assets at year-end 2010 were expected to be comparable to year-end 2009. Management warned that weak economic conditions could pressure truck operators’ profitability and customers’ payment performance.
- Expected 2010 capital spending was $175–$200; R&D spending was expected at $225–$250. The company said investment would focus on manufacturing efficiency, engine development and new products.
- On April 29, 2010, after quarter-end, Standard & Poor’s lowered PACCAR’s credit rating from AA− to A+. PACCAR stated it expected its liquidity and investment-grade rating to support capital-market access. A $300.0 PACCAR Financial Corp. floating-rate note issuance settled in early April, after quarter-end.
- Key disclosed risks include industry demand and competition, emissions and other regulation, foreign exchange and commodity prices, used-truck values, manufacturing utilization and supply interruptions, capital-market liquidity, interest rates, warranty costs and customer credit quality. Management reported no material change in risk factors or market risk for the quarter. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the modest North American pre-buy and economic recovery translate into sustained truck demand, and how actual markets compare with management’s ranges.
- Whether the June 2010 maturity of $2.0 billion in syndicated bank facilities was refinanced as planned, and the effect of the April credit-rating downgrade on funding costs and access.
- Financial Services receivable quality, allowance assumptions, repossessions and used-truck residual values, particularly in Mexico and Australia, where past-due rates remained higher.
- The durability of earnings excluding the $11.3 favorable tax settlement and the impact of foreign-exchange movements and hedging.
- Actual capital and R&D spending against guidance, and whether the $300.0 million note issuance settled in April on the disclosed terms.