PACCAR Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing is an annual report; fourth-quarter figures are noted separately below. PACCAR designs and manufactures Kenworth, Peterbilt and DAF trucks, distributes aftermarket parts, and provides truck-related financing and leasing.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $17.124 billion | $17.051 billion | Up 0.4% |
| Income before tax | $1.695 billion | $1.629 billion | Up 4.1% |
| Net income | $1.171 billion | $1.112 billion | Up 5.4% |
| Diluted EPS | $3.30 | $3.12 | Up 5.8% |
| Operating cash flow | $2.376 billion | $1.519 billion | Up $856.7 million |
| Cash and marketable debt securities | $3.018 billion | $2.465 billion | Up $552.5 million |
Revenue was essentially flat as truck and other sales declined slightly, offset by growth in Parts and Financial Services. Return on revenue rose to 6.8% from 6.5%. The filing reports $15.949 billion of Truck, Parts and Other revenue and $1.175 billion of Financial Services revenue.
- Truck: Revenue of $13.003 billion, down 1%; pretax income of $936.7 million, up 2%. Pretax return on revenue was 7.2% versus 7.0%; truck gross margin edged down to 10.1% from 10.2%. Deliveries declined 2% to 137,100 units. North American Class 8 market share was 28.0%, down from 28.9%; DAF’s Western and Central European heavy-duty share reached a record 16.2%.
- Parts: Revenue of $2.822 billion, up 6%; pretax income of $416.0 million, up 11%. Pretax return on revenue improved to 14.7% from 14.0%, and gross margin rose to 25.3% from 25.2%, supported by demand, pricing and cost control.
- Financial Services: Revenue of $1.175 billion, up 7%; record pretax income of $340.2 million, up 11%. Average earning assets rose 9% to $10.598 billion. New loan and lease volume fell 7%, and finance market share on new PACCAR truck sales declined to 29.2% from 30.6%. The provision for credit losses decreased to $12.9 million from $20.0 million.
Fourth quarter: Net income was $334.2 million and diluted EPS was $0.94, compared with $253.5 million and $0.72 in Q4 2012. Truck, Parts and Other revenue was $4.299 billion; Financial Services revenue was $299.5 million. Q4 2012 included a $12.7 million cost-of-sales benefit from capitalization of new product tooling, increasing that quarter’s net income by $9.0 million, or $0.03 per share.
Cash flow, debt and liquidity
- Operating cash flow increased to $2.376 billion, primarily reflecting improved working capital and $164.6 million lower pension contributions. Investing used $2.151 billion; financing provided $273.8 million. Cash and cash equivalents ended the year at $1.750 billion.
- Financial Services debt was $8.274 billion; Truck, Parts and Other long-term debt was $150 million, which matured and was repaid in February 2014. Total reported debt was therefore approximately $8.424 billion. Financial Services debt primarily funds loans, leases and related assets.
- Unused credit facilities were $3.466 billion of $3.708 billion available. The company reported investment-grade ratings of A+/A1 and said it expected cash, receivable collections, bank lines and capital-market access to support liquidity. Approximately $4.0 billion of Financial Services borrowings were scheduled to mature in 2014, including commercial paper; PACCAR expected to refinance or fund maturities through collections and market borrowings.
- Dividends declared were $1.70 per share, including a $0.90 year-end extra dividend. The company said it expected to continue regular dividends, subject to future earnings, capital needs and financial condition.
Changes, outlook and risks
- Truck revenue and deliveries weakened in North America and several other regions, while European truck revenue increased. Some European customers advanced purchases ahead of Euro 6 emissions requirements taking effect in 2014.
- Parts was the strongest operating growth contributor. Financial Services earnings also improved as higher average assets and margins, along with lower credit-loss provisions, outweighed lower new business volume and yields.
- For 2014, management expected U.S. and Canadian truck retail sales of 210,000–240,000 units, versus 212,200 in 2013; European registrations for trucks over 16 tonnes of 200,000–230,000, versus 240,800; and Parts aftermarket sales growth of 3%–7%. Average Financial Services earning assets were expected to grow about 5%.
- Planned 2014 capital investment was $350–$400 million and R&D spending $225–$275 million. DAF began production at its new Brazilian plant in Q4 2013; management planned a gradual production ramp in 2014 and expected Brazil truck-industry sales above six tonnes of about 150,000 units.
- Principal risks include cyclical truck demand, competitive pricing, commodity costs and supplier disruption, access to capital markets, credit losses and used-truck residual values, interest and currency movements, emissions and safety regulation, warranty claims, and pension and tax estimates. Cummins supplies engines used in PACCAR trucks under a long-term agreement; a prolonged loss of supply could materially affect results.
- The company had $4.0 billion of production backlog at year-end, including approximately $2.0 billion scheduled for delivery within 90 days; most year-end backlog was expected to be produced in 2014. PACCAR was cooperating with an EU Competition Commission investigation of major European truck manufacturers concerning possible coordination of commercial policy. Management did not expect ordinary-course litigation or environmental matters to materially affect the company’s financial condition.
- Management identified residual truck values, credit-loss allowances, warranties, pensions and income taxes as sensitive estimates. A 10% sustained decline in worldwide used-truck values could add about $47.2 million of annual depreciation over remaining lease terms. The filing also estimates that a 100-basis-point increase in 30-plus-day past-due accounts could raise credit losses by approximately $5–$22 million.
Important facts for investors to verify
- Whether truck-market demand, deliveries and market share—particularly in North America and Europe—develop as management projected.
- Whether the Brazilian factory and dealer network ramp as planned, and whether 2014 investment and R&D spending remain within stated ranges.
- Financial Services refinancing and liquidity needs, including 2014 maturities, commercial-paper access, portfolio growth and credit performance.
- Used-truck values, lease residual assumptions, residual-value guarantees and the adequacy of credit-loss and warranty reserves.
- Developments in the EU competition investigation and any resulting financial or operational exposure.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting; investors should review the full audited statements and notes for detail.