PACCAR Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. PACCAR designs, manufactures and distributes commercial trucks and aftermarket parts, and provides financing and leasing through its Financial Services segment. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Consolidated revenue | $3,283.6 | $2,230.7 | +47% |
| Income before income taxes | $286.3 | $96.0 | +198% |
| Net income | $193.3 | $68.3 | +183% |
| Diluted earnings per share | $0.53 | $0.19 | — |
| Return on revenues | 5.9% | 3.1% | +2.8 percentage points |
| Cash provided by operating activities | $459.3 | $285.4 | +$173.9 |
- Truck and Other: Revenue was $3,042.6, up from $1,984.3; pretax income was $228.0, versus $63.4. Truck segment revenue was $3,018.1 and pretax income was $240.7. Truck segment gross margin improved to 13.5% from 10.9%.
- Financial Services: Revenue was $241.0, down 2%, while pretax income rose to $50.3 from $28.1. The improvement reflected a $13.9 increase in lease margin and a $7.9 lower provision for receivable losses.
- Cash and liquidity: Cash and marketable debt securities totaled $2,691.4 at March 31, up $200.1 from year-end 2010. Cash and cash equivalents alone declined $351.1 during the quarter to $1,689.7. Investing activities used $850.7, including increased securities purchases and lending and lease investments.
- Debt: Truck and Other current and long-term debt totaled $174.2. Financial Services commercial paper and bank loans were $2,590.5 and term notes were $2,647.3. PACCAR reported $3,670 of credit lines, of which $3,400 was unused; none of the syndicated bank facilities was drawn during the quarter.
- Shareholder return: Dividends declared were $0.12 per share, versus $0.09 a year earlier. No common-stock repurchases were made during Q1.
Material changes and management commentary
- Truck deliveries increased 67% to 27,500 units. Truck sales and revenues rose 54%; aftermarket parts sales increased to $620.2 from $505.2.
- Management attributed stronger Truck results to improved demand, higher deliveries and parts sales, improved pricing, and better fixed-cost absorption. Increased production costs included higher EPA 2010 truck content and factory overhead.
- Truck market share was 22.8% in the U.S. and Canada, down from 23.3%, and 15.7% in Europe, down from 16.9%.
- Favorable currency translation increased Q1 revenue by $16.7 and pretax income by $5.7. The effective tax rate was 32.5%, compared with 28.9%; the prior-year rate benefited from resolution of a prior-year tax position.
- Worldwide Financial Services accounts 30 or more days past due were 3.0% of retail loan and lease accounts, unchanged from December 2010 and improved from 4.0% a year earlier. One large U.S. and Canada customer accounted for 1.1 percentage points; excluding it, the worldwide figure would have been 2.4%.
Outlook, risks and contingencies
- Management expected improving economic conditions to support higher truck production and aftermarket sales. Its 2011 industry forecasts were 200,000–220,000 heavy-duty retail truck sales in the U.S. and Canada, and 220,000–240,000 vehicles over 15 tonnes in Europe.
- Management forecast 2011 capital spending of $400–$500 and R&D spending of $275–$300, including product development and South American expansion. Financial Services average earning assets were expected to grow approximately 10% in 2011 from 2010.
- Management cited possible supplier capacity constraints as a factor that could limit industry production growth. Other disclosed risks include weaker truck demand or market share, fuel and commodity prices, regulations, currency and interest-rate movements, used-truck values, supplier interruptions, labor disruptions, and credit-market access.
- Flooding in Queensland, Australia led PACCAR Financial Services to offer three months of payment relief on $97 of customer accounts; $3 of modifications were classified as troubled debt restructurings. The company said 99% of these customers made their first payment after the relief period in April. The program reduced Q1 collections by approximately $8.
- An NLRB administrative law judge decision concerning a former Peterbilt plant work stoppage could result in payments to approximately 300 employees. PACCAR disputed the decision, estimated possible outcomes at nil to $15, and recorded no reserve, believing it would prevail.
- The filing states that Q1 results are not necessarily indicative of full-year results. Management reported no material change in market risk or risk factors during the quarter.
Important facts for investors to verify
- Whether truck demand, deliveries, margins and market share develop in line with management’s market forecasts, especially given supplier-capacity constraints.
- Whether used-truck prices and receivable quality remain supportive of Financial Services lease margins, loss provisions and delinquency trends, including exposure to the large customer.
- Execution and funding of the planned $400–$500 capital spending and $275–$300 R&D programs, alongside the maturity and renewal of bank facilities.
- Developments in the NLRB matter and the potential nil-to-$15 exposure, for which no reserve was recorded.
- Effects of currency movements, the higher effective tax rate, and the Australian payment-relief modifications on subsequent results and cash collections.