PACCAR Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts are in millions of dollars except per-share data. PACCAR operates Truck and Financial Services segments, alongside a smaller industrial winch business.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Consolidated sales and revenues | $4,457.2 | $3,960.7 | $9,233.3 | $7,244.3 |
| Income before tax | $446.3 | $353.2 | $925.3 | $639.5 |
| Net income | $297.2 | $239.7 | $624.5 | $433.0 |
| Diluted EPS | $0.83 | $0.65 | $1.75 | $1.18 |
| Return on revenues | 6.7% | 6.1% | 6.8% | 6.0% |
- Truck: Segment revenue was $4,149.9 in Q2 and $8,624.7 for the half; pretax income was $362.0 and $763.9, respectively. Truck gross margin was 13.2% in both periods, versus 12.7% in Q2 2011 and 13.1% in first-half 2011.
- Financial Services: Revenue was $266.1 in Q2 and $527.5 for the half. Pretax income increased to $77.4 and $148.7, respectively, from $56.9 and $107.2. Management attributed improvement mainly to higher finance margin and lower receivable-loss provisions.
- Cash flow: First-half operating cash flow was $444.0, down from $792.0. Investing used $1,080.4; financing provided $264.2. Cash and cash equivalents ended at $1,719.9, down $386.8 from year-end.
- Liquidity and debt: Cash plus marketable debt securities totaled $2,648.4 at June 30, versus $3,016.8 at December 31. Truck and Other long-term debt was $150.0. Financial Services borrowings comprised $3,381.5 of commercial paper and bank loans and $3,868.8 of term notes. PACCAR reported $3.42 billion of unused credit lines within $3.67 billion of arrangements.
- Capital returns and investment: First-half dividends paid were $385.7, and treasury-stock purchases were $139.5. Capital spending was $208.7 in the first half. The board’s $300 million repurchase authorization had $130.6 million remaining at June 30.
Material changes and drivers
- Truck deliveries rose to 37,800 in Q2 from 34,100 and to 77,600 in the first half from 61,600. North American deliveries and market share gains drove much of the growth; European deliveries declined.
- Truck results benefited from higher volume, pricing, aftermarket parts sales, and improved fixed-cost absorption. Higher material and production-support costs and SG&A partly offset those gains.
- Financial Services average earning assets increased 19% year over year in both the quarter and half-year. Lower portfolio yields were more than offset in finance margin by lower borrowing rates and asset growth. The receivable-loss provision was $5.0 in Q2 and $12.5 for the half, compared with $11.0 and $21.5.
- Weaker foreign currencies, principally the euro, reduced Q2 sales and revenues by $139.4 and pretax income by $3.9; first-half reductions were $179.7 and $3.0.
- First-half cash generation was affected by working-capital movements, higher pension contributions ($85.4 versus $6.8), and tax payments exceeding current tax expense.
Outlook, risks and unusual items
- Management expected 2012 U.S. and Canadian industry retail truck sales of 210,000–230,000 units, versus 197,000 in 2011; second-half sales could be lower than first-half levels amid slow economic growth. European over-16-tonne market sales were forecast at 210,000–230,000 units, below 241,000 in 2011, amid economic weakness and uncertainty.
- 2012 capital investment guidance was $450–$550 million and R&D guidance was $275–$300 million, focused on new products, manufacturing efficiency, and geographic expansion, including a new DAF factory in Brazil.
- Financial Services average earning assets were projected to grow slightly in the second half. Management cautioned that weaker freight and economic conditions could increase delinquencies, repossessions, and net charge-offs from current low levels.
- Liquidity risks include possible disruption in commercial-paper markets and the maturity mismatch between short-term borrowing and longer-dated customer receivables. Management cited cash, investments, credit lines, and investment-grade ratings as liquidity support; a ratings decline could impair access to competitively priced funding.
- The SEC had opened a formal investigation into PACCAR’s 2008–2011 financial reporting, requesting information on loan-loss reserves, troubled debt restructurings, and segment reporting. PACCAR said it was cooperating. The filing provides no stated outcome.
- The U.K. Office of Fair Trading closed its inquiry into possible commercial-vehicle price-fixing or supply restrictions; it stated that the European Commission was better placed to continue the broader investigation. A union petition challenging an NLRB decision was pending; management considered an adverse outcome remote. Other ordinary-course litigation was not expected by management to materially affect the company.
- Currency translation drove a Q2 comprehensive loss relative to net income: comprehensive income was $185.2, versus $297.2 net income, primarily reflecting currency translation losses. Management reported no material market-risk changes and no material changes in risk factors.
Important facts for investors to verify
- Follow the SEC investigation and any resulting findings, restatements, or changes to reserve, restructuring, or segment disclosures.
- Monitor truck demand—especially North American conditions and the weaker European outlook—and whether margins hold as production and costs change.
- Track Financial Services delinquencies, credit-loss provisions, TDR performance, and used-truck collateral values; reported worldwide 30-plus-day delinquencies were 1.2%, or 0.8% excluding one customer.
- Assess funding access, debt maturities, credit ratings, and available facilities against Financial Services portfolio growth and cash-flow needs.
- Verify execution of capital-spending and R&D plans, repurchases, and dividends, and assess the effect of exchange rates and pension funding on cash and comprehensive income.