PACCAR Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. PACCAR designs, manufactures and distributes commercial trucks and parts, finances and leases equipment, and manufactures industrial winches. Financial figures are in millions of dollars except per-share amounts.
Financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $2,464.1 | $1,848.9 | $4,694.8 | $3,835.1 |
| Income before tax | $148.6 | $27.9 | $244.6 | $64.5 |
| Net income | $99.6 | $26.5 | $167.9 | $52.8 |
| Diluted EPS | $0.27 | $0.07 | $0.46 | $0.14 |
- Truck and Other revenue rose to $2,224.8 in Q2 and $4,209.1 for the first half, from $1,602.3 and $3,332.7. Truck segment pretax income turned positive: $114.2 in Q2 and $180.8 year to date, versus losses of $36.5 and $11.1.
- Financial Services revenue declined 3% in both comparison periods, to $239.3 in Q2 and $485.7 for the first half. Pretax income improved to $34.0 and $62.1, respectively, from $15.6 and $30.9.
- Truck segment gross margin was 12.1% in Q2 versus 6.8%, and 11.5% for the first half versus 8.2%. Consolidated return on revenues was 4.0% versus 1.4% in Q2 and 3.6% versus 1.4% for the first half.
- Operating cash flow was $799.5 for the first half, compared with $410.0 in 2009. Investing activities used $13.0, versus providing $489.8; financing activities used $674.3, versus $1,013.8 used.
- Cash and cash equivalents were $1,898.1 at June 30, down from $1,912.0 at year-end; marketable debt securities were $294.9, up from $219.5. Cash plus marketable securities totaled $2,193.0.
- Financial Services debt comprised $2,073.8 of commercial paper and bank loans and $2,951.5 of term notes. Truck and Other long-term debt was $172.1. PACCAR had $3.55 billion in credit lines, of which $3.34 billion was unused; no syndicated bank-line borrowings occurred in the first half.
Changes versus prior period
- Revenue increased 33% in Q2 and 22% for the first half; net income rose to $99.6 and $167.9, respectively. Higher truck deliveries, parts demand and truck margins drove the improvement.
- Worldwide truck deliveries increased 35% in Q2 to 18,561 and 23% for the first half to 35,052. First-half truck sales rose across reported regions; European heavy-truck market size remained below the prior year.
- Financial Services pretax income benefited from improved finance and lease margins and lower credit-loss provisions. The provision fell to $20.2 in Q2 and $41.9 for the first half, from $29.1 and $54.1. Accounts 30+ days past due declined to 4.0% from 4.7% a year earlier, though they were up from 3.8% at year-end.
- Foreign-currency translation increased revenue by $11.6 in Q2 and $124.2 for the first half, and pretax income by $4.2 and $14.4, respectively.
- The 2009 comparison included a $47.7 one-time benefit from discontinuing post-retirement medical subsidies for most U.S. employees. The 2010 effective tax rate was higher: 33.0% in Q2 and 31.4% for the first half, versus 5.0% and 18.1% in 2009.
Outlook, commentary and risks
- Management expected U.S. and Canadian heavy-truck sales of 110,000–130,000 units for 2010. Western and Central European heavy-truck demand was expected to remain challenging, with a market of 160,000–170,000 units. PACCAR anticipated gradual improvement in its primary markets in the second half, potentially supporting sales and margins.
- Financial Services earning assets were expected to be slightly higher in the second half. Management cautioned that customer profitability and payment capacity remained under pressure; past-due balances were expected to remain near current levels for the rest of 2010.
- Expected 2010 capital spending was $175–$200 and R&D spending $225–$250, focused on manufacturing efficiency, engine development and new products. First-half spending was $47.8 and $113.2, respectively.
- Key disclosed risks include weaker truck demand or market share, fuel and commodity costs, regulation, currency and interest-rate movements, used-truck values, manufacturing or supplier disruptions, capital-market access, customer credit quality, warranty costs and litigation. Management reported no material change in market risks or risk factors since year-end.
- Other notable items: accumulated other comprehensive loss was $190.9, principally reflecting currency translation; the company reported no material counterparty-default exposure on derivatives. No common-stock repurchases occurred in the first half. Management concluded disclosure controls were effective and reported no significant internal-control changes.
Investor verification priorities
- Assess whether the truck recovery and margin improvement are sustainable, particularly given the uneven regional market outlook and the unusual 2009 comparison benefit.
- Review Financial Services receivable quality: past-due trends, the $25.9 of specific loss reserves for higher-risk accounts, and concentrations involving large customers.
- Reconcile cash generation with working-capital movements, investment and financing flows, and the reduction in cash from currency translation.
- Monitor Financial Services funding needs, debt maturities, available credit facilities and continued access to capital markets.
- Evaluate forecast capital and R&D spending alongside truck demand, currency exposure, used-truck values and warranty or other contingencies.