PACCAR Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. PACCAR designs, manufactures and distributes commercial trucks and parts, provides truck financing and leasing, and manufactures industrial winches. Amounts below are in millions of dollars except per-share data and units.
Financial performance
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Consolidated revenue | $2,542.5 | $2,011.0 | $7,237.3 | $5,846.1 |
| Income before taxes | $176.8 | $16.8 | $421.4 | $81.3 |
| Net income | $119.9 | $13.0 | $287.8 | $65.8 |
| Diluted EPS | $0.33 | $0.04 | $0.79 | $0.18 |
| Return on revenues | 4.7% | 0.6% | 4.0% | 1.1% |
- Truck and Other: Revenue was $2,304.2 in Q3 and $6,513.3 for nine months. Pre-tax income was $129.8 and $303.5, respectively; the prior-year periods recorded a $6.2 loss and $14.5 income.
- Financial Services: Revenue was $238.3 in Q3 and $724.0 for nine months. Pre-tax income increased to $41.5 and $103.6, from $18.1 and $49.0, respectively.
- Truck margins and volume: Truck segment gross margin was 12.3% in Q3 versus 6.3%, and 11.8% for nine months versus 7.6%. Deliveries rose 28% in Q3 to 19,538 and 25% year to date to 54,590.
- Cash flow: Nine-month operating cash flow was $1,162.8, compared with $864.0; investing used $156.8 versus providing $394.6; financing used $861.3 versus $1,503.8. Cash and equivalents ended at $2,057.2, up $145.2 from the start of the year.
- Liquidity and debt: Cash plus marketable debt securities totaled $2,412.1 at September 30, up $280.6 from year-end 2009. Financial Services borrowings were $5,069.1 ($2,038.0 commercial paper and bank loans; $3,031.1 term notes); Truck and Other debt was $172.8, for approximately $5,241.9 total interest-bearing debt. The company had $3.35 billion of unused credit lines within $3.59 billion of arrangements and reported investment-grade ratings of A+/A1.
- Other metrics: The effective tax rate was 32.2% in Q3 and 31.7% year to date, up from 22.6% and 19.1%. Dividends declared were $0.09 per share in Q3 and $0.27 for nine months.
Changes versus prior period
- Consolidated revenue rose about 26% in Q3 and 24% for the first nine months; net income increased to $119.9 from $13.0 and to $287.8 from $65.8, respectively. Truck results benefited from higher deliveries, selling prices, parts sales and improved factory-cost absorption.
- Truck revenue increased 31% in Q3 and 28% year to date. Management attributed the gains principally to higher deliveries and demand, stronger average prices, and increased parts sales.
- Financial Services revenue declined 6% in Q3 and 4% year to date, largely from lower average finance receivables and dealer wholesale balances. Profit nevertheless improved with higher finance and lease margins and lower credit-loss provisions; the nine-month provision fell to $55.6 from $80.7.
- Worldwide Financial Services accounts 30+ days past due were 3.8% of the portfolio, down from 4.4% a year earlier. The filing notes large-customer concentrations in U.S./Canada and Europe.
- The 2009 comparison included a $18.3 Q3 and $66.0 nine-month curtailment gain from ending post-retirement medical subsidies for most U.S. employees; there was no comparable 2010 gain. Stronger currencies added $15.7 to nine-month pre-tax income in 2010, while Q3 currency effects on pre-tax income were minimal.
Outlook, risks and unusual matters
- Management expected 2010 U.S. and Canada heavy-duty truck industry sales of 120,000–130,000 units and 2011 sales of 160,000–180,000. Europe’s above-15-tonne market was forecast at 160,000–170,000 units in 2010 and 200,000–220,000 in 2011. These are management estimates, not guarantees.
- Financial Services earning assets were expected to be comparable in Q4 2010 and to increase moderately in 2011. Management cautioned that economic conditions continued to pressure truck operators and customer payment performance; it expected past-due levels to remain similar for the rest of 2010 if conditions improved modestly.
- Expected 2010 capital spending was $175–$200 and R&D spending $230–$240; 2011 estimates were $400–$500 and $250–$300, respectively, focused on product programs, engines and manufacturing facilities.
- Risks identified include truck-market demand, competition and market share, fuel and commodity prices, emissions and other regulation, currencies and interest rates, used-truck values, supplier and labor interruptions, liquidity and credit ratings, warranty costs, and customer profitability. Management said market risk had not materially changed during the period.
- The U.K. Office of Fair Trading opened an investigation into possible commercial-vehicle price-setting or supply restrictions involving manufacturers, including two PACCAR subsidiaries; the subsidiaries were cooperating. An NLRB administrative law judge ordered reimbursement, with interest, to approximately 300 Peterbilt employees over a work stoppage; PACCAR disagreed and planned to file exceptions, and said it did not expect a material adverse effect.
- Management reported effective disclosure controls and no significant changes in internal control over financial reporting. PACCAR made no common-stock repurchases during the nine months.
Investor verification priorities
- Check whether truck-market recovery and higher deliveries and pricing translated into sustained truck margins, particularly given higher EPA 2010 vehicle costs.
- Monitor Financial Services delinquencies, large-customer exposures, credit-loss reserves, used-truck values and lease impairments.
- Assess liquidity and refinancing access as commercial paper and credit facilities mature, including the planned renewal of the European medium-term-note program.
- Compare actual capital and R&D spending with management’s 2010–2011 estimates and confirm the expected timing and funding.
- Follow the OFT investigation and NLRB proceeding for developments or changes to PACCAR’s assessment of potential impact.