PACCAR Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and results
PACCAR designs and manufactures commercial trucks, distributes aftermarket parts, and provides financing and leasing, principally for its trucks. It also makes industrial winches. Consolidated revenue rose to $4.38 billion from $3.92 billion, supported mainly by stronger truck sales in North America and higher parts demand.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $4,379.9 | $3,924.3 |
| Income before income taxes | $406.5 | $337.2 |
| Net income | $273.9 | $236.1 |
| Diluted earnings per share | $0.77 | $0.67 |
| Return on revenues | 6.3% | 6.0% |
| Operating cash flow | $285.7 | $384.0 |
- Segments: Truck revenue was $3.33 billion, up 13%; pretax income was $212.3 million, up 29%, and pretax return on revenue improved to 6.4% from 5.6%. Parts revenue was $726.6 million, up 9%; pretax income increased to $112.1 million from $95.3 million. Financial Services revenue was nearly flat at $293.7 million, while pretax income rose to $85.5 million from $80.1 million.
- Margins and costs: Truck gross margin was 8.9% versus 9.1%, reflecting higher per-truck costs and overhead. Parts gross margin improved to 25.8% from 25.4%. Lower R&D expense, $52.7 million versus $72.1 million, contributed to truck segment earnings.
- Cash flow and investment: Operating cash flow fell $98.3 million year over year, primarily reflecting inventory purchases and increased Financial Services wholesale receivables. Investing used $175.6 million, compared with $341.5 million in Q1 2013; capital expenditure was $80.3 million. Financing used $568.1 million, including $389.7 million of dividends, largely the special dividend declared in 2013 and paid in early 2014.
- Liquidity and debt: Cash and cash equivalents were $1.29 billion at March 31; marketable debt securities were $1.25 billion, for combined cash and securities of $2.54 billion, down $477.3 million from year-end. Financial Services reported $2.87 billion of commercial paper and bank loans and $5.37 billion of term notes. PACCAR repaid $550 million of long-term debt during the quarter, including $150 million of manufacturing debt; it reported no manufacturing debt at quarter-end. Of $3.71 billion in credit arrangements, $3.46 billion was unused.
- Other balance-sheet information: Total assets were $20.60 billion and stockholders’ equity was $6.86 billion at March 31, 2014. Inventory increased to $958.0 million from $813.6 million at year-end.
Changes versus the prior comparable period
- Net income increased 16% and diluted EPS rose from $0.67 to $0.77; revenue increased approximately 12%.
- Truck deliveries increased to 31,800 from 30,600. U.S. and Canada deliveries rose 21%, while deliveries in Europe and other international markets declined.
- Truck revenue growth included higher North American volume and improved European pricing associated with Euro 6 vehicles. PACCAR’s Western and Central European over-16-tonne market share fell to 12.2% from 15.8%, partly because of Euro 5/Euro 6 transition rules in the U.K. and Netherlands.
- Financial Services provision for receivable losses declined to $3.7 million from $6.5 million. Worldwide retail loan and lease accounts 30 or more days past due were 0.6%, up from 0.5% at year-end but below 0.7% a year earlier.
- The effective tax rate increased to 32.6% from 30.0%, partly because Q1 2013 benefited from U.S. tax-law changes and Q1 2014 had a higher share of income in higher-tax jurisdictions.
Outlook, risks, and unusual items
- Management expected 2014 U.S. and Canada truck-industry retail sales of 220,000–240,000 units, versus 212,200 in 2013; European registrations for trucks over 16 tonnes were projected at 200,000–230,000, versus 240,800 in 2013.
- Parts aftermarket industry sales were expected to grow 3%–7%. Planned 2014 capital investment was $300–$350 million and R&D spending $200–$250 million.
- Financial Services average earning assets were expected to increase approximately 5%. Management cautioned that weaker freight conditions could raise delinquencies, repossessions, and credit losses from current low levels.
- Risks identified include industry demand and market-share changes, fuel and commodity prices, emissions and safety regulation, foreign exchange and interest rates, lower used-truck values, manufacturing or supplier disruptions, labor and driver shortages, liquidity-market disruptions, and warranty costs or litigation. Management reported no material change in market risks or risk factors during the quarter.
- The EU Competition Commission investigation of major European commercial-vehicle manufacturers, including PACCAR subsidiaries, remained ongoing; PACCAR said its subsidiaries were cooperating. Management stated that ordinary-course lawsuits were not expected to materially affect the business or financial condition.
- Management said Q1 operating results are not necessarily indicative of full-year results. The company adopted an income-tax presentation accounting update with no material financial-statement impact.
Important facts for investors to verify
- Whether North American truck demand and the stated 2014 industry outlook translated into PACCAR deliveries, pricing, and margins.
- Whether European truck registrations, Euro 6 transition effects, and PACCAR market share developed as expected.
- How inventory growth and lower operating cash flow evolved, and whether liquidity remained adequate after the special-dividend payment and debt refinancing.
- Whether Financial Services delinquencies, credit-loss provisions, used-truck values, and lease utilization remained consistent with management’s assumptions.
- Developments in the EU competition investigation and any resulting contingent liability; the filing does not provide a clear estimate of potential exposure.
- Progress against planned 2014 capital expenditure and R&D ranges, and the effect of the higher tax rate on full-year earnings.