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PCAR > SEC Filings for PCAR > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for PACCAR INC


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW:

PACCAR is a global technology company whose Truck segment includes the design, manufacture and distribution of high-quality, light-, medium- and heavy-duty commercial trucks and related aftermarket parts. In North America, trucks are sold under the Kenworth and Peterbilt nameplates, in Europe, under the DAF nameplate and in Australia and South America, under the Kenworth and DAF nameplates. The Company's Financial Services segment (PFS) derives its earnings primarily from financing or leasing PACCAR products in the U.S., Canada, Mexico, Europe and Australia. The Company's other business is the manufacturing and marketing of industrial winches.

Consolidated net sales and revenues in the third quarter of 2012 were $3.82 billion compared to $4.26 billion in the third quarter of 2011. The decrease in the third quarter of 2012 resulted from lower truck unit sales in Europe and the U.S. and Canada, reflecting lower industry truck orders. Third quarter truck unit sales were 31,100 units compared to 35,500 units in the same period in 2011. For the first nine months of 2012, consolidated net sales and revenues were $13.05 billion compared to $11.50 billion for the same period in 2011. For the first nine months of 2012 truck unit sales increased to 108,700 units from 97,100 units in the same period in 2011, primarily due to higher industry retail sales in the U.S. and Canada and record heavy duty truck market share in the U.S. and Canada, and Europe.

Third quarter 2012 net income was $233.6 million ($.66 per diluted share) compared to $281.6 million ($.77 per diluted share) in the third quarter of 2011. The third quarter 2012 results reflect lower sales in the Truck segment compared to the same period in 2011, partially offset by record Financial Services segment results. For the first nine months of 2012, net income was $858.1 million ($2.41 per diluted share) compared to $714.6 million ($1.95 per diluted share) in the first nine months of 2011. The increase in the first nine months of 2012 was primarily due to higher sales in the Truck segment and record Financial Services segment results from higher finance margin and a lower provision for losses on receivables.

The third quarter and first nine months of 2012 consolidated net sales and revenues were negatively affected by the translation of weaker foreign currencies primarily due to the euro. The translation effect decreased net sales and revenues by $122.9 million and $302.6 million for the third quarter of 2012 and the first nine months of 2012, respectively. The effect of weaker foreign currencies on income before income taxes for the third quarter and first nine months of 2012 was not significant.

During September 2012, the Company introduced the new DAF XF Euro 6 truck at the IAA truck show in Hannover, Germany. The new truck is powered by the PACCAR MX-13 Euro 6 engine and is the result of a multi-year design and development program. Production of the new truck will begin in 2013.

Truck Outlook

Industry retail sales in the U.S. and Canada in 2012 are expected to be 210,000-220,000 units compared to 197,000 in 2011. Estimates for U.S. and Canada industry Class 8 retail sales for 2013 are in the range of 210,000-240,000 units, driven primarily by ongoing replacement of the aging fleet. In Europe, 2012 industry sales for over 16-tonne vehicles are expected to be 215,000-225,000 units, lower than the 241,000 trucks in 2011, reflecting economic uncertainty in the Eurozone. Industry sales for over 16-tonne vehicles for 2013 are estimated in the range of 210,000-250,000 units as some customers may purchase Euro 5 vehicles ahead of the introduction of the Euro 6 emission requirement in 2014.

Capital investments in 2012 are expected to be $475 to $525 million. Capital investments in 2013 are expected to be $400 to $500 million, focused on the completion of a truck factory in Brasil and the development of products and services worldwide. Research and development (R&D) in 2012 is expected to be $280 to $290 million and for 2013 to be $275 to $325 million, focused on comprehensive product development programs and enhanced manufacturing operating efficiency.

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PACCAR Inc - Form 10-Q

Financial Services Outlook

Average earning assets in the fourth quarter of 2012 are expected to increase modestly from current levels. For 2013, average earning assets may grow approximately 5-10% as increased new business financing from slightly higher truck sales exceeds portfolio runoff. The Company's customers are benefiting from the current levels of freight tonnage, freight rates and fleet utilization that are contributing to customers' profitability and cash flow. If current freight transportation conditions decline due to slowing economic conditions, past-due accounts, truck repossessions and net charge-offs could increase from current low levels.

See the Forward Looking Statement section of Management's Discussion and Analysis for factors that may affect the Truck and Financial Services outlook.

RESULTS OF OPERATIONS:



                                               Three Months Ended             Nine Months Ended
                                                  September 30                   September 30
($ in millions, except per share amounts)     2012           2011            2012            2011
Net sales and revenues:
Truck                                       $ 3,510.0      $ 3,961.2      $ 12,134.7      $ 10,653.7
Other                                            36.7           31.8           117.8            84.6

Truck and other                               3,546.7        3,993.0        12,252.5        10,738.3
Financial Services                              273.5          264.1           801.0           763.1

                                            $ 3,820.2      $ 4,257.1      $ 13,053.5      $ 11,501.4

Income (loss) before taxes:
Truck                                       $   258.9      $   324.3      $  1,022.8      $    855.3
Other                                            (1.7 )         (2.4 )          (6.1 )         (19.0 )

Truck and Other                                 257.2          321.9         1,016.7           836.3
Financial Services                               80.4           61.8           229.1           169.0
Investment income                                 7.8           11.0            24.9            28.9
Income taxes                                   (111.8 )       (113.1 )        (412.6 )        (319.6 )

Net income                                  $   233.6      $   281.6      $    858.1      $    714.6

Diluted earnings per share                  $     .66      $     .77      $     2.41      $     1.95

Return on Revenues                                6.1 %          6.6 %           6.6 %           6.2 %

The following provides an analysis of the results of operations for the Company's two reportable segments, Truck and Financial Services. Where possible, the Company has quantified the factors identified in the following discussion and analysis. In cases where it is not possible to quantify the impact of factors, the Company lists them in estimated order of importance. Factors for which the Company is unable to specifically quantify the impact include market demand, fuel prices, freight tonnage and economic conditions affecting the Company's results of operations.

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                             PACCAR Inc - Form 10-Q



2012 Compared to 2011:

Truck

The Company's Truck segment accounted for 92% and 93% of revenues in the third
quarter and first nine months of 2012 compared to 93% in both the third quarter
and first nine months of 2011.



                                             Three Months Ended                           Nine Months Ended
                                                September 30                                September 30
($ in millions)                       2012          2011        % Change          2012           2011        % Change
Truck net sales and revenues:
U.S. and Canada                     $ 1,820.0     $ 2,191.6           (17 )    $  7,017.7     $  5,560.1            26
Europe                                  930.4       1,185.8           (22 )       2,954.1        3,529.8           (16 )
Mexico, South America, Australia
and other                               759.6         583.8            30         2,162.9        1,563.8            38

                                    $ 3,510.0     $ 3,961.2           (11 )    $ 12,134.7     $ 10,653.7            14

Truck income before income taxes    $   258.9     $   324.3           (20 )    $  1,022.8     $    855.3            20

The Company's worldwide truck and parts sales and revenues decreased in the third quarter of 2012 compared to the same period in 2011 due to lower truck deliveries from lower demand in U.S. and Canada, and Europe, partially offset by increased truck demand in Mexico, South America, Australia and other markets. The decrease in Truck segment income before income taxes for the third quarter of 2012 reflects the lower truck deliveries.

In the first nine months of 2012, the Company's worldwide truck and parts sales and revenues increased compared to the same period in 2011 due to higher market demand in all markets except Europe. The increase in Truck segment income before income taxes for the first nine months of 2012 was due to higher truck unit sales, truck unit margins and aftermarket parts sales, partially offset by an increase in selling, general and administrative (SG&A) expenses to support a higher level of business activity.

The effect of foreign currencies on Truck income before income taxes in the third quarter and first nine months of 2012 was not significant.

The Company's new truck deliveries are summarized below:

                                                     Three Months Ended                         Nine Months Ended
                                                        September 30                              September 30
                                               2012         2011       % Change         2012          2011        % Change
United States                                  12,200       15,600           (22 )       49,000       40,100             22
Canada                                          2,100        3,100           (32 )        8,800        7,900             11

U.S. and Canada                                14,300       18,700           (24 )       57,800       48,000             20
Europe                                         10,200       11,800           (14 )       32,200       35,100             (8 )
Mexico, South America, Australia and other      6,600        5,000            32         18,700       14,000             34

Total units                                    31,100       35,500           (12 )      108,700       97,100             12

The truck markets in the U.S. and Canada, and Europe declined in the third quarter of 2012 compared to 2011 as heightened economic uncertainty has led to reduced demand for new trucks. These lower truck markets were partially offset by stronger truck markets in the third quarter of 2012 compared to 2011 in Mexico, South America, and Australia.

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PACCAR Inc - Form 10-Q

In the first nine months of 2012, the U.S. and Canada truck market improved from 2011 from higher freight volumes and the need to replace an aging truck fleet. Industry retail sales in the heavy-duty market in the U.S. and Canada increased to 169,600 units in the first nine months of 2012 compared to 133,900 units in the same period of 2011. The Company's heavy-duty truck retail market share increased to a record 29.0% in the first nine months of 2012 from 27.7% in the same period of 2011, reflecting higher deliveries to large fleet customers and overall strong demand for the Company's premium products. The medium-duty market was 48,900 units in the first nine months of 2012 compared to 45,200 units in the same period of 2011. The Company's medium-duty market share was 14.9% in the first nine months of 2012 compared to 11.4% in the same period of 2011.

The over 16-tonne truck market in Western and Central Europe was 167,900 units in the first nine months of 2012 compared to 180,200 units in the same period of 2011. The Company's market share was a record 16.0% in the first nine months of 2012, an increase from 15.2% in the same period of 2011. The 6- to 16-tonne market in the first nine months of 2012 was 42,300 units compared to 45,800 units in the same period of 2011. DAF market share in the 6- to 16-tonne market in the first nine months of 2012 was 11.6% compared to 8.4% in the same period of 2011.

Sales and revenues in Mexico, South America, Australia and other markets increased in the third quarter and first nine months of 2012 primarily due to higher new truck deliveries in the Andean region of South America.

The major factors for the change in net sales and revenues, cost of sales and revenues, and gross margin for the three months ended September 30, 2012 are as follows:

                                                            NET            COST OF          GROSS
($ in millions)                                            SALES            SALES          MARGIN
Three Months Ended September 30, 2011                    $ 3,961.2        $ 3,457.6        $ 503.6
Increase (decrease)
Truck delivery volume                                       (372.8 )         (308.0 )        (64.8 )
Average truck sales prices                                    23.4                            23.4
Average truck material, labor and other direct costs                           32.5          (32.5 )
Factory overhead, warehouse and other indirect costs                             .3            (.3 )
Aftermarket parts volume                                      (6.1 )           (1.5 )         (4.6 )
Average aftermarket parts sales prices                        19.1                            19.1
Average aftermarket parts direct costs                                         10.9          (10.9 )
Currency translation                                        (114.8 )         (111.9 )         (2.9 )

Total decrease                                              (451.2 )         (377.7 )        (73.5 )

Three Months Ended September 30, 2012                    $ 3,510.0        $ 3,079.9        $ 430.1

Truck delivery volume reflects lower truck deliveries in the U.S. and Canada, and Europe, partially offset by higher deliveries in Mexico, South America, Australia and other markets. Average truck sales prices increased sales by $23.4 million reflecting increased price realization.

Average truck cost increased $32.5 million primarily due to higher material costs.

Factory overhead, warehouse and other indirect costs increased $.3 million primarily due to higher salaries and related costs ($4.0 million), partially offset by lower manufacturing supplies and maintenance ($3.3 million).

Lower market demand in Europe lowered aftermarket parts volume by $21.2 million and related cost of sales by $11.1 million. This was partially offset by higher market demand in the U.S. and Canada, and Australia that increased aftermarket parts volume by $15.1 million and related cost of sales by $9.6 million.

Average aftermarket parts sales prices increased by $19.1 million reflecting improved price realization, primarily in North America.

Average aftermarket parts costs increased $10.9 million from higher material costs.

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PACCAR Inc - Form 10-Q

The currency translation effect on sales and cost of sales primarily reflects a decrease in the value of the euro compared to the U.S. dollar.

The major factors for the change in net sales and revenues, cost of sales and revenues, and gross margin for the nine months ended September 30, 2012 are as follows:

                                                     NET             COST OF            GROSS
($ in millions)                                     SALES             SALES            MARGIN
Nine Months Ended September 30, 2011              $ 10,653.7        $  9,275.7        $ 1,378.0
Increase (decrease)
Truck delivery volume                                1,392.8           1,229.5            163.3
Average truck sales prices                             247.1                              247.1
Average truck material, labor and other
direct costs                                                             157.1           (157.1 )
Factory overhead, warehouse and other
indirect costs                                                            88.3            (88.3 )
Aftermarket parts volume                                73.1              49.5             23.6
Average aftermarket parts sales prices                  51.6                               51.6
Average aftermarket parts direct costs                                    35.7            (35.7 )
Currency translation                                  (283.6 )          (265.9 )          (17.7 )

Total increase                                       1,481.0           1,294.2            186.8

Nine Months Ended September 30, 2012              $ 12,134.7        $ 10,569.9        $ 1,564.8

The higher truck delivery volume primarily reflects improved truck markets and market share in North America. The increased demand for trucks also resulted in higher average truck sales prices which increased sales by $247.1 million.

Average truck cost of sales increased $157.1 million primarily due to higher material costs.

Factory overhead, warehouse and other indirect costs increased $88.3 million primarily due to higher salaries and related costs ($51.6 million), manufacturing supplies and maintenance ($12.5 million), utilities ($3.1 million) and other overhead costs ($13.1 million) to support higher production levels.

Higher market demand, primarily in North America, increased aftermarket parts sales volume by $73.1 million and related cost of sales by $49.5 million.

Average aftermarket parts sales prices increased by $51.6 million reflecting improved price realization.

Average aftermarket parts costs increased $35.7 million from higher material costs.

The currency translation effect on sales and cost of sales primarily reflects a decrease in the value of the euro compared to the U.S. dollar.

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                             PACCAR Inc - Form 10-Q



Net sales and revenues and gross margins for truck units and aftermarket parts
are provided below. The aftermarket parts gross margin includes direct revenues
and costs, but excludes certain Truck segment costs.



                                            Three Months Ended                             Nine Months Ended
($ in millions)                                September 30                                   September 30
                                    2012           2011         % Change          2012            2011          % Change
Net sales and revenues:
Trucks                            $ 2,859.9      $ 3,305.7            (13 )    $ 10,138.0      $  8,735.4              16
Aftermarket parts                     650.1          655.5             (1 )       1,996.7         1,918.3               4

                                  $ 3,510.0      $ 3,961.2            (11 )    $ 12,134.7      $ 10,653.7              14

Gross Margin:
Trucks                            $   205.8      $   276.9            (26 )    $    873.9      $    709.9              23
Aftermarket parts                     224.3          226.7             (1 )         690.9           668.1               3

                                  $   430.1      $   503.6            (15 )    $  1,564.8      $  1,378.0              14

Gross Margin %:
Trucks                                  7.2 %          8.4 %                          8.6 %           8.1 %
Aftermarket parts                      34.5 %         34.6 %                         34.6 %          34.8 %

                                       12.3 %         12.7 %                         12.9 %          12.9 %

Total Truck segment gross margins for the third quarter of 2012 were 12.3% compared to 12.7% in the same period in 2011. Total Truck segment gross margins for the first nine months of 2012 and 2011 were 12.9%. The lower truck sales gross margins for the third quarter of 2012 resulted from reduced truck deliveries in the U.S. and Canada, and Europe and decreased absorption of fixed costs resulting from lower truck production. The aftermarket parts gross margins in the third quarter and first nine months of 2012 were comparable to 2011.

Truck R&D expenditures in the third quarter and first nine months of 2012 decreased to $66.7 million and $212.6 million from $69.9 million and $215.5 million in the corresponding periods of 2011, respectively. R&D spending in both periods of 2012 reflects continued focus on product development activities, primarily for new truck models and engine development for North America and Europe. Foreign currency, primarily the euro, reduced R&D in the third quarter and first nine months of 2012 by $5.5 million and $12.4 million, respectively.

Truck SG&A of $104.6 million in the third quarter of 2012 was comparable to $105.6 million in the third quarter of 2011. In the first nine months of 2012, SG&A was $330.6 million and $306.2 million in the first nine months of 2011. The higher spending for the first nine months of 2012 is primarily due to higher salaries and personnel related expenses of $19.0 million to support higher levels of business activity.

As a percentage of sales, SG&A increased to 3.0% in the third quarter of 2012 from 2.7% in the third quarter of 2011, reflecting lower sales volumes. For the first nine months of 2012, SG&A as a percentage of sales was 2.7%, down from 2.9% in the first nine months of 2011 due to higher sales volumes and ongoing cost control. Foreign currency, primarily the euro, reduced SG&A in the third quarter and first nine months of 2012 by $5.2 million and $12.5 million, respectively.

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                             PACCAR Inc - Form 10-Q



Financial Services



($ in millions)                                  Three Months Ended                          Nine Months Ended
                                                    September 30                               September 30
                                          2012          2011        % change         2012          2011        % change
New loan and lease volume:
U.S. and Canada                         $   735.5     $   638.0            15      $ 2,124.1     $ 1,673.3            27
Europe                                      202.3         215.7            (6 )        646.0         684.5            (6 )
Mexico and Australia                        224.1         151.9            48          570.5         443.7            29

                                        $ 1,161.9     $ 1,005.6            16      $ 3,340.6     $ 2,801.5            19
New loan and lease volume by product:
Loans and finance leases                $   902.2     $   783.5            15      $ 2,621.1     $ 2,060.6            27
Equipment on operating leases               259.7         222.1            17          719.5         740.9            (3 )

                                        $ 1,161.9     $ 1,005.6            16      $ 3,340.6     $ 2,801.5            19
New loan and lease unit volume:
Loans and finance leases                    8,970         8,750             3         25,940        24,000             8
Equipment on operating leases               2,600         2,290            14          6,830         7,450            (8 )

                                           11,570        11,040             5         32,770        31,450             4
Average earning assets:
U.S. and Canada                         $ 6,149.6     $ 4,710.8            31      $ 5,791.4     $ 4,443.0            30
Europe                                    2,197.7       2,268.8            (3 )      2,263.8       2,184.4             4
Mexico and Australia                      1,613.7       1,459.7            11        1,510.1       1,452.4             4

                                        $ 9,961.0     $ 8,439.3            18      $ 9,565.3     $ 8,079.8            18
Average earning assets by product:
Loans and finance leases                $ 6,323.0     $ 5,342.7            18      $ 6,080.5     $ 5,229.8            16
Dealer wholesale financing                1,640.4       1,228.5            34        1,585.0       1,125.8            41
Equipment on lease and other              1,997.6       1,868.1             7        1,899.8       1,724.2            10

                                        $ 9,961.0     $ 8,439.3            18      $ 9,565.3     $ 8,079.8            18
Revenue:
U.S. and Canada                         $   149.5     $   131.1            14      $   427.9     $   374.9            14
Europe                                       67.2          79.9           (16 )        210.1         232.5           (10 )
Mexico and Australia                         56.8          53.1             7          163.0         155.7             5

                                        $   273.5     $   264.1             4      $   801.0     $   763.1             5
Revenue by product:
Loans and finance leases                $   100.2     $    94.4             6      $   290.3     $   279.0             4
Dealer wholesale financing                   15.3          12.1            26           46.6          34.4            35
Equipment on lease and other                158.0         157.6                        464.1         449.7             3

                                        $   273.5     $   264.1             4      $   801.0     $   763.1             5

Income before income taxes              $    80.4     $    61.8            30      $   229.1     $   169.0            36

In the third quarter of 2012, new loan and lease volume increased 16% to $1.16 billion compared to the third quarter of 2011. The increase reflects higher finance market share of new PACCAR truck sales and a higher average amount financed per unit, partially offset by lower new PACCAR truck sales. In the third quarter of 2012, PFS market share on new PACCAR trucks increased to 33.1% compared to 29.1% in the same period of 2011 from higher market share in all markets except Mexico. In the first nine months of 2012, new loan and lease volume increased 19% to $3.34 billion compared to the first nine months of 2011. The increase reflects higher new PACCAR truck sales and a higher average amount financed per unit. In the first nine months of 2012, finance market share of 29.8% decreased slightly compared to the 30.2% finance market share in the same period in 2011, primarily due to lower market share in the U.S. and Canada.

. . .

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