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PCAR > SEC Filings for PCAR > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for PACCAR INC


7-Aug-2013

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 and manufacture of high-quality, light-, medium- and heavy-duty commercial trucks. 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 Parts segment includes the distribution of aftermarket parts for trucks and related commercial vehicles. The Company's Financial Services segment (PFS) derives its earnings primarily from financing or leasing PACCAR products in North America, Europe and Australia. The Company's Other business is the manufacturing and marketing of industrial winches.

Consolidated net sales and revenues in the second quarter and first six months of 2013 were $4.30 billion and $8.22 billion compared to $4.46 billion and $9.23 billion from the same periods in 2012. Truck unit sales decreased in the second quarter and first half of 2013 to 34,700 units and 65,300 units from 37,800 units and 77,600 units in the second quarter and first six months of 2012, primarily due to lower industry retail sales in the U.S. and Canada. Aftermarket parts sales in the second quarter of 2013 were $709.5 million compared to $666.2 million in the second quarter in 2012 primarily due to strong demand worldwide. Aftermarket parts sales in the first half of 2013 were $1,376.9 million compared to $1,346.6 million in the same period of 2012.

Second quarter 2013 net income was $291.6 million ($.82 per diluted share) compared to $297.2 million ($.83 per diluted share) in the second quarter of 2012. For the first six months of 2013, net income was $527.7 million ($1.49 per diluted share) compared to $624.5 million ($1.75 per diluted share) in the first six months of 2012. The results reflect lower sales in the Truck segment compared to the same period in 2012, partially offset by improved Financial Services and Parts segment results.

Construction of PACCAR's new 300,000 square foot DAF factory in Ponta Grossa, Brasil began in January 2012. Construction is progressing on schedule with production of DAF trucks scheduled to begin in late 2013.

In the second quarter and first half of 2013, the Company's research and development expenses (R&D) were $61.8 million and $133.9 million compared to $73.8 million and $146.1 million in the second quarter and first half of 2012, respectively. R&D costs declined as new truck models and engines began production. R&D is focused on engine and other new vehicle development.

Truck and Parts Outlook

Truck industry retail sales in the U.S. and Canada in 2013 are expected to be 210,000-230,000 units compared to 224,900 units in 2012, reflecting the ongoing replacement of the aging industry fleet and some anticipated improvement in the economy. The 2013 truck industry registrations for over 16-tonne vehicles in Europe are expected to be 210,000-230,000 units compared to 221,500 units in 2012 as some customers are purchasing Euro 5 vehicles ahead of the introduction of the Euro 6 emission requirement in 2014.

Parts industry aftermarket sales in 2013 in the U.S. and Canada are expected to modestly increase due to some economic growth and an aging truck fleet. Parts industry aftermarket sales in Europe in 2013 are expected to be comparable to 2012, reflecting uneven economic conditions in the Eurozone.

Capital investments in 2013 are expected to be $425 to $475 million, focused on the completion of the truck factory in Brasil and the development of new products and services worldwide. R&D in 2013 is expected to be $250 to $275 million, focused on comprehensive product development programs and enhanced manufacturing operating efficiency.

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Table of Contents

PACCAR Inc - Form 10-Q

Financial Services Outlook

Based on the 2013 truck market outlook, average earning assets this year are expected to increase approximately 5% as new business financing from truck sales exceeds customer collections. Current levels of freight tonnage, freight rates and fleet utilization are contributing to customers' profitability and cash flow. If current freight transportation conditions decline due to weaker economic conditions, past due accounts, truck repossessions and credit losses would likely increase from the current low levels.

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

RESULTS OF OPERATIONS:



                                               Three Months Ended             Six Months Ended
($ in millions, except per share amounts)           June 30                       June 30
Six Months Ended June 30,                     2013           2012           2013           2012
Net sales and revenues:
Truck                                       $ 3,270.0      $ 3,483.7      $ 6,203.3      $ 7,278.1
Parts                                           709.5          666.2        1,376.9        1,346.6
Other                                            32.2           41.2           62.7           81.1

Truck, Parts and Other                        4,011.7        4,191.1        7,642.9        8,705.8
Financial Services                              288.8          266.1          581.9          527.5

                                            $ 4,300.5      $ 4,457.2      $ 8,224.8      $ 9,233.3

Income (loss) before taxes:
Truck                                       $   238.4      $   272.1      $   403.4      $   572.4
Parts                                           109.4           89.9          204.7          191.5
Other                                            (4.4 )         (1.3 )        (14.1 )         (4.4 )

Truck, Parts and Other                          343.4          360.7          594.0          759.5
Financial Services                               81.5           77.4          161.6          148.7
Investment income                                 8.0            8.2           14.5           17.1
Income taxes                                   (141.3 )       (149.1 )       (242.4 )       (300.8 )

Net income                                  $   291.6      $   297.2      $   527.7      $   624.5

Diluted earnings per share                  $     .82      $     .83      $    1.49      $    1.75

Return on Revenues                                6.8 %          6.7 %          6.4 %          6.8 %

The following provides an analysis of the results of operations for the Company's three reportable segments, Truck, Parts 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



2013 Compared to 2012:

Truck

The Company's Truck segment accounted for 76.0% and 75.4% of revenues in the
second quarter and first six months of 2013 compared to 78.2% and 78.8% in the
second quarter and first six months of 2012.



                                            Three Months Ended                            Six Months Ended
($ in millions)                                   June 30                                      June 30
                                    2013           2012         % Change         2013           2012         % Change
Truck net sales and revenues:
U.S. and Canada                   $ 1,842.3      $ 2,053.2            (10 )    $ 3,452.5      $ 4,429.6            (22 )
Europe                                829.1          790.7              5        1,680.5        1,612.7              4
Mexico, South America,
Australia and Other                   598.6          639.8             (6 )      1,070.3        1,235.8            (13 )

                                  $ 3,270.0      $ 3,483.7             (6 )    $ 6,203.3      $ 7,278.1            (15 )

Truck income before income
taxes                             $   238.4      $   272.1            (12 )    $   403.4      $   572.4            (30 )

Pre-tax return on revenues 7.3 % 7.8 % 6.5 % 7.9 %

The Company's worldwide truck net sales and revenues in the second quarter of 2013 of $3.27 billion decreased from the second quarter of 2012 due to lower truck deliveries in the U.S. and Canada ($210.9 million) and Colombia ($103.5 million), partially offset by higher truck deliveries in Mexico ($46.7 million) and Europe ($38.4 million). In the first six months of 2013, the Company's worldwide truck sales and revenues decreased compared to the same period in 2012 due to lower market demand in the U.S. and Canada and Colombia.

For the second quarter and first half of 2013, Truck segment income before income taxes reflects lower truck unit deliveries and price realization due to slower economic growth.

The second quarter and first six months of 2013 Truck income before income taxes was also affected by the translation of weaker foreign currencies, primarily the British pound. Truck income before income taxes decreased by $7.1 million and $7.5 million, respectively, due to the translation effect of currencies in the second quarter and first six months of 2013.

The Company's new truck deliveries are summarized below:

                                                     Three Months Ended                        Six Months Ended
                                                           June 30                                  June 30
                                               2013         2012       % Change         2013         2012       % Change
U.S.                                           15,300       17,500           (13 )      28,000       36,800           (24 )
Canada                                          2,600        3,100           (16 )       5,300        6,700           (21 )

U.S. and Canada                                17,900       20,600           (13 )      33,300       43,500           (23 )
Europe                                         11,100       11,000             1        21,700       22,000            (1 )
Mexico, South America, Australia and Other      5,700        6,200            (8 )      10,300       12,100           (15 )

Total units                                    34,700       37,800            (8 )      65,300       77,600           (16 )

The truck markets in the U.S. and Canada and South America declined in the second quarter of 2013 compared to 2012, partially offset by slightly higher deliveries in Mexico and Europe.

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PACCAR Inc - Form 10-Q

Industry retail sales in the heavy-duty market in the U.S. and Canada decreased to 99,600 units in the first six months of 2013 compared to 114,900 units in the same period of 2012. The Company's heavy-duty truck retail market share was 27.6% in the first six months of 2013 compared to 29.9% in the same period of 2012. The medium-duty market was 32,800 units in the first six months of 2013 compared to 34,800 units in the same period of 2012. The Company's medium-duty market share was 14.1% in the first six months of 2013 compared to 14.5% in the same period of 2012.

The over 16-tonne truck market in Western and Central Europe was 103,400 units in the first six months of 2013 compared to 116,800 units in the same period of 2012. The Company's market share was 15.8% in the first six months of 2013, a decrease from 15.9% in the same period of 2012. The 6- to 16-tonne market in the first six months of 2013 was 25,600 units compared to 28,700 units in the same period of 2012. DAF market share in the 6- to 16-tonne market in the first six months of 2013 was 11.5% compared to 11.6% in the same period of 2012.

The major factors for the change in net sales and revenues, cost of sales and revenues, and gross margin for the three months ended June 30, 2013 for the Truck segment are as follows:

                                                         Net            Cost of          Gross
($ in millions)                                         Sales            Sales          Margin
Three Months Ended June 30, 2012                      $ 3,483.7        $ 3,100.9        $ 382.8
Increase (decrease)
Truck delivery volume                                    (173.6 )         (146.9 )        (26.7 )
Average truck sales prices                                (57.6 )                         (57.6 )
Average per truck material, labor and other
direct costs                                                               (40.1 )         40.1
Factory overhead and other indirect costs                                    5.9           (5.9 )
Operating lease income and depreciation expense            21.3             21.2             .1
Currency translation                                       (3.8 )            2.3           (6.1 )

Total decrease                                           (213.7 )         (157.6 )        (56.1 )

Three Months Ended June 30, 2013                      $ 3,270.0        $ 2,943.3        $ 326.7

Truck delivery volume reflects lower truck deliveries in the U.S. and Canada and Colombia, partially offset by higher deliveries in Europe and Mexico. Average truck sales prices decreased sales by $57.6 million reflecting decreased price realization from lower market demand.

Average truck cost decreased $40.1 million primarily due to lower direct labor and other direct costs.

Factory overhead and other indirect costs increased $5.9 million primarily due to higher depreciation expense ($2.8 million) and salaries and related costs ($1.6 million).

Operating lease income and depreciation expense increased due to a higher volume of operating leases.

Truck gross margin in the second quarter of 2013 of 10.0% decreased from 11.0% in the same period in 2012 primarily from lower truck volume and price realization as noted above.

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                             PACCAR Inc - Form 10-Q



The major factors for the change in net sales and revenues, cost of sales and
revenues, and gross margin for the six months ended June 30, 2013 for the Truck
segment are as follows:



                                                      Net            Cost of         Gross
($ in millions)                                      Sales            Sales          Margin
Six Months Ended June 30, 2012                     $  7,278.1       $ 6,486.0       $  792.1
Increase (decrease)
Truck delivery volume                                (1,042.6 )        (877.8 )       (164.8 )
Average truck sales prices                              (68.4 )                        (68.4 )
Average per truck material, labor and other
direct costs                                                            (28.9 )         28.9
Factory overhead and other indirect costs                               (13.2 )         13.2
Operating lease income and depreciation expense          41.9            41.0             .9
Currency translation                                     (5.7 )           2.5           (8.2 )

Total decrease                                       (1,074.8 )        (876.4 )       (198.4 )

Six Months Ended June 30, 2013                     $  6,203.3       $ 5,609.6       $  593.7

Truck delivery volume reflects lower truck deliveries in the U.S. and Canada and Colombia. Average truck sales prices decreased sales by $68.4 million reflecting decreased price realization from lower market demand.

Average truck cost decreased $28.9 million primarily due to lower direct labor and other direct costs.

Factory overhead and other indirect costs decreased $13.2 million primarily due to lower manufacturing supplies and maintenance ($12.4 million) and salaries and related costs ($5.4 million) resulting from lower production levels, partially offset by higher depreciation expense ($3.0 million).

Operating lease income and depreciation expense increased due to a higher volume of operating leases.

Truck gross margin in the first six months of 2013 of 9.6% decreased from 10.9% in the same period in 2012 primarily from lower truck volume as noted above.

Truck SG&A of $50.4 million in the second quarter of 2013 decreased from $60.3 million in the second quarter of 2012. The lower spending for the second quarter of 2013 is primarily due to lower sales and marketing expenses of $7.5 million. In the first six months of 2013, Truck SG&A was $103.5 million compared to $121.3 million in the first six months of 2012. The lower spending for the first six months of 2013 was primarily due to lower sales and marketing expenses of $10.6 million and ongoing cost controls.

As a percentage of sales, Truck SG&A decreased to 1.5% in the second quarter of 2013 from 1.7% in the second quarter of 2012. For the first six months of 2013, Truck SG&A as a percentage of sales was 1.7%, unchanged from the first six months of 2012.

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                             PACCAR Inc - Form 10-Q



Parts

The Company's Parts segment accounted for 16.5% and 16.7% of revenues in the
second quarter and first six months of 2013 compared to 14.9% and 14.6% in the
second quarter and first six months of 2012.



                                             Three Months Ended                          Six Months Ended
($ in millions)                                   June 30                                    June 30
                                     2013         2012         % Change        2013           2012          % Change
Parts net sales and revenues:
U.S. and Canada                     $ 408.7      $ 388.6               5     $   791.4      $   768.1               3
Europe                                204.6        194.5               5         404.6          411.0              (2 )
Mexico, South America, Australia
and Other                              96.2         83.1              16         180.9          167.5               8

                                    $ 709.5      $ 666.2               6     $ 1,376.9      $ 1,346.6               2

Parts income before income taxes    $ 109.4      $  89.9              22     $   204.7      $   191.5               7


Pre-tax return on revenues             15.4 %       13.5 %                        14.9 %         14.2 %

The Company's worldwide parts net sales and revenues increased in the second quarter primarily due to higher aftermarket demand worldwide. For the first half of 2013, parts net sales and revenues increased due to higher market demand in all markets except Europe. The increase in Parts segment income before taxes and pretax return on revenues in the second quarter and first half of 2013 was primarily due to higher sales, gross margins and cost control.

The major factors for the change in net sales and revenues, cost of sales and revenues, and gross margin for the three months ended June 30, 2013 for the Parts segment are as follows:

                                                  Net        Cost of       Gross
       ($ in millions)                           Sales        Sales       Margin
       Three Months Ended June 30, 2012         $ 666.2      $  499.5     $ 166.7
       Increase (decrease)
       Aftermarket parts volume                    16.6          12.0         4.6
       Average aftermarket parts sales prices      27.1                      27.1
       Average aftermarket parts direct costs                    10.5       (10.5 )
       Warehouse and other indirect costs                         2.2        (2.2 )
       Currency translation                         (.4 )          .4         (.8 )

       Total increase                              43.3          25.1        18.2

       Three Months Ended June 30, 2013         $ 709.5      $  524.6     $ 184.9

Higher market demand in all markets resulted in increased aftermarket parts sales volume of $16.6 million and related cost of sales by $12.0 million.

Average aftermarket parts sales prices increased sales by $27.1 million reflecting improved price realization.

Average aftermarket parts direct costs increased $10.5 million from higher material costs.

Warehouse and other indirect costs increased $2.2 million primarily due to higher costs from warehouse capacity expansion to support higher sales volume.

Parts gross margins in the second quarter of 2013 of 26.1% increased from 25.0% in the second quarter of 2012 due to the factors noted above.

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                             PACCAR Inc - Form 10-Q



The major factors for the change in net sales and revenues, cost of sales and
revenues, and gross margin for the six months ended June 30, 2013 for the Parts
segment are as follows:



                                                  Net          Cost of       Gross
      ($ in millions)                            Sales          Sales       Margin
      Six Months Ended June 30, 2012           $ 1,346.6      $ 1,004.0     $ 342.6
      Increase (decrease)
      Aftermarket parts volume                       3.4             .9         2.5
      Average aftermarket parts sales prices        27.3                       27.3
      Average aftermarket parts direct costs                       12.6       (12.6 )
      Warehouse and other indirect costs                            4.0        (4.0 )
      Currency translation                           (.4 )           .7        (1.1 )

      Total increase                                30.3           18.2        12.1

      Six Months Ended June 30, 2013           $ 1,376.9      $ 1,022.2     $ 354.7

Higher market demand in all markets except Europe resulted in increased aftermarket parts sales volume of $3.4 million and related cost of sales by $.9 million.

Average aftermarket parts sales prices increased sales by $27.3 million reflecting improved price realization.

Average aftermarket parts direct costs increased $12.6 million from higher material costs.

Warehouse and other indirect costs increased $4.0 million primarily due to higher costs from warehouse capacity expansion to support sales volume.

Parts gross margins in the first half of 2013 of 25.8% increased from 25.4% in the first half of 2012 due to the factors noted above.

Parts SG&A was $51.0 million in the second quarter of 2013 compared to $52.5 million in the second quarter of 2012. In the first six months of 2013, Parts SG&A was $101.8 million compared to $104.7 million in the first six months of 2012. The lower spending for the first six months of 2013 is primarily due to lower sales and marketing expenses of $2.8 million.

As a percentage of sales, Parts SG&A decreased to 7.2% in the second quarter of 2013 from 7.9% in the second quarter of 2012, reflecting higher sales volumes and lower spending. For the first six months of 2013, Parts SG&A as a percentage of sales was 7.4%, down from 7.8% in the first six months of 2012, due to lower sales and marketing expenses.

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                             PACCAR Inc - Form 10-Q



Financial Services

The Company's Financial Services segment accounted for 6.7% and 7.1% of revenues
in the second quarter and first six months of 2013 compared to 6.0% and 5.7% in
the second quarter and first six months of 2012.



                                                  Three Months Ended                           Six Months Ended
($ in millions)                                        June 30                                     June 30
                                           2013          2012        % Change          2013          2012        % Change
New loan and lease volume:
U.S. and Canada                         $    704.2     $   836.9           (16 )    $  1,181.0     $ 1,388.6           (15 )
Europe                                       199.2         220.4           (10 )         390.5         443.7           (12 )
Mexico and Australia                         243.0         191.3            27           436.9         346.4            26

                                        $  1,146.4     $ 1,248.6            (8 )    $  2,008.4     $ 2,178.7            (8 )
New loan and lease volume by product:
Loans and finance leases                $    894.5     $   945.0            (5 )    $  1,575.1     $ 1,718.9            (8 )
Equipment on operating leases                251.9         303.6           (17 )         433.3         459.8            (6 )

                                        $  1,146.4     $ 1,248.6            (8 )    $  2,008.4     $ 2,178.7            (8 )
New loan and lease unit volume:
Loans and finance leases                     8,420         9,120            (8 )        15,120        16,970           (11 )
Equipment on operating leases                2,440         2,680            (9 )         4,240         4,230

                                            10,860        11,800            (8 )        19,360        21,200            (9 )
Average earning assets:
U.S. and Canada                         $  6,299.5     $ 5,908.1             7      $  6,221.6     $ 5,630.6            10
Europe                                     2,384.1       2,286.6             4         2,380.3       2,296.0             4
Mexico and Australia                       1,781.8       1,470.3            21         1,758.4       1,456.6            21

                                        $ 10,465.4     $ 9,665.0             8      $ 10,360.3     $ 9,383.2            10
Average earning assets by product:
Loans and finance leases                $  6,790.5     $ 6,064.8            12      $  6,788.3     $ 5,956.3            14
Dealer wholesale financing                 1,493.6       1,715.9           (13 )       1,417.8       1,576.9           (10 )
Equipment on lease and other               2,181.3       1,884.3            16         2,154.2       1,850.0            16

                                        $ 10,465.4     $ 9,665.0             8      $ 10,360.3     $ 9,383.2            10
Revenue:
U.S. and Canada                         $    153.5     $   141.9             8      $    314.3     $   278.4            13
. . .
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