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

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Form 10-Q for PACCAR INC


7-Nov-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 third quarter and first nine months of 2013 were $4.30 billion and $12.52 billion compared to $3.82 billion and $13.05 billion from the same periods in 2012. Truck unit sales increased in the third quarter of 2013 to 35,400 units from 31,100 units in the third quarter of 2012 primarily due to higher industry retail sales in the U.S., Canada and Europe, partially offset by lower retail sales in Mexico and South America. Truck unit sales decreased in the first nine months of 2013 to 100,700 units from 108,700 units in the same period last year, primarily due to lower industry retail sales in the U.S., Canada and South America, partially offset by higher industry retail sales in Europe. Aftermarket parts sales in the third quarter of 2013 were a record $715.3 million compared to $650.1 million in the third quarter in 2012 primarily due to strong demand worldwide. Aftermarket parts sales in the first nine months of 2013 were $2.09 billion compared to $2.00 billion in the same period of 2012.

Third quarter 2013 net income was $309.4 million ($.87 per diluted share) compared to $233.6 million ($.66 per diluted share) in the third quarter of 2012. The third quarter 2013 results reflect higher Truck segment sales, record Parts sales and record Financial Services segment pre-tax income. For the first nine months of 2013, net income was $837.1 million ($2.36 per diluted share) compared to $858.1 million ($2.41 per diluted share) in the first nine months of 2012. The year-to-date 2013 results reflect lower sales in the Truck segment in the first half of 2013, partially offset by record Parts sales and record Financial Services segment pre-tax income.

In October 2013, PACCAR began production of DAF trucks at its new DAF assembly plant in Ponta Grossa, Brasil. The new 300,000 square foot facility on 569 acres is a high-technology, environmentally friendly plant that will assemble premium-quality DAF XF, CF and LF vehicles. The factory will build DAF trucks for Brasil and the rest of the South American market. The above six tonne truck market in Brasil is projected to be over 145,000 units in 2013, with steady growth expected in future years.

PACCAR completed a new parts distribution center in Brasil and an expansion of the Lancaster, Pennsylvania distribution center that doubled its warehouse space.

Kenworth and Peterbilt continue to launch new products, and in November 2013, production will begin on the Kenworth T880 and the Peterbilt Model 567 trucks, which are designed for the vocational market.

In the third quarter and first nine months of 2013, the Company's research and development expenses (R&D) were $56.6 million and $190.5 million compared to $66.8 million and $212.9 million in the third quarter and first nine months of 2012, respectively. R&D declined as new truck models and engines began production. R&D is focused on engine and new vehicle development.

Truck and Parts Outlook

Truck industry Class 8 retail sales in the U.S. and Canada in 2013 are expected to be 205,000-215,000 units compared to 224,900 units in 2012, reflecting the ongoing replacement of the aging truck population and an improving housing sector. Estimates for the U.S. and Canada truck industry Class 8 retail sales for 2014 are in the range of 210,000-240,000 units, driven primarily by ongoing fleet replacement and some expansion of industry fleet capacity reflecting modest overall economic growth.

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PACCAR Inc - Form 10-Q

In Europe, the 2013 truck industry registrations for over 16-tonne vehicles are expected to be 215,000-225,000 units compared to 221,500 units in 2012. Some customers are purchasing Euro 5 vehicles ahead of the introduction of the Euro 6 emission requirement in 2014. Estimates for 2014 over 16-tonne truck industry registrations in Europe are in the range of 200,000-230,000 units reflecting the impact of the pull-forward of industry truck purchases in 2013.

In 2014, Parts industry aftermarket sales are expected to grow 3-7%, reflecting modest economic growth in the U.S. and Canada and Europe.

Capital investments in 2013 are expected to be $425 to $475 million and include 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 $260 million, focused on comprehensive product development programs and enhanced manufacturing operating efficiency. In 2014, capital investments are expected to be $350 to $400 million and R&D is expected to be $225 to $275 million, as PACCAR will continue to focus on enhanced manufacturing operating efficiencies and investing in new products and services.

Financial Services Outlook

Based on the truck market outlook, average earning assets in the fourth quarter are expected to be slightly higher than current levels, and in 2014 may grow further based on truck industry forecasts. 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             Nine Months Ended
                                                  September 30                   September 30
($ in millions, except per share amounts)     2013           2012            2013            2012
Net sales and revenues:
Truck                                       $ 3,261.2      $ 2,859.9      $  9,464.5      $ 10,138.0
Parts                                           715.3          650.1         2,092.2         1,996.7
Other                                            30.1           36.7            92.8           117.8

Truck, Parts and Other                        4,006.6        3,546.7        11,649.5        12,252.5
Financial Services                              293.5          273.5           875.4           801.0

                                            $ 4,300.1      $ 3,820.2      $ 12,524.9      $ 13,053.5

Income (loss) before taxes:
Truck                                       $   242.5      $   170.2      $    645.9      $    742.6
Parts                                           106.5           88.7           311.2           280.2
Other                                            (4.5 )         (1.7 )         (18.6 )          (6.1 )

Truck, Parts and Other                          344.5          257.2           938.5         1,016.7
Financial Services                               88.2           80.4           249.8           229.1
Investment income                                 7.3            7.8            21.8            24.9
Income taxes                                   (130.6 )       (111.8 )        (373.0 )        (412.6 )

Net income                                  $   309.4      $   233.6      $    837.1      $    858.1

Diluted earnings per share                  $     .87      $     .66      $     2.36      $     2.41

Return on Revenues                                7.2 %          6.1 %           6.7 %           6.6 %

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PACCAR Inc - Form 10-Q

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.

2013 Compared to 2012:

Truck

The Company's Truck segment accounted for 75.8% and 75.6% of revenues in the
third quarter and first nine months of 2013 compared to 74.9% and 77.7% in the
third quarter and first nine months of 2012.



                                            Three Months Ended                            Nine Months Ended
($ in millions)                                September 30                                  September 30
                                    2013           2012         % Change         2013            2012         % Change
Truck net sales and revenues:
U.S. and Canada                   $ 1,880.8      $ 1,431.2             31      $ 5,333.3      $  5,860.8             (9 )
Europe                                876.1          755.9             16        2,556.6         2,368.6              8
Mexico, South America,
Australia and Other                   504.3          672.8            (25 )      1,574.6         1,908.6            (17 )

                                  $ 3,261.2      $ 2,859.9             14      $ 9,464.5      $ 10,138.0             (7 )

Truck income before income
taxes                             $   242.5      $   170.2             42      $   645.9      $    742.6            (13 )

Pre-tax return on revenues 7.4 % 6.0 % 6.8 % 7.3 %

The Company's worldwide truck net sales and revenues in the third quarter of 2013 of $3.26 billion increased from the third quarter of 2012 due to higher truck deliveries in the U.S. and Canada ($449.6 million) and Europe ($120.2 million), partially offset by lower truck deliveries in Mexico ($70.1 million), Australia ($63.7 million) and South America ($51.0 million). In the first nine 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 ($527.5 million) and South America ($355.8 million), partially offset by higher market demand in Europe ($188.0 million).

For the third quarter of 2013, Truck segment income before income taxes reflects higher truck unit deliveries in the U.S. and Canada and Europe. For the first nine months of 2013, Truck segment income before income taxes reflects lower truck unit deliveries and price realization due to slower economic growth.

The third quarter and first nine months of 2013 Truck income before income taxes was also affected by the translation of weaker foreign currencies, primarily the Australian and Canadian dollars, partially offset by a stronger euro. Truck income before income taxes decreased by $.5 million and $8.0 million, respectively, due to the translation effect of currencies in the third quarter and first nine months of 2013.

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                             PACCAR Inc - Form 10-Q



The Company's new truck deliveries are summarized below:



                                               Three Months Ended                         Nine Months Ended
                                                  September 30                              September 30
                                         2013         2012       % Change         2013          2012        % Change
U.S.                                     15,700       12,200            29         43,700        49,000           (11 )
Canada                                    2,500        2,100            19          7,800         8,800           (11 )

U.S. and Canada                          18,200       14,300            27         51,500        57,800           (11 )
Europe                                   12,000       10,200            18         33,700        32,200             5
Mexico, South America, Australia and
Other                                     5,200        6,600           (21 )       15,500        18,700           (17 )

Total units                              35,400       31,100            14        100,700       108,700            (7 )

The truck markets in the U.S. and Canada and Europe improved in the third quarter of 2013 compared to 2012, partially offset by the impact of lower markets in Mexico, South America and Australia.

In the first nine months of 2013, industry retail sales in the heavy-duty market in the U.S. and Canada decreased to 153,000 units compared to 169,600 units in the same period of 2012. The Company's heavy-duty truck retail market share was 27.9% in the first nine months of 2013 compared to 29.0% in the same period of 2012. The medium-duty market was 48,800 units in the first nine months of 2013 compared to 48,900 units in the same period of 2012. The Company's medium-duty market share was 14.9% in both the first nine months of 2013 and 2012.

The over 16-tonne truck market in Western and Central Europe was 157,200 units in the first nine months of 2013 compared to 168,200 units in the same period of 2012. The Company's market share was 15.9% in the first nine months of 2013 compared to 16.0% in the same period of 2012. The 6- to 16-tonne market in the first nine months of 2013 was 39,200 units compared to 42,400 units in the same period of 2012. DAF market share in the 6- to 16-tonne market in the first nine months of 2013 was 11.3% 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 September 30, 2013 for the Truck segment are as follows:

                                                         Net            Cost of          Gross
($ in millions)                                         Sales            Sales          Margin
Three Months Ended September 30, 2012                 $ 2,859.9        $ 2,592.2        $ 267.7
Increase (decrease)
Truck delivery volume                                     329.1            286.1           43.0
Average truck sales prices                                (18.6 )                         (18.6 )
Average per truck material, labor and other
direct costs                                                               (48.4 )         48.4
Factory overhead and other indirect costs                                   17.4          (17.4 )
Operating lease income and depreciation expense            70.5             66.2            4.3
Currency translation                                       20.3             18.6            1.7

Total increase                                            401.3            339.9           61.4

Three Months Ended September 30, 2013                 $ 3,261.2        $ 2,932.1        $ 329.1

Truck delivery volume reflects higher truck deliveries in the U.S. and Canada and Europe, partially offset by lower deliveries in Mexico and South America.

Average truck sales prices decreased sales by $18.6 million reflecting lower price realization, primarily in Europe.

Average truck cost decreased $48.4 million primarily due to lower material and labor costs.

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PACCAR Inc - Form 10-Q

Factory overhead and other indirect costs increased $17.4 million primarily due to higher depreciation expense ($5.7 million) and salaries and related costs ($7.0 million).

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

Truck gross margin in the third quarter of 2013 of 10.1% increased from 9.4% in the same period in 2012 primarily from higher truck volume and lower average material and labor costs as noted above.

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, 2013 for the Truck segment are as follows:

                                                    Net             Cost of           Gross
($ in millions)                                    Sales             Sales           Margin
Nine Months Ended September 30, 2012             $ 10,138.0        $ 9,078.2        $ 1,059.8
Increase (decrease)
Truck delivery volume                                (713.5 )         (591.7 )         (121.8 )
Average truck sales prices                            (87.0 )                           (87.0 )
Average per truck material, labor and other
direct costs                                                           (77.3 )           77.3
Factory overhead and other indirect costs                                4.2             (4.2 )
Operating lease income and depreciation
expense                                               112.4            107.2              5.2
Currency translation                                   14.6             21.1             (6.5 )

Total decrease                                       (673.5 )         (536.5 )         (137.0 )

Nine Months Ended September 30, 2013             $  9,464.5        $ 8,541.7        $   922.8

Truck delivery volume reflects lower truck deliveries in the U.S. and Canada and South America.

Average truck sales prices decreased sales by $87.0 million, reflecting decreased price realization from lower market demand.

Average truck cost decreased $77.3 million primarily due to lower direct labor and material costs.

Factory overhead and other indirect costs increased $4.2 million, primarily due to higher depreciation expense.

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

Truck gross margin in the first nine months of 2013 of 9.8% decreased from 10.5% in the same period in 2012 primarily from lower truck volume as noted above.

Truck SG&A of $51.1 million in the third quarter of 2013 decreased from $53.4 million in the third quarter of 2012. The lower spending for the third quarter of 2013 is primarily due to lower sales and marketing expenses of $2.4 million. In the first nine months of 2013, Truck SG&A was $154.6 million compared to $174.7 million in the first nine months of 2012. The lower spending for the first nine months of 2013 was primarily due to lower sales and marketing expenses of $13.0 million and ongoing cost controls.

As a percentage of sales, Truck SG&A decreased to 1.6% in the third quarter of 2013 compared to 1.9% for the same period in 2012 and decreased to 1.6% in the first nine months of 2013 as compared to 1.7% for the same period in 2012.

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                             PACCAR Inc - Form 10-Q



Parts

The Company's Parts segment accounted for 16.6% and 16.7% of revenues in the
third quarter and first nine months of 2013 compared to 17.0% and 15.3% in the
third quarter and first nine months of 2012.



                                             Three Months Ended                         Nine Months Ended
($ in millions)                                 September 30                               September 30
                                     2013         2012         % Change        2013           2012          % Change
Parts net sales and revenues:
U.S. and Canada                     $ 424.1      $ 388.8               9     $ 1,215.5      $ 1,156.9               5
Europe                                202.7        174.5              16         607.3          585.5               4
Mexico, South America, Australia
and Other                              88.5         86.8               2         269.4          254.3               6

                                    $ 715.3      $ 650.1              10     $ 2,092.2      $ 1,996.7               5

Parts income before income taxes    $ 106.5      $  88.7              20     $   311.2      $   280.2              11


Pre-tax return on revenues             14.9 %       13.6 %                        14.9 %         14.0 %

The Company's worldwide parts net sales and revenues increased in the third quarter and the first nine months of 2013 primarily due to higher aftermarket demand worldwide. The increase in Parts segment income before taxes and pre-tax return on revenues in the third quarter and first nine months 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 September 30, 2013 for the Parts segment are as follows:

                                                  Net        Cost of       Gross
       ($ in millions)                           Sales        Sales       Margin
       Three Months Ended September 30, 2012    $ 650.1      $  487.7     $ 162.4
       Increase (decrease)
       Aftermarket parts volume                    62.0          39.5        22.5
       Average aftermarket parts sales prices      (2.8 )                    (2.8 )
       Average aftermarket parts direct costs                     3.1        (3.1 )
       Warehouse and other indirect costs                          .5         (.5 )
       Currency translation                         6.0           3.6         2.4

       Total increase                              65.2          46.7        18.5

       Three Months Ended September 30, 2013    $ 715.3      $  534.4     $ 180.9

Higher market demand in all markets resulted in increased aftermarket parts sales volume of $62.0 million and related cost of sales by $39.5 million.

Average aftermarket parts sales prices decreased sales by $2.8 million reflecting lower price realization.

Average aftermarket parts direct costs increased $3.1 million from higher material costs.

Parts gross margins in the third quarter of 2013 of 25.3% increased from 25.0% in the third 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 nine months ended September 30, 2013 for the
Parts segment are as follows:



                                                  Net         Cost of       Gross
      ($ in millions)                            Sales         Sales       Margin
      Nine Months Ended September 30, 2012     $ 1,996.7     $ 1,491.7     $ 505.0
      Increase (decrease)
      Aftermarket parts volume                      65.4          40.4        25.0
      Average aftermarket parts sales prices        24.5                      24.5
      Average aftermarket parts direct costs                      15.7       (15.7 )
      Warehouse and other indirect costs                           4.5        (4.5 )
      Currency translation                           5.6           4.3         1.3

      Total increase                                95.5          64.9        30.6

      Nine Months Ended September 30, 2013     $ 2,092.2     $ 1,556.6     $ 535.6

Higher market demand in all markets resulted in increased aftermarket parts sales volume of $65.4 million and related cost of sales by $40.4 million.

Average aftermarket parts sales prices increased sales by $24.5 million reflecting improved price realization.

Average aftermarket parts direct costs increased $15.7 million due to higher material costs.

Warehouse and other indirect costs increased $4.5 million primarily due to higher costs from warehouse capacity expansion to support sales volume.

Parts gross margins in the first nine months of 2013 of 25.6% increased from 25.3% in the first nine months of 2012 due to the factors noted above.

Parts SG&A was $51.1 million in the third quarter of 2013 compared to $51.2 million in the third quarter of 2012. In the first nine months of 2013, Parts SG&A was $152.9 million compared to $155.9 million in the first nine months of 2012.

As a percentage of sales, Parts SG&A decreased to 7.1% in the third quarter of 2013 from 7.9% in the third quarter of 2012, reflecting higher sales volumes. For the first nine months of 2013, Parts SG&A as a percentage of sales was 7.3%, down from 7.8% in the first nine 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 6.8% and 7.0% of revenues
in the third quarter and first nine months of 2013 compared to 7.2% and 6.1% in
the third quarter and first nine months of 2012.



                                                  Three Months Ended                          Nine Months Ended
($ in millions)                                      September 30                                September 30
                                           2013          2012        % Change          2013          2012        % Change
New loan and lease volume:
U.S. and Canada                         $    666.2     $   735.5            (9 )    $  1,847.2     $ 2,124.1           (13 )
Europe                                       196.2         202.3            (3 )         586.7         646.0            (9 )
Mexico and Australia                         213.9         224.1            (5 )         650.8         570.5            14

                                        $  1,076.3     $ 1,161.9            (7 )    $  3,084.7     $ 3,340.6            (8 )
New loan and lease volume by product:
Loans and finance leases                $    842.0     $   902.2            (7 )    $  2,417.1     $ 2,621.1            (8 )
Equipment on operating leases                234.3         259.7           (10 )         667.6         719.5            (7 )

                                        $  1,076.3     $ 1,161.9            (7 )    $  3,084.7     $ 3,340.6            (8 )
New loan and lease unit volume:
. . .
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