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PCAR > SEC Filings for PCAR > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for PACCAR INC

Form 10-K for PACCAR INC


27-Feb-2014

Annual Report


ITEM 7. 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 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 of $17.12 billion in 2013 were the highest in the Company's history. The increase from $17.05 billion in 2012 was mainly due to record aftermarket parts sales and higher financial services revenue. Improving fleet utilization and the age of the North American truck fleet are contributing to excellent parts and service business. Truck unit sales decreased in 2013 to 137,100 units from 140,400 units in 2012, reflecting lower industry retail sales in North America, partially offset by a larger over 16-tonne market and record DAF market share in Europe.

In 2013, PACCAR earned net income for the 75th consecutive year. Net income in 2013 of $1.17 billion was the third highest in the Company's history, increasing from $1.11 billion ($3.12 per diluted share) in 2012, primarily due to record Parts segment sales, improved Truck segment operating margin and record Financial Services segment pre-tax income. Earnings per diluted share of $3.30 was the second best in the Company's history.


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PACCAR completed construction of its new 300,000 square-foot DAF assembly facility in Ponta Grossa, Brasil in October 2013. Brasil is a major truck market with industry sales above six tonnes in 2013 of 149,000 units. During the fourth quarter of 2013, DAF began truck production in Brasil. During 2014, DAF plans to steadily increase truck production. The independent DAF dealer service network in Brasil consisted of 20 locations in 2013 and is expected to expand to 40 locations in 2014. It is estimated that Brasil industry truck sales in the above six tonnes segment will be 150,000 units in 2014.

PACCAR launched a new range of vocational trucks in 2013: the Kenworth T880, the Peterbilt Model 567 and the DAF CF and LF Euro 6 models. PACCAR expanded its family of engines with the introduction of higher horsepower ratings for the PACCAR MX-13 engine and the new PACCAR MX-11 engine. In 2013, the Company's research and development expenses were $251.4 million compared to $279.3 million in 2012.

During 2013, PACCAR completed construction of a new 280,000 square-foot parts distribution center (PDC) in Eindhoven, the Netherlands, established a PDC in Ponta Grossa, Brasil, and doubled the warehouse space in the Lancaster, Pennsylvania PDC. The Company has 16 PDCs strategically located to support customers in North America, Europe, Australia and South America.

The PACCAR Financial Services (PFS) group of companies has operations covering four continents and 23 countries. The global breadth of PFS and its rigorous credit application process support a portfolio of loans and leases with total assets of $11.63 billion that earned a record pre-tax profit of $340.2 million. PFS issued $2.10 billion in medium-term notes during the year to support portfolio growth.

Truck and Parts Outlook

Truck industry retail sales in the U.S. and Canada in 2014 are expected to be 210,000-240,000 units compared to 212,200 units in 2013 driven primarily by ongoing fleet replacement and some expansion of industry fleet capacity reflecting modest overall economic growth. In Europe, the 2014 truck industry registrations for over 16-tonne vehicles are expected to be 200,000-230,000 units, compared to the 240,800 trucks in 2013. Some customers accelerated purchases of Euro 5 vehicles in 2013 ahead of the introduction of the Euro 6 emission requirement in 2014.

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 2014 are expected to be $350 to $400 million, focused on enhanced powertrain development and increased operating efficiency for the assembly facilities. Research and development (R&D) in 2014 is expected to be $225 to $275 million, focused on new products and services.

Financial Services Outlook

Average earning assets in 2014 are expected to grow approximately 5% reflecting record Financial Services asset levels at the start of the year. 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 Statements section of Management's Discussion and Analysis for factors that may affect these outlooks.


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RESULTS OF OPERATIONS:

 ($ in millions, except per share amounts)
 Year Ended December 31,                           2013            2012            2011
 Net sales and revenues:
 Truck                                       $ 13,002.9      $ 13,131.5      $ 12,630.7
 Parts                                          2,822.2         2,667.5         2,577.0
 Other                                            123.8           152.7           118.2

 Truck, Parts and Other                        15,948.9        15,951.7        15,325.9
 Financial Services                             1,174.9         1,098.8         1,029.3

                                             $ 17,123.8      $ 17,050.5      $ 16,355.2

 Income (loss) before income taxes:
 Truck                                       $    936.7      $    920.4      $    864.7
 Parts                                            416.0           374.6           394.1
 Other                                            (26.5 )          (7.0 )         (26.5 )

 Truck, Parts and Other                         1,326.2         1,288.0         1,232.3
 Financial Services                               340.2           307.8           236.4
 Investment income                                 28.6            33.1            38.2
 Income taxes                                    (523.7 )        (517.3 )        (464.6 )

 Net Income                                  $  1,171.3      $  1,111.6      $  1,042.3

 Diluted earnings Per Share                  $     3.30      $     3.12      $     2.86


 Return on revenues                                 6.8 %           6.5 %           6.4 %

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 76% and 77% of total revenues for 2013
and 2012, respectively.



 ($ in millions)
 Year Ended December 31,                            2013            2012      % CHANGE
 Truck net sales and revenues:
 U.S. and Canada                              $  7,138.1      $  7,467.8             (4 )
 Europe                                          3,844.4         3,217.1             19
 Mexico, South America, Australia and other      2,020.4         2,446.6            (17 )

                                              $ 13,002.9      $ 13,131.5             (1 )

 Truck income before income taxes             $    936.7      $    920.4              2


 Pre-tax return on revenues                          7.2 %           7.0 %

The Company's worldwide truck net sales and revenues decreased due to lower market demand in the U.S. and Canada ($329.7 million), South America ($342.3 million) and Australia ($94.8 million), partially offset by higher market demand in Europe ($627.3 million). Truck segment income before income taxes and pre-tax return on revenues reflects improved price realization, primarily in Europe, and lower R&D and selling, general and administrative (SG&A) expenses, partially offset by lower truck unit deliveries.


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The Company's new truck deliveries are summarized below:

   Year Ended December 31,                           2013          2012     % CHANGE
   U.S.                                            59,000        62,200            (5 )
   Canada                                           9,700        10,900           (11 )

   U.S. and Canada                                 68,700        73,100            (6 )
   Europe                                          48,400        43,500            11
   Mexico, South America, Australia and other      20,000        23,800           (16 )

   Total units                                    137,100       140,400            (2 )

In 2013, industry retail sales in the heavy-duty market in the U.S. and Canada decreased to 212,200 units compared to 224,900 units in 2012. The Company's heavy-duty truck retail market share was 28.0% compared to 28.9% in 2012. The medium-duty market was 65,900 units in 2013 compared to 64,600 units in 2012. The Company's medium-duty market share was 15.7% in 2013 compared to 15.4% in 2012.

The over 16-tonne truck market in Western and Central Europe in 2013 was 240,800 units, an 8% increase from 222,000 units in 2012 reflecting a pre-buy of Euro 5 trucks by some customers ahead of Euro 6 emissions regulations effective in 2014. The Company's market share was a record 16.2% in 2013, an increase from 16.0% in 2012. The 6- to 16-tonne market in 2013 was 57,000 units compared to 55,500 units in 2012. The Company's market share was a record 11.8% in 2013, an increase from 11.4% in 2012.

Sales in Mexico, South America, Australia and other markets decreased in 2013 primarily due to fewer new truck deliveries in Colombia.

The major factors for the change in net sales and revenues, cost of sales and revenues and gross margin between 2013 and 2012 for the Truck segment are as follows:

                                                                  NET            COST          GROSS
($ in millions)                                                 SALES        OF SALES         MARGIN
2012                                                       $ 13,131.5      $ 11,794.0      $ 1,337.5
Increase (decrease)
Truck delivery volume                                          (399.7 )        (324.5 )        (75.2 )
Average truck sales prices                                       57.6                           57.6
Average per truck material, labor and other direct costs                          2.2           (2.2 )
Factory overhead and other indirect costs                                        20.6          (20.6 )
Operating lease revenues and depreciation expense               149.0           142.4            6.6
Currency translation                                             64.5            57.2            7.3

Total decrease                                                 (128.6 )        (102.1 )        (26.5 )

2013                                                       $ 13,002.9      $ 11,691.9      $ 1,311.0

Truck delivery volume reflects lower truck deliveries in all markets except Europe. Higher deliveries in Europe reflect purchases of Euro 5 vehicles ahead of the Euro 6 emission requirement in 2014.

Average truck sales prices increased sales by $57.6 million, reflecting increased price realization from higher market demand in Europe.

Factory overhead and other indirect costs increased $20.6 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 margins in 2013 of 10.1% decreased slightly from 10.2% in 2012 primarily from lower truck volume as noted above.

Truck SG&A was $214.1 million in 2013 compared to $231.0 million in 2012. The lower spending in 2013 was primarily due to lower sales and marketing expense of $5.9 million and ongoing cost controls. As a percentage of sales, SG&A decreased to 1.6% in 2013 compared to 1.8% in 2012.


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Parts

The Company's Parts segment accounted for 16% of total revenues for both 2013
and 2012.



  ($ in millions)
  Year Ended December 31,                           2013           2012       % CHANGE
  Parts net sales and revenues:
  U.S. and Canada                              $ 1,635.5      $ 1,529.1               7
  Europe                                           828.3          786.7               5
  Mexico, South America, Australia and other       358.4          351.7               2

                                               $ 2,822.2      $ 2,667.5               6

  Parts income before income taxes             $   416.0      $   374.6              11


  Pre-tax return on revenues                        14.7 %         14.0 %

The Company's worldwide parts net sales and revenues increased due to higher aftermarket demand worldwide. The increase in Parts segment income before taxes and pre-tax return on revenues was primarily due to higher sales, gross margins and cost controls.

The major factors for the change in net sales and revenues, cost of sales and revenues and gross margin between 2013 and 2012 for the Parts segment are as follows:

                                                  NET               COST              GROSS
  ($ in millions)                               SALES           OF SALES             MARGIN
  2012                                     $  2,667.5         $  1,995.0         $    672.5
  Increase (decrease)
  Aftermarket parts volume                      103.6               67.4               36.2
  Average aftermarket parts sales prices         38.3                                  38.3
  Average aftermarket parts direct costs                            29.6              (29.6 )
  Warehouse and other indirect costs                                 6.5               (6.5 )
  Currency translation                           12.8                8.5                4.3

  Total increase                                154.7              112.0               42.7

  2013                                     $  2,822.2         $  2,107.0         $    715.2

Higher market demand in all markets resulted in increased aftermarket parts sales volume of $103.6 million and related cost of sales by $67.4 million.

Average aftermarket parts sales prices increased sales by $38.3 million reflecting improved price realization.

Average aftermarket parts direct costs increased $29.6 million due to higher material costs.

Warehouse and other indirect costs increased $6.5 million primarily due to higher costs from warehouse capacity expansion to support sales volume.

Parts gross margins in 2013 of 25.3% increased slightly from 25.2% in 2012 due to the factors noted above.

Parts SG&A decreased slightly to $204.1 million in 2013 from $206.0 million in 2012 due to lower sales and marketing expenses. As a percentage of sales, Parts SG&A decreased to 7.2% in 2013 from 7.7% in 2012, due to cost controls and higher sales volume.


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Financial Services

The Company's Financial Services segment accounted for 6.9% and 6.4% of total
revenues for 2013 and 2012, respectively.



     ($ in millions)
     Year Ended December 31,                       2013          2012     % CHANGE
     New loan and lease volume:
     U.S. and Canada                         $  2,617.4     $ 2,913.1           (10 )
     Europe                                       838.3         888.2            (6 )
     Mexico and Australia                         862.9         820.9             5

                                             $  4,318.6     $ 4,622.2            (7 )
     New loan and lease volume by product:
     Loans and finance leases                $  3,368.1     $ 3,660.7            (8 )
     Equipment on operating lease                 950.5         961.5            (1 )

                                             $  4,318.6     $ 4,622.2            (7 )
     New loan and lease unit volume:
     Loans and finance leases                    32,200        36,100           (11 )
     Equipment on operating lease                 9,000         9,400            (4 )

                                                 41,200        45,500            (9 )
     Average earning assets:
     U.S. and Canada                         $  6,331.9     $ 5,894.6             7
     Europe                                     2,495.9       2,285.1             9
     Mexico and Australia                       1,770.1       1,556.0            14

                                             $ 10,597.9     $ 9,735.7             9
     Average earning assets by product:
     Loans and finance leases                $  6,876.3     $ 6,213.2            11
     Dealer wholesale financing                 1,490.9       1,574.7            (5 )
     Equipment on lease and other               2,230.7       1,947.8            15

                                             $ 10,597.9     $ 9,735.7             9
     Revenues:
     U.S. and Canada                         $    626.6     $   592.8             6
     Europe                                       303.5         283.5             7
     Mexico and Australia                         244.8         222.5            10

                                             $  1,174.9     $ 1,098.8             7
     Revenue by product:
     Loans and finance leases                $    407.7     $   392.2             4
     Dealer wholesale financing                    55.1          61.5           (10 )
     Equipment on lease and other                 712.1         645.1            10

                                             $  1,174.9     $ 1,098.8             7

     Income before income taxes              $    340.2     $   307.8            11

In 2013, new loan and lease volume decreased 7% to $4.32 billion from $4.62 billion in 2012. The lower volume in 2013 primarily reflects lower market shares. PFS's finance market share on new PACCAR truck sales was 29.2% in 2013 compared to 30.6% in the prior year primarily due to lower market share in the U.S. and Canada and Europe.

The increase in PFS revenue to $1.17 billion in 2013 from $1.10 billion in 2012 primarily resulted from higher average earning asset balances, partially offset by lower yields. PFS income before income taxes increased to a record $340.2 million compared to $307.8 million in 2012 primarily due to higher finance and lease margins and a lower provision for losses on receivables.


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The major factors for the change in interest and fees, interest and other borrowing expenses and finance margin for the year ended December 31, 2013 are outlined below:

                                                       INTEREST AND
                                                              OTHER
                                      INTEREST            BORROWING      FINANCE
        ($ in millions)               AND FEES             EXPENSES       MARGIN
        2012                          $   453.7      $        158.4      $  295.3
        Increase (decrease)
        Average finance receivables        33.5                              33.5
        Average debt balances                                  13.1         (13.1 )
        Yields                            (20.5 )                           (20.5 )
        Borrowing rates                                       (15.7 )        15.7
        Currency translation               (3.9 )                .1          (4.0 )

        Total increase (decrease)           9.1                (2.5 )        11.6

        2013                          $   462.8      $        155.9      $  306.9

Average finance receivables increased $590.5 million (net of foreign exchange effects) in 2013 from retail portfolio new business volume exceeding repayments, partially offset by a decrease in dealer wholesale financing, primarily in the U.S. and Canada.

Average debt balances increased $671.5 million in 2013 and included increased medium-term note funding. The higher average debt balances reflect funding for a higher average earning asset portfolio, including loans, finance leases and equipment on operating leases.

Lower market rates resulted in lower portfolio yields (5.6% in 2013 and 5.8% in 2012) and lower borrowing rates (2.0% in 2013 and 2.2% in 2012).

The following table summarizes operating lease, rental and other revenues and depreciation and other expense:

           ($ in millions)
           Year Ended December 31,                         2013        2012
           Operating lease revenues                     $ 663.0     $ 585.9
           Used truck sales and other                      49.1        59.2

           Operating lease, rental and other revenues   $ 712.1     $ 645.1


           Depreciation of operating lease equipment    $ 435.4     $ 369.9
           Vehicle operating expenses                      98.1        97.0
           Cost of used truck sales and other              38.2        50.5

           Depreciation and other expense               $ 571.7     $ 517.4


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The major factors for the change in operating lease, rental and other revenues, depreciation and other expense and related lease margin for the year ended December 31, 2013 are outlined below:

                                      OPERATING LEASE,        DEPRECIATION
                                            RENTAL AND           AND OTHER         LEASE
 ($ in millions)                        OTHER REVENUES             EXPENSE        MARGIN
 2012                               $            645.1      $        517.4      $  127.7
 Increase (decrease)
 Operating lease impairments                                           (.1 )          .1
 Used truck sales and other                      (10.1 )             (12.2 )         2.1
 Results on returned lease assets                                      3.0          (3.0 )
 Average operating lease assets                   55.3                43.6          11.7
 Revenue and cost per asset                       17.5                16.0           1.5
 Currency translation                              4.3                 4.0            .3

 Total increase                                   67.0                54.3          12.7

 2013                               $            712.1      $        571.7      $  140.4

Used truck sales and other revenues decreased operating lease, rental and other revenues by $10.1 million and decreased depreciation and other expense by $12.2 million, reflecting a lower number of used truck units sold.

Average operating lease assets increased $282.9 million in 2013, which increased revenues by $55.3 million and related depreciation and other expense by $43.6 million, as a result of a higher demand for leased vehicles.

Revenue and cost per asset increased $17.5 million and $16.0 million, respectively, reflecting the higher demand for leased vehicles and the related costs for higher fleet utilization.

The following table summarizes the provision for losses on receivables and net charge-offs:

($ in millions)                                 2013                                        2012
                                  PROVISION FOR                               PROVISION FOR
                                      LOSSES ON                  NET              LOSSES ON                  NET
                                    RECEIVABLES          CHARGE-OFFS            RECEIVABLES          CHARGE-OFFS
U.S. and Canada                 $           1.9        $          .5        $           4.6        $        15.2
Europe                                      7.4                 11.0                    9.9                  9.2
Mexico and Australia                        3.6                  2.1                    5.5                  6.9

                                $          12.9        $        13.6        $          20.0        $        31.3

The provision for losses on receivables was $12.9 million in 2013, a decrease of $7.1 million compared to 2012, due to lower provisions in all markets reflecting improved portfolio performance.

The Company modifies loans and finance leases as a normal part of its Financial Services operations. The Company may modify loans and finance leases for commercial reasons or for credit reasons. Modifications for commercial reasons are changes to contract terms for customers that are not considered to be in financial difficulty. Insignificant delays are modifications extending terms up to three months for customers experiencing some short-term financial stress, but not considered to be in financial difficulty. Modifications for credit reasons are changes to contract terms for customers considered to be in financial difficulty. The Company's modifications typically result in granting more time to pay the contractual amounts owed and charging a fee and interest for the term of the modification. When considering whether to modify customer accounts for credit reasons, the Company evaluates the creditworthiness of the customer and modifies those accounts that the Company considers likely to perform under the modified terms. When the Company modifies loans and finance leases for credit reasons and grants a concession, the modifications are classified as troubled debt restructurings (TDRs).


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The post-modification balances of accounts modified during the year ended December 31, 2013 and 2012 are summarized below:

  ($ in millions)                      2013                               2012
. . .
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