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PCAR > SEC Filings for PCAR > Form 10-Q on 7-May-2014All Recent SEC Filings

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Form 10-Q for PACCAR INC


7-May-2014

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 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 first quarter of 2014 increased to $4.38 billion from $3.92 billion in the first quarter of 2013. Truck unit sales increased in the first quarter of 2014 to 31,800 units from 30,600 units in the same period of 2013 reflecting stronger industry truck sales in North America. The Company's worldwide parts net sales and revenues increased to $726.6 million in the first quarter of 2014 from $667.4 million for the same period last year, primarily due to higher aftermarket demand in the U.S. and Canada and Europe. Financial Services revenues of $293.7 million in the first quarter of 2014 were comparable to $293.1 million in the first quarter of 2013.

Net income in the first quarter of 2014 increased to $273.9 million ($.77 per diluted share) from $236.1 million ($.67 per diluted share) in the first quarter of 2013. The first quarter 2014 results reflect higher Truck and Parts segment sales and good Financial Services results.

In the first quarter of 2014, the Company repaid $150.0 million of manufacturing debt and, as a result, had no manufacturing debt as of March 31, 2014.

In the first quarter of 2014, the Company's research and development (R&D) expenses were $52.7 million compared to $72.1 million in the first quarter of 2013. 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 retail sales in the U.S. and Canada in 2014 are expected to be 220,000-240,000 units compared to 212,200 units in 2013 driven primarily by ongoing replacement of the aging truck population and improving construction and automotive sectors. The truck market in 2014 may also benefit from some expansion of industry fleet capacity, reflecting improved freight demand. In Europe, the 2014 truck industry registrations for over 16-tonne vehicles are expected to be 200,000-230,000 units, compared to 240,800 units in 2013.

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

Capital investments in 2014 are expected to be $300 to $350 million, focused on enhanced powertrain development and increased operating efficiency for the assembly facilities. R&D in 2014 is expected to be $200 to $250 million.

Financial Services Outlook

Average earning assets in 2014 are expected to increase approximately 5% reflecting higher Financial Services asset level 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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Table of Contents

                             PACCAR Inc - Form 10-Q



RESULTS OF OPERATIONS:




       ($ in millions, except per share amounts)
       Three Months Ended March 31,                      2014            2013
       Net sales and revenues:
       Truck                                       $  3,329.2      $  2,933.3
       Parts                                            726.6           667.4
       Other                                             30.4            30.5

       Truck, Parts and Other                         4,086.2         3,631.2
       Financial Services                               293.7           293.1

                                                   $  4,379.9      $  3,924.3

       Income (loss) before income taxes:
       Truck                                       $    212.3      $    165.0
       Parts                                            112.1            95.3
       Other                                             (9.2 )          (9.7 )

       Truck, Parts and Other                           315.2           250.6
       Financial Services                                85.5            80.1
       Investment income                                  5.8             6.5
       Income taxes                                    (132.6 )        (101.1 )

       Net income                                  $    273.9      $    236.1

       Diluted earnings per share                  $      .77      $      .67


       Return on revenues                                 6.3 %           6.0 %

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.

2014 Compared to 2013:

Truck

The Company's Truck segment accounted for 76.0% of revenues in the first quarter
of 2014 compared to 74.7% in the first quarter of 2013.




 ($ in millions)
 Three Months Ended March 31,                       2014            2013       % Change
 Truck net sales and revenues:
 U.S. and Canada                              $  1,959.1      $  1,610.2              22
 Europe                                            962.6           851.4              13
 Mexico, South America, Australia and other        407.5           471.7             (14 )

                                              $  3,329.2      $  2,933.3              13

 Truck income before income taxes             $    212.3      $    165.0              29


 Pre-tax return on revenues                          6.4 %           5.6 %

The Company's worldwide truck net sales and revenues in the first quarter of 2014 of $3.33 billion increased from the first quarter of 2013 primarily due to higher truck deliveries in the U.S., higher price realization in Europe related to higher content Euro 6 emission vehicles, partially offset by lower truck deliveries in Mexico, Australia and Europe.

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Table of Contents

PACCAR Inc - Form 10-Q

For the first quarter of 2014, Truck segment income before income taxes and pre-tax return on revenues reflects higher truck unit deliveries in the U.S. and lower R&D spending, partially offset by lower deliveries in all foreign markets.

The Company's new truck deliveries are summarized below:

  Three Months Ended March 31,                       2014           2013      % Change
  U.S.                                             16,100         12,700             27
  Canada                                            2,500          2,700             (7 )

  U.S. and Canada                                  18,600         15,400             21
  Europe                                            9,300         10,600            (12 )
  Mexico, South America, Australia and other        3,900          4,600            (15 )

  Total units                                      31,800         30,600              4

In the first quarter of 2014, industry retail sales in the heavy-duty market in the U.S. and Canada increased to 50,300 units from 44,900 units in the same period of 2013. The Company's heavy-duty truck retail market share was 27.2% in the first quarter of 2014 compared to 26.6% in the first quarter of 2013. The medium-duty market was 18,000 units in the first quarter of 2014 compared to 16,200 units in the same period of 2013. The Company's medium-duty market share was 13.4% in the first quarter of 2014 compared to 12.1% in the first quarter of 2013.

The over 16-tonne truck market in Western and Central Europe in the first quarter of 2014 was 54,000 units, an 11% increase from 48,700 units in the first quarter of 2013. The largest increases were in Germany, France and Spain, partially offset by reduction in the U.K. and the Netherlands. The Company's market share was 12.2% in the first quarter of 2014, a decrease from 15.8% in the same period of 2013. The decrease in market share was primarily due to lower DAF registrations in the U.K. and the Netherlands which were impacted by the Euro 5/Euro 6 transition rules. The 6- to 16-tonne market in the first quarter of 2014 was 11,000 units compared to 11,900 units in the first quarter of 2013. DAF market share in the 6- to 16-tonne market in the first quarter of 2014 was 6.3% compared to 11.0% in the same period of 2013. The decline in market share is a result of reduced registrations in the U.K. which were also affected by the Euro 5/Euro 6 transition rules.

The major factors for the change in net sales and revenues, cost of sales and revenues and gross margin for the three months ended March 31, 2014 for the Truck segment are as follows:

                                                                  Net            Cost           Gross
($ in millions)                                                 Sales        of Sales          Margin
Three Months Ended March 31, 2013                          $  2,933.3      $  2,666.3      $    267.0
Increase (decrease)
Truck delivery volume                                           239.5           210.8            28.7
Average truck sales prices                                      148.4                           148.4
Average per truck material, labor and other direct costs                        118.7          (118.7 )
Factory overhead and other indirect costs                                        30.3           (30.3 )
Operating lease revenues and depreciation expense                18.4            16.3             2.1
Currency translation                                            (10.4 )          (9.7 )           (.7 )

Total increase                                                  395.9           366.4            29.5

Three Months Ended March 31, 2014                          $  3,329.2      $  3,032.7      $    296.5

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PACCAR Inc - Form 10-Q

Truck delivery volume reflects higher deliveries in the U.S. ($346.7 million), partially offset by lower truck deliveries in Mexico ($48.8 million), Europe ($36.0 million) and Australia ($30.0 million).

Average truck sales prices increased sales by $148.4 million, primarily due to higher content Euro 6 emission vehicles in Europe ($92.6 million) and improved price realization in the U.S. and Canada ($39.0 million).

Costs of sales increased $118.7 million due to higher average cost per truck, primarily from the effect of higher content Euro 6 emission vehicles in Europe ($91.5 million).

Factory overhead and other indirect costs increased $30.3 million primarily due to higher salaries and related costs ($24.8 million) and depreciation expense ($7.6 million).

Operating lease revenues and depreciation expense increased due to a higher operating lease portfolio in Europe.

Truck gross margin in the first quarter of 2014 of 8.9% decreased slightly from 9.1% in the same period in 2013 due to the factors noted above.

Truck selling, general and administrative (SG&A) expenses increased to $54.0 million in the first quarter of 2014 compared to $53.1 million in the first quarter of 2013, primarily due to higher salaries and related costs. As a percentage of sales, SG&A decreased to 1.6% in the first quarter of 2014 compared to 1.8% in the first quarter of 2013 reflecting higher sales volume.

Parts

The Company's Parts segment accounted for 16.6% of revenues in the first quarter
of 2014 compared to 17.0% in the first quarter of 2013.



    ($ in millions)
    Three Months Ended March 31,                    2014         2013       % Change
    Parts net sales and revenues:
    U.S. and Canada                              $ 424.0      $ 382.7              11
    Europe                                         218.2        200.0               9
    Mexico, South America, Australia and other      84.4         84.7

                                                 $ 726.6      $ 667.4               9

    Parts income before income taxes             $ 112.1      $  95.3              18


    Pre-tax return on revenues                      15.4 %       14.3 %

The Company's worldwide parts net sales and revenues increased in the first quarter of 2014 due to higher aftermarket demand, primarily in the U.S., Canada and Europe. The increase in Parts segment income before taxes and pre-tax return on revenues in the first quarter of 2014 was primarily due to higher sales and gross margins.

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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 three months ended March 31, 2014 for the Parts segment are as follows:

                                                    Net           Cost          Gross
    ($ in millions)                               Sales       of Sales         Margin
    Three Months Ended March 31, 2013        $    667.4     $    497.6     $    169.8
    Increase (decrease)
    Aftermarket parts volume                       29.1           19.9            9.2
    Average aftermarket parts sales prices         28.6                          28.6
    Average aftermarket parts direct costs                        19.4          (19.4 )
    Warehouse and other indirect costs                             1.8           (1.8 )
    Currency translation                            1.5             .4            1.1

    Total increase                                 59.2           41.5           17.7

    Three Months Ended March 31, 2014        $    726.6     $    539.1     $    187.5

Higher market demand, primarily in the U.S., Canada and Europe, resulted in increased aftermarket parts sales volume of $29.1 million and related cost of sales by $19.9 million.

Average aftermarket parts sales prices increased sales by $28.6 million reflecting improved price realization.

Average aftermarket parts direct costs increased $19.4 million due to higher material costs.

Warehouse and other indirect costs increased $1.8 million primarily due to additional costs to support higher sales volume.

Parts gross margins in the first quarter of 2014 of 25.8% increased from 25.4% in the first quarter of 2013 due to the factors noted above.

Parts SG&A increased to $51.8 million in the first quarter of 2014 compared to $50.8 million in the first quarter of 2013, primarily due to higher salaries and related expenses. As a percentage of sales, Parts SG&A decreased to 7.1% in the first quarter of 2014 from 7.6% in the first quarter of 2013 due to higher sales volume.

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                             PACCAR Inc - Form 10-Q



Financial Services

The Company's Financial Services segment accounted for 6.7% of revenues in the
first quarter of 2014 compared to 7.5% in the first quarter of 2013.



     ($ in millions)
     Three Months Ended March 31,                  2014           2013     % Change
     New loan and lease volume:
     U.S. and Canada                         $    480.0     $    476.8             1
     Europe                                       225.0          191.3            18
     Mexico and Australia                         158.3          193.9           (18 )

                                             $    863.3     $    862.0
     New loan and lease volume by product:
     Loans and finance leases                $    707.4     $    680.6             4
     Equipment on operating lease                 155.9          181.4           (14 )

                                             $    863.3     $    862.0
     New loan and lease unit volume:
     Loans and finance leases                     6,800          6,700             1
     Equipment on operating lease                 1,500          1,800           (17 )

                                                  8,300          8,500            (2 )
     Average earning assets:
     U.S. and Canada                         $  6,525.7     $  6,188.0             5
     Europe                                     2,738.8        2,372.1            15
     Mexico and Australia                       1,719.3        1,733.7            (1 )

                                             $ 10,983.8     $ 10,293.8             7
     Average earning assets by product:
     Loans and finance leases                $  7,166.0     $  6,781.9             6
     Dealer wholesale financing                 1,434.3        1,385.3             4
     Equipment on lease and other               2,383.5        2,126.6            12

                                             $ 10,983.8     $ 10,293.8             7
     Revenue:
     U.S. and Canada                         $    153.4     $    160.8            (5 )
     Europe                                        80.1           72.3            11
     Mexico and Australia                          60.2           60.0

                                             $    293.7     $    293.1
     Revenue by product:
     Loans and finance leases                $    100.5     $    101.2            (1 )
     Dealer wholesale financing                    12.4           12.6            (2 )
     Equipment on lease and other                 180.8          179.3             1

                                             $    293.7     $    293.1

     Income before income taxes              $     85.5     $     80.1             7

New loan and lease volume of $863.3 million in the first quarter of 2014 was comparable to $862.0 million in the first quarter of 2013. In the first quarter of 2014, finance market share on new PACCAR trucks sales was 27.5% compared to 27.9% in the first quarter of 2013 reflecting lower market share in the U.S. and Canada.

Financial Services revenues of $293.7 million in the first quarter of 2014 increased slightly from $293.1 million in the first quarter of 2013 primarily due to higher average earning asset balances, offset by lower yields. Income before income taxes increased to $85.5 million in the first quarter of 2014 from $80.1 million in the first quarter of 2013 primarily due to higher finance and lease margins and a lower provision for losses on receivables.

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PACCAR Inc - Form 10-Q

The major factors for the change in interest and fees, interest and other borrowing expenses and finance margin for the three months ended March 31, 2014 are outlined in the table below:

                                                         Interest and
                                                                Other
                                         Interest           Borrowing         Finance
   ($ in millions)                       and Fees            Expenses          Margin
   Three Months Ended March 31, 2013   $    113.8      $         38.9      $     74.9
   Increase (decrease)
   Average finance receivables                7.0                                 7.0
   Average debt balances                                          2.0            (2.0 )
   Yields                                    (6.1 )                              (6.1 )
   Borrowing rates                                               (3.7 )           3.7
   Currency translation                      (1.8 )               (.6 )          (1.2 )

   Total (decrease) increase                  (.9 )              (2.3 )           1.4

   Three Months Ended March 31, 2014   $    112.9      $         36.6      $     76.3

Average finance receivables increased $529.6 million (excluding foreign exchange effects) in the first quarter of 2014 as a result of retail portfolio new business volume exceeding repayments and an increase in dealer wholesale financing.

Average debt balances increased $448.6 million in the first quarter of 2014. 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 (5.4% in 2014 compared to 5.7% in 2013) and lower borrowing rates (1.9% in 2014 compared to 2.0% in 2013).

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

        (in millions)
        Three Months Ended March 31,                       2014           2013
        Operating lease revenues                     $    173.5     $    157.4
        Used truck sales and other                          7.3           21.9

        Operating lease, rental and other revenues   $    180.8     $    179.3


        Depreciation of operating lease equipment    $    114.8     $    101.3
        Vehicle operating expenses                         25.4           23.3
        Cost of used truck sales and other                  4.1           19.5

        Depreciation and other expense               $    144.3     $    144.1

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Table of Contents

PACCAR Inc - Form 10-Q

The major factors for the change in operating lease, rental and other revenues, depreciation and other expense and lease margin for the three months ended March 31, 2014 are outlined below:

                                               Operating Lease,         Depreciation
                                                     Rental And            and Other               Lease
($ in millions)                                  Other Revenues              Expense              Margin
Three Months Ended March 31, 2013            $            179.3        $       144.1        $       35.2
Increase (decrease)
Operating lease impairments                                                      (.3 )                .3
Used truck sales and other                                (14.6 )              (15.4 )                .8
Results on returned lease assets                                                  .4                 (.4 )
Average operating lease assets                             12.7                 10.1                 2.6
Revenue and cost per asset                                  2.2                  4.3                (2.1 )
Currency translation                                        1.2                  1.1                  .1

Total increase                                              1.5                   .2                 1.3

Three Months Ended March 31, 2014            $            180.8        $       144.3        $       36.5

A lower volume of used truck sales decreased operating lease, rental and other revenues by $14.6 million and decreased depreciation and other expense by $15.4 million.

Average operating lease assets increased $256.9 million, which increased revenues by $12.7 million and related depreciation and other expense by $10.1 million.

Revenue and cost per asset increased $2.2 million and $4.3 million, respectively. Operating lease margin decreased by $2.1 million mainly due to lower fleet utilization and higher vehicle related expenses.

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

                                             2014                                  2013
                                 Provision For                         Provision For
($ in millions)                      Losses on               Net           Losses on               Net
Three Months Ended March 31,       Receivables       Charge-Offs         Receivables       Charge-Offs
U.S. and Canada                $           1.5     $          .5     $           1.9     $         1.6
Europe                                     2.2               2.2                 3.1               1.5
Mexico and Australia                                                             1.5                .4

                               $           3.7     $         2.7     $           6.5     $         3.5

The provision for losses on receivables was $3.7 million for the first quarter of 2014, a decrease of $2.8 million compared to the same period in 2013, 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 customers 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 (TDR).

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