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

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Form 10-Q for PACCAR INC


7-Aug-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 second quarter of 2014 increased to $4.57 billion from $4.30 billion in the second quarter of 2013. In the first six months of 2014, net sales and revenue increased to $8.95 billion from $8.22 billion in the same period in 2013. The Company's worldwide truck net sales and revenues in the second quarter of 2014 increased to $3.46 billion from $3.27 billion in the second quarter of 2013. In the first six months of 2014, truck net sales increased to $6.78 billion from $6.20 billion in the same period of 2013. Increases in truck sales were primarily due to higher sales volume in the U.S. and Canada and higher price realization for higher content Euro 6 emission vehicles. The Company's worldwide parts net sales and revenues increased to $778.0 million in the second quarter of 2014 from $709.5 million in the second quarter of 2013. In the first six months of 2014 worldwide parts net sales and revenues increased to $1.50 billion from $1.38 billion in the same period in 2013. Parts growth was primarily due to higher aftermarket demand in the U.S. and Canada and Europe. Financial Services revenues increased to $302.6 million in the second quarter of 2014 from $288.8 million in the second quarter of 2013. In the first six months of 2014, Financial Services revenues increased to $596.3 million from $581.9 million in the same period in 2013. The increase in Financial Services revenues for both periods was primarily due to higher average earning assets.

Second quarter 2014 net income increased to $319.2 million ($.90 per diluted share) from $291.6 million ($.82 per diluted share) in the second quarter of 2013. For the first six months of 2014, net income improved to $593.1 million ($1.67 per diluted share) from $527.7 million ($1.49 per diluted share) in the first six months of 2013. The results reflect improving truck sales in the U.S. and Canada and strong aftermarket Parts and Financial Services results worldwide.

In the second quarter of 2014, DAF introduced a new range of Euro 6 CF and XF four-axle trucks and tractors for heavy-duty applications. These new vehicles expand DAF's product range in the construction, container and refuse markets and complement DAF's award-winning Euro 6 on-highway trucks. In addition, Kenworth and Peterbilt launched their new medium-duty cab-over-engine distribution trucks with extensive exterior and interior enhancements.

PACCAR plans to begin construction of a new 176,000 square-foot distribution center in Renton, Washington, in the fourth quarter of 2014. This new facility will more than double the distribution capacity for the Company's dealers and customers in the northwestern U.S. and western Canada.

In the second quarter and first half of 2014, the Company's research and development (R&D) expenses were $49.9 million and $102.6 million compared to $61.8 million and $133.9 million in the second quarter and first half 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 230,000-250,000 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 210,000-230,000 units, compared to 240,800 units in 2013.

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PACCAR Inc - Form 10-Q

In 2014, Parts industry aftermarket sales are expected to increase 4-8%, reflecting modest economic growth in the U.S. and Canada and Europe.

Capital investments in 2014 are expected to be $250 to $300 million, focused on enhanced powertrain development and increased operating efficiency for assembly facilities. R&D in 2014 is expected to be $200 to $225 million.

Financial Services Outlook

Average earning assets in 2014 are expected to increase approximately 5%, reflecting higher 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.

RESULTS OF OPERATIONS:




                                                Three Months Ended               Six Months Ended
                                                     June 30                         June 30
($ in millions, except per share amounts)      2014            2013            2014            2013
Net sales and revenues:
Truck                                       $  3,455.0      $  3,270.0      $  6,784.2      $  6,203.3
Parts                                            778.0           709.5         1,504.6         1,376.9
Other                                             34.0            32.2            64.4            62.7

Truck, Parts and Other                         4,267.0         4,011.7         8,353.2         7,642.9
Financial Services                               302.6           288.8           596.3           581.9

                                            $  4,569.6      $  4,300.5      $  8,949.5      $  8,224.8

Income (loss) before taxes:
Truck                                       $    259.6      $    238.4      $    471.9      $    403.4
Parts                                            126.7           109.4           238.8           204.7
Other                                             (2.5 )          (4.4 )         (11.7 )         (14.1 )

Truck, Parts and Other                           383.8           343.4           699.0           594.0
Financial Services                                91.7            81.5           177.2           161.6
Investment income                                  5.5             8.0            11.3            14.5
Income taxes                                    (161.8 )        (141.3 )        (294.4 )        (242.4 )

Net income                                  $    319.2      $    291.6      $    593.1      $    527.7

Diluted earnings per share                  $      .90      $      .82      $     1.67      $     1.49


Return on revenues                                 7.0 %           6.8 %           6.6 %           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.

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                             PACCAR Inc - Form 10-Q



2014 Compared to 2013:

Truck

The Company's Truck segment accounted for 75.6% and 75.8% of revenues in the
second quarter and first six months of 2014 compared to 76.0% and 75.4% in the
second quarter and first six months of 2013.




                                                    Three Months Ended                                  Six Months Ended
($ in millions)                                           June 30                                            June 30
                                              2014             2013       % Change               2014             2013       % Change
Truck net sales and revenues:
U.S. and Canada                        $   2,123.2      $   1,842.3               15      $   4,082.3      $   3,452.5               18
Europe                                       857.7            829.1                3          1,820.3          1,680.5                8
Mexico, South America, Australia and
other                                        474.1            598.6              (21 )          881.6          1,070.3              (18 )

                                       $   3,455.0      $   3,270.0                6      $   6,784.2      $   6,203.3                9

Truck income before income taxes       $     259.6      $     238.4                9      $     471.9      $     403.4               17


Pre-tax return on revenues                     7.5 %            7.3 %                             7.0 %            6.5 %

The Company's worldwide truck net sales and revenues in the second quarter of 2014 increased to $3.46 billion from $3.27 billion in 2013, primarily due to higher truck deliveries in the U.S. and Canada, higher price realization in Europe related to higher content Euro 6 emission vehicles, partially offset by lower truck deliveries in Europe, Mexico and Australia. The Company's worldwide truck net sales and revenues in the first six months of 2014 increased to $6.78 billion from $6.20 billion in 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 Europe, Mexico and Australia.

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

The Company's new truck deliveries are summarized below:

                                                           Three Months Ended                                   Six Months Ended
                                                                June 30                                             June 30
                                                     2014             2013       % Change                2014             2013       % Change
U.S.                                               17,800           15,300               16            33,900           28,000               21
Canada                                              2,700            2,600                4             5,200            5,300               (2 )

U.S. and Canada                                    20,500           17,900               15            39,100           33,300               17
Europe                                              8,900           11,100              (20 )          18,200           21,700              (16 )
Mexico, South America, Australia and other          4,300            5,700              (25 )           8,200           10,300              (20 )

Total units                                        33,700           34,700               (3 )          65,500           65,300

In the first six months of 2014, industry retail sales in the heavy-duty market in the U.S. and Canada increased to 113,600 units from 99,600 units in the same period of 2013. The Company's heavy-duty truck retail market share was 27.3% in the first half of 2014 compared to 27.6% in the first half of 2013. The medium-duty market was 36,000 units in the first half of 2014 compared to 32,800 units in the same period of 2013. The Company's medium-duty market share was 15.5% in the first six months of 2014 compared to 14.1% in the first six months of 2013.

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PACCAR Inc - Form 10-Q

The over 16-tonne truck market in Western and Central Europe in the first six months of 2014 was 109,000 units, a 5% increase from 103,700 units in the first six months of 2013. The largest increases were in Germany, Spain and Czech Republic, partially offset by reductions in the U.K., France and the Netherlands. The Company's market share was 12.6% in the first six months 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 six months of 2014 was 22,800 units compared to 25,800 units in the first six months of 2013. DAF market share in the 6- to 16-tonne market in the first six months of 2014 was 7.6% compared to 11.4% 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 June 30, 2014 for the Truck segment are as follows:

                                                                  Net            Cost           Gross
($ in millions)                                                 Sales        of Sales          Margin
Three Months Ended June 30, 2013                           $  3,270.0      $  2,943.3      $    326.7
Increase (decrease)
Truck delivery volume                                            37.4            40.5            (3.1 )
Average truck sales prices                                      139.9                           139.9
Average per truck material, labor and other direct costs                        124.9          (124.9 )
Factory overhead and other indirect costs                                         3.9            (3.9 )
Operating leases                                                 (2.7 )          (4.1 )           1.4
Currency translation                                             10.4             9.5              .9

Total increase                                                  185.0           174.7            10.3

Three Months Ended June 30, 2014                           $  3,455.0      $  3,118.0      $    337.0

Truck delivery volume reflects higher truck deliveries in the U.S. and Canada which resulted in higher sales ($275.5 million) and cost of sales ($228.8 million), partially offset by lower deliveries in Europe, Mexico and Australia which lowered sales ($248.1 million) and cost of sales ($198.4 million).

Average truck sales prices increased sales by $139.9 million, primarily due to higher content Euro 6 emission vehicles in Europe ($90.5 million) and improved price realization in the U.S. and Canada ($35.3 million).

Cost of sales increased $124.9 million due to higher average cost per truck, primarily from the effect of higher content Euro 6 emission vehicles in Europe ($113.7 million).

Factory overhead and other indirect costs increased $3.9 million primarily due to higher salaries and related costs ($6.8 million) and depreciation expense ($4.4 million), partially offset by lower Euro 6 project expenses ($6.6 million).

Operating lease revenues and cost of sales decreased due to lower volume of expiring contracts. Gross margins improved due to higher average margins in the portfolio.

Truck gross margin in the second quarter of 2014 of 9.8% decreased slightly from 10.0% in the same period in 2013 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, 2014 for the Truck segment are as follows:

                                                                  Net           Cost           Gross
($ in millions)                                                 Sales       of Sales          Margin
Six Months Ended June 30, 2013                             $  6,203.3     $  5,609.6      $    593.7
Increase (decrease)
Truck delivery volume                                           276.9          251.3            25.6
Average truck sales prices                                      288.3                          288.3
Average per truck material, labor and other direct costs                       243.6          (243.6 )
Factory overhead and other indirect costs                                       34.2           (34.2 )
Operating leases                                                 15.7           12.2             3.5
Currency translation                                                             (.2 )            .2

Total increase                                                  580.9          541.1            39.8

Six Months Ended June 30, 2014                             $  6,784.2     $  6,150.7      $    633.5

Truck delivery volume reflects higher deliveries in the U.S. which resulted in higher sales ($610.5 million) and cost of sales ($518.9 million), partially offset by lower truck deliveries in Mexico, Europe and Australia with lower sales ($363.0 million) and cost of sales ($290.2 million).

Average truck sales prices increased sales by $288.3 million, primarily due to higher content Euro 6 emission vehicles in Europe ($183.1 million) and improved price realization in the U.S. and Canada ($74.3 million).

Cost of sales increased $243.6 million due to higher average cost per truck, primarily from the effect of higher content Euro 6 emission vehicles in Europe ($205.2 million).

Factory overhead and other indirect costs increased $34.2 million primarily due to higher salaries and related costs ($31.6 million) and depreciation expense ($12.0 million), partially offset by lower Euro 6 project expenses ($11.7 million).

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

Truck gross margin in the first six months of 2014 of 9.3% decreased slightly from 9.6% in the same period in 2013 due to the factors noted above.

Truck selling, general and administrative (SG&A) expenses of $50.1 million in the second quarter of 2014 was comparable to $50.4 million in the second quarter of 2013. In the first six months of 2014, Truck SG&A of $104.1 million was comparable to $103.5 million in the first six months of 2013.

As a percentage of sales, Truck SG&A for both second quarter of 2014 and 2013 was 1.5%. For the first six months of 2014, Truck SG&A as a percentage of sales decreased to 1.5% from 1.7% in the first six months of 2013, reflecting higher sales volume.

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                             PACCAR Inc - Form 10-Q



Parts

The Company's Parts segment accounted for 17.0% and 16.8% of revenues in the
second quarter and first six months of 2014 compared to 16.5% and 16.7% in the
second quarter and first six months of 2013.



                                             Three Months Ended                           Six Months Ended
($ in millions)                                   June 30                                     June 30
                                       2014         2013       % Change            2014           2013       % Change
Parts net sales and revenues:
U.S. and Canada                     $ 464.4      $ 408.7              14      $   888.4      $   791.4              12
Europe                                220.6        204.6               8          438.8          404.6               8
Mexico, South America, Australia
and other                              93.0         96.2              (3 )        177.4          180.9              (2 )

                                    $ 778.0      $ 709.5              10      $ 1,504.6      $ 1,376.9               9

Parts income before income taxes    $ 126.7      $ 109.4              16      $   238.8      $   204.7              17


Pre-tax return on revenues             16.3 %       15.4 %                         15.9 %         14.9 %

The Company's worldwide parts net sales and revenues increased in the second quarter and first six months 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 second quarter and first six months of 2014 was primarily due to higher sales.

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, 2014 for the Parts segment are as follows:

                                                    Net           Cost          Gross
    ($ in millions)                               Sales       of Sales         Margin
    Three Months Ended June 30, 2013         $    709.5     $    524.6     $    184.9
    Increase (decrease)
    Aftermarket parts volume                       51.3           31.6           19.7
    Average aftermarket parts sales prices          9.8                           9.8
    Average aftermarket parts direct costs                        13.9          (13.9 )
    Warehouse and other indirect costs                             1.2           (1.2 )
    Currency translation                            7.4            4.5            2.9

    Total increase                                 68.5           51.2           17.3

    Three Months Ended June 30, 2014         $    778.0     $    575.8     $    202.2

Higher market demand, primarily in the U.S., Canada and Europe, resulted in increased aftermarket parts sales volume of $51.3 million and related cost of sales by $31.6 million.

Average aftermarket parts sales prices increased sales by $9.8 million reflecting improved price realization.

Average aftermarket parts direct costs increased $13.9 million due to higher material costs.

Warehouse and other indirect costs increased $1.2 million primarily due to additional costs to support higher sales volume.

Parts gross margins in the second quarter of 2014 of 26.0% decreased from 26.1% in the second quarter of 2013 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, 2014 for the Parts segment are as follows:

                                                    Net           Cost          Gross
    ($ in millions)                               Sales       of Sales         Margin
    Six Months Ended June 30, 2013           $  1,376.9     $  1,022.2     $    354.7
    Increase (decrease)
    Aftermarket parts volume                       80.4           51.5           28.9
    Average aftermarket parts sales prices         38.4                          38.4
    Average aftermarket parts direct costs                        33.3          (33.3 )
    Warehouse and other indirect costs                             3.0           (3.0 )
    Currency translation                            8.9            4.9            4.0

    Total increase                                127.7           92.7           35.0

    Six Months Ended June 30, 2014           $  1,504.6     $  1,114.9     $    389.7

Higher market demand, primarily in the U.S., Canada and Europe, resulted in increased aftermarket parts sales volume of $80.4 million and related cost of sales by $51.5 million.

Average aftermarket parts sales prices increased sales by $38.4 million reflecting improved price realization.

Average aftermarket parts direct costs increased $33.3 million due to higher material costs.

Warehouse and other indirect costs increased $3.0 million primarily due to additional costs to support higher sales volume.

Parts gross margins in the first half of 2014 of 25.9% increased from 25.8% in the first half of 2013 due to the factors noted above.

Parts SG&A for the second quarter increased to $52.5 million in 2014 from $51.0 million in 2013, and in the first half of 2014, Parts SG&A increased to $104.3 million from $101.8 million in 2013. The increase in both periods was primarily due to higher salaries and related expenses.

As a percentage of sales, Parts SG&A decreased to 6.7% in the second quarter of 2014 from 7.2% in the second quarter of 2013 due to higher sales volume. For the first six months of 2014, Parts SG&A as a percentage of sales was 6.9%, down from 7.4% in the first six months of 2013, reflecting higher sales volume.

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                             PACCAR Inc - Form 10-Q



Financial Services

The Company's Financial Services segment accounted for 6.6% and 6.7% of revenues
in the second quarter and first six months of 2014 compared to 6.7% and 7.1% in
the second quarter and first six months of 2013.



                                                  Three Months Ended                            Six Months Ended
($ in millions)                                         June 30                                      June 30
                                              2014           2013     % Change             2014           2013     % Change
New loan and lease volume:
U.S. and Canada                         $    780.4     $    704.2            11      $  1,260.4     $  1,181.0             7
Europe                                       249.8          199.2            25           474.8          390.5            22
Mexico and Australia                         170.8          243.0           (30 )         329.1          436.9           (25 )

                                        $  1,201.0     $  1,146.4             5      $  2,064.3     $  2,008.4             3
New loan and lease volume by product:
Loans and finance leases                $    903.4     $    894.5             1      $  1,614.3     $  1,575.1             2
Equipment on operating lease                 297.6          251.9            18           450.0          433.3             4
. . .
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