UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2010
Commission File No. 001-14817
PACCAR Inc
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(425) 468-7400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, $1 par value — 364,898,310 shares as of April 30, 2010
PACCAR Inc – Form 10-Q
INDEX
ITEM 1.
Consolidated Statements of Income—Three Months Ended March 31, 2010 and 2009 (Unaudited)
Consolidated Balance Sheets—March 31, 2010 (Unaudited) and December 31, 2009
Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2010 and 2009 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 1A.
ITEM 6.
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PART I – FINANCIAL INFORMATION
Consolidated Statements of Income (Unaudited)
(Millions Except Per Share Amounts)
Three Months Ended March 31
TRUCK AND OTHER:
Net sales and revenues
Cost of sales and revenues
Research and development
Selling, general and administrative
Interest and other expense, net
Truck and Other Income Before Income Taxes
FINANCIAL SERVICES:
Interest and fees
Operating lease, rental and other income
Revenues
Interest and other borrowing expenses
Depreciation and other
Provision for losses on receivables
Financial Services Income Before Income Taxes
Investment income
Total Income Before Income Taxes
Income Taxes
Net Income
Net Income Per Share:
Basic
Diluted
Dividends declared per share
See Notes to Consolidated Financial Statements.
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ASSETS
Current Assets
Cash and cash equivalents
Trade and other receivables, net
Marketable debt securities
Inventories
Other current assets
Total Truck and Other Current Assets
Equipment on operating leases, net
Property, plant and equipment, net
Other noncurrent assets
Truck and Other Assets
Finance and other receivables, net
Other assets
Total Financial Services Assets
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Consolidated Balance Sheets (Millions)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable, accrued expenses, and other
Long-term Liabilities
Long-term debt
Residual value guarantees and deferred revenues
Other liabilities
Truck and Other Liabilities
Accounts payable, accrued expenses and other
Commercial paper and bank loans
Term notes
Deferred taxes and other liabilities
Total Financial Services Liabilities
STOCKHOLDERS’ EQUITY
Preferred stock, no par value: Authorized 1.0 million shares, none issued
Common stock, $1 par value: Authorized 1.2 billion shares, 364.7 million shares issued
Additional paid-in capital
Treasury stock - at cost – .41 million shares
Retained earnings
Accumulated other comprehensive (loss) income
Total Stockholders’ Equity
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Condensed Consolidated Statements of Cash Flows (Unaudited)
(Millions)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization:
Property, plant and equipment
Equipment on operating leases and other
Provision for losses on financial services receivables
Other
Change in operating assets and liabilities:
Wholesale receivables on new trucks
Sales-type finance leases and dealer direct loans on new trucks
Pension contributions
Net Cash Provided by Operating Activities
INVESTING ACTIVITIES:
Retail loans and direct financing leases originated
Collections on retail loans and direct financing leases
Marketable securities purchases
Marketable securities sales and maturities
Acquisition of property, plant and equipment
Acquisition of equipment for operating leases
Proceeds from asset disposals
Net Cash Provided by Investing Activities
FINANCIAL ACTIVITIES:
Cash dividends paid
Stock compensation transactions
Net decrease in commercial paper and short-term bank loans
Proceeds from term debt
Payment of term debt
Net Cash Used in Financing Activities
Effect of exchange rate changes on cash
Net Decrease in Cash and Cash Equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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(Millions, Except Share Amounts)
NOTE A – Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the first quarter ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
Earnings per Share: Basic earnings per common share are computed by dividing earnings by the weighted average number of common shares outstanding, plus the effect of any participating securities. Diluted earnings per common share are computed assuming that all potentially dilutive securities are converted into common shares under the treasury stock method. The dilutive and antidilutive options are shown separately in the table below.
Additional shares
Antidilutive options
Debt Issuance: In March 2010, the Company’s U.S. finance subsidiary, PACCAR Financial Corp., issued $300.0 of floating rate medium-term notes which settled in early April.
NOTE B – Investments in Marketable Securities
The cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Amortization, accretion, interest, dividend income and realized gains and losses are included in investment income. The cost of securities sold is based on the specific identification method.
The Company’s investments in marketable securities are classified as available-for-sale. These investments are stated at fair value with any unrealized gains or losses, net of tax, included as a component of accumulated other comprehensive (loss) income. The proceeds from sales of marketable securities for the three months ended March 31, 2010 were $56.7. Gross realized gains were $.2 and $.1 for the three months ended March 31, 2010 and 2009, respectively, with no realized losses.
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Marketable debt securities consisted of the following:
At March 31, 2010
U.S. tax-exempt securities
U.S. government securities
U.S. corporate securities
Non U.S. corporate securities
Non U.S. government securities
Other debt securities
At December 31, 2009
U.S. government and agency securities
The fair value of marketable debt securities that have been in a unrealized loss position for 12 months or greater at March 31, 2010 and December 31, 2009 was nil and $27.4, respectively, and their unrealized losses on such securities were nil and $.1, respectively.
Contractual maturities on these securities at March 31, 2010, were as follows:
Maturities:
2010
2011 through 2015
After 2015
Marketable debt securities included $2.3 and $11.6 of variable rate demand obligations (VRDOs) at March 31, 2010 and December 31, 2009, respectively. VRDOs are debt instruments with long-term scheduled maturities which have interest rates that reset periodically.
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NOTE C – Inventories
Inventories are stated at the lower of cost or market. Cost of inventories in the United States is determined principally by the last in, first out (LIFO) method. Cost of all other inventories is determined principally by the first in, first out (FIFO) method.
Inventories include the following:
Finished products
Work in process and raw materials
Less LIFO reserve
Under the LIFO method of accounting (used for approximately 50% of March 31, 2010 inventories), an actual valuation can be made only at the end of each year based on year-end inventory levels and costs. Accordingly, interim valuations are based on management’s estimates of those year-end amounts.
NOTE D – Finance Receivables
Loans represent fixed- or floating-rate loans to customers collateralized by the vehicles purchased. Retail direct financing and sales-type finance leases are contracts leasing equipment to retail customers and dealers, respectively. These leases are reported as the sum of minimum lease payments receivable and estimated residual value of the property subject to the contracts, reduced by unearned interest on finance leases which is shown separately. Dealer wholesale financing represents floating-rate wholesale loans to PACCAR dealers for new and used trucks. The loans are collateralized by the trucks being financed. Interest and other receivables are interest due on loans and leases and other amounts due in the normal course of business.
The allowance for losses for loans, leases and other are evaluated together as a group since they relate to a similar customer base and their contractual terms require regular payment of principal and interest primarily over 36 to 60 months and are secured by the same type of collateral. The allowance for credit losses consists of both a specific reserve and a general reserve.
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Finance and other receivables include the following:
Loans
Retail direct financing leases
Sales-type finance leases
Dealer wholesale financing
Interest and other receivables
Unearned interest: Finance leases
Less allowance for losses:
Loans, leases and other
NOTE E – Product Support Liabilities
Product support liabilities include reserves related to product warranties and optional extended warranties and repair and maintenance (R&M) contracts. The Company generally offers one-year warranties covering most of its vehicles and related aftermarket parts. Specific terms and conditions vary depending on the product and the country of sale. Optional extended warranty and R&M contracts can be purchased for periods which generally range up to five years. Warranty expenses and reserves are estimated and recorded at the time products or contracts are sold based on historical data regarding the source, frequency and cost of claims, net of any recoveries. PACCAR periodically assesses the adequacy of its recorded liabilities and adjusts them as appropriate to reflect actual experience.
Changes in warranty and R&M reserves are summarized as follows:
Beginning balance, January 1
Cost accruals and revenue deferrals
Payments and revenue recognized
Currency translation
Ending balance, March 31
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NOTE F – Stockholders’ Equity
Comprehensive Income
The components of comprehensive income (loss), net of any related tax, were as follows:
Other comprehensive income (loss):
Currency translation losses
Derivative contracts increases
Marketable securities (decrease) increase
Employee benefit plans amortization
Net other comprehensive loss
Comprehensive Income (Loss)
Accumulated Other Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income was comprised of the following:
Currency translation adjustment
Net unrealized loss on derivative contracts
Net unrealized investment gains
Employee benefit plans
Total Accumulated Other Comprehensive (Loss) Income
Stock Compensation Plans
Stock-based compensation expense was $1.6 and $3.4 for the first three months of 2010 and 2009, respectively. Realized tax benefits related to the excess of deductible amounts over expense recognized amounted to $0.8 and $1.9 for the first three months of 2010 and 2009, respectively, and have been classified as a financing cash flow.
During the first quarter of 2010, PACCAR granted 975,478 employee stock options at an exercise price of $36.12. The estimated aggregate fair value of the options granted was $11.95 per share. The Company issued 327,018 additional common shares under deferred and stock compensation arrangements in the three months ended March 31, 2010.
Other Capital Stock Changes
No share repurchases were completed during the three months ended March 31, 2010.
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NOTE G – Income Taxes
The effective tax rate was 28.9% in the first quarter of 2010 compared to 28.1% for the first quarter of 2009. The first quarter 2010 tax provision includes a benefit of $11.3 from a favorable tax settlement which was offset by the effects of other assessments and a lower percentage benefit from permanent differences such as the R&D tax credit and tax exempt income.
NOTE H – Segment Information
PACCAR operates in two principal segments, Truck and Financial Services.
Three Months Ended March 31,
Net sales and revenues:
Truck
Total
Less intersegment
External customers
All other
Financial Services
Income (loss) before income taxes:
Investment Income
Included in All other is PACCAR’s industrial winch manufacturing business and other sales, income and expense not attributable to a reportable segment, including a portion of corporate expense.
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NOTE I – Derivative Financial Instruments
Derivative financial instruments are used to hedge exposures to fluctuations in interest rates and foreign currency exchange rates. Certain derivative instruments designated as either cash flow hedges or fair value hedges are subject to hedge accounting. Derivative instruments that are not subject to hedge accounting are held as economic hedges. The Company’s policies prohibit the use of derivatives for speculation or trading. At inception of each hedge relationship, the Company documents its risk management objectives, procedures and accounting treatment. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company had no material exposures to default at March 31, 2010.
Interest-Rate Contracts: The Company enters into various interest-rate contracts, including interest-rate swaps and cross currency interest-rate swaps. Interest-rate swaps involve the exchange of fixed for floating rate or floating for fixed rate interest payments based on the contractual notional amounts in a single currency. Cross currency interest-rate swaps involve the exchange of notional amounts and interest payments in different currencies. These contracts are used to manage exposures to fluctuations in interest rates and foreign currency exchange rates. Net amounts paid or received are reflected as adjustments to interest expense.
At March 31, 2010, the notional amount of the Company’s interest-rate contracts was $3,160.0. Notional maturities for all interest-rate contracts are $1,066.4 for 2010, $1,145.7 for 2011, $743.2 for 2012, $34.6 for 2013 and $144.3 for 2014 and $25.8 for 2015. The majority of these contracts are floating to fixed swaps that effectively convert an equivalent amount of commercial paper and other variable rate debt to fixed rates.
Foreign-Exchange Contracts: The Company enters into foreign-exchange contracts to hedge certain anticipated transactions and assets and liabilities denominated in foreign currencies, particularly the Canadian dollar, the euro, the British pound, the Australian dollar and the Mexican peso. At March 31, 2010, the notional amount of the outstanding foreign-exchange contracts was $170.8. Foreign-exchange contracts mature within one year.
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The following table presents the balance sheet locations and fair value of derivative financial instruments:
Derivatives designated under hedge accounting:
Interest-rate contracts:
Financial Services:
Foreign-exchange contracts:
Truck and Other:
Deferred taxes and other current assets
Economic hedges:
Substantially all of the Company’s interest-rate contracts and some foreign-exchange contracts have been designated as cash flow hedges. The Company uses regression analysis to assess and measure effectiveness of interest-rate contracts. For foreign-exchange contracts, the Company performs quarterly assessments to ensure that critical terms continue to match. Gains or losses on the ineffective portion of cash flow hedges are recognized currently in earnings and were immaterial for the period ended March 31, 2010 and 2009, respectively. Hedge accounting is discontinued prospectively when the Company determines that a derivative financial instrument has ceased to be a highly effective hedge.
Fair Value Hedges
Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings together with the changes in fair value of the hedged item attributable to the risk being hedged.
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The (income) or expense recognized in earnings related to fair value hedges was included in Interest and other borrowing expenses in the Financial Services segment as follows:
For the three months ended March 31,
Interest-rate swaps
Cash Flow Hedges
Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income to the extent such hedges are considered effective. Amounts in accumulated other comprehensive income are reclassified into net income in the same period in which the hedged transaction affects earnings. Net realized gains and losses from interest-rate contracts are recognized as an adjustment to interest expense. Net realized gains and losses from foreign-exchange contracts are recognized as an adjustment to cost of sales or to financial services interest expense, consistent with the hedged transaction.
The following table presents the pre-tax effects of derivative instruments recognized in earnings and Other Comprehensive Income (OCI):
(Gain) loss recognized in OCI:
Truck and Other
(Income) expense reclassified from Accumulated OCI into income:
Cost of sales
Interest and other expense (income), net
Of the $39.0 accumulated net loss on derivative contracts included in accumulated other comprehensive loss as of March 31, 2010, $35.5, net of taxes, is expected to be reclassified to interest expense or cost of sales in the following 12 months. The fixed interest earned on finance receivables will offset the amount recognized in interest expense, resulting in a stable interest margin consistent with the Company’s risk management strategy.
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Economic Hedges
Changes in the fair value of economic hedges are recorded in earnings in the period in which the change occurs.
The (income) or expense recognized in earnings related to economic hedges is as follows:
NOTE J – Fair Value Measurements
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy of fair value measurements is described below.
Level 1 – Valuations are based on quoted prices that the Company has the ability to obtain in actively traded markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, valuation of these instruments does not require a significant degree of judgment.
Level 2 – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 – Valuations are based on model-based techniques for which some or all of the assumptions are obtained from indirect market information that is significant to the overall fair value measurement and which require a significant degree of management judgment. The Company has no financial instruments requiring Level 3 valuation.
The Company uses the following methods and assumptions to measure fair value for assets and liabilities subject to recurring fair value measurements.
Marketable Securities: The Company’s marketable debt securities consist of municipal bonds, government obligations, investment-grade corporate obligations, commercial paper, asset-backed securities and term deposits.
The fair value of government obligations is based on quoted prices in active markets. These are categorized as Level 1.
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The fair value of municipal bonds, corporate bonds, asset-backed securities, commercial paper and term deposits is estimated using an industry standard valuation model, which is based on the income approach. The significant inputs into the valuation model include quoted interest rates, yield curves, credit rating of the security, and other observable market information. These are categorized as Level 2.
Derivative Financial Instruments: The Company’s derivative contracts consist of interest-rate swaps, cross currency swaps and foreign currency exchange contracts.
These derivative contracts are over the counter and their fair value is determined using industry standard valuation models, which are based on the income approach. The significant inputs into the valuation models include market inputs such as interest rates, yield curves, currency exchange rates, credit default swap spreads, and forward spot rates. These contracts are categorized as Level 2.
PACCAR’s financial assets and liabilities subject to recurring fair value measurements are either Level 1 or Level 2 as follows:
Assets:
Total marketable debt securities
Derivatives
Cross currency swaps
Foreign-exchange contracts
Total derivative assets
Liabilities:
Total derivatives liabilities
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Total derivative liabilities
Other assets that are measured at fair value on a nonrecurring basis are as follows:
Used trucks held for sale:
Total used trucks held for sale
The carrying amount of used trucks held for sale is written down when appropriate to reflect their fair value. The Company determines the fair value of used trucks from a matrix pricing model, which is based on the market approach. The significant observable inputs into the valuation model are recent sales prices of comparable units, the condition of the vehicles, and the number of similar units to be sold.
Used truck write-downs during the quarter ended March 31, 2010 were $7.6, with $2.5 recorded as cost of sales in the truck segment and $5.1 recorded in the financial services segment (operating lease depreciation expense of $4.7 and credit losses of $.4).
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The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.
Cash and Cash Equivalents: Carrying amounts approximate fair value.
Trade Receivables and Payables: Carrying amounts approximate fair value.
Financial Services Net Receivable: For floating-rate loans, wholesale financing, and interest and other receivables, fair values approximate carrying values. For fixed-rate loans that are not impaired, fair values are estimated using discounted cash flow analysis based on current rates for comparable loans. Finance lease receivables and the related loss provisions have been excluded from the accompanying table.
Debt: The carrying amounts of financial services commercial paper, variable-rate bank loans and variable-rate term notes approximate fair value. For fixed-rate debt, fair values are estimated using discounted cash flow analysis based on current rates for comparable debt.
The carrying amount and fair value of fixed-rate loans and fixed-rate debt at March 31, 2010 and December 31, 2009 were as follows:
Financial Services fixed-rate loans
Truck and Other fixed-rate debt
Financial Services fixed-rate debt
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NOTE K – Employee Benefit Plans
PACCAR has several defined benefit pension plans, which cover a majority of its employees.
The following information details the components of net pension expense for the Company’s defined benefit plans:
Service cost
Interest on projected benefit obligation
Expected return on assets
Amortization of prior service costs
Recognized actuarial loss
Net pension expense
During the first three months of 2010, the Company contributed $19.3 to its pension plans.
NOTE L – Severance Costs
During the first quarter of 2010, the Company did not incur any severance expense and did not have any amounts accrued for future severance payments at March 31, 2010.
During the first quarter 2009, the Company incurred severance costs of $9.7 in the truck segment and $.1 in the financial services segment. The costs incurred in 2009 were the result of work force adjustments reflecting low truck demand, primarily in Europe.
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RESULTS OF OPERATIONS:
Income before taxes:
Income taxes
Diluted Earnings Per Share
Overview:
PACCAR recorded higher sales and net income in the first three months of 2010 compared to the prior year. First quarter 2010 net income was $68.3 million ($.19 per diluted share) compared to $26.3 million ($.07 per diluted share) in the first quarter of 2009.
Net sales and revenues for the Truck and Other businesses was $1.98 billion in the first quarter of 2010 compared to $1.73 billion in the first quarter of 2009. The increase in sales and revenues for 2010 reflects increased truck unit sales in the U.S. and Canada due to a small “pre-buy” as customers transition to the new EPA 2010 engine emission technology and higher parts sales in all markets resulting from an increase in truck transportation.
First quarter 2010 total net sales and revenues and income before income taxes were positively affected by the translation of stronger foreign currencies, primarily the euro, the Australian and Canadian dollar and the British pound. The translation effect increased first quarter 2010 sales and revenues by $112.6 million and income before income taxes by $10.2 million compared to the first quarter of 2009.
Truck and Other Cost of sales and revenues were $1.77 billion in the first quarter of 2010 compared to $1.56 billion in the first quarter of 2009. Cost of sales and revenues increased primarily due to the higher truck and parts sales, partially offset by improved factory capacity utilization and lower severance costs.
Research and development (R&D) expenditures increased to $54.8 million in the first quarter of 2010 from $52.3 million in the first quarter of 2009 primarily due to higher foreign currency translation effects of $1.8 million.
Selling, general and administrative (SG&A) expense for Truck and Other of $94.1 million in the first quarter of 2010 increased from $88.4 million in the first quarter of 2009. The higher spending reflects foreign currency translation effects of $4.1 million, higher sales and marketing spending and travel costs, partially offset by lower severance costs. As a percentage of sales, SG&A decreased in the first quarter to 4.7% in 2010 from 5.1% in 2009.
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Financial Services segment revenues for the first quarter of 2010 decreased to $246.4 million from $255.8 million in the first quarter of 2009. The decreased revenues in the first quarter resulted from lower earning asset balances in all markets. First quarter 2010 Financial Services income before income taxes increased to $28.1 million from $15.3 million in the first quarter of 2009 primarily due to lower interest and other borrowing expenses from economic hedges and a decline in average debt balances. In addition, the first quarter 2010 provision for losses on receivables declined $3.3 million to $21.7 million from $25.0 million in the prior year reflecting lower charge-offs and a larger reduction in the allowance for losses due to a decrease in past due accounts and a lower asset base.
Investment income declined to $4.5 million for the first quarter of 2010 compared to $8.0 million for the first quarter of 2009 due to lower invested balances and lower market interest rates.
The effective tax rate was 28.9% in the first quarter of 2010 compared to 28.1% for the first quarter of 2009. The first quarter 2010 tax provision includes a benefit of $11.3 million from a favorable tax settlement which was offset by the effects of other assessments and a lower percentage benefit from permanent differences such as the R&D tax credit and tax exempt income.
The Company’s return on revenues improved to 3.1% in the first quarter of 2010 from 1.3% for the first quarter of 2009.
PACCAR’s truck segment, which includes the manufacture and distribution of trucks and related aftermarket parts, accounted for 88% of revenues in the first quarter compared to 86% in the first quarter of 2009. In North America, trucks are sold under the Kenworth and Peterbilt nameplates and, in Europe, under the DAF nameplate.
Truck net sales and revenues:
U.S. and Canada
Europe
Mexico, Australia and Other
Truck income before taxes
The Company’s new truck deliveries are summarized below:
United States
Canada
Total Units
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2010 Compared to 2009:
PACCAR’s worldwide truck sales and revenues of $1.97 billion in the first quarter of 2010 increased 15% compared to the first quarter of 2009 due to an increase in truck units delivered and higher demand for the Company’s parts reflecting an increase in truck transportation.
Sales and revenues in the U.S. and Canada during the three month period ended March 31, 2010 increased 22% compared to the first quarter of 2009 due to higher new truck deliveries, reflecting higher truck market demand and improved heavy duty truck market share. The heavy duty truck market size increased to 27,800 units in the first quarter of 2010 from 25,400 units in the comparable quarter of 2009, primarily due to a small “pre-buy” related to the transition to EPA 2010 emissions.
In the first quarter of 2010, European net sales and revenues decreased to $695.9 million from $700.8 million in 2009. The lower net sales and revenues resulted from lower truck market demand, which was partially offset by higher 15 tonne and above truck market share, improved parts sales and a stronger euro. The 15 tonne and above truck market in Western and Central Europe decreased to 37,200 units in the first quarter of 2010 from 52,200 units in the comparable quarter of 2009.
Sales and revenues in Mexico, Australia and export markets increased 48% to $263.1 million in the first quarter of 2010 primarily due to higher new truck deliveries and parts sales from higher overall market demand.
Truck segment income before income taxes increased to $66.6 million in the first quarter of 2010 from $25.4 million of income in the first quarter of 2009. The increase was due to higher truck sales and margins partially offset by small increases in R&D and SG&A expenses, reflecting continued cost controls.
Net sales and revenues and gross margins for truck units and aftermarket parts are provided below. The aftermarket parts gross margin includes direct revenues and costs, but excludes certain truck segment costs.
Trucks
Aftermarket parts
Gross Margin:
* percentage not meaningful
Gross Margin %:
Truck segment
Total truck segment gross margins for the first quarter of 2010 increased to 10.9% from 9.6% in the first quarter of 2009. The increase in gross margins was favorably impacted by higher truck gross margins which increased to 3.0% from higher demand, lower severance costs and increased absorption of fixed costs from higher truck production. Gross margins for parts in 2010 decreased from the prior year due to a higher mix of lower margin service parts.
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Truck Outlook
Heavy duty truck sales in the U.S. and Canada are expected to be in the range of 110,000 – 140,000 units, up slightly from 2009, reflecting some economic growth and an aging truck fleet. The current challenging economic conditions in Europe are expected to continue in 2010 with the market size of above 15-tonne vehicles expected to be in the range of 150,000 – 180,000 units, in line with 2009. See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect this outlook.
The PACCAR Financial Services (PFS) segment, which includes wholly owned subsidiaries in the U.S., Canada, Mexico, Europe and Australia, derives its earnings primarily from financing and leasing PACCAR products.
New loan and lease volume:
Mexico and Australia
Average earning assets:
Average earning assets by product:
Loans and finance leases
Equipment on lease and other
Revenue:
Revenue by product:
Income before taxes
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New Loan and Lease Volume
In the first quarter of 2010, new loan and lease volume increased 60% compared to the first quarter 2009, reflecting increased new PACCAR truck production and increased finance market share. In the first quarter of 2010, PFS market share on new PACCAR trucks delivered increased to 26.3% from 18.0% in the first quarter of 2009 from increased financing to high quality fleet customers, primarily in the U.S., Canada and Europe.
PFS revenues declined 4% in the first quarter of 2010 due to lower interest and fee income partially offset by higher operating lease, rental and other income.
Interest and fees in the first quarter of 2010 declined from the first quarter of 2009 primarily due to lower average loan and finance lease assets summarized as follows:
Interest and fees - 2009
Lower average loan and finance lease balances
Increase in yield
Interest and fees - 2010
The decline in loan and finance lease average earning assets was due to declines in retail loan and finance lease assets as portfolio collections exceeded new loan and lease volume in all markets, as well as, lower dealer wholesale financing in Europe, Mexico and Australia due to a decline in dealer inventory levels.
Operating lease, rental and other income in the first quarter of 2010 increased to $136.4 million from $123.6 million in the prior year from higher rental utilization and higher average rental rates, reflecting an increase in market demand. In addition, first quarter 2010 revenues increased due to higher sales of used trucks acquired from PACCAR truck customers as part of new truck sales packages.
Expenses
Interest and other borrowing expenses decreased in the first quarter of 2010 compared to the first quarter of 2009 due to lower average debt balances and lower borrowing rates as summarized below:
Interest and other borrowing expenses - 2009
Lower average debt balances
Lower borrowing rates
Lower expense from economic hedges
Interest and other borrowing expenses - 2010
Average debt balances decreased due to the lower level of funding needed for a smaller financial services portfolio. Borrowing rates were lower primarily due to lower expenses from economic hedges as well as a decline in market interest rates.
First quarter 2010 depreciation and other expenses of $118.0 increased from $102.9 in the first quarter of 2009, due to higher depreciation and higher expense from the sale of used trucks. First quarter 2010 depreciation was $85.7 million compared to $79.4 million in 2009 reflecting both higher impairments on returned operating lease assets as well as higher losses on the sale of aged operating lease assets.
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Selling, general and administrative (SG&A) expense of $21.5 million in the first quarter of 2010 was comparable to the first quarter of 2009 due to continued cost controls.
The provision for losses on receivables for the first quarter is summarized as follows:
The provision for losses on receivables in the first quarter of 2010 decreased to $21.7 from $25.0 million in the first quarter of 2009. The decrease reflects a reduction in net portfolio charges-offs in the U.S. and Canada, partially offset by higher charge-offs in Mexico. In addition, first quarter 2010 results included a larger decrease in the allowance for credit losses of $4.7 million compared to $3.4 million in the first quarter of 2009, reflecting a declining asset base and lower past due balances in the U.S., Canada and Europe.
At March 31,
Percentage of retail loan and lease accounts
30+ days past due:
Worldwide PFS accounts 30+ days past-due at March 31, 2010 decreased to 4.0% of portfolio balances from 4.9% at March 31, 2009 as an increase in freight tonnage has led to improvement in customer cash flows in all markets, except Mexico.
Financial Services Outlook
Earning assets at the end of 2010 are expected to be comparable to year-end 2009 levels. Slow economic conditions will continue to exert pressure on the profit margins of truck operators and challenge some customers ability to make timely payments to the Company. Improving economic conditions may lead to lower levels of past due accounts, truck repossessions and voluntary truck returns. See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect this outlook.
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Other Business
Included in Truck and Other is the Company’s winch manufacturing business. Sales from this business represent approximately 1% of net sales for 2010 and 2009.
LIQUIDITY AND CAPITAL RESOURCES:
The Company’s total cash and marketable debt securities at March 31, 2010 decreased $30.1 million in 2010 to $2,101.4 million. The Company’s total cash and cash equivalents decreased $57.3 million for the three months ended March 31, 2010 to $1,854.7 million. This was primarily the result of $285.4 million of cash provided by operating activities and $40.5 million of cash provided by investing activities, offset by $350.8 million of cash used in financing activities as summarized below.
Operating activities:
Net income items not affecting cash
Changes in operating assets and liabilities
Net cash provided by operating activities
Net cash provided by investing activities
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
Cash provided by operations increased to $285.4 million in the first three months of 2010 compared to $90.8 million in the same period of 2009, primarily due to higher net income of $42.0 million and lower pension contributions of $133.9 million. Also included in cash provided by operating activities was lower cash provided from wholesale receivables ($205.7 million) and less cash used in the reduction of accounts payable and accrued expenses ($223.1 million).
Cash provided by investing activities decreased to $40.5 million in the three months ended March 31, 2010 compared to $352.1 million in the first quarter of 2009. In the first quarter of 2010, there were higher investments in equipment on operating leases of $66.6 million and an increase in new loan originations of $140.2 million in the Financial Services segment compared to the prior year due to increased new truck demand. In addition, proceeds from asset disposals were $47.1 million lower in the first quarter of 2010 reflecting fewer used truck sales.
The cash outflow from financing activities in the first three months of 2010 of $350.8 million was $59.6 million lower than the first quarter of 2009. This was primarily due to $68.5 million lower cash dividends paid.
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Credit Lines and Other:
The Company has line of credit arrangements of $3.69 billion, of which, $3.36 billion was unused at the end of March 2010. Included in these arrangements are $3.0 billion of syndicated bank facilities. Of the $3.0 billion bank facilities, $2.0 billion matures in June 2010 and $1.0 billion matures in June 2012. The Company intends to replace these credit facilities as they expire with facilities of similar amounts. These credit facilities are maintained primarily to provide backup liquidity for commercial paper borrowings and maturing medium-term notes. There were no borrowings under the syndicated bank lines for the three months ended March 31, 2010.
PACCAR Inc periodically files shelf registrations under the Securities Act of 1933. The total amount of medium-term notes outstanding for PACCAR Inc as of March 31, 2010 was $870.0 million. The current registration expires in 2011 and does not limit the principal amount of debt securities that may be issued during the period.
In November 2009, the Company’s U.S. finance subsidiary, PACCAR Financial Corp. (PFC), filed a shelf registration under the Securities Act of 1933. In late March 2010, PFC issued $300.0 million of floating rate medium-term notes under this registration. The proceeds were received in early April. The total amount of medium-term notes outstanding for PFC as of March 31, 2010 was $1,148.5 million. The registration expires in 2012 and does not limit the principal amount of debt securities that may be issued during the period.
At March 31, 2010, PACCAR’s European finance subsidiary, PACCAR Financial Europe, had €850 million available for issuance under a €1.5 billion medium-term note program registered with the London Stock Exchange. The program was renewed in the third quarter of 2009 and is renewable annually.
On April 29, 2010, Standard and Poor’s lowered the Company’s credit rating from AA- to A+. The Company believes its strong liquidity position and Standard and Poor’s A+ investment grade credit rating will continue to provide financial stability and excellent access to capital markets at competitive interest rates.
The Company provides funding for working capital, capital expenditures, research and development, dividends, stock repurchases and other business initiatives and commitments primarily from cash provided by operations. Management expects this method of funding to continue in the future.
Expenditures for property, plant and equipment in the first three months of 2010 totaled $26.1 million compared to $16.5 million in the first three months of 2009. Capital spending in 2010 is expected to be approximately $175 - $200 million compared to $127.7 million in 2009. Research and development spending is expected to be $225 - $250 million compared to $199.2 million in 2009. PACCAR’s 2010 capital and research and development spending will continue to focus on manufacturing efficiency improvements, engine development and new product programs.
Other information on liquidity and capital resources as presented in the 2009 Annual Report to Stockholders continues to be relevant.
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FORWARD-LOOKING STATEMENTS:
Certain information presented in this report contains forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties that may affect actual results. Risks and uncertainties include, but are not limited to: a significant decline in industry sales; competitive pressures; reduced market share; reduced availability of or higher prices for fuel; increased safety, emissions, or other regulations resulting in higher costs and/or sales restrictions; currency or commodity price fluctuations; lower used truck prices; insufficient or under-utilization of manufacturing capacity; supplier interruptions; insufficient liquidity in the capital markets; fluctuations in interest rates; changes in the levels of the Financial Services segment new business volume due to unit fluctuations in new PACCAR truck sales; changes affecting the profitability of truck owners and operators; price changes impacting equipment costs and residual values; insufficient supplier capacity or access to raw materials; labor disruptions; shortages of commercial truck drivers; increased warranty costs or litigation; or legislative and governmental regulations. A more detailed description of these and other risks is included under the heading Part 1, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
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There were no material changes in the Company’s market risk during the three months ended March 31, 2010. For additional information, refer to Item 7A as presented in the 2009 Annual Report on Form 10-K.
An evaluation was performed under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of March 31, 2010. Based on that evaluation, the principal executive officer and principal financial officer of the Company concluded that the disclosure controls and procedures in place at the Company are effective to ensure that information required to be disclosed by the Company, including its consolidated subsidiaries, in reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported on a timely basis in accordance with applicable rules and regulations.
There have been no significant changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II-OTHER INFORMATION
For Items 1, 3, and 5, there was no reportable information for the three months ended March 31, 2010.
For information regarding risk factors, refer to Part I, Item 1A as presented in the 2009 Annual Report on Form 10-K. There have been no material changes in the Company’s risk factors during the three months ended March 31, 2010.
For items 2(a) and (b), there was no reportable information for the three months ended March 31, 2010.
(c) Issuer purchases of equity securities.
There were no repurchases of PACCAR’s common stock in the three months ended March 31, 2010. On October 29, 2007, the Board of Directors approved a plan to repurchase up to $300 million of PACCAR’s outstanding common stock. As of March 31, 2010, $292 million of shares have been repurchased under this plan. On July 8, 2008, PACCAR’s Board of Directors approved a new plan to repurchase up to an additional $300 million of the Company’s outstanding common stock. No repurchases have been made under this plan.
Any exhibits filed herewith are listed in the accompanying index to exhibits.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
/s/ M.T. Barkley
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INDEX TO EXHIBITS
Exhibit (in order of assigned index numbers)
Instruments defining the rights of security holders, including indentures:
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(101.INS)
(101.SCH)
(101.CAL)
(101.DEF)
(101.LAB)
(101.PRE)
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