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PACCAR 10-Q 2011
10-Q for XBRL
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011

Commission File No. 001-14817

PACCAR Inc

(Exact name of registrant as specified in its charter)

 

Delaware   91-0351110

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

777 – 106th Ave. N.E., Bellevue, WA   98004
(Address of principal executive offices)   (Zip Code)

(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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x              Accelerated filer  ¨              Non-accelerated filer  ¨              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—358,217,233 shares as of October 31, 2011

 

 

 


Table of Contents

PACCAR Inc - Form 10-Q

 

INDEX

 

          Page  

PART I. FINANCIAL INFORMATION:

  

    ITEM 1.

   FINANCIAL STATEMENTS:   

Consolidated Statements of Income—
Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)

     3   

Consolidated Balance Sheets—
September 30, 2011 (Unaudited) and December 31, 2010

     4   

Condensed Consolidated Statements of Cash Flows—
Nine Months Ended September 30, 2011 and 2010 (Unaudited)

     6   

Notes to Consolidated Financial Statements (Unaudited)

     7   

    ITEM 2.

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      25   

    ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      38   

    ITEM 4.

   CONTROLS AND PROCEDURES      38   

PART II. OTHER INFORMATION:

  

    ITEM 1.

   LEGAL PROCEEDINGS      38   

    ITEM 1A.

   RISK FACTORS      38   

    ITEM 2.

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      38   

    ITEM 6.

   EXHIBITS      39   

SIGNATURE

     40   

INDEX TO EXHIBITS

     41   

 

- 2 -


Table of Contents

PACCAR Inc - Form 10-Q

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Consolidated Statements of Income (Unaudited)

(Millions Except Per Share Amounts)

   Three Months Ended
September 30
     Nine Months Ended
September 30
 
       2011              2010              2011              2010      

TRUCK AND OTHER:

           

Net sales and revenues

   $ 3,993.0       $ 2,304.2       $ 10,738.3       $ 6,513.3   
           

Cost of sales and revenues

     3,484.0         2,019.2         9,347.4         5,741.9   

Research and development

     70.0         59.9         215.9         173.1   

Selling, general and administrative

     113.1         94.3         331.6         285.7   

Interest and other expense, net

     4.0         1.0         7.1         9.1   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,671.1         2,174.4         9,902.0         6,209.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Truck and Other Income Before Income Taxes

     321.9         129.8         836.3         303.5   
           

FINANCIAL SERVICES:

           

Interest and fees

     106.5         101.8         313.4         316.8   

Operating lease, rental and other income

     157.6         136.5         449.7         407.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

     264.1         238.3         763.1         724.0   
           

Interest and other borrowing expenses

     44.6         51.8         137.2         163.4   

Depreciation and other

     123.0         110.2         352.9         342.4   

Selling, general and administrative

     24.0         21.9         71.8         65.9   

Provision for losses on receivables

     10.7         12.9         32.2         48.7   
  

 

 

    

 

 

    

 

 

    

 

 

 
     202.3         196.8         594.1         620.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Services Income Before Income Taxes

     61.8         41.5         169.0         103.6   

Investment income

     11.0         5.5         28.9         14.3   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Total Income Before Income Taxes

     394.7         176.8         1,034.2         421.4   
           

Income taxes

     113.1         56.9         319.6         133.6   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Net Income

   $ 281.6       $ 119.9       $ 714.6       $ 287.8   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Net Income Per Share:

           

Basic

   $ .78       $ .33       $ 1.96       $ .79   

Diluted

   $ .77       $ .33       $ 1.95       $ .79   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Weighted Average Common Shares Outstanding:

           

Basic

     363.3         364.9         365.0         364.8   

Diluted

     364.2         366.1         366.2         365.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared per share

   $ .18       $ .09       $ .42       $ .27   
  

 

 

    

 

 

    

 

 

    

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

Consolidated Balance Sheets

(Millions)

   September 30
2011
     December 31
2010*
 
     (Unaudited)         

ASSETS

     

TRUCK AND OTHER:

     

Current Assets

     

Cash and cash equivalents

   $ 1,814.0       $ 1,982.0   

Trade and other receivables, net

     1,015.2         610.4   

Marketable debt securities

     915.7         450.5   

Inventories, net

     725.1         534.0   

Other current assets

     259.3         218.6   
  

 

 

    

 

 

 

Total Truck and Other Current Assets

     4,729.3         3,795.5   
  

 

 

    

 

 

 

Equipment on operating leases, net

     654.6         536.2   

Property, plant and equipment, net

     1,867.8         1,673.7   

Other noncurrent assets, net

     268.6         350.5   
  

 

 

    

 

 

 

Total Truck and Other Assets

     7,520.3         6,355.9   
  

 

 

    

 

 

 
     

FINANCIAL SERVICES:

     

Cash and cash equivalents

     65.6         58.8   

Finance and other receivables, net

     6,652.8         6,070.9   

Equipment on operating leases, net

     1,754.1         1,483.1   

Other assets

     361.5         265.4   
  

 

 

    

 

 

 

Total Financial Services Assets

     8,834.0         7,878.2   
  

 

 

    

 

 

 
   $ 16,354.3       $ 14,234.1   
  

 

 

    

 

 

 

 

* The December 31, 2010 consolidated balance sheet has been derived from audited financial statements.

See Notes to Consolidated Financial Statements.

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

Consolidated Balance Sheets

(Millions)

   September 30
2011
    December 31
2010*
 
     (Unaudited)        

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

TRUCK AND OTHER:

    

Current Liabilities

    

Accounts payable, accrued expenses and other

   $ 2,536.7      $ 1,676.5   

Current portion of long-term debt

       23.5   
  

 

 

   

 

 

 

Total Truck and Other Current Liabilities

     2,536.7        1,700.0   
  

 

 

   

 

 

 

Long-term debt

     150.0        150.0   

Residual value guarantees and deferred revenues

     687.9        563.8   

Other liabilities

     324.9        370.3   
  

 

 

   

 

 

 

Total Truck and Other Liabilities

     3,699.5        2,784.1   
  

 

 

   

 

 

 
    

FINANCIAL SERVICES:

    

Accounts payable, accrued expenses and other

     320.7        275.9   

Commercial paper and bank loans

     3,363.5        2,371.7   

Term notes

     2,613.9        2,730.8   

Deferred taxes and other liabilities

     762.8        713.8   
  

 

 

   

 

 

 

Total Financial Services Liabilities

     7,060.9        6,092.2   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred stock, no par value: Authorized 1.0 million shares, none issued

    

Common stock, $1 par value: Authorized 1.2 billion shares, issued 365.5 million shares

     365.5        365.3   

Additional paid-in capital

     121.8        105.1   

Treasury stock - at cost - 7.4 million shares

     (270.0  

Retained earnings

     5,407.6        4,846.1   

Accumulated other comprehensive (loss) income

     (31.0     41.3   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     5,593.9        5,357.8   
  

 

 

   

 

 

 
   $ 16,354.3      $ 14,234.1   
  

 

 

   

 

 

 

 

* The December 31, 2010 consolidated balance sheet has been derived from audited financial statements.

See Notes to Consolidated Financial Statements.

 

- 5 -


Table of Contents

PACCAR Inc - Form 10-Q

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Millions)

Nine Months Ended September 30

   2011     2010  

OPERATING ACTIVITIES:

    

Net income

   $ 714.6      $ 287.8   

Adjustments to reconcile net income to cash provided by operations:

    

Depreciation and amortization:

    

Property, plant and equipment

     146.4        142.2   

Equipment on operating leases and other

     359.3        326.2   

Provision for losses on financial services receivables

     32.2        48.7   

Other

     24.8        (23.5

Change in operating assets and liabilities:

    

Trade and other receivables

     (419.1     (57.6

Wholesale receivables on new trucks

     (429.1     75.5   

Sales-type finance leases and dealer direct loans on new trucks

     (18.6     101.2   

Inventories

     (197.7     115.2   

Accounts payable and accrued expenses

     663.4        125.4   

Income taxes, warranty and other

     275.1        21.7   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     1,151.3        1,162.8   
    

INVESTING ACTIVITIES:

    

Retail loans and direct financing leases originated

     (1,862.1     (1,203.7

Collections on retail loans and direct financing leases

     1,560.1        1,496.8   

Marketable securities purchases

     (1,424.9     (501.3

Marketable securities sales and maturities

     951.8        363.8   

Payments for property, plant and equipment

     (214.7     (115.8

Acquisition of equipment for operating leases

     (1,013.6     (478.4

Proceeds from asset disposals

     247.6        276.0   

Other

     (29.5     5.8   
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (1,785.3     (156.8
    

FINANCING ACTIVITIES:

    

Cash dividends paid

     (153.1     (98.3

Purchase of treasury stock

     (250.2  

Stock compensation transactions

     4.4        9.8   

Net increase (decrease) in commercial paper and short-term bank loans

     989.8        (874.3

Proceeds from long-term debt

     1,065.5        641.0   

Payments of long-term debt

     (1,144.1     (539.5
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     512.3        (861.3

Effect of exchange rate changes on cash

     (39.5     .5   
  

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     (161.2     145.2   

Cash and cash equivalents at beginning of period

     2,040.8        1,912.0   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,879.6      $ 2,057.2   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (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 three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the consolidated financial statements and footnotes included in PACCAR Inc’s (the Company) Annual Report on Form 10-K for the year ended December 31, 2010.

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.

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
     2011      2010      2011      2010  

Additional shares

     876,000         1,182,000         1,211,000         1,147,000   

Antidilutive options

     1,697,000         2,151,000         770,000         2,204,000   

Reclassifications: The Company made reclassifications to the prior year to conform to the 2011 presentation. The Company has reclassified the impairment losses related to repossessed equipment on operating leases in the Financial Services segment from Provision for losses on receivables to Depreciation and other in the Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows. In addition, the Company has reclassified proceeds for the sale of repossessed assets relating to finance receivables from Collections on retail loans and direct financing leases to Proceeds from asset disposals in the Condensed Consolidated Statements of Cash Flows.

The reclassifications are summarized below:

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
     Before      After      Before      After  

Consolidated Statements of Income

           

Depreciation and other

   $ 109.4       $ 110.2       $ 335.5       $ 342.4   

Provision for losses on receivables

     13.7         12.9         55.6         48.7   

Condensed Consolidated Statements of Cash Flows

           

Operating Activities:

           

Depreciation of equipment on operating leases and other

         $ 319.3       $ 326.2   

Provision for losses on financial services receivables

           55.6         48.7   

Investing Activities:

           

Collections on retail loans and direct financing leases

         $ 1,605.5       $ 1,496.8   

Proceeds from asset disposals

           167.3         276.0   

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

New Accounting Pronouncements: In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-09, Employer Disclosure Requirements for Multiemployer Pension Plans. This amendment requires employers participating in material multiemployer pension and other postretirement benefits plans to provide additional quantitative and qualitative disclosures to give users more detailed information about an employer’s involvement in multiemployer plans. ASU 2011-09 is effective for reporting periods beginning on or after December 15, 2011. The Company does not expect the implementation of this amendment to have a significant impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08 amending the guidance on testing goodwill for impairment. This amendment allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment test. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011. The Company does not expect the implementation of ASU 2011-08 to have a significant impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 gives additional guidance to companies to assist in determining troubled debt restructurings. The Company adopted ASU 2011-02 in the third quarter of 2011; the implementation of this amendment resulted in additional disclosure (see Note D) but did not have a significant impact on the Company’s consolidated financial statements.

NOTE B – Investments in Marketable Debt Securities

The Company’s investments in marketable debt 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 income.

Marketable debt securities at September 30, 2011 and December 31, 2010 consisted of the following:

 

At September 30, 2011

   Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

U.S. tax-exempt securities

   $ 292.6       $ 2.5          $ 295.1   

U.S. government and agency securities

     1.9               1.9   

U.S. corporate securities

     39.2         .1       $ .5         38.8   

Non U.S. corporate securities

     158.3         .3         .7         157.9   

Non U.S. government securities

     349.0         5.3            354.3   

Other debt securities

     67.1         .6            67.7   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 908.1       $ 8.8       $ 1.2       $ 915.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

At December 31, 2010

   Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

U.S. tax-exempt securities

   $ 364.9       $ .8       $ .3       $ 365.4   

U.S. government and agency securities

     2.7               2.7   

U.S. corporate securities

     27.3         .3            27.6   

Non U.S. corporate securities

     37.0               37.0   

Other debt securities

     17.8               17.8   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 449.7       $ 1.1       $ .3       $ 450.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 proceeds from sales and maturities of marketable debt securities for the nine months

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

ended September 30, 2011 were $951.8. Gross realized gains were $2.2 and $.4 for the nine months ended September 30, 2011 and 2010, respectively, with realized losses of $.6 and $.1 for the nine months ended September 30, 2011 and 2010, respectively.

The Company evaluates its investments in marketable debt securities at the end of each reporting period to determine if a decline in fair value is other than temporary. As of September 30, 2011 and December 31, 2010, there were no marketable debt securities in an unrealized loss position for greater than 12 months.

Contractual maturities on these securities at September 30, 2011 were as follows:

 

Maturities:

   Amortized
Cost
     Fair
Value
 

Within one year

   $ 267.7       $ 268.1   

One to five years

     639.7         646.9   

Six to ten years

     .7         .7   
  

 

 

    

 

 

 
   $ 908.1       $ 915.7   
  

 

 

    

 

 

 

Marketable debt securities included $.7 and $12.2 of variable rate demand obligations (VRDOs) at September 30, 2011 and December 31, 2010, respectively. VRDOs are debt instruments with long-term scheduled maturities which have interest rates that reset periodically.

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:

 

     September 30
2011
    December 31
2010
 

Finished products

   $ 438.5      $ 370.1   

Work in process and raw materials

     449.4        322.2   
  

 

 

   

 

 

 
     887.9        692.3   

Less LIFO reserve

     (162.8     (158.3
  

 

 

   

 

 

 
   $ 725.1      $ 534.0   
  

 

 

   

 

 

 

Under the LIFO method of accounting (used for approximately 43% of September 30, 2011 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.

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

NOTE D – Finance and Other Receivables

Finance and other receivables include the following:

 

     September 30
2011
    December 31
2010
 

Loans

   $ 2,889.6      $ 2,713.9   

Retail direct financing leases

     2,001.1        2,005.0   

Sales-type finance leases

     687.2        703.6   

Dealer wholesale financing

     1,412.0        983.4   

Interest and other receivables

     102.3        109.3   

Unearned interest on finance leases

     (296.0     (299.3
  

 

 

   

 

 

 
     6,796.2        6,215.9   

Less allowance for losses:

    

Loans, leases and other

     (132.6     (137.5

Dealer wholesale financing

     (10.8     (7.5
  

 

 

   

 

 

 
   $ 6,652.8      $ 6,070.9   
  

 

 

   

 

 

 

Recognition of interest income and rental revenue is suspended (put on non-accrual status) when the receivable becomes more than 90 days past the contractual due date or earlier if some other event causes the Company to determine that collection is not probable. Accordingly, there were no finance receivables more than 90 days past due still accruing interest at September 30, 2011 or December 31, 2010. Recognition is resumed if the receivable becomes contractually current by the payment of all amounts due under the terms of the existing contract and collection of remaining amounts is considered probable (if not modified), or after the customer has made scheduled payments for three months and collection of remaining amounts is considered probable (if contractually modified). Payments received while the finance receivable is impaired or on non-accrual status are applied to interest and principal in accordance with the contractual terms.

Allowance for Credit Losses

The Company continuously monitors the performance of all its finance receivables by reviewing payment performance. In addition, for large customers and dealer wholesale financing accounts, the Company regularly monitors their financial statements and makes appropriate customer contact. If the Company becomes aware of circumstances with those customers or dealers that could lead to financial difficulty, whether or not they are past-due, the accounts are placed on a watch list. In determining the allowance for credit losses, loans and finance leases are evaluated together since they relate to a similar customer base and their contractual terms require regular payment of principal and interest generally over 36 to 60 months and they are secured by the same type of collateral. The Company collectively and individually evaluates its finance receivables and the allowance for credit losses consists of both general and specific reserves.

The Company individually evaluates certain finance receivables for impairment. Finance receivables which are evaluated individually consist of customers on non-accrual status, all wholesale accounts and certain large retail accounts with past-due balances or that otherwise are deemed to be at a higher risk of credit loss and loans which have been modified as troubled debt restructurings. A receivable is considered impaired if it is probable the Company will be unable to collect all contractual interest and principal payments as scheduled. Impaired receivables are individually evaluated to determine the amount of impairments and these receivables are considered collateral dependent. Accordingly, the evaluation of individual reserves is based on the fair value less costs to sell the associated collateral. When the underlying collateral fair value exceeds the Company’s loss exposure, no individual reserve is recorded. The Company uses a pricing model to value the underlying collateral on a quarterly basis. The fair value of the collateral is determined based on management’s evaluation of numerous factors

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

such as the make, model and year of the equipment, overall condition of the equipment, primary method of distribution for the equipment, recent sales prices of comparable equipment and economic trends affecting used equipment values.

For finance receivables that are evaluated collectively, the Company determines the allowance for credit losses for both retail and wholesale receivables based on historical loss information, using past-due account data and current market conditions. Information used includes assumptions regarding the likelihood of collecting current and past-due accounts, repossession rates and the recovery rate on the underlying collateral based on used truck values and other pledged collateral or recourse. The Company has developed a range of loss estimates for each of its country portfolios based on historical experience, taking into account loss frequency and severity in both strong and weak truck market conditions. A projection is made of the range of estimated credit losses inherent in the portfolio from which an amount is determined as probable based on current market conditions and other factors impacting the creditworthiness of the Company’s borrowers and their ability to repay. The projected amount is then compared to the allowance for credit loss balance and an appropriate adjustment is made.

The provision for losses on finance receivables is charged to income based on management’s estimate of incurred credit losses, net of recoveries, inherent in the portfolio. Accounts are charged-off against the allowance for credit losses when, in the judgment of management, they are considered uncollectable (generally upon repossession of the collateral). Typically the timing between the repossession process and when a receivable is charged-off is not significant. In cases where repossession is delayed (i.e., for legal reasons), the Company will record partial charge-offs. The charge-off is determined by comparing the fair value of the collateral less costs to sell to the recorded investment.

The Company’s allowance for credit losses is segregated into two portfolio segments: wholesale and retail. A portfolio segment is the level at which the Company develops a systematic methodology for determining its allowance for credit losses. The wholesale segment includes wholesale financing loans to dealers that are collateralized by the trucks being financed. The retail segment includes retail loans and direct and sales-type finance leases, net of unearned interest.

The wholesale segment risk characteristics differ from the retail segment. For wholesale receivables the terms are shorter in duration and the Company requires monthly reporting of the dealer’s financial condition, conducts periodic physical audits of the trucks being financed and in many cases, obtains personal guarantees or other security such as dealership assets to reduce the risk of loss compared to retail receivables.

The allowance for credit losses is summarized as follows:

 

     2011  
     Wholesale     Retail     Total  

Balance at January 1

   $ 7.5      $ 137.5      $ 145.0   

Provision for losses

     4.5        27.7        32.2   

Charge-offs

     (1.1     (38.2     (39.3

Recoveries

       7.8        7.8   

Currency translation

     (.1     (2.2     (2.3
  

 

 

   

 

 

   

 

 

 

Balance at September 30

   $ 10.8      $ 132.6      $ 143.4   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

Information regarding finance receivables summarized by those evaluated collectively and individually is as follows:

 

At September 30, 2011

   Wholesale      Retail      Total  

Recorded investment for impaired finance receivables evaluated individually

   $ 22.9       $ 112.4       $ 135.3   

Allowance for finance receivables evaluated individually

   $ 2.1       $ 31.1       $ 33.2   

Recorded investment for finance receivables evaluated collectively

   $ 1,389.1       $ 5,169.5       $ 6,558.6   

Allowance for finance receivables evaluated collectively

   $ 8.7       $ 101.5       $ 110.2   

At December 31, 2010

                    

Recorded investment for impaired finance receivables evaluated individually

   $ 3.4       $ 150.0       $ 153.4   

Allowance for finance receivables evaluated individually

   $ 1.3       $ 33.6       $ 34.9   

Recorded investment for finance receivables evaluated collectively

   $ 980.0       $ 4,973.2       $ 5,953.2   

Allowance for finance receivables evaluated collectively

   $ 6.2       $ 103.9       $ 110.1   

The recorded investment for finance receivables as of September 30, 2011 that are on non-accrual status in the wholesale, fleet and owner/operator portfolio classes as defined below was $23.1, $67.8 and $18.5, respectively. The recorded investment for finance receivables as of December 31, 2010 on non-accrual status was $3.4, $72.2 and $33.9, respectively.

Impaired Loans

The Company’s impaired loans are segregated by portfolio class. A portfolio class of receivables is a subdivision of a portfolio segment with similar measurement attributes and risk characteristics and common methods to monitor and assess credit risk. The Company’s retail segment is subdivided into the fleet and owner/operator classes. Fleet consists of retail accounts with customers operating more than five trucks. All others are owner/operator.

All impaired loans have a specific reserve and are summarized as follows:

 

At September 30, 2011

   Wholesale     Fleet     Owner /
Operator
    Total  

Impaired loans with specific reserve

   $ 23.0      $ 32.3      $ 11.8      $ 67.1   

Associated allowance

     (2.1     (6.8     (2.2     (11.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net carrying amount of impaired loans

   $ 20.9      $ 25.5      $ 9.6      $ 56.0   

Unpaid principal balance

   $ 23.0      $ 32.3      $ 11.8      $ 67.1   

Average recorded investment*

   $ 11.7      $ 30.9      $ 15.1      $ 57.7   

Interest income recognized on a cash basis:

        

Three months ended September 30, 2011

     $ .3      $ .2      $ .5   

Nine months ended September 30, 2011

   $ .3      $ 1.2      $ .7      $ 2.2   

 

* Represents the average during the 12 months ended September 30, 2011.

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

At December 31, 2010

   Wholesale     Fleet     Owner /
Operator
    Total  

Impaired loans with specific reserve

   $ 3.4      $ 21.5      $ 17.8      $ 42.7   

Associated allowance

     (1.3     (4.4     (3.8     (9.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net carrying amount of impaired loans

   $ 2.1      $ 17.1      $ 14.0      $ 33.2   

Unpaid principal balance

   $ 3.4      $ 21.5      $ 17.8      $ 42.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit Quality

The Company’s customers are principally concentrated in the transportation industry in North America, Europe and Australia. On a geographic basis, there is a proportionate concentration of credit risk in each area. The Company retains as collateral a security interest in the related equipment.

At the inception of each contract, the Company considers the credit risk based on a variety of credit quality indicators including, prior payment experience, customer financial information, credit-rating agency ratings and loan-to-value ratios. On an ongoing basis, the Company monitors the credit quality based on past-due status and collection experience as the Company has found a meaningful correlation between the past-due status of customers and the risk of loss.

The table below summarizes the Company’s finance receivables by credit quality indicator and portfolio class. Performing accounts are paying in accordance with the contractual terms and are not considered to be of high risk. Watch accounts primarily include accounts more than 30 days and less than 90 days past-due and other large high risk accounts that are not impaired. At-risk includes customer accounts that are impaired, including accounts more than 90 days past-due.

 

At September 30, 2011

   Wholesale      Fleet      Owner /
Operator
     Total  

Performing

   $ 1,387.7       $ 3,806.7       $ 1,327.5       $ 6,521.9   

Watch

     1.3         15.1         13.5         29.9   

At-risk

     23.0         100.6         18.5         142.1   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,412.0       $ 3,922.4       $ 1,359.5       $ 6,693.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2010

                           

Performing

   $ 966.2       $ 3,544.0       $ 1,359.4       $ 5,869.6   

Watch

     13.8         46.6         23.2         83.6   

At-risk

     3.4         115.1         34.9         153.4   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 983.4       $ 3,705.7       $ 1,417.5       $ 6,106.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

The table below summarizes the Company’s finance receivables by aging category. In determining past due status, the Company considers the entire contractual account balance past due when any installment is over 30 days past-due. Customer accounts that were greater than 30 days past due prior to modification become current upon modification for aging purposes.

 

At September 30, 2011

   Wholesale      Fleet      Owner /
Operator
     Total  

Current and up to 30 days past-due

   $ 1,389.1       $ 3,845.5       $ 1,327.5       $ 6,562.1   

31 – 60 days past-due

     1.4         14.1         13.0         28.5   

Greater than 60 days past-due

     21.5         62.8         19.0         103.3   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,412.0       $ 3,922.4       $ 1,359.5       $ 6,693.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

At December 31, 2010

                           

Current and up to 30 days past-due

   $ 966.2       $ 3,581.1       $ 1,359.5       $ 5,906.8   

31 – 60 days past-due

     7.7         48.5         19.7         75.9   

Greater than 60 days past-due

     9.5         76.1         38.3         123.9   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 983.4       $ 3,705.7       $ 1,417.5       $ 6,106.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

The Company modifies loans and finance leases as a normal part of its Financial Services operations. The Company’s modifications typically resulted in granting more time to pay the contractual amounts owed. When the Company modifies loans and finance leases for customers in financial difficulty and grants a concession, the modifications are classified as troubled debt restructurings (TDRs). The Company rarely forgives principal or accrued interest and may require principal and accrued interest payments at the time of modification. For the three and nine months ended September 30, 2011, the decrease in the recorded investment for loans and leases modified as TDRs was nil and $.1 million, all within the fleet segment. At modification date, the post-modification recorded investment balance was:

 

Post-Modification Recorded Investment

   Fleet      Owner /
Operator
     Total  

Three Months Ended September 30, 2011

   $ 3.4       $ .7       $ 4.1   

Nine Months Ended September 30, 2011

   $ 21.2       $ 5.2       $ 26.4   

The balance of TDRs was $25.4 at September 30, 2011 and $6.5 at December 31, 2010.

As a result of adopting the amendments in ASU 2011-02, the Company reassessed all modifications that occurred during the past nine months for identification as TDRs. The Company identified as TDRs certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology and identified these receivables as impaired. Included in finance receivables evaluated individually for impairment are loans identified as TDRs some of which are loans evaluated as a pool to measure the specific reserve. At September 30, 2011, the recorded investment in loans for which the allowance for credit losses was previously measured under the general allowance for credit losses methodology that are now impaired under the new guidance was $5.9. The allowance for credit losses associated with these loans was $.3 at September 30, 2011.

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

The recorded investment of finance receivables modified during the previous twelve months as TDRs that subsequently defaulted (i.e., became more than 30 days past due) in the three and twelve months ended September 30, 2011 are as follows:

 

     At September 30, 2011  

Recorded Investment

   Fleet      Owner /
Operator
     Total  

Three Months Ended September 30, 2011

   $ 2.0       $ .2       $ 2.2   

Twelve Months Ended September 30, 2011

   $ 6.0       $ 2.1       $ 8.1   

These TDRs that subsequently defaulted (i.e., became more than 30 days past due) did not significantly impact the Company’s reserve at September 30, 2011.

Repossessions

When the Company determines that a customer in default is not likely to meet their contractual commitments, the Company repossesses the vehicles which serve as collateral for loans and finance leases, and equipment on operating leases. The Company records the repossessed vehicles as used truck inventory included in Financial Services Other assets on the Consolidated Balance Sheets. The balance of repossessed inventory at September 30, 2011 and December 31, 2010 was $12.0 and $15.6, respectively. Proceeds from the sales of repossessed assets were $65.7 and $108.7 for the nine months ended September 30, 2011 and 2010, respectively. These amounts are included in Proceeds from asset disposals on the Consolidated Statements of Cash Flows. Write-downs of repossessed equipment on operating leases are recorded as impairments and included in Financial Services Depreciation and other on the Consolidated Statements of Income.

NOTE E - Product Support Liabilities

Product support liabilities include reserves related to product warranties, 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. The Company 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:

 

     2011     2010  

Balance at January 1

   $ 372.2      $ 386.4   

Cost accruals and revenue deferrals

     219.1        152.9   

Payments and revenue recognized

     (161.3     (168.6

Currency translation

     (1.2     (11.6
  

 

 

   

 

 

 

Balance at September 30

   $ 428.8      $ 359.1   
  

 

 

   

 

 

 

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

NOTE F – Stockholders’ Equity

Comprehensive Income

The components of comprehensive income, net of any related tax, were as follows:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2011     2010     2011     2010  

Net income

   $ 281.6      $ 119.9      $ 714.6      $ 287.8   

Other comprehensive (loss) income:

        

Currency translation (losses) gains

     (267.0     226.4        (82.3     (28.5

Derivative contracts (decrease) increase

     (15.2     4.5        (6.8     21.0   

Marketable securities increase

     2.5        .2        4.2        .3   

Employee benefit plans increase (decrease)

     9.3        (1.8     12.6        9.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive (loss) income

     (270.4     229.3        (72.3     2.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 11.2      $ 349.2      $ 642.3      $ 290.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

In the three months ended September 30, 2011, currency translation losses are primarily due to decreases in the euro. In the nine months ended September 30, 2011, currency translation losses are primarily due to decreases in Canadian and Australian dollar.

Accumulated Other Comprehensive (Loss) Income

Accumulated other comprehensive (loss) income was comprised of the following:

 

     September 30
2011
    December 31
2010
 

Currency translation adjustment

   $ 288.8      $ 371.1   

Net unrealized losses on derivative contracts

     (24.7     (17.9

Net unrealized investment gains

     4.7        .5   

Employee benefit plans

     (299.8     (312.4
  

 

 

   

 

 

 

Total accumulated other comprehensive (loss) income

   $ (31.0   $ 41.3   
  

 

 

   

 

 

 

Stock Compensation Plans

Stock-based compensation expense was $2.6 and $11.1 for the three and nine months ended September 30, 2011, respectively, and $2.3 and $6.1 for the three and nine months ended September 30, 2010, respectively. Realized tax benefits related to the excess of deductible amounts over expense recognized amounted to nil and $.7 for the three and nine months ended September 30, 2011, respectively, and $.6 and $2.8 for the three and nine months ended September 30, 2010, respectively, and have been classified as a financing cash flow.

During the first three quarters of 2011, the Company issued 247,796 common shares under deferred and stock compensation arrangements.

NOTE G – Income Taxes

The effective income tax rate was 28.7% in the third quarter of 2011 and 30.9% in the first nine months of 2011 compared to 32.2% in the third quarter and 31.7% in the first nine months of 2010. The lower

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

effective tax rates in 2011 reflect the benefits of implementation in the third quarter of a new tax law in the Netherlands which provides tax incentives related to research and innovation.

NOTE H – Segment Information

The Company operates in two reportable segments, Truck and Financial Services.

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2011     2010     2011     2010  

Net sales and revenues:

        

Truck

        

Total

   $ 4,145.1      $ 2,374.1      $ 11,275.5      $ 6,705.1   

Less intersegment

     (183.9     (92.7     (621.8     (254.5
  

 

 

   

 

 

   

 

 

   

 

 

 

External customers

     3,961.2        2,281.4        10,653.7        6,450.6   

All other

     31.8        22.8        84.6        62.7   
  

 

 

   

 

 

   

 

 

   

 

 

 
     3,993.0        2,304.2        10,738.3        6,513.3   

Financial Services

     264.1        238.3        763.1        724.0   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 4,257.1      $ 2,542.5      $ 11,501.4      $ 7,237.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes:

        

Truck

   $ 324.3      $ 133.4      $ 855.3      $ 314.2   

All other

     (2.4     (3.6     (19.0     (10.7
  

 

 

   

 

 

   

 

 

   

 

 

 
     321.9        129.8        836.3        303.5   

Financial Services

     61.8        41.5        169.0        103.6   

Investment income

     11.0        5.5        28.9        14.3   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 394.7      $ 176.8      $ 1,034.2      $ 421.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

Truck

   $ 78.8      $ 69.5      $ 236.3      $ 206.9   

All other

     2.7        2.2        7.2        6.7   
  

 

 

   

 

 

   

 

 

   

 

 

 
     81.5        71.7        243.5        213.6   

Financial Services

     92.7        80.0        262.1        254.9   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 174.2      $ 151.7      $ 505.6      $ 468.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Included in All other is the Company’s industrial winch manufacturing business and other sales, income and expense not attributable to a reportable segment, including a portion of corporate expenses.

NOTE I – Derivative Financial Instruments

As part of its risk management strategy, the Company enters into derivative contracts to hedge against interest rate and foreign currency risk.

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. The Company is exposed to interest rate and exchange rate risk caused by market volatility as a result of its borrowing activities. The objective of these contracts is to

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

mitigate the fluctuations on earnings, cash flows and fair value of borrowings. Net amounts paid or received are reflected as adjustments to interest expense.

At September 30, 2011, the notional amount of the Company’s interest-rate contracts was $2,954.4. Notional maturities for all interest-rate contracts are $235.4 for the remainder of 2011, $699.5 for 2012, $692.4 for 2013, $896.9 for 2014, $381.0 for 2015 and $49.2 thereafter. 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. The objective is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. At September 30, 2011, the notional amount of the outstanding foreign-exchange contracts was $320.3. Foreign-exchange contracts mature within one year.

The following table presents the balance sheet classifications and fair value of derivative financial instruments designated under hedge accounting:

 

     September 30, 2011      December 31, 2010  
     Assets      Liabilities      Assets      Liabilities  

Derivatives designated under hedge accounting:

           

Interest-rate contracts:

           

Financial Services:

           

Other assets

   $ 2.4          $ 9.1      

Deferred taxes and other liabilities

      $ 92.2          $ 107.5   

Foreign-exchange contracts:

           

Truck and Other:

           

Other current assets

     4.0            .9      

Accounts payable, accrued expenses and other

        2.0            1.1   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6.4       $ 94.2       $ 10.0       $ 108.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

The following table presents the balance sheet classifications and fair value of derivative financial instruments designated as economic hedges:

 

     September 30, 2011      December 31, 2010  
     Assets      Liabilities      Assets      Liabilities  

Economic hedges:

           

Interest-rate contracts:

           

Financial Services:

           

Other assets

   $ 2.1            

Deferred taxes and other liabilities

      $ .8          $ 3.5   

Foreign-exchange contracts:

           

Truck and Other:

           

Other current assets

     .6          $ .1      

Accounts payable, accrued expenses and other

        2.0            .3   

Financial Services:

           

Deferred taxes and other liabilities

        .2            .2   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2.7       $ 3.0       $ .1       $ 4.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. 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:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2011     2010     2011     2010  

Interest-rate swaps

   $ (5.2   $ (1.5   $ (4.7   $ (3.2

Term notes

   $ 4.9      $ 1.4      $ 4.2      $ 3.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow Hedges

The majority of the Company’s interest-rate contracts and some foreign-exchange contracts have been designated as 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 ineffective portions were a loss of $.1 and a gain of $2.0 during the third quarter of 2011 and 2010 and were gains of $.7 and $2.0 during the first nine months of 2011 and 2010, respectively.

 

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PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

The following table presents the pre-tax effects of derivative instruments recognized in Other comprehensive (loss) income (OCI):

 

     Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2011
 
     Interest-rate
Contracts
    Foreign-exchange
Contracts
    Interest-rate
Contracts
    Foreign-exchange
Contracts
 

Income (loss) recognized in OCI:

        

Truck and Other

     $ (1.8     $ 5.9   

Financial Services

   $ (2.6     $ (31.2  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (2.6   $ (1.8   $ (31.2   $ 5.9   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended
September 30, 2010
    Nine Months Ended
September 30, 2010
 

Income (loss) recognized in OCI:

        

Truck and Other

     $ 4.3        $ 1.8   

Financial Services

   $ (40.2     $ (61.0  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (40.2   $ 4.3      $ (61.0   $ 1.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expense (income) reclassified from Accumulated other comprehensive income into income:

 

     Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2011
 
     Interest-rate
Contracts
    Foreign-exchange
Contracts
    Interest-rate
Contracts
     Foreign-exchange
Contracts
 

Truck and Other:

         

Cost of sales and revenues

     $ (.7      $ (3.3

Financial Services:

         

Interest and other borrowing expenses

   $ (16.3     $ 20.2      
  

 

 

   

 

 

   

 

 

    

 

 

 
   $ (16.3   $ (.7   $ 20.2       $ (3.3
  

 

 

   

 

 

   

 

 

    

 

 

 
     Three Months Ended
September 30, 2010
    Nine Months Ended
September 30, 2010
 

Truck and Other:

         

Cost of sales and revenues

     $ .6         $ 1.6   

Interest and other expense, net

       (1.1        (.2

Financial Services:

         

Interest and other borrowing expenses

   $ 44.0        $ 88.7      
  

 

 

   

 

 

   

 

 

    

 

 

 
   $ 44.0      $ (.5   $ 88.7       $ 1.4   
  

 

 

   

 

 

   

 

 

    

 

 

 

Of the $24.7 accumulated net loss on derivative contracts included in Accumulated other comprehensive income as of September 30, 2011, $33.2 of losses, net of taxes, is estimated 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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PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

Economic Hedges

For other risk management purposes, the Company enters into derivative instruments not designated as hedges that do not qualify for hedge accounting. These derivative instruments are used to mitigate the risk of market volatility arising from borrowings and foreign currency denominated transactions. Changes in the fair value of economic hedges are recorded in earnings in the period in which the change occurs.

The (income) expense recognized in earnings related to economic hedges is as follows:

 

     Three Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2011
 
     Interest-rate
Contracts
    Foreign-exchange
Contracts
    Interest-rate
Contracts
    Foreign-exchange
Contracts
 

Truck and Other:

        

Cost of sales and revenues

     $ .1        $ .1   

Interest and other (income) expense, net

       (.3       (.3

Financial Services:

        

Interest and other borrowing expenses

   $ (5.0     (.5   $ (5.0   $ (1.6
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (5.0   $ (.7   $ (5.0   $ (1.8
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended
September 30, 2010
    Nine Months Ended
September 30, 2010
 

Truck and Other:

        

Cost of sales and revenues

     $ .2        $ .3   

Interest and other (income)expense, net

   $ 1.1        4.8      $ .2        6.6   

Financial Services:

        

Interest and other borrowing expenses

     .3        .1        (7.8  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1.4      $ 5.1      $ (7.6   $ 6.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

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 Debt 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 U.S. government obligations is based on quoted prices in active markets. These are categorized as Level 1. The fair value of non U.S. government bonds, 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, currency exchange rates, credit default swap spreads and forward rates. These contracts are categorized as Level 2.

The Company’s financial assets and liabilities subject to recurring fair value measurements are either Level 1 or Level 2 as follows:

 

At September 30, 2011

   Level 1      Level 2      Total  

Assets:

        

Marketable debt securities

        

U.S. tax-exempt securities

      $  295.1       $  295.1   

U.S. government and agency securities

   $  1.9            1.9   

U.S. corporate securities

        38.8         38.8   

Non U.S. corporate securities

        157.9         157.9   

Non U.S. government securities

        354.3         354.3   

Other

        67.7         67.7   
  

 

 

    

 

 

    

 

 

 

Total marketable debt securities

   $ 1.9       $ 913.8       $ 915.7   
  

 

 

    

 

 

    

 

 

 

Derivatives

        

Interest-rate swaps

      $ 2.4       $ 2.4   

Cross currency swaps

        2.1         2.1   

Foreign-exchange contracts

        4.6         4.6   
     

 

 

    

 

 

 

Total derivative assets

      $ 9.1       $ 9.1   
     

 

 

    

 

 

 

Liabilities:

        

Derivatives

        

Interest-rate swaps

      $ 38.2       $ 38.2   

Cross currency swaps

        54.8         54.8   

Foreign-exchange contracts

        4.2         4.2   
     

 

 

    

 

 

 

Total derivative liabilities

      $ 97.2       $ 97.2   
     

 

 

    

 

 

 

 

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PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

At December 31, 2010

   Level 1      Level 2      Total  

Assets:

        

Marketable debt securities

        

U.S. tax-exempt securities

      $ 365.4       $ 365.4   

U.S. government and agency securities

   $ 2.7            2.7   

U.S. corporate securities

        27.6         27.6   

Non U.S. corporate securities

        37.0         37.0   

Other

        17.8         17.8   
  

 

 

    

 

 

    

 

 

 

Total marketable debt securities

   $ 2.7       $ 447.8       $ 450.5   
  

 

 

    

 

 

    

 

 

 

Derivatives

        

Interest-rate swaps

      $ 5.8       $ 5.8   

Cross currency swaps

        3.3         3.3   

Foreign-exchange contracts

        1.0         1.0   
     

 

 

    

 

 

 

Total derivative assets

      $ 10.1       $ 10.1   
     

 

 

    

 

 

 

Liabilities:

        

Derivatives

        

Interest-rate swaps

      $ 37.2       $ 37.2   

Cross currency swaps

        73.8         73.8   

Foreign-exchange contracts

        1.6         1.6   
     

 

 

    

 

 

 

Total derivative liabilities

      $ 112.6       $ 112.6   
     

 

 

    

 

 

 

Other assets that are measured at fair value on a nonrecurring basis are as follows:

 

     September 30
2011
     December 31
2010
 
     Level 2      Level 2  

Impaired loans:

     

Financial Services

   $ 56.0       $ 33.2   
  

 

 

    

 

 

 

Used trucks held for sale:

     

Truck and Other

   $ 22.3       $ 20.0   

Financial Services

     55.9         38.2   
  

 

 

    

 

 

 
   $ 78.2       $ 58.2   
  

 

 

    

 

 

 

The carrying amount of collateral dependent impaired loans and used trucks held for sale are adjusted when appropriate to reflect their fair value. The fair value of used trucks and collateral dependent impaired loans are determined 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 three and nine months ended September 30, 2011 were $.5 and $1.8, respectively, and were recorded as cost of sales in the truck segment. Used truck write-downs during the three and nine months ended September 30, 2010 were $3.2 and $7.0, respectively. Of the $7.0 year to date cost, $1.6 was recorded as cost of sales in the truck segment and $5.4 was recorded in the financial services segment (operating lease depreciation expense of $7.2 and a recovery to provision for losses on receivables of $1.8).

 

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PACCAR Inc - Form 10-Q

 

 

Notes to Consolidated Financial Statements (Unaudited)    (Millions, Except Share Amounts)

 

 

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.

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.

Trade Receivables and Payables: Carrying amounts approximate fair value.

Fixed-rate loans and debt that are not carried at approximate fair value at September 30, 2011 and December 31, 2010 were as follows:

 

     September 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Assets:

           

Financial Services fixed-rate loans

   $ 2,568.3       $ 2,574.9       $ 2,444.1       $ 2,483.3   

Liabilities:

           

Truck and Other fixed-rate debt

   $ 150.0       $ 170.4       $ 173.5       $ 196.9   

Financial Services fixed-rate debt

   $ 2,049.9       $ 2,120.1       $ 1,870.7       $ 1,967.9   

NOTE K – Employee Benefit Plans

The Company 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:

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2011     2010     2011     2010  

Service cost

   $ 11.9      $ 9.3      $ 34.6      $ 27.8   

Interest on projected benefit obligation

     21.0        19.0        61.8        57.0   

Expected return on assets

     (26.5     (24.4     (79.1     (73.0

Amortization of prior service costs

     .3        .4        1.0        1.3   

Recognized actuarial loss

     4.5        3.7        17.7        10.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net pension expense

   $ 11.2      $ 8.0      $ 36.0      $ 24.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the three and nine months ended September 30, 2011, the Company contributed $6.1 and $12.9 to its pension plans, respectively.

 

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PACCAR Inc - Form 10-Q

 

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, manufacture and distribution of high-quality, light-, medium- and heavy-duty commercial trucks and related aftermarket parts. In North America, trucks are sold under the Kenworth and Peterbilt nameplates, in Europe, under the DAF nameplate and in Australia under the Kenworth and DAF nameplates. The Company’s Financial Services segment (PFS) derives its earnings primarily from financing or leasing PACCAR products in the U.S., Canada, Mexico, Europe and Australia. The Company’s Other business is the manufacturing and marketing of industrial winches.

Consolidated net sales and revenues in the third quarter of 2011 were a record $4.26 billion, an increase of $1.71 billion compared to the third quarter of 2010. For the first nine months of 2011, consolidated net sales and revenue were $11.50 billion, an increase of $4.26 billion from the same period in 2010. The increases in both periods are mainly due to higher truck deliveries and aftermarket parts sales in the Company’s primary markets from increased demand for the Company’s products. Truck unit sales increased in the third quarter of 2011 to 35,500 units from 19,500 units in the third quarter of 2010 and increased to 97,100 from 54,600 in the first nine months of 2011. Aftermarket parts sales in the third quarter and first nine months of 2011 increased to $.66 billion and $1.92 billion from $.55 billion and $1.60 billion in the same periods in 2010.

Third quarter 2011 net income increased to $281.6 million ($.77 per diluted share) compared to $119.9 million ($.33 per diluted share) in the third quarter of 2010. First nine months of 2011 net income increased to $714.6 million ($1.95 per diluted share) compared to $287.8 million ($.79 per diluted share) in the first nine months of 2010. Both increases were primarily due to higher sales and margins in the Truck segment.

PACCAR Financial Services assets increased to $8.83 billion at September 30, 2011 from $7.88 billion at December 31, 2010 and third quarter 2011 pre-tax income improved to $61.8 million compared to $41.5 million in the third quarter of 2010. First nine months of 2011 pre-tax income improved to $169.0 million compared to $103.6 million in the first nine months of 2010. The higher levels of assets and profits reflect improving truck sales and finance market share, as well as lower borrowing costs. PACCAR issued $982.4 million of medium-term notes during the first nine months of 2011.

Third quarter and first nine months of 2011 total net sales and revenues and income before income taxes were positively affected by the translation of stronger foreign currencies primarily due to the euro. The translation effect increased third quarter 2011 net sales and revenues by $159.2 million and income before income taxes by $8.2 million. The translation effect increased first nine months of 2011 net sales and revenues by $367.9 million and income before income taxes by $32.6 million.

Truck Outlook

Industry retail sales this year for the heavy-duty truck market in the U.S. and Canada are expected to be in the range of 185,000 – 200,000 units, up 45% to 60% from 2010. Industry retail sales in the U.S. and Canada in 2012 are expected to increase to 205,000 – 230,000 units, primarily due to the ongoing replacement of the aging industry fleet. In Europe, the 2011 market size of 15-tonne and above vehicles is expected to be in the range of 235,000 – 245,000 units, up 30% to 35% from 2010. In 2012, the annual market size of above 15-tonne vehicles is expected to remain comparable at 225,000 – 250,000 units in Europe. The Company’s capital investments in 2011 are expected to increase to $450 to $500 million reflecting product development programs and South American expansion. Capital investments in 2012 are expected to be $450 to $550 million. Research and development (R&D) in 2011 is expected to be $280 to $300 million, focusing on manufacturing efficiency improvements, engine development and new product programs. R&D in 2012 is expected to be $275 to $325 million. Capital investments and R&D in 2012 will focus on construction of a factory in Brasil as well as comprehensive

 

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PACCAR Inc - Form 10-Q

 

product development programs. See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect this outlook.

Financial Services Outlook

Average earning assets in the fourth quarter of 2011 are expected to increase modestly from current levels. For 2012, average earning assets are projected to grow approximately 5-10% due to increased new business financing from slightly higher truck sales as discussed in the Truck Outlook. The Company’s customers are benefiting from increased freight tonnage and fleet utilization that are contributing to improvements in customers’ productivity as well as profitability. If current freight transportation conditions continue, past-due accounts, truck repossessions and net charge-offs in 2012 could be comparable to or improve slightly from 2011 amounts. See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect this outlook.

RESULTS OF OPERATIONS:

 

($ in millions, except per share amounts)

   Three Months Ended
September 30
    Nine Months Ended
September 30
 
   2011     2010     2011     2010  

Net sales and revenues:

        

Truck

   $ 3,961.1      $ 2,281.4      $ 10,653.6      $ 6,450.6   

Other

     31.9        22.8        84.7        62.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Truck and other

     3,993.0        2,304.2        10,738.3        6,513.3   

Financial Services

     264.1        238.3        763.1        724.0   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 4,257.1      $ 2,542.5      $ 11,501.4      $ 7,237.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes:

        

Truck

   $ 324.3      $ 133.3      $ 855.3      $ 314.1   

Other

     (2.4     (3.5     (19.0     (10.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Truck and Other

     321.9        129.8        836.3        303.5   

Financial Services

     61.8        41.5        169.0        103.6   

Investment income

     11.0        5.5        28.9        14.3   

Income taxes

     (113.1     (56.9     (319.6     (133.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 281.6      $ 119.9      $ 714.6      $ 287.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ .77      $ .33      $ 1.95      $ .79   
  

 

 

   

 

 

   

 

 

   

 

 

 

Return on Revenues

     6.6     4.7     6.2     4.0

The following provides an analysis of the results of operations for the two reportable segments, Truck 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

 

2011 Compared to 2010:

Truck

The Company’s truck segment accounted for 93% of revenues in both the third quarter and first nine months of 2011 compared to 90% and 89% in the third quarter and first nine months of 2010.

 

($ in millions)

   Three Months Ended
September 30
     Nine Months Ended
September 30
 
   2011      2010      % Change      2011      2010      % Change  

Truck net sales and revenues:

                 

U.S. and Canada

   $ 2,191.6       $ 1,163.1         88       $ 5,560.1       $ 3,241.4         72   

Europe

     1,185.8         703.1         69         3,529.8         2,125.6         66   

Mexico, Australia and Other

     583.7         415.2         41         1,563.7         1,083.6         44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,961.1       $ 2,281.4         74       $ 10,653.6       $ 6,450.6         65   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Truck income before income taxes

   $ 324.3       $ 133.3         143       $ 855.3       $ 314.1         172   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s worldwide truck and parts sales and revenues in the third quarter and first nine months of 2011 increased 74% and 65% compared to the same periods in 2010. Both increases were due to higher market demand, primarily in the U.S. and Canada and Europe.

Truck segment income before income taxes increased 143% and 172% in the third quarter and first nine months of 2011 from the same periods in 2010. Both of the increases were due to higher truck unit sales and margins and higher aftermarket parts sales and margins, partially offset by increases in R&D and selling, general and administrative (SG&A) expenses to support a higher level of business activity. Third quarter and first nine months of 2011 truck income before income taxes was also affected by the translation of stronger foreign currencies. The translation effect of all currencies increased third quarter and first nine months of 2011 income before income taxes by $6.9 million and $28.5 million, respectively.

The Company’s new truck deliveries are summarized below:

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
     2011      2010      % Change      2011      2010      % Change  

United States

     15,700         7,600         107         40,100         21,000         91   

Canada

     3,100         1,600         94         7,900         5,100         55   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

U.S. and Canada

     18,800         9,200         104         48,000         26,100         84   

Europe

     11,800         6,900         71         35,200         19,500         81   

Mexico, Australia and Other

     4,900         3,400         44         13,900         9,000         54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total units

     35,500         19,500         82         97,100         54,600         78   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The truck market in the U.S. and Canada continued to improve from the recessionary levels of 2010 reflecting higher freight volumes and the need to replace an aging truck fleet. Industry retail sales in the heavy-duty market in the U.S. and Canada increased to 133,900 units in the first nine months of 2011 from 90,500 units in the first nine months of 2010. The Company’s heavy-duty truck retail market share was 27.7% in the first nine months of 2011 compared to 23.4% in the first nine months of 2010.

The 15-tonne and above truck market size in Western and Central Europe increased to 181,000 units in the first nine months of 2011 from 127,700 units in the first nine months of 2010. The Company’s market share was 15.2% in the first nine months of 2011 compared to 15.9% in the first nine months of 2010.

Sales and revenues in Mexico, Australia and other markets increased in the third quarter and first nine months of 2011 primarily due to higher new truck deliveries in Mexico and Latin America.

 

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PACCAR Inc - Form 10-Q

 

The major factors for the changes in net sales and revenues, cost of sales and revenues, and gross margin for the three months ended September 30, 2011 are as follows:

 

($ in millions)

   Net
Sales
     Cost of
Sales
     Gross
Margin
 

Three Months Ended September 30, 2010

   $ 2,281.4       $ 2,000.3       $ 281.1   

Increase (decrease)

        

Truck delivery volume

     1,323.4         1,122.3         201.1   

Average truck sales prices

     128.7            128.7   

Average per truck material, labor and other direct costs

        69.6         (69.6

Factory overhead, warehouse and other indirect costs

        83.4         (83.4

Aftermarket parts volume

     63.4         41.1         22.3   

Average aftermarket parts sales prices

     15.4            15.4   

Average aftermarket parts direct costs

        6.6         (6.6

Currency translation

     148.8         134.2         14.6   
  

 

 

    

 

 

    

 

 

 

Total increase

     1,679.7         1,457.2         222.5   
  

 

 

    

 

 

    

 

 

 

Three Months Ended September 30, 2011

   $ 3,961.1       $ 3,457.5       $ 503.6   
  

 

 

    

 

 

    

 

 

 

 

 

Truck delivery volume increased in the third quarter of 2011 from the third quarter of 2010 which resulted in $1.32 billion in higher sales and $1.12 billion in higher cost of sales. The higher truck delivery volume reflects improved market demand which also resulted in increased sales of $128.7 million from higher average truck sales prices.

 

 

Cost of sales increased $69.6 million due to a higher average cost per truck, primarily from the effect of higher content EPA 2010 emission vehicles in the U.S. and Canada.

 

 

Factory overhead, warehouse and other indirect costs increased $83.4 million primarily due to higher salaries and related costs ($51.5 million) and manufacturing supplies and maintenance ($24.7 million) to support higher production levels.

 

 

Higher market demand also increased aftermarket parts sales volume by $63.4 million and related cost of sales by $41.1 million.

 

 

Average aftermarket parts sales prices increased by $15.4 million reflecting improved price realization.

 

 

The currency translation effect on sales and cost of sales primarily reflects a stronger euro.

The major factors for the changes in net sales and revenues, cost of sales and revenues, and gross margin for the nine months ended September 30, 2011 are as follows:

 

($ in millions)

   Net
Sales
     Cost of
Sales
     Gross
Margin
 

Nine Months Ended September 30, 2010

   $ 6,450.6       $ 5,690.0       $ 760.6   

Increase (decrease)

        

Truck delivery volume

     3,095.5         2,615.4         480.1   

Average truck sales prices

     498.7            498.7   

Average per truck material, labor and other direct costs

        294.3         (294.3

Factory overhead, warehouse and other indirect costs

        222.2         (222.2

Aftermarket parts volume

     209.5         130.1         79.4   

Average aftermarket parts sales prices

     56.0            56.0   

Average aftermarket parts direct costs

        26.4         (26.4

Currency translation

     343.3         297.3         46.0   
  

 

 

    

 

 

    

 

 

 

Total increase

     4,203.0         3,585.7         617.3   
  

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30, 2011

   $ 10,653.6       $ 9,275.7       $ 1,377.9   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

 

Truck delivery volume increased in the first nine months of 2011 from the first nine months of 2010 which resulted in $3.10 billion in higher sales and $2.62 billion in higher cost of sales. The higher truck delivery volume reflects improved market demand which also resulted in increased sales of $498.7 million from higher average truck sales prices.

 

 

Cost of sales increased $294.3 million due to a higher average cost per truck, primarily from the effect of higher content EPA 2010 emission vehicles in the U.S. and Canada.

 

 

Factory overhead, warehouse and other indirect costs increased $222.2 million primarily due to higher salaries and related costs ($134.3 million) and manufacturing supplies and maintenance ($65.8 million) to support higher production levels.

 

 

Higher market demand also increased aftermarket parts sales volume by $209.5 million and related cost of sales by $130.1 million.

 

 

Average aftermarket parts sales prices increased by $56.0 million reflecting improved price realization.

 

 

The currency translation effect on sales and cost of sales primarily reflects a stronger euro.

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.

 

($ in millions)

   Three Months Ended
September 30
     Nine Months Ended
September 30
 
   2011     2010     % Change      2011     2010     % Change  

Net sales and revenues:

             

Trucks

   $ 3,305.7      $ 1,727.6        91       $ 8,735.4      $ 4,853.1        80   

Aftermarket parts

     655.4        553.8        18         1,918.2        1,597.5        20   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 3,961.1      $ 2,281.4        74       $ 10,653.6      $ 6,450.6        65   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross Margin:

             

Trucks

   $ 276.9      $ 93.0        198       $ 709.8      $ 220.3        222   

Aftermarket parts

     226.7        188.1        21         668.1        540.3        24   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 503.6      $ 281.1        79       $ 1,377.9      $ 760.6        81   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross Margin %:

             

Trucks

     8.4     5.4        8.1     4.5  

Aftermarket parts

     34.6     34.0        34.8     33.8  
  

 

 

   

 

 

      

 

 

   

 

 

   

Truck segment

     12.7     12.3        12.9     11.8  
  

 

 

   

 

 

      

 

 

   

 

 

   

Total Truck segment gross margins for the third quarter and first nine months of 2011 increased due to higher truck and parts gross margins. Truck gross margins in 2011 reflect the benefits of higher market demand and increased absorption of fixed costs resulting from higher truck production. Aftermarket parts gross margins in 2011 benefited from higher price realization from improved market demand.

Truck R&D expenditures in the third quarter of 2011 increased to $69.9 million from $59.8 million in 2010. Truck R&D expenditures in the first nine months of 2011 increased to $215.5 million from $172.9 million in 2010. The higher spending in 2011 reflects increased new product development activities, primarily new truck products for North America and Europe and higher foreign currencies, primarily the euro.

Truck SG&A was $105.6 million in the third quarter of 2011 compared to $88.7 million in 2010 and was $306.2 million in the first nine months of 2011 compared to $271.2 million in the first nine months of 2010. The higher spending is due to higher salaries and related expenses of $17.3 million (including $2.8 million from the effect of foreign currencies) for the third quarter and $36.6 million for the first nine months of 2011 (including $8.0 million of foreign exchange effect) to support higher levels of business activity. As a percentage of sales, Truck SG&A decreased to 2.7% and 2.9% in the third quarter and first nine months of

 

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Table of Contents

PACCAR Inc - Form 10-Q

 

2011 from 3.9% and 4.2% in the third quarter and first nine months of 2010, respectively, due to higher sales volumes.

Financial Services

 

($ in millions)

   Three Months Ended
September 30
     Nine Months Ended
September 30
 
   2011      2010      % Change      2011      2010      % Change  

New loan and lease volume:

                 

U.S. and Canada

   $ 638.0       $ 373.5         71       $ 1,673.3       $ 911.3         84   

Europe

     215.7         137.6         57         684.5         394.1         74   

Mexico and Australia

     151.9         101.4         50         443.7         315.8         41   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,005.6       $ 612.5         64       $ 2,801.5       $ 1,621.2         73   

New loan and lease volume by product:

                 

Loans and finance leases

   $ 783.5       $ 504.6         55       $ 2,060.6       $ 1,293.7         59   

Equipment on operating leases

     222.1         107.9         106         740.9         327.5         126   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,005.6       $ 612.5         64       $ 2,801.5       $ 1,621.2         73   

New loan and lease unit volume:

                 

Loans and finance leases

     8,754         6,805         29         23,996         17,495         37   

Equipment on operating leases

     2,291         1,245         84         7,452         3,759         98   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     11,045         8,050         37         31,448         21,254         48   

Average earning assets:

                 

U.S. and Canada

   $ 4,710.8       $ 4,223.8         12       $ 4,443.0       $ 4,365.2         2   

Europe

     2,268.8         1,810.7         25         2,184.4         1,936.2         13   

Mexico and Australia

     1,459.7         1,290.5         13         1,452.4         1,282.8         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,439.3       $ 7,325.0         15       $ 8,079.8       $ 7,584.2         7   

Average earning assets by product:

                 

Loans and finance leases

   $ 5,342.7       $ 4,972.0         7       $ 5,229.8       $ 5,149.1         2   

Dealer wholesale financing

     1,228.5         828.9         48         1,125.8         887.0         27   

Equipment on lease and other

     1,868.1         1,524.1         23         1,724.2         1,548.1         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,439.3       $ 7,325.0         15       $ 8,079.8       $ 7,584.2         7   

Revenue: