UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

 

Commission File No. 0-12553

 

PACCAR FINANCIAL CORP.

(Exact name of Registrant as specified in its charter)

 

Washington		91-6029712
(State of incorporation)		(I.R.S. Employer Identification No.)
777 106th Avenue N.E., Bellevue, Washington		98004
(Address of principal executive offices)		(Zip Code)
(425) 468-7100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class		Name of Each Exchange on Which Registered
Series J Medium-Term Notes
$50 Million Due May 12, 2006		New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)

 

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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes   ý  No   o.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes   o  No  ý.

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004:

 

None

 

The number of shares outstanding of the registrant’s classes of common stock as of February 28, 2005:

 

Common Stock, $100 par value — 145,000 shares

 

THE REGISTRANT IS A WHOLLY-OWNED INDIRECT SUBSIDIARY OF PACCAR INC AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I) (1) (a) AND (b) OF FORM 10-K AND IS, THEREFORE, FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 

 

PACCAR Financial Corp.

 

INDEX

 

PART I
	Item 1.		Business
	Item 2.		Properties
	Item 3.		Legal Proceedings
	Item 4.		Submission of Matters to a Vote of Security Holders
PART II
	Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
	Item 6.		Selected Financial Data
	Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A.		Quantitative and Qualitative Disclosures about Market Risk
	Item 8.		Financial Statements and Supplementary Data
	Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A.		Controls and Procedures
	Item 9B.		Other Information
PART III
	Item 10.		Directors and Executive Officers of the Registrant
	Item 11.		Executive Compensation
	Item 12.		Security Ownership of Certain Beneficial Owners and Management
	Item 13.		Certain Relationships and Related Transactions
	Item 14.		Principal Accountant Fees and Services
PART IV
	Item 15.		Exhibits, Financial Statement Schedules

 

1

 

PACCAR Financial Corp.

(Millions of Dollars)

PART I

 

ITEM 1.  BUSINESS

 

GENERAL

 

PACCAR Financial Corp.

 

PACCAR Financial Corp. (the “Company”), a Washington corporation, was organized in 1961 as a wholly-owned subsidiary of PACCAR Inc (“PACCAR”) to finance the sale of PACCAR products. In 2000, PACCAR transferred the stock of the Company to PACCAR Financial Services Corporation (“PFSC”), a wholly-owned subsidiary of PACCAR.

 

The Company principally provides financing and leasing of PACCAR-manufactured trucks and related equipment sold through PACCAR’s independent dealer network in the United States. The Company also finances dealer inventories of new and used transportation equipment. The Company’s PacLease division franchises PACCAR dealerships to engage in full-service and finance leasing. In selected markets, PacLease directly engages in full-service leasing with its customers through Company-owned stores and on a limited basis through PACCAR dealerships.

 

PACCAR

 

PACCAR has two principal industry segments, (1) design, manufacture and distribution of light-, medium- and heavy-duty trucks and related aftermarket distribution of parts and (2) finance and leasing services provided to customers and dealers. PACCAR distributes trucks and parts primarily through its independent dealer network. PACCAR’s finance and leasing activities are principally related to PACCAR products and associated equipment. Other manufactured products include industrial winches.

 

PACCAR and its subsidiaries design and manufacture heavy-duty diesel trucks which are marketed under the Peterbilt, Kenworth, DAF and Foden nameplates. These vehicles, which are built in four plants in the United States, three in Europe and one each in Australia, Canada and Mexico, are used worldwide for over-the-road and off-highway hauling of freight, petroleum, wood products, construction and other materials.

 

PACCAR, through its Peterbilt and Kenworth Divisions, competes in the North American medium-duty (Class 6/7) markets primarily with conventional models. These medium-duty trucks are assembled at PACCAR’s Ste. Therese, Quebec plant and at PACCAR’s facility in Mexicali, Mexico. PACCAR competes in the European light/medium (6 to 15 metric ton) commercial vehicle market with DAF cab-over-engine trucks assembled in the United Kingdom by Leyland, one of PACCAR’s wholly-owned subsidiaries. Commercial trucks and related replacement parts comprise the largest segment of PACCAR’s business, accounting for
94% of total 2004 net sales and revenues.

 

Substantially all trucks and related parts are sold to independently-owned dealers, except for a small number of factory branches. The Kenworth and Peterbilt nameplates are marketed and distributed by separate divisions in the U.S. and a foreign subsidiary in Canada. The Kenworth nameplate is also marketed and distributed by foreign subsidiaries in Mexico and Australia. The DAF and Foden nameplates are marketed and distributed by foreign subsidiaries headquartered in the Netherlands and United Kingdom, respectively. A U.S. division, PACCAR International, also markets all four nameplates outside each of Kenworth’s, Peterbilt’s, DAF’s and Foden’s primary markets. The decision to operate as a subsidiary or as a division is incidental to Truck Segment operations and reflects legal, tax and regulatory requirements in the various countries where PACCAR operates.

 

There were three other principal competitors in the U.S. and Canada Class 8 truck market in 2004. PACCAR’s share of that market was 24.6% of retail sales in 2004. PACCAR’s share of the Class 6 and 7 truck market in 2004 was 9.7%.  In Europe there were five other principal competitors in the commercial vehicle market in 2004, including parent companies to two competitors of PACCAR in the United States. PACCAR’s subsidiary, DAF, had a 12.8% share of the Western European heavy-duty market and an 8.9% share of the light/medium

 

2

 

market. These markets are highly competitive in price, quality and service, and PACCAR is not dependent on any single customer for its sales. There are no significant seasonal variations.

 

In addition to the Company, which provides financing, leasing and full-service truck leasing in the United States, PACCAR offers similar financing programs for PACCAR products through other wholly-owned finance companies in Mexico, Canada, Australia, the United Kingdom, the Netherlands, Belgium, Germany, France, Italy and Spain.  PACCAR also conducts full-service leasing operations through wholly-owned subsidiaries in Canada and Mexico.

 

PACCAR’s common stock, $1 par value, is traded on the NASDAQ National Market under the symbol “PCAR”. PACCAR and the Company are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, file reports and other information with the Securities and Exchange Commission (the “Commission”). All reports, proxy statements and other information filed by PACCAR and the Company with the Commission may be inspected and copied at the public reference facility maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or through the Commission’s internet site at www.sec.gov.

 

BUSINESS OF THE COMPANY

 

The Company operates primarily in one industry segment, truck and related equipment financing in the United States. The Company provides financing to customers and dealers for new Kenworth and Peterbilt trucks, used trucks, truck trailers and allied equipment. The Company’s PacLease division franchises PACCAR dealerships to engage in full-service and finance leasing. In selected markets, PacLease directly engages in full-service leasing with its customers through Company-owned stores and on a limited basis through PACCAR dealerships.

 

The Company currently conducts business with most PACCAR dealers in the United States. The volume of the Company’s business is significantly affected by PACCAR’s sales of trucks to its dealers and competition from other financing sources.

 

As of December 31, 2004, the Company employed 297 full-time employees, none of whom are represented by a collective bargaining agent. The Company considers relations with its employees to be good.

 

3

 

The Company’s Products

 

Retail Customers

 

The Company offers the following products to retail customers:

 

Retail Contracts and Loans The Company purchases contracts from dealers and receives assignments of the contracts and a first lien security interest in the vehicles financed (“Retail Contracts”). Certain Retail Contracts with third party leasing companies may also include an assignment to the Company of the related lease and rental payments due. Retail Contracts purchased by the Company have fixed or floating interest rates.

 

The Company also makes loans to the end users of the vehicles financed that are secured by a first lien security interest in the vehicles (“Loans”). Loans have fixed or floating interest rates.

 

Direct Financing Leases The Company offers direct financing lease contracts where it is treated as the owner of the equipment for tax purposes and generally retains the tax depreciation (“Direct Financing Leases”). The lessee is responsible for the payment of property and sales taxes, licenses, maintenance and other operating items. The lessee is obligated to maintain the equipment and to insure the equipment against casualty and liability losses.

 

Most of the Company’s Direct Financing Leases contain a Terminal Rental Adjustment Clause, which requires the lessee to guarantee to the Company a stated residual value upon disposition of the equipment at the end of the direct financing lease term.

 

Operating Leases The Company offers operating lease contracts (“Operating Leases”) where the Company owns the equipment. The lessee is responsible for the payment of property and sales taxes, licenses, maintenance and other operating items. The lessee is obligated to maintain the equipment and to insure the equipment against casualty and liability losses.

 

At the end of the operating lease term, the lessee has the option to return the equipment to the Company or purchase the equipment at its fair market value.

 

Insurance The Company sells physical damage insurance through PACCAR dealers who are licensed insurance agents as well as through licensed agents of the Company. The Company retains the premium revenues and loss exposure for the policies, which are issued through an unrelated regulated insurance carrier.

 

The Company offers physical damage and liability insurance on new and used trucks and trailers to its full-service lease customers. The Company retains premium and loss exposure for the policies that are issued through an unrelated regulated insurance carrier. To limit its exposure the Company has acquired insurance coverage for losses above specified levels from a third party insurance carrier.

 

Dealers/Franchisees

 

The Company offers the following products to PACCAR dealers and PacLease franchisees:

 

Master Notes Master note contracts (“Master Notes”) are an alternative form of retail financing offered to select dealers for new and used trucks. Retail installment contracts originated by the dealer for new or used trucks and meeting the Company’s requirement as to form, terms and creditworthiness for Retail Contracts are pledged to the Company as collateral for direct, full recourse loans by the Company to the dealer. Master Notes have fixed or floating interest rates.

 

Wholesale Contracts The Company provides wholesale financing for new and used truck and trailer inventories for dealers (“Wholesale Contracts”). Wholesale Contracts are secured by the inventories financed. The amount of

 

4

 

credit extended by the Company for each truck is generally limited to the invoice price of new equipment and to the wholesale value of used equipment. Interest under Wholesale Contracts is based upon floating interest rates.

 

Dealer Loans The Company makes secured loans to selected Peterbilt and Kenworth dealers (“Dealer Loans”). The purpose of these loans includes the financing of real estate, fixed assets, working capital and dealership acquisitions. Dealer Loans have fixed or floating interest rates.

 

Full-Service Leasing The Company also conducts full-service leasing operations under the PacLease trade name. Selected dealers are franchised to provide full-service leasing. The Company provides the franchisees with equipment financing and managerial support. The Company also operates full-service lease outlets in selected markets on its own behalf.

 

Insurance The Company charges a fee to provide insurance coverage, through an unrelated regulated insurance carrier, on new trucks, used trucks and trailer inventory to dealers having Wholesale Contracts with the Company.

 

CUSTOMER CONCENTRATION, PAST DUE ACCOUNTS AND LOSS EXPERIENCE

 

Customer Concentration

 

The Company’s customers are concentrated in the transportation industry throughout the United States. The Company does not have contractual arrangements for the periods ended December 31, 2004, 2003 and 2002, with any one party (customers, dealers and/or franchises) that account for 10% or more of total Interest and Other Revenue or Finance and Lease Receivables.

 

Past Due Receivables and Allowance for Losses

 

An account is considered past due by the Company if any portion of an installment is due and unpaid for more than 30 days. In periods of adverse economic conditions, past due levels, repossessions and credit losses generally increase.

 

The Company maintains an allowance for losses on receivables at a level that it considers to be adequate to cover management’s estimates of losses inherent in the portfolio.

 

For further discussion of the allowance for losses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

COMPETITION AND ECONOMIC FACTORS

 

The commercial truck and trailer finance and leasing business is highly competitive among banks, commercial finance companies, captive finance companies and leasing companies. Many of these institutions have substantially greater financial resources than the Company and may borrow funds at lower rates.

 

The dealers are the primary source of contracts acquired by the Company. However, dealers are not required to obtain financing from the Company and they have a variety of other sources that may be used for wholesale and customer financing of trucks. Retail purchasers also have a variety of sources available to finance truck purchases.

 

The ability of the Company to compete in its market is principally based on the rates, terms and conditions that the Company offers dealers and retail purchasers, as well as the specialized services it provides. Rates, terms and conditions are based on the Company’s desire to provide flexible financing and services to satisfy dealer and customer needs, the ability of the Company to borrow funds at competitive rates and the Company’s need to earn an adequate return on its invested capital. The Company’s business is also affected by changes in

 

5

 

market interest rates, which in turn are related to general economic conditions, demand for credit, inflation and governmental policies. Seasonality is not a significant factor in the Company’s business.

 

The volume of receivables available to be acquired by the Company from dealers is largely dependent upon the number of Kenworth and Peterbilt trucks sold in the United States. Sales of medium- and heavy-duty trucks depend on the capital equipment requirements of the transportation industry, which in turn are influenced by growth and cyclical variations in the economy. Medium- and heavy-duty truck sales are also sensitive to economic factors such as fuel costs, interest rates, insurance premiums, federal excise and highway use taxes, taxation on the acquisition and use of capital goods, as well as government regulations.

 

REGULATION AND SIMILAR MATTERS

 

In certain states, the Company is subject to retail installment sales or installment loan statutes and related regulations, the terms of which vary from state to state. These laws may require the Company to be licensed as a sales finance company and may regulate disclosure of finance charges and other terms of retail installment contracts. The Company is subject to substantive state franchise regulations and federal and state uniform franchise disclosure laws in connection with the offering of PacLease full-service truck leasing and rental franchises to PACCAR truck dealers. The Company also owns and operates several such truck leasing and rental business locations, which are subject to applicable state licensing laws. The Company is subject to state insurance regulations in connection with its licensed insurance salesmen. The Company is also subject to certain provisions of federal law relating to non-discrimination in the granting of credit.

 

SOURCES OF FUNDS

 

The Company’s primary sources of funds are commercial paper and publicly issued medium-term note borrowings in the capital markets, collections on loans and leases, retained earnings and to a lesser extent bank loans and capital contributions from PFSC. The Company’s profitable investment in additional receivables is dependent upon its ability to raise funds at competitive rates in the public and private debt markets. The receivables and leases that are financed are either fixed rate or floating rate with terms that range from 12 to 84 months.

 

To reduce the risk of changes in interest rates that could affect interest margins, the Company obtains funds with interest rate characteristics similar to the corresponding assets. Fixed rate assets are funded primarily with publicly offered medium-term notes and commercial paper. Interest rate swaps are combined with commercial paper or floating rate medium-term notes to convert floating rate debt to fixed rate debt. Floating rate assets are funded primarily with commercial paper with maturities of three months or less and floating rate medium-term notes. As a result, the Company’s interest margin on existing business does not change significantly from changes in interest rates.

 

The Company enters into interest rate swap contracts as a tool to achieve its matched funding objectives and to reduce total borrowing costs relative to its primary borrowing sources – commercial paper and medium-term notes. Fixed rate swaps, matched to floating rate borrowings, are used to lock in the funding cost of fixed rate assets. As of December 31, 2004, the total notional principal amount of interest rate swap contracts outstanding was $1,943.4, all of which result in a fixed rate payment obligation. The notional amount is used to measure the volume of these contracts and does not represent exposure to credit loss. In the event of default by a counterparty, the risk in these transactions is the cost of replacing the interest-rate contract at current market rates. Management believes the risk of incurring such losses is remote, and any losses would be immaterial. The permitted types of interest rate swap contracts, their transaction limits and related approval authorizations have been established by the Company’s senior management and Board of Directors. The interest rate contracts outstanding are regularly reported to, and reviewed by, the Company’s senior management.

 

6

 

The Company participates with PACCAR and certain other PACCAR affiliates in syndicated credit facilities of $1,500.0 at December 31, 2004.  Of this amount, $750.0 will expire in July 2005 and the remaining $750.0 will expire in July 2006. PACCAR intends to replace these credit facilities as they expire with facilities of similar amounts. Of the $1,500.0 in syndicated credit facilities, $1,350.0 is available for use by the Company and/or PACCAR and certain other PACCAR affiliates. The remaining $150.0 is only available for use by PACCAR’s Canadian subsidiaries.  These credit facilities are used to provide backup liquidity for the Company’s commercial paper and maturing medium-term notes. The Company is liable only for its own borrowings under these credit facilities. There were no borrowings under these credit facilities in the years ended December 31, 2004 or 2003.

 

As of December 31, 2004, the Company had $680.0 of medium-term notes outstanding under a $2,500.0 shelf registration statement, of which $580.0 are due within 12 months.  The Company also had $1,150.0 of medium-term notes outstanding under a $3,000.0 shelf registration statement, none of which are due within 12 months.  See “Note F – Borrowings” in the Notes to Financial Statements for further information on medium-term notes.

 

An indenture of the Company dated as of December 1, 1983, as amended by a first supplemental indenture dated June 19, 1989 (Exhibit 4.1), with respect to the Company’s medium-term notes which are publicly issued from time to time, contains restrictions limiting secured debt which may be incurred by the Company and any subsidiary.

 

7

 

RELATIONSHIP WITH PACCAR AND AFFILIATES

 

General

 

The operations of the Company are fundamentally affected by its relationship with PACCAR. Sales of PACCAR products are the Company’s principal source of financing business. The Company receives administrative support from and pays dividends to PFSC and may occasionally borrow funds from or lend money to PACCAR and/or its affiliates. The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR). The Company also leases office space from two facilities owned by PACCAR and two facilities leased by PACCAR. Since the directors of the Company are all executives of PACCAR or its affiliated companies and PACCAR is the sole owner of PFSC’s outstanding voting common stock, PACCAR can determine the course of the Company’s business.

 

The Company periodically loans funds to certain foreign finance and leasing affiliates of PACCAR. These foreign affiliates have Support Agreements with PACCAR, similar to the Company’s Support Agreement described below. The foreign affiliates operate in the United Kingdom, the Netherlands, Mexico, Canada and Australia, and any resulting currency exposure is fully hedged. The foreign affiliates primarily provide financing and leasing of PACCAR-manufactured trucks and related equipment  sold through PACCAR’s independent dealer networks in Europe, Mexico, Canada and Australia. The Company will not make loans to the foreign affiliates in excess of the equivalent of $375.0 United States dollars, unless the amount in excess of such limits is guaranteed by PACCAR. The Company periodically reviews the funding alternatives for these affiliates, and these limits may be revised in the future.

 

PFSC charges the Company for certain administrative services it provides and certain services the Company receives indirectly from PACCAR. As of December 31, 2004, PFSC employed 167 full-time employees, none of whom are represented by a collective bargaining agent. The costs are charged to the Company based upon the Company’s specific use of the services at PFSC’s or PACCAR’s cost. Management considers these charges reasonable and similar to the costs that would be incurred if the Company were on a stand-alone basis. See “Note D – Transactions with PACCAR and Affiliates” in the Notes to Financial Statements.

 

Support Agreement

 

The Company and PACCAR are parties to a Support Agreement that obligates PACCAR to provide, when required, financial assistance to the Company to assure that the Company maintains a ratio of net earnings available for fixed charges to fixed charges (as defined) of at least 1.25 to 1 for any fiscal year. The Support Agreement also requires PACCAR to own, directly or indirectly, all outstanding voting stock of the Company. The required ratio was met for the years ended December 31, 2004, 2003 and 2002 without assistance. See “Note D – Transactions with PACCAR and Affiliates” in the Notes to Financial Statements.

 

The Company and PACCAR may amend or terminate any or all of the provisions of the Support Agreement upon 30 days notice, with copies of the notice being sent to all nationally recognized statistical rating organizations (“NRSROs”) which have issued ratings with respect to debt of the Company (“Rated Debt”). Such amendment or termination will be effective only if (i) two NRSROs confirm in writing that their ratings with respect to any Rated Debt would remain the same after such amendment or termination, or (ii) the notice of amendment or termination provides that the Support Agreement will continue in effect with respect to Rated Debt outstanding on the effective date of such amendment or termination unless such debt has been paid or defeased pursuant to the indenture or other agreement applicable to such debt, or (iii) the holders of at least two-thirds of the aggregate principal amount of all outstanding Rated Debt with original maturity in excess of 270 days consent in writing to such amendment or termination, provided that the holders of Rated Debt having an original maturity of 270 days or less shall continue to have the benefits of the Support Agreement until the maturity of such debt.

 

The Support Agreement expressly states that PACCAR’s commitments to the Company thereunder do not constitute a PACCAR guarantee of payment of any indebtedness or liability of the Company to others and do not

 

8

 

create rights against PACCAR in favor of persons other than the Company. There are no guarantees, direct or indirect, by PACCAR of payment of any indebtedness of the Company.

 

OTHER DISCLOSURES

 

The Company’s filings on Form 10-K, 10-Q and 8-K and any amendments to those reports can be reached through a link on the Company’s website, www.paccarfinancial.com, or PACCAR Inc’s website, www.paccar.com, free of charge as soon as reasonably practicable after the report is electronically filed with, or furnished to, the Securities and Exchange Commission.

 

ITEM 2.  PROPERTIES

 

The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR) at 777 106^th Avenue N.E., Bellevue, Washington 98004. The Company owns two full-service leasing facilities in Texas.

 

Other offices and leasing facilities of the Company are located in leased premises including two facilities owned by PACCAR and two facilities leased by PACCAR. The Company considers all its properties to be suitable for their intended purpose. Annual lease rentals for these premises in the aggregate are not material in relation to expenses as a whole.

 

ITEM 3.  LEGAL PROCEEDINGS

 

The Company is a party to various routine legal proceedings incidental to its business involving the collection of accounts and other matters. The Company does not consider such matters to be material with respect to the business or financial condition of the Company as a whole.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not applicable.

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

All outstanding common stock is owned by PFSC; therefore, there is no trading market in the Company’s common stock.

 

A cash dividend in the amount of $69.0 was declared and paid to PFSC in the first quarter of 2004 and a cash dividend in the amount of $11.0 was declared and paid in the second quarter of 2002. There was no cash dividend declared or paid during 2003.

 

9

 

ITEM 6.  SELECTED FINANCIAL DATA

 

The following table summarizes selected financial data for the Company. The information with respect to each of the five years in the period ended December 31, 2004 has been derived from the Company’s audited financial statements.

 

Balance Sheet Data

 

		As of December 31
		2004			2003			2002			2001			2000
Total Assets		$	3,970.5		$	3,473.3		$	3,511.5		$	3,562.6		$	4,119.4
Total Liabilities		3,295.4			2,834.8			2,955.6			3,039.6			3,597.2
Total Stockholder’s Equity		675.1			638.5			555.9			523.0			522.2

 

Income Statement Data

 

		Year ended December 31
		2004			2003			2002			2001			2000
Interest and other revenue		$	320.9		$	285.0		$	292.6		$	345.9		$	376.3
Total expenses before assumption of interest expense by PACCAR		209.5			206.9			247.6			338.0			322.3
Assumption of interest expense by PACCAR (1)		—			—			—			(17.0		)	—
Total expenses		209.5			206.9			247.6			321.0			322.3
Income before income taxes		111.4			78.1			45.0			24.9			54.0
Income taxes		42.2			30.8			17.7			9.7			21.0
Income before cumulative effect of accounting change		69.2			47.3			27.3			15.2			33.0
Cumulative effect of accounting change (net of tax)		—			—			—			.4			—
Net income		$	69.2		$	47.3		$	27.3		$	15.6		$	33.0
Ratio of Earnings to Fixed Charges Pursuant to SEC reporting Requirements (2)		2.61		x	1.98		x	1.39		x	1.16		x	1.26		x
Ratio of Earnings to Fixed Charges Pursuant to the Support Agreement		3.26		x	2.33		x	1.53		x	1.25		x	1.31		x

 

(1)   In order to maintain the ratio of earnings to fixed charges in 2001, PACCAR provided earnings support of $17.0 through the assumption of the Company’s interest expense. No earnings support was provided for the years ending December 31, 2004, 2003, 2002, or 2000.

 

(2)   For the purposes of this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense plus a portion of rent expense (which is deemed representative of an interest factor). The method of computing the ratio of earnings to fixed charges shown above complies with SEC reporting requirements (see Exhibit 12.1) but differs from the method called for in the Support Agreement between the Company and PACCAR (see Exhibit 12.2).

 

10

 

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Millions of Dollars)

 

Results of Operations

 

		Year ended December 31
		2004			2003			2002
Average earning assets		$	3,359.1		$	3,140.5		$	3,214.1
Interest and other revenue		320.9			285.0			292.6
Income before taxes		111.4			78.1			45.0
Net income		69.2			47.3			27.3
Allowance for Losses:
Balance at beginning of year		$	67.4		$	66.9		$	66.2
Provision for losses		4.3			19.6			42.2
Credit losses net of recoveries		(4.6		)	(19.1		)	(41.5		)
Balance at end of year		$	67.1		$	67.4		$	66.9
Ratios:
Credit losses net of recoveries ($4.6 in 2004) to average net receivables ($3,109.2 in 2004)		.15		%	.64		%	1.32		%
Allowance for losses ($67.1 in 2004) to year-end net receivables ($3,387.3 in 2004)		1.98		%	2.27		%	2.13		%
Year-end finance and lease receivables and leases past due, over 60 days, ($16.6 in 2004) to year-end retail contracts and lease receivables ($3,192.7 in 2004)		0.52		%	1.15		%	1.91		%

 

2004 Compared to 2003:

 

The Company’s net income increased 46% to $69.2 in 2004 from $47.3 in 2003. The profit improvement resulted from both a higher finance margin (revenues minus borrowing, lease and insurance expenses) and a lower provision for losses. Interest and other revenue increased 13% to $320.9 from $285.0 in 2003 primarily due to higher earning assets, offset by lower interest rates. Average earning assets increased due to higher new loan and lease volume from higher truck production. In addition, increased revenue from used equipment dispositions and insurance premiums contributed to growth in interest and other revenues.  Interest and other borrowing expenses decreased 14% to $71.6 in 2004 due to lower interest rates offset somewhat by higher average debt balances. Depreciation and other operating lease and rental expenses increased 52% to $71.6 in 2004 from $47.2 in 2003 primarily due to continued growth in operating lease assets. Lower credit losses from a significant reduction in repossessed units, reflecting improvements in the portfolio, contributed to the provision for losses on receivables decreasing 78% to $4.3 in 2004 compared to $19.6 in 2003.   The Company’s 2004 effective income tax rate decreased to 37.9% from 39.4% in 2003 due to a lower effective state income tax rate.

 

2003 Compared to 2002:

 

The Company’s net income increased 73% to $47.3 in 2003 from $27.3 in 2002. A lower provision for losses and a higher finance margin contributed to the profit improvement. Interest and other revenue decreased 3% to $285.0 from $292.6 in 2002 mainly due to lower earning assets and lower interest rates. Although 2003 new truck

 

11

 

volume was consistent with 2002 levels, average earning assets decreased slightly due to runoff of the portfolio. Interest and other borrowing expenses decreased 30% to $83.2 in 2003 due to lower average debt balances and interest rates. Depreciation and other operating lease and rental expenses increased 48% to $47.2 in 2003 from $31.9 in 2003 primarily due to higher operating lease assets. Lower levels of past due accounts and repossessions contributed to the provision for losses on receivables decreasing 54% to $19.6 in 2003 compared to $42.2 in 2002.

 

Company Outlook

 

The future profitability of the Company is primarily dependent on the generation of new business and on the level of credit losses experienced.  Asset growth in 2005 is contingent upon continued improvement in the general economy and the resulting increase in truck sales and the impact of increased competition.  Some economic weakness, as well as continuing high fuel and insurance costs and higher interest rates, could exert pressure on the profit margins of truck operators and cause a return to a higher level of past-due accounts and repossessions, which could result in higher credit losses.

 

Funding and Liquidity

 

The Company manages its capital structure consistent with industry standards. Since 1983, the Company has registered debt securities under the Securities Act of 1933 for offering to the public. In December 2003, the Company filed a shelf registration statement under which $3,000.0 of medium-term notes could be issued as needed.  As of December 31, 2004, $1,850.0 of such securities were available for issuance.

 

The Company believes that it has sufficient financial capabilities to continue funding receivables and servicing debt through internally generated funds, access to public and private debt markets, lines of credit and other financial resources.  The increase in borrowings to $2,880.8 at December 31, 2004 from $2,494.5 at December 31, 2003 was mainly due to originations of finance and other receivables and equipment on operating lease additions exceeding collections and cash provided by operations.

 

The Company’s investment grade credit ratings continue to provide access to capital markets at competitive interest rates. The Company’s debt ratings at December 31, 2004 are as follows:

 

 

12

 

The following summarizes the Company’s contractual cash commitments at December 31, 2004:

 

		Maturity
		Less than One Year			More than One Year			Total
Borrowings		$	1,630.8		$	1,250.0		$	2,880.8
Operating Leases		.7			2.1			2.8
Total		$	1,631.5		$	1,252.1		$	2,883.6

 

As described in Note F to the financial statements, borrowings consist of term debt and commercial paper. The Company has operating leases for office space, truck leasing facilities and office equipment. In addition, the Company had loan and lease commitments of $289.6 expiring within one year. These commitments represent commitments to fund new retail loan and lease contracts.

 

Critical Accounting Policies:

 

In the preparation of the Company’s financial statements, in accordance with accounting principles generally accepted in the United States, management uses estimates and makes judgments and assumptions that affect asset and liability values and the amounts reported as income and expense during the periods presented. The following are accounting policies which, in the opinion of management, are particularly sensitive and which, if actual results are different, may have a material impact on the financial statements.

 

Equipment on Operating Leases

 

In determining the estimated residual values for equipment on operating leases, (and certain direct financing leases), the Company considers the length of the lease term, the truck model and anticipated market demand and the expected usage of the truck. If the sales price of the trucks at the end of the lease term differs significantly from the Company’s estimate, a gain or loss will result. The Company believes its residual setting policies are appropriate; however, future market conditions, changes in government regulations and other factors outside the Company’s control can impact the ultimate sales price of trucks returned under these contracts. Residual values are reviewed regularly and adjusted downward if market conditions warrant. See “Note A – Significant Accounting Policies” in the Notes to Financial Statements.

 

Allowance for Credit Losses

 

The establishment of the allowance for credit losses on receivables is dependent on estimates, including assumptions regarding collectibility of past due accounts, repossession rates and the recovery rate on the underlying collateral. The Company believes its reserve-setting policies adequately take into account the known risks inherent in the portfolio. If there are significant variations in the actual results from those estimates, the provision for credit losses and operating earnings may be adversely impacted. See “Note A – Significant Accounting Policies” in the Notes to Financial Statements.

 

Forward Looking Statements

 

Certain information presented in this Form 10-K 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: national and local economic, political and industry conditions; changes in the levels of new business volume due to unit fluctuations in new PACCAR truck sales; changes in competitive factors; changes affecting the profitability of truck owners and operators; price changes impacting equipment costs and residual values; changes in costs and availability of external funding sources; and legislation and governmental regulation.

 

13

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk and Derivative Financial Instruments

In the normal course of business, the Company issues various financial instruments that expose the Company to market risk associated with market interest rates. Policies and procedures have been established by the Company to manage these market risks through the use of various derivative financial instruments. The Company does not engage in derivatives trading, market-making or other speculative activities.

 

The following is a sensitivity analysis for the Company’s derivatives that have interest rate risk. These instruments are held for other than trading purposes. The gains or losses in the following table represent the changes in the financial instruments’ fair values that would result from a 100 basis point increase of the current market rate at December 31, 2004 and 2003.

 

 

Fair Value Gains (Losses)

(Millions of Dollars)

 

		Year ended December 31
		2004			2003
Assets
Retail notes, contracts and wholesale financing, net of unearned interest, less allowance for losses		$	(30.7	)	$	(26.4	)
Liabilities
Debt		.4			.7
Interest rate swaps related to debt		27.5			20.5
Total		$	(2.8	)	$	(5.2	)

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements of the Company and related schedules described under Item 15, “Exhibits, Financial Statement Schedules” are included following this page.

 

14

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors

PACCAR Financial Services Corporation and PACCAR Financial Corp.

 

We have audited the accompanying balance sheets of PACCAR Financial Corp. (a wholly-owned subsidiary of PACCAR Financial Services Corporation) as of December 31, 2004 and 2003, the related statements of income, cash flows, stockholder’s equity and comprehensive income for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board  (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PACCAR Financial Corp. at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.

 

	/s/ Ernst & Young LLP
Seattle, Washington
February 23, 2005

 

15

 

PACCAR Financial Corp.

 

STATEMENTS OF INCOME

(Millions of Dollars)

 

		Year ended December 31
		2004			2003			2002
Interest and fee income		$	201.4		$	202.9		$	230.9
Operating lease and rental income		87.3			60.0			41.5
Insurance premiums and other revenue		32.2			22.1			20.2
TOTAL INTEREST AND OTHER REVENUE		320.9			285.0			292.6
Interest and other borrowing expenses		71.6			83.2			118.9
Depreciation and other operating lease and rental expenses		71.6			47.2			31.9
Insurance claims and other expenses		17.1			12.5			11.7
Selling general and administrative expenses		44.9			44.4			42.9
Provision for losses on receivables		4.3			19.6			42.2
TOTAL EXPENSES		209.5			206.9			247.6
INCOME BEFORE INCOME TAXES		111.4			78.1			45.0
Income taxes		42.2			30.8			17.7
NET INCOME		$	69.2		$	47.3		$	27.3

 

Earnings per share and dividends per share are not reported because the Company is a wholly-owned subsidiary of PACCAR Financial Services Corporation.

 

16

 

PACCAR Financial Corp.

 

BALANCE SHEETS

(Millions of Dollars)

 

		As of December 31
		2004					2003
ASSETS
Cash		$			18.2		$	5.5
Finance and other receivables, net of allowance for losses (2004 - $67.1 and 2003 - $67.4)		3,426.3					2,976.7
Loans to PACCAR Inc and affiliates		129.1					265.0
Equipment on operating leases, net of depreciation (2004 -$73.4 and 2003 - $44.3)		357.8					198.7
Other assets		39.1					27.4
TOTAL ASSETS		$		3,970.5			$	3,473.3
LIABILITIES
Accounts payable, accrued expenses and other		$		133.1			$	131.8
Commercial paper		1,050.8					1,014.5
Medium-term notes		1,830.0					1,480.0
Income taxes – current and deferred		281.5					208.5
TOTAL LIABILITIES		$	3,295.4				$	2,834.8
STOCKHOLDER’S EQUITY
Preferred stock, par value $100 per share, 6% noncumulative and nonvoting, 450,000 shares authorized, 310,000 shares issued and outstanding		$	31.0				$	31.0
Common stock, par value $100 per share, 200,000 shares authorized, 145,000 shares issued and outstanding		14.5					14.5
Additional paid-in capital		150.7					131.9
Retained earnings		473.5					473.3
Accumulated other comprehensive income (loss)		5.4					(12.2		)
TOTAL STOCKHOLDER’S EQUITY		675.1					638.5
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY		$	3,970.5				$	3,473.3

 

See Notes to Financial Statements

 

17

 

PACCAR Financial Corp.

 

STATEMENTS OF CASH FLOWS

(Millions of Dollars)

 

		Year ended December 31
		2004				2003				2002
OPERATING ACTIVITIES
Net income		$		69.2		$	47.3			$	27.3
Items included in net income not affecting cash:
Depreciation and amortization		52.2				34.9				21.9
Provision for losses on receivables		4.3				19.6				42.2
Provision for deferred taxes		68.1				15.1				25.1
(Decrease) increase in payables and other		(22.6			)	(9.8			)	3.2
NET CASH PROVIDED BY OPERATING ACTIVITIES		171.2				107.1				119.7
INVESTING ACTIVITIES
Finance and other receivables originated		(1,664.8			)	(1,186.3			)	(1,185.3			)
Collections on finance and other receivables		1,298.9				1,358.6				1,422.1
Net increase in wholesale receivables		(61.3			)	(3.8			)	(121.4			)
Net decrease (increase) in loans to PACCAR Inc and affiliates		135.9				(73.0			)	(28.8			)
Acquisition of equipment on operating leases, primarily from PACCAR Inc		(218.3			)	(116.1			)	(95.5			)
Proceeds from disposal of equipment		14.8				6.6				8.4
Acquisition of equipment		(.7			)	(.2			)	(.7			)
NET CASH USED IN INVESTING ACTIVITIES		(495.5			)	(14.2			)	(1.2			)
FINANCING ACTIVITIES
Net increase (decrease) in commercial paper and other short-term borrowings		36.3				(106.1			)	(153.9			)
Proceeds from medium-term notes		1,150.0				630.0				845.0
Payments of medium-term notes and other borrowings		(800.0			)	(634.0			)	(826.6			)
Dividends paid		(69.0			)	—				(11.0			)
Payment of advances (to) from PACCAR Inc		.9				(3.1			)	2.9
Capital contributions		18.8				15.9				16.5
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		337.0				(97.3			)	(127.1			)
NET INCREASE (DECREASE) IN CASH		12.7				(4.4			)	(8.6			)
CASH AT BEGINNING OF YEAR		5.5				9.9				18.5
CASH AT END OF YEAR		$	18.2			$		5.5		$		9.9

 

See Notes to Financial Statements

 

18

 

PACCAR Financial Corp.

 

STATEMENTS OF STOCKHOLDER’S EQUITY

(Millions of Dollars)

 

		Year ended December 31
		2004			2003			2002
PREFERRED STOCK, $100 par value
Balance at beginning of year		$	31.0		$	31.0		$	31.0
Balance at end of year		31.0			31.0			31.0
COMMON STOCK, $100 par value
Balance at beginning of year		14.5			14.5			14.5
Balance at end of year		14.5			14.5			14.5
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year		131.9			116.0			99.5
Investments from PACCAR Financial Services Corporation		18.8			15.9			16.5
Balance at end of year		150.7			131.9			116.0
RETAINED EARNINGS
Balance at beginning of year		473.3			426.0			409.7
Net income		69.2			47.3			27.3
Cash dividends paid		(69.0		)	—			(11.0		)
Balance at end of year		473.5			473.3			426.0
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated unrealized net gain (loss) on derivative contracts:
Balance at beginning of year		(12.2		)	(31.6		)	(31.7		)
Net unrealized gains		17.6			19.4			.1
Balance at end of year		5.4			(12.2		)	(31.6		)
TOTAL STOCKHOLDER’S EQUITY		$	675.1		$	638.5		$	555.9

 

See Notes to Financial Statements

 

19

 

PACCAR Financial Corp.

 

STATEMENTS OF COMPREHENSIVE INCOME

(Millions of Dollars)

 

		Year ended December 31
		2004			2003			2002
Net income		$	69.2		$	47.3		$	27.3
Other comprehensive income, net of tax
Unrealized net gain on derivative contracts		17.6			19.4			.1
Net other comprehensive income		17.6			19.4			.1
TOTAL COMPREHENSIVE INCOME		$	86.8		$	66.7		$	27.4

 

See Notes to Financial Statements

 

20

 

PACCAR Financial Corp.

 

NOTES TO FINANCIAL STATEMENTS

(Millions of Dollars)

 

NOTE A – SIGNIFICANT ACCOUNTING POLICIES

 

Description of Operations: PACCAR Financial Corp. (the “Company”), is a wholly-owned subsidiary of PACCAR Financial Services Corporation (“PFSC”). PFSC is a wholly-owned subsidiary of PACCAR Inc. (“PACCAR”).  The Company primarily provides financing of PACCAR-manufactured trucks and related equipment sold by authorized dealers. The Company also finances dealer inventories of transportation equipment and franchises PACCAR dealerships to engage in full-service and finance leasing. The operations of the Company are fundamentally affected by its relationship with PACCAR.

 

Due to the nature of the Company’s business, customers are concentrated in the transportation industry throughout the United States. Generally, all receivables are collateralized by the equipment being financed. The risk of credit losses related to this concentration has been considered in establishing the allowance for losses.

 

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Allowance for Losses: The provision for losses on net finance and other receivables is charged to income in an amount sufficient to maintain the allowance for losses at a level considered adequate to cover estimated credit losses, net of recoveries inherent in the portfolio. Receivables are charged to this allowance when, in the judgment of management, they are deemed uncollectible (generally upon repossession of the collateral). With respect to certain retail contracts acquired from dealers, the dealer retains liability, up to specified limits, for the credit loss. The amount and collectibility of dealer recourse provisions have been considered in establishing the allowance for losses on finance and other receivables.

 

Revenue Recognition: Interest income from finance receivables and other receivables is recognized using the interest method. Certain loan origination costs are deferred and amortized to interest income. For operating leases, rental revenue is recognized on a straight-line basis over the lease term.

 

Recognition of interest income and rental revenue are suspended when management determines that collection is not probable (generally after 90 days past due). Recognition is resumed if the receivable becomes contractually current and the collection of amounts is again considered probable.

 

Equipment on Operating Leases: Equipment on operating leases is recorded at cost and is depreciated on the straight-line basis to its estimated residual value. Residual values are reviewed regularly and adjusted downward if market conditions warrant.

 

Income Taxes: The Company is included in the consolidated federal income tax return of PACCAR. Income taxes for the Company are determined on a separate return basis, and any related tax liability is paid by the Company to PACCAR and any related tax benefit is paid by PACCAR to the Company.

 

Reclassifications: Certain prior-year amounts have been reclassified to conform to the 2004 presentation.

 

21

 

NOTE B – FINANCE AND OTHER RECEIVABLES

 

Terms for finance and other receivables at origination range from 12 to 84 months. Repayment experience indicates some receivables will be paid prior to contract maturity, while some others will be extended or renewed. Accordingly, the maturities of receivables presented here should not be regarded as a forecast of future collections.

 

The Company’s finance and other receivables are as follows:

 

		Year ended December 31
		2004				2003
Retail contracts and loans due within:
One year		$		830.1		$	781.8
Two years		609.0				543.3
Three years		467.7				368.4
Four years		269.8				222.5
Five years		119.9				90.7
Six years and beyond		17.8				12.2
		2,314.3				2,018.9
Wholesale financing		373.7				312.3
Direct financing leases (including unguaranteed residual values of $41.4 in 2004 and $47.5 in 2003)		891.4				787.8
Interest and other receivables		39.4				33.5
		3,618.8				3,152.5
Less allowance for losses		(67.1			)	(67.4			)
		3,551.7				3,085.1
Unearned interest:
Retail contracts and loans		(23.7			)	(21.2			)
Direct financing leases		(101.7			)	(87.2			)
		(125.4			)	(108.4			)
Finance and other receivables		$	3,426.3			$		2,976.7

 

Future minimum lease payments on direct financing leases totaled $850.0 at December 31, 2004 and are due as follows: $244.3 in 2005; $192.9 in 2006; $155.2 in 2007; $115.6 in 2008; $82.9 in 2009; and $59.1 in 2010 and beyond.

 

22