ITEM 1. BUSINESS
GENERAL
PACCAR Financial Corp.
PACCAR Financial Corp. (the "Company"), a wholly owned subsidiary of PACCAR Inc ("PACCAR"), is a Washington corporation organized in 1961 to finance the sale of PACCAR products. The Company provides financing and leasing of trucks and related equipment manufactured primarily by PACCAR and sold through PACCAR's independent dealers in the United States. The Company also finances dealer inventories of transportation equipment.
PACCAR
PACCAR is a multi-national company which designs and manufactures various types of industrial equipment that are marketed primarily through its dealers. Heavy-duty diesel trucks (primarily Class 8 trucks with gross vehicle weight in excess of 33,000 pounds) and related service parts are the principal products of PACCAR and accounted for 90% of PACCAR's total revenues in 1994. PACCAR markets these trucks under the "Kenworth," "Peterbilt" and "Foden" nameplates. Domestic Kenworth and Peterbilt trucks are manufactured in five plants in the United States. Outside of the U.S., PACCAR manufactures and sells trucks through wholly owned subsidiary companies in Canada and Australia and through an affiliate in Mexico. Foden trucks are manufactured and sold in the United Kingdom through a wholly owned U.S. subsidiary. PACCAR also competes in the North American Class 6/7 markets with cab-over-engine and conventional models. These medium-duty trucks are assembled at several PACCAR factories in North America. Other PACCAR products include industrial winches and oilfield equipment. PACCAR competes in the truck parts aftermarket primarily through its dealer network and also sells general automotive parts and accessories through retail outlets.
In the United States, Kenworth and Peterbilt trucks are sold to an independent dealer network, consisting of 290 outlets, for resale to retail purchasers. Trucks manufactured in the United States for export are marketed by a division of PACCAR through an international dealer network.
In addition to the Company, which provides financing and leasing in the United States, PACCAR offers similar financing programs for PACCAR products in Canada, Australia and the United Kingdom through four other wholly owned finance companies and through a wholly owned subsidiary of its Mexican affiliate.
As of December 31, 1994, PACCAR and its subsidiaries had total assets of $3.9 billion and stockholders' equity of $1.2 billion. For the year ended December 31, 1994, PACCAR's consolidated revenues and net income were $4.5 billion and $204.5 million respectively.
There were six principal competitors, including PACCAR, in the United States Class 8 truck market in 1994. Based on 1994 industry registration statistics, PACCAR's Kenworth and Peterbilt combined truck sales accounted for approximately 22% of domestic Class 8 new truck registrations. The domestic heavy-duty truck market is highly competitive in price, quality and service. PACCAR is not dependent on any single customer for a significant amount of its sales.
PACCAR's common stock, $12 par value, is traded in the over-the- counter market under the NASDAQ symbol "PCAR." PACCAR is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). All reports, proxy statements and other information filed by PACCAR with the Commission may be inspected and copied at the Public Reference Section of the Commission at 450 Fifth Street NW, Washington, D.C. 20549.
BUSINESS OF THE COMPANY
The Company operates primarily in one industry segment, truck and related equipment financing. The Company provides financing for dealers' sales of Kenworth and Peterbilt trucks in the United States. In addition, the Company provides financing for dealers' purchases of new Class 6, 7 and 8 trucks and used trucks, regardless of make or model. Financing is also provided for truck trailers and allied equipment such as mixer and dump bodies attached to the truck.
The Company currently conducts business with most PACCAR dealers. The volume of the Company's business is significantly affected by PACCAR's sales and competition from other financing sources.
As of December 31, 1994, the Company employed 240 full-time employees, none of whom are represented by a collective bargaining agent. The Company considers relations with its employees to be good.
The Company's Products
Retail Receivables
Retail Contracts. The Company purchases contracts ("Retail Contracts") from dealers and receives assignments of the contracts and a first lien security interest in the vehicles financed. Collateral for vehicles sold to leasing companies may also include an assignment of leases and rentals due thereunder. Retail Contracts purchased by the Company have fixed or floating interest rates.
Direct Loan. The Company also makes loans ("Direct Loans") to the end users of the vehicles financed that are secured by a first lien security interest in the vehicles. Direct Loans have fixed or floating interest rates.
Master Note
These contracts are an alternative form of retail financing offered to selected dealers for new and used trucks. Retail installment contracts originated by the dealer for new or used trucks and meeting the Company's requirements 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 Note").
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 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 rates.
Leases
The Company offers lease contracts ("Leases") where it is treated as the owner of the equipment for tax purposes and generally retains the tax depreciation. 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 losses.
Most of the Company's 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 lease term.
Insurance
In 1993, the Company initiated a property damage insurance program offered through PACCAR dealers who are licensed insurance agents. The Company retains the premium revenue and loss exposure for the policies which are issued by an unrelated insurance carrier. In 1994, these activities were immaterial to the Company's results.
CUSTOMER CONCENTRATION, PAST DUE ACCOUNTS AND LOSS EXPERIENCE
Customer Concentration
At December 31, 1994, the largest single customer for Retail Contracts, Direct Loans or Leases represented 1.7% of the Company's net receivables, and the five largest such accounts amounted to 5.7% of net receivables.
At December 31, 1994, the largest Master Note dealer borrowing amounted to 7.9% of the Company's net receivables and the five largest dealer notes under Master Note receivables amounted to 12.5% of net receivables. Master Note receivables are secured by numerous retail installment contracts which offset the amount of dealer concentration.
With respect to wholesale financing, at December 31, 1994, the customer concentration was immaterial.
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 losses generally increase.
The Company maintains an allowance for losses on receivables at a level which it considers to be adequate based on management's estimates of future losses. The following table summarizes the activity in the Company's allowance for losses on receivables and presents related ratios:
Allowance for Losses (Thousands of Dollars)
For discussion of the allowance for losses and past due receivables, see "Management's Discussion and Analysis of Financial Condition and Results of Operations, 1992-1994."
COMPETITION AND ECONOMIC FACTORS
The truck financing 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 occasionally 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 which 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 and terms which the Company offers dealers and retail purchasers, as well as the specialized services it provides. Rates and terms are based on the Company's desire to provide flexible financing which meets dealer and customer financing 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 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. Domestic sales of heavy-duty trucks depend on the capital equipment requirements of the transportation industry, which in turn is influenced by economic growth and cyclical variations in the economy. Heavy-duty truck sales are also sensitive to economic factors such as fuel costs, interest rates, federal excise and highway use taxes and taxation of the acquisition and use of capital goods.
REGULATIONS 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 also subject to some of the provisions of federal law relating to discrimination in the granting of credit.
SOURCES OF FUNDS
The operations of the Company are financed by borrowings, retained earnings, and equity investments by PACCAR. The Company's profitable acquisition of 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 a term of generally five years or less.
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 fixed rate medium-term notes. Floating rate assets are funded primarily with commercial paper with maturities of thee months or less. As a result, the Company's interest margin does not change significantly as interest rates change.
The Company enters into over-the-counter interest rate 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 fixed rate medium-term notes. Fixed interest rate swaps, matched to floating rate borrowings, are used to lock in the funding cost of fixed rate assets. Floating interest rate swaps, matched to either fixed or floating rate debt, are used to convert to a floating rate index more appropriate to the Company's floating rate assets, often at a funding cost lower than the cost of commercial paper. Interest rate caps are occasionally purchased to hedge the floating rate funding cost of floating rate assets that have a maximum yield. As of December 31, 1994, the total notional principal amount of interest rate contracts outstanding were as follows: $407.2 million of interest rate swaps resulting in a fixed rate payment obligation; $245.0 million of interest rate swaps resulting in a floating rate payment obligation; and $76.2 million of interest rate caps. The notional amount is used to measure the volume of these contracts and does not represent exposure to credit loss. The Company's risk in these transactions is the cost of replacing, at current market rates, these contracts in the event of default by the counterparty. Management believes the risk of incurring such losses is remote, and any losses would be immaterial. The permitted types of derivatives, their transaction limits and related approval authorizations have been established by the Company's senior management and Board of Directors. The derivative contracts outstanding are regularly reported to and reviewed by the Company's senior management.
As of December 31, 1994, PACCAR and the Company together had $300 million of unused, confirmed bank lines of credit that are reviewed annually for renewal. These lines are maintained primarily to support the Company's short-term borrowings. Neither PACCAR nor the Company is liable for the borrowings of the other.
As of December 31, 1994, the Company had $870.3 million of term debt outstanding, $328.8 million of which was due within 12 months. See "Note E--Term Debt" in the Notes to Financial Statements for term debt maturities.
An indenture of the Company dated as of December 1, 1984 as amended by a first supplemental indenture dated June 19, 1989 (Exhibit 4.1), with respect to the Company's term debt which is publicly issued from time to time, contains restrictions limiting secured debt which may be incurred by the Company and any subsidiary.
RELATIONSHIP WITH PACCAR
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 PACCAR and may occasionally pay dividends to or borrow funds from PACCAR. Since the majority of the directors of the Company are executives of PACCAR and PACCAR is the sole owner of the Company's outstanding voting common stock, PACCAR can determine the course of the Company's business. See "Note D--Transactions with PACCAR" in the Notes to Financial Statements.
Support Agreement
The Company and PACCAR are parties to a Support Agreement which 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 for the years ended December 31, 1994, 1993, 1992 and 1991 was met without assistance. In order to maintain the ratio of 1.25 to 1 in 1990, PACCAR provided earnings support of $7.3 million by assuming $4.5 million of the Company's interest expense and forgiving $2.8 million in administrative service charges.
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 an 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 benefit 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 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.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR) at 777 - 106th Avenue N.E., Bellevue, Washington 98004.
Other offices of the Company are located in leased premises. Annual lease rentals for offices in the aggregate are not material in relation to expenses as a whole.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All outstanding common stock is owned by PACCAR; therefore, there is no trading market in the common stock.
The Company began in 1994 to pay a dividend to PACCAR for the paid-in capital invested in the prior year. A cash dividend of $1.3 million was paid to PACCAR in July 1994.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data for the Company and should be read in conjunction with the more detailed financial statements included under "Financial Statements and Supplementary Data." The information with respect to each of the five years in the period ended December 31, 1994 has been derived from the Company's audited financial statements.
Balance Sheet Data and Income Statement Data (Thousands of Dollars)
(1) In 1990, PACCAR provided earnings support of $7.3 million through the assumption of $4.5 million of the Company's interest expense and the forgiveness of $2.8 million in administrative service charges. (See "Relationship with PACCAR.")
(2) Effective January 1, 1991, the Company adopted Financial Accounting Standards Board Statement (FASB) No. 96, "Accounting for Income Taxes." The most significant impact of this Statement was to change the tax rate at which deferred taxes were recognized on the balance sheet to the lower rate then specified by federal tax laws. The change resulted in a one-time increase in net income of $11,323 in the first quarter of 1991.
(3) For purposes of this ratio, earnings consist of income from operations plus fixed charges. Fixed charges consist of interest expense plus one-third 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 but differs from the method called for in the Support Agreement between the Company and PACCAR. The ratios computed pursuant to the Support Agreement were 1.82x, 1.89x, 1.59x, 1.26x and 1.25x for the years 1994-1990, respectively. See Exhibits 12.1 and 12.2.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, 1992-1994
Results of Operations
1994 Compared to 1993:
Pre-tax earnings increased to $42.1 million from $30.4 million in 1993 primarily as a result of higher gross income attributable to the growth in receivables as well as a lower provision for losses. Average receivables increased 21% to $1.6 billion from $1.3 billion in 1993. The growth resulted from record high new business volume of $992.5 million in 1994 related to increased heavy-duty truck sales by PACCAR. Interest expense was greater due both to the increase in 1994 market interest rates and to the higher amount of debt incurred to fund the receivables growth. Operating expenses remained relatively stable.
The 1994 loss provision of $2.5 million, compared to $6.1 million in 1993, reflected net credit recoveries and an improvement in past due balances. These credit recoveries resulted generally from an improving economy and collections on accounts previously charged off. The number and magnitude of problem accounts continued to decline from the levels in earlier years. At year end 1994, contracts over 60 days past due declined to .23% of period end gross contracts and operating lease receivables compared to .45% and 1.49% at year ends 1993 and 1992, respectively. The reserve for credit losses was increased to $29.9 million to reflect the growth in the portfolio and risks inherent in the financing of heavy-duty trucks.
As a result of the foregoing factors, net income for 1994 improved to $25.2 million from $17.0 million in 1993.
1993 Compared to 1992:
Pre-tax earnings improved to $30.4 million from $18.6 million in 1992 primarily as a result of higher gross income from higher receivables outstanding and a lower provision for losses. Average receivables were $1.3 billion compared to $1.1 billion in 1992. The growth resulted from high new business volume related to increased heavy-duty truck sales by PACCAR. Interest expense decreased due to the general decline in interest rates during 1993. Operating and other expenses remained relatively stable.
The 1993 loss provision of $6.1 million, compared to $8.6 million in 1992, reflected significantly lower net credit losses and an improvement in past due balances. The lower credit losses resulted generally from an improving economy. The number and magnitude of problem accounts continued to decline from the levels in earlier years.
As a result of the 1993 tax law change, which increased corporate income tax rates from 34% to 35%, the Company recorded a one-time increase of $2.3 million to the income tax provision to adjust deferred tax liabilities for the higher 35% rate.
Net income for 1993 was $17.0 million compared to $11.7 million in 1992.
Funding and Liquidity
The Company manages its capital structure consistent with industry standards. Since 1983, the Company has registered senior debt securities under the Securities Act of 1933 for offering to the public. In 1993, the Company registered $1 billion of senior debt securities for offering to the public. At the end of 1994, $513 million of such securities was available for issuance.
The Company believes that it has sufficient financial capabilities, including internally generated funds, access to public and private debt markets, lines of credit and other financial resources, to fund current business needs and service debt maturities.
Impact of New Accounting Rules
FASB No. 114, "Accounting by Creditors for Impairment of a Loan," and FASB No. 118, "Accounting for Impairment of a Loan - Income Recognition and Disclosures," were issued in May 1993 and October 1994, respectively, and are effective for fiscal years beginning after December 15, 1994. The Company does not expect the adoption of FASB No. 114 and FASB No. 118 to have a material impact on the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and related schedules described under Item 14, "Exhibits, Financial Statement Schedules, and Reports on Form 8-K," are included following this page.
Report of Independent Auditors
Board of Directors PACCAR Inc and PACCAR Financial Corp.
We have audited the accompanying balance sheets of PACCAR Financial Corp. as of December 31, 1994 and 1993, and the related statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1994. 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 generally accepted auditing standards. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as 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, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP Seattle, Washington February 10, 1995
BALANCE SHEETS PACCAR Financial Corp.
See notes to financial statements.
STATEMENTS OF INCOME AND RETAINED EARNINGS PACCAR Financial Corp.
See notes to financial statements.
STATEMENTS OF CASH FLOWS PACCAR Financial Corp.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS PACCAR Financial Corp. December 31, 1994 (Thousands of Dollars)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Industry: PACCAR Financial Corp. (the "Company"), a wholly owned subsidiary of PACCAR Inc ("PACCAR"), provides financing of trucks and related equipment manufactured primarily by PACCAR and sold by authorized dealers. The Company also finances dealer inventories of transportation equipment.
Due to the nature of the Company's business, customers are concentrated in the transportation industry throughout the United States. The Company's receivables and direct financing lease portfolio are not concentrated in any geographic region. Generally, all receivables are collateralized by the equipment being financed. The risk of bad debt losses related to this concentration has been considered in establishing the allowance for losses.
Revenue Recognition: Revenue from net finance receivables and other receivables is recognized using the interest method. Certain loan origination costs are deferred and amortized to interest and finance charge income.
Equipment: Equipment on operating leases is recorded at cost and depreciated on a straight-line basis over the term of each operating lease based upon its estimated useful life of five years to an estimated residual value.
Income Taxes: The Company is included in the consolidated federal income tax return of PACCAR. Any related tax liability is paid by the Company to PACCAR and any current related tax benefit is paid by PACCAR to the Company.
Credit 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 anticipated losses. Receivables are charged to this allowance when, in the judgement of management, they are deemed uncollectible.
Interest Rate Contracts: The Company enters into interest rate contracts which generally involve the exchange of fixed or floating rate interest payment obligations without the exchange of the underlying principal amounts. These contracts are used to effectively change the terms of debt to better match the interest rate characteristics of the Company's receivables and thereby reduce the effect of interest rate fluctuations on the Company's income. Net amounts paid or received are reflected as adjustments to interest expense.
Reclassifications: Certain prior year amounts have been reclassified to conform to the 1994 presentations.
NOTES TO FINANCIAL STATEMENTS (Continued) PACCAR Financial Corp. (Thousands of Dollars)
NOTE B--RECEIVABLES
Terms for substantially all finance and other receivables range up to 60 months. Experience of the Company has shown that some receivables will be paid prior to contractual maturity and 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:
The Company's net investment in direct financing leases is as follows:
NOTES TO FINANCIAL STATEMENTS (Continued) PACCAR Financial Corp. (Thousands of Dollars)
Future minimum lease payments on direct financing leases at December 31, 1994 are due as follows:
The allowance for losses on receivables is summarized as follows:
NOTE C--OPERATING LEASES
Terms of operating leases range up to 44 months. Future minimum rental payments to be received for transportation equipment on operating leases at December 31, 1994 are due as follows:
NOTE D--TRANSACTIONS WITH PACCAR
The Company has a Support Agreement with PACCAR that requires, among other provisions, that PACCAR maintain a ratio of earnings to fixed charges, as defined, for the Company of at least 1.25 to 1 for any fiscal year, and that PACCAR own all outstanding voting stock of the Company.
The required ratio of 1.25 to 1 for the years ended December 31, 1994 - 1992 was met without assistance.
NOTES TO FINANCIAL STATEMENTS (Continued) PACCAR Financial Corp. (Thousands of Dollars)
PACCAR charges the Company for certain administrative services it provides. These costs are charged to the Company based upon the Company's specific use of the services and PACCAR's cost. Management considers these charges reasonable and not significantly different from the costs that would be incurred if the Company were on a stand-alone basis. Fees for services of $3,134, $3,628 and $3,093 for 1994, 1993 and 1992, respectively, were charged to the Company. Beginning July 1993, in lieu of payment, PACCAR began recognizing these administrative services as an additional investment in the Company. The Company records the investment as paid-in capital. As of 1994, the Company pays a dividend to PACCAR for the paid-in capital invested in the prior year. A cash dividend of $1.3 million was paid to PACCAR in 1994.
The Company's employees are covered by a defined benefit pension plan, an unfunded postretirement medical and life insurance plan and a defined contribution plan sponsored by PACCAR. Separate allocations of plan assets, defined benefit accumulated plan benefits and defined contribution plan benefits relating to the Company have not been made. Expenses charged to the Company by PACCAR for these plans were $626, $482 and $326 for years 1994, 1993 and 1992, respectively.
Periodically, the Company borrows funds from PACCAR. At December 31, 1994, the Company had outstanding to PACCAR a $46,000 short term note payable at a market rate. The note was repaid in January 1995.
The Company's Articles of Incorporation provide that the 6% noncumulative, nonvoting preferred stock (100% owned by PACCAR) is redeemable only at the option of the Company's Board of Directors.
NOTE E--TERM DEBT
Term debt is summarized as follows:
Interest rates on the floating interest rate medium-term notes are based on various indices, primarily LIBOR and the prime rate.
Principal amounts due over the next five years at December 31, 1994 are $328,800 in 1995, $220,500 in 1996, $227,000 in 1997, $91,000 in 1998, and $3,000 in 1999.
At December 31, 1994, the Company had outstanding 48 interest rate contracts with various financial institutions, having a total notional principal amount of $728.4 million. These agreements expire as follows: $392.4 million in 1995, $313.3 million in 1996, and $22.7 million in 1997. The notional amount is used to measure the volume of these contracts and does not represent exposure to credit loss. The Company's risk in these transactions is the cost of replacing, at current market rates, these contracts in the event of default by the counterparty. Management believes the risk of incurring such losses is remote, and any losses would be immaterial.
NOTES TO FINANCIAL STATEMENTS (Continued) PACCAR Financial Corp. (Thousands of Dollars)
NOTE F-- CREDIT ARRANGEMENTS
The Company and PACCAR together have lines of credit arrangements with various commercial banks that are reviewed annually for renewal. These lines are maintained primarily to support the Company's short-term borrowings. At December 31, 1994, the unused portion of these credit lines was $300 million. The Company compensates banks with fees which are immaterial in amount.
The Company has entered into loan participation programs with various lending institutions under which notes, between the Company and the lending institutions, are sold by the lending institutions to investors. These notes generally mature within 30 days. At December 31, 1994, and 1993, there were $0 and $49 million, respectively, borrowed under these terms.
NOTE G--INTEREST EXPENSE
The following is a summary of interest expense:
Cash paid for interest was $55,349 in 1994, $45,734 in 1993 and $49,667 in 1992.
The weighted average interest rates on bank loans and commercial paper outstanding was 5.55%, 3.15%, and 3.25% as of December 31, 1994, 1993, and 1992, respectively.
NOTE H--INCOME TAXES
The provision for income taxes consists of the following:
NOTES TO FINANCIAL STATEMENTS (Continued) PACCAR Financial Corp. (Thousands of Dollars)
Deferred income tax assets and liabilities consisted of the following:
A reconciliation between the statutory federal income tax rate and the actual provision for income taxes is shown below:
The change in the federal income tax rate from 34% to 35%, effective January 1, 1993, increased the 1993 provision for income tax by $2,302. An increase in the Company's effective state income tax rate raised the 1994 provision by $364.
Cash paid for income taxes was $26,583 in 1994, $20,960 in 1993 and $11,173 in 1992.
NOTE I--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and equivalents: The carrying amount reported in the balance sheets approximates fair value.
NOTES TO FINANCIAL STATEMENTS (Continued) PACCAR Financial Corp. (Thousands of Dollars)
Net Receivables: For floating rate loans including wholesale financings that reprice frequently with no significant change in credit risk, fair values are based on carrying values. For fixed rate loans, fair values are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest and other receivables approximates their fair value. Direct financing leases and the related loss provision are not included in net receivables.
Off-Balance-Sheet Instruments: Fair values for the Company's interest rate contracts are based on costs which would be incurred to terminate existing agreements and enter into new agreements with similar notional amounts, maturity dates and counterparties' credit standing at current market interest rates.
Bank Loans and Term Debt: The carrying amount of the Company's commercial paper and bank loans and floating rate term debt approximates their fair value. The fair value of the Company's fixed rate term debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amount of trade payables and receivables approximate their fair value and have been excluded from the accompanying table.
The carrying amounts and fair values of the Company's financial instruments at December 31, 1994 are as follows:
The Company's off-balance-sheet financial instruments (interest rate contracts) at December 31, 1994 represented gross assets of $7,446 and offsetting gross liabilities of $4,402, resulting in a net asset balance of $3,044, if recorded at fair value. At December 31, 1993, the Company's off-balance-sheet financial instruments reflected an additional liability of $2,000, if recorded at fair value.
NOTES TO FINANCIAL STATEMENTS (Continued) PACCAR Financial Corp. (Thousands of Dollars)
NOTE J--QUARTERLY RESULTS (Unaudited)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The registrant has not had any disagreements with its independent auditors on accounting or financial disclosure matters.
NOTES TO FINANCIAL STATEMENTS (Continued) PACCAR Financial Corp. (Thousands of Dollars)
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company at February 1, 1995, their ages, current positions with the Company and principal occupations during the past five years are set forth in the following table. The table also shows directorships held by a director in public corporations.
Directors and Executive Officers
The directors of the Company are elected annually by PACCAR. All officers are elected annually by the Board of Directors or appointed by the Board of Directors or Chairman to serve at the pleasure of the Board or until their successors are elected or appointed.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This item is omitted pursuant to Form 10-K General Instruction J(1) and (2)(c).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Securities of the Company
PACCAR owns beneficially and of record 100% of the outstanding preferred stock (310,000 shares, $100 par value) and common stock (145,000 shares, $100 par value) of the Company.
Securities of PACCAR
This item is omitted pursuant to Form 10-K General Instruction J(1) and (2)(c).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See generally "Relationship with PACCAR," "Selected Financial Data" and "NOTE D--Transactions with PACCAR" in the Notes to Financial Statements.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of the Company are included in Item 8:
At December 31, 1994 and 1993 and for the Years Ended December 31, 1994, 1993, and 1992
Balance Sheets -- December 31, 1994 and 1993
Statements of Income and Retained Earnings -- Years Ended December 31, 1994, 1993 and 1992
Statements of Cash Flows -- Years Ended December 31, 1994, 1993 and 1992
Notes to Financial Statements -- December 31, 1994
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or have been otherwise disclosed and, therefore, have been omitted.
Listing of Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in the accompanying Exhibit Index.
b. REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1994
There were no reports on Form 8-K for the quarter ended December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PACCAR Financial Corp.
By /S/ T. Ronald Morton ---------------------------------- T. Ronald Morton President
Date: March 23, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant as of the above date and in the capacities indicated.
PACCAR Financial Corp. EXHIBIT INDEX
Other exhibits listed in Item 601 of Regulation S-K are not applicable.