PACCAR INC (PCAR) FY 2022 MD&A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW:

PACCAR is a global technology company whose Truck segment includes the design and manufacture of high-quality light-, medium- and heavy-duty commercial trucks. In North America, trucks are sold under the Kenworth and Peterbilt nameplates, in Europe, under the DAF nameplate and in Australia and South America, under the Kenworth and DAF nameplates. The Parts segment includes the distribution of aftermarket parts for trucks and related commercial vehicles. The Company’s Financial Services segment derives its earnings primarily from financing or leasing PACCAR products in North America, Europe, Australia and South America. The Company’s Other business includes the manufacturing and marketing of industrial winches.

On December 6, 2022, the Board of Directors declared a 50% common stock dividend payable on February 7, 2023. For all years presented, all per share data and dividends have been restated for the effect of the 50% dividend.

2022 Financial Highlights

The new DAF XD truck was named International Truck of the Year 2023 at the IAA truck show in Hannover, Germany in the third quarter of 2022. The DAF XD truck represents a new generation of distribution and vocational vehicles. The DAF XD shares many features and design elements with the new DAF XF, XG, and XG+ trucks, which were named International Truck of the Year 2022.

PACCAR Parts opened a new 260,000 square foot PDC in Louisville, Kentucky in 2022 to further enhance parts availability for customers and dealers.

The PACCAR Financial Services (PFS) group of companies has operations covering four continents and 26 countries. The global breadth of PFS and its rigorous credit application process support a portfolio of loans and leases with total assets of $17.18 billion. PFS issued $3.05 billion in medium-term notes during 2022 to support new business volume and repay maturing debt.

Truck Outlook

Heavy-duty truck industry retail sales in the U.S. and Canada in 2023 are expected to be 270,000 to 310,000 units compared to 283,500 in 2022. In Europe, the 2023 truck industry registrations for over 16-tonne vehicles are expected to be 270,000 to 310,000 units compared to 297,500 in 2022. In South America, heavy-duty truck industry registrations in 2023 are projected to be 125,000 to 135,000 compared to 138,300 in 2022.

The Company has been affected by an industry-wide undersupply of component parts and anticipates the shortage may continue to affect deliveries in 2023.

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Parts Outlook

In 2023, PACCAR Parts sales are expected to increase 8-11% compared to 2022 levels reflecting strong freight demand. If economic conditions were to worsen, lower freight volumes could reduce the demand for replacement parts, resulting in lower parts revenues and operating results.

Financial Services Outlook

In 2023, average earning assets are expected to increase 4-7% compared to 2022. If current freight transportation conditions decline due to weaker economic conditions, then past due accounts, truck repossessions and credit losses would likely increase from the current low levels and new business volume would likely decline.

Capital Spending and R&D Outlook

Capital investments in 2023 are expected to be $525 to $575 million, and R&D is expected to be $360 to $410 million. The Company is increasing its investment in next generation clean diesel and electric powertrain technologies, autonomous driving systems, connected vehicle services, advanced manufacturing and enhanced distribution capabilities.

See the Forward-Looking Statements section of Management’s Discussion and Analysis for factors that may affect these outlooks.

RESULTS OF OPERATIONS:

The Company’s results of operations for the years ended December 31, 2022 and 2021 are presented below. For information on the year ended December 31, 2020, refer to Part II, Item 7 in the 2021 Annual Report on Form 10-K.

The following provides an analysis of the results of operations for the Company’s three reportable segments - Truck, Parts and Financial Services. Where possible, the Company has quantified the impact of factors identified in the following discussion and analysis. In cases where it is not possible to quantify the impact of factors, the Company lists them in estimated order of importance. Factors for which the Company is unable to specifically quantify the impact include market demand, fuel prices, freight tonnage, economic conditions and COVID-19 related factors affecting the Company’s results of operations.

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2022 Compared to 2021:

Truck

The Company’s Truck segment accounted for 75% of revenues in 2022 compared to 71% in 2021.

The Company’s new truck deliveries are summarized below:

The increase in new truck deliveries worldwide in 2022 compared to 2021 was driven by higher build rates and increased demand in all markets. The industry-wide undersupply of component products had an impact on deliveries.

Market share data discussed below is provided by third-party sources and is measured by either registrations or retail sales for the Company’s dealer network as a percentage of total registrations or retail sales depending on the geographic market. In the U.S. and Canada, market share is based on retail sales. In Europe, market share is based primarily on registrations.

In 2022, industry retail sales in the heavy-duty market in the U.S. and Canada increased to 283,500 units from 249,900 units in 2021. The Company’s heavy-duty truck retail market share was 29.8% in 2022 compared to 29.2% in 2021. The medium-duty market was 88,300 units in 2022 compared to 83,700 units in 2021. The Company’s medium-duty market share was 10.9% in 2022 compared to 19.8% in 2021.

The over 16‑tonne truck market in Europe in 2022 increased to 297,500 units from 278,000 units in 2021, and DAF’s market share was 17.3% in 2022 compared to 15.9% in 2021. The 6 to 16‑tonne market was 38,800 units in 2022 and 41,400 units in 2021. DAF’s market share in the 6 to 16-tonne market in 2022 was 9.7% compared to 10.1% in 2021.

The Company’s worldwide truck net sales and revenues are summarized below:

The Company’s worldwide truck net sales and revenues increased to $21.49 billion in 2022 from $16.80 billion in 2021 due to higher truck deliveries and improved price realization in all markets, partially offset by unfavorable currency translation effects. Truck segment income before income taxes and pretax return on revenues reflect higher truck unit deliveries and improved price realization in all markets. In 2021, Truck segment income before taxes and pretax return on revenues reflect the tempering of truck unit deliveries due to the global semiconductor and component supply shortages.

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The major factors for the Truck segment changes in net sales and revenues, cost of sales and revenues and gross margin between 2022 and 2021 are as follows:

Truck selling, general and administrative expenses (SG&A) in 2022 increased to $280.0 million from $267.9 million in 2021. The increase was primarily due to higher professional expenses, higher salaries and related expenses and travel costs, partially offset by currency translation effects. As a percentage of sales, Truck SG&A was 1.3% in 2022 and 1.6% in 2021.

Parts

The Company’s Parts segment accounted for 20% of revenues in 2022 compared to 21% in 2021.

The worldwide parts net sales and revenues increased to $5.76 billion in 2022 from $4.94 billion in 2021 primarily due to higher demand in all markets and higher price realization, partially offset by unfavorable currency translation effects. The increase in Parts segment income before income taxes and pre-tax return on revenues was primarily due to higher sales volume and higher margins, partially offset by unfavorable currency translation effects.

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The major factors for the Parts segment changes in net sales and revenues, cost of sales and revenues and gross margin between 2022 and 2021 are as follows:

Parts SG&A expense in 2022 increased to $216.3 million from $210.3 million in 2021. The increase was primarily due to higher salaries and related expenses, and higher travel expenses, partially offset by lower sales and marketing costs and currency translation effects. As a percentage of sales, Parts SG&A was 3.8% in 2022 and 4.3% in 2021.

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Financial Services

The Company’s Financial Services segment accounted for 5% of revenues in 2022 compared to 7% in 2021.

New loan and lease volume increased to $6.22 billion in 2022 from $5.67 billion in 2021, primarily reflecting higher truck new loan and lease volume in Europe and Brasil. The effect of currency translation decreased new loan and lease volume by $209.3 million, primarily due to the lower euro relative to the U.S. dollar. PFS finance market share of new PACCAR truck sales was 25.6% in 2022 compared to 26.6% in 2021.

PFS revenues decreased to $1.51 billion in 2022 from $1.69 billion in 2021. The decrease was primarily due to lower unit volume of used truck sales in Europe and the U.S., partially offset by higher interest and fee income driven by portfolio growth and higher portfolio yields. The effects of currency translation decreased PFS revenues by $63.0 million in 2022, primarily due to a lower euro relative to the U.S. dollar.

PFS income before income taxes increased to $588.9 million in 2022 from $437.6 million in 2021, primarily due to improved used truck results and higher finance and lease margins driven by portfolio growth, partially offset by weaker foreign currencies. The effect of currency translation decreased PFS income before income taxes by $20.1 million in 2022, primarily due to a lower euro relative to the U.S. dollar.

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Included in Financial Services “Other Assets” on the Company’s Consolidated Balance Sheets are used trucks held for sale, net of impairments, of $141.7 million at December 31, 2022 and $92.1 million at December 31, 2021. These trucks are primarily units returned from matured operating leases in the ordinary course of business, and also include trucks acquired from repossessions, through acquisitions of used trucks in trades related to new truck sales and trucks returned from residual value guarantees (RVGs).

The Company recognized gains on used trucks, excluding repossessions, of $140.1 million in 2022 compared to $30.3 million in 2021, including losses on multiple unit transactions of $.8 million in 2022 compared to $17.7 million in 2021. Used truck gains in 2022 and 2021 related to repossessions, which are recognized as credit recoveries, were insignificant.

The major factors for the changes in interest and fees, interest and other borrowing expenses and finance margin between 2022 and 2021 are outlined below:

The following table summarizes operating lease, rental and other revenues and depreciation and other expenses:

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The major factors for the changes in operating lease, rental and other revenues, depreciation and other expenses and lease margin between 2022 and 2021 are outlined below:

Financial Services SG&A expense increased to $133.9 million in 2022 from $129.4 million in 2021. The increase was primarily due to higher salaries and related expenses, partially offset by decreases in the value of foreign currencies relative to the U.S. dollar, primarily the euro. As a percentage of average earning assets, Financial Services SG&A was .9% in both 2022 and 2021.

The following table summarizes the provision for losses on receivables and net charge-offs:

The provision for losses on receivables increased to $5.5 million in 2022 from $.5 million in 2021, mainly driven by portfolio growth and higher past due balances in Brasil, partially offset by improved portfolio performance in North America and Europe.

The Company modifies loans and finance leases as a normal part of its Financial Services operations. The Company may modify loans and finance leases for commercial reasons or for credit reasons. Modifications for commercial reasons are changes to contract terms for customers that are not considered to be in financial difficulty. Insignificant delays are modifications extending terms up to three months for customers experiencing some short-term financial stress, but not considered to be in financial difficulty. Modifications for credit reasons are changes to contract terms for customers considered to be in financial difficulty. The Company’s modifications typically result in granting more time to pay the contractual amounts owed and charging a fee and interest for the term of the modification. When considering whether to modify customer accounts for credit reasons, the Company evaluates the creditworthiness of the customers and modifies those accounts that the Company considers likely to perform under the modified terms. When the Company modifies a loan or finance lease for credit reasons and grants a concession, the modification is classified as a troubled debt restructuring (TDR).

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The post-modification balances of accounts modified during the years ended December 31, 2022 and 2021 are summarized below:

Modification activity decreased to $364.5 in 2022 from $608.3 in 2021. The decrease in modifications for commercial reasons primarily reflects lower volumes of refinancing. The increase in Insignificant Delay reflects an increase in customers requesting payment relief for up to three months. The increase in Credit modifications reflects higher volumes of contract modifications and requests for payment relief primarily in Brasil.

The following table summarizes the Company’s 30+ days past due accounts:

Accounts 30+ days past due increased to .4% at December 31, 2022 from .3% at December 31, 2021. The Company continues to focus on maintaining low past due balances.

When the Company modifies a 30+ days past due account, the customer is then generally considered current under the revised contractual terms. The Company modified $8.9 million and $.4 million of accounts worldwide during the fourth quarter of 2022 and the fourth quarter of 2021, respectively, which were 30+ days past due and became current at the time of modification. Had these accounts not been modified and continued to not make payments, the pro forma percentage of retail loan and lease accounts 30+ days past due would have been as follows:

Modifications of accounts in prior quarters that were more than 30 days past due at the time of modification are included in past dues if they were not performing under the modified terms at December 31, 2022 and 2021. The effect on the allowance for credit losses from such modifications was not significant at December 31, 2022 and 2021.

The Company’s annualized pre-tax return on average total assets for Financial Services increased to 3.7% in 2022 from 2.8% in 2021, primarily driven by improved used truck results and higher finance and lease margins.

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Other

Other includes the winch business as well as sales, income and expenses not attributable to a reportable segment. Other also includes non-service cost components of pension expense and a portion of corporate expense. Other sales represent less than 1% of consolidated net sales and revenues for 2022 and 2021. Other SG&A increased to $96.1 million in 2022 from $69.2 million in 2021 primarily due to higher salaries and related expenses.

Other (loss) income before tax was ($1.1) million in 2022 compared to $28.3 million in 2021. The decrease was primarily due to higher salaries and related expenses, partially offset by lower non-service pension expenses.

Investment income increased to $61.0 million in 2022 from $15.5 million in 2021, primarily driven by higher yields on investments due to higher market interest rates in all regions as well as higher investment balances.

Income Taxes

In 2022, the effective tax rate was 21.8% compared to 22.2% in 2021. The lower effective tax rate in 2022 was primarily due to the change in mix of income generated in jurisdictions with lower tax rates in 2022 as compared to 2021.

In 2022, both domestic and foreign income before income taxes and pre-tax return on revenues increased primarily due to the improved results from Truck, Parts and Financial Services operations.

LIQUIDITY AND CAPITAL RESOURCES:

The Company’s total cash and marketable securities at December 31, 2022, increased $1.32 billion from the balances at December 31, 2021. Total cash and marketable securities are primarily intended to provide liquidity while preserving capital.

The change in cash and cash equivalents is summarized below:

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Operating activities: Cash provided by operations increased by $840.3 million to $3.03 billion in 2022 from $2.19 billion in 2021. Higher operating cash flows reflect higher net income of $1.15 billion, lower cash usage of $355.3 million for inventories, and $269.9 million of higher deferrals of revenues from extended warranty contracts and accruals for product support primarily due to higher truck deliveries. Additionally, higher operating cash flows reflect lower cash outflow of $146.9 million for accounts payable and accrued expenses as purchases of goods and services exceeded payments. These higher operating cash flows were partially offset by $1.03 billion higher cash used for wholesale receivables.

Investing activities: Cash used in investing activities increased by $670.3 million to $2.03 billion in 2022 from $1.36 billion in 2021. Higher net cash used in investing activities primarily reflects higher net originations for retail loans and financing leases of $713.4 million and lower proceeds from asset disposals of $216.4 million. The higher net cash usage was partially offset by fewer acquisitions of equipment for operating leases of $208.2 million.

Financing activities: Cash provided by financing activities was $304.9 million in 2022 compared to cash used in financing activities of $882.9 million in 2021. Cash provided by net borrowing activities in 2022 of $1.28 billion was $1.49 billion higher than the cash used for borrowing activities of $210.9 million in 2021 reflecting higher funding to support financial services portfolio growth. The Company paid $1.00 billion in dividends in 2022 compared to $708.0 million in 2021 primarily due to a higher extra dividend paid in January 2022.

The Company expects to continue paying dividends, although there is no assurance as to future dividends because they are dependent upon future earnings, capital requirements and financial conditions. Cash dividends declared for the last two years were as follows:

*   The sum of quarterly per share amounts do not equal per share amounts reported for the full year due to rounding.

Credit Lines and Other:

The Company has line of credit arrangements of $3.70 billion, of which $3.36 billion were unused at December 31, 2022. Included in these arrangements are $3.00 billion of committed bank facilities, of which $1.00 billion expires in June 2023, $1.00 billion expires in June 2025 and $1.00 billion expires in June 2027. The Company intends to extend or replace these credit facilities on or before expiration to maintain facilities of similar amounts and duration. These credit facilities are maintained primarily to provide backup liquidity for commercial paper borrowings and maturing medium-term notes. There were no borrowings under the committed bank facilities for the year ended December 31, 2022.

On December 4, 2018, PACCAR’s Board of Directors approved the repurchase of up to $500.0 million of the Company’s outstanding common stock. As of December 31, 2022, the Company has repurchased $110.0 million of shares under this plan. There were no repurchases made under this plan during the year ended December 31, 2022.

Truck, Parts and Other

The Company provides funding for working capital, capital expenditures, R&D, dividends, stock repurchases and other business initiatives and commitments primarily from cash provided by operations. Management expects this method of funding to continue in the future.

Investments for manufacturing property, plant and equipment in 2022 were $491.2 million compared to $495.6 million in 2021. Over the past decade, the Company’s combined investments in worldwide capital projects and R&D totaled $7.25 billion and have significantly increased the operating capacity and efficiency of its facilities and enhanced the quality and operating efficiency of the Company’s premium products.

Capital investments in 2023 are expected to be $525 to $575 million, and R&D is expected to be $360 to $410 million. The Company is increasing its investment in next generation clean diesel and electric powertrain technologies, autonomous driving systems, connected vehicle services, advanced manufacturing and distribution capabilities.

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Financial Services

The Company funds its financial services activities primarily from collections on existing finance receivables and borrowings in the capital markets. The primary sources of borrowings in the capital markets are commercial paper and medium-term notes issued in the public markets and, to a lesser extent, bank loans.

In November 2021, the Company’s U.S. finance subsidiary, PACCAR Financial Corp. (PFC), filed a shelf registration under the Securities Act of 1933. The total amount of medium-term notes outstanding for PFC as of December 31, 2022 was $5.85 billion. In January 2023, PFC issued $300.0 million of medium-term notes under this registration. The registration expires in November 2024 and does not limit the principal amount of debt securities that may be issued during that period.

As of December 31, 2022, the Company’s European finance subsidiary, PACCAR Financial Europe, had €1.12 billion available for issuance under a €2.50 billion medium-term note program listed on the Euro MTF Market of the Luxembourg Stock Exchange. This program renews annually and expires in July 2023.

In August 2021, PACCAR Financial Mexico registered a 10.00 billion Mexican peso program with the Comision Nacional Bancaria y de Valores to issue medium-term notes and commercial paper. The registration expires in August 2026 and limits the amount of Commercial paper (up to one year) to 5.00 billion Mexican pesos. At December 31, 2022, 9.08 billion Mexican pesos were available for issuance.

In August 2018, the Company’s Australian subsidiary, PACCAR Financial Pty. Ltd. (PFPL Australia), registered a medium-term note program. The program does not limit the principal amount of debt securities that may be issued under the program. The total amount of medium-term notes outstanding for PFPL Australia as of December 31, 2022 was 700.0 million Australian dollars.

In May 2021, the Company’s Canadian subsidiary, PACCAR Financial Ltd. (PFL Canada), established a medium-term note program. The program does not limit the principal amount of debt securities that may be issued under the program. The total amount of medium-term notes outstanding for PFL Canada as of December 31, 2022 was 150.0 million Canadian dollars.

The Company believes its cash balances and investments, collections on existing finance receivables, committed bank facilities, and current investment-grade credit ratings of A+/A1 will continue to provide it with sufficient resources and access to capital markets at competitive interest rates and therefore contribute to the Company maintaining its liquidity and financial stability. In the event of a decrease in the Company’s credit ratings or a disruption in the financial markets, the Company may not be able to refinance its maturing debt in the financial markets. In such circumstances, the Company would be exposed to liquidity risk to the degree that the timing of debt maturities differs from the timing of receivable collections from customers. The Company believes its various sources of liquidity, including committed bank facilities, would continue to provide it with sufficient funding resources to service its maturing debt obligations.

Commitments

The following summarizes the Company’s contractual cash commitments at December 31, 2022:

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Total cash commitments for borrowings and interest on term debt were $11.88 billion and were related to the Financial Services segment. As described in Note J of the consolidated financial statements, borrowings consist primarily of term notes and commercial paper issued by the Financial Services segment. The Company expects to fund its maturing Financial Services debt obligations principally from funds provided by collections from customers on loans and lease contracts, as well as from the proceeds of commercial paper and medium-term note borrowings. Purchase obligations are the Company’s contractual commitments to acquire future production inventory and capital equipment. Other obligations primarily include commitments to purchase energy.

The Company’s other commitments include the following at December 31, 2022:

Loan and lease commitments are for funding new retail loan and lease contracts. Residual value guarantees represent the Company’s commitment to acquire trucks at a guaranteed value if the customer decides to return the truck at a specified date in the future.

IMPACT OF ENVIRONMENTAL MATTERS:

The Company, its competitors and industry in general are subject to various domestic and foreign requirements relating to the environment and greenhouse gases. The statutory and regulatory requirements governing greenhouse gas and non-greenhouse gas emissions are included in Item 1A, Risk Factors – Emissions Requirements and Reduction Targets in the 2022 Form 10-K. The Company believes its policies, practices and procedures are designed to prevent unreasonable risk of environmental damage and that its handling, use and disposal of hazardous or toxic substances have been in accordance with environmental laws and regulations in effect at the time such use and disposal occurred.

The Company is involved in various stages of investigations and cleanup actions in different countries related to environmental matters. In certain of these matters, the Company has been designated as a “potentially responsible party” by domestic and foreign environmental agencies. The Company has accrued the estimated costs to investigate and complete cleanup actions where it is probable that the Company will incur such costs in the future. Expenditures related to environmental activities in the years ended December 31, 2022 and 2021 were $4.6 million and $4.0 million, respectively. While the timing and amount of the ultimate costs associated with future environmental cleanup cannot be determined, management expects that these matters will not have a significant effect on the Company’s consolidated cash flow, liquidity or financial condition.

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CRITICAL ACCOUNTING POLICIES:

The Company’s significant accounting policies are disclosed in Note A of the consolidated financial statements. In the preparation of the Company’s financial statements, in accordance with U.S. generally accepted accounting principles, 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 from estimates used by management, may have a material impact on the financial statements.

Operating Leases

Trucks sold pursuant to agreements accounted for as operating leases are disclosed in Note F of the consolidated financial statements. In determining its estimate of the residual value of such vehicles, the Company considers the length of the lease term, the truck model, the expected usage of the truck and anticipated market demand. Operating lease terms generally range from three to five years. The resulting residual values on operating leases generally range between 30% and 70% of the original equipment cost. If the sales price of a truck at the end of the term of the agreement differs from the Company’s estimated residual value, a gain or loss will result.

Future market conditions, changes in government regulations and other factors outside the Company’s control could impact the ultimate sales price of trucks returned under these contracts. Residual values are reviewed regularly and adjusted if market conditions warrant. A decrease in the estimated equipment residual values would increase annual depreciation expense over the remaining lease term.

During 2022, market values on equipment returning upon operating lease maturity were generally higher than the residual values on the equipment, resulting in a decrease in depreciation expense of $173.2 million.

At December 31, 2022, the aggregate residual value of equipment on operating leases in the Financial Services segment and residual value guarantee on trucks accounted for as operating leases in the Truck segment was $1.74 billion. A 10% decrease in used truck values worldwide, if expected to persist over the remaining maturities of the Company’s operating leases, would reduce residual value estimates and result in the Company recording additional depreciation expense of approximately $69.1 million in 2023, $55.8 in 2024, $33.4 in 2025, $12.1 in 2026, $3.8 in 2027 and thereafter.

Allowance for Credit Losses

The allowance for credit losses related to the Company’s loans and finance leases is disclosed in Note E of the consolidated financial statements. The Company has developed a systematic methodology for determining the allowance for credit losses for its two portfolio segments, retail and wholesale. The retail segment consists of retail loans and finance leases, net of unearned interest. The wholesale segment consists of truck inventory financing loans to dealers that are collateralized by trucks and other collateral. The wholesale segment generally has less risk than the retail segment. Wholesale receivables generally are shorter in duration than retail receivables, and the Company requires periodic reporting of the wholesale dealer’s financial condition, conducts periodic audits of the trucks being financed and in many cases obtains guarantees or other security such as dealership assets. In determining the allowance for credit losses, retail loans and finance leases are evaluated together since they relate to a similar customer base, their contractual terms require regular payment of principal and interest, generally over three to five years, and they are secured by the same type of collateral. The allowance for credit losses consists of both specific and general reserves.

The Company individually evaluates certain finance receivables for impairment. Finance receivables that are evaluated individually for impairment consist of all wholesale accounts and certain large retail accounts with past due balances or otherwise determined to be at a higher risk of loss. A finance receivable is impaired if it is considered probable the Company will be unable to collect all contractual interest and principal payments as scheduled. In addition, all retail loans and leases which have been classified as TDRs and all customer accounts over 90 days past due are considered impaired. Generally, impaired accounts are on non-accrual status. Impaired accounts classified as TDRs which have been performing for 90 consecutive days are placed on accrual status if it is deemed probable that the Company will collect all principal and interest payments.

Impaired receivables are generally considered collateral dependent. Large balance retail and all wholesale impaired receivables are individually evaluated to determine the appropriate reserve for losses. The determination of reserves for large balance impaired receivables considers the fair value of the associated collateral. When the underlying collateral fair value exceeds the Company’s amortized cost basis, no reserve is recorded. Small balance impaired receivables with similar risk characteristics are evaluated as a separate pool to determine the appropriate reserve for losses using the historical loss and economic forecasts information discussed below.

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The Company evaluates finance receivables that are not individually impaired and share similar risk characteristics on a collective basis and determines the general allowance for credit losses for both retail and wholesale receivables based on historical loss information, using past due account data, current market conditions, and expected changes in future macroeconomic conditions that affect collectability. Historical credit loss information provides relevant information of expected credit losses. The historical information used includes assumptions regarding the likelihood of collecting current and past due accounts, repossession rates, and the recovery rate on the underlying collateral based on used truck values and other pledged collateral or recourse.

The Company has developed a range of loss estimates for each of its country portfolios based on historical experience, taking into account loss frequency and severity in both strong and weak truck market conditions. A projection is made of the range of estimated credit losses inherent in the portfolio from which an amount is determined based on current market conditions and other factors impacting the creditworthiness of the Company’s borrowers and their ability to repay. Adjustments to historical loss information are made for changes in forecasted economic conditions that are specific to the industry and markets in which the Company conducts business. The Company utilizes economic forecasts from third party sources and determines expected losses based on historical experience under similar market conditions. After determining the appropriate level of the allowance for credit losses, a provision for losses on finance receivables is charged to income as necessary to reflect management’s estimate of expected credit losses, net of recoveries, inherent in the portfolio.

The adequacy of the allowance is evaluated quarterly based on the most recent past due account information and current and future market conditions. As accounts become past due, the likelihood that they will not be fully collected increases. The Company’s experience indicates the probability of not fully collecting past due accounts ranges between 15% and 70%. Over the past two years, the Company’s year-end 30+ days past due accounts have ranged between .3% and .4% of loan and lease receivables. Historically, a 100 basis point increase in the 30+ days past due percentage has resulted in an increase in credit losses of 2 to 40 basis points of receivables. At December 31, 2022 , 30+ days past dues were .4%. If past dues were 100 basis points higher or 1.4% as of December 31, 2022, the Company’s estimate of credit losses would likely have increased by a range of $2 to $44 million depending on the extent of the past dues, the estimated value of the collateral as compared to amounts owed and general economic factors.

Product Warranty

Product warranty, including changes in estimates for pre-existing warranties, is disclosed in Note I of the consolidated financial statements. The expenses related to product warranty are estimated and recorded at the time products are sold based on historical and current data and reasonable expectations for the future regarding the frequency and cost of warranty claims, net of recoveries. Estimates consider product type, geographical differences, labor rates, and any other known factors affecting the number or amount of expected claim payments. For new products with no historical experience, reference to similar products is utilized. Management takes actions to minimize warranty costs through quality-improvement programs; however, actual claim costs incurred could materially differ from the estimated amounts and require adjustments to the reserve. Historically those adjustments have not been material. Over the past two years, warranty expense as a percentage of Truck, Parts and Other net sales and revenues has ranged between 1.6% and 1.9%. If the 2022 warranty expense had been .2% higher as a percentage of net sales and revenues in 2022, warranty expense would have increased by approximately $55 million.

FORWARD-LOOKING STATEMENTS:

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements relating to future results of operations or financial position and any other statement that does not relate to any historical or current fact. Such statements are based on currently available operating, financial and other information and are subject to risks and uncertainties that may affect actual results. Risks and uncertainties include, but are not limited to: a significant decline in industry sales; competitive pressures; reduced market share; reduced availability of or higher prices for fuel; increased safety, emissions, or other regulations or tariffs resulting in higher costs and/or sales restrictions; currency or commodity price fluctuations; lower used truck prices; insufficient or under-utilization of manufacturing capacity; supplier interruptions; insufficient liquidity in the capital markets; fluctuations in interest rates; changes in the levels of the Financial Services segment new business volume due to unit fluctuations in new PACCAR truck sales or reduced market shares; changes affecting the profitability of truck owners and operators; price changes impacting truck sales prices and residual values; insufficient supplier capacity or access to raw materials and components, including semiconductors; labor disruptions; shortages of commercial truck drivers; increased warranty costs; pandemics; climate-related risks; global conflicts; litigation, including European Commission (EC) settlement-related claims; or legislative and governmental regulations. A more detailed description of these and other risks is included under the heading Part I, Item 1A, “Risk Factors” and in Note L in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

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