PACCAR, INC. 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. InNorth America , trucks are sold under the Kenworth andPeterbilt nameplates, inEurope , under the DAF nameplate and inAustralia andSouth 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 leasingPACCAR products inNorth America ,Europe ,Australia , andSouth America . The Company's Other business includes the manufacturing and marketing of industrial winches.
2021 Financial Highlights
• Worldwide net sales and revenues were
• Truck sales were
primarily due to higher truck deliveries in all markets.
• Parts sales were a record
2020 reflecting higher demand in all markets.
• Financial Services revenues were
billion in 2020, primarily due to higher used truck sales.
• In 2021,
was
(
Financial Services revenues and operating results.
• Capital investments were
2020.
• After-tax return on beginning equity (ROE) was 17.8% in 2021 compared to
13.4% in 2020.
• Research and development (R&D) expenses were
to
The Company launched new DAF XF, XG and XG+ truck models in 2021, which provide unsurpassed performance including up to a 10% fuel efficiency gain, side view cameras, larger interior space and a customizable digital dashboard. The trucks' streamlined silhouette incorporates the new European regulations governing truck design. The Company began production of the next generation Kenworth T680 andPeterbilt 579 heavy-duty truck models, offering major enhancements in uptime, connectivity technology, aerodynamics, fuel-efficiency and driver comfort in the third quarter of 2021. The new models feature PACCAR MX-13 and MX-11 engines with the integrated PACCAR Transmission for up to a 7% increase in fuel-efficiency. Kenworth andPeterbilt began production of their new medium-duty truck models designed to serve a wide variety of applications in the third quarter of 2021.PACCAR began production of seven battery electric vehicle models in 2021 forPeterbilt , Kenworth and DAF customers.PACCAR battery electric heavy- and medium-duty vehicles provide competitive total cost of ownership for customers operating in city and regional haul, port drayage and refuse applications.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$15.42 billion . PFS issued$1.97 billion in medium-term notes during 2021 to support new business volume and repay maturing debt. 16 --------------------------------------------------------------------------------
Truck Outlook
Heavy-duty truck industry retail sales in theU.S. andCanada in 2022 are expected to be 250,000 to 290,000 units compared to 250,000 in 2021. InEurope , the 2022 truck industry registrations for over 16-tonne vehicles are expected to be 260,000 to 300,000 units compared to 278,000 in 2021. InSouth America , heavy-duty truck industry registrations in 2022 are projected to be 125,000 to 135,000 compared to 127,000 in 2021.
The Company has been affected by an industry-wide undersupply of semiconductor chips and anticipates the shortage will continue to affect deliveries in 2022.
Parts Outlook
In 2022, PACCAR Parts sales are expected to increase 6-9% compared to 2021 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 2022, average earning assets are expected to be similar to 2021. Current high levels of freight tonnage, freight rates and fleet utilization are contributing to customers' profitability and cash flow. 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 2022 are expected to be$425 to$475 million , and R&D is expected to be$350 to$400 million . The Company is increasing its investment in clean diesel and zero emissions powertrain technologies, autonomous systems, connected vehicle services, next-generation manufacturing and distribution capabilities.
See the Forward-Looking Statements section of Management's Discussion and Analysis for factors that may affect these outlooks.
RESULTS OF OPERATIONS:
The Company's results of operations for the years endedDecember 31, 2021 and 2020 are presented below. For information on the year endedDecember 31, 2019 , refer to Part II, Item 7 in the 2020 Annual Report on Form 10-K. ($ in millions, except per share amounts) Year Ended December 31, 2021 2020 Net sales and revenues: Truck$ 16,799.7 $ 13,164.8 Parts 4,944.3 3,912.9 Other 90.5 76.6 Truck, Parts and Other 21,834.5 17,154.3 Financial Services 1,687.8 1,574.2$ 23,522.3 $ 18,728.5 Income before income taxes: Truck$ 795.8 $ 581.4 Parts 1,104.1 799.3 Other 25.6 18.2 Truck, Parts and Other 1,925.5 1,398.9 Financial Services 437.6 223.1 Investment income 15.5 35.9 Income taxes (526.5 ) (359.5 ) Net Income$ 1,852.1 $ 1,298.4 Diluted earnings per share$ 5.32 $ 3.74 After-tax return on revenues 7.9 % 6.9 % 17
-------------------------------------------------------------------------------- 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.
2021 Compared to 2020:
Truck
The Company's Truck segment accounted for 71% of revenues in 2021 compared to 70% in 2020.
The Company's new truck deliveries are summarized below:
Year Ended December 31, 2021 2020 % CHANGE U.S. and Canada 86,300 73,300 18 Europe 53,200 42,900 24
36
Total units 162,700 133,300 22
The increase in new truck deliveries worldwide in 2021 compared to 2020 was driven primarily by higher build rates and increased demand in all markets.
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 theU.S. andCanada , market share is based on retail sales. InEurope , market share is based primarily on registrations. In 2021, industry retail sales in the heavy-duty market in theU.S. andCanada increased to 249,900 units from 216,500 units in 2020. The Company's heavy-duty truck retail market share was 29.2% in 2021 compared to 30.1% in 2020. The medium-duty market was 83,700 units in 2021 compared to 74,400 units in 2020. The Company's medium-duty market share was 19.8% in 2021 compared to 22.6% in 2020. The over 16tonne truck market inEurope in 2021 increased to 278,000 units from 230,400 units in 2020, and DAF's market share was 15.9% in 2021 compared to 16.3% in 2020. The 6 to 16tonne market was 41,400 units in 2021 and 2020. DAF's market share in the 6 to 16-tonne market in 2021 was 10.1% compared to 9.5% in 2020.
The Company's worldwide truck net sales and revenues are summarized below:
($ in millions) Year Ended December 31, 2021 2020 % CHANGE Truck net sales and revenues: U.S. and Canada$ 9,877.6 $ 8,062.0
23
Europe 4,489.8 3,419.3
31
44
$ 16,799.7 $ 13,164.8
28
Truck income before income taxes$ 795.8 $ 581.4 37 Pre-tax return on revenues 4.7 % 4.4 % The Company's worldwide truck net sales and revenues increased to$16.80 billion in 2021 from$13.16 billion in 2020 due to higher truck deliveries in all markets. Truck segment income before income taxes and pretax return on revenues reflect higher truck unit deliveries, primarily due to increased demand in all markets. In both 2021 and 2020, Truck segment income before taxes and pretax return on revenues reflect the tempering of truck unit deliveries due to the COVID-19 pandemic. In 2021, truck deliveries and margins were impacted by the global semiconductor supply shortage. 18 -------------------------------------------------------------------------------- The major factors for the Truck segment changes in net sales and revenues, cost of sales and revenues and gross margin between 2021 and 2020 are as follows: NET COST OF SALES AND SALES AND GROSS ($ in millions) REVENUES REVENUES MARGIN 2020$ 13,164.8 $ 12,171.7 $ 993.1 Increase (decrease) Truck sales volume 2,804.8 2,378.9 425.9 Average truck sales prices 457.0 457.0 Average per truck material, labor and other direct costs 448.7 (448.7 ) Factory overhead and other indirect costs 226.0 (226.0 ) Extended warranties, operating leases and other 95.6 30.5 65.1 Currency translation 277.5 238.7 38.8 Total increase 3,634.9 3,322.8 312.1 2021$ 16,799.7 $ 15,494.5 $ 1,305.2
• Truck sales volume reflects higher unit deliveries in all markets, primarily
in the
and
increased demand.
• Average truck sales prices increased sales by
to higher price realization in all major markets.
• Average cost per truck increased cost of sales by
reflecting higher raw material costs, partially offset by lower product
support costs.
• Factory overhead and other indirect costs increased
due to higher labor costs, and higher supplies and maintenance costs to
support increased truck production.
• Extended warranties, operating leases and other revenues increased by
million primarily due to higher revenues from service contracts and extended
warranty contracts. Cost of sales and revenues increased by
primarily due to higher costs from service contracts and extended warranty
contracts, largely offset by gains on sales of used trucks and lower
impairments in
• The currency translation effect on sales and cost of sales primarily reflects
an increase in the value of the euro relative to the
• Truck gross margins increased to 7.8% in 2021 from 7.5% in 2020, primarily
due to the factors noted above.
Truck selling, general and administrative expenses (SG&A) for 2021 increased to$267.9 million from$210.9 million in 2020. The increase was primarily due to higher salaries and related expenses and higher professional expenses. As a percentage of sales, Truck SG&A was 1.6% for 2021 and 2020. 19
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Parts
The Company's Parts segment accounted for 21% of revenues in 2021 and 2020.
($ in millions) Year Ended December 31, 2021 2020 % CHANGE Parts net sales and revenues: U.S. and Canada$ 3,312.4 $ 2,664.9 24 Europe 1,164.6 896.1 30
33
$ 4,944.3 $ 3,912.9
26
Parts income before income taxes$ 1,104.1 $ 799.3 38 Pre-tax return on revenues 22.3 % 20.4 % The worldwide parts net sales and revenues increased to a record$4.94 billion in 2021 from$3.91 billion in 2020 primarily due to higher demand in all markets and favorable currency translation effects. The increase in Parts segment income before income taxes and pre-tax return on revenues was primarily due to higher sales volume and higher margins, as well as favorable currency translation effects. The major factors for the Parts segment changes in net sales and revenues, cost of sales and revenues and gross margin between 2021 and 2020 are as follows: NET COST OF SALES AND SALES AND GROSS ($ in millions) REVENUES REVENUES MARGIN 2020$ 3,912.9 $ 2,842.8 $ 1,070.1 Increase (decrease) Aftermarket parts volume 720.8 481.8 239.0 Average aftermarket parts sales prices 239.7
239.7
Average aftermarket parts direct costs 137.6 (137.6 ) Warehouse and other indirect costs 33.9 (33.9 ) Currency translation 70.9 40.2 30.7 Total increase 1,031.4 693.5 337.9 2021$ 4,944.3 $ 3,536.3 $ 1,408.0
• Aftermarket parts sales volume increased by
of sales increased by
markets.
• Average aftermarket parts sales prices increased sales by
primarily due to higher price realization in
• Average aftermarket parts direct costs increased
material costs.
• Warehouse and other indirect costs increased
higher salaries and related expenses and higher shipping costs due to
increased volumes and rates.
• The currency translation effect on sales and cost of sales primarily reflects
an increase in the value of the euro relative to the
• Parts gross margins in 2021 increased to 28.5% from 27.3% in 2020 due to the
factors noted above.
Parts SG&A expense for 2021 increased to
20
--------------------------------------------------------------------------------Financial Services
The Company's Financial Services segment accounted for 7% of revenues in 2021 compared to 8% in 2020. ($ in millions) Year Ended December 31, 2021 2020 % CHANGE New loan and lease volume: U.S. and Canada$ 3,338.9 $ 3,027.0 10 Europe 1,316.2 1,204.1 9 Mexico, Australia and other 1,016.6 787.6 29$ 5,671.7 $ 5,018.7 13 New loan and lease volume by product: Loans and finance leases$ 4,683.7 $ 3,975.0 18 Equipment on operating lease 988.0 1,043.7 (5 )$ 5,671.7 $ 5,018.7 13 New loan and lease unit volume: Loans and finance leases 39,100 36,100 8 Equipment on operating lease 11,000 10,700 3 50,100 46,800 7 Average earning assets: U.S. and Canada$ 8,635.2 $ 9,011.3 (4 ) Europe 3,787.1 3,560.2 6 Mexico, Australia and other 2,107.6 1,782.4 18$ 14,529.9 $ 14,353.9 1 Average earning assets by product: Loans and finance leases$ 9,952.1 $ 9,123.8 9 Dealer wholesale financing 1,472.6 2,101.4 (30 ) Equipment on lease and other 3,105.2 3,128.7 (1 )$ 14,529.9 $ 14,353.9 1 Revenues: U.S. and Canada$ 759.9 $ 785.0 (3 ) Europe 676.8 562.2 20 Mexico, Australia and other 251.1 227.0 11$ 1,687.8 $ 1,574.2 7 Revenues by product: Loans and finance leases$ 481.9 $ 457.8 5 Dealer wholesale financing 42.5 69.6 (39 ) Equipment on lease and other 1,163.4 1,046.8 11$ 1,687.8 $ 1,574.2 7 Income before income taxes$ 437.6 $ 223.1 96 New loan and lease volume increased to a record$5.67 billion in 2021 from$5.02 billion in 2020, primarily reflecting higher truck deliveries worldwide. PFS finance market share of newPACCAR truck sales was 26.6% in 2021 compared to 28.4% in 2020. PFS revenues increased to$1.69 billion in 2021 from$1.57 billion in 2020. The increase was primarily due to higher used truck sales inEurope andNorth America . The effects of currency translation increased PFS revenues by$41.2 million in 2021, primarily due to a stronger euro and Mexican peso relative to theU.S. dollar. PFS income before income taxes increased to a record$437.6 million in 2021 from$223.1 million in 2020, primarily due to improved used truck results and a lower provision for credit losses. The effect of currency translation increased 2021 PFS income before income taxes by$8.8 million . 21 --------------------------------------------------------------------------------
Included in Financial Services "Other Assets" on the Company's Consolidated
Balance Sheets are used trucks held for sale, net of impairments, of
The Company recognized gains on used trucks, excluding repossessions, of$30.3 million in 2021 compared to losses of$88.2 million in 2020, including losses on multiple unit transactions of$17.7 million in 2021 compared to$38.6 million in 2020. Used truck gains in 2021 and losses in 2020 related to repossessions, which are recognized as credit losses, were insignificant. The major factors for the changes in interest and fees, interest and other borrowing expenses and finance margin between 2021 and 2020 are outlined below: INTEREST AND OTHER INTEREST BORROWING FINANCE ($ in millions) AND FEES EXPENSES MARGIN 2020$ 527.4 $ 192.1 $ 335.3 Increase (decrease) Average finance receivables .1 .1 Average debt balances (6.4 ) 6.4 Yields (14.6 ) (14.6 ) Borrowing rates (37.1 ) 37.1 Currency translation and other 11.5 2.3 9.2 Total (decrease) increase (3.0 ) (41.2 ) 38.2 2021$ 524.4 $ 150.9 $ 373.5
• Average debt balances decreased
effects) in 2021, reflecting lower funding requirements for the portfolio
which includes loans, finance leases, dealer wholesale and equipment on
operating lease.
• Lower portfolio yields (4.6% in 2021 compared to 4.7% in 2020) decreased
interest and fees by
due to lower market rates in
• Lower borrowing rates (1.4% in 2021 compared to 1.8% in 2020) were primarily
due to lower debt market rates in the
• Currency translation and other primarily reflects an increase in the value of
foreign currencies relative to the
The following table summarizes operating lease, rental and other revenues and depreciation and other expenses:
($ in millions) Year Ended December 31, 2021 2020
Operating lease and rental revenues
284.2 194.8
Insurance, franchise and other revenues 18.7 20.0
Operating lease, rental and other revenues
Depreciation of operating lease equipment
87.2 152.4
Cost of used truck sales 280.5 200.1
Insurance, franchise and other expenses 3.9 3.6
Depreciation and other expenses $ 969.4 $ 1,008.0
22
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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 2021 and 2020 are
outlined below:
OPERATING LEASE,
RENTAL AND DEPRECIATION LEASE
($ in millions) OTHER REVENUES AND OTHER EXPENSES MARGIN
2020 $ 1,046.8 $ 1,008.0 $ 38.8
Increase (decrease)
Used truck sales 81.4 72.5 8.9
Results on returned lease assets (107.4 ) 107.4
Average operating lease assets (14.7 ) (11.5 ) (3.2 )
Revenue and cost per asset 20.5 (19.7 ) 40.2
Currency translation and other 29.4 27.5 1.9
Total increase (decrease) 116.6 (38.6 ) 155.2
2021 $ 1,163.4 $ 969.4 $ 194.0 • Higher market prices and a higher sales volume of used trucks received on
trade and upon RVG contract expiration increased operating lease, rental and
other revenues by
increased depreciation and other expenses by
• Results on returned lease assets decreased depreciation and other expenses by
2021 compared to losses in 2020 and lower impairments in
as a result of higher used truck market values.
• Average operating lease assets decreased
exchange effects), which decreased revenues by
depreciation and other expenses by
• Revenue per asset increased
utilization. Cost per asset decreased
lease impairment in
• The currency translation effects reflect an increase in the value of foreign
currencies relative to the
Financial Services SG&A expense increased to$129.4 million in 2021 from$122.2 million in 2020. The increase was primarily due to higher salaries and related expenses. As a percentage of revenues, Financial Services SG&A decreased to 7.7% in 2021 from 7.8% in 2020. The following table summarizes the provision (benefit) for losses on receivables and net charge-offs: 2021 2020 PROVISION FOR PROVISION FOR LOSSES ON NET LOSSES ON NET ($ in millions) RECEIVABLES CHARGE-OFFS RECEIVABLES CHARGE-OFFS U.S. and Canada $ (2.2 ) $ 1.0 $ 16.2$ 13.8 Europe (1.7 ) 2.6 5.1 3.2 Mexico, Australia and other 4.4 4.7 7.5 5.3 $ .5 $ 8.3 $ 28.8$ 22.3 The provision for losses on receivables decreased to$.5 million in 2021 from$28.8 million in 2020, primarily reflecting strong portfolio performance in 2021, and 2020 included higher provisioning due to weakening economic conditions related to the COVID-19 pandemic and a credit loss on a fleet customer in theU.S. The Company modifies loans and finance leases as a normal part of its Financial Services operations. The Company may modify loans and finance leases for commercial reasons or for credit reasons. Modifications for commercial reasons are changes to contract terms for customers that are not considered to be in financial difficulty. Insignificant delays are modifications extending terms up to three months for customers experiencing some short-term financial stress, but not considered to be in financial difficulty. Modifications for credit reasons are changes to contract terms for customers considered to be in financial difficulty. The Company's modifications typically result in granting more time to pay the contractual amounts owed and charging a fee and interest for the term of the modification. When considering whether to modify customer accounts for credit reasons, the Company evaluates the creditworthiness of the customers and modifies those accounts that the Company considers likely to perform under the modified terms. When the 23
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Company modifies a loan or finance lease for credit reasons and grants a concession, the modification is classified as a troubled debt restructuring (TDR).
The post-modification balances of accounts modified during the years ended
2021 2020
AMORTIZED % OF TOTAL AMORTIZED % OF TOTAL
($ in millions) COST BASIS PORTFOLIO* COST BASIS PORTFOLIO*
Commercial $ 484.2 4.8 % $ 244.4 2.5 %
Insignificant delay 63.8 .6 % 2,545.3 26.0 %
Credit - no concession 52.3 .5 % 120.2 1.2 %
Credit - TDR 8.0 .1 % 74.7 .8 %
$ 608.3 6.0 % $ 2,984.6 30.5 %
* Amortized cost basis immediately after modification as a percentage of the
year-end retail portfolio balance.
In 2021, total modification activity decreased compared to 2020. The increase in modifications for Commercial reasons primarily reflects higher volumes of refinancing. The decrease in modifications for Insignificant delay reflects fleet customers requesting payment relief for up to three months related to the COVID-19 pandemic in 2020. The decrease in modifications for Credit - no concession is primarily due to lower volumes of refinancing and requests for payment relief inMexico andEurope . The decrease in modifications for Credit - TDR is primarily due to 2020 contract modifications of two fleet customers in theU.S. and four fleet customers inMexico .
The following table summarizes the Company's 30+ days past due accounts:
AtDecember 31, 2021
2020
Percentage of retail loan and lease accounts 30+ days past due: U.S. and Canada .1 % Europe .4 % .9 % Mexico, Australia and other 1.2 % 1.7 % Worldwide .3 % .5 % Accounts 30+ days past due decreased to .3% atDecember 31, 2021 from .5% atDecember 31, 2020 . 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$.4 million and$18.6 million of accounts worldwide during the fourth quarter of 2021 and the fourth quarter of 2020, 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: At December 31, 2021
2020
Pro forma percentage of retail loan and lease accounts 30+ days past due: U.S. and Canada .1 % Europe .4 % 1.5 % Mexico, Australia and other 1.2 % 1.9 % Worldwide .3 % .6 % 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 atDecember 31, 2021 and 2020. The effect on the allowance for credit losses from such modifications was not significant atDecember 31, 2021 and 2020.
The Company's 2021 and 2020 annualized pre-tax return on average total assets for Financial Services was 2.8% and 1.4%, respectively.
24
--------------------------------------------------------------------------------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 2021 and 2020. Other SG&A increased to$69.2 million in 2021 from$55.6 million in 2020 primarily due to higher salaries and related expenses. Other income before tax was$25.6 million in 2021 compared to$18.2 million in 2020. The increase was primarily due to a higher benefit from non-service components of pension expense, partially offset by higher salaries and related expenses. Investment income decreased to$15.5 million in 2021 from$35.9 million in 2020, primarily due to lower yields onU.S. investments due to lower market interest rates. Income Taxes In 2021, the effective tax rate was 22.1% compared to 21.7% in 2020. The higher effective tax rate in 2021 was primarily due to the change in mix of income generated in jurisdictions with higher tax rates in 2021 as compared to 2020. ($ in millions) Year Ended December 31, 2021 2020 Domestic income before taxes$ 1,373.7 $ 1,122.9 Foreign income before taxes 1,004.9 535.0 Total income before taxes$ 2,378.6 $ 1,657.9
Domestic pre-tax return on revenues 10.9 % 10.8 % Foreign pre-tax return on revenues 9.2 % 6.4 % Total pre-tax return on revenues
10.1 % 8.9 %
In 2021, 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:
($ in millions) At December 31, 2021 2020 Cash and cash equivalents$ 3,428.3 $ 3,539.6 Marketable securities 1,559.4 1,429.0$ 4,987.7 $ 4,968.6
The Company's total cash and marketable securities at
The change in cash and cash equivalents is summarized below:
($ in millions) Year Ended December 31, 2021 2020 Operating activities: Net income$ 1,852.1 $ 1,298.4 Net income items not affecting cash 711.2
1,097.7
Pension contributions (25.1 ) (184.9 ) Changes in operating assets and liabilities, net (351.5 ) 776.0 Net cash provided by operating activities 2,186.7
2,987.2
Net cash used in investing activities (1,362.7 ) (1,875.8 ) Net cash used in financing activities (882.9 ) (1,808.5 ) Effect of exchange rate changes on cash (52.4 )
61.6
Net decrease in cash and cash equivalents (111.3 ) (635.5 ) Cash and cash equivalents at beginning of the year 3,539.6 4,175.1 Cash and cash equivalents at end of the year$ 3,428.3 $ 3,539.6 25
-------------------------------------------------------------------------------- Operating activities: Cash provided by operations decreased by$800.5 million to$2.19 billion in 2021 from$2.99 billion in 2020. Lower operating cash flows reflect lower cash receipts from wholesale receivables in the Financial Services segment of$780.4 million , higher cash usage of$562.1 million for inventories and lower cash receipts from accounts receivables of$534.7 million as there were fewer receipts in 2021 compared to collections exceeding sales in 2020. Additionally, lower operating cash flows reflect higher cash outflows for payment of income taxes of$387.1 million . This was partially offset by higher cash inflows of$747.0 million from accounts payable and accrued expenses as purchases of goods and services exceeded payments in 2021 compared to 2020 when payments exceeded purchases. Additionally, the lower operating cash flows were offset by higher net income of$553.7 million and lower pension contributions of$159.8 million compared to 2020. Investing activities: Cash used in investing activities decreased by$513.1 million to$1.36 billion in 2021 from$1.88 billion in 2020. Lower net cash used in investing activities primarily reflects higher proceeds from asset disposals of$302.2 million and lower net originations from retail loans and financing leases of$208.0 million . Financing activities: Cash used in financing activities decreased$925.6 million to$882.9 million in 2021 compared to$1,808.5 million in 2020. Cash used by borrowing activities in 2021 was$210.9 million ,$369.4 million lower than the cash used by borrowing activities of$580.3 million in 2020. The Company repurchased .02 million shares of common stock for$1.5 million in 2021 compared to the repurchase of .7 million shares for$42.1 million in 2020. In addition, the Company paid$708.0 million in dividends in 2021 compared to$1,239.8 million in 2020 due to a lower extra dividend paid inJanuary 2021 . The Company expects to continue paying dividends, although there is no assurance as to future dividends because they are dependent upon future earnings, capital requirements and financial conditions. Cash dividends declared for the last two years were as follows: QUARTER 2021 2020 First$ .32 $ .32 Second .34 .32 Third .34 .32 Fourth .34 .32 Year-End Extra (paid in January of the following year) 1.50
.70
Total dividends declared per share$ 2.84 $ 1.98 Credit Lines and Other: The Company has line of credit arrangements of$3.60 billion , of which$3.32 billion were unused atDecember 31, 2021 . Included in these arrangements are$3.00 billion of committed bank facilities, of which$1.00 billion expires inJune 2022 ,$1.00 billion expires inJune 2024 and$1.00 billion expires inJune 2026 . 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 endedDecember 31, 2021 . OnDecember 4, 2018 ,PACCAR's Board of Directors approved the repurchase of up to$500.0 million of the Company's outstanding common stock. As ofDecember 31, 2021 , the Company has repurchased$110.0 million of shares under this plan. There were no repurchases made under this plan during the year endedDecember 31, 2021 . 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 2021 were$495.6 million compared to$558.8 million in 2020. Over the past decade, the Company's combined investments in worldwide capital projects and R&D totaled$7.21 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 2022 are expected to be$425 to$475 million , and R&D is expected to be$350 to$400 million . The Company is increasing its investment in clean diesel and zero emissions powertrain technologies, autonomous systems, connected vehicle services, next-generation manufacturing and distribution capabilities. 26
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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. InNovember 2021 , the Company'sU.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 ofDecember 31, 2021 was$5.50 billion . InFebruary 2022 , PFC issued$300.0 million of medium-term notes under this registration. The registration expires inNovember 2024 and does not limit the principal amount of debt securities that may be issued during that period. As ofDecember 31, 2021 , the Company's European finance subsidiary,PACCAR Financial Europe, had €1.60 billion available for issuance under a €2.50 billion medium-term note program listed on the Euro MTF Market of theLuxembourg Stock Exchange . This program renews annually and expires inJuly 2022 . InAugust 2021 , PACCAR Financial Mexico registered a10.00 billion Mexican peso program with the Comision Nacional Bancaria y de Valores to issue medium-term notes and commercial paper. The registration expires inAugust 2026 and limits the amount of Commercial paper (up to one year) to5.00 billion Mexican pesos . AtDecember 31, 2021 ,9.54 billion Mexican pesos were available for issuance. InAugust 2018 , the Company's Australian subsidiary,PACCAR Financial Pty. Ltd. (PFPL), 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 as ofDecember 31, 2021 was700.0 million Australian dollars . InMay 2021 , the Company's Canadian subsidiary,PACCAR Financial Ltd. (PFLCanada ), 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 ofDecember 31, 2021 was150.0 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 atDecember 31, 2021 : MATURITY WITHIN 1 1-3 3-5 MORE THAN ($ in millions) YEAR YEARS YEARS 5 YEARS TOTAL Borrowings*$ 5,302.9 $ 4,075.4 $ 1,075.1 $ 10,453.4 Purchase obligations 94.6 10.4 4.2 109.2 Interest on debt** 85.6 66.8 5.6 158.0 Lease liabilities 15.0 14.7 4.5$ 3.4 37.6 Other obligations 39.5 6.0 .7 46.2$ 5,537.6 $ 4,173.3 $ 1,090.1 $ 3.4 $ 10,804.4
* Commercial paper included in borrowings is at par value.
** Interest on floating-rate debt is based on the applicable market rates at
December 31, 2021 .
Total cash commitments for borrowings and interest on term debt were $10.61
billion and were related to the Financial Services segment. As described in Note
J of the consolidated financial statements, borrowings consist primarily of term
notes and commercial paper issued by the Financial Services segment. The Company
expects to fund its maturing Financial Services debt obligations principally
from funds provided by collections from customers on loans and lease contracts,
as well as from the proceeds of
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commercial paper and medium-term note borrowings. Purchase obligations are the
Company's contractual commitments to acquire future production inventory and
capital equipment. Other obligations primarily include commitments to purchase
energy.
The Company's other commitments include the following at
COMMITMENT EXPIRATION
WITHIN 1 1-3 3-5 MORE THAN
($ in millions) YEAR YEARS YEARS 5 YEARS TOTAL
Loan and lease commitments $ 2,085.8 $ 2,085.8
Residual value guarantees 592.9 $ 673.6 $ 170.2 $ 24.7 1,461.4
Letters of credit 10.1 .3 12.1 22.5
$ 2,688.8 $ 673.9 $ 170.2 $ 36.8 $ 3,569.7
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. 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 endedDecember 31, 2021 and 2020 were$4.0 million and$1.9 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. 28
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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 withU.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 2021, 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$21.8 million . AtDecember 31, 2021 , 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$2.17 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$84.1 million in 2022,$53.1 in 2023,$55.0 in 2024,$16.7 in 2025 and$8.5 in 2026 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 30% and 70%. Over the past two
years, the Company's year-end 30+ days past due accounts have ranged between .3%
and .5% 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 3 to 44 basis points of receivables. At December 31, 2021 , 30+ days past dues
were .3%. If past dues were 100 basis points higher or 1.3% as of December 31,
2021 , the Company's estimate of credit losses would likely have increased by a
range of $3 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 2.2%. If the 2021 warranty expense had been .2% higher as a percentage of net sales and revenues in 2021, warranty expense would have increased by approximately$44 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 newPACCAR 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; litigation, includingEuropean 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. 30
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