Paccar Inc: Form 10-K for the period ended Dec 31, 2023

PACCAR Inc (the Company or PACCAR), incorporated under the laws of Delaware in 1971, is the successor to Pacific Car and Foundry Company which was incorporated in Washington in 1924. The Company traces its predecessors to Seattle Car Manufacturing Company formed in 1905.

Description of Business

PACCAR is a multinational company operating in three principal industry segments:

(1) The Truck segment includes the design, manufacture and distribution of high-quality, light-, medium- and heavy-duty commercial trucks. Heavy-duty trucks have a gross vehicle weight (GVW) of over 33,000 lbs (Class 8) in North America and over 16 metric tonnes in Europe and South America. Medium-duty trucks have a GVW ranging from 19,500 to 33,000 lbs (Class 6 to 7) in North America, and in Europe, light- and medium-duty trucks range between 6 and 16 metric tonnes. Trucks are configured with the engine in front of cab (conventional) or cab-over-engine (COE).

(2) The Parts segment includes the distribution of aftermarket parts for trucks and related commercial vehicles.

(3) The Financial Services segment includes finance and leasing products and services provided to customers and dealers. PACCAR’s finance and leasing activities are principally related to PACCAR products and associated equipment.

PACCAR’s Other business includes the manufacturing and marketing of industrial winches.

TRUCKS

PACCAR’s trucks are marketed under the Kenworth, Peterbilt and DAF nameplates. These trucks, which are built in three plants in the United States, three in Europe and one each in Australia, Brasil, Canada and Mexico, are used worldwide for over-the-road and off-highway hauling of commercial and consumer goods. The Company also designs and manufactures diesel engines, primarily for use in the Company’s trucks, at its facilities in Columbus, Mississippi; Eindhoven, the Netherlands; and Ponta Grossa, Brasil. PACCAR competes in the North American Class 8 market, primarily with Kenworth and Peterbilt conventional models. These trucks are assembled at facilities in Chillicothe, Ohio; Denton, Texas; Renton, Washington and Mexicali, Mexico. PACCAR also competes in the North American Class 6 to 7 markets primarily with Kenworth and Peterbilt conventional models. These trucks are assembled at facilities in Ste. Therese, Canada; Denton, Texas, and Mexicali, Mexico. PACCAR competes in the European light/medium market with DAF COE trucks assembled in the United Kingdom (U.K.) by Leyland, one of PACCAR’s wholly owned subsidiaries, and participates in the European heavy market with DAF COE trucks assembled in the Netherlands and the U.K. PACCAR competes in the Brazilian heavy truck market with DAF COE models assembled in Ponta Grossa in the state of Paraná, Brasil. PACCAR competes in the Australian medium and heavy truck markets with Kenworth conventional and COE models and certain DAF COE models assembled at its facility at Bayswater in the state of Victoria, Australia, and DAF COE models primarily assembled in the U.K. Commercial truck manufacturing comprises the largest segment of PACCAR’s business and accounted for 77% of total 2023 net sales and revenues.

Substantially all trucks are sold to independent dealers. The Kenworth and Peterbilt nameplates are marketed and distributed by separate divisions in the U.S. and a foreign subsidiary in Canada. The Kenworth nameplate is also marketed and distributed by foreign subsidiaries in Mexico and Australia. The DAF nameplate is marketed and distributed worldwide by a foreign subsidiary headquartered in the Netherlands and is also marketed and distributed by foreign subsidiaries in Brasil and Australia. The decision to operate as a subsidiary or as a division is incidental to PACCAR’s Truck segment operations and reflects legal, tax and regulatory requirements in the various countries where PACCAR operates.

The Truck segment utilizes centrally managed purchasing, information technology, technical research and testing, treasury and finance functions. Some manufacturing plants in North America produce trucks for more than one nameplate, while other plants produce trucks for only one nameplate, depending on various factors. Best manufacturing practices within the Company are shared on a routine basis reflecting the similarity of the business models employed by each nameplate.

The Company’s trucks have a reputation for high quality products, most of which are ordered by dealers according to customer specifications. Some units are ordered by dealers for stocking to meet the needs of certain customers who require immediate delivery or for customers that require the chassis to be fitted with specialized bodies. For a significant portion of the Company’s truck operations, major components, such as engines, transmissions and axles, as well as a substantial percentage of other components, are purchased from component manufacturers pursuant to PACCAR and customer specifications. DAF, which is more vertically integrated, manufactures PACCAR engines and axles and a higher percentage of other components for its heavy truck models. The Company also manufactures engines at its Columbus, Mississippi facility. In 2023, the Company installed PACCAR engines in approximately 37% of the Company’s Kenworth and Peterbilt heavy‑duty trucks in the U.S. and Canada and substantially all of the DAF heavy-duty trucks sold throughout the world. Engines not manufactured by the Company are purchased from Cummins Inc. (Cummins). The Company purchased a significant portion of its transmissions from Eaton Corporation Plc. (Eaton) and ZF Friedrichshafen AG (ZF). The Company also purchased a significant portion of North America stampings used for cabs from Magna International Inc. (Magna). The Company has long-term agreements with Cummins, Eaton, ZF and Magna to provide for continuity of supply. A loss of supply from Cummins, Eaton, ZF or Magna, and the resulting interruption in the production of trucks, would have a material effect on the Company’s results. Purchased materials and parts include raw materials, partially processed materials, such as castings, and finished components manufactured by independent suppliers. The Company and its suppliers rely on semiconductors as an essential component in the production of its trucks and aftermarket parts. The Company and its suppliers source semiconductors from various suppliers. Raw materials, partially processed materials and finished components typically make up approximately 85% of the cost of new trucks. The value of finished truck components manufactured by independent suppliers ranges from approximately 24% in Europe to approximately 87% in North America. In addition to materials, the Company’s cost of sales includes labor and factory overhead, vehicle delivery and warranty. Accordingly, except for certain factory overhead costs such as facilities depreciation, property taxes and utilities, the Company’s cost of sales are highly correlated to sales.

The Company’s DAF subsidiary purchases fully assembled cabs from a competitor, Renault V.I., for its European light-, medium-duty product line pursuant to a joint product development and long-term supply contract. Sales of trucks manufactured with these cabs amounted to approximately 3% of consolidated revenues in 2023. A short-term loss of supply, and the resulting interruption in the production of these trucks, would not have a material effect on the Company’s results of operations. However, a loss of supply for an extended period of time would require the Company to either contract for an alternative source of supply or to manufacture cabs itself.

Other than these components, the Company is not limited to any single source for any significant component, although the sudden inability of a supplier to deliver components could have a temporary adverse effect on production of certain products. Manufacturing inventory levels are based upon production schedules, and orders are placed with suppliers accordingly.

Key factors affecting Truck segment earnings include the number of new trucks sold in the markets served and the margins realized on the sales. The Company’s sales of new trucks are dependent on the size of the truck markets served and the Company’s share of those markets. Truck segment sales and margins tend to be cyclical based on the level of overall economic activity, the availability of capital and the amount of freight being transported. The Company’s costs for trucks consist primarily of material costs, which are influenced by the price of commodities such as steel, copper, aluminum and petroleum. The Company utilizes long-term supply agreements to reduce the variability of the unit cost of purchased materials and finished components and engages in hedging activities for some commodities in certain geographical markets. The Company’s spending on research and development varies based on product development cycles and government requirements such as changes to diesel engine emissions and vehicle fuel efficiency standards in the various markets served. The Company maintains rigorous control of selling, general and administrative (SG&A) expenses and seeks to minimize such costs.

There are four principal competitors in the U.S. and Canada commercial truck market. The Company’s share of the U.S. and Canadian Class 8 market was 29.5% of retail sales in 2023, and the Company’s medium-duty market share was 14.5%. In Europe, there are six principal competitors in the commercial truck market, including parent companies to the four competitors of the Company in the U.S. In 2023, DAF had a 15.6% share of the European heavy-duty market and a 9.1% share of the light/medium-duty market. These markets are highly competitive in price, quality and service. PACCAR is not dependent on any single customer for its sales. There are no significant seasonal variations in sales.

The Peterbilt, Kenworth and DAF nameplates are recognized internationally and play an important role in the marketing of the Company’s truck products. The Company engages in a continuous program of trademark and trade name protection in all marketing areas of the world.

The Company’s truck products are subject to noise, emission and safety regulations. Competing manufacturers are subject to the same regulations. The Company believes the cost of complying with these regulations will not be detrimental to its business.

The Company had a total production backlog of $17.4 billion at the end of 2023. Within this backlog, orders scheduled for delivery within three months (90 days) are considered to be firm. The 90‑day backlog approximated $7.6 billion at December 31, 2023, $8.0 billion at December 31, 2022 and $5.2 billion at December 31, 2021. Production of the year-end 2023 backlog is expected to be substantially completed during 2024.

PARTS

The Parts segment includes the distribution of aftermarket parts for trucks and related commercial vehicles to over 2,300 Kenworth, Peterbilt and DAF dealers in 95 countries around the world. Aftermarket truck parts are sold and delivered to the Company’s independent dealers through the Company’s 18 strategically located parts distribution centers (PDCs) in the U.S., Canada, Europe, Australia, Mexico and Central and South America. Parts are primarily purchased from various suppliers and also manufactured by the Company. Aftermarket parts inventory levels are determined largely by anticipated customer demand and the need for timely delivery. The Parts segment accounted for 18% of total 2023 net sales and revenues.

Key factors affecting Parts segment earnings include the aftermarket parts sold in the markets served and the margins realized on the sales. Aftermarket parts sales are influenced by the total number of the Company’s trucks in service and the average age and mileage of those trucks. To reflect the benefit the Parts segment receives from costs incurred by the Truck segment, certain factory overhead, research and development, engineering and SG&A expenses are allocated from the Truck segment to the Parts segment. The Company’s cost for parts sold consists primarily of material costs, which are influenced by the price of commodities such as steel, copper, aluminum and petroleum. The Company utilizes long-term supply agreements to reduce the variability of the cost of parts sold. The Company maintains rigorous control of SG&A expenses and seeks to minimize such costs.

FINANCIAL SERVICES

PACCAR Financial Services (PFS) operates in 26 countries in North America, Europe, Australia and South America through wholly owned finance companies operating under the PACCAR Financial trade name. PFS also conducts full-service leasing operations through operating divisions or wholly owned subsidiaries in North America, Germany and Australia under the PacLease trade name. Selected dealers in North America and Australia are franchised to provide full-service leasing. PFS provides its franchisees with equipment financing and administrative support. PFS also operates its own full service lease outlets. PFS’s retail loan and lease customers consist of small, medium and large commercial trucking companies, independent owner/operators and other businesses and acquire their PACCAR trucks principally from independent PACCAR dealers. PFS accounted for 5% of total net sales and revenues and 51% of total assets in 2023.

PFS is primarily responsible for managing the sales of the Company’s used trucks. The Company’s Financial Services segment sells used trucks returned from matured operating leases in the ordinary course of business and trucks acquired from repossessions. PFS also obtains used trucks from the Truck segment in trades related to new truck sales and trucks returned from residual value guarantees (RVGs). Certain gains and losses from the sale of used trucks are shared with the Truck segment. The Company’s Financial Services segment records revenue on the sale of used trucks received in trade and RVG returns.

The Company’s finance receivables are classified as dealer wholesale, dealer retail and customer retail segments. The dealer wholesale segment consists of truck inventory financing to independent PACCAR dealers. The dealer retail segment consists of loans and leases to participating dealers and franchises, which use the proceeds to fund their customers’ acquisition of trucks and related equipment. The customer retail segment consists of loans and leases directly to customers for their acquisition of trucks and related equipment. Customer retail receivables are further segregated by fleet and owner/operator classes. The fleet class consists of customers operating five or more trucks. All others are considered owner/operators. Similar methods are employed to assess and monitor credit risk for each class.

Finance receivables are secured by the trucks and related equipment being financed or leased. The terms of loan and lease contracts generally range from three to five years depending on the type and use of equipment. Payment is required on dealer inventory financing when the floored truck is sold to a customer or upon maturity of the flooring loan, whichever comes first. Dealer inventory loans generally mature within one year.

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 public and private offerings and, to a lesser extent, bank loans. An additional source of funds is loans from other PACCAR companies. PFS matches the maturity and interest rate characteristics of its debt with the maturity and interest rate characteristics of loans and leases.

Key factors affecting the earnings of the Financial Services segment include the volume of new loans and leases, the yield earned on the loans and leases, the costs of funding investments in loans and leases, the ability to collect the amounts owed to PFS, the volume of used truck sales and used truck prices. New loan and lease volume is dependent on the volume of new trucks sold by Kenworth, Peterbilt and DAF and the share of those truck sales that are financed by the Financial Services segment. The Company’s Financial Services market share is influenced by the extent of competition in the financing market. PFS’s primary competitors include commercial banks and independent finance and leasing companies.

The revenue earned on loans and leases depends on market interest and lease rates and the ability of PFS to differentiate itself from the competition by superior industry knowledge and customer service. Dealer inventory loans have variable rates with rates reset monthly based on an index pertaining to the applicable local market. Retail loan and lease contracts normally have fixed rates over the contract term. PFS obtains funds either through fixed rate borrowings or through variable rate borrowings, a portion of which have been effectively converted to fixed rate through the use of interest-rate contracts. This enables PFS to obtain a stable spread between the cost of borrowing and the yield on fixed rate contracts over the contract term. Included in Financial Services cost of revenues is depreciation on equipment on operating leases. The amount of depreciation on operating leases principally depends on the acquisition cost of leased equipment, the term of the leases, which generally ranges from three to five years, and the residual value of the leases, which generally ranges from 30% to 70%. The margin earned is the difference between the revenues on loan and lease contracts and the direct costs of operation, including interest and depreciation.

PFS incurs credit losses when customers are unable to pay the full amounts due under loan and finance lease contracts. PFS takes a conservative approach to underwriting new retail business in order to minimize credit losses.

The ability of customers to pay their obligations to PFS depends on the state of the general economy, the extent of freight demand, freight rates and the cost of fuel, among other factors. PFS limits its exposure to any one customer, with no one customer or dealer balance representing over 5% of the aggregate portfolio assets. PFS generally requires a down payment and secures its interest in the underlying truck collateral and may require other collateral or guarantees. In the event of default, PFS will repossess the truck and sell it in the open market primarily through its dealer network as well as PFS used truck centers. PFS will also seek to recover any shortfall between the amounts owed and the amounts recovered from sale of the collateral. The amount of credit losses depends on the rate of default on loans and finance leases and, in the event of repossession, the ability to recover the amount owed from sale of the collateral which is affected by used truck prices. PFS’s experience over the last sixty years financing truck sales has been that periods of economic weakness result in higher past dues and increased rates of repossession. Used truck prices also tend to fall during periods of economic weakness. As a result, credit losses tend to increase during periods of economic weakness. PFS provides an allowance for credit losses based on specifically identified customer risks and an analysis of estimated losses inherent in the portfolio, considering the amount of past due accounts, the trends of used truck prices and the current and forecasted economic conditions of its geographic markets.

Financial Services SG&A expenses consist primarily of personnel costs associated with originating and servicing the loan and lease portfolios. These costs vary somewhat depending on overall levels of business activity, but given the ongoing nature of servicing activities, tend to be relatively stable.

OTHER BUSINESSES

Other businesses include the manufacturing of industrial winches in two U.S. plants and marketing them under the Braden, Carco and Gearmatic nameplates. The markets for these products are highly competitive, and the Company competes with a number of well established firms. Sales of industrial winches were less than 1% of total net sales and revenues in 2023, 2022 and 2021.

The Braden, Carco and Gearmatic trademarks and trade names are recognized internationally and play an important role in the marketing of those products.

PATENTS

The Company owns numerous patents which relate to all product lines. Although these patents are considered important to the overall conduct of the Company’s business, no patent or group of patents is considered essential to a material part of the Company’s business.

REGULATION

As a manufacturer of highway trucks, the Company is subject to the National Traffic and Motor Vehicle Safety Act and Federal Motor Vehicle Safety Standards promulgated by the National Highway Traffic Safety Administration as well as environmental laws and regulations in the United States, and is subject to similar regulations in all countries where it has operations and where its trucks are distributed. In addition, the Company is subject to certain other licensing requirements to do business in the United States and Europe. The Company believes it is in compliance with laws and regulations applicable to safety standards, the environment and other licensing requirements in all countries where it has operations and where its trucks are distributed.

The Company designs and manufactures engines for use in PACCAR vehicles worldwide. The Company’s operations and products are subject to extensive statutory and regulatory requirements governing greenhouse gas and non-greenhouse gas emissions. These include standards imposed by the U.S. Environmental Protection Agency (EPA), the European Union, U.S. state regulatory agencies (such as the California Air Resources Board), regulatory agencies in other international markets where the Company operates, and non-binding international accords related to climate change. The primary laws and regulations are the EPA’s Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Medium and Heavy-Duty Engines and Vehicles, EPA’s Clean Truck Initiative, the Regulation of the European Parliament and of the Council on the Monitoring and Reporting of CO2 Emissions from Fuel Consumption of New Heavy-Duty Vehicles, and the Heavy-Duty Omnibus Regulation and Advanced Clean Truck (ACT) regulation of the California Air Resources Board. The ACT regulation, which has been adopted by several other states, requires an increasing percentage of medium- and heavy-duty trucks sold into the state to be zero emissions.

PACCAR established its science-based greenhouse gas emission reduction targets to meet the goals of the Paris Agreement. The Company continually monitors developments in emissions and climate change-related laws and regulations in the markets in which the Company conducts business. The Company will continue to fund capital and R&D projects to meet future emissions and certification requirements through the introduction of new technologies into our products, engines and exhaust after-treatment systems.

The Company’s manufacturing and assembly plants are subject to environmental laws and regulations such as regulating air emissions, water discharges and the handling and disposal of hazardous substances. Failure to comply with these regulations could lead to fines and other penalties. The Company believes in all material respects it is in compliance with the laws and regulations applicable to our plants and operations.

Information regarding the effects that compliance with international, federal, state and local environmental regulations have on the Company’s capital and operating expenditures and the Company’s involvement in environmental matters is included in Item 1A, “Risk Factors” and in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s Consolidated Financial Statements in Items 7 and 8, respectively.

HUMAN CAPITAL MANAGEMENT

PACCAR is committed to a strong, diverse and inclusive culture and the Company’s excellent financial results reflect its human centered philosophy. The Company provides its employees with robust benefit packages, comprehensive training programs, tuition assistance and a work environment that promotes safety and diversity.

The Company’s benefit packages support employee physical, emotional and financial well-being. Employee satisfaction and engagement are measured through periodic surveys. Employee training and development programs are extensive and comprehensive, including professional and technical skills training, compliance training, leadership development and management training. The Company has diversity councils throughout its global business that set goals to enhance business success through diverse and inclusive workplaces. The Company is proud to have been honored for the past several years as a Top Company for Women to Work for in Transportation by the Women in Trucking Association. PACCAR has a proud tradition of making grants around the world for education, social services and the arts to enrich the communities in which its employees live and work.

Safety is a key priority and the Company’s major manufacturing facilities are equipped with safety and health departments staffed with trained medical personnel. The Company’s managers continuously address safety enhancements; provide regular and ongoing safety training; and use displays located in the Factories, Parts Distribution Centers and Offices to provide all employees with safety-related information. PACCAR’s consistent focus on workplace safety has resulted in a recordable injury rate lower than the U.S. industry average.

On December 31, 2023, the Company had approximately 32,400 employees. Approximately 39% are U.S. employees.

ENVIRONMENTAL AND SUSTAINABILITY LEADERSHIP

Reducing the environmental impact of the Company’s activities and products is an integral part of the Company’s process of continuous improvement. PACCAR’s commitment to the environment is demonstrated in the Company’s energy efficient operations and technologically advanced products. The Company’s environmental management system and policy are designed to focus on the reduction of the environmental impacts of the Company’s activities, products and services.

PACCAR has disclosed greenhouse gas emissions through CDP (formerly Carbon Disclosure Project) since 2014. PACCAR earned an "A-" score on its CDP environmental report in 2023, placing the Company in the Leadership tier of over 21,000 reporting companies worldwide. The Company has earned an “A” or “A-” score from CDP for the past nine years.

PACCAR has established emissions reduction targets in partnership with the Science Based Targets Initiative (SBTi). SBTi works with more than 7,000 companies worldwide to create a clearly defined path to reduce greenhouse gas emissions in line with the Paris Agreement.

Operations - PACCAR is committed to environmental responsibility in the vehicle production process. PACCAR is continuously looking for ways to reduce waste, reuse materials, conserve energy in its facilities and reduce the environmental impact of our activities. PACCAR’s factories are ISO 14001 certified and more than 80% are zero waste-to-landfill.

Innovative Products - A key element of PACCAR’s environmental strategy is to offer our customers commercial vehicles that reduce environmental impacts. The Company invests in technologies that reduce greenhouse gas emissions such as highly fuel-efficient diesel engines, natural gas and biofuel engines, as well as next generation electric, hybrid, and hydrogen powertrains. To develop these industry-leading products and technologies, PACCAR makes significant research and development and capital investments every year.

PACCAR’s Zero Emissions Trucks - PACCAR’s research and development efforts include demonstration and development projects for Kenworth, Peterbilt and DAF vehicles, including battery-electric, hydrogen fuel cell, hydrogen combustion and hybrid technologies. PACCAR is currently producing battery-electric Kenworth, Peterbilt and DAF trucks.

Low Carbon and Renewable Fuels – All truck sales and diesel engine unit sales are certified to use biofuels. PACCAR’s MX-13 and MX-11 engines are certified to use B10/B20/B30 and XTL biofuels in Europe and B20 biofuel in the U.S. Engines used in PACCAR trucks not manufactured by the Company are certified to use up to B20 biofuels.

Advanced Vehicles - PACCAR began work on its SuperTruck 3 program to continue the development of its Class 8 Kenworth and Peterbilt battery-electric and fuel cell vehicles, along with its vehicle charging stations. SuperTruck 3 is a U.S. Department of Energy (DOE) initiative to develop state-of-the-art zero emissions medium- and heavy-duty trucks. The SuperTruck initiative was launched in 2009 by the DOE to improve heavy-duty truck freight efficiency. Kenworth and Peterbilt successfully developed state-of-the-art vehicles in the prior SuperTruck and SuperTruck 2 programs. Many of the technologies developed in the earlier SuperTruck programs were deployed in production vehicles, benefiting the environment and PACCAR’s customers.

Remanufacturing - Remanufacturing is the industrial process of returning a previously used component to “like-new” condition. Remanufacturing helps the environment by reducing waste. PACCAR’s aftermarket parts division sells remanufactured engines and many other remanufactured components. PACCAR announced in December 2023 that it will construct a new engine remanufacturing facility in Columbus, Mississippi to be opened in 2025.

Connected Trucks and Driver Training - PACCAR Connect fleet management system gives fleet customers real-time information on vehicle and driver performance including fuel consumption, fleet utilization, idle time and route optimization. This information enables customers to improve fleet operating efficiency and reduce fuel consumption and CO2 emissions. PACCAR has introduced technologies that train drivers to operate vehicles more efficiently.

Battery Manufacturing - PACCAR, Cummins, Daimler Trucks and EVE Energy are partnering to produce state-of-the-art commercial vehicle batteries in a 21-gigawatt hour (GWh) factory in Marshall County, Mississippi, subject to regulatory approval. Production is expected to begin in 2027.

OTHER DISCLOSURES

The Company’s filings on Forms 10‑K, 10‑Q and 8‑K and any amendments to those reports can be found on the Company’s website www.paccar.com (http://www.paccar.com) free of charge as soon as practicable after the report is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). The information on the Company’s website is not incorporated by reference into this report. In addition, the Company’s reports filed with the SEC can be found at www.sec.gov (http://www.sec.gov).

INFORMATION ABOUT THE COMPANY’S EXECUTIVE OFFICERS

The following are significant risks which could have a material negative impact on the Company’s financial condition or results of operations.

Business and Industry Risks

Commercial Truck Market Demand is Variable. The Company’s business is highly sensitive to global and national economic conditions as well as economic conditions in the industries and markets it serves. Negative economic conditions and outlook can materially weaken demand for the Company’s equipment and services. The yearly demand for commercial vehicles may increase or decrease more than overall gross domestic product in markets the Company serves, which are principally North America and Europe. Demand for commercial vehicles may also be affected by the introduction of new vehicles and technologies by the Company or its competitors.

Competition and Prices. The Company operates in a highly competitive environment, which could adversely affect the Company’s sales and pricing. Financial results depend largely on the ability to develop, manufacture and market competitive products that profitably meet customer demand.

Production Costs, Capacity and Inflation. The Company’s products are exposed to variability in material and commodity costs. Commodity or component price increases, cost pressures due to inflation, significant shortages of component products and labor availability may adversely impact the Company’s financial results or use of its production capacity. Many of the Company’s suppliers also supply automotive manufacturers, and factors that adversely affect the automotive industry can also have adverse effects on these suppliers and the Company. Supplier delivery performance can be adversely affected if increased demand for these suppliers’ products exceeds their production capacity.

Unexpected events, including natural disasters, extreme weather events, or pandemics, may increase the Company’s cost of doing business or disrupt the Company’s or its suppliers’ operations. The likelihood or severity of these unexpected events may increase due to the effects of climate change.

Transition Risks Related to Climate Change. The Company has ongoing product development programs intended to address changing customer demand in the context of climate change and achieve its targeted reductions in emissions. These involve the continuing development of compliant clean diesel powertrains and the design, manufacture, and sale of alternative powertrain commercial vehicles (e.g., battery-electric, hybrid, hydrogen fuel cell, and hydrogen combustion). The pace of transition from diesel combustion to alternative powertrain commercial vehicles is highly uncertain and will be influenced by:

• the success of the Company’s research and development programs
• customer demand for alternative powertrain vehicles
• advancements in battery-electric, hydrogen fuel cell, and hydrogen combustion technology
• the cost of batteries, hydrogen fuel cells and liquid hydrogen
• global regulations requiring the use of alternative powertrain vehicles and/or providing incentives to facilitate the transition to alternative powertrain commercial vehicles
• investments in energy and power infrastructure (e.g., renewable power supply, electric charging services, hydrogen supply and distribution) in key markets, as well as the associated utility costs
• the ability of the supply chain to deliver components, including commodities and raw materials that are unique to alternative powertrain commercial vehicles
• the success of new and existing competitors in developing and selling alternative powertrain commercial vehicles

The Company believes its current strategies, programs and resources are sufficient to address changes in customer demand in the context of climate change and to meet its emissions reduction targets. If the Company is not successful in addressing the risks noted above, there may be a material adverse impact on its business, operations, and financial condition.

Liquidity Risks, Credit Ratings and Costs of Funds. Disruptions or volatility in global financial markets could limit the Company’s sources of liquidity, or the liquidity of customers, dealers and suppliers. A lowering of the Company’s credit ratings could increase the cost of borrowing and adversely affect access to capital markets. The Company’s Financial Services segment obtains funds for its operations from commercial paper, medium-term notes and bank debt. If the markets for commercial paper, medium-term notes and bank debt do not provide the necessary liquidity in the future, the Financial Services segment may experience increased costs or may have to limit its financing of retail and wholesale assets. This could result in a reduction of the number of vehicles the Company is able to produce and sell to customers.

The Financial Services Industry is Highly Competitive. The Company’s Financial Services segment competes with banks, other commercial finance companies and financial services firms which may have lower costs of borrowing, higher leverage or market share goals that result in a willingness to offer lower interest rates, which may lead to decreased margins, lower market share or both. A decline in the Company’s truck unit sales or a decrease in used truck prices are also factors which may affect the Company’s Financial Services segment.

The Financial Services Segment is Subject to Credit Risk. The Financial Services segment is exposed to the risk of loss arising from the failure of a customer, dealer or counterparty to meet the terms of the loans, leases and derivative contracts with the Company. Although the financial assets of the Financial Services segment are secured by underlying equipment collateral, in the event a customer cannot meet its obligations to the Company, there is a risk the value of the underlying collateral will not be sufficient to recover the amounts owed to the Company, resulting in credit losses.

Interest-Rate Risks. The Financial Services segment is subject to interest-rate risks, because increases in interest rates can reduce demand for its products, increase borrowing costs and potentially reduce interest margins. PFS uses derivative contracts to match the interest-rate characteristics of its debt to the interest-rate characteristics of its finance receivables in order to mitigate the risk of changing interest rates.

All of the Company’s finance contracts which used to reference LIBOR (London Inter-Bank Offered Rate), including dealer wholesale financing contracts, retail loan and lease contracts, medium-term notes, hedging instruments and line of credit arrangements, have been transitioned to alternative benchmark rates.

Changes to other benchmark interest rates, such as CDOR (Canadian Dollar Offered Rate), will have an uncertain impact on finance receivables and other financial obligations, the Company’s future cost of funds and/or access to capital markets. The Company will attempt to minimize the impact of differences between the current and replacement benchmark rates through pricing adjustments on the financing provided by PFS, but it is not certain the Company will be able to do so. The Company does not expect the cessation of CDOR or the anticipated changes to other benchmark rates will have a material impact on the results of operations.

Information Technology and Cybersecurity. The Company relies on information technology systems and networks, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of its business processes and activities. Some of the Company’s products include telematics which provide over-the-air software updates, advanced fleet management tools and real-time data analytics on driver and vehicle performance. These computer systems and networks may be subject to disruptions during the process of upgrading or replacing software, databases or components; power outages; hardware failures; computer viruses; or outside parties attempting to disrupt the Company’s business or gain unauthorized access to the Company’s electronic data. The Company maintains a cybersecurity insurance policy and continues to invest in protections to guard against such events. Despite these safeguards, there remains a risk of system disruptions, unauthorized access and data loss.

If the Company’s computer systems were to be damaged, disrupted or breached, it could impact data availability and integrity, result in a theft of the Company’s intellectual property or lead to unauthorized disclosure of confidential information of the Company’s customers, suppliers and employees. Security breaches could also result in a violation of U.S. and international privacy and other laws and subject the Company to various litigations and governmental proceedings. These events could have an adverse impact on the Company’s results of operations and financial condition, damage its reputation, disrupt operations and negatively impact competitiveness in the marketplace.

Political, Regulatory and Economic Risks

Multinational Operations. The Company’s global operations are exposed to political, economic and other risks and events beyond its control in the countries in which the Company operates. The Company may be adversely affected by political instabilities, fuel shortages or interruptions in utility or transportation systems, natural calamities, recessions or slower economic growth, inflation, epidemics and pandemics (such as COVID-19), wars, geopolitical tensions and conflicts (such as conflicts in Ukraine and Israel), terrorism and labor strikes. Changes in government monetary or fiscal policies and international trade policies may impact demand for the Company’s products, financial results and competitive position. PACCAR’s global operations are subject to extensive trade, competition and anti-corruption laws and regulations that could impose significant compliance costs.

Environmental Regulations. The Company’s operations are subject to environmental laws and regulations that impose significant compliance costs. The Company could experience higher research and development and manufacturing costs due to changes in government requirements for its products, including changes in emissions, fuel, greenhouse gas or other regulations.

Emissions Requirements and Reduction Targets. PACCAR’s operations and products are subject to extensive statutory and regulatory requirements governing greenhouse gas and non-greenhouse gas emissions. These include standards imposed by the U.S. Environmental Protection Agency (EPA), the European Union, U.S. state regulatory agencies (such as the California Air Resources Board), regulatory agencies in other international markets where the Company operates, and non-binding international accords related to climate change. The primary laws and regulations are the EPA’s Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Medium and Heavy-Duty Engines and Vehicles, EPA’s Clean Truck Initiative, the Regulation of the European Parliament and of the Council on the Monitoring and Reporting of CO2 Emissions from Fuel Consumption of New Heavy-Duty Vehicles, and the Heavy-Duty Omnibus Regulation and Advanced Clean Truck (ACT) regulation of the California Air Resources Board. The ACT regulation, which has been adopted by several other states, requires an increasing percentage of medium- and heavy-duty trucks sold into the state to be zero emission.

PACCAR established its science-based greenhouse gas emission reduction targets to meet the goals of the Paris Agreement. The Company’s product planning through 2030 is aligned with these statutory and regulatory requirements, and uses a climate change scenario analysis to limit global warming to below 2°C. Even without legislation to reduce greenhouse gas emissions, PACCAR expects to continue to significantly invest in technologies to improve fuel efficiency for its customers, which would also reduce greenhouse gas emissions.

The Company continually monitors developments in emissions and climate change-related laws and regulations in the markets in which the Company conducts business, and expects that climate change-related laws, regulations, and international accords will continue to evolve. PACCAR cannot reasonably predict whether future laws, regulations, and international accords could materially increase its environmental compliance costs, alter its product development strategy, or impact its business, financial condition, or results of operations.

Litigation, Product Liability and Regulatory. The Company’s products are subject to recall for environmental, performance and safety-related issues. Product recalls, lawsuits, regulatory actions or increases in the reserves the Company establishes for contingencies may increase the Company’s costs and lower profits. Due to the international nature of the Company’s business, some products are also subject to international trade regulations, including customs and import/export related laws and regulations, government embargoes and sanctions prohibiting sales to specific persons or countries, as well as anti-corruption laws. The Company’s telematics depend on cellular frequency allocations regulated by government agencies and collected data is subject to various privacy laws and government regulations. The Company’s reputation and its brand names are valuable assets, and claims or regulatory actions, even if unsuccessful or without merit, could adversely affect the Company’s reputation and brand images because of adverse publicity.

Currency Exchange and Translation. The Company’s consolidated financial results are reported in U.S. dollars, while significant operations are denominated in the currencies of other countries. Currency exchange rate fluctuations can affect the Company’s assets, liabilities and results of operations through both translation and transaction risk, as reported in the Company’s financial statements. The Company uses certain derivative financial instruments and localized production of its products to reduce, but not eliminate, the effects of foreign currency exchange rate fluctuations.

Accounting Estimates. 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. Certain of these estimates, judgments and assumptions, such as residual values on operating leases, the allowance for credit losses and product warranty are particularly sensitive. If actual results are different from estimates used by management, they may have a material impact on the financial statements. For additional disclosures regarding accounting estimates, see “Critical Accounting Policies” under Item 7 of this Form 10-K.

Taxes. Changes in statutory income tax rates in the countries in which the Company operates impact the Company’s effective tax rate. Changes to other taxes or the adoption of other new tax legislation could affect the Company’s provision for income taxes and related tax assets and liabilities.

The Company maintains a comprehensive cybersecurity management and governance program. The Company’s information security management system is based upon the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF). The Company engages internal and third-party auditors and other professional parties when necessary, as part of its cybersecurity management program. The Company conducts penetration and compromise assessment tests, implements detection and prevention tools, monitors cyber events and has active disaster recovery plans. For third-party IT services, the Company conducts an architectural, privacy and security analysis of their solution. If any gaps are identified, the third-party remediates or mitigates the risk to an acceptable level. The Company simulates potential cyber-attacks and performs incident responses to test preparedness. These exercises are used to train and update the Company’s Incident Response plan, including any gaps identified. The Company conducts yearly information security training for employees and conducts ongoing phishing tests.

The Company’s Security Risk Council, including the Chief Information Security Officer, meets regularly to cover risks, plans and updates to the security program. It briefs the Board of Directors and/or the Audit Committee of the Board of Directors on technology and information security matters. Management and the Board of Directors also receive periodic updates on the status of cybersecurity investments to guard against such events. In the event of a security breach, the Company’s Security Risk Council evaluates its significance and briefs the Board on the event.

The Company has not experienced any notable security incidents that would have a material impact on the results of operations and financial condition of the Company. Certain dealers and suppliers have reported they have experienced cyberattacks and those have not caused any material impact to the Company.

The Company and its subsidiaries own and operate manufacturing plants in five U.S. states, three countries in Europe, and in Australia, Brasil, Canada and Mexico. The Company also has 18 parts distribution centers, many sales and service offices, and finance and administrative offices which are operated in owned or leased premises in these and other locations. Facilities for product testing and research and development are located in the state of Washington and the Netherlands. The Company also has an innovation center in Sunnyvale, California. The Company’s corporate headquarters is located in owned premises in Bellevue, Washington. The Company considers all of the properties used by its businesses to be suitable for their intended purposes.

The Company invests in facilities, equipment and processes to provide manufacturing and warehouse capacity to meet its customers’ needs and improve operating performance.

The following summarizes the number of the Company’s manufacturing plants and parts distribution centers by geographical location within indicated industry segments:

Refer to Note L – “Commitments and Contingencies” in the Notes to Consolidated Financial Statements (Part II, Item 8) for discussion on litigation matters, which is incorporated by reference herein.

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.

2023 Financial Highlights

• Worldwide net sales and revenues were $35.13 billion in 2023 compared to $28.82 billion in 2022, primarily due to higher truck and parts revenues.
• Truck sales were $26.85 billion in 2023 compared to $21.49 billion in 2022, primarily due to higher truck deliveries and price realization in all markets.
• Parts sales were $6.41 billion in 2023 compared to $5.76 billion in 2022 reflecting higher price realization in all markets.
• Financial Services revenues were $1.81 billion in 2023 compared to $1.51 billion in 2022, primarily due to portfolio growth and higher portfolio yields.
• In 2023, PACCAR earned net income for the 85th consecutive year. Net income was $4.60 billion ($8.76 per diluted share) in 2023 compared to $3.01 billion ($5.75 per diluted share) in 2022 reflecting higher Truck and Parts operating results.
• Adjusted net income (non-GAAP), excluding a $446.4 million after-tax non-recurring charge related to civil litigation in Europe was $5.05 billion ($9.61 per diluted share). After-tax return on beginning equity (ROE) was 34.9% in 2023, which includes the $446.4 million after-tax non-recurring charge related to civil litigation in Europe in the first quarter of this year. Excluding the one-time charge, adjusted ROE (non-GAAP) was 38.3%. This compares to an ROE of 26.0% in 2022. See Reconciliation of GAAP to Non-GAAP Financial Measures on page 30.
• Capital investments were $698.3 million in 2023 compared to $505.0 million in 2022.
• Research and development (R&D) expenses were $410.9 million in 2023 compared to $341.2 million in 2022.

PACCAR has begun construction of a new 240,000 square-foot PACCAR Parts Distribution Center (PDC) to be opened in Massbach, Germany, in 2024. This PDC will improve parts delivery to dealers and customers in the region.

PACCAR, Cummins, Daimler Trucks and EVE Energy are partnering to create state-of-the-art commercial vehicle battery cell production. The joint venture partners expect growing demand for zero emissions vehicles throughout the decade. The planned factory in Marshall County, Mississippi, will provide cost effective scale and industry leading battery cell technology, which will benefit our commercial vehicle customers. The total investment is expected to be in the range of $2-3 billion, with PACCAR, Cummins and Daimler Truck each owning 30% of the joint venture and EVE Energy having 10% ownership and contributing its industry leading battery cell design and manufacturing expertise. Subject to regulatory approval, the 21-gigawatt hour (GWh) factory is expected to begin producing battery cells in 2027.

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 $20.96 billion. PFS issued $2.91 billion in medium-term notes during 2023 to support new business volume and repay maturing debt.

Truck Outlook

Heavy-duty truck industry retail sales in the U.S. and Canada in 2024 are expected to be 260,000 to 300,000 units compared to 297,000 in 2023. In Europe, the 2024 truck industry registrations for over 16-tonne vehicles are expected to be 260,000 to 300,000 units compared to 343,300 in 2023. In South America, heavy-duty truck industry registrations in 2024 are projected to be 105,000 to 115,000 compared to 105,000 in 2023.

Parts Outlook

In 2024, PACCAR Parts sales are expected to increase 4-8% compared to 2023 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 2024, average earning assets are expected to increase 3-5% compared to 2023. 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 2024 are expected to be $700 to $750 million, and R&D is expected to be $460 to $500 million. The Company is increasing its investment in fuel efficient diesel and electric powertrain technologies, connected vehicle services, and next-generation manufacturing and parts 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, 2023 and 2022 are presented below. For information on the year ended December 31, 2021, refer to Part II, Item 7 in the 2022 Annual Report on Form 10-K.

($ in millions, except per share amounts)

* In 2023, Other includes a $600.0 million non-recurring charge related to civil litigation in Europe (EC-related claims) in the first quarter 2023.

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 and economic conditions affecting the Company’s results of operations.

2023 Compared to 2022:

Truck

The Company’s Truck segment accounted for 77% of revenues in 2023 compared to 75% in 2022.

The Company’s new truck deliveries are summarized below:

The increase in new truck deliveries worldwide in 2023 compared to 2022 was driven by higher build rates and increased demand in all major markets.

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

In 2023, industry retail sales in the heavy-duty market in the U.S. and Canada increased to 297,000 units from 283,500 units in 2022. The Company’s heavy-duty truck retail market share was 29.5% in 2023 compared to 29.8% in 2022. The medium-duty market was 105,300 units in 2023 compared to 88,300 units in 2022. The Company’s medium-duty market share was 14.5% in 2023 compared to 10.9% in 2022.

The over 16‑tonne truck market in Europe in 2023 increased to 343,300 units from 297,500 units in 2022, and DAF’s market share was 15.6% in 2023 compared to 17.3% in 2022. The 6 to 16‑tonne market was 46,800 units in 2023 and 38,800 units in 2022. DAF’s market share in the 6 to 16-tonne market in 2023 was 9.1% compared to 9.7% in 2022.

The over 16‑tonne truck market in Brasil in 2023 decreased to 82,100 units from 97,900 units in 2022, and DAF Brasil achieved a record 10.2% market share in 2023 compared to 6.9% in 2022.

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

($ in millions)

The Company’s worldwide truck net sales and revenues increased to $26.85 billion in 2023 from $21.49 billion in 2022 primarily due to higher truck unit deliveries, improved price realization in all markets and favorable currency translation effects, primarily the euro. Truck segment income before income taxes and pretax return on revenues reflect the impact of higher truck unit deliveries and improved margins.

The major factors for the Truck segment changes in net sales and revenues, cost of sales and revenues and gross margin between 2023 and 2022 are as follows:

($ in millions)

• Truck sales volume reflects higher truck deliveries in all major markets.
• Average truck sales prices increased sales by $2.79 billion, primarily due to higher price realization worldwide reflecting the positive effect of new truck models as well as inflationary cost increases.
• Average cost per truck increased cost of sales by $916.7 million, primarily reflecting higher raw material, labor and product support costs, mainly warranty expense.
• Factory overhead and other indirect costs increased $204.3 million, primarily due to higher labor costs, maintenance, depreciation and utilities.
• Extended warranties, operating leases and other increased revenues by $40.5 million and increased cost of sales by $134.2 million. The increase in cost of sales was primarily due to higher costs from extended warranty and service contracts.
• The currency translation effect on sales and cost of sales reflects an increase in the value of the euro and Brazilian real relative to the U.S. dollar, partially offset by the decrease in the value of the Canadian dollar and Australian dollar relative to the U.S. dollar.
• Truck gross margin was 16.4% in 2023 compared to 10.6% in 2022 due to the factors noted above.

Truck selling, general and administrative expenses (SG&A) in 2023 decreased to $278.5 million from $280.0 million in 2022. The decrease was primarily due to lower professional expenses, and lower sales and marketing expenses, offset by higher salaries and travel related costs. As a percentage of sales, Truck SG&A was 1.0% in 2023 and 1.3% in 2022.

Parts

The Company’s Parts segment accounted for 18% of revenues in 2023 compared to 20% in 2022.

($ in millions)

The Company’s worldwide parts net sales and revenues increased to $6.41 billion in 2023 from $5.76 billion in 2022 primarily due to higher price realization in all markets. The increase in Parts segment income before income taxes and pre-tax return on revenues was primarily due to higher price realization in all markets.

The major factors for the Parts segment changes in net sales and revenues, cost of sales and revenues and gross margin between 2023 and 2022 are as follows:

($ in millions)

• Aftermarket parts sales volume increased by $22.5 million and related cost of sales increased by $9.2 million primarily reflecting higher sales volume in Brasil, Australia and Europe, partially offset by lower sales volume in the U.S.
• Average aftermarket parts sales prices increased sales by $614.2 million primarily due to higher price realization in North America and Europe.
• Average aftermarket parts direct costs increased $297.6 million due to higher material costs, primarily in the U.S. and Europe.
• Warehouse and other indirect costs increased $44.8 million primarily due to higher salaries and related expenses and costs of supplies.
• The currency translation effect on sales and cost of sales primarily reflects an increase in the value of the euro relative to the U.S. dollar, partially offset by a decrease in the value of the Australian dollar and the Canadian dollar relative to the U.S. dollar.
• Parts gross margin was 31.9% in 2023 compared to 30.4% in 2022 due to the factors noted above.

Parts SG&A expense in 2023 increased to $238.0 million from $216.3 million in 2022. The increase was primarily due to higher salaries and related expenses, partially offset by lower sales and marketing costs. As a percentage of sales, Parts SG&A was 3.7% in 2023 and 3.8% in 2022.

Financial Services

The Company’s Financial Services segment accounted for 5% of revenues in 2023 and 2022.

($ in millions)

New loan and lease volume increased to $7.21 billion in 2023 from $6.22 billion in 2022. The increase in new loan and finance lease volume reflected higher retail sales of PACCAR trucks and a higher amount financed per truck in all major markets. The decrease in equipment on operating leases new business volume reflected lower market demand, partially offset by a higher amount financed per truck in all major markets. The effect of currency translation increased new loan and lease volume by $98.7 million, primarily due to the stronger Mexican peso and euro relative to the U.S. dollar. PFS finance market share of new PACCAR truck sales was 24.0% in 2023 compared to 25.6% in 2022.

PFS revenues increased to $1.81 billion in 2023 from $1.51 billion in 2022. The increase was primarily due to higher interest and fee income driven by portfolio growth and higher portfolio yields. The effects of currency translation increased PFS revenues by $40.8 million in 2023, primarily due to a stronger Mexican peso and euro relative to the U.S. dollar.

PFS income before income taxes decreased to $540.3 million in 2023 from $588.9 million in 2022, primarily due to lower operating lease margins, reflecting lower results on returned lease assets, partially offset by higher finance margins. The effect of currency translation increased PFS income before income taxes by $15.0 million in 2023, primarily due to a stronger Mexican peso and euro relative to the U.S. dollar.

Included in Financial Services “Other Assets” on the Company’s Consolidated Balance Sheets are used trucks held for sale, net of impairments, of $309.8 million at December 31, 2023 and $141.7 million at December 31, 2022. 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 $43.5 million in 2023 compared to $140.1 million in 2022, including losses on multiple unit transactions of $12.3 million in 2023 compared to $.8 million in 2022. Used truck losses related to repossessions, which are recognized as credit losses, in 2023 were $4.6 million and were insignificant in 2022.

The major factors for the changes in interest and fees, interest and other borrowing expenses and finance margin between 2023 and 2022 are outlined below:

($ in millions)

• Average finance receivables increased $2.77 billion (excluding foreign exchange effects) in 2023 primarily due to higher average loan, finance lease and dealer wholesale balances.
• Average debt balances increased $1.91 billion (excluding foreign exchange effects) in 2023, reflecting higher funding requirements for the portfolio, which includes loans, finance leases, dealer wholesale and equipment on operating lease.
• Higher portfolio yields (6.7% in 2023 compared to 5.1% in 2022) increased interest and fees by $177.7 million. The higher portfolio yields were primarily due to higher market rates in all markets.
• Higher borrowing rates (3.9% in 2023 compared to 2.0% in 2022) were primarily due to higher debt market rates in all markets.
• The currency translation effects reflect a increase in the value of foreign currencies relative to the U.S. dollar, primarily the Mexican peso, Brazilian real and euro.

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

($ in millions)

23

The major factors for the changes in operating lease, rental and other revenues, depreciation and other expenses and lease margin between 2023 and 2022 are outlined below:

($ in millions)

• Lower sales volume and lower market prices of used truck on trade, primarily in Europe, decreased revenues by $27.8 million and related depreciation and other expenses by $25.6 million.
• Results on returned lease assets increased depreciation and other expenses by $107.6 million primarily due to lower gains on sales of returned lease units as a result of lower used truck market values.
• Average operating lease assets decreased $280.7 million (excluding foreign exchange effects), which decreased revenues by $129.4 million and related depreciation and other expenses by $110.3 million.
• Revenue per asset increased $53.1 million primarily due to higher lease rates reflecting higher average truck value financed and higher market rates. Cost per asset increased $42.1 million due to higher depreciation and operating expenses.
• The currency translation effects reflect an increase in the value of foreign currencies relative to the U.S. dollar, primarily the Mexican peso and euro.

Financial Services SG&A expense increased to $149.0 million in 2023 from $133.9 million in 2022. The increase was primarily due to higher salaries and related expenses, higher travel costs and unfavorable currency translation effects, primarily the Mexican peso and euro. As a percentage of average earning assets, Financial Services SG&A was .8% in 2023 and .9% in 2022.

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

($ in millions)

The provision for losses on receivables increased to $31.3 million in 2023 from $5.5 million in 2022, primarily driven by higher charge-offs, portfolio growth and higher past due balances in 2023.

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.

The post-modification balances of accounts modified during the years ended December 31, 2023 and 2022 are summarized below:

($ in millions)

* Amortized cost basis immediately after modification as a percentage of the year-end retail portfolio balance.

Modification activity increased to $487.8 in 2023 from $364.5 in 2022. The decrease in modifications for commercial reasons primarily reflects lower volumes of refinancing. The increase related to Insignificant Delay reflects an increase in customers requesting payment relief for up to three months, primarily in the U.S. The decrease in Credit modifications reflects lower volumes of contract modifications and requests for payment relief, primarily in Brasil, partially offset by higher volumes of credit modifications in Europe.

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

Accounts 30+ days past due increased to 1.0% at December 31, 2023 from .4% at December 31, 2022. 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 $35.0 million, primarily in Europe, and $8.9 million of accounts worldwide during the fourth quarter of 2023 and the fourth quarter of 2022, 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, 2023 and 2022. The effect on the allowance for credit losses from such modifications was not significant at December 31, 2023 and 2022.

The Company’s annualized pre-tax return on average total assets for Financial Services was 2.9% in 2023 compared to 3.7% in 2022, respectively.

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 2023 and 2022. Other SG&A decreased to $87.8 million in 2023 from $96.1 million in 2022 primarily due to lower corporate expenses.

Other loss before tax was $616.8 million in 2023 compared to $1.1 million in 2022. The increase was primarily due to the EC-related charge in the first quarter 2023 which is discussed in Note L of the consolidated financial statements.

Investment income increased to $292.2 million in 2023 from $61.0 million in 2022, primarily due to higher market interest rates in all regions, as well as higher investment balances.

Income Taxes

In 2023, the effective tax rate was 19.5% compared to 21.8% in 2022. The lower effective tax rate in 2023 was primarily due to a $119.7 million discrete tax benefit for the release of a valuation allowance on deferred tax assets in Brasil, and the change in mix of income generated in jurisdictions with lower tax rates in 2023 as compared to 2022.

($ in millions)

In 2023, both domestic and foreign income before income taxes and domestic pre-tax return on revenues increased primarily due to the improved results from Truck and Parts operations. In 2023, foreign income before income taxes and pre-tax return on revenues includes a one-time expense for the EC-related charge of $600.0 million in the first quarter 2023.

LIQUIDITY AND CAPITAL RESOURCES:

($ in millions)

The Company’s total cash and marketable securities at December 31, 2023, increased $2.70 billion from the balances at December 31, 2022. Total cash and marketable securities are primarily intended to provide liquidity while preserving capital.

The change in cash and cash equivalents is summarized below:

($ in millions)

26

Operating activities: Cash provided by operations increased by $1.16 billion to $4.19 billion in 2023 from $3.03 billion in 2022. Higher operating cash flows reflect higher net income of $1,589.2 million and higher accruals of $750.7 million, including EC-related charge and product support liabilities. The higher operating cash flows were partially offset by lower accruals in 2023 compared to 2022 of $464.5 million for accounts payable and current accrued expenses. Additionally, there were higher cash outflows for income taxes of $567.2 million and higher cash used of $331.0 million for wholesale receivables.

Investing activities: Cash used in investing activities increased by $838.0 million to $2.87 billion in 2023 from $2.03 billion in 2022. Higher net cash used in investing activities primarily reflects higher net originations for retail loans and financing leases of $877.1 million and higher cash used in the acquisition of property, plant and equipment of $170.0 million. The higher net cash usage was partially offset by lower acquisitions of equipment for operating leases of $298.0 million.

Financing activities: Cash provided by financing activities was $1.10 billion in 2023 compared to $304.9 million in 2022. The Company paid $1.52 billion in dividends in 2023 compared to $1.00 billion in 2022, primarily due to a higher year-end dividend paid in January 2023. Cash provided from net borrowing activities was $2.57 billion, $1.30 billion higher than the cash provided by net borrowing activities of $1.28 billion in 2022 reflecting higher funding to support financial services portfolio growth.

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 $4.20 billion, of which $3.66 billion were unused at December 31, 2023. Included in these arrangements are $3.00 billion of committed bank facilities, of which $1.00 billion expires in June 2024, $1.00 billion expires in June 2026 and $1.00 billion expires in June 2028. 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, 2023.

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 without an expiration. The objective of the repurchase plan is to return value to PACCAR shareholders. As of December 31, 2023, 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, 2023.

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 2023 were $679.4 million compared to $491.2 million in 2022. Over the past decade, the Company’s combined investments in worldwide capital projects and R&D totaled $7.68 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 2024 are expected to be $700 to $750 million, and R&D is expected to be $460 to $500 million. The Company is increasing its investment in fuel efficient diesel and electric powertrain technologies, connected vehicle services, and next-generation manufacturing and parts distribution capabilities.

PACCAR, Cummins, Daimler Trucks and EVE Energy are partnering to produce state of the art commercial vehicle batteries in a factory in Marshall County, Mississippi. The total investment is expected to be in the range of $2-3 billion, of which PACCAR’s share is 30%. The 21-gigawatt hour (GWh) factory is expected to begin producing batteries in 2027, subject to regulatory approval.

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, 2023 was $6.10 billion. In January 2024, PFC issued $600.0 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, 2023, the Company’s European finance subsidiary, PACCAR Financial Europe, had €911.7 million 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 September 2024.

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, 2023, 6.32 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, 2023 was 850.0 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, 2023 was 150.0 million Canadian dollars.

The Company’s Brazilian subsidiary, Banco PACCAR S.A., established a lending program in December 2021 with the local development bank, Banco Nacional de Desenvolvimento Economico e Social (BNDES) for qualified customers to receive preferential conditions and generally market interest rates. This program is limited to 1.15 billion Brazilian reais and has 775.5 million Brazilian reais outstanding as of December 31, 2023.

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, 2023:

($ in millions)

* Commercial paper included in borrowings is at par value.

** Interest on floating-rate debt is based on the applicable market rates at December 31, 2023.

Total cash commitments for borrowings and interest on term debt were $14.94 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 commodities.

The Company’s other commitments include the following at December 31, 2023:

($ in millions)

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.” 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, 2023 and 2022 were $3.0 million and $4.6 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.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES:

This Form 10-K includes “adjusted net income (non-GAAP)” and “adjusted net income per diluted share (non-GAAP)”, which are financial measures that are not in accordance with U.S. generally accepted accounting principles (“GAAP”), since they exclude a charge for EC-related claims. These measures differ from the most directly comparable measures calculated in accordance with GAAP and may not be comparable to similarly titled non-GAAP financial measures used by other companies. In addition, the Form 10-K includes the financial ratios noted below calculated on non-GAAP measures.

Adjustment for the EC-related claims relates to a pre-tax charge of $600.0 million ($446.4 million after-tax) for estimable total costs recorded in Interest and other expenses (income), net in the year ended December 31, 2023 (recorded in the first quarter 2023).

Management utilizes these non-GAAP measures to evaluate the Company’s performance and believes these measures allow investors and management to evaluate operating trends by excluding a significant non-recurring charge that is not representative of underlying operating trends.

Reconciliations from the most directly comparable GAAP measures to adjusted net income (non-GAAP) and adjusted net income per diluted shares (non-GAAP) are as follows:

($ in millions, except per share amounts)

30

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 2023, 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 $63.8 million.

At December 31, 2023, 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 $1.49 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 $73.6 million in 2024, $34.8 million in 2025, $20.5 million in 2026, $13.1 million in 2027, $6.8 million in 2028 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 sales-type 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 expected credit losses. Finance receivables that are evaluated individually 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. In general, finance receivables that are 90 days past due are placed on non-accrual status. Finance receivables on non-accrual status 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.

Individually evaluated receivables on non-accrual status are generally considered collateral dependent. Large balance retail and all wholesale receivables on non-accrual status are individually evaluated to determine the appropriate reserve for losses. The determination of reserves for large balance receivables on non-accrual status 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 receivables on non-accrual status with similar risk characteristics are evaluated as a separate pool to determine the appropriate reserve for losses using the historical loss information discussed below.

The Company evaluates finance receivables that are not individually evaluated 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 data 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 10% and 70%. Over the past two years, the Company’s year-end 30+ days past due accounts have ranged between .4% and 1.0% 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 25 basis points of receivables. At December 31, 2023, 30+ days past dues were 1.0%. If past dues were 100 basis points higher or 2.0% as of December 31, 2023, the Company’s estimate of credit losses would likely have increased by a range of $2 to $35 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 1.9% and 2.9%. If the 2023 warranty expense had been .2% higher as a percentage of net sales and revenues in 2023, warranty expense would have increased by approximately $67 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; cybersecurity risks to the Company’s information technology systems; 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.

Currencies are presented in millions for the market risks and derivative instruments sections below.

Interest-Rate Risks - See Note P for a description of the Company’s hedging programs and exposure to interest rate fluctuations. The Company measures its interest-rate risk by estimating the amount by which the fair value of interest-rate sensitive assets and liabilities, including derivative financial instruments, would change assuming an immediate 100 basis point increase across the yield curve as shown in the following table:

Currency Risks - The Company enters into foreign currency exchange contracts to hedge its exposure to exchange rate fluctuations of foreign currencies, particularly the Canadian dollar, the euro, the British pound, the Australian dollar, the Brazilian real and the Mexican peso (see Note P for additional information concerning these hedges). Based on the Company’s sensitivity analysis, the potential loss in fair value for such financial instruments from a 10% unfavorable change in quoted foreign currency exchange rates would be a loss of $259.7 related to contracts outstanding at December 31, 2023, compared to a loss of $216.6 at December 31, 2022. These amounts would be largely offset by changes in the values of the underlying hedged exposures.

Commodity Price Risks - The Company enters into commodity forward contracts to hedge the prices of certain commodities used in the production of trucks (see Note P for additional information concerning these hedges). The objective is to reduce the fluctuation in earnings and cash flows associated with adverse movement in commodity prices. Based on the Company’s sensitivity analysis, the potential loss in fair value for such financial instruments from a 10% unfavorable change in quoted commodity prices would be a loss of $3.3 related to contracts outstanding at December 31, 2023, compared to a loss of $2.5 at December 31, 2022. These amounts would be largely offset by changes in the values of the underlying hedged exposures.

Disclosure Controls and Procedures.

The Company’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting.

Management’s Report on Internal Control over Financial Reporting on page 77 and Report of Independent Registered Public Accounting Firm on the Company’s internal control over financial reporting on page 79 for the year ended December 31, 2023, are included in this Form 10-K.

There have been no changes in the Company’s internal controls over financial reporting during the fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.