PACCAR 2009 Annual Report Download - page 40

PACCAR Inc and Subsidiaries
During 2007 and 2008 market values on vehicles returning upon operating lease maturity were generally higher than
the residual values on these vehicles resulting in a decrease of depreciation expense of $15.5 million and $6.9 million,
respectively. During 2009, lower market values on trucks returning upon lease maturity, as well as impairments on
existing operating leases resulted in additional depreciation expense of $45.6 million.
At December 31, 2009, 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 $1.14
billion. A 10% decrease in used truck values worldwide, expected to persist over the remaining maturities of the
Company’s operating leases, would reduce residual values estimates and result in the Company recording
approximately $30 million of additional depreciation per year.
Allowance for Credit Losses
The accounting for allowance for credit losses related to the Company’s loans and finance leases is discussed in
Note E of the consolidated financial statements. The Company determines the allowance for credit losses on
financial services retail and wholesale receivables based on historical loss information, using past-due account data,
current market conditions and expectations about the future. The allowance for credit losses consists of both a
specific reserve and a general reserve based on estimates, including 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 specifically evaluates large retail and wholesale
accounts with past-due balances or that otherwise are deemed to be at a higher risk of credit loss. All other past-due
customers, dealers and current accounts are evaluated as a group.
The Company has developed a range of specific loss estimates for each of its portfolios by country 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 as probable based on current market conditions and other factors impacting the creditworthiness of the
Company’s borrowers and their ability to repay. The projected amount is then compared to the allowance for credit
loss balance and an appropriate adjustment is made.
The adequacy of the allowance is evaluated quarterly based on the most recent information and expectations about
the future. As accounts become past due, the likelihood increases they will not be fully collected. The Company’s
experience indicates the probability of not fully collecting past-due accounts range between 20% and 80%. Over the
past three years, the Company’s year-end 30+ days past-due accounts have ranged between 2.0% and 3.8% of
average loan and lease receivables. Historically, a 100 basis point increase in the 30+ days past-due percentage has
resulted in an increase in future credit losses of 10 to 35 basis points of average receivables. Past-dues were 3.8% at
December 31, 2009. If past-dues were 100 basis points higher or 4.8% as of December 31, 2009, the Company’s
estimate of future credit losses would likely have increased by approximately $5 to $20 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
The accounting for product warranty is discussed 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.
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 three years, the Company’s year-end warranty expense as a
percentage of net sales and revenues has ranged between 1.2% and 1.3%. For 2009, warranty expense was 1.2% of
net sales and revenues. If warranty expense were .2% higher as a percentage of truck net sales and revenues in 2009,
warranty expense would have increased by approximately $17 million.
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