**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

# **FORM 10-K**

# ** **

**FOR ANNUAL AND TRANSITION REPORTSPURSUANT TO SECTIONS 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

| **(Mark One)**                                                                                                                                                                                                                                                |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                                                    | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  (NO FEE REQUIRED)** |
|                                                                                                                                                                                                                                                          |   |   |
| **For the fiscal year ended December 31, 2004**                                                                                                                                                                                                               |
| ** **                                                                                                                                                                                                                                                    | ** ** | ** ** |
| ** **                                                                                                                                                                                                                                                    | ** ** | **OR** |
|                                                                                                                                                                                                                                                          |   |   |
| **o**                                                                                                                                                                                                                                                         | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  (NO FEE REQUIRED)** |
|                                                                                                                                                                                                                                                          |   |   |
| **For  transition period from                     to                   ** |

 

**CommissionFile No. 0-12553**

 

**PACCAR FINANCIAL CORP.**

(Exact name of Registrant as specified in its charter)

 
| **Washington**                                              |   | **91-6029712**                       |
|-------------------------------------------------------------|--------|--------------------------------------|
| (State of incorporation)                                    |   | (I.R.S. Employer Identification No.) |
|                                                        |   |                                 |
| **777 106th Avenue N.E., Bellevue, Washington**             |   | **98004**                            |
| (Address of principal executive offices)                    |   | (Zip Code)                           |
|                                                        |   |                                 |
| **(425) 468-7100**                                          |
| (Registrant’s telephone number, including area code)   |
|                                                        |   |                                 |
| Securities registered pursuant to Section 12(b) of the Act: |

 
| **Title of Each Class**                                     | ** ** | **Name of Each Exchange on Which Registered** |
|-------------------------------------------------------------|------------|-----------------------------------------------|
|                                                        |       |                                          |
| Series J Medium-Term Notes                                  |       |                                          |
| $50 Million Due May 12, 2006                                |       | New York Stock Exchange                       |
|                                                        |       |                                          |
| Securities registered pursuant to Section 12(g) of the Act: |
|                                                        |       |                                          |
| **None**                                                    |
| (Title of Class)                                            |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter periods that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for at least the past 90 days. Yes   ý  No   o.

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act). Yes   o  No  ý.

 

Theaggregate market value of the voting stock held by non-affiliates of theregistrant as of June 30, 2004:

 

None

 

Thenumber of shares outstanding of the registrant’s classes of common stock as ofFebruary 28, 2005:

 

###### Common Stock, $100 par value — 145,000shares

 

THEREGISTRANT IS A WHOLLY-OWNED INDIRECT SUBSIDIARY OF PACCAR INC AND MEETS THECONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I) (1) (a) AND (b) OF FORM 10-KAND IS, THEREFORE, FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 

 

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PACCAR Financial Corp.

 

**INDEX**

 
| **PART I**   |         |       |                                                                                                                |
|--------------|--------------|------------|---------------------------------------------------------------------------------------------------------------------|
|         |         |       |                                                                                                                |   |
| ** **   | **Item  1.** | ** ** | **Business**                                                                                                        | ** ** |
|         | Item 2.      |       | Properties                                                                                                          |   |
|         | Item 3.      |       | Legal Proceedings                                                                                                   |   |
|         | Item 4.      |       | Submission of Matters to a Vote of Security  Holders                                                                |   |
|         |         |       |                                                                                                                |   |
| **PART II**  |         |       |                                                                                                                |
|         |         |       |                                                                                                                |   |
|         | Item 5.      |       | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities |   |
|         | Item 6.      |       | Selected Financial Data                                                                                             |   |
|         | Item 7.      |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                         |   |
|         | Item 7A.     |       | Quantitative and Qualitative Disclosures about  Market Risk                                                         |   |
|         | Item 8.      |       | Financial Statements and Supplementary Data                                                                         |   |
|         | Item 9.      |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                               |   |
|         | Item 9A.     |       | Controls and Procedures                                                                                             |   |
|         | Item 9B.     |       | Other Information                                                                                                   |   |
|         |         |       |                                                                                                                |   |
| **PART III** |         |       |                                                                                                                |
|         |         |       |                                                                                                                |   |
|         | Item 10.     |       | Directors and Executive  Officers of the Registrant                                                                 |   |
|         | Item 11.     |       | Executive Compensation                                                                                              |   |
|         | Item 12.     |       | Security Ownership of Certain  Beneficial Owners and Management                                                     |   |
|         | Item 13.     |       | Certain Relationships and  Related Transactions                                                                     |   |
|         | Item 14.     |       | Principal Accountant Fees and Services                                                                              |   |
|         |         |       |                                                                                                                |   |
| **PART IV**  |         |       |                                                                                                                |
|         |         |       |                                                                                                                |   |
|         | Item 15.     |       | Exhibits, Financial Statement Schedules                                                                             |   |

 

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** **

PACCAR Financial Corp.

(Millions of Dollars)

**PART I**

 

#### **ITEM1.**  BUSINESS

#### ** **

## GENERAL

 

PACCAR Financial Corp.

 

PACCAR Financial Corp. (the “Company”), aWashington corporation, was organized in 1961 as a wholly-owned subsidiary ofPACCAR Inc (“PACCAR”) to finance the sale of PACCAR products. In 2000, PACCARtransferred the stock of the Company to PACCAR Financial Services Corporation (“PFSC”),a wholly-owned subsidiary of PACCAR.

 

The Company principally provides financing andleasing of PACCAR-manufactured trucks and related equipment sold through PACCAR’sindependent dealer network in the United States. The Company also financesdealer inventories of new and used transportation equipment. The Company’sPacLease division franchises PACCAR dealerships to engage in full-service andfinance leasing. In selected markets, PacLease directly engages in full-serviceleasing with its customers through Company-owned stores and on a limited basisthrough PACCAR dealerships.

 

### PACCAR

 

PACCAR has two principal industry segments, (1) design, manufacture anddistribution of light-, medium- and heavy-duty trucks and related aftermarketdistribution of parts and (2) finance and leasing services provided tocustomers and dealers. PACCAR distributes trucks and parts primarily throughits independent dealer network. PACCAR’s finance and leasing activities areprincipally related to PACCAR products and associated equipment. Othermanufactured products include industrial winches.

 

PACCAR and its subsidiaries design and manufacture heavy-duty dieseltrucks which are marketed under the Peterbilt, Kenworth, DAF and Fodennameplates. These vehicles, which are built in four plants in the UnitedStates, three in Europe and one each in Australia, Canada and Mexico, are usedworldwide for over-the-road and off-highway hauling of freight, petroleum, woodproducts, construction and other materials.

 

PACCAR, through its Peterbilt and Kenworth Divisions, competes in theNorth American medium-duty (Class 6/7) markets primarily with conventionalmodels. These medium-duty trucks are assembled at PACCAR’s Ste. Therese, Quebecplant and at PACCAR’s facility in Mexicali, Mexico. PACCAR competes in theEuropean light/medium (6 to 15 metric ton) commercial vehicle market with DAFcab-over-engine trucks assembled in the United Kingdom by Leyland, one ofPACCAR’s wholly-owned subsidiaries. Commercial trucks and related replacementparts comprise the largest segment of PACCAR’s business, accounting for94% of total 2004 net sales and revenues.

 

Substantially all trucks and related parts are sold toindependently-owned dealers, except for a small number of factory branches. TheKenworth and Peterbilt nameplates are marketed and distributed by separatedivisions in the U.S. and a foreign subsidiary in Canada. The Kenworthnameplate is also marketed and distributed by foreign subsidiaries in Mexicoand Australia. The DAF and Foden nameplates are marketed and distributed byforeign subsidiaries headquartered in the Netherlands and United Kingdom,respectively. A U.S. division, PACCAR International, also markets all fournameplates outside each of Kenworth’s, Peterbilt’s, DAF’s and Foden’s primarymarkets. The decision to operate as a subsidiary or as a division is incidentalto Truck Segment operations and reflects legal, tax and regulatory requirementsin the various countries where PACCAR operates.

 

There were three otherprincipal competitors in the U.S. and Canada Class 8 truck market in 2004.PACCAR’s share of that market was 24.6% of retail sales in 2004. PACCAR’s shareof the Class 6 and 7 truck market in 2004 was 9.7%.  In Europe there were five other principalcompetitors in the commercial vehicle market in 2004, including parentcompanies to two competitors of PACCAR in the United States. PACCAR’ssubsidiary, DAF, had a 12.8% share of the Western European heavy-duty marketand an 8.9% share of the light/medium

 

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market. These markets are highlycompetitive in price, quality and service, and PACCAR is not dependent on anysingle customer for its sales. There are no significant seasonal variations.

 

In addition to theCompany, which provides financing, leasing and full-service truck leasing inthe United States, PACCAR offers similar financing programs for PACCAR productsthrough other wholly-owned finance companies in Mexico, Canada, Australia, theUnited Kingdom, the Netherlands, Belgium, Germany, France, Italy andSpain.  PACCAR also conducts full-serviceleasing operations through wholly-owned subsidiaries in Canada and Mexico.

 

PACCAR’s common stock,$1 par value, is traded on the NASDAQ National Market under the symbol “PCAR”.PACCAR and the Company are subject to the informational requirements of theSecurities Exchange Act of 1934 and, in accordance therewith, file reports andother information with the Securities and Exchange Commission (the “Commission”).All reports, proxy statements and other information filed by PACCAR and theCompany with the Commission may be inspected and copied at the public referencefacility maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,Washington, D.C. 20549 or through the Commission’s internet site atwww.sec.gov.

 

BUSINESS OF THE COMPANY

 

The Company operatesprimarily in one industry segment, truck and related equipment financing in theUnited States. The Company provides financing to customers and dealers for newKenworth and Peterbilt trucks, used trucks, truck trailers and alliedequipment. The Company’s PacLease division franchises PACCAR dealerships toengage in full-service and finance leasing. In selected markets, PacLeasedirectly engages in full-service leasing with its customers throughCompany-owned stores and on a limited basis through PACCAR dealerships.

 

The Company currentlyconducts business with most PACCAR dealers in the United States. The volume ofthe Company’s business is significantly affected by PACCAR’s sales of trucks toits dealers and competition from other financing sources.

 

As of December 31, 2004,the Company employed 297 full-time employees, none of whom are represented by acollective bargaining agent. The Company considers relations with its employeesto be good.

 

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The Company’s Products

 

Retail Customers

 

The Company offers the following productsto retail customers:

 

Retail Contracts and Loans The Companypurchases contracts from dealers and receives assignments of the contracts anda first lien security interest in the vehicles financed (“Retail Contracts”).Certain Retail Contracts with third party leasing companies may also include anassignment to the Company of the related lease and rental payments due. RetailContracts purchased by the Company have fixed or floating interest rates.

 

The Company also makesloans to the end users of the vehicles financed that are secured by a firstlien security interest in the vehicles (“Loans”). Loans have fixed or floatinginterest rates.

 

Direct Financing Leases The Companyoffers direct financing lease contracts where it is treated as the owner of theequipment for tax purposes and generally retains the tax depreciation (“DirectFinancing Leases”). The lessee is responsible for the payment of property andsales taxes, licenses, maintenance and other operating items. The lessee isobligated to maintain the equipment and to insure the equipment againstcasualty and liability losses.

 

Most of the Company’sDirect Financing Leases contain a Terminal Rental Adjustment Clause, whichrequires the lessee to guarantee to the Company a stated residual value upondisposition of the equipment at the end of the direct financing lease term.

 

Operating Leases The Companyoffers operating lease contracts (“Operating Leases”) where the Company ownsthe equipment. The lessee is responsible for the payment of property and salestaxes, licenses, maintenance and other operating items. The lessee is obligatedto maintain the equipment and to insure the equipment against casualty andliability losses.

 

At the end of theoperating lease term, the lessee has the option to return the equipment to theCompany or purchase the equipment at its fair market value.

 

Insurance The Companysells physical damage insurance through PACCAR dealers who are licensedinsurance agents as well as through licensed agents of the Company. The Companyretains the premium revenues and loss exposure for the policies, which areissued through an unrelated regulated insurance carrier.

 

The Company offersphysical damage and liability insurance on new and used trucks and trailers toits full-service lease customers. The Company retains premium and loss exposurefor the policies that are issued through an unrelated regulated insurancecarrier. To limit its exposure the Company has acquired insurance coverage forlosses above specified levels from a third party insurance carrier.

 

Dealers/Franchisees

 

The Company offers the following productsto PACCAR dealers and PacLease franchisees:

 

Master Notes Master notecontracts (“Master Notes”) are an alternative form of retail financing offeredto select dealers for new and used trucks. Retail installment contractsoriginated by the dealer for new or used trucks and meeting the Company’srequirement as to form, terms and creditworthiness for Retail Contracts arepledged to the Company as collateral for direct, full recourse loans by theCompany to the dealer. Master Notes have fixed or floating interest rates.

 

Wholesale Contracts The Companyprovides wholesale financing for new and used truck and trailer inventories fordealers (“Wholesale Contracts”). Wholesale Contracts are secured by theinventories financed. The amount of

 

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credit extended by the Company for eachtruck is generally limited to the invoice price of new equipment and to thewholesale value of used equipment. Interest under Wholesale Contracts is basedupon floating interest rates.

 

Dealer Loans The Companymakes secured loans to selected Peterbilt and Kenworth dealers (“Dealer Loans”).The purpose of these loans includes the financing of real estate, fixed assets,working capital and dealership acquisitions. Dealer Loans have fixed orfloating interest rates.

 

Full-Service Leasing The Companyalso conducts full-service leasing operations under the PacLease trade name.Selected dealers are franchised to provide full-service leasing. The Companyprovides the franchisees with equipment financing and managerial support. The Companyalso operates full-service lease outlets in selected markets on its own behalf.

 

Insurance The Companycharges a fee to provide insurance coverage, through an unrelated regulatedinsurance carrier, on new trucks, used trucks and trailer inventory to dealershaving Wholesale Contracts with the Company.

 

CUSTOMER CONCENTRATION,PAST DUE ACCOUNTS AND LOSS EXPERIENCE

 

Customer Concentration

 

TheCompany’s customers are concentrated in the transportation industry throughoutthe United States. The Company does not have contractual arrangements for theperiods ended December 31, 2004, 2003 and 2002, with any one party (customers,dealers and/or franchises) that account for 10% or more of total Interest andOther Revenue or Finance and Lease Receivables.

 

Past Due Receivables and Allowance forLosses

 

An account is consideredpast due by the Company if any portion of an installment is due and unpaid formore than 30 days. In periods of adverse economic conditions, past due levels,repossessions and credit losses generally increase.

 

The Company maintains anallowance for losses on receivables at a level that it considers to be adequateto cover management’s estimates of losses inherent in the portfolio.

 

For further discussionof the allowance for losses, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”

 

COMPETITION AND ECONOMICFACTORS

 

The commercial truck andtrailer finance and leasing business is highly competitive among banks,commercial finance companies, captive finance companies and leasing companies.Many of these institutions have substantially greater financial resources thanthe Company and may borrow funds at lower rates.

 

The dealers are theprimary source of contracts acquired by the Company. However, dealers are notrequired to obtain financing from the Company and they have a variety of othersources that may be used for wholesale and customer financing of trucks. Retailpurchasers also have a variety of sources available to finance truck purchases.

 

The ability of theCompany to compete in its market is principally based on the rates, terms andconditions that the Company offers dealers and retail purchasers, as well asthe specialized services it provides. Rates, terms and conditions are based onthe Company’s desire to provide flexible financing and services to satisfydealer and customer needs, the ability of the Company to borrow funds atcompetitive rates and the Company’s need to earn an adequate return on itsinvested capital. The Company’s business is also affected by changes in

 

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market interest rates, which in turn arerelated to general economic conditions, demand for credit, inflation andgovernmental policies. Seasonality is not a significant factor in the Company’sbusiness.

 

The volume ofreceivables available to be acquired by the Company from dealers is largelydependent upon the number of Kenworth and Peterbilt trucks sold in the UnitedStates. Sales of medium- and heavy-duty trucks depend on the capital equipmentrequirements of the transportation industry, which in turn are influenced bygrowth and cyclical variations in the economy. Medium- and heavy-duty trucksales are also sensitive to economic factors such as fuel costs, interest rates,insurance premiums, federal excise and highway use taxes, taxation on theacquisition and use of capital goods, as well as government regulations.

 

REGULATION AND SIMILARMATTERS

 

In certain states, theCompany is subject to retail installment sales or installment loan statutes andrelated regulations, the terms of which vary from state to state. These lawsmay require the Company to be licensed as a sales finance company and mayregulate disclosure of finance charges and other terms of retail installmentcontracts. The Company is subject to substantive state franchise regulationsand federal and state uniform franchise disclosure laws in connection with theoffering of PacLease full-service truck leasing and rental franchises to PACCARtruck dealers. The Company also owns and operates several such truck leasingand rental business locations, which are subject to applicable state licensinglaws. The Company is subject to state insurance regulations in connection withits licensed insurance salesmen. The Company is also subject to certainprovisions of federal law relating to non-discrimination in the granting ofcredit.

 

SOURCES OF FUNDS

 

The Company’s primarysources of funds are commercial paper and publicly issued medium-term noteborrowings in the capital markets, collections on loans and leases, retainedearnings and to a lesser extent bank loans and capital contributions from PFSC.The Company’s profitable investment in additional receivables is dependent uponits ability to raise funds at competitive rates in the public and private debtmarkets. The receivables and leases that are financed are either fixed rate orfloating rate with terms that range from 12 to 84 months.

 

To reduce the risk ofchanges in interest rates that could affect interest margins, the Companyobtains funds with interest rate characteristics similar to the correspondingassets. Fixed rate assets are funded primarily with publicly offeredmedium-term notes and commercial paper. Interest rate swaps are combined withcommercial paper or floating rate medium-term notes to convert floating ratedebt to fixed rate debt. Floating rate assets are funded primarily withcommercial paper with maturities of three months or less and floating ratemedium-term notes. As a result, the Company’s interest margin on existingbusiness does not change significantly from changes in interest rates.

 

The Company enters intointerest rate swap contracts as a tool to achieve its matched fundingobjectives and to reduce total borrowing costs relative to its primaryborrowing sources – commercial paper and medium-term notes. Fixed rate swaps,matched to floating rate borrowings, are used to lock in the funding cost offixed rate assets. As of December 31, 2004, the total notional principal amountof interest rate swap contracts outstanding was $1,943.4, all of which resultin a fixed rate payment obligation. The notional amount is used to measure thevolume of these contracts and does not represent exposure to credit loss. Inthe event of default by a counterparty, the risk in these transactions is thecost of replacing the interest-rate contract at current market rates.Management believes the risk of incurring such losses is remote, and any losseswould be immaterial. The permitted types of interest rate swap contracts, theirtransaction limits and related approval authorizations have been established bythe Company’s senior management and Board of Directors. The interest ratecontracts outstanding are regularly reported to, and reviewed by, the Company’ssenior management.

 

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The Company participateswith PACCAR and certain other PACCAR affiliates in syndicated credit facilitiesof $1,500.0 at December 31, 2004.  Ofthis amount, $750.0 will expire in July 2005 and the remaining $750.0 willexpire in July 2006. PACCAR intends to replace these credit facilities as theyexpire with facilities of similar amounts. Of the $1,500.0 in syndicatedcredit facilities, $1,350.0 is available for use by the Company and/or PACCARand certain other PACCAR affiliates. The remaining $150.0 is only available foruse by PACCAR’s Canadian subsidiaries. These credit facilities are used to provide backup liquidity for theCompany’s commercial paper and maturing medium-term notes. The Company isliable only for its own borrowings under these credit facilities. There were noborrowings under these credit facilities in the years ended December 31, 2004or 2003.

 

As of December 31, 2004,the Company had $680.0 of medium-term notes outstanding under a $2,500.0 shelfregistration statement, of which $580.0 are due within 12 months.  The Company also had $1,150.0 of medium-termnotes outstanding under a $3,000.0 shelf registration statement, none of which aredue within 12 months.  See “Note F –Borrowings” in the Notes to Financial Statements for further information onmedium-term notes.

 

An indenture of theCompany dated as of December 1, 1983, as amended by a first supplementalindenture dated June 19, 1989 (Exhibit 4.1), with respect to the Company’smedium-term notes which are publicly issued from time to time, containsrestrictions limiting secured debt which may be incurred by the Company and anysubsidiary.

 

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RELATIONSHIP WITH PACCARAND AFFILIATES

 

General

 

The operations of theCompany are fundamentally affected by its relationship with PACCAR. Sales ofPACCAR products are the Company’s principal source of financing business. TheCompany receives administrative support from and pays dividends to PFSC and mayoccasionally borrow funds from or lend money to PACCAR and/or its affiliates.The Company’s principal office is located in the corporate headquartersbuilding of PACCAR (owned by PACCAR). The Company also leases office space fromtwo facilities owned by PACCAR and two facilities leased by PACCAR. Since thedirectors of the Company are all executives of PACCAR or its affiliatedcompanies and PACCAR is the sole owner of PFSC’s outstanding voting commonstock, PACCAR can determine the course of the Company’s business.

 

The Company periodicallyloans funds to certain foreign finance and leasing affiliates of PACCAR. Theseforeign affiliates have Support Agreements with PACCAR, similar to the Company’sSupport Agreement described below. The foreign affiliates operate in the UnitedKingdom, the Netherlands, Mexico, Canada and Australia, and any resultingcurrency exposure is fully hedged. The foreign affiliates primarily providefinancing and leasing of PACCAR-manufactured trucks and related equipment  sold through PACCAR’s independent dealernetworks in Europe, Mexico, Canada and Australia. The Company will not makeloans to the foreign affiliates in excess of the equivalent of $375.0 UnitedStates dollars, unless the amount in excess of such limits is guaranteed byPACCAR. The Company periodically reviews the funding alternatives for theseaffiliates, and these limits may be revised in the future.

 

PFSC charges the Companyfor certain administrative services it provides and certain services the Companyreceives indirectly from PACCAR. As of December 31, 2004, PFSC employed 167full-time employees, none of whom are represented by a collective bargainingagent. The costs are charged to the Company based upon the Company’s specificuse of the services at PFSC’s or PACCAR’s cost. Management considers thesecharges reasonable and similar to the costs that would be incurred if theCompany were on a stand-alone basis. See “Note D – Transactions with PACCAR andAffiliates” in the Notes to Financial Statements.

 

Support Agreement

 

The Company and PACCARare parties to a Support Agreement that obligates PACCAR to provide, whenrequired, financial assistance to the Company to assure that the Companymaintains a ratio of net earnings available for fixed charges to fixed charges(as defined) of at least 1.25 to 1 for any fiscal year. The Support Agreementalso requires PACCAR to own, directly or indirectly, all outstanding votingstock of the Company. The required ratio was met for the years ended December31, 2004, 2003 and 2002 without assistance. See “Note D – Transactions withPACCAR and Affiliates” in the Notes to Financial Statements.

 

The Company and PACCARmay amend or terminate any or all of the provisions of the Support Agreementupon 30 days notice, with copies of the notice being sent to all nationallyrecognized statistical rating organizations (“NRSROs”) which have issuedratings with respect to debt of the Company (“Rated Debt”). Such amendment ortermination will be effective only if (i) two NRSROs confirm in writing thattheir ratings with respect to any Rated Debt would remain the same after suchamendment or termination, or (ii) the notice of amendment or terminationprovides that the Support Agreement will continue in effect with respect to RatedDebt outstanding on the effective date of such amendment or termination unlesssuch debt has been paid or defeased pursuant to the indenture or otheragreement applicable to such debt, or (iii) the holders of at least two-thirdsof the aggregate principal amount of all outstanding Rated Debt with originalmaturity in excess of 270 days consent in writing to such amendment ortermination, provided that the holders of Rated Debt having an originalmaturity of 270 days or less shall continue to have the benefits of the SupportAgreement until the maturity of such debt.

 

The Support Agreementexpressly states that PACCAR’s commitments to the Company thereunder do notconstitute a PACCAR guarantee of payment of any indebtedness or liability ofthe Company to others and do not

 

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create rights against PACCAR in favor ofpersons other than the Company. There are no guarantees, direct or indirect, byPACCAR of payment of any indebtedness of the Company.

 

OTHER DISCLOSURES

 

The Company’s filings onForm 10-K, 10-Q and 8-K and any amendments to those reports can be reachedthrough a link on the Company’s website, www.paccarfinancial.com, or PACCAR Inc’swebsite, www.paccar.com, free of charge as soon as reasonably practicable afterthe report is electronically filed with, or furnished to, the Securities andExchange Commission.

 

**ITEM 2.****  PROPERTIES**

 

The Company’s principaloffice is located in the corporate headquarters building of PACCAR (owned byPACCAR) at 777 106th Avenue N.E., Bellevue, Washington 98004. TheCompany owns two full-service leasing facilities in Texas.

 

Other offices andleasing facilities of the Company are located in leased premises including twofacilities owned by PACCAR and two facilities leased by PACCAR. The Companyconsiders all its properties to be suitable for their intended purpose. Annuallease rentals for these premises in the aggregate are not material in relationto expenses as a whole.

 

**ITEM 3.****  LEGALPROCEEDINGS**

 

The Company is a partyto various routine legal proceedings incidental to its business involving thecollection of accounts and other matters. The Company does not consider suchmatters to be material with respect to the business or financial condition ofthe Company as a whole.

 

**ITEM 4.****  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Not applicable.

 

**PART II**

 

**ITEM 5.****  MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

All outstanding commonstock is owned by PFSC; therefore, there is no trading market in the Company’scommon stock.

 

A cash dividend in theamount of $69.0 was declared and paid to PFSC in the first quarter of 2004 anda cash dividend in the amount of $11.0 was declared and paid in the secondquarter of 2002. There was no cash dividend declared or paid during 2003.

 

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**ITEM 6.****  SELECTEDFINANCIAL DATA**

 

The following tablesummarizes selected financial data for the Company. The information withrespect to each of the five years in the period ended December 31, 2004 hasbeen derived from the Company’s audited financial statements.

 

**Balance Sheet Data**

 
| ** **                      | ** ** | **As of December 31** | ** **  |
|---------------------------------|------------|-----------------------|-------------|
| ** **                      | ** ** | **2004**              | ** **  | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                            |       |                  |        |   |   |   |   |   |   |   |   |
| Total Assets                    | ** ** | **$**                 | **3,970.5** |   | $ | 3,473.3 |   | $ | 3,511.5 |   | $ | 3,562.6 |   | $ | 4,119.4 |   |
| Total Liabilities               | ** ** | **3,295.4**           |        | 2,834.8 |   | 2,955.6 |   | 3,039.6 |   | 3,597.2 |   |
| Total Stockholder’s Equity | ** ** | **675.1**             |        | 638.5 |   | 555.9 |   | 523.0 |   | 522.2 |   |
|                                 |            |                       |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Income Statement Data**

 
| ** **                                                                     | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                     | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Interest and other revenue                                                     | ** ** | **$**                      | **320.9**  |   | $ | 285.0 |   | $ | 292.6 |   | $ | 345.9 |   | $ | 376.3 |   |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Total expenses before assumption of  interest expense by PACCAR                | ** ** | **209.5**                  |       | 206.9 |   | 247.6 |   | 338.0 |   | 322.3 |   |
| Assumption of interest expense by PACCAR  (1)                                  | ** ** | **—**                 |       | — |   | — |   | (17.0 | ) | — |   |
| Total expenses                                                                 | ** ** | **209.5**                  |       | 206.9 |   | 247.6 |   | 321.0 |   | 322.3 |   |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Income before income taxes                                                     | ** ** | **111.4**                  |       | 78.1 |   | 45.0 |   | 24.9 |   | 54.0 |   |
| Income taxes                                                                   | ** ** | **42.2**                   |       | 30.8 |   | 17.7 |   | 9.7 |   | 21.0 |   |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Income before cumulative effect of  accounting change                          | ** ** | **69.2**                   |       | 47.3 |   | 27.3 |   | 15.2 |   | 33.0 |   |
| Cumulative effect of accounting change (net  of tax)                           | ** ** | **—**                 |       | — |   | — |   | .4 |   | — |   |
| Net income                                                                     | ** ** | **$**                      | **69.2**   |   | $ | 47.3 |   | $ | 27.3 |   | $ | 15.6 |   | $ | 33.0 |   |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Ratio of Earnings to Fixed Charges Pursuant  to SEC reporting Requirements (2) |       | 2.61                       | x          | 1.98 | x | 1.39 | x | 1.16 | x | 1.26 | x |
|                                                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Ratio of Earnings to Fixed Charges Pursuant  to the Support Agreement          |       | 3.26                       | x          | 2.33 | x | 1.53 | x | 1.25 | x | 1.31 | x |

 

----

(1)   In order to maintain the ratio ofearnings to fixed charges in 2001, PACCAR provided earnings support of $17.0through the assumption of the Company’s interest expense. No earnings supportwas provided for the years ending December 31, 2004, 2003, 2002, or 2000.

 

(2)   For the purposes of this ratio, earningsconsist of income before income taxes plus fixed charges. Fixed charges consistof interest expense plus a portion of rent expense (which is deemedrepresentative of an interest factor). The method of computing the ratio ofearnings to fixed charges shown above complies with SEC reporting requirements(see Exhibit 12.1) but differs from the method called for in the SupportAgreement between the Company and PACCAR (see Exhibit 12.2).

 

10

----

 

** **

**ITEM 7.****  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND****RESULTS OF OPERATIONS**(Millions of Dollars)

 

**Results of Operations**

 
| ** **                                                                                                                                                        | ** ** | **Year ended December 31** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|
| ** **                                                                                                                                                        | ** ** | **2004**                   | ** **  | **2003** | ** ** | **2002** | ** ** |
| Average earning assets                                                                                                                                            | ** ** | **$**                      | **3,359.1** |   | $ | 3,140.5 |   | $ | 3,214.1 |   |
| Interest and other revenue                                                                                                                                        | ** ** | **320.9**                  |        | 285.0 |   | 292.6 |   |
| Income before taxes                                                                                                                                               | ** ** | **111.4**                  |        | 78.1 |   | 45.0 |   |
| Net income                                                                                                                                                        | ** ** | **69.2**                   |        | 47.3 |   | 27.3 |   |
|                                                                                                                                                              |       |                       |        |   |   |   |   |
| Allowance for Losses:                                                                                                                                             |       |                       |        |   |   |   |   |
| Balance at beginning of year                                                                                                                                      | ** ** | **$**                      | **67.4**    |   | $ | 66.9 |   | $ | 66.2 |   |
| Provision for losses                                                                                                                                              | ** ** | **4.3**                    |        | 19.6 |   | 42.2 |   |
| Credit losses net of recoveries                                                                                                                                   | ** ** | **(4.6**                   | **)**       | (19.1 | ) | (41.5 | ) |
|                                                                                                                                                              | ** ** | ** **                 |        |   |   |   |   |
| Balance at end of year                                                                                                                                            | ** ** | **$**                      | **67.1**    |   | $ | 67.4 |   | $ | 66.9 |   |
|                                                                                                                                                              | ** ** | ** **                 |        |   |   |   |   |
| Ratios:                                                                                                                                                           |       |                       |        |   |   |   |   |
| Credit losses net of recoveries ($4.6 in  2004) to average net receivables ($3,109.2 in 2004)                                                                     |       | .15                        | %           | .64 | % | 1.32 | % |
| Allowance for losses ($67.1 in 2004) to  year-end net receivables ($3,387.3 in 2004)                                                                              |       | 1.98                       | %           | 2.27 | % | 2.13 | % |
| Year-end finance and lease receivables and  leases past due, over 60 days, ($16.6 in 2004) to year-end retail contracts and  lease receivables ($3,192.7 in 2004) |       | 0.52                       | %           | 1.15 | % | 1.91 | % |

 

**2004 Compared to 2003:**

 

The Company’s net incomeincreased 46% to $69.2 in 2004 from $47.3 in 2003. The profit improvementresulted from both a higher finance margin (revenues minus borrowing, lease andinsurance expenses) and a lower provision for losses. Interest and otherrevenue increased 13% to $320.9 from $285.0 in 2003 primarily due to higherearning assets, offset by lower interest rates. Average earning assetsincreased due to higher new loan and lease volume from higher truck production.In addition, increased revenue from used equipment dispositions and insurancepremiums contributed to growth in interest and other revenues.  Interest and other borrowing expensesdecreased 14% to $71.6 in 2004 due to lower interest rates offset somewhat byhigher average debt balances. Depreciation and other operating lease and rentalexpenses increased 52% to $71.6 in 2004 from $47.2 in 2003 primarily due tocontinued growth in operating lease assets. Lower credit losses from a significantreduction in repossessed units, reflecting improvements in the portfolio,contributed to the provision for losses on receivables decreasing 78% to $4.3in 2004 compared to $19.6 in 2003.   TheCompany’s 2004 effective income tax rate decreased to 37.9% from 39.4% in 2003due to a lower effective state income tax rate.

 

**2003 Compared to 2002:**

 

The Company’s net incomeincreased 73% to $47.3 in 2003 from $27.3 in 2002. A lower provision for lossesand a higher finance margin contributed to the profit improvement. Interest andother revenue decreased 3% to $285.0 from $292.6 in 2002 mainly due to lowerearning assets and lower interest rates. Although 2003 new truck

 

11

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volume was consistent with 2002 levels,average earning assets decreased slightly due to runoff of the portfolio.Interest and other borrowing expenses decreased 30% to $83.2 in 2003 due tolower average debt balances and interest rates. Depreciation and otheroperating lease and rental expenses increased 48% to $47.2 in 2003 from $31.9in 2003 primarily due to higher operating lease assets. Lower levels of pastdue accounts and repossessions contributed to the provision for losses onreceivables decreasing 54% to $19.6 in 2003 compared to $42.2 in 2002.

 

**Company Outlook**

 

The future profitabilityof the Company is primarily dependent on the generation of new business and onthe level of credit losses experienced. Asset growth in 2005 is contingent upon continued improvement in the generaleconomy and the resulting increase in truck sales and the impact of increasedcompetition.  Some economic weakness, aswell as continuing high fuel and insurance costs and higher interest rates,could exert pressure on the profit margins of truck operators and cause areturn to a higher level of past-due accounts and repossessions, which couldresult in higher credit losses.

 

**Funding and Liquidity**

 

TheCompany manages its capital structure consistent with industry standards. Since1983, the Company has registered debt securities under the Securities Act of1933 for offering to the public. In December 2003, the Company filed a shelfregistration statement under which $3,000.0 of medium-term notes could beissued as needed.  As ofDecember 31, 2004, $1,850.0 of such securities were available for issuance.

 

The Company believesthat it has sufficient financial capabilities to continue funding receivablesand servicing debt through internally generated funds, access to public andprivate debt markets, lines of credit and other financial resources.  The increase in borrowings to $2,880.8 atDecember 31, 2004 from $2,494.5 at December 31, 2003 was mainly due tooriginations of finance and other receivables and equipment on operating leaseadditions exceeding collections and cash provided by operations.

 

The Company’s investmentgrade credit ratings continue to provide access to capital markets atcompetitive interest rates. The Company’s debt ratings at December 31, 2004 areas follows:

 

| ** **            | ** ** | **Moody’s** | ** ** | **Standard  and Poor’s** | ** ** |
|-----------------------|------------|------------------|------------|-------------------------------|------------|
| Commercial paper      |       | P-1              |       | A-1+                          |       |
| Senior unsecured debt |       | A1               |       | AA-                           |       |

 

12

----

 

The following summarizes the Company’scontractual cash commitments at December 31, 2004:

 
| ** **       | ** ** | **Maturity**            | ** ** | ** **              | ** ** |
|------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **       | ** ** | **Less than  One Year** | ** ** | **More than  One Year** | ** ** | **Total** | ** ** |
| Borrowings       |       | $                       | 1,630.8    |                    | $          | 1,250.0 |   | $ | 2,880.8 |   |
| Operating Leases |       | .7                      |       | 2.1                     |       | 2.8 |   |
| Total            |       | $                       | 1,631.5    |                    | $          | 1,252.1 |   | $ | 2,883.6 |   |

 

As described in Note Fto the financial statements, borrowings consist of term debt and commercial paper.The Company has operating leases for office space, truck leasing facilities andoffice equipment. In addition, the Company had loan and lease commitments of$289.6 expiring within one year. These commitments represent commitments tofund new retail loan and lease contracts.

 

**Critical Accounting Policies:**

 

In the preparation ofthe Company’s financial statements, in accordance with accounting principlesgenerally accepted in the United States, management uses estimates and makesjudgments and assumptions that affect asset and liability values and theamounts reported as income and expense during the periods presented. Thefollowing are accounting policies which, in the opinion of management, areparticularly sensitive and which, if actual results are different, may have amaterial impact on the financial statements.

 

Equipment on Operating Leases

 

In determining theestimated residual values for equipment on operating leases, (and certaindirect financing leases), the Company considers the length of the lease term,the truck model and anticipated market demand and the expected usage of thetruck. If the sales price of the trucks at the end of the lease term differssignificantly from the Company’s estimate, a gain or loss will result. TheCompany believes its residual setting policies are appropriate; however, futuremarket conditions, changes in government regulations and other factors outsidethe Company’s control can impact the ultimate sales price of trucks returnedunder these contracts. Residual values are reviewed regularly and adjusteddownward if market conditions warrant. See “Note A – Significant AccountingPolicies” in the Notes to Financial Statements.

 

Allowancefor Credit Losses

 

The establishment of theallowance for credit losses on receivables is dependent on estimates, includingassumptions regarding collectibility of past due accounts, repossession ratesand the recovery rate on the underlying collateral. The Company believes itsreserve-setting policies adequately take into account the known risks inherentin the portfolio. If there are significant variations in the actual resultsfrom those estimates, the provision for credit losses and operating earningsmay be adversely impacted. See “Note A – Significant Accounting Policies” inthe Notes to Financial Statements.

 

**Forward Looking Statements**

 

Certaininformation presented in this Form 10-K contains forward-looking statementsmade pursuant to the Private Securities Litigation Reform Act of 1995, whichare subject to risks and uncertainties that may affect actual results. Risksand uncertainties include, but are not limited to: national and local economic,political and industry conditions; changes in the levels of new business volumedue to unit fluctuations in new PACCAR truck sales; changes in competitivefactors; changes affecting the profitability of truck owners and operators;price changes impacting equipment costs and residual values; changes in costsand availability of external funding sources; and legislation and governmentalregulation.

 

13

----

 

**ITEM 7A.**** QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Market Risk and Derivative FinancialInstruments

In the normal course ofbusiness, the Company issues various financial instruments that expose theCompany to market risk associated with market interest rates. Policies andprocedures have been established by the Company to manage these market risksthrough the use of various derivative financial instruments. The Company doesnot engage in derivatives trading, market-making or other speculativeactivities.

 

The following is asensitivity analysis for the Company’s derivatives that have interest raterisk. These instruments are held for other than trading purposes. The gains orlosses in the following table represent the changes in the financialinstruments’ fair values that would result from a 100 basis point increase ofthe current market rate at December 31, 2004 and 2003.

 

 

**Fair Value Gains (Losses)**

(Millions of Dollars)

 
| ** **                                                                                            | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                            | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|                                                                                                  |       |                       |       |   |   |
| Assets                                                                                                |       |                       |       |   |   |
| Retail notes, contracts and wholesale  financing, net of unearned interest, less allowance for losses | ** ** | **$**                      | **(30.7**  | **)** | $ | (26.4 | ) |
|                                                                                                  |       |                       | ** ** |   |   |
| Liabilities                                                                                           |       |                       | ** ** |   |   |
| Debt                                                                                                  | ** ** | **.4**                     | ** ** | .7 |   |
| Interest rate swaps related to debt                                                                   | ** ** | **27.5**                   | ** ** | 20.5 |   |
|                                                                                                  |       |                       | ** ** |   |   |
| Total                                                                                                 | ** ** | **$**                      | **(2.8**   | **)** | $ | (5.2 | ) |

 

**ITEM 8.****  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

The financial statementsof the Company and related schedules described under Item 15, “Exhibits,Financial Statement Schedules” are included following this page.

 

14

----

 

Report of IndependentRegistered Public Accounting Firm

 

Board of Directors

PACCAR Financial Services Corporation andPACCAR Financial Corp.

 

We have audited the accompanying balancesheets of PACCAR Financial Corp. (a wholly-owned subsidiary of PACCAR FinancialServices Corporation) as of December 31, 2004 and 2003, the related statementsof income, cash flows, stockholder’s equity and comprehensive income for eachof the three years in the period ended December 31, 2004. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordancewith the standards of the Public Company Accounting Oversight Board  (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of PACCAR Financial Corp. at December 31, 2004 and 2003, and theresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2004 in conformity with U.S. generally acceptedaccounting principles.

 
|                | /s/ Ernst & Young LLP |   |
|---------------------|---------------------------|--------|
|                |                      |
| Seattle, Washington |                      |
| February 23, 2005   |                      |

 

15

----

 

**PACCARFinancial Corp.**

 

##### **STATEMENTS OF INCOME**

(Millions of Dollars)

 
|                                                        |   | **Year ended December 31** |      |
|-------------------------------------------------------------|--------|---------------------------------|-----------|
|                                                        |   | **2004**                        |      | **2003** |   | **2002** |   |
|                                                        |   | ** **                      |      |   |   |   |   |
| Interest and  fee income                                    |   | **$**                           | **201.4** |   | $ | 202.9 |   | $ | 230.9 |   |
| Operating  lease and rental income                          |   | **87.3**                        |      | 60.0 |   | 41.5 |   |
| Insurance  premiums and other revenue                       |   | **32.2**                        |      | 22.1 |   | 20.2 |   |
|                                                        |   | ** **                      |      |   |   |   |   |
| **TOTAL  INTEREST AND OTHER REVENUE**                       |   | **320.9**                       |      | 285.0 |   | 292.6 |   |
|                                                        |   | ** **                      |      |   |   |   |   |
| Interest and  other borrowing expenses                      |   | **71.6**                        |      | 83.2 |   | 118.9 |   |
| Depreciation  and other operating lease and rental expenses |   | **71.6**                        |      | 47.2 |   | 31.9 |   |
| Insurance  claims and other expenses                        |   | **17.1**                        |      | 12.5 |   | 11.7 |   |
| Selling  general and administrative expenses                |   | **44.9**                        |      | 44.4 |   | 42.9 |   |
| Provision  for losses on receivables                        |   | **4.3**                         |      | 19.6 |   | 42.2 |   |
|                                                        |   | ** **                      |      |   |   |   |   |
| **TOTAL  EXPENSES**                                         |   | **209.5**                       |      | 206.9 |   | 247.6 |   |
|                                                        |   | ** **                      |      |   |   |   |   |
| **INCOME  BEFORE INCOME TAXES**                             |   | **111.4**                       |      | 78.1 |   | 45.0 |   |
| Income taxes                                                |   | **42.2**                        |      | 30.8 |   | 17.7 |   |
|                                                        |   | ** **                      |      |   |   |   |   |
| **NET  INCOME**                                             |   | **$**                           | **69.2**  |   | $ | 47.3 |   | $ | 27.3 |   |

 

Earnings per share anddividends per share are not reported because the Company is a wholly-ownedsubsidiary of PACCAR Financial Services Corporation.

 

16

----

 

**PACCARFinancial Corp.**

 

**BALANCE SHEETS**

(Millions of Dollars)

 
| ** **                                                                                                                                    | ** ** | **As of December 31** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|-------------|
| ** **                                                                                                                                    | ** ** | **2004**                   | ** **  | **2003** | ** ** |
|                                                                                                                                          |       |                       |        |   |   |
| **ASSETS**                                                                                                                                    |       |                       |        |   |   |
|                                                                                                                                          |       |                       |        |   |   |
| Cash                                                                                                                                          | ** ** | **$**                      | **18.2**    |   | $ | 5.5 |   |
| Finance and  other receivables, net of allowance for losses (2004 - $67.1 and 2003 -  $67.4)                                                  | ** ** | **3,426.3**                |        | 2,976.7 |   |
| Loans to  PACCAR Inc and affiliates                                                                                                           | ** ** | **129.1**                  |        | 265.0 |   |
| Equipment on  operating leases, net of depreciation (2004 -$73.4 and 2003 - $44.3)                                                            | ** ** | **357.8**                  |        | 198.7 |   |
| Other assets                                                                                                                                  | ** ** | **39.1**                   |        | 27.4 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **TOTAL  ASSETS**                                                                                                                             | ** ** | **$**                      | **3,970.5** |   | $ | 3,473.3 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **LIABILITIES**                                                                                                                               |       |                       |        |   |   |
|                                                                                                                                          |       |                       |        |   |   |
| Accounts  payable, accrued expenses and other                                                                                                 | ** ** | **$**                      | **133.1**   |   | $ | 131.8 |   |
| Commercial  paper                                                                                                                             | ** ** | **1,050.8**                |        | 1,014.5 |   |
| Medium-term  notes                                                                                                                            | ** ** | **1,830.0**                |        | 1,480.0 |   |
| Income taxes  – current and deferred                                                                                                     | ** ** | **281.5**                  |        | 208.5 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **TOTAL  LIABILITIES**                                                                                                                        | ** ** | **$**                      | **3,295.4** |   | $ | 2,834.8 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **STOCKHOLDER’S  EQUITY**                                                                                                                |       |                       |        |   |   |
|                                                                                                                                          |       |                       |        |   |   |
| Preferred  stock, par value $100 per share, 6% noncumulative and nonvoting, 450,000  shares authorized, 310,000 shares issued and outstanding | ** ** | **$**                      | **31.0**    |   | $ | 31.0 |   |
| Common  stock, par value $100 per share, 200,000 shares authorized, 145,000 shares  issued and outstanding                                    | ** ** | **14.5**                   |        | 14.5 |   |
| Additional  paid-in capital                                                                                                                   | ** ** | **150.7**                  |        | 131.9 |   |
| Retained  earnings                                                                                                                            | ** ** | **473.5**                  |        | 473.3 |   |
| Accumulated  other comprehensive income (loss)                                                                                                | ** ** | **5.4**                    |        | (12.2 | ) |
|                                                                                                                                          |       |                       |        |   |   |
| **TOTAL  STOCKHOLDER’S EQUITY**                                                                                                          | ** ** | **675.1**                  |        | 638.5 |   |
|                                                                                                                                          |       |                       |        |   |   |
| **TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                          | ** ** | **$**                      | **3,970.5** |   | $ | 3,473.3 |   |
|                                                                                                                                               |            |                            |             |  |  |  |  |  |  |

 

See Notes to FinancialStatements

 

17

----

 

**PACCARFinancial Corp.**

 

**STATEMENTS OF CASH FLOWS**

(Millions of Dollars)

 
| ** **                                                                   | ** ** | **Year ended December 31** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                         |       |                            | ** ** |   |   |   |   |
| **OPERATING  ACTIVITIES**                                                    |       |                            | ** ** |   |   |   |   |
|                                                                         |       |                            | ** ** |   |   |   |   |
| Net income                                                                   | ** ** | **$**                           | **69.2**   | ** ** | $ | 47.3 |   | $ | 27.3 |   |
| Items  included in net income not affecting cash:                            |       |                            | ** ** |   |   |   |   |
| Depreciation  and amortization                                               | ** ** | **52.2**                        | ** ** | 34.9 |   | 21.9 |   |
| Provision  for losses on receivables                                         | ** ** | **4.3**                         | ** ** | 19.6 |   | 42.2 |   |
| Provision  for deferred taxes                                                | ** ** | **68.1**                        | ** ** | 15.1 |   | 25.1 |   |
| (Decrease)  increase in payables and other                                   | ** ** | **(22.6**                       | **)**      | (9.8 | ) | 3.2 |   |
|                                                                         |       |                            | ** ** |   |   |   |   |
| **NET CASH  PROVIDED BY OPERATING ACTIVITIES**                               | ** ** | **171.2**                       | ** ** | 107.1 |   | 119.7 |   |
|                                                                         |       |                            | ** ** |   |   |   |   |
| **INVESTING  ACTIVITIES**                                                    |       |                            | ** ** |   |   |   |   |
|                                                                         |       |                            | ** ** |   |   |   |   |
| Finance and  other receivables originated                                    | ** ** | **(1,664.8**                    | **)**      | (1,186.3 | ) | (1,185.3 | ) |
| Collections  on finance and other receivables                                | ** ** | **1,298.9**                     | ** ** | 1,358.6 |   | 1,422.1 |   |
| Net increase  in wholesale receivables                                       | ** ** | **(61.3**                       | **)**      | (3.8 | ) | (121.4 | ) |
| Net decrease  (increase) in loans to PACCAR Inc and affiliates               | ** ** | **135.9**                       | ** ** | (73.0 | ) | (28.8 | ) |
| Acquisition  of equipment on operating leases, primarily from PACCAR Inc     | ** ** | **(218.3**                      | **)**      | (116.1 | ) | (95.5 | ) |
| Proceeds  from disposal of equipment                                         | ** ** | **14.8**                        | ** ** | 6.6 |   | 8.4 |   |
| Acquisition  of equipment                                                    | ** ** | **(.7**                         | **)**      | (.2 | ) | (.7 | ) |
|                                                                         |       |                            | ** ** |   |   |   |   |
| **NET CASH  USED IN INVESTING ACTIVITIES**                                   | ** ** | **(495.5**                      | **)**      | (14.2 | ) | (1.2 | ) |
|                                                                         |       |                            | ** ** |   |   |   |   |
| **FINANCING  ACTIVITIES**                                                    |       |                            | ** ** |   |   |   |   |
|                                                                         |       |                            | ** ** |   |   |   |   |
| Net increase  (decrease) in commercial paper and other short-term borrowings | ** ** | **36.3**                        | ** ** | (106.1 | ) | (153.9 | ) |
| Proceeds  from medium-term notes                                             | ** ** | **1,150.0**                     | ** ** | 630.0 |   | 845.0 |   |
| Payments of  medium-term notes and other borrowings                          | ** ** | **(800.0**                      | **)**      | (634.0 | ) | (826.6 | ) |
| Dividends  paid                                                              | ** ** | **(69.0**                       | **)**      | — |   | (11.0 | ) |
| Payment of  advances (to) from PACCAR Inc                                    | ** ** | **.9**                          | ** ** | (3.1 | ) | 2.9 |   |
| Capital  contributions                                                       | ** ** | **18.8**                        | ** ** | 15.9 |   | 16.5 |   |
|                                                                         |       |                            | ** ** |   |   |   |   |
| **NET CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES**                     | ** ** | **337.0**                       | ** ** | (97.3 | ) | (127.1 | ) |
|                                                                         |       |                            | ** ** |   |   |   |   |
| **NET  INCREASE (DECREASE) IN CASH**                                         | ** ** | **12.7**                        | ** ** | (4.4 | ) | (8.6 | ) |
|                                                                         |       |                            | ** ** |   |   |   |   |
| **CASH AT  BEGINNING OF YEAR**                                               | ** ** | **5.5**                         | ** ** | 9.9 |   | 18.5 |   |
|                                                                         |       |                            | ** ** |   |   |   |   |
| **CASH AT  END OF YEAR**                                                     | ** ** | **$**                           | **18.2**   | ** ** | $ | 5.5 |   | $ | 9.9 |   |
|                                                                              |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

See Notes to FinancialStatements

 

18

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**PACCARFinancial Corp.**

 

**STATEMENTSOF STOCKHOLDER’S EQUITY**

(Millions of Dollars)

 
| ** **                                                       | ** ** | **Year ended December 31** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                       | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                             |       |                            | ** ** |   |   |   |   |
| **PREFERRED  STOCK**, $100 par value                             |       |                            | ** ** |   |   |   |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **$**                           | **31.0**   | ** ** | $ | 31.0 |   | $ | 31.0 |   |
| Balance at  end of year                                          | ** ** | **31.0**                        | ** ** | 31.0 |   | 31.0 |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| **COMMON  STOCK**, $100 par value                                |       |                            | ** ** |   |   |   |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **14.5**                        | ** ** | 14.5 |   | 14.5 |   |
| Balance at  end of year                                          | ** ** | **14.5**                        | ** ** | 14.5 |   | 14.5 |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| **ADDITIONAL  PAID-IN CAPITAL**                                  |       |                            | ** ** |   |   |   |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **131.9**                       | ** ** | 116.0 |   | 99.5 |   |
| Investments  from PACCAR Financial Services Corporation          | ** ** | **18.8**                        | ** ** | 15.9 |   | 16.5 |   |
| Balance at  end of year                                          | ** ** | **150.7**                       | ** ** | 131.9 |   | 116.0 |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| **RETAINED  EARNINGS**                                           |       |                            | ** ** |   |   |   |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **473.3**                       | ** ** | 426.0 |   | 409.7 |   |
| Net income                                                       | ** ** | **69.2**                        | ** ** | 47.3 |   | 27.3 |   |
| Cash  dividends paid                                             | ** ** | **(69.0**                       | **)**      | — |   | (11.0 | ) |
| Balance at  end of year                                          | ** ** | **473.5**                       | ** ** | 473.3 |   | 426.0 |   |
|                                                             |       |                            | ** ** |   |   |   |   |
| **ACCUMULATED  OTHER COMPREHENSIVE INCOME (LOSS)**               |       |                            | ** ** |   |   |   |   |
| ** **                                                       |       |                            | ** ** |   |   |   |   |
| Accumulated  unrealized net gain (loss) on derivative contracts: |       |                            | ** ** |   |   |   |   |
| Balance at  beginning of year                                    | ** ** | **(12.2**                       | **)**      | (31.6 | ) | (31.7 | ) |
| Net  unrealized gains                                            | ** ** | **17.6**                        | ** ** | 19.4 |   | .1 |   |
| Balance at  end of year                                          | ** ** | **5.4**                         | ** ** | (12.2 | ) | (31.6 | ) |
|                                                             |       |                            | ** ** |   |   |   |   |
| **TOTAL  STOCKHOLDER’S EQUITY**                             | ** ** | **$**                           | **675.1**  | ** ** | $ | 638.5 |   | $ | 555.9 |   |

 

See Notes to FinancialStatements

 

19

----

 

**PACCARFinancial Corp.**

 

**STATEMENTSOF COMPREHENSIVE INCOME**

(Millions of Dollars)

 
| ** **                                   | ** ** | **Year ended December 31** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                         |       |                            |       |   |   |   |   |
| Net income                                   | ** ** | **$**                           | **69.2**   |   | $ | 47.3 |   | $ | 27.3 |   |
| Other  comprehensive income, net of tax      |       |                            |       |   |   |   |   |
| Unrealized  net gain on derivative contracts | ** ** | **17.6**                        |       | 19.4 |   | .1 |   |
| Net other  comprehensive income              | ** ** | **17.6**                        |       | 19.4 |   | .1 |   |
|                                         |       |                            |       |   |   |   |   |
| **TOTAL  COMPREHENSIVE INCOME**              | ** ** | **$**                           | **86.8**   |   | $ | 66.7 |   | $ | 27.4 |   |

 

See Notes to FinancialStatements

 

20

----

 

**PACCARFinancial Corp.**

 

**NOTES TO FINANCIAL STATEMENTS**

(Millions of Dollars)

 

**NOTE A – SIGNIFICANT ACCOUNTINGPOLICIES**

 

Description ofOperations: PACCAR Financial Corp. (the “Company”),is a wholly-owned subsidiary of PACCAR Financial Services Corporation (“PFSC”).PFSC is a wholly-owned subsidiary of PACCAR Inc. (“PACCAR”).  The Company primarily provides financing ofPACCAR-manufactured trucks and related equipment sold by authorized dealers.The Company also finances dealer inventories of transportation equipment andfranchises PACCAR dealerships to engage in full-service and finance leasing.The operations of the Company are fundamentally affected by its relationshipwith PACCAR.

 

Due to the nature of theCompany’s business, customers are concentrated in the transportation industrythroughout the United States. Generally, all receivables are collateralized bythe equipment being financed. The risk of credit losses related to thisconcentration has been considered in establishing the allowance for losses.

 

Use of Estimates: Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Actual results could differ from those estimates.

 

Allowance for Losses:The provision for losses on net finance and other receivables is charged toincome in an amount sufficient to maintain the allowance for losses at a levelconsidered adequate to cover estimated credit losses, net of recoveriesinherent in the portfolio. Receivables are charged to this allowance when, inthe judgment of management, they are deemed uncollectible (generally uponrepossession of the collateral). With respect to certain retail contractsacquired from dealers, the dealer retains liability, up to specified limits,for the credit loss. The amount and collectibility of dealer recourseprovisions have been considered in establishing the allowance for losses onfinance and other receivables.

 

Revenue Recognition: Interestincome from finance receivables and other receivables is recognized using theinterest method. Certain loan origination costs are deferred and amortized tointerest income. For operating leases, rental revenue is recognized on astraight-line basis over the lease term.

 

Recognition of interestincome and rental revenue are suspended when management determines thatcollection is not probable (generally after 90 days past due). Recognition isresumed if the receivable becomes contractually current and the collection ofamounts is again considered probable.

 

Equipment on OperatingLeases: Equipment on operating leases is recorded at cost and isdepreciated on the straight-line basis to its estimated residual value.Residual values are reviewed regularly and adjusted downward if marketconditions warrant.

 

Income Taxes: TheCompany is included in the consolidated federal income tax return of PACCAR.Income taxes for the Company are determined on a separate return basis, and anyrelated tax liability is paid by the Company to PACCAR and any related taxbenefit is paid by PACCAR to the Company.

 

Reclassifications: Certainprior-year amounts have been reclassified to conform to the 2004 presentation.

 

21

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**NOTE B – FINANCE AND OTHERRECEIVABLES**

 

Terms for finance andother receivables at origination range from 12 to 84 months. Repaymentexperience indicates some receivables will be paid prior to contract maturity,while some others will be extended or renewed. Accordingly, the maturities ofreceivables presented here should not be regarded as a forecast of futurecollections.

 

The Company’s financeand other receivables are as follows:

 
| ** **                                                                                            | ** ** | **Year ended December 31** | ** **  |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                                                            | ** ** | **2004**                        | ** **  | **2003** | ** ** |
| Retail  contracts and loans due within:                                                               |       |                            | ** **  |   |   |
| One year                                                                                              | ** ** | **$**                           | **830.1**   | ** ** | $ | 781.8 |   |
| Two years                                                                                             | ** ** | **609.0**                       | ** **  | 543.3 |   |
| Three years                                                                                           | ** ** | **467.7**                       | ** **  | 368.4 |   |
| Four years                                                                                            | ** ** | **269.8**                       | ** **  | 222.5 |   |
| Five years                                                                                            | ** ** | **119.9**                       | ** **  | 90.7 |   |
| Six years  and beyond                                                                                 | ** ** | **17.8**                        | ** **  | 12.2 |   |
| ** **                                                                                            |       | **2,314.3**                     | ** **  | 2,018.9 |   |
| Wholesale  financing                                                                                  | ** ** | **373.7**                       | ** **  | 312.3 |   |
| Direct  financing leases (including unguaranteed residual values of $41.4 in 2004 and  $47.5 in 2003) | ** ** | **891.4**                       | ** **  | 787.8 |   |
| Interest and  other receivables                                                                       | ** ** | **39.4**                        | ** **  | 33.5 |   |
|                                                                                                  |       |                            | ** **  |   |   |
| ** **                                                                                            |       | **3,618.8**                     | ** **  | 3,152.5 |   |
|                                                                                                  |       |                            | ** **  |   |   |
| Less  allowance for losses                                                                            | ** ** | **(67.1**                       | **)**       | (67.4 | ) |
|                                                                                                  |       |                            | ** **  |   |   |
| ** **                                                                                            |       | **3,551.7**                     | ** **  | 3,085.1 |   |
|                                                                                                  |       |                            | ** **  |   |   |
| Unearned  interest:                                                                                   |       |                            | ** **  |   |   |
| Retail contracts  and loans                                                                           | ** ** | **(23.7**                       | **)**       | (21.2 | ) |
| Direct  financing leases                                                                              | ** ** | **(101.7**                      | **)**       | (87.2 | ) |
|                                                                                                  |       |                            | ** **  |   |   |
| ** **                                                                                            |       | **(125.4**                      | **)**       | (108.4 | ) |
|                                                                                                  |       |                            | ** **  |   |   |
| Finance and  other receivables                                                                        | ** ** | **$**                           | **3,426.3** | ** ** | $ | 2,976.7 |   |
|                                                                                                       |            |                                 |             |  |  |  |  |  |  |

 

Future minimum leasepayments on direct financing leases totaled $850.0 at December 31, 2004and are due as follows: $244.3 in 2005; $192.9 in 2006; $155.2 in 2007; $115.6in 2008; $82.9 in 2009; and $59.1 in 2010 and beyond.

 

22

----

 

The allowance for losseson finance and other receivables is summarized as follows:

 
| ** **                        | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **2004**                        | ** ** | **2003** | ** ** |
|                              |       |                            | ** ** |   |   |
| Balance at  beginning of year     | ** ** | **$**                           | **67.4**   | ** ** | $ | 66.9 |   |
| Provision  for losses             | ** ** | **4.3**                         | ** ** | 19.6 |   |
| Credit  losses, net of recoveries | ** ** | **(4.6**                        | **)**      | (19.1 | ) |
|                              |       |                            | ** ** |   |   |
| Balance at  end of year           | ** ** | **$**                           | **67.1**   | ** ** | $ | 67.4 |   |

 

At December 31,2004 and 2003, the recorded investments in retail contracts and loans that wereconsidered to be impaired were $17.8 and $32.7, respectively. Included in theallowance for losses were specific reserves of $3.2 and $6.5 on these impairedretail contracts and loans. The average recorded investment in impaired retailcontracts and loans during the years ended December 31, 2004 and 2003, was$21.9 and $40.9, respectively. The Company recognized interest income of $.2,$.5 and $1.2 for the years ended December 31, 2004, 2003 and 2002,respectively, on those impaired retail contracts and loans, all of which wasrecognized using the cash basis method of income recognition.

 

**NOTE C – EQUIPMENT ON OPERATINGLEASES**

 

Terms of operatingleases at origination range from 18 to 72 months.  Future annual minimum rental payments to bereceived for equipment on non-cancelable operating leases beginning January 1,2005 totaled $158.6 and are due as follows: $54.4 in 2005; $47.2 in 2006; $37.7in 2007; $18.9 in 2008; $.3 in 2009 and $.1 in 2010 and beyond. Depreciationexpense related to equipment on operating leases was $44.9, $27.3 and $15.3 in2004, 2003 and 2002, respectively. Substantially all equipment on operatingleases is manufactured by PACCAR.

 

**NOTE D – TRANSACTIONS WITH PACCARAND AFFILIATES**

 

The Company and PACCARare parties to a Support Agreement that obligates PACCAR to provide, whenrequired, financial assistance to the Company to ensure that the Companymaintains a ratio of net earnings available for fixed charges to fixed charges(as defined) of at least 1.25 to 1 for any fiscal year. The required ratio forthe years ended December 31, 2004, 2003 and 2002 was met withoutassistance. The Support Agreement also requires PACCAR to own, directly orindirectly, all outstanding voting stock of the Company.

 

PFSC charges the Companyfor certain administrative services it provides and certain services theCompany receives indirectly from PACCAR. The costs are charged to the Companybased upon the Company’s specific use of the services at PFSC’s or PACCAR’scost. Management considers these charges reasonable and similar to the coststhat would be incurred if the Company were on a stand-alone basis. Fees forservices of $18.8, $15.9 and $16.5 in 2004, 2003 and 2002, respectively, werecharged to the Company. PFSC recognizes certain of these administrativeservices as an additional investment in the Company. The Company records theinvestment as additional paid-in capital. A cash dividend in the amount of$69.0 was declared and paid in the first quarter of 2004. A cash dividend inthe amount of $11.0 was declared and paid in the second quarter of 2002. Therewas no cash dividend declared or paid during 2003.

 

The Company’s principaloffice is located in the corporate headquarters building of PACCAR (owned byPACCAR). The Company also leases office space from two facilities owned byPACCAR and two facilities leased by PACCAR.

 

23

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The Company’s employeesare covered by a defined benefit pension plan, an unfunded post-retirementmedical and life insurance plan and a defined contribution plan sponsored byPACCAR. Separate allocations of plan assets and defined benefit planobligations relating to the Company have not been made. Expenses charged to theCompany by PACCAR for the defined benefit pension plan and the unfundedpost-retirement medical and life insurance plan were $.9, $.8, and $.9 foryears 2004, 2003 and 2002, respectively. Expenses incurred by the Company forthe defined contribution plan benefits were $1.1, $1.0 and $.9 for years 2004,2003 and 2002, respectively.

 

Financing and cashmanagement is partly provided through unsecured short-term advances to and fromPACCAR. Net annual interest paid to PACCAR was $.1 for the years ended 2004,2003 and 2002.

 

Periodically, theCompany borrows funds from PACCAR and makes loans to PACCAR. Loans outstandingto PACCAR were $13.8 and $54.5 at December 31, 2004 and 2003,respectively. Loans outstanding from PACCAR were $.9 at December 31,2004.  There were no loans outstandingfrom PACCAR at December 31, 2003.

 

PACCAR has issuedletters of credit as of December 31, 2004 in the amount of $6.1 on behalfof the Company to guarantee funds for payment to insured franchises and theircustomers for any future insurance losses.

 

The Company periodicallyloans funds to certain foreign finance and leasing affiliates of PACCAR. Theseforeign affiliates have Support Agreements with PACCAR, similar to the Company’sSupport Agreement. The foreign affiliates operate in the United Kingdom, theNetherlands, Mexico, Canada and Australia, and any resulting currency exposureis fully hedged. The foreign affiliates primarily provide financing and leasingof PACCAR-manufactured trucks and related equipment sold through PACCAR’sindependent dealer networks in Europe, Mexico, Canada and Australia. TheCompany will not make loans to the foreign affiliates in excess of theequivalent of $375.0 United States dollars, unless the amount in excess of suchlimits is guaranteed by PACCAR. The Company periodically reviews the fundingalternatives for these affiliates, and these limits may be revised in thefuture. There was a total of $115.3 in loans outstanding to foreign affiliatesoperating in the United Kingdom and the Netherlands at December 31, 2004.There was a total of $210.5 in loans outstanding to foreign affiliatesoperating in the United Kingdom and the Netherlands at December 31, 2003.There were no loans outstanding to other foreign affiliates for those periods.Interest income earned on affiliate loans was $3.5, $3.2 and $3.3 in 2004, 2003and 2002, respectively.

 

Included within accountspayable, accrued expenses and other is $5.0 and $6.3 payable to PACCAR’s truckdivisions at December 31, 2004 and 2003, respectively.

 

**NOTE E – DERIVATIVE FINANCIALINSTRUMENTS**

 

The Company does notengage in derivatives trading, market-making or other speculative activities.Derivative financial instruments are used as hedges to manage exposuresto fluctuations in interest rates and foreign currency exchange rates. TheCompany documents its risk management strategy and hedge effectiveness at theinception of and during the term of each hedge. The Company, in the normalcourse of business, enters into various interest-rate contracts, includinginterest-rate and currency swaps. Interest-rate contracts generallyinvolve the exchange of fixed and floating rate interest payments without theexchange of the underlying principal. These contracts are used to manageexposures to fluctuations in interest rates. Net amounts paid or received arereflected as adjustments to interest expense. At December 31, 2004, theCompany had 118 interest rate contracts outstanding with various financialinstitutions. The notional amount of these contracts totaled $1,943.4, withamounts expiring over the next five years. The notional amount is used tomeasure the volume of these contracts and does not represent exposure to creditloss. In the event of default by a counterparty, the risk in these transactionsis the cost of replacing the interest-rate contract at current market rates.The Company has established minimum credit ratings of the counterparties andlimits its exposure to any one counterparty. Management believes that the riskof nonperformance by the counterparties is remote.

 

24

----

 

Floating to fixed rateswaps effectively convert an equivalent amount of commercial paper and othervariable rate debt to fixed rate debt. Notional maturities for the five yearsbeginning January 1, 2005 are $704.9, $572.7, $467.0, $130.9 and $67.9.The weighted average pay rate on these floating to fixed rate swaps was 3.07%.The weighted average receive rate of 2.30% offsets rates on associated debtobligations.

 

All derivatives are reported at fair value and included in “Otherassets” or “Accounts payable, accrued expenses & other” in the accompanyingbalance sheets depending on the individual derivative contracts estimated fairvalue. The unrealized gain or loss on the effective portion of derivatives thathave been designated as cash flow hedging instruments arising from the changein fair value is initially reported in Other Comprehensive Income (OCI). Theremaining unrealized gain or loss, if any, is recognized currently in earnings.For fair value hedge transactions, changes in the fair value of the derivativeinstrument are generally offset in the income statement by changes in the fairvalue of the item being hedged. Hedge ineffectiveness was considered immaterialfor 2004, 2003 and 2002. Amounts in accumulated OCI are reclassified intointerest expense in the same period in which the hedged forecastedtransaction affects earnings. Net gains and losses from interest-rate contractsare recognized as an adjustment to interest expense. Of the accumulatedunrealized net income included in OCI as of December 31, 2004, $ .6 isexpected to be reclassified to interest expense in 2005. The fixed interestearned on finance receivables will offset the amount recognized in interestexpense resulting in a stable interest margin consistent with the Company’sinterest rate risk management strategy.

 

25

----

 

**NOTE F – BORROWINGS**

 

Borrowings aresummarized as follows:

 
| ** **                       | ** ** | **Effective** | ** ** | **As of December 31,** | ** **  |
|----------------------------------|------------|---------------|------------|-----------------------------|-------------|
| ** **                       | ** ** | **Rate***     | ** ** | **2004**                    | ** **  | **2003** | ** ** |
|                             |       |          |       |                        |        |   |   |
| Commercial  paper                | ** ** | **2.86**      | **%**      | **$**                       | **1,050.8** |   | $ | 1,014.5 |   |
| Fixed rate  medium-term notes    | ** ** | **2.50**      | **%**      | **50.0**                    |        | 55.0 |   |
| Floating  rate medium-term notes | ** ** | **2.70**      | **%**      | **1,780.0**                 |        | 1,425.0 |   |
| Total                            | ** ** | **2.75**      | **%**      | **$**                       | **2,880.8** |   | $ | 2,494.5 |   |
|                                  |            |               |            |                             |             |  |  |  |  |  |

 

----

*The effective rate isthe weighted average rate as of December 31, 2004 and includes the effectsof interest rate swap agreements.

 

Interest expense onborrowings amounted to $67.9, $78.8, and $114.7 for 2004, 2003 and 2002,respectively.

 

Principal amounts ofmedium-term notes due over the next five years beginning January 1, 2005are $580.0 in 2005 and $1,250.0 in 2006.

 

At December 31, 2004,there was $1,850.0 of medium-term debt available for issuance under a currentlyoutstanding shelf registration statement.

 

Cash paid for interest(net of swap interest received) was $69.0 in 2004, $82.5 in 2003, and $120.9 in2002.

 

**NOTE G – CREDIT ARRANGEMENTS**

 

The Company participateswith PACCAR and certain other PACCAR affiliates in syndicated credit facilitiesof $1,500.0 at December 31, 2004. Of this amount, $750.0 will expire in July 2005 and the remaining$750.0 will expire in July 2006. PACCAR intends to replace these creditfacilities as they expire with facilities of similar amounts. Of the $1,500.0in syndicated credit facilities, $1,350.0 is available for use by the Companyand/or PACCAR and certain other PACCAR affiliates. The remaining $150.0 is onlyavailable for use by PACCAR’s Canadian subsidiaries.  These credit facilities are used to providebackup liquidity for the Company’s commercial paper and maturing medium-termnotes. The Company is liable only for its own borrowings under these creditfacilities. There were no borrowings under these credit facilities in the yearsended December 31, 2004 or 2003.

 

26

----

 

**NOTE H – INCOME TAXES**

 

The provision for incometaxes consists of the following:

 
| ** **                   | ** ** | **Year ended December 31** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|                         | ** ** | ** **                      | ** ** |   |   |   |   |
| Current  provision (benefit) |       |                            | ** ** |   |   |   |   |
| Federal                      | ** ** | **$**                           | **(26.4**  | **)** | $ | 12.5 |   | $ | (9.0 | ) |
| State                        | ** ** | **.5**                          | ** ** | 3.2 |   | 1.6 |   |
| ** **                   |       | **(25.9**                       | **)**      | 15.7 | ** ** | (7.4 | ) |
|                         |       |                            | ** ** |   |   |   |   |
| Deferred  provision          | ** ** | **68.1**                        | ** ** | 15.1 |   | 25.1 |   |
|                         |       |                            | ** ** |   |   |   |   |
| ** **                   |       | **$**                           | **42.2**   |   | $ | 30.8 | ** ** | $ | 17.7 |   |

 

A reconciliation betweenthe statutory federal income tax rate to the actual provision for income taxesis shown below:

 
| ** **                        | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** |
|                              |       |                            |       |   |   |   |   |
| Tax at the  statutory rate of 35% | ** ** | **$**                           | **39.0**   |   | $ | 27.3 |   | $ | 15.8 |   |
| Effect of  state income taxes     | ** ** | **3.2**                         |       | 3.0 |   | 1.8 |   |
| Other                             | ** ** | **—**                      |       | .5 |   | .1 |   |
| ** **                        |       | **$**                           | **42.2**   |   | $ | 30.8 |   | $ | 17.7 |   |

 

Cash paid/ (received)for income taxes was $(20.2) in 2004, $16.0 in 2003, and $(.2) in 2002.

 

Deferred income taxassets and liabilities consisted of the following:

 
| ** **                             | ** ** | **As of December 31** | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **2004**                   | ** ** | **2003** | ** ** |
| Deferred tax  liability:               |       |                       | ** ** |   |   |
| Asset capitalization  and depreciation | ** ** | **$**                      | **320.2**  | ** ** | $ | 252.8 |   |
| Other                                  | ** ** | **5.9**                    | ** ** | 1.3 |   |
|                                   | ** ** | ** **                 | ** ** |   |   |
| Deferred tax  assets:                  |       |                       | ** ** |   |   |
| Allowance  for losses on receivables   | ** ** | **(25.7**                  | **)**      | (25.9 | ) |
| Other                                  | ** ** | **(8.8**                   | **)**      | (15.7 | ) |
|                                   |       |                       | ** ** |   |   |
| Net deferred  tax liability            | ** ** | **$**                      | **291.6**  | ** ** | $ | 212.5 |   |

 

27

----

 

**NOTE I – FAIR VALUES OF FINANCIALINSTRUMENTS**

 

The following methodsand assumptions were used by the Company in estimating its fair valuedisclosures for financial instruments:

 

Cash: Thecarrying amount reported in the balance sheets is stated at fair value.

 

Net Receivables: Forfloating rate loans and wholesale financings, fair values are based on carryingvalues. For fixed rate loans, fair values are estimated using discounted cashflow analysis based on interest rates currently being offered for loans withsimilar terms to borrowers of similar credit quality. The carrying amount ofaccrued interest and other receivables approximates its fair value. Directfinancing lease receivables and the related loss provisions have been excludedfrom the accompanying table.

 

Commercial Paper andMedium-Term Notes: The carrying amounts of the Company’scommercial paper and floating rate medium-term notes approximate their fairvalue. The fair value of the Company’s fixed rate medium-term notes isestimated using discounted cash flow analysis, based on the Company’s currentincremental borrowing rates for similar types of borrowing arrangements.

 

Derivative Instruments:Derivative instruments are carried at fair value. Fair values for the Company’sinterest-rate and foreign exchange contracts are based on costs that would beincurred to terminate existing agreements and enter into new agreements withsimilar notional amounts, maturity dates and counterparties’ credit standing atcurrent market interest rates.

 

Accounts Payable, Accrued Expenses and Other:**Carrying amounts approximate fair value and have beenexcluded from the accompanying table.

 

Financial instruments ofthe Company, where the recorded carrying amount is not at fair value, are asfollows:

 
| ** **                    | ** ** | **As of December 31** | ** **  |
|-------------------------------|------------|----------------------------|-------------|
| ** **                    | ** ** | **2004**                   | ** **  | **2003** | ** ** |
| ** **                    | ** ** | **Carrying  Amount**       | ** **  | **Fair Value** | ** ** | **Carrying   Amount** | ** ** | **Fair Value** | ** ** |
|                          |       |                       |        |   |   |   |   |   |   |
| Net  receivables              | ** ** | **$**                      | **2,612.5** | ** ** | **$** | **2,605.3** |   | $ | 2,258.9 |   | $ | 2,278.5 |   |
| Fixed rate  medium-term notes | ** ** | **50.0**                   | ** **  | **49.7** |   | 55.0 |   | 55.8 |   |
|                               |            |                            |             |  |  |  |  |  |  |  |  |  |  |

 

28

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**NOTE J – STOCKHOLDER’S EQUITY**

 

**Preferred Stock**

 

The Company’s Articlesof Incorporation provide that the 6%, noncumulative, nonvoting preferred stock(100% owned by PFSC) is redeemable only at the option of the Company’s Board ofDirectors.

 

**Other Comprehensive Income**

 

The components of othercomprehensive income (loss) with the related tax effects are as follows:

 
| ** **                                | ** ** | **Pretax  Amount** | ** ** | **Tax Effect** | ** ** | **Net Amount** | ** ** |
|-------------------------------------------|------------|--------------------|------------|----------------|------------|----------------|------------|
| ** **                                | ** ** | ** **         | ** ** | ** **     | ** ** | ** **     | ** ** |
| **2004**                                  |       |               |       |           |       |           |       |
| ** **                                |       |               |       |           |       |           |       |
| Other  comprehensive income (loss):       | ** ** | ** **         | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net holding  gain on derivative contracts | ** ** | **$**              | **7.2**    | ** **     | **$**      | **(2.8**       | **)**      | **$** | **4.4** | ** ** |
| Reclassification  adjustment              | ** ** | **21.3**           | ** ** | **(8.1**       | **)**      | **13.2**       | ** ** |
| Net other  comprehensive income           | ** ** | **$**              | **28.5**   | ** **     | **$**      | **(10.9**      | **)**      | **$** | **17.6** | ** ** |
|                                      |       |               |       |           |       |           |       |
| **2003**                                  |       |               |       |           |       |           |       |
| ** **                                |       |               |       |           |       |           |       |
| Other  comprehensive income (loss):       |       |               |       |           |       |           |       |
| Net holding  loss on derivative contracts |       | $                  | (10.1      | )              | $          | 4.0            |       | $ | (6.1 | ) |
| Reclassification  adjustment              |       | 41.5               |       | (16.0          | )          | 25.5           |       |
| Net other  comprehensive income           |       | $                  | 31.4       |           | $          | (12.0          | )          | $ | 19.4 |   |
|                                      |       |               |       |           |       |           |       |
| **2002**                                  |       |               |       |           |       |           |       |
| ** **                                |       |               |       |           |       |           |       |
| Other  comprehensive income (loss):       |       |               |       |           |       |           |       |
| Net holding  loss on derivative contracts |       | $                  | (48.3      | )              | $          | 18.5           |       | $ | (29.8 | ) |
| Reclassification  adjustment              |       | 48.5               |       | (18.6          | )          | 29.9           |       |
| Net other  comprehensive income           |       | $                  | .2         |           | $          | (.1            | )          | $ | .1 |   |

 

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**NOTE K – QUARTERLY RESULTS** (Unaudited)

 
| ** **                  | ** ** | **QUARTER** | ** ** |
|-----------------------------|------------|-------------|------------|
| ** **                  | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|                        |       |        |       |   |   |   |   |   |   |
| **2004**                    |       |        |       |   |   |   |   |   |   |
|                        |       |        |       |   |   |   |   |   |   |
| Interest and  other revenue |       | $           | 72.0       |   | $ | 77.4 |   | $ | 82.2 |   | $ | 89.3 |   |
| Income  before income taxes |       | 24.4        |       | 28.0 |   | 29.1 |   | 29.9 |   |
| Net income                  |       | 15.1        |       | 17.4 |   | 18.0 |   | 18.7 |   |
|                        |       |        |       |   |   |   |   |   |   |
| **2003**                    |       |        |       |   |   |   |   |   |   |
|                        |       |        |       |   |   |   |   |   |   |
| Interest and  other revenue |       | $           | 70.6       |   | $ | 71.0 |   | $ | 71.2 |   | $ | 72.2 |   |
| Income  before income taxes |       | 17.0        |       | 18.3 |   | 20.4 |   | 22.4 |   |
| Net income                  |       | 10.4        |       | 11.2 |   | 12.5 |   | 13.2 |   |

 

**NOTE L – COMMITMENTS ANDCONTINGENCIES**

 

The Company is a partyto various routine legal proceedings incidental to its business involving thecollection of accounts and other matters. The Company does not consider suchmatters to be material with respect to the business or financial condition ofthe Company as a whole. In addition, the Company had loan and lease commitmentsof $289.6 expiring within one year. These commitments represent commitments tofund new retail loan and lease contracts.

 

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**ITEM 9****.****         ****CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

Theregistrant has not had any disagreements with its independent auditors onaccounting or financial disclosure matters.

 

**ITEM 9A.****      ****CONTROLS AND PROCEDURES**

 

Anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the principal executive officer andprincipal financial officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures (as defined in rules13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,as amended) as of December 31, 2004 (“Evaluation Date”). Based on thatevaluation, the principal executive officer and principal financial officer ofthe Company concluded that the disclosure controls and procedures in place atthe Company were adequate to ensure that information required to be disclosedby the Company, including its consolidated subsidiaries (the Company has nosubsidiaries), in reports that the Company files or submits under the ExchangeAct, is recorded, processed, summarized and reported on a timely basis inaccordance with applicable rules and regulations. There have been nosignificant changes in the Company’s internal controls over financial reportingduring the fourth quarter of 2004 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**ITEM 9B.****      ****OTHER INFORMATION**

 

Notapplicable.

 

**PART III**

 

**ITEMS 10, 11, 12 AND 13**

 

Theseitems omitted pursuant to Form 10-K General Instruction (I)(1)(a) and (b).

 

**ITEM 14.****      ****PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Audit Fees

Audit fees charged to the Company by PACCAR were $.4 and $.2 for 2004and 2003, respectively.

 

Other Fees

The registrant has no audit-related, tax or other fees billed and/orpaid during 2004 or 2003 for services provided by the principal accountant.

 

All fees are approved in advance by the PACCAR Inc audit committee.

 

31

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**PART IV**

 

**ITEM 15.****      ****EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

 

(1) Listing offinancial statements

 
|                                          | The following  financial statements of the Company are included in Item 8:                                                                                                                                                   |   |
|-----------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                          |                                                                                                                                                                                                                         |   |
|                                          | Statements  of Income – Years Ended December 31, 2004, 2003 and 2002                                                                                                                                               |   |
|                                          |                                                                                                                                                                                                                         |   |
|                                          | Balance  Sheets – December 31, 2004 and 2003                                                                                                                                                                       |   |
|                                          |                                                                                                                                                                                                                         |   |
|                                          | Statements of Cash Flows –  Years Ended December 31, 2004, 2003 and 2002                                                                                                                                           |   |
|                                          |                                                                                                                                                                                                                         |   |
|                                          | Statements of  Stockholder’s Equity – Years Ended December 31, 2004, 2003 and 2002                                                                                                                            |   |
|                                          |                                                                                                                                                                                                                         |   |
|                                          | Statements of  Comprehensive Income – Years Ended December 31, 2004, 2003 and 2002                                                                                                                                 |   |
|                                          |                                                                                                                                                                                                                         |   |
|                                          | Notes to Financial Statements  – December 31, 2004, 2003 and 2002                                                                                                                                                  |   |
|                                          |                                                                                                                                                                                                                         |   |
| (2) Listing of  financial statement schedules |                                                                                                                                                                                                                         |
|                                          |                                                                                                                                                                                                                         |   |
|                                          | All schedules are  omitted because the required matter or conditions are not present or because  the information required by the schedules is submitted as part of the  consolidated financial statements and notes thereto. |   |
|                                          |                                                                                                                                                                                                                         |   |
| (3) Listing of  Exhibits                      |                                                                                                                                                                                                                         |
|                                          |                                                                                                                                                                                                                         |   |
|                                          | The exhibits  required by Item 601 of Regulation S-K are listed in the accompanying Exhibit  Index.                                                                                                                          |   |

 

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                           | PACCAR Financial Corp. |
|--------------------------------|------------------------|
|                           |                   |   |
|                           |                   |   |
|                           | By                     | /s/ Timothy M. Henebry |   |
|                           |                   | Timothy M. Henebry |
|                           |                   | President |
|                           |                   |   |
| Date:  March 4, 2005 |                   |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has been signedbelow by the following persons on behalf of the registrant as of the above dateand in the capacities indicated.

 
| (1)    | Principal Executive  Officer          |                      |   |
|--------|---------------------------------------|---------------------------|--------|
|   |                                  |                      |   |   |
|   |                                  |                      |   |   |
|   |                                  | /s/ Mark C. Pigott        |   | Chairman |
|   |                                  | Mark C. Pigott            |   |   |
|   |                                  |                      |   |   |
| (2)    | Principal Financial  Officer          |                      |   |
|   |                                  |                      |   |   |
|   |                                  |                      |   |   |
|   |                                  | /s/ Michael A.  Tembreull |   | Vice Chairman |
|   |                                  | Michael A. Tembreull      |   |   |
|   |                                  |                      |   |   |
| (3)    | Principal Accounting  Officer         |                      |   |
|   |                                  |                      |   |   |
|   |                                  |                      |   |   |
|   |                                  | /s/ Brice J. Poplawski    |   | Controller |
|   |                                  | Brice J. Poplawski        |   |   |
|   |                                  |                      |   |   |
| (4)    | A Majority of the  Board of Directors |                      |   |
|   |                                  |                      |   |   |
|   |                                  |                      |   |   |
|   |                                  | /s/ Timothy M. Henebry    |   |   |
|   |                                  | Timothy M. Henebry        |   |   |
|   |                                  |                      |   |   |
|   | Kenneth R. Gangl*                     |                      |   |
|   | Thomas E. Plimpton*                   |                      |   |

 

----

| *By    | /s/ Timothy M. Henebry |   |   | . |
|--------|------------------------|--------|--------|---|
|   | Timothy M. Henebry     |   |   |
|   | Attorney-in-fact       |   |   |

 

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**EXHIBIT INDEX**

 

3.1           RestatedArticles of Incorporation of the Company, as amended (incorporated by referenceto Exhibit 3.1 to the Company’s Annual Report on Form 10-K dated March 26,1985. Amendment incorporated by reference to Exhibit 19.1 to the Company’sQuarterly Report on Form 10-Q dated August 13, 1985, File Number 0-12553).

 

3.2           By-laws ofthe Company, as amended (incorporated by reference to Exhibit 3.2 to theCompany’s Registration Statement on Form 10-Q dated October 20, 1983, FileNumber 0-12553).

 

4.1           Indenturefor Senior Debt Securities dated as of December 1, 1983 and firstSupplemental Indenture dated as of June 19, 1989 between the Company andCitibank, N.A. (incorporated by reference to Exhibit 4.1 to the Company’sAnnual Report on Form 10-K dated March 26, 1984, File Number 0-12553 andExhibit 4.2 to the Company’s Registration Statement on Form S-3 dated June 23,1989, Registration Number 33-29434).

 

4.4           Forms ofMedium-Term Note, Series I (incorporated by reference to Exhibits 4.2A and 4.2Bto the Company’s Registration Statement on Form S-3 dated September 10,1998, Registration Number 333-63153).

 

Formof Letter of Representation among the Company, Citibank, N.A. and TheDepository Trust Company, Series I (incorporated by reference to Exhibit 4.3 tothe Company’s Registration Statement on Form S-3 dated September 10, 1998,Registration Number 333-63153).

 

4.5           Forms ofMedium-Term Note, Series J (incorporated by reference to Exhibits 4.2A and 4.2Bto the Company’s Registration Statement on Form S-3 dated March 2, 2000,Registration Number 333-31502).

 

Formof Letter of Representation among the Company, Citibank, N.A. and TheDepository Trust Company, Series J (incorporated by reference to Exhibit 4.3 tothe Company’s Registration Statement on Form S-3 dated March 2, 2000,Registration Number 333-31502).

 

4.6           Forms ofMedium-Term Note, Series K (incorporated by reference to Exhibits 4.2A and 4.2Bto the Company’s Registration Statement on Form S-3 dated December 23,2003, Registration Number 333-111504).

 

Formof Letter of Representation among the Company, Citibank, N.A. and TheDepository Trust Company, Series K (incorporated by reference to Exhibit 4.3 tothe Company’s Registration Statement on Form S-3 dated December 23, 2003,Registration Number 333-111504).

 

10.1         SupportAgreement between the Company and PACCAR dated as of June 19, 1989(incorporated by reference to Exhibit 28.1 to the Company’s RegistrationStatement on Form S-3 dated June 23, 1989, Registration Number 33-29434).

 

12.1         Statementre: computation of ratio of earnings to fixed charges of the Company pursuantto SEC reporting requirements for each of the five years ended December 31,2000 - 2004.

 

12.2         Statementre: computation of ratio of earnings to fixed charges of the Company pursuantto the Support Agreement with PACCAR for each of the five years ended December 31,2000 - 2004.

 

12.3         Statementre: computation of ratio of earnings to fixed charges of PACCAR andsubsidiaries pursuant to SEC reporting requirements for each of the five yearsended December 31, 2000 - 2004.

 

23            Consent ofIndependent Auditors

 

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25.1         Power ofattorney of certain officers and directors

 

31.1        Rule13a-14(a)/15d-14(a) Certification - Certification of Principal ExecutiveOfficer.

 

31.2        Rule13a-14(a)/15d-14(a) Certification - Certification of Principal FinancialOfficer.

 

32.1         Section 1350Certifications - Certification pursuant to Rule 13a-14(b) and Section 906of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350).

 

Other exhibits listed inItem 601 of Regulation S-K are not applicable.

 

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