Edgar Filing: PACCAR INC

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012

Commission File No. 001-14817

PACCAR Inc

(Exact name of registrant as specified in its charter)


Delaware		91-0351110
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


777 - 106th Ave. N.E., Bellevue, WA		98004
(Address of principal executive offices)		(Zip Code)

(425) 468-7400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $1 par value — 353,030,892 shares as of October 31, 2012

PACCAR Inc – Form 10-Q

INDEX


			Page
PART I. FINANCIAL INFORMATION:

	ITEM 1.	FINANCIAL STATEMENTS:

	Consolidated Statements of Comprehensive Income – Three and Nine months ended September 30, 2012 and 2011 (Unaudited)			3

	Consolidated Balance Sheets – September 30, 2012 (Unaudited) and December 31, 2011			4

	Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2012 and 2011 (Unaudited)			6

	Notes to Consolidated Financial Statements (Unaudited)			7

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		27

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		42

	ITEM 4.	CONTROLS AND PROCEDURES		42

PART II. OTHER INFORMATION:

	ITEM 1.	LEGAL PROCEEDINGS		43

	ITEM 1A.	RISK FACTORS		43

	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		43

	ITEM 6.	EXHIBITS		44

SIGNATURE				45

INDEX TO EXHIBITS				46

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PACCAR Inc – Form 10-Q

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Consolidated Statements of Comprehensive Income (Unaudited)

(Millions Except Per Share Amounts)


	Three Months Ended September 30				Nine Months Ended September 30
	2012		2011		2012			2011
TRUCK AND OTHER:
Net sales and revenues	$	3,546.7	$	3,993.0	$	12,252.5		$	10,738.3
Cost of sales and revenues		3,108.5		3,484.0		10,660.9			9,347.4
Research and development		66.8		70.0		212.9			215.9
Selling, general and administrative		113.9		113.1		362.2			331.6
Interest and other expense (income), net		.3		4.0		(.2	)		7.1

		3,289.5		3,671.1		11,235.8			9,902.0

Truck and Other Income Before Income Taxes		257.2		321.9		1,016.7			836.3
FINANCIAL SERVICES:
Interest and fees		115.5		106.5		336.9			313.4
Operating lease, rental and other income		158.0		157.6		464.1			449.7

Revenues		273.5		264.1		801.0			763.1
Interest and other borrowing expenses		40.6		44.6		118.4			137.2
Depreciation and other expense		127.2		123.0		367.5			352.9
Selling, general and administrative		22.6		24.0		70.8			71.8
Provision for losses on receivables		2.7		10.7		15.2			32.2

		193.1		202.3		571.9			594.1

Financial Services Income Before Income Taxes		80.4		61.8		229.1			169.0
Investment income		7.8		11.0		24.9			28.9

Total Income Before Income Taxes		345.4		394.7		1,270.7			1,034.2
Income taxes		111.8		113.1		412.6			319.6

Net Income	$	233.6	$	281.6	$	858.1		$	714.6

Net Income Per Share:
Basic	$	.66	$	.78	$	2.41		$	1.96
Diluted	$	.66	$	.77	$	2.41		$	1.95

Weighted Average Common Shares Outstanding:
Basic		353.7		363.3		355.5			365.0
Diluted		354.3		364.2		356.3			366.2

Dividends declared per share	$	.20	$	.18	$	.58		$	.42

Comprehensive Income	$	308.9	$	11.2	$	916.5		$	642.3

See Notes to Consolidated Financial Statements.

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PACCAR Inc – Form 10-Q

Consolidated Balance Sheets (Millions)


	September 30 2012		December 31 2011*
	(Unaudited)
ASSETS
TRUCK AND OTHER:
Current Assets
Cash and cash equivalents	$	1,685.0	$	1,990.6
Trade and other receivables, net		1,003.6		977.8
Marketable debt securities		955.9		910.1
Inventories, net		915.6		710.4
Other current assets		333.2		249.1

Total Truck and Other Current Assets		4,893.3		4,838.0

Equipment on operating leases, net		808.2		679.1
Property, plant and equipment, net		2,182.2		1,973.3
Other noncurrent assets, net		241.3		280.9

Total Truck and Other Assets		8,125.0		7,771.3

FINANCIAL SERVICES:
Cash and cash equivalents		65.5		116.1
Finance and other receivables, net		8,133.0		7,259.7
Equipment on operating leases, net		1,932.1		1,710.7
Other assets		436.9		314.9

Total Financial Services Assets		10,567.5		9,401.4

	$	18,692.5	$	17,172.7

*	The December 31, 2011 consolidated balance sheet has been derived from audited financial statements.

See Notes to Consolidated Financial Statements.

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PACCAR Inc – Form 10-Q

Consolidated Balance Sheets (Millions)


	September 30 2012			December 31 2011*
	(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
TRUCK AND OTHER:
Current Liabilities
Accounts payable, accrued expenses and other	$	2,479.7		$	2,377.4
Dividend payable		70.6			250.3

Total Truck and Other Current Liabilities		2,550.3			2,627.7

Long-term debt		150.0			150.0
Residual value guarantees and deferred revenues		850.2			712.0
Other liabilities		531.2			507.0

Total Truck and Other Liabilities		4,081.7			3,996.7

FINANCIAL SERVICES:
Accounts payable, accrued expenses and other		319.0			363.4
Commercial paper and bank loans		3,371.3			3,909.9
Term notes		4,143.0			2,595.5
Deferred taxes and other liabilities		915.4			942.8

Total Financial Services Liabilities		8,748.7			7,811.6

STOCKHOLDERS’ EQUITY
Preferred stock, no par value: Authorized 1.0 million shares, none issued
Common stock, $1 par value: Authorized 1.2 billion shares, issued 357.2 and 356.8 million shares		357.2			356.8
Additional paid-in capital		71.8			52.1
Treasury stock, at cost - 4.2 million and nil shares		(162.1	)
Retained earnings		5,755.8			5,174.5
Accumulated other comprehensive loss		(160.6	)		(219.0	)

Total Stockholders’ Equity		5,862.1			5,364.4

	$	18,692.5		$	17,172.7

*	The December 31, 2011 consolidated balance sheet has been derived from audited financial statements.

See Notes to Consolidated Financial Statements.

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PACCAR Inc – Form 10-Q

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Millions)


Nine Months Ended September 30	2012			2011
OPERATING ACTIVITIES:
Net income	$	858.1		$	714.6
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization:
Property, plant and equipment		144.6			146.4
Equipment on operating leases and other		377.8			359.3
Provision for losses on financial services receivables		15.2			32.2
Other, net		58.1			24.8
Pension contributions		(93.7	)		(12.9	)
Change in operating assets and liabilities:
Trade and other receivables		(27.6	)		(419.1	)
Wholesale receivables on new trucks		(177.6	)		(429.1	)
Sales-type finance leases and dealer direct loans on new trucks		(112.1	)		(18.6	)
Inventories		(201.0	)		(197.7	)
Accounts payable and accrued expenses		13.9			663.4
Income taxes, warranty and other		60.9			288.0

Net Cash Provided by Operating Activities		916.6			1,151.3
INVESTING ACTIVITIES:
Retail loans and direct financing leases originated		(2,332.3	)		(1,862.1	)
Collections on retail loans and direct financing leases		1,773.8			1,560.1
Marketable securities purchases		(498.5	)		(1,424.9	)
Marketable securities sales and maturities		445.8			951.8
Payments for property, plant and equipment		(334.6	)		(214.7	)
Acquisition of equipment for operating leases		(962.7	)		(1,013.6	)
Proceeds from asset disposals		251.2			247.6
Other, net		(4.9	)		(29.5	)

Net Cash Used in Investing Activities		(1,662.2	)		(1,785.3	)
FINANCING ACTIVITIES:
Cash dividends paid		(455.9	)		(153.1	)
Purchase of treasury stock		(162.1	)		(250.2	)
Stock compensation transactions		7.4			4.4
Net (decrease) increase in commercial paper and short-term bank loans		(557.9	)		989.8
Proceeds from long-term debt		1,951.1			1,065.5
Payments of long-term debt		(402.6	)		(1,144.1	)

Net Cash Provided by Financing Activities		380.0			512.3
Effect of exchange rate changes on cash		9.4			(39.5	)

Net Decrease in Cash and Cash Equivalents		(356.2	)		(161.2	)
Cash and cash equivalents at beginning of period		2,106.7			2,040.8

Cash and cash equivalents at end of period	$	1,750.5		$	1,879.6

See Notes to Consolidated Financial Statements.

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PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

NOTE A - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and footnotes included in PACCAR Inc’s (the Company) Annual Report on Form 10-K for the year ended December 31, 2011.

Earnings per Share: Basic earnings per common share are computed by dividing earnings by the weighted average number of common shares outstanding, plus the effect of any participating securities. Diluted earnings per common share are computed assuming that all potentially dilutive securities are converted into common shares under the treasury stock method. The dilutive and antidilutive options are shown separately in the table below.

Three Months Ended
September 30

Nine Months Ended
September 30

2012

2011

2012

2011

Additional shares

689,000

876,000

746,000

1,211,000

Antidilutive options

2,497,000

1,697,000

2,561,000

770,000

New Accounting Pronouncements: In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. While many of the amendments are clarifications to the existing guidance and are intended to align U.S. GAAP and International Financial Reporting Standards (IFRS), the ASU changes some fair value measurement principles and disclosure requirements. The Company adopted ASU 2011-04 in the first quarter of 2012; the implementation of this amendment resulted in additional disclosures (see note J), but did not have a significant impact on the Company’s consolidated financial statements.

The FASB issued ASU 2011-05, Presentation of Comprehensive Income, in June 2011, which was subsequently amended by ASU 2011-12 in December 2011. The new guidance requires entities to present components of net income and comprehensive income in either a combined financial statement or in two separate but consecutive statements of net income and comprehensive income. The Company adopted ASU 2011-05 as amended in the first quarter of 2012 and has elected to present components of net income combined with a total for comprehensive income in a single continuous statement in its consolidated interim financial statements. The Company is currently evaluating which method to adopt in the consolidated annual financial statements.

NOTE B - Investments in Marketable Debt Securities

The Company’s investments in marketable debt securities are classified as available-for-sale. These investments are stated at fair value with any unrealized gains or losses, net of tax, included as a component of accumulated other comprehensive income (loss).

The Company utilizes third-party pricing services for all of its marketable debt security valuations. The Company reviews the pricing methodology used by the third-party pricing services including the manner employed to collect market information. On a periodic basis, the Company also performs review and validation procedures on the pricing information received from the third-party providers. These procedures help ensure that the fair value information used by the Company is determined in accordance with applicable accounting guidance.

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PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

The Company evaluates its investment in marketable debt securities at the end of each reporting period to determine if a decline in fair value is other than temporary. Realized losses are recognized upon management’s determination that a decline in fair value is other than temporary. The determination of other-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions regarding the amount and timing of recovery. The Company reviews and evaluates its investments at least quarterly to identify investments that have indications of other-than-temporary impairments. It is reasonably possible that a change in estimate could occur in the near term relating to other-than-temporary impairment. Accordingly, the Company considers several factors when evaluating debt securities for other-than-temporary impairment, including whether the decline in fair value of the security is due to increased default risk for the specific issuer or market interest rate risk.

In assessing default risk, the Company considers the collectability of principal and interest payments by monitoring changes to issuers’ credit ratings, specific credit events associated with individual issuers as well as the credit ratings of any financial guarantor, and the extent and duration to which amortized cost exceeds fair value.

In assessing market interest rate risk, including benchmark interest rates and credit spreads, the Company considers its intent for selling the securities and whether it is more likely than not the Company will be able to hold these securities until the recovery of any unrealized losses.

Marketable debt securities at September 30, 2012 and December 31, 2011 consisted of the following:


At September 30, 2012	AMORTIZED COST		UNREALIZED GAINS		UNREALIZED LOSSES		FAIR VALUE
U.S. tax-exempt securities	$	299.7	$	2.6			$	302.3
U.S. corporate securities		27.9		.3				28.2
U.S. government and agency securities		1.2						1.2
Non-U.S. government securities		386.1		7.4				393.5
Non-U.S. corporate securities		150.3		1.1				151.4
Other debt securities		78.6		.7				79.3

	$	943.8	$	12.1			$	955.9


At December 31, 2011	AMORTIZED COST		UNREALIZED GAINS		UNREALIZED LOSSES		FAIR VALUE
U.S. tax-exempt securities	$	291.9	$	2.6	$	.1	$	294.4
U.S. corporate securities		27.4		.3		.2		27.5
U.S. government and agency securities		1.9						1.9
Non-U.S. government securities		361.2		6.0		.1		367.1
Non-U.S. corporate securities		148.0		.5		.2		148.3
Other debt securities		70.3		.6				70.9

	$	900.7	$	10.0	$	.6	$	910.1

The cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Amortization, accretion, interest and dividend income and realized gains and losses are included in investment income. The cost of securities sold is based on the specific identification method. The proceeds from sales and maturities of marketable securities for the nine months ended September 30, 2012 were $445.8. Gross realized gains were $1.9 and $2.2 and gross realized losses were $.1 and $.6 for the nine months ended September 30, 2012 and 2011, respectively.

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PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

The fair value of marketable debt securities that have been in an unrealized loss position for 12 months or greater at September 30, 2012 was $2.6 and the associated unrealized loss was $.01. At September 30, 2011, there were no marketable debt securities in an unrealized loss position for greater than 12 months.

For the investment securities in gross unrealized loss positions identified above, the Company does not intend to sell the investment securities, it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and the Company expects that the contractual principal and interest will be received on the investment securities. As a result, the Company recognized no other-than-temporary impairments during the periods presented.

Contractual maturities on marketable debt securities at September 30, 2012 were as follows:


Maturities:	AMORTIZED COST		FAIR VALUE
Within one year	$	326.6	$	328.3
One to five years		615.7		626.1
Six to ten years		.2		.2
More than ten years		1.3		1.3

	$	943.8	$	955.9

Marketable debt securities included $1.3 and $7.1 of variable rate demand obligations (VRDOs) at September 30, 2012 and December 31, 2011, respectively. VRDOs are debt instruments with long-term scheduled maturities which have interest rates that reset periodically.

NOTE C - Inventories

Inventories are stated at the lower of cost or market. Cost of inventories in the U.S. is determined principally by the last-in, first-out (LIFO) method. Cost of all other inventories is determined principally by the first-in, first-out (FIFO) method.

Inventories include the following:


	September 30 2012			December 31 2011
Finished products	$	486.3		$	436.2
Work in process and raw materials		597.6			439.6

		1,083.9			875.8
Less LIFO reserve		(168.3	)		(165.4	)

	$	915.6		$	710.4

Under the LIFO method of accounting (used for approximately 47% of September 30, 2012 inventories), an actual valuation can be made only at the end of each year based on year-end inventory levels and costs. Accordingly, interim valuations are based on management’s estimates of those year-end amounts.

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PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

NOTE D - Finance and Other Receivables

Finance and other receivables include the following:


	September 30 2012			December 31 2011
Loans	$	3,554.8		$	3,114.8
Retail direct financing leases		2,401.7			2,187.8
Sales-type finance leases		857.9			795.8
Dealer wholesale financing		1,702.4			1,517.1
Accrued rents and other trade receivables		111.5			111.0
Unearned interest on finance leases		(356.2	)		(327.8	)

		8,272.1			7,398.7
Less allowance for losses:
Loans and leases		(120.6	)		(118.5	)
Dealer wholesale financing		(12.4	)		(11.7	)
Accrued rents and other trade receivables		(6.1	)		(8.8	)

	$	8,133.0		$	7,259.7

Recognition of interest income and rental revenue is suspended (put on non-accrual status) when the receivable becomes more than 90 days past the contractual due date or earlier if some other event causes the Company to determine that collection is not probable. Accordingly, there were no finance receivables more than 90 days past due still accruing interest at September 30, 2012 or December 31, 2011. Recognition is resumed if the receivable becomes current by the payment of all amounts due under the terms of the existing contract and collection of remaining amounts is considered probable (if not contractually modified), or after the customer has made scheduled payments for three months and collection of remaining amounts is considered probable (if contractually modified). Payments received while the finance receivable is impaired or on non-accrual status are applied to interest and principal in accordance with the contractual terms.

Allowance for Credit Losses

The Company continuously monitors the payment performance of all its finance receivables. For large retail finance customers and dealers with wholesale financing, the Company regularly reviews their financial statements and makes site visits and phone contact as appropriate. If the Company becomes aware of circumstances that could cause those customers or dealers to face financial difficulty, whether or not they are past due, the customers are placed on a watch list.

When considering whether to modify customer accounts for credit reasons, the Company evaluates the creditworthiness of the customers and modifies those accounts that the Company considers likely to perform under the modified terms. When the Company modifies loans and finance leases for credit reasons and grants a concession, the modifications are classified as troubled debt restructurings (TDRs). The Company does not typically grant credit modifications for customers that do not meet minimum underwriting standards since the Company normally repossesses the financed equipment in these circumstances. When such modifications do occur, they are considered TDRs.

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PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

On average, modifications extended contractual terms by approximately eight months in 2012 and nine months in 2011 and did not have a significant effect on the weighted average term or interest rate of the total portfolio at September 30, 2012 and December 31, 2011.

The Company has developed a systematic methodology for determining the allowance for credit losses for its two portfolio segments, retail and wholesale. The retail segment consists of retail loans and direct and sales-type finance leases, net of unearned interest. The wholesale segment consists of wholesale financing loans to dealers that are collateralized by trucks and other collateral. The wholesale segment generally has less risk than the retail segment. Wholesale receivables generally are shorter in duration than retail receivables, and the Company requires monthly reporting of the wholesale dealer’s financial condition, conducts periodic audits of the trucks being financed and in many cases, obtains personal guarantees or other security such as dealership assets. In determining the allowance for credit losses, retail loans and finance leases are evaluated together since they relate to a similar customer base, their contractual terms require regular payment of principal and interest generally over 36 to 60 months and they are secured by the same type of collateral. The allowance for credit losses consists of both specific and general reserves.

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

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

For finance receivables that are not individually impaired, the Company collectively evaluates and determines the general allowance for credit losses for both retail and wholesale receivables based on historical loss information, using past-due account data and current market conditions. Information used includes assumptions regarding the likelihood of collecting current and past-due accounts, repossession rates, the recovery rate on the underlying collateral based on used truck values and other pledged collateral or recourse. The Company has developed a range of loss estimates for each of its country portfolios based on historical experience, taking into account loss frequency and severity in both strong and weak truck market conditions. A projection is made of the range of estimated credit losses inherent in the portfolio from which an amount is determined as probable based on current market conditions and other factors impacting the creditworthiness of the Company’s borrowers and their ability to repay. After determining the appropriate level of the allowance for credit losses, the provision for losses on finance receivables is charged to income as necessary to reflect management’s estimate of incurred credit losses, net of recoveries, inherent in the portfolio.

In determining the fair value of the collateral, the Company uses a pricing model and categorizes the fair value as Level 2 in the hierarchy of fair value measurement. The pricing model is reviewed quarterly and updated as appropriate. The pricing model considers the make, model and year of the equipment as well as recent sales prices of comparable equipment through wholesale channels to the Company’s dealers (principal market). The fair value of the collateral also considers the overall condition of the equipment.

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PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

Accounts are charged-off against the allowance for credit losses when, in the judgment of management, they are considered uncollectable (generally upon repossession of the collateral). Typically the timing between the repossession and charge-off is not significant. In cases where repossession is delayed (e.g., for legal proceedings), the Company records partial charge-offs. The charge-off is determined by comparing the fair value of the collateral, less cost to sell, to the recorded investment.

The allowance for credit losses is summarized as follows:


	2012
	WHOLESALE			RETAIL			OTHER*			TOTAL
Balance at January 1	$	11.7		$	118.5		$	8.8		$	139.0
Provision for losses		2.3			10.5			2.4			15.2
Charge-offs					(17.1	)		(4.8	)		(21.9	)
Recoveries		.1			4.6			.3			5.0
Currency translation and other		(1.7	)		4.1			(.6	)		1.8

Balance at September 30	$	12.4		$	120.6		$	6.1		$	139.1


	2011
	WHOLESALE			RETAIL			OTHER*			TOTAL
Balance at January 1	$	7.5		$	131.5		$	6.0		$	145.0
Provision for losses		4.4			17.1			10.7			32.2
Charge-offs		(1.0	)		(29.6	)		(8.7	)		(39.3	)
Recoveries					7.0			.8			7.8
Currency translation		(.1	)		(2.9	)		.7			(2.3	)

Balance at September 30	$	10.8		$	123.1		$	9.5		$	143.4

*	Accrued rents and other trade receivables.

Information regarding finance receivables evaluated and determined individually and collectively is as follows:


At September 30, 2012	WHOLESALE		RETAIL		TOTAL
Recorded investment for impaired finance receivables evaluated individually	$	3.3	$	82.9	$	86.2
Allowance for impaired finance receivables determined individually	$	2.2	$	19.3	$	21.5
Recorded investment for finance receivables evaluated collectively	$	1,699.1	$	6,375.3	$	8,074.4
Allowance for finance receivables determined collectively	$	10.2	$	101.3	$	111.5


At December 31, 2011	WHOLESALE		RETAIL		TOTAL
Recorded investment for impaired finance receivables evaluated individually	$	18.4	$	96.0	$	114.4
Allowance for impaired finance receivables determined individually	$	2.2	$	25.7	$	27.9
Recorded investment for finance receivables evaluated collectively	$	1,498.7	$	5,674.6	$	7,173.3
Allowance for finance receivables determined collectively	$	9.5	$	92.8	$	102.3

The recorded investment for finance receivables that are on non-accrual status in the wholesale segment and the fleet and owner/operator portfolio classes (as defined in impaired loans below) as of September 30, 2012 was $2.9, $57.4 and $12.8, respectively, and as of December 31, 2011 was $18.4, $63.9 and $17.6, respectively.

- 12 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

Impaired Loans

The Company’s impaired loans are segregated by portfolio class. A portfolio class of receivables is a subdivision of a portfolio segment with similar measurement attributes and risk characteristics and common methods to monitor and assess credit risk. The Company’s retail segment is subdivided into the fleet and owner/operator classes. Fleet consists of retail accounts with customers operating more than five trucks. All others are owner/operator.

Substantially all impaired loans have a specific reserve and are summarized below. The impaired loans with specific reserve represent the unpaid principal loan balance.


At September 30, 2012	WHOLESALE			FLEET			OWNER / OPERATOR			TOTAL
Impaired loans with specific reserve	$	3.3		$	42.4		$	8.3		$	54.0
Associated allowance		(2.2	)		(8.5	)		(1.7	)		(12.4	)

Net carrying amount of impaired loans	$	1.1		$	33.9		$	6.6		$	41.6


Average recorded investment*	$	12.9		$	23.6		$	10.2		$	46.7

At December 31, 2011	WHOLESALE			FLEET			OWNER / OPERATOR			TOTAL
Impaired loans with specific reserve	$	18.4		$	27.9		$	11.5		$	57.8
Associated allowance		(2.2	)		(6.0	)		(2.6	)		(10.8	)

Net carrying amount of impaired loans	$	16.2		$	21.9		$	8.9		$	47.0


Average recorded investment*	$	11.7		$	30.9		$	15.1		$	57.7

*	Represents the average during the 12 months ended September 30, 2012 and 2011.

During the period the loans above were considered impaired, all interest income recognized was recorded on a cash basis:


	Three Months Ended September 30				Nine Months Ended September 30
	2012		2011		2012		2011
Interest income recognized:
Wholesale					$	.1	$	.3
Fleet	$	.2	$	.3		.9		1.2
Owner / Operator		.2		.2		.6		.7

	$	.4	$	.5	$	1.6	$	2.2

Credit Quality

The Company’s customers are principally concentrated in the transportation industry in North America, Europe and Australia. On a geographic basis, there is a proportionate concentration of credit risk in each area. The Company retains as collateral a security interest in the related equipment.

At the inception of each contract, the Company considers the credit risk based on a variety of credit quality factors including; prior payment experience, customer financial information, credit-rating agency

- 13 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

ratings, loan-to-value ratios and other internal metrics. On an ongoing basis, the Company monitors credit quality based on past-due status and collection experience as the Company has found a meaningful correlation between the past due status of customers and the risk of loss.

The Company has three credit quality indicators: performing, watch and at-risk. Performing accounts pay in accordance with the contractual terms and are not considered high risk. Watch accounts include accounts 31 to 90 days past due and large accounts that are performing but are considered to be high-risk. Watch accounts are not impaired. At-risk accounts are accounts that are impaired, including TDRs, accounts over 90 days past-due and other accounts on non-accrual status. The Company uses historical data and known trends to estimate default rates for each credit quality indicator. The tables below summarize the Company’s finance receivables by credit quality indicator and portfolio class.


At September 30, 2012	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Performing	$	1,663.8	$	4,984.4	$	1,355.9	$	8,004.1
Watch		35.3		21.9		13.1		70.3
At-risk		3.3		68.8		14.1		86.2

	$	1,702.4	$	5,075.1	$	1,383.1	$	8,160.6


At December 31, 2011	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Performing	$	1,451.9	$	4,262.8	$	1,361.0	$	7,075.7
Watch		46.7		37.2		13.7		97.6
At-risk		18.4		76.5		19.5		114.4

	$	1,517.0	$	4,376.5	$	1,394.2	$	7,287.7

The tables below summarize the Company’s finance receivables by aging category. In determining past due status, the Company considers the entire contractual account balance past due when any installment is over 30 days past due. Substantially all customer accounts that were greater than 30 days past due prior to credit modification became current upon modification for aging purposes.


At September 30, 2012	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Current and up to 30 days past due	$	1,697.3	$	5,037.5	$	1,359.4	$	8,094.2
31 – 60 days past due		1.3		7.2		10.7		19.2
Greater than 60 days past due		3.8		30.4		13.0		47.2

	$	1,702.4	$	5,075.1	$	1,383.1	$	8,160.6


At December 31, 2011	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Current and up to 30 days past due	$	1,490.0	$	4,321.8	$	1,365.2	$	7,177.0
31 – 60 days past due		9.1		8.7		11.9		29.7
Greater than 60 days past due		17.9		46.0		17.1		81.0

	$	1,517.0	$	4,376.5	$	1,394.2	$	7,287.7

- 14 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

Troubled Debt Restructurings

For the three and nine months ended September 30, 2012, the decrease in the recorded investment for loans and leases modified as TDRs was $.8 and $1.5, respectively, resulting in post-modification recorded investment of $14.5 and $45.9, respectively. At modification date, the pre-modification and post-modification recorded investment balances by portfolio class are as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2012
	Recorded Investment				Recorded Investment
	Pre- Modification		Post- Modification		Pre- Modification		Post- Modification
Fleet	$	14.7	$	13.9	$	45.3	$	43.8
Owner / Operator		.6		.6		2.1		2.1

	$	15.3	$	14.5	$	47.4	$	45.9


	Three Months Ended				Nine Months Ended
	September 30, 2011				September 30, 2011
	Recorded Investment				Recorded Investment
	Pre- Modification		Post- Modification		Pre- Modification		Post- Modification
Fleet	$	3.4	$	3.4	$	24.5	$	24.3
Owner / Operator		.7		.7		5.2		5.2

	$	4.1	$	4.1	$	29.7	$	29.5

The balance of TDRs was $44.0 at September 30, 2012 and $26.0 at December 31, 2011.

The recorded investment in finance receivables modified as TDRs during the previous twelve months that subsequently defaulted (i.e., became more than 30 days past-due) in the nine months ended September 30, 2012 was $7.7 and $.5 for fleet and owner/operator, respectively. Included in the $7.7 of fleet redefaults is $4.8 from one customer, for which the Company had a specific reserve of $1.8 as of September 30, 2012. The TDRs that subsequently defaulted did not significantly impact the Company’s allowance for credit losses at September 30, 2012.

Repossessions

When the Company determines that a past-due customer is not likely to meet its contractual commitments, the Company repossesses the vehicles which serve as collateral for loans, finance leases and equipment under operating lease. The Company records the repossessed vehicles as used truck inventory which is included in Financial Services other assets on the Consolidated Balance Sheets. The balance of repossessed inventory at September 30, 2012 and December 31, 2011 was $10.8 and $16.0, respectively. Proceeds from the sales of repossessed assets were $48.7 and $65.7 for the nine months ended September 30, 2012 and 2011, respectively. These amounts are included in proceeds from asset disposals on the Condensed Consolidated Statements of Cash Flows. Write-downs of repossessed equipment on operating leases are recorded as impairments and included in Financial Services depreciation and other expense on the Consolidated Statements of Comprehensive Income.

NOTE E - Product Support Liabilities

Product support liabilities are estimated future payments related to product warranties, optional extended warranties and repair and maintenance (R&M) contracts. The Company generally offers one-year warranties covering most of its vehicles and related aftermarket parts. Specific terms and conditions vary depending on the product and the country of sale. Optional extended warranty and

- 15 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

R&M contracts can be purchased for periods which generally range up to five years. Warranty expenses and reserves are estimated and recorded at the time products or contracts are sold based on historical data regarding the source, frequency and cost of claims, net of any recoveries. Revenue from extended warranty contracts is deferred and recognized to income on a straight-line basis over the contract period. Warranty costs on these contracts are recognized as incurred. The Company periodically assesses the adequacy of its recorded liabilities and adjusts them as appropriate to reflect actual experience.

Changes in product support liabilities are summarized as follows:


	2012			2011
Balance at January 1	$	448.7		$	372.2
Cost accruals and revenue deferrals		234.6			219.1
Payments and revenue recognized		(168.0	)		(161.3	)
Currency translation		1.2			(1.2	)

Balance at September 30	$	516.5		$	428.8

NOTE F - Stockholders’ Equity

Comprehensive Income

The components of comprehensive income, net of any related tax, were as follows:


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012			2011
Net income	$	233.6		$	281.6		$	858.1		$	714.6
Other comprehensive income:
Currency translation gains (losses)		73.9			(267.0	)		46.6			(82.3	)
Derivative contracts decrease		(2.4	)		(15.2	)		(6.9	)		(6.8	)
Marketable securities increase		.8			2.5			2.7			4.2
Employee benefit plans increase		3.0			9.3			16.0			12.6

Net other comprehensive income (loss)		75.3			(270.4	)		58.4			(72.3	)

Comprehensive income	$	308.9		$	11.2		$	916.5		$	642.3

In the three and nine months ended September 30, 2012 and 2011, currency translation losses are primarily due to changes in the value of the euro compared to the U.S. dollar.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss was comprised of the following:


	September 30			December 31
	2012			2011
Currency translation adjustment	$	321.1		$	274.5
Net unrealized loss on derivative contracts		(28.9	)		(22.0	)
Net unrealized gain on investments		9.3			6.6
Employee benefit plans		(462.1	)		(478.1	)

Total accumulated other comprehensive loss	$	(160.6	)	$	(219.0	)

- 16 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

Stock Compensation Plans

Stock-based compensation expense was $2.6 and $11.0 for the three and nine months ended September 30, 2012, respectively, and $2.6 and $11.1 for the three and nine months ended September 30, 2011, respectively. Realized tax benefits related to the excess of deductible amounts over expense recognized amounted to nil and $.8 for the three and nine months ended September 30, 2012, respectively, and nil and $.7 for the three and nine months ended September 30, 2011, respectively, and have been classified as a financing cash flow.

During the first three quarters of 2012, the Company issued 447,002 common shares under deferred and stock compensation arrangements.

NOTE G - Income Taxes

The effective income tax rate in the third quarter of 2012 was 32.4% an increase from 28.7% in the third quarter of 2011 due to a higher mix of foreign income in jurisdictions with higher tax rates. For the first nine months of 2012, the effective income tax rate was 32.5% an increase from 30.9% in the first nine months of 2011. The higher tax rate in the first nine months of 2012 primarily reflects an increased proportion of domestic income.

- 17 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

NOTE H - Segment Information

The Company operates in two reportable segments, Truck and Financial Services.


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012			2011
Net sales and revenues:
Truck
Total	$	3,662.5		$	4,145.1		$	12,694.6		$	11,275.5
Less intersegment		(152.5	)		(183.9	)		(559.9	)		(621.8	)

External customers		3,510.0			3,961.2			12,134.7			10,653.7
All other		36.7			31.8			117.8			84.6

		3,546.7			3,993.0			12,252.5			10,738.3
Financial Services		273.5			264.1			801.0			763.1

	$	3,820.2		$	4,257.1		$	13,053.5		$	11,501.4

Income (loss) before income taxes:
Truck	$	258.9		$	324.3		$	1,022.8		$	855.3
All other		(1.7	)		(2.4	)		(6.1	)		(19.0	)

		257.2			321.9			1,016.7			836.3
Financial Services		80.4			61.8			229.1			169.0
Investment income		7.8			11.0			24.9			28.9

	$	345.4		$	394.7		$	1,270.7		$	1,034.2

Depreciation and amortization:
Truck	$	76.5		$	78.8		$	237.9		$	236.3
All other		2.6			2.7			7.7			7.2

		79.1			81.5			245.6			243.5
Financial Services		97.1			92.8			276.8			262.2

	$	176.2		$	174.3		$	522.4		$	505.7

Included in all other is the Company’s industrial winch manufacturing business and other sales, income and expense not attributable to a reportable segment, including a portion of corporate expenses.

NOTE I - Derivative Financial Instruments

As part of its risk management strategy, the Company enters into derivative contracts to hedge exposures to fluctuations in interest rates and foreign currency exchange rates. Certain derivative instruments designated as either cash flow hedges or fair value hedges are subject to hedge accounting. Derivative instruments that are not subject to hedge accounting are held as economic hedges. The Company’s policies prohibit the use of derivatives for speculation or trading. At the inception of each hedge relationship, the Company documents its risk management objectives, procedures and accounting treatment.

The Company has elected not to offset derivative positions in the balance sheet with the same counterparty under the same master netting agreements. The Company is not required to post or receive collateral under these agreements. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company had no material exposures to default at September 30, 2012.

- 18 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

The Company uses regression analysis to assess effectiveness of interest-rate contracts on a quarterly basis. For foreign-exchange contracts, the Company performs quarterly assessments to ensure that critical terms continue to match. All components of the derivative instrument’s gain or loss are included in the assessment of hedge effectiveness. Gains or losses on the ineffective portion of cash flow hedges are recognized currently in earnings. Hedge accounting is discontinued prospectively when the Company determines that a derivative financial instrument has ceased to be a highly effective hedge.

Interest-Rate Contracts: The Company enters into various interest-rate contracts, including interest-rate swaps and cross currency interest-rate swaps. Interest-rate swaps involve the exchange of fixed for floating rate or floating for fixed rate interest payments based on the contractual notional amounts in a single currency. Cross currency interest-rate swaps involve the exchange of notional amounts and interest payments in different currencies. The Company is exposed to interest-rate and exchange-rate risk caused by market volatility as a result of its borrowing activities. The objective of these contracts is to mitigate the fluctuations on earnings, cash flows and fair value of borrowings. Net amounts paid or received are reflected as adjustments to interest expense.

At September 30, 2012, the notional amount of the Company’s interest-rate contracts was $3,135.6. Notional maturities for all interest-rate contracts are $56.8 for the remainder of 2012, $716.9 for 2013, $1,342.8 for 2014, $775.4 for 2015, $39.3 for 2016 and $204.4 thereafter. The majority of these contracts are floating to fixed swaps that effectively convert an equivalent amount of commercial paper and other variable rate debt to fixed rates.

Foreign-Exchange Contracts: The Company enters into foreign-exchange contracts to hedge certain anticipated transactions and assets and liabilities denominated in foreign currencies, particularly the Canadian dollar, the euro, the British pound, the Australian dollar and the Mexican peso. The objective is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. At September 30, 2012, the notional amount of the outstanding foreign-exchange contracts was $188.1. Foreign-exchange contracts mature within one year.

The following table presents the balance sheet classifications and fair value of derivative financial instruments designated under hedge accounting:


	September 30, 2012				December 31, 2011
	Assets		Liabilities		Assets		Liabilities
Derivatives designated under hedge accounting:
Interest-rate contracts:
Financial Services:
Other assets	$	2.0			$	1.4
Deferred taxes and other liabilities			$	113.5			$	107.6
Foreign-exchange contracts:
Truck and Other:
Other current assets		.6				.1
Accounts payable, accrued expenses and other				.1				2.1

Total	$	2.6	$	113.6	$	1.5	$	109.7

- 19 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

The following table presents the balance sheet classifications and fair value of derivative financial instruments designated as economic hedges:


	September 30, 2012				December 31, 2011
	Assets		Liabilities		Assets		Liabilities
Economic hedges:
Interest-rate contracts:
Financial Services:
Other assets					$	.8
Deferred taxes and other liabilities			$	1.1			$	.4
Foreign-exchange contracts:
Truck and Other:
Other current assets	$	.3				.1
Accounts payable, accrued expenses and other				.4				.3
Financial Services:
Deferred taxes and other liabilities								.1

Total	$	.3	$	1.5	$	.9	$	.8

Fair Value Hedges

Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings together with the changes in fair value of the hedged item attributable to the risk being hedged. The expense or (income) recognized in earnings related to fair value hedges was included in interest and other borrowing expenses in the Financial Services segment of the Consolidated Statements of Comprehensive Income as follows:


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012			2011
Interest-rate swaps	$	(2.4	)	$	(5.2	)	$	(4.0	)	$	(4.7	)
Term notes	$	3.2		$	4.9		$	4.7		$	4.2

Cash Flow Hedges

Substantially all of the Company’s interest-rate contracts and some foreign-exchange contracts have been designated as cash flow hedges. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income to the extent such hedges are considered effective. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is 5.7 years.

Amounts in accumulated other comprehensive income are reclassified into net income in the same period in which the hedged transaction affects earnings. Net realized gains and losses from interest-rate contracts are recognized as an adjustment to interest expense. Net realized gains and losses from foreign-exchange contracts are recognized as an adjustment to cost of sales or to Financial Services interest expense, consistent with the hedged transaction. The ineffective portions were a gain of $.2 and a loss of $.1 during the third quarter of 2012 and 2011, respectively, and were gains of $.4 and $.7 during the first nine months of 2012 and 2011, respectively.

- 20 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

The following table presents the pre-tax effects of derivative instruments recognized in other comprehensive income (OCI):


	Three Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2012
	Interest-rate		Foreign-exchange		Interest-rate		Foreign-exchange
	Contracts		Contracts		Contracts		Contracts
Loss recognized in OCI:
Truck and Other			$	1.3			$	2.2
Financial Services	$	5.7			$	29.4

	$	5.7	$	1.3	$	29.4	$	2.2


	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
Loss (gain) recognized in OCI:
Truck and Other			$	1.8			$	(5.9	)
Financial Services	$	2.6			$	31.2

	$	2.6	$	1.8	$	31.2	$	(5.9	)

Expense reclassified from accumulated OCI into income:


	Three Months Ended						Nine Months Ended
	September 30, 2012						September 30, 2012
	Interest-rate			Foreign-exchange			Interest-rate		Foreign-exchange
	Contracts			Contracts			Contracts		Contracts
Truck and Other:
Cost of sales and revenues				$	1.6				$	4.3
Interest and other expense, net					.4					.4
Financial Services:
Interest and other borrowing expenses	$	1.6					$	17.7

	$	1.6		$	2.0		$	17.7	$	4.7


	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
Truck and Other:
Cost of sales and revenues				$	(.7	)			$	(3.3	)
Financial Services:
Interest and other borrowing expenses	$	(16.3	)				$	20.2

	$	(16.3	)	$	(.7	)	$	20.2	$	(3.3	)

The amount of loss recorded in accumulated OCI at September 30, 2012 that is estimated to be reclassified to interest expense or cost of sales in the following 12 months if interest rates and exchange rates remain unchanged is approximately $36.8, net of taxes. The fixed interest earned on finance receivables will offset the amount recognized in interest expense, resulting in a stable interest margin consistent with the Company’s risk management strategy.

- 21 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

Economic Hedges

For other risk management purposes, the Company enters into derivative instruments not designated as hedges that do not qualify for hedge accounting. These derivative instruments are used to mitigate the risk of market volatility arising from borrowings and foreign currency denominated transactions. Changes in the fair value of economic hedges are recorded in earnings in the period in which the change occurs.

The (income) expense recognized in earnings related to economic hedges is as follows:


	Three Months Ended						Nine Months Ended
	September 30, 2012						September 30, 2012
	Interest- rate			Foreign- exchange			Interest- rate			Foreign- exchange
	Contracts			Contracts			Contracts			Contracts
Truck and Other:
Cost of sales and revenues										$	(.3	)
Interest and other expense, net				$	2.0						(.4	)
Financial Services:
Interest and other borrowing (income) expenses	$	1.6			(.5	)	$	1.5			.6

	$	1.6		$	1.5		$	1.5		$	(.1	)


	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
Truck and Other:
Cost of sales and revenues				$	.1					$	.1
Interest and other (income) expense, net					(.3	)					(.3	)
Financial Services:
Interest and other borrowing income	$	(5.0	)		(.5	)	$	(5.0	)	$	(1.6	)

	$	(5.0	)	$	(.7	)	$	(5.0	)	$	(1.8	)

NOTE J - Fair Value Measurements

Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs to valuation techniques used to measure fair value are either observable or unobservable. These inputs have been categorized into the fair value hierarchy described below.

Level 1 – Valuations are based on inputs from quoted prices that the Company has the ability to obtain in actively traded markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, valuation of these instruments does not require a significant degree of judgment.

Level 2 – Valuations are based on inputs from quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

- 22 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

Level 3 – Valuations are based on model-based techniques for which some or all of the assumptions are obtained from unobservable market information that is significant to the overall fair value measurement and which require a significant degree of management judgment.

There were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2012. The Company’s policy is to recognize transfers between levels at the end of the reporting period.

The Company uses the following methods and assumptions to measure fair value for assets and liabilities subject to recurring fair value measurements.

Marketable Securities: The Company’s marketable debt securities consist of municipal bonds, government obligations, investment-grade corporate obligations, commercial paper, asset-backed securities and term deposits. The fair value of U.S. government obligations is determined using the market approach and is based on quoted prices in active markets and are categorized as Level 1.

The fair value of non-U.S. government bonds, municipal bonds, corporate bonds, asset-backed securities, commercial paper, and term deposits is determined using the market approach and is primarily based on matrix pricing as a practical expedient which does not rely exclusively on quoted prices for a specific security. Significant inputs used to determine fair value include interest rates, yield curves, credit rating of the security and other observable market information and are categorized as Level 2.

Derivative Financial Instruments: The Company’s derivative contracts consist of interest-rate swaps, cross currency swaps and foreign currency exchange contracts. These derivative contracts are traded over the counter and their fair value is determined using industry standard valuation models, which are based on the income approach (i.e., discounted cash flows). The significant observable inputs into the valuation models include interest rates, yield curves, currency exchange rates, credit default swap spreads and forward spot rates and are categorized as Level 2.

- 23 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

Assets and Liabilities Subject to Recurring Fair Value Measurement

The Company’s assets and liabilities subject to recurring fair value measurements are either Level 1 or Level 2 as follows:

At September 30, 2012

LEVEL 1

LEVEL 2

TOTAL

Assets:

Marketable debt securities

U.S. tax-exempt securities

302.3

U.S. corporate securities

28.2

U.S. government and agency securities

1.2

Non-U.S. government securities

393.5

Non-U.S. corporate securities

151.4

Other debt securities

79.3

Total marketable debt securities

955.4

955.9

Derivatives

Interest-rate swaps

1.1

Cross currency swaps

Foreign-exchange contracts

Total derivative assets

2.9

Liabilities:

Derivatives

Cross currency swaps

76.1

Interest-rate swaps

38.5

Foreign-exchange contracts

Total derivative liabilities

115.1

- 24 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)


At December 31, 2011	LEVEL 1		LEVEL 2		TOTAL
Assets:
Marketable debt securities
U.S. tax-exempt securities			$	294.4	$	294.4
U.S. corporate securities				27.5		27.5
U.S. government and agency securities	$	1.9				1.9
Non-U.S. government securities				367.1		367.1
Non-U.S. corporate securities				148.3		148.3
Other debt securities				70.9		70.9

Total marketable debt securities	$	1.9	$	908.2	$	910.1

Derivatives
Interest-rate swaps			$	1.4	$	1.4
Cross currency swaps				.8		.8
Foreign-exchange contracts				.2		.2

Total derivative assets			$	2.4	$	2.4

Liabilities:
Derivatives
Cross currency swaps			$	74.7	$	74.7
Interest-rate swaps				33.3		33.3
Foreign-exchange contracts				2.5		2.5

Total derivative liabilities			$	110.5	$	110.5

Fair Value Disclosure of Other Financial Instruments

For financial instruments that are not recognized at fair value, the Company uses the following methods and assumptions to determine the fair value. These instruments are categorized as Level 2, except fixed-rate loans which are categorized as Level 3.

Cash and Cash Equivalents: Carrying amounts approximate fair value.

Financial Services Net Receivables: For floating-rate loans, wholesale financings, and accrued rents and other trade receivables, carrying values approximate fair values. For fixed-rate loans, fair values are estimated using the income approach by discounting cash flows to their present value based on current rates for comparable loans. Finance lease receivables and related allowance for credit losses have been excluded from the accompanying table.

Debt: The carrying amounts of financial services commercial paper, variable-rate bank loans and variable-rate term notes approximate fair value. For fixed-rate debt, fair values are estimated using the income approach by discounting cash flows to their present value based on current rates for comparable debt.

- 25 -

PACCAR Inc – Form 10-Q


Notes to Consolidated Financial Statements (Unaudited)		(Millions, Except Share Amounts)

The Company’s estimate of fair value for fixed-rate loans and debt that are not carried at fair value at September 30, 2012 and December 31, 2011 was as follows:


	September 30, 2012				December 31, 2011
	CARRYING AMOUNT		FAIR VALUE		CARRYING AMOUNT		FAIR VALUE
Assets:
Financial Services fixed-rate loans	$	3,190.6	$	3,243.7	$	2,740.1	$	2,776.1
Liabilities:
Truck and Other fixed-rate debt	$	150.0	$	165.1	$	150.0	$	167.6
Financial Services fixed-rate debt	$	3,271.1	$	3,343.4	$	1,958.6	$	2,021.1

NOTE K - Employee Benefit Plans

The Company has several defined benefit pension plans, which cover a majority of its employees. The following information details the components of net pension expense for the Company’s defined benefit plans:


	Three Months Ended September 30						Nine Months Ended September 30
	2012			2011			2012			2011
Service cost	$	16.0		$	11.9		$	48.0		$	34.6
Interest on projected benefit obligation		20.3			21.0			61.0			61.8
Expected return on assets		(27.6	)		(26.5	)		(82.8	)		(79.1	)
Amortization of prior service costs		.3			.3			1.1			1.0
Recognized actuarial loss		10.8			4.5			32.4			17.7

Net pension expense	$	19.8		$	11.2		$	59.7		$	36.0

During the three and nine months ended September 30, 2012, the Company contributed $8.3 and $93.7 to its pension plans, respectively, and $6.1 and $12.9 for the three and nine months ended September 30, 2011, respectively.

- 26 -

PACCAR Inc – Form 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW:

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

Consolidated net sales and revenues in the third quarter of 2012 were $3.82 billion compared to $4.26 billion in the third quarter of 2011. The decrease in the third quarter of 2012 resulted from lower truck unit sales in Europe and the U.S. and Canada, reflecting lower industry truck orders. Third quarter truck unit sales were 31,100 units compared to 35,500 units in the same period in 2011. For the first nine months of 2012, consolidated net sales and revenues were $13.05 billion compared to $11.50 billion for the same period in 2011. For the first nine months of 2012 truck unit sales increased to 108,700 units from 97,100 units in the same period in 2011, primarily due to higher industry retail sales in the U.S. and Canada and record heavy duty truck market share in the U.S. and Canada, and Europe.

Third quarter 2012 net income was $233.6 million ($.66 per diluted share) compared to $281.6 million ($.77 per diluted share) in the third quarter of 2011. The third quarter 2012 results reflect lower sales in the Truck segment compared to the same period in 2011, partially offset by record Financial Services segment results. For the first nine months of 2012, net income was $858.1 million ($2.41 per diluted share) compared to $714.6 million ($1.95 per diluted share) in the first nine months of 2011. The increase in the first nine months of 2012 was primarily due to higher sales in the Truck segment and record Financial Services segment results from higher finance margin and a lower provision for losses on receivables.

The third quarter and first nine months of 2012 consolidated net sales and revenues were negatively affected by the translation of weaker foreign currencies primarily due to the euro. The translation effect decreased net sales and revenues by $122.9 million and $302.6 million for the third quarter of 2012 and the first nine months of 2012, respectively. The effect of weaker foreign currencies on income before income taxes for the third quarter and first nine months of 2012 was not significant.

During September 2012, the Company introduced the new DAF XF Euro 6 truck at the IAA truck show in Hannover, Germany. The new truck is powered by the PACCAR MX-13 Euro 6 engine and is the result of a multi-year design and development program. Production of the new truck will begin in 2013.

Truck Outlook

Industry retail sales in the U.S. and Canada in 2012 are expected to be 210,000-220,000 units compared to 197,000 in 2011. Estimates for U.S. and Canada industry Class 8 retail sales for 2013 are in the range of 210,000-240,000 units, driven primarily by ongoing replacement of the aging fleet. In Europe, 2012 industry sales for over 16-tonne vehicles are expected to be 215,000-225,000 units, lower than the 241,000 trucks in 2011, reflecting economic uncertainty in the Eurozone. Industry sales for over 16-tonne vehicles for 2013 are estimated in the range of 210,000-250,000 units as some customers may purchase Euro 5 vehicles ahead of the introduction of the Euro 6 emission requirement in 2014.

Capital investments in 2012 are expected to be $475 to $525 million. Capital investments in 2013 are expected to be $400 to $500 million, focused on the completion of a truck factory in Brasil and the development of products and services worldwide. Research and development (R&D) in 2012 is expected to be $280 to $290 million and for 2013 to be $275 to $325 million, focused on comprehensive product development programs and enhanced manufacturing operating efficiency.

- 27 -

PACCAR Inc – Form 10-Q

Financial Services Outlook

Average earning assets in the fourth quarter of 2012 are expected to increase modestly from current levels. For 2013, average earning assets may grow approximately 5-10% as increased new business financing from slightly higher truck sales exceeds portfolio runoff. The Company’s customers are benefiting from the current levels of freight tonnage, freight rates and fleet utilization that are contributing to customers’ profitability and cash flow. If current freight transportation conditions decline due to slowing economic conditions, past-due accounts, truck repossessions and net charge-offs could increase from current low levels.

See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect the Truck and Financial Services outlook.

RESULTS OF OPERATIONS:


($ in millions, except per share amounts)	Three Months Ended						Nine Months Ended
	September 30						September 30
	2012			2011			2012			2011
Net sales and revenues:
Truck	$	3,510.0		$	3,961.2		$	12,134.7		$	10,653.7
Other		36.7			31.8			117.8			84.6

Truck and other		3,546.7			3,993.0			12,252.5			10,738.3
Financial Services		273.5			264.1			801.0			763.1

	$	3,820.2		$	4,257.1		$	13,053.5		$	11,501.4

Income (loss) before taxes:
Truck	$	258.9		$	324.3		$	1,022.8		$	855.3
Other		(1.7	)		(2.4	)		(6.1	)		(19.0	)

Truck and Other		257.2			321.9			1,016.7			836.3
Financial Services		80.4			61.8			229.1			169.0
Investment income		7.8			11.0			24.9			28.9
Income taxes		(111.8	)		(113.1	)		(412.6	)		(319.6	)

Net income	$	233.6		$	281.6		$	858.1		$	714.6

Diluted earnings per share	$	.66		$	.77		$	2.41		$	1.95

Return on Revenues		6.1	%		6.6	%		6.6	%		6.2	%

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

- 28 -

PACCAR Inc – Form 10-Q

2012 Compared to 2011:

Truck

The Company’s Truck segment accounted for 92% and 93% of revenues in the third quarter and first nine months of 2012 compared to 93% in both the third quarter and first nine months of 2011.


($ in millions)	Three Months Ended September 30							Nine Months Ended September 30
($ in millions)	2012		2011		% Change			2012		2011		% Change
Truck net sales and revenues:
U.S. and Canada	$	1,820.0	$	2,191.6		(17	)	$	7,017.7	$	5,560.1		26
Europe		930.4		1,185.8		(22	)		2,954.1		3,529.8		(16	)
Mexico, South America, Australia and other		759.6		583.8		30			2,162.9		1,563.8		38

	$	3,510.0	$	3,961.2		(11	)	$	12,134.7	$	10,653.7		14

Truck income before income taxes	$	258.9	$	324.3		(20	)	$	1,022.8	$	855.3		20

The Company’s worldwide truck and parts sales and revenues decreased in the third quarter of 2012 compared to the same period in 2011 due to lower truck deliveries from lower demand in U.S. and Canada, and Europe, partially offset by increased truck demand in Mexico, South America, Australia and other markets. The decrease in Truck segment income before income taxes for the third quarter of 2012 reflects the lower truck deliveries.

In the first nine months of 2012, the Company’s worldwide truck and parts sales and revenues increased compared to the same period in 2011 due to higher market demand in all markets except Europe. The increase in Truck segment income before income taxes for the first nine months of 2012 was due to higher truck unit sales, truck unit margins and aftermarket parts sales, partially offset by an increase in selling, general and administrative (SG&A) expenses to support a higher level of business activity.

The effect of foreign currencies on Truck income before income taxes in the third quarter and first nine months of 2012 was not significant.

The Company’s new truck deliveries are summarized below:


	Three Months Ended September 30							Nine Months Ended September 30
	2012		2011		% Change			2012		2011		% Change
United States		12,200		15,600		(22	)		49,000		40,100		22
Canada		2,100		3,100		(32	)		8,800		7,900		11

U.S. and Canada		14,300		18,700		(24	)		57,800		48,000		20
Europe		10,200		11,800		(14	)		32,200		35,100		(8	)
Mexico, South America, Australia and other		6,600		5,000		32			18,700		14,000		34

Total units		31,100		35,500		(12	)		108,700		97,100		12

The truck markets in the U.S. and Canada, and Europe declined in the third quarter of 2012 compared to 2011 as heightened economic uncertainty has led to reduced demand for new trucks. These lower truck markets were partially offset by stronger truck markets in the third quarter of 2012 compared to 2011 in Mexico, South America, and Australia.

- 29 -

PACCAR Inc – Form 10-Q

In the first nine months of 2012, the U.S. and Canada truck market improved from 2011 from higher freight volumes and the need to replace an aging truck fleet. Industry retail sales in the heavy-duty market in the U.S. and Canada increased to 169,600 units in the first nine months of 2012 compared to 133,900 units in the same period of 2011. The Company’s heavy-duty truck retail market share increased to a record 29.0% in the first nine months of 2012 from 27.7% in the same period of 2011, reflecting higher deliveries to large fleet customers and overall strong demand for the Company’s premium products. The medium-duty market was 48,900 units in the first nine months of 2012 compared to 45,200 units in the same period of 2011. The Company’s medium-duty market share was 14.9% in the first nine months of 2012 compared to 11.4% in the same period of 2011.

The over 16-tonne truck market in Western and Central Europe was 167,900 units in the first nine months of 2012 compared to 180,200 units in the same period of 2011. The Company’s market share was a record 16.0% in the first nine months of 2012, an increase from 15.2% in the same period of 2011. The 6- to 16-tonne market in the first nine months of 2012 was 42,300 units compared to 45,800 units in the same period of 2011. DAF market share in the 6- to 16-tonne market in the first nine months of 2012 was 11.6% compared to 8.4% in the same period of 2011.

Sales and revenues in Mexico, South America, Australia and other markets increased in the third quarter and first nine months of 2012 primarily due to higher new truck deliveries in the Andean region of South America.

The major factors for the change in net sales and revenues, cost of sales and revenues, and gross margin for the three months ended September 30, 2012 are as follows:


($ in millions)	NET SALES			COST OF SALES			GROSS MARGIN
Three Months Ended September 30, 2011	$	3,961.2		$	3,457.6		$	503.6
Increase (decrease)
Truck delivery volume		(372.8	)		(308.0	)		(64.8	)
Average truck sales prices		23.4						23.4
Average truck material, labor and other direct costs					32.5			(32.5	)
Factory overhead, warehouse and other indirect costs					.3			(.3	)
Aftermarket parts volume		(6.1	)		(1.5	)		(4.6	)
Average aftermarket parts sales prices		19.1						19.1
Average aftermarket parts direct costs					10.9			(10.9	)
Currency translation		(114.8	)		(111.9	)		(2.9	)

Total decrease		(451.2	)		(377.7	)		(73.5	)

Three Months Ended September 30, 2012	$	3,510.0		$	3,079.9		$	430.1

•

Truck delivery volume reflects lower truck deliveries in the U.S. and Canada, and Europe, partially offset by higher deliveries in Mexico, South America, Australia and other markets. Average truck sales prices increased sales by $23.4 million reflecting increased price realization.

•

Average truck cost increased $32.5 million primarily due to higher material costs.

•

Factory overhead, warehouse and other indirect costs increased $.3 million primarily due to higher salaries and related costs ($4.0 million), partially offset by lower manufacturing supplies and maintenance ($3.3 million).

•

Lower market demand in Europe lowered aftermarket parts volume by $21.2 million and related cost of sales by $11.1 million. This was partially offset by higher market demand in the U.S. and Canada, and Australia that increased aftermarket parts volume by $15.1 million and related cost of sales by $9.6 million.

•

Average aftermarket parts sales prices increased by $19.1 million reflecting improved price realization, primarily in North America.

•

Average aftermarket parts costs increased $10.9 million from higher material costs.

- 30 -

PACCAR Inc – Form 10-Q

•

The currency translation effect on sales and cost of sales primarily reflects a decrease in the value of the euro compared to the U.S. dollar.

The major factors for the change in net sales and revenues, cost of sales and revenues, and gross margin for the nine months ended September 30, 2012 are as follows:


($ in millions)	NET SALES			COST OF SALES			GROSS MARGIN
Nine Months Ended September 30, 2011	$	10,653.7		$	9,275.7		$	1,378.0
Increase (decrease)
Truck delivery volume		1,392.8			1,229.5			163.3
Average truck sales prices		247.1						247.1
Average truck material, labor and other direct costs					157.1			(157.1	)
Factory overhead, warehouse and other indirect costs					88.3			(88.3	)
Aftermarket parts volume		73.1			49.5			23.6
Average aftermarket parts sales prices		51.6						51.6
Average aftermarket parts direct costs					35.7			(35.7	)
Currency translation		(283.6	)		(265.9	)		(17.7	)

Total increase		1,481.0			1,294.2			186.8

Nine Months Ended September 30, 2012	$	12,134.7		$	10,569.9		$	1,564.8

•

The higher truck delivery volume primarily reflects improved truck markets and market share in North America. The increased demand for trucks also resulted in higher average truck sales prices which increased sales by $247.1 million.

•

Average truck cost of sales increased $157.1 million primarily due to higher material costs.

•

Factory overhead, warehouse and other indirect costs increased $88.3 million primarily due to higher salaries and related costs ($51.6 million), manufacturing supplies and maintenance ($12.5 million), utilities ($3.1 million) and other overhead costs ($13.1 million) to support higher production levels.

•

Higher market demand, primarily in North America, increased aftermarket parts sales volume by $73.1 million and related cost of sales by $49.5 million.

•

Average aftermarket parts sales prices increased by $51.6 million reflecting improved price realization.

•

Average aftermarket parts costs increased $35.7 million from higher material costs.

•

The currency translation effect on sales and cost of sales primarily reflects a decrease in the value of the euro compared to the U.S. dollar.

- 31 -

PACCAR Inc – Form 10-Q

Net sales and revenues and gross margins for truck units and aftermarket parts are provided below. The aftermarket parts gross margin includes direct revenues and costs, but excludes certain Truck segment costs.


($ in millions)	Three Months Ended September 30									Nine Months Ended September 30
	2012			2011			% Change			2012			2011			% Change
Net sales and revenues:
Trucks	$	2,859.9		$	3,305.7			(13	)	$	10,138.0		$	8,735.4			16
Aftermarket parts		650.1			655.5			(1	)		1,996.7			1,918.3			4

	$	3,510.0		$	3,961.2			(11	)	$	12,134.7		$	10,653.7			14

Gross Margin:
Trucks	$	205.8		$	276.9			(26	)	$	873.9		$	709.9			23
Aftermarket parts		224.3			226.7			(1	)		690.9			668.1			3

	$	430.1		$	503.6			(15	)	$	1,564.8		$	1,378.0			14

Gross Margin %:
Trucks		7.2	%		8.4	%					8.6	%		8.1	%
Aftermarket parts		34.5	%		34.6	%					34.6	%		34.8	%

		12.3	%		12.7	%					12.9	%		12.9	%

Total Truck segment gross margins for the third quarter of 2012 were 12.3% compared to 12.7% in the same period in 2011. Total Truck segment gross margins for the first nine months of 2012 and 2011 were 12.9%. The lower truck sales gross margins for the third quarter of 2012 resulted from reduced truck deliveries in the U.S. and Canada, and Europe and decreased absorption of fixed costs resulting from lower truck production. The aftermarket parts gross margins in the third quarter and first nine months of 2012 were comparable to 2011.

Truck R&D expenditures in the third quarter and first nine months of 2012 decreased to $66.7 million and $212.6 million from $69.9 million and $215.5 million in the corresponding periods of 2011, respectively. R&D spending in both periods of 2012 reflects continued focus on product development activities, primarily for new truck models and engine development for North America and Europe. Foreign currency, primarily the euro, reduced R&D in the third quarter and first nine months of 2012 by $5.5 million and $12.4 million, respectively.

Truck SG&A of $104.6 million in the third quarter of 2012 was comparable to $105.6 million in the third quarter of 2011. In the first nine months of 2012, SG&A was $330.6 million and $306.2 million in the first nine months of 2011. The higher spending for the first nine months of 2012 is primarily due to higher salaries and personnel related expenses of $19.0 million to support higher levels of business activity.

As a percentage of sales, SG&A increased to 3.0% in the third quarter of 2012 from 2.7% in the third quarter of 2011, reflecting lower sales volumes. For the first nine months of 2012, SG&A as a percentage of sales was 2.7%, down from 2.9% in the first nine months of 2011 due to higher sales volumes and ongoing cost control. Foreign currency, primarily the euro, reduced SG&A in the third quarter and first nine months of 2012 by $5.2 million and $12.5 million, respectively.

- 32 -

PACCAR Inc – Form 10-Q

Financial Services


($ in millions)	Three Months Ended							Nine Months Ended
	September 30							September 30
	2012		2011		% change			2012		2011		% change
New loan and lease volume:
U.S. and Canada	$	735.5	$	638.0		15		$	2,124.1	$	1,673.3		27
Europe		202.3		215.7		(6	)		646.0		684.5		(6	)
Mexico and Australia		224.1		151.9		48			570.5		443.7		29

	$	1,161.9	$	1,005.6		16		$	3,340.6	$	2,801.5		19
New loan and lease volume by product:
Loans and finance leases	$	902.2	$	783.5		15		$	2,621.1	$	2,060.6		27
Equipment on operating leases		259.7		222.1		17			719.5		740.9		(3	)

	$	1,161.9	$	1,005.6		16		$	3,340.6	$	2,801.5		19
New loan and lease unit volume:
Loans and finance leases		8,970		8,750		3			25,940		24,000		8
Equipment on operating leases		2,600		2,290		14			6,830		7,450		(8	)

		11,570		11,040		5			32,770		31,450		4
Average earning assets:
U.S. and Canada	$	6,149.6	$	4,710.8		31		$	5,791.4	$	4,443.0		30
Europe		2,197.7		2,268.8		(3	)		2,263.8		2,184.4		4
Mexico and Australia		1,613.7		1,459.7		11			1,510.1		1,452.4		4

	$	9,961.0	$	8,439.3		18		$	9,565.3	$	8,079.8		18
Average earning assets by product:
Loans and finance leases	$	6,323.0	$	5,342.7		18		$	6,080.5	$	5,229.8		16
Dealer wholesale financing		1,640.4		1,228.5		34			1,585.0		1,125.8		41
Equipment on lease and other		1,997.6		1,868.1		7			1,899.8		1,724.2		10

	$	9,961.0	$	8,439.3		18		$	9,565.3	$	8,079.8		18
Revenue:
U.S. and Canada	$	149.5	$	131.1		14		$	427.9	$	374.9		14
Europe		67.2		79.9		(16	)		210.1		232.5		(10	)
Mexico and Australia		56.8		53.1		7			163.0		155.7		5

	$	273.5	$	264.1		4		$	801.0	$	763.1		5
Revenue by product:
Loans and finance leases	$	100.2	$	94.4		6		$	290.3	$	279.0		4
Dealer wholesale financing		15.3		12.1		26			46.6		34.4		35
Equipment on lease and other		158.0		157.6					464.1		449.7		3

	$	273.5	$	264.1		4		$	801.0	$	763.1		5

Income before income taxes	$	80.4	$	61.8		30		$	229.1	$	169.0		36

In the third quarter of 2012, new loan and lease volume increased 16% to $1.16 billion compared to the third quarter of 2011. The increase reflects higher finance market share of new PACCAR truck sales and a higher average amount financed per unit, partially offset by lower new PACCAR truck sales. In the third quarter of 2012, PFS market share on new PACCAR trucks increased to 33.1% compared to 29.1% in the same period of 2011 from higher market share in all markets except Mexico. In the first nine months of 2012, new loan and lease volume increased 19% to $3.34 billion compared to the first nine months of 2011. The increase reflects higher new PACCAR truck sales and a higher average amount financed per unit. In the first nine months of 2012, finance market share of 29.8% decreased slightly compared to the 30.2% finance market share in the same period in 2011, primarily due to lower market share in the U.S. and Canada.

The increase in PFS revenues primarily resulted from higher average earning asset balances, partially offset by lower yields. PFS income before income taxes increased to $80.4 million and $229.1 million in the third quarter and first nine months of 2012 compared to $61.8 million and $169.0 million in the same periods in 2011 primarily due to higher finance margins and a lower provision for losses as noted below.

- 33 -

PACCAR Inc – Form 10-Q

The major factors for the change in interest and fees, interest and other borrowing expenses and finance margin for the three months ended September 30, 2012 are outlined in the table below:


($ in millions)	INTEREST AND FEES			INTEREST AND OTHER BORROWING EXPENSES			FINANCE MARGIN
Three Months Ended September 30, 2011	$	106.5		$	44.6		$	61.9
Increase (decrease)
Average finance receivables		23.2						23.2
Yields		(11.6	)					(11.6	)
Average debt balances					9.3			(9.3	)
Borrowing rates					(12.0	)		12.0
Currency translation		(2.6	)		(1.3	)		(1.3	)

Total increase (decrease)		9.0			(4.0	)		13.0

Three Months Ended September 30, 2012	$	115.5		$	40.6		$	74.9

•

Average finance receivables increased $1.60 billion (excluding foreign currency effects of $212.2 million) from an increase in retail portfolio new business volume exceeding repayments and an increase in dealer wholesale financing, primarily in the U.S. and Canada.

•

Lower market rates resulted in lower portfolio yields.

•

Average debt balances increased $1.69 billion (including foreign currency effects of $209.5 million) in the third quarter of 2012 and included increased medium-term note funding. The higher average debt balances reflect funding needed for the higher average finance receivable portfolio.

•

Borrowing rates declined in the third quarter of 2012 due to lower market interest rates.

•

Currency translation variances primarily reflect a decrease in the value of the euro compared to the U.S. dollar.

The major factors for the change in interest and fees, interest and other borrowing expenses and finance margin for the nine months ended September 30, 2012 are outlined in the table below:


($ in millions)	INTEREST AND FEES			INTEREST AND OTHER BORROWING EXPENSES			FINANCE MARGIN
Nine Months Ended September 30, 2011	$	313.4		$	137.2		$	176.2
Increase (decrease)
Average finance receivables		70.3						70.3
Yields		(41.1	)					(41.1	)
Average debt balances					30.5			(30.5	)
Borrowing rates					(46.6	)		46.6
Currency translation		(5.7	)		(2.7	)		(3.0	)

Total increase (decrease)		23.5			(18.8	)		42.3

Nine Months Ended September 30, 2012	$	336.9		$	118.4		$	218.5

•

Average finance receivables increased $1.50 billion (excluding foreign currency effects of $190.8 million) from an increase in retail portfolio new business volume exceeding repayments and an increase in dealer wholesale financing, primarily in the U.S. and Canada.

•

Lower market rates resulted in lower portfolio yields.

•

Average debt balances increased $1.73 billion (excluding foreign currency effects of $173.8 million) in the first nine months of 2012 and included increased medium-term note funding. The higher average debt balances reflect funding needed for the higher average finance receivable portfolio.

•

Borrowing rates declined in the first nine months of 2012 due to lower market interest rates.

- 34 -

PACCAR Inc – Form 10-Q

•

Currency translation variances primarily reflect a decrease in the value of the euro compared to the U.S. dollar.

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


($ in millions)	Three Months Ended September 30				Nine Months Ended September 30
	2012		2011		2012		2011
Operating lease revenues	$	146.9	$	147.6	$	431.8	$	420.3
Used truck sales and other		11.1		10.0		32.3		29.4

Operating lease, rental and other income	$	158.0	$	157.6	$	464.1	$	449.7

Depreciation on operating lease	$	94.5	$	91.2	$	270.0	$	257.4
Vehicle operating expenses		23.3		25.9		72.4		76.3
Cost of used truck sales and other		9.4		5.9		25.1		19.2

Depreciation and other	$	127.2	$	123.0	$	367.5	$	352.9

The major factors for the change in lease, rental and other income, depreciation and other and lease margin for the three months ended September 30, 2012 are outlined in the table below:


($ in millions)	LEASE, RENTAL AND OTHER INCOME			DEPRECIATION AND OTHER			LEASE MARGIN
Three Months Ended September 30, 2011	$	157.6		$	123.0		$	34.6
Increase (decrease)
Operating lease impairments					.2			(.2	)
Results on returned lease assets					2.9			(2.9	)
Average operating lease assets		5.7			4.6			1.1
Currency translation and other		(5.3	)		(3.5	)		(1.8	)

Total increase (decrease)		.4			4.2			(3.8	)

Three Months Ended September 30, 2012	$	158.0		$	127.2		$	30.8

•

Results on returned lease assets decreased $2.9 million as the Company had net gains on sales of trucks returned from leases of $.5 million in the third quarter of 2012 compared to $3.5 million in the third quarter of 2011. The lower gains in 2012 primarily relate to the U.S. and Canada, and Europe.

•

Average operating lease assets increased $210.4 million (excluding foreign currency effects of $80.9 million) resulting in $5.7 million in higher revenues and $4.6 million in higher depreciation and other vehicle operating expenses.

•

Currency translation variances primarily reflect a decrease in the value of the euro compared to the U.S. dollar.

- 35 -

PACCAR Inc – Form 10-Q

The major factors for the change in lease rental and other income, depreciation and other and lease margin for the nine months ended September 30, 2012 are outlined in the table below:


($ in millions)	LEASE, RENTAL AND OTHER INCOME			DEPRECIATION AND OTHER			LEASE MARGIN
Nine Months Ended September 30, 2011	$	449.7		$	352.9		$	96.8
Increase (decrease)
Operating lease impairments					(2.1	)		2.1
Results on returned lease assets					2.3			(2.3	)
Average operating lease assets		25.8			20.8			5.0
Currency translation and other		(11.4	)		(6.4	)		(5.0	)

Total increase		14.4			14.6			(.2	)

Nine Months Ended September 30, 2012	$	464.1		$	367.5		$	96.6

•

Operating lease impairments decreased $2.1 million in the first nine months of 2012 due to fewer impaired units.

•

Results on returned lease assets decreased $2.3 million as the Company had net gains on sales of trucks returned from leases of $8.3 million in the first nine months of 2012 compared to net gains of $10.6 million in the first nine months of 2011. The lower gains in 2012 primarily relate to the U.S. and Canada, and Europe.

•

Average operating lease assets increased $234.6 million (excluding foreign currency effects of $59.0 million) resulting in $25.8 million in higher revenue and $20.8 million in higher depreciation expense.

•

Currency translation variances primarily reflect a decrease in the value of the euro compared to the U.S. dollar.

The following tables summarize the provision for losses on receivables and net charge-offs:

Three Months Ended

Nine Months Ended

September 30, 2012

($ in millions)

PROVISION
FOR LOSSES
ON
RECEIVABLES

NET
CHARGE-OFFS

PROVISION FOR
LOSSES ON
RECEIVABLES

NET
CHARGE-OFFS

U.S. and Canada

(.4

)

2.7

2.6

5.7

Europe

1.9

1.4

7.6

5.5

Mexico and Australia

1.2

1.5

5.0

5.7

2.7

5.6

15.2

16.9


	Three Months Ended September 30, 2011					Nine Months Ended September 30, 2011
($ in millions)	PROVISION FOR LOSSES ON RECEIVABLES			NET CHARGE-OFFS		PROVISION FOR LOSSES ON RECEIVABLES		NET CHARGE-OFFS
U.S. and Canada	$	(.2	)	$	.7	$	3.6	$	4.5
Europe		4.4			2.7		13.4		13.2
Mexico and Australia		6.5			6.5		15.2		13.8

	$	10.7		$	9.9	$	32.2	$	31.5

The provision for losses on receivables for the third quarter and first nine months of 2012 declined $8.0 million and $17.0 million, respectively, compared to same periods in 2011 due to transportation industry conditions which have improved the profitability and cash flow for many of the Company’s customers.

- 36 -

PACCAR Inc – Form 10-Q

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

The accounts modified during the nine months ended September 30, 2012 and 2011 are summarized below:


	Nine Months Ended
	September 30, 2012					September 30, 2011
	Recorded Investment		% of Total Portfolio*			Recorded Investment		% of Total Portfolio*
Commercial	$	168.0		2.7	%	$	152.9		3.0	%
Insignificant Delay		46.4		.8	%		110.4		2.2	%
Credit - No Concession		30.9		.5	%

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company