PACCAR Inc (PCAR, NASDAQ)
Industry: Farm & Heavy Construction Machinery
Annual report, fiscal year 2013


## PACCAR
2013 ANNUAL REPORT



PACCAR is a global technology company that designs and manufactures premium quality light, medium and heavy duty commercial vehicles sold worldwide under the Kenworth, Peterbilt and DAF nameplates. PACCAR designs and manufactures diesel engines for use in its own products and for sale to third party manufacturers of trucks and buses. PACCAR distributes aftermarket truck parts to its dealers through a worldwide network of Parts Distribution Centers. Finance and leasing subsidiaries facilitate the sale of PACCAR products in many countries worldwide. PACCAR manufactures and markets industrial winches under the Braden, Carco and Gearmatic nameplates. PACCAR maintains exceptionally high standards of quality for all of its products: they are well engineered, highly customized for specific applications and sell in the premium segments of their markets, where they have a reputation for superior performance and pride of ownership.

## CONTENTS

1 Financial Highlights
2 Message to Shareholders
6 PACCAR Operations
22 Financial Charts
23 Stockholder Return Performance Graph
24 Management's Discussion and Analysis
48 Consolidated Statements of Income
49 Consolidated Statements of Comprehensive Income
50 Consolidated Balance Sheets
52 Consolidated Statements of Cash Flows
53 Consolidated Statements of Stockholders' Equity
54 Notes to Consolidated Financial Statements

86 Management’s Report on Internal Control Over Financial Reporting
86 Report of Independent Registered Public Accounting Firm on the Company’s Consolidated Financial Statements
87 Report of Independent Registered Public Accounting Firm on the Company’s Internal Control Over Financial Reporting
88 Selected Financial Data
88 Common Stock Market Prices and Dividends
89 Quarterly Results
90 Market Risks and Derivative Instruments
91 Officers and Directors
92 Divisions and Subsidiaries



For the past 17 years, Mr. Pigott has led PACCAR as Chairman and Chief Executive Officer. During his tenure, the company became one of the largest and most successful technology companies worldwide. He built on the strong foundation established by previous generations and the thousands of dedicated employees who deliver world-class products and services every day. The company has prospered as revenues grew from $4.60 billion to a record $17.12 billion. Net income increased six-fold and shareholders' equity increased from $1.36 billion to $6.63 billion. Even more impressive, in the 17 years Mr. Pigott led the company, PACCAR earned a profit every year, a remarkable performance in a highly cyclical industry.

Mr. Pigott’s managerial excellence, financial discipline, and commitment to increasing shareholder value resulted in a total return to shareholders of 1,479% since 1997. His commitment to quality is evidenced by the many awards PACCAR’s products have earned, including 34 J.D. Power and Associates quality awards and the International Truck of the Year in Europe three times. PACCAR has redefined the industry with a new range of aerodynamic vehicles, complemented by a new family of PACCAR engines, and now manufactures trucks on six continents. PACCAR pioneered the adoption of Six Sigma in 1997, and its strategic implementation has been integrated into all business activities, realizing cumulative savings of over $2.3 billion. Mr. Pigott was honored as Six Sigma Executive of the Year in 2008.

During Mr. Pigott’s tenure, which will continue as Executive Chairman, PACCAR achieved record share in all of its markets, including Class 8 share in the U.S. and Canada of 28.9% in 2012. PACCAR acquired European truck manufacturer DAF in 1996 and grew its European 16+ tonne market share from 9.1% to a record 16.2%. PACCAR’s share of the Class 8 Mexico market has grown from 24.1% in 1995 to 45.0% today.

Mr. Pigott has generously contributed to the larger community in the same effective way he guided the company. Under his leadership, the PACCAR Foundation distributes approximately $5-$10 million annually to non-profit organizations in communities where PACCAR does business.

Mr. Pigott’s leadership in business, education and the arts has been recognized by many countries and organizations, including: Knight Commander of the Order of the British Empire (KBE) (UK), Commander of the Order of the Crown (Belgium), Officer of the Order of Orange Nassau (Netherlands), Knight’s Cross of the Order of Merit (Hungary) and the National Medal of Technology (U.S.).



<table><tr><td></td><td>2013</td><td>2012</td></tr><tr><td></td><td colspan="2">(millions except per share data)</td></tr><tr><td>Truck, Parts and Other Net Sales and Revenues</td><td>$15,948.9</td><td>$15,951.7</td></tr><tr><td>Financial Services Revenues</td><td>1,174.9</td><td>1,098.8</td></tr><tr><td>Total Revenues</td><td>17,123.8</td><td>17,050.5</td></tr><tr><td>Net Income</td><td>1,171.3</td><td>1,111.6</td></tr><tr><td>Total Assets:</td><td></td><td></td></tr><tr><td>Truck, Parts and Other</td><td>9,095.4</td><td>7,832.3</td></tr><tr><td>Financial Services</td><td>11,630.1</td><td>10,795.5</td></tr><tr><td>Truck, Parts and Other Long-Term Debt</td><td>150.0</td><td>150.0</td></tr><tr><td>Financial Services Debt</td><td>8,274.2</td><td>7,730.1</td></tr><tr><td>Stockholders&#x27; Equity</td><td>6,634.3</td><td>5,846.9</td></tr><tr><td>Per Common Share:</td><td></td><td></td></tr><tr><td>Net Income:</td><td></td><td></td></tr><tr><td>Basic</td><td>$ 3.31</td><td>$ 3.13</td></tr><tr><td>Diluted</td><td>3.30</td><td>3.12</td></tr><tr><td>Cash Dividends Declared</td><td>1.70</td><td>1.58</td></tr></table>





Return on Revenues (percent)



Return on Equity (percent)



PACCAR had an excellent year in 2013, as it achieved record revenues due to good truck markets in North America and Europe. The company has earned an impressive 75 consecutive years of net income. This remarkable achievement was due to our 21,800 employees who delivered industry-leading product quality, innovation and outstanding operating efficiency. PACCAR increased its global diversification, opening a new DAF truck manufacturing facility in Ponta Grossa, Brasil, in October 2013. PACCAR's superior financial strength enabled the company to invest $661 million of capital and research and development in 2013 to enhance its manufacturing capability, introduce a new range of vehicles and engines and strengthen its aftermarket capabilities. PACCAR delivered 137,100 trucks to its customers and sold a record $2.82 billion of aftermarket parts. PACCAR's excellent S&P credit rating of A+ results from consistent profitability, a strong balance sheet and excellent cash flow. Looking ahead to 2014, the North American truck market is expected to improve modestly compared to 2013 due to a better economy. The European truck market could be lower due to the effect of the "pre-buy" in late 2013 stimulated by Euro 6 emissions regulations. It is anticipated that there will be continued growth in the aftermarket parts business due to improving economic conditions as well as the age of the industry truck fleet. PACCAR Financial should continue to perform well due to an improving economy.

PACCAR's net income of $1.17 billion on revenues of $17.12 billion was the third best in company history. PACCAR declared regular dividends of $0.80 per share and a special dividend of $0.90 per share. Regular quarterly cash dividends have more than tripled in the last 10 years. Shareholders' equity was a record $6.63 billion.



Class 8 industry truck sales in North America, including Mexico, were 236,000 vehicles in 2013 compared to 249,000 the prior year. The European 16+ tonne market in 2013 rose to 241,000 vehicles, compared to 222,000 in 2012. Our customers are generating good profits due to increased freight and higher fleet utilization.

PACCAR’s excellent financial performance in 2013 benefited from record parts sales and record pre-tax profits in Financial Services. The company’s 2013 after-tax return on revenues was 6.8%. After-tax return on beginning shareholders’ equity (ROE) was 20.0% in 2013, compared to 20.7% in 2012. PACCAR’s excellent long-term financial performance has enabled the company to distribute $4.46 billion in dividends during the last 10 years. PACCAR’s average annual total shareholder return over the last decade was 12.3%, versus 7.4% for S&P 500 Index.

INVESTING FOR THE FUTURE — PACCAR’s consistent profitability, strong balance sheet and intense focus on quality, technology and productivity have allowed the company to invest $5.72 billion since 2004 in capital projects, new products and processes. Productivity and efficiency improvement of 5-7% annually and capacity improvements of over 15% in the last five years have enhanced the capability of the company’s manufacturing and parts facilities. PACCAR is recognized as one of the leading technology companies worldwide, and innovation continues to be a cornerstone of its success. PACCAR has integrated new technology, such as 3D component printing, to profitably support its business, as well as its dealers, customers and suppliers.

In 2013, capital investments were $410 million and research and development expenses were $251 million. PACCAR launched many new truck models, invested in global expansion and enhanced its manufacturing efficiency during the year. The new Kenworth T880 and Peterbilt Model 567 vocational trucks and the DAF LF and CF Euro 6 trucks deliver industry-leading fuel efficiency and premium quality. PACCAR's Mississippi engine factory has produced over 51,000 PACCAR MX-13 engines for Kenworth and Peterbilt trucks. Customers benefit from the engine's excellent fuel economy and reliability.

PACCAR has increased its investment in the BRIC countries (Brasil, Russia, India, China). The company's new DAF factory in Ponta Grossa, Brasil, was completed in October 2013 and has begun truck production. DAF and Kenworth increased their dealer locations in Russia to 38. The PACCAR Technical Center in Pune, India, partners with KPIT, a leading technology solutions company. The Center concentrates on engineering, information technology and component sourcing. In China, the world's largest truck market, PACCAR's purchasing team increased their activities and continues to examine joint venture opportunities.

SIX SIGMA — Six Sigma is integrated into all business activities at PACCAR and has been adopted at 273 of the company’s suppliers and many of the company’s dealers and customers. Its statistical methodology is critical in the development of new product designs, customer services and manufacturing processes. Since 1997, Six Sigma has delivered over $2.3 billion in cumulative savings in all facets of the company. Over 14,000 employees have been trained in Six Sigma and 22,300 projects have been implemented. Six Sigma, in conjunction with Supplier Quality, has been vital to improving logistics performance and component quality from company suppliers.

INFORMATION TECHNOLOGY — PACCAR’s Information Technology Division (ITD) and its 730 innovative employees are an important competitive asset for the company. PACCAR’s use of information technology is centered on developing and integrating software and hardware that enhance the quality and efficiency of all products and operations throughout the company. In 2013, PACCAR again earned a leading technology position in InformationWeek magazine’s Top 500 company list. Over 30,000 dealers, customers, suppliers and employees have experienced the company’s Technology Centers, which highlight electronic work instructions (EWI), mobile computing, an electronic leasing and finance office, and an automated service analyst.

TRUCKS — U.S. and Canadian Class 8 industry retail sales in 2013 were 212,000 units, and the Mexican market totaled 24,000. The European Union (EU) industry 16+ tonne sales were 241,000 units.

PACCAR’s Class 8 retail sales in the U.S. and Canada achieved a market share of 28.0% in 2013. DAF



achieved a record 16.2% share in the 16+ tonne truck market in Europe. Industry Class 6 and 7 truck retail sales in the U.S. and Canada were 65,900 units, up 2% from the previous year. In the EU, the 6 to 16-tonne market was 57,000 units, up 3% over 2012. PACCAR's North American and European market shares in the medium duty truck segment were 15.7% and 11.8%, respectively, as the company delivered 24,500 medium duty vehicles in 2013.

A tremendous team effort by the company’s engineering, purchasing, materials and production employees contributed to the launch of the most new vehicles in our history. Our factories were also updated with new robotic assembly cells to deliver industry-leading product quality and efficiency.

PACCAR’s product quality continued to be recognized as the industry leader in 2013. Kenworth’s T680, powered by the PACCAR MX-13 engine, earned the American Truck Dealers 2013 Heavy Duty Commercial Truck of the Year award.

One-half of PACCAR’s revenues were generated outside the U.S. The company has realized excellent synergies globally in product development, sales and finance activities, purchasing and manufacturing.

Leyland Trucks is the United Kingdom’s leading truck manufacturer. The DAF XF105 ATE earned Fleet Truck of the Year at the Motor Transport Awards 2013 in London. This was DAF’s fifth win in the last six years.

PACCAR Mexico (KENMEX) continues its sales leadership achieving a 45.0% Class 8 market share. The truck markets in the Andean region of South America remained at lower levels due to slower economic growth.

PACCAR Australia achieved strong results in 2013 with combined heavy duty market share of Kenworth and DAF increasing to 24.5% in a smaller market. AFTERMARKET CUSTOMER SERVICES — PACCAR Parts achieved record revenue in 2013, as dealers and customers embraced vehicle maintenance programs, integrated customer logistics and national billing programs. With sales of $2.82 billion, PACCAR Parts is the primary source for aftermarket parts and services for PACCAR vehicles, as well as supplying its “TRP” branded parts for competitors’ trucks, trailers and buses. Over six million heavy duty trucks operate in North America and Europe, and the average age of North American vehicles is estimated to be seven years. The large vehicle parc and aging industry fleet create excellent demand for parts and service and moderate the cyclicality of truck sales.

PACCAR Parts expanded its facilities to enhance logistics performance to dealers and customers. PACCAR Parts' new Eindhoven, the Netherlands, Distribution Center opened in March 2013 and the Pennsylvania Parts Distribution Center (PDC) doubled in size to 120,000 square feet. PACCAR Parts continues to lead the industry with technology that offers competitive advantages at PACCAR dealerships. FINANCIAL SERVICES — PACCAR Financial Services' (PFS) conservative business approach, coupled with PACCAR's superb S&P credit rating of A+ and the strength of the dealer network, enabled PFS to earn record pre-tax profits in 2013. PACCAR issued $2.10 billion in medium-term notes at attractive rates during the year. The PACCAR Financial Services group of companies has operations covering four continents and 23 countries. The global breadth of PFS and its rigorous credit application process support a portfolio of over 161,000 trucks and trailers, with total assets of $11.63 billion. PACCAR Financial Corp. (PFC) is the preferred funding source in North America for Peterbilt and Kenworth trucks, financing 22.0% of dealer Class 8 sales in the U.S. and Canada in 2013. Interactive webcasts, strategically located used truck centers and target marketing resulted in PFS selling over 7,000 used trucks worldwide.

PACCAR Financial Europe (PFE) completed its 12th year of operation, focusing on the financing of new and used DAF trucks. PFE provides wholesale and retail financing for DAF dealers and customers in 17 European countries and financed 22.8% of DAF's 6+ tonne vehicle sales in 2013.

PACCAR Leasing (PacLease) had a record year, expanding its fleet to 35,900 vehicles. PacLease placed 7,200 new PACCAR vehicles in service in 2013. PacLease represents one of the largest full-service truck rental and leasing operations in North America and Germany and continued to increase its market presence in 2013, growing its global network to over 600 locations. ENVIRONMENTAL LEADERSHIP — PACCAR is a global environmental leader. All PACCAR manufacturing



facilities have earned ISO 14001 environmental certification. The company’s manufacturing facilities enhanced their “Zero Waste to Landfill” programs during the year. PACCAR employees are environmentally conscious and utilize van pools, car pools and bus passes for 30% of their business commuting. PACCAR is a member of the CDP (Carbon Disclosure Project), which aligns corporate environmental goals with national and local “green” initiatives.

A LOOK AHEAD — PACCAR’s 21,800 employees enabled the company to distinguish itself as a global leader in the technology, capital goods, financial services and aftermarket parts businesses. Superior product quality, technological innovation and balanced global diversification are three key operating characteristics that define PACCAR’s business philosophy.

Current estimates for the 2014 Class 8 truck industry in the U.S. and Canada indicate that truck sales could range from 210,000-240,000 units. Sales for Class 6-7 trucks are expected to be between 60,000-70,000 units. The European 16+ tonne truck market in 2014 is estimated to be in the range of 200,000-230,000 trucks, while demand for medium trucks should range from 50,000-55,000 units.

The outlook for 2014 appears good as the North American economy is expected to generate growth of 2-3%, and the European economy is expected to grow about 1%. PACCAR plans to grow its business in all markets. PACCAR is well positioned and committed to maintaining the profitable results its shareholders expect by delivering industry-leading products and services globally.

I would like to thank Warren Staley, who is retiring from the Board this year, for his dedication and diligence in enhancing the company’s strategic analysis and global growth. His experience in South America has provided excellent insight into the market, which will benefit the company’s long-term success in Brasil.

I am pleased that the Board elected Ron Armstrong as Chief Executive Officer and Bob Christensen as President and Chief Financial Officer, effective April 27, 2014. Ron will also be on the Board of Directors. They are experienced and talented executives with decades of leadership at PACCAR.

I am retiring as Chief Executive Officer on the same date, but will continue as Executive Chairman. I have been blessed to work at PACCAR for 35 years, with 17 years as Chairman and Chief Executive Officer. Shareholders have enjoyed a return of over 1,400% in the last 17 years. The company’s new range of vehicles, modern high technology factories and superb customer service in parts and financial services provide an excellent foundation for future growth. It is a privilege and honor to work at PACCAR.

PACCAR and its employees are proud of the remarkable achievement of 75 consecutive years of net profit. PACCAR embraces a long-term view of its businesses, and our shareholders have benefited from that approach. The embedded principles of integrity, quality and consistency of purpose define the course in PACCAR’s operations. The proven business strategy — deliver technologically advanced premium products and provide an extensive array of tailored aftermarket customer services — enables PACCAR to pragmatically approach growth opportunities with a long-term focus. PACCAR is enhancing its stellar reputation as a leading technology company in the capital goods and financial services marketplace.



MARK C. PIGOTT
Chairman and Chief Executive Officer
February 18, 2014



Front Row Left to Right: Kyle Quinn, Jack LeVier, Ron Armstrong, Michael Barkley; Back Row Left to Right: Sam Means, Harrie Schippers, Dan Sobic, Mark Pigott, Bob Christensen, Dave Anderson, Bob Bengston







DAF Trucks N.V. strengthened its position as a leading global commercial vehicle manufacturer in 2013, unveiling new vehicles, increasing its EU market share in the 16+ tonne segment to a record 16.2% and expanding into emerging markets.

DAF launched its new XF, CF and LF Euro 6 vehicles during the year. The new DAF XF and CF Euro 6 are designed for optimum transport efficiency, industry-leading low operating costs and excellent performance. The new LF Euro 6, developed for urban distribution, and the new CF Euro 6, developed for regional applications, include a new integrated chassis, fuel efficient PACCAR engines and an aerodynamic exterior design. The DAF Euro 6 model range represents the most comprehensive engineering design and development program in DAF's 85 year history.

DAF further strengthened its leadership in the areas of fuel efficiency and environmental stewardship with the launch of the new PACCAR MX-11 engine. This 10.8L engine is Euro 6 compliant and incorporates advanced common rail technology, a variable geometry turbo and double overhead cams to optimize powertrain efficiency to deliver excellent fuel efficiency combined with low kerb weight.

DAF registered 3,900 medium and heavy duty trucks in Russia in 2013, resulting in a 12.8% market share among the European truck brands. DAF invested in its Russian distribution network by appointing 16 new dealers. Total DAF deliveries outside the EU grew 13% compared to 2012, as DAF expanded its presence in global markets.



A $320 million DAF truck assembly facility was opened in Ponta Grossa, Brasil, in October 2013. The 300,000 square-foot facility on 569 acres is a high-technology, environmentally friendly plant that assembles the premium-quality DAF XF, CF and LF vehicles. The factory builds DAF trucks for Brasil and other South American markets. Brazilian DAF dealers have invested in a modern distribution network in the country to support the growing customer base.

DAF unveiled a new state-of-the-art 280,000 square-foot PACCAR Parts Distribution Center (PDC) in Eindhoven in March 2013. The PDC provides 20% additional capacity and enhanced operating efficiency to support DAF’s aftermarket growth.

The DAF XF105 ATE has been voted Fleet Truck of the Year at the prestigious Motor Transport Awards 2013 in London, which is DAF’s fifth win in the last six years.

The PACCAR Production System (PPS) enhanced DAF’s manufacturing efficiency and product quality, enabling a 12% increase in production output compared to last year. In 2013, DAF further expanded its extensive distribution network with 67 new dealer facilities. DAF sales and service locations were added in Western and Central Europe, Russia, South America and Asia.







Kenworth celebrated its 90th anniversary in 2013 and launched its new Kenworth T880 for the vocational industry. The T680 earned the prestigious American Truck Dealers Association’s (ATD) “2013 Heavy Duty Commercial Truck of the Year” award.

Kenworth, “The World’s Best,” celebrated its 90th anniversary in 2013 and has produced more than 960,000 trucks in its nine decade history. The new Kenworth T680 – the most aerodynamic heavy duty truck in its history – surpassed 8,800 customer deliveries in its first year of production. The T680’s innovative design is powered by the PACCAR MX-13 engine, which improves fuel efficiency by 8%,

saving customers over $4,000 per vehicle per year. The optimized PACCAR MX-13 engine has a horsepower range of 380 to 500 and delivers peak torque output of up to 1,850 lb-ft, enhancing performance, reliability, durability and operating efficiency. The T680 earned the Environmental Protection Agency’s (EPA) environmental certification, SmartWay \( ^{™} \) .

Kenworth launched a new, 52" mid-roof sleeper T680 for short haul distribution and regional delivery applications. A new chassis design and suspension package delivers weight savings of 800 pounds to maximize customer payload.

Kenworth unveiled the new T880 heavy duty vocational truck. The T880 features Kenworth's spacious 2.1 meter wide precision-stamped aluminum cab built with state-of-the-art robotic manufacturing. The T880 is standard with a 50% larger panoramic one-piece windshield for superior visibility. The new Driver Performance Center (DPC) has a full-color, high resolution 5" display screen which provides
real-time diagnostic data and driver feedback to achieve up to 5% annual fuel savings. Kenworth expanded its industry-leading range of natural gas vehicles by offering liquid and compressed natural gas (LNG and CNG) configurations up to 400 horsepower. Kenworth's natural gas powered vehicles reduce greenhouse gas emissions by up to 20%.



The versatility of the Kenworth medium duty truck range K270 and K370 expanded with disc brakes offering a 30% reduction in stopping distances and 100% longer operating life. All Kenworth medium duty vehicles are powered exclusively by the fuel-efficient PACCAR PX engine.

Kenworth’s “Right Choice” customer events enabled thousands of visitors to tour Kenworth’s technologically advanced production facilities in Chillicothe, Ohio, and Renton, Washington, and the PACCAR plant in Ste-Thérèse, Quebec. Visitors experienced interactive product displays featuring the entire range of new Kenworth vehicles, innovative technology and the PACCAR engine range.

The Kenworth dealer network expanded to a record 345 locations in the U.S. and Canada.







Peterbilt introduced many new truck models for vocational customers as well as new sleeper configurations in 2013, reinforcing its position as a leading global commercial vehicle manufacturer.

Peterbilt launched its new Model 567 into the vocational market and subsequently achieved a record 18.9% market share in the heavy duty vocational segment. The Model 567 has a 2.1 meter wide cab that provides a 22% larger interior designed to provide a comfortable and quiet environment to enhance driver productivity, complemented by ergonomic controls and gauges that deliver luxury automotive styling and quality. The Model 567, powered by the standard lightweight PACCAR MX-13 engine, delivers 8% better fuel efficiency.

Peterbilt expanded its Model 579 options in 2013 by introducing new sleeper configurations. A new 80" sleeper represents the largest sleeper in Peterbilt's history and is designed for customers desiring a combination of optimized work space, abundant storage and a comfortable driver rest

environment. In addition, a new 44" sleeper was introduced for regional applications.

Peterbilt introduced a new Model 579 in a 117" bumper-to-back-of-cab (BBC) configuration that provides a 13% improvement in curb-to-curb maneuverability and an 11%



improvement in visibility. The Peterbilt 579 (117") configuration is

optimized for the PACCAR MX-13 engine and is ideal in regional markets.

Peterbilt also introduced a new Model 320 low-cab forward for the urban refuse market in which Peterbilt achieved a record 23.6% market share in 2013. The Model 320 has a new interior and includes a new electronic driver information display.

Peterbilt continued to lead the market for alternative fuel vehicles by achieving a 33% market share of the natural-gas-powered commercial truck market. Peterbilt has been manufacturing over-the-road, regional and vocational trucks featuring liquefied natural gas (LNG) and compressed natural gas (CNG) fuel vehicles since 1996.

Peterbilt enhanced its Model 220 medium duty cabover with the addition of a “clear rail” chassis package that facilitates body installations and right-hand drive steering for street sweeper and road repair applications.

The Peterbilt Denton, Texas, facility has produced over 410,000 Peterbilt trucks since it opened in 1980. The Peterbilt dealer network expanded the number of distribution points to a record 285 locations in the U.S. and Canada.



PACCAR Australia has achieved 42 years of industry-leading performance and produced the 50,000th Australian-built Kenworth. It is the number one commercial vehicle manufacturer in one of the toughest operating environments in the world.

PACCAR Australia achieved a manufacturing milestone in 2013, with the Bayswater plant delivering its 50,000th Kenworth since the factory opened in 1971. DAF Trucks Australia achieved record results in 2013 with over 2,800 vehicles delivered to customers since DAF entered the market. PACCAR Australia’s heavy duty market share reached 24.5% in 2013.

PACCAR Australia was honored as a “Recommended Employer of Choice” by the 2013 Australian Business Awards. Kenworth launched the special edition T909 Director Series model to commemorate the 90th anniversary of Kenworth.

PACCAR Parts delivered record sales in 2013 and successfully launched the TRP brand of all-makes aftermarket parts in Australia. PACCAR Australia customers are supported by a Kenworth and DAF dealer network of 42 locations providing customers industry-leading parts and service support.





Kenworth trucks are designed and manufactured in Australia to perform in some of the most demanding applications found anywhere in the world. The Model K200 is a leader in the heavy duty truck market in Australia and is the class-leading choice for fleet owners who require maximum productivity and payloads.



PACCAR Mexico (KENMEX) achieved a 45.0% share in the Class 8 truck market in Mexico in 2013. KENMEX has manufactured over 220,000 vehicles since its founding in 1959.

KENMEX produces a broad range of Kenworth, DAF and Peterbilt Class 5-8 vehicles for the Mexican and export markets in its state-of-the-art 590,000 square-foot production facilities in Mexicali, Baja California.

KENMEX launched two new truck models in 2013, the Kenworth T680 and T880 models. The Kenworth T680 model is a 2.1 meter wide on-highway vehicle that delivers 8% better fuel efficiency with its PACCAR MX-13 engine. The Kenworth vocational T880 vehicle is designed for the rugged application of construction and on-/off-highway duty cycles.

This year KENMEX installed new assembly technology in the factory – including a sophisticated robotic manufacturing process for the cabs of the new T680 and T880 models. A 3,000 square-foot world-class training facility was developed to support the PACCAR MX-13 engine launch.

KENMEX sold 2,500 vehicles in the Andean region of South America and introduced the award-winning DAF XF truck. KENMEX’s 135 dealer locations in Mexico and the PACCAR Parts Distribution Center (PDC) in San Luis Potosí offer the most comprehensive customer service in Mexico. KENMEX has grown its South and Central American service network to 94 dealer locations.





The Kenworth T680 was launched in Mexico in 2013 and was the star of the ExpoTransporte Truck Show in Guadalajara. It has been lauded for its superior aerodynamic characteristics that deliver unequaled fuel economy. Drivers cite the greater visibility and comfort as the new standard in the industry.



Leyland, the United Kingdom’s leading truck manufacturer, celebrated its 15th anniversary as a PACCAR company. Leyland delivered over 15,000 DAF vehicles to customers in Europe, Asia, Australia, the Middle East, Russia and the Americas.

Leyland’s highly efficient 710,000 square-foot manufacturing facility features an innovative robotic chassis paint facility and a technologically advanced production system, which incorporates electronic work instructions (EWI) that deliver engineering designs and bills of material to employees by mobile computer screens. Leyland builds the full DAF product range – LF, CF and XF models – for right- and left-hand drive markets. Leyland produced its 50,000th DAF CF truck in 2013. The DAF XF105 was voted Fleet Truck of the Year at the prestigious Motor Transport Awards 2013 ceremony in the United Kingdom.

Leyland began production of the new DAF LF, CF and XF Euro 6 trucks in 2013. The DAF LF Euro 6 features a reconfigured chassis, aerodynamic exterior design and updated interior that provides an integrated family of 7.5 to 18.0 tonne vehicles.

The new DAF LF Euro 6 is offered with PACCAR designed factory-installed vehicle bodies. Leyland delivered its 4,000th DAF vehicle with a PACCAR body and increased body sales by 13% over 2012.



Leyland manufactures the entire DAF product range, including the agile, new Euro 6 LF series offering superb maneuverability, productivity and operating efficiency. The LF vehicle is the ideal distribution truck and is designed for the construction and vocational markets.



PACCAR sells DAF, Kenworth and Peterbilt trucks and parts to customers in 100 countries worldwide. In 2013, the company expanded its geographic diversification through significant investments in Brasil, Russia, India and China.

PACCAR completed construction and dedicated the 300,000 square-foot DAF truck assembly facility in Ponta Grossa, Brasil, with a grand opening in October 2013. The factory builds DAF trucks for Brasil and other South American markets. DAF Brasil dealers are constructing 20 new dealership facilities throughout Brasil to sell and service DAF vehicles. The Brasilian 6+ tonne truck market in 2013 was 149,000 units.

DAF and Kenworth registered 3,900 vehicles in Russia in 2013. DAF’s and Kenworth’s Russian distribution network expanded to 38 sales and service locations. DAF continued its growth in Taiwan, increasing deliveries of the DAF LF and CF by 12% in 2013. DAF is the largest European truck manufacturer in the Taiwan 16+ tonne segment.

The PACCAR Technical Center in Pune, India, enhanced its operations in 2013. The Technical Center accelerates new product and systems development by delivering industry-leading resources to PACCAR’s global engineering, information technology and purchasing organizations.









The DAF trucks manufactured in Brasil will be distributed to all countries in South America. With the opening of a DAF assembly facility in Morocco, PACCAR vehicles are assembled on six continents.



PACCAR Parts achieved record worldwide revenue in 2013 — delivering 1.3 million parts shipments to over 2,000 Kenworth, Peterbilt and DAF dealer locations.

PACCAR Parts benefitted from strengthening freight volumes and aging fleets – especially in North America and Europe. PACCAR Parts expanded its industry-leading Fleet Services Program offering guaranteed national pricing, centralized billing and diagnostic scheduling of maintenance to over 500 commercial vehicle fleets worldwide. PACCAR Parts’ successful aftermarket brand, TRP, which stocks parts for many truck, bus, and trailer makes, expanded to 110,000 part numbers. TRP rewards customers with the highest quality parts and cost-effective choices for vehicle repair and maintenance.

The Kenworth Privileges, Peterbilt Preferred and DAF MAX loyalty cards achieved 2.5 million customer redemptions in 2013. PACCAR Parts employs state-of-the-art technologies – integrated logistics systems and dealer inventory management tools – to support aftermarket customers.

PACCAR Parts expanded to 16 parts distribution centers (PDC) worldwide during 2013, opening a new 280,000 square-foot PDC in Eindhoven, the Netherlands, and doubling the size of the Lancaster, Pennsylvania, PDC to 120,000 square feet. PACCAR’s new PDC in Ponta Grossa, Brasil, was opened to support the launch of DAF trucks.



PACCAR Parts sells high quality parts and TRP aftermarket parts for all makes of trucks, trailers and buses. PACCAR Parts Distribution Centers use advanced inventory management technology to ensure customers have required parts on a timely basis.



PACCAR has designed diesel engines for 53 years and produced over 1.2 million engines. In 2013, PACCAR launched an updated PACCAR MX-13 engine that delivered improved performance, and the new PACCAR MX-11 engine was introduced in Europe.

PACCAR is one of the premier diesel engine manufacturers in the world, with over 800,000 square-feet of production facilities in Columbus, Mississippi, and Eindhoven, the Netherlands. PACCAR operates two world-class engine research and development centers with 42 sophisticated engine test cells.

The PACCAR MX-13 engine incorporates precision manufacturing, advanced design and premium materials to deliver best-in-class operating efficiency, performance and durability. In 2013, PACCAR engine innovations included high pressure common rail fuel injection to increase the MX-13's fuel economy. Performance ratings were expanded to include a best-in-class 500 hp at 1,850 lb-ft of torque. The PACCAR MX-13 was certified to the U.S. Environmental Protection Agency's (EPA) 2013 emissions regulations and Euro 6 standards, reinforcing PACCAR's legacy of environmental leadership.

PACCAR expanded its engine family in 2013 with the introduction of the new PACCAR MX-11 engine. The MX-11 is a 10.8 liter engine that offers optimum fuel efficiency and quiet operation. The MX-11 is available in DAF CF and XF Euro 6 trucks with power ratings from 290 to 440 hp.



PACCAR engine factories in Eindhoven, the Netherlands, and Columbus, Mississippi, represent technology leadership in commercial vehicle diesel engine production. PACCAR engines are standard in DAF, Kenworth and Peterbilt vehicles worldwide, where they have earned a reputation for superior reliability, durability and operating efficiency.



PACCAR Financial Services (PFS), which supports the sale of PACCAR trucks worldwide, achieved retail market share of 29.2% and earned record pre-tax profits of $340M in 2013.

The PFS portfolio is comprised of more than 161,000 trucks and trailers, with total assets of $11.63 billion. PACCAR’s excellent balance sheet, complemented by its A+/A1 credit rating, enabled PFS to issue $2.10 billion in two-, three-, and five-year medium term notes in 2013. Ongoing access to the capital markets at historic low interest rates allowed PFS to support the sale of Kenworth, Peterbilt and DAF trucks in 23 countries on four continents.

For over 50 years, PACCAR Financial Corporation (PFC) has facilitated the sale of premium Kenworth and Peterbilt trucks in North America. PFC finances 65.4% of dealer inventories and 22.0% of new Kenworth and Peterbilt Class 8 trucks sold or leased. PFC has enhanced its online services web-based portal with new applications to enable customers who want to make electronic payments and obtain real-time account information, payment history and monthly transaction summaries.

PACCAR Financial Europe (PFE) has $2.97 billion in assets and provides financial services to DAF dealers and customers in 17 European countries. PFE achieved 22.8% retail market share in 2013.

PFS sold more than 7,000 pre-owned PACCAR trucks worldwide in 2013.









PACCAR Financial facilitates the sale of premium-quality PACCAR trucks worldwide by offering a full range of financial products and by utilizing leading-edge web-based information technologies to streamline communication for dealers and customers.



PACCAR Leasing achieved a record profit contribution in 2013 and increased its worldwide network to over 600 full-service locations. The PacLease fleet totals 36,000 vehicles.

PacLease offers only premium-quality Kenworth, Peterbilt and DAF vehicles, which are valued for their reliability, superior fuel efficiency and residual values that are 15-25% higher than competitive models. In 2013, PacLease delivered 7,200 Kenworth, Peterbilt and DAF trucks to customers.

PacLease is a leader in introducing new technologies, such as advanced safety features, on-board telematics and alternative fueled vehicles.

PacLease placed its 5,000th PACCAR MX-13 powered truck into North American service during 2013. Kenworth and Peterbilt trucks with PACCAR MX-13 engines represented 66% of all PacLease orders due to the engine’s superior productivity, reliability and fuel efficiency.

PacLease Mexico operates a fleet of 7,000 trucks and trailers, adding a record 1,700 Kenworth trucks in 2013, ranking it as the largest full-service lease provider in Mexico. PacLease Europe operates a fleet of 3,700 trucks and trailers and contributed to DAF’s growth in the German market.



PacLease has one of the most innovative global truck leasing networks in the industry, providing customers with value-added transportation services and premium-quality Kenworth, Peterbilt and DAF vehicles.



PACCAR’s Technical Centers’ (PTC) world-class engineering, simulation and validation capabilities accelerate product development and ensure that PACCAR continues to deliver the highest-quality products in the industry.

PACCAR’s Technical Centers in Europe and North America are equipped with state-of-the-art product development and validation capabilities and staffed with experts in powertrain and vehicle development. The advanced engineering tools in the technical centers are utilized to innovate and accelerate the launch of new products. New 3-D prototype machines were introduced in 2013 to accelerate the design process from concept to production. Digitally controlled, proprietary hydraulic road simulators enhance product validation by replicating millions of road miles in weeks, instead of years. Sophisticated computer simulations and advanced analysis of engine and vehicle control systems operate on powerful supercomputers to optimize vehicle efficiency.

PACCAR’s Technical Centers partner with government agencies and academic institutions to evaluate future vehicle technologies. The technical centers leverage these partnerships to identify innovative designs that will further improve the industry-leading performance and fuel efficiency of Kenworth, Peterbilt and DAF trucks.



PACCAR Technical Centers in Europe and North America advance the quality and competitiveness of PACCAR products worldwide. Technical experts in powertrain and vehicle development employ state-of-the-art product test and validation capabilities to accelerate development cycles.



PACCAR’s Information Technology Division (ITD) is an industry leader in the application of software and hardware technologies. ITD enhances the quality of all PACCAR operations and electronically integrates dealers, suppliers and customers.

PACCAR has been recognized as a top 50 innovator in InformationWeek magazine’s 2013 Top 500 Companies highlighting leading innovators of cost-effective technologies. ITD achieved 2013 recognition for development of an integrated vehicle configuration and sales application for DAF trucks.

ITD’s 730 employees collaborate with PACCAR divisions by using technology to enhance manufacturing, financial services and engineering design. This year ITD partnered with Kenworth and Peterbilt to develop emission systems and databases for EPA greenhouse gas compliance. ITD also introduced tablet computers in PACCAR’s sales and marketing teams to enhance customer proposals and presentations.

ITD collaborated with PACCAR India Technical Center in Pune, India, to develop financial and operational software utilized in DAF’s new Brasil factory. ITD also enhanced PACCAR’s information technology infrastructure to support growth by upgrading mainframe capacity, enhancing PACCAR’s Global Wide Area Network and replacing 5,600 PCs worldwide.



One of the most innovative information technology organizations in the world, PACCAR ITD partners with leading-edge hardware and software companies to enhance PACCAR's competitiveness, manufacturing efficiency, product quality, customer service and profitability.




Total Western and Central Europe
16+ T Units

PACCAR Market Share (percent)



Total U.S. and Canada Class 8 Units

PACCAR Market Share (percent)



Truck, Parts and Other

Financial Services



United States

Rest of World



The following line graph compares the yearly percentage change in the cumulative total stockholder return on the Company’s common stock, to the cumulative total return of the Standard & Poor’s Composite 500 Stock Index and the return of an industry peer group of companies (the Peer Group Index) for the last five fiscal years ended December 31, 2013. Standard & Poor’s has calculated a return for each company in the Peer Group Index weighted according to its respective capitalization at the beginning of each period with dividends reinvested on a monthly basis. Management believes that the identified companies and methodology used in the graph for the Peer Group Index provides a better comparison than other indices available. The Peer Group Index consists of AGCO Corporation, Caterpillar Inc., Cummins Inc., Dana Holding Corporation, Deere & Company, Eaton Corporation, Meritor Inc., Navistar International Corp., Oshkosh Corporation, Scania AB and AB Volvo. The comparison assumes that $100 was invested on December 31, 2008 in the Company’s common stock and in the stated indices and assumes reinvestment of dividends.



<table><tr><td></td><td>2008</td><td>2009</td><td>2010</td><td>2011</td><td>2012</td><td>2013</td></tr><tr><td>PACCAR Inc</td><td>100</td><td>129.13</td><td>207.10</td><td>139.81</td><td>174.92</td><td>235.96</td></tr><tr><td>S&amp;P 500 Index</td><td>100</td><td>126.46</td><td>145.51</td><td>148.59</td><td>172.37</td><td>228.19</td></tr><tr><td>Peer Group Index</td><td>100</td><td>147.56</td><td>258.76</td><td>219.07</td><td>252.36</td><td>289.67</td></tr></table>



## OVERVIEW:

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

Consolidated net sales and revenues of $17.12 billion in 2013 were the highest in the Company’s history. The increase from $17.05 billion in 2012 was mainly due to record aftermarket parts sales and higher financial services revenue. Improving fleet utilization and the age of the North American truck fleet are contributing to excellent parts and service business. Truck unit sales decreased in 2013 to 137,100 units from 140,400 units in 2012, reflecting lower industry retail sales in North America, partially offset by a larger over 16-tonne market and record DAF market share in Europe.

In 2013, PACCAR earned net income for the 75th consecutive year. Net income in 2013 of $1.17 billion was the third highest in the Company’s history, increasing from $1.11 billion ($3.12 per diluted share) in 2012, primarily due to record Parts segment sales, improved Truck segment operating margin and record Financial Services segment pre-tax income. Earnings per diluted share of $3.30 was the second best in the Company’s history.

PACCAR completed construction of its new 300,000 square-foot DAF assembly facility in Ponta Grossa, Brasil in October 2013. Brasil is a major truck market with industry sales above six tonnes in 2013 of 149,000 units. During the fourth quarter of 2013, DAF began truck production in Brasil. During 2014, DAF plans to steadily increase truck production. The independent DAF dealer service network in Brasil consisted of 20 locations in 2013 and is expected to expand to 40 locations in 2014. It is estimated that Brasil industry truck sales in the above six tonnes segment will be 150,000 units in 2014.

PACCAR launched a new range of vocational trucks in 2013: the Kenworth T880, the Peterbilt Model 567 and the DAF CF and LF Euro 6 models. PACCAR expanded its family of engines with the introduction of higher horsepower ratings for the PACCAR MX-13 engine and the new PACCAR MX-11 engine. In 2013, the Company’s research and development expenses were $251.4 million compared to $279.3 million in 2012.

During 2013, PACCAR completed construction of a new 280,000 square-foot parts distribution center (PDC) in Eindhoven, the Netherlands, established a PDC in Ponta Grossa, Brasil, and doubled the warehouse space in the Lancaster, Pennsylvania PDC. The Company has 16 PDCs strategically located to support customers in North America, Europe, Australia and South America.

The PACCAR Financial Services (PFS) group of companies has operations covering four continents and 23 countries. The global breadth of PFS and its rigorous credit application process support a portfolio of loans and leases with total assets of $11.63 billion that earned a record pre-tax profit of $340.2 million. PFS issued $2.10 billion in medium-term notes during the year to support portfolio growth.

## Truck and Parts Outlook

Truck industry retail sales in the U.S. and Canada in 2014 are expected to be 210,000–240,000 units compared to 212,200 units in 2013 driven primarily by ongoing fleet replacement and some expansion of industry fleet capacity reflecting modest overall economic growth. In Europe, the 2014 truck industry registrations for over 16-tonne vehicles are expected to be 200,000–230,000 units, compared to the 240,800 trucks in 2013. Some customers accelerated purchases of Euro 5 vehicles in 2013 ahead of the introduction of the Euro 6 emission requirement in 2014.

In 2014, Parts industry aftermarket sales are expected to grow 3-7%, reflecting modest economic growth in the U.S. and Canada and Europe.



Capital investments in 2014 are expected to be $350 to $400 million, focused on enhanced powertrain development and increased operating efficiency for the assembly facilities. Research and development (R&D) in 2014 is expected to be $225 to $275 million, focused on new products and services.

## Financial Services Outlook

Average earning assets in 2014 are expected to grow approximately 5% reflecting record Financial Services asset levels at the start of the year. Current levels of freight tonnage, freight rates and fleet utilization are contributing to customers' profitability and cash flow. If current freight transportation conditions decline due to weaker economic conditions, past due accounts, truck repossessions and credit losses would likely increase from the current low levels.

See the Forward-Looking Statements section of Management’s Discussion and Analysis for factors that may affect these outlooks.

## RESULTS OF OPERATIONS:

<table><tr><td colspan="4">($ in millions, except per share amounts)</td></tr><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net sales and revenues:</td><td></td><td></td><td></td></tr><tr><td>Truck</td><td>$13,002.9</td><td>$13,131.5</td><td>$12,630.7</td></tr><tr><td>Parts</td><td>2,822.2</td><td>2,667.5</td><td>2,577.0</td></tr><tr><td>Other</td><td>123.8</td><td>152.7</td><td>118.2</td></tr><tr><td>Truck, Parts and Other</td><td>15,948.9</td><td>15,951.7</td><td>15,325.9</td></tr><tr><td>Financial Services</td><td>1,174.9</td><td>1,098.8</td><td>1,029.3</td></tr><tr><td></td><td>$17,123.8</td><td>$17,050.5</td><td>$16,355.2</td></tr><tr><td>Income (loss) before income taxes:</td><td></td><td></td><td></td></tr><tr><td>Truck</td><td>$936.7</td><td>$920.4</td><td>$864.7</td></tr><tr><td>Parts</td><td>416.0</td><td>374.6</td><td>394.1</td></tr><tr><td>Other</td><td>(26.5)</td><td>(7.0)</td><td>(26.5)</td></tr><tr><td>Truck, Parts and Other</td><td>1,326.2</td><td>1,288.0</td><td>1,232.3</td></tr><tr><td>Financial Services</td><td>340.2</td><td>307.8</td><td>236.4</td></tr><tr><td>Investment income</td><td>28.6</td><td>33.1</td><td>38.2</td></tr><tr><td>Income taxes</td><td>(523.7)</td><td>(517.3)</td><td>(464.6)</td></tr><tr><td>Net Income</td><td>$1,171.3</td><td>$1,111.6</td><td>$1,042.3</td></tr><tr><td>Diluted earnings Per Share</td><td>$3.30</td><td>$3.12</td><td>$2.86</td></tr><tr><td>Return on revenues</td><td>6.8%</td><td>6.5%</td><td>6.4%</td></tr></table>

The following provides an analysis of the results of operations for the Company’s three reportable segments – Truck, Parts and Financial Services. Where possible, the Company has quantified the 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.



## Truck

The Company’s Truck segment accounted for 76% and 77% of total revenues for 2013 and 2012, respectively.

<table><tr><td>(\( in millions)</td><td></td><td></td><td></td></tr><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>% CHANGE</td></tr><tr><td>Truck net sales and revenues:</td><td></td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>$ 7,138.1</td><td>$ 7,467.8</td><td>(4)</td></tr><tr><td>Europe</td><td>3,844.4</td><td>3,217.1</td><td>19</td></tr><tr><td>Mexico, South America, Australia and other</td><td>2,020.4</td><td>2,446.6</td><td>(17)</td></tr><tr><td></td><td>$13,002.9</td><td>$13,131.5</td><td>(1)</td></tr><tr><td>Truck income before income taxes</td><td>$ 936.7</td><td>$ 920.4</td><td>2</td></tr><tr><td>Pre-tax return on revenues</td><td>7.2%</td><td>7.0%</td><td></td></tr></table>

The Company’s worldwide truck net sales and revenues decreased due to lower market demand in the U.S. and Canada ($329.7 million), South America ($342.3 million) and Australia ($94.8 million), partially offset by higher market demand in Europe ($627.3 million). Truck segment income before income taxes and pre-tax return on revenues reflects improved price realization, primarily in Europe, and lower R&D and selling, general and administrative (SG&A) expenses, partially offset by lower truck unit deliveries.

The Company’s new truck deliveries are summarized below:

<table><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>% CHANGE</td></tr><tr><td>U.S.</td><td>59,000</td><td>62,200</td><td>(5)</td></tr><tr><td>Canada</td><td>9,700</td><td>10,900</td><td>(11)</td></tr><tr><td>U.S. and Canada</td><td>68,700</td><td>73,100</td><td>(6)</td></tr><tr><td>Europe</td><td>48,400</td><td>43,500</td><td>11</td></tr><tr><td>Mexico, South America, Australia and other</td><td>20,000</td><td>23,800</td><td>(16)</td></tr><tr><td>Total units</td><td>137,100</td><td>140,400</td><td>(2)</td></tr></table>

In 2013, industry retail sales in the heavy-duty market in the U.S. and Canada decreased to 212,200 units compared to 224,900 units in 2012. The Company’s heavy-duty truck retail market share was 28.0% compared to 28.9% in 2012. The medium-duty market was 65,900 units in 2013 compared to 64,600 units in 2012. The Company’s medium-duty market share was 15.7% in 2013 compared to 15.4% in 2012.

The over 16-tonne truck market in Western and Central Europe in 2013 was 240,800 units, an 8% increase from 222,000 units in 2012 reflecting a pre-buy of Euro 5 trucks by some customers ahead of Euro 6 emissions regulations effective in 2014. The Company’s market share was a record 16.2% in 2013, an increase from 16.0% in 2012. The 6- to 16-tonne market in 2013 was 57,000 units compared to 55,500 units in 2012. The Company’s market share was a record 11.8% in 2013, an increase from 11.4% in 2012.

Sales in Mexico, South America, Australia and other markets decreased in 2013 primarily due to fewer new truck deliveries in Colombia.



The major factors for the change in net sales and revenues, cost of sales and revenues and gross margin between 2013 and 2012 for the Truck segment are as follows:

<table><tr><td>($ in millions)</td><td>NET SALES</td><td>COST OF SALES</td><td>GROSS MARGIN</td></tr><tr><td>2012</td><td>$13,131.5</td><td>$11,794.0</td><td>$1,337.5</td></tr><tr><td>Increase (decrease)</td><td></td><td></td><td></td></tr><tr><td>Truck delivery volume</td><td>(399.7)</td><td>(324.5)</td><td>(75.2)</td></tr><tr><td>Average truck sales prices</td><td>57.6</td><td></td><td>57.6</td></tr><tr><td>Average per truck material, labor and other direct costs</td><td></td><td>2.2</td><td>(2.2)</td></tr><tr><td>Factory overhead and other indirect costs</td><td></td><td>20.6</td><td>(20.6)</td></tr><tr><td>Operating lease revenues and depreciation expense</td><td>149.0</td><td>142.4</td><td>6.6</td></tr><tr><td>Currency translation</td><td>64.5</td><td>57.2</td><td>7.3</td></tr><tr><td>Total decrease</td><td>(128.6)</td><td>(102.1)</td><td>(26.5)</td></tr><tr><td>2013</td><td>$13,002.9</td><td>$11,691.9</td><td>$1,311.0</td></tr></table>

- Truck delivery volume reflects lower truck deliveries in all markets except Europe. Higher deliveries in Europe reflect purchases of Euro 5 vehicles ahead of the Euro 6 emission requirement in 2014.

- Average truck sales prices increased sales by $57.6 million, reflecting increased price realization from higher market demand in Europe.

• Factory overhead and other indirect costs increased $20.6 million, primarily due to higher depreciation expense.

• Operating lease income and depreciation expense increased due to a higher volume of operating leases in Europe.

- Truck gross margins in 2013 of 10.1% decreased slightly from 10.2% in 2012 primarily from lower truck volume as noted above.

Truck SG&A was $214.1 million in 2013 compared to $231.0 million in 2012. The lower spending in 2013 was primarily due to lower sales and marketing expense of $5.9 million and ongoing cost controls. As a percentage of sales, SG&A decreased to 1.6% in 2013 compared to 1.8% in 2012.

## Parts

The Company’s Parts segment accounted for 16% of total revenues for both 2013 and 2012.

<table><tr><td>($ in millions)</td><td></td><td></td><td></td></tr><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>% CHANGE</td></tr><tr><td>Parts net sales and revenues:</td><td></td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>$ 1,635.5</td><td>$ 1,529.1</td><td>7</td></tr><tr><td>Europe</td><td>828.3</td><td>786.7</td><td>5</td></tr><tr><td>Mexico, South America, Australia and other</td><td>358.4</td><td>351.7</td><td>2</td></tr><tr><td></td><td>$ 2,822.2</td><td>$ 2,667.5</td><td>6</td></tr><tr><td>Parts income before income taxes</td><td>$ 416.0</td><td>$ 374.6</td><td>11</td></tr><tr><td>Pre-tax return on revenues</td><td>14.7%</td><td>14.0%</td><td></td></tr></table>

The Company’s worldwide parts net sales and revenues increased due to higher aftermarket demand worldwide. The increase in Parts segment income before taxes and pre-tax return on revenues was primarily due to higher sales, gross margins and cost controls.



The major factors for the change in net sales and revenues, cost of sales and revenues and gross margin between 2013 and 2012 for the Parts segment are as follows:

<table><tr><td>($ in millions)</td><td>NET SALES</td><td>COST OF SALES</td><td>GROSS MARGIN</td></tr><tr><td>2012</td><td>$2,667.5</td><td>$1,995.0</td><td>$672.5</td></tr><tr><td>Increase (decrease)</td><td></td><td></td><td></td></tr><tr><td>Aftermarket parts volume</td><td>103.6</td><td>67.4</td><td>36.2</td></tr><tr><td>Average aftermarket parts sales prices</td><td>38.3</td><td></td><td>38.3</td></tr><tr><td>Average aftermarket parts direct costs</td><td></td><td>29.6</td><td>(29.6)</td></tr><tr><td>Warehouse and other indirect costs</td><td></td><td>6.5</td><td>(6.5)</td></tr><tr><td>Currency translation</td><td>12.8</td><td>8.5</td><td>4.3</td></tr><tr><td>Total increase</td><td>154.7</td><td>112.0</td><td>42.7</td></tr><tr><td>2013</td><td>$2,822.2</td><td>$2,107.0</td><td>$715.2</td></tr></table>

- Higher market demand in all markets resulted in increased aftermarket parts sales volume of $103.6 million and related cost of sales by $67.4 million.

• Average aftermarket parts sales prices increased sales by $38.3 million reflecting improved price realization.

• Average aftermarket parts direct costs increased $29.6 million due to higher material costs.

• Warehouse and other indirect costs increased $6.5 million primarily due to higher costs from warehouse capacity expansion to support sales volume.

• Parts gross margins in 2013 of 25.3% increased slightly from 25.2% in 2012 due to the factors noted above.

Parts SG&A decreased slightly to $204.1 million in 2013 from $206.0 million in 2012 due to lower sales and marketing expenses. As a percentage of sales, Parts SG&A decreased to 7.2% in 2013 from 7.7% in 2012, due to cost controls and higher sales volume.



## Financial Services

The Company’s Financial Services segment accounted for 6.9% and 6.4% of total revenues for 2013 and 2012, respectively.

<table><tr><td>(\( in millions)</td><td></td><td></td><td></td></tr><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>% CHANGE</td></tr><tr><td>New loan and lease volume:</td><td></td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>$ 2,617.4</td><td>$2,913.1</td><td>(10)</td></tr><tr><td>Europe</td><td>838.3</td><td>888.2</td><td>(6)</td></tr><tr><td>Mexico and Australia</td><td>862.9</td><td>820.9</td><td>5</td></tr><tr><td></td><td>$ 4,318.6</td><td>$4,622.2</td><td>(7)</td></tr><tr><td>New loan and lease volume by product:</td><td></td><td></td><td></td></tr><tr><td>Loans and finance leases</td><td>$ 3,368.1</td><td>$3,660.7</td><td>(8)</td></tr><tr><td>Equipment on operating lease</td><td>950.5</td><td>961.5</td><td>(1)</td></tr><tr><td></td><td>$ 4,318.6</td><td>$4,622.2</td><td>(7)</td></tr><tr><td>New loan and lease unit volume:</td><td></td><td></td><td></td></tr><tr><td>Loans and finance leases</td><td>32,200</td><td>36,100</td><td>(11)</td></tr><tr><td>Equipment on operating lease</td><td>9,000</td><td>9,400</td><td>(4)</td></tr><tr><td></td><td>41,200</td><td>45,500</td><td>(9)</td></tr><tr><td>Average earning assets:</td><td></td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>$ 6,331.9</td><td>$5,894.6</td><td>7</td></tr><tr><td>Europe</td><td>2,495.9</td><td>2,285.1</td><td>9</td></tr><tr><td>Mexico and Australia</td><td>1,770.1</td><td>1,556.0</td><td>14</td></tr><tr><td></td><td>$10,597.9</td><td>$9,735.7</td><td>9</td></tr><tr><td>Average earning assets by product:</td><td></td><td></td><td></td></tr><tr><td>Loans and finance leases</td><td>$ 6,876.3</td><td>$6,213.2</td><td>11</td></tr><tr><td>Dealer wholesale financing</td><td>1,490.9</td><td>1,574.7</td><td>(5)</td></tr><tr><td>Equipment on lease and other</td><td>2,230.7</td><td>1,947.8</td><td>15</td></tr><tr><td></td><td>$10,597.9</td><td>$9,735.7</td><td>9</td></tr><tr><td>Revenues:</td><td></td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>$ 626.6</td><td>$ 592.8</td><td>6</td></tr><tr><td>Europe</td><td>303.5</td><td>283.5</td><td>7</td></tr><tr><td>Mexico and Australia</td><td>244.8</td><td>222.5</td><td>10</td></tr><tr><td></td><td>$ 1,174.9</td><td>$1,098.8</td><td>7</td></tr><tr><td>Revenue by product:</td><td></td><td></td><td></td></tr><tr><td>Loans and finance leases</td><td>$ 407.7</td><td>$ 392.2</td><td>4</td></tr><tr><td>Dealer wholesale financing</td><td>55.1</td><td>61.5</td><td>(10)</td></tr><tr><td>Equipment on lease and other</td><td>712.1</td><td>645.1</td><td>10</td></tr><tr><td></td><td>$ 1,174.9</td><td>$1,098.8</td><td>7</td></tr><tr><td>Income before income taxes</td><td>$ 340.2</td><td>$ 307.8</td><td>11</td></tr></table>

In 2013, new loan and lease volume decreased 7% to $4.32 billion from $4.62 billion in 2012. The lower volume in 2013 primarily reflects lower market shares. PFS's finance market share on new PACCAR truck sales was 29.2% in 2013 compared to 30.6% in the prior year primarily due to lower market share in the U.S. and Canada and Europe.

The increase in PFS revenue to $1.17 billion in 2013 from $1.10 billion in 2012 primarily resulted from higher average earning asset balances, partially offset by lower yields. PFS income before income taxes increased to a record $340.2 million compared to $307.8 million in 2012 primarily due to higher finance and lease margins and a lower provision for losses on receivables.



The major factors for the change in interest and fees, interest and other borrowing expenses and finance margin for the year ended December 31, 2013 are outlined below:

<table><tr><td>($ in millions)</td><td>INTEREST AND FEES</td><td>INTEREST AND OTHER BORROWING EXPENSES</td><td>FINANCE MARGIN</td></tr><tr><td>2012</td><td>$453.7</td><td>$158.4</td><td>$295.3</td></tr><tr><td>Increase (decrease)</td><td></td><td></td><td></td></tr><tr><td>Average finance receivables</td><td>33.5</td><td></td><td>33.5</td></tr><tr><td>Average debt balances</td><td></td><td>13.1</td><td>(13.1)</td></tr><tr><td>Yields</td><td>(20.5)</td><td></td><td>(20.5)</td></tr><tr><td>Borrowing rates</td><td></td><td>(15.7)</td><td>15.7</td></tr><tr><td>Currency translation</td><td>(3.9)</td><td>.1</td><td>(4.0)</td></tr><tr><td>Total increase (decrease)</td><td>9.1</td><td>(2.5)</td><td>11.6</td></tr><tr><td>2013</td><td>$462.8</td><td>$155.9</td><td>$306.9</td></tr></table>

- Average finance receivables increased $590.5 million (net of foreign exchange effects) in 2013 from retail portfolio new business volume exceeding repayments, partially offset by a decrease in dealer wholesale financing, primarily in the U.S. and Canada.

- Average debt balances increased $671.5 million in 2013 and included increased medium-term note funding. The higher average debt balances reflect funding for a higher average earning asset portfolio, including loans, finance leases and equipment on operating leases.

- Lower market rates resulted in lower portfolio yields (5.6% in 2013 and 5.8% in 2012) and lower borrowing rates (2.0% in 2013 and 2.2% in 2012).

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

<table><tr><td>(\( in millions)</td><td></td><td></td></tr><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Operating lease revenues</td><td>$663.0</td><td>$585.9</td></tr><tr><td>Used truck sales and other</td><td>49.1</td><td>59.2</td></tr><tr><td>Operating lease, rental and other revenues</td><td>$712.1</td><td>$645.1</td></tr><tr><td>Depreciation of operating lease equipment</td><td>$435.4</td><td>$369.9</td></tr><tr><td>Vehicle operating expenses</td><td>98.1</td><td>97.0</td></tr><tr><td>Cost of used truck sales and other</td><td>38.2</td><td>50.5</td></tr><tr><td>Depreciation and other expense</td><td>$571.7</td><td>$517.4</td></tr></table>



The major factors for the change in operating lease, rental and other revenues, depreciation and other expense and related lease margin for the year ended December 31, 2013 are outlined below:

<table><tr><td>($ in millions)</td><td>OPERATING LEASE, RENTAL AND OTHER REVENUES</td><td>DEPRECIATION AND OTHER EXPENSE</td><td>LEASE MARGIN</td></tr><tr><td>2012</td><td>$645.1</td><td>$517.4</td><td>$127.7</td></tr><tr><td>Increase (decrease)</td><td></td><td></td><td></td></tr><tr><td>Operating lease impairments</td><td></td><td>(.1)</td><td>.1</td></tr><tr><td>Used truck sales and other</td><td>(10.1)</td><td>(12.2)</td><td>2.1</td></tr><tr><td>Results on returned lease assets</td><td></td><td>3.0</td><td>(3.0)</td></tr><tr><td>Average operating lease assets</td><td>55.3</td><td>43.6</td><td>11.7</td></tr><tr><td>Revenue and cost per asset</td><td>17.5</td><td>16.0</td><td>1.5</td></tr><tr><td>Currency translation</td><td>4.3</td><td>4.0</td><td>.3</td></tr><tr><td>Total increase</td><td>67.0</td><td>54.3</td><td>12.7</td></tr><tr><td>2013</td><td>$712.1</td><td>$571.7</td><td>$140.4</td></tr></table>

- Used truck sales and other revenues decreased operating lease, rental and other revenues by $10.1 million and decreased depreciation and other expense by $12.2 million, reflecting a lower number of used truck units sold.

• Average operating lease assets increased $282.9 million in 2013, which increased revenues by $55.3 million and related depreciation and other expense by $43.6 million, as a result of a higher demand for leased vehicles.

• Revenue and cost per asset increased $17.5 million and $16.0 million, respectively, reflecting the higher demand for leased vehicles and the related costs for higher fleet utilization.

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

<table><tr><td rowspan="2">(\( in millions)</td><td colspan="3">2013</td><td colspan="2">2012</td></tr><tr><td>PROVISION FOR LOSSES ON RECEIVABLES</td><td>NET CHARGE-OFFS</td><td>PROVISION FOR LOSSES ON RECEIVABLES</td><td>NET CHARGE- OFF</td><td>NET CHARGE-OFFS</td></tr><tr><td>U.S. and Canada</td><td>$ 1.9</td><td>$ .5</td><td>$ 4.6</td><td>$ 15.2</td><td></td></tr><tr><td>Europe</td><td>7.4</td><td>11.0</td><td>9.9</td><td>9.2</td><td></td></tr><tr><td>Mexico and Australia</td><td>3.6</td><td>2.1</td><td>5.5</td><td>6.9</td><td></td></tr><tr><td></td><td>$12.9</td><td>$ 13.6</td><td>$ 20.0</td><td>$ 31.3</td><td></td></tr></table>

The provision for losses on receivables was $12.9 million in 2013, a decrease of $7.1 million compared to 2012, due to lower provisions in all markets reflecting improved portfolio performance.

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 customer 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 post-modification balances of accounts modified during the year ended December 31, 2013 and 2012 are summarized below:

<table><tr><td rowspan="2">(\( in millions)</td><td colspan="2">2013</td><td colspan="2">2012</td></tr><tr><td>RECORDED INVESTMENT</td><td>% OF TOTAL PORTFOLIO*</td><td>RECORDED INVESTMENT</td><td>% OF TOTAL PORTFOLIO*</td></tr><tr><td>Commercial</td><td>$233.0</td><td>3.2%</td><td>$211.6</td><td>3.1%</td></tr><tr><td>Insignificant delay</td><td>110.1</td><td>1.6%</td><td>57.1</td><td>.9%</td></tr><tr><td>Credit - no concession</td><td>24.2</td><td>.3%</td><td>41.0</td><td>.6%</td></tr><tr><td>Credit - TDR</td><td>13.6</td><td>.2%</td><td>56.9</td><td>.8%</td></tr><tr><td></td><td>$380.9</td><td>5.3%</td><td>$366.6</td><td>5.4%</td></tr></table>

* Recorded investment immediately after modification as a percentage of ending retail portfolio.

In 2013, total modification activity increased slightly compared to 2012 due to higher modifications for commercial reasons and insignificant delays, partially offset by lower credit modifications. The increase in commercial modifications primarily reflects higher levels of additional equipment financed and end-of-contract modifications. The higher modifications for insignificant delays were mainly due to granting two customers in Australia extensions due to business disruptions arising from flooding and granting one large fleet customer in the U.S. a one-month extension.

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

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Percentage of retail loan and lease accounts 30+ days past due:</td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>.3%</td><td>.3%</td></tr><tr><td>Europe</td><td>.7%</td><td>1.0%</td></tr><tr><td>Mexico and Australia</td><td>1.4%</td><td>1.5%</td></tr><tr><td>Worldwide</td><td>.5%</td><td>.6%</td></tr></table>

Worldwide PFS accounts 30+ days past due were .5% at December 31, 2013 and have decreased .1% from December 31, 2012. The Company continues to focus on maintaining low past due balances.

When the Company modifies a 30+ days past due account, the customer is then generally considered current under the revised contractual terms. The Company modified $4.9 million of accounts worldwide during the fourth quarter of 2013 and $11.5 million during the fourth quarter of 2012 that were 30+ days past due and became current at the time of modification. Had these accounts not been modified and continued to not make payments, the pro forma percentage of retail loan and lease accounts 30+ days past due would have been as follows:

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Pro forma percentage of retail loan and lease accounts 30+ days past due:</td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>.3%</td><td>.4%</td></tr><tr><td>Europe</td><td>.8%</td><td>1.3%</td></tr><tr><td>Mexico and Australia</td><td>1.7%</td><td>1.9%</td></tr><tr><td>Worldwide</td><td>.6%</td><td>.8%</td></tr></table>

Modifications of accounts in prior quarters that were more than 30 days past due at the time of modification are included in past dues if they were not performing under the modified terms at December 31, 2013 and 2012. The effect on the allowance for credit losses from such modifications was not significant at December 31, 2013 and 2012.

The Company’s 2013 and 2012 pre-tax return on average earning assets for Financial Services was 3.2%.



## Other

Other includes the winch business as well as sales, income and expenses not attributable to a reportable segment, including a portion of corporate expense. Other sales represent approximately 1.0% of consolidated net sales and revenues for 2013 and 2012. Other SG&A was $47.1 million in 2013 and $39.4 million in 2012 as higher salaries and related expenses of $6.2 million and charitable contributions of $3.0 million were partially offset by lower professional fees of $1.6 million. Other income (loss) before tax was a loss of $26.5 million in 2013 compared to a loss of $7.0 million in 2012. The higher loss in 2013 was primarily due to lower income before tax from the winch business.

Investment income was $28.6 million in 2013 compared to $33.1 million in 2012. The lower investment income in 2013 primarily reflects lower yields on investments from lower market interest rates.

The 2013 effective income tax rate of 30.9% decreased from 31.8% in 2012. The decrease in the effective tax rate was primarily due to a higher proportion of income generated in lower taxed jurisdictions.

<table><tr><td>(\( in millions)</td><td></td><td></td></tr><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Domestic income before taxes</td><td>$ 827.0</td><td>$ 786.6</td></tr><tr><td>Foreign income before taxes</td><td>868.0</td><td>842.3</td></tr><tr><td>Total income before taxes</td><td>$1,695.0</td><td>$1,628.9</td></tr><tr><td>Domestic pre-tax return on revenues</td><td>10.2%</td><td>9.6%</td></tr><tr><td>Foreign pre-tax return on revenues</td><td>9.7%</td><td>9.6%</td></tr><tr><td>Total pre-tax return on revenues</td><td>9.9%</td><td>9.6%</td></tr></table>

The higher income before income taxes and return on revenues for domestic operations were primarily due to higher revenues and margins from parts and financial services operations, partially offset by lower revenues and margins from the Truck segment. The higher income before income taxes and return on revenues for foreign operations were primarily due to higher revenues and margins from parts operations, partially offset by lower revenues and margins from all foreign truck markets, except Europe.

## 2012 Compared to 2011:

## Truck

The Company’s Truck segment accounted for 77% of total revenues for both 2012 and 2011.

<table><tr><td>(\( in millions)</td><td></td><td></td><td></td></tr><tr><td>Year Ended December 31,</td><td>2012</td><td>2011</td><td>% CHANGE</td></tr><tr><td>Truck net sales and revenues:</td><td></td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>$ 7,467.8</td><td>$ 6,776.4</td><td>10</td></tr><tr><td>Europe</td><td>3,217.1</td><td>3,914.6</td><td>(18)</td></tr><tr><td>Mexico, South America, Australia and other</td><td>2,446.6</td><td>1,939.7</td><td>26</td></tr><tr><td></td><td>$13,131.5</td><td>$12,630.7</td><td>4</td></tr><tr><td>Truck income before income taxes</td><td>$ 920.4</td><td>$ 864.7</td><td>6</td></tr><tr><td>Pre-tax return on revenues</td><td>7.0%</td><td>6.8%</td><td></td></tr></table>

The Company’s worldwide truck net sales and revenues increased due to higher market demand in all markets except Europe, which experienced difficult economic conditions during 2012. The increase in Truck segment income before income taxes and pre-tax return on revenues for 2012 primarily reflects the higher truck unit sales and lower R&D expenses.



The Company’s new truck deliveries are summarized below:

<table><tr><td>Year Ended December 31,</td><td>2012</td><td>2011</td><td>% CHANGE</td></tr><tr><td>U.S.</td><td>62,200</td><td>58,900</td><td>6</td></tr><tr><td>Canada</td><td>10,900</td><td>10,500</td><td>4</td></tr><tr><td>U.S. and Canada</td><td>73,100</td><td>69,400</td><td>5</td></tr><tr><td>Europe</td><td>43,500</td><td>48,700</td><td>(11)</td></tr><tr><td>Mexico, South America, Australia and other</td><td>23,800</td><td>19,900</td><td>20</td></tr><tr><td>Total units</td><td>140,400</td><td>138,000</td><td>2</td></tr></table>

In 2012, industry retail sales in the heavy-duty market in the U.S. and Canada increased to 224,900 units compared to 197,000 units in 2011. The Company’s heavy-duty retail truck market share increased to a record 28.9% from 28.1% in 2011, reflecting overall strong demand for the Company’s premium products. The medium-duty market was 64,600 units in 2012 compared to 61,000 units in 2011. The Company’s medium-duty market share was 15.4% in 2012 compared to 12.4% in 2011.

The over 16-tonne truck market in Western and Central Europe in 2012 was 222,000 units, a 8.5% decline from 242,500 units in 2011 reflecting economic weakness in the Eurozone. The Company’s market share was a record 16.0% in 2012, an increase from 15.5% in 2011. The 6- to 16-tonne market in 2012 was 55,500 units compared to 61,100 units in 2011. The Company’s market share was 11.4% in 2012, an increase from 9.0% in 2011.

Sales and revenues in Mexico, South America, Australia and other markets increased in 2012 primarily due to higher new truck deliveries in Mexico and Australia from increased market demand and higher market share.

The major factors for the change in net sales and revenues, cost of sales and revenues and gross margin between 2012 and 2011 for the Truck segment are as follows:

<table><tr><td>($ in millions)</td><td>NET SALES</td><td>COST OF SALES</td><td>GROSS MARGIN</td></tr><tr><td>2011</td><td>12,630.7</td><td>11,323.8</td><td>1,306.9</td></tr><tr><td>Increase (decrease)</td><td></td><td></td><td></td></tr><tr><td>Truck delivery volume</td><td>428.0</td><td>406.5</td><td>21.5</td></tr><tr><td>Average truck sales prices</td><td>326.0</td><td></td><td>326.0</td></tr><tr><td>Average per truck material, labor and other direct costs</td><td></td><td>254.4</td><td>(254.4)</td></tr><tr><td>Factory overhead and other indirect costs</td><td></td><td>63.4</td><td>(63.4)</td></tr><tr><td>Currency translation</td><td>(253.2)</td><td>(254.1)</td><td>.9</td></tr><tr><td>Total increase</td><td>500.8</td><td>470.2</td><td>30.6</td></tr><tr><td>2012</td><td>13,131.5</td><td>11,794.0</td><td>1,337.5</td></tr></table>

- The higher truck delivery volume reflects improved truck markets in North America and Australia and higher market share, partially offset by lower deliveries in Europe. The increased demand for trucks also resulted in higher average truck sales prices which increased sales by $326.0 million.

- Average truck material, labor and other direct costs increased $254.4 million primarily due to higher material costs.

- Factory overhead and other indirect costs increased $63.4 million primarily due to higher salaries and related costs ($44.2 million).

• The currency translation effect on sales and cost of sales primarily reflects a weaker euro.

- Truck gross margins in 2012 of 10.2% were comparable to the 10.3% in 2011 as higher average margins in North America and Australia were more than offset by lower average margins in Europe from lower market demand.

Truck SG&A was $231.0 million in 2012, comparable to 2011. As a percentage of sales, SG&A was 1.8% in 2012 and in 2011, reflecting ongoing cost control.



## Parts

The Company’s Parts segment accounted for 16% of total revenues for both 2012 and 2011.

<table><tr><td>(\( in millions)</td><td></td><td></td><td></td></tr><tr><td>Year Ended December 31,</td><td>2012</td><td>2011</td><td>% CHANGE</td></tr><tr><td>Parts net sales and revenues:</td><td></td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>$1,529.1</td><td>$1,386.5</td><td>10</td></tr><tr><td>Europe</td><td>786.7</td><td>885.2</td><td>(11)</td></tr><tr><td>Mexico, South America, Australia and other</td><td>351.7</td><td>305.3</td><td>15</td></tr><tr><td></td><td>$2,667.5</td><td>$2,577.0</td><td>4</td></tr><tr><td>Parts income before income taxes</td><td>$ 374.6</td><td>$ 394.1</td><td>(5)</td></tr><tr><td>Pre-tax return on revenues</td><td>14.0%</td><td>15.3%</td><td></td></tr></table>

The Company’s worldwide parts net sales and revenues increased due to higher market demand in North America, partially offset by lower market demand in Europe. The decrease in Parts segment income before income taxes and pre-tax return on revenues was primarily due to higher SG&A expenses (21.8 million) and higher cost allocations from the Truck segment (12.5 million), partially offset by a higher gross margin (13.4 million).

The major factors for the change in net sales and revenues, cost of sales and revenues and gross margin between 2012 and 2011 for the Parts segment are as follows:

<table><tr><td>(\( in millions)</td><td>NET SALES</td><td>COST OF SALES</td><td>GROSS MARGIN</td></tr><tr><td>2011</td><td>$2,577.0</td><td>$1,918.2</td><td>$658.8</td></tr><tr><td>Increase (decrease)</td><td></td><td></td><td></td></tr><tr><td>Aftermarket parts volume</td><td>67.5</td><td>43.2</td><td>24.3</td></tr><tr><td>Average aftermarket parts sales prices</td><td>72.6</td><td></td><td>72.6</td></tr><tr><td>Average aftermarket parts direct costs</td><td></td><td>52.9</td><td>(52.9)</td></tr><tr><td>Warehouse and other indirect costs</td><td></td><td>16.3</td><td>(16.3)</td></tr><tr><td>Currency translation</td><td>(49.6)</td><td>(35.6)</td><td>(14.0)</td></tr><tr><td>Total increase</td><td>90.5</td><td>76.8</td><td>13.7</td></tr><tr><td>2012</td><td>$2,667.5</td><td>$1,995.0</td><td>$672.5</td></tr></table>

- Higher market demand in the U.S. and Canada, partially offset by lower market demand in Europe, resulted in increased aftermarket parts sales volume of $67.5 million and related cost of sales of $43.2 million.

• Average aftermarket parts sales prices increased by $72.6 million reflecting improved price realization from improved market demand in North America.

• Average aftermarket parts direct costs increased $52.9 million from higher material costs.

• Warehouse and other indirect costs increased $16.3 million primarily due to higher salaries and related costs from higher warehouse capacity to support higher sales volume.

• The currency translation effect on sales and cost of sales primarily reflects a weaker euro.

- Parts gross margins in 2012 of 25.2% decreased from 25.6% in 2011 primarily from a lower proportion of sales in Europe.

Parts SG&A was $206.0 million in 2012 (including $6.6 million from the effect of weaker foreign currencies) and $184.2 million in 2011. The higher SG&A reflects higher marketing expenses ($13.1 million) and salaries and related expenses ($6.7 million) to support business expansion activities. As a percentage of sales, SG&A was 7.7% in 2012 and 7.1% in 2011.



## Financial Services

The Company’s Financial Services segment accounted for 6.4% of revenues in 2012 compared to 6.3% in 2011.

<table><tr><td>Year Ended December 31,</td><td>2012</td><td>2011</td><td>% CHANGE</td></tr><tr><td>New loan and lease volume:</td><td></td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>$2,913.1</td><td>$2,523.1</td><td>15</td></tr><tr><td>Europe</td><td>888.2</td><td>933.5</td><td>(5)</td></tr><tr><td>Mexico and Australia</td><td>820.9</td><td>604.4</td><td>36</td></tr><tr><td></td><td>$4,622.2</td><td>$4,061.0</td><td>14</td></tr><tr><td>New loan and lease volume by product:</td><td></td><td></td><td></td></tr><tr><td>Loans and finance leases</td><td>$3,660.7</td><td>$3,117.2</td><td>17</td></tr><tr><td>Equipment on operating lease</td><td>961.5</td><td>943.8</td><td>2</td></tr><tr><td></td><td>$4,622.2</td><td>$4,061.0</td><td>14</td></tr><tr><td>New loan and lease unit volume:</td><td></td><td></td><td></td></tr><tr><td>Loans and finance leases</td><td>36,100</td><td>35,200</td><td>3</td></tr><tr><td>Equipment on operating lease</td><td>9,400</td><td>9,500</td><td>(1)</td></tr><tr><td></td><td>45,500</td><td>44,700</td><td>2</td></tr><tr><td>Average earning assets:</td><td></td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>$5,894.6</td><td>$4,595.0</td><td>28</td></tr><tr><td>Europe</td><td>2,285.1</td><td>2,234.9</td><td>2</td></tr><tr><td>Mexico and Australia</td><td>1,556.0</td><td>1,445.1</td><td>8</td></tr><tr><td></td><td>$9,735.7</td><td>$8,275.0</td><td>18</td></tr><tr><td>Average earning assets by product:</td><td></td><td></td><td></td></tr><tr><td>Loans and finance leases</td><td>$6,213.2</td><td>$5,291.0</td><td>17</td></tr><tr><td>Dealer wholesale financing</td><td>1,574.7</td><td>1,220.4</td><td>29</td></tr><tr><td>Equipment on lease and other</td><td>1,947.8</td><td>1,763.6</td><td>10</td></tr><tr><td></td><td>$9,735.7</td><td>$8,275.0</td><td>18</td></tr><tr><td>Revenues:</td><td></td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>$ 592.8</td><td>$ 508.6</td><td>17</td></tr><tr><td>Europe</td><td>283.5</td><td>313.0</td><td>(9)</td></tr><tr><td>Mexico and Australia</td><td>222.5</td><td>207.7</td><td>7</td></tr><tr><td></td><td>$1,098.8</td><td>$1,029.3</td><td>7</td></tr><tr><td>Revenue by product:</td><td></td><td></td><td></td></tr><tr><td>Loans and finance leases</td><td>$ 392.2</td><td>$ 373.2</td><td>5</td></tr><tr><td>Dealer wholesale financing</td><td>61.5</td><td>49.9</td><td>23</td></tr><tr><td>Equipment on lease and other</td><td>645.1</td><td>606.2</td><td>6</td></tr><tr><td></td><td>$1,098.8</td><td>$1,029.3</td><td>7</td></tr><tr><td>Income before income taxes</td><td>$ 307.8</td><td>$ 236.4</td><td>30</td></tr></table>

In 2012, new loan and lease volume increased 14% to $4.62 billion from $4.06 billion in 2011, reflecting a higher average amount financed per unit and a slight unit increase in new loan and lease volume. PFS’s finance market share on new PACCAR truck sales was 30.6% in 2012 compared to 31.0% in the prior year.



The increase in PFS revenues to $1.10 billion in 2012 from $1.03 billion in 2011 primarily resulted from higher average earning asset balances, partially offset by lower yields. PFS income before income taxes increased to $307.8 million in 2012 compared to $236.4 million in 2011 primarily due to higher finance margin, as noted below, and a lower provision for losses on receivables.

The major factors for the change in interest and fees, interest and other borrowing expenses and finance margin for the year ended December 31, 2012 are outlined below:

<table><tr><td>($ in millions)</td><td>INTEREST AND FEES</td><td>INTEREST AND OTHER BORROWING EXPENSES</td><td>FINANCE MARGIN</td></tr><tr><td>2011</td><td>$423.1</td><td>$181.3</td><td>$241.8</td></tr><tr><td>Increase (decrease)</td><td></td><td></td><td></td></tr><tr><td>Average finance receivables</td><td>87.5</td><td></td><td>87.5</td></tr><tr><td>Average debt balances</td><td></td><td>37.6</td><td>(37.6)</td></tr><tr><td>Yields</td><td>(51.7)</td><td></td><td>(51.7)</td></tr><tr><td>Borrowing rates</td><td></td><td>(57.8)</td><td>57.8</td></tr><tr><td>Currency translation</td><td>(5.2)</td><td>(2.7)</td><td>(2.5)</td></tr><tr><td>Total increase (decrease)</td><td>30.6</td><td>(22.9)</td><td>53.5</td></tr><tr><td>2012</td><td>$453.7</td><td>$158.4</td><td>$295.3</td></tr></table>

- Average finance receivables increased $1.43 billion (excluding foreign currency effects of $150.1 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.

- Average debt balances increased $1.64 billion (excluding foreign currency effects of $139.1 million) in 2012 and included increased medium-term note funding. The higher average debt balances reflect funding for a higher average finance receivable portfolio.

- Lower market rates resulted in lower portfolio yields (5.8% in 2012 and 6.5% in 2011) and lower borrowing rates (2.2% in 2012 and 3.1% in 2011).

• 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 revenues and depreciation and other expense:

<table><tr><td>(\( in millions)</td><td></td><td></td></tr><tr><td>Year Ended December 31,</td><td>2012</td><td>2011</td></tr><tr><td>Operating lease revenues</td><td>$585.9</td><td>$567.0</td></tr><tr><td>Used truck sales and other</td><td>59.2</td><td>39.2</td></tr><tr><td>Operating lease, rental and other revenues</td><td>$645.1</td><td>$606.2</td></tr><tr><td>Depreciation of operating lease equipment</td><td>$369.9</td><td>$346.6</td></tr><tr><td>Vehicle operating expenses</td><td>97.0</td><td>103.2</td></tr><tr><td>Cost of used truck sales and other</td><td>50.5</td><td>26.4</td></tr><tr><td>Depreciation and other expense</td><td>$517.4</td><td>$476.2</td></tr></table>



The major factors for the change in operating lease, rental and other revenues, depreciation and other expense and related margin for the year ended December 31, 2012 are outlined below:

<table><tr><td>(\( in millions)</td><td>OPERATING LEASE, RENTAL AND OTHER REVENUES</td><td>DEPRECIATION AND OTHER EXPENSE</td><td>LEASE MARGIN</td></tr><tr><td>2011</td><td>$606.2</td><td>$476.2</td><td>$130.0</td></tr><tr><td>Increase (decrease)</td><td></td><td></td><td></td></tr><tr><td>Operating lease impairments</td><td></td><td>(.6)</td><td>.6</td></tr><tr><td>Used truck sales and other</td><td>20.0</td><td>24.1</td><td>(4.1)</td></tr><tr><td>Results on returned lease assets</td><td></td><td>5.7</td><td>(5.7)</td></tr><tr><td>Average operating lease assets</td><td>34.9</td><td>28.2</td><td>6.7</td></tr><tr><td>Currency translation and other</td><td>(16.0)</td><td>(16.2)</td><td>.2</td></tr><tr><td>Total increase (decrease)</td><td>38.9</td><td>41.2</td><td>(2.3)</td></tr><tr><td>2012</td><td>$645.1</td><td>$517.4</td><td>$127.7</td></tr></table>

- Used truck sales and other revenues increased operating lease, rental and other revenues by $20.0 million and depreciation and other by $24.1 million, reflecting a higher number of used truck trade units sold and lower gains on sale.

• Results on returned lease assets reflect a decrease in used truck values in Europe.

- Average operating lease assets increased $184.2 million in 2012, which increased revenues by $34.9 million and related depreciation and other expense by $28.2 million, as a result of a higher volume of equipment placed in service from higher demand for leased vehicles.

- Currency translation and other primarily results from a decrease in the value of the euro compared to the U.S. dollar.

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

<table><tr><td rowspan="2">(\( in millions)</td><td colspan="2">2012</td><td colspan="2">2011</td></tr><tr><td>PROVISION FOR LOSSES ON RECEIVABLES</td><td>NET CHARGE-OFFS</td><td>PROVISION FOR LOSSES ON RECEIVABLES</td><td>NET CHARGE- OFFs</td></tr><tr><td>U.S. and Canada</td><td>$ 4.6</td><td>$ 15.2</td><td>$ 3.8</td><td>$ 6.7</td></tr><tr><td>Europe</td><td>9.9</td><td>9.2</td><td>17.9</td><td>15.3</td></tr><tr><td>Mexico and Australia</td><td>5.5</td><td>6.9</td><td>19.7</td><td>23.0</td></tr><tr><td></td><td>$ 20.0</td><td>$ 31.3</td><td>$ 41.4</td><td>$ 45.0</td></tr></table>

The provision for losses on receivables and net charge-offs for 2012 declined compared to 2011 primarily due to decreases in Europe, Mexico and Australia from improving portfolio performance. The higher charge-offs in the U.S. and Canada of $15.2 million in 2012 compared to $6.7 million in 2011 primarily reflects the charge-off of one large account in the U.S.

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



The post-modification balances of accounts modified during the years ended December 31, 2012 and 2011 are summarized below:

<table><tr><td rowspan="2">(\( in millions)</td><td colspan="2">2012</td><td colspan="2">2011</td></tr><tr><td>RECORDED INVESTMENT</td><td>% OF TOTAL PORTFOLIO*</td><td>RECORDED INVESTMENT</td><td>% OF TOTAL PORTFOLIO*</td></tr><tr><td>Commercial</td><td>211.6</td><td>3.1%</td><td>197.1</td><td>3.4%</td></tr><tr><td>Insignificant delay</td><td>57.1</td><td>.9%</td><td>130.1</td><td>2.2%</td></tr><tr><td>Credit - no concession</td><td>41.0</td><td>.6%</td><td>50.5</td><td>.9%</td></tr><tr><td>Credit - TDR</td><td>56.9</td><td>.8%</td><td>33.1</td><td>.6%</td></tr><tr><td></td><td>366.6</td><td>5.4%</td><td>410.8</td><td>7.1%</td></tr></table>

* Recorded investment immediately after modification as a percentage of ending retail portfolio.

Total modification activity of $366.6 million in 2012 decreased compared to 2011, primarily due to lower insignificant delay modifications in Australia. In the first quarter of 2011, due to severe flooding in the Queensland, Australia region, the Company provided modifications to credit qualified customers. In addition, the Company’s TDRs increased in 2012 from 2011 primarily due to the restructuring of one large account in Europe and one in the U.S.

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

<table><tr><td>At December 31,</td><td>2012</td><td>2011</td></tr><tr><td>Percentage of retail loan and lease accounts 30+ days past due:</td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>.3%</td><td>1.1%</td></tr><tr><td>Europe</td><td>1.0%</td><td>1.0%</td></tr><tr><td>Mexico and Australia</td><td>1.5%</td><td>3.4%</td></tr><tr><td>Worldwide</td><td>.6%</td><td>1.5%</td></tr></table>

Worldwide PFS accounts 30+ days past due at December 31, 2012 of .6% improved from 1.5% at December 31, 2011 due to lower or the same past dues in all markets, reflecting a better operating environment for customers in all markets and the charge-off of a major account in the U.S. The Company continues to focus on maintaining low past due balances.

When the Company modifies a 30+ days past due account, the customer is then generally considered current under the revised contractual terms. The Company modified $11.5 million of accounts worldwide during the fourth quarter of 2012 and $4.5 million during the fourth quarter of 2011 that were 30+ days past due and became current at the time of modification. Had these accounts not been modified and continued to not make payments, the pro forma percentage of retail loan and lease accounts 30+ days past due would have been as follows:

<table><tr><td>At December 31,</td><td>2012</td><td>2011</td></tr><tr><td>Pro forma percentage of retail loan and lease accounts 30+ days past due:</td><td></td><td></td></tr><tr><td>U.S. and Canada</td><td>.4%</td><td>1.1%</td></tr><tr><td>Europe</td><td>1.3%</td><td>1.0%</td></tr><tr><td>Mexico and Australia</td><td>1.9%</td><td>3.8%</td></tr><tr><td>Worldwide</td><td>.8%</td><td>1.5%</td></tr></table>

Modifications of accounts in prior quarters that were more than 30 days past due at the time of modification are included in past dues if they were not performing under the modified terms at December 31, 2012 and 2011. During the fourth quarter of 2012, the Company entered into a restructuring agreement with a large customer in the U.S. The restructuring resulted in a charge-off of $8.2 million at December 31, 2012 which was provided for in prior periods. The effect on the allowance for credit losses from such modifications was not significant at December 31, 2011.



The Company’s 2012 pre-tax return on revenue for Financial Services increased to 28.0% from 23.0% in 2011 primarily results from lower borrowing rates exceeding the decline in asset yields and a lower provision for losses reflecting improvement in portfolio quality.

## Other

Other includes the winch business as well as sales, income and expenses not attributable to a reportable segment, including a portion of corporate expense. Sales represent approximately 1% of consolidated net sales and revenues for 2012 and 2011. Other SG&A was $39.4 million in 2012 and $37.7 million in 2011 as higher salaries and related expenses of $8.0 million was partially offset by lower professional fees of $2.5 million and charitable contributions of $2.0 million. Other income (loss) before tax was a loss of $7.0 million in 2012 compared to a loss of $26.5 million in 2011. The lower loss in 2012 is primarily due to $6.1 million of higher income before tax from the winch business and $5.0 million lower transportation equipment expenses.

Investment income was $33.1 million in 2012 compared to $38.2 million in 2011. The lower investment income in 2012 reflects lower yields on investments from lower market interest rates and lower average invested balances.

The 2012 effective income tax rate of 31.8% increased from 30.8% in 2011 from a higher proportion of income in jurisdictions with higher tax rates.

<table><tr><td>(\( in millions)</td><td></td><td></td></tr><tr><td>Year Ended December 31,</td><td>2012</td><td>2011</td></tr><tr><td>Domestic income before taxes</td><td>$ 786.6</td><td>$ 607.0</td></tr><tr><td>Foreign income before taxes</td><td>842.3</td><td>899.9</td></tr><tr><td>Total income before taxes</td><td>$1,628.9</td><td>$1,506.9</td></tr><tr><td>Domestic pre-tax return on revenues</td><td>9.6%</td><td>8.2%</td></tr><tr><td>Foreign pre-tax return on revenues</td><td>9.6%</td><td>10.0%</td></tr><tr><td>Total pre-tax return on revenues</td><td>9.6%</td><td>9.2%</td></tr></table>

The improvements in income before income taxes and return on revenues for domestic operations were primarily due to higher revenue and margins from truck and parts operations. The lower income before income taxes and return on revenues for foreign operations were primarily due to lower revenue and margins from truck and parts operations in Europe.

## LIQUIDITY AND CAPITAL RESOURCES:

<table><tr><td>(\( in millions)</td><td></td><td></td><td></td></tr><tr><td>At December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Cash and cash equivalents</td><td>$1,750.1</td><td>$1,272.4</td><td>$2,106.7</td></tr><tr><td>Marketable debt securities</td><td>1,267.5</td><td>1,192.7</td><td>910.1</td></tr><tr><td></td><td>$3,017.6</td><td>$2,465.1</td><td>$3,016.8</td></tr></table>

The Company’s total cash and marketable debt securities at December 31, 2013 increased $552.5 million from the balances at December 31, 2012, primarily due to an increase in cash and cash equivalents.



The change in cash and cash equivalents is summarized below:

<table><tr><td>(\( in millions)</td><td></td><td></td><td></td></tr><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Operating activities:</td><td></td><td></td><td></td></tr><tr><td>Net income</td><td>$1,171.3</td><td>$1,111.6</td><td>$1,042.3</td></tr><tr><td>Net income items not affecting cash</td><td>957.5</td><td>906.6</td><td>967.7</td></tr><tr><td>Pension contributions</td><td>(26.2)</td><td>(190.8)</td><td>(85.2)</td></tr><tr><td>Changes in operating assets and liabilities, net</td><td>273.1</td><td>(308.4)</td><td>(332.2)</td></tr><tr><td>Net cash provided by operating activities</td><td>2,375.7</td><td>1,519.0</td><td>1,592.6</td></tr><tr><td>Net cash used in investing activities</td><td>(2,151.0)</td><td>(2,588.0)</td><td>(2,419.0)</td></tr><tr><td>Net cash provided by financing activities</td><td>273.8</td><td>209.5</td><td>946.1</td></tr><tr><td>Effect of exchange rate changes on cash</td><td>(20.8)</td><td>25.2</td><td>(53.8)</td></tr><tr><td>Net increase (decrease) in cash and cash equivalents</td><td>477.7</td><td>(834.3)</td><td>65.9</td></tr><tr><td>Cash and cash equivalents at beginning of the year</td><td>1,272.4</td><td>2,106.7</td><td>2,040.8</td></tr><tr><td>Cash and cash equivalents at end of the year</td><td>$1,750.1</td><td>$1,272.4</td><td>$2,106.7</td></tr></table>

## 2013 Compared to 2012:

Operating activities: Cash provided by operations increased $856.7 million to $2.38 billion in 2013 primarily due to an improvement in working capital and $164.6 million in lower pension contributions. Higher operating cash flow reflects a $544.4 million higher inflow for purchases of goods and services in accounts payable and accrued expenses in excess of payments, $87.9 million in higher depreciation of equipment on operating leases and $59.7 million of higher net income. In addition, there was a $21.9 million lower increase in inventories. These cash inflows were partially offset by a $190.2 million increase in sales of goods and services in accounts receivable exceeding cash receipts.

Investing activities: Cash used in investing activities of $2.15 billion in 2013 decreased $437.0 million from the $2.59 billion used in 2012. Net new loan and lease originations in the Financial Services segment in 2013 were $307.6 million lower, reflecting a lower growth in the portfolio. In addition, net purchases of marketable securities were $179.4 million lower in 2013.

Financing activities: Cash provided by financing activities increased to $273.8 million from $209.5 million in 2012. The Company paid $283.1 million of dividends in 2013, a decrease of $526.4 million, compared to the $809.5 million paid in 2012. The higher dividends paid in 2012 reflect a special dividend declared in 2011 and paid in early 2012, and a special dividend declared and paid at the end of 2012. The special dividend declared in 2013 is payable in 2014. In addition, there were no purchases of treasury stock in 2013, compared to $162.1 million purchased in 2012. In 2013, the Company issued $2.13 billion of medium-term debt, $67.0 million less than 2012. The proceeds were used to repay medium-term debt of $568.9 million and to reduce outstanding balances on commercial paper and bank loans by $1.04 billion, resulting in cash provided by borrowing activities of $525.9 million, $641.3 million lower than the cash provided by borrowing activities of $1.17 billion in 2012.

## 2012 Compared to 2011:

Operating activities: Cash provided by operations decreased $73.6 million to $1.52 billion in 2012. The lower operating cash flow was primarily due to an $888.6 million outflow as payments for goods and services in accounts payable and accrued expenses exceeded purchases in 2012 and purchases exceeded payments in 2011. In addition, a $161.8 million outflow occurred from income tax payments exceeding expense in 2012 and income tax expense exceeding payments in 2011. Also, pension contributions in 2012 were $105.6 million higher than in 2011. These outflows were partially offset by a $483.6 million inflow as receipts from sales of goods and services in accounts receivable exceeded sales in 2012 and sales exceeded receipts in 2011, a $544.6 million lower increase in Financial Services segment wholesale receivables and $69.3 million higher net income.



Investing activities: Cash used in investing activities of $2.59 billion in 2012 increased $169.0 million from the $2.42 billion used in 2011. In 2012, there was $174.7 million increased cash used for acquisitions of property, plant and equipment for new product and facility investments. In addition there was $220.3 million of higher new loan and lease originations in the Financial Services segment reflecting increased portfolio growth. These higher cash outflows were partially offset by lower net purchases of marketable securities of $191.2 million compared to 2011.

Financing activities: Cash provided by financing activities in 2012 of $209.5 million was $736.6 million lower than the cash provided by financing activities in 2011. In 2012, the Company paid $809.5 million in dividends, an increase of $592.1 million, compared to $217.4 million in 2011. The higher amounts paid results from a special dividend declared in 2011 and paid in early 2012, higher regular quarterly dividends in 2012 and a special dividend declared and paid at the end of 2012. In 2012, the Company issued $2.20 billion of long-term debt, $1.04 billion higher than 2011. The proceeds were partially used to repay medium-term debt of $668.1 million and to reduce outstanding balances of commercial paper by $365.8 million, resulting in cash provided by borrowing activities of $1.2 billion, $3 billion lower than the cash provided by borrowing activities of $1.5 billion in 2011. In both periods, cash provided by net borrowings was used to fund growth in the Financial Services portfolios. These lower amounts of cash provided by financing activities were partially offset by lower purchases of treasury stock of $175.5 million in 2012.

## Credit Lines and Other:

The Company has line of credit arrangements of $3.71 billion, of which $3.47 billion were unused at December 31, 2013. Included in these arrangements are $3.0 billion of syndicated bank facilities, of which $1.0 billion matures in June 2014, $1.0 billion matures in June 2017 and $1.0 billion matures in June 2018. The Company intends to replace these credit facilities as they expire with facilities of similar amounts and duration. These credit facilities are maintained primarily to provide backup liquidity for commercial paper borrowings and maturing medium-term notes. There were no borrowings under the syndicated bank facilities for the year ended December 31, 2013.

In December 2011, PACCAR Inc filed a shelf registration under the Securities Act of 1933. The current registration expires in the fourth quarter of 2014 and does not limit the principal amount of debt securities that may be issued during the period. The total amount of medium-term notes outstanding for PACCAR Inc as of December 31, 2013 was $500.0 million.

In December 2011, PACCAR’s Board of Directors approved the repurchase of $300.0 million of the Company’s common stock, and as of December 31, 2013, $192.0 million of shares have been repurchased pursuant to the authorization.

At December 31, 2013 and December 31, 2012, the Company had cash and cash equivalents and marketable debt securities of $1.75 billion and $1.82 billion, respectively, which are considered indefinitely reinvested in foreign subsidiaries. The Company periodically repatriates foreign earnings that are not indefinitely reinvested. Dividends paid by foreign subsidiaries to the U.S. parent were $.19 billion, $.23 billion and $.33 billion in 2013, 2012 and 2011, respectively. The Company believes that its U.S. cash and cash equivalents and marketable debt securities, future operating cash flow and access to the capital markets, along with periodic repatriation of foreign earnings, will be sufficient to meet U.S. liquidity requirements.

## Truck, Parts and Other

The Company provides funding for working capital, capital expenditures, R&D, dividends, stock repurchases and other business initiatives and commitments primarily from cash provided by operations. Management expects this method of funding to continue in the future. Long-term debt was $150.0 million as of December 31, 2013, which was repaid upon maturity in February 2014.

Investments for property, plant and equipment in 2013 totaled $406.5 million compared to $509.7 million in 2012 as the Company invested in new products and building a new DAF factory in Brasil. Over the past decade, the Company’s combined investments in worldwide capital projects and R&D totaled $5.72 billion, which have significantly increased operating capacity and efficiency and the quality of the Company’s premium products.



In 2014, capital investments are expected to be $350 to $400 million and are targeted for enhanced powertrain development and increased operating efficiency of our assembly facilities. Spending on R&D in 2014 is expected to be $225 to $275 million, as PACCAR will continue to focus on new products and services.

The Company conducts business in Spain, Italy, Portugal, Ireland and Greece which have been experiencing significant financial stress. As of December 31, 2013, the Company had finance and trade receivables in these countries of approximately 1% of consolidated total assets. As of December 31, 2013, the Company did not have any marketable debt security investments in corporate or sovereign government securities in these countries. In addition, the Company had no derivative counterparty credit exposures in these countries as of December 31, 2013.

## Financial Services

The Company funds its financial services activities primarily from collections on existing finance receivables and borrowings in the capital markets. The primary sources of borrowings in the capital markets are commercial paper and medium-term notes issued in the public markets and, to a lesser extent, bank loans. An additional source of funds is loans from other PACCAR companies.

The Company issues commercial paper for a portion of its funding in its Financial Services segment. Some of this commercial paper is converted to fixed interest rate debt through the use of interest rate swaps, which are used to manage interest rate risk. In the event of a future significant disruption in the financial markets, the Company may not be able to issue replacement commercial paper. As a result, the Company is exposed to liquidity risk from the shorter maturity of short-term borrowings paid to lenders compared to the longer timing of receivable collections from customers. The Company believes its cash balances and investments, collections on existing finance receivables, syndicated bank lines and current investment-grade credit ratings of A+/A1 will continue to provide it with sufficient resources and access to capital markets at competitive interest rates and therefore contribute to the Company maintaining its liquidity and financial stability. A decrease in these credit ratings could negatively impact the Company's ability to access capital markets at competitive interest rates and the Company's ability to maintain liquidity and financial stability.

In November 2012, the Company’s U.S. finance subsidiary, PACCAR Financial Corp. (PFC), filed a shelf registration under the Securities Act of 1933 effective for a three year period. The total amount of medium-term notes outstanding for PFC as of December 31, 2013 was $3.85 billion. The registration expires in the fourth quarter of 2015 and does not limit the principal amount of debt securities that may be issued during that period.

As of December 31, 2013, the Company’s European finance subsidiary, PACCAR Financial Europe, had €418.5 million available for issuance under a €1.50 billion medium-term note program registered with the London Stock Exchange. The program was renewed in the second quarter of 2013 and is renewable annually through the filing of a new prospectus.

In April 2011, PACCAR Financial Mexico registered a 10.00 billion peso medium-term note and commercial paper program with the Comision Nacional Bancaria y de Valores. The registration expires in 2016 and limits the amount of commercial paper (up to one year) to 5.00 billion pesos. At December 31, 2013, 7.38 billion pesos remained available for issuance.

PACCAR believes its Financial Services companies will be able to continue funding receivables, servicing debt and paying dividends through internally generated funds, access to public and private debt markets and lines of credit.



## Commitments

The following summarizes the Company’s contractual cash commitments at December 31, 2013:

<table><tr><td rowspan="2">(\( in millions)</td><td colspan="4">MATURITY</td><td rowspan="2">TOTAL</td></tr><tr><td>WITHIN 1 YEAR</td><td>1-3 YEARS</td><td>3-5 YEARS</td><td>MORE THAN 5 YEARS</td></tr><tr><td>Borrowings*</td><td>$4,144.6</td><td>$3,399.7</td><td>$877.3</td><td></td><td>$8,421.6</td></tr><tr><td>Purchase obligations</td><td>166.9</td><td>125.1</td><td></td><td></td><td>292.0</td></tr><tr><td>Interest on debt**</td><td>66.9</td><td>56.7</td><td>6.2</td><td></td><td>129.8</td></tr><tr><td>Operating leases</td><td>23.4</td><td>31.5</td><td>14.7</td><td>$ 2.4</td><td>72.0</td></tr><tr><td>Other obligations</td><td>11.1</td><td>18.8</td><td>1.8</td><td>8.5</td><td>40.2</td></tr><tr><td></td><td>$4,412.9</td><td>$3,631.8</td><td>$900.0</td><td>$10.9</td><td>$8,955.6</td></tr></table>

* Borrowings include commercial paper and other short-term debt.

** Includes interest on fixed and floating-rate term debt. Interest on floating-rate debt is based on the applicable market rates at December 31, 2013.

Of the $8.55 billion total cash commitments for borrowings and interest on term debt, $8.40 billion were related to the Financial Services segment. As described in Note I of the consolidated financial statements, borrowings consist primarily of term notes and commercial paper issued by the Financial Services segment. The Company expects to fund its maturing Financial Services debt obligations principally from funds provided by collections from customers on loans and lease contracts, as well as from the proceeds of commercial paper and medium-term note borrowings. Purchase obligations are the Company’s contractual commitment to acquire future production inventory and capital equipment. Other obligations include deferred cash compensation.

The Company’s other commitments include the following at December 31, 2013:

<table><tr><td rowspan="2">(\( in millions)</td><td colspan="4">COMMITMENT EXPIRATION</td><td rowspan="2">TOTAL</td></tr><tr><td>WITHIN 1 YEAR</td><td>1-3 YEARS</td><td>3-5 YEARS</td><td>MORE THAN 5 YEARS</td></tr><tr><td>Loan and lease commitments</td><td>$ 407.4</td><td></td><td></td><td></td><td>$ 407.4</td></tr><tr><td>Residual value guarantees</td><td>180.0</td><td>$ 293.2</td><td>$166.0</td><td>$14.7</td><td>653.9</td></tr><tr><td>Letters of credit</td><td>18.5</td><td>1.0</td><td>1.0</td><td>.1</td><td>20.6</td></tr><tr><td></td><td>$ 605.9</td><td>$ 294.2</td><td>$167.0</td><td>$14.8</td><td>$1,081.9</td></tr></table>

Loan and lease commitments are for funding new retail loan and lease contracts. Residual value guarantees represent the Company’s commitment to acquire trucks at a guaranteed value if the customer decides to return the truck at a specified date in the future.

## IMPACT OF ENVIRONMENTAL MATTERS:

The Company, its competitors and industry in general are subject to various domestic and foreign requirements relating to the environment. The Company believes its policies, practices and procedures are designed to prevent unreasonable risk of environmental damage and that its handling, use and disposal of hazardous or toxic substances have been in accordance with environmental laws and regulations enacted at the time such use and disposal occurred.

The Company is involved in various stages of investigations and cleanup actions in different countries related to environmental matters. In certain of these matters, the Company has been designated as a “potentially responsible party” by domestic and foreign environmental agencies. The Company has provided an accrual for the estimated costs to investigate and complete cleanup actions where it is probable that the Company will incur such costs in the future. Expenditures related to environmental activities in the years ended December 31, 2013, 2012 and 2011 were $2.3 million, $1.7 million and $1.2 million, respectively. Management expects that these matters will not have a significant effect on the Company’s consolidated cash flow, liquidity or financial condition.



## CRITICAL ACCOUNTING POLICIES:

The Company’s significant accounting policies are disclosed in Note A of the consolidated financial statements. In the preparation of the Company’s financial statements, in accordance with U.S. generally accepted accounting principles, management uses estimates and makes judgments and assumptions that affect asset and liability values and the amounts reported as income and expense during the periods presented. The following are accounting policies which, in the opinion of management, are particularly sensitive and which, if actual results are different from estimates used by management, may have a material impact on the financial statements.

## Operating Leases

Trucks sold pursuant to agreements accounted for as operating leases are disclosed in Note E of the consolidated financial statements. In determining its estimate of the residual value of such vehicles, the Company considers the length of the lease term, the truck model, the expected usage of the truck and anticipated market demand. Operating lease terms generally range from three to five years. The resulting residual values on operating leases generally range between 30% and 50% of original equipment cost. If the sales price of the trucks at the end of the term of the agreement differs from the Company’s estimated residual value, a gain or loss will result.

Future market conditions, changes in government regulations and other factors outside the Company’s control could impact the ultimate sales price of trucks returned under these contracts. Residual values are reviewed regularly and adjusted if market conditions warrant. A decrease in the estimated equipment residual values would increase annual depreciation expense over the remaining lease term.

During 2013, 2012 and 2011, market values on equipment returning upon operating lease maturity were generally higher than the residual values on the equipment, resulting in a decrease in depreciation expense of $4.4 million, $5.0 million and $10.2 million, respectively.

At December 31, 2013, the aggregate residual value of equipment on operating leases in the Financial Services segment and residual value guarantee on trucks accounted for as operating leases in the Truck segment was $1.89 billion. A 10% decrease in used truck values worldwide, expected to persist over the remaining maturities of the Company's operating leases, would reduce residual value estimates and result in the Company recording an average of approximately $47.2 million of additional depreciation per year.

## Allowance for Credit Losses

The allowance for credit losses related to the Company’s loans and finance leases is disclosed in Note D of the consolidated financial statements. The Company has developed a systematic methodology for determining the allowance for credit losses for its two portfolio segments, retail and wholesale. The retail segment consists of retail loans and 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 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. Generally, 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 recorded investment, 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.

The adequacy of the allowance is evaluated quarterly based on the most recent past due account information and current market conditions. As accounts become past due, the likelihood increases they will not be fully collected. The Company’s experience indicates the probability of not fully collecting past due accounts ranges between 20% and 80%. Over the past three years, the Company’s year-end 30+ days past due accounts have ranged between .5% and 1.5% of loan and lease receivables. Historically, a 100 basis point increase in the 30+ days past due percentage has resulted in an increase in credit losses of 10 to 35 basis points of receivables. Past dues were .5% at December 31, 2013. If past dues were 100 basis points higher or 1.5% as of December 31, 2013, the Company’s estimate of credit losses would likely have increased by approximately $5 to $22 million depending on the extent of the past dues, the estimated value of the collateral as compared to amounts owed and general economic factors.

## Product Warranty

Product warranty is disclosed in Note H of the consolidated financial statements. The expenses related to product warranty are estimated and recorded at the time products are sold based on historical and current data and reasonable expectations for the future regarding the frequency and cost of warranty claims, net of recoveries. Management takes actions to minimize warranty costs through quality-improvement programs; however, actual claim costs incurred could materially differ from the estimated amounts and require adjustments to the reserve. Historically those adjustments have not been material. Over the past three years, warranty expense as a percentage of Truck, Parts and Other net sales and revenues has ranged between 1.1% and 1.2%. If the 2013 warranty expense had been .2% higher as a percentage of net sales and revenues in 2013, warranty expense would have increased by approximately $32 million.

## Pension Benefits

Employee benefits are disclosed in Note L of the consolidated financial statements. The Company’s accounting for employee pension benefit costs and obligations is based on management assumptions about the future used by actuaries to estimate net costs and liabilities. These assumptions include discount rates, long-term rates of return on plan assets, inflation rates, retirement rates, mortality rates and other factors. Management bases these assumptions on historical results, the current environment and reasonable estimates of future events.



The discount rate for pension benefits is based on market interest rates of high-quality corporate bonds with a maturity profile that matches the timing of the projected benefit payments of the plans. Changes in the discount rate affect the valuation of the plan benefits obligation and funded status of the plans. The long-term rate of return on plan assets is based on projected returns for each asset class and relative weighting of those asset classes in the plans.

Because differences between actual results and the assumptions for returns on plan assets, retirement rates and mortality rates are accumulated and amortized into expense over future periods, management does not believe these differences or a typical percentage change in these assumptions worldwide would have a material effect on its financial results in the next year. The most significant assumption which could negatively affect pension expense is a decrease in the discount rate. If the discount rate was to decrease .5%, 2013 net pension expense would increase to $96.3 million from $80.1 million and the projected benefit obligation would increase $153 million to $2.11 billion from $1.96 billion.

## Income Taxes

Income taxes are disclosed in Note M of the consolidated financial statements. The Company calculates income tax expense on pre-tax income based on current tax law. Deferred tax assets and liabilities are recorded for future tax consequences on temporary differences between recorded amounts in the financial statements and their respective tax basis. The determination of income tax expense requires management estimates and involves judgment regarding indefinitely reinvested foreign earnings, jurisdictional mix of earnings and future outcomes regarding tax law issues included in tax returns. The Company updates its assumptions on all of these factors each quarter as well as new information on tax laws and differences between estimated taxes and actual returns when filed. If the Company’s assessment of these matters changes, the effect is accounted for in earnings in the period the change is made.

## FORWARD-LOOKING STATEMENTS:

Certain information presented in this report contains forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties that may affect actual results. Risks and uncertainties include, but are not limited to: a significant decline in industry sales; competitive pressures; reduced market share; reduced availability of or higher prices for fuel; increased safety, emissions, or other regulations resulting in higher costs and/or sales restrictions; currency or commodity price fluctuations; lower used truck prices; insufficient or under-utilization of manufacturing capacity; supplier interruptions; insufficient liquidity in the capital markets; fluctuations in interest rates; changes in the levels of the Financial Services segment new business volume due to unit fluctuations in new PACCAR truck sales or reduced market shares; changes affecting the profitability of truck owners and operators; price changes impacting truck sales prices and residual values; insufficient supplier capacity or access to raw materials; labor disruptions; shortages of commercial truck drivers; increased warranty costs or litigation; or legislative and governmental regulations. A more detailed description of these and other risks is included under the heading Part 1, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.



<table><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td></td><td colspan="3">(millions, except per share data)</td></tr><tr><td>TRUCK, PARTS AND OTHER:</td><td></td><td></td><td></td></tr><tr><td>Net sales and revenues</td><td>$15,948.9</td><td>$15,951.7</td><td>$15,325.9</td></tr><tr><td>Cost of sales and revenues</td><td>13,900.7</td><td>13,908.3</td><td>13,341.8</td></tr><tr><td>Research and development</td><td>251.4</td><td>279.3</td><td>288.2</td></tr><tr><td>Selling, general and administrative</td><td>465.3</td><td>476.4</td><td>452.9</td></tr><tr><td>Interest and other expense (income), net</td><td>5.3</td><td>(.3)</td><td>10.7</td></tr><tr><td></td><td>14,622.7</td><td>14,663.7</td><td>14,093.6</td></tr><tr><td>Truck, Parts and Other Income Before Income Taxes</td><td>1,326.2</td><td>1,288.0</td><td>1,232.3</td></tr><tr><td>FINANCIAL SERVICES:</td><td></td><td></td><td></td></tr><tr><td>Interest and fees</td><td>462.8</td><td>453.7</td><td>423.1</td></tr><tr><td>Operating lease, rental and other revenues</td><td>712.1</td><td>645.1</td><td>606.2</td></tr><tr><td>Revenues</td><td>1,174.9</td><td>1,098.8</td><td>1,029.3</td></tr><tr><td>Interest and other borrowing expenses</td><td>155.9</td><td>158.4</td><td>181.3</td></tr><tr><td>Depreciation and other expense</td><td>571.7</td><td>517.4</td><td>476.2</td></tr><tr><td>Selling, general and administrative</td><td>94.2</td><td>95.2</td><td>94.0</td></tr><tr><td>Provision for losses on receivables</td><td>12.9</td><td>20.0</td><td>41.4</td></tr><tr><td></td><td>834.7</td><td>791.0</td><td>792.9</td></tr><tr><td>Financial Services Income Before Income Taxes</td><td>340.2</td><td>307.8</td><td>236.4</td></tr><tr><td>Investment income</td><td>28.6</td><td>33.1</td><td>38.2</td></tr><tr><td>Total Income Before Income Taxes</td><td>1,695.0</td><td>1,628.9</td><td>1,506.9</td></tr><tr><td>Income taxes</td><td>523.7</td><td>517.3</td><td>464.6</td></tr><tr><td>Net Income</td><td>$ 1,171.3</td><td>$ 1,111.6</td><td>$ 1,042.3</td></tr><tr><td>Net Income Per Share</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ 3.31</td><td>$ 3.13</td><td>$ 2.87</td></tr><tr><td>Diluted</td><td>$ 3.30</td><td>$ 3.12</td><td>$ 2.86</td></tr><tr><td>Weighted average number of common shares outstanding</td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>354.2</td><td>355.1</td><td>363.3</td></tr><tr><td>Diluted</td><td>355.2</td><td>355.8</td><td>364.4</td></tr></table>

See notes to consolidated financial statements.



<table><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td></td><td></td><td>(millions)</td><td></td></tr><tr><td>Net income</td><td>$1,171.3</td><td>$1,111.6</td><td>$1,042.3</td></tr><tr><td>Other comprehensive income (loss):</td><td></td><td></td><td></td></tr><tr><td>Unrealized gains (losses) on derivative contracts</td><td></td><td></td><td></td></tr><tr><td>Gains (losses) arising during the period</td><td>53.2</td><td>(29.2)</td><td>(52.9)</td></tr><tr><td>Tax effect</td><td>(16.3)</td><td>9.1</td><td>18.8</td></tr><tr><td>Reclassification adjustment</td><td>(35.6)</td><td>22.7</td><td>47.7</td></tr><tr><td>Tax effect</td><td>10.8</td><td>(7.8)</td><td>(17.7)</td></tr><tr><td></td><td>12.1</td><td>(5.2)</td><td>(4.1)</td></tr><tr><td>Unrealized (losses) gains on marketable debt securities</td><td></td><td></td><td></td></tr><tr><td>Net holding (loss) gain</td><td>(8.3)</td><td>2.7</td><td>7.0</td></tr><tr><td>Tax effect</td><td>2.2</td><td>(.6)</td><td>(1.9)</td></tr><tr><td>Reclassification adjustment</td><td>1.7</td><td>(2.9)</td><td>1.6</td></tr><tr><td>Tax effect</td><td>(.5)</td><td>.8</td><td>(.6)</td></tr><tr><td></td><td>(4.9)</td><td></td><td>6.1</td></tr><tr><td>Pension plans</td><td></td><td></td><td></td></tr><tr><td>Gains (losses) arising during the period</td><td>324.9</td><td>(71.0)</td><td>(281.9)</td></tr><tr><td>Tax effect</td><td>(120.1)</td><td>22.4</td><td>99.0</td></tr><tr><td>Reclassification adjustment</td><td>45.3</td><td>45.4</td><td>26.2</td></tr><tr><td>Tax effect</td><td>(15.8)</td><td>(15.2)</td><td>(9.0)</td></tr><tr><td></td><td>234.3</td><td>(18.4)</td><td>(165.7)</td></tr><tr><td>Foreign currency translation (losses) gains</td><td>(73.3)</td><td>83.1</td><td>(96.6)</td></tr><tr><td>Net other comprehensive income (loss)</td><td>168.2</td><td>59.5</td><td>(260.3)</td></tr><tr><td>Comprehensive Income</td><td>$1,339.5</td><td>$1,171.1</td><td>$782.0</td></tr></table>

See notes to consolidated financial statements.



<table><tr><td>ASSETS</td><td></td><td></td></tr><tr><td>December 31,</td><td>2013</td><td>2012</td></tr><tr><td></td><td>(millions)</td><td></td></tr><tr><td>TRUCK, PARTS AND OTHER:</td><td></td><td></td></tr><tr><td>Current Assets</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>$ 1,657.7</td><td>$ 1,203.2</td></tr><tr><td>Trade and other receivables, net</td><td>1,019.6</td><td>902.1</td></tr><tr><td>Marketable debt securities</td><td>1,267.5</td><td>1,192.7</td></tr><tr><td>Inventories, net</td><td>813.6</td><td>782.4</td></tr><tr><td>Other current assets</td><td>308.1</td><td>331.7</td></tr><tr><td>Total Truck, Parts and Other Current Assets</td><td>5,066.5</td><td>4,412.1</td></tr><tr><td>Equipment on operating leases, net</td><td>1,038.3</td><td>857.9</td></tr><tr><td>Property, plant and equipment, net</td><td>2,513.3</td><td>2,312.9</td></tr><tr><td>Other noncurrent assets, net</td><td>477.3</td><td>249.4</td></tr><tr><td>Total Truck, Parts and Other Assets</td><td>9,095.4</td><td>7,832.3</td></tr></table>

<table><tr><td>FINANCIAL SERVICES:</td><td></td><td></td></tr><tr><td>Cash and cash equivalents</td><td>92.4</td><td>69.2</td></tr><tr><td>Finance and other receivables, net</td><td>8,812.1</td><td>8,298.3</td></tr><tr><td>Equipment on operating leases, net</td><td>2,290.1</td><td>2,030.8</td></tr><tr><td>Other assets</td><td>435.5</td><td>397.2</td></tr><tr><td>Total Financial Services Assets</td><td>11,630.1</td><td>10,795.5</td></tr><tr><td></td><td>$20,725.5</td><td>$18,627.8</td></tr></table>



<table><tr><td>December 31,</td><td>2013</td><td>2012</td></tr><tr><td></td><td>(millions)</td><td></td></tr><tr><td>TRUCK, PARTS AND OTHER:</td><td></td><td></td></tr><tr><td>Current Liabilities</td><td></td><td></td></tr><tr><td>Accounts payable, accrued expenses and other</td><td>$ 2,155.0</td><td>$ 2,073.2</td></tr><tr><td>Dividend payable</td><td>318.8</td><td></td></tr><tr><td>Current portion of long-term debt</td><td>150.0</td><td></td></tr><tr><td>Total Truck, Parts and Other Current Liabilities</td><td>2,623.8</td><td>2,073.2</td></tr><tr><td>Long-term debt</td><td></td><td>150.0</td></tr><tr><td>Residual value guarantees and deferred revenues</td><td>1,093.8</td><td>903.5</td></tr><tr><td>Other liabilities</td><td>734.4</td><td>674.6</td></tr><tr><td>Total Truck, Parts and Other Liabilities</td><td>4,452.0</td><td>3,801.3</td></tr><tr><td>FINANCIAL SERVICES:</td><td></td><td></td></tr><tr><td>Accounts payable, accrued expenses and other</td><td>391.7</td><td>309.5</td></tr><tr><td>Commercial paper and bank loans</td><td>2,508.9</td><td>3,562.7</td></tr><tr><td>Term notes</td><td>5,765.3</td><td>4,167.4</td></tr><tr><td>Deferred taxes and other liabilities</td><td>973.3</td><td>940.0</td></tr><tr><td>Total Financial Services Liabilities</td><td>9,639.2</td><td>8,979.6</td></tr><tr><td>STOCKHOLDERS&#x27; EQUITY:</td><td></td><td></td></tr><tr><td>Preferred stock, no par value - authorized 1.0 million shares, none issued</td><td></td><td></td></tr><tr><td>Common stock, $1 par value - authorized 1.2 billion shares;</td><td></td><td></td></tr><tr><td>issued 354.3 million and 353.4 million shares</td><td>354.3</td><td>353.4</td></tr><tr><td>Additional paid-in capital</td><td>106.2</td><td>56.6</td></tr><tr><td>Retained earnings</td><td>6,165.1</td><td>5,596.4</td></tr><tr><td>Accumulated other comprehensive income (loss)</td><td>8.7</td><td>(159.5)</td></tr><tr><td>Total Stockholders&#x27; Equity</td><td>6,634.3</td><td>5,846.9</td></tr><tr><td></td><td>$20,725.5</td><td>$18,627.8</td></tr></table>

See notes to consolidated financial statements.



<table><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td></td><td colspan="3">(millions)</td></tr><tr><td>OPERATING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Net Income</td><td>$1,171.3</td><td>$1,111.6</td><td>$1,042.3</td></tr><tr><td>Adjustments to reconcile net income to cash provided by operations:</td><td></td><td></td><td></td></tr><tr><td>Depreciation and amortization:</td><td></td><td></td><td></td></tr><tr><td>Property, plant and equipment</td><td>210.7</td><td>188.8</td><td>196.5</td></tr><tr><td>Equipment on operating leases and other</td><td>600.0</td><td>512.1</td><td>477.3</td></tr><tr><td>Provision for losses on financial services receivables</td><td>12.9</td><td>20.0</td><td>41.4</td></tr><tr><td>Deferred taxes</td><td>97.3</td><td>151.7</td><td>224.1</td></tr><tr><td>Other, net</td><td>36.6</td><td>34.0</td><td>28.4</td></tr><tr><td>Pension contributions</td><td>(26.2)</td><td>(190.8)</td><td>(85.2)</td></tr><tr><td>Change in operating assets and liabilities:</td><td></td><td></td><td></td></tr><tr><td>(Increase) decrease in assets other than cash and cash equivalents:</td><td></td><td></td><td></td></tr><tr><td>Receivables:</td><td></td><td></td><td></td></tr><tr><td>Trade and other</td><td>(115.0)</td><td>75.2</td><td>(408.4)</td></tr><tr><td>Wholesale receivables on new trucks</td><td>(82.5)</td><td>(6.5)</td><td>(551.1)</td></tr><tr><td>Sales-type finance leases and dealer direct loans on new trucks</td><td>(101.9)</td><td>(186.6)</td><td>(141.3)</td></tr><tr><td>Inventories</td><td>(39.6)</td><td>(61.5)</td><td>(187.1)</td></tr><tr><td>Other assets, net</td><td>(86.9)</td><td>(120.7)</td><td>28.1</td></tr><tr><td>Increase (decrease) in liabilities:</td><td></td><td></td><td></td></tr><tr><td>Accounts payable and accrued expenses</td><td>240.8</td><td>(303.6)</td><td>585.0</td></tr><tr><td>Residual value guarantees and deferred revenues</td><td>261.8</td><td>204.4</td><td>231.8</td></tr><tr><td>Other liabilities, net</td><td>196.4</td><td>90.9</td><td>110.8</td></tr><tr><td>Net Cash Provided by Operating Activities</td><td>2,375.7</td><td>1,519.0</td><td>1,592.6</td></tr><tr><td>INVESTING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Originations of retail loans and direct financing leases</td><td>(2,992.8)</td><td>(3,235.5)</td><td>(2,731.9)</td></tr><tr><td>Collections on retail loans and direct financing leases</td><td>2,469.2</td><td>2,404.3</td><td>2,121.0</td></tr><tr><td>Net decrease (increase) in wholesale receivables on used equipment</td><td>6.5</td><td>(5.7)</td><td>(18.1)</td></tr><tr><td>Purchases of marketable securities</td><td>(990.1)</td><td>(1,048.9)</td><td>(1,614.2)</td></tr><tr><td>Proceeds from sales and maturities of marketable securities</td><td>888.9</td><td>768.3</td><td>1,142.4</td></tr><tr><td>Payments for property, plant and equipment</td><td>(510.6)</td><td>(515.4)</td><td>(340.7)</td></tr><tr><td>Acquisitions of equipment for operating leases</td><td>(1,362.2)</td><td>(1,288.0)</td><td>(1,306.6)</td></tr><tr><td>Proceeds from asset disposals</td><td>340.1</td><td>330.2</td><td>339.0</td></tr><tr><td>Other, net</td><td></td><td>2.7</td><td>(9.9)</td></tr><tr><td>Net Cash Used in Investing Activities</td><td>(2,151.0)</td><td>(2,588.0)</td><td>(2,419.0)</td></tr><tr><td>FINANCING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Payments of cash dividends</td><td>(283.1)</td><td>(809.5)</td><td>(217.4)</td></tr><tr><td>Purchases of treasury stock</td><td></td><td>(162.1)</td><td>(337.6)</td></tr><tr><td>Proceeds from stock compensation transactions</td><td>31.0</td><td>13.9</td><td>10.9</td></tr><tr><td>Net (decrease) increase in commercial paper and short-term bank loans</td><td>(1,039.3)</td><td>(365.8)</td><td>1,642.6</td></tr><tr><td>Proceeds from long-term debt</td><td>2,134.1</td><td>2,201.1</td><td>1,165.5</td></tr><tr><td>Payments on long-term debt</td><td>(568.9)</td><td>(668.1)</td><td>(1,317.9)</td></tr><tr><td>Net Cash Provided by Financing Activities</td><td>273.8</td><td>209.5</td><td>946.1</td></tr><tr><td>Effect of exchange rate changes on cash</td><td>(20.8)</td><td>25.2</td><td>(53.8)</td></tr><tr><td>Net Increase (Decrease) in Cash and Cash Equivalents</td><td>477.7</td><td>(834.3)</td><td>65.9</td></tr><tr><td>Cash and Cash Equivalents at beginning of year</td><td>1,272.4</td><td>2,106.7</td><td>2,040.8</td></tr><tr><td>Cash and Cash Equivalents at end of year</td><td>$1,750.1</td><td>$1,272.4</td><td>$2,106.7</td></tr></table>

See notes to consolidated financial statements.



<table><tr><td>December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td></td><td colspan="3">(millions, except per share data)</td></tr><tr><td>COMMON STOCK, $1 PAR VALUE:</td><td></td><td></td><td></td></tr><tr><td>Balance at beginning of year</td><td>$ 353.4</td><td>$ 356.8</td><td>$ 365.3</td></tr><tr><td>Treasury stock retirement</td><td></td><td>(4.2)</td><td>(9.2)</td></tr><tr><td>Stock compensation</td><td>.9</td><td>.8</td><td>.7</td></tr><tr><td>Balance at end of year</td><td>354.3</td><td>353.4</td><td>356.8</td></tr><tr><td>ADDITIONAL PAID-IN CAPITAL:</td><td></td><td></td><td></td></tr><tr><td>Balance at beginning of year</td><td>56.6</td><td>52.1</td><td>105.1</td></tr><tr><td>Treasury stock retirement</td><td></td><td>(28.0)</td><td>(82.7)</td></tr><tr><td>Stock compensation and tax benefit</td><td>49.6</td><td>32.5</td><td>29.7</td></tr><tr><td>Balance at end of year</td><td>106.2</td><td>56.6</td><td>52.1</td></tr><tr><td>TREASURY STOCK, AT COST:</td><td></td><td></td><td></td></tr><tr><td>Balance at beginning of year</td><td></td><td></td><td></td></tr><tr><td>Purchases, shares: 2013-nil; 2012-4.2; 2011-9.2</td><td></td><td>(162.1)</td><td>(337.6)</td></tr><tr><td>Retirements</td><td></td><td>162.1</td><td>337.6</td></tr><tr><td>Balance at end of year</td><td></td><td></td><td></td></tr><tr><td>RETAINED EARNINGS:</td><td></td><td></td><td></td></tr><tr><td>Balance at beginning of year</td><td>5,596.4</td><td>5,174.5</td><td>4,846.1</td></tr><tr><td>Net income</td><td>1,171.3</td><td>1,111.6</td><td>1,042.3</td></tr><tr><td>Cash dividends declared on common stock, per share: 2013-$1.70; 2012-$1.58; 2011-$1.30</td><td>(602.6)</td><td>(559.8)</td><td>(468.2)</td></tr><tr><td>Treasury stock retirement</td><td></td><td>(129.9)</td><td>(245.7)</td></tr><tr><td>Balance at end of year</td><td>6,165.1</td><td>5,596.4</td><td>5,174.5</td></tr><tr><td>ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):</td><td></td><td></td><td></td></tr><tr><td>Balance at beginning of year</td><td>(159.5)</td><td>(219.0)</td><td>41.3</td></tr><tr><td>Other comprehensive income (loss)</td><td>168.2</td><td>59.5</td><td>(260.3)</td></tr><tr><td>Balance at end of year</td><td>8.7</td><td>(159.5)</td><td>(219.0)</td></tr><tr><td>Total Stockholders&#x27; Equity</td><td>$6,634.3</td><td>$5,846.9</td><td>$5,364.4</td></tr></table>

See notes to consolidated financial statements.



December 31, 2013, 2012 and 2011 (currencies in millions)

## A. SIGNIFICANT ACCOUNTING POLICIES

Description of Operations: PACCAR Inc (the Company or PACCAR) is a multinational company operating in three principal segments: (1) the Truck segment includes the design and manufacture of high-quality, light-, medium- and heavy-duty commercial trucks; (2) the Parts segment includes the distribution of aftermarket parts for trucks and related commercial vehicles; and (3) the Financial Services segment (PFS) derives its earnings primarily from financing or leasing PACCAR products in the U.S., Canada, Mexico, Europe and Australia. PACCAR's sales and revenues are derived primarily from North America and Europe. The Company also operates in Australia and sells trucks and parts to customers in Asia, Africa, Middle East and South America.

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

## Revenue Recognition:

Truck, Parts and Other: Substantially all sales and revenues of trucks and related aftermarket parts are recorded by the Company when products are shipped to dealers or customers, except for certain truck shipments that are subject to a residual value guarantee to the customer. Revenues related to these shipments are generally recognized on a straight-line basis over the guarantee period (see Note E). At the time certain truck and parts sales to a dealer are recognized, the Company records an estimate of any future sales incentive costs related to such sales. The estimate is based on historical data and announced incentive programs. In the Truck and Parts segments, the Company grants extended payment terms on selected receivables. Interest is charged for the period beyond standard payment terms. Interest income is recorded as earned.

Financial Services: Interest income from finance and other receivables is recognized using the interest method. Certain loan origination costs are deferred and amortized to interest income over the expected life of the contracts, generally 36 to 60 months, using the straight-line method which approximates the interest method. For operating leases, rental revenue is recognized on a straight-line basis over the lease term. Rental revenues for the years ended December 31, 2013, 2012 and 2011 were $631.7, $551.5 and $527.8, respectively. Depreciation and related leased unit operating expenses were $503.5, $434.9 and $412.5 for the years ended December 31, 2013, 2012 and 2011, respectively.

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, no finance receivables more than 90 days past due were accruing interest at December 31, 2013 or December 31, 2012. 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 if the customer makes scheduled payments for three months and collection of remaining amounts is considered probable (if contractually modified). Payments received while the finance receivable is on non-accrual status are applied to interest and principal in accordance with the contractual terms.

Cash and Cash Equivalents: Cash equivalents consist of liquid investments with a maturity at date of purchase of 90 days or less.

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 quarterly basis, the Company also performs review and validation procedures on the



December 31, 2013, 2012 and 2011 (currencies in millions)

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.

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 an 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.

## Receivables:

Trade and Other Receivables: The Company’s trade and other receivables are recorded at cost, net of allowances. At December 31, 2013 and 2012, respectively, trade and other receivables include trade receivables from dealers and customers of $847.6 and $768.0 and other receivables of $172.0 and $134.1 relating primarily to value added tax receivables and supplier allowances and rebates.

## Finance and Other Receivables:

Loans – Loans represent fixed or floating-rate loans to customers collateralized by the vehicles purchased and are recorded at amortized cost.

Finance leases – Finance leases are retail direct financing leases and sales-type finance leases, which lease equipment to retail customers and dealers. These leases are reported as the sum of minimum lease payments receivable and estimated residual value of the property subject to the contracts, reduced by unearned interest which is shown separately.

Dealer wholesale financing – Dealer wholesale financing is floating-rate wholesale loans to PACCAR dealers for new and used trucks and are recorded at amortized cost. The loans are collateralized by the trucks being financed.

Operating lease and other trade receivables – Operating lease and other trade receivables are monthly rentals due on operating leases, interest on loans and other amounts due within one year in the normal course of business.

## Allowance for Credit Losses:

Truck, Parts and Other: The Company historically has not experienced significant losses or past due amounts on trade and other receivables in its Truck, Parts and Other businesses. The Company’s Truck, Parts and Other trade receivable past dues are determined based on contractual payment terms. Accounts are considered past due once the unpaid balance is over 30 days outstanding. Accounts are charged-off against the allowance for credit losses when, in the judgment of management, they are considered to be uncollectible. The allowance for credit losses for Truck, Parts and Other was $2.4 and $3.2 for the years ended December 31, 2013 and 2012, respectively. Net charge-offs were $2.5, $3.4 and $1.1 for the years ended December 31, 2013, 2012 and 2011, respectively.

Financial Services: The Company continuously monitors the payment performance of 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.

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. 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.

On average, modifications extended contractual terms by approximately six months in 2013 and seven months in 2012 and did not have a significant effect on the weighted average term or interest rate of the total portfolio at December 31, 2013 and December 31, 2012.

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.

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 truck inventory financing loans to dealers that are collateralized by trucks and other collateral. The wholesale segment generally has less risk than the retail segment. Wholesale receivables generally are shorter in duration than retail receivables, and the Company requires 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 that are evaluated individually for impairment consist of all wholesale accounts and certain large retail accounts with past due balances or otherwise determined to be at a higher risk of loss. A finance receivable is impaired if it is considered probable the Company will be unable to collect all contractual interest and principal payments as scheduled. In addition, all retail loans and leases which have been classified as TDRs and all customer accounts over 90 days past due are considered impaired. Generally, impaired accounts are on non-accrual status. Impaired accounts classified as TDRs which have been performing for 90 consecutive days are placed on accrual status if it is deemed probable that the Company will collect all principal and interest payments.

Impaired receivables are 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 recorded investment, 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, a 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 matrix and categorizes the fair value as Level 2 in the hierarchy of fair value measurement. The pricing matrix is reviewed quarterly and updated as appropriate. The pricing matrix 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.

Accounts are charged-off against the allowance for credit losses when, in the judgment of management, they are considered uncollectible (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.

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. Cost of sales and revenues include shipping and handling costs incurred to deliver products to dealers and customers.

Equipment on Operating Leases: The Company’s Financial Services segment leases equipment under operating leases to its customers. In addition, in the Truck segment, equipment sold to customers in Europe subject to a residual value guarantee (RVG) by the Company is accounted for as an operating lease. Equipment is recorded at cost and is depreciated on the straight-line basis to the lower of the estimated residual value or guarantee value. Lease and guarantee periods generally range from three to five years. Estimated useful lives of the equipment range from four to nine years. The Company reviews residual values of equipment on operating leases periodically to determine that recorded amounts are appropriate.

Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is computed principally by the straight-line method based on the estimated useful lives of the various classes of assets. Certain production tooling is amortized on a unit of production basis.

Long-lived Assets and Goodwill: The Company evaluates the carrying value of property, plant and equipment when events and circumstances warrant a review. Goodwill is tested for impairment at least on an annual basis. There were no impairment charges for the three years ended December 31, 2013. Goodwill was $144.6 and $139.4 at December 31, 2013 and 2012, respectively.

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 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. The Company periodically assesses the adequacy of its recorded liabilities and adjusts them as appropriate to reflect actual experience. Revenue from extended warranty and R&M contracts is deferred and recognized to income generally on a straight-line basis over the contract period. Warranty and R&M costs on these contracts are recognized as incurred.

Derivative Financial Instruments: As part of its risk management strategy, the Company enters into derivative contracts to hedge against interest rates and foreign currency risk. 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



December 31, 2013, 2012 and 2011 (currencies in millions, except per share data)

speculation or trading. At the inception of each hedge relationship, the Company documents its risk management objectives, procedures and accounting treatment. All of the Company’s interest-rate and certain foreign exchange contracts are transacted under International Swaps and Derivatives Association (ISDA) master agreements. Each agreement permits the net settlement of amounts owed in the event of default and certain other termination events. For derivative financial instruments, the Company has elected not to offset derivative positions in the balance sheet with the same counterparty under the same agreements and is not required to post or receive collateral. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company had no material exposures to default at December 31, 2013.

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.

Foreign Currency Translation: For most of the Company’s foreign subsidiaries, the local currency is the functional currency. All assets and liabilities are translated at year-end exchange rates and all income statement amounts are translated at the weighted average rates for the period. Translation adjustments are recorded in accumulated other comprehensive income (loss). The Company uses the U.S. dollar as the functional currency for all but one of its Mexican subsidiaries, which uses the local currency. For the U.S. functional currency entities in Mexico, inventories, cost of sales, property, plant and equipment and depreciation are remeasured at historical rates and resulting adjustments are included in net income.

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.

Reclassifications: Certain liabilities for product support programs for 2012 were reclassified from current to non-current liabilities to conform to the 2013 presentation.

New Accounting Pronouncements: In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the consolidated financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if available under the applicable tax jurisdiction. The ASU is effective for annual periods beginning after December 15, 2013 and interim periods within those annual periods. The Company does not expect the adoption of the ASU to have a material impact on its consolidated financial statements.

In July 2013, the FASB issued ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this ASU permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes in addition to U.S. government and London Interbank Offered Rate. The amendments also remove the restriction on using different benchmark rates for similar hedges. The ASU is effective for qualifying new or redesignated hedging relationships entered on or after July 17, 2013. The Company adopted ASU 2013-10 in the third quarter of 2013; the implementation of this amendment did not have an impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires disclosure of additional information about reclassification adjustments from other comprehensive income. The ASU is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The Company adopted ASU 2013-02 in the first quarter of 2013; the implementation of this amendment resulted in additional disclosures (see Note N), but did not have an impact on the Company’s consolidated financial statements.



December 31, 2013, 2012 and 2011 (currencies in millions)

In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, an update to ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The ASUs require entities with derivatives, repurchase agreements and securities borrowing and lending transactions that are either offset on the balance sheet, or subject to a master netting arrangement, to provide expanded disclosures about the nature of the rights of offset. The updated ASU is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The Company adopted ASU 2013-01 in the first quarter of 2013; the implementation of this amendment resulted in additional disclosures (see Note O), but did not have an impact on the Company’s consolidated financial statements.

## B. INVESTMENTS IN MARKETABLE DEBT SECURITIES

Marketable debt securities consisted of the following at December 31:

<table><tr><td>2013</td><td>AMORTIZED COST</td><td>UNREALIZED GAINS</td><td>UNREALIZED LOSSES</td><td>FAIR VALUE</td></tr><tr><td>U.S. tax-exempt securities</td><td>$ 214.9</td><td>$ 1.2</td><td></td><td>$ 216.1</td></tr><tr><td>U.S. corporate securities</td><td>78.2</td><td>.1</td><td>$ .1</td><td>78.2</td></tr><tr><td>U.S. government and agency securities</td><td>5.5</td><td></td><td></td><td>5.5</td></tr><tr><td>Non-U.S. corporate securities</td><td>608.5</td><td>1.2</td><td>.4</td><td>609.3</td></tr><tr><td>Non-U.S. government securities</td><td>217.3</td><td>.7</td><td>.5</td><td>217.5</td></tr><tr><td>Other debt securities</td><td>140.5</td><td>.4</td><td></td><td>140.9</td></tr><tr><td></td><td>$1,264.9</td><td>$ 3.6</td><td>$ 1.0</td><td>$1,267.5</td></tr></table>

<table><tr><td>2012</td><td>AMORTIZED COST</td><td>UNREALIZED GAINS</td><td>UNREALIZED LOSSES</td><td>FAIR VALUE</td></tr><tr><td>U.S. tax-exempt securities</td><td>$ 217.2</td><td>$ 1.5</td><td>$ .1</td><td>$ 218.6</td></tr><tr><td>U.S. corporate securities</td><td>59.8</td><td>.3</td><td></td><td>60.1</td></tr><tr><td>U.S. government and agency securities</td><td>.8</td><td></td><td></td><td>.8</td></tr><tr><td>Non-U.S. corporate securities</td><td>447.5</td><td>1.4</td><td>.2</td><td>448.7</td></tr><tr><td>Non-U.S. government securities</td><td>349.3</td><td>5.8</td><td>.1</td><td>355.0</td></tr><tr><td>Other debt securities</td><td>108.9</td><td>.6</td><td></td><td>109.5</td></tr><tr><td></td><td>$1,183.5</td><td>$ 9.6</td><td>$ .4</td><td>$1,192.7</td></tr></table>

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. Gross realized gains were $2.0, $3.8 and $3.2, and gross realized losses were $7, $3.3 and $1.3 for the years ended December 31, 2013, 2012 and 2011, respectively.

Marketable debt securities with continuous unrealized losses and their related fair values were as follows:

<table><tr><td rowspan="2">At December 31,</td><td colspan="2">2013</td><td colspan="2">2012</td></tr><tr><td>LESS THAN TWELVE MONTHS</td><td>TWELVE MONTHS OR GREATER</td><td>LESS THAN TWELVE MONTHS</td><td>TWELVE MONTHS OR GREAT</td></tr><tr><td>Fair value</td><td>$ 388.3</td><td>$ 28.4</td><td>$ 291.0</td><td></td></tr><tr><td>Unrealized losses</td><td>.9</td><td>.1</td><td>.4</td><td></td></tr></table>

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.



December 31, 2013, 2012 and 2011 (currencies in millions)

Contractual maturities at December 31, 2013 were as follows:

<table><tr><td>Maturities:</td><td>AMORTIZED COST</td><td>FAIR VALUE</td></tr><tr><td>Within one year</td><td>$ 534.7</td><td>$ 535.5</td></tr><tr><td>One to five years</td><td>729.9</td><td>731.6</td></tr><tr><td>Six to ten years</td><td>.3</td><td>.4</td></tr><tr><td></td><td>$1,264.9</td><td>$1,267.5</td></tr></table>

Marketable debt securities included $4 and nil of variable rate demand obligations (VRDOs) at December 31, 2013 and 2012, respectively. VRDOs are debt instruments with long-term scheduled maturities which have interest rates that reset periodically.

## C. INVENTORIES

Inventories include the following:

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Finished products</td><td>$ 440.6</td><td>$ 432.0</td></tr><tr><td>Work in process and raw materials</td><td>545.2</td><td>519.8</td></tr><tr><td></td><td>985.8</td><td>951.8</td></tr><tr><td>Less LIFO reserve</td><td>(172.2)</td><td>(169.4)</td></tr><tr><td></td><td>$ 813.6</td><td>$ 782.4</td></tr></table>

Inventories valued using the LIFO method comprised 47% and 49% of consolidated inventories before deducting the LIFO reserve at December 31, 2013 and 2012, respectively.

## D. FINANCE AND OTHER RECEIVABLES

Finance and other receivables include the following:

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Loans</td><td>$3,977.4</td><td>$3,738.2</td></tr><tr><td>Direct financing leases</td><td>2,680.8</td><td>2,489.3</td></tr><tr><td>Sales-type finance leases</td><td>921.1</td><td>916.8</td></tr><tr><td>Dealer wholesale financing</td><td>1,616.5</td><td>1,541.0</td></tr><tr><td>Operating lease and other trade receivables</td><td>121.3</td><td>112.0</td></tr><tr><td>Unearned interest: Finance leases</td><td>(375.7)</td><td>(369.0)</td></tr><tr><td></td><td>$8,941.4</td><td>$8,428.3</td></tr><tr><td>Less allowance for losses:</td><td></td><td></td></tr><tr><td>Loans and leases</td><td>(110.9)</td><td>(112.6)</td></tr><tr><td>Dealer wholesale financing</td><td>(10.4)</td><td>(11.8)</td></tr><tr><td>Operating lease and other trade receivables</td><td>(8.0)</td><td>(5.6)</td></tr><tr><td></td><td>$8,812.1</td><td>$8,298.3</td></tr></table>

The net activity of sales-type finance leases, dealer direct loans and dealer wholesale financing on new trucks is shown in the operating section of the Consolidated Statements of Cash Flows since those receivables finance the sale of Company inventory.



December 31, 2013, 2012 and 2011 (currencies in millions)

Annual minimum payments due on finance receivables are as follows:

<table><tr><td></td><td>LOANS</td><td>FINANCE LEASES</td></tr><tr><td>2014</td><td>$1,285.8</td><td>$1,041.5</td></tr><tr><td>2015</td><td>1,028.4</td><td>849.8</td></tr><tr><td>2016</td><td>806.7</td><td>675.4</td></tr><tr><td>2017</td><td>535.9</td><td>451.5</td></tr><tr><td>2018</td><td>277.2</td><td>226.6</td></tr><tr><td>Thereafter</td><td>43.4</td><td>127.5</td></tr><tr><td></td><td>$3,977.4</td><td>$3,372.3</td></tr></table>

Estimated residual values included with finance leases amounted to $229.6 in 2013 and $206.0 in 2012. Experience indicates substantially all of dealer wholesale financing will be repaid within one year. In addition, repayment experience indicates that some loans, leases and other finance receivables will be paid prior to contract maturity, while others may be extended or modified.

For the following credit quality disclosures, finance receivables are classified as dealer wholesale, dealer retail and customer retail segments. The dealer wholesale segment consists of truck inventory financing to PACCAR dealers. The dealer retail segment consists of loans and leases to participating dealers and franchises that use the proceeds to fund customers' acquisition of commercial vehicles and related equipment. The customer retail segment consists of loans and leases directly to customers for the acquisition of commercial vehicles and related equipment. Customer retail receivables are further segregated between fleet and owner/operator classes. The fleet class consists of customer retail accounts operating more than five trucks. All other customer retail accounts are considered owner/operator. Each individual class has similar measurement attributes, risk characteristics and common methods to monitor and assess credit risk.

Allowance for Credit Losses: The allowance for credit losses is summarized as follows:

<table><tr><td rowspan="3"></td><td colspan="6">2013</td></tr><tr><td colspan="2">DEALER</td><td colspan="2">CUSTOMER</td><td></td><td></td></tr><tr><td>WHOLESALE</td><td>RETAIL</td><td>RETAIL</td><td>OTHER*</td><td>TOTAL</td><td></td></tr><tr><td>Balance at January 1</td><td>$11.8</td><td>$ 13.4</td><td>$ 99.2</td><td>$ 5.6</td><td>$ 130.0</td><td></td></tr><tr><td>Provision for losses</td><td>(.9)</td><td>.2</td><td>9.8</td><td>3.8</td><td>12.9</td><td></td></tr><tr><td>Charge-offs</td><td>(.5)</td><td></td><td>(21.2)</td><td>(2.8)</td><td>(24.5)</td><td></td></tr><tr><td>Recoveries</td><td></td><td></td><td>9.9</td><td>1.0</td><td>10.9</td><td></td></tr><tr><td>Currency translation and other</td><td></td><td>(.2)</td><td>(.2)</td><td>.4</td><td></td><td></td></tr><tr><td>Balance at December 31</td><td>$10.4</td><td>$ 13.4</td><td>$ 97.5</td><td>$ 8.0</td><td>$ 129.3</td><td></td></tr><tr><td></td><td colspan="6">2012</td></tr><tr><td></td><td colspan="2">DEALER</td><td colspan="2">CUSTOMER</td><td></td><td></td></tr><tr><td></td><td>WHOLESALE</td><td>RETAIL</td><td>RETAIL</td><td>OTHER*</td><td>TOTAL</td><td></td></tr><tr><td>Balance at January 1</td><td>$11.7</td><td>$ 12.0</td><td>$106.5</td><td>$ 8.8</td><td>$ 139.0</td><td></td></tr><tr><td>Provision for losses</td><td>1.8</td><td>1.4</td><td>13.1</td><td>3.7</td><td>20.0</td><td></td></tr><tr><td>Charge-offs</td><td></td><td></td><td>(32.1)</td><td>(6.6)</td><td>(38.7)</td><td></td></tr><tr><td>Recoveries</td><td></td><td></td><td>7.0</td><td>.4</td><td>7.4</td><td></td></tr><tr><td>Currency translation and other</td><td>(1.7)</td><td></td><td>4.7</td><td>(.7)</td><td>2.3</td><td></td></tr><tr><td>Balance at December 31</td><td>$11.8</td><td>$ 13.4</td><td>$ 99.2</td><td>$ 5.6</td><td>$ 130.0</td><td></td></tr></table>

 \( ^{*} \) Operating lease and other trade receivables.



## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012 and 2011 (currencies in millions)

<table><tr><td rowspan="3"></td><td colspan="6">2011</td></tr><tr><td colspan="2">DEALER</td><td colspan="2">CUSTOMER</td><td rowspan="2">OTHER*</td><td rowspan="2">TOTAL</td></tr><tr><td>WHOLESALE</td><td>RETAIL</td><td>RETAIL</td><td>RETAIL</td></tr><tr><td>Balance at January 1</td><td>$ 7.5</td><td>$ 10.1</td><td>$ 123.4</td><td>$ 4.0</td><td>$ 145.0</td><td></td></tr><tr><td>Provision for losses</td><td>5.8</td><td>1.9</td><td>19.8</td><td>13.9</td><td>41.4</td><td></td></tr><tr><td>Charge-offs</td><td>(1.4)</td><td></td><td>(47.3)</td><td>(10.2)</td><td>(58.9)</td><td></td></tr><tr><td>Recoveries</td><td></td><td></td><td>12.7</td><td>1.2</td><td>13.9</td><td></td></tr><tr><td>Currency translation and other</td><td>(.2)</td><td></td><td>(2.1)</td><td>(.1)</td><td>(2.4)</td><td></td></tr><tr><td>Balance at December 31</td><td>$11.7</td><td>$ 12.0</td><td>$ 106.5</td><td>$ 8.8</td><td>$ 139.0</td><td></td></tr></table>

 \( ^{*} \) Operating lease and other trade receivables.

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

<table><tr><td rowspan="2">At December 31, 2013</td><td colspan="2">DEALER</td><td colspan="2">CUSTOMER</td></tr><tr><td>WHOLESALE</td><td>RETAIL</td><td>RETAIL</td><td>TOTAL</td></tr><tr><td>Recorded investment for impaired finance receivables evaluated individually</td><td>$ 8.5</td><td></td><td>$ 42.1</td><td>$ 50.6</td></tr><tr><td>Allowance for impaired finance receivables determined individually</td><td>1.4</td><td></td><td>5.9</td><td>7.3</td></tr><tr><td>Recorded investment for finance receivables evaluated collectively</td><td>1,608.0</td><td>$1,525.6</td><td>5,635.9</td><td>8,769.5</td></tr><tr><td>Allowance for finance receivables determined collectively</td><td>9.0</td><td>13.4</td><td>91.6</td><td>114.0</td></tr></table>

<table><tr><td rowspan="2">At December 31, 2012</td><td colspan="2">DEALER</td><td colspan="2">CUSTOMER</td></tr><tr><td>WHOLESALE</td><td>RETAIL</td><td>RETAIL</td><td>TOTAL</td></tr><tr><td>Recorded investment for impaired finance receivables evaluated individually</td><td>$ 3.6</td><td>$ .1</td><td>$ 67.4</td><td>$ 71.1</td></tr><tr><td>Allowance for impaired finance receivables determined individually</td><td>2.2</td><td></td><td>10.8</td><td>13.0</td></tr><tr><td>Recorded investment for finance receivables evaluated collectively</td><td>1,537.4</td><td>1,429.6</td><td>5,278.2</td><td>8,245.2</td></tr><tr><td>Allowance for finance receivables determined collectively</td><td>9.6</td><td>13.4</td><td>88.4</td><td>111.4</td></tr></table>

The recorded investment for finance receivables that are on non-accrual status is as follows:

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Dealer:</td><td></td><td></td></tr><tr><td>Wholesale</td><td>$ 8.0</td><td>$ 3.1</td></tr><tr><td>Retail</td><td></td><td>.1</td></tr><tr><td>Customer retail:</td><td></td><td></td></tr><tr><td>Fleet</td><td>30.5</td><td>42.8</td></tr><tr><td>Owner/operator</td><td>8.6</td><td>11.7</td></tr></table>



December 31, 2013, 2012 and 2011 (currencies in millions)

Impaired Loans: Impaired loans with no specific reserves were $10.7 and $6.8 at December 31, 2013 and 2012, respectively. Impaired loans with a specific reserve are summarized below in which the impaired loans with specific reserve represent the unpaid principal balance. The recorded investment of impaired loans as of December 31, 2013 and 2012 was not significantly different than the unpaid principal balance.

<table><tr><td rowspan="2">At December 31, 2013</td><td colspan="2">DEALER</td><td colspan="3">CUSTOMER RETAIL</td></tr><tr><td>WHOLESALE</td><td>RETAIL</td><td>FLEET</td><td>OWNER/OPERATOR</td><td>TOTAL</td></tr><tr><td>Impaired loans with specific reserve</td><td>$8.5</td><td></td><td>$10.8</td><td>$3.1</td><td>$22.4</td></tr><tr><td>Associated allowance</td><td>(1.4)</td><td></td><td>(2.1)</td><td>(.6)</td><td>(4.1)</td></tr><tr><td>Net carrying amount of impaired loans</td><td>$7.1</td><td></td><td>$8.7</td><td>$2.5</td><td>$18.3</td></tr><tr><td>Average recorded investment</td><td>$5.8</td><td></td><td>$28.9</td><td>$5.0</td><td>$39.7</td></tr><tr><td></td><td colspan="2">DEALER</td><td colspan="3">CUSTOMER RETAIL</td></tr><tr><td>At December 31, 2012</td><td>WHOLESALE</td><td>RETAIL</td><td>FLEET</td><td>OWNER/OPERATOR</td><td>TOTAL</td></tr><tr><td>Impaired loans with specific reserve</td><td>$3.6</td><td></td><td>$43.9</td><td>$6.8</td><td>$54.3</td></tr><tr><td>Associated allowance</td><td>(2.2)</td><td></td><td>(7.3)</td><td>(1.2)</td><td>(10.7)</td></tr><tr><td>Net carrying amount of impaired loans</td><td>$1.4</td><td></td><td>$36.6</td><td>$5.6</td><td>$43.6</td></tr><tr><td>Average recorded investment</td><td>$9.4</td><td></td><td>$35.0</td><td>$9.2</td><td>$53.6</td></tr></table>

During the period the loans above were considered impaired, interest income recognized on a cash basis is as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Interest income recognized:</td><td></td><td></td><td></td></tr><tr><td>Dealer wholesale</td><td>$ .1</td><td>$ .1</td><td>$ .4</td></tr><tr><td>Customer retail - fleet</td><td>2.9</td><td>1.2</td><td>2.7</td></tr><tr><td>Customer retail - owner/operator</td><td>.9</td><td>.8</td><td>2.0</td></tr><tr><td></td><td>$ 3.9</td><td>$ 2.1</td><td>$ 5.1</td></tr></table>

Credit Quality: The Company’s customers are principally concentrated in the transportation industry in North America, Europe and Australia. The Company’s portfolio is diversified over a large number of customers and dealers with no single customer or dealer balances representing over 4% of the total portfolio. 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 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 there is a meaningful correlation between the past due status of customers and the risk of loss.



December 31, 2013, 2012 and 2011 (currencies in millions)

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 tables below summarize the Company’s finance receivables by credit quality indicator and portfolio class.

<table><tr><td rowspan="2">At December 31, 2013</td><td colspan="2">DEALER</td><td colspan="2">CUSTOMER RETAIL</td><td rowspan="2">TOTAL</td></tr><tr><td>WHOLESALE</td><td>RETAIL</td><td>FLEET</td><td>OWNER/OPERATOR</td></tr><tr><td>Performing</td><td>$1,576.9</td><td>$1,520.1</td><td>$4,396.5</td><td>$1,219.5</td><td>$8,713.0</td></tr><tr><td>Watch</td><td>31.1</td><td>5.5</td><td>12.7</td><td>7.2</td><td>56.5</td></tr><tr><td>At-risk</td><td>8.5</td><td></td><td>33.3</td><td>8.8</td><td>50.6</td></tr><tr><td></td><td>$1,616.5</td><td>$1,525.6</td><td>$4,442.5</td><td>$1,235.5</td><td>$8,820.1</td></tr><tr><td></td><td colspan="2">DEALER</td><td colspan="2">CUSTOMER RETAIL</td><td></td></tr><tr><td></td><td>WHOLESALE</td><td>RETAIL</td><td>FLEET</td><td>OWNER/OPERATOR</td><td>TOTAL</td></tr><tr><td>Performing</td><td>$1,479.1</td><td>$1,423.3</td><td>$3,878.4</td><td>$1,365.6</td><td>$8,146.4</td></tr><tr><td>Watch</td><td>58.3</td><td>6.3</td><td>23.5</td><td>10.7</td><td>98.8</td></tr><tr><td>At-risk</td><td>3.6</td><td>.1</td><td>54.7</td><td>12.7</td><td>71.1</td></tr><tr><td></td><td>$1,541.0</td><td>$1,429.7</td><td>$3,956.6</td><td>$1,389.0</td><td>$8,316.3</td></tr></table>

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.

<table><tr><td rowspan="2">At December 31, 2013</td><td colspan="2">DEALER</td><td colspan="2">CUSTOMER RETAIL</td><td rowspan="2">TOTAL</td></tr><tr><td>WHOLESALE</td><td>RETAIL</td><td>FLEET</td><td>OWNER/OPERATOR</td></tr><tr><td>Current and up to 30 days past due</td><td>$1,611.7</td><td>$1,525.6</td><td>$4,417.5</td><td>$1,221.4</td><td>$8,776.2</td></tr><tr><td>31-60 days past due</td><td>1.7</td><td></td><td>9.2</td><td>6.3</td><td>17.2</td></tr><tr><td>Greater than 60 days past due</td><td>3.1</td><td></td><td>15.8</td><td>7.8</td><td>26.7</td></tr><tr><td></td><td>$1,616.5</td><td>$1,525.6</td><td>$4,442.5</td><td>$1,235.5</td><td>$8,820.1</td></tr><tr><td></td><td colspan="2">DEALER</td><td colspan="2">CUSTOMER RETAIL</td><td></td></tr><tr><td></td><td>WHOLESALE</td><td>RETAIL</td><td>FLEET</td><td>OWNER/OPERATOR</td><td>TOTAL</td></tr><tr><td>Current and up to 30 days past due</td><td>$1,537.0</td><td>$1,429.7</td><td>$3,934.8</td><td>$1,369.0</td><td>$8,270.5</td></tr><tr><td>31-60 days past due</td><td>.5</td><td></td><td>9.4</td><td>7.9</td><td>17.8</td></tr><tr><td>Greater than 60 days past due</td><td>3.5</td><td></td><td>12.4</td><td>12.1</td><td>28.0</td></tr><tr><td></td><td>$1,541.0</td><td>$1,429.7</td><td>$3,956.6</td><td>$1,389.0</td><td>$8,316.3</td></tr></table>



December 31, 2013, 2012 and 2011 (currencies in millions)

Troubled Debt Restructurings: The balance of TDRs was $27.6 and $38.5 at December 31, 2013 and 2012, respectively. At modification date, the pre-modification and post-modification recorded investment balances for finance receivables modified during the period by portfolio class are as follows:

<table><tr><td rowspan="2"></td><td colspan="2">2013</td><td colspan="2">2012</td></tr><tr><td colspan="2">RECORDED INVESTMENT</td><td colspan="2">RECORDED INVESTMENT</td></tr><tr><td></td><td>PRE-MODIFICATION</td><td>POST-MODIFICATION</td><td>PRE-MODIFICATION</td><td>POST-MODIFICATION</td></tr><tr><td>Fleet</td><td>$ 11.4</td><td>$ 11.2</td><td>$ 64.0</td><td>$ 54.2</td></tr><tr><td>Owner/operator</td><td>2.4</td><td>2.4</td><td>2.7</td><td>2.7</td></tr><tr><td></td><td>$ 13.8</td><td>$ 13.6</td><td>$ 66.7</td><td>$ 56.9</td></tr></table>

The effect on the allowance for credit losses from such modifications was not significant at December 31, 2013. The decrease in the post-modification recorded investment in 2012 primarily reflects a TDR of one large customer in the U.S. during the fourth quarter of 2012. The restructuring resulted in a charge-off of $8.2 at December 31, 2012. A specific reserve had been provided for this exposure in prior periods.

TDRs modified during the previous twelve months that subsequently defaulted (i.e., became more than 30 days past due) in the year ended by portfolio class are as follows:

<table><tr><td></td><td colspan="2">2013</td><td>2012</td></tr><tr><td>Fleet</td><td>$ 4.6</td><td>$ 19.3</td><td></td></tr><tr><td>Owner/operator</td><td>.7</td><td>.6</td><td></td></tr><tr><td></td><td>$ 5.3</td><td>$ 19.9</td><td></td></tr></table>

The TDRs that subsequently defaulted did not significantly impact the Company’s allowance for credit losses at December 31, 2013 and 2012.

Repossessions: When the Company determines a customer is not likely to meet its contractual commitments, the Company repossesses the vehicles which serve as collateral for the loans, finance leases and equipment under operating lease. The Company records the vehicles as used truck inventory included in Financial Services other assets on the Consolidated Balance Sheets. The balance of repossessed inventory at December 31, 2013 and 2012 was $13.7 and $20.9, respectively. Proceeds from the sales of repossessed assets were $63.2, $62.2 and $80.1 for the years ended December 31, 2013, 2012 and 2011, respectively. These amounts are included in proceeds from asset disposals in the 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 Income.

## E. EQUIPMENT ON OPERATING LEASES

A summary of equipment on operating leases for Truck, Parts and Other and for the Financial Services segment is as follows:

<table><tr><td rowspan="2"></td><td colspan="2">TRUCK, PARTS AND OTHER</td><td colspan="2">FINANCIAL SERVICES</td></tr><tr><td>2013</td><td>2012</td><td>2013</td><td>2012</td></tr><tr><td>Equipment on operating leases</td><td>$1,357.8</td><td>$1,183.7</td><td>$3,212.2</td><td>$2,778.2</td></tr><tr><td>Less allowance for depreciation</td><td>(319.5)</td><td>(325.8)</td><td>(922.1)</td><td>(747.4)</td></tr><tr><td></td><td>$1,038.3</td><td>$ 857.9</td><td>$2,290.1</td><td>$2,030.8</td></tr></table>

Annual minimum lease payments due on Financial Services operating leases beginning January 1, 2014 are $530.3, $373.4, $245.0, $127.2, $41.9 and $6.6 thereafter.



December 31, 2013, 2012 and 2011 (currencies in millions)

When the equipment is sold subject to an RVG, the full sales price is received from the customer. A liability is established for the residual value obligation with the remainder of the proceeds recorded as deferred lease revenue. These amounts are summarized below:

<table><tr><td rowspan="2">At December 31,</td><td colspan="2">TRUCK, PARTS AND OTHER</td></tr><tr><td>2013</td><td>2012</td></tr><tr><td>Residual value guarantees</td><td>$ 653.9</td><td>$ 496.3</td></tr><tr><td>Deferred lease revenues</td><td>439.9</td><td>407.2</td></tr><tr><td></td><td>$1,093.8</td><td>$ 903.5</td></tr></table>

The deferred lease revenue is amortized on a straight-line basis over the RVG contract period. At December 31, 2013, the annual amortization of deferred revenues beginning January 1, 2014 is $175.3, $127.5, $82.7, $47.8, $6.5 and $1 thereafter. Annual maturities of the RVGs beginning January 1, 2014 are $180.0, $149.2, $144.0, $120.4, $45.6 and $14.7 thereafter.

## F. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment include the following:

<table><tr><td>At December 31,</td><td>USEFUL LIVES</td><td>2013</td><td>2012</td></tr><tr><td>Land</td><td></td><td>$ 238.5</td><td>$ 231.0</td></tr><tr><td>Buildings and improvements</td><td>10-40 years</td><td>1,024.9</td><td>960.1</td></tr><tr><td>Machinery, equipment and production tooling</td><td>3-12 years</td><td>3,345.8</td><td>2,678.6</td></tr><tr><td>Construction in progress</td><td></td><td>321.2</td><td>667.9</td></tr><tr><td></td><td></td><td>4,930.4</td><td>4,537.6</td></tr><tr><td>Less allowance for depreciation</td><td></td><td>(2,417.1)</td><td>(2,224.7)</td></tr><tr><td></td><td></td><td>$2,513.3</td><td>$2,312.9</td></tr></table>

## G. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER

Accounts payable, accrued expenses and other include the following:

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Truck, Parts and Other:</td><td></td><td></td></tr><tr><td>Accounts payable</td><td>$ 975.8</td><td>$ 838.0</td></tr><tr><td>Product support reserves</td><td>291.7</td><td>265.2</td></tr><tr><td>Accrued expenses</td><td>264.1</td><td>261.7</td></tr><tr><td>Accrued capital expenditures</td><td>139.9</td><td>241.1</td></tr><tr><td>Salaries and wages</td><td>223.9</td><td>210.3</td></tr><tr><td>Other</td><td>259.6</td><td>256.9</td></tr><tr><td></td><td>$2,155.0</td><td>$2,073.2</td></tr></table>



## H. PRODUCT SUPPORT LIABILITIES

Changes in product support liabilities are summarized as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Balance at January 1</td><td>$ 540.7</td><td>$ 448.7</td><td>$ 372.2</td></tr><tr><td>Cost accruals and revenue deferrals</td><td>340.4</td><td>305.4</td><td>304.3</td></tr><tr><td>Payments and revenue recognized</td><td>(260.6)</td><td>(219.7)</td><td>(219.6)</td></tr><tr><td>Currency translation</td><td>10.0</td><td>6.3</td><td>(8.2)</td></tr><tr><td>Balance at December 31</td><td>$ 630.5</td><td>$ 540.7</td><td>$ 448.7</td></tr></table>

Product support liabilities are included in the accompanying Consolidated Balance Sheets as follows:

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Truck, Parts and Other:</td><td></td><td></td></tr><tr><td>Accounts payable, accrued expenses and other</td><td>$ 291.7</td><td>$ 265.2</td></tr><tr><td>Other liabilities</td><td>327.5</td><td>265.8</td></tr><tr><td>Financial Services:</td><td></td><td></td></tr><tr><td>Deferred taxes and other liabilities</td><td>11.3</td><td>9.7</td></tr><tr><td></td><td>$ 630.5</td><td>$ 540.7</td></tr></table>

## I. BORROWINGS AND CREDIT ARRANGEMENTS

Truck, Parts and Other long-term debt at December 31, 2013 and 2012, consisted of $150.0 of notes with an effective interest rate of 6.9% which was repaid upon maturity in February 2014.

Financial Services borrowings include the following:

<table><tr><td rowspan="2"></td><td colspan="2">2013</td><td colspan="2">2012</td></tr><tr><td>EFFECTIVE RATE</td><td>BORROWINGS</td><td>EFFECTIVE RATE</td><td>BORROWINGS</td></tr><tr><td>At December 31,</td><td>1.2%</td><td>$2,266.8</td><td>1.1%</td><td>$3,325.0</td></tr><tr><td>Commercial paper</td><td>5.0%</td><td>242.1</td><td>5.5%</td><td>237.7</td></tr><tr><td>Medium-term bank loans</td><td></td><td>2,508.9</td><td></td><td>3,562.7</td></tr><tr><td></td><td></td><td>1.8%</td><td>5,765.3</td><td>4,167.4</td></tr><tr><td>Term notes</td><td>1.7%</td><td>$8,274.2</td><td>1.8%</td><td>$7,730.1</td></tr></table>

The commercial paper and term notes of $8,032.1 and $7,492.4 at December 31, 2013 and 2012 include a net effect of fair value hedges and unamortized discounts of $1.5 and $6.3, respectively. The effective rate is the weighted average rate as of December 31, 2013 and 2012 and includes the effects of interest-rate contracts.



December 31, 2013, 2012 and 2011 (currencies in millions)

The annual maturities of the Financial Services borrowings are as follows:

<table><tr><td>Beginning January 1, 2014</td><td>COMMERCIAL PAPER</td><td>BANK LOANS</td><td>TERM NOTES</td><td>TOTAL</td></tr><tr><td>2014</td><td>$2,267.8</td><td>$165.6</td><td>$1,562.3</td><td>$3,995.7</td></tr><tr><td>2015</td><td></td><td>23.0</td><td>1,599.7</td><td>1,622.7</td></tr><tr><td>2016</td><td></td><td>38.2</td><td>1,738.8</td><td>1,777.0</td></tr><tr><td>2017</td><td></td><td>15.3</td><td>612.0</td><td>627.3</td></tr><tr><td>2018</td><td></td><td></td><td>250.0</td><td>250.0</td></tr><tr><td></td><td>$2,267.8</td><td>$242.1</td><td>$5,762.8</td><td>$8,272.7</td></tr></table>

Interest paid on borrowings was $149.3, $149.9 and $192.1 in 2013, 2012 and 2011, respectively. For the years ended December 31, 2013, 2012 and 2011, the Company capitalized interest on borrowings of $10.3 in Truck, Parts and Other in each respective year.

The primary sources of borrowings in the capital markets are commercial paper and medium-term notes issued in the public markets, and to a lesser extent, bank loans. The medium-term notes are issued by PACCAR Inc, PACCAR Financial Corp. (PFC), PACCAR Financial Europe and PACCAR Financial Mexico.

In December 2011, PACCAR Inc filed a shelf registration under the Securities Act of 1933. The current registration expires in the fourth quarter of 2014 and does not limit the principal amount of debt securities that may be issued during the period. The total amount of medium-term notes outstanding for PACCAR Inc as of December 31, 2013 was $500.0.

In November 2012, the Company’s U.S. finance subsidiary, PFC, filed a shelf registration under the Securities Act of 1933 effective for a three year period. The total amount of medium-term notes outstanding for PFC as of December 31, 2013 was $3,850.0. The registration expires in the fourth quarter of 2015 and does not limit the principal amount of debt securities that may be issued during that period.

At December 31, 2013, the Company’s European finance subsidiary, PACCAR Financial Europe, had €418.5 available for issuance under a €1,500.0 medium-term note program registered with the London Stock Exchange. The program was renewed in the second quarter of 2013 and is renewable annually through the filing of a new prospectus.

In April 2011, PACCAR Financial Mexico registered a 10,000.0 peso medium-term note and commercial paper program with the Comision Nacional Bancaria y de Valores. The registration expires in 2016 and limits the amount of commercial paper (up to one year) to 5,000.0 pesos. At December 31, 2013, 7,380.0 pesos remained available for issuance.

The Company has line of credit arrangements of $3,707.9, of which $3,465.8 were unused at December 31, 2013. Included in these arrangements are $3,000.0 of syndicated bank facilities, of which $1,000.0 matures in June 2014, $1,000.0 matures in June 2017 and $1,000.0 matures in June 2018. The Company intends to replace these credit facilities as they expire with facilities of similar amounts and duration. These credit facilities are maintained primarily to provide backup liquidity for commercial paper borrowings and maturing medium-term notes. There were no borrowings under the syndicated bank facilities for the year ended December 31, 2013.

## J. LEASES

The Company leases certain facilities and computer equipment under operating leases. Leases expire at various dates through the year 2023. At January 1, 2014, annual minimum rent payments under non-cancelable operating leases having initial or remaining terms in excess of one year are $23.4, $18.9, $12.6, $8.6, $6.1 and $2.4 thereafter. For the years ended December 31, 2013, 2012 and 2011, total rental expenses under all leases amounted to $34.1, $29.1 and $29.0, respectively.



December 31, 2013, 2012 and 2011 (currencies in millions)

## K. COMMITMENTS AND CONTINGENCIES

The Company is involved in various stages of investigations and cleanup actions in different countries related to environmental matters. In certain of these matters, the Company has been designated as a “potentially responsible party” by domestic and foreign environmental agencies. The Company has an undiscounted accrual to provide for the estimated costs to investigate and complete cleanup actions where it is probable that the Company will incur such costs in the future. Expenditures related to environmental activities for the years ended December 31, 2013, 2012 and 2011 were $2.3, $1.7 and $1.2, respectively.

While the timing and amount of the ultimate costs associated with future environmental cleanup cannot be determined, management expects that these matters will not have a significant effect on the Company’s consolidated financial position.

At December 31, 2013, PACCAR had standby letters of credit of $20.6, which guarantee various insurance and financing activities. At December 31, 2013, PACCAR's financial services companies, in the normal course of business, had outstanding commitments to fund new loan and lease transactions amounting to $407.4. The commitments generally expire in 90 days. The Company had other commitments, primarily to purchase production inventory, equipment and energy amounting to $175.6, $132.7, $7.6 for 2014, 2015 and 2016, respectively, and nil thereafter.

PACCAR is a defendant in various legal proceedings and, in addition, there are various other contingent liabilities arising in the normal course of business. After consultation with legal counsel, management does not anticipate that disposition of these proceedings and contingent liabilities will have a material effect on the consolidated financial statements.

## I. EMPLOYEE BENEFITS

Severance Costs: The Company incurred severance expense in 2013, 2012 and 2011 of $3.5, $4.8 and $.8, respectively.

Defined Benefit Pension Plans: PACCAR has several defined benefit pension plans, which cover a majority of its employees. The Company evaluates its actuarial assumptions on an annual basis and considers changes based upon market conditions and other factors.

The Company funds its pensions in accordance with applicable employee benefit and tax laws. The Company contributed $26.2 to its pension plans in 2013 and $190.8 in 2012. The Company expects to contribute in the range of $30.0 to $70.0 to its pension plans in 2014, of which $15.5 is estimated to satisfy minimum funding requirements. Annual benefits expected to be paid beginning January 1, 2014 are $71.6, $74.5, $81.0, $85.5, $91.0 and for the five years thereafter, a total of $532.0.

Plan assets are invested in global equity and debt securities through professional investment managers with the objective to achieve targeted risk adjusted returns and maintain liquidity sufficient to fund current benefit payments. Typically, each defined benefit plan has an investment policy that includes a target for asset mix, including maximum and minimum ranges for allocation percentages by investment category. The actual allocation of assets may vary at times based upon rebalancing policies and other factors. The Company periodically assesses the target asset mix by evaluating external sources of information regarding the long-term historical return, volatilities and expected future returns for each investment category. In addition, the long-term rates of return assumptions for pension accounting are reviewed annually to ensure they are appropriate. Target asset mix and forecast long-term returns by asset category are considered in determining the assumed long-term rates of return, although historical returns realized are given some consideration.



December 31, 2013, 2012 and 2011 (currencies in millions)

The fair value of mutual funds, common stocks and U.S. treasuries is determined using the market approach and is based on the quoted prices in active markets. These securities are categorized as Level 1. The fair value of commingled trust funds is determined using the market approach and is based on the unadjusted net asset value per unit as determined by the sponsor of the fund based on the fair values of underlying investments. These securities are categorized as Level 2. The fair value of debt securities is determined using the market approach and is based on the quoted market prices of the securities or other observable inputs. These securities are categorized as Level 2.

The following information details the allocation of plan assets by investment type. See Note P for definitions of fair value levels.

<table><tr><td>At December 31, 2013</td><td>TARGET</td><td>LEVEL 1</td><td>LEVEL 2</td><td>TOTAL</td></tr><tr><td>Equities:</td><td></td><td></td><td></td><td></td></tr><tr><td>U.S. equities</td><td></td><td></td><td>$ 585.5</td><td>$ 585.5</td></tr><tr><td>Global equities</td><td></td><td></td><td>661.7</td><td>661.7</td></tr><tr><td>Total equities</td><td>50-70%</td><td></td><td>1,247.2</td><td>1,247.2</td></tr><tr><td>Fixed income:</td><td></td><td></td><td></td><td></td></tr><tr><td>U.S. fixed income</td><td></td><td>$ 252.5</td><td>299.6</td><td>552.1</td></tr><tr><td>Non-U.S. fixed income</td><td></td><td></td><td>260.3</td><td>260.3</td></tr><tr><td>Total fixed income</td><td>30-50%</td><td>252.5</td><td>559.9</td><td>812.4</td></tr><tr><td>Cash and other</td><td></td><td>1.2</td><td>47.6</td><td>48.8</td></tr><tr><td>Total plan assets</td><td></td><td>$ 253.7</td><td>$1,854.7</td><td>$2,108.4</td></tr><tr><td>At December 31, 2012</td><td>TARGET</td><td>LEVEL 1</td><td>LEVEL 2</td><td>TOTAL</td></tr><tr><td>Equities:</td><td></td><td></td><td></td><td></td></tr><tr><td>U.S. equities</td><td></td><td></td><td>$ 549.9</td><td>$ 549.9</td></tr><tr><td>Global equities</td><td></td><td></td><td>566.3</td><td>566.3</td></tr><tr><td>Total equities</td><td>50-70%</td><td></td><td>1,116.2</td><td>1,116.2</td></tr><tr><td>Fixed income:</td><td></td><td></td><td></td><td></td></tr><tr><td>U.S. fixed income</td><td></td><td>$ 230.8</td><td>275.8</td><td>506.6</td></tr><tr><td>Non-U.S. fixed income</td><td></td><td></td><td>234.9</td><td>234.9</td></tr><tr><td>Total fixed income</td><td>30-50%</td><td>230.8</td><td>510.7</td><td>741.5</td></tr><tr><td>Cash and other</td><td></td><td>.3</td><td>43.0</td><td>43.3</td></tr><tr><td>Total plan assets</td><td></td><td>$ 231.1</td><td>$1,669.9</td><td>$1,901.0</td></tr></table>

The following additional data relates to all pension plans of the Company:

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Weighted average assumptions:</td><td></td><td></td></tr><tr><td>Discount rate</td><td>4.7%</td><td>4.0%</td></tr><tr><td>Rate of increase in future compensation levels</td><td>3.9%</td><td>3.8%</td></tr><tr><td>Assumed long-term rate of return on plan assets</td><td>6.6%</td><td>6.6%</td></tr></table>



## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012 and 2011 (currencies in millions)

The components of the change in projected benefit obligation and change in plan assets are as follows:

<table><tr><td></td><td>2013</td><td>2012</td></tr><tr><td>Change in projected benefit obligation:</td><td></td><td></td></tr><tr><td>Benefit obligation at January 1</td><td>$2,068.0</td><td>$1,808.1</td></tr><tr><td>Service cost</td><td>73.5</td><td>64.1</td></tr><tr><td>Interest cost</td><td>81.0</td><td>81.4</td></tr><tr><td>Benefits paid</td><td>(68.4)</td><td>(71.1)</td></tr><tr><td>Actuarial (gain) loss</td><td>(199.2)</td><td>163.8</td></tr><tr><td>Currency translation and other</td><td>3.2</td><td>18.3</td></tr><tr><td>Participant contributions</td><td>3.5</td><td>3.4</td></tr><tr><td>Projected benefit obligation at December 31</td><td>$1,961.6</td><td>$2,068.0</td></tr><tr><td>Change in plan assets:</td><td></td><td></td></tr><tr><td>Fair value of plan assets at January 1</td><td>$1,901.0</td><td>$1,549.9</td></tr><tr><td>Employer contributions</td><td>26.2</td><td>190.8</td></tr><tr><td>Actual return on plan assets</td><td>242.5</td><td>208.8</td></tr><tr><td>Benefits paid</td><td>(68.4)</td><td>(71.1)</td></tr><tr><td>Currency translation and other</td><td>3.6</td><td>19.2</td></tr><tr><td>Participant contributions</td><td>3.5</td><td>3.4</td></tr><tr><td>Fair value of plan assets at December 31</td><td>2,108.4</td><td>1,901.0</td></tr><tr><td>Funded status at December 31</td><td>$ 146.8</td><td>$ (167.0)</td></tr><tr><td>Amounts recorded on balance sheet:</td><td>2013</td><td>2012</td></tr><tr><td>Other noncurrent assets</td><td>$ 217.7</td><td>$ 10.0</td></tr><tr><td>Other liabilities</td><td>70.9</td><td>177.0</td></tr><tr><td>Accumulated other comprehensive (income) loss:</td><td></td><td></td></tr><tr><td>Actuarial loss</td><td>257.0</td><td>490.4</td></tr><tr><td>Prior service cost</td><td>4.9</td><td>5.7</td></tr><tr><td>Net initial transition amount</td><td>.3</td><td>.4</td></tr></table>

Of the December 31, 2013 amounts in accumulated other comprehensive income (loss), $20.8 of unrecognized actuarial loss and $1.3 of unrecognized prior service cost are expected to be amortized into net pension expense in 2014.

The accumulated benefit obligation for all pension plans of the Company was $1,742.2 and $1,794.7 at December 31, 2013 and 2012, respectively.

Information for all plans with an accumulated benefit obligation in excess of plan assets is as follows:

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Projected benefit obligation</td><td>$ 78.6</td><td>$ 214.5</td></tr><tr><td>Accumulated benefit obligation</td><td>63.4</td><td>198.8</td></tr><tr><td>Fair value of plan assets</td><td>9.2</td><td>123.5</td></tr></table>



December 31, 2013, 2012 and 2011 (currencies in millions)

The components of pension expense are as follows:

<table><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Service cost</td><td>$ 73.5</td><td>$ 64.1</td><td>$ 45.5</td></tr><tr><td>Interest on projected benefit obligation</td><td>81.0</td><td>81.4</td><td>81.6</td></tr><tr><td>Expected return on assets</td><td>(119.4)</td><td>(110.8)</td><td>(105.1)</td></tr><tr><td>Amortization of prior service costs</td><td>1.3</td><td>1.4</td><td>1.5</td></tr><tr><td>Recognized actuarial loss</td><td>44.0</td><td>39.2</td><td>24.7</td></tr><tr><td>Curtailment gain</td><td>(.3)</td><td></td><td></td></tr><tr><td>Settlement loss</td><td></td><td>4.8</td><td></td></tr><tr><td>Net pension expense</td><td>$ 80.1</td><td>$ 80.1</td><td>$ 48.2</td></tr></table>

Multi-employer Plans: The Company participates in multi-employer plans in the U.S. and Europe. These are typically under collective bargaining agreements and cover its union-represented employees. The Company’s participation in the following multi-employer plans for the years ended December 31 are as follows:

<table><tr><td rowspan="2">PENSION PLAN</td><td rowspan="2">EIN</td><td rowspan="2">PENSION PLAN NUMBER</td><td colspan="3">COMPANY CONTRIBUTIONS</td></tr><tr><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Metal and Electrical Engineering Industry Pension Fund</td><td></td><td>135668</td><td>$ 24.5</td><td>$ 22.0</td><td>$ 22.7</td></tr><tr><td>Western Metal Industry Pension Plan</td><td>91-6033499</td><td>001</td><td>1.5</td><td>1.6</td><td>1.8</td></tr><tr><td>Other plans</td><td></td><td></td><td>.9</td><td>1.0</td><td>.6</td></tr><tr><td></td><td></td><td></td><td>$ 26.9</td><td>$ 24.6</td><td>$ 25.1</td></tr></table>

The Company contributions shown in the table above approximates the multi-employer pension expense for each of the years ended December 31, 2013, 2012 and 2011, respectively.

Metal and Electrical Engineering Industry Pension Fund is a multi-employer union plan incorporating all DAF employees in the Netherlands and is covered by a collective bargaining agreement that will expire on April 30, 2015. The Company’s contributions were less than 5% of the total contributions to the plan for the last two reporting periods ending December 2013. The plan is required by law (the Netherlands Pension Act) to have a coverage ratio in excess of 104.3%. Because the coverage ratio of the plan was 103.8% at December 31, 2013, a funding improvement plan is in place. In February 2014, a decision to reduce pension benefits as part of the funding improvement plan was approved.

The Western Metal Industry Pension Plan is located in the U.S. and is covered by a collective bargaining agreement that will expire on November 1, 2015. In accordance with the U.S. Pension Protection Act of 2006, the plan was certified as critical (red) status and a funding improvement plan was implemented requiring additional contributions through 2022 as long as the plan remains in critical status. For the last two reporting periods ending December 2013, contributions by the Company were greater than 5% and less than 12% of the total contributions to the plan.

Other plans are principally located in the U.S. For the last two reporting periods, none were under funding improvement plans and Company contributions to these plans are less than 5% of each plan’s total contributions.

There were no significant changes for the multi-employer plans in the periods presented that affected comparability between periods.



December 31, 2013, 2012 and 2011 (currencies in millions)

Defined Contribution Plans: The Company maintains several defined contribution benefit plans whereby it contributes designated amounts on behalf of participant employees. The largest plan is for U.S. salaried employees where the Company matches a percentage of employee contributions up to an annual limit. The match was 5% of eligible pay in 2013, 2012 and 2011. Other plans are located in Australia, Brasil, Canada, the Netherlands and Belgium. Expenses for these plans were $34.0, $33.6 and $29.3 in 2013, 2012 and 2011, respectively.

## M. INCOME TAXES

The Company’s tax rate is based on income and statutory tax rates in the various jurisdictions in which the Company operates. Tax law requires certain items to be included in the Company’s tax returns at different times than the items reflected in the Company’s financial statements. As a result, the Company’s annual tax rate reflected in its financial statements is different than that reported in its tax returns. Some of these differences are permanent, such as expenses that are not deductible in the Company’s tax return, and some differences reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. The Company establishes valuation allowances for its deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The components of the Company’s income before income taxes include the following:

<table><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Domestic</td><td>$ 827.0</td><td>$ 786.6</td><td>$ 607.0</td></tr><tr><td>Foreign</td><td>868.0</td><td>842.3</td><td>899.9</td></tr><tr><td></td><td>$1,695.0</td><td>$1,628.9</td><td>$1,506.9</td></tr></table>

The components of the Company’s provision for income taxes include the following:

<table><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Current provision:</td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>$ 191.4</td><td>$ 126.2</td><td>$ .4</td></tr><tr><td>State</td><td>20.9</td><td>31.5</td><td>20.5</td></tr><tr><td>Foreign</td><td>214.1</td><td>207.9</td><td>219.6</td></tr><tr><td></td><td>426.4</td><td>365.6</td><td>240.5</td></tr><tr><td>Deferred provision:</td><td></td><td></td><td></td></tr><tr><td>Federal</td><td>68.8</td><td>134.4</td><td>207.8</td></tr><tr><td>State</td><td>18.4</td><td>9.5</td><td>3.4</td></tr><tr><td>Foreign</td><td>10.1</td><td>7.8</td><td>12.9</td></tr><tr><td></td><td>97.3</td><td>151.7</td><td>224.1</td></tr><tr><td></td><td>$ 523.7</td><td>$ 517.3</td><td>$ 464.6</td></tr></table>

Tax benefits recognized for net operating loss carryforwards were $4.5, $3.2 and $8.1 for the years ended 2013, 2012 and 2011, respectively.



December 31, 2013, 2012 and 2011 (currencies in millions)

A reconciliation of the statutory U.S. federal tax rate to the effective income tax rate is as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Statutory rate</td><td>35.0%</td><td>35.0%</td><td>35.0%</td></tr><tr><td>Effect of:</td><td></td><td></td><td></td></tr><tr><td>Tax on foreign earnings</td><td>(3.8)</td><td>(3.1)</td><td>(3.3)</td></tr><tr><td>Other, net</td><td>(.3)</td><td>(.1)</td><td>(.9)</td></tr><tr><td></td><td>30.9%</td><td>31.8%</td><td>30.8%</td></tr></table>

The Company has not provided a deferred tax liability for the temporary differences of approximately $4,400.0 related to the investments in foreign subsidiaries that are considered to be indefinitely reinvested. The amount of the deferred tax liability would be approximately $850.0 as of December 31, 2013.

Included in domestic taxable income for 2013, 2012 and 2011 are $241.7, $256.0 and $311.0 of foreign earnings, respectively, which are not indefinitely reinvested, for which domestic taxes of $19.5, $22.1 and $28.5, respectively, were provided as the difference between the domestic and foreign rate on those earnings.

At December 31, 2013, the Company had net operating loss carryforwards of $474.1, of which $229.6 related to foreign subsidiaries and $244.5 related to states in the U.S. The related deferred tax asset was $78.2. The carryforward periods range from five years to indefinite, subject to certain limitations under applicable laws. The future tax benefits of net operating loss carryforwards are evaluated on a regular basis, including a review of historical and projected operating results.

The tax effects of temporary differences representing deferred tax assets and liabilities are as follows:

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Assets:</td><td></td><td></td></tr><tr><td>Accrued expenses</td><td>$ 188.4</td><td>$ 179.9</td></tr><tr><td>Postretirement benefit plans</td><td></td><td>64.4</td></tr><tr><td>Net operating loss carryforwards</td><td>78.2</td><td>64.2</td></tr><tr><td>Allowance for losses on receivables</td><td>47.0</td><td>50.4</td></tr><tr><td>Other</td><td>88.4</td><td>83.3</td></tr><tr><td></td><td>402.0</td><td>442.2</td></tr><tr><td>Valuation allowance</td><td>(43.9)</td><td>(21.2)</td></tr><tr><td></td><td>358.1</td><td>421.0</td></tr><tr><td>Liabilities:</td><td></td><td></td></tr><tr><td>Financial Services leasing depreciation</td><td>(851.8)</td><td>(775.8)</td></tr><tr><td>Depreciation and amortization</td><td>(296.1)</td><td>(241.4)</td></tr><tr><td>Postretirement benefit plans</td><td>(51.3)</td><td></td></tr><tr><td>Other</td><td>(5.4)</td><td>(14.1)</td></tr><tr><td></td><td>(1,204.6)</td><td>(1,031.3)</td></tr><tr><td>Net deferred tax liability</td><td>$ (846.5)</td><td>$ (610.3)</td></tr></table>



## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012 and 2011 (currencies in millions)

The balance sheet classification of the Company’s deferred tax assets and liabilities are as follows:

<table><tr><td>At December 31,</td><td>2013</td><td>2012</td></tr><tr><td>Truck, Parts and Other:</td><td></td><td></td></tr><tr><td>Other current assets</td><td>$ 122.2</td><td>$ 151.2</td></tr><tr><td>Other noncurrent assets, net</td><td>33.1</td><td>40.9</td></tr><tr><td>Accounts payable, accrued expenses and other</td><td>(.6)</td><td>(1.7)</td></tr><tr><td>Other liabilities</td><td>(218.7)</td><td>(90.7)</td></tr><tr><td>Financial Services:</td><td></td><td></td></tr><tr><td>Other assets</td><td>77.2</td><td>72.4</td></tr><tr><td>Deferred taxes and other liabilities</td><td>(859.7)</td><td>(782.4)</td></tr><tr><td>Net deferred tax liability</td><td>($ 846.5)</td><td>$ (610.3)</td></tr></table>

Cash paid for income taxes was $434.0, $448.2 and $284.0 in 2013, 2012 and 2011, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Balance at January 1</td><td>$23.4</td><td>$ 18.3</td><td>$ 43.1</td></tr><tr><td>Additions for tax positions related to the current year</td><td>1.0</td><td>1.0</td><td>.9</td></tr><tr><td>Additions for tax positions related to prior years</td><td>.3</td><td>9.9</td><td>5.6</td></tr><tr><td>Reductions for tax positions related to prior years</td><td>(.7)</td><td>(5.2)</td><td>(22.9)</td></tr><tr><td>Reductions related to settlements</td><td>(9.7)</td><td>(.3)</td><td>(7.7)</td></tr><tr><td>Lapse of statute of limitations</td><td>(1.2)</td><td>(.3)</td><td>(.7)</td></tr><tr><td>Balance at December 31</td><td>$13.1</td><td>$ 23.4</td><td>$ 18.3</td></tr></table>

The Company had $13.1 and $23.4 of unrecognized tax benefits, of which $1.5 and $1.9 would impact the effective tax rate, if recognized, as of December 31, 2013, and 2012, respectively.

The Company recognized $1.1 of income, $1.0 of expense and $2.1 of income related to interest and penalties in 2013, 2012 and 2011, respectively. Accrued interest expense and penalties were $5.5 and $6.7 as of December 31, 2013 and 2012, respectively. Interest and penalties are classified as income taxes in the Consolidated Statements of Income.

The Company believes it is reasonably possible that approximately $7 to $8 of unrecognized tax benefits, resulting from intercompany transactions, will be resolved within the next twelve months from Competent Authority negotiations between tax authorities of two jurisdictions; the company does not expect the net impact of these negotiations will be material to its effective tax rate. As of December 31, 2013, the United States Internal Revenue Service has completed examinations of the Company’s tax returns for all years through 2010. The Company’s tax returns for other major jurisdictions remain subject to examination for the years ranging from 2006 through 2013.



December 31, 2013, 2012 and 2011 (currencies in millions, except per share data)

## N. STOCKHOLDERS' EQUITY

Accumulated Other Comprehensive Income (Loss): The components of accumulated other comprehensive income (loss) (AOCI) as of December 31, 2013 and 2012 and the changes in AOCI, net of tax, included in the Consolidated Balance Sheets, consisted of the following:

<table><tr><td></td><td>UNREALIZED GAINS AND (LOSSES) ON DERIVATIVE CONTRACTS</td><td>UNREALIZED GAINS AND (LOSSES) ON MARKETABLE DEBT SECURITIES</td><td>PENSION PLANS</td><td>FOREIGN CURRENCY TRANSLATION</td><td>TOTAL</td></tr><tr><td>Balance at December 31, 2012</td><td>$ (27.2)</td><td>$ 6.6</td><td>$ (496.5)</td><td>$ 357.6</td><td>$ (159.5)</td></tr><tr><td>Recorded into AOCI</td><td>36.9</td><td>(6.1)</td><td>204.8</td><td>(71.3)</td><td>164.3</td></tr><tr><td>Reclassified out of AOCI</td><td>(24.8)</td><td>1.2</td><td>29.5</td><td>(2.0)</td><td>3.9</td></tr><tr><td>Net other comprehensive income (loss)</td><td>12.1</td><td>(4.9)</td><td>234.3</td><td>(73.3)</td><td>168.2</td></tr><tr><td>Balance at December 31, 2013</td><td>$ (15.1)</td><td>$ 1.7</td><td>$ (262.2)</td><td>$ 284.3</td><td>$ 8.7</td></tr></table>

Reclassifications out of AOCI during the year ended December 31, 2013 are as follows:

<table><tr><td>AOCI COMPONENTS</td><td>LINE ITEM IN THE CONSOLIDATED STATEMENT OF INCOME</td><td>AMOUNT RECLASSIFIED OUT OF AOCI</td></tr><tr><td>Unrealized gains and losses on derivative contracts:</td><td></td><td></td></tr><tr><td>Truck, Parts and Other</td><td></td><td></td></tr><tr><td>Foreign-exchange contracts</td><td>Cost of sales and revenues</td><td>$ 1.0</td></tr><tr><td></td><td>Interest and other expense (income), net</td><td>(6)</td></tr><tr><td>Financial Services</td><td></td><td></td></tr><tr><td>Interest-rate contracts</td><td>Interest and other borrowing expenses</td><td>(36.0)</td></tr><tr><td></td><td>Pre-tax expense reduction</td><td>(35.6)</td></tr><tr><td></td><td>Tax expense</td><td>10.8</td></tr><tr><td></td><td>After-tax expense reduction</td><td>(24.8)</td></tr><tr><td>Unrealized gains and losses on marketable debt securities:</td><td></td><td></td></tr><tr><td>Marketable debt securities</td><td>Investment income</td><td>1.7</td></tr><tr><td></td><td>Tax expense</td><td>(5)</td></tr><tr><td></td><td>After-tax income increase</td><td>1.2</td></tr><tr><td>Pension plans:</td><td></td><td></td></tr><tr><td>Truck, Parts and Other</td><td></td><td></td></tr><tr><td>Prior service costs</td><td>Cost of sales and revenues $4, SG\)A $6, R\)D $3</td><td>1.3</td></tr><tr><td>Actuarial loss</td><td>Cost of sales and revenues $21.4, SG&A $20.3</td><td>41.7</td></tr><tr><td>Financial Services</td><td></td><td></td></tr><tr><td>Actuarial loss</td><td>SG&A</td><td>2.3</td></tr><tr><td></td><td>Pre-tax expense increase</td><td>45.3</td></tr><tr><td></td><td>Tax benefit</td><td>(15.8)</td></tr><tr><td></td><td>After-tax expense increase</td><td>29.5</td></tr><tr><td>Foreign currency translation:</td><td></td><td></td></tr><tr><td>Truck, Parts and Other</td><td>Interest and other expense (income), net</td><td>(1.1)</td></tr><tr><td>Financial Services</td><td>Interest and other borrowing expenses</td><td>(9)</td></tr><tr><td></td><td>Expense reduction</td><td>(2.0)</td></tr><tr><td>Total reclassifications out of AOCI</td><td></td><td>$ 3.9</td></tr></table>

Other Capital Stock Changes: In 2012 and 2011, the Company purchased and retired 4.2 million and 9.2 million treasury shares, respectively. In 2013, there were no purchases or retirements of treasury shares.



December 31, 2013, 2012 and 2011 (currencies in millions)

## O. DERIVATIVE FINANCIAL INSTRUMENTS

As part of its risk management strategy, the Company enters into derivative contracts to hedge against interest rate and foreign currency risk.

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 or 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 December 31, 2013, the notional amount of the Company’s interest-rate contracts was $3,746.6. Notional maturities for all interest-rate contracts are $1,219.2 for 2014, $1,248.4 for 2015, $1,020.9 for 2016, $219.6 for 2017, $13.5 for 2018 and $25.0 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, the Brazilian real and the Mexican peso. The objective is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. At December 31, 2013, the notional amount of the outstanding foreign-exchange contracts was $301.8. Foreign-exchange contracts mature within one year.

The following table presents the balance sheet classification and fair value of derivative financial instruments:

<table><tr><td rowspan="2">At December 31,</td><td colspan="2">2013</td><td colspan="2">2012</td></tr><tr><td>ASSETS</td><td>LIABILITIES</td><td>ASSETS</td><td>LIABILITIES</td></tr><tr><td>Derivatives designated under hedge accounting:</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest-rate contracts:</td><td></td><td></td><td></td><td></td></tr><tr><td>Financial Services:</td><td></td><td></td><td></td><td></td></tr><tr><td>Other assets</td><td>$46.3</td><td></td><td>$ 4.6</td><td></td></tr><tr><td>Deferred taxes and other liabilities</td><td></td><td>$ 67.7</td><td></td><td>$111.7</td></tr><tr><td>Foreign-exchange contracts:</td><td></td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other:</td><td></td><td></td><td></td><td></td></tr><tr><td>Other current assets</td><td></td><td></td><td>.2</td><td></td></tr><tr><td>Accounts payable, accrued expenses and other</td><td></td><td>.6</td><td></td><td>.1</td></tr><tr><td>Total</td><td>$46.3</td><td>$ 68.3</td><td>$ 4.8</td><td>$111.8</td></tr><tr><td>Economic hedges:</td><td></td><td></td><td></td><td></td></tr><tr><td>Interest-rate contracts:</td><td></td><td></td><td></td><td></td></tr><tr><td>Financial Services:</td><td></td><td></td><td></td><td></td></tr><tr><td>Deferred taxes and other liabilities</td><td></td><td></td><td></td><td>$ .6</td></tr><tr><td>Foreign-exchange contracts:</td><td></td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other:</td><td></td><td></td><td></td><td></td></tr><tr><td>Other current assets</td><td>$ .6</td><td></td><td>$ .3</td><td></td></tr><tr><td>Accounts payable, accrued expenses and other</td><td></td><td>$ .2</td><td></td><td>.2</td></tr><tr><td>Financial Services:</td><td></td><td></td><td></td><td></td></tr><tr><td>Other assets</td><td>1.1</td><td></td><td></td><td></td></tr><tr><td>Deferred taxes and other liabilities</td><td></td><td>.1</td><td></td><td>.4</td></tr><tr><td>Total</td><td>$ 1.7</td><td>$ .3</td><td>$ .3</td><td>$ 1.2</td></tr></table>



December 31, 2013, 2012 and 2011 (currencies in millions)

The following tables present the balance sheet classification of the gross and pro forma net amounts of derivative financial instruments:

<table><tr><td>At December 31, 2013</td><td>GROSS AMOUNT RECOGNIZED IN BALANCE SHEET</td><td>AMOUNT NOT OFFSET IN FINANCIAL INSTRUMENTS</td><td>PRO FORMA NET AMOUNT</td></tr><tr><td>Assets:</td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other</td><td></td><td></td><td></td></tr><tr><td>Foreign-exchange contracts</td><td>$ .6</td><td>$ (.2)</td><td>$ .4</td></tr><tr><td>Financial Services</td><td></td><td></td><td></td></tr><tr><td>Interest-rate contracts</td><td>46.3</td><td>(16.1)</td><td>30.2</td></tr><tr><td>Foreign-exchange contracts</td><td>1.1</td><td></td><td>1.1</td></tr><tr><td>Total derivative assets</td><td>$ 48.0</td><td>$ (16.3)</td><td>$ 31.7</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other</td><td></td><td></td><td></td></tr><tr><td>Foreign-exchange contracts</td><td>$ .8</td><td>$ (.2)</td><td>$ .6</td></tr><tr><td>Financial Services</td><td></td><td></td><td></td></tr><tr><td>Interest-rate contracts</td><td>67.7</td><td>(16.1)</td><td>51.6</td></tr><tr><td>Foreign-exchange contracts</td><td>.1</td><td></td><td>.1</td></tr><tr><td>Total derivative liabilities</td><td>$ 68.6</td><td>$ (16.3)</td><td>$ 52.3</td></tr><tr><td>At December 31, 2012</td><td>GROSS AMOUNT RECOGNIZED IN BALANCE SHEET</td><td>AMOUNT NOT OFFSET IN FINANCIAL INSTRUMENTS</td><td>PRO FORMA NET AMOUNT</td></tr><tr><td>Assets:</td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other</td><td></td><td></td><td></td></tr><tr><td>Foreign-exchange contracts</td><td>$ .5</td><td></td><td>$ .5</td></tr><tr><td>Financial Services</td><td></td><td></td><td></td></tr><tr><td>Interest-rate contracts</td><td>4.6</td><td>$ (2.6)</td><td>2.0</td></tr><tr><td>Total derivative assets</td><td>$ 5.1</td><td>$ (2.6)</td><td>$ 2.5</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other</td><td></td><td></td><td></td></tr><tr><td>Foreign-exchange contracts</td><td>$ .3</td><td></td><td>$ .3</td></tr><tr><td>Financial Services</td><td></td><td></td><td></td></tr><tr><td>Interest-rate contracts</td><td>112.3</td><td>$ (2.6)</td><td>109.7</td></tr><tr><td>Foreign-exchange contracts</td><td>.4</td><td></td><td>.4</td></tr><tr><td>Total derivative liabilities</td><td>$113.0</td><td>$ (2.6)</td><td>$110.4</td></tr></table>

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 Income as follows:

<table><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Interest-rate swaps</td><td>$ .7</td><td>$ (3.8)</td><td>$ (4.4)</td></tr><tr><td>Term notes</td><td>(.8)</td><td>4.5</td><td>3.7</td></tr></table>

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 (loss) 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 6.4 years.



December 31, 2013, 2012 and 2011 (currencies in millions)

Amounts in accumulated other comprehensive income (loss) 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. For the periods ended December 31, 2013, 2012 and 2011, the Company recognized gains on the ineffective portion of 1.1, 1.5 and 1.8, respectively.

The following table presents the pre-tax effects of derivative instruments recognized in OCI:

<table><tr><td rowspan="2">Year Ended December 31,</td><td colspan="2">2013</td><td colspan="2">2012</td><td colspan="2">2011</td></tr><tr><td>INTEREST-RATE CONTRACTS</td><td>FOREIGN-EXCHANGE CONTRACTS</td><td>INTEREST-RATE CONTRACTS</td><td>FOREIGN-EXCHANGE CONTRACT</td><td>INTEREST-RATE CONTRACTS</td><td>FOREIGN-EXCHANGE</td></tr><tr><td>Gain (loss) recognized in other comprehensive income:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other</td><td></td><td>$ (1.2)</td><td></td><td>$ (1.3)</td><td></td><td>$ 2.3</td></tr><tr><td>Financial Services</td><td>$ 54.4</td><td></td><td>$ (27.9)</td><td></td><td>$ (55.2)</td><td></td></tr><tr><td>Total</td><td>$ 54.4</td><td>$ (1.2)</td><td>$ (27.9)</td><td>$ (1.3)</td><td>$ (55.2)</td><td>$ 2.3</td></tr></table>

Expense (income) reclassified out of accumulated other comprehensive (income) loss into income:

<table><tr><td>Truck, Parts and Other:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cost of sales and revenues</td><td>$ 1.0</td><td></td><td>$ 3.2</td><td></td><td>$ (4.1)</td></tr><tr><td>Interest and other expense (income), net</td><td>(.6)</td><td></td><td>.2</td><td></td><td></td></tr><tr><td>Financial Services:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest and other borrowing expenses</td><td>$ (36.0)</td><td></td><td>$ 19.3</td><td></td><td>$ 51.8</td></tr><tr><td>Total</td><td>$ (36.0)</td><td>$ .4</td><td>$ 19.3</td><td>$ 3.4</td><td>$ 51.8</td></tr></table>

The amount of loss recorded in accumulated other comprehensive income (loss) at December 31, 2013 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 $21.0, 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.

Economic Hedges: For other risk management purposes, the Company enters into derivative instruments 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 expense (income) recognized in earnings related to economic hedges is as follows:

<table><tr><td rowspan="2">Year Ended December 31,</td><td colspan="2">2013</td><td colspan="2">2012</td><td colspan="2">2011</td></tr><tr><td>INTEREST-RATE CONTRACTS</td><td>FOREIGN-EXCHANGE CONTRACTS</td><td>INTEREST-RATE CONTRACTS</td><td>FOREIGN-EXCHANGE CONTRACT</td><td>INTEREST-RATE CONTRACTS</td><td>FOREIGN-EXCHANGE</td></tr><tr><td>Truck, Parts and Other:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Cost of sales and revenues</td><td></td><td>$ (1.3)</td><td></td><td>$ (.3)</td><td></td><td>$ .2</td></tr><tr><td>Interest and other expense (income), net</td><td></td><td>.3</td><td></td><td>(.5)</td><td></td><td>(2.8)</td></tr><tr><td>Financial Services:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest and other borrowing expenses</td><td>$ (1.5)</td><td>(9.6)</td><td>$ 1.0</td><td>.6</td><td>$ (4.1)</td><td>(1.2)</td></tr><tr><td>Total</td><td>$ (1.5)</td><td>$ (10.6)</td><td>$ 1.0</td><td>$ (.2)</td><td>$ (4.1)</td><td>$ (3.8)</td></tr></table>



December 31, 2013, 2012 and 2011 (currencies in millions)

## P. 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 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 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.

Level 3 – Valuations are based on model-based techniques for which some or all of the assumptions are obtained from indirect 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 year ended December 31, 2013. 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 U.S. government agency obligations, 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.



December 31, 2013, 2012 and 2011 (currencies in millions)

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

<table><tr><td>At December 31, 2013</td><td>LEVEL 1</td><td>LEVEL 2</td><td>TOTAL</td></tr><tr><td>Assets:</td><td></td><td></td><td></td></tr><tr><td>Marketable debt securities</td><td></td><td></td><td></td></tr><tr><td>U.S. tax-exempt securities</td><td></td><td>$ 216.1</td><td>$ 216.1</td></tr><tr><td>U.S. corporate securities</td><td></td><td>78.2</td><td>78.2</td></tr><tr><td>U.S. government and agency securities</td><td>$5.2</td><td>.3</td><td>5.5</td></tr><tr><td>Non-U.S. corporate securities</td><td></td><td>609.3</td><td>609.3</td></tr><tr><td>Non-U.S. government securities</td><td></td><td>217.5</td><td>217.5</td></tr><tr><td>Other debt securities</td><td></td><td>140.9</td><td>140.9</td></tr><tr><td>Total marketable debt securities</td><td>$5.2</td><td>$1,262.3</td><td>$1,267.5</td></tr><tr><td>Derivatives</td><td></td><td></td><td></td></tr><tr><td>Cross currency swaps</td><td></td><td>$ 40.9</td><td>$ 40.9</td></tr><tr><td>Interest-rate swaps</td><td></td><td>5.4</td><td>5.4</td></tr><tr><td>Foreign-exchange contracts</td><td></td><td>1.7</td><td>1.7</td></tr><tr><td>Total derivative assets</td><td></td><td>$ 48.0</td><td>$ 48.0</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td></tr><tr><td>Derivatives</td><td></td><td></td><td></td></tr><tr><td>Cross currency swaps</td><td></td><td>$ 42.1</td><td>$ 42.1</td></tr><tr><td>Interest-rate swaps</td><td></td><td>25.6</td><td>25.6</td></tr><tr><td>Foreign-exchange contracts</td><td></td><td>.9</td><td>.9</td></tr><tr><td>Total derivative liabilities</td><td></td><td>$ 68.6</td><td>$ 68.6</td></tr><tr><td>At December 31, 2012</td><td>LEVEL 1</td><td>LEVEL 2</td><td>TOTAL</td></tr><tr><td>Assets:</td><td></td><td></td><td></td></tr><tr><td>Marketable debt securities</td><td></td><td></td><td></td></tr><tr><td>U.S. tax-exempt securities</td><td></td><td>$ 218.6</td><td>$ 218.6</td></tr><tr><td>U.S. corporate securities</td><td></td><td>60.1</td><td>60.1</td></tr><tr><td>U.S. government and agency securities</td><td>$ .6</td><td>.2</td><td>.8</td></tr><tr><td>Non-U.S. corporate securities</td><td></td><td>448.7</td><td>448.7</td></tr><tr><td>Non-U.S. government securities</td><td></td><td>355.0</td><td>355.0</td></tr><tr><td>Other debt securities</td><td></td><td>109.5</td><td>109.5</td></tr><tr><td>Total marketable debt securities</td><td>$ .6</td><td>$1,192.1</td><td>$1,192.7</td></tr><tr><td>Derivatives</td><td></td><td></td><td></td></tr><tr><td>Cross currency swaps</td><td></td><td>$ 3.0</td><td>$ 3.0</td></tr><tr><td>Interest-rate swaps</td><td></td><td>1.6</td><td>1.6</td></tr><tr><td>Foreign-exchange contracts</td><td></td><td>.5</td><td>.5</td></tr><tr><td>Total derivative assets</td><td></td><td>$ 5.1</td><td>$ 5.1</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td></tr><tr><td>Derivatives</td><td></td><td></td><td></td></tr><tr><td>Cross currency swaps</td><td></td><td>$ 74.1</td><td>$ 74.1</td></tr><tr><td>Interest-rate swaps</td><td></td><td>38.2</td><td>38.2</td></tr><tr><td>Foreign-exchange contracts</td><td></td><td>.7</td><td>.7</td></tr><tr><td>Total derivative liabilities</td><td></td><td>$ 113.0</td><td>$ 113.0</td></tr></table>



December 31, 2013, 2012 and 2011 (currencies in millions, except per share data)

## 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 cash which is categorized as Level 1 and 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 operating lease 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.

The Company’s estimate of fair value for fixed rate loans and debt that are not carried at fair value was as follows:

<table><tr><td rowspan="2">At December 31,</td><td colspan="2">2013</td><td colspan="2">2012</td></tr><tr><td>CARRYING AMOUNT</td><td>FAIR VALUE</td><td>CARRYING AMOUNT</td><td>FAIR VALUE</td></tr><tr><td>Assets:</td><td></td><td></td><td></td><td></td></tr><tr><td>Financial Services fixed rate loans</td><td>$3,592.7</td><td>$3,627.3</td><td>$3,361.7</td><td>$3,434.8</td></tr><tr><td>Liabilities:</td><td></td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other fixed rate debt</td><td>150.0</td><td>151.1</td><td>150.0</td><td>160.6</td></tr><tr><td>Financial Services fixed rate debt</td><td>4,039.1</td><td>4,087.0</td><td>3,277.2</td><td>3,350.5</td></tr></table>

## Q. STOCK COMPENSATION PLANS

PACCAR has certain plans under which officers and key employees may be granted options to purchase shares of the Company’s authorized but unissued common stock under plans approved by stockholders. Non-employee directors and certain officers may be granted restricted shares of the Company’s common stock under plans approved by stockholders. Options outstanding under these plans were granted with exercise prices equal to the fair market value of the Company’s common stock at the date of grant. Options expire no later than ten years from the grant date and generally vest after three years. Restricted stock awards generally vest over three years or earlier upon meeting certain age and service requirements.

The Company recognizes compensation cost on these options and restricted stock awards on a straight-line basis over the requisite period the employee is required to render service. The maximum number of shares of the Company’s common stock authorized for issuance under these plans is 46.7 million shares, and as of December 31, 2013, the maximum number of shares available for future grants was 16.8 million.

The estimated fair value of each option award is determined on the date of grant using the Black-Scholes-Merton option pricing model that uses assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on historical volatility. The dividend yield is based on an estimated future dividend yield using projected net income for the next five years, implied dividends and Company stock price. The expected term is based on the period of time that options granted are expected to be outstanding based on historical experience.

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Risk-free interest rate</td><td>.88%</td><td>.74%</td><td>2.22%</td></tr><tr><td>Expected volatility</td><td>44%</td><td>47%</td><td>45%</td></tr><tr><td>Expected dividend yield</td><td>3.3%</td><td>3.8%</td><td>2.8%</td></tr><tr><td>Expected term</td><td>5 years</td><td>5 years</td><td>5 years</td></tr><tr><td>Weighted average grant date fair value of options per share</td><td>13.78</td><td>12.67</td><td>16.45</td></tr></table>



December 31, 2013, 2012 and 2011 (currencies in millions, except per share data)

The fair value of options granted was $11.2, $12.0 and $10.9 for the years ended December 31, 2013, 2012 and 2011, respectively. The fair value of options vested during the years ended December 31, 2013, 2012 and 2011 was $8.8, $8.9 and $7.6, respectively.

A summary of activity under the Company’s stock plans is presented below:

<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Intrinsic value of options exercised</td><td>$ 19.6</td><td>$ 15.4</td><td>$ 13.5</td></tr><tr><td>Cash received from stock option exercises</td><td>31.0</td><td>13.9</td><td>10.9</td></tr><tr><td>Tax benefit related to stock option exercises</td><td>3.9</td><td>4.4</td><td>4.7</td></tr><tr><td>Stock based compensation</td><td>14.0</td><td>13.9</td><td>13.8</td></tr><tr><td>Tax benefit related to stock based compensation</td><td>4.9</td><td>4.8</td><td>4.8</td></tr></table>

The summary of options as of December 31, 2013 and changes during the year then ended is presented below:

<table><tr><td></td><td>NUMBER OF SHARES</td><td>PER SHARE EXERCISE PRICE*</td><td>REMAINING CONTRACTUAL LIFE IN YEARS*</td><td>AGGREGATE INTRINSIC VALUE</td></tr><tr><td>Options outstanding at January 1</td><td>5,042,800</td><td>$38.56</td><td></td><td></td></tr><tr><td>Granted</td><td>814,300</td><td>47.81</td><td></td><td></td></tr><tr><td>Exercised</td><td>(952,300)</td><td>32.57</td><td></td><td></td></tr><tr><td>Cancelled</td><td>(159,600)</td><td>45.61</td><td></td><td></td></tr><tr><td>Options outstanding at December 31</td><td>4,745,200</td><td>$41.11</td><td>5.90</td><td>$ 85.7</td></tr><tr><td>Vested and expected to vest</td><td>4,562,900</td><td>$40.92</td><td>5.80</td><td>$ 83.3</td></tr><tr><td>Exercisable</td><td>2,582,200</td><td>$36.46</td><td>3.97</td><td>$ 58.6</td></tr></table>

 \( ^{*} \) Weighted Average

The fair value of restricted shares is determined based upon the stock price on the date of grant. The summary of nonvested restricted shares as of December 31, 2013 and changes during the year then ended is presented below:

<table><tr><td>NONVESTED SHARES</td><td>NUMBER OF SHARES</td><td>GRANT DATE FAIR VALUE*</td></tr><tr><td>Nonvested awards outstanding at January 1</td><td>152,100</td><td>$43.68</td></tr><tr><td>Granted</td><td>98,900</td><td>47.53</td></tr><tr><td>Vested</td><td>(82,000)</td><td>42.88</td></tr><tr><td>Forfeited</td><td>(2,300)</td><td>46.40</td></tr><tr><td>Nonvested awards outstanding at December 31</td><td>166,700</td><td>$46.32</td></tr></table>

## *Weighted Average

As of December 31, 2013, there was $9.7 of total unrecognized compensation cost related to nonvested stock options, which is recognized over a remaining weighted average vesting period of 1.47 years. Unrecognized compensation cost related to nonvested restricted stock awards of $1.1 is expected to be recognized over a remaining weighted average vesting period of 1.22 years.

The dilutive and antidilutive options are shown separately in the table below:

<table><tr><td>Year Ended December 31,</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Additional shares</td><td>932,000</td><td>730,000</td><td>1,082,000</td></tr><tr><td>Antidilutive options</td><td>873,800</td><td>2,572,000</td><td>1,244,700</td></tr></table>

A total of 187,500 performance based restricted stock awards were granted in 2008 and 2007 at a weighted average fair value of $43.61. These awards vest after five years if the Company’s earnings per share growth over the same five year period meet or exceed certain performance goals. No matching shares were granted under this program in 2013, 2012 or 2011.

The fair value of the performance based restricted stock awards were determined based on the stock price on the grant date. Compensation expense for awards with performance conditions is recorded only when it is probable that the requirements will be achieved. As of December 31, 2013, the requirements were not achieved.



December 31, 2013, 2012 and 2011 (currencies in millions)

## R. SEGMENT AND RELATED INFORMATION

PACCAR operates in three principal segments: Truck, Parts and Financial Services. The Company evaluates the performance of its Truck and Parts segments based on operating profits, which excludes investment income, other income and expense and income taxes. The Financial Services segment’s performance is evaluated based on income before income taxes. Geographic revenues from external customers are presented based on the country of the customer. The accounting policies of the reportable segments are the same as those applied in the consolidated financial statements as described in Note A.

Truck and Parts: The Truck segment includes the manufacture of trucks and the Parts segment includes the distribution of related aftermarket parts, both of which are sold through the same network of independent dealers. These segments derive a large proportion of their revenues and operating profits from operations in North America and Europe. The Truck segment incurs substantial costs to design, manufacture and sell trucks to its customers. The sale of new trucks provides the Parts segment with the basis for parts sales that may continue over the life of the truck, but are generally concentrated in the first five years after truck delivery. To reflect the benefit the Parts segment receives from costs incurred by the Truck segment, certain expenses are allocated from the Truck segment to the Parts segment. The expenses allocated are based on a percentage of the average annual expenses for factory overhead, engineering, research and development and SG&A expenses for the preceding five years. The allocation is based on the ratio of the average parts direct margin dollars (net sales less material and labor costs) to the total truck and parts direct margin dollars for the previous five years. The Company believes such expenses have been allocated on a reasonable basis. Truck segment assets related to the indirect expense allocation are not allocated to the Parts segment.

Financial Services: The Financial Services segment includes finance and leasing of primarily PACCAR products and services provided to truck customers and dealers. Revenues are primarily generated from operations in North America and Europe.

Other: Included in Other is the Company’s industrial winch manufacturing business. Also within this category are other sales, income and expense not attributable to a reportable segment, including a portion of corporate expense. Intercompany interest income on cash advances to the financial services companies is included in Other and was $7, $9 and $6 for 2013, 2012 and 2011, respectively.

<table><tr><td>Geographic Area Data</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Revenues:</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$ 8,147.6</td><td>$ 8,234.8</td><td>$ 7,389.8</td></tr><tr><td>Europe</td><td>4,967.2</td><td>4,282.3</td><td>5,104.0</td></tr><tr><td>Other</td><td>4,009.0</td><td>4,533.4</td><td>3,861.4</td></tr><tr><td></td><td>$17,123.8</td><td>$17,050.5</td><td>$16,355.2</td></tr><tr><td>Property, plant and equipment, net:</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$ 1,183.1</td><td>$ 1,182.5</td><td>$ 1,059.1</td></tr><tr><td>The Netherlands</td><td>620.0</td><td>529.7</td><td>467.1</td></tr><tr><td>Other</td><td>710.2</td><td>600.7</td><td>447.1</td></tr><tr><td></td><td>$ 2,513.3</td><td>$ 2,312.9</td><td>$ 1,973.3</td></tr><tr><td>Equipment on operating leases, net:</td><td></td><td></td><td></td></tr><tr><td>United States</td><td>$ 1,153.8</td><td>$ 1,019.7</td><td>$ 871.2</td></tr><tr><td>United Kingdom</td><td>414.9</td><td>425.3</td><td>374.8</td></tr><tr><td>Germany</td><td>404.1</td><td>390.8</td><td>350.6</td></tr><tr><td>Other</td><td>1,355.6</td><td>1,052.9</td><td>793.2</td></tr><tr><td></td><td>$ 3,328.4</td><td>$ 2,888.7</td><td>$ 2,389.8</td></tr></table>



## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013, 2012 and 2011 (currencies in millions)

<table><tr><td>Business Segment Data</td><td>2013</td><td>2012</td><td>2011</td></tr><tr><td>Net sales and revenues:</td><td></td><td></td><td></td></tr><tr><td>Truck</td><td>$13,627.7</td><td>$13,797.1</td><td>$13,359.2</td></tr><tr><td>Less intersegment</td><td>(624.8)</td><td>(665.6)</td><td>(728.5)</td></tr><tr><td>External customers</td><td>13,002.9</td><td>13,131.5</td><td>12,630.7</td></tr><tr><td>Parts</td><td>2,868.3</td><td>2,712.1</td><td>2,617.1</td></tr><tr><td>Less intersegment</td><td>(46.1)</td><td>(44.6)</td><td>(40.1)</td></tr><tr><td>External customers</td><td>2,822.2</td><td>2,667.5</td><td>2,577.0</td></tr><tr><td>Other</td><td>123.8</td><td>152.7</td><td>118.2</td></tr><tr><td></td><td>15,948.9</td><td>15,951.7</td><td>15,325.9</td></tr><tr><td>Financial Services</td><td>1,174.9</td><td>1,098.8</td><td>1,029.3</td></tr><tr><td></td><td>$17,123.8</td><td>$17,050.5</td><td>$16,355.2</td></tr><tr><td>Income before income taxes:</td><td></td><td></td><td></td></tr><tr><td>Truck</td><td>$936.7</td><td>$920.4</td><td>$864.7</td></tr><tr><td>Parts</td><td>416.0</td><td>374.6</td><td>394.1</td></tr><tr><td>Other</td><td>(26.5)</td><td>(7.0)</td><td>(26.5)</td></tr><tr><td></td><td>1,326.2</td><td>1,288.0</td><td>1,232.3</td></tr><tr><td>Financial Services</td><td>340.2</td><td>307.8</td><td>236.4</td></tr><tr><td>Investment income</td><td>28.6</td><td>33.1</td><td>38.2</td></tr><tr><td></td><td>$1,695.0</td><td>$1,628.9</td><td>$1,506.9</td></tr><tr><td>Depreciation and amortization:</td><td></td><td></td><td></td></tr><tr><td>Truck</td><td>$352.9</td><td>$308.8</td><td>$311.8</td></tr><tr><td>Parts</td><td>5.3</td><td>5.9</td><td>6.8</td></tr><tr><td>Other</td><td>10.2</td><td>10.6</td><td>9.2</td></tr><tr><td></td><td>368.4</td><td>325.3</td><td>327.8</td></tr><tr><td>Financial Services</td><td>442.3</td><td>375.6</td><td>346.0</td></tr><tr><td></td><td>$810.7</td><td>$700.9</td><td>$673.8</td></tr><tr><td>Expenditures for long-lived assets:</td><td></td><td></td><td></td></tr><tr><td>Truck</td><td>$812.9</td><td>$816.0</td><td>$876.9</td></tr><tr><td>Parts</td><td>6.8</td><td>17.1</td><td>2.2</td></tr><tr><td>Other</td><td>20.8</td><td>22.8</td><td>28.2</td></tr><tr><td></td><td>840.5</td><td>855.9</td><td>907.3</td></tr><tr><td>Financial Services</td><td>931.2</td><td>943.1</td><td>934.3</td></tr><tr><td></td><td>$1,771.7</td><td>$1,799.0</td><td>$1,841.6</td></tr><tr><td>Segment assets:</td><td></td><td></td><td></td></tr><tr><td>Truck</td><td>$5,123.3</td><td>$4,530.2</td><td>$4,043.9</td></tr><tr><td>Parts</td><td>748.4</td><td>707.8</td><td>641.4</td></tr><tr><td>Other</td><td>298.5</td><td>198.4</td><td>185.3</td></tr><tr><td>Cash and marketable securities</td><td>2,925.2</td><td>2,395.9</td><td>2,900.7</td></tr><tr><td></td><td>9,095.4</td><td>7,832.3</td><td>7,771.3</td></tr><tr><td>Financial Services</td><td>11,630.1</td><td>10,795.5</td><td>9,401.4</td></tr><tr><td></td><td>$20,725.5</td><td>$18,627.8</td><td>$17,172.7</td></tr></table>



The management of PACCAR Inc (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Management assessed the Company’s internal control over financial reporting as of December 31, 2013, based on criteria for effective internal control over financial reporting described in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Based on this assessment, we concluded that the Company maintained effective internal control over financial reporting as of December 31, 2013.

Ernst & Young LLP, the Independent Registered Public Accounting Firm that audited the financial statements included in this Annual Report, has issued an attestation report on the Company’s internal control over financial reporting. The attestation report is included on page 87.



Mark C. Pigott
Chairman and Chief Executive Officer

## REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS

## The Board of Directors and Stockholders of PACCAR Inc

We have audited the accompanying consolidated balance sheets of PACCAR Inc as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PACCAR Inc at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PACCAR Inc's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 27, 2014 expressed an unqualified opinion thereon.

Seattle, Washington
February 27, 2014

Ernst + Young LLP



The Board of Directors and Stockholders of PACCAR Inc

We have audited PACCAR Inc’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). PACCAR Inc’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, PACCAR Inc maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PACCAR Inc as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013 and our report dated February 27, 2014 expressed an unqualified opinion thereon.

Seattle, Washington
February 27, 2014

Emet + Young LLP



<table><tr><td></td><td>2013</td><td>2012</td><td>2011</td><td>2010</td><td>2009</td></tr><tr><td></td><td colspan="5">(millions except per share data)</td></tr><tr><td>Truck, Parts and Other Net Sales</td><td>$15,948.9</td><td>$15,951.7</td><td>$15,325.9</td><td>$ 9,325.1</td><td>$ 7,076.7</td></tr><tr><td>Financial Services Revenues</td><td>1,174.9</td><td>1,098.8</td><td>1,029.3</td><td>967.8</td><td>1,009.8</td></tr><tr><td>Total Revenues</td><td>$17,123.8</td><td>$17,050.5</td><td>$16,355.2</td><td>$10,292.9</td><td>$ 8,086.5</td></tr><tr><td>Net Income</td><td>$ 1,171.3</td><td>$ 1,111.6</td><td>$ 1,042.3</td><td>$ 457.6</td><td>$ 111.9</td></tr><tr><td>Net Income Per Share:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>3.31</td><td>3.13</td><td>2.87</td><td>1.25</td><td>.31</td></tr><tr><td>Diluted</td><td>3.30</td><td>3.12</td><td>2.86</td><td>1.25</td><td>.31</td></tr><tr><td>Cash Dividends Declared Per Share</td><td>1.70</td><td>1.58</td><td>1.30</td><td>.69</td><td>.54</td></tr><tr><td>Total Assets:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other</td><td>9,095.4</td><td>7,832.3</td><td>7,771.3</td><td>6,355.9</td><td>6,137.7</td></tr><tr><td>Financial Services</td><td>11,630.1</td><td>10,795.5</td><td>9,401.4</td><td>7,878.2</td><td>8,431.3</td></tr><tr><td>Truck, Parts and Other Long-Term Debt</td><td>150.0</td><td>150.0</td><td>150.0</td><td>150.0</td><td>172.3</td></tr><tr><td>Financial Services Debt</td><td>8,274.2</td><td>7,730.1</td><td>6,505.4</td><td>5,102.5</td><td>5,900.5</td></tr><tr><td>Stockholders&#x27; Equity</td><td>6,634.3</td><td>5,846.9</td><td>5,364.4</td><td>5,357.8</td><td>5,103.7</td></tr><tr><td>Ratio of Earnings to Fixed Charges</td><td>11.17x</td><td>10.69x</td><td>8.93x</td><td>3.89x</td><td>1.56x</td></tr></table>

## COMMON STOCK MARKET PRICES AND DIVIDENDS

Common stock of the Company is traded on the NASDAQ Global Select Market under the symbol PCAR. The table below reflects the range of trading prices as reported by The NASDAQ Stock Market LLC and cash dividends declared. There were 1,868 record holders of the common stock at December 31, 2013.

<table><tr><td rowspan="2"></td><td colspan="3">2013</td><td colspan="3">2012</td></tr><tr><td>DIVIDENDS DECLARED</td><td>HIGH</td><td>STOCK PRICE LOW</td><td>DIVIDENDS DECLARED</td><td>HIGH</td><td>STOCK PRICE LOW</td></tr><tr><td>First</td><td>$ .20</td><td>$51.38</td><td>$45.42</td><td>$ .18</td><td>$48.00</td><td>$38.36</td></tr><tr><td>Second</td><td>.20</td><td>55.05</td><td>47.12</td><td>.20</td><td>48.22</td><td>35.55</td></tr><tr><td>Third</td><td>.20</td><td>60.00</td><td>52.59</td><td>.20</td><td>43.38</td><td>35.21</td></tr><tr><td>Fourth</td><td>.20</td><td>59.35</td><td>53.67</td><td>.20</td><td>45.68</td><td>39.52</td></tr><tr><td>Year-End Extra</td><td>.90</td><td></td><td></td><td>.80</td><td></td><td></td></tr></table>

The Company expects to continue paying regular cash dividends, although there is no assurance as to future dividends because they are dependent upon future earnings, capital requirements and financial conditions.



<table><tr><td rowspan="2"></td><td rowspan="2">FIRST</td><td rowspan="2">SECOND</td><td rowspan="2">THIRD</td><td colspan="2">QUARTER</td><td rowspan="2">(a) FOURTH</td><td rowspan="2">89</td></tr><tr><td colspan="2">(millions except per share data)</td></tr><tr><td>2013</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales and revenues</td><td>$3,631.2</td><td>$4,011.7</td><td>$4,006.6</td><td>$4,299.4</td><td></td><td></td><td></td></tr><tr><td>Cost of sales and revenues</td><td>3,189.3</td><td>3,494.6</td><td>3,491.1</td><td>3,725.7</td><td></td><td></td><td></td></tr><tr><td>Research and development</td><td>72.1</td><td>61.8</td><td>56.6</td><td>60.9</td><td></td><td></td><td></td></tr><tr><td>Financial Services:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Revenues</td><td>293.1</td><td>288.8</td><td>293.5</td><td>299.5</td><td></td><td></td><td></td></tr><tr><td>Interest and other borrowing expenses</td><td>38.9</td><td>39.4</td><td>37.9</td><td>39.7</td><td></td><td></td><td></td></tr><tr><td>Depreciation and other expense</td><td>144.1</td><td>138.9</td><td>140.2</td><td>148.5</td><td></td><td></td><td></td></tr><tr><td>Net Income</td><td>236.1</td><td>291.6</td><td>309.4</td><td>334.2</td><td></td><td></td><td></td></tr><tr><td>Net Income Per Share (b):</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ .67</td><td>$ .82</td><td>$ .87</td><td>$ .94</td><td></td><td></td><td></td></tr><tr><td>Diluted</td><td>.67</td><td>.82</td><td>.87</td><td>.94</td><td></td><td></td><td></td></tr><tr><td>2012</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Truck, Parts and Other:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Net sales and revenues</td><td>$4,514.7</td><td>$4,191.1</td><td>$3,546.7</td><td>$3,699.2</td><td></td><td></td><td></td></tr><tr><td>Cost of sales and revenues</td><td>3,919.9</td><td>3,632.5</td><td>3,108.5</td><td>3,247.4</td><td></td><td></td><td></td></tr><tr><td>Research and development</td><td>72.3</td><td>73.8</td><td>66.8</td><td>66.4</td><td></td><td></td><td></td></tr><tr><td>Financial Services:</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Revenues</td><td>261.4</td><td>266.1</td><td>273.5</td><td>297.8</td><td></td><td></td><td></td></tr><tr><td>Interest and other borrowing expenses</td><td>39.7</td><td>38.1</td><td>40.6</td><td>40.0</td><td></td><td></td><td></td></tr><tr><td>Depreciation and other expense</td><td>118.8</td><td>121.5</td><td>127.2</td><td>149.9</td><td></td><td></td><td></td></tr><tr><td>Net Income</td><td>327.3</td><td>297.2</td><td>233.6</td><td>253.5</td><td></td><td></td><td></td></tr><tr><td>Net Income Per Share (b):</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Basic</td><td>$ .92</td><td>$ .83</td><td>$ .66</td><td>$ .72</td><td></td><td></td><td></td></tr><tr><td>Diluted</td><td>.91</td><td>.83</td><td>.66</td><td>.72</td><td></td><td></td><td></td></tr></table>

(a) The fourth quarter 2012 includes the benefit of a $12.7 reduction in cost of sales related to the capitalization of new product tooling that had been expensed in the first nine months of 2012. The positive effect on net income for the fourth quarter was $9.0 ($.03 per share).

(b) The sum of quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted shares outstanding and the effects of rounding for each period.



(currencies in millions)

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

<table><tr><td>Fair Value Gains (Losses)</td><td>2013</td><td>2012</td></tr><tr><td>CONSOLIDATED:</td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Cash equivalents and marketable debt securities</td><td>$ (16.6)</td><td>$ (19.4)</td></tr><tr><td>TRUCK, PARTS AND OTHER:</td><td></td><td></td></tr><tr><td>Liabilities</td><td></td><td></td></tr><tr><td>Fixed rate long-term debt</td><td>.3</td><td>1.9</td></tr><tr><td>FINANCIAL SERVICES:</td><td></td><td></td></tr><tr><td>Assets</td><td></td><td></td></tr><tr><td>Fixed rate loans</td><td>(68.4)</td><td>(65.2)</td></tr><tr><td>Liabilities</td><td></td><td></td></tr><tr><td>Fixed rate term debt</td><td>71.0</td><td>76.4</td></tr><tr><td>Interest-rate swaps related to Financial Services debt</td><td>28.4</td><td>29.4</td></tr><tr><td>Total</td><td>$ 14.7</td><td>$ 23.1</td></tr></table>

Currency Risks - The Company enters into foreign currency exchange contracts to hedge its exposure to exchange rate fluctuations of foreign currencies, particularly the Canadian dollar, the euro, the British pound, the Australian dollar, the Brazilian real and the Mexican peso (See Note O for additional information concerning these hedges). Based on the Company’s sensitivity analysis, the potential loss in fair value for such financial instruments from a 10% unfavorable change in quoted foreign currency exchange rates would be a loss of $27.7 related to contracts outstanding at December 31, 2013, compared to a loss of $28.0 at December 31, 2012. These amounts would be largely offset by changes in the values of the underlying hedged exposures.



## OFFICERS

Mark C. Pigott
Chairman and
Chief Executive Officer

Ronald E. Armstrong
President

Robert J. Christensen
Executive Vice President and
Chief Financial Officer

Daniel D. Sobic
Executive Vice President

Robert A. Bengston
Senior Vice President

T. Kyle Quinn
Senior Vice President and
Chief Information Officer

## DIRECTORS

Mark C. Pigott
Chairman and
Chief Executive Officer
PACCAR Inc (3)

Dame Alison J. Carnwath
Chairman
Land Securities Group PLC (2, 4)

John M. Fluke, Jr.
Chairman
Fluke Capital Management, L.P. (1, 3, 4)

Kirk S. Hachigian
Former Chairman and
Chief Executive Officer
Cooper Industries, PLC (2)

## COMMITTEES OF THE BOARD

(1) Audit Committee
(2) Compensation Committee
(3) Executive Committee
(4) Nominating and Governance Committee
(5) Lead Director
David C. Anderson
Vice President and
General Counsel

Michael T. Barkley
Vice President and Controller

Jack K. LeVier
Vice President

Samuel M. Means III
Vice President

Harrie C.A.M. Schippers
Vice President

Richard E. Bangert, II
Vice President

D. Craig Brewster
Vice President

Todd R. Hubbard
Vice President

Luiz Kaufman
Partner
L. Kaufmann Consultants (1)

Roderick C. McGeary
Former Vice Chairman
KPMG LLP (1)

John M. Pigott
Partner
Beta Business Ventures LLC (3)

Mark A. Schulz
Retired President,
International Operations
Ford Motor Company (4)

William D. Jackson
Vice President

Elias J. Langholt
Vice President

Helene N. Mawyer
Vice President

Gary L. Moore
Vice President

Darrin C. Siver
Vice President

George E. West, Jr.
Vice President

Robin E. Easton
Treasurer

Janice M. D'Amato
Secretary

Gregory M. E. Spierkel
Retired Chief Executive Officer
Ingram Micro Inc. (1, 2)

Charles R. Williamson
Chairman
Weyerhaeuser Company and
Chairman
Talisman Energy Inc. (2, 4, 5)



## TRUCKS

Kenworth Truck Company
Division Headquarters:
10630 N.E. 38th Place
Kirkland, Washington 98033

Factories:
Chillicothe, Ohio
Renton, Washington

Peterbilt
Motors Company
Division Headquarters:
1700 Woodbrook Street
Denton, Texas 76205

Factory:
Denton, Texas

PACCAR of Canada Ltd.
Markborough Place I
6711 Mississauga Road N.
Mississauga, Ontario
L5N 4J8 Canada

Factory:
Ste-Thérèse, Quebec, Canada

Canadian Kenworth
Company
Division Headquarters:
Markborough Place I
6711 Mississauga Road N.
Mississauga, Ontario
L5N 4J8 Canada

Peterbilt of Canada
Division Headquarters:
Markborough Place I
6711 Mississauga Road N.
Mississauga, Ontario
L5N 4J8 Canada

DAF Caminhões Brasil
Indústria Ltda
Rodovia PR 151
CEP 84001-970
Cidade de Ponta Grossa
Estado do Paraná
Brasil

Factory:
Cidade de Ponta Grossa, Brasil

DAF Trucks N.V.
Hugo van der Goeslaan 1
P.O. Box 90065
5600 PT Eindhoven
The Netherlands

Factories:
Eindhoven,
The Netherlands
Westerlo, Belgium

## Leyland Trucks Ltd.

Croston Road
Leyland, Preston
Lancashire PR26 6LZ
United Kingdom

Factory:
Leyland, Lancashire, United
Kingdom

## Kenworth México, S.A. de C.V.

Calzada Gustavo Vildósola
Castro 2000
Mexicali, Baja California, Mexico

Factory:
Mexicali, Baja California, Mexico

## PACCAR

Australia Pty. Ltd.
Kenworth Trucks
Division Headquarters:
64 Canterbury Road
Bayswater, Victoria 3153
Australia

Factory:
Bayswater, Victoria, Australia

## TRUCK PARTS
AND SUPPLIES

PACCAR Engine Company
1000 PACCAR Drive
Columbus, Mississippi 39701

Factory:
Columbus, Mississippi

PACCAR Parts
Division Headquarters:
750 Housew Way N.
Renton, Washington 98035

Dynacraft
Division Headquarters:
650 Milwaukee Avenue N.
Algona, Washington 98001

Factories:
Algona, Washington
Louisville, Kentucky

## WINCHES

PACCAR Winch Division
Division Headquarters:
800 E. Dallas Street
Broken Arrow, Oklahoma
74012

Factories:
Broken Arrow, Oklahoma
Okmulgee, Oklahoma

PRODUCT TESTING,
RESEARCH AND
DEVELOPMENT

PACCAR Technical Center
Division Headquarters:
12479 Farm to Market Road
Mount Vernon, Washington
98273

DAF Trucks Test Center
Weverspad 2
5491 RL St. Oedenrode
The Netherlands

## PACCAR FINANCIAL
SERVICES GROUP

PACCAR Financial Corp.
PACCAR Building
777 106th Avenue N.E.
Bellevue, Washington 98004

## PACCAR Financial

Europe B.V.
Hugo van der Goeslaan 1
P.O. Box 90065
5600 PT Eindhoven
The Netherlands

PACCAR Capital
México S.A. de C.V.
Calzada Gustavo Vildósola
Castro 2000
Mexicali, Baja California, Mexico

## PacLease México

S.A. de C.V.
Calzada Gustavo Vildósola
Castro 2000
Mexicali, Baja California, Mexico

## PACCAR Financial

Services Ltd.
Markborough Place I
6711 Mississauga Road N.
Mississauga, Ontario
L5N 4J8 Canada

## PACCAR Financial

Pty. Ltd.
64 Canterbury Road
Bayswater, Victoria 3153
Australia

## PACCAR Leasing Company

Division of PACCAR
Financial Corp.
PACCAR Building
777 106th Avenue N.E.
Bellevue, Washington 98004

## PACCAR GLOBAL SALES

Division Headquarters:
10630 N.E. 38th Place
Kirkland, Washington 98033

Offices:
Beijing, People's Republic
of China
Shanghai, People's Republic
of China
Jakarta, Indonesia
Manama, Bahrain
Miami, Florida
Moscow, Russia
Pune, India



Corporate Offices
PACCAR Building
777 106th Avenue N.E.
Bellevue, Washington
98004

Mailing Address
P.O. Box 1518
Bellevue, Washington
98009

Telephone
425.468.7400

Facsimile
425.468.8216

Web site
www.paccar.com



Stock Transfer
and Dividend
Dispersing Agent
Wells Fargo Bank
Minnesota, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, Minnesota
55164-0854
800.468.9716
www.shareowneronline.com

PACCAR’s transfer agent maintains the company’s shareholder records, issues stock certificates and distributes dividends and IRS Form 1099. Requests concerning these matters should be directed to Wells Fargo.

Online Delivery of Annual Report and Proxy Statement
PACCAR’s 2013 Annual Report and the 2014 Proxy Statement are available on PACCAR’s Web site at www.paccar.com/2014annualmeeting/

Stockholders who hold PACCAR stock in street name may inquire of their bank or broker about the availability of electronic delivery of annual meeting documents.
DAF, Kenmex, Kenworth, Leyland, PACCAR, PACCAR MX-13, PACCAR PX, PacLease, Peterbilt, The World's Best and TRP are trademarks owned by PACCAR Inc and its subsidiaries.

Independent Auditors
Ernst & Young LLP
Seattle, Washington

SEC Form 10-K
PACCAR’s annual report to the Securities and Exchange Commission will be furnished to stockholders on request to the Corporate Secretary, PACCAR Inc, P.O. Box 1518, Bellevue, Washington 98009. It is also available online at www.paccar.com/investors/investor_resources.asp, under SEC Filings or on the SEC’s website at www.sec.gov.

Annual Stockholders' Meeting
April 29, 2014, 10:30 a.m.
Meydenbauer Center
11100 N.E. Sixth Street
Bellevue, Washington
98004

An Equal Opportunity Employer



This report was printed on recycled paper.