PACCAR INC (Form: 10-K, Received: 02/29/2012 06:31:07)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2011

Commission File No. 001-14817

PACCAR Inc

(Exact name of Registrant as specified in its charter)


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

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

Registrant’s telephone number, including area code (425) 468-7400

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $1 par value		The NASDAQ Global Select Market LLC

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2011:

Common Stock, $1 par value - $18.10 billion

The number of shares outstanding of the registrant’s classes of common stock, as of January 31, 2012:

Common Stock, $1 par value – 356,877,678 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Stockholders for the year ended December 31, 2011 are incorporated by reference into Parts I and II.

Portions of the proxy statement for the annual stockholders meeting to be held on April 24, 2012 are incorporated by reference into Part III.

PART I

ITEM 1.

BUSINESS.

(a)	General Development of Business

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

(b)	Financial Information About Industry Segments and Geographic Areas

Information about the Company’s industry segments and geographic areas in response to Items 101(b), (c)(1)(i), and (d) of Regulation S-K appears on page 78 of the Annual Report to Stockholders for the year ended December 31, 2011 and is incorporated herein by reference.

(c)	Narrative Description of Business

The Company has two principal industry segments, (1) design, manufacture and distribution of light-, medium- and heavy-duty trucks and related aftermarket parts and (2) finance and leasing products and services provided to customers and dealers. Light and medium-duty trucks have a gross vehicle weight (GVW) ranging from 16,000 to 33,000 lbs (Class 5 to 7) in North America and 6 to 15 metric tonnes in Europe. Heavy duty trucks have a GVW of over 33,000 lbs (Class 8) in North America and over 15 metric tonnes in Europe. The Company’s finance and leasing activities are principally related to Company products and associated equipment. Other manufactured products include industrial winches.

TRUCKS

The Company and its subsidiaries design and manufacture heavy-duty diesel trucks which are marketed under the Kenworth, Peterbilt and DAF nameplates. These trucks, which are built in three plants in the United States, three in Europe and one each in Australia, Canada and Mexico, are used world-wide for over-the-road and off-highway hauling of freight, petroleum, wood products, construction and other materials. The Company competes in the North American Class 5 - 7 markets primarily with Kenworth and Peterbilt conventional models. These trucks are assembled at facilities in Ste. Therese, Canada and in Mexicali, Mexico, which are operated by the Company’s wholly owned subsidiaries located in those countries. The Company competes in the European light/medium market with DAF cab-over-engine trucks assembled in the United Kingdom by Leyland, one of the Company’s wholly owned subsidiaries. The Company has acquired land and has begun construction of a new DAF assembly plant in Ponta Grossa, Brasil. The Company expects to begin manufacturing DAF vehicles for sale in Brasil and other South American markets in 2013. Commercial trucks and related aftermarket parts comprise the largest segment of the Company’s business, accounting for 93.7% of total 2011 net sales and revenues.

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

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

The Company’s trucks have a reputation for high quality and are essentially custom products, most of which are ordered by dealers according to customer specification. Some units are ordered by dealers for stocking to meet the needs of certain customers who require immediate delivery or for customers that require chassis to be fitted with specialized bodies. For a significant portion of the Company’s truck operations, major components, such as engines, transmissions and axles, as well as a substantial percentage of other components, are purchased from component manufacturers pursuant to PACCAR and customer specifications. DAF, which is more vertically integrated, manufactures its own engines and axles and a higher percentage of other components for its heavy truck models. In 2010, the Company began installing PACCAR engines in approximately 25% of the Company’s Kenworth and Peterbilt heavy-duty trucks in the U.S. and Canada. Engines not manufactured by the Company are purchased from Cummins Inc. (Cummins). The Company has a long term agreement with Cummins to provide for continuity of supply. A loss of supply from Cummins, and the resulting interruption in the production of trucks, would have a material effect on the Company’s results of operations. The cost of purchased materials and parts includes raw materials, partially processed materials, such as castings, and finished components manufactured by independent suppliers. The cost of materials purchased from suppliers of raw materials, partially processed materials and finished components make up more than 80% of the cost of new trucks and parts. The value of finished truck components manufactured by independent suppliers ranges from approximately 45% in Europe to approximately 90% in North America. In addition to purchased materials, the Company’s cost of sales includes labor and factory overhead, vehicle and parts delivery, and warranty. Accordingly, except for certain factory overhead costs such as depreciation, property taxes and utilities, the Company’s cost of sales are highly variable in relation to sales.

The Company’s DAF subsidiary purchases fully assembled cabs from a competitor, Renault V.I., for its European light-duty product line pursuant to a joint product development and long-term supply contract. Sales of trucks manufactured with these cabs amounted to approximately 3% of consolidated revenues in 2011. A short-term loss of supply, and the resulting interruption in the production of these trucks, would not have a material effect on the Company’s results of operations. However, a loss of supply for an extended period of time would either require the Company to contract for an alternative source of supply or to manufacture cabs itself.

Other than these components, the Company is not limited to any single source for any significant component, although the sudden inability of a supplier to deliver components could have a temporary adverse effect on production of certain products. No significant shortages of materials or components were experienced in 2011. Manufacturing inventory levels are based upon production schedules and orders are placed with suppliers accordingly.

Aftermarket truck parts are sold and delivered to the Company’s independent dealers through the Company’s parts distribution network. Parts are both manufactured by the Company and purchased from various suppliers. Aftermarket parts inventory levels are determined largely by anticipated customer demand and the need for timely delivery. As a percentage of total consolidated net sales and revenues, parts sales were 15.8% in 2011, 21.3% in 2010, and 23.4% in 2009.

Key factors affecting Truck segment earnings include the number of new trucks and aftermarket parts sold in the markets served and the margins realized on the sales. The Company’s sales of new trucks is dependent on the size of the truck markets served and the Company’s share of those markets. Aftermarket parts sales are influenced by the total number of the Company’s trucks in service and the average age and mileage of those trucks. Truck segment sales and margins tend to be cyclical related to the level of overall economic activity, the availability of capital and the amount of freight being transported. The Company’s cost for trucks and parts sold consist primarily of material costs which are influenced by commodities prices such as steel, copper, aluminum and petroleum. The Company utilizes long term supply agreements with its suppliers to reduce the variability of the unit cost of purchased materials and finished components. The Company’s spending on research and development varies based on product development cycles and government requirements such as the periodic need to meet diesel engine emissions standards in the various markets served. The Company maintains rigorous control of Selling, General and Administrative (SG&A) expenses and seeks to minimize such costs.

There were four other principal competitors in the U.S. and Canada commercial truck market in 2011. The Company’s share of the U.S. and Canadian Class 8 market was 28.1% of retail sales in 2011. In Europe, there were six other principal competitors in the commercial truck market in 2011, including parent companies to two competitors of the Company in the United States. In 2011, DAF had a 15.5% share of the Western and Central European heavy-duty market and a 8.9% share of the light/medium market. These markets are highly competitive in price, quality and service, and PACCAR is not dependent on any single customer for its sales. There are no significant seasonal variations in sales.

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

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

The Company had a total production backlog of $4.9 billion at the end of 2011. Within this backlog, orders scheduled for delivery within three months (90 days) are considered to be firm. The 90-day backlog approximated $2.6 billion at December 31, 2011, $2.0 billion at December 31, 2010 and $1.1 billion at December 31, 2009. Production of the year end 2011 backlog is expected to be substantially completed during 2012.

OTHER BUSINESS

The Truck and other businesses include a division of the Company which manufactures industrial winches in two U.S. plants and markets them under the Braden, Carco, and Gearmatic nameplates. The markets for these products are highly competitive and the Company competes with a number of well established firms. Sales of industrial winches were approximately 1% of net sales and revenues in 2011, 2010 and 2009.

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

FINANCIAL SERVICES

PACCAR Financial Services (PFS) operates in 21 countries principally in North America, Europe and Australia through wholly owned finance companies operating under the PACCAR Financial trade name. PFS provides inventory financing for independent dealers selling PACCAR products, and retail loan and lease financing for new and used trucks and other transportation equipment sold principally by its independent dealers. Receivables are secured by the products financed or leased. The terms of loan and lease contracts vary with the type and usage of equipment but generally range from three to five years. Payment is required on dealer inventory financing when the floored truck is sold to a customer or upon maturity of the flooring loan whichever comes first. Dealer inventory loans generally mature within one to two years.

PFS also conducts full service leasing operations through wholly owned subsidiaries in North America and Germany under the PacLease trade name. Selected dealers in North America are franchised to provide full service leasing. PFS provides its franchisees equipment financing and administrative support. PFS also operates full service lease outlets on its own behalf.

PFS funds its financing activities primarily through commercial paper, bank loans and by issuing medium-term debt through public debt markets. PFS attempts to match the maturity and interest rate characteristics of its debt with the maturity and interest rate characteristics of loans and leases.

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

The revenue earned on loans and leases depends on market interest and lease rates and the ability of PFS to differentiate itself from the competition by superior industry knowledge and customer service. Dealer inventory loans have variable rates with rates reset monthly based on an index pertaining to the applicable local market. Retail loan and lease contracts normally have fixed rates over the contract term. PFS obtains funds either through fixed rate borrowings or through variable rate borrowings which have been effectively converted to fixed rate through the use of interest rate contracts. This enables PFS to obtain a stable spread between the cost of borrowing and the yield on fixed rate contracts over the contract term. Included in Financial Services cost of revenues is depreciation on equipment on operating leases. The amount of depreciation on operating leases principally depends on the amount of leased equipment, and the average term of the lease which ranges from two to four years and residual values which generally range from 30 to 50%. The margin earned is the difference between the revenues on loan and lease contracts and the direct costs of operation including interest and depreciation.

PFS incurs credit losses when customers are unable to pay the full amounts due under loan and finance lease contracts. PFS takes a conservative approach to underwriting new retail business in order to minimize credit losses and the related provision for losses. Retail loan and lease customers consist of small, medium and large commercial trucking companies, independent owner operators and other businesses that use trucks in their operations. The ability of these customers to pay their obligations to PFS depends on the state of the general economy, the extent of freight demand, freight rates and the cost of fuel.

PFS limits its exposure to any one customer, with no one customer amounting to more than 2% of the aggregate portfolio. PFS generally requires a down payment and secures its interest in the underlying truck equipment collateral and may include other collateral or personal guarantees. In the event of default, PFS will repossess the vehicle and sell it in the open market primarily through its dealer network. PFS will take legal means to recover any shortfall between the amounts owed and the amounts recovered from sale of the collateral. The amount of credit losses depends on the rate of default on loans and finance leases and, in the event of repossession, the ability to recover the amount owed from sale of the collateral which is affected by used truck prices. PFS’s experience over the last fifty years financing truck sales has been that periods of economic weakness result in higher past dues and increased rates of repossession. Used truck prices also tend to fall during periods of economic weakness. As a result, credit losses tend to increase during periods of economic weakness. PFS provides an allowance for credit losses based on specifically identified customer risks and an analysis of estimated losses inherent in the portfolio, considering the amount of past due accounts, the trends of used truck prices and the economic climate in each of its markets.

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

PATENTS

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

REGULATION

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

Information regarding the effects that compliance with international, federal, state and local provisions regulating the environment have on the Company’s capital and operating expenditures and the Company’s involvement in environmental cleanup activities is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s Consolidated Financial Statements incorporated by reference in Items 7 and 8, respectively.

EMPLOYEES

On December 31, 2011, the Company had approximately 23,400 employees.

OTHER DISCLOSURES

The Company’s filings on Form 10-K, 10-Q and 8-K and any amendments to those reports can be found on the Company’s website www.paccar.com free of charge as soon as practicable after the report is electronically filed with, or furnished to, the Securities and Exchange Commission. The information on the Company’s website is not incorporated by reference into this report.

ITEM 1A.

RISK FACTORS.

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

Business and Industry Risks

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

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

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

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

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

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

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

Product Liability, Litigation and Recalls. Costs associated with product recalls, lawsuits or increases in the reserves the Company establishes for contingencies may increase the Company’s costs. The Company’s reputation and its brand names are valuable assets, and product or other claims, even if unsuccessful or without merit, could adversely affect the Company’s reputation and brand images because of adverse publicity. The Company’s products are subject to recall for environmental, performance and safety-related issues, which can cause increased costs and lower profits.

Political, Regulatory and Economic Risks

Multinational Operations . The Company’s global operations are exposed to political, economic and other risks and events beyond its control in the countries in which the Company operates. The Company may be adversely affected by political instabilities, fuel shortages or interruptions in utility or transportation systems, natural calamities, wars, terrorism and labor strikes. Changes in government monetary or fiscal policies and international trade policies may impact demand for the Company’s products, financial results and competitive position. PACCAR’s global operations are subject to extensive trade and anti-corruption laws and regulations.

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

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

Accounting Estimates. In the preparation of the Company’s financial statements in accordance with U.S. generally accepted accounting principles, management uses estimates and makes judgments and assumptions that affect asset and liability values and the amounts reported as income and expense during the periods presented. Certain of these estimates, judgments and assumptions, such as residual values on operating leases, the allowance for credit losses, warranty and pension expenses and the provision for income taxes, are particularly sensitive. If actual results are different from estimates used by management, they may have a material impact on the financial statements.

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

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2.

PROPERTIES.

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

In 2011, the Company broke ground on a new DAF truck assembly facility in Ponta Grossa, Brasil. The facility is expected to be completed in 2013. The Company invests in facilities, equipment and processes to provide manufacturing and warehouse capacity to meet its customers’ needs and improve operating performance.

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


	U.S.		Canada		Australia		Mexico		Europe
Truck		4		1		1		1		3
Other		2		—		—		—		—

ITEM 3.

LEGAL PROCEEDINGS.

The Company and its subsidiaries are parties to various lawsuits incidental to the ordinary course of business. Management believes that the disposition of such lawsuits will not materially affect the Company’s business or financial condition.

In September 2010, the United Kingdom Office of Fair Trading (OFT) notified all major commercial vehicle manufacturers operating in the U.K., that it had commenced an investigation into whether such manufacturers agreed to set prices or limit supply of their commercial vehicles and spare parts. The Company’s U.K. subsidiaries are cooperating fully with the OFT.

In January 2011, the European Union (EU) Competition Commission commenced an investigation of all major European commercial vehicle manufacturers, including subsidiaries of the Company, concerning whether such companies participated in agreements or concerted practices to coordinate their commercial policy in the EU. The Company’s subsidiaries are cooperating fully with the EU Competition Commission.

On July 15, 2011, the National Labor Relations Board (NLRB) ruled unanimously that the Company is not required to compensate former employees of the Peterbilt plant in Madison, Tennessee for wage and benefit losses incurred during a work stoppage that ended on April 6, 2009. The NLRB decision reversed a ruling by an administrative law judge dated October 28, 2010. On December 20, 2011, the NLRB denied a motion by the union that represented the former plant employees to reconsider its July 15, 2011 decision. The union has not sought judicial review of the NLRB decision.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)	Market Information, Holders, Dividends, Securities Authorized for Issuance Under Equity Compensation Plans and Performance Graph

Data regarding Market Information, Holders and Dividends are included in the Annual Report to Stockholders for the year ended December 31, 2011, under the caption “Common Stock Market Prices and Dividends” and are incorporated herein by reference.

Securities Authorized for Issuance Under Equity Compensation Plans.

The following table provides information as of December 31, 2011 regarding compensation plans under which PACCAR equity securities are authorized for issuance.

Plan Category

Stock compensation

Number of
Securities to be
Issued on Exercise
of Outstanding
Options and Other
Rights

(1)

Weighted-average
Exercise Price of
Outstanding Options
(2)

Securities Available
for Future Grant
(Excluding Shares
Reflected in
Column (1))

(3)

plans approved by stockholders

5,679,882

35.53

18,280,190

All stock compensation plans have been approved by the stockholders.

The number of securities to be issued includes those issuable under the PACCAR Inc Long Term Incentive Plan (LTI Plan) and the Restricted Stock and Deferred Compensation Plan for Non-Employee Directors (RSDC Plan). Securities to be issued include 363,082 shares that represent deferred cash awards payable in stock. The weighted-average exercise price does not include the securities that represent deferred cash awards.

Securities available for future grant are authorized under the following two plans: (i) 17,343,265 shares under the LTI Plan, and (ii) 936,925 shares under the RSDC Plan.

Data regarding the Performance Graph are included in the Annual Report to Stockholders for the year ended December 31, 2011, under the caption “Stockholder Return Performance Graph” and are incorporated herein by reference.

(b)	Use of Proceeds from Registered Securities

Not applicable

(c)	Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On October 29, 2007, the Board of Directors approved a plan to repurchase up to $300 million of PACCAR’s outstanding common stock. On July 8, 2008, PACCAR’s Board of Directors approved a new plan to repurchase up to an additional $300 million of the Company’s outstanding common stock. As of December 31, 2011, all $600 million of shares have been repurchased under these plans.

On December 6, 2011, the Board of Directors approved a plan to repurchase up to an additional $300 million of the Company’s outstanding common stock. As of December 31, 2011, $29.9 million of shares have been repurchased under this plan. The following are details of repurchases made under these plans for the fourth quarter of 2011:


Period	Total Number of Shares Purchased		Average Price Paid per Share		Maximum Dollar Value that May Yet be Purchased Under the Plans
October 1 - 31, 2011		—			$	37,747,370
November 1 - 30, 2011 ⁽¹⁾		828,506	$	38.22	$	6,081,617
December 1 - 31, 2011 ⁽²⁾		953,658	$	37.72	$	270,108,956

Total		1,782,164	$	37.95	$	270,108,956

⁽¹⁾	Purchased under the July 8, 2008 Plan.

⁽²⁾	Includes 153,658 shares purchased under the remaining portion of the July 8, 2008 plan and 800,000 shares purchased under the December 6, 2011 plan.

ITEM 6.

SELECTED FINANCIAL DATA.

Information in response to Item 301 of Regulation S-K appears in the Annual Report to Stockholders for the year ended December 31, 2011 under the caption “Selected Financial Data” and is incorporated herein by reference.

ITEM 7.

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

Information in response to Item 303 of Regulation S-K appears in the Annual Report to Stockholders for the year ended December 31, 2011 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and is incorporated herein by reference.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information in response to Item 305 of Regulation S-K appears in the Annual Report to Stockholders for the year ended December 31, 2011 under the caption “Market Risks and Derivative Instruments” and is incorporated herein by reference.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following consolidated financial statements of the registrant, included in the Annual Report to Stockholders for the year ended December 31, 2011, are incorporated herein by reference:

Consolidated Statements of Income — Years Ended December 31, 2011, 2010 and 2009

Consolidated Balance Sheets — December 31, 2011 and 2010

Consolidated Statements of Cash Flows — Years Ended December 31, 2011, 2010 and 2009

Consolidated Statements of Stockholders’ Equity — Years Ended December 31, 2011, 2010 and 2009

Consolidated Statements of Comprehensive Income — Years Ended December 31, 2011, 2010 and 2009

Notes to Consolidated Financial Statements — December 31, 2011, 2010 and 2009

Information in response to Item 302(A) of Regulation S-K appears in the Annual Report to Stockholders for the year ended December 31, 2011 under the caption “Quarterly Results (Unaudited)” and is incorporated herein by reference.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

The registrant has not had any disagreements with its independent auditors on accounting or financial disclosure matters.

ITEM 9A.

CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures.

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

Management’s Report on Internal Control over Financial Reporting.

Management’s Report on Internal Control over Financial Reporting on page 80 and Report of Independent Registered Public Accounting Firm on the Company’s Internal Control over Financial Reporting on page 81 of the Annual Report to Stockholders for the year ended December 31, 2011, are incorporated herein by reference.

There have been no changes in the Company’s internal controls over financial reporting during the fourth quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION.

Not applicable.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Item 401(a), (d), and (e) of Regulation S-K:

The following information is included in the proxy statement for the annual stockholders meeting of April 24, 2012 and is incorporated herein by reference:

Identification of directors, family relationships, and business experience is included under the caption “ITEM 1: ELECTION OF DIRECTORS.”

Item 401(b) of Regulation S-K:

Executive Officers of the registrant as of February 29, 2012:


Name and Age		Present Position and Other Position(s) Held During Last Five Years
Mark C. Pigott (58)		Chairman and Chief Executive Officer since 1997. Mr. Pigott is the brother of John M. Pigott, a director of the Company.

Ronald E. Armstrong (56)		President; Executive Vice President from August 2010 to December 2010; Senior Vice President from December 2007 to July 2010; Vice President from January 2007 to November 2007.

Daniel D. Sobic (58)		Executive Vice President; Senior Vice President from January 2007 to October 2008.

Robert J. Christensen (55)		Executive Vice President; Senior Vice President from November 2008 to July 2010; Vice President of PACCAR and General Manager of Kenworth from July 2002 to October 2008.

David C. Anderson (58)		Vice President and General Counsel since December 2004.

Michael T. Barkley (56)		Vice President and Controller since January 1, 2007.

Robert A. Bengston (56)		Vice President, Financial Services; Managing Director PACCAR Financial Europe from January 2004 to December 2008.

Jack K. LeVier (52)		Vice President, Human Resources since June 2007; Chief People Officer at Yum Brands from October 1997 to June 2007.

Samuel M. Means III (70)		Vice President; Director General Mexico from January 1993 to December 2010.

T. Kyle Quinn (50)		Vice President and Chief Information Officer; General Manager and Chief Information Officer from September 2008 to December 2009; Senior Director Applications and Global Operations from May 2005 to August 2008.

Harrie C.A.M. Schippers (49)		Vice President of PACCAR and President of DAF Trucks N.V.; Finance Director, DAF Trucks N.V. from August 2003 to March 2010.

Officers are elected annually but may be appointed or removed on interim dates.

Item 405 of Regulation S-K:

The information required by this item is included in the proxy statement for the annual stockholders meeting of April 24, 2012 and is incorporated herein by reference.

Item 406 of Regulation S-K:

The Company has adopted a Code of Ethics applicable to the registrant’s senior financial officers including the Chief Executive Officer and Principal Financial Officer. The Company, in accordance with Item 406 of Regulation S-K, has posted this Code of Ethics on its website at www.paccar.com . The Company intends to disclose on its website any amendments to, or waivers from, its Code of Ethics that are required to be publicly disclosed pursuant to the rules of the Securities and Exchange Commission. The information on the Company’s website is not incorporated by reference into this report.

Item 407(d)(4) and 407(d)(5) of Regulation S-K:

The following information is included in the proxy statement for the annual stockholders meeting of April 24, 2012 and is incorporated herein by reference:

•

Identification of the audit committee is included under the caption “THE AUDIT COMMITTEE.”

•

Identification of audit committee financial experts is included under the caption “AUDIT COMMITTEE REPORT.”

ITEM 11.

EXECUTIVE COMPENSATION.

The following information is included in the proxy statement for the annual stockholders meeting of April 24, 2012 and is incorporated herein by reference:

•

Compensation of Directors is included under the caption “COMPENSATION OF DIRECTORS.”

•

Compensation of Executive Officers and Related Matters is included under the caption “COMPENSATION OF EXECUTIVE OFFICERS.”

•

Compensation Committee Report is under the caption “COMPENSATION COMMITTEE REPORT.”

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Stock ownership information is included under the captions “STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS” and “STOCK OWNERSHIP OF OFFICERS AND DIRECTORS” in the proxy statement for the annual stockholders meeting of April 24, 2012 and is incorporated herein by reference.

Information regarding equity compensation plans required by Regulation S-K Item 201(d) is provided in Item 5 of this Form 10-K.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

No transactions with management and others as defined by Item 404 of Regulation S-K occurred in 2011.

Information concerning director independence is included under the caption “BOARD GOVERNANCE” in the proxy statement for the annual stockholders meeting of April 24, 2012 and is incorporated herein by reference.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Principal accountant fees and services information is included under the caption “INDEPENDENT AUDITORS” in the proxy statement for the annual stockholders meeting of April 24, 2012 and is incorporated herein by reference.

PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a) (1)

Listing of financial statements

The following consolidated financial statements of PACCAR Inc, included in the Annual Report to Stockholders for the year ended December 31, 2011, are incorporated by reference in Item 8:

Consolidated Statements of Income — Years Ended December 31, 2011, 2010 and 2009

Consolidated Balance Sheets — December 31, 2011 and 2010

Consolidated Statements of Cash Flows — Years Ended December 31, 2011, 2010 and 2009

Consolidated Statements of Stockholders’ Equity — Years Ended December 31, 2011, 2010 and 2009

Consolidated Statements of Comprehensive Income — Years Ended December 31, 2011, 2010 and 2009

Notes to Consolidated Financial Statements — December 31, 2011, 2010 and 2009

(2) Listing of financial statement schedules

All schedules are omitted because the required matter or conditions are not present or because the information required by the schedules is submitted as part of the consolidated financial statements and notes thereto.

(3) Listing of Exhibits (in order of assigned index numbers):

Exhibit

Number

Exhibit Description

Form

Date of First
Filing

Exhibit
Number

File
Number

(3) (i)

Articles of Incorporation:

(a) Restated Certificate of Incorporation of PACCAR Inc

8-K

September 19, 2005

99.3

001-14817

(b) Certificate of Amendment of Certificate of Incorporation of PACCAR Inc dated April 28, 2008

10-Q

May 2, 2008

3(b)

001-14817

(ii)

Amended and Restated Bylaws of PACCAR Inc

8-K

September 19, 2005

99.4

001-14817

Exhibit

Number

Exhibit Description

Form

Date of First
Filing

Exhibit
Number

File
Number

(4)

Instruments defining the rights of security holders,

including indentures:

(a) Indenture for Senior Debt Securities dated as of November 20, 2009 between PACCAR Financial Corp. and The Bank of New York Mellon Trust Company, N.A.

10-K

February 26, 2010

4(c)

001-11677

(b) Forms of Medium-Term Note, Series M (PACCAR Financial Corp.)

S-3

November 20, 2009

4.2 and
4.3

333-163273

S-3

November 20, 2009

4.4

333-163273

(d) Indenture for Senior Debt Securities dated as of November 18, 2008 between PACCAR Inc and Wilmington Trust Company

S-3

November 18, 2008

4.1

333-155429

(e) Forms of Medium-Term Note, Series A

S-3

November 18, 2008

4.2A and
4.2B

333-155429

(f) Indenture for Senior Debt Securities dated as of December 19, 2011 between PACCAR Inc and The Bank of New York Mellon Trust Company, N.A.

S-3

December 19, 2011

4.1

333-178607

(g) Forms of Medium-Term Note, Series B (Fixed- and Floating-Rate)

S-3

December 19, 2011

4.2A and
4.2B

333-178607

(h) Terms and Conditions of the Notes applicable to the €1,500,000,000 Euro Medium Term Note Programme of PACCAR Financial Europe B.V. and PACCAR Financial PLC

10-Q

November 5, 2009

4(f)

001-14817

(i) Pursuant to the Instructions to Exhibits, certain instruments defining the rights of holders of long-term debt securities of the Company and its wholly owned subsidiaries are not filed because the total amount of securities authorized under any such instrument does not exceed 10 percent of the Company’s total assets. The Company will file copies of such instruments upon request of the Commission.

(10)

Material Contracts:

(a) PACCAR Inc Amended and Restated Supplemental Retirement Plan

10-K

February 27, 2009

10(a)

001-14817

(b) Amended and Restated Deferred Compensation Plan

10-K

February 27, 2009

10(b)

001-14817

Exhibit

Number

Exhibit Description

Form

Date of First
Filing

Exhibit
Number

File
Number

10-K

February 27, 2006

10(b)

001-14817

(d) Amended and Restated PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-employee Directors

10-K

February 27, 2009

10(d)

001-14817

(e) PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-Employee Directors, Form of Restricted Stock Agreement for Non-Employee Directors

10-K

February 27, 2009

10(e)

001-14817

(f) PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-Employee Directors, Form of Deferred Restricted Stock Unit Agreement For Non-Employee Directors

8-K

December 10, 2007

99.3

001-14817

(g) Amendment to Compensatory Arrangement with Non-employee Directors*

(h) PACCAR Inc Senior Executive Yearly Incentive Compensation Plan

DEF14A

March 10, 2011

Appendix B

001-14817

(i) PACCAR Inc Long Term Incentive Plan

DEF14A

March 10, 2011

Appendix A

001-14817

(j) PACCAR Inc Long Term Incentive Plan, Nonstatutory Stock Option Agreement and Form of Option Grant Agreement

8-K

January 25, 2005

99.1

001-14817

(k) PACCAR Inc Long Term Incentive Plan, Amended Form of 2006 Restricted Stock Award Agreement

8-K

February 5, 2007

99.2

001-14817

(l) PACCAR Inc Long Term Incentive Plan, Form of Restricted Stock Award Agreement

8-K

February 5, 2007

99.1

001-14817

(m) PACCAR Inc Long Term Incentive Plan, 2010 Form of Restricted Stock Award Agreement

10-K

February 26, 2010

10(m)

001-14817

(n) PACCAR Inc Long Term Incentive Plan, Alternate Form of Restricted Stock Award Agreement

10-K

March 1, 2011

10(n)

001-14817

(o) PACCAR Inc Long Term Incentive Plan, Amended Form of Share Match Restricted Stock Award Agreement

8-K

February 5, 2007

99.3

001-14817

Exhibit

Number

Exhibit Description

Form

Date of First
Filing

Exhibit
Number

File
Number

(p) PACCAR Inc Long Term Incentive Plan, 2008 Form of Share Match Restricted Stock Award Agreement

8-K

February 5,
2008

99.1

001-14817

(q) PACCAR Inc Long Term Incentive Plan, 2011 Form of Share Match Restricted Stock Award Agreement.

10-K

March 1,
2011

10(p)

001-14817

(r) PACCAR Inc Savings Investment Plan, Amendment and Restatement effective January 1, 2009

10-K

March 1,
2011

10(q)

001-14817

(s) Memorandum of Understanding, dated as of May 11, 2007, by and among PACCAR Engine Company, the State of Mississippi and certain state and local supporting government entities

8-K

May 16,
2007

10.1

001-14817

(t) Letter Waiver Dated as of July 22, 2008 amending the Memorandum of Understanding, dated as of May 11, 2007, by and among PACCAR Engine Company, the State of Mississippi and certain state and local supporting governmental entities

10-Q

October
27, 2008

10(o)

001-14817

(12)

Statements Re: Computation of Ratios:

(a) Statement re: computation of ratio of earnings to fixed charges of the Company pursuant to SEC reporting requirements for each of the five years ended December 31, 2007 - 2011*

(13)

Annual report to security holders – Portions of the 2011 Annual Report to Stockholders have been incorporated by reference and are filed herewith.

(21)

Subsidiaries of the registrant

(23)

Consent of independent registered public accounting firm

(24)

Power of attorney – Powers of attorney of certain directors

(31)

Rule 13a-14(a)/15d-14(a) Certifications:

(a) Certification of Principal Executive Officer

(b) Certification of Principal Financial Officer

(32)

Section 1350 Certifications:

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


Exhibit Number		Exhibit Description

(101.INS)		XBRL Instance Document

(101.SCH)		XBRL Taxonomy Extension Schema Document

(101.CAL)		XBRL Taxonomy Extension Calculation Linkbase Document

(101.DEF)		XBRL Taxonomy Extension Definition Linkbase Document

(101.LAB)		XBRL Taxonomy Extension Label Linkbase Document

(101.PRE)		XBRL Taxonomy Extension Presentation Linkbase Document

*	filed herewith

(b)	Exhibits (Exhibits filed with the Securities and Exchange Commission are not included herein. Copies of exhibits will be furnished to stockholders at a cost of 25¢ per page upon written request addressed to Corporate Secretary, PACCAR Inc, P.O. Box 1518, Bellevue, Washington 98009.)

(c)	Financial Statement Schedules – All schedules are omitted because the required matter or conditions are not present or because the information required by the schedules is submitted as part of the consolidated financial statements and notes thereto.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


						PACCAR Inc Registrant

Date: February 29, 2012						/s/ M. C. P IGOTT
						M. C. Pigott, Chairman
						Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.


Signature		Title

/s/ M. C. P IGOTT M.C. Pigott		Chief Executive Officer and Director (Principal Executive Officer)

/s/ R. E. A RMSTRONG R. E. Armstrong		President (Principal Financial Officer)

/s/ M. T. B ARKLEY M. T. Barkley		Vice President and Controller (Principal Accounting Officer)

/s/ A. J. C ARNWATH A. J. Carnwath*		Director

/s/ J. M. F LUKE , J R . J. M. Fluke, Jr.*		Director

/s/ K. S. H ACHIGIAN K. S. Hachigian*		Director

/s/ S. F. P AGE S. F. Page*		Director

/s/ R. T. P ARRY R. T. Parry*		Director

/s/ J. M. P IGOTT J. M. Pigott*		Director

/s/ G. M. E. S PIERKEL G. M. E. Spierkel*		Director

/s/ W. R. S TALEY W. R. Staley*		Director

/s/ C. R. W ILLIAMSON C. R. Williamson*		Director


*By		/s/ M. C. P IGOTT
		M. C. Pigott
		Attorney-in-Fact

Exhibit 10(g)

PACCAR Inc

Amendment to Compensatory Arrangement With Non-Employee Directors

Effective January 2012, the annual award of restricted stock or restricted stock units for non-employee directors is increased from $90,000 to $100,000 under the Amended and Restated Restricted Stock and Deferred Compensation Plan for Non-Employee Directors. The cash retainer and meeting fees are unchanged.

Effective January 2012, the lead director and the chairman of the audit, compensation, and nominating & governance committees are entitled to an annual cash retainer of $10,000, payable quarterly. If the Board designates a lead director or committee chairman during a calendar quarter, a pro-rated retainer is paid.

Exhibit 12(a)

PACCAR Inc

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

PURSUANT TO SEC REPORTING REQUIREMENTS

(Millions of Dollars)


Year Ended December 31,	2011		2010		2009		2008		2007
FIXED CHARGES
Interest expense - PACCAR and Subsidiaries (1)	$	174.0	$	208.4	$	291.3	$	391.1	$	387.0
Portion of rentals deemed interest		4.7		6.5		16.8		17.9		17.5

TOTAL FIXED CHARGES	$	178.7	$	214.9	$	308.1	$	409.0	$	404.5

EARNINGS
Income before taxes - PACCAR and Subsidiaries (2)	$	1,506.9	$	660.3	$	175.0	$	1,464.0	$	1,764.3
FIXED CHARGES		178.7		214.9		308.1		409.0		404.5

EARNINGS AS DEFINED	$	1,685.6	$	875.2	$	483.1	$	1,873.0	$	2,168.8

RATIO OF EARNINGS TO FIXED CHARGES		9.43X		4.07X		1.57X		4.58X		5.36X

Exhibit 13

STOCKHOLDER RETURN PERFORMANCE GRAPH

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 two industry peer groups of companies identified in the graph (the Current Peer Group Index and the Prior Peer Group Index) for the last five fiscal years ending December 31, 2011. Effective January 1, 2011, the Company revised its peer group to better reflect global manufacturing and the cyclicality of the commercial vehicle industry. Standard & Poor’s has calculated a return for each company in both the Current Peer Group Index and the Prior 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 indices provides a better comparison than other indices available. The Current 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 Prior Peer Group Index consists of Caterpillar Inc., Cummins Inc., Danaher Corporation, Deere & Company, Dover Corporation, Eaton Corporation, Harley-Davidson, Inc., Honeywell International Inc., Illinois Tool Works Inc., Ingersoll-Rand Company Ltd. and United Technologies Corporation. The comparison assumes that $100 was invested on December 31, 2006 in the Company’s common stock and in the stated indices and assumes reinvestment of dividends.

LOGO


	2006		2007		2008		2009		2010		2011
PACCAR Inc		100		129.80		69.63		89.91		144.20		97.35
S&P 500 Index		100		105.49		66.46		84.05		96.71		98.76
Current Peer Group Index		100		146.02		68.16		100.58		176.38		149.33
Prior Peer Group Index		100		128.24		75.57		104.09		145.81		138.47

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(tables in millions, except truck unit and per share data)

OVERVIEW :

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

Consolidated net sales and revenues of $16.36 billion in 2011 were the second highest in the Company’s history. Consolidated net sales and revenues in 2011 increased 59% from $10.29 billion in 2010, mainly due to higher truck deliveries and record aftermarket parts sales. Truck unit sales increased in 2011 to 138,000 units from 79,000 units in 2010, reflecting higher industry retail sales and record truck market share in North America and Europe.

In 2011, PACCAR earned net income for the 73rd consecutive year. Net income in 2011 was $1,042.3 million ($2.86 per diluted share) an increase of 128% from $457.6 million ($1.25 per diluted share) in 2010 due to higher sales and margins in the Truck segment and improved Financial Services segment results.

During the past year, the Company acquired land and began construction of a new 300,000 square-foot DAF assembly facility in Ponta Grossa, Brasil. When completed in 2013, this world-class facility will provide a platform for the introduction of DAF’s full product range in Brasil and contribute to sales growth in other South American markets. The Company expanded its office in China in 2011 to support increased component purchases for production and aftermarket operations. The Company opened a technical center in Pune, India in late 2011 focused on engineering, information technology and component sourcing for worldwide production and aftermarket operations. Research and development and capital were invested in new Peterbilt, Kenworth and DAF products, new engine technologies, manufacturing efficiencies and the opening of a new parts distribution center (PDC) in Moscow, Russia. The Company now has fifteen PDCs strategically located to support truck customers in North America, Europe, Australia and South America.

The PACCAR Financial Services group of companies has operations covering three continents and 21 countries. The global breadth of PFS and its rigorous credit application process support a portfolio of loans and leases with total assets of $9.4 billion that earned a pretax profit of $236.4 million. PFS issued $982.4 million in medium-term notes during the year to pay off maturing debt and support portfolio growth.

Truck Outlook

Industry retail sales in the U.S. and Canada in 2012 are expected to increase from 197,000 units in 2011 to 210,000–240,000 units, primarily due to the ongoing replacement of the aging industry fleet. In Europe, the 2012 market size of above 15-tonne vehicles is expected to be 210,000–240,000 units, lower than the 244,000 trucks in 2011 due to slowing economies in the Eurozone reflecting the ongoing European sovereign debt crisis.

Capital investments in 2012 are expected to be $450 to $550 million. Research and development (R&D) in 2012 is expected to be $275 to $325 million. Capital investments and R&D in 2012 will focus on construction of the factory in Brasil as well as comprehensive product development programs. See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect this outlook.

Financial Services Outlook

Average earning assets in 2012 are projected to grow due to new business financing from truck sales being greater than portfolio runoff. The Company’s customers are benefiting from increased freight tonnage, higher freight rates and fleet utilization that are contributing to improvements in customers’ profitability and cash flow. If current freight transportation conditions continue, past-due accounts, truck repossessions and net charge-offs in 2012 could be comparable to or improve slightly from 2011. See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect this outlook.

RESULTS OF OPERATIONS


($ in millions, except per share data) Year ended December 31,	2011			2010			2009
Net sales and revenues:
Truck	$	15,207.7		$	9,237.3		$	6,994.0
Other		118.2			87.8			82.7

Truck and Other		15,325.9			9,325.1			7,076.7
Financial Services		1,029.3			967.8			1,009.8

	$	16,355.2		$	10,292.9		$	8,086.5

Income (loss) before income taxes:
Truck	$	1,258.8		$	501.0		$	25.9
Other		(26.5	)		(15.3	)		42.2

Truck and Other		1,232.3			485.7			68.1
Financial Services		236.4			153.5			84.6
Investment income		38.2			21.1			22.3
Income taxes		(464.6	)		(202.7	)		(63.1	)

Net Income	$	1,042.3		$	457.6		$	111.9

Diluted Earnings Per Share	$	2.86		$	1.25		$	.31

Return on Revenues		6.4	%		4.4	%		1.4	%

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

2011 Compared to 2010:

Truck

The Company’s truck segment accounted for 93% and 90% of revenues in 2011 and 2010, respectively.


($ in millions) Year ended December 31,	2011		2010		% change
Truck net sales and revenues:
U.S. and Canada	$	8,162.9	$	4,419.2		85
Europe		4,799.8		3,190.2		50
Mexico, South America, Australia and other		2,245.0		1,627.9		38

	$	15,207.7	$	9,237.3		65

Truck income before income taxes	$	1,258.8	$	501.0		151

The Company’s worldwide truck and parts sales and revenues increased due to higher market demand, primarily in the U.S. and Canada and Europe.

The increase in Truck segment income before income taxes was due to higher truck unit sales and margin and higher aftermarket parts sales and margins, partially offset by increases in R&D and selling, general and administrative (SG&A) expenses to support a higher level of business activity. 2011 truck income before income taxes was also affected by the translation of stronger foreign currencies, primarily the euro. The translation effect of all currencies increased 2011 income before income taxes by $28.1 million compared to 2010.

The Company’s new truck deliveries are summarized below:


Year ended December 31,	2011		2010		% change
United States		59,400		29,100		104
Canada		10,500		6,100		72

U.S. and Canada		69,900		35,200		99
Europe		51,100		31,200		64
Mexico, South America, Australia and other		17,000		12,400		37

Total units		138,000		78,800		75

The truck market in the U.S. and Canada in 2011 improved from the recessionary levels of 2010, reflecting higher freight volumes and the need to replace an aging truck fleet. Industry retail sales in the heavy-duty market in U.S. and Canada increased to 197,000 units in 2011 compared to 126,000 units in 2010. The Company’s heavy-duty truck retail market share was a record 28.1% in 2011 compared to 24.1% in 2010, reflecting overall strong demand for the Company’s premium products and increased deliveries to large fleet customers. The medium-duty market was 61,000 units in 2011 compared to 41,000 units in 2010. The Company’s medium-duty market share was 12.4% in 2011 compared to 13.5% in 2010.

The 15-tonne and above truck market in Western and Central Europe was 244,000 units compared to 183,000 units in 2010. The Company’s market share was a record 15.5% in 2011 compared to 15.2% in 2010, reflecting improvement in the U.K., Germany and Central Europe. DAF market share in the 6- to 15-tonne market in 2011 was 8.9%, compared to 7.7% in 2010. The 6- to 15-tonne market in 2011 was 57,000 units, compared to 51,000 units in 2010.

Sales and revenues in Mexico, South America, Australia and other markets increased in 2011 primarily due to higher new truck deliveries in Mexico and the Andean region of South America.

The major factors for the change in net sales and revenues, cost of sales and revenues, and gross margin between 2011 and 2010 follow:


($ in millions)	NET SALES		COST OF SALES		GROSS MARGIN
2010	$	9,237.3	$	8,125.5	$	1,111.8
Increase (decrease)
Truck delivery volume		4,739.9		4,050.5		689.4
Average truck sales prices		567.7				567.7
Average per truck material, labor, and other direct costs				303.4		(303.4	)
Factory overhead, warehouse and other indirect costs				273.6		(273.6	)
Aftermarket parts volume		258.8		157.8		101.0
Average aftermarket parts sales prices		69.5				69.5
Average aftermarket parts direct costs				41.8		(41.8	)
Currency translation		334.5		289.4		45.1

Total increase		5,970.4		5,116.5		853.9

2011	$	15,207.7	$	13,242.0	$	1,965.7

•

The higher truck delivery volume reflects improved truck markets and higher market share. The increased demand for trucks also resulted in higher average truck sales prices which increased sales by $567.7 million.

•

Cost of sales increased $303.4 million due to a higher average cost per truck, primarily from the effect of EPA 2010 engines in the U.S. and Canada.

•

Factory overhead, warehouse and other indirect costs increased $273.6 million primarily due to higher salaries and related costs ($169.4 million) and manufacturing supplies and maintenance ($84.8 million) to support higher production levels.

•

Aftermarket parts volume benefited from stronger retail markets, reflecting improving freight volumes and aging truck fleets. This higher market demand resulted in increased aftermarket parts sales volume of $258.8 million and related cost of sales of $157.8 million.

•

Average aftermarket parts sales prices increased by $69.5 million reflecting improved price realization from improved market demand.

•

Average aftermarket parts costs increased $41.8 million from higher material costs.

•

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

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


($ in millions) Year ended December 31,	2011			2010			% change
Truck net sales and revenues:
Trucks	$	12,630.7		$	7,042.9			79
Aftermarket parts		2,577.0			2,194.4			17

	$	15,207.7		$	9,237.3			65
Gross margin:
Trucks	$	1,072.8		$	366.1			193
Aftermarket parts		892.9			745.7			20

	$	1,965.7		$	1,111.8			77
Gross margin %:
Trucks		8.5	%		5.2	%
Aftermarket parts		34.7	%		34.0	%

		12.9	%		12.0	%

Truck gross margins in 2011 reflect the benefits of higher market demand and increased absorption of fixed costs resulting from higher truck production. Aftermarket parts gross margins in 2011 benefited from higher price realization from improved market demand.

Truck R&D expenditures increased to $287.5 million in 2011 from $238.2 million in 2010. The higher spending in 2011 reflects increased new product development activities, primarily for new truck products for North America and Europe and $8.3 million from higher foreign currencies, primarily the euro.

Truck SG&A was $415.1 million in 2011 compared to $368.3 million in 2010. The higher spending is due to higher salaries and related expenses of $51.4 million (including $10.1 million from the effect of foreign currencies) to support higher levels of business activity. As a percentage of sales, SG&A decreased to 2.7% in 2011 from 4.0% in 2010 due to higher sales volumes and ongoing cost control.

Financial Services


($ in millions) Year ended December 31,	2011		2010		% change
New loan and lease volume:
U.S. and Canada	$	2,523.1	$	1,409.4		79
Europe		933.5		593.7		57
Mexico and Australia		604.4		473.0		28

	$	4,061.0	$	2,476.1		64
New loan and lease volume by product:
Loans and finance leases	$	3,117.2	$	1,975.1		58
Equipment on operating lease		943.8		501.0		88

	$	4,061.0	$	2,476.1		64
New loan and lease unit volume:
Loans and finance leases		35,200		24,100		46
Equipment on operating lease		9,500		5,600		70

		44,700		29,700		51
Average earning assets:
U.S. and Canada	$	4,595.0	$	4,320.6		6
Europe		2,234.9		1,944.5		15
Mexico and Australia		1,445.1		1,303.2		11

	$	8,275.0	$	7,568.3		9
Average earning assets by product:
Loans and finance leases	$	5,291.0	$	5,119.9		3
Dealer wholesale financing		1,220.4		899.1		36
Equipment on operating lease and other		1,763.6		1,549.3		14

	$	8,275.0	$	7,568.3		9
Revenues:
U.S. and Canada	$	508.6	$	491.6		3
Europe		313.0		286.6		9
Mexico and Australia		207.7		189.6		10

	$	1,029.3	$	967.8		6
Revenue by product:
Loans and finance leases	$	373.2	$	383.8		(3	)
Dealer wholesale financing		49.9		37.8		32
Equipment on operating lease and other		606.2		546.2		11

	$	1,029.3	$	967.8		6

Income before income taxes	$	236.4	$	153.5		54

In 2011, new loan and lease volume increased 64% to $4.06 billion from $2.48 billion in 2010, reflecting increased new PACCAR truck sales, increased finance market share and a higher average amount financed per unit. PFS increased its finance market share on new PACCAR trucks to 31% in 2011 from 28% in the prior year.

The increase in PFS revenues to $1.03 billion in 2011 from $.97 billion in 2010 primarily resulted from higher average earning asset balances and the impact of stronger foreign currencies, partially offset by lower yields. PFS income before income taxes increased to $236.4 million in 2011 compared to $153.5 million in 2010 primarily due to higher finance and lease margins 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, 2011 are outlined in the table below:


($ in millions)	INTEREST AND FEES			INTEREST AND OTHER BORROWING EXPENSES			FINANCE MARGIN
2010	$	421.6		$	213.0		$	208.6
Increase (decrease)
Average finance receivables		21.8						21.8
Yields		(32.1	)					(32.1	)
Average debt balances					15.5			(15.5	)
Borrowing rates					(53.4	)		53.4
Currency translation		11.8			6.2			5.6

Total increase (decrease)		1.5			(31.7	)		33.2

2011	$	423.1		$	181.3		$	241.8

•

Average finance receivables increased $319.2 million (net of $173.2 million of foreign exchange effects) from an increase in dealer wholesale financing, primarily in the U.S. and Canada and Europe as well as retail portfolio new business volume exceeding repayments.

•

Lower market rates resulted in lower portfolio yields.

•

Average debt balances increased $409.0 million in 2011, reflecting funding needed for a higher average finance receivable portfolio.

•

Borrowing rates declined in 2011 due to lower market interest rates.

•

Currency translation primarily relates to the stronger euro.

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


($ in millions) Year ended December 31,	2011		2010
Operating lease revenues	$	567.0	$	498.7
Used truck sales and other		39.2		47.5

Operating lease, rental and other income	$	606.2	$	546.2

Depreciation of equipment on operating leases	$	346.6	$	325.6
Vehicle operating expenses		103.2		92.1
Cost of used truck sales and other		26.4		33.9

Depreciation and other expense	$	476.2	$	451.6

The major factors for the changes in operating lease, rental and other income, depreciation and other expense and lease margin for the year ended December 31, 2011 are outlined in the table below:


($ in millions)	OPERATING LEASE, RENTAL AND OTHER INCOME		DEPRECIATION AND OTHER			LEASE MARGIN
2010	$	546.2	$	451.6		$	94.6
Increase (decrease)
Operating lease impairments				(3.8	)		3.8
Results on returned lease assets				(19.5	)		19.5
Average operating lease assets		34.3		27.8			6.5
Revenue and cost per asset		21.8		17.6			4.2
Currency translation and other		3.9		2.5			1.4

Total increase		60.0		24.6			35.4

2011	$	606.2	$	476.2		$	130.0

•

The decrease in operating lease impairments and improved results on trucks returned from leases in 2011 reflect higher used truck prices.

•

Average operating lease assets increased $214.3 million in 2011, which increased income by $34.3 million and related depreciation on operating leases by $27.8 million, as a result of higher volume of equipment placed in service reflecting higher demand for leased vehicles.

•

Higher truck transportation demand also resulted in an increase in revenues per asset in 2011. The increase in revenue consisted of higher asset utilization (the proportion of available operating lease units that are being leased) of $4.4 million, higher lease rates of $13.5 million and higher fuel and service revenue of $3.9 million. The 2011 increase in costs per asset of $17.6 million is due to higher vehicle operating expenses, including higher fuel costs and variable costs from higher asset utilization levels.

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


	2011				2010
($ in millions)	NET CHARGE-OFFS		PROVISION FOR LOSSES ON RECEIVABLES		NET CHARGE-OFFS		PROVISION FOR LOSSES ON RECEIVABLES
U.S. and Canada	$	6.7	$	3.8	$	35.7	$	21.0
Europe		15.3		17.9		27.2		20.9
Mexico and Australia		23.0		19.7		20.4		19.1

	$	45.0	$	41.4	$	83.3	$	61.0

The provision for losses on receivables for 2011 declined $19.6 million compared to 2010 due to generally improving economic conditions which have improved the profitability and cash flow for many of the Company’s customers in the transportation industry, particularly in the U.S. and Canada.


At December 31,	2011			2010
Percentage of retail loan and lease accounts 30+ days past-due:
U.S. and Canada		1.1	%		2.1	%
Europe		1.0	%		2.5	%
Mexico and Australia		3.4	%		5.8	%
Total		1.5	%		3.0	%

Worldwide PFS accounts 30+ days past due at December 31, 2011 of 1.5% improved from 3.0% at December 31, 2010. Included in the U.S. and Canada past-due percentage of 1.1% is .8% from one large customer. Excluding that customer, worldwide PFS accounts 30+ days past due at December 31, 2011 would have been .9%. At December 31, 2011, the Company had $27.9 million of specific loss reserves for this large customer and other accounts considered at risk. The Company remains focused on minimizing past-due balances.

When the Company modifies a 30+ days past-due account, the customer is generally considered current under the revised contractual terms. During the fourth quarter of 2011, the Company modified $4.5 million of accounts worldwide that were 30+ days past-due that became current at the time of modification. Had these accounts not been modified and continued to not make payments, worldwide PFS accounts 30+ days past due of 1.5% at December 31, 2011 would have remained at 1.5%. During the fourth quarter of 2010, the Company modified $20.8 million of accounts worldwide that were 30+ days past due that became current at the time of modification. Had these accounts not been modified and continued to not make payments, worldwide PFS accounts 30+ days past due of 3.0% would have been 3.3%. Modifications of accounts in prior quarters that were more than 30 days past due at the time of modification are included in past-dues as of December 31, 2011 and 2010 if they were not performing under the modified terms. The effect on the allowance for credit losses from such modifications was not significant at December 31, 2011 and 2010.

Of the $4.5 million modified accounts in the fourth quarter of 2011 that were 30+ days past due at the time of modification, $4.4 million were in Mexico and Australia. Had these accounts in Mexico and Australia not been modified and the customers continued to not make payments, past-dues of 3.4% in Mexico and Australia would have been 3.8%. Of the $20.8 million modified accounts in the fourth quarter of 2010 that were 30+ days past due at the time of modification, $14.2 million were in Mexico and Australia. Had these accounts in Mexico and Australia not been modified and the customers continued to not make payments, past-dues of 5.8% in Mexico and Australia would have been 6.8%.

The Company’s 2011 pretax return on revenue for Financial Services increased to 23.0% from 15.9% in 2010 primarily due to higher finance and lease margins. The higher finance margin reflects a lower cost of funds and a larger finance receivable portfolio. The higher lease margin is primarily due to improved results on the sales of operating lease units.

Other

Investment income was $38.2 million in 2011 compared to $21.1 million in 2010. The higher investment income in 2011 reflects higher average investment balances and higher yields on investments.

The 2011 effective income tax rate of 30.8% was comparable to 30.7% in 2010.


($ in millions) Year ended December 31,	2011			2010
Domestic income before taxes	$	607.0		$	186.3
Foreign income before taxes		899.9			474.0

Total income before taxes	$	1,506.9		$	660.3

Domestic pre-tax return on revenues		8.2	%		4.4	%
Foreign pre-tax return on revenues		10.0	%		7.8	%

Total pre-tax return on revenues		9.2	%		6.4	%

The improvements in income before income taxes and return on revenues for both domestic and foreign operations were primarily due to a higher return on revenues in truck operations.

2010 Compared to 2009:

Truck

PACCAR’s Truck segment accounted for 90% and 86% of revenues in 2010 and 2009, respectively.


($ in millions) Year ended December, 31	2010		2009		% change
Truck net sales and revenues:
U.S. and Canada	$	4,419.2	$	3,566.0		24
Europe		3,190.2		2,520.2		27
Mexico, Australia and other		1,627.9		907.8		79

	$	9,237.3	$	6,994.0		32

Truck income before income taxes	$	501.0	$	25.9		*

*	Percentage not meaningful

PACCAR’s worldwide truck sales and revenues increased to $9.24 billion in 2010 from $6.99 billion in 2009 due to higher market demand in all markets attributable to improving global economic conditions.

Truck segment income before income taxes increased to $501.0 million in 2010 from $25.9 million in 2009 from higher truck unit and aftermarket parts sales and margins in all markets, partially offset by increased R&D and higher SG&A spending. 2010 truck income before income taxes was also affected by the translation of stronger foreign currencies, primarily the Canadian and Australian dollars offset by a weaker euro and British pound. The translation effect of all currencies increased 2010 income before income taxes by $15.1 million compared to 2009.

The Company’s new truck deliveries are summarized below:


Year ended December 31,	2010		2009		% change
United States		29,100		28,300		3
Canada		6,100		4,400		39

U.S. and Canada		35,200		32,700		8
Europe		31,200		22,200		41
Mexico, Australia and other		12,400		6,100		103

Total units		78,800		61,000		29

In the U.S. and Canada, 2010 net sales and revenues increased to $4.42 billion from $3.57 billion in 2009. Industry retail sales in the heavy-duty market in U.S. and Canada increased 17% to 126,000 units in 2010 compared to 108,000 units in 2009. The Company’s market share was 24.1% in 2010 and 25.1% in 2009. The medium-duty market was 41,000 units in 2010 and 2009. The Company’s medium-duty market share was 13.5% in 2010 compared to 15.9% in 2009.

In Europe, 2010 net sales and revenues increased to $3.19 billion from $2.52 billion in 2009. The 15-tonne and above truck market in Western and Central Europe was 183,000 units compared to 168,000 units in 2009. The Company’s market share was 15.2% in 2010 compared to 14.8% in 2009. DAF market share in the 6- to 15-tonne market in 2010 was 7.7%, compared to 9.3% in 2009. The 6- to 15-tonne market in 2010 was 51,000 units, comparable to 2009.

Net sales and revenues in Mexico, Australia and other countries outside the Company’s primary markets increased to $1.63 billion in 2010 from $.91 billion in 2009 primarily due to higher sales from new truck deliveries in Mexico ($.44 billion) and Australia ($.19 billion) reflecting higher market demand.

The major factors for the change in net sales and revenues, cost of sales and revenues, and gross margin between 2010 and 2009 follow:


($ in millions)	NET SALES			COST OF SALES			GROSS MARGIN
2009	$	6,994.0		$	6,414.9		$	579.1
Increase (decrease)
Truck delivery volume		1,410.7			1,189.3			221.4
Average truck sales prices		523.1						523.1
Average per truck material, labor, and other direct costs					256.5			(256.5	)
Factory overhead, warehouse and other indirect costs					89.7			(89.7	)
Aftermarket parts volume		266.7			176.0			90.7
Average aftermarket parts sales prices		51.3						51.3
Average aftermarket parts direct costs					12.5			(12.5	)
Currency translation		(8.5	)		(13.4	)		4.9

Total increase		2,243.3			1,710.6			532.7

2010	$	9,237.3		$	8,125.5		$	1,111.8

•

The higher truck delivery volume reflects improved market demand which also resulted in an increase of $523.1 million from higher average truck sales prices.

•

In addition, there was an increase in cost of sales of $256.5 million due to a higher average cost per truck, primarily from the effect of higher content EPA 2010 emission vehicles in the U.S. and Canada.

•

Factory overhead, warehouse and other indirect costs increased $89.7 million primarily due to higher supplies and maintenance ($38.6 million) and salaries and related costs ($16.5 million) to support higher production levels.

•

Higher market demand also improved aftermarket parts sales volume by $266.7 million and related cost of sales by $176.0 million.

•

Average aftermarket parts sales prices increased by $51.3 million reflecting improved price realization.

•

The currency translation effect on sales and cost of sales was not significant as a weaker euro and British pound was offset by stronger Canadian and Australian dollars.

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


($ in millions) Year ended December 31,	2010			2009			% change
Truck net sales and revenues:
Trucks	$	7,042.9		$	5,103.3			38
Aftermarket parts		2,194.4			1,890.7			16

	$	9,237.3		$	6,994.0			32
Gross margin:
Trucks	$	366.1		$	(46.6	)		*
Aftermarket parts		745.7			625.7			19

	$	1,111.8		$	579.1			92
Gross margin %:
Trucks		5.2	%		(.9	)%
Aftermarket parts		34.0	%		33.1	%

		12.0	%		8.3	%

*	Percentage not meaningful

Total Truck segment gross margins for 2010 increased primarily as a result of higher truck gross margins. Gross margins on trucks increased to 5.2% in 2010, reflecting higher average truck selling prices from increased market demand and increased absorption of fixed costs resulting from the increase in truck production. 2010 aftermarket parts gross margins increased due to improved price realization.

Truck R&D expenditures increased to $238.2 million in 2010 from $198.5 million in 2009. The higher spending reflects increased new product development activities, primarily new truck products for North America and Europe.

Truck SG&A was $368.3 million in 2010 compared to $341.4 million in 2009. The higher spending is primarily due to higher salaries and related expenses ($22.8 million) and sales and marketing activities ($3.4 million), partially offset by lower severance costs ($5.0 million). As a percentage of sales, SG&A decreased to 4.0% in 2010 from 4.9% in 2009 due to higher sales volumes.

Financial Services


($ in millions) Year ended December 31,	2010		2009		% change
New loan and lease volume:
U.S. and Canada	$	1,409.4	$	1,175.0		20
Europe		593.7		433.5		37
Mexico and Australia		473.0		306.1		55

	$	2,476.1	$	1,914.6		29
New loan and lease volume by product:
Loans and finance leases	$	1,975.1	$	1,395.1		42
Equipment on operating lease		501.0		519.5		(4	)

	$	2,476.1	$	1,914.6		29
New loan and lease unit volume:
Loans and finance leases		24,100		18,300		32
Equipment on operating lease		5,600		5,900		(5	)

		29,700		24,200		23
Average earning assets:
U.S. and Canada	$	4,320.6	$	4,795.5		(10	)
Europe		1,944.5		2,535.9		(23	)
Mexico and Australia		1,303.2		1,321.9		(1	)

	$	7,568.3	$	8,653.3		(13	)
Average earning assets by product:
Loans and finance leases	$	5,119.9	$	5,904.1		(13	)
Dealer wholesale financing		899.1		1,221.2		(26	)
Equipment on operating lease		1,549.3		1,528.0		1

	$	7,568.3	$	8,653.3		(13	)
Revenues:
U.S. and Canada	$	491.6	$	501.8		(2	)
Europe		286.6		318.5		(10	)
Mexico and Australia		189.6		189.5

	$	967.8	$	1,009.8		(4	)
Revenue by product:
Loans and finance leases	$	383.8	$	449.3		(15	)
Dealer wholesale financing		37.8		52.5		(28	)
Equipment on operating lease and other		546.2		508.0		8

	$	967.8	$	1,009.8		(4	)

Income before income taxes	$	153.5	$	84.6		81

In 2010, new loan and lease volume increased due to higher retail truck sales ($313.4 million) as well as higher average amounts financed per unit ($130.3 million). PFS increased its finance market share on new PACCAR trucks to 28% in 2010 from 26% in the prior year.

Decreased Financial Services revenues in 2010 primarily resulted from lower average earning asset balances in all markets. Financial Services income before income taxes increased to $153.5 million in 2010 compared to $84.6 million in 2009. The increase of $68.9 million was primarily due to higher lease margin of $42.7 million and a lower provision for losses on receivables of $29.8 million.

The major factors for the change in interest and fees, interest and other borrowing expenses and finance margin for the year ended December 31, 2010 are outlined in the table below:


($ in millions)	INTEREST AND FEES			INTEREST AND OTHER BORROWING EXPENSES			FINANCE MARGIN
2009	$	501.8		$	291.8		$	210.0
Increase (decrease)
Average finance receivables		(86.2	)					(86.2	)
Yields		(3.0	)					(3.0	)
Average debt balances					(58.9	)		58.9
Borrowing rates					(23.9	)		23.9
Currency translation		9.0			4.0			5.0

Total decrease		(80.2	)		(78.8	)		(1.4	)

2010	$	421.6		$	213.0		$	208.6

•

Lower average finance receivables in 2010 ($1.11 billion) resulted in $86.2 million of lower interest and fee income. The lower finance receivables result from retail portfolio repayments exceeding new business volume as well as a decrease in average wholesale financing ($322.1 million) due to lower dealer inventory balances.

•

Average debt balances declined in 2010 by $1.35 billion resulting in $58.9 million of lower interest and other borrowing expenses. The lower average debt balances reflect a lower level of funding needed for a smaller financial services portfolio.

•

Borrowing rates declined in 2010 due to lower market interest rates.

•

Currency translation, primarily the stronger Australian and Canadian dollars, increased interest and fees by $9.0 million and interest and other borrowing expense by $4.0 million, respectively.

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


($ in millions) Year ended December 31,	2010		2009
Operating lease revenues	$	498.7	$	470.6
Used truck sales and other		47.5		37.4

Operating lease, rental and other income	$	546.2	$	508.0

Depreciation of equipment on operating leases	$	325.6	$	344.8
Vehicle operating expenses		92.1		87.4
Cost of used truck sales and other		33.9		23.9

Depreciation and other expense	$	451.6	$	456.1

The major factors for the change in operating lease, rental and other income, depreciation and other expense and lease margin for the year ended December 31, 2010 are outlined in the table below:


($ in millions)	OPERATING LEASE, RENTAL AND OTHER INCOME			DEPRECIATION AND OTHER			LEASE MARGIN
2009	$	508.0		$	456.1		$	51.9
Increase (decrease)
Operating lease impairments					(23.9	)		23.9
Results on returned lease assets					(16.3	)		16.3
Used trucks taken on trade package		12.7			12.6			.1
Average operating lease assets		3.4			2.9			.5
Revenue and cost per asset		29.7			27.4			2.3
Currency translation		(5.6	)		(4.6	)		(1.0	)
Insurance and other		(2.0	)		(2.6	)		.6

Total increase (decrease)		38.2			(4.5	)		42.7

2010	$	546.2		$	451.6		$	94.6

•

Operating lease impairments decreased $23.9 million in 2010 due to improving used truck prices ($17.5 million) and fewer losses on repossessed operating lease equipment ($6.4 million).

•

Results on sales of trucks returned from leases improved $16.3 million in 2010 also reflecting higher used truck prices as a result of the increased demand for used trucks in an improving global economy.

•

The $12.7 million increase in trucks taken on trade and associated cost of $12.6 million are due to an increase in the volume of trucks sold.

•

Higher average operating lease assets in 2010 ($21.3 million) increased income by $3.4 million and related depreciation on operating leases by $2.9 million.

•

Higher truck market demand resulted in an increase in revenues per asset in 2010 of $29.7 million. The increase in revenue consisted of higher asset utilization (the proportion of available operating lease units that are being leased) of $13.5 million, higher lease rates of $10.7 million and higher fuel and service revenue of $5.5 million.

•

The 2010 increase in costs per asset of $27.4 million is due to higher vehicle operating expenses, including higher fuel costs and variable costs from higher asset utilization levels.

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


	2010				2009
($ in millions)	NET CHARGE-OFFS		PROVISION FOR LOSSES ON RECEIVABLES		NET CHARGE-OFFS		PROVISION FOR LOSSES ON RECEIVABLES
U.S. and Canada	$	35.7	$	21.0	$	63.1	$	49.0
Europe		27.2		20.9		30.8		28.8
Mexico and Australia		20.4		19.1		14.3		13.0

	$	83.3	$	61.0	$	108.2	$	90.8

The provision for losses on receivables for 2010 of $61.0 million declined $29.8 million compared to 2009, primarily from improvements in portfolio quality as well as a decline in the receivable balances. Charge-offs declined in the U.S. and Canada and Europe due to improvements in economic conditions. Charge-offs increased in Mexico and Australia due to weakness in the transport industry in Mexico during much of the year. Past-due percentages are noted below.


At December 31,	2010			2009
Percentage of retail loan and lease accounts 30+ days past-due:
U.S. and Canada		2.1	%		1.8	%
Europe		2.5	%		4.4	%
Mexico and Australia		5.8	%		9.6	%
Total		3.0	%		3.8	%

Worldwide PFS accounts 30+ days past due at December 31, 2010 of 3.0% improved from 3.8% at December 31, 2009, reflecting improvements in Europe, Mexico and Australia, partially offset by a slight increase in the U.S. and Canada. Included in the U.S. and Canada past-due percentage of 2.1% is 1.1% from one large customer. Excluding that customer, worldwide PFS accounts 30+ days past due at December 31, 2010 would have been 2.3%. At December 31, 2010, the Company had $34.9 million of specific loss reserves for this large customer and other accounts considered at risk. The Company continues to focus on reducing past-due balances. When the Company modifies a 30+ days past-due account, the customer is generally considered current under the revised contractual terms. The effect on total 30+ days past-dues from such modifications was not significant at December 31, 2010 and 2009.

The Company’s 2010 pretax return on revenue for Financial Services increased to 15.9% from 8.4% in 2009 primarily due to higher lease margin from lower operating lease impairments and a decline in losses on the sale of lease returns, and a lower provision for losses from improving 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 2010 and 2009. Other SG&A was $24.5 million in 2010 and $7.1 million in 2009. The increase is primarily due to higher salaries and related expenses ($5.7 million), higher charitable contributions ($5.2 million), increased professional fees ($2.7 million) and higher travel and related costs ($1.2 million). Other income (loss) before tax was a loss of $15.3 million in 2010 compared to income of $42.2 million in 2009, primarily due to a one-time $66.0 million gain from the curtailment of postretirement benefits, partially offset by higher expense from economic hedges of $21.2 million in 2009 and higher SG&A in 2010.

The 2010 effective income tax rate was 30.7% compared to 36.1% in 2009. In 2009, a retroactive tax law change in Mexico increased income tax expense by $11.4 million and the effective tax rate by 6.5 percentage points. Excluding the Mexican tax law change, the effective tax rate in 2009 was 29.6%. The higher rate in 2010 reflects a lower proportion of tax benefits for research and development and other permanent differences.

Consolidated pretax return on revenues was 6.4% in 2010 compared to 2.2% in 2009. The increase was primarily due to higher returns in foreign operations. Foreign income before income taxes was $474.0 million in 2010 compared to $95.9 million in 2009. The ratio of foreign income before tax to revenues was 7.8% in 2010 compared to 2.1% in 2009. The improvement was primarily due to a higher return on revenues in foreign truck operations.

LIQUIDITY AND CAPITAL RESOURCES :


($ in millions) At December 31	2011		2010		2009
Cash and cash equivalents	$	2,106.7	$	2,040.8	$	1,912.0
Marketable debt securities		910.1		450.5		219.5

	$	3,016.8	$	2,491.3	$	2,131.5

The Company’s total cash and marketable debt securities increased $525.5 million at December 31, 2011 primarily from an increase in marketable debt securities of $459.6 million.

The change in cash and cash equivalents is summarized below.


($ in millions) Year Ended December 31,	2011			2010			2009
Operating activities:
Net income	$	1,042.3		$	457.6		$	111.9
Net income items not affecting cash		882.5			678.2			697.7
Changes in operating assets and liabilities, net		(332.2	)		415.6			563.7

Net cash provided by operating activities		1,592.6			1,551.4			1,373.3
Net cash (used in) provided by investing activities		(2,419.0	)		(467.1	)		310.6
Net cash provided by (used in) financing activities		946.1			(960.4	)		(1,816.2	)
Effect of exchange rate changes on cash		(53.8	)		4.9			89.1

Net increase (decrease) in cash and cash equivalents		65.9			128.8			(43.2	)
Cash and cash equivalents at beginning of the year		2,040.8			1,912.0			1,955.2

Cash and cash equivalents at end of the year	$	2,106.7		$	2,040.8		$	1,912.0

2011 Compared to 2010:

Operating activities : Cash provided by operations increased $41.2 million to $1.59 billion in 2011. The higher operating cash flow was primarily due to higher net income of $584.7 million and $363.7 million from higher purchases of goods and services in accounts payable and accrued expenses greater than payments compared to 2010. In addition, $141.0 million of additional operating cash flow was provided from higher current income tax provisions compared to payments in 2011 as opposed to a decrease in current income tax provisions compared to payments in 2010. Higher operating cash flow of $83.6 million was provided by higher warranty expenses than payments in 2011, reflecting increased truck production. These were partially offset by $366.1 million lower amount of cash provided from Truck segment trade receivables as billings exceeded collections reflecting normal trade terms on higher truck sales. In addition, $758.4 million of operating cash flow was used for increased Financial Services segment wholesale receivables, sales-type finance leases and dealer direct loans in 2011 reflecting higher truck sales compared to 2010.

Investing activities : Cash used in investing activities of $2.42 billion in 2011 increased $1.95 billion from the $467.1 million used in 2010. In 2011, there were higher new loan and lease originations of $942.7 million in the Financial Services segment due to increased retail sales from higher new truck demand. In addition, there were higher acquisitions of equipment on operating leases of $591.2 million from higher new truck demand. Net purchases of marketable securities were $238.1 million higher as the Company increased returns on available cash by investing in marketable debt securities with higher yields. Proceeds from asset disposals were $53.1 million lower in 2011, reflecting fewer used truck unit sales.

Financing activities : Cash provided by financing activities in 2011 of $946.1 million was $1.91 billion higher than the cash used in financing activities in 2010. This was primarily due to $1.64 billion from net borrowings on commercial paper and short-term bank loans in 2011 compared to net repayments in 2010 of $548.1 million and higher issuances of long-term debt of $458.5 million, partially offset by higher payments of term debt of $428.3 million and $337.6 million for higher stock repurchases. The higher cash inflow in financing reflects higher funding required for a growing financial services asset portfolio.

2010 Compared to 2009:

Operating activities : Cash provided by operations increased $178.1 million to $1.55 billion in 2010 compared to $1.37 billion in 2009. The higher operating cash flow was primarily due to higher net income of $345.7 million and $493.1 million from higher purchases of goods and services in accounts payable and accrued expenses greater than payments compared to 2009. Also, due to the improved funded status of its pension plans, pension contributions in 2010 were $112.7 million lower than in 2009. In addition, $113.4 million of additional operating cash flow was provided from higher income tax liabilities compared to payments in 2010 as opposed to a decrease in income tax liabilities compared to payments in 2009. This was partially offset by a lower amount of cash provided from Truck Segment trade receivables ($205.5 million) and Financial Services segment wholesale receivables ($642.9 million) in 2010 reflecting higher truck production compared to 2009.

Investing activities : Cash used in investing activities of $467.1 million in 2010 decreased $777.7 million from the $310.6 million provided in 2009. In 2010, there were higher new loan and lease originations of $507.0 million in the Financial Services segment compared to the prior year due to increased new truck demand. In addition, proceeds from asset disposals were $128.0 million lower in 2010, reflecting fewer used truck unit sales, and net purchases of marketable securities were $190.9 million higher in 2010 compared to the prior year.

Financing activities : The cash outflow from financing activities in 2010 of $960.4 million was $855.8 million lower than in 2009. This was primarily due to lower repayments of long term debt of $1,295.3 million and net repayments of commercial paper and bank loans of $241.7 million, partially offset by lower proceeds from term debt of $666.0 million. The lower overall cash outflow in financing reflects a smaller funding reduction in the financial services asset portfolio.

Credit Lines and Other:

The Company has line of credit arrangements of $3.55 billion, of which $3.31 billion was unused at the end of December 2011. Included in these arrangements are $3.0 billion of syndicated bank facilities. Of the $3.0 billion bank facilities, $1.0 billion matures in June 2012, $1.0 billion matures in June 2013 and $1.0 billion matures in June 2016. 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, 2011.

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, 2011 is $870.0 million.

In 2011, the Company completed the repurchase of $307.7 million of the Company’s common stock under authorizations approved in October 2007 and July 2008. In December 2011, PACCAR’s Board of Directors approved the repurchase of an additional $300.0 million of the Company’s common stock and as of December 31, 2011 $29.9 million of the shares have been repurchased pursuant to the authorization.

Truck 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 totaled $150.0 million as of December 31, 2011.

Expenditures for property, plant and equipment in 2011 totaled $340.7 million compared to $168.4 million in 2010 as the Company increased its spending for tooling and factory equipment for new products. Over the last ten years, the Company’s combined investments in worldwide capital projects and research and development totaled $4.60 billion which have significantly increased operating capacity and efficiency and the quality of the Company’s premium products.

Capital spending in 2012 is expected to increase to approximately $450 to $550 million. The increased capital spending will accelerate comprehensive product development programs and geographic expansion, including building a new DAF factory in Brasil. Spending on R&D in 2012 is expected to be $275 to $325 million. PACCAR will continue to focus on new product programs, engine development and manufacturing efficiency improvements.

The Company conducts business in Spain, Italy, Portugal, Ireland and Greece which have been experiencing significant financial stress. As of December 31, 2011, the Company had finance and trade receivables in these countries of approximately 1% of consolidated total assets. As of December 31, 2011, 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, 2011.

Financial Services

The Company funds its financial services activities primarily from collections on existing finance receivables and borrowings in the capital markets. An additional source of funds is loans from other PACCAR companies.

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 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 future 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, 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 2009, the Company’s U.S. finance subsidiary, PACCAR Financial Corp. (PFC), filed a shelf registration under the Securities Act of 1933. The total amount of medium-term notes outstanding for PFC as of December 31, 2011 was $1.35 billion. The registration expires in 2012 and does not limit the principal amount of debt securities that may be issued during the period.

As of December 31, 2011, the Company’s European finance subsidiary, PACCAR Financial Europe, had €1.1 billion available for issuance under a €1.5 billion medium-term note program registered with the London Stock Exchange. The program was renewed in the second quarter of 2011 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, 2011, 8.82 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, 2011:


	MATURITY
	WITHIN 1 YEAR		1-3 YEARS		3-5 YEARS		MORE THAN 5 YEARS		TOTAL
Borrowings*	$	4,339.2	$	2,179.6	$	129.6			$	6,648.4
Purchase obligations		148.3		174.6		132.7	$	66.0		521.6
Interest on term debt**		88.0		93.7		1.9				183.6
Operating leases		23.5		23.5		9.6		1.6		58.2
Other obligations		9.3		3.8		2.4		15.8		31.3

	$	4,608.3	$	2,475.2	$	276.2	$	83.4	$	7,443.1

*	Borrowings also 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, 2011.

Of the $6.83 billion total cash commitments for borrowings and interest on term debt, $6.66 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, 2011:


	COMMITMENT EXPIRATION
	WITHIN 1 YEAR		1-3 YEARS		3-5 YEARS		MORE THAN 5 YEARS		TOTAL
Loan and lease commitments	$	378.1							$	378.1
Residual value guarantees		68.3	$	209.3	$	101.8	$	12.6		392.0
Letters of credit		17.5								17.5

	$	463.9	$	209.3	$	101.8	$	12.6	$	787.6

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, 2011, 2010 and 2009 were $1.2 million, $1.3 million and $1.3 million, respectively. Management expects that these matters will not have a significant effect on the Company’s consolidated cash flow, liquidity or financial condition.

C RITICAL A CCOUNTING P OLICIES :

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 seven 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 estimate, 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 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 $10.2 million. During 2009 and 2010, lower market values on equipment returning upon lease maturity, as well as impairments on existing operating leases, resulted in additional depreciation expense of $59.2 million and $13.1 million, respectively.

At December 31, 2011, 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 $1.42 billion. A 10% decrease in used truck values worldwide, expected to persist over the remaining maturities of the Company’s operating leases, would reduce residual values estimates and result in the Company recording approximately $36 million of additional depreciation per year.

Allowance for Credit Losses

The accounting for allowance for credit losses related to the Company’s loans and finance leases is disclosed in Note D of the consolidated financial statements. The Company determines the allowance for credit losses on financial services retail and wholesale receivables based on historical loss information, using past-due account data, current market conditions and expectations about the future. The allowance for credit losses consists of both a specific reserve and a general reserve based on estimates, including assumptions regarding the likelihood of collecting current and past-due accounts, repossession rates and the recovery rate on the underlying collateral based on used truck values and other pledged collateral or recourse. The Company specifically evaluates large retail and wholesale accounts with past-due balances or that otherwise are deemed to be at a higher risk of credit loss. All other past-due customers and current accounts are evaluated as a group.

The Company has developed a range of specific loss estimates for each of its portfolios by country based on historical experience, taking into account loss frequency and severity in both strong and weak truck market conditions. A projection is made of the range of estimated credit losses inherent in the portfolio from which an amount is determined as probable based on current market conditions and other factors impacting the creditworthiness of the Company’s borrowers and their ability to repay. The projected amount is then compared to the allowance for credit loss balance and an appropriate adjustment is made.

The adequacy of the allowance is evaluated quarterly based on the most recent information and expectations about the future. As accounts become past-due, the likelihood increases they will not be fully collected. The Company’s experience indicates the probability of not fully collecting past-due accounts ranges between 20% and 80%. Over the past three years, the Company’s year-end 30+ days past-due accounts have ranged between 1.5% and 3.8% of average loan and lease receivables. Historically, a 100 basis point increase in the 30+ days past-due percentage has resulted in an increase in future credit losses of 10 to 35 basis points of average receivables. Past-dues were 1.5% at December 31, 2011. If past-dues were 100 basis points higher or 2.5% as of December 31, 2011, the Company’s estimate of future credit losses would likely have increased by approximately $5 to $20 million depending on the extent of the past-dues, the estimated value of the collateral as compared to amounts owed and general economic factors.

Product Warranty

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 net sales and revenues has ranged between 1.1% and 1.2%. For 2011, warranty expense was 1.1% of net sales and revenues. If warranty expense were .2% higher as a percentage of truck net sales and revenues in 2011, warranty expense would have increased by approximately $24 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%, 2011 net pension expense would increase to $63.5 million from $48.2 million and the projected benefit obligation would increase $148.3 million to $1.96 billion from $1.81 billion.

Income Taxes

Income taxes are disclosed in Note M of the consolidated financial statements. The Company calculates income tax expense on pretax 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.

F ORWARD - 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; changes affecting the profitability of truck owners and operators; price changes impacting equipment costs 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, 2011.

CONSOLIDATED STATEMENTS OF INCOME


Year Ended December 31,	2011		2010		2009
	(millions, except per share data)
TRUCK AND OTHER :
Net sales and revenues	$	15,325.9	$	9,325.1	$	7,076.7
Cost of sales and revenues		13,341.8		8,198.8		6,483.4
Research and development		288.2		238.5		199.2
Selling, general and administrative		452.9		392.8		348.4
Curtailment gain						(66.0	)
Interest and other expense, net		10.7		9.3		43.6

		14,093.6		8,839.4		7,008.6

Truck and Other Income Before Income Taxes		1,232.3		485.7		68.1
FINANCIAL SERVICES :
Interest and fees		423.1		421.6		501.8
Operating lease, rental and other income		606.2		546.2		508.0

Revenues		1,029.3		967.8		1,009.8

Interest and other borrowing expenses		181.3		213.0		291.8
Depreciation and other expense		476.2		451.6		456.1
Selling, general and administrative		94.0		88.7		86.5
Provision for losses on receivables		41.4		61.0		90.8

		792.9		814.3		925.2

Financial Services Income Before Income Taxes		236.4		153.5		84.6
Investment income		38.2		21.1		22.3

Total Income Before Income Taxes		1,506.9		660.3		175.0
Income taxes		464.6		202.7		63.1

Net Income	$	1,042.3	$	457.6	$	111.9

Net Income Per Share
Basic	$	2.87	$	1.25	$	.31

Diluted	$	2.86	$	1.25	$	.31

Weighted average number of common shares outstanding
Basic		363.3		365.0		363.8

Diluted		364.4		366.2		364.9

See notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEETS

ASSETS


December 31,	2011		2010
	(millions)
TRUCK AND OTHER :
Current Assets
Cash and cash equivalents	$	1,990.6	$	1,982.0
Trade and other receivables, net		977.8		610.4
Marketable debt securities		910.1		450.5
Inventories, net		710.4		534.0
Other current assets		249.1		218.6

Total Truck and Other Current Assets		4,838.0		3,795.5
Equipment on operating leases, net		679.1		536.2
Property, plant and equipment, net		1,973.3		1,673.7
Other noncurrent assets, net		280.9		350.5

Total Truck and Other Assets		7,771.3		6,355.9

FINANCIAL SERVICES :
Cash and cash equivalents		116.1		58.8
Finance and other receivables, net		7,259.7		6,070.9
Equipment on operating leases, net		1,710.7		1,483.1
Other assets		314.9		265.4

Total Financial Services Assets		9,401.4		7,878.2

	$	17,172.7	$	14,234.1

LIABILITIES AND STOCKHOLDERS’ EQUITY


December 31,	2011			2010
	(millions)
TRUCK AND OTHER :
Current Liabilities
Accounts payable, accrued expenses and other	$	2,377.4		$	1,676.5
Current portion of long-term debt					23.5
Dividend payable		250.3

Total Truck and Other Current Liabilities		2,627.7			1,700.0
Long-term debt		150.0			150.0
Residual value guarantees and deferred revenues		712.0			563.8
Other liabilities		507.0			370.3

Total Truck and Other Liabilities		3,996.7			2,784.1

FINANCIAL SERVICES :
Accounts payable, accrued expenses and other		363.4			275.9
Commercial paper and bank loans		3,909.9			2,371.7
Term notes		2,595.5			2,730.8
Deferred taxes and other liabilities		942.8			713.8

Total Financial Services Liabilities		7,811.6			6,092.2

STOCKHOLDERS ’ EQUITY :
Preferred stock, no par value - authorized 1.0 million shares, none issued
Common stock, $1 par value - authorized 1.2 billion shares; issued 356.8 million and 365.3 million shares		356.8			365.3
Additional paid-in capital		52.1			105.1
Retained earnings		5,174.5			4,846.1
Accumulated other comprehensive (loss) income		(219.0	)		41.3

Total Stockholders’ Equity		5,364.4			5,357.8

	$	17,172.7		$	14,234.1

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS


Year Ended December 31,	2011			2010			2009
	(millions)
OPERATING ACTIVITIES :
Net Income	$	1,042.3		$	457.6		$	111.9
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization:
Property, plant and equipment		196.5			189.9			188.0
Equipment on operating leases and other		477.3			433.3			463.7
Provision for losses on financial services receivables		41.4			61.0			90.8
Curtailment gain								(66.0	)
Deferred taxes		224.1			46.3			159.7
Other, net		28.4			11.6			38.1
Pension and post-retirement contributions		(85.2	)		(63.9	)		(176.6	)
Change in operating assets and liabilities:
(Increase) decrease in assets other than cash and cash equivalents:
Receivables:
Trade and other		(408.4	)		(42.3	)		163.2
Wholesale receivables on new trucks		(551.1	)		(1.1	)		641.8
Sales-type finance leases and dealer direct loans on new trucks		(141.3	)		67.1			81.6
Inventories		(187.1	)		96.6			53.4
Other assets, net		28.1			(48.2	)		8.1
Increase (decrease) in liabilities:
Accounts payable and accrued expenses		585.0			221.3			(271.8	)
Residual value guarantees and deferred revenues		231.8			79.8			48.2
Other liabilities, net		110.8			42.4			(160.8	)

Net Cash Provided by Operating Activities		1,592.6			1,551.4			1,373.3
INVESTING ACTIVITIES :
Retail loans and direct financing leases originated		(2,731.9	)		(1,789.2	)		(1,282.2	)
Collections on retail loans and direct financing leases		2,121.0			2,039.3			2,083.0
Net (increase) decrease in wholesale receivables on used equipment		(18.1	)		8.2			3.5
Marketable securities purchases		(1,614.2	)		(757.5	)		(288.3	)
Marketable securities sales and maturities		1,142.4			523.8			245.5
Payments for property, plant and equipment		(340.7	)		(168.4	)		(127.7	)
Acquisition of equipment for operating leases		(1,306.6	)		(715.4	)		(843.3	)
Proceeds from asset disposals		339.0			392.1			520.1
Other, net		(9.9	)

Net Cash (Used in) Provided by Investing Activities		(2,419.0	)		(467.1	)		310.6
FINANCING ACTIVITIES :
Cash dividends paid		(217.4	)		(251.7	)		(232.1	)
Purchase of treasury stock		(337.6	)
Stock compensation transactions		10.9			22.0			17.6
Net increase (decrease) in commercial paper and short-term bank loans		1,642.6			(548.1	)		(789.8	)
Proceeds from long-term debt		1,165.5			707.0			1,373.0
Payments on long-term debt		(1,317.9	)		(889.6	)		(2,184.9	)

Net Cash Provided by (Used in) Financing Activities		946.1			(960.4	)		(1,816.2	)
Effect of exchange rate changes on cash		(53.8	)		4.9			89.1

Net Increase (Decrease) in Cash and Cash Equivalents		65.9			128.8			(43.2	)
Cash and Cash Equivalents at beginning of year		2,040.8			1,912.0			1,955.2

Cash and Cash Equivalents at end of year	$	2,106.7		$	2,040.8		$	1,912.0

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


December 31,	2011			2010			2009
	(millions, except per share data)
COMMON STOCK , $1 PAR VALUE :
Balance at beginning of year	$	365.3		$	364.4		$	363.1
Treasury stock retirement		(9.2	)		(.4	)
Stock compensation		.7			1.3			1.3

Balance at end of year		356.8			365.3			364.4

ADDITIONAL PAID - IN CAPITAL :
Balance at beginning of year		105.1			80.0			46.1
Treasury stock retirement		(82.7	)		(17.0	)
Stock compensation and tax benefit		29.7			42.1			33.9

Balance at end of year		52.1			105.1			80.0

TREASURY STOCK , AT COST :
Balance at beginning of year					(17.4	)		(17.4	)
Purchases, shares: 2011-9.2		(337.6	)
Retirements		337.6			17.4

Balance at end of year								(17.4	)

RETAINED EARNINGS :
Balance at beginning of year		4,846.1			4,640.5			4,724.7
Net income		1,042.3			457.6			111.9
Cash dividends declared on common stock, per share: 2011-$1.30; 2010-$.69; 2009-$.54		(468.2	)		(252.0	)		(196.1	)
Treasury stock retirement		(245.7	)

Balance at end of year		5,174.5			4,846.1			4,640.5

ACCUMULATED OTHER COMPREHENSIVE ( LOSS ) INCOME :
Balance at beginning of year		41.3			36.2			(269.8	)
Other comprehensive (loss) income		(260.3	)		5.1			306.0

Balance at end of year		(219.0	)		41.3			36.2

Total Stockholders’ Equity	$	5,364.4		$	5,357.8		$	5,103.7

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


Year Ended December 31,	2011			2010			2009
	(millions)
Net income	$	1,042.3		$	457.6		$	111.9
Other comprehensive income (loss):
Unrealized (losses) gains on derivative contracts
Losses arising during the period		(52.9	)		(76.8	)		(71.6	)
Tax effect		18.8			26.2			21.3
Reclassification adjustment		47.7			123.1			119.9
Tax effect		(17.7	)		(42.0	)		(35.7	)

		(4.1	)		30.5			33.9
Unrealized gains (losses) on investments
Net holding gain (loss)		7.0			(1.2	)		(.3	)
Tax effect		(1.9	)		.5			.1
Reclassification adjustment		1.6			.6			.7
Tax effect		(.6	)		(.3	)		(.2	)

		6.1			(.4	)		.3
Pension and postretirement
(Losses) gains arising during the period		(281.9	)		(35.9	)		73.0
Tax effect		99.0			12.7			(32.1	)
Reclassification adjustment		26.2			16.5			11.2
Tax effect		(9.0	)		(5.6	)		(3.9	)

		(165.7	)		(12.3	)		48.2
Foreign currency translation (losses) gains		(96.6	)		(12.7	)		223.6

Net other comprehensive (loss) income		(260.3	)		5.1			306.0

Comprehensive Income	$	782.0		$	462.7		$	417.9

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

A.	SIGNIFICANT ACCOUNTING POLICIES

Description of Operations : PACCAR Inc (the Company or PACCAR) is a multinational company operating in two principal segments: (1) the design, manufacture and distribution of light-, medium- and heavy-duty commercial trucks and related aftermarket parts and (2) finance and leasing products and services provided to customers and dealers. 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 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 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 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 the future sales incentive costs related to such sales. The estimate is based on historical data and announced incentive programs.

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.

Recognition of interest income and rental revenue is suspended (put on non-accrual status) when the receivable becomes more than 90 days past the contractual due date or earlier if some other event causes the Company to determine that collection is not probable. Accordingly, there were no finance receivables more than 90 days past due still accruing interest at December 31, 2011 or 2010. Recognition is resumed if the receivable becomes contractually 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 modified), or after the customer has made scheduled payments for three months and collection of remaining amounts is considered probable (if contractually modified). Payments received while the finance receivable is impaired or on non-accrual status are applied to interest and principal in accordance with the contractual terms.

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.

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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 on the balance sheet, net of allowances.

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.

Interest and other – Interest and other receivables are interest on loans and leases and other amounts due within one year in the normal course of business.

Allowance for Credit Losses:

Truck and Other: The Company historically has not experienced significant losses on trade and other receivables in its Truck and Other businesses. The allowance for credit losses for Truck and Other was $3.2 and $3.5 for the years ended December 31, 2011 and 2010, respectively, and net charge-offs were $1.1, $.2 and $1.8 for the years ended December 31, 2011, 2010 and 2009, respectively.

Financial Services: The Company continuously monitors the payment performance of all its finance receivables. The Company evaluates its finance receivables collectively and, in some cases, individually. For large customers and dealers with wholesale financing, the Company regularly reviews their financial statements and makes site visits and phone contacts 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 may modify loans and finance leases for commercial reasons or for credit reasons for customers having difficulty making payments under the contract terms. When customer accounts are modified, the Company thoroughly evaluates the creditworthiness of the customers and modifies accounts that the Company considers likely to perform under the modified terms. It is rare for the Company to grant credit modifications for customers that do not meet minimum underwriting standards since the Company normally repossesses the financed equipment in these circumstances. The Company’s credit modifications for customers that do not meet minimum underwriting standards are classified as troubled debt restructurings (TDRs). On average, modifications extend contractual terms less than three months. Modifications did not have a significant effect on the weighted average term or interest rate of the portfolio. When granting modifications, the Company rarely forgives principal or interest or reduces interest rates.

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 includes retail loans and direct and sales-type finance leases, net of unearned interest. The wholesale segment includes wholesale financing loans to dealers that are collateralized by the trucks being financed. The wholesale segment generally has less risk than the retail segment. Wholesale receivables 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. The allowance for credit losses consists of both specific and general reserves.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

The Company individually evaluates certain finance receivables for impairment. Finance receivables which are evaluated individually consist of customers on non-accrual status, all wholesale accounts, certain large retail accounts with past-due balances or that otherwise are determined to be at a higher risk of credit loss, and loans which have been modified as TDRs. A receivable is considered impaired if it is probable the Company will be unable to collect all contractual interest and principal payments as scheduled. Large balance impaired receivables are individually evaluated to determine the appropriate reserve for losses. Small balance impaired receivables with similar risk characteristics are evaluated as a separate pool. Impaired receivables are considered collateral dependent. Accordingly, the evaluation of individual reserves is based on the fair value of the associated collateral (estimated sales proceeds less the costs to sell). When the underlying collateral fair value exceeds the Company’s loss exposure, no individual reserve is recorded. The Company uses a pricing model to assist in valuing the underlying collateral and categorizes the fair value as Level 2 in the hierarchy of fair value measurement. The pricing model is reviewed quarterly and updated as appropriate. The pricing model considers the make, model and year of the equipment as well as recent sales prices of comparable equipment. The fair value of the collateral is determined based on management’s evaluation of numerous factors such as the pricing model value, overall condition of the equipment, whether the Company will dispose of the equipment through wholesale or retail channels, as well as economic trends affecting used equipment values.

For finance receivables that are evaluated collectively, the Company 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. The amount is then compared to the allowance for credit loss balance (after charge-offs for the current period) and an appropriate adjustment is made. In determining the general allowance for credit losses, 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.

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

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.

Equipment on Operating Leases : The Company leases equipment under operating leases to customers in the Financial Services segment. 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 seven 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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, Goodwill and Other Intangible Assets: The Company evaluates the carrying value of property, plant, equipment and other intangible assets when events and circumstances warrant a review. Goodwill is tested for impairment at least on an annual basis. Impairment charges were insignificant during the three years ended December 31, 2011.

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. PACCAR periodically assesses the adequacy of its recorded liabilities and adjusts them as appropriate to reflect actual experience.

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

The Company has elected not to offset derivative positions in the balance sheet with the same counterparty under the same master netting agreements. The Company is not required to post or receive collateral under these agreements. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company had no material exposures to default at December 31, 2011.

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 PACCAR’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). PACCAR 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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


Year Ended December 31,	2011		2010		2009
Additional shares		1,173,000		1,339,300		1,103,600
Antidilutive options		1,249,800		1,642,600		2,290,400

New Accounting Pronouncements: In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 gives additional guidance to companies to assist in determining troubled debt restructurings. The Company adopted ASU 2011-02 in the third quarter of 2011; the implementation of this amendment resulted in additional disclosure (see Note D) but did not have a significant impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs . While many of the amendments are clarifications to the existing guidance and are intended to align U.S. GAAP and IFRS, the ASU changes some fair value measurement principles and disclosure requirements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company is evaluating the impact of the ASU on its consolidated financial statements.

The FASB issued ASU 2011-05, Presentation of Comprehensive Income, subsequently amended by ASU 2011-12 in December 2011. This new guidance is effective for fiscal years, including interim periods, beginning after December 15, 2011. The new guidance requires entities to present components of net income and other comprehensive income in either a combined financial statement or in two separate but consecutive statements of net income and other comprehensive income. The Company is currently evaluating which method to adopt as required in 2012.

In September 2011, the FASB issued ASU 2011-08 amending the guidance on testing goodwill for impairment. This amendment allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment test. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011 with early adoption permitted. The Company early adopted ASU 2011-08 in the fourth quarter of 2011 with no impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-09, Employer Disclosure Requirements for Multiemployer Pension Plans . This amendment requires employers participating in material multi-employer pension and other postretirement benefit plans to provide additional quantitative and qualitative disclosures to give users more detailed information about an employer’s involvement in multi-employer plans. The Company adopted ASU 2011-09 in the fourth quarter of 2011; the implementation of this amendment resulted in additional disclosures (see Note L), but did not have an impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11 , Disclosures about Offsetting Assets and Liabilities . The ASU requires all entities with financial instruments and derivatives 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. ASU 2011-11 is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The Company will provide the expanded disclosures in 2013.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

B.	INVESTMENTS IN MARKETABLE DEBT SECURITIES

Marketable debt securities consisted of the following at December 31:


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

	$	900.7	$	10.0	$	.6	$	910.1


2010	AMORTIZED COST		UNREALIZED GAINS		UNREALIZED LOSSES		FAIR VALUE
U.S. tax-exempt securities	$	364.9	$	.8	$	.3	$	365.4
U.S. corporate securities		27.3		.3				27.6
U.S. government and agency securities		2.7						2.7
Non-U.S. corporate securities		37.0						37.0
Other debt securities		17.8						17.8

	$	449.7	$	1.1	$	.3	$	450.5

The cost of marketable debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Amortization, accretion, interest and dividend income and realized gains and losses are included in investment income. The cost of securities sold is based on the specific identification method. The proceeds from sales and maturities of marketable securities during 2011 were $1,142.4. Gross realized gains were $3.2, $.7 and $1.2 and gross realized losses were $1.3, $.1 and $.1 for the years ended December 31, 2011, 2010 and 2009, respectively.

The fair value of marketable debt securities that have been in an unrealized loss position for 12 months or greater at December 31, 2011 was $8.0 and the associated unrealized loss was $.1. The Company had no marketable debt securities in an unrealized loss position for 12 months or greater at December 31, 2010.

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

Contractual maturities at December 31, 2011 were as follows:


Maturities:	AMORTIZED COST		FAIR VALUE
Within one year	$	259.7	$	260.1
One to five years		633.9		642.9
Ten or more years		7.1		7.1

	$	900.7	$	910.1

Marketable debt securities included $7.1 and $12.2 of variable-rate demand obligations (VRDOs) at December 31, 2011 and 2010, respectively. VRDOs are debt instruments with long-term scheduled maturities which have interest rates that reset periodically.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

C.	INVENTORIES

Inventories include the following:


At December 31,	2011			2010
Finished products	$	436.2		$	370.1
Work in process and raw materials		439.6			322.2

		875.8			692.3
Less LIFO reserve		(165.4	)		(158.3	)

	$	710.4		$	534.0

Inventories valued using the LIFO method comprised 45% and 38% of consolidated inventories before deducting the LIFO reserve at December 31, 2011 and 2010, respectively. During 2010, inventory quantities declined which provided a pretax favorable income effect from the liquidation of LIFO inventory of $15.0.

D.	FINANCE AND OTHER RECEIVABLES

Finance and other receivables include the following:


At December 31,	2011			2010
Loans	$	3,114.8		$	2,713.9
Retail direct financing leases		2,187.8			2,005.0
Sales-type finance leases		795.8			703.6
Dealer wholesale financing		1,517.1			983.4
Interest and other receivables		111.0			109.3
Unearned interest: Finance leases		(327.8	)		(299.3	)

		7,398.7			6,215.9
Less allowance for losses:
Loans, leases and other		(127.3	)		(137.5	)
Dealer wholesale financing		(11.7	)		(7.5	)

	$	7,259.7		$	6,070.9

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.

Annual minimum payments due on finance receivables are as follows:


	LOANS		FINANCE LEASES
2012	$	1,108.9	$	908.7
2013		800.1		685.4
2014		574.5		511.5
2015		394.8		352.6
2016		208.8		219.3
Thereafter		27.7		96.7

	$	3,114.8	$	2,774.2

Estimated residual values included with finance leases amounted to $209.4 in 2011 and $165.3 in 2010. Experience indicates the majority 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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


				2011
				WHOLESALE			RETAIL			TOTAL
Balance at January 1				$	7.5		$	137.5		$	145.0
Provision for losses					5.8			35.6			41.4
Charge-offs					(1.4	)		(57.5	)		(58.9	)
Recoveries								13.9			13.9
Currency translation					(.2	)		(2.2	)		(2.4	)

Balance at December 31				$	11.7		$	127.3		$	139.0


	2010									2009
	WHOLESALE			RETAIL			TOTAL			TOTAL
Balance at January 1	$	10.5		$	157.1		$	167.6		$	178.3
Provision for losses		.2			60.8			61.0			90.8
Charge-offs		(2.9	)		(94.9	)		(97.8	)		(115.2	)
Recoveries		.3			14.2			14.5			7.0
Currency translation		(.6	)		.3			(.3	)		6.7

Balance at December 31	$	7.5		$	137.5		$	145.0		$	167.6

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

At December 31, 2011

WHOLESALE

RETAIL

TOTAL

Recorded investment for impaired finance receivables evaluated individually

18.4

96.0

114.4

Allowance for finance receivables evaluated individually

2.2

25.7

27.9

Recorded investment for finance receivables evaluated collectively

1,498.7

5,674.6

7,173.3

Allowance for finance receivables evaluated collectively

9.5

101.6

111.1


At December 31, 2010	WHOLESALE		RETAIL		TOTAL
Recorded investment for impaired finance receivables evaluated individually	$	3.4	$	150.0	$	153.4
Allowance for finance receivables evaluated individually		1.3		33.6		34.9
Recorded investment for finance receivables evaluated collectively	$	980.0	$	4,973.2	$	5,953.2
Allowance for finance receivables evaluated collectively		6.2		103.9		110.1

The recorded investment of finance receivables that are on non-accrual status in the wholesale segment and the fleet and owner/operator portfolio classes (see impaired loans below) as of December 31, 2011 are $18.4, $63.9 and $17.6, as compared to $3.4, $72.2 and $33.9 as of December 31, 2010, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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


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

Net carrying amount of impaired loans	$	16.2		$	21.9		$	8.9		$	47.0
Unpaid principal balance		18.4			27.9			11.5			57.8
Average recorded investment		14.4			28.7			13.6			56.7
Interest income recognized		.4			2.7			2.0			5.1

At December 31, 2010	WHOLESALE			FLEET			OWNER / OPERATOR			TOTAL
Impaired loans with specific reserve	$	3.4		$	21.5		$	17.8		$	42.7
Associated allowance		(1.3	)		(4.4	)		(3.8	)		(9.5	)

Net carrying amount of impaired loans	$	2.1		$	17.1		$	14.0		$	33.2
Unpaid principal balance		3.4			21.5			17.8			42.7
Average recorded investment		7.8			31.7			18.8			58.3
Interest income recognized		.1			1.7			.2			2.0

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

At the inception of each contract, the Company considers the credit risk based on a variety of criteria, 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 the credit exposure based on past-due status and collection experience as the Company has found a meaningful correlation between the past-due status of customers and the risk of loss.

The Company has three credit quality indicators: performing, watch and at-risk. Performing accounts pay in accordance with the contractual terms and are not considered high risk. Watch accounts include past-due and large high-risk accounts that are not impaired. At-risk accounts are accounts that are impaired including TDRs, accounts

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

over 90 days past due and other accounts on non-accrual status. The Company uses historical data and expectations about the future to estimate default rates for each credit quality indicator as of December 31, 2011. The table below summarizes the Company’s finance receivables by credit quality indicator and portfolio class.


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

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


At December 31, 2010	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Performing	$	966.2	$	3,544.0	$	1,359.4	$	5,869.6
Watch		13.8		46.6		23.2		83.6
At-risk		3.4		115.1		34.9		153.4

	$	983.4	$	3,705.7	$	1,417.5	$	6,106.6

The table below summarizes the Company’s financing receivables by aging category.


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

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


At December 31, 2010	WHOLESALE		FLEET		OWNER / OPERATOR		TOTAL
Current and up to 30 days past-due	$	966.2	$	3,581.1	$	1,359.5	$	5,906.8
31 - 60 days past-due		7.7		48.5		19.7		75.9
Greater than 60 days past-due		9.5		76.1		38.3		123.9

	$	983.4	$	3,705.7	$	1,417.5	$	6,106.6

Troubled Debt Restructurings: The Company modifies loans and finance leases as a normal part of its Financial Services operations. The Company’s modifications typically result in granting more time to pay the contractual amounts owed and charging a fee and additional interest for the modification. The Company rarely forgives principal or accrued interest and may require principal and accrued interest payments at the time of modification. When the Company modifies loans and finance leases for customers in financial difficulty and grants a concession, the modifications are classified as TDRs. For the year ended December 31, 2011, the decrease in the recorded investment for loans and leases modified as TDRs was $.2 resulting in post-modification recorded investment of $33.1. At modification date, the pre- and post-modification recorded investment balances by portfolio class are as follows:

FLEET

OWNER /
OPERATOR

TOTAL

Pre-Modification Recorded Investment

27.7

5.6

33.3

Post-Modification Recorded Investment

27.5

5.6

33.1

The balance of TDRs was $26.0 and $6.5 at December 31, 2011 and 2010, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

The recorded investment in finance receivables modified as TDRs during the previous twelve months that subsequently defaulted (i.e., became more than 30 days past-due) in the year ended December 31, 2011 was $3.7 and $.6 for fleet and owner/operator, respectively. The TDRs that subsequently defaulted did not significantly impact the Company’s allowance for losses at December 31, 2011.

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 balance sheet. The balance of repossessed inventory at December 31, 2011 and 2010 is $16.0 and $15.6 respectively. Proceeds from the sales of repossessed assets were $80.1, $135.3 and $202.5 for the years ended December 31, 2011, 2010 and 2009, respectively. These amounts are included in proceeds from asset disposals in the consolidated statements of cash flows.

E.	EQUIPMENT ON OPERATING LEASES

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


	TRUCK AND OTHER						FINANCIAL SERVICES
At December 31,	2011			2010			2011			2010
Equipment on operating leases	$	939.0		$	776.8		$	2,373.2		$	2,118.6
Less allowance for depreciation		(259.9	)		(240.6	)		(662.5	)		(635.5	)

	$	679.1		$	536.2		$	1,710.7		$	1,483.1

Annual minimum lease payments due on Financial Services operating leases beginning January 1, 2012 are $406.5, $285.7, $195.4, $90.2, $32.1 and $4.7 thereafter.

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:


	TRUCK AND OTHER
At December 31,	2011		2010
Residual value guarantees	$	320.0	$	250.6
Deferred lease revenues		392.0		313.2

	$	712.0	$	563.8

The deferred lease revenue is amortized on a straight-line basis over the RVG contract period. At December 31, 2011, the annual amortization of deferred revenues beginning January 1, 2012 is $55.7, $86.8, $84.0, $51.2, $32.0 and $10.3 thereafter. Annual maturities of the RVGs beginning January 1, 2012 are $68.3, $106.4, $102.9, $62.7, $39.1 and $12.6 thereafter.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

F.	PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment include the following:


At December 31,	USEFUL LIVES	2011			2010
Land		$	211.6		$	200.7
Buildings and improvements	10-40 years		938.7			940.3
Machinery, equipment and production tooling	3-12 years		2,387.9			2,335.2
Construction in progress			552.2			176.0

			4,090.4			3,652.2
Less allowance for depreciation			(2,117.1	)		(1,978.5	)

		$	1,973.3		$	1,673.7

G.	ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER

Accounts payable, accrued expenses and other include the following:


At December 31,	2011		2010
Truck and Other:
Accounts payable	$	1,098.9	$	707.4
Product support reserves		310.4		231.3
Accrued capital expenditures		245.5		51.2
Accrued expenses		209.9		224.9
Salaries and wages		197.4		171.8
Other		315.3		289.9

	$	2,377.4	$	1,676.5

H.	PRODUCT SUPPORT LIABILITIES

Changes in product support liabilities are summarized as follows:


	2011			2010			2009
Beginning balance	$	372.2		$	386.4		$	450.4
Cost accruals and revenue deferrals		304.3			172.4			169.0
Payments and revenue recognized		(219.6	)		(171.3	)		(245.6	)
Currency translation		(8.2	)		(15.3	)		12.6

Ending balance	$	448.7		$	372.2		$	386.4

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


At December 31,	2011		2010
Truck and Other:
Accounts payable, accrued expenses and other	$	310.4	$	231.3
Other liabilities		74.6		83.2
Financial Services:
Deferred taxes and other liabilities		63.7		57.7

	$	448.7	$	372.2

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

I.	BORROWINGS AND CREDIT ARRANGEMENTS

Truck and Other long-term debt at December 31, 2011 and 2010, consisted of $150.0 of notes with an effective interest rate of 6.9% which mature in 2014.

Financial Services borrowings include the following:


	2011					2010
	EFFECTIVE					EFFECTIVE
At December 31,	RATE			BORROWINGS		RATE			BORROWINGS
Commercial paper		1.3	%	$	3,673.6		2.2	%	$	2,126.4
Medium-term bank loans		6.9	%		236.3		7.8	%		245.3

					3,909.9					2,371.7
Term notes		3.4	%		2,595.5		4.6	%		2,730.8

		2.3	%	$	6,505.4		3.8	%	$	5,102.5

The term notes of $2,595.5 and $2,730.8 at December 31, 2011 and 2010 include an increase in fair value of $7.1 and $9.6, respectively, for notes designated as fair value hedges. The effective rate is the weighted average rate as of December 31, 2011 and 2010 and includes the effects of interest rate contracts.

The annual maturities of the financial services borrowings are as follows:


	COMMERCIAL		BANK		TERM
Beginning January 1, 2012	PAPER		LOANS		NOTES		TOTAL
2012	$	3,673.6	$	45.6	$	620.0	$	4,339.2
2013				17.2		550.0		567.2
2014				173.5		1,288.8		1,462.3
2015						129.6		129.6

	$	3,673.6	$	236.3	$	2,588.4	$	6,498.3

Interest paid on borrowings was $192.1, $230.2 and $267.6 in 2011, 2010 and 2009, respectively. For the years ended December 31, 2011, 2010 and 2009, the Company capitalized interest on borrowings of $10.3, $10.3 and $2.3, respectively, in Truck and Other.

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 November 2009, the Company’s U.S. finance subsidiary, PFC, filed a shelf registration under the Securities Act of 1933. The total amount of medium-term notes outstanding for PFC as of December 31, 2011 was $1,350.0. The registration expires in the fourth quarter of 2012 and does not limit the principal amount of debt securities that may be issued during the period.

At December 31, 2011, PACCAR’s European finance subsidiary, PACCAR Financial Europe, had €1,100.0 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 2011 and is renewable annually through the filing of a new prospectus.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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, 2011, 8,820.0 pesos remained available for issuance. In August 2011, PACCAR Mexico’s 7,000.0 peso medium-term note program with the Comision Nacional Bancaria y de Valores, registered in June 2008, expired.

The Company has line of credit arrangements of $3,550.0, of which $3,313.7 was unused at the end of December 2011. Included in these arrangements is $3,000.0 of syndicated bank facilities. Of the $3,000.0 bank facilities, $1,000.0 matures in June 2012, $1,000.0 matures in June 2013 and $1,000.0 matures in June 2016. 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, 2011.

J.	LEASES

The Company leases certain facilities and computer equipment under operating leases. Leases expire at various dates through the year 2019. At January 1, 2012, annual minimum rent payments under non-cancelable operating leases having initial or remaining terms in excess of one year are $23.5, $14.7, $8.8, $6.0, $3.6 and $1.6 thereafter. For the years ended December 31, 2011, 2010 and 2009, total rental expenses under all leases amounted to $29.0, $29.7 and $40.6, respectively.

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 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 in the years ended December 31, 2011, 2010 and 2009 were $1.2, $1.3 and $1.3, 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, 2011, PACCAR had standby letters of credit of $17.5, which guarantee various insurance and financing activities. At December 31, 2011, PACCAR’s financial services companies, in the normal course of business, had outstanding commitments to fund new loan and lease transactions amounting to $378.1. The commitments generally expire in 90 days. The Company had other commitments, primarily to purchase production inventory and related equipment, amounting to $154.0 in 2012 and $373.3 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.

L.	EMPLOYEE BENEFITS

Severance Costs: The Company did not incur significant severance expense in 2011 or 2010. During the year ended December 31, 2009, the Company incurred severance costs of $25.9.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

The Company funds its pensions in accordance with applicable employee benefit and tax laws. The Company contributed $84.7 to its pension plans in 2011 and $61.8 in 2010. The Company expects to contribute in the range of $100.0 to $150.0 to its pension plans in 2012, of which $14.2 is estimated to satisfy minimum funding requirements. Annual benefits expected to be paid beginning January 1, 2012 are $63.6, $66.6, $72.0, $76.0, $81.8 and for the five years thereafter, a total of $474.1.

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.

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


*At December 31, 2011*	TARGET	LEVEL 1		LEVEL 2		TOTAL
*Equities:*
U.S. equities				$	456.3	$	456.3
Global equities					450.5		450.5

Total equities	50 - 70%				906.8		906.8

*Fixed income:*
U.S. fixed income		$	224.5		196.7		421.2
Non-U.S. fixed income					183.1		183.1

Total fixed income	30 - 50%		224.5		379.8		604.3

Cash and other			4.6		34.2		38.8

Total plan assets		$	229.1	$	1,320.8	$	1,549.9


At December 31, 2010	TARGET	LEVEL 1		LEVEL 2		TOTAL
Equities:
U.S. equities		$	38.1	$	431.3	$	469.4
Global equities					394.8		394.8

Total equities	50-70%		38.1		826.1		864.2

Fixed income:
U.S. fixed income			208.5		172.1		380.6
Non-U.S. fixed income					171.0		171.0

Total fixed income	30-50%		208.5		343.1		551.6

Cash and other			2.7		26.9		29.6

Total plan assets		$	249.3	$	1,196.1	$	1,445.4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

The following additional data relates to all pension plans of the Company, except for certain multi-employer and defined contribution plans:


At December 31,	2011			2010
Weighted average assumptions:
Discount rate		4.5	%		5.4	%
Rate of increase in future compensation levels		3.9	%		3.9	%
Assumed long-term rate of return on plan assets		6.9	%		7.2	%

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


	2011			2010
Change in projected benefit obligation:
Benefit obligation at January 1	$	1,485.6		$	1,324.8
Service cost		45.5			37.5
Interest cost		81.6			76.5
Benefits paid		(59.5	)		(56.2	)
Actuarial loss		259.1			99.7
Currency translation and other		(7.5	)		.4
Participant contributions		3.3			2.9

Projected benefit obligation at December 31	$	1,808.1		$	1,485.6

Change in plan assets:
Fair value of plan assets at January 1	$	1,445.4		$	1,276.3
Employer contributions		84.7			61.8
Actual return on plan assets		79.0			162.6
Benefits paid		(59.5	)		(56.2	)
Currency translation and other		(3.0	)		(2.0	)
Participant contributions		3.3			2.9

Fair value of plan assets at December 31		1,549.9			1,445.4

Funded status at December 31	$	(258.2	)	$	(40.2	)


Amounts recorded on balance sheet:	2011			2010
Other noncurrent assets	$	.4		$	47.1
Other liabilities		(258.6	)		(87.3	)
Accumulated other comprehensive loss:
Actuarial loss		469.3			302.8
Prior service cost		8.3			9.0
Net initial transition amount		.5			.6

Of the December 31, 2011 amounts in accumulated other comprehensive loss, $42.6 of unrecognized actuarial loss and $1.5 of unrecognized prior service cost are expected to be amortized into net pension expense in 2012.

The accumulated benefit obligation for all pension plans of the Company, except for certain multi-employer and defined contribution plans was $1,594.9 at December 31, 2011 and $1,350.3 at December 31, 2010.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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


At December 31,	2011		2010
Projected benefit obligation	$	304.8	$	266.5
Accumulated benefit obligation		286.7		253.7
Fair value of plan assets		191.1		193.9

The components of pension expense are as follows:


Year Ended December 31,	2011			2010			2009
Service cost	$	45.5		$	37.5		$	36.2
Interest on projected benefit obligation		81.6			76.5			71.1
Expected return on assets		(105.1	)		(98.2	)		(93.1	)
Amortization of prior service costs		1.5			1.8			1.7
Recognized actuarial loss		24.7			14.7			9.5
Curtailment gain								(.1	)

Net pension expense	$	48.2		$	32.3		$	25.3

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 follows:


		PENSION PLAN NUMBER		COMPANY CONTRIBUTIONS
PENSION PLAN	EIN	PENSION PLAN NUMBER		2011		2010		2009
Metal and Electrical Engineering Industry Pension Fund			135668	$	22.7	$	22.2	$	28.8
Western Metal Industry Pension	91-6033499		001		1.8		.5		.7
Other Plans					.6		.5		1.1

				$	25.1	$	23.2	$	30.6

The Company contributions shown in the table above approximates the multi-employer pension expense for each of the years ended December 31, 2011, 2010 and 2009, 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 June 30, 2013. The Company’s contributions were less than 5% of the total contributions to the plan for the last two reporting periods ending December 2010. The plan is required by law (the Netherlands Pension Act) to have a coverage ratio in excess of 100%. Because the coverage ratio of the plan is currently less than 100%, a funding improvement plan has been implemented which requires additional premiums to be paid by the Company.

The Western Metal Industry Pension Plan is located in the U.S. and is covered by a collective bargaining agreement that will expire on October 30, 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 has been implemented requiring an under-funded penalty of approximately 10% of the base contribution. For the last two reporting periods ending December 2010, contributions by the Company were greater than 5% and less than 10% of the total contributions to the plan.

Other plans are principally located in the U.S. For the last two reporting periods, none are 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

Defined Contribution Plans: The Company has certain defined contribution benefit plans whereby it generally matches employee contributions up to 5% of base wages. The largest plan is in the U.S. where participants are non–union employees. The Company match in the U.S. was 5%, 3% and 1% in 2011, 2010 and 2009, respectively. Other plans are located in Australia, Canada, the Netherlands and Belgium. Expenses for these plans were $29.3, $23.0 and $16.8 in 2011, 2010 and 2009, respectively.

Postretirement Medical & Life Insurance Plans: During the second quarter of 2009, the Company discontinued subsidizing postretirement medical costs for the majority of its U.S. employees and recognized a curtailment gain of $47.7. The Company also recognized a curtailment gain of $18.3 in the third quarter of 2009 for the discontinuation of postretirement healthcare related to the permanent closure of the Peterbilt facility in Madison, Tennessee. The unfunded amount at December 31, 2011 and 2010 and postretirement expense for the years ended December 31, 2011, 2010 and 2009 were not significant.

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:


Year Ended December 31,	2011		2010		2009
Domestic	$	607.0	$	186.3	$	79.1
Foreign		899.9		474.0		95.9

	$	1,506.9	$	660.3	$	175.0

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


Year Ended December 31,	2011		2010			2009
Current provision (benefit):
Federal	$	.4	$	24.5		$	(102.4	)
State		20.5		8.2			(2.5	)
Foreign		219.6		123.7			8.3

		240.5		156.4			(96.6	)
Deferred provision (benefit):
Federal		207.8		24.6			125.4
State		3.4		(7.1	)		8.2
Foreign		12.9		28.8			26.1

		224.1		46.3			159.7

	$	464.6	$	202.7		$	63.1

Tax benefits recognized for net operating loss carryforwards were $14.2, $9.0 and $27.8 for the years ended 2011, 2010 and 2009, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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


	2011			2010			2009
Statutory rate		35.0	%		35.0	%		35.0	%
Effect of:
Qualified dividends to defined contribution plan		(.6	)		(.7	)		(2.3	)
Research and development credit		(.3	)		(.5	)		(2.1	)
Tax on foreign earnings		(3.3	)		(3.9	)		.8
Tax contingencies		(.6	)		(.8	)		2.2
Mexican tax law change								6.5
Other, net		.6			1.6			(4.0	)

		30.8	%		30.7	%		36.1	%

U.S. income taxes are not provided on the undistributed earnings of the Company’s foreign subsidiaries that are considered to be indefinitely reinvested. At December 31, 2011, the amount of undistributed earnings which are considered to be indefinitely reinvested is $3,374.9. It is not practicable to estimate the amount of unrecognized U.S. taxes on these earnings.

Included in domestic taxable income for 2011, 2010 and 2009 are $311.0, $169.0 and $31.4 of foreign earnings, respectively, which are not indefinitely reinvested, for which domestic taxes of $28.5, $16.5 and $3.7, respectively, were provided as the difference between the domestic and foreign rate on those earnings.

At December 31, 2011, the Company had net operating loss carryforwards of $280.5, of which $195.1 were in foreign subsidiaries and $85.4 were in the U.S. The related deferred tax asset was $58.6. The carryforward periods range from five years to indefinite, subject to certain limitations under applicable laws. At December 31, 2011, the Company has U.S. tax credit carryforwards of $15.8, most of which expire in 2020. The future tax benefits of net operating loss and credit 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:


At December 31,	2011			2010
Assets:
Accrued expenses	$	138.6		$	112.8
Postretirement benefit plans		94.1			15.8
Net operating loss carryforwards		58.6			68.2
Allowance for losses on receivables		50.1			47.3
Tax credit carryfowards		15.8			57.5
Other		89.1			80.9

		446.3			382.5
Valuation allowance		(16.4	)		(12.4	)

		429.9			370.1
Liabilities:
Financial Services leasing depreciation		(721.8	)		(532.6	)
Depreciation and amortization		(161.3	)		(162.1	)
Other		(12.1	)		(4.7	)

		(895.2	)		(699.4	)

Net deferred tax liability	$	(465.3	)	$	(329.3	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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


At December 31,	2011			2010
Truck and Other:
Other current assets	$	126.0		$	98.8
Other noncurrent assets, net		126.3			79.2
Accounts payable, accrued expenses and other		(1.0	)
Other liabilities		(41.0	)		(26.7	)
Financial Services:
Other assets		55.1			48.9
Deferred taxes and other liabilities		(730.7	)		(529.5	)

Net deferred tax liability	$	(465.3	)	$	(329.3	)

Cash paid for income taxes was $284.0, $82.9 and $67.3 in 2011, 2010 and 2009, respectively.

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


	2011			2010			2009
Balance at January 1	$	43.1		$	37.0		$	33.0
Additions based on tax positions and settlements related to the current year		5.4			2.5			1.1
Additions based on tax positions and settlements related to the prior year		1.1			23.5			11.5
Reductions for tax positions of prior years		(30.6	)		(10.7	)		(7.2	)
Lapse of statute of limitations		(.7	)		(9.2	)		(1.4	)

Balance at December 31	$	18.3		$	43.1		$	37.0

The Company had $16.3 and $40.6 of related assets at December 31, 2011 and 2010. All of the unrecognized tax benefits and related assets would impact the effective tax rate if recognized.

The Company recognized $1.7 of income related to interest and penalties in 2011. Accrued interest expense and penalties were $5.7 and $7.8 at December 31, 2011 and 2010, respectively.

The Company does not anticipate that there will be a material increase or decrease in the total amount of unrecognized tax benefits in the next twelve months. As of December 31, 2011, the United States Internal Revenue Service has completed examinations of the Company’s tax returns for all years through 2008. The Company’s tax returns for other major jurisdictions remain subject to examination for the years ranging from 2004 through 2011.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

N.	STOCKHOLDERS’ EQUITY

Accumulated Other Comprehensive (Loss) Income: Following are the components of accumulated other comprehensive (loss) income:


At December 31,	2011			2010			2009
Unrealized gain on investments	$	9.4		$	.8		$	1.4
Tax effect		(2.8	)		(.3	)		(.5	)

		6.6			.5			.9

Unrealized loss on derivative contracts		(32.3	)		(27.1	)		(73.4	)
Tax effect		10.3			9.2			25.0

		(22.0	)		(17.9	)		(48.4	)

Pension and postretirement:
Unrecognized:
Actuarial loss		(722.5	)		(465.1	)		(444.7	)
Prior service cost		(12.3	)		(13.9	)		(14.7	)
Net initial obligation		(.6	)		(.7	)		(.6	)
Tax effect		257.3			167.3			159.9

		(478.1	)		(312.4	)		(300.1	)

Currency translation adjustment		274.5			371.1			383.8

Accumulated other comprehensive (loss) income	$	(219.0	)	$	41.3		$	36.2

Other Capital Stock Changes : In 2011, the Company purchased and retired 9.2 million treasury shares. In April 2010, the Company retired .4 million of its common shares held as treasury stock.

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

At December 31, 2011, the notional amount of the Company’s interest-rate contracts was $2,914.1. Notional maturities for all interest-rate contracts are $705.6 for 2012, $708.9 for 2013, $1,037.2 for 2014, $387.2 for 2015, $39.1 for 2016 and $36.1 thereafter. The majority of these contracts are floating to fixed swaps that effectively convert an equivalent amount of commercial paper and other variable rate debt to fixed rates.

Foreign-Exchange Contracts: The Company enters into foreign-exchange contracts to hedge certain anticipated transactions and assets and liabilities denominated in foreign currencies, particularly the Canadian dollar, the euro, the British pound, the Australian dollar and the Mexican peso. The objective is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. At December 31, 2011, the notional amount of the outstanding foreign-exchange contracts was $185.7. Foreign-exchange contracts mature within one year.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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


At December 31,	2011				2010
	ASSETS		LIABILITIES		ASSETS		LIABILITIES
Derivatives designated under hedge accounting:
Interest-rate contracts:
Financial Services:
Other assets	$	1.4			$	9.1
Deferred taxes and other liabilities			$	107.6			$	107.5
Foreign-exchange contracts:
Truck and Other:
Other current assets		.1				.9
Accounts payable, accrued expenses and other				2.1				1.1

Total	$	1.5	$	109.7	$	10.0	$	108.6


Economic hedges:
Interest-rate contracts:
Financial Services:
Other assets	$	.8
Deferred taxes and other liabilities			$	.4			$	3.5
Foreign-exchange contracts:
Truck and Other:
Other current assets		.1			$	.1
Accounts payable, accrued expenses and other				.3				.3
Financial Services:
Deferred taxes and other liabilities				.1				.2

Total	$	.9	$	.8	$	.1	$	4.0

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 (income) or expense recognized in earnings related to fair value hedges was included in Interest and other borrowing expenses in the Financial Services segment as follows:


Year Ended December 31,	2011			2010
Interest-rate swaps	$	(4.4	)	$	(1.0	)
Term notes	$	3.7		$	.9

Cash Flow Hedges: Substantially all of the Company’s interest-rate contracts and some foreign-exchange contracts have been designated as cash flow hedges. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income to the extent such hedges are considered effective. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is 6.5 years.

Amounts in accumulated other comprehensive income are reclassified into net income in the same period in which the hedged transaction affects earnings. Net realized gains and losses from interest-rate contracts are recognized as an adjustment to interest expense. Net realized gains and losses from foreign-exchange contracts are recognized as an adjustment to cost of sales or to financial services interest expense, consistent with the hedged transaction. For the periods ended December 31, 2011 and 2010, the Company recognized gains on the ineffective portion of $.8 and $2.3, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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


Year Ended December 31,	2011					2010
	INTEREST-RATE CONTRACTS		FOREIGN- EXCHANGE CONTRACTS			INTEREST-RATE CONTRACTS		FOREIGN- EXCHANGE CONTRACTS
(Gain) loss recognized in OCI:
Truck and Other			$	(2.3	)			$	(.2	)
Financial Services	$	55.2				$	77.0

Total	$	55.2	$	(2.3	)	$	77.0	$	(.2	)

(Income) expense reclassified from Accumulated OCI into income:


Truck and Other:
Cost of sales and revenues			$	(4.1	)			$	(.4	)
Financial Services:
Interest and other borrowing expenses	$	51.8				$	123.5

Total	$	51.8	$	(4.1	)	$	123.5	$	(.4	)

Of the $22.0 accumulated net loss on derivative contracts included in accumulated other comprehensive income (loss) as of December 31, 2011, $39.7 of losses, net of taxes, is estimated to be reclassified to interest expense or cost of sales in the following 12 months. 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 not designated as hedges that do not qualify for hedge accounting. These derivative instruments are used to mitigate the risk of market volatility arising from borrowings and foreign currency denominated transactions. Changes in the fair value of economic hedges are recorded in earnings in the period in which the change occurs.

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


Year Ended December 31,	2011						2010
	INTEREST-RATE CONTRACTS			FOREIGN- EXCHANGE CONTRACTS			INTEREST-RATE CONTRACTS			FOREIGN- EXCHANGE CONTRACTS
Truck and Other:
Cost of sales and revenues				$	.2					$	.2
Interest and other (income) expense, net					(2.8	)	$	.6			8.0
Financial Services:
Interest and other borrowing expenses	$	(4.1	)		(1.2	)		(7.8	)

Total	$	(4.1	)	$	(3.8	)	$	(7.2	)	$	8.2

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. The hierarchy of fair value measurements is 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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. The Company has no financial instruments requiring Level 3 valuation.

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 based on quoted prices in active markets. These are categorized as Level 1. The fair value of non U.S. government bonds, municipal bonds, corporate bonds, asset-backed securities, commercial paper and term deposits is estimated using an industry standard valuation model, which is based on the income approach. The significant inputs into the valuation model include quoted interest rates, yield curves, credit rating of the security and other observable market information. These 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. The significant inputs into the valuation models include market inputs such as interest rates, yield curves, currency exchange rates, credit default swap spreads and forward spot rates. These contracts are categorized as Level 2.

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

At December 31, 2011

LEVEL 1

LEVEL 2

TOTAL

Assets:

Marketable debt securities

U.S. tax-exempt securities

294.4

U.S. corporate securities

27.5

U.S. government and agency securities

1.9

Non-U.S. government securities

367.1

Non-U.S. corporate securities

148.3

Other debt securities

70.9

Total marketable debt securities

1.9

908.2

910.1

Derivatives

Interest-rate swaps

1.4

Cross currency swaps

Foreign-exchange contracts

Total derivative assets

2.4

Liabilities:

Derivatives

Cross currency swaps

74.7

Interest-rate swaps

33.3

Foreign-exchange contracts

2.5

Total derivative liabilities

110.5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)


At December 31, 2010	LEVEL 1		LEVEL 2		TOTAL
Assets:
Marketable debt securities
U.S. tax-exempt securities			$	365.4	$	365.4
U.S. corporate securities				27.6		27.6
U.S. government and agency securities	$	2.7				2.7
Non-U.S. corporate securities				37.0		37.0
Other debt securities				17.8		17.8

Total marketable debt securities	$	2.7	$	447.8	$	450.5
Derivatives
Interest-rate swaps			$	5.8	$	5.8
Cross currency swaps				3.3		3.3
Foreign-exchange contracts				1.0		1.0

Total derivative assets			$	10.1	$	10.1
Liabilities:
Derivatives
Cross currency swaps			$	73.8	$	73.8
Interest-rate swaps				37.2		37.2
Foreign-exchange contracts				1.6		1.6

Total derivative liabilities			$	112.6	$	112.6

The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash and Cash Equivalents: Carrying amounts approximate fair value.

Financial Services Net Receivables: For floating-rate loans, wholesale financings, and interest and other receivables, fair values approximate carrying values. For fixed-rate loans, fair values are estimated using discounted cash flow analysis based on current rates for comparable loans. Finance lease receivables and related allowance for credit losses provisions 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 discounted cash flow analysis based on current rates for comparable debt.

Trade Receivables and Payables: Carrying amounts approximate fair value.

Fixed-rate loans and debt that are not carried at approximate fair value are as follows:


At December 31,	2011				2010
	CARRYING AMOUNT		FAIR VALUE		CARRYING AMOUNT		FAIR VALUE
Assets:
Financial Services fixed-rate loans	$	2,740.1	$	2,776.1	$	2,444.1	$	2,483.3
Liabilities:
Truck and Other fixed-rate debt	$	150.0	$	167.6	$	173.5	$	196.9
Financial Services fixed-rate debt	$	1,958.6	$	2,021.1	$	1,870.7	$	1,967.9

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

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, 2011, the maximum number of shares available for future grants was 18.3 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.


	2011			2010			2009
Risk-free interest rate		2.22	%		2.48	%		2.00	%
Expected volatility		45	%		44	%		39	%
Expected dividend yield		2.8	%		2.5	%		3.0	%
Expected term		5 years			5 years			5 years
Weighted average grant date fair value of options per share	$	16.45		$	11.95		$	8.47

The fair value of options granted was $10.9, $11.7 and $10.0 for the years ended December 31, 2011, 2010 and 2009, respectively.

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


	2011		2010		2009
Intrinsic value of options exercised	$	13.5	$	33.7	$	22.7
Cash received from stock option exercises		10.9		22.0		17.6
Tax benefit related to stock option exercises		4.7		10.8		7.1
Stock based compensation		13.8		8.5		9.5
Tax benefit related to stock based compensation		5.2		3.2		3.5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

The summary of options as of December 31, 2011 and changes during the year then ended is presented below.


	NUMBER OF SHARES			EXERCISE PRICE*		REMAINING CONTRACTUAL LIFE IN YEARS*		AGGREGATE INTRINSIC VALUE
Options outstanding at January 1		5,282,300		$	32.18
Granted		660,200			50.50
Exercised		(536,100	)		20.26
Cancelled		(431,000	)		36.40

Options outstanding at December 31		4,975,400		$	35.53		5.71	$	25.4

Vested and expected to vest		4,865,800		$	35.32		5.64	$	25.3

Exercisable		2,704,600		$	33.65		3.81	$	18.3

*	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, 2011 and changes during the year then ended is presented below:


NONVESTED SHARES	NUMBER OF SHARES			GRANT DATE FAIR VALUE*
Nonvested awards outstanding at January 1		142,600		$	38.25
Granted		117,200			51.38
Vested		(105,900	)		44.40

Nonvested awards outstanding at December 31		153,900		$	43.72

*	Weighted Average

As of December 31, 2011, there was $9.0 of total unrecognized compensation cost related to nonvested stock options, which is recognized over a remaining weighted average vesting period of 1.44 years. Unrecognized compensation cost related to nonvested restricted stock awards of $.7 is expected to be recognized over a remaining weighted average vesting period of .8 years.

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 2011, 2010 or 2009.

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, 2011, 2010 and 2009, the attainment of the conditions of the awards was not considered probable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)

R.	SEGMENT AND RELATED INFORMATION

PACCAR operates in two principal segments: Truck and Financial Services.

The Truck segment includes the manufacture of trucks and the distribution of related aftermarket parts, both of which are sold through a network of independent dealers. This segment derives a large proportion of its revenues and operating profits from operations in North America and Europe.

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

Included in All Other is PACCAR’s industrial winch manufacturing business. Also within this category are other sales, income and expenses 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 All Other and was $.6 for 2011 and nil for 2010 and 2009. Included in All Other income before income taxes of $42.2 in 2009 was $66.0 of curtailment gains and $22.2 of expense related to economic hedges. Geographic revenues from external customers are presented based on the country of the customer.

PACCAR evaluates the performance of its Truck segment 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 Area Data	2011		2010		2009
Revenues:
United States	$	7,389.8	$	4,195.8	$	3,594.4
Europe		5,104.0		3,472.3		2,828.3
Other		3,861.4		2,624.8		1,663.8

	$	16,355.2	$	10,292.9	$	8,086.5

Property, plant and equipment, net:
United States	$	1,059.1	$	846.4	$	814.6
The Netherlands		467.1		381.6		452.8
Other		447.1		445.7		490.3

	$	1,973.3	$	1,673.7	$	1,757.7

Equipment on operating leases, net:
United States	$	871.2	$	666.9	$	686.6
United Kingdom		374.8		384.9		349.7
Germany		350.6		334.0		362.7
Other		793.2		633.5		618.0

	$	2,389.8	$	2,019.3	$	2,017.0

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2011, 2010 and 2009 (currencies in millions)


Business Segment Data:	2011			2010			2009
Net sales and revenues:
Truck	$	15,922.8		$	9,591.3		$	7,388.6
Less intersegment		(715.1	)		(354.0	)		(394.6	)

Net Truck		15,207.7			9,237.3			6,994.0
All Other		118.2			87.8			82.7

Truck and Other		15,325.9			9,325.1			7,076.7
Financial Services		1,029.3			967.8			1,009.8

	$	16,355.2		$	10,292.9		$	8,086.5

Income before income taxes:
Truck	$	1,258.8		$	501.0		$	25.9
All Other		(26.5	)		(15.3	)		42.2

		1,232.3			485.7			68.1
Financial Services		236.4			153.5			84.6
Investment income		38.2			21.1			22.3

	$	1,506.9		$	660.3		$	175.0

Depreciation and amortization:
Truck	$	318.6		$	276.7		$	277.2
Financial Services		346.0			337.5			364.4
All Other		9.2			9.0			10.1

	$	673.8		$	623.2		$	651.7

Expenditures for long-lived assets:
Truck	$	879.1		$	373.9		$	324.2
Financial Services		934.3			505.6			646.0
All Other		28.2			4.3			.8

	$	1,841.6		$	883.8		$	971.0

Segment assets:
Truck	$	4,685.3		$	3,742.2		$	3,849.1
Other		185.3			181.2			232.6
Cash and marketable securities		2,900.7			2,432.5			2,056.0

		7,771.3			6,355.9			6,137.7
Financial Services		9,401.4			7,878.2			8,431.3

	$	17,172.7		$	14,234.1		$	14,569.0

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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, 2011, 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. Based on this assessment, we concluded that the Company maintained effective internal control over financial reporting as of December 31, 2011.

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 81.

Mark C. Pigott

(Manual Signature)

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, 2011 and 2010, 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, 2011. 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, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, 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, 2011, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2012 expressed an unqualified opinion thereon.

Ernst & Young LLP

(manual signature)

Seattle, Washington

February 29, 2012

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

FIRM ON THE COMPANY’S INTERNAL CONTROL OVER

FINANCIAL REPORTING

The Board of Directors and Stockholders of PACCAR Inc

We have audited PACCAR Inc’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (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, 2011, 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, 2011 and 2010, 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, 2011 and our report dated February 29, 2012 expressed an unqualified opinion thereon.

Ernst & Young LLP

(manual signature)

Seattle, Washington

February 29, 2012

SELECTED FINANCIAL DATA


	2011		2010		2009		2008		2007
	(millions except per share data)
Truck and Other Net Sales and Revenues	$	15,325.9	$	9,325.1	$	7,076.7	$	13,709.6	$	14,030.4
Financial Services Revenue		1,029.3		967.8		1,009.8		1,262.9		1,191.3

Total Revenues	$	16,355.2	$	10,292.9	$	8,086.5	$	14,972.5	$	15,221.7
Net Income	$	1,042.3	$	457.6	$	111.9	$	1,017.9	$	1,227.3
Net Income Per Share:
Basic		2.87		1.25		.31		2.79		3.31
Diluted		2.86		1.25		.31		2.78		3.29
Cash Dividends Declared Per Share		1.30		.69		.54		.82		1.65
Total Assets:
Truck and Other		7,771.3		6,355.9		6,137.7		6,219.4		6,599.9
Financial Services		9,401.4		7,878.2		8,431.3		10,030.4		10,710.3
Truck and Other Long-Term Debt		150.0		150.0		172.3		19.3		23.6
Financial Services Debt		6,505.4		5,102.5		5,900.5		7,465.5		7,852.2
Stockholders’ Equity		5,364.4		5,357.8		5,103.7		4,846.7		5,013.1
Ratio of Earnings to Fixed Charges		9.43x		4.07x		1.57x		4.58x		5.36x

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 2,063 record holders of the common stock at December 31, 2011.


	2011						2010
	CASH DIVIDENDS DECLARED		STOCK PRICE				CASH DIVIDENDS DECLARED		STOCK PRICE
Quarter	CASH DIVIDENDS DECLARED		HIGH		LOW		CASH DIVIDENDS DECLARED		HIGH		LOW
First	$	.12	$	56.75	$	46.73	$	.09	$	43.64	$	33.79
Second		.12		53.29		44.65		.09		47.81		38.66
Third		.18		52.39		32.79		.09		47.90		38.95
Fourth		.18		43.36		32.02		.12		57.49		47.32
Year-End Extra		.70						.30

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.

QUARTERLY RESULTS (UNAUDITED)


	QUARTER
	FIRST		SECOND		THIRD		FOURTH
	(millions except per share data)
2011
Truck and Other:
Net sales and revenues	$	3,042.6	$	3,702.7	$	3,993.0	$	4,587.6
Cost of sales and revenues		2,632.3		3,231.1		3,484.0		3,994.4
Research and development		68.4		77.5		70.0		72.3
Financial Services:
Revenues		241.0		258.0		264.1		266.2
Interest and other borrowing expenses		46.5		46.1		44.6		44.1
Depreciation and other expense		110.5		119.4		123.0		123.3
Net Income		193.3		239.7		281.6		327.7
Net Income Per Share:
Basic	$	.53	$	.66	$	.78	$	.91
Diluted		.53		.65		.77		.91
2010
Truck and Other:
Net sales and revenues	$	1,984.3	$	2,224.8	$	2,304.2	$	2,811.8
Cost of sales and revenues		1,767.8		1,954.9		2,019.2		2,456.9
Research and development		54.8		58.4		59.9		65.4
Financial Services:
Revenues		246.4		239.3		238.3		243.8
Interest and other borrowing expenses		57.1		54.5		51.8		49.6
Depreciation and other expense		121.3		110.9		110.2		109.2
Net Income		68.3		99.6		119.9		169.8
Net Income Per Share:
Basic	$	.19	$	.27	$	.33	$	.46
Diluted		.19		.27		.33		.46

MARKET RISKS AND DERIVATIVE INSTRUMENTS

(currencies in millions)

Interest-Rate Risks - S ee 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:


Fair Value Gains (Losses)	2011			2010
CONSOLIDATED:
Assets
Cash equivalents and marketable securities	$	(13.8	)	$	(5.7	)
TRUCK AND OTHER:
Liabilities
Fixed-rate long-term debt		3.5			5.2
FINANCIAL SERVICES:
Assets
Fixed-rate loans		(51.5	)		(40.2	)
Liabilities
Fixed-rate term debt		35.8			30.9
Interest-rate swaps related to financial services debt		41.2			37.0

Total	$	15.2		$	27.2

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 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 $21.2 related to contracts outstanding at December 31, 2011, compared to a loss of $15.0 at December 31, 2010. These amounts would be largely offset by changes in the values of the underlying hedged exposures.

Exhibit 21

SUBSIDIARIES OF THE REGISTRANT


Name(a)	State or Country of Incorporation	Names Under Which Company Or Subsidiaries Do Business
PACCAR of Canada Ltd.	Canada	PACCAR of Canada Ltd.
		Canadian Kenworth Co.
		Peterbilt of Canada
		PACCAR Parts of Canada

PACCAR Australia Pty. Ltd.	Australia	PACCAR Australia Pty. Ltd.
		Kenworth Trucks
		DAF Trucks Australia

PACCAR Financial Pty. Ltd.	Australia	PACCAR Financial Pty. Ltd.

PACCAR Mexico, S.A. de C.V.	Mexico	PACCAR Mexico, S.A. de C.V.
		KENFABRICA, S.A. de C.V.
		Kenworth Mexicana S.A. de C.V.
		PACCAR Parts Mexico S.A. de C.V.
		PACCAR Capital Mexico S.A. de C.V.
		PacLease Mexicana S.A. de C.V.

PACCAR Financial Mexico	Mexico	PACCAR Financial Mexico

DAF Trucks, N.V. (a)(b)	Netherlands	DAF Trucks, N.V.

DAF Trucks Vlaanderen N.V. (c)	Belgium	DAF Trucks Vlaanderen N.V.

DAF Trucks Ltd. (c)	United Kingdom	DAF Trucks Ltd.

DAF Trucks Deutschland GmbH (c)	Germany	DAF Trucks Deutschland GmbH

DAF Trucks France, S.A.R.L. (c)	France	DAF Trucks France, S.A.R.L.

DAF Vehiculos Industriales S.A. (c)	Spain	DAF Vehiculos Industriales S.A.

DAF Veicoli Industriali S.p.A. (c)	Italy	DAF Veicoli Industriali S.p.A.

DAF Trucks Polska SP.Z.O.O. (c)	Poland	DAF Trucks Polska SP.Z.O.O.

PACCAR Parts U.K. Limited (d)	England and Wales	PACCAR Parts U.K. Limited

Leyland Trucks Limited (e)	England and Wales	Leyland Trucks Limited

PACCAR Engine Company	Mississippi	PACCAR Engine Company

PACCAR Financial Corp.	Washington	PACCAR Financial Corp.
		PACCAR Leasing Company
		PacLease

PACCAR Financial Services Ltd.	Canada	PACCAR Financial Services Ltd.
		PACCAR Leasing of Canada a division
		of PACCAR Financial Services Ltd.

PACCAR Financial Ltd. (f)	Canada	PACCAR Financial Ltd.

PACCAR Sales North America, Inc.	Delaware	PACCAR Sales North America, Inc.

SUBSIDIARIES OF THE REGISTRANT


Name(a)	State or Country of Incorporation	Names Under Which Company Or Subsidiaries Do Business
PACCAR Holding B.V. (g)	Netherlands	PACCAR Holding B.V.

PACCAR Financial Europe B.V. (b)	Netherlands	PACCAR Financial Europe B.V.

PACCAR Financial Holdings Europe B.V. (h)	Netherlands	PACCAR Financial Holdings Europe B.V.

PACCAR Financial Belux BVBA (i)	Belgium	PACCAR Financial Belux BVBA

PACCAR Financial Deutschland GmbH (i)	Germany	PACCAR Financial Deutschland GmbH

PACCAR Leasing GmbH (i)	Germany	PACCAR Leasing Europe

PACCAR Financial Espana S.r.l. (i)	Spain	PACCAR Financial Espana S.r.l.

PACCAR Financial France S.A.S. (i)	France	PACCAR Financial France S.A.S.

PACCAR Financial Italia Srl (i)	Italy	PACCAR Financial Italia Srl

PACCAR Financial PLC (i)	United Kingdom	PACCAR Financial PLC

PACCAR Financial Nederland B.V. (i)	Netherlands	PACCAR Financial Nederland B.V.

PACCAR Financial Services Europe B.V. (i)	Netherlands	PACCAR Financial Services Europe B.V.

(a)	The names of some subsidiaries have been omitted. Considered in the aggregate, omitted subsidiaries would not constitute a significant subsidiary.

(b)	A wholly owned subsidiary of PACCAR Holding B.V.

(c)	A wholly owned subsidiary of DAF Trucks, N.V.

(d)	A wholly owned subsidiary of PACCAR Trucks U.K. Ltd., which is a wholly owned subsidiary of PACCAR Holding B.V.

(e)	A wholly owned subsidiary of PACCAR Parts U.K. Limited

(f)	A wholly owned subsidiary of PACCAR Financial Services Ltd.

(g)	A wholly owned subsidiary of PACCAR Sales North America, Inc.

(h)	A wholly owned subsidiary of PACCAR Financial Europe B.V.

(i)	A wholly owned subsidiary of PACCAR Financial Holdings Europe B.V.

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Annual Report (Form 10-K) of PACCAR Inc of our reports dated February 29, 2012, with respect to the consolidated financial statements of PACCAR Inc, and the effectiveness of internal control over financial reporting of PACCAR Inc, included in the 2011 Annual Report to Stockholders of PACCAR Inc.

We also consent to the incorporation by reference in the following Registration Statements:

the Registration Statement (Form S-8 No. 33-47763) pertaining to the 1991 Long-Term Incentive Plan of PACCAR Inc

the Registration Statement (Form S-8 No. 333-39161) pertaining to the 1991 Long-Term Incentive Plan of PACCAR Inc

the Registration Statement (Form S-8 No. 333-103706) pertaining to the 1991 Long-Term Incentive Plan of PACCAR Inc

the Registration Statement (Form S-8 No. 333-36712) pertaining to the PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-Employee Directors

the Registration Statement (Form S-8 No. 333-120238) pertaining to the PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-Employee Directors

the Registration Statement (Form S-8 No. 333-52230) pertaining to the PACCAR Inc Savings Investment Plan

the Registration Statement (Form S-8 No. 333-139544) pertaining to the PACCAR Inc Savings Investment Plan

the Registration Statement (Form S-3 No. 333-178607) pertaining to the shelf registration of Senior Debt Securities.

of our reports dated February 29, 2012, with respect to the consolidated financial statements of PACCAR Inc, and the effectiveness of internal control over financial reporting of PACCAR Inc incorporated by reference in this Annual Report (Form 10-K) of PACCAR Inc.

/s/ Ernst and Young LLP

Ernst and Young LLP

Seattle, Washington

February 29, 2012

Exhibit 24

POWER OF ATTORNEY

We, the undersigned directors of PACCAR Inc, a Delaware corporation, hereby severally constitute and appoint M. C. Pigott our true and lawful attorney-in-fact, to sign for us, and in our names in our capacity as director, a Form 10-K on behalf of the Company for the year ending December 31, 2011, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

IN WITNESS WHEREOF, each of the undersigned has executed this power of attorney as of this 6 ^t ^h day of December, 2011.



/s/ A.J. Carnwath				/s/ J.M. Pigott
A. J. Carnwath				J. M. Pigott
Director, PACCAR Inc				Director, PACCAR Inc

/s/ J. M. Fluke Jr				/s/ T. E. Plimpton
J. M. Fluke, Jr.				T. E. Plimpton
Director, PACCAR Inc				Director, PACCAR Inc

/s/ K. S. Hachigian				/s/ G. M. E. Spierkel
K. S. Hachigian				G. M. E. Spierkel
Director, PACCAR Inc				Director, PACCAR Inc

/s/ S. F. Page				/s/ W. R. Staley
S. F. Page				W. R. Staley
Director, PACCAR Inc				Director, PACCAR Inc

/s/ R. T. Parry				/s/ C. R. Williamson
R. T. Parry				C. R. Williamson
Director, PACCAR Inc				Director, PACCAR Inc

Exhibit 31(a)

CERTIFICATION

I,	Mark C. Pigott, certify that:

1.	I have reviewed this annual report on Form 10-K of PACCAR Inc;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date February 29, 2012

/s/ Mark C. Pigott

Mark C. Pigott

Chairman and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31(b)

CERTIFICATION

I, Ronald E. Armstrong, certify that:

1.	I have reviewed this annual report on Form 10-K of PACCAR Inc;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date February 29, 2012

/s/ Ronald E. Armstrong

Ronald E. Armstrong

President

(Principal Financial Officer)

Exhibit 32

CERTIFICATION PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350)

In connection with the Annual Report of PACCAR Inc (the “Company”) on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), that to the best of our knowledge and belief:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date	February 29, 2012	By	/s/ Mark C. Pigott
			Mark C. Pigott
			Chairman and Chief Executive Officer PACCAR Inc

		By	/s/ Ronald E. Armstrong
			Ronald E. Armstrong
			President PACCAR Inc (Principal Financial Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.