PACCAR FINANCIAL CORP (Form: 10-K, Received: 02/21/2018 17:45:00)

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, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from __________ to __________

Commission File No. 001-11677

PACCAR FINANCIAL CORP.

(Exact name of Registrant as specified in its charter)

Washington		91-6029712
(State of incorporation)		(I.R.S. Employer Identification No.)

777 106 ^th Avenue N.E., Bellevue, Washington		98004
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code is (425) 468-7100

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

Title of Each Class

Name of Each Exchange on Which Registered

Series O Medium-Term Notes

$250.0 Million Due August 11, 2021

New York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: ☒ 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: ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ 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: ☒ 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, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2017: None

The number of shares outstanding of the registrant’s classes of common stock as of January 31, 2018:

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

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

INDEX

PART I

Item 1.	Business	3
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	9
Item 2.	Properties	10
Item 3.	Legal Proceedings	10
Item 4.	Mine Safety Disclosures	10

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10
Item 6.	Selected Financial Data	11
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 8.	Financial Statements and Supplementary Data	24
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	45
Item 9A.	Controls and Procedures	45
Item 9B.	Other Information	45

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	45
Item 11.	Executive Compensation	45
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	45
Item 13.	Certain Relationships and Related Transactions, and Director Independence	45
Item 14.	Principal Accounting Fees and Services	45

PART IV

Item 15.	Exhibits and Financial Statement Schedules	47

PACCAR Financial Corp.

(Millions of Dollars)

PART I

ITEM 1.

BUSINESS

GENERAL

PACCAR Financial Corp.

PACCAR Financial Corp. (the “Company”), a Washington corporation, was incorporated in 1961 as a wholly owned subsidiary of PACCAR Inc (“PACCAR”) to finance the sale of PACCAR products.

The Company principally provides financing and leasing of PACCAR manufactured trucks and other transportation equipment sold through the Kenworth and Peterbilt independent dealer networks in the United States. The Company also finances dealer inventories of new and used transportation equipment. PACCAR Leasing Company, a division of the Company operating as “PacLease”, franchises Kenworth and Peterbilt dealerships to engage in full-service and finance leasing. In selected markets, PacLease directly engages in full-service leasing with its customers through Company-owned stores and through Kenworth and Peterbilt dealerships.

PACCAR

PACCAR is a multinational company operating in three principal industry segments: (1) the Truck segment includes the design, manufacture and distribution of high-quality, light-, medium- and heavy-duty commercial trucks; (2) the Parts segment includes the distribution of aftermarket parts for trucks and related commercial vehicles; and (3) the Financial Services segment includes finance and leasing products and services provided to customers and dealers. Heavy-duty trucks have a gross vehicle weight (GVW) of over 33,000 lbs (Class 8) in North America and over 16 metric tonnes in Europe. Medium-duty trucks have a GVW ranging from 19,500 to 33,000 lbs (Class 6 to 7) in North America, and in Europe, light- and medium-duty trucks range between 6 to 16 metric tonnes. PACCAR’s finance and leasing activities are principally related to PACCAR products and associated equipment. PACCAR’s Other business includes the manufacturing and marketing of industrial winches.

PACCAR’s trucks 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, Brasil, Canada and Mexico, are used worldwide for over-the-road and off-highway hauling of commercial and consumer goods. PACCAR also manufactures engines, primarily for use in PACCAR’s trucks, at its facilities in Columbus, Mississippi; Eindhoven, the Netherlands; and Ponta Grossa, Brasil. PACCAR competes in the North American Class 8 market, primarily with Kenworth and Peterbilt conventional models. These trucks are assembled at facilities in Chillicothe, Ohio; Denton, Texas; Renton, Washington; Ste. Therese, Canada and Mexicali, Mexico. PACCAR also competes in the North American Class 6 to 7 markets primarily with Kenworth and Peterbilt conventional models. These trucks are assembled at facilities in Ste. Therese, Canada and Mexicali, Mexico. PACCAR competes in the European light/medium market with DAF cab-over-engine (COE) trucks assembled in the United Kingdom by Leyland, one of PACCAR’s wholly owned subsidiaries, and participates in the European heavy market with DAF COE trucks assembled in the Netherlands and the United Kingdom. PACCAR competes in the Brazilian heavy truck market with DAF models assembled at Ponta Grossa in the state of Paraná, Brasil. PACCAR competes in the Australian light and heavy truck markets with Kenworth conventional and COE models assembled at its facility at Bayswater in the state of Victoria, Australia, and DAF COE models assembled in the United Kingdom. Commercial truck manufacturing comprises the largest segment of PACCAR’s business and accounted for 76% of total 2017 net sales and revenues.

Substantially all trucks 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 and is also marketed and distributed by foreign subsidiaries in Brasil and Australia. The decision to operate as a subsidiary or as a division is incidental to PACCAR’s Truck segment operations and reflects legal, tax and regulatory requirements in the various countries where PACCAR operates.

There are four principal competitors in the U.S. and Canada commercial truck market. PACCAR’s share of the U.S. and Canadian Class 8 market was a record 30.7% of retail sales in 2017, and PACCAR’s medium-duty market share was 17.1% of registrations in 2017. In Europe, there are six principal competitors in the commercial truck market, including parent companies to two competitors of PACCAR in the U.S. In 2017, DAF had a 15.3% share of the European heavy-duty market and a 10.5% share of the light/medium market. These markets are highly competitive in price, quality and service. PACCAR is not dependent on any single customer for its sales. There are no significant seasonal variations in sales.

PACCAR Financial Corp.

(Millions of Dollars)

Aftermarket truck parts are sold and delivered to PACCAR’s independent dealers through PACCAR’s 18 strategically located parts distribution centers (PDCs) in the U.S., Canada, Europe, Australia, Mexico and Central and South America. Parts are primarily purchased from various suppliers and also manufactured by PACCAR. Aftermarket parts inventory levels are determined largely by anticipated cus tomer demand and the need for timely delivery. The Parts segment accounted for 17% of total 2017 net sales and revenues.

In addition to the Company, which provides financing, leasing and full-service truck leasing in the United States, PACCAR offers similar financing programs for PACCAR products in Canada, Mexico, Australia, Europe and South America through other wholly owned finance subsidiaries. PACCAR also conducts full-service leasing operations through wholly owned subsidiaries in Canada, Mexico, Germany and Australia.

PACCAR’s common stock is traded on the NASDAQ Global Select Market under the symbol PCAR. PACCAR and the Company are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance therewith, file reports and other information with the Securities and Exchange Commission (the “Commission”). All reports, proxy statements and other information filed by PACCAR and the Company with the Commission may be inspected and copied at the public reference facility maintained by the Commission at 100 F Street, N.E., Washington, D.C. 20549 or through the Commission’s internet site at www.sec.gov.

BUSINESS OF THE COMPANY

The Company operates primarily in the industry segment of finance and leasing services provided to customers and dealers in the United States for new Kenworth and Peterbilt trucks, used trucks, truck trailers and allied equipment. The Company’s PacLease division franchises Kenworth and Peterbilt dealerships to engage in full-service and finance leasing. In selected markets, PacLease directly engages in full-service leasing with its customers through Company-owned stores and on a limited basis through Kenworth and Peterbilt dealerships.

The Company conducts business with most Kenworth and Peterbilt dealers in the United States. The volume of the Company’s business is significantly affected by PACCAR’s sales of trucks to its dealers and competition from other financing sources.

As of December 31, 2017, the Company employed 437 full-time employees, none of whom are represented by a collective bargaining agent.

THE COMPANY’S PRODUCTS

The Company offers the following products to retail customers:

Retail Contracts and Loans

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

The Company also makes loans to the end users of the vehicles financed that are secured by a first lien security interest in the vehicles. These loans have fixed or floating interest rates.

Direct Financing Leases

The Company offers direct financing lease contracts where it is treated as the owner of the equipment for tax purposes and generally retains the tax depreciation (“Direct Financing Leases”). The lessee is responsible for the payment of property and sales taxes, licenses, maintenance and other operating costs. The lessee is obligated to maintain the equipment and to insure the equipment against physical damage and liability losses.

Most of the Company’s Direct Financing Leases contain a Terminal Rental Adjustment Clause, which requires the lessee to guarantee to the Company a stated residual value upon disposition of the equipment at the end of the direct financing lease term.

PACCAR Financial Corp.

(Millions of Dollars)

Operating Leases

The Company offers operating lease contracts (“Operating Leases”) where the Company owns the equipment. The lessee is responsible for the payment of property and sales taxes, licenses, maintenance and other operating costs. The lessee is obligated to maintain the equipment and to insure the equipment against physical damage and liability losses.

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

The Company offers the following products to Kenworth and Peterbilt dealers and PacLease franchisees:

Master Notes

Master note contracts (“Master Notes”) are offered to select dealers for new and used trucks. Retail installment contracts originated by the dealer for new or used trucks which meet the Company’s requirements as to form, terms and creditworthiness for Retail Contracts are pledged to the Company as collateral for direct, full recourse loans by the Company to the dealer. The dealer may pay the loans early or make additional draws up to specified balances of the contracts pledged to the Company. Master Notes have fixed or floating interest rates.

Wholesale Contracts

The Company provides wholesale financing for new and used truck inventories for dealers (“Wholesale Contracts”). Wholesale Contracts are secured by the inventories financed. The amount of credit extended by the Company for each truck is generally limited to the invoice price of new equipment and to the wholesale value of used equipment. Wholesale Contracts have floating interest rates.

Dealer Loans

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

Full-Service Leasing

The Company also conducts full-service leasing operations under the PacLease trade name. Selected dealers are franchised to provide full-service leasing, which includes the equipment, maintenance, parts, taxes and licenses in one combined contract with the customer. The Company provides the franchisees with equipment financing and managerial support. The Company also operates full-service lease outlets in selected markets.

Insurance

The Company offers insurance coverage through an unrelated regulated insurance carrier for a fee on new trucks and used trucks inventory to dealers that have Wholesale Contracts with the Company.

CUSTOMER CONCENTRATION, PAST DUE ACCOUNTS AND LOSS EXPERIENCE

Customer Concentration

The Company’s customers are principally concentrated in the transportation industry in the United States. The Company’s portfolio assets are diversified over a large number of customers and dealers with no single customer or dealer balance representing over 10% of the total portfolio assets as of December 31, 2017 and 2016.

The Company has contractual arrangements with one customer, Swift Transportation Corporation, that accounted for 10.4%, 12.1% and 13.8% of total interest and other revenues for the years ended December 31, 2017, 2016 and 2015, respectively.

Past Due Receivables and Allowance for Credit Losses

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

PACCAR Financial Corp.

(Millions of Dollars)

The provision for losses on finance and other receivables is charged to income as necessary to reflect management’s estima te of incurred credit losses, net of recoveries, inherent in the portfolio. Receivables are charged off against the allowance for credit losses when, in the judgment of management, they are considered uncollectible (generally upon repossession of the colla teral).

For further discussion of the allowance for credit losses, see “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

COMPETITION AND ECONOMIC FACTORS

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

The dealers are the primary source of contracts acquired by the Company. Dealers are not required to obtain financing from the Company and they have a variety of other sources that may be used for wholesale and customer financing of trucks. Retail purchasers also have a variety of sources available to finance truck purchases.

The ability of the Company to compete in its market is principally based on the rates, terms and conditions that the Company offers dealers and retail purchasers, as well as the specialized services it provides. Rates, terms and conditions are based on the Company’s desire to provide flexible financing and services to satisfy dealer and customer needs, the ability of the Company to borrow funds at competitive rates and the Company’s need to earn an adequate return on its invested capital. The Company’s business is also affected by changes in market interest rates and used truck values, which in turn are related to general economic conditions, demand for credit, inflation and governmental policies. Seasonality is not a significant factor in the Company’s business.

The volume of receivables available to be acquired by the Company from dealers is largely dependent upon the number of Kenworth and Peterbilt trucks sold in the United States. Sales of medium- and heavy-duty trucks depend on the capital equipment requirements of the transportation industry, which are influenced by growth and cyclical variations in the economy. Medium- and heavy-duty truck sales are also sensitive to economic factors such as fuel costs, interest rates, insurance premiums, federal excise and highway use taxes, taxation on the acquisition and use of capital goods, as well as government regulations.

REGULATION AND SIMILAR MATTERS

In certain states, the Company is subject to retail installment sales or installment loan statutes and related regulations, the terms of which vary from state to state. These laws may require the Company to be licensed as a sales finance company and may regulate disclosure of finance charges and other terms of retail installment contracts. The Company is subject to substantive state franchise regulations and federal and state uniform franchise disclosure laws in connection with the offering of PacLease full-service truck leasing and rental franchises to Kenworth and Peterbilt truck dealers. The Company owns and operates several truck leasing and rental business locations, which are subject to applicable state licensing laws. The Company is also subject to certain provisions of federal law relating to non-discrimination in the granting of credit.

SOURCES OF FUNDS

The Company’s primary sources of funds are medium-term note borrowings and commercial paper proceeds in the public capital markets, collections on loans and leases, retained earnings and to a lesser extent borrowings from PACCAR, bank loans and capital contributions. The Company’s investment in additional receivables is dependent upon its ability to raise funds at competitive rates in the public and private debt markets. The receivables and leases that are financed are either fixed rate or floating rate with terms that generally range from 36 to 60 months.

To reduce the risk of changes in interest rates that could affect interest margins, the Company obtains funding with interest rate characteristics similar to the corresponding assets. Fixed rate assets are primarily funded with fixed and floating rate medium-term notes and commercial paper. Floating rate assets are funded primarily with commercial paper with maturities of three months or less and floating rate medium-term notes. Interest-rate swaps may be combined with commercial paper or medium-term notes to achieve the Company’s matched funding objectives.

PACCAR Financial Corp.

(Millions of Dollars)

As of December 31, 2017, the total notional amount of interest-rate swap cont racts outstanding was $838.7. These swap contracts are accounted for as cash flow or fair value hedges.

The notional amounts are used to measure the volume of these contracts and do not represent exposure to credit loss. The permitted types of interest-rate swap contracts, counterparties’ transaction limits and related approval authorizations have been established by the Company’s senior management and Board of Directors. The interest-rate contracts outstanding are regularly reported to, and reviewed by, the Company’s senior management.

The Company periodically registers debt securities under the Securities Act of 1933 for offering to the public. In November 2015, the Company filed a shelf registration statement to issue medium-term notes. The shelf registration statement expires in November 2018 and does not limit the principal amount of debt securities that may be issued during the period. The Company intends to renew the registration prior to its expiration. The total principal amount of medium-term notes outstanding for the Company as of December 31, 2017 was $4,450.0. See “Note G – Borrowings” in the Notes to the Financial Statements for further information on the Company’s medium-term notes.

The Company participated with PACCAR and certain other PACCAR affiliates in syndicated credit facilities of $3,000.0 at December 31, 2017. Of this amount, $1,000.0 expires in June 2018, $1,000.0 expires in June 2021 and $1,000.0 expires in June 2022. PACCAR and the Company intend to replace these credit facilities on or before expiration with facilities of similar amounts and duration.

Of the $3,000.0 credit facilities, $1,953.0 is available for use by the Company and/or PACCAR and PACCAR Financial Europe. The remaining $1,047.0 is allocated to other non-U.S. PACCAR financial subsidiaries. These credit facilities are used to provide backup liquidity for the Company’s commercial paper and maturing medium-term notes. The Company is liable only for its own borrowings under these credit facilities. There were no borrowings under these credit facilities in 2017.

RELATIONSHIP WITH PACCAR AND AFFILIATES

General

The operations of the Company are dependent on its relationship with PACCAR. Sales of PACCAR products are the Company’s principal source of its financing business. The Company receives administrative support from and pays dividends to its parent company and periodically borrows funds from or lends money to PACCAR and/or its affiliates. The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR). The Company also leases office space from one facility owned by PACCAR and five facilities leased by PACCAR. Since the directors of the Company are all executives of PACCAR and PACCAR is the sole owner of the Company’s outstanding voting common stock, PACCAR can determine the course of the Company’s business.

Periodically, the Company makes loans to, borrows from and has intercompany transactions with PACCAR. The Company had $777.5 and $756.5 outstanding in loans due from PACCAR as of December 31, 2017 and 2016, respectively. In addition, the Company periodically loans funds to certain foreign finance and leasing affiliates of PACCAR. The Company had $295.0 and $413.0 outstanding in loans due from foreign finance affiliates of PACCAR as of December 31, 2017 and 2016, respectively. These affiliates have Support Agreements with PACCAR, similar to the Company’s Support Agreement with PACCAR described below. The foreign affiliates operate in the United Kingdom, the Netherlands, Mexico, Canada and Australia. Loans to these foreign affiliates during 2017 and 2016 were denominated in United States dollars. The foreign affiliates primarily provide financing and leasing of PACCAR manufactured trucks and related equipment sold through the DAF, Kenworth and Peterbilt independent dealer networks in Europe, Mexico, Canada and Australia. The Company will not make loans to the foreign affiliates in excess of the equivalent of $500.0 United States dollars, unless the amount in excess of such limit is guaranteed by PACCAR. The Company periodically reviews the funding alternatives for these affiliates, and these limits may be revised in the future.

PACCAR charges the Company for certain administrative services it provides. These costs were charged to the Company based upon the Company’s use of the services and PACCAR’s cost. See “Note D – Transactions with PACCAR and Affiliates” in the Notes to the Financial Statements.

Support Agreement

PACCAR Financial Corp.

(Millions of Dollars)

Agreement) of at least 1.25 to 1 for any fiscal year. The requir ed ratio for the years ended December 31, 2017, 2016 and 2015 was met without assistance. The Support Agreement also requires PACCAR to own, directly or indirectly, all outstanding voting stock of the Company. See “Note D – Transactions with PACCAR and Aff iliates” in the Notes to the Financial Statements.

The Company and PACCAR may amend or terminate any or all of the provisions of the Support Agreement upon 30 days notice, with copies of the notice being sent to all nationally recognized statistical rating organizations (“NRSROs”) which have issued ratings with respect to debt of the Company (“Rated Debt”). Such amendment or termination will be effective only if (i) two NRSROs confirm in writing that their ratings with respect to any Rated Debt would remain the same after such amendment or termination, or (ii) the notice of amendment or termination provides that the Support Agreement will continue in effect with respect to Rated Debt outstanding on the effective date of such amendment or termination unless such debt has been paid or defeased pursuant to the indenture or other agreement applicable to such debt, or (iii) the holders of at least two-thirds of the aggregate principal amount of all outstanding Rated Debt with an original maturity in excess of 270 days consent in writing to such amendment or termination, provided that the holders of Rated Debt having an original maturity of 270 days or less shall continue to have the benefits of the Support Agreement until the maturity of such debt.

The Support Agreement expressly states that PACCAR’s commitments to the Company thereunder do not constitute a PACCAR guarantee of payment of any indebtedness or liability of the Company to others and do not create rights against PACCAR in favor of persons other than the Company. There are no guarantees, direct or indirect, by PACCAR of payment of any indebtedness of the Company.

OTHER DISCLOSURES

The Company’s filings on Forms 10-K, 10-Q and 8-K and any amendments to those reports can be obtained through a link on the Company’s website, www.paccarfinancial.com, or PACCAR’s website, www.paccar.com, free of charge as soon as reasonably practicable after the report is electronically filed with, or furnished to, the Commission. The information on the websites is not incorporated by reference into this report.

ITEM 1A.

RISK FACTORS

The Company is exposed to certain risks and uncertainties that could have a material adverse impact to the Company’s financial condition and operating results, including:

Sales of PACCAR Products

The Company’s business is substantially dependent upon the sale of PACCAR products and its ability to offer competitive financing in the United States. Changes in the volume of sales of PACCAR products due to a variety of reasons could impact the level of business of the Company. Refer to the “Relationship with PACCAR and Affiliates” section in “Item 1. – Business” and “Note D – Transactions with PACCAR and Affiliates” in the Notes to the Financial Statements for further discussion regarding the Company’s relationship with PACCAR.

Liquidity Risks, Credit Ratings and Costs of Funds

Disruptions or volatility in U.S. financial markets could limit the Company’s sources of liquidity, or the liquidity of customers and dealers. A lowering of the Company’s credit ratings could increase the cost of borrowing and adversely affect access to capital markets. The Company obtains funds for its operations from commercial paper and medium-term note debt. If the markets for commercial paper and medium-term notes do not provide the necessary liquidity in the future, the Company may experience increased costs or may have to limit its financing of retail and wholesale assets.

Competitive Risk

The Company 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.

PACCAR Financial Corp.

(Millions of Dollars)

Credit Risk

The Company 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 most of the financial assets of the Company 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 Risk

The Company is subject to interest-rate risks, because increases in interest rates could reduce demand for its products, increase borrowing costs and potentially reduce interest margins. The Company uses derivative contracts to match the interest rate characteristics of its debt to the interest rate characteristics of its finance receivables in order to mitigate the risk of changing interest rates.

Residual Value Risk

Residual value risk is the risk that the estimated residual value of leased assets, established at lease origination for the Company’s operating leases and certain direct financing leases, will not be recoverable when the leased asset is returned to the Company. When the market value of these leased assets at contract maturity or at early termination is less than its contractual residual value, the Company will be exposed to a greater risk of loss on the sales of the returned equipment. Refer to the Critical Accounting Policy on “Equipment on Operating Leases” in “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion regarding the Company’s exposure to residual value risk.

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 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.

Information Technology

The Company relies on information technology systems, including the internet and other computer systems, which may be subject to disruptions during the process of upgrading or replacing software, databases or components; power outages; hardware failures; computer viruses; or outside parties attempting to disrupt the Company’s business or gain unauthorized access to the Company’s electronic data. The Company maintains protections to guard against such events. If the Company’s computer systems were to be damaged, disrupted or breached, it could result in a negative impact on the Company’s operating results and could also cause reputational damage, business disruption or the disclosure of confidential data.

Litigation and Regulatory Actions

On July 19, 2016, the European Commission (EC) concluded its investigation of all major European truck manufacturers and reached a settlement with DAF Trucks N.V., its subsidiary DAF Trucks Deutschland GmbH (collectively, “DAF”) and PACCAR Inc as their parent. Following the settlement, claims and lawsuits have been filed against PACCAR Inc, DAF and other truck manufacturers. Others may bring EC-related claims and lawsuits against PACCAR Inc or its subsidiaries. While PACCAR Inc believes it has meritorious defenses, such claims and lawsuits will likely take a significant period of time to resolve. An adverse outcome of such proceedings could have a material impact on PACCAR Inc’s results of operations.

ITE M 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

PACCAR Financial Corp.

(Millions of Dollars)

ITEM 2.

PR OPERTIES

The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR) at 777 106 ^th Avenue N.E., Bellevue, Washington 98004. The Company owns three full-service leasing facilities in Texas and leases one in Texas and one in Illinois. The Company owns used truck sales facilities in South Carolina, Illinois and Utah, and leases one facility in California.

Other offices and leasing facilities of the Company are located in leased premises including one facility owned by PACCAR and four facilities leased by PACCAR. The Company considers all its properties to be suitable for their intended purpose. Annual lease rentals for these premises in the aggregate are not material in relation to expenses as a whole.

ITEM 3.

LEGAL PROCEEDINGS

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

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

All outstanding common stock is owned by PACCAR; therefore, there is no trading market in the Company’s common stock.

No dividends were declared in 2017. Dividends in the amount of $100.0 and nil were declared and paid to PACCAR in 2016 and 2015, respectively.

PACCAR Financial Corp.

(Millions of Dollars)

ITEM 6.

SELECTED FINANCIAL DATA

The following table summarizes selected financial data for the Company.

Balance Sheet Data

	As of December 31
	2017		2016		2015		2014		2013
Total Assets	$	8,352.6	$	8,330.5	$	8,050.4	$	7,785.9	$	7,247.6
Total Liabilities		6,782.3		7,157.5		6,873.5		6,726.1		6,302.6
Total Stockholder’s Equity		1,570.3		1,173.0		1,176.9		1,059.8		945.0

Income Statement Data

	Year ended December 31
		2017			2016		2015		2014		2013
Total interest and other revenues	$	672.4		$	623.7	$	604.1	$	563.5	$	545.0
Total expenses		581.1			484.5		421.9		388.5		385.6
Income before income taxes		91.3			139.2		182.2		175.0		159.4
Income taxes (1)		(299.9	)		50.3		69.4		66.4		60.2
Net income	$	391.2		$	88.9	$	112.8	$	108.6	$	99.2

Ratio of Earnings to Fixed Charges
Pursuant to SEC Reporting Requirements (2)	1.98x			2.79x		3.96x		4.20x		3.65x

Ratio of Earnings to Fixed Charges
Pursuant to the Support Agreement	5.64x			6.34x		7.94x		8.41x		7.12x

(1)	The Company’s 2017 income tax benefit was $299.9, primarily due to the change in U.S. tax law in 2017. See “Note I – Income Taxes” in the Notes to the Financial Statements.

(2)

For the purposes of this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense plus a portion of rent expense (which is considered representative of an interest factor). This method of computing the ratio of earnings to fixed charges complies with SEC reporting requirements (see Exhibit 12(a)) but differs from the method called for in the Support Agreement between the Company and PACCAR (see Exhibit 12(b)).

PACCAR Financial Corp.

(Millions of Dollars)

ITEM 7.

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

Results of Operations

2017 Compared to 2016:

	Year ended December 31
		2017		2016	% Change
New business volume by product:
Retail loans and direct financing leases	$	1,452.1	$	1,467.7		(1	)
Equipment on operating leases		501.3		621.4		(19	)
Dealer master notes		201.6		154.0		31
	$	2,155.0	$	2,243.1		(4	)

Average earning assets by product:
Retail loans and direct financing leases	$	4,275.0	$	4,448.2		(4	)
Equipment on operating leases		1,578.3		1,433.4		10
Dealer wholesale financing		925.6		927.6
Dealer master notes		25.5		30.9		(17	)
	$	6,804.4	$	6,840.1		(1	)

Revenue by product:
Retail loans and direct financing leases	$	204.9	$	210.8		(3	)
Equipment on operating leases		392.6		351.4		12
Dealer wholesale financing		28.7		26.0		10
Dealer master notes		.9		1.0		(10	)
Used truck sales, other revenues and fees		45.3		34.5		31
	$	672.4	$	623.7		8

Income before income taxes	$	91.3	$	139.2		(34	)

New Business Volume

New business volume from retail loans and direct financing leases in 2017 decreased 1% from 2016 due to a lower share of retail sales financed in 2017. Equipment on operating leases new business volume decreased 19% in 2017 from 2016, attributable to lower fleet business in 2017. Dealer master notes new business volume in 2017 increased 31% from 2016 due to increased finance volume from dealers.

Market share on financing of new PACCAR trucks was 21.2% in 2017 compared to 23.3% in 2016 due to less operating lease fleet business.

The Company has programs to assign new lease and loan contracts to third parties to limit the risk of portfolio concentration with certain large customers and to generate new business. These transactions are accounted for as sales of the related retail loans, direct financing leases, or equipment on operating leases, and are excluded from new business volume. The Company sold retail loans and direct financing leases with a book value of $25.0 and $16.2 in 2017 and 2016, and received cash proceeds of $25.6 and $16.5 in 2017 and 2016, respectively. The Company sold equipment under operating leases with a book value of $6.9 and $4.8 in 2017 and 2016, and received cash proceeds of $7.1 and $5.0 in 2017 and 2016, respectively. The Company retains servicing responsibilities for these retail loans and leases, and fees received for servicing are deferred and recognized over the contract term.

Income Before Income Taxes

The Company’s income before income taxes was $91.3 in 2017 compared to $139.2 in 2016. The decrease in income before income taxes in 2017 was primarily the result of lower operating lease margin of $27.3 and lower finance margin of $20.0.

Included in Other assets on the Company’s Balance Sheets are used trucks held for sale, net of impairments, of $139.8 at December 31, 2017 and $205.5 at December 31, 2016. These trucks are primarily units returned from matured operating leases in the ordinary

PACCAR Financial Corp.

(Millions of Dollars)

course of business, and also includes trucks acquired from repossessions or through acquisitions of used trucks in trades related to new truck sales.

In 2017, the Company recognized losses on used trucks, excluding repossessions, of $47.4 in 2017 and $18.4 in 2016, including losses on multiple unit transactions of $26.7 in 2017 and $3.1 in 2016. Used truck losses related to repossessions, which are recognized as credit losses, were $4.9 in 2017 compared to $2.4 in 2016.

Revenue and Expenses

The major factors for the changes in interest and fee income, interest and other borrowing costs and finance margin in 2017 compared to 2016 are summarized below:

				Interest and
	Interest and			Other Borrowing			Finance
	Fee Income			Costs			Margin
2016	$	239.1		$	84.2		$	154.9
(Decrease) increase
Average finance receivables		(7.5	)					(7.5	)
Average receivables from PACCAR and affiliates		.7						.7
Average debt balances					(.6	)		.6
Yields		3.8						3.8
Borrowing rates					17.6			(17.6	)
Total (decrease) increase		(3.0	)		17.0			(20.0	)
2017	$	236.1		$	101.2		$	134.9

•

Average finance receivables in 2017 decreased $180.6 as a result of retail portfolio collections exceeding new business volume.

•

Average receivables from PACCAR and affiliates increased $40.8 in 2017 as a result of new loans to affiliated companies exceeding collections.

•

Average debt balances decreased $32.1 in 2017. The lower average debt balances reflect funding for the lower average earning asset portfolio, including retail loans, finance leases, wholesale financing and equipment on operating leases.

•

Yields increased primarily due to higher yields on receivables from PACCAR and affiliates (1.65% in 2017, compared to 1.33% in 2016). Yields on customer finance receivables were 4.16% in 2017, compared to 4.15% in 2016.

•

Average borrowing rates in 2017 were 1.7% compared to 1.4% in 2016 due to higher debt market interest rates.

The major factors for the changes in operating lease and rental revenues, depreciation and other rental expenses and operating lease margin in 2017 compared to 2016 are summarized below:

	Operating Lease		Depreciation
	and Rental		and Other			Operating
	Revenues		Rental Expenses			Lease Margin
2016	$	351.4	$	306.4		$	45.0
Increase (decrease)
Operating lease impairment				9.0			(9.0	)
Results on returned lease assets				28.1			(28.1	)
Average operating lease assets		38.8		32.4			6.4
Revenue and cost per asset		2.4		(1.0	)		3.4
Total increase (decrease)		41.2		68.5			(27.3	)
2017	$	392.6	$	374.9		$	17.7

•

Operating lease impairments increased in 2017 reflecting higher operating lease assets and lower used truck market prices.

•

Results on returned lease assets were lower in 2017 compared to 2016 primarily due to higher losses on sales of returned lease units.

PACCAR Financial Corp.

(Millions of Dollars)

•

Average operating lease assets increased due to higher demand for leased vehicles compared to the volume of expiring lease s.

•

Revenue per asset increased driven by higher rental utilization. Cost per asset decreased due to lower vehicle related expenses, including lower fuel expenses.

Used truck sales and other revenues and cost of used truck sales and other expenses are summarized below for 2017 compared to 2016:

	Year ended December 31
		2017		2016
Used truck sales and other revenues	$	43.7	$	33.2
Cost of used truck sales and other expenses		40.1		32.1
Results from used trucks and other	$	3.6	$	1.1

Results from used trucks and other increased by $2.5 in 2017, primarily due to improved results from the sale of used trucks received on trade.

Allowance for Credit Losses

	Year ended December 31
		2017			2016
Balance at beginning of period	$	59.4		$	59.3
Provision for losses		12.0			12.3
Charge-offs		(14.9	)		(13.5	)
Recoveries		1.9			1.3
Balance at end of period	$	58.4		$	59.4

Ratios:
Charge-offs, net of recoveries ($13.0 in 2017) to average total portfolio ($5,226.1 in 2017)		.25	%		.23	%

Allowance for credit losses ($58.4 in 2017) to year-end total portfolio ($5,312.6 in 2017)		1.10	%		1.12	%

Year-end retail loan and lease receivables past due over 30 days ($18.0 in 2017) to year-end retail loan and lease receivables ($4,309.3 in 2017)		.42	%		.30	%

The provision for losses on receivables was $12.0 in 2017 compared to $12.3 in 2016, reflecting continued good portfolio performance .

Retail loan and lease receivables past due over 30 days was .42% at December 31, 2017 compared to .30% at December 31, 2016 primarily due to two fleet customers becoming past due at December 31, 2017. The Company continues to focus on maintaining low past due balances.

The estimation methods and factors considered for determining the allowance during the periods included in this filing have been consistently applied. See “Critical Accounting Policies”, “Note A – Significant Accounting Policies” and “Note B – Finance and Other Receivables” for additional discussion regarding the Allowance for Credit Losses.

Modifications

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

PACCAR Financial Corp.

(Millions of Dollars)

modifies loans and finance leases for credit reasons and grants a concession, the modifications are classified as troubled debt restructurings (TDR).

The post-modification balances of accounts modified during 2017 and 2016 are summarized below:

	Year ended December 31
	2017					2016
	Recorded Investment		% of Total Portfolio*			Recorded Investment		% of Total Portfolio*

Commercial	$	151.0		2.9	%	$	205.7		3.9	%
Insignificant Delay		67.9		1.3	%		69.1		1.3	%
Credit - No Concession		7.6		.1	%		6.3		.1	%
Credit - TDR		11.3		.2	%		17.8		.4	%
	$	237.8		4.5	%	$	298.9		5.7	%

*	Recorded investment immediately after modification as a percentage of the year-end portfolio balance.

Total modification activity decreased in 2017 compared to 2016. The decrease in modifications for commercial reasons reflects lower volumes of refinancing. The decrease in modifications for insignificant delay reflects fewer fleet customers requesting payment relief for up to three months. Credit - TDR modifications decreased to $11.3 in 2017 from $17.8 in 2016 mainly due to the contract modifications of two fleet customers in 2016.

When the Company modifies a 30+ days past due account, the customer is then generally considered current under the revised contractual terms. The Company modified $.3 of accounts during the fourth quarter of 2017 and $.7 of accounts during the fourth quarter of 2016 that were 30+ days past due and became current at the time of modification. Had these accounts not been modified and had they continued to not make payments, the pro forma percentage of retail loan and lease accounts 30+ days past due would have been as follows:

	As of December 31
	2017			2016
Pro forma percentage of retail loan and lease accounts 30+ days past due		.42	%		.32	%

Modification of accounts in prior quarters that were more than 30 days past due at the time of modification are included in past dues if they were not performing under the modified terms at December 31, 2017 and 2016. The effect of the allowance for credit losses from such modifications was not significant at December 31, 2017 and 2016.

Portfolio

The Company’s portfolio is concentrated with customers in the heavy- and medium-duty truck transportation industry. The portfolio is comprised of retail loans and leases, dealer wholesale financing and dealer master notes as follows:

	December 31				December 31
	2017				2016
Retail loans	$	2,908.3	55	%	$	2,948.6	56	%
Retail leases		1,401.0	26	%		1,495.7	28	%
Dealer wholesale financing		913.8	18	%		760.3	15	%
Dealer master notes		18.3				23.8
Operating lease and other trade receivables		71.2	1	%		65.9	1	%
Total portfolio	$	5,312.6	100	%	$	5,294.3	100	%

Retail loans and retail leases decreased to $2,908.3 and $1,401.0 at December 31, 2017 from $2,948.6 and $1,495.7 at December 31, 2016, reflecting collections exceeding new business volume.

Dealer wholesale financing balances increased to $913.8 at December 31, 2017 from $760.3 at December 31, 2016 due to higher dealer new truck inventory.

PACCAR Financial Corp.

(Millions of Dollars)

Dealer master notes were $18.3 at December 31, 2017 compared to $23.8 at December 31, 2016. The dealer may pay the loans early or make additional draws up to specified balances of the contracts pledged to the Company. As of December 31, 2017, the underlying pledged contracts were $95.1 of which the dealers have $39.3 as potenti al additional borrowing capacity.

Income Taxes

The Company’s effective income tax rate was a benefit of (328.5)% for 2017 compared to a provision of 36.1% for 2016. The primary difference in tax rates was due to the change in U.S. tax law in 2017 as further explained below.

The Company’s estimated effective tax rate for 2018 is estimated at 24.0% to 25.0%, reflecting the reduced federal tax rate of 21.0% and other provisions of the Tax Act.

The Company is included in the consolidated federal income tax return of PACCAR. Federal income taxes for the Company are determined on a separate return basis. State income taxes, where the Company files combined tax returns with PACCAR, are determined on a blended statutory rate, which is substantially the same as the rate computed on a separate return basis.

During 2017, the Company’s deferred income tax benefit was $208.0 compared to $30.2 deferred income tax provision during 2016. The Company’s net deferred tax liability decreased to $597.9 at December 31, 2017 from $804.9 at December 31, 2016 primarily due to the reduction in the Federal tax rate. Deferred taxes are impacted by new business volume and the accelerated depreciation deduction rate under U.S. tax law. The difference in the timing of depreciation for financial statement and income tax purposes does not impact operating results and is not expected to have a significant impact on liquidity in 2018.

2016 Compared to 2015:

	Year ended December 31
		2016		2015	% Change
New business volume by product:
Retail loans and direct financing leases	$	1,467.7	$	1,744.1		(16	)
Equipment on operating leases		621.4		518.2		20
Dealer master notes		154.0		217.5		(29	)
	$	2,243.1	$	2,479.8		(10	)

Average earning assets by product:
Retail loans and direct financing leases	$	4,448.2	$	4,308.7		3
Equipment on operating leases		1,433.4		1,353.0		6
Dealer wholesale financing		927.6		1,017.3		(9	)
Dealer master notes		30.9		59.9		(48	)
	$	6,840.1	$	6,738.9		2

Revenue by product:
Retail loans and direct financing leases	$	210.8	$	201.0		5
Equipment on operating leases		351.4		337.0		4
Dealer wholesale financing		26.0		26.7		(3	)
Dealer master notes		1.0		1.9		(47	)
Used truck sales, other revenues and fees		34.5		37.5		(8	)
	$	623.7	$	604.1		3

Income before income taxes	$	139.2	$	182.2		(24	)

PACCAR Financial Corp.

(Millions of Dollars)

New Business Volume

New business volume from retail loans and direct financing leases in 2016 decreased 16% from 2015 due to lower retail sales of PACCAR trucks in 2016. Equipment on operating leases new business volume increased 20% in 2016 from 2015, attributable to higher fleet business in 2016. Dealer master notes new business volume in 2016 decreased 29% from 2015 due to lower retail truck sales resulting in decreased finance volume from dealers.

Market share on new PACCAR trucks was 23.3% in 2016 compared to 22.4% in 2015 due to increased fleet business.

The Company has programs to assign new lease and loan contracts to third parties to limit the risk of portfolio concentration with certain large customers and to generate new business. These transactions are accounted for as sales of the related retail loans, direct financing leases, or equipment on operating leases, and are excluded from new business volume. The Company sold retail loans and direct financing leases with a book value of $16.2 and $6.2 in 2016 and 2015, and received cash proceeds of $16.5 and $6.3 in 2016 and 2015, respectively. The Company sold equipment under operating leases with a book value of $4.8 and $11.3 in 2016 and 2015, and received cash proceeds of $5.0 and $11.6 in 2016 and 2015, respectively. The Company retains servicing responsibilities for these retail loans and leases, and fees received for servicing are deferred and recognized over the contract term.

Income Before Income Taxes

The Company’s income before income taxes was $139.2 in 2016 compared to $182.2 in 2015. The decrease in income before income taxes in 2016 was the result of lower operating lease margin of $18.5, lower finance margin of $12.6, higher provision for losses of $4.9, lower results from used trucks and other of $4.7, and higher selling, general and administrative expenses of $2.3.

Revenue and Expenses

The major factors for the changes in interest and fee income, interest and other borrowing costs and finance margin in 2016 compared to 2015 are summarized below:

				Interest and
	Interest and			Other Borrowing		Finance
	Fee Income			Costs		Margin
2015	$	234.9		$	67.4	$	167.5
Increase (decrease)
Average finance receivables		.9					.9
Average receivables from PACCAR and affiliates		(.4	)				(.4	)
Average debt balances					.5		(.5	)
Yields		3.7					3.7
Borrowing rates					16.3		(16.3	)
Total increase (decrease)		4.2			16.8		(12.6	)
2016	$	239.1		$	84.2	$	154.9

•

Average finance receivables in 2016 increased $20.8 as a result of retail portfolio new business volume exceeding collections.

•

Average receivables from PACCAR and affiliates decreased $33.5 in 2016 as a result of collections exceeding new loans to affiliated companies.

•

Average debt balances increased $34.2 in 2016. The higher average debt balances reflect funding for the higher average earning asset portfolio, including retail loans and finance leases and operating leases.

•

Average yields on finance receivables were 4.2% in 2016, compared to 4.1% in 2015. Yields increased primarily due to higher yields on receivables from PACCAR and affiliates (1.3% in 2016, compared to 1.1% in 2015).

•

Average borrowing rates in 2016 were 1.4% compared to 1.2% in 2015 due to higher debt market interest rates.

PACCAR Financial Corp.

(Millions of Dollars)

The major factors for the changes in operating lease and rental revenues, depreciation and other rental expenses and operating lease margin in 2016 compared to 2015 are summarized below:

	Operating Lease			Depreciation
	and Rental			and Other			Operating
	Revenues			Rental Expenses			Lease Margin
2015	$	337.0		$	273.5		$	63.5
Increase (decrease)
Operating lease impairment				10.6				(10.6	)
Results on returned lease assets					8.8			(8.8	)
Average operating lease assets		20.6			17.4			3.2
Revenue and cost per asset		(6.2	)		(3.9	)		(2.3	)
Total increase (decrease)		14.4			32.9			(18.5	)
2016	$	351.4		$	306.4		$	45.0

•

Operating lease impairments increased in 2016 reflecting lower used truck market prices.

•

Results on returned lease assets were lower in 2016 compared to 2015 primarily due to lower margin per unit sold.

•

Average operating lease assets increased as a result of higher volume of equipment placed in service from higher demand for leased vehicles.

•

Revenue per asset decreased driven by lower rental utilization and fuel surcharge revenue. Cost per asset decreased due to lower vehicle related expenses, including lower fuel expenses.

Used truck sales and other revenues and cost of used truck sales and other expenses are summarized below for 2016 compared to 2015:

	Year ended December 31
		2016		2015
Used truck sales and other revenues	$	33.2	$	32.2
Cost of used truck sales and other expenses		32.1		26.4
Results from used trucks and other	$	1.1	$	5.8

Results from used trucks and other decreased by $4.7, primarily due to impairments and loss on sales of used trucks resulting from lower used truck market prices ($1.5), and higher insurance expense ($1.3).

Allowance for Credit Losses

	Year ended December 31
		2016			2015
Balance at beginning of period	$	59.3		$	56.0
Provision for losses		12.3			7.4
Charge-offs		(13.5	)		(6.0	)
Recoveries		1.3			1.9
Balance at end of period	$	59.4		$	59.3

Ratios:
Charge-offs, net of recoveries ($12.2 in 2016) to average total portfolio ($5,406.7 in 2016)		.23	%		.08	%

Allowance for credit losses ($59.4 in 2016) to year-end total portfolio ($5,294.3 in 2016)		1.12	%		1.07	%

Year-end retail loan and lease receivables past due over 30 days ($13.5 in 2016) to year-end retail loan and lease receivables ($4,444.3 in 2016)		.30	%		.31	%

The provision for losses on receivables increased to $12.3 in 2016 from $7.4 in 2015 primarily due to losses from customers associated with the oil and gas exploration business.

PACCAR Financial Corp.

(Millions of Dollars)

Charge-offs, net of recoveries increased to $12.2 in 2016 from $4.1 in 2015 primarily due to customers associated with the oil and gas exploration business.

Retail loan and lease receivables past due over 30 days was .30% at December 31, 2016 compared to .31% at December 31, 2015. The Company continues to focus on maintaining low past due balances.

Modifications

The post-modification balances of accounts modified during 2016 and 2015 are summarized below:

	Year ended December 31
	2016					2015
	Recorded Investment		% of Total Portfolio*			Recorded Investment		% of Total Portfolio*
Commercial	$	205.7		3.9	%	$	114.7		2.1	%
Insignificant Delay		69.1		1.3	%		39.1		.7	%
Credit - No Concession		6.3		.1	%		2.2
Credit - TDR		17.8		.4	%		10.4		.2	%
	$	298.9		5.7	%	$	166.4		3.0	%

*	Recorded investment immediately after modification as a percentage of the year-end portfolio balance.

Total modification activity increased in 2016 compared to 2015, primarily due to modifications for commercial reasons reflecting higher volumes of refinancing, including contract modifications for one large customer. The increase in modifications for insignificant delay reflects more fleet customers requesting payment relief for up to three months. The increase in modifications for credit - TDR is due to the contract modifications of two large fleet customers in 2016.

When the Company modifies a 30+ days past due account, the customer is then generally considered current under the revised contractual terms. The Company modified $.7 of accounts during the fourth quarter of 2016 and $.1 of accounts during the fourth quarter of 2015 that were 30+ days past due and became current at the time of modification. Had these accounts not been modified and had they continued to not make payments, the pro forma percentage of retail loan and lease accounts 30+ days past due would have been as follows:

	As of December 31
	2016			2015
Pro forma percentage of retail loan and lease accounts 30+ days past due		.32	%		.31	%

Modification of accounts in prior quarters that were more than 30 days past due at the time of modification are included in past dues if they were not performing under the modified terms at December 31, 2016 and 2015. The effect of the allowance for credit losses from such modifications was not significant at December 31, 2016 and 2015.

PACCAR Financial Corp.

(Millions of Dollars)

Portfolio

	December 31				December 31
	2016				2015
Retail loans	$	2,948.6	56	%	$	2,898.4	52	%
Retail leases		1,495.7	28	%		1,552.0	28	%
Dealer wholesale financing		760.3	15	%		967.1	18	%
Dealer master notes		23.8				43.0	1	%
Operating lease and other trade receivables		65.9	1	%		62.1	1	%
Total portfolio	$	5,294.3	100	%	$	5,522.6	100	%

Retail loans increased to $2,948.6 at December 31, 2016 from $2,898.4 at December 31, 2015, due to new business volume exceeding collections.

Retail leases decreased to $1,495.7 at December 31, 2016 from $1,552.0 at December 31, 2015 reflecting collections exceeding new business volume.

Dealer wholesale financing balances decreased to $760.3 at December 31, 2016 from $967.1 at December 31, 2015 due to lower dealer new truck inventory.

Dealer master notes were $23.8 at December 31, 2016 compared to $43.0 at December 31, 2015. The dealer may pay the loans early or make additional draws up to specified balances of the contracts pledged to the Company. As of December 31, 2016, the underlying pledged contracts were $104.7 of which the dealers have $51.6 as potential additional borrowing capacity.

Income Taxes

The Company’s effective income tax rate was 36.1% for 2016 compared to 38.1% for 2015, reflecting lower deferred state tax expense in 2016 compared to 2015 as a result of a lower state tax rate on the deferred tax liabilities.

During 2016, the Company’s deferred income tax provision was $30.2 compared to $7.9 during 2015. The Company’s net deferred tax liability increased to $804.9 at December 31, 2016 from $773.7 at December 31, 2015 primarily due to higher benefits from accelerated depreciation. Deferred taxes are impacted by new business volume and the accelerated depreciation deduction rate under U.S. tax law. The difference in the timing of depreciation for financial statement and income tax purposes does not impact operating results. The impact on liquidity in 2017 was not significant.

Company Outlook

Average earning assets in 2018 are expected to be comparable to 2017. Current good levels of freight tonnage, freight rates and fleet utilization are contributing to customers’ profitability and cash flow. If current freight transportation conditions decline due to weaker economic conditions, then past due accounts, truck repossessions and credit losses would likely increase from the current low levels and new business volume would likely decline. See the Forward Looking Statements section of Management’s Discussion and Analysis for factors that may affect this outlook.

PACCAR Financial Corp.

(Millions of Dollars)

Funding and Liquidity

The Company’s debt ratings at December 31, 2017 are as follows:

	Standard
	and Poor's	Moody's
Commercial paper	A-1	P-1
Senior unsecured debt	A+	A1

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.

The Company participated with PACCAR and certain other PACCAR affiliates in syndicated credit facilities of $3,000 at December 31, 2017. Of this amount, $1,000.0 expires in June 2018, $1,000.0 expires in June 2021 and $1,000.0 expires in June 2022. PACCAR and the Company intend to replace these credit facilities on or before expiration with facilities of similar amounts and duration.

The Company issues commercial paper and medium-term notes to fund its financing and leasing operations. 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. The total principal amounts of commercial paper and medium-term notes outstanding for the Company as of December 31, 2017 were $1,438.7 and $4,450.0, respectively.

The Company believes its current investment grade credit ratings of A+/A1, syndicated bank lines, collections on existing loans and leases and its ability to borrow from PACCAR, if necessary, will continue to provide it with sufficient resources and access to capital markets at competitive interest rates to maintain its liquidity and financial stability. In the event of a decrease in the Company’s credit ratings or a disruption in the financial markets, the Company may not be able to refinance its maturing debt in the financial markets. In such circumstances, the Company would be exposed to liquidity risk to the degree that the timing of debt maturities differs from the timing of receivable collections from customers. The Company believes its various sources of liquidity would continue to provide it with sufficient funding resources to service its maturing debt obligations.

The following summarizes the Company’s contractual cash commitments at December 31, 2017:

	Maturity
	Within						More than
	1 Year		1-3 Years		3-5 Years		5 Years	Total
Borrowings*	$	2,738.7	$	2,350.0	$	800.0		$	5,888.7
Interest on debt**		69.5		74.8		14.5			158.8
Operating leases		1.0		3.1		1.2			5.3
Total	$	2,809.2	$	2,427.9	$	815.7		$	6,052.8

*	Commercial paper included in borrowings is at par value.

**	Interest on floating rate debt is based on the applicable market rates at December 31, 2017.

As described in “Note G – Borrowings” in the Notes to the Financial Statements, borrowings consist of medium-term notes and commercial paper. The Company has operating leases for office space, truck leasing facilities and office equipment.

PACCAR Financial Corp.

(Millions of Dollars)

In addition, the Company had loan and lease commitments of $303.4 expiring within one year. These commitments represent commitments to fund new retail loan and lease contracts.

Critical Accounting Policies

The Company’s significant accounting policies are disclosed in “Note A – Significant Accounting Policies” in the Notes to the 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 C – Equipment on Operating Leases” in the Notes to the Financial Statements. In determining its estimate of the residual value of such vehicles, the Company considers the length of the lease term, the truck model, the expected usage of the truck and anticipated market demand. Operating lease terms generally range from three to five years. The resulting residual values on operating leases generally range between 30% and 60% of original equipment cost. If the sales price of the trucks at the end of the term of the agreement differs from the Company’s estimated residual value, a gain or loss will result.

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

During 2017 and 2016, market values on equipment returning upon operating lease maturity were generally lower than the residual values on the equipment, resulting in additional depreciation expense of $37.4 and $8.4, respectively. During 2015, market values on equipment returning upon operating lease maturity were generally higher than the residual values on the equipment, resulting in a reduction in depreciation expense of $6.8.

At December 31, 2017, the aggregate residual value of equipment on operating leases was $938.5. If a 10% decrease in used truck values persisted over the remaining maturities of the Company’s operating leases, it would reduce residual value estimates and result in the Company recording approximately $18.8 of additional depreciation per year.

Allowance for Credit Losses

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

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

PACCAR Financial Corp.

(Millions of Dollars)

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

The Company evaluates finance receivables that are not individually impaired on a collective basis and determines the general allowance for credit losses for both retail and wholesale receivables based on historical loss information, using past due account data and current market conditions. Information used includes assumptions regarding the likelihood of collecting current and past due accounts, repossession rates, the recovery rate on the underlying collateral based on used truck values and other pledged collateral or recourse.

The Company has developed a range of loss estimates for its portfolio based on historical experience, taking into account loss frequency and severity in both strong and weak truck market conditions. A projection is made of the range of estimated credit losses inherent in the portfolio from which an amount is determined as probable based on current market conditions and other factors impacting the creditworthiness of the Company’s borrowers and their ability to repay. After determining the appropriate level of the allowance for credit losses, a provision for losses on finance receivables is charged to income as necessary to reflect management’s estimate of incurred credit losses, net of recoveries, inherent in the portfolio.

The adequacy of the allowance is evaluated quarterly based on the most recent past due account information and current market conditions. As accounts become past due, the likelihood that they will not be fully collected increases. The Company’s experience indicates the probability of not fully collecting past due accounts ranges between 20% and 70%. Over the past three years, the Company’s year-end 30+ days past due accounts have ranged between .30% and .42% of loan and lease receivables .

Historically, a 100 basis point increase in the 30+ days past due percentage has resulted in an increase in credit losses of 5 to 35 basis points of receivables. As of December 31, 2017, 30+ days past dues were .42%. If past dues were 100 basis points higher or 1.42% as of December 31, 2017, the Company’s estimate of credit losses would likely have increased by a range of $2 million to $15 million depending on the extent of the past dues, the estimated value of the collateral as compared to amounts owed and general economic factors.

Forward-Looking Statements

This Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements relating to future results of operations or financial position and any other statement that does not relate to any historical or current fact. Such statements are based on currently available operating, financial and other information and are subject to risks and uncertainties that may affect actual results. Risks and uncertainties include, but are not limited to: national and local economic, political and industry conditions; changes in the levels of new business volume due to unit fluctuations in new PACCAR truck sales or reduced market share; changes in competitive factors; changes affecting the profitability of truck owners and operators; price changes impacting equipment costs and residual values; changes in interest rates and other operating costs; insufficient liquidity in the capital markets and availability of other funding sources; cybersecurity risks to the Company’s information technology systems; litigation involving the Company or affiliated entities; and legislation and governmental regulation.

PACCAR Financial Corp.

(Millions of Dollars)

ITEM 7A.

QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK

Market Risk and Derivative Financial Instruments

In the normal course of business, the Company issues various financial instruments that expose the Company to market risk associated with market interest rates. Policies and procedures have been established by the Company to manage these market risks through the use of various derivative financial instruments. The Company does not engage in derivatives trading, market-making or other speculative activities.

The following is a sensitivity analysis for the Company’s assets and liabilities that have interest-rate risk. 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)

	Year ended December 31
		2017		2016
Assets
Fixed rate loans	$	(51.9	)	$	(54.8	)
Due from PACCAR		(21.1	)		(14.0	)
Due from foreign finance affiliates		(3.7	)		(5.4	)
Interest rate swaps related to debt		8.2			.5

Liabilities
Fixed rate debt		77.1			82.2
Interest rate swaps related to debt		(2.1	)		(.5	)
Total	$	6.5		$	8.0

The Company’s debt as of December 31, 2017 and 2016 consisted of commercial paper and floating and fixed rate medium-term notes.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

Report of Independent Regist ered Public Accounting Firm

Board of Directors

PACCAR Inc and PACCAR Financial Corp.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of PACCAR Financial Corp. (a wholly-owned subsidiary of PACCAR Inc) (the Company) as of December 31, 2017 and 2016, and the related statements of income, comprehensive income, stockholder’s equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

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 are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1961.

Seattle, Washington

February 21, 2018

PACCAR Financial Corp.

STATEMENTS OF INCOME
	Year ended December 31
(Millions of Dollars)		2017			2016		2015
Interest and fee income	$	236.1		$	239.1	$	234.9
Operating lease and rental revenues		392.6			351.4		337.0
Used truck sales and other revenues		43.7			33.2		32.2
TOTAL INTEREST AND OTHER REVENUES		672.4			623.7		604.1

Interest and other borrowing costs		101.2			84.2		67.4
Depreciation and other rental expenses		374.9			306.4		273.5
Cost of used truck sales and other expenses		40.1			32.1		26.4
Selling, general and administrative expenses		52.9			49.5		47.2
Provision for losses on receivables		12.0			12.3		7.4
TOTAL EXPENSES		581.1			484.5		421.9

INCOME BEFORE INCOME TAXES		91.3			139.2		182.2

Income taxes (benefit) expense		(299.9	)		50.3		69.4
NET INCOME	$	391.2		$	88.9	$	112.8

Earnings per share and dividends per share are not reported because the Company is a wholly owned subsidiary of PACCAR.

STATEMENTS OF COMPREHENSIVE INCOME
	Year ended December 31
(Millions of Dollars)		2017			2016			2015
Net income	$	391.2		$	88.9		$	112.8
Other comprehensive income (loss)
Unrealized income (losses) on derivative contracts
Income (losses) arising during the period		1.2			(.8	)		(7.5	)
Tax effect		(.4	)		.3			2.9
Reclassification adjustment		1.4			3.5			7.2
Tax effect		(.6	)		(1.3	)		(2.8	)
Net other comprehensive income (loss)		1.6			1.7			(.2	)
TOTAL COMPREHENSIVE INCOME	$	392.8		$	90.6		$	112.6

See Notes to Financial Statements.

PACCAR Financial Corp.

BALANCE SHEETS
	December 31		December 31
(Millions of Dollars)		2017		2016

ASSETS

Cash	$	62.7	$	46.6
Finance and other receivables, net of allowance for losses (2017 - $58.4 and 2016 - $59.4)		5,254.2		5,234.9
Due from PACCAR and affiliates		1,236.3		1,265.5
Equipment on operating leases, net of accumulated depreciation (2017 - $630.6 and 2016 - $548.2)		1,592.6		1,522.9
Other assets		206.8		260.6
TOTAL ASSETS	$	8,352.6	$	8,330.5

LIABILITIES

Accounts payable, accrued expenses and other	$	288.4	$	252.3
Due to PACCAR and affiliates		20.2		16.2
Commercial paper		1,437.8		1,343.5
Medium-term notes		4,433.4		4,733.5
Deferred taxes and other liabilities		602.5		812.0
TOTAL LIABILITIES		6,782.3		7,157.5

STOCKHOLDER'S EQUITY

Preferred stock, par value $100 per share, 6% noncumulative and nonvoting, 450,000 shares authorized, 310,000 shares issued and outstanding		31.0		31.0
Common Stock, par value $100 per share, 200,000 shares authorized, 145,000 shares issued and outstanding		14.5		14.5
Additional paid-in capital		126.8		122.3
Retained earnings		1,396.1		1,004.9
Accumulated other comprehensive income		1.9		.3
TOTAL STOCKHOLDER'S EQUITY		1,570.3		1,173.0
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	8,352.6	$	8,330.5

See Notes to Financial Statements.

PACCAR Financial Corp.

STATEMENTS OF CASH FLOWS
	Year ended December 31
(Millions of Dollars)		2017			2016			2015
OPERATING ACTIVITIES

Net income	$	391.2		$	88.9		$	112.8
Items included in net income not affecting cash:
Depreciation and amortization		356.1			291.9			260.1
Provision for losses on receivables		12.0			12.3			7.4
Deferred taxes		(208.0	)		30.2			7.9
Administrative fees for services from PACCAR		4.5			5.5			4.5
Change in tax-related balances with PACCAR		(112.4	)		(5.6	)		(13.3	)
Increase (decrease) in payables and other		105.6			(36.3	)		(27.7	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		549.0			386.9			351.7

INVESTING ACTIVITIES

Finance and other receivables originated		(1,678.7	)		(1,651.0	)		(1,989.9	)
Collections on finance and other receivables		1,753.1			1,621.5			1,749.0
Net (increase) decrease in wholesale receivables		(153.5	)		206.8			(223.7	)
Loans to PACCAR and affiliates		(225.0	)		(542.0	)		(173.0	)
Collections on loans from PACCAR and affiliates		258.5			380.5			315.0
Net decrease (increase) in other receivables and leases to PACCAR and affiliates		70.5			(58.6	)		117.6
Acquisition of equipment for operating leases, primarily from PACCAR		(501.4	)		(624.0	)		(518.2	)
Proceeds from disposal of equipment		170.3			132.9			180.1
Other		(17.5	)		5.3

NET CASH USED IN INVESTING ACTIVITIES		(323.7	)		(528.6	)		(543.1	)

FINANCING ACTIVITIES

Dividends paid					(100.0	)
Net increase (decrease) in short-term commercial paper		95.7			(89.4	)		(65.4	)
Proceeds from medium-term notes and other commercial paper		996.5			1,597.8			1,306.2
Payments of medium-term notes and other commercial paper		(1,301.4	)		(1,255.4	)		(1,057.0	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(209.2	)		153.0			183.8
NET INCREASE (DECREASE) IN CASH		16.1			11.3			(7.6	)
CASH AT BEGINNING OF YEAR		46.6			35.3			42.9
CASH AT END OF YEAR	$	62.7		$	46.6		$	35.3

See Notes to Financial Statements .

PACCAR Financial Corp.

STATEMENTS OF STOCKHOLDER’S EQUITY
	Year ended December 31
(Millions of Dollars)		2017		2016			2015
PREFERRED STOCK, $100 par value

Balance at beginning of year	$	31.0	$	31.0		$	31.0
Balance at end of year		31.0		31.0			31.0

COMMON STOCK, $100 par value

Balance at beginning of year		14.5		14.5			14.5
Balance at end of year		14.5		14.5			14.5

ADDITIONAL PAID-IN CAPITAL

Balance at beginning of year		122.3		116.8			112.3
Investments from PACCAR		4.5		5.5			4.5
Balance at end of year		126.8		122.3			116.8

RETAINED EARNINGS

Balance at beginning of year		1,004.9		1,016.0			903.2
Net income		391.2		88.9			112.8
Dividends paid				(100.0	)
Balance at end of year		1,396.1		1,004.9			1,016.0

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated unrealized net gain (loss) on derivative contracts:
Balance at beginning of year		.3		(1.4	)		(1.2	)
Net unrealized gain (loss)		1.6		1.7			(.2	)
Balance at end of year		1.9		.3			(1.4	)
TOTAL STOCKHOLDER’S EQUITY	$	1,570.3	$	1,173.0		$	1,176.9

See Notes to Financial Statements .

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

NOTE A – SIGNIFICANT ACCOUNTING POLICIES

Description of Operations and Basis of Presentation :

PACCAR Financial Corp. (the “Company”), is a wholly owned subsidiary of PACCAR Inc (“PACCAR”). The Company primarily provides financing of PACCAR manufactured trucks and related equipment sold by authorized dealers. The Company also finances dealer inventories of transportation equipment and franchises Kenworth and Peterbilt dealerships to engage in full-service and finance leasing. The operations of the Company are fundamentally affected by its relationship with PACCAR.

Due to the nature of the Company’s business, customers are concentrated in the transportation industry throughout the United States. Generally, all receivables are collateralized by the equipment being financed. The risk of credit losses related to this concentration has been considered in establishing the allowance for credit losses.

Use of Estimates :

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.

Finance and Other Receivables:

Loans – Loans represent fixed or floating rate loans to customers or dealers 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 Kenworth and Peterbilt dealers for new and used trucks and are recorded at amortized cost. The loans are collateralized by the trucks being financed.

Operating lease receivables and other – Operating lease receivables and other include monthly rentals due on operating leases, unamortized loan and lease origination costs, interest on loans and other amounts due within one year in the normal course of business.

Allowance for Credit Losses:

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

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

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

On average, modifications extended contractual terms by approximately three months in 2017 and 2016 and did not have a significant effect on the weighted average term or interest rate of the total portfolio at December 31, 2017 or 2016.

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

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

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

Accounts are charged off against the allowance for credit losses when, in the judgment of management, they are considered uncollectible, which generally occurs 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 a partial charge-off. The charge-off is determined by comparing the fair value of the collateral, less cost to sell, to the recorded investment.

Revenue Recognition :

Interest income from finance and other receivables is recognized using the interest method. Certain loan and lease 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

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

method which approximates the interest method. For operating lease s, 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, no finance receivables more than 90 days past due were accruing interest at December 31, 2017 or December 31, 2016. Recognition is resumed if the receivable becomes current by the payment of all amounts due under the terms of the existing contract and collection of remaining amounts is considered probable (if not contractually modified) or if the customer makes scheduled payments for three months and collection of remaining amounts is considered probable (if contractually modified). Payments received while the finance receivable is on non-accrual status are applied to interest and principal in accordance with the contractual terms.

The Company recognizes revenue on the sale of used trucks acquired from PACCAR truck division customers as part of new truck sales packages when the used trucks are invoiced and delivered to a customer.

Equipment on Operating Leases :

Equipment on operating leases is recorded at cost and is depreciated on the straight-line basis to its estimated residual value. Residual values are reviewed regularly and adjusted if market conditions warrant.

Derivative Financial Instruments:

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

All of the Company’s interest-rate contracts are transacted under International Swaps and Derivatives Association (ISDA) master agreements. Each agreement permits the net settlement of amounts owed in the event of default and certain other termination events. The Company has elected not to offset derivative positions in the balance sheet with the same counterparty under the same agreements and is not required to post or receive collateral. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company’s maximum exposure to potential default of its swap counterparties is limited to the asset position of its swap portfolio. The asset position of the Company’s swap portfolio was $3.1 at December 31, 2017.

The Company uses regression analysis to assess effectiveness of interest-rate contracts on a quarterly basis. 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 in current earnings. Hedge accounting is discontinued prospectively when the Company determines that a derivative financial instrument has ceased to be a highly effective hedge.

Income Taxes :

The Company is included in the consolidated federal income tax return of PACCAR. Federal income taxes for the Company are determined on a separate return basis, and any related tax liability is paid by the Company to PACCAR and any related tax benefit is paid by PACCAR to the Company. State income taxes, where the Company files combined tax returns with PACCAR, are determined on a blended statutory rate, which is substantially the same as the rate computed on a separate return basis. As of December 31, 2017, the United States Internal Revenue Service has completed examinations of PACCAR’s tax returns for all years through 2011. PACCAR’s tax returns remain subject to examination in most jurisdictions for the years ranging from 2012 through 2017.

Preferred Stock :

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

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

New Accounting Pronouncements:

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02 Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income . The amendment requires a reclassification from accumulated other comprehensive income (AOCI) to retained earnings the difference between the historical corporate income tax rate and the newly enacted income tax rate resulting from the Tax Act. This ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The Company does not expect adoption of the new standard to have a material impact on the Company’s financial statements. The Company expects to early adopt this ASU in 2018.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The amendment in this ASU requires entities having financial assets measured at amortized cost to estimate credit reserves under an expected credit loss model rather than the current incurred loss model. Under this new model, expected credit losses will be based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect collectability. The ASU is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted, but not earlier than annual and interim periods beginning after December 15, 2018. This amendment should be applied on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact on its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which amends the existing accounting standards for leases. Under the new lease standard, lessees will recognize a right-of-use asset and a lease liability for virtually all leases (other than short-term leases). Lessor accounting is largely unchanged. The ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. This ASU requires leases to be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact on its financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers . This ASU amends the existing accounting standards for revenue recognition. Under the new revenue recognition model, a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The FASB has subsequently issued several related ASUs to clarify the implementation guidance in ASU 2014-09. This standard may be applied retrospectively to each prior period presented or modified retrospectively with a cumulative effect recognized as of the date of initial application. The Company expects to adopt this ASU on a modified retrospective basis on January 1, 2018. The Company does not expect adoption of the new standard to have a material impact on the Company’s financial statements as leases and financial instruments, which comprise a majority of the Company’s revenue, are excluded from the scope of this guidance.

On January 1, 2017, the Company adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory . This ASU did not have a material impact on the Company’s financial statements.

The FASB also issued the following standards, which are not expected to have a material impact on the Company’s financial statements.

STANDARD	DESCRIPTION	EFFECTIVE DATE
2016-01*	Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities	January 1, 2018

2016-15*	Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments	January 1, 2018

2017-12**	Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities	January 1, 2019

*The Company expects to adopt on the effective date.

**The Company expects to early adopt on January 1, 2018.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

NOTE B – FINANCE AND OTHER RECEIVABLES

The Company’s finance and other receivables include the following:

	December 31			December 31
		2017			2016
Retail loans	$	2,908.3		$	2,948.6
Retail direct financing leases		1,536.5			1,644.7
Dealer wholesale financing		913.8			760.3
Dealer master notes		18.3			23.8
Operating lease receivables and other		71.2			65.9
Unearned interest on finance leases		(135.5	)		(149.0	)
		5,312.6			5,294.3
Less allowance for credit losses:
Loans and leases		(54.8	)		(56.3	)
Dealer wholesale financing		(2.4	)		(2.0	)
Operating lease receivables and other		(1.2	)		(1.1	)
	$	5,254.2		$	5,234.9

Annual minimum payments due on loans and leases are as follows:

	Loans		Finance leases
2018	$	890.0	$	431.9
2019		767.2		366.7
2020		631.3		303.3
2021		405.2		199.0
2022		175.0		112.9
Thereafter		57.9		65.3
	$	2,926.6	$	1,479.1

Estimated residual values included with finance leases amounted to $57.4 in 2017 and $50.5 in 2016. Experience indicates substantially all of dealer wholesale financing will be repaid within one year. In addition, collection experience indicates that some loans, leases and other finance receivables will be paid prior to contract maturity, while others may be extended or modified.

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

Allowance for Credit Losses

The allowance for credit losses is summarized as follows:

	2017
	Dealer					Customer
	Wholesale		Retail			Retail			Other*			Total
Balance at January 1	$	2.0	$	8.5		$	47.8		$	1.1		$	59.4
Provision (benefit) for losses		.4		(.6	)		11.9			.3			12.0
Charge-offs							(14.6	)		(.3	)		(14.9	)
Recoveries							1.8			.1			1.9
Balance at December 31	$	2.4	$	7.9		$	46.9		$	1.2		$	58.4

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

	2016
	Dealer						Customer
	Wholesale			Retail			Retail			Other*			Total
Balance at January 1	$	2.7		$	9.2		$	46.3		$	1.1		$	59.3
(Benefit) provision for losses		(.7	)		(.7	)		12.9			.8			12.3
Charge-offs								(12.7	)		(.8	)		(13.5	)
Recoveries								1.3						1.3
Balance at December 31	$	2.0		$	8.5		$	47.8		$	1.1		$	59.4

	2015
	Dealer						Customer
	Wholesale			Retail			Retail			Other*			Total
Balance at January 1	$	2.8		$	10.4		$	42.0		$	.8		$	56.0
(Benefit) provision for losses		(.1	)		(1.2	)		8.0			.7			7.4
Charge-offs								(5.5	)		(.5	)		(6.0	)
Recoveries								1.8			.1			1.9
Balance at December 31	$	2.7		$	9.2		$	46.3		$	1.1		$	59.3

*	Operating lease and other trade receivables

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

	Dealer				Customer
At December 31, 2017	Wholesale		Retail		Retail		Total
Recorded investment for impaired finance receivables evaluated individually					$	29.2	$	29.2

Allowance for impaired finance receivables determined individually					$	3.5	$	3.5

Recorded investment for finance receivables evaluated collectively	$	913.8	$	1,156.3	$	3,142.1	$	5,212.2

Allowance for finance receivables determined collectively	$	2.4	$	7.9	$	43.4	$	53.7

	Dealer				Customer
At December 31, 2016	Wholesale		Retail		Retail		Total
Recorded investment for impaired finance receivables evaluated individually					$	31.4	$	31.4

Allowance for impaired finance receivables determined individually					$	2.5	$	2.5

Recorded investment for finance receivables evaluated collectively	$	760.3	$	1,248.7	$	3,188.0	$	5,197.0

Allowance for finance receivables determined collectively	$	2.0	$	8.5	$	45.3	$	55.8

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

	December 31		December 31
		2017		2016
Fleet	$	28.2	$	29.9
Owner/Operator		1.0		1.5
	$	29.2	$	31.4

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

Impaired Loans

Impaired loans are summarized below. The impaired loans with a specific reserve represent the unpaid principal balance. The recorded investment of impaired loans as of December 31, 2017 and 2016 was not significantly different than the unpaid principal balance.

	Dealer		Customer Retail
						Owner/
At December 31, 2017	Wholesale	Retail	Fleet			Operator			Total
Impaired loans with a specific reserve			$	10.7		$	.8		$	11.5
Associated allowance				(2.3	)		(.2	)		(2.5	)
Net carrying amount of impaired loans with a specific reserve				8.4			.6			9.0
Impaired loans with no specific reserve				12.5			.2			12.7
Net carrying amount of impaired loans			$	20.9		$	.8		$	21.7

Average recorded investment for impaired loans			$	21.8		$	1.2		$	23.0

	Dealer		Customer Retail
						Owner/
At December 31, 2016	Wholesale	Retail	Fleet			Operator			Total
Impaired loans with a specific reserve			$	11.3		$	1.1		$	12.4
Associated allowance				(1.9	)		(.2	)		(2.1	)
Net carrying amount of impaired loans with a specific reserve				9.4			.9			10.3
Impaired loans with no specific reserve				10.0			.2			10.2
Net carrying amount of impaired loans			$	19.4		$	1.1		$	20.5

Average recorded investment for impaired loans			$	17.5		$	1.7		$	19.2

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

		2017		2016		2015
Fleet	$	1.2	$	1.0	$	1.0
Owner/Operator		.1		.2		.3
	$	1.3	$	1.2	$	1.3

Credit Quality

The Company’s customers are principally concentrated in the transportation industry in the United States. The Company’s portfolio assets are diversified over a large number of customers and dealers with no single customer or dealer balances representing over 10% of the total portfolio assets as of December 31, 2017 and 2016.

The Company has contractual arrangements with one customer, Swift Transportation Corporation, that accounted for 10.4%, 12.1% and 13.8% of total Interest and other revenues for the years ended December 31, 2017, 2016 and 2015, respectively. The Company retains as collateral a security interest in the related equipment.

At the inception of each contract, the Company considers the credit risk based on a variety of credit quality factors including prior payment experience, customer financial information, credit-rating agency ratings, loan-to-value ratios and other internal metrics. On an ongoing basis, the Company monitors credit quality based on past due status and collection experience as there is a meaningful correlation between the past due status of customers and the risk of loss.

The Company has three credit quality indicators: performing, watch and at-risk. Performing accounts pay in accordance with the contractual terms and are not considered high risk. Watch accounts include accounts 31 to 90 days past due and large accounts that are performing but are considered to be high-risk. Watch accounts are not impaired. At-risk accounts are accounts that are impaired, including TDRs, accounts over 90 days past due and other accounts on non-accrual status.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

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

	Dealer				Customer Retail
							Owner/
At December 31, 2017	Wholesale		Retail		Fleet		Operator		Total
Performing	$	913.8	$	1,156.3	$	2,663.1	$	427.9	$	5,161.1
Watch						50.5		.6		51.1
At-risk						28.2		1.0		29.2
	$	913.8	$	1,156.3	$	2,741.8	$	429.5	$	5,241.4

	Dealer				Customer Retail
							Owner/
At December 31, 2016	Wholesale		Retail		Fleet		Operator		Total
Performing	$	757.4	$	1,248.7	$	2,761.9	$	421.0	$	5,189.0
Watch		2.9				4.4		.7		8.0
At-risk						30.0		1.4		31.4
	$	760.3	$	1,248.7	$	2,796.3	$	423.1	$	5,228.4

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

	Dealer				Customer Retail
							Owner/
At December 31, 2017	Wholesale		Retail		Fleet		Operator		Total
Current and up to 30 days past-due	$	913.8	$	1,156.3	$	2,725.1	$	428.2	$	5,223.4
31 – 60 days past-due						9.0		.8		9.8
Greater than 60 days past-due						7.7		.5		8.2
	$	913.8	$	1,156.3	$	2,741.8	$	429.5	$	5,241.4

	Dealer				Customer Retail
							Owner/
At December 31, 2016	Wholesale		Retail		Fleet		Operator		Total
Current and up to 30 days past-due	$	760.3	$	1,248.7	$	2,784.5	$	421.4	$	5,214.9
31 – 60 days past-due						5.8		.9		6.7
Greater than 60 days past-due						6.0		.8		6.8
	$	760.3	$	1,248.7	$	2,796.3	$	423.1	$	5,228.4

Troubled Debt Restructurings

The balance of TDRs was $16.9 and $18.1 at December 31, 2017 and 2016, respectively. At modification date, the pre- and post-modification recorded investment balances for finance receivables modified during the period by portfolio class are as follows:

	2017				2016
	Recorded Investment				Recorded Investment
	Pre-Modification		Post-Modification		Pre-Modification		Post-Modification
Fleet	$	11.3	$	11.3	$	17.8	$	17.8
Owner/Operator
	$	11.3	$	11.3	$	17.8	$	17.8

The effect on the allowance for credit losses from such modifications was not significant at December 31, 2017 and 2016.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

The post-modification recorded investment of finance receivables modified as TDRs during the previous twelve months that subsequently defaulted (i.e. became more than 30 days past due) during the periods by portfolio class are as follows:

	Year ended December 31
		2017		2016
Fleet	$	4.3	$	.3
Owner/Operator
	$	4.3	$	.3

There were $4.3 of finance receivables modified as TDRs during the last twelve months that subsequently defaulted in 2017, resulting in a specific reserve for one fleet customer of $1.2 as of December 31, 2017. There were $1.4 and nil of finance receivables modified as TDRs during the previous twelve months that subsequently defaulted and were charged off in 2017 and 2016, respectively.

Repossessions

When the Company determines that a customer is not likely to meet its contractual commitments, the Company repossesses the vehicles which serve as collateral for loans, finance leases and equipment under operating leases. The Company records the vehicles as used truck inventory included in Other assets on the Balance Sheets. The balance of repossessed units at December 31, 2017 and 2016 was $7.5 and $15.5, respectively. Proceeds from the sales of repossessed assets were $28.2, $21.5 and $11.6 for the years ended December 31, 2017, 2016 and 2015, respectively. These amounts are included in Proceeds from disposal of equipment on the Statements of Cash Flows. Write-downs of repossessed equipment under operating leases are recorded as impairments and included in Depreciation and other rental expenses on the Statements of Income.

NOTE C – EQUIPMENT ON OPERATING LEASES

Terms of operating leases at origination and the related depreciation, generally range from three to five years. The total future annual minimum rental payments to be received for equipment on non-cancelable operating leases beginning January 1, 2018 of $801.3 are due as follows: $319.1 in 2018, $226.5 in 2019, $145.2 in 2020, $80.2 in 2021, and $30.3 in 2022 and thereafter. Depreciation expense related to equipment on operating leases was $338.9, $275.7 and $245.2 in 2017, 2016 and 2015, respectively. Substantially all equipment on operating leases is manufactured by PACCAR.

NOTE D – TRANSACTIONS WITH PACCAR AND AFFILIATES

The Company and PACCAR are parties to a Support Agreement that obligates PACCAR to provide, when required, financial assistance to the Company to ensure that the Company maintains a ratio of earnings to fixed charges (as defined in the Support Agreement) of at least 1.25 to 1 for any fiscal year. The required ratio for the years ended December 31, 2017, 2016 and 2015 was met without assistance. The Support Agreement also requires PACCAR to own, directly or indirectly, all outstanding voting stock of the Company.

Periodically, the Company makes loans to, borrows from and has intercompany transactions with PACCAR. In addition, the Company periodically loans funds to certain foreign finance and leasing affiliates of PACCAR. These affiliates have Support Agreements with PACCAR, similar to the Company’s Support Agreement with PACCAR. The foreign affiliates operate in the United Kingdom, the Netherlands, Mexico, Canada and Australia. Loans to these foreign affiliates during 2017 and 2016 were denominated in United States dollars. The foreign affiliates primarily provide financing and leasing of PACCAR manufactured trucks and related equipment sold through the DAF, Kenworth, and Peterbilt independent dealer networks in Europe, Mexico, Canada and Australia. The Company will not make loans to the foreign affiliates in excess of the equivalent of $500.0 United States dollars, unless the amount in excess of such limit is guaranteed by PACCAR. The Company periodically reviews the funding alternatives for these affiliates, and these limits may be revised in the future.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

Amounts outstanding at December 31, 2017 and 2016, including balances with foreign finance af filiates operating in the United Kingdom, the Netherlands, Mexico, Canada and Australia, are summarized below:

	December 31		December 31
		2017		2016
Due from PACCAR and affiliates
Loans due from PACCAR	$	777.5	$	756.5
Loans due from foreign finance affiliates		295.0		413.0
Direct financing leases due from affiliate		.6		.5
Tax-related receivable due from PACCAR		119.5		7.1
Receivables		43.7		88.4
	$	1,236.3	$	1,265.5

Due to PACCAR and affiliates
Payables	$	20.2	$	16.2
	$	20.2	$	16.2

The Company is included in the consolidated federal income tax return of PACCAR. The tax-related receivable due from PACCAR represents the related tax benefit to be settled with PACCAR.

The Company provides direct financing leases to dealer locations operated by an affiliate of PACCAR.

PACCAR has issued letters of credit as of December 31, 2017 in the amount of $1.2 on behalf of the Company to guarantee funds for payment to insured franchisees and customers for any future insurance losses.

PACCAR charges the Company for certain administrative services it provides. These costs were charged to the Company based upon the Company’s use of the services and PACCAR’s cost. Fees for the services were $4.5, $5.5 and $4.5 in 2017, 2016 and 2015, respectively, and are included in Additional paid-in capital.

The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR). The Company also leases office space from one facility owned by PACCAR and five facilities leased by PACCAR. Lease payments for the use of these facilities are included in the above-mentioned administrative services charged by PACCAR.

The Company’s employees and PACCAR employees are covered by a defined benefit pension plan sponsored by PACCAR. The assets and liabilities of the plan are reflected on the balance sheets of PACCAR. PACCAR contributes to the plan and allocates the expenses to the Company based principally on the number of eligible plan participants. Expenses for the defined benefit pension plan were $3.3, $3.3 and $3.5 for the years 2017, 2016 and 2015, respectively, and are included in Selling, general and administrative expenses.

The Company’s employees and PACCAR employees are also covered by a defined contribution plan, sponsored by PACCAR. Expenses are based on the actual contribution made on the behalf of participating employees. Expenses incurred by the Company for the defined contribution plan were $1.5, $1.3 and $1.2 for the years 2017, 2016 and 2015, respectively, and are included in Selling, general and administrative expenses.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

NOTE E – STOCKHOLDER’S EQUITY

Accumulated other comprehensive income (AOCI) of $1.9 and $.3 at December 31, 2017 and 2016, respectively, is comprised of the unrealized net gain (loss) on derivative contracts, net of taxes. Changes in and reclassifications out of AOCI during 2017, 2016 and 2015 are as follows:

		2017			2016			2015
Balance at beginning of year	$	.3		$	(1.4	)	$	(1.2	)
Amounts recorded in AOCI
Unrealized gain (loss) on derivative contracts		1.2			(.8	)		(7.5	)
Income tax effect		(.4	)		.3			2.9
Amounts reclassified out of AOCI
Interest and other borrowing costs		1.4			3.5			7.2
Income taxes		(.6	)		(1.3	)		(2.8	)
Net other comprehensive income (loss)		1.6			1.7			(.2	)
Balance at end of year	$	1.9		$	.3		$	(1.4	)

NOTE F – DERIVATIVE FINANCIAL INSTRUMENTS

Interest-rate contracts 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. The Company is exposed to interest-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, 2017, the notional amount of these contracts totaled $838.7 with amounts expiring over the next ten years. Notional maturities for all interest-rate contracts are $325.0 for 2018, $243.0 for 2019, $40.0 for 2020, $179.6 for 2021, $25.0 for 2022 and $26.1 thereafter. The majority of these contracts are floating to fixed rate swaps that effectively convert an equivalent amount of commercial paper and other variable rate debt to fixed rates.

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

	As of December 31
	2017						2016
Interest-rate contracts:	Assets			Liabilities			Assets			Liabilities
Other assets	$	3.1					$	2.4
Accounts payable, accrued expenses and other				$	2.7					$	4.1
Gross amounts recognized in Balance Sheets		3.1			2.7			2.4			4.1

Less amounts not offset in financial instruments		(.5	)		(.5	)		(.6	)		(.6	)
Pro-forma net amount	$	2.6		$	2.2		$	1.8		$	3.5

Cash Flow Hedges

Certain of the Company’s interest-rate contracts have been designated as cash flow hedges. Changes in the fair value of derivatives designated as cash flow hedges are recorded in AOCI to the extent such hedges are considered effective. Gains or losses on the ineffective portion of cash flow hedges are recognized in current earnings and were immaterial for the years ended December 31, 2017, 2016 and 2015. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is ten years.

Amounts in AOCI are reclassified into net income in the same period in which the hedged transaction affects earnings. The amount of loss recorded in AOCI at December 31, 2017 that is estimated to be reclassified to interest expense in the following 12 months if interest rates remain unchanged is approximately $.8, net of taxes. The fixed interest earned on finance receivables will offset the amount recognized in interest expense, resulting in a stable interest margin consistent with the Company’s interest-rate risk management strategy.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

Fair Value Hedges

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

	Year ended December 31
		2017			2016			2015
Interest-rate swaps	$	2.3		$	5.5		$	(.9	)
Term notes	$	(1.5	)	$	(6.4	)	$	.6

NOTE G – BORROWINGS

The carrying amounts of borrowings are summarized as follows:

	As of December 31
	2017					2016
	Effective					Effective
	Rate			Borrowings		Rate			Borrowings
Commercial paper		1.4	%	$	1,437.8		.7	%	$	1,343.5
Medium-term notes		1.9	%		4,433.4		1.6	%		4,733.5
		1.8	%	$	5,871.2		1.4	%	$	6,077.0

Commercial paper and medium-term notes borrowings were $5,871.2 and $6,077.0 at December 31, 2017 and 2016, respectively. Unamortized debt issuance costs, unamortized discounts and the net effect of fair value hedges were $(17.5) and $(17.0) at December 31, 2017 and 2016, respectively. The effective rate is the weighted average rate as of December 31, 2017 and includes the effects of interest-rate swap agreements.

The annual principal maturities of the borrowings are as follows:

	Commercial		Term
	Paper		Notes		Total
2018	$	1,438.7	$	1,300.0	$	2,738.7
2019				1,400.0		1,400.0
2020				950.0		950.0
2021				500.0		500.0
2022				300.0		300.0
	$	1,438.7	$	4,450.0	$	5,888.7

Interest expense on borrowings amounted to $91.9, $77.3, and $60.3 for 2017, 2016 and 2015, respectively. Interest paid on borrowings was $88.0, $74.7, and $56.1 in 2017, 2016 and 2015, respectively.

In November 2015, the Company filed a shelf registration statement under the Securities Act of 1933. The registration expires in November 2018 and does not limit the principal amount of debt securities that may be issued during the period.

See “Note D – Transactions with PACCAR and Affiliates” for discussion of borrowings from PACCAR.

NOTE H – CREDIT ARRANGEMENTS

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

liquidity for the Company’s comm ercial paper and maturing medium-term notes. The Company is liable only for its own borrowings under these credit facilities. There were no borrowings under these credit facilities in 2017.

NOTE I – INCOME TAXES

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

	Year ended December 31
		2017			2016		2015
Current (benefit) provision
Federal	$	(95.9	)	$	19.2	$	60.4
State		4.0			.9		1.1
		(91.9	)		20.1		61.5
Deferred (benefit) provision
Federal		(214.2	)		28.7		.3
State		6.2			1.5		7.6
		(208.0	)		30.2		7.9
Total (benefit) provision for income taxes	$	(299.9	)	$	50.3	$	69.4

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

	Year ended December 31
		2017		2016		2015
Statutory rate		35.0	%	35.0	%	35.0	%
Effect of:
Rate change on U.S. federal deferred taxes		(370.8	)%
State		7.3	%	1.1	%	3.1	%
		(328.5	)%	36.1	%	38.1	%

Cash paid for income taxes was $.1, $1.5, and $3.6 in 2017, 2016 and 2015, respectively.

On December 22, 2017, the U.S. enacted new federal income tax legislation, the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act lowered the U.S. statutory income tax rate from 35.0% to 21.0%. The Company recorded a provisional amount of $338.5 of deferred tax benefits, due to the re-measurement of net deferred tax liabilities at the new lower statutory tax rate. The provisional amount may change in 2018, as new information becomes available and the Tax Act continues to be interpreted. Once the Company finalizes certain tax positions when it files its 2017 U.S. income tax returns, it will be able to conclude whether the provisional amounts require further adjustment to the net U.S. deferred tax liability, as of December 31, 2017.

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

	December 31			December 31
		2017			2016
Deferred tax assets:
Allowance for losses on receivables	$	14.4		$	22.5
Other		11.1			14.7
Deferred tax liabilities:
Depreciation		(621.5	)		(840.8	)
Derivative asset		(1.9	)		(1.3	)
Net deferred tax liability	$	(597.9	)	$	(804.9	)

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

NOTE J – FAIR VALUE MEASUREMENTS

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

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

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

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

There were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy during the year ended December 31, 2017. The Company’s policy is to recognize transfers between levels at the end of the reporting period.

Assets and Liabilities Subject to Non-recurring and Recurring Fair Value Measurement

Impaired loans and used trucks held for sale are measured on a non-recurring basis. Derivative contracts are measured on a recurring basis. The Company’s assets and liabilities subject to fair value measurements are as follows:

	December 31		December 31
Level 2	2017		2016
Assets:
Impaired loans, net of specific reserves (2017 - $1.8 and 2016 - $1.0)	$	8.4	$	1.9
Used trucks held for sale		53.3		100.4
Derivative contracts		3.1		2.4
Liabilities:
Derivative contracts	$	2.7	$	4.1

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

Impaired Loans: Impaired loans that are individually evaluated are generally considered collateral dependent. Accordingly, the evaluation of individual reserves on such loans considers the fair value of the associated collateral (estimated sales proceeds less the costs to sell).

Used Trucks Held for Sale: The carrying amount of used trucks held for sale is written down as necessary to reflect the fair value less costs to sell. The Company determines the fair value of used trucks from a pricing matrix, which is based on the market approach. The significant observable inputs into the valuation model are recent sales prices of comparable units sold individually, which is the lowest unit of account, and the condition of the vehicles. Used truck impairments related to units held at December 31, 2017 and 2016 were $23.0 and $14.1 during 2017 and 2016, respectively. These assets, which are shown in the above table when they are written down to fair value less costs to sell, are categorized as Level 2 and are included in Other assets on the Balance Sheets.

Derivative Financial Instruments: The Company’s derivative financial instruments consist of interest-rate swaps and are carried at fair value. These derivative contracts are traded over the counter and their fair value is determined using industry standard valuation models, which are based on the income approach (i.e., discounted cash flows). The significant observable inputs into the valuation models include interest rates, yield curves and credit default swap spreads. These contracts are categorized as Level 2 and are included in Other assets and Accounts payable, accrued expenses and other on the Balance Sheets.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

Fair Value Disclosure of Other Financial Instruments

For financial instruments that are not recognized at fair value, the Company uses the following methods and assumptions to determine the fair value. These instruments are categorized as Level 2, except cash which is categorized as Level 1 and fixed rate loans which are categorized as Level 3.

Cash: Carrying amounts approximate fair value.

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

Commercial Paper and Medium-Term Notes: The carrying amounts of the Company’s commercial paper and variable medium-term notes approximate fair value. For fixed rate debt, fair values are estimated using the income approach by discounting cash flows to their present value based on current rates for comparable debt.

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

	December 31				December 31
	2017				2016
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Due from PACCAR	$	765.5	$	762.5	$	648.0	$	648.4
Due from foreign finance affiliates		172.0		172.0		218.0		219.4
Fixed rate loans		2,756.9		2,758.4		2,796.0		2,816.2
Liabilities:
Fixed rate debt	$	4,091.8	$	4,072.0	$	4,193.1	$	4,191.4

NOTE K – QUARTERLY RESULTS (UNAUDITED)

	QUARTER
	First		Second		Third		Fourth
2017
Interest and other revenues	$	166.1	$	161.0	$	173.0	$	172.3
Income before income taxes		20.0		22.5		25.0		23.8
Net income (1)		12.5		13.1		14.5		351.1

2016
Interest and other revenues	$	150.7	$	154.1	$	156.6	$	162.3
Income before income taxes		38.3		33.9		31.4		35.6
Net income		24.3		21.0		21.6		22.0

(1 )	The Company’s net income in the fourth quarter of 2017 includes the impact of the Tax Act. See “Note I – Income Taxes” for additional discussion regarding the Company’s effective income tax rate.

NOTE L – COMMITMENTS AND CONTINGENCIES

The Company is a party to various routine legal proceedings incidental to its business involving the collection of accounts and other matters. The Company believes that any reasonably possible range of losses with respect to these matters in addition to amounts accrued is not material to the Company’s financial statements.

At December 31, 2017, the Company has loan and lease commitments of $303.4 expiring within one year. These commitments represent commitments to fund new retail loan and lease contracts.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOU NTANTS 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

An evaluation was performed under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of December 31, 2017. Based on that evaluation, the principal executive officer and principal financial officer of the Company concluded that the disclosure controls and procedures in place at the Company are effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported on a timely basis in accordance with applicable rules and regulations.

Management’s Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining satisfactory 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, 2017, 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 (2013 framework). Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2017.

There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2017 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

Not applicable.

PART III

ITEMS 10, 11, 12 AND 13

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

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Fees

Audit fees charged to the Company were $1.0 in both 2017 and 2016.

Other Fees

The Company was charged $.2 and $.2 in 2017 and 2016, respectively, by the principal accountant for tax consulting services.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

As a wholly owned subsidiary of PACCAR, audit and non-audit services provided by the Company’s independent registered public accounting firm are subjec t to PACCAR’s Audit Committee pre-approval policies and procedures as described in the PACCAR 2017 proxy statement. During the year ended December 31, 2017, all services provided by the independent registered public accounting firm were pre-approved by the PACCAR Audit Committee.

PACCAR Financial Corp.

Notes to Financial Statements

(Millions of Dollars)

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1) Listing of financial statements

The following financial statements of the Company are included in Item 8:

Statements of Income – Years Ended December 31, 2017, 2016, and 2015

Statements of Comprehensive Income – Years Ended December 31, 2017, 2016, and 2015

Balance Sheets – December 31, 2017 and 2016

Statements of Cash Flows – Years Ended December 31, 2017, 2016, and 2015

Statements of Stockholder’s Equity – Years Ended December 31, 2017, 2016, and 2015

Notes to Financial Statements – December 31, 2017, 2016, and 2015

(2) Listing of financial statement schedules

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

(3) Listing of Exhibits

The exhibits required by Item 601 of Regulation S-K are listed in the accompanying Exhibit Index.

PACCAR Financial Corp.

EXHIBIT INDEX

Exhibits (in order of assigned index numbers)

Exhibit
Number

Exhibit Description

Form

Date of First

Filing

Exhibit

Number

File Number

(3)

Articles of incorporation and by-laws:

(i)

Restated Articles of Incorporation of the Company, as amended*

10-K

February 26, 2015

3.1

001-11677

(ii)

Restated By-laws of the Company

10-Q

August 7, 2014

3(c)

001-11677

(4)

Instruments defining the rights of security holders, including indentures:

(a)

Indenture for Senior Debt Securities dated as of November 20, 2009 between the Company and The Bank of New York Mellon Trust Company, N.A.

S-3

November 20, 2009

4.1

333-163273

(b)

Forms of Medium-Term Note, Series N

S-3

November 7, 2012

4.2 and 4.3

333-184808

(c)

Forms of Medium-Term Note, Series O

S-3

November 5, 2015

4.2 and 4.3

333-207838

(d)

Form of InterNotes, Series C

S-3

November 5, 2015

4.4

333-207838

(10)

Material contracts:

(a)

Support Agreement between the Company and PACCAR dated as of June 19, 1989. (P)

S-3

June 23, 1989

28.1

33-29434

(12)

Statements re: computation of ratios:

(a)

Computation of ratio of earnings to fixed charges of the Company pursuant to SEC reporting requirements for the each of the five years ended December 31, 2013 – 2017.*

(b)

Computation of ratio of earnings to fixed charges of the Company pursuant to the Support Agreement between the Company and PACCAR for the each of the five years ended December 31, 2013 – 2017.*

(23)

Consent of Independent Registered Public Accounting Firm*

(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)*

(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

PACCAR Financial Corp.

SIGNAT URES

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 Financial Corp.

Date	February 21, 2018	/s/ T. R. Hubbard
		T. R. Hubbard
		President

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 as of the above date and in the capacities indicated.

(1)	Principal Executive Officer

/s/ R. E. Armstrong		Chief Executive Officer
R. E. Armstrong

(2)	Principal Financial Officer

/s/ R. A. Bengston		Principal Financial Officer
R. A. Bengston

(3)	Principal Accounting Officer

/s/ Y. Zhang		Controller
Y. Zhang

(4)	A Majority of the Board of Directors

/s/ R. E. Armstrong		Director
R. E. Armstrong

/s/ R. A. Bengston		Director
R. A. Bengston

/s/ T. R. Hubbard		Director
T. R. Hubbard

Exhibit 12(a)

PACCAR Financial Corp.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

PURSUANT TO SEC REPORTING REQUIREMENTS (1)

(Millions of Dollars)

	Year ended December 31
	2017		2016		2015		2014		2013
FIXED CHARGES
Interest expense	$	91.5	$	76.6	$	60.2	$	53.4	$	58.9
Portion of rentals deemed interest		1.3		1.2		1.3		1.3		1.2

TOTAL FIXED CHARGES	$	92.8	$	77.8	$	61.5	$	54.7	$	60.1

EARNINGS
Income before income taxes	$	91.3	$	139.2	$	182.2	$	175.0	$	159.4
Fixed charges		92.8		77.8		61.5		54.7		60.1

EARNINGS AS DEFINED	$	184.1	$	217.0	$	243.7	$	229.7	$	219.5

RATIO OF EARNINGS TO FIXED CHARGES	1.98x		2.79x		3.96x		4.20x		3.65x

(1)	The method of computing the ratio of earnings to fixed charges shown above complies with SEC reporting requirements, but differs from the method called for in the Support Agreement between the Company and PACCAR as shown in Exhibit 12(b).

Exhibit 12(b)

PACCAR Financial Corp.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

PURSUANT TO THE SUPPORT AGREEMENT

BETWEEN THE COMPANY AND PACCAR

(Millions of Dollars)

	Year ended December 31
	2017		2016		2015		2014		2013
FIXED CHARGES
Interest expense	$	91.5	$	76.6	$	60.2	$	53.4	$	58.9
Facility and equipment rental		1.6		1.4		1.6		1.6		1.5

TOTAL FIXED CHARGES	$	93.1	$	78.0	$	61.8	$	55.0	$	60.4

EARNINGS
Income before income taxes	$	91.3	$	139.2	$	182.2	$	175.0	$	159.4
Depreciation		340.9		277.2		246.6		232.3		210.0
		432.2		416.4		428.8		407.3		369.4

FIXED CHARGES		93.1		78.0		61.8		55.0		60.4

EARNINGS AS DEFINED	$	525.3	$	494.4	$	490.6	$	462.3	$	429.8

RATIO OF EARNINGS TO FIXED CHARGES	5.64x		6.34x		7.94x		8.41x		7.12x

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-207838) of PACCAR Financial Corp. and in the related Prospectus of our report dated February 21, 2018 with respect to the financial statements of PACCAR Financial Corp. included in this Annual Report (Form 10-K) for the year ended December 31, 2017.

		/s/ Ernst & Young LLP

Seattle, Washington
February 21, 2018

Exhibit 31(a)

PACCAR Financial Corp.

CERTIFICATION

I, Ronald E. Armstrong, certify that:

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

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-15(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 21, 2018

/s/ Ronald E. Armstrong

Ronald E. Armstrong

Chief Executive Officer

(Principal Executive Officer)

Exhibit 31(b)

PACCAR Financial Corp.

CERTIFICATION

I, Robert A. Bengston, certify that:

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

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 21, 2018

/s/ Robert A. Bengston

Robert A. Bengston

Principal Financial Officer

Exhibit 32(a)

PACCAR Financial Corp.

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 Financial Corp. (the “Company”) on Form 10-K for the year ended December 31, 2017 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 21, 2018	/s/ Ronald E. Armstrong
		Ronald E. Armstrong Chief Executive Officer PACCAR Financial Corp. (Principal Executive Officer)

		/s/ Robert A. Bengston
		Robert A. Bengston Principal Financial Officer PACCAR Financial Corp.

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.