-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PHla46EQXQuQgEPw7V+C8krix3qQa+edTqDgycqj64w4RSPQM4TwhRh8Vk/nTFP2 NhX0NQ/B1NujBe5Aq00rFw== 0001047469-99-011075.txt : 19990325 0001047469-99-011075.hdr.sgml : 19990325 ACCESSION NUMBER: 0001047469-99-011075 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACCAR INC CENTRAL INDEX KEY: 0000075362 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 910351110 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-14817 FILM NUMBER: 99571368 BUSINESS ADDRESS: STREET 1: 777 106TH AVE NE STREET 2: PO BOX 1518 CITY: BELLEVUE STATE: WA ZIP: 98004 BUSINESS PHONE: 4254557383 MAIL ADDRESS: STREET 1: 777 106TH AVENUE NE STREET 2: PO BOX 1518 CITY: BELLEVUE STATE: WA ZIP: 98004 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC CAR & FOUNDRY CO DATE OF NAME CHANGE: 19720707 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended December 31, 1998 Commission File No. 0-6394 PACCAR INC - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 91-0351110 (State of incorporation) (I.R.S. Employer Identification No.) 777 - 106TH AVE. N.E., BELLEVUE, WASHINGTON 98004 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (425) 468-7400 -------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1 par value Preferred Stock Purchase Rights - -------------------------------------------------------------------------------- (Title of Class) 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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No --- Indicate by check mark 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. [x] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 26, 1999: COMMON STOCK, $1 PAR VALUE -- $2.931 BILLION -------------------------------------------- The number of shares outstanding of the issuer's classes of common stock, as of February 26, 1999: COMMON STOCK, $1 PAR VALUE -- 78,145,449 SHARES ----------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 1998 are incorporated by reference into Parts I and II. Portions of the proxy statement for the annual stockholders meeting to be held on April 27, 1999 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS (a) General Development of Business PACCAR Inc (the Company), incorporated under the laws of Delaware in 1971, is the successor to Pacific Car and Foundry Company which was incorporated in Washington in 1924. The Company traces its predecessors to Seattle Car Manufacturing Company formed in 1905. In the United States, the Company's manufacturing operations are conducted through unincorporated manufacturing divisions. Each of the divisions are responsible for at least one of the Company's products. That responsibility includes new product development, applications engineering, manufacturing and marketing. Outside the U.S., the Company manufactures and sells through wholly owned subsidiary companies in Australia, Mexico, the Netherlands and the United Kingdom. An export sales division generally is responsible for export sales. Effective June 2, 1998, the Company acquired privately-held Leyland Trucks Limited (Leyland). Leyland is a United Kingdom truck manufacturing company with approximately 600 employees. The Company's Netherlands truck manufacturing subsidiary, DAF Trucks N.V. (DAF), is a major customer of Leyland. The 45 and 55 Series distribution trucks produced by Leyland are marketed exclusively in Europe by DAF. In Canada, the Company sells and distributes through a wholly owned foreign subsidiary. The Netherlands subsidiary also has a manufacturing plant located in Belgium, and uses foreign sales subsidiaries to handle export sales in the European Community and Eastern Europe. Product financing and leasing is offered through subsidiaries located in North America, Australia, and the United Kingdom. Retail automotive parts are sold through a U.S. subsidiary. (b) Financial Information About Industry Segments and Geographic Areas Information about the Company's industry segments and geographic areas in response to Items 101(b), (c)(1)(i), and (d) of Regulation S-K appears on pages 46 and 47 of the Annual Report to Stockholders for the year ended December 31, 1998 and is incorporated herein by reference. (c) Narrative Description of Business The Company has two principal industry segments, (1) manufacture of light-, medium- and heavy-duty trucks and related aftermarket distribution of parts and (2) finance and leasing services provided to customers and dealers. The Company competes in the truck parts aftermarket primarily through its dealer network. The Company's finance and leasing activities are principally related to Company products and associated equipment. Other manufactured products also include industrial winches. In addition, the Company sells general automotive parts and accessories through retail outlets. -2- TRUCKS The Company and its subsidiaries design and manufacture trucks which are marketed under the Peterbilt, Kenworth, DAF and Foden nameplates in the heavy-duty diesel category. These vehicles, which are built in four plants in the United States, three in Europe and one each in Australia and Mexico, are used worldwide for over-the-road and off-highway heavy-duty hauling of freight, petroleum, wood products, construction and other materials. Commercial trucks and related service parts are the largest segment of the Company's business, accounting for 92% of total 1998 revenues. The Company competes in the North American Class 6/7 markets primarily with conventional models. These medium-duty trucks are assembled at the Company's Mexican subsidiary in Mexicali, Mexico and in the Seattle, Washington plant. The Company's Canadian truck plant, which was closed in 1997 and 1998, is currently undergoing major refurbishment. Production of medium-duty trucks is planned to commence mid-year 1999 at this plant. This line of business represents a small, but increasing, percentage of the Company's North American sales to date. The Company competes in the European medium commercial vehicle market with a cab-over-engine truck manufactured in the Netherlands. Leyland manufactures light commercial vehicles in the United Kingdom for sale throughout Europe under the DAF and Leyland DAF nameplates. During 1998, DAF continued its long-term design development under an agreement with Renault V.I. for a new light-line product. Trucks and related parts are sold to independent dealers for resale. Trucks manufactured in the U.S. for export are marketed by PACCAR International, a U.S. division. Those sales are made through a worldwide network of dealers. Trucks manufactured in Australia, Mexico, the Netherlands and the United Kingdom are marketed domestically through independent dealers and factory branches. Trucks manufactured in these countries for export are marketed by DAF or PACCAR International. The Company's trucks are essentially custom products and have a reputation for high quality. For a majority of the Company's truck operations, major components, such as engines, transmissions and axles, as well as a substantial percentage of other components, are purchased from component manufacturers pursuant to customer specifications. DAF, which is more vertically integrated, manufactures its own engines and axles. Raw materials and other components used in the manufacture of trucks are purchased from a number of suppliers. The Company is not limited to any single source for any significant component. No significant shortages of materials or components were experienced in 1998. Manufacturing inventory levels are based upon production schedules and orders are placed with suppliers accordingly. Replacement truck parts are sold and delivered to the Company's independent dealers through the Company's parts distribution network. Parts are both manufactured by the Company and purchased from various suppliers. Replacement parts inventory levels are determined largely by anticipated customer demand and the need for timely delivery. -3- There were four other principal competitors in the U.S. Class 8 truck market in 1998. The Company's share of that market was approximately 21% of registrations in 1998. There were seven other principal competitors in the European medium and heavy commercial vehicle market in 1998, including parent companies to three competitors of the Company in the United States. The Company's subsidiary, DAF, had approximately a 10.5% share of the western Europe heavy-truck market. These markets are highly competitive in price, quality and service, and PACCAR is not dependent on any single customer for its sales. There are no significant seasonal variations. The Peterbilt, Kenworth, DAF, Leyland DAF and Foden nameplates are recognized internationally and play an important role in the marketing of the Company's truck products. The Company engages in a continuous program of trademark and trade name protection in all marketing areas of the world. Although the Company's truck products are subject to environmental noise and emission controls, competing manufacturers are subject to the same controls. The Company believes the cost of complying with noise and emission controls will not be detrimental to its business. The Company had a total production backlog of nearly $4 billion at the end of 1998. Within this backlog, orders scheduled for delivery within three months (90 days) are considered to be firm. The 90-day backlog approximated $1.7 billion at December 31, 1998 compared with approximately $1.4 billion at year-end 1997. Production of the year-end 1998 backlog is expected to be completed during 1999. The number of persons employed by the Company in its truck business at December 31, 1998 was approximately 18,000. OTHER BUSINESSES Other businesses of the Company account for 4% of total 1998 revenues. This group includes industrial winches and PACCAR Automotive Inc., a wholly owned subsidiary. Winches are manufactured in two U.S. plants and are marketed under the Braden, Carco, and Gearmatic nameplates. The markets for all of these products are highly competitive and the Company competes with a number of well established firms. The Braden, Carco, and Gearmatic trademarks and trade names are recognized internationally and play an important role in the marketing of those products. The Company has an ongoing program of trademark and trade name protection in all relevant marketing areas. PACCAR Automotive purchases and sells general automotive parts and accessories through 176 retail locations under the names of Grand Auto and Al's Auto Supply. These locations are supplied from the subsidiary's distribution warehouses. FINANCIAL SERVICES In North America, Australia and the United Kingdom, the Company provides financing principally for its manufactured trucks through six wholly owned finance companies. These companies provide inventory financing for independent -4- dealers selling PACCAR products and retail and lease financing for new and used Class 6, 7, and 8 truck and other transportation equipment sold principally by its independent dealers. Customer contracts are secured by the products financed. PACCAR has a 49% equity ownership in DAF Financial Services in Europe. This investment, which is recorded under the equity method, is not material. PACCAR Leasing Corporation (PLC), a wholly owned subsidiary, franchises selected Company truck dealers in North America to engage in full service truck leasing under the PacLease trade name. PLC also leases equipment to and provides managerial and sales support for its franchisees. The subsidiary also operates full service leasing operations primarily in Texas on its own behalf. PATENTS The Company owns numerous patents which relate to all product lines. Although these patents are considered important to the overall conduct of the Company's business, no patent or group of patents is considered essential to a material part of the Company's business. RESEARCH AND DEVELOPMENT The Company maintains technical centers dedicated to product testing and research and development activities. Additional product development activities are conducted within each separate manufacturing division. Amounts spent on research and development approximated $119 million in 1998, $84 million in 1997 and $47 million in 1996. REGULATION As a manufacturer of highway trucks, the Company is subject to the National Traffic and Motor Vehicle Safety Act and Federal Motor Vehicle Safety Standards promulgated by the National Highway Traffic Safety Administration. The Company believes it is in compliance with the Act and applicable safety standards. Information regarding the effects that compliance with international, federal, state and local provisions regulating the environment have on the Company's capital and operating expenditures and the Company's involvement in environmental cleanup activities is included in Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Consolidated Financial Statements incorporated by reference in Items 7 and 8, respectively. EMPLOYEES On December 31, 1998, the Company employed a total of approximately 23,000 persons. -5- ITEM 2. PROPERTIES The Company and its subsidiaries own and operate manufacturing plants in five U.S. states, four locations in Europe, and one each in Australia and Mexico. Several parts distribution centers, sales and service offices, and finance and administrative offices are also operated in owned or leased premises in these and other countries. DAF operates sales subsidiaries in owned or leased premises in various countries throughout Europe. Facilities for product testing and research and development are located in Skagit County, Washington and Eindhoven, the Netherlands. Retail auto parts sales locations operate primarily in leased premises in six western states. The Company's corporate headquarters is located in owned premises in Bellevue, Washington. The Company considers substantially all of the properties used by its businesses to be suitable for their intended purposes. In 1997, the Seattle facility was used for warehousing of inventories and for some limited assembly operations and was excluded from the table below for the year ended December 31, 1997. During 1998, the Seattle plant was utilized for production of Class 6/7 and Class 8 off-highway trucks. Accordingly, the Seattle plant has been included in the table below for the year ended December 31, 1998. In addition, the table below reflects the acquisition of Leyland which occurred during the second quarter of 1998. See Item 1 for additional discussion related to the Leyland acquisition. The Company's Canadian truck plant remained closed in 1998. However, an agreement was reached with the Canadian and Quebec governments in September of 1997 for PACCAR to refurbish and expand the facility. The Canadian plant is scheduled to reopen mid-year 1999. Although no production occurred at the Canadian location in 1998, the plant is shown as a truck manufacturing facility in the accompanying table. The Company's remaining manufacturing facilities operated near their productive capacities for most of 1998. Geographical locations of manufacturing plants within indicated industry segments are as follows:
U.S. Canada Australia Mexico Europe Trucks 5 1 1 1 4 Other 2 - - - -
Properties located in Torrance, California and Odessa, Texas are being held for sale. These properties were originally obtained principally as a result of a business acquisition in 1987. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to various lawsuits incidental to the ordinary course of business. Management believes that the disposition of such lawsuits will not materially affect the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1998. -6- PART II ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock Market Prices and Dividends on page 49 of the Annual Report to Stockholders for the year ended December 31, 1998 are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data on page 48 of the Annual Report to Stockholders for the year ended December 31, 1998 are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 25 through 30 of the Annual Report to Stockholders for the year ended December 31, 1998 is incorporated herein by reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk on page 50 of the Annual Report to Stockholders for the year ended December 31, 1998 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the registrant and its subsidiaries, included in the Annual Report to Stockholders for the year ended December 31, 1998 are incorporated herein by reference: Consolidated Balance Sheets -- December 31, 1998 and 1997 Consolidated Statements of Income -- Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Comprehensive Income -- Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows -- Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements -- December 31, 1998, 1997 and 1996 Quarterly Results (Unaudited) on page 49 of the Annual Report to Stockholders for the years ended December 31, 1998 and 1997 are incorporated herein by reference. -7- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The registrant has not had any disagreements with its independent auditors on accounting or financial disclosure matters. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item 401(a), (d), (e) and Item 405 of Regulation S-K: Identification of directors, family relationships, and business experience on pages 4 and 5 of the proxy statement for the annual stockholders meeting of April 27, 1999 is incorporated herein by reference. Item 401(b) of Regulation S-K: Executive Officers of the registrant as of February 26, 1999:
Present Position and Other Position(s) Name and Age Held During Last Five Years - ------------ -------------------------------------- Mark C. Pigott (45) Chairman and Chief Executive Officer; Vice Chairman from January 1995 to December 1996; previously Executive Vice President. Mr. Pigott is the son of Charles M. Pigott and nephew of James C. Pigott, both directors of the Company. David J. Hovind (58) President since 1992. Michael A. Tembreull (52) Vice Chairman; Executive Vice President from January 1992 to January 1995. Gary S. Moore (55) Senior Vice President since 1992. Thomas E. Plimpton (49) Executive Vice President; Senior Vice President from June, 1996 to July, 1998; General Manager, Peterbilt Motors Company from January, 1992 to May, 1996. G. Don Hatchel (54) Vice President and Controller since 1991. G. Glen Morie (56) Vice President and General Counsel since 1984. Cor G. Baan (60) Senior Vice President since February, 1998; President, DAF Trucks, N.V. since March, 1993.
Officers are elected annually but may be appointed or removed on interim dates. -8- ITEM 11. EXECUTIVE COMPENSATION Compensation of Directors and Executive Officers and Related Matters on pages 5 through 11 of the proxy statement for the annual stockholders meeting of April 27, 1999 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Stock ownership information on pages 2 through 3 of the proxy statement for the annual stockholders meeting of April 27, 1999 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS No transactions with management and others as defined by Item 404 of Regulation S-K occurred in 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Listing of financial statements The following consolidated financial statements of PACCAR Inc and subsidiaries, included in the Annual Report to Stockholders for the year ended December 31, 1998 are incorporated by reference in Item 8: Consolidated Balance Sheets -- December 31, 1998 and 1997 Consolidated Statements of Income -- Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Comprehensive Income -- Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows -- Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements -- December 31, 1998, 1997 and 1996 (2) Listing of financial statement schedules All schedules for which provision has been made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or have been otherwise disclosed and, therefore, have been omitted. -9- (3) Listing of Exhibits (in order of assigned index numbers) (3) Articles of incorporation and bylaws (a) PACCAR Inc Certificate of Incorporation, as amended to April 29, 1997 (incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). (b) PACCAR Inc Bylaws, as amended to April 26, 1994 (incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1994). (4) Instruments defining the rights of security holders, including indentures (a) Rights agreement dated as of December 10, 1998 between PACCAR Inc and First Chicago Trust Company of New York setting forth the terms of the Series A Junior Participating Preferred Stock, no par value per share (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K of PACCAR Inc dated December 21, 1998). (b) Indenture for Senior Debt Securities dated as of December 1, 1983, and first Supplemental Indenture dated as of June 19, 1989, between PACCAR Financial Corp. and Citibank, N.A., Trustee (incorporated by reference to Exhibit 4.1 of the Annual Report on Form 10-K of PACCAR Financial Corp. dated March 26, 1984, File Number 0-12553 and Exhibit 4.2 to PACCAR Financial Corp.'s registration statement on Form S-3 dated June 23, 1989, Registration No. 33-29434). (c) Forms of Medium-Term Note, Series F (incorporated by reference to Exhibits 4.3A, 4.3B and 4.3C to PACCAR Financial Corp.'s Registration Statement on Form S-3, dated May 26, 1992, Registration Number 33-48118). Form of Letter of Representation among PACCAR Financial Corp., Citibank, N.A., and the Depository Trust Company, Series F (incorporated by reference to Exhibit 4.4 to PACCAR Financial Corp.'s Registration Statement on Form S-3, dated May 26, 1992, Registration Number 33-48118). (d) Forms of Medium-Term Note, Series G (incorporated by reference to Exhibits 4.3A and 4.3B to PACCAR Financial Corp.'s Registration Statement on Form S-3, dated December 8, 1993, Registration Number 33-51335). Form of Letter of Representation among PACCAR Financial Corp., Citibank, N.A., and the Depository Trust Company, Series G (incorporated by reference to Exhibit 4.4 to PACCAR Financial Corp.'s Registration Statement on Form S-3, dated December 8, 1993, Registration Number 33-51335). -10- (e) Forms of Medium-Term Note, Series H (incorporated by reference to Exhibits 4.3A and 4.3B to PACCAR Financial Corp.'s Registration Statement on Form S-3, dated March 11, 1996, Registration Number 333-01623). Form of Letter of Representation among PACCAR Financial Corp., Citibank, N.A. and the Depository Trust Company, Series H (incorporated by reference to Exhibit 4.4 to PACCAR Financial Corp.'s Registration Statement on Form S-3 dated March 11, 1996, Registration Number 333-01623). (f) Forms of Medium-Term Note, Series I (incorporated by reference to Exhibits 4.3A and 4.3B to PACCAR Financial Corp.'s Registration Statement on Form S-3 dated September 10, 1998, Registration Number 333-63153). Form of Letter of Representation among PACCAR Financial Corp., Citibank, N.A. and the Depository Trust Company, Series I (incorporated by reference to Exhibit 4.5 to PACCAR Financial Corp.'s Registration Statement on Form S-3 dated September 10, 1998, Registration Number 333-63153). (10) Material contracts (a) PACCAR Inc Incentive Compensation Plan (incorporated by reference to Exhibit (10)(a) of the Annual Report on Form 10-K for the year ended December 31, 1980). (b) PACCAR Inc Deferred Compensation Plan for Directors (incorporated by reference to Exhibit (10)(b) of the Annual Report on Form 10-K for the year ended December 31, 1980). (c) Supplemental Retirement Plan (incorporated by reference to Exhibit (10)(c) of the Annual Report on Form 10-K for the year ended December 31, 1980). (d) 1981 Long Term Incentive Plan (incorporated by reference to Exhibit A of the 1982 Proxy Statement, dated March 25, 1982). (e) Amendment to 1981 Long Term Incentive Plan (incorporated by reference to Exhibit (10)(a) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1991). (f) PACCAR Inc 1991 Long-Term Incentive Plan (incorporated by reference to Exhibit C of the 1997 Proxy Statement, dated March 20, 1997). (g) Amended and Restated Deferred Incentive Compensation Plan (incorporated by reference to Exhibit (10)(g) of the Annual Report on Form 10-K for the year ended December 31, 1993). -11- (h) PACCAR Inc Senior Executive Incentive Plan (incorporated by reference to Exhibit D of the 1997 Proxy Statement, dated March 20, 1997). (13) Annual report to security holders Portions of the 1998 Annual Report to Shareholders have been incorporated by reference and are filed herewith. (21) Subsidiaries of the registrant (23) Consent of independent auditors (24) Power of attorney Powers of attorney of certain directors (27) Financial Data Schedule (a) For the 12 months ended December 31, 1998 The following schedules are submitted for certain reclassifications as reflected in Note G in Notes to Consolidated Financial Statements - December 31, 1998, 1997 and 1996. (b) For the 12 months ended December 31, 1997 - restated (c) For the 12 months ended December 31, 1996 - restated (b) Reports on Form 8-K A report on Form 8-K was filed on December 21, 1998 to report the adoption of a new Preferred Share Purchase Rights Plan. (c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report. (d) 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. -12- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PACCAR INC ------------------------------------- Registrant Date: March 24, 1999 /s/ M. C. Pigott ------------------- ------------------------------------- M. C. Pigott, Director, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
Signature Title - --------- ----- /s/ M. A. Tembreull Director and Vice Chairman - ------------------------ (Principal Financial Officer) M. A. Tembreull /s/ G. D. Hatchel Vice President and Controller - ------------------------ (Principal Accounting Officer) G. D. Hatchel */s/ C. M. Pigott Director and Chairman Emeritus - ------------------------ and Audit Committee Member C. M. Pigott */s/ D. J. Hovind Director and President - ------------------------ D. J. Hovind */s/ J. W. Pitts Director and Chairman of - ------------------------ Audit Committee J. W. Pitts */s/ J. C. Pigott Director and Audit Committee Member - ------------------------ J. C. Pigott */s/ J. M. Fluke, Jr. Director and Audit Committee Member - ------------------------ J. M. Fluke, Jr. */s/ C. H. Hahn Director - ------------------------ C. H. Hahn */s/ G. Grinstein Director - ------------------------ G. Grinstein */s/ W. G. Reed, Jr. Director - ------------------------ W. G. Reed, Jr. *By /s/ M. C. Pigott - ------------------------ M. C. Pigott Attorney-in-Fact
-13- ANNUAL REPORT ON FORM 10-K ITEM 14(c) CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 1998 PACCAR INC AND SUBSIDIARIES BELLEVUE, WASHINGTON EX-13 2 EXHIBIT 13 PACCAR INC AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS:
1998 1997 1996 - ------------------------------------------------------------------------------- Truck and Other Sales $ 7,577.7 $ 6,479.4 $ 4,334.4 Financial Services Revenues $ 317.1 $ 284.3 $ 267.9 - ------------------------------------------------------------------------------- Income Before Taxes: Truck and Other $ 553.4 $ 379.6 $ 217.1 Financial Services 62.2 71.3 68.3 Gain on sale of subsidiary 55.7 Investment Income 33.3 24.7 25.8 Other, net 4.2 3.4 1.7 Income Taxes (236.3) (190.1) (111.9) - ------------------------------------------------------------------------------- Net Income $ 416.8 $ 344.6 $ 201.0 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
OVERVIEW: PACCAR's net income in 1998 was a record $416.8 million, or $5.30 per share diluted, on sales of $7.6 billion. This compares to 1997 net income of $344.6 million, or $4.41 per share diluted, on sales of $6.5 billion. 1998 reflects the consolidation of Leyland Trucks Ltd. from June 2, 1998, the date of acquisition. Leyland's impact on PACCAR's 1998 operating results and financial condition was not material. Net income in 1997 includes a $55.7 million ($35 million after-tax) gain on the sale of its oilfield equipment business, Trico Industries. Results in 1996 include DAF Trucks, N.V., from November 15, 1996, the date of acquisition. Truck and Other income before taxes increased 46% to $553.4 million in 1998 on a 17% increase in sales. The $173.8 million increase resulted largely from higher production levels and improved margins. The North American and European heavy-duty truck markets reached record levels, with the Company's market share increasing in Europe and holding steady in North America. Operating margins improved significantly as a result of the efficiencies of operating at higher production levels, cost reductions from global purchasing synergies, business process improvements and higher selling prices in most markets. Selling, general and administrative expenses increased in 1998 to support higher production levels, research and development, systems enhancements and meeting Year 2000 requirements. Financial Services pretax income was $62.2 million in 1998 compared to $71.3 million in 1997. The increased finance margin that resulted from strong asset growth was more than offset by higher loss provisions and a one-time write-off of capitalized costs for discontinued system development in the U.S. finance company. TRUCKS The most significant segment for PACCAR continues to be Trucks, accounting for 92% of consolidated revenues in 1998, 91% in 1997 and 87% in 1996. The Truck segment includes all of the Company's domestic and international truck manufacturing and related aftermarket parts distribution operations. In North America, trucks are sold under the Kenworth and Peterbilt nameplates and, in Europe, under DAF, Leyland DAF and Foden nameplates. The financial impact of this segment increased in 1998 with the growth in North American and European markets. Substantially all of PACCAR's factories were at or near record levels of production at the end of 1998. Peterbilt raised the production rate at its Denton, Texas, facility and utilized skilled temporary employees at the Nashville, Tennessee, plant to meet increased customer demand. The Nashville truck factory had a work stoppage from May 4 to November 24, 1998. Agreement was reached on a four-year contract with the United Auto Workers (UAW) at the Nashville plant in November. DAF's results increased due to continued strong customer demand for the Model 95XF, which was named 1998 International Truck of the Year by the European industry press. The current economic problems in Asia and South America negatively impacted export sales to these regions in 1998 and are forecasted to continue in 1999. Sales and profits of this business are a minor portion of PACCAR's overall results. As we enter 1999, orders and backlogs remain strong in the U.S. and Canada. However, demand for trucks in those key markets could soften later in 1999. Orders and backlogs for PACCAR operations in Europe and Mexico have declined in recent months as economic growth has slowed. Daily build rates for trucks in those markets have been reduced, reflecting this lower demand.
1998 1997 1996 - ------------------------------------------------------------------------------- Truck Net Sales $ 7,270.4 $ 6,157.8 $ 4,019.2 - ------------------------------------------------------------------------------- Operating Profit $ 534.3 $ 376.8 $ 204.1 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
1998 COMPARED TO 1997: PACCAR's worldwide truck sales increased 18% to $7.3 billion in 1998 on record sales volume in excess of 93,800 trucks, solidifying PACCAR's position as the second-largest producer of heavy-duty trucks in the world. Operating profit from truck operations was a record $534.3 million, a 42% increase over the $376.8 million earned in 1997. Registrations of new heavy-duty trucks were at record levels in 1998 in both the United States and Europe. Of the 210,000 trucks registered in the United States, PACCAR achieved a 21% share, comparable to 1997. DAF, with a strong product line-up led by the 95XF, achieved a 10.5% share of the 205,000 European heavy-duty market in 1998. Sales in Europe represent approximately 30% of PACCAR's total truck sales. In Canada, PACCAR's third largest market, sales and profits in 1998 were comparable to 1997. The favorable effects of a larger market were offset by reduced market share. Due to the significant weakening of the Canadian dollar, in 1998, the cost of importing trucks from PACCAR's U.S. truck factories increased substantially, creating competitive pricing pressures. The Company's operations in Mexico achieved higher sales and profits in 1998 over 1997. The benefit of a larger market and an increase in the Company's market share were partially offset by lower operating margins as competitors continued to increase their marketing efforts in the country. Sales and profits for the Company's worldwide aftermarket parts distribution activities continued to grow in 1998. Sales and operating results in the United States and Europe benefited from the strong heavy-duty truck market, growth in the population of trucks in service, and marketing programs to promote parts sales. In 1998, significant spending was devoted to product development, business process improvements, and systems enhancements. Research and development expense in 1998 amounted to $119 million, a 42% increase over 1997. 1997 COMPARED TO 1996: PACCAR's truck revenues increased 53% to $6.2 billion in 1997 on sales volume in excess of 79,000 trucks. Operating profit from truck operations was $376.8 million, an 85% increase over the $204.1 million earned in 1996. The increase in sales and profit was primarily due to the acquisition of DAF. The percentage of 1997 consolidated truck revenues from PACCAR operations in Europe increased to over 30% in 1997, primarily due to including DAF for a full year. Sales and profits outside the United States and Europe increased substantially, largely due to stronger overall markets in Mexico and Australia. In Canada, profitability also improved in 1997 compared to 1996, when a plant closure charge of $18.0 million pretax unfavorably impacted results. Sales and profits increased in 1997 over 1996 for the Company's truck aftermarket parts distribution activities. Operating results improved due to the rising number of heavy-duty trucks in service, and growth in the truck parts distribution network. OTHER BUSINESSES 1998 COMPARED TO 1997: The Company's retail auto parts operations are located on the West Coast. Retail revenues grew in 1998 and 1997 by adding new stores and achieving modest gains in same store sales. The addition of new stores and better customer service have also resulted in steady growth in profitability. Pretax income in 1998 increased for the sixth year in a row. PACCAR's winch business reported an outstanding year in 1998. Sales and operating profits increased over 1997. The business benefited from strong demand for its products in the U.S. market, and improved margins due to favorable product mix. 1997 COMPARED TO 1996: Prior to 1997, PACCAR's other products included retail auto parts, winches and the Company's oilfield equipment business, Trico Industries. Combined sales in 1997 were slightly lower than 1996, due to the sale of Trico Industries in the fourth quarter of 1997. Combined operating profits increased in 1997, over 1996, due to higher sales volumes for both retail auto parts and winches. FINANCIAL SERVICES The Financial Services segment, including PACCAR Financial Corp., PACCAR Leasing Corporation and the Company's finance subsidiaries in Australia, Canada, Mexico and the United Kingdom, derives earnings primarily from financing the sale of PACCAR products. PACCAR has a 49% equity ownership in DAF Financial Services in Europe. This investment, which is recorded under the equity method, is not material.
1998 1997 1996 - ------------------------------------------------------------------------------- Financial Services: Average Earning Assets $ 3,210.3 $ 2,818.9 $ 2,723.9 Revenues $ 317.1 $ 284.3 $ 267.9 Pretax Income $ 62.2 $ 71.3 $ 68.3 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
1998 COMPARED TO 1997: Financial Services operations earned $62.2 million before tax in 1998 compared to $71.3 million in 1997. Increased revenues from earning asset portfolio growth in both foreign and domestic finance operations were more than offset by higher operating expenses and a higher provision for loan losses. The loss provision increase is consistent with the rapid growth in earning assets. Operating expenses included a $7.5 million write-off of capitalized systems development costs in the U.S. finance company. Overall, credit quality of the portfolio remains good due to favorable economic conditions and a continued focus on credit controls. 1997 COMPARED TO 1996: Financial Services operations earned $71.3 million before taxes in 1997, up $3.0 million or 4% compared to 1996. Increases achieved in 1997 by PACCAR's finance company in Mexico and its leasing company in the United States were partially offset by lower profitability in its U.S. finance company, due to competitive market conditions in 1997. LIQUIDITY AND CAPITAL RESOURCES:
1998 1997 1996 - ------------------------------------------------------------------------------- Cash and cash equivalents $ 432.4 $ 337.9 $ 222.9 Marketable securities 404.8 357.0 304.9 - ------------------------------------------------------------------------------- $ 837.2 $ 694.9 $ 527.8 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The Company's cash and marketable securities totaled $837.2 million at December 31, 1998, $142.3 million more than 1997. The growth can be attributed to record earnings in 1998, which increased cash from operations by $215.4 million to $653.8 million. This increase was partially offset by additional capital expenditures, higher dividends paid, the purchase of Leyland Trucks Ltd., and cash utilized for the Financial Services operations. The Company's strong liquidity position continues to provide financial stability and strength. TRUCK AND OTHER Cash for working capital, capital expenditures, systems (including Year 2000), and research and development has been provided by operations. Management expects this method of funding to continue. Long-term debt included the guilder-denominated note arising from the acquisition of DAF Trucks in 1996. The remaining principal balance of this debt was $218.5 million at December 31, 1998. Cash flows were used to make payments on the DAF acquisition debt and to partially fund the acquisition of Leyland Trucks in 1998. The movements in the exchange rates, from the time the original debt was incurred to the time debt payments were made, have not had a significant effect on the amount of cash required to repay the debt. Expenditures for long-lived assets in 1998 totaled $187 million. PACCAR's truck operations made significant investments in the expansion and modernization of their facilities, including state-of-the-art systems to improve product design capabilities and efficiencies of its business processes, as well as new product tooling to meet the demands of an aggressive product development plan. Over the last five years, the Company's worldwide capital spending, excluding the Financial Services segment, totaled over $530 million. Spending for ongoing capital additions, product development and process efficiencies at PACCAR is expected to be higher in 1999. PACCAR will invest approximately $80 million in building its Canadian truck plant. An agreement with the governments of Canada and Quebec will provide partial funding through a public financing package. PACCAR will fund the remainder from external borrowings, which will be repaid from operating cash flows. The state-of-the-art facility is expected to commence production in mid-year 1999. In addition, the Company expects to make significant investments in new product tooling, in new technology and systems to support business process improvements, and to increase its network of retail auto parts locations. FINANCIAL SERVICES The Financial Services companies rely heavily on funds borrowed in capital markets as well as funds generated from collections on loans and leases. An additional source of funds includes capital contributions and intercompany loans from PACCAR. Growth in net finance receivables continues to be funded primarily with borrowings by the finance and leasing companies. In 1998, PACCAR Financial Corp. filed a shelf registration under which $1 billion of medium-term notes could be issued as needed. At the end of 1998, $805 million of this registration was still available for issuance. To reduce exposure to fluctuations in interest rates, the Financial Services companies pursue a policy of obtaining funds with interest rate characteristics similar to the assets being funded. As part of this policy, the companies use over-the-counter interest-rate contracts. The permitted type of interest-rate contracts and transaction limits have been established by the Company's senior management, who receive periodic reports on the amount of contracts outstanding. PACCAR believes its Financial Services companies have sufficient financial capabilities to continue funding receivables and servicing debt through internally generated funds, lines of credit and access to public and private debt markets. EURO CONVERSION: PACCAR's subsidiary, DAF Trucks N.V., located in the Netherlands, has developed a formal plan for converting to the euro. Effective January 1, 1999, DAF was ready to invoice customers, receive billings from vendors and prepare consolidated internal and external financial reports in euros. While some new systems will need further modification, planned revisions are on schedule. The cost of becoming euro-compliant is not significant to PACCAR and no incremental costs will be passed on to customers. The increased price transparency, as a result of the euro, is not expected to have a significant impact on overall margins in 1999, as DAF is a custom truck manufacturer and each truck is built to customer-specification. While the long-term impact on margins is estimated to be minimal, the ultimate impact is dependent on future events, including market conditions. The conversion to the euro is not expected to materially impact PACCAR's financial condition or results of operations. IMPACT OF ENVIRONMENTAL MATTERS: The Company, its competitors and industry in general are subject to various federal, state and local requirements relating to the environment. The Company believes its policies, practices and procedures are designed to prevent unreasonable risk of environmental damage and that its handling, use and disposal of hazardous or toxic substances have been in accordance with environmental laws and regulations enacted at the time such use and disposal occurred. Expenditures were approximately $3 million in 1998, $6 million in 1997 and $4 million in 1996 for costs related to environmental activities. The Company does not anticipate that the effects on future operations or cash flows will be materially greater than recent experience. The Company is involved in various stages of investigations and cleanup actions related to environmental matters. In certain of these matters, the Company has been designated as a "potentially responsible party" by the U.S. Environmental Protection Agency (EPA) or by a state-level environmental agency. At certain of these sites, the Company, together with other parties, is participating with the EPA and other state-level agencies both in cleanup studies and the determination of remedial action, as well as actual remediation procedures. The Company's estimated range of reasonably possible costs to complete cleanup actions, where it is probable that the Company will incur such costs and such amounts can be reasonably estimated, is between $30 million and $55 million. The Company has established a reserve to provide for estimated future environmental cleanup costs. In prior years, the Company was successful in recovering a portion of its environmental remediation costs from insurers, but does not believe future recoveries from insurance carriers will be significant. While the timing and amount of the ultimate costs associated with environmental cleanup matters cannot be determined, management does not expect that these matters will have a material adverse effect on the Company's consolidated cash flow, liquidity or financial condition. YEAR 2000 STATUS: GENERAL The Company established a formal Year 2000 project in 1996 to manage PACCAR's global compliance effort. The scope of the project includes the compliance of (1) mainframe computer systems, (2) PC and LAN systems, (3) embedded systems (including both the Company's internal machinery and equipment and the Company's products), and (4) significant third parties. A steering committee comprised of senior management monitors progress and addresses compliance issues. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. STATUS OF THE COMPANY'S YEAR 2000 COMPLIANCE The Company has completed the evaluation of virtually all computer systems and applications used by the Company and its subsidiaries. PACCAR has prioritized the non-compliant systems and expects to substantially complete modifications to all significant systems before problems related to the Year 2000 occur. Outside specialists have been retained to assist in this process to the extent considered necessary. Mainframe computer systems compliance efforts are approximately 80% complete. PC and LAN systems, and embedded manufacturing systems are both approximately 75% complete. The Company has verified that there are no Year 2000 issues with the portion of its products manufactured by the Company, and it has received confirmation from most major suppliers that there are no Year 2000 issues with their components as used in the Company's products. The Company is continuing to contact the remaining suppliers about compliance of their components. Year 2000 compliance work is being successfully completed along with other systems development projects. SIGNIFICANT THIRD PARTIES Some of the Company's Year 2000 compliance efforts are dependent on the release of new versions of software by the software developers, which are scheduled to be delivered in 1999. These software developers have represented to the Company that the new releases will be delivered in time to avoid any material Year 2000 issues with their software. PACCAR is contacting all business critical suppliers to assess their Year 2000 efforts and take appropriate action if there is significant risk to PACCAR's continued operation. PACCAR is also assessing the Year 2000 programs of its independent dealers and tracking their progress toward completion. There is regular communication with dealers, which includes the importance of addressing the Year 2000 issue and general guidance regarding appropriate steps to take. The Company also depends on banks and other financial institutions to support its cash management activities and to fund the lending activity of its financial services companies with the issuance of commercial paper and public debt. The Company has sent letters and has received responses indicating that banks and other financial institutions, with which it has relationships, already are or will be compliant by the Year 2000. To date, the Company is not aware of any significant third party, including software developers, suppliers, dealers, banks and others, with a Year 2000 issue that would materially impact the Company's results of operations, liquidity or capital resources. YEAR 2000 COSTS The total cost to complete these projects is expected to approximate $25 million, of which $15 million has been incurred through December 31, 1998. The Company has and expects to continue to fund the cost of these projects from operations. All project costs are being expensed. YEAR 2000 RISKS The Company has not yet completed all necessary phases of its Year 2000 program. In addition, the Company has no means of ensuring that significant third parties will be fully prepared for the Year 2000. In the event the Company or one or more significant third parties fail to become completely Year 2000 compliant, the most reasonably likely worst case scenario for the Company is that manufacturing operations could be temporarily impacted. Production at one or more of the Company's plants could be interrupted for a period of time, which in turn could result in lost sales and profits. Selling, general and administrative expense for the Company would likely increase to the extent that automated functions would need to be performed manually. The most reasonably likely worst case scenario for the Company's financial services companies, if some of their systems are not Year 2000 compliant, is that information and reports would contain inaccuracies that would reduce the efficiency of payment processing and would result in increased administrative costs and generally reduce customer service. If a significant failure of banking systems or systems of other entities that are key to the public debt markets occurred due to Year 2000 issues, the financial services companies' ability to access various credit and money markets and to process payments could be adversely affected. In addition, the world economy could enter a recession due to widespread interruption in commercial activity or due to diverting substantial resources to achieve Year 2000 compliance, which could also have a materially adverse impact on the Company. The cumulative effect of these potential outcomes is unknown, but could have a material effect on consolidated financial condition, results of operations and liquidity. CONTINGENCY PLANS PACCAR considers alternatives in planning and scheduling Year 2000 projects. The Company continually evaluates the status of completion of all Year 2000 projects to determine whether contingency plans should be developed or implemented. Such plans include automated and manual workarounds, as considered necessary.
CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- (millions except per share data) TRUCK AND OTHER: Net sales $ 7,577.7 $ 6,479.4 $ 4,334.4 Costs and Expenses Cost of sales 6,431.0 5,549.3 3,737.3 Selling, general and administrative 575.2 532.9 375.8 Interest 18.1 17.6 4.2 - ------------------------------------------------------------------------------------------------------------------- 7,024.3 6,099.8 4,117.3 - ------------------------------------------------------------------------------------------------------------------- TRUCK AND OTHER INCOME BEFORE INCOME TAXES 553.4 379.6 217.1 FINANCIAL SERVICES: Revenues 317.1 284.3 267.9 Costs and Expenses Interest and other 173.8 151.5 147.6 Selling, general and administrative 67.1 53.6 46.8 Provision for losses on receivables 14.0 7.9 5.2 - ------------------------------------------------------------------------------------------------------------------- 254.9 213.0 199.6 - ------------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES INCOME BEFORE INCOME TAXES 62.2 71.3 68.3 Gain on sale of subsidiary 55.7 Investment income 33.3 24.7 25.8 Other, net 4.2 3.4 1.7 - ------------------------------------------------------------------------------------------------------------------- Total Income Before Income Taxes 653.1 534.7 312.9 Income taxes 236.3 190.1 111.9 - ------------------------------------------------------------------------------------------------------------------- Net Income $ 416.8 $ 344.6 $ 201.0 - ------------------------------------------------------------------------------------------------------------------- Net Income Per Share Basic $ 5.34 $ 4.43 $ 2.59 - ------------------------------------------------------------------------------------------------------------------- Diluted $ 5.30 $ 4.41 $ 2.59 - ------------------------------------------------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding 78.1 77.8 77.7 - -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS ASSETS December 31 1998 1997 - ------------------------------------------------------------------------------------------------------------------- (millions of dollars) TRUCK AND OTHER: Current Assets Cash and cash equivalents $ 410.3 $ 318.6 Trade and other receivables, net of allowance for losses (1998 - $27.1 and 1997 - $20.3) 645.6 600.3 Marketable securities 404.8 357.0 Inventories 511.1 393.5 Deferred taxes and other current assets 98.2 86.7 - ------------------------------------------------------------------------------------------------------------------- Total Truck and Other Current Assets 2,070.0 1,756.1 Deferred taxes, goodwill and other 261.9 183.5 Property, plant and equipment, net 827.7 665.9 - ------------------------------------------------------------------------------------------------------------------- Total Truck and Other Assets 3,159.6 2,605.5 - ------------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES: Cash and cash equivalents 22.1 19.3 Finance and other receivables, net of allowance for losses (1998 - $67.1 and 1997 - $57.5) 3,790.4 3,131.0 Less unearned interest (267.4) (237.1) - ------------------------------------------------------------------------------------------------------------------- 3,523.0 2,893.9 Equipment on operating leases, net 65.3 55.8 Other assets 24.8 24.9 - ------------------------------------------------------------------------------------------------------------------- Total Financial Services Assets 3,635.2 2,993.9 - ------------------------------------------------------------------------------------------------------------------- $ 6,794.8 $ 5,599.4 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS` EQUITY December 31 1998 1997 - ------------------------------------------------------------------------------------------------------------------- (millions of dollars) TRUCK AND OTHER: Current Liabilities Accounts payable and accrued expenses $ 1,293.9 $ 1,047.3 Current portion of long-term debt 43.8 15.0 Dividend payable 125.0 116.7 Income taxes and other 56.4 44.5 - ------------------------------------------------------------------------------------------------------------------- Total Truck and Other Current Liabilities 1,519.1 1,223.5 Long-term debt 204.3 236.6 Other, including deferred taxes 336.4 216.4 - ------------------------------------------------------------------------------------------------------------------- Total Truck and Other Liabilities 2,059.8 1,676.5 - ------------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES: Accounts payable and accrued expenses 83.6 85.8 Commercial paper and bank loans 1,617.8 1,086.7 Long-term debt 1,106.9 1,097.7 Deferred income taxes and other 162.5 154.9 - ------------------------------------------------------------------------------------------------------------------- Total Financial Services Liabilities 2,970.8 2,425.1 - ------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock, no par value - authorized 1.0 million shares, none issued Common stock, $1 par value - authorized 200.0 million shares, 78.1 million shares issued and outstanding 78.1 77.8 Additional paid-in capital 620.2 609.9 Retained earnings 1,185.7 940.8 Currency translation and net unrealized investment gains or (losses) (119.8) (130.7) - ------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 1,764.2 1,497.8 - ------------------------------------------------------------------------------------------------------------------- $ 6,794.8 $ 5,599.4 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY December 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- (millions of dollars) COMMON STOCK, $1 PAR VALUE: ($12 PAR VALUE - 1996) Balance at beginning of year $ 77.8 $ 466.4 $ 466.3 Reduction in par value from $12 per share to $1 per share (427.8) Stock split 38.9 Stock options exercised .3 .3 .1 - ------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 78.1 $ 77.8 $ 466.4 - ------------------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL: Balance at beginning of year $ 609.9 $ 219.0 $ 218.7 Reduction in par value from $12 per share to $1 per share 427.8 Stock split (38.9) Other, including options exercised and tax benefit 10.3 2.0 .3 - ------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 620.2 $ 609.9 $ 219.0 - ------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS: Balance at beginning of year $ 940.8 $ 757.7 $ 653.8 Net income 416.8 344.6 201.0 Cash dividends declared on common stock, per share: 1998 - $2.20; 1997 - $2.075; 1996 - $1.25 (171.9) (161.5) (97.1) - ------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 1,185.7 $ 940.8 $ 757.7 - ------------------------------------------------------------------------------------------------------------------- NET UNREALIZED INVESTMENT GAINS (LOSSES): Balance at beginning of year $ .9 $ .6 $ 2.2 Net unrealized gains (losses) 1.1 .3 (1.6) - ------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 2.0 $ .9 $ .6 - ------------------------------------------------------------------------------------------------------------------- CURRENCY TRANSLATION ADJUSTMENTS: Balance at beginning of year $ (131.6) $ (85.7) $ (89.8) Translation gains (losses) 9.8 (45.9) 4.1 - ------------------------------------------------------------------------------------------------------------------- Balance at end of year $ (121.8) $ (131.6) $ (85.7) - ------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity $ 1,764.2 $1,497.8 $ 1,358.0 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME December 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- (millions of dollars) Net income $ 416.8 $ 344.6 $ 201.0 Other comprehensive income, net of tax: Currency translation adjustments 9.8 (45.9) 4.1 Net unrealized investment gains (losses) 1.1 .3 (1.6) - ------------------------------------------------------------------------------------------------------------------- Net other comprehensive income (loss) 10.9 (45.6) 2.5 - ------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 427.7 $ 299.0 $ 203.5 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- (millions of dollars) OPERATING ACTIVITIES: Net income $ 416.8 $ 344.6 $ 201.0 Items Included in Net Income Not Affecting Cash: Depreciation and amortization 123.9 112.0 81.1 Provision for losses on financial services receivables 14.0 7.9 5.2 Gain on sale of subsidiary (55.7) (Gain) Loss on sale of property, plant and equipment 4.7 (4.4) (4.7) Other 53.0 8.5 16.5 Change in Operating Assets and Liabilities: (Increase) Decrease in assets other than cash and equivalents: Receivables (39.0) (108.5) (39.5) Inventories (88.0) (44.9) 33.9 Other (2.0) (15.7) (10.6) Increase (Decrease) in liabilities: Accounts payable and accrued expenses 175.0 179.6 86.6 Other (4.6) 15.0 (11.2) - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 653.8 438.4 358.3 INVESTING ACTIVITIES: Finance receivables originated (1,973.6) (1,509.9) (1,318.0) Collections on finance receivables 1,332.9 1,248.6 1,164.5 Net decrease (increase) in wholesale receivables (50.6) 37.8 63.3 Marketable securities purchased (1,286.3) (2,307.9) (2,036.5) Marketable securities sales and maturities 1,265.3 2,256.5 2,183.3 Proceeds from sale of subsidiary 105.0 Acquisition of businesses (75.2) (465.2) Acquisition of property, plant and equipment (192.9) (107.0) (108.7) Acquisition of equipment for operating leases (29.9) (26.0) (14.5) Proceeds from asset disposals 44.3 41.7 43.7 Other 6.0 1.9 (.4) - ------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (960.0) (259.3) (488.5) FINANCING ACTIVITIES: Cash dividends paid (163.6) (103.1) (155.5) Stock option transactions 6.6 2.3 .4 Net (decrease) increase in notes payable (347.4) 347.4 Net increase in commercial paper and bank loans 539.4 133.8 22.5 Proceeds from long-term debt 612.1 801.7 426.8 Payments on long-term debt (582.0) (582.8) (469.7) - ------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 412.5 (95.5) 171.9 Effect of exchange rate changes on cash (11.8) 31.4 (2.8) - ------------------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 94.5 115.0 38.9 Cash and cash equivalents at beginning of year 337.9 222.9 184.0 - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 432.4 $ 337.9 $ 222.9 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) A. SUMMARY OF ACCOUNTING POLICIES Organization: PACCAR Inc (the Company or PACCAR) is a multinational company with its largest operations in the United States and Europe. The Company's Truck and Financial Services segments also have operations in Canada, Australia and Mexico. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with 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. Cash, Cash Equivalents and Marketable Securities: Cash equivalents consist of short-term liquid investments with a maturity at date of purchase of three months or less. Cash equivalents were $410.3 and $281.1 at December 31, 1998 and 1997, respectively. The Company's investments in cash equivalents and marketable securities are classified as debt securities available-for-sale. These investments are stated at fair value with any unrealized holding gains or losses, net of tax, included as a component of stockholders' equity until realized. The cost of debt securities available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Amortization of premiums, accretion of discounts, interest and dividend income are included as a component of investment income. The cost of securities sold is based on the specific identification method. Inventories: Inventories are stated at the lower of cost or market. Cost of inventories in the United States is determined principally by the last-in, first-out (LIFO) method. Cost of all other inventories is determined by the first-in, first-out (FIFO) or the weighted average method. Goodwill: Goodwill is amortized on a straight-line basis for periods ranging from 20 to 27 years. At December 31, 1998 and 1997, goodwill amounted to $106.4 and $100.8, net of accumulated amortization of $16.9 and $11.7, respectively. Amortization of goodwill totaled $4.7 in 1998, $5.1 in 1997 and $2.0 in 1996. Annual amortization expense is impacted by the effect of movements in the exchange rate used to translate amounts from the Company's foreign subsidiaries. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation of plant and equipment is computed principally by the straight-line method based upon the estimated useful lives of the various classes of assets, which range as follows: Machinery and equipment 5-12 years Buildings 30-40 years Environmental: Expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and which do not contribute to current or future revenue generation are expensed. Liabilities are recorded when it is probable the Company will be obligated to pay amounts for environmental site evaluation, remediation or related costs, and such amounts can be reasonably estimated. Revenue Recognition: Substantially all sales of trucks and related aftermarket parts are recorded by the Company when products are shipped to dealers or customers. Generally, interest income from finance receivables is recognized using the interest method. Estimated Credit Losses: The provision for losses on net finance and other receivables is charged to income in an amount sufficient to maintain the allowance for losses at a level considered adequate to cover estimated credit losses. Receivables are charged to this allowance when, in the judgment of management, they are deemed uncollectible (usually upon repossession of the collateral). Derivative Financial Instruments: The Company does not engage in derivatives trading, market-making or other speculative activities. The Company enters into agreements to manage certain exposures to fluctuations in interest rates and foreign exchange. It uses interest-rate contracts to match the interest rate characteristics of the Company's finance receivables with the borrowings used to fund those receivables. Interest-rate contracts generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying principal. Net amounts paid or received are reflected as adjustments to interest expense. To mitigate the effect of changes in currency exchange rates, PACCAR regularly enters into currency exchange contracts to hedge its net foreign currency exposure. Gains and losses on these contracts are deferred and included in the measurement of the related foreign currency transaction when completed. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) PACCAR has currency exchange exposure for the U.S. dollar compared to the Canadian dollar. With respect to Europe, PACCAR has currency exposure for the Dutch guilder compared to the British pound. When the U.S. dollar or the Dutch guilder strengthens relative to the Canadian dollar or the British pound, the translated value of sales in the other currencies decreases. When the U.S. dollar or the Dutch guilder weakens, the translated value of sales in the other currencies increases. Overall, PACCAR is a net receiver of Canadian dollars and British pounds and benefits from a weaker U.S. dollar or Dutch guilder. Research and Development: Research and development costs are expensed as incurred. Amounts charged against income were $119.0 in 1998, $84.0 in 1997 and $47.0 in 1996. NEW ACCOUNTING STANDARDS: In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE AND HEDGING ACTIVITIES. PACCAR will adopt SFAS 133 in the first quarter of 2000. The impact of adoption is not expected to be material to PACCAR's consolidated financial position or results of operations. Reclassifications: Certain prior-year amounts have been reclassified to conform to the 1998 presentation. B. INVESTMENTS IN DEBT SECURITIES All investments in debt securities were classified as available-for-sale at December 31, 1998 and 1997. Amounts at December 31, 1998, were as follows:
AMORTIZED FAIR COST VALUE - ------------------------------------------------------------------------------- U.S. government securities $ 65.9 $ 66.3 Tax-exempt securities 325.1 327.3 Other debt securities 421.0 421.5 - ------------------------------------------------------------------------------- $812.0 $815.1 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Amounts at December 31, 1997, were as follows:
AMORTIZED FAIR COST VALUE - ------------------------------------------------------------------------------- U.S. government securities $ 84.9 $ 85.2 Tax-exempt securities 353.6 355.0 Other debt securities 197.9 197.9 - ------------------------------------------------------------------------------- $636.4 $638.1 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Fair value of investments in debt securities were included in cash and equivalents and marketable securities as follows:
1998 1997 - ------------------------------------------------------------------------------- Truck and Other: Cash and equivalents $404.9 $275.7 Marketable securities 404.8 357.0 Financial Services: Cash and equivalents 5.4 5.4 - ------------------------------------------------------------------------------- $815.1 $638.1 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) The contractual maturities of debt securities at December 31, 1998, were as follows:
AMORTIZED FAIR COST VALUE - ------------------------------------------------------------------------------- Maturities in: One year or less $445.5 $445.0 One to five years 355.8 359.1 Five to ten years 10.7 11.0 - ------------------------------------------------------------------------------- $812.0 $815.1 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Gross realized gains and losses and unrealized holding gains and losses were not significant for any of the years presented. C. INVENTORIES
1998 1997 - ------------------------------------------------------------------------------- Inventories at FIFO cost: Finished products $ 328.2 $ 274.7 Work in process and raw materials 308.2 244.9 - ------------------------------------------------------------------------------- 636.4 519.6 Less excess of FIFO cost over LIFO (125.3) (126.1) - ------------------------------------------------------------------------------- $ 511.1 $ 393.5 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Inventories valued using the LIFO method comprised 55% of consolidated inventories at FIFO or weighted average cost for both December 31, 1998 and 1997. D. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment include the following:
1998 1997 - ------------------------------------------------------------------------------- Land $ 63.4 $ 51.9 Buildings 486.7 441.3 Machinery and equipment 951.1 722.1 - ------------------------------------------------------------------------------- 1,501.2 1,215.3 Less allowance for depreciation (673.5) (549.4) - ------------------------------------------------------------------------------- $ 827.7 $ 665.9 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS EXCEPT PER SHARE AMOUNTS) E. ACQUISITIONS AND SALE OF BUSINESSES On June 2, 1998, PACCAR acquired Leyland Trucks Ltd., a manufacturer of light- and medium-duty trucks in the United Kingdom. PACCAR used the purchase method of accounting for the acquisition. The consolidated financial statements include Leyland operations subsequent to the acquisition date. Leyland's impact on consolidated results and financial position are not material. In addition, due to the supplier-customer relationship of Leyland to DAF, a substantial portion of Leyland's sales eliminate in consolidation. In December 1997, PACCAR sold Trico Industries, its oilfield equipment business, to an oil services company based in Houston, Texas, for $105 in cash, resulting in a $55.7 pretax gain. On November 15, 1996, PACCAR acquired all the outstanding shares of DAF Trucks, N.V. (DAF), a truck manufacturer that also produces its own engines and axles. Its core operations include development, production, marketing and aftermarket parts sales for medium- and heavy-duty commercial trucks with factories in the Netherlands and Belgium. DAF was purchased for 900 Dutch guilders (NLG), or approximately $532. PACCAR paid NLG 300 in cash and financed the remaining balance with guilder-denominated debt. DAF's operations have been included in the consolidated financial statements since the date of acquisition. The following unaudited pro forma consolidated results of operations for the year ended December 31, 1996, reflect the DAF acquisition as though it occurred at the beginning of the year after adjustments for the impact of interest on acquisition debt, depreciation and amortization of assets, including goodwill, to reflect the purchase price allocation. The pro forma information is provided for information purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor does it represent results that may occur in the future.
For the year ended December 31, 1996 (UNAUDITED) - ------------------------------------------------------------------------------- Manufacturing Revenues $5,900.0 Net Income 250.0 Net Income Per Share $ 3.22 - -------------------------------------------------------------------------------
F. FINANCE AND OTHER RECEIVABLES Terms for substantially all finance and other receivables range up to 60 months. Repayment experience indicates some receivables will be paid prior to contracted maturity, while others will be extended or renewed. The Company's finance and other receivables are as follows:
1998 1997 - ------------------------------------------------------------------------------- Retail notes and contracts $2,667.9 $2,171.7 Wholesale financing 187.2 138.4 Direct financing leases 980.9 860.1 Interest and other receivables 21.5 18.3 - ------------------------------------------------------------------------------- 3,857.5 3,188.5 Less allowance for losses (67.1) (57.5) - ------------------------------------------------------------------------------- 3,790.4 3,131.0 Unearned interest: Retail notes and contracts (135.3) (123.4) Direct financing leases (132.1) (113.7) - ------------------------------------------------------------------------------- (267.4) (237.1) $3,523.0 $2,893.9 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Annual payments due on retail notes and contracts for the five years beginning January 1, 1999, are $950.5, $750.8, $543.7, $309.7, $105.4 and $7.8 thereafter. Estimated residual values included with direct financing leases amounted to $52.3 in 1998 and $43.0 in 1997. Annual minimum lease payments due on direct financing leases for the five years beginning January 1, 1999, are $267.2, $230.7, $192.1, $132.8, $68.8 and $37.0 thereafter. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) G. ALLOWANCE FOR LOSSES The allowance for losses on Truck and Other and Financial Services receivables is summarized as follows:
TRUCK FINANCIAL AND OTHER SERVICES - ------------------------------------------------------------------------------- Balance, January 1, 1996 $ 5.8 $56.8 Additions: Provision for losses .5 5.2 Resulting from acquisitions 15.4 Net losses, including translation (2.5) (8.0) - ------------------------------------------------------------------------------- Balance, December 31, 1996 19.2 54.0 Provision for losses 3.5 7.9 Net losses, including translation (2.4) (4.4) - ------------------------------------------------------------------------------- Balance, December 31, 1997 20.3 57.5 Additions: Provision for losses 7.1 14.0 Resulting from acquisitions .2 Net losses, including translation (.5) (4.4) - ------------------------------------------------------------------------------- Balance, December 31, 1998 $27.1 $67.1 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The Company's customers are principally concentrated in the transportation industry. There are no significant concentrations of credit risk in terms of a single customer or geographic region. Generally, financial services receivables are collateralized by financed equipment. H. EQUIPMENT ON OPERATING LEASES Equipment leased to customers under operating leases is recorded at cost and is depreciated on the straight-line basis to its estimated residual value. Estimated useful lives are five years.
1998 1997 - ------------------------------------------------------------------------------- Trucks and other equipment $82.1 $79.3 Less allowance for depreciation (16.8) (23.5) - ------------------------------------------------------------------------------- $65.3 $55.8 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Original terms of operating leases generally range up to 84 months. Annual minimum lease payments due on operating leases for the five years beginning January 1, 1999, are $14.0, $11.3, $8.2, $5.1 and $3.4. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) I. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses include the following:
1998 1997 - ------------------------------------------------------------------------------- Truck and Other: Accounts payable $ 671.6 $ 533.1 Salaries and wages 130.0 127.1 Warranty and self-insurance reserves 218.0 169.3 Other 274.3 217.8 - ------------------------------------------------------------------------------- $1,293.9 $1,047.3 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Financial Services: Accounts payable $ 63.6 $ 61.7 Other 20.0 24.1 - ------------------------------------------------------------------------------- $ 83.6 $ 85.8 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
J. BORROWINGS AND CREDIT ARRANGEMENTS
1998 1997 - ------------------------------------------------------------------------------- Truck and Other: Long-term debt $243.1 $246.9 Less current portion (43.4) (14.6) - ------------------------------------------------------------------------------- 199.7 232.3 Capital lease obligations 5.0 4.7 Less current portion (.4) (.4) - ------------------------------------------------------------------------------- 4.6 4.3 - ------------------------------------------------------------------------------- $204.3 $236.6 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The weighted average interest rate on the fixed portion of long-term debt ($163.9) was 4.9% at December 31, 1998. The interest rate on the floating portion of long-term debt ($79.2) is based on the Amsterdam Interbank Offered Rate and was 3.5% at December 31, 1998. Annual maturities for long-term debt and capital leases for the five years beginning January 1, 1999, are $43.8, $42.5, $39.4, $117.8 and $1.4, respectively.
EFFECTIVE RATE 1998 1997 - ------------------------------------------------------------------------------- Financial Services: Commercial paper 5.3% $1,511.5 $ 947.2 Bank loans 7.6% 106.3 139.5 - ------------------------------------------------------------------------------- 1,617.8 1,086.7 - ------------------------------------------------------------------------------- Long-term debt: Fixed rate 6.0% 963.9 922.7 Floating rate 5.8% 143.0 175.0 - ------------------------------------------------------------------------------- 1,106.9 1,097.7 - ------------------------------------------------------------------------------- $2,724.7 $2,184.4 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The effective rate is the weighted average rate as of December 31, 1998, and includes the effects of interest-rate agreements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) Annual maturities of long-term debt for the five years beginning January 1, 1999, are $431.7, $299.7, $255.9, $111.8 and $7.8, respectively. CONSOLIDATED: Interest paid on consolidated borrowings was $188.0 in 1998, $143.6 in 1997 and $133.3 in 1996. The weighted average interest rate on consolidated commercial paper and bank loans was 5.34%, 5.78% and 4.73% at December 31, 1998, 1997 and 1996, respectively. The Company has line of credit arrangements of $1,548.7, most of which are reviewed annually for renewal. The unused portion of these credit lines was $1,292.7 at December 31, 1998, of which the majority is maintained to support commercial paper and other short-term borrowings of the financial services companies. Compensating balances are not required on the lines, and service fees are immaterial. In addition, at December 31, 1998, there was $805 of medium-term debt available for issuance under a currently outstanding shelf registration. K. LEASES The Company leases most store locations for its automotive parts sales operations and various other office space under operating leases. Leases expire at various dates through the year 2013. Annual minimum rental payments due under operating leases for the five years beginning January 1, 1999, are $26.1, $23.0, $18.7, $12.4, $10.6 and $27.9 thereafter. Minimum payments on leases have not been reduced by aggregate minimum sublease rentals of $8.5 receivable under noncancelable subleases. The Company has operating leases which, in addition to aggregate minimum annual rentals, provide for additional rental payments based on sales and certain expenses. Total rental expenses under all leases for the three years ended December 31, 1998, were $27.5, $19.1 and $15.8, net of sublease rentals of $2.0, $2.1 and $2.0, respectively. L. DERIVATIVE FINANCIAL INSTRUMENTS Interest-Rate Contracts: The Company enters into various interest-rate contracts, including interest-rate and currency swap, cap and forward-rate agreements. These contracts are used to manage exposures to fluctuations in interest rates. At December 31, 1998, the Company had 138 interest-rate contracts outstanding with other financial institutions. The notional amount of these contracts totaled $1,246, with amounts expiring annually over the next five years. The notional amount is used to measure the volume of these contracts and does not represent exposure to credit loss. In the event of default by a counterparty, the risk in these transactions is the cost of replacing the interest-rate contract at current market rates. The Company monitors its positions and the credit ratings of its counterparties. Management believes the risk of incurring losses is remote, and that if incurred, such losses would be immaterial. Floating to fixed rate swaps effectively convert an equivalent amount of commercial paper and other variable rate debt to fixed rates. Notional maturities for the five years beginning January 1, 1999, are $604.0, $408.8, $151.5, $64.3, $12.9 and $4.0 thereafter. The weighted average pay rate of 5.7% approximates the Company's net cost of funds. The weighted average receive rate of 5.4% offsets rates on associated debt obligations. Foreign Currency Exchange Contracts: PACCAR enters into foreign currency exchange contracts to hedge certain firm commitments denominated in foreign currencies. As a matter of policy, the Company does not engage in currency speculation. Foreign exchange contracts generally mature within six months. At December 31, 1998 and 1997, PACCAR had net foreign exchange purchase contracts outstanding amounting to $188 and $143 U.S. dollars, respectively. Approximately 90% of the 1998 amount represented contracts related to the U.S. and Canadian dollars. The remaining balance in 1998 represented contracts related to Dutch guilders and the British pound. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) M. COMMITMENTS AND CONTINGENCIES The Company is involved in various stages of investigations and cleanup actions in different countries related to environmental matters. In certain of these matters, the Company has been designated as a Potentially Responsible Party by the U.S. Environmental Protection Agency or by a state-level environmental agency. The Company has provided for the estimated costs to investigate and complete cleanup actions where it is probable that the Company will incur such costs in the future. While neither the timing nor the amount of the ultimate costs associated with future environmental cleanup can be determined, management does not expect that those matters will have a material adverse effect on the Company's consolidated financial position. At December 31, 1998, PACCAR had standby letters of credit outstanding totaling $35, which guarantee various insurance and financing activities. PACCAR is a defendant in various legal proceedings and, in addition, there are various other contingent liabilities arising in the normal course of business. After consultation with legal counsel, management does not anticipate that disposition of these proceedings and contingent liabilities will have a material effect on the consolidated financial statements. N. RETIREMENT PLANS PACCAR has several defined benefit pension plans which cover a majority of its employees. The following data relate to all pension plans of the Company except for certain union-negotiated, multi-employer and foreign insured plans.
1998 1997 1996 - ------------------------------------------------------------------------------- Weighted Average Assumptions as of December 31: Discount rate 7.0% 7.5% 7.5% Rate of increase in future compensation levels 4.8% 4.8% 4.8% Assumed long-term rate of return on plan assets 8.0% 8.0% 8.0% - -------------------------------------------------------------------------------
1998 1997 - ------------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at January 1 $365.4 $319.2 Service cost 18.0 15.0 Interest cost 26.7 24.4 Actuarial loss 27.9 18.8 Acquisition of Leyland Trucks Ltd. 21.5 Benefits paid (11.8) (12.0) - ------------------------------------------------------------------------------- Benefit obligation at December 31 $447.7 $365.4 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets at January 1 $402.2 $342.0 Actual return on plan assets 57.1 65.7 Employer contributions 7.4 6.5 Acquisition of Leyland Trucks Ltd. 24.6 Benefits paid (11.8) (12.0) - ------------------------------------------------------------------------------- Fair value of plan assets at December 31 $479.5 $402.2 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) Funded Status at December 31: Funded status $ 31.8 $ 36.8 Unrecognized actuarial gain (62.4) (64.1) Unrecognized prior service cost 10.6 8.9 Unrecognized net initial obligation .8 1.4 - ------------------------------------------------------------------------------- Net liability $(19.2) $(17.0) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Details of Net Asset (Liability) Recorded: Prepaid benefit costs $ 13.3 $ 3.9 Accrued benefit liability (35.2) (22.9) Intangible asset 2.7 2.0 - ------------------------------------------------------------------------------- Net liability $(19.2) $(17.0) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
1998 1997 1996 - ------------------------------------------------------------------------------- Components of Pension Expense: Service cost $ 18.0 $ 15.0 $ 13.5 Interest on projected benefit obligation 26.7 24.4 21.2 Expected return on assets (29.1) (26.8) (23.4) Amortization of prior service costs 2.0 2.0 2.1 Recognized actuarial gain (.4) (2.2) (2.5) - ------------------------------------------------------------------------------- Net pension expense $ 17.2 $ 12.4 $ 10.9 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Pension expense for union-negotiated, multi-employer and foreign insured plans was $16.7 in 1998, $14.3 in 1997, and $3.5 in 1996. Pension expense in 1998 and 1997 included $12.3 and $10.8, respectively, for a foreign insured plan related to DAF Trucks, acquired at the end of 1996. The Company has unfunded postretirement medical and life insurance plans covering approximately one-half of all U.S. employees that reimburse retirees for approximately 50% of their medical costs from retirement to age 65 and provide a nominal death benefit. The following data relate to unfunded postretirement medical and life insurance plans.
1998 1997 - ------------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at January 1 $ 30.5 $ 29.7 Service cost 1.6 1.8 Interest cost 1.6 2.2 Amendments 2.7 Actuarial gain (6.8) (2.8) Benefits paid (.5) (.4) - ------------------------------------------------------------------------------- Benefit obligation at December 31 $ 29.1 $ 30.5 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) Unfunded Status at December 31: Unfunded status $(29.1) $(30.5) Unrecognized actuarial (gain) loss (1.9) 4.8 Unrecognized prior service cost 3.1 .4 Unrecognized net initial obligation 6.1 6.6 - ------------------------------------------------------------------------------- Accrued postretirement benefits $(21.8) $(18.7) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
1998 1997 1996 - ------------------------------------------------------------------------------- Components of Retiree Expense: Service cost $ 1.6 $ 1.8 $ 1.7 Interest cost 1.6 2.2 2.0 Recognized actuarial (gain) loss (.1) .2 .2 Recognized net initial obligation .5 .5 .5 - ------------------------------------------------------------------------------- Net retiree expense $ 3.6 $ 4.7 $ 4.4 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The discount rate and long-term medical inflation rate used for calculating the accumulated plan benefits were 7.0% and 7.0%, respectively, for 1998 and 7.5% and 7.0%, respectively, for 1997. Assumed health care cost trends have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% 1% INCREASE DECREASE - ------------------------------------------------------------------------------- Effect on total of service and interest cost components $ .3 $ (.3) Effect on accumulated postretirement benefit obligation $ 3.1 $ (2.8)
The Company has certain defined contribution benefit plans whereby it generally matches employee contributions of 2% to 5% of base wages. The majority of participants in these plans are non-union employees located in the United States. Expenses for these plans were $12.6, $11.8 and $12.3 in 1998, 1997 and 1996, respectively. O. FOREIGN OPERATIONS AND CURRENCY TRANSLATION For most of PACCAR's foreign subsidiaries, the local currency is the functional currency and all assets and liabilities are translated at year-end exchange rates and all income statement amounts are translated at an average of the month-end rates. Adjustments resulting from this translation are recorded in a separate component of stockholders' equity. Also included are the effects of foreign denominated borrowings designated as hedges of certain net foreign investments. DAF uses the guilder as the functional currency to account for its foreign subsidiaries and PACCAR uses the U.S. dollar as the functional currency for its Mexican subsidiaries. Accordingly, for DAF's foreign subsidiaries and PACCAR's Mexican subsidiaries, inventories, cost of sales, property, plant and equipment, and depreciation were translated at historical rates. Resulting gains and losses are included in net income. Net foreign currency translations and transactions increased net income by $3.1 in 1998 and $1.2 in 1996 and decreased net income by $.2 in 1997. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) P. INCOME TAXES
1998 1997 1996 - ------------------------------------------------------------------------------- Income Before Income Taxes: Domestic $385.3 $342.2 $271.5 Foreign 267.8 192.5 41.4 - ------------------------------------------------------------------------------- $653.1 $534.7 $312.9 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Provision for Income Taxes: Current provision: Federal $ 130.1 $123.5 $ 90.8 Foreign 92.3 55.0 6.8 State 17.4 12.6 13.3 - ------------------------------------------------------------------------------- 239.8 191.1 110.9 Deferred provision (benefit): Federal and state (2.1) (8.0) (3.0) Foreign (1.4) 7.0 4.0 - ------------------------------------------------------------------------------- (3.5) (1.0) 1.0 - ------------------------------------------------------------------------------- $ 236.3 $190.1 $111.9 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Reconciliation of Statutory U.S. Tax to Actual Provision: Statutory rate 35% 35% 35% Statutory tax $ 228.6 $187.2 $109.5 Effect of: State income taxes 11.6 10.3 8.4 Foreign tax rates 5.0 3.8 (1.0) FSC benefit (3.2) (2.4) (2.3) Tax-exempt income (4.3) (4.5) (5.2) Utilization of loss carryforwards (4.3) (9.1) Other 2.9 4.8 2.5 - ------------------------------------------------------------------------------- $ 236.3 $190.1 $111.9 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS)
At December 31: 1998 1997 - ------------------------------------------------------------------------------- Components of Deferred Tax Assets (Liabilities): Assets: Provisions for accrued expenses $ 121.8 $ 121.0 Allowance for losses on receivables 31.1 20.7 Net operating losses 120.0 4.6 Other 35.8 19.0 - ------------------------------------------------------------------------------- 308.7 165.3 Valuation reserve (120.0) - ------------------------------------------------------------------------------- 188.7 165.3 Liabilities: Asset capitalization and depreciation (46.0) (48.1) Financing and leasing activities (146.8) (136.6) Other (60.1) (53.3) - ------------------------------------------------------------------------------- (252.9) (238.0) Net deferred tax liability $ (64.2) $ (72.7) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
At December 31: 1998 1997 - ------------------------------------------------------------------------------- Classification of Deferred Tax Assets and Liabilities: Truck and Other: Deferred taxes and other current assets $ 75.3 $ 67.5 Deferred taxes, goodwill and other 17.4 13.6 Other, including deferred taxes (30.0) (34.0) Financial Services: Deferred income taxes and other (126.9) (119.8) - ------------------------------------------------------------------------------- Net deferred tax liability $ (64.2) $ (72.7) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
United States income taxes are not provided on undistributed earnings of the Company's foreign subsidiaries because of the intent to reinvest these earnings. The amount of undistributed earnings, which are considered to be indefinitely reinvested, is approximately $404.9 at December 31, 1998. While the amount of any federal income taxes on these reinvested earnings, if distributed in the future, is not presently determinable, it is anticipated that the available foreign tax credits would substantially offset any potential federal tax liability. Leyland Trucks Ltd. net operating losses of approximately $390 were recorded and fully reserved as utilization is limited by U.K. law. Cash paid for income taxes was $228.3 in 1998, $163.6 in 1997 and $121.3 in 1996. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) Q. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in determining its fair value disclosures for financial instruments: Cash and Equivalents: The carrying amount reported in the balance sheet is stated at fair value. Marketable Securities: Marketable securities consist of debt securities. Fair values are based on quoted market prices. Financial Services Net Receivables: For floating-rate loans and wholesale financings, fair values are based on carrying values. For fixed-rate loans, fair values are estimated using discounted cash flow analysis based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest and other receivables approximates its fair value. Direct financing lease receivables and the related loss provisions are not included in net receivables. Short- and Long-term Debt: The carrying amount of the Company's commercial paper and short-term bank borrowings and floating-rate long-term debt approximates its fair value. The fair value of the Company's fixed-rate long-term debt is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Off-Balance-Sheet Instruments: Fair values for the Company's interest-rate contracts are based on costs that would be incurred to terminate existing agreements and enter into new agreements with similar notional amounts, maturity dates and counterparties' credit standing at current market interest rates. The fair value of foreign exchange contracts is the amount the Company would receive or pay to terminate the contracts. This amount is calculated using quoted market rates. Trade Receivables and Payables: Carrying amounts approximate fair value and have been excluded from the accompanying table. The carrying amounts and fair values of the Company's financial instruments are as follows:
CARRYING FAIR 1998 AMOUNT VALUE - ------------------------------------------------------------------------------- Truck and Other: Cash and equivalents $ 410.3 $ 410.3 Marketable securities 404.8 404.8 Long-term debt 243.1 247.5 Financial Services: Cash and equivalents 22.1 22.1 Net receivables 2,694.5 2,697.4 Commercial paper and bank loans 1,617.8 1,617.8 Long-term debt 1,106.9 1,120.8
The Company's off-balance-sheet financial instruments consisted of interest-rate agreements and foreign currency exchange contracts. The interest-rate agreements represented an additional liability of $7.4, and the foreign currency exchange contracts represented an additional liability of $.1 if recorded at fair value at December 31, 1998. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS)
CARRYING FAIR 1997 AMOUNT VALUE - ------------------------------------------------------------------------------- Truck and Other: Cash and equivalents $ 318.6 $ 318.6 Marketable securities 357.0 357.0 Long-term debt 246.9 247.7 Financial Services: Cash and equivalents 19.3 19.3 Net receivables 2,162.6 2,168.4 Commercial paper and bank loans 1,086.7 1,086.7 Long-term debt 1,097.7 1,098.4
The Company's off-balance-sheet financial instruments consisted of interest-rate agreements and foreign currency exchange contracts. The interest-rate agreements represented an additional liability of $2.6 and the foreign currency exchange contracts represented an additional asset of $2.7 if recorded at fair value at December 31, 1997. R. STOCK COMPENSATION PLANS PACCAR uses the intrinsic value based method to account for stock options granted to employees. Since the Company awards stock options to its employees at an exercise price equal to the market price on the date of grant, no compensation expense is recognized. The effect on net income and net income per share of accounting for stock compensation expense through application of the Black-Scholes option pricing model would have been as follows:
1998 1997 1996 - ------------------------------------------------------------------------------- Pro Forma: Net income $414.3 $342.5 $199.5 Basic EPS 5.31 4.41 2.57 Diluted EPS 5.27 4.38 2.57 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The following assumptions were used for grants in 1998, 1997 and 1996: expected volatility of 38%, 31% and 34%; risk-free interest rate of 6.01%, 6.94% and 6.81%, and expected lives of 5 years. Options granted over the three-year period ended December 31, 1998, totaled approximately 315,600, 409,000 and 621,000 for 1998, 1997 and 1996 with per share exercise prices of $53.50, $36.63 and $24.75, respectively. The fair value per share of options granted during this period amounted to $17.17, $9.44 and $6.91 for 1998, 1997 and 1996, respectively. Options vest at the beginning of the third year after the grant date. At December 31, 1998, options representing 1.5 million shares were outstanding with a weighted average exercise price of $32.58, of which 315,600 shares were exercisable. On January 1, 1999, approximately 550,000 additional shares became exercisable at a price of $24.75. All share amounts have been adjusted for the effects of the stock split declared in 1997. S. STOCKHOLDERS' EQUITY Changes in the Company's common stock are summarized as follows: Balance, January 1, 1996 38,862,359 Stock options exercised 8,919 - ------------------------------------------------------------------------------- Balance, December 31, 1996 38,871,278 Stock options exercised 48,567 Stock split 38,906,927 - ------------------------------------------------------------------------------- Balance, December 31, 1997 77,826,772 Stock options exercised 304,013 - ------------------------------------------------------------------------------- Balance, December 31, 1998 78,130,785 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) Other Comprehensive Income: Changes in unrealized investment holding gains or losses, reclassification adjustments and related tax effects were immaterial for the three years ended December 31, 1998. Reduction in Par Value and Increase in Number of Authorized Shares: At the Annual Meeting held on April 29, 1997, the stockholders approved an amendment to the Certificate of Incorporation reducing the par value of the common stock from $12 to $1 per share, and increasing the number of authorized shares of common stock from 100 million to 200 million. As a result of the reduction in par value, the common stock account was reduced by $427.8 and the additional paid-in capital account was increased by the same amount. Stock Split: On April 29, 1997, the Board of Directors declared a two-for-one stock split which was paid on May 21, 1997, to stockholders of record at the close of business on May 9, 1997. All per share figures presented have been adjusted for the effects of the stock split. Stockholder Rights Plan: The plan provides one right for each share of PACCAR common stock outstanding. Rights become exercisable if a person publicly announces the intention to acquire 15% or more of PACCAR's common stock or if a person (Acquiror) acquires such amount of common stock. In all cases, rights held by the Acquiror are not exercisable. When exercisable, each right entitles the holder to purchase for two hundred dollars a fractional share of Series A Junior Participating Preferred Stock. Each fractional preferred share has dividend, liquidation and voting rights which are no less than those for a share of common stock. Under certain circumstances, the rights may become exercisable for shares of PACCAR common stock or common stock of the Acquiror having a market value equal to twice the exercise price of the right. Also under certain circumstances, the Board of Directors may exchange exercisable rights, in whole or in part, for one share of PACCAR common stock per right. The rights, which expire in the year 2009, may be redeemed at one cent per right, subject to certain conditions. For this plan, 50,000 preferred shares are reserved for issuance. No shares have been issued. T. SEGMENT AND RELATED INFORMATION PACCAR operates in two principal industries, Trucks and Financial Services. The Truck segment is composed of the manufacture of trucks and the distribution of related parts which are sold through a network of company-appointed dealers. This segment derives a large proportion of its revenues and operating profits from operations in the United States and Europe. Truck revenues and operating profits include operations of Leyland Trucks Ltd. from June 1998 (the date of acquisition) and DAF Trucks, N.V. from date of acquisition in November 1996. The Financial Services segment is composed of finance and leasing services provided to truck customers and dealers. Revenues and income before taxes are primarily generated from operations in the United States. Included in All Other are the following: PACCAR's automotive parts sales and related services business conducted through company-operated retail stores, and the industrial winch business, which includes design, manufacturing and marketing operations. Also included here are other sales, income and expense not attributable to a reportable segment, including a portion of corporate expense. Sales between reportable segments were insignificant. Geographic revenues from external customers are presented based on the country of the customer. PACCAR evaluates the performance of its Truck segment based on operating profits which excludes investment income, goodwill amortization, other income and expense and income taxes. The Financial Services segment's performance is evaluated based on income before income taxes.
BUSINESS SEGMENT DATA: 1998 1997 1996 - ------------------------------------------------------------------------------- Revenues: Net sales Trucks $ 7,270.4 $ 6,157.8 $ 4,019.2 All other 307.3 321.6 315.2 - ------------------------------------------------------------------------------- 7,577.7 6,479.4 4,334.4 Financial Services revenues 317.1 284.3 267.9 - ------------------------------------------------------------------------------- $ 7,894.8 $ 6,763.7 $ 4,602.3 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) Truck operating profit $ 534.3 $ 376.8 $ 204.1 All other 37.2 20.4 17.2 Interest expense (18.1) (17.6) (4.2) - ------------------------------------------------------------------------------- 553.4 379.6 217.1 Financial Services income before taxes 62.2 71.3 68.3 Gain on sale of subsidiary 55.7 Investment income 33.3 24.7 25.8 Other, net 4.2 3.4 1.7 - ------------------------------------------------------------------------------- $ 653.1 $ 534.7 $ 312.9 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
BUSINESS SEGMENT DATA: 1998 1997 1996 - ------------------------------------------------------------------------------- Depreciation and amortization: Trucks $ 91.7 $ 74.3 $ 46.2 Financial Services 13.3 16.4 17.1 Other 18.9 21.3 17.8 - ------------------------------------------------------------------------------- $ 123.9 $ 112.0 $ 81.1 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Expenditures for long-lived assets: Trucks $ 142.9 $ 86.2 $ 88.5 Financial Services 35.9 30.0 15.4 Other 44.0 16.8 19.3 - ------------------------------------------------------------------------------- $ 222.8 $ 133.0 $ 123.2 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Segment assets: Trucks $ 2,104.1 $ 1,752.0 $ 1,757.2 Other 240.4 177.9 212.0 Cash and marketable securities 815.1 675.6 507.9 - ------------------------------------------------------------------------------- 3,159.6 2,605.5 2,477.1 Financial Services 3,635.2 2,993.9 2,821.7 - ------------------------------------------------------------------------------- $ 6,794.8 $ 5,599.4 $ 5,298.8 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
GEOGRAPHIC AREA DATA: 1998 1997 1996 - ------------------------------------------------------------------------------- Revenues: United States $ 4,466.6 $ 3,835.6 $ 3,614.9 Other 3,428.2 2,928.1 987.4 - ------------------------------------------------------------------------------- $ 7,894.8 $ 6,763.7 $ 4,602.3 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Long-lived assets: Property, plant and equipment, net United States $ 420.4 $ 361.3 $ 384.0 The Netherlands 187.3 168.7 200.8 Other 220.0 135.9 147.8 - ------------------------------------------------------------------------------- $ 827.7 $ 665.9 $ 732.6 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (CURRENCIES IN MILLIONS) Goodwill and other, net United States $ 12.5 $ 12.1 $ 23.0 The Netherlands 114.8 110.3 108.4 Other 2.3 - ------------------------------------------------------------------------------- $ 129.6 $ 122.4 $ 131.4 - ------------------------------------------------------------------------------- Equipment on operating leases, net United States $ 43.5 $ 46.0 $ 42.8 Other 21.8 9.8 2.1 - ------------------------------------------------------------------------------- $ 65.3 $ 55.8 $ 44.9 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders PACCAR Inc We have audited the accompanying consolidated balance sheets of PACCAR Inc and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PACCAR Inc and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Seattle, Washington February 16, 1999
SELECTED FINANCIAL DATA - ------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------ (millions except per share data) Net Sales $7,577.7 $6,479.4 $4,334.4 $4,592.9 $4,294.2 Financial Services Revenue 317.1 284.3 267.9 257.5 210.9 Net Income 416.8 344.6 201.0 252.8 204.5 Net Income Per Share: Basic 5.34 4.43 2.59 3.25 2.63 Diluted 5.30 4.41 2.59 3.25 2.63 Cash Dividends Declared 2.20 2.075 1.25 2.00 1.50 Total Assets: Truck and Other 3,159.6 2,605.5 2,477.1 1,646.2 1,562.7 Financial Services 3,635.2 2,993.9 2,821.7 2,744.3 2,365.5 Long-Term Debt: Truck and Other 204.3 236.6 32.9 10.7 11.1 Financial Services 1,106.9 1,097.7 1,112.0 1,149.6 999.9 Stockholders' Equity $1,764.2 $1,497.8 $1,358.0 $1,251.2 $1,174.5 - ------------------------------------------------------------------------------------------------
All per share amounts have been restated to give effect to a two-for-one stock split declared in 1997. QUARTERLY RESULTS (UNAUDITED) - -------------------------------------------------------------------------------
QUARTER FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------------------------------------------- 1998 (millions except per share data) Net Sales $ 1,752.3 $ 1,849.4 $ 1,857.3 $ 2,118.7 Truck and Other Gross Profit (Before SG&A and Interest) 263.9 281.1 275.0 326.7 Financial Services Gross Profit (Before SG&A) 30.8 31.9 32.7 33.9 Net Income 100.4 104.9 96.6 114.9 Net Income Per Share: Basic $ 1.29 $ 1.34 $ 1.24 $ 1.47 Diluted 1.28 1.33 1.23 1.46 - ------------------------------------------------------------------------------------------------------------------- 1997 Net Sales $ 1,444.8 $ 1,590.5 $ 1,639.2 $ 1,804.9 Truck and Other Gross Profit (Before SG&A and Interest) 190.5 223.8 237.1 278.7 Financial Services Gross Profit (Before SG&A) 29.9 30.7 31.6 32.7 Net Income 57.9 71.5 82.5 132.7 Net Income Per Share: Basic $ .74 $ .92 $ 1.06 $ 1.71 Diluted .74 .92 1.05 1.70 - -------------------------------------------------------------------------------------------------------------------
Net income per share amounts have been restated to give effect to a two-for-one stock split declared in 1997. Fourth quarter 1997 net income includes a $35 after-tax gain on sale of Trico Industries. COMMON STOCK MARKET PRICES AND DIVIDENDS - ------------------------------------------------------------------------------- Common stock of the Company is traded on the Nasdaq National Market under the symbol PCAR. The table below reflects the range of trading prices as reported by Nasdaq and cash dividends declared. All amounts have been restated to give effect to a two-for-one stock split paid in May of 1997. There were 2,885 record holders of the common stock at December 31, 1998.
1998 CASH DIVIDENDS STOCK PRICE 1997 CASH DIVIDENDS STOCK PRICE QUARTER DECLARED HIGH LOW QUARTER DECLARED HIGH LOW - ------------------------------------------------------------------------------------------------------------------- First $.15 $66 3/4 $47 1/2 First $.125 $38 5/16 $30 5/16 Second .15 63 50 5/8 Second .15 54 31/64 33 7/8 Third .15 53 40 Third .15 57 42 3/4 Fourth .15 50 1/2 37 Fourth .15 59 1/2 39 3/8 Year-End Extra 1.60 Year-End Extra 1.50 - -------------------------------------------------------------------------------------------------------------------
The Company expects to continue paying regular cash dividends, although there is no assurance as to future dividends because they are dependent upon future earnings, capital requirements and financial conditions. MARKET RISKS AND DERIVATIVE INSTRUMENTS - ------------------------------------------------------------------------------- In the normal course of business, PACCAR holds or issues various financial instruments which expose the Company to market risk associated with market currency exchange rates and 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. CURRENCY RISKS See Note A for a description of the Company's exposure to currency risks. To mitigate the short-term impact of changes in currency exchange rates, PACCAR regularly enters into currency exchange agreements to hedge 50-100% of its U.S. dollar denominated exposure in Canada over a period of 3 to 6 months. At December 31, 1998 the Company had U.S. dollar obligations of $99.4 related to firmly committed sales orders denominated in Canadian dollars. The Canadian plant construction has forecasted U.S. dollar obligations amounting to $30.7. All transactions are expected to occur in 1999. The Company has related forward contracts to sell Canadian dollars for U.S. dollars in the notional amount of $130.0 to occur in 1999. Dutch guilder hedging activity at year-end was not material. INTEREST RATE RISKS See Note L for a description of the Company's exposure to interest rate risks. The following table presents instruments which are subject to market risk exposure and, where applicable, the derivatives which are used to manage that risk.
EXPECTED MATURITY DATE ------------------------------------------------------------------------------ (MILLIONS OF DOLLARS) 1999 2000 2001 2002 2003 THEREAFTER - -------------------------------------------------------------------------------------------------------------------- CONSOLIDATED: Cash Equivalents and Marketable Securities: Fixed rate $ 444.7 $ 133.2 $ 221.2 $ 4.3 $ .4 $ 1.0 Average interest rate 4.4% 4.2% 4.0% 4.3% 4.3% 7.6% Variable rate $ .3 $ 10.0 Average interest rate 5.1% 5.0% TRUCK AND OTHER: Liabilities Fixed rate Long-term debt $ 43.4 $ 42.2 $ 39.1 $ 38.2 $ 1.0 Average interest rate 5.0% 5.0% 4.8% 4.8% 6.6% Variable rate Long-term debt $ 79.2 Average interest rate 3.5% FINANCIAL SERVICES: Assets Retail notes, contracts and wholesale financing, net of unearned interest, less allowance for losses: Fixed rate $ 760.5 $ 641.7 $ 465.3 $ 268.1 $ 90.9 $ 6.0 Average interest rate 8.55% 8.39% 8.26% 8.02% 7.95% 7.48% Variable rate $ 303.4 $ 57.7 $ 46.0 $ 24.8 $ 6.8 $ .9 Average interest rate 6.56% 6.36% 6.41% 6.54% 5.94% 6.81% Liabilities Commercial paper and bank loans $ 1,617.8 Average interest rate 5.2% Long-term Debt: Fixed rate $ 292.1 $ 297.3 $ 255.1 $ 111.7 $ 7.4 $ .3 Average interest rate 6.2% 6.1% 6.1% 5.9% 6.3% 7.2% Variable rate $ 140.0 $ 2.2 $ .7 $ .1 Average interest rate 6.3% Interest Rate Derivative Financial Instruments Related To Debt: Interest rate swaps: Pay fixed - receive variable $ 604.0 $ 408.8 $ 151.5 $ 64.3 $ 12.9 $ 4.0 Average pay rate 5.84% 5.66% 5.30% 5.54% 5.83% 5.37% Average receive rate 5.45% 5.36% 5.21% 5.23% 5.28% 5.00% FAIR (MILLIONS OF DOLLARS) TOTAL VALUE - ------------------------------------------------------------ CONSOLIDATED: Cash Equivalents and Marketable Securities: Fixed rate $ 804.8 $ 804.8 Average interest rate 4.3% Variable rate $ 10.3 $ 10.3 Average interest rate 5.0% TRUCK AND OTHER: Liabilities Fixed rate Long-term debt $ 163.9 $ 168.3 Average interest rate 4.9% Variable rate Long-term debt $ 79.2 $ 79.2 Average interest rate 3.5% FINANCIAL SERVICES: Assets Retail notes, contracts and wholesale financing, net of unearned interest, less allowance for losses: Fixed rate $ 2,232.5 $ 2,236.0 Average interest rate 8.35% Variable rate $ 439.6 $ 439.6 Average interest rate 6.51% Liabilities Commercial paper $ 1,617.8 $ 1,617.8 and bank loans Average interest rate 5.2% Long-term Debt: Fixed rate $ 963.9 $ 977.8 Average interest rate 6.1% Variable rate $ 143.0 $ 143.0 Average interest rate 6.9% Interest Rate Derivative Financial Instruments Related To Debt: Interest rate swaps: Pay fixed - receive variable $ 1,245.5 $ (7.4) Average pay rate 5.70% Average receive rate 5.38%
EX-21 3 EX-21 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT
State or Country of Names Under Which Company Or Name(a) Incorporation Subsidiaries Do Business - -------------------------- ------------- ---------------------------- PACCAR of Canada Ltd. Canada PACCAR of Canada Ltd. Canadian Kenworth Co. Peterbilt of Canada PACCAR Parts of Canada PACCAR Australia Pty. Ltd. Australia PACCAR Australia Pty. Ltd. Kenworth Trucks PACCAR Financial Pty. Ltd. Australia PACCAR Financial Pty. Ltd. PACCAR U.K. Ltd. Delaware PACCAR U.K. Ltd. Foden Trucks PACCAR Mexico, S.A. de C.V. Mexico PACCAR Mexico, S.A. de C.V. KENFABRICA, S.A. de C.V. KENCOM, S.A. de C.V. Kenworth Mexicana S.A. de C.V. PACCAR Parts Mexico S.A. de C.V. PACCAR Capital Mexico S.A. de C.V. Paclease Mexicana S.A. de C.V. PACCAR Arrendadora Financiera S.A. de C.V. PACCAR Financial Corp. Washington PACCAR Financial Corp. PACCAR Financial Services Ltd. Canada PACCAR Financial Services Ltd. PACCAR Leasing Corporation Delaware PACCAR Leasing Corporation PacLease PACCAR Automotive, Inc. Washington Grand Auto Al's Auto Supply PACCAR Sales North America, Inc. Delaware PACCAR Sales North America PACCAR Holding B.V.(b) Netherlands PACCAR Holding B.V. DAF Trucks, N.V.(c) Netherlands DAF Trucks, N.V. Leyland DAF DAF Trucks Vlaanderen N.V.(d) Belgium DAF Trucks Vlaanderen N.V. Leyland DAF Trucks Ltd.(d) United Kingdom Leyland DAF Trucks Ltd. Leyland Trucks Limited(e) England and Wales Leyland Trucks Limited
(a) The names of some subsidiaries have been omitted. Considered in the aggregate, omitted subsidiaries would not constitute a significant subsidiary. (b) A wholly owned subsidiary of PACCAR Sales North America, Inc. (c) A wholly owned subsidiary of PACCAR Holding B.V. (d) A wholly owned subsidiary of DAF Trucks, N.V. (e) A subsidiary of Kepacourt Limited, an England and Wales corporation which is a subsidiary of PACCAR Trucks U.K. Ltd., an England and Wales corporation which is a subsidiary of PACCAR Holding B.V. EX-23 4 EX-23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of PACCAR Inc of our report dated February 16, 1999, included in the 1998 Annual Report to Shareholders of PACCAR Inc. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 2-83673) pertaining to the 1981 Long-Term Incentive Plan and in the Registration Statement (Form S-8 No. 33-47763) pertaining to the 1991 Long-Term Incentive Plan of PACCAR Inc of our report dated February 16, 1999, with respect to the consolidated financial statements of PACCAR Inc incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ Ernst & Young LLP ERNST & YOUNG LLP Seattle, Washington March 24, 1999 EX-24 5 EX-24 Exhibit 24 POWER OF ATTORNEY We, the undersigned directors of PACCAR Inc, a Delaware corporation, hereby severally constitute and appoint M. C. Pigott, our true and lawful attorney-in-fact, with full power to sign for us, and in our names in our capacity as director, a Form 10-K on behalf of the Company for the year ending December 31, 1998, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. IN WITNESS WHEREOF, each of the undersigned has executed this power of attorney as of this 10th day of December 1998. /s/J. M. Fluke, Jr. /s/J. C. Pigott - ----------------------- ------------------------ J. M. Fluke, Jr. J. C. Pigott Director, PACCAR Inc Director, PACCAR Inc /s/G. Grinstein /s/J. W. Pitts - ----------------------- ------------------------ G. Grinstein J. W. Pitts Director, PACCAR Inc Director, PACCAR Inc /s/C. H. Hahn /s/W. G. Reed, Jr. - ----------------------- ------------------------ C. H. Hahn W. G. Reed, Jr. Director, PACCAR Inc Director, PACCAR Inc /s/D. J. Hovind /s/M. A. Tembreull - ----------------------- ------------------------ D. J. Hovind M. A. Tembreull Director, PACCAR Inc Director, PACCAR Inc /s/C. M. Pigott - ----------------------- C. M. Pigott Director, PACCAR Inc
EX-27.1 6 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998, 1997, AND 1996, AND FROM THE CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1998 AND 1997 OF PACCAR INC AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 432,400 404,800 4,262,800 94,200 511,100 0 1,583,300 690,300 6,794,800 0 1,311,200 0 0 78,100 1,686,100 6,794,800 7,577,700 7,894,800 6,431,000 6,604,800 0 21,100 18,100 653,100 236,300 416,800 0 0 0 416,800 5.34 5.30
EX-27.2 7 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997, 1996, AND 1995, AND FROM THE CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997 AND 1996 OF PACCAR INC AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 337,900 357,000 3,572,000 77,800 393,500 0 1,294,600 572,900 5,599,400 0 1,334,300 0 0 77,800 1,420,000 5,599,400 6,479,400 6,763,700 5,549,300 5,700,800 0 11,400 17,600 534,700 190,100 344,600 0 0 0 344,600 4.43 4.41
EX-27.3 8 EXHIBIT 27.3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996, 1995, AND 1994, AND FROM THE CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996 AND 1995 OF PACCAR INC AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1996 222,900 304,900 3,370,600 73,200 406,500 0 1,330,200 552,700 5,298,800 0 1,144,900 0 0 466,400 891,600 5,298,800 4,334,400 4,602,300 3,737,300 3,884,900 0 5,700 4,200 312,900 111,900 201,000 0 0 0 201,000 2.59 2.59
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