NOTE A - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10‑Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. For further information, refer to the consolidated financial statements and footnotes included in PACCAR Inc’s (PACCAR or the Company) Annual Report on Form 10‑K for the year ended December 31, 2017.

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

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2018		2017		2018		2017
Additional shares		811,800		1,035,000		868,800		1,021,000
Antidilutive options		1,174,200		599,400		1,177,600		695,900

New Accounting Pronouncements

New Revenue Standard

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, including subsequently issued ASUs to clarify the implementation guidance in ASU 2014-09. Under the new revenue recognition model, a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company adopted this ASU for outstanding contracts on a modified retrospective basis on January 1, 2018.

The most significant effect of the standard relates to certain trucks sold in Europe that are subject to a residual value guarantee (RVG) and were accounted for as an operating lease in the Truck, Parts and Other section of the Company’s Consolidated Balance Sheets. Prior to the adoption of ASU 2014-09, these sales were recognized on a straight-line basis over the guarantee period. Under the new standard, revenues are recognized upon transfer of control for certain of these RVG contracts that allow customers the option to return their truck and for which there is no economic incentive to do so. The estimate of customers’ economic incentive to return the truck is based on an analysis of historical guaranteed buyback value and estimated market value. A return asset and liability is recognized for estimated returns. Return rates are estimated by using a historical weighted average return rate over a four-year period. Also as required by the new standard, the Company recognized an asset for the value of expected returned aftermarket parts which had previously been netted with the related liabilities.

The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet on January 1, 2018 for the adoption of ASU 2014-09 was as follows:

	BALANCE AT DECEMBER 31, 2017		CHANGE DUE TO NEW STANDARD			BALANCE AT JANUARY 1, 2018
Consolidated Balance Sheets
TRUCK, PARTS AND OTHER:
Other current assets	$	404.4	$	100.0		$	504.4
Equipment on operating leases, net		1,265.7		(668.8	)		596.9
Other noncurrent assets, net		425.2		115.0			540.2
Accounts payable, accrued expenses and other		2,569.5		103.1			2,672.6
Residual value guarantees and deferred revenues		1,339.0		(703.8	)		635.2
Other liabilities		939.8		129.8			1,069.6

STOCKHOLDERS' EQUITY:
Retained earnings		8,369.1		17.1			8,386.2

The following reconciles pro forma amounts as they would have been reported under the prior standard to current reporting:

Three Months Ended September 30, 2018	PRO FORMA UNDER PRIOR STANDARD		EFFECTS OF NEW STANDARD		CURRENTLY REPORTED
Consolidated Statements of Comprehensive Income
TRUCK, PARTS AND OTHER:
Net sales and revenues	$	5,298.1	$	118.8	$	5,416.9
Cost of sales and revenues		4,547.7		105.9		4,653.6
Truck, Parts and Other Income Before Income Taxes		560.7		12.9		573.6

Total Income Before Income Taxes		655.9		12.9		668.8

Income taxes		120.3		3.2		123.5

Net income		535.6		9.7		545.3
Comprehensive Income		534.5		9.5		544.0

Nine Months Ended September 30, 2018	PRO FORMA UNDER PRIOR STANDARD		EFFECTS OF NEW STANDARD		CURRENTLY REPORTED
Consolidated Statements of Comprehensive Income
TRUCK, PARTS AND OTHER:
Net sales and revenues	$	16,065.4	$	140.5	$	16,205.9
Cost of sales and revenues		13,716.0		120.4		13,836.4
Truck, Parts and Other Income Before Income Taxes		1,778.0		20.1		1,798.1

Total Income Before Income Taxes		2,037.7		20.1		2,057.8

Income taxes		435.8		5.0		440.8

Net income		1,601.9		15.1		1,617.0
Comprehensive Income		1,501.4		14.2		1,515.6

At September 30, 2018	PRO FORMA UNDER PRIOR STANDARD		EFFECTS OF NEW STANDARD			CURRENTLY REPORTED
Consolidated Balance Sheets
TRUCK, PARTS AND OTHER:
Other current assets	$	264.8	$	112.0		$	376.8
Equipment on operating leases, net		1,619.3		(840.7	)		778.6
Other noncurrent assets, net		536.9		186.6			723.5
Accounts payable, accrued expenses and other		3,119.1		115.0			3,234.1
Residual value guarantees and deferred revenues		1,725.0		(892.6	)		832.4
Other liabilities		849.1		204.2			1,053.3

STOCKHOLDERS' EQUITY:
Total stockholders' equity		9,139.7		31.3			9,171.0

New Pension Standard

In March 2017, FASB issued ASU 2017-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendment disaggregates the service cost component from non-service cost components of pension expense and prescribes where to present the various components of pension cost on the income statement. This ASU also allows only the service cost component to be eligible for capitalization, when applicable (e.g. as a cost of manufactured inventory or self-constructed assets). The Company adopted this ASU in January 2018 and accordingly applied the income statement presentation of service and non-service components of pension expense retrospectively and the capitalization of service cost prospectively. Adoption of this ASU had no impact on net income. The retrospective application of this ASU had the following effects on the Consolidated Statement of Comprehensive Income:

Three Months Ended September 30, 2017	PREVIOUSLY REPORTED		EFFECTS OF NEW STANDARD			CURRENTLY REPORTED
Consolidated Statements of Comprehensive Income
TRUCK, PARTS AND OTHER:
Cost of sales and revenues	$	4,046.8	$	8.8		$	4,055.6
Selling, general and administrative		112.9		3.6			116.5
Interest and other (income), net		3.2		(13.0	)		(9.8	)
Truck, Parts and Other Income Before Income Taxes		501.6		.6			502.2

FINANCIAL SERVICES:
Selling, general and administrative		27.8		.6			28.4
Financial Services Income Before Income Taxes		71.2		(.6	)		70.6

Nine Months Ended September 30, 2017	PREVIOUSLY REPORTED		EFFECTS OF NEW STANDARD			CURRENTLY REPORTED
Consolidated Statements of Comprehensive Income
TRUCK, PARTS AND OTHER:
Cost of sales and revenues	$	11,184.2	$	26.3		$	11,210.5
Selling, general and administrative		332.0		10.8			342.8
Interest and other (income), net		3.1		(38.8	)		(35.7	)
Truck, Parts and Other Income Before Income Taxes		1,351.7		1.7			1,353.4

FINANCIAL SERVICES:
Selling, general and administrative		79.3		1.7			81.0
Financial Services Income Before Income Taxes		191.5		(1.7	)		189.8

Other Standards

In February 2018, FASB issued ASU 2018-02 Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendment requires a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for the difference between the historical corporate income tax rate and the newly enacted income tax rate resulting from the Tax Cuts and Jobs Act. This ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods and early adoption is permitted. Upon adoption, the Company estimates Retained earnings will increase and AOCI will decrease approximately $30 million with no impact to Stockholders’ Equity. The Company expects to early adopt this ASU in the fourth quarter of 2018.

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), including subsequently issued ASUs to clarify the implementation guidance in ASU 2016-02. Under the new lease standard, lessees will recognize a right-of-use asset and a lease liability for virtually all leases (other than short-term leases). Lessor accounting is largely unchanged, except for a reduction in the capitalization of certain initial direct costs and the classification of certain cash flows. The ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. This ASU requires leases to be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach with optional practical expedients. The Company will elect the optional transition method to recognize a cumulative effect adjustment to the opening balance of retained earnings on January 1, 2019. Upon adoption, the Company estimates Retained earnings will decrease approximately $11 million due to the reversal of previously capitalized initial direct costs. As required by the new standard, the Company will present cash receipts from direct financing leases as an operating cash inflow rather than the current presentation as an investing cash inflow. For the first nine months of 2018 total cash receipts from direct financing leases was $816 million. The Company does not expect the overall effects on the Consolidated Balance Sheets and the Consolidated Statements of Comprehensive Income to be material.

In addition to adopting the ASUs discussed above, the Company adopted the following standards effective January 1, 2018, none of which had a material impact on the Company’s consolidated financial statements.

STANDARD		DESCRIPTION
2016-01 *		Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
2016-15 *		Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
2017-12 **		Derivative and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

*	The Company adopted on the effective date of January 1, 2018.

**	The Company early adopted in 2018.

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

STANDARD	DESCRIPTION	EFFECTIVE DATE
2018-07 *	Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.	January 1, 2019
2018-13 *	Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.	January 1, 2020
2018-14 *	Compensation – Retirement Benefits – Defined Benefit Plans – General (Topic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans.	January 1, 2021
2018-15 *	Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.	January 1, 2020

*	The Company will adopt on the effective date.