M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L  C O N D I T I O N A N D R E S U L T S O F O P E R ATI O N S OVERVIEW: Truck Outlook Financial Services Outlook  (tables in millions, except truck unit and per share data) PACCAR is a global technology company whose Truck segment includes the design, manufacture and distribution  of high-quality, light-, medium- and heavy-duty commercial trucks and related aftermarket parts. In North  America, trucks are sold under the Kenworth and Peterbilt nameplates, in Europe, under the DAF nameplate and in  Australia and South America under the Kenworth and DAF nameplates. The Company’s Financial Services segment  (PFS) derives its earnings primarily from financing or leasing PACCAR products in the U.S., Canada, Mexico,  Europe and Australia. The Company’s Other business is the manufacturing and marketing of industrial winches. Consolidated net sales and revenues of $16.36 billion in 2011 were the second highest in the Company’s history.  Consolidated net sales and revenues in 2011 increased 59% from $10.29 billion in 2010, mainly due to higher truck  deliveries and record aftermarket parts sales. Truck unit sales increased in 2011 to 138,000 units from 79,000 units  in 2010, reflecting higher industry retail sales and record truck market share in North America and Europe. In 2011, PACCAR earned net income for the 73rd consecutive year. Net income in 2011 was $1,042.3 million ($2.86  per diluted share) an increase of 128% from $457.6 million ($1.25 per diluted share) in 2010 due to higher sales  and margins in the Truck segment and improved Financial Services segment results. During the past year, the Company acquired land and began construction of a new 300,000 square-foot DAF  assembly facility in Ponta Grossa, Brasil. When completed in 2013, this world-class facility will provide a platform  for the introduction of DAF’s full product range in Brasil and contribute to sales growth in other South American  markets. The Company expanded its office in China in 2011 to support increased component purchases for  production and aftermarket operations. The Company opened a technical center in Pune, India in late 2011 focused  on engineering, information technology and component sourcing for worldwide production and aftermarket  operations. Research and development and capital were invested in new Peterbilt, Kenworth and DAF products, new  engine technologies, manufacturing efficiencies and the opening of a new parts distribution center (PDC) in  Moscow, Russia. The Company now has fifteen PDCs strategically located to support truck customers in North  America, Europe, Australia and South America. The PACCAR Financial Services group of companies has operations covering three continents and 21 countries. The  global breadth of PFS and its rigorous credit application process support a portfolio of loans and leases with total  assets of $9.4 billion that earned a pretax profit of $236.4 million. PFS issued $982.4 million in medium-term notes  during the year to pay off maturing debt and support portfolio growth. Industry retail sales in the U.S. and Canada in 2012 are expected to increase from 197,000 units in 2011 to 210,000– 240,000 units, primarily due to the ongoing replacement of the aging industry fleet. In Europe, the 2012 market size  of above 15-tonne vehicles is expected to be 210,000–240,000 units, lower than the 244,000 trucks in 2011 due to  slowing economies in the Eurozone reflecting the ongoing European sovereign debt crisis. Capital investments in 2012 are expected to be $450 to $550 million. Research and development (R&D) in 2012 is  expected to be $275 to $325 million. Capital investments and R&D in 2012 will focus on construction of the factory  in Brasil as well as comprehensive product development programs. See the Forward Looking Statement section of  Management’s Discussion and Analysis for factors that may affect this outlook. Average earning assets in 2012 are projected to grow due to new business financing from truck sales being greater  than portfolio runoff. The Company’s customers are benefiting from increased freight tonnage, higher freight rates  and fleet utilization that are contributing to improvements in customers’ profitability and cash flow. If current  freight transportation conditions continue, past-due accounts, truck repossessions and net charge-offs in 2012 could  be comparable to or improve slightly from 2011. See the Forward Looking Statement section of Management’s  Discussion and Analysis for factors that may affect this outlook.