STATEMENT OF COMPANY BUSINESS As a multinational technology company, PACCAR manufactures heavy-duty, on- and off-road Class 8 trucks sold around the world under the Kenworth, Peterbilt, DAF and Foden nameplates. The company competes in the North American Class 6-7 market with its medium-duty models assembled in North America and sold under the Peterbilt and Kenworth nameplates. In addition, DAF manufactures Class 6-7 trucks in the Netherlands and Belgium for sale throughout Europe, the Middle East and Africa and distributes Class 4-7 trucks in Europe manufactured by Leyland Trucks (UK). • PACCAR manufactures and markets industrial winches under the Braden, Gearmatic and Carco nameplates and competes in the truck parts aftermarket through its dealer network. • Finance and Leasing subsidiaries facilitate the sale of PACCAR products in many countries worldwide. Significant company assets are employed in financial services activities. • PACCAR maintains exceptionally high standards of quality for all of its products: they are well-engineered, are highly customized for specific applications and sell in the premium segments of their markets, where they have a reputation for superior performance and pride of ownership. CONTENTS 1 Financial Highlights 2 Message to Shareholders 6 PACCAR Operations 22 Financial Charts 23 Management’s Discussion and Analysis 29 Consolidated Statements of Income 30 Consolidated Balance Sheets 32 Consolidated Statements of Cash Flows 33 Consolidated Statements of Stockholders’ Equity 34 Consolidated Statements of Comprehensive Income 34 Notes to Consolidated Financial Statements 48 Auditor’s Report 48 Selected Financial Data 49 Quarterly Results 49 Common Stock Market Prices and Dividends 50 Market Risks and Derivative Instruments 51 Officers and Directors 52 Divisions and Subsidiaries FINANCIAL HIGHLIGHTS 2002 2001 (millions except per share data) 1 Truck and Other Net Sales and Revenues $6,786.0 $5,641.7 Financial Services Revenues 432.6 458.8 Total Revenues 7,218.6 6,100.5 Net Income 372.0 173.6 Total Assets: Truck and Other 3,590.2 3,155.4 Financial Services 5,112.3 4,758.5 Truck and Other Long-Term Debt 33.9 40.7 Financial Services Debt 3,527.6 3,426.2 Stockholders’ Equity 2,600.7 2,252.6 Per Common Share: Net Income: Basic $ 3.22 $ 1.51 Diluted 3.20 1.50 Cash Dividends Declared 1.50 .97 All per share amounts have been restated to give effect to a 50% stock dividend in May 2002. REVENUES NET INCOME STOCKHOLDERS’ EQUITY billions of dollars millions of dollars billions of dollars 9.0 600 3.0 36% 7.5 500 2.5 30% 6.0 400 2.0 24% 4.5 300 1.5 18% 3.0 200 1.0 12% 1.5 100 0.5 6% 0.0 0 0.0 0% 93 94 95 96 97 98 99 00 01 02 93 94 95 96 97 98 99 00 01 02 93 94 95 96 97 98 99 00 01 02 I $17.5 million gain on sale of Return on Equity (percent) subsidiary – 1999 I $35 million gain on sale of subsidiary – 1997 PACCAR Inc and Subsidiaries TO OUR SHAREHOLDERS PACCAR had an excellent year in 2002 due to superior vehicle quality, geographic 2 diversification and innovative implementation of technology in all facets of the business. PACCAR increased its share in the North American and European markets to record levels, as customers recognized the benefits of the lower operating costs and higher residual values of PACCAR products. PACCAR delivered over 92,000 trucks and sold more than $1 billion of aftermarket parts and services during the year. Net income of $372 million was more than double 2001 earnings, and revenues of $7.2 billion were higher compared to the previous year. Dividends of $1.50 per share were declared during the year, including a special dividend of $.70. PACCAR has increased its regular quarterly dividend by 110 percent in the last five years. PACCAR declared a 3-for-2 stock dividend in May 2002. PACCAR achieved many milestones during 2002 by Several truck manufacturers in North America, adhering to its proven principles of producing the Europe and Japan are struggling due to their financial highest-quality products in the marketplace, investing losses and high cost structures. With the challenges in technology to benefit all aspects of the business these companies are facing, it is anticipated that there and ensuring rigorous cost controls throughout the will be additional consolidation within the commercial company. Ongoing investment in manufacturing vehicle market. facilities, parts distribution centers and technical PACCAR continued to set the pace for financial research and development enabled the company to performance for commercial vehicle manufacturers. be one of the low-cost manufacturers in the industry Return on beginning shareholder equity (ROE) was and to provide a broad array of innovative 16.5 percent in 2002, compared to 7.7 percent in 2001. customer services. The company’s 2002 after-tax return on sales (ROS) The North American truck market was buoyed was 5.5 percent, compared to 3.1 percent a year earlier. by the pull-forward demand caused by the PACCAR’s shareholder equity has increased 151 percent implementation of new engine-emission regulations in the last decade to $2.6 billion. PACCAR’s total in October 2002. The Class 8 truck market in North shareholder return in 2002 was 9 percent and has America, including Mexico, reached 180,000 vehicles, exceeded the Standard & Poor’s 500 Index for the a 4 percent increase from the previous year. The previous one-, five- and ten-year periods. European heavy-truck market was 11 percent lower INVESTING FOR THE FUTURE – PACCAR’s strong than in 2001, as the region experienced slower balance sheet, steady profit growth and quality focus economic growth. have enabled the company to maintain its investment in all aspects of the business. Capital expenditures resources, the successful launch of a new Human for the manufacturing facilities have resulted in Resource/Payroll system, the ongoing implementation productivity and assembly efficiency improvements. of the wireless infrastructure in all PACCAR facilities 3 PACCAR is recognized as one of the leading and the initiation of an electronic dealership-of-the- technology companies in North America. In future module. collaboration with leading software and hardware PACCAR’s information technology investment has companies, PACCAR has successfully integrated new benefited its dealers worldwide through the utilization technology to profitably support its own businesses as of interlocking technology in all aspects of the parts well as its dealers and customers. Fifty-four new and service business, which dramatically enhances the dealership locations were opened worldwide, including customer’s positive experience at the independent a DAF-owned facility in Berlin. dealerships. Standardized software and hardware Major capital projects during the year included the platforms using XML technology have enabled development of a new parts distribution center in the PACCAR to implement uniform applications for the U.K., expansion of the Atlanta parts distribution sales, service and parts business throughout the center, installation of new DAF engine assembly and Kenworth, Peterbilt and DAF distribution networks. machining lines, expansion of Peterbilt Division TRUCKS – U.S. and Canadian Class 8 retail sales in headquarters and the implementation of efficient, 2002 were 166,000 units and the Mexican market electronically controlled assembly tooling in the totaled 14,000. Western Europe heavy-truck manufacturing facilities. In addition, major truck registrations were 220,000 units. models were launched with updated features, including PACCAR’s Class 8 retail sales market share in the disc brakes and dashboard-installed telematic U.S. surged to a record 23.6 percent in 2002. DAF’s navigational systems. heavy-truck market share in Europe increased to a SIX SIGMA – Six Sigma is integrated into all business record 12.0 percent. activities at PACCAR and has been introduced into Industry Class 6 and 7 registrations in the U.S. and many of the company’s dealers and suppliers. Its Canada numbered 78,000, a 10 percent reduction from statistical methodology has been critical in the the previous year. In Europe, the 6- to 15-tonne development of new product design and manufacturing market was 77,000 units, a 12 percent decrease from processes, increased productivity and the establishment 2001. PACCAR increased its North American and of clearly defined quality standards in PACCAR’s European market share in the medium-duty truck manufacturing divisions. segment, as the company delivered nearly 18,000 Over 6,000 employees have been trained in Six medium-duty trucks and tractors in 2002. Sigma, and there are 600 active projects under way. Six The J.D. Power and Associates Customer Sigma, in conjunction with Supplier Quality, has been Satisfaction StudySM award in the United States for instrumental in delivering improved performance by medium-duty conventional trucks has been earned by our suppliers and has measurably enhanced the quality either Kenworth or Peterbilt for four consecutive years. and the fit and finish of trucks delivered worldwide. Kenworth and Peterbilt are the fastest-growing INFORMATION TECHNOLOGY – PACCAR has made medium-duty products in the marketplace, and this major steps in developing the competitive advantages growth has contributed to dealers’ profitability. of a strong Information Technology Division (ITD). Peterbilt’s factory in Denton, Texas, installed the PACCAR’s use of information technology is centered second phase of its robotic paint system for base-coat on developing software and hardware that will reduce application for the Model 387 and Model 379 manufacturing costs and generate increased sales and conventional trucks. The Peterbilt Nashville contract profitability. Major accomplishments during the year expired September 1, 2002, and negotiations continued include the integration of PACCAR’s European ITD through year-end.