PACCAR INC

U.K. Exit from the European Union. In March 2017, the United Kingdom (U.K.) invoked Article 50 of their treaty with the European Union signaling their intent to leave the EU. Under the EU Treaty the U.K. had two years to negotiate terms of their exit with the EU. Although a preliminary agreement between the EU and the U.K. Government was made, it was not ratified by the U.K. Parliament. If the terms of the exit from the EU are not agreed by March 29, 2019, it is anticipated that the standard trade protocols of the World Trade Organization (WTO) would become effective (“Hard Brexit”).

The Company manufactures medium- and heavy-duty DAF trucks in the U.K. which are sold primarily in the U.K. and to a lesser extent in Europe and other world markets. In 2018, approximately 10% of the Company’s worldwide truck production was manufactured in the U.K. Most of the truck components used in the manufacturing of trucks in the U.K., as well as aftermarket parts are sourced from the EU. In the event of a Hard Brexit, it is anticipated that there would be an increase in tariffs from truck components and parts from the EU which would increase the cost of all trucks and parts in the U.K. It is expected that there would also be an increase in tariffs on trucks sold from the U.K. to the EU which would lead to higher costs for trucks imported from the U.K into the EU. The imposition of tariffs and border controls would most likely lead to longer lead times in the supply chain from the EU and the U.K. In the event of a Hard Brexit, the Company anticipates that after a period of time, changes would be made to the supply chain to minimize the effects of tariffs and delays. The higher cost of trucks and parts may impact manufacturing and parts sales and margins which could have an adverse impact on the Company’s results of operations.

In January 2019, PACCAR displayed innovative electric and hydrogen fuel cell trucks at the CES 2019 show in Las Vegas, Nevada. CES is one of the world’s largest showcases for technological innovation. PACCAR exhibited three zero emission vehicles: a battery-electric Peterbilt Model 579EV; a battery-electric Peterbilt Model 220EV; and a hydrogen fuel cell electric Kenworth T680 developed in collaboration with Toyota. These trucks are designed for a range of customer applications, including over-the-road transportation, port operations and urban distribution. PACCAR was the only commercial vehicle manufacturer displaying trucks at CES.

ASU 2016-02 requires lessors to classify cash receipts from leases within operating activities. As required, 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 year ended December 31, 2018 total cash receipts from direct financing leases was $1.0 billion. On December 19, 2018, the FASB issued a proposed ASU – Leases (Topic 842): Codification Improvements for Lessors within the scope of ASC 942, Financial Services – Depository and Lending. The proposed ASU would require lessors to classify principal payments received from sales-type and direct financing leases in investing activities in the statement of cash flows. If the proposed ASU is codified, the Company will continue to present cash receipts from direct finance leases as an investing cash inflow and will reclassify cash flows from sales-type leases from operating to investing activities. For the year ended December 31, 2018, total cash originations and cash receipts from sales-type leases were $159.4 million and $189.5 million, respectively.