**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **
| **x****Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                         |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                |
| **For the quarterly period ended September 30,  2007**                                                                                                                                                    |
| ** **                                                                                                                                                                                                |
| **or**                                                                                                                                                                                                    |
| ** **                                                                                                                                                                                                |
| **o****Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                        |
| ** **                                                                                                                                                                                                |
| **For transition period from               to              ** |

** **

**Commission File No. 001-11677**

** **

**PACCARFINANCIAL CORP.**

(Exactname of registrant as specified in its charter)

 

| **Washington**                               | ** ** | **91-6029712**                       |
|----------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of              |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)               |       |                                 |
| ** **                                   | ** ** | ** **                           |
| **777 – 106th Ave. N.E., Bellevue, WA** | ** ** | **98004**                            |
| (Address of principal executive offices)     |       | (Zip code)                           |

 

**(425) 468-7100**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 
| Large  accelerated filer: o | Accelerated  filer: o | Non-accelerated  filer: x |
|-----------------------------|-----------------------|---------------------------|

 

Indicateby check mark whether registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 

Common Stock, $100 parvalue—145,000 shares as of October 31, 2007

 

THE REGISTRANT IS A WHOLLYOWNED INDIRECT SUBSIDIARY OF PACCAR INC AND MEETS THE CONDITIONS SET FORTH INGENERAL INSTRUCTIONS (H)(1)(A) AND (B) OF FORM 10-Q AND IS, THEREFORE, FILINGTHIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 

 

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**INDEX**

 
|                                                                                                                  |                                                                                        | **Page** |
|-----------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|----------|
|                                                                                                                  |                                                                                        |     |
| PART I. FINANCIAL INFORMATION:                                                                                        |                                                                                        |
|                                                                                                                  |                                                                                        |     |
| ITEM  1.                                                                                                              | FINANCIAL STATEMENTS:                                                                       |     |
|                                                                                                                  |                                                                                        |     |
| Statements of Income and  Retained Earnings—Three  and Nine Months Ended September 30, 2007 and 2006 (Unaudited) | 3                                                                                           |
|                                                                                                                  |                                                                                        |     |
| Balance Sheets—  September 30, 2007 (Unaudited) and December 31, 2006                                            | 4                                                                                           |
|                                                                                                                  |                                                                                        |     |
| Statements of Cash Flows —Nine  Months Ended September 30, 2007 and 2006 (Unaudited)                             | 5                                                                                           |
|                                                                                                                  |                                                                                        |     |
| Notes to  Financial Statements (Unaudited)                                                                            | 6                                                                                           |
|                                                                                                                  |                                                                                        |     |
| ITEM 2.                                                                                                               | MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 9        |
|                                                                                                                  |                                                                                        |     |
| ITEM 3.                                                                                                               | QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK                                 | 12       |
|                                                                                                                  |                                                                                        |     |
| ITEMS 4 &  4T.                                                                                                    | CONTROLS AND PROCEDURES                                                                     | 12       |
|                                                                                                                  |                                                                                        |     |
| PART II. OTHER INFORMATION:                                                                                           |                                                                                        |
|                                                                                                                  |                                                                                        |     |
| ITEM 6.                                                                                                               | EXHIBITS                                                                                    | 13       |
|                                                                                                                  |                                                                                        |     |
| SIGNATURES                                                                                                            |                                                                                        | 14       |
|                                                                                                                  |                                                                                        |     |
| INDEX TO EXHIBITS                                                                                                     | 15                                                                                          |
|                                                                                                                       |                                                                                             |          |  |  |

 

2

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** **

**FORM 10-Q**

**PACCARFINANCIAL CORP.**

 

**PART I – FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIALSTATEMENTS**

 

##### **Statements of Income and Retained Earnings (Unaudited)**

(Millions of Dollars)

 
| ** **                                    | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and fee  income                      | ** ** | **$**                                               | **93.5**   |                                               | $          | 84.1 | ** ** | **$** | **276.7** |   | $ | 234.6 |   |
| Operating lease  and rental income            | ** ** | **38.8**                                            |       | 34.4                                               | ** ** | **111.1** |   | 99.0 |   |
| Insurance  premiums and other revenue         | ** ** | **15.0**                                            |       | 12.8                                               | ** ** | **43.1** |   | 37.7 |   |
|                                          | ** ** | ** **                                          |       |                                               | ** ** | ** ** |   |   |   |
| **TOTAL  INTEREST AND OTHER REVENUE**         | ** ** | **147.3**                                           |       | 131.3                                              | ** ** | **430.9** |   | 371.3 |   |
|                                          |       |                                                |       |                                               |       |   |   |   |   |
| Interest and  other borrowing expenses        | ** ** | **51.5**                                            |       | 44.5                                               | ** ** | **153.4** |   | 120.3 |   |
| Depreciation and  other rental expenses       | ** ** | **31.0**                                            |       | 27.8                                               | ** ** | **90.2** |   | 80.4 |   |
| Insurance claims  and other expenses          | ** ** | **10.7**                                            |       | 7.4                                                | ** ** | **31.4** |   | 21.2 |   |
| Selling, general  and administrative expenses | ** ** | **13.7**                                            |       | 12.7                                               | ** ** | **39.6** |   | 37.4 |   |
| Provision for  losses on receivables          | ** ** | **3.8**                                             |       | 4.1                                                | ** ** | **13.0** |   | 10.5 |   |
|                                          | ** ** | ** **                                          |       |                                               | ** ** | ** ** |   |   |   |
| **TOTAL  EXPENSES**                           | ** ** | **110.7**                                           |       | 96.5                                               | ** ** | **327.6** |   | 269.8 |   |
|                                          |       |                                                |       |                                               |       |   |   |   |   |
| **INCOME  BEFORE INCOME TAXES**               | ** ** | **36.6**                                            |       | 34.8                                               | ** ** | **103.3** |   | 101.5 |   |
|                                          |       |                                                |       |                                               |       |   |   |   |   |
| Income taxes                                  | ** ** | **14.0**                                            |       | 13.3                                               | ** ** | **39.6** |   | 38.9 |   |
|                                          |       |                                                |       |                                               |       |   |   |   |   |
| **NET  INCOME**                               | ** ** | **22.6**                                            |       | 21.5                                               | ** ** | **63.7** |   | 62.6 |   |
|                                          | ** ** | ** **                                          |       |                                               | ** ** | ** ** |   |   |   |
| **RETAINED  EARNINGS AT BEGINNING OF PERIOD** | ** ** | **573.1**                                           |       | 488.6                                              | ** ** | **532.0** |   | 477.5 |   |
| Cash dividends declared                       | ** ** | **24.0**                                            | ** ** | ** **                                         | ** ** | **24.0** |   | 30.0 |   |
|                                          | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** |   |   |   |
| **RETAINED  EARNINGS AT END OF PERIOD**       | ** ** | **$**                                               | **571.7**  |                                               | $          | 510.1 | ** ** | **$** | **571.7** |   | $ | 510.1 |   |

 

Earnings per share anddividends per share are not reported because the Company is a wholly ownedsubsidiary of PACCAR Financial Services Corporation.

 

See Notes to FinancialStatements.

 

3

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**FORM 10-Q**

**PACCAR FINANCIAL CORP.**

 
| **Balance Sheets**                                                                                                                       | ** ** | **September 30** | ** **  | **December 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|----------------------|------------|
| **(Millions of Dollars)**                                                                                                           | ** ** | **2007**              | ** **  | **2006***            | ** ** |
|                                                                                                                                          |       | **(Unaudited**)       |        |                 |       |
| **ASSETS**                                                                                                                                    | ** ** | ** **            |        |                 |       |
|                                                                                                                                          |       |                  |        |                 |       |
| Cash                                                                                                                                          | ** ** | **$**                 | **21.4**    |                 | $          | 13.9 |   |
| Finance and  other receivables, net of allowance for losses (2007 - $88.3 and 2006 -  $86.9)                                                  |       | **4,808.8**           |        | 4,933.3              |       |
| Due from PACCAR  Inc and affiliates                                                                                                           | ** ** | **164.1**             |        | 14.6                 |       |
| Equipment on  operating leases, net of depreciation (2007 - $185.5 and 2006 - $151.1)                                                         |       | **468.6**             |        | 461.4                |       |
| Other assets                                                                                                                                  | ** ** | **61.3**              |        | 85.1                 |       |
|                                                                                                                                          |       |                  |        |                 |       |
| **TOTAL  ASSETS**                                                                                                                             | ** ** | **$**                 | **5,524.2** |                 | $          | 5,508.3 |   |
|                                                                                                                                          |       |                  |        |                 |       |
| **LIABILITIES**                                                                                                                               |       |                  |        |                 |       |
|                                                                                                                                          |       |                  |        |                 |       |
| Accounts  payable, accrued expenses and other                                                                                                 | ** ** | **$**                 | **219.0**   |                 | $          | 218.5 |   |
| Dividend payable                                                                                                                              | ** ** | **24.0**              |        |                 |       |
| Due to PACCAR  Inc and affiliates                                                                                                             | ** ** | **27.8**              |        | 46.4                 |       |
| Commercial paper                                                                                                                              | ** ** | **1,795.8**           |        | 2,081.1              |       |
| Medium-term  notes                                                                                                                            | ** ** | **2,275.0**           |        | 2,050.0              |       |
| Income taxes –  current and deferred                                                                                                     | ** ** | **361.5**             |        | 331.3                |       |
|                                                                                                                                          | ** ** | ** **            |        |                 |       |
| **TOTAL  LIABILITIES**                                                                                                                        | ** ** | **$**                 | **4,703.1** |                 | $          | 4,727.3 |   |
|                                                                                                                                          |       |                  |        |                 |       |
| **STOCKHOLDER’S  EQUITY**                                                                                                                | ** ** | ** **            | ** **  | ** **           | ** ** |
|                                                                                                                                          |       |                  |        |                 |       |
| Preferred stock,  par value $100 per share, 6% noncumulative and nonvoting, 450,000 shares  authorized, 310,000 shares issued and outstanding |       | **$**                 | **31.0**    |                 | $          | 31.0 |   |
| Common stock,  par value $100 per share, 200,000 shares authorized, 145,000 shares issued  and outstanding                                    |       | **14.5**              |        | 14.5                 |       |
| Additional paid-in capital                                                                                                                    | ** ** | **210.1**             |        | 192.4                |       |
| Retained  earnings                                                                                                                            | ** ** | **571.7**             |        | 532.0                |       |
| Accumulated other comprehensive  income                                                                                                       | ** ** | **(6.2**              | **)**       | 11.1                 |       |
|                                                                                                                                          | ** ** | ** **            |        |                 |       |
| **TOTAL  STOCKHOLDER’S EQUITY**                                                                                                          | ** ** | **821.1**             |        | 781.0                |       |
|                                                                                                                                          |       |                  |        |                 |       |
| **TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                          | ** ** | **$**                 | **5,524.2** |                 | $          | 5,508.3 |   |

 

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*The December 31, 2006balance sheet has been derived from audited financial statements.

 

See Notes to FinancialStatements.

 

4

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**FORM 10-Q**

**PACCARFINANCIAL CORP.**

 

##### **Statements of Cash Flows (Unaudited)**

(Millions of Dollars)

 
| **Nine Months Ended September 30**                   | ** ** | **2007**     | ** ** | **2006**   | ** ** |
|--------------------------------------------------------------------------|------------|--------------|------------|------------|------------|
|                                                                     |       |         |       |       |       |
| **OPERATING  ACTIVITIES**                                                |       |         |       |       |       |
|                                                                     |       |         |       |       |       |
| Net income                                                               | ** ** | **$**        | **63.7**   |       | $          | 62.6 |   |
| Items included  in net income not affecting cash:                        |       |         |       |       |       |
| Depreciation and  amortization                                           | ** ** | **70.4**     |       | 62.0       |       |
| Provision for losses  on receivables                                     | ** ** | **13.0**     |       | 10.5       |       |
| Increase in  deferred tax liability                                      | ** ** | **14.1**     |       | 3.4        |       |
| Administrative  fees for services from PFSC                              | ** ** | **17.7**     | ** ** | 17.1       |       |
| Decrease in  payables and other                                          | ** ** | **(2.6**     | **)**      | (26.9      | )          |
|                                                                     |       |         | ** ** |       |       |
| **NET  CASH PROVIDED BY OPERATING ACTIVITIES**                           | ** ** | **176.3**    | ** ** | 128.7      |       |
|                                                                     |       |         | ** ** |       |       |
| **INVESTING  ACTIVITIES**                                                |       |         | ** ** |       |       |
|                                                                     |       |         | ** ** |       |       |
| Finance and  other receivables originated                                | ** ** | **(1,361.8** | **)**      | (1,632.0   | )          |
| Collections on  finance and other receivables                            | ** ** | **1,277.6**  | ** ** | 1,295.4    |       |
| Net decrease  (increase) in wholesale receivables                        | ** ** | **171.3**    | ** ** | (39.0      | )          |
| Net (increase)  decrease due from PACCAR Inc and affiliates              | ** ** | **(149.5**   | **)**      | 39.5       |       |
| Acquisition of  equipment on operating leases, primarily from PACCAR Inc |       | **(114.1**   | **)**      | (116.2     | )          |
| Proceeds from  disposal of equipment                                     | ** ** | **55.6**     | ** ** | 50.9       |       |
| Other                                                                    | ** ** | **4.6**      | ** ** | (51.5      | )          |
|                                                                     |       |         | ** ** |       |       |
| **NET  CASH USED IN INVESTING ACTIVITIES**                               | ** ** | **(116.3**   | **)**      | (452.9     | )          |
|                                                                     |       |         | ** ** |       |       |
| **FINANCING  ACTIVITIES**                                                | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                               | ** ** | ** **   | ** ** | ** ** | ** ** |
| Net (decrease)  increase in commercial paper                             | ** ** | **(285.3**   | **)**      | 94.0       |       |
| Proceeds from  medium-term notes                                         | ** ** | **475.0**    | ** ** | 1,050.0    |       |
| Payments of  medium-term notes                                           | ** ** | **(250.0**   | **)**      | (800.0     | )          |
| Dividends paid                                                           |       |         | ** ** | (30.0      | )          |
| Proceeds from loans from PACCAR Inc                                      | ** ** | **7.8**      | ** ** | 8.9        |       |
|                                                                     |       |         | ** ** |       |       |
| **NET  CASH (USED) PROVIDED BY FINANCING ACTIVITIES**                    | ** ** | **(52.5**    | **)**      | 322.9      |       |
|                                                                     |       |         | ** ** |       |       |
| **NET  INCREASE (DECREASE) IN CASH**                                     | ** ** | **7.5**      | ** ** | (1.3       | )          |
|                                                                     |       |         | ** ** |       |       |
| **CASH AT  BEGINNING OF PERIOD**                                         | ** ** | **13.9**     | ** ** | 19.0       |       |
|                                                                     |       |         | ** ** |       |       |
| **CASH AT  END OF PERIOD**                                               | ** ** | **$**        | **21.4**   |       | $          | 17.7 |   |

 

See Notes to FinancialStatements.

 

5

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**FORM 10-Q**

**PACCARFINANCIAL CORP.**

 

##### **Notes to Financial Statements (Unaudited)**

##### **(Millionsof Dollars)**

##### ** **

**NOTE A –Basis of Presentation**

 

The accompanyingunaudited financial statements have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included. Forfurther information, refer to the financial statements and footnotes includedin PACCAR Financial Corp.’s (the “Company”) Annual Report on Form 10-K for theyear ended December 31, 2006.

 

*Reclassifications*:Certain prior year amounts have been reclassified to conform to the 2007presentation.

 

**New Accounting Standard**

 

The Company adopted FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (FIN 48) effective January 1, 2007 with no effect onthe Company’s financial statements. As of the date of adoption, theCompany had less than $1.0 of unrecognized tax benefits which would impact theeffective tax rate if recognized. The Company is not currently underexamination by the Internal Revenue Service and has completedexaminations for all years through 2003. Tax interest andpenalties are classified as income taxes in the accompanying statements ofincome and were not significant in any period presented. The Company does not currentlyanticipate any significant changes to unrecognized tax benefits during the next12 months.

 

**NOTE B –Transactions with PACCAR Inc and Affiliates**

 

The Company and PACCARInc (“PACCAR”) are parties to a Support Agreement that obligates PACCAR to provide,when required, financial assistance to the Company to ensure that the Companymaintains a ratio of net earnings available for fixed charges to fixed charges(as defined in the Agreement) of at least 1.25 to 1 for any year. The requiredratio for the nine months ended September 30, 2007 and full year 2006 was metwithout assistance. The Company determines the amount of PACCAR assistance, ifany, at the end of each year. The Support Agreement also requires PACCAR toown, directly or indirectly, all outstanding voting stock of the Company.

 

PACCAR Financial ServicesCorporation (“PFSC”), the Company’s parent, charges the Company for certainadministrative services it provides and certain services the Company receivesindirectly from PACCAR. The costs are charged to the Company based upon theCompany’s specific use of the services at PFSC’s or PACCAR’s cost. Managementconsiders these charges similar to the costs that would be incurred if theCompany were on a stand-alone basis. PFSC recognizes certain of theseadministrative services as an additional investment in the Company. The Companyrecords the investment as additional paid-in capital.

 

There was a dividenddeclared in the third quarter of 2007 in the amount of $24.0, payable in thefourth quarter of 2007. A dividend in the amount of $30.0 was declared and paidduring the first quarter of 2006.

 

The Company’s principaloffice is located in the corporate headquarters building of PACCAR (owned byPACCAR). The Company also leases office space from two additional facilitiesowned by PACCAR and four facilities leased by PACCAR.

 

Company employees andPACCAR employees are covered by a defined benefit pension plan and an unfundedpost-retirement medical and life insurance plan, both sponsored by PACCAR. Theassets and liabilities of these plans are reflected on the balance 

 

6

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sheets of PACCAR. PACCARcontributes to the plans and allocates the expenses to the Company basedprincipally on the number of eligible plan participants.

 

Company employees andPACCAR employees are also covered by a defined contribution plan, sponsored byPACCAR. Costs incurred by the Company for defined contribution plan benefitsare based on the actual contribution made on behalf of participating employees.

 

Expenses for the definedbenefit pension plan, the unfunded post-retirement medical and life insuranceplan and the defined contribution plan are included as selling, general andadministrative expenses.

 

Periodically, the Companymakes loans to, borrows from and has intercompany transactions with PACCAR. Inaddition, the Company periodically loans funds to certain foreign finance andleasing affiliates of PACCAR. These various affiliates have Support Agreementswith PACCAR, similar to the Company’s Support Agreement. The foreign affiliatesoperate in the United Kingdom, The Netherlands, Mexico, Canada and Australia,and any resulting currency exposure is fully hedged. The foreign affiliatesprimarily provide financing and leasing of PACCAR-manufactured trucks andrelated equipment sold through PACCAR’s independent dealer networks in Europe,Mexico, Canada and Australia. The Company will not make loans to the foreignaffiliates in excess of the equivalent of $500.0 United States dollars, unlessthe amount in excess of such limit is guaranteed by PACCAR. The Companyperiodically reviews the funding alternatives for these affiliates, and theselimits may be revised in the future. There was a total of $117.8 in loansoutstanding to foreign affiliates operating in the United Kingdom, TheNetherlands and Mexico at September 30, 2007. There were no loans outstandingto foreign affiliates at December 31, 2006. Amounts outstanding at September30, 2007 are summarized below:

 
| ** **                          | ** ** | **September 30  2007** | ** ** | **December 31  2006** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Due from PACCAR  Inc and affiliates |       |                        |       |                       |       |
| Loans                               | ** ** | **$**                       | **163.2**  |                       | $          | 14.4 |   |
| Receivables                         | ** ** | **.9**                      |       | .2                         |       |
| Total                               | ** ** | **$**                       | **164.1**  |                       | $          | 14.6 |   |
|                                |       |                        |       |                       |       |
| Due to PACCAR  Inc and affiliates   |       |                        |       |                       |       |
| Loans                               | ** ** | **$**                       | **19.3**   |                       | $          | 11.5 |   |
| Payables                            | ** ** | **8.5**                     |       | 34.9                       |       |
| Total                               | ** ** | **$**                       | **27.8**   |                       | $          | 46.4 |   |

 

PACCAR has issued lettersof credit as of September 30, 2007 in the amount of $4.9 on behalf of theCompany to guarantee funds for payment to insured franchisees and customers forany future insurance losses.

 

7

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**NOTE C –Stockholder’s Equity**

 

**PreferredStock**

 

The Company’s Articles ofIncorporation provide that the 6% noncumulative, nonvoting preferred stock(100% owned by PFSC) is redeemable only at the option of the Company’s Board ofDirectors.

 

**ComprehensiveIncome**

 

The components of comprehensive income, net of related tax,were as follows:

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| ** **                                   | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                   | ** ** | **$**                            | **22.6**   |                            | $          | 21.5 | ** ** | **$** | **63.7** |   | $ | 62.6 |   |
| Other comprehensive  income:                 |       |                             |       |                            |       |   |   |   |   |
| Unrealized net  loss on derivative contracts | ** ** | **(19.4**                        | **)**      | (18.0                           | )          | **(17.3** | **)** | (7.1 | ) |
| Total  comprehensive income                  | ** ** | **$**                            | **3.2**    |                            | $          | 3.5 | ** ** | **$** | **46.4** |   | $ | 55.5 |   |

 

The unrealized net losson derivative contracts in the three and nine months ended September 30, 2007was due to a decrease in long term market interest rates causing a decrease inthe fair value of the Company’s floating to fixed interest rate swap contracts.

 

Accumulated othercomprehensive income of $(6.2) and $11.1 at September 30, 2007 and December 31,2006, respectively, is comprised of the unrealized net (loss) gain onderivative contracts.

 

8

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**ITEM 2.****    MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**(Millions ofDollars)

 

**Resultsof Operations**

 

The Company’s net income of $22.6for the third quarter of 2007 increased from $21.5 for the third quarter of2006. Net income of $63.7 for the first nine months of 2007 increased from$62.6 earned in the first nine months in 2006. Interest and fee income in thethird quarter and first nine months of 2007 increased $9.4 and $42.1,respectively, compared to 2006 levels. Higher earning assets contributed $6.5and higher interest rates contributed $2.9 to the third quarter increase. Forthe first nine months of 2007, higher earning assets contributed $30.6 andhigher interest rates contributed $11.5 to the increase. Operating lease andrental income, and the related depreciation and other rental expenses for thethird quarter and first nine months of 2007 increased due to higher averagebalances of operating lease assets.

 

Interest and other borrowingexpenses increased $7.0 for the third quarter of 2007 and $33.1 for the firstnine months of 2007 from the comparable periods in 2006. Average debt balancescontributed $2.6 and higher interest rates contributed $4.4 to the thirdquarter increase. For the first nine months of 2007, average debt balancescontributed $14.1 and higher interest rates contributed $19.0 to the increase. Insuranceclaims and other expenses increased in the third quarter and first nine monthsof 2007, from the comparable periods in 2006, due to higher claims. The Company’seffective income tax rate of 38.3% in 2007 was comparable to the prior periodsin 2006.

 

9

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The following table summarizesinformation on the Company’s allowance for losses on receivables and assetportfolio and presents related ratios:

 

##### **Allowance for Losses**

 
| ** **                                                                                                                                                | ** ** | **Nine Months  Ended** | ** ** | **Nine Months  Ended** | ** ** | **Year Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                | ** ** | **September 30**       | ** ** | **September 30**       | ** ** | **December 31** | ** ** |
| ** **                                                                                                                                                | ** ** | **2007**                    | ** ** | **2006**                    | ** ** | **2006**             | ** ** |
| Balance at  beginning of period                                                                                                                           | ** ** | **$**                       | **86.9**   |                        | $          | 77.3                 |       | $ | 77.3 |   |
| Provision for  losses                                                                                                                                     | ** ** | **13.0**                    | ** ** | 10.5                        |       | 14.9                 |       |
| Credit losses                                                                                                                                             | ** ** | **(13.1**                   | **)**      | (5.9                        | )          | (8.4                 | )          |
| Recoveries                                                                                                                                                | ** ** | **1.5**                     | ** ** | 2.8                         |       | 3.1                  |       |
| Balance at end  of period                                                                                                                                 | ** ** | **$**                       | **88.3**   | ** **                  | $          | 84.7                 |       | $ | 86.9 |   |
|                                                                                                                                                      | ** ** | ** **                  | ** ** |                        |       |                 |       |
| Ratios:                                                                                                                                                   |       |                        | ** ** |                        |       |                 |       |
|                                                                                                                                                      |       |                        | ** ** |                        |       |                 |       |
| Credit losses  net of recoveries ($11.6 in 2007) to average total portfolio ($4,976.8 in  2007) annualized at September 30, 2007 and 2006                 | ** ** | **.31%**                    | ** ** | .09%                        |       | .12%                 |       |
|                                                                                                                                                      | ** ** | ** **                  | ** ** |                        |       |                 |       |
| Allowance for  losses ($88.3 in 2007) to period-end total portfolio ($4,897.1 in 2007)                                                                    | ** ** | **1.80%**                   | ** ** | 1.81%                       |       | 1.73%                |       |
|                                                                                                                                                      | ** ** | ** **                  |       |                        |       |                 |       |
| Period-end  retail loan and lease receivables past due, over 30 days, ($54.2 in 2007) to  period-end retail loan and lease receivables ($4,034.6 in 2007) | ** ** | **1.34%**                   |       | .84%                        |       | .91%                 |       |

 

The provision for losses for thefirst nine months of 2007 was $13.0 compared to $10.5 for the first nine monthsof 2006. Although the Company experienced an increase in credit losses duringthe first nine months of 2007, losses remained at relatively low levels.

 

The Company’s portfolio isconcentrated with customers in the heavy and medium duty truck transportationindustry. The portfolio is comprised of retail loans and leases, dealerwholesale financing and dealer master notes as follows:

 
| ** **                  | ** ** | **September 30** | ** **  | **September 30** | ** ** | **December 31** | ** ** |
|-----------------------------|------------|-----------------------|-------------|-----------------------|------------|----------------------|------------|
| ** **                  | ** ** | **2007**              | ** **  | **2006**              | ** ** | **2006**             | ** ** |
| Retail loans                | ** ** | **$**                 | **2,783.6** | ** **            | **57%**    | ** **           | $          | 2,735.4 |   | 59% |   | $ | 2,798.4 |   | 56% |   |
| Retail leases               | ** ** | **1,251.0**           | ** **  | **26%**               | ** ** | 1,085.9              |       | 23% |   | 1,203.9 |   | 24% |   |
| Dealer wholesale  financing | ** ** | **545.1**             | ** **  | **11%**               | ** ** | 665.9                |       | 14% |   | 716.4 |   | 14% |   |
| Dealer master  notes        | ** ** | **317.4**             | ** **  | **6%**                | ** ** | 183.4                |       | 4% |   | 301.5 |   | 6% |   |
| Total portfolio             | ** ** | **$**                 | **4,897.1** | ** **            | **100%**   | ** **           | $          | 4,670.6 |   | 100% |   | $ | 5,020.2 |   | 100% |   |

 

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The ratio of the allowance forlosses to period-end total portfolio was 1.80% at September 30, 2007, 1.73% atDecember 31, 2006, and 1.81% at September 30, 2006.

 

The estimation methods and factorsconsidered for determining the allowance during the periods included in thisfiling have been consistently applied. There have been no significant changesin customer contract terms during the periods.

 

**Company Outlook**

 

The future profitability of theCompany is principally dependent on the generation of new business volume, therelated spread between the asset yields and the borrowing costs on new businessand the level of credit losses experienced. Portfolio balances for theremainder of 2007 are not expected to be significantly different from currentlevels, as new business originated is forecast to approximate collections onthe portfolio. The Company continues to be exposed to risks affecting freightdemand, including economic weakness, changes in governmental regulations andvolatile interest rates and diesel prices, that could negatively impact futuretruck sales financed and existing customers’ ability to make timely payments,which could increase the level of credit losses experienced.

 

**Fundingand Liquidity**

 

TheCompany periodically registers debt securities under the Securities Act of 1933for offering to the public. In November 2006, the Company filed a new shelfregistration statement. The registration expires in 2009 and does not limit theprincipal amount of debt securities that may be issued during the period.

 

Dueto continued strong credit ratings and portfolio performance, the Company wasnot affected by the disturbance in certain credit markets during the quarter. TheCompany continues to believe it will be able to fund receivables, service debtand pay dividends through internally generated funds, and access to publicand private debt markets. Other information on liquidity and capital resourcesas presented in the 2006 Form 10-K continues to be relevant.

 

TheCompany’s credit ratings at September 30, 2007 are as follows:

 
|                  |   | **Moody’s** | ** ** | **Standard  and Poor’s** |
|-----------------------|--------|------------------|------------|-------------------------------|
| Commercial paper      |   | P-1              |       | A-1+                          |
| Senior unsecured debt |   | A1               |       | AA-                           |

 

TheCompany’s strong credit ratings are primarily based on PACCAR’s operating cashflow, demand for its quality products and excellent overall financial condition. Access to financing at competitive rates would be negatively impacted by adowngrade in these credit ratings.

 

TheCompany participates with PACCAR and certain other PACCAR affiliates insyndicated credit facilities of $2,200. Of this amount, $1,200 expires inJune 2008 and $1,000 expires in June 2012.

 

Ofthe credit facilities, $1,375.0 is available for use by the Company and/orPACCAR and certain other PACCAR affiliates. Of the remaining $825.0,$360.0 is only available for use by PACCAR’s Canadian subsidiaries, $350.0is only

 

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availablefor use by PACCAR’s Mexican subsidiary and $115.0 is only available foruse by PACCAR’s Australian financial subsidiary.  These credit facilitiesare used to provide backup liquidity for the Company’s commercial paper andmaturing medium-term notes. The Company is liable only for its own borrowingsunder these credit facilities. There were no borrowings under these creditfacilities in the nine months ended September 30, 2007 and the year endedDecember 31, 2006.

 

EffectiveNovember 1,2007, PACCAR, increased the $1,200 credit facility to$1,700. PACCAR intends to replace the current credit facilities as they expirewith facilities of similar amounts.

 

Otherinformation on liquidity, sources of capital, and contractual cash commitmentsas presented in the Company’s 2006 Annual Report on Form 10-K continues to berelevant.

 

**ForwardLooking Statements**

 

Certain information presented in this Form 10-Q containsforward-looking statements made pursuant to the Private Securities LitigationReform Act of 1995, which are subject to risks and uncertainties that mayaffect actual results. Risks and uncertainties include, but are not limited to:national and local economic, political and industry conditions; changes in thelevels of new business volume due to unit fluctuations in new PACCAR trucksales; changes in competitive factors; changes affecting the profitability oftruck owners and operators; price changes impacting equipment costs andresidual values; changes in costs and availability of external funding sources;and legislation and governmental regulation.

 

**ITEM 3.****    QUANTITATIVE****AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

There have been no material changes in the Company’smarket risk during the nine months ended September 30, 2007. For additionalinformation, refer to the market risk disclosure in Item 7A as presented in theCompany’s 2006 Annual Report on Form 10-K.

 

**ITEM 4 & 4T.**

 

**CONTROLS AND PROCEDURES**

 

An evaluation was performed under the supervisionand with the participation of the Company’s management, including the principalexecutive officer and principal financial officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in rules 13a-15(e) and 15d-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended) as of September 30, 2007. Based on thatevaluation, the principal executive officer and principal financial officer ofthe Company concluded that the disclosure controls and procedures in place atthe Company are effective to ensure that information required to be disclosedby the Company, including its consolidated subsidiaries, in reports thatthe Company files or submits under the Exchange Act, is recorded, processed,summarized and reported on a timely basis in accordance with applicable rulesand regulations. The Company implemented a new global treasury system whichsupports debt, cash and risk management processes and was used to producecertain information contained in this quarterly report. There have been nosignificant changes in the Company’s internal controls over financial reportingthat occurred during the fiscal quarter covered by this quarterly reportthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

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**PART II – OTHERINFORMATION**

 

Foritems 1 and 5, there was no reportable information during the nine months endedSeptember 30, 2007.

 

Items2, 3 and 4 are omitted pursuant to Form 10-Q General Instructions (H)(1)(A) and(B).

 

**ITEM 1A. RISK FACTORS**

 

For information regarding risk factors, refer toPart I, Item 1A as presented in the 2006 Annual Report Form 10-K. There havebeen no material changes in the Company’s risk factors during the nine monthsended September 30, 2007.

 

**ITEM 6.****    EXHIBITS**

 

Any exhibits filed herewith are listed in theaccompanying index to exhibits.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | **PACCAR  Financial Corp.** |
|--------|-----------------------------|
|   |                        | (Registrant) |
|   |                        |   |
|   |                        |   |
| Date   | November 2, 2007            |   | By | /s/ Timothy M.  Henebry |
|   |                        |  Timothy M. Henebry |
|   |                        |  President   (Authorized Officer) |
|   |                        |   |
|   |                        |   |
|   | By                          | /s/ Nanette C.  Anderson |
|   |                        |  Nanette C. Anderson |
|   |                        |  Controller   (Chief Accounting Officer) |
|        |                             |  |  |  |

 

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**INDEX TO EXHIBITS**

 

Exhibits (in order of assigned index numbers)

 

3              Articlesof incorporation and bylaws:

 

(a)           RestatedArticles of Incorporation of the Company, as amended (incorporated by referenceto Exhibit 3.1 to the Company’s Annual Report on Form 10-K dated March 26,1985. Amendment incorporated by reference to Exhibit 19.1 to the Company’sQuarterly Report on Form 10-Q dated August 13, 1985, File Number 0-12553).

 

(b)           By-lawsof the Company, as amended (incorporated by reference to Exhibit 3.2 to theCompany’s Registration Statement on Form 10 dated October 20, 1983, File Number0-12553).

 

4              Instrumentsdefining the rights of security holders, including indentures:

 

(a)           Indenturefor Senior Debt Securities dated as of December 1, 1983 and first SupplementalIndenture dated as of June 19, 1989 between the Company and Wilmington TrustCompany (incorporated by reference to Exhibit 4.1 to the Company’s AnnualReport on Form 10-K dated March 26, 1984, File Number 001-11677 and Exhibit 4.2to the Company’s Registration Statement on Form S-3 dated June 23, 1989,Registration Number 33-29434), and the Agreement of Resignation, Appointmentand Acceptance, dated as of October 31, 2006 (incorporated by reference to theCompany’s Form 8-K dated November 3, 2006).

 

(b)           Formsof Medium-Term Note, Series K (incorporated by reference to Exhibits 4.2A and4.2B to the Company’s Registration Statement on Form S-3 dated December 23,2003, Registration Number 333-111504).

 

Formof Letter of Representation among the Company, Citibank, N.A. and TheDepository Trust Company, Series K (incorporated by reference to Exhibit 4.3 tothe Company’s Registration Statement on Form S-3 dated December 23, 2003,Registration Number 333-111504).

 

(c)           Formsof Medium-Term Note, Series L (incorporated by reference to Exhibits 4.2A and4.2B to the Company’s Registration Statement on Form S-3 dated November 7,2006, Registration Number 333-138464).

 

Formof Letter of Representation among the Company, Citibank, N.A. and TheDepository Trust Company, Series L (incorporated by reference to Exhibit 4.3 tothe Company’s Registration Statement on Form S-3 dated November 7, 2006,Registration Number 333-138464).

 

10            Material contracts:

 

(a)           SupportAgreement between the Company and PACCAR dated as of June 19, 1989  (incorporated by reference to Exhibit 28.1 tothe Company’s Registration Statement on Form S-3 dated June 23, 1989,Registration Number 33-29434).

 

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12            Statements recomputation of ratios:

 

(a)           Computationof ratio of earnings to fixed charges of the Company pursuant to SEC reportingrequirements for the nine month periods ended September 30, 2007 and 2006.

 

(b)           Computationof ratio of earnings to fixed charges of the Company pursuant to the SupportAgreement between the Company and PACCAR for the nine month periods endedSeptember 30, 2007 and 2006.

 

(c)           Computationof ratio of earnings to fixed charges of PACCAR and subsidiaries pursuant toSEC reporting requirements for the nine month periods ended September 30, 2007and 2006.

 

31            Rule13a-14(a)/15d-14(a) Certifications:

 

(a)           Certificationof Principal Executive Officer.

 

(b)           Certificationof Principal Financial Officer.

 

32            Section 1350Certifications:

 

(a)           Certificationpursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002(18 U.S.C. section 1350).

 

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