Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

 

**FORM 10-Q**

 

x Quarterly Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934

 

**For the quarterly period ended September 30,2008**

 

or

 

o Transition Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For transition periodfrom                     to

 

Commission File No. 001-11677

 

**PACCAR FINANCIAL CORP.**

(Exact name ofregistrant 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’stelephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes   x   No  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.

 
| Large accelerated  filer: o | Accelerated filer: o | Non-accelerated filer: x | Smaller reporting  company: o |
|-----------------------------|----------------------|--------------------------|-------------------------------|

 

Indicate by check markwhether registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o   No  x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:

 

Common Stock, $100 par value—145,000 shares as of October 31, 2008

 

THE REGISTRANT IS A WHOLLY OWNED INDIRECT SUBSIDIARY OF PACCAR INC ANDMEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H)(1)(A) AND (B) OFFORM 10-Q AND IS, THEREFORE, FILING THIS FORM WITH THE REDUCEDDISCLOSURE FORMAT.

 

 

 

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Table of Contents

 

**INDEX**

 
|                                                                                                                       |                                                                                        | Page   |
|----------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|--------|
|                                                                                                                       |                                                                                        |   |
| PART I.  FINANCIAL INFORMATION:                                                                                       |                                                                                        |
|                                                                                                                       |                                                                                        |
| ITEM 1.                                                                                                                    | FINANCIAL STATEMENTS:                                                                       |   |
|                                                                                                                       |                                                                                        |   |
| Statements of Income and Retained Earnings—  Three and Nine Months Ended September 30, 2008 and 2007 (Unaudited) | 3                                                                                           |
|                                                                                                                       |                                                                                        |
| Balance  Sheets—  September 30, 2008 (Unaudited) and December 31, 2007                                                | 4                                                                                           |
|                                                                                                                       |                                                                                        |
| Statements of Cash Flows —  Nine Months Ended September 30, 2008 and 2007 (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                                 | 13     |
|                                                                                                                       |                                                                                        |   |
| ITEMS 4 & 4T                                                                                                      | CONTROLS AND PROCEDURES                                                                     | 13     |
|                                                                                                                       |                                                                                        |   |
| PART II.  OTHER INFORMATION:                                                                                          |                                                                                        |
|                                                                                                                       |                                                                                        |   |
| ITEM 6.                                                                                                                    | EXHIBITS                                                                                    | 14     |
|                                                                                                                       |                                                                                        |   |
| SIGNATURES                                                                                                                 |                                                                                        | 15     |
|                                                                                                                       |                                                                                        |   |
| EXHIBIT INDEX                                                                                                              | 16                                                                                          |

 

2

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** **

**FORM 10-Q**

**PACCARFINANCIAL CORP.**

 

**PART I – FINANCIALINFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

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

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

 
| ** **                                    | ** ** | Three  Months Ended  September 30 |       | Nine  Months Ended  September 30 | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2008**                          | ** ** | 2007                             | ** ** | **2008** | ** ** | 2007 | ** ** |
|                                          |       |                              |       |                             |       |   |   |   |   |
| Interest and  fees                            | ** ** | **$**                             | **73.4**   |                             | $          | 93.5 | ** ** | **$** | **235.2** |   | $ | 276.7 |   |
| Operating lease  and rental income            | ** ** | **44.9**                          |       | 38.8                             | ** ** | **127.2** |   | 111.1 |   |
| Insurance  premiums and other                 | ** ** | **5.5**                           |       | 15.0                             | ** ** | **22.0** |   | 43.1 |   |
| ** **                                    | ** ** | ** **                        |       |                             | ** ** | ** ** |   |   |   |
| **TOTAL  INTEREST AND OTHER REVENUE**         | ** ** | **123.8**                         |       | 147.3                            | ** ** | **384.4** |   | 430.9 |   |
|                                          |       |                              |       |                             |       |   |   |   |   |
| Interest and  other borrowing expenses        | ** ** | **39.1**                          |       | 51.5                             | ** ** | **125.4** |   | 153.4 |   |
| Depreciation and  other rental expenses       | ** ** | **37.2**                          |       | 31.0                             | ** ** | **104.1** |   | 90.2 |   |
| Insurance claims  and other expenses          | ** ** | **1.2**                           |       | 10.7                             | ** ** | **8.7** |   | 31.4 |   |
| Selling, general  and administrative expenses | ** ** | **13.0**                          |       | 13.7                             | ** ** | **39.7** |   | 39.6 |   |
| Provision for  losses on receivables          | ** ** | **24.4**                          |       | 3.8                              | ** ** | **55.1** |   | 13.0 |   |
| ** **                                    | ** ** | ** **                        |       |                             | ** ** | ** ** |   |   |   |
| **TOTAL  EXPENSES**                           | ** ** | **114.9**                         |       | 110.7                            | ** ** | **333.0** |   | 327.6 |   |
|                                          |       |                              |       |                             |       |   |   |   |   |
| **INCOME  BEFORE INCOME TAXES**               | ** ** | **8.9**                           |       | 36.6                             | ** ** | **51.4** |   | 103.3 |   |
|                                          | ** ** | ** **                        |       |                             | ** ** | ** ** |   |   |   |
| Income taxes                                  | ** ** | **3.4**                           |       | 14.0                             | ** ** | **19.7** |   | 39.6 |   |
|                                          |       |                              |       |                             |       |   |   |   |   |
| **NET  INCOME**                               | ** ** | **5.5**                           |       | 22.6                             | ** ** | **31.7** |   | 63.7 |   |
| ** **                                    | ** ** | ** **                        |       |                             | ** ** | ** ** |   |   |   |
| **RETAINED  EARNINGS AT BEGINNING OF PERIOD** | ** ** | **616.5**                         |       | 573.1                            | ** ** | **590.3** |   | 532.0 |   |
| Dividends  declared                           | ** ** | ** **                        |       | 24.0                             | ** ** | ** ** |   | 24.0 |   |
| ** **                                    | ** ** | ** **                        |       |                             | ** ** | ** ** |   |   |   |
| **RETAINED  EARNINGS AT END OF PERIOD**       | ** ** | **$**                             | **622.0**  |                             | $          | 571.7 | ** ** | **$** | **622.0** |   | $ | 571.7 |   |

 

Earnings per share and dividends per share are not reported because theCompany is a wholly owned subsidiary of PACCAR Financial Services Corporation.

 

See Notes to Financial Statements.

 

3

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**FORM 10-Q**

**PACCARFINANCIAL CORP.**

 
| **Balance Sheets**                                                                                                                       | ** ** | **September 30** | ** **  | December  31 | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|--------------|------------|
| (Millions of Dollars)                                                                                                               | ** ** | **2008**         | ** **  | 2007*        | ** ** |
| ** **                                                                                                                                    | ** ** | **(Unaudited)**  | ** **  | ** **   | ** ** |
| **ASSETS**                                                                                                                                    |       |             |        |         |       |
|                                                                                                                                          |       |             |        |         |       |
| Cash                                                                                                                                          | ** ** | **$**            | **21.3**    |         | $          | 25.6 |   |
| Finance and  other receivables, net of allowance for losses (2008 - $92.7 and 2007 -  $92.6)                                                  | ** ** | **3,951.7**      |        | 4,550.3      |       |
| Due from PACCAR  Inc and affiliates                                                                                                           | ** ** | **448.4**        |        | 402.8        |       |
| Equipment on  operating leases, net of depreciation (2008 - $211.1 and 2007 - $189.2)                                                         | ** ** | **570.3**        |        | 475.5        |       |
| Other assets                                                                                                                                  | ** ** | **98.4**         |        | 53.4         |       |
|                                                                                                                                          |       |             |        |         |       |
| **TOTAL  ASSETS**                                                                                                                             | ** ** | **$**            | **5,090.1** |         | $          | 5,507.6 |   |
|                                                                                                                                          |       |             |        |         |       |
| **LIABILITIES**                                                                                                                               |       |             |        |         |       |
|                                                                                                                                          |       |             |        |         |       |
| Accounts  payable, accrued expenses and other                                                                                                 | ** ** | **$**            | **186.3**   |         | $          | 239.3 |   |
| Due to PACCAR  Inc and affiliates                                                                                                             | ** ** | **16.9**         |        | 10.1         |       |
| Commercial paper                                                                                                                              | ** ** | **1,222.6**      |        | 1,453.7      |       |
| Medium-term  notes                                                                                                                            | ** ** | **2,420.0**      |        | 2,625.0      |       |
| Income taxes –  current and deferred                                                                                                     | ** ** | **365.6**        |        | 354.9        |       |
|                                                                                                                                          |       |             |        |         |       |
| **TOTAL  LIABILITIES**                                                                                                                        | ** ** | **$**            | **4,211.4** |         | $          | 4,683.0 |   |
|                                                                                                                                          |       |             |        |         |       |
| **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 $100 per share, 200,000 shares authorized, 145,000 shares issued  and outstanding                                    | ** ** | **14.5**         |        | 14.5         |       |
| Additional  paid-in capital                                                                                                                   | ** ** | **233.5**        |        | 215.1        |       |
| Retained  earnings                                                                                                                            | ** ** | **622.0**        |        | 590.3        |       |
| Accumulated  other comprehensive loss                                                                                                         | ** ** | **(22.3**        | **)**       | (26.3        | )          |
|                                                                                                                                          |       |             |        |         |       |
| **TOTAL  STOCKHOLDER’S EQUITY**                                                                                                          | ** ** | **$**            | **878.7**   |         | $          | 824.6 |   |
|                                                                                                                                          |       |             |        |         |       |
| **TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                          | ** ** | **$**            | **5,090.1** |         | $          | 5,507.6 |   |

 

*The December 31, 2007 balance sheet has been derived from auditedfinancial statements.

 

See Notes to Financial Statements.

 

4

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**FORM 10-Q**

**PACCAR FINANCIAL CORP.**

 

**Statements of Cash Flows(Unaudited)**

(Millions of Dollars)

 
| ** **                                                               | ** ** | Nine  Months Ended September 30 | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                               | ** ** | **2008**                        | ** ** | 2007 | ** ** |
|                                                                     |       |                            | ** ** |   |   |
| **OPERATING  ACTIVITIES**                                                |       |                            | ** ** |   |   |
|                                                                     |       |                            | ** ** |   |   |
| Net income                                                               | ** ** | **$**                           | **31.7**   | ** ** | $ | 63.7 |   |
| Items included  in net income not affecting cash:                        |       |                            | ** ** |   |   |
| Depreciation and  amortization                                           | ** ** | **79.1**                        | ** ** | 70.4 |   |
| Provision for  losses on receivables                                     | ** ** | **55.1**                        | ** ** | 13.0 |   |
| Increase in  deferred tax liability                                      | ** ** | **24.5**                        | ** ** | 14.1 |   |
| Administrative  fees for services from PFSC                              | ** ** | **18.4**                        | ** ** | 17.7 |   |
| Decrease in  payables and other                                          | ** ** | **(57.8**                       | **)**      | (2.6 | ) |
|                                                                     |       |                            | ** ** |   |   |
| **NET  CASH PROVIDED BY OPERATING ACTIVITIES**                           | ** ** | **151.0**                       | ** ** | 176.3 |   |
|                                                                     |       |                            | ** ** |   |   |
| **INVESTING  ACTIVITIES**                                                |       |                            | ** ** |   |   |
|                                                                     |       |                            | ** ** |   |   |
| Finance and  other receivables originated                                | ** ** | **(862.5**                      | **)**      | (1,361.8 | ) |
| Collections on  finance and other receivables                            | ** ** | **1,293.6**                     | ** ** | 1,277.6 |   |
| Net decrease in  wholesale receivables                                   | ** ** | **89.7**                        | ** ** | 171.3 |   |
| Net increase in  loans and leases from PACCAR Inc and affiliates         | ** ** | **(45.6**                       | **)**      | (149.5 | ) |
| Acquisition of  equipment on operating leases, primarily from PACCAR Inc | ** ** | **(213.9**                      | **)**      | (114.1 | ) |
| Proceeds from  disposal of equipment                                     | ** ** | **44.0**                        | ** ** | 55.6 |   |
| Net (increase)  decrease in other                                        | ** ** | **(25.2**                       | **)**      | 4.6 |   |
|                                                                     |       |                            | ** ** |   |   |
| **NET  CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES**                 | ** ** | **280.1**                       | ** ** | (116.3 | ) |
|                                                                     |       |                            | ** ** |   |   |
| **FINANCING  ACTIVITIES**                                                |       |                            | ** ** |   |   |
|                                                                     | ** ** | ** **                      | ** ** |   |   |
| Net decrease in  commercial paper                                        | ** ** | **(231.1**                      | **)**      | (285.3 | ) |
| Proceeds from  medium-term notes                                         | ** ** | **145.0**                       | ** ** | 475.0 |   |
| Payments of  medium-term notes                                           | ** ** | **(350.0**                      | **)**      | (250.0 | ) |
| Advances from  PACCAR Inc                                                | ** ** | **.7**                          | ** ** | 7.8 |   |
|                                                                     |       |                            | ** ** |   |   |
| **NET  CASH USED IN FINANCING ACTIVITIES**                               | ** ** | **(435.4**                      | **)**      | (52.5 | ) |
|                                                                     |       |                            | ** ** |   |   |
| **NET  (DECREASE) INCREASE IN CASH**                                     | ** ** | **(4.3**                        | **)**      | 7.5 |   |
|                                                                     |       |                            | ** ** |   |   |
| **CASH AT  BEGINNING OF PERIOD**                                         | ** ** | **25.6**                        | ** ** | 13.9 |   |
|                                                                     |       |                            | ** ** |   |   |
| **CASH AT  END OF PERIOD**                                               | ** ** | **$**                           | **21.3**   | ** ** | $ | 21.4 |   |

 

See Notes to Financial Statements.

 

5

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**FORM 10-Q**

**PACCAR FINANCIAL CORP.**

 
| **Notes  to Financial Statements (Unaudited)** |   |   |
|------------------------------------------------|--------|--------|

(Millions of 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, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. For further information, refer to thefinancial statements and footnotes included in PACCAR Financial Corp.’s (the “Company”)Annual Report on Form 10-K for the year ended December 31, 2007.

 

Effective September 2008,the Company elected to cease originating new physical damage insurancecontracts for its retail business. Expenses related to exiting this activity were not material and arereported as a component of selling, general and administrative expense for thethird quarter 2008.

 

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

 

The Company andPACCAR Inc (“PACCAR”) are parties to a Support Agreement that obligates PACCARto provide, when required, financial assistance to the Company to ensure thatthe Company maintains a ratio of net earnings available for fixed charges tofixed charges (as defined in the Agreement) of at least 1.25 to 1 for anyfiscal year. The required ratio for the nine months ended September 30,2008 and full year 2007 was met without assistance. The Company determines theamount of PACCAR assistance, if any, at the end of each year. The SupportAgreement also requires PACCAR to own, directly or indirectly, all outstandingvoting stock of the Company.

 

PACCAR FinancialServices Corporation (“PFSC”), the Company’s parent, charges the Company forcertain administrative services it provides and certain services the Companyreceives indirectly from PACCAR. The costs are charged to the Company basedupon the Company’s specific use of the services at PFSC’s or PACCAR’s cost.Management considers these charges similar to the costs that would be incurredif the Company 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 were nodividends declared or paid during the first nine months of 2008. A dividend inthe amount of $24.0 was declared in the third quarter of 2007 and paid in thefourth quarter of 2007.

 

The Company’sprincipal office is located in the corporate headquarters building of PACCAR(owned by PACCAR). The Company also leases office space from two additionalfacilities owned by PACCAR and five facilities leased by PACCAR.

 

Company employeesand PACCAR employees are covered by a defined benefit pension plan and anunfunded post-retirement medical and life insurance plan, both sponsored byPACCAR.  The assets and liabilities ofthese plans are reflected on the balance sheets of PACCAR.  PACCAR contributes to the plans and allocatesthe expenses to the Company based principally on the number of eligible planparticipants.

 

Company employeesand PACCAR employees are also covered by a defined contribution plan, sponsoredby PACCAR.  Expenses incurred by theCompany for the defined contribution plan benefits are based on the actualcontribution made on the behalf of participating employees.

 

6

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Expenses for thedefined benefit pension plan, the unfunded post-retirement medical and lifeinsurance plan and the defined contribution plan are included in selling,general and administrative expenses.

 

Periodically, theCompany makes loans to, borrows from and has intercompany transactions withPACCAR. In addition, the Company periodically loans funds to certain foreignfinance and leasing affiliates of PACCAR. These various affiliates have SupportAgreements with PACCAR, similar to the Company’s Support Agreement. The foreignaffiliates operate in the United Kingdom, The Netherlands, Mexico, Canada andAustralia, and any resulting currency exposure is fully hedged. The foreignaffiliates primarily provide financing and leasing of PACCAR-manufacturedtrucks and related equipment sold through PACCAR’s independent dealer networksin Europe, Mexico, Canada and Australia. The Company’s guideline is not to makeloans to the foreign affiliates in excess of the equivalent of $500.0 millionUnited States dollars, unless the amount in excess of such limit is guaranteedby PACCAR. The Company periodically reviews the funding alternatives for theseaffiliates, and these limits may be revised in the future.

 

Amountsoutstanding at September 30, 2008 and December 31, 2007, includingforeign finance affiliates operating in The Netherlands, Mexico, Australia andCanada, are summarized below:

 
| ** **                                                  | ** ** | **September 30  2008** | ** ** | December 31  2007 | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| Due from PACCAR Inc and affiliates | ** ** | ** **                  |       |                   |       |
| Loans due from  PACCAR Inc                                  | ** ** | **$**                       | **26.4**   |                   | $          | 11.5 |   |
| Loans due from  foreign finance affiliates                  | ** ** | **403.1**                   |       | 371.2                  |       |
| Direct financing  leases due from affiliate                 | ** ** | **15.0**                    |       | 16.2                   |       |
| Receivables                                                 | ** ** | **3.9**                     |       | 3.9                    |       |
| Total                                                       | ** ** | **$**                       | **448.4**  |                   | $          | 402.8 |   |
|                                                        |       |                        |       |                   |       |
| Due to PACCAR  Inc and affiliates                           |       |                        |       |                   |       |
| Loans due to  PACCAR Inc                                    | ** ** | **$**                       | **.7**     |                   | $          |   |   |
| Payables                                                    | ** ** | **16.2**                    |       | 10.1                   |       |
| Total                                                       | ** ** | **$**                       | **16.9**   |                   | $          | 10.1 |   |
|                                                             |            |                             |            |                        |            |  |  |  |

 

The Companyprovides direct financing leases to a certain dealer location operated by anaffiliate of PACCAR.

 

PACCAR has issuedletters of credit as of September 30, 2008 in the amount of $5.1 on behalfof the Company to guarantee funds for payment to insured franchisees andcustomers for any future insurance losses.

 

7

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** **

**NOTE C –Stockholder’s Equity**

 

**PreferredStock**

 

The Company’sArticles of Incorporation provide that the 6% noncumulative, nonvotingpreferred stock (100% owned by PFSC) is redeemable only at the option of theCompany’s Board of Directors.

 

**OtherComprehensive Income**

 

The components of other comprehensive income, net of related tax, were asfollows:

 
| ** **                                          | ** ** | Three Months Ended |       | Nine Months Ended | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-------------------|------------|
| ** **                                          | ** ** | September 30                 | ** ** | September 30      |
| ** **                                          | ** ** | **2008**                     | ** ** | 2007              | ** ** | **2008** | ** ** | 2007 | ** ** |
| Net income                                          | ** ** | **$**                        | **5.5**    |              | $          | 22.6 | ** ** | **$** | **31.7** |   | $ | 63.7 |   |
| Other  comprehensive income:                        |       |                         |       |              |       |   |   |   |   |
| Unrealized net  gain (loss) on derivative contracts | ** ** | **$**                        | **3.5**    |              | (19.4      | ) | **$** | **4.0** |   | (17.3 | ) |
| Total other  comprehensive income                   | ** ** | **$**                        | **9.0**    |              | $          | 3.2 | ** ** | **$** | **35.7** |   | $ | 46.4 |   |

 

The unrealized netgain on derivative contracts in the three and nine months ended September 30,2008 was due to an increase in long term market interest rates causing anincrease in the fair value of the Company’s floating to fixed interest rateswap contracts.

 

Accumulated othercomprehensive loss of $(22.3) and $(26.3) at September 30, 2008 and December 31,2007, respectively, is comprised of the unrealized net loss on derivativecontracts.

 

**NOTE D –Fair Value Measurements**

 

The Companyadopted Statement No.157, Fair Value Measurements (FAS 157) effective January 1,2008 with no effect on the financial statements. FAS 157 defines fair value andestablishes a three-level hierarchy for measuring fair value of certainfinancial instruments based on the source of information used to determine fairvalue. FAS 157 also expands disclosures about fair value measurements. Thehierarchy of fair value measurements is described below:

 

Level 1 –Valuations are based on quoted prices that the Company has the ability toobtain in actively traded markets for identical assets or liabilities. Sincevaluations are based on quoted prices that are readily and regularly availablein an active market or exchange traded market, valuation of these instrumentsdoes not require a significant degree of judgment.

 

Level 2 –Valuations are based on quoted prices for similar instruments in activemarkets, quoted prices for identical or similar instruments in markets that arenot active, and model-based valuation techniques for which all significantassumptions are observable in the market.

 

Level 3 –Valuations are based on model-based techniques for which some or all of theassumptions are obtained from indirect market information that is significantto the overall fair value measurement and which require a significant degree ofmanagement judgment.

 

The Company’sderivative contracts consist of interest rate contracts. These derivativecontracts are over the counter and their fair value is determined using modelingtechniques that include market inputs such as interest rates and yieldcurves.  At September 30, 2008 theCompany’s net liability related to these interest rate derivatives totaled$36.0 and were the only instruments categorized as Level 2. There were no Level1 or 3 assets or liabilities.

 

8

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| **ITEM 2.** | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**(Millions  of Dollars) |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------|

 

**Resultsof Operations**

 

**Netincome**

 

The Company’s net income was $5.5 for the third quarter of2008 compared to $22.6 for the third quarter of 2007. Net income was $31.7 forthe first nine months of 2008 compared to $63.7 for the first nine months of2007. The lower net income was primarily the result of an increase in theprovision for losses on receivables due to higher net credit losses.

 

**Revenue**

 

Third quarter and the first ninemonths interest and otherrevenue decreased $23.5 and $46.5, respectively. The third quarter and firstnine months decreases were due to declines in interest and fee income of $20.1and $41.5, respectively, and lower insurance premiums. The Company decided todiscontinue originating personal damage insurance on retail business as it wasnot integral to its finance business. The remainder of the personal damagecontracts will be managed to completion. These were partially offset by higherrevenue from operating lease assets.

 

The following table summarizes the changes in interest andfee income:

 
|                                 |   | Three months  ended  September 30 |   | Nine months  ended  September 30 |   |
|--------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                 |   |                                        |   |                                       |   |
| Interest  and fee income - 2007      |   | $                                           | 93.5   |                                       | $      | 276.7 |   |
|                                 |   |                                        |   |                                       |   |
| Lower  average balances              |   | (14.3                                       | )      | (36.1                                      | )      |
| Change  in yield                     |   | (5.8                                        | )      | (5.4                                       | )      |
|                                 |   |                                        |   |                                       |   |
| Interest  and fee income – 2008 |   | $                                           | 73.4   |                                       | $      | 235.2 |   |

 

Finance receivables declined due to lower new loan volumerelated to lower dealer truck sales. The reduction in average loan yields inthe third quarter and first nine months of 2008 was due to lower marketinterest rates. Operating lease and rental income increased over the periodsdue to higher operating lease assets.

 

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**Expenses**

 

Third quarter and the first nine months interest and otherborrowing expenses decreased $12.4 and $28.0, respectively. These decreaseswere due to lower average debt balances and borrowing rates as summarized inthe table below:

 
|                                         |   | Three months  ended  September 30 |   | Nine months  ended  September 30 |   |
|----------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                         |   |                                        |   |                                       |   |
| Interest  and borrowing expenses - 2007      |   | $                                           | 51.5   |                                       | $      | 153.4 |   |
|                                         |   |                                        |   |                                       |   |
| Lower  average balances                      |   | (5.2                                        | )      | (12.2                                      | )      |
| Lower  borrowing rates                       |   | (7.2                                        | )      | (15.8                                      | )      |
|                                         |   |                                        |   |                                       |   |
| Interest  and borrowing expenses – 2008 |   | $                                           | 39.1   |                                       | $      | 125.4 |   |

 

The reduction in borrowing rates was due to lower marketinterest rates and the decline in average debt balances was due to a reductionin required funding levels.

 

Depreciation and other rental expenses increased in thethird quarter and first nine months of 2008 from the comparable periods in 2007due to an increase in operating lease assets.

 

Insurance claims and other expenses decreased in the thirdquarter and first nine months of 2008 from the comparable periods in 2007 as aresult of fewer contracts outstanding.

 

Third quarter and the first nine months of 2008 provisionfor losses on receivables increased $20.6 and $42.1, respectively, due tohigher net credit losses as a slowing economy and high fuel prices affectedtruck operators in the U.S.

 

The Company’s effective income tax rates of 38.2% for thethird quarter and 38.3% for the first nine months of 2008 were comparable tothe prior periods in 2007.

 

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The following table summarizes information on the Company’sallowance for losses on receivables and asset portfolio and presents relatedratios:

 

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

 
|                                                                                                                                                       |       | **Nine Months  Ended  September 30****2008** |     | Nine Months  Ended  September 302007 |   | Year Ended  December 312007 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|----------|------------------------------------------------|--------|---------------------------------------|--------|
| Balance  at beginning of period                                                                                                                            | ** ** | **$**                                                  | **92.6** |                                           | $      | 86.9                                  |   | $ | 86.9 |   |
| Provision  for losses                                                                                                                                      | ** ** | **55.1**                                               |     | 13.0                                           |   | 24.4                                  |   |
| Credit  losses                                                                                                                                             | ** ** | **(56.4**                                              | **)**    | (13.1                                          | )      | (20.7                                 | )      |
| Recoveries                                                                                                                                                 | ** ** | **1.4**                                                |     | 1.5                                            |   | 2.0                                   |   |
| Balance  at end of period                                                                                                                                  | ** ** | **$**                                                  | **92.7** |                                           | $      | 88.3                                  |   | $ | 92.6 |   |
|                                                                                                                                                       | ** ** | ** **                                             |     |                                           |   |                                  |   |
| Ratios:                                                                                                                                                    |       |                                                   |     |                                           |   |                                  |   |
|                                                                                                                                                       |       |                                                   |     |                                           |   |                                  |   |
| Credit  losses net of recoveries ($55.0 in 2008) to average total portfolio  ($4,232.2 in 2008) annualized at September 30, 2008 and 2007             | ** ** | **1.74%**                                              |     | .31%                                           |   | .39%                                  |   |
|                                                                                                                                                       | ** ** | ** **                                             |     |                                           |   |                                  |   |
| Allowance  for losses ($92.7 in 2008) to period-end total portfolio  ($4,044.4 in 2008)                                                                    | ** ** | **2.29%**                                              |     | 1.80%                                          |   | 1.99%                                 |   |
|                                                                                                                                                       | ** ** | ** **                                             |     |                                           |   |                                  |   |
| Period-end  retail loan and lease receivables past due, over 30 days,  ($66.3 in 2008) to period-end retail loan and lease receivables ($3,500.2 in  2008) | ** ** | **1.89%**                                              |     | 1.34%                                          |   | 2.80%                                 |   |

 

The Company’s portfolio is concentrated withcustomers in the heavy and medium duty truck transportation industry.  The portfolio is comprised of retail loansand leases, dealer wholesale financing and dealer master notes as follows:

 
|                        | ** ** | **September 30** |        | September 30 |     | December 31 |   |
|-----------------------------|------------|-----------------------|-------------|-------------------|----------|------------------|--------|
|                        | ** ** | **2008**              |        | 2007              |     | 2007             |   |
| Retail  loans               | ** ** | **$**                 | **2,354.8** |              | **58%**  |             | $      | 2,783.6 |   | 57% |   | $ | 2,667.8 |   | 57% |   |
| Retail  leases              | ** ** | **1,145.4**           |        | **28%**           |     | 1,251.0          |   | 26% |   | 1,219.5 |   | 27% |   |
| Dealer  wholesale financing | ** ** | **364.3**             |        | **9%**            |     | 545.1            |   | 11% |   | 454.0 |   | 10% |   |
| Dealer  master notes        | ** ** | **179.9**             |        | **5%**            |     | 317.4            |   | 6% |   | 301.6 |   | 6% |   |
| Total  portfolio            | ** ** | **$**                 | **4,044.4** |              | **100%** |             | $      | 4,897.1 |   | 100% |   | $ | 4,642.9 |   | 100% |   |

 

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In the first nine monthsof 2008, credit losses net of recoveries increased to $55.0 compared to $11.6for the first nine months of 2007.  Aneconomic slowdown together with high fuel costs have resulted in increases inpast due receivables and credit losses as some truck owners have experienced loweroperating profits and cashflows which have impacted their ability to make timelypayments. The percentage of retail loan and lease receivables past due over 30days has reduced to 1.89% as of September 30, 2008 compared to 2.80% at December 31,2007. The allowance for losses as a percentage of the total portfolio increasedto 2.29% at September 30, 2008 from 1.99% at year-end 2007.

 

The estimation methods and factors considered fordetermining the allowance during the periods included in this filing have beenconsistently applied. There have been no significant changes in customer contractterms during the periods.

 

**Company Outlook**

 

The profitability of the Companyis principally dependent on the generation of new business volume and therelated spread between asset yields and borrowing costs, offset by the level ofcredit losses experienced. Assets are not likely to increase until the newtruck retail sales market recovers. The Company may be affected by reducedliquidity in the capital markets but does not anticipate a material impact onits ability to generate new business volume (see Funding and Liquidity below).The Company continues to be impacted by a slower economy.  These factors may reduce profit margins oftruck operators resulting in higher past-due accounts and increased creditlosses due to increased repossessions, though recent lower fuel prices haspositively benefited some truck fleets.

 

**Fundingand Liquidity**

 

The Company periodically registers debt securitiesunder the Securities Act of 1933 for offering to the public. In 2006, the Company filed a new shelfregistration statement. The registration expires in November 2009 and doesnot limit the principal amount of debt securities that may be issued during theperiod.

 

On October 20, 2008, the Company was approved toparticipate in the Commercial Paper Funding Facility offered by the FederalReserve Bank of New York. Under this funding facility, the Company may issue90-day commercial paper during the period from October 27, 2008 through April30, 2009. The amount of commercial paper that the Company may have outstanding underthis program is $1.456 billion.

 

During the first ninemonths of 2008, the Company maintained its Moody’s and Standard & Poor’sshort-and long-term debt ratings.  The current disruption in world widecredit markets has affected the ability of many financial institutions andother companies to access liquidity. The company cannot predict the impact thatfurther disruptions in the credit market will have on its liquidity. TheCompany believes it will be able to fund receivables, service debt and meetits other payment obligations through internally generated funds, access topublic and private debt markets, and advances from PACCAR Inc.

 

The Company’s debt ratingsat September 30,2008****are as follows:

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

 

The Company’s strongcredit ratings are primarily based on PACCAR’s operating cash flow, demand forits quality products and substantial financial assets.

 

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TheCompany participates with PACCAR and certain other PACCAR affiliates insyndicated credit facilities of $3,000 at September 30, 2008. Of thisamount, $2,000 expires in June 2009 and $1,000 expires in2012. PACCAR intends to replace these credit facilities as they expire withfacilities of similar amounts.

 

Creditfacilities of $2,040 are available for use by the Company and/or PACCAR andcertain other PACCAR affiliates. The remaining $960 is allocated to thefollowing subsidiaries: $455 is available for use by PACCAR’s Canadianfinancial subsidiary, $400 is available for use by PACCAR’s Mexican subsidiary,and $105 is available for use by PACCAR’s Australian financial subsidiary.These credit facilities are used to provide backup liquidity for the Company’scommercial paper and maturing medium-term notes. The Company is liable only forits own borrowings under these credit facilities. There were no borrowingsunder these credit facilities in the nine months ended September 30, 2008and the year ended December 31, 2007.

 

Otherinformation on liquidity, sources of capital, and contractual cash commitmentsas presented in the Company’s 2007 Annual Report on Form 10-K continues tobe relevant.

 

**ForwardLooking Statements**

 

Certaininformation presented in this Form 10-Q contains forward-lookingstatements made pursuant to the Private Securities Litigation Reform Act of1995, which are subject to risks and uncertainties that may affect actualresults. Risks and uncertainties include, but are not limited to: national andlocal economic, political and industry conditions; changes in the levels of newbusiness volume due to unit fluctuations in new PACCAR truck sales; changes incompetitive factors; changes affecting the profitability of truck owners andoperators; price changes impacting equipment costs and residual values; changesin costs, insufficient liquidity in the capital markets and availability ofother funding sources; and legislation and governmental regulation.

 

**ITEM 3.   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Therehave been no material changes in the Company’s market risk during the ninemonths ended September 30, 2008. For additional information, refer to themarket risk disclosure in Item 7A as presented in the Company’s 2007 AnnualReport on Form 10-K.

 

**ITEM 4 &4T.**

 

**CONTROLS AND PROCEDURES**

 

Anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the principal executive officer andprincipal financial officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures (as defined in rules 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934, asamended) as of September 30, 2008 (“Evaluation Date”). 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 (the Company has nosubsidiaries), in reports that the Company files or submits under the ExchangeAct, is recorded, processed, summarized and reported on a timely basis inaccordance with applicable rules and regulations. There have been nosignificant changes in the Company’s internal control over financial reportingthat occurred during the fiscal quarter covered by this quarterly report thathave materially affected, or are reasonably likely to materially affect,internal control over financial reporting.

 

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**PART II – OTHER INFORMATION**

 

Foritems 1 and 5, there was no reportable information during the nine months endedSeptember 30, 2008.

 

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 to Part I, Item 1A as presented in the 2007 Annual  Report Form 10-K. There have been no material changes in the Company’s  risk factors during the nine months ended September 30, 2008. |
|          |                                                                                                                                                                                                                                                         |
| **ITEM 6.**   | **EXHIBITS**                                                                                                                                                                                                                                                 |
|          |                                                                                                                                                                                                                                                         |
|          | Any  exhibits filed herewith are listed in the accompanying 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  | October 27, 2008 |                       | 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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 **EXHIBIT INDEX**

 

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 Number0-12553).

 

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

 

4                                                            Instrumentsdefining the rights of security holders, including indentures:

 

(a)          Indenture for SeniorDebt Securities dated as of December 1, 1983 and first SupplementalIndenture dated as of June 19, 1989 between the Company and WilmingtonTrust Company (incorporated by reference to Exhibit 4.1 to the Company’sAnnual Report on Form 10-K dated March 26, 1984, File Number001-11677 and Exhibit 4.2 to the Company’s Registration Statement on Form S-3dated June 23, 1989, Registration Number 33-29434), and the Agreement ofResignation, Appointment and Acceptance, dated as of October 31, 2006(incorporated by reference to the Company’s Form 8-K dated November 3,2006).

 

(b)         Forms of Medium-TermNote, Series K (incorporated by reference to Exhibits 4.2A and 4.2B to theCompany’s Registration Statement on Form S-3 dated December 23, 2003,Registration Number 333-111504).

 

Form of Letter ofRepresentation among the Company, Citibank, N.A. and The Depository TrustCompany, Series K (incorporated by reference to Exhibit 4.3 to theCompany’s Registration Statement on Form S-3 dated December 23, 2003,Registration Number 333-111504).

 

(c)          Forms of Medium-TermNote, Series L (incorporated by reference to Exhibits 4.2A and 4.2B to theCompany’s Registration Statement on Form S-3 dated November 7, 2006,Registration Number 333-138464).

 

Form of Letter ofRepresentation among the Company, Citibank, N.A. and The Depository TrustCompany, Series L (incorporated by reference to Exhibit 4.3 to theCompany’s Registration Statement on Form S-3 dated November 7, 2006,Registration Number 333-138464).

 

10                                                      Materialcontracts:

 

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

 

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12                                                      Statementsre computation of ratios:

 

(a)          Computation of ratio ofearnings to fixed charges of the Company pursuant to SEC reporting requirementsfor the nine month periods ended September 30, 2008 and 2007.

 

(b)         Computation of ratio ofearnings to fixed charges of the Company pursuant to the Support Agreementbetween the Company and PACCAR for the nine month periods ended September 30,2008 and 2007.

 

(c)          Computation of ratio ofearnings to fixed charges of PACCAR and subsidiaries pursuant to SEC reportingrequirements for the nine month periods ended September 30, 2008 and 2007.

 

31                                                      Rule 13a-14(a)/15d-14(a) Certifications:

 

(a)          Certification ofPrincipal Executive Officer.

 

(b)         Certification ofPrincipal Financial Officer.

 

32                                                      Section 1350Certifications:

 

(a)          Certification pursuantto Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of2002 (18 U.S.C. section 1350).

 

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