**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For thequarterly period ended June 30, 2006**

 

**or**

 

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

 

**Fortransition period from                     to                     **

 

**CommissionFile No. 0-12553**

 

**PACCAR FINANCIAL CORP.**

(Exact name of registrant as specified in its charter)

 
| **Washington**                                                  | ** ** | **91-6029712**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **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 mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes  ý  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

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

 

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

 

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

 

Common Stock, $100 par value—145,000 shares as of June 30,2006

 

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

 

 

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**FORM 10-Q**

**PACCAR FINANCIAL CORP.**

 

**INDEX**

 
| PART I. FINANCIAL INFORMATION:                                 |                                                                                        |
|---------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                                |                                                                                        |
| ITEM  1.                                                            | FINANCIAL STATEMENTS:                                                                       |   |
|                                                                |                                                                                        |   |
| Statements  of Income and Retained Earnings—                   |                                                                                        |
| Three  and Six Months Ended June 30, 2006 and 2005 (Unaudited) |                                                                                        |
|                                                                |                                                                                        |   |
| Balance Sheets—                                                |                                                                                        |
| June 30, 2006 (Unaudited) and  December 31, 2005          |                                                                                        |
|                                                                |                                                                                        |   |
| Statements  of Cash Flows —                                    |                                                                                        |
| Six  Months Ended June  30, 2006 and 2005 (Unaudited)          |                                                                                        |
|                                                                |                                                                                        |   |
| Notes to Financial Statements (Unaudited)                           |                                                                                        |
|                                                                |                                                                                        |   |
| ITEM  2.                                                            | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
|                                                                |                                                                                        |   |
| ITEM  3.                                                            | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                 |   |
|                                                                |                                                                                        |   |
| ITEM  4.                                                            | CONTROLS AND PROCEDURES                                                                     |   |
|                                                                |                                                                                        |   |
| PART II. OTHER INFORMATION:                                    |                                                                                        |
|                                                                |                                                                                        |   |
| ITEM  6.                                                            | EXHIBITS                                                                                    |   |
|                                                                |                                                                                        |   |
| SIGNATURES                                                          |                                                                                        |
|                                                                |                                                                                        |
| INDEX TO EXHIBITS                                                   |                                                                                        |

 

2

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**FORM 10-Q**

**PACCAR FINANCIAL CORP.**

** **

**PART I – FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

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

(Millions of Dollars)

 
| ** **                                                  | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                             | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and fee income                                     | ** ** | **$**                                | **78.0**   |                               | $          | 59.7 | ** ** | **$** | **150.5** |   | $ | 114.7 |   |
| Operating lease and rental income                           | ** ** | **32.7**                             |       | 28.9                               | ** ** | **64.6** |   | 55.9 |   |
| Insurance premiums and other revenue                        | ** ** | **13.3**                             |       | 9.4                                | ** ** | **24.9** |   | 18.5 |   |
|                                                        | ** ** | ** **                           |       |                               | ** ** | ** ** |   |   |   |
| **TOTAL INTEREST AND OTHER REVENUE**                        | ** ** | **124.0**                            |       | 98.0                               | ** ** | **240.0** |   | 189.1 |   |
|                                                        |       |                                 |       |                               |       |   |   |   |   |
| Interest and other borrowing expenses                       | ** ** | **40.0**                             |       | 24.4                               | ** ** | **75.8** |   | 45.7 |   |
| Depreciation and other operating lease and rental  expenses | ** ** | **26.3**                             |       | 23.4                               | ** ** | **52.7** |   | 46.0 |   |
| Insurance claims and other expenses                         | ** ** | **7.0**                              |       | 5.3                                | ** ** | **13.8** |   | 9.9 |   |
| Selling, general and administrative expenses                | ** ** | **12.4**                             |       | 11.5                               | ** ** | **24.7** |   | 23.4 |   |
| Provision for losses on receivables                         | ** ** | **3.8**                              |       | 4.6                                | ** ** | **6.4** |   | 5.7 |   |
|                                                        | ** ** | ** **                           |       |                               | ** ** | ** ** |   |   |   |
| **TOTAL EXPENSES**                                          | ** ** | **89.5**                             |       | 69.2                               | ** ** | **173.4** |   | 130.7 |   |
|                                                        |       |                                 |       |                               |       |   |   |   |   |
| **INCOME BEFORE INCOME TAXES**                              | ** ** | **34.5**                             |       | 28.8                               | ** ** | **66.6** |   | 58.4 |   |
|                                                        |       |                                 |       |                               |       |   |   |   |   |
| Income taxes                                                | ** ** | **13.2**                             |       | 11.1                               | ** ** | **25.5** |   | 22.4 |   |
| ** **                                                  | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **NET INCOME**                                              | ** ** | **21.3**                             |       | 17.7                               | ** ** | **41.1** |   | 36.0 |   |
| ** **                                                  | ** ** | ** **                           |       |                               | ** ** | ** ** |   |   |   |
| **RETAINED EARNINGS AT BEGINNING OF PERIOD**                | ** ** | **467.3**                            |       | 491.8                              | ** ** | **477.5** |   | 473.5 |   |
| Cash dividends paid                                         | ** ** | **—**                           |       | 20.0                               | ** ** | **30.0** |   | 20.0 |   |
|                                                        | ** ** | ** **                           |       |                               | ** ** | ** ** |   |   |   |
| **RETAINED EARNINGS AT END OF PERIOD**                      | ** ** | **$**                                | **488.6**  |                               | $          | 489.5 | ** ** | **$** | **488.6** |   | $ | 489.5 |   |

 

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**                                                                                                                           | ** ** | **June 30**     | ** **  | **December 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|-------------|-----------------|------------|
| (Millions Except Share and  Per Share Amounts)                                                                                                | ** ** | **2006**        | ** **  | **2005***       | ** ** |
| ** **                                                                                                                                    | ** ** | **(Unaudited)** |        |            |       |
| **ASSETS**                                                                                                                                    | ** ** | ** **      |        |            |       |
|                                                                                                                                          |       |            |        |            |       |
| Cash                                                                                                                                          | ** ** | **$**           | **20.5**    |            | $          | 19.0 |   |
| Finance and  other receivables, net of allowance for losses   (2006 - $81.7 and 2005 - $77.3)                                                 | ** ** | **4,434.5**     |        | 4,214.7         |       |
| Loans to PACCAR  Inc and affiliates                                                                                                           | ** ** | **8.5**         |        | 50.7            |       |
| Equipment on  operating leases, net of depreciation   (2006 - $133.7 and 2005 - $119.1)                                                       | ** ** | **396.5**       |        | 421.3           |       |
| Other assets                                                                                                                                  | ** ** | **133.8**       |        | 73.0            |       |
|                                                                                                                                          |       |            |        |            |       |
| **TOTAL ASSETS**                                                                                                                              | ** ** | **$**           | **4,993.8** |            | $          | 4,778.7 |   |
|                                                                                                                                          |       |            |        |            |       |
| **LIABILITIES**                                                                                                                               |       |            |        |            |       |
|                                                                                                                                          |       |            |        |            |       |
| Accounts  payable, accrued expenses and other                                                                                                 | ** ** | **$**           | **187.0**   |            | $          | 156.9 |   |
| Commercial paper                                                                                                                              | ** ** | **1,786.3**     |        | 1,805.6         |       |
| Medium-term  notes                                                                                                                            | ** ** | **1,950.0**     |        | 1,800.0         |       |
| Income taxes —  current and deferred                                                                                                     | ** ** | **323.3**       |        | 303.6           |       |
|                                                                                                                                          |       |            |        |            |       |
| **TOTAL LIABILITIES**                                                                                                                         | ** ** | **$**           | **4,246.6** |            | $          | 4,066.1 |   |
|                                                                                                                                          |       |            |        |            |       |
| **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 $100 per share, 200,000 shares authorized, 145,000 shares issued  and outstanding                                    | ** ** | **14.5**        |        | 14.5            |       |
| Additional  paid-in capital                                                                                                                   | ** ** | **182.6**       |        | 170.0           |       |
| Retained  earnings                                                                                                                            | ** ** | **488.6**       |        | 477.5           |       |
| Accumulated other comprehensive income                                                                                                        | ** ** | **30.5**        |        | 19.6            |       |
|                                                                                                                                          | ** ** | ** **      |        |            |       |
| **TOTAL STOCKHOLDER’S EQUITY**                                                                                                           | ** ** | **747.2**       |        | 712.6           |       |
|                                                                                                                                          |       |            |        |            |       |
| **TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                           | ** ** | **$**           | **4,993.8** |            | $          | 4,778.7 |   |

 

----

*The December 31,2005 balance sheet has been derived from audited financial statements.

 

See Notes to FinancialStatements.

 

4

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**FORM 10-Q**

**PACCAR FINANCIAL CORP.**

 

**Statements of Cash Flows (Unaudited)**

(Millions of Dollars)

 
| **Six Months Ended June 30**                                             | ** ** | **2006**     | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------|------------|--------------|------------|------------|------------|
|                                                                     |       |         |       |       |       |
| **OPERATING ACTIVITIES**                                                 |       |         |       |       |       |
|                                                                     |       |         |       |       |       |
| Net income                                                               | ** ** | **$**        | **41.1**   |       | $          | 36.0 |   |
| Items included  in net income not affecting cash:                        |       |         | ** ** |       |       |
| Depreciation and  amortization                                           | ** ** | **40.7**     | ** ** | 35.3       |       |
| Benefit for  deferred taxes                                              | ** ** | **(4.8**     | **)**      | (20.8      | )          |
| Provision for  losses on receivables                                     | ** ** | **6.4**      | ** ** | 5.7        |       |
| Increase in  payables and other                                          | ** ** | **29.8**     | ** ** | 20.0       |       |
| ** **                                                               | ** ** | ** **   | ** ** | ** ** | ** ** |
| **NET CASH PROVIDED BY OPERATING ACTIVITIES**                            | ** ** | **113.2**    | ** ** | 76.2       |       |
|                                                                     |       |         | ** ** |       |       |
| **INVESTING ACTIVITIES**                                                 |       |         | ** ** |       |       |
|                                                                     |       |         | ** ** |       |       |
| Finance and  other receivables originated                                | ** ** | **(1,048.3** | **)**      | (885.1     | )          |
| Collections on  finance and other receivables                            | ** ** | **809.6**    | ** ** | 680.0      |       |
| Net decrease  (increase) in wholesale receivables                        | ** ** | **18.0**     | ** ** | (93.0      | )          |
| Net decrease in  loans to PACCAR Inc and affiliates                      | ** ** | **42.2**     | ** ** | 72.0       |       |
| Acquisition of  equipment on operating leases, primarily from PACCAR Inc |       | **(42.6**    | **)**      | (58.0      | )          |
| Proceeds from  disposal of equipment                                     | ** ** | **36.8**     | ** ** | 10.0       |       |
| Other                                                                    | ** ** | **(47.2**    | **)**      | (38.6      | )          |
|                                                                     |       |         | ** ** |       |       |
| **NET CASH USED IN INVESTING ACTIVITIES**                                | ** ** | **(231.5**   | **)**      | (312.7     | )          |
|                                                                     |       |         | ** ** |       |       |
| **FINANCING ACTIVITIES**                                                 |       |         | ** ** |       |       |
|                                                                     |       |         | ** ** |       |       |
| Net (decrease)  increase in commercial paper                             | ** ** | **(19.3**    | **)**      | 380.2      |       |
| Proceeds from  medium-term notes                                         | ** ** | **800.0**    | ** ** | 200.0      |       |
| Payments of  medium-term notes                                           | ** ** | **(650.0**   | **)**      | (330.0     | )          |
| Dividends paid                                                           | ** ** | **(30.0**    | **)**      | (20.0      | )          |
| Payments of advances from PACCAR Inc                                     | ** ** | **6.5**      | ** ** | 7.4        |       |
| Capital  contributions                                                   | ** ** | **12.6**     | ** ** | 10.8       |       |
|                                                                     |       |         | ** ** |       |       |
| **NET CASH PROVIDED BY FINANCING ACTIVITIES**                            | ** ** | **119.8**    | ** ** | 248.4      |       |
|                                                                     |       |         | ** ** |       |       |
| **NET INCREASE IN CASH**                                                 | ** ** | **1.5**      | ** ** | 11.9       |       |
|                                                                     |       |         | ** ** |       |       |
| **CASH AT BEGINNING OF PERIOD**                                          | ** ** | **19.0**     | ** ** | 18.2       |       |
|                                                                     |       |         | ** ** |       |       |
| **CASH AT END OF PERIOD**                                                | ** ** | **$**        | **20.5**   |       | $          | 30.1 |   |

 

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 the information and footnotes requiredby generally accepted accounting principles for complete financial statements. Inthe opinion 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 forthe year ended December 31, 2005.

 

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

 

The Company and PACCARInc (“PACCAR”) are parties to a Support Agreement that obligates PACCAR toprovide, when required, financial assistance to the Company to ensure that theCompany maintains a ratio of net earnings available for fixed charges to fixedcharges (as defined in the Agreement) of at least 1.25 to 1 for any year. Therequired ratio for the six months ended June 30, 2006 and full year 2005was met without assistance. The Company determines the amount of PACCARassistance, if any, at the end of each year. The Support Agreement alsorequires PACCAR to own, directly or indirectly, all outstanding voting stock ofthe 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.

 

A cash dividend in the amountof $30.0 was declared and paid during the first quarter of 2006 and a cashdividend in the amount of $20.0 was declared and paid during the second quarterof 2005.

 

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

 

The Company’s employeesare covered by a defined benefit pension plan, an unfunded post-retirementmedical and life insurance plan, and a defined contribution plan sponsored byPACCAR. Separate allocations of defined benefit plan assets and obligationsrelating to the Company have not been made.

 

Periodically, the Companyborrows funds from PACCAR and makes loans to PACCAR. Loans outstanding toPACCAR were $8.5 and $.6 at June 30, 2006 and December 31, 2005,respectively. Loans outstanding from PACCAR were $6.7 and $.2 at June 30,2006 and December 31, 2005, respectively.

 

PACCAR has issued lettersof credit as of June 30, 2006 in the amount of $5.9 on behalf of theCompany to guarantee funds for payment to insured franchisees and customers forany future insurance losses.

 

The Company periodicallyloans funds to certain foreign finance and leasing affiliates of PACCAR. Thesevarious affiliates have Support Agreements with PACCAR, similar to the Company’sSupport Agreement. The foreign affiliates operate in the United Kingdom, TheNetherlands, Mexico, Canada and Australia, and any resulting currency exposureis fully hedged. The foreign 

 

6

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affiliates providefinancing and leasing of PACCAR-manufactured trucks and related equipment soldthrough PACCAR’s dealer networks in Europe, Mexico, Canada and Australia. TheCompany will not make loans to the foreign affiliates in excess of theequivalent of $375.0 United States dollars, unless the amount in excess of suchlimit is guaranteed by PACCAR. The Company periodically reviews the fundingalternatives for these affiliates, and these limits may be revised in thefuture. There were no loans outstanding to foreign affiliates at June 30,2006. There was a total of $50.1 in loans outstanding to foreign affiliatesoperating in the United Kingdom and The Netherlands at December 31, 2005.

 

Included in accountspayable, accrued expenses and other is $16.1 and $17.9 payable to PACCAR’struck divisions at June 30, 2006 and December 31, 2005, respectively.

 

**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** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **June 30**       | ** ** | **June 30**     | ** ** |
| ** **                                          | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                          | ** ** | **$**                  | **21.3**   |                 | $          | 17.7 | ** ** | **$** | **41.1** |   | $ | 36.0 |   |
| Other comprehensive income:                         |       |                   |       |                 |       |   |   |   |   |
| Unrealized net  gain (loss) on derivative contracts | ** ** | **4.7**                |       | (7.2                 | )          | **10.9** |   | 3.5 |   |
| Total comprehensive income                          | ** ** | **$**                  | **26.0**   |                 | $          | 10.5 | ** ** | **$** | **52.0** |   | $ | 39.5 |   |

 

The unrealized net gain (loss)on derivative contracts in the three and six months ended June 30, 2006and June 30, 2005 was due to the change in short term market interestrates causing a change  in the fair valueof the Company’s floating to fixed rate contracts.

 

Accumulated othercomprehensive income of $30.5 and $19.6 at June 30, 2006 and December 31,2005, respectively, is comprised of the unrealized net gain on derivativecontracts.

 

7

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

 

**Results of Operations**

 

The Company’s net income of $21.3for the second quarter of 2006 increased 20% from $17.7 for the second quarterof 2005.  Net income of $41.1 for thefirst six months of 2006 increased $5.1 or 14% from the $36.0 in the first sixmonths of 2005.  The profit improvement inthe second quarter and for the first six months primarily resulted from ahigher finance margin (revenues minus borrowing, lease, and insurance expenses)and included the favorable impact of higher lease gains in the second quarterfrom higher used truck values.  Interestand fee income in the second quarter and first six months of 2006 increased $18.3and $35.8, respectively, from higher earning assets and higher interestrates.  Average earning assets increased 20%and 21% in the second quarter and first six months, respectively, from thecomparable periods in the prior year due to higher new loan and lease volumeresulting from higher PACCAR truck production. Interest and other borrowing expenses increased by $15.6 to $40.0 forthe second quarter of 2006 and increased $30.1 to $75.8 for the first sixmonths of 2006 due to an increase in average debt balances and higher marketinterest rates.  Operating lease revenueand related depreciation increased for the six months ended June 2006compared to the same prior year period, due to an increase in equipment onoperating leases.

 

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

 

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

##### ** **

| ** **                                                                                                                                                 | ** ** | **Six Months  Ended  June 30  2006** | ** ** | **Six Months  Ended  June 30  2005** | ** ** | **Year Ended  December 31  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|
| Balance at beginning of period                                                                                                                             | ** ** | **$**                                     | **77.3**   |                                      | $          | 67.1                                   |       | $ | 67.1 |   |
| Provision for losses                                                                                                                                       | ** ** | **6.4**                                   |       | 5.7                                       |       | 14.2                                   |       |
| Credit losses                                                                                                                                              |       | **(3.9**                                  | **)**      | (3.1                                      | )          | (7.3                                   | )          |
| Recoveries                                                                                                                                                 |       | **1.9**                                   |       | 1.8                                       |       | 3.3                                    |       |
| Balance at end of period                                                                                                                                   | ** ** | **$**                                     | **81.7**   |                                      | $          | 71.5                                   |       | $ | 77.3 |   |
| Ratios:                                                                                                                                                    |       |                                      |       |                                      |       |                                   |       |
|                                                                                                                                                       |       |                                      |       |                                      |       |                                   |       |
| Credit losses  net of recoveries ($2.0 in 2006) to average net receivables ($4,308.7 in  2006) annualized at June 30, 2006 and 2005                   |       | **.09**                                   | **%**      | .07                                       | %          | .11                                    | %          |
|                                                                                                                                                       |       | ** **                                | ** ** |                                      |       |                                   |       |
| Allowance for  losses ($81.7 in 2006) to period-end net receivables ($4,372.7 in 2006)                                                                     |       | **1.87**                                  | **%**      | 1.94                                      | %          | 1.85                                   | %          |
|                                                                                                                                                       |       | ** **                                | ** ** |                                      |       |                                   |       |
| Period-end  finance and lease receivables past due, over 30 days, ($26.3 in 2006) to  period-end retail contracts and lease receivables ($3,962.9 in 2006) |       | **.66**                                   | **%**      | .68                                       | %          | .79                                    | %          |
|                                                                                                                                                            |            |                                           |            |                                           |            |                                        |            |  |  |  |  |

 

8

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The Company’s portfolio isconcentrated with customers in the heavy and medium duty truck transportationindustry.  The portfolio is comprised ofretail loans and leases, dealer wholesale financing and dealer master notes asfollows:

 
| ** **                 | ** ** | **Six Months  Ended  June 30** | ** **  | **Six Months  Ended  June 30** | ** ** | **Year Ended  December 31** | ** ** |
|----------------------------|------------|-------------------------------------|-------------|-------------------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **2006**                            | ** **  | **2005**                            | ** ** | **2005**                         | ** ** |
| Retail loans               | ** ** | **$**                               | **2,648.8** | ** **                          | **59**     | **%**                            | $          | 2,331.6 |   | 62 | % | $ | 2,481.8 |   | 58 | % |
| Retail leases              | ** ** | **1,027.9**                         | ** **  | **23**                              | **%**      | 800.8                            |       | 21 | % | 977.3 |   | 23 | % |
| Dealer wholesale financing | ** ** | **608.9**                           | ** **  | **13**                              | **%**      | 466.7                            |       | 12 | % | 626.9 |   | 14 | % |
| Dealer master notes        | ** ** | **230.6**                           | ** **  | **5**                               | **%**      | 196.4                            |       | 5 | % | 206.0 |   | 5 | % |
| Total portfolio            | ** ** | **$**                               | **4,516.2** | ** **                          | **100**    | **%**                            | $          | 3,795.5 |   | 100 | % | $ | 4,292.0 |   | 100 | % |

 

The provision for losses in the firstsix months of 2006 of $6.4 increased by $.7 from the $5.7 in the first sixmonths of 2005, from slightly higher credit losses; however, net credit lossesof $2.0 remained at historically low levels. This reflects customers’ ability to make timely payments as they havebenefited from strong demand for transportation services.  Also, current industry conditions have had apositive impact on used truck values supporting the collateral underlying theCompany’s receivables.

 

Dealer wholesale financing, whichhas a lower allowance for losses than retail accounts, increased to 13% of thetotal portfolio at June 30, 2006 compared to June 2005, reducing theratio of the allowance for losses to net receivables (1.87% at June 2006versus 1.94% at June 2005).

 

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

 

**Company Outlook**

 

Continued strength in the generaleconomy and the related demand for freight transportation, and some acceleratedtruck buying in advance of changes in engine emission requirements in 2007, maypositively impact the level of truck sales financed for the next six to ninemonths.  The long-term profitability ofthe Company is primarily dependent on the generation of new business and on thelevel of credit losses experienced, both of which are impacted by conditions inthe general economy and the truck transportation industry.  Industry conditions are currently favorable;however, continued high diesel prices and interest rate increases couldnegatively impact future truck sales financed as well as existing customers’ability to make timely payments, which increases the risk of loss inherent inthe portfolio.

 

9

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**Funding and Liquidity**

 

TheCompany manages its capital structure consistent with industry standards. Since1983, the Company has registered debt securities under the Securities Act of1933 for offering to the public. In December 2003, the Company filed ashelf registration statement under which $3,000 of medium-term notes could beissued as needed. As of June 30, 2006, $500 of such securities wereavailable for issuance.  The Company intends to file a new shelfregistration in September 2006.

 

TheCompany believes that it has sufficient financial capabilities to continuefunding receivables, servicing debt and paying dividends through internallygenerated funds, access to public and private debt markets, lines of credit andother financial resources.

 

TheCompany’s investment grade credit ratings continue to provide access to capitalmarkets at competitive interest rates. The Company’s credit ratings at June 30,2006 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 substantial financial assets. 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 $1,500 at June 30, 2006.  Of thisamount, $1,000 expires in July 2010.  During July 2006 theremaining $500 expired and was replaced with a credit facility of $1,000 thatexpires in July 2007.

 

Ofthe $2,000 in total facilities, $1,217 is available for use by theCompany and/or PACCAR and certain other PACCAR affiliates, $370 is only availablefor use by PACCAR’s Canadian subsidiaries, $300 is only available for use byPACCAR’s Mexican subsidiary and $113 is only available for use by PACCAR’sAustralian financial subsidiary.  These credit facilities are used toprovide backup liquidity for the Company’s commercial paper and maturingmedium-term notes. The Company is liable only for its own borrowings underthese credit facilities. There were no borrowings under these credit facilitiesin the six months ended June 30, 2006 and the year ended December 31,2005.

 

Otherinformation on liquidity, sources of capital, and contractual cash commitmentsas presented in the Company’s 2005 Annual Report on Form 10-K continues tobe relevant.

 

**Forward Looking Statements**

 

Certain information presented in this Form 10-Qcontains forward-looking statements made pursuant to the Private SecuritiesLitigation Reform Act of 1995, which are subject to risks and uncertaintiesthat may affect actual results. Risks and uncertainties include, but are notlimited to: national and local economic, political and industry conditions;changes in the levels of new business volume due to unit fluctuations in newPACCAR truck sales; changes in competitive factors; changes affecting theprofitability of truck owners and operators; price changes impacting equipmentcosts and residual values; changes in costs and availability of externalfunding sources; and legislation and governmental regulation.

 

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| **ITEM 3****.** | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |
|-----------------|-----------------------------------------------------------------|

 

Therehave been no material changes in the Company’s market risk during the sixmonths ended June 30, 2006. For additional information, refer to themarket risk disclosure in Item 7a as presented in the Company’s 2005 annualreport on Form 10-K.

 
| **ITEM 4****.** | **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 theSecurities Exchange Act of 1934, as amended) as of June 30, 2006 (“EvaluationDate”). Based on that evaluation, the principal executive officer and principalfinancial officer of the Company concluded that the disclosure controls andprocedures in place at the Company are effective to ensure that informationrequired to be disclosed by the Company, including its consolidatedsubsidiaries (the Company has no subsidiaries), in reports that the Companyfiles or submits under the Exchange Act, is recorded, processed, summarized andreported on a timely basis in accordance with applicable rules and regulations.There have been no changes in the Company’s internal control over financialreporting during the second quarter of 2006 that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**PART II – OTHER INFORMATION**

 

For items 1, 1A, 2, 3, 4and 5, there was no reportable information during the six months ended June 30,2006.

 

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

 

Anyexhibits filed herewith as part of this report are listed in the accompanyingIndex of Exhibits.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   | **PACCAR  Financial Corp.** |                        |
|--------|-----------------------------|-----------------------------|
|   | (Registrant)                |
|   |                        |                        |
|   |                        |                        |
| Date   | July 28,  2006         |                        | By | /s/ Timothy M.  Henebry |
|   |                        | Timothy M.  Henebry         |
|   |                        | President                   |
|   |                        | (Authorized  Officer)       |
|   |                        |                        |
|   |                        |                        |
|   | By                          | /s/ Brice J.  Poplawski     |
|   |                        | Brice J.  Poplawski         |
|   |                        | Controller                  |
|   |                        | (Chief  Accounting Officer) |
|        |                             |                             |  |  |  |

 

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**INDEX TOEXHIBITS**

 

Exhibits (in order ofassigned index numbers)

 
| 3.1    |   | Restated  Articles of Incorporation of the Company, as amended (incorporated by  reference to 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’s Quarterly Report on Form 10-Q  dated August 13, 1985, File Number 0-12553).                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2    |   | By-laws of the  Company, as amended (incorporated by reference to Exhibit 3.2 to the  Company’s Registration Statement on Form 10 dated October 20, 1983,  File Number 0-12553).                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1    |   | Indenture for  Senior Debt Securities dated as of December 1, 1983 and first  Supplemental Indenture dated as of June 19, 1989 between the Company and  Citibank, N.A. (incorporated by reference to Exhibit 4.1 to the  Company’s Annual Report on Form 10-K dated March 26, 1984, File  Number 0-12553 and Exhibit 4.2 to the Company’s Registration Statement  on Form S-3 dated June 23, 1989, Registration Number 33-29434). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5    |   | Forms of  Medium-Term Note, Series J (incorporated by reference to Exhibits 4.2A  and 4.2B to the Company’s Registration Statement on Form S-3 dated  March 2, 2000, Registration Number 333-31502).                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | Form of  Letter of Representation among the Company, Citibank, N.A. and The Depository  Trust Company, Series J (incorporated by reference to Exhibit 4.3  to the Company’s Registration Statement on Form S-3 dated March 2,  2000, Registration Number 333-31502).                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Forms of  Medium-Term Note, Series K (incorporated by reference to Exhibits 4.2A  and 4.2B to the Company’s Registration Statement on Form S-3 dated  December 23, 2003, Registration Number 333-111504).                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | Form of  Letter of Representation among the Company, Citibank, N.A. and The Depository  Trust Company, Series K (incorporated by reference to Exhibit 4.3  to the Company’s Registration Statement on Form S-3 dated  December 23, 2003, Registration Number 333-111504).                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1   |   | Support  Agreement between the Company and PACCAR dated as of June 19, 1989  (incorporated by reference to Exhibit 28.1 to the Company’s Registration  Statement on Form S-3 dated June 23, 1989, Registration  Number 33-29434).                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.1   |   | Statement re:  computation of ratio of earnings to fixed charges of the Company pursuant to  SEC reporting requirements for the six month periods ended June 30, 2006  and 2005.                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.2   |   | Statement re:  computation of ratio of earnings to fixed charges of the Company pursuant to  the Support Agreement between the Company and PACCAR for the six month  periods ended June 30, 2006 and 2005.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.3   |   | Statement re:  computation of ratio of earnings to fixed charges of PACCAR and subsidiaries  pursuant to SEC reporting requirements for the six month periods ended  June 30, 2006 and 2005.                                                                                                                                                                                                                                                                                   |

 

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| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification  - Certification of Principal Executive Officer.                                                                              |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                           |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification  - Certification of Principal Financial Officer.                                                                              |
|   |   |                                                                                                                                                                           |
| 32.1   |   | Section 1350  Certifications - Certification pursuant to Rule 13a-14(b) and  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  section 1350). |

 

Other exhibits listed in Item 601 of Regulation S-K are not applicable.

 

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