**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

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

**For the quarterly period endedSeptember 30, 2006**

or

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

For transition period from               to               

Commission File No. 0-12553

**PACCAR FINANCIAL CORP.**(Exact name of registrant as specified in its charter)

| **Washington**                                         |   | **91-6029712**                        |
|--------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                       |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                        |   |                                  |
|                                                   |   |                                  |
| **777 —  106****th 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 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, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

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

 

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

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

Common Stock, $100par value—145,000 shares as of October 31, 2006

THEREGISTRANT IS A WHOLLY-OWNED INDIRECT SUBSIDIARY OF PACCAR INC AND MEETS THECONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H)(1)(A) AND (B) OF FORM 10-Q ANDIS, THEREFORE, FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 

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**FORM 10-QPACCAR FINANCIAL CORP.**

**INDEX**
|                                                                                                                        | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|
| PART I. FINANCIAL  INFORMATION:                                                                                        |       |       |
|                                                                                                                   |       |       |
| ITEM  1. FINANCIAL STATEMENTS:                                                                                         |       |       |
|                                                                                                                   |       |       |
| Statements of Income and Retained Earnings —  Three and Nine Months Ended September 30, 2006 and 2005 (Unaudited) |       |       |
|                                                                                                                   |       |       |
| Balance Sheets —  September 30, 2006 (Unaudited) and December 31, 2005                                            |       |       |
|                                                                                                                   |       |       |
| Statements of Cash Flows —  Nine Months Ended September 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-QPACCAR FINANCIAL CORP.**

**PART I — FINANCIALINFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

**Statements of Income and Retained Earnings (Unaudited)**(Millions of Dollars)
| ** **                                                  | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                        |       |                                                |       |                                               |       |   |   |   |   |
| Interest and fee income                                     | ** ** | **$**                                               | **84.1**   |                                               | $          | 64.8 | ** ** | **$** | **234.6** |   | $ | 178.9 |   |
| Operating lease and  rental income                          | ** ** | **34.4**                                            |       | 31.1                                               | ** ** | **99.0** |   | 87.2 |   |
| Insurance premiums and  other revenue                       | ** ** | **12.8**                                            |       | 10.5                                               | ** ** | **37.7** |   | 29.6 |   |
| ** **                                                  | ** ** | ** **                                          |       |                                               | ** ** | ** ** |   |   |   |
| **TOTAL INTEREST AND OTHER  REVENUE**                       | ** ** | **131.3**                                           |       | 106.4                                              | ** ** | **371.3** |   | 295.7 |   |
|                                                        |       |                                                |       |                                               |       |   |   |   |   |
| Interest and other  borrowing expenses                      | ** ** | **44.5**                                            |       | 28.5                                               | ** ** | **120.3** |   | 74.2 |   |
| Depreciation and other  operating lease and rental expenses | ** ** | **27.8**                                            |       | 25.5                                               | ** ** | **80.4** |   | 71.7 |   |
| Insurance claims and  other expenses                        | ** ** | **7.4**                                             |       | 6.4                                                | ** ** | **21.2** |   | 16.3 |   |
| Selling, general and  administrative expenses               | ** ** | **12.7**                                            |       | 11.9                                               | ** ** | **37.4** |   | 35.2 |   |
| Provision for losses on  receivables                        | ** ** | **4.1**                                             |       | 3.5                                                | ** ** | **10.5** |   | 9.3 |   |
| ** **                                                  | ** ** | ** **                                          |       |                                               | ** ** | ** ** |   |   |   |
| **TOTAL EXPENSES**                                          | ** ** | **96.5**                                            |       | 75.8                                               | ** ** | **269.8** |   | 206.7 |   |
|                                                        |       |                                                |       |                                               |       |   |   |   |   |
| **INCOME BEFORE INCOME TAXES**                              | ** ** | **34.8**                                            |       | 30.6                                               | ** ** | **101.5** |   | 89.0 |   |
|                                                        |       |                                                |       |                                               |       |   |   |   |   |
| Income taxes                                                | ** ** | **13.3**                                            |       | 11.7                                               | ** ** | **38.9** |   | 34.1 |   |
|                                                        |       |                                                |       |                                               |       |   |   |   |   |
| **NET INCOME**                                              | ** ** | **21.5**                                            |       | 18.9                                               | ** ** | **62.6** |   | 54.9 |   |
| ** **                                                  | ** ** | ** **                                          |       |                                               | ** ** | ** ** |   |   |   |
| **RETAINED EARNINGS AT BEGINNING  OF PERIOD**               | ** ** | **488.6**                                           |       | 489.5                                              | ** ** | **477.5** |   | 473.5 |   |
| Cash dividends paid                                         |       | —                                              |       | —                                             | ** ** | **30.0** |   | 20.0 |   |
|                                                        | ** ** | ** **                                          |       |                                               | ** ** | ** ** |   |   |   |
| **RETAINED EARNINGS AT END OF  PERIOD**                     | ** ** | **$**                                               | **510.1**  |                                               | $          | 508.4 | ** ** | **$** | **510.1** |   | $ | 508.4 |   |
|                                                        |       |                                                |       |                                               |       |   |   |   |   |

 

Earnings per share and dividends per share are notreported because the Company is a wholly-owned subsidiary of PACCAR FinancialServices Corporation.

See Notes to Financial Statements.

3

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**FORM 10-QPACCAR FINANCIAL CORP.**

**Balance Sheets**(Millions Except ShareAmounts)
| ** **                                                                                                                                    | ** ** | **September 30** | ** **  | **December 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|----------------------|------------|
| ** **                                                                                                                                    | ** ** | **2006**              | ** **  | **2005***            | ** ** |
| ** **                                                                                                                                    | ** ** | **(Unaudited)**       | ** **  | ** **           | ** ** |
|                                                                                                                                          |       |                  |        |                 |       |
| **ASSETS**                                                                                                                                    | ** ** | ** **            |        |                 |       |
| ** **                                                                                                                                    | ** ** | ** **            |        |                 |       |
| Cash                                                                                                                                          | ** ** | **$**                 | **17.7**    |                 | $          | 19.0 |   |
| Finance and other receivables, net of allowance for  losses (2006 - $84.7 and 2005 - $77.3)                                                   | ** ** | **4,585.9**           |        | 4,214.7              |       |
| Loans to PACCAR Inc and affiliates                                                                                                            | ** ** | **11.2**              |        | 50.7                 |       |
| Equipment on operating leases, net of depreciation (2006  - $141.5 and 2005 - $119.1)                                                         | ** ** | **436.8**             |        | 421.3                |       |
| Other assets                                                                                                                                  | ** ** | **115.2**             |        | 73.0                 |       |
| ** **                                                                                                                                    | ** ** | ** **            |        |                 |       |
| **TOTAL  ASSETS**                                                                                                                             | ** ** | **$**                 | **5,166.8** |                 | $          | 4,778.7 |   |
| ** **                                                                                                                                    | ** ** | ** **            |        |                 |       |
| **LIABILITIES**                                                                                                                               |       |                  |        |                 |       |
| ** **                                                                                                                                    |       |                  |        |                 |       |
| Accounts payable, accrued expenses and other                                                                                                  | ** ** | **$**                 | **143.2**   |                 | $          | 156.9 |   |
| Commercial paper                                                                                                                              | ** ** | **1,899.6**           |        | 1,805.6              |       |
| Medium-term notes                                                                                                                             | ** ** | **2,050.0**           |        | 1,800.0              |       |
| Income taxes — current and deferred                                                                                                      | ** ** | **318.8**             |        | 303.6                |       |
| ** **                                                                                                                                    | ** ** | ** **            |        |                 |       |
| **TOTAL  LIABILITIES**                                                                                                                        | ** ** | **$**                 | **4,411.6** |                 | $          | 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 $100 per share, 200,000 shares  authorized, 145,000 shares issued and outstanding                                     | ** ** | **14.5**              |        | 14.5                 |       |
| Additional paid-in capital                                                                                                                    | ** ** | **187.1**             |        | 170.0                |       |
| Retained earnings                                                                                                                             | ** ** | **510.1**             |        | 477.5                |       |
| Accumulated other comprehensive income                                                                                                        | ** ** | **12.5**              |        | 19.6                 |       |
|                                                                                                                                          | ** ** | ** **            |        |                 |       |
| **TOTAL  STOCKHOLDER’S EQUITY**                                                                                                          | ** ** | **755.2**             |        | 712.6                |       |
| ** **                                                                                                                                    | ** ** | ** **            |        |                 |       |
| **TOTAL LIABILITIES AND  STOCKHOLDER’S EQUITY**                                                                                          | ** ** | **$**                 | **5,166.8** |                 | $          | 4,778.7 |   |

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

See Notes to Financial Statements.

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**FORM 10-QPACCAR FINANCIAL CORP.**

**Statements of Cash Flows (Unaudited)**(Millions of Dollars)

 
| **Nine Months Ended September 30**                   | ** ** | **2006**     | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------|------------|--------------|------------|----------|------------|
|                                                                     |       |         |       |     |       |
| **OPERATING  ACTIVITIES**                                                |       |         |       |     |       |
| ** **                                                               |       |         |       |     |       |
| Net income                                                               | ** ** | **$**        | **62.6**   |     | $          | 54.9 |   |
| Items included  in net income not affecting cash:                        |       |         |       |     |       |
| Depreciation and amortization                                            | ** ** | **62.0**     |       | 53.6     |       |
| Provision for losses on receivables                                      | ** ** | **10.5**     |       | 9.3      |       |
| Provision for deferred taxes                                             | ** ** | **3.4**      |       | (24.4    | )          |
| (Decrease)  increase in payables and other                               | ** ** | **(26.9**    | **)**      | 43.4     |       |
|                                                                     |       |         |       |     |       |
| **NET  CASH PROVIDED BY OPERATING ACTIVITIES**                           | ** ** | **111.6**    |       | 136.8    |       |
| ** **                                                               | ** ** | ** **   |       |     |       |
| **INVESTING  ACTIVITIES**                                                |       |         |       |     |       |
| ** **                                                               |       |         |       |     |       |
| Finance and  other receivables originated                                | ** ** | **(1,632.0** | **)**      | (1,414.8 | )          |
| Collections on  finance and other receivables                            | ** ** | **1,295.4**  |       | 1,060.1  |       |
| Net increase in  wholesale receivables                                   | ** ** | **(39.0**    | **)**      | (141.6   | )          |
| Net decrease in  loans to PACCAR Inc and affiliates                      | ** ** | **39.5**     |       | 68.8     |       |
| Acquisition of  equipment on operating leases, primarily from PACCAR Inc |       | **(116.2**   | **)**      | (99.2    | )          |
| Proceeds from  disposal of equipment                                     | ** ** | **50.9**     |       | 14.6     |       |
| Other                                                                    | ** ** | **(51.5**    | **)**      | (40.3    | )          |
|                                                                     |       |         |       |     |       |
| **NET  CASH USED IN INVESTING ACTIVITIES**                               | ** ** | **(452.9**   | **)**      | (552.4   | )          |
| ** **                                                               | ** ** | ** **   | ** ** |     |       |
| **FINANCING  ACTIVITIES**                                                |       |         |       |     |       |
| ** **                                                               |       |         |       |     |       |
| Net increase in  commercial paper                                        | ** ** | **94.0**     |       | 526.3    |       |
| Proceeds from  medium-term notes                                         | ** ** | **1,050.0**  |       | 400.0    |       |
| Payments of  medium-term notes                                           | ** ** | **(800.0**   | **)**      | (510.0   | )          |
| Dividends paid                                                           | ** ** | **(30.0**    | **)**      | (20.0    | )          |
| Payments of  advances from (to) PACCAR Inc                               | ** ** | **8.9**      |       | (.6      | )          |
| Capital contributions                                                    | ** ** | **17.1**     |       | 15.2     |       |
|                                                                     | ** ** | ** **   |       |     |       |
| **NET  CASH PROVIDED BY FINANCING ACTIVITIES**                           | ** ** | **340.0**    |       | 410.9    |       |
|                                                                     |       |         |       |     |       |
| **NET  DECREASE IN CASH**                                                | ** ** | **(1.3**     | **)**      | (4.7     | )          |
|                                                                     |       |         |       |     |       |
| **CASH AT  BEGINNING OF PERIOD**                                         | ** ** | **19.0**     |       | 18.2     |       |
|                                                                     |       |         |       |     |       |
| **CASH AT END OF PERIOD**                                                | ** ** | **$**        | **17.7**   |     | $          | 13.5 |   |

 

See Notes to Financial Statements.

5

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**FORM 10-Q**

**PACCARFINANCIAL CORP.**

 
| **Notes to Financial Statements  (Unaudited)** |   | (Millions of Dollars) |
|------------------------------------------------|--------|-----------------------|

 

**NOTE A — Basis ofPresentation**

The accompanying unaudited financial statements havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. For further information, refer to the financial statements and footnotesincluded in PACCAR Financial Corp.’s (the “Company”) Annual Report on Form 10-Kfor the year ended December 31, 2005.

*Reclassifications:*   Certainprior year amounts have been reclassified to conform to the 2006 presentation.

**New AccountingStandard**

*Accounting forUncertainty in Income Taxes:**  *In July 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(FIN 48). FIN 48 is an interpretation of FAS No. 109, *Accounting for Income Taxes*, and clarifiesthe criteria for recognition of income tax benefits.  The effective dateof FIN 48 is January 1, 2007, with any cumulative effect of adoption recordedas an adjustment to beginning retained earnings.  The Company does notexpect the adoption of FIN 48 to have a material effect on its financialstatements.

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

The Company and PACCAR Inc (“PACCAR”) are parties to aSupport Agreement that obligates PACCAR to provide, when required, financialassistance to the Company to ensure that the Company maintains a ratio of netearnings available for fixed charges to fixed charges (as defined in theAgreement) of at least 1.25 to 1 for any year. The required ratio for the ninemonths ended September 30, 2006 and full year 2005 was met without assistance.The Company determines the amount of PACCAR assistance, if any, at the end ofeach year. The Support Agreement also requires PACCAR to own, directly orindirectly, all outstanding voting stock of the Company.

PACCAR Financial Services Corporation (“PFSC”), theCompany’s parent, charges the Company for certain administrative services itprovides and certain services the Company receives indirectly from PACCAR. Thecosts are charged to the Company based upon the Company’s specific use of theservices at PFSC’s or PACCAR’s cost. Management considers these charges similarto the costs that would be incurred if the Company were on a stand-alone basis.PFSC recognizes certain of these administrative services as an additionalinvestment in the Company. The Company records the investment as additionalpaid-in capital.

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

The Company’s principal office is located in thecorporate headquarters building of PACCAR (owned by PACCAR). The Company alsoleases office space from two additional facilities owned by PACCAR and twofacilities leased by PACCAR.

The Company’s employees are covered by a definedbenefit pension plan, an unfunded post-retirement medical and life insuranceplan, and a defined contribution plan sponsored by PACCAR. Separate allocationsof defined benefit plan assets and obligations relating to the Company have notbeen made.

6

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Periodically, the Company borrows funds from PACCARand makes loans to PACCAR. Loans outstanding to PACCAR were $11.2 and $.6 atSeptember 30, 2006 and December 31, 2005, respectively. Loans outstanding fromPACCAR were $9.1 and $.2 at September 30, 2006 and December 31, 2005,respectively.

PACCAR has issued letters of credit as of September30, 2006 in the amount of $5.9 on behalf of the Company to guarantee funds forpayment to insured franchisees and customers for any future insurance losses.

The Company periodically loans funds to certainforeign finance and leasing affiliates of PACCAR. These various affiliates haveSupport Agreements with PACCAR, similar to the Company’s Support Agreement. Theforeign affiliates operate in the United Kingdom, The Netherlands, Mexico,Canada and Australia, and any resulting currency exposure is fully hedged. Theforeign affiliates provide financing and leasing of PACCAR-manufactured trucksand related equipment sold through PACCAR’s dealer networks in Europe, Mexico,Canada and Australia. The Company will not make loans to the foreign affiliatesin excess of the equivalent of $375.0 United States dollars, unless the amountin excess of such limit is guaranteed by PACCAR. The Company periodicallyreviews the funding alternatives for these affiliates, and these limits may berevised in the future. There were no loans outstanding to foreign affiliates atSeptember 30, 2006. There was a total of $50.1 in loans outstanding to foreignaffiliates operating in the United Kingdom and The Netherlands at December 31,2005.

Included in accounts payable, accrued expenses andother is $19.9 and $20.8 payable to PACCAR’s truck divisions at September 30,2006 and December 31, 2005, respectively.

7

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**NOTE C —Stockholder’s Equity**

**Preferred Stock**

The Company’s Articles of Incorporation provide thatthe 6% noncumulative, nonvoting preferred stock (100% owned by PFSC) isredeemable only at the option of the Company’s Board of Directors.

**ComprehensiveIncome**

The components of comprehensive income, net of relatedtax, were as follows:
| ** **                                          | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|  Net income                                    | ** ** | **$**                                               | **21.5**   |                                               | $          | 18.9 | ** ** | **$** | **62.6** |   | $ | 54.9 |   |
| Other comprehensive  income:                        | ** ** | ** **                                          |       |                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized net  (loss) gain on derivative contracts | ** ** | **(18.0**                                           | **)**      | 8.7                                                | ** ** | **(7.1** | **)** | 12.2 |   |
| Total comprehensive income                          | ** ** | **$**                                               | **3.5**    |                                               | $          | 27.6 | ** ** | **$** | **55.5** |   | $ | 67.1 |   |

 

The unrealized net (loss) gain on derivative contractsin the three and nine months ended September 30, 2006 and 2005, respectively,was due to a change in long term market interest rates causing a change in thefair value of the Company’s floating to fixed rate contracts.

Accumulated other comprehensive income of $12.5 and$19.6 at September 30, 2006 and December 31, 2005, respectively, is comprisedof the unrealized net gain on derivative contracts.

8

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**ITEM 2.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**(Millionsof Dollars)

**Results of Operations**

The Company’s net incomeof $21.5 for the third quarter of 2006 and $62.6 in the first nine months of2006 both increased 14% from the $18.9 for the third quarter of 2005 and $54.9in the first nine months of 2005.  Theprofit improvement in the third quarter and for the first nine months primarilyresulted from a higher finance margin (revenues minus borrowing, lease, andinsurance expenses).  Interest and feeincome in the third quarter and first nine months of 2006 increased $19.3 and$55.7, respectively, from higher earning assets and higher portfolio interestrates.  Average earning assets increased17% and 20% in the third quarter and first nine months, respectively, from thecomparable periods in the prior year. The increase in average earning assets was due to higher new loan andlease volume resulting from higher PACCAR truck production.  Interest and other borrowing expensesincreased by $16.0 for the third quarter of 2006 and $46.1 for the first ninemonths of 2006 due to an increase in average debt balances and interestrates.  Operating lease revenue andrelated depreciation have increased due to an increase in equipment onoperating leases in the past year.

The following tablesummarizes information on the Company’s allowance for losses on receivables andasset portfolio and presents related ratios:

**Allowancefor Losses**
|                                                                                                                                                            | ** ** | **Nine Months  Ended** | ** ** | **Nine Months  Ended** | ** ** | **Year Ended**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                 | ** ** | **September 30**       | ** ** | **September 30**       | ** ** | **December 31** | ** ** |
| ** **                                                                                                                                                 | ** ** | **2006**                    | ** ** | **2005**                    | ** ** | **2005**             | ** ** |
| Balance at beginning of  period                                                                                                                            | ** ** | **$**                       | **77.3**   |                        | $          | 67.1                 |       | $ | 67.1 |   |
| Provision for losses                                                                                                                                       | ** ** | **10.5**                    |       | 9.3                         |       | 14.2                 |       |
| Credit losses                                                                                                                                              | ** ** | **(5.9**                    | **)**      | (4.8                        | )          | (7.3                 | )          |
| Recoveries                                                                                                                                                 | ** ** | **2.8**                     |       | 2.6                         |       | 3.3                  |       |
| Balance at end of  period                                                                                                                                  | ** ** | **$**                       | **84.7**   |                        | $          | 74.2                 |       | $ | 77.3 |   |
| Ratios:                                                                                                                                                    |       |                        |       |                        |       |                 |       |
|                                                                                                                                                       |       |                        |       |                        |       |                 |       |
| Credit losses net of  recoveries ($3.1 in 2006) to average net receivables ($4,381.1 in 2006)  annualized at September 30, 2006 and 2005                   | ** ** | **.09**                     | **%**      | .08                         | %          | .11                  | %          |
|                                                                                                                                                       | ** ** | ** **                  | ** ** |                        |       |                 |       |
| Allowance for losses  ($84.7 in 2006) to period-end net receivables ($4,579.7 in 2006)                                                                     | ** ** | **1.85**                    | **%**      | 1.91                        | %          | 1.85                 | %          |
|                                                                                                                                                       | ** ** | ** **                  | ** ** |                        |       |                 |       |
| Period-end finance and lease receivables past due, over 30 days,  ($32.0 in 2006) to period-end retail contracts and lease receivables  ($4,135.2 in 2006) | ** ** | **.77**                     | **%**      | .70                         | %          | .79                  | %          |

 

9

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The Company’s portfoliois concentrated with customers in the heavy and medium duty trucktransportation industry.  The portfoliois comprised of retail loans and leases, dealer wholesale financing and dealermaster notes as follows:
|                             | ** ** | **Nine Months  Ended  September 30** | ** **  | **Nine Months  Ended  September 30** | ** ** | **Year EndedDecember 31** | ** ** |
|-----------------------------|------------|------------------------------------------------|-------------|------------------------------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **2006**                                       | ** **  | **2005**                                       | ** ** | **2005**                            | ** ** |
| Retail loans                | ** ** | **$**                                          | **2,735.4** | ** **                                     | **59**     | **%**                               | $          | 2,425.0 |   | 61 | % | $ | 2,481.8 |   | 58 | % |
| Retail leases               | ** ** | **1,085.9**                                    | ** **  | **23**                                         | **%**      | 846.8                               |       | 21 | % | 977.3 |   | 23 | % |
| Dealer wholesale  financing | ** ** | **665.9**                                      | ** **  | **14**                                         | **%**      | 515.3                               |       | 13 | % | 626.9 |   | 14 | % |
| Dealer master notes         | ** ** | **183.4**                                      | ** **  | **4**                                          | **%**      | 193.4                               |       | 5 | % | 206.0 |   | 5 | % |
| Total portfolio             | ** ** | **$**                                          | **4,670.6** | ** **                                     | **100**    | **%**                               | $          | 3,980.5 |   | 100 | % | $ | 4,292.0 |   | 100 | % |

 

The provision for lossesin the first nine months of 2006 of $10.5 increased by $1.2 from the $9.3 inthe first nine months of 2005, primarily from higher credit losses.  As a percentage of the total portfolio, netcredit losses remained at historically low levels for the nine months endingSeptember 30, 2006 at .09% compared to .08% for the nine months endingSeptember 30, 2005.  This reflectscustomers’ ability to make timely payments as they have benefited from thedemand for transportation services.  Inaddition, current industry conditions have had a positive impact on used truckvalues supporting the collateral underlying the Company’s receivables.

Dealer wholesalefinancing, which has a lower allowance for losses than retail accounts,increased to 14% of the total portfolio at September 30, 2006 compared to 13%in September 2005, reducing the ratio of the allowance for losses to netreceivables (1.85% at September 2006 versus 1.91% at September 2005).

The estimation methodsand factors considered for determining the allowance during the periodsincluded in this filing have been consistently applied.  There have been no significant changes incustomer contract terms during the periods.

***Company Outlook***

Continued strength in thegeneral economy and the related demand for freight transportation, and someaccelerated truck buying in advance of changes in engine emission requirementsin 2007, may positively impact the level of truck sales financed for the nextthree to six months.  The long-termprofitability of the Company is primarily dependent on the generation of newbusiness and on the level of credit losses experienced, both of which areimpacted by conditions in the general economy and the truck transportationindustry.  Industry conditions aregenerally positive; however, continued high diesel prices and interest ratestogether with a decline in freight demand could negatively impact future trucksales financed as well as existing customers’ ability to make timely payments,which increases the risk of loss inherent in the portfolio.

***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 a shelfregistration statement under which $3,000 of medium-term notes could be issuedas needed. This shelf registration was

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fully utilized as ofOctober 24, 2006.  The Company intends tofile a new shelf registration in November 2006.

The Company believes thatit has sufficient financial capabilities to continue funding receivables,servicing debt and paying dividends through internally generated funds, accessto public and private debt markets, lines of credit and other financialresources.

The Company’s investmentgrade credit ratings continue to provide access to capital markets atcompetitive interest rates. The Company’s credit ratings at September 30, 2006are 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 excellent overall financial condition.  Access tofinancing at competitive rates would be negatively impacted by a downgrade inthese credit ratings.

The Company participateswith PACCAR and certain other PACCAR affiliates in syndicated credit facilitiesof $2,000 at September 30, 2006.  Of this amount, $1,000expires in July 2007 and the remaining $1,000 expires in July2010.

Of the $2,000 intotal credit facilities, $1,217 is available for use by the Company and/orPACCAR and certain other PACCAR affiliates, $370 is only available for useby PACCAR’s Canadian subsidiaries, $300 is only available for use by PACCAR’sMexican 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 nine months ended September 30, 2006 and the year ended December 31,2005.

Other information onliquidity, sources of capital, and contractual cash commitments as presented inthe Company’s 2005 Annual Report on Form 10-K continues to be relevant.

***Forward Looking Statements***

Certaininformation presented in this Form 10-Q contains forward-looking statementsmade pursuant to the Private Securities Litigation Reform Act of 1995, whichare subject to risks and uncertainties that may affect actual results. Risksand uncertainties include, but are not limited to: national and local economic,political and industry conditions; changes in the levels of new business volumedue to unit fluctuations in new PACCAR truck sales; changes in competitivefactors; changes affecting the profitability of truck owners and operators;price changes impacting equipment costs and residual values; changes in costsand availability of external funding sources; and legislation and governmentalregulation.

**ITEM 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

There have been nomaterial changes in the Company’s market risk during the nine months endedSeptember 30, 2006. For additional information, refer to the market riskdisclosure in Item 7a as presented in the Company’s 2005 Annual Report on Form10-K.

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**ITEM 4.  CONTROLS AND PROCEDURES**

An evaluation wasperformed under the supervision and with the participation of the Company’smanagement, including the principal executive officer and principal financialofficer, of the effectiveness of the design and operation of the Com­pany’sdisclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e)promulgated under the Securities Exchange Act of 1934, as amended) as ofSeptember 30, 2006 (“Evaluation Date”). Based on that evaluation, the principalexecutive officer and principal financial officer of the Company concluded thatthe disclosure controls and procedures in place at the Company are effective toensure that information required to be disclosed by the Company, including itsconsolidated subsidiaries (the Company has no subsidiaries), in reports thatthe Company files or submits under the Exchange Act, is recorded, processed,summarized and reported on a timely basis in accordance with applicable rulesand regulations. There have been no changes in the Company’s internal controlover financial reporting during the third quarter of 2006 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

**PART II — OTHERINFORMATION**

For items 1, 1A, 2, 3, 4 and 5, there was noreportable information during the nine months ended September 30, 2006.

**ITEM 6.   EXHIBITS**

Any exhibits filedherewith as part of this report are listed in the accompanying Index ofExhibits.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|        |             |   |   | **PACCAR Financial Corp.**                                 | ** ** |
|--------|------------------|--------|--------|------------------------------------------------------------|------------|
|   |             |   |   | (Registrant)                                               |
|   |             |   |   |                                                       |
|   |             |   |   |                                                       |
| Date   | November 3, 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 TO EXHIBITS**

Exhibits (in order of assignedindex 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). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2    |   | 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  nine month periods ended September 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 nine month periods ended September 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 nine month periods ended September 30, 2006 and 2005.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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-Kare not applicable.

 

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