UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

 

**FORM 10-Q**

 

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

 

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

 

or

 

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

 

For transition periodfrom                     to

 

Commission File No. 001-11677

 

**PACCAR FINANCIAL CORP.**

(Exact name ofregistrant as specified in its charter)

 

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

 

(425) 468-7100

(Registrant’stelephone number, including area code)

 

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

 

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

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

 

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

 

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

 

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

 

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

 

 

 

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**INDEX**

 
|                                                                                                                 |                                                                                        | Page   |
|----------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|--------|
|                                                                                                                 |                                                                                        |   |
| PART I. FINANCIAL INFORMATION:                                                                                  |                                                                                        |
|                                                                                                                 |                                                                                        |
| ITEM  1.                                                                                                             | FINANCIAL STATEMENTS:                                                                       |   |
|                                                                                                                 |                                                                                        |   |
| Statements of Income and Retained Earnings—  Three and Six Months Ended June 30, 2008 and 2007 (Unaudited) | 3                                                                                           |
|                                                                                                                 |                                                                                        |
| Balance Sheets—  June 30, 2008 (Unaudited) and December 31, 2007                                                | 4                                                                                           |
|                                                                                                                 |                                                                                        |
| Statements  of Cash Flows —  Six Months Ended June 30, 2008 and 2007 (Unaudited)                                | 5                                                                                           |
|                                                                                                                 |                                                                                        |   |
| Notes to Financial  Statements (Unaudited)                                                                           | 6                                                                                           |
|                                                                                                                 |                                                                                        |   |
| ITEM 2.                                                                                                              | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 9      |
|                                                                                                                 |                                                                                        |   |
| ITEM 3.                                                                                                              | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 | 13     |
|                                                                                                                 |                                                                                        |   |
| ITEMS 4 & 4T                                                                                                | CONTROLS AND PROCEDURES                                                                     | 13     |
|                                                                                                                 |                                                                                        |   |
| PART II. OTHER  INFORMATION:                                                                                    |                                                                                        |
|                                                                                                                 |                                                                                        |   |
| ITEM 6.                                                                                                              | EXHIBITS                                                                                    | 14     |
|                                                                                                                 |                                                                                        |   |
| SIGNATURES                                                                                                           |                                                                                        | 15     |
|                                                                                                                 |                                                                                        |   |
| EXHIBIT INDEX                                                                                                        | 16                                                                                          |

 

2

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**FORM 10-Q**

**PACCARFINANCIAL CORP.**

 

**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**Statements of Income and Retained Earnings**

**(Unaudited) **(Millions of Dollars)

 
| ** **                                    | ** ** | Three Months Ended  June 30 |       | Six Months Ended  June 30 | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                   | ** ** | 2007                                     | ** ** | **2008** | ** ** | 2007 | ** ** |
|                                          |       |                                       |       |                                     |       |   |   |   |   |
| Interest and  fees                            | ** ** | **$**                                      | **77.9**   |                                     | $          | 92.9 | ** ** | **$** | **161.8** |   | $ | 183.1 |   |
| Operating lease  and rental income            | ** ** | **42.0**                                   |       | 36.8                                     | ** ** | **82.3** |   | 72.3 |   |
| Insurance  premiums and other                 | ** ** | **7.4**                                    |       | 14.5                                     | ** ** | **16.5** |   | 28.1 |   |
|                                          | ** ** | ** **                                 |       |                                     | ** ** | ** ** |   |   |   |
| **TOTAL  INTEREST AND OTHER REVENUE**         | ** ** | **127.3**                                  |       | 144.2                                    | ** ** | **260.6** |   | 283.5 |   |
|                                          |       |                                       |       |                                     |       |   |   |   |   |
| Interest and  other borrowing expenses        | ** ** | **40.5**                                   |       | 51.5                                     | ** ** | **86.3** |   | 101.9 |   |
| Depreciation and  other rental expenses       | ** ** | **34.5**                                   |       | 29.9                                     | ** ** | **66.9** |   | 59.3 |   |
| Insurance claims  and other expenses          | ** ** | **3.2**                                    |       | 10.7                                     | ** ** | **7.5** |   | 20.7 |   |
| Selling, general  and administrative expenses | ** ** | **13.4**                                   |       | 13.4                                     | ** ** | **26.7** |   | 25.8 |   |
| Provision for  losses on receivables          | ** ** | **18.2**                                   |       | 5.2                                      | ** ** | **30.7** |   | 9.2 |   |
|                                          | ** ** | ** **                                 |       |                                     | ** ** | ** ** |   |   |   |
| **TOTAL  EXPENSES**                           | ** ** | **109.8**                                  |       | 110.7                                    | ** ** | **218.1** |   | 216.9 |   |
|                                          |       |                                       |       |                                     |       |   |   |   |   |
| **INCOME  BEFORE INCOME TAXES**               | ** ** | **17.5**                                   |       | 33.5                                     | ** ** | **42.5** |   | 66.6 |   |
|                                          |       |                                       |       |                                     |       |   |   |   |   |
| Income taxes                                  | ** ** | **6.7**                                    |       | 12.8                                     | ** ** | **16.3** |   | 25.5 |   |
|                                          |       |                                       |       |                                     |       |   |   |   |   |
| **NET  INCOME**                               | ** ** | **10.8**                                   |       | 20.7                                     | ** ** | **26.2** |   | 41.1 |   |
|                                          | ** ** | ** **                                 |       |                                     | ** ** | ** ** |   |   |   |
| **RETAINED  EARNINGS AT BEGINNING OF PERIOD** | ** ** | **605.7**                                  |       | 552.4                                    | ** ** | **590.3** |   | 532.0 |   |
|                                          |       |                                       |       |                                     |       |   |   |   |   |
| **RETAINED  EARNINGS AT END OF PERIOD**       | ** ** | **$**                                      | **616.5**  |                                     | $          | 573.1 | ** ** | **$** | **616.5** |   | $ | 573.1 |   |

 

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

 

See Notes to Financial Statements.

 

3

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**FORM 10-Q**

**PACCARFINANCIAL CORP.**

 
| **Balance Sheets**                                                                                                                       | ** ** | **June 30** | ** **  | December 31 | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|------------------|------------|
| (Millions of Dollars)                                                                                                               | ** ** | **2008**         | ** **  | 2007*            | ** ** |
| ** **                                                                                                                                    | ** ** | **(Unaudited)**  | ** **  | ** **       | ** ** |
| **ASSETS**                                                                                                                                    | ** ** | ** **       |        |             |       |
| ** **                                                                                                                                    | ** ** | ** **       |        |             |       |
| Cash                                                                                                                                          | ** ** | **$**            | **24.6**    |             | $          | 25.6 |   |
| Finance and  other receivables, net of allowance for losses (2008 - $92.8 and 2007 -  $92.6)                                                  | ** ** | **4,197.4**      |        | 4,550.3          |       |
| Due from PACCAR  Inc and affiliates                                                                                                           | ** ** | **361.7**        |        | 402.8            |       |
| Equipment on  operating leases, net of depreciation (2008 - $206.3 and 2007 - $189.2)                                                         |       | **503.3**        | ** **  | 475.5            |       |
| Other assets                                                                                                                                  | ** ** | **98.5**         |        | 53.4             |       |
|                                                                                                                                          | ** ** | ** **       |        |             |       |
| **TOTAL  ASSETS**                                                                                                                             | ** ** | **$**            | **5,185.5** |             | $          | 5,507.6 |   |
| ** **                                                                                                                                    | ** ** | ** **       |        |             |       |
| **LIABILITIES**                                                                                                                               |       |             |        |             |       |
| ** **                                                                                                                                    |       |             |        |             |       |
| Accounts  payable, accrued expenses and other                                                                                                 | ** ** | **$**            | **203.0**   |             | $          | 239.3 |   |
| Due to PACCAR  Inc and affiliates                                                                                                             | ** ** | **15.2**         |        | 10.1             |       |
| Commercial paper                                                                                                                              | ** ** | **1,029.7**      |        | 1,453.7          |       |
| Medium-term  notes                                                                                                                            | ** ** | **2,720.0**      |        | 2,625.0          |       |
| Income taxes –  current and deferred                                                                                                     | ** ** | **352.6**        |        | 354.9            |       |
|                                                                                                                                          | ** ** | ** **       |        |             |       |
| **TOTAL  LIABILITIES**                                                                                                                        | ** ** | **$**            | **4,320.5** |             | $          | 4,683.0 |   |
|                                                                                                                                          |       |             |        |             |       |
| **STOCKHOLDER’S  EQUITY**                                                                                                                |       |             |        |             |       |
| ** **                                                                                                                                    |       |             |        |             |       |
| Preferred stock,  par value $100 per share, 6% noncumulative and nonvoting, 450,000 shares  authorized, 310,000 shares issued and outstanding | ** ** | **$**            | **31.0**    |             | $          | 31.0 |   |
| Common stock,  par value $100 per share, 200,000 shares authorized, 145,000 shares issued  and outstanding                                    | ** ** | **14.5**         |        | 14.5             |       |
| Additional  paid-in capital                                                                                                                   | ** ** | **228.8**        |        | 215.1            |       |
| Retained  earnings                                                                                                                            | ** ** | **616.5**        |        | 590.3            |       |
| Accumulated other comprehensive loss                                                                                                          | ** ** | **(25.8**        | **)**       | (26.3            | )          |
|                                                                                                                                          |       |             |        |             |       |
| **TOTAL  STOCKHOLDER’S EQUITY**                                                                                                          | ** ** | **865.0**        |        | 824.6            |       |
|                                                                                                                                          |       |             |        |             |       |
| **TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                          | ** ** | **$**            | **5,185.5** |             | $          | 5,507.6 |   |

 

*TheDecember 31, 2007 balance sheet has been derived from audited financialstatements.

 

SeeNotes to Financial Statements.

 

4

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**FORM 10-Q**

**PACCAR FINANCIAL CORP.**

 

**Statements of Cash Flows (Unaudited)**

(Millions of Dollars)

 
| ** **                                                                  | ** ** | Six Months Ended June 30 | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                     | ** ** | 2007 | ** ** |
|                                                                        |       |                                         | ** ** |   |   |
| **OPERATING  ACTIVITIES**                                                   |       |                                         | ** ** |   |   |
|                                                                        |       |                                         | ** ** |   |   |
| Net income                                                                  | ** ** | **$**                                        | **26.2**   | ** ** | $ | 41.1 |   |
| Items included  in net income not affecting cash:                           |       |                                         | ** ** |   |   |
| Depreciation and  amortization                                              | ** ** | **50.3**                                     | ** ** | 46.3 |   |
| Provision for  losses on receivables                                        | ** ** | **30.7**                                     | ** ** | 9.2 |   |
| (Decrease)  increase in deferred tax liability                              | ** ** | **(1.0**                                     | **)**      | 4.3 |   |
| Administrative  fees for services from PFSC                                 | ** ** | **13.7**                                     | ** ** | 12.4 |   |
| Decrease in  payables and other                                             | ** ** | **(37.8**                                    | **)**      | (16.4 | ) |
|                                                                        |       |                                         | ** ** |   |   |
| **NET  CASH PROVIDED BY OPERATING ACTIVITIES**                              | ** ** | **82.1**                                     | ** ** | 96.9 |   |
|                                                                        |       |                                         | ** ** |   |   |
| **INVESTING  ACTIVITIES**                                                   |       |                                         | ** ** |   |   |
|                                                                        |       |                                         | ** ** |   |   |
| Finance and  other receivables originated                                   | ** ** | **(621.2**                                   | **)**      | (969.2 | ) |
| Collections on  finance and other receivables                               | ** ** | **868.1**                                    | ** ** | 800.1 |   |
| Net decrease in  wholesale receivables                                      | ** ** | **52.7**                                     | ** ** | 84.8 |   |
| Net decrease  (increase) in loans and leases from PACCAR Inc and affiliates |       | **41.0**                                     | ** ** | (20.9 | ) |
| Acquisition of  equipment on operating leases, primarily from PACCAR Inc    |       | **(102.3**                                   | **)**      | (63.9 | ) |
| Proceeds from  disposal of equipment                                        | ** ** | **25.9**                                     | ** ** | 37.6 |   |
| Other                                                                       | ** ** | **(19.0**                                    | **)**      | (9.3 | ) |
|                                                                        |       |                                         | ** ** |   |   |
| **NET  CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES**                    | ** ** | **245.2**                                    | ** ** | (140.8 | ) |
|                                                                        |       |                                         | ** ** |   |   |
| **FINANCING  ACTIVITIES**                                                   |       |                                         | ** ** |   |   |
|                                                                        |       |                                         | ** ** |   |   |
| Net decrease in  commercial paper                                           | ** ** | **(424.0**                                   | **)**      | (41.6 | ) |
| Proceeds from  medium-term notes                                            | ** ** | **145.0**                                    | ** ** | 225.0 |   |
| Payments of  medium-term notes                                              | ** ** | **(50.0**                                    | **)**      | (150.0 | ) |
| Advances from PACCAR Inc                                                    | ** ** | **.7**                                       | ** ** | 6.3 |   |
|                                                                        |       |                                         | ** ** |   |   |
| **NET  CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES**                    | ** ** | **(328.3**                                   | **)**      | 39.7 |   |
|                                                                        |       |                                         | ** ** |   |   |
| **NET  DECREASE IN CASH**                                                   | ** ** | **(1.0**                                     | **)**      | (4.2 | ) |
|                                                                        |       |                                         | ** ** |   |   |
| **CASH AT  BEGINNING OF PERIOD**                                            | ** ** | **25.6**                                     | ** ** | 13.9 |   |
|                                                                        |       |                                         | ** ** |   |   |
| **CASH AT  END OF PERIOD**                                                  | ** ** | **$**                                        | **24.6**   | ** ** | $ | 9.7 |   |

 

SeeNotes to Financial Statements.

 

5

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**FORM 10-Q**

**PACCAR FINANCIAL CORP.**

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

(Millions of Dollars)

 

**NOTE A –Basis of Presentation**

 

The accompanyingunaudited financial statements have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. For further information, refer to thefinancial statements and footnotes included in PACCAR Financial Corp.’s (the “Company”)Annual Report on Form 10-K for the year ended December 31, 2007.

 

**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 fiscalyear. The required ratio for the six months ended June 30, 2008 and fullyear 2007 was met without assistance. The Company determines the amount ofPACCAR assistance, 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.

 

There were no cashdividends declared or paid during the first six months of 2008 and 2007.

 

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

 

Company employees andPACCAR employees are covered by a defined benefit pension plan and an unfundedpost-retirement medical and life insurance plan, both sponsored by PACCAR.  The assets and liabilities of these plans arereflected on the balance sheets of PACCAR. PACCAR contributes to the plans and allocates the expenses to theCompany based principally on the number of eligible plan participants.

 

Company employees andPACCAR employees are also covered by a defined contribution plan, sponsored byPACCAR.  Expenses incurred by the Companyfor the defined contribution plan benefits are based on the actual contributionmade on behalf of participating employees.

 

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

 

Periodically, the Companymakes loans to, borrows from and has intercompany transactions with PACCAR. Inaddition, the Company periodically loans funds to certain foreign finance andleasing affiliates of PACCAR. These various affiliates have Support Agreementswith PACCAR, similar to the Company’s Support Agreement.

 

6

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The foreign affiliatesoperate in the United Kingdom, The Netherlands, Mexico, Canada and Australia,and any resulting currency exposure is fully hedged. The foreign affiliatesprimarily provide financing and leasing of PACCAR-manufactured trucks andrelated equipment sold through PACCAR’s independent dealer networks in Europe,Mexico, Canada and Australia. The Company will not make loans to the foreignaffiliates in excess of the equivalent of $500.0 United States dollars, unlessthe amount in excess of such limit is guaranteed by PACCAR. The Companyperiodically reviews the funding alternatives for these affiliates, and theselimits may be revised in the future.

 

Amounts outstanding at June 30,2008, including foreign finance affiliates operating in The Netherlands, Mexicoand Australia, are summarized below:

 
| ** **                                                  | ** ** | **June 30  2008** | ** ** | December 31  2007 | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| Due from PACCAR Inc and affiliates | ** ** | ** **             | ** ** |                   |       |   |   |
| Loans due from  PACCAR Inc                                  | ** ** | **$**                  | **22.6**   |                   | $          | 11.5 |   |
| Loans due from  foreign finance affiliates                  | ** ** | **321.5**              |       | 371.2                  |       |
| Direct financing  leases due from affiliate                 | ** ** | **13.8**               |       | 16.2                   |       |
| Receivables                                                 | ** ** | **3.8**                |       | 3.9                    |       |
| Total                                                       | ** ** | **$**                  | **361.7**  |                   | $          | 402.8 |   |
|                                                        |       |                   |       |                   |       |
| Due to PACCAR  Inc and affiliates                           |       |                   |       |                   |       |
| Loans due to  PACCAR Inc                                    | ** ** | **$**                  | **.7**     |                   | $          |   |
| Payables                                                    | ** ** | **14.5**               |       | 10.1                   |       |
| Total                                                       | ** ** | **$**                  | **15.2**   |                   | $          | 10.1 |   |

 

Amounts outstanding at December 31,2007 include loans outstanding to foreign affiliates operating in TheNetherlands, Mexico and Canada. The Company provides direct financing leases toa certain dealer location operated by an affiliate of PACCAR.

 

PACCAR has issued lettersof credit as of June 30, 2008 in the amount of $5.1 on behalf of theCompany to guarantee funds for payment to insured franchisees and customers forany future insurance losses.

 

**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.

 

7

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**Other Comprehensive Income**

 

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

 
| ** **                                   | ** ** | Three Months Ended  June 30 |       | Six Months Ended  June 30 | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                   |
| ** **                                   | ** ** | **2008**                                   | ** ** | 2007                                     | ** ** | **2008** | ** ** | 2007 | ** ** |
| Net  income                                  | ** ** | **$**                                      | **10.8**   |                                     | $          | 20.7 | ** ** | **$** | **26.2** |   | $ | 41.1 |   |
| Other  comprehensive income:                 |       |                                       |       |                                     |       |   |   |   |   |
| Unrealized  net gain on derivative contracts | ** ** | **31.9**                                   |       | 8.8                                      | ** ** | **.5** |   | 2.1 |   |
| Total  comprehensive income                  | ** ** | **$**                                      | **42.7**   |                                     | $          | 29.5 | ** ** | **$** | **26.7** |   | $ | 43.2 |   |

 

The unrealized net gainon derivative contracts in the three months ended June 30, 2008 was due toan increase in market interest rates causing an increase in the fair value ofthe Company’s floating to fixed interest rate swap contracts.

 

Accumulated othercomprehensive loss of $(25.8) and $(26.3) at June 30, 2008 and December 31,2007, respectively, is comprised of the unrealized net loss on derivativecontracts.

 

**NOTE D – Fair Value Measurements**

 

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

 

Level 1 – Valuations arebased on quoted prices that the Company has the ability to obtain in activelytraded markets for identical assets or liabilities. Since valuations are basedon quoted prices that are readily and regularly available in an active marketor exchange traded market, valuation of these instruments does not require asignificant degree of judgment.

 

Level 2 – Valuations arebased on quoted prices for similar instruments in active markets, quoted pricesfor identical or similar instruments in markets that are not active, andmodel-based valuation techniques for which all significant assumptions areobservable in the market.

 

Level 3 – Valuations arebased on model-based techniques for which some or all of the assumptions areobtained from indirect market information that is significant to the overallfair value measurement and which require a significant degree of managementjudgment.

 

The Company’s derivativecontracts consist of interest rate contracts. These derivative contracts areover the counter and their fair value is determined using modeling techniquesthat include market inputs such as interest rates and yield curves.  At June 30, 2008 the Company’s netliability related to these interest rate derivatives totaled $41.8 and were theonly instruments categorized as Level 2. There were no Level 1 or 3 assets orliabilities.

 

8

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

 

**Resultsof Operations**

 

**Netincome**

 

The Company’s net income was $10.8 for the second quarterof 2008 compared to $20.7 for the second quarter of 2007. Net income was $26.2for the first six months of 2008 compared to $41.1 for the first six months of2007. The lower net income was primarily the result of an increase in theprovision for losses on receivables due to higher net credit losses and lowernet interest margin from a decline in earning assets.

 

**Revenue**

 

Second quarter and first half2008 interest and other revenuedecreased $16.9 and $22.9, respectively. Both the second quarter and first half2008 decreases were due to declines in interest and fee income of $15.0 and$21.3, respectively, and lower insurance premiums. These were partially offsetby higher revenue from operating lease assets.

 

The following table summarizes the changes in interest andfee income:

 
| ** **                           | ** ** | Three months  ending June 30 |   | Six months  ending June 30 | ** ** |
|--------------------------------------|------------|---------------------------------------------|--------|-------------------------------------------|------------|
|                                 |       |                                        |   |                                      |       |
| Interest and fee  income - 2007      |       | $                                           | 92.9   |                                      | $          | 183.1 |   |
|                                 |       |                                        |   |                                      |       |
| Lower average  balances              |       | (11.9                                       | )      | (21.7                                     | )          |
| Change in yield                      |       | (3.1                                        | )      | 0.4                                       |       |
|                                 |       |                                        |   |                                      |       |
| Interest and fee  income – 2008 |       | $                                           | 77.9   |                                      | $          | 161.8 |   |

 

Finance receivables declined due to lower new loan volumerelated to lower dealer truck sales. The reduction in average loan yields inthe second quarter of 2008 was due to lower market interest rates.

 

Operating lease and rental income increased over theperiods due to higher operating lease assets. Insurance premiums declined dueto a change in underwriting policy that resulted in fewer contracts outstandingin 2008.

 

9

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**Expenses**

 

Second quarter and first half 2008 interest and otherborrowing expenses decreased $11.0 and $15.6, respectively. These decreaseswere due to lower average debt balances and lower borrowing rates as summarizedin the table below:

 
| ** **                                   | ** ** | Three months  ending June 30 |   | Six months  ending June 30 | ** ** |
|----------------------------------------------|------------|---------------------------------------------|--------|-------------------------------------------|------------|
|                                         |       |                                        |   |                                      |       |
| Interest and  borrowing expenses - 2007      |       | $                                           | 51.5   |                                      | $          | 101.9 |   |
|                                         |       |                                        |   |                                      |       |
| Lower average  balances                      |       | (3.9                                        | )      | (7.0                                      | )          |
| Lower borrowing  rates                       |       | (7.1                                        | )      | (8.6                                      | )          |
|                                         |       |                                        |   |                                      |       |
| Interest and  borrowing expenses – 2008 |       | $                                           | 40.5   |                                      | $          | 86.3 |   |

 

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

 

Depreciation and other rental expenses increased in thesecond quarter and first half of 2008 from the comparable periods in 2007 dueto an increase in operating lease assets.

 

Insurance claims and other expenses decreased in the secondquarter and first half of 2008 from the comparable periods in 2007 as a resultof fewer contracts outstanding.

 

Second quarter and first half 2008 provision for losses onreceivables increased $13.0 and $21.5, respectively. These increases were dueto higher net credit losses as a slowing economy and higher fuel pricesnegatively affected truck operators in the U.S.

 

The Company’s effective income tax rates of 38.3% for thesecond quarter and 38.4% for the first half of 2008 were comparable to theprior periods in 2007.

 

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

 

##### **Allowancefor Losses**

 
| ** **                                                                                                                                                 | ** ** | **Six Months  Ended** | ** ** | Six Months  Ended |   | Year Ended  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------|--------|------------------|------------|
| ** **                                                                                                                                                 | ** ** | **June 30**           | ** ** | June 30           |   | December 31 | ** ** |
| ** **                                                                                                                                                 | ** ** | **2008**                   | ** ** | 2007                   |   | 2007             | ** ** |
| Balance at  beginning of period                                                                                                                            | ** ** | **$**                      | **92.6**   |                   | $      | 86.9             |       | $ | 86.9 |   |
| Provision for  losses                                                                                                                                      | ** ** | **30.7**                   |       | 9.2                    |   | 24.4             |       |
| Credit losses                                                                                                                                              | ** ** | **(31.4**                  | **)**      | (7.1                   | )      | (20.7            | )          |
| Recoveries                                                                                                                                                 | ** ** | **.9**                     |       | 1.1                    |   | 2.0              |       |
| Balance at end  of period                                                                                                                                  | ** ** | **$**                      | **92.8**   |                   | $      | 90.1             |       | $ | 92.6 |   |
|                                                                                                                                                       |       |                       |       |                   |   |             |       |
| Ratios:                                                                                                                                                    |       |                       |       |                   |   |             |       |
|                                                                                                                                                       |       |                       |       |                   |   |             |       |
| Credit losses  net of recoveries ($30.5 in 2008) to average total portfolio ($4,324.6 in  2008) annualized at June 30, 2008 and 2007                  | ** ** | **1.42%**                  |       | .24%                   |   | .39%             |       |
|                                                                                                                                                       | ** ** | ** **                 |       |                   |   |             |       |
| Allowance for  losses ($92.8 in 2008) to period-end total portfolio ($4,290.2 in 2008)                                                                     | ** ** | **2.16%**                  |       | 1.77%                  |   | 1.99%            |       |
|                                                                                                                                                       | ** ** | ** **                 |       |                   |   |             |       |
| Period-end  retail loan and lease receivables past due, over 30 days, ($105.1 in 2008) to  period-end retail loan and lease receivables ($3,654.5 in 2008) | ** ** | **2.88%**                  |       | 1.10%                  |   | 2.80%            |       |

 

TheCompany’s portfolio is concentrated with customers in the heavy and medium dutytruck transportation industry.  Theportfolio is comprised of retail loans and leases, dealer wholesale financingand dealer master notes as follows:

 
| ** **                  | ** ** | **June 30  2008** | ** **  | June 30  2007 | ** ** | December 31  2007 | ** ** |
|-----------------------------|------------|------------------------|-------------|--------------------|------------|------------------------|------------|
| Retail loans                | ** ** | **$**                  | **2,480.3** | ** **         | **58%**    | ** **             | $          | 2,895.0 |   | 57% | ** ** | $ | 2,667.8 |   | 57% |   |
| Retail leases               | ** ** | **1,174.2**            | ** **  | **27%**            | ** ** | 1,246.0                |       | 25% | ** ** | 1,219.5 |   | 27% |   |
| Dealer wholesale  financing | ** ** | **401.3**              | ** **  | **9%**             | ** ** | 631.6                  |       | 12% | ** ** | 454.0 |   | 10% |   |
| Dealer master  notes        | ** ** | **234.4**              | ** **  | **6%**             | ** ** | 305.9                  |       | 6% | ** ** | 301.6 |   | 6% |   |
| Total portfolio             | ** ** | **$**                  | **4,290.2** | ** **         | **100%**   | ** **             | $          | 5,078.5 |   | 100% | ** ** | $ | 4,642.9 |   | 100% |   |

 

In the first half of2008, credit losses net of recoveries increased to $30.5 compared to $6.0 forthe first six months of 2007.  Aneconomic slowdown together with higher fuel costs have resulted in increases inpast due receivables and credit losses 

 

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as certain truck owners have experienced diminishedoperating profits and cashflows which have decreased their ability to maketimely payments. The percentage of retail loan and lease receivables past dueover 30 days was 2.88% as of June 30, 2008 compared to 2.80% at December 31,2007 and 1.10% for the same period end in 2007. The allowance for losses as apercentage of the total portfolio increased to 2.16% at June 30, 2008 from1.99% at year-end 2007 and 1.77% at June 30, 2007.

 

Theestimation methods and factors considered for determining the allowance duringthe periods included in this filing have been consistently applied. There havebeen no significant changes in customer contract terms during the periods.

 

**CompanyOutlook**

 

Theprofitability of the Company is principally dependent on the generation of newbusiness volume and the related spread between asset yields and borrowingcosts, as well as the level of credit losses experienced. Assets are not likelyto increase until the new truck retail sales market recovers. The Company hasthe potential of being impacted by reduced liquidity in the capital markets butdoes not anticipate the impact of reduced market liquidity to materially impactits ability to generate new business volume (see Funding and Liquidity below).The Company continues to be impacted by a slower economy and higher fuelcosts.  These factors may continue toexert negative pressure on the profit margins of truck operators resulting inhigher past-due accounts and increased credit losses due to increasedrepossessions.

 

**Fundingand Liquidity**

 

TheCompany periodically registers debt securities under the Securities Act of 1933for offering to the public. In 2006,the Company filed a new shelf registration statement. The registration expiresin 2009 and does not limit the principal amount of debt securities that may beissued during the period.

 

The Company’s investment grade credit ratings continue toprovide access to capital markets at competitive interest rates. The Company’s credit ratings enabled it to meet itsfunding requirements despite continued disturbance in certain credit marketsduring the second quarter of 2008. The Company believes it will be able to fund receivables,service debt and meet its other payment obligations through internallygenerated funds, and access to public and private debt markets.

 

The Company’s debt ratings at June 30, 2008****are asfollows:

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

 

The Company’s strong credit ratings are primarily based onPACCAR’s operating cash flow, demand for its quality products and substantialfinancial assets.

 

TheCompany participates with PACCAR and certain other PACCAR affiliates insyndicated credit facilities of $3,000 at June 30, 2008. Of thisamount, $2,000 expires in June 2009 and $1,000 expires in 2012.PACCAR intends to replace these credit facilities as they expire withfacilities of similar amounts.

 

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Creditfacilities of $2,040 are available for use by the Company and/or PACCAR andcertain other PACCAR affiliates. The remaining $960 is allocated to thefollowing subsidiaries: $455 is only available for use by PACCAR’sCanadian financial subsidiary, $400 is only available for use by PACCAR’sMexican subsidiary, and $105 is only available for use by PACCAR’sAustralian financial subsidiary. These credit facilities are used to providebackup liquidity for the Company’s commercial paper and maturing medium-termnotes. The Company is liable only for its own borrowings under these creditfacilities. There were no borrowings under these credit facilities in the sixmonths ended June 30, 2008 and the year ended December 31, 2007.

 

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

 

**ForwardLooking Statements**

 

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

 

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

 

There have been nomaterial changes in the Company’s market risk during the six months ended June 30,2008. For additional information, refer to the market risk disclosure in Item7A as presented in the Company’s 2007 Annual Report on Form 10-K.

 

**ITEM 4 & 4T.**

 

**CONTROLS AND PROCEDURES**

 

Anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the principal executive officer andprincipal financial officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures (as defined in rules 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934, asamended) as of June 30, 2008 (“Evaluation Date”). Based on thatevaluation, the principal executive officer and principal financial officer ofthe Company concluded that the disclosure controls and procedures in place atthe Company are effective to ensure that information required to be disclosedby the Company, including its consolidated subsidiaries (the Company has nosubsidiaries), in reports that the Company files or submits under the ExchangeAct, is recorded, processed, summarized and reported on a timely basis inaccordance with applicable rules and regulations. During the secondquarter of 2008, the Company implemented a new consolidation systemfor financial reporting. This implementation involved changes to internalprocesses and procedures over financial reporting, but the internalcontrols over financial reporting did not materially change. There have been nosignificant changes in the Company’s internal control over financial reportingthat occurred during the fiscal quarter covered by this quarterly report thathave materially affected, or are reasonably likely to materially affect,internal control over financial reporting.

 

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**PART II – OTHER INFORMATION**

 

For items 1 and 5, therewas no reportable information during the six months ended June 30, 2008.

 

Items 2, 3 and 4 areomitted pursuant to Form 10-Q General Instructions (H)(1)(A) and (B).

 
| **ITEM 1A.** | **RISK FACTORS**                                                                                                                                                                                                                                           |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** **                                                                                                                                                                                                                                                 |
| ** **   | For  information regarding risk factors, refer to Part I, Item 1A as  presented in the 2007 Annual Report on Form 10-K. There have been no  material changes in the Company’s risk factors during the six months ended  June 30, 2008. |
| ** **   | ** **                                                                                                                                                                                                                                                 |
| **ITEM 6.**  | **EXHIBITS**                                                                                                                                                                                                                                               |
| ** **   | ** **                                                                                                                                                                                                                                                 |
| ** **   | Any exhibits filed herewith are listed in the accompanying index to  exhibits.                                                                                                                                                                             |

 

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**SIGNATURES**

 

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

 

 
|   | ** PACCAR Financial Corp.** |
|--------|----------------------------------|
|   |                             | (Registrant) |
|   |                             |
|   |                             |
| Date   | August 1, 2008              |   | By | /s/ Timothy M. Henebry |
|   |                             |  Timothy M.  Henebry |
|   |                             |  President |
|   |                             |  (Authorized  Officer) |
|   |                             |
|   |                             |
|   | By                               | /s/ Nanette C. Anderson |
|   |                             |  Nanette C.  Anderson |
|   |                             |  Controller |
|   |                             |  (Chief Accounting  Officer) |
|        |                                  |  |  |  |  |

 

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**EXHIBIT INDEX**

 

3                                          Articlesof incorporation and bylaws:

 

(a)          Restated Articles of Incorporationof the Company, as amended (incorporated by reference to Exhibit 3.1 tothe Company’s Annual Report on Form 10-K dated March 26, 1985.Amendment incorporated by reference to Exhibit 19.1 to the Company’sQuarterly Report on Form 10-Q dated August 13, 1985, File Number0-12553).

 

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

 

4                                          Instrumentsdefining the rights of security holders, including indentures:

 

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

 

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

 

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

 

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

 

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

 

10                                    Materialcontracts:

 

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

 

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12                                    Statementsre computation of ratios:

 

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

 

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

 

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

 

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

 

(a)          Certification ofPrincipal Executive Officer.

 

(b)         Certification ofPrincipal Financial Officer.

 

32                                    Section 1350Certifications:

 

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

 

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