PACCAR FINANCIAL CORP - FORM 10-Q - November 7, 2011

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended September 30, 2011

Commission File No. 001-11677

PACCAR FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Washington   91-6029712
(State of incorporation)   (I.R.S. Employer Identification No.)
777 – 106th Ave. N.E., Bellevue, Washington   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) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer:  ¨              Accelerated filer:  ¨              Non-accelerated filer:  x              Smaller reporting company:  ¨

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

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

Common Stock, $100 par value—145,000 shares as of October 31, 2011

THE REGISTRANT IS A WHOLLY OWNED INDIRECT SUBSIDIARY OF PACCAR INC (“PACCAR”) AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H)(1)(a) and (b) OF FORM 10-Q AND IS, THEREFORE, FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 

 

 

Table of Contents

PACCAR FINANCIAL CORP. - FORM 10-Q

 

INDEX

 

          Page  
PART I. FINANCIAL INFORMATION:   
    ITEM 1.    FINANCIAL STATEMENTS:   

Statements of Income and Retained Earnings—
Three and Nine Months Ended September  30, 2011 and 2010 (Unaudited)

      3   

Balance Sheets—
September 30, 2011 (Unaudited) and December 31, 2010

      4   

Statements of Cash Flows—
Nine Months Ended September  30, 2011 and 2010 (Unaudited)

      5   

Notes to Financial Statements (Unaudited)

      6   
    ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      19   
    ITEM 4.    CONTROLS AND PROCEDURES      26   
PART II. OTHER INFORMATION:   
    ITEM 1A.    RISK FACTORS      26   
    ITEM 6.    EXHIBITS      26   
SIGNATURES      27   
EXHIBIT INDEX      28   

 

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Table of Contents

PACCAR FINANCIAL CORP. - FORM 10-Q

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Statements of Income and Retained Earnings (Unaudited)

(Millions of Dollars)

    Three Months Ended
September 30		      Nine Months Ended
September 30		  
       2011             2010              2011              2010      

Interest and fee income

    $ 42.9      $ 44.9       $ 126.3       $ 140.7   

Operating lease and rental revenues

      59.9        47.4         165.8         140.2   

Used truck sales and other revenues

      8.1        10.0         23.6         30.5   
  

 

 

    

 

 

     

 

 

     

 

 

  
          

TOTAL INTEREST AND OTHER REVENUE

      110.9        102.3         315.7         311.4   
  

 

 

    

 

 

     

 

 

     

 

 

  
          

Interest and other borrowing costs

      16.2        23.3         50.8         74.8   

Depreciation and other rental expenses

      48.4        38.9         132.7         121.1   

Cost of used truck sales and other expenses

      5.8        9.6         18.0         29.6   

Selling, general and administrative expenses

      10.5        10.4         31.6         30.2   

(Benefit) provision for losses on receivables

      (.5 )      4.0         2.3         16.4   
  

 

 

    

 

 

     

 

 

     

 

 

  
          

TOTAL EXPENSES

      80.4        86.2         235.4         272.1   
  

 

 

    

 

 

     

 

 

     

 

 

  
          

INCOME BEFORE INCOME TAXES

      30.5        16.1         80.3         39.3   
          

Income taxes

      12.2        6.2         31.2         10.9   
  

 

 

    

 

 

     

 

 

     

 

 

  
          

NET INCOME

      18.3        9.9         49.1         28.4   
          

RETAINED EARNINGS AT BEGINNING OF PERIOD

      537.4        481.0         506.6         462.5   
          

Dividend paid

      150.0           150.0      
  

 

 

    

 

 

     

 

 

     

 

 

  
          

RETAINED EARNINGS AT END OF PERIOD

    $ 405.7      $ 490.9       $ 405.7       $ 490.9   
  

 

 

    

 

 

     

 

 

     

 

 

  

Earnings per share and dividends per share are not reported because the Company is a wholly owned subsidiary of PACCAR Financial Services Corporation (“PFSC”).

See Notes to Financial Statements.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

BALANCE SHEETS

(Millions of Dollars)

    September 30
2011		     December 31
2010*		  
     (Unaudited)        

ASSETS

     
    

Cash

    $ 7.5      $ 10.4   

Finance and other receivables, net of allowance for losses
(2011 - $60.8 and 2010 - $61.7)

      3,162.9        2,771.5   

Due from PACCAR Inc and affiliates

      406.5        440.5   

Equipment on operating leases, net of accumulated depreciation
(2011 - $301.5 and 2010 - $258.0)

      881.4        666.9   

Other assets

      150.5        58.6   
  

 

 

    

 

 

  
    

TOTAL ASSETS

    $ 4,608.8      $ 3,947.9   
  

 

 

    

 

 

  
    

LIABILITIES

     
    

Accounts payable, accrued expenses and other

    $ 181.6      $ 118.9   

Due to PACCAR Inc and affiliates

      442.8        417.9   

Commercial paper

      1,356.1        995.6   

Medium-term notes

      1,350.6        1,125.2   

Deferred taxes and other liabilities

      546.5        472.6   
  

 

 

    

 

 

  
    

TOTAL LIABILITIES

    $ 3,877.6      $ 3,130.2   
  

 

 

    

 

 

  
    

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

      290.6        275.6   

Retained earnings

      405.7        506.6   

Accumulated other comprehensive loss

      (10.6 )      (10.0 ) 
  

 

 

    

 

 

  
    

TOTAL STOCKHOLDER’S EQUITY

    $ 731.2      $ 817.7   
  

 

 

    

 

 

  
    

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

    $ 4,608.8      $ 3,947.9   
  

 

 

    

 

 

  

 

* The December 31, 2010 balance sheet has been derived from audited financial statements.

See Notes to Financial Statements.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

STATEMENT OF CASH FLOWS (Unaudited)

(Millions of Dollars)

    Nine Months Ended September 30  
   2011     2010  

OPERATING ACTIVITIES

     
    

Net income

    $       49.1      $ 28.4   

Items included in net income not affecting cash:

     

Depreciation and amortization

      113.9        106.7   

Provision for losses on receivables

      2.3        16.4   

Deferred tax provision

      46.9        (51.7 ) 

Administrative fees for services from PFSC

      15.0        13.0   

Increase in payables and other

      57.4        30.2   
  

 

 

    

 

 

  
    

NET CASH PROVIDED BY OPERATING ACTIVITIES

      284.6        143.0   
    

INVESTING ACTIVITIES

     
    

Finance and other receivables originated

      (1,039.7 )      (629.2 ) 

Collections on finance and other receivables

      853.3        876.5   

Net increase in wholesale receivables

      (216.8 )      (18.3 ) 

Net decrease (increase) in loans and leases to PACCAR Inc and affiliates

      46.1        (82.7 ) 

Acquisition of equipment on operating leases, primarily from PACCAR Inc

      (393.2 )      (104.5 ) 

Proceeds from disposal of equipment

      68.5        114.2   

Other

      (62.2 )      (32.0 ) 
  

 

 

    

 

 

  
    

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

      (744.0 )      124.0   
    

FINANCING ACTIVITIES

     
    

Net increase (decrease) in commercial paper

      360.5        (608.7 ) 

Proceeds from medium-term notes

      549.5        549.7   

Payments of medium-term notes

      (323.5 )      (225.0 ) 

Advances from PACCAR Inc

      20.0     

Dividends paid

      (150.0 )   
  

 

 

    

 

 

  
    

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

      456.5        (284.0 ) 
  

 

 

    

 

 

  
    

NET DECREASE IN CASH

      (2.9 )      (17.0 ) 
    

CASH AT BEGINNING OF PERIOD

      10.4        19.7   
  

 

 

    

 

 

  
    

CASH AT END OF PERIOD

    $ 7.5      $ 2.7   
  

 

 

    

 

 

  

See Notes to Financial Statements.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

NOTE A – Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes included in PACCAR Financial Corp.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2010.

New Accounting Pronouncements: In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 gives additional guidance to companies to assist in determining troubled debt restructurings. The Company adopted ASU 2011-02 in the third quarter of 2011; the implementation of this amendment resulted in additional disclosure (see Note B) but did not have a significant impact on the Company’s financial statements.

Reclassifications: The Company made the following reclassifications to the prior year to conform to the 2011 presentation. The Company has reclassified the impairment losses related to repossession of equipment on operating lease from “Provision for losses on receivables” to “Depreciation and other rental expenses” in the Statements of Income and Statements of Cash Flows. There is no change to the Statement of Income for the three months ended September 30, 2010. The impacts of the reclassification to the Statements of Income and Statements of Cash Flows for the nine months ended September 30, 2010 are as follows:

 

                 Nine Months Ended September 30, 2010   
                 Before         After   

Statements of Income

            

Depreciation and other rental expenses

          $ 120.4       $ 121.1   

Provision for losses on receivables

                17.1         16.4   
           
           
     Nine Months Ended September 30, 2010   
                 Before         After   

Statements of Cash Flows

            

Operating Activities

            

Depreciation and amortization

          $ 106.0       $ 106.7   

Provision for losses on receivables

                17.1         16.4   

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

The Company has reclassified the proceeds from the sale of trucks acquired from the repossession of retail loans from “Collections on finance and other receivables” to “Proceeds from disposal of equipment” in the Statements of Cash Flows as follows:

 

     Nine Months Ended September 30, 2010  
     Before      After  

Statements of Cash Flows

      

Investing Activities

      

Collections on finance and other receivables

    $ 925.6       $ 876.5   

Proceeds from disposal of equipment

      65.1         114.2   

NOTE B – Finance and Other Receivables

The Company’s finance and other receivables include the following:

 

     September 30     December 31  
     2011     2010  

Retail loans

    $ 1,671.3      $ 1,509.5   

Retail direct financing leases

      1,072.3        1,068.6   

Dealer wholesale financing

      483.8        267.0   

Dealer master notes

      71.9        70.4   

Interest and other receivables

      28.8        27.9   

Unearned interest - finance leases

      (104.4 )      (110.2 ) 
  

 

 

    

 

 

  

Total portfolio

      3,223.7        2,833.2   

Less allowance for losses:

     

Loans, leases and other

      (58.1 )      (60.2 ) 

Dealer wholesale financing

      (2.7 )      (1.5 ) 
  

 

 

    

 

 

  

Total portfolio, net of allowance for losses

    $ 3,162.9      $ 2,771.5   
  

 

 

    

 

 

  

Recognition of interest income and rental revenue is suspended (put on non-accrual status) when the receivable becomes more than 90 days past the contractual due date or earlier if some other event causes the Company to determine that collection is not probable. Accordingly, there were no finance receivables more than 90 days past due still accruing interest at September 30, 2011 or December 31, 2010. Recognition is resumed if the receivable becomes contractually current by the payment of all amounts due under the terms of the existing contract and collection of amounts is considered probable (if not modified), or after the customer has made scheduled payments for three months and collection of remaining amounts is considered probable (if contractually modified). Payments received while the finance receivable is impaired or on non-accrual status are applied to interest and principal in accordance with the contractual terms.

Allowance for Credit Losses

The Company continuously monitors the performance of all its finance receivables by reviewing payment performance. In addition, for large customers and dealer wholesale financing accounts, the Company regularly monitors their financial statements and makes appropriate customer contact. If the Company becomes aware of circumstances with those customers or dealers that could lead to financial difficulty, whether or not they are past-due, the accounts are placed on a watch list. In determining the allowance for credit losses, loans and finance leases are evaluated together since they relate to a similar customer base and their contractual terms require regular payment of principal and interest generally over 36 to 60 months and they are secured by the same type of collateral.

 

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Table of Contents

PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

The Company collectively and individually evaluates its finance receivables and the allowance for credit losses consists of both general and specific reserves.

The Company individually evaluates certain finance receivables for impairment. Finance receivables, which are evaluated individually, consist of customers on non-accrual status, all wholesale accounts and certain large retail accounts with past-due balances or that otherwise are deemed to be at a higher risk of credit loss, and loans and finance leases which have been modified as troubled debt restructurings. A receivable is considered impaired if it is probable the Company will be unable to collect all contractual interest and principal payments as scheduled. Impaired receivables are individually evaluated to determine the amount of impairment and these receivables are considered collateral dependent. Accordingly, the evaluation of individual reserves is based on the fair value less costs to sell the associated collateral. When the underlying collateral fair value exceeds the Company’s loss exposure, no individual reserve is recorded. The Company uses a pricing model to value the underlying collateral on a quarterly basis. The fair value of the collateral is determined based on management’s evaluation of numerous factors such as the make, model and year of the equipment, overall condition of the equipment, primary method of distribution for the equipment, recent sales prices of comparable equipment and economic trends affecting used equipment values.

For finance receivables that are evaluated collectively, the Company determines the allowance for credit losses for both retail and wholesale receivables based on historical loss information, using past-due account data and current market conditions. Information used includes assumptions regarding the likelihood of collecting current and past-due accounts, repossession rates and the recovery rate on the underlying collateral based on used truck values and other pledged collateral or recourse. The Company has developed a range of loss estimates based on historical experience, taking into account loss frequency and severity in both strong and weak truck market conditions. A projection is made of the range of estimated credit losses inherent in the portfolio from which an amount is determined as probable based on current market conditions and other factors impacting the creditworthiness of the Company’s borrowers and their ability to repay. The projected amount is then compared to the allowance for credit loss balance and an appropriate adjustment is made.

The provision for losses on finance receivables is charged to income based on management’s estimate of incurred credit losses, net of recoveries, inherent in the portfolio. Accounts are charged-off against the allowance for credit losses when, in the judgment of management, they are considered uncollectible (generally upon repossession of the collateral). Typically the timing between the repossession process and when a receivable is charged-off is not significant. In cases where repossession is delayed (i.e. for legal reasons), the Company will record partial charge-offs. The charge-off is determined by comparing the fair value of the collateral less costs to sell to the recorded investment.

The Company’s allowance for credit losses is segregated into two portfolio segments, wholesale and retail. A portfolio segment is the level at which the Company develops a systematic methodology for determining its allowance for credit losses. The wholesale segment includes wholesale financing loans to dealers that are collateralized by the trucks being financed. The retail segment includes retail loans and direct financing leases, net of unearned interest, which are also collateralized by the trucks financed.

The wholesale segment risk characteristics differ from those in the retail segment. For wholesale receivables the terms are shorter in duration and the Company requires monthly reporting of the dealer’s financial condition, conducts periodic physical audits of the trucks being financed and in many cases, obtains personal guarantees or other security such as dealership assets to reduce the risk of loss compared to retail receivables.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

The allowance for credit losses is summarized as follows:

     2011  
     Wholesale      Retail     Total  

Balance at January 1

    $ 1.5       $ 60.2      $ 61.7   

Provision for losses

      1.2         1.1        2.3   

Charge offs

         (5.5 )      (5.5 ) 

Recoveries

         2.3        2.3   
  

 

 

     

 

 

    

 

 

  

Balance at September 30

    $ 2.7       $ 58.1      $ 60.8   
  

 

 

     

 

 

    

 

 

  
Information regarding finance receivables summarized by those evaluated collectively and individually is as follows:   
At September 30, 2011    Wholesale      Retail     Total  

Recorded investment for impaired finance receivables evaluated individually

    $         $ 58.0      $ 58.0   

Allowance for finance receivables evaluated individually

    $         $ 19.8      $ 19.8   

Recorded investment for finance receivables evaluated collectively

    $     483.8       $     2,653.1      $     3,136.9   

Allowance for finance receivables evaluated collectively

    $ 2.7       $ 38.3      $ 41.0   
At December 31, 2010    Wholesale      Retail     Total  

Recorded investment for impaired finance receivables evaluated individually

    $         $ 92.6      $ 92.6   

Allowance for finance receivables evaluated individually

    $         $ 25.4      $ 25.4   

Recorded investment for finance receivables evaluated collectively

    $ 267.0       $ 2,445.7      $ 2,712.7   

Allowance for finance receivables evaluated collectively

    $ 1.5       $ 34.8      $ 36.3   

The recorded investment for finance receivables as of September 30, 2011 that are on non-accrual status in the wholesale, fleet and owner/operator portfolio classes, as defined below was nil, $42.5 and $6.7, respectively. The recorded investment for finance receivables as of December 31, 2010 on non-accrual status, was nil, $53.8 and $12.7, respectively.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

Impaired Loans

The Company’s impaired loans are segregated by portfolio class. A portfolio class of receivables is a subdivision of a portfolio segment with similar measurement attributes, risk characteristics and common methods to monitor and assess credit risk. The Company’s retail segment is subdivided into the fleet and owner/operator classes. Fleet consists of retail accounts with customers operating more than five trucks. All others are owner/operator.

All impaired loans have a specific reserve and are summarized as follows:

 

At September 30, 2011

    Wholesale      Fleet     Owner /
Operator		     Total  

Impaired loans with specific reserve

    $                    $  10.1      $ 8.0      $ 18.1   

Associated allowance

         (2.1 )      (1.7 )      (3.8 ) 
  

 

 

     

 

 

    

 

 

    

 

 

  

Net carrying amount of impaired loans

    $                    $ 8.0      $ 6.3      $  14.3   

Unpaid principal balance

    $                    $ 10.1      $ 8.0      $ 18.1   

Average recorded investment*

    $                    $ 11.7      $ 11.3      $ 23.0   

Interest income recognized on a cash basis:

          

Three months ended September 30, 2011

    $                    $ .1      $ .1      $ .2   

Nine months ended September 30, 2011

    $                    $ .3      $ .5      $ .8   
         

*  Represents the average during the 12 months ended September 30, 2011.

 

          

At December 31, 2010

    Wholesale      Fleet     Owner /
Operator		     Total  

Impaired loans with specific reserve

    $                    $ 11.9      $ 13.0      $ 24.9   

Associated allowance

         (2.4 )      (3.3 )      (5.7 ) 
  

 

 

     

 

 

    

 

 

    

 

 

  

Net carrying amount of impaired loans

    $                    $ 9.5      $ 9.7      $ 19.2   

Unpaid principal balance

    $                    $ 11.9      $ 13.0      $ 24.9   

Credit Quality

The Company’s customers are principally concentrated in the transportation industry in the United States. The Company retains as collateral a security interest in the related equipment.

At the inception of each contract, the Company considers the credit risk based on a variety of credit quality indicators, including prior payment experience, customer financial information, credit-rating agency ratings and loan-to-value ratios. On an ongoing basis, the Company monitors the credit quality based on past-due status and collection experience as the Company has found a meaningful correlation between the past-due status of customers and the risk of loss.

The tables below summarize the Company’s financing receivables by credit quality indicator and portfolio class. Performing accounts are paying in accordance with the contractual terms and are not considered to be of high risk. Watch accounts primarily include accounts more than 30 days and less than 90 days past-due and other large high risk accounts that are not impaired.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

At-risk includes customer accounts that are impaired, including accounts more than 90 days past-due.

 

At September 30, 2011

    Wholesale      Fleet      Owner /
Operator		      Total  

Performing

    $ 483.8       $   2,281.2       $   354.2       $   3,119.2   

Watch

         17.5         .2         17.7   

At-risk

         49.6         8.4         58.0   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 483.8       $ 2,348.3       $ 362.8       $ 3,194.9   
  

 

 

     

 

 

     

 

 

     

 

 

  

At December 31, 2010

    Wholesale      Fleet      Owner /
Operator		      Total  

Performing

    $ 259.7       $ 2,009.2       $ 407.5       $ 2,676.4   

Watch

      7.3         28.2         .8         36.3   

At-risk

         79.4         13.2         92.6   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 267.0       $ 2,116.8       $ 421.5       $ 2,805.3   
  

 

 

     

 

 

     

 

 

     

 

 

  

The tables below summarize the Company’s financing receivables by aging category. In determining past due status, the Company considers the entire contractual account balance past due when any installment is over 30 days past-due. Customer accounts that were greater than 30 days past due prior to modification became current upon modification for aging purposes.

 

At September 30, 2011

    Wholesale      Fleet      Owner /
Operator		      Total  

Current and up to 30 days past-due

    $ 483.8       $   2,310.7       $   356.9       $   3,151.4   

31 – 60 days past-due

         .8         .4         1.2   

Greater than 60 days past-due

         36.8         5.5         42.3   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 483.8       $ 2,348.3       $ 362.8       $ 3,194.9   
  

 

 

     

 

 

     

 

 

     

 

 

  

At December 31, 2010

    Wholesale      Fleet      Owner /
Operator		      Total  

Current and up to 30 days past-due

    $ 259.7       $ 2,065.4       $ 410.5       $ 2,735.6   

31 – 60 days past-due

      7.3         2.8         1.7         11.8   

Greater than 60 days past-due

         48.6         9.3         57.9   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 267.0       $ 2,116.8       $ 421.5       $ 2,805.3   
  

 

 

     

 

 

     

 

 

     

 

 

  

Troubled Debt Restructurings

The Company modifies loans and finance leases as a normal part of its operations. The Company’s modifications typically resulted in granting more time to pay the contractual amounts owed. When the Company modifies loans and finance leases for customers in financial difficulty and grants a concession, the modifications are classified as troubled debt restructurings (TDRs). The Company rarely forgives principal or accrued interest and may require principal and accrued interest payments at the time of modification. For the three and nine months ended September 30, 2011, there was no change in the recorded investment for loans and leases modified as TDRs.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

At modification date, the post-modification recorded investment balance was:

 

 

Post-Modification Recorded Investment

    Fleet      Owner /
Operator		      Total  

Three Months Ended September 30, 2011

    $ 2.5       $ .5       $ 3.0   

Nine Months Ended September 30, 2011

    $ 8.8       $ 2.1       $
 10.9
   

The balance of TDRs was $9.9 at September 30, 2011 and $2.1 at December 31, 2010.

As a result of adopting the amendments in ASU 2011-02, the Company reassessed all modifications that occurred during the past nine months for identification as TDRs. The Company identified as TDRs certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology and identified these receivables as impaired. Included in finance receivables evaluated individually for impairment are loans identified as TDRs, some of which are loans evaluated as a pool to measure the specific reserve. At September 30, 2011, the recorded investment in loans for which the allowance for credit losses was previously measured under the general allowance for credit losses methodology that are now impaired under the new guidance was $1.4. The allowance for credit losses associated with these loans, on the basis of a current evaluation of loss, was $.1.

The recorded investment of finance receivables modified during the previous twelve months as TDRs that subsequently defaulted in the three and twelve months ended September 30, 2011 is as follows:

 

Recorded Investment

    Fleet      Owner /
Operator		      Total  

Three Months Ended September 30, 2011

    $            $ .1       $     .1   

Twelve Months Ended September 30, 2011

    $            $ .1       $     .1   

These TDRs that subsequently defaulted (i.e., became more than 30 days past due) did not significantly impact the Company’s reserve at September 30, 2011.

Repossessions

When the Company determines that a customer in default is not likely to meet their contractual commitments, the Company repossesses vehicles which serve as collateral for loans, finance leases and equipment on operating lease. The Company records the repossessed vehicles as used truck inventory included in “Other assets” on the Balance Sheets. The balance of repossessed inventory at September 30, 2011 and December 31, 2010 was $.5 and $1.0, respectively. Proceeds from the sales of repossessed assets were $15.0 and $49.1 for the nine months ended September 30, 2011 and 2010, respectively. These amounts are included in “Proceeds from disposal of equipment” on the Statements of Cash Flows. Write-downs of repossessed equipment on operating leases are recorded as impairments and included in “Depreciation and other rental expenses” on the Statements of Income.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

Unamortized loan origination cost

The unamortized loan origination costs at September 30, 2011 and December 31, 2010 was $9.9 and $9.3, respectively. This amount is included in “Other assets” on the Balance Sheets.

NOTE C – Transactions with PACCAR and Affiliates

The Company and PACCAR are parties to a Support Agreement that obligates PACCAR to provide, when required, financial assistance to the Company to ensure that the Company maintains a ratio of net earnings available for fixed charges to fixed charges (as defined in the Support Agreement) of at least 1.25 to 1 for any fiscal year. The required ratio for the nine months ended September 30, 2011 and full year 2010 was met without assistance. The Support Agreement also requires PACCAR to own, directly or indirectly, all outstanding voting stock of the Company.

Periodically, the Company makes loans to, borrows from and has intercompany transactions with PACCAR. In addition, the Company periodically loans funds to certain foreign finance and leasing affiliates of PACCAR. These various affiliates have Support Agreements with PACCAR, similar to the Company’s Support Agreement. The foreign affiliates operate in the United Kingdom, The Netherlands, Mexico, Canada and Australia, and any resulting currency exposure is fully hedged. The foreign affiliates primarily provide financing and leasing of PACCAR-manufactured trucks and related equipment sold through DAF’s, Kenworth’s and Peterbilt’s independent dealer networks in Europe, Mexico, Canada and Australia. The Company will not make loans to the foreign affiliates in excess of the equivalent of $500.0 United States dollars, unless the amount in excess of such limit is guaranteed by PACCAR. The Company periodically reviews the funding alternatives for these affiliates, and these limits may be revised in the future.

PACCAR loaned the Company $20.0 during the first nine months of 2011 with an effective fixed interest rate of 2.99%, and $395.0 during 2009 with an effective fixed interest rate of 6.67%. Of the $415.0 in loans, $197.0 matures in 2012 and $218.0 matures in 2014.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

Amounts outstanding at September 30, 2011 and December 31, 2010, including foreign finance affiliates operating in The Netherlands, Mexico, Australia and Canada, are summarized below:

 

       September 30  
2011		        December 31  
2010		  

Due from PACCAR Inc and affiliates

      

Loans due from PACCAR Inc

    $ 222.0       $ 228.6   

Loans due from foreign finance affiliates

      158.6         197.6   

Direct financing leases due from affiliate

      12.4         12.9   

Receivables

      13.5         1.4   
  

 

 

     

 

 

  

Total

    $ 406.5       $ 440.5   
  

 

 

     

 

 

  

Due to PACCAR Inc and affiliates

      

Loans due to PACCAR Inc

    $ 415.0       $ 395.0   

Payables

      27.8         22.9   
  

 

 

     

 

 

  

Total

    $ 442.8       $ 417.9   
  

 

 

     

 

 

  

The Company provides direct financing leases to a dealer location operated by an affiliate of PACCAR.

PFSC charges the Company for certain administrative services it provides and certain services the Company receives indirectly from PACCAR. The costs are charged to the Company based upon the Company’s specific use of the services at PFSC’s or PACCAR’s cost. Management considers these charges similar to the costs that would be incurred if the Company were on a stand-alone basis. PFSC recognizes these administrative services as an additional investment in the Company. The Company records the investment as additional paid-in capital.

The Company declared and paid a dividend of $150.0 during the third quarter of 2011. There were no dividends declared or paid during the first six months of 2011 or during the full year of 2010.

The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR). The Company also leases office space from one facility owned by PACCAR and five facilities leased by PACCAR.

The Company’s employees and PACCAR employees are covered by a defined benefit pension plan sponsored by PACCAR. The assets and liabilities of the plan are reflected on the balance sheets of PACCAR. PACCAR contributes to the plan and allocates the expenses to the Company based principally on the number of eligible plan participants. Expenses for the defined benefit pension plan are included in selling, general and administrative expenses.

The Company’s employees and PACCAR employees are also covered by a defined contribution plan, sponsored by PACCAR. Expenses incurred by the Company for the defined contribution plan benefits are based on the actual contribution made on the behalf of participating employees and are included in selling, general and administrative expenses.

NOTE D – Stockholder’s Equity

Preferred Stock

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

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

Other Comprehensive Income

The components of other comprehensive income (OCI) were as follows:

 

     Three Months
Ended
September 30		     Nine Months
Ended
September 30		  
     2011     2010     2011     2010  

Net income

    $ 18.3      $ 9.9      $ 49.1      $ 28.4   

Other comprehensive income:

         

Unrealized (loss) gain on derivative contracts

      (4.6 )      3.2        (1.0 )      19.7   

Tax effect

      1.7        (1.2 )      .4        (7.6 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  
     (2.9 )      2.0        (.6 )      12.1   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total comprehensive income

    $ 15.4      $ 11.9      $ 48.5      $ 40.5   
  

 

 

    

 

 

    

 

 

    

 

 

  

The unrealized net loss on derivative contracts in the three and nine months ended September 30, 2011, respectively, was due to a decrease in the fair market value of the Company’s floating to fixed interest rate swap contracts.

Accumulated other comprehensive loss of $(10.6) and $(10.0) at September 30, 2011 and December 31, 2010, respectively, is comprised of the unrealized net loss on derivative contracts, net of taxes.

NOTE E – Fair Value Measurements

Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy of fair value measurements is described below:

Level 1 – Valuations are based on quoted prices that the Company has the ability to obtain in actively traded markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, valuation of these instruments does not require a significant degree of judgment. The Company has no financial instruments valued under Level 1 criteria.

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

Level 3 – Valuations are based on model-based techniques for which some or all of the assumptions are obtained from indirect market information that is significant to the overall fair value measurement and which require a significant degree of management judgment. The Company has no financial instruments valued under Level 3 criteria.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

Derivative contracts are measured on a recurring basis. Impaired loans and used trucks held for sale are measured on a non-recurring basis. These assets and liabilities are outlined in the table below:

 

Level 2

          September 30      
2011		            December 31      
2010		  

Assets:

      

Impaired loans

    $ 14.3       $ 19.2   

Used trucks held for sale

      26.4         6.2   

Derivative contracts

         2.1   

Liabilities:

      

Derivative contracts

    $ 17.2       $ 17.8   

Used Trucks Held for Sale: The carrying amount of used trucks held for sale is written down as necessary to reflect their fair value. The Company determines the fair value of used trucks from a pricing model, which is based on the market approach. The significant observable inputs into the valuation model are recent sales prices of comparable units, the condition of the vehicles and the number of similar units to be sold. Used truck impairments were nil and $3.7 during the first nine months of 2011 and 2010, respectively, and were recorded in depreciation and other rental expenses. These assets are categorized as Level 2 and are included in “Other assets” on the Balance Sheets.

Derivative Financial Instruments: The Company’s derivative financial instruments consist of interest rate contracts and are carried at fair value. These derivative contracts are over the counter and their fair value is determined using industry standard valuation models, which are based on the income approach. The significant inputs into the valuation models include market inputs such as interest rates and credit default swap spreads. These contracts are categorized as Level 2 and are included in “Other assets” and “Accounts payable, accrued expenses and other” on the Balance Sheets.

The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below:

Cash: The carrying amount reported in the Balance Sheets is stated at fair value.

Net Receivables: For floating rate loans, wholesale financing, and interest and other receivables, fair values approximate carrying values. For fixed rate loans that were not impaired, fair values are estimated using discounted cash flow analysis based on current rates for comparable loans. Finance lease receivables and the related loss provisions have been excluded from the accompanying table.

Commercial Paper and Medium-Term Notes: The carrying amounts of the Company’s commercial paper and floating-rate medium-term notes approximate their fair value. A portion of the Company’s fixed-rate term notes has been converted to variable-rate term notes using fair value hedges for interest rate risk. Fair value of fixed-rate term notes is determined using modeling techniques that include market inputs for interest rates.

Accounts Payable, Accrued Expenses and Other: Carrying amounts approximate fair value and have been excluded from the accompanying table.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

The carrying amount and fair value of fixed rate loans and fixed rate debt are as follows:

 

     September 30
2011		      December 31
2010		  
     Carrying
Amount		      Fair Value      Carrying
Amount		      Fair
Value		  

Assets:

            

Fixed rate loans

    $   1,614.8       $   1,642.4       $   1,488.6       $   1,517.6   

Liabilities:

            

Due to PACCAR Inc

    $ 415.0       $ 448.7       $ 395.0       $ 440.0   

Fixed rate debt

      900.6         908.9         501.7         509.5   

NOTE F – Derivative Financial Instruments

Interest rate contracts involve the exchange of fixed for floating rate or floating for fixed rate interest payments based on the contractual notional amounts in a single currency. The Company is exposed to interest rate risk caused by market volatility as a result of its borrowing activities. The objective of these contracts is to mitigate the fluctuations on earnings, cash flows and the fair value of borrowings. Net amounts paid or received are reflected as adjustments to interest expense. The notional amount is used to measure the volume of these contracts and does not represent exposure to credit loss. In the event of default by the counterparty, the risk in these transactions is the fair value of replacing the interest rate contract at current market rates.

At September 30, 2011, the notional amount of these contracts totaled $1,204.5 with amounts expiring over the next five years. Notional maturities for all interest rate contracts are $87.5 for the remainder of 2011, $204.0 for 2012, $447.5 for 2013, $304.5 for 2014, $139.0 for 2015 and $22.0 for 2016. The majority of these contracts are floating to fixed swaps that effectively convert an equivalent amount of commercial paper and other variable rate debt to fixed rates.

The following table presents the balance sheet locations and fair value of derivative financial instruments:

 

     September 30
2011		      December 31
2010		  

Interest-rate contracts

    Assets      Liabilities      Assets      Liabilities  

Other assets

    $            $ 2.1      

Accounts payable, accrued expenses and other

       $ 17.2          $ 17.8   

Cash Flow Hedges

Substantially all of the Company’s interest rate contracts have been designated as cash flow hedges. The Company uses regression analysis to assess the effectiveness of hedges. The change in variable cash flows method or the hypothetical derivative method is used to measure ineffectiveness of interest rate contracts designated as cash flow hedges. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income to the extent such hedges are considered effective. Gains or losses on the ineffective portion of cash flow hedges are recognized currently in earnings and were immaterial for the nine months ended September 30, 2011 and 2010.

Amounts in accumulated other comprehensive income are reclassified into net income in the same period in which the hedged transaction affects earnings. Net realized gains and losses from interest rate contracts are recognized as an adjustment to interest expense.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

 

Notes to Financial Statements (Unaudited)    (Millions of Dollars)

 

 

Of the $10.6, net of tax, included in accumulated other comprehensive loss as of September 30, 2011, $6.6, net of tax, is expected to be reclassified to interest expense in the following 12 months. The fixed interest earned on finance receivables will offset the amount recognized in interest expense, resulting in a stable interest margin consistent with the Company’s interest rate risk management strategy.

The following table presents the pre-tax effects of derivative instruments designated as cash flow hedges recognized into accumulated Other Comprehensive Income (OCI) and into the Statements of Income:

 

     Three Months Ended
September 30		     Nine Months Ended
September 30		  
     2011     2010     2011     2010  

Pre-tax loss on derivative contracts recognized in
Other comprehensive Income

    $ (9.5 )    $ (5.9 )    $ (16.7 )    $ (15.2 ) 

Expenses reclassified from accumulated OCI into
Interest and other borrowing expenses

    $ 4.9      $ 9.1      $ 15.7      $ 34.9   

(Income) expense recognized in income on derivative contracts (ineffective portion):
Interest and other borrowing expenses

    $        $        $        $     

Fair Value Hedges

Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings together with the changes in fair value of the hedged item attributable to the risk being hedged. The (income) or expense recognized in earnings related to fair value hedges was as follows:

 

     Three Months Ended
September 30		     Nine Months Ended
September 30		  
     2011     2010     2011     2010  

Interest-rate swaps

    $        $ (2.1 )    $ .1      $ (3.4 ) 

Term notes

    $ (.1 )    $ 2.1      $ (.2 )    $ 3.5   

In addition, the net interest income from the settlement of the interest-rate swaps was nil and $.6 for the nine months ended September 30, 2011 and 2010, respectively.

NOTE G – INCOME TAXES

The Company’s effective income tax rate was 40.0% for the third quarter of 2011 compared to 38.5% for the third quarter of 2010. The Company’s effective tax rate was 38.9% for the first nine months of 2011 compared to 27.7% for the first nine months of 2010, as the first nine months of 2010 reflected a favorable effect of a change in the estimated average state income tax rate in the first quarter of 2010.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

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

 

     Three Months Ended
September 30		      Nine Months Ended
September 30		  
   2011      2010      % Change      2011      2010      % Change  

New business volume by product:

                  

Retail loans and direct financing leases

    $ 375.1       $ 225.3         66%       $ 871.4       $ 509.7         71%   

Equipment on operating leases

      106.2         31.1         241%         393.7         104.8         276%   

Dealer master notes

      59.2         58.6         1%         171.9         113.7         51%   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  
   $ 540.5       $ 315.0         72%       $ 1,437.0       $ 728.2         97%   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Average earning assets by product:

                  

Retail loans and direct financing leases

    $   2,572.7       $   2,438.0         6%       $   2,502.3       $   2,533.2         (1%)   

Equipment on operating leases

      870.3         660.8         32%         773.5         673.3         15%   

Dealer wholesale financing

      447.7         306.2         46%         374.2         300.0         25%   

Dealer master notes

      60.6         74.9         (19%)         63.9         81.2         (21%)   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  
   $ 3,951.3       $ 3,479.9         14%       $ 3,713.9       $ 3,587.7         4%   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Revenue by product:

                  

Retail loans and direct financing leases

    $ 37.2       $ 39.1         (5%)       $ 110.3       $ 123.7         (11%)   

Equipment on operating leases

      59.9         47.4         26%         165.8         140.2         18%   

Dealer wholesale financing

      3.3         2.6         27%         8.1         7.4         9%   

Dealer master notes

      .4         .7         (43%)         1.4         2.3         (39%)   

Used truck sales, other revenues and fees

      10.1         12.5         (19%)         30.1         37.8         (20%)   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  
   $ 110.9       $ 102.3         8%       $ 315.7       $ 311.4         1%   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Net income

    $ 18.3       $ 9.9         85%       $ 49.1       $ 28.4         73%   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Results of Operations

New Business Volume

New business volume in the third quarter and first nine months of 2011 increased 72% and 97%, respectively, from the third quarter and first nine months of 2010 due to higher retail sales of PACCAR trucks in 2011 and higher finance market share. Equipment on operating lease new business volume in the third quarter and first nine months of 2011 increased to $106.2 and $393.7 from $31.1 and $104.8 in the third quarter and first nine months of 2010, respectively. This increase was attributable to increased fleet business in 2011.

Net Income

The Company’s net income was $18.3 for the third quarter of 2011 compared to $9.9 for the third quarter of 2010. The increase in net income for the quarter was primarily the result of a higher finance margin of $5.1, a lower provision for credit losses of $4.5 and a higher operating lease margin of $3.0.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

The Company’s net income was $49.1 for the first nine months of 2011 compared to $28.4 for the first nine months of 2010. The increase in net income for the first nine months was primarily the result of a lower provision for credit losses of $14.1, a higher operating lease margin of $14.0 and higher finance margin of $9.6.

Revenue and Expenses

Interest and other revenue in the third quarter of 2011 increased $8.6 to $110.9 from $102.3 in the third quarter of 2010. The increase was due to higher operating lease and rental revenue, partially offset by declines in interest and fee income and lower used truck sales and other revenue.

Interest and other revenue in the first nine months of 2011 increased $4.3 to $315.7 from $311.4 in the first nine months of 2010. The increase was due to higher operating lease and rental revenue, partially offset by declines in interest and fee income and lower used truck sales and other revenue.

Finance margin increased in the third quarter of 2011 compared to the third quarter of 2010 as summarized below:

 

     Interest
and Fee Income		     Interest and Other
Borrowing Costs		     Finance Margin  

Three Months Ended September 30, 2010

    $ 44.9      $ 23.3      $ 21.6   

Increase (decrease)

       

Average finance receivables

      4.2          4.2   

Yields

      (6.2 )        (6.2 ) 

Average debt balances

        3.2        (3.2 ) 

Borrowing rates

        (10.3 )      10.3   
  

 

 

    

 

 

    

 

 

  

Total (decrease) increase

      (2.0 )      (7.1 )      5.1   
  

 

 

    

 

 

    

 

 

  

Three Months Ended September 30, 2011

    $ 42.9      $ 16.2      $ 26.7   
  

 

 

    

 

 

    

 

 

  

Average finance receivables for the third quarter of 2011 increased as a result of new business volume exceeding collections. The reduction in average loan and direct finance lease yields in the third quarter of 2011 was due to lower market interest rates. The average yield in the third quarter of 2011 was 5.52%, down from 6.32% in the third quarter of 2010.

The increase in average debt balances for the third quarter of 2011 was due to an increase in the average asset portfolio of $261.9 resulting in higher funding requirements. Average borrowing rates in the third quarter of 2011 declined to 2.22% from 3.63% in the third quarter of 2010 primarily due to lower market interest rates and a higher mix of commercial paper debt.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

Finance margin increased in the first nine months of 2011 compared to the first nine months of 2010 as summarized below:

 

      Interest
    and Fee Income    		     Interest and Other
Borrowing Costs		     Finance Margin  

Nine Months Ended September 30, 2010

    $ 140.7      $ 74.8      $ 65.9   

Increase (decrease)

       

Average finance receivables

      1.2          1.2   

Yields

      (15.6 )        (15.6 ) 

Average debt balances

        1.2        (1.2 ) 

Borrowing rates

        (25.2 )      25.2   
  

 

 

    

 

 

    

 

 

  

Total (decrease) increase

      (14.4 )      (24.0 )      9.6   
  

 

 

    

 

 

    

 

 

  

Nine Months Ended September 30, 2011

    $ 126.3      $ 50.8      $ 75.5   
  

 

 

    

 

 

    

 

 

  

Average finance receivables for the first nine months of 2011 increased as a result of new business volume exceeding collections. The reduction in average loan and direct finance lease yields in the first nine months of 2011 was due to lower market interest rates. The average yield in 2011 was 5.74%, down from 6.46% in the first nine months of 2010.

The increase in average debt balances of $53.6 for the first nine months of 2011 was due to an increase in the average asset portfolio of $26.0 resulting in higher funding requirements. Average borrowing rates in the first nine months of 2011 declined to 2.55% from 3.84% in the first nine months of 2010 primarily due to lower market interest rates and a higher mix of commercial paper debt.

Operating lease margin increased in the third quarter of 2011 compared to the third quarter of 2010 as summarized below:

 

     Operating Lease and
Rental Revenues		      Depreciation
and Other
Rental Expenses		     Operating
Lease Margin		  

Three Months Ended September 30, 2010

    $ 47.4       $ 38.9      $ 8.5   

Increase (decrease)

        

(Gains) / losses on returned lease assets

         (1.8 )      1.8   

Average operating lease assets

      11.5         9.1        2.4   

Revenue and cost per asset

      1.0         2.2        (1.2 ) 
  

 

 

     

 

 

    

 

 

  

Total increase

      12.5         9.5        3.0   
  

 

 

     

 

 

    

 

 

  

Three Months Ended September 30, 2011

    $ 59.9       $ 48.4      $ 11.5   
  

 

 

     

 

 

    

 

 

  

Average operating lease assets increased due to high operating lease volume in the third quarter of 2011. Gains on returned leased assets were higher due to stronger used truck values.

 

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Operating lease margin increased in the first nine months of 2011 compared to the first nine months of 2010 as summarized below:

 

     Operating Lease and
Rental Revenues		      Depreciation
and Other
Rental Expenses		     Operating
Lease Margin		  

Nine Months Ended September 30, 2010

    $ 140.2       $ 121.1      $ 19.1   

Increase (decrease)

        

Operating lease impairments

         (.7 )      .7   

(Gains) / losses on returned lease assets

         (10.4 )      10.4   

Average operating lease assets

      14.2         11.1        3.1   

Revenue and cost per asset

      11.4         11.6        (.2 ) 
  

 

 

     

 

 

    

 

 

  

Total increase

      25.6         11.6        14.0   
  

 

 

     

 

 

    

 

 

  

Nine Months Ended September 30, 2011

    $ 165.8       $ 132.7      $ 33.1   
  

 

 

     

 

 

    

 

 

  

Gains on returned leased assets were higher in the first nine months of 2011 compared to the first nine months of 2010 due to stronger used truck values. Average operating lease assets increased due to higher operating lease volume during the first nine months of 2011.

Used truck sales and other revenue and Cost of used truck sales and other expenses decreased in the third quarter and first nine months of 2011 due to lower sales of used trucks acquired from PACCAR truck division customers as part of new truck sales packages.

Used truck inventory increased to $26.4 at September 30, 2011 from $6.2 at December 31, 2010 primarily due to scheduled returns of units at the end of lease term.

The provision for losses on receivables in the first nine months of 2011 decreased to $2.3 from $16.4 in the first nine months of 2010 primarily due to improvements in the performance of the portfolio reflecting stronger freight demand. In the third quarter of 2011, the Company reduced the allowance for credit losses by $1.0 which resulted in a net benefit to the provision of $.5 for the quarter.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

The following table summarizes information on the Company’s allowance for losses on receivables and asset portfolio and presents related ratios:

Allowance for Losses

 

     Nine Months Ended
September 30 2011		     Year Ended
December 31 2010		     Nine Months Ended
September 30 2010		  

Balance at beginning of period

    $ 61.7      $ 75.7      $ 75.7   

Provision for losses

      2.3        17.1        16.4   

Charge offs

      (5.5 )      (36.0 )      (31.9 ) 

Recoveries

      2.3        4.9        3.7   
  

 

 

    

 

 

    

 

 

  

Balance at end of period

    $ 60.8      $ 61.7      $ 63.9   
  

 

 

    

 

 

    

 

 

  
      

Ratios:

       
      

Charge offs, net of recoveries ($3.2 in 2011) to average total portfolio ($2,940.4 in 2011) annualized at September 2011

      0.15%        1.08%        1.29%   
      

Allowance for losses ($60.8 in 2011) to period-end total portfolio ($3,223.7 in 2011)

      1.89%        2.18%        2.26%   
      

Period-end retail loan and lease receivables past due, over 30 days, ($43.5 in 2011) to period-end retail loan and lease receivables ($2,668.0 in 2011)

      1.63%        2.50%        3.20%   

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

 

     September 30
2011		      December 31
2010		      September 30
2010		  

Retail loans

    $   1,700.1           53%       $   1,537.4           54%       $     1,497.0         53%   

Retail leases

      967.9         30%         958.4         34%         957.0         34%   

Dealer wholesale financing

      483.8         15%         267.0         9%         294.0         10%   

Dealer master notes

      71.9         2%         70.4         3%         77.5         3%   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total portfolio

    $ 3,223.7         100%       $ 2,833.2         100%       $ 2,825.5         100%   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

In the first nine months of 2011, charge offs, net of recoveries decreased $25.0 to $3.2 from $28.2 in the first nine months of 2010 due to improved economic conditions, higher used truck values and stronger underwriting practices, which resulted in fewer repossessions and a lower loss per repossession.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

Retail loan and lease receivables past due over 30 days at September 30, 2011 was 1.63%, a decrease from 2.50% at December 31, 2010 and a decrease from 3.20% at September 30, 2010. Included in the September 30, 2011 past-due percentage is 1.25% related to one large customer. Excluding that customer, the past due percentage would have been .38% at September 30, 2011, compared to .85% at December 31, 2010 and 1.44% at September 30, 2010. At September 30, 2011, the Company had $19.8 of specific loss reserves for all accounts considered to be at-risk, including the above referenced large customer. The Company continues to focus on past-due balances. The allowance for losses as a percentage of the total portfolio decreased to 1.89% at September 30, 2011 from 2.18% as of December 31, 2010, reflecting improved operating conditions and cash flows for its customers. When the Company modifies a 30+ days past-due account, the customer is considered current under the revised contractual terms. The effect on total 30+ days past-dues from such modifications was not significant.

Retail loans increased to $1,700.1 compared to $1,537.4 at December 31, 2010, due to higher new truck sales in the first nine months of 2011.

Retail leases increased to $967.9 compared to $958.4 at December 31, 2010, due to new business volume exceeding collections.

Dealer wholesale financing balances increased to $483.8 at September 30, 2011 compared to $267.0 at December 31, 2010, as dealers increased new truck inventory.

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

The Company’s effective income tax rate was 40.0% for the third quarter of 2011 compared to 38.5% for the third quarter of 2010. The Company’s effective tax rate was 38.9% for the first nine months of 2011 compared to 27.7% for the first nine months of 2010, as the first nine months of 2010 reflected a favorable effect of a change in the estimated average state income tax rate in the first quarter of 2010.

Company Outlook

Average earning assets in the fourth quarter of 2011 are expected to increase modestly from current levels. For 2012, average earning assets are projected to grow approximately 5-10% due to increased new business financing from slightly higher truck sales in the U.S. The Company’s customers are benefiting from increased freight tonnage and fleet utilization that are contributing to improvements in customers’ productivity as well as profitability. If current freight transportation conditions continue, past-due accounts, truck repossessions and net charge-offs in 2012 could be comparable to or improve slightly from 2011 amounts. See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect this outlook.

Funding and Liquidity

The Company’s debt ratings at September 30, 2011 are as follows:

 

     Standard
and Poor’s		    Moody’s

Commercial paper

    A-1    P-1

Senior unsecured debt

    A+    A1

Any decrease in these credit ratings could negatively impact the Company’s ability to access capital markets at competitive interest rates and the Company’s ability to maintain liquidity and financial stability.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

The Company periodically registers debt securities under the Securities Act of 1933 for offering to the public. In November 2009, the Company filed a shelf registration statement to issue medium-term notes. The shelf registration statement expires in 2012 and does not limit the principal amount of debt securities that may be issued during the period. The total notional amount of medium-term notes outstanding for the Company as of September 30, 2011 was $1,350.0.

PACCAR loaned the Company $395.0 during 2009 and $20.0 during the first quarter of 2011. Of the $415.0 in loans, $197.0 matures in 2012 and $218.0 matures in 2014.

The Company believes it will be able to fund receivables, service debt and meet its other payment obligations through internally generated funds, access to public and private debt markets, and advances from PACCAR.

The Company participated with PACCAR and certain other PACCAR affiliates in syndicated credit facilities of $3,000 at September 30, 2011. Of this amount, $1,000 expires in June 2012, $1,000 expires in 2013 and $1,000 expires in 2016. PACCAR and the Company intend to replace these credit facilities as they expire with facilities of similar amounts. Credit facilities of $2,110 are available for use by the Company and/or PACCAR and certain other PACCAR affiliates. The remaining $890 is allocated to the following subsidiaries: $310 is available for use by PACCAR’s Canadian financial subsidiary, $200 is available for use by PACCAR’s Mexican financial subsidiaries, $170 is available for use by PACCAR’s Australian financial subsidiary and $210 is available for use by PACCAR’s United Kingdom financial subsidiary. These credit facilities are used to provide backup liquidity for the Company’s commercial paper and maturing medium-term notes. The Company is liable only for its own borrowings under these credit facilities. There were no borrowings under these credit facilities in the nine months ended September 30, 2011 and the year ended December 31, 2010.

The Company issues commercial paper for a portion of its funding. Some of this commercial paper is converted to fixed interest rate debt through the use of interest rate swaps, which are used to manage interest rate risk. In the event of future disruption in the financial markets, the Company may not be able to issue replacement commercial paper. As a result, the Company is exposed to liquidity risk from the maturity of short-term borrowings paid to lenders compared to the timing of receivable collections from customers. The Company believes its cash balances and investments, syndicated bank lines, current investment-grade credit ratings of A+/A1 and its ability to borrow from PACCAR, if necessary, will continue to provide it with sufficient resources and access to capital markets at competitive interest rates and therefore contribute to the Company maintaining its liquidity and financial stability.

Other information on liquidity, sources of capital, and contractual cash commitments as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”) continues to be relevant.

Forward Looking Statements

Certain information presented in this Form 10-Q contains forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995, which are subject to risks and uncertainties that may affect actual results. Risks and uncertainties include, but are not limited to: national and local economic, political and industry conditions; changes in the levels of new business volume due to unit fluctuations in new PACCAR truck sales; changes in competitive factors; changes affecting the profitability of truck owners and operators, including fuel costs; price changes impacting equipment costs and residual values; changes in costs, credit ratings or other factors that would affect financing costs; insufficient liquidity in the capital markets and availability of other funding sources; and legislation and governmental regulation.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

Item 3 is omitted pursuant to Form 10-Q General Instructions (H)(2)(c).

 

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no significant changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

For Items 1 and 5, there was no reportable information during the nine months ended September 30, 2011.

Items 2, 3 and 4 are omitted pursuant to Form 10-Q General Instructions (H)(2)(b).

 

ITEM 1A. RISK FACTORS

For information regarding risk factors, refer to Part I, Item 1A as presented in the 2010 Annual Report on Form 10-K. There have been no material changes in the Company’s risk factors during the nine months ended September 30, 2011.

 

ITEM 6. EXHIBITS

Any exhibits filed herewith are listed in the accompanying index to exhibits.

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

SIGNATURES

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

 

   

PACCAR Financial Corp.

        (Registrant)

Date November 7, 2011   By  

/s/    Todd R. Hubbard

    Todd R. Hubbard
    President
    (Authorized Officer)
  By  

/s/    Craig C. McGlinchey

    Craig C. McGlinchey
    Controller
    (Chief Accounting Officer)

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

EXHIBIT INDEX

Exhibits (in order of assigned index numbers)

 

Exhibit
Number

     

Exhibit Description

   

Form

   

Date of First Filing

   

Exhibit
Number

   

File Number

(3)

         Articles of incorporation and by-laws:            
   (a)      Restated Articles of Incorporation of the Company    10-K    March 26, 1985    3.1    001-11677
   (b)      Amendment to Articles of Incorporation of the Company    10-Q    August 13, 1985    19.1    001-11677
   (c)      By-laws of the Company    10-Q    October 20, 1983    3.2    001-11677

(4)

         Instruments defining the rights of security holders, including indentures:
   (a)      Indenture for Senior Debt Securities dated as of November 20, 2009 between the Company and The Bank of New York Mellon Trust Company, N.A.    10-K    February 26, 2010    4(c)    001-11677
   (b)      Forms of Medium-Term Note, Series M    S-3    November 20, 2009    4.2 and 4.3    333-163273
   (c)      Form of InterNotes, Series A    S-3    November 20, 2009    4.4    333-163273

(10)

         Material contracts:
   (a)      Support Agreement between the Company and PACCAR dated as of June 19, 1989    S-3    June 23, 1989    28.1    33-29434

(12)

         Statements re: computation of ratios:
   (a)      Computation of ratio of earnings to fixed charges of the Company pursuant to SEC reporting requirements for the nine month periods ended September 30, 2011 and 2010
   (b)      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, 2011 and 2010

 

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PACCAR FINANCIAL CORP. - FORM 10-Q

 

Exhibit
Number

     

Exhibit Description

   

Form

   

Date of First Filing

   

Exhibit
Number

   

File Number

(31)

         Rule 13a-14(a)/15d-14(a) Certifications:
   (a)      Certification of Principal Executive Officer
   (b)      Certification of Principal Financial Officer

(32)

         Section 1350 Certifications:
   (a)      Certification pursuant to rule 13a-14(b) and section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350)

(101.INS)*

      XBRL Instance Document

(101.SCH)*

      XBRL Taxonomy Extension Schema Document

(101.CAL)*

      XBRL Taxonomy Extension Calculation Linkbase Document

(101.DEF)*

      XBRL Taxonomy Extension Definition Linkbase Document

(101.LAB)*

      XBRL Taxonomy Extension Label Linkbase Document

(101.PRE)*

      XBRL Taxonomy Extension Presentation Linkbase Document

 

* Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.

 

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PACCAR FINANCIAL CORP Reports