Attached files
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 March 31, 2012
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 April 30, 2012
THE REGISTRANT IS A WHOLLY OWNED DIRECT 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.
PACCAR FINANCIAL CORP. - FORM 10-Q
INDEX
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PACCAR FINANCIAL CORP. - FORM 10-Q
PART I – FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
Earnings per share and dividends per share are not reported because the Company is a wholly owned subsidiary of PACCAR Inc.
See Notes to Financial Statements.
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PACCAR FINANCIAL CORP. - FORM 10-Q
|
(Millions of Dollars) |
March 31 2012 |
December 31 2011* |
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| (Unaudited) | ||||||||
| ASSETS |
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| Cash |
$ | 11.5 | $ | 33.2 | ||||
| Finance and other receivables, net of allowance for losses |
3,920.5 | 3,582.5 | ||||||
| Due from PACCAR Inc and affiliates |
636.7 | 627.7 | ||||||
| Equipment on operating leases, net of accumulated depreciation |
871.7 | 880.6 | ||||||
| Other assets |
176.9 | 126.1 | ||||||
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| TOTAL ASSETS |
$ | 5,617.3 | $ | 5,250.1 | ||||
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| LIABILITIES |
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| Accounts payable, accrued expenses and other |
$ | 232.1 | $ | 208.9 | ||||
| Due to PACCAR Inc and affiliates |
289.5 | 451.7 | ||||||
| Commercial paper |
1,787.9 | 1,779.2 | ||||||
| Medium-term notes |
1,848.0 | 1,350.3 | ||||||
| Deferred taxes and other liabilities |
689.8 | 709.0 | ||||||
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| TOTAL LIABILITIES |
$ | 4,847.3 | $ | 4,499.1 | ||||
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| STOCKHOLDER’S EQUITY |
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| Preferred stock, par value $100 per share, |
$ | 31.0 | $ | 31.0 | ||||
| Common Stock, par value $100 per share, |
14.5 | 14.5 | ||||||
| Additional paid-in capital |
101.7 | 101.7 | ||||||
| Retained earnings |
630.7 | 611.7 | ||||||
| Accumulated other comprehensive loss |
(7.9 | ) | (7.9 | ) | ||||
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| TOTAL STOCKHOLDER’S EQUITY |
$ | 770.0 | $ | 751.0 | ||||
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| TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY |
$ | 5,617.3 | $ | 5,250.1 | ||||
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| * | The December 31, 2011 balance sheet has been derived from audited financial statements. |
See Notes to Financial Statements.
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PACCAR FINANCIAL CORP. - FORM 10-Q
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
PACCAR Financial Corp. (the “Company”), is a wholly-owned subsidiary of PACCAR Inc (“PACCAR”). The Company primarily provides financing of PACCAR-manufactured trucks and related equipment sold by authorized dealers. The Company also finances dealer inventories of transportation equipment and franchises Kenworth and Peterbilt dealerships to engage in full-service and finance leasing. The operations of the Company are fundamentally affected by its relationship with PACCAR. In 2000, PACCAR transferred the stock of the Company to PACCAR Financial Services Corporation (“PFSC”), a wholly-owned subsidiary of PACCAR. In December 2011, PFSC was dissolved by means of a statutory merger with and into PACCAR Financial Corp., making the Company a direct subsidiary of PACCAR Inc.
The merger was accounted for using the pooling of interest method because the Company and PFSC were under common control of PACCAR Inc. Under this method of accounting, the results and cash flows of the pre-merged Company and PFSC and their assets and liabilities are combined at the amounts at which they were previously recorded as if they had been part of the Company since the beginning of the periods shown. There was no material impact to the financial statements for all periods presented.
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 Annual Report on Form 10-K for the year ended December 31, 2011.
New Accounting Pronouncements: In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. While many of the amendments are clarifications to the existing guidance and are intended to align U.S. GAAP and IFRS, the ASU changes some fair value measurement principles and disclosure requirements. The Company adopted ASU 2011-04 in the first quarter of 2012. The impact of adoption reduced the allowance for credit loss for the impaired finance receivables by $2.5 at March 31, 2012, including $1.9 for impaired leases and $.6 for impaired loans.
The FASB issued ASU 2011-05 in July 2011, Presentation of Comprehensive Income, which was subsequently amended by ASU 2011-12 in December 2011. The new guidance requires entities to present components of net income and other comprehensive income in either a combined financial statement or in two separate but consecutive statements of net income and comprehensive income. The Company adopted ASU 2011-05 in the first quarter of 2012 and has elected to present components of net income combined with a total for comprehensive income in a single continuous statement in its interim financial statements. The Company is currently evaluating which method to adopt in the annual financial statements.
-6-
PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
NOTE B – Finance and Other Receivables
The Company’s finance and other receivables are as follows:
| March 31 2012 |
December 31 2011 |
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| Retail loans |
$ | 1,903.9 | $ | 1,807.2 | ||||
| Retail direct financing leases |
1,251.7 | 1,245.1 | ||||||
| Dealer wholesale financing |
828.4 | 576.5 | ||||||
| Dealer master notes |
85.7 | 104.2 | ||||||
| Interest and other receivables |
35.0 | 33.0 | ||||||
| Unearned interest - finance leases |
(126.2 | ) | (124.7 | ) | ||||
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| Total portfolio |
3,978.5 | 3,641.3 | ||||||
| Less allowance for losses: |
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| Loans, leases and other |
(52.9 | ) | (55.4 | ) | ||||
| Dealer wholesale financing |
(5.1 | ) | (3.4 | ) | ||||
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| Total portfolio, net of allowance for losses |
$ | 3,920.5 | $ | 3,582.5 | ||||
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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 March 31, 2012 or December 31, 2011. 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 remaining 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 payment performance of all its finance receivables. The Company evaluates its finance receivables collectively and, in some cases, individually. For large customers and dealers with wholesale financing, the Company regularly reviews their financial statements and makes site visits and phone contacts as appropriate. If the Company becomes aware of circumstances that could cause those customers or dealers to face financial difficulty, whether or not they are past due, the customers are placed on a watch list.
The Company may modify loans and finance leases for commercial reasons or for credit reasons for customers having difficulty making payments under the contract terms. When considering whether to modify customer accounts, the Company thoroughly evaluates the creditworthiness of the customers and modifies accounts that the Company considers likely to perform under the modified terms. It is rare for the Company to grant credit modifications for customers that do not meet minimum underwriting standards since the Company normally repossesses the financed equipment in these circumstances. The Company’s credit modifications for customers that do not meet minimum underwriting standards are classified as troubled debt restructurings (TDRs). On average, modifications extend contractual terms less than three months. Modifications did not have a significant effect on the weighted average term or interest rate of the portfolio. When granting modifications, the Company rarely forgives principal or interest or reduces interest rates.
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PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
The Company has developed a systematic methodology for determining the allowance for credit losses for its two portfolio segments, retail and wholesale. The retail segment includes retail loans and direct finance leases, net of unearned interest. The wholesale segment includes wholesale financing loans to dealers that are collateralized by the trucks being financed. The wholesale segment generally has less risk than the retail segment. Wholesale receivables are shorter in duration than retail receivables, and the Company requires monthly reporting of the wholesale dealer’s financial condition, conducts periodic audits of the trucks being financed and in many cases, obtains personal guarantees or other security such as dealership assets. The allowance for credit losses consists of both specific and general 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, certain large retail accounts with past-due balances or that otherwise are determined to be at a higher risk of credit loss, and loans and leases which have been modified as TDRs. A receivable is considered impaired if it is probable the Company will be unable to collect all contractual interest and principal payments as scheduled. Large balance impaired receivables are individually evaluated to determine the appropriate reserve for losses. Wholesale accounts are individually evaluated and when there are no indicators of impairment, the allowance for losses is determined collectively. Small balance impaired receivables with similar risk characteristics are evaluated as a separate pool. Impaired receivables are considered collateral dependent. Accordingly, the evaluation of individual reserves considers the fair value of the associated collateral (estimated sales proceeds less the costs to sell). When the underlying collateral fair value exceeds the Company’s loss exposure, no individual reserve is recorded. The Company uses a pricing model to assist in valuing the underlying collateral and categorizes the fair value as Level 2 in the hierarchy of fair value measurement. The pricing model is reviewed quarterly and updated as appropriate. The pricing model considers the make, model and year of the equipment as well as recent sales prices of comparable equipment. The fair value of the collateral is determined based on management’s evaluation of numerous factors such as the pricing model value, overall condition of the equipment, whether the Company will dispose of the equipment through its principal market, as well as economic trends affecting used equipment values.
For finance receivables that are evaluated collectively, the Company determines the general allowance for credit losses 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, 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 amount is then compared to the allowance for credit loss balance (after charge-offs for the current period) and an appropriate adjustment is made. In determining the general allowance for credit losses, loans and finance leases are evaluated together since they relate to a similar customer base, 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.
After determining the appropriate level of the allowance for credit losses, the provision for losses on finance receivables is charged to income as necessary to reflect 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 uncollectable (generally upon repossession of the collateral). Typically the timing between the repossession and charge-off is not significant. In cases where repossession is delayed (e.g., for legal proceedings), the Company records partial charge-offs. The charge-off is determined by comparing the fair value of the collateral, less cost to sell, to the recorded investment.
-8-
PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
The allowance for credit losses is summarized as follows:
| 2012 | ||||||||||||
| Wholesale | Retail | Total | ||||||||||
| Balance at January 1 |
$ | 3.4 | $ | 55.4 | $ | 58.8 | ||||||
| Provision for losses |
1.7 | .1 | 1.8 | |||||||||
| Charge offs |
(2.6 | ) | (2.6 | ) | ||||||||
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| Balance at March 31 |
$ | 5.1 | $ | 52.9 | $ | 58.0 | ||||||
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| 2011 | ||||||||||||
| Wholesale | Retail | Total | ||||||||||
| Balance at January 1 |
$ | 1.5 | $ | 60.2 | $ | 61.7 | ||||||
| Provision for losses |
.1 | 1.4 | 1.5 | |||||||||
| Charge offs |
(2.2 | ) | (2.2 | ) | ||||||||
| Recoveries |
.7 | .7 | ||||||||||
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| Balance at March 31 |
$ | 1.6 | $ | 60.1 | $ | 61.7 | ||||||
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When the Company adopted ASU 2011-04, Fair Value Measurement in the first quarter of 2012, the Company removed the block discount adjustment to the collateral value of the impaired finance receivables. The impact of the adjustment reduced the allowance for credit loss by $2.5 at March 31, 2012, including $1.9 for impaired leases and $.6 for impaired loans.
Information regarding finance receivables evaluated and determined collectively and individually is as follows:
| At March 31, 2012 | Wholesale | Retail | Total | |||||||||
| Recorded investment for impaired finance receivables evaluated individually |
$ | $ | 46.4 | $ | 46.4 | |||||||
| Allowance for impaired finance receivables determined individually |
$ | $ | 14.9 | $ | 14.9 | |||||||
| Recorded investment for finance receivables evaluated collectively |
$ | 828.4 | $ | 3,068.7 | $ | 3,897.1 | ||||||
| Allowance for finance receivables determined collectively |
$ | 5.1 | $ | 38.0 | $ | 43.1 | ||||||
-9-
PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
| At December 31, 2011 | Wholesale | Retail | Total | |||||||||
| Recorded investment for impaired finance receivables evaluated individually |
$ | $ | 52.0 | $ | 52.0 | |||||||
| Allowance for impaired finance receivables determined individually |
$ | $ | 18.2 | $ | 18.2 | |||||||
| Recorded investment for finance receivables evaluated collectively |
$ | 576.5 | $ | 2,979.8 | $ | 3,556.3 | ||||||
| Allowance for finance receivables determined collectively |
$ | 3.4 | $ | 37.2 | $ | 40.6 | ||||||
The recorded investment of finance receivables that are on non-accrual status in the wholesale segment and fleet and owner/operator portfolio classes (see impaired loans below) as of March 31, 2012, are nil, $39.7 and $6.5, as compared to nil, $44.2 and $7.4 as of December 31, 2011, respectively.
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 below. The impaired loans with specific reserve represent the unpaid principal loan balance.
| At March 31, 2012 |
Wholesale | Fleet | Owner/ Operator |
Total | ||||||||||||
| Impaired loans with specific reserve |
$ | $ | 10.0 | $ | 6.1 | $ | 16.1 | |||||||||
| Associated allowance |
(2.4 | ) | (1.6 | ) | (4.0 | ) | ||||||||||
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| Net carrying amount of impaired loans |
$ | $ | 7.6 | $ | 4.5 | $ | 12.1 | |||||||||
| At December 31, 2011 |
Wholesale | Fleet | Owner/ Operator |
Total | ||||||||||||
| Impaired loans with specific reserve |
$ | $ | 10.8 | $ | 7.1 | $ | 17.9 | |||||||||
| Associated allowance |
(2.4 | ) | (1.8 | ) | (4.2 | ) | ||||||||||
| Net carrying amount of impaired loans |
$ | $ | 8.4 | $ | 5.3 | $ | 13.7 | |||||||||
| At March 31, 2012 |
Wholesale | Fleet | Owner/ Operator |
Total | ||||||||||||
| Average recorded investment* |
$ | $ | 10.4 | $ | 8.0 | $ | 18.4 | |||||||||
| Interest income recognized on a cash basis** |
$ | $ | .1 | $ | .2 | $ | .3 | |||||||||
| * | Represents the average during the 12 months ended March 31, 2012. |
| ** | Represents the amounts recognized during the three months ended March 31, 2012. |
-10-
PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
| At March 31, 2011 |
Wholesale | Fleet | Owner/ Operator |
Total | ||||||||||||
| Average recorded investment* |
$ | $ | 15.1 | $ | 17.1 | $ | 32.2 | |||||||||
| Interest income recognized on a cash basis** |
$ | $ | .1 | $ | $ | .1 | ||||||||||
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| * | Represents the average during the 12 months ended March 31, 2011. |
| ** | Represents the amounts recognized during the three months ended March 31, 2011. |
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 criteria, including prior payment experience, customer financial information, agency credit ratings, loan-to-value ratios and other internal metrics. On an ongoing basis, the Company monitors the credit exposure 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 Company has three credit quality indicators: performing, watch and at-risk. Performing accounts pay in accordance with the contractual terms and are not considered high risk. Watch accounts are not impaired and include past-due and large high-risk accounts. At-risk accounts are accounts that are impaired, including TDRs, accounts over 90 days past-due and other accounts on non-accrual status. The Company uses historical data and expectations about the future to estimate default rates for each credit quality indicator.
The tables below summarize the Company’s financing receivables by credit quality indicator and portfolio class.
| At March 31, 2012 |
Wholesale | Fleet | Owner/ Operator |
Total | ||||||||||||
| Performing |
$ | 826.8 | $ | 2,707.6 | $ | 345.9 | $ | 3,880.3 | ||||||||
| Watch |
1.6 | 14.7 | .5 | 16.8 | ||||||||||||
| At-risk |
39.9 | 6.5 | 46.4 | |||||||||||||
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| Total |
$ | 828.4 | $ | 2,762.2 | $ | 352.9 | $ | 3,943.5 | ||||||||
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| At December 31, 2011 |
Wholesale | Fleet | Owner/ Operator |
Total | ||||||||||||
| Performing |
$ | 567.8 | $ | 2,606.5 | $ | 347.9 | $ | 3,522.2 | ||||||||
| Watch |
8.7 | 25.0 | .4 | 34.1 | ||||||||||||
| At-risk |
44.6 | 7.4 | 52.0 | |||||||||||||
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| Total |
$ | 576.5 | $ | 2,676.1 | $ | 355.7 | $ | 3,608.3 | ||||||||
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PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
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 become current upon modification for aging purposes.
| At March 31, 2012 |
Wholesale | Fleet | Owner/ Operator |
Total | ||||||||||||
| Current and up to 30 days past-due |
$ | 826.8 | $ | 2,733.0 | $ | 347.6 | $ | 3,907.4 | ||||||||
| 31 – 60 days past-due |
1.2 | .1 | .7 | 2.0 | ||||||||||||
| Greater than 60 days past-due |
.4 | 29.1 | 4.6 | 34.1 | ||||||||||||
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| Total |
$ | 828.4 | $ | 2,762.2 | $ | 352.9 | $ | 3,943.5 | ||||||||
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| At December 31, 2011 |
Wholesale | Fleet | Owner/ Operator |
Total | ||||||||||||
| Current and up to 30 days past-due |
$ | 567.8 | $ | 2,642.5 | $ | 350.1 | $ | 3,560.4 | ||||||||
| 31 – 60 days past-due |
8.6 | 1.4 | .9 | 10.9 | ||||||||||||
| Greater than 60 days past-due |
.1 | 32.2 | 4.7 | 37.0 | ||||||||||||
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| Total |
$ | 576.5 | $ | 2,676.1 | $ | 355.7 | $ | 3,608.3 | ||||||||
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Troubled Debt Restructurings
The Company modifies loans and finance leases as a normal part of its operations. The Company’s modifications typically result in granting more time to pay the contractual amounts owed and charging a fee and additional interest for the modification. The Company rarely forgives principal or accrued interest and may require principal and accrued interest payments at the time of modification. When the Company modifies loans and finance leases for customers in financial difficulty and grants a concession, the modifications are classified as TDRs. For the three months ended March 31, 2012, there was no change in the recorded investment for loans and leases modified as TDRs. At modification date, the pre-modification and post-modification recorded investment balances by portfolio class are as follows:
| For the three months ended March 31, 2012 |
Fleet |
Owner/ Operator |
Total | |||||||||
| Pre- and Post-Modification Recorded Investment |
$ | 3.1 | $ | .2 | $ | 3.3 | ||||||
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The balance of TDRs was $12.3 and $11.4 at March 31, 2012 and December 31, 2011, respectively.
The recorded investment in finance receivables modified as TDRs during the previous twelve months that subsequently defaulted (i.e., became more than 30 days past-due) in the three months ended March 31, 2012 was nil for fleet and owner/operator and did not impact the Company’s allowance for losses at March 31, 2012.
-12-
PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
Repossessions
When the Company determines a past-due customer is not likely to meet their contractual commitments, the Company repossesses vehicles which serve as collateral for loans, finance leases and equipment under operating lease. The Company records the repossessed vehicles as used truck inventory which is included in “Other assets” on the Balance Sheets. The balance of repossessed inventory at March 31, 2012 and December 31, 2011 was $1.3 and $1.0, respectively. Proceeds from the sales of repossessed assets were $2.9 and $5.4 for the three months ended March 31, 2012 and 2011, respectively. These amounts are included in “Proceeds from disposal of equipment” on the Statements of Cash Flows.
Unamortized Loan Origination Costs
The unamortized loan origination costs at March 31, 2012 and December 31, 2011 was $10.9 and $10.4, 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 three months ended March 31, 2012 and full year 2011 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 with PACCAR. 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.
Loans due to PACCAR Inc decreased to $238.0 at March 31, 2012 from $415.0 at December 31, 2011 due to the maturity of a $177.0 loan in February 2012. Of the $238.0 in loans, $20.0 with an effective fixed interest rate of 2.99% matures in September 2012 and $218.0 with an effective fixed interest rate of 6.67% matures in 2014.
-13-
PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
Amounts outstanding at March 31, 2012 and December 31, 2011, including foreign finance affiliates operating in the United Kingdom, The Netherlands, Mexico, Australia and Canada, are summarized below:
| March 31
2012 |
December 31 2011 |
|||||||
| Due from PACCAR Inc and affiliates |
||||||||
| Loans due from PACCAR Inc |
$ | 170.0 | $ | 170.1 | ||||
| Loans due from foreign finance affiliates |
235.6 | 219.6 | ||||||
| Direct financing leases due from affiliate |
13.0 | 13.8 | ||||||
| Receivables |
218.1 | 224.2 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 636.7 | $ | 627.7 | ||||
|
|
|
|
|
|||||
| Due to PACCAR Inc and affiliates |
||||||||
| Loans due to PACCAR Inc |
$ | 238.0 | $ | 415.0 | ||||
| Payables |
51.5 | 36.7 | ||||||
|
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|
|
|
|||||
| Total |
$ | 289.5 | $ | 451.7 | ||||
|
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|
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The Company provides direct financing leases to a dealer location operated by an affiliate of PACCAR.
PACCAR charges the Company for certain administrative services it provides. These costs were charged to the Company based upon the Company’s specific use of the services and PACCAR’s cost. Management considers these charges reasonable and similar to the costs that would be incurred if the Company were on a stand-alone basis.
There were no dividends declared or paid during the first three months of 2012 and 2011. Dividends in the amount of $117.0 were declared and paid to PACCAR during 2011.
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.
-14-
PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
NOTE D – Stockholder’s Equity
Preferred Stock
The Company’s Articles of Incorporation provide that the 6% noncumulative, nonvoting preferred stock (100% owned by PACCAR Inc) is redeemable only at the option of the Company’s Board of Directors.
Comprehensive Income
The components of comprehensive income were as follows:
| Three Months Ended March 31 |
||||||||
| 2012 | 2011 | |||||||
| Net income |
$ | 19.0 | $ | 14.6 | ||||
| Comprehensive income |
||||||||
| Unrealized (losses) gains on derivative contracts |
||||||||
| (Losses) gains arising during the period |
(3.2 | ) | .1 | |||||
| Tax effect |
1.2 | |||||||
| Reclassification adjustment |
3.2 | 5.8 | ||||||
| Tax effect |
(1.2 | ) | (2.2 | ) | ||||
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|
|||||
| Net comprehensive income |
3.7 | |||||||
|
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|
|||||
| TOTAL COMPREHENSIVE INCOME |
$ | 19.0 | $ | 18.3 | ||||
|
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|
|||||
Accumulated other comprehensive loss of $(7.9) at March 31, 2012 and December 31, 2011, 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. Inputs to valuation techniques used to measure fair value are either observable or unobservable. These inputs have been categorized into the fair value hierarchy described below:
Level 1 – Valuations are based on inputs from 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 inputs from 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 unobservable market information that is significant to the overall fair value measurement and which require a significant degree of management judgment.
There were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2012. The Company’s policy is to recognize transfers between levels at the end of the reporting period.
-15-
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 |
March 31
2012 |
December 31 2011 |
||||||
| Assets: |
||||||||
| Impaired loans |
$ | 12.1 | $ | 13.7 | ||||
| Used trucks held for sale |
12.8 | |||||||
| Derivative contracts |
.2 | |||||||
| Liabilities: |
||||||||
| Derivative contracts |
$ | 14.8 | $ | 13.0 | ||||
The Company uses the following methods and assumptions to measure fair value for assets and liabilities subject to recurring fair value measurements. The Company has not elected to use the portfolio approach to measure a group of financial instruments with offsetting risk.
Impaired Loans: Impaired loans are considered collateral dependent. Accordingly, the evaluation of individual reserves considers the fair value of the associated collateral (estimated sales proceeds less the costs to sell). The valuation of the collateral is described below in used trucks held for sale. When the Company adopted ASU 2011-04, Fair Value Measurement in the first quarter of 2012, the Company removed the block discount adjustment to the collateral value of the impaired loans. The impact of the collateral value adjustment for the fair value of the impaired loans at March 31, 2012 was $.6.
Used Trucks Held for Sale: The carrying amount of used trucks held for sale is written down as necessary to reflect the fair value less costs to sell. 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. Used truck impairments were $1.0 and nil during the first three months of 2012 and 2011, respectively, and were recorded in depreciation and other rental expenses. These assets, which are shown in the above table when they are written down at fair value less costs to sell, 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 swaps and are carried at fair value. These derivative contracts are traded over the counter and their fair value is determined using industry standard valuation models, which are based on the income approach (i.e., discounted cash flows). The significant observable inputs into the valuation models include interest rates, yield curves 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.
For financial instruments that are not recognized at fair value, the Company uses the following methods and assumptions to determine the fair value. These instruments are categorized as Level 2, except fixed-rate loans which are categorized as Level 3.
Cash: Carrying amounts approximate fair value.
-16-
PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
Net Receivables: For floating rate loans, wholesale financing, and interest and other receivables, carrying values approximate fair values. For fixed rate loans, fair values are estimated using the income approach by discounted cash flows to their present value based on current rates for comparable loans. Finance lease receivables and related allowance for credit losses 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.
The Company’s estimate of fair value for fixed-rate loans and debt that are not carried at fair value at March 31, 2012 and December 31, 2011 were as follows:
| March 31 2012 |
December 31 2011 |
|||||||||||||||
| Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
| Assets: |
||||||||||||||||
| Fixed rate loans |
$ | 1,861.2 | $ | 1,889.8 | $ | 1,732.8 | $ | 1,761.3 | ||||||||
| Liabilities: |
||||||||||||||||
| Due to PACCAR Inc |
$ | 238.0 | $ | 262.3 | $ | 415.0 | $ | 442.0 | ||||||||
| Fixed rate debt |
1,398.0 | 1,405.9 | 900.3 | 907.3 | ||||||||||||
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.
The Company has elected not to offset derivative positions in the balance sheet with the same counterparty under the same master netting agreements. The Company is not required to post or receive collateral under these agreements. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company had no material exposures to default at March 31, 2012.
At March 31, 2012, the notional amount of these contracts totaled $1,464.0 with amounts expiring over the next five years. Notional maturities for all interest rate contracts are $143.0 for the remainder of 2012, $456.5 for 2013, $404.5 for 2014, $150.0 for 2015, $22.0 for 2016, and $288.0 for 2017. 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.
-17-
PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
The following table presents the balance sheet locations and fair value of derivative financial instruments:
| March 31 2012 |
December 31 2011 |
|||||||||||||||
| Interest-rate contracts |
Assets | Liabilities | Assets | Liabilities | ||||||||||||
| Other assets |
$ | .2 | $ | |||||||||||||
| Accounts payable, accrued expenses and other |
$ | 14.8 | $ | 13.0 | ||||||||||||
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 three months ended March 31, 2012 and 2011. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is 4.8 years.
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. Of the $7.9, net of tax, included in accumulated other comprehensive loss as of March 31, 2012, $3.0, 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 Comprehensive Income and Retained Earnings:
| Three Months Ended | ||||||||
| March 31 | ||||||||
| 2012 | 2011 | |||||||
| Pre-tax (loss) gain on derivative contracts recognized in OCI |
$ | (3.2 | ) | $ | .1 | |||
| Expenses reclassified from accumulated OCI into |
||||||||
| Interest and other borrowing expenses |
$ | 3.2 | $ | 5.8 | ||||
-18-
PACCAR FINANCIAL CORP. - FORM 10-Q
| Notes to Financial Statements (Unaudited) | (Millions of Dollars) |
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 expense or (income) recognized in earnings related to fair value hedges was as follows:
| Three Months Ended March 31 |
||||||||
| 2012 | 2011 | |||||||
| Interest-rate swaps |
$ | 2.0 | $ | .1 | ||||
| Term notes |
$ | (2.1 | ) | $ | (.1 | ) | ||
In addition, the net interest income from the settlement of the interest-rate swaps was $.2 and nil for the three months ended March 31, 2012 and 2011, respectively.
NOTE G – Income Taxes
The Company’s effective income tax rate was 40.3% for the first quarter of 2012 compared to 37.9% for the first quarter of 2011, primarily due to state income tax expenses on recently filed state tax returns. The Company’s effective income tax rate for the full year of 2011 was 39.5%.
-19-
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 March 31 |
||||||||||||
| 2012 | 2011 | % Change | ||||||||||
| New business volume by product: |
||||||||||||
| Retail loans and direct financing leases |
$ | 352.7 | $ | 194.0 | 82% | |||||||
| Equipment on operating leases |
53.3 | 79.7 | (33%) | |||||||||
| Dealer master notes |
67.6 | 50.3 | 34% | |||||||||
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|
|||||||
| $ | 473.6 | $ | 324.0 | 46% | ||||||||
|
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|||||||
| Average earning assets by product: |
||||||||||||
| Retail loans and direct financing leases |
$ | 2,995.9 | $ | 2,454.5 | 22% | |||||||
| Equipment on operating leases |
870.7 | 669.9 | 30% | |||||||||
| Dealer wholesale financing |
717.3 | 293.1 | 145% | |||||||||
| Dealer master notes |
78.8 | 65.5 | 20% | |||||||||
|
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|
|||||||
| $ | 4,662.7 | $ | 3,483.0 | 34% | ||||||||
|
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|
|||||||
| Revenue by product: |
||||||||||||
| Retail loans and direct financing leases |
$ | 39.7 | $ | 37.0 | 7% | |||||||
| Equipment on operating leases |
60.3 | 49.8 | 21% | |||||||||
| Dealer wholesale financing |
5.2 | 2.0 | 160% | |||||||||
| Dealer master notes |
.5 | .5 | 0% | |||||||||
| Used truck sales, other revenues and fees |
11.3 | 8.9 | 27% | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 117.0 | $ | 98.2 | 19% | ||||||||
|
|
|
|
|
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|
|||||||
| Net Income |
$ | 19.0 | $ | 14.6 | 30% | |||||||
|
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|
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Results of Operations
New Business Volume
New business volume in the first quarter of 2012 increased 46% from first quarter of 2011 due to higher retail sales of PACCAR trucks in 2012. Equipment on operating lease new business volume in the first quarter of 2012 decreased $26.4 from the first quarter of 2011. This decrease was attributable to decreased operating lease fleet business in the first quarter of 2012.
Net Income
The Company’s net income was $19.0 for the first quarter of 2012 compared to $14.6 for the first quarter of 2011. The increase in net income for the quarter was primarily the result of a higher finance margin of $7.4 and a higher operating lease margin of $1.8.
-20-
PACCAR FINANCIAL CORP. - FORM 10-Q
Revenue and Expenses
The major factors causing the change in interest and fee income, interest and other borrowing costs and finance margin in the first quarter of 2012 compared to the first quarter of 2011 are summarized below:
| Interest and Fee Income |
Interest and Other Borrowing Costs |
Finance Margin | ||||||||||
| Three Months Ended March 31, 2011 |
$ | 41.7 | $ | 17.8 | $ | 23.9 | ||||||
| Increase (decrease) |
||||||||||||
| Average finance receivables |
12.9 | 12.9 | ||||||||||
| Yields |
(7.7 | ) | (7.7 | ) | ||||||||
| Average debt balances |
7.1 | (7.1 | ) | |||||||||
| Borrowing rates |
(9.3 | ) | 9.3 | |||||||||
|
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|
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|
|||||||
| Total increase (decrease) |
5.2 | (2.2 | ) | 7.4 | ||||||||
|
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|
|||||||
| Three Months Ended March 31, 2012 |
$ | 46.9 | $ | 15.6 | $ | 31.3 | ||||||
|
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|||||||
Average finance receivables in the first quarter of 2012 increased as a result of dealer wholesale financing, as well as retail portfolio new business volume exceeding repayments. The reduction in average loan and direct finance lease yields in the first quarter of 2012 was due to lower market interest rates. The average yield in the first quarter of 2012 was 4.97%, down from 6.01% in the first quarter of 2011.
The increase in average debt balances in the first quarter of 2012 was due to growth in earning assets of $978.9. Average borrowing rates in the first quarter of 2012 declined to 1.70% from 2.94% in the first quarter of 2011 primarily due to the issuance of lower interest rate medium-term notes and the maturity of higher interest rate loans from PACCAR Inc in the first quarter of 2012.
The major factors causing the change in operating lease and rental revenues, depreciation and other rental expenses and operating lease margin in the first quarter of 2012 compared to the first quarter of 2011 are summarized below:
| Operating Lease and Rental Revenues |
Depreciation and Other Rental Expenses |
Operating Lease Margin |
||||||||||
| Three Months Ended March 31, 2011 |
$ | 49.8 | $ | 40.0 | $ | 9.8 | ||||||
| Increase (decrease) |
||||||||||||
| Results on returned lease assets |
.2 | (.2 | ) | |||||||||
| Average operating lease assets |
8.6 | 6.9 | 1.7 | |||||||||
| Revenue and cost per asset |
1.9 | 1.6 | .3 | |||||||||
|
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|
|||||||
| Total increase |
10.5 | 8.7 | 1.8 | |||||||||
|
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|
|||||||
| Three Months Ended March 31, 2012 |
$ | 60.3 | $ | 48.7 | $ | 11.6 | ||||||
|
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|
|||||||
Average operating lease assets increased due to a higher number of units on operating lease in the first quarter of 2012. Higher truck market demand resulted in an increase in revenue per asset in 2012. The increase in cost per asset is due to higher vehicle operating expenses.
The provision for losses on receivables in the first quarter of 2012 increased $.3 from the first quarter of 2011 primarily due to an increase in the receivable balances.
-21-
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
| Three Months Ended March 31 2012 |
Year Ended December 31 2011 |
Three Months Ended March 31 2011 |
||||||||||
| Balance at beginning of period |
$ | 58.8 | $ | 61.7 | $ | 61.7 | ||||||
| Provision for losses |
1.8 | 2.5 | 1.5 | |||||||||
| Charge offs |
(2.6 | ) | (8.6 | ) | (2.2 | ) | ||||||
| Recoveries |
3.2 | .7 | ||||||||||
|
|
|
|
|
|
|
|||||||
| Balance at end of period |
$ | 58.0 | $ | 58.8 | $ | 61.7 | ||||||
|
|
|
|
|
|
|
|||||||
| Ratios: |
||||||||||||
| Charge offs, net of recoveries ($2.6 in 2012) to average total portfolio ($3,792.0 in 2012) annualized at March 31, 2012 |
.28 | % | .18 | % | .22 | % | ||||||
| Allowance for losses ($58.0 in 2012) to period-end total portfolio ($3,978.5 in 2012) |
1.46 | % | 1.61 | % | 2.17 | % | ||||||
| Period-end retail loan and lease receivables past due, over 30 days, ($34.5 in 2012) to period-end retail loan and lease receivables ($3,064.4 in 2012) |
1.13 | % | 1.32 | % | 2.42 | % | ||||||
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:
| March 31 2012 |
December 31 2011 |
March 31 2011 |
||||||||||||||||||||||
| Retail loans |
$ | 1,938.9 | 49 | % | $ | 1,840.2 | 50 | % | $ | 1,544.1 | 54 | % | ||||||||||||
| Retail leases |
1,125.5 | 28 | % | 1,120.4 | 31 | % | 918.4 | 32 | % | |||||||||||||||
| Dealer wholesale financing |
828.4 | 21 | % | 576.5 | 16 | % | 302.4 | 11 | % | |||||||||||||||
| Dealer master notes |
85.7 | 2 | % | 104.2 | 3 | % | 76.9 | 3 | % | |||||||||||||||
|
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|
|
|
|
|
|||||||||||||
| Total portfolio |
$ | 3,978.5 | 100 | % | $ | 3,641.3 | 100 | % | $ | 2,841.8 | 100 | % | ||||||||||||
|
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Retail loan and lease receivables past due over 30 days at March 31, 2012 was 1.13%, a decrease from 1.32% at December 31, 2011 and a decrease from 2.42% at March 31, 2011. Included in the March 31, 2012 past-due percentage is .91% related to one large customer. Excluding that customer, the past due percentage would have been .22% at March 31, 2012, compared to .29% at December 31, 2011. At March 31, 2012, the Company had $14.9 of specific loss reserves for all accounts considered to be at-risk, including the above referenced large customer. The Company continues to focus on reducing past-due balances. The allowance for losses as a percentage of the total portfolio decreased to 1.46% at March 31, 2012 from 1.61% as of December 31, 2011, reflecting improved operating conditions and cash flows for its customers.
When the Company modifies a 30+ days past-due account, the customer is generally considered current under the revised contractual terms. During the first quarter of 2012, the Company modified $2.5 of accounts that were 30+ days past due that became current at the time of modification. Had these accounts not been modified and continued to not make payments, accounts 30+ days past due of 1.13% at March 31, 2012 would have been 1.21%.
-22-
PACCAR FINANCIAL CORP. - FORM 10-Q
During the fourth quarter of 2011, the Company modified $.2 of accounts that were 30+ days past due that became current at the time of modification. Had these accounts not been modified and continued to not make payments, accounts 30+ days past due of 1.32% at December 31, 2011 would have been 1.33%. Modifications of accounts in prior quarters that were more than 30 days past due at the time of modification are included in past dues if they were not performing under the modified terms at March 31, 2012, December 31, 2011 and March 31, 2011. The effect on the allowance for credit losses from such modifications was not significant at March 31, 2012 and December 31, 2011. See “Note B – Finance and Other Receivables” for additional discussion regarding the Allowance for Losses.
Retail loans increased to $1,938.9 compared to $1,840.2 at December 31, 2011, due to higher new truck sales in the first quarter of 2012.
Retail leases increased to $1,125.5 compared to $1,120.4 at December 31, 2011, due to new business volume exceeding collections.
Dealer wholesale financing balances increased to $828.4 at March 31, 2012 compared to $576.5 at December 31, 2011, 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 40.3% for the first quarter of 2012 compared to 37.9% for the first quarter of 2011, primarily due to an adjustment to state net operating loss carry-forwards in 2012. The Company’s effective income tax rate for the full year of 2011 was 39.5%.
The Company’s deferred income tax benefit for the first quarter of 2012 was $17.9 as compared to $24.7 for the first quarter of 2011 due to lower benefits from bonus depreciation. The Company’s net deferred tax liability at March 31, 2012 was $663.6 as compared to $681.4 at December 31, 2011. The decrease in deferred tax liability primarily relates to the reversal of deferred tax timing differences on assets placed in service in prior to 2012, which had utilized the bonus depreciation deduction available under U.S. tax law.
Company Outlook
Average earning assets in 2012 are projected to grow due to new business financing from truck sales being greater than portfolio runoff. The Company’s customers are benefiting from increased freight tonnage, higher freight rates and fleet utilization that are contributing to improvements in customers’ profitability and cash flow. If current freight transportation conditions continue, past-due accounts, truck repossessions and net charge-offs could remain at the current low levels. See the Forward Looking Statement section of Management’s Discussion and Analysis for factors that may affect this outlook.
-23-
PACCAR FINANCIAL CORP. - FORM 10-Q
Funding and Liquidity
The Company’s debt ratings at March 31, 2012 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.
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 November 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 March 31, 2012 was $1,850. The Company intends to renew the registration.
Loans due to PACCAR Inc decreased to $238.0 at March 31, 2012 from $415.0 at December 31, 2011 due to the maturity of $177.0 loan in February 2012. Of the $238.0 in loans, $20.0 with an effective fixed interest rate of 2.99% matures in September 2012 and $218.0 with an effective fixed interest rate of 6.67% 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 March 31, 2012. 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 finance subsidiary, $210 is available for use by PACCAR’s United Kingdom finance subsidiary, $200 is available for use by PACCAR’s Mexican finance subsidiaries and $170 is available for use by PACCAR’s Australian finance 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 three months ended March 31, 2012 and the year ended December 31, 2011.
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, 2011 (the “2011 Annual Report”) continues to be relevant.
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PACCAR FINANCIAL CORP. - FORM 10-Q
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.
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.
For Item 5, there was no reportable information during the three months ended March 31, 2012.
Items 2, 3 and 4 are omitted pursuant to Form 10-Q General Instructions (H)(2)(b).
| ITEM 1. | LEGAL PROCEEDINGS |
The Company’s parent, PACCAR Inc, received notice on April 24, 2012 that the Securities and Exchange Commission (“SEC”) had initiated a formal investigation relating to PACCAR Inc’s financial reporting from 2008 to 2011. The SEC has requested information concerning PACCAR Inc’s loan loss reserves, troubled debt restructuring and segment reporting. PACCAR Inc is cooperating fully with the SEC’s investigation.
| ITEM 1A. | RISK FACTORS |
For information regarding risk factors, refer to Part I, Item 1A as presented in the 2011 Annual Report on Form 10-K. There have been no material changes in the Company’s risk factors during the three months ended March 31, 2012.
| 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
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 May 10, 2012 | 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
Exhibits (in order of assigned index numbers)
| Exhibit Number |
Exhibit Description |
Form |
Date of First Filing |
Exhibit |
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 three month periods ended March 31, 2012 and 2011 | |||||||||||
| (b) | Computation of ratio of earnings to fixed charges of the Company pursuant to the Support Agreement between the Company and PACCAR for the three month periods ended March 31, 2012 and 2011 | |||||||||||
| (31) |
Rule 13a-14(a)/15d-14(a) Certifications: | |||||||||||
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PACCAR FINANCIAL CORP. - FORM 10-Q
EXHIBIT INDEX
| Exhibit |
Exhibit Description |
Form |
Date of First Filing |
Exhibit |
File Number | |||||||
| (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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