Item 1.
Business
Item 1A.
Item 1A.
Risk Factors
Item 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR) at 777 106th Avenue N.E., Bellevue, Washington 98004. The Company owns two full-service leasing facilities in Texas.
Other offices and leasing facilities of the Company are located in leased premises including two facilities owned by PACCAR and three facilities leased by PACCAR. The Company considers all its properties to be suitable for their intended purpose. Annual lease rentals for these premises in the aggregate are not material in relation to expenses as a whole.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings incidental to its business involving the collection of accounts and other matters. The Company does not consider such matters to be material with respect to the business or financial condition of the Company as a whole.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
All outstanding common stock is owned by PFSC; therefore, there is no trading market in the Company’s common stock.
Cash dividends in the amount of $30.0, $70.0 and $69.0 were declared and paid to PFSC in 2006, 2005 and 2004, respectively.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data for the Company. The information with respect to each of the five years in the period ended December 31, 2006 has been derived from the Company’s audited financial statements.
Balance Sheet Data
Income Statement Data
(1) For the purposes of this ratio, earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense plus a portion of rent expense (which is deemed representative of an interest factor). The method of computing the ratio of earnings to fixed charges shown above complies with SEC reporting requirements (see Exhibit 12.1) but differs from the method called for in the Support Agreement between the Company and PACCAR (see Exhibit 12.2).
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Millions of Dollars)
Results of Operations
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:
In 2006, credit losses of $8.4 increased by $1.1 compared to the $7.3 of credit losses in 2005 and decreased by $.5 compared to the $8.9 of credit losses in 2004. As a percentage of the total portfolio, net credit losses remained at low levels for the year ended December 2006 at .12% compared to .11% and .15% at December 2005 and 2004, respectively. This reflects customers’ ability to make timely payments as they have benefited from the demand for transportation services. In addition, current industry conditions have had a positive impact on used truck values supporting the collateral underlying the Company’s receivables.
In 2006, recoveries of accounts previously written off of $3.1 decreased $.2 and $1.2 from $3.3 and $4.3 in 2005 and 2004, respectively. This was primarily due to lower credit losses experienced in prior years.
Dealer master notes, which have a lower allowance for losses than retail accounts, increased to 6% of the total portfolio at December 2006 compared to 5% at December 2005 and 2004, reducing the ratio of the allowance for losses to net receivables (1.73% at December 2006 from 1.80% and 1.92% at December 2005 and 2004, respectively).
The estimation methods and factors considered for determining the allowance during the periods included in this filing have been consistently applied and are discussed further under Critical Accounting Policies. There have been no significant changes in customer contract terms during the periods.
2006 Compared to 2005:
The Company’s net income of $84.5 in 2006 increased 14% from $74.0 in 2005. The profit improvement primarily resulted from an increased finance gross profit (revenues minus borrowing, lease and insurance expenses). Interest and other revenue increased to $509.6 from $409.3 in 2005 due to higher earning assets and higher interest rates. Average earning assets increased due to higher new loan and lease volume from increased PACCAR truck production. Interest and other borrowing expenses increased to $168.8 in 2006 due to an increase in average debt balances and higher interest rates. Depreciation and other operating lease and rental expenses increased 11% to $109.7 in 2006 from $98.7 in 2005 primarily due to continued growth in operating lease assets. The provision for losses in 2006 of $14.9 increased slightly from the $14.2 in 2005, reflecting the impact of a growing portfolio and higher credit losses. The Company’s 2006 income tax rate of 38.0% was comparable to 2005.
2005 Compared to 2004:
The Company’s net income of $74.0 in 2005 increased 7% from $69.2 in 2004. The profit improvement primarily resulted from an increased finance gross profit partially offset by a higher provision for losses from a growing portfolio. Interest and other revenue increased to $409.3 from $320.9 in 2004 due to higher earning assets and higher interest rates. Interest and other borrowing expenses increased to $106.4 in 2005 due to an increase in average debt balances and higher interest rates. Depreciation and other operating lease and rental expenses increased to $98.7 in 2005 from $71.6 in 2004 primarily due to continued growth in operating lease assets. The increase in the provision for losses on receivables was discussed above. The Company’s 2005 income tax rate of 38.3% was comparable to 2004.
Company Outlook
The future profitability of the Company is principally dependent on the generation of new business volume, the related spread between the asset yields and the borrowing costs on new business and the level of credit losses experienced. Asset growth is expected to be modest as new business volume is likely to approximate asset prepayments. The Company continues to be exposed to the risk that economic weakness, as well as volatile interest rates and diesel prices together with a decline in freight demand and changes in governmental regulations could negatively impact future truck sales financed and existing customers’ ability to make timely payments, which increases the risk of loss inherent in the portfolio.
Funding and Liquidity
The Company periodically registers debt securities under the Securities Act of 1933 for offering to the public. In November 2006, the Company filed a new shelf registration statement. The registration expires in 2009 and does not limit the principal amount of debt securities that may be issued during the period.
The Company believes that it has sufficient financial capabilities to continue funding receivables, servicing debt and paying dividends through internally generated funds, access to public and private debt markets, lines of credit and other financial resources.
The Company’s investment grade credit ratings continue to provide access to capital markets at competitive interest rates. The Company’s debt ratings at December 31, 2006 are as follows:
The Company’s strong credit ratings are primarily based on PACCAR’s operating cash flow, demand for its quality products and substantial financial assets. Access to financing at competitive rates would be negatively impacted by a downgrade in these credit ratings.
The following summarizes the Company’s contractual cash commitments at December 31, 2006:
As described in Note F to the financial statements, borrowings consist of medium-term notes and commercial paper. Included in the $1,800.0 of borrowings that mature in more than one year are $300.0 of medium-term extendible notes. These extendible notes have an initial maturity of 13 months, which can be extended at the investor’s option to a final maturity of 5 years. The interest rate adjustment to LIBOR on the notes increases each year by a nominal, predetermined amount. These extendible medium-term notes are included as principal amounts due in 2008. The Company has operating leases for office space, truck leasing facilities and office equipment.
In addition, the Company had loan and lease commitments of $280.3 expiring within one year. These commitments represent commitments to fund new retail loan and lease contracts.
Critical Accounting Policies:
In the preparation of the Company’s financial statements, in accordance with accounting principles generally accepted in the United States, management uses estimates and makes judgments and assumptions that affect asset and liability values and the amounts reported as income and expense during the periods presented. The following are accounting policies which, in the opinion of management, are particularly sensitive and which, if actual results are different, may have a material impact on the financial statements.
Equipment on Operating Leases
In determining the estimated residual values for equipment on operating leases, and certain direct financing leases, the Company considers the length of the lease term, the truck model and anticipated market demand and the ex­pected usage of the truck. If the sales price of the trucks at the end of the lease term differs significantly from the Company’s estimate, a gain or loss will result. The Company believes its residual setting policies are appropriate; however, future market conditions, changes in government regulations and other factors outside the Company’s control can impact the ultimate sales price of trucks returned under these contracts. Residual values are reviewed regularly and adjusted if market conditions warrant. See “Note A - Significant Accounting Policies” in the Notes to Financial Statements.
Allowance for Credit Losses
The Company determines the allowance for credit losses on its retail loan and lease, wholesale and master note portfolios based on a combination of historical information and current market conditions. This analysis is dependent on estimates, including assumptions regarding collectibility of past-due accounts, repossession rates and the recovery rate on the underlying collateral. Loss estimates have been established from historical collection and loss information using past due account data which has demonstrated a strong correlation to future credit losses.
The Company individually evaluates bankrupt accounts, accounts which have significant amounts past due and other large accounts with higher risk ($42.0 million at December 31, 2006 or 1.0% of the total outstanding receivables). It evaluates all other customers as a group based on past due categories (i.e., 90+, 60-90, 30-59 and less than 30 days past due), as well as current account balances. The Company has developed a range of specific loss estimates for each of its retail, wholesale and dealer master note portfolios based on historical experience, taking into account loss frequency and severity in both strong and weak truck market conditions. Loss estimates at December 31, 2006 range from less than 1% on current accounts to 35% on certain accounts over 90 days past due. 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, including diesel prices, freight tonnage trends, interest rates and other factors representing leading indicators impacting the creditworthiness of our borrowers and their ability to repay. The Company further considers the impact of dealer recourse, cash recoveries and used equipment collateral recoveries. The projected amount is then compared to the balance in the allowance and appropriate adjustments are made.
Although certain retail contracts acquired from dealers include full or partial dealer recourse for the credit loss, this is a minor and decreasing component of the portfolio (6% of the retail portfolio at December 31, 2006). For wholesale and dealer master note portfolios, dealer recourse is present in substantially all the loan arrangements. Cash recoveries and used equipment collateral recoveries generally vary with market conditions.
Forward Looking Statements
Certain information presented in this Form 10-K 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; price changes impacting equipment costs and residual values; changes in costs and availability of external funding sources; and legislation and governmental regulation.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk and Derivative Financial Instruments
In the normal course of business, the Company issues various financial instruments that expose the Company to market risk associated with market interest rates. Policies and procedures have been established by the Company to manage these market risks through the use of various derivative financial instruments. The Company does not engage in derivatives trading, market-making or other speculative activities.
The following is a sensitivity analysis for the Company’s assets and liabilities that have interest rate risk. The gains or losses in the table represent the changes in the financial instruments’ fair values that would result from a 100 basis point increase from the current market rate at December 31, 2006 and 2005.
Fair Value Gains (Losses)
(Millions of Dollars)
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and related schedules described under Item 15, “Exhibits, Financial Statement Schedules” are included following this page.
PACCAR Financial Corp.
Report of Independent Registered Public Accounting Firm
Board of Directors
PACCAR Financial Services Corporation and PACCAR Financial Corp.
We have audited the accompanying balance sheets of PACCAR Financial Corp. (a wholly-owned subsidiary of PACCAR Financial Services Corporation) as of December 31, 2006 and 2005, and the related statements of income, cash flows, stockholder’s equity and comprehensive income for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PACCAR Financial Corp. at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles.
PACCAR Financial Corp.
STATEMENTS OF INCOME (Millions of Dollars)
Earnings per share and dividends per share are not reported because the Company is a wholly-owned subsidiary of PACCAR Financial Services Corporation.
PACCAR Financial Corp.
BALANCE SHEETS
(Millions of Dollars)
See Notes to Financial Statements
PACCAR Financial Corp.
STATEMENTS OF CASH FLOWS
(Millions of Dollars)
See Notes to Financial Statements
PACCAR Financial Corp.
STATEMENTS OF STOCKHOLDER’S EQUITY
(Millions of Dollars)
See Notes to Financial Statements
PACCAR Financial Corp.
STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
See Notes to Financial Statements
PACCAR Financial Corp.
NOTES TO FINANCIAL STATEMENTS
(Millions of Dollars)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Description of Operations: PACCAR Financial Corp. (the “Company”), is a wholly-owned subsidiary of PACCAR Financial Services Corporation (“PFSC”). PFSC 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 PACCAR dealerships to engage in full-service and finance leasing. The operations of the Company are fundamentally affected by its relationship with PACCAR.
Due to the nature of the Company’s business, customers are concentrated in the transportation industry throughout the United States. Generally, all receivables are collateralized by the equipment being financed. The risk of credit losses related to this concentration has been considered in establishing the allowance for losses.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Allowance for Losses: The provision for losses on finance and other receivables is charged to income in an amount sufficient to maintain the allowance for losses at a level considered adequate to cover estimated credit losses, net of recoveries, inherent in the portfolio. Receivables are charged to this allowance when, in the judgment of management, they are deemed uncollectible (generally upon repossession of the collateral). With respect to certain retail contracts acquired from dealers, the dealer retains liability, up to specified limits, for the credit loss.
Revenue Recognition: Interest income from finance receivables and other receivables is recognized using the interest method. Certain loan origination costs are deferred and amortized to interest income over the term of the loan using the effective yield method. For operating leases, rental revenue is recognized on a straight-line basis over the lease term.
Recognition of interest income and rental revenue are suspended when management determines that collection is not probable (generally after 90 days past due). Recognition is resumed if the receivable becomes contractually current and the collection of amounts is again considered probable.
Equipment on Operating Leases: Equipment on operating leases is recorded at cost and is depreciated on the straight-line basis to its estimated residual value. Residual values are reviewed regularly and adjusted if market conditions warrant.
Income Taxes: The Company is included in the consolidated federal income tax return of PACCAR. Income taxes for the Company are determined on a separate return basis, and any related tax liability is paid by the Company to PACCAR and any related tax benefit is paid by PACCAR to the Company.
Reclassifications: Certain prior-year amounts have been reclassified to conform to the 2006 presentation.
New Accounting Pronouncements
Accounting for Uncertainty in Income Taxes: In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 is an interpretation of FAS No. 109, Accounting for Income Taxes, that clarifies the criteria for recognition of income tax benefits and becomes effective January 1, 2007. The Company does not expect this pronouncement to have a significant effect on its results of operations or financial position.
NOTE B - FINANCE AND OTHER RECEIVABLES
Terms for finance and other receivables at origination range from 12 to 84 months. Repayment experience indicates some receivables will be paid prior to contract maturity, while some others will be extended or renewed. Accordingly, the maturities of receivables presented here should not be regarded as a forecast of future collections.
Loans are reported at the principal amount outstanding, net of unearned income.
Direct financing leases are carried at the aggregate of lease payments receivable plus estimated residual value of the leased property, less unearned income.
The Company’s finance and other receivables are as follows:
Future minimum lease payments on direct financing leases totaled $1,361.7 at December 31, 2006 and are due as follows: $320.7 in 2007; $290.5 in 2008; $290.1 in 2009; $226.1 in 2010; $147.8 in 2011 and $86.5 in 2012 and beyond.
The allowance for losses on finance and other receivables is summarized as follows:
At December 31, 2006 and 2005, the recorded investments in retail contracts and loans that were considered to be impaired were $21.5 and $18.5, respectively. Included in the allowance for losses were specific reserves of $3.6 and $3.0 on these impaired retail contracts and loans. The average recorded investment in impaired retail contracts and loans during the years ended December 31, 2006, 2005 and 2004, was $17.9, $19.6 and $23.5, respectively. The Company recognized interest income of $.6, $.5 and $.2 for the years ended December 31, 2006, 2005 and 2004, respectively, on those impaired retail contracts and loans, all of which were recognized in income upon receipt of cash.
NOTE C - EQUIPMENT ON OPERATING LEASES
Terms of operating leases at origination generally range from 24 to 72 months. The total future annual minimum rental payments to be received for equipment on non-cancelable operating leases beginning January 1, 2007 of $209.2 are due as follows: $95.6 in 2007; $62.6 in 2008; $38.1 in 2009; $12.0 in 2010 and $0.9 in 2011. Depreciation expense related to equipment on operating leases was $78.1, $67.1, and $44.9 in 2006, 2005 and 2004, respectively. Substantially all equipment on operating leases is manufactured by PACCAR.
NOTE D - 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 Agreement) of at least 1.25 to 1 for any fiscal year. The required ratio for the years ended December 31, 2006, 2005 and 2004 was met without assistance. The Support Agreement also requires PACCAR to own, directly or indirectly, all outstanding voting stock of the Company.
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 reasonable and similar to the costs that would be incurred if the Company were on a stand-alone basis. Fees for services of $22.4, $19.3 and $18.8 in 2006, 2005 and 2004, respectively, were charged to the Company. PFSC recognizes certain of these administrative services as an additional investment in the Company. The Company records the investment as additional paid-in capital.
Cash dividends in the amount of $30.0, $70.0 and $69.0 were declared and paid in 2006, 2005 and 2004, respectively.
The Company’s principal office is located in the corporate headquarters building of PACCAR (owned by PACCAR). The Company also leases office space from two facilities owned by PACCAR and three facilities leased by PACCAR.
The Company’s employees are covered by a defined benefit pension plan, an unfunded post-retirement medical and life insurance plan and a defined contribution plan sponsored by PACCAR. Separate allocations of plan assets and defined benefit plan obligations relating to the Company have not been made. Expenses charged to the Company by PACCAR for the defined benefit pension plan and the unfunded post-retirement medical and life insurance plan were $1.7, $1.1 and $.9, for years 2006, 2005 and 2004, respectively. Expenses incurred by the Company for the defined contribution plan benefits were $1.1 for each of the three years ended December 31, 2006.
Financing and cash management is partly provided through unsecured short-term advances to and from PACCAR. Net annual interest paid to PACCAR was $.3, $.1 and $.1 for years 2006, 2005 and 2004.
Periodically, the Company borrows funds from PACCAR and makes loans to PACCAR. Loans outstanding to PACCAR were $14.6 and $.6 at December 31, 2006 and 2005, respectively. Loans outstanding from PACCAR were $11.5 and $.2 at December 31, 2006 and 2005, respectively.
The Company periodically loans funds to certain foreign finance and leasing affiliates of PACCAR. These foreign 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 PACCAR’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 $375.0 United States dollars, unless the amount in excess of such limits is guaranteed by PACCAR. The Company periodically reviews the funding alternatives for these affiliates, and these limits may be revised in the future. There were no loans outstanding to foreign affiliates operating in the United Kingdom and The Netherlands at December 31, 2006. There was a total of $50.1 in loans outstanding to foreign affiliates operating in the United Kingdom and The Netherlands at December 31, 2005. There were no loans outstanding to other foreign affiliates for those periods. Interest income earned on affiliate loans was $.9, $2.3 and $3.5 in 2006, 2005 and 2004, respectively.
PACCAR has issued letters of credit as of December 31, 2006 in the amount of $5.9 on behalf of the Company to guarantee funds for payment to insured franchises and their customers for any future insurance losses.
Included within accounts payable, accrued expenses and other is $34.9 and $20.8 payable to PACCAR’s truck divisions at December 31, 2006 and 2005, respectively.
NOTE E - DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used as hedges to manage exposures to fluctuations in interest rates. The Company’s policies prohibit the use of derivatives for speculation or trading. The Company documents its hedge objectives, procedures and accounting treatment at the inception of and during the term of each hedge. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default, and the Company had no material exposures to default at December 31, 2006.
The Company enters into interest-rate contracts, including cap agreements. Interest-rate contracts generally involve the exchange of fixed and floating rate interest payments. These contracts are used to manage exposures to fluctuation in interest rates. Net amounts paid or received are reflected as adjustments to interest expense. At December 31, 2006, the Company had 172 interest-rate swaps and one interest-rate cap agreement outstanding. The notional amount of these contracts totaled $2,927.3 with amounts expiring annually over the next six years. 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 a counterparty, the risk in these transactions is the cost of replacing the interest-rate contract at current market rates. The total fair value of all interest-rate contracts amounted to an asset of $21.8 and a liability of $3.9 at December 31, 2006. Fair values at December 31, 2005 amounted to an asset of $32.0 and a liability of $.3.
Notional maturities for all interest-rate contracts for the six years beginning January 1, 2007, are $806.2, $867.9, $871.2, $269.0, $100.0 and $13.0. 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.
Derivative assets are included in the consolidated balance sheets in “Other assets.” Derivative liabilities are included in “Accounts payable, accrued expenses and other.”
All of the Company’s interest-rate contracts have been designated as cash flow hedges. The Company uses regression and the change in variable cash flows method to assess and measure effectiveness of interest-rate contracts. Gains or losses on the effective portion of derivatives designated and qualifying as cash flow hedges that arise from changes in fair value are initially reported in other comprehensive income. Gains or losses on the ineffective portion of cash flow hedges are recognized currently in earnings and were immaterial for each of the three years ended December 31, 2006.
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 for interest-rate contracts are recognized as an adjustment to interest expense. Of the accumulated net gain included in other comprehensive income as of December 31, 2006, $9.9, net of tax, is expected to be reclassified to interest expense in 2007. 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.
NOTE F - BORROWINGS
Borrowings are summarized as follows:
*The effective rate is the weighted average rate as of December 31, 2006 and includes the effects of interest rate swap agreements.
Interest expense on borrowings amounted to $163.9, $101.2, and $67.9 for 2006, 2005 and 2004, respectively.
Cash paid for interest (net of swap interest received) was $162.4 in 2006, $106.1 in 2005, and $69.0 in 2004.
Principal amounts of medium-term notes due over the next five years beginning January 1, 2007 are $250.0 in 2007, $500.0 in 2008, and $1,300.0 in 2009.
In 2005 and 2006, the Company issued, and has outstanding at December 31, 2006, $300.0 of extendible floating rate medium-term notes under its shelf registration. The extendible notes have an initial maturity of 13 months, which can be extended at the investor’s option to a final maturity of 5 years. The interest rate adjustment to LIBOR on the notes increases each year by a nominal, predetermined amount. These extendible medium-term notes are included as principal amounts due in 2008.
NOTE G - CREDIT ARRANGEMENTS
The Company participates with PACCAR and certain other PACCAR affiliates in syndicated credit facilities of $2,000.0 at December 31, 2006. Of this amount, $1,000.0 expires in July 2007 and $1,000.0 expires in July 2010. PACCAR intends to replace these credit facilities as they expire with facilities of similar amounts.
Of the facilities, $1,216.7 is available for use by the Company and/or PACCAR and certain other PACCAR affiliates. Of the remaining $783.3, $370.0 is only available for use by PACCAR’s Canadian subsidiaries, $300.0 is only available for use by PACCAR’s Mexican financial subsidiary, and $113.3 is only available for use by PACCAR’s Australian 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 years ended December 31, 2006 and 2005.
NOTE H - INCOME TAXES
The provision for income taxes consisted of the following:
A reconciliation between the statutory federal income tax rate to the actual provision for income taxes is shown below:
Cash paid/(received) for income taxes was $18.9 in 2006, $32.7 in 2005 and ($20.2) in 2004.
Deferred income tax assets and liabilities consisted of the following:
NOTE I - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash: The carrying amount reported in the balance sheets is stated at fair value.
Net Receivables: For floating rate loans and wholesale financing, fair values approximate carrying values. For fixed rate loans, fair values are estimated using discounted cash flow analysis based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest and other receivables approximates its fair value. Direct financing lease receivables and the related allowance for losses 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. The fair value of the Company’s fixed rate medium-term notes is estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Derivative Instruments: Derivative instruments, including interest rate contracts, are carried at fair value. Fair values are based on quoted market prices or pricing models using current market rates.
Accounts Payable, Accrued Expenses and Other: Carrying amounts approximate fair value and have been excluded from the accompanying table.
Financial instruments where the recorded carrying amount is not at fair value are as follows:
NOTE J - 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.
Other Comprehensive Income
The components of other comprehensive income with the related tax effects are as follows:
NOTE K - QUARTERLY RESULTS (Unaudited)
NOTE L - COMMITMENTS AND CONTINGENCIES
The Company is a party to various routine legal proceedings incidental to its business involving the collection of accounts and other matters. The Company does not consider such matters to be material with respect to the business or financial condition of the Company as a whole. In addition, at December 31, 2006, the Company has loan and lease commitments of $280.3 expiring within one year. These commitments represent commitments to fund new retail loan and lease contracts.
PACCAR Financial Corp.
(Millions of Dollars)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The registrant has not had any disagreements with its independent auditors on accounting or financial disclosure matters.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Com­pany’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of December 31, 2006 (“Evaluation Date”). Based on that evaluation, the principal executive officer and principal financial officer of the Company concluded that the disclosure controls and procedures in place at the Company were adequate to ensure that information required to be disclosed by the Company, including its consolidated subsidiaries (the Company has no subsidiaries), in reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported on a timely basis in accordance with applicable rules and regulations. There have been no changes in the Company’s internal controls over financial reporting during the fourth quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
Audit fees charged to the Company were $.5 and $.4 for 2006 and 2005, respectively.
Other Fees
The registrant has no audit-related, tax or other fees billed and/or paid during 2006 or 2005 for services provided by the principal accountant.
As a wholly-owned, indirect subsidiary of PACCAR Inc, audit and non-audit services provided by the Company’s external auditor are subject to PACCAR Inc’s Audit Committee pre-approval policies and procedures as described in the PACCAR Inc 2007 proxy statement. During the year ended December 31, 2006, all services provided by the external auditor were pre-approved by the PACCAR Inc Audit Committee.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(1) Listing of financial statements
The following financial statements of the Company are included in Item 8:
Statements of Income - Years Ended December 31, 2006, 2005 and 2004
Balance Sheets - December 31, 2006 and 2005
Statements of Cash Flows - Years Ended December 31, 2006, 2005 and 2004
Statements of Stockholder’s Equity - Years Ended December 31, 2006, 2005 and 2004
Statements of Comprehensive Income - Years Ended December 31, 2006, 2005 and 2004
Notes to Financial Statements - December 31, 2006, 2005 and 2004
(2) Listing of financial statement schedules
All schedules are omitted because the required matter or conditions are not present or because the information required by the schedules is submitted as part of the consolidated financial statements and notes thereto.
(3) Listing of Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in the accompanying Exhibit Index.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant as of the above date and in the capacities indicated.
*By
/s/ Timothy M. Henebry
Timothy M. Henebry
Attorney-in-fact
EXHIBIT INDEX
3.1 Restated Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K dated March 26, 1985. Amendment incorporated by reference to Exhibit 19.1 to the Company’s Quarterly Report on Form 10-Q dated August 13, 1985, File Number 0-12553).
3.2 By-laws of the Company, as amended (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 10 dated October 20, 1983, File Number 0-12553).
4.1 Indenture for Senior Debt Securities dated as of December 1, 1983 and first Supplemental Indenture dated as of June 19, 1989 between the Company and Citibank, N.A. (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K dated March 26, 1984, File Number 0-12553 and Exhibit 4.2 to the Company’s Registration Statement on Form S-3 dated June 23, 1989, Registration Number 33-29434).
4.2 Forms of Medium-Term Note, Series K (incorporated by reference to Exhibits 4.2A and 4.2B to the Company’s Registration Statement on Form S-3 dated December 23, 2003, Registration Number 333-111504).
Form of Letter of Representation among the Company, Citibank, N.A. and The Depository Trust Company, Series K (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 dated December 23, 2003, Registration Number 333-111504).
4.3 Forms of Medium-Term Note, Series L (incorporated by reference to Exhibits 4.2A and 4.2B to the Company’s Registration Statement on Form S-3 dated November 7, 2006, Registration Number 333-138464).
Form of Letter of Representation among the Company, Citibank, N.A. and The Depository Trust Company, Series L (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 dated November 7, 2006, Registration Number 333-138464).
10.1 Support Agreement between the Company and PACCAR dated as of June 19, 1989 (incorporated by reference to Exhibit 28.1 to the Company’s Registration Statement on Form S-3 dated June 23, 1989, Registration Number 33-29434).
12.1 Statement re: computation of ratio of earnings to fixed charges of the Company pursuant to SEC reporting requirements for each of the five years ended December 31, 2002 - 2006.
12.2 Statement re: computation of ratio of earnings to fixed charges of the Company pursuant to the Support Agreement with PACCAR for each of the five years ended December 31, 2002 - 2006.
12.3 Statement re: computation of ratio of earnings to fixed charges of PACCAR and subsidiaries pursuant to SEC reporting requirements for each of the five years ended December 31, 2002 - 2006.
23 Consent of Independent Registered Public Accounting Firm.
25.1 Power of attorney of certain officers and directors.
31.1 Rule 13a-14(a)/15d-14(a) Certification - Certification of Principal Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification - Certification of Principal Financial Officer.
32.1 Section 1350 Certifications - Certification pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350).
Other exhibits listed in Item 601 of Regulation S-K are not applicable.