UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from _______________ to _______________ Commission File No. 0-12553 PACCAR FINANCIAL CORP. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) WASHINGTON 91-6029712 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 777 - 106TH AVENUE N.E., BELLEVUE, WASHINGTON 98004 --------------------------------------------- ---------- Address of Principal Executive Offices) (Zipcode) Registrant's telephone number, including area code: (425) 468-7100 -------------- - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report) 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 periods 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 145,000 shares at October 31, 1999. THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF PACCAR Inc 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. Item 1 FINANCIAL STATEMENTS PACCAR Financial Corp. BALANCE SHEETS (Thousands of Dollars) September 30 December 31 1999 1998* (Unaudited) ------------------------------------- ASSETS Cash $ 3,551 $ 14,641 Finance and other receivables, net of allowance for losses of $51,240 ($44,800 in 1998) 3,028,095 2,606,540 Loans to affiliate 18,070 13,493 Equipment on operating leases, net of allowance for depreciation of $11,883 ($10,894 in 1998) 26,690 30,076 Other assets 19,237 15,070 ------------------------------------- TOTAL ASSETS $ 3,095,643 $ 2,679,820 ===================================== LIABILITIES Accounts payable and accrued expenses $ 31,371 $ 38,590 Payable for finance receivables acquired 3,583 41,526 Commercial paper and other short-term borrowings 1,278,582 1,212,743 Medium-term notes 1,298,000 956,000 Income taxes - current and deferred 66,960 62,732 ------------------------------------- TOTAL LIABILITIES 2,678,496 2,311,591 ===================================== STOCKHOLDER'S EQUITY Preferred stock, par value $100 per share 6% noncumulative and nonvoting 450,000 shares authorized, 310,000 shares issued and outstanding 31,000 31,000 Common stock, par value $100 per share 200,000 shares authorized, 145,000 shares issued and outstanding 14,500 14,500 Paid-in capital 40,554 13,990 Retained earnings 331,093 308,739 ------------------------------------- TOTAL STOCKHOLDER'S EQUITY 417,147 368,229 ------------------------------------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 3,095,643 $ 2,679,820 ===================================== *The December 31, 1998 Balance Sheet has been derived from audited financial statements. See accompanying notes. -2- PACCAR Financial Corp. STATEMENTS OF INCOME AND RETAINED EARNINGS (Thousands of Dollars) Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ----------------------------------------------------------------- (Unaudited) (Unaudited) Interest and other income $ 59,963 $ 50,731 $168,102 $145,361 Rentals on operating leases 1,823 1,986 5,810 6,611 ----------------------------------------------------------------- TOTAL FINANCE INCOME 61,786 52,717 173,912 151,972 Interest expense 35,407 29,113 98,290 82,774 Other borrowing expense 707 504 1,956 1,460 Depreciation expense related to operating leases 1,391 1,496 4,453 4,869 ----------------------------------------------------------------- TOTAL FINANCE EXPENSES 37,505 31,113 104,699 89,103 FINANCE MARGIN 24,281 21,604 69,213 62,869 Insurance premiums earned 2,105 1,748 5,960 4,909 Insurance claims and underwriting expenses 1,592 1,287 4,546 3,644 ----------------------------------------------------------------- INSURANCE MARGIN 513 461 1,414 1,265 Selling, general and administrative expenses 5,838 6,878 19,956 20,430 Provision for losses on receivables 4,507 2,992 10,580 7,760 ----------------------------------------------------------------- INCOME BEFORE INCOME TAXES 14,449 12,195 40,091 35,944 Federal and state income taxes 5,476 4,708 15,453 13,997 ----------------------------------------------------------------- NET INCOME 8,973 7,487 24,638 21,947 Retaining earnings at beginning of period 322,120 298,565 308,739 286,198 Cash dividends paid - - (2,284) (2,093) ----------------------------------------------------------------- RETAINED EARNINGS AT END OF PERIOD $331,093 $306,052 $331,093 $306,052 ================================================================= Earnings per share and dividends per share are not reported because the Company is a wholly-owned subsidiary of PACCAR Inc. See accompanying notes. -3- PACCAR Financial Corp. STATEMENTS OF CASH FLOWS (Thousands of Dollars) Nine Months Ended September 30 1999 1998 ------------------------------------- (Unaudited) OPERATING ACTIVITIES: Net income $ 24,638 $ 21,947 Items included in net income not affecting cash: Provision for losses on receivables 10,580 7,760 Increase (decrease) in deferred taxes payable 2,881 (5,994) Depreciation and amortization 7,753 7,762 Increase in payables, income taxes and other (17,833) (19,714) -------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 28,019 11,761 INVESTING ACTIVITIES: Finance and other receivables acquired (1,327,969) (1,085,569) Collections on finance and other receivables 924,151 772,951 Net increase in wholesale receivables (65,164) (7,852) Acquisition of equipment (5,384) (9,103) Proceeds from disposal of equipment 3,138 7,008 ------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (471,228) (322,565) FINANCING ACTIVITIES: Net increase in commercial paper and other short-term borrowings 65,839 371,930 Proceeds from medium-term notes 610,000 340,000 Payments of medium-term notes (268,000) (405,000) Additions to paid-in capital 26,564 2,207 Payment of cash dividend (2,284) (2,093) -------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 432,119 307,044 ------------------------------------- NET DECREASE IN CASH (11,090) (3,760) CASH AT BEGINNING OF PERIOD 14,641 13,370 ------------------------------------- CASH AT END OF PERIOD $ 3,551 $ 9,610 ===================================== See accompanying notes. -4- PACCAR Financial Corp. NOTES TO FINANCIAL STATEMENTS NOTE A--BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance 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. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes included in PACCAR Financial Corp.'s (the "Company") Annual Report on Form 10-K for the year ended December 31, 1998. Reclassifications: Certain prior year amounts have been reclassified to conform to the 1999 presentation. NOTE B--TRANSACTIONS WITH PACCAR INC AND AFFILIATES The Company and PACCAR Inc ("PACCAR") are parties to a Support Agreement which obligates PACCAR to provide, when required, financial assistance to the Company to assure that the Company maintains a ratio of earnings to fixed charges (as defined) of at least 1.25 to 1 for any fiscal year, and that PACCAR own, directly or indirectly, all outstanding voting stock of the Company. The required ratio for the nine months ended September 30, 1999 and 1998 was met without assistance. PACCAR charges the Company for certain administrative services it provides. These costs are charged to the Company based upon the Company's specific use of the services and PACCAR's cost. Management considers these charges reasonable and not significantly different from the costs that would be incurred if the Company were on a stand-alone basis. In lieu of current year payment, PACCAR recognizes certain of these administrative services as an additional investment in the Company. The Company records the investment as paid-in capital. The Company pays a dividend to PACCAR for the paid-in capital invested in the prior year. Cash dividends of $2.3 million and $2.1 million were paid to PACCAR during the first nine months of 1999 and 1998, respectively. PACCAR made an additional $25 million investment in the Company through paid-in capital in the third quarter of 1999. Periodically, the Company borrows funds from PACCAR and makes loans to PACCAR. At September 30, 1999 and 1998, the Company had no loans from or to PACCAR. The Company periodically loans funds to certain foreign and domestic finance and leasing affiliates of PACCAR. These various affiliates have Support Agreements with PACCAR, similar to the Company's Support Agreement. The foreign affiliates operate in the United Kingdom, Canada and Australia, and any resulting currency exposure is fully hedged. The foreign finance affiliates provide financing and leasing of trucks and related equipment manufactured primarily by PACCAR and sold through PACCAR's independent dealer networks in the United Kingdom, Canada and Australia. The domestic leasing affiliate finances trucks and trailers under direct finance leases, operating leases and other financing agreements for terms of one to ten years. The Company will not make loans to the foreign affiliates in excess of the equivalent of $50 million United States dollars, or loans to its domestic leasing affiliate in excess of $200 million, 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 was a total of $18 million and $10 million in loans outstanding to a foreign affiliate operating in the United Kingdom at September 30, 1999 and 1998, respectively, and no loans outstanding to the domestic leasing affiliate for either period. -5- NOTE C--PREFERRED STOCK The Company's Articles of Incorporation provide that the 6% non-cumulative, nonvoting preferred stock (100% owned by PACCAR) is redeemable only at the option of the Company's Board of Directors. Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The finance margin improved 10% to $69.2 million for the nine months ended September 30, 1999, from $62.9 million for the same period in 1998, primarily due to growth in receivable balances. Average receivables increased 23% to $2.9 billion for the first nine months of 1999 compared to the first nine months of 1998 due to record loan volume. New lending volume increased 21% to $1,295 million for the first nine months of 1999 from $1,071 million for the first nine months of 1998. The average margin rate on receivables has continued to decline to 3.24% for the first nine months of 1999 from 3.62% for the same period in 1998 due to higher leverage and intense rate competition in the truck lending market. Selling, general and administrative expenses of $20.0 million for the first nine months of 1999 were 2% lower than for the same period of 1998. Operating expenses were favorably impacted $1.4 million by a settlement with a vendor. Development costs payable to this vendor were included in the charge-off of a terminated loan system development project recorded in the fourth quarter of 1998. Operating expenses for the first nine months of 1999, excluding this non-recurring item, were 5% higher than comparable prior year expenses due to higher salary related costs and Year 2000 compliance efforts. The provision for losses increased 36% to $10.6 million for the first nine months of 1999 compared to the first nine months of 1998 due to asset growth and higher credit losses. Net credit losses in the first nine months of 1999 were $4.1 million compared to $2.8 million in the comparable prior year period. The level of the allowance reflects the risks inherent in the financing of commercial highway transportation equipment. As a result of the foregoing factors, year to date September 30, 1999 net income increased 12% to $24.6 million from $21.9 million for the same period of 1998. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 1999, the Company funded its portfolio growth primarily through the issuance of medium-term notes, which increased $342 million during the period. In September 1998, the Company registered $1 billion of senior debt securities under the Securities Act of 1933 for offering to the public. As of September 30, 1999, $195 million of such securities were available for issuance. The Company intends to file a registration statement for additional debt securities in the near future. In order to minimize exposure to fluctuations in interest rates, the Company seeks to borrow funds or enter into interest rate contracts with interest rate characteristics similar to the characteristics of its receivables and leases. Other considerations which affect the Company's funding operations include the amount of fixed and variable rate receivables, the maturity schedule of existing debt, the availability of desired debt maturities and the level of interest rates. As of September 30, 1999, the Company and PACCAR maintained total unused bank lines of credit of $755 million which are largely used to support the Company's commercial paper borrowings. Of this, $680 million are shared with PACCAR and $75 million pertain to the Company alone. Other information on liquidity and sources of capital as presented in the Company's 1998 Annual Report on Form 10-K continues to be relevant. -6- YEAR 2000 ISSUE The Company relies upon computer processing to originate and service loans and leases. The Company has identified, evaluated and converted its major internal systems for Year 2000 compliance and has developed contingency plans. The project, including comprehensive testing of all systems working together, has been completed. Total cost to the Company was $2.0 million and was funded with operating funds. Since the Company is not a manufacturer, the Company's reliance on embedded computer systems is limited to facilities related matters, such as office security systems and telecommunications equipment. The Company has confirmed with its vendors that such systems will be, or are, Year 2000 compliant. The Company also relies on the ability of banks and other financial institutions participating in the public debt markets to fund its lending activity. If there is a significant failure of banking systems or systems of other entities within the public market structure due to the Year 2000 issue, the Company's ability to access the credit markets and process payments could be adversely affected. The Company has sent letters and has received responses indicating that banks and other financial institutions with which it has relationships already are, or will be, compliant by the Year 2000. If the United States economy enters into a recession due to widespread interruption in commercial activity or the effect of diverting substantial resources to achieve Year 2000 compliance, the Company would likely experience an increase in credit losses, a reduction in interest income and a drop in new lending volume. Due to the cyclical nature of the trucking business, however, the possibility of a general economic or a trucking industry downturn has long been a factor in the Company's credit granting decisions. Since the Company is a collateral based lender with hard copy documents to enforce its loans and leases, the most reasonably likely worst case scenario if all its systems are not Year 2000 compliant is that information and reports would contain inaccuracies that would slow the efficient processing of payments, result in increased administrative costs to the Company and generally reduce customer service. The cumulative effect of these potential outcomes is unknown, but could have a material effect on the Company's financial condition, results of operations and liquidity. The Company has no single customer concentration greater than 2% of assets and the impact on the Company from a single customer's non-compliance is not expected to be material. However, if a large number of its major customers encounter operating problems due to Year 2000 that cause them to default on their obligations, there could be a material impact on the Company due to higher credit losses and lower interest income. Management believes it has taken the necessary steps regarding Year 2000 compliance with respect to matters within its control to ensure that the Year 2000 issue will not materially impact the Company. -7- Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk during the nine months ended September 30, 1999. For additional information, refer to Item 7a of the Company's December 31, 1998 Report 10-K. PART II--OTHER INFORMATION Item 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed as part of this report are listed in the accompanying Exhibit Index. (b) There were no reports on Form 8-K for the quarter ended September 30, 1999. -8- PACCAR Financial Corp. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PACCAR Financial Corp. (Registrant) Date: November 11, 1999 BY: /s/ Andrew J. Wold ----------------------------------- A. J. Wold President (Authorized Officer) BY: /s/ Michael T. Barkley ----------------------------------- M. T. Barkley Controller (Chief Accounting Officer) -9- PACCAR Financial Corp. 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 G (incorporated by reference to Exhibits 4.3A and 4.3B to the Company's Registration Statement on Form S-3 dated December 8, 1993, Registration Number 33-51335). Form of Letter of Representation among the Company, Citibank, N.A. and the Depository Trust Company, Series G (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-3 dated December 8, 1993, Registration Number 33-51335). 4.3 Forms of Medium-Term Note, Series H (incorporated by reference to Exhibits 4.3A and 4.3B to the Company's Registration Statement on Form S-3 dated March 11, 1996, Registration Number 333-01623). Form of Letter of Representation among the Company, Citibank, N.A. and the Depository Trust Company, Series H (incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-3 dated March 11, 1996, Registration Number 333-01623). 4.4 Forms of Medium-Term Note, Series I (incorporated by reference to Exhibits 4.2A and 4.2B to the Company's Registration Statement on Form S-3 dated September 10, 1998, Registration Number 333-63153). Form of Letter of Representation among the Company, Citibank, N.A. and the Depository Trust Company, Series I (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3 dated September 10, 1998, Registration Number 333-63153). 10.1 Support Agreement between the Company and PACCAR dated as of June 19, 1989 (incorporated by reference to Exhibit 28.1 to the Company's Registration Statement on Form S-3 dated June 23, 1989, Registration Number 33-29434). 12.1 Statement re computation of ratio of earnings to fixed charges of the Company pursuant to SEC reporting requirements for the nine-month periods ended September 30, 1999 and 1998. 12.2 Statement re computation of ratio of earnings to fixed charges of the Company pursuant to the Support Agreement with PACCAR for the nine-month periods ended September 30, 1999 and 1998. -10- PACCAR Financial Corp. EXHIBIT INDEX 12.3 Statement re computation of ratio of earnings to fixed charges of PACCAR and subsidiaries pursuant to SEC reporting requirements for the nine-month periods ended September 30, 1999 and 1998. 27 Financia Data Schedule for Article 5 of Regulation S-X, Item 601(c) for the nine-month period ended September 30, 1999. Other exhibits listed in Item 601 of Regulation S-K are not applicable. -11-