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, 1998
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.
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(Exact name of Registrant as specified in its charter)
Washington 91-6029712
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 - 106th Avenue N.E., Bellevue, Washington 98004
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Address of Principal Executive Offices) (Zipcode)
Registrant's telephone number, including area code: (425) 468-7100
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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
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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 September 30,
1998.
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF PACCAR Inc AND MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I)(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
1998 1997*
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(Unaudited)
ASSETS
Cash $ 9,610 $ 13,370
Finance and other receivables, net of
allowance for losses of $42,250 ($37,350 in 1997) 2,438,646 2,136,315
Equipment on operating leases, net of
allowance for depreciation of $12,233 ($16,332 in 1997) 29,097 34,593
Other assets 21,103 16,786
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TOTAL ASSETS $2,498,456 $2,201,064
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LIABILITIES
Accounts payable and accrued expenses $ 26,021 $ 36,580
Payable for finance receivables acquired 15,872 35,799
Commercial paper and other short-term borrowings 1,130,946 759,016
Medium-term notes 899,000 964,000
Income taxes - current and deferred 61,152 62,265
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TOTAL LIABILITIES 2,132,991 1,857,660
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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 13,913 11,706
Retained earnings 306,052 286,198
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TOTAL STOCKHOLDER'S EQUITY 365,465 343,404
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,498,456 $2,201,064
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*The December 31, 1997 Balance Sheet has been derived from audited financial
statements.
See accompanying notes.
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PACCAR Financial Corp.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(Thousands of Dollars)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited)
Interest and other income $ 50,731 $ 45,459 $145,361 $134,498
Rentals on operating leases 1,986 2,417 6,611 7,251
-------- -------- -------- --------
TOTAL FINANCE INCOME 52,717 47,876 151,972 141,749
Interest expense 29,113 25,384 82,774 75,238
Other borrowing expense 504 460 1,460 1,386
Depreciation expense related
to operating leases 1,496 1,699 4,869 5,467
-------- -------- -------- --------
TOTAL FINANCE EXPENSES 31,113 27,543 89,103 82,091
FINANCE MARGIN 21,604 20,333 62,869 59,658
Insurance premiums earned 1,748 1,444 4,909 4,210
Insurance claims and underwriting expenses 1,287 1,063 3,644 3,084
-------- -------- -------- --------
INSURANCE MARGIN 461 381 1,265 1,126
Selling, general and
administrative expenses 6,878 6,374 20,430 18,455
Provision for losses on receivables 2,992 1,424 7,760 3,878
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 12,195 12,916 35,944 38,451
Federal and state income taxes 4,708 5,034 13,997 14,982
-------- -------- -------- --------
NET INCOME 7,487 7,882 21,947 23,469
Retaining earnings at beginning of period 298,565 270,874 286,198 257,941
Cash dividends paid - - (2,093) (2,654)
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RETAINED EARNINGS AT END OF PERIOD $306,052 $278,756 $306,052 $278,756
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share and dividends per share are not reported because the Company
is a wholly-owned subsidiary of PACCAR Inc.
See accompanying notes.
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PACCAR Financial Corp.
STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Nine Months Ended
September 30
1998 1997
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(Unaudited)
OPERATING ACTIVITIES:
Net income $ 21,947 $ 23,469
Items included in net income not
affecting cash:
Provision for losses on receivables 7,760 3,878
Decrease in deferred taxes payable (5,994) (3,867)
Depreciation and amortization 8,393 9,043
Decrease in payables,
income taxes and other (10,307) (13,145)
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 21,799 19,378
INVESTING ACTIVITIES:
Finance and other receivables acquired (1,085,569) (835,723)
Collections on finance and other receivables 762,913 762,132
Net (increase) decrease in wholesale receivables (7,852) 31,730
Acquisition of equipment (9,103) (9,981)
Proceeds from disposal of equipment 7,008 7,404
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NET CASH USED IN
INVESTING ACTIVITIES (332,603) (44,438)
FINANCING ACTIVITIES:
Net increase (decrease) in commercial paper
and other short-term borrowings 371,930 (9,597)
Proceeds from medium-term notes 340,000 360,000
Payments of medium-term notes (405,000) (332,000)
Additions to paid in capital 2,207 2,167
Payment of cash dividend (2,093) (2,654)
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NET CASH PROVIDED BY
FINANCING ACTIVITIES 307,044 17,916
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NET DECREASE IN CASH (3,760) (7,144)
CASH AT BEGINNING OF PERIOD 13,370 13,154
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CASH AT END OF PERIOD $ 9,610 $ 6,010
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See accompanying notes.
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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. Operating results for the three- and nine-month periods
ended September 30, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998. 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, 1997.
Reclassifications: Certain prior year amounts have been reclassified to
conform to the 1998 presentation.
NOTE B--TRANSACTIONS WITH PACCAR INC AND AFFILIATES
The Company and PACCAR Inc are parties to a Support Agreement which obligates
PACCAR Inc to provide, when required, financial assistance to the Company to
assure that the Company maintains a ratio of net earnings available for fixed
charges to fixed charges (as defined) of at least 1.25 to 1 for any fiscal
year. The Support Agreement also requires PACCAR Inc to own, directly or
indirectly, all outstanding voting stock of the Company. The required ratio
for the nine months ended September 30, 1998 and September 30, 1997, was met
without assistance.
PACCAR Inc 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 Inc'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 Inc 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 Inc for the paid-in
capital invested in the prior year. Cash dividends of $2.1 million and $2.7
million were paid to PACCAR Inc during the first nine months of 1998 and 1997,
respectively.
Periodically, the Company borrows funds from PACCAR Inc and makes loans to
PACCAR Inc. At September 30, 1998 and 1997, there were no outstanding loans
for the Company from or to PACCAR Inc.
The Company periodically loans funds to certain foreign and domestic finance
and leasing affiliates of PACCAR Inc. These various affiliates have Support
Agreements with PACCAR Inc, 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 aggregate of any such
loans not guaranteed by PACCAR Inc will not exceed the equivalent of 50
million United States dollars. At September 30, 1998 there was a $10 million
loan outstanding to a finance affiliate operating in the United Kingdom.
There were no loans at September 30, 1997.
NOTE C--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.
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PACCAR Financial Corp.
NOTES TO FINANCIAL STATEMENTS
NOTE D--CONTINGENCIES
As of September 30, 1998, the Company has invested $7 million in a project to
upgrade the loan system for PACCAR Financial Corp. The primary contractor on
that project has informed the Company that they anticipate a significant
increase in cost and time to complete their work on the project. The Company
has suspended work with the contractor pending resolution of this matter. If a
satisfactory solution cannot be found, a significant portion of the Company's
investment will be charged against income. Although the outcome of the
negotiation is unclear at this time, it is expected that the matter will be
concluded in the fourth quarter of 1998.
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The finance margin improved 5% to $62.9 million for the nine months ended
September 30, 1998, from $59.7 million for the same period in 1997, primarily
due to growth in receivable balances. Average receivables grew 10% to $2.3
billion for year-to-date 1998, from $2.1 billion for the same period in 1997,
reflecting record lending volume. New lending volume increased 32% to $1,071
million for the first nine months of 1998 from $810 million for the first
nine months of 1997. The average margin rate on receivables has continued to
decline, to 3.62% for year-to-date 1998 from 3.79% for the same period in 1997,
due to intense rate competition in the truck lending market.
Selling, general and administrative expenses of $20.4 million were 11% higher
for year-to-date 1998 than the first nine months of 1997 due to increased
staffing and related costs. The provision for losses increased 100% to $7.8
million from $3.9 million, despite lower credit losses, due to asset growth.
The allowance for losses as a percentage of earning assets was 1.70% at
September 30, 1998 and September 30, 1997. The level of the allowance
reflects the risks inherent in the financing of commercial highway
transportation equipment.
As a result of the foregoing factors, September 30, 1998 year-to-date net
income declined 6% to $21.9 million from $23.5 million for the same period in
1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1998, the Company funded its portfolio growth
primarily through the issuance of commercial paper, which increased $372
million from December 31, 1997. 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, 1998, $925 million of such
securities were available for issuance.
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, 1998, the Company and PACCAR Inc maintained total unused
bank lines of credit of $750 million which are largely used to support the
Company's commercial paper borrowings.
Other information on liquidity and sources of capital as presented in the
Company's 1997 Annual Report on Form 10-K continues to be relevant.
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YEAR 2000 ISSUE
The Year 2000 issue refers to the potential adverse consequences of computer
systems failing because they do not recognize or correctly process a date
falling on or after January 1, 2000. The problem stems from decisions made
decades ago by software developers trying to save scarce storage space by
using only two digits to signify the year. Without corrective action, many
systems will read the Year 2000 as 1900, causing processing errors and
systems failures.
As a finance company, the Company relies upon computer processing to
originate and service loans and leases. The Company has identified and
evaluated its major internal systems for Year 2000 compliance. Internal
systems have already been modified to enable the Company to process loans and
leases with a termination date after the Year 2000. Some additional software
related changes for the systems to operate properly after the Year 2000 have
been identified by the Company and are in the process of being corrected. A
team consisting of full-time employees supplemented with contract staff is
working to make the necessary changes. The Company expects to have its
critical systems compliant before the Year 2000. Total cost to the Company is
expected to approximate $2.0 million, of which $0.6 million has been incurred
through September 30, 1998. Operating funds will fund the cost of the project.
In the unlikely event that one or more of the Company's systems fail as a
result of the Year 2000 issue, the Company is developing a contingency plan
which will explore a combination of manual processes and alternate Year 2000
compliant systems in place at other PACCAR finance subsidiaries.
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 is in the
process of confirming with its vendors that such systems will be 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. With respect to banks and other financial institutions
with which it has relationships, the Company has sent letters and has
received responses indicating that such banks and other financial
institutions 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, the 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 causing 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 is taking 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.
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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) On September 4, 1998 the Company filed a Form 8-K under Item 5
regarding the impact of Year 2000 on the Company.
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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: October 29, 1998 BY: /S/A. J. Wold
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A. J. Wold
President
(Authorized Officer)
BY: /S/M. T. Barkley
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M. T. Barkley
Controller
(Chief Accounting Officer)
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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 F (incorporated by reference to
Exhibits 4.3A, 4.3B and 4.3C to the Company's Registration
Statement on Form S-3 dated May 26, 1992, Registration Number
33-48118).
Form of Letter of Representation among the Company, Citibank, N.A.
and the Depository Trust Company, Series F (incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-3 dated May 26, 1992, Registration Number 33-48118).
4.3 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).
4.4 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).
4.5 Forms of Medium-Term Note, Series I (incorporated by reference to
Exhibits 4.3A and 4.3B 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 4.5 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 Inc 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).
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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, 1998 and 1997.
12.2 Statement re computation of ratio of earnings to fixed charges of
the Company pursuant to the Support Agreement with PACCAR Inc for
the nine-month periods ended September 30, 1998 and 1997.
12.3 Statement re computation of ratio of earnings to fixed charges of
PACCAR Inc and subsidiaries pursuant to SEC reporting requirements
for the nine-month periods ended September 30, 1998 and 1997.
27 Financial Data Schedule for Article 5 of Regulation S-X, Item
601(c) for the nine-month period ended September 30, 1998.
Other exhibits listed in Item 601 of Regulation S-K are not applicable.
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