Paccar - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the transition period from           to          

Commission File No. 001-14817

PACCAR Inc 

(Exact name of Registrant as specified in its charter)

(425) 468-7400

(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 at least the past 90 days. Yes ýNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

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

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

Common Stock, $1 par value—166,719,077 shares as of March 31, 2006

*  The December 31, 2005 Consolidated Balance Sheet has been derived from audited financial statements.

See Notes to Consolidated Financial Statements.

5

FORM 10-Q

PACCAR Inc AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) ($ in Millions, except per share amounts)

NOTE A—Basis of Presentation

The accompanying unaudited consolidated 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. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Income taxes for the first three months of 2006 include a benefit of $6.0 related to a tax settlement. Operating results for the three month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. For further information, refer to the consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2005.

Stock-Based Compensation: Effective January 1, 2003, PACCAR elected to recognize compensation expense on all new employee stock option awards over the option vesting period, generally three years, pursuant to FAS No. 123.

In December 2004, the Financial Accounting Standards Board issued FAS No. 123(R), Share-Based Payment, which requires the expensing of all share-based payment transactions, including stock option awards. PACCAR adopted FAS No. 123(R) on a modified prospective basis, effective January 1, 2006. All stock option awards granted prior to the adoption of the FAS No. 123 expensing provisions had vested as of the adoption date of FAS No. 123(R). Accordingly, the adoption of FAS No. 123(R) had an immaterial effect on the consolidated financial statements.

Stock-based compensation expense included in first quarter net income was $1.4 in 2006 and $1.3 in 2005. As of March 31, 2006, there was $12.2 of unamortized compensation cost related to unvested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.1 years. Unamortized compensation cost related to restricted stock awards was immaterial as of March 31, 2006. The tax benefit of $5.5, arising from appreciation realized on option exercise in excess of the recorded grant date fair value, for the three months ended March 31, 2006 has been classified as a financing cash flow in accordance with FAS No. 123(R).

In January 2006, the Company granted options to buy 428,756 shares at an exercise price of $72.51. The total value of the award was $7.7 using the Black-Scholes-Merton model. The assumptions for the risk-free interest rate, expected volatility of common stock, dividend yield and expected life of the options were 4.4%, 34%, 4.0%, and 5 years, respectively.

7

ITEM 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS:

In the first quarter of 2006, PACCAR set new records for quarterly revenues and net income. First quarter 2006 total net sales and revenues increased 16% to $3.85 billion compared to the $3.33 billion in the first quarter of 2005 due to strong demand for the Company’s products and services. First quarter 2006 net income of $342.0 million increased 25% from $274.0 million in the first quarter of 2005. Both the Truck and Financial Services segments contributed to the improved financial results.

Truck segment net sales and revenues increased 15% to $3.61 billion in the first quarter of 2006 from $3.13 billion in the first quarter of 2005. Truck segment income before income taxes of $428.1 million increased 19% compared to $358.9 million in the first quarter of 2005.

Truck segment results in the first quarter of 2006 benefited from increased heavy-duty truck demand in North America and continued high production rates in Europe. Gross margins improved to 14.8% in the first quarter of 2006 from 14.7% in the first quarter of 2005. Higher material costs from suppliers due to increases in steel, aluminum, crude oil and other commodities have generally been reflected in new truck sales prices. All of the Company’s suppliers continue to meet their production and financial obligations despite recent financial difficulties experienced by some of these suppliers. Selling, general and administrative expense (SG&A) increased $2.5 million compared to the first quarter of 2005, however, as a percent of sales, SG&A decreased to 3.0% from 3.4%. SG&A increased to support higher sales levels and technology investments. The value of certain foreign currencies compared to the U.S. dollar decreased from the prior year. The translation effect from weaker foreign currencies, primarily the euro, decreased first quarter 2006 sales by $112 million and pretax income by $14.8 million compared to the first quarter of 2005.

Demand for heavy-duty trucks in the U.S. and Canada is expected to improve approximately 5% compared to 2005, with industry retail sales expected to be 290,000–310,000 trucks. European heavy-duty registrations for 2006 are projected to be similar to 2005 at 245,000–265,000 units. Both markets will be affected by engine emissions regulations. In Europe, effective October 1, 2006, all new truck registrations will be required to comply with Euro 4 emissions standards. In the U.S. and Canada, effective January 1, 2007, all new diesel engines manufactured will be required to comply with EPA 2007 engine emissions standards. In both markets, conversion to the new engine emissions standards will increase the end user vehicle cost. Customers may adopt strategies to mitigate the cost impact by accelerating purchases of trucks before the new standards take effect. This could result in a “pull forward” of vehicle sales in Europe in the first three quarters of 2006 and in the U.S. and Canada prior to the January 1, 2007 deadline.

Financial Services segment revenues increased 24% to $212.5 million from $171.4 million last year due to higher asset levels and interest rates. Financial Services income before income taxes of $54.8 million in the first quarter of 2006 increased 16% compared to the $47.3 million earned in the first quarter of 2005. The improvement was due primarily to higher finance margins resulting from portfolio growth and continued low credit losses. Past dues continued at low levels with accounts 30 days or more past due at 1.2% of portfolio balances as of March 31, 2006 compared to 1.6% as of March 31, 2005.

12

ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There were no material changes in the Company’s market risk during the three months ended March 31, 2006. For additional information, refer to Item 7a as presented in the 2005 Annual Report on Form 10-K.

ITEM 4.        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 March 31, 2006. 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 are effective to ensure that information required to be disclosed by the Company, including its consolidated 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 significant changes in the Company’s internal controls over financial reporting that occurred during the fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

For Items 1, 3 and 5, there was no reportable information for the three months ended March 31, 2006.

ITEM 1A.     RISK FACTORS

For information regarding risk factors, refer to Part I, Item 1A as presented in the 2005 Annual Report on Form 10-K. There has been no material changes in the Company’s risk factors during the three months ended March 31, 2006.

14

ITEM 2.         UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

For items 2(a) and (b), there was no reportable information for the three months ended March 31, 2006.

(c)   Issuer purchases of equity securities.

On October 25, 2005 PACCAR’s Board of Directors approved a plan to repurchase from time to time on the open market, up to five million shares of the Company’s outstanding common stock. The following are details of repurchases under this plan for the period covered by this report:

ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)   The annual meeting of stockholders was held on April 25, 2006.

(b)   The following persons were elected to serve as directors:

Class II - Term Expiring in 2009

James C. Pigott

Mark C. Pigott

William G. Reed, Jr.

Other persons whose term of office as a director continued after the meeting:

Class III - Term Expiring in 2007

Alison J. Carnwath

Robert T. Parry

Harold A. Wagner

Class I - Term Expiring in 2008

John M. Fluke, Jr.

Stephen F. Page

Michael A. Tembreull

15

(c)   Following is a brief description and vote count of all items voted on at the annual meeting:

ITEM NO. 1: ELECTION OF DIRECTORS

Directors were elected with the following vote:

ITEM NO. 2: PROPOSAL TO APPROVE THE AMENDMENT AND RESTATEMENT OF THE LONG TERM INCENTIVE PLAN (LTIP) INCLUDING APPROVAL OF THE PLAN’S PERFORMANCE GOALS

Item No. 2 was approved with the following vote:

ITEM NO. 3: PROPOSAL TO APPROVE THE AMENDMENT AND RESTATEMENT OF THE SENIOR EXECUTIVE YEARLY INCENTIVE COMPENSATION PLAN (the “PLAN”) INCLUDING APPROVAL OF THE PLAN’S PERFORMANCE GOALS.

Item No. 3 was approved with the following vote:

ITEM NO. 4: STOCKHOLDER PROPOSAL REGARDING ANNUAL ELECTION OF ALL DIRECTORS.

Item No. 4 was not approved with the following vote:

ITEM NO. 5: STOCKHOLDER PROPOSAL REGARDING A DIRECTOR VOTE THRESHOLD.

Item No. 5 was not approved with the following vote:

(d)   None

ITEM 6.         EXHIBITS

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

16

INDEX TO EXHIBITS

Exhibit (in order of assigned index numbers)

3              Articles of incorporation and bylaws:

(a)     Restated Certificate of Incorporation of PACCAR Inc (incorporated by reference to Exhibit 99.3 of the Current Report on Form 8-K of PACCAR Inc dated September 19, 2005).

(b)     Amended and Restated Bylaws of PACCAR Inc (incorporated by reference to Exhibit 99.4 of the Current Report on Form 8-K of PACCAR Inc dated September 19, 2005).

4              Instruments defining the rights of security holders, including indentures:

(a)     Rights agreement dated as of December 10, 1998 between PACCAR Inc and First Chicago Trust Company of New York setting forth the terms of the Series A Junior Participating Preferred Stock, no par value per share (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K of PACCAR Inc dated December 21, 1998).

(b)     Amendment Number 1 to rights agreement dated as of December 10, 1998 between PACCAR Inc and First Chicago Trust Company of New York appointing Wells Fargo Bank N.A. as successor rights agent, effective as of the close of business September 15, 2000 (incorporated by reference to Exhibit (4)(b) of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).

(c)     Indenture for Senior Debt Securities dated as of December 1, 1983, and first Supplemental Indenture dated as of June 19, 1989, between PACCAR Financial Corp. and Citibank, N.A., Trustee (incorporated by reference to Exhibit 4.1 of the Annual Report on Form 10-K of PACCAR Financial Corp. dated March 26, 1984, File Number 0-12553 and Exhibit 4.2 to PACCAR Financial Corp.’s registration statement on Form S-3 dated June 23, 1989, Registration Number 33-29434).

(d)     Forms of Medium-Term Note, Series J (incorporated by reference to Exhibits 4.2A and 4.2B to PACCAR Financial Corp.’s Registration Statement on Form S-3 dated March 2, 2000, Registration Number 333-31502).

Form of Letter of Representation among PACCAR Financial Corp., Citibank, N.A. and the Depository Trust Company, Series J (incorporated by reference to Exhibit 4.3 to PACCAR Financial Corp.’s Registration Statement on Form S-3 dated March 2, 2000, Registration Number 333-31502).

(e)     Forms of Medium-Term Note, Series K (incorporated by reference to Exhibits 4.2A and 4.2B to PACCAR Financial Corp.’s Registration Statement on Form S-3 dated December 23, 2003, Registration Number 333-111504).

Form of Letter of Representation among PACCAR Financial Corp., Citibank, N.A. and the Depository Trust Company, Series K (incorporated by reference to Exhibit 4.3 to PACCAR Financial Corp.’s Registration Statement on Form S-3 dated December 23, 2003, Registration Number 333-111504).

18

10            Material contracts:

(a)     Amended and Restated Supplemental Retirement Plan (as incorporated by reference to Exhibit (10)(b) of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2000) and Amendment dated December 19, 2005 (incorporated by reference to Exhibit (10)(a) of the Annual Report on Form 10-K for the year ended December 31, 2005).

(b)     Deferred Incentive Compensation Plan (Amended and Restated as of December 31, 2004) (incorporated by reference to Exhibit (10)(b) of the Annual Report on Form 10-K for the year ended December 31, 2005).

(c)     PACCAR Inc Restricted Stock and Deferred Compensation Plan for Non-employee Directors (incorporated by reference to Appendix C of the 2004 Proxy Statement of PACCAR Inc, dated March 15, 2004) and Amendment to Section 4 (incorporated by reference to Exhibit 99.1 of Current Report on Form 8-K dated September 19, 2005).

(d)     PACCAR Inc Long Term Incentive Plan (incorporated by reference to Appendix A of the 2006 Proxy Statement, dated March 14, 2006).

(e)     PACCAR Inc Senior Executive Yearly Incentive Compensation Plan (incorporated by reference to Appendix B of the 2006 Proxy Statement, dated March 14, 2006).

(f)      Compensatory arrangement with K. R. Gangl dated February 1, 1999 and attached amendment dated February 18, 1999 (incorporated by reference to Exhibit (10)(g) of the Annual Report on Form 10-K for the year ended December 31, 2004).

(g)     PACCAR Inc Long Term Incentive Plan, Nonstatutory Stock Option Agreement and Form of Option Grant Agreement (incorporated by reference to Exhibit 99.1 of Form 8-K dated January 20, 2005 and filed January 25, 2005).

(h)     PACCAR Inc Long Term Incentive Plan, Form of 2006 Restricted Stock Award Agreement (incorporated by reference as Exhibit 99.1 of Form 8-K dated and filed May 1, 2006).

(i)      PACCAR Inc Long Term Incentive Plan, Form of Share Match Restricted Stock Award Agreement (incorporated by reference as Exhibit 99.2 of Form 8-K dated  and filed May 1, 2006).

(j)      Amendment to compensatory arrangement with non-employee directors (incorporated by reference to Exhibit (10)(h) of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

(k)     PACCAR Inc Savings Investment Plan (incorporated by reference to Exhibit (10)(i) of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

Certain instruments relating to long-term debt constituting less than 10 percent of the Company’s total assets are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulations S-K. The Company will file copies of such instruments upon request of the Commission.

19

31            Rule 13a-14(a)/15d-14(a) Certifications:

(a)     Certification of Principal Executive Officer.

(b)     Certification of Principal Financial Officer.

32            Section 1350 Certifications:

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

20