UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 20152018
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number 1-9961
TOYOTA MOTOR CREDIT CORPORATION
(Exact name of registrant as specified in its charter)
California |
| 95-3775816 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (310) 468-1310(469) 486-9300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Name of each exchange on which registered |
Medium-Term Notes, Series B, CPI Linked Notes Medium-Term Notes, Series B Stated Maturity Date January 11, 2028 |
| New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x☒ No o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitionthe definitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
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Non-accelerated filer |
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Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
As of April 30, 2015,2018, the number of outstanding shares of capital stock, no par value per share, of the registrant was 91,500, all of which shares were held by Toyota Financial Services AmericasInternational Corporation.
Documents incorporated by reference: None
Reduced Disclosure Format
The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format.
TOYOTA MOTOR CREDIT CORPORATION
FORM 10-K
For the fiscal year ended March 31, 20152018
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. | Certain Relationships and Related Transactions and Director Independence |
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Item 16. |
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GENERAL
Toyota Motor Credit Corporation was incorporated in California in 1982 and commenced operations in 1983. References herein to “TMCC” denote Toyota Motor Credit Corporation, and references herein to “we”, “our”, and “us” denote Toyota Motor Credit Corporation and its consolidated subsidiaries. We are wholly-owned by Toyota Financial Services AmericasInternational Corporation (“TFSA”TFSIC”), a California corporation, which is a wholly-owned subsidiary of Toyota Financial Services Corporation (“TFSC”), a Japanese corporation. TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor Corporation (“TMC”), a Japanese corporation. TFSC manages TMC’s worldwide financial services operations. TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial Services.
We provide a variety of finance and insurance products to authorized Toyota (including Scion) and Lexus vehicle dealers or dealer groups and, to a lesser extent, other domestic and import franchise dealers (collectively referred to as “vehicle dealers”“dealers”) and their customers in the United States of America (excluding Hawaii) (the “U.S.”) and Puerto Rico. In addition, we also provide financing to industrial equipment dealers and their customers in the U.S. Our products fall primarily into the following categories:
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Finance - We acquire retail installment sales contracts from dealers in the U.S. and Puerto Rico (“retail contracts”) and leasing contracts accounted for as operating leases (“lease contracts”) from dealers in the U.S. We collectively refer to our retail and lease contracts as the “consumer portfolio.” We also provide dealer financing, including wholesale financing, working capital loans, revolving lines of credit and real estate financing to dealers in the U.S. and Puerto Rico. We collectively refer to our dealer financing portfolio as the “dealer portfolio.”
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Insurance - Through Toyota Motor Insurance Services, Inc., a wholly-owned subsidiary, and its insurance company subsidiaries (collectively referred to as “TMIS”), we provide marketing, underwriting, and claims administration for vehicle and payment protection products sold by dealers in the U.S. Our vehicle and payment protection products include vehicle service agreements, guaranteed auto protection agreements, prepaid maintenance contracts, excess wear and use agreements, tire and wheel protection agreements and key replacement protection. TMIS also covers certain risks of dealers and provides related administrative services to certain of our affiliates in the U.S. Although the vehicle and payment protection products are generally not regulated as insurance products, for ease of reference we collectively refer to the group of products provided by TMIS herein as “insurance products.”
We support growth in earning assets through funding obtained primarily in the global capital markets as well as funds provided by investing and operating activities. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for a discussion of our funding activities.
We primarily acquire retail contracts,and lease contracts from dealers and TMIS markets insurance contracts from vehicleproducts to dealers through 3029 dealer sales and services offices (“DSSOs”). The DSSOs are supported by three regional management offices and we service the contracts through three regional customer service centers (“CSCs”) located throughout the U.S. Contract acquisition and servicing for commercial vehicles and industrial equipment dealers are performed at our headquarters in Torrance, California. The DSSOs primarily support vehicle dealer financing needsthe dealers by providing services such as acquiring retail and lease contracts from vehicle dealers,and providing wholesale financing inventories, and financing other dealer financing activities and requirements such as business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements. The DSSOs also provide support for our insurance products sold in the U.S. The CSCs support customer account servicing functions such as collections, lease terminations, and administration of both retail contract customers and lease contract customer accounts. The Central region CSC also supports insurance product operations by providing agreement and claims administrative services.
In fiscal 2016, we sold certain assets and liabilities related to our industrial equipment retail, lease and dealer portfolios (hereinafter the “commercial finance business”). Refer to Note 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for further discussion.
Our filings with the Securities and Exchange Commission (“SEC”) may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings may also be found by accessing the SEC website (http://www.sec.gov). The SEC website contains reports, registration statements, and other information regarding issuers that file electronically with the SEC. A link to the SEC website and certain of our filings is contained on our website located at: www.toyotafinancial.com under “Investor Relations, SEC Filings”. We will make available, without charge, electronic or paper copies of our filings upon written request to:
Toyota Motor Credit Corporation
19001 South Western Avenue6565 Headquarters Drive
Torrance, CA 90501Plano, Texas 75024
Attention: Corporate Communications
Investors and others should note that we announce material financial information using the investor relations section of our corporate website (http://www.toyotafinancial.com). We use our website, press releases, as well as social media to communicate with our investors, customers and the general public about our company, our services and other issues. While not all of the information that we post on our website or on social media is of a material nature, some information could be material. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the investor relations section of our website and the Toyota Motor Credit Corporation Twitter feed (http://www.twitter.com/toyotafinancial). Any changes to the social media channels we use for this purpose will be posted on the investor relations section of our corporate website. We are not incorporating any of the information set forth on our website or on social media channels into this filing on Form 10-K.
Seasonality
Revenues generated by our retail and lease contracts are generally not subject to seasonal variations. Financing volume is subject to a certain degree of seasonality. This seasonality does not have a significant impact on revenues as collections, generally in the form of fixed payments, occur over the course of several years. We are subject to seasonal variations in credit losses, which are historically higher in the first and fourth calendar quarters of the year.
Geographic Distribution of Operations
As of March 31, 2015,2018, approximately 2122 percent of vehicle retail and lease contracts were concentrated in California, 1011 percent in Texas, 8 percent in New York and 65 percent in New Jersey. As of March 31, 2015,2018, approximately 26 percent of insurance policies and contracts were concentrated in California, 76 percent in New York, and 65 percent in both Maryland and New Jersey. Any material adverse changes to the economies or applicable laws in these states could have an adverse effect on our financial condition and results of operations.operations and financial condition.
We acquire retail and lease contracts from, and provide financing and certain other financial products and services to authorized Toyota and Lexus vehicle dealers and, to a lesser extent, other domestic and import franchise dealers and their customers in the U.S. and Puerto Rico. We also offer financing for various industrial and commercial products such as forklifts and light and medium-duty trucks. Revenues related to transactions with industrial equipment dealers contributed approximately 3 percent, 4 percent, and 3 percent to total financing revenues in the fiscal years ended March 31, 2015 (“fiscal 2015”), 2014 (“fiscal 2014”), and 2013 (“fiscal 2013”), respectively.
The table below summarizes our financing revenues, net of depreciation by primary product.
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Percentage of financing revenues, net of depreciation: |
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Operating leases, net of depreciation |
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| 36 | % |
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| 31 | % |
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| 32 | % |
Retail1 |
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| 52 | % |
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| 56 | % |
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| 56 | % |
Dealer |
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| 12 | % |
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| 13 | % |
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| 12 | % |
Financing revenues, net of depreciation |
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| 100 | % |
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| 100 | % |
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| 100 | % |
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Percentage of financing revenues, net of depreciation: |
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Operating leases, net of depreciation |
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| 30 | % |
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| 27 | % |
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| 35 | % |
Retail |
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| 54 | % |
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| 58 | % |
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| 53 | % |
Dealer |
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| 16 | % |
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| 15 | % |
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| 12 | % |
Financing revenues, net of depreciation |
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| 100 | % |
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| 100 | % |
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| 100 | % |
Retail and Lease Financing
Pricing
We utilize a tiered pricing program, for retail and lease contracts. The programwhich matches contract interest rates with customer risk as defined by credit bureau scores and other factors for a range of price and risk combinations. Each application is assigned a credit tier. Rates vary based on credit tier, term, loan-to-value and collateral, including whether a new or used vehicle is financed. In addition, special rates may apply as a result of promotional activities. We review and adjust interest rates based on competitive and economic factors and distribute the rates, by tier, to our dealers.
Underwriting
We acquire new and used vehicle and industrial equipment retail and lease contracts primarily from Toyota and Lexus vehicle dealers and industrial equipment dealers. Dealers transmit customer credit applications electronically through our online system for contract acquisition. The customer may submit a credit application directly to our website, in which case, the credit application is sent to the dealer of the customer’s choice or to a dealer thatand is near the customer’s residence. In addition, through our website, customers are able to request a pre-qualification letterconsidered by us for presentation to the dealer specifying the maximum amount that may be financed.preapproval. Upon receipt of the credit application, our loan origination system automatically requests a credit bureau report from one of the major credit bureaus. We use a proprietary credit scoring system to evaluate an applicant’s risk profile. Factors used by the credit scoring system (based on the applicant’s credit history) include the termsterm of the contract, ability to pay, debt ratios, amount financed relative to the value of the vehicle to be financed, and credit bureau attributes such as number of trade lines, utilization ratio and number of credit inquiries.
Credit applications are subject to systematic evaluation. Our loan origination system evaluates each credit application to determine if it qualifies for automatic approval or decline without manual intervention (“auto-decisioning”). The system distinguishes this type of applicant by using specific requirements, including internal credit score and approves theother application without manual intervention. The origination system is programmed to review application information for purchase policy and legal compliance.characteristics. Typically, the highest quality credit applications are approved automatically. The automated approval process approves onlyautomatically and the applicant’slowest quality credit eligibility.applications are automatically declined.
Credit analysts (located at the DSSOs) approve or rejectdecline all credit applications that are not auto-decisioned.auto-decisioned, and may also approve an application that has been the subject of an automated decline. Failure to be automatically approved through auto-decisioning does not mean that an application does not meet our underwriting guidelines. A credit analyst decisions applications based on an evaluation that considers an applicant’s creditworthiness and projected ability to meet the monthly payment obligation, which is derived, among other things, from the amount financed and the term. A credit analyst will verify information contained in the credit application if the application presents an elevated level of credit risk. Our proprietary scoring system assists the credit analyst in the credit review process. The credit analyst’s final credit decision is made based upon the degree of credit risk perceived by the credit analyst after assessing the strengths and weaknesses of the application.
Completion of the financing process is dependent upon whether the transaction is a retail or lease contract. For a retail contract, transaction, we acquire the retail contract from vehicle and industrial equipment dealersthe dealer and obtain a security interest in the vehiclevehicle. We perfect our security interests in the financed retail vehicles through the applicable state’s department of motor vehicles (or equivalent) with certificate of title filings or industrial equipment.with a Uniform Commercial Code (“UCC”) filing, as appropriate. For a lease contract, except as described below under “Servicing”, we acquire the lease contract and concurrently assume ownership of the leased vehicle. We have the right to pursue collection actions against a delinquent customer, as well as repossess a vehicle or industrial equipment. We view our lease arrangements, including our operating leases, as financing transactions as we do not re-lease the vehicle or equipment upon default or lease termination.if a customer fails to meet contractual obligations.
We regularly review and analyze our retail and lease contractconsumer portfolio to evaluate the effectiveness of our underwriting guidelines and purchasing criteria. If external economic factors, credit losses or delinquency experience, market conditions or other factors change, we may adjust our underwriting guidelines and purchasing criteria in order to change the asset quality of our portfolio.portfolio or to achieve other goals and objectives.
Subvention and Incentive Programs
Subvention
In partnership with Toyota Motor Sales, U.S.A.,U.S.A, Inc. (“TMS”), a subsidiary of Toyota Material Handling, U.S.A.,Motor North America, Inc. (“TMHU”TMNA”), Hino Motor Sales, U.S.A., Inc. (“HINO”),is the primary distributor of Toyota and Lexus vehicles in the United States. In partnership with TMNA and other non-affiliated third party distributors, we may offer special promotional rates, which we refer to as subvention programs. TMS is the primary distributor of Toyota, Lexus and Scion vehicles in the United States. TMHU is the primary distributor of Toyota forklifts in the U.S., and HINO is the exclusive U.S. distributor of commercial trucks manufactured by Hino Motors Ltd. (a TMC subsidiary). These affiliates payTMNA pays us the majority of the difference between our standard rate and the promotional rate. Amounts received in connection with these programs allow us to maintain yields at levels consistent with standard program levels. The level of subvention program activity varies based on our affiliates’the marketing strategies of TMNA, economic conditions, and volume of new and used vehicle sales. The amount of subvention received varies based on the mix of Toyota and Lexus and Scion vehicles and industrial equipment included in the promotional rate programs and the timing of the programs. The majority of our retail and lease contracts are subvened. We may also offer other cash incentive programs in partnership with TMNA. Subvention and other cash incentive program payments are receivedsettled at the beginning of the retail or lease contract. We defer the payments and recognize them over the life of the contract as a yield adjustment for retail contracts and as rental income for lease contracts. A large portion of our retail and lease contracts is subvened.
Servicing
Our CSCs are responsible for servicing the vehicle retail and lease contracts.consumer portfolio. A centralized department manages third party vendor relationships responsible for the bankruptcy administration, pre charge-off collections, post charge-off recovery, liquidation activities, customer services activities and post charge off recovery and liquidation activities. Our industrial equipment retail and lease contracts are serviced at a centralized facility.certain administrative activities with support from the CSCs.
We use an online collection and auto dialer system that prioritizes collection efforts and signals our collections personnel to make telephone contact with delinquent customers. We also use a behavioral-based collection strategy to minimize risk of loss and employ various collection methods. When contracts are acquired, we perfect our security interests in the financed retail vehicles and industrial equipment through state department of motor vehicles (or equivalent) certificate of title filings or through Uniform Commercial Code (“UCC”) filings, as appropriate. We have the right to repossess the assets if customers fail to meet contractual obligations and the right to enforce collection actions against the obligors under the contracts.
We use an on-line collection and auto dialer system that prioritizes collection efforts, generates past due notices, and signals our collections personnel to make telephone contact with delinquent customers. Collection efforts aremethods based on behavioral scoring models (which analyze borrowers’ past payment performance, vehicle valuation and credit bureau scores to predict future payment behavior). We generally determine whether to commence repossession efforts after an account is 60approximately 80 days past due. Repossessed vehicles are held in inventoryfor sale to comply with statutory requirements and then sold at private auctions, unless public auctions are required by applicablestate law. Any unpaid amounts remaining after salethe repossessed vehicle is sold or after taking the full charge offbalance charge-off are pursued by us to the extent practical and legally permissible. Any surplus amounts remaining after salerecovery fees, disposition costs, and other expenses have been paid, and after any reserve charge-backs, and/or dealer guarantees and optional product refunds have been credited to the customer’s account, are refunded to the customers. Collections of post-sale deficiencies and refunds of surplusfull-balance charge-offs are administered at a centralized facility.handled by third party vendors and the CSCs. We charge off the amount we do not expect to collectcharge-off accounts when payments duethey are no longer expected to be receiveduncollectable or when the account isbalance becomes 120 days contractually delinquent, whichever occurs first. However, the CSCs will continue to collect or pursue recovery of the vehicle up to 190 days after the account is past due.
We may, in accordance with our customary servicing procedures, offer rebates or waive any prepayment charge, late payment charge, or any other fees that may be collected in the ordinary course of servicing the retail and lease contracts.consumer portfolio. In addition, we may defer a customer’s obligation to make a payment by extending the contract term.
Substantially all of our retail and lease contracts are purchased as non-recourse tofrom the vehicle and industrial equipment dealers, whichdealers. This relieves the vehicle and industrial equipment dealers fromof financial responsibility in the event of a customer default.
We may experience a higher risk of loss if customers fail to maintain required insurance coverage. The terms of our retail contracts require customers to maintain physical damage insurance covering loss or damage to the financed vehicle or industrial equipment in an amount not less than the full value of the vehicle or equipment.and to provide evidence of such insurance upon our request. The terms of each contract allow but do not require us to obtain any such insurance coverage on behalf of the customer. In accordance with our normalcustomary servicing procedures, we do not exercise our right to obtain insurance coverage on behalf of the customer. Our vehicle lease contracts require lessees to maintain minimum liability insurance and physical damage insurance covering loss or damage to the leased vehicle in an amount not less than the full value of the vehicle. We currently do not monitor ongoing maintenance ofcustomer insurance coverage as part of our customary servicing procedures for retail or lease accounts.the consumer portfolio.
Toyota Lease Trust, a Delaware business trust (the “Titling Trust”), acts as lessor and holds title to certain leased vehicles in specified states.the U.S. This arrangement was established to facilitate lease securitizations. We service lease contracts acquired by the Titling Trust from Toyota and Lexus vehicle dealers in the same manner as lease contracts owned directly by us.dealers. We hold an undivided trust interest in lease contracts owned by the Titling Trust, and these lease contracts are included in Investments in operating leases, net on our lease assets.Consolidated Balance Sheets.
Remarketing
At the end of the lease term, theThe lessee may purchase the leased asset at the contractual residual value or return the leased asset to the vehicle or industrial equipment dealer. If the leased asset is returned to the vehicle or industrial equipment dealer, the vehicle or industrial equipment dealer may purchase the leased asset or return it to us. We are responsible for disposing of the leased asset if the lessee vehicle dealer, or industrial equipment dealer does not purchase the asset at lease maturity.
In order to minimize losses at lease maturity,when vehicles are returned to us, we have developed remarketing strategies to maximize proceeds and minimize disposition costs on used vehicles and industrial equipment sold at lease termination.vehicles. We use various channels to sell vehicles returned at lease endlease-end and repossessed vehicles, including a dealer direct program (“Dealer Direct”) and physical auctions.
The goal of Dealer Direct is to increase vehicle dealer purchases of off-lease vehicles thereby reducing the disposition costs of such vehicles. Through Dealer Direct, the vehicle dealer accepting return of the leasedlease vehicle (the “grounding dealer”) has the option to purchase the vehicle at the contractual residual value, purchase the vehicle at an assessed market value, or return the vehicle to us. Vehicles not purchased by the grounding dealer are made available to all Toyota and Lexus vehicle dealers through the Dealer Direct online auction. Vehicles not purchased through Dealer Direct are sold at physical vehicle auction sites throughout the country. Where deemed necessary, we recondition used vehicles prior to sale in order to enhance the vehicle values at auction. Additionally, we redistribute vehicles geographically to minimize oversupply in any location.
Industrial equipment returned by the lessee or industrial equipment dealer is sold through authorized Toyota industrial equipment dealers or wholesalers using an auction process.
Dealer financing is comprised of wholesale financing and other financing options designed to meet dealer business needs.
Wholesale Financing
We provide wholesale financing to vehicle and industrial equipment dealers for inventories of new and used Toyota, Lexus Scion and other domestic and import vehicles and industrial equipment.vehicles. We acquire a security interest in vehicles financed at wholesale,the vehicle inventory, and/or other dealership assets, as appropriate, which we perfect through UCC filings, and these financingsfilings. Wholesale financing may also be backed by corporate or individual guarantees from, or on behalf of, participating vehicle and industrial equipmentaffiliated dealers, dealer groups, or dealer principals. In the event of vehicle or industrial equipmenta dealer default under a wholesale loan arrangement,agreement, we have the right to liquidate assets in which we have a perfected security interest and to seek legal remedies pursuant to the wholesale loan agreement and any applicable guarantees.
TMCC and TMSTMNA are parties to an agreement pursuant to which TMSTMNA will arrange for the repurchase of new Toyota Lexus and ScionLexus vehicles at the aggregate cost financed by TMCC in the event of vehiclea dealer default under wholesale financing. TMCC is also party to similar agreements with TMHU, HINO, and other domestic and import manufacturers. In addition, we provide other types of financing to certain Toyota and Lexus dealers and other third parties, at the request of TMSTMNA or private Toyota distributors, and TMSTMNA or the applicable private distributor guarantees the payments by such borrowers.
Other Dealer Financing
We provide fixed and variable rate working capital loans, revolving lines of credit, and real estate financing to vehicledealers and industrial equipment dealersvarious multi-franchise organizations referred to as dealer groups for facilities construction and refurbishment, working capital requirements, real estate purchases, business acquisitions and other general business purposes. Our credit facility pricing reflects market conditions, the competitive environment, the level of support dealers provide our retail, lease and insurance business and the credit worthiness of each dealer. These loans are typically secured with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate, and may be guaranteed by the personalindividual or corporate guarantees of the dealer principals or dealerships. We also provide financing to various multi-franchise dealer organizations, referred to asaffiliated dealers, dealer groups, often as part of a lending consortium, for wholesale, working capital, real estate, and business acquisitions. These loans are typically collateralized with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate. We obtain a personal guarantee from the vehicle or industrial equipment dealer or corporate guarantee from the dealership when deemed prudent.principals. Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure under such agreements. We priceOur pricing reflects market conditions, the credit facilities according tocompetitive environment, the risks assumed in entering intolevel of support dealers provide our retail, lease and insurance products and the credit facility and competitive factors.creditworthiness of each dealer.
Before establishing a wholesale lineloan or other dealer financing arrangement,agreement, we perform a credit analysis of the dealer. During this analysis, we:
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Review financial statements and we may obtain credit reports and bank references;
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Evaluate the dealer’s financial condition and history of servicing debt; and
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Assess the dealer’s operations and management.
On the basis of this analysis, we may approve the issuance of a credit lineloan or financing agreement and determine the appropriate size.amount to lend.
As part of our monitoring processes, we may require all dealers to submit monthlyperiodic financial statements. We also perform periodic physical audits of vehicle inventory as well as monitor the timeliness of dealer inventory financing payoffs in accordance with the agreed-upon terms to identify possible risks.
TMCC markets its insurance products through Toyota Motor Insurance Services, Inc., a wholly-owned subsidiary (together with its insurance company subsidiaries, collectively, “TMIS”). The principal activities of TMIS include marketing, underwriting, and claims administration related to covering certain risks of Toyota, Lexus, Scion and other domestic and import franchise dealers and their customers in the U.S. TMIS also provides other coverage and related administrative services to certain of our affiliates in the U.S.
Gross revenues from insurance operationsproducts on a consolidated basis comprised 89 percent of total gross revenues for fiscal 2015,2018, 8 percent for fiscal 20142017 and 97 percent for fiscal 2013.2016.
Products and Services
TMIS offers variousvehicle and payment protection products and services on Toyota, Lexus Scion and other domestic and import vehicles suchthat are sold by dealers as part of the dealer’s sale of a vehicle service agreements, guaranteed auto protection agreements, prepaid maintenance contracts, excess wear and use agreements, and tire and wheel protection agreements.as further described below. Vehicle service agreements offer vehicle owners and lessees mechanical breakdown protection for new and used vehicles secondary to the manufacturer’s new vehicle warranty. Guaranteed auto protection insurance and debt cancellation agreements provide coverage for a lease or retail contract deficiency balance in the event of a total loss or theft of the covered vehicle. Prepaid maintenance contracts provide maintenance services at manufacturer recommended intervals. Excess wear and use agreements are available on leases of Toyota Lexus and ScionLexus vehicles and protect against excess wear and use charges that may be assessed at lease termination. Tire and wheel protection which was introduced in December 2013, providesagreements provide coverage in the event that a covered vehicle’s tires or wheels become damaged as a result of a road hazard or structural failure due to a defect in material or workmanship, to the extent not covered by the manufacturer or the tire distributor warranty.warranties. Certain tire and wheel protection agreements also cover expenses related either to replacing or reprogramming a vehicle key or vehicle key remote in the event of damage or loss. Key replacement protection was introduced in December 2017 and provides stand-alone coverage for expenses related either to replacing or reprogramming a vehicle key or vehicle key remote in the event of damage or loss.
Prior to March 1, 2014,Certain Toyota, Lexus and other domestic and import vehicle dealers obtained coverage forelect to participate in the inventory financed by TMCC through TMIS. Beginning March 1, 2014, participating Toyota, Lexus, and other domestic and import vehicle dealersinsurance program to obtain coverage for eligible vehicle inventory through a third party who cedes 100%would cede 100 percent of the businessrisk to TMIS. TMIS continues to purchasein turn purchases third party reinsurance covering the excess of certain dollar maximums per occurrence and in the aggregate, the amount of which remains unchanged.aggregate. Through reinsurance, TMIS limits its exposure to losses by obtaining the right to reimbursement from the assuming company for the reinsured portion of losses. In February 2018, TMIS announced the inventory insurance program would be discontinued effective September 2018.
TMIS obtains a portion of vehicle service contract business by providing TMSprovides TMNA contractual indemnity insurance coverage for limited warranties on certified Toyota Lexus and ScionLexus pre-owned vehicles. TMIS also provides umbrella liability insurance to TMSTMNA and other affiliates covering certain dollar value layers of risk above various primary or self-insured retentions. On all layers in which TMIS provides coverage, 99 percent of the risk is ceded to various reinsurers. In addition, until April 30, 2016, TMIS providesprovided property deductible reimbursement insurance to TMSTMNA and other affiliates covering losses incurred under their primary policy.
TMS, a subsidiary of TMNA, is the primary distributor of Toyota and Lexus vehicles in the U.S. Our business is substantially dependent upon the retail sale of Toyota Lexus and ScionLexus vehicles and our ability to offer competitive financing and insurance products in the U.S. TMS is the primary distributorSales of Toyota and Lexus and Scion vehicles in the U.S. Automobilesare reported publicly by TMNA. As reported by TMNA, sales of automobiles and light-duty trucks sold by TMS totaled 2.5 million units for both fiscal 2018 and fiscal 2016, compared to 2.4 million units for fiscal 2015 compared to 2.2 million units for fiscal 20142017. Toyota and 2.1 million units for fiscal 2013. Toyota, Lexus and Scion vehicles accounted for approximately 1514 percent of all retail automobile and light-duty truck unit sales volume in the U.S. during fiscal 2015, compared to 14 percent during both2018, fiscal 20142017 and fiscal 2013.2016.
Certain retailTMCC is party to agreements with TMNA and lease sales programs on vehiclescertain TMNA subsidiaries. For ease of reference herein, we refer solely to the parent entity, TMNA. As a result, all references to the agreements or activities of TMNA herein that are carried out by a TMNA subsidiary are deemed to also make reference to and industrial equipment are subvened by our affiliates. TMSinclude the applicable TMNA subsidiary.
TMNA sponsors subvention and other cash incentive programs on certain new and used Toyota and Lexus and Scion vehicles that result in reduced scheduled payments for qualified retail and lease customers. Reduced scheduled payments on certain Toyota industrial equipment for qualified lease and retail customers are subvened by various affiliates.vehicles. The level of subvention and incentive program activity varies based on our affiliates’TMNA marketing strategies, economic conditions, and volume of vehicle sales.
TMCC and TMS are parties to a shared services agreement which covers certain technological and administrative services, such as information systems support, facilities, insurance coverage, and corporate services provided between the companies. In addition, TMCC and TMSTMNA are parties to an agreement that provides that TMSpursuant to which TMNA will arrange for the repurchase of new Toyota Lexus and ScionLexus vehicles at the aggregate cost financed by TMCC in the event of a vehicle dealer defaultsdefault under floorplanwholesale financing. TMCC is also a party to similar agreements with TMHU, HINO, and other domestic and import manufacturers. In addition, we provide other types of financing to certain Toyota and Lexus dealers and other third parties, at the request of TMSTMNA or private Toyota distributors, and TMSTMNA or the applicable private distributor guarantees the payments by such borrowers.
TMNA provides shared services to TMCC, including certain technological and administrative services, such as information systems support, facilities, insurance coverage, and corporate services.
Prior to January 1, 2015, our employees were generally eligible to participate in the Toyota Motor Sales, U.S.A., Inc. Pension Plan (the “Pension Plan”). Effective January 1, 2015, the Pension Plan was closed to employees first employed or reemployed on or after such date. Employees meeting certain eligibility requirements may participate in the Toyota Motor North America, Inc. Retirement Savings Plan (the “Savings Plan”). Certain employees hired on or after January 1, 2015, may be eligible to receive an additional contribution to the Savings Plan calculated based on their age and compensation. Various health, life and other post-retirement benefits are offered and sponsored by TMNA, as discussed further in Note 12 – Pension and Other Benefit Plans of the Notes to Consolidated Financial Statements.
TMCC is party to agreements with TMNA and other affiliates relating to the team member vehicle benefit program, which allows team members to lease Toyota and Lexus vehicles on terms exclusive to the benefit program. TMNA serves as the chief administrator of the program. TMCC acquires and services team member leases entered into after the third quarter of fiscal 2018. A portion of the vehicles used for the team member vehicle benefit program are acquired from TMNA. TMCC receives a per vehicle contribution from participating affiliates to assist with the costs of its contribution to the benefit program, and TMCC pays a per vehicle participation fee to TMNA to participate in the benefit program.
TMCC and Toyota Financial Savings Bank (“TFSB”), a Nevada thrift company owned by TFSA,TFSIC, are parties to a master shared services agreement under which TMCC and TFSB provide certain services to each other. TMCC and TFSB are also parties to an expense reimbursement agreement, which provides that TMCC will reimburse certain expenses incurred by TFSB in connection with providing certain financial products and services to TMCC’s customers and dealers in support of TMCC’s customer loyalty strategy and programs.
TMCC and TFSATFSIC are parties to an expense reimbursement agreement. Under the terms of the agreement, TMCC will reimbursereimbursed certain expenses incurred by TFSA,TFSIC, the parent of TMCC and TFSB, with respect to costs related to TFSB’s credit card rewards program.
Prior to January 1, TFSB sold its credit card portfolio in October 2015 our employees were generally eligible to participate in the Toyota Motor Sales, U.S.A., Inc. Pension Plan sponsored by TMS. Effective January 1, 2015, except for certain employees subject to collective bargaining agreements, TMS-sponsored benefit pension plans were closed to employees first employed or reemployed on orand no credit card rewards program costs have been incurred after such date. In addition, employees meeting certain eligibility requirements may participate in the Toyota Motor Sales Savings Plan sponsored by TMS and various health, life and other post-retirement benefits sponsored by TMS, as discussed further in Note 12 – Pension and Other Benefit Plans of the Notes to Consolidated Financial Statements.
Credit support agreements exist between TMCC and TFSC and between TFSC and TMC. These agreements are further discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources”.Resources.”
Additionally, TFSC and TMCC were parties to conduit finance agreements pursuant to which TFSC acquired funds from lending institutions solely for the benefit of TMCC and, in turn, provided these funds to TMCC. The last of these agreements expired in April 2012.
TMIS provides administrative services and various types of coverage to TMSTMNA and other affiliates, including contractual indemnity coverage for TMS’limited warranties on TMNA’s certified pre-owned vehicle program and umbrella liability insurance, andinsurance. Until April 30, 2016, TMIS also provided property deductible reimbursement insurance.insurance to TMNA and other affiliates.
SeeRefer to Note 15 – Related Party Transactions of the Notes to Consolidated Financial Statements for further information.
COMPETITION
We operate in a highly competitive environment and compete with other financial institutions including national and regional commercial banks, credit unions, savings and loan associations, online banks, and finance companies. To a lesser extent, we compete with other automobile manufacturers’ affiliated finance companies that actively seek to purchase retail consumer contracts through Toyota and Lexus dealers. We also compete with national and regional commercial banks and other automobile manufacturers’ affiliated finance companies for dealer financing. No single competitor is dominant in the industry. We compete primarily through service quality, our relationship with TMS,TMNA, and financing rates. We seek to provide exceptional customer service and competitive financing programs to our vehicle and industrial equipment dealers and to their customers. Our affiliation with TMSTMNA offers an advantage in providing financing or leasesleasing of Toyota Lexus and ScionLexus vehicles.
Competition for the principalinsurance products and services provided through our insurance operations is primarily from national and regional independent service contract providers. We compete primarily through service quality, our relationship with TMSTMNA and product benefits. Our affiliation with TMSTMNA provides an advantage in selling our insurance products and services.
REGULATORY ENVIRONMENT
Our finance and insurance operationsproducts are regulated under both federal and state law.
Federal Consumer Finance Regulation
Our finance operations are governed by, among other federal laws, the Equal Credit Opportunity Act, the Truth in Lending Act, the Truth inConsumer Leasing Act, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the unfair, deceptive and abusive practices (UDAAP) provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and the consumer data privacy and security provisions of the Gramm-Leach Bliley Act. The Equal Credit Opportunity Act is designed to prevent credit discrimination on the basis of certain protected classes, requires the distribution of specified credit decision notices and limits the information that may be requested and considered in a credit transaction. The Truth in Lending Act and the Truth inConsumer Leasing Act place disclosure and substantive transaction restrictions on consumer credit and leasing transactions. The Fair Credit Reporting Act imposes restrictions and requirements regarding our use and sharing of credit reports, the reporting of data to credit reporting agencies credit decision notices,including the accuracy and integrity of information reported, to the credit reporting agenciesdecision notices, consumer dispute handling procedures and identity theft prevention requirements. We are also subject to theThe Servicemembers Civil Relief Act which requires us, in most circumstances, to reduce the interest rate charged to customers who have subsequently joined, enlisted, been inducted or called to active military duty.duty, and also requires us to allow eligible servicemembers to terminate their lease agreements with us early without penalty. UDAAP laws prohibit practices that are unfair, deceptive or abusive towards consumers. Federal privacy and data security laws place restrictions on our use and sharing of consumer data, impose privacy notice requirements, give consumers the right to opt out of certain uses and sharing of their data and impose safeguarding rules regarding the maintenance, storage, transmission and destruction of consumer data. In addition, the dealers who originate our retail and lease contracts also must comply with both state and federal credit and trade practice statutes and regulations. Failure of the dealers to comply with these statutes and regulations could result in remedies that could have an adverse effect on us.
The Dodd-Frank Wall Street Reform andBureau of Consumer Financial Protection, Act (the “Dodd-Frank Act”), which was enacted in 2010, and its implementing regulations have had, and will likely continue to have, broad implications forpreviously known as the consumer financial services industry. The Consumer Financial Protection Bureau (“CFPB”), which was created by the Dodd-Frank Act, has broad regulatory, supervisory and enforcement authority over entities offering consumer financial services or products, including non-bank companies, such as TMCC.
The CFPB has supervisory and examination authority over certain bank and non-bank entitiesTMCC (“Covered Entities”). In this capacity, theThe CFPB can examineexamines Covered Entities for compliance with applicable laws and will have authority to order remediation of violations of consumer financial protection laws in a numberlaws. As part of ways, including imposing civil monetary penalties and requiring Covered Entities to provide customer restitution and to improve their compliance management systems. We are not currently subject tothis authority, the CFPB’s supervisory and examination authority, but we will be once the CFPB finalizes its larger participant rule for the auto finance industry (see below).
In September 2014, the CFPB issued a proposed rule that would expand the scope of its supervisory authority to include non-bank larger participants in the auto finance industry, which would include us. We expect that such companies may become subject to CFPB supervision as early as 2015. Such supervisory authority would allow the CFPB to conduct comprehensive and rigorous on-site examinations to assess compliance with consumer financial protection laws, which could result in enforcement actions, regulatory fines and mandated changes to our business, products, policies and procedures.
The CFPB’s rulemaking authority includes the authority to promulgate rules regarding, among other practices, debt collection practices that would apply to third-party collectors and first-party collectors, such as ourselves, and rules regarding consumer credit reporting practices. The timing and impact of these rules on our business remain uncertain.
In addition, to its supervisory and examination authority, the CFPB has increased scrutiny of the sale of certain ancillary or add-on products, including products similar to those we finance. The CFPB has questioned such products’ value and how such products are marketed and sold.
The CFPB also has enforcement authority. Under this authority the CFPBunder which it is authorized to conduct investigations (which may include a joint investigation with other agencies and regulators) to determine whether any person is engaging in, or has engaged in, conduct that violatesand initiate enforcement actions for violations of federal consumer financial protection laws and to initiate enforcement actions for such violations.laws. The CFPB has the authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kindstypes of affirmative relief), or other forms of remediation, and/or impose monetary penalties. The CFPB and the Federal Trade Commission (“FTC”) have become more active in investigating the products, services and operations of credit providers, including banks and other finance companies engaged in auto finance activities. Both the FTCCFPB and CFPBFTC announced various enforcement actions against lenders in the past few years involving significant penalties, consent orders, cease and desist orders and similar remedies that, if applicable to auto finance providersus and the products, services and operations we offer, may require us to cease or alter certain business practices, which could have a material adverse effect on our results of operations, financial condition, liquidity and results of operations.liquidity.
The CFPB has focused on the area of auto finance, particularly with respect to indirect financing arrangements, dealer compensation and fair lending compliance. In March 2013, the CFPB issued a bulletin stating that indirect auto lenders may be liable for violations under the Equal Credit Opportunity Act based on dealer-specific and portfolio-wide disparities on a prohibited basis. According to the bulletin, these disparities result from allowing dealers to mark up the interest rate offered by the indirect auto lenders to the contract rate offered to consumers by the dealers. In addition, the bulletin outlined steps that indirect auto lenders should take in order to comply with fair lending laws regarding dealer markup and compensation policies. We have adoptedOn May 21, 2018, President Trump signed into law a dealer monitoring programresolution approved by Congress under the Congressional Review Act that repealed the CFPB’s fair lending guidance contained in the bulletin and prohibits the future enactment of a similar rule without Congressional approval.
As previously disclosed, in February 2016, we believe is consistententered into consent orders with these requirements.
Thethe CFPB together withand the U.S. Department of Justice (collectively, the “Agencies”), has requested that we provide certain information about discretionary dealer compensation practices related to reflect the settlement of the Agencies’ allegations regarding our purchases of auto finance contracts from dealers. We are voluntarily cooperating with this request for information. On November 25, 2014, we received from the Agencies a letter alleging that such practices resulted in discriminatory pricing of loans to certain borrowers in violation of fair lending laws. The Agencies informed us that they are prepared to initiate an enforcement proceeding unless we agree to a voluntary resolution satisfactory to them. The Agencies have indicated that they are seeking monetary reliefdealers and implementation of changes to ourrelated discretionary dealer compensation practices and policies,(together, the “Consent Orders”). The Consent Orders were to be effective for three years, until February 2019, unless we met certain requirements at the end of the second year of the Consent Orders, in which case, the term of the Consent Orders could adversely affect our business. be reduced from three years to two years.
We are continuing discussions withhave been advised by the Agencies and intend to achieve a mutually satisfactory resolution to these matters. However, if such resolution does not occur,that we may be subject to an enforcement action. We have also received a requestsatisfied the requirements for documents and information from the New York State Department of Financial Services relating to our lending practices (including fair lending), and we are fully cooperating with this request.
The CFPB has also indicated a strong interest in debt collection and consumer reporting practices. In November 2013, the CFPB issued an advance notice of proposed rulemaking regarding debt collection, seeking input on, among other issues, whether it should issue rules to cover the conduct of creditors collecting in their own names on their own consumer loans and whether it should generally seek to apply rules developed for third party collectors to first party collectors, such as ourselves. The timing and impact of these anticipated rules on our business remain uncertain.
In addition, the CFPB has increased scrutinyearly termination of the saleConsent Orders. The termination of certain ancillary or add-on products, including extended warrantiesthe Consent Orders is conditioned upon our completion of the distribution of the consumer restitution funds required by the Consent Orders and credit insurance. Regulators have questioned such products’ valuewas effective May 1, 2018. TMCC and how such products are marketed and sold.the DOJ sought final court approval of a joint stipulation that we had satisfied our obligations under the Consent Orders, which was endorsed by the court on May 16, 2018.
CFPB supervision regulation, inquiries and related enforcement actions, if any, may result in monetary penalties, increase our compliance costs, require changes in our business practices, affect our competitiveness, impair our profitability, harm our reputation or otherwise adversely affect our business.
The Dodd-Frank Act also established the Financial Stability Oversight Council (the “FSOC”), which may designate non-bank financial companies that pose systemic risk to the U.S. financial system (“SIFIs”) to be supervised by the Federal Reserve. The Federal Reserve is required to establish and apply enhanced prudential standards to SIFIs, including capital, liquidity, counterparty exposure, resolution plan and overall risk management standards. To date, we have not received notification from the FSOC that we are being considered for designation but, if we were designated, we could experience increased compliance costs, the need to change our business practices, and other adverse effects on our business.
In addition to the FSOC process, certain parallel regulatory efforts are underway on an international level. The Financial Stability Board (“FSB”) – an international standard-setting authority – has proposed a methodology for assessing and designating non-bank non-insurer global-SIFIs (“G-SIFI”). It is unclear when this framework will be finalized, what form a final framework may take, what policy measures will be recommended to apply to G-SIFIs, and whether TMCC or any of its affiliates would be designated and subject to additional regulatory requirements due to any potential G-SIFI designation.
In addition, certain financial companies with $50 billion or more in assets, which could include us, and FSOC-designated SIFIs are potentially subject to assessments under the new Orderly Liquidation Authority (“OLA”), which was created by the Dodd-Frank Act to provide the Federal Deposit Insurance Corporation (“FDIC”) with authority to resolve large, complex financial companies outside of the normal bankruptcy process. Should a resolution under OLA occur and the proceeds from liquidation are not able to fully cover the costs of resolution, the FDIC is required to impose assessments in accordance with factors specified in the Dodd-Frank Act. Therefore, the amount of any assessment that might result cannot currently be determined. Further, we could be placed into resolution under the OLA if the U.S. Treasury Secretary (in consultation with the President of the United States) were to determine that we were in default or danger of default and that our resolution under other applicable law (e.g., U.S. bankruptcy law) would have serious adverse effects on the financial stability of the United States. Resolution under the OLA could result in changes in our structure, organization, and funding, and the repudiation of certain of our contracts by the FDIC, as receiver under the OLA.
As directed by the Dodd-Frank Act, on December 10, 2013, various federal financial regulators adopted final regulations to implement the Volcker Rule. The Volcker Rule generally prohibits companies affiliated with U.S. insured depository institutions from engaging in “proprietary trading” or acquiring or retaining any ownership interest in, sponsoring, or engaging in certain transactions with certain privately offered funds. The activities prohibited by the Volcker Rule are not core activities for us, but we continue to assess the full impact of the rule and the final implementing regulations based on developing regulatory and supervisory guidance.
Compliance with implementing the regulations under the Dodd-Frank Act or the oversight of the SEC or the CFPB may impose costs on, create operational constraints for, or place limits on pricing with respect to finance companies such as us or our affiliates. Federal regulatory agencies have issued numerous additional rulemakings to implement various requirements of the Dodd-Frank Act, and some of these rules remain in proposed form. Agencies have issued rules establishing a comprehensive framework for the regulation of derivatives and requiring sponsors of asset-backed securities to retain an ownership stake in securitization transactions. Although we have analyzed these and other rulemakings, the absence of final rules in some cases and the complexity of some of the proposed rules make it difficult for us to estimate the financial, compliance or operational impacts.
State Consumer Finance Regulation
A majority of states (and Puerto Rico) have enacted legislation establishing licensing requirements to conduct financing activities. We must renew these licenses periodically. Most states also impose limits on the maximum rate of finance charges. In certain states, the margin between the present statutory maximum interest rates and borrowing costs is sufficiently narrow that, in periods of rapidly increasing or high interest rates, there could be an adverse effect on our operations in these states if we were unable to pass on increased interest costs to our customers. Some state and federal laws impose rate and other restrictions on credit transactions with customers in active military status.status in addition to those imposed by the Servicemembers Civil Relief Act.
State laws also impose requirements and restrictions on us with respect to, among other matters, required credit application and finance and lease disclosures, late fees and other charges, the right to repossess a vehicle for failure to pay or other defaults under the retail or lease contract, other rights and remedies we may exercise in the event of a default under the retail or lease contract, privacy matters, and other consumer protection matters.
Our insuranceTMIS operations are subject to state insurance regulations and licensing requirements. State laws vary with respect to which products are regulated and what types of corporate licenses and filings are required to offer certain products and services.products. Certain products offered by TMIS are covered by federal and state privacy laws. InsuranceOur insurance company subsidiaries must be appropriately licensed in certain states in which they conduct business, must maintain minimum capital requirements and file annual financial information as determined by their state of domicile and the National Association of Insurance Commissioners. Failure to comply with these requirements could have an adverse effect on insurance operations in a particular state. We actively monitor applicable laws and regulations in each state in order to maintain compliance.
Recently, state regulators are taking a more stringent approach to supervising and regulating providers of financial products and services subject to their jurisdiction. We expect to continue to face greater supervisory scrutiny and enhanced supervisory requirements for the foreseeable future. For example, on January 28, 2015, we received a request for documents and information from the New York State Department of Financial Services relating to our lending practices (including fair lending), and on April 6, 2016, we received a request for documents and information pursuant to a civil investigative demand from the Commonwealth of Massachusetts Office of the Attorney General relating to our financing of guaranteed auto protection (“GAP”) agreements on retail contracts. We provided the requested documents and information, but have not had further communication with either agency regarding their respective reviews.
Other Federal and International Regulation
The Dodd-Frank Act also established the Financial Stability Oversight Council (the “FSOC”), which may designate non-bank financial companies that pose systemic risk to the U.S. financial system (“SIFIs”) to be supervised by the Federal Reserve. The Federal Reserve is required to establish and apply enhanced prudential standards to SIFIs, including capital, liquidity, counterparty exposure, resolution plan and overall risk management standards. The FSOC uses a multi-stage review process to evaluate non-bank financial companies for potential designation and supervision by the Federal Reserve. If we were designated for supervision after this multi-stage review process and any available appeal processes, we could experience increased compliance costs, the need to change our business practices, impairments to our profitability and competitiveness and other adverse effects on our business.
Under the Volcker Rule, companies affiliated with U.S. insured depository institutions are generally prohibited from engaging in “proprietary trading” and certain transactions with certain privately offered funds. The activities prohibited by the Volcker Rule are not core activities for us. Accordingly, we do not believe the Volcker Rule and its implementing regulations are likely to have a material effect on our business or operations. In the future, however, the federal financial regulatory agencies charged with implementing the Volcker Rule could change their approach to administering, enforcing or interpreting the rule, which could negatively affect us and potentially require us to limit or change our activities or operations.
The Dodd-Frank Act amended the U.S. Commodity Exchange Act (“CEA”) to establish a comprehensive framework for the regulation of certain over-the-counter (“OTC”) derivatives referred to as swaps. Under the Dodd-Frank Act, the Commodity Futures Trading Commission (“CFTC”) is required to adopt certain rules and regulations governing swaps. The CFTC has completed the majority of its regulations in this area, most of which are in effect.
The OTC derivatives provisions of the CEA, as amended by the Dodd-Frank Act, impose clearing, trading and margin requirements on certain contracts. At present, we qualify for exceptions from these requirements for the swaps that we enter into to hedge our commercial risks. However, if we were to fail to qualify for such exceptions, we could become subject to some or all of these requirements, which would increase our cost of entering into and maintaining such hedging positions. Moreover, the application of the clearing, trading and margin requirements, and other related regulations, to our dealer counterparties may change the cost and availability of the OTC derivatives that we use for hedging. Certain other requirements, such as reporting and recordkeeping, also apply to such instruments, but are not expected to have a material impact on us.
The full impact of the OTC derivatives provisions of the Dodd-Frank Act and related regulatory requirements upon our business will not be known until the regulations are fully implemented and the market for derivatives contracts has adjusted. The Dodd-Frank Act and related regulations could significantly increase the cost of OTC derivative contracts, materially alter the terms of OTC derivative contracts, reduce the availability of OTC derivatives to protect against risks we encounter, or reduce our ability to monetize or restructure our existing OTC derivative contracts. If we reduce our use of OTC derivatives as a result of the Dodd-Frank Act and resulting regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures. The Trump Administration has indicated in public statements that the Dodd-Frank Act will be under scrutiny and that some of its provisions and the rules promulgated thereunder may be revised, repealed or amended. Any such changes, including their nature and impact, cannot yet be determined with any degree of certainty.
We continually review our operations for compliance with applicable laws. Future administrative rulings, judicial decisions, legislation, regulations and regulatory guidance, and supervision and enforcement actions may result in monetary penalties, increase our compliance costs, require modification ofchanges in our business practices, and procedures.affect our competitiveness, impair our profitability, harm our reputation or otherwise adversely affect our business.
SeeRefer to “Part 1, Item 1A. “Part 1, Risk Factors – The regulatory environment in which we operate could have a material adverse effect on our business and operating results.results of operations.”
EMPLOYEE RELATIONS
At April 30, 2015,2018, we had 3,251approximately 3,300 full-time employees. We consider our employee relations to be satisfactory. We are not subject to any collective bargaining agreements with our employees.
We are exposed to certain risks and uncertainties that could have a material adverse impact on our business, results of operations and financial condition and operating results.condition.
General business, economic, and geopolitical conditions, as well as other market events, may adversely affect our operatingbusiness, results of operations and financial condition.
Our operating results of operations and financial condition are affected by a variety of factors. These factors include changes in the overall market for retail contracts, leasing or dealer financing, the new and used vehicle market, rate of growth in the number and average balance of customer accounts, the U.S. regulatory environment, competition, rate of default by our customers, changes in the U.S. and international wholesale capital funding markets, the used vehicle market, levels of operating and administrative expenses (including, but not limited to, personnel costs, technology costs and costs associated with reorganization or relocation), general economic conditions, inflation, and fiscal and monetary policies in the United States,U.S., Europe and other countries in which we issue debt. Further, a significant and sustained increase in fuel prices could lead to diminished new and used vehicle purchases. This could reduce the demand for automotive retail, lease and wholesale financing. In turn, lower used vehicle pricesvalues could affect return rates, charge-offs and depreciation on operating leases.
Economic slowdown and recession in the United States may lead to diminished consumer and business confidence, lower household incomes, increases in unemployment rates, higher consumer debt levels and higher consumer and commercial bankruptcy filings, allany of which could adversely affect vehicle sales and discretionary consumer spending. These conditions may decrease the demand for our financing products, as well as increase our delinquencies and losses. In addition, because our credit exposures are generally collateralized by vehicles, the severity of losses can be particularly affected by declines in used vehicle prices. Vehicle and industrial equipment dealersvalues. Dealers may also be affected by economic slowdown and recession, which in turn may increase the risk of default of certain dealers within our dealer portfolio.
Elevated levels of market disruption and volatility, includingsuch as in the United StatesU.S., Europe and in Europe,Asia, could increase our cost of capital and adversely affect our ability to access the global capital markets in a similar manner and at a similar cost as we have had in the past. These market conditions could also have an adverse effect on our operating results of operations and financial condition by diminishing the value of our investment portfolio and increasing our cost of funding. If as a result we increase the rates we charge to our customers and dealers, our competitive position could be negatively affected.
Geopolitical conditions and other market events may also impact our operating results. Anyresults of operations. Restrictive exchange or import controls or other disruptive trade policies, disruption of operations as a result of systemic political or military actions in response toeconomic instability, outbreak of war or expansion of hostilities, and acts of terrorism, regional conflict or other events, could adversely affect general economic or industry conditions.each have a material adverse effect on our results of operations and financial condition.
Our operating results of operations and financial condition are heavily dependent on the sales of Toyota, Lexus and Scion vehicles and to a lesser extent the sales of Toyota forklifts and HINO commercial trucks.
Our business is substantially dependent upon the sale of Toyota and Lexus and Scion vehicles, and to a lesser extent the sales of Toyota forklifts and HINO commercial trucks, as well as our ability to offer competitive financing and insurance products.
We primarily provide a variety of finance and insurance products to authorized Toyota and Lexus dealers and their customers in the United States. TMSU.S. Accordingly, our business is substantially dependent upon the primary distributorsale of Toyota Lexus and ScionLexus vehicles in the United States. TMHU is the primary distributor of Toyota forklifts and HINO is the exclusive distributor of commercial trucks manufactured by Hino Motors Ltd. TMS, TMHU and HINO sponsor subvention programs offered by us in the United States on certain new and used Toyota, Lexus and Scion vehicles, Toyota forklifts and HINO commercial trucks. The level of subvention varies based on our affiliates’ marketing strategies, economic conditions and volume of vehicle sales.U.S. Changes in the volume of sales sale of all or a portion of our portfolio, or changes in the size of our portfolio of loans and leases would impact the level of our financing volume, insurance volume and results of operations. These changes may result from governmental action or changes in governmental regulation or trade policies, changes in consumer demand, new vehicle incentive programs, recalls, the actual or perceived quality, safety or reliability of Toyota and Lexus and Scion vehicles, Toyota forklifts and HINO commercial trucks, economic conditions, increased competition, increases in the price of vehicles due to increased raw material costs, changes in import fees or tariffs on raw materials or imported vehicles, changes to or withdrawals from trade agreements (for example, the level of our affiliates’ sponsored subvention programs, increased competition, changes in pricing of imported units due toNorth American Free Trade Agreement), currency fluctuations, or other reasons, orfluctuations in interest rates, decreased or delayed vehicle production due to natural disasters, supply chain interruptions or other events. In addition, many manufacturers have increased their level of incentive programs on new vehicles in an attempt to maintain and grow market share; these incentives historically have included a combination of subvention, price rebates, and other incentives. Any negative impact on the volume of TMNA sales could have a material adverse effect on our business, results of operations, and financial condition.
TMS, a subsidiary of TMNA, is the primary distributor of Toyota and Lexus vehicles in the U.S. While TMNA conducts extensive market research before launching new or refreshed vehicles and introducing new services, many factors both within and outside TMNA’s control affect the success of new or existing products and services in the marketplace. Offering vehicles and services that customers want and value can mitigate the risks of increasing price competition and declining demand, but products and services that are perceived to be less desirable (whether in terms of product mix, price, quality, styling, safety, overall value, fuel efficiency, or other attributes) and the level of availability of products and services that are desirable can exacerbate these risks. With increased consumer interconnectedness through the internet, social media, and other media, mere allegations relating to quality, safety, fuel efficiency, corporate social responsibility, or other key attributes can negatively impact TMNA’s reputation or market acceptance of its products or services, even where such allegations prove to be inaccurate or unfounded.
Additionally, the volume of TMNA sales may also be affected by Toyota’s ability to successfully grow through investments in the area of emerging opportunities such as mobility and connected services, vehicle electrification, fuel cell technology and autonomy, which depends on many factors, including advancements in technology, regulatory changes, and other factors that are difficult to predict.
We operate in a highly competitive environment and compete with other financial institutions and, to a lesser extent, other automobile manufacturers’ affiliated finance companies primarily through service, quality, our relationship with TMNA, and financing rates. TMNA sponsors subvention and other incentive programs offered by us on certain new and used Toyota and Lexus vehicles. Our ability to offer competitive financing and insurance products in the U.S. depends in part on the level of TMNA sponsored subvention and other incentive program activity, which varies based on TMNA marketing strategies, economic conditions, and the volume of vehicle sales, among other factors. Any negative impact on the level of TMNA sponsored subvention and other incentive programs could in turn have a material adverse effect on our business, results of operations, and financial condition.
Changes in consumer behavior could affect the automotive industry, TMNA and TMC, and, as a result, our business, results of operations and financial condition.
A number of trends are affecting the automotive industry. These include a market shift from cars to sport utility vehicles (“SUVs”) and trucks, high demand for incentives, the rise of mobility services such as vehicle sharing and ride hailing, the development of autonomous and alternative-energy vehicles, the impact of demographic shifts on attitudes and behaviors toward vehicle ownership and use, the development of flexible alternatives to traditional financing and leasing such as subscription service offerings, changing expectations around the vehicle buying experience, adjustments in the geographic distribution of new and used vehicle sales, and advancements in communications and technology. Any one or more of these trends could adversely affect the automotive industry, TMNA and TMC, and could in turn have an impact on our business, results of operations and financial condition.
Recalls and other related announcements by TMSTMNA could affect our business, results of operations and financial condition and operating results.condition.
TMSTMNA periodically conducts vehicle recalls which could include temporary suspensions of sales and production of certain Toyota and Lexus models. Because our business is substantially dependent upon the sale of Toyota Lexus and ScionLexus vehicles, such events could adversely affect our business. A decrease in the level of sales, including as a result of the actual or perceived quality, safety or reliability of Toyota Lexus and ScionLexus vehicles or a change in standards of regulatory bodies will have a negative impact on the level of our financing volume, insurance volume, earning assets, Net financing revenues and insurance revenues. The credit performance of our dealer and consumer lending portfolios may also be adversely affected. In addition, a decline in the values of used Toyota Lexus and ScionLexus vehicles would have a negative effect on realizedresidual values and return rates, which, in turn, could increase depreciation expense and credit losses. Further, certain of TMCC’s affiliated entities are or may become subject to litigation and governmental investigations and have been or may become subject to fines or other penalties. These factors could affect sales of Toyota Lexus and ScionLexus vehicles and, accordingly, could have a negative effect on our operatingbusiness, results of operations and financial condition.
If we are unable to compete successfully or if competition increases in the businesses in which we operate, our results of operations could be negatively affected.
We operate in a highly competitive environment. We compete with other financial institutions including national and regional commercial banks, credit unions, savings and loan associations, finance companies, and to a lesser extent, other automobile manufacturers’ affiliated finance companies. In addition, online financing options provide consumers with alternative financing sources. Increases in competitive pressures could have an adverse impact on our contract volume, market share, Net financing revenues, insurance revenues and margins. Further, the financial condition and viability of our competitors and peers may have an adverse impact on the financial services industry in which we operate, resulting in a decrease in the demand for our products and services. This could have an adverse impact on the volume of our business and our results of operations.
Our borrowing costs and access to the unsecured debt capital markets depend significantly on the credit ratings of TMCC and its parent companies and our credit support arrangements.
The costavailability and availabilitycost of financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security or obligation. Our credit ratings depend, in large part, on the existence of the credit support arrangements with TFSC and TMC and on the financial condition and operating results of operations of TMC. If these arrangements (or replacement arrangements acceptable to the rating agencies) become unavailable to us, or if the credit ratings of the credit support providers were lowered, our credit ratings would be adversely impacted.
Credit rating agencies which rate the credit of TMC and its affiliates, including TMCC, may qualify or alter ratings at any time. Global economic conditions and other geopolitical factors may directly or indirectly affect such ratings. Any downgrade in the sovereign credit ratings of the United States or Japan may directly or indirectly have a negative effect on the ratings of TMC and TMCC. Downgrades or placement on review for possible downgrades could result in an increase in our borrowing costs as well as reduced access to the global unsecured debt capital markets. In addition, depending on the level of the downgrade, we may be required to post an increased amount of cash collateral under certain of our derivative agreements. These factors would have a negative impact on our competitive position, operating results of operations, liquidity and financial condition.
A disruption in our funding sources and access to the capital markets would have an adverse effect on our liquidity.
Liquidity risk is the risk arising from our ability to meet obligations in a timely manner when they come due in a timely manner.due. Our liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and cost-effective manner even in the event of adverse market conditions. A disruption in our funding sources may adversely affect our ability to meet our obligations as they become due. An inability to meet obligations when they come due in a timely manner would have a negative impact on our ability to refinance maturing debt and fund new asset growth and would have an adverse effect on our operating results of operations and financial condition.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for further discussion of liquidity risk.
Our allowance for credit losses may not be adequate to cover actual losses, which may adversely affect our financial condition and results of operations.operations and financial condition.
We maintain an allowance for credit losses to cover probable and estimable losses as of the balance sheet date resulting from the non-performance of our customers and dealers under their contractual obligations. The determination of the allowance involves significant assumptions, complex analyses, and management judgment and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information,information. Actual results may differ from our estimates or assumptions. For example, we review and analyze external factors, including changes in economic conditions, actual or perceived quality, safety and reliability of Toyota and Lexus vehicles, unemployment levels, the used vehicle market, and consumer behavior, among other factors. Internal factors, such as purchase quality mix and operational changes are also considered. A change in any or all of which may change.these factors would cause a change in estimated probable losses. As a result, our allowance for credit losses may not be adequate to cover our actual losses. In addition, changes in economic conditions affecting borrowers, accounting rules and related guidance, new information regarding existing portfolios, and other factors, both within and outside of our control, may require changes to the allowance for credit losses. A material increase in our allowance for credit losses may adversely affect our financial condition and results of operations.operations and financial condition.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” for further discussion of the estimates involved in determining the allowance.
We use estimatesallowance for credit losses and assumptionsNote 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for further discussion of the methodology used in determining the fair valueallowance for credit losses.
Our business and operations make extensive use of certain assets.quantitative models, estimates and assumptions. If our design, implementation or use of models is flawed or if actual results differ from our estimates or assumptions, prove to be incorrect, our financial condition and results of operations and financial condition could be materially and adversely affected.
We use quantitative models, estimates and various assumptions to price products and services, measure risk, estimate asset and liability values, assess liquidity, manage our balance sheet, and otherwise conduct our business and operations. If the design, implementation, or use of any of these models is flawed or if actual results different from our estimates or assumptions, it may adversely affect our results of operations and financial condition. In addition, to the extent that any inaccurate model outputs are used in determiningreports to regulatory agencies or the fair valuepublic, we could be subjected to supervisory actions, litigation, and other proceedings that may adversely affect our business, results of many of our assets which in some cases do not have an established market value or are not publicly traded. Our assumptionsoperations and estimates may be inaccurate for many reasons. For example, assumptionsfinancial condition.
Assumptions and estimates often involve matters that are inherently difficult to predict and are beyond our control (for example, macro-economic conditions and their impact on our dealers)conditions). In addition, they often involve complex interactions between a number of dependent and independent variables, factors, and other assumptions. As a result, our actual experience may differ materially from these estimates and assumptions. A material difference between our estimates and assumptions and our actual experience may adversely affect our financial condition and results of operations.operations and financial condition.
Fluctuations in the valuation of investment securities or significant fluctuations in investment market prices could negatively affect revenues.our Net financing revenues and results of operations.
Investment market prices, in general, are subject to fluctuation. Consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value and could negatively affect our Net financing revenues and other revenues. Additionally, negative fluctuations in the value of available-for-sale investment securities could result in unrealized losses recorded in otherOther comprehensive incomeloss or in other-than-temporary impairment within our results of operations. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investment, the relative price of alternative investments, national and international events, andgeopolitical conditions, or general market conditions. A material fluctuation in valuation or market prices of investments may adversely affect our Net financing revenues and results of operations.
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) could adversely affect our financial condition and results of operations.operations and financial condition.
Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America,U.S., which are periodically revised and/or expanded. The application of accounting principles is also subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time to time by various parties, including accounting standard setters and those who interpret the standards, such as the FASB and the SEC and our independent registered public accounting firm. Those changes could adversely affect our financial condition and result of operations.
The FASB has recently proposed new financial accounting standards and has many active projects underway which include potential forthat may result in significant changes in the accounting for financial instruments (including loans, allowance for loan losses, and debt) and the accounting for leases, among others. It is possible that any changes, if enacted, could adversely affect our financial condition and results of operations.operations and financial condition.
Refer to Note 1 – Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements for further discussion of these new accounting standards, including the potential impact to TMCC’s consolidated financial statements.
A decrease in the residual values of our off-lease vehicles and a higher number of returned lease assets could negatively affect our operating results of operations and financial condition.
We are exposed to residual value risk of loss on the disposition of leased vehicles and industrial equipment if sales proceeds realized upon the sale of returned lease assets are not sufficient to cover the residual value that was estimated at lease inception and if the number of returned lease assets areis higher than anticipated. To the extent the estimated end-of-term market value of a leased vehicle is lower than the residual value established at lease inception, the residual value of the leased vehicle is adjusted downward resulting in additional depreciation expense over the term of the lease contract so that the carrying value at lease endlease-end will approximate the estimated end-of-term market value. Among other factors, local, regional and national economic conditions, new vehicle pricing, new vehicle incentive programs, new vehicle sales, the actual or perceived quality, safety or reliability of our vehicles, future plans for new Toyota Lexus and ScionLexus product introductions, competitive actions and behavior, product attributes of popular vehicles, the mix of used vehicle supply, the level of current used vehicle values and inventory levels, and fuel prices heavily influence used vehicle pricesvalues and thus the actual residual value of off-lease vehicles. Differences between the actual residual values realized on leased vehicles and our estimates of such values at lease inception could have a negative impact on our operating results of operations and financial condition, due to the impact of higher-than-anticipated lossesDepreciation on operating leases recorded as depreciation expense in our Consolidated StatementStatements of Income. Actual return volumes may be higher than expected which can be impacted by contractual lease-end residual values relative to market values, a higher market supply of certain models of used vehicles, new vehicle incentive programs, and general economic conditions. The return of a higher number of leased assets could also impact the amount of depreciation expense recorded in our Consolidated StatementStatements of Income.Income, which could adversely affect our results of operations and financial condition.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Residual Value Risk”, “– Financial Condition – Disposition of Off-Lease Vehicles” and “– Financial Condition – Depreciation on Operating Leases” for further discussion of current lease trends.
We are exposed to customer and dealer credit risk, which could negatively affect our operating results of operations and financial condition.
Credit risk is the risk of loss arising from the failure of a customer or dealer to meet the terms of any retail, lease or leasedealer financing contract with us or otherwise fail to perform as agreed. An increase in credit risk would increase our provision for credit losses, which would have a negative impact on our results of operations and financial condition. There can be no assurance that our monitoring of credit risk and our efforts to mitigate credit risk are or will be sufficient to prevent an adverse effect on our results of operations and financial condition.
The level of credit risk in our retail and lease portfoliosconsumer portfolio is influenced primarily by two factors: the total number of contracts that experience default (“default frequency”) and the amount of loss per occurrence (“loss severity”), which in turn are influenced by various economic factors, the used vehicle market, purchase quality mix, contract term length, and operational changes as discussed below.changes. The used vehicle market is impacted by the supply of, and demand for, used vehicles, interest rates, inflation, the level of manufacturer incentives on new vehicles, the manufacturer’s actual or perceived reputation for quality, safety, and reliability, and the general economic outlook.
The level of credit risk in our dealer financing portfolio is influenced primarily by the financial strength of dealers within our portfolio, dealer concentration, collateral quality, and other economic factors. The financial strength of dealers within our portfolio is influenced by general macroeconomic conditions, the overall demand for new and used vehicles, and the financial condition of automotive manufacturers, among other factors. An increase in credit risk would increase our provision for credit losses, which would have a negative impact on our operating results and financial condition.
Economic slowdown and recession in the United States,U.S., natural disasters and other factors increase the risk that a customer or dealer may not meet the terms of a financeretail, lease or dealer financing contract with us or may otherwise fail to perform as agreed. A weak economic environment evidenced by, among other things, unemployment, underemployment, and consumer bankruptcy filings, may affect some of our customers’ and dealers’ ability to make their scheduled payments. There can be no assurance that our monitoring
Our results of credit risk and our efforts to mitigate credit risk are or will be sufficient to prevent an adverse effect on our operating results and financial condition.
Our operating results,operations, financial condition and cash flowflows may be adversely affected because ofby changes in interest rates, foreign currency exchange rates and market prices.
Market risk is the risk that changes in market interest rates and foreign currency exchange rates cause volatility in our operating results of operations, financial condition and cash flow. The effect of anflows. An increase in market interest rates on our cost of capital could have an adverse effect on our business, financial condition and operating results of operations by increasing our cost of capital and the rates we charge to our customers and dealers, which could, in turn, decrease our financing volumes and market share, thereby affectingresulting in a decline in our competitive position. We use various derivative instruments to manage our market risk. However, changes in interest rates, foreign currency exchange rates and market prices cannot always be predicted or hedged. Changes in interest rates or foreign currency exchange rates could affect our interest expense and the value of our derivatives, which could result in volatility in our operating results of operations, financial condition, and financial condition. Market risk also includes the risk that the value of our investment portfolio could decline.cash flows.
A failure or interruption in our operations could adversely affect our operating results of operations and financial condition.
Operational risk is the risk of loss resulting from, among other factors, inadequate or failed processes, systems or internal controls, theft, fraud or natural disasters including earthquakes.disasters. Operational risk can occur in many forms including, but not limited to, errors, business interruptions, failure of controls, failure of systems or other technology, deficiencies in our insurance risk management program, inappropriate behavior or misconduct by our employees or those contracted to perform services for us, and vendors that do not perform in accordance with their contractual agreements. Our corporate headquarters are locatedWe have established business recovery plans to address interruptions in the Los Angeles, California area, which is near major earthquake faults.our operations, but we can give no assurance that these plans will be adequate to remediate all events that we may face. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations. These events can potentially result in financial losses or other damage to us, including damage to our reputation.
Further, on April 28, 2014, we issued a press release announcing that, as part of TMC’s planned consolidation of its three separate North American headquarters for manufacturing, sales and marketing to a single new headquarters facility in Plano, Texas, our corporate headquarters would move from Torrance, California, to Plano, Texas, beginning in 2017. We do not expect that the relocation of our headquarters will change our corporate or leadership structure. However, we note that there are uncertainties related to the relocation. We can give no assurance that the relocation will be completed as planned or within the expected timing. In addition, the pending relocation may involve significant cost to us and the expected benefits of the move may not be fully realized due to associated disruption to operations and to personnel.
In addition, we periodically upgrade or replace our legacy transaction systems, which could have a significant impact on our ability to conduct our core business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new systems. These factors could have an adverse effect on our operating results and financial condition.
We also rely on a framework of internal controls designed to provide a sound and well-controlled operating environment. Due to the complexity of our business and the challenges inherent in implementing control structures across large organizations, control issues could be identified in the future that could have a material effect on our operations.
A security breach
We moved our corporate headquarters from Torrance, California to Plano, Texas as part of TMC’s consolidation of its three North American headquarters for manufacturing, sales and marketing, and finance operations to a single new headquarters facility. The relocation of our headquarters has not caused a change in our corporate or a cyber attackleadership structure. However, our future success depends on our ability to retain existing, and attract, hire and integrate new key personnel and other necessary employees at our new corporate headquarters. Any failure to do so could adversely affect our operatingbusiness, results of operations and financial condition.
A failure or interruption of our information systems could adversely affect our business, results of operations and financial condition.
We rely on internal and third party information and technological systems to manage our operations, which creates meaningful operational risk for us. Any failure or interruption of our information systems or the third party information systems on which we rely as a result of inadequate or failed processes or systems, human errors, employee misconduct, catastrophic events, external or internal security breaches, acts of vandalism, computer viruses, malware, ransomware, misplaced or lost data, or other events could disrupt our normal operating procedures, damage our reputation and are exposedhave an adverse effect on our business, results of operations and financial condition.
In addition, we periodically upgrade or replace our existing transaction systems, which could have a significant impact on our ability to conduct our core business operations and increase our risk of loss resulting from breachesdisruptions of normal operating processes and procedures that may occur during and after the implementation of new systems. For example, we are in the security or other failuresprocess of implementing a new core servicing system to replace our legacy core servicing system, which includes building a new enterprise integration platform that also accommodates downstream systems. We are also planning to implement a standardized enterprise resource planning system for our finance and accounting functions which will integrate legacy systems and provide enhanced functionality. The development and implementation of these systems. new systems and any future upgrades related thereto may require significant expenditures and divert management’s attention and other resources from our core business operations. There are no assurances that these new systems will provide us with the anticipated benefits and efficiencies. There can also be no assurance that the time and resources our management will need to devote to implementation and upgrades, potential delays in the implementation or upgrade or any resulting service interruptions, or any impact on the reliability of our data from any upgrade of our legacy system, will not have a material adverse effect on our business, results of operations and financial condition.
A security breach or a cyber-attack could adversely affect our business, results of operations and financial condition.
We collect and store certain personal and financial information from customers, employees, customers and other third parties. Security breaches or cyber attackscyber-attacks involving our systems or facilities, or the systems or facilities of our service providers, could expose us to a risk of loss of thispersonally identifiable information of customers, employees and third parties or other proprietary or competitively sensitive information, business interruptions, regulatory scrutiny, actions and penalties, litigation, reputational harm, and a loss of confidence, thatand other financial and non-financial costs, all of which could potentially have an adverse impact on our future business with current and potential customers.customers, results of operations and financial condition.
We rely on encryption and authentication technologyother information security technologies licensed from third parties to provide the security and authenticationcontrols necessary to effect securehelp in securing online transmission of confidential information frompertaining to customers, employees and employees.other aspects of our business. Advances in computerinformation system capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the technology that we use to protect sensitive customer and employee data. A party who is able to circumvent our security measures by methods such as hacking, fraud, trickery or other forms of deception could misappropriate proprietary information or cause interruption in our operations. We may be required to expend capital and other resources to protect against such security breaches or cyber attackscyber-attacks or to remediate problems caused by such breaches or attacks. Our security measures are designed to protect against security breaches and cyber attacks,cyber-attacks, but our failure to prevent such security breaches and cyber attackscyber-attacks could subject us to liability, decrease our profitability and damage our reputation. Even if a failure of, or interruption in, our systems or facilities is timely resolved or an attempted cyber incident or other security breach is successfully avoided or thwarted, it may require us to expend substantial resources or to take actions that could adversely affect customer satisfaction or behavior and expose us to reputational harm.
We could also be subjected to cyber-attacks that could result in slow performance and loss or temporary unavailability of our information systems. Information security risks have increased because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists, and others. We may not be able to anticipate or implement effective preventative measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. The occurrence of any of these events could have a material adverse effect on our business, results of operations and financial condition.
The failure or commercial soundness of our counterparties and other financial institutions may have an effect on our liquidity, operating results of operations or financial condition.
We have exposure to many different financial institutions, and we routinely execute transactions with counterparties in the financial industry. Our debt, derivative and investment transactions, and our ability to borrow under committed and uncommitted credit facilities, could be adversely affected by the actions and commercial soundness of other financial institutions. We cannot guarantee that our ability to borrow under committed and uncommitted credit facilities will continue to be available on reasonable terms or at all. Deterioration of social, political, labor, or economic conditions in a specific country or region may also adversely affect the ability of financial institutions, including our derivative counterparties and lenders, to perform their contractual obligations. Financial institutions are interrelated as a result of trading, clearing, lending and other relationships, and as a result, financial and political difficulties in one country or region may adversely affect financial institutions in other jurisdictions, including those with which we have relationships. The failure of any financial institutions and other counterparties to which we have exposure, directly or indirectly, to perform their contractual obligations, and any losses resulting from that failure, may materially and adversely affect our liquidity, operating results of operations or financial condition.
If we are unable to compete successfully or if competition increases in the businesses in which we operate, our operating results could be negatively affected.
We operate in a highly competitive environment. We compete with other financial institutions including national and regional commercial banks, credit unions, savings and loan associations, finance companies, and to a lesser extent, other automobile manufacturers’ affiliated finance companies. Increases in competitive pressures could have an adverse impact on our contract volume, market share, revenues, and margins. Further, the financial condition and viability of our competitors and peers may have an impact on the financial services industry in which we operate, resulting in changes in the demand for our products and services. This could have an adverse impact on the volume of our business and our operating results.
Our insurance operations could suffer losses if our reserves are insufficient to absorb actual losses.
Our insurance operations are subject to the risk of loss if our reserves for unearned premium and contract revenues on unexpired policies and agreements in force are not sufficient. Using historical loss experience as a basis for recognizing revenue over the term of the contract or policy may result in the timing of revenue recognition varying materially from the actual loss development. Our insurance operations are also subject to the risk of loss if our reserves for reported losses, losses incurred but not reported, and loss adjustment expenses are not sufficient. Because we use estimates in establishing reserves, actual losses may vary from amounts established in earlier periods.periods as a result of changes in frequency and severity.
We are exposed to risk transfer credit risk which could negatively impact our insurance operations.
Risk transfer credit risk is the risk that a reinsurer or other company assuming liabilities relating to our insurance operations will be unable to meet its obligations under the terms of our agreement with them. Such failure could result in losses to our insurance operations.
The regulatory environment in which we operate could have a material adverse effect on our business and operating results.results of operations.
Regulatory risk includes risk arising from failure to comply with applicable regulatory requirements and risk of liability and other costs imposed under various laws and regulations, including changes in applicable law, regulation and regulatory guidance.
Consumer Finance Regulation
As a provider of finance insurance and other payment and vehicle protectioninsurance products, we operate in a highly regulated environment. We are subject to licensing requirements at the state level and to laws, regulation, examination and examinationinvestigation from time to time at the state and federal levels. We hold lending, leasing, insurance and debt collector licenses where required in the various states in which we do business. We are obligated to comply with periodic reporting requirements and to submit to regular examinations as a condition of maintenance of our licenses and the offering of our products and services. We must comply with laws that regulate our business, including in the areas of marketing, analytics, origination, collection and servicing.
At the federal level, the Dodd-Frank Act has broad implications for the financial services industry and requires the development, adoption and implementation of many regulations. Among other things, the Dodd-Frank Act created the CFPB, which has broad regulatory, examination and enforcement powers over consumer financial products and services. Two of the primary purposes of the CFPB are to ensure that consumers receive clear and accurate disclosures regarding financial products and to protect consumers from discrimination and unfair, deceptive and abusive practices. Although the impact of the CFPB on our business remains uncertain, it appears that the CFPB is increasing its focus on auto finance providers and we may be subject to CFPB supervision and examination as early as 2015. CFPB supervision, regulation, inquiries and related enforcement action, if any, may result in monetary penalties, increase our compliance costs, require changes in our business practices, affect our competitiveness, impair our profitability, harm our reputation or otherwise adversely affect our business.
The Dodd-Frank Act also established the FSOC, which is mandated with designating SIFIs. An international standard-setting body, the FSB, also has proposed – but has not yet finalized – a methodology for assessing and designating non-bank non-insurer G-SIFIs. If TMCC or one of its affiliates were designated as a SIFI or, once the FSB finalizes its process, a G-SIFI, we could experience increased compliance costs, the need to change certain business practices, impairments to our profitability and competitiveness and other adverse effects on our business.
As directed by the Dodd-Frank Act, on December 10, 2013, various federal financial regulators adopted final regulations to implement the Volcker Rule, which generally prohibits companies affiliated with U.S. insured depository institutions from engaging in “proprietary trading” or certain transactions with certain privately offered funds. The activities prohibited by the Volcker Rule are not core activities for us, but we continue to assess the full impact of the rule and the final regulations based on developing regulatory and supervisory guidance.
Federal regulatory agencies have issued numerous additional rulemakings to implement various requirements of the Dodd-Frank Act, and some of these rules remain in proposed form. Agencies have issued rules establishing a comprehensive framework for the regulation of derivatives and requiring sponsors of asset-backed securities to retain an ownership stake in securitization transactions. Although we have analyzed these and other rulemakings, the absence of final rules in some cases and the complexity of some of the proposed rules make it difficult for us to estimate the financial, compliance or operational impacts.
Compliance with applicable law is costly and can affect operating results.results of operations. Compliance requires forms, processes, procedures, controls and the infrastructure to support these requirements. Compliance may create operational constraints and place limits on pricing, as the laws and regulations in the financial services industry are designed primarily for the protection of consumers. Changes in regulation could restrict our ability to operate our business as currently operated, could impose substantial additional costs or require us to implement new processes, which could adversely affect our business, prospects, financial performance or financial condition. The failure to comply could result in significant statutory civil and criminal fines, penalties, monetary damages, attorneys’ fees and costs, restrictions on our ability to operate our business, possible revocation of licenses and damage to our reputation, brand and valued customer relationships. Any such costs, restrictions, revocations or damage could adversely affect our business, prospects, financial performanceresults of operations or financial condition.
Our principal consumer finance regulator at the federal level is the CFPB, which has broad regulatory, supervisory and enforcement authority over us. The CFPB’s supervisory authority allows it, among other things, to conduct comprehensive and rigorous examinations to assess our compliance with consumer financial protection laws, which could result in enforcement actions, regulatory fines and mandated changes to our business products, policies and procedures.
The CFPB’s rulemaking authority includes the authority to promulgate rules regarding, among other practices, debt collection practices that would apply to third-party collectors and first-party collectors, such as ourselves, and rules regarding consumer credit reporting practices. The timing and impact of these rules on our business remain uncertain. In addition, the CFPB has increased scrutiny of the sale of certain ancillary or add-on products, including products similar to those that we finance or sell through TMIS. Regulators have questioned such products’ value and how such products are marketed and sold.
The CFPB and FTC have become more active in investigating the products, services and operations of credit providers, including banks and other finance companies engaged in auto finance activities, and have announced various enforcement actions against lenders in the past few years involving significant penalties, consent orders, cease and desist orders and similar remedies that, if applicable to us and the products, services and operations we offer, may require us to cease or alter certain business practices, which could have a material effect on our results of operations, financial condition, and liquidity. CFPB supervision and enforcement actions, if any, may result in monetary penalties, increase our compliance costs, require changes in our business practices, affect our competitiveness, impair our profitability, harm our reputation or otherwise adversely affect our business.
Refer to Item 1. “Business – Regulatory Environment” for further discussion of the CFPB’s authority and activities.
At the state level, state regulators are taking a more stringent approach to supervising and regulating financial products and services subject to their jurisdiction. We expect to continue to face greater supervisory scrutiny and enhanced supervisory requirements for the foreseeable future. For example, on January 28, 2015, we received a request for documents and information from the New York State Department of Financial Services relating to our lending practices (including fair lending), and on April 6, 2016, we received a request for documents and information pursuant to a civil investigative demand from the Commonwealth of Massachusetts Office of the Attorney General relating to our financing of GAP insurance products on retail contracts. We provided the requested documents and information, but have not had further communication with either agency regarding their respective reviews.
The Dodd-Frank Act also established the FSOC, which is mandated with designating SIFIs. If we or one of our affiliates were designated as a SIFI, we could experience increased compliance costs, the need to change our business practices, impairments to our profitability and competitiveness and other adverse effects on our business.
Under the Volcker Rule companies affiliated with U.S. insured depository institutions are generally prohibited from engaging in “proprietary trading” and certain transactions with certain privately offered funds. The activities prohibited by the Volcker Rule are not core activities for us. Accordingly, we do not believe the Volcker Rule and its implementing regulations are likely to have a material effect on our business or operations. In the future, however, the federal financial regulatory agencies charged with implementing the Volcker Rule could change their approach to administering, enforcing or interpreting the rule, which could negatively affect us and potentially require us to limit or change our activities or operations.
The Dodd-Frank Act amended the CEA to establish a new framework for the regulation of certain OTC derivatives referred to as swaps. The OTC derivatives provisions of the CEA, as amended by the Dodd-Frank Act, impose clearing, trading and margin requirements on certain contracts. At present, we qualify for exceptions from these requirements for the swaps that we enter into to hedge our commercial risks. However, if we were to fail to qualify for such exceptions, we could become subject to some or all of these requirements, which would increase our cost of entering into and maintaining such hedging positions. Moreover, the application of the clearing, trading and margin requirements, and other related regulations, to our dealer counterparties may change the cost and availability of the OTC derivatives that we use for hedging.
The full impact of the OTC derivatives provisions of the Dodd-Frank Act and related regulatory requirements upon our business will not be known until the regulations are fully implemented and the market for derivatives contracts has adjusted. The Dodd-Frank Act and regulations could significantly increase the cost of OTC derivative contracts, materially alter the terms of OTC derivative contracts, reduce the availability of OTC derivatives to protect against risks we encounter, or reduce our ability to monetize or restructure our existing OTC derivative contracts. If we reduce our use of OTC derivatives as a result of the Dodd-Frank Act and resulting regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures.
The Trump Administration has indicated in public statements that the Dodd-Frank Act will be under scrutiny and that some of its provisions and the rules promulgated thereunder may be revised, repealed or amended. Any such changes, including their nature and impact, cannot yet be determined with any degree of certainty.
Refer to Item 1. “Business – Regulatory Environment” for additional information on our regulatory environment.
Adverse economic conditions or changes in state laws in states in which we have customer concentrations may negatively affect our operating results of operations and financial condition.
We are exposed to geographic customer concentration risk in our retail, lease, dealer, and insurance products in certain states. Factors adversely affecting the economyeconomies and applicable laws in variousthe states where we have concentration risk could have an adverse effect on our consolidated financial condition and results of operations.operations and financial condition.
Refer to Note 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for additional information and disclosure about customer concentrations in certain states.
ITEM 1B. UNRESOLVEDUNRESOLVED STAFF COMMENTS
There are no unresolved SEC staff comments to report.
Our finance and insurance headquarters operations are currently located in Torrance, California,Plano, Texas, and our facilities are leased from TMS.
On April 28, 2014, we issued a press release announcing that our corporate headquarters will move from Torrance, California, to Plano, Texas, beginning in 2017 as part of TMC’s planned consolidation of its three separate North American headquarters for manufacturing, sales and marketing to a single new headquarters facility.TMNA.
Field operations for both finance and insurance are located in three CSCs, three regional management offices, and 3029 DSSOs in cities throughout the U.S. Two of the DSSOs share premises with the regional CSCs. All three of the regional management offices share premises with DSSO offices. The Central region CSC is located in Cedar Rapids, Iowa, and is leased from TMS.TMNA. The Western region CSC is located in Chandler, Arizona. The Eastern region CSC is located in Owings Mills, Maryland. We also have a sales and operations office in Puerto Rico. All premises are occupied under lease.
We believe that our properties are suitable to meet the requirements of our business.
Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business. Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices. Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies. We perform periodic reviews of pending claims and actions to determine the probability of adverse verdicts and resulting amounts of liability. We establish accruals for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. When we are able, we also determine estimates of reasonably possible loss or range of loss, whether in excess of any related accrued liability or where there is no accrued liability. SeeRefer to Note 14-14 – Commitments and Contingencies.Contingencies of the Notes to Consolidated Financial Statements. Given the inherent uncertainty associated with legal matters, the actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts for which accruals have been established. Based on available information and established accruals, we do not believe it is reasonably possible that the results of these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
TMCC is a wholly-owned subsidiary of TFSA,TFSIC, and accordingly, all shares of TMCC’s stock are owned by TFSA.TFSIC. There is no market for TMCC's stock.
InNo dividends were declared or paid in fiscal 2015, fiscal 20142018, 2017, and fiscal 2013, TMCC declared and paid cash dividends to TFSA of $435 million, $665 million and $1,487 million, respectively.2016.
ITEM 6. SELECTED FINANCIAL DATA
|
| Years ended March 31, |
| |||||||||||||||||
(Dollars in millions) |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 20121 |
|
| 20111 |
| |||||
INCOME STATEMENT DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease |
| $ | 6,113 |
|
| $ | 5,068 |
|
| $ | 4,748 |
|
| $ | 4,722 |
|
| $ | 4,912 |
|
Retail |
|
| 1,797 |
|
|
| 1,897 |
|
|
| 2,062 |
|
|
| 2,371 |
|
|
| 2,791 |
|
Dealer |
|
| 400 |
|
|
| 432 |
|
|
| 434 |
|
|
| 365 |
|
|
| 385 |
|
Total financing revenues |
|
| 8,310 |
|
|
| 7,397 |
|
|
| 7,244 |
|
|
| 7,458 |
|
|
| 8,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation on operating leases |
|
| 4,857 |
|
|
| 4,012 |
|
|
| 3,568 |
|
|
| 3,368 |
|
|
| 3,377 |
|
Interest expense |
|
| 736 |
|
|
| 1,340 |
|
|
| 940 |
|
|
| 1,300 |
|
|
| 1,614 |
|
Net financing revenues |
|
| 2,717 |
|
|
| 2,045 |
|
|
| 2,736 |
|
|
| 2,790 |
|
|
| 3,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance earned premiums and contract revenues |
|
| 638 |
|
|
| 567 |
|
|
| 571 |
|
|
| 604 |
|
|
| 543 |
|
Investment and other income, net |
|
| 194 |
|
|
| 135 |
|
|
| 173 |
|
|
| 113 |
|
|
| 236 |
|
Net financing revenues and other revenues |
|
| 3,549 |
|
|
| 2,747 |
|
|
| 3,480 |
|
|
| 3,507 |
|
|
| 3,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
| 308 |
|
|
| 170 |
|
|
| 121 |
|
|
| (98 | ) |
|
| (433 | ) |
Operating and administrative |
|
| 1,046 |
|
|
| 965 |
|
|
| 911 |
|
|
| 857 |
|
|
| 1,059 |
|
Insurance losses and loss adjustment expenses |
|
| 269 |
|
|
| 258 |
|
|
| 293 |
|
|
| 325 |
|
|
| 247 |
|
Total expenses |
|
| 1,623 |
|
|
| 1,393 |
|
|
| 1,325 |
|
|
| 1,084 |
|
|
| 873 |
|
Income before income taxes |
|
| 1,926 |
|
|
| 1,354 |
|
|
| 2,155 |
|
|
| 2,423 |
|
|
| 3,003 |
|
Provision for income taxes |
|
| 729 |
|
|
| 497 |
|
|
| 824 |
|
|
| 937 |
|
|
| 1,150 |
|
Net income |
| $ | 1,197 |
|
| $ | 857 |
|
| $ | 1,331 |
|
| $ | 1,486 |
|
| $ | 1,853 |
|
|
|
|
| Years Ended March 31, | ||||||||
(Dollars in millions) |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
| 2014 |
INCOME STATEMENT DATA |
|
|
|
|
|
|
|
|
|
|
Financing revenues: |
|
|
|
|
|
|
|
|
|
|
Operating lease |
| $8,167 |
| $7,720 |
| $7,141 |
| $6,113 |
| $5,068 |
Retail |
| 1,974 |
| 1,850 |
| 1,859 |
| 1,797 |
| 1,897 |
Dealer |
| 576 |
| 476 |
| 403 |
| 400 |
| 432 |
Total financing revenues |
| 10,717 |
| 10,046 |
| 9,403 |
| 8,310 |
| 7,397 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation on operating leases |
| 7,041 |
| 6,853 |
| 5,914 |
| 4,857 |
| 4,012 |
Interest expense |
| 1,851 |
| 1,754 |
| 1,137 |
| 736 |
| 1,340 |
Net financing revenues |
| 1,825 |
| 1,439 |
| 2,352 |
| 2,717 |
| 2,045 |
|
|
|
|
|
|
|
|
|
|
|
Insurance earned premiums and contract revenues |
| 882 |
| 804 |
| 719 |
| 638 |
| 567 |
Gain on sale of commercial finance business |
| - |
| - |
| 197 |
| - |
| - |
Investment and other income, net |
| 216 |
| 170 |
| 158 |
| 124 |
| 135 |
Realized gains, net on investments in marketable securities |
| 41 |
| 226 |
| 6 |
| 70 |
| - |
Net financing revenues and other revenues |
| 2,964 |
| 2,639 |
| 3,432 |
| 3,549 |
| 2,747 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
| 401 |
| 582 |
| 441 |
| 308 |
| 170 |
Operating and administrative |
| 1,357 |
| 1,277 |
| 1,161 |
| 1,046 |
| 965 |
Insurance losses and loss adjustment expenses |
| 425 |
| 371 |
| 318 |
| 269 |
| 258 |
Total expenses |
| 2,183 |
| 2,230 |
| 1,920 |
| 1,623 |
| 1,393 |
Income before income taxes |
| 781 |
| 409 |
| 1,512 |
| 1,926 |
| 1,354 |
(Benefit) provision for income taxes |
| (2,629) |
| 142 |
| 580 |
| 729 |
| 497 |
Net income |
| $3,410 |
| $267 |
| $932 |
| $1,197 |
| $857 |
|
| As of March 31, |
|
| March 31, |
| ||||||||||||||||||||||||||||||||||
(Dollars in millions) |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2012 |
|
| 2011 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2014 |
| ||||||||||
BALANCE SHEET DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables, net |
| $ | 65,893 |
|
| $ | 65,176 |
|
| $ | 62,567 |
|
| $ | 58,042 |
|
| $ | 57,736 |
|
| $ | 69,647 |
|
| $ | 68,462 |
|
| $ | 65,636 |
|
| $ | 65,893 |
|
| $ | 65,176 |
|
Investments in operating leases, net |
| $ | 31,128 |
|
| $ | 24,769 |
|
| $ | 20,384 |
|
| $ | 18,743 |
|
| $ | 19,041 |
|
| $ | 38,697 |
|
| $ | 38,152 |
|
| $ | 36,488 |
|
| $ | 31,128 |
|
| $ | 24,769 |
|
Total assets |
| $ | 109,625 |
|
| $ | 102,740 |
|
| $ | 95,302 |
|
| $ | 88,913 |
|
| $ | 91,704 |
|
| $ | 120,546 |
|
| $ | 119,635 |
|
| $ | 114,592 |
|
| $ | 109,503 |
|
| $ | 102,624 |
|
Debt |
| $ | 90,231 |
|
| $ | 85,367 |
|
| $ | 78,832 |
|
| $ | 73,234 |
|
| $ | 77,282 |
|
| $ | 98,353 |
|
| $ | 98,233 |
|
| $ | 93,594 |
|
| $ | 90,109 |
|
| $ | 85,251 |
|
Capital stock |
| $ | 915 |
|
| $ | 915 |
|
| $ | 915 |
|
| $ | 915 |
|
| $ | 915 |
|
| $ | 915 |
|
| $ | 915 |
|
| $ | 915 |
|
| $ | 915 |
|
| $ | 915 |
|
Retained earnings |
| $ | 7,383 |
|
| $ | 6,621 |
|
| $ | 6,429 |
|
| $ | 6,585 |
|
| $ | 5,840 |
|
| $ | 11,992 |
|
| $ | 8,582 |
|
| $ | 8,315 |
|
| $ | 7,383 |
|
| $ | 6,621 |
|
Total shareholder's equity |
| $ | 8,520 |
|
| $ | 7,738 |
|
| $ | 7,557 |
|
| $ | 7,662 |
|
| $ | 6,856 |
|
| $ | 12,880 |
|
| $ | 9,524 |
|
| $ | 9,397 |
|
| $ | 8,520 |
|
| $ | 7,738 |
|
No dividends were declared or paid during fiscal 2018, 2017 and 2016. Our Board of Directors declared and paid cash dividends of $435 million and $665 million $1,487 million, $741 million and $266 million to TFSATFSIC during fiscal 2015 and 2014, 2013, 2012 and 2011, respectively.
|
| As of and for the years ended March 31, |
|
| As of and for the years ended March 31, |
| ||||||||||||||||||||||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2012 |
|
| 2011 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2014 |
| ||||||||||
KEY FINANCIAL DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges |
|
| 3.59 |
|
|
| 2.00 |
|
|
| 3.27 |
|
|
| 2.85 |
|
|
| 2.85 |
|
|
| 1.42 |
|
|
| 1.23 |
|
|
| 2.32 |
|
|
| 3.59 |
|
|
| 2.00 |
|
Debt to equity |
|
| 10.6 |
|
|
| 11.0 |
|
|
| 10.4 |
|
|
| 9.6 |
|
|
| 11.3 |
|
|
| 7.6 |
|
|
| 10.3 |
|
|
| 10.0 |
|
|
| 10.6 |
|
|
| 11.0 |
|
Return on assets |
|
| 1.13 | % |
|
| 0.87 | % |
|
| 1.45 | % |
|
| 1.65 | % |
|
| 2.14 | % |
|
| 2.84 | % |
|
| 0.23 | % |
|
| 0.83 | % |
|
| 1.13 | % |
|
| 0.87 | % |
Allowance for credit losses as a percentage of gross earning assets |
|
| 0.50 | % |
|
| 0.50 | % |
|
| 0.63 | % |
|
| 0.80 | % |
|
| 1.13 | % |
|
| 0.55 | % |
|
| 0.58 | % |
|
| 0.52 | % |
|
| 0.50 | % |
|
| 0.50 | % |
Net charge-offs as a percentage of average gross earning assets |
|
| 0.29 | % |
|
| 0.28 | % |
|
| 0.27 | % |
|
| 0.21 | % |
|
| 0.52 | % |
|
| 0.39 | % |
|
| 0.47 | % |
|
| 0.38 | % |
|
| 0.29 | % |
|
| 0.28 | % |
60 or more days past due as a percentage of gross earning assets |
|
| 0.21 | % |
|
| 0.18 | % |
|
| 0.19 | % |
|
| 0.18 | % |
|
| 0.26 | % |
|
| 0.30 | % |
|
| 0.27 | % |
|
| 0.26 | % |
|
| 0.21 | % |
|
| 0.18 | % |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
Certain statements contained in this Form 10-K or incorporated by reference herein are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and currently available information. However, since these statements are based on factors that involve risks and uncertainties, our performance and results may differ materially from those described or implied by such forward-looking statements. Words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” “should,” “intend,” “will,” “may” or words or phrases of similar meaning are intended to identify forward-looking statements. We caution that the forward-looking statements involve known and unknown risks, uncertainties and other important factors such as the following that may cause actual results to differ materially from those stated:
| Changes in general business, economic, and geopolitical conditions, as well as in consumer demand and the competitive environment in the automotive markets in the United States; A decline in TMNA sales volume and the level of TMNA sponsored subvention and other cash incentive programs; Increased competition from other financial institutions seeking to increase their share of financing Toyota and Lexus vehicles; Changes in consumer behavior; Recalls announced by TMNA and the perceived quality of Toyota and Lexus vehicles; Availability and cost of financing; Changes in our credit ratings and those of TMC; Changes in our financial position and liquidity, or changes or disruptions in our funding sources or access to the global capital markets; Revisions to the estimates and assumptions for our allowance for credit losses; Flaws in the design, implementation and use of quantitative models and revisions to the estimates and assumptions that are used to determine the value of certain assets; Fluctuations in the value of our investment securities or market prices; Changes to existing, or adoption of new, accounting standards; Changes in prices of used vehicles and their effect on residual values of our off-lease vehicles and return rates; Failure of our customers or dealers to meet the terms of any contract with us, or otherwise perform as agreed; Fluctuations in interest rates and foreign currency exchange rates; Failure or interruption in our operations, including our communications and information systems, or as a result of our failure to retain existing or to attract new key personnel; A security breach or a cyber-attack; Failure or changes in commercial soundness of our counterparties and other financial institutions; Insufficient establishment of reserves, or the failure of a reinsurer to meet its obligations, in our insurance operations; Compliance with current laws and regulations or becoming subject to more stringent laws, regulatory requirements and regulatory scrutiny; Natural disasters, changes in fuel prices, manufacturing disruptions and production suspensions of Toyota and Lexus vehicle models and related parts supply; Changes in the economy or to laws in states where we have a high concentration of customers;
Forward-looking statements speak only as of the date they are made. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements.
Key Performance Indicators and Factors Affecting Our Business In our finance operations, we generate revenue, income, and cash flows by providing retail, In our insurance operations, we generate revenue through marketing, underwriting, and providing claims administration Our financial results are affected by a variety of economic and industry factors including, but not limited to, new and used vehicle markets, Toyota Our primary competitors are other financial institutions including national and regional commercial banks, credit unions, savings and loan associations, independent insurance service contract providers, online banks, finance companies and, to a lesser extent, other automobile manufacturers’ affiliated finance companies that actively seek to purchase Exceptional Customer Service: Our relationship with Toyota and Lexus Risk-Based Origination and Pricing: We price and structure our retail and lease contracts to compensate us for the credit risk we assume. The objective of this strategy is to maximize operating results and better match contract rates across a broad range of risk levels. To achieve this objective, we evaluate our existing portfolio for key opportunities to expand volume in targeted markets. We deliver timely strategic information to
Fiscal During fiscal Industry-wide vehicle sales in the U.S.
We continue to maintain broad global access to both domestic and international markets. Conditions in the global capital markets were generally stable during fiscal 2018. During fiscal 2018, our interest expense increased as compared to fiscal 2017 as a result of increasing interest rates. Future changes in interest rates in the U.S. and foreign
Fiscal Our consolidated net income was Our overall capital position increased $3.4 billion, bringing total shareholder’s equity to $12.9 billion at March 31, 2018, as compared to $9.5 billion at March 31, 2017. Our debt increased to $98.4 billion at March 31, 2018 from $98.2 billion at March 31, 2017 as a result of funding our earning asset growth. Our debt-to-equity ratio decreased to 7.6 at March 31, 2018 from 10.3 at March 31, 2017. Our overall capital position and our debt-to-equity ratios were favorably impacted by the previously mentioned TCJA enactment. Fiscal 2017 Compared to Fiscal 2016 Our consolidated net income was $267 million in fiscal 2017, compared to $932 million in fiscal 2016. The decrease in net income during fiscal 2017 compared to fiscal 2016, was primarily due to a $939 million increase in depreciation on operating leases, a $617 million increase in interest expense, a $141 million increase in provision for credit losses and a $116 million increase in operating and administrative expense. These decreases in net income were partially offset by a $643 million increase in total financing revenues primarily driven by an increase in operating lease revenues, a $438 million decrease in provision for income taxes and a Our overall capital position
The following table summarizes key results of our Finance Operations:
Our finance operations reported net income of Total financing revenues increased
Operating lease revenues increased 6 percent in fiscal 2018 as compared to fiscal 2017, due to higher average earning asset balances, higher portfolio yields, and increases in subvention revenue. The increase in our portfolio yields was partially offset by an increase in our depreciation expense.
Retail financing revenues increased 7 percent in fiscal 2018 as compared to fiscal 2017, due to higher portfolio yields and higher average earning asset balances.
Dealer financing revenues increased 21 percent in fiscal 2018 as compared to fiscal 2017, due to higher portfolio yields and higher average earning asset balances. Our total portfolio yield, which includes operating lease, retail and dealer financing Depreciation on Operating Leases
Interest Expense Our liabilities consist mainly of fixed and floating rate debt, denominated in U.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps, interest rate floors, interest rate caps and foreign currency swaps to hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. The following table summarizes the consolidated components of interest expense:
During fiscal Interest expense on debt and derivatives primarily represents contractual net interest settlements and changes in accruals on secured and unsecured notes and loans payable,
Gain or loss on non-hedge accounting debt denominated in foreign Gain or loss on
Future changes in interest and foreign currency exchange rates could continue to result in significant volatility in our interest expense, thereby affecting our results of operations. Realized Gains, Net on Investments in Marketable Securities During fiscal 2018, our finance operations reported no realized gains, net on investments in marketable securities. During fiscal 2017, our finance operations reported realized gains, net on investments in marketable securities of $241 million due to the sale of our equity mutual fund to take advantage of favorable market conditions. Provision for Credit Losses We recorded a provision for credit losses of Operating and Administrative Expenses
The following table summarizes key results of our Insurance Operations:
Our insurance operations reported net income of Agreements issued increased Revenue from Insurance Operations Our insurance operations reported insurance earned premiums and contract revenues of
Realized Gains, Net on Investments in Marketable Securities Our insurance operations reported Insurance Losses and Loss Adjustment Expenses Our insurance operations reported insurance losses and loss adjustment expenses of Operating and Administrative Expenses Our insurance operations reported operating and administrative expenses of Our overall benefit for income taxes for fiscal 2018 was $2.6 billion compared to a provision for income taxes of $142 million for fiscal 2017. The change in the provision for income taxes for fiscal
Vehicle Financing Volume and Net Earning Assets The composition of our vehicle contract volume and market share is summarized below:
The volume of our retail and lease contracts, which are acquired primarily from Toyota and Lexus Vehicle sales by demand for Toyota vehicles. Our financing volume
The composition of our net earning assets is summarized below:
Retail Contract Volume and Earning Assets Our new Lease Contract Volume and Earning Assets Our Dealer Financing and Earning Assets Dealer financing, net at March 31, 2018, decreased
We are exposed to risk Factors Affecting Exposure to Residual Value Risk Residual value represents an estimate of the end-of-term market value of a leased Residual Values at Lease Inception Residual values of lease End-of-term Market Values On a quarterly basis, we review the estimated end-of-term market values of leased vehicles to assess the appropriateness of our carrying values. To the extent the estimated end-of-term market value of a leased vehicle is lower than the residual value established at lease inception, the residual value of the leased vehicle is adjusted downward so that the carrying value at lease end will approximate the estimated end-of-term market value. Factors affecting the estimated
The
Impairment of Operating Leases We Disposition of Off-Lease Vehicles The following table summarizes our vehicle sales at lease termination and our scheduled maturities related to our
Scheduled maturities decreased Depreciation on Operating Leases
leases and average operating lease units outstanding are as follows:
Depreciation expense on operating leases increased
We are exposed to credit risk on our The level of credit risk on our dealer Factors Affecting Economic Factors General economic conditions such as changes in unemployment rates, housing values, bankruptcy rates, consumer debt levels, fuel prices, consumer credit performance, interest rates, inflation, household disposable income and unforeseen events such as natural disasters, among other factors, can influence both default frequency and loss severity. Used Vehicle Market Changes in used vehicle Purchase Quality Mix A change in the mix of contracts acquired at various risk levels may change the amount of credit risk we assume. An increase in the number of contracts acquired with lower credit quality (as measured by scores that establish a consumer’s creditworthiness based on present financial condition, experience, and credit history) can increase the amount of credit risk. Conversely, an increase in the number of contracts with higher credit quality can lower credit risk. An increase in the mix of contracts with lower credit quality can also increase operational risk unless appropriate controls and procedures are established. We strive to price contracts to achieve an appropriate risk adjusted return on our investment. The average original contract term of retail and lease contracts influences credit losses. Longer term contracts generally experience a higher rate of default and thus affect default frequency. In addition, the carrying values of vehicles under longer term contracts decline at a slower rate, resulting in a longer period during which we may be subject to used vehicle market volatility, which may in turn lead to increased loss severity. The types and models of the vehicles in our retail and lease portfolios have an effect on loss severity. Vehicle product mix can be influenced by factors such as customer preferences, fuel efficiency and fuel prices. These factors impact the demand for and Operational Changes Operational changes and ongoing implementation of new information and transaction systems and improved methods of consumer evaluation are designed to have a positive effect on the credit risk profile of our In an effort to mitigate credit losses, we regularly evaluate our purchasing practices. We limit our risk exposure by limiting approvals of lower credit quality contracts and requiring certain loan-to-value ratios. We continue to refine our credit risk management and analysis to ensure that the appropriate level of collection resources are aligned with portfolio risk, and we adjust capacity accordingly. We continue our focus on early and late stage delinquencies to increase the likelihood of resolution. We have also increased efficiency in our collections through the use of technology.
Factors Affecting Dealer The financial strength of dealers to which we extend credit directly affects our credit risk. Lending to dealers with lower credit quality, or a negative change in the credit quality of existing dealers, increases the risk of credit loss we assume. Extending a substantial amount of financing or commitments to a specific dealer or group of dealers creates a concentration of credit risk, particularly when the financing may not be secured by fully realizable collateral assets. Collateral quality influences credit risk in that lower quality collateral increases the risk that in the event of We assign risk classifications to each of our dealers and dealer groups based on their financial condition, the strength of the collateral, and other quantitative and qualitative factors including input from our field personnel. Our monitoring processes of the dealers and dealer groups are based on these risk classifications. We periodically update the risk classifications based on changes in financial condition. As part of our monitoring processes, we require dealers to submit monthly financial statements. We also perform periodic physical audits of vehicle inventory and monitor the timeliness of Dealer We also provide financing for some dealerships which sell products not distributed by
Our credit loss experience may be affected by a number of factors including the economic environment, our purchasing, servicing, and The following table provides information related to our credit loss experience:
The level of credit losses primarily reflects two factors: default frequency and loss severity. Net charge-offs as a percentage of average gross earning assets
We maintain an allowance for credit losses to cover probable and estimable losses as of the balance sheet date resulting from the non-performance of our customers and dealers under their contractual obligations. The determination of the allowance for credit losses involves significant assumptions, complex analyses, and management judgment. Refer to “Critical Accounting Estimates” for further discussion of the estimates involved in determining the The allowance for credit losses for our consumer portfolio is established through a process that estimates probable losses incurred as of the balance sheet date based upon consistently applied statistical analyses of portfolio data. This process utilizes delinquency migration analysis, in which historical delinquency and credit loss experience is applied to the current aging of the portfolio, and incorporates current and expected trends and other relevant factors, including used vehicle market conditions, economic conditions, unemployment rates, purchase quality mix, and operational factors. This process, along with management judgment, is used to establish the allowance for credit losses to cover probable and estimable losses incurred as of the balance sheet date. Movement in any of these factors would cause changes in estimated probable losses. The allowance for credit losses for our dealer portfolio is established by aggregating dealer financing receivables into loan-risk pools, which are determined based on the risk characteristics of the loan (e.g. secured by The following table provides information related to our allowance for credit losses:
During fiscal The total allowance for credit losses 2017. The allowance for credit losses as a percentage of gross earning assets
LIQUIDITY AND CAPITAL RESOURCES Liquidity risk is the risk relating to our ability to meet our financial obligations when they come due. Our liquidity strategy is to ensure that we maintain the ability to fund assets and repay liabilities in a timely and cost-effective manner, even in adverse market conditions. Our strategy includes raising funds via the global capital markets and through loans, credit facilities, and other transactions, as well as generating liquidity from our earning assets. This strategy has led us to develop a diversified borrowing base that is The following table summarizes the components of our outstanding funding sources at carrying value:
Liquidity management involves forecasting and maintaining sufficient capacity to meet our cash needs, including unanticipated events. To ensure adequate liquidity through a full range of potential operating environments and market conditions, we conduct our liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility and diversity. Key components of this operating strategy include a strong focus on developing and maintaining direct relationships with commercial paper investors and wholesale market funding providers, and maintaining the ability to sell certain assets when and if conditions warrant. We develop and maintain contingency funding plans and regularly evaluate our liquidity position under various operating circumstances, allowing us to assess how we will be able to operate through a period of stress when access to normal sources of capital is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, and outline actions and procedures for effectively managing through the problem period. In addition, we monitor the ratings and credit exposure of the lenders that participate in our credit facilities to ascertain any issues that may arise with potential draws on these facilities if that contingency becomes warranted. We maintain broad access to a variety of domestic and global markets and may choose to realign our funding activities depending upon market conditions, relative costs, and other factors. We believe that our funding sources, combined with operating and investing activities, provide sufficient liquidity to meet future funding requirements and business growth. Our funding volume is primarily based on the expected net change in earning assets and debt maturities. For liquidity purposes, we hold cash in excess of our immediate funding needs. These excess funds are invested in short-term, highly liquid and investment grade money market instruments as well as certain available-for-sale debt securities, which provide liquidity for our short-term funding needs and flexibility in the use of our other funding sources. We maintained excess funds ranging from We may lend to or borrow from affiliates on terms based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities. Credit support is provided to us by our indirect parent TMC’s obligations under its credit support agreement with TFSC rank pari passu with TMC’s senior unsecured debt obligations. Refer to “Part I, Item 1A. Risk Factors - Our borrowing costs and access to the unsecured debt capital markets depend significantly on the credit ratings of TMCC and its parent companies and our credit support arrangements” for further discussion. We routinely monitor global financial conditions and our financial exposure to our global Commercial Paper Short-term funding needs are met through the issuance of commercial paper in the
Unsecured Notes and Loans Payable The following table summarizes the components of our unsecured notes and loans payable:
We maintain a shelf registration statement with the SEC to provide for the issuance of debt securities in the U.S. capital markets to retail and institutional investors. We qualify as a well-known seasoned issuer under SEC rules, which allows us to issue under our registration statement an unlimited amount of debt securities during the three year period ending Our EMTN program, shared with our affiliates Toyota Motor Finance (Netherlands) B.V., Toyota Credit Canada Inc. and Toyota Finance Australia Limited (TMCC and such affiliates, the “EMTN Issuers”), provides for the issuance of debt securities in the international capital markets. In September TMCC has entered into term loan agreements with various banks. These term loan agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. We are currently in compliance with these covenants and conditions. In addition, we may issue other debt securities through the global capital markets or enter into other unsecured financing arrangements,
Secured Notes and Loans Payable Overview Asset-backed securitization of our earning asset portfolio provides us with an alternative source of funding. We securitize finance receivables and beneficial interests in investments in operating leases (“Securitized Assets”) using a variety of structures. Our securitization transactions involve the transfer of Securitized Assets to bankruptcy-remote special purpose entities. These bankruptcy-remote entities are used to ensure that the Securitized Assets are isolated from the claims of creditors of TMCC and that the cash flows from these assets are available solely for the benefit of the investors in these asset-backed securities. Investors in asset-backed securities do not have recourse to our other assets, and neither TMCC nor our affiliates guarantee these obligations. We are not required to repurchase or make reallocation payments with respect to the Securitized Assets that become delinquent or default after securitization. As seller and servicer of the Securitized Assets, we are required to repurchase or make a reallocation payment with respect to the underlying assets that are subsequently discovered not to have met specified eligibility requirements. This repurchase obligation is customary in securitization transactions. We service the Securitized Assets in accordance with our customary servicing practices and procedures. Our servicing duties include collecting payments on Securitized Assets and submitting them to a trustee for distribution to security holders and other interest holders. We prepare monthly servicer certificates on the performance of the Securitized Assets, including collections, investor distributions, delinquencies, and credit losses. We also perform administrative services for the special purpose entities. Our use of special purpose entities in securitizations is consistent with conventional practice in the securitization market. None of our officers, directors, or employees hold any equity interests or receive any direct or indirect compensation from our special purpose entities. These entities do not own our stock or the stock of any of our affiliates. Each special purpose entity has a limited purpose and generally is permitted only to purchase assets, issue asset-backed securities, and make payments to the security holders, other interest holders and certain service providers as required under the terms of the transactions. Our securitizations are structured to provide credit enhancement to reduce the risk of loss to security holders and other interest holders in the asset-backed securities. Credit enhancement may include some or all of the following:
Overcollateralization: The principal of the Securitized Assets that exceeds the principal amount of the related secured debt.
Excess spread: The expected interest collections on the Securitized Assets that exceed the expected fees and expenses of the special purpose entity, including the interest payable on the debt, net of swap settlements, if any.
Cash reserve funds: A portion of the proceeds from the issuance of asset-backed securities may be held by the securitization trust in a segregated reserve fund and may be used to pay principal and interest to security holders and other interest holders if collections on the underlying receivables are insufficient.
Yield supplement arrangements: Additional overcollateralization may be provided to supplement the future contractual interest payments from securitized receivables with relatively low contractual interest rates.
In addition to the credit enhancement described above, we may enter into interest rate swaps with our special purpose entities that issue variable rate debt. Under the terms of these swaps, the special purpose entities are obligated to pay TMCC a fixed rate of interest on payment dates in exchange for receiving a floating rate of interest on notional amounts equal to the outstanding balance of the secured debt. This arrangement enables the special purpose entities to mitigate the interest rate risk inherent in issuing variable rate debt that is secured by fixed rate Securitized Assets. Securitized Assets and the related debt remain on our Consolidated Balance
We maintain shelf registration statements with the SEC to provide for the issuance of securities backed by Securitized Assets in the U.S. capital markets. We regularly sponsor public securitization trusts that issue securities backed by retail finance receivables, including registered securities that we retain. Funding obtained from our public term securitization transactions is repaid as the underlying Securitized Assets amortize. None of these securities have defaulted, experienced any events of default or failed to pay principal in full at maturity. As of March 31,
We
Liquidity Facilities and Letters of Credit For additional liquidity purposes, we maintain syndicated credit facilities with certain banks. 364 Day Credit Agreement, Three Year Credit Agreement and Five Year Credit Agreement In November The ability to make draws is subject to covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These agreements may be used for general corporate purposes and none were drawn upon as of March 31, Other Unsecured Credit Agreements TMCC has entered into additional unsecured credit facilities with various banks. As of March 31, These credit agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These credit facilities were not drawn upon as of March 31, Credit Ratings The cost and availability of unsecured financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets. Credit ratings are not recommendations to buy, sell, or hold securities, and are subject to revision or withdrawal at any time by the assigning credit rating organization. Each credit rating organization may have different criteria for evaluating risk, and therefore ratings should be evaluated independently for each organization. Our credit ratings depend in part on the existence of the credit support agreements of TFSC and TMC. Refer to “Part Credit Support Agreements Under the terms of a credit support agreement between TMC and TFSC, TMC has agreed to:
maintain 100 percent ownership of TFSC;
cause TFSC and its subsidiaries to have a tangible net worth (the aggregate amount of issued capital, capital surplus and retained earnings less any intangible assets) of at least JPY 10 million, equivalent to $94,091 at March 31, 2018; and
make sufficient funds available to TFSC so that TFSC will be able to (i) service the obligations arising out of its own bonds, debentures, notes and other investment securities and commercial paper and (ii) honor its obligations incurred as a result of guarantees or credit support agreements that it has extended (collectively, “Securities”).
The agreement is not a guarantee by TMC of any securities or obligations of TFSC. TMC’s obligations under the credit support agreement rank pari passu with TMC’s senior unsecured debt obligations. Either party may terminate the agreement upon 30 days written notice to the other party. However, such termination cannot take effect unless and until (1) all Securities issued on or prior to the date of the termination notice have been repaid or (2) each rating agency that has issued a rating in respect of TFSC or any Securities upon the request of TMC or TFSC has confirmed to TFSC that the debt ratings of all such Securities will be unaffected by such termination. In addition, with certain exceptions, the agreement may be modified only by the written agreement of TMC and TFSC, and no modification or amendment can have any adverse effect upon any holder of any Securities outstanding at the time of such modification or amendment. The agreement is governed by, and construed in accordance with, the laws of Japan. Under the terms of a similar credit support agreement between TFSC and TMCC, TFSC has agreed to:
maintain 100 percent ownership of TMCC;
cause TMCC and its subsidiaries to have a tangible net worth (the aggregate amount of issued capital, capital surplus and retained earnings less any intangible assets) of at least $100,000; and
make sufficient funds available to TMCC so that TMCC will be able to service the obligations arising out of its own bonds, debentures, notes and other investment securities and commercial paper (collectively, “TMCC Securities”). The agreement is not a guarantee by TFSC of any TMCC Securities. The agreement contains termination and modification provisions that are similar to those in the agreement between TMC and TFSC as described above. The agreement is governed by, and construed in accordance with, the laws of Japan. TMCC Securities do not include the securities issued by securitization trusts in connection with TMCC’s securitization programs or any indebtedness under TMCC’s credit facilities or term loan agreements. Holders of TMCC Securities have the right to claim directly against TFSC and TMC to perform their respective obligations under the credit support agreements by making a written claim together with a declaration to the effect that the holder will have recourse to the rights given under the credit support agreements. If TFSC and/or TMC In addition, TMCC and TFSC are parties to a credit support fee agreement which requires TMCC to pay to TFSC a fee which is based upon the weighted average outstanding amount of TMCC Securities entitled to credit support. TCPR is the beneficiary of a credit support agreement with TFSC containing the same provisions as the credit support agreement between TFSC and TMCC but pertaining to TCPR bonds, debentures, notes and other investment securities and commercial paper (collectively, “TCPR Securities”). Holders of TCPR Securities have the right to claim directly against TFSC and TMC to perform their respective obligations as described above. This agreement is not a guarantee by TFSC of any securities or other obligations of TCPR. TCPR has agreed to pay TFSC a fee which is based upon the weighted average outstanding amount of TCPR Securities entitled to credit support.
Risk Management Strategy Our liabilities consist mainly of fixed and floating rate debt, denominated in U.S dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps, interest rate floors, interest rate caps and foreign currency swaps to hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. Our use of derivative transactions is intended to reduce long-term fluctuations in Accounting for Derivative Instruments All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow us to net settle positive and negative positions and offset cash collateral held with the same counterparty on a net basis. Changes in the fair value of derivatives are recorded in Our derivative contracts are governed by International Swaps and Derivatives Association (“ISDA”) Master Agreements. Substantially all of these ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement at market value in the event of a ratings downgrade of the other party below a specified threshold. We have daily valuation and collateral exchange arrangements with all of our counterparties. Our collateral agreements with substantially all our counterparties include a zero threshold, full collateralization arrangement. However, due to the time required to move collateral, there may be a delay of up to one day between the exchange of collateral and the valuation of our derivatives. We would not be required to post additional collateral to the counterparties with whom we were in a net liability position at March 31, 2018, if our credit ratings were to decline, since we fully collateralize without regard to credit ratings with these counterparties. We categorize derivatives as those designated for hedge accounting (“hedge accounting derivatives”) and those that are not designated for hedge accounting (“non-hedge accounting derivatives”). At the inception of a derivative contract, we may elect to designate a derivative as a hedge accounting derivative. We may also, from time-to-time, issue debt which can be characterized as hybrid financial instruments. These obligations often contain an embedded derivative which may require bifurcation. Changes in the fair value of the bifurcated embedded derivative are reported in Derivative Assets and Liabilities The following table summarizes our derivative assets and liabilities, which are included in Sheets:
Collateral represents cash received or deposited under reciprocal arrangements that we have entered into with our derivative counterparties. As of March 31,
OFF-BALANCE-SHEET ARRANGEMENTS Guarantees TMCC has guaranteed the payments of principal and interest with respect to the bond obligations that were issued by Putnam County, West Virginia and Gibson County, Indiana to finance the construction of pollution control facilities at manufacturing plants of certain TMCC affiliates. TMCC would be required to perform under the guarantees in the event of non-payment on the bonds and other related obligations. TMCC is entitled to reimbursement by the applicable affiliates for any amounts paid. TMCC receives an annual fee of $78 thousand for guaranteeing such payments. Other than this fee, there are no corresponding expenses or cash flows arising from our guarantees. The nature, business purpose, and amounts of these guarantees are described in Note 14 – Commitments and Contingencies of the Notes to Consolidated Financial Statements. Commitments We provide fixed and variable rate credit facilities to We have also extended credit facilities to affiliates as described in Note Indemnification Refer to Note 14 – Commitments and Contingencies of the Notes to Consolidated Financial Statements for a description of agreements containing indemnification provisions. We have not made any material payments in the past as a result of these provisions, and as of March 31,
CONTRACTUAL OBLIGATIONS AND CREDIT-RELATED COMMITMENTS We have certain obligations to make future payments under contracts and credit-related financial instruments and commitments. Aggregate contractual obligations and credit-related commitments in existence at March 31,
Refer to Note 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. CRITICAL ACCOUNTING ESTIMATES We have identified the estimates below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these estimates on business operations are discussed throughout this report where such estimates affect reported and expected financial results. The evaluation of the factors used in determining each of our critical accounting estimates involves significant assumptions, complex analyses, and management judgment. Changes in the evaluation of these factors may significantly impact the consolidated financial statements. Different assumptions or changes in economic circumstances could result in additional changes to the determination of residual values, the determination of the allowance for credit losses, the Determination of Residual Values The determination of residual values Nature of Estimates and Assumptions Required Residual values are estimated at lease inception by examining external industry data, the anticipated Toyota
Estimated return rates and end-of-term market values represent two of the key assumptions involved in determining the amount and timing of depreciation expense to be recorded in The vehicle lease return rate represents the number of end-of-term leased vehicles returned to us for sale as a percentage of lease contracts that were originally scheduled to mature in the same period less certain qualified early terminations. When the market value of a leased vehicle at
Determination of the Allowance for Credit Losses We maintain an allowance for credit losses to cover probable and estimable losses as of the balance sheet date on our earning assets resulting from the failure of customers or dealers to make required payments.
Consumer Portfolio The consumer portfolio is evaluated using methodologies such as roll rate, credit risk grade/tier, and vintage analysis. We review and analyze external factors, such as changes in economic conditions, actual or perceived quality, safety and reliability of Toyota Dealer Portfolio We evaluate the dealer portfolio by aggregating dealer financing receivables into loan-risk pools, which are determined based on the risk characteristics of the loan (e.g., whether the loan is secured by Sensitivity Analysis The assumptions used in evaluating our exposure to credit losses involve estimates and significant judgment. The Valuation of Derivative Instruments We manage our exposure to market risks such as interest rate and foreign currency risks with derivative instruments. These instruments include interest rate swaps, foreign currency swaps, interest rate floors, and interest rate caps. Our use of derivatives is limited to the management of interest rate and foreign currency risks. For further discussion of the accounting treatment of our derivatives, refer to Note 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. Nature of Estimates and Assumptions Required We determine the application of derivatives accounting through the identification of hedging instruments, hedged items, and the nature of the risk being hedged, as well as the methodology used to assess the hedging instrument's effectiveness. The fair values of our over-the-counter derivative assets and liabilities are determined using quantitative models that require the use of multiple market inputs including interest and foreign exchange rates, prices and indices to generate yield or pricing curves and volatility factors, which are used to value the position. Market inputs are validated through external sources, including brokers, market transactions and third-party pricing services. Estimation risk is greater for derivative asset and liability positions that are either option-based or have longer maturity dates where observable market inputs are less readily available or are unobservable, in which case quantitative based extrapolations of rate, price or index scenarios are used in determining fair values. Fair Value of Financial Instruments A portion of our assets Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models that primarily use as inputs market-based or independently sourced market parameters. We ensure that all applicable inputs are appropriately calibrated to market data, including but not limited to yield curves, interest rates, and foreign exchange rates. In addition to market information, the models also incorporate transaction details, such as maturity. Fair value adjustments, including those made for credit (counterparties and TMCC), liquidity, and input parameter uncertainty are included, as appropriate, to the model value to arrive at a fair value measurement. During fiscal
ITEM 7A. QUANTITATIVE AND MARKET RISK Market risk is the sensitivity of our financial instruments to changes in market prices, interest and foreign exchange rates. Market risk is inherent in the financial instruments associated with our operations, including debt, cash equivalents, available-for-sale securities, finance receivables and derivatives. Our business and global capital market activities give rise to market sensitive assets and liabilities. ALCO is responsible for the execution of our market risk management strategies and their activities are governed by written policies and procedures. The principal objective of asset and liability management is to manage the sensitivity of net interest margin to changing interest rates. When evaluating risk management strategies, we consider a variety of factors, including, but not limited to, management’s risk tolerance, market conditions and portfolio composition. We manage our exposure to certain market risks through our regular operating and financing activities and when deemed appropriate, through the use of derivative instruments. These instruments are used to manage underlying exposures; we do not use derivatives for trading, market making or speculative purposes. Refer to “Derivative Instruments” within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for information on risk management strategies, corporate governance and derivatives usage. Interest Rate Risk Interest rate risk can result from timing differences in the maturity or re-pricing of assets and liabilities. Changes in the level and volatility of market interest rate curves also create interest rate risk as the re-pricing of assets and liabilities are a function of implied forward interest rates. We are also exposed to basis risk, which is the difference in re-pricing characteristics of two floating rate indices. We use sensitivity simulations to assess and manage interest rate risk. Our simulations allow us to analyze the sensitivity of our existing portfolio as well as the expected sensitivity of our new business. We measure the potential volatility in our net interest cash flows and manage our interest rate risk by assessing the dollar impact given a 100 basis point increase or decrease in the implied yield curve. ALCO reviews the amount at risk and prescribes steps, if needed, to mitigate our exposure. Sensitivity Model Assumptions Interest rate scenarios were derived from implied forward curves based on market expectations. Internal and external data sources were used for the reinvestment of maturing assets, refinancing of maturing debt and replacement of maturing derivatives. The prepayment of retail and lease The table below reflects the potential 12-month change in pre-tax cash flows based on hypothetical movements in future market interest rates. The sensitivity analysis assumes instantaneous, parallel shifts in interest rate yield curves. These interest rate scenarios do not represent management’s view of future interest rate movements. In reality, interest
Our net interest cash flow sensitivity results from the “+100bp” scenario show a slightly Foreign currency risk represents exposure to changes in the values of our current holdings and future cash flows denominated in other currencies. To meet our funding objectives, we issue fixed and floating rate debt denominated in a number of different currencies. Our policy is to minimize exposures to changes in foreign exchange rates. Currency exposure related to foreign currency debt is hedged at issuance through the execution of foreign currency swaps which effectively convert our obligations on foreign denominated debt into U.S. dollar denominated 3-month LIBOR based payments. As a result, our economic exposure to foreign currency risk is minimized. Our debt is accounted for at amortized cost in our Consolidated Balance Certain fixed income mutual funds in our investment securities portfolio are exposed to foreign currency risk. The funds may invest directly in foreign currencies, in securities that trade in and receive revenues in foreign currencies, or in financial derivatives that provide exposure to foreign currencies. The funds may also enter into foreign currency derivative contracts to hedge the currency exposure associated with some or all of the fund’s securities. The market value of these holdings is translated into U.S. dollars based on the current exchange rates each business day. The effect of changes in foreign currency on our portfolio is reflected in the net asset value of the fund. Derivative Counterparty Credit Risk We manage derivative counterparty credit risk by maintaining policies for entering into derivative contracts, exercising our rights under our derivative contracts, requiring the posting of collateral and actively monitoring our exposure to counterparties. All of our Our International Swaps and Derivatives Association (“ISDA”) Master Agreements contain reciprocal collateral arrangements which help mitigate our exposure to the credit risk associated with our counterparties. As of March 31, In addition, many of our ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement and related transactions at market value in the event of a ratings downgrade below a specified threshold. Refer to “Part I, Item 1A. Risk Factors” for further discussion. A summary of our net counterparty credit exposure by credit rating (net of collateral held) is presented below:
We exclude from the table above credit valuation adjustments of
Issuer credit risk represents exposures to changes in the creditworthiness of individual issuers or groups of issuers. Changes in economic conditions may expose us to issuer credit risk where the value of an asset may be adversely impacted by changes in the levels of credit spreads, by credit migration, or by defaults. The following tables summarize our fixed income holding distribution by credit rating as
ITEM 8. FINANCIAL REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholder of Toyota Motor Credit Corporation:
We have audited the accompanying consolidated balance Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on We conducted our audits of these consolidatedfinancial statements in accordance with the standards of the Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence /
June We have served as the Company’s auditor since 1983.
TOYOTA MOTOR CREDIT CORPORATION CONSOLIDATED (Dollars in millions)
CONSOLIDATED
TOYOTA MOTOR CREDIT CORPORATION CONSOLIDATED BALANCE (Dollars in millions)
The following table presents the assets and liabilities of our consolidated variable interest entities.
TOYOTA MOTOR CREDIT CORPORATION CONSOLIDATED (Dollars in millions)
TOYOTA MOTOR CREDIT CORPORATION CONSOLIDATED (Dollars in millions)
70 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 1 – Summary of Significant Accounting Policies Nature of Operations Toyota Motor Credit Corporation We provide a variety of finance and insurance products to authorized Toyota Our products fall primarily into the following product categories:
Finance - We acquire retail installment sales contracts from dealers in the U.S. and Puerto Rico (“retail contracts”) and leasing contracts accounted for as operating leases (“lease contracts”) from dealers in the U.S. We collectively refer to our retail and lease contracts as the “consumer portfolio.” We also provide dealer financing, including wholesale financing, working capital loans, revolving lines of credit and real estate financing to dealers in the U.S. and Puerto Rico. We collectively refer to our dealer financing portfolio as the “dealer portfolio.”
Insurance - Through Toyota Motor Insurance Services, Inc., a wholly-owned subsidiary, and its insurance company subsidiaries (collectively referred to as “TMIS”), we provide marketing, underwriting, and claims administration for vehicle and payment protection products sold by dealers in the U.S. Our vehicle and payment protection products include vehicle service agreements, guaranteed auto protection agreements, prepaid maintenance contracts, excess wear and use agreements, tire and wheel protection agreements and key replacement protection. TMIS also covers certain risks of dealers and provides coverage and related administrative services to certain of our affiliates in the U.S. Although the vehicle and payment protection products are generally not regulated as insurance products, for ease of reference we collectively refer to the group of products provided by TMIS herein as “insurance products.” Our In December 2014, we entered into an agreement for the sale of certain assets and liabilities related to our industrial equipment retail, lease, and dealer portfolios (hereinafter the “commercial finance business”) to Toyota Industries Commercial Finance, Inc. (“TICF”), a subsidiary of Toyota Industries Corporation, which forms part of the group of companies known as the Toyota Group and is a related party to TMCC. As discussed in our Form 10-K for fiscal 2016, the sale was completed on October 1, 2015 and resulted in cash proceeds of $2.3 billion and a gain of $197 million that was reflected in our results of operations in fiscal 2016. The sale of our commercial finance business did not meet the criteria to be presented as a discontinued operation. 71 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Basis of Presentation Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America Related party transactions presented in the Consolidated Financial Statements are disclosed in Note 15 – Related Party Transactions.
Principles of Consolidation The consolidated financial statements include the accounts of TMCC, its wholly-owned subsidiaries and all variable interest entities (“VIE”) of which we are the primary beneficiary. All intercompany transactions and balances have been eliminated. Variable Interest Entities A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE. To assess whether we have the power to direct the activities of a VIE that most significantly impact its economic performance, we consider all the facts and circumstances including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the party that makes the most significant decisions affecting the VIE is determined to have the power to direct the activities of We perform ongoing reassessments, usually quarterly, of whether we are the primary beneficiary of a VIE. The reassessment process considers whether we have acquired or divested the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. We also reconsider whether entities previously determined not to be VIEs have become VIEs, based on new events, and therefore Refer to Note 10 – Variable Interest Entities for additional discussion and disclosure. 72 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because of inherent uncertainty involved in making estimates, actual results could differ from those estimates and assumptions. The accounting estimates that are most important to our business are the determination of residual value relating to our investments in operating leases and the allowance for credit losses as well as estimates related to the fair value of our derivative instruments, marketable securities and
Revenue Recognition
Operating Lease Revenues Operating lease revenues are recorded to income on a straight-line basis over the term of the lease. Incremental direct fees and costs received or paid in connection with the acquisition of operating leases, including incentive and rate participation payments made to
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 1 – Summary of Significant Accounting Policies (Continued) Insurance Earned Premiums and Contract Revenues Revenues from providing coverage under various contractual agreements are recognized over the term of the coverage in relation to the timing and level of anticipated claims and administrative expenses. Revenues from insurance policies, net of premiums ceded to reinsurers, are earned over the terms of the respective policies in proportion to the estimated loss development. Management relies on historical loss experience as a basis for establishing earnings factors used to recognize revenue over the term of the contract or policy. The portion of premiums and contract revenues applicable to the unexpired terms of the agreements is recorded as unearned insurance premiums and contract revenues. Service commissions and fees are recognized over the term of the coverage in relation to the timing of services performed. Depreciation on Operating Leases Depreciation on 74 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Allowance for Credit Losses We maintain an allowance for credit losses to cover probable and estimable losses incurred on our finance receivables and investments in operating leases resulting from the failure of customers or dealers to make contractual payments. Management evaluates the allowance at least quarterly, considering a variety of factors and assumptions to determine whether the allowance is considered adequate to cover probable and estimable losses incurred as of the balance sheet date.
Management develops and documents the allowance for credit losses on finance receivables based on Retail Loan Portfolio Segment – The retail loan portfolio segment consists of retail contracts acquired from dealers in the U.S. and Puerto Rico. Under a retail contract, we are granted a security interest in the underlying collateral which consists primarily of Toyota and Lexus vehicles. Based on the common risk characteristics associated with the finance receivables, the retail loan portfolio segment is considered a single class of finance receivable. Dealer Products Portfolio Segment – The dealer products portfolio segment consists of wholesale financing, working capital loans, revolving lines of credit and real estate loans to dealers in the U.S. and Puerto Rico. Wholesale financing is primarily collateralized by new or used vehicle inventory with the outstanding balance fluctuating based on the level of inventory. Working capital loans and revolving lines of credit are granted for working capital purposes and are secured by dealership assets. Real estate loans are collateralized by the underlying real estate, are underwritten primarily on a loan-to-value basis and are typically for a fixed term. Based on the risk characteristics associated with the underlying finance receivables, the dealer products portfolio segment consists of three classes of finance receivables: wholesale, working capital (including revolving lines of credit), and real estate. We also separately develop and document the allowance for credit losses for investments in operating leases. Investments in operating leases are not within the scope of accounting guidance governing the disclosure of portfolio segments.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Methodology Used to Develop the Allowance for Credit Losses Retail Loan Portfolio Segment and Investments in Operating Leases The level of credit risk in our retail loan portfolio segment and our investments in operating leases is influenced primarily by two factors: default frequency and loss severity, which in turn are influenced by various factors such as economic conditions, the used vehicle market, purchase quality mix, contract term length, and We evaluate the retail loan portfolio segment and investments in operating leases using methodologies that include roll rate, credit risk grade/tier, and vintage analysis. We review and analyze external factors, including changes in economic conditions, actual or perceived quality, safety and reliability of Toyota
We Dealer Products Portfolio Segment The level of credit risk in our dealer products portfolio segment is influenced primarily by the financial strength of dealers within our portfolio, dealer concentration, collateral quality, and other economic factors. The financial strength of dealers within our portfolio is influenced by, among other factors, general economic conditions, the overall demand for new and used vehicles and We evaluate the dealer portfolio by aggregating dealer financing receivables into loan-risk pools, which are determined based on the risk characteristics of the loan (e.g. secured by
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Accounting for the Allowance for Credit Losses and Impaired Receivables The majority of the allowance for credit losses covers estimated losses on the retail loan portfolio segment which is collectively evaluated for impairment. The remainder of the allowance for credit losses covers the estimated losses on investments in operating leases and the dealer products Troubled debt restructurings in the retail loan Increases to the allowance for credit losses are accompanied by corresponding charges to the Refer to Note 6 – Allowance for Credit Losses for additional discussion and disclosure. Insurance Losses and Loss Adjustment Expenses Insurance losses and loss adjustment expenses include amounts paid and accrued for loss events that are known and have been recorded as claims, estimates of losses incurred but not reported that are based on actuarial estimates and historical loss development patterns, and loss adjustment expenses that are expected to be incurred in connection with settling and paying these claims. Accruals for unpaid losses, losses incurred but not reported, and loss adjustment expenses are included in Cash Equivalents Cash equivalents Restricted Cash and Cash Equivalents Restricted cash
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Investments in Marketable Securities Investments in marketable securities consist of debt and equity securities. Debt and equity securities designated as available-for-sale (“AFS”) are recorded at fair value using quoted market prices where available with unrealized gains or losses included in accumulated other comprehensive income (“AOCI”), net of applicable Other-than-Temporary Impairment An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI. We conduct periodic reviews of securities in unrealized loss positions for the purpose of evaluating whether the impairment is other-than-temporary. As part of our ongoing assessment of other-than-temporary impairment (“OTTI”), we consider a variety of factors. Such factors include the length of time and extent to which the market value of a security has been less than amortized cost, adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying collateral of the security and the volatility of the fair value changes. An OTTI loss with respect to AFS debt securities must be recognized in earnings if we have the intent to sell the debt security or it is more likely than not that we will be required to sell the debt security before recovery of its amortized cost basis. If we have the intent to sell, the cost basis of the security is written down to fair value and the We perform periodic reviews of our AFS equity securities to determine whether unrealized losses are temporary in nature. We consider our intent and ability to hold the security for a period of time sufficient for recovery of fair value. Where we lack that intent or ability, the equity security’s decline in fair value is deemed to be other-than-temporary. If losses are considered to be other-than-temporary, the cost basis of the security is written down to fair value and the Refer to Note 3 – Investments in Marketable Securities for additional discussion and disclosure.
78 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Finance Receivables Our finance receivables consist of the retail loan Finance receivables are classified as held-for-investment if the Company has the intent and ability to hold the receivables for the foreseeable future or until maturity or payoff. As of March 31, Impaired Finance Receivables A finance receivable Troubled Debt Restructurings A troubled debt restructuring occurs when Nonaccrual Policy Retail Loan Portfolio Segment The accrual of revenue is discontinued at the time a retail loan finance receivable is determined to be uncollectible. These finance receivables may be restored to accrual status when future payments are reasonably assured. For these finance receivables in non-accrual status, subsequent financing revenue is recognized only to the extent a payment is received. Payments are applied first to outstanding interest and then to the unpaid principal balance. Dealer Products Portfolio Segment Impaired receivables in the dealer
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Investments in Operating Leases We record our investments in operating leases at acquisition cost, net of deferred fees and costs, deferred income, accumulated depreciation and the allowance for credit losses. Nonaccrual Policy The accrual of revenue on investments in operating leases is discontinued at the time an account is determined to be Determination of Residual Value
On a quarterly basis, we review the estimated end-of-term market values and return rates of leased vehicles to assess the appropriateness of the carrying values at We Refer to Note 5 – Investments in Operating Leases, Net for additional discussion and disclosure.
80 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Used Vehicles Held for Sale Used vehicles held for sale, reported in Other assets in our Consolidated Balance Sheets, consist of off-lease vehicles and repossessed vehicles. These vehicles are recorded at the lower of their carrying value or estimated fair value less costs to sell. These vehicles are sold promptly after grounding or repossession. Debt Issuance Costs Costs that are direct and incremental to debt issuance are Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If quoted prices in an active market are available, fair value is determined by reference to these prices. If quoted prices are not available, fair value is determined by valuation models that primarily use, as inputs, market-based or independently sourced parameters, including but not limited to interest rates, volatilities, foreign exchange rates and credit curves. Additionally, we may reference prices for similar instruments, quoted prices or recent transactions in less active markets. We use prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the availability of prices and inputs may be reduced for certain financial instruments. This condition could result in a financial instrument being reclassified from Level 1 to Level 2 or from Level 2 to Level 3. Level 1: Quoted (unadjusted) prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2: Quoted prices in active markets for similar assets and liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. Level 3: Unobservable inputs that are supported by little or no market activity and may require significant judgment in order to determine the fair value of the assets and liabilities. The use of observable and unobservable inputs is reflected in the fair value hierarchy assessment disclosed in the tables within this document. The availability of observable inputs can vary based upon the financial instrument and other factors, such as instrument type, market liquidity and other specific characteristics particular to the financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires additional judgment by management.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Valuation Methods We maintain policies and procedures to value financial instruments using the best and most relevant data available. Our Treasury Risk and Analytics Group (“TR&A”) is responsible for determining the fair value of our financial instruments. TR&A consists of quantitative analysts and risk and accounting professionals. Using benchmarking techniques, TR&A reviews our valuation pricing models at least annually to assess their ongoing propriety. As markets and products develop and the pricing for certain products becomes more or less transparent, TR&A refines its valuation methodologies. TR&A reviews the appropriateness of fair value measurements including validation processes, key model inputs, and the reconciliation of period-over-period fluctuations based on changes in key market inputs. Where possible, valuations, including both internally and externally obtained transaction prices, are validated against independent valuation sources. Our Fair Value Working Group (“FVWG”) reviews and approves the fair value measurement results and other relevant data quarterly. The FVWG consists of a cross-section of internal stakeholders who are knowledgeable in the area of financial valuations. All changes to our valuation methodologies are reviewed and approved by the FVWG. We conduct reviews of our primary pricing vendors to understand and assess the reasonableness of inputs used in their pricing process. While we do not have access to our vendors’ proprietary models, we perform detailed reviews of the pricing process, methodologies and control procedures for each asset class for which prices are provided. Our reviews include examination of the underlying inputs and assumptions for a sample of individual securities selected based on the nature and complexity of the securities. In addition, our pricing vendors have established processes in place for all valuations, which facilitates identification and resolution of potentially erroneous prices. Valuation Adjustments We may make valuation adjustments to ensure that financial instruments are recorded at fair value. These adjustments include amounts to reflect counterparty credit quality, our own creditworthiness, as well as constraints due to market illiquidity or unobservable parameters. Counterparty Credit Valuation Adjustments – Adjustments are required when the market price (or parameter) is not indicative of the credit quality of the counterparty. Non-Performance Credit Valuation Adjustments – Adjustments reflect our own non-performance risk when our liabilities are measured at fair value. Liquidity Valuation Adjustments – Adjustments are necessary when we are unable to observe prices for a financial instrument due to market illiquidity. 82 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Recurring Fair Value Measurements Cash Equivalents and Restricted Cash Equivalents Cash equivalents and restricted cash equivalents include money market instruments, commercial paper,
Investments in Marketable Securities The marketable securities portfolio consists of debt and equity securities. We estimate the value of our debt securities using observed transaction prices, independent pricing vendors, and internal pricing models. Pricing methodologies and inputs to valuation models used by the pricing vendors depend on the security type. Where possible, quoted prices in active markets for identical securities are used to determine the fair value of the investment securities; these securities are classified in Level 1 of the fair value hierarchy. Where quoted prices in active markets are not available, the pricing vendor uses various pricing models for each asset class that are consistent with what market participants use. The inputs and assumptions to the models of the pricing vendors are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many fixed income securities do not trade on a daily basis, the pricing vendors use applicable available information, such as benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. These investments are classified in Level 2 of the fair value hierarchy. Our pricing vendors may provide us with valuations that are based on significant unobservable inputs; in such circumstances, we classify these investments in Level 3 of the fair value hierarchy. Valuations obtained from third party pricing vendors are validated to assess their reasonableness. We may hold investments in actively traded open-end Derivatives We estimate the fair value of our derivatives using industry standard valuation models that require observable market inputs, including market prices, yield curves, credit curves, interest rates, foreign exchange rates, volatilities and the contractual terms of the derivative instruments. For derivatives that trade in liquid markets, model inputs can generally be verified and do not require significant management judgment. These derivative instruments are classified in Level 2 of the fair value hierarchy. Certain other derivative transactions trade in less liquid markets with limited pricing information. For such derivatives, key inputs to the valuation process include quotes from counterparties and other market data used to corroborate and adjust values where appropriate. Other market data includes values obtained from a market participant that serves as a third party pricing vendor. Inputs obtained from counterparties and third party pricing vendors are internally validated using valuation models to assess the reasonableness of changes in factors such as market prices, yield curves, credit curves, interest rates, foreign exchange rates and volatilities. These derivative instruments are classified in Level 3 of the fair value hierarchy. Our derivative fair value measurements consider assumptions about counterparty credit risk and our own non-performance risk. We consider counterparty credit risk and our own non-performance risk through credit valuation adjustments.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Nonrecurring Fair Value Measurements Impaired Dealer Finance Receivables For finance receivables within the dealer products portfolio segment for which there is evidence of impairment, we may measure impairment based on discounted cash flows, the loan’s observable market price or the fair value of the underlying collateral if the loan is collateral-dependent. If the loan is collateral-dependent, the fair values of impaired finance receivables are reported at fair value on a nonrecurring basis. The methods used to estimate the fair value of the underlying collateral depends on the specific class of finance receivable. For finance receivables within the wholesale class of finance receivables, the collateral value is generally based on wholesale market value or liquidation value for new and used vehicles. For finance receivables within the real estate class of finance receivables, the collateral value is generally based on appraisals. For finance receivables within the working capital class of finance receivables, the collateral value is generally based on the expected liquidation value of the underlying dealership assets. Adjustments may be performed in circumstances where market comparables are not specific to the attributes of the specific collateral or appraisal information may not be reflective of current market conditions due to the passage of time and the occurrence of market events since receipt of the information. As these valuations utilize unobservable inputs, our impaired finance receivables are classified in Level 3 of the fair value hierarchy. Impaired Retail Receivables Retail Financial Instruments Not Carried at Fair Value Finance Receivables Our finance receivables consist of retail loans Commercial Paper The carrying value of commercial paper issued is assumed to approximate fair value due to its short duration and generally negligible credit risk. We validate this assumption by recalculating the fair value of our commercial paper using quoted market rates. Commercial paper is classified in Level 2 of the fair value hierarchy.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Unsecured Notes and Loans Payable Unsecured notes and loans payable are primarily valued using current market rates and credit spreads for debt with similar maturities. Our valuation models utilize observable inputs such as standard industry curves; therefore, we classify these unsecured notes and loans payables in Level 2 of the fair value hierarchy. Where observable inputs are not available, we use quoted market prices to estimate the fair value of unsecured notes and loans payable. These unsecured notes and loans payable are classified in Level 3 of the fair value hierarchy since the market for these instruments is not active. In a limited number of instances, where neither observable inputs nor quoted market prices are available, we estimate the fair value of unsecured notes and loans payable using quotes from counterparties or a third party pricing vendor. We review the appropriateness of these fair value measurements by assessing the reasonableness of period over period fluctuations. Since the valuations utilize unobservable inputs, we classify Secured Notes and Loans Payable Fair value is estimated based on current market rates and credit spreads for debt with similar maturities. We also use internal assumptions, including prepayment speeds and expected credit losses on the underlying securitized assets, to estimate the timing of cash flows to be paid on these instruments. As these valuations utilize unobservable inputs, our secured notes and loans payables are classified in Level 3 of the fair value hierarchy. Refer to Note 2 – Fair Value Measurements for additional discussion and disclosure. Derivative Instruments All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow us to net settle asset and liability positions and offset cash collateral held with the same counterparty on a net basis. Changes in the fair value of derivatives are recorded in We categorize derivatives as those designated for hedge accounting (“hedge accounting derivatives”) and those that are not designated for hedge accounting (“non-hedge accounting derivatives”). At the inception of a derivative contract, we may elect to designate a derivative as a hedge accounting derivative if certain criteria are met. Hedge accounting derivatives are not widely used as a part of our risk management strategy. Hedge Accounting Derivatives We use derivatives to reduce the risk of changes in the fair value of debt. We occasionally designate certain derivatives as hedge accounting derivatives. In these instances, the risk being hedged is the risk of changes in the fair value of the hedged debt attributable to changes in the benchmark interest rate. In order to qualify for hedge accounting, a derivative must be considered highly effective at reducing the risk associated with the exposure being hedged. When we designate a derivative in a hedging relationship, we contemporaneously document the risk management objective and strategy. This documentation includes the identification of the hedging instrument, the hedged item and the risk exposure, how we will assess effectiveness prospectively and retrospectively, and how often we will carry out this assessment. We use the “long-haul” method of assessing effectiveness for our fair value
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued)
We review the effectiveness of our hedging relationships at least quarterly to determine whether the relationships have been and continue to be effective. We use regression analysis to assess the effectiveness of our hedges. When we determine that a hedging relationship is not or has not been effective, hedge accounting is no longer applied. If hedge accounting is discontinued, we continue to carry the derivative instrument as a component of We will also discontinue the use of hedge accounting if a derivative is sold, terminated, or if management determines that designating a derivative under hedge accounting is no longer deemed appropriate based on current investment strategy (“de-designated derivatives”). De-designated derivatives are included within the category of non-hedge accounting derivatives.
Our non-hedge accounting derivatives are carried at fair value. The full change in the fair value of the derivative instrument is recognized as a component of Interest expense in our Consolidated Statements of Income with no offsetting adjustment for the economically hedged item. The derivative instrument is included as a component of Other assets or Other liabilities in our Consolidated Balance Sheets. Embedded Derivatives Periodically, we issue debt instruments which Offsetting of Derivatives The accounting guidance permits the net presentation on We use master netting agreements to mitigate counterparty credit risk in derivative transactions. A master netting agreement is a contract with a counterparty that permits multiple transactions governed by that contract to be cancelled and settled with a single net balance paid to either party in the event of default or other termination event outside the normal course of business, such as a ratings downgrade of either party to the contract. Our reciprocal collateral agreements require the transfer of cash collateral to the party in a net asset position across all transactions governed by the master netting agreement. Our collateral agreements with substantially all our counterparties include a zero threshold, full collateralization arrangement. Upon default, the collateral agreement grants the party in a net asset position the right to set-off amounts receivable against any posted collateral. Refer to Note 7 – Derivatives, Hedging Activities and Interest Expense for additional discussion and disclosure.
86 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) Foreign Currency Transactions Certain of our debt transactions Risk Transfer Our insurance operations transfer certain risks to protect us against the impact of unpredictable high severity losses. The amounts recoverable from reinsurers and other companies that assume liabilities relating to our insurance operations are determined in a manner consistent with the related reinsurance or risk transfer agreement. Amounts recoverable from reinsurers and other companies on unpaid losses are recorded as a receivable but are not collectible until the losses are paid. Revenues related to risks transferred are recognized on the same basis as the related revenues from the underlying agreements. Covered losses are recorded as a reduction to insurance losses and loss adjustment expenses. Income Taxes We use the liability method of accounting for income taxes under which deferred tax assets and liabilities are adjusted to reflect changes in tax rates and laws in the period such changes are enacted resulting in adjustments to the current fiscal year’s provision for income taxes. TMCC files a consolidated federal income tax return with its subsidiaries and Refer to Note 13 – Income Taxes for additional discussion and disclosure.
87 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) New Accounting Guidance In May 2014, the Financial Accounting Standards Board ("FASB") issued new guidance on the recognition of revenue from contracts with customers. This comprehensive standard will supersede virtually all existing revenue recognition guidance. In August 2015, the FASB issued a one-year deferral of the effective date, with early adoption as of the original effective date permitted. The FASB also subsequently issued guidance amending and clarifying various aspects of the new revenue recognition standard. The majority of our revenues are outside the scope of the standard; however, certain insurance products fall within the scope of this guidance. Upon adoption of the guidance on April 1, 2018, we expect to recognize the cumulative effect of adoption by recording a reduction to our opening retained earnings of approximately $110 million, net of income taxes, resulting from an increase to unearned revenues (included in Other liabilities) of approximately $219 million, and deferred expenses (included in Other assets) of approximately $73 million, and an increase to deferred tax assets of approximately $36 million. While the adoption of the standard will change the timing of recognition of certain revenues and costs, the total revenue and expense recognized will not change as a result of the adoption of the standard. In January 2016, the FASB issued new guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and will require entities to measure equity investments at fair value and recognize any changes in fair value in earnings. This guidance also requires an entity to present, separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from changes in instrument-specific credit risk for instruments where the entity has elected the fair value option. Upon adoption of the guidance on April 1, 2018, we expect to recognize the cumulative effect of adoption by recording a reduction to our opening retained earnings that is not significant to our consolidated financial statements. In February 2016, the FASB issued new guidance that introduces a lessee model that brings most leases on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard. The new leasing standard represents a wholesale change to lease accounting for lessees and requires additional disclosures regarding leasing arrangements. This accounting guidance is effective for us on April 1, 2019. Upon adoption, we expect to recognize lease liabilities and right-of-use assets (at their present value) in our Consolidated Balance Sheets related to predominantly all of the future minimum lease payments disclosed in Note 14 – Commitments and Contingencies. We are continuing to evaluate the other potential impacts of this guidance from both a lessee and lessor perspective on our consolidated financial statements and related disclosures. In June 2016, the FASB issued new guidance that introduces a new impairment model based on expected losses rather than incurred losses for certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. This accounting guidance is effective for us on April 1, 2020. We expect this new guidance will result in an increase in our allowance for credit losses with a cumulative-effect adjustment to our opening retained earnings. The magnitude of the increase in our allowance for credit losses is under evaluation. We are currently evaluating the other potential impacts of this guidance on our consolidated financial statements and related disclosures. In August 2016, the FASB issued new guidance that is intended to reduce diversity in practice in the classification of certain items in the statement of cash flows. This accounting guidance is effective for us on April 1, 2018. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures. In November 2016, the FASB issued new guidance that clarifies how restricted cash and cash equivalents should be classified and presented on the statement of cash flows and requires new disclosures related to restricted cash and cash equivalents. This guidance was intended to reduce diversity in practice in the classification of restricted cash and cash equivalents on the statement of cash flows. This accounting guidance is effective for us on April 1, 2018 88 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 1 – Summary of Significant Accounting Policies (Continued) In March 2017, the FASB issued new guidance that requires certain premiums on callable debt securities to be amortized to the earliest call date. This accounting guidance is effective for us on April 1, In In February 2018, the FASB issued new guidance that would allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cut and Jobs Act of 2017 (“TCJA”). The amount of the reclassification would be the difference between the historical 35% corporate income tax rate and the newly enacted 21% corporate income tax rate. The accounting guidance is effective for us on April 1, 2019, with early adoption permitted. The adoption of this guidance will not have a material impact on our consolidated financial statements and disclosures. Recently Adopted Accounting Guidance In April 2017, we adopted new FASB accounting guidance which clarifies that a change in the counterparty to a designated derivative hedging instrument does not, in and of itself, require de-designation of that hedging relationship; provided that all other hedge accounting criteria continue to be met. The adoption of this guidance did not have an impact on our consolidated financial statements. In April 2017, we adopted new FASB accounting guidance which clarifies whether an embedded contingent put or call option is clearly and closely related to the debt host when bifurcating an embedded derivative. The adoption of this guidance did not have an impact on our consolidated financial statements. In April 2017, we adopted new FASB accounting guidance that further amends the analysis a reporting entity must perform to determine whether it should consolidate certain legal entities. This
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 2 – Fair Value Measurements
90 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 2 – Fair Value Measurements (Continued)
91 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 2 – Fair Value Measurements (Continued) Transfers between levels of the fair value hierarchy are recognized at the end of their respective reporting periods. The following tables summarize the
92 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 2 – Fair Value Measurements (Continued)
Nonrecurring Fair Value Measurements Nonrecurring fair value measurements
Level 3 Fair Value Measurements The 93 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 2 – Fair Value Measurements (Continued) Financial Instruments The following tables provide information about
The carrying value of each class of finance receivables includes accrued interest and deferred fees and costs, net of deferred income and the allowance for credit losses.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 3 – Investments in Marketable Securities We classify all of our investments in marketable securities as available-for-sale. The amortized cost and estimated fair value of investments in marketable securities and related unrealized gains and losses were as follows:
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 3 – Investments in Marketable Securities (Continued)
The
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 3 – Investments in Marketable Securities (Continued) Unrealized Losses on Securities Investments in marketable securities Realized Gains and Losses on Securities The following table represents realized gains and losses on our available-for-sale securities presented in our Consolidated Statements of Income:
Contractual Maturities The amortized cost, fair value and contractual maturities of available-for-sale debt instruments
1 Mortgage-backed and asset-backed securities are shown separately from other maturity groupings as these securities
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 4 – Finance Receivables, Net Finance receivables, net consist of retail receivables and dealer Finance receivables, net consisted of the following:
Contractual maturities on retail receivables and dealer financing are as follows:
A significant portion of our finance receivables has historically settled prior to contractual maturity. Contractual maturities shown above should not be considered indicative of future cash collections.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 4 – Finance Receivables, Net (Continued) Credit Quality Indicators We are exposed to credit risk on our finance receivables. Credit risk is the risk of loss arising from the failure of customers or dealers to meet the terms of their contracts with us or otherwise fail to perform as agreed. Retail Loan
Individual borrower accounts Dealer Products Portfolio Segment For the three classes of finance receivables within the dealer products portfolio segment (wholesale, real estate and working capital), all loans outstanding for an individual dealer or dealer group, which includes affiliated entities, are aggregated and evaluated collectively by dealer or dealer group. This reflects the interconnected nature of financing provided to our individual dealer and dealer group customers, and their affiliated entities. When assessing the credit quality of the finance receivables within the dealer products portfolio segment, we segregate the finance receivables account balances into four categories representing distinct credit quality indicators based on internal risk assessments. The internal risk assessments for all finance receivables within the dealer products portfolio segment are updated on a monthly basis. The four credit quality indicators are:
Performing – Account not classified as either Credit Watch, At Risk or Default
Credit Watch – Account designated for elevated attention
At Risk – Account where there is an increased likelihood that default may exist based on qualitative and quantitative factors
Default – Account is not currently meeting contractual obligations or we have temporarily waived certain contractual requirements
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 4 – Finance Receivables, Net (Continued) The tables below present each credit quality indicator by class of finance
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 4 – Finance Receivables, Net (Continued) Impaired Finance Receivables The following table summarizes the information related to our impaired loans by class of finance receivables:
As of March 31,
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 4 – Finance Receivables, Net (Continued) The following table summarizes the average impaired loans by class of finance receivables as of the balance sheet date:
The primary source of interest income recognized on the loans in the table above is from performing troubled debt restructurings.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 4 – Finance Receivables, Net (Continued) Troubled Debt Restructuring For accounts not under bankruptcy protection, the amount of finance receivables modified as a troubled debt restructuring during fiscal We consider finance receivables under bankruptcy protection within the retail loan Payment Defaults Finance receivables modified as troubled debt restructurings for which there was a subsequent payment default during fiscal
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 5 – Investments in Operating Leases, Net Investments in operating leases, net consist of Investments in operating leases, net consisted of the following:
Future minimum rentals on investments in operating leases are as follows:
A portion of our operating lease contracts has historically terminated prior to maturity. Future minimum rentals shown above should not be considered indicative of future cash collections.
104 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 6 – Allowance for Credit Losses The following table provides information related to our allowance for credit losses on finance receivables and investments in operating leases:
1 Amount relates to the commercial finance business which was sold in fiscal 2016. Charge-offs are shown net of recoveries of Allowance for Credit Losses and Finance Receivables by Portfolio Segment The following tables provide information related to our allowance for credit losses and finance receivables by portfolio
segment:
The ending balance of finance receivables collectively evaluated for impairment in the above table includes approximately
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 6 – Allowance for Credit Losses (Continued)
The ending balance of finance receivables collectively evaluated for impairment in the above table includes approximately
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 6 – Allowance for Credit Losses (Continued) Past Due Finance Receivables and Investments in Operating Leases The following table shows aggregate balances of finance receivables and investments in operating leases 60 or more days past due:
Substantially all finance receivables and investments in operating Past Due Finance Receivables by Class The following tables summarize the aging of finance receivables by
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 7 – Derivatives, Hedging Activities and Interest Expense Derivative Instruments Our liabilities consist mainly of fixed and floating rate debt, denominated in U.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps, interest rate floors, interest rate caps and foreign currency swaps to hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. Our use of derivative transactions is intended to reduce long-term fluctuations in Credit Risk Related Contingent Features Our derivative contracts are governed by International Swaps and Derivatives Association (“ISDA”) Master Agreements. Substantially all of these ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement at market value in the event of a ratings downgrade of the other party below a specified threshold.
108 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 7 – Derivatives, Hedging Activities and Interest Expense (Continued) Derivative Activity Impact on Financial Statements The following tables show the financial statement line item and amount of our derivative assets and liabilities that are reported in Sheets:
As of March 31,
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 7 – Derivatives, Hedging Activities and Interest Expense (Continued)
As of March 31, 2017, we held collateral of $154 million which offset derivative assets and we posted collateral of $1,013 million which offset derivative liabilities. In addition, there was $394 million in counterparty netting included for both derivative assets and derivative liabilities. We also held excess collateral of $5 million which we did not use to offset derivative assets, and we posted excess collateral of $5 million which we did not use to offset derivative liabilities. 110 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 7 – Derivatives, Hedging Activities and Interest Expense (Continued) The following table summarizes the components of interest expense, including the location and amount of gains and losses on derivative instruments and related hedged items,
Interest expense on debt and derivatives represents net interest settlements and changes in accruals. Gains and losses The relative fair value allocation of derivative credit value adjustments for counterparty and non-performance credit risk within interest expense
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 8 – Other Assets and Other Liabilities Other assets and other liabilities consisted of the following:
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Debt and the related weighted average contractual interest rates are summarized as follows:
The As of March 31,
Certain unsecured notes and loans payable are Our secured notes and loans payable are denominated in U.S. dollars and consist of both fixed and variable rate debt with contractual interest rates ranging from
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Scheduled maturities of our debt portfolio are summarized
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 10 – Variable Interest Entities Consolidated Variable Interest Entities We use one or more special purpose entities that are considered Variable Interest Entities to issue asset-backed securities to third party bank-sponsored asset-backed securitization vehicles and to investors in securitization transactions. The securities issued by these VIEs are backed by the cash flows related to retail finance receivables and beneficial interests in investments in operating leases (“Securitized Assets”). We hold variable interests in the VIEs that could potentially be significant to the VIEs. We determined that we are the primary beneficiary of the securitization trusts because (i) our servicing responsibilities for the Securitized Assets give us the power to direct the activities that most significantly impact the performance of the VIEs, and (ii) our variable interests in the VIEs give us the obligation to absorb losses and the right to receive residual returns that could potentially be significant. The following tables show the assets and liabilities related to our VIE securitization transactions that were included in our Consolidated Balance Sheets:
Restricted Cash, including cash equivalents, shown in the table above represents collections from the underlying Gross Securitized Assets shown in the table above and certain reserve deposits held by TMCC for the VIEs and is included as part of
The assets of the VIEs and the restricted cash and cash equivalents held by TMCC serve as the sole source of repayment for the asset-backed securities issued by these entities. Investors in the notes issued by the VIEs do not have recourse to us or our other assets, with the exception of customary representation and warranty repurchase provisions and indemnities. As the primary beneficiary of these entities, we are exposed to credit, residual value, interest rate, and prepayment risk from the Securitized Assets in the VIEs. However, our exposure to these risks did not change as a result of the transfer of the assets to the VIEs. We may also be exposed to interest rate risk arising from the secured notes issued by the VIEs. 115 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 10 – Variable Interest Entities (Continued) In addition, we entered into interest rate swaps with certain special purpose entities that issue variable rate debt. Under the terms of these swaps, the special purpose entities are obligated to pay TMCC a fixed rate of interest on certain payment dates in exchange for receiving a floating rate of interest on notional amounts equal to the outstanding balance of the secured debt. This arrangement enables the special purpose entities to mitigate the interest rate risk inherent in issuing variable rate debt that is secured by fixed rate Securitized Assets. The transfers of the Securitized Assets to the special purpose entities in our securitizations are considered to be sales for legal purposes. However, the Securitized Assets and the related debt remain on our Consolidated Balance Non-consolidated Variable Interest Entities We provide lending to Toyota and Lexus dealers through the Toyota Dealer Investment Group’s Dealer Capital Program (“TDIG Program”) operated by our affiliate, We also have other lending relationships which have been determined to be VIEs, but these relationships are not consolidated as we are not the primary beneficiary. Amounts due and revenues earned under these relationships as of March 31, 2018 and 2017 were not significant.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 11 – Liquidity Facilities and Letters of Credit For additional liquidity purposes, we maintain syndicated 364 Day Credit Agreement, Three Year Credit Agreement and Five Year Credit Agreement In November The ability to make draws is subject to covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These agreements may be used for general corporate purposes and none were drawn upon as of March 31, Other Unsecured Credit Agreements TMCC has entered into additional unsecured credit facilities with various banks. As of March 31, These credit agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These credit facilities were not drawn upon as of March 31,
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 12 – Pension and Other Benefit Plans We are a participating employer in certain retirement and post-employment health care, life insurance, and other benefits sponsored by Defined Benefit Plan Prior to January 1, 2015, our employees were generally eligible to participate in the Toyota Motor Sales, U.S.A., Inc. Pension Plan Benefits payable under this non-contributory defined benefit pension plan are based, generally, upon the employees' years of credited service (up to a maximum of 25 years), the highest average annual compensation (as defined in the plan) for any 60 consecutive month period out of the last 120 months of employment (the “Applicable Years”), and one-half of eligible bonus/gift payments for the Applicable Years (recalculated to determine the annual average of such amount), reduced by a percentage of the estimated amount of social security benefits.
Defined Contribution Plan Employees meeting certain eligibility requirements, as defined in the plan documents, may participate in the Toyota Motor TMCC employer contributions to the Other Post-Retirement Benefit Plans
Other post-retirement benefit costs allocated to TMCC were
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 13 – Income On December 22, 2017, the TCJA was signed into law. It changed many aspects of U.S. corporate income taxation and included a reduction of the corporate income tax rate from 35% to 21% and imposed a tax on deemed repatriated earnings of foreign subsidiaries. Our assessment of the impact of the TCJA is substantially complete and is reflected in our consolidated financial statements as of March 31, 2018 and for the year then ended. As a result of the TCJA in fiscal 2018, we recorded a $2.9 billion tax benefit from the revaluation of our net deferred tax liabilities, offset by a provisional deemed repatriation tax of $10 million. Upon completion of our fiscal 2018 income tax return, we may identify additional revaluation adjustments to our recorded deferred tax liabilities, including the deemed repatriation tax. The issuance of future administrative guidance may further clarify the interpretation of the new law and require adjustments to the provisional amount we recorded. Any adjustment required to the provisional amount for repatriation tax recorded in fiscal 2018 is not expected to be material. The (benefit) provision for income taxes consisted of the following:
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows:
1 Our federal statutory rate for fiscal 2018 was a blended rate of 31.6% compared to 35% for fiscal 2017 and 2016 due to the reduction of the corporate income tax rate from 35% to 21% by the TCJA.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 13 – Income Our net deferred income tax liability
1
We have deferred tax assets related to The deferred tax
Realization with respect to the federal tax 120 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Note 13 – Income Taxes (Continued) We have made an assertion of permanent reinvestment of earnings from our foreign subsidiary; as a result, Although
The guidance for the accounting and reporting for income taxes requires us to assess tax positions in cases where the interpretation of the tax law may be uncertain.
We accrue interest, if applicable, related to uncertain income tax positions in interest expense. Statutory penalties, if applicable, accrued with respect to uncertain income tax positions are recognized as an addition to the income tax liability. For each of fiscal Tax-related Contingencies As of March 31,
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 14 – Commitments and Contingencies Commitments and Guarantees We have entered into certain commitments and guarantees for which the maximum unfunded amounts are summarized in the table below:
Wholesale financing
Commitments We provide fixed and variable rate working capital loans, revolving lines of credit, 122 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 14 – Commitments and Contingencies (Continued) In fiscal 2018, we completed the move of
Guarantees and Other Contingencies TMCC has guaranteed bond obligations totaling $100 million in principal that were issued by Putnam County, West Virginia and Gibson County, Indiana to finance the construction of pollution control facilities at manufacturing plants of certain TMCC affiliates. The bonds mature in the following fiscal years ending March 31: 2028 - $20 million; 2029 - $50 million; 2030 - $10 million; 2031 - $10 million; and 2032 - $10 million. TMCC would be required to perform under the guarantees in the event of non-payment on the bonds and other related obligations. TMCC is entitled to reimbursement by the applicable affiliates for any amounts paid. TMCC receives an annual fee of $78 thousand for guaranteeing such payments. TMCC has not been required to perform under any of these affiliate bond guarantees as of March 31, Indemnification In the ordinary course of business, we enter into agreements containing indemnification provisions standard in the industry related to several types of transactions, including, but not limited to, debt funding, derivatives, securitization transactions, and our vendor and supplier agreements. Performance under these indemnities would occur upon a breach of the representations, warranties or covenants made or given, or a third party claim. In addition, we have agreed in certain debt and derivative issuances, and subject to certain exceptions, to gross-up payments due to third parties in the event that withholding tax is imposed on such payments. In addition, certain of our funding arrangements may require us to pay lenders for increased costs due to certain changes in laws or regulations. Due to the difficulty in predicting events which could cause a breach of the indemnification provisions or trigger a gross-up or other payment obligation, we are not able to estimate our maximum exposure to future payments that could result from claims made under such provisions. We have not made any material payments in the past as a result of these provisions, and as of March 31,
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 14 – Commitments and Contingencies (Continued) Litigation and Governmental Proceedings Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business. Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices. Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies. On January 28, 2015, we received a request for documents and information from the New York State Department of Financial Services relating to our lending practices (including fair lending), and on April 6, 2016, we received a request for documents and information pursuant to a civil investigative demand from the Commonwealth of Massachusetts Office of the Attorney General relating to our financing of guaranteed auto protection insurance products in Massachusetts on retail contracts. We provided the requested documents and information, but have not had further communication with either agency regarding their respective reviews. We perform periodic reviews of pending claims and actions to determine the probability of adverse verdicts and resulting amounts of liability. We establish accruals for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. When we are able, we also determine estimates of reasonably possible loss or range of loss, whether in excess of any related accrued liability or where there is no accrued liability. Given the inherent uncertainty associated with legal matters, the actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts for which accruals have been established. Based on available information and established accruals, we do not believe it is reasonably possible that the results of these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial condition or results of operations.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Note 15 – Related Party Transactions The tables below summarize amounts included in our Consolidated
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 15 – Related Party Transactions (Continued)
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 15 – Related Party Transactions (Continued) Financing Support Arrangements with Affiliates TMCC is party to a credit support agreement with TFSC (the “TMCC Credit Support Agreement”). The
In addition, TMCC receives support from and provides financing support
Other Financing Support Provided to TMCC provides home loans to certain employees. In addition, we also provide home equity advances through a relocation provider to certain employees relocating to Texas. TMCC executive officers and TMCC provides wholesale financing, real estate and working capital loans to certain dealerships that were consolidated with another affiliate under the accounting guidance for variable interest entities. TMCC also pays these dealers origination fees. These costs represent direct costs incurred in TMCC has guaranteed the payments of principal and interest with respect to the bonds of manufacturing facilities of certain affiliates. The nature, business purpose, and amounts of these guarantees are described in Note 14 – Commitments and Contingencies.
TMCC and TFSB are parties to a master participation agreement pursuant to which TMCC agreed to purchase up to $60 million per year of residential mortgage loans originated by TFSB that meet specified credit underwriting guidelines. At March 31, 2018 and 2017, we had $30 million and $33 million, respectively, in loan participations outstanding that had been purchased by TMCC under this agreement.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 15 – Related Party Transactions (Continued)
Shared Service Arrangements with Affiliates TMCC is subject to the following shared service agreements:
TMCC and TCPR incur costs under various shared service agreements with our affiliates. Services provided by affiliates under the shared service agreements include marketing, technological, facilities, and administrative services, as well as services related to our funding and risk management activities and our bank and investor relationships.
TMCC provides various services to our financial services affiliates, including certain administrative, systems and operational support.
TMCC provides various services to TFSB, including marketing, administrative, systems, and operational support in exchange for TFSB making available certain financial products and services to TMCC’s customers and dealers meeting TFSB’s credit standards. TMCC is party to a master netting agreement with TFSB, which allows TMCC to net settle payments for shared services between TMCC and TFSB.
TMCC is a party to expense reimbursement agreements with TFSB and TFSC related to costs incurred by TMCC or these affiliates on behalf of the other party in connection with TMCC’s provision of services to these affiliates or the provision by these affiliates of certain financial products and services to our customers and dealers in support of TMCC’s customer loyalty strategy and programs, and other brand and sales support. TMCC is also party to an expense reimbursement agreement with TFSIC that reimbursed expenses incurred by TFSIC with respect to costs related to TFSB’s credit card rewards program. TFSB sold its credit card rewards portfolio in October 2015 and no credit card reward program costs have been incurred after such date.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 15 – Related Party Transactions (Continued) Operational Support Arrangements with Affiliates
TMCC and TCPR provide various wholesale financing to dealers, which result in our having payables to TMNA and Toyota de Puerto Rico Corp (“TDPR”).
TMCC is party to a lease agreement with TMNA for our new headquarters facility in Plano, Texas, expiring in 2032 and our Customer Service Center located in Cedar Rapids, Iowa, expiring in 2019. TMCC was party to a lease agreement with TMNA for our former headquarters location in the TMS headquarters complex in Torrance, California, that was terminated in the third quarter of fiscal 2018. The lease commitments are described in Note 14 – Commitments and Contingencies.
Subvention receivable represents amounts due from TMNA and other affiliates in support of retail and lease subvention and other cash incentive programs offered by TMCC. Deferred subvention income represents the unearned portion of amounts received from these transactions, and manufacturers’ subvention and other revenues primarily represent the earned portion of such amounts.
TMCC is a participating employer in certain retirement, postretirement health care and life insurance benefits sponsored by TMNA. Refer to Note 12 – Pension and Other Benefit Plans for additional information. TMCC also participates in share-based compensation plans sponsored by TMC. TMCC is party to agreements with TMNA and other affiliates relating to the team member vehicle benefit program, which allows team members to lease Toyota and Lexus vehicles on terms exclusive to the benefit program. TMNA serves as the chief administrator of
Affiliate insurance premiums and contract revenues primarily represent revenues from TMIS for administrative services and various types of coverage provided to TMNA and affiliates. This includes contractual indemnity coverage for limited warranties on certified Toyota and Lexus pre-owned vehicles and related administrative services for TMNA’s certified pre-owned vehicle program and umbrella liability policy. TMIS provides umbrella liability insurance to TMNA and affiliates covering certain dollar value layers of risk above various primary or self-insured retentions. On all layers in which TMIS has provided coverage, 99 percent of the risk has been ceded to various reinsurers. Up until April 30, 2016, TMIS also provided property deductible reimbursement insurance to TMNA and affiliates covering losses incurred under their primary policy.
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions)
Our reportable segments Financial information for our reportable operating segments
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 16 – Segment Information (Continued)
TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 16 – Segment Information (Continued)
132 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 17 – Selected Quarterly Financial Data
133 TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) Note 17 – Selected Quarterly Financial Data
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH There is nothing to report with regard to this item. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures We maintain “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the rules and regulations of the SEC. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our Exchange Act reports is accumulated and communicated to management, including our Chief Executive Officer
Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate. Management conducted, under the supervision of our CEO and This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by our independent registered public accounting firm. There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31,
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE TMCC has omitted certain information in this section pursuant to General Instruction I(2) of Form 10-K. The following table sets forth certain information regarding the directors and executive officers of TMCC as of
All directors of TMCC are elected annually and hold office until their successors are elected and qualified. Officers are elected annually and serve at the discretion of the Board of Directors. Mr. Groff was named President and Chief Executive Officer of TMCC in October 2013 and has served as a Director of Mr. Kawai was named Director Mr.
Mr. Mr. Lentz was named Mr. Mr.
ITEM 11. TMCC has omitted this section pursuant to General Instruction I(2) of Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS TMCC has omitted this section pursuant to General Instruction I(2) of Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE TMCC has omitted this section pursuant to General Instruction I(2) of Form 10-K. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following table represents aggregate fees billed to us by PricewaterhouseCoopers LLP, an independent registered public accounting firm.
Audit fees include the audits of our consolidated financial statements included in our Annual Reports on Form 10-K, reviews of our consolidated financial statements included in our Quarterly Reports on Form 10-Q, and providing comfort letters, consents and other attestation reports in connection with our funding transactions. Audit related fees primarily include Tax fees primarily include tax reporting software license fees, tax planning services, assistance in connection with tax audits, and tax compliance system license fees. Other fees include industry research, information technology risk and process assessment review, and translation services performed in connection with our funding Auditor Fees Pre-approval Policy The Audit Committee
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a)(1)Financial Statements Included in Part II, “Item 8. Financial Statements and Supplementary Data” of this Form 10-K on pages (a)(2)Financial Statements Schedules Schedules have been omitted because they are not applicable, the information required to be contained in them is disclosed in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Credit Risk” and “Item 8. Financial Statements and Supplementary Data” of this Form 10-K or the amounts involved are not sufficient to require submission. (b)Exhibits See Exhibit Index on page None.
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 and in the capacities and on the dates indicated.
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