UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
------------------2003
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9961
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TOYOTA MOTOR CREDIT CORPORATION
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3775816
- ---------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 S. Western Avenue
Torrance, California 90509
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 468-1310
-----------------------
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes No X
--- ---
As of June 30, 2002,2003, the number of outstanding shares of capital stock, par
value $10,000 per share, of the registrant was 91,500, all of which shares were
held by Toyota Financial Services Americas Corporation.
-1-- 1 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
June 30, March 31,
June 30,
2002 2002 2001
------------2003 2003
------------ ------------
(Unaudited)
(Unaudited)
ASSETS
------
Cash and cash equivalents............... $ 322735 $ 747 $ 265980
Investments in marketable securities.... 1,371 1,100 1,1161,388 1,630
Finance receivables, net................ 22,911 22,390 19,842
Finance receivables, net - securitized.. 947 1,087 -28,345 26,477
Investments in operating leases, net.... 7,732 7,631 7,2007,900 8,017
Derivative assets....................... 701 454 3792,171 1,421
Other assets............................ 914 630 760
Income taxes receivable................. 403 221 131
-------563 708
------- -------
Total Assets................... $35,301 $34,260 $29,693
=======$41,102 $39,233
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................. $27,571 $25,990 $22,200
Notes payable related to securitized
finance receivables structured as
collateralized borrowings............ 900 1,036 -$33,851 $32,099
Derivative liabilities.................. 556 1,124 1,752432 514
Other liabilities....................... 837 819 925916 869
Income taxes payable.................... 18 26
Deferred income......................... 880 861 7361,059 996
Deferred income taxes................... 1,836 1,679 1,516
-------1,890 1,866
------- -------
Total Liabilities................. 32,580 31,509 27,129
-------38,166 36,370
------- -------
Commitments and Contingencies (See note 7)
Shareholder's Equity:
Capital stock, $l0,000 par value
(100,000 shares authorized;
91,500 issued and outstanding)... 915 915
915
Retained earnings.................... 1,791 1,820 1,6311,980 1,930
Accumulated other comprehensive
income............................ 15 1641 18
-------
------- -------
Total Shareholder's Equity........ 2,721 2,751 2,564
-------2,936 2,863
------- -------
Total Liabilities and
Shareholder's Equity........... $35,301 $34,260 $29,693
=======$41,102 $39,233
======= =======
See Accompanying Notes to Consolidated Financial Statements.
-2-- 2 -
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
(Unaudited)
Three Months Ended
June 30,
---------------------------------------------
2003 2002
2001
------ ------
(Unaudited)---------- ----------
Financing Revenues:
Leasing........................................ $ 621622 $ 620621
Retail financing............................... 290 263 194
Wholesale and other dealer financing........... 49 40
60
----- -------------- --------
Total financing revenues.......................... 961 924 874
Depreciation on leases......................... 458 373 374
Interest expense............................... 193 217
296
SFAS 133 and 138Derivative fair value adjustments........adjustments.............. 38 214
(9)
------ -------------- --------
Net financing revenues............................ 272 120 213
Insurance premiums earned and contract
revenues....................................... 45 41 40
Investment and other income....................... 36 64
65
Loss on asset impairment.......................... - 47
------ -------------- --------
Net financing revenues and other revenues......... 353 225
271
------ -------------- --------
Expenses:
Operating and administrative................... 136 128 114
Losses related to Argentine Investment......... - 5 -
Provision for credit losses.................... 109 122 50
Insurance losses and loss adjustment
expenses.................................... 25 21
20
------ -------------- --------
Total expenses.................................... 270 276
184
------ ------
-------- --------
Income/(Loss)/Income before income taxes................. 83 (51)
87
Provision/(Benefit) provision for income taxes.............. 33 (22)
37
------ -------------- --------
Net Income/(Loss)/Income.................................................................. $ 50 $ (29)
$ 50
====== ============== ========
See Accompanying Notes to Consolidated Financial Statements.
-3-- 3 -
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in Millions)
(Unaudited)
Accumulated
Other
Capital Retained Comprehensive
Stock Earnings Income/(Loss) Total
------- -------- ------------- --------
Balance at March 31, 2001........ $ 915 $ 1,581 $ 18 $ 2,514
------ ------- ---------- -------
Net income for the three months
ended June 30, 2001........... - 50 - 50
Change in net unrealized gains
on available-for-sale
marketable securities......... - - - -
------ -------- ---------- -------
Total Comprehensive Income....... - 50 - 50
------ -------- ---------- -------
Balance at June 30, 2001
(unaudited).................... $ 915 $ 1,631 $ 18 $ 2,564
====== ======= ========== =======
Balance at March 31, 2002........ $ 915 $ 1,820 $ 16 $ 2,751
------ ------- ---------- -------
Net loss for the three months
ended June 30, 2002........... - (29) - (29)
Change in net unrealized gains
on available-for-sale
marketable securities......... - - (1) (1)
------ -------- ---------- -------
Total Comprehensive Loss......... - (29) (1) (30)
------ -------- ---------- -------
Balance at June 30, 2002
(unaudited)...................2002.......... $ 915 $ 1,791 $ 15 $ 2,721
====== ======= ========== =======
Balance at March 31, 2003........ $ 915 $ 1,930 $ 18 $ 2,863
------ ------- ---------- -------
Net income for the three months
ended June 30, 2003........... - 50 - 50
Change in net unrealized gains
on available-for-sale
marketable securities......... - - 23 23
------ -------- ---------- -------
Total Comprehensive Income....... - 50 23 73
------ -------- ---------- -------
Balance at June 30, 2003......... $ 915 $ 1,980 $ 41 $ 2,936
====== ======= ========== =======
See Accompanying Notes to Consolidated Financial Statements.
-4-- 4 -
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three Months Ended
June 30,
-------------------------
2003 2002 2001
-------- ---------
(Unaudited)
Cash flows from operating activities:
Net (loss)/ income.......................................Income/(Loss)........................................ $ (29)50 $ 50(29)
-------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
FairDerivative fair value adjustments of SFAS 133 and 138
derivatives....................................adjustments.................. 38 214 (9)
Depreciation and amortization...................... 458 399 373
Provision for credit losses........................ 109 122 50
Gain from sale of finance receivables, net......... - (33) (26)
Gain from sale of marketable securities, net....... (3) -
(1)
Loss on asset impairment........................... - 47
Lossand reserve related to Argentine Investment...............Investment... - 5
-
Increase(Increase) in other assets...........................assets......................... (702) (612) (110)
Decrease in accrued interest expense............... (12) (41)
Increase in deferred income taxes.................. 9 155 48
Increase in other liabilities...................... 180 78930 168
-------- ---------
Total adjustments........................................ 839 418 409
-------- ---------
Net cash provided by operating activities................... 889 389 459
-------- ---------
Cash flows from investing activities:
Addition to investments in marketable securities......... (222) (535) (865)
Disposition of investments in marketable securities...... 466 234
816
PurchaseAcquisition of finance receivables..........................receivables....................... (11,785) (6,596) (8,214)
Liquidation of finance receivables....................... 9,842 4,598 6,121
Proceeds from sale of finance receivables................ - 1,549 1,450
Addition to investments in operating leases.............. (769) (960) (863)
Disposition of investments in operating leases........... 442 475 704
-------- --------
Net cash used in investing activities....................... (2,026) (1,235) (851)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable........ 1,327 1,933 2,005
Payments on notes and loans payable...................... (2,295) (1,443)
(1,186)
Net decreaseincrease(decrease) in commercial paper with
original maturities less than 90 days.................paper............... 1,860 (69) (456)
-------- --------
Net cash provided by financing activities................... 892 421 363
-------- --------
Net decrease in cash and cash equivalents................... (245) (425) (29)
Cash and cash equivalents at the beginning of the period.... 980 747 294
-------- --------
Cash and cash equivalents at the end of the period.......... $ 322735 $ 265322
======== ========
Supplemental disclosures:
Interest paid............................................ $ 210171 $ 328210
Income taxes paid........................................ $ 432 $ 434
See Accompanying Notes to Consolidated Financial Statements.
-5-- 5 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data
- -------------------------------
The accompanying information pertaining to the three months ended June 30,
20022003 and 20012002 is unaudited and has been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and 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. Actual
results could differ from those estimates. In the opinion of management, the
unaudited financial information reflects all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods presented. The results of operations for the three months
ended June 30, 20022003 are not necessarily indicative of those expected for any
other interim period or for a full year. Certain prior period amounts have
been reclassified to conform with the current period presentation.
These financial statements should be read in conjunction with the consolidated
financial statements, significant accounting policies, and other notes to the
consolidated financial statements included in Toyota Motor Credit
Corporation's ("TMCC's" or the "Company's") 20022003 Annual Report to the Securities and Exchange Commission
("SEC")on Form 10-K. -6-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSReferences herein to "TMCC" denote Toyota Motor Credit
Corporation and references herein to "the Company" denote Toyota Motor Credit
Corporation and its consolidated subsidiaries.
Note 2 - Finance Receivables
- ----------------------------
Finance receivables, net and Finance receivables, net - securitized consisted of the following:
June 30, March 31,
June 30,
2002 2002 20012003 2003
------------ ------------ -----------
(Dollars in Millions)
Retail.................................... $14,211 $13,715 $9,641$18,331 $16,160
Finance leases............................ 7,112 7,692 8,4525,617 6,078
Wholesale and other dealer loans.......... 4,091 3,626 3,4495,705 5,608
------- -------
------
25,414 25,033 21,54229,653 27,846
Unearned income........................... (1,284) (1,340) (1,528)(962) (1,043)
------- -------
Finance receivables, net of
unearned income................... $28,691 $26,803
Allowance for credit losses............... (272) (216) (172)(346) (326)
------- ------- ------
Finance receivables, net and
Finance receivables, net - securitized. $23,858 $23,477 $19,842
=======.............. $28,345 $26,477
======= =======
Finance leases included estimated unguaranteed residual values of $1.9 billion,
$1.9 billion and $1.6$1.8 billion
at both June 30 2002,and March 31, 2002 and June 30,
2001, respectively.2003. The aggregate balances related to finance
receivables 60 or more days past due totaled $199 million, $189$163 million and $53$160 million at
June 30 2002,and March 31, 2002 and June 30, 2001, respectively. The increased delinquency experience is
a result of a number of factors including the effects of TMCC's field
reorganization which has temporarily disrupted normal collection activities
and the continuation of the national economic downturn. The field
reorganization is ongoing and the transfer of certain functions from branches
to customer service centers is scheduled to be completed in fiscal 2003. TMCC
is taking measures to minimize the disruption of operations; however, the
restructuring of field operations and economic downturn could continue to
adversely affect delinquencies and credit losses. In addition, the increased
delinquency can be attributed to changes in portfolio quality in connection
with the national tiered pricing program coupled with a general increase in
the average original contract term of retail and lease vehicle contracts
which, historically, experience higher rates of credit losses. Under the
national tiered pricing program, the Company generally acquires higher-
yielding earning assets to compensate for the increased credit risk of such
contracts. The trend toward longer term contracts is reflective of industry
trends. The average length of contracts initiated during fiscal year to date
2003, and fiscal year 2002 was 56.1 and 54.4, respectively. The majority of retail and finance
lease receivables do not involve recourse to the dealer in the event of
customer default.
-7-- 6 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Operating Leases
- ----------------------------------------
Investments in operating leases, net consisted of the following:
June 30, March 31,
June 30,
2002 2002 2001
------------2003 2003
------------ ------------
(Dollars in Millions)
Vehicles.................................. $9,191 $9,011 $8,553$9,639 $9,687
Equipment and other....................... 715 721 706719 720
------ ------
------
9,906 9,732 9,25910,358 10,407
Accumulated depreciation.................. (2,095) (2,034) (2,000)(2,301) (2,254)
Allowance for credit losses .............. (79) (67) (59)
------(157) (136)
------ ------
Investments in operating leases, net...... $7,732 $7,631 $7,200
======$7,900 $8,017
====== ======
Note 4 - Allowance for Credit Losses
- ------------------------------------
An analysis of the allowance for credit losses follows:
Three months ended
June 30, March 31, June 30,
2003 2003 2002 2002 2001
--------- --------- ------------------
(Dollars in Millions)
Allowance for credit losses at
beginning of period............... $ 283526 $ 269466 $ 227283
Provision for credit losses.......... 109 204 122
97 50
Charge-offs.......................... (94) (138) (60)
(62) (40)
Recoveries........................... 11 11 7 6 5
Other adjustments.................... - (17) (1)
(27) (11)
------------- ------ ------
Allowance for credit losses
at end of period.................. $ 351552 $ 283526 $ 231351
====== ====== ======
TheAt June 30, 2003, the allowance for credit losses consisted of $503 million to
cover probable losses on the Company's owned portfolio and $49 million to
cover probable losses on repossessed collateral in inventory as of the period
end dates shown above. Total repossessed collateral in inventory at June 30
2002 increased $68 million and $120
million from the periods ended March 31, 20022003, and June 30, 2001, respectively,
primarily due to an increase2002 was $118 million, $147 million, and
$144 million, respectively. Repossessed collateral is included in other
assets in the provision for credit losses. The $25
million and $72 million increase in the provision for credit losses for the
quarter ended June 30, 2002 as compared with the periods ending March 31, 2002
and June 2001, respectively, corresponds with increases in delinquencies and
credit losses. Allowance for credit losses is discussed further under Item 2.
Provision for Credit Losses and Delinquency.
-8-Consolidated Balance Sheet.
- 7 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities
- -------------------------------------------
The following table sets forth the items included in the Company's Derivative
fair value adjustments in accordance with Statement of Financial Accounting
Standards No. 133,No.133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an Amendment of related amendments ("SFAS 133, ("SFAS 138") require
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Fair value of the Company's derivatives is determined
using external market data in conjunction with an internal market valuation
system, or externally quoted market values. Derivative assets and liabilities
include interest rate swaps, indexed note swap agreements, cross currency
interest rate swap agreements and option-based products. The accounting for
the gain or loss due to changes in fair value of the hedged item depends on
whether the relationship between the hedged item and the derivative instrument
qualifies for hedge treatment. If the relationship between the hedged item and
the derivative instrument does not qualify as a hedge, the gains or losses of
the derivative instrument are reported in earnings when they occur. However,
if the relationship between the hedged item and the derivative instrument
qualifies as a hedge, the accounting varies based on the type of hedge.
For the three months ended June 30, 2002, the Company recognized a $214 million
unfavorable SFAS 133 and SFAS 138 adjustment (reported as SFAS 133 and 138
fair value adjustment in the Consolidated Statement of Income). The net
adjustment reflects a $226 million decrease in the fair market value of TMCC's
portfolio of option-based products and certain interest rate swaps which did
not qualify for hedge accounting, offset by an increase of $12 million related
to the ineffective portion of TMCC's fair value hedges. The decrease in the
fair value of TMCC's option-based products as well as certain interest rate
swaps was due to the significant reduction in interest rates during the
quarter, as well as actions taken by TMCC to protect interest rate margins,
including an increase in TMCC's hedge portfolio and a higher mix of swap
derivative products. Various derivative instruments, such as option-based
products and certain interest rate swaps which hedge interest rate risk from an
economic perspective, and which the Company is unable or has elected not to
apply hedge accounting, are discussed in Non-Hedging Activities below. For
fair value hedging relationships, the components of each derivative
instrument's and hedged item's gain or loss are included in the assessment of
hedge effectiveness.
TMCC maintains an overall risk management strategy that utilizes a variety of
interest rate and currency derivative financial instruments to mitigate its
economic exposure to fluctuations caused by volatility in interest rate and
currency exchange rates. TMCC does not use any of these instruments for
trading purposes.
The Company enters into interest rate swaps, indexed note swap agreements and
cross currency interest rate swap agreements to convert its fixed-rate debt to
variable-rate debt, a portion of which is converted back to fixed rates using
option-based products. (Refer to non-hedging activities below for a discussion
of option-based products).
-9-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities (Continued)
- -------------------------------------------
TMCC uses interest rate swap agreements in managing its exposure to interest
rate fluctuations. Interest rate swap agreements are executed as either an
integral part of specific debt transactions or on a portfolio basis. TMCC's
interest rate swap agreements involve agreements to pay fixed and receive a
floating rate, or receive fixed and pay a floating rate, at specified
intervals, calculated on an agreed-upon notional amount. Interest rate swap
agreements may also involve basis swap contracts which are agreements to
exchange the difference between certain floating interest amounts, such as the
net payment based on the commercial paper rate and the London Interbank
Offered Rate ("LIBOR"amended"), calculated on an agreed-upon notional amount. The
original maturities of interest rate swap agreements ranged from one to ten
years at June 30, 2002.
TMCC uses indexed note swap agreements in managing its exposure in connection
with debt instruments whose interest rate and/or principal redemption amounts
are derived from other underlying indices. Indexed note swap agreements
involve agreements to receive interest and/or principal amounts associated
with the indexed notes, denominated in either U.S. dollars or a foreign
currency, and to pay fixed or floating rates on U.S. dollar liabilities.
TMCC uses cross currency interest rate swap agreements to entirely hedge
exposure to exchange rate fluctuations on principal and interest payments for
borrowings denominated in foreign currencies. Notes and loans payable issued
in foreign currencies are hedged by concurrently executing cross currency
interest rate swap agreements which involve the exchange of foreign currency
principal and interest obligations for U.S. dollar obligations at agreed-upon
currency exchange and interest rates.
Derivative financial instruments used by TMCC involve, to varying degrees,
elements of credit risk in the event a counterparty defaults in performing its
obligation under the derivative agreement and market risk as the instruments
are subject to rate and price fluctuations. Credit risk is managed through
the use of credit standard guidelines, counterparty diversification, monitoring
of counterparty financial condition and master netting agreements in place with
all derivative counterparties. Credit exposure of derivative instruments is
discussed further under Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
Non-Hedging Activities
- ----------------------
Option-based products are executed on a portfolio basis and consist primarily
of purchased interest rate cap agreements, certain interest rate swaps and to a
lesser extent, foreign exchange forward contract agreements. Option-based
products are agreements which either grant TMCC the right to receive, or
require TMCC to make payments at, specified interest rate levels. Option-based
products are used primarily to hedge interest rate risk from an economic
perspective on TMCC's portfolio.
The Company uses this strategy to moderate its exposure to volatility in
interest rates, particularly LIBOR, and for liability management purposes.
These products are not linked to specific assets and liabilities that appear on
the balance sheet and therefore, do not qualify for hedge accounting.
-10-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities (Continued)
- -------------------------------------------
Accounting for Derivatives and Hedging Activities
- -------------------------------------------------
Derivatives are recognized in the balance sheet at their fair value. On the
date that the Company enters into a derivative contract that qualifies as
hedge, it designates the derivative as a hedge of the fair value of a
recognized asset or liability or a foreign-currency fair-value hedge (a
"foreign currency hedge"). Changes in the fair value of a derivative that is
highly effective as - and that is designated and qualifies as - a fair-value
hedge or foreign-currency hedge, along with changes in fair value of the
hedged liabilities that are attributable to the hedged risk, are recorded in
current-period earnings.
The Company occasionally purchases a financial instrument in which a derivative
instrument is "embedded." Upon purchasing the financial instrument, the
Company assesses whether the economic characteristics of the embedded
derivative are clearly and closely related to the economic characteristics of
the remaining component of the financial instrument (i.e. host contract) and
whether a separate, non-embedded instrument with the same terms as the embedded
instrument would meet the definition of a derivative instrument. When it is
determined that (1) the embedded derivative possesses economic characteristics
that are not clearly and closely related to the economic characteristics of the
host contract and (2) a separate, stand-alone instrument with the same terms
would qualify as a derivative instrument, the embedded derivative is separated
from the host contract, carried at fair value, and designated as either (1) a
fair-value hedge or (2) non-hedging derivative instrument. However, if the
Company could not reliably identify and measure the embedded derivative for
purposes of separating that derivative from its host contract, the entire
contract would be carried on the balance sheet at fair value and not be
designated as a hedging instrument.
The Company formally documents relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking
derivatives that are designated as fair-value hedges to specific liabilities on
the balance sheet. The Company also assesses whether the derivatives that are
used in hedging transactions have been highly effective in offsetting changes
in the fair value of hedged items and whether those derivatives may be expected
to remain highly effective in future periods. When it is determined that a
derivative is not (or has ceased to be) highly effective as a hedge, the
Company discontinues hedge accounting prospectively, as discussed below.
The Company will discontinue hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair value of a hedged item; (2) the derivative expires or is sold,
terminated, or exercised; or (3) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
-11-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities (Continued)
- -------------------------------------------
When hedge accounting is discontinued due to the Company's determination that
the derivative no longer qualifies as an effective fair-value hedge, the
Company will continue to carry the derivative on the balance sheet at its fair
value but cease to adjust the hedged liability for changes in fair value. In a
situation in which hedge accounting is discontinued and the derivative remains
outstanding, the Company will carry the derivative at its fair value on the
balance sheet, recognizing changes in the fair value in current-period
earnings.
Note 6 - Notes and Loans Payable
- --------------------------------
Notes and loans payable consisted of the following::
Three months ended
June 30, March 31, June 30,
2003 2002
2002 2001
------------ ------------ ------------------- ---------
(Dollars in Millions)
Commercial paper, net....................Net loss on non-designated derivatives....... $ 5,111(36) $ 5,012(234)
Net loss for hedges that no longer qualify
as fair value hedges....................... (8) -
Net gain related to the ineffective portion
of the Company's fair value hedges......... 6 20
------ ------
Derivative fair value adjustments............ $ 3,965
------- ------- -------
Other senior debt, due in the fiscal
years ending:
2002..................................(38) $ (214)
====== ======
- 8 - - 3,835
2003.................................. 4,238 5,184 3,428
2004.................................. 5,916 5,360 5,281
2005.................................. 3,851 3,665 1,970
2006.................................. 3,501 2,885 1,477
2007.................................. 1,353 1,252 18
Thereafter............................ 3,601 2,632 2,226
------- ------- -------
Total other senior debt............... 22,460 20,978 18,235
------- ------- -------
Notes and loans payable............ $27,571 $25,990 $22,200
======= ======= =======
Notes and loans payable at June 30, 2002, March 31, 2002 and June 30, 2001
reflect the adjustments required under SFAS 133 and 138 for derivatives and
debt instruments which qualify for hedge treatment as discussed in Note 5 -
Derivatives and Hedging Activities. TMCC recorded a $214 million net
unfavorable fair value adjustment under SFAS 133. This adjustment was
comprised of a $1,029 million increase in the fair market value of the
Company's debt portfolio offset by a $247 million increase in the fair market
value of the Company's derivative assets and a $568 million decrease in the
fair market value of the Company's derivative liabilities. The notional amount
of notes and loans payable was $27.2 billion at June 30, 2002.
Short-term borrowings consist of commercial paper having a weighted average
remaining term and weighted average interest rate of 20 days and 1.84%,
respectively, at June 30, 2002.
-12-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Notes and Loans Payable
(Continued)
- --------------------------------
Other senior debt includes certain MTNs, euro bondsNotes and domestic bonds. Theloans payable and the related weighted average interest rate on other senior debt was 3.33% for the quarter
ended June 30, 2002 including the effect of interest rate swap agreements. The
rates have been calculated using ratesare
summarized as follows:
June 30, March 31, June 30, March 31,
2003 2003 2003 2003
--------- --------- --------- ---------
(Dollars in Millions)
Short-term debt .............. $ 6,695 $ 4,843 1.17% 1.36%
Long-term debt ............... 25,068 26,034 1.36% 1.43%
Fair Value Adjustments ... 2,088 1,222
--------- ---------
Notes and Loans Payable.. $ 33,851 $ 32,099 1.32% 1.42%
========= =========
- --------------------
Includes the effect of U.S. dollar interest rate swap agreements and cross currency interest
rate swap agreements.
Adjusts debt to fair market value in accordance with SFAS 133, as amended.
Unsecured notes denominated in effect at June 30, 2002, some of
which are floating rates that reset periodically. Less than one percent of
other senior debt at June 30, 2002 had interest rates, including the effect of
interest rate swap agreements, that were fixed for a period of more than one
year.
Approximately 70% of other senior debt at June 30, 2002 had floating interest
rates that were covered by option-based products. The weighted average strike
rate on these option-based products was 4.30% at June 30, 2002. TMCC manages
interest rate risk through continuous adjustment of the mix of fixed and
floating rated debt using interest rate swap agreements and option-based
products.
Includedvarious foreign currencies included in notes and
loans payable totaled approximately $11.4 billion at June 30 2002 were unsecured notes
denominated in various foreign currencies; concurrentlyand March 31,
2003. Concurrent with the issuance of these unsecured notes, TMCCthe Company
entered into cross currency interest rate swap agreements to convert these
obligations at maturity into variable rate U.S. dollar obligations which in
aggregate total a principal amount at maturity of $7.5 billion.
Note 7obligations.
Back-up credit facilities are summarized as follows:
Committed Uncommitted Unused Facilities
------------------ ------------------ ------------------
June 30, March 31, June 30, March 31, June 30, March 31,
2003 2003 2003 2003 2003 2003
-------- -------- -------- -------- -------- --------
(Dollars in Millions)
Syndicated bank credit
facilities.................... $ 4,200 $ 4,200 $ - $ - $ 4,200 $ 4,200
Letters of credit facilities..... - - 60 60 59 59
-------- -------- -------- -------- -------- --------
Total facilities $ 4,200 $ 4,200 $ 60 $ 60 $ 4,259 $ 4,259
======== ======== ======== ======== ======== ========
- Sale of Retail Receivables and Valuation of Residual Interest9 - ----------------------------------------------------------------------
TMCC maintains programs to sell retail receivables through the limited purpose
subsidiaries Toyota Motor Credit Receivables Corporation ("TMCRC") and Toyota
Auto Finance Receivables LLC ("TAFR"). TMCC services its securitized
receivables and earns a servicing fee of 1% of the total principal balance of
the outstanding receivables. In a subordinated capacity, the limited purpose
subsidiaries retain excess cash flows, certain cash deposits and other related
amounts, which are held as restricted assets subject to limited recourse
provisions. These restricted assets are not available to satisfy any
obligations of TMCC. The value of these restricted assets retained by the
limited purpose subsidiaries is exposed to losses in receivables and such cash
flows are available as credit support for senior securities. The exposure of
these restricted assets exists until the associated securities are paid in
full. Investors do not have recourse to other assets held by TMCC for failure
of obligors to pay amounts due.
In May 2002 TMCC sold certain retail finance receivables totaling $1.6 billion
to TAFR, which in turn sold the receivables to a specific trust. The pretax
gain resulting from the sale of retail receivables totaled approximately $33
million. The gain is included in investment and other income for the three
months ended June 30, 2002. The recorded gain on sale is dependent on the
carrying amount of the assets at the time of the sale. The carrying amount is
allocated between the assets sold and the retained interests based on their
relative fair values at the date of the sale. The fair value of retained
interests was estimated by discounting expected cash flows using management's
best estimates and other key assumptions.
-13-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Retail ReceivablesCommitments and Valuation of Residual Interest
(Continued)Contingent Liabilities
- ----------------------------------------------------------------------
As part of the transaction,-----------------------------------------------
Guarantees and Comfort Letters
- ------------------------------
TMCC has entered into a revolving liquidity note
agreement in lieuguarantees or comfort letters on behalf of a cash reserve fund to fund shortfallsits
subsidiaries and certain affiliates. As of principalJune 30, 2003, TMCC has not
recorded any liabilities under such guarantees and interest payments to senior security holders.comfort letters. The
maximum aggregate amount
availablecommitment amounts under the revolving liquidity note is $8 million. The trust will be
obligated to repay amounts drawnguarantees and interest will be accrued at 4.69% per
annum. If TMCC's short-term unsecured debt rating falls below P-1 or A-1+ by
Moody's or S&P, respectively, or if TMCC fails to fund any amount drawn under
the revolving liquidity note, the trust is entitled to draw down the entire
undrawn amountcomfort letters as of the revolving liquidity note. Repayments of principal and
interest due under the revolving liquidity noteJune
30, 2003 are subordinated to principal
and interest payments to the senior security holders and, in some
circumstances, to deposits into a reserve account.
TMCC records its retained assets at fair value, which is estimated using a
discounted cash flow analysis. The retained assets are not considered to have
a readily available market value. Any excess of the carrying amount of the
retained interest over its fair value results in an adjustment to the asset
with a corresponding offset to unrealized gain. Unrealized gains, net of
income taxes, related to the retained assets are included in comprehensive
income. If management deems the excess between the carrying value and the
fair value to be unrealizable, the asset is written down through current
period earnings. Management evaluates the key economic assumptions usedsummarized in the initial valuation of the retained assets and performs a subsequent review
of those assumptions on a quarterly basis.
In June 2001, the Company experienced increased return rates and losses per
unit upon disposition relating to vehicles associated with its lease and
finance receivables. This experience, combined with revised forecasts for
future return rates and loss per unit, resulted in a downward revision to the
vehicle disposition assumptions. As a result of the change in assumptions, in
the quarter ending June 30, 2001, TMCC recognized losses due to the permanent
impairment of assets retained in the sale of interests in lease finance
receivables totaling $47 million as required by EITF 99-20, which was adoptedtable below:
Maximum
Commitment
Amount
--------------
(Dollars in Millions)
Guarantees:
Banco Toyota Do Brasil debt.............. $ 30
Toyota Services de Venezuela, C.A.
("TSV") debt......................... 39
Affiliate pollution control
and solid waste disposal bonds...... 148
Comfort Letters:
Toyota Services de Mexico, S.A. de C.V.
("TSM") credit facilities........... 124
TSV office lease........................ 1
------
Total guarantees and comfort letters........ $ 342
======
During the first quarter of fiscal year 2002. The2004 the Company did not have any
outstanding lease securitization transactions asincreased the maximum
commitment amount of TSV debt guaranteed by the Company from $33 million at
March and June 2002. The
Company did not record any impairment on retail securitization transactions
during the quarter ended31, 2003 to $39 million at June 30, 2002.
-14-2003. The revised commitment
amount of $39 million is subject to the same terms and conditions as the
guarantees described in Note 16 - Commitments and Contingent Liabilities
included in the Company's 2003 Annual Report on Form 10-K.
During the first quarter of fiscal 2004 the Company executed a new comfort
letter with a Mexican bank on behalf of TSM. Additionally, the Company
increased the total maximum amount of borrowings supported under existing
comfort letters with Mexican banks. After consideration of the new comfort
letter and increases to existing comfort letters, the maximum amount of
borrowings supported by the Company totaled $124 million at June 30, 2003.
Under the comfort letters described in the preceding paragraph, TMCC would be
required to exercise its influence to induce TSM to meet all obligations under
the credit facilities should TSM default on payments as a result of financial
- 10 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Related Party Transactions
- -----------------------------------
As of June 30, 2002, there have been no material changes to related party
agreements or relationships as described in the Company's annual report Form
10-K for the year ended March 31, 2002. The table below summarizes amounts
paid or received under such agreements or relationships for the following
periods:
Three Months Ended
June 30,
-------------------
2002 2001
------- --------
(Dollars in Millions)
Credit support fees.................. $ 3.6 $ 2.9
Shared services reimbursement........ 11.4 10.8
Rent expense under facilities lease.. 1.3 1.3
Affiliate wholesale revenue.......... 0.3 0.9
Affiliate insurance premiums and
commissions received............ 10.1 10.2
------- -------
Total.............................. $ 26.7 $ 26.2
======= =======
-15-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 97 - Commitments and Contingent Liabilities (Continued)
- -----------------------------------------------------------------------------------------------
insolvency. TMCC has executed guarantees totaling $65 million in respect of Toyota Credit
Argentina S.A.'s ("TCA") offshore dollar bank loans, of which approximately
$36 million, including principal and interest, is outstanding as of June 30,
2002. Late in 2001, the Argentine government instituted a series of changes
that lednot obligated to political, economic and regulatory risksmake any payments to Argentine businesses.
The government has imposed foreign exchange controls restricting offshore
payment transfers, and these controls are currently preventing TCA from
sending paymentsthird parties
should TSM default on its offshore dollar loans out of Argentina. In February
2002, the Argentine government established measures to re-denominate the
entire Argentine economy into pesos and has permitted the peso to float freely
against other global currencies. This re-denomination policy adversely
affected TCA's financial condition and its ability to fully satisfy its
offshore dollar loans. In fiscal 2002, TMCC established a reserve of $26
million relating to TMCC's guaranty of TCA's offshore outstanding debt.
During the quarter ended June 30, 2002 the valuation of the peso continued to
deteriorate. As a result, TMCC recorded a $5 million charge against income to
increase the reserve related to the Company's guarantee of TCA's offshore
outstanding debt to $31 million. TMCC will continue to monitor the situation
in Argentina.
TMCC has executed guarantees totaling $30 million in respect of the debt of
Banco Toyota do Brasil, S.A. ("BTB"), of which approximately $12 million,
including principal and interest, is outstanding as of June 30, 2002.
In fiscal 2002, TMCC signed a comfort letter on behalf of Toyota Services de
Venezuela, C.A. ("TSV") regarding TSV's office lease. The comfort letter
provides that if any currency exchange controls are imposed in Venezuela that
render it illegal for TSV to pay the rent to the Landlord in U.S. Dollars
(which is required under the Lease), then TMCC will pay the rental fees that
are owed to the landlord during the currency exchange restriction period to a
bank account located outside of Venezuela. The total rent and other lease
costs payable under the lease for the entire 5-year term is approximately $4.2
million. The lease is cancellable at the convenience of TMCC after year three
of the term.
During the quarter ended June 30, 2002, the Company entered into additional
comfort letters on behalf of TSV and Toyota Services de Mexico, S.A. de C.V.
("TSM"). Effective June 2002, TMCC has signed comfort letters with Mexican and
Venezuelan banks on behalf of TSM and TSV regarding local bank credit
facilities whereby TMCC will exercise its influence to induce TSM and TSV to
meet all obligations under their credit facilities. These comfort letters
allow TSM and TSV to obtain uncommitted bank lines of credit for a period of
one year and allow advances in the maximum amounts equivalent to $34 million
for TSM and $5 million for TSV.obligations. Maturities for TSM and TSV bank loan advances
range from one month to 36 months.five years. These comfort letters will remain in
effect for as long as any associated TSM and/or TSV loans are outstanding. The initialThese comfort
letters may be extended for additional periods by mutual agreementagreements between
TMCC and the banks.
-16-Other Commitments
- -----------------
In addition to the commitments previously discussed, TMCC has also issued
revolving liquidity notes in connection with securitization transactions and
extended lending commitments to dealers for revolving credit facilities. As
of June 30, 2003, no amounts were outstanding under the revolving liquidity
notes. The maximum commitments as of June 30, 2003 are summarized in the table
below:
Maximum
Commitment
Amount
-----------
(Dollars in Millions)
Revolving liquidity notes
related to securitizations................ $ 39
Credit facilities with
dealers and affiliates.................... 3,042
Lease commitments............................. 144
------
Total $3,225
======
During the first quarter of fiscal 2004 Toyota Credit de Puerto Rico Corp.
extended a $90 million revolving line of credit to Toyota de Puerto Rico
Corp., a wholly-owned subsidiary of Toyota Motor Sales, U.S.A., Inc. ("TMS").
The revolving line of credit has a one-year renewable term, with interest due
monthly. Any loans outstanding under this revolving line of credit are not
guaranteed by TMS. The $90 million total commitment and related borrowings of
$35 million are included in the table above under total credit facilities with
dealers and affiliates.
During the first quarter of fiscal 2004 the Company entered into a 15-year
lease agreement with TMS. The lease agreement is for the Company's new
headquarters location in the TMS headquarters complex in Torrance, California.
At June 30, 2003, minimum future commitments under lease agreements to which
the Company is a lessee, including those under the agreement discussed above,
are as follows: fiscal years ending 2004 - $21 million; 2005 - $19 million;
2006 - $17 million; 2007 - $13 million; 2008 - $10 million; 2009 - $8 million;
and thereafter - $56 million.
In the ordinary course of business, the Company enters into agreements
containing indemnification provisions standard in the industry related to
several types of transactions, such as debt funding, derivatives, and
securitization transactions. Performance under these indemnities would occur
upon a breach of the representations, warranties or covenants made or given, or
- 11 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 97 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
TMCCa third party claim. Management periodically evaluates the probability of
having to incur such costs. Due to the difficulty in predicting events which
could cause a breach of these provisions, the Company is not able to estimate
its maximum exposure to future payments that could result from claims made
under such indemnities. The Company has guaranteednot made any material payments in the
past as a result of principalthese provisions, and interest on $58 million principal
amount of flexible rate demand pollution control revenue bonds maturing in
2006, issued in connection with the Kentucky manufacturing facility of an
affiliate.
TMCC has guaranteed payments of principal, interest and premiums, if any, on
$88 million principal amount of flexible rate demand solid waste disposal
revenue bonds issued by Putnam County, West Virginia, of which $40 million
matures in June 2028, $27.5 million matures in August 2029, and $20.5 million
matures in April 2030. The bonds were issued in connection with the West
Virginia manufacturing facility of an affiliate.
TMCC has guaranteed payments of principal, interest and premiums, if any, on
$60 million principal amount of flexible rate demand pollution control revenue
bonds issued by Gibson County, Indiana, of which $10 million matures in
October 2027, January 2028, January 2029, January 2030, February 2031 and
September 2031. The bonds were issued in connection with the Indiana
manufacturing facility of an affiliate.
In lieu of a cash reserve fund to fund shortfalls in principal and interest
payments to security holders in asset backed securitization transactions, TMCC
may undertake to advance funds in respect of certain shortfalls and losses,
taking a revolving liquidity note in return which allows the securitization
trust to receive draws from TMCC to fund shortfalls in principal and interest
payments due to investors up to a specified amount and obligates the
securitization trust to repay any amounts drawn with interest accrued thereon.
Repayments of principal and interest due under the revolving liquidity note
are subordinated to principal and interest payments on the asset-backed
securities and, in some circumstances, to deposits into a reserve account. To
the extent amounts are insufficient to repay amounts outstanding under a
revolving liquidity note, TMCC may recognize a loss. As of June 30, 2002, the
aggregate amount available under the revolving liquidity notes is $23 million.
TMCC maintains revolving credit facilities with dealers. These revolving
credit facilities can be used for business acquisitions, inventory financing,
facilities refurbishment, real estate purchases and working capital
requirements. These financings are generally backed by corporate or individual
guarantees from or on behalf of the participating dealers. The revolving
credit facilities totaled $1,588 million of which $763 million was outstanding as of June 30, 2002.
TMCC has guaranteed2003 the obligations of TMIS relatingCompany does
not believe it is probable that it will have to vehicle service
insurance agreements issuedmake any material payments in
Alabama, Illinois, New York and Virginia.
These guaranteesthe future. As such, no amounts have been given without regard to any security, but are
limited to the duration of the underlying insurance coverages up to a maximum
of the original manufacturer's suggested retail price on the vehicles. Asrecorded under these indemnifications
as of June 30, 2002, TMCC has not paid, and does not expect to pay, any amounts
under these guarantees.
An operating agreement between TMCC and Toyota Credit de Puerto Rico
Corporation ("TCPR")(the "Agreement"), provides that TMCC will make necessary
equity contributions or provide other financial assistance TMCC deems
appropriate to ensure that TCPR maintains a minimum coverage on fixed charges
of 1.10 times such fixed charges in any fiscal quarter. The Agreement does not
constitute a guarantee by TMCC of any obligations of TCPR. The fixed charge
coverage provision of the Agreement is solely for the benefit of the holders of
TCPR's commercial paper, and the Agreement may be amended or terminated at any
time without notice to, or the consent of, holders of other TCPR obligations.
-17-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------2003.
Various legal actions, governmental proceedings and other claims are pending or
may be instituted or asserted in the future against TMCC and its subsidiariesthe Company with respect to
matters arising fromin the ordinary course of business. Certain of these actions
are or purport to be class action suits, seeking sizeable damages and/or
changes in TMCC'sthe Company's business operations, policies and practices. Certain
of these actions are similar to suits which have been filed against other
financial institutions and captive finance companies. Management and internal
and external counsel perform periodic reviews of pending claims and actions to
determine the probability of adverse verdicts and resulting amounts of
liability. The amounts of liability on pending claims and actions as of June
30, 20022003 were not determinable; however, in the opinion of management, the
ultimate liability resulting therefrom should not have a material adverse
effect on TMCC'sthe Company's consolidated financial position or results of
operations.
Note 10- Lines of Credit/Standby Letters of Credit
- ---------------------------------------------------
To support its commercial paper program, TMCC maintains syndicated bank credit
facilities with certain banks which aggregated $3.5 billion, $3.5 billion and
$3.0 billion, at June 30, 2002, March 31, 2002 and June 30, 2001, respectively.
No loans were outstanding under any of these bank credit facilities as of June
30, 2002, March 31, 2002 or June 30, 2001.
In addition, as of June 30, 2002 and March 31, 2002, there are additional
committed and uncommitted lines of credit for $40 million and $100 million,
respectively, which are intended to be used by the Company to support its
commercial paper program and for general corporate purposes. No amounts were
outstanding under this programs as of June 30, 2002 and March 31, 2002.
To facilitate and maintain letters of credit, TMCC maintains uncommitted,
unsecured lines of credit with banks totaling $61 million, $61 million and $85
million as of June 30, 2002, March 31, 2002 and June 30, 2001, respectively.
Approximately $0.8 million, $0.5 million and $0.6 million in letters of credit
were outstanding as of June 30, 2002, March 31, 2002 and June 30, 2001,
respectively.
-18-12 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 118 - Segment Information
- ----------------------------
Financial results for the Company's operating segments are summarized below:
Three Months Ended
June 30,
------------------
2003 2002 2001
------- -------
(Dollars in Millions)
Assets:
Financing operations.............. $34,684 $29,143operations................... $40,313 $34,673
Insurance operations..............operations................... 1,002 810
684
Eliminations/reclassifications.... (193) (134)reclassifications......... (213) (182)
------- -------
Total assets....................assets......................... $41,102 $35,301 $29,693
======= =======
Gross revenues:
Financing operations..............operations................... $ 988 $ 980
$ 932
Insurance operations..............operations................... 54 49 47
------- -------
Total gross revenues............revenues................. $ 1,0291,042 $ 9791,029
======= =======
Net (Loss)/Income:income/(loss):
Financing operations..............operations................... $ 39 $ (39)
$ 41
Insurance operations..............operations................... 11 10 9
------- -------
Total net income................income/(loss)............... $ (29)50 $ 50(29)
======= =======
-19-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 129 - Subsequent Events
- -----------------------------------------------------
In July 2002,August 2003, TMCC executed aincreased the maximum amount of borrowings supported under
existing comfort letterletters with Mexican banks on behalf of TSM. As a result, TSM
withis allowed to borrow in Mexican Pesos up to a Mexican
bank regarding local bank credit facilities whereby TMCC will exercise its
influence to induce TSM to meet all obligations under its credit facilities.
The comfort letter allows TSM to obtain uncommitted bank lines of credit for a
period of one year and allow advances in the maximum amount equivalent to $10
million. Maturities for TSM bank loan advances range from one month$131
million U.S. dollars. The revised commitment amount is subject to 36
months. Thethe same
terms and conditions as the comfort letter will remainletters described in effect for as long as any TSM loans
are outstanding. The initial comfort letter may be extended for additional
periods by mutual agreement between TMCCNote 7 - Commitments
and Contingent Liabilities of the bank.
-20-consolidated financial statements.
- 13 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITIONEARNING ASSETS AND RESULTS OF OPERATIONSCONTRACT VOLUME
Net Income
- ----------
The following table summarizes Toyota Motor Credit Corporation's ("TMCC's")
net income by business segment for the three months ended June 30, 2002 and
2001:
Three Months Ended
June 30,
------------------
2002 2001
---- ----
(Dollars in Millions)
Net income:
Financing operations.............. $(39) $ 41
Insurance operations.............. 10 9
---- ----
Total net income............... $(29) $ 50
==== ====
Net income from financing operations decreased $80 million, or 196%, for the
quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001
primarily due to an unfavorable fair value adjustment related to the Statement
of Financial Statement Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an Amendment of SFAS 133 ("SFAS 138"), which
is reported as SFAS 133 and 138 fair value adjustments in the Consolidated
Statement of Income. The adjustment was due to the significant reduction in
interest rates during the quarter, as well as actions taken by TMCC to protect
interest rate margins, including an increase in TMCC's hedge portfolio and a
higher mix of swap derivative products.
Net income excluding the effects of the SFAS 133 adjustment (net of income
tax), increased $48 million, or 102%, for the quarter ended June 30, 2002 as
compared to the quarter ended June 30, 2001. The increase is primarily
attributed to asset and revenue growth and an improvement in net interest
margin. The net margin increase was partially offset by higher credit losses
and increased operating costs associated with the restructuring of field
operations and technology projects.
Net income from insurance operations increased $1 million, or 11%, for the
quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001
primarily as a result of increased contract volume.
-21-
Earning Assets
- --------------------------------
The composition of TMCC'sthe Company's net earning assets (which excludes receivables sold
through securitization transactions that qualify as a sale for legal and
accounting purposes, but includes receivables sold through securitization
transactions that qualify as a sale for legal but not accounting purposes,
under the Financial Accounting Standards Board Statement No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities"), as of the balance sheet
dates reported herein and TMCC's vehicle
lease and retail contract volume and finance penetration for the quarter ended
June 30, 2002 the fiscal year ended March 31, 2002 and the quarter ended June
30, 2001 areis summarized below:
June 30, March 31, June 30,
2003 2003 2002 2002 2001
------------ ------------ ------------
(Dollars in Millions)
Vehicle lease earning assets
Investment in operating leases, net....net..... $ 7,3327,585 $ 7,2157,679 $ 6,7757,333
Finance leases, net.................... 5,810 6,338 6,935net..................... 4,614 4,997 5,794
------- ------- -------
Total vehicle leases.................... 13,142 13,553 13,710lease earning assets....... 12,199 12,676 13,127
Vehicle retail finance receivables, net. 13,895 13,409 9,321net.. 18,072 15,873 13,885
Vehicle wholesale and other financing... 4,885 4,429 4,244financing 6,477 6,407 4,901
Allowance for credit losses............. (351) (283) (231)losses ......... (503) (462) (324)
------- ------- -------
Total net earning assets................ $31,571 $31,108 $27,044
======= ======= =======
-22-
Three Months Ended
-------------------------------
June 30, March 31, June 30,
2002 2002 2001
------- -------- --------
Total contract volume:
Vehicle retail....................... 169,000 159,000 148,000
Vehicle lease........................ 44,000 45,000 57,000
------- ------- -------
Total................................... 213,000 204,000 205,000assets................. $36,245 $34,494 $31,589
======= ======= =======
TMS sponsored contract volume:
Vehicle retail....................... 22,000 32,000 31,000
Vehicle lease........................ 2,000 5,000 12,000
------- ------- -------
Total................................... 24,000 37,000 43,000
======= ======= =======
Market share (excluding fleet):
Vehicle retail....................... 30.2% 30.2% 27.0%
Vehicle lease........................ 11.6% 13.4% 15.6%
----- ----- -----_
Total................................... 41.8% 43.6% 42.6%
===== ===== =====
- ------------------------------------------
Finance penetration represents penetrationFor purposes of Toyotathis table, vehicle wholesale and Lexus vehicle financed
salesother financing includes
wholesale financing, real estate loans, working capital loans, revolving credit lines,
and industrial equipment financing.
Consists of allowance to consumers, excluding sales ofcover probable losses on the Southeast Toyota distributor. Previously,
the percentages reported includes sales of Southeast Toyota distributor and were 37.5%
and 36.4% for the periods ending March 31, 2002 and June 30, 2001, respectively.Company's owned portfolio.
TMCC's netNet earning assets increased to $31.6 billion at June 30, 2002 from
$31.12003 increased $1.8 billion ator 5% compared to
March 31, 20022003 and $27.0increased $4.7 billion ator 15% compared to June 30, 2001. Asset2002.
The growth from March 31, 2002 and June 30, 2001 reflects primarily higher retail
and wholesalein earning assets slightlywas primarily due to higher levels of both vehicle
retail financing and vehicle wholesale and other financing, partially offset by
a declinedecrease in vehicle lease earning assets. The increase in retail earning assets and correspondingsignificant increase in retail
finance revenuereceivables primarily resulted from March 31, 2002higher contract volume, generated
by an increased use of marketing incentives sponsored by Toyota Motor Sales,
U.S.A., Inc. ("TMS") and June 30, 2001 was primarily due
to volume increases resulting from competitive pricing and strong sales ofhigher Toyota and Lexus vehicles.vehicles sales levels. In
addition, for the three months ended June 30, 2003, TMCC market share (as
defined below under "Contract Volume") increased from 41.8% to 47.9% when
compared to the same period in the prior year. The decreaseCompany also experienced
growth in the number of vehicle dealers receiving vehicle wholesale financing.
Vehicle lease earning assets as of June
30, 2002 as compareddecreased due to the quarter ended June 30, 2001 reflects a general shift in programs
sponsored by TMS from lease to retail as well as an industry-wide shift away
from leasing.
While lease earning assets decreased,
leasing revenueThe increase in the allowance for credit losses from March 31, 2003 and June
30, 2002, respectively, resulted from significant increases in charge-off
rates over the prior periods. Refer to the "Provision for Credit Losses"
section of the Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") for further discussion regarding the Company's
delinquency and charge-off experience.
- 14 -
Contract Volume
- ---------------
The composition of the Company's contract volume and market share for the
quarterquarters ended June 30, 2003 and 2002 remained consistentis summarized below:
Three Months Ended
------------------------
June 30, June 30,
2003 2002
------- --------
Total contract volume:
Vehicle retail....................... 216,000 169,000
Vehicle lease........................ 31,000 44,000
------- -------
Total................................... 247,000 213,000
======= =======
TMS sponsored contract volume:
Vehicle retail....................... 79,000 22,000
Vehicle lease........................ 8,000 2,000
------- -------
Total................................... 87,000 24,000
======= =======
Market share :
Vehicle retail....................... 39.8% 30.2%
Vehicle lease........................ 8.1% 11.6%
----- -----
Total................................... 47.9% 41.8%
===== =====
- --------------------
Market share represents penetration of Toyota and Lexus vehicle financed sales to consumers,
excluding fleet sales, sales of Toyota Services de Mexico, S.A. de C.V., Toyota Services de
Venezuela, C.A and a private Toyota distributor.
Total contract volume increased 16% primarily due to increased vehicle retail
contract volume reflecting the continued use of incentives on new vehicles,
and increases in retail financing programs sponsored by TMS. Vehicle lease
contract volume decreased 30% reflecting a general shift in programs sponsored
by TMS from lease to retail as well as an industry-wide shift away from
leasing.
Total market share increased during the first quarter of fiscal 2004 over the
comparable prior year period as the increase in retail volume more than offset
the overall decline in vehicle lease contract volume.
- 15 -
NET INCOME
- ----------
The table below presents the Company's net income for the three months ended
June 30, 2003 and 2002. The table also presents net income for the three
months ended June 30, 2003 and 2002 excluding the impact of adjustments
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities" and related amendments ("SFAS 133, as amended"). Management
believes that providing a summary of net income excluding the effects of SFAS
133, as amended, provides useful information to investors for the reasons
explained below, and a more balanced representation of the Company's operating
results. Management uses this measure when analyzing its core operating
results.
Three Months Ended
June 30,
------------------
2003 2002
----- -----
(Dollars in Millions)
Net income........................ $ 50 $ (29)
Impact of application of SFAS 133,
as amended, (net of income tax)... 21 124
----- -----
Net income excluding impact of
application of SFAS 133, as
amended(net of income tax)........ $ 71 $ 95
===== =====
Net income for the first quarter of fiscal 2004 improved significantly over the
comparable period ended June 30, 2001in fiscal 2003 primarily due to lower unfavorable derivative
fair value adjustments in the current period. The reduction in the impact of
adjustments calculated in accordance with SFAS 133, as amended, resulted from
less volatility in interest rates in the current period relative to the
comparable quarter in the prior year.
Net income excluding the impact of the application of SFAS 133, as amended,
decreased $24 million or 25% over the comparable prior year period. The
decrease resulted from the combined effects of higher depreciation expense and
lower investment and other income partially offset by higher financing revenues
and lower interest expense. The more significant fluctuations in the
components of net income are discussed on the following pages of this MD&A
section.
- 16 -
In accordance with SFAS 133, as amended, the effect of market interest rate
movements on portfolio-based derivative instruments and the ineffective
portion of the Company's fair value hedge relationships must be included in
the Company's financial results. Under Generally Accepted Accounting
Principles, the effect of market interest rate movements on the Company's
related earning assets is not included in the Company's financial results.
Management believes that including in the Company's financial results the
effect of market interest rate movements on its portfolio-based derivative
instruments and the ineffective portion of the Company's fair value hedges in
accordance with SFAS 133, as amended, while not including any corresponding
valuation adjustment related to earning assets, does not provide a complete
picture of the economics of the Company's business and its operating
performance. Therefore, the Company reports financial results on a basis that
includes, as well as excludes, the impact of the application of SFAS 133, as
amended.
TOTAL FINANCING REVENUES
- ------------------------
Total financing revenues increased $37 million or 4% for the first quarter of
fiscal 2004 over the comparable prior year period primarily due to higher
retail financing revenues and, to a lesser extent, higher wholesale and other
dealer financing revenues. The increase in retail financing revenues resulted
from an increase in TMCC's average
interest rates related to changesvehicle retail finance receivables partially offset by a
reduction in overall portfolio quality on lease contracts.yields. Wholesale earning assetsand other dealer financing
revenues increased from March 31, 2002 due to$9 million or 23% as a slight
increaseresult of the growth in the number
of vehicle dealers receiving vehicle wholesale dealersfinancing partially offset by a
reduction in overall portfolio yields.
DEPRECIATION ON LEASES
- ----------------------
Depreciation expense increased $85 million or 23% over the comparable period
in fiscal 2003. The increase was comprised of a $29 million increase in
straight-line depreciation and a corresponding$56 million increase in wholesale units financed. Wholesale earning assets increased from June 30,
2001 primarily dueadditional
depreciation expense.
Straight-line depreciation expense is based upon the difference between a
leased vehicle's capitalized cost and the contractual residual value
established at lease origination. Average capitalized costs have continued to
increase while average contractual residual values have declined. The
combination of higher capitalized costs and lower residual values resulted in
an overall increase in the numberdepreciable basis of dealers receiving wholesale
financing. Though wholesale earning assets increased, wholesale revenue
decreased forleased vehicles.
Additional depreciation expense beyond straight-line depreciation is primarily
driven by projected vehicle return rates and projected used vehicle prices.
The continued use of new vehicle incentive programs together with an ongoing
weak economic climate have adversely affected both vehicle return rates and
used vehicle prices. The amount of additional depreciation expense taken
during the quarterthree months ended June 30, 2002 as compared2003 was attributable to the combined
impact of these factors.
- 17 -
INTEREST EXPENSE
- ----------------
Interest expense decreased $24 million or 11% for the first quarter ended
June 30, 2001 primarilyof fiscal
2004 over the comparable prior year period due to a general decrease in LIBOR.
-23-
The allowance for credit lossesmarket
interest rates, partially offset by increased from March 31, 2002average outstanding debt used to
fund growth in assets. Average outstanding debt was $29 billion and June 30,
2001, reflecting asset growth and increased delinquency experience.
The increased delinquency experience is a result of a number of factors
including the effects of TMCC's field reorganization which has temporarily
disrupted normal collection activities and the continuation of the national
economic downturn. The field reorganization is ongoing and the transfer of
certain functions from branches to customer service centers is scheduled to be
completed in fiscal 2003. TMCC is taking measures to minimize the disruption
of operations; however, the restructuring of field operations and economic
downturn could continue to adversely affect delinquencies and credit losses.
In addition, the increased delinquency can be attributed to changes in
portfolio quality in connection with the national tiered pricing program
coupled with a general increase in the average original contract term of
retail and lease vehicle contracts which, historically, experience higher
rates of credit losses. Under the national tiered pricing program, the
Company generally acquires higher-yielding earning assets to compensate for
the increased credit risk of such contracts. The trend toward longer term
contracts is reflective of industry trends. The average length of contracts
initiated during fiscal year to date 2003 and fiscal year 2002 was 56.1 and
54.4, respectively. The majority of retail and finance lease receivables do
not involve recourse to the dealer in the event of customer default. The
allowance for credit losses is evaluated quarterly, considering historical
trends of repossession, charge-offs, recoveries and credit losses. In
addition, portfolio credit quality, and current and projected economic and
market conditions, are monitored and taken into account. After carefully
evaluating these factors, management develops several loss scenarios and
reviews allowance levels to ensure reserves are adequate to cover the probable
range of losses. The allowance for credit losses as of June 30, 2002 is
considered by management to be appropriate in relation to the expected loss on
the present owned portfolio.
In October 1996, TMCC created Toyota Lease Trust, a Delaware business trust
(the "Titling Trust"), to act as a lessor and to hold title to leased vehicles
in specified states. TMCC holds an undivided trust interest in lease
contracts owned by the Titling Trust, and such lease contracts are included in
TMCC's lease assets, unless and until such time as the beneficial interests in
such contracts are transferred in connection with a securitization
transaction. The majority of all leases owned by the Titling Trust are
classified as finance receivables due to certain residual value insurance
arrangements in place with respect to such leases, while leases of a similar
nature originated outside of the Titling Trust are classified as operating
leases. The purchase of residual value insurance on leases acquired by the
Titling Trust before June 2001 changed the composition of the Company's
earning assets resulting in an increased mix of finance receivables relative
to operating lease assets due to the classification differences described
above. However, in June 2001, the purchasing of residual value insurance on
lease contracts was terminated. As a result, the future composition of the
Company's lease portfolio will gradually change as more leases acquired by the
Titling Trust will be classified as operating leases.
TMCC's retail contract volume increased during the quarter ended June 30,
2002, as compared with the comparable June 30, 2001 quarter reflecting higher
levels of programs sponsored by TMS and strong sales of Toyota and Lexus
vehicles. The retail finance portfolio includes contracts with original terms
ranging from 24 to 72 months; the average original contract term in TMCC's
finance portfolio was 57 months and 56 months as of June 30, 2002 and 2001,
respectively. The increase in average original contract term is reflective of
an overall trend toward consumers entering into longer term contracts.
-24-
TMCC's lease contract volume decreased during the quarter ended June 30, 2002,
as compared with the comparable June 30, 2001 quarter as demand for financing
has shifted from leasing to retail loans. The Company's lease portfolio
includes contracts with original terms ranging from 12 to 60 months; the
average original contract term in TMCC's lease portfolio was 46 months and 44
months$25
billion at June 30, 2003 and 2002, and 2001, respectively.
The increase in average
original term for lease contracts reflects an overall trend toward consumers
entering into longer term contracts.
Net Financing RevenuesDERIVATIVE FAIR VALUE ADJUSTMENT
- ----------------------
TMCC's net financing revenues decreased $93 million, or 44%, for the quarter
ended June 30, 2002 as compared with the quarter ended June 30, 2001 primarily
due to the unfavorable effects of SFAS 133 and 138 mark to market adjustments
on debt and derivative contracts in the current quarter. The adjustment was
due to the significant reduction in interest rates during the quarter, as well
as actions taken by TMCC to protect interest rate margins, including an
increase in TMCC's hedge portfolio and a higher mix of swap derivative
products. TMCC uses derivative contracts as part of its interest rate risk
management program. The mark to market adjustments on derivatives and the
related debt obligations are determined in accordance with Financial
Accounting Standards Board Pronouncement Numbers 133 and 138. The Company's
derivative and hedging activities are discussed further at Note 5 in the Notes
to Consolidated Financial Statements.
Net financing revenues excluding the effects of the SFAS 133 adjustment,
increased $130 million, or 64%, for the quarter ended June 30, 2002 as compared
to the quarter ended June 30, 2001. The increase is primarily attributed to
asset and revenue growth and an improvement in net interest margin. The net
margin increase was partially offset by higher credit losses and increased
operating costs associated with the restructuring of field operations and
technology projects.
-25-
Depreciation on Leases
- ------------------------------------------------------
The following table sets forth the items included in TMCC's depreciation on
leases for the three months ended June 30, 2002 and 2001:Company's Derivative
fair value adjustments in accordance with SFAS 133, as amended:
Three Months Endedmonths ended
June 30, ------------------June 30,
2003 2002
2001
---- ------------ --------
(Dollars in Millions)
(Dollars in Millions)
Straight-line depreciationNet loss on operating leases.. $318 $294
Provisionnon-designated derivatives....... $ (36) $ (234)
Net loss for residualhedges that no longer qualify
as fair value losses............. 55 80
---- ----
Total depreciation on leases................. $373 $374
==== ====hedges....................... (8) -
Net gain related to the ineffective portion
of the Company's fair value hedges......... 6 20
------- -------
Derivative fair value adjustments............ $ (38) $ (214)
======= =======
Straight-line depreciation expense on operating leases increased $24The derivative fair value adjustment decreased $176 million
or 8% for the quarter ended June 30, 2002 as compared with the quarter ended
June 30, 2001 due to an increase in average operating lease assets. As
discussed earlier, purchasing residual value insurance for leases acquired by
the Titling Trust before June 2001 increased the ratio of lease finance
receivables relative to operating lease assets. TMCC discontinued purchasing
residual value insurance for operating lease assets acquired by the Titling
Trust in June 2001. The Company expects an increase in straight-line
depreciation expense as operating leases become a larger proportion of the
Company's lease portfolio.
TMCC is subject to residual value risk in connection with its lease portfolio.
TMCC's residual value exposure is a function of the number of off-lease
vehicles returned for disposition and any shortfall between the net
disposition proceeds and the estimated unguaranteed residual values on
returned vehicles. If the market value of a leased vehicle at contract
termination is less than its contract residual value, the vehicle is more
likely to be returned to TMCC. A higher rate of vehicle returns exposes TMCC
to a higher risk of aggregate losses.
-26-
Total unguaranteed residual values related to TMCC's vehicle lease portfolio
increased from approximately $7.1 billion to $7.2 billion between March 31,
2002 and June 30, 2002. The increase primarily resulted from the
suspension of
purchasing residual value insurance for operating leases acquired by the
Titling Trust beginningcomparable period in June 2001.
The Company maintains an allowance to cover estimated vehicle disposition
losses related to unguaranteed residuals on its present owned portfolio. The
allowance required to cover estimated residual value losses is evaluated
quarterly, considering projected vehicle return rates and projected loss
severity derived from historical and market information on used vehicle sales,
historical factors including trends in lease returns, the new car markets, and
general economic conditions. After carefully evaluating these factors,
management develops several loss scenarios and reviews allowance levels to
ensure reserves are adequate to cover the probable range of losses. The
allowance for residual value losses is maintained in amounts considered by
management to be appropriate in relation to the expected losses on the present
owned portfolio. Upon disposal of the assets, the allowance for residual
losses is adjusted for the difference between the net book value and the
proceeds from sale. The allowance for residual value losses and related
provision expense are included in finance receivables, net and investment in
operating leases, net in the Consolidated Balance Sheet and lease depreciation
expense in the Consolidated Statement of Income, respectively.
Losses at vehicle disposition decreased $24 million for the quarter ended June
30, 2002 as compared with the quarter ended June 30, 2001fiscal 2003 primarily due to the benefits derived from a change inimpact of lower interest
rate volatility on the Company's residual value setting policy
beginning with model year 1999 Toyota vehicles. The new policy requires
separate calculations of the residual value applicable to the base vehicle and
the residual value applicable to certain specified optional accessories and
optional equipment. Affected model year 1999 vehicles started terminating in
fiscal 2002 and have contributed to lower residual losses in the quarter ended
June 30, 2002. The decrease also results from a decrease in the number of
vehicles coming off-lease innon-designated derivative portfolio.
In the current quarter, coupled with a slight
decreasethe absolute level of interest rates declined slightly
from March 31, 2003, resulting in the average loss per unit.
The numberan unfavorable fair value adjustment of returned leased vehicles sold by TMCC during a specified period
as a percentage$38
million of the number of lease contracts that as of their origination
dates were scheduled to terminate ("full term return rates") in the current
periodwhich $36 million was 47% for the quarter ended June 30, 2002 as compared to 51% for the
quarter June 30, 2001. TMCC believes that the decrease for the quarter ended
June 30, 2002, as comparedattributed to the same period in fiscal 2001, is due primarily
to a decrease in the number of vehicles coming off lease in the current
quarter relative to those vehicles scheduled to terminate in the same period.
The Company has taken action to reduce vehicle disposition losses by
developing strategies to increase dealer purchases of off-lease vehicles and
expanding marketing of off-lease vehicles through the internet to maximize
proceeds on vehicles sold through auction.
The provision for residual value losses decreased for the quarter ended June
30, 2002 as compared to the quarter ended June 30, 2001. The decrease in the
provision is reflective of the overall decrease in residual value losses as
discussed above. Despite the decrease in the provision for residual value
losses, the Company's overall allowance remained consistent with March 31,
2002 levels.
-27-non-designated
derivative portfolio.
- 18 -
Interest Expense
- ----------------
Interest expense decreased $79 million, or 27% during the quarter ended June
30, 2002 as compared with the quarter ended June 30, 2001 primarily due to a
decrease in the average cost of borrowings. The weighted average cost of
borrowings was 3.09% and 4.95% for the quarters ended June 30, 2002 and 2001,
respectively.
Insurance
- ---------
The principal activities of TMCC's insurance subsidiary, Toyota Motor Insurance
Services, Inc. ("TMIS"), include marketing, underwriting, claims administration
and providing certain insurance and contractual coverages to Toyota and Lexus
vehicle dealers and their customers. In addition, TMIS insures and reinsures
certain TMS and TMCC risks. Insurance premiums earned and contract revenues
recognized from insurance operations increased $1 million during the quarter
ended June 30, 2002 as compared with the same period in 2001 primarily due to
increased contract volume.
Investment and Other IncomeINVESTMENT AND OTHER INCOME
- ---------------------------
The following table summarizes TMCC'sthe Company's investment and other income for
the three months ended June 30, 20022003 and 2001:2002:
Three Months Ended
June 30,
------------------
2003 2002 2001
------ ------
(Dollars in Millions)
Investment income......................and servicing fee income.... $ 2226 $ 2923
Gains on assets sold................... - 33
----- -----
Investment income-securitizations... $ 26 Servicing fee income................... 9 10
------ ------$ 56
Investment income-marketable
securities and other income......... 10 8
----- -----
Total Investment and Other Income $ 36 $ 64
$ 65
====== =========== =====
Investment and other income decreased $7$28 million or 24%, during the quarter ended June
30, 2002, as compared with the same period in fiscal 2001, primarily due to a
general decrease in interest rates.
-28-
Gains on assets sold increased $7 million, or 27%,44% for the quarter ended
June 30, 2002 as compared2003 from the comparable prior year period. The decrease was related
to a reduction in the Company's securitization activity in the current quarter
relative to the quarter ended June 30, 2001 due to decreases in
market interest rates, which resulted in larger spreads retained bycomparable prior year period. As the Company. Gains recognized on asset-backed securitization transactions
generally accelerateCompany's funding needs
were met through the recognition of income on lease and retail contracts,
net of servicing fees and other related deferrals, into the period the assets
are sold. Numerous factors can affect the timing and amounts of these gains,
such as the type and amount of assets sold, the structure of the sale, key
assumptions used and current financial market conditions.
Servicing fee income decreased for the three months ended June 30, 2002 as
compared to June 30, 2001 due to a decrease in the average balance of sold
interests in lease and retail finance receivables at June 30, 2002 as compared
to June 30, 2001.
Loss on Asset Impairment
- ------------------------
TMCC performs a periodic review of the fair market value of assets retained in
the sale of retail receivables and interests in lease finance receivables on a
quarterly basis. The fair market value of these retained assets is impacted
by management's and the market's expectations as to future losses on vehicle
disposition, credit losses, discount rates and prepayment rates. In June
2001,debt capital markets, the Company experienced increased return rates and losses per unit upon
disposition relating to vehicles associated with its lease and finance
receivables. This experience, combined with revised forecasts for future
return rates and loss per unit, resulted in a downward revision to the vehicle
disposition assumptions. As a result of the change in assumptions, in the
quarter ending June 30, 2001, TMCC recognized losses due to the permanent
impairment of assets retained in the sale of interests in lease finance
receivables totaling $47 million as required by EITF 99-20, which was adopteddid not initiate any
securitization transactions in the first quarter of fiscal year 2002.2004.
- 19 -
PROVISION FOR CREDIT LOSSES
- ---------------------------
The Company did not have any
outstanding lease securitization transactions as of March and June 2002.The
Company did not record any impairment on retail securitization transactions
during the quarter ended June 30, 2002.
Losses Relatedis exposed to Argentine Investment
- --------------------------------------
TMCC has executed guarantees totaling $65 million in respect to TCA's offshore
dollar bank loans of which approximately $36 million, including principal and
interest is outstanding. Late in 2001, the Argentine government instituted a
series of changes that led to political, economic and regulatory risks to
Argentine businesses. The government has imposed foreign exchange controls
restricting offshore payment transfers and these controls are currently
preventing TCA from sending paymentscredit risk on its offshore dollar loans outowned portfolio. Credit risk is
the risk that customers will not make required payments to the Company in
accordance with their contractual obligation. The Company's level of Argentina. In February 2002,credit
losses is influenced primarily by two factors: the Argentine government established measurestotal number of contracts
that default ("frequency of occurrence") and loss per occurrence ("loss
severity"). The Company maintains an allowance for credit losses to re-denominate the entire Argentine economy into pesos and has permitted the
peso to float freely against other global currencies. This re-denomination
policy adversely affected TCA's financial condition and its ability to fully
satisfy its offshore dollar loans. As a result, in fiscal 2002 TMCC
established a reserve of $26 million relating to TMCC's guaranty of TCA's
offshore outstanding debt.
During the quarter ended June 30, 2002, the value of the peso continued to
deteriorate. As a result, TMCC recorded a $5 million charge against income to
increase the reservecover
probable losses.
The following tables provide information related to the Company's guarantee of TCA's offshore
outstanding debt to $31 million. TMCC will continue to monitor the situation
in Argentina.
-29-
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased $14 million, or 12%, for the
quarter ended June 30, 2002 as compared with the quarter ended June 30, 2001.
The increase reflects costs associated with the field operations restructuring,
technology-related projects as well as costs to support the Company's growing
customer base.
Included in operating and administrative expenses are charges allocated by TMS
for certain technological and administrative services provided to TMCC. Net
charges reimbursed by TMCC to TMS totaled $11.4 million and $10.8 million
during the quarters ended June 30, 2002 and 2001, respectively.
Operating and administrative expenses are also expected to increase during
fiscal 2003 as a result of the costs incurred in connection with the continued
restructuring of TMCC's field operations. The branch offices of TMCC are
being converted to serve only dealer financing needs which includes the
purchasing of contracts from dealers, financing inventories, loans to dealers
for business acquisitions, facilities refurbishment, real estate purchases and
working capital requirements, as well as consulting on finance and insurance
operations. The other functions that the branch offices currently cover, such
as customer service, collections, lease termination and administrative
functions for retail and lease contracts, will be handled by three regional
customer service centers. The regional center for the Western region was
opened in October 2001. The regional center for the Eastern region opened in
February 2002, and the transfer of the other functions from branches to the
regional center for the Midwest region is scheduled to continue during the
summer of 2002. The conversion of these activities is expected to be
completed in fiscal 2003.
Restructuring charges and costs recognized during the quarters ended June 30,
2002 and 2001 were $6.3 million and $2 million, respectively. Expenses
charged during the quarter ended June 30, 2002 were comprised of $4.5 million
related to asset and facility costs and $1.8 million for other exit costs.
The expenses charged in the quarter ended June 30, 2001 were comprised
primarily of employee separation and asset and facility costs. Additional
restructuring charges and costs are expected through fiscal 2003. During the
restructuring, TMCC has experienced an increase in delinquency rates and
charge off rates as a result of the disruption to normal collection process
during the field reorganization. TMCC is taking measures to minimize the
disruption of operations; however, the restructuring of field operations could
continue to adversely affect delinquencies and credit losses. Management
believes that the impact of the restructuring has been accurately factored
into the provision for credit losses. Upon completion of the field
reorganization and strategic deployment of resources, the Company hopes to
derive greater internal operating efficiencies and superior dealer and
customer account management. At June 30, 2002, restructuring and related
charges to be recognized during fiscal 2003 are estimated to be $8 million.
-30-
Provision for Credit Losses and Delinquency
- --------------------------------------------
TMCC maintains allowances to cover probable losses on its present owned
portfolio resulting from the inability of customers to make required payments.
The allowance for credit losses is evaluated quarterly, considering historical
trends of repossession, charge-offs, recoveries and credit losses. In
addition, portfolio credit quality, and current and projected economic and
market conditions, are monitored and taken into account. After carefully
evaluating these factors, management develops several loss
scenarios and
reviews allowance levels to ensure reserves are adequate to cover the probable
range of losses. The allowance for credit losses as of June 30, 2002 is
considered by management to be appropriate in relation to the expected loss
experience on the present owned portfolio.
An analysis of credit losses and the related allowance follows. This analysis
includes net losses on receivables sold through securitizations that qualify as
a sale for legal but not accounting purposes, but excludes net losses on
receivables sold through securitization transactions that qualify as a sale for
legal and accounting purposes, under SFAS 140:experience:
Three MonthsThree-months Ended
June 30,
------------------------------------------
2003 2002
2001
------------- -------
(Dollars in Millions)
Allowance for credit losses
at beginning of period.......................period............... $ 283526 $ 227283
Provision for credit losses..................losses............. 109 122
50
Charge-offs.................................Charge-offs............................. (94) (60)
(40)
Recoveries..................................Recoveries.............................. 11 7
5
Other adjustments...........................adjustments....................... - (1)
(11)
------ ------------- -------
Allowance for credit losses
at end of period.............................period..................... $ 552 $ 351
$ 231
====== ======
Annualized======= =======
June 30,
--------------------
2003 2002
------ ------
(Dollars in Millions)
Net Credit Lossescredit losses as a %percentage
of average earning assets................ 0.68% 0.52%
Allowance for Credit Losses as a percent of gross
earning assets........................... 1.10% 0.85%assets .... 0.92% 0.67%
Aggregate balances at end of period
for lease rentals and installments 60 or more days
past due ................ $238 $77
Aggregate balances at end of period
for lease rentals and installments
60 or more days past due.............................. $ 198 $ 238
Over-60 day delinquencies as a %percentage
of net investments in operating
leases and gross receivables
outstandingearning assets ......................... 0.75% 0.28%....... 0.54% 0.74%
Allowance for credit losses
as a percentage of gross
earning assets ................... 1.50% 1.21%
- ------------------------------------
60+ delinquency for June 30, 2001 was previously reportedDelinquency and charge-off ratios typically fluctuate over time as 0.21%.a portfolio matures. The
information in the preceding table has not been adjusted to eliminate the effect of the growth of
the Company's portfolio.
For purposes of this table, "earning assets" include earning assets and repossessed
collateral.
-31-- 20 -
The allowance for credit lossesCharge-offs, net of recoveries, increased $120$30 million foror 57% in the quarter
ended June 30, 2002 as compared to2003 over the comparable period in the prior year. Although
charge-offs increased in the most recent quarter, ended June 30, 2001 due to an increasethe provision for credit
losses declined $13 million or 11% in the current quarter over the comparable
period in the prior year. The decline in the provision for credit losses
partially offsetreflects the decline in 60-day contractual delinquency from 0.74% at June 30,
2002 to 0.54% at June 30, 2003.
Net Credit Losses and Delinquency Experience
- --------------------------------------------
The Company's credit loss experience continued to be significantly influenced
by an increasethe combined impact of the following factors:
- - The Company's field restructuring
- - Lower used vehicle prices
- - Continued economic weakness
- - Longer term financing
- - Tiered/risk based pricing
The impact of the listed factors to the Company's credit loss experience,
except as discussed below, is consistent with the impact to fiscal 2003
results as discussed in net
charge-offs.the "Provision for Credit Losses" section of the
Company's 2003 Annual Report on Form 10-K. The impact of the tiered/risk
based pricing program ("tiered pricing"), which was fully implemented as of
March 2001, is now considered to be a lesser contributing factor to higher
credit losses. In prior periods, the increase in the provisionlevel of credit losses
experienced by the Company was more significantly influenced by the
implementation of tiered pricing. While the implementation of tiered pricing
has resulted in increased overall credit losses, the period-to-period effects
have lessened over time.
Although delinquency rates have improved from June 2002 to June 2003, the
overall level of delinquency remains high relative to the Company's historical
experience. Additionally, the credit loss rate for the quarterthree months ended June
30, 20022003, was at the upper end of historical experience. Management expects
that the adverse impact of the field restructuring should lessen as compared witha result
of measures taken to improve processes and technology; however, management
remains cautious regarding the same period ended June 2001 corresponds with
increases in delinquenciesnear term economic outlook, the benefit of the
actions taken and the potential impact on these factors affecting credit losses reflected in the chart above.
The Companyloss
experience. Management believes that the increased delinquency experience is a resultlevel of a number of factors including the effects of TMCC's field reorganization which
has temporarily disrupted normal collection activities and the continuation of
the national economic downturn. The field reorganization is ongoing and the
transfer of certain functions from branches to customer service centers is
scheduled to be completed in fiscal 2003. TMCC is taking measures to minimize
the disruption of operations; however, the restructuring of field operations
and economic downturn could continue to adversely affect delinquencies and
credit losses. In addition, the increased delinquency can be attributed to
changes in portfolio quality in connection with the national tiered pricing
program coupled with a general increase in the average original contract term
of retail and lease vehicle contracts which, historically, experience higher
rates of credit losses. Under the national tiered pricing program, the
Company generally acquires higher-yielding earning assets to compensate for
the increased credit risk of such contracts. The trend toward longer term
contracts is reflective of industry trends. The average length of contracts
initiated during fiscal year to date 2003 and fiscal year 2002 was 56.1 and
54.4, respectively. The majority of retail and finance lease receivables do
not involve recourse to the dealer in the event of customer default. The
increase in the allowance for net credit losses as a percent of average
earning assets and as a percent of gross earning assets fromreserve at June 30, 2001 to
June 30, 2002 are reflective2003 is
reasonable in light of the increased provision for credit losses.
Delinquencycurrent facts and charge-off ratios typically fluctuate over time as a portfolio
matures.circumstances.
- 21 -
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The information in the table above has not been adjusted to
eliminate the effect of the growth of TMCC's portfolio.
-32-
Derivatives and Hedging Activities
- ----------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an Amendment of SFAS 133 ("SFAS 138") require
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Fair valueobjective of the Company's derivatives is determined
using external market data in conjunction with an internal market valuation
system, or externally quoted market values. Derivative assets and liabilities
include interest rate swaps, indexed note swap agreements, cross currency
interest rate swap agreements and option-based products. The accounting for
the gain or loss due to changes in fair value of the hedged item depends on
whether the relationship between the hedged item and the derivative instrument
qualifies for hedge treatment. If the relationship between the hedged item and
the derivative instrument does not qualify as a hedge, the gains or losses of
the derivative instrument are reported in earnings when they occur. However,
if the relationship between the hedged item and the derivative instrument
qualifies as a hedge, the accounting varies based on the type of hedge.
Additional information concerning the SFAS 133 and 138 requirements are
disclosed in Note 5 - Derivatives and Hedging Activities of the Notes to
Consolidated Financial Statements. Additional information concerning the
Company's derivative and hedging activities is set forth below in "Item 3.
Quantitative and Qualitative Disclosures About Market Risk."
Derivatives are recognized in the balance sheet at their fair value. On the
date that the Company enters into a derivative contract that qualifies as a
hedge, it designates the derivative as a hedge of the fair value of a
recognized asset or liability or a foreign-currency fair-value hedge (a
"foreign currency hedge"). Changes in the fair value of a derivative that is
highly effective as - and that is designated and qualifies as - a fair-value
hedge or foreign-currency hedge, along with changes in fair value of the hedged
assets or liabilities that are attributable to the hedged risk, are recorded in
current-period earnings.
For the quarter ended June 30, 2002, the Company recognized a $214 million
unfavorable SFAS 133 and 138 adjustment (reported as SFAS 133 and 138 fair
value adjustments in the Consolidated Statement of Income). The net
adjustment reflects an increase of $12 million related to the ineffective
portion of TMCC's fair value hedges, offset by a $226 million decrease in the
fair market value of TMCC's portfolio of option-based products and certain
interest rate swaps. The decrease in the fair value of TMCC's option-based
products as well as certain interest rate swaps was due to the significant
reduction in interest rates during the quarter, as well as actions taken by
TMCC to protect interest rate margins, including an increase in TMCC's hedge
portfolio and a higher mix of swap derivative products. Various derivative
instruments, such as option-based products and certain interest rate swaps
which hedge interest rate risk from an economic perspective, and which the
Company is unable or has elected not to apply hedge accounting, are discussed
in "Item 3 Quantitative and Qualitative Disclosure About Market Risk-Non-
Hedging Activities" below. For fair value hedging relationships, the
components of each derivative's gain or loss are included in the assessment of
hedge effectiveness.
-33-
Liquidity and Capital Resources
- -------------------------------
The Company, in the normal course of business, is an active debt issuer and
requires a substantial amount of funding to support the growth in earning
assets. The objective of its liquidity managementstrategy is to ensure the Company has
the ability to maintain access to the
capital markets so as to meet its obligations and other commitments on a timely and
cost-effective basis.basis to support the growth in earning assets. Significant
reliance is placed on the Company's ability to obtain debt and asset-backed
securitization
funding in the capital markets in addition to funding provided
by earning asset liquidations and cash provided by operating activities.markets. Debt issuances have generally been in the form
of commercial paper and domesticunsecured term debt. The Company believes that debt
issuances and euro medium-term notes ("MTNs")securitization funding, combined with cash provided by operating,
investing, and bonds.financing activities, will provide sufficient liquidity to meet
future funding requirements.
Commercial Paper
- ----------------
Commercial paper issuances are used to meet short-term funding needs.
Commercial paper outstanding under TMCC'sthe Company's commercial paper programprograms
ranged from approximately $4.6$4.7 billion to $6.4$7.0 billion during the quarter ended
June 30, 2002,2003, with an average outstanding balance of $5.5$5.9 billion.
For additional liquidity purposes, TMCC maintains syndicated bank credit
facilities with certain banks which aggregated $3.5 billion at June 30, 2002.
No loans were outstanding under any of these bank credit facilities as of June
30, 2002. TMCC maintains additional committed and uncommitted lines of credit
for $40 million and $100 million, respectively. TMCC also maintains
uncommitted, unsecured lines of credit with banks totaling $61 million as of
June 30, 2002. At June 30, 2002 TMCC had issued approximately $0.8 million in
letters of credit in connection with these uncommitted, unsecured lines of
credit.Unsecured Term Debt
- -------------------
Long-term funding requirements are met through the issuance of a variety of
debt securities underwritten in both the United States ("U.S.") and
international capital markets. Domestic and euro MTNsMedium term notes ("MTNs") and bonds have
provided TMCCthe Company with significant sources of funding. During the quarter
ended June 30, 2002, TMCC2003, the Company issued approximately $1.7$1.0 billion of domestic and euro MTNs and
bonds, all of which had original maturities of one year or more. At June 30,
2003, the Company had total MTNs and bonds outstanding of $26.0 billion, of
which $11.4 billion was denominated in foreign currencies. The originalremaining
maturities of all MTNs and bonds outstanding at June 30, 20022003 ranged from less
than one year to ten years.
As of June 30, 2002, TMCC had total MTNs
and bonds outstanding of $22.0 billion, of which $7.6 billion was denominated
in foreign currencies.
TMCCThe Company anticipates continued use of MTNs and bonds in both the United StatesU.S. and
international capital markets. To provide for the issuance of MTNs and other debt securities
in the U.S. capital market, the Company maintains a shelf registration with the
SECSecurities and Exchange Commission ("SEC") under which approximately $9.2$5.4
billion was available for issuance at July 31, 2002.2003. Under TMCC'sthe Company's euro
MTN program, which provides for the issuance of debt securities in the
international capital market, the maximum aggregate principal amount authorized
to be outstanding at any time is $16.0 billion, of which $3.8approximately $1.9
billion was available for issuance at July 31, 2002.2003. The United StatesU.S. dollar and euro
MTN programs may be expanded from time to time to allow for the continued use
of these sources of funding. In addition, TMCCthe Company may issue bonds in the
domesticU.S. and international capital markets that are not issued under its MTN
programs.
Additionally, TMCC usesSecuritization Funding
- ----------------------
TMCC's securitization program allows the Company to access an additional
source of funding, further diversifying its asset-backedinvestor base to enhance its
liquidity position. TMCC's securitization programs to generate
funds for investment in earning assets as described in the above section "Sales
of Receivables and Securitization" and in Note 7 - Sale of Receivables and
Securitization to the Consolidated Financial Statements. TMCC maintains a shelf
registration statementtransactions are completed using
qualifying special purpose entities with the SEC relatingexception of one transaction in
fiscal 2002. The outstanding balance of securitized retail finance
receivables which TMCC continues to the issuance of asset-backed
notes secured by, and certificates representing interests, in retail
receivables. During the quarter endedservice totaled $5.7 billion at June 30,
2002, TMCC sold retail
receivables totaling $1.6 billion in connection with securities issued under2003.
- 22 -
For the shelf registration statement.past three fiscal years, securitization transactions averaged
approximately 29% of the Company's total funding. As of July 31, 2002, $22003,
$7.4 billion remainedof securities was available for issuance under the SEC shelf
registration statement. -34-
A reduction or termination of TMCC's ratiosecuritization
activities would cause the Company to seek alternative funding from debt
capital markets. Management does not anticipate any changes in the Company's
ability to access the securization market in the foreseeable future.
Back-Up Liquidity Facilities
- ----------------------------
For additional liquidity purposes, the Company maintains syndicated bank
credit facilities with banks whose commitments aggregated $4.2 billion at June
30, 2003. No amounts were outstanding under the syndicated bank credit
facilities as of earningsJune 30, 2003. The 364-day facility is subject to fixed chargesrenewal
during September 2003 and the Company expects the facility will be renewed.
The Company maintains uncommitted lines of credit to facilitate issuance of
letters of credit. These lines of credit totaled $60 million as of June 30,
2003 of which approximately $1 million was less thanoutstanding.
Credit Ratings
- --------------
Effective August 1, 2003, Moody's Investors Service, Inc. ("Moody's") upgraded
the long-term ratings of Toyota Motor Corporation ("TMC") and its supported
subsidiaries, including TMCC, from Aa1 to Aaa, and retained its stable
outlook. After consideration of the upgrade, Moody's and Standard & Poor's
Ratings, Group, a 1:1 ratiodivision of The McGraw-Hill Companies, Inc. ("S&P") ratings
of TMCC were as follows:
Rating Agency Senior Debt Commercial Paper
--------------- ------------- ------------------
S&P AAA A-1+
Moody's Aaa P-1
In March 2003, S&P affirmed the ratings of both senior debt and commercial
paper, while maintaining a negative outlook.
CONTRACTUAL OBLIGATIONS AND CREDIT-RELATED COMMITMENTS
- ------------------------------------------------------
During the first quarter of fiscal 2004 the Company entered into a 15-year
lease agreement with TMS. The lease agreement is for the quarter endedCompany's new
headquarters location in the TMS headquarters complex in Torrance, California.
At June 30, 20022003, minimum future commitments under lease agreements to which
the Company is a lessee, including those under the agreement discussed above,
are as follows: fiscal years ending 2004 - $21 million; 2005 - $19 million;
2006 - $17 million; 2007 - $13 million; 2008 - $10 million; 2009 - $8 million;
and 1.29 for the quarter ended June 30, 2001. The
deficiency in the ratio for the quarter ended June 30, 2002 was primarily due
to a decrease in net income from financing operations due to an unfavorable
fair value adjustment related to the Statement of Financial Statement
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activitiesthereafter - an Amendment of SFAS 133 ("SFAS 138"), which is reported
as SFAS 133 and 138 fair value adjustments in the Consolidated Statement of
Income. The Company would require $51 million in additional net income to
attain a 1:1 ratio.
Cash flows provided by operating, investing and financing activities have been
used primarily to support earning asset growth. Cash provided by the
liquidation and sale of earning assets, totaling $6.6 billion for the quarter
ended June 30, 2002 was used to purchase additional investments in operating
leases and finance receivables, totaling $7.6 billion during the quarter ended
June 30, 2002. Investing activities resulted in a net use of cash of $1.3
billion for the quarter ended June 30, 2002 as the purchase of additional
earning assets exceeded cash provided by the liquidation of earning assets.
Net cash provided by operating activities totaled $389 million for the quarter
ended June 30, 2002 and net cash provided by financing activities totaled $421
million during the quarter ended June 30, 2002. The Company believes that cash
provided by operating and investing activities as well as access to domestic
and international capital markets, the issuance of commercial paper, and asset-
backed securitization transactions will provide sufficient liquidity to meet
its future funding requirements.
-35-$56 million.
- 23 -
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act ofCAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- ------------------------------------------------------------------------
This report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which include estimates,
projections and statements of the Company's beliefs concerning future events,
business plans, objectives, expected operating results, and the assumptions
upon which those statements are based. Forward looking statements include,
without limitation, any statement that may predict, forecast, indicate or
imply future results, performance or achievements, and are typically
identified with words such as "believe," "anticipate," "expect," "estimate,"
"project," "should," "intend," "will,""believe", "anticipate", "expect", "estimate",
"project", "should", "intend", "will", "may" or words or phrases of similar
meaning. The Company cautions that the forward looking statements involve
known and unknown risks, uncertainties and other important factors that may
cause actual results to differ materially from those in the forward looking
statements, including, without limitation, the following: decline in demand
for Toyota and Lexus products; the effect of economic conditions; the effect of
the current political, economic and regulatory risk in Argentina, Mexico,
Venezuela, Brazil and other Latin American and South American countries and the
resulting effect on their economies;economies and monetary and fiscal policies; a decline
in the market acceptability of leasing; the effect of competitive pricing on
interest margins; changes in pricing due to the appreciation of the Japanese
yen against the United StatesU.S. dollar; the effect of governmental actions; changes in tax
laws; changes in regulations that affect retail installment lending, leasing or
insurance; the effect of competitive pressures on the used car market and
residual values and the continuation of the other factors causing an increase
in vehicle returns and disposition losses; the continuation of, and if
continued, the level and type of special programs offered by TMS; the ability
of the Company to successfully access the United
StatesU.S. and international capital
markets; the effects of any rating agency actions; increases in market interest
rates; the implementation of new technology systems; the continuation of
factors causing increased delinquencies and credit losses; the changes in the
fiscal policy of any government agency which increases sovereign risk, monetary
policies exercised by the European Central Bank and other monetary authorities;
increased costs associated with the Company's debt funding or restructuring
efforts; the effect of any military action by or against the U.S., as well as
any future terrorist attacks, including any resulting effects on general
economic conditions, consumer confidence and general market liquidity; with
respect to the effects of litigation matters, the discovery of facts not
presently known to the Company or determination by judges, juries or other
finders of fact which do not accord with the Company's evaluation of the
possible liability from existing litigation,litigation; increased losses resulting from
default by any dealers to which the Company has a significant credit exposure,exposure;
default by any counterparty to a derivative contract,contract; and performance under any
guaranty or comfort letter issued by the Company; and the ability of the Company's counterparties
to perform under interest rate and cross currency swap agreements.Company. The risks included here are
not exhaustive. New risk factors emerge from time to time and it is not
possible for the Company to predict all such risk factors, nor to assess the
impact such risk factors might have on the Company's business or the extent to
which any factor or combination of factors may cause actual results to differ
materially from those contained in any forward looking statements. Given
these risks and uncertainties, investors should not place undue reliance on
forward looking statements as a prediction of actual results. The Company
will not update the forward looking statements to reflect actual results or
changes in the factors affecting the forward looking statements.
-36-
New Accounting Standards
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146), which addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3 "Liability Recognition for Certain Employee Terminations
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred as opposed to the date of an entity's commitment to
an exit plan as required under EITF Issue No. 94-3. SFAS 146 also requires
that measurement of the liability associated with exit or disposal
activities be at fair value. SFAS 146 is effective for the Company for exit
or disposal activities that are initiated after December 31, 2002. The
implementation of SFAS 146 is not expected to have a material impact on the
Company's financial statements.
-37-- 24 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TMCC maintains an overallValue at Risk
- -------------
The Company's primary market risk management strategy that uses a variety ofexposure is interest rate and currency derivative financial instruments to mitigate its
economic exposure to fluctuations caused by volatilityrisk, in
interest rate and
currency exchange rates. TMCC does not use any of these instruments for
trading purposes.
Fair-Value Hedges
- -----------------
The Company enters into interest rate swaps, indexed note swap agreements and
cross currency interest rate swap agreements to convert its fixed-rate debt to
variable-rate debt, a portion of which is converted back to fixed rates using
option-based products. (Additional information regarding option-based products
is set forth below under "Non-Hedging Activities.").
TMCC uses interest rate swap agreements in managing its exposure to interest
rate fluctuations. Interest rate swap agreements are executed as an integral
part of specific debt transactions or on a portfolio basis. TMCC's interest
rate swap agreements involve agreements to pay fixed and receive a floating
rate, or receive fixed and pay a floating rate, at specified intervals,
calculated on an agreed-upon notional amount. Interest rate swap agreements
may also involve basis swap contracts which are agreements to exchange the
difference between certain floating interest amounts, such as the net payment
based on the commercial paper rate and theparticular U.S. dollar London Interbank Offered Rate
("LIBOR"), calculated on an agreed-upon notional amount.
TMCC uses indexed note swap agreements in managing its exposure in connection
with debt instruments whose interest rate and/or principal redemption amounts
are derived from other underlying indices. Indexed note swap agreements
involve agreements to receive interest and/or principal amounts associated
with the indexed notes, denominated in either U.S. dollars or a foreign
currency, and to pay fixed or floating rates on U.S. dollar liabilities.
TMCC uses cross currency interest rate swap agreements to entirely hedge
exposure to exchange rate fluctuations on principal and interest payments for
borrowings denominated in foreign currencies. Notes and loans payable issued
in foreign currencies are hedged by concurrently executing cross currency
interest rate swap agreements which involve the exchange of foreign currency
principal and interest obligations for U.S. dollar obligations at agreed-upon
currency exchange and interest rates.
Derivative financial instruments used by TMCC involve, to varying degrees,
elements of credit risk in the event a counterparty defaults in performing its
obligation under the derivative agreement and market risk as the instruments
are subject to rate and price fluctuations. Credit risk is managed through
the use of credit standard guidelines, counterparty diversification,
monitoring of counterparty financial condition and master netting agreements
in place with all derivative counterparties. Credit exposure of derivative
financial instruments is represented by the fair value of contracts with a
positive fair value at June 30, 2002 reduced by the effects of master netting
agreements. The credit exposure of TMCC's derivative financial instruments at
June 30, 2002 was $627 million on an aggregate notional amount of $41.3
billion. Additionally, at June 30, 2002, approximately 99% of TMCC's derivative
financial instruments, based on notional amounts, were with commercial banks
and investment banking firms assigned investment grade ratings of "AA" or
better by national rating agencies. TMCC does not currently anticipate non-
performance by any of its counterparties and has no reserves related to non-
performance as of June 30, 2002. TMCC has not experienced any counterparty
default during the quarter ended June 30, 2002.
-38-
Non-Hedging Activities
- ----------------------
Option-based products are executed on a portfolio basis and consist primarily
of purchased interest rate cap agreements and certain interest rate swaps and,
to a lesser extent, foreign exchange forward contract agreements. Option-based
products are agreements which either grant TMCC the right to receive, or
require TMCC to make payments at, specified interest rate levels. Option-based
products are used primarily to hedge interest rate risk from an economic
perspective on TMCC's portfolio.Rate. The Company uses the
value at risk methodology ("VAR") to measure this strategy to moderate itsrisk. The VAR provides an
overview of the Company's exposure to volatilitychanges in interest rates, particularly LIBOR, and for liability management purposes.
These products are not linked to specific assets and liabilities that appear on
the balance sheet and therefore, do not qualify for hedge accounting.
Value-At-Risk Methodology
- -------------------------
TMCC uses a value-at-risk methodology, in connection with other management
tools, to assess and manage the interest rate risk of aggregated loan and lease
assets and financial liabilities, including interest rate derivatives and
option-based products. Value-at-riskmarket factors. VAR
represents the potential lossesloss in fair value for athe Company's portfolio from
adverse changes in market factors for a specified30-day holding period of time and likelihood of occurrence (i.e. level of confidence).
TMCC's value-at-riskwithin a 95%
confidence interval using the Monte Carlo simulation technique. The VAR
methodology uses historical interest rate data to assess the potential future
loss.
The Company's VAR methodology incorporates the impact from adverse changes in
market interest rates but does not incorporate anythe impact from other market
changes, such as foreign currency exchange rates, or commodity prices, which do not materially
affect the value of TMCC'sthe Company's portfolio. The value-at-riskVAR methodology excludesis applied
to more than 90% of the Company's market risk sensitive positions. Management
believes the positions considered in the analysis are representative of the
Company's total portfolio. The VAR methodology currently does not consider
changes in fair values related to investments in marketable securities and
equipment financing as these amounts are not significant to TMCC's total
portfolio.financing.
The value-at-risk methodology uses seven years of historical interest rate
data to build a database of prediction errors in forward rates for a one month
holding period. These prediction errors are then applied randomly to current
forward rates through a Monte Carlo process to simulate 500 potential future
yield curves. The portfolio is then re-priced with these curves to develop a
distribution of future portfolio values. Options in the portfolio are priced
with current market implied volatilities and the simulated yield curves using
the Black Scholes method. The lowest portfolio value at the 95% confidence
interval is compared with the current portfolio value to derive the value-at-
risk number.
-39-
The value-at-riskVAR and the average value-at-riskVAR of TMCC'sthe Company's portfolio as of, and for the
three months ended, June 30, 20022003 measured as the potential 30 day loss in
fair value from assumed adverse changes in interest rates are as follows:
Average for the
As of Three Months Ended
June 30, 20022003 June 30, 20022003
------------------- -------------------
Mean portfolio value..................... $3,892$5.7 billion $5.8 billion
VAR...................................... $32 million $3,995 million
Value-at-risk............................ $44.4 million $43.4$38 million
Percentage of the mean portfolio value... 1.1% 1.1%0.6% 0.7%
Confidence level......................... 95.0% 95.0%95% 95%
TMCC'sThe Company's calculated value-at-riskVAR exposure represents an estimate of reasonably
possible net losses that would be recognized on its portfolio of financial
instruments assuming hypothetical movements in future market rates and is not
necessarily indicative of actual results which may occur. It does not
represent the maximum possible loss nor any expected loss that may occur,
since actual future gains and losses will differ from those estimated, based
upon actual fluctuations in market rates, operating exposures, and the timing
thereof, and changes in the composition of TMCC'sthe Company's portfolio of
financial instruments during the year.
A reconciliation- 25 -
Market Price Risk
- -----------------
The Company is also exposed to market price risk related to equity investments
included in the investment portfolio of its insurance operations. Investments
in marketable securities consist primarily of equity investments, consisting
primarily of mutual fund investments. These investments are classified as
available for sale in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). None of the activityequity
investments are considered trading securities within the meaning of TMCC'sSFAS 115.
A summary of the sensitivity of the fair market value of the Company's equity
investments to an assumed 10% and 20% adverse change in market prices is
presented below.
As of
June 30,
2003
-----------
(Dollars in Millions)
Cost..................................... $ 167
Fair Market Value........................ 183
Net unrealized gain...................... 16
Estimated 10% adverse change in prices... (18)
Estimated 20% adverse change in prices... (37)
These hypothetical scenarios represent an estimate of reasonably possible net
losses that may be recognized on the Company's equity investments assuming
hypothetical movements in future market rates and is not necessarily
indicative of actual results that may occur. Additionally, the hypothetical
scenarios do not represent the maximum possible loss nor any expected loss
that may occur, since actual future gains and losses will differ from those
estimated, based upon actual fluctuations in market rates.
Counterparty Credit Risk
- ------------------------
Counterparty credit risk of derivative financial instruments foris represented by the three months endedfair
value of contracts with a positive fair value at June 30, 2002 and 2001 is2003, reduced by the
effects of master netting agreements. At June 30, 2003, aggregate
counterparty credit risk as follows:
Three Months Ended June 30,
------------------------------------------------------------
Cross
Currency
Interest Interest Indexed
Rate Swap Rate Swap Option-based Note Swap
Agreements Agreements Products Agreements
------------ ------------ ------------ ------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Billions)
Beginning notional amount....... $7.8 $8.3 $29.6 $16.9 $ 6.1 $11.5 $0.2 $0.6
Add:
New agreements...............represented by the fair value of the Company's
derivative instruments was approximately $2.0 billion on an aggregate notional
amount of $44.7 billion.
- 26 - 0.6 2.0 3.3 0.8 0.6 - 0.1
Less:
Terminated agreements........ - - 0.1 - - - 0.1 -
Expired agreements........... 0.3 - 4.5 0.9 - 1.2 - 0.3
Amortizing notionals......... - - 0.2 - - - - -
---- ---- ----- ----- ----- ----- ---- ----
Ending notional amount.......... $7.5 $8.9 $26.8 $19.3 $ 6.9 $10.9 $0.1 $0.4
==== ==== ===== ===== ===== ===== ==== ====
-40-
Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month periods ended June 30, 20022003 and
2001,2002, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") reported that they
have applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report dated August 14,
20022003 appearing herein, states that they did not audit and they do not express
an opinion on that unaudited consolidated financial information. Accordingly,
the degree of reliance on their report on such information should be restricted
in light of the limited nature of the review procedures applied.
PricewaterhouseCoopers is not subject to the liability provisions of Section 11
of the Securities Act of 1933 for their report on the unaudited consolidated
financial information because that report is not a "report" or a "part" of the
registration statement prepared or certified by PricewaterhouseCoopers within
the meaning of Sections 7 and 11 of the Act.
-41-ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports filed or
submitted under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms.
As of the end of the period of this quarterly report, the Company's Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO") evaluated the
effectiveness of such disclosure controls and procedures in place pursuant to
Rule 13a-14 of the Exchange Act. Based on the evaluation, the CEO and CFO
concluded that such disclosure controls and procedures are effective.
There has been no change in the Company's internal control over financial
reporting during the Company's most recent fiscal quarter that materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
- 27 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions, governmental proceedings and other claims are pending or
may be instituted or asserted in the future against TMCC and its subsidiaries
with respect to matters arising from the ordinary course of business. Certain
of these actions are or purport to be class action suits, seeking sizeable
damages and/or changes in TMCC'sthe Company's business operations, policies and
practices. Certain of these actions are similar to suits, which have been
filed against other financial institutions and captive finance companies.
Management and internal and external counsel perform periodic reviews of
pending claims and actions to determine the probability of adverse verdicts and
resulting amounts of liability. The amounts of liability on pending claims and
actions as of June 30, 20022003 were not determinable; however, in the opinion of
management, the ultimate liability resulting therefrom should not have a
material adverse effect on TMCC'sthe Company's consolidated financial position or
results of operations. The foregoing is a forward looking statement within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended, which represents the Company's
expectations and beliefs concerning future events. The Company cautions that
its discussion of Legal Proceedings is further qualified by important factors
that could cause actual results to differ materially from those in the forward
looking statement, including but not limited to the discovery of facts not
presently known to the Company or determinations by judges, juries or other
finders of fact which do not accord with the Company's evaluation of the
possible liability from existing litigation.
ITEM 2. CHANGES IN SECURITIES
There is nothing to report with regard to this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There is nothing to report with regard to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
There is nothing to report with regard to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index, on page 44,30,
are filed as part of this report.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the registrant during
the quarter ended June 30, 2002:2003:
Date of Report Items Reported
----------------- ---------------------
July 29, 2002May 9, 2003 Item 5. Other Events.
-42-9. Regulation FD Disclosure (the
information was furnished under "Item 12.
Results of Operations and Financial
Condition")
- 28 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOYOTA MOTOR CREDIT CORPORATION
-------------------------------
(Registrant)
Date: August 14, 20022003 By /S/ GEORGE E. BORST
-------------------------------
George E. Borst
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 20022003 By /S/ JOHN F. STILLO
-------------------------------
John F. Stillo
Vice President and
Chief Financial Officer
(Principal Financial Officer)
-43-- 29 -
EXHIBIT INDEX
Exhibit Method
Number Description of Filing
- ------- ----------- ---------
12.1 Calculation of Ratio of Earnings to Fixed Charges Filed
Herewith
15.1 Report of Independent Accountants Filed
Herewith
15.2 Letter regarding unaudited interim financial Filed
information Herewith
99.131.1 Certification of Chief Executive Officer Filed
Herewith
31.2 Certification of Chief Financial Officer Filed
Herewith
32.1 Certification pursuant to 18 U.S.C. Section 1350 FiledFurnished
Herewith
99.232.2 Certification pursuant to 18 U.S.C. Section 1350 FiledFurnished
Herewith
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