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 SeptemberJune 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 November 14, 2002,June 30, 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)
SeptemberJune 30, March 31,
September 30,
2002 2002 2001
------------2003 2003
------------ ------------
(Unaudited)
(Unaudited) (Unaudited)
ASSETS
------
Cash and cash equivalents............... $ 465735 $ 747 $ 1,167980
Investments in marketable securities.... 1,039 1,100 8541,388 1,630
Finance receivables, net................ 25,074 22,390 19,813
Finance receivables, net - securitized.. 816 1,087 1,40728,345 26,477
Investments in operating leases, net.... 7,792 7,631 7,3217,900 8,017
Derivative assets....................... 988 454 6152,171 1,421
Other assets............................ 732 630 793
Income taxes receivable................. 348 221 109
-------563 708
------- -------
Total Assets................... $37,254 $34,260 $32,079
=======$41,102 $39,233
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................. $29,564 $25,990 $24,127
Notes payable related to securitized
finance receivables structured as
collateralized borrowings............ 772 1,036 1,072$33,851 $32,099
Derivative liabilities.................. 624 1,124 1,193432 514
Other liabilities....................... 846 819 774916 869
Income taxes payable.................... 18 26
Deferred income......................... 943 861 7701,059 996
Deferred income taxes................... 1,795 1,679 1,569
-------1,890 1,866
------- -------
Total Liabilities................. 34,544 31,509 29,505
-------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.................... 1,795 1,820 1,6481,980 1,930
Accumulated other comprehensive
income............................ - 16 11
-------41 18
------- -------
Total Shareholder's Equity........ 2,710 2,751 2,574
-------2,936 2,863
------- -------
Total Liabilities and
Shareholder's Equity........... $37,254 $34,260 $32,079
=======$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
Six Months Ended
SeptemberJune 30,
September 30,
------------------ --------------------------------------------
2003 2002
2001 2002 2001
------ ------ ------ ------
(Unaudited) (Unaudited)---------- ----------
Financing Revenues:
Leasing....................................Leasing........................................ $ 632622 $ 617 $1,253 $1,237621
Retail financing........................... 285 216 548 410financing............................... 290 263
Wholesale and other dealer financing....... 42financing........... 49 82 109
------ ------ ------ ------40
-------- --------
Total financing revenues...................... 959 882 1,883 1,756revenues.......................... 961 924
Depreciation on leases..................... 394 380 767 754leases......................... 458 373
Interest expense........................... 215 268 432 564
SFAS 133 and 138expense............................... 193 217
Derivative fair value adjustments.... 124 77 338 68
------ ------ ------ ------adjustments.............. 38 214
-------- --------
Net financing revenues........................ 226 157 346 370revenues............................ 272 120
Insurance premiums earned and contract
revenues................................... 42 40 83 80revenues....................................... 45 41
Investment and other income................... 28 32 92 97
Loss on asset impairment...................... 11 - 11 47
------ ------ ------ ------income....................... 36 64
-------- --------
Net financing revenues and other revenues..... 285 229 510 500
------ ------ ------ ------revenues......... 353 225
-------- --------
Expenses:
Operating and administrative............... 123 129 251 243administrative................... 136 128
Losses related to Argentine Investment..... 6Investment......... - 11 -5
Provision for credit losses................ 127 51 249 101losses.................... 109 122
Insurance losses and loss adjustment
expenses................................ 23 18 44 38
------ ------ ------ ------expenses.................................... 25 21
-------- --------
Total expenses................................ 279 198 555 382
------ ------ ------ ------expenses.................................... 270 276
-------- --------
Income/(Loss) before income taxes............. 6 31 (45) 118taxes................. 83 (51)
Provision/(Benefit) for income taxes.......... 2 10 (20) 47
------ ------ ------ ------taxes.............. 33 (22)
-------- --------
Net Income/(Loss).............................................................. $ 450 $ 21 $ (25) $ 71
====== ====== ====== ======(29)
======== ========
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........2002........ $ 915 $ 1,5811,820 $ 1816 $ 2,5142,751
------ ------- ---------- -------
Net incomeloss for the sixthree months
ended SeptemberJune 30, 2001......2002........... - 71(29) - 71
Dividends........................ - (4) - (4)(29)
Change in net unrealized gains
on available-for-sale
marketable securities......... - - (7) (7)(1) (1)
------ -------- ---------- -------
Total Comprehensive Income.......Loss......... - 67 (7) 60(29) (1) (30)
------ -------- ---------- -------
Balance at SeptemberJune 30, 2001
(unaudited)...................2002.......... $ 915 $ 1,6481,791 $ 1115 $ 2,5742,721
====== ======= =================== =======
Balance at March 31, 2002........2003........ $ 915 $ 1,8201,930 $ 1618 $ 2,7512,863
------ ------- ------------------- -------
Net lossincome for the sixthree months
ended SeptemberJune 30, 2002......2003........... - (25)50 - (25)50
Change in net unrealized gains
on available-for-sale
marketable securities......... - - (16) (16)23 23
------ -------- ------------------- -------
Total Comprehensive Loss.........Income....... - (25) (16) (41)50 23 73
------ -------- ------------------- -------
Balance at SeptemberJune 30, 2002
(unaudited)...................2003......... $ 915 $ 1,7951,980 $ -41 $ 2,7102,936
====== ======= =================== =======
See Accompanying Notes to Consolidated Financial Statements.
-4-- 4 -
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
SixThree Months Ended
SeptemberJune 30,
-------------------------
2003 2002 2001
-------- ---------
(Unaudited)
Cash flows from operating activities:
Net (loss)/ income.......................................Income/(Loss)........................................ $ (25)50 $ 71(29)
-------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
FairDerivative fair value adjustments of SFAS 133 and 138
derivatives.................................... 338 68adjustments.................. 38 214
Depreciation and amortization...................... 811 750458 399
Provision for credit losses........................ 249 101109 122
Gain from sale of finance receivables, net......... - (33) (25)
Gain from sale of marketable securities, net....... (3) -
(1)
Loss on asset impairment........................... 11 47
Lossand reserve related to Argentine Investment............... 11Investment... - Increase5
(Increase) in other assets........................... (593) (82)
(Decrease) in accrued interest expense............. (13) -assets......................... (702) (612)
Increase in deferred income taxes.................. 122 1019 155
Increase (decrease) in other liabilities........... 445 (102)liabilities...................... 930 168
-------- ---------
Total adjustments........................................ 1,348 857839 418
-------- ---------
Net cash provided by operating activities................... 1,323 928889 389
-------- ---------
Cash flows from investing activities:
Addition to investments in marketable securities......... (562) (963)(222) (535)
Disposition of investments in marketable securities...... 545 1,162
Purchase466 234
Acquisition of finance receivables.......................... (19,804) (16,040)receivables....................... (11,785) (6,596)
Liquidation of finance receivables....................... 15,657 12,5179,842 4,598
Proceeds from sale of finance receivables................ - 1,549 1,450
Addition to investments in operating leases.............. (1,929) (1,985)(769) (960)
Disposition of investments in operating leases........... 1,006 1,336
Increase in receivable from Affiliate................... (12) (42)442 475
-------- -----------------
Net cash used in investing activities....................... (3,550) (2,565)(2,026) (1,235)
-------- -----------------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable........ 4,433 6,0001,327 1,933
Payments on notes and loans payable...................... (2,956) (1,890)(2,295) (1,443)
Net increase(decrease) in commercial paper with
original maturities less than 90 days................. 468 (1,600)paper............... 1,860 (69)
-------- -----------------
Net cash provided by financing activities................... 1,945 2,510892 421
-------- -----------------
Net (decrease)/increasedecrease in cash and cash equivalents........ (282) 873equivalents................... (245) (425)
Cash and cash equivalents at the beginning of the period.... 980 747
294
-------- -----------------
Cash and cash equivalents at the end of the period.......... $ 465735 $ 1,167322
======== =================
Supplemental disclosures:
Interest paid............................................ $ 387171 $ 588210
Income taxes received/paid ..............................paid........................................ $ (18)32 $ 504
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 and six months ended SeptemberJune 30,
20022003 and 20012002 is unaudited and has been prepared in accordance with generally
accepted accounting principles for interim financial information and in accordance 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 and six
months
ended SeptemberJune 30, 20022003 are not necessarily indicative of those expected for any
other interim period or for a full year. Certain September
2001 accountsprior period amounts have
been reclassified to conform with the September 2002 and
March 2002current 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 ("Form 10-K").
-6-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS10-K. References 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:
SeptemberJune 30, March 31,
September 30,
2002 2002 2001
------------2003 2003
------------ ------------
(Dollars in Millions)
Retail.................................... $16,429 $13,715 $11,480$18,331 $16,160
Finance leases............................ 7,018 7,692 8,2445,617 6,078
Wholesale and other dealer loans.......... 3,996 3,626 3,1515,705 5,608
------- -------
-------
27,443 25,033 22,87529,653 27,846
Unearned income........................... (1,214) (1,340) (1,470)
Allowance for credit losses............... (339) (216) (185)
-------(962) (1,043)
------- -------
Finance receivables, net andof
unearned income................... $28,691 $26,803
Allowance for credit losses............... (346) (326)
------- -------
Finance receivables, net - securitized. $25,890 $23,477 $21,220
=======.............. $28,345 $26,477
======= =======
Finance leases included estimated unguaranteed residual values of $1.9 billion,
$1.9 billion and $1.8 billion
at Septemberboth June 30 2002,and March 31, 2002 and
September 30, 2001, respectively.2003. The aggregate balances related to finance
receivables 60 or more days past due totaled $199 million, $189$163 million and $82$160 million at
SeptemberJune 30 2002,and March 31, 2002 and September 30, 2001,2003, 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:
SeptemberJune 30, March 31,
September 30,
2002 2002 2001
------------2003 2003
------------ ------------
(Dollars in Millions)
Vehicles.................................. $9,267 $9,011 $8,594$9,639 $9,687
Equipment and other....................... 719 720 721 712
------ ------
------
9,987 9,732 9,30610,358 10,407
Accumulated depreciation.................. (2,117) (2,034) (1,922)(2,301) (2,254)
Allowance for credit losses .............. (78) (67) (63)
------(157) (136)
------ ------
Investments in operating leases, net...... $7,792 $7,631 $7,321
======$7,900 $8,017
====== ======
-8-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Allowance for Credit Losses
- ------------------------------------
An analysis of the allowance for credit losses follows:
SixThree months ended
SeptemberJune 30, SeptemberMarch 31, June 30,
2003 2003 2002
2001
------------ --------------------- --------- ----------
(Dollars in Millions)
Allowance for credit losses at
beginning of period............... $ 283526 $ 227466 $ 283
Provision for credit losses.......... 249 101
Charge-offs............................ (129) (79)109 204 122
Charge-offs.......................... (94) (138) (60)
Recoveries........................... 15 1011 11 7
Other adjustments.................... - (17) (1)
(11)
--------- --------------- ------ ------
Allowance for credit losses
at end of period.................. $ 417552 $ 248
========= =========526 $ 351
====== ====== ======
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 SeptemberJune 30
and March 31, 2003, and June 30, 2002 increased $169was $118 million, from September 30, 2001, primarily due to an increase$147 million, and
$144 million, respectively. Repossessed collateral is included in other
assets in the provision for
credit losses attributed to overall increases in delinquencies and credit
losses. Charge-offs for the six months ended September 30, 2002 increased $50
million, compared to the same period ended September 30, 2001, as a result of a
number of factors including the effects of TMCC's field restructuring, which
has temporarily disrupted normal collection activities, and the continuation
of the national economic downturn. In addition, increased delinquency and
credit losses can be attributed in part to changes in portfolio quality in
connection with the national tiered pricing program. Under the national
tiered pricing program, the Company generally will acquire contracts with
higher yields to compensate for the potential increase in credit losses. The
Company has also experienced a general increase in the average original
contract term of retail and lease vehicle contracts in the six months ended
September 30, 2002, compared to the same period in fiscal 2002. The average
length of contracts initiated during fiscal year to date 2003 and fiscal year
2002, was 55.6 months and 54.8 months, respectively.
-9-Consolidated Balance Sheet.
- 7 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities
- -------------------------------------------
TMCC maintains an overall risk management strategy that utilizes a variety of
interest rate and currency derivative financial instruments to mitigate its
exposure to fluctuationsThe following table sets forth the items included 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 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 and certain interest rate swaps.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. 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 and whether the Company elects to apply hedge accounting.
If the relationship between the hedged item and the derivative instrument does
not qualify for hedge treatment, or if the Company elects not to apply hedge
accounting, the gain or loss on the derivative instrument is reported in
earnings as incurred. However, if the relationship between the hedged item and
the derivative instrument qualifies for hedge treatment and the Company elects
to apply hedge accounting, the accounting varies based on the type of hedge.
For the six months ended September 30, 2002, the Company recognized a $338
million unfavorable SFAS 133/138 adjustment (reported as SFAS 133 and 138 fair
value adjustments in the Consolidated Statement of Income). The net adjustment
reflects a $369 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 $31 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 primarily due to the significant reduction in interest rates during the six
month period ended September 30, 2002. The increase in the unfavorable SFAS
133/138 adjustment for the six months ended September 30, 2002, as compared to
the same period in fiscal 2002, is due to the significant reduction in interest
rates during the six months ended September 30, 2002, as well as actions taken
by TMCC to protect interest rate margins, including an increase in interest
rate swap derivative products that do not qualify for hedge accounting.
The Company uses portfolio based derivatives to mitigate 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. 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 more fully in the Company's March 2002 Annual Report
on Form 10-K. For fair value hedging relationships, the gain or loss
components of each derivative instrument and hedged item are included in the
assessment of hedge effectiveness.
-10-amended"):
Three months ended
June 30, June 30,
2003 2002
--------- ---------
(Dollars in Millions)
Net loss on non-designated derivatives....... $ (36) $ (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............ $ (38) $ (214)
====== ======
- 8 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Notes and Loans Payable
- --------------------------------
Notes and loans payable consisted ofand the following:related weighted average interest rates are
summarized as follows:
SeptemberJune 30, March 31, SeptemberJune 30, 2002 2002 2001
------------ ------------ ------------March 31,
2003 2003 2003 2003
--------- --------- --------- ---------
(Dollars in Millions)
Commercial paper, net....................
Short-term debt .............. $ 5,8656,695 $ 5,012 $ 2,997
------- ------- -------
Other senior4,843 1.17% 1.36%
Long-term debt due in the fiscal
years ending:
2002.................................. - - 3,725
2003.................................. 3,031 5,184 3,964
2004.................................. 6,273 5,360 5,523
2005.................................. 3,988 3,665 2,997
2006.................................. 4,197 2,885 1,755
2007.................................. 1,786 1,252 322
Thereafter............................ 4,424 2,632 2,844
------- ------- -------
Total other senior debt............... 23,699 20,978 21,130
------- ------- -------............... 25,068 26,034 1.36% 1.43%
Fair Value Adjustments ... 2,088 1,222
--------- ---------
Notes and loans payable............ $29,564 $25,990 $24,127
======= ======= =======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.
NotesUnsecured notes denominated in various foreign currencies included in notes and
loans payable totaled approximately $11.4 billion at SeptemberJune 30 2002,and March 31,
2002 and September
30, 2001 reflect2003. Concurrent with the adjustments required under SFAS 133/138 for derivatives
and debt instruments which qualify for hedge treatmentissuance of these unsecured notes, the Company
entered into cross currency interest rate swap agreements to convert these
obligations into variable rate U.S. dollar obligations.
Back-up credit facilities are summarized as discussed in Note 5
- - Derivatives and Hedging Activities. TMCC recorded a $338 million net
unfavorable fair value adjustment under SFAS 133/138 during the six months
ended September 30, 2002. This adjustment consisted of the following:follows:
Six Months Ended
SeptemberCommitted Uncommitted Unused Facilities
------------------ ------------------ ------------------
June 30, 2002
----------------March 31, June 30, March 31, June 30, March 31,
2003 2003 2003 2003 2003 2003
-------- -------- -------- -------- -------- --------
(Dollars in Millions)
Increase in derivative assets
Syndicated bank credit
facilities.................... $ 534
Decrease in derivative liabilities 500
Increase in fair market value4,200 $ 4,200 $ - $ - $ 4,200 $ 4,200
Letters of debt portfolio (1,372)credit facilities..... - - 60 60 59 59
-------- Net unfavorable fair value adjustment-------- -------- -------- -------- --------
Total facilities $ (338)4,200 $ 4,200 $ 60 $ 60 $ 4,259 $ 4,259
======== ======== ======== ======== ======== ========
Short-term borrowings consist of commercial paper having a weighted average
remaining term and weighted average interest rate of 19 days and 1.81%,
respectively, at September 30, 2002.
-11-- 9 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Notes and Loans Payable (Continued)
- --------------------------------
Other senior debt includes certain MTNs, euro bonds and domestic bonds. The
weighted average interest rate on other senior debt was 3.11% for the six
months ended September 30, 2002 including the effect of interest rate swap
agreements. The rates have been calculated using rates in effect at September
30, 2002, some of which are floating rates that reset periodically. Less than
one percent of other senior debt at September 30, 2002 had interest rates that
were fixed for a period of more than one year. The notional amount of notes
and loans payable was $28.8 billion at September 30, 2002.
Approximately 73% of other senior debt at September 30, 2002 had floating
interest rates that were covered by option-based products and certain interest
rate swap agreements on a portfolio basis. The weighted average strike rate
on these option-based products and certain interest rate swap agreements was
4.17% at September 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.
Included in notes and loans payable at September 30, 2002 were unsecured notes
denominated in various foreign currencies. Concurrently with the issuance of
these notes, TMCC entered into cross currency swap agreements to convert these
obligations into U.S. dollar obligations which, in aggregate, total a
principal amount at maturity of $8.0 billion.
-12-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Retail Receivables and Valuation of Residual Interest
- ----------------------------------------------------------------------
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% per annum of the total principal
balance of the outstanding receivables. On a subordinated basis, 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.
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 used in
the initial valuation of the retained assets and performs a subsequent review
of those assumptions on a quarterly basis.
During the three months ended September 30, 2002, TMCC recognized $10.7
million in impairment losses related to retail finance receivables as a result
of expected credit losses exceeding original credit loss assumptions. The
assumptions used to calculate expected credit losses per annum for outstanding
securitization transactions were adjusted from 0.50% - 0.90% at March 31, 2002
to 0.68% - 0.94% at September 30, 2002. Impairment of retail finance
receivables is due to increased credit losses resulting from a number of
factors including the effects of TMCC's field restructuring, which has
temporarily disrupted normal collection activities, and the continuation of
the national economic downturn. In addition, increased delinquency and credit
losses can be attributed in part to changes in portfolio quality in connection
with the national tiered pricing program. Under the national tiered pricing
program, the Company generally will acquire contracts with higher yields to
compensate for the potential increase in credit losses. The Company has also
experienced a general increase in the average original contract term of retail
contracts. The average length of contracts initiated has increased from 56.3
months for the six months ended September 30, 2000 to 57.4 months for the six
months ended September 30, 2002.
During the six months ended September 2001, the Company experienced increased
return rates and losses per unit upon disposition relating to vehicles
associated with its lease receivables. This experience, combined with revised
forecasts for future return rates and loss per unit, resulted in a downward
revision to the residual loss assumptions. As a result of the change in
assumptions, in the six months ended September 30, 2001, TMCC recognized
losses due to the permanent impairment of assets retained in the sale of
interests in finance lease receivables totaling $47 million as required by
EITF 99-20, which was adopted in the first quarter of fiscal year 2002.
-13-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Related Party Transactions
- -----------------------------------
As of September 30, 2002, there have been no material changes to related party
agreements or relationships as described in the Company's annual report on Form
10-K for the year ended March 31, 2002. The table below summarizes amounts
incurred or earned under such agreements or relationships for the following
periods:
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -----------------
2002 2001 2002 2001
------- -------- ------- -------
(Dollars in Millions)
Credit support fees incurred......... $ (3.2) $ (3.0) $ (6.8) $ (5.9)
Shared services reimbursement........ (9.4) (15.9) (20.8) (26.7)
Rent expense under facilities lease.. (1.2) (1.3) (2.5) (2.6)
Marketing and wholesale support
revenue......................... 39.7 29.5 62.7 56.1
Affiliate insurance premiums and
commissions revenue............. 10.3 10.9 20.4 21.1
Other amounts incurred............... (0.1) (0.1) (0.4) (0.1)
------- ------- ------- -------
Total.............................. $ 36.1 $ 20.1 $ 52.6 $ 41.9
======= ======= ======= =======
Other amounts incurred reflect expenses incurred for vehicles leased from
affiliates, partially offset by amounts earned for services TMCC performed on
behalf of affiliates.
-14-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and Contingent Liabilities
- -----------------------------------------------
Guarantees and Comfort Letters
- ------------------------------
TMCC has entered into guarantees or comfort letters on behalf of its
fully
owned subsidiaries and certain affiliates. TheseAs of June 30, 2003, TMCC has not
recorded any liabilities under such guarantees and comfort letters. The
maximum commitment amounts under the guarantees and comfort letters signed by TMCCas of June
30, 2003 are summarized in the table below:
September 30,
2002
Outstanding
Balance of
Maximum
Debt/Bonds
Commitment
under the
Amount
Commitment
---------- -------------------------
(Dollars in Millions)
Guarantees:
Toyota Credit Argentina S.A.
(TCA) offshore dollar bank loans $ 65.0 $ 36.7
Banco Toyota doDo Brasil S.A.
(BTB) debt 30.0 12.0debt.............. $ 30
Toyota Services de Venezuela, C.A.
(TSV) debt 6.2 2.3("TSV") debt......................... 39
Affiliate pollution control
and solid waste disposal bonds 206.0 206.0bonds...... 148
Comfort Letters:
Toyota Services de Mexico, S.A., de C.V.
(TSM) 67.1 26.1("TSM") credit facilities........... 124
TSV 15.0 4.4
---------- -----------office lease........................ 1
------
Total guarantees and comfort lettersletters........ $ 389.3 $ 287.5
========== ===========342
======
The guarantees shown above consist of TMCC's guarantees of the debt of TCA,
BTB, and TSV, and various flexible rate demand pollution control and solid
waste disposal revenue bonds issued in connection with the manufacturing
facilities of certain affiliates.
At March 31, 2002, TMCC had a $26 million reserve relating to TMCC's guarantee
of TCA's offshore outstanding debt.
During the first six monthsquarter of fiscal year2004 the Company increased the maximum
commitment amount of TSV debt guaranteed by the Company from $33 million at
March 31, 2003 the valueto $39 million at June 30, 2003. The revised commitment
amount of the peso continued to deteriorate. As a result, for
the three and six months ended September 30, 2002, TMCC recorded a $6$39 million and $11 million charge against income, respectively, to increase the reserve
relatedis subject to the Company's guarantee of TCA's offshore outstanding debt to $37
million at September 30, 2002. TMCC will continue to monitorsame terms and conditions as the
situationguarantees described in Argentina.
The comfort letters shown above consist of amounts related to TSV's office
lease agreementNote 16 - Commitments and credit facilities entered into by TSV and TSM. TMCC's
obligations under these commitments are discussed more fullyContingent 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, 2002 Form 10-Q and March 31, 2002 Form 10-K.
-15-2003.
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 97 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
insolvency. TMCC is not obligated to make any payments to third parties
should TSM default on its obligations. Maturities for bank loan advances
range from one month to five years. These comfort letters will remain in
effect for as long as any associated TSM loans are outstanding. These comfort
letters may be extended for additional periods by mutual agreements between
TMCC and the banks.
Other Commitments
- -----------------
In addition to the commitments previously discussed, TMCC has also entered
intoissued
revolving formsliquidity notes in connection with securitization transactions and
extended lending commitments to dealers for revolving credit facilities. As
of guaranteed or contingent arrangements, whichJune 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 and are discussed more fully in the Company's
June 30, 2002 Form 10-Q and March 31, 2002 Form 10-K.below:
September 30,
2002
Outstanding
Balance of
Maximum
Note/Facility
Commitment
under the
Amount
Commitment
---------- ------------------------
(Dollars in Millions)
ABS revolvingRevolving liquidity notes
related to securitizations................ $ 23.0 $ -
Revolving credit39
Credit facilities with
dealerships 1,611.9 720.7
---------- -----------dealers and affiliates.................... 3,042
Lease commitments............................. 144
------
Total $ 1,634.9 $ 720.7
========== ===========$3,225
======
TMCC has guaranteed certain obligationsDuring the first quarter of TMIS related to vehicle service
agreements issued in Alabama, Illinois, New York and Virginia. These
guarantees have been given without regard to any security, but are limited to
the duration of the underlying coverage up to a maximum of the original
manufacturer's suggested retail price on the vehicles. As of September 30,
2002, TMCC has not paid, and does not expect to pay, any amounts under these
guarantees.
An operating agreement between TMCC andfiscal 2004 Toyota Credit de Puerto Rico CorporationCorp.
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. ("TCPR"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 "Agreement"), providestable 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 7 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
a 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 TMCC will make necessary
equity contributions or provide other financial assistance TMCC deems
appropriate to ensure that TCPR maintainscould result from claims made
under such indemnities. The Company has not made any material payments in the
past as a minimum coverage on fixed chargesresult of 1.10 times such fixed charges in any fiscal quarter. The Agreementthese provisions, and as of June 30, 2003 the Company does
not constitute a guarantee by TMCC ofbelieve it is probable that it will have to make any obligations of TCPR. The fixed charge
coverage provision ofmaterial payments in
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.
Nofuture. As such, no amounts have been fundedrecorded under this agreementthese indemnifications
as of SeptemberJune 30, 2002.2003.
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 -16-
SeptemberJune
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 and general corporate purposes, TMCC
maintains syndicated bank credit facilities with certain banks which
aggregated $4.2 billion, $3.5 billion and $3.5 billion, at September 30, 2002,
March 31, 2002 and September 30, 2001, respectively. No loans were outstanding
under any of these bank credit facilities as of September 30, 2002, March 31,
2002 or September 30, 2001.
The Company maintains uncommitted lines of credit to facilitate and maintain
letters of credit. Available lines of credit totaled $60 million, $61
million, and $85 million as of September 30, 2002, March 31, 2002 and
September 30, 2001, respectively. Approximately $699 thousand, $471 thousand,
and $594 thousand in letters of credit were outstanding as of September 30,
2002, March 31, 2002 and September 30, 2001, respectively.
-17-12 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 118 - Segment Information
- ---------------------------------------------------------
Financial results for the Company's operating segments are summarized below:
At/For At/For
Three Months Ended
Six Months Ended
September 30, SeptemberJune 30,
------------------
------------------2003 2002 2001 2002 2001
------- -------
------- -------
(Dollars in Millions)
Assets:
Financing operations............. $36,601 $31,516 $36,601 $31,516operations................... $40,313 $34,673
Insurance operations............. 846 699 846 699operations................... 1,002 810
Eliminations/reclassifications... (193) (136) (193) (136)
------- -------reclassifications......... (213) (182)
------- -------
Total assets.................. $37,254 $32,079 $37,254 $32,079
======= =======assets......................... $41,102 $35,301
======= =======
Gross revenues:
Financing operations.............operations................... $ 971988 $ 906 $ 1,951 $ 1,838980
Insurance operations............. 58 48 107 95
------- -------operations................... 54 49
------- -------
Total gross revenues...........revenues................. $ 1,042 $ 1,029
$ 954 $ 2,058 $ 1,933
======= =======
======= =======
Net(Loss)/Income:Net income/(loss):
Financing operations.............operations................... $ (3)39 $ 9 $ (42) $ 50(39)
Insurance operations............. 7 12 17 21
------- -------operations................... 11 10
------- -------
Total net income...............income/(loss)............... $ 450 $ 21 $ (25) $ 71
======= =======(29)
======= =======
-18-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 129 - Subsequent Events
- -----------------------------------------------------
In October 2002,August 2003, TMCC executed aincreased the maximum amount of borrowings supported under
existing comfort letterletters with a Venezuelan bankMexican banks on behalf of TSV regardingTSM. As a local bank credit facility whereby TMCC will
exercise its influence to induce TSV to meet all obligations under the credit
facility. This comfort letter allows TSVresult, TSM
is allowed to borrow in local currencyMexican Pesos up to a maximum amount equivalent to $1.3 million. Maturities for bank loan advances
range from one month$131
million U.S. dollars. The revised commitment amount is subject to 36 months. This comfort letter will remain in effect
for as longthe same
terms and conditions as the TSV loan is outstanding. The initial comfort letter may be
extended for additional periods by mutual agreement between TMCCletters described in Note 7 - Commitments
and the bank.
As of November 14, 2002, the amount outstanding under this comfort letter is
$1.3 million.
In addition, in October 2002, TMCC executed a guarantee for a maximum amount
equivalent to $7.2 million in respectContingent Liabilities of the debt of TSV with a local
Venezuelan bank. This guarantee allows TSV to borrow in local currency. This
guarantee may be terminated at any time by TMCC with a written notice to the
bank if there is no outstanding balance. As of November 14, 2002, the amount
outstanding under this guarantee is $4.4 million.
Additionally, in November 2002, TMCC executed guarantees for maximum amounts
totaling equivalent to $18.4 million in respect of the debt of TSV with local
Venezuelan banks. These guarantees replaced comfort letters that were in
existence as of September 30, 2002 for amounts totaling $12.3 million. These
guarantees allow TSV to borrow in local currency. These guarantees may be
terminated at any time by TMCC with written notices to the banks if there is
no outstanding balance. As of November 14, 2002, the amounts outstanding
under these guarantees total $2.3 million.
During October 2002, TMCC sold retail finance receivables totaling $1.5
billion, subject to certain limited recourse provisions, to TAFR.
-19-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 or loss by business segment for the three and six months ended
September 30, 2002 and 2001:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------- ------- ------ -------
(Dollars in Millions)
Net income:
Financing operations.............. $ (3) $ 9 $(42) $50
Insurance operations.............. 7 12 17 21
---- ---- ---- ----
Total net income............... $ 4 $ 21 $(25) $71
==== ==== ==== ====
Net income from financing operations decreased $12 million or 133% for the
three months ended September 30, 2002 as compared with the same period in
fiscal 2002. The decrease primarily reflects a higher provision for credit
losses attributed to overall increases in delinquencies and credit losses,
coupled with a $124 million ($78 million, net of income tax) unfavorable fair
value adjustment related to the application of Statements of Financial
Accounting Standards 133 and 138 (SFAS 133/138). Net income from financing
operations decreased $92 million or 184% for the six months ended September
30, 2002 as compared with the same period in fiscal 2002 primarily due to a
$338 million ($202 million, net of income tax) unfavorable fair value
adjustment related to the application of SFAS 133/138, coupled with a higher
provision for credit losses attributed to overall increases in delinquencies
and credit losses.
The SFAS 133/138 adjustments are reported as SFAS 133 and 138 fair value
adjustments in the Consolidated Statement of Income. The increase in the
unfavorable SFAS 133/138 adjustment for the six months ended September 30,
2002, as compared to the same period in fiscal 2002, is due to the significant
reduction in interest rates during the six months ended September 30, 2002, as
well as actions taken by TMCC to protect interest rate margins, including an
increase in interest rate swap derivative products that do not qualify for
hedge accounting.
Net income from insurance operations decreased $5 million, or 42%, and $4
million, or 19%, for the three and six months ended September 30, 2002,
respectively, as compared with the same periods in fiscal 2002. The lower
level of net income is primarily due to higher claim expense, resulting from
an overall increase in loss experience, and a decrease in investment income,
associated with the decline in interest rates.
-20-
Earning Assets
- --------------
Net earning assets 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".------------------
The composition of TMCC'sthe Company's net earning assets as of the balance sheet
dates reported areis summarized below:
SeptemberJune 30, March 31, SeptemberJune 30,
2003 2003 2002 2002 2001
------------ ------------ ------------
(Dollars in Millions)
Vehicle lease earning assets
Investment in operating leases.........leases, net..... $ 7,3917,585 $ 7,2157,679 $ 6,8987,333
Finance leases......................... 5,764 6,338 6,776leases, net..................... 4,614 4,997 5,794
------- ------- -------
Total vehicle leases.................... 13,155 13,553 13,674lease earning assets....... 12,199 12,676 13,127
Vehicle retail finance receivables...... 16,135 13,409 11,165receivables, net.. 18,072 15,873 13,885
Vehicle wholesale and other financing... 4,782 4,429 3,950financing 6,477 6,407 4,901
Allowance for credit losses............. (417) (283) (248)losses ......... (503) (462) (324)
------- ------- -------
Total net earning assets................ $33,655 $31,108 $28,541assets................. $36,245 $34,494 $31,589
======= ======= =======
=======
- ----------------------
For purposes of this table, vehicle wholesale and other financing includes
wholesale financing, real estate loans, working capital loans, revolving credit lines,
and industrial equipment financing.
Consists of allowance to cover probable losses on the Company's owned portfolio.
TMCC's netNet earning assets at June 30, 2003 increased to $33.7$1.8 billion at September 30, 2002
from $31.1 billion ator 5% compared to
March 31, 20022003 and $28.5increased $4.7 billion at Septemberor 15% compared to June 30, 2001.
Asset2002.
The growth from March 31, 2002in earning assets was primarily due to higher levels of both vehicle
retail financing and September 30, 2001 reflects higher retailvehicle wholesale and wholesale earning assets,other financing, partially offset by
a small 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 September 30, 2001
was primarily due to volume increases 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 September 30, 2002 as
compareddecreased due to March 31, 2002 and September 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.
In addition to the overall decrease in vehicle lease
earning assets, the composition of the vehicle lease portfolio has also
changed, resulting in an increasing mix of operating leases relative to
finance lease receivables. 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. The primary purpose of
purchasing residual value insurance was to cause leases acquired by the
Titling Trust to be classified as finance lease receivables rather than
operating lease assets. TMCC discontinued purchasing residual value insurance
for operating lease assets in June 2001.
Wholesale assets increased from March 31, 2002 due to an increase in the
number of dealers receiving wholesale financing and a corresponding increase
in wholesale units financed. Wholesale and other earning assets increased
from September 30, 2001 primarily due to an increase in the number of dealers
receiving wholesale and other financing. Though wholesale earning assets
increased, wholesale revenue decreased for the three and six months ended
September 30, 2002 as compared to the same periods in fiscal year 2001
-21-
primarily due to a decrease in the applicable interest rate index for
wholesale loans.
The allowance for credit losses increased 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 September
30, 2001, reflecting increased delinquency experienceAnalysis of Financial Condition and
asset growth. The
increasedResults of Operations ("MD&A") for further discussion regarding the Company's
delinquency and credit loss experience is a result of a number of
factors including the effects of TMCC's field restructuring which has
temporarily disrupted normal collection activities and the continuationcharge-off experience.
- 14 -
Contract Volume
- ---------------
The composition of the national economic downturn. While the physical migration of resources related
to the restructuring of field operations has been substantially completed,
TMCC continues to review and refine current processes and deploy additional
resources and technology in an effort to improve operating efficiencies and
minimize the disruption of operations; however, the restructuring of field
operations has adversely affected, and could continue to adversely affect
delinquencies and credit losses. In addition, increased delinquency and
credit losses can be attributed in part to changes in portfolio quality in
connection with the national tiered pricing program. Under the national
tiered pricing program, the Company generally will acquire contracts with
higher yields to compensate for the potential increase in credit losses. The
Company has also experienced a general increase in the average original
contract term of retail and lease vehicle contracts in the six months ended
September 30, 2002, compared to the same period in fiscal 2002. Historically,
longer-term contracts experience higher credit losses. The average length of
contracts initiated during fiscal year to date 2003 and fiscal year 2002 was
55.6 months and 54.8 months, 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, economic conditions and market conditions are monitored and taken
into account. After evaluating these factors, management develops several loss
scenarios and reviews allowance levels to determine whether reserves are
considered adequate to cover the probable range of losses. The allowance for
credit losses as of September 30, 2002 is considered by management to be
appropriate in relation to the expected loss on the present owned portfolio.
-22-
TMCC's vehicle retail and leaseCompany's contract volume and finance penetrationmarket share for the
threequarters ended June 30, 2003 and six months ended September 30, 2002 and 2001 areis summarized below:
Three Months Ended
Six Months Ended
September------------------------
June 30, SeptemberJune 30,
------------------- ----------------2003 2002
2001 2002 2001
------- ------- ------- --------------
Total contract volume:
Vehicle retail....................... 195,000 158,000 364,000 306,000216,000 169,000
Vehicle lease........................ 31,000 44,000 49,000 88,000 106,000
------- -------
------- -------
Total................................... 239,000 207,000 452,000 412,000
======= =======247,000 213,000
======= =======
TMS sponsored contract volume:
Vehicle retail....................... 65,000 29,000 87,000 60,00079,000 22,000
Vehicle lease........................ 13,000 11,000 15,000 23,000
------- -------8,000 2,000
------- -------
Total................................... 78,000 40,000 102,000 83,000
======= =======87,000 24,000
======= =======
Market share (excluding fleet):
Vehicle retail....................... 35.6% 28.6% 33.0% 27.8%39.8% 30.2%
Vehicle lease........................ 11.2% 13.6% 11.4% 14.6%
----- -----8.1% 11.6%
----- -----
Total................................... 46.8% 42.2% 44.4% 42.4%
===== =====47.9% 41.8%
===== =====
- --------------------
Finance penetrationMarket share represents penetration of Toyota and Lexus new 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.
Previously, reported market share rates, including sales of the private Toyota
distributor, were 36.1% and 36.3% for the three and six months ended September 30,
2001, respectively.
TMCC'sTotal contract volume increased 16% primarily due to increased vehicle retail
contract volume increased duringreflecting the threecontinued use of incentives on new vehicles,
and six months ended
September 30, 2002, respectively, as compared with the same periodsincreases in fiscal
2002retail financing programs sponsored by TMS. Vehicle lease
contract volume decreased 30% reflecting higher levels ofa general shift in programs sponsored
by TMS and strong salesfrom lease to retail as well as an industry-wide shift away from
leasing.
Total market share increased during the first quarter of Toyota and Lexus vehicles. Thefiscal 2004 over the
comparable prior year period as the increase in retail finance portfolio includes contracts
with original terms ranging from 24 to 72 months;volume more than offset
the average original
contract termsoverall decline in TMCC's finance portfolio were 57.4 months, 57.0 months and
55.5 months as of September 30, 2002, 2001 and 2000, respectively.
TMCC'svehicle lease contract volume decreased duringvolume.
- 15 -
NET INCOME
- ----------
The table below presents the three and six months ended
September 30, 2002, respectively, as compared with the same periods in fiscal
2002, 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 47 months, 44 months and 42 months at September 30, 2002, 2001 and 2000,
respectively.
-23-
Net Financing Revenues
- ----------------------
TMCC's net financing revenues increased $69 million, or 44%,income for the three months ended
SeptemberJune 30, 20022003 and decreased $24 million or 6% for the six
months ended September 30, 2002 as compared with the same periods in fiscal 2002. The increasetable also presents net income for the three
months ended SeptemberJune 30, 2003 and 2002 isexcluding 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 in 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 effecteffects of higher leasing and retail revenues, lower interestdepreciation expense and
lower lease termination costs,investment and other income partially offset by unfavorable
effects of SFAS 133/138 fair value adjustments on the Company's debt and
derivative portfolios in the current quarter.
The decrease in nethigher financing revenues for the six months ended September 30,
2002, is primarily due to a $338 million unfavorable SFAS 133/138 fair value
adjustment, partially offset by the increase in leasing and retail 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 vehicle retail finance receivables partially offset by a
reduction in overall portfolio yields. Wholesale and other dealer financing
revenues increased $9 million or 23% as a result of the growth in the number
of vehicle dealers receiving vehicle wholesale financing 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 $56 million increase in additional
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 unfavorable SFAS 133/138 fair
value adjustmentdepreciable basis of leased 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 three months ended June 30, 2003 was attributable to the combined
impact of these factors.
- 17 -
INTEREST EXPENSE
- ----------------
Interest expense decreased $24 million or 11% for the six months ended September 30, 2002, as compared tofirst quarter of fiscal
2004 over the samecomparable prior year period in fiscal 2002, is due to the significant reductiona general decrease in market
interest rates, during the six months ended Septemberpartially offset by increased average outstanding debt used to
fund growth in assets. Average outstanding debt was $29 billion and $25
billion at June 30, 2003 and 2002, as well as actions taken
by TMCC to protect interest rate margins, including an increase in interest
rate swap derivative products that do not qualify for hedge accounting. TMCC
uses derivative contracts as part of its interest rate risk management
program.
Depreciation on Leasesrespectively.
DERIVATIVE FAIR VALUE ADJUSTMENT
- ------------------------------------------------------
The following table sets forth the items included in TMCC's depreciation on
leases for the three and six months ended September 30, 2002 and 2001:Company's Derivative
fair value adjustments in accordance with SFAS 133, as amended:
Three Months Ended Six Months Ended
Septembermonths ended
June 30, SeptemberJune 30,
------------------ ------------------2003 2002
2001 2002 2001
---- ---- ---- ------------ --------
(Dollars in Millions)
(Dollars in Millions)
Straight-line depreciationNet loss on operating leases.................. $324 $293 $642 $587
Provisionnon-designated derivatives....... $ (36) $ (234)
Net loss for residualhedges that no longer qualify
as fair value losses................ 70 87 125 167
---- ---- ---- ----
Total depreciation on leases......... $394 $380 $767 $754
==== ==== ==== ====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 $31The derivative fair value adjustment decreased $176 million or 11% and $55 million or 9% forfrom the
three and six months ended September 30,
2002 as compared with the same periodscomparable period in fiscal 2002 due to an increase in
average operating lease assets. Purchasing residual value insurance for
leases acquired by the Titling Trust before June 2001 increased the ratio of
finance lease 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, there is a higher
probability that the vehicle will be returned to TMCC. A higher rate of
vehicle returns exposes TMCC to a higher risk of residual value losses.
-24-
The Company maintains an allowance to cover estimated residual value 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,
factors including trends in lease returns, new car markets, and general
economic conditions. After evaluating these factors, management develops
several loss scenarios and reviews allowance levels to determine whether
reserves are considered 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 in lease
depreciation expense in the Consolidated Statement of Income, respectively.
Total unguaranteed residual values related to TMCC's vehicle lease portfolio
increased from approximately $6.9 billion to $7.1 billion between September
30, 2001 and September 30, 2002. The increase primarily resulted from the
discontinuation of purchasing residual value insurance for operating leases
acquired by the Titling Trust beginning in June 2001.
The provision for residual value losses decreased $17 million or 20% and $42
million or 25% for the three and six months ended September 30, 2002,
respectively, as compared with the same periods in fiscal 2002. The decrease
in the provision is reflective of an overall decrease in actual and expected
residual value losses.
Residual losses decreased $3 million and $28 million for the three and six
months ended September 30, 2002, respectively, as compared with the same
periods in fiscal 2002,2003 primarily due to a decrease in the numberimpact of vehicles
coming off-lease forlower interest
rate volatility on the six months ended September 30, 2002.
The number of returned leased vehicles sold by TMCC during a specified period
as a percentage of the number of lease contracts that as of their origination
dates were scheduled to terminate inCompany's non-designated derivative portfolio.
In the current period ("return rate") was
46% forquarter, the six months ended September 30, 2002, respectively, as compared to
51% for the same period in fiscal 2002. The Company has taken action to reduce
residual losses by developing strategies to increase dealer purchases of off-
lease vehicles and expanding marketing of off-lease vehicles through Internet
auctions to maximize proceeds on vehicles sold.
Interest Expense
- ----------------
Interest expense decreased $53 million, or 20% and $132 million or 23% during
the three and six months ended September 30, 2002, respectively, as compared
with the same periods in fiscal 2002 primarily due to a decrease in the
average cost of borrowings. The weighted average cost of borrowings was 3.01%
and 4.80% for the six months ended September 30, 2002 and 2001, respectively.
-25-
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 $2 million and $3 million during the three and six months
ended September 30, 2002, respectively, as compared with the same periods in
fiscal 2002 primarily due to increased contract volume and a higher number of
agreements in force.
Net income from insurance operations was $7 million and $17 million for the
three and six months ended September 30, 2002, a decrease of $5 million, or
42%, and $4 million, or 19%, respectively, as compared with the same periods in
fiscal 2002. The lowerabsolute level of net income is primarily dueinterest rates declined slightly
from March 31, 2003, resulting in an unfavorable fair value adjustment of $38
million of which $36 million was attributed to higher claim
expense, resulting from an overall increase in loss experience, and a decrease
in investment income, associated with the decline in interest rates.
Investment and Other IncomeCompany's non-designated
derivative portfolio.
- 18 -
INVESTMENT AND OTHER INCOME
- ---------------------------
The following table summarizes TMCC'sthe Company's investment and other income for
the three and six months ended SeptemberJune 30, 20022003 and 2001:2002:
Three Months Ended
Six Months Ended
September 30, SeptemberJune 30,
------------------
----------------2003 2002 2001 2002 2001
------ ------
------ ------
(Dollars in Millions)
Investment income...............and servicing fee income.... $ 2026 $ 25 $ 42 $ 5423
Gains on assets sold............ -sold................... - 33
25
Servicing fee income............----- -----
Investment income-securitizations... $ 26 $ 56
Investment income-marketable
securities and other income......... 10 8
8 17 18
Loss on repurchases............. - (1) - -
------ ------ ------ ----------- -----
Total Investment and other income..Other Income $ 2836 $ 32 $ 92 $ 97
====== ====== ====== ======64
===== =====
Investment and other income decreased $5$28 million or 20% and $12 million, or 22%, during44% for the three and six monthsquarter ended
SeptemberJune 30, 2002, respectively, as compared
with2003 from the same periods in fiscal 2002, duecomparable prior year period. The decrease was related
to a decrease in insurance
investment income resulting from a decrease in rates on portfolio investments,
coupled with a decrease in asset-backed lease securitization investment income
on funds held in reserve accounts related to transactions that have fully
matured as of the end of fiscal 2002.
Gains on assets sold increased $8 million, or 32%, for the six months ended
September 30, 2002, as compared with the same period in fiscal 2002 primarily
due to decreases in market interest rates, which resulted in larger interest
only strips retained by the Company. Gains recognized on asset-backed
securitization transactions generally accelerate the recognition of income on
lease and retail contracts, net of servicing fees and other related deferrals,
into the period in which the assets are sold. Numerous factors can affect the
timing and amounts of these gains, such as the type and amount of assets sold,
market interest rates at the time of the asset sale, the structure of the
sale, key assumptions used and other current financial market conditions.
-26-
Loss on Asset Impairment
- ------------------------
TMCC performs a periodic review of the fair market value of assets retainedreduction in the sale of retail receivables and interestsCompany's securitization activity in finance lease receivables on a
quarterly basis. The fair market value of these retained assets is impacted
by management's and the market's expectations ascurrent quarter
relative to future residual losses,
credit losses, discount rates and prepayment rates.
During the three months ended September 30, 2002, TMCC recognized $11 million
in impairment losses related to retail finance receivables as a result of
expected credit losses exceeding original credit loss assumptions. The
assumptions used to calculate expected credit losses per annum for outstanding
securitization transactionscomparable prior year period. As the Company's funding needs
were adjusted from 0.50% - 0.90% at March 31, 2002
to 0.68% - 0.94% at September 30, 2002. Impairment of retail finance
receivables is due to increased credit losses resulting from a number of
factors includingmet through the effects of TMCC's field restructuring, which has
temporarily disrupted normal collection activities, and the continuation of
the national economic downturn. In addition, increased delinquency and credit
losses can be attributed in part to changes in portfolio quality in connection
with the national tiered pricing program. Under the national tiered pricing
program,debt capital markets, the Company generally will acquire contracts with higher yields to
compensate for the potential increase in credit losses. The Company has also
experienced a general increase in the average original contract term of retail
contracts in the six months ended September 30, 2002, compared to the same
period in fiscal 2002. Historically, longer-term contracts experience higher
credit losses.
During the six months ended September 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 residual loss assumptions. As a result of the
change in assumptions, in the six months ended September 30, 2001, TMCC
recognized losses due to the permanent impairment of assets retained in the
sale of interests in finance lease 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.
Losses Related2004.
- 19 -
PROVISION FOR CREDIT LOSSES
- ---------------------------
The Company is exposed to Argentine Investment
- --------------------------------------
TMCC has executed guarantees totaling $65 million in respect to TCA's offshore
U.S. dollar bank loans of which approximately $37 million, including principal
and interest is outstanding as of September 30, 2002. 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 U.S. 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 U.S. 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.
For the three and six months ended September 30, 2002, TMCC recorded a $6
million and $11 million charge against income, respectively, to increase the
reservecover
probable losses.
The following tables provide information related to the Company's guarantee of TCA's offshore outstanding debt
to $37 million. TMCC will continue to monitor the situation in Argentina.
-27-
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses decreased $6 million, or 5% for the
three months ended September 30, 2002 as compared with the same period in
fiscal 2002. The net decrease primarily reflects a $1.8 million decrease in
charges and costs incurred for the field restructuring, coupled with a
reclassification to interest expense of $3.4 million of credit support fees
that were previously included in operating and administrative expenses.
Operating and administrative expenses increased $8 million, or 3% for the six
months ended September 30, 2002 as compared to the same period in fiscal 2002.
The net increase primarily reflects a $14.4 million increase in employee
expenses related to the Company's new customer service centers, partially
offset by a reclassification to interest expense of $6.8 million of credit
support fees that were previously included in operating and administrative
expenses.
Operating and administrative expenses have continued to increase in the
current fiscal year partially as a result of the costs incurred in connection
with the continued restructuring of TMCC's field operations. The branch
offices of TMCC have been converted to serve only dealer financing needs
including the purchasing of contracts from dealers, financing inventories,
financing other dealer activities such as business acquisitions, facilities
refurbishment, real estate purchases and working capital requirements, as well
as consulting on finance and insurance operations. Other functions previously
performed at the branch offices, such as customer service, collections, lease
termination and administrative functions for retail and lease contracts, have
been transferred to three regional customer service centers which opened, or
were expanded, during the last year. The physical restructuring of TMCC's
field operations was substantially completed as of September 30, 2002.
Restructuring charges and costs recognized during the three and six months
ended September 30, 2002 were $3.3 million and $6.6 million, respectively.
Restructuring charges and costs recognized during the three and six months
ended September 30, 2001 were $5.1 million and $6.3 million, respectively.
Expenses charged during the six months ended September 30, 2002 were comprised
of $2.7 million related to asset and facility costs and $3.9 million for other
exit costs. The expenses charged in the six months ended September 30, 2001
were comprised of $4.0 million related to employee separation costs, $0.8
million for asset and facility costs and $1.5 million for other exit costs.
At September 30, 2002, remaining restructuring and related charges to be
recognized during fiscal 2003 are estimated to be $1.9 million.
During the field restructuring, TMCC has experienced an increase in
delinquency rates and charge off rates as a result of the disruption to normal
collection process. While the physical migration of resources related to the
restructuring of the field operations has been substantially completed, the
Company continues to review and refine current processes and deploy additional
resources and technology in an effort to improve operating efficiencies and to
minimize the disruption of operations; however, the restructuring of field
operations has adversely affected, and could continue to adversely affect
delinquencies and credit losses. Upon completion of the field restructuring
and strategic deployment of resources and technology, the Company anticipates
greater internal operating efficiencies and superior dealer and customer
account management.
-28-
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, economic conditions and market conditions
are monitored and taken into account. After evaluating these factors,
management develops several loss
scenarios and reviews allowance levels to
determine whether reserves are considered adequate to cover the probable range
of losses. The allowance for credit losses as of September 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
Six Months Ended
SeptemberJune 30,
September 30,
------------------- ------------------------------------------
2003 2002 2001 2002 2001
------- -------
------- -------
(Dollars in Millions)
Allowance for credit losses
at beginning of period....................period............... $ 351526 $ 231 $ 283 $ 227
Provision for credit losses.............. 127 51 249 101
Charge-offs.............................. (69) (39) (129) (79)
Recoveries............................... 8 5 15 10losses............. 109 122
Charge-offs............................. (94) (60)
Recoveries.............................. 11 7
Other adjustments........................adjustments....................... - - (1) (11)
------- -------
------- -------
Allowance for credit losses
at end of period..........................period..................... $ 417552 $ 248 $ 417 $ 248
======= =======351
======= =======
SeptemberJune 30,
---------------------------------------
2003 2002
2001
------- ------------- ------
(Dollars in Millions)
Annualized Net Credit Lossescredit losses as a %percentage
of average earning assets............. 0.70% 0.50%
Allowance for Credit Losses as a % of
gross earning assets.................. 1.22% 0.86%assets .... 0.92% 0.67%
Aggregate balances at end of period
for lease rentals and installments 60 or more days
past due ....................................... $ 246198 $ 108
Aggregate balances at end of period
for lease rentals and installments
60 or more days past due238
Over-60 day delinquencies as a %percentage
of net investments in operating
leases and gross receivables
outstandingearning assets ...................... 0.72% 0.38%....... 0.54% 0.74%
Allowance for credit losses
as a percentage of gross
earning assets ................... 1.50% 1.21%
- --------------------
Aggregate balances for lease rentalsDelinquency and installments 60 or more days past due for September
30, 2001 was previously reported as $74 million.
Aggregate balances for lease rentals and installments 60 or more days past duecharge-off ratios typically fluctuate over time as a %portfolio matures. The
information in the preceding table has not been adjusted to eliminate the effect of net
investments in operating leasesthe growth of
the Company's portfolio.
For purposes of this table, "earning assets" include earning assets and gross receivables outstanding for September 30, 2001 was
previously reported as 0.26%.repossessed
collateral.
-29-- 20 -
The allowanceCharge-offs, net of recoveries, increased $30 million or 57% in the quarter
ended June 30, 2003 over the comparable period in the prior year. Although
charge-offs increased in the most recent quarter, the provision for credit
losses at September 30, 2002 increased $169declined $13 million from September 30, 2001, primarily due to an increaseor 11% in the current quarter over the comparable
period in the prior year. The decline in the provision for credit losses
resultingreflects the decline in 60-day contractual delinquency from an increase0.74% 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 the 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 provision and net charge-offslevel 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 three and six months ended SeptemberJune
30, 2002 as compared with2003, was at the same periods in fiscal 2002 is due to increases
in delinquencies and credit losses.
The Company believesupper end of historical experience. Management expects
that the increased delinquency experience isadverse impact of the field restructuring should lessen as a result
of a numbermeasures taken to improve processes and technology; however, management
remains cautious regarding the near term economic outlook, the benefit of factors including the
effects of TMCC's field restructuring which
has temporarily disrupted normal collection activitiesactions taken and the continuation of
the national economic downturn. While the physical migration of resources
related to the restructuring of field operations has been substantially
completed, the Company continues to review and refine current processes and
deploy additional resources and technology in an effort to improve operating
efficiencies and to minimize the disruption of operations; however, the
restructuring of field operations and economic downturn has adversely
affected, and could continue to adversely affect delinquencies andpotential impact on these factors affecting credit losses. In addition, increased delinquency and credit losses can be
attributed in part to changes in portfolio quality in connection with the
national tiered pricing program. Under the national tiered pricing program,
the Company generally will acquire contracts with higher yields to compensate
for the potential increase in credit losses. The Company has also experienced
a general increase in the average original contract term of retail and lease
vehicle contracts in the six months ended September 30, 2002, compared to the
same period in fiscal 2002. Historically, longer-term contracts experience
higher credit losses. The trend toward longer-term contracts is reflective of
industry trends. The average length of retail and lease contracts initiated
during fiscal year to date 2003 and fiscal year 2002 was 55.6 months and 54.8
months, respectively. The majority of retail and finance lease receivables do
not involve recourse to the dealer in the event of customer default.loss
experience. Management believes that the impactlevel of the restructuring has been reasonably
factored into the provision for credit losses.
Delinquencyreserve at June 30, 2003 is
reasonable in light of current facts and charge-off ratios typically fluctuate over time as a portfolio
matures. The information in the preceding table has not been adjusted to
eliminate the effect of the growth of TMCC's portfolio.
Derivatives and Hedging Activitiescircumstances.
- ----------------------------------
TMCC maintains an overall risk management strategy that utilizes a variety of
interest rate and currency derivative financial instruments to mitigate its
exposure to fluctuations 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 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 and certain interest rate swaps.
The Company uses portfolio based derivatives to mitigate 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.
For the six months ended September 30, 2002, the Company recognized a $338
million unfavorable SFAS 133/SFAS 138 adjustment (reported as SFAS 133 and 138
fair value adjustment in the Consolidated Statement of Income). The net
adjustment reflects a $369 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 $31 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
-30-21 -
swaps was primarily due to the significant reduction in interest rates during
the six month period ended September 30, 2002. The increase in the unfavorable
SFAS 133/138 adjustment for the six months ended September 30, 2002, as
compared to the same period in fiscal 2002 is due to the significant reduction
in interest rates during the six months ended September 30, 2002, as well as
actions taken by TMCC to protect interest rate margins, including an increase
in interest rate swap derivative products that do not qualify for hedge
accounting.
Liquidity and Capital ResourcesLIQUIDITY 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 itsthe Company's 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 $4.7 billion to $6.5$7.0 billion during the six monthsquarter ended
SeptemberJune 30, 2002,2003, with an average outstanding balance of $5.6$5.9 billion.
For additional liquidity purposes, TMCC maintains syndicated bank credit
facilities with certain banks which aggregated $4.2 billion at September 30,
2002. No loans were outstanding under any of these bank credit facilities as of
September 30, 2002. In addition, the Company maintains uncommitted lines of
credit to facilitate and maintain letters of credit. Available lines of
credit totaled $60 million as of September 30, 2002. Approximately $699
thousand in letters of credit was outstanding as of September 30, 2002.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 six monthsquarter
ended SeptemberJune 30, 2002, TMCC2003, the Company issued approximately $3.9$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 SeptemberJune 30, 20022003 ranged from less
than one year to ten years.
As of September 30, 2002, TMCC had
total MTNs and bonds outstanding of $23.7 billion, of which $8.0 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 $8.6$5.4
billion was available for issuance at OctoberJuly 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 $2.9approximately $1.9
billion was available for issuance at OctoberJuly 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.
-31-
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 Note 7 - Sale of Retail
Receivables and Valuation of Residual Interest. 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 service totaled $5.7 billion at June 30,
2003.
- 22 -
For the issuancepast three fiscal years, securitization transactions averaged
approximately 29% of asset-backed
notes secured by, and certificates representing interests, in retail
receivables. During the six months ended September 30, 2002, TMCC sold retail
receivables totaling $1.6 billion in connection with securities issued under
the shelf registration statement.Company's total funding. As of November 1, 2002, approximately
$1July 31, 2003,
$7.4 billion remainedof securities was available for issuance under the SEC shelf
registration statement. 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 than 1.00outstanding.
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 division 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 six
months ended September 30, 2002 and was 1.21 for the six months ended
September 30, 2001. The deficiencyCompany's new
headquarters location in the ratio forTMS headquarters complex in Torrance, California.
At June 30, 2003, minimum future commitments under lease agreements to which
the six months ended
September 30, 2002 was primarily due toCompany is a decrease in net income from
financing operations due to unfavorable SFAS 133/138 fair value adjustments,
which is reportedlessee, including those under the agreement discussed above,
are as SFAS 133follows: fiscal years ending 2004 - $21 million; 2005 - $19 million;
2006 - $17 million; 2007 - $13 million; 2008 - $10 million; 2009 - $8 million;
and 138 fair value adjustments in the
Consolidated Statement of Income. The Company would require an additional $45
million in net income to attain a ratio of 1.00.
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 $18.2 billion for the six
months ended September 30, 2002 was used to purchase additional investments in
operating leases and finance receivables, totaling $21.7 billion during the six
months ended September 30, 2002. Investing activities resulted in a net use of
cash of $3.6 billion for the six months ended September 30, 2002 as the
purchase of additional earning assets exceeded cash provided by the liquidation
and sale of earning assets. Net cash provided by operating activities totaled
$1.3 billion for the six months ended September 30, 2002 and net cash provided
by financing activities totaled $1.9 billion during the six months ended
September 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.
-32-thereafter - $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 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 United States,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; increased losses resulting from
default by any dealers to which the Company has a significant credit exposure;
default by any counterparty to a derivative 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.
-33-
New Accounting Standards
In June 2002, the Financial Accounting Standards Board (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.
In October 2002, the FASB issued SFAS No. 147, Acquisition of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and
FASB Interpretation No. 9 (SFAS 147). SFAS 147 provides guidance on the
accounting for the acquisitions of financial institutions, except those
acquisitions between two or more mutual enterprises. SFAS 147 removes
acquisitions of financial institutions from the scope of both SFAS 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FIN
9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or
a Similar Institution Is Acquired in a Business Combination Accounted for by
the Purchase Method, and requires that those transactions be accounted for in
accordance with SFAS 141, Business Combinations, and SFAS 142, Goodwill and
Other Intangible Assets. SFAS 147 also amends SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor-relationship and borrower-relationship intangible assets and credit
cardholder intangible assets. SFAS 147 is effective for acquisitions for
which the date of acquisition is on or after October 1, 2002. The
implementation of SFAS 147 is not expected to have a material impact on the
Company's financial statements.
-34-24 -
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 instrumentsrisk, in
particular U.S. dollar London Interbank Offered Rate. The Company uses the
value at risk methodology ("VAR") to mitigate its
economic exposure to fluctuations in interest rate and currency exchange
rates. TMCC does not use any of these instruments for trading purposes. A
detailed discussionmeasure this risk. The VAR provides an
overview of the Company's hedging program including strategiesexposure to mitigatechanges in market risk, interest rate risk, counter-party risk and operating
risk is contained in the March 31, 2002 Annual Report on Form 10-K.
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-riskfactors. 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.
-35-
The value-at-riskVAR and the average value-at-riskVAR of TMCC'sthe Company's portfolio as of, and for the
sixthree months ended, SeptemberJune 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 SixThree Months Ended
SeptemberJune 30, 2002 September2003 June 30, 20022003
------------------- -------------------
Mean portfolio value..................... $4,893$5.7 billion $5.8 billion
VAR...................................... $32 million $4,342 million
Value-at-risk............................ $47.6 million $44.6$38 million
Percentage of the mean portfolio value... 1.0% 1.0%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's derivative financial instruments forSFAS 115.
A summary of the six months ended September 30, 2002sensitivity of the fair market value of the Company's equity
investments to an assumed 10% and 200120% adverse change in market prices is
as follows:presented below.
Six Months Ended SeptemberAs of
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
---- ---- ---- ---- ---- ---- ---- ----2003
-----------
(Dollars in Billions)Millions)
Beginning notional amount....... $7.8 $8.3 $29.6 $16.9 $6.1 $11.5 $0.2 $0.6
Add:
New agreements............... 0.8 0.6 2.6 9.4 1.8 2.3Cost..................................... $ 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 instruments is represented by the fair
value of contracts with a positive fair value at June 30, 2003, reduced by the
effects of master netting agreements. At June 30, 2003, aggregate
counterparty credit risk as 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 - 0.2
Less:
Terminated agreements........ - - 0.1 - - 8.0 0.2 -
Expired agreements........... 0.6 0.1 6.8 1.3 0.1 2.6 - 0.4
Amortizing notionals......... - - 0.7 - - - - -
---- ---- ----- ----- ---- ---- ---- ----
Ending notional amount.......... $8.0 $8.8 $24.6 $25.0 $7.8 $ 3.2 $ - $0.4
==== ==== ===== ===== ===== ===== ==== ====
-36-
Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month and six months periods ended SeptemberJune 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 NovemberAugust 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.
-37-
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.
WithinAs of the 90 days prior toend of the filing dateperiod of this quarterly report, the Company's Chief
Executive Officer (CEO)("CEO") and Chief Financial Officer (CFO)("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 havehas been no significant changeschange in the Company's internal controlscontrol over financial
reporting during the Company's most recent fiscal quarter that materially
affected, or in
other factors that could significantlyis reasonably likely to materially affect, these controls subsequent to the date of the evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-38-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 SeptemberJune 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 43,30,
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 SeptemberJune 30, 2002:2003:
Date of Report Items Reported
----------------- ---------------------
July 29, 2002May 9, 2003 Item 5. Other Events
-39-9. 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: NovemberAugust 14, 20022003 By /S/ GEORGE E. BORST
-------------------------------
George E. Borst
President and
Chief Executive Officer
(Principal Executive Officer)
Date: NovemberAugust 14, 20022003 By /S/ JOHN F. STILLO
-------------------------------
John F. Stillo
Vice President and
Chief Financial Officer
(Principal Financial Officer)
-40-
CERTIFICATIONS
I, George E. Borst, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Toyota Motor Credit
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
By /s/ GEORGE E. BORST
------------------------
George E. Borst
President and
Chief Executive Officer
-41-
CERTIFICATIONS
I, John F. Stillo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Toyota Motor Credit
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
By /s/ JOHN F. STILLO
------------------------
John F. Stillo
Vice President and
Chief Financial Officer
-42-- 29 -
EXHIBIT INDEX
Exhibit Method
Number Description of Filing
- ------- ----------- ---------
4.3 Fourth Amended and Restated Agency Agreement dated
October 1, 2002 among TMCC, JPMorgan Chase Bank, Filed
and J.P. Morgan Bank Luxembourg S.A. Herewith
10.15 364 Day Credit Agreement dated September 12, 2002
among TMCC, Bank of America, N.A. as Administrative
Agent, JPMorgan Chase Bank as Syndication Agent, The
Bank of Tokyo-Mitsubishi, Ltd. and Citibank, N.A. as
Documentation Agents, Banc of America Securities LLC
as Sole Lead Arranger and Sole Book Manager and the Filed
other Banks named therein Herewith
10.16 Five-year Credit Agreement dated September 12, 2002
among TMCC, Bank of America, N.A. as Administrative
Agent, JPMorgan Chase Bank as Syndication Agent, The
Bank of Tokyo-Mitsubishi, Ltd. and Citibank, N.A. as
Documentation Agents, Banc of America Securities LLC
as Sole Lead Arranger and Sole Book Manager and the Filed
other Banks named therein Herewith
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
-43-31.1 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 Furnished
Herewith
32.2 Certification pursuant to 18 U.S.C. Section 1350 Furnished
Herewith
- 30 -