UNITED STATES
                    SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C. 20549

                                 FORM 10-Q


(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the quarterly period ended June 30,December 31, 2003
                                    -------------------------------
          OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from           to
                                     --------    --------

Commission file number    1-9961
                        ----------


                      TOYOTA MOTOR CREDIT CORPORATION
- ---------------------------------------------------------------------------
          (Exact name of registrant as specified in its charter)

               California                                 95-3775816
- ----------------------------------------            -----------------------
   (State or other jurisdiction of                     (I.R.S. Employer
    incorporation or organization)                    Identification No.)

        19001 S. Western Avenue
          Torrance, California                               90509
- ----------------------------------------            -----------------------
(Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code       (310) 468-1310
                                                    -----------------------


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
                                                             Yes  X  No
                                                                 ---    ---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
                                                             Yes     No  X
                                                                 ---    ---

As of June 30, 2003,January 31, 2004, 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 -




                          PART I.  FINANCIAL INFORMATION



ITEM 1.    FINANCIAL STATEMENTS.STATEMENTS


                          TOYOTA MOTOR CREDIT CORPORATION
                             CONSOLIDATED BALANCE SHEET
                               (Dollars in Millions)
                                    (Unaudited)

June 30,December 31, March 31, 2003 2003 ------------ ------------ (Unaudited) ASSETS ------ Cash and cash equivalents............... $ 735946 $ 980 Investments in marketable securities.... 1,3881,407 1,630 Finance receivables, net................ 28,34530,722 26,477 Investments in operating leases, net.... 7,9007,755 8,017 Derivative assets....................... 2,1712,345 1,421 Other assets............................ 563558 708 ------- --------------- -------- Total Assets................... $41,102 $39,233 ======= =======assets................... $ 43,733 $ 39,233 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Notes and loans payable................. $33,851 $32,099$ 36,044 $ 32,099 Derivative liabilities.................. 432221 514 Other liabilities....................... 916849 869 Income taxes payable.................... 1851 26 Deferred income......................... 1,0591,125 996 Deferred income taxes................... 1,8902,088 1,866 ------- --------------- -------- Total Liabilities................. 38,166liabilities................. 40,378 36,370 ------- --------------- -------- Commitments and Contingenciescontingent liabilities (See note 7)8) Shareholder's Equity:equity: Capital stock, $l0,000 par value (100,000 shares authorized; 91,500 issued and outstanding)... 915 915 Retained earnings.................... 1,9802,399 1,930 Accumulated other comprehensive income............................ 41 18 ------- --------------- -------- Total Shareholder's Equity........ 2,936shareholder's equity........ 3,355 2,863 ------- --------------- -------- Total Liabilitiesliabilities and Shareholder's Equity........... $41,102 $39,233 ======= =======shareholder's equity........... $ 43,733 $ 39,233 ======== ========
See Accompanying Notes to Consolidated Financial Statements. - 2 - TOYOTA MOTOR CREDIT CORPORATION CONSOLIDATED STATEMENT OF INCOME (Dollars in Millions) (Unaudited)
Three Months Ended June 30, ---------------------------Nine Months Ended December 31, December 31, ------------------ ----------------- 2003 2002 ---------- ----------2003 2002 ------- ------- ------- ------- Financing Revenues: Leasing........................................revenues: Leasing.................................... $ 622605 $ 621630 $ 1,840 $ 1,883 Retail financing............................... 290 263financing........................... 311 293 911 841 Wholesale and other dealer financing........... 49 40 -------- --------financing....... 45 45 137 127 ------- ------- ------- ------- Total financing revenues..........................revenues...................... 961 924968 2,888 2,851 Depreciation on leases......................... 458 373leases..................... 389 415 1,252 1,182 Interest expense............................... 193 217 Derivative fair value adjustments.............. 38 214 -------- --------expense........................... 115 192 433 955 ------- ------- ------- ------- Net financing revenues............................ 272 120revenues........................ 457 361 1,203 714 Insurance premiums earned and contract revenues....................................... 45revenues................................... 46 41 138 124 Investment and other income....................... 36 64 -------- --------income................... 45 71 159 152 ------- ------- ------- ------- Net financing revenues and other revenues......... 353 225 -------- --------revenues..... 548 473 1,500 990 ------- ------- ------- ------- Expenses: Operating and administrative................... 136 128administrative............... 142 142 420 400 Losses related to Argentine Investment.........investment..... - 5- - 11 Provision for credit losses.................... 109 122losses................ 76 151 263 400 Insurance losses and loss adjustment expenses.................................... 25 21 -------- --------expenses................................ 24 22 74 66 ------- ------- ------- ------- Total expenses.................................... 270 276 -------- -------- Income/(Loss)expenses................................ 242 315 757 877 ------- ------- ------- ------- Income before income taxes................. 83 (51) Provision/(Benefit)taxes.................... 306 158 743 113 Provision for income taxes.............. 33 (22) -------- --------taxes.................... 102 65 274 45 ------- ------- ------- ------- Net Income/(Loss).................................income.................................... $ 50204 $ (29) ======== ========93 $ 469 $ 68 ======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements. - 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, 2002........ $ 915 $ 1,820 $ 16 $ 2,751 ------ ------- ------------------ ------------- ------- Net lossincome for the threenine months ended June 30, 2002...........December 31, 2002....... - (29)68 - (29)68 Change in net unrealized gainsgain on available-for-sale marketable securities.........securities (net of tax).................. - - (1) (1) ------(5) (5) ------- -------- ----------------------- ------- Total Comprehensive Loss.........comprehensive income....... - (29) (1) (30) ------68 (5) 63 ------- -------- ----------------------- ------- Balance at June 30, 2002..........December 31, 2002.... $ 915 $ 1,7911,888 $ 1511 $ 2,721 ======2,814 ======= ================== ============= ======= Balance at March 31, 2003........ $ 915 $ 1,930 $ 18 $ 2,863 ------ ------- ------------------ ------------- ------- Net income for the threenine months ended June 30, 2003...........December 31, 2003....... - 50469 - 50469 Change in net unrealized gainsgain on available-for-sale marketable securities.........securities (net of tax).................. - - 23 23 ------------- -------- ----------------------- ------- Total Comprehensive Income.......comprehensive income....... - 50469 23 73 ------492 ------- -------- ----------------------- ------- Balance at June 30, 2003.........December 31, 2003.... $ 915 $ 1,9802,399 $ 41 $ 2,936 ======3,355 ======= ================== ============= =======
See Accompanying Notes to Consolidated Financial Statements. - 4 - TOYOTA MOTOR CREDIT CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Millions) (Unaudited)
ThreeNine Months Ended June 30,December 31, ------------------------- 2003 2002 -------- ----------------- Cash flows from operating activities: Net Income/(Loss)........................................income................................................ $ 50469 $ (29)68 -------- ----------------- Adjustments to reconcile net income to net cash provided by operating activities: Derivative fair value adjustments.................. 38 214adjustment.................... (125) 322 Depreciation and amortization...................... 458 399amortization....................... 1,337 1,256 Provision for credit losses........................ 109 122losses......................... 263 400 Gain from salesecuritization of finance receivables, net......... - (33)receivables..... (42) (72) Gain from sale of marketable securities, net....... (3)securities............. (7) - Loss on impairment of retained interests............ - 11 Loss and reserve related to Argentine Investment...Investment.... - 5 (Increase)11 Decrease in other assets......................... (702) (612)assets............................ 112 178 Increase in deferred income taxes.................. 9 155taxes................... 239 174 Increase in other liabilities...................... 930 168liabilities....................... 77 23 -------- ----------------- Total adjustments........................................ 839 418adjustments......................................... 1,854 2,303 -------- ----------------- Net cash provided by operating activities................... 889 389activities.................... 2,323 2,371 -------- ----------------- Cash flows from investing activities: Addition to investments in marketable securities......... (222) (535)securities.......... (1,401) (1,469) Disposition of investments in marketable securities...... 466 234securities....... 1,530 1,165 Acquisition of finance receivables....................... (11,785) (6,596)receivables........................ (36,224) (29,632) Liquidation of finance receivables....................... 9,842 4,598receivables........................ 30,011 23,207 Proceeds from sale of finance receivables................ - 1,549receivables................. 1,825 3,002 Addition to investments in operating leases.............. (769) (960)leases............... (2,274) (2,726) Disposition of investments in operating leases........... 442 475leases............ 1,282 1,375 -------- -------- Net cash used in investing activities....................... (2,026) (1,235)activities........................ (5,251) (5,078) -------- -------- Cash flows from financing activities: Proceeds from issuance of notes and loans payable........ 1,327 1,933payable......... 9,020 6,949 Payments on notes and loans payable...................... (2,295) (1,443)payable....................... (7,696) (5,551) Net increase(decrease)increase in commercial paper............... 1,860 (69)paper.......................... 1,570 1,419 -------- -------- Net cash provided by financing activities................... 892 421activities.................... 2,894 2,817 -------- -------- Net decrease(decrease)/increase in cash and cash equivalents................... (245) (425)equivalents......... (34) 110 Cash and cash equivalents at the beginning of the period....period..... 980 747 -------- -------- Cash and cash equivalents at the end of the period..........period........... $ 735946 $ 322857 ======== ======== Supplemental disclosures: Interest paid............................................paid............................................. $ 171497 $ 210569 Income taxes paid........................................paid/(received).............................. $ 3243 $ 4(378)
See Accompanying Notes to Consolidated Financial Statements. - 5 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim Financial Data - ------------------------------- The accompanying information pertaining to the three and nine months ended June 30,December 31, 2003 and 2002 is unaudited and has been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, and liabilities, revenues, expenses, 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.liabilities. 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 nine months ended June 30,December 31, 2003 are not necessarily indicative of those expected for any other interim period or for a full year. Certain prior period amounts have been reclassified to conform with the current period presentation. These include the reclassification of the derivative fair value adjustment into interest expense in the consolidated statement of income, made in response to recent Securities and Exchange Commission ("SEC") public announcements related to the income statement presentation of certain derivative activities. The reclassification had no impact on net financing revenues and other revenues or net income. 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 2003 Annual Report to the Securities and Exchange Commission ("SEC")SEC on Form 10-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 consisted of the following:
June 30,December 31, March 31, 2003 2003 ------------ ------------ (Dollars in Millions) Retail.................................... $18,331 $16,160$ 21,013 $ 16,160 Finance leases............................ 5,6174,817 6,078 Wholesale and other dealer loans.......... 5,7056,042 5,608 ------- ------- 29,653-------- -------- 31,872 27,846 Unearned income........................... (962)(814) (1,043) ------- --------------- -------- Finance receivables, net of unearned income................... $28,691 $26,80331,058 26,803 Allowance for credit losses............... (346)(336) (326) ------- --------------- -------- Finance receivables, net .............. $28,345 $26,477 ======= =======$ 30,722 $ 26,477 ======== ========
Finance leases included estimated unguaranteed residual values of $1.4 billion and $1.8 billion at both June 30December 31 and March 31, 2003.2003, respectively. The aggregate balances related to finance receivables 60 or more days past due totaled $163$162 million and $160 million at June 30December 31 and March 31, 2003, respectively. The majority of retail and finance lease receivables do not involve recourse to the dealer in the event of customer default. - 6 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 3 - Investments in Operating Leases - ---------------------------------------- Investments in operating leases, net consisted of the following:
June 30,December 31, March 31, 2003 2003 ------------ ------------ (Dollars in Millions) Vehicles.................................. $9,639 $9,687$ 9,736 $ 9,687 Equipment and other....................... 719693 720 ------ ------ 10,358------- ------- 10,429 10,407 Accumulated depreciation.................. (2,301)(2,508) (2,254) Allowance for credit losses .............. (157)(166) (136) ------ ------------- ------- Investments in operating leases, net...... $7,900 $8,017 ====== ======$ 7,755 $ 8,017 ======= =======
Note 4 - Allowance for Credit Losses - ------------------------------------ An analysis of the allowance for credit losses follows:
Three months ended June 30, MarchMonths Ended Nine Months Ended December 31, June 30, 2003December 31, ------------------ ------------------ 2003 2002 --------- --------- ----------2003 2002 ------- ------- ------- ------- (Dollars in Millions) Allowance for credit losses at beginning of period............... $ 526544 $ 466417 $ 526 $ 283 Provision for credit losses.......... 109 204 122 Charge-offs.......................... (94) (138) (60) Recoveries........................... 11 11 7losses............. 76 151 263 400 Charge-offs............................. (88) (98) (264) (227) Recoveries.............................. 17 9 43 24 Other adjustments.................... - (17) (1) ------ ------ ------adjustments....................... 1 (13) (18) (14) ------- ------- ------- ------- Allowance for credit losses at end of period..................period..................... $ 552550 $ 526466 $ 351 ====== ====== ======550 $ 466 ======= ======= ======= =======
At June 30,December 31, 2003, the allowance for credit losses consisted of $503$502 million to cover probable losses on the Company's owned portfolio and $49$48 million to cover probable losses on repossessed collateral in inventory as of the period end dates shown above.inventory. Total repossessed collateral in inventory at June 30 and MarchDecember 31, 2003 and June 30, 2002 was $118 million, $147 million, and $144 million, respectively.$119 million. Repossessed collateral is included in other assets in the Consolidated Balance Sheet.consolidated balance sheet. - 7 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 - Derivatives and Hedging Activities - ------------------------------------------- In response to recent SEC public announcements related to the income statement presentation of certain derivative activities, the Company's derivative fair value adjustment was reclassified into interest expense in the consolidated statement of income. The following table sets forthsummarizes the net unrealized gains and losses for the items included in the Company's Derivativederivative fair value adjustments in accordance with Statement of Financial Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging Activities" and related amendments ("SFAS 133, as amended"):adjustment:
Three months ended June 30, June 30,Nine months ended December 31, December 31, ------------------ ------------------ 2003 2002 --------- ---------2003 2002 ------ ------ ------ ------ (Dollars in Millions) (Unrealized (Gain)/Loss) Net loss on non-designated derivatives....... Non-designated derivatives............... $ (36)(86) $ (234) Net loss for hedges36 $ (132) $ 428 Previously designated derivatives that no longer qualify as fair value hedges....................... (8)hedges... - Net gain related to the ineffective5 18 3 Ineffective portion of the Company's fair value hedges.........hedges........... 6 20(57) (11) (109) ------ ------ ------ ------ Derivative fair value adjustments............adjustment......... $ (38)(80) $ (214)(16) $ (125) $ 322 ====== ====== ====== ======
- 8 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 - Notes and Loans Payable - -------------------------------- NotesThe following table summarizes the items comprising notes and loans payable and the related weighted average interest rates are summarized as follows:rates:
June 30,December 31, March 31, June 30,December 31, March 31, 2003 2003 2003 2003 --------- --------- --------- --------- (Dollars in Millions) Short-term debt ............................. $ 6,6958,246 $ 4,843 1.17%1.07% 1.36% Long-term debt ............... 25,068................ 25,515 26,034 1.36%1.26% 1.43% Fair Value Adjustmentsvalue adjustments ... 2,088.... 2,283 1,222 --------- --------- Notes and Loans Payable..loans payable... $ 33,85136,044 $ 32,099 1.32%1.22% 1.42% ========= ========= - -------------------- Includes the effect of certain United States ("U.S.") dollar interest rate swap agreements and cross currency interest rate swap agreements. Adjusts debt to fair market value in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" and related amendments ("SFAS 133, as amended.amended").
UnsecuredIncluded in long-term debt are unsecured notes denominated in various foreign currencies included in notestotaling approximately $11.5 billion and loans payable totaled approximately $11.4 billion at June 30December 31 and March 31, 2003.2003, respectively. Concurrent with the issuance 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 follows:- 9 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 - Liquidity Facilities and Letters of Credit - --------------------------------------------------- The following table summarizes the Company's committed and uncommitted facilities:
Committed Uncommitted Unused Facilities ------------------ ------------------ ------------------ June 30,-------------------- -------------------- -------------------- December 31, March 31, June 30,December 31, March 31, June 30,December 31, March 31, 2003 2003 2003 2003 2003 2003 -------- -------- -------- -------- -------- -------- (Dollars in Millions) Syndicated364-day syndicated bank credit facilities....................facilities........ $ 4,2003,600 $ 4,2002,800 $ - $ - $ 4,2003,600 $ 4,2002,800 5-year syndicated bank credit facility - TMCC... 1,400 1,400 - - 1,400 1,400 Letters of credit facilities.....facilities - - 60 60 59 59 -------- -------- -------- -------- -------- -------- Total facilities $ 4,2005,000 $ 4,200 $ 60 $ 60 $ 4,2595,059 $ 4,259 ======== ======== ======== ======== ======== ========
During the second quarter of fiscal 2004, Toyota Credit de Puerto Rico Corp. ("TCPR Corp.") established a $400 million, 364-day syndicated bank credit facility, which is restricted to its own use. In addition, a TMCC 364-day syndicated bank credit facility, which is restricted to TMCC's own use, was increased to $3.2 billion and renewed during September 2003 for an additional 364-day period. - 910 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 78 - Commitments and Contingent Liabilities - ----------------------------------------------- Guarantees and Comfort Letters - ------------------------------ TMCC has entered into certain guarantees or comfort letters on behalf of its subsidiaries and certain affiliates.commitments. As of June 30,December 31, 2003, TMCC hashad not recorded any liabilities under such guarantees and comfort letters.arrangements. The maximum commitment amounts under the guarantees and comfort letterscommitments as of June 30,December 31, 2003 are summarized in the table below:
Maximum Commitment Amount -------------- (Dollars in Millions) Guarantees: Banco Toyota Do Brasil debt..............Credit facilities with dealers and affiliates................. $ 30 Toyota Services de Venezuela, C.A. ("TSV") debt......................... 39 Affiliate3,239 Guarantees of affiliate pollution control and solid waste disposal bonds......bonds......... 148 Comfort Letters:Lease commitments......................... 147 Revolving liquidity notes related to securitizations............. 48 Guarantee of Banco Toyota Services de Mexico, S.A. de C.V. ("TSM"Do Brasil debt("BTB") credit facilities........... 124 TSV office lease........................ 1 ------..................... 30 ------- Total guarantees and comfort letters........commitments............. $ 342 ======3,612 =======
The Company maintains credit facilities with dealers and affiliates. These credit facilities may be used for business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements. These loans are typically collateralized with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate. The Company obtains a personal guarantee from the dealer or corporate guarantee from the dealership when deemed prudent. Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover the Company's exposure under such agreements. The Company prices the credit facilities according to the risks assumed in entering into the credit facility. During the first quarter of fiscal 2004, the Company increased the maximum commitment amount of TSV debt guaranteed by the Company from $33 million at March 31, 2003 to $39 million at June 30, 2003. The revised commitment amount of $39 million is subject to the same terms and conditions as the guarantees described in Note 16 - Commitments and Contingent Liabilities included in the Company's 2003 Annual Report on Form 10-K. During the first quarter of fiscal 2004 the Company executed a new comfort letter with a Mexican bank on behalf of TSM. Additionally, the Company increased the total maximum amount of borrowings supported under existing comfort letters with Mexican banks. After consideration of the new comfort letter and increases to existing comfort letters, the maximum amount of borrowings supported by the Company totaled $124 million at June 30, 2003. Under the comfort letters described in the preceding paragraph, TMCC would be required to exercise its influence to induce TSM to meet all obligations under the credit facilities should TSM default on payments as a result of financial - 10 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 - 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 issued revolving liquidity notes in connection with securitization transactions and extended lending commitments to dealers for revolving credit facilities. As of June 30, 2003, no amounts were outstanding under the revolving liquidity notes. The maximum commitments as of June 30, 2003 are summarized in the table below:
Maximum Commitment Amount ----------- (Dollars in Millions) Revolving liquidity notes related to securitizations................ $ 39 Credit facilities with dealers and affiliates.................... 3,042 Lease commitments............................. 144 ------ Total $3,225 ======
During the first quarter of fiscal 2004 Toyota Credit de Puerto RicoTCPR Corp. extended a $90 million revolving line of credit to Toyota de Puerto Rico Corp. ("TDPR"), a wholly-ownedwholly- owned subsidiary of Toyota Motor Sales, U.S.A., Inc. ("TMS"). This $90 million commitment is included in the table above under credit facilities with dealers and affiliates. 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. - 11 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Commitments and Contingent Liabilities (Continued) - ------------------------------------------------ TMCC has guaranteed payments of principal, interest, and premiums, if any, on $88 million principal amount of flexible rate demand solid waste disposal revenue bonds issued by Putnam County, West Virginia, of which $40 million matures in June 2028, $28 million matures in August 2029, and $20 million matures in April 2030. The $90bonds were issued in connection with a West Virginia manufacturing facility of an affiliate. TMCC has guaranteed payments of principal, interest, and premiums, if any, on $60 million total commitmentprincipal amount of flexible rate demand pollution control revenue bonds issued by Gibson County, Indiana, of which $10 million matures in October 2027, January 2028, January 2029, January 2030, February 2031, and related borrowingsSeptember 2031, respectively. The bonds were issued in connection with an Indiana manufacturing facility of $35 million are includedan affiliate. Under these affiliate bond guarantees, TMCC would be required to perform in the table aboveevent of any of the following: a) payment of any installment of interest, principal, premium, if any, or purchase price on the bonds is not made when the payment becomes due and payable; b) the occurrence of certain events of bankruptcy involving the benefactor manufacturing facilities or TMCC; c) failure by the benefactor manufacturing facilities to observe or perform any covenant, condition or agreement under total creditthe guarantees, other than as referred to in (a) above; d) failure by the bond issuers to observe or perform any covenant, condition or agreement under the guarantees, other than as referred to in (a) above; e) failure by TMCC to observe or perform any covenant, condition, agreement or obligation under the guarantees. These guarantees include provisions whereby TMCC is entitled to reimbursement by the benefactor manufacturing facilities with dealersfor all principal and affiliates.interest paid and fees incurred on behalf of the benefactor manufacturing facilities, and to default interest on those amounts. TMCC has not been required to perform under any of these affiliate bond guarantees as of December 31, 2003. 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,December 31, 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$15 million; 2008 - $10 million; 2009 - $8$9 million; and thereafter - $56 million. - 12 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8 - Commitments and Contingent Liabilities (Continued) - ------------------------------------------------ In certain securitization structures, revolving liquidity notes are used in lieu of reserve funds to provide credit enhancement to the senior securities. Under these revolving liquidity notes, investors may draw upon the notes to cover any shortfall in interest and principal payments. The draws are funded by TMCC, and TMCC is entitled to reimbursement of amounts drawn on the liquidity notes. Reimbursement of amounts drawn on the liquidity notes is subordinated to principal and interest payments due on the securities. TMCC must fund the entire amount available under the revolving liquidity notes if TMCC's short-term unsecured debt rating is downgraded below P-1 or A-1 by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group a division of The McGraw-Hill Companies, Inc. ("S&P"), respectively. TMCC has guaranteed payments of up to $30 million in principal, interest, fees, and expenses with respect to the offshore bank loan of BTB. This guarantee will remain in effect until the loan is repaid in full, and TMCC elects to terminate the guarantee. The loan matures in fiscal 2005. Under the terms of the guarantee, TMCC would be required to perform on behalf of BTB should BTB default on payments for any reason including, but not limited to, financial insolvency, cross border payment restrictions, and other sovereign restrictions on offshore payments. TMCC has entered into a separate indemnity agreement with BTB. The indemnity agreement includes provisions whereby TMCC is entitled to reimbursement from BTB. TMCC has not been required to perform under the BTB guarantee as of December 31, 2003. 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, securitization transactions, and securitization transactions.its vendor and supplier agreements. 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. In addition, the Company has agreed in certain debt and derivative issuances, and subject to certain exceptions, to gross-up payments due to third parties in the event that withholding tax is imposed on such payments. Management periodically evaluates the probability of having to incur such costs. Due to the difficulty in predicting events which could cause a breach of thesethe indemnification provisions or trigger a gross-up obligation, the Company is not able to estimate its maximum exposure to future payments that could result from claims made under such indemnities.provisions. The Company has not made any material payments in the past as a result of these provisions, and as of June 30,December 31, 2003, the Company does not believe it is probable that it will have to make any material payments in the future. As such, no amounts have been recorded under these indemnifications as of June 30,December 31, 2003. Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against the Company with respect to matters arising in the ordinary course of business. Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in the Company's business operations, policies, and practices. Certain of these actions are similar to suits whichthat have been filed against other financial institutions and captive finance companies. Management and internal and external counsel perform periodic reviews of pending claims and actions to determine the probability of adverse verdicts and resulting amounts of liability. The amounts of liability on pending claims and actions as of June 30,December 31, 2003 were not determinable; however, in the opinion of management, the ultimate liability resulting therefrom should not have a material adverse effect on the Company's consolidated financial position or results of operations. - 1213 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 89 - Related Party Transactions - ----------------------------------- As of December 31, 2003, 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, 2003, except for the finance receivables with TDPR and the lease agreement with TMS, as described in Note 8. The table below summarizes amounts included in the Company's consolidated balance sheet and statement of income under various related party agreements or relationships:
December 31, March 31, 2003 2003 ---------- ---------- (Dollars in Millions) Assets: Finance receivables with affiliate... $ 33 $ - Notes receivable under home loan program................ $ 6 $ 9 Other................................ $ - $ 7 Liabilities: Accrued credit support fee payable... $ 12 $ 7 Net intercompany payable............. $ 48 $ 59 Notes payable under affiliate MTN program............ $ 1 $ 1 Other................................ $ 1 $ -
Three Months Ended Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- (Dollars in Millions) Revenues: Marketing, wholesale support, and other revenues.................... $ 48 $ 44 $ 142 $ 108 Affiliate insurance premiums and commissions revenue............... $ 13 $ 9 $ 35 $ 29 Expenses: Credit support fees incurred........... $ 4 $ 3 $ 12 $ 10 Shared services reimbursement.......... $ 14 $ 10 $ 58 $ 31 Rent expense and other amounts incurred $ 2 $ 1 $ 6 $ 4
- 14 - TOYOTA MOTOR CREDIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 - Segment Information - --------------------------------------------------------- Financial results for the Company's operating segments are summarized below:
December 31, March 31, ----------- ------------ 2003 2003 -------- -------- (Dollars in Millions) Assets: Financing operations................. $ 42,837 $ 38,529 Insurance operations................. 1,104 912 Eliminations/reclassifications....... (208) (208) -------- -------- Total assets....................... $ 43,733 $ 39,233 ======== ========
Three Months Ended June 30,Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- (Dollars in Millions) Assets: Financing operations................... $40,313 $34,673 Insurance operations................... 1,002 810 Eliminations/reclassifications......... (213) (182) ------- ------- Total assets......................... $41,102 $35,301 ======= ======= Gross revenues: Financing operations...................operations................. $ 988994 $ 9801,032 $ 3,019 $ 2,983 Insurance operations................... 54 49operations................. 58 48 166 144 ------- ------- ------- ------- Total gross revenues.................revenues............... $ 1,0421,052 $ 1,0291,080 $ 3,185 $ 3,127 ======= ======= ======= ======= Net income/(loss):income: Financing operations...................operations................. $ 39191 $ (39)83 $ 434 $ 41 Insurance operations................... 11operations................. 13 10 35 27 ------- ------- ------- ------- Total net income/(loss)...............income................... $ 50204 $ (29)93 $ 469 $ 68 ======= ======= ======= =======
Note 9 - Subsequent Events - -------------------------- In August 2003, TMCC increased the maximum amount of borrowings supported under existing comfort letters with Mexican banks on behalf of TSM. As a result, TSM is allowed to borrow in Mexican Pesos up to a maximum amount equivalent to $131 million U.S. dollars. The revised commitment amount is subject to the same terms and conditions as the comfort letters described in Note 7 - Commitments and Contingent Liabilities of the consolidated financial statements. - 1315 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EARNING ASSETS AND CONTRACT VOLUME Net Earning Assets - ------------------ The composition of the Company's net earning assets as of the balance sheet dates reported is summarized below:
June 30,December 31, March 31, June 30,December 31, 2003 2003 2002 ------------ ------------ ------------ (Dollars in Millions) Vehicle lease earning assets Investment in operating leases, net.....net...... $ 7,5857,475 $ 7,679 $ 7,3337,415 Finance leases, net..................... 4,614net...................... 3,957 4,997 5,794 ------- ------- -------5,410 -------- -------- -------- Total vehicle lease earning assets....... 12,199assets........ 11,432 12,676 13,12712,825 Vehicle retail finance receivables, net.. 18,072net... 20,796 15,873 13,88515,976 Vehicle wholesale and other financing 6,4776,751 6,407 4,9016,014 Allowance for credit losses ......... (503).......... (502) (462) (324) ------- ------- -------(381) -------- -------- -------- Total net earning assets................. $36,245 $34,494 $31,589 ======= ======= =======assets.................. $ 38,477 $ 34,494 $ 34,434 ======== ======== ======== - ---------------------- 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 allowanceIncludes amounts to cover probable losses on the Company's owned portfolio.portfolio, but excludes amounts related to repossessed collateral in inventory.
Net earning assets at June 30,December 31, 2003 increased $1.8$4.0 billion or 5%12% compared to both March 31, 2003 and increased $4.7 billion or 15% compared to June 30,December 31, 2002. The growth in earning assets during this period was primarily due to higher levelsdriven by the increased volume of both vehicle retail financing and vehicle wholesale and other financing, partially offset by a decrease in vehicle lease earning assets.financing. The significant increase in retail finance receivables primarily resulted from higher contract volume,the continued growth in the number of new vehicles financed under the Company's retail financing programs. This growth was generated in large part by an increased use of marketing incentives sponsored by Toyota Motor Sales, U.S.A., Inc. ("TMS") and higher Toyota and Lexus vehiclesvehicle sales levels. In addition,levels, which increased 12% and 8% for the three and nine months ended June 30,December 31, 2003, TMCC market share (as defined below under "Contract Volume") increased from 41.8% to 47.9%respectively, when compared to the same periodperiods in the prior year. TheAlso contributing to the growth in retail finance receivables during the current year periods was a decrease in the amount of retail finance receivables securitized when compared to the same periods in the prior year. Vehicle wholesale and other financing receivables also increased when compared to March 31, 2003 and December 31, 2002 primarily due to an increase in dealer inventory financed by the Company also experienced growthand increases in the number of vehicle dealers receiving vehicle wholesale financing. Vehicle lease earning assets decreasedcontinued to decrease when compared to March 31, 2003 and December 31, 2002 due to a general shift in programs sponsored by TMS from lease to retail as well as an industry-wide shift away from leasing.the Company's reduced emphasis on leasing, in line with industry trends. - 16 - The increase in the allowance for credit losses fromat December 31, 2003 increased $40 million or 9% and $121 million or 32% when compared to March 31, 2003 and June 30,December 31, 2002, respectively, resulted from significant increases in charge-off rates over the prior periods.respectively. Refer to the "Provision for Credit Losses" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for further discussion regarding the Company's delinquency and charge-off experience. - 14 - Contract Volume - --------------- The composition of the Company's contract volume and market share for the quarters ended June 30, 2003 and 2002 is summarized below:
Three Months Ended ------------------------ June 30, June 30,Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------- --------------- ------- ------- Total contract volume: Vehicle retail....................... 216,000 169,000194,000 153,000 647,000 521,000 Vehicle lease........................ 31,000 44,00025,000 33,000 90,000 121,000 ------- ------- ------- ------- Total................................... 247,000 213,000219,000 186,000 737,000 642,000 ======= ======= ======= ======= TMS sponsored contract volume: Vehicle retail....................... 79,000 22,00057,000 46,000 207,000 134,000 Vehicle lease........................ 8,000 2,0005,000 6,000 24,000 21,000 ------- ------- ------- ------- Total................................... 87,000 24,00062,000 52,000 231,000 155,000 ======= ======= ======= ======= Market share : Vehicle retail....................... 39.8% 30.2%35.8% 31.1% 38.3% 32.4% Vehicle lease........................ 8.1% 11.6%6.6% 9.8% 7.5% 10.9% ----- ----- ----- ----- Total................................... 47.9% 41.8%42.4% 40.9% 45.8% 43.3% ===== ===== ===== ===== - -------------------- Market share represents penetrationthe percentage of total TMS sales of new Toyota and Lexus vehiclevehicles financed by TMCC. Total TMS sales to consumers, excludingexcludes fleet sales, sales of Toyota Services de Mexico, S.A. de C.V., Toyota Services de Venezuela, C.AC.A., and a private Toyota distributor.
Total contract volume increased 16% primarilyfor the three and nine months ended December 31, 2003, respectively, when compared to the same periods in the prior year due to increased vehicle retail contract volume. The growth in vehicle retail contract volume reflectingduring both periods was attributable to the combined effects of higher Toyota and Lexus vehicle sales, incremental volume from the increased number of wholesale dealers serviced by TMCC, and continued use of incentives on new vehicles, and increases in retail financingvehicle incentive programs sponsored by TMS. VehicleIn contrast, vehicle lease contract volume decreased 30% reflectingfor the three and nine months ended December 31, 2003, respectively, when compared to the same periods in the prior year. The decline in lease contract volume was due to a general shift in programs sponsored by TMS from lease to retail as well as an industry-wide shift away from leasing. Total market share increased during the first quarter of fiscal 2004 over the comparable prior year period as the increaseCompany's reduced emphasis on leasing, in retail volume more than offset the overall decline in vehicle lease contract volume.line with industry trends. - 1517 - NET INCOMERESULTS OF OPERATIONS - ---------- The table below presents the Company's net--------------------- Net income increased $111 million and $401 million for the three and nine months ended June 30,December 31, 2003, and 2002. The table also presents net income for the three months ended June 30, 2003 and 2002 excluding the impact of adjustments calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" and related amendments ("SFAS 133, as amended"). Management believes that providing a summary of net income excluding the effects of SFAS 133, as amended, provides useful information to investors for the reasons explained below, and a more balanced representation of the Company's operating results. Management uses this measurerespectively, 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 relativecompared to the comparable quartersame periods in the prior year. NetThe increases in net income excludingfor both periods reflect reductions in total interest expense and in provision for credit losses. The decrease in total interest expense reflects the effect of declines in short term interest rates and the positive impact of changes in market interest rates on the applicationvaluation of SFAS 133, as amended, decreased $24 million or 25% over the comparable prior year period. The decrease resulted fromCompany's derivatives, partially offset by the combined effects of higher depreciation expenseaverage outstanding balances of notes and lower investment and other income partially offset by higher financing revenues and lower interest expense.loans payable used to finance asset growth. The more significant fluctuationsdecrease 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 includedprovision for credit losses reflects continued improvement 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 inoverall delinquency experience. These items, and other factors influencing 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 hedgesare discussed 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.more depth within this MD&A section. TOTAL FINANCING REVENUES - ------------------------ Total financing revenues increased $37 million or 4%remained essentially level for the first quarter of fiscal 2004 overthree and nine months ended December 31, 2003 when compared to the comparablesame periods in the prior year period primarily due to higheras a result of offsetting fluctuations in leasing and retail financing revenues and, to a lesser extent, higher wholesale and other dealer financing revenues. The increase in retailRetail financing revenues resulted from an increaseincreased as a result of the continued growth in vehicle retail finance receivables, partially offset by a reductionreductions in overall portfolio yields.yield. Leasing revenues declined during both periods due to reductions in portfolio yield and vehicle lease earning assets. Wholesale and other dealer financing revenues increased $9 million or 23%remained relatively unchanged during both periods as a resultincreases in average vehicle wholesale and other receivables outstanding were offset by reductions in portfolio yield. The decrease in portfolio yield reflects general decreases in market interest rates. Portfolio yield on the Company's total net earning assets decreased from 7.40% for the three months ended December 31, 2002 to 6.36% for the three months ended December 31, 2003, and from 7.61% for the nine months ended December 31, 2002 to 6.60% for the nine months ended December 31, 2003. The changes in leasing and retail financing revenues are consistent with the general shift in programs sponsored by TMS from lease to retail as well as the Company's reduced emphasis on leasing, in line with industry trends. Refer to the "Earning Assets and Contract Volume" section of the growth in the number of vehicle dealers receiving vehicle wholesale financing partially offset by a reduction in overall portfolio yields.MD&A for further discussion regarding earning asset changes. - 18 - 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, recorded over the original contract life, is based upon the depreciable basis of leased vehicles ("depreciable basis"). Depreciable basis is the difference between a leased vehicle's original book value ("capitalized costcost") and theits contractual residual value established at lease origination. Average capitalized costs haveAdditional depreciation expense is recorded ratably over the remaining life of the lease when the residual value at lease maturity is estimated to be less than the contractual residual value. Factors affecting the estimated residual value at lease maturity include, but are not limited to, new vehicle incentive programs, new vehicle pricing, and used vehicle supply. The evaluation of these factors involves significant assumptions, complex analysis, and management judgment. Any difference between the undepreciated value at termination and the proceeds received at sale is recorded as depreciation expense at the time of asset disposal. Total depreciation expense decreased $26 million or 6% for the three months ended December 31, 2003 when compared to the same period in the prior year. The decrease was comprised of a $49 million decrease in additional depreciation expense, partially offset by a $23 million increase in straight- line depreciation. The decline in additional depreciation expense resulted primarily from lower losses incurred at lease termination, attributable to lower average losses per vehicle sold ("loss severity") during the quarter, coupled with a reduction in the number of leased vehicles returned at maturity and sold at auction. In prior periods, the Company recorded additional depreciation expense in response to the continued decline in used vehicle prices. These actions were taken to increase while averagebring contractual residual values have declined. The combination of higher capitalized costs and lowerin line with expected residual values at lease maturity. Additionally, the Company continued to adjust contractual residual values on new lease volume to take into account lower expected used vehicle prices. These adjustments have contributed to the increase in straight-line depreciation and the corresponding decrease in additional depreciation expense. Total depreciation expense increased $70 million or 6% for the nine months ended December 31, 2003 when compared to the same period in the prior year. The increase was comprised of a $79 million increase in straight-line depreciation, partially offset by a $9 million decrease in additional depreciation expense. Increases in straight-line depreciation expense resulted in anfrom the overall increase in the depreciable basis of leased vehicles. Additional depreciation expense beyond straight-line depreciation is primarily driven by projected vehicle return rates and projected used vehicle prices.basis. 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 ofdecrease in additional depreciation expense takenrecognized during the threenine months ended June 30,December 31, 2003 primarily resulted from adjustments to contractual residual values at lease inception in response to expected lower end-of-term market values. This decrease was attributableoffset by an increase in loss severity, primarily during the first quarter of fiscal 2004, experienced on units returned at maturity when compared to the combined impact of these factors.same prior year period. - 1719 - INTEREST EXPENSE - ---------------- Interest expense decreased $24 million or 11%is comprised of interest paid on notes and loans payable, including net settlements on interest rate swaps, and unrealized gains and losses included in the Company's derivative fair value adjustment. During the current year, the Company's derivative fair value adjustment was reclassified into interest expense in response to recent SEC public announcements regarding the income statement presentation of certain derivative activities. The following table summarizes the primary components of interest expense:
Three months ended Nine months ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------ ------ ------ ------ (Dollars in Millions) Interest on notes and loans payable, including net settlements on interest rate swaps............................ $ 195 $ 208 $ 558 $ 633 Derivative fair value adjustment............ (80) (16) (125) 322 ------ ------ ------ ------ Total interest expense...................... $ 115 $ 192 $ 433 $ 955 ====== ====== ====== ======
The decrease in total interest expense for the first quarterthree and nine months ended December 31, 2003 reflects the effect of fiscal 2004 overdeclines in short term interest rates and the comparable prior year period due to a general decreasepositive impact of changes in market interest rates on the valuation of the Company's derivatives, partially offset by increasedthe effects of higher average outstanding debtbalances of notes and loans payable used to fund growthfinance asset growth. Interest on notes and loans payable, including net settlements on interest rate swaps, benefited from a decline in assets. Averageshort term interest rates. The impact of the decrease in rates was partially offset by an increase in the average outstanding debt wasbalance of notes and loans payable from $29 billion and $25for the nine months ended December 31, 2002 to $34 billion at June 30, 2003 and 2002, respectively. DERIVATIVE FAIR VALUE ADJUSTMENT - --------------------------------for the nine months ended December 31, 2003. The following table sets forthsummarizes the net unrealized gains and losses for the items included in the Company's Derivativederivative fair value adjustmentsadjustment, which is included in accordance with SFAS 133, as amended:interest expense. The unrealized gains were primarily due to an increase in the value of the Company's non-designated derivatives. These derivatives are used to manage interest rate risk on a portfolio basis.
Three months ended June 30, June 30,Nine months ended December 31, December 31, ------------------ ------------------ 2003 2002 -------- --------2003 2002 ------ ------ ------ ------ (Dollars in Millions) (Unrealized (Gain)/Loss) Net loss on non-designated derivatives....... Non-designated derivatives............... $ (36)(86) $ (234) Net loss for hedges36 $ (132) $ 428 Previously designated derivatives that no longer qualify as fair value hedges....................... (8)hedges... - Net gain related to the ineffective5 18 3 Ineffective portion of the Company's fair value hedges.........hedges........... 6 20 ------- -------(57) (11) (109) ------ ------ ------ ------ Derivative fair value adjustments............adjustment......... $ (38)(80) $ (214) ======= =======(16) $ (125) $ 322 ====== ====== ====== ======
The derivative fair value adjustment decreased $176- 20 - INSURANCE PREMIUMS EARNED AND CONTRACT REVENUES - ----------------------------------------------- Insurance premiums earned and contract revenues recognized from insurance operations increased $5 million fromor 12% and $14 million or 11% for the comparable periodthree and nine months ended December 31, 2003, respectively, when compared to the same periods in fiscal 2003 primarilythe prior year due to the impact of lower interest rate volatility on the Company's non-designated derivative portfolio. In the current quarter, the absolute level of interest rates declined slightly from March 31, 2003, resultingincreased contract volume and an increase in an unfavorable fair value adjustment of $38 million of which $36 million was attributed to the Company's non-designated derivative portfolio. - 18 - total agreements in force. INVESTMENT AND OTHER INCOME - --------------------------- The following table summarizes the Company's investment and other income for the three months ended June 30, 2003 and 2002:income:
Three Months Ended June 30,Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------ ------ ------ ------ (Dollars in Millions) Investment and servicing fee income....income...... $ 2633 $ 2324 $ 87 $ 70 Gains from securitization of finance receivables................... - 39 42 72 Loss on assets sold...................impairment of retained interests.................... - - - (11) ------ ------ ------ ------ Investment income from securitizations 33 ----- -----63 129 131 Investment income-securitizations... $ 26 $ 56 Investment income-marketableincome from marketable securities and other income......... 10income........... 12 8 ----- -----30 21 ------ ------ ------ ------ Total Investmentinvestment and Other Incomeother income..... $ 3645 $ 64 ===== =====71 $ 159 $ 152 ====== ====== ====== ======
InvestmentFor the three months ended December 31, 2003, total investment and other income decreased $28 million or 44% forwhen compared with the quarter ended June 30, 2003 fromsame period in the comparable prior year period. The decrease was relatedprimarily due to a reductiondecrease in investment income from securitizations, partially offset by an increase in investment income from marketable securities and other income. For the nine months ended December 31, 2003, total investment and other income increased when compared with the same period in the Company's securitization activityprior year primarily due to an increase in investment income from marketable securities and other income. For the three months ended December 31, 2003, investment income from securitizations decreased when compared with the same period in the current quarter relativeprior year primarily due to the comparable prior year period. Asabsence of a securitization transaction during the Company's funding needs were met throughmost recent quarter. There was one securitization transaction during the debt capital markets, the Company did not initiate any securitization transactions in the firstthird quarter of fiscal 2004.2003. For the nine months ended December 31, 2003, investment income from securitizations remained relatively unchanged when compared with the same period in the prior year. However, the components within investment income from securitizations changed. Servicing fee income increased primarily due to an increase in the average outstanding principal balance of the securitized receivables on which such income is earned. Gains from securitization of finance receivables decreased primarily due to a decrease in the number of securitization transactions. During the nine months ended December 31, 2003, the Company entered into one securitization transaction totaling $1.9 billion compared to two securitization transactions during the nine months ended December 31, 2002 totaling $3.1 billion. The Company also incurred impairment losses on retained interests during the nine months ended December 31, 2002 as a result of projected credit losses on the related retail finance receivables exceeding the existing loss assumptions. No impairment loss on retained interests was recorded during the nine months ended December 31, 2003. - 1921 - Investment income from marketable securities and other income increased for the three and nine months ended December 31, 2003 when compared to the same periods in the prior year primarily as a result of higher net realized gains on investments in corporate and U.S. debt securities. During the three and nine months ended December 31, 2003, net realized gains on debt securities were $2 million and $6 million, respectively, compared to net realized losses of $1 million during both the three and nine months ended December 31, 2002. OPERATING AND ADMINISTRATIVE EXPENSES - ------------------------------------- Operating and administrative expenses increased $20 million, or 5% for the nine months ended December 31, 2003 when compared to the same period in fiscal 2003. The higher level of expense reflected increases in personnel expenses related to increased headcount and training activities, charges related to technology services provided by TMS, and losses on disposal of assets in connection with the Company's move to the new headquarters location in the TMS headquarters complex in Torrance, California. LOSSES RELATED TO ARGENTINE INVESTMENT - -------------------------------------- During the nine months ended December 31, 2002, TMCC recorded an $11 million charge against income to increase the reserve related to the Company's guarantee of Toyota Credit Argentina S.A.'s ("TCA") offshore outstanding debt to $37 million. During the remainder of fiscal 2003, TMCC satisfied its obligations under the guarantees and terminated the guarantees. Accordingly, no additional charges were recorded during the three or nine months ended December 31, 2003. - 22 - PROVISION FOR CREDIT LOSSES - --------------------------- The Company is exposed to credit risk on its owned 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 credit losses is influenced primarily by two factors: the total number of contracts that default ("frequency of occurrence") and loss per occurrence ("loss severity").occurrence. The Company maintains an allowance for credit losses to cover probable losses.losses resulting from the non-performance of its customers. The following tables provide information related to the Company's allowance for credit losses and credit loss experience:
Three-monthsThree Months Ended June 30, -----------------------Nine Months Ended December 31, December 31, ------------------ ------------------ 2003 2002 2003 2002 ------- ------- ------- ------- (Dollars in Millions) Allowance for credit losses at beginning of period............... $ 544 $ 417 $ 526 $ 283 Provision for credit losses............. 109 12276 151 263 400 Charge-offs............................. (94) (60)(88) (98) (264) (227) Recoveries.............................. 11 717 9 43 24 Other adjustments....................... - (1)1 (13) (18) (14) ------- ------- ------- ------- Allowance for credit losses at end of period..................... $ 552550 $ 351466 $ 550 $ 466 ======= ======= ======= =======
June 30, --------------------December 31, ------------------- 2003 2002 ------ ------ (Dollars in Millions) NetAnnualized net credit losses as a percentage of average earning assets .... 0.92% 0.67%. 0.80% 0.82% Aggregate balances 60 or more days past due .............................................................. $ 198196 $ 238260 Over-60 day delinquencies as a percentage of gross earning assets ....... 0.54%........ 0.50% 0.74% Allowance for credit losses as a percentage of gross earning assets ................... 1.50% 1.21%...................... 1.41% 1.33% - -------------------- Delinquency 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 the Company's portfolio.portfolio growth. For purposes of this table, "earning assets" include earning assets and repossessed collateral.collateral that has not yet been sold. Net credit loss ratios have been annualized using nine-month results.
- 2023 - Charge-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 declined $13 million or 11% in the current quarter over the comparable period in the prior year. The declinedecrease in the provision for credit losses recorded during the three and nine months ended December 31, 2003 when compared to the same periods in the prior year reflects continued improvement in the declineCompany's overall delinquency experience. During the third quarter of fiscal 2003 the Company was experiencing historically high delinquency and charge-off rates primarily as a result of the Company's field restructuring and the general weakness of the economy. The higher level of provision recorded in 60-day contractual delinquency from 0.74% at June 30, 2002the prior year reflected management's expectations for increased losses in the near term. The lower amount of provision expense recorded in the current year reflects recent favorable trends and management's expectations for probable losses on the currently owned portfolio. The increase in total charge-offs, net of recoveries, for the nine months ended December 31, 2003 when compared to 0.54% at June 30, 2003.the same period in the prior year was consistent with management's expectations. Delinquency and Net Credit Losses and DelinquencyLoss Experience - -------------------------------------------------------------------------------------- The Company's delinquency and net credit loss experience continued to be significantly influenced by the combined impact of the following factors: - - The Company's field restructuringContinued economic uncertainty - - Lower used vehicle prices - - Continued economic weakness - - Longer term financing - - Tiered/risk based pricing - - The Company's field restructuring The impact of the listed factors toon the Company's current year delinquency and net credit loss experience except as discussed below, is consistent with the impact to fiscal 2003 results as discussed in the "Provision for Credit Losses" section of the Company's 2003 Annual Report on Form 10-K.10-K, except as discussed below. The impact of the tiered/risk based pricing program ("tiered pricing"), which was fully implemented as of March 2001, is now consideredcontinues to bediminish as a lesser contributing factor to higher delinquency and credit losses. In prior periods, the increase in the level of credit losses experienced by the Company was more significantly influenced by the implementation of tiered pricing.loss rates. While the implementation of tiered pricing has resulted in increased overall credit losses, the period-to-periodperiod- to-period effects have lessenedcontinue to lessen over time. Although delinquency rates have improved from June 2002 to June 2003,Similarly, the overall level of delinquency remains high relative to the Company's historical experience. Additionally, the credit loss rate for the three months ended June 30, 2003, was at the upper end of historical experience. Management expects that the adverse impact of the Company's field restructuring, should lessen ascompleted in fiscal 2003, has been significantly reduced due to improvements in operating efficiencies at the customer service centers. While the Company's credit loss rates have declined from historical highs reached during fiscal 2003, credit loss rates remain at elevated levels. Management does not anticipate a result of measures takenreturn to improve processeshistorically high delinquency and technology; however, managementcredit loss rates in the near term but remains cautious regarding the near term economic outlook, the benefit of the actions taken and the potential impact onextent to which these factors affecting credit loss experience. Management believes that the level of reserve at June 30, 2003 is reasonable in light of current facts and circumstances.favorable trends are expected to continue. - 2124 - LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The objective of the Company's liquidity strategy is to ensure access to the capital markets, so as to meet obligations and other commitments on a timely and cost-effectivecost- effective basis, toand support the growth in earning assets. Significant reliance is placed on the Company's ability to obtain debt and securitization funding in the capital markets. Debt issuances have generally been in the form of commercial paper and unsecured term debt. The Company does not rely on any one source of funding and may choose to reallocate its funding activities depending upon market conditions, relative costs, and other factors. Management does not anticipate changes in the Company's ability to access the unsecured debt and securitization markets in the foreseeable future. The Company believes that debt issuances and securitization funding, combined with cash provided by operating investing, and financinginvesting activities, will provide sufficient liquidity to meet future funding requirements. Commercial Paper - ---------------- Commercial paper issuancesShort-term funding needs are used to meet short-term funding needs.met through the issuance of commercial paper. Commercial paper outstanding under the Company's commercial paper programs ranged from approximately $4.7$6.0 billion to $7.0$8.7 billion during the quarter ended June 30,December 31, 2003, with an average outstanding balance of $5.9$7.3 billion. 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. Medium term notes ("MTNs") and bonds have provided the Company with significant sources of funding. During the quarter ended June 30,December 31, 2003, the Company issued approximately $1.0$2.4 billion of MTNs and bonds, all of which had original maturities ofranging from greater than one year or more.to approximately ten years. At June 30,December 31, 2003, the Company had total MTNs and bonds outstanding of $26.0$27.3 billion, of which $11.4$11.5 billion was denominated in foreign currencies. The remaining maturities of all MTNs and bonds outstanding at June 30,December 31, 2003 ranged from less than one year to approximately ten years. The Company anticipates continued use of MTNs and bonds in both the U.S. and international capital markets. To provide for the issuance of debt securities in the U.S. capital market, the Company maintains a shelf registration with the Securities and Exchange Commission ("SEC")SEC under which approximately $5.4$4 billion was available for issuance at JulyJanuary 31, 2003.2004. Under the Company's euroEuro MTN program, which provides for the issuance of debt securities in the international capital market,markets, the maximum aggregate principal amount authorized to be outstanding at any time is $16.0$20 billion, of which approximately $1.9$6 billion was available for issuance at JulyJanuary 31, 2003.2004. The U.S. dollar and euroEuro MTN programs may be expanded from time to time to allow for the continued use of these sources of funding. In addition, the Company may issue bonds in the U.S. and international capital markets that are not issued under its MTN programs. Securitization Funding - ---------------------- TMCC's securitization program allows the Company to access an additional source of funding, thus further diversifying its investor base to enhanceand enhancing its liquidity position. With the exception of the securitization transaction executed in September 2001, TMCC's securitization transactions are completed using qualifying special purpose entities with the exception of one transaction in fiscal 2002.treated as sales for accounting purposes. The outstanding balance of securitized retail finance receivables whichserviced by TMCC continues to service totaled $5.7 billion at June 30,December 31, 2003. - 2225 - ForDuring the past three fiscal years, securitization transactions averaged approximately 29%nine months ended December 31, 2003, the Company sold retail receivables totaling $1.9 billion in connection with securities issued under a shelf registration statement maintained with the SEC. Of the $1.9 billion sold, the Company invested $0.6 billion in purchased and retained senior class and other securities, resulting in $1.3 billion of the Company's totalnet funding. As of JulyJanuary 31, 2003, $7.42004, $6.2 billion of securities waswere available for issuance under the current SEC shelf registration statement. A reduction or termination of TMCC's securitization 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 and Letters of Credit - ---------------------------------------------------------------------- For additional liquidity purposes, the Company maintains syndicated bank credit facilities with banks whose commitments aggregated $4.2$5.0 billion at June 30,December 31, 2003. No amounts were outstanding under the syndicated bank credit facilities as of June 30,December 31, 2003. TheDuring the second quarter of fiscal 2004, TCPR Corp. established a $400 million, 364-day syndicated bank credit facility, which is subjectrestricted to renewalits own use. In addition, the TMCC 364-day syndicated bank credit facility, which is restricted to its own use, was increased to $3.2 billion and renewed 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 outstanding.for an additional 364-day period.
Committed Uncommitted Unused Facilities -------------------- -------------------- -------------------- December 31, March 31, December 31, March 31, December 31, March 31, 2003 2003 2003 2003 2003 2003 -------- -------- -------- -------- -------- -------- (Dollars in Millions) 364-day syndicated bank credit facilities........ $ 3,600 $ 2,800 $ - $ - $ 3,600 $ 2,800 5-year syndicated bank credit facility - TMCC... 1,400 1,400 - - 1,400 1,400 Letters of credit facilities - - 60 60 59 59 -------- -------- -------- -------- -------- -------- Total facilities $ 5,000 $ 4,200 $ 60 $ 60 $ 5,059 $ 4,259 ======== ======== ======== ======== ======== ========
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 andJanuary 2004, Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P") revised the outlook of Toyota Motor Corporation ("TMC") and its supported subsidiaries, including TMCC, from negative to stable. As of January 31, 2004, the ratings ofand outlook established by Moody's Investors Service, Inc. ("Moody's") and S&P for TMCC were as follows:
Rating Agency Senior Debt Commercial Paper Outlook --------------- ------------- ------------------ --------- S&P AAA A-1+ Stable Moody's Aaa P-1 Stable
In March 2003, S&P affirmed the ratings of both senior debt and commercial paper, while maintaining a negative outlook.- 26 - 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 Company's new headquarters location in the TMS headquarters complex in Torrance, California. At June 30,December 31, 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$15 million; 2008 - $10 million; 2009 - $8$9 million; and thereafter - $56 million. - 2327 - CAUTIONARY 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", "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 vehicle and component pricing due to the appreciation of the Japanese yen against the U.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 increasechanges in vehicle returns and dispositiontermination 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 U.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 increasedchanges in delinquencies and credit losses; the changes in the fiscal policy of any government agency which increases sovereign risk,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;funding; the effect of any military action by or against the U.S., as well as any future terrorist attacks, including any resulting effects on general economic conditions, consumer confidence and general market liquidity; with respect to the effects of litigation matters, the discovery of facts not presently known to the Company or determination by judges, juries or other finders of fact which do not accord with the Company's evaluation of the possible liability from existing litigation; 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. 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. - 2428 - NEW ACCOUNTING STANDARDS - ------------------------ In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132"). The revised Statement retains the disclosure requirements contained in SFAS 132, but requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS 132 is effective for financial statements for fiscal years ending after December 15, 2003. The implementation of SFAS 132 is not expected to have a material impact on the Company's consolidated financial statements. - 29 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Value at Risk - ------------- The Company's primary market risk exposure is interest rate risk, in particular U.S. dollar London Interbank Offered Rate.risk. The Company uses the value at risk methodology ("VAR") methodology to measure this risk. The VAR provides an overview of the Company's exposure to changes in market factors. VAR represents the potential loss in fair value for the Company's portfolio of interest rate sensitive instruments from adverse changes in market factorsinterest rates for a 30-day holding period within 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 the impact from other market changes, such as foreign currency exchange rates, which do not materially affect the value of the Company's portfolio. The VAR methodology is 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. The VAR and the average VAR of the Company's portfolio as of, and for the three months ended, June 30, 2003 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 ThreeNine Months Ended June 30,December 31, 2003 June 30,December 31, 2003 ------------------- ------------------------------------- ------------------ Mean portfolio value..................... $5.7$6.5 billion $5.8$6.1 billion VAR...................................... $32$56 million $38$48 million Percentage of the mean portfolio value... 0.6% 0.7%0.86% 0.79% Confidence level......................... 95% 95%
The Company's calculated VAR 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 the Company's portfolio of financial instruments during the year. - 2530 - 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 securitiesThese investments consist primarily of passively managed mutual funds that are designed to track the performance of major equity investments, consisting primarily of mutual fund investments.market indices. 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 equity investments are considered trading securities within the meaning of SFAS 115.sale. A summary of the sensitivity of the fair market value ofunrealized gains and losses on equity investments included in the Company's equity investments to an assumedother comprehensive income assuming a 10% and 20% adverse change in market prices is presented below.
As of June 30,December 31, ------------------ 2003 -----------2002 ------ ------ (Dollars in Millions) Cost..................................... Cost....................................... $ 167131 $ 130 Fair Market Value........................ 183 Net unrealized gain...................... 16Value.......................... $ 171 $ 110 Estimated 10% adverse change, in prices... (18)net of tax... $ 14 $ (19) Estimated 20% adverse change, in prices... (37)net of tax... $ 4 $ (26)
These hypothetical scenarios represent an estimate of reasonably possible net losses that may be recognized onas a result of changes in the fair market value of the Company's equity investments assuming hypothetical adverse movements in future market rates and isvalues. These scenarios are 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.prices. 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,December 31, 2003, reduced by the effects of master netting agreements. At June 30,December 31, 2003, aggregate counterparty credit risk as represented by the fair value of the Company's derivative instruments was approximately $2.0$2.5 billion on an aggregate notional amount of $44.7$47.0 billion. - 2631 - Review by Independent Accountants With respect to the unaudited consolidated financial information of Toyota Motor Credit Corporation for the three-month and nine-month periods ended June 30,December 31, 2003 and 2002, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated August 14, 2003February 13, 2004 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. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended ("Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the Commission's rules and forms. As of the end of the period of this quarterly report, the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") evaluated the effectiveness of such disclosure controls and procedures in place pursuant to Rule 13a-1413a-15(b) of the Exchange Act. Based on the evaluation, the CEO and CFO concluded that such disclosure controls and procedures are effective. There has been no change in the Company's internal control over financial reporting identified in connection with the evaluation referred to above during the Company's most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. - 2732 - 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 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 the Company's business operations, policies, and practices. Certain of these actions are similar to suits whichthat have been filed against other financial institutions and captive finance companies. Management and internal and external counsel perform periodic reviews of pending claims and actions to determine the probability of adverse verdicts and resulting amounts of liability. The amounts of liability on pending claims and actions as of June 30,December 31, 2003 were not determinable; however, in the opinion of management, the ultimate liability resulting therefrom should not have a material adverse effect on the 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 AND USE OF PROCEEDS 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 30,35, are filed as part of this report. (b) Reports on Form 8-K The following reports on Form 8-K were filed by the registrant during the quarter ended June 30,December 31, 2003: Date of Report Items Reported ----------------- --------------------- May 9,December 4, 2003 Item 9. Regulation FD7. Financial Statements, Pro Forma Financial Information and Exhibits. November 12, 2003 Item 12. Disclosure (the information was furnished under "Item 12.of Results of Operations andAnd Financial Condition")Condition. - 2833 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TOYOTA MOTOR CREDIT CORPORATION ------------------------------- (Registrant) Date: August 14, 2003February 13, 2004 By /S/ GEORGE E. BORST ------------------------------- George E. Borst President and Chief Executive Officer (Principal Executive Officer) Date: August 14, 2003February 13, 2004 By /S/ JOHN F. STILLO ------------------------------- John F. Stillo Vice President and Chief Financial Officer (Principal Financial Officer) - 2934 - EXHIBIT INDEX Exhibit Method Number Description of Filing - ------- ----------- --------- 12.1 Calculation of Ratio of Earnings to Fixed Charges Filed Herewith 15.1 Report of Independent Accountants Filed Herewith 15.2 Letter regarding unaudited interim financial Filed information Herewith 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 - 3035 -