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, 1999
-------------March 31, 2000
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9961
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TOYOTA MOTOR CREDIT CORPORATION
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3775816
- ---------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 S. Western Avenue
Torrance, California 90509
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 787-1310
-----------------------
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
--- ---
As of July 31, 1999,April 30, 2000, 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 Motor Sales, U.S.A., Inc.
-1-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
June 30,March 31, September 30, June 30,March 31,
2000 1999 1998 19981999
------------ ------------- ------------
(Unaudited) (Unaudited)
ASSETS
------
Cash and cash equivalents................. $ 184159 $ 156180 $ 152161
Investments in marketable securities...... 439 435 379424 450 441
Finance receivables, net.................. 13,508 11,521 11,39016,957 13,856 12,198
Investments in operating leases, net...... 8,795 9,765 9,7758,393 8,605 9,091
Receivable from Parent and Affiliate...... 207 512 8360 717 481
Other receivables......................... 218 304 144333 366 222
Deferred charges.......................... 133 167 179126 131 135
Other assets.............................. 223 266 260239 242 222
Income taxes receivable................... - 99 831 35
------- ------- -------
Total Assets..................... $23,707 $23,225 $22,370$26,691 $24,578 $22,986
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................... $17,565 $17,597 $16,932$20,291 $18,565 $17,174
Accrued interest.......................... 122 176 145161 143
Accounts payable and accrued expenses..... 1,432 995 1,2911,451 1,096 1,156
Deposits.................................. 213 240 240183 201 225
Income taxes payable...................... 7781 - -
Deferred income........................... 606 607 555657 636 586
Deferred income taxes..................... 1,350 1,379 1,0201,430 1,554 1,401
------- ------- -------
Total Liabilities................... 21,365 20,994 20,18324,269 22,213 20,685
------- ------- -------
Commitments and Contingencies
Shareholder's Equity:
Capital stock, $l0,000 par value
(100,000 shares authorized; 91,500
issued and outstanding)............. 915 915 915
Retained earnings...................... 1,405 1,303 1,2581,492 1,435 1,366
Accumulated other comprehensive
income.............................. 22 13 1415 15 20
------- ------- -------
Total Shareholder's Equity.......... 2,342 2,231 2,1872,422 2,365 2,301
------- ------- -------
Total Liabilities and
Shareholder's Equity............. $23,707 $23,225 $22,370$26,691 $24,578 $22,986
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
-2-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
Three Months Ended NineSix Months Ended
June 30, June 30,March 31, March 31,
------------------ ---------------------------------
2000 1999 19982000 1999 1998
------ ------ ------ ------
(Unaudited)
Financing Revenues:
Leasing................................. $ 591599 $ 647 $1,810 $1,941599 $1,182 $1,219
Retail financing........................ 169 138 492 394194 162 377 323
Wholesale and other dealer financing.... 28 27 77 7337 25 68 49
------ ------ ------ ------
Total financing revenues................... 788 812 2,379 2,408830 786 1,627 1,591
Depreciation on leases.................. 410 423 1,268 1,259367 427 750 858
Interest expense........................ 230 249 690 722317 220 594 460
------ ------ ------ ------
Net financing revenues..................... 148 140 421 427146 139 283 273
Insurance premiums earned and contract
revenues................................ 31 28 89 8034 30 68 58
Investment and other income................ 18 13 62 394 20 26 44
------ ----- ------ ------
Net financing revenues and other revenues.. 197 181 572 546184 189 377 375
------ ------ ------ ------
Expenses:
Operating and administrative............ 94 81 272 228102 95 193 178
Provision for credit losses............. 20 31 79 10830 60 59
Insurance losses and loss adjustment
expenses............................. 20 15 14 45 3938 30
------ ------ ------ ------
Total expenses............................. 129 126 396 375153 140 291 267
------ ------ ------ ------
Income before income taxes................. 68 55 176 17131 49 86 108
Provision for income taxes................. 6 21 29 23 74 7245
------ ------ ------ ------
Net Income................................. $ 3925 $ 3228 $ 10257 $ 9963
====== ====== ====== ======
See Accompanying Notes to Consolidated Financial Statements.
-3-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in Millions)
Accumulated
Other
Capital Retained Comprehensive
Stock Earnings Income Total
------- -------- ------------- -------
Balance at September 30, 1997....1998.... $ 915 $ 1,1591,303 $ 7 $2,08113 $2,231
------ ------- ---------- ------
Net income for the ninesix months
ended June 30, 1998...........March 31, 1999.......... - 9963 - 9963
Change in net unrealized gains
on available-for-sale
marketable securities......... - - 7 7
------ -------- ---------- ------
Total Comprehensive IncomeIncome....... - 9963 7 10670
------ -------- ---------- ------
Balance at June 30, 1998.........March 31, 1999........ $ 915 $ 1,2581,366 $ 14 $2,18720 $2,301
====== ======= ========== ======
Balance at September 30, 1998....1999.... $ 915 $ 1,3031,435 $ 13 $2,23115 $2,365
------ ------- ---------- ------
Net income for the ninesix months
ended June 30, 1999...........March 31, 2000.......... - 10257 - 10257
Change in net unrealized gains
on available-for-sale
marketable securities......... - - 9 9- -
------ -------- ---------- ------
Total Comprehensive IncomeIncome....... - 102 9 11157 - 57
------ -------- ---------- ------
Balance at June 30, 1999.........March 31, 2000........ $ 915 $ 1,4051,492 $ 22 $2,34215 $2,422
====== ======= ========== ======
See Accompanying Notes to Consolidated Financial Statements.
-4-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
NineSix Months Ended June 30,March 31,
--------------------------
2000 1999 1998
------ ------
(Unaudited)
Cash flows from operating activities:
Net income............................................ $ 10257 $ 9963
------ ------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 1,301 1,356800 878
Provision for credit losses..................... 79 10860 59
Gain from sale of finance receivables, net...... (9) (2)(1) (6)
Realized loss on asset impairment............... 14 -
Decrease (increase) in other assets............. 314 (118)
Decreaseassets........................ 142 297
Increase (decrease) in accrued interest.................... (54) (68)interest......... 15 (33)
(Decrease) increase in deferred income taxes..... (36) 66taxes.... (124) 17
Increase (decrease) in other liabilities................... 121 22liabilities........ 123 (49)
------ ------
Total adjustments..................................... 1,716 1,3641,029 1,163
------ ------
Net cash provided by operating activities................ 1,818 1,4631,086 1,226
------ ------
Cash flows from investing activities:
Addition to investments in marketable securities...... (551) (523)(376) (335)
Disposition of investments in marketable securities... 561 486382 339
Purchase of finance receivables....................... (14,949) (13,722)(12,334) (9,189)
Liquidation of finance receivables.................... 11,836 10,0089,132 7,513
Proceeds from sale of finance receivables............. 1,022 66327 931
Addition to investments in operating leases........... (2,613) (3,228)(1,637) (1,684)
Disposition of investments in operating leases........ 2,351 2,4001,119 1,515
Change in receivable from Parent and Affiliate........ 71 71590 (206)
------ ------
Net cash used in investing activities.................... (2,272) (3,845)(3,097) (1,116)
------ ------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable..... 4,546 4,7763,599 3,923
Payments on notes and loans payable................... (3,689) (3,171)(3,189) (3,150)
Net increase (decrease) increase in commercial paper with
original maturities less than 90 days.............. (375) 7521,580 (878)
------ ------
Net cash provided by (used in) financing activities................ 482 2,357activities...... 1,990 (105)
------ ------
Net (decrease) increase (decrease) in cash and cash equivalents..... 28 (25)(21) 5
Cash and cash equivalents at the beginning of the period. 180 156 177
------ ------
Cash and cash equivalents at the end of the period....... $ 184159 $ 152161
====== ======
Supplemental disclosures:
Interest paid......................................... $ 762568 $ 765516
Income taxes paid..................................... $ 1716 $ 510
See Accompanying Notes to Consolidated Financial Statements.
-5-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data
- -------------------------------
Information pertaining to the three and ninesix months ended June 30,March 31, 2000 and
1999 and
1998 is unaudited. In the opinion of management, the unaudited financial
information reflects all adjustments, consisting only 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 ninesix months
ended June 30, 1999March 31, 2000 are not necessarily indicative of those expected for any
other interim period or for a full year. Certain June 1998March 1999 accounts have
been reclassified to conform with the June 1999March 2000 and September 19981999
presentation.
Toyota Credit Argentina S.A. ("TCA") was incorporated in September 1998 and
commenced business operations in December 1998. TCA provides retail and
wholesale financing to authorized Toyota vehicle dealers and their customers
in Argentina. TCA is owned 85% by Toyota Motor Corporation ("TMC") and 15% by
Toyota Motor Credit Corporation ("TMCC" or the "Company"). As of June 30,
1999 TMCC's investment in TCA totaled $2 million and is accounted for using
the cost method.
Banco Toyota do Brasil ("BTB") was incorporated in January 1999 and commenced
business operations in June 1999. BTB provides retail, wholesale and upon
commencement of operations of a related subsidiary, lease financing to
authorized Toyota vehicle dealers and their customers in Brazil. BTB is owned
85% by TMC and 15% by TMCC. As of June 30, 1999 TMCC's investment in BTB
totaled $1 million and is accounted for using the cost method.
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 TMCC's 19981999 Annual Report to the
Securities and Exchange Commission ("SEC")on Form 10-K.
-6-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Finance Receivables
- ----------------------------
Finance receivables, net consisted of the following:
June 30,March 31, September 30, June 30,March 31,
2000 1999 1998 1998
--------1999
--------- ------------- -----------------
(Dollars in Millions)
Retail...................................Retail..................................... $10,773 $ 9,5799,524 $ 8,395 $ 7,5828,753
Finance leases........................... 3,361 2,856 3,380leases............................. 5,456 4,065 2,813
Wholesale and other dealer loans......... 1,511 1,099 1,359loans........... 2,021 1,292 1,468
------- ------- -------
14,451 12,350 12,32118,250 14,881 13,034
Unearned income.......................... (795) (709) (798)income............................ (1,140) (888) (703)
Allowance for credit losses.............. (148) (120)losses................ (153) (137) (133)
------- ------- -------
Finance receivables, net.............. $13,508 $11,521 $11,390net................ $16,957 $13,856 $12,198
======= ======= =======
Finance leases included estimated unguaranteed residual values of
$715$1,075 million, $679$823 million and $802$651 million at JuneMarch 31, 2000, September 30,
1999 September 30,
1998 and June 30, 1998,March 31, 1999, respectively.
The aggregate balances related to finance receivables 60 or more days past due
totaled $19$23 million, $16$20 million and $16 million at JuneMarch 31, 2000,
September 30, 1999 September 30, 1998 and June 30, 1998,March 31, 1999, respectively.
Note 3 - Investments in Operating Leases
- ----------------------------------------
Investments in operating leases, net consisted of the following:
June 30,March 31, September 30, June 30,March 31,
2000 1999 1998 1998
--------1999
--------- ------------- -----------------
(Dollars in Millions)
Vehicles................................. $10,606 $11,809 $11,919Vehicles.................................. $10,036 $10,246 $11,047
Equipment and other...................... 524 442 410other....................... 592 548 499
------- ------- -------
11,130 12,251 12,32910,628 10,794 11,546
Accumulated depreciation................. (2,255) (2,386) (2,454)depreciation.................. (2,174) (2,124) (2,363)
Allowance for credit losses ............. (80) (100) (100).............. (61) (65) (92)
------- ------- -------
Investments in operating leases, net.....net...... $ 8,7958,393 $ 9,7658,605 $ 9,7759,091
======= ======= =======
-7-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Notes and Loans Payable
- --------------------------------
Notes and loans payable consisted of the following:
June 30,March 31, September 30, June 30,March 31,
2000 1999 1998 1998
--------1999
--------- ------------- -----------------
(Dollars in Millions)
Commercial paper, net.................... $ 1,7653,492 $ 2,5461,427 $ 2,3821,484
Extendible commercial notes, net......... 147 146 -
------- ------- -------
Other senior debt, due in the years
ending September 30,:
1998..................................1999.................................. - - 664
1999.................................. 885 1,943 1,736986
2000.................................. 2,948 2,521 2,4241,671 4,077 3,003
2001.................................. 3,188 2,678 2,2453,971 3,213 3,204
2002.................................. 2,471 2,689 2,5782,601 2,718 2,517
2003.................................. 1,739 1,884 1,8552,527 2,095 1,772
2004.................................. 2,916 2,466 1,812
Thereafter............................ 4,480 3,223 2,9252,890 2,336 2,305
------- ------- -------
15,711 14,938 14,42716,576 16,905 15,599
Unamortized premium...................... 89 113 12376 87 91
------- ------- -------
Total other senior debt............... 15,800 15,051 14,55016,652 16,992 15,690
------- ------- -------
Notes and loans payable............ $17,565 $17,597 $16,932$20,291 $18,565 $17,174
======= ======= =======
Short-term borrowings include commercial paper, extendible commercial notes
and certain medium-term notes ("MTNs"). The weighted average remaining term
and weighted average interest rate of commercial paper was 1437 days and 4.99%6.05%,
respectively, at June 30, 1999.March 31, 2000. The weighted average remaining term and
weighted average interest rate on extendible commercial notes at
March 31, 2000 was 23 days and 6.12%, respectively. Short-term MTNs with
original terms of one year or less, included in other senior debt, were $544 million$1.5
billion at June 30, 1999.March 31, 2000. The weighted average interest rate on these short-termshort-
term MTNs was 5.01%6.17% at June 30, 1999,March 31, 2000, including the effect of interest rate
swap agreements.
The weighted average interest rate on other senior debt was 5.13%6.07% at June 30,
1999,March 31,
2000, including the effect of derivative financial instruments.interest rate swap agreements. This rate has
been calculated using rates in effect at June 30, 1999, substantially allMarch 31, 2000, some of which are
floating rates that reset periodically. Approximately 40%58.8% of other senior
debt at June 30, 1999March 31, 2000 had interest rates including the effect of interest
rate swap agreements that were fixed. The weighted average of these fixed
interest rates was 6.48% at March 31, 2000.
Approximately 39.4% of total debt at March 31, 2000 had floating interest
rates that were covered by option-based products. The weighted average strike
rate on these option-based products was 5.81%6.06% at June 30, 1999.March 31, 2000. TMCC manages
interest rate risk viathrough continuous adjustment of the mix of fixed and
floating rate debt through use ofusing interest rate swap agreements and option-based
products.
-8-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Notes and Loans Payable (continued)
- --------------------------------------------
Included in notes and loans payable at June 30, 1999March 31, 2000 were unsecured notes
denominated in various foreign currencies; concurrent with the issuance of
these notes, TMCC entered into cross currency interest rate swap agreements to
convert these obligations at maturity into U.S. dollar obligations which in
aggregate total a principal amount of $7.7$7.5 billion. TMCC's foreign currency
debt was translated into U.S. dollars in the financial statements at the
various foreign currency spot exchange rates in effect at June 30, 1999.March 31, 2000. The
receivables or payables arising as a result of the differences between the
June 30, 1999March 31, 2000 foreign currency spot exchange rates and the contract rates
applicable to the cross currency interest rate swap agreements are classified
in other receivables or accounts payable and accrued expenses, respectively,
and in aggregate reflect a net payable position of $1.0 billion$903 million at June 30,
1999.
-8-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMarch 31,
2000.
Note 5 - Sale of Retail Receivables and Interests in Lease Finance Receivables
- ------------------------------------------------------------------------------
TMCC maintains programs to sell retail receivables and interests in lease
finance receivables through Toyota Motor Credit Receivables Corporation
("TMCRC") and Toyota Leasing, Inc. ("TLI"), limited purpose subsidiaries.
During the nine months ended June 30, 1999, TMCC sold interests in lease
finance receivables totaling $782 million, as described below.
TMCC holds an undivided trust interest ("UTI") in leases held in a titling
trust established by TMCC. In December 1998, TMCC identified certain leases
included in the UTI to be allocated to a separate portfolio represented by a
Special Unit of Beneficial Interest ("SUBI") totaling $782 million. TMCC then
sold the SUBI to TLI which in turn contributed substantially all of the SUBI to
a trust. TMCC continues to act as servicer for all assets represented by the
UTI and the SUBI and is paid a servicing fee. TLI retains subordinated
interests in the excess cash flows of these transactions, certain cash deposits
and other related amounts which are held as restricted assets subject to
limited recourse provisions. None of the lease assets represented by the SUBI
or the restricted assets are available to satisfy any obligations of TMCC.
The pretax gain resulting from the sale of interests in lease finance
receivables totaled approximately $5 million for the nine months ended June 30,
1999, after providing an allowance for estimated credit and residual value
losses. Principal collections related to the lease receivables sold in the
December 1998 and previous transactions were used to allocate additional
vehicle lease contracts to the SUBI resulting in gains of approximately
$5 million for the three months ended June 30, 1999 and $6 million and
$2 million for the nine months ended June 30, 1999 and 1998, respectively.
During the quarter ended June 30, 1999, TMCC exercised its option to purchase
the outstanding receivables sold in the July 1996 retail transaction resulting
in a $2 million loss. In addition, in July 1999, TMCC sold retail receivables
totaling $962 million.
Note 6 - Related Party Transactions
- -----------------------------------
TMCC has an arrangement to borrow from and invest funds with Toyota Motor
Sales, U.S.A., Inc. ("TMS" or "Parent") at short term market rates. For the
ninesix months ended June 30,March 31, 2000 and 1999, and 1998, the highest amounts of funds,
included in Receivable from Parent and Affiliate, invested with TMS were
$759 million and $2.0 billion, and $273 million, respectively. Interest earned on these
investments totaled $4 million and $1$9 million for the three months ended
June 30,March 31, 2000 and 1999, and 1998, respectively, and $29$10 million and $3$25 million for the
ninesix months ended June 30,March 31, 2000 and 1999, and 1998, respectively.
In April 1999, Toyota Credit Canada Inc. ("TCCI"), an affiliate of the Company,
re-paid $201 million in intercompany loans. Interest charged on these loans
reflected market rates and totaled $8 million for the nine months ended
June 30, 1999.
Note 76 - Commitments and Contingent Liabilities
- -----------------------------------------------
As of June 30, 1999,March 31, 2000, TMCC has guaranteed payments of principal, interest and
premiums, if any, on $128$165.5 million principal amount of bonds issued in
connection with the manufacturing facilities of certain of its affiliates.
Effective July 1999, TMCC authorized the guarantee of up to $50 million of the
debt of TCA,Toyota Credit Argentina S.A. ("TCA"), of which $30$40 million has been
guaranteed as of JulyMarch 31, 1999.2000.
-9-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 87 - Segment Information
- ----------------------------
Financial results for the Company's operating segments are summarized below:
Three Months Ended NineSix Months Ended
June 30, June 30,March 31, March 31,
------------------ -------------------------------------
- ---
2000 1999 19982000 1999
1998
------------- ------- -------- --------
(Dollars in Millions)
Assets:
Financing operations.............. $ 23,29626,232 $ 22,01222,590 $ 23,29626,232 $ 22,01222,590
Insurance operations.............. 680 558 680 558772 649 772 649
Eliminations/reclassifications.... (269) (200) (269) (200)(313) (253) (313) (253)
-------- -------- -------- --------
Total assets.................... $ 23,70726,691 $ 22,37022,986 $ 23,70726,691 $ 22,37022,986
======== ======== ======== ========
Gross revenues:
Financing operations.............. $ 803830 $ 821800 $ 2,4261,644 $ 2,4331,623
Insurance operations.............. 34 32 104 9438 36 77 70
-------- -------- -------- --------
Total gross revenues............ $ 837868 $ 853836 $ 2,5301,721 $ 2,5271,693
======== ======== ======== ========
Net income:
Financing operations.............. $ 3614 $ 2723 $ 8741 $ 8451
Insurance operations.............. 311 5 15 1516 12
-------- -------- -------- --------
Total net income................ $ 3925 $ 3228 $ 10257 $ 9963
======== ======== ======== ========
Note 8 - Subsequent Events
- --------------------------
Effective April 1, 2000, TMCC has guaranteed payments of principal, interest
and premiums, if any, on $20.5 million principal amount of flexible rate
demand solid waste disposal revenue bonds issued by Putnam County, West
Virginia maturing in April 2030, issued in connection with the West Virginia
manufacturing facility of an affiliate.
On April 18, 2000, Toyota Motor Corporation announced its plans to establish
Toyota Financial Services Corporation ("TFS"), a Japanese corporation that
will eventually oversee Toyota's worldwide financial service operations,
including those in the United States. TFS is scheduled to assume ownership of
TMCC, currently a subsidiary of TMS, on October 1, 2000.
In March 2000, certain nationally recognized statistical rating organizations
placed several classes of TMCC's lease securitizations under review for
possible downgrade as a result of higher than expected residual value losses.
In April 2000, TMCC announced that it will make a cash capital contribution
totaling $102 million to Toyota Leasing, Inc., a wholly-owned subsidiary of
TMCC, for deposit into the reserve funds of the lease securitizations under
review. TMCC also announced that a portion of the monthly excess cash flows in
the transactions will be retained in these reserve funds to supplement the
capital contribution. As a result of TMCC's stated intentions, the rating
organizations affirmed the original credit ratings for the lease asset-backed
securities.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Income
- ----------
The following table summarizes TMCC's net income by operating segment for the
three and ninesix months ended June 30, 1999March 31, 2000 and June 30, 1998:March 31, 1999:
Three Months Ended NineSix Months Ended
June 30, June 30,March 31, March 31,
------------------ ---------------------------------
2000 1999 19982000 1999 1998
---- ---- ---- ----
(Dollars in Millions)
Net income:
Financing operations................ $36 $27 $ 87 $ 84$14 $23 $41 $51
Insurance operations................ 311 5 15 1516 12
--- --- ------- ---
Total net income................. $39 $32 $102 $99$25 $28 $57 $63
=== === ======= ===
Net income from financing operations increased 33%decreased 39% and 20% for the quarter and
six months ended June 30, 1999,March 31, 2000, respectively, as compared with the same
period in fiscal 1998 primarily due
to lower interest expense, lower depreciation on leases, lower provision for
credit losses and increased investment and other income, offset by lower
financing revenues and higher operating and administrative expenses.
Net income from financing operations increased 4% for the nine months ended
June 30, 1999, as compared with the same periodperiods in fiscal 1999 primarily due to lower interest margin as a result of
higher interest expense, lower provision for credit losses and increased investment and other income substantially offset byand higher
operating and administrative expenses, partially offset by lower financing revenues and increased depreciation
on leases.leases and higher financing revenues.
Net income from insurance operations decreased 40%increased $6 million and $4 million for
the quarter and six months ended June 30, 1999,March 31, 2000,respectively, as compared with
the same periodperiods in fiscal 1998,1999, primarily due to decreased gains on saleslower provision for income
taxes reflecting a modification of investments.tax allocation treatment for intercompany
insurance income which resulted in elimination of previously provided income
tax and reduction of current income tax by $7 million.
-11-
Earning Assets
- --------------
The composition of TMCC's net earning assets (excluding(which excludes retail
receivables and interests in lease finance receivables sold through
securitization transactions), as of the balance sheet dates reported herein
and TMCC's vehicle lease and retail contract volume and finance penetration
for the three and ninesix months ended June 30,March 31, 2000 and March 31, 1999 and June 30, 1998 are
summarized below:
June 30,March 31, September 30, June 30,March 31,
2000 1999 1998 19981999
--------- ------------- ---------
(Dollars in Millions)
Vehicle lease
Investment in operating leases, net..... $ 8,5138,048 $ 9,5598,290 $ 9,5918,841
Finance leases, net..................... 2,731 2,313 2,7394,454 3,315 2,271
------ ------- -------
Total vehicle leases..................... 11,244 11,872 12,33012,502 11,605 11,112
Vehicle retail finance receivables, net.. 8,909 7,834 7,02410,115 8,916 8,143
Vehicle wholesale and other receivables.. 2,378 1,800 2,0442,947 2,142 2,259
Allowance for credit losses.............. (228) (220) (233)
------(214) (202) (225)
------- ------- -------
Total net earning assets................. $22,303 $21,286 $21,165$25,350 $22,461 $21,289
======= ======= =======
Three Months Ended NineSix Months Ended
June 30, June 30,March 31, March 31,
------------------ -------------------------------------
2000 1999 19982000 1999 1998
------- ------- ------- -------
Total contract volume:
Vehicle lease......................... 65,000 87,000 176,000 222,000lease.......................... 69,000 56,000 126,000 111,000
Vehicle retail........................ 92,000 78,000 220,000 188,000retail......................... 104,000 72,000 189,000 128,000
------- ------- ------- -------
Total.................................... 157,000 165,000 396,000 410,000Total..................................... 173,000 128,000 315,000 239,000
======= ======= ======= =======
TMS sponsored contract volume:
Vehicle lease......................... 20,000 52,000 37,000 77,000lease.......................... 17,000 12,000 31,000 17,000
Vehicle retail........................ 12,000 28,000 26,000 41,000retail......................... 13,000 11,000 18,000 14,000
------- ------- ------- -------
Total.................................... 32,000 80,000 63,000 118,000Total..................................... 30,000 23,000 49,000 31,000
======= ======= ======= =======
Finance penetration (excluding fleet):
Vehicle lease.........................lease.......................... 18.8% 18.6% 17.0% 17.3%
Vehicle retail......................... 18.8% 16.6% 17.4% 25.9% 17.4% 25.4%
Vehicle retail........................ 16.6% 16.6% 14.7% 14.1%13.7%
----- ----- ----- ----
Total.................................... 34.0% 42.5% 32.1% 39.5%Total..................................... 37.6% 35.2% 34.4% 31.0%
===== ===== ===== =====
-12-
TMCC's net earning assets increased to $22.3$25.4 billion at June 30, 1999March 31, 2000 from
$21.3$22.5 billion at September 30, 19981999 and $21.2$21.3 billion at June 30, 1998.March 31, 1999. Asset
growth from the prior yearSeptember 30, 1999 and March 31, 1999, reflects primarily increasedhigher
vehicle retail and finance lease contract volume, as well as increased
wholesale earning assets. The increase in retail earning assets was partially
offset by a decline in lease earning assets
primarily due to the sale of $1.9 billion$989 million of interests in leaseretail finance receivables through lease securitization transactions. Thein July 1999.
Wholesale earning assets increased from September 30, 1999 and March 31, 1999,
due to an increase in net
earning assets for the nine months ended June 30, 1999 reflects primarily
increased retail andnumber of dealers receiving wholesale earning assets, partially offset by a decline
in lease earning assets primarily due to the sale of $782 million of interests
in lease finance receivables.financing from
TMCC. The allowance for credit losses increased slightly from September 30, 19981999
reflecting asset growth and is deemed adequate to cover expected losses based
on current and historical credit loss experience, portfolio composition and
other factors.
In October 1996, TMCC created Toyota Lease Trust, a Delaware business trust
(the "Titling Trust"), to act as a lessor and to hold title to leased vehicles
in specified states. TMCC holds an undivided trust interest in lease
contracts owned by the Titling Trust, and such lease contracts are included in
TMCC's lease assets, until such time as the beneficial interests in such
contracts are transferred in connection with a securitization transaction.
Substantially all leases owned by the Titling Trust are classified as finance
receivables due to certain residual value insurance arrangements in place with
respect to such leases, while leases of similar nature originated outside of
the Titling Trust are classified as operating leases. The continued
acquisition of leases by the Titling Trust has changed the composition of
earning assets resulting in an increased mix of finance receivables relative
to operating lease assets due to the classification differences described
above.
TMCC's lease contract volume decreasedincreased for the quarter and ninesix months ended
June 30, 1999,March 31, 2000, as compared with the same periods in fiscal 19981999 reflecting
lower finance penetration due to changes in lease programsstrong sales of Toyota and the residual
value setting policy,Lexus vehicles as well as lowerhigher levels of programs
sponsored by TMS.
TMCC's retail contract volume increased for the quarter and ninesix months ended
June 30, 1999,March 31, 2000, as compared with the same periods in fiscal 19981999 primarily due
to higher finance penetration on strong sales of Toyota and Lexus vehicles.vehicles, as
well as an increase in used vehicle financing.
-13-
Net Financing Revenues and Other Revenues
- -----------------------------------------
TMCC's net financing revenues increased 6%5% and 4% for the quarter and six
months ended June 30,
1999,March 31, 2000, as compared with the same periodperiods in fiscal 19981999
primarily due to
increased retail revenue, lower interest expense and lower depreciation on leases, described below under
Depreciation on Leases, and increased retail and wholesale revenue,
substantially offset by lower lease revenues. Net financing revenues decreased 1% for the nine months
ended June 30, 1999, as compared with the same period in fiscal 1998 primarily
due to lower lease revenues, substantially offset by increased retail revenues
and lowerhigher interest expense. TMCC's continued use of the
Titling Trust to purchase leases has caused a shift in the composition of
earning assets from operating leases to finance receivables, as discussed
earlier, and has resulted in increased revenues from finance leases (until such interests in leases were
sold in securitization transactions) and
reduced operating lease revenues and depreciation on operating leases.
Insurance premiums earned and contract revenues increased 11%13% and 17% for the
quarter and ninesix months ended June 30, 1999,March 31, 2000, respectively, as compared with
the same periods in fiscal 19981999 due to higher underwriting revenues associated
with in-force agreements.
The following table summarizes TMCC's investment and other income for the
three and ninesix months ended June 30, 1999March 31, 2000 and June 30, 1998:March 31, 1999:
Three Months Ended NineSix Months Ended
June 30, June 30,March 31, March 31,
------------------ ---------------------------------
2000 1999 19982000 1999 1998
---- ---- ---- ----
(Dollars in Millions)
Investment income...................... $11 $ 9 $22 $19
Servicing fee income................... $ 9 $ 7 $28 $18
Investment income...................... 6 6 2510 17 19
Gains on assets sold................... 3 - 9 21 1 6
Asset impairment....................... (14) - (14) -
---- ---- ---- ----
Investment and other income......... $18 $13 $62 $39$ 4 $20 $26 $44
==== ==== ==== ====
Servicing feeThe decrease in investment and other income increased 29% and 56% for the quarter and ninesix months
ended March 31, 2000 as compared with the same periods in fiscal 1999 was
primarily due to the permanent impairment of assets retained in the sale of
interests in lease finance receivables resulting from higher than expected
residual value losses. In addition, TMCC expects a decrease in investment and
other income for the quarter ended June 30, 1999,30,2000 resulting from the discounting
of cash deposited into the reserve funds of the Company's lease
securitizations as described in Note 8 of the Notes to the Consolidated
Financial Statements.
Investment income increased 22% and 16% for the quarter and six months ended
March 31, 2000, respectively, as compared with the same periods in fiscal 19981999
primarily due to growthincreased interest income.
Servicing fee income decreased 30% and 10% for the quarter and six months
ended March 31, 2000, respectively, as compared with the same periods in
fiscal 1999 due to the reduction in the combined balance of sold interests in
lease finance and sold retail receivables as well as a temporary waiver of
servicing fee income related to the fiscal 1997 sale of interests in lease
finance receivables.
Investment income increased 32%Gains on assets sold decreased by $5 million for the ninesix months ended
June 30, 1999,March 31, 2000, as compared with the same period in fiscal 1998 primarily due to increased gains
on sales1999 reflecting a
decrease in the amount of investments and interest income.
Gains on assets sold increased by $3 million and $7 million for the quarter
and nine months ended June 30, 1999, respectively, as compared with the same
periods in fiscal 1998 reflecting the sale of interests in lease finance receivables as described in Note 5 of the Notes to the Consolidated Financial
Statements.sold. Gains recognized on asset-backedasset-
backed securitization transactions generally accelerate the recognition of
income on lease and retail contracts, net of servicing fees and other related
deferrals, into the period the assets are sold. Numerous factors can affect
the timing and amounts of these gains, such as the type and amount of assets
sold, the structure of the sale, key assumptions used and current financial
market conditions.
-14-
Depreciation on Leases
- ----------------------
The following table sets forth the items included in TMCC's depreciation on
leases for the three and ninesix months ended June 30, 1999March 31, 2000 and 1998:1999:
Three Months Ended NineSix Months Ended
June 30, June 30,March 31, March 31,
------------------ -----------------------------------
2000 1999 19982000 1999 1998
---- ---- ------ ---------- ----
(Dollars in Millions)
Straight-line depreciation on operating leases... $338 $371 $1,050 $1,133$323 $351 $644 $712
Provision for residual value losses.............. 72 80 218 179
Parent support for certain vehicle disposition
losses........................................ - (28) - (53)44 76 106 146
---- ---- ------ ---------- ----
Total depreciation on leases.................. $410 $423 $1,268 $1,259$367 $427 $750 $858
==== ==== ====== ========== ====
Straight-line depreciation expense decreased 9%8% and 7%10% for the quarter and
ninesix months ended June 30, 1999, respectively,March 31, 2000, as compared with the same periods in fiscal
19981999 corresponding with a decline in average operating lease assets. As
discussed earlier, the acquisition of leases by the Titling Trust has
increased the ratio of lease finance receivables relative to operating lease
assets, which results in reduced operating lease revenues and depreciation expense.on
operating leases.
TMCC is subject to residual value risk in connection with its lease portfolio.
TMCC's residual value exposure is a function of the number of off-lease
vehicles returned for disposition and any shortfall between the net
disposition proceeds and the estimated unguaranteed residual values on
returned vehicles. If the market value of a leased vehicle at contract
termination is less than its contract residual value, the vehicle is more
likely to be returned to TMCC. A higher rate of vehicle returns exposes TMCC
to a higher risk of aggregate losses.
Total unguaranteed residual values related to TMCC's vehicle lease portfolio
declinedincreased from approximately $7.8$6.5 billion at September 30, 19981999 to $7.0$7.1
billion at June 30, 1999 reflecting the acquisition of residual value insurance on an
increasing number of leases in connection with the lease securitization
program as well as sales of interests in lease finance receivables.March 31, 2000. TMCC maintains an allowance for estimated losses on
lease vehicles returned to the Company for disposition at lease termination.
The level of allowance required to cover future vehicle disposition losses is
based upon projected vehicle return rates and projected residual value losses
derived from market information on used vehicle sales, historical factors,
including lease return trends, and general economic factors.
-15-
The decrease in the provision for residual value losses for the quarter and
six months ended June 30, 1999March 31, 2000 as compared with the same periodperiods in fiscal
19981999 reflects reduced losses at vehicle disposition of $15 million and $18
million, respectively, as well as management's estimate that current reserve
levels are considered adequate to cover expected losses at vehicle disposition
as of June 30, 1999. The
increase in the provision for residual value losses for the nine months ended
June 30, 1999 as compared with the same period in fiscal 1998 reflects higher
off-lease vehicle return rates and a larger supply of vehicles coming off-
lease resulting in higher total losses although the loss per vehicle has
declined during the same period.March 31, 2000. The number of returned leased vehicles sold by TMCC
during a specified period as a percentage of the number of lease contracts
that as of their origination dates were scheduled to terminate ("full term
return ratio") was 47%52% in the first ninesix months of fiscal 19992000 as compared to
39%48% for the same period in fiscal 1998. Losses at vehicle
disposition increased $5 million and $38 million1999 while per unit residual value loss
rates have improved for the quarter and nine
months ended June 30, 1999, respectively, as compared with the same periods in
fiscal 1998.period.
-15-
TMCC believes that the increase inindustry-wide record levels of incentives on new vehicles
and a large supply of late model off-lease vehicles have put downward pressure
on used car prices. In addition, TMCC's increased vehicle returns and losses is
due in part toreturn rates
reflect the impact of competitive pricing in the new vehicle market
which has put continued pressure on late modelpricing for core Toyota and
Lexus usedmodels. Return rates and losses may also be affected by the amount and
types of accessories or installed optional equipment included in leased
vehicles. Although vehicle prices.loss rates are typically the result of a
combination of factors, to the extent certain types of optional equipment
depreciate more quickly than the value of the base vehicle, leased vehicles
having a greater portion of their manufacturer's suggested retail price
attributable to such optional equipment will experience relatively higher
levels of loss. TMCC expects the large supply of vehicles coming off-lease to
continue for at least the remainder of thethrough fiscal year2000 and that the full term return ratio and losses
will remain at or near current levels.
The Company has taken action to reduce vehicle disposition losses by
developing strategies to increase dealer and lessee purchases of off-lease
vehicles, expandexpanding marketing of off-lease vehicles through the internet and
maximizemaximizing proceeds on vehicles sold through auction. In addition, TMCC
implemented a new residual value setting policy for new model year 1999 Toyota
vehicles that separately calculates the residual value applicable to the base
vehicle and the residual value applicable to certain specified optional
accessories and optional equipment.
Under an arrangement with TMS, TMCC received Parent support for vehicle
disposition losses in the last three quarters of fiscal 1998. During the
first nine months of fiscal 1999, the Company did not receive any Parent
support for vehicle disposition losses. There are currently no plans for
additional Parent support for vehicle disposition losses.
TMCC's lease portfolio includes contracts with original terms ranging from 12
to 60 months; the average original contract term in TMCC's lease portfolio was
41 months and 39 months at March 31, 2000 and 38 months at June 30, 1999, and 1998, respectively.
Interest Expense
- ----------------
Interest expense decreased 8%increased 44% and 4%29% for the quarter and ninesix months ended
June 30, 1999, respectively,March 31, 2000, as compared with the same periods in fiscal 19981999 primarily due
to lowerhigher average cost of borrowings partially offset by an
increase inand increased average debt outstanding.
The weighted average cost of borrowings was 5.30%6.07% and 5.87%5.36% for the ninesix months
ended June 30,March 31, 2000 and 1999, and 1998,
respectively. Continuing increases in market
interest rates are expected to negatively impact the interest margin on TMCC's
outstanding portfolio.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased 16%7% and 19%8% for the quarter and
ninesix months ended June 30, 1999, respectively,March 31, 2000, as compared with the same periods in fiscal
19981999 reflecting primarily additional personnel and operatingexpenses associated with technology-related projects, as well
as costs required to support TMCC's growing customer base and expanded customer
service activities as well as costs in connection with technology upgrades and
software modifications to address year 2000 issues.base.
-16-
Provision for Credit Losses
- ---------------------------
TMCC's provision for credit losses decreased 35% and 27%remained relatively stable for the quarter
and ninesix months ended June 30, 1999, respectively,March 31, 2000, as compared with the same periods in
fiscal 1998 reflecting improved credit loss experience and
management's estimate that current reserve levels are adequate based on
current credit loss levels, portfolio composition and other factors. TMCC has
not significantly altered its underwriting standards during the first nine
months of fiscal 1999 as compared with the same period in fiscal 1998.1999. Allowances for credit losses are evaluated periodically,
considering historical loss experience and other factors, and are considered
adequate to cover expected credit losses as of June 30, 1999.March 31, 2000.
In April 2000, TMCC completed the national launch of an expanded tiered
pricing program for retail vehicle contracts. The objective of the expanded
program is to better match customer risk with contract rates charged to allow
profitable purchases of a wider range of risk levels. A pilot program for
expanded tiered pricing for lease vehicle contracts is underway.
Implementation of these expanded programs is expected to both increase
contract yields and increase credit losses in connection with purchases of
higher risk contracts.
Net credit loss experience, excluding net losses on receivables sold subject
to limited recourse provisions, for the three and ninesix months ended June 30,March 31,
2000 and 1999,
and 1998, was as follows:
Three Months Ended NineSix Months Ended
June 30, June 30,March 31, March 31,
------------------ ---------------------------------
2000 1999 19982000 1999 1998
----- ----- ----- -----
(Dollars in Millions)
Gross Credit Losses............. $ 2331 $ 3029 $ 7957 $ 9256
Recoveries...................... (5) (4) (4) (13) (11)(9) (9)
----- ----- ----- -----
Net Credit Losses............... $ 19 $ 26 $ 6625 $ 8148 $ 47
===== ===== ===== =====
Annualized Net Credit Losses
as a % of Average Earning
Assets....................... .35% .50% .41% .54%.42% .47% .39% .45%
The allowance for credit losses and the allowance for credit losses as a
percent of net earning assets as of the balance sheet dates reported herein
are summarized below:
June 30,March 31, September 30, June 30,March 31,
2000 1999 1998 1998
--------1999
--------- ------------- -----------------
(Dollars in Millions)
Allowance for Credit Losses..... $228 $220 $233$214 $202 $225
Allowance for Credit Losses
as a % of Earning Assets..... 1.01% 1.02% 1.09%0.84% 0.89% 1.05%
-17-
Liquidity and Capital Resources
- -------------------------------
The Company requires, in the normal course of business, substantial funding to
support the level of its earning assets. Significant reliance is placed on
the Company's ability to obtain debt funding in the capital markets in
addition to funding provided by earning asset liquidations and cash provided
by operating activities as well as transactions through the Company's asset-backedasset-
backed securities programs. Debt issuances have generally been in the form of
commercial paper, extendible commercial notes, domestic and euro MTNsmedium-term
notes ("MTNs"), and bonds.
Commercial paper issuances and extendible commercial notes are used to meet
short-term funding needs. Commercial paper outstanding under TMCC's commercial
paper program ranged from approximately $1.1$1.5 billion to $2.9$3.6 billion during
the first ninesix months of fiscal 1999,2000, with an average outstanding balance of
$1.8$2.5 billion. The outstanding balance of extendible commercial notes at March
31, 2000 totaled $148 million. For additional liquidity purposes, TMCC
maintains syndicated bank credit facilities with certain banks which
aggregated $3.0$2.7 billion at June 30, 1999.March 31, 2000. No loans were outstanding under
any of these bank credit facilities during the first ninesix months of fiscal
1999.2000. TMCC also maintains uncommitted, unsecured lines of credit with banks
totaling $175 million, of which $100 million is maintained along with TMS. At
June 30, 1999,March 31, 2000, TMCC and TMS had issued approximately $12$13 million in letters
of credit in connection with these uncommitted, unsecured lines of credit.
Long-term funding requirements are met through the issuance of a variety of
debt securities underwritten in both the United States and international
capital markets. Domestic and euro MTNs and bonds have provided TMCC with
significant sources of funding. During the first ninesix months of fiscal 1999,2000,
TMCC issued approximately $2.8$2.6 billion of domestic and euro MTNs and bonds,
all of which had original maturities of one year or more.
The original maturities of all MTNs and bonds outstanding at June 30, 1999March 31, 2000
ranged from one to eleven years. As of June 30, 1999,March 31, 2000, TMCC had total MTNs
and bonds outstanding of $15.5$16.1 billion, of which $6.7$6.6 billion was denominated
in foreign currencies.
TMCC anticipates continued use of MTNs and bonds in both the United States and
international capital markets. The Company maintains a shelf registration
with the SEC providing for the issuance of MTNs and other debt securities. At
July 31, 1999,April 30, 2000 approximately $1.9$5.8 billion was available for issuance under
this registration statement. The maximum aggregate principal amount
authorized to be outstanding at any time under TMCC's euro MTN program is
$16.0 billion. Approximately $6.0$4.4 billion was available for issuance under
the euro MTN program as of July 31, 1999April 30, 2000 of which the Company hasTMCC had committed to issue
approximately $457$102 million. The United States and euro MTN programs may be
expanded from time to time to allow for the continued use of these sources of
funding. In addition, TMCC may issue bonds in the domestic and international
capital market that are not issued under its domestic or euro MTN programs.
Additionally, TMCC uses its asset-backed securitization programs to generate
funds for investment in earning assets. During the nine months ended June 30,
1999, TMCC sold interests in lease finance receivables totaling $782 million asAs described in Note 5 of the Notes to the Consolidated Financial Statements.
During the nine months ended June 30, 1999, the number and principal amount ofearlier, leases are
purchased by the Toyota Lease Trust to maintain a pool of assets available for
sale in connection with TMCC's lease securitization program comprised a significant and increasing percentage of
what otherwise would have been TMCC's lease portfolio.program. However, until
leases are included in a securitization transaction, they continue to be
classified as finance receivables on TMCC's balance sheet. In addition, TMCC
maintains a shelf registration statement with the SEC relating to the issuance
of asset-
backedasset-backed notes secured by, and certificates representing interests in,
retail receivables. In July 1999, TMCC sold retail receivables totaling $962 million
in connection with securities issued under the shelf registration statement.
As of July 31, 1999,April 30, 2000, $1.5 billion remained available for
issuance under the registration statement.
-18-
In March 2000, certain nationally recognized statistical rating organizations
placed several classes of TMCC's lease securitizations under review for
possible downgrade as a result of higher than expected residual value losses.
In April 2000, TMCC announced that it will make a cash capital contribution
totaling $102 million to Toyota Leasing, Inc., a wholly-owned subsidiary of
TMCC, for deposit into the reserve funds of the lease securitizations under
review. TMCC also announced that a portion of the monthly excess cash flows in
the transactions will be retained in these reserve funds to supplement the
capital contribution. As a result of TMCC's stated intentions, the rating
organizations affirmed the original credit ratings for the lease asset-backed
securities. TMCC's long term unsecured ratings were unaffected by these
recent events. TMCC does not believe that the rating organization actions
have had a material adverse effect on its liquidity or access to capital
markets.
TMCC's ratio of earnings to fixed charges has remained relatively stable at
1.25was 1.14 for the first ninesix months of
fiscal 19992000 compared to 1.241.23 for the first ninesix months of fiscal 1998.1999. TMCC
believes that the decline in the ratio has not affected its ability to
maintain liquidity or access to outside funding sources. The decline in the
ratio is due to several factors including higher interest expense, lower
investment and other income as well as higher operating and administrative
expenses attributable to technology projects and TMCC's growing customer base.
Cash flows provided by operating, investing and financing activities have been
used primarily to support earning asset growth. During the first ninesix months
of fiscal 1999,2000, cash used to purchase additional finance receivables and
investments in operating leases, totaling $17.5$14.0 billion, was partially
provided by the liquidation and sale of earning assets totaling $15.2$10.3 billion.
Investing activities resulted in a net cash use of $2.3$3.1 billion during the
first ninesix months of fiscal 1999,2000, as the purchase of additional earning assets
exceeded cash provided by the liquidation and sale of earning assets.
Investing activities were also supported by net cash provided by operating and
financing activities totaling $1.8$1.1 billion and $482 million,$2.0 billion, respectively,
during the first ninesix months of fiscal 1999.2000. The Company believes that cash
provided by operating and investing activities as well as access to domestic
and international capital markets, the issuance of commercial paper and
asset-
backedextendible commercial notes, and asset-backed securitization transactions will
provide sufficient liquidity to meet its future funding requirements.
-19-
Year 2000 Date Conversion
- -------------------------
The year 2000 issue concerns the inability of computer systems and related
applications to function properly in the year 2000 and beyond. As a wholly-
owned subsidiary of TMS, TMCC is participating in TMS' comprehensive action
plan to identify and address year 2000 issues. As part of the year 2000
action plan, TMCC is identifying and evaluating potential year 2000 problems
and is implementing changes designed to yield year 2000 compliance in its
information technology systems, including mainframe, distributed and desktop
computer systems, networks and telecommunications (collectively, "IT systems")
and its non-information technology systems, including security and HVAC
systems, automated access readers and other machinery and equipment
(collectively, "embedded systems"). An additional component of the year 2000
action plan involves TMCC's communications with its external business partners
for the purpose of assessing and reducing the risk that TMCC's operations
could be adversely affected by such third parties' noncompliance with year
2000 issues.
Phases
The year 2000 action plan consists of four phases, some of which are being
conducted concurrently:
Inventory and Assessment: During this phase an inventory is taken of all
software and/or hardware components of significant applications or systems.
Software and hardware that is no longer in use or is planned to be replaced
before the year 2000, is identified and removed from the scope of the project.
Once the inventory is completed and verified, a preliminary determination of
whether the software or hardware is likely to have year 2000 date issues is
made either by manual review, vendor inquiry or by use of software tools
designed to search for date impacts. Once the assessment is completed, a
business critical prioritized plan is developed for remediation, testing, and
implementing the remediated hardware or software in the remaining phases.
Remediation: During this phase, software for which TMS or TMCC owns the
source code will be scanned and corrected. In most instances, TMCC will use
the "windowing" approach to fix source code which uses program logic to
correct year 2000 date issues. In some cases, it will be necessary to expand
the year field from two to four digits where the year 2000 date issue can not
be solved with the "windowing" method. Software for which TMS or TMCC does
not own the source code will be remediated by obtaining the year 2000 ready
version of the software from the vendor. For hardware and operating system
software, the year 2000 ready component will also be obtained from the vendor.
Testing: The testing phase focuses mainly on remediated hardware and software
that supports business critical functions. Test plans and test cases are
expected to be developed and performed for each application. For software
modified by TMCC, tests will be designed to demonstrate that application
functionality has not changed as a result of the remediation.
Implementation: During this phase, the remediated hardware and software
components will be implemented in the production environment. At this time,
policies and procedures will be implemented to ensure that additional
modifications to remediated and tested hardware and/or software are year 2000
compliant.
-20-
State of Readiness
The Company has identified the following six areas for specific review and
remediation in connection with its year 2000 compliance efforts:
Critical Business Systems Applications: Includes distributed and mainframe
applications used in operations such as retail and lease financing, customer
account processing, collections, insurance operations and accounting systems.
TMCC has completed the inventory and remediation of these systems. Certain
business critical applications have been tested and implemented back into
production. Testing, validation and implementation of the remaining business
critical applications is expected to continue through the third quarter of
calendar year 1999.
Desktop Systems: Includes commercial off-the-shelf software as well as custom
developed applications. TMCC has substantially completed the inventory and
assessment of these systems and related software applications. Remediation
and testing of business critical custom developed systems is underway with
implementation expected by the third quarter of calendar year 1999.
Replacement of non-compliant off-the-shelf software applications is expected
by the third quarter of calendar year 1999.
Technical Infrastructure: Includes mainframe, distributed and PC systems,
networks, and telecommunications. TMCC has completed the inventory and
assessment phases of its technical infrastructure. Testing of business
critical components has begun and implementation is expected by the third
quarter of calendar year 1999.
Embedded Systems: Includes non-information technology systems described
above. TMCC has completed the inventory, assessment and implementation phases
for embedded systems at its owned facilities. With respect to embedded
systems located at facilities leased by TMCC, TMCC is presently in the
assessment phase and has contacted the property managers and/or owners
regarding the year 2000 status of the facilities. TMCC is establishing
contingency plans for coping with problems that may arise from embedded
systems in leased facilities that are not year 2000 compliant.
External Compliance: Includes financial institutions, dealers, suppliers,
trustees, underwriters and affiliates ("business partners"). Critical
business partners have been identified and prioritized. Letters and surveys
have been sent to business partners to assess the risk associated with those
business partners' failure to remediate their own year 2000 issues. TMCC has
completed the assessment phase of critical business partners. Testing of
business critical systems with external business partners will continue
through calendar year 1999.
Non-Critical Systems: Includes systems and applications from the above-listed
areas which have been prioritized as non-critical. Such systems and
applications will be reviewed on an ongoing basis and assessed for year 2000
compliance throughout calendar year 1999.
-21-
TMS has contacted its affiliates and others involved in the manufacture of
Toyota and Lexus vehicles and equipment to determine the status of year 2000
product compliance, and based on information received to date, TMCC is not
aware of any year 2000 problems that would affect the operational safety of
these products.
Year 2000 Costs
Costs associated with the year 2000 systems and software modifications are
generally expensed as incurred. TMS is allocating a portion of its year 2000
costs to TMCC. TMCC's total cost (including allocated costs from TMS) for the
year 2000 issue is estimated not to exceed $20 million. The estimated total
cost to be incurred by TMCC in connection with its year 2000 compliance
efforts is not expected to have a material adverse effect on the Company's
results of operations, liquidity or capital resources. As a result of the
application of resources to year 2000 compliance efforts, certain information
technology projects previously scheduled to be initiated or implemented in
fiscal 1999 may be deferred. Such deferral is not expected to have a material
adverse effect on the Company's results of operations, liquidity or capital
resources.
Year 2000 Risks
The most reasonably likely worst case scenario with respect to the year 2000
issue is the failure of a business partner, particularly another financial
institution, to be year 2000 compliant. Although TMCC does not currently
anticipate that it will experience significant business disruptions as a
result of year 2000 problems, there remains uncertainty in this area. The
failure to achieve year 2000 compliance by energy and water utilities,
governmental agencies or other private or public suppliers of general
infrastructure could present substantial difficulties to TMCC's business
operations in the affected geographic areas. The inability of TMCC, its
external business partners or the public and private suppliers of general
infrastructure to identify and timely resolve year 2000 problems could result
in a significant adverse effect on the Company's operations and financial
results, including an inability to collect receivables, pay obligations,
process new business, raise capital and occupy facilities.
Year 2000 Contingency Plan
The Company is currently developing a contingency plan to address problems
resulting from year 2000 noncompliance. TMCC's contingency planning will
focus on identifying systems of TMCC and its business partners that TMCC
believes would be the most likely to experience year 2000 problems. The
contingency plan is expected to include arrangements with back-up vendors,
suppliers and other resources to permit operations to be conducted temporarily
on a manual basis. Completion of the contingency plan is expected by the
third quarter of calendar year 1999, although continuing revisions will be
made on an ongoing basis throughout the year as circumstances change and
additional information becomes available.
-22-
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The foregoing Business description and Management's Discussion and Analysis
contain various "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 represent the Company's expectations
or beliefs concerning future events, including the following: that residual valueTMCC
expects a decrease in investment and other income for the quarter ended June
30,2000 resulting from the discounting of cash deposited into the reserve fund
of the Company's lease securitizations; that current reserve levels are
considered adequate to cover expected losses at vehicle disposition; that TMCC
believes that industry-wide record levels of incentives on new vehicles and
large supply of late model off-lease vehicles have put downward pressure on
used car prices; that TMCC expects the large supply of vehicles coming off-leaseoff-
lease to continue for at least
the remainder of thethrough fiscal year2000 and that the full term return ratio and
losses will remain at or near current levels; that continuing increases in
market interest rates are expected to negatively impact the interest margin on
the existing portfolio; that the implementation of the expanded tiered pricing
program is expected to both increase contract yields and increase credit
losses in connection with purchases of higher risk contracts; that allowances
for credit losses are considered adequate to cover expected credit losses;
the Company'sthat TMCC anticipates continued use of MTNs and bonds in both the United States and
the international capital markets; that TMCC may issue bonds in the domestic
and international capital markets that are not issued under its MTN programs;
that TMCC does not believe that the rating organizations actions have had a
material adverse effect on its liquidity or access to capital markets; that
the decline in the ratio of earnings to fixed charges has not affected TMCC's
ability to maintain liquidity or access to outside funding sources; that cash
provided by operating and investing activities as well as access to domestic
and international capital markets, the issuance of commercial paper and
extendible commercial notes, and asset-backed securitization transactions will
provide sufficient liquidity to meet the Company'sTMCC's future funding requirements; that
the Company's action plan for year 2000 compliance efforts will be carried out
as described under Item 2 - "Year 2000 Date Conversion - Phases and - State of
Readiness"; that the Company expects to complete its year 2000 compliance
efforts on its critical systems on a timely basis; that the total estimated
cost in connection with the year 2000 issue is not expected to exceed
$20 million and is not expected to have a material adverse effect on the
Company's results of operations, liquidity or capital resources; that deferral
of certain information technology projects is not expected to have a material
adverse effect on the Company's results of operations, liquidity or capital
resources; that the risk to the Company with respect to year 2000 issues is as
described under Item 2 - "Year 2000 Date Conversion - Year 2000 Risks"; that
the Company's contingency plan to address year 2000 issues will be as described
under Item 2 - "Year 2000 Date Conversion - Year 2000 Contingency Plan" and
completion of the Company's contingency plan relating to the year 2000 issue is
expected by the third quarter of calendar year 1999; that TMCC does not
anticipate non-performance by any of its counterparties; that TMCC believes
that the new value-at-risk methodology will result in a more accurate
measurement of the interest rate risk in the portfolio.requirements.
The Company cautions that thesethe forward looking statements are further qualified byreferred to above
involve known and unknown risks, uncertainties and other important factors
that could 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; a
decline in the market acceptability of leasing; the effect of competitive
pricing on interest margins; increases in prevailing interest rates; changes
in pricing due to the appreciation of the Japanese yen against the United
States dollar; the effect of governmental actions; the effect of competitive
pressures on the used car market and residual values and the continuation of
the other factors that could causecausing an increase in vehicle returns and disposition
losses; the continuation of, and if continued, the level and type of special
programs offered by TMS; the ability of the Company to successfully access the
United States and international capital markets; unanticipated problems or delays in
the completioneffects of any rating
agency actions; the monetary policies exercised by the Company of its year 2000 action plan; failure of TMCC's
business partners to timely resolve their year 2000 issues ; the failure of the
Company to developEuropean Central Bank
and implement an adequate contingency plan relating to year
2000 issues;other monetary authorities; increased costs associated with the Company's
debt funding efforts; 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; and the ability
of the Company's counterparties to perform under interest rate and cross
currency swap agreements. Results actually achieved thus may differ
materially from expected results included in these statements, and the Company
will not update the forward looking statements to reflect actual results or
changes in the factors affecting the forward looking statements.
-23--20-
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
effective for fiscal years beginning after June 15, 1999. SFAS No. 133
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains and losses resulting from changes
in the values of those derivatives would be accounted for as either components
of earnings or accumulated other comprehensive income depending on the use of
the derivative and whether it qualifies for hedge accounting. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133", which defers the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. The Company has not determined the impact that
adoption of this standard will have on its consolidated financial statements.
The Company plans to adopt SFAS No. 133 by October 1, 2000, as required.
-24--21-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As discussed more fully in TMCC's 19981999 Annual Report on Form 10-K, TMCC uses a
variety of interest rate and currency derivative financial instruments to
manage interest rate and currency exchange exposures. TMCC does not use these
instruments for trading purposes. Derivative financial instruments used by
TMCC involve, to varying degrees, elements of credit risk in the event a
counterparty should default and market risk as the instruments are subject to
rate and price fluctuations.
Credit exposure of derivative financial instruments is represented by the fair
value of contracts with a positive fair value at June 30, 1999March 31, 2000 reduced by the
effects of master netting agreements. The credit exposure of TMCC's
derivative financial instruments at June 30, 1999March 31, 2000 was $28$97 million on an
aggregate notional amount of $25.3$36.8 billion. At June 30, 1999March 31, 2000 approximately
89%96% of TMCC's derivative financial instruments, based on notional amounts,
were with commercial banks and investment banking firms assigned investment
grade ratings of "AA" or better by national rating agencies. TMCC does not
anticipate non-
performancenon-performance by any of its counterparties.
Changes in interest rates may impact TMCC's future weighted average interest
rate on outstanding debt as a result of floating rate liabilities. As of
June 30, 1999,March 31, 2000, an interest rate increase of 1% (100 basis points) would raise
TMCC's weighted average interest rate, including the effects of interest rate
swap agreements and option-based products, by .62%.51% from 5.14%6.11% to an estimated
5.76%6.62% at June 30, 1999.March 31, 2000. Conversely, an interest rate decrease of 1% (100
basis points) would lower TMCC's weighted average interest rate, including the
effects of interest rate swap agreements and option-based products, by .54%.61%
from 5.14%6.11% to an estimated 4.60%5.50% at June 30, 1999.March 31, 2000.
TMCC uses a value-at-risk methodology, in connection with other management
tools, to assess and manage the interest rate risk of aggregated loan and
lease assets and financial liabilities, including interest rate derivatives
and option-based products. Value-at-risk represents the potential losses for
a portfolio from adverse changes in market factors for a specified period of
time and likelihood of occurrence (i.e. level of confidence). TMCC's value-
at-risk methodology incorporates the impact from adverse changes in market
interest rates but does not incorporate any impact from other market changes,
such as foreign currency exchange rates or commodity prices, which do not
affect the value of TMCC's portfolio. The value-at-risk methodology excludes
changes in fair values related to investments in marketable securities as
these amounts are not significant.
During the quarter ended March 31, 1999, TMCC changed itsThe value-at-risk methodology. The new methodology makes no assumptions about the distribution
of interest rates; instead it relies on actual interest rate data. Fouruses four years of historical interest rate data is used
to build a database of prediction errors in forward rates for a one month
holding period. These prediction errors are then applied randomly to current
forward rates through a Monte Carlo process to simulate 500 potential future
yield curves. The portfolio is then re-priced with these curves to develop a
distribution of future portfolio values. Options in the portfolio are priced
with current market implied volatilities and the simulated yield curves using
the Black Scholes method. The lowest portfolio value at the 95% confidence
interval is compared with the current portfolio value to derive the value-at-riskvalue-at-
risk number.
The previous
method used two years of historical interest rate volatilities, simulated only
100 potential future yield curves using a stratified random sampling
methodology and assumed that changes in interest rates are lognormally
distributed. Since the new model makes no assumptions about the distribution
of interest rates but instead uses the actual historical distribution of
interest rates along with an increased number of simulations, TMCC believes
that the new methodology will result in a more accurate measurement of the
interest rate risk in the portfolio.
-25--22-
The value-at-risk and the average value-at-risk of TMCC's portfolio as of
June 30, 1999March 31, 2000 and for the ninesix months ended June 30, 1999,March 31, 2000, measured as the
potential 30 day loss in fair value from assumed adverse changes in interest
rates under the new and old method are as follows:
Average for the
As of NineSix Months Ended
New Method: June 30, 1999 June 30, 1999March 31, 2000 March 31, 2000
----------------- -------------------------------------
Mean portfolio value..................... $3,550.0$4,990.0 million $3,600.0$4,370.0 million
Value-at-risk............................ $92.7$116.4 million $66.7$111.2 million
Percentage of the mean portfolio value... 2.6% 1.9%
Confidence level......................... 95.0% 95.0%
Average for the
As of Nine Months Ended
Old Method: June 30, 1999 June 30, 1999
----------------- -------------------
Mean portfolio value..................... $3,550.0 million $3,600.0 million
Value-at-risk............................ $70.0 million $51.1 million
Percentage of the mean portfolio value... 2.0% 1.4%2.3% 2.5%
Confidence level......................... 95.0% 95.0%
TMCC's calculated value-at-risk exposure represents an estimate of reasonably
possible net losses that would be recognized on its portfolio of financial
instruments assuming hypothetical movements in future market rates and is not
necessarily indicative of actual results which may occur. It does not
represent the maximum possible loss nor any expected loss that may occur,
since actual future gains and losses will differ from those estimated, based
upon actual fluctuations in market rates, operating exposures, and the timing
thereof, and changes in the composition of TMCC's portfolio of financial
instruments during the year.
A reconciliation of the activity of TMCC's derivative financial instruments
for the ninesix months ended June 30,March 31, 2000 and 1999 and 1998 is as follows:
NineSix Months Ended June 30,March 31,
------------------------------------------------------------
Cross
Currency
Interest Interest Indexed
Rate Swap Rate Swap Option-based Note Swap
Agreements Agreements Products Agreements
------------ ------------ ------------ ------------
2000 1999 19982000 1999 19982000 1999 19982000 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Billions)
Beginning notional amount....... $8.8 $9.0 $6.5$ 9.0 $7.3 $6.9 $6.3 $6.3 $5.6$1.3 $0.8 $2.4
Add:
New agreements............... 0.9 - 3.5 4.0 1.3 1.8 2.1 0.6 0.111.2 3.2 2.8 0.9 0.2 0.5
Less:
Terminated agreements........ - - 0.3 - - - -
-
Expired agreements........... 0.6 0.9 2.0 1.6 1.4 1.21.9 0.3 0.41.1 1.8 1.3 0.7 - 0.2
---- ---- --------- ---- ---- ---- ---- ----
Ending notional amount.......... $7.8 $8.7 $19.1 $8.4 $9.1 $9.0 $6.0 $6.7$8.4 $6.5 $1.5 $1.1 $2.1
==== ==== ========= ==== ==== ==== ==== ====
-26--23-
Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month and nine-monthsix-month periods ended
June 30,March 31, 2000 and 1999, and 1998, 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 13, 1999May 12, 2000 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.
-27--24-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Various claimslegal actions, governmental proceedings and actionsother claims are pending
or may be instituted or asserted in the future against TMCC and its
subsidiaries with respect to financing and insurance activities, taxes and other matters arising from the ordinary course of
business. Certain of these actions are or purport to be class action suits.suits,
seeking sizeable damages. Certain of these actions are similar to suits which
have been filed against other financial institutions and captive finance
companies. Management and internal and external counsel perform periodic
reviews of pending claims and actions to determine the probability of adverse
verdicts and resulting amounts of liability. The amounts of liability on
pending claims and actions as of June 30, 1999March 31, 2000 were not determinable;
however, in the opinion of management, the ultimate liability resulting
therefrom should not have a material adverse effect on TMCC's consolidated
financial position or results of operations. The foregoing is a forward
looking statement within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Act of 1934, as amended,
which represents the Company's expectations and beliefs concerning future
events. The Company cautions that its discussion of Legal Proceedings is
further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statement, including but
not limited to the discovery of facts not presently known to the Company or
determinations by judges, juries or other finders of fact which do not accord
with the Company's evaluation of the possible liability from existing
litigation.
ITEM 2. CHANGES IN SECURITIES.
There is nothing to report with regard to this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There is nothing to report with regard to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
There is nothing to report with regard to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index, on page 30,27,
are filed as part of this report.
(b) Reports on Form 8-K
There were noThe following reports on Form 8-K were filed by the registrant during the quarter ended
June 30, 1999.
-28-March 31, 2000, none of which contained financial statements.
Date of Report Items Reported
---------------- -------------------------------------------
January 12, 2000 Item 7 - Financial Statements, Pro Forma
Financial Information and Exhibits
-25-
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 13, 1999May 12, 2000 By /S/ MICHAEL DEADERICK
---------------------------------
Michael Deaderick
Group Vice President - Operations
Date: August 13, 1999May 12, 2000 By /S/ GREGORY B. WILLIS
-------------------------------
Gregory B. WillisROBERT M. ALLEN
---------------------------------
Robert M. Allen
Vice President
Finance and AdministrationAffiliated Operations
(Principal Accounting Officer)
-29--26-
EXHIBIT INDEX
Exhibit Method
Number Description of Filing
- ------- ----------- ---------
10.1 Amendment No. 3 to Operating Agreement dated Filed
June 1, 1999 between TMCC, TMS and TMMNA Herewith
12.1 Calculation of Ratio of Earnings to Fixed Charges. Filed
Herewith
15.1 Report of Independent Accountants. Filed
Herewith
15.2 Letter regarding unaudited interim financial Filed
information. Herewith
27.1 Financial Data Schedule. Filed
Herewith
-30--27-