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 December 31, 1999
-----------------
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
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(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 January 31, 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)
December 31, September 30, December 31,
1999 1999 1998
------------ ------------- ------------
(Unaudited) (Unaudited)
ASSETS
------
Cash and cash equivalents................. $ 135 $ 180 $ 167
Investments in marketable securities...... 452 450 455
Finance receivables, net.................. 15,492 13,856 11,514
Investments in operating leases, net...... 8,426 8,605 9,428
Receivable from Parent and Affiliate...... 379 717 1,924
Other receivables......................... 320 366 351
Deferred charges.......................... 124 131 147
Other assets.............................. 244 242 278
Income taxes receivable................... - 31 -
------- ------- -------
Total Assets..................... $25,572 $24,578 $24,264
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................... $19,265 $18,565 $18,942
Accrued interest.......................... 142 161 143
Accounts payable and accrued expenses..... 1,383 1,096 796
Deposits.................................. 192 201 234
Income taxes payable...................... 82 - 71
Deferred income........................... 641 636 580
Deferred income taxes..................... 1,463 1,554 1,225
------- ------- -------
Total Liabilities................... 23,168 22,213 21,991
------- ------- -------
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...................... 1,467 1,435 1,338
Accumulated other comprehensive
income.............................. 22 15 20
------- ------- -------
Total Shareholder's Equity.......... 2,404 2,365 2,273
------- ------- -------
Total Liabilities and
Shareholder's Equity............. $25,572 $24,578 $24,264
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
-2-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
Three Months Ended
December 31,
------------------
1999 1998
------ ------
(Unaudited)
Financing Revenues:
Leasing................................. $ 583 $ 620
Retail financing........................ 183 161
Wholesale and other dealer financing.... 31 24
------ ------
Total financing revenues................... 797 805
Depreciation on leases.................. 383 431
Interest expense........................ 277 240
------ ------
Net financing revenues..................... 137 134
Insurance premiums earned and contract
revenues................................ 34 28
Investment and other income................ 22 24
------ -----
Net financing revenues and other revenues.. 193 186
------ ------
Expenses:
Operating and administrative............ 91 83
Provision for credit losses............. 29 29
Insurance losses and loss adjustment
expenses............................. 18 15
------ ------
Total expenses............................. 138 127
------ ------
Income before income taxes................. 55 59
Provision for income taxes................. 23 24
------ ------
Net Income................................. $ 32 $ 35
====== ======
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, 1998.... $ 915 $ 1,303 $ 13 $2,231
------ ------- ---------- ------
Net income for the three months
ended December 31, 1998....... - 35 - 35
Change in net unrealized gains
on available-for-sale
marketable securities......... - - 7 7
------ -------- ---------- ------
Total Comprehensive Income - 35 7 42
------ -------- ---------- ------
Balance at December 31, 1998..... $ 915 $ 1,338 $ 20 $2,273
====== ======= ========== ======
Balance at September 30, 1999.... $ 915 $ 1,435 $ 15 $2,365
------ ------- ---------- ------
Net income for the three months
ended December 31, 1999....... - 32 - 32
Change in net unrealized gains
on available-for-sale
marketable securities......... - - 7 7
------ -------- ---------- ------
Total Comprehensive Income - 32 7 39
------ -------- ---------- ------
Balance at December 31, 1999..... $ 915 $ 1,467 $ 22 $2,404
====== ======= ========== ======
See Accompanying Notes to Consolidated Financial Statements.
-4-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
Three Months Ended
December 31,
--------------------------
1999 1998
------ ------
(Unaudited)
Cash flows from operating activities:
Net income............................................ $ 32 $ 35
------ ------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 400 452
Provision for credit losses..................... 29 29
Gain from sale of finance receivables, net...... (1) (5)
Decrease in other assets........................ 70 324
Decrease in accrued interest.................... (19) (33)
Decrease in deferred income taxes............... (95) (158)
Increase in other liabilities................... 81 22
------ ------
Total adjustments..................................... 465 631
------ ------
Net cash provided by operating activities................ 497 666
------ ------
Cash flows from investing activities:
Addition to investments in marketable securities...... (81) (171)
Disposition of investments in marketable securities... 89 163
Purchase of finance receivables....................... (6,065) (4,573)
Liquidation of finance receivables.................... 4,368 3,723
Proceeds from sale of finance receivables............. 27 821
Addition to investments in operating leases........... (754) (839)
Disposition of investments in operating leases........ 560 756
Change in receivable from Parent and Affiliate........ 337 (1,686)
------ ------
Net cash used in investing activities.................... (1,519) (1,806)
------ ------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable..... 1,749 3,542
Payments on notes and loans payable................... (1,790) (1,104)
Net increase (decrease) in commercial paper with
original maturities less than 90 days.............. 1,018 (1,287)
------ ------
Net cash provided by financing activities................ 977 1,151
------ ------
Net (decrease) increase in cash and cash equivalents..... (45) 11
Cash and cash equivalents at the beginning of the period. 180 156
------ ------
Cash and cash equivalents at the end of the period....... $ 135 $ 167
====== ======
Supplemental disclosures:
Interest paid......................................... $ 290 $ 276
Income taxes paid..................................... $ 5 $ 7
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 months ended December 31, 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 months ended
December 31, 1999 are not necessarily indicative of those expected for any
other interim period or for a full year. Certain December 1998 accounts have
been reclassified to conform with the December 1999 and September 1999
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 67% by Toyota Motor Corporation ("TMC") and 33% by
Toyota Motor Credit Corporation ("TMCC"). As of December 31, 1999 TMCC's
investment in TCA totaled $5 million and is accounted for using the equity
method.
Banco Toyota do Brasil ("BTB") was incorporated in January 1999 and commenced
business operations in June 1999. BTB provides retail and lease financing to
authorized Toyota vehicle dealers and their customers in Brazil. BTB is owned
85% by TMC and 15% by TMCC. As of December 31, 1999 TMCC's investment in BTB
totaled $4 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 1999 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:
December 31, September 30, December 31,
1999 1999 1998
------------ ------------- ------------
(Dollars in Millions)
Retail................................... $10,200 $ 9,524 $ 8,529
Finance leases........................... 4,624 4,065 2,386
Wholesale and other dealer loans......... 1,807 1,292 1,369
------- ------- -------
16,631 14,881 12,284
Unearned income.......................... (993) (888) (642)
Allowance for credit losses.............. (146) (137) (128)
------- ------- -------
Finance receivables, net.............. $15,492 $13,856 $11,514
======= ======= =======
Finance leases included estimated unguaranteed residual values of
$924 million, $823 million and $650 million at December 31, 1999, September 30,
1999 and December 31, 1998, respectively.
The aggregate balances related to finance receivables 60 or more days past due
totaled $29 million, $20 million and $19 million at December 31, 1999,
September 30, 1999 and December 31, 1998, respectively.
Note 3 - Investments in Operating Leases
- ----------------------------------------
Investments in operating leases, net consisted of the following:
December 31, September 30, December 31,
1999 1999 1998
------------ ------------- ------------
(Dollars in Millions)
Vehicles................................. $10,067 $10,246 $11,428
Equipment and other...................... 567 548 474
------- ------- -------
10,634 10,794 11,902
Accumulated depreciation................. (2,145) (2,124) (2,381)
Allowance for credit losses ............. (63) (65) (93)
------- ------- -------
Investments in operating leases, net..... $ 8,426 $ 8,605 $ 9,428
======= ======= =======
-7-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Notes and Loans Payable
- --------------------------------
Notes and loans payable consisted of the following:
December 31, September 30, December 31,
1999 1999 1998
------------ ------------- ------------
(Dollars in Millions)
Commercial paper, net.................... $ 2,642 $ 1,427 $ 2,069
Extendible commercial notes, net......... 75 146 -
------- ------- -------
Other senior debt, due in the years
ending September 30,:
1999.................................. - - 1,744
2000.................................. 2,440 4,077 3,118
2001.................................. 3,799 3,213 3,223
2002.................................. 2,628 2,718 2,661
2003.................................. 2,044 2,095 1,831
2004.................................. 2,773 2,466 1,882
Thereafter............................ 2,784 2,336 2,313
------- ------- -------
16,468 16,905 16,772
Unamortized premium...................... 80 87 101
------- ------- -------
Total other senior debt............... 16,548 16,992 16,873
------- ------- -------
Notes and loans payable............ $19,265 $18,565 $18,942
======= ======= =======
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 27 days and 6.01%,
respectively, at December 31, 1999. The weighted average remaining term and
weighted average interest rate on extendible commercial notes at December 31,
1999 was 20 days and 6.21%, respectively. Short-term MTNs with original terms
of one year or less, included in other senior debt, were $1.3 billion at
December 31, 1999. The weighted average interest rate on these short-term MTNs
was 6.16% at December 31, 1999, including the effect of interest rate swap
agreements.
The weighted average interest rate on other senior debt was 6.06% at
December 31, 1999, including the effect of derivative financial instruments.
This rate has been calculated using rates in effect at December 31, 1999,
substantially all of which are floating rates that reset periodically.
Approximately 43% of other senior debt at December 31, 1999 had floating
interest rates that were covered by option-based products. The weighted
average strike rate on these option-based products was 5.89% at December 31,
1999. TMCC manages interest rate risk through continuous adjustment of the mix
of fixed and floating rate debt using interest rate swap agreements and option-
based products.
Included in notes and loans payable at December 31, 1999 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 $8.1 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 December 31, 1999.
The receivables or payables arising as a result of the differences between the
December 31, 1999 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 $904 million at December 31,
1999.
-8-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - 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
three months ended December 31, 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, respectively. Interest earned on these
investments totaled $5 million and $16 million for the three months ended
December 31, 1999 and 1998, respectively.
Note 6 - Commitments and Contingent Liabilities
- -----------------------------------------------
As of December 31, 1999, TMCC has guaranteed payments of principal, interest
and premiums, if any, on $155.5 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, of which $40 million has been guaranteed as of December 31, 1999.
Note 7 - Segment Information
- ----------------------------
Financial results for the Company's operating segments are summarized below:
Three Months Ended
December 31,
------------------
1999 1998
------- -------
(Dollars in Millions)
Assets:
Financing operations.............. $25,108 $23,877
Insurance operations.............. 769 638
Eliminations/reclassifications.... (305) (251)
------- -------
Total assets.................... $25,572 $24,264
======= =======
Gross revenues:
Financing operations.............. $ 814 $ 823
Insurance operations.............. 39 34
------- -------
Total gross revenues............ $ 853 $ 857
======= =======
Net income:
Financing operations.............. $ 27 $ 28
Insurance operations.............. 5 7
------- -------
Total net income................ $ 32 $ 35
======= =======
-9-
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 months ended December 31, 1999 and 1998:
Three Months Ended
December 31,
------------------
1999 1998
---- ----
(Dollars in Millions)
Net income:
Financing operations................ $27 $28
Insurance operations................ 5 7
--- ---
Total net income................. $32 $35
=== ===
Net income from financing operations decreased 4% for the quarter ended
December 31, 1999, as compared with the same period in fiscal 1999 primarily
due to higher interest expense, decreased financing revenues and higher
operating and administrative expenses, substantially offset by lower
depreciation on leases.
Net income from insurance operations decreased 29% for the quarter ended
December 31, 1999, as compared with the same period in fiscal 1999, primarily
due to higher operating and administrative expenses and higher insurance
losses and loss adjustment expenses, partially offset by increased revenues
and the $1.5 million gain on the sale of Toyota Motor Life Insurance Company,
an indirect wholly-owned subsidiary of TMCC.
-10-
Earning Assets
- --------------
The composition of TMCC's net earning assets (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 months ended December 31, 1999 and 1998 are summarized below:
December 31, September 30, December 31,
1999 1999 1998
----------- ------------- ------------
(Dollars in Millions)
Vehicle lease
Investment in operating leases, net..... $ 8,098 $ 8,290 $ 9,192
Finance leases, net..................... 3,778 3,315 1,908
------- ------- -------
Total vehicle leases..................... 11,876 11,605 11,100
Vehicle retail finance receivables, net.. 9,542 8,916 7,933
Vehicle wholesale and other receivables.. 2,709 2,142 2,130
Allowance for credit losses.............. (209) (202) (221)
------- ------- -------
Total net earning assets................. $23,918 $22,461 $20,942
======= ======= =======
Three Months Ended
December 31,
------------------
1999 1998
------- -------
Total contract volume:
Vehicle lease................................... 57,000 55,000
Vehicle retail.................................. 85,000 56,000
------- -------
Total.............................................. 142,000 111,000
======= =======
TMS sponsored contract volume:
Vehicle lease................................... 14,000 5,000
Vehicle retail.................................. 5,000 3,000
------- -------
Total.............................................. 19,000 8,000
======= =======
Finance penetration (excluding fleet):
Vehicle lease................................... 16.0% 16.1%
Vehicle retail.................................. 15.2% 11.1%
----- -----
Total.............................................. 31.2% 27.2%
===== =====
-11-
TMCC's net earning assets increased to $23.9 billion at December 31, 1999 from
$22.5 billion at September 30, 1999 and $20.9 billion at December 31, 1998.
Asset growth from September 30, 1999 and December 31, 1998, reflects primarily
higher retail contract volume and increased lease earning assets. The
increase in retail earning assets was partially offset by the sale of
$989 million of retail finance receivables in July 1999. Wholesale earning
assets increased from September 30, 1999 and December 31, 1998, due to an
increase in the number of dealers receiving wholesale financing from TMCC. The
allowance for credit losses increased from September 30, 1999 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 increased in the first quarter of fiscal 2000 as
compared with the same period in fiscal 1999 reflecting higher levels of
programs sponsored by TMS.
TMCC's retail contract volume increased in the first quarter of fiscal 2000 as
compared with the same period in fiscal 1999 primarily due to higher finance
penetration on strong sales of Toyota and Lexus vehicles.
-12-
Net Financing Revenues and Other Revenues
- -----------------------------------------
TMCC's net financing revenues increased 2% in the first quarter of fiscal 2000
as compared with the same period in fiscal 1999 primarily due to lower
depreciation on leases, described below under Depreciation on Leases and
increased retail and wholesale revenue, substantially offset by higher
interest expense and lower leasing revenue. 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 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 21% in the first
quarter of fiscal 2000 as compared with the same period in fiscal 1999 due to
higher underwriting revenues associated with in-force agreements.
The following table summarizes TMCC's investment and other income for the
three months ended December 31, 1999 and 1998:
Three Months Ended
December 31,
------------------
1999 1998
---- ----
(Dollars in Millions)
Investment income...................... $ 11 $ 10
Servicing fee income................... 10 9
Gains on assets sold................... 1 5
---- ----
Investment and other income......... $ 22 $ 24
==== ====
Investment income increased 10% in the first quarter of fiscal 2000 as
compared with the same period in fiscal 1999 primarily due to increased
interest income.
Servicing fee income increased 11% in the first quarter of fiscal 2000 as
compared with the same period in fiscal 1999 due to growth in the combined
balance of sold interests in lease finance and sold retail receivables.
Gains on assets sold decreased by $4 million as compared with the same period
in fiscal 1999 reflecting a decrease in the amount of finance receivables
sold. Gains recognized on asset-backed securitization transactions generally
accelerate the recognition of income on lease and retail contracts, net of
servicing fees and other related deferrals, into the period 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.
-13-
Depreciation on Leases
- ----------------------
The following table sets forth the items included in TMCC's depreciation on
leases for the three months ended December 31, 1999 and 1998:
Three Months Ended
December 31,
------------------
1999 1998
---- ----
(Dollars in Millions)
Straight-line depreciation on operating leases... $321 $361
Provision for residual value losses.............. 62 70
---- ----
Total depreciation on leases.................. $383 $431
==== ====
Straight-line depreciation expense decreased 11% in the first quarter of
fiscal 2000 as compared with the same period in fiscal 1999 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 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
increased from approximately $6.5 billion at September 30, 1999 to $6.9
billion at December 31, 1999. 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.
-14-
The decrease in the provision for residual value losses for the quarter ended
December 31, 1999 as compared with the same period in fiscal 1999 reflects
management's estimate that current reserve levels are considered adequate to
cover expected losses at vehicle disposition as of December 31, 1999. 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 51% in the first
quarter of fiscal 2000 as compared to 45% for the same period in fiscal 1999.
Losses at vehicle disposition decreased $3 million in the first quarter of
fiscal 2000 as compared with the same period in fiscal 1999 and per unit
residual value loss rates have improved for the same period.
TMCC believes that industry-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 return rates
reflect the impact of competitive new vehicle pricing for core Toyota and
Lexus models. 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 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 through fiscal 2000 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, expanding marketing of off-lease vehicles through the internet and
maximizing 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.
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
40 months and 39 months at December 31, 1999 and 1998, respectively.
Interest Expense
- ----------------
Interest expense increased 15% in the first quarter of fiscal 2000 as compared
with the same period in fiscal 1999 primarily due to higher average cost of
borrowings and increased average debt outstanding. The weighted average cost
of borrowings was 5.89% and 5.50% for the three months ended December 31, 1999
and 1998, respectively.
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased 10% in the first quarter of
fiscal 2000 as compared with the same period in fiscal 1999 reflecting
primarily additional personnel and operating costs required to support TMCC's
growing customer base, as well as costs in connection with technology-related
projects.
-15-
Provision for Credit Losses
- ---------------------------
TMCC's provision for credit losses for the quarter ended December 31, 1999
remained at the same level as the quarter ended December 31, 1998. 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 December 31, 1999.
In fiscal 1999, TMCC pilot tested 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 national roll-out of the expanded tiered
pricing program for both retail and lease vehicle contracts is planned for
fiscal 2000. Implementation of this expanded program may result in both
increased contract yields and increased 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 months ended December 31, 1999 and
1998, was as follows:
Three Months Ended
December 31,
------------------
1999 1998
----- -----
(Dollars in Millions)
Gross Credit Losses............. $25.5 $26.9
Recoveries...................... (4.3) (4.4)
----- -----
Net Credit Losses............... $21.2 $22.5
===== =====
Annualized Net Credit Losses
as a % of Average Earning
Assets....................... 0.36% 0.43%
The allowance for credit losses and the allowance for credit losses as a
percent of earning assets as of the balance sheet dates reported herein are
summarized below:
December 31, September 30, December 31,
1999 1999 1998
------------ ------------- ------------
(Dollars in Millions)
Allowance for Credit Losses..... $209 $202 $221
Allowance for Credit Losses
as a % of Earning Assets..... 0.87% 0.89% 1.04%
-16-
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-backed
securities programs. Debt issuances have generally been in the form of
commercial paper, extendible commercial notes, domestic and euro medium-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 $1.5 billion to $2.7 billion during the
first three months of fiscal 2000, with an average outstanding balance of
$2.2 billion. The outstanding balance of extendible commercial notes at
December 31, 1999 totaled $75 million. For additional liquidity purposes, TMCC
maintains syndicated bank credit facilities with certain banks which aggregated
$2.7 billion at December 31, 1999. No loans were outstanding under any of
these bank credit facilities during the first three months of fiscal 2000.
TMCC also maintains uncommitted, unsecured lines of credit with banks totaling
$175 million, of which $100 million is maintained along with TMS. At
December 31, 1999, TMCC and TMS had issued approximately $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 three months of fiscal 2000,
TMCC issued approximately $1.5 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 December 31, 1999
ranged from one to eleven years. As of December 31, 1999, TMCC had total MTNs
and bonds outstanding of $16.3 billion, of which $7.2 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
January 31, 2000 approximately $4.6 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 $5.7 billion was available for issuance under the euro MTN
program as of January 31, 2000. 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 three months ended
December 31, 1999, the number and principal amount of leases purchased by the
Toyota Lease Trust in connection with TMCC's lease securitization program
comprised a significant and increasing percentage of what otherwise would have
been TMCC's lease portfolio. 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-backed
notes secured by, and certificates representing interests in, retail
receivables. As of January 31, 2000, $1.5 billion remained available for
issuance under the registration statement.
-17-
TMCC's ratio of earnings to fixed charges was 1.20 for the first three months
of fiscal 2000 compared to 1.24 for the first three months of fiscal 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 and
increased personnel and operating expenses attributable to TMCC's growing
customer base and technology upgrades.
Cash flows provided by operating, investing and financing activities have been
used primarily to support earning asset growth. During the first three months
of fiscal 2000, cash used to purchase additional finance receivables and
investments in operating leases, totaling $6.8 billion, was partially provided
by the liquidation and sale of earning assets totaling $4.9 billion. Investing
activities resulted in a net cash use of $1.5 billion during the first three
months of fiscal 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 $497 million and $977 million, respectively, during the
first three months of fiscal 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 extendible
commercial notes, and asset-backed securitization transactions will provide
sufficient liquidity to meet its future funding requirements.
-18-
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 participated in TMS' comprehensive action plan to
identify and address year 2000 issues. As part of the year 2000 action plan,
TMCC identified and evaluated potential year 2000 problems and implemented
changes designed to yield year 2000 compliance in its information technology
systems. An additional component of the year 2000 action plan involved TMCC's
communications with its external business partners. The risks to TMCC,
mitigation efforts and contingency plans have been described in our most recent
annual report on Form 10-K. The following information updates those
disclosures.
TMCC has completed all major year 2000 projects. With the passage of January
1, 2000, TMCC and its external business partners have not experienced any
significant disruptions due to the inability of any system to recognize the
century dates accurately. Based on this experience, we currently do not expect
any significant disruptions in the future as a result of the year 2000 issue or
the fact that 2000 is a leap year. Accordingly, the year 2000 issue has not
had, and is not currently expected to have, any material adverse effect on
TMCC's results of operation, liquidity or capital resources.
Costs associated with the year 2000 systems and software modifications are
generally expensed as incurred. TMS has allocated 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, of which approximately
$17.4 million has been incurred as of December 31, 1999. 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.
-19-
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 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 current reserve levels are considered adequate to cover expected losses at
vehicle disposition; that the implementation of the expanded tiered pricing
program may result in increased contract yields and increased credit losses in
connection with purchases of higher risk contracts; that TMCC expects the large
supply of vehicles coming off-lease to continue through fiscal 2000 and that
the full term return ratio and losses will remain at or near current levels;
that allowances for credit losses are considered adequate to cover expected
credit losses; that TMCC anticipates continued use of MTNs and bonds in 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 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 TMCC's
future funding requirements; that TMCC does not expect any significant
disruptions in the future as a result of the year 2000 issue or the fact that
2000 is a leap year; that the year 2000 issue is not currently expected to
have any material adverse effect on TMCC's results of operation, liquidity or
capital resources; that the total estimated cost in connection with the year
2000 issue is not expected to have a material adverse effect on the Company's
results of operations, liquidity or capital resources.
The Company cautions that the forward looking statements referred 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 causing an increase in vehicle returns and disposition losses; the
continuation of, and if continued, the level and type of special programs
offered by TMS; the ability of the Company to successfully access the United
States and international capital markets; the effects of any rating agency
actions; the monetary policies exercised by the European Central Bank and other
monetary authorities; failure of TMCC's business partners to timely resolve
their year 2000 issues; 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.
-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.
-21-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As discussed more fully in TMCC's 1999 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 December 31, 1999 reduced by
the effects of master netting agreements. The credit exposure of TMCC's
derivative financial instruments at December 31, 1999 was $81 million on an
aggregate notional amount of $26.1 billion. At December 31, 1999 approximately
94% of TMCC's derivative financial instruments, based on notional amounts, were
with commercial banks and investment banking firms assigned investment grade
ratings of "AA" or better by national rating agencies. TMCC does not currently
anticipate non-performance by any of its counterparties.
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
December 31, 1999, 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 .47% from 6.05% to an
estimated 6.52%. 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 .47%
from 6.05% to an estimated 5.58% at December 31, 1999. TMCC's interest rate
exposure primarily results from changes in U.S. commercial paper rates and U.S.
LIBOR.
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.
The value-at-risk methodology uses four years of historical interest rate data
to build a database of prediction errors in forward rates for a one month
holding period. These prediction errors are then applied randomly to current
forward rates through a Monte Carlo process to simulate 500 potential future
yield curves. The portfolio is then re-priced with these curves to develop a
distribution of future portfolio values. Options in the portfolio are priced
with current market implied volatilities and the simulated yield curves using
the Black Scholes method. The lowest portfolio value at the 95% confidence
interval is compared with the current portfolio value to derive the value-at-
risk number.
-22-
The value-at-risk and the average value-at-risk of TMCC's portfolio as of
December 31, 1999 and for the three months ended December 31, 1999, measured
as the potential 30 day loss in fair value from assumed adverse changes in
interest rates are as follows:
Average for the
As of Three Months Ended
December 31, 1999 December 31, 1999
----------------- -------------------
Mean portfolio value..................... $3,740.0 million $3,620.0 million
Value-at-risk............................ $105.9 million $96.1 million
Percentage of the mean portfolio value... 2.8% 2.2%
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 three months ended December 31, 1999 and 1998 is as follows:
Three Months Ended December 31,
------------------------------------------------------------
Cross
Currency
Interest Interest Indexed
Rate Swap Rate Swap Option-based Note Swap
Agreements Agreements Products Agreements
------------ ------------ ------------ ------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Billions)
Beginning notional amount....... $8.8 $9.0 $9.0 $7.3 $6.9 $6.3 $1.3 $0.8
Add:
New agreements............... 0.8 - 0.5 3.2 1.2 0.2 - -
Less:
Terminated agreements........ - - - 0.3 - - - -
Expired agreements........... 1.0 0.1 0.8 0.8 0.6 0.1 - 0.2
---- ---- ---- ---- ---- ---- ---- ----
Ending notional amount.......... $8.6 $8.9 $8.7 $9.4 $7.5 $6.4 $1.3 $0.6
==== ==== ==== ==== ==== ==== ==== ====
-23-
Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month periods ended December 31, 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
February 11, 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.
-24-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Various legal actions, governmental proceedings and other claims are pending or
may be instituted or asserted in the future against TMCC and its subsidiaries
with respect to matters arising from the ordinary course of business. Certain
of these actions are or purport to be class action suits, seeking sizeable
damages. 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 December 31, 1999 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 28,
are filed as part of this report.
(b) Reports on Form 8-K
The following report on Form 8-K was filed by the registrant during
the quarter ended December 31, 1999, which did not contain
financial statements:
Date of Report Items Reported
----------------- -------------------------------------------
November 22, 1999 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: February 11, 2000 By /S/ GEORGE E. BORST
-------------------------------
George E. Borst
Senior Vice President and
General Manager
(Principal Executive Officer)
Date: February 11, 2000 By /S/ GREGORY B. WILLIS
-------------------------------
Gregory B. Willis
Vice President
Finance and Administration
(Principal Accounting Officer)
-26-
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
27.1 Financial Data Schedule. Filed
Herewith
-27-