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, 2001
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 468-1310
-----------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of July 31, 2001, the number of outstanding shares of capital
stock, par value $10,000 per share, of the registrant was 91,500, all of which
shares were held by Toyota Financial Services Americas Corporation.
-1-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
June 30, March 31, June 30,
2001 2001 2000
------------ ------------- ------------
(Unaudited) (Unaudited)
ASSETS
------
Cash and cash equivalents................. $ 265 $ 294 $ 161
Investments in marketable securities...... 1,116 1,075 890
Finance receivables, net.................. 19,842 19,216 16,787
Investments in operating leases, net...... 7,200 7,409 8,151
Receivable from Parent and Affiliate...... - - 189
Derivative assets......................... 379 379 -
Other receivables......................... 279 311 466
Deferred charges.......................... 111 117 125
Other assets.............................. 370 334 275
Income taxes receivable................... 131 79 -
------- ------- -------
Total Assets..................... $29,693 $29,214 $27,044
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................... $22,200 $22,194 $20,475
Accrued interest.......................... 110 151 151
Derivative liabilities.................... 1,752 1,414 -
Accounts payable and accrued expenses..... 690 635 1,645
Deposits.................................. 125 139 172
Income taxes payable...................... - - 45
Deferred income........................... 736 699 663
Deferred income taxes..................... 1,516 1,468 1,445
------- ------- -------
Total Liabilities................... 27,129 26,700 24,596
------- ------- -------
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...................... 1,631 1,581 1,515
Accumulated other comprehensive
income.............................. 18 18 18
------- ------- -------
Total Shareholder's Equity.......... 2,564 2,514 2,448
------- ------- -------
Total Liabilities and
Shareholder's Equity............. $29,693 $29,214 $27,044
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
-2-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
Three Months Ended
June 30,
------------------
2001 2000
------ ------
(Unaudited)
Financing Revenues:
Leasing................................. $ 620 $ 606
Retail financing........................ 194 204
Wholesale and other dealer financing.... 60 51
------ ------
Total financing revenues................... 874 861
Depreciation on leases.................. 374 322
Interest expense........................ 296 347
SFAS 133 fair value adjustments......... (9) -
------ ------
Net financing revenues..................... 213 192
Insurance premiums earned and contract
revenues................................ 40 35
Investment and other income................ 65 22
Loss on asset impairment................... 47 60
------ -----
Net financing revenues and other revenues.. 271 189
------ ------
Expenses:
Operating and administrative............ 114 104
Provision for credit losses............. 50 29
Insurance losses and loss adjustment
expenses............................. 20 21
------ ------
Total expenses............................. 184 154
------ ------
Income before equity in net loss of
subsidiary and income taxes............. 87 35
Equity in net loss of subsidiary........... - 1
Provision for income taxes................. 37 11
------ ------
Net Income................................. $ 50 $ 23
====== ======
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 March 31, 2000........ $ 915 $ 1,492 $ 15 $ 2,422
------ ------- ---------- -------
Net income for the three months
ended June 30, 2000........... - 23 - 23
Change in net unrealized gains
on available-for-sale
marketable securities......... - - 3 3
------ -------- ---------- -------
Total Comprehensive Income - 23 3 26
------ -------- ---------- -------
Balance at June 30, 2000
(unaudited)................... $ 915 $ 1,515 $ 18 $ 2,448
====== ======= ========== =======
Balance at March 31, 2001........ $ 915 $ 1,581 $ 18 $ 2,514
------ ------- ---------- -------
Net income for the three months
ended June 30, 2001........... - 50 - 50
Change in net unrealized gains
on available-for-sale
marketable securities......... - - - -
------ -------- ---------- -------
Total Comprehensive Income - 50 - 50
------ -------- ---------- -------
Balance at June 30, 2001
(unaudited)................... $ 915 $ 1,631 $ 18 $ 2,564
====== ======= ========== =======
See Accompanying Notes to Consolidated Financial Statements.
-4-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
Three Months Ended
June 30,
--------------------------
2001 2000
------ ------
(Unaudited)
Cash flows from operating activities:
Net income............................................ $ 50 $ 23
------ ------
Adjustments to reconcile net income to net
cash provided by operating activities:
Fair value adjustments of SFAS 133 derivatives.. (9) -
Depreciation and amortization................... 373 367
Provision for credit losses..................... 50 29
Gain from sale of finance receivables, net...... (26) (5)
Gain from sale of marketable securities, net.... (1) (1)
Loss on asset impairment........................ 47 60
Increase in other assets........................ (110) (168)
Decrease in accrued interest.................... (41) (25)
Increase in deferred income taxes............... 48 22
Increase in other liabilities................... 78 11
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Total adjustments..................................... 409 290
------ ------
Net cash provided by operating activities................ 459 313
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Cash flows from investing activities:
Addition to investments in marketable securities...... (865) (669)
Disposition of investments in marketable securities... 816 215
Purchase of finance receivables....................... (8,214) (6,287)
Liquidation of finance receivables.................... 6,121 4,989
Proceeds from sale of finance receivables............. 1,450 1,449
Addition to investments in operating leases........... (863) (699)
Disposition of investments in operating leases........ 704 575
Decrease in receivable from Affiliate................. - (124)
------ ------
Net cash used in investing activities.................... (851) (551)
------ ------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable..... 2,005 1,430
Payments on notes and loans payable................... (1,186) (373)
Net decrease in commercial paper with
original maturities less than 90 days.............. (456) (817)
------ ------
Net cash provided by financing activities................ 363 240
------ ------
Net (decrease) increase in cash and cash equivalents..... (29) 2
Cash and cash equivalents at the beginning of the period. 294 159
------ ------
Cash and cash equivalents at the end of the period....... $ 265 $ 161
====== ======
Supplemental disclosures:
Interest paid......................................... $ 328 $ 368
Income taxes paid..................................... $ 43 $ 4
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 June 30, 2001 and 2000 is
unaudited. In the opinion of management, the unaudited financial information
reflects all adjustments necessary for a fair statement of the results for the
interim periods presented. The results of operations for the three months
ended June 30, 2001 are not necessarily indicative of those expected for any
other interim period or for a full year. Certain June 2000 accounts have been
reclassified to conform with the June 2001 and March 2001 presentation.
These financial statements should be read in conjunction with the consolidated
financial statements, significant accounting policies and other notes to the
consolidated financial statements included in Toyota Motor Credit Corporation's
("TMCC's" or the "Company's") 2001 Transitional Annual Report to the Securities
and Exchange Commission ("SEC") on Form 10-KT.
-6-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Derivatives and Hedging Activities
- -------------------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Derivative assets and liabilities include interest rate swaps, indexed
note swap agreements, cross currency interest rate swap agreements and option-
based products. The accounting for the gain or loss due to changes in fair
value of the hedged item depends on whether the relationship between the hedged
item and the derivative instrument qualifies for hedge treatment. If the
relationship between the hedged item and the derivative instrument does not
qualify as a hedge, the gains or losses are reported in earnings when they
occur. However, if the relationship between the hedged item and the derivative
instrument qualifies as a hedge, the accounting varies based on the type of
risk being hedged.
For the three months ended June 30, 2001, the Company recognized income of $9
million (reported as SFAS 133 fair value adjustments in the Consolidated
Statement of Income). The net adjustment reflects a gain of $20 million
related to the ineffective portion of TMCC's fair-value hedges, offset by a
$11 million decrease in the fair market value of TMCC's portfolio of option-
based products and certain interest rate swaps. The decrease in the fair
market value of TMCC's option-based products as well as certain interest rate
swaps are due to lower market interest rates. Various derivative instruments,
such as option-based products and certain interest rate swaps which hedge
interest rate risk from an economic perspective, and which the Company is
unable or has elected not to apply hedge accounting, is discussed in Non-
Hedging Activities below. For fair value hedging relationships, all components
of each derivative's gain or loss were included in the assessment of hedge
effectiveness.
TMCC maintains an overall risk management strategy that utilizes a variety of
interest rate and currency derivative financial instruments to mitigate its
exposure to fluctuations caused by volatility in interest rate and currency
exchange rates. TMCC does not use any of these instruments for trading
purposes.
Fair-Value Hedges
- -----------------
The Company enters into interest rate swaps, indexed note swap agreements and
cross currency interest rate swap agreements to convert its fixed-rate debt to
variable-rate debt, a portion of which is covered by option-based products.
(Refer to non-hedging activities below for a discussion on option-based
products).
TMCC uses interest rate swap agreements in managing its exposure to interest
rate fluctuations. Interest rate swap agreements are executed as an integral
part of specific debt transactions or on a portfolio basis. TMCC's interest
rate swap agreements involve agreements to pay fixed and receive a floating
rate, or receive fixed and pay a floating rate, at specified intervals,
calculated on an agreed-upon notional amount. Interest rate swap agreements
may also involve basis swap contracts which are agreements to exchange the
difference between certain floating interest amounts, such as the net payment
based on the commercial paper rate and the London Interbank Offered Rate
("LIBOR"), calculated on an agreed-upon notional amount. The original
maturities of interest rate swap agreements ranged from one to ten years at
June 30, 2001.
-7-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Derivatives and Hedging Activities (Continued)
- ------------------------------------
TMCC uses indexed note swap agreements in managing its exposure in connection
with debt instruments whose interest rate and/or principal redemption amounts
are derived from other underlying indices. Indexed note swap agreements
involve agreements to receive interest and/or principal amounts associated
with the indexed notes, denominated in either U.S. dollars or a foreign
currency, and to pay fixed or floating rates on fixed U.S. dollar liabilities.
TMCC uses cross currency interest rate swap agreements to entirely hedge
exposure to exchange rate fluctuations on principal and interest payments for
borrowings denominated in foreign currencies. Notes and loans payable issued
in foreign currencies are hedged by concurrently executing cross currency
interest rate swap agreements which involve the exchange of foreign currency
principal and interest obligations for U.S. dollar obligations at agreed-upon
currency exchange and interest rates.
Derivative 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 risk is managed
through the use of credit standard guidelines, counterparty diversification,
monitoring of counterparty financial condition and master netting agreements in
place with all derivative counterparties. Credit exposure of derivative
instruments is discussed further under Item 3. Quantitative and Qualitative
Disclosures About Market Risk.
Non-Hedging Activities
- ----------------------
Option-based products are executed on a portfolio basis and consist primarily
of purchased interest rate cap agreements and, to a lesser extent, corridor
agreements. Option-based products are agreements which either grant TMCC the
right to receive, or require TMCC to make payments at, specified interest rate
levels. Option-based products are used to hedge interest rate risk from an
economic perspective on TMCC's portfolio of pay-variable receive-fixed interest
rate swaps.
The Company uses this strategy to minimize its exposure to volatility in LIBOR.
These products are not linked to specific assets and liabilities that appear on
the balance sheet and therefore, do not qualify for hedge accounting. In
addition, the Company also uses certain interest rate swaps for overall
asset/liability management purposes. These products are not linked to specific
assets or liabilities.
Accounting for Derivatives and Hedging Activities
- -------------------------------------------------
All derivatives are recognized on the balance sheet at their fair value. On
the date that the Company enters into a derivative contract, it designates the
derivative as a hedge of the fair value of a recognized asset or liability or a
foreign-currency fair-value hedge (a "foreign currency hedge"). Changes in the
fair value of a derivative that is highly effective as - and that is designated
and qualifies as - a fair-value hedge or foreign-currency hedge, along with
changes in fair value of the hedged asset or liability that are attributable to
the hedged risk, are recorded in current-period earnings.
-8-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Derivatives and Hedging Activities (Continued)
- ------------------------------------
The Company occasionally purchases a financial instrument in which a derivative
instrument is "embedded." Upon purchasing the financial instrument, the
Company assesses whether the economic characteristics of the embedded
derivative are clearly and closely related to the economic characteristics of
the remaining component of the financial instrument (i.e. host contract) and
whether a separate, non-embedded instrument with the same terms as the embedded
instrument would meet the definition of a derivative instrument. When it is
determined that (1) the embedded derivative possesses economic characteristics
that are not clearly and closely related to the economic characteristics of the
host contract and (2) a separate, stand-alone instrument with the same terms
would qualify as a derivative instrument, the embedded derivative is separated
from the host contract, carried at fair value, and designated as either (1) a
fair-value hedge or (2) non-hedging derivative instrument. However, if the
entire contract were to be measured at fair value, with changes in fair value
reported in current earnings, or if the Company could not reliably identify and
measure the embedded derivative for purposes of separating that derivative from
its host contract, the entire contract would be carried on the balance sheet at
fair value and not be designated as a hedging instrument.
The Company formally documents relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking
derivatives that are designated as fair-value hedges to specific liabilities on
the balance sheet. The Company also assesses whether the derivatives that are
used in hedging transactions have been highly effective in offsetting changes
in the fair value of hedged items and whether those derivatives may be expected
to remain highly effective in future periods. When it is determined that a
derivative is not (or has ceased to be) highly effective as a hedge, the
Company discontinues hedge accounting prospectively, as discussed below.
The Company will discontinue hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair value of a hedged item; (2) the derivative expires or is sold,
terminated, or exercised; or (3) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued due to the Company's determination that
the derivative no longer qualifies as an effective fair-value hedge, the
Company will continue to carry the derivative on the balance sheet at its fair
value but cease to adjust the hedged liability for changes in fair value. In a
situation in which hedge accounting is discontinued and the derivative remains
outstanding, the Company will carry the derivative at its fair value on the
balance sheet, recognizing changes in the fair value in current-period
earnings.
-9-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Finance Receivables
- ----------------------------
Finance receivables, net consisted of the following:
June 30, March 31, June 30,
2001 2001 2000
------------ ------------- ------------
(Dollars in Millions)
Retail................................... $ 9,641 $ 9,370 $ 9,664
Finance leases........................... 8,452 7,871 6,047
Wholesale and other dealer loans......... 3,449 3,619 2,464
------- ------- -------
21,542 20,860 18,175
Unearned income.......................... (1,528) (1,476) (1,237)
Allowance for credit losses.............. (172) (168) (151)
------- ------- -------
Finance receivables, net.............. $19,842 $19,216 $16,787
======= ======= =======
Finance leases included estimated unguaranteed residual values of
$1,595 million, $1,532 million and $1,188 million at June 30, 2001, March 31,
2001 and June 30, 2000, respectively.
The aggregate balances related to finance receivables 60 or more days past due
totaled $34 million, $29 million and $32 million at June 30, 2001, March 31,
2001 and June 30, 2000, respectively.
Note 4 - Investments in Operating Leases
- ----------------------------------------
Investments in operating leases, net consisted of the following:
June 30, March 31, June 30,
2001 2001 2000
------------ ------------ ------------
(Dollars in Millions)
Vehicles................................. $ 8,553 $ 8,891 $ 9,770
Equipment and other...................... 706 689 615
------- ------- -------
9,259 9,580 10,385
Accumulated depreciation................. (2,000) (2,112) (2,174)
Allowance for credit losses ............. (59) (59) (60)
------- ------- -------
Investments in operating leases, net..... $ 7,200 $ 7,409 $ 8,151
======= ======= =======
-10-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Notes and Loans Payable
- --------------------------------
Notes and loans payable consisted of the following:
June 30, March 31, June 30,
2001 2001 2000
------------ ------------- ------------
(Dollars in Millions)
Commercial paper, net.................... $ 3,965 $ 4,407 $ 2,468
Extendible commercial notes, net......... - - 51
------- ------- -------
Other senior debt, due in the years
ending:
2001.................................. - - 4,469
2002.................................. 3,835 4,620 3,626
2003.................................. 3,428 3,080 1,843
2004.................................. 5,281 5,182 4,042
2005.................................. 1,970 1,839 1,519
2006.................................. 1,477 1,228 421
Thereafter............................ 2,244 1,838 1,964
------- ------- -------
18,235 17,787 17,884
Unamortized premium...................... - - 72
------- ------- -------
Total other senior debt............... 18,235 17,787 17,956
------- ------- -------
Notes and loans payable............ $22,200 $22,194 $20,475
======= ======= =======
Notes and loans payable at June 30, 2001 reflect the adjustments required under
SFAS 133 for derivatives and debt instruments which qualify for hedge treatment
as discussed in Note 2 - Derivatives and Hedging Activities. Prior period
amounts have not been restated. The notional amount of notes and loans payable
was $18.6 billion at June 30, 2001.
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 20 days and 3.86%,
respectively, at June 30, 2001. At June 30, 2001, TMCC had no extendible
commercial notes. Short-term MTNs with original terms of one year or less,
included in other senior debt, were $1,762 million at June 30, 2001. The
weighted average interest rate on these short-term MTNs was 3.35% at June 30,
2001, including the effect of interest rate swap agreements.
The weighted average interest rate on other senior debt was 4.60% at June 30,
2001, including the effect of interest rate swap agreements. This rate has
been calculated using rates in effect at June 30, 2001, some of which are
floating rates that reset periodically. Less than one percent of other senior
debt at June 30, 2001 had interest rates, including the effect of interest rate
swap agreements, that were fixed for a period of more than one year.
Approximately 56% of other senior debt at June 30, 2001 had floating interest
rates that were covered by option-based products. The weighted average strike
rate on these option-based products was 6.52% at June 30, 2001. TMCC manages
interest rate risk through continuous adjustment of the mix of fixed and
floating rated debt using interest rate swap agreements and option-based
products.
-11-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Notes and Loans Payable (Continued)
- --------------------------------
Included in notes and loans payable at June 30, 2001 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 $8.6 billion.
Note 6 - Sale of Retail Receivables and Valuation of Residual Interest
- ----------------------------------------------------------------------
During May 2001, TMCC sold retail finance receivables totaling $1.5 billion
subject to certain limited recourse provisions. TMCC sold its receivables to
Toyota Auto Finance Receivables ("TAFR") which in turn sold them to a trust;
TMCC remains as servicer and is paid a servicing fee. In a subordinated
capacity, TAFR retains excess servicing cash flows, certain cash deposits and
other related amounts which are held as restricted assets subject to limited
recourse provisions. These restricted assets are not available to satisfy any
obligations of TMCC. Investors in these securitizations have recourse to the
interest only strips, restricted cash held by the securitization trusts, and
any subordinated retained interest. Investors do not have recourse to other
assets held by TMCC for failure of debtors to pay when due.
Key economic assumptions used in measuring the fair value of retained
interests and calculation of the pretax gain at the date of sale are as
follows:
Collateral prepayment speed......................... 1.50% ABS
Weighted average life (in years).................... 1.26
Collateral expected credit losses (per annum)....... 0.70%
Discount rate used on residual cash flows........... 10% - 12%
Discount rate used on the subordinated tranche...... 8%
Included in investment and other income for the quarter ended June 30, 2001 is
a net pretax gain of $29.5 million resulting from the sale of retail finance
receivables. The gain on sale recorded depends on the carrying amount of the
assets at the time of the sale. The carrying amount is allocated between the
assets sold and the retained interests based on their relative fair values at
the date of the sale. The fair value of retained interests was estimated by
discounting expected cash flows using management's best estimates of key
assumptions.
TMCC performs a periodic review of the fair market value of assets retained in
the sale of retail receivables and interests in lease finance receivables.
The fair market value of these retained assets is impacted by management's and
the market's expectations as to future losses on vehicle disposition, credit
losses and prepayment rates. In June 2001, the Company experienced a
deterioration in return rates and loss per unit upon disposition. This
experience, combined with revised forecasts for future return rates and loss
per unit, resulted in a downward revision to the vehicle disposition
assumptions. The assumption for expected residual value losses for the lease
securitizations was 4.9%-7.6% at March 31, 2001 and has been revised to 7.1%-
7.9% at June 30, 2001. This decline is primarily related to the performance of
leases originated prior to model year 1999 and scheduled to terminate over the
next 9 months. As a result of the decline, in the first quarter TMCC
recognized losses due to the permanent impairment of assets retained in the
sale of interests in lease finance receivables totaling $47 million as
required by EITF 99-20.
-12-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Related Party Transactions
- -----------------------------------
During fiscal 2000, TMCC had an arrangement to borrow from and invest funds
with Toyota Motor Sales, U.S.A., Inc. ("TMS") at short-term market rates. This
arrangement was terminated on October 1, 2000, when ownership of TMCC was
transferred from TMS to Toyota Financial Services Americas Corporation
("TFSA"), a holding company owned 100% by Toyota Financial Services Corporation
("TFSC"). TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor
Corporation ("TMC"). Due to the termination of the arrangement, no funds were
borrowed from or invested with TMS during the three months ended June 30, 2001.
In connection with the creation of TFSC and the transfer of ownership of TMCC
from TMS to TFSC, the Operating Agreement with TMS and Toyota Motor
Manufacturing North America Inc. ("TMMNA") was terminated, a new credit
support agreement (the "TMC Credit Support Agreement") was entered into between
TMC and TFSC, and a new credit support agreement (the "TFSC Credit Support
Agreement") was entered into between TFSC and TMCC. Under the terms of the TMC
Credit Support Agreement, TMC agreed to: 1) maintain 100% ownership of TFSC; 2)
cause TFSC and its subsidiaries to have a net worth of at least Japanese yen 10
million; and 3) make sufficient funds available to TFSC so that TFSC will be
able to (i) service the obligations arising out of its own bonds, debentures,
notes and other investment securities and commercial paper and (ii) honor its
obligations incurred as a result of guarantees or credit support agreements
that it has extended. The agreement is not a guarantee by TMC of any
securities or obligations of TFSC. Under the terms of the TFSC Credit Support
Agreement, TFSC agreed to: 1) maintain 100% ownership of TMCC; 2) cause TMCC
and its subsidiaries to have a net worth of at least U.S. $100,000; and 3) make
sufficient funds available to TMCC so that TMCC will be able to service the
obligations arising out of its own bonds, debentures, notes and other
investment securities and commercial paper (collectively, "TMCC Securities").
The agreement is not a guarantee by TFSC of any TMCC Securities or other
obligations of TMCC. The TMC Credit Support and the TFSC Credit Support
Agreements are governed by, and construed in accordance with, the laws of
Japan. Net charges reimbursed by TMCC to TFSC totaled $3 million for the
quarter ended June 30, 2001.
TMS allocates charges for certain technological and administrative services
provided to TMCC. During fiscal 2001, TMS and TMCC entered into a Shared
Services Agreement covering the services TMS continues to provide after the
ownership of TMCC was transferred to TFSA. Net charges reimbursed by TMCC to
TMS totaled $10.8 million and $6.2 million for the quarter ended June 30, 2001
and June 30, 2000, respectively.
TMCC has extended a $42 million uncommitted revolving line of credit to
iStarSystems, Inc., a corporation owned 80% by TMS. The loan bears interest at
a floating rate of interest of LIBOR plus 3.75% per annum and is guaranteed by
TMS. As of June 30, 2001, $32.6 million was outstanding under the line of
credit and the rate was 7.74% per annum.
-13-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities
- -----------------------------------------------
TMCC has guaranteed payments of principal and interest on $58 million principal
amount of flexible rate demand pollution control revenue bonds maturing in
2006, issued in connection with the Kentucky manufacturing facility of an
affiliate.
TMCC has guaranteed payments of principal, interest and premiums, if any, on
$88 million principal amount of flexible rate demand solid waste disposal
revenue bonds issued by Putnam County, West Virginia, of which $40 million
matures in June 2028, $27.5 million matures in August 2029, and $20.5 million
matures in April 2030. The bonds were issued in connection with the West
Virginia manufacturing facility of an affiliate.
TMCC has guaranteed payments of principal, interest and premiums, if any, on
$50 million principal amount of flexible rate demand pollution control revenue
bonds issued by Gibson County, Indiana, of which $10 million matures in October
2027, January 2028, January 2029, January 2030 and February 2031. The bonds
were issued in connection with the Indiana manufacturing facility of an
affiliate.
TMCC has guaranteed $50 million of the debt of Toyota Credit Argentina,
S.A. ("TCA").
-14-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Segment Information
- ----------------------------
Financial results for the Company's operating segments are summarized below:
Three Months Ended
June 30,
------------------
2001 2000
------- -------
(Dollars in Millions)
Assets:
Financing operations.............. $29,143 $26,570
Insurance operations.............. 684 793
Eliminations/reclassifications.... (134) (319)
------- -------
Total assets.................... $29,693 $27,044
======= =======
Gross revenues:
Financing operations.............. $ 932 $ 876
Insurance operations.............. 47 42
------- -------
Total gross revenues............ $ 979 $ 918
======= =======
Net income:
Financing operations.............. $ 41 $ 14
Insurance operations.............. 9 9
------- -------
Total net income................ $ 50 $ 23
======= =======
-15-
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 Toyota Motor Credit Corporation's ("TMCC's")
net income by operating segment for the three months ended June 30, 2001 and
2000:
Three Months Ended
June 30,
------------------
2001 2000
---- ----
(Dollars in Millions)
Net income:
Financing operations................ $41 $14
Insurance operations................ 9 9
--- ---
Total net income................. $50 $23
=== ===
Net income from financing operations increased $27 million, or 193%, for the
quarter ended June 30, 2001, as compared with the quarter ended June 30, 2000
primarily due to lower interest expense, higher investment income and lower
impairment of assets retained in the sale of interests in lease finance
receivables, partially offset by higher depreciation expense and increased
provision for income taxes. In addition, during fiscal 2000, Toyota Motor
Sales, U.S.A., Inc. ("TMS") provided support to TMCC for certain vehicle
disposition losses. The TMS support amount included in the Consolidated
Statement of Income related to this arrangement totaled $35 million for the
quarter ended June 30, 2000. TMCC did not receive any support for vehicle
disposition losses for the quarter ended June 30, 2001.
Net income from insurance operations remained the same for the quarter ended
June 30, 2001, as compared with the quarter ended June 30, 2000.
-16-
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 June 30, 2001 and 2000 are summarized below:
June 30, March 31, June 30,
2001 2001 2000
------------ ------------ ------------
(Dollars in Millions)
Vehicle lease
Investment in operating leases, net..... $ 6,775 $ 6,994 $ 7,791
Finance leases, net..................... 6,934 6,432 4,939
------- ------- -------
Total vehicle leases..................... 13,709 13,426 12,730
Vehicle retail finance receivables, net.. 9,320 9,034 9,288
Vehicle wholesale and other financing.... 4,244 4,392 3,131
Allowance for credit losses.............. (231) (227) (211)
------- ------- -------
Total net earning assets................. $27,042 $26,625 $24,938
======= ======= =======
Three Months Ended
June 30,
------------------
2001 2000
------- -------
Total contract volume:
Vehicle lease................................... 57,000 56,000
Vehicle retail.................................. 148,000 104,000
------- -------
Total.............................................. 205,000 160,000
======= =======
TMS sponsored contract volume:
Vehicle lease................................... 12,000 11,000
Vehicle retail.................................. 31,000 11,000
------- -------
Total.............................................. 43,000 22,000
======= =======
Finance penetration (excluding fleet):
Vehicle lease................................... 13.3% 17.0%
Vehicle retail.................................. 23.1% 13.8%
----- -----
Total.............................................. 36.4% 30.8%
===== =====
-17-
TMCC's net earning assets increased to $27.0 billion at June 30, 2001 from
$26.6 billion at March 31, 2001 and $24.9 billion at June 30, 2000. Asset
growth from March 31, 2001 reflects primarily higher lease and retail earning
assets, partially offset by a retail receivables sold through securitization
transactions and a decline in wholesale earning assets. Asset growth from June
30, 2000 reflects higher lease, retail and wholesale earning assets. The
increase in lease earning assets from March 31, 2001 and June 30, 2000 was
primarily due to volume which has exceeded liquidations. The increase in
retail earning assets from March 31, 2001 and June 30, 2000 was primarily due
to higher retail contract volume. Wholesale earning assets decreased from
March 31, 2001 due to a slight decrease in the number of dealers receiving
wholesale financing. Wholesale earning assets increased from June 30, 2000
primarily due to an increase in the number of dealers receiving wholesale
financing. The allowance for credit losses increased from March 31, 2001 and
June 30, 2000, reflecting asset growth and is deemed adequate to cover
probable 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 purchase of
residual value insurance on leases acquired by the Titling Trust before June
2001 changed the composition of the Company's earning assets resulting in an
increasing mix of finance receivables relative to operating lease assets due
to the classification differences described above. However, beginning June
2001, the purchasing of residual value insurance on lease contracts was
terminated. As a result, the future composition of the Company's earning
assets will change as substantially all leases acquired by the Titling Trust
will be classified as operating leases.
TMCC's lease contract volume increased slightly during the quarter ended June
30, 2001 as compared with the quarter ended June 30, 2000 as demand for
financing has shifted from leasing to retail loans.
TMCC's retail contract volume increased during the quarter ended June 30, 2001
as compared with the quarter ended June 30, 2000 reflecting higher levels of
programs sponsored by TMS and strong sales of Toyota and Lexus vehicles.
-18-
Net Financing Revenues
- ----------------------
TMCC's net financing revenues increased 11% during the quarter ended June 30,
2001 as compared with the same period in fiscal 2000 primarily due to higher
leasing and wholesale revenues on higher earning assets and lower interest
expense, partially offset by lower retail financing revenues and higher
depreciation on leases, described below under Depreciation on Leases. The
purchase of residual value insurance for leases acquired by the Titling Trust
before June 2001 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 are sold
in securitization transactions) and reduced operating lease revenues and
straight-line depreciation on operating leases. However, due to the
termination of residual value insurance on lease contracts beginning in June
2001, operating lease revenue and depreciation on operating leases are expected
to increase as leases acquired by the Titling Trust will be classified as
operating leases.
Investment and Other Income
- ---------------------------
The following table summarizes TMCC's investment and other income for the
three months ended June 30, 2001 and 2000:
Three Months Ended
June 30,
------------------
2001 2000
---- ----
(Dollars in Millions)
Investment income...................... $ 29 $ 8
Servicing fee income................... 10 9
Gains on assets sold................... 26 5
---- ----
Investment and other income......... $ 65 $ 22
==== ====
Investment income increased $21 million during the quarter ended June 30, 2001
as compared with the quarter ended June 30, 2000 primarily due to increased
interest income.
Gains on assets sold increased by $21 million for the quarter ended June 30,
2001, as compared with the same period in fiscal 2000 due to a greater spread
between the annual percentage rate on receivables sold and the costs of funds
on securities issued. 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.
-19-
Loss on Asset Impairment
- ---------------------------
TMCC performs a periodic review of the fair market value of assets retained in
the sale of retail receivables and interests in lease finance receivables.
The fair market value of these retained assets is impacted by management's and
the market's expectations as to future losses on vehicle disposition, credit
losses and prepayment rates. In June 2001, the Company experienced a
deterioration in return rates and loss per unit upon disposition resulting in
a downward revision to the vehicle disposition assumptions. The assumption
for expected residual value losses for the lease securitizations was 4.9%-7.6%
at March 31, 2001 and has been revised to 7.1%-7.9% at June 30, 2001. This
decline is primarily related to the performance of leases originated prior to
model year 1999 and scheduled to terminate over the next 9 months. As a
result of the decline, in the first quarter TMCC recognized losses due to the
permanent impairment of assets retained in the sale of interests in lease
finance receivables totaling $47 million.
Depreciation on Leases
- ----------------------
The following table sets forth the items included in TMCC's depreciation on
leases for the three months ended June 30, 2001 and 2000:
Three Months Ended
June 30,
------------------
2001 2000
---- ----
(Dollars in Millions)
Straight-line depreciation on operating leases... $294 $318
Provision for residual value losses.............. 80 39
TMS support for certain vehicle disposition
losses........................................ - (35)
---- ----
Total depreciation on leases.................. $374 $322
==== ====
Straight-line depreciation expense decreased 8% during the quarter ended June
30, 2001 as compared with the quarter ended June 30, 2000 corresponding with a
decline in average operating lease assets. As discussed earlier, the purchase
of residual value insurance for leases acquired by the Titling Trust before
June 2001 increased the ratio of lease finance receivables relative to
operating lease assets, 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.
-20-
Total unguaranteed residual values related to TMCC's vehicle lease portfolio
decreased from approximately $6.9 billion at March 31, 2001 to $6.7 billion at
June 30, 2001. 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. The provision for
residual value losses reflects management's estimate that current reserve
levels are considered adequate to cover expected losses at vehicle disposition
as of June 30, 2001.
Losses at vehicle disposition increased $30 million for the quarter ended
June 30, 2001 as compared to the quarter ended June 30, 2000, primarily due to
higher off-lease vehicle return rates, a larger supply of vehicles coming off-
lease as well as higher losses per vehicle. As a result of these factors, the
provision for residual value losses was increased. 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 beginning with 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. The model 1999 Toyota vehicles will begin to terminate
during the third quarter of fiscal year 2002.
The number of returned leased vehicles sold by TMCC during a specified period
as a percentage of the number of lease contracts that as of their origination
dates were scheduled to terminate ("full term return ratio") was 51% for the
quarter ended June 30, 2001 as compared to 46% for the quarter ended June 30,
2000. 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 increased losses at vehicle disposition to
continue through fiscal 2002 due to the large supply of vehicles coming off-
lease.
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
44 months and 41 months at June 30, 2001 and 2000, respectively.
Interest Expense
- ----------------
Interest expense decreased $51 million, or 15%, during the quarter ended June
30, 2001 as compared with the quarter ended June 30, 2000 primarily due to a
decrease in the average cost of borrowings. The weighted average cost of
borrowings was 4.95% and 6.49% for the three months ended June 30, 2001 and
2000, respectively.
-21-
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased 10% during the quarter ended
June 30, 2001 as compared with the quarter ended June 30, 2000 reflecting
expenses associated with technology-related projects, as well as costs to
support TMCC's growing customer base.
Included in operating and administrative expenses are charges allocated by TMS
for certain technological and administrative services provided to TMCC. Net
charges reimbursed by TMCC to TMS totaled $10.8 million and $6.3 million
during the three months ended June 30, 2001 and 2000, respectively.
A Credit Support Fee Agreement entered into between TMCC and Toyota Financial
Services Corporation ("TFSC") provides that TMCC will pay to TFSC a semi-
annual fee equal to 0.05% of the weighted average outstanding amount of TMCC's
Securities entitled to credit support. Credit support fees included in
operating and administrative expenses for the quarter ended June 30, 2001 were
$3 million and are estimated to be $12 million for fiscal 2002.
Operating and administrative expenses are also expected to increase during
fiscal 2002 through 2003 as a result of the costs incurred in connection with
the restructuring of TMCC's field operations. The branch offices of TMCC will
be converted to serve only dealer business which includes the purchasing of
contracts from dealers, financing inventories, loans to dealers for business
acquisitions, facilities refurbishment, real estate purchases and working
capital requirements, as well as consulting on finance and insurance
operations. The other functions that the branch offices currently cover, such
as customer service, collections, lease termination and administrative
functions, will be handled by three regional customer service centers. All
three regional customer service centers will be established during fiscal 2002
with the conversion of activities expected to be completed in fiscal 2003.
Restructuring charges and costs recognized during the quarter ended
June 30, 2001 were $2 million. Restructuring charges and costs recognized
during fiscal 2002 are not expected to exceed $31 million. Additional
restructuring charges and costs are expected through fiscal 2003. In the
process of restructuring, TMCC may experience an increase during fiscal 2002
through 2003 in delinquency rates and charge off rates.
-22-
Provision for Credit Losses
- ---------------------------
TMCC's provision for credit losses increased 72% for the quarter ended
June 30, 2001 as compared with the quarter ended June 30, 2000, reflecting
growth in earning assets and increased credit losses. 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, 2001.
TMCC recently completed the national launch of an expanded tiered pricing
program for both retail and lease 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. Implementation
of these expanded programs is expected to increase contract yields and, as the
portfolio matures, 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 months ended June 30, 2001 and 2000,
was as follows:
Three Months Ended
June 30,
------------------
2001 2000
----- -----
(Dollars in Millions)
Gross Credit Losses............. $39.8 $27.3
Recoveries...................... (4.9) (5.0)
----- -----
Net Credit Losses............... $34.9 $22.3
===== =====
Annualized Net Credit Losses
as a % of Average Earning
Assets....................... 0.52% 0.35%
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:
June 30, March 31, June 30,
2001 2001 2000
------------ ------------ ------------
(Dollars in Millions)
Allowance for Credit Losses..... $231 $227 $211
Allowance for Credit Losses
as a % of Earning Assets..... 0.85% 0.85% 0.84%
-23-
Derivatives and Hedging Activities
- ----------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Derivative assets and liabilities include interest rate swaps, indexed
note swap agreements, cross currency interest rate swap agreements and option-
based products. The accounting for the gain or loss due to changes in fair
value of the hedged item depends on whether the relationship between the hedged
item and the derivative instrument qualifies for hedge treatment. If the
relationship between the hedged item and the derivative instrument does not
qualify as a hedge, the gains or losses are reported in earnings when they
occur. However, if the relationship between the hedged item and the derivative
instrument qualifies as a hedge, the accounting varies based on the type of
risk being hedged. Additional information concerning the SFAS 133 requirements
is disclosed in Note 2 - Derivatives and Hedging Activities of the Notes to
Consolidated Financial Statements. Additional information concerning the
Company's derivative and hedging activities is set forth below in "Item 3.
Quantitative and Qualitative Disclosures About Market Risk."
For the three months ended June 30, 2001, the Company recognized income of $9
million (reported as SFAS 133 fair value adjustments in the Consolidated
Statement of Income). The net adjustment reflects a gain of $20 million
related to the ineffective portion of TMCC's fair-value hedges, offset by a $11
million decrease in the fair market value of TMCC's portfolio of option-based
products and certain interest rate swaps. The decrease in the fair market
value of TMCC's option-based products as well as certain interest rate swaps
are due to lower market interest rates. Various derivative instruments, such
as option-based products and certain interest rate swaps which hedge interest
rate risk from an economic perspective, and which the Company is unable or has
elected not to apply hedge accounting. For fair value hedging relationships,
all components of each derivative's gain or loss were included in the
assessment of hedge effectiveness.
-24-
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
securitization programs. Debt issuances have generally been in the form of
commercial paper, domestic and Euro medium-term notes ("MTNs") and bonds.
Commercial paper issuances are used to meet short-term funding needs.
Commercial paper outstanding under TMCC's commercial paper program ranged from
approximately $3.9 billion to $5.4 billion during the quarter ended
June 30, 2001, with an average outstanding balance of $4.5 billion.
For additional liquidity purposes, TMCC maintains syndicated bank credit
facilities with certain banks which aggregated $3.0 billion at June 30, 2001.
No loans were outstanding under any of these bank credit facilities during the
quarter ended June 30, 2001. TMCC also maintains uncommitted, unsecured lines
of credit with banks totaling $85 million. At June 30, 2001, TMCC had issued
approximately $0.6 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 2002,
TMCC issued approximately $1.6 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, 2001
ranged from one to eleven years. As of June 30, 2001, TMCC had total MTNs and
bonds outstanding of $18.2 billion, of which $8.6 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, 2001 approximately $0.5 billion was available for issuance under this
registration statement. In addition, the Company has filed a new registration
statement for an additional $1 billion of securities. The Company's board of
directors has authorized the registration of up to $3.5 billion under the new
registration statement, and the Company may increase the amount of securities
that may be issued thereunder before it is declared effective. The maximum
aggregate principal amount authorized to be outstanding at any time under
TMCC's Euro MTN program is $16.0 billion. Approximately $4.9 billion was
available for issuance under the Euro MTN program as of July 31, 2001. 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 MTN programs.
Additionally, TMCC uses its asset-backed securitization programs to generate
funds for investment in earning assets. 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. During the
three months ended June 30, 2001, TMCC sold retail receivables totaling $1.5
billion in connection with securities issued under the shelf registration
statement. As of July 31, 2001, $1.8 billion remained available for issuance
under the registration statement.
-25-
TMCC's ratio of earnings to fixed charges was 1.29 for the quarter ended
June 30, 2001 as compared to 1.10 for the quarter ended June 30, 2000. The
increase in the ratio is due to several factors including higher investment
income and lower interest expense.
Cash flows provided by operating, investing and financing activities have been
used primarily to support earning asset growth. During the quarter ended June
30, 2001, cash used to purchase additional finance receivables and investments
in operating leases, totaling $9.1 billion, was partially provided by the
liquidation and sale of earning assets totaling $8.3 billion. Investing
activities resulted in a net cash use of $851 million during the quarter ended
June 30, 2001, 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 $459 million and $363 million, respectively, during the quarter ended
June 30, 2001. The Company believes that cash provided by operating and
investing activities as well as access to domestic and international capital
markets, the issuance of commercial paper, and asset-backed securitization
transactions will provide sufficient liquidity to meet its future funding
requirements.
-26-
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 allowances for
credit losses are considered adequate to cover expected credit losses; that due
to the termination of residual value insurance on lease contracts, operating
lease revenue and depreciation on operating leases are expected to increase;
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 increased
losses at vehicle disposition to continue through fiscal 2002; that operating
and administrative expenses are expected to increase during fiscal 2002 through
2003 due to restructuring costs; that restructuring charges recognized during
2002 are not expected to exceed $31 million and that additional restructuring
charges are expected through 2003; that TMCC may experience an increase during
fiscal 2002 and 2003 in delinquency rates and charge off rates; that the
implementation of the expanded tiered pricing program for both retail and lease
vehicle contracts is expected to increase contract yields and, as the portfolio
matures, increase credit losses in connection with purchases of higher risk
contracts; that 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 cash provided by operating and investing activities as well
as access to domestic and international capital markets, the issuance of
commercial paper, and asset-backed securitization transactions will provide
sufficient liquidity to meet TMCC's future funding requirements; that TMCC does
not currently anticipate non-performance by any of its counterparties.
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; 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; increases in market
interest rates; the monetary policies exercised by the European Central Bank
and other monetary authorities; increased costs associated with the Company's
debt funding or restructuring 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.
-27-
New Accounting Standards
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
statement replaces SFAS No. 125 and revises the standards for accounting for
securitizations and other transfers of financial assets and collateral. SFAS
No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This statement
is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. SFAS No. 140 was adopted for the
Company's 2001 Transitional Annual Report to the Securities and Exchange
Commission and did not have a significant impact on the Company's financial
results. SFAS No. 140 disclosure requirements have been disclosed in Note 6 -
Sale of Retail Receivables of the Notes to Consolidated Financial Statements.
In July 2000, the Emerging Issues Task Force reached consensus on Issue
No. 99-20 "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets." The Task
Force reached a consensus that the holder should recognize the excess of all
cash flows attributable to the beneficial interest estimated at the
acquisition/transaction date (the "transaction date") over the initial
investment (the accretable yield) as interest income over the life of the
beneficial interest using the effective yield method. If the holder of the
beneficial interest is the transferor, the initial investment would be the
allocated carrying amount after application of the relative fair value
allocation method required by Statement 140. The Task Force further reached a
consensus that the holder of a beneficial interest should continue to update
the estimate of cash flows over the life of the beneficial interest. The
consensus in this issue should be applied to the accounting for interest
income and impairment of beneficial interests in securitization transactions
meeting the scope criteria of this issue effective for all fiscal quarters
beginning after March 15, 2001. The Company has adopted Issue 99-20 and it
did not have a significant impact on the Company's financial results except as
disclosed in Note 6 - Sale of Retail Receivables and Valuation of Residual
Interest.
-28-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
TMCC maintains an overall risk management strategy that utilizes a variety of
interest rate and currency derivative financial instruments to mitigate its
exposure to fluctuations caused by volatility in interest rate and currency
exchange rates. TMCC does not use any of these instruments for trading
purposes.
Fair-Value Hedges
- -----------------
The Company enters into interest rate swaps, indexed note swap agreements and
cross currency interest rate swap agreements to convert its fixed-rate debt to
variable-rate debt, a portion of which is covered by option-based products.
(Additional information regarding option-based products is set forth below
under "Non-Hedging Activities.").
TMCC uses interest rate swap agreements in managing its exposure to interest
rate fluctuations. Interest rate swap agreements are executed as an integral
part of specific debt transactions or on a portfolio basis. TMCC's interest
rate swap agreements involve agreements to pay fixed and receive a floating
rate, or receive fixed and pay a floating rate, at specified intervals,
calculated on an agreed-upon notional amount. Interest rate swap agreements
may also involve basis swap contracts which are agreements to exchange the
difference between certain floating interest amounts, such as the net payment
based on the commercial paper rate and the London Interbank Offered Rate
("LIBOR"), calculated on an agreed-upon notional amount.
TMCC uses indexed note swap agreements in managing its exposure in connection
with debt instruments whose interest rate and/or principal redemption amounts
are derived from other underlying indices. Indexed note swap agreements
involve agreements to receive interest and/or principal amounts associated
with the indexed notes, denominated in either U.S. dollars or a foreign
currency, and to pay fixed or floating rates on fixed U.S. dollar liabilities.
TMCC uses cross currency interest rate swap agreements to entirely hedge
exposure to exchange rate fluctuations on principal and interest payments for
borrowings denominated in foreign currencies. Notes and loans payable issued
in foreign currencies are hedged by concurrently executing cross currency
interest rate swap agreements which involve the exchange of foreign currency
principal and interest obligations for U.S. dollar obligations at agreed-upon
currency exchange and interest rates.
Derivative financial instruments used by TMCC involve, to varying degrees,
elements of credit risk in the event a counterparty should default and market
risk as the instruments are subject to rate and price fluctuations. Credit
risk is managed through the use of credit standard guidelines, counterparty
diversification, monitoring of counterparty financial condition and master
netting agreements in place with all derivative counterparties. Credit
exposure of derivative financial instruments is represented by the fair value
of contracts with a positive fair value at June 30, 2001 reduced by the effects
of master netting agreements. The credit exposure of TMCC's derivative
financial instruments at June 30, 2001 was $225.4 million on an aggregate
notional amount of $39.5 billion. Additionally, at June 30, 2001,
approximately 93% of TMCC's derivative financial instruments, based on notional
amounts, were with commercial banks and investment banking firms assigned
investment grade ratings of "AA" or better by national rating agencies. TMCC
does not currently anticipate non-performance by any of its counterparties and
has no reserves related to non-performance as of June 30, 2001. TMCC has not
experienced any counterparty default during the quarter ended June 30, 2001.
-29-
Non-Hedging Activities
- ----------------------
Option-based products are executed on a portfolio basis and consist primarily
of purchased interest rate cap agreements and, to a lesser extent, corridor
agreements. Option-based products are agreements which either grant TMCC the
right to receive, or require TMCC to make payments at, specified interest rate
levels. Option-based products are used to hedge interest rate risk from an
economic perspective on TMCC's portfolio of pay-variable receive-fixed interest
rate swaps.
The Company uses this strategy to minimize its exposure to volatility in LIBOR.
These products are not linked to specific assets and liabilities that appear on
the balance sheet and therefore, do not qualify for hedge accounting. In
addition, the Company also uses certain interest rate swaps for overall
asset/liability management purposes. These products are not linked to specific
assets or liabilities.
Value-at-Risk Methodology
- -------------------------
TMCC uses a value-at-risk methodology, in connection with other management
tools, to assess and manage the interest rate risk of aggregated loan and
lease assets and financial liabilities, including interest rate derivatives
and option-based products. Value-at-risk represents the potential losses in
fair value 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 and equipment financing as these amounts
are not significant to TMCC's total portfolio.
The value-at-risk methodology uses six 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.
-30-
The value-at-risk and the average value-at-risk of TMCC's portfolio as of June
30, 2001 and for the three months ended June 30, 2001, measured as the
potential 30 day loss in fair value from assumed adverse changes in interest
rates are as follows:
Average for the
As of Three Months Ended
June 30, 2001 June 30, 2001
----------------- -------------------
Mean portfolio value..................... $5,705 million $4,824 million
Value-at-risk............................ $134.0 million $122.1 million
Percentage of the mean portfolio value... 2.4% 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 three months ended June 30, 2001 and 2000 is as follows:
Three Months Ended June 30,
------------------------------------------------------------
Cross
Currency
Interest Interest Indexed
Rate Swap Rate Swap Option-based Note Swap
Agreements Agreements Products Agreements
------------ ------------ ------------ ------------
2001 2000 2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Billions)
Beginning notional amount....... $8.3 $7.8 $16.9 $19.1 $11.5 $8.4 $0.6 $1.5
Add:
New agreements............... 0.6 0.8 3.3 0.9 0.6 2.5 0.1 -
Less:
Terminated agreements........ - - - - - - - 0.1
Expired agreements........... - - 0.9 0.7 1.2 0.6 0.3 -
---- ---- ----- ----- ----- ----- ---- ----
Ending notional amount.......... $8.9 $8.6 $19.3 $19.3 $10.9 $10.3 $0.4 $1.4
==== ==== ===== ===== ===== ===== ==== ====
-31-
Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month periods ended June 30, 2001 and
2000, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") reported that they
have applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report dated
August 14, 2001 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.
-32-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Various legal actions, governmental proceedings and other claims are pending or
may be instituted or asserted in the future against TMCC and its subsidiaries
with respect to matters arising from the ordinary course of business. Certain
of these actions are or purport to be class action suits, seeking sizeable
damages and/or changes in TMCC's business operations, policies and practices.
Certain of these actions are similar to suits which have been filed against
other financial institutions and captive finance companies. Management and
internal and external counsel perform periodic reviews of pending claims and
actions to determine the probability of adverse verdicts and resulting amounts
of liability. The amounts of liability on pending claims and actions as of
June 30, 2001 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 35,
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 June 30, 2001, which did not contain
financial statements:
Date of Report Items Reported
----------------- -------------------------------------------
June 8, 2001 Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits.
-33-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOYOTA MOTOR CREDIT CORPORATION
-------------------------------
(Registrant)
Date: August 14, 2001 By /S/ GEORGE E. BORST
-------------------------------
George E. Borst
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2001 By /S/ NOBUKAZU TSURUMI
-------------------------------
Nobukazu Tsurumi
Executive Vice President
and Treasurer and Director
(Principal Financial Officer)
-34-
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
-35-