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, 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
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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, 2002, 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)
December 31, March 31, December 31,
2001 2001 2000
------------ ------------ ------------
(Unaudited) (Unaudited)
ASSETS
------
Cash and cash equivalents............... $ 216 $ 294 $ 449
Investments in marketable securities.... 750 1,075 993
Finance receivables, net................ 22,464 19,216 18,864
Finance receivables, net - securitized.. 1,239 - -
Investments in operating leases, net.... 7,382 7,409 7,703
Derivative assets....................... 486 379 256
Other assets............................ 727 762 769
Income taxes receivable................. 182 79 17
------- ------- -------
Total Assets................... $33,446 $29,214 $29,051
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................. $25,451 $22,194 $22,374
Notes payable related to securitized
finance receivables structured as
collateralized borrowings............ 1,072 - -
Derivative liabilities.................. 1,090 1,414 1,156
Other liabilities....................... 773 925 836
Deferred income......................... 850 699 686
Deferred income taxes................... 1,538 1,468 1,508
------- ------- -------
Total Liabilities................. 30,774 26,700 26,560
------- ------- -------
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.................... 1,740 1,581 1,557
Accumulated other comprehensive
income............................ 17 18 19
------- ------- -------
Total Shareholder's Equity........ 2,672 2,514 2,491
------- ------- -------
Total Liabilities and
Shareholder's Equity........... $33,446 $29,214 $29,051
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
-2-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2001 2000 2001 2000
------ ------ ------ ------
(Unaudited) (Unaudited)
Financing Revenues:
Leasing................................ $ 617 $ 619 $1,854 $1,839
Retail financing....................... 252 201 662 603
Wholesale and other dealer financing... 40 58 149 161
----- ------ ------ ------
Total financing revenues.................. 909 878 2,665 2,603
Depreciation on leases................. 415 368 1,169 1,058
Interest expense....................... 244 383 808 1,078
SFAS 133 fair value adjustments........ (92) 11 (24) 11
------ ------ ------ ------
Net financing revenues.................... 342 116 712 456
Insurance premiums earned and contract
revenues............................... 37 34 117 104
Investment and other income............... 27 39 124 98
Loss on asset impairment.................. - - 47 60
------ ------ ------ ------
Net financing revenues and other revenues. 406 189 906 598
------ ------ ------ ------
Expenses:
Operating and administrative........... 137 105 380 312
Losses related to Argentine Investment. 31 - 31 -
Provision for credit losses............ 65 36 166 111
Insurance losses and loss adjustment
expenses............................ 19 17 57 60
------ ------ ------ ------
Total expenses............................ 252 158 634 483
------ ------ ------ ------
Income before equity in net loss of
subsidiary, income taxes and
cumulative effect of change in
accounting principle................... 154 31 272 115
Equity in net loss of subsidiary.......... - - - 1
Provision for income taxes................ 62 11 109 47
------ ------ ------ ------
Income before cumulative effect of
change in accounting principle......... 92 20 163 67
Cumulative effect of change in accounting
principle, net of tax benefits......... - (2) - (2)
------ ------ ------ ------
Net Income................................ $ 92 $ 18 $ 163 $ 65
====== ====== ====== ======
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
(unaudited)................... $ 915 $ 1,492 $ 15 $ 2,422
------ ------- ---------- -------
Net income for the nine months
ended December 31, 2000....... - 65 - 65
Dividends........................ - - - -
Change in net unrealized gains
on available-for-sale
marketable securities......... - - 4 4
------ -------- ---------- -------
Total Comprehensive Income....... - 65 4 69
------ -------- ---------- -------
Balance at December 31, 2000
(unaudited).................... $ 915 $ 1,557 $ 19 $ 2,491
====== ======= ========== =======
Balance at March 31, 2001........ $ 915 $ 1,581 $ 18 $ 2,514
------ ------- ---------- -------
Net income for the nine months
ended December 31, 2001....... - 163 - 163
Dividends........................ - (4) - (4)
Change in net unrealized gains
on available-for-sale
marketable securities......... - - (1) (1)
------ -------- ---------- -------
Total Comprehensive Income....... - 159 (1) 158
------ -------- ---------- -------
Balance at December 31, 2001
(unaudited)................... $ 915 $ 1,740 $ 17 $ 2,672
====== ======= ========== =======
See Accompanying Notes to Consolidated Financial Statements.
-4-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
Nine Months Ended
December 31,
--------------------------
2001 2000
-------- --------
(Unaudited)
Cash flows from operating activities:
Net income............................................... $ 163 $ 65
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in
accounting principles, net...................... - 2
Fair value adjustments of SFAS 133 derivatives..... (24) 11
Depreciation and amortization...................... 1,181 1,163
Provision for credit losses........................ 166 111
Gain from sale of finance receivables, net......... (25) (6)
Gain from sale of marketable securities, net....... (1) (9)
Loss on asset impairment........................... 47 60
Losses Related to Argentine Investment............. 31 -
Increase in other assets........................... (142) (323)
Increase in deferred income taxes.................. 70 78
(Decrease) increase in other liabilities........... (79) 23
-------- --------
Total adjustments........................................ 1,224 1,110
-------- --------
Net cash provided by operating activities................... 1,387 1,175
-------- --------
Cash flows from investing activities:
Addition to investments in marketable securities......... (1,120) (1,630)
Disposition of investments in marketable securities...... 1,433 1,079
Purchase of finance receivables.......................... (16,489) (19,972)
Liquidation of finance receivables....................... 10,422 15,105
Proceeds from sale of finance receivables................ 1,450 2,858
Addition to investments in operating leases.............. (2,919) (2,114)
Disposition of investments in operating leases........... 1,779 1,713
Decrease in receivable from Affiliate.................... - 54
-------- --------
Net cash used in investing activities....................... (5,444) (2,907)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable........ 8,827 5,190
Payments on notes and loans payable...................... (5,449) (4,731)
Net increase in commercial paper with
original maturities less than 90 days................. 601 1,563
-------- --------
Net cash provided by financing activities................... 3,979 2,022
-------- --------
Net (decrease) increase in cash and cash equivalents........ (78) 290
Cash and cash equivalents at the beginning of the period.... 294 159
-------- --------
Cash and cash equivalents at the end of the period.......... $ 216 $ 449
======== ========
Supplemental disclosures:
Interest paid............................................ $ 824 $ 1,062
Income taxes paid........................................ $ 157 $ 12
See Accompanying Notes to Consolidated Financial Statements.
-5-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data
- -------------------------------
The accompanying information pertaining to the nine months ended
December 31, 2001 and 2000 is unaudited and has been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, the unaudited financial information reflects all
adjustments necessary for a fair statement of the results for the interim
periods presented. The results of operations for the nine months ended
December 31, 2001 are not necessarily indicative of those expected for any
other interim period or for a full year. Certain December 2000 accounts have
been reclassified to conform with the December 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 - Finance Receivables
- ----------------------------
Finance receivables, net and Finance receivables, net - securitized consisted
of the following:
December 31, March 31, December 31,
2001 2001 2000
------------ ------------ ------------
(Dollars in Millions)
Retail.................................... $13,811 $ 9,370 $10,073
Finance leases............................ 7,922 7,871 7,243
Wholesale and other dealer loans.......... 3,580 3,619 3,139
------- ------- -------
25,313 20,860 20,455
Unearned income........................... (1,406) (1,476) (1,426)
Allowance for credit losses............... (204) (168) (165)
------- ------- -------
Finance receivables, net and
Finance receivables, net - securitized. $23,703 $19,216 $18,864
======= ======= =======
Finance leases included estimated unguaranteed residual values of
$1,828 million, $1,532 million and $1,436 million at December 31, 2001,
March 31, 2001 and December 31, 2000, respectively.
The aggregate balances related to finance receivables 60 or more days past due
totaled $86 million, $29 million and $38 million at December 31, 2001,
March 31, 2001 and December 31, 2000, respectively. The increased delinquency
experience is a result of a number of factors including the consolidation into
regional centers of certain of TMCC's servicing operations that were
previously performed in branch offices, the recent national economic downturn
and the introduction of the expanded tiered pricing program for both retail
and lease vehicle contracts. The consolidation is ongoing and the transfer of
certain functions from branches to customer service centers is scheduled to
continue during the spring and summer of 2002. TMCC is taking measures to
minimize the disruption of operations; however, the restructuring of field
operations and economic downturn could continue to adversely affect
delinquencies and credit losses.
Note 3 - Investments in Operating Leases
- ----------------------------------------
Investments in operating leases, net consisted of the following:
December 31, March 31, December 31,
2001 2001 2000
------------ ------------ ------------
(Dollars in Millions)
Vehicles.................................. $8,677 $8,891 $9,254
Equipment and other....................... 722 689 671
------ ------ ------
9,399 9,580 9,925
Accumulated depreciation.................. (1,952) (2,112) (2,162)
Allowance for credit losses .............. (65) (59) (60)
------ ------ ------
Investments in operating leases, net...... $7,382 $7,409 $7,703
====== ====== ======
-7-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - 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 nine months ended December 31, 2001, the Company recognized a gain of
$24 million (reported as SFAS 133 fair value adjustments in the Consolidated
Statement of Income). The net adjustment reflects a gain of $41 million
related to the ineffective portion of TMCC's fair value hedges, offset by a
$17 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 is primarily 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, are discussed
in Non-Hedging Activities below. For fair value hedging relationships, the
components of each derivative's gain or loss are 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
economic 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 of option-based
products).
TMCC uses interest rate swap agreements in managing its exposure to interest
rate fluctuations. Interest rate swap agreements are executed as either 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
December 31, 2001.
-8-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - 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 defaults in performing its obligation
under the derivative agreement. 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 interest rate swaps. 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.
The Company uses this strategy to moderate 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.
Accounting for Derivatives and Hedging Activities
- -------------------------------------------------
All derivatives are recognized in 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.
-9-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - 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.
-10-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Notes and Loans Payable
- --------------------------------
Notes and loans payable consisted of the following:
December 31, March 31, December 31,
2001 2001 2000
------------ ------------ ------------
(Dollars in Millions)
Commercial paper, net.................... $ 5,006 $ 4,407 $ 5,446
Extendible commercial notes, net......... - - 21
------- ------- -------
Other senior debt, due in the fiscal
years ending:
2001.................................. - - 2,667
2002.................................. 993 4,620 3,168
2003.................................. 5,190 3,080 3,640
2004.................................. 5,350 5,182 3,750
2005.................................. 3,198 1,839 853
2006.................................. 1,700 1,228 842
Thereafter............................ 4,014 1,838 1,987
------- ------- -------
Total other senior debt............... 20,445 17,787 16,907
------- ------- -------
Notes and loans payable............ $25,451 $22,194 $22,374
======= ======= =======
Notes and loans payable at December 31, 2001, March 31, 2001 and
December 31, 2000 reflect the adjustments required under SFAS 133 for
derivatives and debt instruments which qualify for hedge treatment as discussed
in Note 4 - Derivatives and Hedging Activities. The notional amount of notes
and loans payable was $26.0 billion, $23.1 billion and $22.3 billion at
December 31, 2001, March 31, 2001 and December 31, 2000.
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 22 days and 1.89%,
respectively, at December 31, 2001. At December 31, 2001, TMCC had no
extendible commercial notes or short-term MTNs with original terms of one year
or less.
Other senior debt includes certain MTNs, euro bonds and domestic bonds. The
weighted average interest rate on other senior debt was 3.73% and 4.49% for the
quarter and nine months ended December 31, 2001, respectively, including the
effect of interest rate swap agreements. Less than one percent of other senior
debt at December 31, 2001 had interest rates, including the effect of interest
rate swap agreements, that were fixed for a period of more than one year.
Approximately 21% of other senior debt at December 31, 2001 had floating
interest rates that were covered by option-based products. The weighted
average strike rate on these option-based products was 4.57% at
December 31, 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 December 31, 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 $7.4 billion.
Note 6 - Sale of Retail Receivables and Valuation of Residual Interest
- ----------------------------------------------------------------------
TMCC maintains programs to sell retail receivables either through the limited
purpose subsidiaries Toyota Motor Credit Receivables Corporation ("TMCRC") and
Toyota Auto Finance Receivables LLC ("TAFR") or by treating the securitization
as a secured borrowing. For the nine months ended December 31, 2001, TMCC
securitized retail finance receivables totaling $3.0 billion.
In September 2001, TMCC securitized retail finance receivables totaling $1.5
billion. This securitization was treated as a sale for legal purposes, but
treated as a secured borrowing for accounting purposes since the
securitization trust was not a qualifying special purpose entity. The
receivables and debt issued remained on the balance sheet pursuant to
Financial Accounting Standards Board Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 140"), as amended. This accounting method is referred to as the
"portfolio method". Under the portfolio method, the finance receivables
transferred to the securitization trust and held as collateral for the notes
issued to investors are classified as "Finance receivables, net -
securitized". The average annual percentage rate for these receivables is
approximately 8.55%. The $1.1 billion notes issued to investors in the
securitization trust are classified as "Notes payable related to securitized
finance receivables structured as collateralized borrowings". The weighted
average fixed rate equivalent for these payables at December 31, 2001 was
approximately 4.39% and had an original weighted average life of approximately
1.79 years.
During May 2001, TMCC sold retail finance receivables totaling $1.5 billion
subject to certain limited recourse provisions. TMCC sold its receivables to
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.
Included in investment and other income for the nine months ended
December 31, 2001 is a net pretax gain of $29.5 million resulting from the
sale of retail finance receivables in May 2001. 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.
-12-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Sale of Retail Receivables and Valuation of Residual Interest
(Continued)
- ----------------------------------------------------------------------
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 relating to
vehicles associated with its lease and finance receivables. This experience,
combined with revised forecasts for future return rates and loss per unit,
resulted in a downward revision to the vehicle disposition assumptions. The
assumption for expected residual value losses for TMCC's lease securitizations
was 4.9%-7.6% at March 31, 2001 and was revised to 7.1%-7.9% at June 30, 2001.
This decline was primarily due to the performance of leases originated prior
to model year 1999 and scheduled to terminate over the next 3 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, which was
adopted in the first quarter of fiscal year 2002. There were no additional
impairments recognized for the quarter ended December 31, 2001.
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"). No funds were borrowed from or invested with TMS under
this arrangement during the nine months ended December 31, 2001. However, TMS
made a short term $282 million loan to TMCC at an interest rate of 3.53% in
September 2001 to assist TMCC in its efforts to assure continuing liquidity
during the financial market dislocations that occurred in the aftermath of the
events of September 11, 2001. The loan and interest incurred was repaid in
full prior to September 30, 2001.
-13-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Related Party Transactions (Continued)
- -----------------------------------
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 and
$9 million for the quarter and nine months ended December 31, 2001,
respectively.
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 $14 million and $12 million for the quarters ended
December 31, 2001 and 2000, respectively, and $41 million and $25 million for
the nine months ended December 31, 2001 and 2000, respectively.
TMCC has extended a $42.5 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 December 31, 2001, $38.9 million was outstanding under the line of
credit and the rate was 5.78% per annum.
-14-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities
- -----------------------------------------------
TMCC has executed guarantees totaling $65 million in respect to TCA's offshore
dollar bank loans, of which approximately $47 million, including principal and
interest, is outstanding. Late in 2001, the Argentine government instituted a
series of changes that lead to political, economic and regulatory risks to
Argentine businesses. The government has imposed foreign exchange controls
restricting offshore payment transfers, and these controls are currently
preventing TCA from sending payments on its offshore dollar loans out of
Argentina. In February 2002, the Argentine government established measures to
re-denominate the entire Argentine economy into pesos and has permitted the
peso to float freely against other global currencies. This re-denomination
policy adversely affects TCA's financial condition and its ability to fully
satisfy its offshore dollar loans. Consequently, TMCC has included a charge
against income of $31 million to write-off its $5 million investment in TCA and
to establish a contingency reserve of $26 million which is the estimate of what
TMCC will be required to fund under its $47 million guaranty of TCA's offshore
outstanding debt. TMCC will continue to monitor the situation.
TMCC has executed guarantees totaling $30 million of the debt of Banco Toyota
do Brasil, S.A. ("BTB").
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
$60 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, February 2031 and
September 2031. The bonds were issued in connection with the Indiana
manufacturing facility of an affiliate.
-15-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
In September 2001, TMCC securitized retail finance receivables totaling $1.5
billion. The securitization involved the issuance by a trust of asset backed
notes secured by the receivables. As part of the transaction, TMCC entered
into a revolving liquidity note agreement in lieu of a cash reserve fund to
fund shortfalls of principal and interest payment to note holders. The
aggregate amount that may be drawn and outstanding under the revolving
liquidity note is $7,500,000. The Trust will be obligated to repay amounts
drawn and interest will be accrued at 5.07% per annum. If TMCC's short-term
unsecured debt rating falls below P-1 or A-1+ by Moody's or S&P, respectively,
or if TMCC fails to fund any amount drawn under the revolving liquidity note,
the trust is entitled to draw down the entire undrawn amount of the revolving
liquidity note. Repayments of principal and interest due under the revolving
liquidity note are subordinated to principal and interest payments on the
asset backed notes and, in some circumstances, to deposits into a reserve
account.
Note 9 - Segment Information
- ----------------------------
Financial results for the Company's operating segments are summarized below:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
(Dollars in Millions)
Assets:
Financing operations.............. $32,980 $28,546 $32,980 $28,546
Insurance operations.............. 625 838 625 838
Eliminations/reclassifications.... (154) (333) (154) (333)
------- ------- ------- -------
Total assets.................... $33,451 $29,051 $33,451 $29,051
======= ======= ======= =======
Gross revenues:
Financing operations.............. $ 929 $ 909 $ 2,767 $ 2,675
Insurance operations.............. 44 42 139 130
------- ------- ------- -------
Total gross revenues............ $ 973 $ 951 $ 2,906 $ 2,805
======= ======= ======= =======
Net income:
Financing operations.............. $ 83 $ 8 $ 133 $ 37
Insurance operations.............. 9 10 30 28
------- ------- ------- -------
Total net income................ $ 92 $ 18 $ 163 $ 65
======= ======= ======= =======
-16-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Subsequent Events
- ---------------------------
During January 2002, TMCC sold retail finance receivables totaling $1.6
billion subject to certain limited recourse provisions. TMCC sold its
receivables to 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, if
any, and any subordinated retained interest. Investors do not have recourse to
other assets held by TMCC for failure of debtors to pay when due. In
connection with this issuance, TMCC entered into a revolving liquidity note
agreement, as discussed in Note 8, except that the maximum amount of draws
outstanding at any time under the Note equals $7,786,611 and the interest rate
payable under the Note is 4.419%.
In February 2002, the Argentine government established measures to re-
denominate the entire Argentine economy into pesos and has permitted the peso
to float freely against other global currencies. This re-denomination policy
adversely affects TCA's financial condition and its ability to fully satisfy
its offshore dollar loans. Consequently, TMCC has included a charge against
income of $31 million as discussed in Note 8.
-17-
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 and nine months ended
December 31, 2001 and 2000:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in Millions)
Net income:
Financing operations.............. $ 83 $ 8 $133 $ 37
Insurance operations.............. 9 10 30 28
---- ---- ---- ----
Total net income............... $ 92 $ 18 $163 $ 65
==== ==== ==== ====
Net income from financing operations increased $75 million for the quarter
ended December 31, 2001, as compared with the same period in fiscal 2001
primarily due to an increase in finance margin on lower interest rates, higher
earning asset amounts funded, and favorable fair value adjustment related to
the Statement of Financial Statement Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is
reported as SFAS 133 fair value adjustments in the Consolidated Statement of
Income, partially offset by higher net credit losses, increased termination
losses, and the write-off its $5 million investment in Toyota Credit Argentina,
S.A. ("TCA") and to establish a contingency reserve of $26 million which is the
estimate of what TMCC will be required to fund under its $47 million guaranty
of TCA's offshore outstanding debt.
Net income from financing operations increased $96 million, or 259%, for the
nine months ended December 31, 2001 as compared to the nine months ended
December 31, 2000 primarily due to lower interest expense, increased finance
revenues, a favorable fair value adjustment related to SFAS 133, and gains
from the sale of retail receivables, partially offset by higher termination
losses, increased provision for income taxes, higher provision for credit
losses, increased operating and administrative expenses, and the write-off its
$5 million investment in TCA and to establish a contingency reserve of $26
million which is the estimate of what TMCC will be required to fund under its
$47 million guaranty of TCA's offshore outstanding debt. 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 nine months ended December 31, 2000. TMCC did not receive any
support for vehicle disposition losses for the nine months ended
December 31, 2001.
-18-
Net income from insurance operations decreased $1 million, or 10%, and
increased $2 million, or 7%, for the quarter and nine months ended
December 31, 2001, respectively, as compared to the quarter and nine months
ended December 31, 2000. The decrease for the three months ended December 31,
2001 is due to an increase in provision for income taxes resulting from an
increase in the effective rate after ownership of TMCC was transferred from
TMS to Toyota Financial Services Corporation ("TFSC"). The increase for the
nine months ended December 31, 2001, is primarily due to increased insurance
premiums and decreased loss adjustment expense.
-19-
Earning Assets
- --------------
The composition of TMCC's net earning assets (which excludes receivables sold
through securitization transactions that qualify as a sale for legal and
accounting purposes, but includes receivables sold through securitization
transactions that qualify as a sale for legal but not accounting purposes,
under the Financial Accounting Standards Board Statement No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities"), as of the balance sheet dates reported herein and TMCC's
vehicle lease and retail contract volume and finance penetration for the nine
months ended December 31, 2001 and 2000 are summarized below:
December 31, March 31, December 31,
2001 2001 2000
------------ ------------ ------------
(Dollars in Millions)
Vehicle lease
Investment in operating leases, net.... $ 6,959 $ 6,994 $ 7,297
Finance leases, net.................... 6,513 6,432 5,916
------- ------- -------
Total vehicle leases.................... 13,472 13,426 13,213
Vehicle retail finance receivables, net. 13,498 9,034 9,680
Vehicle wholesale and other financing... 4,384 4,392 3,899
Allowance for credit losses............. (269) (227) (225)
------- ------- -------
Total net earning assets................ $31,085 $26,625 $26,567
======= ======= =======
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
2001 2000 2001 2000
------- ------- ------- -------
Total contract volume:
Vehicle lease........................ 41,000 48,000 147,000 161,000
Vehicle retail....................... 178,000 99,000 484,000 322,000
------- ------- ------- -------
Total................................... 219,000 147,000 631,000 483,000
======= ======= ======= =======
TMS sponsored contract volume:
Vehicle lease........................ 5,000 15,000 28,000 39,000
Vehicle retail....................... 57,000 12,000 117,000 38,000
------- ------- ------- -------
Total................................... 62,000 27,000 145,000 77,000
======= ======= ======= =======
Finance penetration (excluding fleet):
Vehicle lease........................ 9.3% 13.3% 11.4% 13.6%
Vehicle retail....................... 28.6% 17.2% 25.4% 17.9%
----- ----- ----- -----
Total................................... 37.9% 30.5% 36.8% 31.5%
===== ===== ===== =====
-20-
TMCC's net earning assets increased to $31.1 billion at December 31, 2001 from
$26.6 billion at March 31, 2001 and December 31, 2000. Asset growth from
March 31, 2001 reflects primarily higher retail and lease earning assets,
slightly offset by a decline in wholesale earning assets. Asset growth from
December 31, 2000 reflects higher retail, lease, and wholesale earning assets.
The increase in lease earning assets from March 31, 2001 and December 31, 2000
was primarily due to origination volume which has exceeded liquidations. The
increase in retail earning assets from March 31, 2001 and December 31, 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
wholesale units financed. Wholesale earning assets increased from
December 31, 2000 primarily due to an increase in the number of dealers
receiving wholesale financing and an increase in wholesale units financed. The
allowance for credit losses increased from March 31, 2001 and
December 31, 2000, reflecting asset growth and increased delinquency
experience. TMCC believes that the increased delinquency experience is a
result of a number of factors including the restructuring of field operations
into regional centers of certain of its servicing operations that were
previously performed in branch offices, the recent national economic downturn
and the introduction of the expanded tiered pricing program for both retail
and lease vehicle contracts. The consolidation is ongoing and the transfer of
certain functions from branches to customer service centers is scheduled to
continue during the spring and summer of 2002. TMCC is taking measures to
minimize the disruption of operations; however, the restructuring of field
operations and an economic downturn could continue to adversely affect
delinquencies and credit losses. The allowance for credit losses as of
December 31, 2001 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 gradually change as more leases acquired by the Titling Trust will
be classified as operating leases.
TMCC's lease contract volume decreased during the quarter and nine months
ended December 31, 2001, as compared with the quarter and nine months ended
December 31, 2000, as demand for financing has shifted from leasing to retail
loans.
TMCC's retail contract volume increased during the quarter and nine months
ended December 31, 2001, as compared with the quarter and nine months ended
December 31, 2000, reflecting higher levels of programs sponsored by TMS and
strong sales of Toyota and Lexus vehicles.
-21-
Net Financing Revenues
- ----------------------
TMCC's net financing revenues increased $226 million, or 195%, and
$256 million, or 56%, for the quarter and nine months ended December 31, 2001,
respectively, as compared with the quarter and nine months ended
December 31, 2000 primarily due to lower interest expense, favorable fair
value adjustments related to SFAS 133, and higher retail revenues on an
increased amount of earning assets, partially offset by higher total
depreciation on leases.
Depreciation on Leases
- ----------------------
The following table sets forth the items included in TMCC's depreciation on
leases for the three and nine months ended December 31, 2001 and 2000:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2001 2000 2001 2000
---- ---- ------ ------
(Dollars in Millions)
Straight-line depreciation on operating leases.. $300 $308 $ 887 $ 937
Provision for residual value losses............. 115 60 282 156
TMS support for certain vehicle disposition
losses....................................... - - - (35)
---- ---- ------ ------
Total depreciation on leases................. $415 $368 $1,169 $1,058
==== ==== ====== ======
Straight-line depreciation expense decreased $8 million, or 3%, and
$50 million, or 5%, for the quarter and nine months ended December 31, 2001,
respectively, as compared with the quarter and nine months ended
December 31, 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.
However, the Company expects an increase in straight-line depreciation expense
as the future composition of the Company's earning assets gradually changes as
more leases acquired by the Titling Trust will be classified as 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.
-22-
Total unguaranteed residual values related to TMCC's vehicle lease portfolio
remained unchanged at $6.9 billion at December 31, 2001 and March 31, 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
December 31, 2001. Losses at vehicle disposition increased $36 million and
$83 million for the quarter and nine months ended December 31, 2001,
respectively, as compared with the quarter and nine months ended December 31,
2000, primarily due to a larger supply of vehicles coming off-lease and higher
off-lease vehicle return rates. 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 have started to terminate during the quarter
ended December 31, 2001.
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 64% and 54%
for the quarter and nine months ended December 31, 2001, respectively, as
compared to 49% for both the quarter and nine months ended December 31, 2000.
TMCC believes that the increase for the quarter ended December 31, 2001, as
compared to the same period in fiscal 2001, is due primarily to an increased
supply of used cars returned to dealers in the form of trade-ins due to recent
new model incentives. TMCC believes that the impact of competitive new
vehicle pricing for core Toyota and Lexus models, 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. The Company also
believes that these factors have been compounded by auto manufacturers'
responding to the events of September 11, 2001 with additional incentives and
that these factors will continue through the fourth quarter of fiscal 2002.
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.
As a result of the factors discussed above, TMCC expects increased losses at
vehicle disposition to continue at least through fiscal 2002.
TMCC's lease portfolio includes contracts with original terms ranging from 11
to 60 months; the average original contract term in TMCC's lease portfolio was
45 months and 42 months at December 31, 2001 and 2000, respectively.
-23-
Interest Expense
- ----------------
Interest expense decreased $139 million, or 36%, and $270 million, or 25%,
during the quarter and nine months ended December 31, 2001, respectively, as
compared with the quarter and nine months ended December 31, 2000 primarily
due to a decrease in the average cost of borrowings. The weighted average
cost of borrowings was 4.36% and 6.60% for the nine months ended
December 31, 2001 and 2000, respectively.
Insurance
- ---------
The principal activities of TMCC's insurance subsidiary, Toyota Motor
Insurance Services, Inc. ("TMIS"), include marketing, underwriting, claims
administration and providing certain coverages related to vehicle service
agreements and contractual liability agreements sold by or through Toyota and
Lexus vehicle dealers and affiliates to customers. In addition, TMIS insures
and reinsures certain TMS and TMCC risks. Insurance premiums earned and
contract revenues recognized from insurance operations increased $3 million
and $13 million during the quarter and nine months ended December 31, 2001,
respectively, as compared with the quarter and nine months ended
December 31, 2000 primarily due to increased contract volume.
Investment and Other Income
- ---------------------------
The following table summarizes TMCC's investment and other income for the
three and nine months ended December 31, 2001 and 2000:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2001 2000 2001 2000
------ ------ ------ ------
(Dollars in Millions)
Investment income............... $ 20 $ 27 $ 74 $ 64
Servicing fee income............ 7 10 25 27
Gains on assets sold............ - 2 30 10
Loss on repurchases and
optional redemptions........ - - (5) (3)
------ ------ ------ ------
Investment and other income.. $ 27 $ 39 $124 $ 98
====== ====== ====== ======
Investment income decreased $7 million, or 26%, during the quarter ended
December 31, 2001, as compared with the same period in fiscal 2001, primarily
due to lower realized gains on fixed income investments.
Investment income increased $10 million, or 16%, during the nine months ended
December 31, 2001, as compared with the nine months ended December 31, 2000,
primarily due to the higher earning base from the retention of Class A-1 notes
on securitized finance receivables.
-24-
Gains on assets sold increased $20 million, or 200%, for the nine months ended
December 31, 2001, as compared with the nine months ended December 31, 2000,
due to a greater spread between the annual percentage rate on receivables sold
and the cost 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.
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 relating to
vehicles associated with its lease and finance receivables. This experience,
combined with revised forecasts for future return rates and loss per unit,
resulted in a downward revision to the vehicle disposition assumptions. The
assumption for expected residual value losses for TMCC's lease securitizations
was 4.9%-7.6% at March 31, 2001 and was revised to 7.1%-7.9% at June 30, 2001.
This decline was primarily due to the performance of leases originated prior
to model year 1999 and scheduled to terminate over the next 3 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, which was
adopted in the first quarter of fiscal year 2002. There were no additional
impairments recognized for the quarter ended December 31, 2001.
Losses Related to Argentine Investment
- --------------------------------------
TMCC has executed guarantees totaling $65 million in respect to TCA's offshore
dollar bank loans, of which approximately $47 million, including principal and
interest, is outstanding. Late in 2001, the Argentine government instituted a
series of changes that lead to political, economic and regulatory risks to
Argentine businesses. The government has imposed foreign exchange controls
restricting offshore payment transfers, and these controls are currently
preventing TCA from sending payments on its offshore dollar loans out of
Argentina. In February 2002, the Argentine government established measures to
re-denominate the entire Argentine economy into pesos and has permitted the
peso to float freely against other global currencies. This re-denomination
policy adversely affects TCA's financial condition and its ability to fully
satisfy its offshore dollar loans. Consequently, TMCC has included a charge
against income of $31 million to write-off its $5 million investment in TCA and
to establish a contingency reserve of $26 million which is the estimate of what
TMCC will be required to fund under its $47 million guaranty of TCA's offshore
outstanding debt. TMCC will continue to monitor the situation.
-25-
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased $32 million, or 30%, and
$68 million, or 22%, for the quarter and nine months ended December 31, 2001,
respectively, as compared with the quarter and nine months ended
December 31, 2000 reflecting expenses associated with technology-related
projects, the restructuring of TMCC's field operations, 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 $40 million and $25 million during
the nine months ended December 31, 2001 and 2000, respectively.
A Credit Support Fee Agreement entered into between TMCC and 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 and nine months ended December 31, 2001 were $3 million and $9
million, respectively, 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 for retail and lease contracts, will be handled by three regional
customer service centers. The regional center for the Western region was
opened in October 2001. The regional center for the Eastern region is
expected to open in the spring of 2002, and the transfer of certain functions
from branches to the regional center for the Midwest region is scheduled to
continue during the spring and summer of 2002. The conversion of activities
is expected to be completed in fiscal 2003. Restructuring charges and costs
recognized during the quarter and nine months ended December 31, 2001 were $9
million and $17 million, respectively. At March 31, 2001, restructuring
charges and costs to be recognized during fiscal 2002 were estimated to be $31
million. This estimate was revised to $36 million for the quarter ended
September 30, 2001 and remains unchanged for the quarter ended December 31,
2001, to reflect costs that will be incurred earlier than initially
anticipated; the estimated total cost of the field organization restructure
has not changed. Additional restructuring charges and costs are expected
through fiscal 2003. During the restructuring, TMCC has experienced an
increase in delinquency rates and charge off rates. TMCC is taking measures
to minimize the disruption of operations; however, the restructuring of field
operations could continue to adversely affect delinquencies and credit losses.
Management believes that the impact of the restructuring has been accurately
factored into the provision for credit losses.
-26-
Provision for Credit Losses and Delinquency
- -------------------------------------------
TMCC's provision for credit losses increased $29 million, or 81%, and
$55 million, or 50%, for the quarter and nine months ended December 31, 2001,
respectively, as compared with the quarter and nine months ended
December 31, 2000, reflecting growth in earning assets and increased credit
losses and delinquencies. 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,
2001.
TMCC recently completed the national launch of expanded tiered pricing programs
for both retail and lease vehicle contracts. The objective of the expanded
programs 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 will increase contract yields and credit losses in
connection with purchases of higher risk contracts.
The change in the allowance for credit losses included in finance receivables,
net and finance receivables, net - securitized, excluding net losses on
receivables sold subject to limited recourse provisions, for the three and nine
months ended December 31, 2001 and 2000, was as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2001 2000 2001 2000
------ ------ ------ ------
(Dollars in Millions)
Allowance for credit losses at
beginning of period........... $ 248 $ 230 $ 227 $ 214
Additions to the allowance...... 65 36 166 111
Charge-offs..................... (49) (33) (128) (92)
Recoveries...................... 4 4 14 14
Other adjustments............... 1 (12) (10) (22)
------ ------ ------ ------
Allowance for credit losses at
end of period................. $ 269 $ 225 $ 269 $ 225
====== ====== ====== ======
Annualized Credit Losses as a %
of average earning assets.... 0.59% 0.44% 0.54% 0.40%
The increase in the allowance for credit losses as a percent of average
earning assets for the quarter and nine months ended December 31, 2001 as
compared with the same periods ended December 31, 2000 is due to the
restructuring of TMCC's field operations, the recent national economic
downturn and the introduction of the tiered pricing program described
previously.
-27-
Allowance for credit losses as a percent of gross earning assets and two
months and over contractual delinquency as of the balance sheet dates reported
herein is as follows:
December 31, March 31, December 31,
2001 2001 2000
------------ ------------ ------------
(Dollars in Millions)
Allowance for credit losses as
a percent of gross earning
assets....................... 0.86% 0.85% 0.84%
Aggregate balances at end of
period for lease rentals and
installments 60 or more days
past due..................... $124 $56 $69
Aggregate balances at end of
period for lease rentals and
installments 60 or more days
past due as a percent of net
investments in operating
leases and gross receivables
outstanding.................. 0.39% 0.21% 0.25%
Delinquency and charge-off ratios typically fluctuate over time as a portfolio
matures. Accordingly, the delinquency and charge-off data above is not
necessarily indicative of delinquency and charge-off experience that could be
expected for a portfolio with a different level of seasoning. In addition,
the information in the table above has not been adjusted to eliminate the
effect of the growth of TMCC's portfolio. During the quarter ended
December 31, 2001, TMCC's portfolio has experienced significantly increased
delinquency rates. Repossession and credit loss experience has also increased
during the same period. TMCC believes that the increased delinquency
experience is a result of a number of factors including the restructuring of
field operations into regional centers of certain of its servicing operations
that were previously performed in branch offices, the recent national economic
downturn and the introduction of the tiered pricing program described
previously. The consolidation is ongoing and the transfer of certain
functions from branches to customer service centers is scheduled to continue
during the spring and summer of 2002. TMCC is taking measures to minimize the
disruption of operations; however, the restructuring of field operations and
economic downturn could continue to adversely affect delinquencies and credit
losses.
-28-
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 4 - 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 nine months ended December 31, 2001, the Company recognized a gain of
$24 million (reported as SFAS 133 fair value adjustments in the Consolidated
Statement of Income). The net adjustment reflects a gain of $41 million
related to the ineffective portion of TMCC's fair value hedges, offset by a
$17 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 is primarily 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, are discussed
in Non-Hedging Activities below. For fair value hedging relationships, the
components of each derivative's gain or loss are included in the assessment of
hedge effectiveness.
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 $3.0 billion to $5.6 billion during the nine months ended
December 31, 2001, with an average outstanding balance of $4.2 billion.
For additional liquidity purposes, TMCC maintains syndicated bank credit
facilities with certain banks which aggregated $3.5 billion at
December 31, 2001. No loans were outstanding under any of these bank credit
facilities during the nine months ended December 31, 2001. TMCC also maintains
uncommitted, unsecured lines of credit with banks totaling $85 million. At
December 31, 2001, TMCC had issued approximately $0.5 million in letters of
credit in connection with these uncommitted, unsecured lines of credit.
-29-
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 nine months of fiscal 2002,
TMCC issued approximately $6.6 billion of domestic and Euro MTNs and bonds all
of which had original maturities of one month or more.
The original maturities of all MTNs and bonds outstanding at December 31, 2001
ranged from one year to ten years. As of December 31, 2001, TMCC had total
MTNs and bonds outstanding of $20.4 billion, of which $6.7 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, 2002 approximately $1.6 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 billion.
Approximately $4.3 billion was available for issuance under the Euro MTN
program as of January 31, 2002. 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
nine months ended December 31, 2001, TMCC sold retail receivables totaling $3.0
billion in connection with securities issued under the shelf registration
statement. As of January 31, 2002, $3.1 billion remained available for
issuance under the current registration statement.
TMCC's ratio of earnings to fixed charges was 1.33 for the nine months ended
December 31, 2001 as compared to 1.11 for the nine months ended
December 31, 2000. The increase in the ratio is due to several factors
including higher finance margins and investment income.
Cash flows provided by operating, investing and financing activities have been
used primarily to support earning asset growth. During the nine months ended
December 31, 2001, cash used to purchase additional finance receivables and
investments in operating leases, totaling $19.4 billion, was partially provided
by the liquidation and sale of earning assets totaling $13.7 billion. Investing
activities resulted in a net cash use of $5.4 billion during the nine months
ended December 31, 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 $1.4 billion and $4.0 billion, respectively, during the
nine months ended December 31, 2001. The Company believes that cash provided
by operating and financing 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.
-30-
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
This report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which include estimates,
projections and statements of the Company's beliefs concerning future events,
business plans, objectives, expected operating results, and the assumptions
upon which those statements are based. Forward looking statements include,
without limitation, any statement that may predict, forecast, indicate or
imply future results, performance or achievements, and are typically
identified with words such as "believe," "anticipate," "expect," "estimate,"
"project," "should," "intend," "will," "may" or words or phrases of similar
meaning. The Company cautions that the forward looking statements involve
known and unknown risks, uncertainties and other important factors that may
cause actual results to differ materially from those in the forward looking
statements, including, without limitation, the following: decline in demand
for Toyota and Lexus products; the effect of economic conditions; the effects
of the September 11, 2001 terrorist attacks; the effect of the current
political, economic and regulatory risk in Argentina; 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. The risks included here are not exhaustive. New risk factors
emerge from time to time and it is not possible for the Company to predict all
such risk factors, nor to assess the impact such risk factors might have on
the Company's business or the extent to which any factor or combination of
factors may cause actual results to differ materially from those contained in
any forward looking statements. Given these risks and uncertainties,
investors should not place undue reliance on forward looking statements as a
prediction of actual results. The Company will not update the forward looking
statements to reflect actual results or changes in the factors affecting the
forward looking statements.
-31-
New Accounting Standards
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). This
Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and it applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. Under SFAS No. 143, a company is required to
1) record an existing legal obligation associated with the retirement of a
tangible long-lived asset as a liability when incurred and the amount of the
liability be initially measured at fair value, 2) recognize subsequent changes
in the liability that result from (a) the passage of time and (b) revisions in
either the timing or amount of estimated cash flows and 3) upon initially
recognizing a liability for an asset retirement obligation, an entity
capitalize the cost by recognizing an increase in the carrying amount of the
related long-lived asset. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002, with earlier application
encouraged. Management does not anticipate that the adoption of SFAS No. 143
will have a material impact on the financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144"). The objectives of SFAS 144 are to address significant
issues relating to the implementation of FASB Statement No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS No. 121") and to develop a single accounting model based
on the framework established in SFAS No. 121 for long-lived assets to be
disposed of by sale whether previously held and used or newly acquired. Even
though SFAS No. 144 supersedes SFAS No. 121, it retains the fundamental
provisions of SFAS No. 121 for (1) the recognition and measurement of the
impairment of long-lived assets to be held and used and (2) the measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 supersedes the
accounting and reporting provisions of Accounting Principles Board No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30") for segments of a business to be disposed
of. However, SFAS 144 retains APB 30's requirement that entities report
discontinued operations separately from continuing operations and extends that
reporting requirement to "a component of an entity" that either has been
disposed of (by sale, abandonment, or in a distribution to owners) or is
classified as "held for sale". SFAS No. 144 also amends the guidance of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" ("ARB
51") to eliminate the exception to consolidation for a temporarily controlled
subsidiary. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. Management of the Company
anticipates that the adoption of SFAS No. 144 will not have a significant
effect on the Company's earnings or financial position.
-32-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TMCC maintains an overall risk management strategy that uses a variety of
interest rate and currency derivative financial instruments to mitigate its
economic 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 either 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 December 31, 2001 reduced by the
effects of master netting agreements. The credit exposure of TMCC's derivative
financial instruments at December 31, 2001 was $187.5 million on an aggregate
notional amount of $39.3 billion. Additionally, at December 31, 2001,
approximately 96% of TMCC's derivative financial instruments, based on notional
amounts, were with commercial banks and investment banking firms assigned
investment grade ratings of "AA" or better by national rating agencies. TMCC
does not currently anticipate non-performance by any of its counterparties and
has no reserves related to non-performance as of December 31, 2001. TMCC has
not experienced any counterparty default during the quarter ended December 31,
2001.
-33-
Non-Hedging Activities
- ----------------------
Option-based products are executed on a portfolio basis and consist primarily
of purchased interest rate cap agreements and interest rate swaps. 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.
The Company uses this strategy to moderate 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.
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.
-34-
The value-at-risk and the average value-at-risk of TMCC's portfolio as of
December 31, 2001 and for the nine months ended December 31, 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 Nine Months Ended
December 31, 2001 December 31, 2001
------------------- -------------------
Mean portfolio value..................... $4,339 million $5,054 million
Value-at-risk............................ $61.1 million $95.0 million
Percentage of the mean portfolio value... 1.4% 1.9%
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 nine months ended December 31, 2001 and 2000 is as follows:
Nine Months Ended December 31,
------------------------------------------------------------
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............... 1.3 1.3 12.5 5.0 3.7 5.8 0.2 0.3
Less:
Terminated agreements........ - - - 1.5 8.0 - 0.1 -
Expired agreements........... 2.2 0.9 2.2 12.2 2.8 2.3 0.4 0.9
---- ---- ----- ----- ----- ----- ---- ----
Ending notional amount.......... $7.4 $8.2 $27.2 $10.4 $ 4.4 $11.9 $0.3 $0.9
==== ==== ===== ===== ===== ===== ==== ====
-35-
Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month and nine-month periods ended
December 31, 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 February 8, 2002 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.
-36-
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
December 31, 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 39,
are filed as part of this report.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the registrant during
the quarter ended December 31, 2001:
Date of Report Items Reported
----------------- ---------------------
November 1, 2001 Item 5. Other Events.
December 28, 2001 Item 5. Other Events.
-37-
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, 2002 By /S/ GEORGE E. BORST
-------------------------------
George E. Borst
President and
Chief Executive Officer
(Principal Executive Officer)
Date: February 11, 2002 By /S/ JOHN F. STILLO
-------------------------------
John F. Stillo
Vice President and
Chief Financial Officer
(Principal Financial Officer)
-38-
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
-39-