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 September 30, 2002
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 1-9961
----------
TOYOTA MOTOR CREDIT CORPORATION
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3775816
- ---------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 S. Western Avenue
Torrance, California 90509
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 468-1310
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes No X
--- ---
As of November 14, 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)
September 30, March 31, September 30,
2002 2002 2001
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
ASSETS
------
Cash and cash equivalents............... $ 465 $ 747 $ 1,167
Investments in marketable securities.... 1,039 1,100 854
Finance receivables, net................ 25,074 22,390 19,813
Finance receivables, net - securitized.. 816 1,087 1,407
Investments in operating leases, net.... 7,792 7,631 7,321
Derivative assets....................... 988 454 615
Other assets............................ 732 630 793
Income taxes receivable................. 348 221 109
------- ------- -------
Total Assets................... $37,254 $34,260 $32,079
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................. $29,564 $25,990 $24,127
Notes payable related to securitized
finance receivables structured as
collateralized borrowings............ 772 1,036 1,072
Derivative liabilities.................. 624 1,124 1,193
Other liabilities....................... 846 819 774
Deferred income......................... 943 861 770
Deferred income taxes................... 1,795 1,679 1,569
------- ------- -------
Total Liabilities................. 34,544 31,509 29,505
------- ------- -------
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.................... 1,795 1,820 1,648
Accumulated other comprehensive
income............................ - 16 11
------- ------- -------
Total Shareholder's Equity........ 2,710 2,751 2,574
------- ------- -------
Total Liabilities and
Shareholder's Equity........... $37,254 $34,260 $32,079
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
-2-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
(Unaudited) (Unaudited)
Financing Revenues:
Leasing.................................... $ 632 $ 617 $1,253 $1,237
Retail financing........................... 285 216 548 410
Wholesale and other dealer financing....... 42 49 82 109
------ ------ ------ ------
Total financing revenues...................... 959 882 1,883 1,756
Depreciation on leases..................... 394 380 767 754
Interest expense........................... 215 268 432 564
SFAS 133 and 138 fair value adjustments.... 124 77 338 68
------ ------ ------ ------
Net financing revenues........................ 226 157 346 370
Insurance premiums earned and contract
revenues................................... 42 40 83 80
Investment and other income................... 28 32 92 97
Loss on asset impairment...................... 11 - 11 47
------ ------ ------ ------
Net financing revenues and other revenues..... 285 229 510 500
------ ------ ------ ------
Expenses:
Operating and administrative............... 123 129 251 243
Losses related to Argentine Investment..... 6 - 11 -
Provision for credit losses................ 127 51 249 101
Insurance losses and loss adjustment
expenses................................ 23 18 44 38
------ ------ ------ ------
Total expenses................................ 279 198 555 382
------ ------ ------ ------
Income/(Loss) before income taxes............. 6 31 (45) 118
Provision/(Benefit) for income taxes.......... 2 10 (20) 47
------ ------ ------ ------
Net Income/(Loss)............................. $ 4 $ 21 $ (25) $ 71
====== ====== ====== ======
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/(Loss) Total
------- -------- ------------- --------
Balance at March 31, 2001........ $ 915 $ 1,581 $ 18 $ 2,514
------ ------- ---------- -------
Net income for the six months
ended September 30, 2001...... - 71 - 71
Dividends........................ - (4) - (4)
Change in net unrealized gains
on available-for-sale
marketable securities......... - - (7) (7)
------ -------- ---------- -------
Total Comprehensive Income....... - 67 (7) 60
------ -------- ---------- -------
Balance at September 30, 2001
(unaudited)................... $ 915 $ 1,648 $ 11 $ 2,574
====== ======= ========= =======
Balance at March 31, 2002........ $ 915 $ 1,820 $ 16 $ 2,751
------ ------- --------- -------
Net loss for the six months
ended September 30, 2002...... - (25) - (25)
Change in net unrealized gains
on available-for-sale
marketable securities......... - - (16) (16)
------ -------- --------- -------
Total Comprehensive Loss......... - (25) (16) (41)
------ -------- --------- -------
Balance at September 30, 2002
(unaudited)................... $ 915 $ 1,795 $ - $ 2,710
====== ======= ========= =======
See Accompanying Notes to Consolidated Financial Statements.
-4-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
Six Months Ended
September 30,
-------------------------
2002 2001
-------- ---------
(Unaudited)
Cash flows from operating activities:
Net (loss)/ income....................................... $ (25) $ 71
-------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Fair value adjustments of SFAS 133 and 138
derivatives.................................... 338 68
Depreciation and amortization...................... 811 750
Provision for credit losses........................ 249 101
Gain from sale of finance receivables, net......... (33) (25)
Gain from sale of marketable securities, net....... - (1)
Loss on asset impairment........................... 11 47
Loss related to Argentine Investment............... 11 -
Increase in other assets........................... (593) (82)
(Decrease) in accrued interest expense............. (13) -
Increase in deferred income taxes.................. 122 101
Increase (decrease) in other liabilities........... 445 (102)
-------- ---------
Total adjustments........................................ 1,348 857
-------- ---------
Net cash provided by operating activities................... 1,323 928
-------- ---------
Cash flows from investing activities:
Addition to investments in marketable securities......... (562) (963)
Disposition of investments in marketable securities...... 545 1,162
Purchase of finance receivables.......................... (19,804) (16,040)
Liquidation of finance receivables....................... 15,657 12,517
Proceeds from sale of finance receivables................ 1,549 1,450
Addition to investments in operating leases.............. (1,929) (1,985)
Disposition of investments in operating leases........... 1,006 1,336
Increase in receivable from Affiliate................... (12) (42)
-------- ---------
Net cash used in investing activities....................... (3,550) (2,565)
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable........ 4,433 6,000
Payments on notes and loans payable...................... (2,956) (1,890)
Net increase(decrease) in commercial paper with
original maturities less than 90 days................. 468 (1,600)
-------- ---------
Net cash provided by financing activities................... 1,945 2,510
-------- ---------
Net (decrease)/increase in cash and cash equivalents........ (282) 873
Cash and cash equivalents at the beginning of the period.... 747 294
-------- ---------
Cash and cash equivalents at the end of the period.......... $ 465 $ 1,167
======== =========
Supplemental disclosures:
Interest paid............................................ $ 387 $ 588
Income taxes received/paid .............................. $ (18) $ 50
See Accompanying Notes to Consolidated Financial Statements.
-5-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data
- -------------------------------
The accompanying information pertaining to the three and six months ended
September 30, 2002 and 2001 is unaudited and has been prepared in accordance
with generally accepted accounting principles for interim financial
information and in accordance 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 three and six
months ended September 30, 2002 are not necessarily indicative of those
expected for any other interim period or for a full year. Certain September
2001 accounts have been reclassified to conform with the September 2002 and
March 2002 presentation.
These financial statements should be read in conjunction with the consolidated
financial statements and notes to the consolidated financial statements
included in Toyota Motor Credit Corporation's ("TMCC's" or the "Company's")
2002 Annual Report to the Securities and Exchange Commission ("SEC")on Form
10-K ("Form 10-K").
-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:
September 30, March 31, September 30,
2002 2002 2001
------------ ------------ ------------
(Dollars in Millions)
Retail.................................... $16,429 $13,715 $11,480
Finance leases............................ 7,018 7,692 8,244
Wholesale and other dealer loans.......... 3,996 3,626 3,151
------- ------- -------
27,443 25,033 22,875
Unearned income........................... (1,214) (1,340) (1,470)
Allowance for credit losses............... (339) (216) (185)
------- ------- -------
Finance receivables, net and
Finance receivables, net - securitized. $25,890 $23,477 $21,220
======= ======= =======
Finance leases included estimated unguaranteed residual values of $1.9 billion,
$1.9 billion and $1.8 billion at September 30, 2002, March 31, 2002 and
September 30, 2001, respectively.
The aggregate balances related to finance receivables 60 or more days past due
totaled $199 million, $189 million and $82 million at September 30, 2002,
March 31, 2002 and September 30, 2001, respectively. The majority of retail
and finance lease receivables do not involve recourse to the dealer in the
event of customer default.
-7-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Operating Leases
- ----------------------------------------
Investments in operating leases, net consisted of the following:
September 30, March 31, September 30,
2002 2002 2001
------------ ------------ ------------
(Dollars in Millions)
Vehicles.................................. $9,267 $9,011 $8,594
Equipment and other....................... 720 721 712
------ ------ ------
9,987 9,732 9,306
Accumulated depreciation.................. (2,117) (2,034) (1,922)
Allowance for credit losses .............. (78) (67) (63)
------ ------ ------
Investments in operating leases, net...... $7,792 $7,631 $7,321
====== ====== ======
-8-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Allowance for Credit Losses
- ------------------------------------
An analysis of the allowance for credit losses follows:
Six months ended
September 30, September 30,
2002 2001
------------ ------------
(Dollars in Millions)
Allowance for credit losses at
beginning of period............... $ 283 $ 227
Provision for credit losses.......... 249 101
Charge-offs............................ (129) (79)
Recoveries........................... 15 10
Other adjustments.................... (1) (11)
--------- ---------
Allowance for credit losses
at end of period.................. $ 417 $ 248
========= =========
The allowance for credit losses at September 30, 2002 increased $169 million
from September 30, 2001, primarily due to an increase in the provision for
credit losses attributed to overall increases in delinquencies and credit
losses. Charge-offs for the six months ended September 30, 2002 increased $50
million, compared to the same period ended September 30, 2001, as a result of a
number of factors including the effects of TMCC's field restructuring, which
has temporarily disrupted normal collection activities, and the continuation
of the national economic downturn. In addition, increased delinquency and
credit losses can be attributed in part to changes in portfolio quality in
connection with the national tiered pricing program. Under the national
tiered pricing program, the Company generally will acquire contracts with
higher yields to compensate for the potential increase in credit losses. The
Company has also experienced a general increase in the average original
contract term of retail and lease vehicle contracts in the six months ended
September 30, 2002, compared to the same period in fiscal 2002. The average
length of contracts initiated during fiscal year to date 2003 and fiscal year
2002, was 55.6 months and 54.8 months, respectively.
-9-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities
- -------------------------------------------
TMCC maintains an overall risk management strategy that utilizes a variety of
interest rate and currency derivative financial instruments to mitigate its
exposure to fluctuations in interest rate and currency exchange rates. TMCC
does not use any of these instruments for trading purposes.
The Company enters into interest rate swaps, indexed note swap agreements and
cross currency swap agreements to convert its fixed-rate debt to variable-rate
debt, a portion of which is converted back to fixed rates using option-based
products and certain interest rate swaps.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an Amendment of SFAS 133 ("SFAS 138") require
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Fair value of the Company's derivatives is determined
using external market data in conjunction with an internal market valuation
system, or externally quoted market values. 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 and whether the Company elects to apply hedge accounting.
If the relationship between the hedged item and the derivative instrument does
not qualify for hedge treatment, or if the Company elects not to apply hedge
accounting, the gain or loss on the derivative instrument is reported in
earnings as incurred. However, if the relationship between the hedged item and
the derivative instrument qualifies for hedge treatment and the Company elects
to apply hedge accounting, the accounting varies based on the type of hedge.
For the six months ended September 30, 2002, the Company recognized a $338
million unfavorable SFAS 133/138 adjustment (reported as SFAS 133 and 138 fair
value adjustments in the Consolidated Statement of Income). The net adjustment
reflects a $369 million decrease in the fair market value of TMCC's portfolio
of option-based products and certain interest rate swaps which did not qualify
for hedge accounting, offset by an increase of $31 million related to the
ineffective portion of TMCC's fair value hedges. The decrease in the fair
value of TMCC's option-based products as well as certain interest rate swaps
was primarily due to the significant reduction in interest rates during the six
month period ended September 30, 2002. The increase in the unfavorable SFAS
133/138 adjustment for the six months ended September 30, 2002, as compared to
the same period in fiscal 2002, is due to the significant reduction in interest
rates during the six months ended September 30, 2002, as well as actions taken
by TMCC to protect interest rate margins, including an increase in interest
rate swap derivative products that do not qualify for hedge accounting.
The Company uses portfolio based derivatives to mitigate its exposure to
volatility in interest rates, particularly LIBOR, and for liability management
purposes. These products are not linked to specific assets and liabilities
that appear on the balance sheet and, therefore, do not qualify for hedge
accounting. 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 more fully in the Company's March 2002 Annual Report
on Form 10-K. For fair value hedging relationships, the gain or loss
components of each derivative instrument and hedged item are included in the
assessment of hedge effectiveness.
-10-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Notes and Loans Payable
- --------------------------------
Notes and loans payable consisted of the following:
September 30, March 31, September 30,
2002 2002 2001
------------ ------------ ------------
(Dollars in Millions)
Commercial paper, net.................... $ 5,865 $ 5,012 $ 2,997
------- ------- -------
Other senior debt, due in the fiscal
years ending:
2002.................................. - - 3,725
2003.................................. 3,031 5,184 3,964
2004.................................. 6,273 5,360 5,523
2005.................................. 3,988 3,665 2,997
2006.................................. 4,197 2,885 1,755
2007.................................. 1,786 1,252 322
Thereafter............................ 4,424 2,632 2,844
------- ------- -------
Total other senior debt............... 23,699 20,978 21,130
------- ------- -------
Notes and loans payable............ $29,564 $25,990 $24,127
======= ======= =======
Notes and loans payable at September 30, 2002, March 31, 2002 and September
30, 2001 reflect the adjustments required under SFAS 133/138 for derivatives
and debt instruments which qualify for hedge treatment as discussed in Note 5
- - Derivatives and Hedging Activities. TMCC recorded a $338 million net
unfavorable fair value adjustment under SFAS 133/138 during the six months
ended September 30, 2002. This adjustment consisted of the following:
Six Months Ended
September 30,
2002
----------------
(Dollars in Millions)
Increase in derivative assets $ 534
Decrease in derivative liabilities 500
Increase in fair market value of
debt portfolio (1,372)
--------
Net unfavorable fair value adjustment $ (338)
========
Short-term borrowings consist of commercial paper having a weighted average
remaining term and weighted average interest rate of 19 days and 1.81%,
respectively, at September 30, 2002.
-11-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Notes and Loans Payable (Continued)
- --------------------------------
Other senior debt includes certain MTNs, euro bonds and domestic bonds. The
weighted average interest rate on other senior debt was 3.11% for the six
months ended September 30, 2002 including the effect of interest rate swap
agreements. The rates have been calculated using rates in effect at September
30, 2002, some of which are floating rates that reset periodically. Less than
one percent of other senior debt at September 30, 2002 had interest rates that
were fixed for a period of more than one year. The notional amount of notes
and loans payable was $28.8 billion at September 30, 2002.
Approximately 73% of other senior debt at September 30, 2002 had floating
interest rates that were covered by option-based products and certain interest
rate swap agreements on a portfolio basis. The weighted average strike rate
on these option-based products and certain interest rate swap agreements was
4.17% at September 30, 2002. 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.
Included in notes and loans payable at September 30, 2002 were unsecured notes
denominated in various foreign currencies. Concurrently with the issuance of
these notes, TMCC entered into cross currency swap agreements to convert these
obligations into U.S. dollar obligations which, in aggregate, total a
principal amount at maturity of $8.0 billion.
-12-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Retail Receivables and Valuation of Residual Interest
- ----------------------------------------------------------------------
TMCC maintains programs to sell retail receivables through the limited purpose
subsidiaries Toyota Motor Credit Receivables Corporation ("TMCRC") and Toyota
Auto Finance Receivables LLC ("TAFR"). TMCC services its securitized
receivables and earns a servicing fee of 1% per annum of the total principal
balance of the outstanding receivables. On a subordinated basis, the limited
purpose subsidiaries retain excess 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. The value of these restricted assets retained by the
limited purpose subsidiaries is exposed to losses in receivables and such cash
flows are available as credit support for senior securities. The exposure of
these restricted assets exists until the associated securities are paid in
full. Investors do not have recourse to other assets held by TMCC for failure
of obligors to pay amounts due.
TMCC records its retained assets at fair value, which is estimated using a
discounted cash flow analysis. The retained assets are not considered to have
a readily available market value. Any excess of the carrying amount of the
retained interest over its fair value results in an adjustment to the asset
with a corresponding offset to unrealized gain. Unrealized gains, net of
income taxes, related to the retained assets are included in comprehensive
income. If management deems the excess between the carrying value and the
fair value to be unrealizable, the asset is written down through current
period earnings. Management evaluates the key economic assumptions used in
the initial valuation of the retained assets and performs a subsequent review
of those assumptions on a quarterly basis.
During the three months ended September 30, 2002, TMCC recognized $10.7
million in impairment losses related to retail finance receivables as a result
of expected credit losses exceeding original credit loss assumptions. The
assumptions used to calculate expected credit losses per annum for outstanding
securitization transactions were adjusted from 0.50% - 0.90% at March 31, 2002
to 0.68% - 0.94% at September 30, 2002. Impairment of retail finance
receivables is due to increased credit losses resulting from a number of
factors including the effects of TMCC's field restructuring, which has
temporarily disrupted normal collection activities, and the continuation of
the national economic downturn. In addition, increased delinquency and credit
losses can be attributed in part to changes in portfolio quality in connection
with the national tiered pricing program. Under the national tiered pricing
program, the Company generally will acquire contracts with higher yields to
compensate for the potential increase in credit losses. The Company has also
experienced a general increase in the average original contract term of retail
contracts. The average length of contracts initiated has increased from 56.3
months for the six months ended September 30, 2000 to 57.4 months for the six
months ended September 30, 2002.
During the six months ended September 2001, the Company experienced increased
return rates and losses per unit upon disposition relating to vehicles
associated with its lease receivables. This experience, combined with revised
forecasts for future return rates and loss per unit, resulted in a downward
revision to the residual loss assumptions. As a result of the change in
assumptions, in the six months ended September 30, 2001, TMCC recognized
losses due to the permanent impairment of assets retained in the sale of
interests in finance lease receivables totaling $47 million as required by
EITF 99-20, which was adopted in the first quarter of fiscal year 2002.
-13-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Related Party Transactions
- -----------------------------------
As of September 30, 2002, there have been no material changes to related party
agreements or relationships as described in the Company's annual report on Form
10-K for the year ended March 31, 2002. The table below summarizes amounts
incurred or earned under such agreements or relationships for the following
periods:
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -----------------
2002 2001 2002 2001
------- -------- ------- -------
(Dollars in Millions)
Credit support fees incurred......... $ (3.2) $ (3.0) $ (6.8) $ (5.9)
Shared services reimbursement........ (9.4) (15.9) (20.8) (26.7)
Rent expense under facilities lease.. (1.2) (1.3) (2.5) (2.6)
Marketing and wholesale support
revenue......................... 39.7 29.5 62.7 56.1
Affiliate insurance premiums and
commissions revenue............. 10.3 10.9 20.4 21.1
Other amounts incurred............... (0.1) (0.1) (0.4) (0.1)
------- ------- ------- -------
Total.............................. $ 36.1 $ 20.1 $ 52.6 $ 41.9
======= ======= ======= =======
Other amounts incurred reflect expenses incurred for vehicles leased from
affiliates, partially offset by amounts earned for services TMCC performed on
behalf of affiliates.
-14-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and Contingent Liabilities
- -----------------------------------------------
Guarantees and Comfort Letters
- ------------------------------
TMCC has entered into guarantees or comfort letters on behalf of its fully
owned subsidiaries and certain affiliates. These guarantees and comfort
letters signed by TMCC are summarized in the table below:
September 30,
2002
Outstanding
Balance of
Maximum Debt/Bonds
Commitment under the
Amount Commitment
---------- -----------
(Dollars in Millions)
Guarantees:
Toyota Credit Argentina S.A.
(TCA) offshore dollar bank loans $ 65.0 $ 36.7
Banco Toyota do Brasil, S.A.
(BTB) debt 30.0 12.0
Toyota Services de Venezuela, C.A.
(TSV) debt 6.2 2.3
Affiliate pollution control
and solid waste disposal bonds 206.0 206.0
Comfort Letters:
Toyota Services de Mexico,
S.A., de C.V. (TSM) 67.1 26.1
TSV 15.0 4.4
---------- -----------
Total guarantees and comfort letters $ 389.3 $ 287.5
========== ===========
The guarantees shown above consist of TMCC's guarantees of the debt of TCA,
BTB, and TSV, and various flexible rate demand pollution control and solid
waste disposal revenue bonds issued in connection with the manufacturing
facilities of certain affiliates.
At March 31, 2002, TMCC had a $26 million reserve relating to TMCC's guarantee
of TCA's offshore outstanding debt. During the first six months of fiscal
year 2003, the value of the peso continued to deteriorate. As a result, for
the three and six months ended September 30, 2002, TMCC recorded a $6 million
and $11 million charge against income, respectively, to increase the reserve
related to the Company's guarantee of TCA's offshore outstanding debt to $37
million at September 30, 2002. TMCC will continue to monitor the situation in
Argentina.
The comfort letters shown above consist of amounts related to TSV's office
lease agreement and credit facilities entered into by TSV and TSM. TMCC's
obligations under these commitments are discussed more fully in the Company's
June 30, 2002 Form 10-Q and March 31, 2002 Form 10-K.
-15-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
Other Commitments
- -----------------
In addition to the commitments previously discussed, TMCC has also entered
into revolving forms of guaranteed or contingent arrangements, which are
summarized in the table below and are discussed more fully in the Company's
June 30, 2002 Form 10-Q and March 31, 2002 Form 10-K.
September 30,
2002
Outstanding
Balance of
Maximum Note/Facility
Commitment under the
Amount Commitment
---------- -------------
(Dollars in Millions)
ABS revolving liquidity notes $ 23.0 $ -
Revolving credit facilities
with dealerships 1,611.9 720.7
---------- -----------
Total $ 1,634.9 $ 720.7
========== ===========
TMCC has guaranteed certain obligations of TMIS related to vehicle service
agreements issued in Alabama, Illinois, New York and Virginia. These
guarantees have been given without regard to any security, but are limited to
the duration of the underlying coverage up to a maximum of the original
manufacturer's suggested retail price on the vehicles. As of September 30,
2002, TMCC has not paid, and does not expect to pay, any amounts under these
guarantees.
An operating agreement between TMCC and Toyota Credit de Puerto Rico
Corporation ("TCPR")(the "Agreement"), provides that TMCC will make necessary
equity contributions or provide other financial assistance TMCC deems
appropriate to ensure that TCPR maintains a minimum coverage on fixed charges
of 1.10 times such fixed charges in any fiscal quarter. The Agreement does not
constitute a guarantee by TMCC of any obligations of TCPR. The fixed charge
coverage provision of the Agreement is solely for the benefit of the holders of
TCPR's commercial paper, and the Agreement may be amended or terminated at any
time without notice to, or the consent of, holders of other TCPR obligations.
No amounts have been funded under this agreement as of September 30, 2002.
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
-16-
September 30, 2002 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.
Note 10- Lines of Credit/Standby Letters of Credit
- ---------------------------------------------------
To support its commercial paper program and general corporate purposes, TMCC
maintains syndicated bank credit facilities with certain banks which
aggregated $4.2 billion, $3.5 billion and $3.5 billion, at September 30, 2002,
March 31, 2002 and September 30, 2001, respectively. No loans were outstanding
under any of these bank credit facilities as of September 30, 2002, March 31,
2002 or September 30, 2001.
The Company maintains uncommitted lines of credit to facilitate and maintain
letters of credit. Available lines of credit totaled $60 million, $61
million, and $85 million as of September 30, 2002, March 31, 2002 and
September 30, 2001, respectively. Approximately $699 thousand, $471 thousand,
and $594 thousand in letters of credit were outstanding as of September 30,
2002, March 31, 2002 and September 30, 2001, respectively.
-17-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Segment Information
- -----------------------------
Financial results for the Company's operating segments are summarized below:
At/For At/For
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
(Dollars in Millions)
Assets:
Financing operations............. $36,601 $31,516 $36,601 $31,516
Insurance operations............. 846 699 846 699
Eliminations/reclassifications... (193) (136) (193) (136)
------- ------- ------- -------
Total assets.................. $37,254 $32,079 $37,254 $32,079
======= ======= ======= =======
Gross revenues:
Financing operations............. $ 971 $ 906 $ 1,951 $ 1,838
Insurance operations............. 58 48 107 95
------- ------- ------- -------
Total gross revenues........... $ 1,029 $ 954 $ 2,058 $ 1,933
======= ======= ======= =======
Net(Loss)/Income:
Financing operations............. $ (3) $ 9 $ (42) $ 50
Insurance operations............. 7 12 17 21
------- ------- ------- -------
Total net income............... $ 4 $ 21 $ (25) $ 71
======= ======= ======= =======
-18-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Subsequent Events
- ---------------------------
In October 2002, TMCC executed a comfort letter with a Venezuelan bank on
behalf of TSV regarding a local bank credit facility whereby TMCC will
exercise its influence to induce TSV to meet all obligations under the credit
facility. This comfort letter allows TSV to borrow in local currency up to a
maximum amount equivalent to $1.3 million. Maturities for bank loan advances
range from one month to 36 months. This comfort letter will remain in effect
for as long as the TSV loan is outstanding. The initial comfort letter may be
extended for additional periods by mutual agreement between TMCC and the bank.
As of November 14, 2002, the amount outstanding under this comfort letter is
$1.3 million.
In addition, in October 2002, TMCC executed a guarantee for a maximum amount
equivalent to $7.2 million in respect of the debt of TSV with a local
Venezuelan bank. This guarantee allows TSV to borrow in local currency. This
guarantee may be terminated at any time by TMCC with a written notice to the
bank if there is no outstanding balance. As of November 14, 2002, the amount
outstanding under this guarantee is $4.4 million.
Additionally, in November 2002, TMCC executed guarantees for maximum amounts
totaling equivalent to $18.4 million in respect of the debt of TSV with local
Venezuelan banks. These guarantees replaced comfort letters that were in
existence as of September 30, 2002 for amounts totaling $12.3 million. These
guarantees allow TSV to borrow in local currency. These guarantees may be
terminated at any time by TMCC with written notices to the banks if there is
no outstanding balance. As of November 14, 2002, the amounts outstanding
under these guarantees total $2.3 million.
During October 2002, TMCC sold retail finance receivables totaling $1.5
billion, subject to certain limited recourse provisions, to TAFR.
-19-
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 or loss by business segment for the three and six months ended
September 30, 2002 and 2001:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
------- ------- ------ -------
(Dollars in Millions)
Net income:
Financing operations.............. $ (3) $ 9 $(42) $50
Insurance operations.............. 7 12 17 21
---- ---- ---- ----
Total net income............... $ 4 $ 21 $(25) $71
==== ==== ==== ====
Net income from financing operations decreased $12 million or 133% for the
three months ended September 30, 2002 as compared with the same period in
fiscal 2002. The decrease primarily reflects a higher provision for credit
losses attributed to overall increases in delinquencies and credit losses,
coupled with a $124 million ($78 million, net of income tax) unfavorable fair
value adjustment related to the application of Statements of Financial
Accounting Standards 133 and 138 (SFAS 133/138). Net income from financing
operations decreased $92 million or 184% for the six months ended September
30, 2002 as compared with the same period in fiscal 2002 primarily due to a
$338 million ($202 million, net of income tax) unfavorable fair value
adjustment related to the application of SFAS 133/138, coupled with a higher
provision for credit losses attributed to overall increases in delinquencies
and credit losses.
The SFAS 133/138 adjustments are reported as SFAS 133 and 138 fair value
adjustments in the Consolidated Statement of Income. The increase in the
unfavorable SFAS 133/138 adjustment for the six months ended September 30,
2002, as compared to the same period in fiscal 2002, is due to the significant
reduction in interest rates during the six months ended September 30, 2002, as
well as actions taken by TMCC to protect interest rate margins, including an
increase in interest rate swap derivative products that do not qualify for
hedge accounting.
Net income from insurance operations decreased $5 million, or 42%, and $4
million, or 19%, for the three and six months ended September 30, 2002,
respectively, as compared with the same periods in fiscal 2002. The lower
level of net income is primarily due to higher claim expense, resulting from
an overall increase in loss experience, and a decrease in investment income,
associated with the decline in interest rates.
-20-
Earning Assets
- --------------
Net earning assets 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". The composition of
TMCC's net earning assets as of the balance sheet dates reported are summarized
below:
September 30, March 31, September 30,
2002 2002 2001
------------ ------------ ------------
(Dollars in Millions)
Vehicle lease
Investment in operating leases......... $ 7,391 $ 7,215 $ 6,898
Finance leases......................... 5,764 6,338 6,776
------- ------- -------
Total vehicle leases.................... 13,155 13,553 13,674
Vehicle retail finance receivables...... 16,135 13,409 11,165
Vehicle wholesale and other financing... 4,782 4,429 3,950
Allowance for credit losses............. (417) (283) (248)
------- ------- -------
Total net earning assets................ $33,655 $31,108 $28,541
======= ======= =======
TMCC's net earning assets increased to $33.7 billion at September 30, 2002
from $31.1 billion at March 31, 2002 and $28.5 billion at September 30, 2001.
Asset growth from March 31, 2002 and September 30, 2001 reflects higher retail
and wholesale earning assets, partially offset by a small decline in vehicle
lease earning assets. The increase in retail earning assets and corresponding
increase in retail finance revenue from March 31, 2002 and September 30, 2001
was primarily due to volume increases and strong sales of Toyota and Lexus
vehicles.
The decrease in vehicle lease earning assets as of September 30, 2002 as
compared to March 31, 2002 and September 30, 2001 reflects a general shift in
programs sponsored by TMS from lease to retail as well as an industry-wide
shift away from leasing. In addition to the overall decrease in vehicle lease
earning assets, the composition of the vehicle lease portfolio has also
changed, resulting in an increasing mix of operating leases relative to
finance lease receivables. 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. The primary purpose of
purchasing residual value insurance was to cause leases acquired by the
Titling Trust to be classified as finance lease receivables rather than
operating lease assets. TMCC discontinued purchasing residual value insurance
for operating lease assets in June 2001.
Wholesale assets increased from March 31, 2002 due to an increase in the
number of dealers receiving wholesale financing and a corresponding increase
in wholesale units financed. Wholesale and other earning assets increased
from September 30, 2001 primarily due to an increase in the number of dealers
receiving wholesale and other financing. Though wholesale earning assets
increased, wholesale revenue decreased for the three and six months ended
September 30, 2002 as compared to the same periods in fiscal year 2001
-21-
primarily due to a decrease in the applicable interest rate index for
wholesale loans.
The allowance for credit losses increased from March 31, 2002 and September
30, 2001, reflecting increased delinquency experience and asset growth. The
increased delinquency and credit loss experience is a result of a number of
factors including the effects of TMCC's field restructuring which has
temporarily disrupted normal collection activities and the continuation of the
national economic downturn. While the physical migration of resources related
to the restructuring of field operations has been substantially completed,
TMCC continues to review and refine current processes and deploy additional
resources and technology in an effort to improve operating efficiencies and
minimize the disruption of operations; however, the restructuring of field
operations has adversely affected, and could continue to adversely affect
delinquencies and credit losses. In addition, increased delinquency and
credit losses can be attributed in part to changes in portfolio quality in
connection with the national tiered pricing program. Under the national
tiered pricing program, the Company generally will acquire contracts with
higher yields to compensate for the potential increase in credit losses. The
Company has also experienced a general increase in the average original
contract term of retail and lease vehicle contracts in the six months ended
September 30, 2002, compared to the same period in fiscal 2002. Historically,
longer-term contracts experience higher credit losses. The average length of
contracts initiated during fiscal year to date 2003 and fiscal year 2002 was
55.6 months and 54.8 months, respectively.
The majority of retail and finance lease receivables do not involve recourse
to the dealer in the event of customer default. The allowance for credit
losses is evaluated quarterly, considering historical trends of repossession,
charge-offs, recoveries and credit losses. In addition, portfolio credit
quality, economic conditions and market conditions are monitored and taken
into account. After evaluating these factors, management develops several loss
scenarios and reviews allowance levels to determine whether reserves are
considered adequate to cover the probable range of losses. The allowance for
credit losses as of September 30, 2002 is considered by management to be
appropriate in relation to the expected loss on the present owned portfolio.
-22-
TMCC's vehicle retail and lease contract volume and finance penetration for the
three and six months ended September 30, 2002 and 2001 are summarized below:
Three Months Ended Six Months Ended
September 30, September 30,
------------------- ----------------
2002 2001 2002 2001
------- ------- ------- ------
Total contract volume:
Vehicle retail....................... 195,000 158,000 364,000 306,000
Vehicle lease........................ 44,000 49,000 88,000 106,000
------- ------- ------- -------
Total................................... 239,000 207,000 452,000 412,000
======= ======= ======= =======
TMS sponsored contract volume:
Vehicle retail....................... 65,000 29,000 87,000 60,000
Vehicle lease........................ 13,000 11,000 15,000 23,000
------- ------- ------- -------
Total................................... 78,000 40,000 102,000 83,000
======= ======= ======= =======
Market share (excluding fleet)<F1>:
Vehicle retail....................... 35.6% 28.6% 33.0% 27.8%
Vehicle lease........................ 11.2% 13.6% 11.4% 14.6%
----- ----- ----- -----
Total................................... 46.8% 42.2% 44.4% 42.4%
===== ===== ===== =====
<FN>
- --------------------
<F1> Finance penetration represents penetration of Toyota and Lexus new vehicle
financed sales to consumers, excluding sales of a private Toyota distributor.
Previously, reported market share rates, including sales of the private Toyota
distributor, were 36.1% and 36.3% for the three and six months ended September 30,
2001, respectively.
</FN>
TMCC's retail contract volume increased during the three and six months ended
September 30, 2002, respectively, as compared with the same periods in fiscal
2002 reflecting higher levels of programs sponsored by TMS and strong sales of
Toyota and Lexus vehicles. The retail finance portfolio includes contracts
with original terms ranging from 24 to 72 months; the average original
contract terms in TMCC's finance portfolio were 57.4 months, 57.0 months and
55.5 months as of September 30, 2002, 2001 and 2000, respectively.
TMCC's lease contract volume decreased during the three and six months ended
September 30, 2002, respectively, as compared with the same periods in fiscal
2002, as demand for financing has shifted from leasing to retail loans. The
Company's lease portfolio includes contracts with original terms ranging from
12 to 60 months; the average original contract term in TMCC's lease portfolio
was 47 months, 44 months and 42 months at September 30, 2002, 2001 and 2000,
respectively.
-23-
Net Financing Revenues
- ----------------------
TMCC's net financing revenues increased $69 million, or 44%, for the three
months ended September 30, 2002 and decreased $24 million or 6% for the six
months ended September 30, 2002 as compared with the same periods in fiscal
2002. The increase for the three months ended September 30, 2002 is due to
the combined effect of higher leasing and retail revenues, lower interest
expense and lower lease termination costs, partially offset by unfavorable
effects of SFAS 133/138 fair value adjustments on the Company's debt and
derivative portfolios in the current quarter.
The decrease in net financing revenues for the six months ended September 30,
2002, is primarily due to a $338 million unfavorable SFAS 133/138 fair value
adjustment, partially offset by the increase in leasing and retail revenues
and lower interest expense. The increase in the unfavorable SFAS 133/138 fair
value adjustment for the six months ended September 30, 2002, as compared to
the same period in fiscal 2002, is due to the significant reduction in interest
rates during the six months ended September 30, 2002, as well as actions taken
by TMCC to protect interest rate margins, including an increase in interest
rate swap derivative products that do not qualify for hedge accounting. TMCC
uses derivative contracts as part of its interest rate risk management
program.
Depreciation on Leases
- ----------------------
The following table sets forth the items included in TMCC's depreciation on
leases for the three and six months ended September 30, 2002 and 2001:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in Millions)
Straight-line depreciation
on operating leases.................. $324 $293 $642 $587
Provision for
residual value losses................ 70 87 125 167
---- ---- ---- ----
Total depreciation on leases......... $394 $380 $767 $754
==== ==== ==== ====
Straight-line depreciation expense on operating leases increased $31 million,
or 11% and $55 million or 9% for the three and six months ended September 30,
2002 as compared with the same periods in fiscal 2002 due to an increase in
average operating lease assets. Purchasing residual value insurance for
leases acquired by the Titling Trust before June 2001 increased the ratio of
finance lease receivables relative to operating lease assets. TMCC
discontinued purchasing residual value insurance for operating lease assets
acquired by the Titling Trust in June 2001. The Company expects an increase
in straight-line depreciation expense as operating leases become a larger
proportion of the Company's lease portfolio.
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, there is a higher
probability that the vehicle will be returned to TMCC. A higher rate of
vehicle returns exposes TMCC to a higher risk of residual value losses.
-24-
The Company maintains an allowance to cover estimated residual value losses
related to unguaranteed residuals on its present owned portfolio. The
allowance required to cover estimated residual value losses is evaluated
quarterly, considering projected vehicle return rates and projected loss
severity derived from historical and market information on used vehicle sales,
factors including trends in lease returns, new car markets, and general
economic conditions. After evaluating these factors, management develops
several loss scenarios and reviews allowance levels to determine whether
reserves are considered adequate to cover the probable range of losses. The
allowance for residual value losses is maintained in amounts considered by
management to be appropriate in relation to the expected losses on the present
owned portfolio. Upon disposal of the assets, the allowance for residual
losses is adjusted for the difference between the net book value and the
proceeds from sale. The allowance for residual value losses and related
provision expense are included in finance receivables, net and investment in
operating leases, net in the Consolidated Balance Sheet, and in lease
depreciation expense in the Consolidated Statement of Income, respectively.
Total unguaranteed residual values related to TMCC's vehicle lease portfolio
increased from approximately $6.9 billion to $7.1 billion between September
30, 2001 and September 30, 2002. The increase primarily resulted from the
discontinuation of purchasing residual value insurance for operating leases
acquired by the Titling Trust beginning in June 2001.
The provision for residual value losses decreased $17 million or 20% and $42
million or 25% for the three and six months ended September 30, 2002,
respectively, as compared with the same periods in fiscal 2002. The decrease
in the provision is reflective of an overall decrease in actual and expected
residual value losses.
Residual losses decreased $3 million and $28 million for the three and six
months ended September 30, 2002, respectively, as compared with the same
periods in fiscal 2002, primarily due to a decrease in the number of vehicles
coming off-lease for the six months ended September 30, 2002.
The number of returned leased vehicles sold by TMCC during a specified period
as a percentage of the number of lease contracts that as of their origination
dates were scheduled to terminate in the current period ("return rate") was
46% for the six months ended September 30, 2002, respectively, as compared to
51% for the same period in fiscal 2002. The Company has taken action to reduce
residual losses by developing strategies to increase dealer purchases of off-
lease vehicles and expanding marketing of off-lease vehicles through Internet
auctions to maximize proceeds on vehicles sold.
Interest Expense
- ----------------
Interest expense decreased $53 million, or 20% and $132 million or 23% during
the three and six months ended September 30, 2002, respectively, as compared
with the same periods in fiscal 2002 primarily due to a decrease in the
average cost of borrowings. The weighted average cost of borrowings was 3.01%
and 4.80% for the six months ended September 30, 2002 and 2001, respectively.
-25-
Insurance
- ---------
The principal activities of TMCC's insurance subsidiary, Toyota Motor Insurance
Services, Inc. ("TMIS"), include marketing, underwriting, claims administration
and providing certain insurance and contractual coverages to Toyota and Lexus
vehicle dealers and their customers. In addition, TMIS insures and reinsures
certain TMS and TMCC risks.
Insurance premiums earned and contract revenues recognized from insurance
operations increased $2 million and $3 million during the three and six months
ended September 30, 2002, respectively, as compared with the same periods in
fiscal 2002 primarily due to increased contract volume and a higher number of
agreements in force.
Net income from insurance operations was $7 million and $17 million for the
three and six months ended September 30, 2002, a decrease of $5 million, or
42%, and $4 million, or 19%, respectively, as compared with the same periods in
fiscal 2002. The lower level of net income is primarily due to higher claim
expense, resulting from an overall increase in loss experience, and a decrease
in investment income, associated with the decline in interest rates.
Investment and Other Income
- ---------------------------
The following table summarizes TMCC's investment and other income for the
three and six months ended September 30, 2002 and 2001:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
2002 2001 2002 2001
------ ------ ------ ------
(Dollars in Millions)
Investment income............... $ 20 $ 25 $ 42 $ 54
Gains on assets sold............ - - 33 25
Servicing fee income............ 8 8 17 18
Loss on repurchases............. - (1) - -
------ ------ ------ ------
Investment and other income.. $ 28 $ 32 $ 92 $ 97
====== ====== ====== ======
Investment income decreased $5 million, or 20% and $12 million, or 22%, during
the three and six months ended September 30, 2002, respectively, as compared
with the same periods in fiscal 2002, due to a decrease in insurance
investment income resulting from a decrease in rates on portfolio investments,
coupled with a decrease in asset-backed lease securitization investment income
on funds held in reserve accounts related to transactions that have fully
matured as of the end of fiscal 2002.
Gains on assets sold increased $8 million, or 32%, for the six months ended
September 30, 2002, as compared with the same period in fiscal 2002 primarily
due to decreases in market interest rates, which resulted in larger interest
only strips retained by the Company. 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 in which the assets are sold. Numerous factors can affect the
timing and amounts of these gains, such as the type and amount of assets sold,
market interest rates at the time of the asset sale, the structure of the
sale, key assumptions used and other current financial market conditions.
-26-
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 finance lease receivables on a
quarterly basis. The fair market value of these retained assets is impacted
by management's and the market's expectations as to future residual losses,
credit losses, discount rates and prepayment rates.
During the three months ended September 30, 2002, TMCC recognized $11 million
in impairment losses related to retail finance receivables as a result of
expected credit losses exceeding original credit loss assumptions. The
assumptions used to calculate expected credit losses per annum for outstanding
securitization transactions were adjusted from 0.50% - 0.90% at March 31, 2002
to 0.68% - 0.94% at September 30, 2002. Impairment of retail finance
receivables is due to increased credit losses resulting from a number of
factors including the effects of TMCC's field restructuring, which has
temporarily disrupted normal collection activities, and the continuation of
the national economic downturn. In addition, increased delinquency and credit
losses can be attributed in part to changes in portfolio quality in connection
with the national tiered pricing program. Under the national tiered pricing
program, the Company generally will acquire contracts with higher yields to
compensate for the potential increase in credit losses. The Company has also
experienced a general increase in the average original contract term of retail
contracts in the six months ended September 30, 2002, compared to the same
period in fiscal 2002. Historically, longer-term contracts experience higher
credit losses.
During the six months ended September 2001, the Company experienced increased
return rates and losses 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 residual loss assumptions. As a result of the
change in assumptions, in the six months ended September 30, 2001, TMCC
recognized losses due to the permanent impairment of assets retained in the
sale of interests in finance lease receivables totaling $47 million as
required by EITF 99-20, which was adopted in the first quarter of fiscal year
2002.
Losses Related to Argentine Investment
- --------------------------------------
TMCC has executed guarantees totaling $65 million in respect to TCA's offshore
U.S. dollar bank loans of which approximately $37 million, including principal
and interest is outstanding as of September 30, 2002. Late in 2001, the
Argentine government instituted a series of changes that led 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 U.S. 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 affected TCA's financial
condition and its ability to fully satisfy its offshore U.S. dollar loans. As
a result, in fiscal 2002 TMCC established a reserve of $26 million relating to
TMCC's guaranty of TCA's offshore outstanding debt.
For the three and six months ended September 30, 2002, TMCC recorded a $6
million and $11 million charge against income, respectively, to increase the
reserve related to the Company's guarantee of TCA's offshore outstanding debt
to $37 million. TMCC will continue to monitor the situation in Argentina.
-27-
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses decreased $6 million, or 5% for the
three months ended September 30, 2002 as compared with the same period in
fiscal 2002. The net decrease primarily reflects a $1.8 million decrease in
charges and costs incurred for the field restructuring, coupled with a
reclassification to interest expense of $3.4 million of credit support fees
that were previously included in operating and administrative expenses.
Operating and administrative expenses increased $8 million, or 3% for the six
months ended September 30, 2002 as compared to the same period in fiscal 2002.
The net increase primarily reflects a $14.4 million increase in employee
expenses related to the Company's new customer service centers, partially
offset by a reclassification to interest expense of $6.8 million of credit
support fees that were previously included in operating and administrative
expenses.
Operating and administrative expenses have continued to increase in the
current fiscal year partially as a result of the costs incurred in connection
with the continued restructuring of TMCC's field operations. The branch
offices of TMCC have been converted to serve only dealer financing needs
including the purchasing of contracts from dealers, financing inventories,
financing other dealer activities such as business acquisitions, facilities
refurbishment, real estate purchases and working capital requirements, as well
as consulting on finance and insurance operations. Other functions previously
performed at the branch offices, such as customer service, collections, lease
termination and administrative functions for retail and lease contracts, have
been transferred to three regional customer service centers which opened, or
were expanded, during the last year. The physical restructuring of TMCC's
field operations was substantially completed as of September 30, 2002.
Restructuring charges and costs recognized during the three and six months
ended September 30, 2002 were $3.3 million and $6.6 million, respectively.
Restructuring charges and costs recognized during the three and six months
ended September 30, 2001 were $5.1 million and $6.3 million, respectively.
Expenses charged during the six months ended September 30, 2002 were comprised
of $2.7 million related to asset and facility costs and $3.9 million for other
exit costs. The expenses charged in the six months ended September 30, 2001
were comprised of $4.0 million related to employee separation costs, $0.8
million for asset and facility costs and $1.5 million for other exit costs.
At September 30, 2002, remaining restructuring and related charges to be
recognized during fiscal 2003 are estimated to be $1.9 million.
During the field restructuring, TMCC has experienced an increase in
delinquency rates and charge off rates as a result of the disruption to normal
collection process. While the physical migration of resources related to the
restructuring of the field operations has been substantially completed, the
Company continues to review and refine current processes and deploy additional
resources and technology in an effort to improve operating efficiencies and to
minimize the disruption of operations; however, the restructuring of field
operations has adversely affected, and could continue to adversely affect
delinquencies and credit losses. Upon completion of the field restructuring
and strategic deployment of resources and technology, the Company anticipates
greater internal operating efficiencies and superior dealer and customer
account management.
-28-
Provision for Credit Losses and Delinquency
- --------------------------------------------
TMCC maintains allowances to cover probable losses on its present owned
portfolio resulting from the inability of customers to make required payments.
The allowance for credit losses is evaluated quarterly, considering historical
trends of repossession, charge-offs, recoveries and credit losses. In
addition, portfolio credit quality, economic conditions and market conditions
are monitored and taken into account. After evaluating these factors,
management develops several loss scenarios and reviews allowance levels to
determine whether reserves are considered adequate to cover the probable range
of losses. The allowance for credit losses as of September 30, 2002 is
considered by management to be appropriate in relation to the expected loss
experience on the present owned portfolio.
An analysis of credit losses and the related allowance follows. This analysis
includes net losses on receivables sold through securitizations that qualify as
a sale for legal but not accounting purposes, but excludes net losses on
receivables sold through securitization transactions that qualify as a sale for
legal and accounting purposes, under SFAS 140:
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
(Dollars in Millions)
Allowance for credit losses at
beginning of period.................... $ 351 $ 231 $ 283 $ 227
Provision for credit losses.............. 127 51 249 101
Charge-offs.............................. (69) (39) (129) (79)
Recoveries............................... 8 5 15 10
Other adjustments........................ - - (1) (11)
------- ------- ------- -------
Allowance for credit losses at
end of period.......................... $ 417 $ 248 $ 417 $ 248
======= ======= ======= =======
September 30,
-------------------
2002 2001
------- -------
Annualized Net Credit Losses as a %
of average earning assets............. 0.70% 0.50%
Allowance for Credit Losses as a % of
gross earning assets.................. 1.22% 0.86%
Aggregate balances at end of period
for lease rentals and installments
60 or more days past due <F1>......... $ 246 $ 108
Aggregate balances at end of period
for lease rentals and installments
60 or more days past due as a %
of net investments in operating
leases and gross receivables
outstanding <F2>...................... 0.72% 0.38%
<FN>
- --------------------
<F1> Aggregate balances for lease rentals and installments 60 or more days past due for September
30, 2001 was previously reported as $74 million.
<F2> Aggregate balances for lease rentals and installments 60 or more days past due as a % of net
investments in operating leases and gross receivables outstanding for September 30, 2001 was
previously reported as 0.26%.
</FN>
-29-
The allowance for credit losses at September 30, 2002 increased $169 million
from September 30, 2001, primarily due to an increase in the provision for
credit losses, resulting from an increase in net charge-offs. The increase in
the provision and net charge-offs for the three and six months ended September
30, 2002 as compared with the same periods in fiscal 2002 is due to increases
in delinquencies and credit losses.
The Company believes that the increased delinquency experience is a result of
a number of factors including the effects of TMCC's field restructuring which
has temporarily disrupted normal collection activities and the continuation of
the national economic downturn. While the physical migration of resources
related to the restructuring of field operations has been substantially
completed, the Company continues to review and refine current processes and
deploy additional resources and technology in an effort to improve operating
efficiencies and to minimize the disruption of operations; however, the
restructuring of field operations and economic downturn has adversely
affected, and could continue to adversely affect delinquencies and credit
losses. In addition, increased delinquency and credit losses can be
attributed in part to changes in portfolio quality in connection with the
national tiered pricing program. Under the national tiered pricing program,
the Company generally will acquire contracts with higher yields to compensate
for the potential increase in credit losses. The Company has also experienced
a general increase in the average original contract term of retail and lease
vehicle contracts in the six months ended September 30, 2002, compared to the
same period in fiscal 2002. Historically, longer-term contracts experience
higher credit losses. The trend toward longer-term contracts is reflective of
industry trends. The average length of retail and lease contracts initiated
during fiscal year to date 2003 and fiscal year 2002 was 55.6 months and 54.8
months, respectively. The majority of retail and finance lease receivables do
not involve recourse to the dealer in the event of customer default.
Management believes that the impact of the restructuring has been reasonably
factored into the provision for credit losses.
Delinquency and charge-off ratios typically fluctuate over time as a portfolio
matures. The information in the preceding table has not been adjusted to
eliminate the effect of the growth of TMCC's portfolio.
Derivatives and Hedging Activities
- ----------------------------------
TMCC maintains an overall risk management strategy that utilizes a variety of
interest rate and currency derivative financial instruments to mitigate its
exposure to fluctuations in interest rate and currency exchange rates. TMCC
does not use any of these instruments for trading purposes.
The Company enters into interest rate swaps, indexed note swap agreements and
cross currency swap agreements to convert its fixed-rate debt to variable-rate
debt, a portion of which is converted back to fixed rates using option-based
products and certain interest rate swaps.
The Company uses portfolio based derivatives to mitigate its exposure to
volatility in interest rates, particularly LIBOR, and for liability management
purposes. These products are not linked to specific assets and liabilities
that appear on the balance sheet and, therefore, do not qualify for hedge
accounting.
For the six months ended September 30, 2002, the Company recognized a $338
million unfavorable SFAS 133/SFAS 138 adjustment (reported as SFAS 133 and 138
fair value adjustment in the Consolidated Statement of Income). The net
adjustment reflects a $369 million decrease in the fair market value of TMCC's
portfolio of option-based products and certain interest rate swaps which did
not qualify for hedge accounting, offset by an increase of $31 million related
to the ineffective portion of TMCC's fair value hedges. The decrease in the
fair value of TMCC's option-based products as well as certain interest rate
-30-
swaps was primarily due to the significant reduction in interest rates during
the six month period ended September 30, 2002. The increase in the unfavorable
SFAS 133/138 adjustment for the six months ended September 30, 2002, as
compared to the same period in fiscal 2002 is due to the significant reduction
in interest rates during the six months ended September 30, 2002, as well as
actions taken by TMCC to protect interest rate margins, including an increase
in interest rate swap derivative products that do not qualify for hedge
accounting.
Liquidity and Capital Resources
- --------------------------------
The Company, in the normal course of business, is an active debt issuer and
requires a substantial amount of funding to support the growth in earning
assets. The objective of its liquidity management is to ensure the Company has
the ability to maintain access to the capital markets to meet its obligations
and other commitments on a timely and cost-effective basis. Significant
reliance is placed on the Company's ability to obtain debt and asset-backed
securitization funding in the capital markets in addition to funding provided
by earning asset liquidations and cash provided by operating activities. Debt
issuances have generally been in the form of commercial paper, and 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 $4.7 billion to $6.5 billion during the six months ended
September 30, 2002, with an average outstanding balance of $5.6 billion.
For additional liquidity purposes, TMCC maintains syndicated bank credit
facilities with certain banks which aggregated $4.2 billion at September 30,
2002. No loans were outstanding under any of these bank credit facilities as of
September 30, 2002. In addition, the Company maintains uncommitted lines of
credit to facilitate and maintain letters of credit. Available lines of
credit totaled $60 million as of September 30, 2002. Approximately $699
thousand in letters of credit was outstanding as of September 30, 2002.
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 six months ended September 30,
2002, TMCC issued approximately $3.9 billion of domestic and euro MTNs and
bonds, all of which had original maturities of one year or more.
The original maturities of all MTNs and bonds outstanding at September 30,
2002 ranged from one year to ten years. As of September 30, 2002, TMCC had
total MTNs and bonds outstanding of $23.7 billion, of which $8.0 billion was
denominated in foreign currencies.
TMCC anticipates continued use of MTNs and bonds in both the United States and
international capital markets. To provide for the issuance of MTNs and other
debt securities in the U.S. capital market, the Company maintains a shelf
registration with the SEC under which approximately $8.6 billion was available
for issuance at October 31, 2002. Under TMCC's euro MTN program, which
provides for the issuance of debt securities in the international capital
market, the maximum aggregate principal amount authorized to be outstanding at
any time is $16.0 billion, of which $2.9 billion was available for issuance at
October 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
markets that are not issued under its MTN programs.
-31-
Additionally, TMCC uses its asset-backed securitization programs to generate
funds for investment in earning assets as described in Note 7 - Sale of Retail
Receivables and Valuation of Residual Interest. 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 six months ended September 30, 2002, TMCC sold retail
receivables totaling $1.6 billion in connection with securities issued under
the shelf registration statement. As of November 1, 2002, approximately
$1 billion remained available for issuance under the registration statement.
TMCC's ratio of earnings to fixed charges was less than 1.00 for the six
months ended September 30, 2002 and was 1.21 for the six months ended
September 30, 2001. The deficiency in the ratio for the six months ended
September 30, 2002 was primarily due to a decrease in net income from
financing operations due to unfavorable SFAS 133/138 fair value adjustments,
which is reported as SFAS 133 and 138 fair value adjustments in the
Consolidated Statement of Income. The Company would require an additional $45
million in net income to attain a ratio of 1.00.
Cash flows provided by operating, investing and financing activities have been
used primarily to support earning asset growth. Cash provided by the
liquidation and sale of earning assets, totaling $18.2 billion for the six
months ended September 30, 2002 was used to purchase additional investments in
operating leases and finance receivables, totaling $21.7 billion during the six
months ended September 30, 2002. Investing activities resulted in a net use of
cash of $3.6 billion for the six months ended September 30, 2002 as the
purchase of additional earning assets exceeded cash provided by the liquidation
and sale of earning assets. Net cash provided by operating activities totaled
$1.3 billion for the six months ended September 30, 2002 and net cash provided
by financing activities totaled $1.9 billion during the six months ended
September 30, 2002. The Company believes that cash provided by operating and
investing activities as well as access to domestic and international capital
markets, the issuance of commercial paper, and asset-backed securitization
transactions will provide sufficient liquidity to meet its future funding
requirements.
-32-
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
This report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which include estimates,
projections and statements of the Company's beliefs concerning future events,
business plans, objectives, expected operating results, and the assumptions
upon which those statements are based. Forward looking statements include,
without limitation, any statement that may predict, forecast, indicate or
imply future results, performance or achievements, and are typically
identified with words such as "believe," "anticipate," "expect," "estimate,"
"project," "should," "intend," "will," "may" or words or phrases of similar
meaning. The Company cautions that the forward looking statements involve
known and unknown risks, uncertainties and other important factors that may
cause actual results to differ materially from those in the forward looking
statements, including, without limitation, the following: decline in demand
for Toyota and Lexus products; the effect of economic conditions; the effect of
the current political, economic and regulatory risk in Argentina, Mexico,
Venezuela, Brazil and other Latin American and South American countries and the
resulting effect on their economies and monetary and fiscal policies; a decline
in the market acceptability of leasing; the effect of competitive pricing on
interest margins; changes in 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
changes in the fiscal policy of any government agency which increases sovereign
risk, monetary policies exercised by the European Central Bank and other
monetary authorities; increased costs associated with the Company's debt
funding or restructuring efforts; the effect of any military action by or
against the United States, as well as any future terrorist attacks, including
any resulting effects on general economic conditions, consumer confidence and
general market liquidity; with respect to the effects of litigation matters,
the discovery of facts not presently known to the Company or determination by
judges, juries or other finders of fact which do not accord with the Company's
evaluation of the possible liability from existing litigation; increased losses
resulting from default by any dealers to which the Company has a significant
credit exposure; default by any counterparty to a derivative contract;
performance under any guaranty or comfort letter issued by the Company; 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.
-33-
New Accounting Standards
In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
146), which addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3 "Liability Recognition for Certain Employee Terminations
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)". SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred as opposed to the date of an entity's commitment to an exit plan
as required under EITF Issue No. 94-3. SFAS 146 also requires that
measurement of the liability associated with exit or disposal activities be at
fair value. SFAS 146 is effective for the Company for exit or disposal
activities that are initiated after December 31, 2002. The implementation of
SFAS 146 is not expected to have a material impact on the Company's financial
statements.
In October 2002, the FASB issued SFAS No. 147, Acquisition of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and
FASB Interpretation No. 9 (SFAS 147). SFAS 147 provides guidance on the
accounting for the acquisitions of financial institutions, except those
acquisitions between two or more mutual enterprises. SFAS 147 removes
acquisitions of financial institutions from the scope of both SFAS 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FIN
9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or
a Similar Institution Is Acquired in a Business Combination Accounted for by
the Purchase Method, and requires that those transactions be accounted for in
accordance with SFAS 141, Business Combinations, and SFAS 142, Goodwill and
Other Intangible Assets. SFAS 147 also amends SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor-relationship and borrower-relationship intangible assets and credit
cardholder intangible assets. SFAS 147 is effective for acquisitions for
which the date of acquisition is on or after October 1, 2002. The
implementation of SFAS 147 is not expected to have a material impact on the
Company's financial statements.
-34-
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 in interest rate and currency exchange
rates. TMCC does not use any of these instruments for trading purposes. A
detailed discussion of the Company's hedging program including strategies to
mitigate market risk, interest rate risk, counter-party risk and operating
risk is contained in the March 31, 2002 Annual Report on Form 10-K.
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 seven 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.
-35-
The value-at-risk and the average value-at-risk of TMCC's portfolio as of, and
for the six months ended, September 30, 2002 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 Six Months Ended
September 30, 2002 September 30, 2002
------------------- -------------------
Mean portfolio value..................... $4,893 million $4,342 million
Value-at-risk............................ $47.6 million $44.6 million
Percentage of the mean portfolio value... 1.0% 1.0%
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 six months ended September 30, 2002 and 2001 is as follows:
Six Months Ended September 30,
------------------------------------------------------------
Cross
Currency
Interest Interest Indexed
Rate Swap Rate Swap Option-based Note Swap
Agreements Agreements Products Agreements
------------ ------------ ------------ ------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Billions)
Beginning notional amount....... $7.8 $8.3 $29.6 $16.9 $6.1 $11.5 $0.2 $0.6
Add:
New agreements............... 0.8 0.6 2.6 9.4 1.8 2.3 - 0.2
Less:
Terminated agreements........ - - 0.1 - - 8.0 0.2 -
Expired agreements........... 0.6 0.1 6.8 1.3 0.1 2.6 - 0.4
Amortizing notionals......... - - 0.7 - - - - -
---- ---- ----- ----- ---- ---- ---- ----
Ending notional amount.......... $8.0 $8.8 $24.6 $25.0 $7.8 $ 3.2 $ - $0.4
==== ==== ===== ===== ===== ===== ==== ====
-36-
Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month and six months periods ended
September 30, 2002 and 2001, 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 November 14, 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.
-37-
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports filed or
submitted under the Securities Exchange of 1934, as amended ("Exchange Act"),
is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms.
Within the 90 days prior to the filing date of this quarterly report, the
Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
evaluated the effectiveness of such disclosure controls and procedures in place
pursuant to Rule 13a-14 of the Exchange Act. Based on the evaluation, the CEO
and CFO concluded that such disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-38-
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
September 30, 2002 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 43,
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 September 30, 2002:
Date of Report Items Reported
----------------- ---------------------
July 29, 2002 Item 5. Other Events
-39-
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: November 14, 2002 By /S/ GEORGE E. BORST
-------------------------------
George E. Borst
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2002 By /S/ JOHN F. STILLO
-------------------------------
John F. Stillo
Vice President and
Chief Financial Officer
(Principal Financial Officer)
-40-
CERTIFICATIONS
I, George E. Borst, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Toyota Motor Credit
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
By /s/ GEORGE E. BORST
------------------------
George E. Borst
President and
Chief Executive Officer
-41-
CERTIFICATIONS
I, John F. Stillo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Toyota Motor Credit
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
By /s/ JOHN F. STILLO
------------------------
John F. Stillo
Vice President and
Chief Financial Officer
-42-
EXHIBIT INDEX
Exhibit Method
Number Description of Filing
- ------- ----------- ---------
4.3 Fourth Amended and Restated Agency Agreement dated
October 1, 2002 among TMCC, JPMorgan Chase Bank, Filed
and J.P. Morgan Bank Luxembourg S.A. Herewith
10.15 364 Day Credit Agreement dated September 12, 2002
among TMCC, Bank of America, N.A. as Administrative
Agent, JPMorgan Chase Bank as Syndication Agent, The
Bank of Tokyo-Mitsubishi, Ltd. and Citibank, N.A. as
Documentation Agents, Banc of America Securities LLC
as Sole Lead Arranger and Sole Book Manager and the Filed
other Banks named therein Herewith
10.16 Five-year Credit Agreement dated September 12, 2002
among TMCC, Bank of America, N.A. as Administrative
Agent, JPMorgan Chase Bank as Syndication Agent, The
Bank of Tokyo-Mitsubishi, Ltd. and Citibank, N.A. as
Documentation Agents, Banc of America Securities LLC
as Sole Lead Arranger and Sole Book Manager and the Filed
other Banks named therein Herewith
12.1 Calculation of Ratio of Earnings to Fixed Charges Filed
Herewith
15.1 Report of Independent Accountants Filed
Herewith
15.2 Letter regarding unaudited interim financial Filed
information Herewith
-43-