UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9961
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TOYOTA MOTOR CREDIT CORPORATION
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(Exact name of registrant as specified in its charter)
California 95-3775816
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 S. Western Avenue
Torrance, California 90509
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 787-1310
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ---
As of January 31, 1996, the number of outstanding shares of capital
stock, par value $10,000 per share, of the registrant was 86,500, all of which
shares were held by Toyota Motor Sales, U.S.A., Inc.
-1-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
December 31, September 30, December 31,
1995 1995 1994
------------ ------------- ------------
(Unaudited) (Unaudited)
ASSETS
------
Cash and cash equivalents................. $ 62 $ 108 $ 305
Investments in marketable securities...... 179 169 138
Investments in operating leases, net...... 8,596 8,148 6,676
Finance receivables, net.................. 7,498 7,227 8,086
Receivable from Parent.................... 29 51 -
Other receivables......................... 304 350 207
Deferred charges.......................... 94 85 71
Income taxes receivable................... 12 6 -
Other assets.............................. 91 81 67
------- ------- -------
Total Assets..................... $16,865 $16,225 $15,550
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................... $13,253 $12,696 $12,435
Accrued interest.......................... 171 190 161
Accounts payable and accrued expenses..... 297 298 286
Deposits.................................. 209 200 168
Payable to Parent......................... - - 13
Income taxes payable...................... - - 12
Deferred income........................... 524 505 472
Deferred income taxes..................... 659 627 432
------- ------- -------
Total liabilities................... 15,113 14,516 13,979
------- ------- -------
Commitments and contingencies
Shareholder's Equity:
Capital stock, $l0,000 par value
(100,000 shares authorized; issued
and outstanding 86,500)............. 865 865 865
Retained earnings...................... 887 844 706
------- ------- -------
Total shareholder's equity.......... 1,752 1,709 1,571
------- ------- -------
Total Liabilities and
Shareholder's Equity............. $16,865 $16,225 $15,550
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
-2-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
Three Months Ended
December 31,
------------------
1995 1994
------ ------
(Unaudited)
Financing Revenues:
Leasing................................. $ 557 $ 429
Retail financing........................ 101 109
Wholesale and other dealer financing.... 30 26
------ ------
Total financing revenues................... 688 564
Depreciation on operating leases........ 370 277
Interest expense........................ 193 161
------ ------
Net financing revenues..................... 125 126
Other revenues............................. 29 24
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Net Financing Revenues and Other Revenues.. 154 150
------ ------
Expenses:
Operating and administrative............ 65 59
Provision for credit losses............. 21 18
------ ------
Total Expenses............................. 86 77
------ ------
Income before income taxes................. 68 73
Provision for income taxes................. 27 29
------ ------
Net Income................................. $ 41 $ 44
====== ======
See Accompanying Notes to Consolidated Financial Statements.
-3-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
Three Months Ended December 31,
-------------------------------
1995 1994
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(Unaudited)
Cash flows from operating activities:
Net income............................................ $ 41 $ 44
------ ------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 359 285
Provision for credit losses..................... 21 18
Increase (decrease) in accrued interest......... (19) 5
Increase in deferred income taxes............... 32 46
Decrease in other assets........................ 7 28
Increase in other liabilities................... 21 39
------ ------
Total adjustments..................................... 421 421
------ ------
Net cash provided by operating activities................ 462 465
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Cash flows from investing activities:
Additions to investments in marketable securities..... (21) (46)
Disposition of investments in marketable securities... 12 8
Purchase of finance receivables....................... (2,901) (2,733)
Liquidations of finance receivables................... 2,619 2,472
Additions to investments in operating leases.......... (1,137) (922)
Disposition of investments in operating leases........ 309 177
------ ------
Net cash used in investing activities.................... (1,119) (1,044)
------ ------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable..... 1,007 1,498
Payments on notes and loans payable................... (1,289) (984)
Net increase in commercial paper with
original maturities less than 90 days.............. 893 93
------ ------
Net cash provided by financing activities................ 611 607
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Net increase (decrease) in cash and cash equivalents..... (46) 28
Cash and cash equivalents at the beginning
of the period......................................... 108 277
------ ------
Cash and cash equivalents at the end of the period....... $ 62 $ 305
====== ======
Supplemental disclosures:
Interest paid......................................... $223 $149
Income taxes paid..................................... $1 $1
See Accompanying Notes to Consolidated Financial Statements.
-4-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data
- -------------------------------
Information pertaining to the three months ended December 31, 1995 and
1994 is unaudited. In the opinion of management, the unaudited
financial information reflects all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the
results for the interim periods presented. The results of operations
for the three months ended December 31, 1995 are not necessarily
indicative of those expected for any other interim period or for a full
year. Certain December 1994 and September 1995 accounts have been
reclassified to conform with the December 1995 presentation.
Note 2 - Investments in Operating Leases
- ----------------------------------------
Investments in operating leases, net consisted of the following:
December 31, September 30, December 31,
1995 1995 1994
------------ ------------- ------------
(Dollars in Millions)
Vehicles............................... $10,509 $ 9,864 $7,837
Equipment, aircraft and other.......... 220 201 160
------- ------- ------
10,729 10,065 7,997
Accumulated depreciation............... (2,050) (1,838) (1,253)
Allowance for credit losses ........... (83) (79) (68)
------- ------- ------
Investments in operating leases, net $ 8,596 $ 8,148 $6,676
======= ======= ======
Note 3 - Finance Receivables
- ----------------------------
Finance receivables, net consisted of the following:
December 31, September 30, December 31,
1995 1995 1994
------------ ------------- ------------
(Dollars in Millions)
Retail.............................. $5,214 $5,050 $5,722
Finance leases...................... 1,505 1,567 1,741
Wholesale and other dealer loans.... 1,380 1,229 1,388
------ ------ ------
8,099 7,846 8,851
Unearned income..................... (507) (527) (661)
Allowance for credit losses......... (94) (92) (104)
------ ------ ------
Finance receivables, net......... $7,498 $7,227 $8,086
====== ====== ======
-5-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Finance Receivables (Continued)
- ----------------------------
Included in finance lease receivables were estimated unguaranteed
residual values of $658 million, $673 million and $699 million at
December 31, 1995, September 30, 1995 and December 31, 1994,
respectively.
The aggregate balances related to finance receivables 60 or more days
past due totaled $19 million, $16 million and $16 million at
December 31, 1995, September 30, 1995 and December 31, 1994,
respectively.
Note 4 - Notes and Loans Payable
- --------------------------------
Notes and loans payable, which consisted of senior debt, included the
following:
December 31, September 30, December 31,
1995 1995 1994
------------ ------------- ------------
(Dollars in Millions)
Commercial paper, net................... $ 1,746 $ 1,442 $ 1,441
------- ------- -------
Other senior debt, due in the years
ending September 30,:
1995................................. - - 3,081
1996................................. 2,767 3,252 2,546
1997................................. 2,678 2,722 2,484
1998................................. 2,185 2,371 1,272
1999................................. 729 529 330
2000................................. 1,687 1,723 973
Thereafter........................... 1,410 611 275
------- ------- -------
11,456 11,208 10,961
Unamortized premium..................... 51 46 33
------- ------- -------
Total other senior debt.............. 11,507 11,254 10,994
------- ------- -------
Notes and loans payable........... $13,253 $12,696 $12,435
======= ======= =======
-6-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Notes and Loans Payable (Continued)
- --------------------------------
Short-term borrowings include commercial paper and certain medium-term
notes ("MTNs"). The weighted average remaining term of commercial
paper was 19 days at December 31, 1995. The weighted average interest
rate on commercial paper was 5.78% at December 31, 1995. Short-term
MTNs with original terms ranging from nine months to one year, included
in other senior debt, were $394 million at December 31, 1995. The
weighted average interest rate on these short-term MTNs was 5.88% at
December 31, 1995, including the effect of interest rate swap
agreements.
The weighted average interest rate on other senior debt was 5.81% at
December 31, 1995, including the effect of interest rate swap
agreements and option-based products. This rate has been calculated on
the basis of rates in effect at December 31, 1995, some of which are
floating rates that reset daily. Approximately 32% of other senior
debt at December 31, 1995 had interest rates, including the effect of
interest rate swap agreements, that were fixed for a period of more
than one year. The weighted average of these fixed interest rates was
6.15% at December 31, 1995. Approximately 39% of other senior debt at
December 31, 1995 had floating interest rates that were covered by
option-based products with an average strike rate of 7.24%. The mix of
TMCC's fixed and floating rate debt changes from time to time as a
result of interest rate risk management.
Included in Notes and Loans Payable at December 31, 1995 were unsecured
notes denominated in various foreign currencies. Concurrent with the
issuance of these unsecured notes denominated in foreign currencies,
TMCC entered into cross currency interest rate swap agreements to
convert these obligations at maturity into U.S. dollar obligations
which aggregate to a principal amount of $5.1 billion. TMCC's foreign
currency debt is translated into U.S. dollars in the financial
statements at the various foreign currency spot exchange rates in
effect at December 31, 1995. The receivables or payables, arising as
a result of the differences between the December 31, 1995 foreign
currency spot exchange rates and the contract rates applicable to the
cross currency interest rate swap agreements, are classified in Other
Receivables or Accounts Payable and Accrued Expenses, respectively, and
would aggregate to a net receivable position of $76 million at
December 31, 1995.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Introduction
The earnings of Toyota Motor Credit Corporation ("TMCC") are primarily
affected by interest margins and the average outstanding balance of earning
assets and borrowing levels. The interest rates implicit in leases and
charged on retail finance receivables are fixed at the time acquired. Yields
on the majority of wholesale receivables and other loans to dealers vary with
changes in short-term interest rates. Funding requirements are primarily met
through net cash provided by operating activities, earning asset liquidations
and the issuance of debt obligations of varying terms at both fixed and
floating interest rates. TMCC utilizes interest rate swap agreements and
cross currency interest rate swap agreements as part of its financing
activities and in managing its cost of borrowings.
The business of TMCC and its subsidiaries (collectively the "Company") is
dependent upon the sale of Toyota and Lexus vehicles in the United States.
Lower levels of sales of such vehicles resulting from governmental action,
decline in demand, changes in pricing due to the appreciation of the Japanese
yen against the United States dollar, or other events, could result in a
reduction in the level of finance and insurance operations of the Company.
To date, the level of the Company's operations has not been restricted by the
level of sales of Toyota and Lexus vehicles.
Financial Condition and Results of Operations
TMCC's earning assets, consisting of investments in operating leases and
finance receivables, totaled $16.3 billion, $15.5 billion and $14.9 billion
at December 31, 1995, September 30, 1995 and December 31, 1994, respectively.
The increases in earning assets were primarily due to the growth in lease
earning assets.
Lease earning assets, consisting of lease finance receivables, net of unearned
income, and investments in operating leases, net of accumulated depreciation,
totaled $9.9 billion, $9.5 billion and $8.2 billion at December 31, 1995,
September 30, 1995 and December 31, 1994, respectively. Lease earning assets
increased from September 30, 1995 and December 31, 1994 primarily due to
operating lease additions exceeding operating lease dispositions as a result
of the effect of special lease programs sponsored by Toyota Motor Sales,
U.S.A., Inc. ("TMS") and the increased acceptance of leasing by retail
consumers. The Company anticipates further growth in lease earning assets as
special lease programs and the increased acceptance of leasing by retail
consumers continue.
Retail finance receivables, net of unearned income, were $5.0 billion,
$4.8 billion and $5.3 billion at December 31, 1995, September 30, 1995 and
December 31, 1994, respectively. Retail finance receivables increased from
September 30, 1995 to December 31, 1995 due to contract volume exceeding
liquidations and decreased from December 31, 1994 to December 31, 1995
primarily due to the sale of approximately $679 million of retail finance
receivables in the fourth quarter of fiscal 1995.
-8-
Wholesale receivables and other dealer loans were $1.4 billion, $1.2 billion
and $1.4 billion at December 31, 1995, September 30, 1995 and December 31,
1994, respectively. The increase in these receivables from September 30, 1995
to December 31, 1995 resulted primarily from the higher average receivables
balance outstanding per dealer.
Contract volume related to TMCC's vehicle leasing and retail financing
programs is summarized below:
Three Months Ended
December 31,
------------------
1995 1994
------ ------
Contract volume:
Vehicle lease contracts................. 48,000 41,000
Vehicle retail installment contracts.... 39,000 38,000
------ ------
Total................................ 87,000 79,000
====== ======
Total contract volume for the first quarter of fiscal 1996 increased as
compared to the first quarter of fiscal 1995 primarily due to the increase in
vehicle lease contract volume. Vehicle lease contract volume increased
primarily due to an increase in the level of special lease programs sponsored
by TMS and the increased acceptance of leasing in the vehicle retail sales
market.
Under special programs sponsored by TMS, TMCC offers reduced monthly payments
on certain Toyota and Lexus new vehicles and Toyota industrial equipment to
qualified lease and retail customers and receives an amount from TMS, and in
some cases, dealers, for each lease and retail installment contract. Amounts
received approximate the balances required by TMCC to maintain revenues at
standard program levels and are earned over the expected lease and retail
installment contract terms. The level of sponsored program activity varies
based on TMS marketing strategies. Revenues earned depend not only on the
level of TMS programs offered, but on the mix of Toyota and Lexus vehicles,
the timing of TMS programs, and the amount of reduced monthly payments
determined by TMS. TMCC's revenues earned from all TMS programs were
$41 million and $28 million during the first quarters of fiscal 1996 and 1995,
respectively.
-9-
TMCC leased or financed ("finance penetration") the following percentages of
new Toyota and Lexus vehicle deliveries (excluding fleet) in the United States
(excluding Hawaii):
Three Months Ended
December 31,
-------------------
1995 1994
------- -------
Finance penetration............................. 31.7% 31.1%
Total financing revenues increased 22% in the first quarter of fiscal 1996 as
compared to the same period in fiscal 1995. The increase resulted primarily
from earning asset growth.
In the first quarter of fiscal 1996, TMCC's primary source of revenue and
earning asset growth was leasing. Leasing revenues increased 30% in the first
quarter of fiscal 1996 from the same period in fiscal 1995 primarily due to
the growth in average lease earning assets. The Company anticipates further
growth in leasing revenues as special lease programs sponsored by TMS and the
increased acceptance of leasing by retail consumers are expected to continue
to result in increases in lease earning assets.
Retail financing revenues decreased 7% in the first quarter of fiscal 1996
from the same period in fiscal 1995. Retail financing revenues decreased as
a result of the decline in average retail finance receivables outstanding due
to the sale of retail finance receivables in the fourth quarter of fiscal
1995.
Wholesale and other dealer financing revenues increased 15% in the first
quarter of fiscal 1996 from the same period in fiscal 1995. The increased
revenues resulted primarily from higher average wholesale receivable balances
and increases in wholesale financing rates.
Investments in operating leases are recorded at cost and depreciated,
primarily on a straight-line basis, over the lease term to the estimated
residual value. Finance leases are recorded at cost and amortized using the
effective yield method to the estimated residual value. The estimated
residual value may be less than the purchase option price established at lease
inception. The estimated residual values are derived by vehicle model and
lease term from, among other factors, market information on sales of used
vehicles, historical information, including lease vehicle return trends, and
economic factors. Residual values totaled approximately $6.9 billion and
$5.1 billion at December 31, 1995 and 1994, respectively. TMCC's residual
value risk is a function of the number of off-lease vehicles returned to TMCC
for disposition, and the difference between the amount of disposition proceeds
and the estimated residual value on returned vehicles. TMCC actively manages
the disposition of its lease vehicles by working with lessees, dealers and
auctions through end-of-lease-term remarketing programs. In addition, lease
vehicles scheduled to mature are inspected and lessees are charged for excess
wear and tear, excess mileage and any damage to the vehicles. During the
-10-
first quarters of fiscal 1996 and 1995, approximately 14% and 9%,
respectively, of lease vehicles originally scheduled to mature in those
quarters were returned to TMCC. The difference between the total disposition
proceeds from off-lease vehicles returned to TMCC and their estimated residual
values was not material to the results of operations for the first quarters
of fiscal 1996 and 1995. As the lease portfolio matures, the Company
anticipates that the level of vehicle lease returns will increase; however,
the Company believes that its lease earning assets are recorded at net
realizable value.
Depreciation on operating leases increased 34% in the first quarter of fiscal
1996 from the same period in fiscal 1995 primarily as a result of the growth
in investments in operating leases. The Company anticipates higher
depreciation on operating leases in fiscal 1996 as compared to fiscal 1995 due
to anticipated growth in investments in operating leases.
Interest expense increased 20% in the first quarter of fiscal 1996 from the
same period in fiscal 1995 due to higher average borrowing levels required to
fund the growth in earning assets and increases in the average cost of
borrowings. The weighted average cost of borrowings was 5.98% and 5.32% for
the three months ended December 31, 1995 and 1994, respectively.
Net financing revenues decreased 1% in the first quarter of fiscal 1996 from
the same period in fiscal 1995. The decrease was primarily attributable to
declining interest margins which was substantially offset by the growth in the
level of earning assets. Interest margin is the excess of the combined
interest rate yield implicit in leases and on finance receivables over the
effective interest rate cost of total borrowings. Lower interest margins in
the first quarter of fiscal 1996 were primarily the result of higher average
borrowing costs as compared to the same period in fiscal 1995.
Other revenues increased 21% during the first quarter of fiscal 1996 from the
same period in fiscal 1995. The increase in other revenues resulted primarily
from the continued growth in the Company's insurance operations and, to a
lesser extent, from servicing and other income related to the retail finance
receivables sold in fiscal 1995.
Operating and administrative expenses increased 10% in the first quarter of
fiscal 1996 from the same period in fiscal 1995. This increase reflected
costs for the growth in the Company's insurance operations and for additional
personnel required to support the Company's growing customer base. The
Company anticipates that operating and administrative expenses for fiscal 1996
will continue to increase as a result of the Company's growing customer base.
The provision for credit losses increased 17% in the first quarter of fiscal
1996 from the same period in fiscal 1995 as a result of the growth in earning
assets and an increase in credit losses primarily related to leasing. The
increase in lease credit losses is primarily due to the aging of lease earning
assets added during high volume periods in fiscal 1995 and 1994. The Company
will continue to monitor loss levels and place emphasis on controlling its
credit loss exposure.
Financial support is provided by TMS, as necessary, to maintain TMCC's minimum
fixed charge coverage at the level specified in the Operating Agreement. As
a result of the favorable operating profits in the first quarters of fiscal
1996 and 1995, TMCC did not receive any financial support from TMS.
-11-
Liquidity and Capital Resources
The Company requires, in the normal course of business, substantial funding
to support the level of its earning assets. Significant reliance is placed
on the Company's ability to obtain debt funding in the capital markets in
addition to funding provided by earning asset liquidations and cash provided
by operating activities. Debt issuances have generally been in the form of
commercial paper, United States and Euro medium-term notes ("MTNs"), Eurobonds
and to a lesser extent, the sale of retail finance receivables in the
asset-backed securities market. On occasion, this funding has been
supplemented by loans and equity contributions from TMS.
Commercial paper issuances and borrowings from TMS are specifically utilized
to meet short-term funding needs. Commercial paper outstanding under TMCC's
commercial paper program ranged from approximately $1.1 billion to
$1.8 billion during the first quarter of fiscal 1996, with an average
outstanding balance of $1.5 billion. For additional liquidity purposes, TMCC
maintains syndicated bank credit facilities with certain banks which
aggregated $1.5 billion at December 31, 1995. No loans were outstanding under
any of these bank credit facilities during the first quarter of fiscal 1996.
TMCC also maintains, along with TMS, uncommitted, unsecured lines of credit
with banks totaling $225 million to facilitate the issuance of letters of
credit. At December 31, 1995, TMCC issued approximately $61 million in
letters of credit, primarily related to the Company's insurance operations.
On occasion, TMS makes interest-bearing loans to TMCC. The interest rate
charged by TMS to TMCC for these interest-bearing loans approximates the
Federal Reserve Board's one-month commercial paper composite rate for firms
whose bonds are rated AA. No loans were outstanding from TMS during the first
quarter of fiscal 1996.
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. United States and Euro MTNs with original maturities ranging
from one to ten years have provided TMCC with a significant source of funding.
During the first quarter of fiscal 1996, TMCC issued approximately
$1.0 billion of MTNs all of which had original maturities of more than one
year. TMCC had approximately $9.2 billion of MTNs outstanding at December 31,
1995, including the effect of foreign currency translations at December 31,
1995 spot exchange rates. Approximately $3.4 billion of the $9.2 billion in
MTNs was denominated in foreign currencies. In addition to MTNs, TMCC had
approximately $2.3 billion of debt securities outstanding issued principally
in the form of Eurobonds in the international capital markets at December 31,
1995, including the effect of foreign currency translations at December 31,
1995 spot exchange rates. Approximately $1.8 billion of the $2.3 billion in
debt securities was denominated in foreign currencies.
-12-
TMCC anticipates continued use of MTNs in both the United States and
international capital markets. At January 31, 1996, approximately
$1.6 billion was available for issuance under TMCC's United States public MTN
program. The maximum aggregate principal amount authorized to be outstanding
at any time under TMCC's Euro MTN program is $9.5 billion. Approximately
$3.1 billion was available for issuance under the Euro MTN program as of
January 31, 1996, of which the Company has committed to issue approximately
$29 million. The United States and Euro MTN programs may be expanded from
time to time to allow for the continued use of these sources of funding. In
addition, approximately $700 million of securities registered with the
Securities and Exchange Commission, excluding MTNs, were available for
issuance at January 31, 1996.
Cash flows provided by operating, investing and financing activities have been
used primarily to support earning asset growth. During the first quarter of
fiscal 1996, cash provided by the liquidation of earning assets, totaling
$2.9 billion was used to purchase additional investments in operating leases
and finance receivables totaling $4.0 billion. Investing activities resulted
in a net use of cash of $1.1 billion in the first quarter of fiscal 1996 as
the purchase of additional earning assets, primarily investments in operating
leases, exceeded cash provided by the liquidation of earning assets.
Investing activities were also supported by net cash provided by operating
activities totaling $0.5 billion and net cash provided by financing activities
totaling $0.6 billion during the first quarter of fiscal 1996. The Company
believes that cash provided by operating, investing and financing activities
will be sufficient to meet the Company's liquidity and capital resource needs
in the future.
TMCC utilizes derivative financial instruments to manage its currency
exchange rate risk arising as a result of borrowings denominated in foreign
currencies and its interest rate risk. The underlying notional amounts of the
derivative financial instruments are not exchanged and do not represent
exposure to credit loss. TMCC does not enter into these instruments for
trading purposes. TMCC manages counterparty risk through the use of credit
standard guidelines, counterparty diversification and financial condition
monitoring. At December 31, 1995, approximately 82% of TMCC's derivative
financial instruments, based on notional amounts, were with commercial banks
and investment banking firms assigned investment grade ratings of "AA" or
better by national rating agencies. TMCC does not anticipate non-performance
by any of its counterparties. Credit exposure of derivative financial
instruments is represented by the fair value of contracts with a positive fair
value at December 31, 1995 reduced by the effects of master netting
agreements. The credit exposure of TMCC's derivative financial instruments
at December 31, 1995 was $485 million on an aggregate notional amount of
$18.7 billion.
TMCC utilizes cross currency interest rate swap agreements to manage exposure
to exchange rate fluctuations on principal and interest payments for
borrowings denominated in foreign currencies. Debt issued in foreign
currencies is hedged by concurrently executed cross currency interest rate
swap agreements. These cross currency interest rate swap agreements involve
agreements to exchange TMCC's foreign currency principal and interest
obligations for U.S. dollar obligations at agreed-upon currency exchange rates
and interest rates. In the event that a counterparty fails to perform, TMCC's
credit exposure is limited to the currency exchange and interest rate
differential between the non-performing swap and the corresponding debt
transaction.
-13-
TMCC utilizes interest rate swap agreements and option-based products in
managing its exposure to interest rate fluctuations. The mix of fixed and
floating interest rates on TMCC's debt outstanding is periodically adjusted
through the use of interest rate swap agreements and other option-based
products. Interest rate swap agreements are executed as an integral part of
specific debt transactions or on a portfolio basis. TMCC's interest rate swap
agreements involve agreements to pay at a certain fixed or floating rate and
to receive payments at a different rate, at specified intervals, calculated
on an agreed-upon notional amount. In the event that a counterparty fails to
perform, TMCC's credit exposure is limited to the interest rate differential.
Option-based products consist primarily of purchased interest rate cap
agreements and, to a lesser extent, corridor agreements. Option-based
products are agreements which either grant TMCC the right, for a premium
payment, to receive a payment when interest rates exceed a specified level,
or require TMCC, in receipt of a premium, to make a payment when interest
rates exceed or go below a specified level. An interest rate increase of 1%
(100 basis points) would raise TMCC's weighted average interest rate,
including the effects of interest rate swap agreements and option-based
products, by .32%, from 5.79% to an estimated 6.11% at December 31, 1995.
Conversely, an interest rate decrease of 1% (100 basis points) would lower
TMCC's weighted average interest rate, including the effects of interest rate
swap agreements and option-based products, by .37%, from 5.79% to an estimated
5.42% at December 31, 1995.
A reconciliation of the activity of TMCC's derivative financial instruments
for the first quarters of fiscal 1996 and 1995 is as follows:
December 31,
-----------------------------------------------------------
Cross
Currency
Interest Interest Indexed
Rate Swap Rate Swap Option-based Note Swap
Agreements Agreements Products Agreements
------------ ------------ ------------ ------------
1995 1994 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Billions)
Beginning notional amount....... $4.8 $4.0 $7.1 $7.6 $3.8 $0.5 $1.7 $2.4
Add:
New agreements............... 0.1 0.3 1.6 0.5 0.6 1.9 - 0.1
Less:
Terminated agreements........ - - - - - - - -
Expired agreements........... 0.3 - 0.4 0.3 - - 0.3 0.3
---- ---- ---- ---- ---- ---- ---- ----
Ending notional amount.......... $4.6 $4.3 $8.3 $7.8 $4.4 $2.4 $1.4 $2.2
==== ==== ==== ==== ==== ==== ==== ====
On occasion, TMS has made equity contributions to maintain TMCC's equity
capitalization at certain levels. Such levels have been periodically
established by TMS as it deems appropriate. No such equity contributions were
made during the first quarter of fiscal 1996.
-14-
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
The foregoing Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represent the Company's expectations or beliefs concerning
future events, including the following: statements regarding the further
growth in lease earning assets (including investments in operating leases);
the increased acceptance of leasing by retail consumers; the further growth
in leasing revenues; higher depreciation on operating leases; the level of
leased vehicle returns; that the lease earning assets on the Company's books
are recorded at net realizable value; the growth in operating and
administrative expenses as a result of a growing customer base; the Company's
continued use of MTNs in the United States and the international capital
markets; the sufficiency of the Company's cash provided by operating,
investing and financing activities for the Company's future liquidity and
capital resource needs; and the continued performance of the Company's
counterparties under interest rate and cross currency swap agreements and
option-based products. The Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including, without
limitations, the following: decline in demand for Toyota and Lexus products;
the effect of economic conditions; a decline in the market acceptability of
leasing; the effect of competitive pricing on interest margins; increases in
prevailing interest rates; changes in pricing due to the appreciation of the
Japanese yen against the United States dollar; the effect of governmental
actions; the effect of competitive pressures on the used car market and
residual values; 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; increased costs
associated with the Company's debt funding efforts; and the ability of the
Company's counterparties to perform under interest rate and cross currency
swap agreements. Results actually achieved thus may differ materially from
expected results included in these statements.
Recently Enacted Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("Statement No. 121"). Statement No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be
held and used and long-lived assets and certain identifiable intangibles to
be disposed of. Statement No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition,
Statement No. 121 requires that certain long-lived assets and intangibles to
be disposed of be reported at the lower of carrying amount or fair value less
cost to sell. Statement No. 121 is effective for fiscal years beginning after
December 15, 1995. The Company has not determined the impact that the
adoption of this accounting standard will have on its financial position or
results of operations. The Company plans to adopt Statement No. 121 in the
first interim period of fiscal 1997.
-15-
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. Certain of these
actions are similar to suits which have been filed against other
financial institutions and captive finance companies. At this
time, the Company believes any resulting liability from the above
legal actions, proceedings and other claims will not materially
affect its 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 Exchange 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.
-16-
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 19,
are filed as part of this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the registrant during
the quarter ended December 31, 1995.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOYOTA MOTOR CREDIT CORPORATION
-------------------------------
(Registrant)
Date: February 12, 1996 By /S/ WOLFGANG JAHN
-------------------------------
Wolfgang Jahn
Senior Vice President and
General Manager
(principal executive officer)
Date: February 12, 1996 By /S/ PATRICK BREENE
-------------------------------
Patrick Breene
Corporate Manager -
Finance and Administration
(principal accounting officer)
-18-
EXHIBIT INDEX
Exhibit Method
Number Description of Filing
- ------- ----------- ---------
10.1 Toyota Motor Sales, U.S.A., Inc. Supplemental Filed
Executive Retirement Plan. Herewith
10.2 Toyota Motor Sales, U.S.A., Inc. 401(k) Filed
Excess Plan. Herewith
12.1 Calculation of ratio of earnings to fixed charges. Filed
Herewith
27.1 Financial Data Schedule. Filed
Herewith
-19-