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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, 2003
------------------
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
- ---------------------------------------------------------------------------
(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 September 30, 2003, 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,
2003 2003
------------ ------------
(Unaudited)
ASSETS
------
Cash and cash equivalents............... $ 684 $ 980
Investments in marketable securities.... 1,818 1,630
Finance receivables, net................ 27,868 26,477
Investments in operating leases, net.... 7,895 8,017
Derivative assets....................... 1,829 1,421
Other assets............................ 589 708
------- -------
Total Assets................... $40,683 $39,233
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................. $33,179 $32,099
Derivative liabilities.................. 301 514
Other liabilities....................... 921 869
Income taxes payable.................... 28 26
Deferred income......................... 1,100 996
Deferred income taxes................... 2,009 1,866
------- -------
Total Liabilities................. 37,538 36,370
------- -------
Commitments and Contingent Liabilities (See note 8)
Shareholder's Equity:
Capital stock, $l0,000 par value
(100,000 shares authorized;
91,500 issued and outstanding)... 915 915
Retained earnings.................... 2,195 1,930
Accumulated other comprehensive
income............................ 35 18
------- -------
Total Shareholder's Equity........ 3,145 2,863
------- -------
Total Liabilities and
Shareholder's Equity........... $40,683 $39,233
======= =======
See Accompanying Notes to Consolidated Financial Statements.
- 2 -
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------ ------
Financing Revenues:
Leasing.................................... $ 613 $ 632 $1,235 $1,253
Retail financing........................... 310 285 600 548
Wholesale and other dealer financing....... 43 42 92 82
------ ------ ------ ------
Total financing revenues...................... 966 959 1,927 1,883
Depreciation on leases..................... 405 394 863 767
Interest expense........................... 87 332 318 763
------ ------ ------ ------
Net financing revenues........................ 474 233 746 353
Insurance premiums earned and contract
revenues................................... 47 42 92 83
Investment and other income................... 78 17 114 81
------ ------ ------ ------
Net financing revenues and other revenues..... 599 292 952 517
------ ------ ------ ------
Expenses:
Operating and administrative............... 142 130 278 258
Losses related to Argentine Investment..... - 6 - 11
Provision for credit losses................ 78 127 187 249
Insurance losses and loss adjustment
expenses................................ 25 23 50 44
------ ------ ------ ------
Total expenses................................ 245 286 515 562
------ ------ ------ ------
Income/(Loss) before income taxes............. 354 6 437 (45)
Provision/(Benefit) for income taxes.......... 139 2 172 (20)
------ ------ ------ ------
Net Income/(Loss)............................. $ 215 $ 4 $ 265 $ (25)
====== ====== ====== ======
See Accompanying Notes to Consolidated Financial Statements.
- 3 -
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in Millions)
(Unaudited)
Accumulated
Other
Capital Retained Comprehensive
Stock Earnings Income/(Loss) Total
------- -------- ------------- --------
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 gain
on available-for-sale
marketable securities
(net of tax).................. - - (16) (16)
------ -------- ---------- -------
Total Comprehensive Loss......... - (25) (16) (41)
------ -------- ---------- -------
Balance at September 30, 2002.... $ 915 $ 1,795 $ - $ 2,710
====== ======= ========== =======
Balance at March 31, 2003........ $ 915 $ 1,930 $ 18 $ 2,863
------ ------- ---------- -------
Net income for the six months
ended September 30, 2003...... - 265 - 265
Change in net unrealized gain
on available-for-sale
marketable securities
(net of tax).................. - - 17 17
------ -------- ---------- -------
Total Comprehensive Income....... - 265 17 282
------ -------- ---------- -------
Balance at September 30, 2003.... $ 915 $ 2,195 $ 35 $ 3,145
====== ======= ========== =======
See Accompanying Notes to Consolidated Financial Statements.
- 4 -
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months Ended
September 30,
-------------------------
2003 2002
-------- ---------
Cash flows from operating activities:
Net Income/(Loss)......................................... $ 265 $ (25)
-------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Derivative fair value adjustment.................... (45) 338
Depreciation and amortization....................... 914 811
Provision for credit losses......................... 187 249
Gain from securitization of finance receivables..... (42) (33)
Gain from sale of marketable securities............. (4) -
Loss on impairment of retained interests............ - 11
Loss and reserve related to Argentine Investment.... - 11
Decrease/(increase) in other assets................. 266 (763)
Increase in deferred income taxes................... 131 122
(Decrease)/increase in other liabilities............ (56) 602
-------- ---------
Total adjustments......................................... 1,351 1,348
-------- ---------
Net cash provided by operating activities.................... 1,616 1,323
-------- ---------
Cash flows from investing activities:
Addition to investments in marketable securities.......... (1,212) (562)
Disposition of investments in marketable securities....... 960 545
Acquisition of finance receivables........................ (23,897) (19,804)
Liquidation of finance receivables........................ 20,599 15,657
Proceeds from sale of finance receivables................. 1,825 1,549
Addition to investments in operating leases............... (1,637) (1,929)
Disposition of investments in operating leases............ 896 1,006
Increase in receivable from affiliate..................... - (12)
-------- --------
Net cash used in investing activities........................ (2,466) (3,550)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable......... 4,418 4,433
Payments on notes and loans payable....................... (3,904) (2,956)
Net increase in commercial paper.......................... 40 468
-------- --------
Net cash provided by financing activities.................... 554 1,945
-------- --------
Net decrease in cash and cash equivalents.................... (296) (282)
Cash and cash equivalents at the beginning of the period..... 980 747
-------- --------
Cash and cash equivalents at the end of the period........... $ 684 $ 465
======== ========
Supplemental disclosures:
Interest paid............................................. $ 343 $ 387
Income taxes paid/(received).............................. $ 39 $ (18)
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, 2003 and 2002 is unaudited and has been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses, and disclosure of contingent assets and liabilities.
Actual results could differ from those estimates. In the opinion of
management, the unaudited financial information reflects all adjustments,
consisting of normal recurring 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, 2003 are not necessarily
indicative of those expected for any other interim period or for a full year.
Certain prior period amounts have been reclassified to conform with the
current period presentation. These include the reclassification of the
derivative fair value adjustment into interest expense in the consolidated
statement of income, made in response to recent Securities and Exchange
Commission ("SEC") public announcements related to the income statement
presentation of certain derivative activities.
These financial statements should be read in conjunction with the consolidated
financial statements, significant accounting policies, and other notes to the
consolidated financial statements included in Toyota Motor Credit
Corporation's 2003 Annual Report to the SEC on Form 10-K. References herein to
"TMCC" denote Toyota Motor Credit Corporation and references herein to "the
Company" denote Toyota Motor Credit Corporation and its consolidated
subsidiaries.
Note 2 - Finance Receivables
- ----------------------------
Finance receivables, net consisted of the following:
September 30, March 31,
2003 2003
------------ ------------
(Dollars in Millions)
Retail.................................... $19,066 $16,160
Finance leases............................ 5,206 6,078
Wholesale and other dealer loans.......... 4,815 5,608
------- -------
29,087 27,846
Unearned income........................... (886) (1,043)
------- -------
Finance receivables, net of
unearned income................... 28,201 26,803
Allowance for credit losses............... (333) (326)
------- -------
Finance receivables, net .............. $27,868 $26,477
======= =======
Finance leases included estimated unguaranteed residual values of $1.5 billion
and $1.8 billion at September 30 and March 31, 2003, respectively. The
aggregate balances related to finance receivables 60 or more days past due
totaled $151 million and $160 million at September 30 and March 31, 2003,
respectively. The majority of retail and finance lease receivables do not
involve recourse to the dealer in the event of customer default.
- 6 -
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,
2003 2003
------------ ------------
(Dollars in Millions)
Vehicles.................................. $9,739 $9,687
Equipment and other....................... 708 720
------ ------
10,447 10,407
Accumulated depreciation.................. (2,389) (2,254)
Allowance for credit losses .............. (163) (136)
------ ------
Investments in operating leases, net...... $7,895 $8,017
====== ======
Note 4 - Allowance for Credit Losses
- ------------------------------------
An analysis of the allowance for credit losses follows:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(Dollars in Millions)
Allowance for credit losses
at beginning of period............... $ 552 $ 351 $ 526 $ 283
Provision for credit losses............. 78 127 187 249
Charge-offs............................. (82) (69) (176) (129)
Recoveries.............................. 15 8 26 15
Other adjustments....................... (19) - (19) (1)
------- ------- ------- -------
Allowance for credit losses
at end of period..................... $ 544 $ 417 $ 544 $ 417
======= ======= ======= =======
At September 30, 2003, the allowance for credit losses consisted of $496
million to cover probable losses on the Company's owned portfolio and $48
million to cover probable losses on repossessed collateral in inventory.
Total repossessed collateral in inventory at September 30, 2003 was $123
million. Repossessed collateral is included in other assets in the
consolidated balance sheet.
- 7 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities
- -------------------------------------------
In response to recent SEC public announcements related to the income statement
presentation of certain derivative activities, the Company's derivative fair
value adjustment was reclassified into interest expense in the consolidated
statement of income.
The following table sets forth the items comprising the Company's derivative
fair value adjustment, which is included in interest expense:
Three months ended Six months ended
September 30, September 30,
2003 2002 2003 2002
------ ------ ------ ------
(Dollars in Millions)
Net unrealized gain/(loss) on non-designated
derivatives................................... $ 82 $ (158) $ 46 $ (392)
Net unrealized (loss)/gain on previously
designated derivatives that no longer
qualify as fair value hedges.................... (10) 2 (18) 2
Net unrealized gain related to the
ineffective portion of the
Company's fair value hedges..................... 11 32 17 52
------ ------ ------ ------
Derivative fair value adjustment................. $ 83 $ (124) $ 45 $ (338)
====== ====== ====== ======
- 8 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Notes and Loans Payable
- --------------------------------
The following table sets forth the items comprising notes and loans payable
and the related weighted average interest rates:
September 30, March 31, September 30, March 31,
2003 2003 2003 2003
--------- ---------- --------- ---------
(Dollars in Millions)
Short-term debt .............. $ 6,168 $ 4,843 1.06% 1.36%
Long-term debt ............... 25,259 26,034 1.23% 1.43%
Fair value adjustments ... 1,752 1,222
--------- ---------
Notes and loans payable.. $ 33,179 $ 32,099 1.20% 1.42%
========= =========
- --------------------
Includes the effect of certain United States ("U.S.") dollar interest rate swap agreements
and cross currency interest rate swap agreements.
Adjusts debt to fair market value in accordance with Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" and related
amendments ("SFAS 133, as amended").
Included in long-term debt are unsecured notes denominated in various foreign
currencies totaling approximately $11.2 billion and $11.4 billion at September
30 and March 31, 2003, respectively. Concurrent with the issuance of these
unsecured notes, the Company entered into cross currency interest rate swap
agreements to convert these obligations into variable rate U.S. dollar
obligations.
- 9 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Liquidity Facilities and Letters of Credit
- ---------------------------------------------------
The following table sets forth the Company's committed and uncommitted
facilities at September 30 and March 31, 2003:
Committed Uncommitted Unused Facilities
-------------------- -------------------- --------------------
September 30, March 31, September 30, March 31, September 30, March 31,
2003 2003 2003 2003 2003 2003
-------- -------- -------- -------- -------- --------
(Dollars in Millions)
364-day syndicated bank
credit facilities........ $ 3,600 $ 2,800 $ - $ - $ 3,600 $ 2,800
5-year syndicated bank
credit facility - TMCC... 1,400 1,400 - - 1,400 1,400
Letters of credit facilities - - 60 60 59 59
-------- -------- -------- -------- -------- --------
Total facilities $ 5,000 $ 4,200 $ 60 $ 60 $ 5,059 $ 4,259
======== ======== ======== ======== ======== ========
During the second quarter of fiscal 2004, Toyota Credit de Puerto Rico Corp.
("TCPR Corp.") established a $400 million, 364-day syndicated bank credit
facility, which is restricted to its own use. In addition, a TMCC 364-day
syndicated bank credit facility, which is restricted to TMCC's own use, was
increased to $3.2 billion and renewed during September 2003 for an additional
364-day period.
- 10 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities
- -----------------------------------------------
TMCC has entered into certain guarantees and commitments. As of September 30,
2003, TMCC had not recorded any liabilities under such arrangements. The
maximum commitment amounts under the guarantees and commitments as of
September 30, 2003 are summarized in the table below:
Maximum
Commitment
Amount
--------------
(Dollars in Millions)
Credit facilities with
dealers and affiliates................. $ 3,117
Guarantees of affiliate pollution control
and solid waste disposal bonds......... 148
Lease commitments......................... 147
Revolving liquidity notes
related to securitizations............. 48
Guarantee of Banco Toyota Do
Brasil debt("BTB")..................... 30
-------
Total guarantees and commitments............. $ 3,490
=======
The Company maintains credit facilities with dealers and affiliates. These
credit facilities may be used for business acquisitions, facilities
refurbishment, real estate purchases, and working capital requirements. These
loans are typically collateralized with liens on real estate, vehicle
inventory, and/or other dealership assets, as appropriate. The Company
obtains a personal guarantee from the dealer or corporate guarantee from the
dealership when deemed prudent. Although the loans are typically
collateralized or guaranteed, the value of the underlying collateral or
guarantees may not be sufficient to cover the Company's exposure under such
agreements. The Company prices the credit facilities according to the risks
assumed in entering into the credit facility.
During the first quarter of fiscal 2004, TCPR Corp. extended a $90 million
revolving line of credit to Toyota de Puerto Rico Corp., a wholly-owned
subsidiary of Toyota Motor Sales, U.S.A., Inc. ("TMS"). This $90 million
commitment is included in the table above under credit facilities with dealers
and affiliates. The revolving line of credit has a one-year renewable term,
with interest due monthly. Any loans outstanding under this revolving line of
credit are not guaranteed by TMS.
- 11 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
TMCC has guaranteed payments of principal, interest, and premiums, if any, on
$88 million principal amount of flexible rate demand solid waste disposal
revenue bonds issued by Putnam County, West Virginia, of which $40 million
matures in June 2028, $28 million matures in August 2029, and $20 million
matures in April 2030. The bonds were issued in connection with a West
Virginia manufacturing facility of an affiliate.
TMCC has guaranteed payments of principal, interest, and premiums, if any, on
$60 million principal amount of flexible rate demand pollution control revenue
bonds issued by Gibson County, Indiana, of which $10 million matures in
October 2027, January 2028, January 2029, January 2030, February 2031, and
September 2031, respectively. The bonds were issued in connection with an
Indiana manufacturing facility of an affiliate.
Under these affiliate bond guarantees, TMCC would be required to perform in
the event of any of the following:
a) payment of any installment of interest, principal, premium, if any, or
purchase price on the bonds is not made when the payment becomes due and
payable;
b) the occurrence of certain events of bankruptcy involving the benefactor
manufacturing facilities or TMCC;
c) failure by the benefactor manufacturing facilities to observe or perform
any covenant, condition or agreement under the guarantees, other than as
referred to in (a) above;
d) failure by the bond issuers to observe or perform any covenant, condition
or agreement under the guarantees, other than as referred to in (a) above;
e) failure by TMCC to observe or perform any covenant, condition, agreement
or obligation under the guarantees.
These guarantees include provisions whereby TMCC is entitled to reimbursement
by the benefactor manufacturing facilities for all principal and interest paid
and fees incurred on behalf of the benefactor manufacturing facilities, and to
default interest on those amounts. TMCC has not been required to perform
under any of these affiliate bond guarantees as of September 30, 2003.
During the first quarter of fiscal 2004, the Company entered into a 15-year
lease agreement with TMS. The lease agreement is for the Company's new
headquarters location in the TMS headquarters complex in Torrance, California.
At September 30, 2003, minimum future commitments under lease agreements to
which the Company is a lessee, including those under the agreement discussed
above, are as follows: fiscal years ending 2004 - $21 million; 2005 - $19
million; 2006 - $17 million; 2007 - $15 million; 2008 - $10 million; 2009 - $9
million; and thereafter - $56 million.
- 12 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
In certain securitization structures, revolving liquidity notes are used in
lieu of reserve funds to provide credit enhancement to the senior securities.
Under these revolving liquidity notes, investors may draw upon the notes to
cover any shortfall in interest and principal payments. The draws are funded
by TMCC and TMCC is entitled to reimbursement of amounts drawn on the
liquidity notes. Reimbursement of amounts drawn on the liquidity notes is
subordinated to principal and interest payments due on the securities. TMCC
must fund the entire amount available under the revolving liquidity notes if
TMCC's short-term unsecured debt rating is downgraded below P-1 or A-1 by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
a division of The McGraw-Hill Companies, Inc. ("S&P"), respectively.
TMCC has guaranteed payments of principal, interest, fees, and expenses with
respect to a $30 million offshore bank loan of BTB. This guarantee will
remain in effect until the loan is repaid in full, and TMCC elects to
terminate the guarantee. The loan matures in fiscal 2005. Under the terms of
the guarantee, TMCC would be required to perform on behalf of BTB should BTB
default on payments for any reason including, but not limited to, financial
insolvency, cross border payment restrictions, and other sovereign
restrictions on off-shore payments. TMCC has entered into a separate
indemnity agreement with BTB. The indemnity agreement includes provisions
whereby TMCC is entitled to reimbursement from BTB. TMCC has not been
required to perform under the BTB guarantee as of September 30, 2003.
In the ordinary course of business, the Company enters into agreements
containing indemnification provisions standard in the industry related to
several types of transactions, such as debt funding, derivatives,
securitization transactions, and its vendor and supplier agreements.
Performance under these indemnities would occur upon a breach of the
representations, warranties or covenants made or given, or a third party claim.
In addition, the Company has agreed in certain debt and derivative issuances,
and subject to certain exceptions, to gross-up payments due to third parties in
the event that withholding tax is imposed on such payments. Management
periodically evaluates the probability of having to incur such costs. Due to
the difficulty in predicting events which could cause a breach of the
indemnification provisions or trigger a gross-up obligation, the Company is not
able to estimate its maximum exposure to future payments that could result from
claims made under such provisions. The Company has not made any material
payments in the past as a result of these provisions, and as of September 30,
2003, the Company does not believe it is probable that it will have to make any
material payments in the future. As such, no amounts have been recorded under
these indemnifications as of September 30, 2003.
Various legal actions, governmental proceedings and other claims are pending or
may be instituted or asserted in the future against the Company with respect to
matters arising in the ordinary course of business. Certain of these actions
are or purport to be class action suits, seeking sizeable damages and/or
changes in the Company's business operations, policies, and practices. Certain
of these actions are similar to suits that 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, 2003 were not determinable; however, in the opinion of
management, the ultimate liability resulting therefrom should not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
- 13 -
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Related Party Transactions
- -----------------------------------
As of September 30, 2003, 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, 2003, except for the lease agreement with
TMS, as described in Note 8. The table below summarizes amounts included in
the Company's consolidated balance sheet and statement of income for the
periods presented, under various related party agreements or relationships:
September 30, March 31,
2003 2003
---------- ----------
(Dollars in Millions)
Consolidated balance sheet:
Accrued credit support fee payable... $ 8 $ 7
Net intercompany payable............. $ 18 $ 59
Notes payable under
affiliate MTN program............ $ 1 $ 1
Notes receivable under
home loan program................ $ 6 $ 9
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(Dollars in Millions)
Consolidated statement of income:
Credit support fees incurred......... $ (4) $ (3) $ (9) $ (7)
Shared services reimbursement........ (21) (9) (44) (21)
Rent expense under facilities lease.. (2) (1) (3) (3)
Marketing, wholesale support, and
other revenues.................. 45 40 93 63
Affiliate insurance premiums and
commissions revenue............. 11 10 22 20
Other amounts incurred............... - - (1) -
------- ------- ------- -------
Total.............................. $ 29 $ 37 $ 58 $ 52
======= ======= ======= =======
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 10 - 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,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(Dollars in Millions)
Assets:
Financing operations................. $40,055 $36,587 $40,055 $36,587
Insurance operations................. 842 846 842 846
Eliminations/reclassifications....... (214) (179) (214) (179)
------- ------- ------- -------
Total assets....................... $40,683 $37,254 $40,683 $37,254
======= ======= ======= =======
Gross revenues:
Financing operations................. $ 1,037 $ 960 $ 2,025 $ 1,940
Insurance operations................. 54 58 108 107
------- ------- ------- -------
Total gross revenues............... $ 1,091 $ 1,018 $ 2,133 $ 2,047
======= ======= ======= =======
Net income/(loss):
Financing operations................. $ 204 $ (3) $ 243 $ (42)
Insurance operations................. 11 7 22 17
------- ------- ------- -------
Total net income/(loss)............ $ 215 $ 4 $ 265 $ (25)
======= ======= ======= =======
- 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EARNING ASSETS AND CONTRACT VOLUME
Net Earning Assets
- ------------------
The composition of the Company's net earning assets as of the balance sheet
dates reported is summarized below:
September 30, March 31, September 30,
2003 2003 2002
------------ ------------ ------------
(Dollars in Millions)
Vehicle lease earning assets
Investment in operating leases, net...... $ 7,594 $ 7,679 $ 7,392
Finance leases, net...................... 4,273 4,997 5,734
------- ------- -------
Total vehicle lease earning assets........ 11,867 12,676 13,126
Vehicle retail finance receivables, net... 18,850 15,873 16,095
Vehicle wholesale and other financing 5,542 6,407 4,803
Allowance for credit losses .......... (496) (462) (342)
------- ------- -------
Total net earning assets.................. $35,763 $34,494 $33,682
======= ======= =======
- ----------------------
For purposes of this table, vehicle wholesale and other financing includes
wholesale financing, real estate loans, working capital loans, revolving credit lines,
and industrial equipment financing.
Includes amounts to cover probable losses on the Company's owned portfolio, but
excludes amounts related to repossessed collateral in inventory.
Net earning assets at September 30, 2003 increased $1.3 billion or 4% compared
to March 31, 2003. The growth in earning assets during this period was driven
by the increased volume of vehicle retail financing, partially offset by
decreases in vehicle lease financing and vehicle wholesale and other financing.
The significant increase in retail finance receivables primarily resulted from
the increased volume of new financings continuing to outpace the liquidation
of the existing portfolio. The volume achieved was generated in large part by
an increased use of marketing incentives sponsored by Toyota Motor Sales,
U.S.A., Inc. ("TMS") and higher Toyota and Lexus vehicle sales levels, which
increased 9% for the three months ended September 30, 2003 when compared to
the same period in the prior year. Vehicle lease earning assets continued to
decrease as compared with March 31, 2003 due to a general shift in programs
sponsored by TMS from lease to retail as well as the Company's reduced
emphasis on leasing, in line with industry trends. Vehicle wholesale and
other financing receivables decreased as compared with March 31, 2003 as a
result of seasonal fluctuations in the number of dealer-financed units
outstanding, partially offset by continued growth in the number of vehicle
dealers receiving vehicle wholesale financing.
- 16 -
Net earning assets at September 30, 2003 increased $2.1 billion or 6% compared
to September 30, 2002. The growth in earning assets during this period was
driven by the increased volume of vehicle retail financing and vehicle
wholesale and other financing, partially offset by a decrease in vehicle lease
financing. The significant increase in retail finance receivables primarily
resulted from the increased volume of new financings continuing to outpace the
liquidation of the existing portfolio. The volume achieved was generated in
large part by an increased use of marketing incentives sponsored by TMS and
higher Toyota and Lexus vehicle sales levels, which increased 7% for the six
months ended September 30, 2003 when compared to the same period in the prior
year. Vehicle wholesale and other financing also increased as compared with
September 30, 2002 resulting from an increased number of dealer-financed units
and growth in the number of vehicle dealers receiving vehicle wholesale
financing. Vehicle lease earning assets continued to decrease as compared
with September 30, 2003 due to a general shift in programs sponsored by TMS
from lease to retail as well as the Company's reduced emphasis on leasing, in
line with industry trends.
The allowance for credit losses at September 30, 2003 increased $34 million or
7% and $154 million or 45% as compared to March 31, 2003 and September 30,
2002, respectively. Refer to the "Provision for Credit Losses" section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") for further discussion regarding the Company's delinquency
and charge-off experience.
Contract Volume
- ---------------
The composition of the Company's contract volume and market share for the three
and six months ended September 30, 2003 and 2002 is summarized below:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Total contract volume:
Vehicle retail....................... 237,000 195,000 453,000 368,000
Vehicle lease........................ 34,000 44,000 65,000 88,000
------- ------- ------- -------
Total................................... 271,000 239,000 518,000 456,000
======= ======= ======= =======
TMS sponsored contract volume:
Vehicle retail....................... 71,000 65,000 150,000 88,000
Vehicle lease........................ 11,000 13,000 19,000 15,000
------- ------- ------- -------
Total................................... 82,000 78,000 169,000 103,000
======= ======= ======= =======
Market share :
Vehicle retail....................... 40.8% 35.6% 40.3% 33.0%
Vehicle lease........................ 7.8% 11.2% 8.0% 11.4%
----- ----- ----- -----
Total................................... 48.6% 46.8% 48.3% 44.4%
===== ===== ===== =====
- --------------------
Market share represents penetration of new Toyota and Lexus vehicle financed sales to
consumers, excluding fleet sales, sales of Toyota Services de Mexico, S.A. de C.V., Toyota
Services de Venezuela, C.A., and a private Toyota distributor.
- 17 -
Total contract volume increased 13% and 14% for the three and six months ended
September 30, 2003, respectively, when compared to the same periods in the
prior year primarily due to increased vehicle retail contract volume. The
increase in retail contract volume reflects the continued use of incentives on
new vehicles primarily related to retail financing programs sponsored by TMS.
In contrast, vehicle lease contract volume decreased 23% and 26% for the three
and six months ended September 30, 2003, respectively, when compared with the
same periods in the prior year. The decline in lease contract volume is due
to a general shift in programs sponsored by TMS from lease to retail as well
as the Company's reduced emphasis on leasing, in line with industry trends.
The increase in total market share for the three and six months ended
September 30, 2003 over the comparable prior year period was attributable to
increased levels of marketing incentives sponsored by TMS.
RESULTS OF OPERATIONS
- ---------------------
Net income increased $211 million and $290 million for the three and six
months ended September 30, 2003, respectively, when compared to the same
periods in the prior year. During both the three and six months ended
September 30, 2003, the Company incurred significantly lower interest expense,
driven by the impact of net unrealized gains associated with derivative fair
value adjustments, while total financing revenues remained essentially level
when compared to prior year results. The Company also experienced lower
provision for credit losses for the three and six months ended September 30,
2003 when compared to the same periods in the prior year. The more
significant fluctuations in the components of net income are discussed within
this MD&A section.
TOTAL FINANCING REVENUES
- ------------------------
Total financing revenues remained essentially level for the three and six
months ended September 30, 2003 when compared with the same periods in the
prior year. Total financing revenues increased $7 million or 1% and $44
million or 2% for the three and six months ended September 30, 2003,
respectively, primarily due to higher retail financing revenues and, to a
lesser extent, higher wholesale and other dealer financing revenues. Total
financing revenues increased at a lesser rate than the growth in the earning
asset portfolio due to reductions in overall portfolio yield, resulting from a
general decrease in market interest rates. Overall portfolio yield decreased
from 7.73% for the six months ended September 30, 2002 to 6.72% for the six
months ended September 30, 2003.
- 18 -
DEPRECIATION ON LEASES
- ----------------------
Straight-line depreciation expense is based upon the difference between a
leased vehicle's original book value ("capitalized cost") and the contractual
residual value established at lease origination. Additional depreciation
expense is recorded ratably over the remaining life of the lease when the
residual value at lease maturity is estimated to be less than the contractual
residual value. Factors affecting the estimate of residual value include, but
are not limited to, new vehicle incentive programs, new vehicle pricing and
used vehicle supply. The evaluation of these factors involves significant
assumptions, complex analysis, and management judgment. Any difference
between the undepreciated value at termination and the proceeds received at
sale is recorded as depreciation expense at the time of asset disposal.
Depreciation expense increased $11 million or 3% for the three months ended
September 30, 2003 when compared to the same period in the prior year. The
increase was comprised of a $27 million increase in straight-line
depreciation, partially offset by a $16 million decrease in additional
depreciation expense when compared to the same period in the prior year.
Average capitalized costs have continued to increase while average contractual
residual values as a percentage of capitalized cost have declined. This
combination has resulted in an overall increase in the depreciable basis of
leased vehicles ("depreciable basis") and the resulting increase in straight-
line depreciation expense. The decline in additional depreciation expense was
primarily due to a decrease in the number of leased vehicles returned at
maturity and sold at auction during the period.
For the six months ended September 30, 2003, depreciation expense increased
$96 million or 13% when compared to the same period in the prior year. The
increase was comprised of a $56 million increase in straight-line depreciation
and a $40 million increase in additional depreciation expense. Increases in
straight-line depreciation expense resulted from the overall increase in the
depreciable basis. The increase in the amount of additional depreciation
expense recognized during the six months ended September 30, 2003 was
attributable to a significant increase in the total number of leased vehicles
returned at maturity and sold at auction during the period.
- 19 -
INTEREST EXPENSE
- ----------------
In response to recent SEC public announcements related to the income statement
presentation of certain derivative activities, the Company's derivative fair
value adjustment was reclassified into interest expense in the consolidated
statement of income.
Interest expense is comprised of realized and unrealized gains and losses from
the Company's derivative activity and interest on notes and loans payable. The
following table summarizes the Company's interest expense for the three and
six months ended September 30, 2003 and 2002:
Three months ended Six months ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
(Dollars in Millions)
Net unrealized gain/(loss) on
non-designated derivatives............... $ 82 $ (158) $ 46 $ (392)
Net unrealized (loss)/gain on previously
designated derivatives that no longer
qualify as fair value hedges............. (10) 2 (18) 2
Net unrealized gain related to the
ineffective portion of the
Company's fair value hedges.............. 11 32 17 52
------ ------ ------ ------
Derivative fair value adjustment............ 83 (124) 45 (338)
Realized derivative gains and losses and
interest on notes and loans payable...... (170) (208) (363) (425)
------ ------ ------ ------
Total interest expense...................... $ (87) $ (332) $ (318) $ (763)
====== ====== ====== ======
Interest expense decreased $245 million or 74% and $445 million or 58% during
the three and six months ended September 30, 2003, respectively, compared to
the same periods in the prior year. The decline was primarily due to the
recognition of a net unrealized gain from derivative and hedging activities for
the three and six months ended September 30, 2003 in contrast to the
recognition of a net unrealized loss for the same periods in the prior year.
These unrealized gains and losses are presented as "Derivative fair value
adjustment" in the table above. Unrealized gains and losses on non-designated
derivatives comprised the largest component of the derivative fair value
adjustment. Non-designated derivatives are used to manage interest rate risk
on a portfolio basis as part of an overall program of interest rate risk
management.
Realized derivative gains and losses and interest on notes and loans payable
also declined for the three and six months ended September 30, 2003 compared
to the same periods in fiscal 2003. A general decrease in market interest
rates represented the primary reason for the decline, offset in part by an
increase in the average balance outstanding of notes and loans payable. The
average balance outstanding of notes and loans payable was $33 billion and $29
billion for the six months ended September 30, 2003 and 2002, respectively.
- 20 -
INVESTMENT AND OTHER INCOME
- ---------------------------
The following table summarizes the Company's investment and other income for
the three and six months ended September 30, 2003 and 2002:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
(Dollars in Millions)
Investment and servicing fee income... $ 28 $ 23 $ 54 $ 46
Gain from securitization of
finance receivables................ 42 - 42 33
Loss on impairment of
retained interests................. - (11) - (11)
------ ------ ------ ------
Investment income-securitizations.. 70 12 96 68
Investment income-marketable
securities and other income........ 8 5 18 13
------ ------ ------ ------
Total investment and other income.. $ 78 $ 17 $ 114 $ 81
====== ====== ====== ======
Investment and other income increased $61 million or 359% and $33 million or
41% during the three and six months ended September 30, 2003 when compared
with the same periods in the prior year. For the quarter ended September 30,
2003, the increase was primarily due to the gain from the securitization of
finance receivables initiated during the period. There was no securitization
transaction during the comparable prior year period.
For the six months ended September 30, 2003, the higher level of investment
and other income was primarily due to an increase in the gain from the
securitization of finance receivables, and the absence of impairment losses on
assets retained in securitization transactions.
The size of the pool of assets sold during the six months ended September 30,
2003 was $1.9 billion as compared to $1.6 billion in the comparable prior year
period, representing the primary reason for the larger gain. The impairment
on retained interests incurred during the six months ended September 30, 2002
was recorded as a result of projected credit losses on the related retail
finance receivables exceeding the original credit loss assumptions. No
impairment was recognized during the six months ended September 30, 2003.
- 21 -
LOSSES RELATED TO ARGENTINE INVESTMENT
- --------------------------------------
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 Toyota Credit Argentina S.A.'s
("TCA") offshore outstanding debt to $37 million. During the remainder of
fiscal 2003, TMCC satisfied its obligations under the guarantee and terminated
the guarantees. As such, no additional charges were recorded during the three
or six months ended September 30, 2003.
OPERATING AND ADMINISTRATIVE EXPENSES
- -------------------------------------
Operating and administrative expenses increased $12 million, or 9% for the
three months ended September 30, 2003 as compared with the same period in
fiscal 2003. The net increase primarily reflects a $4 million increase in
charges related to technology services provided by TMS and a $4 million
increase in personnel expenses related to increases in headcount.
Operating and administrative expenses increased $20 million, or 8% for the six
months ended September 30, 2003 as compared to the same period in fiscal 2003.
Approximately $8 million resulted from increases in charges related to
technology services provided by TMS. The majority of the remaining increase
was comprised of a $4 million increase in personnel expenses associated with
increases in headcount and a $3 million loss on disposal of assets in
connection with the Company's move to the new headquarters location in the TMS
headquarters complex in Torrance, California.
- 22 -
PROVISION FOR CREDIT LOSSES
- ---------------------------
The Company is exposed to credit risk on its owned portfolio. Credit risk is
the risk that customers will not make required payments to the Company in
accordance with their contractual obligation. The Company's level of credit
losses is influenced primarily by two factors: the total number of contracts
that default ("frequency of occurrence") and loss per occurrence ("loss
severity"). The Company maintains an allowance for credit losses to cover
probable losses.
The following tables provide information related to the Company's credit loss
experience:
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(Dollars in Millions)
Allowance for credit losses
at beginning of period............... $ 552 $ 351 $ 526 $ 283
Provision for credit losses............. 78 127 187 249
Charge-offs............................. (82) (69) (176) (129)
Recoveries.............................. 15 8 26 15
Other adjustments....................... (19) - (19) (1)
------- ------- ------- -------
Allowance for credit losses
at end of period..................... $ 544 $ 417 $ 544 $ 417
======= ======= ======= =======
September 30,
-------------------
2003 2002
------ ------
(Dollars in Millions)
Net credit losses as a percentage
of average earning assets .... 0.83% 0.71%
Aggregate balances 60 or more days
past due .............................. $ 184 $ 246
Over-60 day delinquencies as a percentage
of gross earning assets ...... 0.52% 0.72%
Allowance for credit losses
as a percentage of gross
earning assets .................... 1.50% 1.22%
- --------------------
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 Company's
portfolio growth.
For purposes of this table, "earning assets" include earning assets and repossessed
collateral.
- 23 -
Charge-offs, net of recoveries, increased $6 million or 10% and $36 million or
32% for the three and six months ended September 30, 2003, respectively, when
compared to the same periods in the prior year. Although charge-offs
increased in the most recent fiscal quarter and fiscal year-to-date periods,
the provision for credit losses for the three and six months ended September
30, 2003 declined when compared with the same periods in the prior year. The
period-to-period declines in the provision for credit losses reflect recent
favorable trends in 60-day contractual delinquency from 0.72% at September 30,
2002 to 0.52% at September 30, 2003.
Delinquency and Net Credit Loss Experience
- ------------------------------------------
The Company's delinquency and net credit loss experience continued to be
influenced by the combined impact of the following factors:
- - Continued economic uncertainty
- - Lower used vehicle prices
- - Longer term financing
- - Tiered/risk based pricing
- - The Company's field restructuring
The impact of the listed factors to the Company's current year delinquency and
net credit loss experience is consistent with the impact to fiscal 2003
results as discussed in the "Provision for Credit Losses" section of the
Company's 2003 Annual Report on Form 10-K, except as discussed below. The
impact of the tiered/risk based pricing program ("tiered pricing"), which was
fully implemented as of March 2001, continues to diminish as a contributing
factor to higher delinquency and credit loss rates. While the implementation
of tiered pricing has resulted in increased overall credit loss, the period-
to-period effects have lessened over time. Similarly, the impact of the
Company's field restructuring, completed in fiscal 2003, is becoming a less
significant factor affecting the level of delinquencies due to improvements in
operating efficiencies at the recently opened service centers.
Although delinquency rates have improved from September 2002 to September
2003, the overall level of delinquency remains high relative to historical
experience. While the Company's credit loss rates have declined from
historical highs reached during fiscal 2003, credit loss rates remain at
elevated levels. Though the impact of certain factors influencing heightened
levels of delinquencies and charge-offs over the last several quarters has
lessened, management remains cautious regarding the near term economic
outlook, used vehicle price trends, and the extent to which significant and
sustained favorable trends are expected.
- 24 -
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The objective of the Company's liquidity strategy is to ensure access to the
capital markets so as to meet obligations and other commitments on a timely and
cost-effective basis to support the growth in earning assets. Significant
reliance is placed on the Company's ability to obtain debt and securitization
funding in the capital markets. Debt issuances have generally been in the form
of commercial paper and unsecured term debt. The Company believes that debt
issuances and securitization funding, combined with cash provided by operating,
investing, and financing activities, will provide sufficient liquidity to meet
future funding requirements.
Commercial Paper
- ----------------
Commercial paper issuances are used to meet short-term funding needs.
Commercial paper outstanding under the Company's commercial paper programs
ranged from approximately $6.0 billion to $7.7 billion during the quarter ended
September 30, 2003, with an average outstanding balance of $6.9 billion.
Unsecured Term Debt
- -------------------
Long-term funding requirements are met through the issuance of a variety of
debt securities underwritten in both the U.S. and international capital
markets. Medium term notes ("MTNs") and bonds have provided the Company with
significant sources of funding. During the quarter ended September 30, 2003,
the Company issued approximately $1.5 billion of MTNs and bonds, all of which
had original maturities ranging from greater than one year to approximately ten
years. At September 30, 2003, the Company had total MTNs and bonds outstanding
of $26.5 billion, of which $11.2 billion was denominated in foreign currencies.
The remaining maturities of all MTNs and bonds outstanding at September 30,
2003 ranged from less than one year to approximately ten years.
The Company anticipates continued use of MTNs and bonds in both the U.S. and
international capital markets. To provide for the issuance of debt securities
in the U.S. capital market, the Company maintains a shelf registration with the
SEC under which approximately $5.0 billion was available for issuance at
October 31, 2003. Under the Company's euro MTN program, which provides for the
issuance of debt securities in the international capital markets, the maximum
aggregate principal amount authorized to be outstanding at any time is $20.0
billion, of which approximately $6.0 billion was available for issuance at
October 31, 2003. The U.S. dollar and euro MTN programs may be expanded from
time to time to allow for the continued use of these sources of funding. In
addition, the Company may issue bonds in the U.S. and international capital
markets that are not issued under its MTN programs.
Securitization Funding
- ----------------------
TMCC's securitization program allows the Company to access an additional
source of funding, further diversifying its investor base to enhance its
liquidity position. TMCC's securitization transactions are structured using
qualifying special purpose entities (with the exception of one transaction
executed in fiscal 2002). The outstanding balance of securitized retail
finance receivables which TMCC continues to service totaled $6.6 billion at
September 30, 2003.
- 25 -
In September 2003, the Company sold retail receivables totaling $1.9 billion
in connection with securities issued under a shelf registration statement
maintained with the SEC. Of the $1.9 billion sold, the Company invested $0.6
billion in purchased and retained senior class and other securities, resulting
in $1.3 billion of net funding. As of October 31, 2003, $6.2 billion of
securities remained available for issuance under the SEC shelf registration
statement.
For the past three fiscal years, securitization transactions averaged
approximately 29% of the Company's total funding. A reduction or termination
of TMCC's securitization activities would cause the Company to seek
alternative funding from debt capital markets. Management does not anticipate
any changes in the Company's ability to access the securitization market in
the foreseeable future.
Liquidity Facilities and Letters of Credit
- ------------------------------------------
For additional liquidity purposes, the Company maintains syndicated bank
credit facilities with banks whose commitments aggregated $5.0 billion at
September 30, 2003. No amounts were outstanding under the syndicated bank
credit facilities as of September 30, 2003. During the second quarter of
fiscal 2004, TCPR Corp. established a $400 million, 364-day syndicated bank
credit facility, which is restricted to its own use. In addition, the TMCC
364-day syndicated bank credit facility, which is restricted to its own use,
was increased to $3.2 billion and renewed during September 2003 for an
additional 364-day period.
Committed Uncommitted Unused Facilities
-------------------- -------------------- --------------------
September 30, March 31, September 30, March 31, September 30, March 31,
2003 2003 2003 2003 2003 2003
-------- -------- -------- -------- -------- --------
(Dollars in Millions)
364-day syndicated bank
credit facilities........ $ 3,600 $ 2,800 $ - $ - $ 3,600 $ 2,800
5-year syndicated bank
credit facility - TMCC... 1,400 1,400 - - 1,400 1,400
Letters of credit facilities - - 60 60 59 59
-------- -------- -------- -------- -------- --------
Total facilities $ 5,000 $ 4,200 $ 60 $ 60 $ 5,059 $ 4,259
======== ======== ======== ======== ======== ========
- 26 -
Credit Ratings
- --------------
Effective August 2003, Moody's Investors Service, Inc. ("Moody's") upgraded
the long-term ratings of Toyota Motor Corporation ("TMC") and its supported
subsidiaries, including TMCC, from Aa1 to Aaa, and retained its stable
outlook. As of September 30, 2003, the ratings established by Moody's and
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc.
("S&P") for TMCC were as follows:
Rating Agency Senior Debt Commercial Paper Outlook
--------------- ------------- ------------------ ---------
S&P AAA A-1+ Negative
Moody's Aaa P-1 Stable
CONTRACTUAL OBLIGATIONS AND CREDIT-RELATED COMMITMENTS
- ------------------------------------------------------
During the first quarter of fiscal 2004, the Company entered into a 15-year
lease agreement with TMS. The lease agreement is for the Company's new
headquarters location in the TMS headquarters complex in Torrance, California.
At September 30, 2003, minimum future commitments under lease agreements to
which the Company is a lessee, including those under the agreement discussed
above, are as follows: fiscal years ending 2004 - $21 million; 2005 - $19
million; 2006 - $17 million; 2007 - $15 million; 2008 - $10 million; 2009 - $9
million; and thereafter - $56 million.
- 27 -
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 U.S. dollar; the effect of governmental actions; changes in tax
laws; changes in regulations that affect retail installment lending, leasing or
insurance; 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 U.S. and international capital
markets; the effects of any rating agency actions; increases in market interest
rates; the implementation of new technology systems; the continuation of
factors causing increased delinquencies and credit losses; 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 U.S., 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; and performance under any
guaranty or comfort letter issued by the Company. 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.
- 28 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Value at Risk
- -------------
The Company's primary market risk exposure is interest rate risk, in
particular risk relating to changes in the U.S. dollar London Interbank
Offered Rate ("LIBOR"). The Company uses the value at risk ("VAR")
methodology to measure this risk. The VAR provides an overview of the
Company's exposure to changes in market factors. VAR represents the potential
loss in fair value for the Company's portfolio from adverse changes in market
factors for a 30-day holding period within a 95% confidence interval using the
Monte Carlo simulation technique. The VAR methodology uses historical
interest rate data to assess the potential future loss.
The Company's VAR methodology incorporates the impact from adverse changes in
market interest rates but does not incorporate the impact from other market
changes, such as foreign currency exchange rates, which do not materially
affect the value of the Company's portfolio. The VAR methodology is applied
to more than 90% of the Company's market risk sensitive positions. Management
believes the positions considered in the analysis are representative of the
Company's total portfolio. The VAR methodology currently does not consider
changes in fair values related to investments in marketable securities and
equipment financing.
The VAR and the average VAR of the Company's portfolio as of, and for the six
months ended September 30, 2003 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, 2003 September 30, 2003
------------------ ------------------
Mean portfolio value..................... $5.5 billion $5.6 billion
VAR...................................... $53 million $43 million
Percentage of the mean portfolio value... 0.97% 0.77%
Confidence level......................... 95% 95%
The Company's calculated VAR 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 the Company's portfolio of
financial instruments during the year.
- 29 -
Market Price Risk
- -----------------
The Company is also exposed to market price risk related to equity investments
included in the investment portfolio of its insurance operations. Investments
in marketable securities consist primarily of equity investments in mutual
funds. These investments are classified as available for sale in accordance
with Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). None of the
equity investments are considered trading securities within the meaning of
SFAS 115.
A summary of the sensitivity of the fair market value of the Company's equity
investments to an assumed 10% and 20% adverse change in market prices is
presented below.
As of
September 30,
------------------
2003 2002
------ ------
(Dollars in Millions)
Cost..................................... $ 158 $ 153
Fair Market Value........................ $ 179 $ 127
Net unrealized gain/(loss)............... $ 21 $ (26)
Estimated 10% adverse change in prices... $ (18) $ (13)
Estimated 20% adverse change in prices... $ (36) $ (25)
These hypothetical scenarios represent an estimate of reasonably possible net
losses that may be recognized on the Company's equity investments assuming
hypothetical movements in future market rates and is not necessarily
indicative of actual results that may occur. Additionally, the hypothetical
scenarios do 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.
Counterparty Credit Risk
- ------------------------
Counterparty credit risk of derivative instruments is represented by the fair
value of contracts with a positive fair value at September 30, 2003, reduced
by the effects of master netting agreements. At September 30, 2003, aggregate
counterparty credit risk as represented by the fair value of the Company's
derivative instruments was approximately $1.9 billion on an aggregate notional
amount of $46.9 billion.
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Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month and six-month periods ended
September 30, 2003 and 2002, 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, 2003 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.
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 Act of 1934, as amended ("Exchange
Act"), is recorded, processed, summarized, and reported within the time periods
specified in the Commission's rules and forms.
As of the end of the period 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-15(b) of the Exchange Act. Based on the evaluation, the CEO and CFO
concluded that such disclosure controls and procedures are effective.
There has been no change in the Company's internal control over financial
reporting during the Company's most recent fiscal quarter that materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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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 the Company with respect to
matters arising in the ordinary course of business. Certain of these actions
are or purport to be class action suits, seeking sizeable damages and/or
changes in the Company's business operations, policies, and practices. Certain
of these actions are similar to suits that 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, 2003 were not determinable; however, in the opinion of
management, the ultimate liability resulting therefrom should not have a
material adverse effect on the Company'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 AND USE OF PROCEEDS
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 34,
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, 2003:
Date of Report Items Reported
----------------- ---------------------
August 5, 2003 Item 12. Disclosure of Results of Operations
And Financial Condition.
July 14, 2003 Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits.
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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, 2003 By /S/ GEORGE E. BORST
-------------------------------
George E. Borst
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2003 By /S/ JOHN F. STILLO
-------------------------------
John F. Stillo
Vice President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit Method
Number Description of Filing
- ------- ----------- ---------
4.1 Amendment No. 1 to the Fourth Amended and Restated Filed
Agency Agreement, dated September 30, 2003 among, Herewith
TMCC, JP Morgan Chase Bank and JP Morgan Bank
Luxembourg, S.A.
10.1 364 Day Facility Credit Agreement, dated September Filed
11, 2003 among TCPR, Bank of America, N.A., and Herewith
the Other Lenders Party Thereto
10.2 First Amended and Restated 364 Day Facility Filed
Credit Agreement, dated September 11, 2003 among Herewith
TMCC, Bank of America, N.A., and Other Lenders
Party Thereto
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
31.1 Certification of Chief Executive Officer Filed
Herewith
31.2 Certification of Chief Financial Officer Filed
Herewith
32.1 Certification pursuant to 18 U.S.C. Section 1350 Furnished
Herewith
32.2 Certification pursuant to 18 U.S.C. Section 1350 Furnished
Herewith
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