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EX-12.1 - EXHIBIT 12.1 - RATIO OF EARNINGS TO FIXED ASSETS - TOYOTA MOTOR CREDIT CORPexhibit_12-1.htm
EX-31.2 - EXHIBIT 31.2 - 302 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_31-2.htm
EX-31.1 - EXHIBIT 31.1 - 302 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_31-1.htm
EX-32.1 - EXHIBIT 32.1 - 906 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_32-1.htm
EX-32.2 - EXHIBIT 32.2 - 906 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_32-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2010
 
OR
 
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
Commission File Number 1-9961
 
TOYOTA MOTOR CREDIT CORPORATION
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
95-3775816
(I.R.S. Employer
Identification No.)
   
19001 S. Western Avenue
Torrance, California
(Address of principal executive offices)
90501
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  __           No __                       

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   __                                                                                                           Accelerated filer   __
 
Non-accelerated filer    x                                                                                                           Smaller reporting company  __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes __    No  x

As of July 31, 2010, the number of outstanding shares of capital stock, no par value per share, of the registrant was 91,500, all of which shares were held by Toyota Financial Services Americas Corporation.

Reduced Disclosure Format

The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
 
 

 

TOYOTA MOTOR CREDIT CORPORATION
FORM 10-Q
For the quarter ended June 30, 2010

INDEX

INDEX
   
Part I
 
3
Item 1
Financial Statements
3
 
Consolidated Statement of Income
3
 
Consolidated Balance Sheet
4
 
Consolidated Statement of Shareholder’s Equity
5
 
Consolidated Statement of Cash Flows
6
 
Notes to Consolidated Financial Statements
7
Item 2
Management’s Discussion and Analysis
46
Item 3
Quantitative and Qualitative Disclosures About Market Risk
74
Item 4
Controls and Procedures
74
Part II
 
75
Item 1
Legal Proceedings
75
Item 1A
Risk Factors
76
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
76
Item 3
Defaults Upon Senior Securities
76
Item 4
Submission of Matters to a Vote of Security Holders
76
Item 5
Other Information
76
Item 6
Exhibits
76
Signatures
 
77
Exhibit Index
 
78

 
- 2 -

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
 (Unaudited)

 
Three months ended June 30,
(Dollars in millions)
2010
 
2009
Financing revenues:
     
Operating lease
$1,200
 
$1,196
Retail
730
 
781
Dealer
94
 
93
Total financing revenues
2,024
 
2,070
       
Depreciation on operating leases
811
 
893
Interest expense
491
 
499
Net financing revenues
722
 
678
       
Insurance earned premiums and contract revenues
123
 
110
Investment and other income, net
35
 
58
Net financing revenues and other revenues
880
 
846
       
Expenses:
     
Provision for credit losses
(289)
 
328
Operating and administrative
184
 
177
Insurance losses and loss adjustment expenses
58
 
57
Total expenses
(47)
 
562
       
Income before income taxes
927
 
284
Provision for income taxes
357
 
108
       
Net income
$570
 
$176
       
See Accompanying Notes to Consolidated Financial Statements.



 
- 3 -

 

TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
 (Unaudited)

(Dollars in millions)
June 30, 2010
 
March 31, 2010
ASSETS
     
       
Cash and cash equivalents
$4,839
 
$4,343
Restricted cash
359
 
173
Investments in marketable securities
2,660
 
2,521
Finance receivables, net
56,692
 
55,087
Investments in operating leases, net
17,773
 
17,151
Other assets
2,160
 
1,918
Total assets
$84,483
 
$81,193
       
LIABILITIES AND SHAREHOLDER'S EQUITY
     
       
Debt
$70,968
 
$69,179
Deferred income taxes
3,645
 
3,290
Other liabilities
4,032
 
3,451
Total liabilities
78,645
 
75,920
       
Commitments and contingencies (See Note 13)
     
       
Shareholder's equity:
     
Capital stock, no par value and $10,000 par value (100,000 shares
     
authorized; 91,500 issued and outstanding) at June 30, and March 31,
2010, respectively
915
 
915
Additional paid-in-capital
1
 
1
Accumulated other comprehensive income
99
 
104
Retained earnings
4,823
 
4,253
Total shareholder's equity
5,838
 
5,273
Total liabilities and shareholder's equity
$84,483
 
$81,193

The following table presents the assets of consolidated variable interest entities that can only be used to settle obligations of the consolidated variable interest entities and the liabilities of those entities for which creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the consolidated balance sheet above.

(Dollars in millions)
June 30, 2010
ASSETS
 
Finance receivables, net
$6,783
Total assets
$6,783
   
LIABILITIES
 
Debt
$6,356
Other liabilities
1
Total liabilities
$6,357

See Accompanying Notes to Consolidated Financial Statements.

 
- 4 -

 

 TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY
 (Unaudited)

(Dollars in millions)
Capital stock
 
Additional paid-in
capital
 
Accumulated other comprehensive (loss) income
 
Retained earnings
 
Total
                   
BALANCE AT MARCH 31, 2009
$915
 
$1
 
($63)
 
$3,240
 
$4,093
                   
Net income for the three months ended
June 30, 2009
-
 
 
-
 
-
 
176
 
176
Net unrealized gain on available-for-sale
  marketable securities, net of tax provision
  of $37 million
-
 
 
 
-
 
61
 
-
 
61
Reclassification adjustment for net loss
  included in net income, net of tax benefit
  of $2 million
-
 
 
 
-
 
4
 
-
 
4
Total comprehensive income
-
 
-
 
65
 
176
 
241
                   
BALANCE AT JUNE 30, 2009
$915
 
$1
 
$2
 
$3,416
 
$4,334
                   
BALANCE AT MARCH 31, 2010
$915
 
$1
 
$104
 
$4,253
 
$5,273
                   
Net income for the three months ended
June 30, 2010
-
 
 
-
 
-
 
570
 
570
Net unrealized gain on available-for-sale
  marketable securities, net of tax provision
  of $1 million
-
 
 
 
-
 
3
 
-
 
3
Reclassification adjustment for net gain
  included in net income, net of tax
  provision of $5 million
-
 
 
 
-
 
(8)
 
-
 
(8)
Total comprehensive income
-
 
-
 
(5)
 
570
 
565
                   
BALANCE AT JUNE 30, 2010
$915
 
$1
 
$99
 
$4,823
 
$5,838
                   
See Accompanying Notes to Consolidated Financial Statements.
   

 
- 5 -

 

TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
 (Unaudited)
 
Three months ended June 30,
 
(Dollars in millions)
2010
 
2009
Cash flows from operating activities:
     
Net income
$570
 
$176
Adjustments to reconcile net income to net cash provided by operating activities:
     
Depreciation and amortization
841
 
925
Recognition of deferred income
(300)
 
(248)
Provision for credit losses
(289)
 
328
Amortization of deferred origination costs
72
 
90
Fair value adjustments and amortization of premiums and
       discounts associated with debt, net
(1,233)
 
2,279
Net gain from sale of marketable securities
(11)
 
(1)
Other-than-temporary impairment on marketable securities
-
 
6
Net change in:
     
Restricted cash
(186)
 
-
Derivative assets
183
 
(595)
Other assets
(108)
 
(164)
Deferred income taxes
359
 
282
Derivative liabilities
483
 
(819)
Other liabilities
106
 
207
Net cash provided by operating activities
487
 
2,466
Cash flows from investing activities:
     
Purchase of investments in marketable securities
(618)
 
(156)
Disposition of investments in marketable securities
482
 
142
Acquisition of finance receivables
(6,245)
 
(4,686)
Collection of finance receivables
5,380
 
5,006
Net change in dealer receivables (excluding term loans)
(387)
 
1,289
Acquisition of investments in operating leases
(2,807)
 
(1,342)
Disposals of investments in operating leases
1,518
 
1,293
Advances to affiliates
(690)
 
(761)
Repayments from affiliates
350
 
850
Other, net
(5)
 
(4)
Net cash (used in) provided by investing activities
(3,022)
 
1,631
Cash flows from financing activities:
     
Proceeds from issuance of debt
7,177
 
1,061
Payments on debt
(3,620)
 
(6,125)
Net change in commercial paper
(518)
 
(640)
Advances from affiliates (Note 15)
-
 
2,000
Repayments to affiliates (Note 15)
(8)
 
(11)
Net cash provided by (used in) financing activities
3,031
 
(3,715)
Net increase in cash and cash equivalents
496
 
382
Cash and cash equivalents at the beginning of the period
4,343
 
6,298
Cash and cash equivalents at the end of the period
$4,839
 
$6,680
Supplemental disclosures:
     
Interest paid
($447)
 
($584)
Income taxes (paid) received, net
($5)
 
$23

See Accompanying Notes to Consolidated Financial Statements.

 
- 6 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data

Basis of Presentation

The information furnished in these unaudited interim financial statements for the three months ended June 30, 2010 and 2009 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  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 months ended June 30, 2010 do not necessarily indicate the results that may be expected for the full fiscal year.

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 Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2010 (“fiscal 2010”), which was filed with the Securities and Exchange Commission (“SEC”) on June 10, 2010.  References herein to “TMCC” denote Toyota Motor Credit Corporation, and references herein to “we”, “our”, and “us” denote Toyota Motor Credit Corporation and its consolidated subsidiaries.

Summary of Significant Accounting Policies

Investments in Marketable Securities

Investments in marketable securities consist of debt and equity securities.  Debt and equity securities designated as available-for-sale (“AFS”) are carried at fair value using quoted market prices where available with unrealized gains or losses included in Accumulated Other Comprehensive Income (“AOCI”), net of applicable taxes.  We use the specific identification method to determine realized gains and losses related to our investment portfolio.  Realized investment gains and losses are reflected in Investment and Other Income, net in the Consolidated Statement of Income.

Other-Than-Temporary Impairment

We periodically evaluate unrealized losses on our AFS debt securities portfolio for other-than-temporary impairment (“OTTI”).  If we have no intent to sell and we believe that it is more likely than not we will not be required to sell these securities prior to recovery, the credit loss component of the unrealized losses are recognized in Investment and Other Income, net in the Consolidated Statement of Income, while the remainder of the loss is recognized in AOCI. The credit loss component recognized in Investment and Other Income, net in the Consolidated Statement of Income is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected using a credit cash flow analysis for debt securities.

We perform periodic reviews of our AFS equity securities to determine whether unrealized losses are temporary in nature.  If losses are considered to be other-than-temporary, the cost basis of the security is written down to fair value and the write down is reflected in Investment and Other Income, net in the Consolidated Statement of Income.

 
- 7 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data (Continued)

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

New Accounting Guidance

In July 2010, the Financial Accounting Standards Board (“FASB”) issued accounting guidance in which entities must provide additional disclosures regarding the nature of credit risk inherent in their portfolio of financing receivables, how credit risk is analyzed and assessed in arriving at the allowance for credit losses, and the reasons for changes in the allowance for credit losses. This accounting guidance is effective for us on December 31, 2010 and is not expected to have a material impact on our consolidated financial condition or results of operations.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that sets forth the requirements that must be met for a company to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. This accounting guidance is effective for us on April 1, 2011 and is not expected to have a material impact on our consolidated financial condition or results of operations.

In October 2009, the FASB issued accounting guidance that changes the accounting model for revenue arrangements that include both tangible products and software elements that function together to deliver the product’s essential functionality. The accounting guidance more closely reflects the underlying economics of these transactions. This accounting guidance is effective for us on April 1, 2011 and is not expected to have a material impact on our consolidated financial condition or results of operations.

Recently Adopted Accounting Guidance

On April 1, 2010, we adopted new FASB accounting guidance for transfers of financial assets.  The new accounting guidance removes the concept of a qualifying special purpose entity and revises the accounting criteria for transfer of financial assets to be considered a sale.  The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

On April 1, 2010, we adopted new FASB accounting guidance on consolidation of variable interest entities.  The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

On March 31, 2010, we adopted new FASB accounting guidance requiring disclosure of gross transfers in and out of Level 3 as well as transfers between Levels 1 and 2 of the fair value hierarchy.


 
- 8 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements

Fair Value Measurement – Definition and Hierarchy

The accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  This guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs by requiring that observable inputs be used when available.  Fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk.  The standard describes three levels of inputs that may be used to measure fair value:

Level 1:  Quoted (unadjusted) prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.  Examples of assets currently utilizing Level 1 inputs are most U.S. government securities, actively exchange-traded equity mutual funds, and money market funds.

Level 2:  Quoted prices in active markets for similar assets and liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.  Examples of assets and liabilities currently utilizing Level 2 inputs are certificates of deposit, commercial paper, U.S. government agency securities, corporate debt securities, mortgage-backed and asset-backed securities, private placement investments in fixed income mutual funds, and most over-the-counter derivatives.

Level 3:  Unobservable inputs that are supported by little or no market activity and may require significant judgment in order to determine the fair value of the assets and liabilities.  Examples of assets and liabilities currently utilizing Level 3 inputs are structured over-the-counter derivatives with limited activity or less transparency around inputs to the valuation.

The use of observable and unobservable inputs is reflected in the fair value hierarchy assessment disclosed in the tables within this section.  The availability of observable inputs can vary based upon the financial instrument and other factors, such as instrument type, market liquidity and other specific characteristics particular to the financial instrument.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires additional judgment by management. The degree of management’s judgment can result in financial instruments being classified as or transferred to the Level 3 category.

We review the appropriateness of fair value measurements including validation processes, key model inputs, and the reconciliation of period-over-period fluctuations based on changes in key market inputs.  All fair value measurements are subject to our analysis.  Review and approval by management is required as part of the validation process.


 
- 9 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Fair Value Methods

Fair value is based on quoted market prices, if available.  If listed prices or quotes are not available, fair value is based upon internally developed models that primarily use as inputs market-based or independently sourced market parameters.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation.  In periods of market dislocation, the availability of prices and inputs may be reduced for certain financial instruments.  This condition could result in a financial instrument being reclassified from Level 1 to Level 2 or from Level 2 to Level 3.

Valuation Adjustments

Counterparty Credit Valuation Adjustments – Adjustments are required when the market price (or parameter) is not indicative of the credit quality of the counterparty.

Non-Performance Credit Valuation Adjustments – Adjustments reflect our own non-performance risk when our liabilities are measured at fair value.

Liquidity Valuation Adjustments – Adjustments are necessary when we are unable to observe prices for a financial instrument due to market illiquidity.

Valuation Methods

For financial instruments measured at fair value, the following section describes the valuation methodologies, key inputs and significant assumptions.

Cash Equivalents

Cash equivalents, consisting primarily of money market instruments, represent highly liquid investments with maturities of three months or less at purchase.  Generally, quoted market prices are used to determine the fair value of money market instruments.

Marketable Securities

The marketable securities portfolio consists of debt and equity securities.  We use quoted prices of identical securities for all U.S. government bonds, exchange-traded equity mutual funds and all other securities if available.

If quoted market prices are not available for specific securities, then we may estimate the value of such instruments using observed transaction prices, independent pricing services, and either internally or externally developed pricing models or discounted cash flows.  Where there is limited market activity or less transparency around inputs to the valuation model for certain collateralized mortgage and debt obligations, asset-backed securities, and high-yield debt securities, the determination of fair value may require benchmarking yields to that of similar instruments or analyzing default rates.  In addition, asset-backed securities may be valued based on external prices or market spreads, using current market assumptions on prepayment speeds and default rates. For certain other asset-backed securities where the external price is not observable, we may incorporate the deal collateral performance and tranche level attributes into our valuation analysis.

 
- 10 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

We hold investments in exchange-traded equity mutual funds and private placement fixed income mutual funds. Where the funds produce a daily net asset value that is quoted in an active market, that value is used to value the fund investment and is classified in Level 1 of the fair value hierarchy. Where the funds produce a daily net asset value that is based on a combination of quoted prices from identical and similar securities and/or observable inputs, the funds are classified within Level 2.

Derivatives

As part of our risk management strategy, we enter into derivative transactions to mitigate our interest rate and foreign currency exposures.  These derivative transactions are considered over-the-counter for valuation purposes.  All of our derivative counterparties to which we had credit exposure at June 30, 2010 were assigned investment grade ratings by a nationally recognized statistical rating organization (“NRSRO”).

We estimate the fair value of our derivatives using industry standard valuation models that require observable market inputs, including market prices, yield curves, credit curves, interest rates, foreign exchange rates, volatilities and the contractual terms of the derivative instruments.  For derivatives that trade in liquid markets, such as interest rate swaps, model inputs can generally be verified and do not require significant management judgment.

Certain other derivative transactions trade in less liquid markets with limited pricing information.  For such derivatives, key inputs to the valuation process include quotes from counterparties, and other market data used to corroborate and adjust values where appropriate.  Other market data includes values obtained from a market participant that serves as a third party pricing agent.  In addition, pricing is validated internally using valuation models to assess the reasonableness of changes in factors such as market prices, yield curves, credit curves, interest rates, foreign exchange rates and volatilities.

Our derivative fair value measurements consider assumptions about counterparty credit risk and our own non-performance risk.  Generally, we assume that a valuation that uses the London Interbank Offered Rate (“LIBOR”) curve to convert future values to present value is appropriate for derivative assets and liabilities.  We consider counterparty credit risk and our own non-performance risk through credit valuation adjustments.  In situations in which our net position with a derivative counterparty is an asset, the counterparty credit valuation adjustment calculation uses the credit default probabilities of our derivative counterparties over a particular time period.  In situations in which our net position with a derivative counterparty is a liability, we use our own credit default probability to calculate the required non-performance credit valuation adjustment.  We use a relative fair value approach to allocate the credit valuation adjustments to our derivatives portfolio.

As of June 30, 2010, we reduced our derivative liabilities by $8 million to account for our own non-performance risk.  Derivative assets were reduced $11 million to account for counterparty credit risk.


 
- 11 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Finance Receivables

Our finance receivables are not carried at fair value on a recurring basis on the balance sheet.  In certain instances, for finance receivables for which there is evidence of impairment we may use an observable market price or the fair value of collateral if the loan is collateral dependent.  The fair values of impaired finance receivables based on the collateral value or market prices where available are reported at fair value on a nonrecurring basis.  We may consider additional adjustments to reflect current market conditions in estimating fair value.



 
- 12 -

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The following table summarizes our financial assets and liabilities that were accounted for at fair value as of June 30, 2010, by level within the fair value hierarchy:
 
Fair value measurements on a recurring basis
(Dollars in millions)
 Level 1
 Level 2
 Level 3
Counterparty
netting &
collateral 1
Fair value
Cash equivalents
$4,506
$6
$-
$-
$4,512
Available-for-sale securities:
         
Debt instruments:
         
U.S. government and agency obligations
62
25
-
-
87
Municipal debt securities
-
13
-
-
13
Certificates of deposit and commercial paper
-
226
-
-
226
Foreign government debt securities
-
15
-
-
15
Corporate debt securities
-
108
-
-
108
Mortgage-backed securities:
         
U.S. government agency
-
88
-
-
88
Non-agency residential
-
6
-
-
6
Non-agency commercial
-
13
-
-
13
Asset-backed securities
-
312
-
-
312
Equity instruments:
         
Fixed income mutual funds
         
Short-term sector fund
-
37
-
-
37
U.S. government sector fund
-
434
-
-
434
Municipal sector fund
-
43
-
-
43
Investment grade corporate sector fund
-
294
-
-
294
High-yield sector fund
-
21
-
-
21
Real return sector fund
-
17
-
-
17
Mortgage sector fund
-
417
-
-
417
Asset-backed securities sector fund
-
35
-
-
35
Emerging market sector fund
-
41
-
-
41
International sector fund
-
135
-
-
135
Equity mutual fund – S&P 500 index
318
-
-
-
318
Available-for-sale securities total
380
2,280
-
-
2,660
Derivative assets: 2
         
Foreign currency swaps
-
1,777
131
-
1,908
Interest rate swaps
-
281
60
-
341
Counterparty netting and collateral1
-
-
-
(1,852)
(1,852)
  Derivative assets total
-
2,058
191
(1,852)
397
  Embedded derivative assets
-
-
5
-
5
Total assets 3
4,886
4,344
196
(1,852)
7,574
   Derivative liabilities: 2
         
Foreign currency swaps
-
(803)
(65)
-
(868)
Interest rate swaps
-
(1,302)
(5)
-
(1,307)
Counterparty netting and collateral1
-
-
-
1,162
1,162
   Derivative liabilities total
-
(2,105)
(70)
1,162
(1,013)
   Embedded derivative liabilities
-
-
(37)
-
(37)
Total liabilities 3
-
(2,105)
(107)
1,162
(1,050)
Total net assets
$4,886
$2,239
$89
($690)
$6,524

1   We meet the accounting guidance for setoff criteria and elected to net derivative assets and derivative liabilities and the related cash
    collateral received and paid when legally enforceable master netting agreements exist.
2   Includes derivative asset counterparty credit valuation adjustment of $11 million and derivative liability non-performance credit
    valuation adjustment of $8 million.
3   Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair
    value measurement.
 
- 13 -

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The following table summarizes our financial assets and liabilities that were accounted for at fair value as of March 31, 2010, by level within the fair value hierarchy:
 
Fair value measurements on a recurring basis1
(Dollars in millions)
 Level 1
 Level 2
 Level 3
Counterparty netting
& collateral 2
Fair value
Cash equivalents
$4,256
$-
$-
$-
$4,256
Available-for-sale securities:
         
Debt instruments:
         
U.S. government and agency obligations
25
24
-
-
49
Municipal debt securities
-
6
-
-
6
Certificates of deposit and commercial paper
 
50
   
50
Foreign government debt securities
-
22
-
-
22
Corporate debt securities
-
93
-
-
93
Mortgage-backed securities:
         
U.S. government agency
-
120
-
-
120
Non-agency residential
-
8
-
-
8
Non-agency commercial
-
23
-
-
23
Asset-backed securities
-
641
3
-
644
Equity instruments:
         
Fixed income mutual funds
         
Short-term sector fund
-
32
-
-
32
U.S. government sector fund
-
250
-
-
250
Municipal sector fund
-
39
-
-
39
Investment grade corporate sector fund
-
260
-
-
260
High-yield sector fund
-
22
-
-
22
Mortgage sector fund
-
360
-
-
360
Asset-backed securities sector fund
-
30
-
-
30
Emerging market sector fund
-
37
-
-
37
International sector fund
-
117
-
-
117
Equity mutual fund – S&P 500 index
359
-
-
-
359
Available-for-sale securities total
384
2,134
3
-
2,521
Derivative assets: 3
         
Foreign currency swaps
-
2,454
158
-
2,612
Interest rate swaps
-
288
39
-
327
Counterparty netting and collateral2
-
-
-
(2,358)
(2,358)
  Derivative assets total
-
2,742
197
(2,358)
581
  Embedded derivative assets
-
-
4
-
4
Total assets 4
4,640
4,876
204
(2,358)
7,362
   Derivative liabilities: 3
         
Foreign currency swaps
-
(370)
(89)
-
(459)
Interest rate caps
-
(1)
-
-
(1)
Interest rate swaps
-
(1,180)
(23)
-
(1,203)
Counterparty netting and collateral2
-
-
-
1,130
1,130
   Derivative liabilities total
-
(1,551)
(112)
1,130
(533)
   Embedded derivative liabilities
-
-
(34)
-
(34)
Total liabilities 4
-
(1,551)
(146)
1,130
(567)
Total net assets
$4,640
$3,325
$58
($1,228)
$6,795
1   Prior period amounts have been reclassified to conform to the current period presentation.
2   We meet the accounting guidance for setoff criteria and elected to net derivative assets and derivative liabilities and the related cash
    collateral received and paid when legally enforceable master netting agreements exist.
3   Includes derivative asset counterparty credit valuation adjustment of $10 million and derivative liability non-performance credit valuation
     adjustment of $4 million.
4     Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value
     measurement.
 
- 14 -

 


 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The determination in classifying a financial instrument within Level 3 of the fair value hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement.  There were no transfers between Level 1 and Level 2 securities during the three months ended June 30, 2010 and 2009.  The following tables summarize the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2010 and 2009:

Three Months Ended June 30, 2010

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
   Available-for-sale securities   Derivatives
 Total net
assets
(liabilities)
(Dollars in millions)
Asset-backed securities
Available-for-sale securities total
 
Interest
rate
swaps
Foreign
currency
swaps
Embedded
derivative
liabilities,
net
Total Derivatives
 
Fair value, April 1, 2010
$3
$3
 
$16
$69
($30)
55
$58
Total gains/(losses)
               
Included in earnings
-
-
 
52
31
(2)
81
81
Included in other comprehensive income
-
-
 
-
 
-
 
-
 
-
-
Purchases, issuances, sales, and settlements
             
-
Purchases
-
-
 
-
-
-
-
-
Issuances
-
-
 
-
-
-
-
-
Sales
-
-
 
-
-
-
-
-
Settlements
-
-
 
(13)
(34)
-
(47)
(47)
Transfers in to Level 3 1
-
-
 
-
-
-
-
-
Transfers out of Level 3 1
(3)
(3)
 
-
-
-
-
(3)
Fair value, June 30, 2010
$-
$-
 
$55
$66
($32)
$89
$89
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date
     
$53
$29
($2)
$80
$80

1 Transfers in and transfers out are recognized at the end of the reporting period.





 
- 15 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Three Months Ended June 30, 2009

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Available-for-sale Debt Instruments
 
Derivatives
Total net assets (liabilities)
 
 
 
(Dollars in millions)
Non-agency residential mortgage-backed securities
Asset-backed securities
Available-
for-sale
securities
total
 
Interest rate swaps
Foreign currency swaps
Embedded
derivative
liabilities,
net
Total
Derivatives
 
Fair value, April 1, 2009
$-
$-
$-
 
$88
($145)
($1)
($58)
($58)
Total gains/(losses)
                 
Included in earnings
-
-
-
 
(87)
128
(4)
37
37
Included in other comprehensive income
-
-
-
 
-
-
-
-
-
Purchases, issuances, sales, and settlements
                 
Purchases
-
-
-
 
-
-
-
-
-
Issuances
-
-
-
 
-
-
-
-
-
Sales
-
-
-
 
-
-
-
-
-
Settlements
-
-
-
 
(19)
(21)
-
(40)
(40)
Transfers in to Level 3 1
1
1
2
 
-
-
-
-
2
Transfers out of Level 3 1
-
-
-
 
(10)
-
-
(10)
(10)
Fair value, June 30, 2009
$1
$1
$2
 
($28)
($38)
($5)
($71)
($69)
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date
       
 
 
 
 
 
 
 
($66)
 
 
 
 
 
 
 
$144
 
 
 
 
 
 
 
($5)
 
 
 
 
 
 
 
$73
 
 
 
 
 
 
 
$73

1 Transfers in and transfers out are recognized at the end of the reporting period.

Significant Changes to Level 3 Assets During the Period

Level 3 assets net, reported at fair value on a recurring basis increased $31 million for the quarter ended June 30, 2010. The increase is primarily attributable to the decline in swap rates during the first quarter of the fiscal year ended March 31, 2011 (“fiscal 2011”).




 
- 16 -

 


TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Assets Measured at Fair Value on a Nonrecurring Basis

Certain assets are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances, for example, when there is evidence of impairment.  For these assets, we disclose the fair value on a nonrecurring basis and any changes in fair value during the reporting period.

The following tables present the financial instruments carried on the Consolidated Balance Sheet by caption and by level within the fair value hierarchy for which a fair value measurement on a nonrecurring basis has been recorded during the reporting period:

Fair value measurements on a nonrecurring basis as of June 30, 2010:

(Dollars in millions)
 Level 1
 Level 2
Level 3
Total fair value
Finance receivables, net
$-
$-
$181
$181
Total assets at fair value on a nonrecurring basis
$-
$-
$181
$181


Fair value measurements on a nonrecurring basis as of March 31, 2010:

(Dollars in millions)
 Level 1
 Level 2
Level 3
Total fair value
Finance receivables, net
$-
$-
$143
$143
Total assets at fair value on a nonrecurring basis
$-
$-
$143
$143


Nonrecurring Fair Value Changes

The following table presents the total change in fair value of financial instruments measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Consolidated Statement of Income:
 
 
 
Three months ended June 30,
(Dollars in millions)
2010
2009
Finance receivables, net
$15
$9
Total nonrecurring fair value gain
$15
$9


 
- 17 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3 - Fair Value of Financial Instruments

The accounting guidance for financial instruments requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair value.  Financial instruments that are within the scope of this accounting guidance are included in the table below.

The following is a description of financial instruments for which the ending balances as of June 30, 2010 and March 31, 2010 are not carried at fair value in their entirety on the Consolidated Balance Sheet.

Finance Receivables

Fair value of finance receivables is generally determined by valuing expected discounted cash flows using a securitization model.  We estimate cash flows expected to be collected using contractual principal and interest cash flows adjusted for specific factors, such as prepayments, default rates, loss severity, credit scores, and collateral type.  The securitization model utilizes quoted secondary market rates if available, or estimated market rates that incorporate management’s best estimate of investor assumptions about the portfolio.

Commercial Paper

The carrying value of commercial paper issued is assumed to approximate fair value due to its short duration and generally negligible credit risk.  We validate this assumption using quoted market prices where available.

Unsecured Notes and Loans Payable

We use quoted market prices for debt when available.  When quoted market prices are not available, fair value is estimated based on current market rates and credit spreads for debt with similar maturities.


 
- 18 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3 - Fair Value of Financial Instruments (Continued)

Secured Notes and Loans Payable

Fair value is estimated based on current market rates and credit spreads for debt with similar maturities.  We also use internal assumptions, including prepayment speeds and expected credit losses on the underlying securitized assets, to estimate the timing of cash flows to be paid on these instruments.

The carrying value and estimated fair value of certain financial instruments at June 30, 2010 and March 31, 2010 were as follows:



 
June 30, 2010
March 31, 2010
 
(Dollars in millions)
Carrying
Value
Fair Value
Carrying
Value
Fair Value
Financial assets
       
Finance receivables, net1
$56,414
$58,235
$54,775
$56,568
         
Financial liabilities
       
Commercial paper
$18,954
$18,954
$19,466
$19,466
Unsecured notes and loans payable2
$45,658
$46,149
$46,713
$47,189
Secured notes and loans payable
$6,356
$6,359
$3,000
$3,006

1  Finance receivables are presented net of allowance for credit losses. Amounts exclude related party transactions and direct finance leases.
2  Carrying value of unsecured notes and loans payable represents the sum of unsecured notes and loans payable and carrying value
   adjustment.  Also included in unsecured notes and loans payable is $4.1 billion of loans payable to affiliates at June 30, 2010 and
   March 31, 2010, that are carried at amounts that approximate fair value.


 
- 19 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities

We classify all of our investments in marketable securities as available-for-sale.  The amortized cost and estimated fair value of investments in marketable securities and related unrealized gains and losses were as follows:

 
June 30, 2010
(Dollars in millions)
Amortized
cost
 
Unrealized gains
 
Unrealized losses
 
Fair
value
Available-for-sale securities:
             
Debt instruments:
             
U.S. government and agency obligations
$83
 
$4
 
$-
 
$87
Municipal debt securities
12
 
1
 
-
 
13
Certificates of deposit and commercial paper
227
 
-
 
(1)
 
226
Foreign government debt securities
15
 
-
 
-
 
15
Corporate debt securities
103
 
5
 
-
 
108
Mortgage-backed securities:
             
U.S. government agency
84
 
4
 
-
 
88
Non-agency residential
5
 
1
 
-
 
6
Non-agency commercial
12
 
1
 
-
 
13
Asset-backed securities
310
 
2
 
-
 
312
Equity instruments:
             
Fixed income mutual funds:
             
Short-term sector fund
37
 
-
 
-
 
37
U.S. government sector fund
429
 
5
 
-
 
434
Municipal sector fund
38
 
5
 
-
 
43
Investment grade corporate sector fund
268
 
26
 
-
 
294
High-yield sector fund
15
 
6
 
-
 
21
Real return sector fund
17
 
-
 
-
 
17
Mortgage sector fund
392
 
25
 
-
 
417
Asset-backed securities sector fund
33
 
2
 
-
 
35
Emerging market sector fund
37
 
4
 
-
 
41
International sector fund
127
 
8
 
-
 
135
Equity mutual fund – S&P 500 Index
254
 
64
 
-
 
318
Total investments in marketable securities
$2,498
 
$163
 
($1)
 
$2,660




 
- 20 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

 
March 31, 20101
(Dollars in millions)
Amortized
cost
 
Unrealized gains
 
Unrealized losses
 
Fair
value
Available-for-sale securities:
             
Debt instruments:
             
U.S. government and agency obligations
$49
 
$-
 
$-
 
$49
Municipal debt securities
6
 
-
 
-
 
6
Certificates of deposit and commercial paper
50
 
-
 
-
 
50
Foreign government debt securities
22
 
-
 
-
 
22
Corporate debt securities
89
 
4
 
-
 
93
Mortgage-backed securities:
             
U.S. government agency
116
 
4
 
-
 
120
Non-agency residential
7
 
1
 
-
 
8
Non-agency commercial
20
 
3
 
-
 
23
Asset-backed securities
635
 
9
 
-
 
644
Equity instruments:
             
Fixed income mutual funds:
             
Short-term sector fund
32
 
-
 
-
 
32
U.S. government sector fund
271
 
-
 
(21)
 
250
Municipal sector fund
35
 
4
 
-
 
39
Investment grade corporate sector fund
235
 
25
 
-
 
260
High-yield sector fund
15
 
7
 
-
 
22
Mortgage sector fund
345
 
15
 
-
 
360
Asset-backed securities sector fund
29
 
1
 
-
 
30
Emerging market sector fund
33
 
4
 
-
 
37
International sector fund
111
 
6
 
-
 
117
Equity mutual fund – S&P 500 Index
252
 
107
 
-
 
359
Total investments in marketable securities
$2,352
 
$190
 
($21)
 
$2,521
1 Prior period amounts have been reclassified to conform to the current period presentation.

Total fair value of certificates of deposit and commercial paper at June 30, and March 31, 2010 was $226 million and $50 million, respectively.  At these dates, these balances included commercial paper issued by an affiliated entity with a fair value of $50 million.

Total fair value of mortgage-backed securities at June 30, and March 31, 2010 was $107 million and $151 million, respectively.  Total fair value of the mortgage sector fund at June 30, and March 31, 2010 was $417 million and $360 million, respectively.  The total fair value related to subprime mortgage-backed securities was $41 million and $37 million at June 30, and March 31, 2010, respectively.

Total fair value of asset-backed securities at June 30, and March 31, 2010 was $312 million and $644 million, respectively.  The majority of our asset-backed securities is comprised of automobile collateral.  The fair value of asset-backed securities with collateral consisting primarily of Toyota vehicles is $296 million and $627 million at June 30, and March 31, 2010, respectively.

The fixed income mutual funds are private placement funds.  The total fair value of private placement fixed income mutual funds was $1.5 billion and $1.1 billion at June 30, and March 31, 2010, respectively.  For each fund, cash redemption limits may apply to each 90 day period.

 
- 21 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

Other-Than-Temporarily Impaired Securities

In April 2009, the FASB amended the OTTI model for debt securities. The impairment model for equity securities was not affected. Under the revised accounting guidance, an OTTI loss with respect to debt securities must be recognized in earnings if we have the intent to sell the debt security or it is more likely than not that we will be required to sell the debt security before recovery of its amortized cost basis.

OTTI Evaluation

An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis.   Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI in the Consolidated Statement of Shareholder’s Equity.  We conduct periodic reviews of securities in unrealized loss positions for the purpose of evaluating whether the impairment is other-than-temporary.

As part of our ongoing assessment of OTTI, we consider a variety of factors.  Such factors include the length of time and extent to which the market value has been less than cost, adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying collateral of the security, the volatility of the fair value changes, and changes to the fair value after the balance sheet date.
 
 
For equity securities, we also consider our intent and ability to hold the equity security for a period of time sufficient for recovery of fair value.  Where we lack that intent or ability, the equity security’s decline in fair value is deemed to be other-than-temporary and is recorded in earnings.

For debt securities, we also consider the factors identified previously.  However, for debt securities that we do not intend to sell or with respect to which it is more likely than not that we will not be required to sell, we also evaluate expected cash flows to be received to determine whether a credit loss has occurred.  In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in AOCI.  For debt securities that we intend to sell or where it is more likely than not that we will be required to sell, the OTTI loss is recorded in earnings.

OTTI Recognition and Measurement

In April 2009, we adopted the new accounting guidance for OTTI and did not record a transition adjustment for securities held at March 31, 2009 that were previously considered other-than-temporarily impaired as we intend to sell or believe it is more likely than not that we will be required to sell the securities for which we had previously recognized OTTI.

As of June 30, 2010, AFS debt securities that were identified as other-than-temporarily impaired were written down to their current fair value.  For debt securities that we intend to sell or that we believe it is more likely than not that we will be required to sell prior to recovery, an OTTI loss was recognized in earnings.  There were no credit losses on impaired debt securities.  Additionally, there were no AFS equity securities deemed to be other-than-temporarily impaired, and therefore, all unrealized losses on AFS equity securities were recognized in AOCI.


 
- 22 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

The following table presents other-than-temporary impairment losses that are included in realized losses:


 
Three months ended June 30,
  2010   2009
(Dollars in millions)
Non-agency residential mortgage backed securities
Asset-backed securities
Total
 
Non-agency residential mortgage backed securities
Asset-backed securities
Total
Total other-than-temporary impairment losses
$-
$-
$-
 
$4
$2
$6
Less: Portion of loss recognized in other comprehensive income (pre-tax)1
-
-
-
 
-
-
-
Net impairment losses recognized in income2
$-
$-
$-
 
$4
$2
$6

1 Represents the non-credit component impact of the other-than-temporary impairment on AFS debt securities.
2 Represents the other-than-temporary impairment on AFS debt and equity securities included in Investment and other income, net in the
   Consolidated Statement of Income.

The following tables present the aging of fair value and gross unrealized losses for AFS securities:

 
June 30, 2010
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in millions)
Fair
value
Unrealized losses
 
Fair
value
Unrealized losses
 
Fair
value
Unrealized losses
Available-for-sale securities:
               
Debt instruments:
               
Certificates of deposit and commercial paper
$226
($1)
 
$-
$-
 
$226
($1)
Total investments in marketable securities
$226
($1)
 
$-
$-
 
$226
($1)

 
March 31, 2010
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in millions)
Fair
value
Unrealized losses
 
Fair
value
Unrealized losses
 
Fair
value
Unrealized losses
Available-for-sale securities:
               
Equity instruments:
               
U.S. government sector fund
$-
$-
 
$250
($21)
 
$250
($21)
Total investments in marketable securities
$-
$-
 
$250
($21)
 
$250
($21)


 
- 23 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
 
Note 4 – Investments in Marketable Securities (Continued)

Unrealized Losses on Securities

At June 30, 2010, we did not own any investments that have been in a continuous unrealized loss position for 12 consecutive months or more.   At March 31, 2010, total gross unrealized loss and fair value of investments that have been in a continuous unrealized loss position for 12 consecutive months or more were $21 million and $250 million, respectively.  These investments were comprised of private placement fixed income mutual funds. These securities were predominantly investment grade.  Investments with unrealized losses decreased at June 30, 2010 primarily due to improvements in liquidity and market spreads.

The contractual maturities of investments in marketable securities at June 30, 2010 are summarized in the following table (dollars in millions).  Prepayments may cause actual maturities to differ from scheduled maturities.

 
Fair Value of Available-for-Sale Securities:
Due in 1 Year
or Less
 
Due after 1 Year through 5 Years
 
Due after 5 Years through 10 Years
 
Due after 10 Years
 
Total
Amount
 
Yield1
 
Amount
 
Yield1
 
Amount
 
Yield1
 
Amount
 
Yield1
 
Amount
 
Yield1
U.S. government and agency obligations
$1
 
0.09%
 
$25
 
2.33%
 
$40
 
2.56%
 
$21
 
3.04%
 
$87
 
2.51%
Municipal debt securities
-
 
-
 
-
 
-
 
-
 
-
 
13
 
4.95
 
13
 
4.95
Certificates of deposit and commercial paper
226
 
0.27
 
-
 
-
 
-
 
-
 
-
 
-
 
226
 
0.27
Foreign government debt
   securities
-
 
-
 
15
 
1.93
 
-
 
-
 
-
 
-
 
15
 
1.93
Corporate debt securities
2
 
2.71
 
56
 
3.92
 
40
 
4.21
 
10
 
5.42
 
108
 
4.13
Mortgage-backed securities:
                                     
U.S. government agency
-
 
-
 
1
 
5.41
 
4
 
5.62
 
83
 
4.39
 
88
 
4.45
Non-agency residential
-
 
-
 
-
 
-
 
-
 
-
 
6
 
14.37
 
6
 
14.37
Non-agency commercial
-
 
-
 
-
 
-
 
-
 
-
 
13
 
5.11
 
13
 
5.11
Asset-backed securities
6
 
0.64
 
303
 
1.91
 
-
 
-
 
3
 
0.60
 
312
 
1.82
Fixed income mutual funds
1,474
 
3.51
 
-
 
-
 
-
 
-
 
-
 
-
 
1,474
 
3.51
Equity mutual funds
318
 
2.76
 
-
 
-
 
-
 
-
 
-
 
-
 
318
 
2.76
Total Fair Value
$2,027
 
3.01%
 
$400
 
2.15%
 
$84
 
3.49%
 
$149
 
4.63%
 
$2,660
 
3.29%
Total Amortized Cost
$1,881
     
$396
     
$80
     
$141
     
$2,498
   

1Yields are calculated based on average outstanding amortized cost of the securities.

In accordance with statutory requirements, we had on deposit with state insurance authorities U.S. debt securities with amortized cost and fair value of $6 million at both June 30, and March 31, 2010.

 
- 24 -

 


TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 5 – Finance Receivables, Net

Finance receivables, net consisted of the following:

(Dollars in millions)
June 30, 2010
 
March 31, 2010
Retail receivables
$39,284
 
$42,184
Pledged receivables1
6,888
 
3,037
Dealer financing
11,907
 
11,513
 
58,079
 
56,734
Deferred origination costs
667
 
666
Unearned income
(934)
 
(833)
Allowance for credit losses
     
Retail receivables
(969)
 
(1,276)
Dealer financing
(151)
 
(204)
Total allowance for credit losses
(1,120)
 
(1,480)
       
Finance receivables, net2
$56,692
 
$55,087

1 Represents finance receivables that have been sold for legal purposes to securitization trusts in transactions that did not qualify for sales
   accounting treatment.  Cash flows from these receivables are available only for the repayment of debt issued by these trusts and other
   obligations arising from the securitization transactions.  They are not available for payment of our other obligations or to satisfy claims of
   our other creditors.
2 Includes direct finance lease receivables, net of $238 million and $265 million at June 30, and March 31, 2010, respectively.

The tables below summarize information about impaired finance receivables:

(Dollars in millions)
June 30, 2010
 
March 31, 2010
Impaired account balances with an allowance
$240
 
$217
Impaired account balances without an allowance
17
 
17
Total impaired account balances
257
 
234
Allowance for credit losses
(76)
 
(91)
Impaired account balances, net
$181
 
$143

Impaired finance receivables primarily consist of dealer financing accounts for which an allowance has been recorded based on the fair value of the underlying collateral.  For dealer financing accounts for which the fair value of the underlying collateral was in excess of the outstanding balance, no allowance was provided.

 
Three months ended June 30,
(Dollars in millions)
2010
2009
     
Average balance of accounts during the period that were impaired as of June 30
   
Dealer financing
$264
$285
     
Interest income recognized on impaired account balances during the period
   
Dealer financing
$2
$2


 
- 25 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 6 – Investments in Operating Leases, Net

Investments in operating leases, net consisted of the following at the dates indicated:

(Dollars in millions)
June 30, 2010
March 31, 2010
Vehicles
$23,850
$23,460
Equipment and other
803
812
 
24,653
24,272
Deferred origination fees
(143)
(123)
Deferred income
(681)
(577)
Accumulated depreciation
(5,860)
(6,196)
Allowance for credit losses
(196)
(225)
Investments in operating leases, net
$17,773
$17,151



 
- 26 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 7 – Allowance for Credit Losses

The following table provides information related to our allowance for credit losses on finance receivables and investments in operating leases:

 
Three months ended June 30,
(Dollars in millions)
2010
2009
Allowance for credit losses at beginning of period
$1,705
$1,864
Provision for credit losses
(289)
328
Charge-offs, net of recoveries1
(100)
(188)
Allowance for credit losses at end of period
$1,316
$2,004


(Dollars in millions)
June 30, 2010    
March 31, 2010  
Aggregate balances 60 or more days past due2
   
Finance receivables3
$266    
$247    
Operating leases3
76    
77    
Total
$342    
$324    
 
 
1 Net of recoveries of $39 million and $33 million for the three months ended June 30, 2010 and 2009, respectively.
2  Substantially all retail, direct finance lease, and operating lease receivables do not involve recourse to the dealer in the event of
   customer default.
3 Includes accounts in bankruptcy and excludes accounts for which vehicles have been repossessed.

 
- 27 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense

Derivative Instruments

We use derivatives as part of our risk management strategy to hedge against changes in interest rate and foreign currency risks.  We manage these risks by entering into derivatives transactions with the intent to minimize fluctuations in earnings, cash flows and fair value adjustments of assets and liabilities caused by market volatility.  Our use of derivatives is limited to the management of interest rate and foreign currency risks.

Our derivative activities are authorized and monitored by our Asset-Liability Committee, which provides a framework for financial controls and governance to manage these market risks.  We use internal models to analyze data from internal and external sources in developing various hedging strategies.  We incorporate the resulting hedging strategies into our overall risk management strategies.

Our liabilities consist mainly of fixed and floating rate debt, denominated in a number of different currencies, which we issue in the global capital markets.  We hedge our interest rate and currency risk inherent in these liabilities by entering into interest rate swaps, foreign currency swaps and foreign currency forwards, which effectively convert our obligations into U.S. dollar denominated, 3-month LIBOR based payments.

Our assets consist primarily of U.S. dollar denominated, fixed rate receivables.  Our approach to asset-liability management involves hedging our risk exposures so that changes in interest rates have a limited effect on our net interest margin and cash flows.  We use pay fixed interest rate swaps and caps, executed on a portfolio basis, to manage the interest rate risk of these assets.  The resulting asset liability profile is consistent with the overall risk management strategy as directed by the Asset-Liability Committee.

Credit Risk Related Contingent Features

Certain of our derivative contracts are governed by International Swaps and Derivatives Association (“ISDA”) Master Agreements.  Substantially all of these ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement at market value in the event of a ratings downgrade of the other party below a specified threshold.  In addition, upon specified downgrades in a party’s credit ratings, the threshold at which that party would be required to post collateral to the other party would be lowered.

The aggregate fair value of derivative instruments that contain credit risk related contingent features that are in a net liability position at June 30, 2010 is $1,013 million. In the normal course of business, we posted collateral of $369 million and held collateral of $665 million with counterparties that were in a net liability position with us, resulting in net collateral held of $296 million.  At June 30, 2010, if our ratings were to have declined to “A+”, we would have been required to post $372 million of additional collateral to the counterparties with which we were in a liability position at June 30, 2010.  If our ratings were to have declined to “BBB+” or below, we would have been required to post $940 million of additional collateral to the counterparties with which we were in a liability position at June 30, 2010.  In order to settle all derivative instruments, excluding embedded derivatives and adjustments made for our own non-performance risk, that were in a net liability position at June 30, 2010, we would be required to pay $1,021 million.



 
- 28 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

Derivative Activity Impact on Financial Statements

The table below shows the location and amount of derivatives at June 30, 2010 as reported in the Consolidated Balance Sheet:
 
   
Hedge accounting derivatives
 
Non-hedge
accounting derivatives
 
Total
(Dollars in millions)
 
Notional
Fair
value
 
Notional
Fair
value
 
Notional
Fair
value
Other assets
                 
Interest rate swaps
 
$495
$66
 
$8,530
$275
 
$9,025
$341
Foreign currency swaps
 
4,987
1,081
 
7,709
827
 
12,696
1,908
Embedded derivatives
 
-
-
 
43
5
 
43
5
Total
 
$5,482
$1,147
 
$16,282
$1,107
 
$21,764
$2,254
                   
Counterparty netting
               
(1,458)
Collateral held
               
(394)
             
Carrying value of derivative contracts – Other assets
         
$402
                   
Other liabilities
                 
Interest rate swaps
 
$-
$-
 
$57,719
$1,307
 
$57,719
$1,307
Foreign currency swaps
 
6,204
608
 
6,432
260
 
12,636
868
Interest rate caps
 
-
-
 
50
-
 
50
-
Embedded derivatives
 
-
-
 
313
37
 
313
37
Total
 
$6,204
$608
 
$64,514
$1,604
 
$70,718
$2,212
                   
Counterparty netting
               
(1,458)
Collateral held1
               
296
         
Carrying value of derivative contracts – Other liabilities
     
$1,050

1 As of June 30, 2010, we posted collateral of $369 million.  We netted $665 million of collateral held from counterparties whose position
   had changed from a net asset position to a net liability position subsequent to the date collateral was transferred, resulting in net
   collateral held of $296 million.

 
- 29 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The table below shows the location and amount of derivatives at March 31, 2010 as reported in the Consolidated Balance Sheet:

   
Hedge accounting derivatives
 
Non-hedge
accounting derivatives
 
Total
(Dollars in millions)
 
Notional
Fair
value
 
Notional
Fair
value
 
Notional
Fair
value
Other assets
                 
Interest rate swaps
 
$541
$52
 
$7,999
$275
 
$8,540
$327
Foreign currency swaps
 
8,271
1,451
 
13,609
1,161
 
21,880
2,612
Embedded derivatives
 
-
-
 
58
4
 
58
4
Total
 
$8,812
$1,503
 
$21,666
$1,440
 
$30,478
$2,943
                   
Counterparty netting
               
(1,073)
Collateral held
               
(1,285)
             
Carrying value of derivative contracts – Other assets
         
$585
                   
Other liabilities
                 
Interest rate swaps
 
$-
$-
 
$57,993
$1,203
 
$57,993
$1,203
Foreign currency swaps
 
3,590
364
 
1,639
95
 
5,229
459
Interest rate caps
 
-
-
 
50
1
 
50
1
Embedded derivatives
 
-
-
 
310
34
 
310
34
Total
 
$3,590
$364
 
$59,992
$1,333
 
$63,582
$1,697
                   
Counterparty netting
               
(1,073)
Collateral posted
               
(57)
         
Carrying value of derivative contracts – Other liabilities
     
$567


 
 

 
- 30 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The following table summarizes the components of interest expense, including the location and amount of gains or losses on derivative instruments and related hedged items, for the three months ended June 30, 2010 and 2009 as reported in our Consolidated Statement of Income:

 
Three months ended June 30,
(Dollars in millions)
2010
20094
Interest expense on debt1
$451
$624
Interest expense on pay float hedge accounting derivatives1
(109)
(183)
Interest expense on pay float non-hedge accounting derivatives1, 3
(131)
(137)
Interest expense on debt, net of pay float swaps
211
304
     
Interest expense on non-hedge pay fixed swaps1
309
301
     
(Gain) loss on hedge accounting derivatives:
   
Interest rate swaps2
(13)
24
Foreign currency swaps2
514
(1,384)
Loss (gain) on hedge accounting derivatives
501
(1,360)
Less hedged item:  change in fair value of fixed rate debt
(510)
1,381
Ineffectiveness related to hedge accounting derivatives2
(9)
21
     
(Gain) loss on foreign currency transactions
(608)
858
Loss (gain) on currency swaps and forwards 2
503
(796)
     
Loss (gain) on other non-hedge accounting derivatives:
   
Pay float swaps2
(46)
139
Pay fixed swaps2
131
(328)
Total interest expense
$491
$499

1   Amounts represent net interest settlements and changes in accruals.
2   Amounts exclude net interest settlements and changes in accruals.
3   Includes interest expense on both non-hedge accounting foreign currency swaps and forwards, and non-hedge interest rate derivatives.
4   Prior period amounts have been reclassified to conform to the current period presentation.


 
- 31 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)


The following table summarizes the relative fair value allocation of derivative credit valuation adjustments within interest expense.    

 
Three months ended June 30,
(Dollars in millions)
2010
2009
     
Ineffectiveness related to hedge accounting derivatives
$1
$27
Loss (gain) on currency swaps and forwards
(2)
14
Loss (gain) on non-hedge accounting derivatives:
   
     Pay float swaps
-
2
     Pay fixed swaps
(1)
28
Total credit valuation adjustment allocated to interest expense
($2)
$71



 
- 32 -

 

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 9 – Other Assets and Other Liabilities

Other assets and other liabilities consisted of the following:

(Dollars in millions)
June 30, 2010
 
March 31, 2010
Other assets:
     
Notes receivable from affiliates
$646
 
$306
Used vehicles held for sale
243
 
220
Deferred charges
178
 
195
Income taxes receivable
104
 
97
Derivative assets
402
 
585
Other assets
587
 
515
Total other assets
$2,160
 
$1,918
       
Other liabilities:
     
Unearned insurance premiums and contract revenues
$1,430
 
$1,382
Derivative liabilities
1,050
 
567
Accounts payable and accrued expenses
914
 
902
Deferred income
248
 
244
Other liabilities
390
 
356
Total other liabilities
$4,032
 
$3,451



 
- 33 -

 

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 10 – Debt

Debt and the related weighted average contractual interest rates are summarized as follows:

     
Weighted average
contractual interest rates4
(Dollars in millions)
June 30,
2010
 
March 31,
2010
 
June 30,
2010
 
March 31,
2010
Commercial paper1
$18,954
 
$19,466
 
0.53%
 
0.28%
Unsecured notes and loans payable2
45,172
 
45,617
 
3.58%
 
3.58%
Secured notes and loans payable
6,356
 
3,000
 
0.80%
 
0.59%
Carrying value adjustment3
486
 
1,096
       
Total debt
$70,968
 
$69,179
 
2.51%
 
2.49%

1 Includes unamortized discount.
2 Includes unamortized premium/discount and effects of foreign currency transaction gains and losses on non-hedged or de-designated
   notes and loans payable which are denominated in foreign currencies.
3 Represents the effects of fair value adjustments to debt in hedging relationships, accrued redemption premiums, and the unamortized fair
   value adjustments on the hedged item for terminated fair value hedge accounting relationships.
4 Calculated based on original notional or par value before consideration of premium or discount.

Included in our unsecured notes and loans payable are unsecured notes and loans denominated in various foreign currencies.  At June 30, and March 31, 2010, the carrying value of these notes payable was $25.9 billion and $28.5 billion, respectively.  Concurrent with the issuance of these foreign currency unsecured notes, we entered into currency swaps in the same notional amount to convert non-U.S. currency payments to U.S. dollar denominated payments.

Additionally, the carrying value of our unsecured notes and loans payable at June 30, 2010 included $14.6 billion of unsecured floating rate debt with contractual interest rates ranging from 0 percent to 9.7 percent and $31.1 billion of unsecured fixed rate debt with contractual interest rates ranging from 0 percent to 15.3 percent.  The carrying value of our unsecured notes and loans payable at March 31, 2010 includes $14.0 billion of unsecured floating rate debt with contractual interest rates ranging from 0 percent to 10.4 percent and $32.7 billion of unsecured fixed rate debt with contractual interest rates ranging from 0 percent to 15.3 percent.  Upon issuance of fixed rate notes, we generally elect to enter into interest rate swaps to convert fixed rate payments on notes to floating rate payments.  The carrying value adjustment on debt decreased by $610 million at June 30, 2010 compared to March 31, 2010 primarily as a result of a stronger U.S. dollar relative to certain other currencies in which some of our debt is denominated.

As of June 30, 2010, our commercial paper had an average remaining maturity of 42 days, while our notes and loans payable mature on various dates through fiscal 2047.

During the first quarter ended June 30, 2010, we sourced approximately $3.8 billion in funding through the transfer of retail finance receivables to asset-backed securitization vehicles.  The notes and loans issued in connection with these transactions are repayable only from collections on the underlying pledged receivables.

 
- 34 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 11 – Variable Interest Entities

A variable interest entity (“VIE”) is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest.  A VIE is consolidated by its primary beneficiary.  We adopted the FASB’s new accounting standard on VIEs on April 1, 2010. The new accounting guidance changes the existing consolidation model for VIEs to a new model based on a qualitative assessment of power and economics, requires ongoing assessments of whether an entity is the primary beneficiary of a VIE, and enhances the disclosures about an entity's involvement with a VIE. This standard requires the consolidation of a VIE if an entity has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses or the right to receive residual returns that could potentially be significant to the VIE.  We did not consolidate or deconsolidate any VIEs as a result of adopting this standard.

On-balance Sheet Securitization Trusts

We use one or more special purpose entities that are considered VIEs to issue asset-backed securities to third party bank-sponsored asset-backed securitization vehicles and to investors in securitization transactions.  The securities issued by these VIEs are backed by the cash flows from finance receivables that have been transferred to the VIEs.  Although the transferred finance receivables have been legally sold to the VIEs, we hold variable interests in the VIEs that are expected to absorb a majority of these entities’ expected losses, receive a majority of the expected residual returns, or both.  We determined that we are the primary beneficiary of the securitization trusts because (i) our servicing responsibilities for the transferred receivables give us the power to direct the activities that most significantly impact the performance of the VIEs, and (ii) our variable interests in the VIEs give us the obligation to absorb losses and the right to receive residual returns that could potentially be significant.

The assets of the consolidated securitization VIEs consisted of $6,888 million and $3,037 million in gross retail finance receivables at June 30, 2010, and March 31, 2010, respectively.   In addition, TMCC held $359 million and $173 million in cash which represent collections from the underlying pledged receivables at June 30, 2010 and March 31, 2010, respectively.  We classified this cash as restricted cash on our consolidated balance sheet.  The liabilities of these consolidated VIEs consisted of $6,356 million and $3,000 million in secured debt and $1 million and $439 thousand in other liabilities at June 30, 2010, and March 31, 2010, respectively.  The assets of the VIEs serve as the sole source of payment for the asset-backed securities issued by these entities.  Investors in the notes issued by the VIEs do not have recourse to TMCC’s general credit, with the exception of customary representation and warranty repurchase provisions and indemnities.

As primary beneficiary of these entities, we are exposed to credit, interest rate, and prepayment risk from the receivables transferred to the VIEs.   However, our exposure to these risks did not change as a result of the transfer of the assets to the VIEs.  We may also be exposed to interest rate risk arising from the secured notes issued by the VIEs.

In addition to the credit enhancement described above, we entered into interest rate swaps with certain special purpose entities that issue variable rate debt.  Under the terms of these swaps, the securitization trusts are obligated to pay TMCC a fixed rate of interest on certain payment dates in exchange for receiving a floating rate of interest on amounts equal to the outstanding balance of the secured debt.  This arrangement enables the securitization trusts to issue variable rate debt that is secured by fixed rate retail finance receivables.


 
- 35 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 11 – Variable Interest Entities (Continued)

The transfers of the receivables to the special purpose entities in our securitizations are considered to be sales for legal purposes.  However, these transactions do not meet the requirements for sale accounting.  As a result, the securitized assets and the related debt remain on our Consolidated Balance Sheet.  We recognize financing revenue on the pledged receivables and interest expense on the secured debt issued by the trusts.  We also maintain an allowance for credit losses on the pledged receivables to cover probable credit losses estimated using a methodology consistent with that used for our non-securitized retail loan portfolio.  The interest rate swaps between TMCC and the special purpose entities are considered intercompany transactions and therefore are eliminated in our consolidated financial statements.


 
- 36 -

 

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 12 – Liquidity Facilities and Letters of Credit

For additional liquidity purposes, we maintain syndicated bank credit facilities with certain banks.

364 Day Credit Agreement

In March 2010, TMCC, its subsidiary Toyota Credit de Puerto Rico Corp. (“TCPR”), and other Toyota affiliates entered into a $5.0 billion 364 day syndicated bank credit facility pursuant to a 364 Day Credit Agreement.  The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross-default provisions and limitations on consolidations, mergers and sales of assets.  The 364 Day Credit Agreement may be used for general corporate purposes and was not drawn upon as of June 30, and March 31, 2010.

Five Year Credit Agreement

In March 2007, TMCC, TCPR, and other Toyota affiliates entered into an $8.0 billion five year syndicated bank credit facility pursuant to a Five Year Credit Agreement. The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross-default provisions and limitations on consolidations, mergers and sales of assets.  The Five Year Credit Agreement may be used for general corporate purposes and was not drawn upon as of June 30, and March 31, 2010.

Letter of Credit Facility Agreement

In addition, TMCC has an uncommitted letter of credit facility totaling $5 million, of which $1 million was issued and outstanding at June 30, and March 31, 2010.

Other Credit Agreements

TMCC has two additional bank credit facilities.  The first is a 364 day committed bank credit facility in the amount of JPY 100 billion (approximately $1.1 billion as of June 30, 2010) which was entered into in December 2009 to replace a similar facility which expired.  The second is a 364 day uncommitted bank credit facility in the amount of JPY 100 billion (approximately $1.1 billion as of June 30, 2010), which was extended in December 2009 for an additional 364 days.  Both of these agreements contain covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross-default provisions and limitations on consolidations, mergers and sales of assets.  Neither of these facilities was drawn upon as of June 30, and March 31, 2010.

We are in compliance with the covenants and conditions of the credit agreements described above.

 
- 37 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13 – Commitments and Contingencies

Commitments and Guarantees

We have entered into certain commitments and guarantees described below.  The maximum amounts under these commitments and guarantees are summarized in the table below:

 
Maximum commitment amount as of
(Dollars in millions)
June 30, 2010
March 31, 2010
Commitments:
   
Credit facilities with vehicle and industrial equipment dealers
$6,112
$6,363
Facilities lease commitments1
87
92
Total commitments
6,199
6,455
Guarantees and other contingencies:
   
Guarantees of affiliate pollution control and solid waste disposal  bonds
100
100
Total commitments and guarantees
$6,299
$6,555
     
Wholesale financing demand note facilities2
$9,450
$9,482

1 Includes $56 million and $58 million in facilities lease commitments with affiliates at June 30, and March 31, 2010, respectively.
2 Amounts are not considered to be contractual commitments as they are not binding arrangements under which TMCC is required to
   perform.  At June 30, and March 31, 2010, amounts outstanding were $6.2 billion and $5.9 billion, respectively.

Commitments

We provide fixed and variable rate credit facilities to vehicle and industrial equipment dealers.  These credit facilities are typically used for business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements.  These loans are generally collateralized with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate.  We obtain a personal guarantee from the vehicle or industrial equipment dealer or a 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 our exposure under such agreements.  We price the credit facilities to reflect the credit risks assumed in entering into the credit facility.  Amounts drawn under these facilities are reviewed for collectability on a quarterly basis, in conjunction with our evaluation of the allowance for credit losses.  We also provide financing to various multi-franchise dealer organizations, often as part of a lending consortium, for wholesale, working capital, real estate, and business acquisitions.  Of the total credit facility commitments available to vehicle and industrial equipment dealers, $5.2 billion was outstanding at both June 30, and March 31, 2010 and was recorded in Finance receivables, net in the Consolidated Balance Sheet.





 
- 38 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13 – Commitments and Contingencies (Continued)

We are party to a 15-year lease agreement with Toyota Motor Sales, USA, Inc. (“TMS”) for our headquarters location in the TMS headquarters complex in Torrance, California.  At June 30, 2010, minimum future commitments under lease agreements to which we are a lessee, including those under the agreement discussed above, are as follows: fiscal years ending March 31, 2011 - $15 million; 2012 - $17 million; 2013 - $13 million; 2014 - $10 million; 2015 - $9 million and thereafter - $23 million.

Guarantees and Other Contingencies

TMCC has guaranteed bond obligations totaling $100 million in principal that were issued by Putnam County, West Virginia and Gibson County, Indiana to finance the construction of pollution control facilities at manufacturing plants of certain TMCC affiliates.  The bonds mature in the following fiscal years ending March 31: 2028 - $20 million; 2029 - $50 million; 2030 - $10 million; 2031 - $10 million; and 2032 - $10 million.  TMCC would be required to perform under the guarantees in the event of non-payment on the bonds and other related obligations.  TMCC is entitled to reimbursement by the affiliates for any amounts paid.  TMCC receives an annual fee of $78,000 for guaranteeing such payments.  TMCC has not been required to perform under any of these affiliate bond guarantees as of June 30, and March 31, 2010.

Indemnification

In the ordinary course of business, we enter into agreements containing indemnification provisions standard in the industry related to several types of transactions, including, but not limited to, debt funding, derivatives, securitization transactions, and our 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, we have 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.  In addition, certain of our funding arrangements would require us to pay lenders for increased costs due to certain changes in laws or regulations.  Due to the difficulty in predicting events which could cause a breach of the indemnification provisions or trigger a gross-up or other payment obligation, we are not able to estimate our maximum exposure to future payments that could result from claims made under such provisions.  We have not made any material payments in the past as a result of these provisions, and as of June 30, 2010, we determined that it is not probable that we will be required to make any material payments in the future.  As of June 30, and March 31, 2010, no amounts have been recorded under these indemnifications.

 
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13 – Commitments and Contingencies (Continued)

Litigation

Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us 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 our 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. We perform periodic reviews of pending claims and actions to determine the probability of adverse verdicts and resulting amounts of liability. We establish accruals for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts accrued for these claims; however, we cannot estimate the losses or ranges of losses for proceedings where there is only a reasonable possibility that a loss may be incurred.  We believe, based on currently available information and established accruals, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, but may be material to our operating results for any particular period, depending in part, upon the operating results for such period.


Repossession Class Actions

A cross-complaint alleging a class action in the Superior Court of California Stanislaus County, Garcia v. Toyota Motor Credit Corporation, filed in August 2007, claims that TMCC's post-repossession notice failed to comply with the Rees-Levering Automobile Sales Finance Act of California.  Three additional putative class action complaints or cross-complaints were filed making similar allegations.  The cases were coordinated in the California Superior Court, Stanislaus County and a Second Amended Consolidated Cross-Complaint and Complaint was subsequently filed in March 2009.  The Second Amended Consolidated Cross-Complaint and Complaint seeks injunctive relief, restitution, disgorgement and other equitable relief under California's Unfair Competition Law.  As a result of mediation in January 2010, the parties agreed to settle all of the foregoing matters. The proposed settlement, for which we have adequately accrued, is subject to preliminary and final court approval.  A fourth case was recently filed which the court has included in the settlement.

Recall-related Class Actions

TMCC and certain affiliates were named as defendants in the consolidated multidistrict litigation, In Re: Toyota Motor Corp. Unintended Acceleration, Marketing, Sales Practices, and Products Liability Litigation consolidated in the United States District Court, Central District of California seeking damages and injunctive relief as a result of alleged sudden unintended acceleration and/or braking defects in certain Toyota and Lexus vehicles.  A parallel action was filed against TMCC and certain affiliates on March 12, 2010 by the Orange County District Attorney.  See "Item 3. Legal Proceedings" in our fiscal 2010 Form 10-K for more information.  On August 2, 2010, the plaintiffs filed a consolidated complaint in the multidistrict litigation that does not name TMCC as a defendant.  TMCC remains, however, a defendant in the action filed by the Orange County District Attorney


 
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13 – Commitments and Contingencies (Continued)
 
TMCC and certain affiliates had also been named as defendants in a putative bondholder class action, Harel Pia Mutual Fund vs. Toyota Motor Corp., et al., filed in the Central District of California on April 8, 2010, alleging violations of federal securities laws.  The plaintiff filed a voluntary dismissal of the lawsuit on July 20, 2010.
 
On July 22, 2010, the same plaintiff in the above federal bondholder action refiled the case in California state court on behalf of purchasers of TMCC bonds traded on foreign exchanges (Harel Pia Mutual Fund v. Toyota Motor Corp., et al., Superior Court of California, County of Los Angeles).  The complaint alleges violations of California securities laws, fraud, breach of fiduciary duty and other state law claims.
 
We believe we have meritorious defenses to these claims and intend to defend against them vigorously.
 

 

 
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 14 – Income Taxes

Our effective tax rate was 39 percent during the first quarter of fiscal 2011 and 38 percent for the same period in fiscal 2010.  Our provision for income taxes for the first quarter of fiscal 2011 was $357 million compared to $108 million for the same period in fiscal 2010.   This increase in provision is consistent with the increase in our income before tax for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010.

Tax Related Contingencies

We are routinely subject to U.S. federal, state and local, and foreign income tax examinations by tax authorities in various jurisdictions. We are in various stages of completion of several income tax examinations, including an examination by the Internal Revenue Service for the taxable years March 31, 2007 through March 31, 2010.  During the fourth quarter of fiscal 2010, the Internal Revenue Service completed its examination for the taxable years March 31, 2004 through March 31, 2006.

We periodically review our uncertain tax positions. Our assessment is based on many factors including the ongoing IRS audits.  For the quarter ended June 30, 2010 this assessment resulted in no change in unrecognized tax benefits.

Our deferred tax assets at June 30, 2010 were $1.8 billion compared with $2.3 billion at March 31, 2010, and were primarily due to the deferred deduction of allowance for credit losses and cumulative federal tax loss carryforwards that expire in varying amounts through fiscal year 2029. The total deferred tax liability at June 30, 2010, net of these deferred tax assets, was $3.6 billion compared with $3.3 billion at March 31, 2010.  Realization with respect to the federal tax loss carryforwards is dependent on generating sufficient income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable could be reduced if management’s estimates change.


 
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 15 – Related Party Transactions

As of June 30, 2010, there were no material changes to our related party agreements or relationships as described in our fiscal 2010 Form 10-K, except as described below.  The tables below summarize amounts included in our Statement of Income and Consolidated Balance Sheet under various related party agreements or relationships:

 
Three months ended June 30,
(Dollars in millions)
2010
 
2009
Net financing revenues:
     
Manufacturers’ subvention support and other revenues
$233
 
$187
Credit support fees incurred
($9)
 
($10)
Foreign exchange gain on notes receivable from affiliates
$-
 
$52
Foreign exchange (loss) on loans payable to affiliates
($61)
 
($33)
Interest expense on loans payable to affiliates
($12)
 
($21)
       
Insurance earned premiums and contract revenues:
     
Affiliate insurance premiums, commissions, and
contract revenues
$29
 
$22
       
Investments and other income, net:
     
Interest earned on notes receivable from affiliates
$1
 
$1
       
Expenses:
     
Shared services charges and other expenses
$10
 
$8
Employee benefits expense
$17
 
$16

 
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 15 – Related Party Transactions (Continued)

(Dollars in millions)
June 30, 2010
 
March 31, 2010
Assets:
     
Investments in marketable securities
     
Investments in marketable securities
$50
 
$50
       
Finance receivables, net
     
Accounts receivable from affiliates
$12
 
$20
Direct finance receivables from affiliates
$4
 
$-
Notes receivable under home loan programs
$28
 
$27
Deferred retail subvention income from affiliates
($769)
 
($663)
       
Investments in operating leases, net
     
Leases to affiliates
$22
 
$29
Deferred lease subvention income from affiliates
($679)
 
($575)
       
Other assets
     
Notes receivable from affiliates
$646
 
$306
Accounts receivable from affiliates
$169
 
$97
Subvention support receivable from affiliates
$140
 
$143
       
Liabilities:
     
Debt
     
Loans payable to affiliates
$4,126
 
$4,065
       
Other liabilities
     
Unearned affiliate insurance premiums, commissions, and
   contract revenues
$269
 
$223
Accounts payable to affiliates
$325
 
$284
Notes payable to affiliate
$36
 
$45
       
Shareholder’s Equity:
     
Dividends paid
$-
 
$50
Stock based compensation
$1
 
$1


TMCC-TMFNL Loan Agreement

Effective as of May 12, 2010, TMCC and Toyota Motor Finance (Netherlands) B.V. (“TMFNL”) entered into a new uncommitted loan finance agreement which replaced an existing loan finance agreement between TMCC and TMFNL.  The new loan agreement provides for reciprocal lines of credit between TMFNL and TMCC, with individual loans to be evidenced by term agreements in an aggregate amount not to exceed €1 billion.  There were no amounts outstanding at June 30, 2010.



 
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 16 – Segment Information

Financial information for our reportable operating segments for the quarters ended or at June 30 is summarized as follows (dollars in millions):

Fiscal 2011:
Finance  
operations
 
Insurance
operations
 
Intercompany
eliminations  
 
Total
Three months ended June 30, 2010:
             
 
Total financing revenues
$2,018
 
$-
 
$6
 
$2,024
Insurance earned premiums and contract revenues
-
 
129
 
(6)
 
123
Investment and other income
10
 
27
 
(2)
 
35
Total gross revenues
2,028
 
156