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Toyota Motor Credit (TM/28)

Filed: 9 Feb 22, 12:22pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number 1-9961

 

TOYOTA MOTOR CREDIT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

California

 

95-3775816

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

6565 Headquarters Drive

Plano, Texas

 

75024

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (469) 486-9300

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Medium-Term Notes, Series B
Stated Maturity Date January 11, 2028

TM/28

New York Stock Exchange

 

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.         

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

As of January 31, 2022, 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 International 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 December 31, 2021

 

 


2


 

 

 

PART I. FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in millions)

(Unaudited)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Financing revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease

 

$

2,081

 

 

$

2,122

 

 

$

6,329

 

 

$

6,365

 

Retail

 

 

830

 

 

 

749

 

 

 

2,442

 

 

 

2,144

 

Dealer

 

 

80

 

 

 

103

 

 

 

251

 

 

 

312

 

Total financing revenues

 

 

2,991

 

 

 

2,974

 

 

 

9,022

 

 

 

8,821

 

Depreciation on operating leases

 

 

1,460

 

 

 

1,450

 

 

 

4,400

 

 

 

4,484

 

Interest expense

 

 

346

 

 

 

491

 

 

 

1,055

 

 

 

1,534

 

Net financing revenues

 

 

1,185

 

 

 

1,033

 

 

 

3,567

 

 

 

2,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voluntary protection contract revenues and insurance earned premiums

 

 

255

 

 

 

241

 

 

 

758

 

 

 

714

 

Investment and other income, net

 

 

76

 

 

 

179

 

 

 

239

 

 

 

445

 

Net financing revenues and other revenues

 

 

1,516

 

 

 

1,453

 

 

 

4,564

 

 

 

3,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

45

 

 

 

118

 

 

 

110

 

 

 

366

 

Operating and administrative

 

 

394

 

 

 

354

 

 

 

1,163

 

 

 

1,088

 

Voluntary protection contract expenses and insurance losses

 

 

96

 

 

 

98

 

 

 

303

 

 

 

265

 

Total expenses

 

 

535

 

 

 

570

 

 

 

1,576

 

 

 

1,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

981

 

 

 

883

 

 

 

2,988

 

 

 

2,243

 

Provision for income taxes

 

 

233

 

 

 

215

 

 

 

697

 

 

 

546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

748

 

 

$

668

 

 

$

2,291

 

 

$

1,697

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in millions)

(Unaudited)

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income

 

$

748

 

 

$

668

 

 

$

2,291

 

 

$

1,697

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (losses) gains on available-for-sale

  marketable securities [net of tax benefit (provision)

  of $1, $0, ($1) and ($6), respectively]

 

 

(3

)

 

 

2

 

 

 

4

 

 

 

26

 

Reclassification adjustment for net gains on

  available-for-sale marketable securities included in

  investment and other income, net [net of tax

provision of $0, $0, $0 and $4, respectively]

 

 

(1

)

 

 

(2

)

 

 

(1

)

 

 

(15

)

Other comprehensive (loss) income

 

 

(4

)

 

 

0

 

 

 

3

 

 

 

11

 

Comprehensive income

 

$

744

 

 

$

668

 

 

$

2,294

 

 

$

1,708

 

 

Refer to the accompanying Notes to Consolidated Financial Statements.

3


 

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in millions except share data)

(Unaudited)

 

 

 

December 31,

 

 

March 31,

 

 

 

2021

 

 

2021

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,431

 

 

$

8,195

 

Restricted cash and cash equivalents

 

 

2,372

 

 

 

1,957

 

Investments in marketable securities

 

 

5,121

 

 

 

4,820

 

Finance receivables, net of allowance for credit losses of $1,185 and $1,178

 

 

80,925

 

 

 

79,192

 

Investments in operating leases, net

 

 

36,836

 

 

 

37,091

 

Other assets

 

 

2,450

 

 

 

2,473

 

Total assets

 

$

136,135

 

 

$

133,728

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDER’S EQUITY

 

 

 

 

 

 

 

 

Debt

 

$

110,122

 

 

$

109,725

 

Deferred income taxes

 

 

2,399

 

 

 

2,860

 

Other liabilities

 

 

5,725

 

 

 

5,548

 

Total liabilities

 

 

118,246

 

 

 

118,133

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Refer to Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder’s equity:

 

 

 

 

 

 

 

 

Capital stock, no par value (100,000 shares authorized; 91,500 issued

   and outstanding) at December 31, 2021 and March 31, 2021

 

 

915

 

 

 

915

 

Additional paid-in capital

 

 

2

 

 

 

2

 

Accumulated other comprehensive income

 

 

11

 

 

 

8

 

Retained earnings

 

 

16,961

 

 

 

14,670

 

Total shareholder's equity

 

 

17,889

 

 

 

15,595

 

Total liabilities and shareholder's equity

 

$

136,135

 

 

$

133,728

 

 

The following table presents the assets and liabilities of our consolidated variable interest entities (Refer to Note 8).

  

 

 

December 31,

 

 

March 31,

 

 

 

2021

 

 

2021

 

ASSETS

 

 

 

 

 

 

 

 

Finance receivables, net

 

$

21,637

 

 

$

21,745

 

Investments in operating leases, net

 

 

12,434

 

 

 

6,599

 

Other assets

 

 

73

 

 

 

89

 

Total assets

 

$

34,144

 

 

$

28,433

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Debt

 

$

28,068

 

 

$

24,212

 

Other liabilities

 

 

10

 

 

 

14

 

Total liabilities

 

$

28,078

 

 

$

24,226

 

 

Refer to the accompanying Notes to Consolidated Financial Statements.

 

4


 

 

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(Dollars in millions)

(Unaudited)

 

 

 

 

Three months ended December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

other

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

 

 

 

 

 

stock

 

 

capital

 

 

income

 

 

earnings

 

 

Total

 

Balance at September 30, 2020

 

$

915

 

 

$

2

 

 

$

26

 

 

$

14,382

 

 

$

15,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

668

 

 

 

668

 

Other comprehensive loss, net of tax

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Balance at December 31, 2020

 

$

915

 

 

$

2

 

 

$

26

 

 

$

15,050

 

 

$

15,993

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

other

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

 

 

 

 

 

stock

 

 

capital

 

 

income

 

 

earnings

 

 

Total

 

Balance at March 31, 2020

 

$

915

 

 

$

2

 

 

$

15

 

 

$

13,571

 

 

$

14,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative-effect of adoption of ASU 2016-13

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(218

)

 

 

(218

)

Net income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,697

 

 

 

1,697

 

Other comprehensive income, net of tax

 

 

0

 

 

 

0

 

 

 

11

 

 

 

0

 

 

 

11

 

Balance at December 31, 2020

 

$

915

 

 

$

2

 

 

$

26

 

 

$

15,050

 

 

$

15,993

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

other

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

 

 

 

 

 

stock

 

 

capital

 

 

income (loss)

 

 

earnings

 

 

Total

 

Balance at September 30, 2021

 

$

915

 

 

$

2

 

 

$

15

 

 

$

16,213

 

 

$

17,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

748

 

 

 

748

 

Other comprehensive loss, net of tax

 

 

0

 

 

 

0

 

 

 

(4

)

 

 

0

 

 

 

(4

)

Balance at December 31, 2021

 

$

915

 

 

$

2

 

 

$

11

 

 

$

16,961

 

 

$

17,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

other

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

 

 

 

 

 

stock

 

 

capital

 

 

income

 

 

earnings

 

 

Total

 

Balance at March 31, 2021

 

$

915

 

 

$

2

 

 

$

8

 

 

$

14,670

 

 

$

15,595

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,291

 

 

 

2,291

 

Other comprehensive income, net of tax

 

 

0

 

 

 

0

 

 

 

3

 

 

 

0

 

 

 

3

 

Balance at December 31, 2021

 

$

915

 

 

$

2

 

 

$

11

 

 

$

16,961

 

 

$

17,889

 

Refer to the accompanying Notes to Consolidated Financial Statements.

 

5


 

 

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

 

Nine months ended December 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,291

 

 

$

1,697

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,489

 

 

 

4,572

 

Recognition of deferred income

 

 

(1,841

)

 

 

(1,864

)

Provision for credit losses

 

 

110

 

 

 

366

 

Amortization of deferred costs

 

 

743

 

 

 

572

 

Foreign currency and other adjustments to the carrying value of financial instruments, net

 

 

(164

)

 

 

1,806

 

Net gains from investments in marketable securities

 

 

(108

)

 

 

(222

)

Net change in:

 

 

 

 

 

 

 

 

Derivative assets

 

 

(9

)

 

 

(9

)

Other assets and accrued interest

 

 

(421

)

 

 

140

 

Deferred income taxes

 

 

(462

)

 

 

(1,797

)

Derivative liabilities

 

 

(1

)

 

 

(21

)

Other liabilities

 

 

150

 

 

 

993

 

Net cash provided by operating activities

 

 

4,777

 

 

 

6,233

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of investments in marketable securities

 

 

(1,780

)

 

 

(1,862

)

Proceeds from sales of investments in marketable securities

 

 

1,284

 

 

 

405

 

Proceeds from maturities of investments in marketable securities

 

 

296

 

 

 

916

 

Acquisition of finance receivables

 

 

(30,681

)

 

 

(29,164

)

Collection of finance receivables

 

 

25,604

 

 

 

20,390

 

Net change in wholesale and certain working capital receivables

 

 

3,370

 

 

 

3,261

 

Acquisition of investments in operating leases

 

 

(12,293

)

 

 

(11,777

)

Disposals of investments in operating leases

 

 

9,435

 

 

 

8,570

 

Long term loans to affiliates

 

 

(200

)

 

 

(200

)

Payments on long term loans from affiliates

 

 

300

 

 

 

406

 

Other, net

 

 

(39

)

 

 

(48

)

Net cash used in investing activities

 

 

(4,704

)

 

 

(9,103

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

29,270

 

 

 

38,669

 

Payments on debt

 

 

(29,246

)

 

 

(21,909

)

Net change in commercial paper and other short-term financing

 

 

537

 

 

 

(7,334

)

Payment on loan from affiliate

 

 

0

 

 

 

(3,000

)

Net change in financing support provided by affiliates

 

 

17

 

 

 

(17

)

Net cash provided by financing activities

 

 

578

 

 

 

6,409

 

Net increase in cash and cash equivalents and restricted cash and cash equivalents

 

 

651

 

 

 

3,539

 

Cash and cash equivalents and restricted cash and cash equivalents at the beginning of the period

 

 

10,152

 

 

 

8,529

 

Cash and cash equivalents and restricted cash and cash equivalents at the end of the period

 

$

10,803

 

 

$

12,068

 

Supplemental disclosures:

 

 

 

 

 

 

 

 

Interest paid, net

 

$

1,310

 

 

$

1,909

 

Income taxes paid, net

 

$

1,296

 

 

$

1,177

 

 

Refer to the accompanying Notes to Consolidated Financial Statements.

 

 

6


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 1 – Interim Financial Data

Basis of Presentation

The information furnished in these unaudited interim consolidated financial statements as of and for the three and nine months ended December 31, 2021 and 2020 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  In the opinion of management, the unaudited consolidated financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented.  The results of operations for the three and nine months ended December 31, 2021 do not necessarily indicate the results which may be expected for the full fiscal year ending March 31, 2022 (“fiscal 2022”).

These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes to 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, 2021 (“fiscal 2021”), which was filed with the Securities and Exchange Commission on June 3, 2021.  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.

Other Matters

In fiscal 2021, TMCC began providing private label financial services to third-party automotive and mobility companies commencing with the provision of services to Mazda Motor of America, Inc. (“Mazda”).  We are currently leveraging our existing processes and personnel to originate and service the new assets; however, we will continue to evaluate the private label financial services business, which includes partnering with or transitioning a portion of the business to our affiliates, some of which are not consolidated with TMCC.  We have also made certain technology investments to support the Mazda program and future private label customers.

On November 19, 2021, TMCC announced, in furtherance of its private label financial services initiative for third party automotive and mobility companies, that we entered into a nonbinding letter of intent with Great American Outdoors Group LLC, the parent company of Bass Pro Shops, Cabela’s and the White River Marine Group (“Bass Pro Shops”) to provide private label financial services for Bass Pro Shop’s boats, all-terrain vehicle products, and other mobility products.  The Company expects to provide inventory financing for Bass Pro Shops, its affiliates, and authorized independent dealers, starting in fiscal 2023, with additional private label services, including consumer financing and voluntary protection products and services, to be added over time.

Recently Adopted Accounting Guidance

On April 1, 2021, we adopted the following new accounting standards:

We adopted Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, along with the subsequently issued guidance, which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met.  The provisions of this update are available to us until December 31, 2022.  The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

We adopted ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, which requires an entity to reevaluate the amortization period for callable debt securities held at a premium each reporting period.  The premium is amortized to the earliest call date of the debt security.  The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

Accounting Guidance Issued But Not Yet Adopted

In July 2021, the FASB issued ASU 2021-05, Lessors-Certain Leases with Variable Lease Payments (Topic 842), which modifies the lease classification for certain leases. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or rate as an operating lease if certain criteria are met. This ASU is effective for us on April 1, 2022, with early application permitted. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures.

 

7


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 2 – Investments in Marketable Securities

Investments in marketable securities consist of debt securities and equity investments.  We classify all of our debt securities as available-for-sale (“AFS”).  Except when fair value option is elected, AFS debt securities are recorded at fair value with unrealized gains or losses included in accumulated other comprehensive income (“AOCI”), net of applicable taxes. All equity investments are recorded at fair value with changes in fair value included in Investment and other income, net in our Consolidated Statements of Income.

In fiscal 2022, we have elected the fair value option for certain debt securities held within one of our affiliate investment portfolios for operational ease given the size and composition of this portfolio.  All debt securities within this specific portfolio are recorded at fair value with changes in fair value included in Investment and other income, net in our Consolidated Statements of Income.  We estimate the fair value of these securities using observed transaction prices, independent third-party pricing valuation vendors, and internal valuation models.  AFS debt securities for which fair value option is elected are not subject to credit loss impairment.  As of December 31, 2021, we held AFS debt securities for which fair value option was elected of $703 million.  The difference between the aggregate fair value and the aggregate unpaid principal balance of long-term AFS debt securities for which the fair value option was elected was not significant.

Investments in marketable securities consisted of the following:

 

 

 

December 31, 2021

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

cost

 

 

gains

 

 

losses

 

 

value

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

491

 

 

$

5

 

 

$

(6

)

 

$

490

 

Foreign government and agency obligations

 

 

32

 

 

 

0

 

 

 

(1

)

 

 

31

 

Municipal debt securities

 

 

9

 

 

 

2

 

 

 

0

 

 

 

11

 

Commercial paper

 

 

25

 

 

 

0

 

 

 

0

 

 

 

25

 

Corporate debt securities

 

 

589

 

 

 

15

 

 

 

(3

)

 

 

601

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency

 

 

21

 

 

 

1

 

 

 

0

 

 

 

22

 

Non-agency residential

 

 

11

 

 

 

0

 

 

 

0

 

 

 

11

 

Non-agency commercial

 

 

75

 

 

 

2

 

 

 

(1

)

 

 

76

 

Asset-backed securities

 

 

86

 

 

 

3

 

 

 

(1

)

 

 

88

 

Total available-for-sale debt securities

 

$

1,339

 

 

$

28

 

 

$

(12

)

 

$

1,355

 

Equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,766

 

Total investments in marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,121

 

 

 

 

March 31, 2021

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

cost

 

 

gains

 

 

losses

 

 

value

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

217

 

 

$

4

 

 

$

(10

)

 

$

211

 

Municipal debt securities

 

 

8

 

 

 

2

 

 

 

0

 

 

 

10

 

Commercial paper

 

 

196

 

 

 

0

 

 

 

0

 

 

 

196

 

Corporate debt securities

 

 

177

 

 

 

12

 

 

 

(2

)

 

 

187

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency

 

 

31

 

 

 

1

 

 

 

0

 

 

 

32

 

Non-agency residential

 

 

1

 

 

 

0

 

 

 

0

 

 

 

1

 

Non-agency commercial

 

 

47

 

 

 

2

 

 

 

(2

)

 

 

47

 

Asset-backed securities

 

 

49

 

 

 

3

 

 

 

0

 

 

 

52

 

Total available-for-sale debt securities

 

$

726

 

 

$

24

 

 

$

(14

)

 

$

736

 

Equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,084

 

Total investments in marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,820

 

8


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 2 – Investments in Marketable Securities (Continued)

 

A portion of our equity investments are investments in funds that are privately placed and managed by an open-end investment management company (the “Trust”).  If we elect to redeem shares, the Trust will normally redeem all shares for cash, but may, in unusual circumstances, redeem amounts exceeding the lesser of $250 thousand or 1 percent of the Trust’s asset value by payment in kind of securities held by the respective fund during any 90-day period.

We also invest in actively traded open-end mutual funds.  Redemptions are subject to normal terms and conditions as described in each fund’s prospectus.

For the nine months ended December 31, 2021, non-cash investing activities related to in-kind redemptions and subsequent purchases amounted to $1.1 billion.  There were 0 non-cash investing activities related to in-kind redemptions for the three months ended December 31, 2021.

Unrealized Losses on Securities

Available-for-sale debt securities in a continuous loss position for less than twelve months and greater than twelve months were not significant as of December 31, 2021 and March 31, 2021.

An allowance for credit losses is established when it is determined that a credit loss has occurred.  As of December 31, 2021, management determined that credit losses did not exist for securities in an unrealized loss position.  This analysis considered a variety of factors including, but not limited to, performance indicators of the issuer, default rates, industry analyst reports, credit ratings, and other relevant information, which indicated that contractual cash flows are expected to occur.

Gains and Losses on Securities

The following table represents gains and losses on our investments in marketable securities presented in our Consolidated Statements of Income:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on securities for which the fair value option was elected

 

$

(4

)

 

$

0

 

 

$

3

 

 

$

0

 

Realized (losses) gains

 

$

(1

)

 

$

2

 

 

$

(1

)

 

$

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

 

$

26

 

 

$

49

 

 

$

84

 

 

$

188

 

Realized gains on sales

 

$

0

 

 

$

3

 

 

$

22

 

 

$

15

 

Contractual Maturities

The amortized cost and fair value by contractual maturities of available-for-sale debt securities are summarized in the following table.  Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations.

 

 

December 31, 2021

 

 

 

Amortized cost

 

 

Fair value

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

Due within 1 year

 

$

127

 

 

$

127

 

Due after 1 year through 5 years

 

 

372

 

 

 

375

 

Due after 5 years through 10 years

 

 

357

 

 

 

359

 

Due after 10 years

 

 

290

 

 

 

297

 

Mortgage-backed and asset-backed securities 1

 

 

193

 

 

 

197

 

Total

 

$

1,339

 

 

$

1,355

 

1

Mortgage-backed and asset-backed securities are shown separately from other maturity groupings as these securities have multiple maturity dates.


9


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 3 – Finance Receivables, Net

Finance receivables, net consists of the retail loan and dealer products portfolio segments, and includes deferred origination costs, deferred income, and allowance for credit losses.  Finance receivables, net also includes securitized retail receivables, which represent retail receivables that have been sold for legal purposes to securitization trusts but continue to be included in our consolidated financial statements, as discussed further in Note 8 – Variable Interest Entities.  Cash flows from these securitized retail 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.

Finance receivables, net consisted of the following:

 

 

 

December 31,

 

 

March 31,

 

 

 

2021

 

 

2021

 

Retail receivables 1

 

$

71,727

 

 

$

66,991

 

Dealer financing

 

 

10,254

 

 

 

13,642

 

 

 

 

81,981

 

 

 

80,633

 

 

 

 

 

 

 

 

 

 

Deferred origination costs

 

 

1,305

 

 

 

1,145

 

Deferred income

 

 

(1,176

)

 

 

(1,408

)

Allowance for credit losses

 

 

 

 

 

 

 

 

Retail receivables

 

 

(1,140

)

 

 

(1,075

)

Dealer financing

 

 

(45

)

 

 

(103

)

Total allowance for credit losses

 

 

(1,185

)

 

 

(1,178

)

Finance receivables, net

 

$

80,925

 

 

$

79,192

 

1

Includes securitized retail receivables of $21.9 billion and $22.1 billion as of December 31, 2021 and March 31, 2021, respectively.

Accrued interest related to finance receivables is presented in Other assets on the Consolidated Balance Sheets and was $214 million and $187 million at December 31, 2021 and March 31, 2021, respectively.


10


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 3 – Finance Receivables, Net (Continued)

Credit Quality Indicators

We are exposed to credit risk on our finance receivables.  Credit risk is the risk of loss arising from the failure of customers or dealers to meet the terms of their contracts with us or otherwise fail to perform as agreed.

Retail Loan Portfolio Segment

The retail loan portfolio segment consists of one class of finance receivables.  While we use various credit quality metrics to develop our allowance for credit losses on the retail loan portfolio segment, we primarily utilize the aging of the individual accounts to monitor the credit quality of these finance receivables.  Based on our experience, the payment status of borrowers is the strongest indicator of the credit quality of the underlying receivables.  Payment status also impacts charge-offs.

Individual borrower accounts within the retail loan portfolio segment are segregated into aging categories based on the number of days past due.  The aging of finance receivables is updated monthly.

The following tables present the amortized cost basis of our retail loan portfolio by origination fiscal year by credit quality indicator based on number of days past due:

 

 

 

Amortized Cost Basis by Origination Fiscal Year at December 31, 2021

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017 and Prior

 

 

Total

 

Aging of finance receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

25,098

 

 

$

24,373

 

 

$

10,913

 

 

$

5,626

 

 

$

3,390

 

 

$

1,057

 

 

$

70,457

 

30-59 days past due

 

 

215

 

 

 

341

 

 

 

177

 

 

 

119

 

 

 

81

 

 

 

52

 

 

 

985

 

60-89 days past due

 

 

54

 

 

 

97

 

 

 

49

 

 

 

36

 

 

 

22

 

 

 

16

 

 

 

274

 

90 days or greater past due

 

 

29

 

 

 

51

 

 

 

23

 

 

 

15

 

 

 

11

 

 

 

11

 

 

 

140

 

Total

 

$

25,396

 

 

$

24,862

 

 

$

11,162

 

 

$

5,796

 

 

$

3,504

 

 

$

1,136

 

 

$

71,856

 

 

 

 

Amortized Cost Basis by Origination Fiscal Year at March 31, 2021

 

 

 

 

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016 and Prior

 

 

Total

 

Aging of finance receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

32,026

 

 

$

16,047

 

 

$

8,972

 

 

$

5,977

 

 

$

2,435

 

 

$

496

 

 

$

65,953

 

30-59 days past due

 

 

147

 

 

 

145

 

 

 

114

 

 

 

83

 

 

 

46

 

 

 

27

 

 

 

562

 

60-89 days past due

 

 

37

 

 

 

39

 

 

 

28

 

 

 

21

 

 

 

11

 

 

 

8

 

 

 

144

 

90 days or greater past due

 

 

18

 

 

 

18

 

 

 

13

 

 

 

9

 

 

 

5

 

 

 

6

 

 

 

69

 

Total

 

$

32,228

 

 

$

16,249

 

 

$

9,127

 

 

$

6,090

 

 

$

2,497

 

 

$

537

 

 

$

66,728

 

The amortized cost of retail loan portfolio excludes accrued interest of $193 million and $160 million at December 31, 2021 and March 31, 2021, respectively.  The previous tables include contracts greater than 120 days past due, which are recorded at the fair value of collateral less estimated costs to sell, and contracts in bankruptcy.


11


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 3 – Finance Receivables, Net (Continued)

Dealer Products Portfolio Segment

The dealer products portfolio segment consists of three classes of finance receivables: wholesale, real estate and working capital.  All loans outstanding for an individual dealer or dealer group, which includes affiliated entities, are aggregated and evaluated collectively by dealer or dealer group.  This reflects the interconnected nature of financing provided to our individual dealer and dealer group customers, and their affiliated entities.

When assessing the credit quality of the finance receivables within the dealer products portfolio segment, we segregate the finance receivables account balances into four categories representing distinct credit quality indicators based on internal risk assessments.  The internal risk assessments for all finance receivables within the dealer products portfolio segment are updated on a monthly basis.

The four credit quality indicators are:

 

Performing – Account not classified as either Credit Watch, At Risk or Default;

 

Credit Watch – Account designated for elevated attention;

 

At Risk – Account where there is an increased likelihood that default may exist based on qualitative and quantitative factors; and

 

Default – Account is not currently meeting contractual obligations or we have temporarily waived certain contractual requirements.

 

The following tables present the amortized cost basis of our dealer products portfolio by credit quality indicator based on internal risk assessments by origination fiscal year:

 

 

 

Amortized Cost Basis by Origination Fiscal Year at December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017 and Prior

 

 

Revolving loans

 

 

Total

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

2,852

 

 

$

2,852

 

Credit Watch

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

12

 

 

 

12

 

At Risk

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2

 

 

 

2

 

Default

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Wholesale total

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

2,866

 

 

$

2,866

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

1,164

 

 

$

1,316

 

 

$

280

 

 

$

568

 

 

$

292

 

 

$

1,434

 

 

$

0

 

 

$

5,054

 

Credit Watch

 

 

0

 

 

 

2

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

12

 

 

 

0

 

 

 

14

 

At Risk

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

8

 

 

 

0

 

 

 

8

 

Default

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Real estate total

 

$

1,164

 

 

$

1,318

 

 

$

280

 

 

$

568

 

 

$

292

 

 

$

1,454

 

 

$

0

 

 

$

5,076

 

Working Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

519

 

 

$

368

 

 

$

216

 

 

$

162

 

 

$

40

 

 

$

183

 

 

$

823

 

 

$

2,311

 

Credit Watch

 

 

0

 

 

 

1

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1

 

At Risk

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Default

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Working capital total

 

$

519

 

 

$

369

 

 

$

216

 

 

$

162

 

 

$

40

 

 

$

183

 

 

$

823

 

 

$

2,312

 

Total

 

$

1,683

 

 

$

1,687

 

 

$

496

 

 

$

730

 

 

$

332

 

 

$

1,637

 

 

$

3,689

 

 

$

10,254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 3 – Finance Receivables, Net (Continued)

 

 

 

Amortized Cost Basis by Origination Fiscal Year at March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016 and Prior

 

 

Revolving loans

 

 

Total

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

5,893

 

 

$

5,893

 

Credit Watch

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

218

 

 

 

218

 

At Risk

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

35

 

 

 

35

 

Default

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

11

 

 

 

11

 

Wholesale total

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

6,157

 

 

$

6,157

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

1,874

 

 

$

320

 

 

$

596

 

 

$

356

 

 

$

312

 

 

$

1,493

 

 

$

0

 

 

$

4,951

 

Credit Watch

 

 

8

 

 

 

49

 

 

 

3

 

 

 

20

 

 

 

9

 

 

 

99

 

 

 

0

 

 

 

188

 

At Risk

 

 

13

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

12

 

 

 

17

 

 

 

0

 

 

 

42

 

Default

 

 

0

 

 

 

0

 

 

 

0

 

 

 

13

 

 

 

9

 

 

 

0

 

 

 

0

 

 

 

22

 

Real estate total

 

$

1,895

 

 

$

369

 

 

$

599

 

 

$

389

 

 

$

342

 

 

$

1,609

 

 

$

0

 

 

$

5,203

 

Working Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

503

 

 

$

334

 

 

$

200

 

 

$

41

 

 

$

106

 

 

$

176

 

 

$

878

 

 

$

2,238

 

Credit Watch

 

 

1

 

 

 

0

 

 

 

6

 

 

 

1

 

 

 

0

 

 

 

19

 

 

 

9

 

 

 

36

 

At Risk

 

 

1

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

7

 

 

 

0

 

 

 

0

 

 

 

8

 

Default

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Working capital total

 

$

505

 

 

$

334

 

 

$

206

 

 

$

42

 

 

$

113

 

 

$

195

 

 

$

887

 

 

$

2,282

 

Total

 

$

2,400

 

 

$

703

 

 

$

805

 

 

$

431

 

 

$

455

 

 

$

1,804

 

 

$

7,044

 

 

$

13,642

 

 

The amortized cost of the dealer products portfolio excludes accrued interest of $21 million and $27 million at December 31, 2021 and March 31, 2021, respectively.  As of December 31, 2021 and March 31, 2021, the amount of line-of-credit arrangements that are converted to term loans in each reporting period was insignificant, respectively.


13


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 3 – Finance Receivables, Net (Continued)

Past Due Finance Receivables by Class

Substantially all finance receivables do not involve recourse to the dealer in the event of customer default.  Finance receivables include contracts greater than 120 days past due, which are recorded at the fair value of collateral less estimated costs to sell, and contracts in bankruptcy.  Contracts for which vehicles have been repossessed are excluded.  For all finance receivables, we define “past due” as any payment, including principal and interest, that is at least 30 days past the contractual due date. For any customer who is granted a payment extension under an extension program, the aging of the receivable is adjusted for the number of days of the extension granted.

The following tables summarize the aging of the amortized cost basis of our finance receivables by class:

 

 

 

December 31, 2021

 

 

 

30 - 59 Days

past due

 

 

60 - 89 Days

past due

 

 

90 Days or

greater

past due

 

 

Total Past

due

 

 

Current

 

 

Total Finance

receivables

 

 

90 Days or

greater past

due and

accruing

 

Retail loan

 

$

985

 

 

$

274

 

 

$

140

 

 

$

1,399

 

 

$

70,457

 

 

$

71,856

 

 

$

89

 

Wholesale

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,866

 

 

 

2,866

 

 

 

0

 

Real estate

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

5,076

 

 

 

5,076

 

 

 

0

 

Working capital

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,312

 

 

 

2,312

 

 

 

0

 

Total

 

$

985

 

 

$

274

 

 

$

140

 

 

$

1,399

 

 

$

80,711

 

 

$

82,110

 

 

$

89

 

 

 

 

 

March 31, 2021

 

 

 

30 - 59 Days

past due

 

 

60 - 89 Days

past due

 

 

90 Days or

greater

past due

 

 

Total Past

due

 

 

Current

 

 

Total Finance

receivables

 

 

90 Days or

greater past

due and

accruing

 

Retail loan

 

$

562

 

 

$

144

 

 

$

69

 

 

$

775

 

 

$

65,953

 

 

$

66,728

 

 

$

39

 

Wholesale

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

6,157

 

 

 

6,157

 

 

 

0

 

Real estate

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

5,203

 

 

 

5,203

 

 

 

0

 

Working capital

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,282

 

 

 

2,282

 

 

 

0

 

Total

 

$

562

 

 

$

144

 

 

$

69

 

 

$

775

 

 

$

79,595

 

 

$

80,370

 

 

$

39

 

 


14


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 3 – Finance Receivables, Net (Continued)

Troubled Debt Restructuring

For accounts not under bankruptcy protection, the amount of finance receivables modified as a troubled debt restructuring during the three and nine months ended December 31, 2021 and 2020 was not significant for each class of finance receivables.  Troubled debt restructurings for accounts not under bankruptcy protection within the retail loan class of finance receivables are comprised exclusively of contract term extensions that reduce the monthly payment due from the customer.  For the three classes of finance receivables within the dealer products portfolio segment, troubled debt restructurings include contract term extensions, interest rate adjustments, waivers of loan covenants, or any combination of the three.  Troubled debt restructurings of accounts not under bankruptcy protection did not include forgiveness of principal or interest rate adjustments during the three and nine months ended December 31, 2021 and 2020.

We consider finance receivables under bankruptcy protection within the retail loan class to be troubled debt restructurings as of the date we receive notice of a customer filing for bankruptcy protection, regardless of the ultimate outcome of the bankruptcy proceedings.  The bankruptcy court may impose modifications as part of the proceedings, including interest rate adjustments and forgiveness of principal.  For the three and nine months ended December 31, 2021 and 2020, the financial impact of troubled debt restructurings related to finance receivables under bankruptcy protection was not significant to our Consolidated Statements of Income and Consolidated Balance Sheets. 

For a limited time during fiscal 2021, we offered several programs to provide relief to customers during the COVID-19 pandemic.  These programs, which were broadly available to our customers, included retail loan payment extensions and lease payment deferrals.  We concluded that these programs did not meet troubled debt restructuring criteria due to the short-term nature of the modifications with no change in the contractual interest rate.  To provide relief for our dealers we offered certain temporary interest reductions, interest payment deferrals, and interest waivers on dealer floorplan financing, and principal payment deferrals on dealer floorplan financing, dealer real estate and working capital loans.  We also concluded that these programs did not meet troubled debt restructuring criteria as the finance receivables from the dealers were current.

 

15


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 4 – Allowance for Credit Losses

The following tables provide information related to our allowance for credit losses for finance receivables and certain off-balance sheet lending commitments by portfolio segment:

 

 

 

Three months ended December 31, 2021

 

 

 

Retail loan

 

 

Dealer products

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, October 1, 2021

 

$

1,135

 

 

$

89

 

 

$

1,224

 

Charge-offs

 

 

(64

)

 

 

0

 

 

 

(64

)

Recoveries

 

 

14

 

 

 

0

 

 

 

14

 

Provision for credit losses

 

 

55

 

 

 

(10

)

 

 

45

 

Ending balance, December 31, 2021 1

 

$

1,140

 

 

$

79

 

 

$

1,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended December 31, 2021

 

 

 

Retail loan

 

 

Dealer products

 

 

Total

 

Beginning balance, April 1, 2021

 

$

1,075

 

 

$

140

 

 

$

1,215

 

Charge-offs

 

 

(152

)

 

 

0

 

 

 

(152

)

Recoveries

 

 

46

 

 

 

0

 

 

 

46

 

Provision for credit losses

 

 

171

 

 

 

(61

)

 

 

110

 

Ending balance, December 31, 2021 1

 

$

1,140

 

 

$

79

 

 

$

1,219

 

 

1

Ending balance includes $34 million of allowance for credit losses related to off-balance sheet commitments in the dealer products portfolio which is included in Other liabilities on the Consolidated Balance Sheet.

 

 

 

Three months ended December 31, 2020

 

 

 

Retail loan

 

 

Dealer products

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, October 1, 2020

 

$

1,020

 

 

$

154

 

 

$

1,174

 

Charge-offs

 

 

(113

)

 

 

0

 

 

 

(113

)

Recoveries

 

 

12

 

 

 

8

 

 

 

20

 

Provision for credit losses

 

 

133

 

 

 

(15

)

 

 

118

 

Ending balance, December 31, 2020 2

 

$

1,052

 

 

$

147

 

 

$

1,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended December 31, 2020

 

 

 

Retail loan

 

 

Dealer products

 

 

Total

 

Beginning balance, April 1, 2020

 

$

486

 

 

$

241

 

 

$

727

 

Adoption of ASU 2016-13 1

 

 

281

 

 

 

11

 

 

 

292

 

Charge-offs

 

 

(228

)

 

 

0

 

 

 

(228

)

Recoveries

 

 

33

 

 

 

9

 

 

 

42

 

Provision for credit losses

 

 

480

 

 

 

(114

)

 

 

366

 

Ending balance, December 31, 2020 2

 

$

1,052

 

 

$

147

 

 

$

1,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Cumulative pre-tax adjustments recorded to retained earnings as of April 1, 2020.  See Note 1 – Basis of Presentation and Significant Accounting Policies in our fiscal 2021 Form 10-K.

2

Ending balance includes $37 million of allowance for credit losses related to off-balance sheet commitments in the dealer products portfolio which is included in Other liabilities on the Consolidated Balance Sheet.

 


16


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 4 – Allowance for Credit Losses (Continued)

 

We have elected to exclude accrued interest from the measurement of expected credit losses as we apply policies and procedures that result in the timely write-offs of accrued interest. Accrued interest is written off within allowance for credit losses at the earlier of when an account is deemed to be uncollectible or when an account is greater than 120 days past due.

 

Finance receivables for the dealer products portfolio segment as of December 31, 2021 includes $922 million in finance receivables that are guaranteed by Toyota Motor North America, Inc. (“TMNA”), and $183 million in finance receivables that are guaranteed by third-party private Toyota distributors.  Finance receivables for the dealer products portfolio segment as of December 31, 2020 includes $1,025 million in finance receivables that are guaranteed by TMNA, and $164 million in finance receivables that are guaranteed by third-party private Toyota distributors.  These finance receivables are related to certain Toyota and Lexus dealers and other third parties to whom we provided financing at the request of TMNA and third-party private Toyota distributors.

 

During the first nine months of fiscal 2022, the allowance for credit losses increased $4 million as the growth of our retail loan portfolio and increase in delinquencies was largely offset by improvement in the financial performance of our dealers.  In contrast, during the first nine months of fiscal 2021, the allowance for credit losses increased $472 million reflecting an increase to the allowance for credit losses of $292 million related to the adoption of ASU 2016-13, and an increase of $180 million primarily due to the increase in expected credit losses for the retail loan portfolio driven by economic conditions caused by the COVID-19 pandemic and the restrictions designed to slow the spread of COVID-19, including stay-at-home orders, increased unemployment, and decreased consumer spending.  

 

 

17


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 5 – Investments in Operating Leases, Net

Investments in operating leases, net consists of vehicle lease contracts acquired from dealers, and includes deferred origination fees and costs, deferred income, and accumulated depreciation.  Securitized investments in operating leases represent beneficial interests in a pool of certain vehicle leases that have been sold for legal purposes to securitization trusts but continue to be included in our consolidated financial statements as discussed further in Note 8 - Variable Interest Entities.  Cash flows from these securitized investments in operating leases 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.

Investments in operating leases, net consisted of the following:

 

 

 

December 31,

 

 

March 31,

 

 

 

2021

 

 

2021

 

Investments in operating leases 1

 

$

47,397

 

 

$

48,337

 

Deferred origination (fees) and costs, net

 

 

(56

)

 

 

(101

)

Deferred income

 

 

(1,488

)

 

 

(1,759

)

Accumulated depreciation

 

 

(9,017

)

 

 

(9,386

)

Investments in operating leases, net

 

$

36,836

 

 

$

37,091

 

1

Includes securitized investments in operating leases of $16.8 billion and $9.3 billion as of December 31, 2021 and March 31, 2021, respectively.

 

 

 

18


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 6 – Derivatives, Hedging Activities and Interest Expense

Derivative Instruments

Our liabilities consist mainly of fixed and variable rate debt, denominated in U.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables.  We enter into interest rate swaps, and foreign currency swaps to economically hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities.  Our use of derivative transactions is intended to reduce long-term fluctuations in the fair value of assets and liabilities caused by market movements.  All of our derivative activities are authorized and monitored by our management and our Asset-Liability Committee which provides a framework for financial controls and governance to manage market risk.    

Offsetting of Derivatives

Accounting guidance permits the net presentation on our Consolidated Balance Sheets of derivative receivables and derivative payables with the same counterparty and the related cash collateral when a legally enforceable master netting agreement exists, or when the derivative receivables and derivative payables meet all the conditions for the right of setoff to exist.  When we meet this condition, we elect to present such balances on a net basis.  

Over-the-Counter (“OTC”) Derivatives

Our International Swaps and Derivatives Association (“ISDA”) Master Agreements are our master netting agreements which permit multiple transactions to be cancelled and settled with a single net balance paid to either party for our OTC derivatives.  The master netting agreements also contain reciprocal collateral agreements which require the transfer of cash collateral to the party in a net asset position across all transactions.  Our collateral agreements with substantially all our counterparties include a zero threshold, full collateralization arrangement.  Although we have daily valuation and collateral exchange arrangements with all of our counterparties, due to the time required to move collateral, there may be a delay of up to one day between the exchange of collateral and the valuation of our derivatives.  We would not be required to post additional collateral to the counterparties with whom we were in a net liability position at December 31, 2021, if our credit ratings were to decline, since we fully collateralize without regard to credit ratings with these counterparties.  In addition, as our collateral agreements include legal right of offset provisions, collateral amounts are netted against derivative assets or derivative liabilities, and the net amount is included in Other assets or Other liabilities on our Consolidated Balance Sheets.

Centrally Cleared Derivatives

For our centrally cleared derivatives, variation margin payments are legally characterized as settlement payments and accounted for with corresponding derivative positions as one unit of account as opposed to collateral.  Initial margin payments are separately recorded in Other assets on our Consolidated Balance Sheets. We perform valuation and margin exchange on a daily basis.  Similar to the OTC swaps, there may be a delay of up to one day between the exchange of margin payments and the valuation of our derivatives.

19


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

Note 6 – Derivatives, Hedging Activities and Interest Expense (Continued)

Derivative Activity Impact on Consolidated Financial Statements

The following tables show the financial statement line item and amount of our derivative assets and liabilities that are reported on our Consolidated Balance Sheets:

 

 

 

December 31, 2021

 

 

March 31, 2021

 

 

 

 

 

 

 

Fair

 

 

 

 

 

 

Fair

 

 

 

Notional

 

 

value

 

 

Notional

 

 

value

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

63,788

 

 

$

998

 

 

$

44,125

 

 

$

1,026

 

Foreign currency swaps

 

 

2,776

 

 

 

85

 

 

 

7,274

 

 

 

330

 

Total

 

$

66,564

 

 

$

1,083

 

 

$

51,399

 

 

$

1,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty netting

 

 

 

 

 

 

(640

)

 

 

 

 

 

 

(840

)

Collateral held

 

 

 

 

 

 

(380

)

 

 

 

 

 

 

(462

)

Carrying value of derivative contracts – Other assets

 

 

 

 

 

$

63

 

 

 

 

 

 

$

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

33,127

 

 

$

514

 

 

$

55,062

 

 

$

1,142

 

Foreign currency swaps

 

 

7,007

 

 

 

424

 

 

 

4,321

 

 

 

243

 

Total

 

$

40,134

 

 

$

938

 

 

$

59,383

 

 

$

1,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty netting

 

 

 

 

 

 

(640

)

 

 

 

 

 

 

(840

)

Collateral posted

 

 

 

 

 

 

(298

)

 

 

 

 

 

 

(544

)

Carrying value of derivative contracts – Other liabilities

 

 

 

 

 

$

0

 

 

 

 

 

 

$

1

 

 

As of December 31, 2021 and March 31, 2021, we held excess collateral of $1 million and $29 million, respectively, which we did not use to offset derivative assets and was recorded in Other liabilities on our Consolidated Balance Sheets.  As of December 31, 2021 and March 31, 2021, we posted initial margin and excess collateral of $121 million and $10 million, respectively, which we did not use to offset derivative liabilities and was recorded in Other assets on our Consolidated Balance Sheets.  

20


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

Note 6 – Derivatives, Hedging Activities and Interest Expense (Continued)

The following table summarizes the components of interest expense, including the location and amount of gains and losses on derivative instruments and related hedged items, as reported in our Consolidated Statements of Income:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Interest expense on debt

 

$

362

 

 

$

460

 

 

$

1,134

 

 

$

1,531

 

Interest expense on derivatives

 

 

23

 

 

 

103

 

 

 

137

 

 

 

334

 

Interest expense on debt and derivatives

 

 

385

 

 

 

563

 

 

 

1,271

 

 

 

1,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Gains) losses on debt denominated in

foreign currencies

 

 

(60

)

 

 

655

 

 

 

(338

)

 

 

1,703

 

Losses (gains) on foreign currency swaps

 

 

151

 

 

 

(658

)

 

 

509

 

 

 

(1,754

)

Gains on U.S. dollar interest rate swaps

 

 

(130

)

 

 

(69

)

 

 

(387

)

 

 

(280

)

Total interest expense

 

$

346

 

 

$

491

 

 

$

1,055

 

 

$

1,534

 

 

Interest expense on debt and derivatives represents net interest settlements and changes in accruals.  Gains and losses on derivatives and debt denominated in foreign currencies exclude net interest settlements and changes in accruals.  Cash flows associated with derivatives are reported in Net cash provided by operating activities in our Consolidated Statements of Cash Flows.

 


21


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 7 – Debt and Credit Facilities

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

 

 

 

December 31, 2021

 

 

March 31, 2021

 

 

 

Face value

 

 

Carrying value

 

 

Weighted average

contractual interest rates

 

 

Face value

 

 

Carrying value

 

 

Weighted average

contractual interest rates

 

Unsecured notes and loans payable

 

 

82,293

 

 

 

82,054

 

 

 

1.17

%

 

 

85,759

 

 

 

85,513

 

 

 

1.31

%

Secured notes and loans payable

 

 

28,114

 

 

 

28,068

 

 

 

0.91

%

 

 

24,256

 

 

 

24,212

 

 

 

1.29

%

Total debt

 

$

110,407

 

 

$

110,122

 

 

 

1.10

%

 

$

110,015

 

 

$

109,725

 

 

 

1.31

%

The carrying value of our debt includes unamortized premiums, discounts, debt issuance costs and the effects of foreign currency translation adjustments.  

Weighted average contractual interest rates are calculated based on original notional or par value before consideration of premium or discount and approximate the effective interest rates.  Debt is callable at par value.  

Unsecured Notes and Loans Payable

Our unsecured notes and loans payable consist of commercial paper and fixed and variable rate debt.  Short-term funding needs are met through the issuance of commercial paper in the U.S.  Amounts outstanding under our commercial paper programs were $17.0 billion as of December 31, 2021 and March 31, 2021, respectively.

Upon issuance of fixed rate debt, we generally elect to enter into pay-float swaps to convert fixed rate payments on debt to floating rate payments.  Certain unsecured notes and loans payable are denominated in various foreign currencies.  The debt is translated into U.S. dollars using the applicable exchange rate at the transaction date and retranslated at each balance sheet date using the exchange rate in effect at that date.  Concurrent with the issuance of these foreign currency unsecured notes and loans payable, we enter into currency swaps in the same notional amount to convert non-U.S. currency payments to U.S. dollar denominated payments.  Gains and losses related to foreign currency transactions are included in Interest expense in our Consolidated Statements of Income.  

Certain of our unsecured notes and loans payable contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets.  We are currently in compliance with these covenants and conditions.  

Secured Notes and Loans Payable

Our secured notes and loans payable are denominated in U.S. dollars and consist of both fixed and variable rate debt.  Secured notes and loans payable are issued using on-balance sheet securitization trusts, as further discussed in Note 8 – Variable Interest Entities.  These notes are repayable only from collections on the underlying securitized retail finance receivables and the beneficial interests in investments in operating leases and from related credit enhancements. Some of our secured notes are backed by a revolving pool of finance receivables and cash collateral, with the ability to repay the notes in full after the revolving period ends, after which an amortization period begins.

 


22


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 7 – Debt and Credit Facilities (Continued)

Credit Facilities and Letters of Credit

For additional liquidity purposes, we maintain credit facilities, which may be used for general corporate purposes, as described below:  

364-Day Credit Agreement, Three-Year Credit Agreement and Five-Year Credit Agreement

TMCC, Toyota Credit de Puerto Rico Corp. (“TCPR”), and other Toyota affiliates are party to a $5.0 billion 364-day syndicated bank credit facility, a $5.0 billion three-year syndicated bank credit facility, and a $5.0 billion five-year syndicated bank credit facility, expiring in fiscal 2023, 2025, and 2027, respectively.

The ability to make draws is subject to covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets.  These agreements were 0t drawn upon and had 0 outstanding balances as of December 31, 2021 and March 31, 2021.  We are currently in compliance with the covenants and conditions of the credit agreements described above.  

Committed Revolving Asset-backed Facility

We are party to a 364-day revolving securitization facility with certain bank-sponsored asset-backed conduits and other financial institutions expiring in fiscal 2023.  Under the terms and subject to the conditions of this facility, the committed lenders under the facility have committed to make advances up to a facility limit of $7.0 billion backed by eligible retail finance receivables transferred by us to a special-purpose entity acting as borrower.  We utilized $3.7 billion and $3.2 billion of this facility as of December 31, 2021 and March 31, 2021, respectively.

Other Unsecured Credit Agreements

TMCC is party to additional unsecured credit facilities with various banks.  As of December 31, 2021, TMCC had committed bank credit facilities totaling $4.6 billion, of which $350 million, $2.2 billion, $300 million, and $1.7 billion mature in fiscal 2022, 2023, 2024, and 2025 respectively.

These credit agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets.  These credit facilities were 0t drawn upon and had 0 outstanding balances as of December 31, 2021 and March 31, 2021. We are currently in compliance with the covenants and conditions of the credit agreements described above.

TMCC is party to a $5.0 billion three-year revolving credit facility with Toyota Motor Sales U.S.A., Inc. expiring in fiscal 2025.  This credit facility was 0t drawn upon and had 0 outstanding balance as of December 31, 2021 and March 31, 2021.

From time to time, we may borrow from affiliates based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities.  Amounts borrowed from affiliates are recorded in Other liabilities on our Consolidated Balance Sheets.

 

 

23


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 8 – Variable Interest Entities

Consolidated Variable Interest Entities

We use one or more special purpose entities that are considered Variable Interest Entities (“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 related to retail finance receivables and beneficial interests in investments in operating leases (“Securitized Assets”).  We hold variable interests in the VIEs that could potentially be significant to the VIEs.  We determined that we are the primary beneficiary of the securitization trusts because (i) our servicing responsibilities for the Securitized Assets 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 following tables show the assets and liabilities related to our VIE securitization transactions that were included on our Consolidated Balance Sheets:

 

 

 

December 31, 2021

 

 

 

 

 

 

 

VIE Assets

 

 

VIE Liabilities

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted

cash

 

 

securitized

assets

 

 

Other

assets

 

 

Debt

 

 

Other

liabilities

 

Retail finance receivables

 

$

1,233

 

 

$

21,637

 

 

$

51

 

 

$

19,230

 

 

$

8

 

Investments in operating leases

 

 

616

 

 

 

12,434

 

 

 

22

 

 

 

8,838

 

 

 

2

 

Total

 

$

1,849

 

 

$

34,071

 

 

$

73

 

 

$

28,068

 

 

$

10

 

 

 

 

March 31, 2021

 

 

 

 

 

 

 

VIE Assets

 

 

VIE Liabilities

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted

cash

 

 

securitized

assets

 

 

Other

assets

 

 

Debt

 

 

Other

liabilities

 

Retail finance receivables

 

$

1,521

 

 

$

21,745

 

 

$

46

 

 

$

19,665

 

 

$

13

 

Investments in operating leases

 

 

436

 

 

 

6,599

 

 

 

43

 

 

 

4,547

 

 

 

1

 

Total

 

$

1,957

 

 

$

28,344

 

 

$

89

 

 

$

24,212

 

 

$

14

 

 

Restricted Cash, including cash equivalents, shown in the previous tables represent collections from the underlying Net securitized assets and certain reserve deposits held by TMCC for the VIEs and is included as part of Restricted cash and cash equivalents on our Consolidated Balance Sheets.  Net securitized assets shown in the previous tables are presented net of deferred fees and costs, deferred income, accumulated depreciation and allowance for credit losses.  Other assets represent accrued interests related to securitized retail finance receivables and used vehicles held-for-sale that were repossessed by or returned to TMCC for the benefit of the VIEs.  The related debt of these consolidated VIEs is presented net of $1,515 million and $1,409 million of securities retained by TMCC at December 31, 2021 and March 31, 2021, respectively.  Other liabilities represent accrued interest on the debt of the consolidated VIEs.

The assets of the VIEs and the restricted cash and cash equivalents held by TMCC serve as the sole source of repayment for the asset-backed securities issued by these entities.  Investors in the notes issued by the VIEs do not have recourse to us or our other assets, with the exception of customary representation and warranty repurchase provisions and indemnities.

As the primary beneficiary of these entities, we are exposed to credit, residual value, interest rate, and prepayment risk from the Securitized Assets in 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.


24


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 8 – Variable Interest Entities (Continued)

In addition, we entered into interest rate swaps with certain special purpose entities that issue variable rate debt.  Under the terms of these swaps, the special purpose entities are obligated to pay TMCC a fixed rate of interest on certain payment dates in exchange for receiving a floating rate of interest on notional amounts equal to the outstanding balance of the secured debt.  This arrangement enables the special purpose entities to mitigate the interest rate risk inherent in issuing variable rate debt that is secured by fixed rate Securitized Assets.

The transfers of the Securitized Assets to the special purpose entities in our securitizations are considered to be sales for legal purposes.  However, the Securitized Assets and the related debt remain on our Consolidated Balance Sheets.  We recognize financing revenue on the Securitized Assets and interest expense on the secured debt issued by the special purpose entities.  We also maintain an allowance for credit losses on the securitized retail finance receivables using a methodology consistent with that used for our non-securitized asset 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.

Non-consolidated Variable Interest Entities

We provide lending to Toyota and Lexus dealers through the Toyota Dealer Investment Group’s Dealer Capital Program (“TDIG Program”) operated by our affiliate TMNA, which has an equity interest in these dealerships.  Dealers participating in this program have been determined to be VIEs.  We do not consolidate the dealerships in this program as we are not the primary beneficiary and any exposure to loss is limited to the amount of the credit facility.  Amounts due from these dealers under the TDIG Program that are classified as Finance receivables, net in our Consolidated Balance Sheets as of December 31, 2021 and March 31, 2021 and revenues earned from these dealers for the three and nine months ended December 31, 2021 and 2020 were not significant. 

We also have other lending relationships which have been determined to be VIEs, but these relationships are not consolidated as we are not the primary beneficiary.  Amounts due and revenues earned under these relationships as of and for the three and nine months ended December 31, 2021 and 2020 were not significant.

 

 

25


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 9 – Commitments and Contingencies

Commitments and Guarantees

We have entered into certain commitments and guarantees for which the maximum unfunded amounts are summarized in the table below:

 

 

December 31,

 

 

March 31,

 

 

 

2021

 

 

2021

 

Commitments:

 

 

 

 

 

 

 

 

Credit facilities commitments with dealers

 

$

3,131

 

 

$

2,338

 

Commitments under operating lease agreements

 

 

124

 

 

 

141

 

Total commitments

 

 

3,255

 

 

 

2,479

 

Guarantees of affiliate pollution control and solid waste disposal bonds

 

 

100

 

 

 

100

 

Total commitments and guarantees

 

$

3,355

 

 

$

2,579

 

 

Wholesale financing is not considered to be a contractual commitment as the arrangements are not binding arrangements under which TMCC is required to perform.

Commitments

We provide fixed and variable rate working capital loans, revolving lines of credit, and real estate financing to dealers and various multi-franchise organizations referred to as dealer groups for facilities construction and refurbishment, working capital requirements, real estate purchases, business acquisitions and other general business purposes.  These loans are typically secured with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate, and may be guaranteed by individual or corporate guarantees of affiliated dealers, dealer groups, or dealer principals.  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.  Our pricing reflects market conditions, the competitive environment, the level of support dealers provide our retail, lease and voluntary protection business and the credit worthiness of each dealer.  Amounts drawn under these facilities are reviewed for collectability on a quarterly basis, in conjunction with our evaluation of the allowance for credit losses.  In addition to the total commitments and guarantees in the previous table, we also have extended credit facilities to affiliates as described in Note 12 – Related Party Transactions in our fiscal 2021 Form 10-K.

Lease Commitments

Our operating lease portfolio consists of real estate leases.  Total operating lease expense, including payments to affiliates, was $25 million and $8 million for the first nine months and third quarter of fiscal 2022, as compared to $28 million and $8 million for the same periods in fiscal 2021.  We have a lease agreement through August 2032 with TMNA for our headquarters facility in Plano, Texas.  Commitments under operating lease agreements in the previous table include $86 million and $93 million for facilities leases with affiliates at December 31, 2021 and March 31, 2021, respectively.

Lease terms may contain renewal and extension options or early termination features. Generally, these options do not impact the lease term because TMCC is not reasonably certain that it will exercise the options. These lease agreements do not impose restrictions on our ability to pay dividends, engage in debt or equity financing transactions or enter into further lease agreements, nor do they have residual value guarantees. We exclude from our Consolidated Balance Sheets leases with a term equal to one year or less and do not separate non-lease components from our real estate leases.


26


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 9 – Commitments and Contingencies (Continued)

Our commitments under operating lease agreements are summarized below:

 

 

December 31,

 

Years ending March 31,

 

2021

 

2022

 

$

5

 

2023

 

 

19

 

2024

 

 

16

 

2025

 

 

14

 

2026

 

 

13

 

Thereafter

 

 

57

 

Total

 

$

124

 

Present value discount

 

 

(14

)

Total operating lease liability

 

$

110

 

 

Operating lease liabilities and right-of-use (“ROU”) assets are recognized at the lease commencement date based on the present value of the future minimum lease payments over the lease term.  As the interest rate implicit in the lease contract is typically not readily determinable, we utilize our incremental borrowing rate at the lease commencement date for the duration of the lease term.

 

The following table provides additional information related to operating lease agreements for which we are the lessee:

 

 

 

December 31,

 

 

 

2021

 

ROU assets

 

$

101

 

Weighted average remaining lease term (in years)

 

 

8.4

 

Weighted average discount rate

 

 

2.76

%

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

Cash paid for amounts included in the measurement of

lease liabilities - operating cash flows

 

$

21

 

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 applicable affiliates for any amounts paid.  TMCC receives a nominal annual fee for guaranteeing such payments.  TMCC has not been required to perform under any of these affiliate bond guarantees as of December 31, 2021 and March 31, 2021.


27


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 9 – Commitments and Contingencies (Continued)

 

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, supplier and service agreements.  Performance under these indemnities would generally occur upon a breach of the representations, warranties, covenants or other commitments made or given in the agreement, or as a result of 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 may 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 December 31, 2021, we determined that it is not probable that we will be required to make any material payments in the future.  As of December 31, 2021 and March 31, 2021, 0 amounts have been recorded under these indemnification provisions.

Litigation and Governmental Proceedings

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.  In addition, we are subject to governmental and regulatory examinations, information-gathering requests, and investigations from time to time at the state and federal levels.  It is inherently difficult to predict the course of such legal actions and governmental inquiries.  

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.  When we are able, we also determine estimates of reasonably probable loss or range of loss, whether in excess of any related accrued liability or where there is no accrued liability.  Given the inherent uncertainty associated with legal matters, the actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts for which accruals have been established.  Based on available information and established accruals, we do not believe it is reasonably probable that the results of these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial condition or results of operations.

On November 24, 2020, the Consumer Financial Protection Bureau (“CFPB”) issued a civil investigative demand to the Company seeking, among other things, certain information relating to the Company’s vehicle and payment protection products and credit reporting policies and procedures and reporting records.  We are cooperating with the inquiry and cannot predict the eventual scope, duration or outcome at this time.  As a result, we are unable to estimate the amount or range of any potential loss arising from this investigation.

28


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

Note 10 – Income Taxes

Our provision for income taxes was $233 million and $697 million for the three and nine months ended December 31, 2021, respectively, compared to $215 million and $546 million for the same periods in fiscal 2021.  Our effective tax rate was 24 percent and 23 percent for the three and nine months ended December 31, 2021, respectively, compared to 24 percent for each of the same periods in fiscal 2021.  The increase in the provision for income taxes for the three and nine months ended December 31, 2021, compared to the same periods in fiscal 2021, was primarily due to the increase in income before income taxes.  The lower effective tax rate for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was primarily attributable to the tax benefit from the federal tax credits recognized in fiscal 2022 as well as the enacted state tax law changes that resulted in higher state tax expense in fiscal 2021.

Tax-related Contingencies

As of December 31, 2021, we remain under IRS examination for fiscal 2018 through fiscal 2022.  

We periodically review our uncertain tax positions.  Our assessment is based on many factors including any ongoing IRS audits.  For the three months ended December 31, 2021, our assessment did not result in a material change in unrecognized tax benefits.

Our deferred tax assets include the deferred deduction of allowance for credit losses and residual value loss estimates and other deferred costs.  The total deferred tax liability, net of these deferred tax assets, was $2.4 billion and $2.9 billion at December 31, 2021 and March 31, 2021, respectively.  Although realization of the deferred tax assets 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.

 

29


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 11 – Related Party Transactions

In April 2021, TMCC increased financing support available to Toyota Finance New Zealand Limited to $250 million.  In July 2021, TMCC entered into a services agreement with Toyota Financial Savings Bank (“TFSB”) to subservice loans on their behalf.  In August 2021, TMCC increased financing support available to TFSB to $1.0 billion and entered into a financing support agreement with Toyota Finance Corporation (“TFC”) for $100 million.  In November 2021, in accordance with the financing support agreement and for general corporate purposes, TFC borrowed from TMCC in Japanese Yen a principal amount equivalent to $100 million with an interest rate of 0.0175% and repayment date of November 2023.

Except for the transactions mentioned above, as of December 31, 2021, there were no material changes to our related party agreements or relationships as described in our fiscal 2021 Form 10-K.  The tables below show the financial statement line items and amounts included in our Consolidated Statements of Income and in our Consolidated Balance Sheets under various related party agreements or relationships:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net financing revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturer's subvention and other revenues

 

$

425

 

 

$

503

 

 

$

1,361

 

 

$

1,504

 

Depreciation on operating leases

 

$

(14

)

 

$

(33

)

 

$

(67

)

 

$

(82

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit support fees, interest and other expenses

 

$

25

 

 

$

26

 

 

$

76

 

 

$

93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voluntary protection contract revenues

  and insurance earned premiums:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voluntary protection contract revenues

  and insurance earned premiums

 

$

42

 

 

$

43

 

 

$

127

 

 

$

130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment and other income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

$

1

 

 

$

3

 

 

$

6

 

 

$

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating and administrative expenses

 

$

19

 

 

$

20

 

 

$

62

 

 

$

63

 

 


30


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 11 – Related Party Transactions (Continued)

 

 

 

December 31,

 

 

March 31,

 

 

 

2021

 

 

2021

 

Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

Commercial paper

 

$

25

 

 

$

6

 

 

 

 

 

 

 

 

 

 

Investments in marketable securities

 

 

 

 

 

 

 

 

Commercial paper

 

$

25

 

 

$

196

 

 

 

 

 

 

 

 

 

 

Finance receivables, net

 

 

 

 

 

 

 

 

Accounts receivable

 

$

88

 

 

$

140

 

Deferred retail subvention income

 

$

(932

)

 

$

(1,156

)

 

 

 

 

 

 

 

 

 

Investments in operating leases, net

 

 

 

 

 

 

 

 

Investments in operating leases, net

 

$

(217

)

 

$

(236

)

Deferred lease subvention income

 

$

(1,120

)

 

$

(1,528

)

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

Notes receivable

 

$

768

 

 

$

869

 

Other receivables, net

 

$

80

 

 

$

83

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

Unearned voluntary protection contract revenues

  and insurance earned premiums

 

$

376

 

 

$

352

 

Other payables, net

 

$

383

 

 

$

306

 

Notes payable

 

$

36

 

 

$

19

 

 

 

 

 

 

 

 

 

 

TMCC receives subvention payments from TMNA which results in a gross monthly subvention receivable.  As of December 31, 2021 and March 31, 2021, the subvention receivable from TMNA was $56 million and $184 million, respectively.  We have a master netting agreement with TMNA which allows us to net settle payments for shared services and subvention transactions.  Under this agreement, as of December 31, 2021 and March 31, 2021, respectively, we had a net amount payable to TMNA which is recorded in Other payables, net in Other liabilities.

 

 

31


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 12 – Fair Value Measurements

Recurring Fair Value Measurements

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.  The following tables summarize our financial assets and financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy except for certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient and are excluded from the leveling information provided in the tables below.  Fair value amounts presented below are intended to permit reconciliation of the fair value hierarchy to the amounts presented in our Consolidated Balance Sheets.  

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

netting &

 

 

Fair

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

collateral

 

 

value

 

Investments in marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

484

 

 

$

6

 

 

$

0

 

 

$

0

 

 

$

490

 

Foreign government and agency obligations

 

 

0

 

 

 

31

 

 

 

0

 

 

 

0

 

 

 

31

 

Municipal debt securities

 

 

0

 

 

 

11

 

 

 

0

 

 

 

0

 

 

 

11

 

Commercial paper

 

 

0

 

 

 

25

 

 

 

0

 

 

 

0

 

 

 

25

 

Corporate debt securities

 

 

0

 

 

 

601

 

 

 

0

 

 

 

0

 

 

 

601

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency

 

 

0

 

 

 

22

 

 

 

0

 

 

 

0

 

 

 

22

 

Non-agency residential

 

 

0

 

 

 

8

 

 

 

3

 

 

 

0

 

 

 

11

 

Non-agency commercial

 

 

0

 

 

 

60

 

 

 

16

 

 

 

0

 

 

 

76

 

Asset-backed securities

 

 

0

 

 

 

72

 

 

 

16

 

 

 

0

 

 

 

88

 

Available-for-sale debt securities total

 

 

484

 

 

 

836

 

 

 

35

 

 

 

0

 

 

 

1,355

 

Equity investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income mutual funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income mutual funds measured at

   net asset value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,205

 

Total return bond funds

 

 

1,569

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,569

 

Equity mutual funds

 

 

992

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

992

 

Equity investments total

 

 

2,561

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

3,766

 

Investments in marketable securities total

 

 

3,045

 

 

 

836

 

 

 

35

 

 

 

0

 

 

 

5,121

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

0

 

 

 

998

 

 

 

0

 

 

 

0

 

 

 

998

 

Foreign currency swaps

 

 

0

 

 

 

85

 

 

 

0

 

 

 

0

 

 

 

85

 

Counterparty netting and collateral

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(1,020

)

 

 

(1,020

)

Derivative assets total

 

 

0

 

 

 

1,083

 

 

 

0

 

 

 

(1,020

)

 

 

63

 

Assets at fair value

 

 

3,045

 

 

 

1,919

 

 

 

35

 

 

 

(1,020

)

 

 

5,184

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

0

 

 

 

(514

)

 

 

0

 

 

 

0

 

 

 

(514

)

Foreign currency swaps

 

 

0

 

 

 

(424

)

 

 

0

 

 

 

0

 

 

 

(424

)

Counterparty netting and collateral

 

 

0

 

 

 

0

 

 

 

0

 

 

 

938

 

 

 

938

 

Liabilities at fair value

 

 

0

 

 

 

(938

)

 

 

0

 

 

 

938

 

 

 

0

 

Net assets at fair value

 

$

3,045

 

 

$

981

 

 

$

35

 

 

$

(82

)

 

$

5,184

 


32


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 12 – Fair Value Measurements (Continued)

 

 

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

netting &

 

 

Fair

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

collateral

 

 

value

 

Investments in marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

209

 

 

$

2

 

 

$

0

 

 

$

0

 

 

$

211

 

Municipal debt securities

 

 

0

 

 

 

10

 

 

 

0

 

 

 

0

 

 

 

10

 

Commercial paper

 

 

20

 

 

 

176

 

 

 

0

 

 

 

0

 

 

 

196

 

Corporate debt securities

 

 

0

 

 

 

187

 

 

 

0

 

 

 

0

 

 

 

187

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency

 

 

0

 

 

 

32

 

 

 

0

 

 

 

0

 

 

 

32

 

Non-agency residential

 

 

0

 

 

 

0

 

 

 

1

 

 

 

0

 

 

 

1

 

Non-agency commercial

 

 

0

 

 

 

5

 

 

 

42

 

 

 

0

 

 

 

47

 

Asset-backed securities

 

 

0

 

 

 

19

 

 

 

33

 

 

 

0

 

 

 

52

 

Available-for-sale debt securities total

 

 

229

 

 

 

431

 

 

 

76

 

 

 

0

 

 

 

736

 

Equity investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income mutual funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income mutual funds measured at

   net asset value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

772

 

Total return bond funds

 

 

2,429

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,429

 

Equity mutual funds

 

 

883

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

883

 

Equity investments total

 

 

3,312

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

4,084

 

Investments in marketable securities total

 

 

3,541

 

 

 

431

 

 

 

76

 

 

 

0

 

 

 

4,820

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

0

 

 

 

1,026

 

 

 

0

 

 

 

0

 

 

 

1,026

 

Foreign currency swaps

 

 

0

 

 

 

330

 

 

 

0

 

 

 

0

 

 

 

330

 

Counterparty netting and collateral

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(1,302

)

 

 

(1,302

)

Derivative assets total

 

 

0

 

 

 

1,356

 

 

 

0

 

 

 

(1,302

)

 

 

54

 

Assets at fair value

 

 

3,541

 

 

 

1,787

 

 

 

76

 

 

 

(1,302

)

 

 

4,874

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

0

 

 

 

(1,142

)

 

 

0

 

 

 

0

 

 

 

(1,142

)

Foreign currency swaps

 

 

0

 

 

 

(243

)

 

 

0

 

 

 

0

 

 

 

(243

)

Counterparty netting and collateral

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,384

 

 

 

1,384

 

Liabilities at fair value

 

 

0

 

 

 

(1,385

)

 

 

0

 

 

 

1,384

 

 

 

(1

)

Net assets at fair value

 

$

3,541

 

 

$

402

 

 

$

76

 

 

$

82

 

 

$

4,873

 

Level 3 Fair Value Measurements

The Level 3 financial assets and liabilities recorded at fair value which are subject to recurring and nonrecurring fair value measurement, and the corresponding activity and change in the fair value measurements of these assets and liabilities, were not significant to our Consolidated Balance Sheets as of December 31, 2021and March 31, 2021, or Consolidated Statements of Income for the three and nine months ended December 31, 2021 and 2020.

Nonrecurring Fair Value Measurements

Nonrecurring fair value measurements include Level 3 net finance receivables that are not measured at fair value on a recurring basis but are subject to fair value adjustments utilizing the fair value of the underlying collateral when there is evidence of impairment. We did not have any significant nonrecurring fair value items as of December 31, 2021 and March 31, 2021.


33


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 12 – Fair Value Measurements (Continued)

Financial Instruments

The following tables provide information about assets and liabilities not carried at fair value on a recurring basis on our Consolidated Balance Sheets:

 

 

December 31, 2021

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

 

 

value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail loan

 

$

70,904

 

 

$

0

 

 

$

0

 

 

$

74,090

 

 

$

74,090

 

Wholesale

 

 

2,864

 

 

 

0

 

 

 

0

 

 

 

2,878

 

 

 

2,878

 

Real estate

 

 

5,041

 

 

 

0

 

 

 

0

 

 

 

5,215

 

 

 

5,215

 

Working capital

 

 

2,238

 

 

 

0

 

 

 

0

 

 

 

2,181

 

 

 

2,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured notes and loans payable

 

$

82,054

 

 

$

0

 

 

$

82,671

 

 

$

0

 

 

$

82,671

 

Secured notes and loans payable

 

 

28,068

 

 

 

0

 

 

 

0

 

 

 

28,120

 

 

 

28,120

 

 

 

 

March 31, 2021

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

 

 

value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail loan

 

$

65,808

 

 

$

0

 

 

$

0

 

 

$

69,007

 

 

$

69,007

 

Wholesale

 

 

6,132

 

 

 

0

 

 

 

0

 

 

 

6,158

 

 

 

6,158

 

Real estate

 

 

5,142

 

 

 

0

 

 

 

0

 

 

 

5,224

 

 

 

5,224

 

Working capital

 

 

2,154

 

 

 

0

 

 

 

0

 

 

 

2,171

 

 

 

2,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured notes and loans payable

 

$

85,513

 

 

$

0

 

 

$

86,205

 

 

$

555

 

 

$

86,760

 

Secured notes and loans payable

 

 

24,212

 

 

 

0

 

 

 

0

 

 

 

24,478

 

 

 

24,478

 

 

Accrued interest related to finance receivables is in Other assets in the Consolidated Balance Sheets; however, TMCC measures the fair value of each class of finance receivables using scheduled principal and interest payments.  Therefore, accrued interest has been included in the carrying value of each class of finance receivables in the previous tables, along with the finance receivables, deferred origination costs, deferred income, and allowance for credit losses.  Finance receivables in the previous tables excludes related party transactions, for which the fair value approximates the carrying value, of $88 million and $140 million at December 31, 2021 and March 31, 2021, respectively.  Fair values of related party finance receivables, net are classified as Level 3 within the fair value hierarchy.

For Cash and cash equivalents and Restricted cash and cash equivalents on our Consolidated Balance Sheets, the fair value approximates the carrying value and these instruments are classified as Level 1 within the fair value hierarchy.  

34


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

Note 13 – Segment Information

Financial information for our reportable operating segments, which includes allocated corporate expenses, is summarized as follows:

 

 

Three months ended December 31, 2021

 

 

 

Finance

 

 

Voluntary protection

 

 

Intercompany

 

 

 

 

 

 

 

operations

 

 

operations

 

 

eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financing revenues

 

$

2,991

 

 

$

0

 

 

$

0

 

 

$

2,991

 

Depreciation on operating leases

 

 

1,460

 

 

 

0

 

 

 

0

 

 

 

1,460

 

Interest expense

 

 

346

 

 

 

0

 

 

 

0

 

 

 

346

 

Net financing revenues

 

 

1,185

 

 

 

0

 

 

 

0

 

 

 

1,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voluntary protection contract revenues

  and insurance earned premiums

 

 

0

 

 

 

255

 

 

 

0

 

 

 

255

 

Investment and other income, net

 

 

12

 

 

 

64

 

 

 

0

 

 

 

76

 

Net financing and other revenues

 

 

1,197

 

 

 

319

 

 

 

0

 

 

 

1,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

45

 

 

 

0

 

 

 

0

 

 

 

45

 

Operating and administrative expenses

 

 

293

 

 

 

101

 

 

 

0

 

 

 

394

 

Voluntary protection contract expenses and insurance losses

 

 

0

 

 

 

96

 

 

 

0

 

 

 

96

 

Total expenses

 

 

338

 

 

 

197

 

 

 

0

 

 

 

535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

859

 

 

 

122

 

 

 

0

 

 

 

981

 

Provision for income taxes

 

 

204

 

 

 

29

 

 

 

0

 

 

 

233

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

655

 

 

$

93

 

 

$

0

 

 

$

748

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended December 31, 2021

 

 

 

Finance

 

 

Voluntary protection

 

 

Intercompany

 

 

 

 

 

 

 

operations

 

 

operations

 

 

eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financing revenues

 

$

9,022

 

 

$

0

 

 

$

0

 

 

$

9,022

 

Depreciation on operating leases

 

 

4,400

 

 

 

0

 

 

 

0

 

 

 

4,400

 

Interest expense

 

 

1,055

 

 

 

0

 

 

 

0

 

 

 

1,055

 

Net financing revenues

 

 

3,567

 

 

 

0

 

 

 

0

 

 

 

3,567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voluntary protection contract revenues

  and insurance earned premiums

 

 

0

 

 

 

758

 

 

 

0

 

 

 

758

 

Investment and other income, net

 

 

40

 

 

 

199

 

 

 

0

 

 

 

239

 

Net financing and other revenues

 

 

3,607

 

 

 

957

 

 

 

0

 

 

 

4,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

110

 

 

 

0

 

 

 

0

 

 

 

110

 

Operating and administrative expenses

 

 

872

 

 

 

291

 

 

 

0

 

 

 

1,163

 

Voluntary protection contract expenses and insurance losses

 

 

0

 

 

 

303

 

 

 

0

 

 

 

303

 

Total expenses

 

 

982

 

 

 

594

 

 

 

0

 

 

 

1,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

2,625

 

 

 

363

 

 

 

0

 

 

 

2,988

 

Provision for income taxes

 

 

610

 

 

 

87

 

 

 

0

 

 

 

697

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,015

 

 

$

276

 

 

$

0

 

 

$

2,291

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at December 31, 2021

 

$

129,511

 

 

$

6,745

 

 

$

(121

)

 

$

136,135

 

 

35


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 13 – Segment Information (Continued)

 

 

 

Three months ended December 31, 2020

 

 

 

Finance

 

 

Voluntary protection

 

 

Intercompany

 

 

 

 

 

 

 

operations

 

 

operations

 

 

eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financing revenues

 

$

2,974

 

 

$

0

 

 

$

0

 

 

$

2,974

 

Depreciation on operating leases

 

 

1,450

 

 

 

0

 

 

 

0

 

 

 

1,450

 

Interest expense

 

 

491

 

 

 

0

 

 

 

0

 

 

 

491

 

Net financing revenues

 

 

1,033

 

 

 

0

 

 

 

0

 

 

 

1,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voluntary protection contract revenues

  and insurance earned premiums

 

 

0

 

 

 

241

 

 

 

0

 

 

 

241

 

Investment and other income, net

 

 

21

 

 

 

158

 

 

 

0

 

 

 

179

 

Net financing and other revenues

 

 

1,054

 

 

 

399

 

 

 

0

 

 

 

1,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

118

 

 

 

0

 

 

 

0

 

 

 

118

 

Operating and administrative expenses

 

 

268

 

 

 

86

 

 

 

0

 

 

 

354

 

Voluntary protection contract expenses and insurance losses

 

 

0

 

 

 

98

 

 

 

0

 

 

 

98

 

Total expenses

 

 

386

 

 

 

184

 

 

 

0

 

 

 

570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

668

 

 

 

215

 

 

 

0

 

 

 

883

 

Provision for income taxes

 

 

163

 

 

 

52

 

 

 

0

 

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

505

 

 

$

163

 

 

$

0

 

 

$

668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended December 31, 2020

 

 

 

Finance

 

 

Voluntary protection

 

 

Intercompany

 

 

 

 

 

 

 

operations

 

 

operations

 

 

eliminations

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financing revenues

 

$

8,821

 

 

$

0

 

 

$

0

 

 

$

8,821

 

Depreciation on operating leases

 

 

4,484

 

 

 

0

 

 

 

0

 

 

 

4,484

 

Interest expense

 

 

1,534

 

 

 

0

 

 

 

0

 

 

 

1,534

 

Net financing revenues

 

 

2,803

 

 

 

0

 

 

 

0

 

 

 

2,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voluntary protection contract revenues

  and insurance earned premiums

 

 

0

 

 

 

714

 

 

 

0

 

 

 

714

 

Investment and other income, net

 

 

76

 

 

 

369

 

 

 

0

 

 

 

445

 

Net financing and other revenues

 

 

2,879

 

 

 

1,083

 

 

 

0

 

 

 

3,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

366

 

 

 

0

 

 

 

0

 

 

 

366

 

Operating and administrative expenses

 

 

818

 

 

 

270

 

 

 

0

 

 

 

1,088

 

Voluntary protection contract expenses and insurance losses

 

 

0

 

 

 

265

 

 

 

0

 

 

 

265

 

Total expenses

 

 

1,184

 

 

 

535

 

 

 

0

 

 

 

1,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

1,695

 

 

 

548

 

 

 

0

 

 

 

2,243

 

Provision for income taxes

 

 

414

 

 

 

132

 

 

 

0

 

 

 

546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,281

 

 

$

416

 

 

$

0

 

 

$

1,697

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at December 31, 2020

 

$

128,442

 

 

$

6,176

 

 

$

(127

)

 

$

134,491

 

 

 

36


TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions)

(Unaudited)

 

 

Note 13 – Segment Information (Continued)

Voluntary protection operations – Contract revenues

For the three and nine months ended December 31, 2021 and 2020, approximately 82 percent and 83 percent, respectively, of voluntary protection contract revenues in the Voluntary protection operations segment were accounted for under the guidance for revenue from contracts with customers.  

The Voluntary protection operations segment defers contractually determined incentives paid to dealers as contract costs for selling voluntary protection products.  These costs are recorded in Other assets on our Consolidated Balance Sheets and are amortized to Operating and administrative expenses in the Consolidated Statements of Income using a methodology consistent with the recognition of revenue.  The amount of capitalized dealer incentives and the related amortization was not significant to our consolidated financial statements as of and for the three and nine months ended December 31, 2021 and 2020.

We had $2.4 billion and $2.5 billion of unearned voluntary protection contract revenues from contracts with customers included in Other liabilities on our Consolidated Balance Sheets as of March 31, 2020 and March 31, 2021, respectively.  We recognized $170 million and $545 million of these balances in voluntary protection contract revenues in our Consolidated Statements of Income during the three and nine months ended December 31, 2021, respectively, compared to $169 million and $537 million recognized during the same periods in fiscal 2021.  As of December 31, 2021, we had unearned voluntary protection contract revenues of $2.6 billion included in Other liabilities on our Consolidated Balance Sheets, and with respect to this balance we expect to recognize revenue of $205 million during fiscal 2022, and $2.4 billion thereafter.  At December 31, 2020, we had unearned voluntary protection contract revenues of $2.4 billion associated with outstanding contracts.

 

 

 

37


 

 

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Information

Certain statements contained in this Form 10-Q are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements are based on current expectations and currently available information.  However, since these statements are based on factors that involve risks and uncertainties, our performance and results may differ materially from those described or implied by such forward-looking statements.  Words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” “should,” “intend,” “will,” “may” or words or phrases of similar meaning are intended to identify forward-looking statements.  We caution that the forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause actual results to differ materially from those in the forward-looking statements, including, without limitation, the risk factors set forth in “Part II. Other Information – Item 1A. Risk Factors” and “Item 1A. Risk Factors” of our Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2021 (“fiscal 2021”), including the following:

 

Risks related to health epidemics and other outbreaks;

 

Changes in general business, economic, and geopolitical conditions, including trade policy, as well as in consumer demand and the competitive environment in the automotive markets in the United States;

 

A decline in Toyota Motor North America, Inc. (“TMNA”) or any private label sales volume and the level of TMNA or any private label sponsored subvention, cash, and contractual residual value support incentive programs;

 

Extreme weather conditions, natural disasters, changes in fuel prices, manufacturing disruptions and production suspensions of Toyota, Lexus, and private label vehicles and related parts supply;

 

Increased competition from other financial institutions seeking to increase their share of financing Toyota, Lexus, and private label vehicles;

 

Changes in consumer behavior;

 

Recalls announced by TMNA or private label companies and the perceived quality of Toyota, Lexus, and any private label vehicles;

 

Availability and cost of financing;

 

Failure or interruption in our operations, including our communications and information systems, or as a result of our failure to retain existing or to attract new key personnel;

 

Increased cost, credit and operating risk exposure, or our failure to realize the anticipated benefits, from our private label financial services to third-party automotive and mobility companies, including Mazda;

 

 

Changes in our credit ratings and those of our ultimate parent, Toyota Motor Corporation (“TMC”) and changes in our credit support arrangements;

 

Changes in our financial position and liquidity, or changes or disruptions in our funding sources or access to the global capital markets;

 

Revisions to the estimates and assumptions for our allowance for credit losses;

 

Flaws in the design, implementation and use of quantitative models and revisions to the estimates and assumptions that are used to determine the value of certain assets;

 

Fluctuations in the value or market prices of our investment securities;

 

Changes in prices of used vehicles and their effect on residual values of our off-lease vehicles and return rates;

 

Failure of our customers or dealers to meet the terms of any contract with us, or otherwise perform as agreed;

 

Fluctuations in interest rates and foreign currency exchange rates;

 

Failure or changes in commercial soundness of our counterparties and other financial institutions;

 

Insufficient establishment of reserves, or the failure of a reinsurer to meet its obligations, in our voluntary protection operations;

 

Changes to existing, or adoption of new, accounting standards;

 

A security breach or a cyber-attack;

38


 

 

 

Failure to maintain compliant enterprise data practices, including the collection, use, sharing, and security of personally identifiable and financial information of our customers and employees;

 

Compliance with current laws and regulations or becoming subject to more stringent laws, regulatory requirements and regulatory scrutiny; and

 

Changes in the economies and applicable laws in the states where we have concentration risk.

Forward-looking statements speak only as of the date they are made.  We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements.


39


 

 

OVERVIEW

Key Performance Indicators and Factors Affecting Our Business

In our finance operations, we generate revenue, income, and cash flows by providing retail, lease, and dealer financing to dealers and their customers.  We measure the performance of our finance operations using the following metrics: financing volume, market share, net financing revenues, operating and administrative expense, residual value and credit loss metrics.

In our voluntary protection operations, we generate revenue primarily through marketing, underwriting, and providing claims administration for products that cover certain risks of customers.  We measure the performance of our voluntary protection operations using the following metrics: issued contract volume, average number of contracts in force, loss metrics and investment income.

Our financial results are affected by a variety of economic and industry factors including, but not limited to, new and used vehicle markets, Toyota, Lexus, and private label new vehicle production and sales volume, vehicle sales and financing incentive programs, consumer behavior, employment levels, our ability to respond to changes in interest rates with respect to both contract pricing and funding, the actual or perceived quality, safety or reliability of Toyota, Lexus, and private label vehicles, the financial health of the dealers we finance, and competitive pressure.  Our financial results may also be affected by the regulatory environment in which we operate, including as a result of new legislation or changes in regulation and any compliance costs or changes we may be required to make to our business practices.  All of these factors can influence consumer contract and dealer financing volume, the number of consumer contracts and dealers that default and the loss per occurrence, our inability to realize originally estimated contractual residual values on leased vehicles, the volume and performance of our voluntary protection operations, and our net financing revenues on consumer and dealer financing volume.  Changes in the volume of vehicle sales, sales of our voluntary protection products, or the level of voluntary protection expenses and insurance losses could materially and adversely impact our voluntary protection operations.  Additionally, our funding programs and related costs are influenced by changes in the global capital markets, prevailing interest rates, and our credit ratings and those of our parent companies, which may affect our ability to obtain cost effective funding to support earning asset growth.

40


 

Fiscal 2022 First Nine Months Operating Environment

During the first nine months of the fiscal year ending March 31, 2022 (“fiscal 2022”), the United States (“U.S.”) economy continued to be impacted by the global coronavirus and related variants (“COVID-19”) pandemic and the extraordinary governmental measures intended to slow its spread. In conjunction with increases in vaccination rates and the easing of restrictive measures in the current fiscal year, there has been improvement in unemployment levels and consumer confidence from fiscal 2021 pandemic lows, but neither have returned to pre-pandemic levels.  There remains uncertainty around the duration and the severity of the COVID-19 pandemic, the timing and strength of the economy’s recovery, and the impacts of government support and lender relief programs ending.  In addition, along with the reopening of the US economy, inflation has increased in fiscal 2022 from pandemic lows in fiscal 2021.  The impact of the COVID-19 pandemic on our future operations is difficult to predict, but the curtailment of economic activities as a result of further outbreak of COVID-19, extended or additional government restrictions intended to slow the spread of the virus, ending of government support programs, delayed consumer response to the lifting of restrictive measures, or permanent behavior changes in consumer spending could have further negative impact on consumer economics, dealerships, and auction sites, which could have a material adverse impact on our business, financial condition, and future results of operations. In addition, changes in the economy that adversely impact the consumer, such as inflation, higher interest rates, elevated debt levels and an increase in unemployment from the current levels could adversely impact our results of operations.

Economic conditions caused by the COVID-19 pandemic, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in dealer new vehicle inventory levels.  This includes the global shortage of semiconductor chips and other parts and raw materials the automotive industry continues to face.  The duration and severity of the supply chain disruptions and shortages, including but not limited to the semiconductor chips, are difficult to predict, but should these persist or become more severe, the negative impact to the manufacturers’ vehicle production and new dealer inventory levels could adversely impact our results of operations.  

Average used vehicle values continued to increase in the first nine months of fiscal 2022 to historically high levels, primarily due to the lack of availability of new vehicles. Future declines in used vehicle values resulting from increases in the supply of new and used vehicles and increases in new vehicle sales incentives could unfavorably impact return rates, residual values, depreciation expense and credit losses in the future.

Conditions in the global capital markets were generally stable during the first nine months of fiscal 2022. We continue to maintain broad global access to both domestic and international markets. However, uncertainty regarding the course of the COVID-19 pandemic or future changes in U.S. monetary policy could cause disruptions in the capital markets and increase our funding costs during the remainder of the fiscal year.  Future changes in interest rates in the U.S. and foreign markets could result in volatility in our interest expense, which could affect our results of operations.

41


 

RESULTS OF OPERATIONS

The following table summarizes total net income by our reportable operating segments:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance operations 1

 

$

655

 

 

$

505

 

 

$

2,015

 

 

$

1,281

 

Voluntary protection operations 1

 

 

93

 

 

 

163

 

 

 

276

 

 

 

416

 

Total net income

 

$

748

 

 

$

668

 

 

$

2,291

 

 

$

1,697

 

 

1

Refer to Note 13 - Segment Information of the Notes to Consolidated Financial Statements for the total asset balances of our finance and voluntary protection operations.

Our consolidated net income was $2,291 million and $748 million for the first nine months and third quarter of fiscal 2022, respectively, compared to $1,697 million and $668 million for the same periods in fiscal 2021.  The increase in net income for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to a $479 million decrease in interest expense, a $256 million decrease in provision for credit losses, a $201 million increase in total financing revenues, and a $84 million decrease in depreciation on operating leases, partially offset by a $206 million decrease in investment and other income, net, a $151 million increase in provision for income taxes, and a $75 million increase in operating and administrative expense.  The increase in net income for the third quarter of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to a $145 million decrease in interest expense, a $73 million decrease in provision for credit losses, and a $17 million increase in total financing revenues, partially offset by a $103 million decrease in investment and other income, net, a $40 million increase in operating and administrative expense and an $18 million increase in provision for income taxes.

Our overall capital position increased $2.3 billion, bringing total shareholder’s equity to $17.9 billion at December 31, 2021 as compared to $15.6 billion at March 31, 2021.  Our debt increased to $110.1 billion at December 31, 2021 from $109.7 billion at March 31, 2021.  Our debt-to-equity ratio decreased to 6.2 at December 31, 2021 from 7.0 at March 31, 2021.


42


 

 

Finance Operations

The following table summarizes key results of our finance operations:

 

 

Three months ended

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

December 31,

 

 

Percentage

 

 

December 31,

 

 

Percentage

 

(Dollars in millions)

 

2021

 

 

2020

 

 

Change

 

 

2021

 

 

2020

 

 

change

 

Financing revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease

 

$

2,081

 

 

$

2,122

 

 

 

(2

)%

 

$

6,329

 

 

$

6,365

 

 

 

(1

)%

Retail

 

 

830

 

 

 

749

 

 

 

11

%

 

 

2,442

 

 

 

2,144

 

 

 

14

%

Dealer

 

 

80

 

 

 

103

 

 

 

(22

)%

 

 

251

 

 

 

312

 

 

 

(20

)%

Total financing revenues

 

 

2,991

 

 

 

2,974

 

 

 

1

%

 

 

9,022

 

 

 

8,821

 

 

 

2

%

Depreciation on operating leases

 

 

1,460

 

 

 

1,450

 

 

 

1

%

 

 

4,400

 

 

 

4,484

 

 

 

(2

)%

Interest expense

 

 

346

 

 

 

491

 

 

 

(30

)%

 

 

1,055

 

 

 

1,534

 

 

 

(31

)%

Net financing revenues

 

 

1,185

 

 

 

1,033

 

 

 

15

%

 

 

3,567

 

 

 

2,803

 

 

 

27

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment and other income, net

 

 

12

 

 

 

21

 

 

 

(43

)%

 

 

40

 

 

 

76

 

 

 

(47

)%

Net financing and other revenues

 

 

1,197

 

 

 

1,054

 

 

 

14

%

 

 

3,607

 

 

 

2,879

 

 

 

25

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

45

 

 

 

118

 

 

 

(62

)%

 

 

110

 

 

 

366

 

 

 

(70

)%

Operating and administrative expenses

 

 

293

 

 

 

268

 

 

 

9

%

 

 

872

 

 

 

818

 

 

 

7

%

Total expenses

 

 

338

 

 

 

386

 

 

 

(12

)%

 

 

982

 

 

 

1,184

 

 

 

(17

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

859

 

 

 

668

 

 

 

29

%

 

 

2,625

 

 

 

1,695

 

 

 

55

%

Provision for income taxes

 

 

204

 

 

 

163

 

 

 

25

%

 

 

610

 

 

 

414

 

 

 

47

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from finance operations

 

$

655

 

 

$

505

 

 

 

30

%

 

$

2,015

 

 

$

1,281

 

 

 

57

%

Our finance operations reported net income of $2,015 million and $655 million for the first nine months and third quarter of fiscal 2022, respectively, compared to $1,281 million and $505 million for the same periods in fiscal 2021.  The increase in net income from finance operations for first nine months of fiscal 2022, compared to the same period in fiscal 2021 was due to a $479 million decrease in interest expense, a $256 million decrease in provision for credit losses, a $201 million increase in total financing revenues, and a $84 million decrease in depreciation on operating leases, partially offset by a $196 million increase in provision for income taxes, a $54 million increase in operating and administrative expenses, and a $36 million decrease in investment and other income.  The increase in net income from finance operations for the third quarter of fiscal 2022, compared to the same period in fiscal 2021 was primarily due to a $145 million decrease in interest expense, a $73 million decrease in provision for credit losses, partially offset by a $41 million increase in provision for income taxes, and a $25 million increase in operating and administrative expenses.

Financing Revenues

Total financing revenues increased 2 percent and remained relatively unchanged during the first nine months and third quarter of fiscal 2022, respectively, as compared to the same periods in fiscal 2021 due to the following:

 

Operating lease revenues remained relatively unchanged for first nine months of fiscal 2022, compared to the same period in fiscal 2021.  Operating lease revenues decreased 2% for the third quarter of fiscal 2022, compared to the same period in fiscal 2021 primarily due to lower yields partially offset by higher earning asset balances outstanding.

 

Retail financing revenues increased 14 percent and 11 percent for the first nine months and third quarter of fiscal 2022, respectively, as compared to the same periods in fiscal 2021, primarily due to higher average outstanding earning asset balances partially offset by lower yields.

 

Dealer financing revenues decreased 20 percent and 22 percent for the first nine months and third quarter of fiscal 2022, respectively, as compared to the same periods in fiscal 2021, due to lower average outstanding earning asset balances from lower average inventory levels partially offset by higher yields.

As a result of the above, our total portfolio yield, which includes operating lease, retail and dealer financing revenues, was 5.1 percent for the first nine months and third quarter of fiscal 2022, respectively, compared to 5.1 percent and 5.3 percent for the same periods in fiscal 2021.


43


 

 

Depreciation on Operating Leases

We reported depreciation on operating leases of $4,400 million for the first nine months of fiscal 2022, compared to $4,484 million for the same period in fiscal 2021, primarily due to lower residual value losses as a result of continued historically high levels of average used vehicle values and lower average operating lease units outstanding.  We reported depreciation on operating leases of $1,460 million for the third quarter of fiscal 2022, compared to $1,450 million for the same period in fiscal 2021.  The economic conditions caused by the COVID-19 pandemic, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in the availability of new vehicles, which has led to higher off-lease vehicle purchases by dealers due to increased used vehicle values and decreased new vehicle inventory supply.


44


 

 

Interest Expense

Our liabilities consist mainly of fixed and variable rate debt, denominated in U.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables.  We enter into interest rate swaps and foreign currency swaps to economically hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities.  The following table summarizes the components of interest expense:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Interest expense on debt

 

$

362

 

 

$

460

 

 

$

1,134

 

 

$

1,531

 

Interest expense on derivatives

 

 

23

 

 

 

103

 

 

 

137

 

 

 

334

 

Interest expense on debt and derivatives

 

 

385

 

 

 

563

 

 

 

1,271

 

 

 

1,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Gains) losses on debt denominated in foreign currencies

 

 

(60

)

 

 

655

 

 

 

(338

)

 

 

1,703

 

Losses (gains) on foreign currency swaps

 

 

151

 

 

 

(658

)

 

 

509

 

 

 

(1,754

)

Gains on U.S. dollar interest rate swaps

 

 

(130

)

 

 

(69

)

 

 

(387

)

 

 

(280

)

Total interest expense

 

$

346

 

 

$

491

 

 

$

1,055

 

 

$

1,534

 

 

During the first nine months and third quarter of fiscal 2022, total interest expense decreased to $1,055 million and $346 million, respectively, from $1,534 million and $491 million for the same periods in fiscal 2021.  The decrease in total interest expense for the first nine months and third quarter of fiscal 2022 compared to the same periods in fiscal 2021 is primarily attributable to a decrease in interest expense on debt and derivatives combined and higher gains on U.S. dollar interest rate swaps, partially offset by losses on foreign currency swaps net of gains from debt denominated in foreign currencies.

Interest expense on debt and derivatives primarily represents contractual net interest settlements and changes in accruals on secured and unsecured notes and loans payable and derivatives, and includes amortization of discounts, premiums, and debt issuance costs.  During the first nine months and third quarter of fiscal 2022, interest expense on debt and derivatives decreased to $1,271 million and $385 million from $1,865 million and $563 million for the same periods in fiscal 2021. The decrease in interest expense on debt is due to a decrease in weighted average interest rates, partially offset by an increase in portfolio size.  The decrease in interest expense on derivatives is primarily due to a decrease in interest expense on pay-fixed swaps partially offset by increase in interest expense on pay-float swaps.

Gains or losses on debt denominated in foreign currencies represent the impact of translation adjustments.  We use foreign currency swaps to economically hedge the debt denominated in foreign currencies. During the first nine months and third quarter of fiscal 2022, we recorded net losses of $171 million and $91 million, respectively, primarily as a result of increases in foreign currency swap rates across various currencies in which our debt is denominated.  During the first nine months and third quarter of fiscal 2021, we recorded net gains of $51 million and $3 million, respectively, primarily as a result of decreases in foreign currency swap rates across various currencies in which our debt is denominated.

Gains or losses on U.S. dollar interest rate swaps represent the change in the valuation of interest rate swaps. During the first nine months and third quarter of fiscal 2022, we recorded gains of $387 million and $130 million, respectively, primarily due to the upward shift of U.S. dollar swap rates and net interest income on our pay-fixed swaps exceeding losses on our pay-float swaps.  During the first nine months and third quarter of fiscal 2021, we recorded gains of $280 million and $69 million, respectively, as the impact from net interest income outweighed the losses attributed to the downward shift of U.S. dollar swap rates.   

Future changes in interest and foreign currency exchange rates could continue to result in significant volatility in our interest expense, thereby affecting our results of operations.


45


 

 

Investment and Other Income, Net

We recorded investment and other income, net of $40 million and $12 million for the first nine months and third quarter of fiscal 2022, respectively, compared to $76 million and $21 million for the same periods in fiscal 2021.  The decrease in investment and other income, net for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, was primarily due to lower average balances in our cash equivalents and investment in marketable securities portfolio.

Provision for Credit Losses

We recorded a provision for credit losses of $110 million and $45 million for the first nine months and third quarter of fiscal 2022, respectively, compared to a provision for credit losses of $366 million and $118 million for the same periods in fiscal 2021.  The decrease in the provision for credit losses for the first nine months and third quarter of fiscal 2022, respectively, compared to the same periods in fiscal 2021, was primarily a result of the improvement in macroeconomic conditions and the financial performance of our dealers in fiscal 2022.  In contrast, in fiscal 2021, we increased the expected credit losses for our retail loan portfolio due to a decline in economic conditions caused by the COVID-19 pandemic and the restrictions designed to slow the spread of COVID-19, which resulted in stay-at-home orders, increased unemployment, and decreased consumer spending.

Operating and Administrative Expenses

We recorded operating and administrative expenses of $872 million and $293 million for the first nine months and third quarter of fiscal 2022, respectively, compared to $818 million and $268 million for the same periods in fiscal 2021. The increase in operating and administrative expenses for the first nine months and third quarter of fiscal 2022, respectively, compared the same periods in fiscal 2021, was primarily due to an increase in employee and technology expenses.

46


 

Voluntary Protection Operations

The following table summarizes key results of our voluntary protection operations:

 

 

 

Three months ended

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

December 31,

 

 

Percentage

 

 

December 31,

 

 

Percentage

 

 

 

2021

 

 

2020

 

 

Change

 

 

2021

 

 

2020

 

 

change

 

Contracts (units in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued

 

 

677

 

 

 

662

 

 

 

2

%

 

 

2,296

 

 

 

1,872

 

 

 

23

%

Average in force

 

 

10,063

 

 

 

9,526

 

 

 

6

%

 

 

9,866

 

 

 

9,465

 

 

 

4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voluntary protection contract revenues

  and insurance earned premiums

 

$

255

 

 

$

241

 

 

 

6

%

 

$

758

 

 

$

714

 

 

 

6

%

Investment and other income, net

 

 

64

 

 

 

158

 

 

 

(59

)%

 

 

199

 

 

 

369

 

 

 

(46

)%

Revenues from voluntary protection operations

 

 

319

 

 

 

399

 

 

 

(20

)%

 

 

957

 

 

 

1,083

 

 

 

(12

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voluntary protection contract expenses

  and insurance losses

 

 

96

 

 

 

98

 

 

 

(2

)%

 

 

303

 

 

 

265

 

 

 

14

%

Operating and administrative expenses

 

 

101

 

 

 

86

 

 

 

17

%

 

 

291

 

 

 

270

 

 

 

8

%

Total expenses

 

 

197

 

 

 

184

 

 

 

7

%

 

 

594

 

 

 

535

 

 

 

11

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

122

 

 

 

215

 

 

 

(43

)%

 

 

363

 

 

 

548

 

 

 

(34

)%

Provision for income taxes

 

 

29

 

 

 

52

 

 

 

(44

)%

 

 

87

 

 

 

132

 

 

 

(34

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from voluntary protection operations

 

$

93

 

 

$

163

 

 

 

(43

)%

 

$

276

 

 

$

416

 

 

 

(34

)%

Our voluntary protection operations reported net income of $276 million and $93 million for the first nine months and third quarter of fiscal 2022, respectively, compared to $416 million and $163 million for the same periods in fiscal 2021.  The decrease in net income from voluntary protection operations for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to a $170 million decrease in investment and other income, net, and a $38 million increase in voluntary protection contract expenses and insurance losses, partially offset by a $45 million decrease in provision for income taxes, and a $44 million increase in voluntary protection contract revenues and insurance earned premiums.  The decrease in net income from voluntary protection operations for the third quarter of fiscal 2022, compared to same period in fiscal 2021, was primarily due to a $94 million decrease in investment and other income, net, and a $15 million increase in operating and administrative expenses, partially offset by a $23 million decrease in provision for income taxes, and a $14 million increase in voluntary protection contract revenues and insurance earned premiums.  

Contracts issued increased 23 percent and 2 percent in the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021. The higher contract issuances for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was mainly due to the continued growth of our private label services and our issuances were negatively impacted in fiscal year 2021 by the decline in economic conditions caused by the COVID-19 pandemic and the restrictions designed to slow the spread of COVID-19.  The average number of contracts in force increased 4 percent and 6 percent for the first nine months and third quarter of fiscal 2022, respectively, compared to the same periods in fiscal 2021, due to net growth in the voluntary protection portfolio, most notably in prepaid maintenance, guaranteed auto protection, and vehicle services contracts.

Revenue from Voluntary Protection Operations

Our voluntary protection operations reported voluntary protection contract revenues and insurance earned premiums of $758 million and $255 million for the first nine months and third quarter of fiscal 2022, respectively, compared to $714 million and $241 million for the same periods in fiscal 2021.  Voluntary protection contract revenues and insurance earned premiums represent revenues from in force contracts and are affected by issuances as well as the level, age, and mix of in force contracts.  Voluntary protection contract revenues and insurance earned premiums are recognized over the term of the contracts in relation to the timing and level of anticipated claims.  The increase in voluntary protection contract revenues and insurance earned premiums for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, was primarily due to an increase in our average in force contracts resulting from net growth in the voluntary protection portfolio.  


47


 

 

Investment and Other Income, Net

Our voluntary protection operations reported investment and other income, net of $199 million for the first nine months of fiscal 2022, compared to $369 million for the same period in fiscal 2021.  Our voluntary protection operations reported investment and other income, net of $64 million for the third quarter of fiscal 2022, compared to investment and other income, net of $158 million for the same period in fiscal 2021.  Investment and other income, net, consists primarily of dividend and interest income, realized gains and losses on investments in marketable securities, changes in fair value from equity and available-for-sale debt securities for which the fair value option was elected, and credit loss expense on available-for-sale debt securities, if any.  The decrease in investment and other income, net for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to lower gains from changes in fair value on our equity investments and from sales of fixed income securities, as well as lower dividend income.  The decrease in investment and other income, net for the third quarter of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to lower dividend income and lower gains from changes in fair value on our equity investments.

Voluntary Protection Contract Expenses and Insurance Losses

Our voluntary protection operations reported voluntary protection contract expenses and insurance losses of $303 million and $96 million for the first nine months and third quarter of fiscal 2022, respectively, compared to $265 million and $98 million for the same periods in fiscal 2021.  Voluntary protection contract expenses and insurance losses incurred are a function of the amount of covered risks, the frequency and severity of claims associated with in force contracts and the level of risk retained by our voluntary protection operations.  Voluntary protection contract expenses and insurance losses include amounts paid and accrued for reported losses, estimates of losses incurred but not reported, and any related claim adjustment expenses.  The increase in voluntary protection contract expenses and insurance losses for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was primarily due to an increase in frequency of claims in our prepaid maintenance contracts, vehicle service contracts and tire and wheel contracts.  Our voluntary protection contract expenses and insurance losses in fiscal 2021 were impacted by lower claims as a result of changes in consumer driving patterns caused by the COVID-19 pandemic, including restrictions and other changes in behavior.

Operating and Administrative Expenses

Our voluntary protection operations operating and administrative expenses increased to $291 million and $101 million for the first nine months and third quarter of fiscal 2022, respectively, compared to $270 million and $86 million for the same periods in fiscal 2021.  The increase in operating and administrative expenses for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, was primarily attributable to higher acquisition and other product expenses, higher dealer back-end program expenses, and overhead expenses.  Insurance dealer back-end program expenses are incentives or expense reduction programs we offer to dealers based on certain performance criteria.


48


 

 

Provision for Income Taxes

We recorded a provision for income taxes of $697 million and $233 million for the first nine months and third quarter of fiscal 2022, respectively, compared to $546 million and $215 million for the same periods in fiscal 2021.  Our effective tax rate was 23 percent and 24 percent for the first nine months and third quarter of fiscal 2022, respectively, compared to 24 percent for each of the same periods in fiscal 2021.  The increase in the provision for income taxes for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, was primarily due to the increase in income before income taxes.  The lower effective tax rate for the first nine months of fiscal 2022, compared to the same period in fiscal 2021, was primarily attributable to the tax benefit from the federal tax credits recognized in fiscal 2022 as well as the enacted state tax law changes that resulted in higher state tax expense in fiscal 2021.

 


49


 

 

FINANCIAL CONDITION

Vehicle Financing Volume and Net Earning Assets

The composition of our vehicle contract volume and market share is summarized below:

 

 

 

Three months ended

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

December 31,

 

 

Percentage

 

 

December 31,

 

 

Percentage

 

(units in thousands):

 

2021

 

 

2020

 

 

change

 

 

2021

 

 

2020

 

 

Change

 

Vehicle financing volume 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New retail contracts

 

 

158

 

 

 

198

 

 

 

(20

)%

 

 

523

 

 

 

570

 

 

 

(8

)%

Used retail contracts

 

 

106

 

 

 

114

 

 

 

(7

)%

 

 

355

 

 

 

354

 

 

 

-

%

Lease contracts

 

 

72

 

 

 

142

 

 

 

(49

)%

 

 

349

 

 

 

355

 

 

 

(2

)%

Total

 

 

336

 

 

 

454

 

 

 

(26

)%

 

 

1,227

 

 

 

1,279

 

 

 

(4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TMNA subvened vehicle financing volume 2:

 

 

 

 

 

New retail contracts

 

 

63

 

 

 

68

 

 

 

(7

)%

 

 

174

 

 

 

234

 

 

 

(26

)%

Used retail contracts

 

 

8

 

 

 

8

 

 

 

-

%

 

 

21

 

 

 

50

 

 

 

(58

)%

Lease contracts

 

 

42

 

 

 

107

 

 

 

(61

)%

 

 

207

 

 

 

257

 

 

 

(19

)%

Total

 

 

113

 

 

 

183

 

 

 

(38

)%

 

 

402

 

 

 

541

 

 

 

(26

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market share of TMNA sales 3:

 

 

54.3

%

 

 

59.1

%

 

 

 

 

 

 

55.1

%

 

 

61.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

Total financing volume was comprised of approximately 64 percent Toyota, 15 percent Lexus, 14 percent Mazda, and 7 percent non-Toyota/Lexus/Mazda for the first nine months of fiscal 2022.  Total financing volume was comprised of approximately 67 percent Toyota, 15 percent Lexus, 10 percent Mazda, and 8 percent non-Toyota/Lexus/Mazda for the third quarter of fiscal 2022.  Total financing volume was comprised of approximately 66 percent Toyota, 15 percent Lexus, 13 percent Mazda, and 6 percent non-Toyota/Lexus/Mazda for the first nine months of fiscal 2021.  Total financing volume was comprised of approximately 67 percent Toyota, 16 percent Lexus, 11 percent Mazda, and 6 percent non-Toyota/Lexus/ Mazda for the third quarter of fiscal 2021.

2

TMNA subvened volume units are included in the total vehicle financing.  Units exclude third-party subvened units.

3

Represents the percentage of total domestic TMNA sales of new Toyota and Lexus vehicles financed by us, excluding sales under dealer rental car and commercial fleet programs, sales of a private Toyota distributor and private label vehicles financed.

 

Vehicle Financing Volume

The volume of our retail and lease contracts, which are acquired primarily from Toyota, Lexus, and private label dealers, is dependent upon TMNA and private label sales volume, the level of TMNA, private label, and third-party sponsored subvention and other incentive programs, as well as TMCC competitive rate and other incentive programs.  

Our financing volume decreased 4 percent and 26 percent for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, primarily due to lower new vehicles inventory levels.  The economic conditions caused by the COVID-19 pandemic, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in the availability of new vehicles.  This has led to lower levels of incentives and subvention on new and used retail contracts and lease contracts, which has resulted in increased competition from other financial institutions.  

Our market share of TMNA sales decreased approximately 6 percentage points and approximately 5 percentage points for the first nine months and third quarter of fiscal 2022, respectively, compared to the same periods in fiscal 2021, due to lower levels of incentives and subvention on new and used retail and lease contracts and increased competition from other financial institutions.


50


 

 

The composition of our net earning assets is summarized below: 

 

 

 

December 31,

 

 

March 31,

 

 

Percentage

 

(Dollars in millions)

 

2021

 

 

2021

 

 

change

 

Net Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables, net

 

 

 

 

 

 

 

 

 

 

 

 

Retail finance receivables, net

 

$

70,716

 

 

$

65,653

 

 

 

8

%

Dealer financing, net 1

 

 

10,209

 

 

 

13,539

 

 

 

(25

)%

Total finance receivables, net

 

 

80,925

 

 

 

79,192

 

 

 

2

%

Investments in operating leases, net

 

 

36,836

 

 

 

37,091

 

 

 

(1

)%

Net earning assets

 

$

117,761

 

 

$

116,283

 

 

 

1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dealer Financing

 

 

 

 

 

 

 

 

 

 

 

 

(Number of dealers serviced)

 

 

 

 

 

 

 

 

 

 

 

 

Toyota, Lexus, and private label dealers1

 

 

1,015

 

 

 

1,002

 

 

 

1

%

Dealers outside of the Toyota/Lexus/private label dealer network

 

 

411

 

 

 

395

 

 

 

4

%

Total number of dealers receiving wholesale financing

 

 

1,426

 

 

 

1,397

 

 

 

2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Dealer inventory outstanding (units in thousands)

 

 

65

 

 

 

185

 

 

 

(65

)%

 

1

Includes wholesale and other credit arrangements in which we participate as part of a syndicate of lenders.

  

Retail Contract Volume and Earning Assets

Our new retail contract volume decreased 8 percent and 20 percent for the first nine months and third quarter of fiscal 2022, respectively, compared to the same periods in fiscal 2021, primarily due to a decrease in the availability of new vehicles and lower levels of incentives and subvention on new contracts.  Economic conditions caused by the COVID-19 pandemic, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in the availability of new vehicles.  

Our used retail contracts remained relatively unchanged for the first nine months of fiscal 2022, compared to the same period in fiscal 2021.  Our used retail contracts decreased by 7 percent for the third quarter of fiscal 2022, compared to same period in fiscal 2021, due to increased competition in the used vehicle marketplace caused by the reduction in new vehicle inventory levels.

Our retail finance receivables, net increased 8 percent at December 31, 2021 as compared to March 31, 2021 due to higher retail contracts outstanding and higher average amount financed.

Lease Contract Volume and Earning Assets

Our lease contract volume decreased 2 percent and 49 percent for the first nine months and third quarter of fiscal 2022, compared to the same periods in fiscal 2021, primarily due to the decrease in the availability of new vehicles and lower levels of incentive and subvention programs.  Our investments in operating leases, net, remained relatively unchanged at December 31, 2021, as compared to March 31, 2021 due to lower average operating lease units outstanding, offset by higher vehicle values.

 

Dealer Financing and Earning Assets

Dealer financing, net decreased 25 percent at December 31, 2021, as compared to March 31, 2021, primarily due to a decrease in dealer inventory and related financing.  Economic conditions caused by the COVID-19 pandemic, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a temporary decrease in dealer new vehicle inventory levels.


51


 

 

Residual Value Risk

The primary factors affecting our exposure to residual value risk are the levels at which residual values are established at lease inception, current economic conditions and outlook, projected end-of-term market values, and the resulting impact on depreciation expense and lease return rates.  Higher average operating lease units outstanding and the resulting increase in maturities, a higher supply of used vehicles, as well as deterioration in actual and expected used vehicle values for Toyota, Lexus, and private label vehicles could unfavorably impact return rates, residual values, and depreciation expense.

On a quarterly basis, we review the estimated end-of-term market values of leased vehicles to assess the appropriateness of our carrying values.  To the extent the estimated end-of-term market value of a leased vehicle is lower than the residual value established at lease inception, the residual value of the leased vehicle is adjusted downward so that the carrying value at lease end will approximate the estimated end-of-term market value.  For investments in operating leases, adjustments are made on a straight-line basis over the remaining terms of the lease contracts and are included in Depreciation on operating leases in our Consolidated Statements of Income as a change in accounting estimate.

Depreciation on Operating Leases

Depreciation on operating leases and average operating lease units outstanding are as follows:

 

 

 

Three months ended

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

December 31,

 

 

Percentage

 

 

December 31,

 

 

Percentage

 

 

 

2021

 

 

2020

 

 

change

 

 

2021

 

 

2020

 

 

change

 

Depreciation on operating leases

   (dollars in millions)

 

$

1,460

 

 

$

1,450

 

 

 

1

%

 

$

4,400

 

 

$

4,484

 

 

 

(2

)%

Average operating lease units

   outstanding

   (in thousands)

 

 

1,308

 

 

 

1,326

 

 

 

(1

)%

 

 

1,330

 

 

 

1,337

 

 

 

(1

)%

 

Depreciation expense on operating leases decreased 2 percent for the first nine months of fiscal 2022, as compared to the same period in fiscal 2021, primarily due to lower residual value losses as a result of continued historically high levels of average used vehicle values and lower average operating lease units outstanding.  Depreciation expense on operating leases remained relatively consistent for the third quarter of fiscal 2022, as compared to the same period in fiscal 2021.  The economic conditions caused by the COVID-19 pandemic, including production halts and supply shortages affecting the automotive industry and additional delays affecting the supply chain and logistics networks, have resulted in a decrease in the availability of new vehicles, which has led to higher off-lease vehicle purchases by dealers due to increased used vehicle values and decreased new vehicle inventory supply.  


52


 

 

Origination, Credit Loss, and Delinquency Experience

Our credit loss experience may be affected by a number of factors including the economic environment, our purchasing, servicing and collections practices, used vehicle market conditions and subvention.  Changes in the economy that impact the consumer such as increasing interest rates, and a rise in the unemployment rate as well as higher debt balances, coupled with deterioration in actual and expected used vehicle values, could increase our credit losses.  In addition, a decline in the effectiveness of our collection practices could also increase our credit losses.  We continuously evaluate and refine our purchasing practices and collection efforts to minimize risk.  In addition, subvention contributes to our overall portfolio quality, as subvened contracts typically have higher credit scores than non-subvened contracts.

The following table provides information related to our origination experience:

 

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2021

 

 

2020

 

Average consumer portfolio origination FICO score

 

 

742

 

 

 

744

 

 

 

744

 

Average retail loan origination term (months) 1

 

 

69

 

 

 

68

 

 

 

68

 

1

Retail loan origination greater than or equal to 78 months was 9% as of December 31, 2021, 8% as of March 31, 2021, and 7% as of December 31, 2020.

While we have included the average origination FICO score to illustrate origination trends, we also use a proprietary credit scoring system to evaluate an applicant’s risk profile.  Refer to Part I. Item 1. Business “Finance Operations” in our fiscal 2021 Form 10-K for further discussion of the proprietary manner in which we evaluate risk.

The following table provides information related to our consumer finance receivables and investment in operating leases:

 

 

 

December 31,

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2021

 

 

2020

 

Net charge-offs as a percentage of average

    finance receivables 1

 

 

0.18

%

 

 

0.29

%

 

 

0.32

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Default frequency as a percentage of outstanding

    finance receivables contracts 1

 

 

0.71

%

 

 

0.90

%

 

 

0.86

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Average finance receivables loss severity per unit 2

 

$

8,598

 

 

$

10,035

 

 

$

10,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate balances for accounts 60 or more days

   past due as a percentage of earning assets 3, 4

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables

 

 

0.51

%

 

 

0.27

%

 

 

0.38

%

Operating leases

 

 

0.28

%

 

 

0.20

%

 

 

0.30

%

1

The ratio for net charge-offs and the ratio for default frequency have been annualized using nine months results for the periods ended December 31, 2021 and 2020.  Net charge-off includes the write-offs of accounts deemed to be uncollectable and accounts greater than 120 days past due.

2

Average loss per unit upon disposition of repossessed vehicles or charge-off prior to repossession.

3

Substantially all retail receivables do not involve recourse to the dealer in the event of customer default.

4

Includes accounts in bankruptcy and excludes accounts for which vehicles have been repossessed.

Management considers historical credit loss information when assessing the allowance for credit losses. Historical credit losses are primarily driven by two factors: default frequency and loss severity.  Our net charge-offs as a percentage of average finance receivables for the first nine months of fiscal 2022 decreased to 0.18 percent at December 31, 2021 from 0.32 percent at December 31, 2020. Our average finance receivables loss severity per unit for the first nine months of fiscal 2022 decreased to $8,598 from $10,138 in the first nine months of fiscal 2021.  Our default frequency as a percentage of outstanding finance receivable contracts decreased to 0.71 percent for the first nine months of fiscal 2022, compared to 0.86 percent in the same period in fiscal 2021.  The changes in our net charge-offs, loss severity per unit, and default frequency were primarily due to higher average used vehicle values, which reduced net charge-offs, loss per unit, and default frequency.

Our aggregate balances for accounts 60 or more days past due as a percentage of finance receivables was 0.51 percent at December 31, 2021, compared to 0.38 percent at December 31, 2020, and 0.27 percent at March 31, 2021.  Our aggregate balances for accounts 60 or more days past due as a percentage of operating leases was 0.28 percent at December 31, 2021, compared to 0.30 percent at December 31, 2020, and 0.20 percent at March 31, 2021.  Along with our typical seasonal pattern for delinquency, the finance receivables delinquency rate in fiscal 2021 was positively impacted by the retail payment extension programs offered to our customers and dealers impacted by COVID-19, as well as influenced by government

53


 

stimulus and other external programs in fiscal 2021, which are no longer available.  In addition, for a portion of fiscal 2021, as a result of a decline in economic conditions caused by the COVID-19 pandemic, there were government restrictions on repossession activities in certain states for which we have a high percentage of lease contracts which had a negative impact on our operating lease payments delinquency.  If the negative economic conditions caused by the COVID-19 pandemic continue, delinquencies and charge-offs could increase.

 

Allowance for Credit Losses

We maintain an allowance for credit losses which is measured by an impairment model that reflects lifetime expected losses.

The allowance for credit losses for our retail consumer portfolio is measured on a collective basis when loans have similar risk characteristics such as loan-to-value ratio, book payment-to-income ratio, FICO score at origination, collateral type, contract term, and other relevant factors.  We use statistical models to estimate lifetime expected credit losses of our retail loan portfolio segment by applying probability of default and loss given default to the exposure at default on a loan level basis.  Probability of default models are developed from internal risk scoring models which consider variables such as delinquency status, historical default frequency, and other credit quality indicators.  Other credit quality indicators include loan-to-value ratio, book payment-to-income ratio, FICO score at origination, collateral type (new or used, Lexus, Toyota, or private label), and contract term.  Loss given default models forecast the extent of losses given that a default has occurred and consider variables such as collateral, trends in recoveries, historical loss severity, and other contract structure variables.  Exposure at default represents the expected outstanding principal balance, including the effects of expected prepayment when applicable.  The lifetime expected credit losses incorporate the probability-weighted forward-looking macroeconomic forecasts for baseline, favorable, and adverse scenarios.  The loan lifetime is regarded by management as the reasonable and supportable period.  We use macroeconomic forecasts from a third party and update such forecasts quarterly.  On an ongoing basis, we review our models, including macroeconomic factors, the selection of macroeconomic scenarios and their weighting to ensure they reflect the risk of the portfolio.  

For the allowance for credit losses for our dealer portfolio, an allowance for credit losses is established for both outstanding dealer finance receivables and certain unfunded off-balance sheet lending commitments.  The allowance for credit losses is measured on a collective basis when loans have similar risk characteristics such as dealer group internal risk rating and loan-to-value ratios.  We measure lifetime expected credit losses of our dealer products portfolio segment by applying probability of default and loss given default to the exposure at default on a loan level basis.  Probability of default is primarily established based on internal risk assessments.  The probability of default model also considers qualitative factors related to macroeconomic outlooks.  Loss given default is established based on the nature and market value of the collateral, loan-to-value ratios and other credit quality indicators.  Exposure at default represents the expected outstanding principal balance.  The lifetime of the loan or lending commitment is regarded by management as the reasonable and supportable period.  On an ongoing basis, we review our models, including macroeconomic outlooks, to ensure they reflect the risk of the portfolio.  

If management does not believe the models reflect lifetime expected credit losses, a qualitative adjustment is made to reflect management judgment regarding observable changes in recent or expected economic trends and conditions, portfolio composition, and other relevant factors.

The following table provides information related to our allowance for credit losses for finance receivables and certain off-balance sheet lending commitments:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Allowance for credit losses at beginning of period

 

$

1,224

 

 

$

1,174

 

 

$

1,215

 

 

$

727

 

Adoption of ASU 2016-13 1

 

 

-

 

 

 

-

 

 

 

-

 

 

 

292

 

Charge-offs

 

 

(64

)

 

 

(113

)

 

 

(152

)

 

 

(228

)

Recoveries

 

 

14

 

 

 

20

 

 

 

46

 

 

 

42

 

Provision for credit losses

 

 

45

 

 

 

118

 

 

 

110

 

 

 

366

 

Allowance for credit losses at end of period 2

 

$

1,219

 

 

$

1,199

 

 

$

1,219

 

 

$

1,199

 

1

Cumulative pre-tax adjustments recorded to retained earnings as of April 1, 2020.

2

Ending balance as of December 31, 2021 and 2020 includes allowance for credit losses related to off-balance-sheet commitments of $34 million and $37 million, respectively, which is included in Other liabilities on the Consolidated Balance Sheet.

 

54


 

 

Our allowance for credit losses increased by $20 million from $1,199 million at December 31, 2020 to $1,219 million at December 31, 2021.  The increase in the allowance for credit losses was primarily due to the increase in size of our retail loan portfolio and an increase in delinquencies, partially offset by lower expected credit losses in response to improvements in the macroeconomic forecast as well as a decrease in size of our dealer products portfolio.

Future changes in the economy that impact the consumer and consumer confidence such as increasing interest rates and a rise in the unemployment rate as well as higher debt balances, coupled with deterioration in actual and expected used vehicle values, could result in further increases to our allowance for credit losses.  In addition, a decline in the effectiveness of our collection practices could also increase our allowance for credit losses.

55


 

LIQUIDITY AND CAPITAL RESOURCES

Liquidity risk is the risk relating to our ability to meet our financial obligations when they come due.  Our liquidity strategy is to ensure that we maintain the ability to fund assets and repay liabilities in a timely and cost-effective manner, even in adverse market conditions.  Our strategy includes raising funds via the global capital markets and through loans, credit facilities, and other transactions as well as generating liquidity from our earning assets.  This strategy has led us to develop a diversified borrowing base that is distributed across a variety of markets, geographies, investors and financing structures.

Liquidity management involves forecasting and maintaining sufficient capacity to meet our cash needs, including unanticipated events.  To ensure adequate liquidity through a full range of potential operating environments and market conditions, we conduct our liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility and diversity.  Key components of this operating strategy include a strong focus on developing and maintaining direct relationships with commercial paper investors and wholesale market funding providers and maintaining the ability to sell certain assets when and if conditions warrant.

We develop and maintain contingency funding plans and regularly evaluate our liquidity position under various operating circumstances, allowing us to assess how we will be able to operate through a period of stress when access to normal sources of capital is constrained.  The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, and outline actions and procedures for effectively managing through the problem period. In addition, we monitor the ratings and credit exposure of the lenders that participate in our credit facilities to ascertain any issues that may arise with potential draws on these facilities if that contingency becomes warranted.

We maintain broad access to a variety of domestic and global markets and may choose to realign our funding activities depending upon market conditions, relative costs, and other factors.  We believe that our funding sources, combined with operating and investing activities, provide sufficient liquidity to meet future funding requirements and business growth. For liquidity purposes, we hold cash in excess of our immediate funding needs.  These excess funds are invested in short-term, highly liquid and investment grade money market instruments as well as certain available-for-sale debt securities, which provide liquidity for our short-term funding needs and flexibility in the use of our other funding sources.  We maintained excess funds ranging from $7.5 billion to $11.4 billion with an average balance of $9.2 billion during the quarter ended December 31, 2021.  The amount of excess funds we hold may fluctuate, depending on market conditions and other factors.  We also have access to liquidity under the $5.0 billion credit facility with Toyota Motor Sales U.S.A., Inc. (“TMS”), which as of December 31, 2021 was not drawn upon and had no outstanding balance as further described in Note 7 – Debt and Credit Facilities of the Notes to the Consolidated Financial Statements.  We believe we have sufficient capacity to meet our short-term funding requirements and manage our liquidity.

Credit support is provided to us by our indirect parent Toyota Financial Services Corporation (“TFSC”), and, in turn to TFSC by TMC.  Taken together, these credit support agreements provide an additional source of liquidity to us, although we do not rely upon such credit support in our liquidity planning and capital and risk management.  The credit support agreements are not a guarantee by TMC or TFSC of any securities or obligations of TFSC or TMCC, respectively.  The fees paid pursuant to these agreements are disclosed in Note 11 – Related Party Transactions of the Notes to Consolidated Financial Statements.

TMC’s obligations under its credit support agreement with TFSC rank pari passu with TMC’s senior unsecured debt obligations.  Refer to Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations “Liquidity and Capital Resources” in our fiscal 2021 Form 10-K for further discussion.

We routinely monitor global financial conditions and our financial exposure to our global counterparties, particularly in those countries experiencing significant economic, fiscal or political strain, and the corresponding likelihood of default.  As of December 31, 2021, our exposure to foreign sovereign and non-sovereign counterparties was not significant.  Refer to the “Liquidity and Capital Resources - Credit Facilities and Letters of Credit” section and Part I, Item 1A. Risk Factors – “The failure or commercial soundness of our counterparties and other financial institutions may have an effect on our liquidity, results of operations or financial condition” in our fiscal 2021 Form 10-K for further discussion.

 

56


 

 

Funding

The following table summarizes the components of our outstanding debt which includes unamortized premiums, discounts, debt issuance costs and the effects of foreign currency translation adjustments:

 

 

 

December 31, 2021

 

 

March 31, 2021

 

(Dollars in millions)

 

Face value

 

 

Carrying value

 

 

Weighted average

contractual interest rates

 

 

Face value

 

 

Carrying value

 

 

Weighted average

contractual interest rates

 

Unsecured notes and loans payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

17,001

 

 

$

16,992

 

 

 

0.17

%

 

$

17,027

 

 

$

17,021

 

 

 

0.20

%

U.S. medium term note

  ("MTN") program

 

 

45,387

 

 

 

45,245

 

 

 

1.45

%

 

 

44,294

 

 

 

44,149

 

 

 

1.64

%

Euro medium term note

  ("EMTN") program

 

 

14,076

 

 

 

13,991

 

 

 

1.54

%

 

 

16,262

 

 

 

16,173

 

 

 

1.57

%

Other debt

 

 

5,829

 

 

 

5,826

 

 

 

1.06

%

 

 

8,176

 

 

 

8,170

 

 

 

1.33

%

Total Unsecured notes and loans

  payable

 

 

82,293

 

 

 

82,054

 

 

 

1.17

%

 

 

85,759

 

 

 

85,513

 

 

 

1.31

%

Secured notes and loans payable

 

 

28,114

 

 

 

28,068

 

 

 

0.91

%

 

 

24,256

 

 

 

24,212

 

 

 

1.29

%

Total debt

 

$

110,407

 

 

$

110,122

 

 

 

1.10

%

 

$

110,015

 

 

$

109,725

 

 

 

1.31

%

Unsecured notes and loans payable

The following table summarizes the significant activities by program of our Unsecured notes and loans payable:

 

(Dollars in millions)

 

Commercial paper 1

 

 

MTNs

 

 

EMTNs

 

 

Other

 

 

Total

Unsecured

notes and

loans

payable

 

Balance at March 31, 2021

 

$

17,027

 

 

$

44,294

 

 

$

16,262

 

 

$

8,176

 

 

$

85,759

 

Issuances

 

 

-

 

 

 

11,605

 

 

 

2,140

 

 

 

1,867

 

 

 

15,612

 

Maturities and terminations

 

 

(26

)

 

 

(10,512

)

 

 

(4,060

)

 

 

(4,210

)

 

 

(18,808

)

Non-cash changes in foreign currency rates

 

 

-

 

 

 

-

 

 

 

(266

)

 

 

(4

)

 

 

(270

)

Balance at December 31, 2021

 

$

17,001

 

 

$

45,387

 

 

$

14,076

 

 

$

5,829

 

 

$

82,293

 

1

Changes in Commercial paper are shown net due to its short duration.  

Commercial paper

Short-term funding needs are met through the issuance of commercial paper in the U.S.  Commercial paper outstanding under our commercial paper programs ranged from approximately $16.7 billion to $17.7 billion during the quarter ended December 31, 2021, with an average outstanding balance of $17.1 billion.  Our commercial paper programs are supported by the credit facilities discussed under the heading “Credit Facilities and Letters of Credit.”  We believe we have sufficient capacity to meet our short-term funding requirements and manage our liquidity.

MTN program

We maintain a shelf registration statement with the Securities and Exchange Commission (“SEC”) to provide for the issuance of debt securities in the U.S. capital markets to retail and institutional investors. We currently qualify as a well-known seasoned issuer under SEC rules, which allows us to issue under our registration statement an unlimited amount of debt securities during the three-year period ending January 2024.  Debt securities issued under the U.S. shelf registration statement are issued pursuant to the terms of an indenture which requires TMCC to comply with certain covenants, including negative pledge and cross-default provisions.  We are currently in compliance with these covenants.

 


57


 

 

EMTN program

Our EMTN program, shared with our affiliates Toyota Motor Finance (Netherlands) B.V., Toyota Credit Canada Inc. and Toyota Finance Australia Limited (TMCC and such affiliates, the “EMTN Issuers”), provides for the issuance of debt securities in the international capital markets.  In September 2021, the EMTN Issuers renewed the EMTN program for a one-year period.  The maximum aggregate principal amount authorized under the EMTN Program to be outstanding at any time is €60.0 billion or the equivalent in other currencies, of which €27.2 billion was available for issuance at December 31, 2021.  The authorized amount is shared among all EMTN Issuers.  The authorized aggregate principal amount under the EMTN program may be increased from time to time.  Debt securities issued under the EMTN program are issued pursuant to the terms of an agency agreement.  Certain debt securities issued under the EMTN program are subject to negative pledge provisions.  We are currently in compliance with these covenants.

We may issue other debt securities through the global capital markets or enter into other unsecured financing arrangements, including those in which we agree to use the proceeds solely to acquire retail or lease contracts financing new Toyota and Lexus vehicles of specified “green” models.  The terms of these “green” bond transactions have been consistent with the terms of other similar transactions except that the proceeds we receive are included in Restricted cash and cash equivalents on our Consolidated Balance Sheets, when applicable.

Other debt

TMCC has entered into term loan agreements with various banks.  These term loan agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets.  We are currently in compliance with these covenants and conditions.

We may borrow from affiliates on terms based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities.  Amounts borrowed from affiliates are recorded in Other liabilities on our Consolidated Balance Sheets and are therefore excluded from Debt amounts.

 

Secured Notes and Loans Payable

Asset-backed securitization of our earning asset portfolio provides us with an alternative source of funding.  We regularly execute public or private securitization transactions.  

The following table summarizes the significant activities of our Secured notes and loans payable:

(Dollars in millions)

 

Secured

notes and

loans

payable

 

Balance at March 31, 2021

 

$

24,256

 

Issuances

 

 

14,304

 

Maturities and terminations

 

 

(10,446

)

Balance at December 31, 2021

 

$

28,114

 

We securitize finance receivables and beneficial interests in investments in operating leases (“Securitized Assets”) using a variety of structures.  Our securitization transactions involve the transfer of Securitized Assets to bankruptcy-remote special purpose entities.  These bankruptcy-remote entities are used to ensure that the Securitized Assets are isolated from the claims of creditors of TMCC and that the cash flows from these assets are available solely for the benefit of the investors in these asset-backed securities.  Investors in asset-backed securities do not have recourse to our other assets, and neither TMCC nor our affiliates guarantee these obligations.  We are not required to repurchase or make reallocation payments with respect to the Securitized Assets that become delinquent or default after securitization.  As seller and servicer of the Securitized Assets, we are required to repurchase or make a reallocation payment with respect to the underlying assets that are subsequently discovered not to have met specified eligibility requirements.  This repurchase obligation is customary in securitization transactions.  With the exception of our revolving asset-backed securitization program, funding obtained from our securitization transactions is repaid as the underlying Securitized Assets amortize.

We service the Securitized Assets in accordance with our customary servicing practices and procedures.  Our servicing duties include collecting payments on Securitized Assets and submitting them to a trustee for distribution to security holders and other interest holders.  We prepare monthly servicer certificates on the performance of the Securitized Assets, including collections, investor distributions, delinquencies, and credit losses.  We also perform administrative services for the special purpose entities.

58


 

Our use of special purpose entities in securitizations is consistent with conventional practice in the securitization market.  None of our officers, directors, or employees hold any equity interests or receive any direct or indirect compensation from our special purpose entities.  These entities do not own our stock or the stock of any of our affiliates.  Each special purpose entity has a limited purpose and generally is permitted only to purchase assets, issue asset-backed securities, and make payments to the security holders, other interest holders and certain service providers as required under the terms of the transactions.

 

Our securitizations are structured to provide credit enhancement to reduce the risk of loss to security holders and other interest holders in the asset-backed securities.  Credit enhancement may include some or all of the following:

 

Overcollateralization:  The principal of the Securitized Assets that exceeds the principal amount of the related secured debt.

 

Excess spread:  The expected interest collections on the Securitized Assets that exceed the expected fees and expenses of the special purpose entity, including the interest payable on the debt, net of swap settlements, if any.

 

Cash reserve funds:  A portion of the proceeds from the issuance of asset-backed securities may be held by the securitization trust in a segregated reserve fund and may be used to pay principal and interest to security holders and other interest holders if collections on the underlying receivables are insufficient.

 

Yield supplement arrangements:  Additional overcollateralization may be provided to supplement the future contractual interest payments from securitized receivables with relatively low contractual interest rates.

 

Subordinated notes:  The subordination of principal and interest payments on subordinated notes may provide additional credit enhancement to holders of senior notes.

In addition to the credit enhancement described above, we may enter into interest rate swaps with our special purpose entities that issue variable rate debt.  Under the terms of these swaps, the special purpose entities are obligated to pay TMCC a fixed rate of interest on payment dates in exchange for receiving a floating rate of interest on notional amounts equal to the outstanding balance of the secured notes and loans payable.  This arrangement enables the special purpose entities to mitigate the interest rate risk inherent in issuing variable rate debt that is secured by fixed rate Securitized Assets.

Securitized Assets and the related debt remain on our Consolidated Balance Sheets.  We recognize financing revenue on the Securitized Assets.  We also recognize interest expense on the secured notes and loans payable issued by the special purpose entities and maintain an allowance for credit losses on the Securitized Assets to cover estimated lifetime expected credit losses using a methodology consistent with that used for our non-securitized asset 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.

We periodically enter into term securitization transactions whereby we agree to use the proceeds solely to acquire retail and lease contracts financing new Toyota and Lexus vehicles of certain specified “green” models.  The terms of these “green” securitization transactions have been consistent with the terms of our other similar transactions except that the proceeds we receive are included in Restricted cash and cash equivalents on our Consolidated Balance Sheets, when applicable.

Our secured notes also include a revolving asset-backed securitization program backed by a revolving pool of finance receivables and cash collateral. Cash flows from these receivables during the revolving period in excess of what is needed to pay certain expenses of the securitization trust and contractual interest payments on the related secured notes may be used to purchase additional receivables, provided that certain conditions are met following the purchase.  The secured notes feature a scheduled revolving period, with the ability to repay the secured notes in full, after which an amortization period begins. The revolving period may also end with the amortization period beginning upon the occurrence of certain events that include certain segregated account balances falling below their required levels, credit losses or delinquencies on the pool of assets supporting the secured notes exceeding specified levels, the adjusted pool balance falling to less than 50% of the initial principal amount of the secured notes, or interest not being paid on the secured notes.

Public Securitization

We maintain a shelf registration statement with the SEC to provide for the issuance of securities backed by Securitized Assets in the U.S. capital markets during the three-year period ending December 2021.  We regularly sponsor public securitization trusts that issue securities backed by retail finance receivables, including registered securities that we retain.  None of these securities have defaulted, experienced any events of default or failed to pay principal in full at maturity.  As of December 31, 2021 and March 31, 2021, we did not have any outstanding lease securitization transactions registered with the SEC.

59


 

 

Credit Facilities and Letters of Credit

For additional liquidity purposes, we maintain credit facilities, which may be used for general corporate purposes, as described below:

364-Day Credit Agreement, Three-Year Credit Agreement and Five-Year Credit Agreement

TMCC, Toyota Credit de Puerto Rico Corp. (“TCPR”), and other Toyota affiliates are party to a $5.0 billion 364-day syndicated bank credit facility, a $5.0 billion three-year syndicated bank credit facility, and a $5.0 billion five-year syndicated bank credit facility, expiring in fiscal 2023, 2025 and 2027, respectively.

The ability to make draws is subject to covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets.  These agreements were not drawn upon and had no outstanding balances as of December 31, 2021 and March 31, 2021.  We are currently in compliance with the covenants and conditions of the credit agreements described above.

Committed Revolving Asset-backed Facility

We are party to a 364-day revolving securitization facility with certain bank-sponsored asset-backed conduits and other financial institutions expiring in fiscal 2023.  Under the terms and subject to the conditions of this facility, the committed lenders under the facility have committed to make advances up to a facility limit of $7.0 billion backed by eligible retail finance receivables transferred by us to a special-purpose entity acting as borrower.  As of December 31, 2021, $3.7 billion of this facility was utilized.

Other Unsecured Credit Agreements

TMCC is party to additional unsecured credit facilities with various banks.  As of December 31, 2021, TMCC had committed bank credit facilities totaling $4.6 billion of which $350 million, $2.2 billion, $300 million, and $1.7 billion mature in fiscal 2022, 2023, 2024, and 2025 respectively.

These credit agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets.  These credit facilities were not drawn upon and had no outstanding balances as of December 31, 2021 and March 31, 2021. We are currently in compliance with the covenants and conditions of the credit agreements described above.

TMCC is party to a $5.0 billion three-year revolving credit facility with TMS expiring in fiscal 2025.  This credit facility was not drawn upon and had no outstanding balance as of December 31, 2021 and March 31, 2021.

From time to time, we may borrow from affiliates based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities.

Credit Ratings

The cost and availability of unsecured financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation.  Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets.  Credit ratings are not recommendations to buy, sell, or hold securities, and are subject to revision or withdrawal at any time by the assigning credit rating organization.  Each credit rating organization may have different criteria for evaluating risk, and therefore ratings should be evaluated independently for each organization.  Our credit ratings depend in part on the existence of the credit support agreements of TFSC and TMC.  Refer to “Part I, Item 1A. Risk Factors - Our borrowing costs and access to the unsecured debt capital markets depend significantly on the credit ratings of TMCC and its parent companies and our credit support arrangements” in our fiscal 2021 Form 10-K.

 

60


 

 

DERIVATIVE INSTRUMENTS

Risk Management Strategy

Our liabilities consist mainly of fixed and variable rate debt, denominated in U.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps and foreign currency swaps to economically hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities.  Our use of derivative transactions is intended to reduce long-term fluctuations in the fair value of assets and liabilities caused by market movements.  All of our derivative activities are authorized and monitored by our management and our Asset-Liability Committee which provides a framework for financial controls and governance to manage market risk.

Accounting for Derivative Instruments

All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow us to net settle asset and liability positions and offset cash collateral held with the same counterparty on a net basis.  Changes in the fair value of derivatives are recorded in Interest expense in our Consolidated Statements of Income.  The derivative instruments are included as a component of Other assets or Other liabilities on our Consolidated Balance Sheets.

Accounting guidance permits the net presentation on our Consolidated Balance Sheets of derivative receivables and derivative payables with the same counterparty and the related cash collateral when a legally enforceable master netting agreement exists, or when the derivative receivables and derivative payables meet all the conditions for the right of setoff to exist.  When we meet this condition, we elect to present such balances on a net basis.  

Our International Swaps and Derivatives Association (“ISDA”) Master Agreements are our master netting agreements which permit multiple transactions to be cancelled and settled with a single net balance paid to either party for our OTC derivatives.  The master netting agreements also contain reciprocal collateral agreements which require the transfer of cash collateral to the party in a net asset position across all transactions.  Our collateral agreements with substantially all our counterparties include a zero threshold, full collateralization arrangement.  Although we have daily valuation and collateral exchange arrangements with all of our counterparties, due to the time required to move collateral, there may be a delay of up to one day between the exchange of collateral and the valuation of our derivatives.  We would not be required to post additional collateral to the counterparties with whom we were in a net liability position at December 31, 2021, if our credit ratings were to decline, since we fully collateralize without regard to credit ratings with these counterparties.  In addition, as our collateral agreements include legal right of offset provisions, collateral amounts are netted against derivative assets or derivative liabilities.

For our centrally cleared derivatives, variation margin payments are legally characterized as settlement payments and accounted for with corresponding derivative positions as one unit of account as opposed to collateral.  Initial margin payments are separately recorded in Other Assets on our Consolidated Balance Sheets. We perform valuation and margin exchange on a daily basis.  Similar to the OTC swaps, there may be a delay of up to one day between the exchange of margin payments and the valuation of our derivatives.

We categorize derivatives as those designated for hedge accounting (“hedge accounting derivatives”) and those that are not designated for hedge accounting (“non-hedge accounting derivatives”).  At the inception of a derivative contract, we may elect to designate a derivative as a hedge accounting derivative.  We had no hedge accounting derivatives as of December 31, 2021 and March 31, 2021, respectively.

Refer to Note 6 – Derivatives, Hedging Activities and Interest Expense of the Notes to Consolidated Financial Statements.


61


 

 

Derivative Assets and Liabilities

The following table summarizes our derivative assets and liabilities, which are included in Other assets and Other liabilities on our Consolidated Balance Sheets:

 

 

December 31,

 

 

March 31,

 

(Dollars in millions)

 

2021

 

 

2021

 

Gross derivatives assets, net of credit valuation adjustment

 

$

1,083

 

 

$

1,356

 

Less: Counterparty netting

 

 

(640

)

 

 

(840

)

Less: Collateral held

 

 

(380

)

 

 

(462

)

Derivative assets, net

 

$

63

 

 

$

54

 

 

 

 

 

 

 

 

 

 

Gross derivative liabilities, net of credit valuation adjustment

 

$

938

 

 

$

1,385

 

Less: Counterparty netting

 

 

(640

)

 

 

(840

)

Less: Collateral posted

 

 

(298

)

 

 

(544

)

Derivative liabilities, net

 

$

-

 

 

$

1

 

Collateral represents cash received or deposited under reciprocal arrangements that we have entered into with our derivative counterparties.  As of December 31, 2021 and March 31, 2021, we held excess collateral of $1 million and $29 million, respectively, which we did not use to offset derivative assets.  As of December 31, 2021 and March 31, 2021, we posted initial margin and excess collateral of $121 million and $10 million, respectively, which we did not use to offset derivative liabilities.

LIBOR TRANSITION

In July 2017, the United Kingdom Financial Conduct Authority (“FCA”), which regulates the London Inter-bank Offered Rate (“LIBOR”), announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021.  In November 2020, ICE Benchmark Administration, the administrator of LIBOR, announced its intention to continue publication of overnight and one-, three-, six- and 12- month U.S. dollar LIBOR rates through June 30, 2023.  However, the United States Federal Reserve and other regulatory agencies issued guidance encouraging banks to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.  On March 5, 2021, the FCA announced that certain LIBOR rates will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021 (or, in the case of overnight and one-, three-, six- and 12-month U.S. dollar LIBOR rates, immediately after June 30, 2023).  We are exposed to LIBOR-based financial instruments, including through our dealer financing activities, derivative contracts, secured and unsecured debt, and investment securities.  To facilitate an orderly transition from LIBOR to alternative reference rates (“ARRs”), we have established an initiative led by senior management, with Board and committee oversight, to assess, monitor and mitigate risks associated with the expected discontinuation of LIBOR, to achieve operational readiness and engage impacted borrowers and counterparties in connection with the transition to ARRs.  Our efforts under this initiative include monitoring developments and the usage of ARRs, monitoring the regulatory and financial reporting guidance, as well as reviewing and updating current legal contracts, internal systems and processes to accommodate the use of ARRs.  For example, we have committed to using Secured Overnight Financing Rate (“SOFR”) linked rates in connection with various borrowing arrangements and Prime in connection with various lending arrangements, and we continue to evaluate other alternatives as potential ARRs to LIBOR.  SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions.  

We are also continuously assessing how the expected discontinuation of LIBOR will impact accounting and financial reporting.  For example, on April 1, 2021, we adopted ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as further discussed in Note 1 – Interim Financial Data of the Notes to Consolidated Financial Statements.

Refer to Part I, Item 1A. Risk Factors – “Uncertainty about the transition away from the London Interbank Offered Rate (“LIBOR”) and the adoption of alternative reference rates could adversely impact our business and results of operations” in our fiscal 2021 Form 10-K for further discussion.

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NEW ACCOUNTING STANDARDS

Refer to Note 1 – Interim Financial Data of the Notes to Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

Guarantees

TMCC has guaranteed the payments of principal and interest with respect to the bond obligations 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.  Refer to Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further discussion.

Commitments

A description of our lending commitments is included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Off-Balance Sheet Arrangements” and Note 12 - Related Party Transactions of the Notes to Consolidated Financial Statements in our fiscal 2021 Form 10-K, as well as in Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements.

Indemnification

Refer to Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for a description of agreements containing indemnification provisions.

 


63


 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.

 

 

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the principal executive officer) and Chief Financial Officer (the principal financial officer), of the effectiveness of our “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”).  Based on this evaluation, the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) concluded that the disclosure controls and procedures were effective as of December 31, 2021, to ensure that information required to be disclosed in reports filed under the Exchange Act was recorded, processed, summarized and reported within the time periods specified by the SEC’s rules, regulations, and forms and that such information is accumulated and communicated to our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

There have been no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 


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PART II. OTHER INFORMATION

 

 

Litigation

For a discussion of legal proceedings, see “Part I. Financial Information – Item 1. Financial Statements - Note 9 – Commitments and Contingencies of the Notes to Consolidated Financial Statements – Litigation and Governmental Proceedings.”  

 

ITEM 1A. RISK FACTORS

The following risk factors have changed from the risk factors set forth under “Item 1A. Risk Factors” in our fiscal 2021 Form 10-K.

Our results of operations and financial condition are substantially dependent upon the sale of Toyota, Lexus, and private label vehicles, as well as our ability to offer competitive financing and voluntary protection products.

We primarily provide a variety of finance and voluntary protection products to authorized Toyota, Lexus, and private label dealers and their customers in the U.S.  Accordingly, our business is substantially dependent upon the sale of Toyota, Lexus, and private label vehicles in the U.S.  Changes in the volume of sales may result from governmental action or changes in governmental regulation or trade policies, changes in consumer demand, new vehicle incentive programs, recalls, the actual or perceived quality, safety or reliability of Toyota, Lexus, and private label vehicles, economic conditions, increased competition, increases in the price of vehicles due to increased raw material costs, changes in import fees or tariffs on raw materials or imported vehicles, changes to or withdrawals from trade agreements, currency fluctuations, fluctuations in interest rates, decreased or delayed vehicle production due to extreme weather conditions, natural disasters, supply chain interruptions, including shortages of parts, components or raw materials, or other events.  For example, the severe weather that many parts of the U.S. experienced during the fourth quarter of fiscal 2021, resulted in a shortage of petrochemicals that affected the production at certain of TMNA’s production facilities.  Any negative impact on the volume of Toyota, Lexus, and private label vehicle sales in the U.S. could have a material adverse effect on our business, results of operations, and financial condition.

TMS, a subsidiary of TMNA, is the primary distributor of Toyota and Lexus vehicles in the U.S.  While TMNA conducts extensive market research before launching new or refreshed vehicles and introducing new services, many factors both within and outside TMNA’s control affect the success of new or existing products and services in the marketplace.  Offering vehicles and services that customers want and value can mitigate the risks of increasing price competition and declining demand, but products and services that are perceived to be less desirable (whether in terms of product mix, price, quality, styling, safety, overall value, fuel efficiency, or other attributes) and the level of availability of products and services that are desirable can exacerbate these risks.  With increased consumer interconnectedness through the internet, social media, and other media, mere allegations relating to quality, safety, fuel efficiency, corporate social responsibility, or other key attributes can negatively impact TMNA’s reputation or market acceptance of its products or services, even where such allegations prove to be inaccurate or unfounded.

In addition, the volume of TMNA sales may also be affected by Toyota’s ability to successfully grow through investments in the area of emerging opportunities such as mobility and connected services, vehicle electrification, fuel cell technology and autonomy, which depends on many factors, including advancements in technology, regulatory changes, and other factors that are difficult to predict.

We operate in a highly competitive environment and compete with other financial institutions and, to a lesser extent, other automobile manufacturers’ affiliated finance companies primarily through service, quality, our relationship with TMNA, and financing rates.  TMNA sponsors subvention, cash, and contractual residual value support incentive programs offered by us on certain new and used Toyota and Lexus vehicles.  Our ability to offer competitive financing and voluntary protection products in the U.S. depends in part on the level of TMNA sponsored subvention, cash, and contractual residual value support incentive program activity, which varies based on TMNA marketing strategies, economic conditions, and the volume of vehicle sales, among other factors.  Any negative impact on the level of TMNA sponsored subvention, cash, and contractual residual value support incentive programs could in turn have a material adverse effect on our business, results of operations, and financial condition.

A failure or interruption in our operations could adversely affect our results of operations and financial condition.

Operational risk is the risk of loss resulting from, among other factors, lack of established processes, inadequate or failed processes, systems or internal controls, theft, fraud, extreme weather conditions, natural disasters (such as wildfires, floods, tornadoes, earthquakes, hurricanes (including an increase in the frequency of such conditions and disasters as the result of climate change)) or other catastrophes (including without limitation, explosions, terrorist attacks, riots, civil disturbances and

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health epidemics and other outbreaks).  Operational risk can occur in many forms including, but not limited to, errors, business interruptions, failure of controls, failure of systems or other technology, deficiencies in our voluntary protection product operations risk management program, inappropriate behavior or misconduct by our employees or those contracted to perform services for us, and vendors that do not perform in accordance with their contractual agreements.  We have established business recovery plans to address interruptions in our operations, but we can give no assurance that these plans will be adequate to remediate all events that we may face.  A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations.  These events can potentially result in financial losses or other damage to us, including damage to our reputation.

We rely on a framework of internal controls designed to provide a sound and well-controlled operating environment.  Due to the complexity of our business and the challenges inherent in implementing control structures across large organizations, control issues could be identified in the future that could have a material adverse effect on our operations.

 

We are currently in the process of restructuring our customer service operations to better serve our customers by relocating and streamlining the customer service operation, moving our three regional CSCs to be co-located with the regional DSCs, and investing in new technology.  We can give no assurance that the restructuring of our customer service operations will be completed as planned or within the expected timing or budget, and the expected benefits may not be fully realized due to associated disruption to customer service operations and personnel.

 

In addition, many parts of our business are dependent on key personnel.  Our future success depends on our ability to retain existing, and attract, hire and integrate new key personnel and other necessary employees.  Any failure to do so could adversely affect our business, results of operations and financial condition.

We are exposed to customer and dealer credit risk, which could negatively affect our results of operations and financial condition.

Credit risk is the risk of loss arising from the failure of a customer or dealer to meet the terms of any retail, lease or dealer financing contract with us or otherwise fail to perform as agreed.  An increase in credit risk would increase our provision for credit losses, which would have a negative impact on our results of operations and financial condition. There can be no assurance that our monitoring of credit risk and our efforts to mitigate credit risk are or will be sufficient to prevent an adverse effect on our results of operations and financial condition.

The level of credit risk in our retail loan portfolio is influenced primarily by two factors: the total number of contracts that experience default (“default frequency”) and the amount of loss per occurrence (“loss severity”), which in turn are influenced by various economic factors, the used vehicle market, purchase quality mix, contract term length, and operational changes.  The used vehicle market is impacted by the supply of, and demand for, used vehicles, interest rates, inflation, new vehicle incentive programs, the manufacturer’s actual or perceived reputation for quality, safety, and reliability, and the general economic outlook.

The level of credit risk in our dealer portfolio is influenced primarily by the financial strength of dealers within our portfolio, dealer concentration, collateral quality, and other economic factors.  The financial strength of dealers within our portfolio is influenced by general macroeconomic conditions, the overall demand for new and used vehicles, and the financial condition of automotive manufacturers, among other factors.  

Economic slowdown and recession in the U.S., extreme weather conditions, natural disasters, health epidemics, and other factors increase the risk that a customer or dealer may not meet the terms of a retail, lease or dealer financing contract with us or may otherwise fail to perform as agreed.  A weak economic environment evidenced by, among other things, unemployment, underemployment, and consumer bankruptcy filings, may affect some of our customers’ and dealers’ ability to make their scheduled payments.

The regulatory environment in which we operate could have a material adverse effect on our business and results of operations.

Regulatory risk includes risk arising from failure or alleged failure to comply with applicable regulatory requirements and risk of liability and other costs imposed under various laws and regulations, including changes in applicable law, regulation and regulatory guidance. For example, laws or regulations intended to mitigate factors contributing to, or intended to address the potential impacts of, climate change, could have a material adverse effect on our business, results of operations and financial condition.

Consumer Finance Regulation

As a provider of finance and voluntary protection products, we operate in a highly regulated environment.  We are subject to state licensing requirements and state, and federal laws and regulations.  In addition, we are subject to governmental and regulatory examinations, information-gathering requests, and investigations from time to time at the state and federal levels.  

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Compliance with applicable law is costly and can affect our results of operations. Compliance requires forms, processes, procedures, controls and the infrastructure to support these requirements.  Compliance may create operational constraints and place limits on pricing, as the laws and regulations in the financial services industry are designed primarily for the protection of consumers.  Changes in laws and regulations could restrict our ability to operate our business as currently operated, could impose substantial additional costs or require us to implement new processes, which could adversely affect our business, prospects, financial performance or financial condition.  The failure to comply with applicable laws and regulations could result in significant statutory civil and criminal fines, penalties, monetary damages, attorney or legal fees and costs, restrictions on our ability to operate our business, possible revocation of licenses and damage to our reputation, brand and valued customer relationships. Any such costs, restrictions, revocations or damage could adversely affect our business, prospects, results of operations or financial condition.

Our principal consumer finance regulator at the federal level is the CFPB, which has broad regulatory, supervisory and enforcement authority over us.  The CFPB’s supervisory authority allows it, among other things, to conduct comprehensive and rigorous examinations to assess our compliance with consumer financial protection laws, which could result in enforcement actions, regulatory fines and mandated changes to our business products, policies and procedures.

The CFPB’s rulemaking authority includes the authority to promulgate rules regarding, among other practices, debt collection practices that would apply to third-party collectors and first-party collectors, such as ourselves, and rules regarding consumer credit reporting practices.  The timing and impact of these rules on our business remain uncertain.  In addition, the CFPB has focused on the area of auto finance, particularly with respect to indirect financing arrangements, dealer compensation and fair lending compliance, and questioned the value and increased scrutiny of the marketing and sale of certain ancillary or add-on products, including products similar to those we finance or sell through TMIS.

The CFPB and FTC may investigate the products, services and operations of credit providers, including banks and other finance companies engaged in auto finance activities.  As a result of such investigations, the CFPB and FTC have announced various enforcement actions against lenders in the past few years involving significant penalties, consent orders, cease and desist orders and similar remedies that, if applicable to us or the products, services and operations we offer, may require us to cease or alter certain business practices, which could have a material adverse effect on our results of operations, financial condition, and liquidity.  Supervision and investigations by these agencies may result in monetary penalties, increase our compliance costs, require changes in our business practices, affect our competitiveness, impair our profitability, harm our reputation or otherwise adversely affect our business.  

Refer to “Item 1. Business, Regulatory Environment of our fiscal 2021 Form 10-K” for further discussion of the CFPB’s authority and activities.

At the state level, state regulators are taking a more stringent approach to supervising and regulating financial products and services subject to their jurisdiction.  For example, certain states have proposed rate cap bills that would put limits on the maximum rate of finance charges.  We expect to continue to face greater supervisory scrutiny and enhanced supervisory requirements for the foreseeable future.  

Other Federal Regulation

Under the Volcker Rule companies affiliated with U.S. insured depository institutions are generally prohibited from engaging in “proprietary trading” and certain transactions with certain privately offered funds.  The activities prohibited by the Volcker Rule are not core activities for us.  However, the federal financial regulatory agencies charged with implementing the Volcker Rule could further amend the rule or change their approach to administering, enforcing or interpreting the rule, which could negatively affect us and potentially require us to limit or change our activities or operations.

The Dodd-Frank Act amended the CEA to establish a framework for the regulation of certain OTC derivatives referred to as swaps.  The OTC derivatives provisions of the CEA, as amended by the Dodd-Frank Act, impose clearing, trading and margin requirements on certain contracts.  At present, we qualify for exceptions from these requirements for the swaps that we enter into to hedge our commercial risks.  However, if we were to no longer qualify for such exceptions, we could become subject to some or all of these requirements, which would increase our cost of entering into and maintaining such hedging positions.  

If we reduce our use of OTC derivatives as a result of the Dodd-Frank Act and resulting regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures.

Refer to “Item 1. Business, Regulatory Environment of our fiscal 2021 Form 10-K” for additional information on our regulatory environment.

 

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

 

ITEM 5. OTHER INFORMATION

None.

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ITEM 6.   EXHIBITS

 

Exhibit Number

 

Description

 

Method of Filing

 

 

 

 

 

3.1

 

Restated Articles of Incorporation of Toyota Motor Credit Corporation filed with the California Secretary of State on April 1, 2010

 

(1)

 

 

 

 

 

3.2

 

Bylaws of Toyota Motor Credit Corporation as amended through December 8, 2000

 

(2)

 

 

 

 

 

10.1

 

364 Day Credit Agreement, dated as of November 5, 2021, among Toyota Motor Credit Corporation, Toyota Motor Finance (NETHERLANDS) B.V., Toyota Financial Services (UK) PLC, Toyota Credit De Puerto Rico Corp., Toyota Credit Canada Inc., Toyota Kreditbank GMBH, and Toyota Finance Australia Limited, as Borrowers, the lenders party thereto, and BNP Paribas, as Administrative Agent, Swing Line Agent and Swing Line Lender, BNP Paribas Securities Corp., BofA Securities, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., and MUFG Bank, LTD., as Joint Lead Arrangers and Joint Book Managers, Citibank, N.A., Bank of America, N.A. and JPMorgan Chase Bank, N.A., as Syndication Agents and Swing Line Lenders, and MUFG Bank, LTD., as a Syndication Agent.

 

(3)

 

 

 

 

 

10.2

 

Three Year Credit Agreement, dated as of November 5, 2021, among Toyota Motor Credit Corporation, Toyota Motor Finance (NETHERLANDS) B.V., Toyota Financial Services (UK) PLC, Toyota Credit De Puerto Rico Corp., Toyota Credit Canada Inc., Toyota Kreditbank GMBH, and Toyota Finance Australia Limited, as Borrowers, the lenders party thereto, and BNP Paribas, as Administrative Agent, Swing Line Agent and Swing Line Lender, BNP Paribas Securities Corp., BofA Securities, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., and MUFG Bank, LTD., as Joint Lead Arrangers and Joint Book Managers, Citibank, N.A., Bank of America, N.A. and JPMorgan Chase Bank, N.A., as Syndication Agents and Swing Line Lenders, and MUFG Bank, LTD., as a Syndication Agent.

 

(4)

 

 

 

 

 

10.3

 

Five Year Credit Agreement, dated as of November 5, 2021, among Toyota Motor Credit Corporation, Toyota Motor Finance (NETHERLANDS) B.V., Toyota Financial Services (UK) PLC, Toyota Credit De Puerto Rico Corp., Toyota Credit Canada Inc., Toyota Kreditbank GMBH, and Toyota Finance Australia Limited, as Borrowers, the lenders party thereto, and BNP Paribas, as Administrative Agent, Swing Line Agent and Swing Line Lender, BNP Paribas Securities Corp., BofA Securities, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., and MUFG Bank, LTD., as Joint Lead Arrangers and Joint Book Managers, Citibank, N.A., Bank of America, N.A. and JPMorgan Chase Bank, N.A., as Syndication Agents and Swing Line Lenders, and MUFG Bank, LTD., as a Syndication Agent.

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Incorporated herein by reference to Exhibit 3.1, filed with our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, Commission File Number 1-9961.

(2)

Incorporated herein by reference to Exhibit 3.2, filed with our Quarterly Report on Form 10-Q for the three months ended December 31, 2000, Commission File Number 1-9961.

(3)

Incorporated herein by reference to Exhibit 10.1, filed with our Current Report on Form 8-K filed November 8, 2021, Commission File Number 1-9961.

(4)

Incorporated herein by reference to Exhibit 10.2, filed with our Current Report on Form 8-K filed November 8, 2021, Commission File Number 1-9961.

(5)

Incorporated herein by reference to Exhibit 10.3, filed with our Current Report on Form 8-K filed November 8, 2021, Commission File Number 1-9961.


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Exhibit Number

 

Description

 

Method of Filing

 

 

 

 

 

31.1

 

Certification of Chief Executive Officer

 

Filed Herewith

 

 

 

 

 

31.2

 

Certification of Chief Financial Officer

 

Filed Herewith

 

 

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. Section 1350

 

Furnished Herewith

 

 

 

 

 

32.2

 

Certification pursuant to 18 U.S.C. Section 1350

 

Furnished Herewith

 

 

 

 

 

101.INS

 

Inline XBRL instance document

 

Filed Herewith

 

 

 

 

 

101.CAL

 

Inline XBRL taxonomy extension calculation linkbase document

 

Filed Herewith

 

 

 

 

 

101.DEF

 

Inline XBRL taxonomy extension definition linkbase document

 

Filed Herewith

 

 

 

 

 

101.LAB

 

Inline XBRL taxonomy extension labels linkbase document

 

Filed Herewith

 

 

 

 

 

101.PRE

 

Inline XBRL taxonomy extension presentation linkbase document

 

Filed Herewith

 

 

 

 

 

101.SCH

 

Inline XBRL taxonomy extension schema document

 

Filed Herewith

 

 

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

Filed Herewith

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

TOYOTA MOTOR CREDIT CORPORATION

 

(Registrant)

 

 

 

 

 

 

 

Date: February 9, 2022

By

/s/ Mark S. Templin

 

 

Mark S. Templin

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

Date: February 9, 2022

By

/s/ Scott Cooke

 

 

Scott Cooke

 

 

Senior Vice President and

Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

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