UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9961
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TOYOTA MOTOR CREDIT CORPORATION
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(Exact name of registrant as specified in its charter)
California 95-3775816
- ---------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 S. Western Avenue
Torrance, California 90509
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 468-1310
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of June 30, 2002, the number of outstanding shares of capital stock, par
value $10,000 per share, of the registrant was 91,500, all of which shares were
held by Toyota Financial Services Americas Corporation.
-1-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
June 30, March 31, June 30,
2002 2002 2001
------------ ------------ ------------
(Unaudited) (Unaudited)
ASSETS
------
Cash and cash equivalents............... $ 322 $ 747 $ 265
Investments in marketable securities.... 1,371 1,100 1,116
Finance receivables, net................ 22,911 22,390 19,842
Finance receivables, net - securitized.. 947 1,087 -
Investments in operating leases, net.... 7,732 7,631 7,200
Derivative assets....................... 701 454 379
Other assets............................ 914 630 760
Income taxes receivable................. 403 221 131
------- ------- -------
Total Assets................... $35,301 $34,260 $29,693
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................. $27,571 $25,990 $22,200
Notes payable related to securitized
finance receivables structured as
collateralized borrowings............ 900 1,036 -
Derivative liabilities.................. 556 1,124 1,752
Other liabilities....................... 837 819 925
Deferred income......................... 880 861 736
Deferred income taxes................... 1,836 1,679 1,516
------- ------- -------
Total Liabilities................. 32,580 31,509 27,129
------- ------- -------
Commitments and Contingencies
Shareholder's Equity:
Capital stock, $l0,000 par value
(100,000 shares authorized;
91,500 issued and outstanding)... 915 915 915
Retained earnings.................... 1,791 1,820 1,631
Accumulated other comprehensive
income............................ 15 16 18
------- ------- -------
Total Shareholder's Equity........ 2,721 2,751 2,564
------- ------- -------
Total Liabilities and
Shareholder's Equity........... $35,301 $34,260 $29,693
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
-2-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
Three Months Ended
June 30,
------------------
2002 2001
------ ------
(Unaudited)
Financing Revenues:
Leasing........................................ $ 621 $ 620
Retail financing............................... 263 194
Wholesale and other dealer financing........... 40 60
----- ------
Total financing revenues.......................... 924 874
Depreciation on leases......................... 373 374
Interest expense............................... 217 296
SFAS 133 and 138 fair value adjustments........ 214 (9)
------ ------
Net financing revenues............................ 120 213
Insurance premiums earned and contract
revenues....................................... 41 40
Investment and other income....................... 64 65
Loss on asset impairment.......................... - 47
------ ------
Net financing revenues and other revenues......... 225 271
------ ------
Expenses:
Operating and administrative................... 128 114
Losses related to Argentine Investment......... 5 -
Provision for credit losses.................... 122 50
Insurance losses and loss adjustment
expenses.................................... 21 20
------ ------
Total expenses.................................... 276 184
------ ------
(Loss)/Income before income taxes................. (51) 87
(Benefit) provision for income taxes.............. (22) 37
------ ------
Net (Loss)/Income................................. $ (29) $ 50
====== ======
See Accompanying Notes to Consolidated Financial Statements.
-3-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in Millions)
Accumulated
Other
Capital Retained Comprehensive
Stock Earnings Income/(Loss) Total
------- -------- ------------- --------
Balance at March 31, 2001........ $ 915 $ 1,581 $ 18 $ 2,514
------ ------- ---------- -------
Net income for the three months
ended June 30, 2001........... - 50 - 50
Change in net unrealized gains
on available-for-sale
marketable securities......... - - - -
------ -------- ---------- -------
Total Comprehensive Income....... - 50 - 50
------ -------- ---------- -------
Balance at June 30, 2001
(unaudited).................... $ 915 $ 1,631 $ 18 $ 2,564
====== ======= ========== =======
Balance at March 31, 2002........ $ 915 $ 1,820 $ 16 $ 2,751
------ ------- ---------- -------
Net loss for the three months
ended June 30, 2002........... - (29) - (29)
Change in net unrealized gains
on available-for-sale
marketable securities......... - - (1) (1)
------ -------- ---------- -------
Total Comprehensive Loss......... - (29) (1) (30)
------ -------- ---------- -------
Balance at June 30, 2002
(unaudited)................... $ 915 $ 1,791 $ 15 $ 2,721
====== ======= ========== =======
See Accompanying Notes to Consolidated Financial Statements.
-4-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
Three Months Ended
June 30,
-------------------------
2002 2001
-------- ---------
(Unaudited)
Cash flows from operating activities:
Net (loss)/ income....................................... $ (29) $ 50
-------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Fair value adjustments of SFAS 133 and 138
derivatives.................................... 214 (9)
Depreciation and amortization...................... 399 373
Provision for credit losses........................ 122 50
Gain from sale of finance receivables, net......... (33) (26)
Gain from sale of marketable securities, net....... - (1)
Loss on asset impairment........................... - 47
Loss related to Argentine Investment............... 5 -
Increase in other assets........................... (612) (110)
Decrease in accrued interest expense............... (12) (41)
Increase in deferred income taxes.................. 155 48
Increase in other liabilities...................... 180 78
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Total adjustments........................................ 418 409
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Net cash provided by operating activities................... 389 459
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Cash flows from investing activities:
Addition to investments in marketable securities......... (535) (865)
Disposition of investments in marketable securities...... 234 816
Purchase of finance receivables.......................... (6,596) (8,214)
Liquidation of finance receivables....................... 4,598 6,121
Proceeds from sale of finance receivables................ 1,549 1,450
Addition to investments in operating leases.............. (960) (863)
Disposition of investments in operating leases........... 475 704
-------- --------
Net cash used in investing activities....................... (1,235) (851)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable........ 1,933 2,005
Payments on notes and loans payable...................... (1,443) (1,186)
Net decrease in commercial paper with
original maturities less than 90 days................. (69) (456)
-------- --------
Net cash provided by financing activities................... 421 363
-------- --------
Net decrease in cash and cash equivalents................... (425) (29)
Cash and cash equivalents at the beginning of the period.... 747 294
-------- --------
Cash and cash equivalents at the end of the period.......... $ 322 $ 265
======== ========
Supplemental disclosures:
Interest paid............................................ $ 210 $ 328
Income taxes paid........................................ $ 4 $ 43
See Accompanying Notes to Consolidated Financial Statements.
-5-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data
- -------------------------------
The accompanying information pertaining to the three months ended June 30,
2002 and 2001 is unaudited and has been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. In the opinion of management, the
unaudited financial information reflects all adjustments necessary for a fair
statement of the results for the interim periods presented. The results of
operations for the three months ended June 30, 2002 are not necessarily
indicative of those expected for any other interim period or for a full year.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
These financial statements should be read in conjunction with the consolidated
financial statements, significant accounting policies and other notes to the
consolidated financial statements included in Toyota Motor Credit
Corporation's ("TMCC's" or the "Company's") 2002 Annual Report to the
Securities and Exchange Commission ("SEC")on Form 10-K.
-6-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Finance Receivables
- ----------------------------
Finance receivables, net and Finance receivables, net - securitized consisted
of the following:
June 30, March 31, June 30,
2002 2002 2001
------------ ------------ -----------
(Dollars in Millions)
Retail.................................... $14,211 $13,715 $9,641
Finance leases............................ 7,112 7,692 8,452
Wholesale and other dealer loans.......... 4,091 3,626 3,449
------- ------- ------
25,414 25,033 21,542
Unearned income........................... (1,284) (1,340) (1,528)
Allowance for credit losses............... (272) (216) (172)
------- ------- ------
Finance receivables, net and
Finance receivables, net - securitized. $23,858 $23,477 $19,842
======= ======= =======
Finance leases included estimated unguaranteed residual values of $1.9 billion,
$1.9 billion and $1.6 billion at June 30, 2002, March 31, 2002 and June 30,
2001, respectively.
The aggregate balances related to finance receivables 60 or more days past due
totaled $199 million, $189 million and $53 million at June 30, 2002, March 31,
2002 and June 30, 2001, respectively. The increased delinquency experience is
a result of a number of factors including the effects of TMCC's field
reorganization which has temporarily disrupted normal collection activities
and the continuation of the national economic downturn. The field
reorganization is ongoing and the transfer of certain functions from branches
to customer service centers is scheduled to be completed in fiscal 2003. TMCC
is taking measures to minimize the disruption of operations; however, the
restructuring of field operations and economic downturn could continue to
adversely affect delinquencies and credit losses. In addition, the increased
delinquency can be attributed to changes in portfolio quality in connection
with the national tiered pricing program coupled with a general increase in
the average original contract term of retail and lease vehicle contracts
which, historically, experience higher rates of credit losses. Under the
national tiered pricing program, the Company generally acquires higher-
yielding earning assets to compensate for the increased credit risk of such
contracts. The trend toward longer term contracts is reflective of industry
trends. The average length of contracts initiated during fiscal year to date
2003 and fiscal year 2002 was 56.1 and 54.4, respectively. The majority of
retail and finance lease receivables do not involve recourse to the dealer in
the event of customer default.
-7-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Operating Leases
- ----------------------------------------
Investments in operating leases, net consisted of the following:
June 30, March 31, June 30,
2002 2002 2001
------------ ------------ ------------
(Dollars in Millions)
Vehicles.................................. $9,191 $9,011 $8,553
Equipment and other....................... 715 721 706
------ ------ ------
9,906 9,732 9,259
Accumulated depreciation.................. (2,095) (2,034) (2,000)
Allowance for credit losses .............. (79) (67) (59)
------ ------ ------
Investments in operating leases, net...... $7,732 $7,631 $7,200
====== ====== ======
Note 4 - Allowance for Credit Losses
- ------------------------------------
An analysis of the allowance for credit losses follows:
Three months ended
June 30, March 31, June 30,
2002 2002 2001
--------- --------- --------
(Dollars in Millions)
Allowance for credit losses at
beginning of period............... $ 283 $ 269 $ 227
Provision for credit losses.......... 122 97 50
Charge-offs.......................... (60) (62) (40)
Recoveries........................... 7 6 5
Other adjustments.................... (1) (27) (11)
------- ------ ------
Allowance for credit losses
at end of period.................. $ 351 $ 283 $ 231
====== ====== ======
The allowance for credit losses at June 30, 2002 increased $68 million and $120
million from the periods ended March 31, 2002 and June 30, 2001, respectively,
primarily due to an increase in the provision for credit losses. The $25
million and $72 million increase in the provision for credit losses for the
quarter ended June 30, 2002 as compared with the periods ending March 31, 2002
and June 2001, respectively, corresponds with increases in delinquencies and
credit losses. Allowance for credit losses is discussed further under Item 2.
Provision for Credit Losses and Delinquency.
-8-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities
- -------------------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an Amendment of SFAS 133 ("SFAS 138") require
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Fair value of the Company's derivatives is determined
using external market data in conjunction with an internal market valuation
system, or externally quoted market values. Derivative assets and liabilities
include interest rate swaps, indexed note swap agreements, cross currency
interest rate swap agreements and option-based products. The accounting for
the gain or loss due to changes in fair value of the hedged item depends on
whether the relationship between the hedged item and the derivative instrument
qualifies for hedge treatment. If the relationship between the hedged item and
the derivative instrument does not qualify as a hedge, the gains or losses of
the derivative instrument are reported in earnings when they occur. However,
if the relationship between the hedged item and the derivative instrument
qualifies as a hedge, the accounting varies based on the type of hedge.
For the three months ended June 30, 2002, the Company recognized a $214 million
unfavorable SFAS 133 and SFAS 138 adjustment (reported as SFAS 133 and 138
fair value adjustment in the Consolidated Statement of Income). The net
adjustment reflects a $226 million decrease in the fair market value of TMCC's
portfolio of option-based products and certain interest rate swaps which did
not qualify for hedge accounting, offset by an increase of $12 million related
to the ineffective portion of TMCC's fair value hedges. The decrease in the
fair value of TMCC's option-based products as well as certain interest rate
swaps was due to the significant reduction in interest rates during the
quarter, as well as actions taken by TMCC to protect interest rate margins,
including an increase in TMCC's hedge portfolio and a higher mix of swap
derivative products. Various derivative instruments, such as option-based
products and certain interest rate swaps which hedge interest rate risk from an
economic perspective, and which the Company is unable or has elected not to
apply hedge accounting, are discussed in Non-Hedging Activities below. For
fair value hedging relationships, the components of each derivative
instrument's and hedged item's gain or loss are included in the assessment of
hedge effectiveness.
TMCC maintains an overall risk management strategy that utilizes a variety of
interest rate and currency derivative financial instruments to mitigate its
economic exposure to fluctuations caused by volatility in interest rate and
currency exchange rates. TMCC does not use any of these instruments for
trading purposes.
The Company enters into interest rate swaps, indexed note swap agreements and
cross currency interest rate swap agreements to convert its fixed-rate debt to
variable-rate debt, a portion of which is converted back to fixed rates using
option-based products. (Refer to non-hedging activities below for a discussion
of option-based products).
-9-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities (Continued)
- -------------------------------------------
TMCC uses interest rate swap agreements in managing its exposure to interest
rate fluctuations. Interest rate swap agreements are executed as either an
integral part of specific debt transactions or on a portfolio basis. TMCC's
interest rate swap agreements involve agreements to pay fixed and receive a
floating rate, or receive fixed and pay a floating rate, at specified
intervals, calculated on an agreed-upon notional amount. Interest rate swap
agreements may also involve basis swap contracts which are agreements to
exchange the difference between certain floating interest amounts, such as the
net payment based on the commercial paper rate and the London Interbank
Offered Rate ("LIBOR"), calculated on an agreed-upon notional amount. The
original maturities of interest rate swap agreements ranged from one to ten
years at June 30, 2002.
TMCC uses indexed note swap agreements in managing its exposure in connection
with debt instruments whose interest rate and/or principal redemption amounts
are derived from other underlying indices. Indexed note swap agreements
involve agreements to receive interest and/or principal amounts associated
with the indexed notes, denominated in either U.S. dollars or a foreign
currency, and to pay fixed or floating rates on U.S. dollar liabilities.
TMCC uses cross currency interest rate swap agreements to entirely hedge
exposure to exchange rate fluctuations on principal and interest payments for
borrowings denominated in foreign currencies. Notes and loans payable issued
in foreign currencies are hedged by concurrently executing cross currency
interest rate swap agreements which involve the exchange of foreign currency
principal and interest obligations for U.S. dollar obligations at agreed-upon
currency exchange and interest rates.
Derivative financial instruments used by TMCC involve, to varying degrees,
elements of credit risk in the event a counterparty defaults in performing its
obligation under the derivative agreement and market risk as the instruments
are subject to rate and price fluctuations. Credit risk is managed through
the use of credit standard guidelines, counterparty diversification, monitoring
of counterparty financial condition and master netting agreements in place with
all derivative counterparties. Credit exposure of derivative instruments is
discussed further under Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
Non-Hedging Activities
- ----------------------
Option-based products are executed on a portfolio basis and consist primarily
of purchased interest rate cap agreements, certain interest rate swaps and to a
lesser extent, foreign exchange forward contract agreements. Option-based
products are agreements which either grant TMCC the right to receive, or
require TMCC to make payments at, specified interest rate levels. Option-based
products are used primarily to hedge interest rate risk from an economic
perspective on TMCC's portfolio.
The Company uses this strategy to moderate its exposure to volatility in
interest rates, particularly LIBOR, and for liability management purposes.
These products are not linked to specific assets and liabilities that appear on
the balance sheet and therefore, do not qualify for hedge accounting.
-10-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities (Continued)
- -------------------------------------------
Accounting for Derivatives and Hedging Activities
- -------------------------------------------------
Derivatives are recognized in the balance sheet at their fair value. On the
date that the Company enters into a derivative contract that qualifies as
hedge, it designates the derivative as a hedge of the fair value of a
recognized asset or liability or a foreign-currency fair-value hedge (a
"foreign currency hedge"). Changes in the fair value of a derivative that is
highly effective as - and that is designated and qualifies as - a fair-value
hedge or foreign-currency hedge, along with changes in fair value of the
hedged liabilities that are attributable to the hedged risk, are recorded in
current-period earnings.
The Company occasionally purchases a financial instrument in which a derivative
instrument is "embedded." Upon purchasing the financial instrument, the
Company assesses whether the economic characteristics of the embedded
derivative are clearly and closely related to the economic characteristics of
the remaining component of the financial instrument (i.e. host contract) and
whether a separate, non-embedded instrument with the same terms as the embedded
instrument would meet the definition of a derivative instrument. When it is
determined that (1) the embedded derivative possesses economic characteristics
that are not clearly and closely related to the economic characteristics of the
host contract and (2) a separate, stand-alone instrument with the same terms
would qualify as a derivative instrument, the embedded derivative is separated
from the host contract, carried at fair value, and designated as either (1) a
fair-value hedge or (2) non-hedging derivative instrument. However, if the
Company could not reliably identify and measure the embedded derivative for
purposes of separating that derivative from its host contract, the entire
contract would be carried on the balance sheet at fair value and not be
designated as a hedging instrument.
The Company formally documents relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking
derivatives that are designated as fair-value hedges to specific liabilities on
the balance sheet. The Company also assesses whether the derivatives that are
used in hedging transactions have been highly effective in offsetting changes
in the fair value of hedged items and whether those derivatives may be expected
to remain highly effective in future periods. When it is determined that a
derivative is not (or has ceased to be) highly effective as a hedge, the
Company discontinues hedge accounting prospectively, as discussed below.
The Company will discontinue hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting changes in
the fair value of a hedged item; (2) the derivative expires or is sold,
terminated, or exercised; or (3) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
-11-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities (Continued)
- -------------------------------------------
When hedge accounting is discontinued due to the Company's determination that
the derivative no longer qualifies as an effective fair-value hedge, the
Company will continue to carry the derivative on the balance sheet at its fair
value but cease to adjust the hedged liability for changes in fair value. In a
situation in which hedge accounting is discontinued and the derivative remains
outstanding, the Company will carry the derivative at its fair value on the
balance sheet, recognizing changes in the fair value in current-period
earnings.
Note 6 - Notes and Loans Payable
- --------------------------------
Notes and loans payable consisted of the following:
June 30, March 31, June 30,
2002 2002 2001
------------ ------------ ----------
(Dollars in Millions)
Commercial paper, net.................... $ 5,111 $ 5,012 $ 3,965
------- ------- -------
Other senior debt, due in the fiscal
years ending:
2002.................................. - - 3,835
2003.................................. 4,238 5,184 3,428
2004.................................. 5,916 5,360 5,281
2005.................................. 3,851 3,665 1,970
2006.................................. 3,501 2,885 1,477
2007.................................. 1,353 1,252 18
Thereafter............................ 3,601 2,632 2,226
------- ------- -------
Total other senior debt............... 22,460 20,978 18,235
------- ------- -------
Notes and loans payable............ $27,571 $25,990 $22,200
======= ======= =======
Notes and loans payable at June 30, 2002, March 31, 2002 and June 30, 2001
reflect the adjustments required under SFAS 133 and 138 for derivatives and
debt instruments which qualify for hedge treatment as discussed in Note 5 -
Derivatives and Hedging Activities. TMCC recorded a $214 million net
unfavorable fair value adjustment under SFAS 133. This adjustment was
comprised of a $1,029 million increase in the fair market value of the
Company's debt portfolio offset by a $247 million increase in the fair market
value of the Company's derivative assets and a $568 million decrease in the
fair market value of the Company's derivative liabilities. The notional amount
of notes and loans payable was $27.2 billion at June 30, 2002.
Short-term borrowings consist of commercial paper having a weighted average
remaining term and weighted average interest rate of 20 days and 1.84%,
respectively, at June 30, 2002.
-12-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Notes and Loans Payable (Continued)
- --------------------------------
Other senior debt includes certain MTNs, euro bonds and domestic bonds. The
weighted average interest rate on other senior debt was 3.33% for the quarter
ended June 30, 2002 including the effect of interest rate swap agreements. The
rates have been calculated using rates in effect at June 30, 2002, some of
which are floating rates that reset periodically. Less than one percent of
other senior debt at June 30, 2002 had interest rates, including the effect of
interest rate swap agreements, that were fixed for a period of more than one
year.
Approximately 70% of other senior debt at June 30, 2002 had floating interest
rates that were covered by option-based products. The weighted average strike
rate on these option-based products was 4.30% at June 30, 2002. TMCC manages
interest rate risk through continuous adjustment of the mix of fixed and
floating rated debt using interest rate swap agreements and option-based
products.
Included in notes and loans payable at June 30, 2002 were unsecured notes
denominated in various foreign currencies; concurrently with the issuance of
these notes, TMCC entered into cross currency interest rate swap agreements to
convert these obligations at maturity into U.S. dollar obligations which in
aggregate total a principal amount at maturity of $7.5 billion.
Note 7 - Sale of Retail Receivables and Valuation of Residual Interest
- ----------------------------------------------------------------------
TMCC maintains programs to sell retail receivables through the limited purpose
subsidiaries Toyota Motor Credit Receivables Corporation ("TMCRC") and Toyota
Auto Finance Receivables LLC ("TAFR"). TMCC services its securitized
receivables and earns a servicing fee of 1% of the total principal balance of
the outstanding receivables. In a subordinated capacity, the limited purpose
subsidiaries retain excess cash flows, certain cash deposits and other related
amounts, which are held as restricted assets subject to limited recourse
provisions. These restricted assets are not available to satisfy any
obligations of TMCC. The value of these restricted assets retained by the
limited purpose subsidiaries is exposed to losses in receivables and such cash
flows are available as credit support for senior securities. The exposure of
these restricted assets exists until the associated securities are paid in
full. Investors do not have recourse to other assets held by TMCC for failure
of obligors to pay amounts due.
In May 2002 TMCC sold certain retail finance receivables totaling $1.6 billion
to TAFR, which in turn sold the receivables to a specific trust. The pretax
gain resulting from the sale of retail receivables totaled approximately $33
million. The gain is included in investment and other income for the three
months ended June 30, 2002. The recorded gain on sale is dependent on the
carrying amount of the assets at the time of the sale. The carrying amount is
allocated between the assets sold and the retained interests based on their
relative fair values at the date of the sale. The fair value of retained
interests was estimated by discounting expected cash flows using management's
best estimates and other key assumptions.
-13-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Retail Receivables and Valuation of Residual Interest
(Continued)
- ----------------------------------------------------------------------
As part of the transaction, TMCC entered into a revolving liquidity note
agreement in lieu of a cash reserve fund to fund shortfalls of principal and
interest payments to senior security holders. The maximum aggregate amount
available under the revolving liquidity note is $8 million. The trust will be
obligated to repay amounts drawn and interest will be accrued at 4.69% per
annum. If TMCC's short-term unsecured debt rating falls below P-1 or A-1+ by
Moody's or S&P, respectively, or if TMCC fails to fund any amount drawn under
the revolving liquidity note, the trust is entitled to draw down the entire
undrawn amount of the revolving liquidity note. Repayments of principal and
interest due under the revolving liquidity note are subordinated to principal
and interest payments to the senior security holders and, in some
circumstances, to deposits into a reserve account.
TMCC records its retained assets at fair value, which is estimated using a
discounted cash flow analysis. The retained assets are not considered to have
a readily available market value. Any excess of the carrying amount of the
retained interest over its fair value results in an adjustment to the asset
with a corresponding offset to unrealized gain. Unrealized gains, net of
income taxes, related to the retained assets are included in comprehensive
income. If management deems the excess between the carrying value and the
fair value to be unrealizable, the asset is written down through current
period earnings. Management evaluates the key economic assumptions used in
the initial valuation of the retained assets and performs a subsequent review
of those assumptions on a quarterly basis.
In June 2001, the Company experienced increased return rates and losses per
unit upon disposition relating to vehicles associated with its lease and
finance receivables. This experience, combined with revised forecasts for
future return rates and loss per unit, resulted in a downward revision to the
vehicle disposition assumptions. As a result of the change in assumptions, in
the quarter ending June 30, 2001, TMCC recognized losses due to the permanent
impairment of assets retained in the sale of interests in lease finance
receivables totaling $47 million as required by EITF 99-20, which was adopted
in the first quarter of fiscal year 2002. The Company did not have any
outstanding lease securitization transactions as of March and June 2002. The
Company did not record any impairment on retail securitization transactions
during the quarter ended June 30, 2002.
-14-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Related Party Transactions
- -----------------------------------
As of June 30, 2002, there have been no material changes to related party
agreements or relationships as described in the Company's annual report Form
10-K for the year ended March 31, 2002. The table below summarizes amounts
paid or received under such agreements or relationships for the following
periods:
Three Months Ended
June 30,
-------------------
2002 2001
------- --------
(Dollars in Millions)
Credit support fees.................. $ 3.6 $ 2.9
Shared services reimbursement........ 11.4 10.8
Rent expense under facilities lease.. 1.3 1.3
Affiliate wholesale revenue.......... 0.3 0.9
Affiliate insurance premiums and
commissions received............ 10.1 10.2
------- -------
Total.............................. $ 26.7 $ 26.2
======= =======
-15-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and Contingent Liabilities
- -----------------------------------------------
TMCC has executed guarantees totaling $65 million in respect of Toyota Credit
Argentina S.A.'s ("TCA") offshore dollar bank loans, of which approximately
$36 million, including principal and interest, is outstanding as of June 30,
2002. Late in 2001, the Argentine government instituted a series of changes
that led to political, economic and regulatory risks to Argentine businesses.
The government has imposed foreign exchange controls restricting offshore
payment transfers, and these controls are currently preventing TCA from
sending payments on its offshore dollar loans out of Argentina. In February
2002, the Argentine government established measures to re-denominate the
entire Argentine economy into pesos and has permitted the peso to float freely
against other global currencies. This re-denomination policy adversely
affected TCA's financial condition and its ability to fully satisfy its
offshore dollar loans. In fiscal 2002, TMCC established a reserve of $26
million relating to TMCC's guaranty of TCA's offshore outstanding debt.
During the quarter ended June 30, 2002 the valuation of the peso continued to
deteriorate. As a result, TMCC recorded a $5 million charge against income to
increase the reserve related to the Company's guarantee of TCA's offshore
outstanding debt to $31 million. TMCC will continue to monitor the situation
in Argentina.
TMCC has executed guarantees totaling $30 million in respect of the debt of
Banco Toyota do Brasil, S.A. ("BTB"), of which approximately $12 million,
including principal and interest, is outstanding as of June 30, 2002.
In fiscal 2002, TMCC signed a comfort letter on behalf of Toyota Services de
Venezuela, C.A. ("TSV") regarding TSV's office lease. The comfort letter
provides that if any currency exchange controls are imposed in Venezuela that
render it illegal for TSV to pay the rent to the Landlord in U.S. Dollars
(which is required under the Lease), then TMCC will pay the rental fees that
are owed to the landlord during the currency exchange restriction period to a
bank account located outside of Venezuela. The total rent and other lease
costs payable under the lease for the entire 5-year term is approximately $4.2
million. The lease is cancellable at the convenience of TMCC after year three
of the term.
During the quarter ended June 30, 2002, the Company entered into additional
comfort letters on behalf of TSV and Toyota Services de Mexico, S.A. de C.V.
("TSM"). Effective June 2002, TMCC has signed comfort letters with Mexican and
Venezuelan banks on behalf of TSM and TSV regarding local bank credit
facilities whereby TMCC will exercise its influence to induce TSM and TSV to
meet all obligations under their credit facilities. These comfort letters
allow TSM and TSV to obtain uncommitted bank lines of credit for a period of
one year and allow advances in the maximum amounts equivalent to $34 million
for TSM and $5 million for TSV. Maturities for TSM and TSV bank loan advances
range from one month to 36 months. These comfort letters will remain in
effect for as long as any TSM and/or TSV loans are outstanding. The initial
comfort letters may be extended for additional periods by mutual agreement
between TMCC and the banks.
-16-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
TMCC has guaranteed payments of principal and interest on $58 million principal
amount of flexible rate demand pollution control revenue bonds maturing in
2006, issued in connection with the Kentucky manufacturing facility of an
affiliate.
TMCC has guaranteed payments of principal, interest and premiums, if any, on
$88 million principal amount of flexible rate demand solid waste disposal
revenue bonds issued by Putnam County, West Virginia, of which $40 million
matures in June 2028, $27.5 million matures in August 2029, and $20.5 million
matures in April 2030. The bonds were issued in connection with the West
Virginia manufacturing facility of an affiliate.
TMCC has guaranteed payments of principal, interest and premiums, if any, on
$60 million principal amount of flexible rate demand pollution control revenue
bonds issued by Gibson County, Indiana, of which $10 million matures in
October 2027, January 2028, January 2029, January 2030, February 2031 and
September 2031. The bonds were issued in connection with the Indiana
manufacturing facility of an affiliate.
In lieu of a cash reserve fund to fund shortfalls in principal and interest
payments to security holders in asset backed securitization transactions, TMCC
may undertake to advance funds in respect of certain shortfalls and losses,
taking a revolving liquidity note in return which allows the securitization
trust to receive draws from TMCC to fund shortfalls in principal and interest
payments due to investors up to a specified amount and obligates the
securitization trust to repay any amounts drawn with interest accrued thereon.
Repayments of principal and interest due under the revolving liquidity note
are subordinated to principal and interest payments on the asset-backed
securities and, in some circumstances, to deposits into a reserve account. To
the extent amounts are insufficient to repay amounts outstanding under a
revolving liquidity note, TMCC may recognize a loss. As of June 30, 2002, the
aggregate amount available under the revolving liquidity notes is $23 million.
TMCC maintains revolving credit facilities with dealers. These revolving
credit facilities can be used for business acquisitions, inventory financing,
facilities refurbishment, real estate purchases and working capital
requirements. These financings are generally backed by corporate or individual
guarantees from or on behalf of the participating dealers. The revolving
credit facilities totaled $1,588 million of which $763 million was outstanding
as of June 30, 2002.
TMCC has guaranteed the obligations of TMIS relating to vehicle service
insurance agreements issued in Alabama, Illinois, New York and Virginia.
These guarantees have been given without regard to any security, but are
limited to the duration of the underlying insurance coverages up to a maximum
of the original manufacturer's suggested retail price on the vehicles. As of
June 30, 2002, TMCC has not paid, and does not expect to pay, any amounts
under these guarantees.
An operating agreement between TMCC and Toyota Credit de Puerto Rico
Corporation ("TCPR")(the "Agreement"), provides that TMCC will make necessary
equity contributions or provide other financial assistance TMCC deems
appropriate to ensure that TCPR maintains a minimum coverage on fixed charges
of 1.10 times such fixed charges in any fiscal quarter. The Agreement does not
constitute a guarantee by TMCC of any obligations of TCPR. The fixed charge
coverage provision of the Agreement is solely for the benefit of the holders of
TCPR's commercial paper, and the Agreement may be amended or terminated at any
time without notice to, or the consent of, holders of other TCPR obligations.
-17-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and Contingent Liabilities (Continued)
- ------------------------------------------------
Various legal actions, governmental proceedings and other claims are pending or
may be instituted or asserted in the future against TMCC and its subsidiaries
with respect to matters arising from the ordinary course of business. Certain
of these actions are or purport to be class action suits, seeking sizeable
damages and/or changes in TMCC's business operations, policies and practices.
Certain of these actions are similar to suits which have been filed against
other financial institutions and captive finance companies. Management and
internal and external counsel perform periodic reviews of pending claims and
actions to determine the probability of adverse verdicts and resulting amounts
of liability. The amounts of liability on pending claims and actions as of
June 30, 2002 were not determinable; however, in the opinion of management, the
ultimate liability resulting therefrom should not have a material adverse
effect on TMCC's consolidated financial position or results of operations.
Note 10- Lines of Credit/Standby Letters of Credit
- ---------------------------------------------------
To support its commercial paper program, TMCC maintains syndicated bank credit
facilities with certain banks which aggregated $3.5 billion, $3.5 billion and
$3.0 billion, at June 30, 2002, March 31, 2002 and June 30, 2001, respectively.
No loans were outstanding under any of these bank credit facilities as of June
30, 2002, March 31, 2002 or June 30, 2001.
In addition, as of June 30, 2002 and March 31, 2002, there are additional
committed and uncommitted lines of credit for $40 million and $100 million,
respectively, which are intended to be used by the Company to support its
commercial paper program and for general corporate purposes. No amounts were
outstanding under this programs as of June 30, 2002 and March 31, 2002.
To facilitate and maintain letters of credit, TMCC maintains uncommitted,
unsecured lines of credit with banks totaling $61 million, $61 million and $85
million as of June 30, 2002, March 31, 2002 and June 30, 2001, respectively.
Approximately $0.8 million, $0.5 million and $0.6 million in letters of credit
were outstanding as of June 30, 2002, March 31, 2002 and June 30, 2001,
respectively.
-18-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Segment Information
- ----------------------------
Financial results for the Company's operating segments are summarized below:
Three Months Ended
June 30,
------------------
2002 2001
------- -------
(Dollars in Millions)
Assets:
Financing operations.............. $34,684 $29,143
Insurance operations.............. 810 684
Eliminations/reclassifications.... (193) (134)
------- -------
Total assets.................... $35,301 $29,693
======= =======
Gross revenues:
Financing operations.............. $ 980 $ 932
Insurance operations.............. 49 47
------- -------
Total gross revenues............ $ 1,029 $ 979
======= =======
Net (Loss)/Income:
Financing operations.............. $ (39) $ 41
Insurance operations.............. 10 9
------- -------
Total net income................ $ (29) $ 50
======= =======
-19-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Subsequent Events
- ---------------------------
In July 2002, TMCC executed a comfort letter on behalf of TSM with a Mexican
bank regarding local bank credit facilities whereby TMCC will exercise its
influence to induce TSM to meet all obligations under its credit facilities.
The comfort letter allows TSM to obtain uncommitted bank lines of credit for a
period of one year and allow advances in the maximum amount equivalent to $10
million. Maturities for TSM bank loan advances range from one month to 36
months. The comfort letter will remain in effect for as long as any TSM loans
are outstanding. The initial comfort letter may be extended for additional
periods by mutual agreement between TMCC and the bank.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Income
- ----------
The following table summarizes Toyota Motor Credit Corporation's ("TMCC's")
net income by business segment for the three months ended June 30, 2002 and
2001:
Three Months Ended
June 30,
------------------
2002 2001
---- ----
(Dollars in Millions)
Net income:
Financing operations.............. $(39) $ 41
Insurance operations.............. 10 9
---- ----
Total net income............... $(29) $ 50
==== ====
Net income from financing operations decreased $80 million, or 196%, for the
quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001
primarily due to an unfavorable fair value adjustment related to the Statement
of Financial Statement Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an Amendment of SFAS 133 ("SFAS 138"), which
is reported as SFAS 133 and 138 fair value adjustments in the Consolidated
Statement of Income. The adjustment was due to the significant reduction in
interest rates during the quarter, as well as actions taken by TMCC to protect
interest rate margins, including an increase in TMCC's hedge portfolio and a
higher mix of swap derivative products.
Net income excluding the effects of the SFAS 133 adjustment (net of income
tax), increased $48 million, or 102%, for the quarter ended June 30, 2002 as
compared to the quarter ended June 30, 2001. The increase is primarily
attributed to asset and revenue growth and an improvement in net interest
margin. The net margin increase was partially offset by higher credit losses
and increased operating costs associated with the restructuring of field
operations and technology projects.
Net income from insurance operations increased $1 million, or 11%, for the
quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001
primarily as a result of increased contract volume.
-21-
Earning Assets
- --------------
The composition of TMCC's net earning assets (which excludes receivables sold
through securitization transactions that qualify as a sale for legal and
accounting purposes, but includes receivables sold through securitization
transactions that qualify as a sale for legal but not accounting purposes,
under the Financial Accounting Standards Board Statement No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities"), as of the balance sheet dates reported herein and TMCC's vehicle
lease and retail contract volume and finance penetration for the quarter ended
June 30, 2002 the fiscal year ended March 31, 2002 and the quarter ended June
30, 2001 are summarized below:
June 30, March 31, June 30,
2002 2002 2001
------------ ------------ ------------
(Dollars in Millions)
Vehicle lease
Investment in operating leases, net.... $ 7,332 $ 7,215 $ 6,775
Finance leases, net.................... 5,810 6,338 6,935
------- ------- -------
Total vehicle leases.................... 13,142 13,553 13,710
Vehicle retail finance receivables, net. 13,895 13,409 9,321
Vehicle wholesale and other financing... 4,885 4,429 4,244
Allowance for credit losses............. (351) (283) (231)
------- ------- -------
Total net earning assets................ $31,571 $31,108 $27,044
======= ======= =======
-22-
Three Months Ended
-------------------------------
June 30, March 31, June 30,
2002 2002 2001
------- -------- --------
Total contract volume:
Vehicle retail....................... 169,000 159,000 148,000
Vehicle lease........................ 44,000 45,000 57,000
------- ------- -------
Total................................... 213,000 204,000 205,000
======= ======= =======
TMS sponsored contract volume:
Vehicle retail....................... 22,000 32,000 31,000
Vehicle lease........................ 2,000 5,000 12,000
------- ------- -------
Total................................... 24,000 37,000 43,000
======= ======= =======
Market share (excluding fleet)<F1>:
Vehicle retail....................... 30.2% 30.2% 27.0%
Vehicle lease........................ 11.6% 13.4% 15.6%
----- ----- -----_
Total................................... 41.8% 43.6% 42.6%
===== ===== =====
<FN>
- --------------------
<F1> Finance penetration represents penetration of Toyota and Lexus vehicle financed
sales to consumers, excluding sales of the Southeast Toyota distributor. Previously,
the percentages reported includes sales of Southeast Toyota distributor and were 37.5%
and 36.4% for the periods ending March 31, 2002 and June 30, 2001, respectively.
</FN>
TMCC's net earning assets increased to $31.6 billion at June 30, 2002 from
$31.1 billion at March 31, 2002 and $27.0 billion at June 30, 2001. Asset
growth from March 31, 2002 and June 30, 2001 reflects primarily higher retail
and wholesale earning assets, slightly offset by a decline in lease earning
assets. The increase in retail earning assets and corresponding increase in
retail finance revenue from March 31, 2002 and June 30, 2001 was primarily due
to volume increases resulting from competitive pricing and strong sales of
Toyota and Lexus vehicles. The decrease in lease earning assets as of June
30, 2002 as compared to the quarter ended June 30, 2001 reflects a general
shift in programs sponsored by TMS from lease to retail as well as an
industry-wide shift away from leasing. While lease earning assets decreased,
leasing revenue for the quarter ended June 30, 2002 remained consistent with
the comparable period ended June 30, 2001 due to an increase in TMCC's average
interest rates related to changes in portfolio quality on lease contracts.
Wholesale earning assets increased from March 31, 2002 due to a slight
increase in the number of wholesale dealers and a corresponding increase in
wholesale units financed. Wholesale earning assets increased from June 30,
2001 primarily due to an increase in the number of dealers receiving wholesale
financing. Though wholesale earning assets increased, wholesale revenue
decreased for the quarter ended June 30, 2002 as compared to the quarter ended
June 30, 2001 primarily due to a decrease in LIBOR.
-23-
The allowance for credit losses increased from March 31, 2002 and June 30,
2001, reflecting asset growth and increased delinquency experience.
The increased delinquency experience is a result of a number of factors
including the effects of TMCC's field reorganization which has temporarily
disrupted normal collection activities and the continuation of the national
economic downturn. The field reorganization is ongoing and the transfer of
certain functions from branches to customer service centers is scheduled to be
completed in fiscal 2003. TMCC is taking measures to minimize the disruption
of operations; however, the restructuring of field operations and economic
downturn could continue to adversely affect delinquencies and credit losses.
In addition, the increased delinquency can be attributed to changes in
portfolio quality in connection with the national tiered pricing program
coupled with a general increase in the average original contract term of
retail and lease vehicle contracts which, historically, experience higher
rates of credit losses. Under the national tiered pricing program, the
Company generally acquires higher-yielding earning assets to compensate for
the increased credit risk of such contracts. The trend toward longer term
contracts is reflective of industry trends. The average length of contracts
initiated during fiscal year to date 2003 and fiscal year 2002 was 56.1 and
54.4, respectively. The majority of retail and finance lease receivables do
not involve recourse to the dealer in the event of customer default. The
allowance for credit losses is evaluated quarterly, considering historical
trends of repossession, charge-offs, recoveries and credit losses. In
addition, portfolio credit quality, and current and projected economic and
market conditions, are monitored and taken into account. After carefully
evaluating these factors, management develops several loss scenarios and
reviews allowance levels to ensure reserves are adequate to cover the probable
range of losses. The allowance for credit losses as of June 30, 2002 is
considered by management to be appropriate in relation to the expected loss on
the present owned portfolio.
In October 1996, TMCC created Toyota Lease Trust, a Delaware business trust
(the "Titling Trust"), to act as a lessor and to hold title to leased vehicles
in specified states. TMCC holds an undivided trust interest in lease
contracts owned by the Titling Trust, and such lease contracts are included in
TMCC's lease assets, unless and until such time as the beneficial interests in
such contracts are transferred in connection with a securitization
transaction. The majority of all leases owned by the Titling Trust are
classified as finance receivables due to certain residual value insurance
arrangements in place with respect to such leases, while leases of a similar
nature originated outside of the Titling Trust are classified as operating
leases. The purchase of residual value insurance on leases acquired by the
Titling Trust before June 2001 changed the composition of the Company's
earning assets resulting in an increased mix of finance receivables relative
to operating lease assets due to the classification differences described
above. However, in June 2001, the purchasing of residual value insurance on
lease contracts was terminated. As a result, the future composition of the
Company's lease portfolio will gradually change as more leases acquired by the
Titling Trust will be classified as operating leases.
TMCC's retail contract volume increased during the quarter ended June 30,
2002, as compared with the comparable June 30, 2001 quarter reflecting higher
levels of programs sponsored by TMS and strong sales of Toyota and Lexus
vehicles. The retail finance portfolio includes contracts with original terms
ranging from 24 to 72 months; the average original contract term in TMCC's
finance portfolio was 57 months and 56 months as of June 30, 2002 and 2001,
respectively. The increase in average original contract term is reflective of
an overall trend toward consumers entering into longer term contracts.
-24-
TMCC's lease contract volume decreased during the quarter ended June 30, 2002,
as compared with the comparable June 30, 2001 quarter as demand for financing
has shifted from leasing to retail loans. The Company's lease portfolio
includes contracts with original terms ranging from 12 to 60 months; the
average original contract term in TMCC's lease portfolio was 46 months and 44
months at June 30, 2002 and 2001, respectively. The increase in average
original term for lease contracts reflects an overall trend toward consumers
entering into longer term contracts.
Net Financing Revenues
- ----------------------
TMCC's net financing revenues decreased $93 million, or 44%, for the quarter
ended June 30, 2002 as compared with the quarter ended June 30, 2001 primarily
due to the unfavorable effects of SFAS 133 and 138 mark to market adjustments
on debt and derivative contracts in the current quarter. The adjustment was
due to the significant reduction in interest rates during the quarter, as well
as actions taken by TMCC to protect interest rate margins, including an
increase in TMCC's hedge portfolio and a higher mix of swap derivative
products. TMCC uses derivative contracts as part of its interest rate risk
management program. The mark to market adjustments on derivatives and the
related debt obligations are determined in accordance with Financial
Accounting Standards Board Pronouncement Numbers 133 and 138. The Company's
derivative and hedging activities are discussed further at Note 5 in the Notes
to Consolidated Financial Statements.
Net financing revenues excluding the effects of the SFAS 133 adjustment,
increased $130 million, or 64%, for the quarter ended June 30, 2002 as compared
to the quarter ended June 30, 2001. The increase is primarily attributed to
asset and revenue growth and an improvement in net interest margin. The net
margin increase was partially offset by higher credit losses and increased
operating costs associated with the restructuring of field operations and
technology projects.
-25-
Depreciation on Leases
- ----------------------
The following table sets forth the items included in TMCC's depreciation on
leases for the three months ended June 30, 2002 and 2001:
Three Months Ended
June 30,
------------------
2002 2001
---- ----
(Dollars in Millions)
Straight-line depreciation on operating leases.. $318 $294
Provision for residual value losses............. 55 80
---- ----
Total depreciation on leases................. $373 $374
==== ====
Straight-line depreciation expense on operating leases increased $24 million,
or 8% for the quarter ended June 30, 2002 as compared with the quarter ended
June 30, 2001 due to an increase in average operating lease assets. As
discussed earlier, purchasing residual value insurance for leases acquired by
the Titling Trust before June 2001 increased the ratio of lease finance
receivables relative to operating lease assets. TMCC discontinued purchasing
residual value insurance for operating lease assets acquired by the Titling
Trust in June 2001. The Company expects an increase in straight-line
depreciation expense as operating leases become a larger proportion of the
Company's lease portfolio.
TMCC is subject to residual value risk in connection with its lease portfolio.
TMCC's residual value exposure is a function of the number of off-lease
vehicles returned for disposition and any shortfall between the net
disposition proceeds and the estimated unguaranteed residual values on
returned vehicles. If the market value of a leased vehicle at contract
termination is less than its contract residual value, the vehicle is more
likely to be returned to TMCC. A higher rate of vehicle returns exposes TMCC
to a higher risk of aggregate losses.
-26-
Total unguaranteed residual values related to TMCC's vehicle lease portfolio
increased from approximately $7.1 billion to $7.2 billion between March 31,
2002 and June 30, 2002. The increase primarily resulted from the suspension of
purchasing residual value insurance for operating leases acquired by the
Titling Trust beginning in June 2001.
The Company maintains an allowance to cover estimated vehicle disposition
losses related to unguaranteed residuals on its present owned portfolio. The
allowance required to cover estimated residual value losses is evaluated
quarterly, considering projected vehicle return rates and projected loss
severity derived from historical and market information on used vehicle sales,
historical factors including trends in lease returns, the new car markets, and
general economic conditions. After carefully evaluating these factors,
management develops several loss scenarios and reviews allowance levels to
ensure reserves are adequate to cover the probable range of losses. The
allowance for residual value losses is maintained in amounts considered by
management to be appropriate in relation to the expected losses on the present
owned portfolio. Upon disposal of the assets, the allowance for residual
losses is adjusted for the difference between the net book value and the
proceeds from sale. The allowance for residual value losses and related
provision expense are included in finance receivables, net and investment in
operating leases, net in the Consolidated Balance Sheet and lease depreciation
expense in the Consolidated Statement of Income, respectively.
Losses at vehicle disposition decreased $24 million for the quarter ended June
30, 2002 as compared with the quarter ended June 30, 2001 primarily due to the
benefits derived from a change in the Company's residual value setting policy
beginning with model year 1999 Toyota vehicles. The new policy requires
separate calculations of the residual value applicable to the base vehicle and
the residual value applicable to certain specified optional accessories and
optional equipment. Affected model year 1999 vehicles started terminating in
fiscal 2002 and have contributed to lower residual losses in the quarter ended
June 30, 2002. The decrease also results from a decrease in the number of
vehicles coming off-lease in the current quarter coupled with a slight
decrease in the average loss per unit.
The number of returned leased vehicles sold by TMCC during a specified period
as a percentage of the number of lease contracts that as of their origination
dates were scheduled to terminate ("full term return rates") in the current
period was 47% for the quarter ended June 30, 2002 as compared to 51% for the
quarter June 30, 2001. TMCC believes that the decrease for the quarter ended
June 30, 2002, as compared to the same period in fiscal 2001, is due primarily
to a decrease in the number of vehicles coming off lease in the current
quarter relative to those vehicles scheduled to terminate in the same period.
The Company has taken action to reduce vehicle disposition losses by
developing strategies to increase dealer purchases of off-lease vehicles and
expanding marketing of off-lease vehicles through the internet to maximize
proceeds on vehicles sold through auction.
The provision for residual value losses decreased for the quarter ended June
30, 2002 as compared to the quarter ended June 30, 2001. The decrease in the
provision is reflective of the overall decrease in residual value losses as
discussed above. Despite the decrease in the provision for residual value
losses, the Company's overall allowance remained consistent with March 31,
2002 levels.
-27-
Interest Expense
- ----------------
Interest expense decreased $79 million, or 27% during the quarter ended June
30, 2002 as compared with the quarter ended June 30, 2001 primarily due to a
decrease in the average cost of borrowings. The weighted average cost of
borrowings was 3.09% and 4.95% for the quarters ended June 30, 2002 and 2001,
respectively.
Insurance
- ---------
The principal activities of TMCC's insurance subsidiary, Toyota Motor Insurance
Services, Inc. ("TMIS"), include marketing, underwriting, claims administration
and providing certain insurance and contractual coverages to Toyota and Lexus
vehicle dealers and their customers. In addition, TMIS insures and reinsures
certain TMS and TMCC risks. Insurance premiums earned and contract revenues
recognized from insurance operations increased $1 million during the quarter
ended June 30, 2002 as compared with the same period in 2001 primarily due to
increased contract volume.
Investment and Other Income
- ---------------------------
The following table summarizes TMCC's investment and other income for the
three months ended June 30, 2002 and 2001:
Three Months Ended
June 30,
------------------
2002 2001
------ ------
(Dollars in Millions)
Investment income...................... $ 22 $ 29
Gains on assets sold................... 33 26
Servicing fee income................... 9 10
------ ------
Investment and other income......... $ 64 $ 65
====== ======
Investment income decreased $7 million, or 24%, during the quarter ended June
30, 2002, as compared with the same period in fiscal 2001, primarily due to a
general decrease in interest rates.
-28-
Gains on assets sold increased $7 million, or 27%, for the quarter ended June
30, 2002 as compared to the quarter ended June 30, 2001 due to decreases in
market interest rates, which resulted in larger spreads retained by the
Company. Gains recognized on asset-backed securitization transactions
generally accelerate the recognition of income on lease and retail contracts,
net of servicing fees and other related deferrals, into the period the assets
are sold. Numerous factors can affect the timing and amounts of these gains,
such as the type and amount of assets sold, the structure of the sale, key
assumptions used and current financial market conditions.
Servicing fee income decreased for the three months ended June 30, 2002 as
compared to June 30, 2001 due to a decrease in the average balance of sold
interests in lease and retail finance receivables at June 30, 2002 as compared
to June 30, 2001.
Loss on Asset Impairment
- ------------------------
TMCC performs a periodic review of the fair market value of assets retained in
the sale of retail receivables and interests in lease finance receivables on a
quarterly basis. The fair market value of these retained assets is impacted
by management's and the market's expectations as to future losses on vehicle
disposition, credit losses, discount rates and prepayment rates. In June
2001, the Company experienced increased return rates and losses per unit upon
disposition relating to vehicles associated with its lease and finance
receivables. This experience, combined with revised forecasts for future
return rates and loss per unit, resulted in a downward revision to the vehicle
disposition assumptions. As a result of the change in assumptions, in the
quarter ending June 30, 2001, TMCC recognized losses due to the permanent
impairment of assets retained in the sale of interests in lease finance
receivables totaling $47 million as required by EITF 99-20, which was adopted
in the first quarter of fiscal year 2002. The Company did not have any
outstanding lease securitization transactions as of March and June 2002.The
Company did not record any impairment on retail securitization transactions
during the quarter ended June 30, 2002.
Losses Related to Argentine Investment
- --------------------------------------
TMCC has executed guarantees totaling $65 million in respect to TCA's offshore
dollar bank loans of which approximately $36 million, including principal and
interest is outstanding. Late in 2001, the Argentine government instituted a
series of changes that led to political, economic and regulatory risks to
Argentine businesses. The government has imposed foreign exchange controls
restricting offshore payment transfers and these controls are currently
preventing TCA from sending payments on its offshore dollar loans out of
Argentina. In February 2002, the Argentine government established measures to
re-denominate the entire Argentine economy into pesos and has permitted the
peso to float freely against other global currencies. This re-denomination
policy adversely affected TCA's financial condition and its ability to fully
satisfy its offshore dollar loans. As a result, in fiscal 2002 TMCC
established a reserve of $26 million relating to TMCC's guaranty of TCA's
offshore outstanding debt.
During the quarter ended June 30, 2002, the value of the peso continued to
deteriorate. As a result, TMCC recorded a $5 million charge against income to
increase the reserve related to the Company's guarantee of TCA's offshore
outstanding debt to $31 million. TMCC will continue to monitor the situation
in Argentina.
-29-
Operating and Administrative Expenses
- -------------------------------------
Operating and administrative expenses increased $14 million, or 12%, for the
quarter ended June 30, 2002 as compared with the quarter ended June 30, 2001.
The increase reflects costs associated with the field operations restructuring,
technology-related projects as well as costs to support the Company's growing
customer base.
Included in operating and administrative expenses are charges allocated by TMS
for certain technological and administrative services provided to TMCC. Net
charges reimbursed by TMCC to TMS totaled $11.4 million and $10.8 million
during the quarters ended June 30, 2002 and 2001, respectively.
Operating and administrative expenses are also expected to increase during
fiscal 2003 as a result of the costs incurred in connection with the continued
restructuring of TMCC's field operations. The branch offices of TMCC are
being converted to serve only dealer financing needs which includes the
purchasing of contracts from dealers, financing inventories, loans to dealers
for business acquisitions, facilities refurbishment, real estate purchases and
working capital requirements, as well as consulting on finance and insurance
operations. The other functions that the branch offices currently cover, such
as customer service, collections, lease termination and administrative
functions for retail and lease contracts, will be handled by three regional
customer service centers. The regional center for the Western region was
opened in October 2001. The regional center for the Eastern region opened in
February 2002, and the transfer of the other functions from branches to the
regional center for the Midwest region is scheduled to continue during the
summer of 2002. The conversion of these activities is expected to be
completed in fiscal 2003.
Restructuring charges and costs recognized during the quarters ended June 30,
2002 and 2001 were $6.3 million and $2 million, respectively. Expenses
charged during the quarter ended June 30, 2002 were comprised of $4.5 million
related to asset and facility costs and $1.8 million for other exit costs.
The expenses charged in the quarter ended June 30, 2001 were comprised
primarily of employee separation and asset and facility costs. Additional
restructuring charges and costs are expected through fiscal 2003. During the
restructuring, TMCC has experienced an increase in delinquency rates and
charge off rates as a result of the disruption to normal collection process
during the field reorganization. TMCC is taking measures to minimize the
disruption of operations; however, the restructuring of field operations could
continue to adversely affect delinquencies and credit losses. Management
believes that the impact of the restructuring has been accurately factored
into the provision for credit losses. Upon completion of the field
reorganization and strategic deployment of resources, the Company hopes to
derive greater internal operating efficiencies and superior dealer and
customer account management. At June 30, 2002, restructuring and related
charges to be recognized during fiscal 2003 are estimated to be $8 million.
-30-
Provision for Credit Losses and Delinquency
- --------------------------------------------
TMCC maintains allowances to cover probable losses on its present owned
portfolio resulting from the inability of customers to make required payments.
The allowance for credit losses is evaluated quarterly, considering historical
trends of repossession, charge-offs, recoveries and credit losses. In
addition, portfolio credit quality, and current and projected economic and
market conditions, are monitored and taken into account. After carefully
evaluating these factors, management develops several loss scenarios and
reviews allowance levels to ensure reserves are adequate to cover the probable
range of losses. The allowance for credit losses as of June 30, 2002 is
considered by management to be appropriate in relation to the expected loss
experience on the present owned portfolio.
An analysis of credit losses and the related allowance follows. This analysis
includes net losses on receivables sold through securitizations that qualify as
a sale for legal but not accounting purposes, but excludes net losses on
receivables sold through securitization transactions that qualify as a sale for
legal and accounting purposes, under SFAS 140:
Three Months Ended
June 30,
-------------------
2002 2001
------ -------
(Dollars in Millions)
Allowance for credit losses at
beginning of period....................... $ 283 $ 227
Provision for credit losses.................. 122 50
Charge-offs................................. (60) (40)
Recoveries.................................. 7 5
Other adjustments........................... (1) (11)
------ ------
Allowance for credit losses at
end of period............................. $ 351 $ 231
====== ======
Annualized Net Credit Losses as a %
of average earning assets................ 0.68% 0.52%
Allowance for Credit Losses as a percent of gross
earning assets........................... 1.10% 0.85%
Aggregate balances at end of period
for lease rentals and installments
60 or more days past due ................ $238 $77
Aggregate balances at end of period
for lease rentals and installments
60 or more days past due as a %
of net investments in operating
leases and gross receivables
outstanding <F1>......................... 0.75% 0.28%
<FN>
- ----------------
<F1> 60+ delinquency for June 30, 2001 was previously reported as 0.21%.
</FN>
-31-
The allowance for credit losses increased $120 million for the quarter ended
June 30, 2002 as compared to the quarter ended June 30, 2001 due to an increase
in the provision for credit losses, partially offset by an increase in net
charge-offs. The increase in the provision for the quarter ended June 30,
2002 as compared with the same period ended June 2001 corresponds with
increases in delinquencies and credit losses reflected in the chart above.
The Company believes that the increased delinquency experience is a result of
a number of factors including the effects of TMCC's field reorganization which
has temporarily disrupted normal collection activities and the continuation of
the national economic downturn. The field reorganization is ongoing and the
transfer of certain functions from branches to customer service centers is
scheduled to be completed in fiscal 2003. TMCC is taking measures to minimize
the disruption of operations; however, the restructuring of field operations
and economic downturn could continue to adversely affect delinquencies and
credit losses. In addition, the increased delinquency can be attributed to
changes in portfolio quality in connection with the national tiered pricing
program coupled with a general increase in the average original contract term
of retail and lease vehicle contracts which, historically, experience higher
rates of credit losses. Under the national tiered pricing program, the
Company generally acquires higher-yielding earning assets to compensate for
the increased credit risk of such contracts. The trend toward longer term
contracts is reflective of industry trends. The average length of contracts
initiated during fiscal year to date 2003 and fiscal year 2002 was 56.1 and
54.4, respectively. The majority of retail and finance lease receivables do
not involve recourse to the dealer in the event of customer default. The
increase in the allowance for net credit losses as a percent of average
earning assets and as a percent of gross earning assets from June 30, 2001 to
June 30, 2002 are reflective of the increased provision for credit losses.
Delinquency and charge-off ratios typically fluctuate over time as a portfolio
matures. The information in the table above has not been adjusted to
eliminate the effect of the growth of TMCC's portfolio.
-32-
Derivatives and Hedging Activities
- ----------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities - an Amendment of SFAS 133 ("SFAS 138") require
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Fair value of the Company's derivatives is determined
using external market data in conjunction with an internal market valuation
system, or externally quoted market values. Derivative assets and liabilities
include interest rate swaps, indexed note swap agreements, cross currency
interest rate swap agreements and option-based products. The accounting for
the gain or loss due to changes in fair value of the hedged item depends on
whether the relationship between the hedged item and the derivative instrument
qualifies for hedge treatment. If the relationship between the hedged item and
the derivative instrument does not qualify as a hedge, the gains or losses of
the derivative instrument are reported in earnings when they occur. However,
if the relationship between the hedged item and the derivative instrument
qualifies as a hedge, the accounting varies based on the type of hedge.
Additional information concerning the SFAS 133 and 138 requirements are
disclosed in Note 5 - Derivatives and Hedging Activities of the Notes to
Consolidated Financial Statements. Additional information concerning the
Company's derivative and hedging activities is set forth below in "Item 3.
Quantitative and Qualitative Disclosures About Market Risk."
Derivatives are recognized in the balance sheet at their fair value. On the
date that the Company enters into a derivative contract that qualifies as a
hedge, it designates the derivative as a hedge of the fair value of a
recognized asset or liability or a foreign-currency fair-value hedge (a
"foreign currency hedge"). Changes in the fair value of a derivative that is
highly effective as - and that is designated and qualifies as - a fair-value
hedge or foreign-currency hedge, along with changes in fair value of the hedged
assets or liabilities that are attributable to the hedged risk, are recorded in
current-period earnings.
For the quarter ended June 30, 2002, the Company recognized a $214 million
unfavorable SFAS 133 and 138 adjustment (reported as SFAS 133 and 138 fair
value adjustments in the Consolidated Statement of Income). The net
adjustment reflects an increase of $12 million related to the ineffective
portion of TMCC's fair value hedges, offset by a $226 million decrease in the
fair market value of TMCC's portfolio of option-based products and certain
interest rate swaps. The decrease in the fair value of TMCC's option-based
products as well as certain interest rate swaps was due to the significant
reduction in interest rates during the quarter, as well as actions taken by
TMCC to protect interest rate margins, including an increase in TMCC's hedge
portfolio and a higher mix of swap derivative products. Various derivative
instruments, such as option-based products and certain interest rate swaps
which hedge interest rate risk from an economic perspective, and which the
Company is unable or has elected not to apply hedge accounting, are discussed
in "Item 3 Quantitative and Qualitative Disclosure About Market Risk-Non-
Hedging Activities" below. For fair value hedging relationships, the
components of each derivative's gain or loss are included in the assessment of
hedge effectiveness.
-33-
Liquidity and Capital Resources
- -------------------------------
The Company, in the normal course of business, is an active debt issuer and
requires a substantial amount of funding to support the growth in earning
assets. The objective of its liquidity management is to ensure the Company has
the ability to maintain access to the capital markets to meet its obligations
and other commitments on a timely and cost-effective basis. Significant
reliance is placed on the Company's ability to obtain debt and asset-backed
securitization funding in the capital markets in addition to funding provided
by earning asset liquidations and cash provided by operating activities. Debt
issuances have generally been in the form of commercial paper, and domestic and
euro medium-term notes ("MTNs") and bonds.
Commercial paper issuances are used to meet short-term funding needs.
Commercial paper outstanding under TMCC's commercial paper program ranged from
approximately $4.6 billion to $6.4 billion during the quarter ended June 30,
2002, with an average outstanding balance of $5.5 billion.
For additional liquidity purposes, TMCC maintains syndicated bank credit
facilities with certain banks which aggregated $3.5 billion at June 30, 2002.
No loans were outstanding under any of these bank credit facilities as of June
30, 2002. TMCC maintains additional committed and uncommitted lines of credit
for $40 million and $100 million, respectively. TMCC also maintains
uncommitted, unsecured lines of credit with banks totaling $61 million as of
June 30, 2002. At June 30, 2002 TMCC had issued approximately $0.8 million in
letters of credit in connection with these uncommitted, unsecured lines of
credit.
Long-term funding requirements are met through the issuance of a variety of
debt securities underwritten in both the United States and international
capital markets. Domestic and euro MTNs and bonds have provided TMCC with
significant sources of funding. During the quarter ended June 30, 2002, TMCC
issued approximately $1.7 billion of domestic and euro MTNs and bonds, all of
which had original maturities of one year or more.
The original maturities of all MTNs and bonds outstanding at June 30, 2002
ranged from one year to ten years. As of June 30, 2002, TMCC had total MTNs
and bonds outstanding of $22.0 billion, of which $7.6 billion was denominated
in foreign currencies.
TMCC anticipates continued use of MTNs and bonds in both the United States and
international capital markets. To provide for the issuance of MTNs and other
debt securities in the U.S. capital market, the Company maintains a shelf
registration with the SEC under which approximately $9.2 billion was available
for issuance at July 31, 2002. Under TMCC's euro MTN program, which provides
for the issuance of debt securities in the international capital market, the
maximum aggregate principal amount authorized to be outstanding at any time is
$16.0 billion, of which $3.8 billion was available for issuance at July 31,
2002. The United States and euro MTN programs may be expanded from time to
time to allow for the continued use of these sources of funding. In addition,
TMCC may issue bonds in the domestic and international capital markets that are
not issued under its MTN programs.
Additionally, TMCC uses its asset-backed securitization programs to generate
funds for investment in earning assets as described in the above section "Sales
of Receivables and Securitization" and in Note 7 - Sale of Receivables and
Securitization to the Consolidated Financial Statements. TMCC maintains a shelf
registration statement with the SEC relating to the issuance of asset-backed
notes secured by, and certificates representing interests, in retail
receivables. During the quarter ended June 30, 2002, TMCC sold retail
receivables totaling $1.6 billion in connection with securities issued under
the shelf registration statement. As of July 31, 2002, $2 billion remained
available for issuance under the registration statement.
-34-
TMCC's ratio of earnings to fixed charges was less than a 1:1 ratio for the
quarter ended June 30, 2002 and 1.29 for the quarter ended June 30, 2001. The
deficiency in the ratio for the quarter ended June 30, 2002 was primarily due
to a decrease in net income from financing operations due to an unfavorable
fair value adjustment related to the Statement of Financial Statement
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of SFAS 133 ("SFAS 138"), which is reported
as SFAS 133 and 138 fair value adjustments in the Consolidated Statement of
Income. The Company would require $51 million in additional net income to
attain a 1:1 ratio.
Cash flows provided by operating, investing and financing activities have been
used primarily to support earning asset growth. Cash provided by the
liquidation and sale of earning assets, totaling $6.6 billion for the quarter
ended June 30, 2002 was used to purchase additional investments in operating
leases and finance receivables, totaling $7.6 billion during the quarter ended
June 30, 2002. Investing activities resulted in a net use of cash of $1.3
billion for the quarter ended June 30, 2002 as the purchase of additional
earning assets exceeded cash provided by the liquidation of earning assets.
Net cash provided by operating activities totaled $389 million for the quarter
ended June 30, 2002 and net cash provided by financing activities totaled $421
million during the quarter ended June 30, 2002. The Company believes that cash
provided by operating and investing activities as well as access to domestic
and international capital markets, the issuance of commercial paper, and asset-
backed securitization transactions will provide sufficient liquidity to meet
its future funding requirements.
-35-
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
This report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which include estimates,
projections and statements of the Company's beliefs concerning future events,
business plans, objectives, expected operating results, and the assumptions
upon which those statements are based. Forward looking statements include,
without limitation, any statement that may predict, forecast, indicate or
imply future results, performance or achievements, and are typically
identified with words such as "believe," "anticipate," "expect," "estimate,"
"project," "should," "intend," "will," "may" or words or phrases of similar
meaning. The Company cautions that the forward looking statements involve
known and unknown risks, uncertainties and other important factors that may
cause actual results to differ materially from those in the forward looking
statements, including, without limitation, the following: decline in demand
for Toyota and Lexus products; the effect of economic conditions; the effect of
the current political, economic and regulatory risk in Argentina, Mexico,
Venezuela, Brazil and other Latin American and South American countries and the
resulting effect on their economies; a decline in the market acceptability of
leasing; the effect of competitive pricing on interest margins; changes in
pricing due to the appreciation of the Japanese yen against the United States
dollar; the effect of governmental actions; the effect of competitive pressures
on the used car market and residual values and the continuation of the other
factors causing an increase in vehicle returns and disposition losses; the
continuation of, and if continued, the level and type of special programs
offered by TMS; the ability of the Company to successfully access the United
States and international capital markets; the effects of any rating agency
actions; increases in market interest rates; the changes in the fiscal policy
of any government agency which increases sovereign risk, monetary policies
exercised by the European Central Bank and other monetary authorities;
increased costs associated with the Company's debt funding or restructuring
efforts; with respect to the effects of litigation matters, the discovery of
facts not presently known to the Company or determination by judges, juries or
other finders of fact which do not accord with the Company's evaluation of the
possible liability from existing litigation, increased losses resulting from
default by any dealers to which the Company has a significant credit exposure,
default by any counterparty to a derivative contract, performance under any
guaranty issued by the Company; and the ability of the Company's counterparties
to perform under interest rate and cross currency swap agreements. The risks
included here are not exhaustive. New risk factors emerge from time to time
and it is not possible for the Company to predict all such risk factors, nor
to assess the impact such risk factors might have on the Company's business or
the extent to which any factor or combination of factors may cause actual
results to differ materially from those contained in any forward looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward looking statements as a prediction of actual
results. The Company will not update the forward looking statements to
reflect actual results or changes in the factors affecting the forward looking
statements.
-36-
New Accounting Standards
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146), which addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3 "Liability Recognition for Certain Employee Terminations
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred as opposed to the date of an entity's commitment to
an exit plan as required under EITF Issue No. 94-3. SFAS 146 also requires
that measurement of the liability associated with exit or disposal
activities be at fair value. SFAS 146 is effective for the Company for exit
or disposal activities that are initiated after December 31, 2002. The
implementation of SFAS 146 is not expected to have a material impact on the
Company's financial statements.
-37-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TMCC maintains an overall risk management strategy that uses a variety of
interest rate and currency derivative financial instruments to mitigate its
economic exposure to fluctuations caused by volatility in interest rate and
currency exchange rates. TMCC does not use any of these instruments for
trading purposes.
Fair-Value Hedges
- -----------------
The Company enters into interest rate swaps, indexed note swap agreements and
cross currency interest rate swap agreements to convert its fixed-rate debt to
variable-rate debt, a portion of which is converted back to fixed rates using
option-based products. (Additional information regarding option-based products
is set forth below under "Non-Hedging Activities.").
TMCC uses interest rate swap agreements in managing its exposure to interest
rate fluctuations. Interest rate swap agreements are executed as an integral
part of specific debt transactions or on a portfolio basis. TMCC's interest
rate swap agreements involve agreements to pay fixed and receive a floating
rate, or receive fixed and pay a floating rate, at specified intervals,
calculated on an agreed-upon notional amount. Interest rate swap agreements
may also involve basis swap contracts which are agreements to exchange the
difference between certain floating interest amounts, such as the net payment
based on the commercial paper rate and the London Interbank Offered Rate
("LIBOR"), calculated on an agreed-upon notional amount.
TMCC uses indexed note swap agreements in managing its exposure in connection
with debt instruments whose interest rate and/or principal redemption amounts
are derived from other underlying indices. Indexed note swap agreements
involve agreements to receive interest and/or principal amounts associated
with the indexed notes, denominated in either U.S. dollars or a foreign
currency, and to pay fixed or floating rates on U.S. dollar liabilities.
TMCC uses cross currency interest rate swap agreements to entirely hedge
exposure to exchange rate fluctuations on principal and interest payments for
borrowings denominated in foreign currencies. Notes and loans payable issued
in foreign currencies are hedged by concurrently executing cross currency
interest rate swap agreements which involve the exchange of foreign currency
principal and interest obligations for U.S. dollar obligations at agreed-upon
currency exchange and interest rates.
Derivative financial instruments used by TMCC involve, to varying degrees,
elements of credit risk in the event a counterparty defaults in performing its
obligation under the derivative agreement and market risk as the instruments
are subject to rate and price fluctuations. Credit risk is managed through
the use of credit standard guidelines, counterparty diversification,
monitoring of counterparty financial condition and master netting agreements
in place with all derivative counterparties. Credit exposure of derivative
financial instruments is represented by the fair value of contracts with a
positive fair value at June 30, 2002 reduced by the effects of master netting
agreements. The credit exposure of TMCC's derivative financial instruments at
June 30, 2002 was $627 million on an aggregate notional amount of $41.3
billion. Additionally, at June 30, 2002, approximately 99% of TMCC's derivative
financial instruments, based on notional amounts, were with commercial banks
and investment banking firms assigned investment grade ratings of "AA" or
better by national rating agencies. TMCC does not currently anticipate non-
performance by any of its counterparties and has no reserves related to non-
performance as of June 30, 2002. TMCC has not experienced any counterparty
default during the quarter ended June 30, 2002.
-38-
Non-Hedging Activities
- ----------------------
Option-based products are executed on a portfolio basis and consist primarily
of purchased interest rate cap agreements and certain interest rate swaps and,
to a lesser extent, foreign exchange forward contract agreements. Option-based
products are agreements which either grant TMCC the right to receive, or
require TMCC to make payments at, specified interest rate levels. Option-based
products are used primarily to hedge interest rate risk from an economic
perspective on TMCC's portfolio.
The Company uses this strategy to moderate its exposure to volatility in
interest rates, particularly LIBOR, and for liability management purposes.
These products are not linked to specific assets and liabilities that appear on
the balance sheet and therefore, do not qualify for hedge accounting.
Value-At-Risk Methodology
- -------------------------
TMCC uses a value-at-risk methodology, in connection with other management
tools, to assess and manage the interest rate risk of aggregated loan and lease
assets and financial liabilities, including interest rate derivatives and
option-based products. Value-at-risk represents the potential losses in fair
value for a portfolio from adverse changes in market factors for a specified
period of time and likelihood of occurrence (i.e. level of confidence).
TMCC's value-at-risk methodology incorporates the impact from adverse changes
in market interest rates but does not incorporate any impact from other market
changes, such as foreign currency exchange rates or commodity prices, which do
not affect the value of TMCC's portfolio. The value-at-risk methodology
excludes changes in fair values related to investments in marketable securities
and equipment financing as these amounts are not significant to TMCC's total
portfolio.
The value-at-risk methodology uses seven years of historical interest rate
data to build a database of prediction errors in forward rates for a one month
holding period. These prediction errors are then applied randomly to current
forward rates through a Monte Carlo process to simulate 500 potential future
yield curves. The portfolio is then re-priced with these curves to develop a
distribution of future portfolio values. Options in the portfolio are priced
with current market implied volatilities and the simulated yield curves using
the Black Scholes method. The lowest portfolio value at the 95% confidence
interval is compared with the current portfolio value to derive the value-at-
risk number.
-39-
The value-at-risk and the average value-at-risk of TMCC's portfolio as of, and
for the three months ended, June 30, 2002 measured as the potential 30 day
loss in fair value from assumed adverse changes in interest rates are as
follows:
Average for the
As of Three Months Ended
June 30, 2002 June 30, 2002
------------------- -------------------
Mean portfolio value..................... $3,892 million $3,995 million
Value-at-risk............................ $44.4 million $43.4 million
Percentage of the mean portfolio value... 1.1% 1.1%
Confidence level......................... 95.0% 95.0%
TMCC's calculated value-at-risk exposure represents an estimate of reasonably
possible net losses that would be recognized on its portfolio of financial
instruments assuming hypothetical movements in future market rates and is not
necessarily indicative of actual results which may occur. It does not
represent the maximum possible loss nor any expected loss that may occur, since
actual future gains and losses will differ from those estimated, based upon
actual fluctuations in market rates, operating exposures, and the timing
thereof, and changes in the composition of TMCC's portfolio of financial
instruments during the year.
A reconciliation of the activity of TMCC's derivative financial instruments for
the three months ended June 30, 2002 and 2001 is as follows:
Three Months Ended June 30,
------------------------------------------------------------
Cross
Currency
Interest Interest Indexed
Rate Swap Rate Swap Option-based Note Swap
Agreements Agreements Products Agreements
------------ ------------ ------------ ------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Billions)
Beginning notional amount....... $7.8 $8.3 $29.6 $16.9 $ 6.1 $11.5 $0.2 $0.6
Add:
New agreements............... - 0.6 2.0 3.3 0.8 0.6 - 0.1
Less:
Terminated agreements........ - - 0.1 - - - 0.1 -
Expired agreements........... 0.3 - 4.5 0.9 - 1.2 - 0.3
Amortizing notionals......... - - 0.2 - - - - -
---- ---- ----- ----- ----- ----- ---- ----
Ending notional amount.......... $7.5 $8.9 $26.8 $19.3 $ 6.9 $10.9 $0.1 $0.4
==== ==== ===== ===== ===== ===== ==== ====
-40-
Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month periods ended June 30, 2002 and
2001, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") reported that they
have applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report dated August 14,
2002 appearing herein, states that they did not audit and they do not express
an opinion on that unaudited consolidated financial information. Accordingly,
the degree of reliance on their report on such information should be restricted
in light of the limited nature of the review procedures applied.
PricewaterhouseCoopers is not subject to the liability provisions of Section 11
of the Securities Act of 1933 for their report on the unaudited consolidated
financial information because that report is not a "report" or a "part" of the
registration statement prepared or certified by PricewaterhouseCoopers within
the meaning of Sections 7 and 11 of the Act.
-41-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions, governmental proceedings and other claims are pending or
may be instituted or asserted in the future against TMCC and its subsidiaries
with respect to matters arising from the ordinary course of business. Certain
of these actions are or purport to be class action suits, seeking sizeable
damages and/or changes in TMCC's business operations, policies and practices.
Certain of these actions are similar to suits, which have been filed against
other financial institutions and captive finance companies. Management and
internal and external counsel perform periodic reviews of pending claims and
actions to determine the probability of adverse verdicts and resulting amounts
of liability. The amounts of liability on pending claims and actions as of
June 30, 2002 were not determinable; however, in the opinion of management, the
ultimate liability resulting therefrom should not have a material adverse
effect on TMCC's consolidated financial position or results of operations. The
foregoing is a forward looking statement within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Act
of 1934, as amended, which represents the Company's expectations and beliefs
concerning future events. The Company cautions that its discussion of Legal
Proceedings is further qualified by important factors that could cause actual
results to differ materially from those in the forward looking statement,
including but not limited to the discovery of facts not presently known to the
Company or determinations by judges, juries or other finders of fact which do
not accord with the Company's evaluation of the possible liability from
existing litigation.
ITEM 2. CHANGES IN SECURITIES
There is nothing to report with regard to this item.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There is nothing to report with regard to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
There is nothing to report with regard to this item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index, on page 44,
are filed as part of this report.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the registrant during
the quarter ended June 30, 2002:
Date of Report Items Reported
----------------- ---------------------
July 29, 2002 Item 5. Other Events.
-42-
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: August 14, 2002 By /S/ GEORGE E. BORST
-------------------------------
George E. Borst
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2002 By /S/ JOHN F. STILLO
-------------------------------
John F. Stillo
Vice President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit Method
Number Description of Filing
- ------- ----------- ---------
12.1 Calculation of Ratio of Earnings to Fixed Charges Filed
Herewith
15.1 Report of Independent Accountants Filed
Herewith
15.2 Letter regarding unaudited interim financial Filed
information Herewith
99.1 Certification pursuant to 18 U.S.C. Section 1350 Filed
Herewith
99.2 Certification pursuant to 18 U.S.C. Section 1350 Filed
Herewith
-44-