UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 1-9961
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TOYOTA MOTOR CREDIT CORPORATION
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3775816
- ---------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19001 S. Western Avenue
Torrance, California 90509
- ---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 468-1310
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes No X
--- ---
As of January 31, 2004, 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-
EXPLANATORY NOTE
This Form 10-Q/A is being filed to amend the Toyota Motor Credit Corporation
(the "Company") Quarterly Report on Form 10-Q/A for the period ended December
31, 2003 in order to reflect the restatement of the Company's Consolidated
Financial Statements and amendments to related disclosures as of December 31
and March 31, 2003 and for the three and nine months ended December 31, 2003
and 2002. The restatement arose from management's determination that the
Company's accounting methodology and the structure and design of certain
financial systems relating primarily to the capitalization and amortization of
incremental direct costs and fees were not in compliance with Statement of
Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases" ("SFAS 91"), and that certain adjustments are necessary to the
Company's Consolidated Financial Statements. Incremental direct costs and
incentive payments made to vehicle dealers were expensed when incurred rather
than capitalized and amortized over the life of the related contracts. The
majority of these costs and fees consisted of incremental direct costs and
fees paid or received primarily in connection with the acquisition of retail
and vehicle lease contracts, and incentive and rate participation payments
made to vehicle dealers. In addition, other incentives in the form of rate
participation payments made to vehicle dealers were deferred and amortized
using a method that was inconsistent with the revenue recognition method of
the underlying contracts. During the course of its review, the Company
determined that additional adjustments and reclassifications to previously
reported results were required.
These additional adjustments related to the Company's accounting for notes
payable during periods when the notes payable and the related derivatives did
not qualify for hedge accounting. The Company did not properly record foreign
currency transaction gains and losses on certain notes payable during these
periods and did not properly determine the calculation of additional basis
adjustments once the hedge was re-established on the notes payable.
Additionally, the reclassifications primarily related to unearned income that
was reclassified to finance receivables, net, and investments in operating
leases, net, that had been previously misclassified in deferred income. The
Company also recorded other adjustments that were previously deemed not
material. The adjustments and reclassifications, including their impact on
the Consolidated Financial Statements, are further described in Note 1 of the
Notes to Consolidated Financial Statements.
Generally, no attempt has been made in this Form 10-Q/A to modify or update
other disclosures presented in the original report on Form 10-Q except as
required to reflect the effects of the restatement. This Form 10-Q/A does not
reflect events occurring after the filing of the original Form 10-Q or modify
or update those disclosures. Information not affected by the restatement is
unchanged and reflects the disclosure made at the time of the original filing
of the Form 10-Q with the Securities and Exchange Commission on February 13,
2004. Accordingly, this Form 10-Q/A should be read in conjunction with the
Company's filings made with the Securities and Exchange Commission subsequent
to the filing of the original Form 10-Q, including any amendments to those
filings. The following items have been amended as a result of the restatement:
- - Part I - Item 1 - Financial Statements
- - Part I - Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
- - Part I - Item 4 - Controls and Procedures; and
- - Part II - Item7 - Exhibits and Reports on Form 8-K
In addition, the Company's Form 10-K/A for the period ended March 31, 2004
dated December 8, 2004, the Form 10-Q/A for the period ended June 30, 2004
dated December 16, 2004, the Form 10-Q for the period ended September 30, 2004
dated November 22, 2004, the Form 8-K dated September 29, 2004 and the Form 8-
K dated October 11, 2004 are hereby incorporated by reference.
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in Millions)
(Unaudited)
(Restated)
December 31, March 31,
2003 2003
------------ ------------
ASSETS
------
Cash and cash equivalents............... $ 946 $ 980
Investments in marketable securities.... 1,407 1,630
Finance receivables, net................ 30,597 26,349
Investments in operating leases, net.... 7,661 7,925
Derivative assets....................... 2,510 1,409
Other assets............................ 558 708
-------- --------
Total assets................... $ 43,679 $ 39,001
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Notes and loans payable................. $ 36,082 $ 32,156
Derivative liabilities.................. 23 139
Other liabilities....................... 1,212 1,232
Income taxes payable.................... 51 26
Deferred income......................... 762 666
Deferred income taxes................... 2,130 1,887
-------- --------
Total liabilities................. 40,260 36,106
-------- --------
Commitments and contingent liabilities (See note 8)
Shareholder's equity:
Capital stock, $l0,000 par value
(100,000 shares authorized;
91,500 issued and outstanding)... 915 915
Retained earnings.................... 2,464 1,963
Accumulated other comprehensive
income............................ 40 17
-------- --------
Total shareholder's equity........ 3,419 2,895
-------- --------
Total liabilities and
shareholder's equity........... $ 43,679 $ 39,001
======== ========
See Accompanying Notes to Consolidated Financial Statements.
-3-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Millions)
(Unaudited)
(Restated)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
2003 2002 2003 2002
------- ------- ------- -------
Financing revenues:
Leasing.................................... $ 588 $ 601 $ 1,763 $ 1,801
Retail financing........................... 321 302 948 870
Wholesale and other dealer financing....... 47 47 145 133
------- ------- ------- -------
Total financing revenues...................... 956 950 2,856 2,804
Depreciation on leases..................... 373 385 1,176 1,097
Interest expense........................... 88 190 414 946
------- ------- ------- -------
Net financing revenues........................ 495 375 1,266 761
Insurance premiums earned and contract
revenues................................... 44 39 130 118
Investment and other income/(loss)............ 45 (16) 146 65
------- ------- ------- -------
Net financing revenues and other revenues..... 584 398 1,542 944
------- ------- ------- -------
Expenses:
Operating and administrative............... 135 139 401 389
Losses related to Argentine investment..... - - - 11
Provision for credit losses................ 76 151 263 400
Insurance losses and loss adjustment
expenses................................ 28 22 83 66
------- ------- ------- -------
Total expenses................................ 239 312 747 866
------- ------- ------- -------
Income before income taxes.................... 345 86 795 78
Provision for income taxes.................... 117 37 294 31
------- ------- ------- -------
Net income.................................... $ 228 $ 49 $ 501 $ 47
======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
-4-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in Millions)
(Unaudited)
(Restated)
Accumulated
Other
Capital Retained Comprehensive
Stock Earnings Income/(Loss) Total
------- -------- ------------- -------
Balance at March 31, 2002........ $ 915 $ 1,873 $ 14 $ 2,802
------- -------- ------------- -------
Net income for the nine months
ended December 31, 2002....... - 47 - 47
Change in net unrealized gain
on available-for-sale
marketable securities
(net of tax).................. - - (4) (4)
------- -------- ------------- -------
Total comprehensive income....... - 47 (4) 43
------- -------- ------------- -------
Balance at December 31, 2002.... $ 915 $ 1,920 $ 10 $ 2,845
======= ======== ============= =======
Balance at March 31, 2003........ $ 915 $ 1,963 $ 17 $ 2,895
------- -------- ------------- -------
Net income for the nine months
ended December 31, 2003....... - 501 - 501
Change in net unrealized gain
on available-for-sale
marketable securities
(net of tax).................. - - 23 23
------- -------- ------------- -------
Total comprehensive income....... - 501 23 524
------- -------- ------------- -------
Balance at December 31, 2003.... $ 915 $ 2,464 $ 40 $ 3,419
======= ======== ============= =======
See Accompanying Notes to Consolidated Financial Statements.
-5-
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
(Restated)
Nine Months Ended
December 31,
-------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income................................................ $ 501 $ 47
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Derivative fair value adjustment.................... (144) 312
Depreciation and amortization....................... 1,364 1,273
Recognition of deferred income...................... 98 (200)
Provision for credit losses......................... 263 400
Gain from securitization of finance receivables..... (30) (55)
Foreign currency transaction loss................... - 69
Gain from sale of marketable securities............. (7) -
Loss on impairment of retained interests............ - 11
Loss and reserve related to Argentine Investment.... - 11
Decrease in other assets............................ 112 178
Increase in deferred income taxes................... 260 160
Increase (decrease) in other liabilities............ 32 (16)
-------- --------
Total adjustments......................................... 1,948 2,143
-------- --------
Net cash provided by operating activities.................... 2,449 2,190
-------- --------
Cash flows from investing activities:
Addition to investments in marketable securities.......... (1,401) (1,469)
Disposition of investments in marketable securities....... 1,530 1,165
Acquisition of finance receivables........................ (36,402) (29,512)
Liquidation of finance receivables........................ 30,011 23,207
Proceeds from sale of finance receivables................. 1,825 3,002
Addition to investments in operating leases............... (2,222) (2,665)
Disposition of investments in operating leases............ 1,282 1,375
-------- --------
Net cash used in investing activities........................ (5,377) (4,897)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of notes and loans payable......... 9,020 6,949
Payments on notes and loans payable....................... (7,696) (5,551)
Net increase in commercial paper.......................... 1,570 1,419
-------- --------
Net cash provided by financing activities.................... 2,894 2,817
-------- --------
Net (decrease)/increase in cash and cash equivalents......... (34) 110
Cash and cash equivalents at the beginning of the period..... 980 747
-------- --------
Cash and cash equivalents at the end of the period........... $ 946 $ 857
======== ========
Supplemental disclosures:
Interest paid............................................. $ 497 $ 569
Income taxes paid/(received).............................. $ 43 $ (378)
See Accompanying Notes to Consolidated Financial Statements.
-6-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results
- --------------------------------------------------------------
Interim Financial Data
The accompanying information pertaining to the three and nine months ended
December 31, 2003 and 2002 is unaudited and has been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses, and disclosure of contingent assets and liabilities.
Actual results could differ from those estimates. In the opinion of
management, the unaudited financial information reflects all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the interim periods presented. The results of operations for
the three and nine months ended December 31, 2003 are not necessarily
indicative of those expected for any other interim period or for a full year.
Certain prior period amounts have been reclassified to conform with the
current period presentation. These include the reclassification of the
derivative fair value adjustment into interest expense in the consolidated
statement of income, made in response to recent Securities and Exchange
Commission ("SEC") public announcements related to the income statement
presentation of certain derivative activities. The reclassification had no
impact on net financing revenues and other revenues or net income.
These financial statements should be read in conjunction with the consolidated
financial statements, significant accounting policies, and other notes to the
consolidated financial statements included in Toyota Motor Credit
Corporation's 2003 Annual Report to the SEC on Form 10-K together with the
amendment to the Company's 2004 Annual Report with the Securities and Exchange
Commission filed on December 8, 2004, which includes restated financial
statements as of and for the fiscal year ended March 31, 2003. References
herein to "TMCC" denote Toyota Motor Credit Corporation and references herein
to "the Company" denote Toyota Motor Credit Corporation and
its consolidated subsidiaries.
-7-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
- --------------------------------------------------------------
Restatement
In October 2004, the Company announced that as part of its ongoing review of
accounting policies and in connection with its planned implementation of new
transaction systems, management determined that the Company's accounting
methodology and the structure and design of certain financial systems relating
primarily to the capitalization and amortization of incremental direct costs and
fees were not in compliance with Statement of Financial Accounting Standards No.
91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases". Incremental direct costs
and incentive payments made to certain vehicle dealers were expensed when
incurred rather than amortized over the life of the related contracts. The
majority of these costs and fees consisted of incremental direct costs and fees
paid or received primarily in connection with the acquisition of retail and
vehicle lease contracts, and incentive and rate participation payments made to
vehicle dealers. In addition, other incentives in the form of rate participation
payments made to vehicle dealers were deferred and amortized using a method that
was inconsistent with the revenue recognition method of the underlying
contracts. This resulted in a cumulative understatement of net financing and
other revenues and overstatement of operating and administrative expenses,
resulting in a cumulative understatement of net income, as well as a cumulative
understatement of finance receivables, net, investments in operating leases,
net, deferred income taxes, and retained earnings. As a result, the Company
determined that certain adjustments were necessary to the Company's Consolidated
Financial Statements as of March 31, 2004 and 2003 and for each of the fiscal
years in the three-year period ended March 31, 2004 and the three months ended
June 30, 2004. After making this determination, the Company conducted a further
review of its policies and determined that additional adjustments and
reclassifications to the Consolidated Financial Statements were necessary.
These additional adjustments are required to correct the accounting treatment
of notes payable during periods when the notes payable and the related
derivatives did not qualify for hedge accounting. The Company did not
properly record foreign currency transaction gains or losses for certain notes
payable during these periods and did not properly determine the calculation of
additional basis adjustments once the hedge was re-established on the notes
payable. These adjustments are reflected as a cumulative decrease in interest
expense and investment and other income/(loss) related to foreign currency
transactions resulting in a cumulative decrease in net income in the
Consolidated Statements of Income as well as a cumulative increase in notes
and loans payable and a decrease in deferred income taxes and retained
earnings in the Consolidated Balance Sheets.
Additionally, the reclassifications primarily related to unearned income that
was reclassified to finance receivables, net, and investments in operating
leases, net, that had been previously misclassified in deferred income. The
Company also recorded other adjustments that were previously deemed not
material.
-8-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
- --------------------------------------------------------------
The combined results of all adjustments and reclassifications described above
is a cumulative increase in net financing revenues and net income and a
decrease in investment and other income/(loss), interest expense and operating
and administrative expenses in the Consolidated Statements of Income, as well
as a decrease in finance receivables, net, investments in operating leases,
net, and other liabilities, and an increase in notes and loans payable,
deferred income taxes and retained earnings in the Consolidated Balance
Sheets. The impact of these adjustments and reclassifications in any
particular quarterly or annual period may vary from the cumulative impact
described above. The adjustments to the Consolidated Financial Statements
resulted in differences in the timing of revenue recognition, but did not
materially affect previously reported cash flows.
These Consolidated Financial Statements included in this Form 10-Q/A have been
restated to reflect the above adjustments and reclassifications. This amended
Form 10-Q/A also includes amendments to related disclosures for the fiscal
periods covered by this report. In addition, the Company has filed an
amendment to its Annual Report on Form 10-K for the fiscal year ended March
31, 2004 and is filing an amendment to its Quarterly Report on Form 10-Q for
the period ended June 30, 2004 concurrently with this Form 10-Q/A that
include restated financial statements and amendments to related disclosures
for the fiscal periods covered by those reports, including selected financial
data for the fiscal years ended September 30, 1999 and 2000 and the six months
ended March 31, 2001 and selected quarterly financial data for each of the
four quarters in fiscal years ended March 31, 2004 and 2003.
The adjustments to net income for the three and nine months ended December 31,
2003 and 2002 are summarized below:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(Dollars in Millions)
Net income, as previously reported...... $ 204 $ 93 $ 469 $ 68
Adjustments (pre-tax)
Dealer incentive payments............ 6 (1) 16 6
Rate participation payments.......... 5 5 14 16
Incremental direct costs............. 1 - 2 1
Fair value hedge adjustment.......... 24 2 15 10
Foreign currency transaction losses - (78) - (69)
Other adjustments.................... 3 - 5 1
------- ------- ------- -------
Total adjustments (pre-tax) ............ 39 (72) 52 (35)
Tax effect of restatement adjustments... (15) 28 (20) 14
Total net adjustments................... 24 (44) 32 (21)
------- ------- ------- -------
Net income, as restated................. $ 228 $ 49 $ 501 $ 47
======= ======= ======= =======
-9-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
- --------------------------------------------------------------
The amounts shown for dealer incentive payments, rate participation payments
and incremental direct costs represent the substantial portion of the net
adjustments related to the acquisition of retail and vehicle lease contracts
for the periods presented. The fair value hedge adjustment represents
additional ineffectiveness recognized on certain foreign currency denominated
notes payable. The foreign currency transaction adjustment represents foreign
currency transaction losses on certain foreign currency denominated notes
payable during periods when the notes payable and the related derivatives did
not qualify for hedge accounting. The other adjustments primarily relate to
items that were deemed not material in prior periods but have been recorded in
connection with this restatement.
-10-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
- --------------------------------------------------------------
The Consolidated Balance Sheets as of December 31 and March 31, 2003 included
in this Form 10-Q/A have been restated to include the effects of the
adjustments and reclassifications as follows:
December 31, 2003 March 31, 2003
------------------------- -------------------------
As previously As previously
reported As restated reported As restated
------------- ----------- ------------- -----------
(Dollars in Millions)
ASSETS
------
Cash and cash equivalents........... $ 946 $ 946 $ 980 $ 980
Investments in marketable securities 1,407 1,407 1,630 1,630
Finance receivables, net............ 30,722 30,597 26,477 26,349
Investments in operating leases, net 7,755 7,661 8,017 7,925
Derivative assets................... 2,345 2,510 1,421 1,409
Other assets........................ 558 558 708 708
-------- -------- -------- --------
Total assets............... $ 43,733 $ 43,679 $ 39,233 $ 39,001
======== ======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Notes and loans payable............. $ 36,044 $ 36,082 $ 32,099 $ 32,156
Derivative liabilities.............. 221 23 514 139
Other liabilities................... 849 1,212 869 1,232
Income taxes payable................ 51 51 26 26
Deferred income..................... 1,125 762 996 666
Deferred income taxes............... 2,088 2,130 1,866 1,887
-------- -------- -------- --------
Total liabilities............. 40,378 40,260 36,370 36,106
-------- -------- -------- --------
Shareholder's equity:
Capital stock, $l0,000 par value
(100,000 shares authorized;
91,500 issued and outstanding) 915 915 915 915
Retained earnings................ 2,399 2,464 1,930 1,963
Accumulated other comprehensive
income........................ 41 40 18 17
-------- -------- -------- --------
Total shareholder's equity.... 3,355 3,419 2,863 2,895
-------- -------- -------- --------
Total liabilities and
shareholder's equity....... $ 43,733 $ 43,679 $ 39,233 $ 39,001
======== ======== ======== ========
-11-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
- --------------------------------------------------------------
As of December 31, 2003
Finance receivables, net, and investments in operating leases, net, were
impacted by the cumulative deferral of incremental direct costs and fees paid
or received primarily in connection with the acquisition of retail and vehicle
lease contracts, and incentive and rate participation payments made to vehicle
dealers. The impact of these items was an increase to finance receivables, net,
and investments in operating leases, net, of $138 million and $10 million,
respectively. Finance receivables, net, and investments in operating leases,
net, were also impacted by the reclassification of deferred subvention and
acquisition fee revenue of approximately $263 million and $104 million,
respectively, that was previously classified as deferred income. The net
effect of these adjustments and reclassifications was an overall decrease in
finance receivables, net, and investments in operating leases, net, of $125
million and $94 million, respectively.
Derivative assets increased $165 million and derivative liabilities decreased
$198 million due to the reclassification of accrued interest on derivatives
that was previously classified as other liabilities and the reclassification
between derivative assets and liabilities as the Company began accounting for
master netting agreements within its derivative contracts.
Notes and loans payable increased $38 million. This increase resulted from
the cumulative impact of a $62 million foreign currency transaction loss on
foreign currency denominated notes payable during periods when the notes
payable and the related derivatives did not qualify for hedge accounting, a
$25 million reversal of improperly recorded fair value losses and a $1 million
loss related to additional basis adjustments associated with the re-
establishment of hedge relationships that were previously ineffective.
Other liabilities increased $363 million due to the reclassification of
accrued interest on derivatives into derivative assets and liabilities
discussed above.
Deferred income decreased $363 million primarily as a result of the $367
million reclassification of deferred subvention and acquisition fee revenue
from deferred income to finance receivables, net, and investments in operating
leases, net, noted above, partially offset by a $4 million adjustment related
to items that were deemed not material in prior periods but have been recorded
in connection with this restatement.
-12-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
- --------------------------------------------------------------
As of March 31, 2003
Finance receivables, net, and investments in operating leases, net, were
impacted by the cumulative deferral of incremental direct costs and fees paid
or received primarily in connection with the acquisition of retail and vehicle
lease contracts, and incentive and rate participation payments made to vehicle
dealers. The impact of these items was an increase to finance receivables,
net, and investments in operating leases, net, of $105 million and $10
million, respectively. Finance receivables, net, and investments in operating
leases, net, were also impacted by the reclassification of deferred subvention
and acquisition fee revenue of approximately $233 million and $102 million,
respectively, that was previously classified as deferred income. The net
effect of these adjustments and reclassifications was an overall decrease in
finance receivables, net, and investments in operating leases, net, of $128
million and $92 million, respectively.
Derivative assets and derivative liabilities decreased $12 million and $375
million, respectively, due to the reclassification of accrued interest on
derivatives that was previously classified as other liabilities and the
reclassification between derivative assets and liabilities as the Company
began accounting for master netting agreements within its derivative
contracts.
Notes and loans payable increased $57 million. This increase resulted from the
cumulative impact of a $62 million foreign currency transaction loss on
foreign currency denominated notes payable during periods when the notes
payable and the related derivatives did not qualify for hedge accounting, a $4
million reversal of improperly recorded fair value losses and a $5 million
gain related to additional basis adjustments associated with the re-
establishment of hedge relationships that were previously ineffective. The
remaining $4 million increase primarily relates to items that were deemed not
material in prior periods but have been recorded in connection with this
restatement.
Other liabilities increased $363 million due to the reclassification of
accrued interest on derivatives into derivative assets and liabilities
discussed above.
Deferred income decreased $330 million resulting from the $335 million
reclassification of deferred subvention and acquisition fee revenue from
deferred income to finance receivables, net, and investments in operating
leases, net, noted above. The remaining $5 million adjustment related to
items that were deemed not material in prior periods but have been recorded in
connection with this restatement.
-13-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
- --------------------------------------------------------------
The Consolidated Statements of Income for the three and nine months ended
December 31, 2003 and 2002 included in this Form 10-Q/A have been restated to
include the effects of the adjustments and reclassifications as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------------- --------------------------------
2003 2002 2003 2002
------------ --------------- -------------- ---------------
(Dollars in Millions)
<F1> <F2> <F1> <F2> <F1> <F2> <F1> <F2>
Financing revenues:
Leasing....................... $ 605 $ 588 $ 630 $ 601 $1,840 $1,763 $1,883 $1,801
Retail financing.............. 311 321 293 302 911 948 841 870
Wholesale and other dealer 45 47 45 47 137 145 127 133
financing. ................ ----- ----- ----- ----- ------ ------ ------ ------
Total financing revenues......... 961 956 968 950 2,888 2,856 2,851 2,804
Depreciation on leases........ 389 373 415 385 1,252 1,176 1,182 1,097
Interest expense.............. 115 88 192 190 433 414 955 946
----- ----- ----- ----- ----- ----- ----- ------
Net financing revenues........... 457 495 361 375 1,203 1,266 714 761
Insurance premiums earned and
contract revenues............. 46 44 41 39 138 130 124 118
Investment and other income/(loss) 45 45 71 (16) 159 146 152 65
----- ----- ----- ----- ------ ------ ------ ------
Net financing revenues and other
revenues...................... 548 584 473 398 1,500 1,542 990 944
----- ----- ----- ----- ------ ------ ------ ------
Expenses:
Operating and administrative.. 142 135 142 139 420 401 400 389
Losses related to Argentine
investment................. - - - - - - 11 11
Provision for credit losses... 76 76 151 151 263 263 400 400
Insurance losses and loss
adjustment expenses........ 24 28 22 22 74 83 66 66
----- ----- ----- ----- ------ ------ ------ ------
Total expenses................... 242 239 315 312 757 747 877 866
----- ----- ----- ----- ------ ------ ------ ------
Income before income taxes... 306 345 158 86 743 795 113 78
Provision for income taxes....... 102 117 65 37 274 294 45 31
----- ----- ----- ----- ------ ------ ------ ------
Net income....................... $ 204 $ 228 $ 93 $ 49 $ 469 $ 501 $ 68 $ 47
===== ===== ===== ===== ====== ====== ====== ======
<FN>
- --------------------
<F1> As previously reported
<F2> As restated
</FN>
-14-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
- --------------------------------------------------------------
Leasing revenues decreased $17 million and $77 million in the three and nine
months ended December 31, 2003, respectively, and $29 million and $82 million
in the three and nine months ended December 31, 2002, respectively. These
decreases were primarily due to the reclassification of residual value losses
on direct finance leases from depreciation on leases to leasing revenues in
the amounts of $16 million and $76 million in the three and nine months ended
December 31, 2003, respectively and $30 million and $85 million in the three
and nine months ended December 31, 2002, respectively. The remaining
differences were due to the deferral and amortization of incremental direct
costs and fees paid or received in connection with the acquisition of vehicle
lease contracts, and incentive and rate participation payments made to vehicle
dealers.
Retail financing revenues increased $10 million and $37 million in the three
and nine months ended December 31, 2003, respectively, and $9 million and $29
million for the three and nine months ended December 31, 2002, respectively.
These increases were due to the net deferral and amortization of incremental
direct costs and fees paid or received in connection with the acquisition of
retail financing contracts, and incentive and rate participation payments made
to vehicle dealers.
Wholesale and other dealer financing revenues increased $2 million and $8
million in the three and nine months ended December 31, 2003, respectively,
and $2 million and $6 million in the three and nine months ended December 31,
2002, respectively, primarily due to the reclassification of insurance
premiums on wholesale lines which should have been eliminated in
consolidation.
Interest expense decreased $27 million and $19 million in the three and nine
months ended December 31, 2003, respectively, and $2 million and $9 million
for the three and nine months ended December 31, 2002, respectively. The
decrease in the three months ended December 31, 2003 resulted from the net
effect of a $26 million reversal of improperly recorded fair value losses and
a $2 million loss related to additional basis adjustments associated with the
re-establishment of hedge relationships that were previously ineffective. The
offsetting $3 million increase primarily relates to items that were deemed not
material in prior periods but have been recorded in connection with this
restatement. The decrease in the nine months ended December 31, 2003 resulted
from the net effect of a $22 million reversal of improperly recorded fair
value losses and a $7 million loss related to additional basis adjustments
associated with the re-establishment of hedge relationships that were
previously ineffective. The offsetting $4 million increase primarily relates
to items that were deemed not material in prior periods but have been recorded
in connection with this restatement.
The decrease in interest expense in the three months ended December 31, 2002
resulted from a $2 million gain related to additional basis adjustments
associated with the re-establishment of hedge relationships that were
previously ineffective. The decrease in the nine months ended December 31,
2002 resulted from the net effect of a $4 million reversal of improperly
recorded fair value losses and a $5 million gain related to additional basis
adjustments associated with the re-establishment of hedge relationships that
were previously ineffective.
-15-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
- --------------------------------------------------------------
Investment and other income remained unchanged and decreased $13 million in
the three and nine months ended December 31, 2003, respectively. Investment
and other income decreased $87 million in both the three and nine months ended
December 31, 2002.
The $13 million decrease in investment and other income in the nine months
ended December 31, 2003 primarily represents adjustments to gains on
securitization transactions resulting from the impact of incremental direct
costs incurred with the acquisition of retail and vehicle lease contracts and
dealer incentive and rate participation payments made to vehicle dealers that
had not previously been capitalized.
The $87 million decrease in investment and other income in both the three and
nine months ended December 31, 2002 was primarily attributable to $78 and $69
million of foreign currency transaction losses in the three and nine months
ended December 31, 2002, respectively. These foreign currency transaction
losses were incurred on certain foreign currency denominated notes payable
during periods when the notes payable and the related derivatives did not
qualify for hedge accounting. The remaining decreases of $9 million and $18
million for the three and nine months ended December 31, 2002 primarily
represent adjustments to gains on securitization transactions resulting from
the impact of incremental direct costs incurred with the acquisition of retail
and vehicle lease contracts and dealer incentive and rate participation payments
made to vehicle dealers that had not previously been capitalized.
Operating and administrative expenses decreased $7 million and $19 million in
the three and nine months ended December 31, 2003, respectively, primarily due
to the deferral of incremental direct costs paid in connection with the
acquisition of retail and vehicle lease contracts in the amounts of $3 million
and $10 million in the three and nine months ended December 31, 2003. The
remaining $4 million and $9 million increases in the three and nine months
ended December 31, 2003, respectively, represent the reclassification of
certain expenses which should have been recorded as insurance losses and loss
adjustment expenses.
Operating and administrative expenses decreased $3 million and $11 million for
the three and nine months ended December 31, 2002, respectively, due to the
deferral of incremental direct costs paid in connection with the acquisition
of retail and vehicle lease contracts.
-16-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Data and Restated Financial Results (Continued)
- --------------------------------------------------------------
The adjustments and reclassifications addressed in the previous sections
resulted in changes to certain components of net cash provided by operating
activities and net cash used in investing activities included in the
Consolidated Statement of Cash Flows but did not change net cash provided by
financing activities and cash and cash equivalents at December 31 and March
31, 2003. The primary adjustment affecting net cash from operating activities
related to the recognition of deferred subvention and acquisition fee revenue.
The primary adjustments affecting net cash used in investing activities
included increases in cash used to acquire finance receivables and investments
in operating leases, respectively. These increases related to the cumulative
deferral of incremental direct costs and fees paid or received in connection
with the acquisition of retail and vehicle lease contracts and deferred
subvention fee revenue.
The adjustments to the Consolidated Statement of Cash Flows for the nine
months ended December 31, 2003 and 2002 are summarized below:
Nine Months Ended
December 31,
2003 2002
------- -------
(Dollars in Millions)
Total adjustment to net income.................. $ 32 $ (21)
Derivative fair value adjustment................ (19) (10)
Increase in depreciation and
amortization for incremental direct costs,
dealer participation payments, and rate
participation payments..................... 27 17
Recognition of deferred subvention
and acquisition fee revenue................ 98 (200)
Foreign currency transaction loss ........... - 69
Change in other assets due to reduction in
gain from sale of finance receivables for
incremental direct costs, dealer incentive
payments, and rate participation payments
and reclassification of deferred subvention
and acquisition fee revenue................ (12) (36)
------- -------
Adjustment to net cash provided by operating
activities................................. $ 126 $ (181)
======= =======
Adjustment to acquisition of finance receivables
for incremental direct costs, dealer
incentive payments, and deferred subvention
and acquisition fee revenue.................. $ (178) $ 120
Adjustment to acquisition of operating leases
for incremental direct costs, dealer
incentive payments, and deferred subvention
and acquisition fee revenue.................. 52 61
------- -------
Adjustment to net cash used in investing
activities................................... $ (126) $ 181
======= =======
-17-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Finance Receivables
- ----------------------------
Finance receivables, net, consisted of the following:
December 31, March 31,
2003 2003
------------ ------------
(Dollars in Millions)
(Restated)
Retail receivables........................ $ 21,013 $ 16,160
Finance leases............................ 4,817 6,078
Wholesale and other dealer loans.......... 6,042 5,608
-------- --------
31,872 27,846
Deferred origination costs................ 105 66
Unearned income........................... (1,044) (1,237)
Allowance for credit losses............... (336) (326)
-------- --------
Finance receivables, net .............. $ 30,597 $ 26,349
======== ========
Finance leases included estimated unguaranteed residual values of $1.4 billion
and $1.8 billion at December 31 and March 31, 2003, respectively. The
aggregate balances related to finance receivables 60 or more days past due
totaled $162 million and $160 million at December 31 and March 31, 2003,
respectively. Substantially all of retail and finance lease receivables do not
involve recourse to the dealer in the event of customer default.
-18-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Operating Leases
- ----------------------------------------
Investments in operating leases, net, consisted of the following:
December 31, March 31,
2003 2003
------------ ------------
(Dollars in Millions)
(Restated)
Vehicles.................................. $ 9,736 $ 9,687
Equipment and other....................... 693 720
------- -------
10,429 10,407
Deferred origination fees................. (56) (54)
Deferred income........................... (38) (38)
Accumulated depreciation.................. (2,508) (2,254)
Allowance for credit losses .............. (166) (136)
------- -------
Investments in operating leases, net...... $ 7,661 $ 7,925
======= =======
Note 4 - Allowance for Credit Losses
- ------------------------------------
An analysis of the allowance for credit losses follows:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(Dollars in Millions)
Allowance for credit losses
at beginning of period............... $ 544 $ 417 $ 526 $ 283
Provision for credit losses............. 76 151 263 400
Charge-offs............................. (88) (98) (264) (227)
Recoveries.............................. 17 9 43 24
Other................................... 1 (13) (18) (14)
------- ------- ------- -------
Allowance for credit losses
at end of period..................... $ 550 $ 466 $ 550 $ 466
======= ======= ======= =======
At December 31, 2003, the allowance for credit losses consisted of $502
million to cover probable losses on the Company's owned portfolio and $48
million to cover probable losses on repossessed collateral in inventory.
Total repossessed collateral in inventory at December 31, 2003 was $119
million. Repossessed collateral is included in other assets in the
consolidated balance sheet.
-19-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Derivatives and Hedging Activities
- -------------------------------------------
In response to recent SEC public announcements related to the income statement
presentation of certain derivative activities, the Company's derivative fair
value adjustment was reclassified into interest expense in the consolidated
statement of income.
The following table summarizes the net unrealized gains and losses for the
items included in the Company's derivative fair value adjustment:
Three months ended Nine months ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
(Dollars in Millions)
(Unrealized (Gain)/Loss)
(Restated)
Non-designated derivatives............... $ (86) $ 36 $ (132) $ 428
Previously designated derivatives that no
longer qualify as fair value hedges... - 5 18 3
Ineffective portion of the
Company's fair value hedges........... (21) (59) (30) (118)
------ ------ ------ ------
Derivative fair value adjustment......... $ (107) $ (18) $ (144) $ 313
====== ====== ====== ======
-20-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Notes and Loans Payable
- --------------------------------
The following table summarizes the items comprising notes and loans payable
and the related weighted average interest rates:
December 31, March 31, December 31, March 31,
2003 2003 2003 <F1> 2003 <F1>
--------- --------- --------- ---------
(Dollars in Millions)
(Restated)
Short-term debt ................. $ 8,246 $ 4,843 1.07% 1.36%
Long-term debt .................. 25,515 26,034 1.26% 1.43%
Fair value hedge adjustments <F2> 2,321 1,279
--------- ---------
Notes and loans payable..... $ 36,082 $ 32,156 1.22% 1.42%
========= =========
<FN>
- --------------------
<F1> Includes the effect of certain United States ("U.S.") dollar interest rate swap
agreements and cross currency interest rate swap agreements.
<F2> Adjusts debt to fair market value in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and related amendments ("SFAS 133, as amended").
</FN>
Included in long-term debt are unsecured notes denominated in various foreign
currencies totaling approximately $11.5 billion and $11.4 billion at December
31 and March 31, 2003, respectively. Concurrent with the issuance of these
unsecured notes, the Company entered into cross currency interest rate swap
agreements to convert these obligations into variable rate U.S. dollar
obligations.
-21-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Liquidity Facilities and Letters of Credit
- ---------------------------------------------------
The following table summarizes the Company's committed and uncommitted
facilities:
Committed Uncommitted Unused Facilities
-------------------- -------------------- --------------------
December 31, March 31, December 31, March 31, December 31, March 31,
2003 2003 2003 2003 2003 2003
-------- -------- -------- -------- -------- --------
(Dollars in Millions)
364-day syndicated bank
credit facilities........ $ 3,600 $ 2,800 $ - $ - $ 3,600 $ 2,800
5-year syndicated bank
credit facility - TMCC... 1,400 1,400 - - 1,400 1,400
Letters of credit facilities - - 60 60 59 59
-------- -------- -------- -------- -------- --------
Total facilities $ 5,000 $ 4,200 $ 60 $ 60 $ 5,059 $ 4,259
======== ======== ======== ======== ======== ========
During the second quarter of fiscal 2004, Toyota Credit de Puerto Rico Corp.
("TCPR Corp.") established a $400 million, 364-day syndicated bank credit
facility, which is restricted to its own use. In addition, a TMCC 364-day
syndicated bank credit facility, which is restricted to TMCC's own use, was
increased to $3.2 billion and renewed during September 2003 for an additional
364-day period.
-22-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingencies
- --------------------------------------
TMCC has entered into certain guarantees and commitments. As of December 31,
2003, TMCC had not recorded any liabilities under such arrangements. The
maximum commitment amounts under the guarantees and commitments as of December
31, 2003 are summarized in the table below:
Maximum
Commitment
Amount
--------------
(Dollars in Millions)
Credit facilities with
dealers and affiliates................. $ 3,239
Guarantees of affiliate pollution control
and solid waste disposal bonds......... 148
Lease commitments......................... 147
Revolving liquidity notes
related to securitizations............. 48
Guarantee of Banco Toyota Do
Brasil debt("BTB")..................... 30
-------
Total guarantees and commitments............. $ 3,612
=======
The Company maintains credit facilities with dealers and affiliates. These
credit facilities may be used for business acquisitions, facilities
refurbishment, real estate purchases, and working capital requirements. These
loans are typically collateralized with liens on real estate, vehicle
inventory, and/or other dealership assets, as appropriate. The Company
obtains a personal guarantee from the dealer or corporate guarantee from the
dealership when deemed prudent. Although the loans are typically
collateralized or guaranteed, the value of the underlying collateral or
guarantees may not be sufficient to cover the Company's exposure under such
agreements. The Company prices the credit facilities according to the risks
assumed in entering into the credit facility.
During the first quarter of fiscal 2004, TCPR Corp. extended a $90 million
revolving line of credit to Toyota de Puerto Rico Corp. ("TDPR"), a wholly-
owned subsidiary of Toyota Motor Sales, U.S.A., Inc. ("TMS"). This $90
million commitment is included in the table above under credit facilities with
dealers and affiliates. The revolving line of credit has a one-year renewable
term, with interest due monthly. Any loans outstanding under this revolving
line of credit are not guaranteed by TMS.
-23-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingencies (Continued)
- --------------------------------------
TMCC has guaranteed payments of principal, interest, and premiums, if any, on
$88 million principal amount of flexible rate demand solid waste disposal
revenue bonds issued by Putnam County, West Virginia, of which $40 million
matures in June 2028, $28 million matures in August 2029, and $20 million
matures in April 2030. The bonds were issued in connection with a West
Virginia manufacturing facility of an affiliate.
TMCC has guaranteed payments of principal, interest, and premiums, if any, on
$60 million principal amount of flexible rate demand pollution control revenue
bonds issued by Gibson County, Indiana, of which $10 million matures in
October 2027, January 2028, January 2029, January 2030, February 2031, and
September 2031, respectively. The bonds were issued in connection with an
Indiana manufacturing facility of an affiliate.
Under these affiliate bond guarantees, TMCC would be required to perform in
the event of any of the following:
a) payment of any installment of interest, principal, premium, if any, or
purchase price on the bonds is not made when the payment becomes due and
payable;
b) the occurrence of certain events of bankruptcy involving the benefactor
manufacturing facilities or TMCC;
c) failure by the benefactor manufacturing facilities to observe or perform
any covenant, condition or agreement under the guarantees, other than as
referred to in (a) above;
d) failure by the bond issuers to observe or perform any covenant, condition
or agreement under the guarantees, other than as referred to in (a) above;
e) failure by TMCC to observe or perform any covenant, condition, agreement
or obligation under the guarantees.
These guarantees include provisions whereby TMCC is entitled to reimbursement
by the benefactor manufacturing facilities for all principal and interest paid
and fees incurred on behalf of the benefactor manufacturing facilities, and to
default interest on those amounts. TMCC has not been required to perform
under any of these affiliate bond guarantees as of December 31, 2003.
During the first quarter of fiscal 2004, the Company entered into a 15-year
lease agreement with TMS. The lease agreement is for the Company's new
headquarters location in the TMS headquarters complex in Torrance, California.
At December 31, 2003, minimum future commitments under lease agreements to
which the Company is a lessee, including those under the agreement discussed
above, are as follows: fiscal years ending 2004 - $21 million; 2005 - $19
million; 2006 - $17 million; 2007 - $15 million; 2008 - $10 million; 2009 - $9
million; and thereafter - $56 million.
-24-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingencies (Continued)
- --------------------------------------
In certain securitization structures, revolving liquidity notes are used in
lieu of reserve funds to provide credit enhancement to the senior securities.
Under these revolving liquidity notes, investors may draw upon the notes to
cover any shortfall in interest and principal payments. The draws are funded
by TMCC, and TMCC is entitled to reimbursement of amounts drawn on the
liquidity notes. Reimbursement of amounts drawn on the liquidity notes is
subordinated to principal and interest payments due on the securities. TMCC
must fund the entire amount available under the revolving liquidity notes if
TMCC's short-term unsecured debt rating is downgraded below P-1 or A-1 by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group
a division of The McGraw-Hill Companies, Inc. ("S&P"), respectively.
TMCC has guaranteed payments of up to $30 million in principal, interest,
fees, and expenses with respect to the offshore bank loan of BTB. This
guarantee will remain in effect until the loan is repaid in full, and TMCC
elects to terminate the guarantee. The loan matures in fiscal 2005. Under
the terms of the guarantee, TMCC would be required to perform on behalf of BTB
should BTB default on payments for any reason including, but not limited to,
financial insolvency, cross border payment restrictions, and other sovereign
restrictions on offshore payments. TMCC has entered into a separate indemnity
agreement with BTB. The indemnity agreement includes provisions whereby TMCC
is entitled to reimbursement from BTB. TMCC has not been required to perform
under the BTB guarantee as of December 31, 2003.
In the ordinary course of business, the Company enters into agreements
containing indemnification provisions standard in the industry related to
several types of transactions, such as debt funding, derivatives,
securitization transactions, and its vendor and supplier agreements.
Performance under these indemnities would occur upon a breach of the
representations, warranties or covenants made or given, or a third party claim.
In addition, the Company has agreed in certain debt and derivative issuances,
and subject to certain exceptions, to gross-up payments due to third parties in
the event that withholding tax is imposed on such payments. Due to the
difficulty in predicting events which could cause a breach of the
indemnification provisions or trigger a gross-up obligation, the Company is not
able to estimate its maximum exposure to future payments that could result from
claims made under such provisions. The Company has not made any material
payments in the past as a result of these provisions, and as of December 31,
2003, the Company does not believe it is probable that it will have to make any
material payments in the future. As such, no amounts have been recorded under
these indemnifications as of December 31, 2003.
-25-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingencies (Continued)
- --------------------------------------
The Company sells discrete pools of retail finance receivables to wholly owned
consolidated bankruptcy remote special purpose entities ("SPE"). TMCC makes
certain representations and warranties to the SPE, and the SPE makes
corresponding representations and warranties to the securitization trust,
relating to receivables sold in a securitization. TMCC and the SPE may be
required to repurchase any receivables in the event of a breach of a
representation and warranty relating to the receivable that materially and
adversely affects the interest of the SPE, or securitization trust, as
applicable. In addition, TMCC, as servicer of the receivables, may be
required to repurchase any receivable in the event of a breach of a covenant
by the servicer with respect to the receivable that materially and adversely
affects the interest of the securitization trust or of certain extensions or
modifications of a receivable as to which TMCC, as servicer, does not commit
to make advances to fund reductions in interest payments. The repurchase
price is generally the outstanding principal balance of the receivable and
accrued interest. These provisions are customary for securitization
transactions. Receivables repurchased under these provisions during the nine
months ended December 31, 2003 totaled $1 million.
As servicer, TMCC is required to advance certain shortfalls in obligor
payments to the related securitization trust to the extent it believes the
advance will be recovered from future collections of the related receivable.
Each securitization trust is required to reimburse the Company for these
advances from collections on all receivables before making other required
payments. These provisions are customary for securitization transactions.
Advances outstanding at December 31, 2003 totaled $16 million.
Various legal actions, governmental proceedings and other claims are pending or
may be instituted or asserted in the future against the Company with respect to
matters arising in the ordinary course of business. Certain of these actions
are or purport to be class action suits, seeking sizeable damages and/or
changes in the Company's business operations, policies, and practices. Certain
of these actions are similar to suits that have been filed against other
financial institutions and captive finance companies. Management and internal
and external counsel perform periodic reviews of pending claims and actions to
determine the probability of adverse verdicts and resulting amounts of
liability. The amounts of liability on pending claims and actions as of
December 31, 2003 were not determinable; however, in the opinion of management,
the ultimate liability resulting therefrom should not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
-26-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Related Party Transactions
- -----------------------------------
As of December 31, 2003, there have been no material changes to related party
agreements or relationships as described in the Company's annual report on Form
10-K for the year ended March 31, 2003, except for the finance
receivables with TDPR and the lease agreement with TMS, as described in Note 8.
The table below summarizes amounts included in the Company's consolidated
balance sheet and statement of income under various related party agreements or
relationships:
December 31, March 31,
2003 2003
---------- ----------
(Dollars in Millions)
(Restated)
Assets:
Finance receivables with affiliate... $ 33 $ 1
Rate subvention receivable from
affiliates....................... $ 18 $ 30
Notes receivable under
home loan program................ $ 7 $ 11
Other................................ $ - $ 6
Deferred rate subvention income......
Finance receivables.............. $(226) $(189)
Operating leases................. $ (36) $ (36)
Liabilities:
Intercompany payables................ $ 90 $ 116
Other................................ $ 2 $ -
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(Dollars in Millions)
(Restated)
Revenues:
Manufacturers' subvention support and
other revenues.................... $ 48 $ 44 $ 142 $ 107
Affiliate insurance premiums and
commissions revenue............... $ 13 $ 9 $ 35 $ 29
Expenses:
Employee benefits expense.............. $ 12 $ 12 $ 36 $ 29
Shared services charges and other
amounts.......................... $ 14 $ 10 $ 59 $ 32
Credit support fees incurred........... $ 4 $ 3 $ 12 $ 10
-27-
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Segment Information
- -----------------------------
Financial results for the Company's operating segments are summarized below:
December 31, March 31,
----------- ------------
2003 2003
-------- --------
(Dollars in Millions)
(Restated)
Assets:
Financing operations................. $ 42,783 $ 38,298
Insurance operations................. 1,104 912
Eliminations/reclassifications....... (208) (209)
-------- --------
Total assets....................... $ 43,679 $ 39,001
======== ========
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(Dollars in Millions)
(Restated)
Gross revenues:
Financing operations................. $ 987 $ 925 $ 2,966 $ 2,843
Insurance operations................. 58 48 166 144
------- ------- ------- -------
Total gross revenues............... $ 1,045 $ 973 $ 3,132 $ 2,987
======= ======= ======= =======
Net income:
Financing operations................. $ 215 $ 39 $ 466 $ 20
Insurance operations................. 13 10 35 27
------- ------- ------- -------
Total net income................... $ 228 $ 49 $ 501 $ 47
======= ======= ======= =======
-28-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As discussed in the Explanatory Note, this Form 10-Q/A is being filed with the
Securities and Exchange Commission ("SEC") to reflect the restatement of Toyota
Motor Credit Corporation's Consolidated Financial Statements and amendments to
related disclosures as of December 31 and March 31, 2003 and for the three and
nine months ended December 31, 2003 and 2002. Accordingly, the discussion and
amounts included in this MD&A have been revised to reflect these amendments.
EARNING ASSETS AND CONTRACT VOLUME
Net Earning Assets
- ------------------
The composition of the Company's net earning assets is summarized below:
December 31, March 31, December 31,
2003 2003 2002
------------ ------------ ------------
(Dollars in Millions)
(Restated)
Vehicle lease earning assets
Investment in operating leases, net...... $ 7,381 $ 7,586 $ 7,334
Finance leases, net...................... 3,910 4,939 5,354
-------- -------- --------
Total vehicle lease earning assets........ 11,291 12,525 12,688
Vehicle retail finance receivables, net... 20,716 15,802 15,900
Vehicle wholesale and other financing <F1> 6,753 6,409 6,016
Allowance for credit losses <F2>.......... (502) (462) (381)
-------- -------- --------
Total net earning assets.................. $ 38,258 $ 34,274 $ 34,223
======== ======== ========
<FN>
- ----------------------
<F1> For purposes of this table, vehicle wholesale and other financing includes
wholesale financing, real estate loans, working capital loans, revolving credit lines,
and industrial equipment financing.
<F2> Includes amounts to cover probable losses on the Company's owned portfolio, but
excludes amounts related to repossessed collateral in inventory.
</FN>
Net earning assets at December 31, 2003 increased $4.0 billion or 12% compared
to both March 31, 2003 and December 31, 2002. The growth in earning assets
during this period was driven by the increased volume of vehicle retail
financing and vehicle wholesale and other financing, partially offset by a
decrease in vehicle lease financing. The significant increase in retail
finance receivables primarily resulted from the continued growth in the number
of new vehicles financed under the Company's retail financing programs. This
growth was generated in large part by an increased use of marketing incentives
sponsored by Toyota Motor Sales, U.S.A., Inc. ("TMS") and higher Toyota and
Lexus vehicle sales levels, which increased 12% and 8% for the three and nine
months ended December 31, 2003, respectively, when compared to the same
periods in the prior year. Also contributing to the growth in retail finance
receivables during the current year periods was a decrease in the amount of
retail finance receivables securitized when compared to the same periods in
the prior year. Vehicle wholesale and other financing receivables also
increased when compared to March 31, 2003 and December 31, 2002 primarily due
to an increase in dealer inventory financed by the Company and increases in
the number of vehicle dealers receiving vehicle wholesale financing. Vehicle
lease earning assets continued to decrease when compared to March 31, 2003 and
December 31, 2002 due to a general shift in programs sponsored by TMS from
lease to retail as well as the Company's reduced emphasis on leasing, in line
with industry trends.
-29-
The allowance for credit losses at December 31, 2003 increased $40 million or
9% and $121 million or 32% when compared to March 31, 2003 and December 31,
2002, respectively. Refer to the "Provision for Credit Losses" section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") for further discussion regarding the Company's delinquency
and charge-off experience.
Contract Volume
- ---------------
The composition of the Company's contract volume and market share is
summarized below:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Total contract volume:
Vehicle retail....................... 194,000 153,000 647,000 521,000
Vehicle lease........................ 25,000 33,000 90,000 121,000
------- ------- ------- -------
Total................................... 219,000 186,000 737,000 642,000
======= ======= ======= =======
TMS subvened contract volume:
Vehicle retail....................... 57,000 46,000 207,000 134,000
Vehicle lease........................ 5,000 6,000 24,000 21,000
------- ------- ------- -------
Total................................... 62,000 52,000 231,000 155,000
======= ======= ======= =======
Market share <F1>:
Vehicle retail....................... 35.8% 31.1% 38.3% 32.4%
Vehicle lease........................ 6.6% 9.8% 7.5% 10.9%
----- ----- ----- -----
Total................................... 42.4% 40.9% 45.8% 43.3%
===== ===== ===== =====
<FN>
- --------------------
<F1> Market share represents the percentage of total TMS sales of new Toyota and Lexus
vehicles financed by TMCC. Total TMS sales excludes fleet sales, sales of Toyota
Services de Mexico, S.A. de C.V., Toyota Services de Venezuela, C.A., and a private
Toyota distributor.
</FN>
Total contract volume increased for the three and nine months ended December
31, 2003, respectively, when compared to the same periods in the prior year
due to increased vehicle retail contract volume. The growth in vehicle retail
contract volume during both periods was attributable to the combined effects
of higher Toyota and Lexus vehicle sales, incremental volume from the
increased number of wholesale dealers serviced by TMCC, and continued use of
new vehicle incentive programs sponsored by TMS. In contrast, vehicle lease
contract volume decreased for the three and nine months ended December 31,
2003, respectively, when compared to the same periods in the prior year. The
decline in lease contract volume was due to a general shift in programs
subvened by TMS from lease to retail as well as the Company's reduced emphasis
on leasing, in line with industry trends.
-30-
RESULTS OF OPERATIONS
- ---------------------
Net income increased $179 million and $454 million for the three and nine
months ended December 31, 2003, respectively, when compared to the same
periods in the prior year. The increases in net income for both periods
reflect reductions in total interest expense and in provision for credit
losses and increases in investment and other income. The decrease in total
interest expense reflects the effect of declines in short term interest rates
and the positive impact of changes in market interest rates on the valuation
of the Company's derivatives, partially offset by the effects of higher
average outstanding balances of notes and loans payable used to finance asset
growth. The decrease in provision for credit losses reflects continued
improvement in the Company's overall delinquency experience. The increase in
investment and other income is due to the absence of foreign currency
transaction losses in the three and nine months ended December 31, 2003.
These items, and other factors influencing the Company's financial results are
discussed in more depth within this MD&A section.
TOTAL FINANCING REVENUES
- ------------------------
Total financing revenues remained essentially level for the three and nine
months ended December 31, 2003 when compared to the same periods in the prior
year as a result of offsetting fluctuations in leasing and retail financing
revenues. Retail financing revenues increased as a result of the continued
growth in vehicle retail finance receivables, partially offset by reductions
in portfolio yield. Leasing revenues declined during both periods due to
reductions in portfolio yield and vehicle lease earning assets. Wholesale and
other dealer financing revenues remained relatively unchanged during both
periods as increases in average vehicle wholesale and other receivables
outstanding were offset by reductions in portfolio yield. The decrease in
portfolio yield reflects general decreases in market interest rates.
Portfolio yield on the Company's total net earning assets decreased from 6.69%
for the three months ended December 31, 2002 to 6.21% for the three months
ended December 31, 2003, and from 6.95% for the nine months ended December 31,
2002 to 6.12% for the nine months ended December 31, 2003. The changes in
leasing and retail financing revenues are consistent with the general shift in
programs sponsored by TMS from lease to retail as well as the Company's
reduced emphasis on leasing, in line with industry trends. Refer to the
"Earning Assets and Contract Volume" section of the MD&A for further
discussion regarding earning asset changes.
-31-
DEPRECIATION ON LEASES
- ----------------------
Straight-line depreciation expense, recorded over the original contract life,
is based upon the depreciable basis of leased vehicles ("depreciable basis").
Depreciable basis is the difference between a leased vehicle's original book
value ("capitalized cost") and its contractual residual value established at
lease origination. Additional depreciation expense is recorded ratably over
the remaining life of the lease when the residual value at lease maturity is
estimated to be less than the contractual residual value. Factors affecting
the estimated residual value at lease maturity include, but are not limited
to, new vehicle incentive programs, new vehicle pricing, and used vehicle
supply. The evaluation of these factors involves significant assumptions,
complex analysis, and management judgment. Any difference between the
undepreciated value at termination and the proceeds received at sale is
recorded at the time of asset disposal as depreciation expense for operating
leases and as a reduction to leasing revenue for direct finance leases.
Total depreciation expense decreased $12 million or 3% for the three months
ended December 31, 2003 when compared to the same period in the prior year.
The decrease was comprised of a $35 million decrease in additional
depreciation expense, partially offset by a $23 million increase in straight-
line depreciation. The decline in additional depreciation expense resulted
primarily from lower losses incurred at lease termination, attributable to
lower average losses per vehicle sold ("loss severity") during the quarter,
coupled with a reduction in the number of leased vehicles returned at maturity
and sold at auction. In prior periods, the Company recorded additional
depreciation expense in response to the continued decline in used vehicle
prices. These actions were taken to bring contractual residual values in line
with expected residual values at lease maturity. Additionally, the Company
continued to adjust contractual residual values on new lease volume to take
into account lower expected used vehicle prices. These adjustments have
contributed to the increase in straight-line depreciation and the
corresponding decrease in additional depreciation expense. The decline in
additional depreciation was also influenced by the reclassification of
residual value losses on direct finance leases from depreciation on leases to
leasing revenues in the amounts of $16 million and $30 million in the three
months ended December 31, 2003 and 2002, respectively.
The increase of $79 million or 7% in total depreciation expense for the nine
months ended December 31, 2003 when compared to the same period in the prior
year was comprised of an increase in straight-line depreciation. Increases in
straight-line depreciation expense resulted from the overall increase in the
depreciable basis.
Additional depreciation expense for the nine months ended December 31, 2003
when compared to the same period in the prior year remained unchanged.
However, the balance was affected by offsetting factors and reclassifications.
Additional depreciation decreased $9 million in the nine months ended December
31, 2003 when compared to the same period in the prior year primarily
resulting from adjustments to contractual residual values at lease inception
in response to expected lower end-of-term market values. The impact of these
adjustments was offset by an increase in loss severity, primarily during the
first quarter of fiscal 2004, experienced on units returned at maturity when
compared to the same prior year period. The total $9 million decrease in
additional depreciation for the nine months ended December 31, 2003 when
compared with the prior year was fully offset by the reclassification of
residual value losses on direct finance leases from depreciation on leases to
leasing revenues in the amounts of $76 million and $85 million in the nine
months ended December 31, 2003 and 2002, respectively.
-32-
INTEREST EXPENSE
- ----------------
Interest expense is comprised of interest paid on notes and loans payable,
including net settlements on interest rate swaps, and unrealized gains and
losses included in the Company's derivative fair value adjustment. During the
current year, the Company's derivative fair value adjustment was reclassified
into interest expense in response to recent SEC public announcements regarding
the income statement presentation of certain derivative activities.
The following table summarizes the primary components of interest expense:
Three months ended Nine months ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
(Dollars in Millions)
(Restated)
Interest on notes and loans payable,
including net settlements on interest
rate swaps............................ $ 195 $ 208 $ 558 $ 633
Derivative fair value adjustment............ (107) (18) (144) 313
------ ------ ------ ------
Total interest expense...................... $ 88 $ 190 $ 414 $ 946
====== ====== ====== ======
The decrease in total interest expense for the three and nine months ended
December 31, 2003 reflects the effect of declines in short term interest rates
and the positive impact of changes in market interest rates on the valuation
of the Company's derivatives, partially offset by the effects of higher
average outstanding balances of notes and loans payable used to finance asset
growth.
Interest on notes and loans payable, including net settlements on interest rate
swaps, benefited from a decline in short term interest rates. The impact of
the decrease in rates was partially offset by an increase in the average
outstanding balance of notes and loans payable from $29 billion for the nine
months ended December 31, 2002 to $34 billion for the nine months ended
December 31, 2003.
The following table summarizes the net unrealized gains and losses for the
items included in the Company's derivative fair value adjustment, which is
included in interest expense. The unrealized gains were primarily due to an
increase in the value of the Company's non-designated derivatives. These
derivatives are used to manage interest rate risk on a portfolio basis.
Three months ended Nine months ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
(Dollars in Millions)
(Unrealized (Gain)/Loss)
(Restated)
Non-designated derivatives............... $ (86) $ 36 $ (132) $ 428
Previously designated derivatives that no
longer qualify as fair value hedges... - 5 18 3
Ineffective portion of the
Company's fair value hedges........... (21) (59) (30) (118)
------ ------ ------ ------
Derivative fair value adjustment......... $ (107) $ (18) $ (144) $ 313
====== ====== ====== ======
-33-
INSURANCE PREMIUMS EARNED AND CONTRACT REVENUES
- -----------------------------------------------
Insurance premiums earned and contract revenues recognized from insurance
operations increased $5 million or 13% and $12 million or 11% for the three
and nine months ended December 31, 2003, respectively, when compared to the
same periods in the prior year due to increased contract volume and an
increase in total agreements in force.
INVESTMENT AND OTHER INCOME/(LOSS)
- ---------------------------------
The following table summarizes the Company's investment and other
income/(loss):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
(Dollars in Millions)
(Restated)
Investment and servicing fee income....... $ 33 $ 23 $ 86 $ 69
Gains from securitization of
finance receivables.................... - 31 30 55
Loss on impairment of
retained interests..................... - - - (11)
------ ------ ------ ------
Investment income from securitizations. 33 54 116 113
Investment income from marketable
securities and other income............ 12 8 30 21
Foreign currency transaction losses....... - (78) - (69)
------ ------ ------ ------
Total investment and other income/(loss) $ 45 $ (16) $ 146 $ 65
====== ====== ====== ======
For the three months ended December 31, 2003, total investment and other
income increased when compared with the same period in the prior year
primarily due to the absence of foreign currency transaction losses and an
increase in investment income from marketable securities and other income,
partially offset by a decrease in investment income from securitizations. For
the nine months ended December 31, 2003, total investment and other income
increased when compared with the same period in the prior year primarily due
to the absence of foreign currency transaction losses and an increase in
investment income from marketable securities and other income.
For the three months ended December 31, 2003, investment income from
securitizations decreased when compared with the same period in the prior year
primarily due to the absence of a securitization transaction during the most
recent quarter. There was one securitization transaction during the third
quarter of fiscal 2003.
-34-
For the nine months ended December 31, 2003, investment income from
securitizations remained relatively unchanged when compared with the same
period in the prior year. However, the components within investment income
from securitizations changed. Servicing fee income increased primarily due to
an increase in the average outstanding principal balance of the securitized
receivables on which such income is earned. Gains from securitization of
finance receivables decreased primarily due to a decrease in the number of
securitization transactions. During the nine months ended December 31, 2003,
the Company entered into one securitization transaction totaling $1.9 billion
compared to two securitization transactions during the nine months ended
December 31, 2002 totaling $3.1 billion. The Company also incurred impairment
losses on retained interests during the nine months ended December 31, 2002 as
a result of projected credit losses on the related retail finance receivables
exceeding the existing loss assumptions. No impairment loss on retained
interests was recorded during the nine months ended December 31, 2003.
Investment income from marketable securities and other income increased for
the three and nine months ended December 31, 2003 when compared to the same
periods in the prior year primarily as a result of higher net realized gains
on investments in corporate and U.S. debt securities. During the three and
nine months ended December 31, 2003, net realized gains on debt securities
were $2 million and $6 million, respectively, compared to net realized losses
of $1 million during both the three and nine months ended December 31, 2002.
Foreign currency transaction gains and losses result from fluctuations in the
value of the dollar relative to other currencies on foreign currency
denominated notes payable during periods when the notes payable and the
associated derivatives do not qualify for hedge accounting. In periods where
hedge accounting is applied, the foreign currency transaction gains and losses
on foreign currency denominated notes payable resulting from such fluctuations
are recorded as a component of interest expense in the Consolidated Statement
of Income together with the change in value of the associated derivatives.
Refer to the "Use of Derivative Instruments" section in the 2004 Annual Report
on Form 10-K, as amended, for further discussion of hedge accounting.
During the three and nine months ended December 31, 2002, certain foreign
currency denominated notes payable and the associated derivatives did not
qualify for hedge accounting and the Company recorded net foreign currency
transaction losses of $78 million and $69 million, respectively. During the
three and nine months ended December 31, 2003, all foreign currency
denominated notes payable were in qualifying hedge accounting relationships
and therefore all foreign currency transaction gains or losses were recorded
as a component of interest expense in the Consolidated Statement of Income
rather than as a component of investment and other income.
OPERATING AND ADMINISTRATIVE EXPENSES
- -------------------------------------
Operating and administrative expenses increased $12 million, or 3% for the
nine months ended December 31, 2003 when compared to the same period in fiscal
2003. The higher level of expense reflected increases in personnel expenses
related to increased headcount and training activities, charges related to
technology services provided by TMS, and losses on disposal of assets in
connection with the Company's move to the new headquarters location in the TMS
headquarters complex in Torrance, California.
LOSSES RELATED TO ARGENTINE INVESTMENT
- --------------------------------------
During the nine months ended December 31, 2002, TMCC recorded an $11 million
charge against income to increase the reserve related to the Company's
guarantee of Toyota Credit Argentina S.A.'s ("TCA") offshore outstanding debt
to $37 million. During the remainder of fiscal 2003, TMCC satisfied its
obligations under the guarantees and terminated the guarantees. Accordingly,
no additional charges were recorded during the three or nine months ended
December 31, 2003.
-35-
PROVISION FOR CREDIT LOSSES
- ---------------------------
The Company is exposed to credit risk on its owned portfolio. Credit risk is
the risk that customers will not make required payments to the Company in
accordance with their contractual obligation. The Company's level of credit
losses is influenced primarily by two factors: the total number of contracts
that default and loss per occurrence. The Company maintains an allowance for
credit losses to cover probable losses resulting from the non-performance of
its customers.
The following tables provide information related to the Company's allowance
for credit losses and credit loss experience:
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
(Dollars in Millions)
Allowance for credit losses
at beginning of period............... $ 544 $ 417 $ 526 $ 283
Provision for credit losses............. 76 151 263 400
Charge-offs............................. (88) (98) (264) (227)
Recoveries.............................. 17 9 43 24
Other .................................. 1 (13) (18) (14)
------- ------- ------- -------
Allowance for credit losses
at end of period..................... $ 550 $ 466 $ 550 $ 466
======= ======= ======= =======
December 31,
-------------------
2003 2002
------ ------
(Dollars in Millions)
(Restated)
Annualized net credit losses as a percentage
of average earning assets <F1> <F2> <F3>. 0.81% 0.83%
Aggregate balances 60 or more days
past due ................................ $ 196 $ 260
Over-60 day delinquencies as a percentage
of gross earning assets <F1> <F2>........ 0.50% 0.75%
Allowance for credit losses
as a percentage of gross
earning assets <F2>...................... 1.41% 1.34%
<FN>
- --------------------
<F1> Delinquency and charge-off ratios typically fluctuate over time as a portfolio
matures. The information in the preceding table has not been adjusted to eliminate the
effect of the Company's portfolio growth.
<F2> For purposes of this table, "earning assets" include earning assets and repossessed
collateral that has not yet been sold.
<F3> Net credit loss ratios have been annualized using nine-month results.
</FN>
-36-
The decrease in the provision for credit losses recorded during the three and
nine months ended December 31, 2003 when compared to the same periods in the
prior year reflects continued improvement in the Company's overall delinquency
experience. During the third quarter of fiscal 2003 the Company was
experiencing historically high delinquency and charge-off rates primarily as a
result of the Company's field restructuring and the general weakness of the
economy. The higher level of provision recorded in the prior year reflected
management's expectations for increased losses in the near term. The lower
amount of provision expense recorded in the current year reflects recent
favorable trends and management's expectations for probable losses on the
currently owned portfolio. The increase in total charge-offs, net of
recoveries, for the nine months ended December 31, 2003 when compared to the
same period in the prior year was consistent with management's expectations.
Delinquency and Net Credit Loss Experience
- ------------------------------------------
The Company's delinquency and net credit loss experience continued to be
influenced by the combined impact of the following factors:
- - Continued economic uncertainty
- - Lower used vehicle prices
- - Longer term financing
- - Tiered/risk based pricing
- - The Company's field restructuring
The impact of the listed factors on the Company's current year delinquency and
net credit loss experience is consistent with the impact to fiscal 2003
results as discussed in the "Provision for Credit Losses" section of the
Company's 2003 Annual Report on Form 10-K, except as discussed
below. The impact of the tiered/risk based pricing program ("tiered
pricing"), which was fully implemented as of March 2001, continues to diminish
as a contributing factor to higher delinquency and credit loss rates. While
the implementation of tiered pricing has resulted in increased overall credit
losses, the period-to-period effects continue to lessen over time. Similarly,
the impact of the Company's field restructuring, completed in fiscal 2003, has
been significantly reduced due to improvements in operating efficiencies at
the customer service centers.
While the Company's credit loss rates have declined from historical highs
reached during fiscal 2003, credit loss rates remain at elevated levels.
Management does not anticipate a return to historically high delinquency and
credit loss rates in the near term but remains cautious regarding the extent
to which these favorable trends are expected to continue.
-37-
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The objective of the Company's liquidity strategy is to ensure access to the
capital markets, meet obligations and other commitments on a timely and cost-
effective basis, and support growth in earning assets. Significant reliance is
placed on the Company's ability to obtain debt and securitization funding in
the capital markets. Debt issuances have generally been in the form of
commercial paper and unsecured term debt. The Company does not rely on any
one source of funding and may choose to reallocate its funding activities
depending upon market conditions, relative costs, and other factors. Except
as discussed below, management does not anticipate changes in the Company's
ability to access the unsecured debt and securitization markets in the
foreseeable future. The Company believes that debt and securitization funding,
combined with cash provided by operating and investing activities, will provide
sufficient liquidity to meet future funding requirements.
Commercial Paper
- ----------------
Short-term funding needs are met through the issuance of commercial paper.
Commercial paper outstanding under the Company's commercial paper programs
ranged from approximately $6.0 billion to $8.7 billion during the quarter ended
December 31, 2003, with an average outstanding balance of $7.3 billion.
Unsecured Term Debt
- -------------------
Long-term funding requirements are met through the issuance of a variety of
debt securities underwritten in both the U.S. and international capital
markets. Medium term notes ("MTNs") and bonds have provided the Company with
significant sources of funding. During the quarter ended December 31, 2003,
the Company issued approximately $2.4 billion of MTNs and bonds, all of which
had original maturities ranging from greater than one year to approximately ten
years. At December 31, 2003, the Company had total MTNs and bonds outstanding
of $27.3 billion, of which $11.5 billion was denominated in foreign currencies.
The remaining maturities of all MTNs and bonds outstanding at December 31, 2003
ranged from less than one year to approximately ten years.
The Company anticipates continued use of MTNs and bonds in both the U.S. and
international capital markets. To provide for the issuance of debt securities
in the U.S. capital market, the Company maintains a shelf registration with the
SEC under which approximately $4 billion was available for issuance at January
31, 2004. Under the Company's Euro MTN program, which provides for the
issuance of debt securities in the international capital markets, the maximum
aggregate principal amount authorized to be outstanding at any time is $20
billion, of which approximately $6 billion was available for issuance at
January 31, 2004. The U.S. dollar and Euro MTN programs may be expanded from
time to time to allow for the continued use of these sources of funding. In
addition, the Company may issue bonds in the U.S. and international capital
markets that are not issued under its MTN programs. The Company intends to
amend certain of its filings with the United Kingdom Listing Authority in
connection with its EMTN program to reflect adjustments to its Consolidated
Financial Statements as of and for the three and nine months ended December
31, 2003 and as of and for the three months ended June 30, 2004. The Company
will not issue debt under its EMTN program until the amended filings are
submitted to the United Kingdom Listing Authority. The Company is working to
complete these filings as soon as practicable. In any event, the Company
believes it has sufficient alternative sources of liquidity to fund its
operations.
-38-
Securitization Funding
- ----------------------
TMCC's securitization program allows the Company to access an additional
source of funding, thus further diversifying its investor base and enhancing
its liquidity position. With the exception of the securitization transaction
executed in September 2001, TMCC's securitization transactions are treated as
sales for accounting purposes. The outstanding balance of securitized retail
finance receivables serviced by TMCC totaled $5.7 billion at December 31,
2003.
During the nine months ended December 31, 2003, the Company sold retail
receivables totaling $1.9 billion in connection with securities issued under a
shelf registration statement maintained with the SEC. Of the $1.9 billion
sold, the Company invested $0.6 billion in purchased and retained senior class
and other securities, resulting in $1.3 billion of net funding. As of January
31, 2004, $6.2 billion of securities were available for issuance under the
current SEC shelf registration statement.
Liquidity Facilities and Letters of Credit
- ------------------------------------------
For additional liquidity purposes, the Company maintains syndicated bank
credit facilities with banks whose commitments aggregated $5.0 billion at
December 31, 2003. No amounts were outstanding under the syndicated bank
credit facilities as of December 31, 2003. During the second quarter of
fiscal 2004, TCPR Corp. established a $400 million, 364-day syndicated bank
credit facility, which is restricted to its own use. In addition, the TMCC
364-day syndicated bank credit facility, which is restricted to its own use,
was increased to $3.2 billion and renewed during September 2003 for an
additional 364-day period.
Committed Uncommitted Unused Facilities
-------------------- -------------------- --------------------
December 31, March 31, December 31, March 31, December 31, March 31,
2003 2003 2003 2003 2003 2003
-------- -------- -------- -------- -------- --------
(Dollars in Millions)
364-day syndicated bank
credit facilities........ $ 3,600 $ 2,800 $ - $ - $ 3,600 $ 2,800
5-year syndicated bank
credit facility - TMCC... 1,400 1,400 - - 1,400 1,400
Letters of credit facilities - - 60 60 59 59
-------- -------- -------- -------- -------- --------
Total facilities $ 5,000 $ 4,200 $ 60 $ 60 $ 5,059 $ 4,259
======== ======== ======== ======== ======== ========
-39-
Credit Ratings
- --------------
Effective January 2004, Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. ("S&P") revised the outlook of Toyota Motor
Corporation ("TMC") and its supported subsidiaries, including TMCC, from
negative to stable. As of January 31, 2004, the ratings and outlook
established by Moody's Investors Service, Inc. ("Moody's") and S&P for TMCC
were as follows:
Rating Agency Senior Debt Commercial Paper Outlook
--------------- ------------- ------------------ ---------
S&P AAA A-1+ Stable
Moody's Aaa P-1 Stable
CONTRACTUAL OBLIGATIONS AND CREDIT-RELATED COMMITMENTS
- ------------------------------------------------------
During the first quarter of fiscal 2004, the Company entered into a 15-year
lease agreement with TMS. The lease agreement is for the Company's new
headquarters location in the TMS headquarters complex in Torrance, California.
At December 31, 2003, minimum future commitments under lease agreements to
which the Company is a lessee, including those under the agreement discussed
above, are as follows: fiscal years ending 2004 - $21 million; 2005 - $19
million; 2006 - $17 million; 2007 - $15 million; 2008 - $10 million; 2009 - $9
million; and thereafter - $56 million.
-40-
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- ------------------------------------------------------------------------
This report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which include estimates,
projections and statements of the Company's beliefs concerning future events,
business plans, objectives, expected operating results, and the assumptions
upon which those statements are based. Forward looking statements include,
without limitation, any statement that may predict, forecast, indicate or
imply future results, performance or achievements, and are typically
identified with words such as "believe", "anticipate", "expect", "estimate",
"project", "should", "intend", "will", "may" or words or phrases of similar
meaning. The Company cautions that the forward looking statements involve
known and unknown risks, uncertainties and other important factors that may
cause actual results to differ materially from those in the forward looking
statements, including, without limitation, the following: decline in demand
for Toyota and Lexus products; the effect of economic conditions; the effect
of the current political, economic and regulatory risk in Argentina, Mexico,
Venezuela, Brazil and other Latin American and South American countries and
the resulting effect on their economies and monetary and fiscal policies; a
decline in the market acceptability of leasing; the effect of competitive
pricing on interest margins; changes in vehicle and component pricing due to
the appreciation of the Japanese yen against the U.S. dollar; the effect of
governmental actions; changes in tax laws; changes in regulations that affect
retail installment lending, leasing or insurance; the effect of competitive
pressures on the used car market and residual values and the continuation of
the other factors causing changes in vehicle returns and termination losses;
the continuation of, and if continued, the level and type of special programs
offered by TMS; the ability of the Company to successfully access the U.S. and
international capital markets; the effects of any rating agency actions;
increases in market interest rates; the implementation of new technology
systems; the effectiveness of the Company's internal control or financial
systems, or a failure of internal control resulting in a loss; the
continuation of factors causing changes in delinquencies and credit losses;
the changes in the fiscal policy of any government agency which increases
sovereign risk; monetary policies exercised by the European Central Bank and
other monetary authorities; increased costs associated with the Company's debt
funding; the effect of any military action by or against the U.S., as well as
any future terrorist attacks, including any resulting effects on general
economic conditions, consumer confidence and general market liquidity; with
respect to the effects of litigation matters, the discovery of facts not
presently known to the Company or determination by judges, juries or other
finders of fact which do not accord with the Company's evaluation of the
possible liability from existing litigation; losses resulting from default by
any dealers to which the Company has a significant credit exposure; with
respect to financial reporting disclosure matters, the discovery of facts not
presently known to the Company or management that may be discovered in
connection with its ongoing review of internal controls over financial
reporting; default by any counterparty to a derivative contract; and
performance under any guaranty or comfort letter issued by the Company. The
risks included here are not exhaustive. New risk factors emerge from time to
time and it is not possible for the Company to predict all such risk factors,
nor to assess the impact such risk factors might have on the Company's
business or the extent to which any factor or combination of factors may cause
actual results to differ materially from those contained in any forward
looking statements. Given these risks and uncertainties, investors should not
place undue reliance on forward looking statements as a prediction of actual
results. The Company will not update the forward looking statements to
reflect actual results or changes in the factors affecting the forward looking
statements.
-41-
NEW ACCOUNTING STANDARDS
- ------------------------
In December 2003, the Financial Accounting Standards Board ("FASB") issued a
revision to SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106"
("SFAS 132"). The revised Statement retains the disclosure requirements
contained in SFAS 132, but requires additional disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. SFAS 132 is
effective for financial statements for fiscal years ending after December 15,
2003. The implementation of SFAS 132 is not expected to have a material
impact on the Company's consolidated financial statements.
-42-
Review by Independent Accountants
With respect to the unaudited consolidated financial information of Toyota
Motor Credit Corporation for the three-month and nine-month periods ended
December 31, 2003 and 2002, PricewaterhouseCoopers LLP
("PricewaterhouseCoopers") reported that they have applied limited procedures
in accordance with professional standards for a review of such information.
However, their separate report dated February 13, 2004, except for Note 1 which
is dated as of December 16, 2004 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.
-43-
ITEM 4. CONTROLS AND PROCEDURES
The following has been amended to reflect the restatement of the Company's
consolidated financial statements as discussed further in the Explanatory Note
and in Note 1 of the Notes to Consolidated Financial Statements.
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports filed or
submitted under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), is recorded, processed, summarized, and reported within the time periods
specified in the Commission's rules and forms. Disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in its Exchange Act reports is accumulated and communicated to the
Company's management including its principal executive and financial officers,
as appropriate to allow timely decisions regarding required disclosure.
In October 2004, the Company announced that as part of its ongoing review of
accounting policies and in connection with its planned implementation of new
transaction systems, management determined that the Company's accounting
methodology and the structure and design of certain financial systems relating
primarily to the capitalization and amortization of incremental direct costs
and fees were not in compliance with Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases".
Incremental direct costs and incentive and rate participation payments made to
vehicle dealers were expensed when incurred rather than capitalized and
amortized over the life of the related contracts. The majority of these costs
and fees consisted of incremental direct costs and fees paid or received
primarily in connection with the acquisition of retail and vehicle lease
contracts, and incentive and rate participation payments made to vehicle
dealers. In addition, other incentives in the form of rate participation
payments made to vehicle dealers were deferred and amortized using a method
that was inconsistent with the revenue recognition method of the underlying
contracts. This resulted in a cumulative understatement of net financing and
other revenues and overstatement of operating and administrative expenses,
resulting in a cumulative understatement of net income, as well as a
cumulative understatement of finance receivables, net, investments in
operating leases, net, deferred income taxes, and retained earnings. As a
result, the Company determined that certain adjustments were necessary to the
Company's Consolidated Financial Statements as of March 31, 2004 and 2003 and
for each of the fiscal years in the three-year period ended March 31, 2004 and
the three months ended June 2004. After making this determination, the
Company conducted a further review of its policies and determined that
additional adjustments and reclassifications to the Consolidated Financial
Statements were necessary.
These additional adjustments are required to correct the accounting treatment
of notes payable during periods when the notes payable and the related
derivatives did not qualify for hedge accounting. The Company did not
properly record foreign currency transaction gains or losses for certain notes
payable during these periods and did not properly determine the calculation of
additional basis adjustments once the hedge was re-established on the notes
payable. These adjustments are reflected as a cumulative decrease in interest
expense and investment and other income related to foreign currency
transactions resulting in a cumulative decrease in net income in the
Consolidated Statements of Income as well as a cumulative increase in notes
and loans payable and a decrease in deferred income taxes and retained
earnings in the Consolidated Balance Sheets.
Additionally, the reclassifications primarily related to unearned income that
was reclassified to finance receivables, net, and investments in operating
leases, net, that had been previously misclassified in deferred income. The
Company also recorded other adjustments that were previously not deemed
material.
-44-
The combined results of all adjustments and reclassifications described above
is a cumulative increase in net financing revenues and net income and a
decrease in investment and other income, interest expense and operating and
administrative expenses in the Consolidated Statements of Income, as well as a
decrease in finance receivables, net, investments in operating leases, net,
and other liabilities, and an increase in notes and loans payable, deferred
income taxes and retained earnings in the Consolidated Balance Sheets. The
impact of these adjustments and reclassifications in any particular quarterly
or annual period may vary from the cumulative impact described above. The
adjustments to the Consolidated Financial Statements resulted in differences
in the timing of revenue recognition, but did not materially affect previously
reported cash flows.
These adjustments and reclassifications are reflected in this amended
Quarterly Report on Form 10-Q/A for the period ended December 31, 2003. In
addition, the Company has filed amendments to its Annual Report on Form 10-K
for the period ended March 31, 2004 and its Quarterly Report on Form 10-Q for
the period ended June 30, 2004 that include restated financial statements and
amendments to related disclosures for the fiscal periods covered by those
reports. The Company also restated, by means of a Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2004, its consolidated
financial statements for the three and six months ended September 30, 2003.
In light of the restatement, the Company believes that a material weakness
existed in its internal controls related to the financial reporting for
acquired retail and vehicle lease contracts. This weakness related to the
design and review of revenue recognition policies, particularly in the areas
of incremental direct costs and fees paid or received primarily in connection
with the acquisition of retail and vehicle lease contracts and incentive and
rate participation payments made to vehicle dealers, in the policies and
procedures necessary to ensure accurate measurement and recording of amounts
over the life of the contracts and in the structure and design of related
financial information systems. In addition, the Company believes that a
material weakness existed in its internal controls related to the financial
reporting of foreign currency transaction adjustments and in the monitoring of
hedging activities. This weakness related to the application of accounting
policies related to the accounting for foreign currency transaction gains and
losses on debt instruments that no longer qualified for hedge accounting.
The Company's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO") evaluated the effectiveness of the Company's disclosure controls and
procedures in place as of the end of the period covered by this quarterly
report pursuant to Rule 13a-15(b) of the Exchange Act. Based on this
evaluation, the CEO and CFO have concluded that the disclosure controls and
procedures did not provide reasonable assurance of effectiveness as of that
period because of the material weaknesses identified above.
The Company intends to devote significant resources to revising its policies,
procedures, and financial information systems to comply with the methods
required by GAAP related to revenue recognition to ensure accurate measurement
and recording of amounts associated with the acquisition of retail and vehicle
lease contracts and dealer incentive and rate participation payments at
acquisition and over the life of the contracts.
In addition, the Company is reviewing its accounting policies related to debt
instruments during the periods when the debt does not qualify for hedge
accounting. The Company does not expect that these errors will recur in
future periods as it now employs regression analysis to assess the
effectiveness of its hedges. The Company began using regression analysis to
assess its hedge effectiveness in January 2004. Prior to this date, the
Company employed the dollar-offset method.
-45-
The Company is implementing the following enhancements to its internal
controls.
- - The Company is currently developing new financial models for calculating
incremental direct cost and fee amortization and reviewing existing systems
to confirm that proper calculations are used. The Company anticipates
finalizing its financial models by the end of calendar year 2004 and
completing its systems review by the end of fiscal year 2005.
- - The Company is reviewing its accounting policies for debt instruments where
the debt did not qualify for hedge accounting and anticipates completing its
review and updating its policies by the end of calendar year 2004.
- - The Company has hired a new Corporate Manager and Chief Accounting
Officer and is in the process of filling two management positions dedicated
to the development, documentation, and proper application of accounting
policies, including accounting for deferred fees and costs, derivatives, and
foreign currency transaction gains and losses. The Company anticipates
filling these two positions by the end of fiscal year 2005.
- - The accounting policies group in conjunction with the marketing group will
review new marketing and related programs. The Company anticipates that the
marketing program review process will be implemented by the end of calendar
year 2004.
- - The Company will also review other existing accounting policies, and develop
appropriate supporting documentation to ensure that generally accepted
accounting principles are applied appropriately. The Company anticipates
completing its accounting policies review by the end of the fiscal year.
The Company is currently in the process of reviewing and formalizing the
consolidated enterprise's internal controls and procedures for financial
reporting in accordance with the SEC's rules implementing the internal control
reporting requirements included in Section 404 of the Sarbanes-Oxley Act of
2002 ("Section 404"). Changes have been and will be made to the Company's
internal controls over financial reporting as a result of these efforts.
There was no change in the Company's internal control over financial reporting
identified in connection with the disclosure controls and procedures
evaluation referred to above during the period covered by this quarterly report
that materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting. However, subsequent to
December 31, 2003 and prior to the filing of this Form 10-Q/A, the Company
began implementing changes to its internal controls, as described above, to
correct the material weaknesses identified above. The Company will continue
to evaluate the effectiveness of its internal controls and procedures on an
ongoing basis, and will take further action as appropriate.
-46-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the accompanying Exhibit Index, on page 49,
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 December 31, 2003:
Date of Report Items Reported
----------------- ---------------------
December 2, 2003 Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits.
November 12, 2003 Item 12. Disclosure of Results of Operations
and Financial Condition.
-47-
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: December 16, 2004 By /S/ GEORGE E. BORST
-------------------------------
George E. Borst
President and
Chief Executive Officer
(Principal Executive Officer)
Date: December 16, 2004 By /S/ JOHN F. STILLO
-------------------------------
John F. Stillo
Vice President and
Chief Financial Officer
(Principal Financial Officer)
-48-
EXHIBIT INDEX
Exhibit Method
Number Description of Filing
- ------- ----------- ---------
3.1(a) Articles of Incorporation filed with the
California Secretary of State on October 4, 1982 (1)
3.1(b) Certificate of Amendment of Articles of
Incorporation filed with the California Secretary
of State on January 24, 1984 (1)
3.1(c) Certificate of Amendment of Articles of
Incorporation filed with the California Secretary
of State on January 25, 1985 (1)
3.1(d) Certificate of Amendment of Articles of
Incorporation filed with the California Secretary
of State on September 6, 1985 (1)
3.1(e) Certificate of Amendment of Articles of
Incorporation filed with the California Secretary
of State on February 28, 1986 (1)
3.1(f) Certificate of Amendment of Articles of
Incorporation filed with the California Secretary
of State on December 3, 1986 (1)
3.1(g) Certificate of Amendment of Articles of
Incorporation filed with the California Secretary
of State on March 9, 1987 (1)
3.1(h) Certificate of Amendment of Articles of
Incorporation filed with the California Secretary
of State on December 20, 1989 (2)
3.2 Bylaws as amended through December 8, 2000 (3)
12.1 Calculation of Ratio of Earnings to Fixed Charges Filed
Herewith
15.1 Report of Independent Registered Public Accounting Filed
Firm Herewith
15.2 Letter regarding unaudited interim financial Filed
information Herewith
- -----------------
(1) Incorporated herein by reference to the same numbered Exhibit filed
with the Company's Registration Statement on Form S-1, File No. 33-22440.
(2) Incorporated herein by reference to the same numbered Exhibit filed
with the Company's Report on Form 10-K for the year ended September 30,
1989, Commission File number 1-9961.
(3) Incorporated herein by reference to Exhibit 4.2 filed with the Company's
Report on Form 10-K for the year ended September 30, 1990,
Commission File number 1-9961.
-49-
EXHIBIT INDEX
Exhibit Method
Number Description of Filing
- ------- ----------- ---------
31.1 Certification of Chief Executive Officer Filed
Herewith
31.2 Certification of Chief Financial Officer Filed
Herewith
32.1 Certification pursuant to 18 U.S.C. Section 1350 Furnished
Herewith
32.2 Certification pursuant to 18 U.S.C. Section 1350 Furnished
Herewith
-50-