ITEM 1. BUSINESS
GENERAL
Toyota Motor Credit Corporation was incorporated in California in 1982 and commenced operations in 1983. References herein to “TMCC” denote Toyota Motor Credit Corporation, and references herein to “we”, “our”, and “us” denote Toyota Motor Credit Corporation and its consolidated subsidiaries. We are wholly-owned by Toyota Financial Services Americas Corporation (“TFSA”), a California corporation, which is a wholly-owned subsidiary of Toyota Financial Services Corporation (“TFSC”), a Japanese corporation. TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor Corporation (“TMC”), a Japanese corporation. TFSC manages TMC’s worldwide financial services operations. TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial Services.
We provide a variety of finance and insurance products to authorized Toyota and Lexus vehicle dealers and, to a lesser extent, other domestic and import franchise dealers (collectively referred to as “vehicle dealers”) and their customers in the United States (excluding Hawaii) (the “U.S.”) and Puerto Rico. We also provide finance products to commercial and industrial equipment dealers (“industrial equipment dealers”) and their customers. Our products fall primarily into the following finance and insurance product categories:
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Finance - We provide a broad range of finance products including retail financing, leasing, and dealer financing to vehicle and industrial equipment dealers and their customers.
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Insurance - Through a wholly-owned subsidiary, we provide marketing, underwriting, and claims administration related to covering certain risks of vehicle dealers and their customers. We also provide coverage and related administrative services to our affiliates.
We support growth in earning assets through funding obtained in the capital markets as well as funds provided by operating activities. Refer to the “Liquidity and Capital Resources” section of Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) for a detailed discussion of our funding activities. A more detailed description of the products and services offered by us is contained within this Business section. Refer to Note 17 - Segment Information of the Notes to Consolidated Financial Statements for financial information including assets, revenues, and net income generated by these segments.
We primarily acquire and service finance, lease, and insurance contracts from vehicle dealers through 30 dealer sales and services offices (“DSSOs”) located throughout the U.S. and three regional customer service centers (“CSCs”) and from industrial equipment dealers through a corporate department located at our headquarters in Torrance, California. The DSSOs primarily support vehicle dealer financing needs by providing services such as acquiring finance and lease contracts from vehicle dealers, financing inventories, and financing other dealer activities and requirements such as business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements. The DSSOs also provide support for our insurance products sold in the U.S. The CSCs support customer account servicing functions such as collections, lease terminations, and administration of retail and lease customer accounts. The Central region CSC also supports insurance operations by providing customer service and handling claims processing. Refer to Item 2., “Properties” for information on the geographical location of the DSSOs and CSCs.
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Public Filings
Our filings with the Securities and Exchange Commission (“SEC”) may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings may also be found by accessing the SEC website (http://www.sec.gov). The SEC website contains reports, registration statements, proxy and information statements, and other information regarding issuers that file electronically with the SEC. A link to the SEC website is also contained on our website located at: www.toyotafinancial.com under “About Us, Investor Relations”. We will make available, without charge, electronic or paper copies of our filings upon written request to:
Toyota Motor Credit Corporation
South Western Avenue
Torrance, CA 90501
Attention: Corporate Communications
TMC files periodic reports and other information with the SEC, which can be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. TMC’s filings may also be found on its website located at: www.toyota.com under “Company Info, Our Company, Our Business, Investor Relations, Presentations and SEC Filings”.
Seasonality
Revenues generated by receivables we own are generally not subject to seasonal variations. Although financing volume is subject to a certain degree of seasonality, this seasonality does not have a significant impact on revenues as collections, generally in the form of fixed payments, occur over the course of several years. The automotive finance industry is subject to seasonal variations in credit losses, which are typically higher in the first and fourth calendar quarters of the year.
Geographic Distribution of Operations
As of March 31, 2008, approximately 22 percent of managed vehicle retail and lease assets were located in California, 10 percent in Texas, 7 percent in New York, and 6 percent in New Jersey. Any material adverse changes to California’s, Texas’, New York’s, or New Jersey’s economies or applicable laws could have an adverse effect on our financial condition and results of operations.
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FINANCE OPERATIONS
We provide retail financing, leasing, wholesale financing, and certain other financial products and services to authorized Toyota and Lexus vehicle dealers and, to a lesser extent, other domestic and import franchised dealers and their customers in the U.S. and the Commonwealth of Puerto Rico. We also offer financing for various industrial and commercial products such as forklifts, light and medium-duty trucks, and electric vehicles. Gross revenues related to transactions with industrial equipment dealers contributed 3 percent to total gross revenues in both fiscal 2008 and 2007, and 4 percent in fiscal 2006.
The table below summarizes our financing revenues, net of depreciation by primary product.
1 Includes direct finance lease revenues.
Retail and Lease Financing
Underwriting
We acquire new and used vehicle and industrial equipment finance and lease contracts primarily from Toyota and Lexus vehicle dealers and industrial equipment dealers. Dealers transmit customer applications electronically to our online system for contract acquisition. Applications that meet certain income, credit, and other requirements are approved by the system while other applications are further analyzed by credit analysts. We use a proprietary credit scoring system for decisioning credit applications. If approved, we acquire the retail finance contracts and a security interest in the vehicle or industrial equipment that is financed under the contract and we acquire the lease contracts and concurrently assume ownership of the leased vehicles or industrial equipment. We view our lease arrangements, including our operating leases, as financing transactions as we do not seek to re-lease the vehicles or equipment upon default or at lease termination.
We utilize a tiered pricing program for retail and lease contracts. The program matches customer risk with contract rates charged to allow for a range of risk levels. Generally, each approved application is assigned a credit tier. We review and adjust rates regularly based on competitive and economic factors. Rates vary based on credit tier, term, and collateral (if applicable), including whether a new or used vehicle is being financed. Special rates may apply as a result of promotional efforts through subvention programs.
We regularly review and analyze our retail and lease portfolio to evaluate the effectiveness of our underwriting guidelines and purchasing criteria.
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Servicing
We also service our retail and lease contracts. Each of our CSCs service the vehicle retail and lease contracts using the same servicing system and procedures, except that centralized tracking units monitor bankruptcy administration, post-charge-off, and recovery. Our industrial equipment retail and lease contracts are serviced at a centralized facility. The collection department manages the liquidation of each retail and lease contract. We consider a customer to be past due if less than 90% of a regularly scheduled payment is received by the due date.
We use a behavioral-based collection strategy to minimize risk of loss and employ various collection methods. Upon commencement of the contracts, we perfect our security interests through state Department of Motor Vehicles (or equivalent) Certificate of Title filings in the retail vehicles financed and through Uniform Commercial Code (“UCC”) filings in the industrial equipment financed. We have the right to repossess the assets if customers fail to meet contractual obligations and the right to enforce collection actions against the obligors under the contracts.
We generally determine whether to commence repossession efforts before an account is 60 days past due. Repossessed vehicles are held in inventory to comply with statutory requirements and then sold at private auctions, unless public auctions are required by applicable law. Any unpaid amounts remaining after sale or after full charge off are pursued by us to the extent practical and legally permitted. Collections of deficiencies are administered at a centralized facility. Our policy is to charge off a retail or lease contract as soon as disposition of the vehicle has been effected and sales proceeds have been received, but may in some circumstances charge-off a retail or lease contract prior to repossession. When repossession and disposition of the collateral has not been effected, our policy is to charge off as soon as we determine that the vehicle cannot be recovered, but not later than when the contract is 150 days contractually delinquent. Bankrupt accounts may be charged off after 150 days. We sell the vehicles or industrial equipment through vehicle or industrial equipment dealers or physical auctions. Repossessed vehicles are sold through a variety of distribution channels, similar to the sale of vehicles returned at lease end. Refer to the “Residual Value Risk” section of the MD&A for further discussion of our remarketing activities.
We may, in accordance with our customary servicing procedures, waive any prepayment charge, late payment charge, or any other fees that may be collected in the ordinary course of servicing the retail and lease account. In addition, we may defer a customer’s obligation to make a payment by extending the contract term.
Substantially all of our retail and operating lease receivables are non-recourse to the vehicle and industrial equipment dealers, which relieves the vehicle and industrial equipment dealers from financial responsibility in the event of repossession.
We may experience a higher risk of loss if customers fail to maintain required insurance coverage. The terms of our retail financing programs require customers to maintain physical damage insurance covering loss or damage to the financed vehicle or industrial equipment in an amount not less than the full value of the vehicle or equipment. TMCC currently does not monitor ongoing insurance compliance as part of its customary servicing procedures for retail accounts.
Our vehicle lease contracts require lessees to maintain minimum liability insurance and physical damage insurance covering loss or damage to the leased vehicle in an amount not less than the full value of the vehicle. TMCC monitors ongoing insurance compliance only in certain vicarious liability states for lease contracts. Refer to the “Regulatory Environment” section of this Business section for further discussion of this issue.
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We are also responsible for the residual value of the leased asset if the lessee, vehicle dealer, or industrial equipment dealer does not purchase the asset at lease maturity. At the end of the lease term, lease customers have the option to purchase the leased asset at the contractual residual value or return the leased asset to the vehicle or industrial equipment dealer. If the leased asset is returned to the vehicle or industrial equipment dealer, the vehicle or industrial equipment dealer has the option of purchasing the leased asset or returning it to us. In an effort to minimize losses incurred at lease maturity, we have developed remarketing strategies to maximize proceeds and minimize disposition costs on used vehicles and industrial equipment sold at lease termination. We use various channels to sell vehicles returned at lease maturity. Refer to the “Residual Value Risk” section of the MD&A for further discussion of our remarketing activities. Industrial equipment returned by the lessee or industrial equipment dealer is sold through authorized Toyota industrial equipment dealers or wholesalers using a bidding process.
Toyota Lease Trust, a Delaware business trust (the “Titling Trust”), acts as lessor and holds title to leased vehicles in specified states. This arrangement was established to facilitate a previously utilized lease securitization program. Lease contracts acquired by the Titling Trust from Toyota and Lexus vehicle dealers are serviced by TMCC in the same manner as lease contracts owned directly by us. We hold an undivided trust interest in lease contracts owned by the Titling Trust, and these lease contracts are included in our lease assets unless and until such time as the interests in the contracts are transferred in a securitization transaction. We do not presently have an active lease securitization program.
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Dealer Financing
Dealer financing is comprised of wholesale financing and other financing options designed to meet dealer business needs.
Wholesale Financing
We provide wholesale financing, also referred to as floorplan financing, to vehicle and equipment dealers for inventories of new and used Toyota, Lexus, and other vehicles and industrial equipment. We acquire a security interest in vehicles financed at wholesale, which we perfect through UCC filings, and these financings may be backed by corporate or individual guarantees from, or on behalf of, participating vehicle and industrial equipment dealers, dealer groups, or dealer principals. In the event of vehicle or industrial equipment dealer default under a wholesale loan arrangement, we have the right to liquidate assets in which we have a perfected security interest and seek legal remedies pursuant to the wholesale loan agreement and any applicable guarantees.
TMCC and Toyota Motor Sales, U.S.A., Inc. (“TMS”), our affiliate, have entered into an Amended and Restated Repurchase Agreement. This agreement states that TMS will arrange for the repurchase of new Toyota and Lexus vehicles at the aggregate cost financed by TMCC in the event of vehicle dealer default under floorplan financing. TMCC also entered into similar agreements with Toyota Material Handling, U.S.A., Inc. (“TMHU”), Hino Motor Sales, U.S.A., Inc. (“HINO”), and other domestic and import manufacturers. TMHU is the primary distributor of Toyota lift trucks in the U.S., and HINO is the exclusive U.S. distributor of commercial trucks manufactured by Hino Motors Ltd. of Japan.
Other Dealer Financing
We extend term loans and revolving lines of credit to vehicle and industrial equipment dealers for business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements. These loans are typically secured with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate, and usually are guaranteed by the personal or corporate guarantees of the dealer principals or dealerships. We also provide financing to various multi-franchise dealer organizations, referred to as dealer groups, often as part of a lending consortium, for wholesale, working capital, real estate, and business acquisitions. These loans are typically collateralized with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate. We obtain a personal guarantee from the vehicle or industrial equipment dealer or corporate guarantee from the dealership when deemed prudent. Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure under such agreements. We price the credit facilities according to the risks assumed in entering into the credit facility and competitive factors.
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INSURANCE OPERATIONS
TMCC markets its insurance products through Toyota Motor Insurance Services, Inc. (“TMIS”), a wholly-owned subsidiary. TMIS and its insurance company subsidiaries’ principal activities include marketing, underwriting, and claims administration related to covering certain risks of Toyota, Lexus, and other domestic and import franchise dealers and their customers. TMIS’ primary business consists of issuing vehicle service and maintenance contracts and guaranteed auto protection (“GAP”) agreements sold to customers by or through Toyota and Lexus vehicle dealers, and certain other domestic or import vehicle dealers in the U.S. TMIS also obtains a portion of vehicle service contract business by providing TMS coverage on certified Toyota and Lexus pre-owned vehicles. TMIS also provides other coverage and related administrative services to our affiliates.
Changes in the volume of vehicle sales, changes in vehicle dealers’ utilization of programs offered by TMIS, or changes in the level of coverage purchased by affiliates could materially impact the level of TMIS operations. Gross revenues from insurance operations comprised 6 percent, 7 percent, and 6 percent of total gross revenues for fiscal 2008, 2007, and 2006, respectively.
Products and Services
Vehicle Service Agreements, Certified Pre-owned, and GAP
Vehicle service agreements (“VSA”) offer vehicle owners and lessees mechanical breakdown protection for new and used vehicles secondary to the manufacturer’s new vehicle warranty. VSA coverage is available on Toyota and Lexus vehicles and other domestic and import vehicles. Certified pre-owned contracts offer coverage on Toyota and Lexus vehicles only. GAP insurance, or debt cancellation agreements, provides coverage for a lease or retail contract deficiency balance in the event of a total loss of the covered vehicle.
Wholesale Inventory
TMIS, through its wholly-owned subsidiary, provides insurance to TMCC covering Toyota, Lexus, and certain other domestic and import vehicle dealers’ inventory financed by TMCC. TMIS has obtained reinsurance on the inventory insurance policy covering the excess of certain dollar maximums per occurrence and in the aggregate. Through reinsurance, TMIS limits its exposure to losses by obtaining the right to reimbursement from the assuming company for the reinsured portion of losses.
Other Products
TMIS provides prepaid maintenance programs covering Toyota, Lexus and certain other domestic and import vehicles. TMIS, through its wholly-owned subsidiary, provides umbrella liability insurance to TMS and affiliates covering certain dollar value layers of risk above various primary or self-insured retentions. On all layers in which TMIS has provided coverage, 99 percent of the risk has been ceded to various reinsurers.
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RELATIONSHIPS WITH AFFILIATES
Our business is substantially dependent upon the sale of Toyota and Lexus vehicles and our ability to offer competitive financing and insurance products in the U.S. TMS is the primary distributor of Toyota and Lexus vehicles in the U.S. Automobiles and light trucks sold by TMS totaled 2.6 million units during both fiscal 2008 and fiscal 2007, and totaled 2.3 million units during fiscal 2006. Toyota and Lexus vehicles accounted for approximately 16 percent of all retail automobile and light duty truck unit sales volume in the U.S during both fiscal 2008 and fiscal 2007, while accounting for 13 percent of all retail automobile and light duty truck unit sales volume in the U.S during fiscal 2006.
Certain lease and retail financing programs we have offered on vehicles and industrial equipment are subvened by our affiliates. TMS sponsors subvention programs on certain new and used Toyota and Lexus vehicles that result in reduced scheduled payments to qualified retail and lease customers. Reduced scheduled payments on certain Toyota industrial equipment to qualified lease and retail financing customers are subvened by various affiliates.
Subvention amounts received in connection with these programs typically approximate the amounts required by TMCC to maintain yields at levels consistent with standard program levels. The level of subvention program activity varies based on our affiliates’ marketing strategies, economic conditions, and level of vehicle sales. Subvention amounts received vary based on the mix of Toyota and Lexus vehicles and timing of programs and are earned over expected retail receivable and lease contract terms.
TMCC and TMS are parties to a Shared Services Agreement which cover certain technological and administrative services, such as information systems support, facilities, insurance coverage, and corporate services provided by each entity to the other. TMCC and TMS are also parties to an Amended and Restated Repurchase Agreement, which provides that TMS will arrange for the repurchase of new Toyota and Lexus vehicles at the aggregate cost financed by TMCC in the event of vehicle dealer default under floorplan financing. TMCC is also a party to similar agreements with TMHU, HINO, and other domestic and import manufacturers. TMCC and Toyota Financial Savings Bank (“TFSB”), a Nevada thrift company owned by TFSA, are parties to a Master Shared Services Agreement under which TMCC and TFSB provide certain services to the other. See Note 16 - Related Party Transactions of the Notes to Consolidated Financial Statements for further information.
Employees of TMCC, Toyota Credit de Puerto Rico Corp. (“TCPR”), and TMCC’s insurance subsidiaries are generally eligible to participate in the TMS pension plan, the Toyota Savings Plan sponsored by TMS, and various health and life and other post-retirement benefits sponsored by TMS, as discussed further in Note 13 - Pension and Other Benefit Plans of the Notes to Consolidated Financial Statements.
Credit support agreements exist between us and TFSC and between TFSC and TMC. These agreements are further discussed in the “Liquidity and Capital Resources” section of the MD&A and Note 16 - Related Party Transactions of the Notes to Consolidated Financial Statements.
TMIS provides administrative services to TMS which are discussed in Note 16 - Related Party Transactions of the Notes to Consolidated Financial Statements. In addition, TMIS provides various levels and types of insurance coverage to TMS, including the warranty coverage for TMS’ certified pre-owned vehicle program. TMIS, through its wholly-owned subsidiary, provides umbrella liability insurance to TMS and affiliates covering certain dollar value layers of risk above various primary or self-insured retentions. On all layers in which TMIS has provided coverage, 99 percent of the risk has been ceded to various reinsurers.
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COMPETITION
We operate in a highly competitive environment and compete with other financial institutions including national and regional commercial banks, credit unions, savings and loan associations, and finance companies. To a lesser extent, we compete with other automobile manufacturers’ affiliated finance companies that actively seek to purchase retail consumer contracts through Toyota and Lexus dealers for retail financing and leasing. We compete with national and regional commercial banks and other automobile manufacturers’ affiliated finance companies for dealer financing. No single competitor is dominant in the industry. We compete primarily through service quality, our relationship with TMS, and financing rates. We seek to provide exceptional customer service and competitive financing programs to our vehicle and industrial equipment dealers and to their customers. Our relationship with TMS is an advantage in providing Toyota and Lexus financing for purchases or leases of Toyota and Lexus vehicles.
Competition for the principal products and services provided through our insurance operations is primarily from national and regional independent service contract providers. We compete primarily through service quality, our relationship with TMS, and pricing. We seek to offer our vehicle dealers competitively priced products and excellent customer service. Our relationship with TMS provides an advantage in selling our products and services.
REGULATORY ENVIRONMENT
Our finance and insurance operations are regulated under both federal and state law. We are governed by, among other federal laws, the Equal Credit Opportunity Act, the Truth-in Lending Act, the Fair Credit Reporting Act, and the consumer data privacy and security provisions of the Gramm-Leach Bliley Act. A majority of states (as well as the Commonwealth of Puerto Rico) have enacted legislation establishing licensing requirements to conduct retail and other finance and insurance activities. Most states also impose limits on the maximum rate of finance charges. In certain states, the margin between the present statutory maximum interest rates and borrowing costs is sufficiently narrow that, in periods of rapidly increasing or high interest rates, there could be an adverse effect on our operations in these states if we were unable to pass on increased interest costs to our customers. State laws also impose requirements and restrictions on us with respect to, among other matters, required credit application and finance and lease disclosures, late and other fees and charges, the right to repossess a vehicle for failure to pay or other defaults under the finance or lease contract, other rights and remedies we may exercise in the event of a default under the finance or lease contract, privacy matters, and other consumer protection matters. In addition, state laws differ as to whether anyone suffering injury to person or property involving a leased vehicle may bring an action against the owner of the vehicle merely by virtue of that ownership. To the extent that applicable state law permits such an action, we may be subject to liability to such an injured party. However, the laws of most states either do not permit such suits or limit the lessor’s liability to the amount of any liability insurance that the lessee was required under applicable law to maintain (or, in some states, the lessor was permitted to maintain), but failed to maintain. Our lease contracts in the U.S. contain provisions requiring the lessees to maintain levels of insurance satisfying applicable state law, and we maintain certain levels of contingent liability insurance for protection from catastrophic claims. TMCC monitors ongoing lease insurance compliance only in certain vicarious liability states. Due to recently-enacted federal law, states are no longer permitted to impose unlimited vicarious liability on lessors of leased vehicles. This federal law has been subjected to judicial actions challenging the law’s constitutionality and preemption of state law. TMCC continues to monitor the impact of the repeal of unlimited vicarious liability and the related judicial challenges. At this time, TMCC has not modified its insurance compliance monitoring programs as a result of this law. We encounter higher risk of loss if the customers fail to maintain the required insurance coverage.
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Our insurance operations are subject to state insurance regulations and licensing requirements. State laws vary with respect to which products are regulated and what types of corporate licenses are required to offer certain products and services. Insurance company subsidiaries must be appropriately licensed in certain states in which they conduct business and must maintain minimum capital requirements as determined by their state of domicile. Failure to comply with these state requirements could have an adverse effect on insurance operations in a particular state. We actively monitor applicable laws and regulations in each state in order to maintain compliance.
We continually review our operations for compliance with applicable laws. Future administrative rulings, judicial decisions, and legislation may require modification of our business practices and documentation.
As a registrant with the SEC under the Securities Exchange Act of 1934, as amended, we are subject to various federal securities laws and regulations including, but not limited to, the Sarbanes-Oxley Act of 2002. We are also subject to similar laws and regulations in the foreign countries in which we obtain debt funding. We maintain policies and procedures to ensure compliance with applicable laws and regulations.
EMPLOYEE RELATIONS
At April 30, 2008, we had approximately 3,200 full-time employees. We consider our employee relations to be satisfactory. We are not subject to any collective bargaining agreements with our employees.
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ITEM 1A.
ITEM 1A. RISK FACTORS
We are exposed to certain risks and uncertainties that could have a material adverse impact to our financial condition and operating results.
Sales of Toyota and Lexus Vehicles
Our business is substantially dependent upon the sale of Toyota and Lexus vehicles and our ability to offer competitive financing and insurance products in the U.S. TMS is the primary distributor of Toyota and Lexus vehicles in the U.S. TMS also sponsors special rate retail financing and lease (“subvention”) programs offered by us in the U.S. on certain new and used Toyota and Lexus vehicles. The level of subvention varies based on TMS’ marketing strategies, economic conditions, and volume of vehicle sales. Changes in the volume of sales of such vehicles resulting from governmental action, changes in consumer demand, changes in the level of TMS sponsored subvention programs, increased competition, or changes in pricing of imported units due to currency fluctuations or other events could impact the level of our finance and insurance operations. To date, the level of sales of Toyota and Lexus vehicles has not restricted our operations. Refer to Item 1., “Business - Relationships with Affiliates” and Note 16 - Related Party Transactions of the Notes to Consolidated Financial Statements for further information regarding our relationship with TMS.
Credit Support
Our credit ratings depend, in part, on the existence of the credit support arrangements discussed in the “Liquidity and Capital Resources - Credit Support Agreements” section of the MD&A and on the financial condition and operating results of TMC. Should we for any reason not have the benefit of these arrangements (or replacement arrangements acceptable to the rating agencies), or should the credit ratings of the credit support providers identified in such arrangements be lowered, we would expect that our credit ratings would be lower than our current ratings, leading to higher borrowing costs. However, we believe that the credit support arrangements will continue to be available.
Residual Value Risk
We are exposed to risk of loss on the disposition of leased vehicles and industrial equipment to the extent that sales proceeds realized upon the sale of returned lease assets are not sufficient to cover the residual value that was estimated at lease inception. Residual value represents an estimate of the end of term market value of a leased asset. When the market value of a leased asset at contract maturity is less than its contractual residual value, there is a higher probability that the leased asset will be returned to us. A higher rate of returns exposes us to greater risk of loss at lease termination. Refer to the “Residual Value Risk” section of the MD&A for further discussion regarding our exposure to this risk.
Credit Risk
Credit risk is the risk of loss arising from the failure of a customer or dealer to meet the terms of any contract with us or otherwise fail to perform as agreed. Refer to the “Credit Risk” section of the MD&A for further discussion regarding our exposure to this risk.
Liquidity Risk
Liquidity risk is the risk arising from our inability to meet obligations when they come due in a timely manner. Our liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and cost-effective manner even in the event of adverse market conditions. Refer to the “Liquidity and Capital Resources” section of the MD&A for further discussion regarding our exposure to this risk.
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Market Risk
Market risk is the risk that changes in market interest rates or prices will negatively impact our income, capital, and market value. Policies governing market risk exposure are established and periodically reviewed by our senior management as conditions warrant. We use derivative instruments, along with other tools and strategies, to manage our market risk. We have established procedures to ensure that our risk management, including our use of derivatives, is in accordance with our policy framework. Refer to Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” for further discussion regarding our exposure to this risk.
Operational Risk
Operational risk is the risk of loss resulting from, among other factors, inadequate or failed processes, systems or internal controls, theft, fraud, or natural disaster. Operational risk can occur in many forms including, but not limited to, errors, business interruptions, failure of controls, inappropriate behavior of or misconduct by our employees or those contracted to perform services for us, and vendors that do not perform in accordance with their contractual agreements. These events can potentially result in financial losses or other damages to us, including damage to our reputation.
We rely on internal and external information and technological systems to manage our operations and are exposed to risk of loss resulting from breaches in the security or other failures of these systems. Any upgrade and replacement of our major legacy transaction systems could have a significant impact on our ability to conduct our core business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information and transaction systems.
In order to monitor and manage operational risk, we maintain a framework of internal controls designed to provide a sound and well-controlled operational environment. However, due to the complexity of our business and the challenges inherent in implementing control structures across global organizations, problems could be identified in the future, and management can provide no assurance that these problems will not have a material effect on our operations.
We strive to maintain appropriate levels of operational risk relative to our business strategies, competitive and regulatory environment, and markets in which we operate. We also maintain appropriate levels of insurance coverage for those operating risks that can be mitigated through the purchase of insurance. Notwithstanding these control measures and insurance coverage, we remain exposed to operational risk. However, while our approach to operational risk management is intended to mitigate such losses, our management can provide no assurance that these problems will not have a material effect on our operations.
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Regulatory Risk
Regulatory risk is the risk arising from the failure to comply with applicable regulatory requirements and the risk of liability and other costs imposed under various laws and regulations, including changes in legislation and new regulatory requirements. Refer to the "Regulatory Environment" in Item 1., “Business” for further discussion of our exposure to this risk.
Counterparty Credit Risk
Counterparty credit risk is the risk that a counterparty may fail to perform on its contractual obligations in a derivatives contract. Refer to Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” for further discussion regarding our exposure to this risk.
Factors Affecting Earnings
Our earnings are affected by a variety of factors, including changes in the overall market for retail financing, leasing or dealer financing, changes in the level of sales of Toyota and Lexus vehicles in the U.S., rates of growth in the number and average balance of customer accounts, the U.S. regulatory environment, competition, rates of default by our customers, changes in the U.S. and international funding markets, the used vehicle market, levels of operating and administrative expenses, including, but not limited to, personnel costs and technology costs, general economic conditions in the U.S., and other factors. A downturn in economic conditions in the U.S. resulting in increased unemployment rates and slow job growth, increased consumer and commercial bankruptcy filings, or other factors that negatively impact household incomes could decrease demand for our financing products and increase delinquency and loss. In addition, because our credit exposures are generally collateralized, the severity of losses is particularly sensitive to a decline in used vehicle prices. Further, a significant and sustained increase in fuel prices could decrease new and used vehicle purchases, thereby reducing the demand for automotive retail and wholesale financing. Refer to “Competition” and “Regulatory Environment” in Item 1., “Business” for discussion regarding our exposure to risk of loss resulting from the competitive and regulatory environments. Refer to the MD&A for discussion of our exposure to credit risk and residual value risk. Refer to Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” for further discussion regarding our exposure to market risk.
Competition
We operate in a highly competitive environment. Increases in competitive pressures could have an adverse impact on our contract volume, market share, revenues, and margins. Refer to “Competition” in Item 1., “Business” for further discussion of the competitive factors affecting our business.
Risk of Catastrophes
Our business is exposed to the risk of catastrophes, including natural events, such as hurricanes, tornados, earthquakes and fires, and other events, such as explosions, terrorist attacks, and riots. The incidence and severity of catastrophes and severe weather conditions are inherently unpredictable. These events may affect consumer spending in the vicinity of the disasters in the U.S. and may otherwise adversely affect our business, earnings, or financial condition.
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Concentration of Customer Risk
We are exposed to customer concentration risk in certain states. Factors adversely affecting the economies and applicable laws in these states could have an adverse effect on our consolidated financial position or results of operations. Refer to “Geographic Distribution of Operations” in Item 1., “Business” for further discussion regarding our exposure to this risk.
Insurance Reserves
Our insurance subsidiary is subject to the risk of loss if our reserves for unearned premium and service revenues on unexpired policies and agreements in force are not sufficient. The risk associated with using historical loss experience as a basis for establishing earnings factors used to recognize revenue over the term of the contract or policy is that the timing of revenue recognition will materially vary from the actual loss development. Our insurance subsidiary is also subject to the risk of loss if our reserves for reported losses, losses incurred but not reported, and loss adjustment expenses are not sufficient. The risk associated with the projection of future loss payments is the assumption that historical loss development patterns will reasonably predict loss development patterns on existing agreements in force. Our management mitigates the risks associated with the use of such estimates by using credentialed actuaries to evaluate the adequacy of our reserves, by periodically reviewing the methods used for making such estimates, and by having experienced claims personnel actively manage the claim settlement process. Because the reserve establishment process is an estimate, actual losses may vary from amounts established in earlier periods. Refer to Note 2 - Summary of Accounting Policies of the Notes to Consolidated Financial Statements for further description of the reserve setting process.
Reinsurance Credit Risk
Reinsurance credit risk is the risk that a reinsurer providing reinsurance coverage to our insurance subsidiary will be unable to meet its obligations under the agreement. We mitigate this risk by holding letters of credit and funds held agreements on behalf of certain reinsurers which are available to us as collateral for reinsurance balances. In addition, we monitor the financial condition of our reinsurers and do not believe that we are exposed to any material credit risk.
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ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved SEC staff comments to report.
ITEM 2.
ITEM 2. PROPERTIES
Our finance and insurance headquarters operations are located in Torrance, California, and our facilities are leased from TMS.
Field operations for both finance and insurance are located in three regional customer service centers (“CSC”), three regional management offices, and 30 dealer sales and service offices (“DSSO”) in cities throughout the U.S. Two of the DSSOs share premises with the regional customer services centers. All three of the regional management offices share premises with DSSO offices. The Central region CSC is located in Cedar Rapids, Iowa, and is leased from TMS. The Western region CSC is located in Chandler, Arizona. The Eastern region CSC is located in Owings Mills, Maryland. We also have offices in the Commonwealth of Puerto Rico. All premises are occupied under lease.
We believe that our properties are suitable to meet the requirements of our business.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business. Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices. Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies. Our 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. We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts reserved for these claims. However, based on information currently available, the advice of counsel, and established reserves, our management expects that the ultimate liability resulting therefrom will not have a material adverse effect on our consolidated financial statements. We caution that the eventual development, outcome and cost of legal proceedings are by their nature uncertain and subject to many factors, including but not limited to, the discovery of facts not presently known to us or determinations by judges, juries or other finders of fact which do not accord with our evaluation of the possible liability from existing litigation.
Repossession Class Actions
A cross-complaint alleging a class action in the Superior Court of California Stanilaus County, Garcia v. Toyota Motor Credit Corporation, filed in January 2007, claims that the Company's post-repossession notice failed to comply with the Reese-Levering Automobile Sales Finance Act of California ("Reese-Levering"). An additional cross-complaint alleging a class action in the Superior Court of California San Francisco County, Aquilar and Smith v. Toyota Motor Credit Corporation, filed in February 2008, contains similar allegations claiming that the Company's post-repossession notices failed to comply with Reese-Levering. The plaintiffs are seeking injunctive relief, restitution and/or disgorgement, as well as damages in the Aquilar matter. The Company has filed a petition to consolidate these cases as they present nearly identical questions of law and fact. The Company believes it has strong defenses to these claims.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TMCC has omitted this section pursuant to General Instruction I(2) of Form 10-K.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
TMCC is a wholly-owned subsidiary of TFSA and, accordingly, all shares of TMCC’s stock are owned by TFSA. There is no market for TMCC's stock.
Dividends are declared and paid by TMCC as determined by its Board of Directors. No dividends were declared or paid during fiscal 2008. TMCC’s Board of Directors declared and paid cash dividends of $130 million and $115 million to TFSA during fiscal 2007 and fiscal 2006, respectively.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
1 Includes direct finance lease revenues.
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Our Board of Directors declared and paid cash dividends of $130 million and $115 million to TFSA during fiscal 2007 and fiscal 2006,
respectively. No dividends were declared or paid in any other period presented.
(A) Due to our loss in fiscal year 2008, the ratio coverage was less than one to one. We must generate additional earnings of $189 million to
achieve a coverage of one to one.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Toyota Motor Credit Corporation (“TMCC”) and its consolidated subsidiaries, collectively referred to herein as “we”, “our”, and “us”, is wholly-owned by Toyota Financial Services Americas Corporation (“TFSA”), a California corporation which is a wholly-owned subsidiary of Toyota Financial Services Corporation (“TFSC”), a Japanese corporation. TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor Corporation (“TMC”), a Japanese corporation. TFSC manages TMC’s worldwide financial services operations. TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial Services.
We generate revenue, income, and cash flows by providing retail financing, leasing, wholesale financing, and certain other financial products and services to vehicle and industrial equipment dealers and their customers. We also generate revenue through marketing, underwriting, and administering claims related to covering certain risks of vehicle dealers and their customers. We support growth in earning assets through funding obtained in the capital markets as well as funds provided by investing and operating activities.
Our financial results are affected by a variety of economic and industry factors, including but not limited to, new and used vehicle markets, new vehicle incentives, consumer behavior, employment growth, our ability to respond to changes in interest rates with respect to both contract pricing and funding, and the level of competitive pressure. Changes in these factors can influence the demand for new and used vehicles, the number of contracts that default and the loss per occurrence, the realizability of residual values on our lease earning assets, and our gross margins on financing volume. Additionally, our funding programs and related costs are influenced by changes in the capital markets and prevailing interest rates, which may affect our ability to obtain cost effective funding to support earning asset growth.
We measure the performance of our finance operations using the following metrics: financing volume, market share related to Toyota and Lexus vehicle sales, return on assets, financial leverage, financing margins, operating efficiency, and loss metrics. We measure the performance of our insurance operations on the basis of agreement volume, the number of agreements in force, investment portfolio return, and loss ratio levels.
Our primary competitors are other financial institutions including national and regional commercial banks, credit unions, savings and loan associations, finance companies and, to a lesser extent, other automobile manufacturers’ affiliated finance companies that actively seek to purchase retail consumer contracts through Toyota and Lexus independent dealerships (“dealerships”). We strive to achieve, among others, the following goals:
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Exceptional Customer Service: Our relationship with Toyota and Lexus vehicle dealers and industrial equipment dealers and their customers offer a competitive advantage for us. We seek to provide exceptional service to dealers and their customers by focusing our dealer sales and services offices (“DSSOs”) network and resources on encouraging the dealerships to continuously improve the quality of service provided by their finance and insurance representatives, and to increase customer loyalty to their dealerships and the Toyota and Lexus brands. By providing consistent and reliable support, training, and resources to our dealer network, we continue to develop our dealer relationships. We work closely with Toyota Motor Sales, U.S.A., Inc. (“TMS”), Toyota Material Handling, U.S.A., Inc. (“TMHU”), and Hino Motor Sales, U.S.A., Inc. (“HINO”) to offer special retail, lease, dealer financing, and insurance programs, in addition to marketing programs targeted towards the retention of repeat customers. We also focus on improving the quality of service provided to existing retail, lease, and insurance customers through our customer service centers (“CSCs”).
Risk Based Pricing: We price and structure our retail and lease contracts to compensate for the credit risk we assume. The goal of this strategy is to maximize profitability and better match contract rates with a broad range of risk levels. To achieve this goal, we evaluate our existing portfolio to identify key opportunities to target and expand additional volume. We deliver timely information to DSSOs and dealerships to assist them in benefiting from market opportunities. We constantly strive to refine our strategy and methodology for risk based pricing.
Liquidity Strategy: Our liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and cost-effective manner even in the event of adverse market conditions. This capacity primarily arises from our high credit rating, our ability to raise funds in the global capital markets, and our ability to generate liquidity from our balance sheet. This strategy has led us to develop a borrowing base that is diversified by market, geographic distribution and type of security, among other factors, as well as programs to prepare assets for sale and securitization.
Fiscal 2008 Operating Summary
Our consolidated net loss was $107 million during fiscal 2008 compared to our consolidated net income of $432 million during fiscal 2007. Our results in fiscal 2008 were primarily affected by an increase in interest expense due to higher unrealized losses of $947 million on our derivatives used to manage interest rate risk. Higher outstanding debt balances also contributed to the increase in interest expense albeit to a lesser extent. Our results were further affected by the softening U.S. economy caused by the decline in home values, the deterioration in the credit markets, tougher lending standards and increased commodity prices. The combination of these factors negatively impacted some of our customers’ ability to make their scheduled payments. While these indicators were evident earlier in the year, the impact of consumer performance issues was much more pronounced in the second half of fiscal 2008. Due to this change in the credit environment as well as the deterioration in used vehicle prices, we recorded higher charge-offs in the second half of fiscal 2008 and increased our allowance for credit losses. These adverse developments were partially offset by the increase in our financing revenues. In fiscal 2008 we had record financing volume of 1.4 million units on our retail and lease contracts and a record number of agreements issued on our insurance products of 1.5 million units.
Our financing operations reported a net loss of $229 million during fiscal 2008 compared to net income of $317 million during fiscal 2007. Results were adversely impacted by higher interest expense due to unrealized losses on our derivatives and to a lesser extent, higher outstanding debt balances. The net loss also resulted from a higher provision for credit losses resulting from the effect of the softening U.S. economy as discussed above.
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Our insurance operations reported net income of $122 million and $115 million during fiscal 2008 and fiscal 2007, respectively. Our results in fiscal 2008 were primarily affected by the increase in contract revenues and earned premiums, partially offset by the increase in insurance losses and loss adjustment expenses. Insurance losses and loss adjustment expenses increased primarily due to the increases in average number of agreements in force and average loss severity.
Overall, our capital position decreased by $135 million bringing total equity to $4.9 billion at March 31, 2008. Our debt-to-equity positions were 13.81 and 11.56 at March 31, 2008 and 2007, respectively.
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FINANCING OPERATIONS
Results of Operations
Fiscal 2008 compared to Fiscal 2007
1 Includes direct finance lease revenues.
Net financing revenues decreased 32 percent during fiscal 2008 compared to fiscal 2007. Our net financing revenues were affected by the increase in interest expense due to higher unrealized losses on our derivatives used to manage interest rate risk and to a lesser extent, higher outstanding debt portfolio. This was partially offset by the increase in finance receivables and higher portfolio yields on our finance receivables. Refer to the “Interest Expense” section within this MD&A for further discussion regarding interest expense. Our financing revenues were influenced as follows:
·
Our operating lease revenues increased 22 percent during fiscal 2008 compared to fiscal 2007. This increase was due to higher leasing volume and higher yields on operating leases.
·
Our retail financing revenues increased 23 percent during fiscal 2008 compared to fiscal 2007. This was due to an increase in retail finance receivables volume with a corresponding increase in our portfolio yield.
·
Dealer financing revenues increased 18 percent during fiscal 2008 compared to fiscal 2007. This was primarily due to an increase in the number of dealers serviced which led to a higher average outstanding balance on dealer financing earning assets.
Our total finance receivables portfolio yield was 7.3 percent and 6.9 percent during fiscal 2008 and fiscal 2007, respectively.
Depreciation expense on operating leases increased 23 percent during fiscal 2008 compared to fiscal 2007. This increase is consistent with the increase in the average number of operating lease units outstanding during fiscal 2008 compared to fiscal 2007. Refer to the “Residual Value Risk” section within this MD&A for further discussion.
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Net Earning Assets and Vehicle Financing Volume
The composition of our net earning assets is summarized below (dollars in millions):
1 Includes direct finance leases.
2 Terms range from 24 months to 60 months.
3 Terms range from 24 months to 84 months.
Includes wholesale and other loan arrangements in which we participate as part of a syndicate of lenders.
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The composition of our vehicle financing volume and market share is summarized below:
Represents the percentage of total domestic TMS sales of new Toyota and Lexus vehicles financed by us, excluding sales
under dealer rental car and commercial fleet programs and sales of a private Toyota distributor.
Our higher retail and lease financing volume during fiscal 2008 compared to fiscal 2007 resulted in increases in earning assets. Our total financing volume, acquired primarily from Toyota and Lexus vehicle dealers, was up 4 percent during fiscal 2008 compared to fiscal 2007. Much of this growth in volume resulted from increased market share of new Toyota and Lexus vehicles in the United States.
Retail Finance Receivables and Financing Volume
Retail finance receivables and vehicle retail financing volume increased due to Toyota and Lexus vehicle sales combined with our emphasis on developing dealer relationships. Our retail market share of TMS new vehicle sales increased in fiscal 2008 compared to fiscal 2007. This was primarily due to the increased availability of TMS retail subvention, strong dealer relationships and the increase in the number of vehicle dealers receiving wholesale financing. We generally experience a higher level of retail financing volume as a result of these relationships.
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Lease Earning Assets and Financing Volume
Total lease earning assets is comprised of investments in operating leases. Our vehicle lease financing volume is impacted by the level of Toyota and Lexus vehicle sales, the availability of subvention programs, and changes in the interest rate environment. Our vehicle lease financing volume increased in fiscal 2008 compared to fiscal 2007 due to increased market share in TMS new vehicle sales.
Dealer Financing Earning Assets
Dealer financing increased primarily due to continued growth in the number of vehicle dealers receiving wholesale financing and our emphasis on developing dealer relationships.
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Residual Value Risk
We are exposed to risk of loss on the disposition of leased vehicles and industrial equipment to the extent that sales proceeds realized upon the sale of returned lease assets are not sufficient to cover the residual value that was estimated at lease inception. Substantially all of our residual value risk relates to our vehicle lease portfolio. To date, we have not incurred material residual value losses related to our industrial equipment portfolios.
Factors Affecting Exposure to Residual Value Risk
Residual value represents an estimate of the end of term market value of a leased asset. The primary factors affecting our exposure to residual value risk are the levels at which residual values are established at lease inception, projected market values, and the resulting impact on vehicle lease return rates and loss severity. The evaluation of these factors involves significant assumptions, complex analysis, and management judgment. Refer to the “Critical Accounting Estimates” section of this MD&A for further discussion of the estimates involved in the determination of residual values.
Residual Values at Lease Inception
Residual values are estimated at lease inception by examining external industry data and our own experience. Factors considered in this evaluation include, but are not limited to, expected economic conditions, new vehicle pricing, new vehicle incentive programs, new vehicle sales, product attributes of popular vehicles, the mix of used vehicle supply, the level of current used vehicle values, and fuel prices. These factors are evaluated in the context of their historical trends to anticipate potential changes in the relationship among those factors in the future.
End of Term Market Values
Our management periodically reviews the estimated end of term market values of leased vehicles to assess the appropriateness of its carrying values. To the extent the estimated end of term market value of a leased vehicle is lower than the residual value established at lease inception, the residual value of the leased vehicle is adjusted downward so that the carrying value at lease end will approximate the estimated end of term market value. These adjustments are made over time for operating leases by recording depreciation expense in the Consolidated Statement of Income. Refer to the “Depreciation on Operating Leases” section of this MD&A for further discussion. For direct finance leases, the impact of the estimated decline in end of term market values is recorded at the time of assessment as a reduction of direct finance lease revenue which is included under our retail financing revenues in the Consolidated Statement of Income. Factors considered in this assessment are similar to those considered in the evaluation of residual values at lease inception discussed above.
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Vehicle Lease Return Rate
The vehicle lease return rate represents the number of end of term leased vehicles returned to us for sale as a percentage of lease contracts that were originally scheduled to mature in the same period. When the market value of a leased vehicle at contract maturity is less than its contractual residual value (i.e., the price at which the lease customer may purchase the leased vehicle), there is a higher probability that the vehicle will be returned to us. In addition, a higher market supply of certain models of used vehicles generally results in a lower relative level of demand for those vehicles, resulting in a higher probability that the vehicle will be returned to us. A higher rate of vehicle returns exposes us to greater risk of loss at lease termination.
Loss Severity
Loss severity is the extent to which the end of term market value of a leased vehicle is less than the estimated residual value. Although we employ a rigorous process to estimate end of term market values, we may incur losses to the extent the end of term market value of a leased vehicle is less than the estimated residual value.
Vehicle Remarketing
At the end of the lease contract, lease customers have the option to purchase the vehicle at the contractual residual value or return the vehicle to the vehicle dealer. If the vehicle is returned to the vehicle dealer, the vehicle dealer has the option of purchasing the vehicle or returning it to us. We have developed remarketing strategies to maximize proceeds and minimize disposition costs on used vehicles sold at lease termination. We use various channels to sell vehicles returned at lease end, including the following:
Dealer Direct
The goal of the Dealer Direct program (“Dealer Direct”) is to increase vehicle dealer purchases of off-lease vehicles thereby reducing the disposition costs of such vehicles. Through Dealer Direct, the vehicle dealer accepting the lease return (the “grounding vehicle dealer”) has the option to purchase the vehicle at the contractual residual value, purchase the vehicle at an assessed market value, or return the vehicle to us. During fiscal 2008, 42 percent of returned vehicles were sold to the grounding vehicle dealer, compared to 35 percent sold during fiscal 2007. The percentage of available full term off lease units purchased by grounding vehicle dealers in fiscal 2008 increased primarily due to an increased number of dealers participating in the Dealer Direct program. In addition, the higher demand for Toyota and Lexus vehicles increased the average number of units purchased by each dealer. Vehicles not purchased by the grounding vehicle dealer are made available to all Toyota and Lexus vehicle dealers through the Dealer Direct online auction. During fiscal 2008, 8 percent of returned vehicles were sold through the Dealer Direct online auction to franchise vehicle dealers, compared to 12 percent sold during fiscal 2007. This decrease is in line with the increase in the number of vehicles purchased by the grounding vehicle dealer. As more vehicles are purchased by the grounding vehicle dealers, fewer vehicles are available through the Dealer Direct online auction. The disposition costs of vehicles sold through the Dealer Direct online auction are lower than the costs of those sold through auction sites. The average holding period of a vehicle sold through Dealer Direct was approximately 7 days, as compared to approximately 30 days for all off-lease vehicles sold.
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Auction
Vehicles not purchased through Dealer Direct are sold at physical vehicle auction sites throughout the country. During fiscal 2008, approximately 50 percent of returned vehicles were sold through physical auction, compared to approximately 53 percent of returned vehicles sold during fiscal 2007. Where necessary, we recondition used vehicles prior to sale in order to enhance the vehicle values at auction. Additionally, we redistribute vehicles geographically to minimize oversupply in any location.
The following table summarizes our scheduled maturities related to our leased vehicle portfolio and vehicle sales at lease termination by period (units in thousands):
1 Includes vehicles sold at physical auction, Dealer Direct online auction, and dealer purchases at a price other than the
contractual residual value.
Scheduled maturities remained fairly consistent in fiscal 2008 compared to fiscal 2007, as did the number of vehicles sold at lease termination. These amounts are not indicative of future scheduled maturities and future vehicle sales at lease termination.
Depreciation on Operating Leases
The following table provides information related to our depreciation on operating leases:
We record depreciation expense on the portion of our lease portfolio classified as operating leases. Depreciation expense is recorded over the lease term and is based upon the depreciable basis of the leased vehicle. Depreciable basis is the difference between a leased vehicle’s original acquisition value and its residual value established at lease inception. Depreciation expense is recorded on a straight-line basis over the remaining life of the lease when the end of term market value is estimated to be less than the carrying value. Refer to the “Residual Value Risk” section of this MD&A for a discussion regarding our exposure to residual value risk on our lease portfolio. Refer to the “Critical Accounting Estimates” section of this MD&A for a further discussion of the estimates involved in the determination of residual values.
Depreciation expense on operating leases increased during fiscal 2008 compared to fiscal 2007 primarily due to an increase in the average number of operating lease vehicles outstanding. Depreciation expense is also affected by changes in the used vehicle market because used vehicle market trends are a significant factor in estimating end of term market values. During fiscal 2008, the used vehicle market did not materially contribute to the increase in depreciation expense.
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Credit Risk
We are exposed to credit risk on our earning assets. Credit risk is the risk of loss arising from the failure of a customer or dealer to meet the terms of any contract with us or otherwise fail to perform as agreed. Our level of credit risk on our retail and lease portfolio is influenced primarily by two factors: the total number of contracts that default (“frequency of occurrence”) and the amount of loss per occurrence (“loss severity”), which in turn are influenced by various economic factors, the used vehicle market, purchase quality mix, contract term length, and operational changes as discussed below. Our level of credit risk on our dealer financing portfolio is influenced primarily by the financial strength of dealers within our portfolio, dealer concentration, collateral quality, and economic factors. To date, we have not incurred material credit losses on our dealer financing portfolio.
Factors Affecting Retail and Lease Portfolio Credit Risk
Economic Factors
General economic conditions such as sudden changes in housing values, unemployment rates, bankruptcy rates, consumer debt levels, fuel prices, consumer credit performance, interest rates, and inflation can influence both the frequency of occurrence and loss severity.
Used Vehicle Market
Changes in used vehicle prices directly affect the proceeds from sales of repossessed vehicles and, accordingly, the level of loss severity we have experienced. The supply of and demand for used vehicles, interest rates, inflation, the level of manufacturer incentives on new vehicles, and general economic outlook are some of the factors affecting the used vehicle market.
Purchase Quality Mix
A change in the mix of contracts acquired at various risk levels may change the amount of credit risk we assume. An increase in the number of contracts acquired with lower credit quality (as measured by scores that establish a consumer’s creditworthiness based on present financial condition, experience, and past credit history) can increase the amount of credit risk. Conversely, an increase in the number of contracts with higher credit quality acquired can lower credit risk. An increase in the mix of contracts with lower credit quality can also increase operational risk unless appropriate controls and procedures are established. We strive to price contracts in order to achieve an appropriate risk adjusted return on investment.
Contract Term Length
The average original contract term of retail and lease vehicle contracts influences credit losses. Longer term contracts generally experience a higher rate of default and thus affect the frequency of occurrence. In addition, vehicles under longer term contracts depreciate at a slower rate which may lead to increased loss severity.
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Operational Changes
Operational changes and ongoing implementation of new information and transaction systems are designed to have a positive effect on our operations, including customer service improvements in the management of delinquencies and credit losses, through the implementation of processes and tools that create greater operational efficiency and effectiveness. We continue to make improvements in our service operations and credit loss management methods.
Factors Affecting Dealer Financing Portfolio Credit Risk
The financial strength of dealers to which we extend credit directly influences credit risk. Lending to dealers with lower quality credit characteristics increases the risk of loss we assume. Extending a substantial amount of financing or commitments to a specific dealer or group of dealers creates a concentration of credit risk, particularly when the financing is unsecured or not fully secured by realizable assets. Collateral quality influences credit risk in that lower quality collateral increases the risk that, in the event of dealer default, the value of the collateral will be less than the amount owed to us.
Credit Loss Experience
We began to experience a significant deterioration in the credit performance of our loan and lease portfolio in the third quarter of fiscal 2008. The softening U.S. economy caused by the decline in home values, the deterioration in the credit markets, tougher lending standards and increased commodity prices has negatively impacted some of our customers’ ability to make their scheduled payments. While these indicators were evident earlier in the year, the impact of consumer performance issues was much more pronounced in the second half of fiscal 2008.
The level of credit losses is influenced primarily by two factors: frequency of occurrence and loss severity. Frequency of occurrence as a percentage of average outstanding contracts increased to 2.2% for fiscal 2008, as compared to 1.8% for fiscal 2007 while loss severity increased by 10.1% from fiscal 2007 to fiscal 2008. In addition we experienced an increase in net charge-offs as a percentage of average gross earning assets from fiscal 2007 to fiscal 2008. These increases are primarily due to the deterioration in the used vehicle prices, longer term contracts and increased risk in our portfolio due to the softening U.S. economy. Refer to Item 1., “Business” for discussion of our charge-off policy.
Due to the adverse change in the credit environment discussed above, we experienced an overall increase in 60-day delinquencies and an increase in credit related costs due to the higher credit risk and exposure within the portfolio.
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Furthermore, the impact of the adverse change in the credit environment and the deterioration of the used vehicle prices contributed to higher contract defaults and higher loss severity. As a result, management strengthened its collection practices in an effort to mitigate credit losses and increased the provision for credit losses. Our provision for credit losses increased substantially in fiscal 2008 compared to fiscal 2007, primarily reflecting higher delinquencies in the consumer portfolio and adverse trends in the macroeconomic environment and in the estimate of future loan losses.
Substantially all retail and operating lease receivables do not involve recourse to the dealer in the event of
customer default.
2 Includes accounts in bankruptcy and excludes accounts for which vehicles have been repossessed.
Allowance for Credit Losses
We maintain an allowance for credit losses to cover probable losses resulting from the non-performance of our customers. The determination of the allowance involves significant assumptions, complex analysis, and management judgment. Refer to the “Critical Accounting Estimates” section of this MD&A for further discussion of the estimates involved in determining the allowance. The following tables provide information related to our allowance for credit losses (dollars in millions):
1 Net of recoveries of $84 million, $82 million, and $79 million in years ended March 31, 2008, 2007, and 2006, respectively.
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The allowance for credit losses increased 32% to $729 million at March 31, 2008 compared to $554 million at March 31, 2007. Our allowance level is based on a comprehensive, adequately documented, and consistently applied analysis taking into account historical net charge-off levels, adjusted for changes in current conditions or other relevant factors. Management believes it considers all material factors that may affect the allowance account. These factors include: current economic conditions and outlook, historical loss experience, used vehicle market, purchase quality mix, contract term length, operational factors, and credit quality of the portfolio at year end.
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INSURANCE OPERATIONS
The following table summarizes the results of our Insurance Operations as a standalone operating segment (dollars in millions):
Contract revenues and earned premiums from insurance operations are affected by sales volume as well as the level, age, and mix of agreements in force. Agreements in force represent active insurance policies written and contracts issued. Contract revenues and earned premiums represent revenues from the agreements in force. Commissions and fees represent revenues from services provided to insurers and insureds, including certain of our affiliates.
Insurance losses and loss adjustment expenses incurred are a function of the number of covered risks, the frequency and severity of claims associated with the agreements in force, and the level of risk retained by our insurance operations. Insurance losses and loss adjustment expenses include amounts paid and accrued for reported losses, estimates of losses incurred but not reported, and any related claim adjustment expenses. Refer to Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for further discussion regarding our exposure to risks surrounding the reserve estimates.
Contract revenues and earned premiums increased due to an increase in the number of agreements issued and agreements in force, which was primarily due to stronger dealer relationships. The increase in commissions and fees is consistent with the increase in the number of agreements issued. Insurance losses and loss adjustment expenses increased due to the increased number of agreements in force and an increase in loss severity and frequency.
Our insurance operations reported investment and other income of $139 million and $134 million which consisted primarily of investment income on marketable securities during fiscal 2008 and fiscal 2007, respectively. This increase was primarily due to higher investment balances during fiscal 2008 that resulted in an increase in investment income.
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INVESTMENT AND OTHER INCOME
Our consolidated investment and other income is primarily comprised of investment income on marketable securities, investment income from securitizations, and other income. We reported $301 million, $252 million, and $116 million of investment and other income during fiscal years 2008, 2007, and 2006, respectively. Of these amounts, $147 million, $134 million, and $44 million consisted of investment income on marketable securities during fiscal years 2008, 2007, and 2006, respectively. The majority of the investment income on marketable securities relates to our insurance operations. Refer to the “Insurance Operations” section within this MD&A for further discussion regarding investment income on marketable securities.
We reported $150 million, $106 million, and $42 million of other income during fiscal years 2008, 2007, and 2006, respectively. Other income primarily consists of interest income on cash held in excess of our immediate funding needs, which increased from the prior year primarily due to higher yields earned during fiscal 2008.
We reported $4 million, $12 million, and $30 million of investment income from securitizations during fiscal years 2008, 2007, and 2006, respectively. The decline is due to a reduction in the average outstanding balance of securitization pools as a result of the amortization of the related receivables. In addition, we had no securitized finance receivables outstanding at March 31, 2008 compared to $164 million which we serviced at March 31, 2007.
TAXES
Our effective tax rate was 44 percent and 35 percent during fiscal 2008 and fiscal 2007, respectively. We note that for fiscal 2008 TMCC had a pre-tax book loss resulting in a tax benefit for the year. This tax benefit was further increased by federal and state hybrid vehicle tax credits.
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OPERATING AND ADMINISTRATIVE EXPENSES
The following table summarizes our operating and administrative expenses (dollars in millions):
Total operating and administrative expenses increased 11 percent during fiscal 2008 compared to fiscal 2007. This increase was due to an increase in employee expenses incurred to support overall business growth. In addition, operating expenses increased due to new technology development. Included in operating and administrative expenses are charges allocated by TMS for certain technological and administrative services provided to TMCC. Refer to Note 16 - Related Party Transactions of the Notes to Consolidated Financial Statements for further information.
Insurance dealer back-end program expenses are primarily driven by insurance volume and underwriting performance. The increase was primarily due to an increase in the number of participating dealers, an increase in the number of agreements issued and agreements in force, and improved dealer underwriting performance. Refer to the “Insurance Operations” section of this MD&A for further discussion regarding our insurance results.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity risk is the risk arising from the inability to meet obligations when they come due. Our liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and cost-effective manner even in the event of adverse market conditions. This capacity primarily arises from our ability to raise funds in the global capital markets as well as our ability to generate liquidity from our balance sheet. This strategy has led us to develop a borrowing base that is diversified by market and geographic distribution, type of security, and investor type, among other factors, as well as a securitization program. See “Off-Balance Sheet Arrangements - Securitization Funding”. Credit support provided by our parent provides an additional source of liquidity to us, although it is not relied upon in our liquidity planning and capital and risk management.
The following table summarizes the outstanding components of our funding sources (dollars in millions):
Includes carrying value adjustments of $2.7 billion and $1.1 billion at March 31, 2008 and 2007, respectively, as described in
Note 10 - Debt of the Notes to Consolidated Financial Statements.
We do not rely on any single source of funding and may choose to realign our funding activities depending upon market conditions, relative costs, and other factors. We believe that our funding sources, combined with operating and investing activities, provide sufficient liquidity to meet future funding requirements and business growth. Our funding volume is based on asset growth and debt maturities.
For liquidity purposes, we hold cash in excess of our immediate funding needs. These excess funds are invested in short-term highly liquid and investment grade money market instruments, which provide liquidity for our short-term funding needs and flexibility in the use of our other funding sources. We maintained excess funds ranging from $97 million to $5.5 billion during fiscal 2008, with an average balance of $2.6 billion.
Commercial Paper
Short-term funding needs are met through the issuance of commercial paper in the United States. Commercial paper outstanding under our commercial paper programs ranged from approximately $13.7 billion to $23.1 billion during fiscal 2008, with an average outstanding balance of $18.3 billion. Our commercial paper programs are supported by the liquidity facilities discussed later in this section. As a commercial paper issuer rated A-1+ by Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc. (“S&P”) and P-1 by Moody’s Investors Service, Inc. (“Moody’s”), we believe there is ample capacity to meet our short-term funding requirements.
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Unsecured Term Debt
Term funding requirements are met through the issuance of a variety of debt securities in both the United States and international capital markets. To diversify our funding sources, we have issued in a variety of markets, currencies, and maturities, and to a variety of investors, which allows us to broaden our distribution of securities and further enhance liquidity.
The following table summarizes our components of unsecured term debt at par value (dollars in millions):
Amounts represent par values and as such exclude unamortized premium/discount, foreign currency transaction gains and losses
on debt denominated in foreign currencies, fair value adjustments to debt in hedge accounting relationships, and the
unamortized fair value adjustments on the hedged item for terminated hedge accounting relationships. Par values of non-U.S.
currency denominated notes are determined using foreign exchange rates applicable as of the issuance dates.
MTNs and domestic bonds had terms to maturity ranging from approximately 1 year to 30 years, and had interest rates at the
time of issuance ranging from 0 percent to 10 percent.
3 EMTNs were issued in U.S. and non-U.S. currencies, had terms to maturity ranging from approximately 1 year to
years, and had interest rates at the time of issuance ranging from 0 percent to 15 percent.
4 Consists of fixed and floating rate debt. Upon the issuance of fixed rate debt, we generally elect to enter into
pay-float interest rate swaps. Refer to the “Derivative Instruments” section of this MD&A for further discussion.
We maintain a shelf registration with the Securities and Exchange Commission (“SEC”) to provide for the issuance of debt securities in the U.S. capital markets to both retail and institutional investors. We qualify as a well-known seasoned issuer under SEC rules, and as a result, we may issue under our registration statement an unlimited amount of debt securities during the three year period ending March 2009. Our EMTN program provides for the issuance of debt securities in the international capital markets. In September 2007, TMCC renewed its EMTN program for a one year period. TMCC’s affiliates, Toyota Motor Finance (Netherlands) B.V., Toyota Credit Canada Inc. and Toyota Finance Australia Limited (TMCC and such affiliates, the “EMTN Issuers”) joined the EMTN program as issuers. The maximum aggregate principal amount authorized under the EMTN Program to be outstanding from time to time was increased from $30 billion to €40 billion, or the equivalent in other currencies, of which €17 billion was available for issuance at April 30, 2008. The authorized amount will be shared among all EMTN Issuers. The EMTN program may be expanded from time to time to allow for the continued use of this source of funding. In addition, we may issue bonds in the international capital markets that are not issued under our U.S. and EMTN programs. Debt securities issued under the U.S. shelf registration statement are issued pursuant to the terms of an indenture, and debt securities issued under the EMTN program are issued pursuant to the terms of an agency agreement, both of which contain customary terms and conditions.
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Liquidity Facilities and Letters of Credit
For additional liquidity purposes, we maintain syndicated bank credit facilities with certain banks.
Day Credit Agreement
In March 2008, TMCC, Toyota Credit de Puerto Rico Corp. (“TCPR”), and other Toyota affiliates entered into a $5.0 billion 364 day syndicated bank credit facility pursuant to a 364 Day Credit Agreement. The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge and cross default provisions. The 364 Day Credit Agreement may be used for general corporate purposes and was not drawn upon as of March 31, 2008.
Five Year Credit Agreement
In March 2007, TMCC, TCPR, and other Toyota affiliates entered into a $8.0 billion five year syndicated bank credit facility pursuant to a Five Year Credit Agreement. The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge and cross default provisions. The Five Year Credit Agreement may be used for general corporate purposes and was not drawn upon as of March 31, 2008.
Letters of Credit Facilities Agreement
In addition, TMCC has uncommitted letters of credit facilities totaling $55 million at March 31, 2008 and 2007. Of the total credit facilities, $1 million of the uncommitted letters of credit facilities were used at March 31, 2008 and 2007.
Securitization
Our securitization program represents an additional source of liquidity which can be used as appropriate. As of March 31, 2008, we owned approximately $44 billion in potentially securitizable retail finance receivables. We maintain an effective registration statement that complies with Regulation AB, the SEC’s rule governing the offering of asset backed securities, and which can be used to issue asset backed securities secured by our retail finance contracts. During fiscal 2008, we did not execute any securitization transactions. TMCC will continue to evaluate the market for asset-backed securities and take into consideration its funding strategies in determining whether to employ securitization funding in the future.
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Credit Support Agreements
Under the terms of a credit support agreement between TMC and TFSC (“TMC Credit Support Agreement”), TMC agreed to: 1) maintain 100 percent ownership of TFSC; 2) cause TFSC and its subsidiaries to have a net worth of at least ¥10 million, equivalent to $100,311 at March 31, 2008; and 3) make sufficient funds available to TFSC so that TFSC will be able to (i) service the obligations arising out of its own bonds, debentures, notes and other investment securities and commercial paper and (ii) honor its obligations incurred as a result of guarantees or credit support agreements that it has extended. The agreement is not a guarantee by TMC of any securities or obligations of TFSC.
Under the terms of a similar credit support agreement between TFSC and TMCC (“TFSC Credit Support Agreement”), TFSC agreed to: 1) maintain 100 percent ownership of TMCC; 2) cause TMCC and its subsidiaries to have a net worth of at least $100,000; and 3) make sufficient funds available to TMCC so that TMCC will be able to service the obligations arising out of its own bonds, debentures, notes and other investment securities and commercial paper (collectively, “TMCC Securities”). The agreement is not a guarantee by TFSC of any TMCC Securities or other obligations of TMCC. The TMC Credit Support Agreement and the TFSC Credit Support Agreement are governed by, and construed in accordance with, the laws of Japan. TMCC Securities do not include the securities issued by securitization trusts in connection with TMCC’s securitization programs.
Holders of TMCC Securities have the right to claim directly against TFSC and TMC to perform their respective obligations under the Credit Support Agreements by making a written claim together with a declaration to the effect that the holder will have recourse to the rights given under the Credit Support Agreement. If TFSC and/or TMC receives such a claim from any holder of TMCC Securities, TFSC and/or TMC shall indemnify, without any further action or formality, the holder against any loss or damage resulting from the failure of TFSC and/or TMC to perform any of their respective obligations under the Credit Support Agreements. The holder of TMCC Securities who made the claim may then enforce the indemnity directly against TFSC and/or TMC.
In connection with the TFSC Credit Support Agreement, TMCC and TFSC are parties to a credit support fee agreement (“Credit Support Fee Agreement”). The Credit Support Fee Agreement requires TMCC to pay to TFSC a semi-annual fee which is based upon the weighted average outstanding amount of TMCC Securities entitled to credit support.
TCPR is the beneficiary of a credit support agreement with TFSC containing the same provisions as the TFSC Credit Support Agreement described above but pertaining to TCPR and TCPR bonds, debentures, notes and other investment securities and commercial paper (collectively, “TCPR Securities”). Holders of TCPR Securities have the right to claim directly against TFSC and TMC to perform their respective obligations as described above. This agreement is not a guarantee by TFSC of any securities or other obligations of TCPR. TCPR has agreed to pay TFSC a semi-annual fee which is based upon the weighted average outstanding amount of TCPR Securities entitled to credit support.
TMC files periodic reports and other information with the SEC, which can be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of such material may also be obtained at prescribed rates by mail at the same address. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. TMC’s filings may also be found on its website located at: www.toyota.com under “Company Info, Our Company, Our Business, Investor Relations, Presentations and SEC Filings”.
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Credit Ratings
As of April 30, 2008, the ratings and outlook established by Moody’s and S&P for TMCC were as follows:
NRSRO
Senior Debt
Commercial Paper
Outlook
S&P
AAA
A-1+
Stable
Moody’s
Aaa
P-1
Stable
The cost and availability of unsecured financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security or obligation. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets. Credit ratings are not recommendations to buy, sell, or hold securities and are subject to revision or withdrawal at any time by the assigning nationally recognized statistical rating organization (“NRSRO”). Each NRSRO may have different criteria for evaluating risk, and therefore ratings should be evaluated independently for each NRSRO. Our credit ratings depend in part on the existence of the credit support agreements of TFSC and TMC. See “Credit Support” in Item 1A., “Risk Factors”.
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Derivative Instruments
Business Use of Derivative Instruments
Our assets consist primarily of U.S. dollar denominated fixed rate receivables. Our liabilities consist primarily of fixed and floating rate debt which is issued in the global capital markets. In order to maintain a conservative liquidity profile, the life of our debt is typically longer than that of our assets. Upon the issuance of fixed rate debt, we generally elect to enter into pay-float interest rate swaps. The terms of pay-float swap agreements correspond to the terms of the debt. The interest rate risk arising from the mismatch in the re-pricing of assets relative to liabilities is managed via pay-fixed swaps and purchased interest rate caps which are executed on a portfolio basis. Our pay-fixed swap agreements are primarily two to three years in tenor from origination. The currency exposure related to non-U.S. dollar denominated debt is economically hedged at issuance, using cross currency interest rate swaps, currency basis swaps, or a combination of interest rate swaps coupled with currency basis swaps to convert non-U.S. dollar denominated debt to U.S. dollar denominated payments.
We enter into derivative instruments for risk management purposes. Our use of derivatives is limited to the management of interest rate and foreign exchange risks.
Accounting for Derivative Instruments
All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow us to net settle positive and negative positions and offset cash collateral held with the same counterparty on a net basis. Changes in the fair value of the derivatives are recorded in interest expense in the Consolidated Statement of Income.
We categorize derivatives as those designated for hedge accounting (“hedge accounting derivatives”) and those that are not designated for hedge accounting (“non-hedge accounting derivatives”). We elect at inception whether to designate a derivative as a hedge accounting derivative. That designation may change based on management’s intentions and changing circumstances. Hedge accounting derivatives are comprised of pay-float interest rate swaps and cross currency interest rate swaps. Non-hedge accounting derivatives are comprised of pay-fixed interest rate swaps, de-designated pay-float interest rate swaps, pay-float interest rate swaps for which hedge accounting has not been elected, interest rate caps, and currency swaps. De-designation of hedge accounting derivatives is further discussed below.
In order to qualify for hedge accounting, a derivative must be considered highly effective at reducing the risk associated with the exposure being hedged. When we designate a derivative in a hedging relationship, we document the risk management objective and strategy. This documentation includes the identification of the hedging instrument, the hedged item and the risk exposure, and how we will assess effectiveness prospectively and retrospectively. We assess the extent to which a hedging instrument is effective at achieving offsetting changes in fair value at least quarterly. We recognize changes in the fair value of derivatives designated in fair value hedging relationships (including foreign currency fair value hedging relationships) in interest expense in the Consolidated Statement of Income along with the fair value changes of the hedged item attributable to the hedged risk. For certain types of existing hedge relationships that meet stringent criteria, we apply the shortcut method, which provides an assumption of zero ineffectiveness that results in equal and offsetting changes in fair value in the Consolidated Statement of Income for both the hedged debt and the hedge accounting derivative.
When the shortcut method is not applied, any ineffective portion of the derivative that is designated as a fair value hedge is recognized as a component of interest expense in the Consolidated Statement of Income. If we elect not to designate a derivative instrument in a hedging relationship, or the relationship does not qualify for hedge accounting treatment, the full change in the fair value of the derivative instrument is recognized as a component of interest expense in the Consolidated Statement of Income with no offsetting adjustment for the economically hedged item.
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We review the effectiveness of our hedging relationships quarterly to determine whether the relationships have been and continue to be effective. We use regression analysis to assess the effectiveness of our hedges. When we determine that a hedging relationship is not or has not been effective, hedge accounting is no longer applied. If hedge accounting is discontinued, we continue to carry the derivative instrument as a component of other assets or other liabilities in the Consolidated Balance Sheet at its fair value with changes in fair value reported as interest expense in the Consolidated Statement of Income. Additionally, for discontinued fair value hedges, we cease to adjust the hedged item for changes in fair value and amortize the cumulative fair value adjustments recognized in prior periods over the remaining term of the debt.
We will also discontinue the use of hedge accounting if a derivative is sold, terminated, or exercised, or if management determines that designating a derivative under hedge accounting is no longer appropriate (“de-designated derivatives”). De-designated derivatives are included within the category of non-hedge accounting derivatives.
We also issue debt which can be characterized as hybrid financial instruments. These obligations may meet the definition in Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), of an “embedded derivative.” These debt instruments are assessed to determine whether the embedded derivative requires separate reporting and accounting, and if so, the embedded derivative may be recorded on the balance sheet at fair value or the entire financial instrument may be recorded at fair value under SFAS No. 155, “Accounting for Certain Hybrid Instruments” (“SFAS 155”). Changes in the fair value of the embedded derivative or the entire hybrid financial instrument, and associated non-hedge accounting derivative are reported in interest expense in the Consolidated Statement of Income. Separating an embedded derivative from its host contract requires careful analysis, judgment, and an understanding of the terms and conditions of the instrument.
One of our goals is to manage the interest rate risk arising from the differences in timing between the re-pricing of assets relative to liabilities. We use non-hedge accounting derivatives, specifically pay-fixed interest rate swaps and interest rate caps, to manage this exposure. The use of non-hedge accounting derivatives to mitigate this risk has historically resulted in significant volatility in the net result from non-hedge accounting. This volatility arises from the difference in accounting treatment between non-hedge accounting derivatives, which are reported at fair value, and that of the assets, which are reported at historical cost. We address this volatility by de-designating certain pay-float interest rate swaps (previously treated as hedge accounting derivatives) that have offsetting economic characteristics to the non-hedge accounting derivatives or by electing not to designate certain pay-float interest rate swaps in a hedging transaction. We employ analytical measures such as duration and Value at Risk to identify whether to de-designate a hedge accounting derivative or to not elect hedge accounting.
De-designating hedge accounting derivatives or not electing hedge accounting typically reduces volatility in the net result from non-hedge accounting because the combined changes in the fair value of these derivatives with those of other non-hedge accounting derivatives result in a natural offset in the Statement of Consolidated Income. The hedged item associated with the derivative previously treated as a hedge accounting derivative ceases to be adjusted for changes in fair value upon de-designation. To the extent we can more closely match the accounting treatment to the underlying economics of the derivatives portfolio by de-designating or by not electing hedge accounting, the transaction is identified and treated as a non-hedge accounting derivative and volatility is typically reduced. There may be interest rate scenarios where volatility may increase as a result of discontinuing hedge accounting. However, we consider the likelihood of such scenarios occurring to be remote.
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Our management’s expectation is that the combination of the changes in fair values of de-designated derivatives with those of non-hedge accounting derivatives will continue to reduce volatility on a quarterly basis. Our management does not engage in de-designation with a view as to the favorable or unfavorable impact on the results of operations. De-designation has resulted in lower losses in the net result from non-hedge accounting in certain quarters and in lower gains in the net result from non-hedge accounting in other quarters. These decreases represent reductions in volatility in the net result from non-hedge accounting. We estimate that the impact of de-designation on the results of operations was a reduction in the volatility in net result from non-hedge accounting of approximately $223 million and $25 million for the quarters ended March 31, 2008 and March 31, 2007, respectively. Our management evaluates the reduction of volatility on a quarterly basis only, and does not aggregate or net these quarterly reductions for the twelve month period.
Derivative Assets and Liabilities
The following table summarizes our derivative assets and liabilities, which are included in other assets and other liabilities in the Consolidated Balance Sheet (dollars in millions):
Represents cash received under reciprocal collateral arrangements that we have entered into with certain derivative
counterparties as described in Item 7A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Toyota Motor Credit Corporation:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholder’s equity and cash flows present fairly, in all material respects, the financial position of Toyota Motor Credit Corporation and its subsidiaries at March 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2008 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/S/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
June 6,
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TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
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TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Dollars in millions)
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TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
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TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
See Accompanying Notes to Consolidated Financial Statements.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Operations
Toyota Motor Credit Corporation was incorporated in California in 1982 and commenced operations in 1983. References herein to “TMCC” denote Toyota Motor Credit Corporation, and references herein to “we”, “our”, and “us” denote Toyota Motor Credit Corporation and its consolidated subsidiaries. We are wholly-owned by Toyota Financial Services Americas Corporation (“TFSA”), a California corporation, which is a wholly-owned subsidiary of Toyota Financial Services Corporation (“TFSC”), a Japanese corporation. TFSC, in turn, is a wholly-owned subsidiary of Toyota Motor Corporation (“TMC”), a Japanese corporation. TFSC manages TMC’s worldwide financial services operations. TMCC is marketed under the brands of Toyota Financial Services and Lexus Financial Services.
We provide a variety of finance and insurance products to authorized Toyota and Lexus vehicle dealers and, to a lesser extent, other domestic and import franchise dealers (collectively referred to as “vehicle dealers”) and their customers in the United States (excluding Hawaii) (the “U.S.”) and Puerto Rico. We also provide finance products to commercial and industrial equipment dealers (“industrial equipment dealers”) and their customers. Our products fall primarily into the following finance and insurance product categories:
·
Finance - We provide a broad range of finance products including retail financing, leasing, and dealer financing to vehicle and industrial equipment dealers and their customers.
·
Insurance - Through Toyota Motor Insurance Services, Inc. (“TMIS”), a wholly-owned subsidiary, we provide marketing, underwriting, and claims administration related to covering certain risks of vehicle dealers and their customers. We also provide coverage and related administrative services to our affiliates.
Our primary finance and insurance operations are located in the U.S. and Puerto Rico with earning assets principally sourced through Toyota and Lexus vehicle dealers. As of March 31, 2008, approximately 22 percent of managed vehicle retail and lease assets were located in California, 10 percent in Texas, 7 percent in New York, and 6 percent in New Jersey.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of TMCC and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
Cash and Cash Equivalents
Cash equivalents, consisting primarily of money market instruments and debt securities, represent highly liquid investments with original maturities of three months or less.
Investments in Marketable Securities
Investments in marketable securities consist of fixed income and equity securities. Fixed income and equity securities are designated as available-for-sale and carried at fair value using quoted market prices where available with unrealized gains or losses included in accumulated other comprehensive income, net of applicable taxes. We use the specific identification method to determine realized gains and losses related to our investment portfolio. Realized investment gains and losses are reflected in investment and other income in the Consolidated Statement of Income. Premiums and discounts on investments are amortized to investment income using the effective interest method.
We utilize a systematic process to evaluate whether unrealized losses related to investments in fixed income and equity securities are temporary in nature. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. If losses are considered to be other-than-temporary, the cost basis of the security is written down to fair value and the write down is reflected in investment and other income in the Consolidated Statement of Income.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
Retail Receivables and Dealer Financing
Revenues associated with retail receivables and dealer financing are recognized so as to approximate a level rate of return over the contract term. Incremental direct costs incurred in connection with the acquisition of retail receivables and dealer financing, including incentive and rate participation payments made to vehicle dealers, are capitalized and amortized so as to approximate a level rate of return over the term of the related contracts. Retail receivables are reported at their outstanding balance, including accrued interest and incremental direct costs, net of unearned income.
Unearned income includes deferred income on affiliate sponsored special rate program (“subvention”) payments received from affiliates.
Direct Finance Leases
At lease inception, we record the aggregate future minimum lease payments, contractual residual value of the leased vehicle, and unearned income. Unearned income includes deferred subvention payments received from affiliates. Revenue is recognized over the lease term so as to approximate a level rate of return on the outstanding net investment. Incremental direct costs and fees paid or received in connection with the acquisition of direct finance leases, including incentive and rate participation payments made to vehicle dealers and acquisition fees collected from customers, are capitalized and amortized so as to approximate a level rate of return over the term of the related contracts.
Investments in Operating Leases
Investments in operating leases are recorded at cost and depreciated on a straight-line basis over the lease term to the estimated residual value. Operating lease revenue is recorded to income on a straight-line basis over the term of the lease. Incremental direct costs and fees paid or received in connection with the acquisition of vehicle leases, including incentive and rate participation payments made to vehicle dealers and acquisition fees collected from customers, are capitalized and amortized on a straight-line basis over the term of the related contracts. Investments in operating leases are recorded net of deferred subvention payments received from affiliates and deferred acquisition fees collected from customers. Operating lease revenue is recorded net of sales taxes collected from customers.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
Determination of Residual Values
Substantially all of our residual value risk relates to our vehicle lease portfolio. Residual values of lease earning assets are estimated at lease inception by examining external industry data and our own experience. Factors considered in this evaluation include, but are not limited to, expected economic conditions, new vehicle pricing, new vehicle incentive programs, new vehicle sales, product attributes of popular vehicles, the mix of used vehicle supply, the level of current used vehicle values, and fuel prices. Our management periodically reviews the estimated end of term market values of leased vehicles to assess the appropriateness of its carrying values. To the extent the estimated end of term market value of a leased vehicle is lower than the residual value established at lease inception, the residual value of the leased vehicle is adjusted downward so that the carrying value at lease end will approximate the estimated end of term market value. Factors affecting the estimated end of term market value are similar to those considered in the evaluation of residual values at lease inception discussed above. These factors are evaluated in the context of their historical trends to anticipate potential changes in the relationship among those factors in the future. For operating leases, adjustments are made on a straight-line basis over the remaining terms of the leases and are included in depreciation on operating leases in the Consolidated Statement of Income. For direct finance leases, adjustments are made at the time of assessment and are recorded as a reduction of direct finance lease revenues which is included under our retail financing revenues in the Consolidated Statement of Income.
We periodically evaluate the carrying value of operating leases for impairment. If the expected undiscounted future cash flows over the remaining lease terms are less than book value, the operating lease assets are considered to be impaired and a loss is recorded in the current period Consolidated Statement of Income. We use various channels to sell vehicles returned at lease end. We do not re-lease returned vehicles.
Allowance for Credit Losses
We maintain an allowance for credit losses to cover probable losses on our earning assets resulting from the failure of customers or dealers to make required payments. Management evaluates the allowance at least quarterly, considering a variety of factors and assumptions to determine whether the allowance is considered adequate to cover probable losses. The allowance for credit losses is management’s best estimate of the amount of probable credit losses in our existing portfolio.
Increases to the allowance for credit losses are accompanied by corresponding charges to the provision for credit losses. Except where applicable law requires otherwise, account balances are charged off when payments due are no longer expected to be received or the account is 150 days contractually delinquent, whichever occurs first. Related collateral, if recoverable, is repossessed and sold. Any shortfalls between proceeds received from the sale of repossessed collateral and the amounts due from customers are charged against the allowance. The allowance related to our earning assets is included in finance receivables, net and investment in operating leases, net in the Consolidated Balance Sheet. The related provision expense is included in the provision for credit losses in the Consolidated Statement of Income. Charge-offs are presented net of amounts recovered on previously charged off accounts.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
Derivative Instruments
All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow us to net settle positive and negative positions and offset cash collateral held with the same counterparty on a net basis. Changes in the fair value of the derivatives are recorded in interest expense in the Consolidated Statement of Income.
We categorize derivatives as those designated for hedge accounting (“hedge accounting derivatives”) and those that are not designated for hedge accounting (“non-hedge accounting derivatives”). We elect at inception whether to designate a derivative as a hedge accounting derivative. That designation may change based on management’s intentions and changing circumstances. Hedge accounting derivatives are comprised of pay-float interest rate swaps and cross currency interest rate swaps. Non-hedge accounting derivatives are comprised of pay-fixed interest rate swaps, de-designated pay-float interest rate swaps, pay-float interest rate swaps for which hedge accounting has not been elected, interest rate caps, and currency swaps. De-designation of hedge accounting derivatives is further discussed below.
In order to qualify for hedge accounting, a derivative must be considered highly effective at reducing the risk associated with the exposure being hedged. When we designate a derivative in a hedging relationship, we document the risk management objective and strategy. This documentation includes the identification of the hedging instrument, the hedged item and the risk exposure, and how we will assess effectiveness prospectively and retrospectively. We assess the extent to which a hedging instrument is effective at achieving offsetting changes in fair value at least quarterly. We recognize changes in the fair value of derivatives designated in fair value hedging relationships (including foreign currency fair value hedging relationships) in interest expense in the Consolidated Statement of Income along with the fair value changes of the hedged item attributable to the hedged risk. For certain types of existing hedge relationships that meet stringent criteria, we apply the shortcut method, which provides an assumption of zero ineffectiveness that results in equal and offsetting changes in fair value in the Consolidated Statement of Income for both the hedged debt and the hedge accounting derivative.
When the shortcut method is not applied, any ineffective portion of the derivative that is designated as a fair value hedge is recognized as a component of interest expense in the Consolidated Statement of Income. If we elect not to designate a derivative instrument in a hedging relationship, or the relationship does not qualify for hedge accounting treatment, the full change in the fair value of the derivative instrument is recognized as a component of interest expense in the Consolidated Statement of Income with no offsetting adjustment for the economically hedged item.
We review the effectiveness of our hedging relationships quarterly to determine whether the relationships have been and continue to be effective. We use regression analysis to assess the effectiveness of our hedges. When we determine that a hedging relationship is not or has not been effective, hedge accounting is no longer applied. If hedge accounting is discontinued, we continue to carry the derivative instrument as a component of other assets or other liabilities in the Consolidated Balance Sheet at fair value with changes in fair value reported in interest expense in the Consolidated Statement of Income. Additionally, for discontinued fair value hedges, we cease to adjust the hedged item for changes in fair value and amortize the cumulative fair value adjustments recognized in prior periods over the remaining term of the debt.
We will also discontinue the use of hedge accounting if a derivative is sold, terminated, or exercised, or if management determines that designating a derivative under hedge accounting is no longer appropriate (“de-designated derivatives”). De-designated derivatives are included within the category of non-hedge accounting derivatives.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
Foreign Currency Transactions
Certain transactions we have entered into, primarily related to debt, are denominated in foreign currencies. During periods when the debt and the related derivatives do not qualify for hedge accounting, the debt is translated into U.S. dollars using the applicable exchange rate at the transaction date and retranslated at each balance sheet date using the exchange rate in effect at that date. Gains and losses related to foreign currency transactions, primarily debt, are included in interest expense in the Consolidated Statement of Income.
Insurance Earned Premiums and Contract Revenues
Revenues from providing coverage under various contractual agreements are recognized over the term of the coverage in relation to the timing and level of anticipated claims and administrative expenses. Revenues from insurance premiums, net of premiums ceded to reinsurers, are earned over the terms of the respective policies in proportion to the estimated loss development. Management relies on historical loss experience as a basis for establishing earnings factors used to recognize revenue over the term of the contract or policy.
The portion of premiums and contract revenues written applicable to the unexpired terms of the policies is recorded as unearned premiums or unearned contract revenue. Policies and contracts sold are usually in force from 3 to 84 months. Certain costs of acquiring new business, consisting primarily of commissions and premium taxes, are deferred and amortized over the term of the related policies on the same basis as revenues are earned.
Commissions and fees from services provided are recognized over the term of the coverage in relation to the timing of services performed. The effect of subsequent cancellations is recorded as an offset to unearned insurance premiums and unearned contract revenues.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses include amounts paid and accrued for loss events that are known and have been recorded as claims, estimates of losses incurred but not reported that are based on actuarial estimates and historical loss development patterns, and loss adjustment expenses that are expected to be incurred in connection with settling and paying these claims.
Accruals for unpaid losses, losses incurred but not reported, and loss adjustment expenses are included in other liabilities in the Consolidated Balance Sheet. Estimated liabilities are reviewed regularly and we recognize any differences in the periods they are determined. If anticipated losses, loss adjustment expenses, unamortized acquisition costs, and maintenance costs exceed the recorded unearned premium, a premium deficiency is recognized by first charging any unamortized acquisition costs to expense and then by recording a liability for any excess deficiency.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
Reinsurance
On certain covered risks, we purchase on an annual basis reinsurance to protect us against the impact of large, irregularly occurring losses. Reinsurance reduces the magnitude of sudden unpredictable changes in net income. The amounts recoverable from reinsurers are estimated in a manner consistent with the reinsurance policy and include recoverable amounts for paid and unpaid losses. Amounts recoverable from reinsurers on unpaid losses, including incurred but not reported losses, and amounts paid to reinsurers relating to the unexpired portion of reinsurance contracts are included in other assets in the Consolidated Balance Sheet. Ceded insurance-related expenses are recorded as a reduction to insurance losses and loss adjustment expenses in the Consolidated Statement of Income. Amounts recoverable from reinsurers are recorded as a receivable but are not collectible until the losses are paid.
Income Taxes
We use the liability method of accounting for income taxes under which deferred tax assets and liabilities are adjusted to reflect changes in tax rates and laws in the period such changes are enacted resulting in adjustments to the current fiscal year’s provision for income taxes.
TMCC files a consolidated federal income tax return with its subsidiaries and TFSA. TMCC files either separate or consolidated/combined state income tax returns with Toyota Motor North America (“TMA”), TFSA, or subsidiaries of TMCC. State income tax expense is generally recognized as if TMCC and its subsidiaries filed their tax returns on a stand-alone basis. In those states where TMCC and its subsidiaries join in the filing of consolidated or combined income tax returns, TMCC and its subsidiaries are allocated their share of the total income tax expense based on combined allocation/apportionment factors and separate company income or loss. Based on the state tax sharing agreement with TMA, TMCC and its subsidiaries pay for their share of the combined income tax expense and are reimbursed for the benefit of any of their tax losses utilized in the combined state income tax returns.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
New Accounting Standards
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS 161”), which modifies and expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation and requires quantitative disclosures about fair value amounts and gains and losses on derivative instruments. It also requires disclosures about credit-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of SFAS 161 is not expected to have a material impact on our consolidated financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), which requires all entities to report noncontrolling interest in subsidiaries as equity in the Consolidated Financial Statements and to account for transactions between an entity and noncontrolling owners as equity transactions if the parent retains its controlling interest in the subsidiary. SFAS 160 requires expanded disclosures that distinguish between the interests of the controlling owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for TMCC financial statements for the year beginning on January 1, 2009, and early adoption is not permitted. The adoption of SFAS 160 is not expected to have a material impact on our consolidated financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which modifies the accounting for business combinations. The accounting standard requires, with little exceptions, the acquirer in a business combination to recognize 100 percent of the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition-date fair value. SFAS 141R is effective for new acquisitions consummated on or after January 1, 2009, and early adoption is not permitted. The adoption of SFAS 141R is not expected to have a material impact on our consolidated financial condition or results of operations.
In November 2007, the SEC issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings” (“SAB 109”), which provides the SEC Staff’s views on accounting for written loan commitments recorded at fair value under US GAAP. SAB 109 requires that that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 109 was adopted by TMCC on January 1, 2008. The adoption of SAB 109 did not have a material impact on our consolidated financial condition or results of operations.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS 159”), which is effective for us as of April 1, 2008, with earlier adoption permitted. This standard provides an option to irrevocably elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments. SFAS 159 is effective for TMCC as of April 1, 2008. The impact of SFAS 159 is not expected to have a material impact on our consolidated financial condition or results of operations as TMCC has not elected the fair value option for its financial assets and financial liabilities.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over specific entity inputs. The standard establishes a three level hierarchy for fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. SFAS 157 is effective for TMCC as of April 1, 2008. The adoption of SFAS 157 is not expected to have a material impact on our consolidated financial condition or results of operations.
In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”). FSP FAS 157-1 states that SFAS 157 does not apply under SFAS No. 13, “Accounting for Leases,” and its related interpretative accounting pronouncements that address leasing transactions. FSP FAS 157-1 is effective upon the initial adoption of SFAS 157 by TMCC, which is April 1, 2008. The adoption of FSP FAS 157-1 is not expected to have a material impact on our consolidated financial condition or results of operations.
In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157,” (“FSP FAS 157-2”), which defers the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities. FSP FAS 157-2 is effective upon the initial adoption of SFAS 157 by TMCC, which is April 1, 2008. The adoption of FSP FAS 157-2 is not expected to have a material impact on our consolidated financial condition or results of operations.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies (Continued)
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not to be sustained on audit, based on the technical merits of the position. FIN 48 was effective for TMCC as of April 1, 2007. The adoption of FIN 48 did not have a material impact on our consolidated financial statements. For additional information on income taxes, refer to Note 14 - Income Taxes.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Marketable Securities
The amortized cost and estimated fair value of investments in marketable securities and related unrealized gains and losses are as follows (dollars in millions):
1 The balance at March 31, 2008 includes private placement fixed income pooled trusts which had a cost of $530 million and fair
market value of $547 million. The balance at March 31, 2007 includes private placement fixed income pooled trusts which had
a cost of $491 million and fair market value of $492 million.
2 The balance at March 31, 2008 includes $35 million of securities with subprime exposure.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Investments in Marketable Securities (Continued)
At March 31, 2008, the total gross unrealized loss and fair value of investments that have been in a continuous unrealized loss position for 12 consecutive months or more was $3 million and $24 million, respectively. These investments are comprised of corporate debt securities, asset-backed securities and mortgage-backed securities. We evaluated investment securities with fair values less than amortized cost and have determined that the decline in value is temporary and is primarily related to the change in market rates since purchase or to other market anomalies that are expected to correct themselves over time. These securities are predominately all investment grade. We have the ability to hold these securities for a period of time sufficient to recover all gross unrealized losses. Accordingly, we have not recognized any other-than-temporary-impairment for these securities.
At March 31, 2007, there were no marketable securities in our available-for-sale portfolio with material unrealized losses that have been in an unrealized loss position for more than a year.
Proceeds from sales and realized gains and losses on sales from available-for-sale securities are presented below (dollars in millions).
1 Cash flows related to interests retained in securitization transactions are discussed in Note 7 - Sale of Receivables.
2 Realized losses incurred in fiscal 2008, 2007, and 2006 include $5 million, $6 million and $3 million, respectively, in
impairment losses.
The contractual maturities of investments in marketable securities at March 31, 2008 are summarized in the following table (dollars in millions). Prepayments may cause actual maturities to differ from scheduled maturities.
In accordance with statutory requirements, we had on deposit with state insurance authorities U.S. debt securities with amortized cost of $5 million and fair value of $6 million at March 31, 2008 and amortized cost and fair market value of $5 million at March 31, 2007.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Finance Receivables, Net
Finance receivables, net consisted of the following (dollars in millions):
1 Includes direct finance lease receivables.
Contractual maturities on retail receivables and dealer financing are as follows (dollars in millions):
1 Includes direct finance lease receivables. Excludes $124 million of estimated unguaranteed residual values related to direct finance leases.
A significant portion of our finance receivables has historically been repaid prior to contractual maturity dates; contractual maturities as shown above should not be considered as necessarily indicative of future cash collections.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Investments in Operating Leases, Net
Investments in operating leases, net consisted of the following (dollars in millions):
Future minimum lease rentals on operating leases are as follows (dollars in millions):
A significant portion of our operating lease contracts has historically been terminated prior to maturity; future minimum rentals as shown above should not be considered as necessarily indicative of future cash collections.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Allowance for Credit Losses
The following tables provide information related to our allowance for credit losses and aggregate balances 60 or more days past due on finance receivables and investments in operating leases (dollars in millions):
1 Net of recoveries of $84 million, $82 million, and $79 million in fiscal 2008, 2007 and 2006, respectively.
Substantially all retail, direct finance lease, and operating lease receivables do not involve recourse to the dealer in the event of customer
default.
3 Includes accounts in bankruptcy and excludes accounts for which vehicles have been repossessed.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Receivables
We retained servicing rights and earned a contractual servicing fee of 1 percent per annum on the total monthly outstanding principal balance of our securitized retail receivables. In a subordinated capacity, we retained interest-only strips and subordinated securities in these securitizations. The retained interests were held as restricted assets. Investors in the securitizations had no recourse to us beyond our retained subordinated interests, any cash reserve funds, and any amounts drawn on revolving liquidity notes. Our exposure to these retained interests existed until the associated securities were paid in full. As of March 31, 2008, TMCC does not have any outstanding retained interest or securitizations.
Cash Flows from Securitizations
No securitizations were executed during fiscal 2008, 2007 and 2006. The following table summarizes certain cash flows received from, and paid to, the retail securitization trusts outstanding during fiscal 2008, 2007, and 2006 (dollars in millions).
1 Balance represents optional clean-up calls. We exercised our right to repurchase finance receivables from securitization trusts
as provided for in the terms of our securitization agreements.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Sale of Receivables (Continued)
Managed Receivables
Outstanding balances, delinquency amounts and net credit losses for managed receivables, which include both owned and securitized receivables, are summarized as follows (dollars in millions):
Includes $483 million and $715 million of direct finance leases managed at March 31, 2008 and 2007, respectively.
1 Includes $12 million and $6 million of 60 days or more past due amounts for direct finance leases managed at March 31, 2008
and 2007, respectively.
2 Includes $6 million and $10 million of credit losses net of recoveries for direct finance leases managed at March 31, 2008 and
2007, respectively.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Interest Expense and Derivatives and Hedging Activities
The following table summarizes the components of interest expense (dollars in millions):
The following table summarizes the components of the net result from non-hedge accounting, which is included in interest expense (dollars in millions):
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Interest Expense and Derivatives and Hedging Activities (Continued)
The following table summarizes our derivative assets and liabilities, which are included in other assets and other liabilities in the Consolidated Balance Sheet (dollars in millions):
Represents cash received under reciprocal collateral arrangements that we have entered into with certain derivative
counterparties as described below under “Counterparty Credit Risk”.
Counterparty Credit Risk
We enter into reciprocal collateral arrangements with certain counterparties to mitigate our exposure to the credit risk associated with the respective counterparty. A valuation of our position with the respective counterparty is performed monthly. If the market value of our net derivatives position with the counterparty exceeds a specified threshold, the counterparty is required to transfer cash collateral in excess of the threshold to us. Conversely, if the market value of the counterparty's net derivatives position with us exceeds a specified threshold, we are required to transfer cash collateral in excess of the threshold to the counterparty. Our International Swaps and Derivatives Association (“ISDA”) Master Agreements with counterparties contain legal right of offset provisions, and therefore the collateral amounts are netted against derivative assets, which are included in other assets in the Consolidated Balance Sheet. At March 31, 2008 and 2007, we held a net $1.7 billion and $291 million, respectively, in collateral from counterparties, which is included in cash and cash equivalents in the Consolidated Balance Sheet. We are not required to hold the collateral in a segregated account.
Counterparty credit risk of derivative instruments is represented by the fair value of contracts with a positive fair value at March 31, 2008, reduced by the effects of master netting agreements and collateral. At March 31, 2008, substantially all of our derivative instruments were executed with commercial banks and investment banking firms assigned investment grade ratings of "A" or better by nationally recognized statistical rating organizations. We have not experienced a counterparty default and do not currently anticipate non-performance by any of our counterparties, and as such have no reserves related to non-performance as of March 31, 2008. In addition, many of our ISDA Master Agreements with counterparties contain reciprocal ratings triggers providing either party with an option to terminate the agreement and related transactions at market in the event of a ratings downgrade below a specified threshold.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Interest Expense and Derivatives and Hedging Activities (Continued)
A summary of the net counterparty credit exposure by credit rating as of March 31, 2008 and 2007 (net of collateral held) is presented below (dollars in millions):
Note 9 - Other Assets and Other Liabilities
Other assets and other liabilities consisted of the following (dollars in millions):
1 Primarily represents repossessed and off-lease vehicles.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Debt
Debt and the related weighted average contractual interest rates are summarized as follows (dollars in millions):
Includes unamortized premium/discount and effects of foreign currency transaction gains and losses on non-hedged and
de-designated debt denominated in foreign currencies.
Represents the effects of foreign currency transaction gains and losses and fair value adjustments to debt in hedging relationships, and the
unamortized fair value adjustments on the hedged item for terminated fair value hedge accounting relationships.
The carrying value of our notes and loans payable includes unsecured notes denominated in various foreign currencies valued at $23.5 billion and $17.0 billion at March 31, 2008 and 2007, respectively. Concurrent with the issuance of these unsecured notes, we entered into cross currency interest rate swaps or a combination of interest rate swaps coupled with currency basis swaps in the same notional amount to convert non-U.S. currency debt to U.S. dollar denominated payments.
Additionally, the carrying value of our notes and loans payable at March 31, 2008 consists of $13.9 billion of unsecured floating rate debt with contractual interest rates ranging from 0 percent to 6.6 percent and $38.1 billion of unsecured fixed rate debt with contractual interest rates ranging from 0 percent to 15.3 percent. Upon issuance of fixed rate debt, we generally elect to enter into interest rate swaps to convert fixed rate debt to floating rate debt.
As of March 31, 2008, our commercial paper had an average remaining maturity of 51 days. Our notes and loans payable mature on various dates through fiscal 2047.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Debt (Continued)
Scheduled maturities of our debt portfolio are summarized below (dollars in millions):
Interest payments on debt, including net settlements on interest rate swaps, were $2.1 billion, $1.6 billion, and $1.4 billion in fiscal 2008, 2007, and 2006, respectively.
Included in the annual results ended March 31, 2008, are adjustments relating to the prior fiscal year that reduce the pre-tax loss by $13 million. These adjustments are to correct errors made in the prior fiscal year relating to certain derivative transactions and bond issue costs.
Note 11 - Liquidity Facilities and Letters of Credit
Day Credit Agreement
In March 2008, TMCC, Toyota Credit de Puerto Rico Corp. (“TCPR”), and other Toyota affiliates entered into a $5.0 billion 364 day syndicated bank credit facility pursuant to a 364 Day Credit Agreement. The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge and cross default provisions. The 364 Day Credit Agreement may be used for general corporate purposes and was not drawn upon as of March 31, 2008.
Five Year Credit Agreement
In March 2007, TMCC, TCPR, and other Toyota affiliates entered into a $8.0 billion five year syndicated bank credit facility pursuant to a Five Year Credit Agreement. The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge and cross default provisions. The Five Year Credit Agreement may be used for general corporate purposes and was not drawn upon as of March 31, 2008.
Letters of Credit Facilities Agreement
In addition, TMCC has uncommitted letters of credit facilities totaling $55 million at March 31, 2008 and 2007. Of the total credit facilities, $1 million of the uncommitted letters of credit facilities were used at March 31, 2008 and 2007.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Fair Value of Financial Instruments
The fair value of financial instruments at March 31, 2008 and 2007 was estimated using the valuation methodologies described below. Considerable judgment was employed in interpreting market data to develop estimates of fair value; accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of our financial instruments are as follows (dollars in millions):
Includes $10.9 billion and $8.7 billion of variable rate finance receivables at March 31, 2008 and 2007, respectively, whose
carrying amounts approximate fair value as these receivables re-price at prevailing market rates. Excludes $481 million and
$704 million of direct finance leases, net at March 31, 2008 and 2007, respectively, which are not considered financial
instruments.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Fair Value of Financial Instruments (Continued)
The fair value estimates presented herein are based on information available as of March 31, 2008 and 2007. The methods and assumptions used to estimate the fair value of financial instruments are summarized as follows:
Cash and Cash Equivalents
The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these investments.
Investments in Marketable Securities
The fair value of marketable securities was estimated using quoted market prices or discounted cash flow analysis.
Finance Receivables, Net
The fair value of fixed rate finance receivables at March 31, 2008 and 2007 was estimated by discounting expected cash flows using the blended rates of finance receivables originated during the quarters ended March 31, 2008 and 2007, respectively. Management expects to collect all amounts due according to the contractual terms of the finance receivable agreements, less the related allowance for credit losses.
Derivative Assets and Liabilities
The estimated fair value of our derivative assets and liabilities was derived by discounting expected cash flows using quoted market exchange rates, quoted market interest rates, or quoted market prices, as of March 31, 2008 and 2007 as applicable to each instrument. Derivative assets and liabilities are recorded in other assets and other liabilities, respectively, in the Consolidated Balance Sheet.
Debt
The fair value of debt was estimated by discounting expected cash flows using the interest rates at which debt of similar credit quality and maturity would be issued as of March 31, 2008 and 2007. We utilize quoted market exchange rates, quoted market interest rates, or quoted market prices, when appropriate, in developing cash flows. The carrying amount of commercial paper was assumed to approximate fair value due to the short maturity of these instruments.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Pension and Other Benefit Plans
Employees of TMCC, TCPR, and TMCC’s insurance subsidiaries are generally eligible to participate in the TMS pension plan commencing on the first day of the month following hire and are vested after 5 years of continuous employment. Benefits payable under this non-contributory defined benefit pension plan are based upon the employees' years of credited service, the highest average compensation for any 60 consecutive month period out of the last 120 months of employment, and one-half of the highest average fiscal year bonus for the 60 consecutive month period in the last 120 months of employment used to calculate highest average compensation, reduced by a percentage of social security benefits.
Employees of TMCC, TCPR, and TMCC’s insurance subsidiaries are also eligible to participate in the Toyota Savings Plan sponsored by TMS. Participants may elect to contribute up to 30 percent of their base pay on a pre-tax basis, subject to Internal Revenue Code limitations. We match 66-2/3 cents for each dollar the participant contributes, up to 6 percent of base pay. Participants are vested 25 percent each year with respect to our contributions and are fully vested after four years.
In addition, employees of TMCC, TCPR, and TMCC’s insurance subsidiaries are generally eligible to participate in various health and life and other post-retirement benefits sponsored by TMS. In order to be eligible for these benefits, the employee must retire from the company with at least ten years of service and in some cases be at least 55 years of age.
We adopted SFAS 158 as of March 31, 2007 and it did not have a material impact on Shareholder’s Equity.
Our employee benefits expense was $54 million, $63 million, and $61 million for the years ended March 31, 2008, 2007, and 2006, respectively.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Income Tax Provision
The provision for income taxes consisted of the following (dollars in millions):
A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows:
Includes deferred tax benefit due to reduced effective state tax rate and hybrid credit for the years ended March 31, 2007 and 2006.
2 The effective tax rate at March 31, 2008 represents a tax benefit. The effective tax rates at March 31, 2007 and 2006 represent tax provision
expenses.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Income Tax Provision (Continued)
The deferred federal and state income tax liabilities are as follows (dollars in millions):
Our deferred tax liabilities and assets consisted of the following (dollars in millions):
We have estimated cumulative federal tax net operating loss carryforwards of over $500 million available at March 31, 2008. At March 31, 2008, we have a deferred tax asset of over $50 million for state tax net operating loss carryforwards which expire in fiscal 2009 through fiscal 2028. In addition, at March 31, 2008, we have a deferred tax asset for federal and state hybrid credits of over $50 million. The state tax net operating loss and state hybrid credits are reduced by a valuation allowance of $6 million. We received a net income tax refund of over $130 million in fiscal 2008 and over $140 million in fiscal 2007.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Income Tax Provision (Continued)
At March 31, 2008, we had a receivable of $35 million for TMA’s share of the income tax in those states where we filed consolidated/combined returns with TMA and/or its subsidiaries. At March 31, 2007, the receivable amount was $21 million.
Our effective tax rate was 43.69 percent and 34.86 percent during fiscal 2008 and fiscal 2007, respectively. We note that for fiscal 2008 TMCC had a pre-tax book loss resulting in a tax benefit for the year. This tax benefit was further increased by federal and state hybrid vehicle tax credits.
We adopted the provision of FIN 48, Accounting for Uncertainty in Income Taxes, on April 1, 2007. FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. Implementation of FIN 48 did not result in a cumulative effect adjustment to retained earnings at the date of adoption.
The change in unrecognized tax benefits in fiscal 2008 is as follows (dollars in millions):
Of the $14 million of unrecognized tax benefits at March 31, 2008, approximately $4 million of the unrecognized tax benefits would, if recognized, affect the effective tax rate. The deductibility of the remaining $10 million of unrecognized tax benefits is highly certain, but there is uncertainty about the timing of such deductibility.
We accrue interest and penalties, if applicable, related to uncertain income tax positions in interest expense and other operating expenses, respectively. For the year ended March 31, 2008, $2 million was accrued for interest and penalties.
As of March 31, 2008, federal income tax returns from fiscal year end March 31, 2004, through fiscal year end March 31, 2007 remain subject to examination. California franchise tax returns are also subject to examination for the same period.
In the normal course of business, our tax filings are examined by various tax authorities, including the Internal Revenue Service (“IRS”). During fiscal 2008, the IRS concluded its examination of the taxable periods ended September 30, 1997 through March 31, 2003. Our allocated tax and interest refund was approximately $79 million. The IRS continues to examine the taxable years ended March 31, 2004 through March 31, 2006.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Commitments and Contingencies
Commitments and Guarantees
We have entered into certain commitments and guarantees described below. The maximum amounts under these commitments and guarantees are summarized in the table below (dollars in millions):
1 Excludes $9.2 billion and $8.1 billion of wholesale financing lines not considered to be contractual commitments at March 31,
and 2007, respectively, of which $6.8 billion and $5.2 billion were outstanding at March 31, 2008 and 2007, respectively.
2 Includes $62 million and $69 million in facilities lease commitments with affiliates at March 31, 2008 and 2007, respectively.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Commitments and Contingencies (Continued)
Commitments
We provide fixed and variable rate credit facilities to vehicle and industrial equipment dealers. These credit facilities are typically used for business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements. These loans are typically collateralized with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate. We obtain a personal guarantee from the vehicle or industrial equipment dealer or a corporate guarantee from the dealership when deemed prudent. Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure under such agreements. We price the credit facilities to reflect the credit risks assumed in entering into the credit facility. Amounts drawn under these facilities are reviewed for collectibility quarterly, in conjunction with our evaluation of the allowance for credit losses. We also provide financing to various multi-franchise dealer organizations, referred to as dealer groups, often as part of a lending consortium, for wholesale, working capital, real estate, and business acquisitions. Of the total credit facilities available to vehicle and industrial equipment dealers, $4.1 billion and $2.9 billion were outstanding at March 31, 2008 and 2007, respectively, and were recorded in finance receivables, net in the Consolidated Balance Sheet.
We are party to a 15-year lease agreement with TMS for our headquarters location in the TMS headquarters complex in Torrance, California. At March 31, 2008, minimum future commitments under lease agreements to which we are a lessee, including those under the agreement discussed above, are as follows: fiscal years ending 2009 - $22 million; 2010 - $19 million; 2011 - $15 million; 2012 - $12 million; 2013 $9 million; and thereafter - $31 million.
Guarantees and Other Contingencies
TMCC has guaranteed certain bond obligations relating to two affiliates totaling $148 million of principal and interest that were issued by Putnam County, West Virginia and Gibson County, Indiana. The bonds mature in the following fiscal years: 2028 - $20 million; 2029 - $50 million; 2030 - $38 million; 2031 - $30 million; and 2032 - $10 million. TMCC would be required to perform under the guarantees in the event of failure by the affiliates to fulfill their obligations; bankruptcy involving the affiliates or TMCC; or failure to observe any covenant, condition, or agreement under the guarantees by the affiliates, bond issuers, or TMCC.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Commitments and Contingencies (Continued)
These guarantees include provisions whereby TMCC is entitled to reimbursement by the affiliates for amounts paid. TMCC receives an annual fee of $102,000 for guaranteeing such payments. TMCC has not been required to perform under any of these affiliate bond guarantees as of March 31, 2008 and 2007. The fair value of these guarantees as of March 31, 2008 and 2007 was approximately $1 million. As of March 31, 2008 and 2007, no liability amounts have been recorded related to the guarantees as management has determined that it is not probable that we would be required to perform under these affiliate bond guarantees.
Indemnification
In the ordinary course of business, we enter into agreements containing indemnification provisions standard in the industry related to several types of transactions, including, but not limited to, debt funding, derivatives, securitization transactions, and our vendor and supplier agreements. Performance under these indemnities would occur upon a breach of the representations, warranties or covenants made or given, or a third party claim. In addition, we have agreed in certain debt and derivative issuances, and subject to certain exceptions, to gross-up payments due to third parties in the event that withholding tax is imposed on such payments. In addition, certain of our funding arrangements would require us to pay lenders for increased costs due to certain changes in laws or regulations. Due to the difficulty in predicting events which could cause a breach of the indemnification provisions or trigger a gross-up or other payment obligation, we are not able to estimate our maximum exposure to future payments that could result from claims made under such provisions. We have not made any material payments in the past as a result of these provisions, and as of March 31, 2008, we determined that it is not probable that we will be required to make any material payments in the future. As of March 31, 2008 and 2007, no amounts have been recorded under these indemnifications.
Litigation
Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business. Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices. Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies. Our 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. We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts reserved for these claims. However, based on information currently available, the advice of counsel, and established reserves, our management expects that the ultimate liability resulting therefrom will not have a material adverse effect on our consolidated financial statements. We caution that the eventual development, outcome and cost of legal proceedings are by their nature uncertain and subject to many factors, including but not limited to, the discovery of facts not presently known to us or determinations by judges, juries or other finders of fact which do not accord with our evaluation of the possible liability from existing litigation.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Commitments and Contingencies (Continued)
Repossession Class Actions
A cross-complaint alleging a class action in the Superior Court of California Stanilaus County, Garcia v. Toyota Motor Credit Corporation, filed in January 2007, claims that the Company's post-repossession notice failed to comply with the Reese-Levering Automobile Sales Finance Act of California ("Reese-Levering"). An additional cross-complaint alleging a class action in the Superior Court of California San Francisco County, Aquilar and Smith v. Toyota Motor Credit Corporation, filed in February 2008, contains similar allegations claiming that the Company's post-repossession notices failed to comply with Reese-Levering. The plaintiffs are seeking injunctive relief, restitution and/or disgorgement, as well as damages in the Aquilar matter. The Company has filed a petition to consolidate these cases as they present nearly identical questions of law and fact. The Company believes it has strong defenses to these claims.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Related Party Transactions
The tables below summarize amounts included in our Consolidated Balance Sheet and Statement of Income under various related party agreements or relationships (dollars in millions):
1 Represents wholesale flooring loans to certain dealerships owned by Toyota Material Handling, U.S.A., Inc. (“TMHU”) and amounts due
under industrial equipment leasing arrangements (classified as direct finance leases) with various affiliates.
2 Certain officers, directors, and other members of our management have received mortgage loans from us secured by residential real
property.
3 Subvention receivables represent amounts due from TMS and other affiliates in support of retail, lease, and industrial equipment subvention
programs offered by us. Deferred subvention income represents the unearned portion of amounts received from these transactions.
4 Represents the investment in operating leases of industrial equipment leased to Toyota Logistics Services and other affiliates.
5 Represents balances primarily due from Toyota Credit Canada Inc. (“TCCI”) and Toyota Financial Savings Bank (“TFSB”).
6 Represents balances due from affiliates arising from various transactions primarily relating to affiliate insurance premiums and
commissions, income taxes, shared services charges, employee benefits, and credit support fees.
7 Represents balances due to affiliates arising from various transactions including credit support fees due to TFSC and Wholesale Flooring
arrangements. TMCC and TCPR provide wholesale financing to vehicle dealers, and as a result of funding the loans, have payables to
TMS and TDPR, respectively.
8 Represents balance due to Toyota Financial Services Americas Corporation (“TFSA”) under its credit agreement with us.
9 TMCC and TFSA are parties to reciprocal credit agreements which allow each company to borrow up to $200 million from the
other. Advances to TFSA are recorded as reductions of retained earnings and are reclassified to notes receivable from affiliates upon
TFSA’s settlements of its advances from TMCC.
No dividends were declared or paid during fiscal 2008. During fiscal 2007, our Board of Directors declared and paid a cash dividend of
$130 million to TFSA.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Related Party Transactions (Continued)
1 Represents the earned portion of retail, lease, and industrial equipment subvention programs.
2 Represents fees incurred under a credit support agreement with TFSC.
3 Represent primarily TMIS’ revenues for administrative services and various levels and types of insurance coverage provided to TMS. This
includes the warranty coverage for TMS’ certified pre-owned vehicle program and various umbrella liability policies. TMIS, through its
wholly-owned subsidiary, provides umbrella liability insurance to TMS and affiliates covering certain dollar value layers of risk above
various primary or self-insured retentions. On all layers in which TMIS has provided coverage, 99 percent of the risk has been ceded to
various reinsurers.
4 TMCC and TMS are parties to a shared services agreement which covers certain technological and administrative services, such as
information systems support, facilities, insurance coverage, and corporate services provided by each entity to the other. In addition, we
pay rent charges to TMS for our headquarters facility in the TMS headquarters complex in Torrance, California and our Central Customer
Service Center.
5 Certain employees are eligible to participate in pension and other benefit plans that are sponsored by TMS. TMS allocates costs to us based
on the total number of participating or eligible employees at TMCC, TMIS and TCPR.
Notes Receivable from Affiliates
During fiscal 2008, TMCC and Toyota Financial Savings Bank (“TFSB”) entered into a promissory note agreement which allows TFSB to borrow up to $400 million with terms up to 10 years at agreed competitive rates. The amount outstanding with TFSB at March 31, 2008 was $271 million.
During fiscal 2008, TMCC also entered into uncommitted loan finance agreements with Toyota Credit Canada Inc. (“TCCI”) and Toyota Motor Finance (Netherlands) B.V. (“TMFNL”) under which TMCC may make loans to TMFNL and TCCI. The terms are determined at the time of each loan based on business factors and market conditions. The amount outstanding with TCCI at March 31, 2008 was $431 million. No amount was outstanding from TMFNL at March 31, 2008.
TCPR has extended a $110 million revolving line of credit to Toyota de Puerto Rico Corp. (“TDPR”), a wholly-owned subsidiary of TMS. The revolving line of credit has a one-year renewable term, with interest due monthly. Any loans outstanding under the revolving line of credit are not guaranteed by TMS and are unsecured. The amount outstanding with TDPR at March 31, 2008 was $9 million. No amount was outstanding with TDPR at March 31, 2007.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Related Party Transactions (Continued)
Credit Support Fees Incurred
In connection with the creation of TFSC and the transfer of ownership of TMCC from TMS to TFSA, TMC and TFSC entered into a credit support agreement (the “TMC Credit Support Agreement”). Under the terms of this agreement, TMC has agreed to certain ownership, subsidiary net worth, and debt service provisions in support of TFSC operations. The agreement is not a guarantee by TMC of any securities or obligations of TFSC.
Concurrent with the execution of the TMC Credit Support Agreement, TFSC and TMCC entered into a credit support agreement (the “TFSC Credit Support Agreement”). Under this agreement, TFSC agreed to certain ownership, subsidiary net worth, and debt service provisions similar to those under the TMC Credit Support Agreement. This agreement is not a guarantee by TFSC of any securities or other obligations of TMCC. The TMC Credit Support Agreement and the TFSC Credit Support Agreement are governed by, and construed in accordance with, the laws of Japan.
TCPR is the beneficiary of a credit support agreement with TFSC containing the same provisions as the TFSC Credit Support Agreement described above. This agreement is not a guarantee by TFSC of any securities or other obligations of TCPR.
In addition, TMCC and TCPR have each entered into agreements to pay TFSC a semi-annual fee which is based upon the weighted average outstanding amount of bonds and other liabilities or securities entitled to credit support.
Shared services charges and other expenses
TMCC and Toyota Financial Savings Bank (“TFSB”) are parties to a shared services agreement. Under the agreement, TMCC provides certain services to TFSB, including certain marketing, administrative, systems, and operational support in exchange for TFSB’s willingness to make available certain financial products and services to TMCC’s customers and dealers meeting TFSB’s credit worthy standards.
TMCC provides administrative support in the form of shared services to support the operations of Toyota Financial Services Securities USA Corporation (“TFSS”), an affiliate of TMCC.
TMCC and TMS are parties to a repurchase agreement, which provides that TMS will arrange for the repurchase of new Toyota and Lexus vehicles at the aggregate cost financed by TMCC in the event of vehicle dealer default under floorplan financing. TMCC is also a party to similar agreements with TMHU, HINO, and other domestic and import manufacturers. No vehicles were repurchased under these agreements during fiscal 2008.
TMCC has guaranteed the payments of principal and interest with respect to the bonds of manufacturing facilities of certain affiliates. TMCC receives an annual fee of $102,000 for guaranteeing such payments. The nature, business purpose, and amounts of these guarantees are described in Note 15 - Commitments and Contingencies.
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Segment Information
Our reportable segments include finance and insurance operations. Finance operations include retail financing, leasing, and dealer financing provided to authorized vehicle dealers and their customers in the U.S. and the Commonwealth of Puerto Rico. Insurance operations are performed by TMIS and its subsidiaries. The principal activities of TMIS include marketing, underwriting, claims administration, and providing certain insurance and contractual coverage to Toyota and Lexus vehicle dealers and their customers. In addition, TMIS insures and reinsures certain TMS and TMCC risks, including warranty coverage for TMS’ certified pre-owned vehicle program, various umbrella liability policies, and insurance of vehicle dealers’ inventory financed by TMCC. The finance and insurance operations segment information presented below includes allocated corporate expenses for the respective segments. Other amounts include financing provided to industrial equipment dealers and intersegment eliminations and reclassifications.
The accounting policies of the operating segments are the same as those described in Note 2 - Summary of Significant Accounting Policies. Currently, our finance and insurance segments operate only in the U.S. and the Commonwealth of Puerto Rico. Substantially all of our finance and insurance segments are located within the U.S.
Financial information for our reportable operating segments for the years ended or at March 31 is summarized as follows (dollars in millions):
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Segment Information (Continued)
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TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Selected Quarterly Financial Data (Unaudited)
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There is nothing to report with regard to this item.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (“the Exchange Act”) that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s (“SEC”) rules and regulations. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is accumulated and communicated to management including its principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of our “disclosure controls and procedures” as of the end of the period covered by this report. Based on this evaluation, the CEO and CFO concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed under the Exchange Act was recorded, processed, summarized and reported within the time periods specified by the SEC.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.
Management conducted, under supervision of our CEO and CFO, an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on the assessment performed, management concluded that as of March 31, 2008, our internal control over financial reporting was effective based upon the COSO criteria.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
There were no changes in our internal controls over financial reporting that occurred during fiscal 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
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PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
TMCC has omitted certain information in this section pursuant to General Instruction I(2) of Form 10-K.
The following table sets forth certain information regarding the directors and executive officers of TMCC as of April 30, 2008.
Name
Age
Position
George E. Borst
Director, President and Chief Executive Officer, TMCC;
Director, President and Chief Operating Officer, TFSA;
Director, TFSC
Ichiro Yajima
Director, Executive Vice President and
Treasurer, TMCC;
Director, Executive Vice President and Treasurer, TFSA
David Pelliccioni
Director, Senior Vice President and
Secretary, TMCC
John F. Stillo
Group Vice President and Chief Financial Officer, TMCC;
Group Vice President and Chief Financial Officer, TFSA
Thomas A. Kiel
Vice President and Chief Accounting Officer, TMCC
Hideto Ozaki
Director, TMCC;
Chairman of the Board of Directors and
Chief Executive Officer, TFSA;
Director, President and Chief Executive Officer, TFSC
Yukitoshi Funo
Director, TMCC;
Chairman of the Board of Directors and
Chief Executive Officer, TMS;
Senior Managing Director, TMC Board of Directors
James E. Lentz III
Director, TMCC;
Director and President, TMS
Takeshi Suzuki
Director, TMCC;
Director, TFSC;
Senior Managing Director, TMC Board of Directors
Eiji Hirano
Director, TMCC;
Director and Executive Vice President, TFSC
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All directors of TMCC are elected annually and hold office until their successors are elected and qualified. Officers are elected annually and serve at the discretion of the Board of Directors.
Mr. Borst was named Director, President, and Chief Executive Officer of TMCC in October 2000. Mr. Borst was named Director, President, and Chief Operating Officer of TFSA in April 2004. Mr. Borst was named Director of TFSC in June 2003. From August 2000 to March 2004, Mr. Borst served as Director, Secretary, and Chief Financial Officer of TFSA. Mr. Borst has been employed with TMCC and TMS, in various positions, since 1985.
Mr. Yajima was named Director, Executive Vice President, and Treasurer of TMCC in January 2008 and Director, Executive Vice President, and Treasurer of TFSA in January 2008. From January 2005 to December 2007, Mr. Yajima served as Senior Vice President for Sales Finance Group of Toyota Financial Service Corporation. From January 2004 to December 2004, Mr. Yajima was General Manager for the General Affairs & Human Resources Department of Toyota Finance Corporation. Mr. Yajima has been employed with TMC, in various positions worldwide, since 1980.
Mr. Pelliccioni was named Director, Senior Vice President - Sales, Marketing and Operations and Secretary of TMCC in January, 2007. From January 2002 to January 2007 Mr. Pelliccioni was Director, Group Vice President - Sales, Marketing and Operations and Secretary of TMCC. From August 2001 to January 2002, Mr. Pelliccioni was Vice President - Sales, Marketing and Operations of TMCC. From May 1999 to August 2001, Mr. Pelliccioni was Vice President - Field Operations of TMCC. Mr. Pelliccioni has been employed with TMCC and TMS, in various positions, since 1988.
Mr. Stillo was named Group Vice President and Chief Financial Officer of TMCC in December 2006. From April 2004 to December 2006, Mr. Stillo was Vice President and Chief Financial Officer of TMCC. Mr. Stillo was named Group Vice President and Chief Financial Officer of TFSA in January 2007. From April 2004 to December 2006, Mr. Stillo was Vice President and Chief Financial Officer of TFSA. From June 2000 to January 2001, Mr. Stillo was Executive Vice President, Investments and Capital Planning at Associates First Capital Corporation.
Mr. Kiel joined TMCC as Chief Accounting Officer in 2004, and was promoted to Vice President and Chief Accounting Officer in December 2006. Prior to joining TMCC, Mr. Kiel served as Senior Vice President - Line of Business Risk Finance Executive at Bank of America Corporation from March 2004 to October 2004, and previously served at Bank of America Corporation as Senior Vice President - Corporate Analysis and Reporting from December 2002 to March 2004, Senior Vice President - Accounting Policy from July 2002 to December 2002, and Vice President - Accounting Policy from April 2000 to June 2002.
Mr. Ozaki was named Director of TMCC in October 2000 and Director, President and Chief Executive Officer of TFSC in July 2000. Mr. Ozaki was named Chairman of the Board of Directors and Chief Executive Officer of TFSA in April 2004. From August 2000 to March 2004, he served as Director and President of TFSA. Mr. Ozaki has been employed with TFSC and TMC, in various positions, since 1968.
Mr. Funo was named Director of TMCC and Chief Executive Officer and Chairman of the Board of Directors of TMS in June 2003. Mr. Funo was named Senior Managing Director of TMC in 2004. In 2000, Mr. Funo was named a Director of TMC, a title that was changed to Managing Officer in 2003. In that role he continued to supervise Toyota’s operations for the Americas and was named Chief Officer, The Americas Operations in June 2007. In 2001, his duties were expanded to include overseeing government and industrial affairs. Mr. Funo has been employed with TMC, in various positions worldwide, since 1970.
Mr. Lentz was named President of TMS in November 2007. Mr. Lentz is currently a Director of TMCC and TMS and prior to his promotion to President, he served as Executive Vice President of TMS from July 2006 to November 2007. Prior to this, he held the position of Group Vice President of Marketing -
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Toyota Division. From 2002 to 2005, Mr. Lentz was the Group Vice President and General Manager of Toyota Division. In addition, from 2001 to 2002 Mr. Lentz was the Vice President of Scion. From 2000 to 2001, Mr. Lentz was the Vice President and General Manager of the Los Angeles Region. Mr. Lentz has been employed with TMS, in various positions, since 1982.
Mr. Suzuki was named Director of TMCC in June 2005. From June 2001 to June 2005, he served as Director of TFSA. Mr. Suzuki was named Senior Managing Director of TMC in June 2004. In 2000, he was named a Director of TFSC as well as a Director of TMC, a title that was changed to Managing Officer in 2003. Mr. Suzuki has been employed with TMC, in various positions, since 1970.
Mr. Hirano was named as a Director of TFSC and Executive Vice President in June 2006. He was named as a Director of TMCC in September 2007. From June 2002 to June 2006 he served as Assistant Governor at Bank of Japan.
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ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
TMCC has omitted this section pursuant to General Instruction I(2) of Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
TMCC has omitted this section pursuant to General Instruction I(2) of Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
TMCC has omitted this section pursuant to General Instruction I(2) of Form 10-K.
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ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table represents aggregate fees billed to us by PricewaterhouseCoopers LLP, our principal accounting firm (dollars in thousands).
Audit fees billed for fiscal 2008 and 2007 include the audits of our consolidated financial statements included in our Annual Reports on Form 10-K, reviews of our consolidated financial statements included in our Quarterly Reports on Form 10-Q, providing comfort letters and consents in connection with our funding transactions, and assistance with interpretation of various accounting standards.
Tax fees billed in fiscal 2008 and fiscal 2007 primarily include tax reporting software, tax planning services, assistance in connection with tax audits, and a tax compliance system license.
Other fees billed in fiscal 2008 and 2007 include industry research and translation services performed in connection with our funding transactions.
We were not billed for any audit-related fees in either fiscal 2008 or fiscal 2007.
Auditor Fees Pre-approval Policy
The Audit Committee has adopted a formal policy concerning approval of audit and non-audit services to be provided by our independent auditor. The policy requires that all services provided to us by PricewaterhouseCoopers LLP, our independent auditor, including audit services and permitted audit-related and non-audit services, be pre-approved by the Committee. All the services provided in fiscal 2008 and 2007 were pre-approved by the Audit Committee.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1)Financial Statements
Included in Part II, Item 8., “Financial Statements and Supplementary Data” of this Form 10-K on pages 61 through 101.
(b)Exhibits
See Exhibit Index on page 109.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Torrance, State of California, on the 6th day of June 2008.
TOYOTA MOTOR CREDIT CORPORATION
By /s/ George E. Borst
George E. Borst
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on the 6th day of June 2008.
Signature
Title
/s/ George E. Borst
George E. Borst
President and Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Ichiro Yajima
Ichiro Yajima
Executive Vice President
and Treasurer and Director
/s/ John F. Stillo
John F. Stillo
Group Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Thomas A. Kiel
Thomas A. Kiel
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
/s/ David Pelliccioni
David Pelliccioni
Director
/s/ Yukitoshi Funo
Yukitoshi Funo
Director
/s/ James Lentz
James Lentz
Director
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EXHIBIT INDEX
Exhibit Number
Description
Method 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)
4.1
Issuing and Paying Agency Agreement dated August 1, 1990 between TMCC and Bankers Trust Company
(4)
4.2(a)
Indenture dated as of August 1, 1991 between TMCC and The Chase Manhattan Bank, N.A
(5)
4.2(b)
First Supplemental Indenture dated as of October 1, 1991 among TMCC, Bankers Trust Company and The Chase Manhattan Bank, N.A
(6)
_______________________
(1)
Incorporated herein by reference to the same numbered Exhibit filed with our Registration Statement on Form S-1, File No. 33-22440.
(2) Incorporated herein by reference to the same numbered Exhibit filed with our Report on Form 10-K for the year ended September 30, 1989, Commission File number 1-9961.
(3)
Incorporated herein by reference to the same numbered Exhibit filed with our Report on Form 10-Q for the quarter ended December 31, 2000, Commission File number 1-9961.
(4)
Incorporated herein by reference to Exhibit 4.2 filed with our Report on Form 10-K for the year ended September 30, 1990, Commission File number 1-9961.
(5)
Incorporated herein by reference to Exhibit 4.1(a), filed with our Registration Statement on Form S-3, File No. 33-52359.
(6)
Incorporated herein by reference to Exhibit 4.1 filed with our Current Report on Form 8-K dated October 16, 1991, Commission File No. 1-9961.
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EXHIBIT INDEX
Exhibit Number
Description
Method of Filing
4.2(c)
Second Supplemental Indenture, dated as of March 31, 2004, among TMCC, JPMorgan Chase Bank (as successor to The Chase Manhattan Bank, N.A.) and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company)
(7)
4.3
Agency Agreement, dated September 28, 2007, among Toyota Motor Finance (Netherlands), B.V., Toyota Credit Canada Inc., Toyota Finance Australia and TMCC, The Bank of New York and The Bank of New York (Luxembourg) S.A.
(8)
4.4
TMCC has outstanding certain long-term debt as set forth in Note 10 - Debt of the Notes to Consolidated Financial Statements. Not filed herein as an exhibit, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934, is any instrument which defines the rights of holders of such long-term debt, where the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of TMCC and its subsidiaries on a consolidated basis. TMCC agrees to furnish copies of all such instruments to the Securities and Exchange Commission upon request
10.1
Five Year Credit Agreement, dated as of March 28, 2007, among Toyota Motor Credit Corporation, Toyota Credit de Puerto Rico Corp., Toyota Credit Canada Inc., Toyota Motor Finance (Netherlands) B.V., Toyota Financial Services (UK) PLC, Toyota Kreditbank GMBH and Toyota Leasing GMBH, as Borrowers, Bank of America, N.A., as Administrative Agent, Swing Line Agent and Swing Line Lender, each lender from time to time party thereto, Citigroup Global Markets Inc and Banc of America Securities LLC, as Joint Lead Arrangers and Joint Book Managers, Citicorp USA, Inc., as Syndication Agent and Swing Line Lender, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas and JPMorgan Chase Bank, N.A., as Documentation Agents
(9)
_______________________
(7)
Incorporated herein by reference to Exhibit 4.1(c) filed with our Registration Statement on Form S-3, Commission File No. 333-113680.
(8)
Incorporated herein by reference to Exhibit 4.1 filed with our Current Report on Form 8-K dated September 28, 2007, Commission File Number 1-9961.
(9)
Incorporated herein by reference to Exhibit 10.2 filed with our Current Report on Form 8-K dated April 2, 2007, Commission File No. 1-9961.
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EXHIBIT INDEX
Exhibit Number
Description
Method of Filing
10.3
Credit Support Agreement dated July 14, 2000 between TFSC and TMC
(11)
10.4
Credit Support Agreement dated October 1, 2000 between TMCC and TFSC
(12)
10.5
Amended and Restated Repurchase Agreement dated effective as of October 1, 2000, between TMCC and TMS
(13)
10.6
Shared Services Agreement dated October 1, 2000 between TMCC and TMS
(14)
10.7(a)
Credit Support Fee Agreement dated March 30, 2001 between TMCC and TFSC
(15)
10.7(b)
Amendment No. 1 to Credit Support Fee Agreement dated June 17, 2005 between TMCC and TFSC
(16)
10.8
Form of Indemnification Agreement between TMCC and its directors and officers
(17)
10.9
Day Credit Agreement, dated as of March 26, 2008, among Toyota Motor Credit Corporation, Toyota Credit de Puerto Rico Corp., Toyota Credit Canada Inc., Toyota Motor Finance (Netherlands) B.V., Toyota Financial Services (UK) PLC, Toyota Kreditbank GMBH and Toyota Leasing GMBH, as Borrowers, Bank of America, N.A., as Administrative Agent, Swing Line Agent and Swing Line Lender, each lender from time to time party thereto, Citigroup Global Markets Inc and Banc of America Securities LLC, as Joint Lead Arrangers and Joint Book Managers, Citibank, N.A., as Syndication Agent and Swing Line Lender, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., BNP Paribas and JPMorgan Chase Bank, N.A., as Documentation Agents.
(18)
________________________
(11)
Incorporated herein by reference to Exhibit 10.9 filed with our Report on Form 10-K for the year ended September 30, 2000,
Commission File No. 1-9961.
(12)
Incorporated herein by reference to Exhibit 10.10 filed with our Report on Form 10-K for the year ended September 30, 2000, Commission File No. 1-9961.
(13)
Incorporated herein by reference to Exhibit 10.11 filed with our Report on Form 10-K for the fiscal year ended March 31, 2001, Commission File No. 1-9961.
(14)
Incorporated herein by reference to Exhibit 10.12 filed with our Report on Form 10-K for the year ended September 30, 2000, Commission File No. 1-9961.
(15)
Incorporated herein by reference to Exhibit 10.13(a), respectively, filed with our Report on Form 10-K for the fiscal year ended March 31, 2001, Commission File No. 1-9961.
(16)
Incorporated herein by reference to Exhibit 10.13(b) filed with our Report on Form 10-K for the year ended March 31, 2005, Commission File No. 1-9961.
(17) Incorporated herein by reference to Exhibit 10.6 filed with our Registration Statement on Form S-1, Commission File No. 33-22440.
(18) Incorporated herein by reference to Exhibit 10.1 filed with our Current Report on Form 8-K dated April 1, 2008.
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EXHIBIT INDEX
Exhibit Number
Description
Method of Filing
12.1
Calculation of ratio of earnings to fixed charges
Filed Herewith
23.1
Consent of Independent Registered Public Accounting Firm
Filed Herewith
31.1
Certification of Chief Executive Officer
Filed Herewith
31.2
Certification of Chief Financial Officer
Filed Herewith
32.1
Certification pursuant to 18 U.S.C. Section 1350
Furnished Herewith
32.2
Certification pursuant to 18 U.S.C. Section 1350
Furnished Herewith
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