UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from _______________ to _______________
Commission File Number
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of July 31, 2023, the number of outstanding shares of capital stock, no par value per share, of the registrant was
Reduced Disclosure Format
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
TOYOTA MOTOR CREDIT CORPORATION
FORM 10-Q
For the quarter ended June 30, 2023
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions)
(Unaudited)
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Three months ended |
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June 30, |
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2023 |
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2022 |
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Financing revenues: |
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Operating lease |
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$ |
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$ |
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Retail |
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Dealer |
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Total financing revenues |
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Depreciation on operating leases |
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Interest expense |
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Net financing revenues |
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Voluntary protection contract revenues and |
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Investment and other income (loss), net |
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Net financing revenues and other revenues |
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Expenses: |
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Provision for credit losses |
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Operating and administrative |
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Voluntary protection contract expenses and insurance losses |
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Total expenses |
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Income before income taxes |
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Provision for income taxes |
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Net income |
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$ |
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$ |
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(Unaudited)
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Three months ended |
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June 30, |
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2023 |
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2022 |
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Net income |
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$ |
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$ |
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Other comprehensive income, net of tax |
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Net unrealized losses on available-for-sale |
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Other comprehensive loss |
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Comprehensive income |
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$ |
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$ |
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Refer to the accompanying Notes to Consolidated Financial Statements.
3
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in millions except share data)
(Unaudited)
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June 30, |
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March 31, |
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2023 |
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2023 |
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ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash and cash equivalents |
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Investments in marketable securities |
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Finance receivables, net of allowance for credit losses of $ |
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Investments in operating leases, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDER’S EQUITY |
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Debt |
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$ |
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$ |
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Deferred income taxes |
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Other liabilities |
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Total liabilities |
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(Refer to Note 9) |
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Shareholder’s equity: |
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Capital stock, |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Retained earnings |
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Total shareholder's equity |
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Total liabilities and shareholder's equity |
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$ |
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$ |
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The following table presents the assets and liabilities of our consolidated variable interest entities (Refer to Note 8).
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June 30, |
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March 31, |
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2023 |
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2023 |
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ASSETS |
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Finance receivables, net |
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$ |
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$ |
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Investments in operating leases, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES |
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Debt |
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$ |
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$ |
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Other liabilities |
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Total liabilities |
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$ |
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$ |
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Refer to the accompanying Notes to Consolidated Financial Statements.
4
TOYOTA MOTOR CREDIT CORPORATION
(Dollars in millions)
(Unaudited)
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Three months ended June 30, 2023 |
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Accumulated |
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Additional |
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other |
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Capital |
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paid-in |
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comprehensive |
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Retained |
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stock |
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capital |
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loss |
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earnings |
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Total |
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net income |
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Other comprehensive loss, net of tax |
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( |
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( |
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Balance at June 30, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Three months ended June 30, 2022 |
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Accumulated |
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Additional |
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other |
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Capital |
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paid-in |
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comprehensive |
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Retained |
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stock |
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capital |
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loss |
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earnings |
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Total |
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Balance at March 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net income |
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Other comprehensive loss, net of tax |
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( |
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( |
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Balance at June 30, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Refer to the accompanying Notes to Consolidated Financial Statements.
5
TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
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Three months ended June 30, |
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2023 |
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2022 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating |
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Depreciation and amortization |
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Recognition of deferred income and fees |
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( |
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( |
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Provision for credit losses |
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Amortization of deferred costs |
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Foreign currency and other adjustments to the carrying value of financial instruments, net |
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( |
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Net (gains) losses from investments in marketable securities |
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Net change in: |
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Derivative assets |
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( |
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Other assets and accrued interest |
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( |
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Deferred income taxes |
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( |
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( |
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Derivative liabilities |
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( |
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( |
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Other liabilities |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Purchase of investments in marketable securities |
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( |
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( |
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Proceeds from sales of investments in marketable securities |
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Proceeds from maturities of investments in marketable securities |
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Acquisition of finance receivables |
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( |
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( |
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Collection of finance receivables |
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Net change in certain wholesale receivables |
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( |
) |
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( |
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Acquisition of investments in operating leases |
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( |
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( |
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Disposals of investments in operating leases |
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Long term loans to affiliates |
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( |
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Payments on long term loans from affiliates |
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Net change in financing support provided to affiliates |
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Other, net |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Proceeds from issuance of debt |
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Payments on debt |
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( |
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( |
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Net change in commercial paper and other short-term financing |
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( |
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Net change in financing support provided by affiliates |
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Net cash provided by financing activities |
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Net (decrease) increase in cash and cash equivalents and restricted cash and cash equivalents |
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( |
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Cash and cash equivalents and restricted cash and cash equivalents at the beginning of the period |
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Cash and cash equivalents and restricted cash and cash equivalents at the end of the period |
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$ |
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$ |
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Supplemental disclosures: |
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Interest paid, net |
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$ |
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$ |
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Income taxes (received) paid, net |
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$ |
( |
) |
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$ |
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Refer to the accompanying Notes to Consolidated Financial Statements.
6
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 1 – Interim Financial Data
Basis of Presentation
The information furnished in these unaudited interim consolidated financial statements as of and for the three months ended June 30, 2023 and 2022 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Certain prior period amounts have been reclassified to conform to current period presentation. In the opinion of management, the unaudited consolidated financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The results of operations for the three months ended June 30, 2023, do not necessarily indicate the results which may be expected for the full fiscal year ending March 31, 2024 (“fiscal 2024”).
These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Toyota Motor Credit Corporation’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2023 (“fiscal 2023”), which was filed with the Securities and Exchange Commission on June 2, 2023. References herein to “TMCC” denote Toyota Motor Credit Corporation, and references herein to “we”, “our”, and “us” denote Toyota Motor Credit Corporation and its consolidated subsidiaries.
Other Matters
In fiscal 2022, TMCC announced, in furtherance of its private label financial services initiative for third party automotive and mobility companies, that we entered into a nonbinding letter of intent with Great American Outdoors Group LLC, the parent company of Bass Pro Shops, Cabela’s and the White River Marine Group (“Bass Pro Shops”) to provide private label financial services for Bass Pro Shops' boats, all-terrain vehicle products, and other mobility products. The Company began to provide inventory financing for Bass Pro Shops, its affiliates, and authorized independent dealers in fiscal 2023, with additional private label services, including consumer financing and voluntary protection products and services, to be added over time. We are leveraging our existing processes and personnel to originate and service the new assets, and we expect to make certain technology investments to support the Bass Pro Shops program. We did not acquire any existing Bass Pro Shops assets or liabilities pursuant to the agreement, and we do not expect launch costs to be significant.
Recently Adopted Accounting Guidance
On
7
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 2 – Investments in Marketable Securities
Investments in marketable securities consist of debt securities and equity investments. We classify all of our debt securities as available-for-sale (“AFS”). Except when the fair value option is elected, AFS debt securities are recorded at fair value with unrealized gains or losses included in accumulated other comprehensive income (“AOCI”), net of applicable taxes. Interest income is recognized on an accrual basis and determined using the effective interest method. Realized gains and losses from sales of AFS debt securities are determined using the specific identification method or first in first out method. Dividend income, interest income, and realized gains and losses from the sales of AFS debt securities are included in Investment and other income (loss), net in our Consolidated Statements of Income.
All equity investments are recorded at fair value with changes in fair value included in Investment and other income (loss), net in our Consolidated Statements of Income. Realized gains and losses from sales of equity investments are determined using the first in first out method and are included in Investment and other income (loss), net in our Consolidated Statements of Income.
Investments in marketable securities consisted of the following:
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June 30, 2023 |
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Amortized |
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Unrealized |
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Unrealized |
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Fair |
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cost |
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gains |
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losses |
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value |
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Available-for-sale debt securities: |
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U.S. government and agency obligations |
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$ |
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$ |
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$ |
( |
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$ |
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Foreign government and agency obligations |
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( |
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Municipal debt securities |
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( |
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Corporate debt securities |
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( |
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Mortgage-backed securities: |
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U.S. government agency |
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( |
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Non-agency residential |
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( |
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Non-agency commercial |
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( |
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Asset-backed securities |
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( |
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Total available-for-sale debt securities |
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$ |
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$ |
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$ |
( |
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$ |
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Equity investments |
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Total investments in marketable securities |
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$ |
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8
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 2 – Investments in Marketable Securities (Continued)
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March 31, 2023 |
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Amortized |
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Unrealized |
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Unrealized |
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Fair |
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cost |
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gains |
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losses |
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value |
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Available-for-sale debt securities: |
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U.S. government and agency obligations |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Foreign government and agency obligations |
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( |
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Municipal debt securities |
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( |
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Corporate debt securities |
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( |
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Mortgage-backed securities: |
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U.S. government agency |
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( |
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Non-agency residential |
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( |
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Non-agency commercial |
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( |
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|
|
|||
Asset-backed securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total available-for-sale debt securities |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total investments in marketable securities |
|
|
|
|
|
|
|
|
|
|
$ |
|
||||
A portion of our equity investments are investments in funds that are privately placed and managed by an open-end investment management company (the “Trust”). If we elect to redeem shares, the Trust will normally redeem all shares for cash, but may, in unusual circumstances, redeem amounts exceeding the lesser of $
We also invest in actively traded open-end mutual funds. Redemptions are subject to normal terms and conditions as described in each fund’s prospectus.
For the three months ended June 30, 2023 and 2022, respectively, we had
Unrealized Losses on Securities
The following table presents the aggregate fair value and unrealized losses on AFS debt securities in a continuous unrealized loss position:
|
|
June 30, 2023 |
|
|||||||||||||||||||||
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|||||||||||||||
Available-for-sale debt securities: |
|
Fair value |
|
|
Unrealized losses |
|
|
Fair value |
|
|
Unrealized losses |
|
|
Fair value |
|
|
Unrealized losses |
|
||||||
U.S. government and agency obligations |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
Foreign government and agency obligations |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Municipal debt securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Corporate debt securities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Government agency |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Non-agency residential |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Non-agency commercial |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Asset-backed securities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Total available-for-sale debt securities |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
9
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 2 – Investments in Marketable Securities (Continued)
|
|
March 31, 2023 |
|
|||||||||||||||||||||
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|||||||||||||||
Available-for-sale debt securities: |
|
Fair value |
|
|
Unrealized losses |
|
|
Fair value |
|
|
Unrealized losses |
|
|
Fair value |
|
|
Unrealized losses |
|
||||||
U.S. government and agency obligations |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
Foreign government and agency obligations |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Municipal debt securities |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Corporate debt securities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. Government agency |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Non-agency residential |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Non-agency commercial |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Asset-backed securities |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Total available-for-sale debt securities |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|||
An allowance for credit losses is established when it is determined that a credit loss has occurred. As of June 30, 2023 and March 31, 2023, management determined that credit losses did not exist for securities in an unrealized loss position. This analysis considered a variety of factors including, but not limited to, performance indicators of the issuer, default rates, industry analyst reports, credit ratings, and other relevant information, which indicated that contractual cash flows are expected to occur.
Gains and Losses on Securities
The following table represents gains and losses on our investments in marketable securities presented in our Consolidated Statements of Income:
|
|
June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Available-for-sale debt securities: |
|
|
|
|
|
|
||
Unrealized losses on securities for which the |
|
$ |
( |
) |
|
$ |
( |
) |
Realized losses on sales |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
||
Equity investments: |
|
|
|
|
|
|
||
Unrealized gains (losses) |
|
$ |
|
|
$ |
( |
) |
|
Realized losses on sales |
|
$ |
|
|
$ |
( |
) |
|
Contractual Maturities
The amortized cost and fair value by contractual maturities of available-for-sale debt securities are summarized in the following table. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations.
|
|
June 30, 2023 |
|
|||||
|
|
Amortized cost |
|
|
Fair value |
|
||
Available-for-sale debt securities: |
|
|
|
|
|
|
||
Due within 1 year |
|
$ |
|
|
$ |
|
||
Due after 1 year through 5 years |
|
|
|
|
|
|
||
Due after 5 years through 10 years |
|
|
|
|
|
|
||
Due after 10 years |
|
|
|
|
|
|
||
Mortgage-backed and asset-backed securities 1 |
|
|
|
|
|
|
||
|
$ |
|
|
$ |
|
|||
1.
10
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 3 – Finance Receivables, Net
Finance receivables, net consists of the retail loan and dealer products portfolio segments, and includes deferred origination costs, deferred income, and allowance for credit losses. Finance receivables, net also includes securitized retail receivables, which represent retail receivables that have been sold for legal purposes to securitization trusts but continue to be included in our consolidated financial statements, as discussed further in Note 8 – Variable Interest Entities. Cash flows from these securitized retail receivables are available only for the repayment of debt issued by these trusts and other obligations arising from the securitization transactions. They are not available for payment of our other obligations or to satisfy claims of our other creditors.
Finance receivables, net consisted of the following:
|
|
June 30, |
|
|
March 31, |
|
||
|
|
2023 |
|
|
2023 |
|
||
Retail receivables 1 |
|
$ |
|
|
$ |
|
||
Dealer financing |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Deferred origination costs |
|
|
|
|
|
|
||
Deferred income |
|
|
( |
) |
|
|
( |
) |
Allowance for credit losses |
|
|
|
|
|
|
||
Retail receivables |
|
|
( |
) |
|
|
( |
) |
Dealer financing |
|
|
( |
) |
|
|
( |
) |
Total allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
Finance receivables, net |
|
$ |
|
|
$ |
|
||
1
Accrued interest related to finance receivables is presented in Other assets on the Consolidated Balance Sheets and was $
11
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 3 – Finance Receivables, Net (Continued)
Credit Quality Indicators
We are exposed to credit risk on our finance receivables. Credit risk is the risk of loss arising from the failure of customers or dealers to meet the terms of their contracts with us or otherwise fail to perform as agreed.
Retail Loan Portfolio Segment
The retail loan portfolio segment consists of one class of finance receivables. While we use various credit quality metrics to develop our allowance for credit losses on the retail loan portfolio segment, we primarily utilize the aging of the individual accounts to monitor the credit quality of these finance receivables. Based on our experience, the payment status of borrowers is the strongest indicator of the credit quality of the underlying receivables. Payment status also impacts charge-offs.
Individual borrower accounts within the retail loan portfolio segment are segregated into aging categories based on the number of days past due. The aging of finance receivables is updated monthly.
The following tables present the amortized cost basis of our retail loan portfolio by origination fiscal year by credit quality indicator based on number of days past due:
|
|
Amortized Cost Basis by Origination Fiscal Year at June 30, 2023 |
|
|
|
|
||||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
2019 and Prior |
|
|
Total |
|
|||||||
Aging of finance receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Current |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
30-59 days past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
60-89 days past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
90 days or greater past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Gross Charge-Offs |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
Amortized Cost Basis by Origination Fiscal Year at March 31, 2023 |
|
|
|
|
||||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
2018 and Prior |
|
|
Total |
|
|||||||
Aging of finance receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Current |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
30-59 days past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
60-89 days past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
90 days or greater past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
The amortized cost of retail loan portfolio excludes accrued interest of $
12
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 3 – Finance Receivables, Net (Continued)
Dealer Products Portfolio Segment
The dealer products portfolio segment consists of three classes of finance receivables: wholesale, real estate and working capital (includes both working capital and revolving lines of credit). All loans outstanding for an individual dealer or dealer group, which includes affiliated entities, are aggregated and evaluated collectively by dealer or dealer group. This reflects the interconnected nature of financing provided to our individual dealer and dealer group customers, and their affiliated entities.
When assessing the credit quality of the finance receivables within the dealer products portfolio segment, we segregate the finance receivables account balances into four categories representing distinct credit quality indicators based on internal risk assessments. The internal risk assessments for all finance receivables within the dealer products portfolio segment are updated on a monthly basis.
The four credit quality indicators are:
The following tables present the amortized cost basis of our dealer products portfolio by credit quality indicator based on internal risk assessments by origination fiscal year:
|
|
Amortized Cost Basis by Origination Fiscal Year at June 30, 2023 |
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
2019 and Prior |
|
|
Revolving loans |
|
|
Total |
|
||||||||
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Performing |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Credit Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
At Risk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Default |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Wholesale total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Performing |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Credit Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
At Risk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Default |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Real estate total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Working Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Performing |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Credit Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
At Risk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Default |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Working capital total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
For the three months ended June 30, 2023, there were
13
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 3 – Finance Receivables, Net (Continued)
|
|
Amortized Cost Basis by Origination Fiscal Year at March 31, 2023 |
|
|
|
|
|
|
|
|||||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
2018 and Prior |
|
|
Revolving loans |
|
|
Total |
|
||||||||
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Performing |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Credit Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
At Risk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Default |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Wholesale total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Performing |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Credit Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
At Risk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Default |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Real estate total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Working Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Performing |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Credit Watch |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
At Risk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Default |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Working capital total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
The amortized cost of the dealer products portfolio excludes accrued interest of $
14
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 3 – Finance Receivables, Net (Continued)
Past Due Finance Receivables by Class
Substantially all finance receivables do not involve recourse to the dealer in the event of customer default. Finance receivables include contracts greater than 120 days past due, which are recorded at the fair value of collateral less estimated costs to sell, and contracts in bankruptcy. Contracts for which vehicles have been repossessed are excluded. For all finance receivables, we define “past due” as any payment, including principal and interest, that is at least 30 days past the contractual due date. For any customer who is granted a payment extension under an extension program, the aging of the receivable is adjusted for the number of days of the extension granted.
The following tables present the aging of the amortized cost basis of our finance receivables by class:
|
|
June 30, 2023 |
|
|||||||||||||||||||||||||
|
|
30 - 59 Days |
|
|
60 - 89 Days |
|
|
90 Days or |
|
|
Total Past |
|
|
Current |
|
|
Total Finance |
|
|
90 Days or |
|
|||||||
Retail loan |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Working capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
|
|
March 31, 2023 |
|
|||||||||||||||||||||||||
|
|
30 - 59 Days |
|
|
60 - 89 Days |
|
|
90 Days or |
|
|
Total Past |
|
|
Current |
|
|
Total Finance |
|
|
90 Days or |
|
|||||||
Retail loan |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Working capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
15
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 3 – Finance Receivables, Net (Continued)
Loan Modifications
Under certain circumstances, we may agree to modify the terms of an existing loan with a borrower for various reasons, including a borrower experiencing financial difficulties. We evaluate loan modifications, which generally represent a continuation of the existing loan and not a new loan. The effect of these modifications is already included in the allowance for credit losses because our estimated allowance represents currently expected credit losses.
The amortized cost at June 30, 2023 of the loans modified during the three months ended June 30, 2023 was not significant. The unpaid principal balances, net of recoveries, of loans charged off during the reporting period that were modified within 12 months preceding default were not significant for the three months ended June 30, 2023.
Troubled Debt Restructuring
For accounts not under bankruptcy protection, the amount of finance receivables modified as a troubled debt restructuring during the three months ended June 30, 2022, was not significant for each class of finance receivables. Troubled debt restructurings for accounts not under bankruptcy protection within the retail loan class of finance receivables are comprised exclusively of contract term extensions that reduce the monthly payment due from the customer. For the three classes of finance receivables within the dealer products portfolio segment, troubled debt restructurings include contract term extensions, interest rate adjustments, waivers of loan covenants, or any combination of the three. Troubled debt restructurings of accounts not under bankruptcy protection did not include forgiveness of principal or interest rate adjustments during the three months ended June 30, 2022.
We consider finance receivables under bankruptcy protection within the retail loan class to be troubled debt restructurings as of the date we receive notice of a customer filing for bankruptcy protection, regardless of the ultimate outcome of the bankruptcy proceedings. The bankruptcy court may impose modifications as part of the proceedings, including interest rate adjustments and forgiveness of principal. For the three months ended June 30, 2022, the financial impact of troubled debt restructurings related to finance receivables under bankruptcy protection was not significant to our Consolidated Statements of Income and Consolidated Balance Sheets.
16
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 4 – Allowance for Credit Losses
The following tables provide information related to our allowance for credit losses for finance receivables and certain off-balance sheet lending commitments by portfolio segment:
|
|
Three months ended June 30, 2023 |
|
|||||||||
|
|
Retail loan |
|
|
Dealer products |
|
|
Total |
|
|||
Beginning balance, April 1, 2023 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Charge-offs |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Recoveries |
|
|
|
|
|
|
|
|
|
|||
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|||
Ending balance, June 30, 2023 ¹ |
|
$ |
|
|
$ |
|
|
$ |
|
|||
1
|
|
Three months ended June 30, 2022 |
|
|||||||||
|
|
Retail loan |
|
|
Dealer products |
|
|
Total |
|
|||
Beginning balance, April 1, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Charge-offs |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Recoveries |
|
|
|
|
|
|
|
|
|
|||
Provision for credit losses |
|
|
|
|
|
( |
) |
|
|
|
||
Ending balance, June 30, 2022 ¹ |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
1
We have elected to exclude accrued interest from the measurement of expected credit losses as we apply policies and procedures that result in the timely write-offs of accrued interest. Accrued interest is written off within allowance for credit losses at the earlier of when an account is deemed to be uncollectible or when an account is greater than 120 days past due.
Finance receivables for the dealer products portfolio segment as of June 30, 2023, includes $
17
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 5 – Investments in Operating Leases, Net
Investments in operating leases, net consists of vehicle lease contracts acquired from dealers, and includes deferred origination fees and costs, deferred income, and accumulated depreciation. Securitized investments in operating leases represent beneficial interests in a pool of certain vehicle leases that have been sold for legal purposes to securitization trusts but continue to be included in our consolidated financial statements as discussed further in Note 8 - Variable Interest Entities. Cash flows from these securitized investments in operating leases are available only for the repayment of debt issued by these trusts and other obligations arising from the securitization transactions. They are not available for payment of our other obligations or to satisfy claims of our other creditors.
Investments in operating leases, net consisted of the following:
|
|
June 30, |
|
|
March 31, |
|
||
|
|
2023 |
|
|
2023 |
|
||
Investments in operating leases 1 |
|
$ |
|
|
$ |
|
||
Deferred income |
|
|
( |
) |
|
|
( |
) |
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Investments in operating leases, net |
|
$ |
|
|
$ |
|
||
1
18
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 6 – Derivatives, Hedging Activities and Interest Expense
Derivative Instruments
Our liabilities consist mainly of fixed and variable rate debt, denominated in U.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps, and foreign currency swaps to economically hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. Our use of derivative transactions is intended to reduce long-term fluctuations in the fair value of assets and liabilities caused by market movements. All of our derivatives are categorized as not designated for hedge accounting, and all activities are authorized and monitored by our management and our Asset-Liability Committee which provides a framework for financial controls and governance to manage market risk.
All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow us to net settle asset and liability positions and offset cash collateral with the same counterparty on a net basis. Changes in the fair value of our derivative instruments are recorded in Interest expense in our Consolidated Statements of Income. The derivative instruments are included as a component of Other assets or Other liabilities on our Consolidated Balance Sheets.
Offsetting of Derivatives
Accounting guidance permits the net presentation on our Consolidated Balance Sheets of derivative receivables and derivative payables with the same counterparty and the related cash collateral when a legally enforceable master netting agreement exists, or when the derivative receivables and derivative payables meet all the conditions for the right of setoff to exist. When we meet this condition, we elect to present such balances on a net basis.
Over-the-Counter (“OTC”) Derivatives
Our International Swaps and Derivatives Association Master Agreements are our master netting agreements which permit multiple transactions to be cancelled and settled with a single net balance paid to either party for our OTC derivatives. The master netting agreements also contain reciprocal collateral agreements which require the transfer of cash collateral to the party in a net asset position across all transactions. Our collateral agreements with substantially all our counterparties include a zero threshold, full collateralization arrangement. Although we have daily valuation and collateral exchange arrangements with all of our counterparties, due to the time required to move collateral, there may be a delay of up to one day between the exchange of collateral and the valuation of our derivatives. We would not be required to post additional collateral to the counterparties with whom we were in a net liability position at June 30, 2023, if our credit ratings were to decline, since we fully collateralize without regard to credit ratings with these counterparties. In addition, as our collateral agreements include legal right of offset provisions, collateral amounts are netted against derivative assets or derivative liabilities, and the net amount is included in Other assets or Other liabilities on our Consolidated Balance Sheets.
Centrally Cleared Derivatives
19
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 6 – Derivatives, Hedging Activities and Interest Expense (Continued)
Derivative Activity Impact on Consolidated Financial Statements
The following tables show the financial statement line item and amount of our derivative assets and liabilities that are reported on our Consolidated Balance Sheets:
|
|
June 30, 2023 |
|
|
March 31, 2023 |
|
||||||||||
|
|
|
|
|
Fair |
|
|
|
|
|
Fair |
|
||||
|
|
Notional |
|
|
value |
|
|
Notional |
|
|
value |
|
||||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swaps |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Foreign currency swaps |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Counterparty netting |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Collateral held |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Carrying value of derivative contracts – |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swaps |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Foreign currency swaps |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Counterparty netting |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Collateral posted |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Carrying value of derivative contracts – |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
As of June 30, 2023 and March 31, 2023, we held excess collateral and variation margin of $
20
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 6 – Derivatives, Hedging Activities and Interest Expense (Continued)
The following table summarizes the components of interest expense, including the location and amount of gains and losses on derivative instruments and related hedged items, as reported in our Consolidated Statements of Income:
|
|
Three months ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Interest expense on debt |
|
$ |
|
|
$ |
|
||
Interest income on derivatives |
|
|
( |
) |
|
|
( |
) |
Interest expense on debt and derivatives |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Losses (gains) on debt denominated in |
|
|
|
|
|
( |
) |
|
Losses on foreign currency swaps |
|
|
|
|
|
|
||
(Gains) losses on U.S. dollar interest rate swaps |
|
|
( |
) |
|
|
|
|
Total interest expense |
|
$ |
|
|
$ |
|
||
Interest expense on debt and derivatives represents net interest settlements and changes in accruals. Gains and losses on derivatives and debt denominated in foreign currencies exclude net interest settlements and changes in accruals. Cash flows associated with derivatives are reported in Net cash provided by operating activities in our Consolidated Statements of Cash Flows.
21
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 7 – Debt and Credit Facilities
Debt and the related weighted average contractual interest rates are summarized as follows:
|
|
June 30, 2023 |
|
March 31, 2023 |
||||||||||||||||
|
|
Face value |
|
|
Carrying value |
|
|
Weighted average |
|
Face value |
|
|
Carrying value |
|
|
Weighted average |
||||
Unsecured notes and loans payable |
|
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
|
||||||
Secured notes and loans payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total debt |
|
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
|
||||||
The carrying value of our debt includes unamortized premiums, discounts, debt issuance costs and the effects of foreign currency translation adjustments.
Weighted average contractual interest rates are calculated based on original notional or par value before consideration of premium or discount and approximate the effective interest rates. Debt is callable at par value.
Unsecured Notes and Loans Payable
Our unsecured notes and loans payable consist of commercial paper and fixed and variable rate debt. Short-term funding needs are met through the issuance of commercial paper in the U.S. Amount outstanding under our commercial paper programs was $
Upon issuance of fixed rate debt, we generally elect to enter into pay-float swaps to convert fixed rate payments on debt to floating rate payments. Certain unsecured notes and loans payable are denominated in various foreign currencies. The debt is translated into U.S. dollars using the applicable exchange rate at the transaction date and retranslated at each balance sheet date using the exchange rate in effect at that date. Concurrent with the issuance of these foreign currency unsecured notes and loans payable, we enter into currency swaps in the same notional amount to convert non-U.S. currency payments to U.S. dollar denominated payments. Gains and losses related to foreign currency transactions are included in Interest expense in our Consolidated Statements of Income.
Certain of our unsecured notes and loans payable contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. We are currently in compliance with these covenants and conditions.
Secured Notes and Loans Payable
Our secured notes and loans payable are denominated in U.S. dollars and consist of both fixed and variable rate debt. Secured notes and loans payable are issued using on-balance sheet securitization trusts, as further discussed in Note 8 – Variable Interest Entities. These notes are repayable only from collections on the underlying securitized retail finance receivables and the beneficial interests in investments in operating leases and from related credit enhancements. Some of our secured notes are backed by a revolving pool of finance receivables and cash collateral, with the ability to repay the notes in full after the revolving period ends, after which an amortization period begins.
22
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 7 – Debt and Credit Facilities (Continued)
Credit Facilities and Letters of Credit
For additional liquidity purposes, we maintain credit facilities, which may be used for general corporate purposes, as described below:
364-Day Credit Agreement, Three-Year Credit Agreement and Five-Year Credit Agreement
TMCC, Toyota Credit de Puerto Rico Corp. (“TCPR”), a wholly owned subsidiary, and other Toyota affiliates are party to a $
The ability to make draws is subject to covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These agreements were
Committed Revolving Asset-backed Facility
We are party to a 364-day revolving securitization facility with certain bank-sponsored asset-backed conduits and other financial institutions expiring in fiscal 2025. Under the terms and subject to the conditions of this facility, the committed lenders under the facility have committed to make advances up to a facility limit of $
Other Unsecured Credit Agreements
TMCC is party to additional unsecured credit facilities with various banks. As of June 30, 2023, TMCC had committed bank credit facilities totaling $
These credit agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These credit facilities were
TMCC is party to a $
From time to time, we may borrow from affiliates based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities. Amounts borrowed from affiliates are recorded in Other liabilities on our Consolidated Balance Sheets.
23
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 8 – Variable Interest Entities
Consolidated Variable Interest Entities
We use one or more special purpose entities that are considered Variable Interest Entities (“VIEs”) to issue asset-backed securities to third-party bank-sponsored asset-backed securitization vehicles and to investors in securitization transactions. The securities issued by these VIEs are backed by the cash flows related to retail finance receivables and beneficial interests in investments in operating leases (“Securitized Assets”). We hold variable interests in the VIEs that could potentially be significant to the VIEs. We determined that we are the primary beneficiary of the securitization trusts because (i) our servicing responsibilities for the Securitized Assets give us the power to direct the activities that most significantly impact the performance of the VIEs, and (ii) our variable interests in the VIEs give us the obligation to absorb losses and the right to receive residual returns that could potentially be significant.
The following tables show the assets and liabilities related to our VIE securitization transactions that are included on our Consolidated Balance Sheets:
|
|
June 30, 2023 |
|
|||||||||||||||||
|
|
|
|
|
VIE Assets |
|
|
VIE Liabilities |
|
|||||||||||
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Restricted |
|
|
securitized |
|
|
Other |
|
|
Debt |
|
|
Other |
|
|||||
Retail finance receivables |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Investments in operating leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
|
|
March 31, 2023 |
|
|||||||||||||||||
|
|
|
|
|
VIE Assets |
|
|
VIE Liabilities |
|
|||||||||||
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Restricted |
|
|
securitized |
|
|
Other |
|
|
Debt |
|
|
Other |
|
|||||
Retail finance receivables |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Investments in operating leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Restricted Cash, including restricted cash equivalents, shown in the previous tables represent collections from the underlying Net securitized assets and certain reserve deposits held by TMCC for the VIEs and is included as part of Restricted cash and cash equivalents on our Consolidated Balance Sheets. Net securitized assets shown in the previous tables are presented net of deferred fees and costs, deferred income, accumulated depreciation and allowance for credit losses. Other assets represent accrued interests related to securitized retail finance receivables and used vehicles held-for-sale that were repossessed by or returned to TMCC for the benefit of the VIEs. The related debt of these consolidated VIEs is presented net of $
The assets of the VIEs and the restricted cash and cash equivalents held by TMCC serve as the sole source of repayment for the asset-backed securities issued by these entities. Investors in the notes issued by the VIEs do not have recourse to us or our other assets, with the exception of customary representation and warranty repurchase provisions and indemnities.
As the primary beneficiary of these entities, we are exposed to credit, residual value, interest rate, and prepayment risk from the Securitized Assets in the VIEs. However, our exposure to these risks did not change as a result of the transfer of the assets to the VIEs. We may also be exposed to interest rate risk arising from the secured notes issued by the VIEs.
In addition, we entered into interest rate swaps with certain special purpose entities that issue variable rate debt. Under the terms of these swaps, the special purpose entities are obligated to pay TMCC a fixed rate of interest on certain payment dates in exchange for receiving a floating rate of interest on notional amounts equal to the outstanding balance of the secured debt. This arrangement enables the special purpose entities to mitigate the interest rate risk inherent in issuing variable rate debt that is secured by fixed rate Securitized Assets.
24
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 8 – Variable Interest Entities (Continued)
The transfers of the Securitized Assets to the special purpose entities in our securitizations are considered to be sales for legal purposes. However, the Securitized Assets and the related debt remain on our Consolidated Balance Sheets. We recognize financing revenue on the Securitized Assets and interest expense on the secured debt issued by the special purpose entities. We also maintain an allowance for credit losses on the securitized retail finance receivables using a methodology consistent with that used for our non-securitized asset portfolio. The interest rate swaps between TMCC and the special purpose entities are considered intercompany transactions and therefore are eliminated in our consolidated financial statements.
Non-consolidated Variable Interest Entities
We provide lending to Toyota and Lexus dealers through the Toyota Dealer Investment Group’s Dealer Capital Program (“TDIG Program”) operated by our affiliate TMNA, which has an equity interest in these dealerships. Dealers participating in this program have been determined to be VIEs. We do not consolidate the dealerships in this program as we are not the primary beneficiary. Any exposure to loss is limited to the amount of the credit facility. Amounts due from these dealers under the TDIG Program that are classified as Finance receivables, net on our Consolidated Balance Sheets at June 30, 2023 and March 31, 2023 and revenues earned from these dealers for the three months ended June 30, 2023 and 2022 were not significant.
25
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 9 – Commitments and Contingencies
Commitments and Guarantees
We have entered into certain commitments and guarantees for which the maximum unfunded amounts are summarized in the table below:
|
|
June 30, |
|
|
March 31, |
|
||
|
|
2023 |
|
|
2023 |
|
||
Commitments: |
|
|
|
|
|
|
||
Credit facilities commitments with dealers |
|
$ |
|
|
$ |
|
||
Commitments under operating lease agreements |
|
|
|
|
|
|
||
Total commitments |
|
|
|
|
|
|
||
Guarantees of affiliate pollution control and solid waste disposal bonds |
|
|
|
|
|
|
||
Total commitments and guarantees |
|
$ |
|
|
$ |
|
||
Wholesale financing is not considered to be a contractual commitment as the arrangements are not binding arrangements under which TMCC is required to perform.
Commitments
We provide fixed and variable rate working capital loans, revolving lines of credit, and real estate financing to dealers and various multi-franchise organizations referred to as dealer groups for facilities construction and refurbishment, working capital requirements, real estate purchases, business acquisitions and other general business purposes. These loans are typically secured with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate, and may be guaranteed by individual or corporate guarantees of affiliated dealers, dealer groups, or dealer principals. Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure under such agreements. Our pricing reflects market conditions, the competitive environment, the level of support dealers provide our retail, lease and voluntary protection business and the credit-worthiness of each dealer. Amounts drawn under these facilities are reviewed for collectability on a quarterly basis, in conjunction with our evaluation of the allowance for credit losses. In addition to the total commitments and guarantees in the previous table, we have also extended credit facilities to affiliates as described in Note 12 – Related Party Transactions in our fiscal 2023 Form 10-K.
Lease Commitments
Our operating lease portfolio consists of real estate leases. Total operating lease expense, including payments to affiliates, was $
26
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 9 – Commitments and Contingencies (Continued)
Our commitments under operating lease agreements are summarized below:
|
|
June 30, |
|
|
Years ending March 31, |
|
2023 |
|
|
2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
Present value discount |
|
|
( |
) |
|
$ |
|
||
Operating lease liabilities and right-of-use (“ROU”) assets are recognized at the lease commencement date based on the present value of the future minimum lease payments over the lease term. As the interest rate implicit in the lease contract is typically not readily determinable, we utilize our incremental borrowing rate at the lease commencement date for the duration of the lease term.
The following table provides additional information related to operating lease agreements for which we are the lessee:
|
|
June 30, |
|
|
|
|
2023 |
|
|
|
$ |
|
||
Weighted average remaining lease term (in years) |
|
|
|
|
Weighted average discount rate |
|
|
% |
|
Guarantees and Other Contingencies
TMCC has guaranteed bond obligations totaling $
27
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 9 – Commitments and Contingencies (Continued)
Indemnification
In the ordinary course of business, we enter into agreements containing indemnification provisions standard in the industry related to several types of transactions, including, but not limited to, debt funding, derivatives, securitization transactions, and our vendor, supplier and service agreements. Performance under these indemnities would generally occur upon a breach of the representations, warranties, covenants or other commitments made or given in the agreement, or as a result of a third-party claim. In addition, we have agreed in certain debt and derivative issuances, and subject to certain exceptions, to gross-up payments due to third parties in the event that withholding tax is imposed on such payments. In addition, certain of our funding arrangements may require us to pay lenders for increased costs due to certain changes in laws or regulations. Due to the difficulty in predicting events which could cause a breach of the indemnification provisions or trigger a gross-up or other payment obligation, we are not able to estimate our maximum exposure to future payments that could result from claims made under such provisions. We have not made any material payments in the past as a result of these provisions, and as of June 30, 2023, we determined that it is not probable that we will be required to make any material payments in the future. As of June 30, 2023 and March 31, 2023,
Litigation and Governmental Proceedings
Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business. Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices. Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies. In addition, we are subject to governmental and regulatory examinations, information-gathering requests, and investigations from time to time at the state and federal levels. It is inherently difficult to predict the course of such legal actions and governmental inquiries.
We perform periodic reviews of pending claims and actions to determine the probability of adverse verdicts and resulting amounts of liability. We establish accruals for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. When we are able, we also determine estimates of reasonable possibility of loss or range of loss, whether in excess of any related accrued liability or where there is no accrued liability. Given the inherent uncertainty associated with legal matters, the actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts for which accruals have been established. Based on available information and established accruals, we do not believe it is reasonably probable that the results of these proceedings, either individually or in the aggregate, will have a material adverse effect on our consolidated financial condition or results of operations.
On November 24, 2020, the Consumer Financial Protection Bureau (“CFPB”) issued a civil investigative demand to the Company seeking, among other things, certain information relating to the Company’s vehicle and payment protection products and credit reporting policies and procedures and reporting records. We are cooperating with the inquiry and cannot predict the eventual scope, duration or outcome at this time. As a result, we are unable to estimate the amount or range of any potential loss arising from this investigation.
28
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 10 – Income Taxes
Our provision for income taxes was $
In August 2022, the Inflation Reduction Act (“the Act”) was signed into law. The Act modifies climate and clean energy corporate tax provisions, including amendments to the federal tax credit for plug-in vehicles available under current tax law. The Act also includes a
Tax-related Contingencies
As of June 30, 2023, we remain under IRS examination for fiscal 2018 through fiscal 2024.
We periodically review our uncertain tax positions. Our assessment is based on many factors including any ongoing IRS audits. For the three months ended June 30, 2023, our assessment did not result in a material change in unrecognized tax benefits.
Our deferred tax assets include the cumulative federal and state net operating loss carry forwards, deferred deduction of allowance for credit losses and residual value loss estimates, mark-to-market adjustment of investment in marketable securities, and other deferred costs. The total deferred tax liability, net of these deferred tax assets, was $
29
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
In April 2023, TMCC entered into a one-year revolving credit agreement with Toyota Motor Sales U.S.A., Inc. (“TMS”), pursuant to which TMS is entitled to borrow a maximum amount of $
|
|
Three months ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Net financing revenues: |
|
|
|
|
|
|
||
Manufacturer's subvention and other revenues |
|
$ |
|
|
$ |
|
||
Depreciation on operating leases |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Interest expense: |
|
|
|
|
|
|
||
Credit support fees, interest and other expenses |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Voluntary protection contract revenues |
|
|
|
|
|
|
||
Voluntary protection contract revenues |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Investment and other income, net: |
|
|
|
|
|
|
||
Interest and other income |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
||
Expenses: |
|
|
|
|
|
|
||
Operating and administrative |
|
$ |
|
|
$ |
|
||
|
|
June 30, |
|
|
March 31, |
|
||
|
|
2023 |
|
|
2023 |
|
||
Assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
|
|
|
|
|
||
Commercial paper |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Finance receivables, net |
|
|
|
|
|
|
||
Accounts receivable |
|
$ |
|
|
$ |
|
||
Deferred retail subvention income |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
Investments in operating leases, net |
|
|
|
|
|
|
||
Investments in operating leases, net |
|
$ |
( |
) |
|
$ |
( |
) |
Deferred lease subvention income |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Notes receivable |
|
$ |
|
|
$ |
|
||
Other receivables, net |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Liabilities: |
|
|
|
|
|
|
||
Other liabilities |
|
|
|
|
|
|
||
Unearned voluntary protection contract revenues |
|
$ |
|
|
$ |
|
||
Other payables, net |
|
$ |
|
|
$ |
|
||
Notes payable |
|
$ |
|
|
$ |
|
||
30
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 11 – Related Party Transactions (Continued)
TMCC receives subvention payments from TMNA which result in a gross monthly subvention receivable. As of June 30, 2023 and March 31, 2023, the subvention receivable from TMNA was $
Our Board of Directors declared and paid cash dividend of approximately $
31
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 12 – Fair Value Measurements
Recurring Fair Value Measurements
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
June 30, 2023 |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Counterparty |
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
netting & |
|
|
Fair |
|
|||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
collateral |
|
|
value |
|
|||||
Investments in marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
U.S. government and agency obligations |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Foreign government and agency obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Municipal debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
U.S. government agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Non-agency residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Non-agency commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Available-for-sale debt securities total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Fixed income mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Fixed income mutual funds measured at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total return bond funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity mutual funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity investments total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Investments in marketable securities total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Foreign currency swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Counterparty netting and collateral |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Derivative assets total |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Assets at fair value |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest rate swaps |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||
Foreign currency swaps |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||
Counterparty netting and collateral |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities at fair value |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||
Net assets at fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
32
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 12 – Fair Value Measurements (Continued)
|
|
March 31, 2023 |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
Counterparty |
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
netting & |
|
|
Fair |
|
|||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
collateral |
|
|
value |
|
|||||
Investments in marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
U.S. government and agency obligations |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Foreign government and agency obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Municipal debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Corporate debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
U.S. government agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Non-agency residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Non-agency commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Available-for-sale debt securities total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Fixed income mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Fixed income mutual funds measured at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total return bond funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity mutual funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity investments total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Investments in marketable securities total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Foreign currency swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Counterparty netting and collateral |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Derivative assets total |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Assets at fair value |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest rate swaps |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||
Foreign currency swaps |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||
Counterparty netting and collateral |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Liabilities at fair value |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|||
Net assets at fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Level 3 Fair Value Measurements
The Level 3 financial assets and liabilities recorded at fair value which are subject to recurring and nonrecurring fair value measurement, and the corresponding activity and change in the fair value measurements of these assets and liabilities, were not significant to our Consolidated Balance Sheets as of June 30, 2023 and March 31, 2023, or Consolidated Statements of Income for the three months ended June 30, 2023 and 2022.
Nonrecurring Fair Value Measurements
Nonrecurring fair value measurements include Level 3 net finance receivables that are not measured at fair value on a recurring basis but are subject to fair value adjustments utilizing the fair value of the underlying collateral when there is evidence of impairment. We did not have any significant nonrecurring fair value items as of June 30, 2023 and March 31, 2023.
33
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 12 – Fair Value Measurements (Continued)
The following tables provide information about assets and liabilities not carried at fair value on a recurring basis on our Consolidated Balance Sheets:
|
|
June 30, 2023 |
|
|||||||||||||||||
|
|
Carrying |
|
|
|
|
|
|
|
|
|
|
|
Total Fair |
|
|||||
|
|
value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
value |
|
|||||
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Finance receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Retail loan |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Working capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unsecured notes and loans payable |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Secured notes and loans payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
March 31, 2023 |
|
|||||||||||||||||
|
|
Carrying |
|
|
|
|
|
|
|
|
|
|
|
Total Fair |
|
|||||
|
|
value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
value |
|
|||||
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Finance receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Retail loan |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Working capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Unsecured notes and loans payable |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Secured notes and loans payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Accrued interest related to finance receivables is in Other assets on the Consolidated Balance Sheets; however, TMCC measures the fair value of each class of finance receivables using scheduled principal and interest payments. Therefore, accrued interest has been included in the carrying value of each class of finance receivables in the previous tables, along with the finance receivables, deferred origination costs, deferred income, and allowance for credit losses.
Finance receivables in the previous tables exclude related party transactions which are classified as Level 3 within the fair value hierarchy. The previous tables also exclude related party notes receivables and notes payables recorded in Other assets and Other liabilities on the Consolidated Balance Sheets which are classified as Level 3 within the fair value hierarchy. Refer to Note 11 - Related Party Transaction for additional information.
34
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 13 – Segment Information
Financial information for our reportable operating segments, which includes allocated corporate expenses, is summarized as follows:
|
|
Three months ended June 30, 2023 |
|
|||||||||||||
|
|
Finance |
|
|
Voluntary protection |
|
|
Intercompany |
|
|
|
|
||||
|
|
operations |
|
|
operations |
|
|
eliminations |
|
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total financing revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Depreciation on operating leases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net financing revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Voluntary protection contract revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment and other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net financing and other revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Voluntary protection contract expenses and insurance losses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets at June 30, 2023 |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
Three months ended June 30, 2022 |
|
|||||||||||||
|
|
Finance |
|
|
Voluntary protection |
|
|
Intercompany |
|
|
|
|
||||
|
|
operations |
|
|
operations |
|
|
eliminations |
|
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total financing revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Depreciation on operating leases |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net financing revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Voluntary protection contract revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment and other income (loss), net |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Net financing and other revenues |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Provision for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Voluntary protection contract expenses and insurance losses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income (loss) before income taxes |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Provision (benefit) for income taxes |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets at June 30, 2022 |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
35
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
Note 13 – Segment Information (Continued)
Voluntary protection operations – Contract revenues
For the three months ended June 30, 2023 and 2022, approximately
The Voluntary protection operations segment defers contractually determined incentives paid to dealers as contract costs for selling voluntary protection products. These costs are recorded in Other assets on our Consolidated Balance Sheets and are amortized to Operating and administrative expenses in the Consolidated Statements of Income using a methodology consistent with the recognition of revenue. The amount of capitalized dealer incentives and the related amortization was not significant to our consolidated financial statements as of and for the three months ended June 30, 2023 and 2022.
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Information
Certain statements contained in this Form 10-Q are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and currently available information. However, since these statements are based on factors that involve risks and uncertainties, our performance and results may differ materially from those described or implied by such forward-looking statements. Words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” “should,” “intend,” “will,” “may” or words or phrases of similar meaning are intended to identify forward-looking statements. We caution that the forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause actual results to differ materially from those in the forward-looking statements, including, without limitation, the risk factors set forth in “Part II. Other Information – Item 1A. Risk Factors” and “Item 1A. Risk Factors” of our Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2023 (“fiscal 2023”), including the following:
Changes in general business, economic, and geopolitical conditions, including trade policy, as well as in consumer demand and the competitive environment in the automotive markets in the United States;
Changes in interest rates and credit spreads;
A decline in Toyota Motor North America, Inc. (“TMNA”) or any private label sales volume and the level of TMNA or any private label sponsored subvention, cash, and contractual residual value support incentive programs;
Extreme weather conditions, natural disasters, changes in fuel prices, manufacturing disruptions and production suspensions of Toyota, Lexus, and private label vehicles and related parts supply;
Increased competition from other financial institutions seeking to increase their share of financing Toyota, Lexus, and private label vehicles;
Changes in consumer behavior;
Recalls announced by TMNA or private label companies and the perceived quality of Toyota, Lexus, and any private label vehicles;
Risks related to health epidemics and other outbreaks;
Availability and cost of financing;
Failure or interruption in our operations, including our communications and information systems, or as a result of our failure to retain existing or to attract new key personnel;
Increased cost, credit and operating risk exposure, or our failure to realize the anticipated benefits, from our private label financial services to third-party automotive and mobility companies, including Mazda and Bass Pro Shops;
Changes in our credit ratings and those of our ultimate parent, Toyota Motor Corporation (“TMC”) and changes in our credit support arrangements;
Changes in our financial position and liquidity, or changes or disruptions in our funding sources or access to the global capital markets;
Revisions to the estimates and assumptions for our allowance for credit losses;
Flaws in the design, implementation and use of quantitative models and revisions to the estimates and assumptions that are used to determine the value of certain assets;
Fluctuations in the value or market prices of our investment securities;
Changes in prices of used vehicles and their effect on residual values of our off-lease vehicles and return rates;
Failure of our customers or dealers to meet the terms of any contract with us, or otherwise perform as agreed;
Market risks including changes in interest rates and foreign currency exchange rates and market prices;
Failure or changes in commercial soundness of our counterparties and other financial institutions;
Insufficient establishment of reserves, or the failure of a reinsurer to meet its obligations, in our voluntary protection operations;
37
A security breach or a cyber-attack;
Failure to maintain compliant enterprise data practices, including the collection, use, sharing, and security of personally identifiable and financial information of our customers and employees;
Compliance with current laws and regulations or becoming subject to more stringent laws, regulatory requirements and regulatory scrutiny; and
Changes in the economies and applicable laws in the states where we have concentration risk.
Forward-looking statements speak only as of the date they are made. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements.
38
OVERVIEW
Key Performance Indicators and Factors Affecting Our Business
In our finance operations, we generate revenue, income, and cash flows by providing retail, lease, and dealer financing to dealers and their customers. We measure the performance of our finance operations using the following metrics: financing volume, market share, Net financing revenues, Operating and administrative expense, residual value and credit loss metrics.
In our voluntary protection operations, we generate revenue primarily through marketing, underwriting, and providing claims administration for products that cover certain risks of customers. We measure the performance of our voluntary protection operations using the following metrics: issued contract volume, average number of contracts in force, loss metrics and investment income.
Our financial results are affected by a variety of economic and industry factors including, but not limited to, new and used vehicle markets, Toyota, Lexus, and private label new vehicle production volume, vehicle inventory levels, vehicle sales and incentive programs, consumer behavior, employment levels, our ability to respond to changes in interest rates with respect to both contract pricing and funding, the actual or perceived quality, safety or reliability of Toyota, Lexus, and private label vehicles, the financial health of the dealers we finance, and competitive pressure. Our financial results may also be affected by the regulatory environment in which we operate, including as a result of new legislation or changes in regulation and any compliance costs or changes we may be required to make to our business practices. All of these factors can influence consumer contract and dealer financing volume, the number of consumer contracts and dealers that default and the loss per occurrence, our inability to realize originally estimated contractual residual values on leased vehicles, the volume and performance of our voluntary protection operations, and our Net financing revenues on consumer and dealer financing volume. Changes in the volume of vehicle sales, sales of our voluntary protection products, or the level of voluntary protection expenses and insurance losses could materially and adversely impact our voluntary protection operations. Additionally, our funding programs and related costs are influenced by changes in the global capital markets, prevailing interest rates, and our credit ratings and those of our parent companies, which may affect our ability to obtain cost effective funding to support earning asset growth.
39
Fiscal 2024 First Three Months Operating Environment
During the first quarter of the fiscal year ending March 31, 2024 (“fiscal 2024”), the United States (“U.S.”) economy continued to be impacted by uncertainties related to inflationary pressures and high interest rates. The economic conditions, including consumer price increases and high interest rates, have negatively impacted some consumers ability to make scheduled payments which has resulted in an increase in consumer delinquencies and charge-offs.
Along with a general improvement of inventory levels of new vehicles, industry-wide vehicle sales and sales incentives increased in the U.S. for the first quarter of fiscal 2024, compared to the same period in fiscal 2023. While the industry inventory levels of new vehicles are generally improving, due to increased demand, intermittent production delays resulting from supply shortages affecting the automotive industry, and additional delays affecting the supply chain and logistics networks, Toyota, Lexus, and private-label dealers continue to face new vehicle inventory constraints.
Average used vehicle values in the first quarter of fiscal 2024 remained elevated compared to pre-pandemic levels; however, there has been a decline in values in the current fiscal year. Future declines in used vehicle values resulting from increases in the supply of new and used vehicles and increases in new vehicle sales incentives could unfavorably impact return rates, residual values, depreciation expense and credit losses.
We continue to maintain broad global access to both domestic and international funding markets. Conditions in the global capital markets were generally stable during the first three months of fiscal 2024; however, persistent inflation and uncertainty regarding the path of U.S. monetary policy led to periods of volatility during the quarter. During the first quarter of fiscal 2024, our interest expense increased as compared to the same period in fiscal 2023 as a result of higher interest rates. Future disruptions and changes in interest rates in the U.S. and foreign markets could result in volatility in our interest expense, which could affect our results of operations.
40
RESULTS OF OPERATIONS
The following table summarizes total net income by our reportable operating segments:
|
|
Three months ended |
|
|||||
|
|
June 30, |
|
|||||
(Dollars in millions) |
|
2023 |
|
|
2022 |
|
||
Net income: |
|
|
|
|
|
|
||
Finance operations 1 |
|
$ |
422 |
|
|
$ |
390 |
|
Voluntary protection operations 1 |
|
|
46 |
|
|
|
(220 |
) |
Total net income |
|
$ |
468 |
|
|
$ |
170 |
|
1 Refer to Note 13 - Segment Information of the Notes to Consolidated Financial Statements for the total asset balances of our finance and voluntary protection operations.
Our consolidated net income was $468 million for the first quarter of fiscal 2024, compared to $170 million for the same period in fiscal 2023. The increase in net income for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, was primarily due to a $468 million increase in investment and other income, net, a $252 million decrease in depreciation on operating leases, and a $73 million increase in total financing revenues, partially offset by a $336 million increase in interest expense, a $87 million increase in provision for credit losses, a $42 million increase in operating and administrative expense, and a $39 million increase in Voluntary protection contract expenses and insurance losses.
Our overall capital position increased $460 million, bringing total shareholder’s equity to $17.0 billion at June 30, 2023 as compared to $16.5 billion at March 31, 2023. Our debt increased to $112.4 billion at June 30, 2023 from $111.7 billion at March 31, 2023. Our debt-to-equity ratio decreased to 6.6 at June 30, 2023 from 6.8 at March 31, 2023.
41
Finance Operations
The following table summarizes key results of our Finance Operations:
|
|
Three months ended |
|
|
|
|||||
|
|
June 30, |
|
|
Percentage |
|||||
(Dollars in millions) |
|
2023 |
|
|
2022 |
|
|
change |
||
Financing revenues: |
|
|
|
|
|
|
|
|
||
Operating lease |
|
$ |
1,615 |
|
|
$ |
1,900 |
|
|
(15)% |
Retail |
|
|
1,104 |
|
|
|
845 |
|
|
31% |
Dealer |
|
|
185 |
|
|
|
86 |
|
|
115% |
Total financing revenues |
|
|
2,904 |
|
|
|
2,831 |
|
|
3% |
Depreciation on operating leases |
|
|
1,157 |
|
|
|
1,409 |
|
|
(18)% |
Interest expense |
|
|
899 |
|
|
|
563 |
|
|
60% |
Net financing revenues |
|
|
848 |
|
|
|
859 |
|
|
(1)% |
Investment and other income, net |
|
|
114 |
|
|
|
33 |
|
|
245% |
Net financing and other revenues |
|
|
962 |
|
|
|
892 |
|
|
8% |
Expenses: |
|
|
|
|
|
|
|
|
||
Provision for credit losses |
|
|
165 |
|
|
|
78 |
|
|
112% |
Operating and administrative |
|
|
334 |
|
|
|
299 |
|
|
12% |
Total expenses |
|
|
499 |
|
|
|
377 |
|
|
32% |
Income before income taxes |
|
|
463 |
|
|
|
515 |
|
|
(10)% |
Provision for income taxes |
|
|
41 |
|
|
|
125 |
|
|
(67)% |
|
|
|
|
|
|
|
|
|
||
Net income from finance operations |
|
$ |
422 |
|
|
$ |
390 |
|
|
8% |
Our finance operations reported net income of $422 million for the first quarter of fiscal 2024, compared to $390 million for the same period in fiscal 2023. The increase in net income from finance operations for the first quarter of fiscal 2024, compared to the same period in fiscal 2023 was due to a $252 million decrease in depreciation on operating leases, an $84 million decrease in provision for income taxes, an $81 million increase in investment and other income, net, and a $73 million increase in total financing revenues, partially offset by a $336 million increase in interest expense, an $87 million increase in provision for credit losses, and a $35 million increase in operating and administrative expenses.
Financing Revenues
Total financing revenues increased 3 percent during the first quarter of fiscal 2024, as compared to the same period in fiscal 2023 due to the following:
As a result of the above, our total portfolio yield, which includes operating lease, retail and dealer financing revenues, was 5.7 percent for the first quarter of fiscal 2024, compared to 4.7 percent for the same period in fiscal 2023.
42
Depreciation on Operating Leases
We recorded depreciation on operating leases of $1.2 billion for the first quarter of fiscal 2024, compared to $1.4 billion for the same period in fiscal 2023, primarily due to lower average operating lease units outstanding.
While production of new vehicles has improved in the first quarter of fiscal 2024, compared to the same period in fiscal 2023, we continue to face vehicle inventory constraints. In addition to the ongoing supply chain shortages affecting the automotive industry and delays affecting the supply chain and logistics networks, we have the challenge of increasing inventory levels of new vehicles to overcome the growing demand. The new vehicle inventory constraints and higher off-lease vehicle purchases by consumers and dealers have led to elevated levels of average used vehicle values; however, there has been a decline in values in the current fiscal year.
Declines in used vehicle values resulting from increases in the supply of new vehicles and increases in new vehicle sales incentives could unfavorably impact return rates, residual values, and depreciation expense in the future.
Interest Expense
Our liabilities consist mainly of fixed and variable rate debt, denominated in U.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps and foreign currency swaps to economically hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. The following table summarizes the components of interest expense:
|
|
Three months ended |
|
|||||
|
|
June 30, |
|
|||||
(Dollars in millions) |
|
2023 |
|
|
2022 |
|
||
Interest expense on debt |
|
$ |
1,087 |
|
|
$ |
446 |
|
Interest income on derivatives |
|
|
(209 |
) |
|
|
(62 |
) |
Interest expense on debt and derivatives |
|
|
878 |
|
|
|
384 |
|
|
|
|
|
|
|
|
||
Losses (gains) on debt denominated in foreign currencies |
|
|
36 |
|
|
|
(591 |
) |
Losses on foreign currency swaps |
|
|
44 |
|
|
|
712 |
|
(Gains) losses on U.S. dollar interest rate swaps |
|
|
(59 |
) |
|
|
58 |
|
Total interest expense |
|
$ |
899 |
|
|
$ |
563 |
|
During the first quarter of fiscal 2024, total interest expense increased to $899 million from $563 million for the same period in fiscal 2023. The increase in total interest expense for the first quarter of fiscal 2024, is attributable to an increase in interest expense on debt and derivatives combined, losses on foreign currency swaps and debt denominated in foreign currencies, partially offset by gains on U.S. dollar interest rate swaps.
Interest expense on debt and derivatives primarily represents contractual net interest settlements and changes in accruals on secured and unsecured notes and loans payable and derivatives, and includes amortization of discounts, premiums, and debt issuance costs. During the first quarter of fiscal 2024, interest expense on debt and derivatives combined increased to $878 million from $384 million for the same period in fiscal 2023. The increase in interest expense on debt is primarily due to an increase in weighted average interest rates. The increase in interest income on derivatives is primarily due to an increase in net interest income on pay-fixed swaps, partially offset by an increase in net interest expense on pay-float swaps.
Gains or losses on debt denominated in foreign currencies represent the impact of translation adjustments. We use foreign currency swaps to economically hedge the debt denominated in foreign currencies. During the first quarter of fiscal 2024 and 2023, we recorded net losses of $80 million and $121 million, respectively, primarily due to increases in foreign currency swap rates across the various currencies in which our debt is denominated.
Gains or losses on U.S. dollar interest rate swaps represent the change in the valuation of interest rate swaps. During the first quarter of fiscal 2024, we recorded gains of $59 million due to an upward shift of U.S. dollar swap rates resulting in gains on pay-fixed swaps exceeding losses on our pay-float swaps and gains due to passage of time. These gains were partially offset by losses due to net interest income on our pay fixed swaps. During the first quarter of fiscal 2023, we recorded losses of $58 million as losses on pay-float swaps exceeded gains on pay-fixed swaps, primarily due to increases in U.S. dollar swap rates.
Future changes in interest and foreign currency exchange rates could result in significant volatility in our interest expense, thereby affecting our results of operations.
43
Investment and Other Income, Net
We recorded investment and other income, net of $114 million for the first quarter of fiscal 2024, compared to $33 million for the same period in fiscal 2023. The increase in investment and other income, net for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, was primarily due to higher yields on our investment in marketable securities portfolio.
Provision for Credit Losses
We recorded a provision for credit losses of $165 million for the first quarter of fiscal 2024, compared to $78 million for the same period in fiscal 2023. The increase in the provision for credit losses for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, was due to an increase in size of our retail loan portfolio, an increase in consumer delinquencies and charge-offs as well as higher expectations of credit losses in the retail loan portfolio.
Operating and Administrative Expenses
We recorded operating and administrative expenses of $334 million for the first quarter of fiscal 2024, compared to $299 million for the same period in fiscal 2023. The increase in operating and administrative expenses for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, was primarily due to higher technology expenses and general operating expenses.
44
Voluntary Protection Operations
The following table summarizes key results of our Voluntary Protection Operations:
|
|
Three months ended |
|
|||||||
|
|
June 30, |
|
|
Percentage |
|||||
|
|
2023 |
|
|
2022 |
|
|
change |
||
Contracts (units in thousands) |
|
|
|
|
|
|
|
|
||
Issued |
|
|
790 |
|
|
|
770 |
|
|
3% |
Average in force |
|
|
10,677 |
|
|
|
10,240 |
|
|
4% |
|
|
|
|
|
|
|
|
|
||
(Dollars in millions) |
|
|
|
|
|
|
|
|
||
Voluntary protection contract revenues |
|
$ |
271 |
|
|
$ |
259 |
|
|
5% |
Investment and other income (loss), net |
|
|
48 |
|
|
|
(339 |
) |
|
(114)% |
Revenues from voluntary protection operations |
|
|
319 |
|
|
|
(80 |
) |
|
(499)% |
Expenses: |
|
|
|
|
|
|
|
|
||
Voluntary protection contract expenses |
|
|
146 |
|
|
|
107 |
|
|
36% |
Operating and administrative |
|
|
114 |
|
|
|
107 |
|
|
7% |
Total expenses |
|
|
260 |
|
|
|
214 |
|
|
21% |
Income (loss) before income taxes |
|
|
59 |
|
|
|
(294 |
) |
|
(120)% |
Provision (benefit) for income taxes |
|
|
13 |
|
|
|
(74 |
) |
|
(118)% |
Net income (loss) from voluntary protection operation |
|
$ |
46 |
|
|
$ |
(220 |
) |
|
(121)% |
Our voluntary protection operations reported net income of $46 million for the first quarter of fiscal 2024, compared to net loss of $220 million for the same period in fiscal 2023. The increase in net income from voluntary protection operations for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, was primarily due to a $387 million increase in investment and other income, net, partially offset by an $87 million increase in provision for income taxes and a $39 million increase in voluntary protection contract expenses and insurance losses.
Contracts issued increased 3 percent for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, primarily due to growth in our private label business. The average number of contracts in force increased 4 percent for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, due to net growth in the voluntary protection portfolio compared to prior years, primarily in prepaid maintenance and tire and wheel contracts.
Revenue from Voluntary Protection Operations
Our voluntary protection operations reported voluntary protection contract revenues and insurance earned premiums of $271 million for the first quarter of fiscal 2024, compared to $259 million for the same period in fiscal 2023. Voluntary protection contract revenues and insurance earned premiums represent revenues from in force contracts and are affected by issuances as well as the level of coverage, age, and mix of in force contracts. Voluntary protection contract revenues and insurance earned premiums are recognized over the term of the contracts in relation to the timing and level of anticipated claims. The increase in voluntary protection contract revenues and insurance earned premiums for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, was primarily due to an increase in our average in force contracts resulting from net growth in the voluntary protection portfolio from prior years.
Investment and Other Income (Loss), Net
Our voluntary protection operations reported investment and other income, net of $48 million for the first quarter of fiscal 2024, compared to investment and other loss, net of $339 million for the same period in fiscal 2023. Investment and other income (loss), net, consists primarily of dividend and interest income, realized gains and losses on investments in marketable securities, changes in fair value from equity and available-for-sale debt securities for which the fair value option was elected, and credit loss expense on available-for-sale debt securities, if any. The increase in investment and other income, net for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, was primarily due to changes in fair value on our equity investments and available-for-sale debt securities for which the fair value option was elected, as a result of market volatility.
45
Voluntary Protection Contract Expenses and Insurance Losses
Our voluntary protection operations reported voluntary protection contract expenses and insurance losses of $146 million for the first quarter of fiscal 2024, compared to $107 million for the same period in fiscal 2023. Voluntary protection contract expenses and insurance losses incurred are a function of the amount of covered risks, the frequency and severity of claims associated with in force contracts and the level of risk retained by our voluntary protection operations. Voluntary protection contract expenses and insurance losses include amounts paid and accrued for reported losses, estimates of losses incurred but not reported, and any related claim adjustment expenses. The increase in voluntary protection contract expenses and insurance losses for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, was primarily due to an increase in frequency and severity of claims in our vehicle service, guaranteed auto protection, and tire and wheel contracts.
Operating and Administrative Expenses
Our voluntary protection operations reported operating and administrative expenses of $114 million for the first quarter of fiscal 2024, compared to $107 million for the same period in fiscal 2023. The increase in operating and administrative expenses for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, was primarily attributable to higher product expenses driven by the continued growth of our voluntary protection product business.
Provision for Income Taxes
We recorded a provision for income taxes of $54 million for the first quarter of fiscal 2024, compared to $51 million for the same period in fiscal 2023. Our effective tax rate was 10 percent for the first quarter of fiscal 2024, compared to 23 percent for the same period in fiscal 2023. The lower effective tax rate for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, was primarily attributable to the increase in federal tax credit for commercial electric vehicles in the current period.
46
FINANCIAL CONDITION
Vehicle Financing Volume and Net Earning Assets
The composition of our vehicle contract volume and market share is summarized below:
|
|
Three months ended |
|
|
|
|||||
|
|
June 30, |
|
|
Percentage |
|||||
(Units in thousands): |
|
2023 |
|
|
2022 |
|
|
change |
||
Vehicle financing volume 1: |
|
|
|
|
|
|
|
|
||
New retail contracts |
|
|
197 |
|
|
|
175 |
|
|
13% |
Used retail contracts |
|
|
106 |
|
|
|
124 |
|
|
(15)% |
Lease contracts |
|
|
81 |
|
|
|
63 |
|
|
29% |
Total |
|
|
384 |
|
|
|
362 |
|
|
6% |
|
|
|
|
|
|
|
|
|
||
TMNA subvened vehicle financing volume 2: |
||||||||||
New retail contracts |
|
|
111 |
|
|
|
93 |
|
|
19% |
Used retail contracts |
|
|
12 |
|
|
|
8 |
|
|
50% |
Lease contracts |
|
|
54 |
|
|
|
36 |
|
|
50% |
Total |
|
|
177 |
|
|
|
137 |
|
|
29% |
|
|
|
|
|
|
|
|
|
||
Market share of TMNA sales 3: |
|
|
53.8 |
% |
|
|
53.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
||
Vehicle Financing Volume
The volume of our retail and lease contracts, which are acquired primarily from Toyota, Lexus, and private label dealers, is dependent upon TMNA and private label sales volume, the level of TMNA, private label, and third-party sponsored subvention and other incentive programs, as well as TMCC competitive rate and other incentive programs.
Our financing volume increased 6 percent for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, primarily due to higher total levels of subvention and other incentives programs. While production of new vehicles has improved in the first quarter of fiscal 2024, compared to the same period in fiscal 2023, we continue to face vehicle inventory constraints. In addition to the ongoing supply chain shortages affecting the automotive industry and delays affecting the supply chain and logistics networks, we have the challenge of increasing inventory levels of new vehicles to overcome the growing demand.
Our market share of TMNA sales remained relatively unchanged for the first quarter of fiscal 2024, compared to the same period in fiscal 2023.
47
The composition of our net earning assets is summarized below:
|
|
June 30, |
|
|
March 31, |
|
|
Percentage |
||
(Dollars in millions) |
|
2023 |
|
|
2023 |
|
|
change |
||
Net Earning Assets |
|
|
|
|
|
|
|
|
||
Finance receivables, net |
|
|
|
|
|
|
|
|
||
Retail finance receivables, net |
|
$ |
80,255 |
|
|
$ |
78,216 |
|
|
3% |
Dealer financing, net 1 |
|
|
12,907 |
|
|
|
12,064 |
|
|
7% |
Total finance receivables, net |
|
|
93,162 |
|
|
|
90,280 |
|
|
3% |
Investments in operating leases, net |
|
|
29,131 |
|
|
|
29,869 |
|
|
(2)% |
Net earning assets |
|
$ |
122,293 |
|
|
$ |
120,149 |
|
|
2% |
|
|
|
|
|
|
|
|
|
||
Dealer Financing |
|
|
|
|
|
|
|
|
||
(Number of dealers serviced) |
|
|
|
|
|
|
|
|
||
Toyota, Lexus, and private label dealers1 |
|
|
1,258 |
|
|
|
1,264 |
|
|
0% |
Dealers outside of the Toyota/Lexus/private label dealer network |
|
|
389 |
|
|
|
393 |
|
|
(1)% |
Total number of dealers receiving wholesale financing |
|
|
1,647 |
|
|
|
1,657 |
|
|
(1)% |
1 Includes wholesale and other credit arrangements in which we participate as part of a syndicate of lenders.
Retail Contract Volume and Earning Assets
Our new retail contract volume increased 13 percent for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, primarily due to higher levels of subvention and other incentives programs. Our used retail contracts decreased 15 percent for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, due to increased competition in the used vehicle marketplace caused by the reduction in new vehicle inventory levels.
Our retail finance receivables, net increased 3 percent at June 30, 2023 as compared to March 31, 2023 due to higher retail contracts outstanding and higher average amount financed.
Lease Contract Volume and Earning Assets
Our lease contract volume increased 29 percent for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, primarily due to higher levels of subvention and other incentives programs. Our investments in operating leases, net, decreased 2 percent at June 30, 2023, as compared to March 31, 2023 due to lower average operating lease units outstanding, partially offset by higher vehicle values.
Dealer Financing and Earning Assets
Dealer financing, net increased 7 percent at June 30, 2023, as compared to March 31, 2023, primarily due to an increase in wholesale and revolving credit financing.
While dealer inventory levels of new vehicles have improved, the ongoing supply chain shortages affecting the automotive industry, additional delays affecting the supply chain and logistics networks, and the challenge of increasing inventory levels of new vehicles to overcome the growing demand, have resulted in lower dealer new vehicle inventory levels.
48
Residual Value Risk
The primary factors affecting our exposure to residual value risk are the levels at which residual values are established at lease inception, current economic conditions and outlook, projected end-of-term market values, and the resulting impact on depreciation expense and lease return rates. Higher average operating lease units outstanding and the resulting increase in maturities, a higher supply of used vehicles, as well as deterioration in actual and expected used vehicle values for Toyota, Lexus, and private label vehicles could unfavorably impact return rates, residual values, and depreciation expense.
On a quarterly basis, we review the estimated end-of-term market values of leased vehicles to assess the appropriateness of our carrying values. To the extent the estimated end-of-term market value of a leased vehicle is lower than the residual value established at lease inception, the residual value of the leased vehicle is adjusted downward so that the carrying value at lease end will approximate the estimated end-of-term market value. For investments in operating leases, adjustments are made on a straight-line basis over the remaining terms of the lease contracts and are included in Depreciation on operating leases in our Consolidated Statements of Income as a change in accounting estimate.
Depreciation on Operating Leases
Depreciation on operating leases and average operating lease units outstanding are as follows:
|
|
Three months ended |
|
|
|
|
|||||
|
|
June 30, |
|
|
Percentage |
|
|||||
|
|
2023 |
|
|
2022 |
|
|
change |
|
||
Depreciation on operating leases |
|
$ |
1,157 |
|
|
$ |
1,409 |
|
|
(18)% |
|
Average operating lease units |
|
|
1,033 |
|
|
|
1,219 |
|
|
(15)% |
|
Depreciation expense on operating leases decreased 18 percent for the first quarter of fiscal 2024, compared to the same period in fiscal 2023, primarily due to lower average operating lease units outstanding.
While production of new vehicles has improved in the first quarter of fiscal 2024, compared to the same period in fiscal 2023, we continue to face vehicle inventory constraints. In addition to the ongoing supply chain shortages affecting the automotive industry and delays affecting the supply chain and logistics networks, we have the challenge of increasing inventory levels of new vehicles to overcome the growing demand. The new vehicle inventory constraints and higher off-lease vehicle purchases by consumers and dealers have led to elevated levels of average used vehicle values; however, there has been a decline in values in the current fiscal year.
Declines in used vehicle values resulting from increases in the supply of new vehicles and increases in new vehicle sales incentives could unfavorably impact return rates, residual values, and depreciation expense in the future.
49
Origination, Credit Loss, and Delinquency Experience
Our credit loss experience may be affected by a number of factors including the economic environment, our purchasing, servicing and collections practices, used vehicle market conditions and subvention. Changes in the economy that impact the consumer such as increasing interest rates, and a rise in the unemployment rate as well as higher debt balances, coupled with deterioration in actual and expected used vehicle values, could increase our credit losses. In addition, a decline in the effectiveness of our collection practices could also increase our credit losses. We continuously evaluate and refine our purchasing practices and collection efforts to minimize risk. In addition, subvention contributes to our overall portfolio quality, as subvened contracts typically have higher credit scores than non-subvened contracts.
The following table provides information related to our origination experience:
|
|
June 30, |
|
|
March 31, |
|
|
June 30, |
|
|||
|
|
2023 |
|
|
2023 |
|
|
2022 |
|
|||
Average consumer portfolio origination FICO score |
|
|
751 |
|
|
|
744 |
|
|
|
742 |
|
Average consumer retail loan origination term (months) 1 |
|
|
69 |
|
|
|
69 |
|
|
|
69 |
|
1 Retail loan origination greater than or equal to 78 months was 10% as of June 30, 2023, March 31, 2023, and June 30, 2022, respectively.
While we have included the average origination FICO score to illustrate origination trends, we also use a proprietary credit scoring system to evaluate an applicant’s risk profile. Refer to Part I. Item 1. Business “Finance Operations” in our fiscal 2023 Form 10-K for further discussion of the proprietary manner in which we evaluate risk.
The following table provides information related to our finance receivables and investment in operating leases:
|
|
June 30, |
|
|
March 31, |
|
|
June 30, |
|
|||
|
|
2023 |
|
|
2023 |
|
|
2022 |
|
|||
Net charge-offs as a percentage of average |
|
0.52% |
|
|
0.54% |
|
|
0.33% |
|
|||
Default frequency as a percentage of outstanding |
|
1.19% |
|
|
0.89% |
|
|
0.83% |
|
|||
Average finance receivables loss severity per unit 2 |
|
$ |
13,441 |
|
|
$ |
12,425 |
|
|
$ |
10,588 |
|
Aggregate balances for accounts 60 or more days |
|
|
|
|
|
|
|
|
|
|||
Finance receivables |
|
0.65% |
|
|
0.61% |
|
|
0.49% |
|
|||
Operating leases |
|
0.42% |
|
|
0.40% |
|
|
0.30% |
|
|||
1 The ratio for net charge-offs and the ratio for default frequency have been annualized using three-month results for the periods ended June 30, 2023 and 2022. Net charge-off includes the write-offs of accounts deemed to be uncollectable and accounts greater than 120 days past due.
2 Average loss per unit upon disposition of repossessed vehicles or charge-off prior to repossession.
3 Substantially all retail receivables do not involve recourse to the dealer in the event of customer default.
4 Includes accounts in bankruptcy and excludes accounts for which vehicles have been repossessed.
5 Excludes accrued interest from average finance receivables.
Management considers historical credit loss information when assessing the allowance for credit losses. Historical credit losses are primarily driven by two factors: default frequency and loss severity. Our net charge-offs as a percentage of average finance receivables for the first quarter of fiscal 2024 increased to 0.52 percent from 0.33 percent for the same period in fiscal 2023. Our default frequency as a percentage of outstanding finance receivable contracts increased to 1.19 percent for the first quarter of fiscal 2024, compared to 0.83 percent in the same period in fiscal 2023. Our average finance receivables loss severity per unit for the first quarter of fiscal 2024 increased to $13,441 from $10,588 in the first quarter of fiscal 2023. The increases in net charge-offs, default frequency, and loss severity per unit were due to an increase in full balance charge-offs, higher average amounts financed, and higher delinquencies.
Our aggregate balances for accounts 60 or more days past due as a percentage of finance receivables was 0.65 percent at June 30, 2023, compared to 0.49 percent at June 30, 2022, and 0.61 percent at March 31, 2023. Our aggregate balances for accounts 60 or more days past due as a percentage of operating leases was 0.42 percent at June 30, 2023, compared to 0.30 percent at June 30, 2022, and 0.40 percent at March 31, 2023. The economic conditions, including consumer price increases and high interest rates, have negatively impacted some consumers ability to make scheduled payments which has resulted in an increase in consumer delinquencies and charge-offs.
50
Allowance for Credit Losses
We maintain an allowance for credit losses which is measured by an impairment model that reflects lifetime expected losses.
The allowance for credit losses for our retail loan portfolio is measured on a collective basis when loans have similar risk characteristics such as loan-to-value ratio, book payment-to-income ratio, FICO score at origination, collateral type, contract term, and other relevant factors. We use statistical models to estimate lifetime expected credit losses of our retail loan portfolio segment by applying probability of default and loss given default to the exposure at default on a loan level basis. Probability of default models are developed from internal risk scoring models which consider variables such as delinquency status, historical default frequency, and other credit quality indicators. Other credit quality indicators include loan-to-value ratio, book payment-to-income ratio, FICO score at origination, collateral type (new or used, Lexus, Toyota, or private label), and contract term. Loss given default models forecast the extent of losses given that a default has occurred and consider variables such as collateral, trends in recoveries, historical loss severity, and other contract structure variables. Exposure at default represents the expected outstanding principal balance, including the effects of expected prepayment when applicable. The lifetime expected credit losses incorporate the probability-weighted forward-looking macroeconomic forecasts for baseline, favorable, and adverse scenarios. The loan lifetime is regarded by management as the reasonable and supportable period. We use macroeconomic forecasts from a third party and update such forecasts quarterly. On an ongoing basis, we review our models, including macroeconomic factors, the selection of macroeconomic scenarios and their weighting to ensure they reflect the risk of the portfolio.
For the allowance for credit losses for our dealer portfolio, an allowance for credit losses is established for both outstanding dealer finance receivables and certain unfunded off-balance sheet lending commitments. The allowance for credit losses is measured on a collective basis when loans have similar risk characteristics such as dealer group internal risk rating and loan-to-value ratios. We measure lifetime expected credit losses of our dealer products portfolio segment by applying probability of default and loss given default to the exposure at default on a loan level basis. Probability of default is primarily established based on internal risk assessments. The probability of default model also considers qualitative factors related to macroeconomic outlooks. Loss given default is established based on the nature and market value of the collateral, loan-to-value ratios and other credit quality indicators. Exposure at default represents the expected outstanding principal balance. The lifetime of the loan or lending commitment is regarded by management as the reasonable and supportable period. On an ongoing basis, we review our models, including macroeconomic outlooks, to ensure they reflect the risk of the portfolio.
If management does not believe the models reflect lifetime expected credit losses, a qualitative adjustment is made to reflect management judgment regarding observable changes in recent or expected economic trends and conditions, portfolio composition, and other relevant factors.
The following table provides information related to our allowance for credit losses for finance receivables and certain off-balance sheet lending commitments:
|
|
Three months ended |
|
|||||
|
|
June 30, |
|
|||||
(Dollars in millions) |
|
2023 |
|
|
2022 |
|
||
Allowance for credit losses at beginning of period |
|
$ |
1,513 |
|
|
$ |
1,272 |
|
Charge-offs |
|
|
(134 |
) |
|
|
(91 |
) |
Recoveries |
|
|
29 |
|
|
|
15 |
|
Provision for credit losses |
|
|
165 |
|
|
|
78 |
|
Allowance for credit losses at end of period 1 |
|
$ |
1,573 |
|
|
$ |
1,274 |
|
1 Ending balance as of June 30, 2023 and 2022 include $28 million and $26 million, respectively, of allowance for credit losses recorded in Other liabilities on the Consolidated Balance Sheet which is related to off-balance-sheet lending commitments.
Our allowance for credit losses increased by $299 million from $1.3 billion at June 30, 2022 to $1.6 billion at June 30, 2023, due to an increase in size of our retail loan portfolio, an increase in consumer delinquencies and charge-offs as well as higher expectations of credit losses in the retail loan portfolio.
Future changes in the economy that impact the consumer and consumer confidence such as increasing interest rates and a rise in the unemployment rate as well as higher debt balances, coupled with deterioration in actual and expected used vehicle values, could result in further increases to our allowance for credit losses. In addition, a decline in the effectiveness of our collection practices could also increase our allowance for credit losses.
51
LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements
Our primary material cash requirements include the acquisition of finance receivables and investment in operating leases from dealers, providing various financing to dealers, payments related to debt and swaps, operating expenses, voluntary protection contract expenses, income taxes, and dividend payments.
Guarantees
TMCC has guaranteed the payments of principal and interest with respect to the bond obligations that were issued by Putnam County, West Virginia and Gibson County, Indiana to finance the construction of pollution control facilities at manufacturing plants of certain TMCC affiliates. Refer to Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further discussion.
Commitments
A description of our lending commitments is included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources” and Note 12 - Related Party Transactions of the Notes to Consolidated Financial Statements in our fiscal 2023 Form 10-K, as well as in Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements.
Indemnification
Refer to Note 9 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for a description of agreements containing indemnification provisions.
Liquidity
Liquidity risk is the risk relating to our ability to meet our financial obligations when they come due. Our liquidity strategy is to ensure that we maintain the ability to fund assets and repay liabilities in a timely and cost-effective manner, even in adverse market conditions. Our strategy includes raising funds via the global capital markets and through loans, credit facilities, and other transactions as well as generating liquidity from our earning assets. This strategy has led us to develop a diversified borrowing base that is distributed across a variety of markets, geographies, investors and financing structures.
Liquidity management involves forecasting and maintaining sufficient capacity to meet our cash needs, including unanticipated events. To ensure adequate liquidity through a full range of potential operating environments and market conditions, we conduct our liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility and diversity. Key components of this operating strategy include a strong focus on developing and maintaining direct relationships with commercial paper investors and wholesale market funding providers and maintaining the ability to sell certain assets when and if conditions warrant.
We develop and maintain contingency funding plans and regularly evaluate our liquidity position under various operating circumstances, allowing us to assess how we will be able to operate through a period of stress when access to normal sources of capital is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, and outline actions and procedures for effectively managing through the problem period. In addition, we monitor the ratings and credit exposure of the lenders that participate in our credit facilities to ascertain any issues that may arise with potential draws on these facilities if that contingency becomes warranted.
We maintain broad access to a variety of domestic and global markets and may choose to realign our funding activities depending upon market conditions, relative costs, and other factors. We believe that our funding sources, combined with operating and investing activities, provide sufficient liquidity to meet future funding requirements and business growth. For liquidity purposes, we hold cash in excess of our immediate funding needs. These excess funds are invested in short-term, highly liquid and investment grade money market instruments as well as certain available-for-sale debt securities, which provide liquidity for our short-term funding needs and flexibility in the use of our other funding sources. We maintained excess funds ranging from $5.8 billion to $10.2 billion with an average balance of $7.5 billion during the quarter ended June 30, 2023. The amount of excess funds we hold may fluctuate, depending on market conditions and other factors. We also have access to liquidity under the $5.0 billion credit facility with Toyota Motor Sales U.S.A., Inc. (“TMS”), which as of June 30, 2023, was not drawn upon and had no outstanding balance as further described in Note 7 – Debt and Credit Facilities of the Notes to the Consolidated Financial Statements. We believe we have sufficient capacity to meet our short-term funding requirements and manage our liquidity, including payment of dividends.
52
Credit support is provided to us by our indirect parent Toyota Financial Services Corporation (“TFSC”), and, in turn to TFSC by TMC. Taken together, these credit support agreements provide an additional source of liquidity to us, although we do not rely upon such credit support in our liquidity planning and capital and risk management. The credit support agreements are not a guarantee by TMC or TFSC of any securities or obligations of TFSC or TMCC, respectively. The fees paid pursuant to these agreements are disclosed in Note 11 – Related Party Transactions of the Notes to Consolidated Financial Statements.
TMC’s obligations under its credit support agreement with TFSC rank pari passu with TMC’s senior unsecured debt obligations. Refer to Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations “Liquidity and Capital Resources” in our fiscal 2023 Form 10-K for further discussion.
We routinely monitor global financial conditions and our financial exposure to our global counterparties, particularly in those countries experiencing significant economic, fiscal or political strain, and the corresponding likelihood of default. As of June 30, 2023, our exposure to foreign sovereign and non-sovereign counterparties was not significant. Refer to the “Liquidity and Capital Resources - Credit Facilities and Letters of Credit” section and Part I, Item 1A. Risk Factors – “The failure or commercial soundness of our counterparties and other financial institutions may have an effect on our liquidity, results of operations or financial condition” in our fiscal 2023 Form 10-K for further discussion.
Funding
The following table summarizes the components of our outstanding debt which includes unamortized premiums, discounts, debt issuance costs and the effects of foreign currency translation adjustments:
|
|
June 30, 2023 |
|
March 31, 2023 |
||||||||||||||||
(Dollars in millions) |
|
Face value |
|
|
Carrying value |
|
|
Weighted average |
|
Face value |
|
|
Carrying value |
|
|
Weighted average |
||||
Unsecured notes and loans payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Commercial paper |
|
$ |
16,949 |
|
|
$ |
16,737 |
|
|
5.32% |
|
$ |
16,946 |
|
|
$ |
16,737 |
|
|
5.01% |
U.S. medium term note |
|
|
47,827 |
|
|
|
47,674 |
|
|
3.35% |
|
|
45,727 |
|
|
|
45,576 |
|
|
3.11% |
Euro medium term note |
|
|
11,778 |
|
|
|
11,703 |
|
|
2.07% |
|
|
12,104 |
|
|
|
12,022 |
|
|
2.10% |
Other debt |
|
|
4,800 |
|
|
|
4,798 |
|
|
5.40% |
|
|
4,616 |
|
|
|
4,614 |
|
|
5.08% |
Total Unsecured notes and loans |
|
|
81,354 |
|
|
|
80,912 |
|
|
3.69% |
|
|
79,393 |
|
|
|
78,949 |
|
|
3.48% |
Secured notes and loans payable |
|
|
31,511 |
|
|
|
31,464 |
|
|
4.02% |
|
|
32,777 |
|
|
|
32,736 |
|
|
3.76% |
Total debt |
|
$ |
112,865 |
|
|
$ |
112,376 |
|
|
3.79% |
|
$ |
112,170 |
|
|
$ |
111,685 |
|
|
3.56% |
Unsecured notes and loans payable
The following table summarizes the significant activities by program of our Unsecured notes and loans payable:
(Dollars in millions) |
|
Commercial paper 1 |
|
|
MTNs |
|
|
EMTNs |
|
|
Other |
|
|
Total |
|
|||||
Balance at March 31, 2023 |
|
$ |
16,946 |
|
|
$ |
45,727 |
|
|
$ |
12,104 |
|
|
$ |
4,616 |
|
|
$ |
79,393 |
|
Issuances |
|
|
3 |
|
|
|
4,700 |
|
|
|
- |
|
|
|
184 |
|
|
|
4,887 |
|
Maturities and terminations |
|
|
- |
|
|
|
(2,600 |
) |
|
|
(369 |
) |
|
|
- |
|
|
|
(2,969 |
) |
Non-cash changes in foreign currency rates |
|
|
- |
|
|
|
- |
|
|
|
43 |
|
|
|
- |
|
|
|
43 |
|
Balance at June 30, 2023 |
|
$ |
16,949 |
|
|
$ |
47,827 |
|
|
$ |
11,778 |
|
|
$ |
4,800 |
|
|
$ |
81,354 |
|
1 Changes in Commercial paper are shown net due to its short duration.
53
Commercial paper
Short-term funding needs are met through the issuance of commercial paper in the U.S. Commercial paper outstanding under our commercial paper programs ranged from approximately $16.7 billion to $17.8 billion during the quarter ended June 30, 2023, with an average outstanding balance of $17.1 billion. Our commercial paper programs are supported by the credit facilities discussed under the heading “Credit Facilities and Letters of Credit.” We believe we have sufficient capacity to meet our short-term funding requirements and manage our liquidity.
MTN program
We maintain a shelf registration statement with the Securities and Exchange Commission (“SEC”) to provide for the issuance of debt securities in the U.S. capital markets to retail and institutional investors. We currently qualify as a well-known seasoned issuer under SEC rules, which allows us to issue under our registration statement an unlimited amount of debt securities during the three-year period ending January 2024. Debt securities issued under the U.S. shelf registration statement are issued pursuant to the terms of an indenture which requires TMCC to comply with certain covenants, including negative pledge and cross-default provisions. We are currently in compliance with these covenants.
EMTN program
Our EMTN program, shared with our affiliates Toyota Motor Finance (Netherlands) B.V., Toyota Credit Canada Inc. and Toyota Finance Australia Limited (TMCC and such affiliates, the “EMTN Issuers”), provides for the issuance of debt securities in the international capital markets. In September 2022, the EMTN Issuers renewed the EMTN program for a one-year period. The maximum aggregate principal amount authorized under the EMTN Program to be outstanding at any time is €60.0 billion or the equivalent in other currencies. The authorized amount is shared among all EMTN Issuers. The authorized aggregate principal amount under the EMTN program may be increased from time to time. Debt securities issued under the EMTN program are issued pursuant to the terms of an agency agreement. Certain debt securities issued under the EMTN program are subject to negative pledge provisions. We are currently in compliance with these covenants.
Other debt
TMCC has entered into term loan agreements with various banks. These term loan agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. We are currently in compliance with these covenants and conditions.
We may borrow from affiliates on terms based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities. Amounts borrowed from affiliates are recorded in Other liabilities on our Consolidated Balance Sheets and are therefore excluded from Debt amounts.
54
Secured Notes and Loans Payable
Asset-backed securitization of our earning asset portfolio provides us with an alternative source of funding. We regularly execute public or private securitization transactions.
The following table summarizes the significant activities of our Secured notes and loans payable:
(Dollars in millions) |
|
Secured |
|
|
Balance at March 31, 2023 |
|
$ |
32,777 |
|
Issuances |
|
|
2,622 |
|
Maturities and terminations |
|
|
(3,888 |
) |
Balance at June 30, 2023 |
|
$ |
31,511 |
|
We securitize finance receivables and beneficial interests in investments in operating leases (“Securitized Assets”) using a variety of structures. Our securitization transactions involve the transfer of Securitized Assets to bankruptcy-remote special purpose entities. These bankruptcy-remote entities are used to ensure that the Securitized Assets are isolated from the claims of creditors of TMCC and that the cash flows from these assets are available solely for the benefit of the investors in these asset-backed securities. Investors in asset-backed securities do not have recourse to our other assets, and neither TMCC nor our affiliates guarantee these obligations. We are not required to repurchase or make reallocation payments with respect to the Securitized Assets that become delinquent or default after securitization. As seller and servicer of the Securitized Assets, we are required to repurchase or make a reallocation payment with respect to the underlying assets that are subsequently discovered not to have met specified eligibility requirements. This repurchase obligation is customary in securitization transactions. With the exception of our revolving asset-backed securitization program, funding obtained from our securitization transactions is repaid as the underlying Securitized Assets amortize.
We service the Securitized Assets in accordance with our customary servicing practices and procedures. Our servicing duties include collecting payments on Securitized Assets and submitting them to a trustee for distribution to security holders and other interest holders. We prepare monthly servicer certificates on the performance of the Securitized Assets, including collections, investor distributions, delinquencies, and credit losses. We also perform administrative services for the special purpose entities.
Our use of special purpose entities in securitizations is consistent with conventional practice in the securitization market. None of our officers, directors, or employees hold any equity interests or receive any direct or indirect compensation from our special purpose entities. These entities do not own our stock or the stock of any of our affiliates. Each special purpose entity has a limited purpose and generally is permitted only to purchase assets, issue asset-backed securities, and make payments to the security holders, other interest holders and certain service providers as required under the terms of the transactions.
Our securitizations are structured to provide credit enhancement to reduce the risk of loss to security holders and other interest holders in the asset-backed securities. Credit enhancement may include some or all of the following:
55
In addition to the credit enhancement described above, we may enter into interest rate swaps with our special purpose entities that issue variable rate debt. Under the terms of these swaps, the special purpose entities are obligated to pay TMCC a fixed rate of interest on payment dates in exchange for receiving a floating rate of interest on notional amounts equal to the outstanding balance of the secured notes and loans payable. This arrangement enables the special purpose entities to mitigate the interest rate risk inherent in issuing variable rate debt that is secured by fixed rate Securitized Assets.
Securitized Assets and the related debt remain on our Consolidated Balance Sheets. We recognize financing revenue on the Securitized Assets. We also recognize interest expense on the secured notes and loans payable issued by the special purpose entities and maintain an allowance for credit losses on the Securitized Assets to cover estimated lifetime expected credit losses using a methodology consistent with that used for our non-securitized asset portfolio. The interest rate swaps between TMCC and the special purpose entities are considered intercompany transactions and therefore are eliminated in our consolidated financial statements.
Our secured notes also include a revolving asset-backed securitization program backed by a revolving pool of finance receivables and cash collateral. Cash flows from these receivables during the revolving period in excess of what is needed to pay certain expenses of the securitization trust and contractual interest payments on the related secured notes may be used to purchase additional receivables, provided that certain conditions are met following the purchase. The secured notes feature a scheduled revolving period, with the ability to repay the secured notes in full, after which an amortization period begins. The revolving period may also end with the amortization period beginning upon the occurrence of certain events that include certain segregated account balances falling below their required levels, credit losses or delinquencies on the pool of assets supporting the secured notes exceeding specified levels, the adjusted pool balance falling to less than 50% of the initial principal amount of the secured notes, or interest not being paid on the secured notes.
Public Securitization
We maintain a shelf registration statement with the SEC to provide for the issuance of securities backed by Securitized Assets in the U.S. capital markets during the three-year period ending December 2024. We regularly sponsor public securitization trusts that issue securities backed by retail finance receivables, including registered securities that we retain. None of these securities have defaulted, experienced any events of default or failed to pay principal in full at maturity. As of June 30, 2023 and March 31, 2023, we did not have any outstanding lease securitization transactions registered with the SEC.
56
Credit Facilities and Letters of Credit
For additional liquidity purposes, we maintain credit facilities, which may be used for general corporate purposes, as described below:
364-Day Credit Agreement, Three-Year Credit Agreement and Five-Year Credit Agreement
TMCC, Toyota Credit de Puerto Rico Corp. (“TCPR”), and other Toyota affiliates are party to a $5.0 billion 364-day syndicated bank credit facility, a $5.0 billion three-year syndicated bank credit facility, and a $5.0 billion five-year syndicated bank credit facility, expiring in fiscal 2024, 2026, and 2028, respectively.
The ability to make draws is subject to covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These agreements were not drawn upon and had no outstanding balances as of June 30, 2023 and March 31, 2023. We are currently in compliance with the covenants and conditions of the credit agreements described above.
Committed Revolving Asset-backed Facility
We are party to a 364-day revolving securitization facility with certain bank-sponsored asset-backed conduits and other financial institutions expiring in fiscal 2025. Under the terms and subject to the conditions of this facility, the committed lenders under the facility have committed to make advances up to a facility limit of $8.0 billion backed by eligible retail finance receivables transferred by us to a special-purpose entity acting as borrower. We utilized $5.0 billion and $5.5 billion of this facility as of June 30, 2023 and March 31, 2023, respectively.
Other Unsecured Credit Agreements
TMCC is party to additional unsecured credit facilities with various banks. As of June 30, 2023, TMCC had committed bank credit facilities totaling $4.4 billion of which $2.0 billion, $300 million, $1.8 billion, and $300 million mature in fiscal 2024, 2025, 2026, and 2027, respectively.
These credit agreements contain covenants and conditions customary in transactions of this nature, including negative pledge provisions, cross-default provisions and limitations on certain consolidations, mergers and sales of assets. These credit facilities were not drawn upon and had no outstanding balances as of June 30, 2023 and March 31, 2023. We are currently in compliance with the covenants and conditions of the credit agreements described above.
TMCC is party to a $5.0 billion three-year revolving credit facility with TMS expiring in fiscal 2026. This credit facility was not drawn upon and had no outstanding balance as of June 30, 2023 and March 31, 2023.
From time to time, we may borrow from affiliates based upon a number of business factors such as funds availability, cash flow timing, relative cost of funds, and market access capabilities.
Credit Ratings
The cost and availability of unsecured financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets. Credit ratings are not recommendations to buy, sell, or hold securities, and are subject to revision or withdrawal at any time by the assigning credit rating organization. Each credit rating organization may have different criteria for evaluating risk, and therefore ratings should be evaluated independently for each organization. Our credit ratings depend in part on the existence of the credit support agreements of TFSC and TMC. Refer to “Part I, Item 1A. Risk Factors - Our borrowing costs and access to the unsecured debt capital markets depend significantly on the credit ratings of TMCC and its parent companies and our credit support arrangements” in our fiscal 2023 Form 10-K.
57
Derivative Instruments
Our liabilities consist mainly of fixed and variable rate debt, denominated in U.S. dollars and various other currencies, which we issue in the global capital markets, while our assets consist primarily of U.S. dollar denominated, fixed rate receivables. We enter into interest rate swaps and foreign currency swaps to economically hedge the interest rate and foreign currency risks that result from the different characteristics of our assets and liabilities. Our use of derivative transactions is intended to reduce long-term fluctuations in the fair value of assets and liabilities caused by market movements. All of our derivatives are categorized as not designated for hedge accounting, and all of our derivative activities are authorized and monitored by our management and our Asset-Liability Committee which provides a framework for financial controls and governance to manage market risk.
Refer to Note 6 – Derivatives, Hedging Activities and Interest Expense of the Notes to Consolidated Financial Statements for further discussion and disclosure on derivative instruments.
LIBOR TRANSITION
While the most commonly used U.S. dollar London Interbank Offered Rate (“LIBOR”) tenors continued to be published until June 30, 2023, U.S. banking agencies issued guidance that financial institutions should cease using U.S. dollar LIBOR as a reference rate in new contracts after December 31, 2021. We were exposed to LIBOR-based financial instruments, including through our dealer financing activities, derivative contracts, secured and unsecured debt, and investment securities. To facilitate an orderly transition from LIBOR to alternative reference rates (“ARRs”), we established an initiative led by senior management, with Board and committee oversight, to assess, monitor and mitigate risks associated with the expected discontinuation of LIBOR, to achieve operational readiness and engage impacted borrowers and counterparties in connection with the transition to ARRs. Our efforts under this initiative included monitoring developments and the usage of ARRs, monitoring the regulatory and financial reporting guidance, as well as reviewing and updating current legal contracts, internal systems and processes to accommodate the use of ARRs.
We have not entered into new contracts that use LIBOR as a reference rate after December 31, 2021, and as of June 30, 2023, we have substantially completed the transition from LIBOR to ARRs, and we remain on track to transition our remaining LIBOR exposure to ARRs as coupon rate resets occur. This effort has included transitioning various borrowing arrangements and derivative contracts to SOFR linked rates and updating various lending arrangements to Prime.
Refer to Part I, Item 1A. Risk Factors – “The transition away from LIBOR and the adoption of ARRs could adversely impact our business and results of operations” in our fiscal 2023 Form 10-K for further discussion.
58
NEW ACCOUNTING STANDARDS
Refer to Note 1 – Interim Financial Data of the Notes to Consolidated Financial Statements.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make certain estimates which affect reported financial results. The evaluation of the factors used in determining each of our critical accounting estimates involves significant assumptions, complex analyses, and management judgment. Changes in the evaluation of these factors may have a significant impact on the consolidated financial statements. Additionally, due to inherent uncertainties in making estimates, actual results could differ from those estimates, and those differences could be material. The critical accounting estimates that affect the consolidated financial statements and the judgment and assumptions used are consistent with those described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Estimates” in our fiscal 2023 Form 10-K.
59
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the principal executive officer) and Chief Financial Officer (the principal financial officer), of the effectiveness of our “disclosure controls and procedures” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) concluded that the disclosure controls and procedures were effective as of June 30, 2023, to ensure that information required to be disclosed in reports filed under the Exchange Act was recorded, processed, summarized and reported within the time periods specified by the SEC’s rules, regulations, and forms and that such information is accumulated and communicated to our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
There have been no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
60
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation
For a discussion of legal proceedings, see “Part I. Financial Information – Item 1. Financial Statements - Note 9 – Commitments and Contingencies of the Notes to Consolidated Financial Statements – Litigation and Governmental Proceedings.”
ITEM 1A. RISK FACTORS
There are no material changes from the risk factors set forth under “Item 1A. Risk Factors” in our fiscal 2023 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
We have omitted this section pursuant to General Instruction H(2) of Form 10-Q.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
61
ITEM 6. EXHIBITS
Exhibit Number |
|
Description |
|
Method of Filing |
|
|
|
|
|
|
|
(1) |
||
|
|
|
|
|
|
Bylaws of Toyota Motor Credit Corporation as amended through December 8, 2000 |
|
(2) |
|
|
|
|
|
|
|
|
(3) |
||
|
|
|
|
|
|
|
Filed Herewith |
||
|
|
|
|
|
|
|
Filed Herewith |
||
|
|
|
|
|
|
|
Furnished Herewith |
||
|
|
|
|
|
|
|
Furnished Herewith |
||
|
|
|
|
|
101.INS |
|
Inline XBRL instance document |
|
Filed Herewith |
|
|
|
|
|
101.CAL |
|
Inline XBRL taxonomy extension calculation linkbase document |
|
Filed Herewith |
|
|
|
|
|
101.DEF |
|
Inline XBRL taxonomy extension definition linkbase document |
|
Filed Herewith |
|
|
|
|
|
101.LAB |
|
Inline XBRL taxonomy extension labels linkbase document |
|
Filed Herewith |
|
|
|
|
|
101.PRE |
|
Inline XBRL taxonomy extension presentation linkbase document |
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Filed Herewith |
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101.SCH |
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Inline XBRL taxonomy extension schema document |
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Filed Herewith |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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Filed Herewith |
(1) Incorporated herein by reference to Exhibit 3.1, filed with our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, Commission File Number 1-9961.
(2) Incorporated herein by reference to Exhibit 3.2, filed with our Quarterly Report on Form 10-Q for the three months ended December 31, 2000, Commission File Number 1-9961.
(3) Incorporated herein by reference to Exhibit 10.1, filed with our Current Report on Form 8-K filed April 3, 2023, Commission File Number 1-9961.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TOYOTA MOTOR CREDIT CORPORATION |
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(Registrant) |
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Date: August 3, 2023 |
By |
/s/ Mark S. Templin |
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Mark S. Templin |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: August 3, 2023 |
By |
/s/ Scott Cooke |
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Scott Cooke |
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Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
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63