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EX-31.2 - EXHIBIT 31.2 - 302 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_31-2.htm
EX-32.1 - EXHIBIT 32.1 - 906 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_32-1.htm
EX-31.1 - EXHIBIT 31.1 - 302 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_31-1.htm
EX-12.1 - EXHIBIT 12.1 - RATIO OF EARNINGS TO FIXED CHARGES - TOYOTA MOTOR CREDIT CORPexhibit_12-1.htm
EX-32.2 - EXHIBIT 32.2 - 906 CERTIFICATION - TOYOTA MOTOR CREDIT CORPexhibit_32-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
OR
 
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
Commission File Number 1-9961
 
TOYOTA MOTOR CREDIT CORPORATION
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
95-3775816
(I.R.S. Employer
Identification No.)
   
19001 S. Western Avenue
Torrance, California
(Address of principal executive offices)
90501
(Zip Code)

Registrant's telephone number, including area code:       (310) 468-1310
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x   No                                  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes                 No                        

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

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

As of October 31, 2010, the number of outstanding shares of capital stock, no par value per share, of the registrant was 91,500, all of which shares were held by Toyota Financial Services Americas Corporation.

Reduced Disclosure Format

The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

 
 

 
TOYOTA MOTOR CREDIT CORPORATION
FORM 10-Q
For the quarter ended September 30, 2010
 
INDEX
   
PART I
…………………………………………………………………………………………………3
 
   Item 1
Financial Statements……………………………………………………………………………………………
  3
 
Consolidated Statement of Income……………………….……………………………………………………
  3
 
Consolidated Balance Sheet……………………………………………………………………………………
  4
 
Consolidated Statement of Shareholder’s Equity………..……………………………………………………
  5
 
Consolidated Statement of Cash Flows………………….…………………………………………………..…
  6
 
Notes to Consolidated Financial Statements……………………….……………………………………..……
  7
   Item 2
Management’s Discussion and Analysis…………………………………………………………………...….
49
   Item 3
Quantitative and Qualitative Disclosures About Market Risk………………………………………....………
78
   Item 4
Controls and Procedures......................................................................................................................................
78
PART II
…………………………………………………………………………………………………79
 
   Item 1
Legal Proceedings………………………………………………………………………………………………
79
   Item 1A
Risk Factors…………………………………………………………………..…………………………………
80
   Item 2
Unregistered Sales of Equity Securities and Use of Proceeds……………………………..……………………
81
   Item 3
Defaults Upon Senior Securities…………………………………………………………….…………………
81
   Item 4
(Removed and Reserved)………………………………………………………………………………………
81
   Item 5
Other Information………………………………………………………………………………………………
81
   Item 6
Exhibits…………………………………………………………………………………………………………
81
   Signatures
………………………………………………………………………………………………………………….
82
   Exhibit Index
………………………………………………………………………………………………………………….
83
 
 
 
- 2 -

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF INCOME
 (Unaudited)

 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
 
2009
2010
 
2009
Financing revenues:
           
Operating lease
$1,216
 
$1,175
$2,416
 
$2,371
Retail
720
 
790
1,450
 
1,571
Dealer
96
 
78
190
 
171
Total financing revenues
2,032
 
2,043
4,056
 
4,113
             
Depreciation on operating leases
824
 
836
1,635
 
1,729
Interest expense
593
 
618
1,084
 
1,117
Net financing revenues
615
 
589
1,337
 
1,267
             
Insurance earned premiums and contract revenues
132
 
114
255
 
224
Investment and other income, net
54
 
47
89
 
105
Net financing revenues and other revenues
801
 
750
1,681
 
1,596
             
Expenses:
           
Provision for credit losses
(14)
 
11
(303)
 
339
Operating and administrative
323
 
174
507
 
351
Insurance losses and loss adjustment expenses
58
 
56
116
 
113
Total expenses
367
 
241
320
 
803
             
Income before income taxes
434
 
509
1,361
 
793
Provision for income taxes
165
 
199
522
 
307
             
Net income
$269
 
$310
$839
 
$486
             
See Accompanying Notes to Consolidated Financial Statements.
       



 
- 3 -

 

TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED BALANCE SHEET
 (Unaudited)

(Dollars in millions)
September 30, 2010
 
March 31, 2010
ASSETS
     
       
Cash and cash equivalents
$4,501
 
$4,343
Restricted cash
475
 
173
Investments in marketable securities
3,012
 
2,521
Finance receivables, net
56,862
 
55,087
Investments in operating leases, net
18,670
 
17,151
Other assets
2,428
 
1,918
Total assets
85,948
 
$81,193
       
LIABILITIES AND SHAREHOLDER'S EQUITY
     
       
Debt
$72,724
 
$69,179
Deferred income taxes
3,851
 
3,290
Other liabilities
3,487
 
3,451
Total liabilities
80,062
 
75,920
       
Commitments and contingencies (See Note 13)
     
       
Shareholder's equity:
     
Capital stock, no par value and $10,000 par value (100,000 shares
     
authorized; 91,500 issued and outstanding) at September 30, and March 31, 2010, respectively
915
 
915
Additional paid-in-capital
1
 
1
Accumulated other comprehensive income
144
 
104
Retained earnings
4,826
 
4,253
Total shareholder's equity
5,886
 
5,273
Total liabilities and shareholder's equity
$85,948
 
$81,193

The following table presents the assets of consolidated variable interest entities that can only be used to settle obligations of the consolidated variable interest entities and the liabilities of those entities for which creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the consolidated balance sheet above.

(Dollars in millions)
September 30, 2010
ASSETS
 
Finance receivables, net
$8,752
Total assets
$8,752
   
LIABILITIES
 
Debt
$7,495
Other liabilities
2
Total liabilities
$7,497

See Accompanying Notes to Consolidated Financial Statements.

 
- 4 -

 

 TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY
 (Unaudited)

(Dollars in millions)
Capital stock
 
Additional
paid-in capital
 
Accumulated other comprehensive (loss) income
 
Retained earnings
 
Total
                   
BALANCE AT MARCH 31, 2009
$915
 
$1
 
($63)
 
$3,240
 
$4,093
                   
Net income for the six months ended
     September 30, 2009
-
 
-
 
-
 
486
 
486
Net unrealized gain on available-for-sale
marketable securities, net of tax provision of $85 million
-
 
-
 
139
 
-
 
139
Reclassification adjustment for net loss included in net income, net of tax benefit of $4 million
-
 
-
 
7
 
-
 
7
Total comprehensive income
-
 
-
 
146
 
486
 
632
                   
BALANCE AT SEPTEMBER 30, 2009
$915
 
$1
 
$83
 
$3,726
 
$4,725
                   
BALANCE AT MARCH 31, 2010
$915
 
$1
 
$104
 
$4,253
 
$5,273
                   
Net income for the six months ended
September 30, 2010
-
 
-
 
-
 
839
 
839
Net unrealized gain on available-for-sale marketable securities, net of tax provision of $20 million
-
 
-
 
35
 
-
 
35
Reclassification adjustment for net loss included in net income, net of tax benefit of $3 million
-
 
-
 
5
 
-
 
5
Total comprehensive income
-
 
-
 
40
 
839
 
879
 Dividends
-
 
-
 
-
 
(266)
 
(266)
BALANCE AT SEPTEMBER 30, 2010
$915
 
$1
 
$144
 
$4,826
 
$5,886
                   
See Accompanying Notes to Consolidated Financial Statements.
   

 
- 5 -

 

TOYOTA MOTOR CREDIT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
 (Unaudited)
 
Six months ended September 30,
 
(Dollars in millions)
2010
 
2009
Cash flows from operating activities:
     
Net income
$839
 
$486
    Adjustments to reconcile net income to net cash provided by operating activities:
     
Depreciation and amortization
1,691
 
1,786
Recognition of deferred income
(613)
 
(495)
Provision for credit losses
(303)
 
339
Amortization of deferred origination costs
138
 
166
Fair value adjustments and amortization of premiums and
     discounts associated with debt, net
1,279
 
4,050
Net gain from sale of marketable securities
(31)
 
(1)
Other-than-temporary impairment on marketable securities
-
 
6
Net change in:
     
Restricted cash
(302)
 
-
Derivative assets
(335)
 
(698)
Other assets
8
 
(157)
Deferred income taxes
537
 
454
Derivative liabilities
(226)
 
(957)
Other liabilities
239
 
401
Net cash provided by operating activities
2,921
 
5,380
Cash flows from investing activities:
     
Purchase of investments in marketable securities
(2,109)
 
(324)
Disposition of investments in marketable securities
1,712
 
387
Acquisition of finance receivables
(11,861)
 
(10,987)
Collection of finance receivables
10,823
 
10,087
Net change in dealer receivables (excluding term loans)
(278)
 
2,617
Acquisition of investments in operating leases
(5,736)
 
(3,020)
Disposals of investments in operating leases
2,850
 
2,578
Advances to affiliates
(1,315)
 
(1,663)
Repayments from affiliates
1,130
 
2,262
Other, net
(14)
 
(9)
Net cash (used in) provided by investing activities
(4,798)
 
1,928
Cash flows from financing activities:
     
Proceeds from issuance of debt
11,912
 
3,728
Payments on debt
(6,718)
 
(9,780)
Net change in commercial paper
(2,918)
 
(6,607)
Advances from affiliates (Note 15)
25
 
2,001
Repayments to affiliates (Note 15)
-
 
(19)
Dividends paid to TFSA
(266)
 
-
Net cash provided by (used in) financing activities
2,035
 
(10,677)
Net increase (decrease) in cash and cash equivalents
158
 
(3,369)
Cash and cash equivalents at the beginning of the period
4,343
 
6,298
Cash and cash equivalents at the end of the period
$4,501
 
$2,929
Supplemental disclosures:
     
Interest paid
$919
 
$1,140
Income taxes (paid) received, net
($53)
 
$4

See Accompanying Notes to Consolidated Financial Statements.

 
- 6 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data

Basis of Presentation

The information furnished in these unaudited interim financial statements for the three and six months ended September 30, 2010 and 2009 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  In the opinion of management, the unaudited financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented.  The results of operations for the three and six months ended September 30, 2010 do not necessarily indicate the results that may be expected for the full fiscal year.

These financial statements should be read in conjunction with the Consolidated Financial Statements, significant accounting policies, and other notes to the Consolidated Financial Statements included in Toyota Motor Credit Corporation’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2010 (“fiscal 2010”), which was filed with the Securities and Exchange Commission (“SEC”) on June 10, 2010.  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.

Summary of Significant Accounting Policies

Investments in Marketable Securities

Investments in marketable securities consist of debt and equity securities.  Debt and equity securities designated as available-for-sale (“AFS”) are carried at fair value using quoted market prices where available with unrealized gains or losses included in Accumulated Other Comprehensive Income (“AOCI”), net of applicable taxes.  We use the specific identification method to determine realized gains and losses related to our investment portfolio.  Realized investment gains and losses are reflected in Investment and Other Income, net in the Consolidated Statement of Income.

Other-Than-Temporary Impairment

We periodically evaluate unrealized losses on our AFS debt securities portfolio for other-than-temporary impairment (“OTTI”).  If we have no intent to sell and we believe that it is more likely than not we will not be required to sell these securities prior to recovery, the credit loss component of the unrealized losses is recognized in Investment and Other Income, net in the Consolidated Statement of Income, while the remainder of the loss is recognized in AOCI. The credit loss component recognized in Investment and Other Income, net in the Consolidated Statement of Income is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected using a credit cash flow analysis for debt securities.

We perform periodic reviews of our AFS equity securities to determine whether unrealized losses are temporary in nature.  If losses are considered to be other-than-temporary, the cost basis of the security is written down to fair value and the write down is reflected in Investment and Other Income, net in the Consolidated Statement of Income.

 
- 7 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data (Continued)

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

New Accounting Guidance

In October 2010, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on the capitalization of costs relating to the acquisition or renewal of insurance contracts. This accounting guidance is effective for us on April 1, 2012 and is not expected to have a material impact on our consolidated financial condition or results of operations.

In July 2010, the FASB issued accounting guidance in which entities must provide additional disclosures regarding the nature of credit risk inherent in their portfolio of financing receivables, how credit risk is analyzed and assessed in arriving at the allowance for credit losses, and the reasons for changes in the allowance for credit losses. This accounting guidance is effective for us on December 31, 2010 and will not have a material impact on our consolidated financial condition or results of operations.

In October 2009, the FASB issued accounting guidance that sets forth the requirements that must be met for a company to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. This accounting guidance is effective for us on April 1, 2011 and is not expected to have a material impact on our consolidated financial condition or results of operations.

In October 2009, the FASB issued accounting guidance that changes the accounting model for revenue arrangements that include both tangible products and software elements that function together to deliver the product’s essential functionality. The accounting guidance more closely reflects the underlying economics of these transactions. This accounting guidance is effective for us on April 1, 2011 and is not expected to have a material impact on our consolidated financial condition or results of operations.

Recently Adopted Accounting Guidance

On April 1, 2010, we adopted new FASB accounting guidance for transfers of financial assets.  The new accounting guidance removes the concept of a qualifying special purpose entity and revises the accounting criteria for transfer of financial assets to be considered a sale.  The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

On April 1, 2010, we adopted new FASB accounting guidance on consolidation of variable interest entities.  The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

On March 31, 2010, we adopted new FASB accounting guidance requiring disclosure of gross transfers in and out of Level 3 as well as transfers between Levels 1 and 2 of the fair value hierarchy.


 
- 8 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements

Fair Value Measurement – Definition and Hierarchy

The accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  This guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs by requiring that observable inputs be used when available.  Fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk.  The standard describes three levels of inputs that may be used to measure fair value:

Level 1:  Quoted (unadjusted) prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.  Examples of assets currently utilizing Level 1 inputs are most U.S. government securities, actively exchange-traded equity mutual funds, and money market funds.

Level 2:  Quoted prices in active markets for similar assets and liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.  Examples of assets and liabilities currently utilizing Level 2 inputs are certificates of deposit, commercial paper, U.S. government agency securities, corporate debt securities, mortgage-backed and asset-backed securities, private placement investments in fixed income mutual funds, and most over-the-counter derivatives.

Level 3:  Unobservable inputs that are supported by little or no market activity and may require significant judgment in order to determine the fair value of the assets and liabilities.  Examples of assets and liabilities currently utilizing Level 3 inputs are structured over-the-counter derivatives with limited activity or less transparency around inputs to the valuation.

The use of observable and unobservable inputs is reflected in the fair value hierarchy assessment disclosed in the tables within this section.  The availability of observable inputs can vary based upon the financial instrument and other factors, such as instrument type, market liquidity and other specific characteristics particular to the financial instrument.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires additional judgment by management. The degree of management’s judgment can result in financial instruments being classified as or transferred to the Level 3 category.

We review the appropriateness of fair value measurements including validation processes, key model inputs, and the reconciliation of period-over-period fluctuations based on changes in key market inputs.  All fair value measurements are subject to our analysis.  Review and approval by management is required as part of the validation process.


 
- 9 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Fair Value Methods

Fair value is based on quoted market prices, if available.  If listed prices or quotes are not available, fair value is based upon internally developed models that primarily use as inputs market-based or independently sourced market parameters.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation.  In periods of market dislocation, the availability of prices and inputs may be reduced for certain financial instruments.  This condition could result in a financial instrument being reclassified from Level 1 to Level 2 or from Level 2 to Level 3.

Valuation Adjustments

Counterparty Credit Valuation Adjustments – Adjustments are required when the market price (or parameter) is not indicative of the credit quality of the counterparty.

Non-Performance Credit Valuation Adjustments – Adjustments reflect our own non-performance risk when our liabilities are measured at fair value.

Liquidity Valuation Adjustments – Adjustments are necessary when we are unable to observe prices for a financial instrument due to market illiquidity.

Valuation Methods

For financial instruments measured at fair value, the following section describes the valuation methodologies, key inputs and significant assumptions.

Cash Equivalents

Cash equivalents, consisting primarily of money market instruments, represent highly liquid investments with maturities of three months or less at purchase.  Generally, quoted market prices are used to determine the fair value of money market instruments.

Marketable Securities

The marketable securities portfolio consists of debt and equity securities.  We use quoted prices of identical securities for all U.S. government bonds, exchange-traded equity mutual funds and all other securities if available.

If quoted market prices are not available for specific securities, then we may estimate the value of such instruments using observed transaction prices, independent pricing services, and either internally or externally developed pricing models or discounted cash flows.  Where there is limited market activity or less transparency around inputs to the valuation model for certain collateralized mortgage and debt obligations, asset-backed securities, and high-yield debt securities, the determination of fair value may require benchmarking yields to that of similar instruments or analyzing default rates.  In addition, asset-backed securities may be valued based on external prices or market spreads, using current market assumptions on prepayment speeds and default rates.  For certain other asset-backed securities where the external price is not observable, we may incorporate the deal collateral performance and tranche level attributes into our valuation analysis.

 
- 10 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

We hold investments in exchange-traded equity mutual funds and private placement fixed income mutual funds. Where the funds produce a daily net asset value that is quoted in an active market, that value is used to value the fund investment and is classified in Level 1 of the fair value hierarchy. Where the funds produce a daily net asset value that is based on a combination of quoted prices from identical and similar securities and/or observable inputs, the funds are classified within Level 2.

Derivatives

As part of our risk management strategy, we enter into derivative transactions to mitigate our interest rate and foreign currency exposures.  These derivative transactions are considered over-the-counter for valuation purposes.  All of our derivative counterparties to which we had credit exposure at September 30, 2010 were assigned investment grade ratings by a nationally recognized statistical rating organization (“NRSRO”).

We estimate the fair value of our derivatives using industry standard valuation models that require observable market inputs, including market prices, yield curves, credit curves, interest rates, foreign exchange rates, volatilities and the contractual terms of the derivative instruments.  For derivatives that trade in liquid markets, such as interest rate swaps, model inputs can generally be verified and do not require significant management judgment.

Certain other derivative transactions trade in less liquid markets with limited pricing information.  For such derivatives, key inputs to the valuation process include quotes from counterparties, and other market data used to corroborate and adjust values where appropriate.  Other market data includes values obtained from a market participant that serves as a third party pricing agent.  In addition, pricing is validated internally using valuation models to assess the reasonableness of changes in factors such as market prices, yield curves, credit curves, interest rates, foreign exchange rates and volatilities.

Our derivative fair value measurements consider assumptions about counterparty credit risk and our own non-performance risk.  Generally, we assume that a valuation that uses the London Interbank Offered Rate (“LIBOR”) curve to convert future values to present value is appropriate for derivative assets and liabilities.  We consider counterparty credit risk and our own non-performance risk through credit valuation adjustments.  In situations in which our net position with a derivative counterparty is an asset, the counterparty credit valuation adjustment calculation uses the credit default probabilities of our derivative counterparties over a particular time period.  In situations in which our net position with a derivative counterparty is a liability, we use our own credit default probability to calculate the required non-performance credit valuation adjustment.  We use a relative fair value approach to allocate the credit valuation adjustments to our derivatives portfolio.

As of September 30, 2010, we reduced our derivative liabilities by $1 million to account for our own non-performance risk.  Derivative assets were reduced $17 million to account for counterparty credit risk.  As of March 31, 2010, we reduced our derivative liabilities by $4 million to account for our own non-performance risk.  Derivative assets were reduced $10 million to account for counterparty credit risk.


 
- 11 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Finance Receivables

Our finance receivables are not carried at fair value on a recurring basis on the balance sheet.  In certain instances, for finance receivables for which there is evidence of impairment we may use an observable market price or the fair value of collateral if the loan is collateral dependent.  The fair values of impaired finance receivables based on the collateral value or market prices where available are reported at fair value on a nonrecurring basis.  We may consider additional adjustments to reflect current market conditions in estimating fair value.



 
- 12 -

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The following table summarizes our financial assets and liabilities that were accounted for at fair value as of September 30, 2010, by level within the fair value hierarchy:
 
Fair value measurements on a recurring basis
(Dollars in millions)
     Level 1
     Level 2
     Level 3
    Counterparty
    netting &
    collateral 1
    Fair
    value
Cash equivalents
$4,334
$-
$-
$-
$4,334
Available-for-sale securities:
         
Debt instruments:
         
U.S. government and agency obligations
79
21
-
-
100
Municipal debt securities
-
16
-
-
16
Certificates of deposit and commercial paper
-
519
-
-
519
Foreign government debt securities
-
7
-
-
7
Corporate debt securities
-
108
-
-
108
Mortgage-backed securities:
         
U.S. government agency
-
75
-
-
75
Non-agency residential
-
8
-
-
8
Non-agency commercial
-
13
-
-
13
Asset-backed securities
-
144
-
-
144
Equity instruments:
         
Fixed income mutual funds
         
Short-term sector fund
-
38
-
-
38
U.S. government sector fund
-
445
-
-
445
Municipal sector fund
-
45
-
-
45
Investment grade corporate sector fund
-
315
-
-
315
High-yield sector fund
-
23
-
-
23
Real return sector fund
-
76
-
-
76
Mortgage sector fund
-
493
-
-
493
Asset-backed securities sector fund
-
38
-
-
38
Emerging market sector fund
-
57
-
-
57
International sector fund
-
138
-
-
138
Equity mutual fund – S&P 500 index
354
-
-
-
354
Available-for-sale securities total
433
2,579
-
-
3,012
Derivative assets: 2
         
Foreign currency swaps
-
3,896
133
-
4,029
Interest rate swaps
-
430
21
-
451
Counterparty netting and collateral1
-
-
-
(3,561)
(3,561)
  Derivative assets total
-
4,326
154
(3,561)
919
  Embedded derivative assets
-
-
1
-
1
Total assets 3
4,767
6,905
155
(3,561)
8,266
   Derivative liabilities: 2
         
Foreign currency swaps
-
(356)
(8)
-
(364)
Interest rate caps
-
(1)
-
-
(1)
Interest rate swaps
-
(1,519)
(1)
-
(1,520)
Counterparty netting and collateral1
-
-
-
1,594
1,594
   Derivative liabilities total
-
(1,876)
(9)
1,594
(291)
   Embedded derivative liabilities
-
-
(50)
-
(50)
Total liabilities 3
-
(1,876)
(59)
1,594
(341)
Total net assets
$4,767
$5,029
$96
($1,967)
$7,925
1   We meet the accounting guidance for setoff criteria and elected to net derivative assets and derivative liabilities and the related cash collateral received and paid when legally
    enforceable master netting agreements exist.
2   Includes derivative asset counterparty credit valuation adjustment of $17 million and derivative liability non-performance credit valuation adjustment of $1 million.
3   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.
 
- 13 -

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The following table summarizes our financial assets and liabilities that were accounted for at fair value as of March 31, 2010, by level within the fair value hierarchy:
 
Fair value measurements on a recurring basis1
(Dollars in millions)
     Level 1
     Level 2
     Level 3
    Counterparty
    netting &
    collateral 2
    Fair
    value
Cash equivalents
$4,256
$-
$-
$-
$4,256
Available-for-sale securities:
         
Debt instruments:
         
U.S. government and agency obligations
25
24
-
-
49
Municipal debt securities
-
6
-
-
6
Certificates of deposit and commercial paper
 
50
   
50
Foreign government debt securities
-
22
-
-
22
Corporate debt securities
-
93
-
-
93
Mortgage-backed securities:
         
U.S. government agency
-
120
-
-
120
Non-agency residential
-
8
-
-
8
Non-agency commercial
-
23
-
-
23
Asset-backed securities
-
641
3
-
644
Equity instruments:
         
Fixed income mutual funds
         
Short-term sector fund
-
32
-
-
32
U.S. government sector fund
-
250
-
-
250
Municipal sector fund
-
39
-
-
39
Investment grade corporate sector fund
-
260
-
-
260
High-yield sector fund
-
22
-
-
22
Mortgage sector fund
-
360
-
-
360
Asset-backed securities sector fund
-
30
-
-
30
Emerging market sector fund
-
37
-
-
37
International sector fund
-
117
-
-
117
Equity mutual fund – S&P 500 index
359
-
-
-
359
Available-for-sale securities total
384
2,134
3
-
2,521
Derivative assets: 3
         
Foreign currency swaps
-
2,454
158
-
2,612
Interest rate swaps
-
288
39
-
327
Counterparty netting and collateral2
-
-
-
(2,358)
(2,358)
  Derivative assets total
-
2,742
197
(2,358)
581
  Embedded derivative assets
-
-
4
-
4
Total assets 4
4,640
4,876
204
(2,358)
7,362
   Derivative liabilities: 3
         
Foreign currency swaps
-
(370)
(89)
-
(459)
Interest rate caps
-
(1)
-
-
(1)
Interest rate swaps
-
(1,180)
(23)
-
(1,203)
Counterparty netting and collateral2
-
-
-
1,130
1,130
   Derivative liabilities total
-
(1,551)
(112)
1,130
(533)
   Embedded derivative liabilities
-
-
(34)
-
(34)
Total liabilities 4
-
(1,551)
(146)
1,130
(567)
Total net assets
$4,640
$3,325
$58
($1,228)
$6,795
1   Prior period amounts have been reclassified to conform to the current period presentation.
2    We meet the accounting guidance for setoff criteria and elected to net derivative assets and derivative liabilities and the related cash collateral received and paid when legally
    enforceable master netting agreements exist.
3   Includes derivative asset counterparty credit valuation adjustment of $10 million and derivative liability non-performance credit valuation adjustment of $4 million.
4    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.
 
- 14 -

 


 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The determination in classifying a financial instrument within Level 3 of the fair value hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement.  There were no transfers between Level 1 and Level 2 securities during the three and six months ended September 30, 2010 and 2009.  The following tables summarize the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended September 30, 2010 and 2009:

Three Months Ended September 30, 2010

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Available-for-sale securities
 
Derivatives
Total net assets (liabilities)
(Dollars in millions)
Asset-backed securities
Available-for-sale securities total
 
Interest rate swaps
Foreign currency swaps
Embedded derivative
liabilities, net
Total Derivatives
 
Fair value, July 1, 2010
$-
$-
 
$55
$66
($32)
$89
$89
Total gains/(losses)
               
Included in earnings
-
-
 
20
272
(17)
275
275
Included in other comprehensive income
-
-
 
-
-
-
-
-
Purchases, issuances, sales, and settlements
               
Purchases
-
-
 
-
-
-
-
-
Issuances
-
-
 
-
-
-
-
-
Sales
-
-
 
-
-
-
-
-
Settlements
-
-
 
(20)
(10)
-
(30)
(30)
Transfers in to Level 3 1
-
-
 
-
-
-
-
-
Transfers out of Level 3 1
-
-
 
(35)
(203)
-
(238)
(238)
Fair value, September 30, 2010
$-
$-
 
$20
$125
($49)
$96
$96
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date
     
$11
$95
($18)
$88
$88

1 Transfers in and transfers out are recognized at the end of the reporting period.





 
- 15 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Three Months Ended September 30, 2009

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Available-for-sale securities
 
Derivatives
Total net assets (liabilities)
 
 
 
 
 
(Dollars in millions)
Non-agency residential mortgage-backed securities
Asset-backed securities
Available-for-sale securities total
 
Interest rate swaps
Foreign currency swaps
Embedded derivative
liabilities, net
Total Derivatives
 
Fair value, July 1, 2009
$1
$1
$2
 
($28)
($38)
($5)
($71)
($69)
Total gains/(losses)
                 
Included in earnings
-
-
-
 
76
158
(24)
210
210
Included in other comprehensive income
-
-
-
 
-
-
-
-
-
Purchases, issuances, sales, and settlements
                 
Purchases
1
-
1
 
-
-
-
-
1
Issuances
-
-
-
 
-
-
-
-
-
Sales
-
-
-
 
-
-
-
-
-
Settlements
-
-
-
 
(24)
-
-
(24)
(24)
Transfers in to Level 3 1
-
-
-
 
-
-
-
-
-
Transfers out of Level 3 1
(1)
-
(1)
 
-
-
-
-
(1)
Fair value, September 30, 2009
$1
$1
$2
 
$24
$120
($29)
$115
$117
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date
       
$70
$152
($22)
$200
$200

1 Transfers in and transfers out are recognized at the end of the reporting period.


 
- 16 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Six Months Ended September 30, 2010

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Available-for-sale securities
 
Derivatives
Total net assets (liabilities)
 
 
 
 
 
(Dollars in millions)
Asset-backed securities
Available-for-sale securities total
 
Interest rate swaps
Foreign currency swaps
Embedded derivative
liabilities, net
Total Derivatives
 
Fair value, April 1, 2010
$3
$3
 
$16
$69
($30)
$55
$58
Total gains/(losses)
               
Included in earnings
-
-
 
72
303
(19)
356
356
Included in other comprehensive income
-
-
 
-
-
-
-
-
Purchases, issuances, sales, and settlements
               
Purchases
-
-
 
-
-
-
-
-
Issuances
-
-
 
-
-
-
-
-
Sales
-
-
 
-
-
-
-
-
Settlements
-
-
 
(33)
(44)
-
(77)
(77)
Transfers in to Level 3 1
-
-
 
-
-
-
-
-
Transfers out of Level 3 1
(3)
(3)
 
(35)
(203)
-
(238)
(241)
Fair value, September 30, 2010
$-
$-
 
$20
$125
($49)
$96
$96
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date
     
 
 
 
 
$22
 
 
 
 
$151
 
 
 
 
($19)
 
 
 
 
$154
 
 
 
 
$154

1 Transfers in and transfers out are recognized at the end of the reporting period.


 
- 17 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Six Months Ended September 30, 2009

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Available-for-sale securities
 
Derivatives
Total net assets (liabilities)
 
 
 
 
 
(Dollars in millions)
Non-agency residential mortgage-backed securities
Asset-backed securities
Available-for-sale securities total
 
Interest rate swaps
Foreign currency swaps
Embedded derivative
liabilities, net
Total Derivatives
 
Fair value, April 1, 2009
$-
$-
$-
 
$88
($145)
($1)
($58)
($58)
Total gains/(losses)
                 
Included in earnings
-
-
-
 
(11)
286
(28)
247
247
Included in other comprehensive income
-
-
-
 
-
-
-
-
-
Purchases, issuances, sales, and settlements
                 
Purchases
1
-
1
 
-
-
-
-
1
Issuances
-
-
-
 
-
-
-
-
-
Sales
-
-
-
 
-
-
-
-
-
Settlements
-
-
-
 
(43)
(21)
-
(64)
(64)
Transfers in to Level 3 1
-
1
1
 
-
-
-
-
1
Transfers out of Level 3 1
-
-
-
 
(10)
-
-
(10)
(10)
Fair value, September 30, 2009
$1
$1
$2
 
$24
$120
($29)
$115
$117
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at the reporting date
       
$5
$292
($29)
$268
$268

1 Transfers in and transfers out are recognized at the end of the reporting period.


Significant Changes to Level 3 Assets During the Period

Level 3 assets net, reported at fair value on a recurring basis increased $7 million and $38 million for the three and six months ended September 30, 2010, respectively.  The increase is primarily attributable to an increase in derivative assets, specifically foreign currency derivatives, due to the weakening of the U.S. dollar during the first half of the fiscal year ending March 31, 2011 (“fiscal 2011”).  Certain derivatives previously categorized as Level 3 in prior periods were valued using observable inputs and were transferred into Level 2 during the quarter ended September 30, 2010.




 
- 18 -

 


TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Assets Measured at Fair Value on a Nonrecurring Basis

Certain assets are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances, for example, when there is evidence of impairment.  For these assets, we disclose the fair value on a nonrecurring basis and any changes in fair value during the reporting period.

The following tables present the financial instruments carried on the Consolidated Balance Sheet by caption and by level within the fair value hierarchy for which a fair value measurement on a nonrecurring basis has been recorded during the reporting period:

Fair value measurements on a nonrecurring basis as of September 30, 2010:

(Dollars in millions)
 Level 1
 Level 2
Level 3
Total fair value
Finance receivables, net
$-
$-
$194
$194
Total assets at fair value on a nonrecurring basis
$-
$-
$194
$194


Fair value measurements on a nonrecurring basis as of March 31, 2010:

(Dollars in millions)
 Level 1
 Level 2
Level 3
Total fair value
Finance receivables, net
$-
$-
$143
$143
Total assets at fair value on a nonrecurring basis
$-
$-
$143
$143


Nonrecurring Fair Value Changes

The following table presents the total change in fair value of financial instruments measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Consolidated Statement of Income:
 
 
 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Finance receivables, net
$7
($26)
$22
($17)
Total nonrecurring fair value gain (loss)
$7
($26)
$22
($17)


 
- 19 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3 - Fair Value of Financial Instruments

The accounting guidance for financial instruments requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair value.  Financial instruments that are within the scope of this accounting guidance are included in the table below.

The following is a description of financial instruments for which the ending balances as of September 30, 2010 and March 31, 2010 are not carried at fair value in their entirety on the Consolidated Balance Sheet.

Finance Receivables

Fair value of finance receivables is generally determined by valuing expected discounted cash flows using a securitization model.  We estimate cash flows expected to be collected using contractual principal and interest cash flows adjusted for specific factors, such as prepayments, default rates, loss severity, credit scores, and collateral type.  The securitization model utilizes quoted secondary market rates if available, or estimated market rates that incorporate management’s best estimate of investor assumptions about the portfolio.

Commercial Paper

The carrying value of commercial paper issued is assumed to approximate fair value due to its short duration and generally negligible credit risk.  We validate this assumption using quoted market prices where available.

Unsecured Notes and Loans Payable

We use quoted market prices for debt when available.  When quoted market prices are not available, fair value is estimated based on current market rates and credit spreads for debt with similar maturities.


 
- 20 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3 - Fair Value of Financial Instruments (Continued)

Secured Notes and Loans Payable

Fair value is estimated based on current market rates and credit spreads for debt with similar maturities.  We also use internal assumptions, including prepayment speeds and expected credit losses on the underlying securitized assets, to estimate the timing of cash flows to be paid on these instruments.

The carrying value and estimated fair value of certain financial instruments at September 30, 2010 and March 31, 2010 were as follows:



 
September 30, 2010
March 31, 2010
 
(Dollars in millions)
  Carrying value
     Fair value
  Carrying value
Fair value
Financial assets
       
Finance receivables, net1
$56,588
$58,400
$54,775
$56,568
         
Financial liabilities
       
Commercial paper
$16,553
$16,553
$19,466
$19,466
Unsecured notes and loans payable2
$48,676
$49,478
$46,713
$47,189
Secured notes and loans payable
$7,495
$7,513
$3,000
$3,006

1  Finance receivables are presented net of allowance for credit losses.  Amounts exclude related party transactions and direct finance leases.
2  Carrying value of unsecured notes and loans payable represents the sum of unsecured notes and loans payable and carrying value adjustment.  Also included in unsecured notes
    and loans payable is $4.2 billion and $4.1 billion of loans payable to affiliates at September 30, 2010 and March 31, 2010, respectively, that are carried at amounts that
    approximate fair value.


 
- 21 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities

We classify all of our investments in marketable securities as available-for-sale.  The amortized cost and estimated fair value of investments in marketable securities and related unrealized gains and losses were as follows:

 
September 30, 2010
(Dollars in millions)
Amortized
cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
Available-for-sale securities:
             
Debt instruments:
             
U.S. government and agency obligations
$96
 
$4
 
$-
 
$100
Municipal debt securities
15
 
1
 
-
 
16
Certificates of deposit and commercial paper
519
 
-
 
-
 
519
Foreign government debt securities
7
 
-
 
-
 
7
Corporate debt securities
100
 
8
 
-
 
108
Mortgage-backed securities:
             
U.S. government agency
72
 
3
 
-
 
75
Non-agency residential
7
 
1
 
-
 
8
Non-agency commercial
12
 
1
 
-
 
13
Asset-backed securities
143
 
1
 
-
 
144
Equity instruments:
             
Fixed income mutual funds:
             
Short-term sector fund
37
 
1
 
-
 
38
U.S. government sector fund
424
 
21
 
-
 
445
Municipal sector fund
39
 
6
 
-
 
45
Investment grade corporate sector fund
273
 
42
 
-
 
315
High-yield sector fund
16
 
7
 
-
 
23
Real return sector fund
75
 
1
 
-
 
76
Mortgage sector fund
466
 
27
 
-
 
493
Asset-backed securities sector fund
34
 
4
 
-
 
38
Emerging market sector fund
54
 
3
 
-
 
57
International sector fund
137
 
2
 
(1)
 
138
Equity mutual fund – S&P 500 Index
256
 
98
 
-
 
354
Total investments in marketable securities
$2,782
 
$231
 
($1)
 
$3,012




 
- 22 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

 
March 31, 20101
(Dollars in millions)
Amortized
cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair
value
Available-for-sale securities:
             
Debt instruments:
             
U.S. government and agency obligations
$49
 
$-
 
$-
 
$49
Municipal debt securities
6
 
-
 
-
 
6
Certificates of deposit and commercial paper
50
 
-
 
-
 
50
Foreign government debt securities
22
 
-
 
-
 
22
Corporate debt securities
89
 
4
 
-
 
93
Mortgage-backed securities:
             
U.S. government agency
116
 
4
 
-
 
120
Non-agency residential
7
 
1
 
-
 
8
Non-agency commercial
20
 
3
 
-
 
23
Asset-backed securities
635
 
9
 
-
 
644
Equity instruments:
             
Fixed income mutual funds:
             
Short-term sector fund
32
 
-
 
-
 
32
U.S. government sector fund
271
 
-
 
(21)
 
250
Municipal sector fund
35
 
4
 
-
 
39
Investment grade corporate sector fund
235
 
25
 
-
 
260
High-yield sector fund
15
 
7
 
-
 
22
Mortgage sector fund
345
 
15
 
-
 
360
Asset-backed securities sector fund
29
 
1
 
-
 
30
Emerging market sector fund
33
 
4
 
-
 
37
International sector fund
111
 
6
 
-
 
117
Equity mutual fund – S&P 500 Index
252
 
107
 
-
 
359
Total investments in marketable securities
$2,352
 
$190
 
($21)
 
$2,521
1 Prior period amounts have been reclassified to conform to the current period presentation.

Total fair value of certificates of deposit and commercial paper at September 30, and March 31, 2010 was $519 million and $50 million, respectively.  The balance at March 31, 2010 includes commercial paper issued by an affiliated entity with a fair value of $50 million.

Total fair value of mortgage-backed securities at September 30, and March 31, 2010 was $96 million and $151 million, respectively.  Total fair value of the mortgage sector fund at September 30, and March 31, 2010 was $493 million and $360 million, respectively.  The total fair value related to subprime mortgage-backed securities was $41 million and $37 million at September 30, and March 31, 2010, respectively.

Total fair value of asset-backed securities at September 30, and March 31, 2010 was $144 million and $644 million, respectively.  The majority of our asset-backed securities is secured by automobile related receivables.  The fair value of asset-backed securities with collateral consisting primarily of receivables relating to Toyota vehicles was $126 million and $627 million at September 30, and March 31, 2010, respectively.

The fixed income mutual funds are private placement funds.  The total fair value of private placement fixed income mutual funds was $1.7 billion and $1.1 billion at September 30, and March 31, 2010, respectively.  For each fund, cash redemption limits may apply to each 90 day period.

 
- 23 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

OTTI Recognition and Measurement

As of September 30, 2010, there were no AFS debt or equity securities deemed to be other-than-temporarily impaired, and therefore, all unrealized losses on AFS debt and equity securities were recognized in AOCI.  In addition, there were no other-than-temporary impairment losses for the three months ended September 30, 2010 and September 30, 2009.  The following table presents other-than-temporary impairment losses for the six months ended September 30, 2010 and September 30, 2009:

 
Six months ended September 30,
 
2010
    2009
(Dollars in millions)
Non-agency
residential
mortgage
backed
securities
Asset-backed securities
Total
 
Non-agency
residential
mortgage
backed
securities
Asset-backed securities
Total
Total other-than-temporary impairment losses
$-
$-
$-
 
$4
$2
$6
Less: Portion of loss recognized in other
          comprehensive income (pre-tax)1
-
-
-
 
-
-
-
Net impairment losses recognized in income2
$-
$-
$-
 
$4
$2
$6

1 Represents the non-credit component impact of the other-than-temporary impairment on AFS debt securities.
2 Represents the other-than-temporary impairment on AFS debt and equity securities included in Investment and other income, net in the Consolidated Statement of Income.

Unrealized Losses on Securities

The following tables present the aging of fair value and gross unrealized losses for AFS securities:

 
September 30, 2010
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in millions)
Fair
value
Unrealized losses
 
Fair
value
Unrealized losses
 
Fair
value
Unrealized losses
Available-for-sale securities:
               
Equity instruments:
               
International sector fund
$109
($1)
 
$-
$-
 
$109
($1)
Total investments in marketable securities
$109
($1)
 
$-
$-
 
$109
($1)

 
March 31, 2010
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in millions)
Fair
value
Unrealized losses
 
Fair
value
Unrealized losses
 
Fair
value
Unrealized losses
Available-for-sale securities:
               
Equity instruments:
               
U.S. government sector fund
$-
$-
 
$250
($21)
 
$250
($21)
Total investments in marketable securities
$-
$-
 
$250
($21)
 
$250
($21)


 
- 24 -

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
Note 4 – Investments in Marketable Securities (Continued)

At September 30, 2010, we did not own any investments that have been in a continuous unrealized loss position for 12 consecutive months or more.  At March 31, 2010, total gross unrealized loss and fair value of investments that had been in a continuous unrealized loss position for 12 consecutive months or more were $21 million and $250 million, respectively.  These predominantly investment grade securities were comprised of private placement fixed income mutual funds. Investments with unrealized losses decreased at September 30, 2010 primarily due to improvements in liquidity and market spreads.

Contractual Maturities and Yields

The contractual maturities of investments in marketable securities at September 30, 2010 are summarized in the following table (dollars in millions).  Prepayments may cause actual maturities to differ from scheduled maturities.
 
 
Fair Value of Available-for-Sale Securities:
Due in 1 Year or Less
 
Due after 1 Year through 5 Years
 
Due after 5 Years through 10 Years
 
Due after 10 Years
 
Total
Amount
 
Yield1
 
Amount
 
Yield1
 
Amount
 
Yield1
 
Amount
 
Yield1
 
Amount
 
Yield1
Debt Instruments:
                                     
U.S. government and agency obligations
$1
 
0.17%
 
$15
 
2.01%
 
$75
 
2.91%
 
$9
 
3.47%
 
$100
 
2.67%
Municipal debt securities
-
 
-
 
-
 
-
 
-
 
-
 
16
 
5.41
 
16
 
5.41
Certificates of deposit and commercial paper
519
 
0.33
 
-
 
-
 
-
 
-
 
-
 
-
 
519
 
0.33
Foreign government debt
   securities
2
 
1.87
 
3
 
2.93
 
-
 
-
 
2
 
1.63
 
7
 
2.64
Corporate debt securities
2
 
2.85
 
56
 
4.43
 
43
 
4.56
 
7
 
5.68
 
108
 
4.53
Mortgage-backed securities:
                                     
U.S. government agency
-
 
-
 
-
 
-
 
3
 
5.59
 
72
 
4.66
 
75
 
4.71
Non-agency residential
-
 
-
 
-
 
-
 
-
 
-
 
8
 
13.68
 
8
 
13.68
Non-agency commercial
-
 
-
 
-
 
-
 
-
 
-
 
13
 
5.18
 
13
 
5.18
Asset-backed securities
-
 
-
 
139
 
2.17
 
1
 
0.93
 
4
 
0.69
 
144
 
2.14
Debt instruments total
524
 
0.82
 
213
 
2.53
 
122
 
3.63
 
131
 
5.05
 
990
 
2.43
                                       
Equity instruments:
                                     
Fixed income mutual funds
                               
1,668
 
4.11
Equity mutual funds
                               
354
 
2.87
Equity instruments total
                               
2,022
 
3.93
                                       
Total Fair Value
$524
 
0.82%
 
$213
 
2.53%
 
$122
 
3.63%
 
$131
 
5.05%
 
$3,012
 
3.65%
 
Total Amortized Cost
$524
     
$206
     
$117
     
$124
     
$2,7822
   

1Yields are calculated based on average outstanding amortized cost of the securities.
2 Includes amortized cost on equity securities that do not have a maturity date.

Securities on Deposit

In accordance with statutory requirements, we had on deposit with state insurance authorities U.S. debt securities with amortized cost and fair value of $6 million at September 30 and March 31, 2010.

 
- 25 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 5 – Finance Receivables, Net

Finance receivables, net consisted of the following:

(Dollars in millions)
September 30, 2010
 
March 31, 2010
Retail receivables
$37,373
 
$42,184
Pledged retail receivables1
8,885
 
3,037
Dealer financing
11,859
 
11,513
 
58,117
 
56,734
Deferred origination costs
671
 
666
Unearned income
(931)
 
(833)
Allowance for credit losses
     
Retail and pledged retail receivables
(854)
 
(1,276)
Dealer financing
(141)
 
(204)
Total allowance for credit losses
(995)
 
(1,480)
Finance receivables, net2
$56,862
 
$55,087

1  Represents finance receivables that have been sold for legal purposes to securitization trusts but continue to be included in our consolidated financial statements.  Cash flows from these 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.
2  Includes direct finance lease receivables, net of $238 million and $265 million at September 30, and March 31, 2010, respectively.

The tables below summarize information about impaired finance receivables:

(Dollars in millions)
September 30, 2010
 
March 31, 2010
Impaired account balances with an allowance
$246
 
$217
Impaired account balances without an allowance
17
 
17
Total impaired account balances
263
 
234
Allowance for credit losses
(69)
 
(91)
Impaired account balances, net
$194
 
$143

Impaired finance receivables primarily consist of dealer financing accounts for which an allowance has been recorded based on either discounted cash flows, market value or the fair value of the underlying collateral.  If a loan is collateral dependent, the repayment of the loan is expected to be provided by the underlying collateral.  The allowance for the impaired dealer financing accounts was recorded based on the fair value of the underlying collateral.  For dealer financing accounts for which the fair value of the underlying collateral was in excess of the outstanding balance, no allowance was provided.

 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Average balance of accounts during the period that
    were impaired as of September 30
       
Dealer financing
$266
$381
$273
$407
         
Interest income recognized on impaired account
    balances during the period
       
Dealer financing
$2
$2
$4
$4


 
- 26 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 6 – Investments in Operating Leases, Net

Investments in operating leases, net consisted of the following at the dates indicated:

(Dollars in millions)
September 30, 2010
March 31, 2010
Vehicles
$24,678
$23,460
Equipment and other
811
812
 
25,489
24,272
Deferred origination fees
(167)
(123)
Deferred income
(770)
(577)
Accumulated depreciation
(5,688)
(6,196)
Allowance for credit losses
(194)
(225)
Investments in operating leases, net
$18,670
$17,151



 
- 27 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 7 – Allowance for Credit Losses

The following table provides information related to our allowance for credit losses on finance receivables and investments in operating leases:

 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Allowance for credit losses at beginning of period
$1,316
$2,004
$1,705
$1,864
Provision for credit losses
(14)
11
(303)
339
Charge-offs, net of recoveries1
(113)
(178)
(213)
(366)
Allowance for credit losses at end of period
$1,189
$1,837
$1,189
$1,837


(Dollars in millions)
September 30, 2010   
March 31, 2010
Aggregate balances 60 or more days past due2
   
Finance receivables3
$251   
$247   
Operating leases3
75   
77   
Total
$326   
$324   
 
1 Net of recoveries of $34 million and $73 million for the three and six months ended September 30, 2010, respectively, and $33 million and $66 million for the three and
  six months ended September 30, 2009, respectively.
2  Substantially all retail, direct finance lease, and operating lease receivables do not involve recourse to the dealer in the event of customer default.
3 Includes accounts in bankruptcy and excludes accounts for which vehicles have been repossessed.

 
- 28 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense

Derivative Instruments

We use derivatives as part of our risk management strategy to hedge against changes in interest rate and foreign currency risks.  We manage these risks by entering into derivative transactions with the intent to minimize fluctuations in earnings, cash flows and fair value adjustments of assets and liabilities caused by market volatility.  Our use of derivatives is limited to the management of interest rate and foreign currency risks.

Our derivative activities are authorized and monitored by our Asset-Liability Committee, which provides a framework for financial controls and governance to manage market risks.  We use internal models for analyzing and incorporating data from internal and external sources in developing various hedging strategies.  We incorporate the resulting hedging strategies into our overall risk management strategies.

Our liabilities consist mainly of fixed and floating rate debt, denominated in various currencies, which we issue in the global capital markets.  We hedge our interest rate and foreign currency risk inherent in these liabilities by entering into interest rate swaps, foreign currency swaps and foreign currency forwards, which effectively convert our obligations into U.S. dollar denominated, 3-month LIBOR based payments.

Our assets consist primarily of U.S. dollar denominated, fixed rate receivables.  Our approach to asset-liability management involves hedging our risk exposures so that changes in interest rates have a limited effect on our net interest margin and cash flows.  We use pay fixed interest rate swaps and caps, executed on a portfolio basis, to manage the interest rate risk of these assets.  Our resulting asset liability profile is consistent with the overall risk management strategy directed by the Asset-Liability Committee.

Credit Risk Related Contingent Features

Certain of our derivative contracts are governed by International Swaps and Derivatives Association (“ISDA”) Master Agreements.  Substantially all of these ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement at market value in the event of a ratings downgrade of the other party below a specified threshold.  In addition, upon specified downgrades in a party’s credit ratings, the threshold at which that party would be required to post collateral to the other party would be lowered.

The aggregate fair value of derivative instruments that contain credit risk related contingent features that were in a net liability position at September 30, 2010 was $292 million, excluding embedded derivatives and adjustments made for our own non-performance risk. In the normal course of business, we posted collateral of $20 million to counterparties with which we were in a net liability position at September 30, 2010.  If our ratings were to have declined to “A+”, we would have been required to post $50 million of additional collateral to the counterparties with which we were in a liability position at September 30, 2010.  If our ratings were to have declined to “BBB+” or below, we would have been required to post $292  million of additional collateral to the counterparties with which we were in a liability position at September 30, 2010.  In order to settle all derivative instruments that were in a net liability position at September 30, 2010, excluding embedded derivatives and adjustments made for our own non-performance risk, we would have been required to pay $292 million.



 
- 29 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

Derivative Activity Impact on Financial Statements

The table below shows the location and amount of derivatives at September 30, 2010 as reported in the Consolidated Balance Sheet:
 
   
Hedge accounting derivatives
 
Non-hedge
accounting derivatives
 
Total
(Dollars in millions)
 
Notional
Fair
value
 
Notional
Fair
value
 
Notional
Fair
value
Other assets
                 
Interest rate swaps
 
$465
$73
 
$9,623
$378
 
$10,088
$451
Foreign currency swaps
 
7,855
1,797
 
14,415
2,232
 
22,270
4,029
Embedded derivatives
 
-
-
 
10
1
 
10
1
Total
 
$8,320
$1,870
 
$24,048
$2,611
 
$32,368
$4,481
                   
Counterparty netting
               
(1,574)
Collateral held
               
(1,987)
             
            Carrying value of derivative contracts – Other assets
         
$920
                   
Other liabilities
                 
Interest rate swaps
 
$-
$-
 
$58,869
$1,520
 
$58,869
$1,520
Foreign currency swaps
 
3,082
355
 
330
9
 
3,412
364
Interest rate caps
 
-
-
 
50
1
 
50
1
Embedded derivatives
 
-
-
 
317
50
 
317
50
Total
 
$3,082
$355
 
$59,566
$1,580
 
$62,648
$1,935
                   
Counterparty netting
               
(1,574)
Collateral posted
               
(20)
         
     Carrying value of derivative contracts – Other liabilities
     
$341


 
- 30 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The table below shows the location and amount of derivatives at March 31, 2010 as reported in the Consolidated Balance Sheet:

   
Hedge accounting derivatives
 
Non-hedge
accounting derivatives
 
Total
(Dollars in millions)
 
Notional
Fair
value
 
Notional
Fair
value
 
Notional
Fair
value
Other assets
                 
Interest rate swaps
 
$541
$52
 
$7,999
$275
 
$8,540
$327
Foreign currency swaps
 
8,271
1,451
 
13,609
1,161
 
21,880
2,612
Embedded derivatives
 
-
-
 
58
4
 
58
4
Total
 
$8,812
$1,503
 
$21,666
$1,440
 
$30,478
$2,943
                   
Counterparty netting
               
(1,073)
Collateral held
               
(1,285)
             
            Carrying value of derivative contracts – Other assets
         
$585
                   
Other liabilities
                 
Interest rate swaps
 
$-
$-
 
$57,993
$1,203
 
$57,993
$1,203
Foreign currency swaps
 
3,590
364
 
1,639
95
 
5,229
459
Interest rate caps
 
-
-
 
50
1
 
50
1
Embedded derivatives
 
-
-
 
310
34
 
310
34
Total
 
$3,590
$364
 
$59,992
$1,333
 
$63,582
$1,697
                   
Counterparty netting
               
(1,073)
Collateral posted
               
(57)
         
     Carrying value of derivative contracts – Other liabilities
     
$567


 
 

 
- 31 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The following table summarizes the components of interest expense, including the location and amount of gains or losses on derivative instruments and related hedged items, for the three and six months ended September 30, 2010 and 2009 as reported in our Consolidated Statement of Income:

 
Three months ended September 30,
Six months ended September 30,
(Dollars in millions)
2010
2009
2010
2009
Interest expense on debt1
$539
$606
$990
$1,230
Interest expense on pay float hedge accounting derivatives1
(142)
(202)
(251)
(385)
Interest expense on pay float non-hedge accounting derivatives1, 3
(167)
(182)
(298)
(319)
Interest expense on debt, net of pay float swaps
230
222
441
526
         
Interest expense on non-hedge pay fixed swaps1
255
345
564
646
         
(Gain) loss on hedge accounting derivatives:
       
Interest rate swaps2
(9)
(9)
(22)
15
Foreign currency swaps2
(1,056)
(925)
(542)
(2,309)
Gain on hedge accounting derivatives
(1,065)
(934)
(564)
(2,294)
Less hedged item:  change in fair value of fixed rate debt
1,062
913
552
2,294
Ineffectiveness related to hedge accounting derivatives2
(3)
(21)
(12)
-
         
Loss on foreign currency transactions
1,436
819
828
1,677
Gain on currency swaps and forwards 2
(1,533)
(860)
(1,030)
(1,656)
         
Loss (gain) on other non-hedge accounting derivatives:
       
Pay float swaps2
(45)
(6)
(91)
133
Pay fixed swaps2
253
119
384
(209)
Total interest expense
$593
$618
$1,084
$1,117

1   Amounts represent net interest settlements and changes in accruals.
2   Amounts exclude net interest settlements and changes in accruals.
3   Includes interest expense on both non-hedge accounting foreign currency swaps and forwards, and non-hedge interest rate derivatives.


 
- 32 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)


The following table summarizes the relative fair value allocation of derivative credit valuation adjustments within interest expense.    

 
Three months ended September 30,
Six months ended September 30,
(Dollars in millions)
2010
2009
2010
2009
         
Ineffectiveness related to hedge accounting derivatives
$2
($7)
$3
$20
Loss on currency swaps and forwards
7
1
5
15
Loss (gain) on non-hedge accounting derivatives:
       
     Pay float swaps
-
(1)
-
1
     Pay fixed swaps
3
-
2
28
Total credit valuation adjustment allocated to interest expense
$12
($7)
$10
$64



 
- 33 -

 

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 9 – Other Assets and Other Liabilities

Other assets and other liabilities consisted of the following:

(Dollars in millions)
September 30, 2010
 
March 31, 2010
Other assets:
     
Notes receivable from affiliates
$491
 
$306
Used vehicles held for sale
212
 
220
Deferred charges
184
 
195
Income taxes receivable
165
 
97
Derivative assets
920
 
585
Other assets
456
 
515
Total other assets
$2,428
 
$1,918
       
Other liabilities:
     
Unearned insurance premiums and contract revenues
$1,483
 
$1,382
Derivative liabilities
341
 
567
Accounts payable and accrued expenses
1,060
 
902
Deferred income
250
 
244
Other liabilities
353
 
356
Total other liabilities
$3,487
 
$3,451



 
- 34 -

 

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 10 – Debt

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

     
Weighted average
contractual interest rates4
(Dollars in millions)
September 30,
2010
 
March 31,
2010
 
September 30,
2010
 
March 31,
2010
Commercial paper1
$16,553
 
$19,466
 
0.37%
 
0.28%
Unsecured notes and loans payable2
47,183
 
45,617
 
3.48%
 
3.58%
Secured notes and loans payable
7,495
 
3,000
 
0.81%
 
0.59%
Carrying value adjustment3
1,493
 
1,096
       
Total debt
$72,724
 
$69,179
 
2.45%
 
2.49%

1 Includes unamortized discount.
2 Includes unamortized premium/discount and effects of foreign currency transaction gains and losses on non-hedged or de-designated notes and loans payable which are
  denominated in foreign currencies.
3 Represents the effects of fair value adjustments to debt in hedging relationships, accrued redemption premiums, and the unamortized fair value adjustments on the
   hedged item for terminated fair value hedge accounting relationships.
4 Calculated based on original notional or par value before consideration of premium or discount.

Included in our unsecured notes and loans payable are unsecured notes and loans denominated in various foreign currencies.  At September 30, 2010 and March 31, 2010, the carrying value of these notes payable was $28.5 billion.  Concurrent with the issuance of these foreign currency unsecured notes, we entered into currency swaps in the same notional amount to convert non-U.S. currency payments to U.S. dollar denominated payments.

Additionally, the carrying value of our unsecured notes and loans payable at September 30, 2010 included $15.0 billion of unsecured floating rate debt with contractual interest rates ranging from 0 percent to 9.1 percent and $33.7 billion of unsecured fixed rate debt with contractual interest rates ranging from 0.4 percent to 15.3 percent.  The carrying value of our unsecured notes and loans payable at March 31, 2010 included $14.0 billion of unsecured floating rate debt with contractual interest rates ranging from 0 percent to 10.4 percent and $32.7 billion of unsecured fixed rate debt with contractual interest rates ranging from 0 percent to 15.3 percent.  Upon issuance of fixed rate notes, we generally elect to enter into interest rate swaps to convert fixed rate payments on notes to floating rate payments.  The carrying value adjustment on debt increased by $397 million at September 30, 2010 compared to March 31, 2010 primarily as a result of a weaker U.S. dollar relative to certain other currencies in which some of our debt is denominated.

As of September 30, 2010, our commercial paper had an average remaining maturity of 56 days, while our notes and loans payable mature on various dates through fiscal 2047.

During the three months ended September 30, 2010, we sourced approximately $1.9 billion in funding through the transfer of retail finance receivables to asset-backed securitization vehicles.  The notes and loans issued in connection with these transactions are repayable only from collections on the underlying pledged receivables.

 
- 35 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 11 – Variable Interest Entities

A variable interest entity (“VIE”) is an entity that either (i) has insufficient equity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest.  A VIE is consolidated by its primary beneficiary.  We adopted the FASB’s new accounting standard on VIEs on April 1, 2010. This standard requires the consolidation of a VIE if an entity has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses or the right to receive residual returns that could potentially be significant to the VIE.  We did not consolidate or deconsolidate any VIEs as a result of adopting this standard.

On-balance Sheet Securitization Trusts

We use one or more special purpose entities that are considered 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 from finance receivables that have been transferred to the VIEs.  Although the transferred finance receivables have been legally sold to the VIEs, we hold variable interests in the VIEs that are expected to absorb a majority of these entities’ expected losses, receive a majority of the expected residual returns, or both.  We determined that we are the primary beneficiary of the securitization trusts because (i) our servicing responsibilities for the transferred receivables 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 assets of the consolidated securitization VIEs consisted of $8,885 million and $3,037 million in gross retail finance receivables at September 30, 2010, and March 31, 2010, respectively.  Net retail finance receivables, after consideration of deferred origination costs, unearned income and allowance for credit losses, were $8,752 million as of September 30, 2010.  In addition, TMCC held $475 million and $173 million in cash which represent collections from the underlying pledged receivables and certain reserve deposits held for the securitization trusts at September 30, 2010 and March 31, 2010, respectively.  We classified this cash as restricted cash on our consolidated balance sheet.  The liabilities of these consolidated VIEs consisted of $7,495 million and $3,000 million in secured debt, net of $1,151 million of securities retained by TMCC, and $2 million and $0.4 million in other liabilities at September 30, 2010 and March 31, 2010, respectively.  The assets of the VIEs and the restricted cash 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 TMCC’s general credit, with the exception of customary representation and warranty repurchase provisions and indemnities.

As the primary beneficiary of these entities, we are exposed to credit, interest rate, and prepayment risk from the receivables transferred to 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 securitization trusts are obligated to pay TMCC a fixed rate of interest on certain payment dates in exchange for receiving a floating rate of interest on amounts equal to the outstanding balance of the secured debt.  This arrangement enables the securitization trusts to issue variable rate debt that is secured by fixed rate retail finance receivables.


 
- 36 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 11 – Variable Interest Entities (Continued)

The transfers of the receivables 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 Sheet.  We recognize financing revenue on the pledged receivables and interest expense on the secured debt issued by the trusts.  We also maintain an allowance for credit losses on the pledged receivables to cover probable credit losses estimated using a methodology consistent with that used for our non-securitized retail loan 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.


 
- 37 -

 

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 12 – Liquidity Facilities and Letters of Credit

For additional liquidity purposes, we maintain syndicated bank credit facilities with certain banks.

364 Day Credit Agreement

In March 2010, TMCC, its subsidiary Toyota Credit de Puerto Rico Corp. (“TCPR”), and other Toyota affiliates entered into a $5.0 billion 364 day syndicated bank credit facility pursuant to a 364 Day Credit Agreement.  The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross-default provisions and limitations on consolidations, mergers and sales of assets.  The 364 Day Credit Agreement may be used for general corporate purposes and was not drawn upon as of September 30, 2010 and March 31, 2010.

Five Year Credit Agreement

In March 2007, TMCC, TCPR, and other Toyota affiliates entered into an $8.0 billion five year syndicated bank credit facility pursuant to a Five Year Credit Agreement.  The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross-default provisions and limitations on consolidations, mergers and sales of assets.  The Five Year Credit Agreement may be used for general corporate purposes and was not drawn upon as of September 30, 2010 and March 31, 2010.

Letter of Credit Facility Agreement

In addition, TMCC has an uncommitted letter of credit facility totaling $5 million, of which $1 million was issued and outstanding at September 30, 2010 and March 31, 2010.

Other Credit Agreements

TMCC has two additional bank credit facilities.  The first is a 364 day committed bank credit facility in the amount of JPY 100 billion (approximately $1.2 billion as of September 30, 2010) which was entered into in December 2009 to replace a similar facility which expired.  The second is a 364 day uncommitted bank credit facility in the amount of JPY 100 billion (approximately $1.2 billion as of September 30, 2010), which was extended in December 2009 for an additional 364 days.  Both of these agreements contain covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross-default provisions and limitations on consolidations, mergers and sales of assets.  Neither of these facilities was drawn upon as of September 30, 2010 and March 31, 2010.

We are in compliance with the covenants and conditions of the credit agreements described above.

 
- 38 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13 – Commitments and Contingencies

Commitments and Guarantees

We have entered into certain commitments and guarantees described below.  The maximum amounts under these commitments and guarantees are summarized in the table below:

 
    Maximum commitment amount as of
(Dollars in millions)
September 30, 2010
March 31, 2010
Commitments:
   
Credit facilities with vehicle and industrial equipment dealers
$6,264
$6,363
Facilities lease commitments1
83
92
Total commitments
6,347
6,455
Guarantees and other contingencies:
   
Guarantees of affiliate pollution control and solid waste disposal  bonds
100
100
Total commitments and guarantees
$6,447
$6,555
     
Wholesale financing demand note facilities2
$9,341
$9,482

1 Includes $54 million and $58 million in facilities lease commitments with affiliates at September 30 and March 31, 2010, respectively.
2 Amounts are not considered to be contractual commitments as they are not binding arrangements under which TMCC is required to perform.  At September 30, 2010 and
   March 31, 2010, amounts outstanding were $6.1 billion and $5.9 billion, respectively.

Commitments

We provide fixed and variable rate credit facilities to vehicle and industrial equipment dealers.  These credit facilities are typically used for business acquisitions, facilities refurbishment, real estate purchases, and working capital requirements.  These loans are generally collateralized with liens on real estate, vehicle inventory, and/or other dealership assets, as appropriate.  We obtain a personal guarantee from the vehicle or industrial equipment dealer or a corporate guarantee from the dealership when deemed prudent.  Although the loans are typically collateralized or guaranteed, the value of the underlying collateral or guarantees may not be sufficient to cover our exposure under such agreements.  We price the credit facilities to reflect the credit risks assumed in entering into the credit facility.  Amounts drawn under these facilities are reviewed for collectability on a quarterly basis, in conjunction with our evaluation of the allowance for credit losses.  We also provide financing to various multi-franchise dealer organizations, often as part of a lending consortium, for wholesale, working capital, real estate, and business acquisitions.  Of the total credit facility commitments available to vehicle and industrial equipment dealers, $5.2 billion was outstanding at September 30 and March 31, 2010, and was recorded in Finance receivables, net in the Consolidated Balance Sheet.





 
- 39 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13 – Commitments and Contingencies (Continued)

We are party to a 15-year lease agreement with Toyota Motor Sales, USA, Inc. (“TMS”) for our headquarters location in the TMS headquarters complex in Torrance, California.  At September 30, 2010, minimum future commitments under lease agreements to which we are a lessee, including those under the agreement discussed above, are as follows: fiscal years ending March 31, 2011 - $10 million; 2012 - $17 million; 2013 - $13 million; 2014 - $10 million; 2015 - $9 million and thereafter - $24 million.

Guarantees and Other Contingencies

TMCC has guaranteed bond obligations totaling $100 million in principal that were issued by Putnam County, West Virginia and Gibson County, Indiana to finance the construction of pollution control facilities at manufacturing plants of certain TMCC affiliates.  The bonds mature in the following fiscal years ending March 31: 2028 - $20 million; 2029 - $50 million; 2030 - $10 million; 2031 - $10 million; and 2032 - $10 million.  TMCC would be required to perform under the guarantees in the event of non-payment on the bonds and other related obligations.  TMCC is entitled to reimbursement by the affiliates for any amounts paid.  TMCC receives an annual fee of $78,000 for guaranteeing such payments.  TMCC has not been required to perform under any of these affiliate bond guarantees as of September 30, 2010 and March 31, 2010.

Indemnification

In the ordinary course of business, we enter into agreements containing indemnification provisions standard in the industry related to several types of transactions, including, but not limited to, debt funding, derivatives, securitization transactions, and our vendor and supplier agreements.  Performance under these indemnities would occur upon a breach of the representations, warranties or covenants made or given, or a third party claim. In addition, we have agreed in certain debt and derivative issuances, and subject to certain exceptions, to gross-up payments due to third parties in the event that withholding tax is imposed on such payments.  In addition, certain of our funding arrangements would require us to pay lenders for increased costs due to certain changes in laws or regulations.  Due to the difficulty in predicting events which could cause a breach of the indemnification provisions or trigger a gross-up or other payment obligation, we are not able to estimate our maximum exposure to future payments that could result from claims made under such provisions.  We have not made any material payments in the past as a result of these provisions, and as of September 30, 2010, we determined that it is not probable that we will be required to make any material payments in the future.  As of September 30, 2010 and March 31, 2010, no amounts have been recorded under these indemnifications.

 
- 40 -

 

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13 – Commitments and Contingencies (Continued)

Litigation

Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business.  Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices.  Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies. 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. The actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts accrued for these claims; however, we cannot estimate the losses or ranges of losses for proceedings where there is only a reasonable possibility that a loss may be incurred.  We believe, based on currently available information and established accruals, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, but may be material to our operating results for any particular period, depending in part, upon the operating results for such period.

Repossession Class Actions

A cross-complaint alleging a class action in the Superior Court of California Stanislaus County, Garcia v. Toyota Motor Credit Corporation, filed in August 2007, claims that TMCC's post-repossession notice failed to comply with the Rees-Levering Automobile Sales Finance Act of California.  Three additional putative class action complaints or cross-complaints were filed making similar allegations.  The cases were coordinated in the California Superior Court, Stanislaus County and a Second Amended Consolidated Cross-Complaint and Complaint was subsequently filed in March 2009.  The Second Amended Consolidated Cross-Complaint and Complaint seeks injunctive relief, restitution, disgorgement and other equitable relief under California's Unfair Competition Law.  As a result of mediation in January 2010, the parties agreed to settle all of the foregoing matters.  A fourth case was recently filed which has been included in the settlement.  The proposed settlement, for which we have adequately accrued, is subject to final court approval.  Preliminary approval was granted by the Court by order dated September 2, 2010.  The hearing on final approval is currently set for December 23, 2010.

Recall-related Class Actions

TMCC and certain affiliates were named as defendants in the consolidated multidistrict litigation, In Re: Toyota Motor Corp. Unintended Acceleration, Marketing, Sales Practices, and Products Liability Litigation (United States District Court, Central District of California) seeking damages and injunctive relief as a result of alleged sudden unintended acceleration in certain Toyota and Lexus vehicles.  A parallel action was filed against TMCC and certain affiliates on March 12, 2010 by the Orange County District Attorney.  On August 2, 2010, the plaintiffs filed a consolidated complaint in the multidistrict litigation that does not name TMCC as a defendant.  In addition, the court has permitted alleged classes of foreign plaintiffs to file complaints naming TMCC and related entities as defendants.  TMCC also remains a defendant in the state court action filed by the Orange County District Attorney.

 
- 41 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 13 – Commitments and Contingencies (Continued)
 
TMCC and certain affiliates had also been named as defendants in a putative bondholder class action, Harel Pia Mutual Fund vs. Toyota Motor Corp., et al., filed in the Central District of California on April 8, 2010, alleging violations of federal securities laws.  The plaintiff filed a voluntary dismissal of the lawsuit on July 20, 2010.
 
On July 22, 2010, the same plaintiff in the above federal bondholder action refiled the case in California state court on behalf of purchasers of TMCC bonds traded on foreign exchanges (Harel Pia Mutual Fund v. Toyota Motor Corp., et al., Superior Court of California, County of Los Angeles).  The complaint alleges violations of California securities laws, fraud, breach of fiduciary duty and other state law claims.  On September 15, 2010, defendants removed the state court action to the United States District Court for the Central District of California pursuant to the Securities Litigation Uniform Standards Act and the Class Action Fairness Act.  Defendants filed a motion to dismiss on October 15, 2010.

We believe we have meritorious defenses to these claims and intend to defend against them vigorously.
 

 

 
- 42 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Note 14 – Income Taxes

Our effective tax rate was 38 percent during the first half of fiscal 2011 and 39 percent for the same period in fiscal 2010.  Our provision for income taxes for the first half of fiscal 2011 was $522 million compared to $307 million for the same period in fiscal 2010.   This increase in provision is consistent with the increase in our income before tax for the first half of fiscal 2011 compared to the first half of fiscal 2010.

Tax Related Contingencies

We are routinely subject to U.S. federal, state and local, and foreign income tax examinations by tax authorities in various jurisdictions.  We are in various stages of completion of several income tax examinations, including an examination by the Internal Revenue Service for the taxable years March 31, 2007 through March 31, 2010.

We periodically review our uncertain tax positions. Our assessment is based on many factors including the ongoing IRS audits.  For the quarter ended September 30, 2010 our assessment resulted in a reduction of unrecognized tax benefits of $34 million.

Our deferred tax assets at September 30, 2010 were $2.0 billion compared to $2.3 billion at March 31, 2010, and were primarily due to the deferred deduction of allowance for credit losses and cumulative federal tax loss carryforwards that expire in varying amounts through fiscal year 2029.  The total deferred tax liability at September 30, 2010, net of these deferred tax assets, was $3.9 billion compared with $3.3 billion at March 31, 2010.  Realization with respect to the federal tax loss carryforwards is dependent on generating sufficient income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized.  The amount of the deferred tax assets considered realizable could be reduced if management’s estimates change.


 
- 43 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 15 – Related Party Transactions

The tables below summarize amounts included in our Statement of Income for the three and six months ended September 30, 2010 and 2009 and in our Consolidated Balance Sheet as of September 30, 2010 and March 31, 2010 under various related party agreements or relationships:

 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Net financing revenues:
       
Manufacturers’ subvention support and other revenues
$240
$183
$473
$370
Credit support fees incurred
($8)
($10)
($17)
($20)
Foreign exchange gain on notes receivable from affiliates
$-
$4
$-
$56
Foreign exchange loss on loans payable to affiliates
($66)
($77)
($127)
($110)
Interest expense on loans payable to affiliates
($12)
($21)
($24)
($42)
         
Insurance earned premiums and contract revenues:
       
Affiliate insurance premiums and contract revenues
$35
$22
$64
$44
         
Investments and other income, net:
       
Interest earned on notes receivable from affiliates
$1
$-
$2
$1
         
Expenses:
       
Shared services charges and other expenses
$134
$10
$144
$18
Employee benefits expense
$17
$16
$34
$32

 
- 44 -

 

 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 15 – Related Party Transactions (Continued)

(Dollars in millions)
September 30, 2010
 
March 31, 2010
Assets:
     
Investments in marketable securities
     
Investments in marketable securities
$-
 
$50
       
Finance receivables, net
     
Accounts receivable from affiliates
$12
 
$20
Direct finance receivables from affiliates
$5
 
$-
Notes receivable under home loan programs
$24
 
$27
Deferred retail subvention income from affiliates
($775)
 
($663)
       
Investments in operating leases, net
     
Leases to affiliates
$15
 
$29
Deferred lease subvention income from affiliates
($768)
 
($575)
       
Other assets
     
Notes receivable from affiliates
$491
 
$306
Accounts receivable from affiliates
$36
 
$97
Subvention support receivable from affiliates
$122
 
$143
       
Liabilities:
     
Debt
     
Loans payable to affiliates
$4,192
 
$4,065
       
Other liabilities
     
Unearned affiliate insurance premiums and contract revenues
$321
 
$223
Accounts payable to affiliates
$254
 
$284
Notes payable to affiliate
$61
 
$45
       
Shareholder’s Equity:
     
Dividends paid
$266
 
$50
Stock based compensation
$1
 
$1


As of September 30, 2010, there were no material changes to our related party agreements or relationships as described in our fiscal 2010 Form 10-K, except as described below.

TMCC-TMFNL Loan Agreement

During the first quarter of fiscal 2011, TMCC and Toyota Motor Finance (Netherlands) B.V. (“TMFNL”) entered into a new uncommitted loan finance agreement which replaced an existing loan finance agreement between TMCC and TMFNL.  The new loan agreement provides for reciprocal lines of credit between TMFNL and TMCC, with individual loans to be evidenced by terms agreements in an aggregate amount not to exceed €1 billion.  There were no amounts outstanding at September 30, 2010.

 
- 45 -

 
 
TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
Note 15 – Related Party Transactions (Continued)

TFSB Expense Reimbursement Agreement

During the second quarter of fiscal 2011, TMCC and Toyota Financial Saving Bank (“TFSB”) entered into an expense reimbursement agreement.  Under the terms of the agreement, TMCC will reimburse certain expenses incurred by TFSB in connection with providing certain financial products and services to TMCC’s customers and dealers in support of TMCC’s customer loyalty strategy and programs.  Expenses incurred by TMCC under this agreement for the three and six months ended September 30, 2010 were $11 million.

TFSA Expense Reimbursement Agreement

During the second quarter of fiscal 2011, TMCC and Toyota Financial Services Americas Corporation (“TFSA”) entered into an expense reimbursement agreement.  Under the terms of the agreement, TMCC will reimburse certain expenses incurred by TFSA, the parent of TMCC and TFSB, with respect to costs related to TFSB’s credit card rewards program.  Expenses incurred by TMCC under this agreement for the three and six months ended September 30, 2010 were $6 million.

TMS Expense Reimbursement Agreement

During the second quarter of fiscal 2011, TMCC and TMS entered into an expense reimbursement agreement.  Under the agreement, TMCC will reimburse a portion of certain sales and marketing expenses incurred by TMS during fiscal 2011 intended to improve brand image.  Expenses incurred by TMCC under this agreement for the three and six months ended September 30, 2010 were $106 million.

 
- 46 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 16 – Segment Information

Financial information for our reportable operating segments for the periods ended or at September 30, 2010 is summarized as follows (dollars in millions):

Fiscal 2011:
Finance
operations
 
Insurance
operations
 
Intercompany
eliminations
 
Total
Three months ended September 30, 2010:
             
 
Total financing revenues
$2,027
 
$-
 
$5
 
$2,032
Insurance earned premiums and contract revenues
-
 
137
 
(5)
 
132
Investment and other income
14
 
42
 
(2)
 
54
Total gross revenues
2,041
 
179
 
(2)
 
2,218
               
Less:
             
Depreciation on operating leases
824
 
-
 
-
 
824
Interest expense
595
 
-
 
(2)
 
593
Provision for credit losses
(14)
 
-
 
-
 
(14)
Operating and administrative expenses
286
 
37
 
-
 
323
Insurance losses and loss adjustment expenses
-
 
58
 
-
 
58
Provision for income taxes
134
 
31
 
-
 
165
Net income
$216
 
$53
 
$-
 
$269
               
Six months ended September 30, 2010:
             
 
Total financing revenues
$4,045
 
$-
 
$11
 
$4,056
Insurance earned premiums and contract revenues
-
 
266
 
(11)
 
255
Investment and other income
24
 
69
 
(4)
 
89
Total gross revenues
4,069
 
335
 
(4)
 
4,400
               
Less:
             
Depreciation on operating leases
1,635
 
-
 
-
 
1,635
Interest expense
1,088
 
-
 
(4)
 
1,084
Provision for credit losses
(303)
 
-
 
-
 
(303)
Operating and administrative expenses
431
 
76
 
-
 
507
Insurance losses and loss adjustment expenses
-
 
116
 
-
 
116
Provision for income taxes
469
 
53
 
-
 
522
Net income
$749
 
$90
 
$-
 
$839
               
Total assets at September 30, 2010
$83,332
 
$3,035
 
($419)
 
$85,948
               


 
- 47 -

 

TOYOTA MOTOR CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 16 – Segment Information (continued)

Financial information for our reportable operating segments for the periods ended or at September 30, 2009 is summarized as follows (dollars in millions):

Fiscal 2010:
Finance
operations
 
Insurance
operations
 
Intercompany
eliminations
 
Total
Three months ended September 30, 2009:
             
 
Total financing revenues
$2,039
 
$-
 
$4
 
$2,043
Insurance earned premiums and contract revenues
-
 
117
 
(3)
 
114
Investment and other income
12
 
37
 
(2)
 
47
Total gross revenues
2,051
 
154
 
(1)
 
2,204
               
Less:
             
Depreciation on operating leases
836
 
-
 
-
 
836
Interest expense
619
 
-
 
(1)
 
618
Provision for credit losses
11
 
-
 
-
 
11
Operating and administrative expenses
146
 
28
 
-
 
174
Insurance losses and loss adjustment expenses
-
 
56
 
-
 
56
Provision for income taxes
173
 
26
 
-
 
199
Net income
$266
 
$44
 
$-
 
$310
               
Six months ended September 30, 2009:
             
 
Total financing revenues
$4,105
 
$-
 
$8
 
$4,113
Insurance earned premiums and contract revenues
-
 
232
 
(8)
 
224
Investment and other income
35
 
73
 
(3)
 
105
Total gross revenues
4,140
 
305
 
(3)
 
4,442
               
Less:
             
Depreciation on operating leases
1,729
 
-
 
-
 
1,729
Interest expense
1,120
 
-
 
(3)
 
1,117
Provision for credit losses
339
 
-
 
-
 
339
Operating and administrative expenses
288
 
63
 
-
 
351
Insurance losses and loss adjustment expenses
-
 
113
 
-
 
113
Provision for income taxes
260
 
47
 
-
 
307
Net income
$404
 
$82
 
$-
 
$486
               
Total assets at September 30, 2009
$75,329
 
$2,702
 
($365)
 
$77,666
               

 
- 48 -

 


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 or incorporated by reference herein 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 “Item 1A. Risk Factors” of this Form 10-Q and our Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2010 (“fiscal 2010”).  We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements.

OVERVIEW

Key Performance Indicators and Factors Affecting Our Business

We generate revenue, income, and cash flows by providing retail financing, dealer financing, and certain other financial products and services to vehicle and industrial equipment dealers and their customers.  We measure the performance of our financing operations using the following metrics: financing volume, market share, financial leverage, financing margins and loss metrics.

We also generate revenue through marketing, underwriting, and administering insurance agreements related to covering certain risks of vehicle dealers and their customers.  We measure the performance of our insurance operations using the following metrics: agreement volume, number of agreements 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, the level of Toyota and Lexus sales, new vehicle incentives, consumer behavior, level of employment, 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 and Lexus vehicles, the financial health of the dealers we finance, and the level of competitive pressure.  Changes in these factors can influence the demand for new and used vehicles, the number of contracts that default and the loss per occurrence, the inability to realize originally estimated contractual residual values on our lease earning assets, and our gross margins on financing volume.  Additionally, our funding programs and related costs are influenced by changes in the global capital markets and prevailing interest rates, as well as our credit ratings, which may affect our ability to obtain cost effective funding to support earning asset growth.


 
- 49 -

 

Fiscal 2011 First Half Operating Environment

During the first half of the fiscal year ending March 31, 2011 (“fiscal 2011”), economic activity in the United States remained weak and the economy continued along a path of slow growth.  While industrial production and business investment and spending began to show positive signs, unemployment rates remained elevated and consumer confidence remained weak.  Consumer spending continued to be constrained by high unemployment, modest income growth, lower household wealth and tight credit.  In addition, home values remained under pressure, and commodity prices continued to fluctuate.  These economic challenges and uncertainties continue to negatively affect some of our customers’ ability to make their payments.

Conditions in the global capital markets during the first half of fiscal 2011 continued to show improvement as compared to fiscal 2010.  Investors’ demand for fixed income products was strong and credit spreads generally improved, leading to favorable borrowing conditions for issuers.  During the first half of fiscal 2011, we continued to maintain broad access to a variety of global markets and continued to issue commercial paper and term debt in both unsecured and secured markets.

Industry wide vehicle sales during the first half of fiscal 2011 in the United States increased as compared to the same period in the prior year.  In addition, sales incentives throughout the auto industry increased over the same period.  Sales of Toyota and Lexus vehicles by Toyota Motor Sales, USA, Inc. (“TMS”) in the first half of fiscal 2010 benefited from the Car Allowance Rebate System, or “cash for clunkers” program.  Sales of Toyota and Lexus vehicles by TMS decreased 4 percent in the first half of fiscal 2011 as compared to the same period in the prior year due to the absence of these United States government programs.   Our overall net earning assets balance at September 30, 2010 was higher than the balance at September 30, 2009 due to an increase in vehicle financing volume, which was in turn due to increased vehicle sales incentives.

Despite the challenging economic conditions, our consumer portfolio continued to show positive signs.  We decreased our allowance for credit losses in the first half of fiscal 2011 in response to lower levels of delinquency and per unit loss severity in our consumer portfolio.  We experienced lower loss severity due to strong used vehicle values during the first half of fiscal 2011 as compared to the same period in fiscal 2010.  Prices of used vehicles were at an unprecedented high during the first half of fiscal 2011 primarily due to a low supply of used vehicles.  In addition, the overall credit quality of our retail portfolio in the first half of fiscal 2011 continued to benefit from our focus on purchasing practices and collection efforts.  As a result, our net charge-offs improved during the first half of fiscal 2011 as compared to the same period in fiscal 2010.  In addition, our delinquencies at September 30, 2010 improved significantly compared to September 30, 2009 and remained flat as compared to the delinquencies at March 31, 2010.

 
- 50 -

 

RESULTS OF OPERATIONS

Fiscal 2011 First Half Summary

 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Net income:
       
Finance operations
$216
$266
$749
$404
Insurance operations
53
44
90
82
Total net income
$269
$310
$839
$486

Our consolidated net income was $839 million and $269 million for the first half and second quarter of fiscal 2011, respectively, compared with $486 million and $310 million for the same periods in fiscal 2010.  Our consolidated results for the first half of fiscal 2011 were favorable as compared to the same period in fiscal 2010 primarily due to the decreases in our provision for credit losses, and to a lesser extent, depreciation on operating leases, partially offset by an increase in operating and administrative expenses.  Our results in the second quarter of fiscal 2011 as compared to the same period in fiscal 2010 were impacted by higher operating and administrative expenses, partially offset by decreases in our provision for credit losses, depreciation on operating leases and interest expense.

We recorded a benefit from credit losses of  $303 million and $14 million for the first half and second quarter of fiscal 2011, respectively, compared to a charge of $339 million and $11 million for the same periods in fiscal 2010.  This reduction in our provision was attributable to strong used vehicle prices fueled by a lower supply of used vehicles and better credit quality within our consumer portfolio.  We decreased our estimate of expected credit losses in response to improvements in per unit loss severity and net charge-offs in the consumer portfolio during the first half of fiscal 2011.  During the first half and second quarter of fiscal 2011, we continued to incorporate into our provision for credit losses the impact of ongoing adverse publicity and governmental investigations associated with the TMS recall-related events.
 
Operating and administrative expenses increased by 44% and 86% during the first half and second quarter of fiscal 2011 as compared to the same periods in fiscal 2010.  The increase in operating and administrative expenses was due to the increases in shared affiliate expenses for sales and marketing activities as well as in employee expenses.  Refer to Note 15 – Related Party Transactions of the Notes to Consolidated Financial Statements for further information.
 
Our overall capital position increased by $613 million, bringing total shareholder’s equity to $5.9 billion at September 30, 2010, as compared to $5.3 billion at March 31, 2010.  Our debt increased to $72.7 billion at September 30, 2010 from $69.2 billion at March 31, 2010.  We experienced an improvement in our debt-to-equity ratio to 12.4 at September 30, 2010 from 13.1 at March 31, 2010 due to an increase in our equity despite an increase in debt.


 
- 51 -

 

Financing Operations

 
Three months ended
September 30,
Percentage
Six months ended
September 30,
Percentage
(Dollars in millions)
2010
2009
Change
2010
2009
Change
Financing Revenues:
           
Operating lease
$1,216
$1,175
3%
$2,416
$2,371
2%
Retail1
720
790
(9%)
1,450
1,571
(8%)
Dealer
91
74
23%
179
163
10%
Total financing revenues
2,027
2,039
(1%)
$4,045
4,105
(1%)
             
Depreciation on operating leases
824
836
(1%)
1,635
1,729
(5%)
Interest expense
595
619
(4%)
1,088
1,120
(3%)
Net financing revenues
608
584
4%
1,322
1,256
5%
 
Provision for credit losses
(14)
11
(227%)
(303)
339
(189%)
             
Net income from financing operations
$216
$266
(19%)
$749
$404
85%

1 Includes direct finance lease revenues.

Our finance operations reported net income of $749 million and $216 million for the first half and second quarter of fiscal 2011, respectively, compared to $404 million and $266 million for the same periods in fiscal 2010.  Results were favorable primarily due to decreases in our provision for credit losses, depreciation on operating leases and interest expense, partially offset by an increase in operating and administrative expenses.

Our per unit credit loss severity improved during the first half and second quarter of fiscal 2011.  The improvement in per unit credit loss severity was attributable to strong used vehicle prices fueled by lower used vehicle supply.  The overall credit quality of our retail portfolio in the first half and second quarter of fiscal 2011 continued to benefit from our focus on purchasing practices and collection efforts.   As a result, net charge-offs improved during the first half and second quarter of fiscal 2011 as compared to the same periods in fiscal 2010.  In addition, our delinquencies at September 30, 2010 improved significantly compared to September 30, 2009 and remained flat as compared to the delinquencies at March 31, 2010.  We recorded a benefit from credit losses of $303 million and $14 million for the first half and second quarter of fiscal 2011, respectively, compared with expenses of $339 million and $11 million for the same periods in fiscal 2010.  The amount of the provision was also positively affected by improvements in default frequency and loss severity.  Depreciation expense on operating leases was also positively affected by strong used vehicle values.



 
- 52 -

 

Financing Revenues

Total financing revenues decreased 1 percent during the first half and second quarter of fiscal 2011, respectively, as compared to the same periods in fiscal 2010 due to the following factors:

·  
Operating lease revenues increased 2 percent and 3 percent in the first half and second quarter of fiscal 2011, as compared to the same periods in fiscal 2010 due to higher portfolio yields and higher average outstanding earning asset balances.

·  
Retail contract revenues decreased 8 percent and 9 percent, primarily due to a decrease in our portfolio yields partially offset by higher average outstanding earning asset balances.

·  
Dealer financing revenues increased 10 percent and 23 percent in the first half and second quarter of fiscal 2011, as compared with the same periods in fiscal 2010 due to higher average outstanding earning asset balances.

Our total finance receivables portfolio yield was 5.7 percent during the first half and second quarter of fiscal 2011, compared to 6.4 percent for the same periods in fiscal 2010.

Depreciation on Operating Leases

Depreciation on operating leases decreased 5 percent and 1 percent during the first half and second quarter of fiscal 2011, respectively, as compared to the same periods in fiscal 2010.  Improvements in used vehicle values, due primarily to lower used vehicle supply, resulted in an increase to the estimated end-of-term residual values of the existing portfolio.  During the first half and second quarter of fiscal 2011, we continued to consider in our estimate of end-of-term residual values the impact of ongoing adverse publicity and governmental investigations associated with the TMS recall-related events.  These events did not have a material impact on our depreciation on operating leases for the first half and second quarter of fiscal 2011.



 
- 53 -

 

Interest Expense

Our debt consists of fixed and floating rate obligations denominated in a number of different currencies. We economically hedge our interest rate and currency risks inherent in these liabilities on a consolidated basis by entering into pay float interest rate swaps, foreign currency swaps, and foreign currency forwards.  These derivatives effectively convert our obligations on the debt into U.S. dollar denominated 3-month LIBOR based payments.  We use pay fixed interest rate swaps executed on a portfolio basis to manage our interest rate risk arising from the resulting mismatch between our predominantly fixed-rate U.S. dollar denominated receivables and floating rate obligations.  The following table summarizes the consolidated components of interest expense:

 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Interest expense on debt1
$539
$606
$990
$1,230
Interest expense on pay float swaps1,2
(309)
(384)
(549)
(704)
Interest expense on debt, net of pay float swaps
230
222
441
526
         
Interest expense on pay fixed swaps1
255
345
564
646
Ineffectiveness related to hedge accounting derivatives3,4
(3)
(21)
(12)
-
Loss on foreign currency transactions
1,436
819
828
1,677
Gain on currency swaps and forwards 3,4
(1,533)
(860)
(1,030)
(1,656)
         
Loss (gain) on other non-hedge accounting derivatives:
       
Pay float swaps3,4
(45)
(6)
(91)
133
Pay fixed swaps3,4
253
119
384
(209)
Total interest expense5
$593
$618
$1,084
$1,117

1  Amounts represent net interest settlements and changes in accruals.
2  Includes both hedge and non-hedge accounting derivatives.
3  Amounts exclude net interest settlements and changes in accruals.
4  Refer to Note 8 –Derivatives, Hedging Activities and Interest Expense of the Notes to Consolidated Financial Statements for additional information relating to the credit
    valuation adjustments for the periods.
5  Excludes $4 million and $2 million of interest on bonds held by our insurance operations for the first half and second quarter of fiscal 2011, respectively, compared to
    $3 million and $1 million for the same periods in fiscal 2010.  Refer to Note 16 – Segment Information of the Notes to Consolidated Financial Statements for further
    information.

We reported consolidated interest expense of $1,084 million and $593 million during the first half and second quarter of fiscal 2011, respectively,  compared to $1,117 million and $618 million during the same periods in fiscal 2010. Interest expense was lower during the first half of fiscal 2011 compared to the same period in fiscal 2010 primarily due to lower contractual interest rates on debt, lower net interest expense on pay fixed swaps, and gains on currency swaps, net of losses on foreign currency transactions.  These factors were partially offset by mark-to-market losses on other non-hedge accounting derivatives in fiscal 2011 resulting from decreases in swap rates.


 
- 54 -

 

Interest expense on debt primarily represents interest due on secured and unsecured notes and loans payable and commercial paper, and includes amortization of discount and premium, debt issue costs, and basis adjustments.  The decrease in interest expense on debt to $990 million and $539 million during the first half and second quarter of fiscal 2011 from $1,230 million and $606 million in the same periods in fiscal 2010 was due to lower weighted average contractual interest rates on unsecured debt and changes in our mix of funding sources.  The proportion of our outstanding debt consisting of commercial paper and secured debt, which carry lower weighted-average interest rates than unsecured term debt, was higher during the first half of fiscal 2011 compared to fiscal 2010.  Interest expense on pay float swaps represents net interest expense on our interest rate and cross-currency swaps.  During the first half of fiscal 2011 and fiscal 2010, 3-month LIBOR rates were generally lower than the rates on the receive leg of these swaps.  Settlements on pay float swaps resulted in interest income of $549 million and $309 million for the first half and second quarter of fiscal 2011 compared to $704 million and $384 million for the same periods in fiscal 2010.  Lower weighted average rates on the receive leg of pay float swaps were primarily responsible for the decrease in interest income on pay float swaps in fiscal 2011 compared to fiscal 2010.  These favorable results from our pay float swaps partially offset our interest expense on debt.

Interest expense on pay fixed swaps represents net interest on our pay fixed swaps portfolio where we pay a fixed rate and receive a floating rate based on 3-month LIBOR.  During the first half of fiscal 2011 and fiscal 2010, 3-month LIBOR was generally lower than the fixed interest rates at which the swap contracts were executed, resulting in net interest expense in both periods.  Pay fixed swaps have a weighted average life of approximately two to three years; this results in a pay fixed swaps portfolio that is constantly changing as new swaps are executed at different rates, and existing swaps mature.  The average pay fixed interest rate on this swap portfolio declined by a greater amount from fiscal 2010 to fiscal 2011 than average 3-month LIBOR rates decreased over the same period.  As a result, net interest expense on pay fixed swaps decreased to $564 million and $255 million for the first half and second quarter of fiscal 2011 from $646 million and $345 million for the same periods of fiscal 2010.

Ineffectiveness related to hedge accounting derivatives represents the net difference between the change in the fair value of the hedged debt and the change in the fair value of the associated derivative instrument.  These amounts also include a credit valuation adjustment loss of $3 million and $2 million for the first half and second quarter of fiscal 2011, compared to a credit valuation adjustment loss of $20 million and gain of $7 million for the same periods in fiscal 2010.

Gain or loss on foreign currency transactions relates to foreign currency denominated transactions for which hedge accounting has not been elected.  We are required to revalue these foreign currency denominated transactions at each balance sheet date.  We use currency swaps and forwards to economically hedge these foreign currency transactions.  During the first half and second quarter of fiscal 2011, the U.S. dollar weakened relative to certain other currencies in which our foreign currency transactions are denominated.  This resulted in the recognition of losses on foreign currency transactions of $828 million and $1,436 million during the first half and second quarter of fiscal 2011, respectively.  We recorded gains in the fair value of currency swaps used to economically hedge these foreign currency transactions of $1,030 million and $1,533 million during the first half and second quarter of fiscal 2011, respectively.  During the same periods in fiscal 2010, the U.S. dollar also weakened relative to certain other currencies in which our foreign currency transactions are denominated. This resulted in the recognition of losses in foreign currency transactions and gains in the fair value of currency swaps used to economically hedge these foreign currency transactions during the first half and second quarter of fiscal 2010.  During fiscal 2011, the weakening of the U.S. dollar in the second quarter was partially offset by a strengthening of the dollar that occurred in the first quarter.  As a result, gains on foreign currency swaps were lower during the first half of fiscal 2011 than during the first half of fiscal 2010, when the dollar weakened in both quarters.


 
- 55 -

 

Declines in swap rates contributed to losses on pay fixed interest rate swaps of $384 million and $253 million during the first half and second quarter of fiscal 2011, respectively.  These losses on pay fixed swaps were partially offset by gains on non-hedge accounting pay float swaps of $91 million and $45 million during the first half and second quarter of fiscal 2011, respectively.  During the first half of fiscal 2010, we recorded gains of $209 million on pay fixed interest rate swaps which were partially offset by losses of $133 million on non-hedge pay float swaps.  During the second quarter of fiscal 2010, gains on pay float swaps of $6 million and losses on pay fixed swaps of $119 million were due to a decrease in swap rates.

 
- 56 -

 

Provision for Credit Losses

We recorded a benefit from credit losses of $303 million and $14 million for the first half and second quarter of fiscal 2011, respectively, compared to expenses of $339 million and $11 million for the same periods in fiscal 2010.  During the first half of fiscal 2010, we increased our provision for credit losses in response to elevated levels of delinquency in our consumer portfolio as well as an increase in the default frequency resulting from the weakness in the United States economy.

Despite continued challenging economic conditions, the credit performance of our consumer portfolio showed favorable trends during the first half and the second quarter of fiscal 2011.  We decreased our provision for credit losses in the first half and second quarter of fiscal 2011 in response to lower levels of delinquency and per unit loss severity in our consumer portfolio.  We experienced lower loss severity due to strong used vehicle values during the first half and second quarter of fiscal 2011 compared to the same periods in fiscal 2010.  During the first half and second quarter of fiscal 2011, prices of used vehicles were at an unprecedented high driven primarily by a low supply of used vehicles.  In addition, the overall credit quality of our retail portfolio in the first half and second quarter of fiscal 2011 continued to benefit from our focus on purchasing practices and collection efforts.  As a result, our net charge-offs improved during the first half and second quarter of fiscal 2011 as compared to the same periods in fiscal 2010.  In addition, our delinquencies at September 30, 2010 improved significantly compared to September 30, 2009 and remained flat as compared to the delinquencies at March 31, 2010.  During the first half and second quarter of fiscal 2011, we continued to incorporate into our provision for credit losses the impact of expected losses from ongoing adverse publicity and governmental investigations associated with the TMS recall-related events. Refer to “Financial Condition – Credit Risk” for further discussion.

 
 

 
 

 
- 57 -

 

Insurance Operations

The following table summarizes key results of our Insurance Operations:

 
Three Months Ended
September 30,
Percentage
Change
Six Months Ended
September 30,
Percentage
Change
(Dollars in millions)
2010
20091
2010
20091
Agreements (units in thousands)
           
     Issued
622
332
87%
1,166
620
88%
     In force
5,777
5,200
11%
5,777
5,200
11%
Insurance earned premiums and contract revenues
$137
$117
17%
$266
$232
15%
Investment and other income
42
37
14%
69
73
(5%)
Gross revenues from insurance operations
$179
$154
16%
$335
$305
10%
             
Insurance losses and loss adjustment expenses
$58
$56
4%
$116
$113
3%
             
Insurance dealer back-end program expenses
$20
$18
11%
$41
$35
17%
             
Net income from insurance operations
$53
$44
20%
$90
$82
10%
1 Prior period amounts have been reclassified to conform to the current period presentation.

Agreements issued increased by 546 thousand and 290 thousand units during the first half and second quarter of fiscal 2011, respectively, compared to the same periods in fiscal 2010.  The increase was primarily due to an increase in prepaid maintenance agreements, which Toyota Motor Insurance Services, Inc. (“TMIS”) began providing to TMS in March 2010 in support of post-recall sales efforts.

Our insurance operations reported net income of $90 million and $53 million during the first half and second quarter of fiscal 2011, respectively, compared to $82 million and $44 million during the same periods in fiscal 2010.  The increase in net income for the first half of fiscal 2011 compared to the same period in fiscal 2010 was primarily attributable to an increase in insurance earned premiums and contract revenues offset by a slight decrease in investment and other income.  The increase in net income for the second quarter of fiscal 2011 compared to the same period in the prior year was primarily due to increases in investment and other income and insurance earned premiums and contract revenues.

Insurance earned premiums and contract revenues are affected by sales volume as well as the level, age, and mix of agreements in force.  Agreements in force represent active insurance policies written and contracts issued.  Insurance earned premiums and contract revenues represent revenues from the agreements in force.

Our insurance operations reported insurance earned premiums and contract revenues of $266 million and $137 million during the first half and second quarter of fiscal 2011, respectively, compared to $232 million and $117 million during the same periods in fiscal 2010.  The increase in insurance earned premiums and contract revenues was primarily due to the overall growth in the number of agreements issued and in force as well as higher average revenues per contract.


 
- 58 -

 

Our insurance operations reported investment and other income of $69 million and $42 million during the first half and second quarter of fiscal 2011, respectively, compared to investment and other income of $73 million and $37 million during the same periods in fiscal 2010.  Investment and other income for our insurance operations consists primarily of investment income on marketable securities.  The decrease in investment and other income for the first half of fiscal 2011 compared to the same period in the prior year was primarily due to lower interest and dividend income offset by higher net realized gains from the sale of securities.  The increase in investment and other income for the second quarter of 2011 compared to the same period in the prior year was primarily due to higher net realized gains from the sale of securities, offset by lower interest and dividend income.  Refer to “Investment and Other Income” below for a more detailed discussion on our consolidated investment portfolio.

Insurance losses and loss adjustment expenses incurred are a function of the amount of covered risks, the frequency and severity of claims associated with the agreements in force, and the level of risk retained by our insurance operations.  Insurance losses and loss adjustment expenses include amounts paid and accrued for reported losses, estimates of losses incurred but not reported, and any related claim adjustment expenses.

Our insurance operations reported $116 million and $58 million of insurance losses and loss adjustment expenses during the first half and second quarter of fiscal 2011, respectively, compared to $113 million and $56 million during the same periods in fiscal 2010.  The slight increase in insurance losses and loss adjustment expenses primarily relates to increases in the frequency of loss in certain programs.

Insurance dealer back-end program expenses are incentives or expense reduction programs we provide to dealers based on their sales volume or underwriting performance.  Insurance dealer back-end program expenses increased by 17 percent and 11 percent during the first half and second quarter of fiscal 2011, respectively, compared to the same periods in fiscal 2010.  The increase was primarily due to an increase in agreements issued and improved underwriting performance.




 
- 59 -

 

Investment and Other Income

The following table summarizes the components of our consolidated investment and other income:
 
 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Interest and dividend income on marketable securities
$24
$39
$43
$72
Realized gains (losses) on marketable securities
20
-
31
(5)
Other income
10
8
15
38
Total investment and other income, net
$54
$47
$89
$105

The decrease in interest and dividend income on marketable securities during the first half and second quarter of fiscal 2011 relates primarily to marketable securities held by our insurance operations.  We reported net realized gains on marketable securities of $31 million and $20 million during the first half and second quarter of fiscal 2011, respectively, compared to net realized losses of $5 million during the first half of fiscal 2010.  This was primarily due to higher net realized gains from the sale of securities in the first half and second quarter of fiscal 2011 compared to the same periods in fiscal 2010.

We reported $15 million and $10 million of other income during the first half and second quarter of fiscal 2011, respectively, compared to $38 million and $8 million during the same periods in fiscal 2010.  The decrease in other income during the first half of fiscal 2011 compared to the same period in fiscal 2010 was primarily due to interest income from an expected tax refund that was recorded during the first half of fiscal 2010 and subsequently collected.  In addition, interest income on cash held in excess of our funding needs was lower in the first half of fiscal 2011 compared to the same period in fiscal 2010.



 
- 60 -

 

Operating and Administrative Expenses

The following table summarizes our operating and administrative expenses:

 
Three months ended
September 30,
Percentage
Six months ended
September 30,
Percentage
(Dollars in millions)
2010
2009
Change
2010
2009
Change
Employee expenses
$88
$79
11%
$170
$150
13%
Operating expenses
215
77
179%
296
166
78%
Insurance dealer back-end program expenses
20
18
11%
41
35
17%
Total operating and administrative expenses
$323
$174
86%
$507
$351
44%

Total operating and administrative expenses increased 44 percent and 86 percent during the first half and second quarter of fiscal 2011, respectively, compared to the same periods in fiscal 2010 primarily due to increases in operating expenses.

Operating expenses increased during the first half and second quarter of fiscal 2011 compared to the same periods in fiscal 2010 primarily due to increases in shared affiliate expenses for sales and marketing activities.  Refer to Note 15 – Related Party Transactions of the Notes to Consolidated Financial Statements for further information.  Employee-related expenses increased in the first half and second quarter of fiscal 2011 compared to the same periods in fiscal 2010 due to higher performance based compensation.

Insurance dealer back-end program expenses are incentives or expense reduction programs we provide to dealers based on their sales volume or underwriting performance.  Refer to Insurance Operations above for further information on insurance dealer back-end program expenses.

Provision for Income Taxes

Our provision for income taxes for the first half and second quarter of fiscal 2011 was $522 million and $165 million, respectively, compared to $307 million and $199 million for the same periods in fiscal 2010.  Our effective tax rate was 38 percent for the first half and second quarter of fiscal 2011, respectively, compared to 39 percent for the same periods in fiscal 2010.  The change in our provision for income taxes is consistent with the change in operating income in the first half and second quarter of fiscal 2011 compared to the same periods in fiscal 2010.


 
- 61 -

 

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
September 30,
Percentage
Change
Six months ended
September 30,
Percentage
Change
(units in thousands):
2010
2009
2010
2009
TMS new sales volume1
368   
434   
(15%)   
722   
749   
(4%)   
             
Vehicle financing volume2
           
New retail contracts
162
211
(23%)
343
334
3%
Used retail contracts
88
81
9%
186
157
18%
Lease contracts
106
56
89%
204
100
104%
Total
356
348
2%
733
591
24%
             
TMS subvened vehicle financing volume
(units included in the above table):
           
New retail contracts
100
123
(19%)
229
164
40%
Used retail contracts
11
10
10%
36
22
64%
Lease contracts
102
44
132%
194
78
149%
Total
213
177
20%
459
264
74%
             
Market share3:
           
Retail contracts
43.7%
48.3%
 
47.2%
44.3%
 
Lease contracts
28.8%
12.9%
 
28.2%
13.2%
 
Total
72.5%
61.2%
 
75.4%
57.5%
 

1 Represents total domestic TMS sales of new Toyota and Lexus vehicles excluding sales under dealer rental car and commercial fleet programs and sales of a private Toyota
   distributor.  TMS new sales volume is comprised of approximately 86% Toyota and 14% Lexus vehicles for the first half and second quarter of fiscal 2011, and
   approximately 87% Toyota and 13% Lexus vehicles for the first half and second quarter of fiscal 2010.
2 Total financing volume is comprised of approximately 81% Toyota, 14% Lexus, and 5% non-Toyota/Lexus vehicles for the first half and second quarter of fiscal 2011 and
   first half of fiscal 2010, and approximately 82% Toyota, 13% Lexus, and 5% non-Toyota/Lexus vehicles for the second quarter of fiscal 2010.
3 Represents the percentage of total domestic TMS sales of new Toyota and Lexus vehicles financed by us, excluding non-Toyota/Lexus sales, sales under dealer rental car and
   commercial fleet programs and sales of a private Toyota distributor.

Vehicle Financing Volume

Our retail and lease contracts are acquired primarily from Toyota and Lexus vehicle dealers, and the volume of contracts is dependent upon TMS sales volume and subvention.  Vehicle sales by TMS decreased 4 percent and 15 percent in the first half and second quarter of fiscal 2011, respectively, compared to the same periods in fiscal 2010.  Sales were higher during the first half and second quarter of fiscal 2010 due to the Car Allowance Rebate System, or “cash for clunkers” program.  No similar United States government programs were available during fiscal 2011.

Our finance volume and market share increased in the first half and second quarter of fiscal 2011 compared to the same periods in fiscal 2010.  These increases were driven primarily by the availability of TMS subvention, as evidenced by the increase of 74 percent and 20 percent in our subvened vehicle financing volume in first half and second quarter of fiscal 2011, respectively.

 
- 62 -

 


The composition of our net earning assets is summarized below:

(Dollars in millions)
September 30, 2010
March 31, 2010
Percentage
Change
Net Earning Assets
 
Finance receivables, net
 
Retail finance receivables, net1
$45,143
$43,776
3%
Dealer financing, net
11,719
11,311
4%
Total finance receivables, net
56,862
55,087
3%
Investments in operating leases, net
18,670
17,151
9%
Net earning assets
$75,532
$72,238
5%
       
Dealer Financing
    (Number of dealers serviced)
     
Toyota and Lexus dealers2
974
963
1%
Vehicle dealers outside of the Toyota/Lexus dealer network
477
490
(3%)
Industrial equipment dealers
144
146
(1%)
Total number of dealers receiving wholesale financing
1,595
1,599
-%
       
Dealer inventory financed
(units in thousands)
234
242
(3%)

1 Includes direct finance leases of $238 million and $265 million at September 30, 2010 and March 31, 2010, respectively.
2 Includes wholesale and other credit arrangements in which we participate as part of a syndicate of lenders.

Retail Contract Volume and Earning Assets

Our overall new and used retail contract volume increased during the first half of fiscal 2011 as compared to the same period in fiscal 2010.  Much of the increase was attributable to an increase in overall TMS subvention. Retail receivables at September 30, 2010 increased slightly as compared to the balance at March 31, 2010, as the volume of new vehicles financed was greater than portfolio liquidations.

Lease Contract Volume and Earning Assets

Our overall vehicle lease contract volume during the first half of fiscal 2011 increased as compared to the same period in fiscal 2010.  Vehicle lease contract volume is affected by the level of Toyota and Lexus vehicle sales, the availability of subvention programs, and changes in the interest rate environment.  Much of the increase during the first half of fiscal 2011 was attributable to an increase in TMS subvention programs.  Our investment in operating leases, net increased at September 30, 2010 as compared to the balance at March 31, 2010 due to increased contract volume partially offset by an increase in scheduled maturities.
 
 

 
- 63 -

 

Dealer Financing and Earning Assets

As of September 30, 2010, the number of dealer inventory units financed and the number of dealers receiving financing remained relatively stable as compared to March 31, 2010.  Dealer financing receivables increased 4% to $11.7 billion at September 30, 2010 from March 31, 2010.

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 vehicle lease return rates and loss severity.

We periodically review the estimated end-of-term residual values of leased vehicles to assess the appropriateness of our carrying values.  To the extent the estimated end-of-term value of a leased vehicle is lower than the residual value established at lease inception, the estimated residual value of the leased vehicle is adjusted downward so that the carrying value at lease end will approximate the estimated end-of-term market value.  These adjustments are made over time for operating leases by recording depreciation expense in the Consolidated Statement of Income.  Gains or losses on vehicles sold at lease termination are also recorded in depreciation expense in the Consolidated Statement of Income.

Depreciation on Operating Leases

 
Three months ended
September 30,
Percentage Change
Six months ended
September 30,
Percentage Change
 
2010
2009
2010
2009
 
Depreciation on operating
leases (dollars in millions)
$824
$836
(1%)
$1,635
$1,729
(5%)
 
Average operating lease units
outstanding (in thousands)
780
713
9%
768
719
7%


Depreciation expense on operating leases decreased by 5 percent and 1 percent to $1,635 million and $824 million during the first half and second quarter of fiscal 2011, respectively, compared to $1,729 million and $836 million during the same periods of fiscal 2010.  The average number of operating leases outstanding during the first half and second quarter of fiscal 2011 increased by 7% and 9%, respectively, as compared to the same prior year periods.  Depreciation expense was positively affected by strong used vehicle values, which are a significant factor in our estimates of the end-of-term market values of our leased vehicle portfolio.  Although used vehicle values remained consistent with the values at the end of fiscal 2010, it is uncertain whether the current level is sustainable.  During the first half and second quarter of fiscal 2011, we continued to consider in our estimate of end-of-term residual values the impact of ongoing adverse publicity and governmental investigations associated with the TMS recall-related events.  These events did not have a material impact on our depreciation on operating leases for the first half and second quarter of fiscal 2011.

 
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Credit Risk

Credit Loss Experience

During the first half of fiscal 2011, economic activity in the United States remained weak and the economy continued along a path of slow growth.  While industrial production and business investment and spending began to show positive signs, unemployment rates remained elevated and consumer confidence remained weak.  Consumer spending continued to be constrained by high unemployment, modest income growth, lower household wealth and tight credit.  In addition, home values remained under pressure, and commodity prices continued to fluctuate.  These challenges and uncertainties continue to negatively affect some of our customers’ ability to make their payments.

Despite the challenging economic conditions, our credit loss severity improved while delinquencies remained consistent with March 31, 2010 levels.  The overall credit quality of our retail portfolio in the first half and second quarter of fiscal 2011 continued to benefit from our focus on purchasing practices and collection efforts.  In addition, subvention contributed to our overall portfolio quality, as subvened contracts typically have better credit quality than non-subvened contracts.  These factors, combined with strong used vehicle prices and a continued focus on collection efforts, contributed to decreased levels of delinquency and net charge-offs during the first half of fiscal 2011 as compared to the same period in fiscal 2010.  We continue to be exposed to higher levels of credit loss related to uncertain economic conditions.  For additional information regarding the potential impact of current market conditions, refer to “Part I. Item 1A. Risk Factors” of our fiscal 2010 Form 10-K.

 
September 30,
2010
March 31,
2010
September 30,
2009
Net charge-offs as a percentage of average gross earning assets1
     
Finance receivables
0.67%
1.15%
1.13%
Operating leases
0.25%
0.63%
0.60%
Total2
0.57%
1.03%
1.00%
       
Default frequency as a percentage of outstanding contracts
2.56%
2.79%
2.91%
Average loss severity per unit
$7,445
$8,342
$8,539
       
Aggregate balances for accounts 60 or more days past due as a percentage of gross earning assets3
     
Finance receivables4
0.43%
0.43%
0.71%
Operating leases4
0.40%
0.44%
0.68%
Total5
0.42%
0.44%
0.70%
       
1 Net charge-off ratios have been annualized using six month results for the six month periods ended September 30, 2010 and 2009.
2 Beginning with the fourth quarter of fiscal 2010, we changed our charge-off policy from 150 days to 120 days past due.  At September 30, 2009, the change would have
   resulted in net charge-offs as a percentage of average gross earning assets of 1.28 percent, 0.79  percent and 1.16 percent for finance receivables, operating leases and in
   total, respectively.
3 Substantially all retail, direct finance lease and operating lease 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 The change in our charge-off policy mentioned above would have resulted in over 60 day delinquencies as a percentage of gross earning assets at September 30, 2009 of 0.64
   percent, 0.58 percent and 0.63 percent for finance receivables, operating leases and in total, respectively.

 
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The improvement in loss severity per unit during the first half and second quarter of fiscal 2011 compared to the same periods in fiscal 2010 is primarily attributable to the improvements in used vehicle values which reduced net loss per charged-off unit.  As a result, our level of net charge-offs for the first half and second quarter of fiscal 2011 decreased compared with the same periods in the prior year.  Net charge-offs as a percentage of average gross earning assets decreased from 1 percent at September 30, 2009 to 0.57 percent at September 30, 2010.

During the first half of fiscal 2011, we remained focused on managing high risk loans in our dealer portfolio.  On an ongoing basis, we review our purchasing practices and leverage technology to improve our collections capabilities.

Allowance for Credit Losses

We maintain an allowance for credit losses to cover probable losses resulting from the non-performance of our customers.  The determination of the allowance involves significant assumptions, complex analysis, and management judgment.  The following table provides information related to our allowance for credit losses and credit loss experience for the three and six months ended September 30, 2010 and 2009:

 
Three months ended
September 30,
Six months ended
September 30,
(Dollars in millions)
2010
2009
2010
2009
Allowance for credit losses at beginning of period
$1,316
$2,004
$1,705
$1,864
Provision for credit losses
(14)
11
(303)
339
Charge-offs, net of recoveries1
(113)
(178)
(213)
(366)
Allowance for credit losses at end of period
$1,189
$1,837
$1,189
$1,837

1 Net of recoveries of $73 million and $34 million for the six and three months ended September 30, 2010, respectively, and $66 million and $33 million for the six and three
  months ended September 30, 2009, respectively.

The level of credit losses primarily reflects two factors: default frequency and loss severity.  Default frequency as a percentage of average outstanding contracts decreased during the first half of fiscal 2011 compared to the same period in fiscal 2010.  The improvement in default frequency was attributable to our focus on purchasing practices and collection efforts and the relative stabilization in the United States economy.

Our allowance for credit losses is established through a process that estimates probable losses incurred as of the balance sheet date based upon consistently applied statistical analyses of portfolio data.  This process utilizes delinquency migration analysis, in which historical delinquency and credit loss experience is applied to the current aging of the portfolio, and incorporates current and expected trends and other relevant factors, including expected loss experience, used vehicle market conditions, economic conditions, unemployment rates, purchase quality mix, contract term length and operational factors.  This process, along with management judgment, is used to establish the allowance to cover probable and estimable losses incurred as of the balance sheet date.  Changes in any of these factors would cause changes in estimated probable losses.

 
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During the first half of fiscal 2011, our allowance for credit losses decreased $516 million or 30 percent from $1,705 million at March 31, 2010 to $1,189 million at September 30, 2010.  While the United States economy generally remained weak during the first half of fiscal 2011, and the strength of the economic recovery remained uncertain, our levels of delinquency and per unit loss severity continued to improve.  The improvement in delinquencies was due to the strengthening of the overall credit quality of our retail portfolio while the improvement in per unit loss severity was attributable to strong used vehicle prices fueled by a low supply of used vehicles.  In the first half of fiscal 2011, we also continued to benefit from our focus on purchasing practices and collection efforts.  As a result, our net charge-offs improved during the first half of fiscal 2011 as compared to the same period in fiscal 2010.  In addition, our delinquencies at September 30, 2010 improved significantly compared to September 30, 2009 and remained flat as compared to the delinquencies at March 31, 2010.  During the first half and second quarter of fiscal 2011, we continued to incorporate into our allowance for credit losses the impact of expected losses from ongoing adverse publicity and governmental investigations associated with the TMS recall-related events.


 
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LIQUIDITY AND CAPITAL RESOURCES

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 balance sheet.  This strategy has led us to develop a borrowing base that is diversified by market and geographic distribution, type of security, investor type, and type of financing vehicle, among other factors.

The following table summarizes the components of our outstanding funding sources at carrying value:

(Dollars in millions)
September 30, 2010
 
March 31, 2010
Commercial paper 1
$16,553
 
$19,466
Unsecured notes and loans payable 2
47,183
 
45,617
Secured notes and loans payable
7,495
 
3,000
Carrying value adjustment3
1,493
 
1,096
Total Debt
$72,724
 
$69,179

1 Includes unamortized premium/discount.
2 Includes unamortized premium/discount and effects of foreign currency transaction gains and losses on non-hedged or de-designated notes and loans payable which are
  denominated in foreign currencies.
3 Represents the effects of fair value adjustments to debt in hedging relationships, accrued redemption premiums, and the unamortized fair value adjustments on the hedged
  item for terminated fair value hedge accounting relationships.

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 maintaining direct relationships with wholesale market funding providers and commercial paper investors, and maintaining the ability to sell certain assets when and if conditions warrant.

We develop and maintain contingency funding plans and evaluate our liquidity position under various operating circumstances, allowing us to ensure that 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.


 
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We do not rely on any single source of funding and may choose to realign our funding activities depending upon market conditions, relative costs, and other factors.  We believe that our funding sources, combined with operating and investing activities, provide sufficient liquidity to meet future funding requirements and business growth. Our funding volume is primarily based on expected net change in earning assets and debt maturities.  We maintain broad access to a variety of global markets and cost of funding has generally improved during fiscal 2011.

For liquidity purposes, we hold cash in excess of our immediate funding needs. These excess funds are invested in short-term, highly liquid and investment grade money market instruments, which provide liquidity for our short-term funding needs and flexibility in the use of our other funding sources.  We maintained excess funds ranging from $4.1 billion to $7.0 billion with an average balance of $5.6 billion for the quarter ended September 30, 2010.
 
 
We may lend to or 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.

Credit support provided by our indirect parent Toyota Financial Services Corporation (“TFSC”), and by Toyota Motor Corporation (“TMC”) to TFSC provides 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 guarantees by TMC of any securities or obligations of TFSC or TMCC.  TMC’s obligations under its credit support agreement with TFSC rank pari passu with its 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 Annual Report on Form 10-K for the fiscal year ended March 31, 2010 for further discussion.

Commercial Paper

Short-term funding needs are met through the issuance of commercial paper in the United States.  Commercial paper outstanding under our commercial paper programs ranged from approximately $16.0 billion to $20.8 billion during the quarter ended September 30, 2010, with an average outstanding balance of $18.2 billion.  Our commercial paper programs are supported by the liquidity facilities discussed later in this section.  As a commercial paper issuer with short-term debt ratings of A-1+ by Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc. (“S&P”), and P-1 by Moody’s Investors Service, Inc. (“Moody’s”), we believe there is ample capacity to meet our short-term funding requirements and manage our liquidity.


 
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Unsecured Notes and Loans Payable

Term funding requirements are met through the issuance of a variety of debt securities and other obligations in both the United States and international capital markets and through bank loans.  To diversify our funding sources, we have issued debt in a variety of markets, currencies, and maturities, and to a variety of investors, which allows us to broaden our distribution of debt securities and obligations and further enhance liquidity.

The following table summarizes the components of our unsecured notes and loans payable at par value:

(Dollars in millions)
U.S. medium
term notes
("MTNs") and
domestic bonds
 
Euro MTNs
("EMTNs")
 
Eurobonds
 
Other
 
  Total unsecured notes and loans payable5
Balance at March 31, 20101
$8,140
 
$26,214
 
$3,633
 
$7,169
 
$45,156
Issuances during the six months ended September 30, 2010
3,5002
 
8643
 
-
 
1,9504
 
6,314
Maturities and terminations during the six months
     ended September 30,  2010
(2,280)
 
(2,756)
 
(400)  
 
(150)
 
(5,586)
Balance at September 30, 20101
$9,360
 
$24,322
 
$3,233
 
$8,969
 
$45,884
                   

1 Amounts represent par values and as such exclude unamortized premium/discount, foreign currency transaction gains and losses on debt denominated in foreign currencies, fair
  value adjustments to debt in hedge accounting relationships, accrued redemption premiums, and the unamortized fair value adjustments on the hedged item for terminated
  hedge accounting relationships.  Par values of non-U.S. currency denominated notes are determined using foreign exchange rates applicable as of the issuance dates.
2 MTNs and domestic bonds had terms to maturity ranging from approximately 1 year to 10 years, and had interest rates at the time of issuance ranging from 0 percent to 4.5
  percent.
3 EMTNs had terms to maturity ranging from approximately 3 years to 5 years, and had interest rates at the time of issuance ranging from 0.8 percent to 5.1 percent.
4 Primarily consists of long-term borrowings, all with terms to maturity from approximately ­­1 year to 5­­ years, and interest rates as of September 30, 2010 ranging from 0.2
  percent to 1.1 percent.
5 Consists of fixed and floating rate debt.  Upon the issuance of fixed rate debt, we generally elect to enter into pay float interest rate swaps.  Refer to “Derivative Instruments”
  for further discussion.

We maintain a shelf registration statement with the SEC to provide for the issuance of debt securities in the U.S. capital markets to retail and institutional investors. We 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 March 2012.  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 provisions.  We are in compliance with these covenants.

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 2010, 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 €50 billion, or the equivalent in other currencies, of which €27.2 billion was available for issuance at September 30, 2010.  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.  Debt securities issued under our EMTN program prior to October 2007 are also subject to cross-default provisions.  We are in compliance with these covenants.


 
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In addition, we may issue other debt securities or enter into other unsecured financing arrangements through the domestic and international capital markets.

Secured Notes and Loans Payable

Asset-backed securitization (“ABS”) of our earning asset portfolio provides us with an alternative source of funding and investor diversification.  During the first half of fiscal 2011, we executed securitization transactions of retail contracts that provided us with approximately $5.7 billion in funding which will be repaid as the underlying finance receivables pools amortize.  We will continue to evaluate the market for asset-backed securities in considering our funding strategies in the future, including the balance of secured and unsecured funding.

The securitization transactions discussed above involve the transfer of discrete pools of retail finance receivables to bankruptcy-remote special purpose entities.  These bankruptcy remote entities are used in an effort to ensure that the securitized assets are isolated from the claims of our other creditors and that the cash flows from the receivables are available for the benefit of securitization investors.  Investors in asset-backed securities do not have recourse to our other assets, and neither TMCC nor any of its affiliates guarantees the obligations issued by any securitization trusts.  We are not required to repurchase receivables from the trusts that become delinquent or default after being securitized.  As seller and servicer of the receivables, we are required to repurchase receivables that are subsequently discovered not to have met specified eligibility requirements.  This repurchase obligation is customary in securitization transactions.

We service the securitized receivables in accordance with our customary servicing practices and procedures.  Our servicing duties include collecting payments on receivables and submitting them to the trustee for distribution to investors and other interest holders.  We prepare monthly investor reports on the performance of the receivables, including collections, investor distributions, delinquencies, and credit losses.  We also perform administrative services for the trusts, including filing periodic reports, preparing notices, and tax reporting.  In servicing the securitized receivables, we apply the same servicing policies and procedures that are applied to loans held in our non-securitized portfolio.

Our use of special purpose entities in securitizations is consistent with conventional practices in the securitization markets.  None of our officers, directors, or employees holds any equity interests or receives 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 investors and certain service providers as required under the terms of the transactions.

 
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Our securitizations are structured to provide credit enhancements that reduce the risk of loss to investors in the asset-backed securities.  Credit enhancements may include some or all of the following:

· 
Overcollateralization:  The principal amount of the securitized assets exceeds the principal amount of the related secured debt.
·  
Excess spread:  The expected interest collections on the securitized assets exceed the expected fees and expenses of the special purpose entity, including the interest payable on the debt and net of swap settlements, if any.
·  
Cash reserve funds:  A portion of the proceeds from the issuance of asset-backed securities may be held by the securitization trust in segregated reserve funds and may be used to pay principal and interest to investors if collections on the underlying receivables are insufficient.
·  
Yield supplement arrangements:  Additional overcollateralization may be provided to supplement the future interest earnings from pledged receivables with relatively low contractual interest rates.
·  
Subordinated notes:  The subordination of principal and interest payments on subordinated notes provides additional credit enhancement to holders of senior notes.

In addition to the credit enhancements described above, we entered into interest rate swaps with the special purpose entities that issue variable rate debt.  Under the terms of these swaps, the securitization trusts 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 debt.  This arrangement enables the securitization trusts to issue variable rate debt that is secured by fixed rate retail finance receivables.

The transfers of the receivables to the special purpose entities are considered to be sales for legal purposes.  However, the securitized assets and the related debt remain on our Consolidated Balance Sheet.  We recognize financing revenue on the pledged receivables and interest expense on the secured debt issued by the trusts.  We also maintain an allowance for credit losses on the pledged receivables to cover estimated probable credit losses using a methodology consistent with that used for our non-securitized retail loan 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.

 
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Liquidity Facilities and Letters of Credit

For additional liquidity purposes, we maintain syndicated bank credit facilities with certain banks.

364 Day Credit Agreement

In March 2010, TMCC, its subsidiary Toyota Credit de Puerto Rico Corp. (“TCPR”), and other Toyota affiliates entered into a $5.0 billion 364 day syndicated bank credit facility pursuant to a 364 Day Credit Agreement.  The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross-default provisions and limitations on consolidations, mergers and sales of assets.  The 364 Day Credit Agreement may be used for general corporate purposes and was not drawn upon as of September 30, 2010 and March 31, 2010.

Five Year Credit Agreement

In March 2007, TMCC, TCPR, and other Toyota affiliates entered into an $8.0 billion five year syndicated bank credit facility pursuant to a Five Year Credit Agreement.  The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross-default provisions and limitations on consolidations, mergers and sales of assets.  The Five Year Credit Agreement may be used for general corporate purposes and was not drawn upon as of September 30, 2010 and March 31, 2010.

Letter of Credit Facility Agreement

In addition, TMCC has an uncommitted letter of credit facility totaling $5 million, of which $1 million was issued and outstanding at September 30, 2010 and March 31, 2010.

Other Credit Agreements

TMCC has two additional bank credit facilities.  The first is a 364 day committed bank credit facility in the amount of JPY 100 billion (approximately $1.2 billion as of September 30, 2010) which was entered into in December 2009 to replace a similar facility which expired.  The second is a 364 day uncommitted bank credit facility in the amount of JPY 100 billion (approximately $1.2 billion), which was extended in December 2009 for an additional 364 days.  Both of these agreements contain covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross-default provisions and limitations on consolidations, mergers and sales of assets.  Neither of these facilities was drawn upon as of September 30, 2010 and March 31, 2010.

We are in compliance with the covenants and conditions of the credit agreements described above.

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 nationally recognized statistical rating organization (“NRSRO”).  Each NRSRO may have different criteria for evaluating risk, and therefore ratings should be evaluated independently for each NRSRO.  Our credit ratings depend in part on the existence of the credit support agreements of TFSC and TMC.  See “Item 1A. Risk Factors - Credit Support” in our fiscal 2010 Form 10-K.

 
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DERIVATIVE INSTRUMENTS

Risk Management Strategy

We use derivatives as part of our risk management strategy to hedge against changes in interest rate and foreign currency risks.  We manage these risks by entering into derivative transactions with the intent to minimize fluctuations in earnings, cash flows and fair value adjustments of assets and liabilities caused by market volatility.

Our derivative activities are authorized and monitored by our Asset-Liability Committee, which provides a framework for financial controls and governance to manage market risks.  We use internal models for analyzing and incorporating data from internal and external sources in developing various hedging strategies.  We incorporate the resulting hedging strategies into our overall risk management strategies.

Our liabilities consist mainly of fixed and floating rate debt, denominated in various currencies, which we issue in the global capital markets.  We hedge our interest rate and foreign currency risk inherent in these liabilities by entering into pay float interest rate swaps, foreign currency swaps, and foreign currency forwards, which effectively convert our obligations into U.S. dollar-denominated, 3-month LIBOR-based payments.

Our assets consist primarily of U.S. dollar-denominated, fixed-rate receivables.  Our approach to asset-liability management involves hedging our risk exposures so that changes in interest rates have a limited effect on our net interest margin and cash flows.  We use pay fixed interest rate swaps and caps, executed on a portfolio basis, to manage the interest rate risk of these assets.  Our resulting asset-liability profile is consistent with the overall risk management strategy directed by the Asset-Liability Committee.

We enter into derivatives for risk management purposes only, and our use of derivatives is limited to the management of interest rate and foreign currency risks.

Accounting for Derivative Instruments

All derivative instruments are recorded on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow us to settle our net positive and negative positions and offset cash collateral held with the same counterparty. Changes in the fair value of derivatives are recorded in interest expense in the Consolidated Statement of Income.

We categorize derivatives as those designated for hedge accounting (“hedge accounting derivatives”) and those that are not designated for hedge accounting (“non-hedge accounting derivatives”).

We may also, from time-to-time, issue debt which can be characterized as hybrid financial instruments.  These obligations often contain an embedded derivative.  Changes in the fair value of the bifurcated embedded derivative or the entire hybrid financial instrument are reported in interest expense in the Consolidated Statement of Income.  Refer to Note 1 – Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in our fiscal 2010 Form 10-K, and above in Note 8 –Derivatives, Hedging Activities and Interest Expense in this Form 10-Q for additional information.

 
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Derivative Assets and Liabilities

The following table summarizes our derivative assets and liabilities, which are included in other assets and other liabilities in the Consolidated Balance Sheet:

(Dollars in millions)
September 30, 2010
 
March 31, 2010
Derivative assets
$2,923
 
$1,876
Less: Collateral held, net 1
(1,987)
 
(1,285)
Derivative assets, net of collateral
936
 
591
Less: Counterparty credit valuation adjustment
(17)
 
(10)
Derivative assets, net of collateral and credit adjustment
$919
 
$581
 
Embedded derivative assets
$1
 
$4
       
Derivative liabilities
$312
 
$594
Less:  Collateral posted, net 1
(20)
 
(57)
Derivative liabilities, net of collateral
292
 
537
Less:  Our own non-performance credit valuation adjustment
(1)
 
(4)
Derivative liabilities, net of collateral
   and non-performance credit valuation adjustment
$291
 
$533
 
Embedded derivative liabilities
$50
 
$34

1  Represents cash received or deposited under reciprocal collateral arrangements that we have entered into with certain derivative counterparties. Refer to the “Counterparty
   Credit Risk” section for more details.

The increase in derivative assets and decrease in derivative liabilities as of September 30, 2010 compared to March 31, 2010, are primarily the result of the weakening of the U.S. dollar relative to certain other currencies in which our foreign currency swaps are denominated.  Refer to the “Interest Expense” section above for further discussion.

 
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Counterparty Credit Risk

We manage counterparty credit risk by maintaining policies for entering into derivative contracts, exercising our rights under our derivative contracts, requiring the posting of collateral and actively monitoring our exposure to counterparties.

All of our derivatives counterparties to which we had credit exposure at September 30, 2010 were assigned investment grade ratings by a NRSRO.  In addition, we require counterparties that are or become rated BBB+ or lower to fully collateralize their net derivative exposures with us.  Our counterparty credit risk could be adversely affected by deterioration of the United States economy and financial distress in the banking industry.

Our International Swaps and Derivatives Association (“ISDA”) Master Agreements contain reciprocal collateral arrangements which help mitigate our exposure to the credit risk associated with our counterparties.  We perform valuations of our position with each counterparty and transfer cash collateral at least monthly.  In addition, if either party under an ISDA Master Agreement, in its reasonable opinion, believes there has been a material decline in the creditworthiness of the other party, it can call for more frequent collateral transfers.  If the market value of either counterparty’s net derivatives position exceeds a specified threshold, that counterparty is required to transfer cash collateral in excess of the threshold to the other counterparty.  Under our ISDA Master Agreements, we are only obligated to exchange cash collateral.  Neither we nor our counterparties are required to hold the collateral in a segregated account.  Our collateral arrangements include legal right of offset provisions, pursuant to which collateral amounts are netted against derivative assets or derivative liabilities, which are included in other assets or other liabilities in our Consolidated Balance Sheet.

In addition, many of our ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement and related transactions at market value in the event of a ratings downgrade below a specified threshold.  Refer to “Part I. Item 1A. Risk Factors” in our fiscal 2010 Form 10-K for further discussion.

A summary of our net counterparty credit exposure by credit rating (net of collateral held) is presented below:

(Dollars in millions)
September 30, 2010
March 31, 2010
Credit Rating
   
AA
$539
$258
A
390
333
BBB
7
-
Total net counterparty credit exposure1
$936
$591

1 Amounts exclude counterparty credit valuation adjustments of $17 million and $10 million in at September 30, 2010 and March 31, 2010, respectively.


At September 30, 2010, we recorded a credit valuation adjustment of $17 million related to non-performance risk of our counterparties and a credit valuation adjustment of $1 million on our own non-performance risk.  All derivative credit valuation adjustments are recorded in interest expense in our Consolidated Statement of Income.  Refer to “Note 2 – Fair Value Measurements” of the Notes to the Consolidated Financial Statements for further discussion.

 
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NEW ACCOUNTING STANDARDS

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

OFF-BALANCE SHEET ARRANGEMENTS

Guarantees

TMCC has guaranteed the payments of principal and interest on bonds relating to manufacturing facilities of certain affiliates.  Refer to Note 13 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further discussion.

Lending Commitments

A description of our lending commitments is included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Off-Balance Sheet Arrangements” in our fiscal 2010 Form 10-K, as well as above in Note 13 - Commitments and Contingencies of the Notes to Consolidated Financial Statements.

Indemnification

Refer to Note 13 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for a description of agreements containing indemnification provisions.

 
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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

Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated 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”) as of the end of the period covered by this report.  Based on this evaluation, the CEO and CFO concluded that the disclosure controls and procedures were effective as of September 30, 2010, 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 Securities and Exchange Commission’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 September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



 
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PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

Litigation

Various legal actions, governmental proceedings and other claims are pending or may be instituted or asserted in the future against us with respect to matters arising in the ordinary course of business. Certain of these actions are or purport to be class action suits, seeking sizeable damages and/or changes in our business operations, policies and practices. Certain of these actions are similar to suits that have been filed against other financial institutions and captive finance companies.  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.  The actual costs of resolving legal claims and associated costs of defense may be substantially higher or lower than the amounts accrued for these claims; however, we cannot estimate the losses or ranges of losses for proceedings where there is only a reasonable possibility that a loss may be incurred.  We believe, based on currently available information and established accruals, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, but may be material to our operating results for any particular period, depending in part, upon the operating results for such period.

Repossession Class Actions

A cross-complaint alleging a class action in the Superior Court of California Stanislaus County, Garcia v. Toyota Motor Credit Corporation, filed in August 2007, claims that TMCC's post-repossession notice failed to comply with the Rees-Levering Automobile Sales Finance Act of California.  Three additional putative class action complaints or cross-complaints were filed making similar allegations.  The cases were coordinated in the California Superior Court, Stanislaus County and a Second Amended Consolidated Cross-Complaint and Complaint was subsequently filed in March 2009.  The Second Amended Consolidated Cross-Complaint and Complaint seeks injunctive relief, restitution, disgorgement and other equitable relief under California's Unfair Competition Law.  As a result of mediation in January 2010, the parties agreed to settle all of the foregoing matters.  A fourth case was recently filed which has been included in the settlement.  The proposed settlement, for which we have adequately accrued, is subject to final court approval.  Preliminary approval was granted by the Court by order dated September 2, 2010.  The hearing on final approval is currently set for December 23, 2010.

Recall-related Class Actions

TMCC and certain affiliates were named as defendants in the consolidated multidistrict litigation, In Re: Toyota Motor Corp. Unintended Acceleration, Marketing, Sales Practices, and Products Liability Litigation (United States District Court, Central District of California) seeking damages and injunctive relief as a result of alleged sudden unintended acceleration in certain Toyota and Lexus vehicles.  A parallel action was filed against TMCC and certain affiliates on March 12, 2010 by the Orange County District Attorney.  On August 2, 2010, the plaintiffs filed a consolidated complaint in the multidistrict litigation that does not name TMCC as a defendant.  In addition, the court has permitted alleged classes of foreign plaintiffs to file complaints naming TMCC and related entities as defendants.  TMCC also remains a defendant in the state court action filed by the Orange County District Attorney.

TMCC and certain affiliates had also been named as defendants in a putative bondholder class action, Harel Pia Mutual Fund v. Toyota Motor Corp., et al., filed in the Central District of California on April 8, 2010, alleging violations of federal securities laws.  The plaintiff filed a voluntary dismissal of the lawsuit on July 20, 2010.
 

 
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On July 22, 2010, the same plaintiff in the above federal bondholder action refiled the case in California state court on behalf of purchasers of TMCC bonds traded on foreign exchanges (Harel Pia Mutual Fund v. Toyota Motor Corp., et al., Superior Court of California, County of Los Angeles).  The complaint alleges violations of California securities laws, fraud, breach of fiduciary duty and other state law claims.  On September 15, 2010, the defendants removed the state court action to the United States District Court for the Central District of California pursuant to the Securities Litigation Uniform Standards Act and the Class Action Fairness Act.  Defendants filed a motion to dismiss on October 15, 2010.
 
We believe we have meritorious defenses to all of the above claims and intend to defend against them vigorously.
 
ITEM 1A.   RISK FACTORS

In addition to the information contained in this report and our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, the following risks may affect us.  If any of these risks occur, our business, financial condition or operating results would be adversely affected.

Recently enacted legislation and future regulatory reforms may have an adverse effect on our business and operating results.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law.  The scope of the Dodd-Frank Act has broad implications for the financial services industry and requires the development, adoption and implementation of many regulations over the next several months and years.  Among other things, the Dodd-Frank Act creates the Financial Stability Oversight Council, with authority for monitoring and regulating systemic risk, and the Bureau of Consumer Financial Protection, which will have broad regulatory and enforcement powers over consumer financial products and services, including the ability to define and regulate unfair and deceptive practices.  The Dodd-Frank Act also mandates numerous studies which may lead to additional regulatory requirements.  The potential impact of the legislation and resulting regulations may include increased cost of operations due to greater regulatory oversight, supervision and examination and limitations on our ability to expand product and service offerings due to stricter consumer protection laws and regulations.

The Dodd-Frank Act also creates a new regulatory framework for oversight of derivatives transactions by the Commodity Futures Trading Commissions (the “CFTC”) and the SEC.  These include new capital, margin and business conduct standards for certain swap participants and requirements for clearing certain swaps through registered clearing facilities and trading certain swaps on a designated exchange or swap execution facility.  The Dodd-Frank Act includes exceptions from these requirements which will be further defined through rulemaking proceedings by the CFTC and SEC.  Although we may qualify for exceptions, our derivatives counterparties may be subject to new capital, margin and business conduct requirements which may increase our transaction costs or make it more difficult for us to enter into hedging transactions on favorable terms.

 
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Recent events announced by TMS could affect our business, financial condition and operating results.

During the latter part of fiscal 2010 and in early fiscal 2011, TMS announced several recalls and temporary suspensions of sales and production of certain Toyota and Lexus models. Because our business is substantially dependent upon the sale of Toyota and Lexus vehicles, these events or similar future events could adversely impact our business. A decrease in the level of sales, including as a result of the actual or perceived quality, safety or reliability of Toyota and Lexus vehicles, will have a negative impact on the level of our financing volume, insurance volume, earning assets and revenues. The credit performance of our dealer and consumer lending portfolios may also be adversely affected. In addition, a decline in values of used Toyota and Lexus vehicles would have a negative effect on realized values and return rates, which, in turn, could increase depreciation expense and credit losses.  Further, TMCC and its affiliates are subject to litigation relating to recall-related events.  In addition, certain of TMCC’s affiliates are currently subject to governmental investigations, including those by the U.S. Attorney for the Southern District of New York, the U.S. Securities and Exchange Commission and the National Highway Traffic Safety Administration and have or may become subject to fines or other penalties.  These factors could have a negative effect on our operating results and financial condition.

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.   (Removed and Reserved)


ITEM 5.   OTHER INFORMATION

None.

ITEM 6.   EXHIBITS

See Exhibit Index on page 83.

 
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SIGNATURES


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

 
                                     TOYOTA MOTOR CREDIT CORPORATION
 
                                     (Registrant)






Date:   November 5, 2010
By     /S/ GEORGE E. BORST
   
 
   George E. Borst
 
    President and
 
Chief Executive Officer
 
(Principal Executive Officer)

Date:   November 5, 2010
By   /S/ CHRIS BALLINGER
   
 
   Chris Ballinger
 
           Group Vice President and
 
  Chief Financial Officer
 
  (Principal Financial Officer)

 
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EXHIBIT INDEX

Exhibit Number
 
Description
 
Method of Filing
         
3.1
 
Restated Articles of Incorporation filed with the California Secretary of State on April 1, 2010
 
(1)
         
3.2
 
Bylaws as amended through December 8, 2000
 
(2)
         
4.1(a)
 
Indenture dated as of August 1, 1991 between TMCC and The Chase Manhattan Bank, N.A
 
(3)
         
4.1(b)
 
First Supplemental Indenture dated as of October 1, 1991 among TMCC, Bankers Trust Company and The Chase Manhattan Bank, N.A
 
(4)
         
4.1(c)
 
Second Supplemental Indenture, dated as of March 31, 2004, among TMCC, JPMorgan Chase Bank (as successor to The Chase Manhattan Bank, N.A.) and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company)
 
(5)
         
4.1(d)
 
Agreement of Resignation and Acceptance dated as of April 26, 2010 between Toyota Motor Credit Corporation, The Bank of New York Mellon and The Bank of New York Trust Company, N.A.
 
(1)
         
4.2
 
Amended and Restated Agency Agreement, dated September 17, 2010, among Toyota Motor Credit Corporation, Toyota Motor Finance (Netherlands) B.V., Toyota Credit Canada Inc., Toyota Finance Australia Limited and The Bank of New York Mellon.
 
(6)
         
4.3
 
TMCC has outstanding certain long-term debt as set forth in Note 10 - Debt of the Notes to Consolidated Financial Statements.  Not filed herein as an exhibit, pursuant to Item 601(b)(4)(iii)(A) of Regulation
S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934, is any instrument which defines the rights of holders of such long-term debt, where the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of TMCC and its subsidiaries on a consolidated basis.  TMCC agrees to furnish copies of all such instruments to the Securities and Exchange Commission upon request.
   

____________

 
(1)
Incorporated herein by reference to the same numbered Exhibit 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 the same numbered Exhibit 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 4.1(a), filed with our Registration Statement on Form S-3, File Number 33-52359.
(4)
Incorporated herein by reference to Exhibit 4.1 filed with our Current Report on Form 8-K dated October 16, 1991, Commission File Number 1-9961.
(5)
Incorporated herein by reference to Exhibit 4.1(c) filed with our Registration Statement on Form S-3, Commission File No. 333-113680.
(6)
Incorporated herein by reference to Exhibit 4.1 filed with our Current Report on Form 8-K dated September 17, 2010, Commission File Number 1-9961.
 

 
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EXHIBIT INDEX

Exhibit Number
 
Description
 
Method of Filing
         
12.1
 
Calculation of ratio of earnings to fixed charges
 
Filed Herewith
         
31.1
 
Certification of Chief Executive Officer
 
Filed Herewith
         
31.2
 
Certification of Chief Financial Officer
 
Filed Herewith
         
32.1
 
Certification pursuant to 18 U.S.C. Section 1350
 
Furnished Herewith
         
32.2
 
Certification pursuant to 18 U.S.C. Section 1350
 
Furnished Herewith
 
 





 
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