Results of Operations — Fiscal 2003 Compared with Fiscal 2002
Net Revenues
Toyota had net revenues for fiscal 2003 of ¥15,501.6 billion, an increase of ¥1,311.2 billion, or 9.2%, compared to
the prior year. This increase principally reflects the impact of increased vehicle unit sales, the impact of the full year consolidation of Hino and Kuozui, increased parts and service sales and the impact of increased financings. These increases
were partially offset by the impact of changes in sales mix and the impact of fluctuations in foreign currency translation rates particularly against the U.S. dollar. Eliminating the difference in the yen value used for translation purposes,
revenues would have been approximately ¥15,590.3 billion during fiscal 2003, a 9.9% increase compared to the prior year. Toyota’s net revenues include sales of products which increased during fiscal 2003 by 9.6% to ¥14,794.0 billion
compared to the prior year and financing operations which increased during fiscal 2003 by 2.4% to ¥707.6 billion compared to the prior year. Eliminating the difference in the yen value used for translation purposes, revenues from sales of
products would have been approximately ¥14,874.9 billion, a 10.2% increase, and revenues from financing operations would have been approximately ¥715.4 billion, a 3.6% increase, during fiscal 2003 compared to the prior year. Revenues for
fiscal 2003 increased by 3.7% in Japan, 8.3% in North America, 19.7% in Europe and 34.9% in all other markets compared with the prior year. Eliminating the difference in the yen value used for translation purposes, revenues would have increased by
3.7% in Japan, 10.9% in North America, 10.4% in Europe and 40.7% in all other markets compared to the prior year.
The following is a discussion of net revenues for each of Toyota’s business segments. The net revenue amounts discussed represent amounts before the
elimination of intersegment revenues.
Automotive
Operations Segment
Net revenues from Toyota’s
automotive operations constitute the largest percentage of Toyota’s revenues and increased by ¥1,244.0 billion, or 9.5%, to ¥14,311.5 billion during fiscal 2003 compared with the prior year. The increase resulted primarily from the
approximate ¥750.0 billion combined net impact of increased vehicle unit sales and changes in sales mix, ¥338.2 billion impact of full year consolidation of Hino and Kuozui and increased parts and service sales. These increases were
partially offset by the ¥77.4 billion impact of foreign currency translation rates. Eliminating the difference in the yen value used for translation purposes, automotive operations revenues would have been approximately ¥14,388.8 billion
during fiscal 2003, a 10.1% increase compared to the prior year. Eliminating the difference in the yen value used for translation purposes and the impact of the consolidation of Hino and Kuozui, automotive operations revenues would have increased by
7.7% compared to the prior year. Revenues in Japan were favorably impacted by the full year consolidation of Hino and higher vehicle unit sales to export markets, that were partially offset by lower average unit sales prices resulting from the
continuing market shift in Japan to lower priced vehicles and decreased vehicle unit sales other than with respect to Hino in Japan. Revenues in North America were favorably impacted by vehicle unit sales growth partially offset by the impact of
foreign currency translation rates fluctuations during fiscal 2003 and lower average unit price. Revenues in Europe were favorably impacted by foreign currency translation rates fluctuations during fiscal 2003 and increased vehicle unit sales
partially offset by lower average unit price. Revenues in all other markets were favorably impacted by the full year consolidation of Kuozui and the combined net impact of increased vehicle unit sales and changes in sales mix, that were partially
offset by the foreign currency translations rates fluctuations during the fiscal 2003. Excluding the impact of the consolidation of Hino and Kuozui, North American, European and all other markets sales reflect vehicle unit sales growth of 11.3%,
6.6% and 26.2%, respectively, compared to the prior year, while vehicle unit sales in Japan decreased by 0.7% compared to the prior year.
Financial Services Operations Segment
Net revenues for Toyota’s financial services operations increased by ¥26.9 billion, or 3.9%, to ¥724.9 billion during fiscal 2003 compared
with the prior year. This increase resulted primarily from the impact of a higher volume of financings and the impact of expansion of the credit card business that were partially offset by
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the impact of foreign currency translation rates during fiscal 2003. Eliminating the difference in the yen value used for translation purposes, financial
services operations revenues would have been approximately ¥732.9 billion during fiscal 2003, a 5.0% increase compared with the prior year.
All Other Operations Segment
Net revenues for Toyota’s other businesses increased by ¥66.4 billion, or 9.1%, to ¥795.2 billion during fiscal 2003 compared with the prior
year. This increase resulted primarily from the impact of increased revenue from the prefabricated housing business.
Operating Costs and Expenses
Operating costs and expenses increased by ¥1,133.2 billion, or 8.7%, to ¥14,229.9 billion during fiscal 2003 compared with the prior year. The
increase resulted primarily from the approximate ¥590.0 billion combined net impact on cost of products sold of increased vehicle unit sales and changes in sales mix, ¥327.1 billion impact of full year consolidation of Hino and Kuozui, the
impact of increased parts and service sales, ¥87.5 billion impact of higher selling, general and administrative expenses and ¥79.1 billion increase in research and development expenses. These increases were partially offset by the
approximate ¥290.0 billion impact of cost cutting efforts.
Continued cost cutting efforts reduced costs and expenses for fiscal 2003 by approximately ¥290.0 billion over what would have otherwise been incurred. These cost cutting efforts relate to ongoing value engineering and value analysis
activities, the use of common parts that result in a reduction of part types and other manufacturing initiatives designed to reduce the costs of vehicle production.
Cost of products sold increased by ¥1,039.8 billion, or 9.6%, to ¥11,914.2 billion during fiscal 2003 compared with
the prior year. This increase (before the elimination of intersegment amounts) reflects an increase of ¥971.3 billion, or 9.2%, for the automotive operations and an increase of ¥68.2 billion, or 11.4%, for the all other operations segment.
The increase for the automotive operations reflects primarily the combined net impact of increased vehicle unit sales and changes in sales mix, the impact of full year consolidation of Hino and Kuozui, the impact of increased parts and service sales
and the increase in research and development expenses that was partially offset by the impact of continued cost cutting efforts.
Cost of products sold as a percentage of revenues from sales of products decreased to 80.5% during fiscal 2003 from 80.6% in the prior year. This reflects
the impact of continued cost cutting efforts that was partially offset by the impact of changes in sales mix, the impact of fluctuations in foreign currency translation rates against the Toyota’s non-domestic sales produced in Japan.
Cost of financing operations decreased by ¥35.3 billion,
or 7.7%, to ¥423.9 billion during fiscal 2003 compared with the prior year. The decrease resulted primarily from the impact of lower interest rates in the United States and the impact of foreign currency translation rates that was partially
offset by the impact of increased volume of financings and the impact of losses on derivative financial instruments that are not designated as hedges and are marked-to-market at the end of each period.
The cost of financing operations as a percentage of revenue from financing
operations decreased to 59.9% during fiscal 2003 from 66.5% in the prior year. This change was principally the result of the impact of decreased interest expenses caused by the lower interest rate in the United States and was partially offset by the
impact of losses on derivative financial instruments that are not designated as hedges.
Research and development expenses increased by ¥79.1 billion, or 13.4%, to ¥668.4 billion during fiscal 2003 compared with the prior year, as a result of increased activities relating primarily to the
development of new models, vehicle safety, new vehicle energy and environmental technologies to promote Toyota’s strength in a competitive market for the future, and the impact of the full year consolidation of Hino during fiscal 2003.
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Selling, general and administrative expenses (after the elimination of intersegment amounts) increased by
¥128.8 billion, or 7.3%, to ¥1,891.8 billion during fiscal 2003 compared with the prior year. This increase (before the elimination of intersegment amounts) reflects an increase of ¥83.7 billion, or 5.6%, for the automotive operations,
an increase of ¥76.8 billion, or 40.0%, for the financial services operations and a decrease of ¥9.3 billion, or 7.1%, for the other operations segment. The increase for the automotive operations consisted primarily of the impact of full
year consolidation of Hino, the increase in personnel costs resulting primarily from expanded operations in North America and Europe and the increase in advertising costs that was partially offset by the impact of continued cost reduction efforts
and the impact of fluctuations in foreign currency translation rates. The increase for the financial services operations reflects higher provisions for credit losses especially in North America resulting from the increase in finance receivables and
increased credit loss experience which was partially offset by the impact of fluctuations in foreign currency translation rates. The decrease for the all other operations segment reflects the impact of fluctuations in foreign currency translation
rates that was partially offset by the increase in personnel costs.
Selling, general and administrative expenses as a percentage of revenue decreased to 12.2% during fiscal 2003 from 12.4% in the prior year. Selling, general and administrative expenses decreased as a percentage of revenue primarily due to
the impact of continued cost reduction efforts. These decreases were partially offset by the increase in personnel costs, the increase in advertising costs and higher provisions for credit losses. Selling, general and administrative expenses in the
automotive operations as a percentage of segment revenues were 11.1% during fiscal 2003, compared to 11.5% in the prior year, reflecting the continued cost reduction efforts. Selling, general and administrative expenses in the financial services
operations as a percentage of segment revenues were 37.1% during fiscal 2003, compared to 27.5% in the prior year, reflecting higher provisions for credit losses. Selling, general and administrative expenses in the all other operations segment as a
percentage of segment revenues were 15.3% during fiscal 2003 compared to 18.0% in the prior year, primarily due to improvements in the intelligent transport systems business.
Operating Income
Toyota’s operating income increased by ¥178.0 billion, or 16.3%, to ¥1,271.6 billion during fiscal 2003 compared with the prior year.
Operating income was affected primarily by vehicle unit sales growth, continued cost cutting efforts, the impact of full year consolidation of Hino and Kuozui and the impact of increased parts and service sales. These increases were partially offset
by the impact of changes in sales mix, the increase in selling, general and administrative expenses and the increase in research and development costs.
During fiscal 2003, operating income (before the elimination of intersegment profits) increased by ¥100.2 billion, or 11.9%, in Japan, ¥15.2
billion, or 5.8%, in North America, ¥32.6 billion, or 249.7 %, in all other markets compared with the prior year and changed by ¥32.5 billion to ¥8.3 billion from a loss of ¥24.1 billion in the prior year, in Europe. The increase in
Japan relates primarily to the impact of increased exports to North America and Asian countries, continued cost reduction efforts and the impact of full year consolidation of Hino during fiscal year 2003. These increases were partially offset by the
impact of changes in sales mix in Japan. The increase in North America relates primarily to the increase in vehicle unit sales that was partially offset by higher provisions for credit losses, the impact of losses on derivative financial
instruments, the impact of costs to transfer production lines between North American manufacturing plants and the impact of changes in sales mix. The increase in European market relates mainly to the impact of favorable exchange rate of the yen
against the Euro and the increase in vehicle unit sales driven by stable shipment volume from the manufacturing plants in France and United Kingdom, that was partially offset by the impact of changes in sales mix. The increase in other markets
relates primarily to the combined net impact of the increase in vehicle unit sales in Asian countries and changes in sales mix and the impact of full year consolidation of Kuozui.
The following is a discussion of operating income for each of Toyota’s business segments. The operating income amounts
discussed represent amounts before the elimination of intersegment profits.
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Automotive Operations Segment
Operating income from Toyota’s automotive operations increased by
¥189.0 billion, or 17.9%, to ¥1,246.9 billion during fiscal 2003 compared with the prior year. Operating income was favorably affected primarily by the increase in the vehicle unit sales, continued cost cutting efforts, the impact of full
year consolidation of Hino and Kuozui and increased parts and service sales. These increases were partially offset by the impact of changes in sales mix, increased selling, general and administrative expenses and research and development costs.
Financial Services Operations Segment
Operating income from Toyota’s financial
services operations decreased by ¥14.8 billion, or 32.8%, to ¥30.3 billion during fiscal 2003 compared with the prior year. This decrease was primarily due to higher provisions for credit losses and the impact of losses on derivative
financial instruments, which was partially offset by higher volume of financings, the decrease in the interest expenses resulting from lower interest rates on borrowings in the United States, the impact of increased spreads on financings and the
increase in the number of credit cards issued.
All Other
Operations Segment
Operating income from
Toyota’s other businesses changed by ¥7.5 billion to ¥4.5 billion during fiscal 2003 from a loss of ¥3.0 billion in the prior year. This increase primarily relates to general profitability improvements.
Other Income and Expenses
Interest and dividend income decreased by ¥3.1 billion, or 5.6%, to
¥52.7 billion during fiscal 2003 compared with the prior year due to decreased bank deposits and lower interest rates in the United States.
Interest expense increased by ¥3.7 billion, or 13.7%, to ¥30.5 billion during fiscal 2003 compared with the prior year due to higher borrowings
that was partially offset by lower interest rates in the United States.
Foreign exchange gain increased to ¥35.6 billion during fiscal 2003 from the prior year. Foreign exchange gain and loss include the differences between the value of foreign currency denominated sales translated at prevailing exchange
rates and the value of the sales amounts settled during the year, including those settled using foreign exchange forward contracts. Foreign exchange gains increased due to the favorable trend of Japanese yen against the U.S. dollar in the second
half of fiscal 2003, as compared with its unfavorable trend in the second half of fiscal 2002.
Other loss decreased by ¥47.7 billion, or 31.7%, to ¥102.8 billion during fiscal 2003 compared with the prior year. During fiscal 2002, there were gains of ¥75.1 billion on exchange transactions relating
to financial institutions in which Toyota held ownership interests and losses of ¥257.4 billion relating to other-than temporary impairments on investment securities of which ¥212.9 billion related to Toyota’s investment in KDDI. During
fiscal 2003, there were losses of ¥111.3 billion relating to other-than temporally impairments on investment securities.
Income Taxes
Provision for income taxes increased by ¥94.2 billion during fiscal 2003 compared with the prior year primarily as a result of the increase in income
before income taxes and increased provision for taxes on undistributed earnings of affiliated companies accounted for by the equity method. The effective tax rate for fiscal 2003 decreased to 42.1% from 43.5% for the prior year due to various normal
changes in taxable income, tax rates and tax credits.
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Minority Interest in Consolidated Subsidiaries and Equity in Earnings of Affiliated Companies
Minority interest in consolidated subsidiaries increased by ¥0.7
billion to ¥11.5 billion during fiscal 2003 compared with the prior year.
Equity in earnings of affiliated companies during fiscal 2003 increased by ¥34.7 billion to ¥52.8 billion during fiscal 2003 compared with the prior year as a result of the impact of operating losses recorded
by Aioi during fiscal 2002.
Net Income
Toyota’s net income increased by ¥194.4 billion, or 34.9%, to
¥750.9 billion during fiscal 2003 compared with the prior year.
Other Comprehensive Income and Loss
Other comprehensive income and loss changed by ¥352.2 billion to a loss of ¥337.0 billion during fiscal 2003 compared with the prior year. This change resulted primarily from a decrease in a foreign currency translation adjustments
during fiscal 2003 to a loss of ¥139.3 billion compared to a gain of ¥133.9 billion in the prior year, an increase in minimum pension liability adjustments during fiscal 2003 to ¥172.0 billion compared to ¥114.3 billion in the prior
year and an increase in unrealized holding losses on securities during fiscal 2003 to ¥26.5 billion compared to ¥3.6 billion in the prior year.
Results of Operations — Fiscal 2002 Compared with Fiscal 2001
Net Revenues
Toyota had net revenues for fiscal 2002 of ¥14,190.3 billion, an increase of ¥1,235.1 billion, or 9.5%, compared to the prior year. This increase
principally reflects the favorable impact of foreign currency translation rates, the combined impact of sales price increases and changes in sales mix, the impact of the consolidation of Hino during fiscal 2002 and the impact of increased
financings. These increases were partially offset by the impact of the disposal of the industrial equipment business during fiscal 2002 and the impact of the disposal of the telecommunications business during fiscal 2001. Eliminating the difference
in the yen value used for translation purposes, revenues would have been approximately ¥13,387.8 billion during fiscal 2002, a 3.3% increase compared to the prior year. Toyota’s net revenues include sales of products which increased during
fiscal 2002 by 8.8% to ¥13,499.6 billion compared to the prior year and financing operations which increased during fiscal 2002 by 24.9% to ¥690.7 billion compared to the prior year. Eliminating the difference in the yen value used for
translation purposes, revenues from sales of products would have been approximately ¥12,761.1 billion, a 2.9% increase, and revenues from financing operations would have been approximately ¥626.7 billion, a 13.3% increase, during fiscal 2002
compared to the prior year. Revenues for fiscal 2002 increased by 0.7% in Japan, 15.5% in North America, 24.8% in Europe and 24.0% in all other markets compared with the prior year. Eliminating the difference in the yen value used for translation
purposes, revenues would have increased by 0.7% in Japan, 2.2% in North America, 13.5% in Europe and 17.3% in all other markets compared to the prior year.
The following is a discussion of net revenues for each of Toyota’s business segments. The net revenue amounts discussed represent amounts before the
elimination of intersegment revenues.
Automotive
Operations Segment
Net revenues from Toyota’s
automotive operations constitute the largest percentage of Toyota’s revenues. During fiscal 2002, net revenues for Toyota’s automotive operations increased by 12.7% to ¥13,067.4 billion from ¥11,591.1 billion in the prior year. The
increase resulted primarily from the ¥744.9 billion favorable impact of foreign currency translations rates, the approximate ¥510.0 billion combined impact of sales price increases and changes in sales mix and the ¥286.9 billion impact
of the consolidation of Hino during fiscal 2002.
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Eliminating the difference in the yen value used for translation purposes, automotive operations revenues would have been approximately ¥12,322.5 billion
during fiscal 2002, a 6.3% increase compared to the prior year. Eliminating the difference in the yen value used for translation purposes and the impact of the consolidation of Hino, automotive operations revenues would have increased by 3.8%
increase compared to the prior year. Revenues in Japan were favorably impacted by higher vehicle unit sales to export markets, higher average sales prices on these sales to export markets and the consolidation of Hino during fiscal 2002 that were
partially offset by decreased vehicle unit sales in Japan and lower average unit sales prices for sales in Japan resulting from the continuing market shift in Japan to lower priced vehicles. Revenues in North America were favorably impacted by
foreign currency translation rates, vehicle unit sales growth and higher average unit sales prices during fiscal 2002. Revenues in Europe were favorably impacted by foreign currency translation rates, higher average unit sales prices and vehicle
unit sales growth during fiscal 2002. Revenues in all other markets were favorably impacted by foreign currency translation rates, higher average unit sales prices and vehicle unit sales growth during fiscal 2002. Vehicle unit sales in North
America, Europe and all other markets increased during fiscal 2002 compared with the prior year and decreased in Japan. Excluding the impact of the consolidation of Hino, North American, European and all other markets sales reflect vehicle unit
sales growth of 2.6%, 5.2% and 3.7%, respectively, compared to the prior year, while vehicle unit sales in Japan decreased by 5.3% compared to the prior year. Overall, excluding the impact of consolidation of Hino, Toyota had a slight decrease in
vehicle unit sales.
Financial Services Operations
Segment
Net revenues for Toyota’s financial
services operations increased by ¥127.0 billion, or 22.2%, to ¥698.0 billion during fiscal 2002 compared with the prior year. This increase resulted primarily from the impact of a higher volume of financings and the favorable impact of
foreign currency translation rates during fiscal 2002. Eliminating the difference in the yen value used for translation purposes, financial services operations revenues would have been approximately ¥633.0 billion during fiscal 2002, a 10.8%
increase compared with the prior year.
All Other
Operations Segment
Net revenues for Toyota’s
other businesses decreased by ¥290.7 billion, or 28.5%, to ¥728.8 billion during fiscal 2002 compared with the prior year. This decrease resulted primarily from the ¥241.5 billion impact of the disposal of the industrial equipment
business during fiscal 2002 and the ¥193.7 billion impact of the disposal of the telecommunications business during fiscal 2001. Excluding revenues of the industrial equipment business and the telecommunication business, net revenues for all
other business increased by ¥144.5 billion, or 24.7%, to ¥728.8 billion during fiscal 2002, reflecting the increase in sales of intelligent transportation systems and increases in sales of other businesses.
Operating Costs and Expenses
Operating costs and expenses increased by ¥932.2 billion, or 7.7%, to
¥13,096.7 billion during fiscal 2002 compared with the prior year. The increase resulted primarily from the impact on cost of products sold of sales mix changes, the ¥396.8 billion impact of foreign currency translation rates, the ¥281.4
billion impact of the consolidation of Hino during fiscal 2002, the ¥202.1 billion impact of higher selling, general and administrative expenses during fiscal 2002, and the ¥113.6 billion impact in increased research and development
expenses. These increases were partially offset by the ¥260.0 billion impact of cost cutting efforts, the ¥237.4 billion impact of the disposal of the industrial equipment business during fiscal 2002 and the ¥181.2 billion impact of the
disposal of the telecommunications business during fiscal 2001.
Continued cost cutting efforts reduced costs and expenses for fiscal 2002 by approximately ¥260.0 billion over what would have otherwise been incurred. These cost cutting efforts relate to ongoing value engineering and value analysis
activities, the use of common parts that result in a reduction of part types and other manufacturing initiatives designed to reduce the costs of vehicle production.
50
Cost of products sold increased by ¥655.9 billion, or 6.4%, to ¥10,874.5 billion during fiscal
2002 compared with the prior year. This increase (before the elimination of intersegment amounts) reflects an increase of ¥999.8 billion, or 10.5%, for the automotive operations and a decrease of ¥230.3 billion, or 27.7%, for the all other
operations segment. The increase for the automotive operations reflects primarily the impact of sales mix changes, the impact of higher costs resulting from foreign currency translation, the impact of the consolidation of Hino during fiscal 2002,
the impact of increased research and development expenses and the impact of increased warranty provisions that were partially offset by the impact of continued cost cutting efforts. The decrease for the all other operations segment reflects the
¥209.1 billion impact of the disposal of the industrial equipment business during fiscal 2002 and ¥127.2 billion impact of the disposal of the telecommunications business during fiscal 2001.
Cost of products sold as a percentage of revenues from sales of products
decreased to 80.6% during fiscal 2002 from 82.4% in the prior year. This reflects the favorable impact of foreign currency rates on revenues related to Toyota’s non-domestic sales produced in Japan and the favorable impact of continued cost
cutting efforts that were partially offset by the impact of the disposal of the telecommunications business during fiscal 2001, the increase in research and development expenses and the impact of increased warranty provisions.
Cost of financing operations increased by ¥31.9 billion, or 7.5%, to
¥459.2 billion during fiscal 2002 compared with the prior year. The increase resulted primarily from the impact of increased residual value losses, the impact of foreign currency translation rates and the impact of a higher volume of financings
during fiscal 2002 that were partially offset by lower costs of financing caused by lower interest rates in the United States. The cost of financing operations as a percentage of revenue from financing operations decreased to 66.5% during fiscal
2002 from 77.3% in the prior year. This change was principally the result of the increased revenues of financing caused by the impact of foreign currency translation rates and lower prevailing interest rates in the United States resulting in lower
funding costs that were partially offset by the impact of increased residual value losses.
Research and development expenses increased to ¥589.3 billion during fiscal 2002 from ¥475.7 billion in the prior year, as a result of increased activities relating primarily to the development of new models,
vehicle safety, new vehicle energy and environmental technologies to promote Toyota’s strength in a competitive market for the future and the impact of the consolidation of Hino during fiscal 2002.
Selling, general and administrative expenses (after the elimination of
intersegment amounts) increased by ¥244.5 billion, or 16.1%, to ¥1,763.0 billion during fiscal 2002 compared with the prior year. This increase (before the elimination of intersegment amounts) reflects an increase of ¥184.2 billion, or
14.0%, for the automotive operations, an increase of ¥73.0 billion, or 61.3%, for the financial services operations and a decrease of ¥62.0 billion, or 32.1%, for the other operations segment. The increase for the automotive operations
consisted primarily of the increase in personnel costs principally in North America and Europe, the impact of foreign currency translation rates, the impact of the consolidation of Hino during fiscal 2002 and the increase in advertising costs that
were partially offset by continuing cost reduction efforts. The increase for the financial services operations reflects higher provisions for credit losses resulting from the increase in finance receivables, higher provisions for credit losses
resulting from the tiered pricing program for retail vehicle contracts which was launched in 2001, the impact of foreign currency translation rates, increased costs for expansion of operations and the impact of restructuring the field operations in
the United States. The decrease for the all other operations segment reflects the impact of disposal of the telecommunications business during fiscal 2001 and the impact of disposal of the industrial equipment business during fiscal 2002.
Selling, general and administrative expenses as a percentage
of revenue increased to 12.4% during fiscal 2002 from 11.7% in the prior year. Selling, general and administrative expenses increased as a percentage of revenue primarily due to increases in the financial service operations. These increases were
partially offset in the all other operations segment by the impact of the disposal of the telecommunications business during fiscal 2001 and continuing cost reduction efforts. Selling, general and administrative expenses in the automotive operations
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as a percentage of segment revenues were 11.5% during fiscal 2002, compared to 11.3% in the prior year, reflecting the increase in personnel costs and the
impact of the consolidation of Hino during fiscal 2002. Selling, general and administrative expenses in the financial services operations as a percentage of segment revenues were 27.5% during fiscal 2002, compared to 20.8% in the prior year,
reflecting higher provisions for credit losses and the impact of restructuring the field operations in the United States. Selling, general and administrative expenses in the all other operations segment as a percentage of segment revenues were 18.0%
during fiscal 2002 compared to 19.0% in the prior year, primarily due to the disposal of the telecommunications business during fiscal 2001.
Operating Income
Toyota’s operating income increased by ¥302.9 billion, or 38.3%, to ¥1,093.6 billion during fiscal 2002 compared with the prior year.
Operating income was affected primarily by the favorable impact of the foreign currency exchange rate changes as well as the impact of continuing cost reduction efforts that were partially offset by the impact of the disposal of the
telecommunications business during fiscal 2001.
During fiscal
2002, operating income (before the elimination of intersegment profits) increased by ¥220.9 billion, or 35.4%, in Japan, ¥70.2 billion, or 36.1%, in North America, ¥6.4 billion, or 96.6%, in other markets and operating loss decreased by
¥0.7 billion, or 3.0%, in Europe compared with the prior year. The increase in Japan relates primarily to the favorable impact of the foreign currency exchange rate changes relating to export sales, the impact of higher average unit sales prices
on export sales, the impact of increased exports to North America and Europe and cost reduction efforts that were partially offset by the impact of lower domestic average unit sales prices and the impact of decreased domestic vehicle unit sales. The
increase in North America relates primarily to the favorable impact of the depreciation of the yen to the U.S. dollar and the impact of increased vehicle unit sales. The increase in other markets relates to improved vehicle unit sales and the impact
of higher average unit sales prices. The decrease in operating loss in Europe relates primarily to the significantly improved operating results resulting from the impact of increased vehicle unit sales and the impact of higher average unit sales
prices that were partially offset by the unfavorable impact of derivative financial instruments used to manage exposure to foreign currency fluctuation from an economic perspective where Toyota was unable to apply hedge accounting.
The following is a discussion of operating income for each of Toyota’s
business segments. The operating income amounts discussed represent amounts before the elimination of intersegment profits.
Automotive Operations Segment
Operating income from Toyota’s automotive operations increased by ¥292.4 billion, or 38.2%, to ¥1,057.9 billion during fiscal 2002 compared
with the prior year. Operating income was favorably affected primarily by the impact of the foreign currency exchange rate changes, continued cost reduction efforts and the impact of the consolidation of Hino during fiscal 2002 that were partially
offset by the impact of increased research and development expenses.
Financial Services Operations Segment
Operating income from Toyota’s financial services operations increased by ¥13.4 billion, or 42.4%, to ¥45.1 billion during fiscal 2002 compared with the prior year. Operating income was favorably affected primarily by the
impact of lower prevailing interest rates in the United States resulting in lower funding costs, the impact of increased spreads on financings and the impact of increased financings. These increases were partially offset by increased residual value
losses, higher provisions for credit losses, the costs for expansion of operations and the impact of restructuring the field operations in the United States.
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All Other Operations Segment
Operating loss from Toyota’s other businesses decreased by ¥1.6 billion to ¥3.0 billion during fiscal 2002
compared with the prior year. This decline resulted primarily from the decrease of intelligent transportation system expenses that were partially offset by the impact of the disposal of the telecommunications business during fiscal 2001 and the
impact of the disposal of the industrial equipment business during fiscal 2002.
Other Income and Expenses
Interest and
dividend income decreased by ¥15.6 billion, or 21.8%, to ¥55.8 billion during fiscal 2002 compared with the prior year due to lower prevailing interest rates in the United States and Japan.
Interest expense decreased by ¥14.1 billion, or 34.5%, to ¥26.8
billion during fiscal 2002 compared with the prior year due to lower prevailing interest rates in the United States and Japan.
Foreign exchange loss decreased by ¥5.9 billion during fiscal 2002 compared with the prior year. Foreign exchange gain and loss include the
differences between the value of foreign currency denominated sales translated at prevailing exchange rates and the value of the sales amounts settled during the year, including those settled using foreign exchange forward contracts. Foreign
exchange losses decreased due to the moderate movement of exchange rates during fiscal 2002, as compared with the trend of depreciation of the yen during the second half of fiscal 2001.
Other income changed by ¥442.5 billion to a loss of ¥150.5 billion during fiscal 2002 from an income of ¥292.0
billion in the prior year. During fiscal 2001, there was a gain of ¥181.0 billion on the disposal of the ownership interest in IDO and a gain of ¥161.2 billion relating to the contribution of certain marketable securities to an employee
retirement benefit trust. During fiscal 2002, there were gains of ¥75.1 billion on exchange transactions relating to financial institutions where Toyota held ownership interests and losses of ¥257.4 billion relating to other than temporary
impairments on investment securities of which ¥212.9 billion related to Toyota’s investment in KDDI.
Income Taxes
Provision for income taxes decreased by ¥101.1 billion during fiscal 2002 compared with the prior year primarily as a result of decrease in income
before income taxes and decreased provision for taxes on undistributed earnings of affiliated companies accounted for by the equity method. The effective tax rate for fiscal 2002 decreased to 43.5% from 47.3% for the prior year due primarily to
decreased provision for taxes on undistributed earnings of affiliated companies.
Minority Interest in Consolidated Subsidiaries and Equity in Earnings of Affiliated Companies
Minority interest in consolidated subsidiaries decreased by ¥1.3 billion to ¥10.8 billion during fiscal 2002 compared with the prior year. The
decrease in minority interest in consolidated subsidiaries reflects decreased earnings of Daihatsu and the impact of disposal of IDO during fiscal 2001 that were partially offset by the impact of the consolidation of Hino during fiscal 2002.
Equity in earnings of affiliated companies during fiscal 2002
decreased by ¥85.5 billion to ¥18.1 billion during fiscal 2002 compared with the prior year as a result of the impact of the recognition of gains on securities relating to the contribution of marketable securities to employee retirement
benefit trusts during fiscal 2001 and a loss by Aioi during fiscal 2002.
Net Income
Toyota’s net income
decreased by ¥118.3 billion, or 17.5%, to ¥556.6 billion during fiscal 2002 compared with the prior year.
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Other Comprehensive Income and Loss
Other comprehensive loss changed by ¥ 172.3 billion, to an income of ¥15.2 billion during fiscal 2002 compared with
the prior year. This change resulted primarily from a decrease in an unrealized holding losses on securities during fiscal 2002 to ¥3.6 billion compared to ¥305.0 billion in the prior year and were partially offset by an increase in other
comprehensive loss to ¥114.3 billion relating to minimum pension liability adjustment compared to ¥13.4 billion in the prior year and a decrease in a foreign currency translation adjustments gain during fiscal 2002 to ¥133.9 billion
compared to a gain of ¥161.3 billion in the prior year.
Off-Balance
Sheet Activities
Toyota uses its securitization program
as part of its funding for its financial services operations. Toyota believes that the securitization market provides it with a cost-effective sources of funding for its operations.
Toyota’s securitization program involves selling discrete pools of retail finance receivables principally Qualifying
Special Purpose Entities (“QSPEs”), which in turn sell the receivables to separate securitization trusts in exchange for the proceeds from securities issued by the trust. Once the receivables are transferred to the QSPE, the receivables
are no longer assets of Toyota and therefore, no longer appear in Toyota’s consolidated balance sheet. The securities issued by the trust, usually notes or certificates of various maturities and interest rates, are secured by collections on the
sold receivables. These securities, commonly referred to as asset-backed securities, are structured into senior and subordinated classes. Generally, the senior classes have priority over the subordinated classes in receiving collections from the
sold receivables.
As of March 31, 2003, outstanding debt from
asset-backed securitizations and notes payable related to securitized finance receivables structured as collateralized borrowings totaled approximately ¥776.0 billion and ¥66.0 billion, respectively.
On any payment date, the priority of payments made from available collections
and amounts withdrawn from existing reserve funds or revolving liquidity notes, are as follows: servicing fee, noteholder interest, allocation of principal, reserve fund account deposit, and finally, excess amounts. Therefore, the interests of
noteholders are subordinate to the servicer, but have priority over any deposits in a reserve fund, any draws against existing revolving liquidity notes, or any excess amounts. In addition, in most cases, noteholders holding senior classes of notes
are paid prior to any existing subordinate class (some transactions are structured so that the subordinate tranche is released pro rata with certain senior tranches).
Toyota acts as servicer on all of its securitizations and earns a contractual servicing fee of 1% per annum on the total
monthly outstanding principal balance of the related securitized receivables. In a subordinated capacity, Toyota retains interest-only strips, subordinated securities, and reserve funds in its securitizations, and these retained interests are held
as restricted assets subject to limited recourse provisions and provide credit enhancement to the senior securities in Toyota’s securitization transactions. The retained interests are not available to satisfy any obligations of Toyota. At March
31, 2003, Toyota’s retained interests relating to these securitizations, including interest in trusts, interest-only strips and other receivables, amounted to ¥135.7 billion. Toyota recorded impairments on retained interests totaling
¥2.4 billion in fiscal 2003.
Toyota may enter into
swap agreements with the securitization trusts so that interest rate exposure remains with Toyota, and not the securitization trusts. This exposure may or may not be mitigated by other swap arrangements entered into by Toyota, which determination is
made by Toyota’s management. Toyota’s general exposure every month, is the notional balance of the security multiplied by the rate differential. However, in the case of a default by the securitization trust, Toyota’s maximum exposure
would be the interest due based on the outstanding notional value of underlying securities paid at the rate inherent in the swap agreement.
54
For the year ended March 31, 2003, the following table summarizes certain cash flows received from and
paid to the securitization trusts:
|
|
|
Yen in millions
|
|
|
Proceeds from new securitizations, net of purchased and retained securities
|
|
¥
|
412,594
|
|
|
Servicing fees received
|
|
|
6,868
|
|
|
Excess interest received from interest only strips
|
|
|
15,313
|
|
|
Repurchases of receivables
|
|
|
(122
|
)
|
|
Reimbursement of servicer advances
|
|
|
122
|
|
Contractual Obligations and
Commitments
For information regarding debt obligations,
capital lease obligations, operating leases, and other obligations, including amounts maturing in each of the next five years, see notes 13, 22 and 23 to the consolidated financial statements. In addition, as part of Toyota’s normal business
practices, Toyota enters into long-term arrangements with suppliers for purchases of certain raw materials, components and services. These arrangements may contain fixed/minimum quantity purchase requirements. Toyota enters into such arrangements to
facilitate adequate supply of these materials and services.
The following table summarizes Toyota’s contractual obligations and commercial commitments as of March 31, 2003:
|
|
|
Payments Due by Period
|
|
|
|
Yen in millions
|
|
|
|
Total
|
|
Less than
1 year
|
|
1 to 3 years
|
|
4 to 5 years
|
|
After
5 years
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
¥
|
774,880
|
|
¥
|
774,880
|
|
¥
|
—
|
|
¥
|
—
|
|
¥
|
—
|
|
Commercial paper
|
|
|
1,080,768
|
|
|
1,080,768
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Long-term debt (note 13)
|
|
|
5,400,545
|
|
|
1,263,017
|
|
|
1,814,285
|
|
|
1,292,153
|
|
|
1,031,090
|
|
Non-cancelable operating lease obligations (note 22)
|
|
|
40,027
|
|
|
9,511
|
|
|
13,254
|
|
|
6,422
|
|
|
10,840
|
|
|
|
Total Amount of
Commitments
|
|
|
|
Yen in millions
|
|
Commercial Commitments (note 23)
|
|
|
|
|
Commitments for the purchase of property, plant and other assets
|
|
¥
|
64,464
|
|
Maximum potential exposure to guaranties given in the ordinary course of business
|
|
|
867,391
|
Related Party Transactions
Toyota does not have any significant related party
transactions other than transactions with affiliated companies in the ordinary course of business as described under note 12 to Toyota’s consolidated financial statements.
Legislation Regarding End-of-Life Vehicles
In September 2000, the European Union approved a directive that requires member states to promulgate regulations implementing the following by April
21, 2002:
|
|
•
|
|
manufacturers are to be financially responsible for taking back end-of-life vehicles put on the market after July 1, 2002 and dismantling and recycling those vehicles. Beginning
January 1, 2007, manufacturers will also be financially responsible for vehicles put on the market before July 1, 2002;
|
55
|
|
•
|
|
manufacturers may not use certain hazardous materials in vehicles to be sold after July 2003;
|
|
|
•
|
|
vehicles approved and put on the market from three years after the amendment of the relevant directive must, upon release, meet re-use and/or recyclability targets of 85% by weight
per vehicle, as well as re-use and/or recoverability targets of 95% by weight per vehicle; and
|
|
|
•
|
|
end-of-life vehicles must meet actual re-use and recovery targets of 80% and 85%, respectively, of vehicle weight by 2006, rising respectively to 85% and 95% by 2015.
|
Currently, there are numerous uncertainties
surrounding the form and implementation of the applicable regulations in different European Union member states, particularly regarding manufacturer responsibilities and resultant expenses that may be incurred. As of June 30, 2003, the following
seven member states have adopted legislation to implement the directive: The Netherlands, Germany, Austria, Spain, Luxembourg, Portugal and Italy. In addition, Sweden and Denmark have existing legislation that partially implements the directive.
Belgium has partially adopted legislation implementing the directive. Although all member states were required to enact legislation to implement the directive by April 21, 2002, implementation of the directive has been delayed in some countries and
is now expected to be substantially finalized during 2003.
In
addition, under this directive member states must take measures to ensure that car manufacturers, distributors and other auto-related businesses establish adequate used vehicle disposal facilities and to ensure that hazardous materials and
recyclable parts are removed from vehicles prior to scrapping. This directive impacts Toyota’s vehicles sold in the European Union.
Based on the legislation that has been enacted to date, Toyota has provided for its estimated liability related to covered vehicles in existence as of
March 31, 2003. Depending on the legislation implemented in the eight member states that have not yet enacted legislation and other circumstances, Toyota may be required to provide additional accruals for the expected costs to comply with these
regulations. Although Toyota does not expect its compliance with the directive to result in significant cash expenditures, Toyota is continuing to assess the impact of this future legislation on its results of operations, cash flows and financial
position.
Recent Accounting Pronouncements in the United States
In June 2001, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standard No.143
Accounting for Asset Retirement Obligations
(“FAS 143”). FAS 143 requires full recognition of asset retirement obligations on the balance sheet from the
point in time at which a legal obligation exists. The obligation is required to be measured at fair value. The carrying value of the asset or assets to which the retirement obligation relates would be increased by an amount equal to the liability
recognized. This amount would then be included in the depreciable base of the asset and charged to income over its life as depreciation. Toyota adopted FAS 143 on April 1, 2003. Management does not expect this statement to have a material impact on
Toyota’s consolidated financial statements.
In April
2002, the FASB issued FAS No. 145,
Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections
(“FAS 145”). This statement makes various technical corrections to existing pronouncements including the
classification of gain or loss on extinguishment of debt and sale-lease back accounting for certain lease modifications. Toyota adopted FAS 145 on April 1, 2003. Management does not expect this statement to have a material impact on Toyota’s
consolidated financial statements.
In November 2002, the
Emerging Issue Task Force (“EITF”) reached consensus on EITF Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables
(“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities. Toyota will apply this consensus for revenue arrangements entered into in periods beginning after June 15, 2003. Toyota is in the process of determining the impact that
the adoption of EITF 00-21 will have on Toyota’s consolidated financial statements.
56
In March 2003, EITF released Issue No. 02-9,
Accounting for Changes That Result in a Transferor
Regaining Control of Financial Assets Sold
(“EITF 02-9”), prospective for events occurring after April 2, 2003. EITF 02-9 relates to securitizations that have been accounted for as sales under FAS No. 140,
Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities
(“FAS 140”). In the event that one or more of the control rules are no longer met, the transferor would have to recognize those assets and the related liabilities on
the consolidated balance sheet at the fair value. The implementation of EITF 02-9 is not expected to have a material impact on the Toyota’s consolidated financial statements because almost all securitization transactions remain in QSPEs and the
control rules of FAS 140 are met.
In April 2003, the FASB
issued FAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
(“FAS 149”). This statement amends and clarifies financial accounting and reporting for derivative instruments, including derivative
instruments embedded in other contracts and for hedging activities under FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
(“FAS 133”). FAS 149 is effective (1) for contracts entered into or modified after
June 30, 2003, with certain exceptions, and (2) for hedging relationships designated after June 30, 2003. Management does not expect this statement to have a material impact on Toyota’s consolidated financial statements.
In May 2003, the FASB issued FAS No. 150,
Accounting for Certain Financial
Instruments with
Characteristics of both Liabilities and Equity
(“FAS 150”). This statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. FAS 150
requires that those instruments be classified as liabilities in the balance sheets. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Management does not expect this statement to have a material impact on Toyota’s consolidated financial statements.
Critical Accounting Policies
The consolidated financial statements of Toyota are prepared in conformity with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. Toyota believes that of its significant accounting policies, the following may involve a higher degree of judgments, estimates and complexity:
Warranty
Toyota generally warrants its products against certain manufacturing and other defects. Product warranties are provided for specific periods of time
and/or usage of the product and vary depending upon the nature of the product, the geographic location of its sale and other factors. All product warranties are consistent with commercial practices. Toyota provides a provision for estimated product
warranty costs as a component of cost of sales at the time the related sale is recognized. The accrued warranty costs represent management’s best estimate at the time of sale of the total costs that Toyota will incur to repair or replace
product parts that fail while still under warranty. The amount of accrued estimated warranty costs is primarily based on historical experience as to product failures as well as current information on repair costs. The amount of warranty costs
accrued also contains an estimate as to warranty claim recoveries from suppliers. The foregoing evaluations are inherently uncertain, as they require material estimates and some products’ warranty extend for several years. Consequently, actual
warranty costs will differ from the estimated amounts and could require additional warranty provisions. If these factors require a significant increase in Toyota’s accrued estimated warranty costs, it would negatively affect future operating
results of the automotive operations.
57
Allowance for Doubtful Accounts and Credit Losses
Sales financing and finance lease receivables consist of retail installment
sales contracts secured by passenger cars and commercial vehicles. Collectibility risks include consumer and dealer insolvencies and insufficient collateral values (less costs to sell) to realize the full carrying values of these receivables. As a
matter of policy, Toyota maintains an allowance for doubtful accounts and credit losses representing Toyota’s management’s estimate of the amount of asset impairment in the portfolios of finance, trade and other receivables. Toyota
determines the allowance for doubtful accounts and credit losses based on a systematic, ongoing review and evaluation performed as part of the credit-risk evaluation process, historical loss experience, the size and composition of the portfolios,
current economic events and conditions, the estimated fair value and adequacy of collateral and other pertinent factors. This evaluation is inherently judgmental and requires material estimates, including the amounts and timing of future cash flows
expected to be received, which may be susceptible to significant change. Although management considers the allowance for doubtful accounts and credit losses to be adequate based on information currently available, additional provisions may be
necessary due to (i) changes in management estimates and assumptions about asset impairment, (ii) information that indicates changes in the expected future cash flows, or (iii) changes in economic and other events and conditions. A prolonged
economic downturn in North America and Western Europe could increase the likelihood of credit losses exceeding current estimates. To the extent that sales incentives remain an integral part of sales promotion with the effect of reducing new vehicle
prices, resale prices of used vehicles and, correspondingly, the collateral value of Toyota’s sales financing and finance lease receivables could experience further downward pressure. If these factors require a significant increase in
Toyota’s allowance for doubtful accounts and credit losses, it could negatively affect future operating results of the financial services operations.
Investment in Operating Leases
Vehicles on operating leases, where Toyota is the lessor, is valued at acquisition cost and depreciated over its estimated useful life using the
straight-line method to its estimated residual value. Toyota utilizes industry published information and its historical experience to determine estimated residual values for these vehicles. Toyota evaluates the recoverability of the carrying values
of its leased vehicles for impairment when there are indications of declines in residual values. In recent years, the resale values of returned vehicles have been depressed, primarily because of an increased supply of used vehicles in the market
that has depressed market prices. In addition, to the extent that sales incentives remain an integral part of sales promotion (reducing new vehicle prices), resale prices of used vehicles and, correspondingly, the carrying value of Toyota’s
leased vehicles could be subject to further downward pressure. If resale prices of used vehicles decline, future operating results of the financial services operations are likely to be adversely affected by incremental charges to reduce estimated
residual values.
Impairment of Long-Lived Assets
Toyota periodically reviews the carrying value of its
long-lived assets held and used and assets to be disposed of, including goodwill and other intangible assets, when events and circumstances warrant such a review. This review is performed using estimates of future cash flows. If the carrying value
of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Management believes that the estimates of future cash flows and fair value are
reasonable; however, changes in estimates of such cash flows and fair value would affect the evaluations and negatively affect future operating results of the automotive operations.
Employee Costs
Pension and other postretirement benefits costs and obligations and post-employment benefit costs are dependent on assumptions used in calculating such
amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest cost, expected return on plan assets, mortality rates and other factors. Actual results that differ from the assumptions are accumulated and
amortized over future periods and,
58
therefore, generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are
appropriate, differences in actual experience or changes in assumptions may affect Toyota’s pension and other postretirement costs and obligations and post-employment benefit costs.
Derivatives and Other Contracts at Fair Value
Toyota uses derivatives in the normal course of business to manage its exposure to foreign currency exchange rates and
interest rates. The accounting is complex and continues to evolve. In addition, there are the significant judgments and estimates involved in the estimating of fair value in the absence of quoted market values. These estimates are based upon
valuation methodologies deemed appropriate in the circumstances; however, the use of different assumptions may have a material effect on the estimated fair value amounts.
Marketable securities
Toyota’s accounting policy is to record a write-down of such investments to realizable value when a decline in fair
value below carrying value is other than temporary. In determining if a decline in value is other than temporary, Toyota considers the length of time and the extent to which the fair value has been less than the carrying value, the financial
condition and prospects of the company and Toyota’s ability and intent to retain its investment in the company for a period of time sufficient to allow for any anticipated recovery in market value.
|
5.B
|
|
LIQUIDITY AND CAPITAL RESOURCES
|
Historically, Toyota had funded its capital expenditures and research and development activities primarily through cash generated by operations.
Toyota expects to fund its capital expenditures and research and development activities in fiscal 2004 primarily through
cash and cash equivalents on hand and operating cash flow. See “Information on the Company—Business Overview – Capital Expenditures and Divestitures” for information regarding Toyota’s material capital expenditures and
divestitures from April 1, 2000 to June 30, 2003 and information concerning Toyota’s principal capital expenditures and divestitures currently in progress.
Toyota funds its financing programs for customers and dealers, including leasing programs, from both operating cash flow and through borrowings by its
finance subsidiaries. Toyota seeks to expand its ability to raise funds locally in markets throughout the world by expanding its network of finance subsidiaries.
Net cash provided by operating activities was ¥2,085.0 billion for fiscal 2003, compared to ¥1,532.7 billion for the
prior year. The increase in net cash provided by operating activities resulted primarily from increased operating income and changes in operating assets and liabilities.
Net cash used in investing activities was ¥2,146.4 billion for fiscal 2003, compared to ¥1,810.8 billion for the
prior year. The increase in net cash used in investing activities resulted primarily from the increase in net purchases of marketable securities, the increase in net investment in fixed assets and the increase in the amount invested in time
deposits. These increases were partially offset by the decrease in net investment in financing receivables.
Net cash provided by financing activities was ¥37.7 billion for fiscal 2003, compared to ¥392.1 billion for the prior year. The decrease in net
cash provided by financing activities resulted primarily from increased purchase of common stock and increased payments of long-term debt.
Total capital expenditures for property, plant and equipment, excluding vehicles and equipment on operating leases, were ¥1,005.9 billion during
fiscal 2003, an increase of 7.0% over the ¥940.5 billion in expenditures for the prior year. The increase in capital expenditures resulted primarily from the impact of full year consolidation
59
of Hino, the completion of several overseas plant expansions in conjunction with the localization of production and the investment in property, plant and
equipment for the development of new models, vehicles safety, new vehicles energy and environmental technologies.
Total expenditures for vehicles and equipment on operating leases were ¥604.3 billion during fiscal 2003, a decrease of 0.6% over the ¥608.0
billion in expenditures in the prior year. The change resulted primarily due to the change in foreign currency translation rates.
Toyota expects investments in property, plant and equipment, excluding vehicles leased to others, to approximate ¥920.0 billion during fiscal 2004.
Toyota’s expected capital expenditures include approximately ¥40.0 billion for the continued expansion of overseas investments as part of Toyota’s efforts to localize its production activities.
Based on currently available information, Toyota does not expect
environmental matters to have a material impact on its financial position, results of operations, liquidity or cash flow during fiscal 2004. However, there exists a substantial amount of uncertainty with respect to Toyota’s obligations under
current and future environment regulations as described in “Information on the Company – Business Overview – Governmental Regulations, Environment and Safety Standards”.
Cash and cash equivalents were ¥1,592.0 billion at March 31, 2003. Most
of Toyota’s cash and cash equivalents are held in Japanese yen. In addition, time deposits were ¥55.4 billion and marketable securities were ¥605.5 billion at March 31, 2003.
Liquid assets, which Toyota defines as cash and cash equivalents, time deposits, marketable debt securities and its
investment in monetary trust funds, increased during fiscal 2003 by ¥150.7 billion, or 4.8%, to ¥3,295.7 billion.
Trade accounts and notes receivable, net increased during fiscal 2003 by ¥18.9 billion, or 1.3%, to ¥1,475.8 billion, reflecting the impact of
increased revenues, which was partially offset by the impact of the change in foreign currency translation rates.
Inventories increased during fiscal 2003 by ¥64.0 billion, or 6.7%, to ¥1,025.8 billion, reflecting the impact of increased volumes which was
partially offset by the impact of the change in foreign currency translation rates.
Finance receivables, net increased during fiscal 2003 by ¥383.0 billion, or 8.2%. The change resulted primarily from the increase in wholesale and other dealer loans, including real estate loans and working
capital financings to be provided to dealers, the increase in the retail financings mainly due to the continuing increase in the portion of installment sales by dealers that are being financed through Toyota’s financial services operations, and
the increase in the number of credit cards issued. These increases were partially offset by the decrease in finance leases and the change in foreign currency translation rates. As of March 31, 2003, finance receivables were geographically
distributed as follows: in North America 65.9%, in Japan 17.5%, in Europe 9.0% and in all other markets 7.6%. Toyota maintains programs to sell finance receivables through limited purpose subsidiaries and obtained proceeds from securitization
transactions, net of purchased and retained interests, amounting to ¥412.6 billion during fiscal 2003.
Marketable securities and other securities investment including those included in current assets increased during fiscal 2003 by ¥125.7 billion, or
5.9%, to ¥2,257.6 billion, reflecting the changes in investment policies of its subsidiaries in North America, which was offset by a decline in market values at March 31, 2003.
Property, plant and equipment increased during fiscal 2003 by ¥96.9 billion, or 1.9%, reflecting an increase of capital
expenditures, which was partially offset by depreciation and the change in foreign currency translation rates.
60
Accounts payable increased during fiscal 2003 by ¥110.9 billion, or 7.8%, reflecting the expansion of
volume, which was partially offset by the change in foreign currency translation rates
.
Accrued expenses increased during fiscal 2003 by ¥135.3 billion, or 14.6%, reflecting the increase in expenses due to the increase in product volume, the increase in sales related expenses and employee bonuses,
the impact of the increase in the accrued liability for credit card points, which was partially offset by the change in foreign currency translation rates.
Income taxes payable decreased during fiscal 2003 by ¥27.0 billion, or 8.2%, principally as a result of the decrease in income for the last half of
fiscal 2003 compared with that for the last half of fiscal 2002.
Toyota’s total borrowings increased during fiscal 2003 by ¥549.1 billion, or 8.2%. Toyota’s short-term borrowings consist of loans with a weighted-average fixed interest rate of 2.05% and commercial paper with a
weighted-average fixed interest rate of 1.52%. Short-term borrowings increased during fiscal 2003 by ¥30.1 billion, or 1.6%, to ¥1,855.6 billion. Toyota’s long-term debt consists of unsecured and secured loans, medium-term notes,
unsecured notes and long-term capital lease obligations with fixed interest rates ranging from 0.01% to 18.00%, with maturity dates ranging from 2003 to 2030. Toyota’s long-term debt also consists of unsecured convertible bonds of consolidated
subsidiaries and notes payable related to securitized finance receivables structured as collateralized borrowings. The current portion of long-term debt increased during fiscal 2003 by ¥104.2 billion, or 9.0%, to ¥1,263.0 billion and the
non-current portion increased by ¥414.8 billion, or 11.1%, to ¥4,137.5 billion. These increases reflect borrowings to fund finance receivables and the issuance of commercial paper in Japan, which was offset by the impact of the change in
foreign currency translation rates. At March 31, 2003, approximately 40% of long-term debt was denominated in U.S. dollars, 30% in Japanese yen, 14% in Euro and 16% in other currencies. Toyota hedges fixed rate exposure by entering into interest
rate swaps. There are no material seasonal variations in Toyota’s borrowings requirements.
As of March 31, 2003, Toyota’s total financial debt was 101.9% of total shareholders’ equity, compared to 92.3% as of March 31, 2002.
At March 31, 2003, Toyota had an unfunded pension liability of
¥1,414.0 billion that related primarily to the parent company and its Japanese subsidiaries. The unfunded amounts are primarily funded on the retirement date of each covered employee. In conjunction with enforcement of the Contributed Benefit
Pension Plan Law, during fiscal 2003, the parent company and certain domestic subsidiaries applied for exemption from the payments of the benefits related to future employee services and received approvals from the Minister of Health, Labor and
Welfare, and also made applications for separation of the remaining substitutional portion that was related to past services, as further described in note 19 to Toyota’s consolidated financial statements.
Toyota’s long-term debt was rated “AAA” by Standard &
Poor’s Ratings Group and “Aa1” by Moody’s Investors Services as of March 31, 2003. These ratings represent Standard and Poor’s highest long-term debt rating and Moody’s second highest rating. A credit rating is not a
recommendation to buy, sell or hold securities. A credit rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating.
Toyota’s treasury policy is to maintain controls on all exposures, to adhere to stringent counterparty credit
standards, and to actively monitor marketplace exposures. Toyota centralized and is pursuing global efficiency of its financial services operations through Toyota Financial Services Corporation.
The key element of Toyota’s financial policy is maintaining a strong
financial position that will allow Toyota to fund its research and development initiatives, capital expenditures and financing operations on a cost effective basis even if earnings experience short-term fluctuations. Toyota believes that it
maintains sufficient liquidity for its present requirements and that by maintaining high credit ratings, it will continue to be able to
61
access funds from external sources in large amounts and at relatively low costs. Toyota’s ability to maintain its high credit ratings is subject to a
number of factors, some of which are not in Toyota’s control. These factors include general economic conditions in Japan and the other major markets in which Toyota does business, as well as Toyota’s successful implementation of its
business strategy.
|
5.C
|
|
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
|
Toyota’s research and development activities focus on the environment, vehicle safety, information technology and product development.
Toyota’s environmental research and development activities focus on:
|
|
•
|
|
Developing light weight and more fuel-efficient engines and transmissions. These technologies include the direct injection four-stroke gasoline engine, the nitrous oxide storage
reduction catalytic system and the common rail direct injection diesel engine.
|
|
|
•
|
|
Developing alternative fuel powering systems for commercial sale. This includes developing hybrid vehicles such as the Prius and fuel-cell vehicles. The next-generation Prius that
Toyota is planning to introduce will feature a new hybrid system combining decreased environmental impact with increased power and performance. Toyota also began limited sales of a fuel cell hybrid vehicle in Japan and the United States in December
2002. Other Toyota efforts in this area include the development of vehicles fueled by compressed natural gas and other alternative fuel vehicles. Toyota has formed a research and development alliance with General Motors Corporation to develop future
power systems.
|
|
|
•
|
|
Recycling of vehicle parts through the development of recycling technologies. Work in this area includes developing uses for shredder residue, the recycling of nickel-metal hydride
batteries and the development of vehicles constructed with a high proportion of recyclable parts.
|
Toyota’s work in the area of vehicle safety is focused on the development of technologies designed to prevent accidents in the first instance, as
well as the development of technologies that protect vehicle occupants and reduce the damage on impact if an accident does occur. Safety technologies in development include:
|
|
•
|
|
research on improving comfort for different types of passengers, including senior citizens,
|
|
|
•
|
|
autonomous driving support systems, including frontal crash-prevention support systems, and
|
|
|
•
|
|
networked driving-support systems using advanced communication technologies.
|
To expand the frontiers of safety technology in automobiles, Toyota completed in 1995 its first prototype Advanced Safety Vehicle, the ASV-1. In 2000,
Toyota created a successor prototype, the ASV-2. The ASV-2 incorporates emerging technologies, such as an autonomous safety support system that uses CCD stereo cameras to recognize obstacles in traffic lanes and an infrastructure-harmonized safety
support system to warn the driver of pedestrian crossings. With the February 2003 introduction of the Harrier models in Japan, Toyota became the first car manufacturer to implement a pre-crash safety system in its automobiles. This multi-faceted
system consists of pre-crash sensors that use millimeter wave radar to detect an imminent crash, seat belts that tighten their hold on passengers during the early stage of crash detection and a brake assist system that utilizes power-assisted
braking to minimize the speed on impact. Toyota plans to continue its focus on developing practical applications for its advanced safety technologies.
Toyota’s product development program uses a series of methods which are generally intended to promote timely and appropriate responses to changing
market demand. These methods include:
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reducing the number of vehicle platforms,
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sharing parts and components among multiple vehicles,
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shortening the time for development and production preparation by the simultaneous study of design and production engineering processes, and
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using computers for production design and its evaluation.
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In July 2001, Toyota also agreed to work with PSA Peugeot Citroën on the development of a new vehicle platform for low-cost, fuel-efficient and
environment-friendly vehicles. In September 2002, Toyota and Nissan Motor Co. entered into an agreement setting forth the basic terms of technical cooperation and other long-term projects involving hybrid systems between the parties. This agreement,
which aims for a long-term business relationship of 10 years or longer, calls for Toyota to supply state-of-the-art hybrid system components to Nissan. In addition, with the aim of promoting technical cooperation, both companies agreed to exchange
information on hybrid systems that both Toyota and Nissan are currently developing independently, and to discuss the joint development of related components.
Toyota’s research and development expenditures were approximately ¥668 billion in fiscal 2003, ¥589 billion in fiscal 2002 and ¥476
billion in fiscal 2001. Worldwide, approximately 23,000 employees are involved in Toyota’s research and development activities.
Toyota does not consider any one group of patents or licenses to be so important that their expiration or termination would materially affect
Toyota’s business. For a further discussion of Toyota’s intellectual property, see “Information on the Company – Business Overview – Intellectual Property”.
For a discussion of the trends that affect Toyota’s business and operating results, see “— Operating Results” and “— Liquidity and Capital Resources”.
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