USGAAP Annual Report 2
Toyota Motor Corporation
31 July 2003
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Table of Contents
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.A OPERATING RESULTS
All financial information discussed in this section is derived from Toyota's
consolidated financial statements that appear elsewhere in this annual report on
Form 20-F. These financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
Overview
Toyota's business segments are automotive operations, financial services
operations and all other operations. Automotive operations is Toyota's most
significant segment, accounting for approximately 90% of Toyota's total revenues
before the elimination of intersegment revenues and 97% of Toyota's operating
income before the elimination of intersegment revenues and costs for the year
ended March 31, 2003. Toyota's primary markets based on vehicle unit sales for
the year ended March 31, 2003 were: Japan (36%), North America (32%) and Europe
(13%).
Automotive Market Environment
The worldwide automotive market is highly competitive and cyclical. Demand for
automobiles in each market can vary substantially from year to year. Demand
depends to a large extent on general economic conditions in a given market, the
cost of purchasing and operating automobiles and the availability and cost of
credit and fuel.
Toyota's vehicle unit sales in Japan increased slightly during fiscal 2003
resulting from the active introduction of new models that met customer needs and
the strong sales efforts of domestic dealers during a period of continued
increased competition from other domestic manufacturers. This follows a decrease
in Toyota's vehicle unit sales in Japan during fiscal 2002 resulting primarily
from an overall industry decline in the Japan market and increased competition
from other domestic manufacturers, and an increase during fiscal 2001 resulting
from the active introduction of new models that met customer needs and the
strong sales efforts of domestic dealers. Toyota's vehicle unit sales in North
America and Europe increased steadily during fiscal 2003, 2002 and 2001,
reflecting strong demand for Toyota vehicles in both of these regions. Toyota
vehicle unit sales increased in these markets during fiscal 2003 despite a
general slowdown in global economic growth. In the aggregate, Toyota's vehicle
unit sales in all other markets increased significantly during fiscal 2003
following increases in fiscal 2002 and 2001 reflecting strong growth in Asian
markets and the impact of inclusion of full year results of Kuozui Motors Ltd.
('Kuozui')
Toyota's share of total vehicle unit sales in each market is influenced by the
quality, price, design, performance, safety, reliability, economy and utility of
its vehicles compared with those offered by other manufacturers. The timely
introduction of new or modified vehicle models is also an important factor in
satisfying customer demand. Toyota's ability to satisfy changing customer
preferences can affect its revenues and earnings significantly.
The profitability of Toyota's automotive operations is affected by many factors.
These factors include:
• vehicle unit sales volumes,
• the mix of vehicle models and options sold,
• the levels of price discounts and other sales incentives and marketing costs,
• the cost of customer warranty claims and other customer satisfaction actions,
• the cost of research and development and other fixed costs,
• the ability to control costs,
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• the efficient use of production capacity, and
• changes in the value of the Japanese yen and other currencies in
which Toyota does business.
Changes in laws, regulations, policies and other governmental actions can also
materially impact the profitability of Toyota's automotive operations. These
laws, regulations and policies include those affecting environmental matters and
vehicle safety, fuel economy and emissions that add significantly to the cost of
vehicles. The European Union has approved a directive that requires
manufacturers to be financially responsible for taking back end-of-life vehicles
and to take measures to ensure that adequate used vehicle disposal facilities
are established and that hazardous materials and recyclable parts are removed
from vehicles prior to scrapping. You should read '- Legislation Regarding
End-of-Life Vehicles' and 'Information on the Company - Business Overview -
Governmental Regulation, Environmental and Safety Standards' for a discussion of
these laws, regulations and policies. In addition, you should read 'Information
on the Company - Business Overview - Legal Proceedings' for a discussion of
legal proceedings involving Toyota and the California Air Resources Board and
the U.S. Environmental Protection Agency.
Many governments also regulate local content, impose tariffs and other trade
barriers and enact price or exchange controls which can limit an automaker's
operations and can make the repatriation of profits to an automaker's home
country difficult. Changes in these laws, regulations, policies and other
governmental actions may affect the production, licensing, distribution or sale
of Toyota's products, cost of products or applicable tax rates. Toyota is
currently one of the defendants in purported national class actions alleging
violations of the U.S. Sherman Antitrust Act. For a more detailed description of
this proceeding, see 'Information on the Company - Business Overview - Legal
Proceedings'.
The worldwide automotive industry is in a period of globalization and
consolidation, which may continue for the foreseeable future. As a result, the
competitive environment in which Toyota operates is likely to intensify. Toyota
believes it has the resources, strategies and technologies in place to compete
effectively in the industry as an independent company for the foreseeable
future.
In August 2001, Toyota acquired additional ownership interest in Hino Motors
Ltd. ('Hino') for Y66.3 billion in cash. As a result, Toyota's ownership
interests in Hino increased by 13.6% to 50.2% and Toyota's consolidated
financial statements include the accounts of Hino from the acquisition date.
Previously Hino was accounted for using the equity method. Hino is primarily
engaged in the design, manufacturing and sale of trucks, buses and related
parts. As a result of the Hino acquisition, Toyota's ownership interest in
Kuozui, an auto body manufacturing company in Taiwan, increased to 56.7% and
Kuozui became a consolidated subsidiary of Toyota. Fiscal 2003 is the first full
year that Toyota's consolidated financial statements include in the operating
results of Hino and Kuozui.
Financial Services Operations
The worldwide financial services market is highly competitive. The market for
automobile financing has grown as more consumers are financing their purchases,
particularly in North America and Europe. Toyota faces increasing competition in
its financial services operations from financial institutions including banks,
savings institutions and leasing companies. These leasing companies include
those affiliated with other automobile manufacturers, in particular those of the
major U.S. producers. As competition increases, spreads earned on financing
transactions may decrease and market share may also decline as customers obtain
financing for Toyota vehicles from alternative sources.
Toyota's portfolio of finance receivables and investment in vehicles and
equipment on operating leases continued to increase during fiscal 2003 resulting
primarily from the continued expansion of its financial services operations in
North America.
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Toyota's financial services operations also include loans and leasing programs
for customers and dealers. Toyota believes that its ability to provide financing
to its customers is an important value added service. Toyota intends to continue
to expand its network of finance subsidiaries to bring its financial services
business to more countries. During fiscal 2001, Toyota launched in the United
States an expanded tiered pricing program for retail vehicle contracts. The
objective of the program is to better match customer risk with contract rates
charged to allow profitable purchases of a wider range of risk levels.
Implementation of the tiered pricing program has contributed to increased
contract yields and increased credit losses during fiscal 2002 and 2003 in
connection these higher risk contracts.
Toyota launched its credit card business in Japan in April 2001. Toyota had 3.6
million cardholders and 2.4 million cardholders as of March 31, 2003 and 2002,
respectively, and credit card receivables were Y95.4 billion and Y54.6 billion
at March 31, 2003 and 2002, respectively.
Toyota has continued to originate operating leases to finance new Toyota
vehicles. These leasing activities are subject to residual value risk. Residual
value risk arises when the lessee of a vehicle does not exercise the option to
purchase the vehicle at the end of the lease. The number of vehicles returned at
the end of leases has grown in recent years. For example, fewer than 20% of
vehicles leased by Toyota Motor Credit Corporation, Toyota's financing
subsidiary located in the United States, were returned at the end of the
applicable lease period during fiscal 1996, compared to a return rate of
approximately 50% during fiscal 2002 and 2003. To avoid a loss on a vehicle
returned to Toyota at the end of the lease, Toyota must resell or re-lease the
vehicle at or above the residual value of the vehicle. If Toyota is unable to
realize the residual value for the vehicle, it will incur a loss at the end of
the lease. This loss would offset any earnings on the lease. 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, sales and financing incentives in the automotive industry,
particularly in the United States, continued in fiscal 2003, adversely affecting
resale values. To the extent that sales incentives remain an integral part of
sales promotion (reducing new vehicle prices and cost of ownership), resale
prices of used vehicles and, correspondingly, the carrying value of Toyota's
leased vehicles could be subject to further downward pressure. As a result of
the depressed market prices of used vehicles, Toyota has incurred losses related
to residual values during each of the past three fiscal years.
Toyota maintains an overall risk management strategy to mitigate its exposure to
fluctuations in interest rates and currency exchange rates. Toyota enters into
interest rate swap agreements and cross currency interest rate swap agreements
to convert its fixed-rate debt to variable-rate functional currency debt. Toyota
formally documents relationships between the derivative instrument and the
hedged item, as well as its risk-management strategy for undertaking hedge
transactions. If Toyota elects fair value hedge accounting, derivative
instruments are designated with specific liabilities on Toyota's consolidated
balance sheet, and the fair value quarterly change component of each derivative
instrument and hedged item is included in the assessment of hedge effectiveness.
Most interest rate swap agreements are executed as an integral part of specific
debt transactions, achieving designated hedges. Toyota uses cross currency
interest rate swap agreements to entirely hedge exposure to exchange rate
fluctuations on principal and/or interest payments and to manage its exposure to
interest rate fluctuations. Certain derivative instruments are entered into to
hedge interest rate risk from an economic perspective and are not designated to
specific assets or liabilities on Toyota's consolidated balance sheet.
Accordingly, unrealized gains or losses related to derivatives that are not
designated to specific assets and liabilities on Toyota's consolidated balance
sheet are recognized currently. As a result, current earnings are impacted by
these non-designated derivatives. During fiscal 2003, earnings were unfavorably
impacted by the recognition of realized and unrealized losses on these
non-designated derivatives. Toyota does not use any derivative instruments for
trading purposes.
In addition, funding costs can affect the profitability of Toyota's financial
services operations. Funding costs are affected by a number of factors, some of
which are not in Toyota's control. These factors include general economic
conditions, prevailing interest rates and Toyota's financial strength. Funding
costs during fiscal 2003 decreased as a result of lower interest rates primarily
in the United States.
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At March 31, 2001, Toyota had a 49.9% ownership interest in The Chiyoda Fire and
Marine Insurance Company ('Chiyoda'), which was accounted for using the equity
method of accounting, and a 19.3% ownership interest in Dai-Tokyo Fire and
Marine Insurance Company Limited ('Dai-Tokyo'), which was accounted for as a
marketable security investment. On April 1, 2001, Chiyoda and Dai-Tokyo merged
with Dai-Tokyo being the surviving corporation and Dai-Tokyo changed its name to
Aioi Insurance Co., Ltd. ('Aioi'). Toyota's ownership interest in Aioi at the
merger was 33.4% and Toyota is accounting for its ownership in Aioi using the
equity method of accounting.
Other Business Operations
Toyota's other business operations include information technology and
telecommunications, intelligent transport systems, GAZOO, housing, marine,
biotechnology and afforestation, and industrial equipment and logistics systems.
The housing business, which is major business component in Toyota's other
business operations, operates in the prefabricated housing market.
Toyota was engaged in the telecommunications business through its subsidiary,
IDO Corporation ('IDO'). IDO was a provider of cellular services in Japan. On
October 1, 2000, IDO merged with two Japanese telecommunication companies and
Toyota's ownership interest in DDI Corporation ('KDDI'), the surviving entity,
became 13.3%. At the date of the transaction, IDO ceased to be a consolidated
subsidiary of Toyota and Toyota's ownership interest in KDDI is accounted for as
a marketable security investment.
On April 1, 2001, Toyota sold its industrial equipment business to Toyota
Industries Corporation (formerly, Toyoda Automatic Loom Works, Ltd.), an
affiliate of Toyota Motor Corporation that is accounted for using the equity
method of accounting.
Toyota does not expect its other business operations to provide a material
contribution to Toyota's consolidated results of operations.
Currency Fluctuations
Toyota is sensitive to fluctuations in foreign currency exchange rates. In
addition to the Japanese yen, Toyota is principally exposed to fluctuations in
the value of the U.S. dollar and the euro and to a lesser extent the British
pound. Toyota's consolidated financial statements, which are presented in
Japanese yen, are affected by foreign currency exchange fluctuations through
both translation risk and transaction risk. Changes in foreign currency exchange
rates may positively or negatively affect Toyota's revenues, gross margins,
operating costs and expenses, operating income, net income and retained
earnings.
Translation risk is the risk that Toyota's financial statements for a particular
period or for a particular date will be affected by changes in the prevailing
exchange rates of the currencies in those countries in which Toyota does
business against the Japanese yen. Even though the fluctuations of currencies
against the Japanese yen can be substantial and, therefore, significantly impact
comparisons with prior periods and among various geographic markets, the
translation effect is a reporting consideration and does not reflect Toyota's
underlying results of operations. Toyota does not hedge against translation
risk.
Transaction risk is the risk that the currency structure of Toyota's costs and
liabilities will deviate from the currency structure of sales proceeds and
assets. Transaction risk relates primarily to sales proceeds from Toyota's
non-domestic sales produced in Japan and, to a lesser extent, sales proceeds
from Toyota's continental European sales produced in the United Kingdom.
Toyota believes that the location of its production facilities in different
parts of the world has significantly reduced the level of transaction risk. As
part of its globalization strategy, Toyota has localized much of its production
by constructing production facilities in the major markets in which it sells its
vehicles. In 2002,
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Toyota produced 56% of Toyota's non-domestic sales outside Japan. In North
America, 58% of vehicles sold in 2002 were produced locally. In Europe, 43% of
vehicles sold in 2002 were produced locally. Local operations permit Toyota to
purchase many of the supplies and resources used in the production process in a
manner that matches the currencies of local revenues with the currencies of
local expenses.
Toyota also enters into currency borrowings and other hedging instruments to
address a portion of its transaction risk. This has reduced, but not eliminated,
the effects of foreign currency exchange rate fluctuations, which in some years
can be significant. See note 20 to Toyota's consolidated financial statements
for additional information regarding the extent of Toyota's use of derivative
financial instruments to hedge foreign currency exchange rate risks.
Generally, a weakening of the Japanese yen against other currencies has a
positive effect on Toyota's revenues, operating income and net income. A
strengthening of the Japanese yen against other currencies has the opposite
effect. The Japanese yen has on average been stronger against the U.S. dollar
during fiscal 2003, weaker against the U.S. dollar during fiscal 2002 and
stronger against the U.S. dollar during fiscal 2001. At the end of fiscal 2003,
2002 and 2001, the Japanese yen was stronger, weaker and weaker, respectively,
against the U.S. dollar in comparison to the end of the prior fiscal year.
During the first quarter of fiscal 2004, the Japanese yen was stronger against
the U.S. dollar, on an average basis, as compared to fiscal 2003, and was
particularly stronger, on an average basis, as compared to the first quarter of
fiscal 2003. The Japanese yen has on average been weaker against the euro during
fiscal 2003 and fiscal 2002 and stronger against the euro during fiscal 2001. At
the end of each of fiscal 2003, 2002 and 2001, the Japanese yen was weaker
against the euro in comparison to the end of the prior fiscal year.
Segmentation
Toyota's most significant business segment is its automotive operations. Toyota
carries out its automotive operations as a global competitor in the worldwide
automotive market and uses a worldwide approach to the management of its
automotive operations. In doing so, Toyota's management allocates resources to,
and assesses the performance of, its automotive operation on a worldwide basis
as a single segment. Toyota does not manage any subset of its automotive
operations, such as domestic or overseas operations or parts, as separate
segments.
The management of the automotive operations is aligned on a functional basis
with managers having oversight responsibility for the major operating functions
within the segment. Management assesses financial and non-financial data such as
units of sale, units of production, market share information, vehicle model
plans and plant location costs to allocate resources within the automotive
operations.
Geographical Breakdown
The following table sets forth Toyota's revenues from external customers in each
of its geographical markets for the past three fiscal years.
Year Ended March 31,
---------------------------------------------
2001 2002 2003
----------- ----------- -----------
(in millions)
Japan Y 6,340,590 Y 6,384,807 Y 6,621,054
North America 4,741,810 5,475,405 5,929,803
Europe 1,013,967 1,265,509 1,514,683
All Other Markets 858,870 1,064,587 1,436,013
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Results of Operations - Fiscal 2003 Compared with Fiscal 2002
Net Revenues
Toyota had net revenues for fiscal 2003 of Y15,501.6 billion, an increase of Y
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 Y15,590.3 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 Y14,794.0 billion compared to the
prior year and financing operations which increased during fiscal 2003 by 2.4%
to Y707.6 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 Y14,874.9 billion, a 10.2% increase, and revenues from
financing operations would have been approximately Y715.4 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 Y1,244.0 billion, or 9.5%, to Y
14,311.5 billion during fiscal 2003 compared with the prior year. The increase
resulted primarily from the approximate Y750.0 billion combined net impact of
increased vehicle unit sales and changes in sales mix, Y338.2 billion impact of
full year consolidation of Hino and Kuozui and increased parts and service
sales. These increases were partially offset by the Y77.4 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 Y14,388.8 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 Y26.9
billion, or 3.9%, to Y724.9 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 Y732.9 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 Y66.4 billion, or 9.1%,
to Y795.2 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 Y1,133.2 billion, or 8.7%, to Y
14,229.9 billion during fiscal 2003 compared with the prior year. The increase
resulted primarily from the approximate Y590.0 billion combined net impact on
cost of products sold of increased vehicle unit sales and changes in sales mix,
Y327.1 billion impact of full year consolidation of Hino and Kuozui, the impact
of increased parts and service sales, Y87.5 billion impact of higher selling,
general and administrative expenses and Y79.1 billion increase in research and
development expenses. These increases were partially offset by the approximate Y
290.0 billion impact of cost cutting efforts.
Continued cost cutting efforts reduced costs and expenses for fiscal 2003 by
approximately Y290.0 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 Y1,039.8 billion, or 9.6%, to Y11,914.2
billion during fiscal 2003 compared with the prior year. This increase (before
the elimination of intersegment amounts) reflects an increase of Y971.3 billion,
or 9.2%, for the automotive operations and an increase of Y68.2 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 Y35.3 billion, or 7.7%, to Y423.9
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 Y79.1 billion, or 13.4%, to Y
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 Y128.8 billion, or 7.3%, to Y1,891.8 billion
during fiscal 2003 compared with the prior year. This increase (before the
elimination of intersegment amounts) reflects an increase of Y83.7 billion, or
5.6%, for the automotive operations, an increase of Y76.8 billion, or 40.0%, for
the financial services operations and a decrease of Y9.3 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 Y178.0 billion, or 16.3%, to Y1,271.6
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 Y100.2 billion, or 11.9%, in Japan, Y15.2 billion, or
5.8%, in North America, Y32.6 billion, or 249.7 %, in all other markets compared
with the prior year and changed by Y32.5 billion to Y8.3 billion from a loss of
Y24.1 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 Y189.0
billion, or 17.9%, to Y1,246.9 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 Y14.8
billion, or 32.8%, to Y30.3 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 Y7.5 billion to Y4.5
billion during fiscal 2003 from a loss of Y3.0 billion in the prior year. This
increase primarily relates to general profitability improvements.
Other Income and Expenses
Interest and dividend income decreased by Y3.1 billion, or 5.6%, to Y52.7
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 Y3.7 billion, or 13.7%, to Y30.5 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 Y35.6 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 Y47.7 billion, or 31.7%, to Y102.8 billion during fiscal
2003 compared with the prior year. During fiscal 2002, there were gains of Y75.1
billion on exchange transactions relating to financial institutions in which
Toyota held ownership interests and losses of Y257.4 billion relating to
other-than temporary impairments on investment securities of which Y212.9
billion related to Toyota's investment in KDDI. During fiscal 2003, there were
losses of Y111.3 billion relating to other-than temporally impairments on
investment securities.
Income Taxes
Provision for income taxes increased by Y94.2 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 Y0.7 billion to Y
11.5 billion during fiscal 2003 compared with the prior year.
Equity in earnings of affiliated companies during fiscal 2003 increased by Y34.7
billion to Y52.8 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 Y194.4 billion, or 34.9%, to Y750.9 billion
during fiscal 2003 compared with the prior year.
Other Comprehensive Income and Loss
Other comprehensive income and loss changed by Y352.2 billion to a loss of Y
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 Y139.3 billion compared to a gain of Y133.9
billion in the prior year, an increase in minimum pension liability adjustments
during fiscal 2003 to Y172.0 billion compared to Y114.3 billion in the prior
year and an increase in unrealized holding losses on securities during fiscal
2003 to Y26.5 billion compared to Y3.6 billion in the prior year.
Results of Operations - Fiscal 2002 Compared with Fiscal 2001
Net Revenues
Toyota had net revenues for fiscal 2002 of Y14,190.3 billion, an increase of Y
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 Y13,387.8 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 Y13,499.6 billion compared to the
prior year and financing operations which increased during fiscal 2002 by 24.9%
to Y690.7 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 Y12,761.1 billion, a 2.9% increase, and revenues from
financing operations would have been approximately Y626.7 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 Y13,067.4 billion from Y11,591.1
billion in the prior year. The increase resulted primarily from the Y744.9
billion favorable impact of foreign currency translations rates, the approximate
Y510.0 billion combined impact of sales price increases and changes in sales mix
and the Y286.9 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 Y12,322.5 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 Y127.0
billion, or 22.2%, to Y698.0 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 Y
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 Y290.7 billion, or
28.5%, to Y728.8 billion during fiscal 2002 compared with the prior year. This
decrease resulted primarily from the Y241.5 billion impact of the disposal of
the industrial equipment business during fiscal 2002 and the Y193.7 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 Y
144.5 billion, or 24.7%, to Y728.8 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 Y932.2 billion, or 7.7%, to Y13,096.7
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 Y
396.8 billion impact of foreign currency translation rates, the Y281.4 billion
impact of the consolidation of Hino during fiscal 2002, the Y202.1 billion
impact of higher selling, general and administrative expenses during fiscal
2002, and the Y113.6 billion impact in increased research and development
expenses. These increases were partially offset by the Y260.0 billion impact of
cost cutting efforts, the Y237.4 billion impact of the disposal of the
industrial equipment business during fiscal 2002 and the Y181.2 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 Y260.0 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.
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Cost of products sold increased by Y655.9 billion, or 6.4%, to Y10,874.5 billion
during fiscal 2002 compared with the prior year. This increase (before the
elimination of intersegment amounts) reflects an increase of Y999.8 billion, or
10.5%, for the automotive operations and a decrease of Y230.3 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 Y209.1 billion impact of the disposal of
the industrial equipment business during fiscal 2002 and Y127.2 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 Y31.9 billion, or 7.5%, to Y459.2
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 Y589.3 billion during fiscal 2002
from Y475.7 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 Y244.5 billion, or 16.1%, to Y1,763.0 billion
during fiscal 2002 compared with the prior year. This increase (before the
elimination of intersegment amounts) reflects an increase of Y184.2 billion, or
14.0%, for the automotive operations, an increase of Y73.0 billion, or 61.3%,
for the financial services operations and a decrease of Y62.0 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 Y302.9 billion, or 38.3%, to Y1,093.6
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 Y220.9 billion, or 35.4%, in Japan, Y70.2 billion, or
36.1%, in North America, Y6.4 billion, or 96.6%, in other markets and operating
loss decreased by Y0.7 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 Y292.4
billion, or 38.2%, to Y1,057.9 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 Y13.4
billion, or 42.4%, to Y45.1 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 Y1.6 billion to Y3.0
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 Y15.6 billion, or 21.8%, to Y55.8
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 Y14.1 billion, or 34.5%, to Y26.8 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 Y5.9 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 Y442.5 billion to a loss of Y150.5 billion during fiscal
2002 from an income of Y292.0 billion in the prior year. During fiscal 2001,
there was a gain of Y181.0 billion on the disposal of the ownership interest in
IDO and a gain of Y161.2 billion relating to the contribution of certain
marketable securities to an employee retirement benefit trust. During fiscal
2002, there were gains of Y75.1 billion on exchange transactions relating to
financial institutions where Toyota held ownership interests and losses of Y
257.4 billion relating to other than temporary impairments on investment
securities of which Y212.9 billion related to Toyota's investment in KDDI.
Income Taxes
Provision for income taxes decreased by Y101.1 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 Y1.3 billion to Y
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 Y85.5
billion to Y18.1 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 Y118.3 billion, or 17.5%, to Y556.6 billion
during fiscal 2002 compared with the prior year.
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Other Comprehensive Income and Loss
Other comprehensive loss changed by Y 172.3 billion, to an income of Y15.2
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 Y3.6 billion compared to Y305.0 billion in the prior year and
were partially offset by an increase in other comprehensive loss to Y114.3
billion relating to minimum pension liability adjustment compared to Y13.4
billion in the prior year and a decrease in a foreign currency translation
adjustments gain during fiscal 2002 to Y133.9 billion compared to a gain of Y
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 Y776.0 billion and Y66.0
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 Y
135.7 billion. Toyota recorded impairments on retained interests totaling Y2.4
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.
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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 Y 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
----------------------------------------------------------------------------------------------------------------------
Less than After
Total 1 year 1 to 3 years 4 to 5 years 5 years
----------------------------------------------------------------------------------------------------------------------
Short-term borrowings (note 13)
Loans Y 774,880 Y 774,880 Y - Y - Y -
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 40,027 9,511 13,254 6,422 10,840
obligations (note 22)
Total
Amount of
Commitments
-----------
Yen in
millions
-----------
Commercial Commitments (note 23)
Commitments for the purchase of property, plant and other assets Y 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;
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• 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.
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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.
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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,
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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 Y2,085.0 billion for fiscal 2003,
compared to Y1,532.7 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 Y2,146.4 billion for fiscal 2003,
compared to Y1,810.8 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 Y37.7 billion for fiscal 2003,
compared to Y392.1 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 Y1,005.9 billion during fiscal 2003, an
increase of 7.0% over the Y940.5 billion in expenditures for the prior year. The
increase in capital expenditures resulted primarily from the impact of full year
consolidation
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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 Y604.3
billion during fiscal 2003, a decrease of 0.6% over the Y608.0 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 Y920.0 billion during fiscal 2004. Toyota's
expected capital expenditures include approximately Y40.0 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 Y1,592.0 billion at March 31, 2003. Most of
Toyota's cash and cash equivalents are held in Japanese yen. In addition, time
deposits were Y55.4 billion and marketable securities were Y605.5 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 Y150.7 billion, or 4.8%, to Y3,295.7 billion.
Trade accounts and notes receivable, net increased during fiscal 2003 by Y18.9
billion, or 1.3%, to Y1,475.8 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 Y64.0 billion, or 6.7%, to Y1,025.8
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 Y383.0 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 Y412.6
billion during fiscal 2003.
Marketable securities and other securities investment including those included
in current assets increased during fiscal 2003 by Y125.7 billion, or 5.9%, to Y
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 Y96.9 billion, or
1.9%, reflecting an increase of capital expenditures, which was partially offset
by depreciation and the change in foreign currency translation rates.
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Accounts payable increased during fiscal 2003 by Y110.9 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 Y135.3 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 Y27.0 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 Y549.1 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 Y
30.1 billion, or 1.6%, to Y1,855.6 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 Y104.2 billion, or 9.0%, to Y1,263.0 billion and the
non-current portion increased by Y414.8 billion, or 11.1%, to Y4,137.5 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 Y1,414.0 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
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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:
• reducing the number of vehicle platforms,
• 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
• using computers for production design and its evaluation.
In July 2001, Toyota also agreed to work with PSA Peugeot Citroen 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 Y668 billion
in fiscal 2003, Y589 billion in fiscal 2002 and Y476 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'.
5.D TREND INFORMATION
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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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A DIRECTORS AND SENIOR MANAGEMENT
In June 2003, Toyota implemented a comprehensive reorganization of its senior
management structure. As part of this reorganization, Toyota introduced a
streamlined board of directors and established the new position of non-board
managing officer. Senior Managing Directors serve as the highest authorities in
their respective areas of supervision and oversee the daily operations of
specific fields/divisions in conjunction with non-board managing officers.
Toyota believes this new management system will enhance its global
competitiveness by promoting timely, hands-on decision-making for day-to-day
operational matters. The 39 non-board managing officers generally have
responsibility for Toyota's daily operations in specific fields/divisions, and
are appointed for one-year terms. In addition, Toyota appointed an additional
outside corporate auditor in order to strengthen the corporate auditing efforts
of its board of auditors.
Name Age Title Date First Elected to
----------------------------------- --- ---------------------------------
Board or as Auditor
---------------------------------
Hiroshi Okuda 70 Chairman of the Board July 1982
Iwao Isomura 70 Vice Chairman of the Board September 1984
Kosuke Ikebuchi 66 Vice Chairman of the Board September 1988
Fujio Cho 66 President, Member of the Board September 1988
Akihiko Saito 63 Executive Vice President, Member September 1991
of the Board
Ryuji Araki 63 Executive Vice President, Member September 1992
of the Board
Yoshio Ishizaka 63 Executive Vice President, Member September 1992
of the Board
Kosuke Shiramizu 62 Executive Vice President, Member September 1992
of the Board
Katsuaki Watanabe 61 Executive Vice President, Member September 1992
of the Board
Kazushi Iwatsuki 62 Executive Vice President, Member June 1999
of the Board
Katsuhiro Nakagawa 61 Executive Vice President, Member June 2001
of the Board
Yasuhito Yamauchi 61 Senior Managing Director, Member June 1995
of the Board
Zenji Yasuda 61 Senior Managing Director, Member June 1996
of the Board
Takashi Kamio 60 Senior Managing Director, Member June 1996
of the Board
Hiroyuki Watanabe 60 Senior Managing Director, Member June 1996
of the Board
Akio Matsubara 61 Senior Managing Director, Member June 1996
of the Board
Tokuichi Uranishi 61 Senior Managing Director, Member June 1996
of the Board
Kazuo Okamoto 59 Senior Managing Director, Member June 1996
of the Board
Kyoji Sasazu 59 Senior Managing Director, Member June 1997
of the Board
Mitsuo Kinoshita 57 Senior Managing Director, Member June 1997
of the Board
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Date First Elected to
Name Age Title Board or as Auditor
---------------------------------------------------------------------------------------------------------------------
Yoshimi Inaba 57 Senior Managing Director, Member June 1997
of the Board
Teruyuki Minoura 59 Senior Managing Director, Member June 1998
of the Board
Takeshi Uchiyamada 56 Senior Managing Director, Member June 1998
of the Board
Masatami Takimoto 57 Senior Managing Director, Member June 1999
of the Board
Akio Toyoda 47 Senior Managing Director, Member June 2000
of the Board
Shoichiro Toyoda 78 Honorary Chairman of the Board July 1952
Shuhei Toyoda 56 Director, Member of the Board June 1998
Hideaki Miyahara 61 Corporate Auditor June 2000
Yoshiro Hayashi 55 Corporate Auditor June 2003
Chiaki Yamaguchi 53 Corporate Auditor June 2003
Yasutaka Okamura 74 Corporate Auditor June 1997
Hiromu Okabe 66 Corporate Auditor June 2002
Yoichi Kaya 69 Corporate Auditor June 2003
Tadashi Ishikawa 61 Corporate Auditor June 2003
The term of each director listed above expires in June 2004.
Biographies
Hiroshi Okuda has served as a Director, Member of the Board of Toyota Motor
Corporation since 1982 and as the Chairman of the Board since 1999. Mr. Okuda
served as the President, Member of the Board of Toyota from 1995 to 1999. Mr.
Okuda also serves as a Director of KDDI Corporation. Mr. Okuda joined Toyota in
1955.
Iwao Isomura has served as a Director, Member of the Board of Toyota Motor
Corporation since 1984 and as the Vice Chairman of the Board since 1996. Mr.
Isomura served as an Executive Vice President, Member of the Board of Toyota
from 1992 to 1996. Mr. Isomura also serves as a Director of Central Japan
Railway Company and as a Director of UFJ Holdings, Inc. Mr. Isomura joined
Toyota in 1956.
Kosuke Ikebuchi has served as a Director, Member of the Board of Toyota Motor
Corporation since 1988 and as the Vice Chairman of the Board since 2001. Mr.
Ikebuchi served as an Executive Vice President, Member of the Board of Toyota
from 1999 to 2001. Mr. Ikebuchi joined Toyota in 1960.
Fujio Cho has served as a Director, Member of the Board of Toyota Motor
Corporation since 1988 and as the President, Member of the Board of Toyota since
1999. Mr. Cho served as an Executive Vice President, Member of the Board of
Toyota from 1998 to 1999 and as the President of Toyota Motor Manufacturing,
U.S.A., Inc. from 1988 to 1994. Mr. Cho also serves as a Director of Aioi
Insurance Co., Ltd. Mr. Cho joined Toyota in 1960.
Akihiko Saito has served as a Director, Member of the Board of Toyota Motor
Corporation since 1991 and as an Executive Vice President, Member of the Board
since 2001. Mr. Saito also serves as a Director of Toyoda Boshoku Corporation.
Mr. Saito joined Toyota in 1968.
Ryuji Araki has served as a Director, Member of the Board of Toyota Motor
Corporation since 1992 and as an Executive Vice President, Member of Board since
2001. Mr. Araki has also served as Chief Finance & Accounting Officer of Toyota
since 2003. Mr. Araki also serves as the Chairman of Toyota Financial Services
(UK) PLC. Mr. Araki also serves as Director of New United Motor Manufacturing,
Inc. Mr. Araki joined Toyota in 1962.
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Yoshio Ishizaka has served as a Director, Member of the Board of Toyota Motor
Corporation since 1992 and as an Executive Vice President, Member of the Board
since 2001. Mr. Ishizaka has also served as the President of Toyota Motor Sales,
U.S.A., Inc. between 1996 and 1999 and as the Chairman of Toyota Motor Marketing
Europe S.A./N.V. since 2001. Mr. Ishizaka joined Toyota in 1964.
Kosuke Shiramizu has served as a Director, Member of the Board of Toyota Motor
Corporation since 1992 and as an Executive Vice President, Member of the Board
since 2001. Mr. Shiramizu also serves as the Chairman of Toyota Motor Technical
Center (China) Co., Ltd. Mr. Shiramizu joined Toyota in 1963.
Katsuaki Watanabe has served as a Director, Member of the Board of Toyota Motor
Corporation since 1992 and as an Executive Vice President, Member of the Board
since 2001. Mr. Watanabe also serves as a Vice Chairman of Gamagori Marine
Development Co., Ltd. and as a Director of Mitsubishi Securities Co., Ltd. Mr.
Watanabe joined Toyota in 1964.
Kazushi Iwatsuki has served as a Senior Managing Director, Member of the Board
of Toyota Motor Corporation since 1999 and as an Executive Vice President,
Member of the Board since 2001. Mr. Iwatsuki has also served as the President of
Osaka Toyopet Co., Ltd. from 1997 to 1999. Mr. Iwatsuki joined Toyota in 1964.
Katsuhiro Nakagawa has served as a Managing Director, Member of the Board of
Toyota Motor Corporation since 2001 and as an Executive Vice President, Member
of the Board since 2003. Mr. Nakagawa served as the Executive Advisor of The
Tokio Marine and Fire Insurance Co., Ltd. between 1998 and 2001. Mr. Nakagawa
was the Vice-Minister for International Affairs at the former Japanese Ministry
of International Trade and Industry before joining The Tokio Marine and Fire
Insurance Co., Ltd. Mr. Nakagawa joined Toyota in 2001.
Yasuhito Yamauchi has served as a Director, Member of the Board of Toyota Motor
Corporation since 1995 and as a Senior Managing Director, Member of the Board
since 2001. Mr. Yamauchi has served as the Chief Production Engineering Officer
and Chief Manufacturing Officer of Toyota since 2003. Mr. Yamauchi joined Toyota
in 1968.
Zenji Yasuda has served as a Director, Member of the Board of Toyota Motor
Corporation since 1996 and as a Senior Managing Director, Member of the Board
since 2001. Mr. Yasuda has served as the Chief Overseas Planning Officer and
Chief Overseas Customer Service Operations Officer of Toyota since 2003. Mr.
Yasuda joined Toyota in 1965.
Takashi Kamio has served as a Director, Member of the Board of Toyota Motor
Corporation since 1996 and as a Senior Managing Director, Member of the Board
since 2001. Mr. Kamio has served as the Chief Government and Public Affairs
Officer of Toyota since 2003. Mr. Kamio joined Toyota in 1965.
Hiroyuki Watanabe has served as a Director, Member of the Board of Toyota Motor
Corporation since 1996 and as a Senior Managing Director, Member of the Board
since 2001. Mr. Watanabe has served as the Chief IT & ITS Officer and Chief
Quality Control Officer of Toyota since 2003. Mr. Watanabe joined Toyota in
1967.
Akio Matsubara has served as a Director, Member of the Board of Toyota Motor
Corporation since 1996 and as a Senior Managing Director, Member of the Board
since 2003. Mr. Matsubara has served as the Chief General Administration & Human
Resources Officer and the Chief Information Systems Officer of Toyota since
2003. Mr. Matsubara joined Toyota in 1966.
Tokuichi Uranishi has served as a Director, Member of the Board of Toyota Motor
Corporation since 1996 and as a Senior Managing Director, Member of the Board
since 2003. Mr. Uranishi has also served as the Chief Europe & Africa Operations
Officer of Toyota since 2003. Mr. Uranishi joined Toyota in 1966.
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Kazuo Okamoto has served as a Director, Member of the Board of Toyota Motor
Corporation since 1996 and as a Senior Managing Director, Member of the Board
since 2003. Mr. Okamoto has also served as the Chief Design Officer and Chief
Product Development Officer of Toyota since 2003. Mr. Okamoto joined Toyota in
1967.
Kyoji Sasazu has served as a Director, Member of the Board of Toyota Motor
Corporation since 1997 and as a Senior Managing Director, Member of the Board
since 2003. Mr. Sasazu has also served as the Chief Domestic Sales Operations
Officer of Toyota since 2003. Mr. Sasazu joined Toyota in 1967.
Mitsuo Kinoshita has served as a Director, Member of the Board of Toyota Motor
Corporation since 1997 and as a Senior Managing Director, Member of the Board
since 2003. Mr. Kinoshita has also served as the Chief Production Control &
Logistics Officer of Toyota since 2003. Mr. Kinoshita joined Toyota in 1968.
Yoshimi Inaba has served as a Director, Member of the Board of Toyota Motor
Corporation since 1997 and as a Senior Managing Director, Member of the Board
since 2003. Mr. Inaba has also served as the Chief The Americas Operations
Officer and Chief Oceania, Middle East and Southwest Asia Operations Officer of
Toyota since 2003. Mr. Inaba joined Toyota in 1968.
Teruyuki Minoura has served as a Director, Member of the Board of Toyota Motor
Corporation since 1998 and as a Senior Managing Director, Member of the Board
since 2003. Mr. Minoura has also served as the Chief Business Development
Officer, Chief Purchasing Officer, and Chief Housing (Housing Company) Officer
of Toyota since 2003. Mr. Minoura joined Toyota in 1967.
Takeshi Uchiyamada has served as a Director, Member of the Board of Toyota Motor
Corporation since 1998 and as a Senior Managing Director, Member of the Board
since 2003. Mr. Uchiyamada has also served as the Chief Vehicle Engineering
Officer of Toyota since 2003. Mr. Uchiyamada joined Toyota in 1969.
Masatami Takimoto has served as a Director, Member of the Board of Toyota Motor
Corporation since 1999 and as a Senior Managing Director, Member of the Board
since 2003. Mr. Takimoto has also has served as the Chief Power Train
Development Officer and Chief Fuel Cell System Development Officer of Toyota
since 2003. Mr. Takimoto joined Toyota in 1970.
Akio Toyoda has served as a Director, Member of the Board of Toyota Motor
Corporation since 2000 and as a Senior Managing Director, Member of the Board
since 2003. Mr. Toyoda has also served as the Chief Asia & China Operations
Officer of Toyota since 2003. Mr. Toyoda joined Toyota in 1984.
Shoichiro Toyoda has served as a Director, Member of the Board of Toyota Motor
Corporation since 1952. Dr. Toyoda is currently the Honorary Chairman of the
Board of Toyota Motor Corporation. Dr. Toyoda joined Toyota in 1952.
Shuhei Toyoda has served as a Director, Member of the Board of Toyota Motor
Corporation since 1998. Mr. Toyoda has also served as the President of Toyota
Motor Engineering & Manufacturing Europe S.A./N.V. since 2001, and as the
President of Toyota Motor Europe S.A./N.V. since 2002. Mr. Toyoda joined Toyota
in 1977.
Hideaki Miyahara has served as a Corporate Auditor of Toyota Motor Corporation
since 2000. Mr. Miyahara served as a Director, Member of the Board of Toyota
from 1996 to 1999 and as a Managing Director, Member of the Board from 1999 to
2000. Mr. Miyahara joined Toyota in 1965.
Yoshiro Hayashi has served as a Corporate Auditor of Toyota Motor Corporation
since 2003. Mr. Hayashi also served as the General Manager of Toyota's TQM
Promotion Division from 1999 to 2003. Mr. Hayashi joined Toyota in 1974.
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Chiaki Yamaguchi has served as a Corporate Auditor of Toyota Motor Corporation
since 2003. Mr. Yamaguchi also served as the Senior Managing Director of Toyota
Finance Corporation from 2001 to 2003. Mr. Yamaguchi joined Toyota in 1972.
Yasutaka Okamura has served as a Corporate Auditor of Toyota Motor Corporation
since 1997. Mr. Okamura is an attorney at the Okamura Legal Offices. Mr. Okamura
has been registered as a practicing lawyer since 1994.
Hiromu Okabe has served as a Corporate Auditor of Toyota Motor Corporation since
2002. Mr. Okabe is the Vice Chairman of the Board of Denso Corporation.
Yoichi Kaya has served as a Corporate Auditor of Toyota Motor Corporation since
2003. Mr. Kaya is the Assistant Director of the Research Institute of Innovative
Technology for the Earth.
Tadashi Ishikawa has served as a Corporate Auditor of Toyota Motor Corporation
since 2003. Mr. Ishikawa is the President of Toyota Industries Corporation.
Akio Toyoda is Shoichiro Toyoda's son. There are no other family relationships
between directors and/or corporate auditors.
None of the persons listed above was selected as a director, corporate auditor
or member of senior management pursuant to an arrangement or understanding with
Toyota's major shareholders, customers, suppliers or others.
6.B COMPENSATION OF DIRECTORS AND CORPORATE AUDITORS
The aggregate amount of remuneration, including bonuses but excluding stock
options, paid to all directors and corporate auditors as a group by Toyota for
services in all capacities during fiscal 2003 was Y2,444 million. Directors and
corporate auditors of Toyota Motor Corporation receive year-end bonuses, the
aggregate amount of which is approved at Toyota Motor Corporation's annual
general meeting of shareholders and is based on Toyota Motor Corporation's
financial performance for the fiscal year. The amounts of the bonuses paid to
individual directors and corporate auditors are then determined at a meeting of
Toyota Motor Corporation's board of directors and the meeting of corporate
auditors.
Toyota Motor Corporation also granted to its directors 465,000 stock options
during fiscal 2003 under its stock option plan. For a detailed description of
the stock options and the stock option plan, see '- Share Ownership'.
In accordance with customary Japanese business practice, when a director or
corporate auditor of Toyota Motor Corporation retires, a proposal to pay a lump
sum retirement allowance is submitted to a general meeting of shareholders for
approval. The amount of the retirement allowance for a director or corporate
auditor generally reflects his position at the time of retirement, the length of
his service as a director or corporate auditor and his contribution to Toyota
Motor Corporation's performance. No reserves are accumulated for payment of
these allowances.
During fiscal 2003, Toyota paid retirement allowances aggregating Y306 million
to retiring directors and corporate auditors.
6.C BOARD PRACTICES
Toyota's articles of incorporation provide for a board of directors of not more
than 30 members and for not more than seven corporate auditors. Shareholders
elect the directors and corporate auditors at general meetings of shareholders.
The normal term of office of a director is one year and of a corporate auditor
is three years (four
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years for corporate auditors elected in or after June 2003). Directors and
corporate auditors may serve any number of consecutive terms. In June 2003,
pursuant to the implementation of a comprehensive reorganization of its senior
management structure, Toyota reduced the size of its board of directors from 58
directors to 27 directors.
The board of directors may elect one Chairman of the Board, one President and
one or more Vice Chairmen of the Board, Executive Vice Presidents and Senior
Managing Directors. The board of directors elects, pursuant to its resolutions,
one or more Representative Directors. Each Representative Director represents
Toyota generally in the conduct of its affairs. The board of directors has the
ultimate responsibility for the administration of Toyota's affairs. None of
Toyota's directors is party to a service contract with the company that provides
for benefits upon termination of employment.
Under Japan's Commercial Code, Toyota must have at least three corporate
auditors. At least one must be an outside corporate auditor. Together, these
corporate auditors form a board of corporate auditors. The corporate auditors
have the duty to examine the financial statements and business reports which are
submitted by the board of directors to the general meeting of shareholders. The
corporate auditors also supervise the administration of Toyota's affairs by the
directors. Corporate auditors are not required to be, and Toyota's corporate
auditors are not, certified public accountants. They are required to participate
in meetings of the board of directors but are not entitled to vote.
Toyota does not have a remuneration committee.
6.D EMPLOYEES
The total number of Toyota employees, on a consolidated basis, as reported in
Toyota's annual Japanese securities report filed with the director of the Kanto
Local Finance Bureau was 264,096 at March 31, 2003, 246,702 at March 31, 2002
and 215,648 at March 31, 2001. The following tables set forth a breakdown of
persons employed by business segment and by geographic location at March 31,
2003.
Segment Number of Location Number of
----------------------------------- -------------------------------
Employees Employees
--------- ---------
Automotive 234,653 Japan 179,039
Financial services 5,711 North America 30,775
All other 18,750 Europe 14,418
Unallocated 4,982 Other foreign countries 39,864
--------- ---------
Total company 264,096 Total company 264,096
--------- ---------
As a result of Toyota's business plan to further localize its global operations,
the number of Toyota's employees in the countries in which Toyota operates has
generally been growing over the last several years.
Most regular employees of Toyota Motor Corporation and its consolidated
subsidiaries in Japan, other than management, are required to become members of
the labor unions that comprise the FEDERATION OF ALL TOYOTA WORKERS' UNIONS.
Approximately 89% of Toyota Motor Corporation's regular employees in Japan are
members of this union.
In Japan, basic wages and other working conditions are negotiated annually. In
addition, in accordance with Japanese national custom, each employee is also
paid a semiannual bonus. Bonuses are negotiated at the time of wage negotiations
and are based on Toyota's financial results, prospects and other factors. The
average wage increases per employee, excluding bonuses, in Japan have been
approximately 2.0% per year for the past five fiscal years.
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In North America, Toyota's workers at its facilities in California are
unionized. The collective bargaining agreement for these workers expires in July
2004. Toyota's workers at its joint venture with General Motors are also
unionized. The collective bargaining agreement for these workers expires in
August 2005.
In general, Toyota considers its labor relations with all of its workers to be
good. However, Toyota is currently a party to, and otherwise from time to time
experiences, labor disputes in some of the countries in which it operates.
Toyota does not expect any disputes to which it is currently a party to
materially affect Toyota's consolidated financial position.
During fiscal 2003, Toyota averaged 5,010 part-time employees at the end of each
month.
6.E SHARE OWNERSHIP
The following table sets forth information with respect to the number of shares
of Toyota's common stock held by each director and corporate auditor as of June
2003.
Name Number of
--- Shares
-----------
Hiroshi Okuda 64,963
Iwao Isomura 20,300
Kosuke Ikebuchi 15,080
Fujio Cho 25,105
Akihiko Saito 116,757
Ryuji Araki 108,293
Yoshio Ishizaka 12,310
Kosuke Shiramizu 10,000
Katsuaki Watanabe 12,171
Kazushi Iwatsuki 12,110
Katsuhiro Nakagawa 7,000
Yasuhito Yamauchi 10,936
Zenji Yasuda 22,675
Takashi Kamio 15,100
Hiroyuki Watanabe 6,315
Akio Matsubara 14,044
Tokuichi Uranishi 15,333
Kazuo Okamoto 11,264
Kyoji Sasazu 12,092
Mitsuo Kinoshita 10,070
Yoshimi Inaba 15,000
Teruyuki Minoura 6,116
Takeshi Uchiyamada 10,464
Masatami Takimoto 10,100
Akio Toyoda 529,891
Shoichiro Toyoda 15,136,193
Shuhei Toyoda 222,207
Hideaki Miyahara 19,600
Yoshiro Hayashi 5,000
Chiaki Yamaguchi 5,000
Yasutaka Okamura -
Hiromu Okabe -
Yoichi Kaya -
Tadashi Ishikawa 3,000
Total 16,484,489
-------
Each of the persons listed above owns less than one percent of the issued and
outstanding shares of common stock of Toyota. The shares listed above do not
include options that are exercisable for shares of Toyota's common stock. For a
description of these options, see '- Stock Options' below.
None of Toyota's shares of common stock entitles the holder to any preferential
voting rights.
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Stock Options
Toyota has enacted stock option plans in each of the past five years. These
plans were approved by Toyota's shareholders in June of 1999, 2000, 2001, 2002
and 2003. Under the plan enacted in 1999, Toyota issued options to purchase up
to 465,000 shares of common stock to its directors. Under the plan enacted in
2000, Toyota issued options to purchase up to 455,000 shares of common stock to
its directors. Under the plan enacted in 2001, Toyota issued options to purchase
up to 1,361,000 shares of common stock to its directors and 408 other employees
that held the two highest ranks at Toyota at the time the plan was approved.
Under the plan enacted in 2002, Toyota issued stock acquisition rights, which
are rights introduced as of April 2002 pursuant to the amendment to the
Commercial Code, to purchase up to 1,876,000 shares of common stock to its
directors and 496 officers and employees, including directors, officers and
employees of its subsidiaries and one Toyota affiliate. Under the 2003 plan,
Toyota is authorized to issue stock acquisition rights to purchase up to
1,958,000 shares of common stock to its directors and 565 officers and
employees, including directors, officers and employees of its subsidiaries and
one Toyota affiliate.
Pursuant to the provisions of each plan enacted prior to 2002, options may be
exercised during a two-year period that starts two years from the date first
granted at an exercise price of 1.025 times the closing price of Toyota's common
stock on the Tokyo Stock Exchange on the date of grant. Each plan provides that
each director will be granted no more than 15,000 and no less than 5,000 options
and the year 2001 plan provides that each eligible employee will be granted
2,000 options. Each option represents one share of common stock of Toyota.
Pursuant to the provisions of the 2002 and 2003 plans, stock acquisition rights
may be exercised during a four-year period that starts two years from the date
first granted at an exercise price of 1.025 times the closing price of Toyota's
common stock on the Tokyo Stock Exchange on the date of grant. The 2002 plan
provides that each director will be granted no more than 200 and no less than
100 stock acquisition rights, and each eligible officer or employee will be
granted no more than 100 and no less than 20 stock acquisition rights. The 2003
plan provides that each director will be granted no more than 200 and no less
than 150 stock acquisition rights, and each eligible officer or employee will be
granted no more than 100 and no less than 20 stock acquisition rights. One
hundred shares will be issued or delivered upon the exercise of each stock
acquisition right. The options are granted on August 1 of each year.
Each plan further provides that an option holder who retires while his options
are still exercisable retains the right to exercise his options until the
earlier of: (i) six months after his retirement, or (ii) four years (six years
under the 2002 plan) after the date the options were first granted. Under the
2003 plan, an option holder who retires while his options are still exercisable
retains the right to exercise his shares until six years after the date the
options were first granted. An option holder's right to purchase common stock
under each plan lapses automatically upon his death.
The following table summarizes information for options outstanding and
exercisable at March 31, 2003:
Outstanding Exercisable
---------------------------------------------------------------------------------------------------------------------
Number Weighted- Weighted- Weighted- Weighted- Weighted-
Exercise of average average average Number average average
Price price exercise exercise remaining of exercise exercise
range shares price price life shares price price
---------------------------------------------------------------------------------------------------------------------
(Yen) (Yen) (Dollars) (Years) (Yen) (Dollars)
Y2,958 - 4,000 1,876,000 Y 2,958 $ 25 5.33 - - -
Y4,001 - 4,838 1,941,000 Y 4,304 $ 36 1.86 625,000 Y 4,503 $ 37
During 2001, Toyota adopted an incentive plan with terms similar to its stock
option plans described above. Under the plan, 58 directors, officers and
employees of Toyota subsidiaries and one Toyota affiliate, each located outside
Japan, are eligible to receive 2,000 options.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A MAJOR SHAREHOLDERS
As of March 31, 2003, 3,451,617,645 shares (excluding treasury shares) of
Toyota's common stock were outstanding. Beneficial ownership of Toyota's common
stock in the table below was prepared from publicly available records of the
filings made by Toyota's shareholders regarding their ownership of Toyota's
common stock under the Securities and Exchange Law of Japan.
Under the Securities and Exchange Law of Japan, any person who becomes,
beneficially and solely or jointly, a holder, including, but not limited to, a
deemed holder who manages shares for another holder pursuant to a discretionary
investment agreement, of more than 5% of the shares with voting rights of a
company listed on a Japanese stock exchange (including ADSs representing such
shares) must file a report concerning the shareholding with the Director of the
relevant local finance bureau. A similar report must be filed, with certain
exceptions, if the percentage of shares held by a holder, solely or jointly, of
more than 5% of the total issued shares of a company increases or decreases by
1% or more, or if any change to a material matter set forth in any previously
filed reports occurs.
Based on publicly available information, the following table sets forth the
beneficial ownership of holders of more than 5% of Toyota's common stock as of
the dates indicated in the reports described below.
Name of Beneficial Owner Number of Percentage
-------------- Shares of
----------- Shares
Outstanding
-----------
UFJ Bank Limited 217,135,458 6.01
Toyota Industries Corporation 187,115,312 5.18
The number of shares owned by UFJ Bank Limited (a successor in interest to The
Sanwa Bank, Limited and The Tokai Bank, Limited that was created by a merger
between the two banks as of January 15, 2002) is based on a report filed under
the Securities and Exchange Law of Japan stating that, as of April 30, 2003, UFJ
Bank Limited and its subsidiaries directly held 128,118,358 shares, and was
deemed to hold beneficially, pursuant to investment or trust contracts,
89,049,200 shares of Toyota's common stock.
The number of shares owned by Toyota Industries Corporation (formerly, Toyoda
Automatic Loom Works, Ltd.) is based on a report filed under the Securities and
Exchange Law of Japan stating that Toyota Industries Corporation held or was
deemed to hold beneficially, as of November 13, 1995, 187,115,312 shares of
Toyota's common stock.
Based on information made publicly available on or after January 1, 2000, the
following table describes transactions resulting in 1% or greater change in
the percentage ownership held by major beneficial owners of Toyota's common
stock.
Shares Owned Number of Shares Owned Percentage
Name of Shareholder Date of Transaction Prior to Percentage of Shares After the of Shares
Transaction Shares Issued Changed Transaction Issued
-----------------------------------------------------------------------------------------------------------------------
The Sanwa Bank, Limited October 31, - - - 192,402,730 5.14
and its joint holders 2000
The Sanwa Bank, Limited April 2, 2001 191,706,330 5.12 225,519,895 417,226,225 11.31
and its joint holders*
Sumitomo Mitsui Banking April 30, 2001 - - - 186,315,239 5.06
Corporation and its joint
holder
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Shares Owned Number of Shares Owned Percentage
Name of Shareholder Date of Transaction Prior to Percentage of Shares After the of Shares
Transaction Shares Issued Changed Transaction Issued
-----------------------------------------------------------------------------------------------------------------------
The Sanwa Bank, May 17, 2001 417,226,225 11.31 (37,414,900) 379,811,325 10.31
Limited, The Tokai
Bank, Limited and
their joint holders
The Sanwa Bank, October 31, 378,027,758 10.26 (45,710,200) 332,317,558 9.10
Limited, The Tokai 2001
Bank, Limited and
their joint holders
UFJ Bank Limited** January 31, 332,317,558 9.10 (38,857,900) 293,459,658 8.04
and its joint holders 2002
Sumitomo Mitsui October 31, 186,315,239 5.06 (67,881,090) 118,434,149 3.28
Banking Corporation 2002
and its joint holder
UFJ Bank Limited and April 30, 255,060,258 7.07 (37,9214,80) 217,135,458 6.01
its joint holders 2003
--------
* The Tokai Bank, Limited became a joint holder as of April 2, 2001.
** Created by a merger between The Sanwa Bank, Limited and The Tokai Bank, Limited on January 15, 2002. The
percentage holding of shares issued by UFJ Bank Limited and its joint holders was changed to 7.80 as of April
30, 2002.
According to The Bank of New York, depositary for Toyota's ADSs, as of March 31,
2003, 18,582,144 shares of Toyota's common stock were held in the form of ADRs
and there were 1,896 ADR holders of record in the United States. According to
Toyota's register of shareholders, as of March 31, 2003, there were 381,901
holders of common stock of record worldwide. As of March 31, 2003, there were
239 record holders of Toyota's common stock with addresses in the United States,
whose shareholdings represented approximately 5.6% of the outstanding common
stock on that date. Because some of these shares were held by brokers or other
nominees, the number of record holders with addresses in the United States might
not fully show the number of beneficial owners in the United States.
None of Toyota's shares of common stock entitles the holder to any preferential
voting rights.
Toyota knows of no arrangements the operation of which may at a later time
result in a change of control.
7.B RELATED PARTY TRANSACTIONS
Business Relationships
Toyota purchases materials, supplies and services from numerous suppliers
throughout the world in the ordinary course of business, including Toyota's
equity-method affiliates and those firms with which certain members of Toyota's
board of directors are affiliated. Toyota purchased materials, supplies and
services from these affiliated entities in the amount of Y3,725 billion in
fiscal 2003. Toyota also sells its products and services to Toyota's
equity-method affiliates and firms with which certain members of Toyota's board
of directors are affiliated. Toyota sold products and services to these
affiliated entities in the amount of Y921.6 billion in fiscal 2003. Toyota
believes all of these purchase and sale transactions were arm's-length
transactions. See note 12 of Toyota's consolidated financial statements for
additional information regarding Toyota's investments in and transactions with
affiliated companies.
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Loans
Toyota regularly has trade accounts and other receivables payable by, and
accounts payable to, Toyota's equity-method affiliates and firms with which
certain members of Toyota's board of directors are affiliated. Toyota had
outstanding trade accounts and other receivables payable by these affiliated
entities in the amount of Y221.2 billion as of March 31, 2003. Toyota had
accounts payable to these affiliated entities in the amount of Y452.2 billion as
of March 31, 2003.
Toyota held convertible debt securities issued by Toyota's equity-method
affiliates and firms with which certain members of Toyota's board of directors
are affiliated in the amount of Y49.0 billion as of March 31, 2003. The debt
securities have interest rates ranging between 0.35% and 2.00%. The maturities
of these debt securities range from one to three years.
Toyota, from time to time, provides short- to medium-term loans to its
affiliates, as well as loans under a loan program established by certain
subsidiaries to assist their executives and directors with the purchase of
homes. As of March 31, 2003, an aggregate amount of Y33.2 billion in loans was
outstanding to its equity-method affiliates. As of March 31, 2003, an aggregate
amount of Y21.1 billion in loans was outstanding to those of its affiliates not
accounted for under the equity method, which are 20% to 50% owned by Toyota. As
of March 31, 2003, the largest single loan outstanding to any such equity-method
affiliate was a short-term loan of Y2.6 billion at a fixed rate. Toyota believes
that each of these loans was entered into in the ordinary course of business.
7.C INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
8.A CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
1-3. Consolidated Financial Statements. Toyota's audited consolidated financial statements are included under '
Item 18 - Financial Statements'. Except for Toyota's consolidated financial statements included under Item
18, no other information in this annual report has been audited by Toyota's auditors.
4. Not applicable.
5. Not applicable.
6. Export Sales. See 'Operating and Financial Review and Prospects - Operating Results - Overview -
Geographical Breakdown'.
7. Legal and Arbitration Proceedings. See 'Information on the Company - Business Overview - Legal Proceedings
'.
8. Dividend Policy. See 'Selected Financial Data - Dividends'.
8.B SIGNIFICANT CHANGES
Except as disclosed in this annual report, there have been no significant
changes since the date of Toyota's latest annual financial statements.
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ITEM 9. THE OFFER AND LISTING
9.A LISTING DETAILS
The following table sets forth for the periods shown the reported high and low
sales prices of the common stock on the Tokyo Stock Exchange and the ADSs on the
Nasdaq SmallCap Market (through September 28, 1999) and the New York Stock
Exchange (from September 29, 1999).
Tokyo Stock Nasdaq New York Stock
Exchange -------------------- Exchange
--------------- ----------------------
Price per Share Price per ADS Price per ADS
--------------- -------------------- ----------------------
High Low High Low High Low
----- ----- ------ --------- ------ --------
Fiscal Year Ending March 31,
1999 3,630 2,530 $58 3/ $40 15/16
4
2000 5,500 3,150 104 52 3/8 $104 $60.875
2001 5,800 3,370 108.25 58.20
2002 4,450 2,665 71.50 46.60
2003 3,790 2,625 57.45 44.40
Financial Quarter Ending
June 30, 2001 4,450 3,940 71.50 65.10
September 30, 2001 4,440 2,665 71.44 46.60
December 31, 2001 3,420 2,970 56.70 47.02
March 31, 2002 3,920 3,210 60.00 48.75
June 30, 2002 3,790 2,995 57.45 49.25
September 30, 2002 3,450 2,690 54.30 47.00
December 31, 2002 3,300 2,755 53.85 45.50
March 31, 2003 3,300 2,625 55.37 44.40
June 30, 2003 3,180 2,455 53.75 41.17
September 30, 2003 (through July 28, 2003) 3,500 3,090 58.95 52.20
Month Ending
January 31, 2003 3,300 2,835 55.37 47.30
February 28, 2003 3,010 2,760 50.19 47.27
March 31, 2003 2,945 2,625 48.96 44.40
April 30, 2003 2,710 2,455 46.00 41.17
May 31, 2003 2,860 2,620 47.89 44.50
June 30, 2003 3,180 2,835 53.75 48.00
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9.B PLAN OF DISTRIBUTION
Not applicable.
9.C MARKETS
The primary trading market for Toyota's common stock is the Tokyo Stock
Exchange. The common stock is also listed on the Nagoya Stock Exchange and three
other regional stock exchanges in Japan.
Since September 29, 1999, American Depositary Shares, each equal to two shares
of Toyota's common stock and evidenced by American Depositary Receipts, have
been traded and listed on the New York Stock Exchange through a sponsored ADR
facility operated by The Bank of New York, as depositary. Prior to that time,
Toyota's ADSs were listed on the Nasdaq SmallCap Market through five unsponsored
ADR facilities.
Toyota's common stock is also listed on the London Stock Exchange.
9.D SELLING SHAREHOLDERS
Not applicable.
9.E DILUTION
Not applicable.
9.F EXPENSES OF THE ISSUE
Not applicable.
77
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