Toyota 2011 Annual Report Download - page 47

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Financial Section and
Investor Information
Business and
Performance Review
Special FeatureMessage/Vision
Management and
Corporate Information
Management's Discussion and Analysis of Financial Condition and Results of Operations
Toyota’s finance receivables are subject to
collectability risks. These risks include consumer
and dealer insolvencies and insufficient collateral
values (less costs to sell) to realize the full carrying
values of these receivables. See discussion in
“Critical Accounting Estimates — Allowance for
Doubtful Accounts and Credit Losses” and note
11 to the consolidated financial statements.
Toyota continues to originate leases to finance
new Toyota vehicles. These leasing activities are
subject to residual value risk. Residual value
losses could be incurred when the lessee of a
vehicle does not exercise the option to purchase
the vehicle at the end of the lease term. See
discussion in “Critical Accounting Estimates —
Investment in Operating Leases” and note 2 to
the consolidated financial statements.
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. A portion
of the derivative instruments are entered into to
hedge interest rate risk from an economic
perspective and are not designated as a hedge
of specific assets or liabilities on Toyota’s
consolidated balance sheet and accordingly,
unrealized gains or losses related to derivatives
that are not designated as a hedge are recognized
currently in operations. See discussion in “Critical
Accounting Estimates — Derivatives and Other
Contracts at Fair Value” and “Quantitative and
Qualitative Disclosures about Market Risk” and
note 20 to the consolidated financial statements.
The fluctuations in 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
changes in the prevailing exchange rates of the
currencies in those countries in which Toyota
does business compared with the Japanese yen.
Even though the fluctuations of currency exchange
rates to the Japanese yen can be substantial,
and, therefore, significantly impact comparisons
with prior periods and among the various
geographic markets, the translation risk 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 operations from vehicles produced
in Japan.
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 continued to localize production by
constructing production facilities in the major
markets in which it sells its vehicles. In calendar
2009 and 2010, Toyota produced 64.5% and
73.4% of Toyota’s non-domestic sales outside
Japan, respectively. In North America, 60.0% and
72.6% of vehicles sold in calendar 2009 and 2010
respectively were produced locally. In Europe,
57.0% and 59.0% of vehicles sold in calendar
2009 and 2010 respectively were produced
locally. Localizing production enables Toyota to
locally purchase many of the supplies and
resources used in the production process, which
allows for a better match of local currency
revenues with local currency expenses.
Toyota also enters into foreign currency
transactions and other hedging instruments to
address a portion of its transaction risk. This has
decreased during fiscal 2010 and 2011, mainly as
a result of lower interest rates.
Toyota launched its credit card business in
Japan in April 2001. As of March 31, 2010, Toyota
had 7.7 million cardholders, an increase of 0.6
million cardholders compared with March 31,
2009. As of March 31, 2011, Toyota had 8.9 million
cardholders, an increase of 1.2 million cardholders
compared with March 31, 2010. The credit card
receivables at March 31, 2010 increased by ¥30.8
billion from March 31, 2009 to ¥255.4 billion. The
credit card receivables at March 31, 2011
increased by ¥8.1 billion from March 31, 2010 to
¥263.5 billion.
Other Business Operations
Toyota’s other business operations consist of
housing, including the manufacture and sale of
prefabricated homes; information technology
related businesses, including information
technology and telecommunications, intelligent
transport systems, GAZOO and other.
Toyota does not expect its other business
operations to materially contribute to Toyota’s
consolidated results of operations.
Currency Fluctuations
Toyota is affected by fluctuations in foreign
currency exchange rates. In addition to the
Japanese yen, Toyota is exposed to fluctuations
in the value of the U.S. dollar and the euro and, to
a lesser extent, the Australian dollar, the Canadian
dollar, the British pound, and others. 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.
Translation risk is the risk that Toyota’s
consolidated financial statements for a particular
period or for a particular date will be affected by
reduced, but not eliminated, the effects of foreign
currency exchange rate fluctuations, which in
some years can be significant. See notes 20 and
21 to the consolidated financial statements for
additional information.
Generally, a weakening of the Japanese yen
against other currencies has a positive effect on
Toyota’s revenues, operating income and net
income attributable to Toyota Motor Corporation.
A strengthening of the Japanese yen against
other currencies has the opposite effect. In fiscal
2010 and 2011, the Japanese yen was on average
and at the end of the fiscal year stronger against
the U.S. dollar and the euro in comparison to the
prior fiscal year. See further discussion in
“Quantitative and Qualitative Disclosures about
Market Risk — Market Risk Disclosures — Foreign
Currency Exchange Rate Risk”.
During fiscal 2010 and 2011, the average
exchange rate of the Japanese yen strengthened
against the major currencies including the U.S.
dollar and the euro compared with the average
exchange rate of the prior fiscal year. The
operating results excluding the impact of currency
fluctuations described in “Results of Operations
— Fiscal 2011 Compared with Fiscal 2010” and
“Results of Operations — Fiscal 2010 Compared
with Fiscal 2009” show results of net revenues
obtained by applying the Japanese yen’s average
exchange rate in the previous fiscal year to the
local currency-denominated net revenues for
fiscal 2010 and 2011, respectively, as if the value
of the Japanese yen had remained constant for
the comparable periods. Results excluding the
impact of currency fluctuations year-on-year are
not on the same basis as Toyota’s consolidated
financial statements and do not conform with U.S.
GAAP. Furthermore, Toyota does not believe that
these measures are a substitute for U.S. GAAP
measures. However, Toyota believes that such
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TOYOTA ANNUAL REPORT 2011