Musing on Toyota's Financials

[RichardJensen]

Figured it would be worth it to take a look at Toyota's financials from the first half of their fiscal '06 (Apr-Sept '05).

 

There's some interesting stuff in there.

 

For the first half of this year:

 

Revenue is up 10.3%

Unit sales are up 9.7%

Operating income is down 6.6%

Net income is down 2.3%

 

Their gross margin fell 15.6%; where it was 9.9% in the first quarter of fiscal 2005, it was 8.1% at the end of the most recently completed quarter (which is closer to a 20% drop). It was as low as 7.8% in Q4 of Fiscal '05.

 

This is not a sustainable situation for Toyota. It is also a fairly new one for them.

 

Smelling weakness at GM (Russia), they have decided to invade.

 

The full extent of this folly has not revealed itself yet. Since Toyota has publicly and repeatedly committed themselves to this strategically pointless "we're number 1" program, it will be very difficult for them to pull back from what appears to be a very messy battle of attrition that is already taking its toll on them.

 

Thing is, GM will be able to get loan guarantees from the U.S.; they will get a measure of protection, they will get enough protection because bottom line the country is better off with GM in business, instead of in receivership. And rhetoric aside, the Congress and the President will act more or less rationally, knowing that rust belt states will decide the next election.

 

So Toyota overextends itself in a bid to drive GM into bankruptcy; but proves unable to do so. Key to their current strategy is keeping Ford and GM at bay. Government intervention, especially for GM, is quite dangerous to them, because it provides space, breathing room, the refreshment of a nice hard Russian winter.

 

Toyota is very much out of their depth here, they have tried to achieve all at once that which would've been theirs in time. Had they been patient. However, people are by nature impatient, and even more so are leaders that have accomplished much, and want to accomplish more, instead of leaving it to their successors.

 

The cost to them will be nothing less than their soul. There is no gradual draw back from this program without loss of face, and the company has a breed of executives now that are experienced in handling everything except failure.

 

Sony embarked on a similarly ambitious campaign to become both purveyor of technology and content with disastrous results. With Sony the mistake was gluttony--too many acquisitions. With Toyota it is more akin to cancer. Uncontrolled growth.

 

...

[68Cougar]

Looks like Toyota is starting to act very un-Toyota like. I guess when you are heading towards #1, you start making the mistakes of the former number one. Toyota has always said that they weren't interested in buying into other car companies, but now they have bought a chuck of Subraru. And of course, when you hit that number one spot, your quality starts to tumble. You would think they would have learned from GM's example.

[ricers-shaft-blueoval]

Ford's financials on the other hand seem to be in excellent shape: :D

 

http://media.ford.com/article_display.cfm?...WW%2EFord%2Ecom

 

Net loss of 15 cents per share, or $284 million.

Loss from continuing operations of 10 cents per share, or $191 million, excluding special items.*

Worldwide automotive pre-tax loss of $1.3 billion, excluding special items.

Financial Services sector pre-tax profit of $1.1 billion, excluding special items.

Full-year earnings results expected to be at the low end of the current guidance range of $1.00 to $1.25 per share from continuing operations, excluding special items.

 

GM's financials appear to be even better:

 

http://www.gm.com/company/investor_informa...ings/index.html

 

DETROIT - General Motors Corp. (NYSE: GM) today reported a loss of $1.1 billion, or $1.92 per diluted share, in the third quarter of 2005, excluding special items and a tax-rate adjustment. These results compare with net income of $315 million, or $0.56 per share, in the third quarter of 2004. Revenue rose more than 5 percent to $47.2 billion.

 

Including special items, GM reported a loss of $1.6 billion, or $2.89 per share in the third quarter of 2005. The special items include a non-cash charge of $805 million for asset impairments primarily in North America and Europe and restructuring charges at GM Europe of $56 million. These were partially offset by a tax-rate normalization totaling $311 million.

 

I too along with Richard Jensen greatly sympathise with the apalling state of Toyota's financials:

 

http://www.autonews.com/article.cms?articleId=55270

 

Toyota operating profits falter as spending rises

 

By James B. Treece

Automotive News / November 07, 2005

 

TOKYO -- Toyota Motor Corp. spent its way to lower operating profits in the quarter ended Sept. 30.

 

Most of the added spending was in Japan. Launching the Lexus brand in Japan, adding factory capacity at home and abroad, and developing new models all ate into operating profits.

 

Toyota raised its forecast for North American vehicle sales in the October 2005-March 2006 second half of the fiscal year.

 

Operating profits fell 3.2 percent to 404.3 billion yen, or $3.58 billion at current exchange rates, in the three months to Sept. 30 compared with the year-earlier period. Net income rose 2.1 percent to $2.68 billion.

 

Revenues rose 10.1 percent to $43.92 billion.

 

Toyota now predicts North American sales of 1.3 million in the six months ending March 31, up from 1.15 million a year earlier.

 

http://www.toyota.com/about/news/corporate...finresults.html

 

TMC estimates that consolidated vehicle sales for the fiscal year ending March 31, 2006 will be 8.03 million vehicles, an increase of 60 thousand vehicles from the forecast announced in August 2005.

 

TMC also announced amendments to its annual prospects for unconsolidated financial results. The company's exchange rate assumption was revised from 105 yen to the dollar to 110 yen. TMC's net income projection was increased by 170 billion yen to 670 billion yen compared with the previous projection announced in May 2005.

 

Kinoshita concluded by commenting on the consolidated profit outlook for the fiscal year ending March 31, 2006. “Assuming that the U.S. dollar is at 110 yen per dollar, we aim to exceed last year's revenues and profits. We will also strive to offset the increase in business expansion costs through marketing and cost reduction efforts.â€

[ricers-shaft-blueoval]

http://www.washingtonpost.com/wp-dyn/conte...5120201377.html

 

Mr. Ford's Wrong Turn

Why U.S. Automakers Can't Blame Japan

 

By James P. Womack

 

Sunday, December 4, 2005; Page B01

 

On Nov. 22 after a speech at the National Press Club, Ford Motor Co. Chairman Bill Ford told the media, with apparent earnestness, that his company "can compete with Toyota, but we can't compete with Japan."

 

What makes this claim so extraordinary is that Japanese companies, led by Toyota Motor Corp., are thrashing Ford by building vehicles in North American factories with North American-made parts and North American workers, who receive American-style wages and health benefits. And increasingly, these Japanese brand vehicles are engineered in America by Americans.

 

Consider a few facts about Toyota. About 65 percent of the vehicles the firm sells in North America it assembles in North America, and it would assemble a much higher proportion here if it could only keep up with its rapid sales growth. Toyota will open its seventh North American assembly line in Texas next summer and an eighth line in Ontario in 2008. It may start assembling vehicles at a Subaru plant in Indiana in 2009, and it is said to be looking for yet another assembly location. In addition, it has three engine manufacturing plants and is looking for a site for a fourth. By the end of the decade, Toyota will be able to assemble about as many cars as Chrysler does in North America, and it is closing in on the capacity Ford will have after plant closings that are widely expected to be announced in January.

 

What's more -- and this best describes Bill Ford's problems -- the leading Japanese car companies are making more money than their U.S. competitors not only because of lower costs, but because their lean design, production and purchasing system is turning out vehicles so desirable that Toyota and Honda can charge much higher prices for products in the same segment of the market. Indeed, these Japanese companies are giving wages and health packages to current workers in North America similar to those provided by their U.S. rivals, but they're selling vehicles today for $2,500 more than comparably equipped cars made by Ford and GM. This revenue difference, more than the production cost issue, lies at the real heart of Motown's problem.

 

It's little wonder that money-losing Ford doesn't have the funds to invest in new technologies and is asking Washington for help. Meanwhile, Toyota is generating such enormous profits (more than $9 billion worldwide this year) that it can invest in new products and new technologies at a level far exceeding anything Japan Inc. could throw into the equation.

 

But no amount of government assistance can rescue U.S. auto companies unless they become better competitors. In fact, Ford had it exactly backwards when he spoke to reporters last month. Japan isn't his problem; Toyota is. And the answer for his company, like the challenge to it, lies here at home.

 

Author's e-mail: jwomack@lean.org

 

 

James Womack is co-author of "The Machine That Changed the World" (Scribner) and the recently released "Lean Solutions" (Free Press). He is president and founder of the Lean Enterprise Institute, a nonprofit research and education organization in Brookline, Mass.

[OAC_Sparky]

Ford's failing is not new news, Toyota's is.

 

Which is why it's being brought up.

 

You sound worried.

[RichardJensen]

RSB: That Washington Post article was bumf. Print it off and keep it handy in the bathroom in case you run out of Charmin.

 

Under no circumstances should you assume that it contains a correct assessment of what Ford has done wrong and what Toyota has done right.

 

Also, OAC is exactly right. Ford's troubles are widely known. Toyota's... are being swept under the rug. For now. They have been steadily increasing incentives and fleet volume in this country over the past few years, and they seem to consider themselves immune to any negative market forces--including the loss of differentiation on a key selling point for them: quality.

 

Toyota should be redoubling their efforts to build better cars and trucks for the NA market, but it's just at this time that they have distracted themselves with other concerns.

 

...

[RichardJensen]

More musing:

 

Toyota's income for FY 2005 (in yen):

 

1,171,260,000,000

 

Toyota's cash on hand at the end of FY 2005:

 

1,483,753,000,000

 

Now, I don't know much about the way Japanese companies obtain financing and pay obligations, but that's a pretty scary figure.

 

Toyota's cash on hand is only slightly higher than a year's profit.

 

I can tell you that if Ford were sitting on only $3B cash, they'd be in a world of hurt.

 

Moreover, Toyota's means of presenting financial data is (IMO) purposefully confusing and non-standard.

 

But, like I said, Toyota's cash on hand looks a pretty small pile for running the soon to be largest car company on the planet.

 

Not that you'd see any concern about that here. Just like with Enron, the bulk of the financial press will swallow a glowing press report and lots of sunshine and smiles, as long as the earnings keep going up. Seemingly no one is interested in finding out how strong Toyota really is, and how much this drive to become the biggest is really costing them.

 

...

[68Cougar]

Also, OAC is exactly right. Ford's troubles are widely known. Toyota's... are being swept under the rug. For now. They have been steadily increasing incentives and fleet volume in this country over the past few years, and they seem to consider themselves immune to any negative market forces--including the loss of differentiation on a key selling point for them: quality.

Toyota is getting more and more like GM all the time. GM sure lived in denial for decades, and it's finally catching up to them. Now it's starting to look like Toyota's turn.

 

Being number one doesn't look so hot now.

[68Cougar]

More musing:

 

Toyota's income for FY 2005 (in yen):

 

1,171,260,000,000

 

Toyota's cash on hand at the end of FY 2005:

 

1,483,753,000,000

 

Now, I don't know much about the way Japanese companies obtain financing and pay obligations, but that's a pretty scary figure.

 

Toyota's cash on hand is only slightly higher than a year's profit.

 

I can tell you that if Ford were sitting on only $3B cash, they'd be in a world of hurt.

 

Moreover, Toyota's means of presenting financial data is (IMO) purposefully confusing and non-standard.

 

But, like I said, Toyota's cash on hand looks a pretty small pile for running the soon to be largest car company on the planet.

 

Not that you'd see any concern about that here. Just like with Enron, the bulk of the financial press will swallow a glowing press report and lots of sunshine and smiles, as long as the earnings keep going up. Seemingly no one is interested in finding out how strong Toyota really is, and how much this drive to become the biggest is really costing them.

 

...

Richard, cash is only part of it. Companies have other forms of equity besides cash. For example, all of Toyota's stock is worth more than GM, Ford and DCX's combined!

 

Toyota market cap: 176.6 B

GM: 12.5 B

Ford: 14.6 B

DCX: 51.5 B

 

All numbers are as of Dec 2nd, and from investorguide.com

[RichardJensen]

Richard, cash is only part of it. Companies have other forms of equity besides cash. For example, all of Toyota's stock is worth more than GM, Ford and DCX's combined!

 

Toyota market cap: 176.6 B

GM: 12.5 B

Ford: 14.6 B

DCX: 51.5 B

 

All numbers are as of Dec 2nd, and from investorguide.com

Shareholder equity or capital is essentially Assets - Liabilities; any difference between equity per share and price per share is pure blue sky. It is of no value to the company, unless they issue more stock at that price, in which case they can expand their cash and shareholder equity simultaneously.

 

...

Edited December 5, 2005 by RichardJensen

[68Cougar]

Shareholder equity or capital is essentially Assets - Liabilities; any difference between equity per share and price per share is pure blue sky. It is of no value to the company, unless they issue more stock at that price, in which case they can expand their cash and shareholder equity simultaneously.

...

Most companies own shares of their own company (treasery stock) and can sell them to make some cash. They don't neccessary have to issue new stock. Either method will dilute the market and could drive the price down.

 

But I agree that Toyota is cutting things a little close.

[RichardJensen]

Most companies own shares of their own company (treasery stock) and can sell them to make some cash. They don't neccessary have to issue new stock. Either method will dilute the market and could drive the price down.

 

But I agree that Toyota is cutting things a little close.

Toyota has about 3.6B shares outstanding, and a little over 340M in treasury stock.

 

It would be interesting to see how many other blue chip companies are leveraging their "blue chip" status to this extent.

 

...

[kenp77]

Toyota has about 3.6B shares outstanding, and a little over 340M in treasury stock.

 

It would be interesting to see how many other blue chip companies are leveraging their "blue chip" status to this extent.

 

...

If I were in the auto business I would not under estimate toyota, don't forget PEARL HARBOR!!!!!!!!!!!!!!!

[NickF1011]

If I were in the auto business I would not under estimate toyota, don't forget PEARL HARBOR!!!!!!!!!!!!!!!

 

Don't forget Enron either. :D

[ricers-shaft-blueoval]

toyota has earned $10.9 billion each year for the past 2 years and as per their guidance will exceed this figure by a small amount at the end of this financial year (31 march 2006). last week their share price reached $100 giving them a valuation of $180 billion (as compared to less than $13 billion for both Ford and GM

Toyota has an AAA+ rating by all the major agencies as opposed to the junk ratings that are accorded to Ford and GM.

 

if richard jensen wants to delude himself by considering the above figures as being apalling; he is welcome to his opinions; essentially the rest of the world does not really cares what he thinks; his knowledge of both the auto world as well as the financial world appears to be as good as ability of the CEO's of Ford and GM with respect to running their respective companies;

 

I purchased ADRs of toyota at $75 around this time last year; right now they fluctuate between $97-100.

 

If on the other hand i had bought the shares of this know-all's favourite company the price would have sunk from $15 to $8 :D

 

any time you want to give finacial advice to people feel free to do so rich; i can become "rich" pun intended; ha ha ha by following the exact opposite of what you say :D

Edited December 5, 2005 by ricers-shaft-blueoval

[ZanatWork]

I wonder how those prices will do once the settlement for the hybrid battery technology hits more news outlets, and more people respond to the "Concerned about quality" articles coming out.

 

Toyota's recalls doubled. As they approach the #1 spot (which I believe they'll hit), I think they'll see how fast the same media that's essentially blown them for years will turn on them. Success is the most punishable of crimes in the mass media.

 

The price of moving the most product in any industry I've ever seen has been a drop in quality. Toyota has had a rough year in this regard, and I don't the problems letting up as they continue to move toward being the largest.

 

Just ask GM.

[OAC_Sparky]

Just ask GM.

Or Sony

 

Or Nike

 

Or Maytag

 

Or....

[ZanatWork]

...or Mesa amplifiers, for you other guitar goons out there!

 

The early Nomad, Road King, and F-series...bad. All because the Recto had been so popular.

[StevenJ]

Also why is that loser Rice boy still posting here? Shouldn't he be putting a fart can on his Civic? cough, loser cough....

[marc-o]

Toyota has about 3.6B shares outstanding, and a little over 340M in treasury stock.

 

It would be interesting to see how many other blue chip companies are leveraging their "blue chip" status to this extent.

 

...

 

Japanese companies are usually heavily leveraged because for cultural reasons they tend to finance with debt, not equity. It's nothing unusual.

 

Toyota isn't in any fiscal trouble... if they have any common sense they won't keep going down this track... you can't take 1 or 2 year trends and extend them 3, 4, 5 years into the future. If the company kept doing that, they'd be committing business hara-kiri. I really don't think they are that dumb.

 

Fact is, Ford and GM are in incredibly much worse financial shape, and most importantly of all, you'll see the Japanese government saving Toyota 100 times quicker than the US government would save GM or Ford.

[ricers-shaft-blueoval]

Also why is that loser Rice boy still posting here?

 

i post here to remind all of you how certain well run companies are doing-and how badly certain others are doing in comparison; eg the best amongst these is worth upwards of $175 billion while others of a similar turnover and unit sales are struggling to achieve a market valuation of $13-14 billion.

 

if you want to know further details let me know, i can always elaborate; or maybe you can ask mr know-it all jensen; (unfortunatley he has a tendency to get very confused and befuddled by facts)

Edited December 5, 2005 by ricers-shaft-blueoval

[RichardJensen]

toyota has earned $10.9 billion each year for the past 2 years and as per their guidance will exceed this figure by a small amount at the end of this financial year (31 march 2006).

Past Performance Does Not Indicate Future Results (or have you never read a mutual fund advertisement)

 

Thing is, Toyota is way over-leveraged for any blue chip company, and if they have a AAA+ rating, well that's only because they can cover their exposure to the CP market by selling some securities they hold.

 

The point is, this is foolhardy business management, the type that no corporation of its size should be engaged in. And I think it indicates a larger cultural problem at Toyota.

 

You can go on and on about how Toyota did such and such in the past, the past is merely prologue.

 

The bottom line is that Toyota's attitude seems to be that they can do no wrong, and that they can take a pass on sound business management.

 

...

[StevenJ]

i post here to remind all of you how certain well run companies are doing-and how badly certain others are doing in comparison; eg the best amongst these is worth upwards of $175 billion while others of a similar turnover and unit sales are struggling to achieve a market valuation of $13-14 billion.

 

if you want to know further details let me know, i can always elaborate; or maybe you can ask mr know-it all jensen; (unfortunatley he has a tendency to get very confused and befuddled by facts)

 

I have better things to do than to listen to people who just cut and paste internet articles when they don't understand what the data and information in them mean.

[marc-o]

Thing is, Toyota is way over-leveraged for any blue chip company, and if they have a AAA+ rating, well that's only because they can cover their exposure to the CP market by selling some securities they hold.

 

The point is, this is foolhardy business management, the type that no corporation of its size should be engaged in. And I think it indicates a larger cultural problem at Toyota.

 

You can go on and on about how Toyota did such and such in the past, the past is merely prologue.

 

The bottom line is that Toyota's attitude seems to be that they can do no wrong, and that they can take a pass on sound business management.

 

...

 

I still think you're trying to extrapolate too much from this Rich... I don't believe a company could do *so* well for so long only to suddenly do *so* bad so suddenly.

 

Japanese companies are usually heavily leveraged because for cultural reasons they tend to finance with debt, not equity. It's nothing unusual.

 

Toyota isn't in any fiscal trouble... if they have any common sense they won't keep going down this track... you can't take 1 or 2 year trends and extend them 3, 4, 5 years into the future. If the company kept doing that, they'd be committing business hara-kiri. I really don't think they are that dumb.

 

Fact is, Ford and GM are in incredibly much worse financial shape, and most importantly of all, you'll see the Japanese government saving Toyota 100 times quicker than the US government would save GM or Ford.

[RichardJensen]

I still think you're trying to extrapolate too much from this Rich... I don't believe a company could do *so* well for so long only to suddenly do *so* bad so suddenly.

I hadn't seen your earlier post.

 

Interestingly, Honda's cash on hand is about 4x their short term debt.

 

Also, I figure there is advantage in using short term loans at low rates instead of holding the cash (Toyota's financials say that their average APR for their short term notes is 1.58%, and their CP rates are about 2.81%). All Toyota has to do is squirrel a similar amount of money in highly liquid securities, and make money off the differential. If they did that with the $22.1B they hold in CP and short term loans, they'd be making $884M per year off a 4% difference.

 

Still, it seems that Toyota is extending themselves perhaps farther than is wise. Although I agree that the Japanese gov't (and Japanese banks) would intervene in Toyota's behalf long before similar action would be taken in GM's behalf here.

 

I say this because if Toyota becomes overly accustomed to this means of doing business, they could find themselves unable to work well in a capital crunch.

 

Another issue is, as you put it, a company does not go from doing well to doing poorly quickly. However, bad business practices can be tough to pick out if everything seems to be going your way. It's the old trap of "exceptionalism", that the rules don't apply to you for some not quite clearly definable reason.

 

...

Edited December 6, 2005 by RichardJensen