Toyota Motor Corporation (NYSE:TM) said on Feb. 6 that its net income dropped 23% to 486.5 billion yen ($4.17 billion) in the quarter ended Dec. 31, on unfavorable exchange rate movements and higher expenses.

Toyota earnings: The raw numbers

Like many Japanese companies, Toyota's fiscal year ends on March 31. The quarter that ended on Dec. 31, 2016, was the third quarter of Toyota's 2017 fiscal year. All financial results are shown in billions of yen. 

Metric

Q3 FY17Q3 FY16 Change 
Revenue 7,084.1 7,339.8  (3.5%)
Retail vehicle sales (thousands) 2,645 2,652  (0.3%) 
Operating income 438.5 722.2  (39.3%) 
Operating margin 6.2% 9.8%   3.6 ppts
Net income 486.5 627.9  (22.5%) 
Yen to U.S. dollar, average during period 109 yen 121 yen  -12 yen 
Yen to euro, average during period 118 yen  133 yen -15 yen 

Data source: Toyota Motor Corporation. 

Several factors hurt Toyota in North America

Like its home-country rivals, Toyota is feeling the effects of the Japanese yen's strengthening versus other major currencies. In the year-ago quarter, on average, a dollar earned in the U.S. was worth 121 yen when it was brought home to Japan, and a euro was worth 133 yen. But in the most recent quarter, that dollar was worth just 109 yen and the euro 118 yen, on average. 

Even if all other factors were equal, Toyota's earnings in the U.S. and Europe would have fallen in yen terms year over year. As the chart below shows, exchange rate movements were a significant factor in Toyota's year-over-year decline in operating profit, but they weren't the only factor. A drop in used-car values that led to lower returns from the sales of off-lease vehicles was a key factor in Toyota's increased costs in the quarter. 

A chart showing how Toyota's operating profit changed from a year ago.

Image source: Toyota Motor Corporation.

The dollar's weakness versus the yen isn't Toyota's only headwind in North America. Toyota has long relied on its well-regarded sedans to make up the bulk of its sales volume in the U.S., and it was slow to react to an ongoing shift in buyer preferences toward SUVs. 

Toyota has been selling all of the RAV4 and Highlander SUVs that it can make for the U.S. market -- but sales would have been better had it moved earlier to boost production. Meanwhile, Toyota has had to boost incentives to keep its sedans moving.

A silver Toyota RAV4 SUV on a hill.

Toyota is belatedly moving to make more RAV4s for North America. Image source: Toyota Motor Corporation.

The upshot was that Toyota's operating income in North America fell 28.6% from a year ago, to 101.3 billion yen ($901 million) -- even though sales were up 2.3% to about 745,000 vehicles during the quarter. Toyota's operating margin in North America was a very thin 3.7% for the quarter, down from 5% a year ago. 

Mixed results elsewhere in the world 

Toyota's operating income in its home market of Japan fell even more sharply, down 46% to 211.1 billion yen ($1.88 billion) despite a 8.3% rise in home-market sales. Exchange rates were a big story here, too: Toyota exports many models from Japan to the U.S. and Europe, including the Prius and its Lexus luxury vehicles. Toyota's operating margin in Japan fell to 5.6% from 10.2% a year ago. 

Toyota's operating income in Europe fell 5.4% to 20.9 billion yen ($185.9 million), again despite a 10.9% year-over-year increase in sales. The story was familiar: Higher costs and those unfavorable exchange rate moves dented profits. Its operating margin of 3.1% was down slightly from 3.4% a year ago. 

In Asia, operating income fell 13.3% to 118.3 billion yen ($1.05 billion) despite an 18% increase in vehicles sold during the quarter. Again, exchange rates were the primary culprit, though Toyota said that "decreased exports to the Middle East" were also a factor in the year-over-year profit decline. Toyota's operating margin in the region was 9.4%, strong but down from 10% a year ago.

Toyota's joint ventures in China earned 15.6 billion yen ($138.8 million) in the quarter, despite good (6.8%) year-over-year sales growth. 

Toyota's "rest of the world" region includes Latin America, Oceania, Africa, and the Middle East. Here, the story was different, as aggressive price increases and marketing efforts offset increases in costs. Operating income rose 74.8% to 25 billion yen ($222.5 million) even as vehicle sales declined 19.5% to about 340,000. Operating margin of 4.5% was an improvement over the region's 2.6% result a year ago. 

Operating income at Toyota's financial services unit fell 12.7% to 72.6 billion yen ($645.9 million). As we saw in the quarterly results for rival Ford's (NYSE:F) financial services unit, a decline in values of used cars in North America hurt Toyota's results from the sale of vehicles returned at the end of their leases. 

Looking ahead: Toyota's guidance for the full fiscal year

Metric

New FY17 ForecastPrevious FY17 Forecast FY16 Result 
Revenue 26.5 trillion yen ($235.8 billion) 26.0 trillion yen 28.4 trillion yen 
Retail vehicle sales 10.15 million 10.10 million   10.09 million
Operating income 1.85 trillion yen ($16.5 billion) 1.70 trillion yen    2.85 trillion yen
Operating margin  7% 6.5%  10% 
Net income 1.70 trillion yen ($15.1 billion) 1.55 trillion yen 2.31 trillion yen
Yen to U.S. dollar, average during period 107 yen 103 yen 120 yen 
Yen to euro, average during period 118 yen  114 yen  133 yen 

Data source: Toyota Motor Corporation. 

Toyota modestly raised its guidance for the full fiscal year that will end on March 31, on expectations that exchange rates will be more favorable and cost-cutting efforts will yield more improvements than predicted. 

John Rosevear owns shares of Ford. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.