Toyota Motor Corporation (NYSE:TM) said on Aug. 4 that it earned 574.29 billion yen ($5.18 billion) in operating profit in the quarter that ended on June 30.

That was down 11% from its operating result a year ago. But it was higher than expected, leading Toyota to raise its full-year profit forecast. Analysts polled by Thomson Reuters had expected Toyota's operating profit to come in at 538.3 billion yen. 

Toyota also announced a new "business and capital alliance" with smaller rival Mazda Motor Corporation (OTC:MZDAF). The two companies will share electric-vehicle technology and build a major new factory in the United States under a joint venture arrangement. 

Toyota earnings: The raw numbers

Like many Japanese companies, Toyota's fiscal year begins on April 1. The quarter that ended on June 30, 2017, was the first quarter of Toyota's 2018 fiscal year. 

All financial results are shown in billions of yen. Vehicle sales are rounded to the nearest thousand.

Metric Q1 FY2018 Q1 FY2017 Change
Revenue 7,047.6 6,589.1  7%
Vehicle sales 2,590,000 2,529,000  2.4%
Operating income 574.2 642.2 (10.6%) 
Operating margin 8.1%  9.7% (1.6 ppts) 
Net income 613.0  552.4  11% 
Yen per U.S. dollar, average during period 111 yen  108 yen +3 yen 
Yen per euro, average during period 122 yen  122 yen 

Data source: Toyota Motor Corporation. Vehicle sales include the vehicles sold by Toyota's joint ventures in China. Ppts = percentage points.

A 2017 Toyota RAV4 in a rugged mountain setting.

Strong demand for Toyota's RAV4 crossover has helped to offset steep declines in sedan sales in North America. Image source: Toyota.

How Toyota's business units performed during the quarter

Toyota reports separate operating results for each of its regional business units as well as its captive-financing arm. Here's how each performed.

  • In its home market of Japan, Toyota earned 319.9 billion yen ($2.88 billion) of operating income (up 10.3% from the year-ago quarter) on sales of about 544,000 vehicles (up 6.6%). Its operating margin in the region was 8.7%, up 10 basis points from a year ago. Toyota attributed the gains to cost cuts and improved sales. 
  • In North America, the company earned 88.8 billion yen ($801.1 million) of operating income, down sharply from 165.4 billion yen a year ago, even as its sales rose 1.1% to about 723,000 vehicles. Operating margin fell to just 3.3% from 6.5% a year ago. Toyota attributed the drop in income to "increased marketing expenses": Automakers' incentives have risen as new-vehicle demand in the U.S. has softened over the last several months. 
  • In Europe, operating income totaled 20.5 billion yen ($184.9 million), up from 8.5 billion yen a year ago. Sales rose 8.1% to about 240,000 vehicles, and operating margin rose to 2.7% from 1.4% a year ago. Toyota's ongoing global cost-reduction effort helped results here as well. 
  • In Asia (excluding Japan and Toyota's joint ventures in China), operating income fell 17.5% to 102.8 billion yen ($927.5 million). Sales slumped 5.4% from a year ago, to about 363,000 vehicles, and Toyota's operating margin in the region plunged to 8.6% from 10.5% in the year-ago quarter. Profit was hurt by unfavorable exchange rate movements as well as lower overall vehicle sales. 
  • In China, equity income from its joint ventures with Chinese automakers came in at 30.5 billion yen ($275.2 million), up 10.5% from a year ago. Sales rose 1.7% to about 296,000 vehicles. 
  • Toyota's "rest of the world" region includes Latin America, Oceania, Africa, and the Middle East. Here, Toyota earned 39.5 billion yen ($356.4 million) in operating income, up 40% from a year ago, on sales of about 345,000 vehicles (up 1.5%). Margin improved to 6.5% from 5.4% a year ago. Toyota attributed much of the big profit increase to favorable exchange-rate shifts. 
  • Toyota's financial services unit earned 75.1 billion yen ($677.6 million) in operating income, down 8% from a year ago. Toyota attributed the decline to increased "costs related to loan losses" and lower prices for off-lease vehicles. 

As of the end of the quarter, Toyota had net liquid assets of 7,872.8 billion yen ($71.03 billion), up 1.4% from the end of the previous quarter. It generated 566.2 billion yen ($5.11 billion) of free cash flow during the quarter.

Akio Toyoda and Masamichi Kogai are shown shaking hands before a backdrop with the Toyota and Mazda logos.

Toyota's president, Akio Toyoda, and Mazda president and CEO Masamichi Kogai at the announcement of a deal between the two companies on Aug. 4. Image source: Toyota.

About that deal with Mazda

Here are the key parts of the Toyota-Mazda tie-up that was announced on Aug. 4:

  • A joint venture to build a new $1.6 billion factory in the United States. The plant will build both Toyotas and Mazdas when it opens in 2021, and it will employ about 4,000 people. The new factory's location hasn't yet been determined. 
  • A series of joint efforts on new technologies, including electric vehicles, connected-car technology, and advanced safety systems. 
  • New "complementary products," which may mean future Mazda and Toyota models that share parts and engineering. 

As part of the deal, Toyota will acquire a roughly 5% stake in its smaller rival. That transaction will close in October. 

Looking ahead: Toyota boosted its full-year guidance 

Toyota boosted its expectations for revenue, operating income, and net income in the fiscal year that will end on March 31, in large part because it now expects the yen to weaken (versus the U.S. dollar and euro) more than it had previously expected

For the full 2018 fiscal year, Toyota now forecasts:

  • Revenue of 28.5 trillion yen, up 1 trillion yen from prior guidance (fiscal 2017 result: 27.6 trillion yen)
  • Operating income of 1.85 trillion yen, up 250 billion yen from prior guidance (FY 2017: 1.99 trillion yen)
  • An operating margin of 6.5, up from 5.8% in prior guidance (FY 2017: 7.2%)
  • Net income of 1.75 trillion yen, up 250 billion yen from prior guidance (FY 2017: 1.83 trillion yen)

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