Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysisof Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on information known tomanagement as of July 2004.
This section contains projections and forward-looking statements that involve risks, uncertainties and assumptions. You should beaware that certain risks and uncertainties could cause the actual results of Toyota Industries Corporation and its consolidated
subsidiaries to differ materially from any projections or forward-looking statements. These risks and uncertainties include, but are notlimited to, those listed under “Risk Information” and elsewhere in this annual report.
The fiscal year ended March 31, 2004 is referred to as fiscal 2004 and other fiscal years are referred to in a corresponding manner.
All references to the “Company” herein are to Toyota Industries Corporation; and references to “Toyota Industries” herein are to theCompany and its 140 consolidated subsidiaries.

Results of Operations
Operating Performance
During fiscal 2004, the Japanese economy began a steadyrecovery, as private-sector capital expenditure increased alongwith an expansion in exports, while consumer spending also
emerged from sluggishness. Overseas, the economic situation
improved as well, with the U.S. economy recovering and theEuropean economy picking up.
In this operating environment, Toyota Industries made efforts
to strengthen its corporate structure by developing new products
to raise customer satisfaction, aggressively conducting sales
promotions, carrying out a company-wide cost-reduction
program and enhancing group-wide management control. As aresult, Toyota Industries recorded consolidated net sales of¥1,164.4 billion, an increase of ¥95.2 billion (8.9%) over fiscal

2003. (For a breakdown in operating results by businesssegment, refer to Operating Performance Highlights by Business
Segment.)
At the profit level, ordinary income amounted to ¥59.0 billion,
an increase of ¥7.6 billion (14.8%) over fiscal 2003. This increasereflected growth in income at our domestic and overseas
subsidiaries as well as a contribution to profits by ST Liquid
Crystal Display Corp. (“ST-LCD”), a joint venture with Sony
Corporation (“Sony”). Net income amounted to ¥33.6 billion, an
increase of ¥11.7 billion (53.3%) over fiscal 2003.

Cost of Sales and Selling,
General and Administrative Expenses
Cost of sales for fiscal 2004 increased ¥78.8 billion (8.8%) overfiscal 2003 to ¥978.5 billion, due mainly to an increase in net
sales.

Net Sales, Overseas Sales andOverseas Sales Ratio

Capital Expenditures(¥ Billion)
150(¥ Billion)

(%)

1,200

60

1,000

50

800

40

600

30

400

20

200

10

100

50

0
FY

00

01

02

03

04

Automobile
Materials Handling Equipment
Textile Machinery
Others (including corporate or elimination)

40

ANNUAL REPORT 2004 — TOYOTA INDUSTRIES CORPORATION

0
FY

0

00

01

02

Net sales (left)
Overseas sales (left)
Overseas sales ratio (right)

03

04

Operating Income andOperating Income Ratio

Net Sales ofAutomobile Segment

Operating Income ofAutomobile Segment(%)(¥ Billion)(¥ Billion)

60

12

600

30

50

10

40

8

400

20

30

6

20

4

200

10

10

2

0
FY

0

00

01

02

03

04

0
FY 00

0
FY

01 02 03 04

00 01 02 03 04

Operating income (left)
Operating income ratio (right)

Selling, general and administrative expenses increased ¥16.3
billion (13.9%) to ¥133.3 billion. This increase was mainly the
result of Aichi Corporation (“Aichi”) becoming a consolidated
subsidiary of Toyota Industries.

Operating Income
Operating income for fiscal 2004 increased ¥0.2 billion (0.3%)
over fiscal 2003 to ¥52.6 billion. Despite a decrease in operating
income by the Company, overall operating income increased due
primarily to the consolidation of Aichi and favorable results at
Toyota Industries’ subsidiaries.

Operating Performance Highlights by
Business Segment
Below are the operating results by business segment. Net sales
for each segment do not include intersegment transactions.

Automobile Segment
Net sales of the Automobile Segment increased ¥8.4 billion(1.4%) over fiscal 2003 to ¥603.9 billion. However, operating
income decreased ¥2.6 billion (8.6%) to ¥27.5 billion.
Sales in the Japanese, European and North American
markets were virtually at the same levels as recorded in theprevious fiscal year. In the Vehicle Business, sales of the Vitz, ourmainstay vehicle, also remained at the same level as for fiscal
2003. While sales of the Corolla Sedan for North America, forwhich production commenced in January 2003, contributed tooverall performance, sales of the RAV4 decreased. In the Engine
Business, we recorded higher sales of the AZ-type gasoline
engine, which is installed in the Estima. However, we posted
lower sales of the UZ-type and FZ-type gasoline engines, which
are incorporated into the Land Cruiser. Sales were also adversely

affected because a portion of CD-type diesel engines for Europe
is now shipped as parts, thus decreasing the overall productionof the engine as a complete product. Toyota Motor Industries
Poland Sp.zo.o., jointly established with Toyota Motor
Corporation (“TMC”), is progressing smoothly with preparations
for the commencement of diesel engine production in January
2005. In the Car Air-Conditioning Compressor Business, sales inboth domestic and overseas markets increased, due mainly tofavorable sales of vehicles fitted with our car air-conditioning
compressors and an expanded range of automobiles equippedwith our products.

Management’s Discussion and Analysis of Financial Condition and Results of Operations(¥ Billion)

Car Air-Conditioning
Compressor Unit Sales(Million Units)
20

15

10

5

0
FY

00

01

02

03

04

Japan
North America
EuropeAsia and Oceania

ANNUAL REPORT 2004 — TOYOTA INDUSTRIES CORPORATION

41

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net Sales of
Textile Machinery
Segment

Operating Income (Loss) of
Textile Machinery
Segment(¥ Billion)(¥ Billion)(¥ Billion)

20

50

3

40

2

30

1

20

0

10

(2)

Net Sales ofMaterials Handling
Equipment Segment

Operating Income ofMaterials Handling
Equipment Segment(¥ Billion)
500

400
15
300
10
200
5

100

0
FY 00

01 02 03 04

0
FY 00

01 02 03 04

Materials Handling Equipment Segment
Net sales of the Materials Handling Equipment Segment
increased ¥70.4 billion (18.9%) over fiscal 2003 to ¥443.4 billion.
Operating income increased ¥3.2 billion (19.6%) to ¥19.3 billion.
Sales were robust in Japan amid a recovery in private-sector
capital expenditure. Sales in Europe and the U.S. also increased
over fiscal 2003. During fiscal 2004, we developed new products
attuned to customer needs while undertaking aggressive sales
promotion activities in close cooperation with our distributors. As
a result, we achieved worldwide sales of 82,000 TOYOTA-brandforklift trucks and 59,000 BT-brand forklift trucks, the latterproduced by the subsidiary BT Industries AB. In Japan, we
attained an all-time high 42.6% share of the forklift truck market
in calendar year 2003. Overseas, export sales of forklift trucks forNorth America and Europe decreased due to the ongoingtransferring of production to local subsidiaries, but export sales
in Asia and Oceania increased sharply.
In fiscal 2004, we strengthened our sales and production
structures globally. In Japan, we made Aichi into one of our
subsidiaries in May 2003 and worked closely with Aichi to carryout cost-reduction activities. Supported by these efforts andbrisk demand, Aichi’s performance is now steadily recovering. In
China, Toyota Industry (Kunshan) Co., Ltd. commenced local
production of forklift trucks in April 2003, while Toyota Material
Handling (Shanghai) Co., Ltd. began sales operations in June
2003. Additionally, we established Toyota Industries Corporation
Australia Pty Limited in Sydney in June 2003 and Toyota
Industries Mercosur Ltda. in São Paulo, Brazil, in January 2004.
These companies have commenced sales operations with theaim of expanding sales in their respective markets.

Textile Machinery Segment
Net sales of the Textile Machinery Segment decreased ¥2.8
billion (5.7%) from fiscal 2003 to ¥46.0 billion. Operating income
decreased ¥2.2 billion (95.7%) to ¥0.1 billion.

42

ANNUAL REPORT 2004 — TOYOTA INDUSTRIES CORPORATION

0
FY 00

01 02 03 04

(4)
FY 00

01 02 03 04

Although sales of air-jet looms to Pakistan and ring spinning
frames to Vietnam increased, sales of air-jet looms to China
decreased, as shipments for a large order to Wujiang, Jiangsu
province that was received in the previous fiscal year werecompleted during fiscal 2004. In China, one of our core markets,strong demand for air-jet looms since 2002 began waning at theend of 2003, due mainly to the effects of monetary tightening in
response to an overheating economy. Although sales of spinningmachinery and weaving machinery showed signs of recovery inIndia and Pakistan, overall sales in other Asian markets remainedsluggish.

Others Segment
Net sales of the Others Segment increased ¥19.1 billion (36.7%)
over fiscal 2003 to ¥71.1 billion. Operating income increased¥1.8 billion (47.0%) to ¥5.8 billion.

Sales by Geographical Segment
Below are Toyota Industries’ operating results by geographicalsegment. Net sales for each geographical segment do notinclude intersegment transactions.

Japan
Net sales totaled ¥785.3 billion, an increase of ¥51.4 billion(7.0%) over fiscal 2003. Operating income amounted to ¥45.8
billion, an increase of ¥0.8 billion (1.7%). The increases mainly
resulted from the consolidation of Aichi.

North America
Net sales amounted to ¥198.7 billion, an increase of ¥6.4 billion(3.3%) over fiscal 2003. Operating income totaled ¥6.1 billion,
the same level as in fiscal 2003. The increase in net sales wasdue mainly to an increase in sales volumes by forklift truck

Net Sales of
Others Segment

Operating Income of
Others Segment
Net Income per Share(¥)(¥ Billion)(¥ Billion)

80

6

120

5

100

4

80

3

60

2

40

1

20

0
FY

0
FY

60

40

20

0
FY

00 01 02 03 04

00 01 02 03 04

manufacturing subsidiaries and car air-conditioning compressor
manufacturing subsidiaries.

EuropeNet sales were ¥167.5 billion, an increase of ¥28.0 billion(20.1%) over fiscal 2003. Operating income amounted to ¥3.1
billion, an increase of ¥1.2 billion (61.7%). These increases
resulted chiefly from higher sales volumes by forklift truck
manufacturing subsidiaries and car air-conditioning compressor
manufacturing subsidiaries.

Others
Net sales totaled ¥12.9 billion, an increase of ¥9.4 billion(272.8%) over fiscal 2003. An operating loss of ¥0.1 billion wasrecorded, an increase of ¥0.1 billion (73.7%).

Basic
Diluted

00

01

02

03

04

Income before Income Taxes
Income before income taxes increased ¥14.1 billion (32.2%) overfiscal 2003 to ¥57.7 billion. This increase was due chiefly to anincrease in ordinary income as well as decreases in revalued lossof investment securities and loss on disposal of property, plantand equipment, both of which were recorded in fiscal 2003.

Management’s Discussion and Analysis of Financial Condition and Results of Operations(Including Elimination ofIntersegment Transactions)

Income Taxes
Net of current and deferred income taxes was ¥20.7 billion,
virtually the same as in fiscal 2003. This was mainly because anincrease in income taxes at subsidiaries was offset by adecrease in taxes at the Company.

Minority Interest in Consolidated Subsidiaries
Non-Operating Income and Expenses
Non-operating income for fiscal 2004 increased ¥3.9 billion(14.6%) over fiscal 2003 to ¥30.2 billion. This increase resulted
mainly from an increase in dividends from TMC and higher equity
in earnings of ST-LCD.
Non-operating expenses decreased ¥3.6 billion (13.1%) to¥23.8 billion, owing primarily to a decrease in equity in net loss of
ST-LCD.

Extraordinary Income and Losses

Minority interest in consolidated subsidiaries increased ¥2.5
billion (266.8%) to ¥3.4 billion. The increase resulted primarily
from the consolidation of Aichi and favorable business results ofsubsidiaries.

Net Income
Net income for fiscal 2004 increased ¥11.7 billion (53.3%) overfiscal 2003 to ¥33.6 billion. Net income per share amounted to¥108.04, compared with ¥70.19 in fiscal 2003. Diluted net
income per share increased from ¥62.90 in fiscal 2003 to¥101.97.

The transition of the benefit plan into a defined contribution
pension plan on a portion of pensions assets in the first half of2003 resulted in an extraordinary gain of ¥0.6 billion. On theother hand, we posted provision for retirement and severance
benefits for directors and corporate auditors as an extraordinary
loss of ¥1.9 billion.

ANNUAL REPORT 2004 — TOYOTA INDUSTRIES CORPORATION

43

Liquidity and Capital Resources
Management’s Discussion and Analysis of Financial Condition and Results of Operations

44

Toyota Industries’ financial policy is to ensure sufficient financing
and liquidity for its business activities and to maintain thestrength of its balance sheets. Currently, funds for capital
investments and other long-term capital needs are provided fromretained earnings and long-term debt, and working capital needs
are met through short-term loans. Long-term debt financing iscarried out mainly through issuance of corporate bonds andloans from financial institutions.
In addition to current assets such as cash and cash
equivalents and securities, Toyota Industries maintained acommercial paper issuance capacity of ¥100.0 billion as ofMarch 31, 2004.
Toyota Industries continues to maintain its solid financial
condition. Through the use of such current assets as cash andcash equivalents and securities, as well as free cash flows andfunds procured from financial institutions, Toyota Industries
believes that it will be able to provide sufficient funds for theworking capital necessary to expand existing businesses anddevelop new projects, and for future investments.

Assets, Liabilities andShareholders’ Equity
Total assets at the end of fiscal 2004 amounted to ¥2,012.0
billion, an increase of ¥361.6 billion (21.9%) over the end of fiscal
2003. This increase was attributable mainly to a significant
increase in investments and other assets.
Current assets decreased ¥21.9 billion (5.9%) from theprevious fiscal year-end to ¥349.9 billion. This decrease primarilyreflected a decrease in cash and cash equivalents. Cash andcash equivalents decreased ¥59.7 billion (43.6%) to ¥77.2 billion,
due chiefly to repayments of corporate bonds.
Property, plant and equipment increased ¥27.2 billion (7.5%)
to ¥389.4 billion, due primarily to the consolidation of Aichi
during fiscal 2004.
Intangible assets increased ¥3.1 billion (3.2%) to ¥99.9
billion, due to an increase in software.
Investments and other assets increased ¥353.2 billion(43.1%) to ¥1,172.8 billion. This increase was mainly the result of
an increase in the market prices of shares of Toyota Group
companies, including TMC, held by Toyota Industries.
On the liabilities side, current liabilities decreased ¥67.0
billion (17.0%) from the previous fiscal year-end to ¥326.3 billion.
This decrease was due mainly to the repayments of corporate
bonds and convertible bonds.
Long-term liabilities amounted to ¥634.0 billion, an increaseof ¥139.8 billion (28.3%) over the previous fiscal year-end. Thiswas due chiefly to an increase of ¥134.0 billion in deferred tax
liabilities as a result of an increase in the market value ofinvestment securities.

ANNUAL REPORT 2004 — TOYOTA INDUSTRIES CORPORATION

Total Assets, Shareholders’ Equity
and Shareholders’ Equity Ratio(¥ Billion)

(%)

2,000

80

1,500

60

1,000

40

500

20

0
FY

0

00

01

02

03

04

Total assets (left)
Shareholders’ equity (left)
Shareholders’ equity ratio (right)

Interest-bearing debt, including short-term bank loans, longterm debt due to mature within one year, corporate bonds,
convertible bonds and long-term bank loans, amounted to¥321.0 billion, a decrease of ¥89.7 billion (21.8%) from the endof fiscal 2003.
Minority interest in consolidated subsidiaries increased ¥10.9
billion (45.6%) to ¥34.9 billion, primarily because Aichi became a
newly consolidated subsidiary.
Shareholders’ equity increased ¥277.9 billion (37.6%) to¥1,016.8 billion. This was mainly because of an increase of¥202.4 billion in net unrealized gains on other securities in
response to an increase in the market value of investment
securities. It was also due to an increase of ¥28.8 billion incommon stock and capital surplus resulting from the conversionof convertible bonds. The ratio of shareholders’ equity to total
assets increased to 50.5% from 44.8% at the end of theprevious fiscal year, while shareholders’ equity per share at yearend increased to ¥3,199.69 from ¥2,522.52.

Cash FlowsNet cash and cash equivalents provided by operating activities
amounted to ¥92.4 billion, a decrease of ¥10.8 billion (10.4%)
from fiscal 2003. Net cash and cash equivalents used ininvesting activities decreased ¥2.5 billion (2.6%) to ¥92.7 billion.
Net cash and cash equivalents used in financing activities
amounted to ¥56.0 billion, a difference of ¥113.8 billion from net
cash and cash equivalents provided by financing activities in theprevious fiscal year. Including translation adjustments and a net

Depreciation and Amortization(¥ Billion)(¥ Billion)

70

100
60
50
50
0

40

(50)

30

(100)

20
10

(150)

0
FY

(200)
FY

00

01

02

03

00

01

02

03

04

04

Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities

decrease in cash and cash equivalents due to changes insubsidiaries’ year-ends, cash and cash equivalents at the end of
fiscal 2004 decreased ¥59.7 billion (43.6%) to ¥77.2 billion.
The decrease in net cash provided by operating activities
was mainly because increases in receivables and income taxes
paid outweighed an increase in depreciation and amortization.
Income taxes paid in fiscal 2004 amounted to ¥30.6 billion, an
increase of ¥6.7 billion over fiscal 2003.
Net cash used in investing activities decreased in fiscal 2004.
Although proceeds from the sales of marketable securities
decreased ¥4.6 billion (54.1%) from fiscal 2003 to ¥3.9 billion,
payments for purchases of property, plant and equipment
decreased ¥8.4 billion (9.7%) to ¥78.3 billion. The amounts used
for purchases of property, plant and equipment consisted mainlyof ¥48.8 billion in the Automobile Segment, a decrease of ¥0.6
billion (1.2%); ¥1.2 billion in the Textile Machinery Segment, adecrease of ¥1.0 billion (45.5%); and ¥7.7 billion in the Others
Segment, a decrease of ¥4.3 billion (35.8%).
Net cash used in financing activities was ¥56.0 billion,
compared with ¥57.8 billion in net cash provided by financing
activities in fiscal 2003. This mainly reflected the absence ofcorporate bond issuances during fiscal 2004 and the repaymentof corporate bonds in an amount of ¥31.7 billion. In fiscal 2004,
Toyota Industries paid ¥7.4 billion in cash dividends, an increaseof ¥1.2 billion (19.4%) over fiscal 2003. Toyota Industries also
repurchased 7.7 million of its common shares in an amount of¥17.1 billion.

Automobile
Materials Handling Equipment
Textile Machinery
Others (including corporate or elimination)

Strategies and Outlook
Business Strategies
Since its establishment as a specialized textile machinery
manufacturer in 1926, Toyota Industries has diversified the scopeof its businesses. Drawing strength from this diversification andinnovation, we are preparing ourselves for further growth overthe coming years. Toyota Industries’ strategic operations are
divided into three categories, based on the mission assigned toeach.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cash FlowsFirst Category: Vehicle Business and Engine Business<Mission>
As a member of the Toyota Group, to contribute to the highquality and technological advances of TOYOTA cars.

Second Category: Car Air-Conditioning Compressor
Business, Materials Handling Equipment Businessand Textile Machinery Business<Mission>
To aggressively expand global markets through the developmentof products using Toyota Industries’ unique technologies.

Third Category: Electronics Business,
Logistics Solutions Business, etc.
<Mission>
To be a key source of Toyota Industries’ future growth.
The first category, the Vehicle Business and the Engine Business,handles mainly the production of vehicles consigned by TMC
and the production of engines for TOYOTA cars. To play a more

ANNUAL REPORT 2004 — TOYOTA INDUSTRIES CORPORATION

45

Management’s Discussion and Analysis of Financial Condition and Results of Operations

46

important role in the Toyota Group, Toyota Industries is making
continual efforts to improve its production technologies andstrengthen quality control. For Toyota Industries, this field of
business provides a stable platform for its own growth, while
also contributing to the success of the Toyota Group.
Aiming to be more proactive in the development andproduction of TOYOTA cars and engines, Toyota Industries will
step up its efforts to strengthen its R&D capability and improve
productivity. Toyota Industries will also make proposals to TMC
for the design and launch of auto parts and small cars, andactively work to ensure such proposals are adopted. In theEngine Business, Toyota Industries will contribute to TMC’s
global strategy, especially in Europe, with its diesel engines.
The second category comprises the Car Air-Conditioning
Compressor Business, the Materials Handling Equipment
Business and the Textile Machinery Business. This is a businessfield in which Toyota Industries must cultivate further
development of global markets by precisely identifying customer
needs, and developing and marketing state-of-the-art productsthat meet these needs through the application of originaltechnologies. Firmly believing that technological improvement is
the key to competitiveness, Toyota Industries strives tostrengthen its technological development capabilities by fostering
the development of superior engineers. Since the Car
Air-Conditioning Compressor Business and the Materials
Handling Equipment Business are positioned as corebusinesses, Toyota Industries intends to prioritize its allocation ofmanagement resources to them. In addition, on April 1, 2001,
Toyota Industries established TOYOTA Material Handling
Company as an independent company within Toyota Industries.
The main purpose of this move was to help ensure a flexible andspeedy response to changes in the business environment andemerge a winner in the face of intensifying global competition.
The third category consists of the Electronics Business,
which includes the production of LCDs, and the Logistics
Solutions Business. These businesses will also be made apriority in Toyota Industries’ allocation of management resourcesin order to grow them into core businesses. The Electronics
Business is a field characterized by rapid advances intechnological innovation, requiring stronger R&D capability andcontinual capital expenditure to maintain competitiveness. The
key to success in this field is to get production on track quickly,
improve the rejection rate of products and achieve a quick returnon investment. In order to participate in the Electronics Businessand expand operations in a short period of time, as well as todiversify the risks of entering new areas of this business, Toyota
Industries has not only carried out independent productdevelopment, but has also entered into joint ventures with Sonyand Ibiden Co., Ltd. In addition, Toyota Industries independently
conducts R&D into power electronics parts for automobiles andorganic light-emitting diodes. Toyota Industries believes that thisstrategy has been successful to date and sees the Electronics
Business as a key source of future corporate growth.

ANNUAL REPORT 2004 — TOYOTA INDUSTRIES CORPORATIONIn recent years, Japanese industries have been increasingly
moving toward outsourcing product distribution and storage
functions in order to reduce logistics costs. Seeing this as anopportunity, Toyota Industries entered into the Logistics
Solutions Business in Japan. Taking advantage of our materials
handling know-how accumulated through the production andsales of forklift trucks and other materials handling equipment,
we aim to provide customer-oriented proposals for optimized
logistics and cost reduction. Through proactive allocation ofmanagement resources, we hope our Logistics Solutions
Business will become a new source of stable revenues for
Toyota Industries.

Outlook for Results for Fiscal 2005
Although the Japanese economy is expected to continue on apath toward a steady recovery, there are numerous areas ofconcern, including exchange rate fluctuations and market
conditions for such raw materials as steel. Overseas, theeconomic outlook is clouded by uncertainties about the directionof the U.S. economy prior to the presidential election as well as
movements in the overheating Chinese economy.
For fiscal 2005, Toyota Industries expects to record
consolidated net sales of ¥1,150.0 billion, ordinary income of¥60.0 billion and net income of ¥34.0 billion. Toyota Industries
will make group-wide efforts aimed at the timely development
and introduction of products tailored to customer needs, carryout sales and service activities and undertake cost-reduction
activities.
Toyota Industries’ forecasts are based on an assumed
exchange rate of ¥105=US$1.

Dividend Policy
Toyota Industries’ dividend policy is to continue paying stabledividends, while giving overall consideration to business results
and the dividend payout ratio, in order to meet the expectationsof shareholders. Toyota Industries’ Ordinary General Meeting of
Shareholders, held on June 22, 2004, approved a year-end cash
dividend of ¥12.0 per share. Including the interim cash dividendof ¥12.0 per share, cash dividends for the year totaled ¥24.0 per
share, an increase of ¥2.0 per share over fiscal 2003. The
dividend payout ratio increased from 34.0% to 35.5%. Toyota
Industries will use retained earnings to improve thecompetitiveness of its products, augment production capacity inJapan and overseas, as well as expand into new fields ofbusiness and strengthen its corporate constitution in securing
future profits for its shareholders. It will also use retained
earnings to repurchase treasury stock.

Risk Information

Economic Trends
Demand for products supplied by the various businesses ofToyota Industries is influenced by market trends in suchindustries as automobiles, logistics, electronics and textiles. Also,
the choice of whether or not to purchase Toyota Industries’
products is at the discretion of customers. Accordingly,
worsening of economic conditions or a worsening economic
outlook could result in sluggish consumption in Toyota Industries’
principal sales regions, which could either directly or indirectly
cause Toyota Industries’ sales and operating income todecrease. Toyota Industries aims to build an earnings structurethat is not easily influenced by changes in the businessenvironment by diversifying its businesses while raisingproductivity, reducing fixed and variable costs and lowering its
break-even margin. Nevertheless, Toyota Industries believes that
decreases in demand in related industries as well as economic
slowdowns in regions and countries where it engages in sales
could have an adverse impact on its business results. Although,as a matter of course, economic trends in Japan are especiallycrucial, Toyota Industries also carries out its Car Air-Conditioning
Compressor, Materials Handling Equipment and Textile
Machinery businesses globally. Therefore, economic trends inprincipal regions and countries where Toyota Industries carriesout business activities, including the U.S., European countries,
China and other Asian countries, could have a significant impact
on its business results.

Principal Customers
Toyota Industries’ automobile and engine products are soldprimarily to TMC. In fiscal 2004, net sales to TMC accounted for
34.9% of consolidated net sales. Therefore, TMC’s vehicle sales
could have an impact on Toyota Industries’ business results. Asof March 31, 2004, TMC held 24.1% of Toyota Industries’ total
voting rights and 23.5% of total shares issued.

Product Development Capabilities
Based on the concept of “developing appealing new products,”
Toyota Industries proactively develops new products by utilizing
its leading-edge technologies, as it strives to anticipate
increasingly sophisticated and diversifying needs of the market

New Businesses
Toyota Industries invests in companies that engage in new
businesses, as well as aggressively carries out new businesses
independently. In undertaking new businesses, a myriad oftechnological and marketing-related issues must be resolved andlatent demand must be effectively stimulated. New businesses
involve numerous uncertain factors, and in the event thatbusiness plans are not achieved in accordance withexpectations, all investment burdens incurred could have an
adverse impact on Toyota Industries’ financial condition andbusiness results.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following represent risks that could have a material impact
on Toyota Industries’ financial condition, business results andshare prices. The risks mentioned in this annual report represent
only a portion of the risks that could have an impact on Toyota
Industries’ financial condition and business results, and do notnecessarily cover all possible risks. There is also a possibility that
Toyota Industries could be affected in the future by risks currently
unknown or not considered noteworthy or significant.

and ensure the satisfaction of its customers. R&D activities arefocused mainly on developing and upgrading products in current
business fields and peripheral sectors. Toyota Industries expects
that revenues derived from these fields will continue to accountfor a significant portion of total revenues and anticipates that
future growth will be contingent on the development and sales of
new products in these fields. Toyota Industries believes that it
can continue to develop appealing new products. However,Toyota Industries may not be able to forecast market needs anddevelop and introduce appealing new products in a timely
manner. This could result in lower future growth and have an
adverse impact on Toyota Industries’ financial condition andbusiness results. Such a situation could result from risks that
include no assurance Toyota Industries can allocate sufficient
future funds necessary for the development of appealing new
products; no assurance that product sales will be successful, as
forecasts of products supported by the market may not always
be accurate; no assurance that newly developed products andtechnologies will always be protected as intellectual property;
and no assurance that Toyota Industries’ products will not
become obsolete due to rapid technological advances andchanges in market needs.

Product Defects
Guided by the basic philosophy of “offering products andservices that are clean, safe and of high quality,” Toyota
Industries makes its utmost efforts to enhance quality. However,Toyota Industries cannot guarantee all its products will be defectfree and that product recalls will not be made in the future.
Toyota Industries is insured for product liability indemnity.
However, Toyota Industries cannot guarantee that this insurance
will sufficiently cover final indemnity amounts incurred. Productdefects that could lead to large-scale recalls and product liability
indemnities could result in large cost burdens and have asignificant negative impact on the evaluation of Toyota Industries.
It could also have an adverse effect on Toyota Industries’
financial condition and business results due to a decrease insales, deterioration of profitability and decrease in share prices ofToyota Industries.

ANNUAL REPORT 2004 — TOYOTA INDUSTRIES CORPORATION

47

Price Competition
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Toyota Industries faces extremely harsh competition in each of
the industries in which it conducts business, including its
materials handling equipment and automobile businesses, which
are the core of Toyota Industries’ earnings foundation. Toyota
Industries believes it offers high-value-added products that are
unrivalled in terms of technology, quality and cost. Amid anenvironment characterized by intensifying price competition,
however, Toyota Industries may be unable to maintain or
increase market share against low-cost competitors or tomaintain profitability. This could have an adverse impact on
Toyota Industries’ financial condition and business results.

Reliance on Suppliers of Raw Materials
and Components
Toyota Industries’ products rely on various raw materials andcomponents from suppliers outside Toyota Industries. Toyota
Industries has concluded basic business contracts with theseexternal suppliers and assumes it can carry out stabletransactions for raw materials and components. However, Toyota
Industries has no assurances against future shortages of raw
materials and components, which arise from a global shortagedue to tight supply or an unforeseen accident involving a
supplier. Such shortages could have a negative effect on Toyota
Industries’ product production and cause an increase in costs,
which could have an adverse impact on Toyota Industries’
financial condition and business results.

because export sales of several businesses are denominatedmainly in yen, exchange rate fluctuations could have an adverse
impact on Toyota Industries’ financial condition and businessresults due to a change in market prices.

Effects of Disasters, Power Blackouts
and Other Incidents
Toyota Industries carries out regular checks and inspections of
its production facilities. However, there is no assurance Toyota
Industries can completely prevent or lessen the impact of manmade or natural disasters, including malfunctions of production
facilities, fires at production facilities and power blackouts. For
example, the majority of Toyota Industries’ domestic production
facilities and most of its business partners are situated in the
Chubu region. Therefore, a major earthquake such as the Tokai
Earthquake, or an incident that affects other operations, could
have an adverse impact on Toyota Industries’ financial condition
and business results.

Latent Risks Associated with International
Activities
Toyota Industries manufactures and sells products and provides
services in various countries. Such unforeseen factors as social
chaos, including political disruptions, terrorism and wars, as well
as changes in economic conditions, could have an adverse
impact on Toyota Industries’ financial condition and businessresults.

Alliances with Other Companies
Aiming to expand its businesses, Toyota Industries engages injoint activities with other companies through alliances and joint
ventures. However, a disagreement between Toyota Industries
and its partners, owing to business, financial or other reasons,could prevent Toyota Industries from deriving the intended
benefits of its alliances. This could have an adverse impact on
Toyota Industries’ financial condition and business results.

Official Restrictions
Toyota Industries’ business activities are subject to a diverse
range of regulations in countries in which it carries out business
operations. They include regulations related to investment, trade,
competition, intellectual property, taxes, foreign exchange, theenvironment and recycling. Significant changes in such
regulations could restrict Toyota Industries’ business activities orlead to an increase in costs.

Exchange Rate Fluctuations
Toyota Industries’ businesses encompass the production andsales of products and the provision of services worldwide.
Generally, the strengthening of the yen against other currencies(especially against the U.S. dollar and the euro, which accountfor a significant portion of Toyota Industries’ sales) has anadverse impact on Toyota Industries’ business, while aweakening of the yen has a favorable impact. An increase in thevalue of currencies in countries or regions where Toyota
Industries carries out production could lead to an increase inlocal production, procurement and distribution costs. Such anincrease in costs could reduce Toyota Industries’ pricecompetitiveness and have an adverse impact on Toyota
Industries’ financial condition and business results. Additionally,

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ANNUAL REPORT 2004 — TOYOTA INDUSTRIES CORPORATION

Share Price Fluctuations
At the end of fiscal 2004, Toyota Industries held marketablesecurities, mostly shares, valued at approximately ¥1,076.9
billion, and therefore bears the risk of price fluctuation of theseshares. Based on fair market value of these shares at the end of
fiscal 2004, Toyota Industries had unrealized gains of ¥889.5
billion on these shares. However, unrealized gains on marketablesecurities could worsen depending on future share pricemovements. Additionally, a fall in share prices could reduce thevalue of pension assets, leading to an increase in the pension
shortfall.

Retirement Benefit Liabilities

expense and is recognized as a liability in future accounting
periods. Toyota Industries believes its assumptions arereasonable. However, differences between actual results orchanges in the assumptions could have an impact on retirement
benefits and retirement benefit expenses and liabilities after
employee retirement.

Toyota Industries’ Relationship to
Toyota Motor Corporation
Significant Accounting Policies
and Estimates
Toyota Industries’ financial statements are prepared in conformity
with accounting principles and practices generally accepted inJapan. In preparing financial statements, management must
make estimates, judgments and assumptions that affectreported amounts of assets and liabilities at fiscal year-end as
well as revenues and expenses during each fiscal year. Among
Toyota Industries’ significant accounting policies, the following
categories require a considerable degree of judgment andestimation and are highly complex.

Allowance for Doubtful Accounts
To prepare for the risk of receivables becoming uncollectible,
Toyota Industries estimates its allowance for doubtful accounts
by utilizing the percentage of historical experiences in credit
losses for ordinary receivables and individually examining thefeasibility of collection for receivables that seem to beuncollectible. Evaluating the allowance for doubtful accounts
involves judgments made in accordance with the nature of thesituation, and this allowance represents an essential and crucial
estimate — including future estimates of cash flow amounts andtiming — that could change significantly. Based on currently
available information, Toyota Industries’ management believes its
present allowance for doubtful accounts is sufficient. However,the need to significantly increase allowance for doubtful
accounts in the future could have an adverse impact on Toyota
Industries’ business results.

For historical reasons, Toyota Industries has a close relationshipwith TMC and Toyota Group companies in terms of capital
investment and business dealings.
Determined to manufacture Japanese-made automobiles, in
1933, Kiichiro Toyoda, the eldest son of founder Sakichi Toyoda
and then Managing Director of Toyota Industries (then Toyoda
Automatic Loom Works, Ltd.), established the Automobile
Division within the Company. In 1937, the Automobile Division
was spun off and became an independent company, Toyota
Motor Co., Ltd. (the present Toyota Motor Corporation).
As of March 31, 2004, Toyota Industries held 5.4% (196,725
thousand shares) of TMC’s total shares issued. As of the samedate, TMC held 24.1% (76,600 thousand shares) of Toyota
Industries’ total voting rights and 23.5% of total shares issued.
Toyota Industries is one of TMC’s affiliates accounted for by theequity method.
Toyota Industries assembles certain cars and produces
automobile engines under consignment from TMC, while its car
air-conditioning compressors are sold to DENSO Corporation(“DENSO”). Also, a portion of our other automobile-related
components and products is directly or indirectly sold to Toyota
Group companies. In fiscal 2004, our net sales to TMC andDENSO accounted for approximately 34.9% and 9.2% ofconsolidated net sales, respectively.
As a member of the Toyota Group, we intend to enhance thecompetitiveness of TMC and other Toyota Group companies bycontributing in such areas as quality, cost, delivery andtechnology. We believe that this will be reflected in increases inour sales to and profits from the Toyota Group, thus increasing
the shareholder value of Toyota Industries.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Toyota Industries’ employee retirement benefit expenses andliabilities are calculated based on expected rates of return on
pension assets as well as assumptions upon making actuarial
calculations that incorporate discount rates and other factors.
Therefore, differences between actual results and assumptions
as well as changes in the assumptions could have a significant
impact on recognized expenses and calculated liabilities in futureaccounting periods.

Allowance for Retirement Benefits
Calculations differ for retirement benefits, retirement benefit
expenses and liabilities after employee retirement, as well as
benefits for employees on leave of absence because different
assumptions are used at the time of calculation. Assumptions
include such factors as discount rates, amount of benefits,interest expenses, expected rates of return on pension assets
and mortality rates. The difference in amounts between theseassumptions and actual results is calculated cumulatively andamortized over future accounting periods, and thus becomes an

ANNUAL REPORT 2004 — TOYOTA INDUSTRIES CORPORATION

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