Toyota Motor Corporation (TM - Analyst Report) agreed to a $1.2 billion settlement with the U.S. Attorney’s Office for the Southern District of New York in relation to the criminal charges for problems in accelerator pedals and floor mats of its cars, which led to sudden acceleration and even crashes. This is the highest penalty imposed on any automaker and is 35 times higher than the maximum penalty the National Highway Traffic Safety Administration (NHTSA) can impose.
Toyota also admitted to misleading customers about the problem. The investigation regarding the matter was started in Feb 2010 although the automaker had been reportedly aware of the problem since 2007. Toyota initially failed to recall cars with the defective parts and continued to manufacture new cars using them despite being aware of the safety risk associated with them. The company finally issued a recall of 8 models after a crash killed an entire family but left out 3 other models that had the same problem.
Toyota will record the settlement amount as after-tax charges against earnings in the fiscal year ending Mar 31, 2014. This will significantly reduce the company’s net income. However, the financial position of the company will not be affected as it had cash and cash equivalents of ¥1,843.4 billion ($18.4 billion) as of Dec 31, 2013.
The U.S. Justice Department will use the settlement amount to compensate people who were affected by Toyota’s activities. Moreover, Toyota will be charged with wire fraud, although the charge will be dismissed after three years if the automaker pays the settlement amount and fulfills the terms of the agreement.
Despite this settlement, Toyota is still facing an investigation by the Securities and Exchange Commission. Additionally, there are innumerable civil lawsuits against the company for deaths and injuries.
Toyota had earlier paid $1.6 billion to settle a class action lawsuit related to sudden acceleration of cars. The company also incurred $1.1 billion during the recall of the affected vehicle. Moreover, it lost vehicle sales worth $880 million.
Currently, Toyota carries a Zacks Rank #2 (Buy). Some other automobile stocks worth considering are Tata Motors Limited (TTM - Snapshot Report), Daimler AG (DDAIF - Snapshot Report) and Tesla Motors, Inc. (TSLA - Analyst Report). TTM and DDAIF sport a Zacks Rank #1 (Strong Buy), while TSLA has a Zacks Rank #2.