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Car Safety: Toyota's Enduring Pain

F TM GM

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The vehicle safety and recall fiasco continue to whip Toyota Motor Corp. (TM - Analyst Report). This time, the company would end up paying $1.1 billion to settle a class-action lawsuit related to complaints of unintended acceleration in its vehicles. According to a plaintiff lawyer, the settlement is one of the largest in a lawsuit in the history of automotive industry.

The lawsuit blamed Toyota’s defective electronic throttle-control system rather than floor mats and sticky accelerator pedals for unintended acceleration, resulting in a crash. The settlement would pacify 16 million owners of Toyota, Lexus and Scion of model years 1998 to 2010. They would be eligible for payments and safety updates on their vehicles.

Key Provisions of the Settlement

Some of the key provisions of the proposed settlement (which are yet to be approved by a federal judge) are –

•    Toyota will establish a fund of $250 million in order to compensate some owners for getting lower resale value of their vehicles stemming from publicity related to unintended acceleration. Those owners sold their cars between September 1, 2009 and December 31, 2010.

•    Toyota will be required to install a brake-override system in roughly 3.25 million vehicles, which were subject to floor mat recalls.

•    Toyota should also establish a fund of $250 million to compensate existing owners whose vehicles are not eligible for a brake-override system. The amount of individual compensation would depend on the model, model year, and the state where the car was purchased.

•    Toyota would make all 16 million-vehicle owners eligible for a customer care plan for 3–10 years that will warranty certain parts that are tied to unintended acceleration.

•    Toyota would provide $30 million in education grants to independent academic institutions to undertake vehicle safety-related studies and improve driver education.

Any More Lawsuits?

Although Toyota still faces hundreds of personal injury lawsuits related to unintended acceleration, the company believes the latest settlement would be the biggest nail in the coffin.

According to a company filing in June, Toyota faces more than 300 wrongful death or injury lawsuits. However, plaintiffs in those smaller cases might face difficulty in claiming damages, as it will become harder to prove.

U.S. Government Fine

Recently, the Transportation Department of U.S. slapped a fine of $17.35 million on Toyota due to late response regarding a defect in its vehicles to safety regulators as well as late recall of those vehicles. According to the department, it was the maximum allowable fine under the law for not initiating a recall in a timely manner.

In May this year, National Highway Traffic Safety Administration (NHTSA) notified Toyota about “floor mat pedal entrapments” in some of its Lexus hybrid models. Manufacturers are legally obligated to notify the U.S. safety regulators within five business days once they come to know of a safety defect.

However, the automaker responded a month later stating that it is aware of 63 incidents related to the defect in the vehicles. Consequently, it announced a recall of 154,036 units of Lexus RX 350 and RX 450h luxury hybrid sports utility vehicles in June in order to fix the problem of loose floor mat that could force down the accelerator pedal.

The latest fine adds to $48.4 million imposed by the U.S. government on the company in 2010 due to late recall of millions of defective vehicles.

The Downfall

Since November 2009, the automaker has recalled about 20 million vehicles globally, surpassing all other automakers. The company also lost its No.1 position to General Motors Company (GM - Analyst Report) and Ford Motor Co. (F - Analyst Report) in terms of sales volumes in the U.S. due to the loss of reputation as well as negative impact from natural disasters in Japan and Thailand in 2011.

A couple of months back, Toyota announced a major worldwide recall of 7.43 million vehicles that included more than a dozen models manufactured between 2005 and 2010. The recall was related to faulty power window switches in the vehicles that can cause fire because they did not have grease applied properly during production.

Impressive Earnings but Lower Outlook

Toyota, a Zacks #4 Rank (Sell) stock, saw more than threefold increase in profits to ¥257.92 billion ($3.28 billion) or ¥81.44 ($1.04) per share in the second quarter of fiscal year ended September 30, 2012 from ¥80.42 billion or ¥25.65 in the same quarter of prior fiscal year.

The increase in profits can be attributable to strong demand for Toyota vehicles as well as positive impact from the company’s cost control measures. However, profits were lower than the Zacks Consensus Estimate of $1.62 per share.

Revenues in the quarter grew 18.2% to ¥5.41 trillion ($68.75 billion) on a 14.9% rise in sales volume to 2.16 million units. Vehicle sales increased in all the regions, except Europe. Operating income more then quadrupled to ¥340.61 billion ($4.33 billion) from ¥75.39 billion in the second quarter of previous fiscal year.

However, Toyota projected lower consolidated vehicles sales of 8.75 million units for fiscal 2013 ending March 31, 2013, down 50 thousand units from the prior guidance. The automaker also lowered its consolidated revenues outlook to ¥21.30 trillion (up 14.6% from fiscal 2012) from the prior guidance of ¥22.00 trillion. The downward revision of sales outlook was based on difficulties in Chinese and European markets.
 

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