Business context and reporting period
Honda Motor Co., Ltd. filed this IFRS annual report on Form 20-F for the fiscal year ended March 31, 2021. Although the request identifies 2020 Q4, the filing reports full-year fiscal 2021 results, with fiscal 2020 as the principal comparable period. Honda’s businesses are motorcycles, automobiles, financial services, and life creation and other businesses. Figures below are in Japanese yen (¥); “billion” means ¥ billion.
Financial performance and position
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Sales revenue | ¥13,170.5bn | ¥14,931.0bn | Down 11.8% |
| Operating profit | ¥660.2bn | ¥633.6bn | Up 4.2% |
| Operating margin | 5.0% | 4.2% | Improved |
| Profit before income taxes | ¥914.1bn | ¥789.9bn | Up 15.7% |
| Profit for the year | ¥695.4bn | ¥509.9bn | Up 36.4% |
| Profit attributable to owners | ¥657.4bn | ¥455.7bn | Up 44.3% |
| Basic and diluted EPS | ¥380.75 | ¥260.13 | Up |
| Operating cash flow | ¥1,072.4bn | ¥979.4bn | Up ¥92.9bn |
| Investing cash flow | Used ¥796.9bn | Used ¥619.5bn | Greater outflow |
| Financing cash flow | Used ¥284.0bn | Used ¥87.4bn | Greater outflow |
| Cash and cash equivalents | ¥2,758.0bn | ¥2,672.4bn | Up ¥85.7bn |
| Total assets | ¥21,921.0bn | ¥20,461.5bn | Up |
| Financing liabilities | ¥7,721.0bn | ¥7,469.7bn | Up |
| Total equity | ¥9,372.8bn | ¥8,286.0bn | Up |
Operating costs and expenses fell 12.5% to ¥12,510.3bn, including lower selling, general and administrative expenses (down 18.9%) and research and development expense (down 8.1%). The operating margin is calculated from reported sales revenue and operating profit. Cash flow from operations remained positive; cash increased despite investing and financing outflows. Honda reported working capital sufficient for present requirements and cash equal to approximately 2.5 months of sales revenue.
Financing liabilities include substantial funding for Honda’s customer and dealer finance business: ¥7,248.2bn, compared with ¥480.0bn for non-financial-services funding. Consequently, consolidated debt should be considered in light of the finance receivables and lease assets it supports. Total receivables from financial services and equipment on operating leases were ¥10,334.4bn, up 5.6%. Current assets were ¥7,579.1bn and current liabilities ¥5,715.5bn.
Material changes versus the prior period
- Revenue fell ¥1,760.4bn, principally as lower vehicle and motorcycle sales volumes affected all business operations; unfavorable currency translation also contributed. Management estimated the revenue decrease would have been 9.4%, rather than 11.8%, using prior-year exchange rates.
- Automobile revenue fell 14.0% to ¥8,567.2bn and segment operating profit fell 41.1% to ¥90.2bn; consolidated automobile unit sales declined 21.1% to 2.617 million.
- Motorcycle revenue fell 13.2% to ¥1,787.2bn and segment operating profit fell 21.4% to ¥224.6bn; consolidated unit sales declined 17.4% to 10.264 million, notably in Asia.
- Financial services revenue fell 3.6% to ¥2,494.2bn, but segment operating profit rose 62.5% to ¥357.0bn, mainly because selling and administrative expense declined, including lower credit-loss allowances.
- Life creation and other businesses improved its operating loss to ¥11.6bn from ¥25.1bn; revenue declined 1.2% to ¥321.7bn.
- Overall operating profit increased despite lower sales, mainly due to reduced selling and administrative expenses and ongoing cost reductions. Profit before tax also benefited from a ¥108.5bn increase in equity-method earnings, including reversal of previously recorded impairment losses on certain investments. Income tax expense declined to ¥218.6bn and the effective tax rate fell to 23.9% from 35.4%.
Outlook, risks and unusual items
- Outlook: The filing provides estimated FY2022 capital expenditures of ¥320bn, excluding equipment on operating leases and intangible assets. It does not provide a clear consolidated earnings or revenue forecast in the supplied text. Honda’s longer-term goals include carbon neutrality by 2050 and zero traffic-collision fatalities involving Honda motorcycles and automobiles globally by 2050; these are ambitions, not near-term financial guidance.
- Management priorities: Honda emphasizes electrification, driver-assistance and connected technologies, cost and production efficiency, and new mobility and energy services. It plans to begin production-technology verification for proprietary all-solid-state batteries on a demonstration line from FY2022.
- COVID-19 and supply constraints: Restrictions, disrupted parts supply, and reduced dealer activity affected production and demand. Honda said activities had largely resumed by year-end, but recovery and the pandemic’s duration remained uncertain. Semiconductor shortages were causing suspended or reduced automobile production at some facilities.
- Other key risks: Foreign-exchange and economic volatility; supplier and semiconductor availability; environmental and safety regulation; cyberattacks and data protection; litigation and product quality; and credit and lease residual-value risk in financial services. Honda disclosed a June 2020 cyberattack that temporarily disrupted operations at several locations.
- Contingencies and estimates: Product-warranty provisions rose to ¥481.0bn from ¥380.7bn; FY2021 warranty accruals were ¥272.1bn, mainly reflecting future recall costs. Honda says potential additional airbag-inflator recall provisions cannot be reasonably estimated. It considers pending litigation routine and does not expect a material adverse outcome; certain product-liability matters include punitive-damage claims.
- Notable non-recurring or sensitive items: Equity-method earnings included a ¥56.8bn reversal of prior impairment losses following transactions involving certain automotive-parts affiliates. A reversal of operating-lease impairment and lower expected credit losses also supported financial-services results. Management’s estimates assume markets recover to pre-COVID levels; actual results may differ materially.
- Shareholder returns: Honda’s stated target is a consolidated dividend payout ratio of approximately 30%. The FY2021 year-end dividend of ¥54 per share was approved after year-end and paid in June 2021. The report also describes a subsequent change to semiannual dividend distributions. The differing “declared during the period” and full-year dividend figures reflect timing and should be checked against the dividend resolutions.
- Audit and controls: KPMG issued unqualified opinions on the IFRS financial statements and internal control over financial reporting; management also concluded disclosure controls were effective at March 31, 2021.
Most important facts for investors to verify
- Whether vehicle and motorcycle volumes recover, especially in Asia, and whether semiconductor and other supply constraints persist.
- How much of the operating-profit and net-profit improvement is repeatable versus expense reductions, lower credit-loss charges, tax-rate changes, and the equity-method impairment reversal.
- Financial-services credit quality, lease-vehicle residual values, and the adequacy of related allowances under less favorable economic conditions.
- Cash generation, refinancing needs, and the composition of ¥7,721.0bn of financing liabilities, distinguishing finance-subsidiary funding from industrial operations.
- Progress and spending on electrification, software, safety, and carbon-neutrality commitments, alongside the FY2022 capital-expenditure estimate.
- Changes in warranty and recall exposure, including airbag-inflator matters, and any material developments in litigation or cybersecurity.
- The timing and basis of FY2021 dividends, including the ¥54 year-end payment and the subsequent change in dividend policy.