Honda Motor Co., Ltd. — Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2011. Although the request metadata refers to “2010 Q4,” this filing is an annual report for FY2011; it also presents unaudited quarterly data, including the fourth quarter. Financial statements are prepared under U.S. GAAP. Amounts below are in yen unless stated otherwise.
Business context and reporting period
Honda develops, manufactures and sells motorcycles, automobiles and power products, and provides customer and dealer financing. Automobiles accounted for about 76% of FY2011 external revenue. The year included the March 11, 2011 Great East Japan Earthquake, which disrupted production and damaged facilities and inventory.
Key financial metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales and operating revenue | ¥8,936.9 billion | ¥8,579.2 billion | +4.2% |
| Operating income | ¥569.8 billion | ¥363.8 billion | +56.6% |
| Operating margin | About 6.4% | About 4.2% | Improved |
| Net income attributable to Honda | ¥534.1 billion | ¥268.4 billion | +99.0% |
| Basic earnings per share | ¥295.67 | ¥147.91 | More than doubled |
| Operating cash flow | ¥1,070.8 billion | ¥1,544.2 billion | Down ¥473.3 billion |
| Investing cash flow | (¥731.4 billion) | (¥595.8 billion) | Greater outflow |
| Financing cash flow | (¥100.4 billion) | (¥559.2 billion) | Smaller outflow |
| Cash and cash equivalents at year-end | ¥1,279.0 billion | ¥1,119.9 billion | Up ¥159.1 billion |
| Total assets | ¥11,570.9 billion | ¥11,629.1 billion | Down slightly |
| Total equity | ¥4,582.9 billion | ¥4,456.4 billion | Up |
| Debt on balance sheet | ¥4,100.4 billion | ¥4,101.7 billion | Broadly unchanged |
FY2011 net income margin was approximately 6.0%. Cash represented about 1.7 months of sales, which management considered adequate. Current liabilities were ¥3,568.2 billion against current assets of ¥4,690.0 billion. Debt includes substantial financing-subsidiary borrowing; interpret it in the context of the finance business and its receivables.
Capital expenditures were ¥1,109.8 billion, including ¥798.4 billion for operating-lease assets; excluding operating-lease property, they were ¥311.4 billion. Finance-subsidiary receivables and operating-lease property totaled ¥4,837.6 billion at year-end.
Fourth-quarter data and material changes
FY2011 Q4 unaudited revenue was ¥2,213.1 billion, operating income ¥46.2 billion and net income attributable to Honda ¥44.6 billion. Versus FY2010 Q4, revenue declined about 2.9%, operating income about 51.9% and attributable net income about 38.3%. The filing attributes earthquake-related disruption to the quarter; it does not provide a standalone Q4 estimate of the earthquake’s effect on these results.
- Annual revenue recovered from FY2010, mainly on higher automobile and motorcycle sales. At prior-year exchange rates, management estimated revenue growth would have been about 8.7%, versus 4.2% reported.
- Operating income improved through increased sales and model mix, higher production that reduced fixed cost per unit, and continuing cost reductions. Negative currency effects reduced operating income by ¥137.6 billion; earthquake impacts and higher SG&A and R&D costs also weighed on results.
- Motorcycle revenue increased 13.0% to ¥1,288.1 billion, with unit sales up 18.7% to 11.445 million, driven particularly by Asia and other regions.
- Automobile revenue increased 3.6% to ¥6,794.0 billion and unit sales increased 3.5% to 3.512 million. North America and Asia grew, while Japan and Europe declined.
- Financial-services revenue fell 7.3% to ¥561.8 billion and operating income fell 4.4% to ¥186.2 billion. Lower credit-loss provisions and lease-residual losses helped, but currency effects offset part of the benefit.
- Power product and other revenue rose 5.4% to ¥292.6 billion; the segment reported an operating loss of ¥5.5 billion, an improvement from the prior year.
Outlook, commentary, risks and unusual items
- Earthquake recovery: Honda said Japanese production had nearly normalized by late June 2011 and overseas production was expected to approach normal levels around August–September, with restrictions continuing for certain models. Management expected sales to recover as production normalized, but identified lost sales, reduced-production overhead and restoration costs as possible pressures. No earnings guidance was provided.
- Investment plans: Estimated FY2012 capital expenditures were ¥430.0 billion, excluding property on operating leases and intangible assets. Plans included ¥350.0 billion for automobiles and ¥65.3 billion for motorcycles.
- Earthquake charges: Honda recognized ¥45.7 billion of costs and expenses in FY2011, including ¥15.6 billion for damaged property and equipment and ¥15.0 billion of unallocated fixed production overhead. Future restoration costs were to be recognized as incurred.
- Other unusual item: A ¥14.1 billion cumulative loss relating to prior-period inventory-management trading activities at a domestic subsidiary was recorded in FY2011 SG&A rather than by restating prior periods; Honda considered it immaterial to the financial statements.
- Affiliate transaction: Honda sold its 26% interest in Hero Honda Motors for ¥71.1 billion and recorded a ¥46.8 billion gain. A new licensing agreement generated ¥32.0 billion of FY2011 revenue; ¥45.0 billion of licensing consideration was payable in installments through 2014.
- Accounting change: Adoption of new transfer and variable-interest-entity rules consolidated ten former securitization entities from April 1, 2010. This brought previously derecognized receivables and related secured debt onto the balance sheet. Honda reported no off-balance-sheet arrangements for FY2011 under the adopted rules.
- Principal risks: Continuing supply-chain constraints and infrastructure disruption; currency and interest-rate movements, especially yen appreciation; demand weakness, competition and pricing pressure; raw-material and component availability; environmental, emissions and safety regulation; financial-services credit and lease-residual exposure; pension assumptions; and legal proceedings. Honda reported six purported U.S. class actions but stated it did not expect pending claims to have a material adverse effect.
- Contingencies and audit: Employee housing-loan guarantees totaled ¥30.3 billion, with no loss accrued. Management and KPMG reported effective internal control over financial reporting; KPMG gave an unqualified opinion on the audited financial statements.
Most important facts for investors to verify
- Actual post-earthquake production, parts availability, lost sales and restoration costs versus management’s recovery expectations.
- Whether revenue and operating-profit improvement persists after adjusting for ¥137.6 billion of adverse currency effects and the affiliate-sale and licensing items.
- Funding, maturity and liquidity exposure in finance subsidiaries, including ¥962.5 billion of long-term debt due within one year and access to committed credit lines.
- Credit quality, used-vehicle prices and lease-return assumptions underlying finance receivables and operating-lease assets.
- The treatment and materiality of the ¥14.1 billion prior-period adjustment, and subsequent developments in the U.S. class actions and other litigation.
- Execution of FY2012 capital spending and whether the reported production-normalization timetable was achieved.