Honda Motor Co., Ltd. — FY2010 Form 20-F Summary
Reporting period: Fiscal year ended March 31, 2010; consolidated statements are prepared under U.S. GAAP. Although the request identifies “2009 Q4,” this filing is an annual report for FY2010, not a standalone quarterly filing. Its unaudited quarterly data identify FY2010 fourth-quarter results separately.
Business context and financial performance
Honda operates motorcycle, automobile, financial services, and power product businesses globally. Figures below are in yen unless stated otherwise; yen-to-dollar translations in the filing use ¥93.04 per US$1.
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Net sales and operating revenue | ¥8,579.2bn | ¥10,011.2bn | Down 14.3% |
| Operating income | ¥363.8bn | ¥189.6bn | Up 91.8% |
| Operating margin | 4.2% | 1.9% | Up about 2.3 percentage points |
| Net income attributable to Honda | ¥268.4bn | ¥137.0bn | Up 95.9% |
| Basic earnings per share | ¥147.91 | ¥75.50 | Up 95.9% |
| Net cash from operating activities | ¥1,544.2bn | ¥383.6bn | Increased ¥1,160.5bn |
| Cash and cash equivalents at year-end | ¥1,119.9bn | ¥690.4bn | Increased ¥429.5bn |
Net margin attributable to Honda was approximately 3.1%, versus 1.4% in FY2009. Operating income recovered primarily through lower selling, general and administrative and R&D expenses, continuing cost reductions, and lower credit and lease-residual provisions. These gains were partly offset by weaker sales, adverse currency effects and higher fixed costs per unit from reduced production. At prior-year exchange rates, management estimated the revenue decline at 7.5%, rather than the reported 14.3%; negative currency effects reduced operating income by ¥167.5bn.
FY2010 standalone fourth-quarter results were unaudited: revenue ¥2,279.6bn, operating income ¥96.1bn and net income attributable to Honda ¥72.2bn. FY2009 fourth-quarter results included an operating loss of ¥272.1bn and an attributable net loss of ¥180.0bn.
Liquidity, debt and investment
Total assets were ¥11,629.1bn and total equity ¥4,456.4bn at March 31, 2010. Current assets were ¥4,613.7bn and current liabilities ¥3,419.1bn. Short-term debt was ¥1,066.3bn; long-term debt, including current maturities, was ¥3,035.3bn. These totals include substantial financing-subsidiary borrowings supporting customer and dealer finance programs. Honda reported ¥410.3bn of funding liabilities for non-financial-services businesses and ¥4,243.7bn for financial services.
Honda said cash of ¥1,119.9bn represented about 1.6 months of net sales and was sufficient for operations. It also reported ¥860.0bn of unused committed credit lines and ¥2,656.4bn of unused commercial-paper and medium-term-note facilities. Operating cash flow was strong, while investing and financing activities used ¥595.8bn and ¥559.2bn, respectively.
Capital expenditures were ¥893.0bn, including ¥544.0bn for operating-lease assets; excluding lease assets, they were ¥348.9bn. Management estimated FY2011 capital expenditures of ¥380bn, excluding operating-lease assets and intangible assets. Honda’s stated long-term dividend policy targets a shareholder-return ratio of approximately 30%. The FY2010 annual dividend was reported as ¥38 per share, including a ¥12 year-end dividend approved after year-end.
Segments and material changes
- Automobiles: Revenue fell 14.6% to ¥6,554.8bn; operating income increased to ¥126.8bn from ¥24.5bn. Unit sales declined 3.6% to 3.392m. Japan and Asia grew, but North America, Europe and other regions contracted.
- Motorcycles: Revenue fell 19.2% to ¥1,140.2bn; operating income declined 41.1% to ¥58.8bn. Unit sales decreased 4.7% to 9.639m, with Asian growth offset by declines in North America, Europe and other regions.
- Financial services: Revenue rose 4.1% to ¥606.3bn and operating income rose 141.6% to ¥194.9bn, mainly as credit-loss and lease-residual provisions and funding costs fell. Finance receivables and operating-lease property totaled ¥4,769.6bn, down 1.9%.
- Power products and other: Revenue fell 19.1% to ¥277.6bn; operating loss widened to ¥16.7bn. Unit sales fell 8.5% to 4.744m.
Overall revenue declined for a second consecutive year from FY2008, but operating income and attributable net income improved from FY2009’s depressed levels. Capital expenditures also fell substantially. Inventory declined from ¥1,244.0bn to ¥935.6bn.
Outlook, risks and unusual items
- The filing provides no consolidated earnings or revenue guidance. The FY2011 capital-expenditure estimate is ¥380bn. Plans for a new Argentina automobile plant, with approximately ¥16bn investment, were delayed from the second half of 2009 to the first half of 2011. Honda also described capacity expansions in India and China.
- Management described gradual economic recovery in the United States, Europe and Japan, and stronger recovery in China and India, while noting continuing economic uncertainty. Priorities include fuel efficiency, safety and environmental technologies, product quality, cost-efficient production and growth in motorcycles and global production capabilities.
- Key risks include economic and consumer-demand weakness, intense competition and pricing pressure, yen appreciation and other currency movements, interest-rate and funding risk, credit losses and lease-residual values, supplier disruption, changing environmental and safety regulations, pension assumptions, and geopolitical events or natural disasters.
- Honda disclosed 44 purported U.S. class actions, along with other litigation and claims, and said the expected outcome was not likely to have a material adverse effect. It also reported ¥109.5bn of unrecognized tax benefits; the timing and amount of potential settlements are uncertain.
- Used-vehicle prices recovered during FY2010, and Honda reported no impairment losses from declines in estimated lease residual values for that year. Credit-loss provisions and lease-residual losses also fell, but estimates remain sensitive to economic conditions and used-vehicle values.
- Honda consolidated certain North American securitization trusts as variable-interest entities. It also disclosed that new accounting rules would require consolidation of certain legacy securitizations, adding previously derecognized receivables of ¥274.5bn and related debt of ¥272.4bn; the cumulative retained-earnings effect was expected to be immaterial.
- Management and KPMG reported effective disclosure controls and internal control over financial reporting as of March 31, 2010. KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the reporting-period match: the filing covers FY2010, while the request refers to 2009 Q4; use the filing’s unaudited quarterly table for quarter-specific comparisons.
- Assess whether the earnings recovery is durable, given falling revenue and the contribution from reduced expenses, currency effects, and lower finance-related provisions.
- Review total debt and funding needs across the manufacturing and finance businesses, including the maturity schedule, credit facilities and securitization exposure.
- Track credit quality, lease-return rates and used-vehicle prices, which affect finance-segment earnings and asset estimates.
- Check developments in the 44 purported class actions, tax examinations and unrecognized tax benefits, as well as pension funding and assumptions.
- Compare the ¥380bn FY2011 capital-spending estimate and delayed Argentina project with subsequent disclosures and actual investment.