XTKS:7267 Honda Motor Co Ltd Annual Report 20-F Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

OR

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report            

Commission file number 1-7628

 

HONDA GIKEN KOGYO KABUSHIKI KAISHA

(Exact name of Registrant as specified in its charter)

 

HONDA MOTOR CO., LTD.

(Translation of Registrant’s name into English)

 

JAPAN

(Jurisdiction of incorporation or organization)

No. 1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo 107-8556, Japan

(Address of principal executive offices)

Mitsuhiro Okayama, Honda North America, Inc.,

ir@hna.honda.com, (212)707-9920, 156 West 56th Street, 20th Floor, New York, NY 10019, U.S.A.

(Name, E-mail and/or Facsimile number, Telephone and Address of Company Contact Person)

 

Securities registered pursuant to Section 12(b) of the Act.

Title of each class

 

Name of each exchange on which registered

Common Stock*   New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Title of each class

 

Outstanding as of March 31, 2012

Common Stock   1,802,299,559**

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act,    Yes  x    No  ¨

If this report is an annual or transmission report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or, a non-accelerated filer. See definition of “accelerated filer and large accelerated filer “in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    x             Accelerated filer  ¨            Non-accelerated filer  ¨            

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S.GAAP  x    International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨    Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

* Not for trading purposes, but only in connection with the registration of American Depositary Shares, each representing one share of Common Stock.
** Shares of Common Stock include 61,138,613 shares represented by American Depositary Shares.

 

 


Table of Contents

PART I

  

Item 1. Identity of Directors, Senior Management and Advisors

     1   

Item 2. Offer Statistics and Expected Timetable

     1   

Item 3. Key Information

     1   

A. Selected Financial Data

     1   

B. Capitalization and Indebtedness

     3   

C. Reason for the Offer and Use of Proceeds

     3   

D. Risk Factors

     3   

Item 4. Information on the Company

     8   

A. History and Development of the Company

     8   

B. Business Overview

     8   

C. Organizational Structure

     25   

D. Property, Plants and Equipment

     26   

Item 4A. Unresolved Staff Comments

     28   

Item 5. Operating and Financial Review and Prospects

     28   

A. Operating Results

     28   

B. Liquidity and Capital Resources

     55   

C. Research and Development

     57   

D. Trend Information

     59   

E. Off-Balance Sheet Arrangements

     59   

F. Tabular Disclosure of Contractual Obligations

     60   

G. Safe Harbor

     60   

Item 6. Directors, Senior Management and Employees

     61   

A. Directors and Senior Management

     61   

B. Compensation

     72   

C. Board Practices

     73   

D. Employees

     73   

E. Share Ownership

     74   

Item 7. Major Shareholders and Related Party Transactions

     74   

A. Major Shareholders

     74   

B. Related Party Transactions

     75   

C. Interests of Experts and Counsel

     75   

Item 8. Financial Information

     75   

A. Consolidated Statements and Other Financial Information

     75   

B. Significant Changes

     76   

Item 9. The Offer and Listing

     76   

A. Offer and Listing Details

     76   

B. Plan of Distribution

     77   

C. Markets

     77   

D. Selling Shareholders

     78   

E. Dilution

     78   

F. Expenses of the Issue

     78   

Item 10. Additional Information

     78   

A. Share Capital

     78   

B. Memorandum and Articles of Association

     78   

C. Material Contracts

     85   

D. Exchange Controls

     85   

E. Taxation

     86   


Table of Contents

F. Dividends and Paying Agents

     89   

G. Statement by Experts

     89   

H. Documents on Display

     90   

I. Subsidiary Information

     90   

Item 11. Quantitative and Qualitative Disclosure about Market Risk

     90   

Item 12. Description of Securities Other than Equity Securities

     93   

PART II

  

Item 13. Defaults, Dividend Arrearages and Delinquencies

     94   

Item 14. Material Modifications to the Rights of Security Holders and Use Proceeds

     94   

Item 15. Controls and Procedures

     94   

Item 16A. Audit Committee Financial Expert

     95   

Item 16B. Code of Ethics

     95   

Item 16C. Principal Accountant Fees and Services

     96   

Item 16D. Exemptions from the Listing Standards for Audit Committees

     96   

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     98   

Item 16F. Change in Registrant’s Certifying Accountant

     98   

Item 16G. Corporate Governance

     98   

Item 16H. Mine Safety Disclosure

     100   

PART III

  

Item 17. Financial Statements

     100   

Item 18. Financial Statements

     100   

Item 19. Exhibits

     101   


Table of Contents

PART I

 

Unless the context otherwise requires, the terms “we”, “us”, “our”, “Registrant”, “Company” and “Honda” as used in this Annual Report each refer to Honda Motor Co., Ltd. and its consolidated subsidiaries.

 

Item 1. Identity of Directors, Senior Management and Advisors

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A. Selected Financial Data:

 

The selected consolidated financial data set out below for each of the five fiscal years ended March 31, 2012 have been derived from our consolidated financial statements that were prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).

 

You should read the U.S. GAAP selected consolidated financial data set out below together with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements contained in this Annual Report.

 

    Fiscal years ended March 31,  
    Yen
(millions)
    U.S. dollars
(millions)
 
    2008     2009     2010     2011     2012             2012          

Income statement data:

           

Net sales and other operating revenue

  ¥ 12,002,834      ¥ 10,011,241      ¥ 8,579,174      ¥ 8,936,867      ¥ 7,948,095      $ 96,704   

Research and development

    587,959        563,197        463,354        487,591        519,818        6,325   

Operating income

    953,109        189,643        363,775        569,775        231,364        2,815   

Income before income taxes and equity in income of affiliates

    895,841        161,734        336,198        630,548        257,403        3,132   

Equity in income of affiliates

    118,942        99,034        93,282        139,756        100,406        1,222   

Net income

    627,347        150,933        282,611        563,477        222,074        2,702   

Net income attributable to Honda Motor Co., Ltd.

    600,039        137,005        268,400        534,088        211,482        2,573   

Balance sheet data:

           

Total assets

  ¥ 12,615,543      ¥ 11,818,917      ¥ 11,629,115      ¥ 11,570,874      ¥ 11,780,759      $ 143,336   

Long-term debt, excluding current portion

    1,836,652        1,932,637        2,313,035        2,043,240        2,235,001        27,193   

Honda Motor Co., Ltd. shareholders’ equity

    4,550,479        4,007,288        4,328,640        4,449,975        4,402,614        53,566   

Total equity

    4,692,285        4,130,344        4,456,430        4,582,912        4,528,290        55,095   

Common stock

    86,067        86,067        86,067        86,067        86,067        1,047   

Cash flow data:

           

Depreciation excluding property on operating leases

  ¥ 417,393      ¥ 441,868      ¥ 401,743      ¥ 351,496      ¥ 320,996      $ 3,906   

Depreciation of property on operating leases

    101,032        195,776        227,931        212,143        209,762        2,552   

Total depreciation

    518,425        637,644        629,674        563,639        530,758        6,458   

Capital expenditures

    668,228        635,190        392,062        318,543        397,218        4,833   

Purchase of operating lease assets

    839,261        668,128        544,027        798,420        683,767        8,319   

Total capital expenditures

    1,507,489        1,303,318        936,089        1,116,963        1,080,985        13,152   

 

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Table of Contents

Weighted average number of shares outstanding

 

     (Thousands of shares)  
         2008              2009              2010              2011              2012      

Weighted average number of common shares outstanding

     1,815,356         1,814,560         1,814,605         1,806,360         1,802,300   

 

Net income attributable to Honda Motor Co., Ltd. per common share

 

     (Yen)      (US$)  
         2008              2009              2010              2011              2012              2012      

Basic

   ¥ 330.54       ¥ 75.50       ¥ 147.91       ¥ 295.67       ¥ 117.34       $ 1.43   

Diluted

     330.54         75.50         147.91         295.67         117.34         1.43   

 

Net income attributable to Honda Motor Co., Ltd. per common share has been computed by dividing net income attributable to Honda Motor Co., Ltd. available to common shareholders by the weighted average number of common shares outstanding during each year.

 

Dividends declared during the period per common share

 

     (Yen)  
         2008             2009             2010             2011             2012      

Dividends declared during the period per common share

     ¥84.00        ¥77.00        ¥34.00        ¥51.00        ¥60.00   
     (US$  0.84     (US$  0.78     (US$  0.37     (US$  0.61     (US$  0.73

 

Additionally, a year-end dividend of ¥15 ($0.18) per common share aggregating ¥27.0 billion ($329 million) relating to fiscal 2012 was determined by our Board of Directors in April 2012 and approved by our shareholders in June 2012. This dividend will be paid in June 2012.

 

U.S. dollar amounts for dividends per share are translated from yen for the convenience of readers at the year-end exchange rate of each period.

 

Exchange Rates

 

In this Annual Report, yen amounts have been translated into U.S. dollars for the convenience of readers. Unless otherwise noted, the rate used for these translations was ¥82.19 =$1.00, which represents the approximate exchange rate quoted on the Tokyo Foreign Exchange Market on March 31, 2012. No representation is made that yen amounts could have been, or could be, converted into U.S. dollars at that rate or any other rate on this or any other data or at all.

 

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The following table sets out information regarding the noon buying rates for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York expressed in yen per $1.00 during the periods shown. On May 31, 2012, the noon buying rate was ¥78.29=$1.00. The average exchange rate for the period shown is the average of the month-end rates during the period.

 

     (Yen)  

Years ended March 31,

   Average      Period end      High      Low  

2008

     113.61         99.85         124.09         96.88   

2009

     100.85         99.15         110.48         87.80   

2010

     92.49         93.40         100.71         86.12   

2011

     85.00         82.76         94.68         78.74   

2012

     78.86         82.41         85.26         75.72   

2013 (through May 31, 2012)

     79.05         78.29         82.62         78.29   

Dec-2011

           78.13         76.98   

Jan-2012

           78.13         76.28   

Feb-2012

           81.10         76.11   

Mar-2012

           83.78         80.86   

Apr-2012

           82.62         79.81   

May-2012

           80.36         78.29   

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reason for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

You should carefully consider the risks described below before making an investment decision. If any of the risks described below actually occurs, Honda’s business, financial condition or results of operations could be adversely affected. In that event, the trading prices of Honda’s common stock and American Depositary Shares could decline, and you may lose all or part of your investment. Additional risks not currently known to Honda or that Honda now deems immaterial may also harm Honda and affect your investment.

 

Risks Relating to Honda’s Industry

 

Honda may be adversely affected by market conditions

 

Honda conducts its operations in Japan and throughout the world, including North America, Europe and Asia. A sustained loss of consumer confidence in these markets, which may be caused by continued economic slowdown, recession, changes in consumer preferences, rising fuel prices, financial crisis or other factors could trigger a decline in demand for automobiles, motorcycles and power products that may adversely affect Honda’s results of operations.

 

Prices for products can be volatile

 

Prices for automobiles, motorcycles and power products in certain markets may experience sharp changes over short periods of time. This volatility is caused by various factors, including fierce competition, which is increasing, short-term fluctuations in demand caused by instability in underlying economic conditions, changes in tariffs, import regulations and other taxes, shortages of certain materials and parts, steep rise in material prices and sales incentives. There can be no assurance that such price volatility will not continue for an extended period of time or that price volatility will not occur in markets that to date have not experienced such volatility.

 

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Overcapacity within the industry has increased and will likely continue to increase if the economic downturn continues in Honda’s major markets, leading, potentially, to further increased price volatility. Price volatility in any of Honda’s markets could adversely affect Honda’s results of operations.

 

Risks Relating to Honda’s Business Generally

 

Currency and Interest Rate Risks

 

Honda’s operations are subject to currency fluctuations

 

Honda has manufacturing operations throughout the world, including Japan, and exports products and components to various countries.

 

Honda purchases materials and components and sells its products and components in foreign currencies. Therefore, currency fluctuations may affect Honda’s pricing of products sold and materials purchased. Accordingly, currency fluctuations have an effect on Honda’s results of operations and financial condition, as well as Honda’s competitiveness, which will over time affect its results.

 

Since Honda exports many products and components, particularly from Japan, and generates a substantial portion of its revenues in currencies other than the Japanese yen, Honda’s results of operations would be adversely affected by an appreciation of the Japanese yen against other currencies, in particular the U.S. dollar.

 

Honda’s hedging of currency and interest rate risk exposes Honda to other risks

 

Although it is impossible to hedge against all currency or interest rate risks, Honda uses derivative financial instruments in order to reduce the substantial effects of currency fluctuations and interest rate exposure on our cash flows and financial condition. These instruments include foreign currency forward contracts, currency swap agreements and currency option contracts, as well as interest rate swap agreements. Honda has entered into, and expects to continue to enter into, such hedging arrangements. As with all hedging instruments, there are risks associated with the use of such instruments. While limiting to some degree our risk fluctuations in currency exchange and interest rates by utilizing such hedging instruments, Honda potentially forgoes benefits that might result from other fluctuations in currency exchange and interest rates. Honda is also exposed to the risk that its counterparties to hedging contracts will default on their obligations. Honda manages exposure to counterparty credit risk by limiting the counterparties to major international banks and financial institutions meeting established credit guidelines. However, any default by such counterparties might have an adverse effect on Honda.

 

Legal and Regulatory Risks

 

The automobile, motorcycle and power product industries are subject to extensive environmental and other governmental regulations, including with respect to global climate changes

 

Regulations regarding vehicle emission levels, fuel economy, noise and safety and noxious substances, as well as levels of pollutants from production plants, are extensive within the automobile, motorcycle and power product industries. These regulations are subject to change, and are often made more restrictive, particularly in recent years, due to an increasing concern with respect to possible global climate changes. The costs to comply with these regulations can be significant to Honda’s operations.

 

Honda is reliant on the protection and preservation of its intellectual property

 

Honda owns or otherwise has rights in a number of patents and trademarks relating to the products it manufactures, which have been obtained over a period of years. These patents and trademarks have been of value in the growth of Honda’s business and may continue to be of value in the future. Honda does not regard any of its

 

4


Table of Contents

businesses as being dependent upon any single patent or related group of patents. However, an inability to protect this intellectual property generally, or the illegal infringement of some or a large group of Honda’s intellectual property rights, would have an adverse effect on Honda’s operations.

 

Honda is subject to legal proceedings

 

Honda is and could be subject to suits, investigations and proceedings under relevant laws and regulations of various jurisdictions. A negative outcome in any of the legal proceedings pending against Honda could adversely affect Honda’s business, financial condition or results of operations.

 

Risks Relating to Honda’s Operations

 

Honda’s Financial services business conducts business under highly competitive conditions in an industry with inherent risks

 

Honda’s Financial services business offers various financing plans to its customers designed to increase the opportunity for sales of its products and to generate financing income. However, customers can also obtain financing for the lease or purchase of Honda’s products through a variety of other sources that compete with our financing services, including commercial banks and finance and leasing companies. The financial services offered by us also involve credit risk as well as risks relating to lease residual values, cost of capital and access to funding. Competition for customers and/or these risks may affect Honda’s results of operations in the future.

 

Honda relies on external suppliers for the provision of certain raw materials and parts

 

Honda purchases raw materials and parts from numerous external suppliers, and relies on certain suppliers for some of the raw materials and parts which it uses in the manufacture of its products. Honda’s ability to continue to obtain these supplies in an efficient and cost-effective manner is subject to a number of factors, some of which are not within Honda’s control. These factors include the ability of its suppliers to provide a continued source of raw materials and parts and Honda’s ability to compete with other users in obtaining the supplies. Loss of a key supplier in particular may affect our production and increase our costs.

 

Honda conducts its operations in various regions of the world

 

Honda conducts its businesses worldwide, and in several countries, Honda conducts businesses through joint ventures with local entities, in part due to the legal and other requirements of those countries. These businesses are subject to various regulations, including the legal and other requirements of each country. If these regulations or the business conditions or policies of these local entities change, it may have an adverse affect on Honda’s business, financial condition or results of operations.

 

Honda may be adversely affected by wars, use of force by foreign countries, terrorism, multinational conflicts and frictions, political uncertainty, natural disasters, epidemics and labor strikes

 

Honda conducts its businesses worldwide and such businesses may be affected by events, such as wars, use of force by foreign countries, terrorism, multinational conflicts and frictions, political uncertainty, natural disasters such as earthquakes, tsunami and floods, epidemics and labor strikes, which may delay, disrupt or suspend the purchase of raw materials and parts, the manufacture, sales and distribution of products, the provision of services, etc., in the region where such events occurred. Such events occurring in one region may in turn affect other regions. If such delay, disruption or suspension occurs and continues for a long period of time, Honda’s business, financial condition or results of operations may be adversely affected.

 

Honda may be adversely affected by inadvertent disclosure of confidential information

 

Although Honda maintains internal controls through established procedures to keep confidential information including personal information of its customers and relating parties, such information may be inadvertently

 

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disclosed. If this occurs, Honda may be subject to, and may be adversely affected by, claims for damages from the customers or parties affected. Also, inadvertent disclosure of confidential business or technical information to third parties may also result in a loss of Honda’s competitiveness.

 

Risks Relating to Pension Costs and Other Postretirement Benefits

 

Honda has pension plans and provides other post-retirement benefits. The amounts of pension benefits, lump-sum payments and other post-retirement benefits are primarily based on the combination of years of service and compensation. The funding policy is to make periodic contributions as required by applicable regulations. Benefit obligations and pension costs are based on assumptions of many factors, including the discount rate, the rate of salary increase and the expected long-term rate of return on plan assets. Differences in actual expenses and costs or changes in assumptions could affect Honda’s pension costs and benefit obligations, including Honda’s cash requirements to fund such obligations, which could materially affect our financial condition and results of operations.

 

A holder of ADSs will have fewer rights than a shareholder has and such holder will have to act through the depositary to exercise those rights

 

The rights of shareholders under Japanese law to take various actions, including exercising voting rights inherent in their shares, receiving dividends and distributions, bringing derivative actions, examining a company’s accounting books and records, and exercising appraisal rights, are available only to holders of record. Because the depositary, through its custodian agents, is the record holder of the Shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited Shares. The depositary will make efforts to exercise votes regarding the Shares underlying the ADSs as instructed by the holders and will pay to the holders the dividends and distributions collected from the Company. However, in the capacity as an ADS holder, such holder will not be able to bring a derivative action, examine our accounting books or records or exercise appraisal rights through the depositary.

 

Rights of shareholders under Japanese law may be more limited than under the laws of other jurisdictions

 

The Company’s Articles of Incorporation, Regulations of the Board of Directors, Regulations of the Board of Corporate Auditors and the Company Law of Japan (the “Company Law”) govern corporate affairs of the Company. Legal principles relating to such matters as the validity of corporate procedures, directors’ and officers’ fiduciary duties, and shareholders’ rights may be different from those that would apply if the Company were a U.S. company. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of the United States. An ADS holder may have more difficulty in asserting his/her rights as a shareholder than such an ADS holder would as a shareholder of a U.S. corporation. In addition, Japanese courts may not be willing to enforce liabilities against the Company in actions brought in Japan that are based upon the securities laws of the United States or any U.S. state.

 

Because of daily price range limitations under Japanese stock exchange rules, a holder of ADSs may not be able to sell his/her shares of the Company’s Common Stock at a particular price on any particular trading day, or at all

 

Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation limits for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his or her shares at such price on a particular trading day, or at all.

 

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U.S. investors may have difficulty in serving process or enforcing a judgment against the Company or its directors, executive officers or corporate auditors

 

The Company is a limited liability, joint stock corporation incorporated under the laws of Japan. Most of its directors, executive officers and corporate auditors reside in Japan. All or substantially all of the Company’s assets and the assets of these persons are located in Japan and elsewhere outside the United States. It may not be possible, therefore, for U.S. investors to effect service of process within the United States upon the Company or these persons or to enforce against the Company or these persons judgments obtained in U.S. Courts predicated upon the civil liability provisions of the Federal securities laws of the United States. There is doubt as to the enforceability in Japan, in original actions or in actions for enforcement of judgment of U.S. courts, of liabilities predicated solely upon the federal securities laws of the United States.

 

The Company’s shareholders of record on a record date may not receive the dividend they anticipate

 

The customary dividend payout practice and relevant regulatory regime of publicly listed companies in Japan may differ from that followed in foreign markets. The Company’s dividend payout practice is no exception. While the Company may announce forecasts of year-end and quarterly dividends prior to the record date, these forecasts are not legally binding. The actual payment of year-end dividends requires a resolution of the Company’s shareholders. If the shareholders adopt such a resolution, the year-end dividend payment is made to shareholders as of the applicable record date, which is currently specified as March 31 by the Company’s Articles of Incorporation. However, such a resolution of the shareholders is usually made at an ordinary general meeting of shareholders held in June. The payment of quarterly dividends requires a resolution of the Company’s Board of Directors. If the board adopts such a resolution, the dividend payment is made to shareholders as of the applicable record dates, which are currently specified as June 30, September 30 and December 31 by the Articles of Incorporation. However, the board usually does not adopt a resolution with respect to a quarterly dividend until after the respective record dates.

 

Shareholders of record as of an applicable record date may sell shares after the record date in anticipation of receiving a certain dividend payment based on the previously announced forecasts. However, since these forecasts are not legally binding and resolutions to pay dividends are usually not adopted until after the record date, our shareholders of record on record dates for year-end and quarterly dividends may not receive the dividend they anticipate.

 

Cautionary statement with respect to forward looking statements in this Annual Report

 

This Annual Report includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward looking statements included in this Annual Report are based on the current assumptions and beliefs of Honda in light of the information currently available to it, and involve known and unknown risks, uncertainties, and other factors. Such risks, uncertainties and other factors may cause Honda’s actual results, performance, achievements or financial position to be materially different from any future results, performance, achievements or financial position expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors are generally set forth in Item 3.D “Risk Factors” and include, without limitation:

 

   

the political, economic and social conditions in Japan and throughout the world including North America, Europe and Asia, including economic slowdowns, recessions, changes in consumer preferences, rising fuel prices, financial crises and other factors, as well as the relevant governments’ specific policies with respect to economic growth, inflation, taxation, currency conversion, imports and sources of supplies and the availability of credit, particularly to the extent such current or future conditions and policies affect the automobile, motorcycle and power product industries and markets in Japan and other markets throughout the world in which Honda conducts its business, and the demand, sales volume and sales prices for Honda’s automobiles, motorcycles and power products;

 

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the effects of competition in the automobile, motorcycle and power product markets on the demand, sales volume and sales prices for Honda’s automobiles, motorcycles and power products;

 

   

Honda’s ability to finance its working capital and capital expenditure requirements, including obtaining any required external debt or other financing;

 

   

the effects of economic stagnation or recession in Honda’s principal markets and of exchange rate and interest rate fluctuations on Honda’s results of operations; and

 

   

the effects of environmental and other governmental regulations and legal proceedings.

 

Honda undertakes no obligation and has no intention to publicly update any forward looking statement after the date of this Annual Report. Investors are advised to consult any further disclosures by Honda in its subsequent filings pursuant to the Securities and Exchange Act of 1934.

 

Item 4. Information on the Company

 

A. History and Development of the Company

 

Honda Motor Co., Ltd. is a limited liability, joint stock corporation incorporated on September 24, 1948 under the Commercial Code of Japan as Honda Giken Kogyo Kabushiki Kaisha. It was formed to succeed to the business of an unincorporated enterprise established in 1946 by the late Soichiro Honda to manufacture motors for motorized bicycles.

 

Honda develops, produces, and manufactures a variety of motor products, ranging from small general-purpose engines and scooters to specialty sports cars that incorporate Honda’s highly efficient internal combustion engine technology.

 

Honda’s principal executive office is located at 1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo, 107-8556, Japan. Its telephone number is 81-3-3423-1111.

 

Principal Capital Investments

 

In the fiscal years ended March 31, 2010, 2011 and 2012, Honda’s capital expenditures were ¥893.0 billion, ¥1,125.0 billion, and ¥1,108.1 billion, respectively, on an accrual basis. Also, capital expenditures excluding those with respect to property on operating leases were ¥348.9 billion, ¥326.6 billion, and ¥424.4 billion, respectively, on an accrual basis. For further details of Honda’s capital expenditures during fiscal 2012, see “Property, Plants and Equipment” included as “Item 4.D” of this Annual Report.

 

B. Business Overview

 

General

 

Honda’s business segments are the Motorcycle business, Automobile business, Financial services business, and Power product and other businesses.

 

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The following tables show the breakdown of Honda’s revenues from external customers by category of activity and by geographical markets based on the location of the customer during the fiscal years ended March 31, 2010, 2011 and 2012:

 

     Fiscal years ended March 31,  
         2010              2011              2012      
     Yen (billions)  

Motorcycle Business

   ¥ 1,140.2       ¥ 1,288.1       ¥ 1,348.8   

Automobile Business

     6,554.8         6,794.0         5,805.9   

Financial Services Business

     606.3         561.8         516.1   

Power Product and Other Businesses

     277.6         292.6         277.1   
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 8,579.1       ¥ 8,936.8       ¥ 7,948.0   
  

 

 

    

 

 

    

 

 

 

 

     Fiscal years ended March 31,  
         2010              2011              2012      
     Yen (billions)  

Japan

   ¥ 1,577.3       ¥ 1,503.8       ¥ 1,517.9   

North America

     3,736.4         3,921.3         3,480.7   

Europe

     764.7         610.1         515.7   

Asia

     1,543.3         1,852.4         1,458.7   

Other Regions

     957.2         1,049.0         974.8   
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 8,579.1       ¥ 8,936.8       ¥ 7,948.0   
  

 

 

    

 

 

    

 

 

 

 

Motorcycle Business

 

In 1949, Honda began mass production of motorcycles with the Dream D-Type, followed by other models such as the Benly and the Cub F-Type. By 1957, Honda became the top Japanese manufacturer in terms of motorcycle production volume. Honda expanded its business overseas by establishing American Honda Motor Co., Inc. in the United States in 1959. Honda’s first overseas production started in Belgium in 1963.

 

Honda produces a wide range of motorcycles, ranging from the 50cc class to the 1800cc class in cylinder displacement. Honda’s motorcycles use internal combustion engines developed by Honda that are air- or water-cooled, four-cycle, and single, two, four or six-cylinder. Honda’s motorcycle line consists of sports (including trial and moto-cross racing), business and commuter models. Honda has also produced all-terrain vehicles (ATVs) since 1984 and multi utility vehicles (MUVs) since 2008.

 

The following table sets out unit sales for Honda’s Motorcycle business, including motorcycles, and all-terrain vehicles (ATVs) and revenue from Motorcycle business, and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2010, 2011 and 2012:

 

     Fiscal years ended March 31,  
     2010     2011     2012  
     Units      Revenue     Units      Revenue     Units      Revenue  
     (thousands)      (billions)     (thousands)      (billions)     (thousands)      (billions)  

Japan

     190       ¥ 70.4        190       ¥ 70.2        220       ¥ 72.9   

North America

     189         103.9        185         96.6        200         97.3   

Europe

     199         124.6        202         103.8        198         96.1   

Asia

     7,628         461.0        9,178         577.6        9,910         579.5   

Other Regions

     1,433         380.1        1,690         439.7        2,031         502.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     9,639       ¥ 1,140.2        11,445       ¥ 1,288.1        12,559       ¥ 1,348.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Motorcycle revenue as a percentage of total sales revenue

        13        15        17

 

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Motorcycles are produced by Honda in Japan at the Kumamoto factory. Honda’s motorcycles are also produced by subsidiaries in countries around the world including Thailand, Vietnam, India, Brazil and Argentina.

 

For further information on recent operations and a financial review of the Motorcycle business, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”.

 

Automobile Business

 

Honda started the Automobile business in 1963 with the T360 mini truck and the S500 small sports car, and subsequently launched a series of mass-produced models including the Civic in 1972, the Accord in 1976, which established a base for its Automobile business. In 1969, production of the mini vehicles N600 and TN600 began in Taiwan using component parts sets. In 1982, Honda became the first Japanese automaker to begin local automobile production in the United States (with the Accord).

 

Honda’s automobiles use gasoline engines of three, four or six-cylinder, diesel engines and gasoline-electric hybrid systems. Honda also offers alternative fuel-powered vehicles such as natural gas, ethanol, and fuel cell vehicles.

 

Honda’s principal automobile products include the following vehicle models:

 

Passenger cars:

 

Accord, Brio, City, Civic, CR-Z, Fit/Jazz, Fit/Jazz Hybrid, Fit Shuttle, Fit Shuttle Hybrid, FREED, FREED Hybrid, Insight, Inspire, Legend, Stream, Acura RL, Acura TL, Acura TSX, Everus S1

 

Light trucks:

 

Crosstour, CR-V, Elysion, Odyssey, Pilot, Ridgeline, Step WGN, Acura MDX, Acura RDX, Acura ZDX

 

Mini vehicles:

 

Acty, Life, N Box, Vamos, Zest

 

The following table sets out Honda’s unit sales of automobiles and revenue from Automobile business and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2010, 2011 and 2012:

 

     Fiscal years ended March 31,  
     2010     2011     2012  
     Units      Revenue     Units      Revenue     Units      Revenue  
     (thousands)      (billions)     (thousands)      (billions)     (thousands)      (billions)  

Japan

     646       ¥ 1,383.8        582       ¥ 1,310.7        580       ¥ 1,329.6   

North America

     1,297         3,013.4        1,458         3,252.8        1,323         2,855.6   

Europe

     249         575.3        198         441.6        158         355.9   

Asia

     950         1,041.2        1,008         1,221.7        874         836.3   

Other Regions

     250         540.9        266         567.1        202         428.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     3,392       ¥ 6,554.8        3,512       ¥ 6,794.0        3,137       ¥ 5,805.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Automobile revenue as a percentage of total sales revenue

        77        76        73

 

* Certain sales of automobiles that are financed with residual value type auto loans by our Japanese finance subsidiaries are accounted for as operating leases in conformity with U.S. generally accepted accounting principles. As a result, they are not included in total sales of our automobile segment or in our measure of unit sales.

 

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Automobiles are produced by Honda at two sites in Japan: the Saitama factory and the Suzuka factory. Our major production sites overseas include those located in Ohio (U.S.A.), Alabama (U.S.A.), Indiana (U.S.A.), Ontario (Canada), Swindon (U.K.), Ayutthaya (Thailand), Greater Noida (India) and Sao Paulo (Brazil). Yachiyo Industry Co., Ltd., one of our consolidated subsidiaries, assembles mini vehicles for the Japanese market.

 

For further information on recent operations and a financial review of the Automobile business, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”.

 

Financial Services Business

 

We offer a variety of financial services to our customers and dealers through finance subsidiaries in countries including Japan, the United States, Canada, the United Kingdom, Germany, Brazil and Thailand, with the aim of providing sales support for our products. The services of these subsidiaries include retail lending, leasing to customers and other financial services, such as wholesale financing to dealers.

 

The following table sets out Honda’s revenue from Financial services business and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2010, 2011 and 2012:

 

     Fiscal years ended March 31,  
           2010                 2011                 2012        
     Revenue     Revenue     Revenue  
     (billions)     (billions)     (billions)  

Japan

   ¥ 24.6      ¥ 26.3      ¥ 28.9   

North America

     553.1        503.9        455.5   

Europe

     10.4        9.2        8.1   

Asia

     4.3        3.7        2.8   

Other Regions

     13.8        18.5        20.6   
  

 

 

   

 

 

   

 

 

 

Total

   ¥ 606.3      ¥ 561.8      ¥ 516.1   
  

 

 

   

 

 

   

 

 

 

Financial Service revenue as a percentage of total sales revenue

     7     6     7

 

For further information on recent operations and a financial review of the Financial services business, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”.

 

Power Product and Other Businesses

 

Honda’s Power product business began in 1953 with the introduction of the model the H, its first general purpose engine. Since then, Honda has manufactured a variety of power products including tillers, portable generators, general-purpose engines, grass cutters, outboard marine engines, water pumps, snow throwers, power carriers, power sprayers, lawn mowers and lawn tractors (riding lawn mowers). In 2003, Honda introduced a compact home-use cogeneration* unit. In addition, Honda began sales of thin film solar cells made of crystalline silicon for home use in 2007 and for public and industrial use in 2008.

 

*

Cogeneration: Cogeneration refers to the multiple applications of energy derived from a single source, such as using the heat supplied during the combustion process that drives an engine for other heating or cooling purposes.

 

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The following table sets out Honda’s revenue from Power product and other businesses and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2010, 2011 and 2012:

 

     Fiscal years ended March 31,  
     2010     2011     2012  
     Units      Revenue     Units      Revenue     Units      Revenue  
     (thousands)      (billions)     (thousands)      (billions)     (thousands)      (billions)  

Japan

     322       ¥ 98.3        388       ¥ 96.5        392       ¥ 86.4   

North America

     1,818         65.8        2,085         67.9        2,314         72.1   

Europe

     1,066         54.3        1,174         55.2        1,121         55.4   

Asia

     1,069         36.7        1,325         49.3        1,472         40.0   

Other Regions

     469         22.3        537         23.6        520         23.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     4,744       ¥ 277.6        5,509       ¥ 292.6        5,819       ¥ 277.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Power Product and Other revenue as a percentage of total sales revenue

        3        3        3

 

For further information on recent operations and a financial review of the Power product and other businesses, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”.

 

Marketing and Distribution

 

Most of Honda’s products are distributed under the Honda trademarks in Japan and/or in overseas markets.

 

Sales in Japan

 

Sales of Honda motorcycles, automobiles, and power products in Japan are made through different distribution networks. Honda’s products are sold to consumers primarily by independent retail dealers throughout Japan.

 

Motorcycles are distributed through approximately 7,000 outlets, including approximately 600 “PRO’S” shops and approximately 100 Honda Dream authorized dealerships.

 

As for the automobile distribution network, at present, approximately 760 retail dealers operate approximately 2,160 shops and sell models including the Accord, Accord Tourer, Civic-Type R EURO, Insight, Inspire, Legend, CR-V, CR-Z, FREED, FREED Hybrid, FREED SPIKE, FREED SPIKE Hybrid, Elysion, Fit, Fit Hybrid, Fit Shuttle, Fit Shuttle Hybrid, Odyssey, Step WGN, Stream, Acty, Life, N Box, Vamos and Zest.

 

Power products are distributed in Japan to approximately 1,200 retail dealers throughout Japan, including affiliates of Honda. A number of small engines are also sold to other manufacturers for use in their products.

 

Service and Parts Related Operations in Japan

 

Sales of spare parts and after sales services are mainly provided through retail dealers. Training programs on automobile service technicians are provided for dealers regularly by Honda’s Automobile Sales Operations (Japan).

 

Overseas Sales

 

In fiscal 2012, approximately 96% of Honda’s overseas sales were made through its principal foreign sales subsidiaries, which distribute Honda’s products to local wholesalers and retail dealers.

 

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In the United States, Honda markets its products through a sales network of approximately 1,070 independent local dealers for motorcycles, approximately 1,310 for automobiles and approximately 7,400 for power products. Many of the motorcycle dealers and some of the automobile dealers also sell Honda’s power products. In 1986, Honda opened the first Acura automobile dealerships in the United States. The Acura network in the United States totaled 272 dealerships at the end of fiscal 2012. The Acura network offers ILX, MDX, RDX, RL, TL, TSX, TSX Sport Wagon and ZDX models.

 

With regard to exports from North America, Honda is currently exporting such North American-built models as the Accord, Civic, Crosstour, Element, Odyssey, Pilot, Ridgeline, Acura MDX, Acura RDX, Acura TL and Acura ZDX to other markets. In fiscal 2012, Honda exported approximately 65,600 units from North America to 45 countries throughout the world.

 

In Europe, Honda’s products are distributed through approximately 1,650 independent local dealers for motorcycles, approximately 1,400 for automobiles and approximately 2,600* for power products.

 

*

Total number represents dealers in 11 countries where Honda has foreign sales subsidiaries

 

In Asia, Honda’s products are distributed through approximately 12,500 independent local dealers for motorcycles, approximately 1,430 for automobiles and approximately 2,740* for power products.

 

*

Total number represents dealers in six countries where Honda has foreign sales subsidiaries.

 

The Company exports motorcycle components to 14 countries, including Indonesia, Vietnam, Thailand and Brazil, where motorcycles are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these vehicles are supplied locally.

 

The Company exports automobile components to 15 countries, including the United States, Canada, China, Thailand and Brazil, where automobiles are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these vehicles are supplied locally.

 

The Company also exports power product components to seven countries, including Thailand and China, where power products are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these products are supplied locally.

 

Service and Parts Related Operations Overseas

 

Honda provides its overseas operations, joint venture firms, independent distributors and licensees with spare parts and necessary technical information, which they in turn supply to wholesale or retail dealers, either directly or through one or more spare parts distributors.

 

Components and Parts, Raw Materials and Sources of Supply

 

Honda manufactures the major components and parts used in its products, including engines, frames and transmissions. Other components and parts, such as shock absorbers, electrical equipment and tires, are purchased from numerous suppliers. The principal raw materials used by Honda are steel plate, aluminum, special steels, steel tubes, paints, plastics and zinc, which are purchased from several suppliers. The most important raw material purchased is steel plate, accounting for approximately 46% of Honda’s total purchases of raw materials.

 

No single supplier accounted for more than 5% of the Company’s purchases of major components and parts and principal raw materials during the fiscal year ended March 31, 2012.

 

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Ordinarily, Honda does not have and does not anticipate having any difficulty in obtaining its required materials from suppliers and considers its contracts and business relations with the suppliers to be satisfactory. The Company does not believe any of its Japanese domestic suppliers are substantially more dependent on foreign suppliers than Japanese suppliers generally. However, it should be noted that Japanese industry in general is heavily dependent on foreign suppliers for substantially all of its raw materials.

 

Seasonality

 

Honda’s Motorcycle and Power product businesses have historically experienced some seasonality. However, this seasonality has not generally been material to our financial results.

 

Environmental and Safety Regulation

 

Outline of Environmental and Safety Regulation for Automobiles

 

1. Emissions

 

Japan

 

In March 2008, to strengthen the enforcement of laws, the 2009 Exhaust Emission Standards were created after the passage of long-term regulation. Long-term targets for gasoline vehicles remained unchanged except those for direct injection gasoline vehicles, which were also required to meet the particulate matter (PM) standard. New long-term emissions targets for diesel vehicles were lowered by more than 60% from the 2005 level of NOx and PM standards.

 

The United States

 

Increasingly stringent emission regulations under the Clean Air Act have been enacted since the 1990s by the U.S. federal government.

 

Under the Clean Air Act, the State of California is permitted to establish its own emission control standards to the extent they are more stringent than federal standards. Pursuant to this authority, the California Air Resources Board (CARB) adopted the “California Low Emission Vehicle Program” in 1990, aiming to establish the strictest emission regulation in the world.

 

In April 2004, the CARB finalized its “Zero-Emission Vehicles” (ZEV) requirements. Under these requirements, beginning with 2005 model cars, 6% of vehicles sold in California by a car manufacturer must be Partial Zero Emission Vehicles (PZEV), which includes Super Ultra Low Emission Vehicles (SULEV) with warranties coverage up to the earlier of 15 years or 150,000 driven miles, 2% must be advanced technology PZEV and 2% must be ZEV. Required percentages have been gradually increased under the ZEV standards from the 2008 model cars.

 

In March 2009, the CARB amended “ZEV regulation” to require 7,500 Fuel Cell Vehicles (FCV) in the entire industry instead of the previous requirement of 2,500 FCV. In addition, manufacturers should sell a significant number of Enhanced Advanced Technology Partial Zero Emission Vehicles (Enhanced AT-PZEV) in the market after the 2012 model year.

 

In December 2011, the CARB issued the Advanced Clean Car package of regulations, which included proposals to amend California Low Emission Vehicle Program III (LEV III) and ZEV regulations. As to the LEV III regulation, which applies to 2015 and subsequent model years, limit values for emissions and evaporative emissions, etc. are enhanced. The ZEV regulation was revised so that requirements can be satisfied by TZEV (formerly, Enhanced AT-PZEV) and ZEV alone for 2018 and subsequent model years. Also, the BEVx category was added for ZEV vehicles; such category includes battery electric vehicles with auxiliary power units.

 

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In addition, the Environmental Protection Agency (EPA) is planning to propose a LEV III equivalent emission regulation (Tier 3) in 2012.

 

Currently, many other states have also adopted or planned to adopt the California LEV III and ZEV regulations.

 

Europe

 

In 2005, the European Union created new emission standards (Euro5 and Euro6) and comprehensive requirements for gasoline vehicles and diesel vehicles. Euro5 was implemented in September 2009. Emission limits for gasoline vehicles and diesel vehicles were further lowered compared to the Euro4 level of HC, NOx and PM. PM mass emission standards shall apply only to vehicles with direct injection engines.

 

Additionally, Euro5 required limits on particle number emissions from diesel vehicles, and implemented new test measurements for PM mass emissions from gasoline vehicles with direct injection engines and diesel vehicles on and after September 2011.

 

Euro6 will be implemented in 2014. Emission limits for diesel vehicles will be lowered even more than the Euro5 level HC and NOx. Additionally, Euro6 will require limits on particle numbers from gasoline vehicles with direct injection engines.

 

Russia

 

The Euro4 regulation has been in effect from January 2010. Additionally, the Euro5 regulation will be implemented in January 2014.

 

China

 

China adopted Step3 and Step4 emission regulations for light-duty vehicles in 2005. These regulations are similar to European regulations (such as Euro3 and Euro4). Step3 was implemented in 2007 and Step4 was implemented in July 2010. In addition, China has proposed to implement Step5 emission regulations in 2015 or 2016, based on Euro5.

 

In the city of Beijing, Step3 was implemented in December 2005 and Step4 was implemented in March 2008. In addition, the city of Beijing is considering the introduction of Step5 emission regulations in the second half of 2012.

 

Other Regions

 

In Korea, the Atmospheric Environment Preservation Act, which applies to the whole country, was amended. Diesel Euro6 (including the Particulate Number (PN) regulations) and the enhancement of gasoline evaporative emission regulations will be enforced from 2014. In addition, the Special Act on Capital Region Air Quality Improvements, which applies in the capital region, is currently under review. The 2014 enforcement items in the Atmospheric Environment Preservation Act may become effective as early as 2012.

 

Several other Asian countries have adopted regulations which are similar to the European regulations (such as Euro2 and Euro3). Some of these countries are considering the introduction of Euro4 and Euro5.

 

Australia implemented Euro4-equivalent regulations in July 2008. In addition, Australia will introduce Euro5-equivalent regulations from November 2013.

 

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2. Fuel Economy / CO2

 

Japan

 

In 2005, discussions about the “POST-2010” standard took place among the applicable ministries and industries. In February 2007, the final “POST-2010” target, or the “2015 standard”, was announced. Fuel consumption will be reduced by 29.2% compared to the 2010 target for passenger cars.

 

In June 2010, the Ministry of Land, Infrastructure and Transport (MLIT) and the Ministry of Economy, Trend and Industry (METI) jointly commenced a study to formulate new fuel efficiency standards for passenger motor vehicles, etc. from 2020. In July 2011, the joint committee opened their proposals for public comments. The next term fuel economy standards, effective from 2020, are expected to improve the 2015 standards by 19.6% and adopt the Corporate Average Fuel Economy (CAFE) method from the US.

 

In order to introduce E10, fuel that is 10% ethanol blended in gasoline, the public was invited to comment in January 2012 on an amendment of an announcement that prescribes details of safety regulations for road vehicles. Japan plans to introduce E10 from April 2012.

 

Ethanol blended fuel is a “biomass fuel”. Biomass fuel is regarded as an effective countermeasure for CO2 reduction. CO2 emissions after burning ethanol fuel produced with biomass resources (such as plants or wood) are not counted as CO2 emissions under the Kyoto Protocol.

 

The United States

 

The Federal Motor Vehicle Information and Cost Savings Act requires automobile manufacturers to comply with the CAFE standards. Under the CAFE standards, manufacturers are subject to substantial penalties if automobiles produced by them in any model year do not meet the average standards for each category.

 

In March 2009, the National Highway Traffic Safety Administration (NHTSA) issued the CAFE regulation standard for passenger cars and light trucks for the 2011 model year. The CAFE standard calculation of passenger cars and light trucks for the 2011 model year use a footprint prescribed in the CAFE regulation issued in 2006. The industry-wide combined average for the 2011 model year was estimated to be 27.3 mpg.

 

The EPA and the NHTSA jointly finalized the U.S. federal Green House Gas (GHG) regulation from 2012 model year in accordance with President Obama’s announcement. The standard for the 2016 model year is 250 g-CO2/mile or 35.5 mpg over the industry average. In addition, a manufacturer is also deemed to comply with CARB GHG regulation if the manufacturer complies with EPA-GHG, based on an agreement among the White House, the CARB and the industry.

 

In March 2008, the EPA denied California’s GHG regulation waiver request against the CARB. On January 26, 2009, U.S. President Obama announced that he had directed the EPA to review California’s waiver request. The EPA approved the waiver on July 8th, 2009 because the CARB promised that a manufacturer was also deemed to comply with CARB GHG regulation if the manufacturer complied with EPA-GHG from the 2012 through 2016 model years.

 

President Obama ordered NHTSA and EPA to extend the National Program for cars and light-duty trucks to the 2017 model year and beyond with the support of CARB on May 21, 2010. NHTSA, EPA, and CARB gave the notice of their intent to conduct a joint rulemaking to establish 2017 and later model year fuel economy and greenhouse gas standards on October 1, 2010. The NHTSA and EPA issued a proposed regulation on December 1, 2011 on GHG / CAFE regulations for 2017 and subsequent model years. CARB also issued a proposed regulation that is almost equivalent to EPA’s proposal on GHG regulations.

 

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Europe

 

In 2008, the European parliament adopted CO2 regulations in response to concerns related to possible global climate changes. The adopted CO2 regulations were published by Official Journal in June 2009.

 

Pursuant to the CO2 regulations, the European Commission set a more stringent target of 130 grams of carbon dioxide per kilometer for new passenger cars offered for sale in the EU from 2012. In addition, the CO2 regulations provided manufacturers with the necessary incentive to reduce the CO2 emissions of their vehicles by imposing an excess emissions premium if their average emission levels are above the limit value curve. This premium is based on the number of grams per kilometer (g/km) that an average vehicle sold by the manufacturer exceeding the limit imposed by the curve, multiplied by the number of vehicles sold by the manufacturer.

 

China

 

China adopted a fuel consumption regulation for passenger vehicles in 2004. Step 1 of this regulation was implemented in 2005 and Step 2 was implemented in 2008. Step 3 will presumably be implemented in 2012. It will be a Corporate Average Fuel Consumption regulation from Step 3.

 

Other Regions

 

Korea introduced CAFE in 2005 and plans to phase-in CAFE and CO2 regulations from 30% for the 2012 model year to 100% for the 2015 model year.

 

India and Australia have also proposed to introduce fuel economy / CO2 regulations in 2015 and 2020 in a phased manner.

 

Taiwan and Malaysia are considering introducing fuel economy / CO2 regulations.

 

3. Recycling / End-of-Life Vehicles (ELV) / REACH

 

Japan

 

Japan enacted the Automobile Recycling Law in July 2002, which required manufacturers to take back air bags, fluorocarbon and shredder residue derived from end-of-life vehicles (ELV), which became effective on January 1, 2005. ELV processing costs are collected from owners of cars currently in use and purchasers of new cars.

 

Europe

 

On December 30, 2006, the European Union adopted the Regulation concerning the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), which became effective on June 1, 2007. From June 1, 2008, any manufacturer or importer of chemical substances is required to submit a registration to the Agency, based on annual production or import quantity levels. Submitting a pre-registration between June 1 and December 1, 2008 will allow the manufacturer or importer to extend the deadline for submitting the registration for existing chemical substances. The list of Substance of Very High Concern (SVHC) is amended periodically to include new substances. Currently, 73 substances are in the SVHC list. Upon a request by a consumer, a supplier of a product containing SVHC must provide the consumer with sufficient information, including at least the name of the substance, within 45 days.

 

On February 18, 2011, the first set of substances which require authorization for use after specified dates were announced. Manufacturers using these substances in Europe must either be authorized for use after submitting an application or use substitute substances. Substances which require authorization will be added periodically. Currently, 14 substances require authorization.

 

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Other Regions

 

Taiwan and Korea implemented automobile recycling laws in January 1, 2008, following the regulations established by the European Union and Japan. In addition, China has a plan to implement automobile recycling laws in the near future.

 

4. Safety

 

Japan

 

In November 2007, MLIT issued safety standards, which are applicable from July 1, 2012, for vehicles which use high voltage electric power such as electric vehicles or hybrid electric vehicles, to avoid electric shocks during normal operations and post crash. And further, in 2011, they have adopted Economic Commission for Europe (ECE) R100 which was amended to incorporate the Japanese electrical safety standard.

 

Japan Automobile Standards Internationalization Center (JASIC), which is organized by the MLIT and Japan Automobile Manufacturers Association (JAMA), among others, has started to review a proposal for the unification of Safety/Environment Standards, vehicle categories and certification in order to promote further internationalization of standards and certifications. JASIC made the proposal to other contracting parties of the 58 / 98 Agreement in 2009 and aims at reaching an agreement among the contracting parties by 2015.

 

In January 2010, MLIT started preparing a guideline for measurements of the silent characteristic of hybrid vehicles and also started studying how to regulate this.

 

In March 2010, in the session of the World Forum for Harmonization of Vehicle Regulations (WP29) of the United Nations Economic Commission for Europe, Japan proposed the establishment of “a mutual certification system of international vehicle type certifications”, which was agreed upon.

 

In March 2010, triggered by a hit-and-run accident in the United States, the MLIT began research on introducing “brake-override-systems”.

 

In May 2011, the MLIT introduced a pedestrian leg protection standard, adopting, for the first time in the world, a flexible leg impactor that is improved in biomechanism characteristic.

 

The United States

 

In August 2006, the NHTSA issued a final rule revising performance requirements for advanced airbag systems. The rule upgrades the maximum speed for frontal barrier crash tests using a belted small adult female dummy. Manufacturers must comply with the upgraded requirements for 35% of all vehicles produced by 2009, 65% by 2010, 100% (with carryover credit) by 2011, and all vehicles by 2012.

 

In January 2008, the NHTSA issued a final rule to revise some performance requirements for event data recorders and to delay the effective date. Manufacturers offering passenger cars and/or other light vehicles equipped with event data recorders must comply with the revised requirements on or after September 2012.

 

In February 2008, the Cameron Gulbransen Kids Transportation Safety Act was established, and the NHTSA issued some regulations to prevent accidents involving children based on the Act. Manufacturers must comply with the new requirements, in accordance with proposed phase-in compliance schedules. The NHTSA has decided to postpone the rulemaking schedule for the final rule until the end of 2012 due to the need for their further research and data analysis.

 

In June 2008, the NHTSA issued a final rule to revise some performance requirements and phase-in compliance schedules in upgraded side impact occupant protection standards. For both the moving deformable barrier test and the oblique side pole impact test, manufacturers must comply with the revised requirements for 20% of all vehicles produced by 2010, 40% by 2011, 60% by 2012, 80% by 2013 and 100% by 2014.

 

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In May 2009, the NHTSA issued a final rule to upgrade the vehicle roof crush standard. The rule newly introduces the “Two-sided Roof Test,” which imposes the strength tests for both sides of the vehicle roof and increases the maximum applied load. For vehicles with a gross vehicle weight rating (GVWR) of 2,722 kg or less, manufacturers must comply with the upgraded requirements for 25% of all vehicles produced by 2012, 50% by 2013, 75% by 2014, and 100% by 2015. For heavier vehicles, manufacturers must comply with the standards on and after September 2016.

 

In January 2011, the NHTSA issued a final rule to prevent the ejection of occupants in rollover accidents. The rule requires “ejection mitigation countermeasure” (e.g. advanced glazing or head protection side airbag) equipment which meet with performance requirements. Manufacturers must comply with the new requirements for 25% of all vehicles produced by 2013, 50% by 2014, 75% by 2015, 100% (with carryover credit) by 2016, and all vehicles by 2017.

 

In February 2012, the NHTSA issued a proposed Driver Distraction Guideline. The purpose of the guideline is to reduce the number of crashes and resulting deaths and injuries that occur due to distracted driving while performing non-driving activities with integrated in-vehicle electronic devices. Compliance with this guideline is voluntary, but the NHTSA believes that manufacturers will take the initiative to implement these guidelines in an effort to improve safety.

 

Europe

 

The European Commission issued a new regulation for type approval requirements for the General Safety of vehicles (GSR). It includes an installation requirement for the advanced safety system (Electronic Stability Control System (ESC) and Tire Pressure Monitoring Systems (TPMS)) and a tire performance requirement in order to improve the safety and environmental performance of vehicles.

 

In February 2011, the United Nations issued a revised ECE regulation relating to the installation of lighting devices, requiring automatic switching of dipped-beam headlamps. For M1 and N1 vehicles, the dipped-beam headlamps shall be switched on and off automatically relative to the ambient light conditions, if a vehicle is equipped with daytime running lamps on and after January 30, 2015.

 

Legislation of eCall is under consideration in the EU and Russia. eCall is a system that can automatically transmit vehicle status (Supplemental Restraint System (SRS) deployment, location, direction and other) to conventional infrastructures simultaneously with voice messages when crash accidents happen. Some relevant draft standards were published in the EU and Russia. The effective date of the EU eCall is scheduled for the end of first quarter in 2015 for new vehicle. The effective date of Russian eCall (ERA-GLONASS) is scheduled for January 1, 2013 for new vehicle.

 

5. New Car Assessment Program (NCAP)

 

Programs that provide customers with assessments of car safety functions and promote the development of car safety by automobile manufacturers are conducted in countries such as the United States, Japan, Australia, the EU, Korea, China and Malaysia. The principal items assessed in these programs are passenger protection and braking power, which are typically assessed with stricter standards or criteria than those required by statute.

 

Outline of Environmental and Safety Regulation for Motorcycles

 

1. Emissions

 

Japan

 

Japan has emissions regulations for motorcycles applicable to all classes of engine displacement. Some aspects of these requirements, such as standards for hydro-carbon levels and durability, are stricter than the

 

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current European regulations, namely the Euro3 regulations. MLIT introduced the Worldwide Harmonized Motorcycle Emissions Certification Procedure (WMTC) and its applicable standards in 2010. It will apply to new models from October 1, 2012.

 

The United States

 

Emissions regulations regarding off-road motorcycles and ATVs were introduced in 2006. In addition, the EPA adopted the current California emissions standards regarding on-road motorcycles on a national basis, two years behind the schedule of California. The new regulations include fuel permeation requirements rather than traditional evaporative emission standards.

 

Canada

 

The Canadian federal government introduced emissions regulations, generally equivalent to the U.S. EPA regulations, for on-road motorcycles from the 2006 model year and for off-road motorcycles from April 2011.

 

Europe

 

The EU maintains emissions regulations (Euro3) for motorcycles, as well as the “Motor Cycle (& Moped)—Whole Vehicle Type Approval (WVTA)”, a uniform certification system for two and three-wheeled motor vehicles. The Euro3 regulations are the most stringent class standard for motorcycles. Euro3 regulations have been in effect from January 2006. The European Commission has introduced a recast proposal of WVTA which contains Euro4, Euro5 and Euro6 stage regulations.

 

Other Regions

 

Other countries, mainly in Asia, have implemented tighter emissions regulations based on European regulations.

 

In Thailand, a sixth stage of emissions control, which is generally equivalent to or stricter than Euro3, has been implemented.

 

In Indonesia, Euro2-equivalent regulations have been in effect from January 2006.

 

In China, the National third stage of emissions control, which is generally equivalent to or stricter than Euro3 regulations, was introduced in 2008.

 

In Korea, Euro3-equivalent regulations were implemented in 2008.

 

In Brazil, Euro3-equivalent regulations have been in effect from the beginning of 2009.

 

In India, second stage regulations based on the Indian authorities’ own test method are in effect and enhanced regulations were enacted in 2005. The third stage of emission control was implemented in 2010.

 

2. Safety

 

Japan

 

Japan introduced ECE R10 (Electromagnetic Compatibility). The ECE R10-03 series will apply to all models from August 1, 2016. The ECE R10-04 series will apply to new models from August 1, 2016 and all models from October 28, 2016.

 

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The United States

 

The Consumer Product Safety Improvement Act of 2008 was signed into law by former President Bush on August 14, 2008. In accordance with this, children’s products including ATVs and off-road motorcycles for children have had to comply with hazardous substance and other requirements (e.g. certificate, third party testing, tracking label requirements) after November 11, 2008, and ATVs products have had to comply with the American National Standards Institute (ANSI) standard from April 13, 2009.

 

Three-wheeled all-terrain vehicles, or ATVs (formerly referred to as “ATCs”) were a problem due to the youth-involved accidents in the ‘80s, and ATV regulations established at that time. However, it turned out that a voluntary standard, which was agreed to between the industry and regulators, was established. Although the number of accidents did not increase in the ‘90s, the ATV market in the US experienced a rapid development from 2000 and the problem of youth-involved accidents increasing continued to be a focal point.

 

The Consumer Product Safety Commission (CPSC) and ATV industry updated the voluntary standard in 2007. That standard has been introduced in the regulation.

 

Canada

 

The Canadian government revised the controls and display regulation in order to harmonize with U.S. motor vehicle safety standards. It has applied to all motorcycles manufactured from February 22, 2008.

 

Europe

 

The number of ATVs designed to travel on four low pressure tires on non-paved surfaces recently increased in the EU market. Because travel on public roads is necessary in Europe, manufacturers in China, Taiwan and the U.S. have been receiving approval for their ATVs by the Whole Vehicle Type Approval (WVTA) Quadricycle category, and the vehicles are used in mixed traffic without safety measures. For that reason, the European Commission is continuing discussions with each industry organization, recognizing the need for a review of the definition and the requirements of these vehicles.

 

From January 19, 2013, a new directive regarding driving licenses will become effective. The directive revises the categories of licenses and includes a new category for mopeds.

 

The European Commission issued a recast proposal of WVTA which contains a mandatory advanced brake system requirement.

 

Other regions

 

The Brazilian government issued a new regulation regarding anti-theft device, which requires installations of an immobilizer and a vehicle tracking system on vehicles and motorcycles sold or registered from August 1, 2009. However, this regulation has not been implemented yet, because the Prosecutors Office claimed it was unconstitutional and asked the court to overturn it. The contents and the effective date of this regulation have been under consultation between the government and the industry. The regulation was originally scheduled to be implemented from August 30, 2012 but is now expected to be postponed because infrastructure will not be ready in time.

 

Many Asian countries, such as India, Thailand, and Vietnam, are introducing several regulations, regarding lighting, braking, and anti-theft, based on ECE regulations.

 

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Outline of Environmental and Safety Regulation for Power Products

 

1. Emissions

 

The United States

 

The EPA introduced more stringent exhaust standards and new evaporative emission standards for fuel tanks and fuel lines used in small non-road engines. The regulation applied starting in the 2011 model year for Class II engines (above 225 cc), in the 2012 model year for Class I engines (less than 225 cc, used in non-handheld applications) and generally in 2010 for handheld products. EPA also adopted a more stringent level of emission standards for outboard and personal watercraft engines started with the 2010 model year. This new regulation includes standards to control evaporative emissions for all vessels using marine spark-ignition engines.

 

Canada

 

The Canadian federal government has introduced emissions regulations generally equivalent to the U.S. EPA regulations for outboard and personal watercraft engines from the 2012 model year. This new regulation includes controls for evaporative emissions from the 2015 model year.

 

China

 

An exhaust emission standard was introduced in China on March 1, 2011. Its requirements are based on the European exhaust emission regulation and are applicable to small spark-ignition engines for non-road mobile machinery with 19 kW or less.

 

2. Safety

 

Japan

 

The Institute of Agricultural Machinery amended the safety standard of backward speed requirement for walk-behind equipment from 3.6 km/h to 1.8 km/h, and the interpretation of splash protection guard requirements for brush cutters. New models have had to comply with the standard from April 2010 and all models will need to comply with it from April 2015.

 

The United States

 

Based on the “Consumer Product Safety Improvement Act of 2008”, walk-behind lawn mowers have had to comply with the certificate requirements from November 11, 2008. The CPSC has enhanced the recall system by this Act.

 

Europe

 

The Machinery Directive was changed and a new directive has been effective from December 29, 2009. The main changes were to clarify the scope of the directive (e.g. partly completed machinery such as an engine unit), add the concrete description of market survey and create an obligation to establish a penalty description for member states.

 

China

 

The Chinese State Council published the “Agricultural Machinery Safety Supervision and Management Regulations”. This regulation requires that defective agricultural machinery producers should conduct recalls in a timely manner. The producers should establish the quality assurance system for their products. In addition, agricultural machinery is required to comply with the applicable new technical standards. The new regulation was implemented on November 1, 2009.

 

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Preparing for the Future

 

Honda aims to achieve global growth by further encouraging and strengthening innovation and creativity and creating quality products that please the customers and exceed their expectations.

 

In 2011, Honda suffered the effects of two large-scale disasters, the Great East Japan Earthquake and the floods in Thailand, but Honda will focus all its energies on the tasks set out below, aiming to get back on a growth trajectory as it pursues the vision toward 2020 of “providing good products to customers with speed, affordability, and low CO2 emissions”.

 

1. Research and Development

 

In connection with its efforts to develop the most effective safety and environmental technologies, Honda will continue to be innovative in advanced technology and products. Honda aims to create and introduce new value-added products to quickly respond to specific needs in various markets around the world. Honda will also continue its efforts to conduct research on experimental technologies for the future.

 

2. Production Efficiency

 

Honda will establish and enhance efficient and flexible production systems at its global production bases and supply high quality products, with the aim of meeting the needs of its customers in each region. Learning from the experience of disasters such as the Great East Japan Earthquake and the floods in Thailand, Honda will work at improving its global supply chain, implementing disaster prevention measures at each place of business and devising more effective business continuity plans (BCPs).

 

3. Sales Efficiency

 

Honda will remain proactive in its efforts to expand product lines through the innovative use of IT and will show its continued commitment to different customers throughout the world by upgrading its sales and service structure.

 

4. Product Quality

 

In response to increasing customer demand, Honda will upgrade its quality control by enhancing the functions of and coordination among the development, purchasing, production, sales and service departments.

 

5. Safety Technologies

 

Honda is working to develop safety technologies that enhance accident prediction and prevention, technologies to help reduce the risk of injuries to passengers and pedestrians from car accidents, and technologies that enhance compatibility between large and small vehicles, as well as expand its lineup of products incorporating such technologies. Honda will reinforce and continue to advance its contribution to traffic safety in motorized societies in Japan and abroad. Honda also intends to remain active in a variety of traffic safety programs, including advanced driving and motorcycling training programs provided by local dealerships.

 

6. The Environment

 

Honda will step up its efforts to create better, cleaner and more fuel-efficient engine technologies and to further improve recyclables throughout its product lines. Honda has now set a target to reduce CO2 emissions from its global products by 30 percent by the end of 2020 compared to year 2000 levels. In addition to reducing CO2 emissions during production and supply chain, Honda will strengthen its efforts to realize reductions in CO2 emissions through its entire corporate activities. Furthermore, Honda will strengthen its efforts in advancing technologies in the area of total energy management, to reduce CO2 emissions through mobility and people’s everyday lives.

 

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7. Continuing to Enhance Honda’s Social Reputation and Communication with the Community

 

In addition to continuing to provide products incorporating Honda’s advanced safety and environmental technologies, Honda will continue striving to enhance its social reputation by, among other things, strengthening its corporate governance, compliance, and risk management as well as participating in community activities and making philanthropic contributions.

 

Through these company-wide activities, Honda will strive to be a company that its shareholders, investors, customers and society want to exist.

 

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C. Organizational Structure

 

As of March 31, 2012, the Company had 94 Japanese subsidiaries and 284 overseas subsidiaries. The following table sets out for each of the Company’s principal subsidiaries, the country of incorporation, function and percentage ownership and voting interest held by Honda.

 

Company

  Country of
Incorporation
 

Function

  Percentage
Ownership
and
Voting Interest
 

Honda R&D Co., Ltd.

  Japan   Research & Development     100.0   

Honda Engineering Co., Ltd.

  Japan   Manufacturing and Sales of machine tools, equipment and production techniques     100.0   

Yachiyo Industry Co., Ltd.

  Japan   Manufacturing     50.5   

Honda Finance Co., Ltd.

  Japan   Finance     100.0   

American Honda Motor Co., Inc.

  U.S.A.   Sales     100.0   

Honda North America, Inc.

  U.S.A.   Coordination of Subsidiaries Operation     100.0   

Honda of America Mfg., Inc.

  U.S.A.   Manufacturing     100.0   

American Honda Finance Corporation

  U.S.A.   Finance     100.0   

Honda Manufacturing of Alabama, LLC

  U.S.A.   Manufacturing     100.0   

Honda Manufacturing of Indiana, LLC

  U.S.A.   Manufacturing     100.0   

Honda Transmission Mfg. of America, Inc.

  U.S.A.   Manufacturing     100.0   

Honda R&D Americas, Inc.

  U.S.A.   Research & Development     100.0   

Honda Canada Inc.

  Canada   Manufacturing and Sales     100.0   

Honda Canada Finance Inc.

  Canada   Finance     100.0   

Honda de Mexico, S.A. de C.V.

  Mexico   Manufacturing and Sales     100.0   

Honda Motor Europe Limited

  U.K.   Coordination of Subsidiaries Operation and Sales     100.0   

Honda of the U.K. Manufacturing Ltd.

  U.K.   Manufacturing     100.0   

Honda Finance Europe plc

  U.K.   Finance     100.0   

Honda France S.A.S.

  France   Sales     100.0   

Honda Bank GmbH

  Germany   Finance     100.0   

Honda Deutschland GmbH

  Germany   Sales     100.0   

Honda Motor (China) Investment Co., Ltd.

  China   Coordination of Subsidiaries Operation and Sales     100.0   

Honda Auto Parts Manufacturing Co., Ltd.

  China   Manufacturing     100.0   

Honda Automobile (China) Co., Ltd.

  China   Manufacturing     65.0   

Honda Motorcycle & Scooter India (Private) Ltd.

  India   Manufacturing and Sales     100.0   

Honda Siel Cars India Limited

  India   Manufacturing and Sales     96.8   

P.T. Honda Prospect Motor

  Indonesia   Manufacturing and Sales     51.0   

Honda Taiwan Co., Ltd.

  Taiwan   Sales     100.0   

Asian Honda Motor Co., Ltd.

  Thailand   Coordination of Subsidiaries Operation and Sales     100.0   

Honda Leasing (Thailand) Co., Ltd.

  Thailand   Finance     100.0   

Honda Automobile (Thailand) Co., Ltd.

  Thailand   Manufacturing and Sales     89.0   

Thai Honda Manufacturing Co., Ltd.

  Thailand   Manufacturing     60.0   

Honda Vietnam Co., Ltd.

  Vietnam   Manufacturing and Sales     70.0   

Honda Motor de Argentina S.A.

  Argentina   Manufacturing and Sales     100.0   

Honda South America Ltda.

  Brazil   Coordination of Subsidiaries Operation     100.0   

Banco Honda S.A.

  Brazil   Finance     100.0   

Honda Automoveis do Brasil Ltda.

  Brazil   Manufacturing and Sales     100.0   

Moto Honda da Amazonia Ltda.

  Brazil   Manufacturing and Sales     100.0   

Honda Turkiye A.S.

  Turkey   Manufacturing and Sales     100.0   

Honda Australia Pty. Ltd.

  Australia   Sales     100.0   

 

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D. Property, Plants and Equipment

 

The following table sets out information, as of March 31, 2012, with respect to Honda’s principal manufacturing facilities, all of which are owned by Honda:

 

Location

   Number of
Employees
    

Principal Products Manufactured

Sayama, Saitama, Japan

     5,146       Automobiles

Hamamatsu, Shizuoka, Japan

     2,435       Power products and transmissions

Suzuka, Mie, Japan

     6,931       Automobiles

Ohzu-machi, Kikuchi-gun Kumamoto, Japan

     3,065       Motorcycles, all-terrain vehicles, power products and engines

Marysville, Ohio, U.S.A.

     5,804       Automobiles

Anna, Ohio, U.S.A.

     2,181       Engines

East Liberty, Ohio, U.S.A.

     2,158       Automobiles

Lincoln, Alabama, U.S.A.

     4,097       Automobiles and engines

Greensburg, Indiana, U.S.A.

     1,818       Automobiles

Alliston, Ontario, Canada

     4,074       Automobiles and engines

El Salto, Mexico

     2,361       Motorcycles and automobiles

Swindon, Wiltshire, U.K.

     3,697       Automobiles and engines

Guangzhou, China

     810       Automobiles

Gurgaon, India

     4,089       Motorcycles

Greater Noida, India

     2,977       Automobiles

Karawang, Indonesia

     1,559       Automobiles and engines

Ayutthaya, Thailand

     3,569       Automobiles

Bangkok, Thailand

     3,095       Motorcycles and power products

Vinhphuc, Vietnam

     3,298       Motorcycles and automobiles

Buenos Aires, Argentina

     759       Motorcycles and automobiles

Sumare, Brazil

     3,061       Automobiles

Manaus, Brazil

     9,132       Motorcycles and power products

Gebze, Turkey

     846       Automobiles

 

In addition to its manufacturing facilities, the Company’s properties in Japan include sales offices and other sales facilities in major cities, repair service facilities, and research and development facilities.

 

As of March 31, 2012, the Company’s property, with a net book value of approximately ¥22.1 billion, was subject to specific mortgages securing indebtedness.

 

Capital Expenditures

 

Capital expenditures in fiscal 2012 were applied to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of sales and R&D facilities.

 

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Total capital expenditures for the year amounted to ¥1,090.3 billion, decreased ¥19.4 billion from the previous year. Also, total capital expenditures, excluding property on operating leases, for the year amounted to ¥406.5 billion, increased ¥95.2 billion from the previous year. Spending by business segment is shown below.

 

     Fiscal years ended March 31,  
     2011      2012      Increase
(Decrease)
 
     Yen (millions)  

Motorcycle Business

   ¥ 37,084       ¥ 62,075       ¥ 24,991   

Automobile Business

     260,149         334,196         74,047   

Financial Services Business

     798,584         684,083         (114,501

Financial Services Business (Excluding Property on Operating Leases)

     164         316         152   

Power Product and Other Businesses

     13,963         10,005         (3,958

Total

   ¥ 1,109,780       ¥ 1,090,359       ¥ (19,421

Total (Excluding Property on Operating Leases)

   ¥ 311,360       ¥ 406,592       ¥ 95,232   

 

Intangible assets are not included in the table above.

 

In Motorcycle business, we made capital expenditures of ¥62,075 million in the fiscal year ended March 31, 2012. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of sales and R&D facilities.

 

In Automobile business, we made capital expenditures of ¥334,196 million in the fiscal year ended March 31, 2012. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of sales and R&D facilities.

 

In Financial services business, capital expenditures excluding property on operating leases amounted to ¥316 million in the fiscal year ended March 31, 2012, while capital expenditures for property on operating leases were ¥683,767 million. Capital expenditures in Power products and other businesses in the fiscal year ended March 31, 2012, totaling ¥10,005 million, were deployed to upgrade, streamline, and modernize manufacturing facilities for power products, and to improve R&D facilities for power products.

 

Plans after fiscal 2012

 

Honda de Mexico, S.A. de C.V., which is one of the Company’s consolidated subsidiaries, plans to build a new auto plant in Guanajuato, Mexico with an investment of approximately $800 million. The annual production capacity of this new plant will be approximately 200,000 units. This new plant is planned to start operation from the first half of 2014.

 

Our original capital expenditure plans for the period from the fiscal year ended March 31, 2012 during the preceding fiscal year have not changed.

 

The estimated amounts of capital expenditures for fiscal year ending March 31, 2013 are shown below.

 

     Fiscal year ending
March 31, 2013
 
     Yen (millions)  

Motorcycle Business

   ¥ 71,000   

Automobile Business

     496,800   

Financial Services Business

     400   

Power Product and Other Businesses

     11,800   
  

 

 

 

Total

   ¥ 580,000   
  

 

 

 

 

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The estimated amount of capital expenditures for Financial services business in the above table does not include property on operating leases.

 

Intangible assets are not included in the table above.

 

Item 4A. Unresolved Staff Comments

 

We do not have any unresolved written comments provided by the staff of the Securities and Exchange Commission regarding our periodic reports under the Securities and Exchange Act of 1934.

 

Item 5. Operating and Financial Review and Prospects

 

A. Operating Result

 

Overview

 

Business Environment

 

During the past year, we faced a challenging economic environment. In the United States, although the overall economy continued to show signs of a gradual recovery, a high unemployment rate, sluggish sales of homes and fiscal austerity could result in the economy slipping into recession. In Europe, the sovereign debt crisis, rising oil prices and other factors led to stagnation, which slowed the economy to a crawl. In Asia, growth continued in China and the pace of growth slackened in India. A general recovery is underway in other countries in the region. In Japan, economic conditions remained challenging amid a mild recovery.

 

Overview of Fiscal Year 2012 Operating Performance

 

Honda’s consolidated net sales and operating revenues for the fiscal year ended March 31, 2012, decreased from the fiscal year ended March 31, 2011, due mainly to decreased net sales in Automobile business attributable to temporary plant shutdown and reduced production by the Great East Japan Earthquake, the floods in Thailand and negative foreign currency translation effects, which was partially offset by increased net sales in Motorcycle business. Operating income decreased from the previous fiscal year, due mainly to a decrease in income attributable to decreased net sales and model mix, increased R&D expenses and negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses.

 

Motorcycle Business

 

Honda’s unit sales in fiscal year 2012 increased 9.7% from the previous fiscal year, to 12,559 thousand units, despite lower sales caused by the floods in Thailand. The increase was mainly attributable to increased sales in India and Vietnam in line with expanded production capacity, and to strong sales in Brazil.

 

Automobile Business

 

Honda’s unit sales in fiscal year 2012 declined 10.7% from the previous fiscal year, to 3,137 thousand units, with all regions recording sharp sales declines. The primary reason for these declines was production shutdowns caused by supply chain disruptions stemming first from the Great East Japan Earthquake and flooded Thai factory due to the floods in Thailand.

 

Power Product and Other Businesses

 

Honda’s unit sales in fiscal year 2012 rose 5.6% from the previous fiscal year to 5,819 thousand units, mainly due to strong sales of completed products such as pumps and lawn mowers in Asia and Europe.

 

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Fiscal Year 2012 Compared with Fiscal Year 2011

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenue (hereafter, “net sales”) for the fiscal year ended March 31, 2012, decreased ¥988.7 billion, or 11.1%, to ¥7,948.0 billion from the fiscal year ended March 31, 2011, due mainly to decreased net sales in Automobile business by the Great East Japan Earthquake, the floods in Thailand and negative foreign currency translation effects, which was partially offset by increased net sales in Motorcycle business. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥555.6 billion, or 6.2%, compared to the decrease as reported of ¥988.7 billion, which includes negative foreign currency translation effects.

 

Operating Costs and Expenses

 

Operating costs and expenses decreased ¥650.3 billion, or 7.8%, to ¥7,716.7 billion from the previous fiscal year. Cost of sales decreased ¥577.2 billion, or 8.9%, to ¥5,919.6 billion from the previous fiscal year, due mainly to a decrease in costs attributable to decreased unit sales in Automobile business and positive foreign currency effects. Selling, general and administrative expenses decreased by ¥105.3 billion, or 7.6%, to ¥1,277.2 billion from the previous fiscal year, due mainly to a decrease in selling expenses attributable to decreased product warranty expenses, decreased unit sales in Automobile business, and positive foreign currency effects. R&D expenses increased by ¥32.2 billion, or 6.6%, to ¥519.8 billion from the previous fiscal year, due mainly to improving safety and environmental technologies and enhancing of the attractiveness of the products.

 

Operating Income

 

Operating income decreased ¥338.4 billion, or 59.4%, to ¥231.3 billion from the previous fiscal year, due mainly to a decrease in income attributable to decreased net sales, increased R&D expenses and negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses. Excluding negative foreign currency effects of ¥114.0 billion, Honda estimates operating income decreased ¥224.3 billion.

 

With respect to the discussion above of the changes, management identified the factors and used what it believes to be a reasonable method to analyze the respective changes in such factors. Management analyzed changes in these factors at the levels of the Company and its material consolidated subsidiaries. “Foreign currency effects” consist of “translation adjustments”, which come from the translation of the currency of foreign subsidiaries’ financial statements into Japanese yen, and “foreign currency adjustments”, which result from foreign-currency-denominated sales. With respect to “foreign currency adjustments”, management analyzed foreign currency adjustments primarily related to the following currencies: U.S. dollar, Euro, Japanese yen and others at the level of the Company and its material consolidated subsidiaries.

 

Income before Income Taxes and Equity in Income of Affiliates

 

Income before income taxes and equity in income of affiliates decreased ¥373.1 billion, or 59.2%, to ¥257.4 billion. Main factors of this decrease except factors relating operating income are as follows;

 

Unrealized gains and losses related to derivative instruments had a negative impact of ¥5.9 billion. Other income (expenses) excluding unrealized gains and losses related to derivative instruments had a negative impact of ¥28.7 billion, due mainly to gain on sales of investments in affiliates related to the dissolution of the joint venture, which was included in the previous fiscal year and a decrease in foreign currency transaction gains.

 

Income Tax Expense

 

Income tax expense decreased ¥71.0 billion, or 34.4%, to ¥135.7 billion from the previous fiscal year. The effective tax rate increased 19.9 percentage points to 52.7% from the previous fiscal year. The increase in the

 

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effective tax rate was due mainly to a decrease in a portion of unrecognized tax benefits related to transfer pricing matters of overseas transactions between the Company and foreign affiliates, which was included in the previous fiscal year and adjustments for the change in income tax laws in Japan in the current fiscal year.

 

Equity in Income of Affiliates

 

Equity in income of affiliates decreased ¥39.3 billion, or 28.2%, to ¥100.4 billion, due mainly to a decrease in income attributable to decreased net sales by the Great East Japan Earthquake at affiliates in Asia and Japan, and decreased Equity in income of the affiliate which was dissolved pursuant to a joint venture agreement in the previous fiscal year.

 

Net Income

 

Net income decreased ¥341.4 billion, or 60.6%, to ¥222.0 billion from the previous fiscal year.

 

Net Income attributable to Noncontrolling Interests

 

Net income attributable to noncontrolling interests decreased ¥18.7 billion, or 64.0%, to ¥10.5 billion from the previous fiscal year.

 

Net Income attributable to Honda Motor Co., Ltd.

 

Net income attributable to Honda Motor Co., Ltd. decreased ¥322.6 billion, or 60.4%, to ¥211.4 billion from the previous fiscal year.

 

Business Segments

 

Motorcycle Business

 

Honda’s unit sales of motorcycles, all-terrain vehicles (ATVs) totaled 12,559 thousand units, increased by 9.7% from the previous fiscal year, due mainly to an increase in unit sales in Asia and Other Regions, including South America.

 

Revenue from external customers increased ¥60.6 billion, or 4.7%, to ¥1,348.8 billion from the previous fiscal year, due mainly to increased unit sales, which was partially offset by negative foreign currency translation effects. The impact of price changes was immaterial. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have increased by approximately ¥158.6 billion, or 12.3%, compared to the increase as reported of ¥60.6 billion, which includes negative foreign currency translation effects.

 

Operating costs and expenses increased ¥56.6 billion, or 4.9%, to ¥1,206.2 billion from the previous fiscal year. Cost of sales increased by ¥51.0 billion, or 5.8%, to ¥939.0 billion, due mainly to an increase in costs attributable to increased unit sales, which was partially offset by positive foreign currency effects. Selling, general and administrative expenses increased by ¥10.0 billion, or 5.2%, to ¥203.8 billion, due mainly to an increase in selling expenses attributable to increased unit sales. R&D expenses decreased by ¥4.4 billion, or 6.6%, to ¥63.3 billion.

 

Operating income increased ¥4.0 billion, or 2.9%, to ¥142.6 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales, which was partially offset by income related to licensing agreements which was included in the previous fiscal year, increased selling, general and administrative expenses and negative foreign currency effects.

 

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Japan

 

Total industry demand for motorcycles in Japan* in fiscal year 2012 was approximately 450 thousand units, approximately 6% higher than in the previous fiscal year. Although the number of licensed riders declined in line with the continued decline in the population of young people in Japan as well as changes in consumer preferences, unit sales growth was driven by the launch of new models, etc.

 

Honda’s consolidated total unit sales in Japan in fiscal year 2012 were 220 thousand units, up 15.8% from the previous fiscal year. This result reflects the positive impact of the launch of the new Dio110 model scooter, increased sales of the Giorno scooter, and the newly launched global strategic road sports CBR250R model, whose global manufacturing base is in Asia.

 

*

Source: JAMA (Japan Automobile Manufacturers Association)

 

North America

 

Total demand for motorcycles and all-terrain vehicles (ATVs) in the United States* during calendar year 2011 declined approximately 5% from the previous fiscal year, to approximately 663 thousand units. Demand fell short of making a full-scale recovery as consumer sentiment remained muted despite signs of improvement in the employment rate and income levels.

 

Under these circumstances, Honda’s consolidated unit sales in North America for fiscal year 2012 increased 8.1% from the previous fiscal year, to 200 thousand units. Unit sales of motorcycles increased 18.9% from the previous fiscal year, to 107 thousand units, due to strong sales of the newly introduced global strategic road sports CBR250R model, the Ruckus scooter and certain other models. Unit sales of ATVs decreased 2.1%, to 93 thousand units despite brisk demand for utility ATVs, such as Foreman TRX500, which underwent a full model change.

 

*

Source: MIC (Motorcycle Industry Council)

 

Europe

 

Total demand for motorcycles in Europe* during calendar year 2011 declined approximately 8%, to approximately 865 thousand units. Weak consumer sentiment due to growing economic instability in Southern European countries in particular adversely affected demand.

 

Under these circumstances, Honda’s consolidated unit sales in Europe for fiscal year 2012 decreased 2.0% from the previous fiscal year, to 198 thousand units, slightly better than the lackluster market as a whole. This result is attributable to strong sales of the newly-launched global strategic road sports CBR250R model and newly-launched scooter model Vision110.

 

*

Based on Honda research, the motorcycle registration market for Europe includes 10 countries: the United Kingdom, Germany, France, Italy, Spain, Switzerland, Portugal, the Netherlands, Belgium and Austria.

 

Asia

 

Total demand for motorcycles in Asia*1 during calendar year 2011 increased approximately 3%, to approximately 42.9 million units. Demand for motorcycles continued to expand despite the impact of the floods in Thailand, the introduction of interest rate hikes to control inflation and tightening of credit policies in certain countries in the region. Unit sales in India rose approximately 16%, to approximately 13.14 million units, while sales in Indonesia increased approximately 9%, to approximately 8.01 million units. Sales in Thailand rose approximately 4%, to approximately 1.92 million units, despite the effects of the flooding.

 

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Under these circumstances, Honda’s unit sales on a consolidated basis in Asia*2 for fiscal year 2012 rose 8.0%, to 9,910 thousand units. Sales rose on growth in sales of the Activa scooters and Shine motorcycles in India, and the AirBlade scooters and Wave cub-type motorcycle models in Vietnam.

 

With respect to production activities, P.T. Astra Honda Motor, which is an affiliate accounted for under the equity method, in Indonesia, announced plans to build a fourth factory solely for scooters, with an annual production capacity of around 1,100 thousand units, in order to meet burgeoning demand in the Indonesian market. By the autumn of 2013, the company’s annual production capacity will be approximately 5,300 thousand units.

 

*1:

Based on Honda research, the motorcycle registration market includes eight countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, India, Pakistan and China.

 

*2:

This total includes sales of completed products of the Company and its consolidated subsidiaries and unit sales of parts for use in local production to Honda’s affiliates accounted for under the equity method.

 

Other Regions

 

In Brazil, the principal market within Other Regions, total demand in calendar year 2011 increased approximately 7%, to 1,930 thousand* units, on the momentum created by economic growth in the first half of the year. This result was achieved despite a fiscal tightening policy, and an economic slowdown brought on by the reverberations of the European sovereign debt crises in the second half.

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), unit sales rose 20.2% over the previous fiscal year, to 2,031 thousand units. Strong sales of mainstay models in Brazil, including the CG150 Fan motorcycles and NXR150 Bros dual-sport motorcycles contributed to sales growth.

 

*

Source: ABRACICLO (the Brazilian association of motorcycle, moped, and bicycle manufacturers)

 

Automobile Business

 

Honda’s unit sales of automobiles totaled 3,137 thousand units, decreased by 10.7% from the previous fiscal year, due mainly to a decrease in unit sales in all regions by the Great East Japan Earthquake and the floods in Thailand.

 

Revenue from external customers decreased ¥988.1 billion, or 14.5%, to ¥5,805.9 billion from the previous fiscal year, due mainly to decreased unit sales and negative foreign currency translation effects. The impact of price changes was immaterial. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥702.7 billion, or 10.3%, compared to the decrease as reported of ¥988.1 billion, which includes negative foreign currency translation effects. Revenue including intersegment sales decreased ¥979.5 billion, or 14.4%, to ¥5,822.7 billion from the previous fiscal year.

 

Operating costs and expenses decreased ¥637.8 billion, or 9.8%, to ¥5,899.9 billion from the previous fiscal year. Cost of sales decreased by ¥587.2 billion, or 11.5%, to ¥4,518.5 billion, due mainly to a decrease in costs attributable to decreased unit sales and positive foreign currency effects. Selling, general and administrative expenses decreased by ¥88.6 billion, or 8.5%, to ¥953.5 billion, due mainly to a decrease in selling expenses attributable to decreased product warranty expenses, decreased unit sales, and positive foreign currency effects. R&D expenses increased by ¥38.0 billion, or 9.7%, to ¥427.8 billion, due mainly to improving safety and environmental technologies and enhancing of the attractiveness of the products.

 

Operating loss was ¥77.2 billion, a decrease of ¥341.7 billion of operating income from the previous fiscal year, due mainly to a decrease in income attributable to decreased net sales, increased R&D expenses and negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses.

 

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The proportion of retail unit sales by each vehicle class is as follows;

 

         2011           2012    

Passenger cars:

   65%   62%

Accord, Brio, City, Civic, CR-Z, Fit/Jazz,

Fit/Jazz Hybrid, Fit Shuttle, Fit Shuttle Hybrid, FREED,

FREED Hybrid, Insight, Inspire, Legend, Stream,

Acura RL, Acura TL, Acura TSX, Everus S1

    

Light trucks:

   31%   33%

Crosstour, CR-V, Elysion, Odyssey,

Pilot, Ridgeline, Step WGN,

Acura MDX, Acura RDX, Acura ZDX

    

Mini vehicles:

   4%   5%

Acty, Life, N Box, Vamos, Zest

    

 

Although there are various factors that affect the profitability of each vehicle class, Honda believes that sales price is an important factor in determining profitability. In general, the weighted average sales price in the light trucks category is higher relative to the total average sales price, while the weighted average sales price in the mini vehicles category is relatively lower, although sales price varies from model to model. The proportion of total unit sales attributable to the light trucks category, which generally has relatively higher average sales prices, has been increasing since the previous fiscal year.

 

Furthermore, it should be noted that the profitability of each category depends on various factors, such as production costs of specific models, selling, general and administrative expenses and R&D expenses allocated to each category, regional differences in market and exchange rate conditions. Although expenses vary from model to model, Honda believes that, in general, weighted average expenses in the light trucks category are higher relative to total average expenses, while weighted average expenses in the mini vehicles category are relatively lower.

 

Japan

 

Total industry automobile sales in Japan*1 for fiscal year 2012 rose approximately 3%, to approximately 4.75 million units. Although the Great East Japan Earthquake and the floods in Thailand had an impact, automobile sales remained stable due to government stimulus policies that provided tax breaks and subsidies for eco-car purchases in the second half of the fiscal year as well as other factors.

 

Honda’s unit sales in Japan were almost on a par with the previous fiscal year at 580 thousand units*2. The impact of lower production due to the Great East Japan Earthquake and the floods in Thailand negated strong sales of new models such as the Fit Shuttle, the Fit Shuttle Hybrid, and the FREED Hybrid, as well as of the new N Box mini vehicle.

 

In production activities, Honda’s domestic unit production of automobiles declined 4.6% from the previous fiscal year, to 870 thousand units due to the impact of the Great East Japan Earthquake and the floods in Thailand.

 

*1:

Source: JAMA (as measured by the number of regular vehicle registrations (661 cc or higher) and mini vehicles (660 cc or lower))

 

*2:

Certain sales of automobiles that are financed with residual value type auto loans by our Japanese finance subsidiaries are accounted for as operating leases in conformity with U.S. generally accepted accounting principles. As a result, they are not included in total sales of our automobile segment or in our measure of unit sales.

 

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North America

 

In calendar year 2011, total industry sales in the United States* increased approximately 9% over the previous year, to approximately 12.78 million units. Sales of small passenger cars and SUVs in particular were firm, reflecting an upswing in consumer sentiment and an improvement in the employment rate.

 

Under these circumstances, Honda’s consolidated automobile unit sales in North America for fiscal year 2012 decreased approximately 9.3% from the previous fiscal year, to 1,323 thousand units. The launch of the fully remodeled Civic and CR-V models generated sales, but supply constraints caused by supply chain disruptions from the Great East Japan Earthquake had a negative impact on vehicle availability.

 

In production activities, Honda manufactured 1,229 thousand units, down 4.8% from the previous fiscal year.

 

Honda Manufacturing of Indiana, LLC, Honda’s consolidated subsidiary in the U.S, began a second production shift from October 2011, which increased annual production capacity at the plant to 200 thousand units.

 

Honda de Mexico, S.A. de C.V., Honda’s consolidated subsidiary in Mexico, announced plans to build a new factory with an annual production capacity of approximately 200 thousand units in order to meet expected market expansion in the compact car segment. This move is expected to raise Honda’s annual automobile production capacity in North America to 1.87 million units by the first half of 2014.

 

*

Source: Ward’s Auto

 

Europe

 

During calendar year 2011, total demand in Europe*1 edged down approximately 1% from the previous year, to approximately 13.57 million units. In Germany, individual retail market sales significantly declined, despite signs of a market recovery. The main factor was weak consumer sentiment due to concerns about the economy. On the other hand, in Russia*2, sales increased approximately 39%, to approximately 2.65 million units, supported by higher sales of locally produced vehicles.

 

Honda’s consolidated unit sales in Europe decreased 20.2% from the previous fiscal year, to 158 thousand units, despite increased sales of the fully remodeled Civic. In addition to supply constraints caused by supply chain disruptions from the Great East Japan Earthquake, the decline was due to increased sales competition, and a drop-off in individual retail market sales which forms the core of Honda sales.

 

On the production front, unit output at Honda’s U.K. plant declined 24.7% from the prior fiscal year, to 104 thousand units.

 

*1:

Source: ACEA (Association des Constructeurs Europeens d’Automobiles (the European Automobile Manufacturers’ Association) (new passenger car registrations cover 27 EU countries and three EFTA countries)), excluding Russia

 

*2:

Source: AEB (The Association of European Businesses)

 

Asia

 

In Asia in calendar year 2011, total demand increased approximately 6% from the previous year, to approximately 7.9 million units*1, despite lower sales in Thailand caused by the flooding. Higher overall sales resulted from a rise in demand in Indonesia, India and certain other countries. Unit sales in China rose approximately 2%, to approximately 18.51 million units*2, despite lower growth brought on by the end of a tax break available through 2010 and more stringent qualification standards for a government incentive program for fuel-efficient vehicles.

 

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Honda’s unit sales in Asia outside Japan, along with shipments to China, for fiscal year 2012 declined 13.3%, to 874 thousand units. The decline was a direct result of lower production due to the Great East Japan Earthquake and the floods in Thailand.

 

On the production front, Honda’s unit production decreased 23.1%, to around 834 thousand*3 due to the impact of the floods in Thailand. In Asia, excluding China, production totaled 198 thousand units, while output in China was approximately 636 thousand units.

 

Production activities at certain automobile plants in the Asia region were suspended due to the floods in Thailand. Subsequently, however, production has gradually resumed at all factories since January 2012.

 

P.T. Honda Prospect Motor, Honda’s consolidated subsidiary in Indonesia, announced plans to construct a new automobile factory with an annual production capacity of 120 thousand units for production of the BRIO and other compact cars. This new facility is expected to raise the company’s annual production capacity to 180 thousand units in 2014.

 

Furthermore, Dongfeng Honda Automobile Co., Ltd., an affiliate accounted for under the equity method, is constructing a second plant to respond to a continuing increase in demand in China’s automobile market. By the end of 2013, Dongfeng Honda’s total annual production capacity is scheduled to increase to 360 thousand units.

 

Moreover, Guangqi Honda Automobile Co., Ltd., an affiliate accounted for under the equity method, has announced plans to build a third production line with an annual production capacity of 120 thousand units. This new line will raise the company’s annual production capacity to 600 thousand units in 2014.

 

As a result, Honda’s annual production capacity of automobiles in China, including the annual production capacity of Honda Automobile (China) Co., Ltd., a factory focused on production for export, is scheduled to increase from 770 thousand units at present to 1,010 thousand units in 2014.

 

*1:

The total is based on Honda research and includes the following 10 countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Singapore, Taiwan, Korea, India and Pakistan.

 

*2:

Source: China Association of Automobile Manufacturers

 

*3:

The total includes the following nine countries: China, Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Taiwan, India and Pakistan.

 

Other Regions

 

Total industry demand for automobiles in Brazil*, one of the principal markets among the Other Regions, increased approximately 3%, to approximately 3,430 thousand units in calendar year 2011, marking a record for the 5th consecutive year. Although the growth rate dropped due to the impact of fiscal tightening measures from the end of 2010, light commercial vehicle sales increased.

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), unit sales in fiscal year 2012 declined 24.1% from the previous fiscal year, to 202 thousand units. This was due to supply chain disruptions caused by the Great East Japan Earthquake and supply constraints caused by the floods in Thailand.

 

On the production front, Honda’s unit production in Brazil, one of the principal markets among the Other Regions, decreased 36.5%, to 80 thousand units from the previous fiscal year.

 

*:

Source: ANFAVEA (Associação Nacional dos Fabricantes de Veiculos Automotores (the Brazilian Automobile Association, includes passenger cars and light commercial vehicles))

 

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Power Product and Other Businesses

 

Honda’s unit sales of power products totaled 5,819 thousand units, increased by 5.6% from the previous fiscal year, due mainly to an increase in unit sales in North America and Asia.

 

Revenue from external customers decreased ¥15.5 billion, or 5.3%, to ¥277.1 billion from the previous fiscal year, due mainly to decreased sales of other business, negative foreign currency translation effects, which was partially offset by increased unit sales of power products. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥4.8 billion, or 1.7%, compared to the decrease as reported of ¥15.5 billion, which includes negative foreign currency translation effects. Revenue including intersegment sales decreased ¥18.0 billion, or 5.9%, to ¥289.7 billion from the previous fiscal year.

 

Operating costs and expenses decreased ¥19.5 billion, or 6.2%, to ¥293.7 billion from the previous fiscal year. Cost of sales decreased by ¥19.5 billion, or 8.6%, to ¥208.6 billion, due mainly to a decrease in costs attributable to decreased net sales of other business and positive foreign currency effects. Selling, general and administrative expenses increased by ¥1.3 billion, or 2.4%, to ¥56.5 billion. R&D expenses decreased by ¥1.3 billion, or 4.4%, to ¥28.6 billion.

 

Operating loss was ¥4.0 billion, an improvement of ¥1.4 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales of power products, which was partially offset by increased selling, general and administrative expenses and negative foreign currency effects.

 

Japan

 

Unit sales for fiscal year 2012 increased 1.0% from the previous fiscal year, to 392 thousand units, due to higher sales of generators, snow blowers and certain other products, despite lower sales of general-purpose engines for OEM* use.

 

*:

OEM (Original Equipment Manufacturer): refers to manufacturers of products and components sold under a third-party brand.

 

North America

 

Unit sales in fiscal year 2012 increased 11.0% from the previous fiscal year, to 2,314 thousand units. Although sales of lawn mowers and certain other products declined, increased sales of general-purpose engines to OEM manufacturers of pressure washers contributed to the increase.

 

Europe

 

Unit sales in fiscal year 2012 declined 4.5% from the previous fiscal year, to 1,121 thousand units due to decreased sales of general-purpose engines for OEM use. On a bright note, sales of completed products such as lawn mowers and other gardening equipment, as well as snow blowers were strong.

 

Asia

 

Unit sales in fiscal year 2012 increased 11.1% from the previous fiscal year, to 1,472 thousand units due to economic expansion and government support programs for farm households, which contributed to strong sales of engines for agricultural equipment and construction machinery, pumps, and brush cutters. This increase was realized despite decreased sales in Thailand due to the impact of the floods.

 

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Other Regions

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), unit sales in fiscal year 2012 declined 3.2% from the previous fiscal year, to 520 thousand units, the result of lower sales of general-purpose engines for OEM use. This was mainly due to lower demand in Brazil. Sales of brush cutters and general-purpose engines for OEM use rose in Australia.

 

Financial Services Business

 

To support the sale of its products, Honda provides retail lending and leasing to customers and wholesale financing to dealers through our finance subsidiaries in Japan, the United States, Canada, the United Kingdom, Germany, Brazil, Thailand and other countries.

 

Total amount of finance subsidiaries-receivables and property on operating leases of finance subsidiaries increased by ¥81.2 billion, or 1.7%, to ¥4,918.8 billion from the previous fiscal year. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, total amount of finance subsidiaries-receivables and property on operating leases of finance subsidiaries as of the end of the year would have increased by approximately ¥168.0 billion, or 3.5%, compared to the increase as reported of ¥81.2 billion, which includes negative foreign currency translation effects.

 

Revenue from external customers in Financial services business decreased ¥45.7 billion, or 8.1%, to ¥516.1 billion from the previous fiscal year, due mainly to negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, revenue for the year would have decreased by approximately ¥6.7 billion, or 1.2%, compared to the decrease as reported of ¥45.7 billion, which includes negative foreign currency translation effects. Revenue including intersegment sales decreased ¥46.8 billion, or 8.2%, to ¥526.5 billion from the previous fiscal year.

 

Operating costs and expenses decreased ¥30.6 billion, or 7.9%, to ¥356.5 billion from the previous fiscal year. Cost of sales decreased ¥16.6 billion, or 5.4%, to ¥293.2 billion from the previous fiscal year, due mainly to a decrease in costs related to lease residual values and positive foreign currency effect. Selling, general and administrative expenses decreased ¥13.9 billion, or 18.1%, to ¥63.3 billion from the previous fiscal year, due mainly to a decrease in provisions for credit losses, losses on lease residual values and positive foreign currency effects.

 

Operating income decreased ¥16.2 billion, or 8.7%, to ¥170.0 billion from the previous fiscal year, due mainly to negative foreign currency effects, which was partially offset by a decrease in losses on lease residual values.

 

Geographical Information

 

Japan

 

In Japan, revenue from domestic and export sales decreased ¥248.2 billion, or 6.9%, to ¥3,362.9 billion from the previous fiscal year, due mainly to a decrease in revenue in Automobile business by the Great East Japan Earthquake and the floods in Thailand. Operating loss was ¥109.8 billion, a decrease of ¥175.9 billion of operating income from the previous fiscal year, due mainly to a decrease in income attributable to decreased net sales and model mix, increased R&D expenses and negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses.

 

North America

 

In North America, which mainly consists of the United States, revenue decreased ¥433.1 billion, or 10.4%, to ¥3,714.7 billion from the previous fiscal year, due mainly to a decrease in revenue in Automobile business by

 

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the Great East Japan Earthquake, the floods in Thailand and negative foreign currency translation effects. Operating income decreased ¥77.6 billion, or 25.8%, to ¥223.2 billion from the previous fiscal year, due mainly to a decrease in income attributable to decreased net sales, model mix and negative foreign currency effects.

 

Europe

 

In Europe, revenue decreased ¥118.5 billion, or 16.9%, to ¥580.7 billion from the previous fiscal year, due mainly to a decrease in revenue in the Automobile business by the Great East Japan Earthquake, the floods in Thailand and negative foreign currency translation effects. Operating loss was ¥12.1 billion, a decrease of ¥1.9 billion of operating income from the previous fiscal year, due mainly to a decrease in income attributable to decreased net sales and model mix.

 

Asia

 

In Asia, revenue decreased ¥350.6 billion, or 19.0%, to ¥1,490.4 billion from the previous fiscal year, due mainly to a decrease in revenue in Automobile businesses by the Great East Japan Earthquake, the floods in Thailand and negative foreign currency translation effects, which was partially offset by an increase in revenue in Motorcycle business. Operating income decreased ¥73.7 billion, or 49.0%, to ¥76.8 billion from the previous fiscal year, due mainly to a decrease in income attributable to decreased net sales and model mix and negative foreign currency effects.

 

Other Regions

 

In Other Regions, revenue decreased ¥88.9 billion, or 9.1%, to ¥893.1 billion from the previous fiscal year, due mainly to a decrease in revenue in Automobile businesses by the Great East Japan Earthquake, the floods in Thailand and negative foreign currency translation effects, which was partially offset by an increase in revenue in Motorcycle business. Operating income decreased ¥12.5 billion, or 18.1%, to ¥56.9 billion from the previous fiscal year, due mainly to a decrease in income attributable to increased selling, general and administrative expenses and negative foreign currency effects.

 

Fiscal Year 2011 Compared with Fiscal Year 2010

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenue (hereafter, “net sales”) for the fiscal year ended March 31, 2011, increased ¥357.6 billion, or 4.2%, to ¥8,936.8 billion from the fiscal year ended March 31, 2010, due mainly to increased net sales in Automobile business and Motorcycle business, which was partially offset by a decrease in net sales attributable to negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have increased by approximately ¥743.3 billion, or 8.7%, compared to the increase as reported of ¥357.6 billion, which includes negative foreign currency translation effects.

 

Operating Costs and Expenses

 

Operating costs and expenses increased ¥151.6 billion, or 1.8%, to ¥8,367.0 billion from the previous fiscal year. Cost of sales increased ¥82.1 billion, or 1.3%, to ¥6,496.8 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased net sales, which was partially offset by continuing cost reduction and positive foreign currency effects. Selling, general and administrative expenses increased ¥45.3 billion, or 3.4%, to ¥1,382.6 billion from the previous fiscal year, due mainly to an increase in selling expenses attributable to increased net sales, the impact of the Great East Japan Earthquake, which was partially offset by a decrease in provisions for credit losses in Financial services business, and positive foreign currency effects. R&D expenses increased by ¥24.2 billion, or 5.2%, to ¥487.5 billion from the previous fiscal year, due mainly to improving safety and environmental technologies and enhancing of the attractiveness of the products.

 

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Operating Income

 

Operating income increased ¥206.0 billion, or 56.6%, to ¥569.7 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales, and continuing cost reduction, which was partially offset by increased selling, general and administrative expenses and R&D expenses, negative foreign currency effects and the impact of the Great East Japan Earthquake. Excluding negative foreign currency effects of ¥137.6 billion, Honda estimates operating income increased ¥343.6 billion.

 

With respect to the discussion above of the changes, management identified the factors and used what it believes to be a reasonable method to analyze the respective changes in such factors. Management analyzed changes in these factors at the levels of the Company and its material consolidated subsidiaries. “Foreign currency effects” consist of “translation adjustments”, which come from the translation of the currency of foreign subsidiaries’ financial statements into Japanese yen, and “foreign currency adjustments”, which result from foreign-currency-denominated sales. With respect to “foreign currency adjustments”, management analyzed foreign currency adjustments primarily related to the following currencies: U.S. dollar, Canadian dollar, Euro, British pound, Brazilian real and Japanese yen, at the level of the Company and its material consolidated subsidiaries.

 

Income before Income Taxes and Equity in Income of Affiliates

 

Income before income taxes and equity in income of affiliates increased ¥294.3 billion, or 87.6%, to ¥630.5 billion. Main factors of this increase except factors relating operating income are as follows;

 

Unrealized gains and losses related to derivative instruments had a negative impact of ¥30.4 billion. Other income (expenses) excluding unrealized gains and losses related to derivative instruments had a positive impact of ¥118.8 billion, due mainly to gain on sales of investments in affiliates related to the dissolution of the joint venture and an increase in foreign currency transaction gains.

 

*

Information about the dissolution of the joint venture is described in note (6) Investments in and Advances to affiliates to the accompanying consolidated financial statement.

 

Income Tax Expense

 

Income tax expense increased ¥59.9 billion, or 40.8%, to ¥206.8 billion from the previous fiscal year. The effective tax rate decreased 10.9 percentage points to 32.8% from the previous fiscal year. The decrease in the effective tax rate was due mainly to a decrease in a portion of unrecognized tax benefits related to transfer pricing matters of overseas transactions between the Company and foreign affiliates.

 

Equity in Income of Affiliates

 

Equity in income of affiliates increased ¥46.4 billion, or 49.8%, to ¥139.7 billion, due mainly to an increase in income attributable to increased net sales and continuing cost reduction at affiliates in Japan and Asia.

 

Net Income

 

Net income increased ¥280.8 billion, or 99.4%, to ¥563.4 billion from the previous fiscal year.

 

Net Income attributable to Noncontrolling Interests

 

Net income attributable to noncontrolling interests increased ¥15.1 billion, or 106.8%, to ¥29.3 billion from the previous fiscal year.

 

Net Income attributable to Honda Motor Co., Ltd.

 

Net income attributable to Honda Motor Co., Ltd. increased ¥265.6 billion, or 99.0%, to ¥534.0 billion from the previous fiscal year.

 

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Business Segments

 

Motorcycle Business

 

Honda’s unit sales of motorcycles, all-terrain vehicles (ATVs) totaled 11,445 thousand units, increased by 18.7% from the previous fiscal year, due mainly to an increase in unit sales in Asia and Other Regions, including South America.

 

Revenue from external customers increased ¥147.9 billion, or 13.0%, to ¥1,288.1 billion from the previous fiscal year, due mainly to increased unit sales, and revenue related to licensing agreements. The impact of price changes was immaterial. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have increased by approximately ¥171.3 billion, or 15.0%, compared to the increase as reported of ¥147.9 billion, which includes negative foreign currency translation effects.

 

Operating costs and expenses increased ¥68.1 billion, or 6.3%, to ¥1,149.6 billion from the previous fiscal year. Cost of sales increased by ¥61.2 billion, or 7.4%, to ¥887.9 billion, due mainly to an increase in costs attributable to increased net sales, which was partially offset by the positive foreign currency effects. Selling, general and administrative expenses increased by ¥3.8 billion, or 2.0%, to ¥193.8 billion. R&D expenses increased by ¥3.0 billion, or 4.7%, to ¥67.8 billion.

 

Operating income increased ¥79.7 billion, or 135.6%, to ¥138.5 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and income related to licensing agreements.

 

*

Information about licensing agreements is described in note (6) Investments in and Advances to affiliates to the accompanying consolidated financial statements.

 

Japan

 

Total industry demand for motorcycles in Japan in fiscal 2011 was approximately 420 thousand units*, approximately 3% higher than in the previous fiscal year. Although the percentage of younger people in the total population continued to decline and there were changes in consumer preferences, unit sales grew primarily due to the introduction of new models.

 

Total unit sales on a consolidated basis were 190 thousand units, and about the same level as in the previous fiscal year, as sales of the scooters PCX and Giorno expanded.

 

In addition, the brand-new electric-powered EV-neo, a commercial use scooter that emits zero CO2 emissions in use, was made available on lease.

 

*

Source: JAMA (Japan Automobile Manufacturers Association)

 

North America

 

Total demand for motorcycles and all-terrain vehicles (ATVs) in the United States during calendar 2010 declined approximately 17% from the previous year, to about 700 thousand* units. Although there were signs of recovery, mainly in sales of utility ATVs, this did not lead to a full-scale recovery in demand.

 

Honda’s consolidated unit sales in North America declined 2.1%, to 185 thousand units. Unit sales of touring models, such as Goldwing, as well as cruiser models including Shadow, were favorable, however, unit sales of sports models such as CBR1000R and CRF230M motocross models decreased. As a result, unit sales of motorcycles were down 8.2% from the previous fiscal year, to approximately 90 thousand units. However, unit sales of ATVs rose 4.4%, to approximately 95 thousand units, because of strong demand for utility ATVs, including the Four Trax Rancher and other models.

 

*

Source: MIC (Motorcycle Industry Council)

 

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Europe

 

Total demand for motorcycles in Europe* during calendar 2010 declined about 13%, to approximately 920 thousand units. This major drop in demand was due to a number of factors, including a reactionary decline following the end of subsidies for motorcycle purchases in Italy and the impact of an increase in the value-added tax (VAT) in Spain.

 

Honda’s consolidated unit sales in Europe increased 1.5% compared with the previous fiscal year, to 202 thousand units. Despite the effects of a decline in the market for 125cc scooters, units sales of PCX motorcycles were favorable and sales of the naked type CBF1000, the new VFR1200F sports tourer, and other models rose.

 

*

Based on Honda research, the motorcycle registration market for Europe includes 10 countries: the United Kingdom, Germany, France, Italy, Spain, Switzerland, Portugal, the Netherlands, Belgium and Austria.

 

Asia

 

Demand for motorcycles continued to expand in Asia, despite price increases, including the price of gasoline, tighter credit, and other factors in certain countries. In calendar 2010, total demand for motorcycles*1 rose about 10%, to approximately 43.8 million units.

 

Unit sales in India rose about 29%, to approximately 11.3 million units, while sales in Indonesia increased about 26%, to approximately 7.36 million units, and sales in Thailand expanded approximately 12%, to approximately 1.85 million units.

 

Honda’s unit sales on a consolidated basis in Asia*2 for the fiscal year increased 20.3%, to 9,178 thousand units. This increase was due to an expansion in sales of the CB Twister motorcycle and the Activa scooter in India, unit sales of a new Wave 110i Cub-style 110cc motorcycle and Scoopy i scooter in Thailand, as well as other factors.

 

With respect to production activities, Honda Motorcycle & Scooter India Private Limited, Honda’s consolidated subsidiary in India, announced it would further expand the production capacity of a second plant that is already under construction, and also build a third plant, to meet the rapidly expanding demand in the Indian market. Combined with expansion in capacity at the existing plant, when the second plant goes into operation in the first half of calendar 2012, Honda Motorcycle and Scooter India is scheduled to have annual production capacity of approximately 2.8 million units. Additionally, when the third plant goes into operation in the first half of calendar 2013, Honda Motorcycle and Scooter India is scheduled to have annual production capacity of approximately 4.0 million units.

 

Also, Honda Vietnam Co., Ltd., Honda’s consolidated subsidiary in Vietnam, announced it would expand the capacity of its second plant to meet the favorable increase in demand. By the latter half of calendar 2011, this expansion in facilities is scheduled to bring total annual capacity to approximately 2.0 million units.

 

In Indonesia, P.T. Astra Honda Motor, which is an affiliate accounted for under the equity method, made the decision to build a new plant to respond to continued robust growth in demand. When this new facility goes into operation in the latter half of calendar 2011, the annual production capacity of Astra Honda Motor is scheduled to increase to approximately 4.0 million units.

 

Honda resolved at a meeting of the Board of Directors on December 16, 2010 to sell to its joint venture partners all the shares held by Honda in Hero Honda Motors Limited, an affiliate of Honda accounted for under the equity method, for the dissolution of the joint venture. Accordingly, Honda executed the share transfer agreement and new license agreements on January 22, 2011. In accordance with the terms of the share transfer agreement, Honda sold all the shares it held in the joint venture partners as of March 22, 2011.

 

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*1:

Based on Honda research, the motorcycle registration market includes eight countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, India, Pakistan and China.

 

*2:

This total includes sales of completed products of the Company and its consolidated subsidiaries and unit sales of parts for use in local production to Honda’s affiliates accounted for under the equity method.

 

Other Regions

 

In Brazil, the principal market within Other Regions, total demand in calendar 2010 increased approximately 12%, to about 1.8 million* units. This was due to improved consumer confidence accompanying an increase in the employment rate and personal income as well as easier availability of credit starting from mid-year onward.

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), unit sales rose 17.9% over the previous fiscal year, to 1.69 million units. This was the result of increased sales of mainstay models, including the CG150FAN and NXR150 motorcycles in Brazil.

 

*

Source: ABRACICLO (the Brazilian association of motorcycle, moped, and bicycle manufacturers)

 

Automobile Business

 

Honda’s unit sales of automobiles totaled 3,512 thousand units, increased by 3.5% from the previous fiscal year, due mainly to an increase in unit sales in North America and Asia, which was partially offset by a decrease in unit sales in Japan and Europe.

 

Revenue from external customers increased ¥239.2 billion, or 3.6%, to ¥6,794.0 billion from the previous fiscal year, due mainly to increased unit sales and increase in sales mix to higher priced vehicles, which was partially offset by the negative foreign currency translation effects. The impact of price changes was immaterial. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have increased by approximately ¥545.7 billion, or 8.3%, compared to the increase as reported of ¥239.2 billion, which includes negative foreign currency translation effects. Revenue including intersegment sales increased ¥247.4 billion, or 3.8%, to ¥6,802.3 billion from the previous fiscal year.

 

Operating costs and expenses increased ¥109.6 billion, or 1.7%, to ¥6,537.7 billion from the previous fiscal year. Cost of sales increased by ¥39.2 billion, or 0.8%, to ¥5,105.7 billion, due mainly to an increase in costs attributable to increased net sales, which was partially offset by continuing cost reduction and the positive foreign currency effects. Selling, general and administrative expenses increased by ¥49.9 billion, or 5.0%, to ¥1,042.1 billion, due mainly to losses in connection with the Great East Japan Earthquake of March 11, 2011, increased advertisement and sales promotion expenses related to sales increase, and product warranty expenses. Losses relating to the Great East Japan Earthquake mainly consisted of losses on damaged property, plant and equipment of ¥15.6 billion and ¥7.7 billion of fixed research and development costs that still had to be incurred even though research and development activities at certain locations had to be suspended. R&D expenses increased by ¥20.4 billion, or 5.5%, to ¥389.8 billion, due mainly to improving safety and environmental technologies and enhancing of the attractiveness of the products.

 

Operating income increased ¥137.7 billion, or 108.7%, to ¥264.5 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and continuing cost reduction, which was partially offset by increased selling, general and administrative expenses and R&D expenses, negative foreign currency effects and the impact of the Great East Japan Earthquake.

 

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The proportion of retail unit sales by each vehicle class is as follows;

 

         2010           2011    

Passenger cars:

   69%   65%

Accord, Airwave, City, Civic, CR-Z, Fit/Jazz, Fit/Jazz Hybrid,

FREED, Insight, Inspire, Legend, Partner, Stream,

Acura CSX, Acura RL, Acura TL, Acura TSX

    

Light trucks:

   26%   31%

Crosstour, CR-V, Element, Elysion, Odyssey,

Pilot, Ridgeline, Step WGN,

Acura MDX, Acura RDX, Acura ZDX

    

Mini vehicles:

   5%   4%

Acty, Life, Vamos, Zest

    

 

Although there are various factors that affect the profitability of each vehicle class, Honda believes that sales price is an important factor in determining profitability. In general, the weighted average sales price in the light trucks category is higher relative to the total average sales price, while the weighted average sales price in the mini vehicles category is relatively lower, although sales price varies from model to model. The proportion of total unit sales attributable to the light trucks category, which generally has relatively higher average sales prices, has been increasing since the previous fiscal year.

 

Furthermore, it should be noted that the profitability of each category depends on various factors, such as production costs of specific models, selling, general and administrative expenses and R&D expenses allocated to each category, regional differences in market and exchange rate conditions. Although expenses vary from model to model, Honda believes that, in general, weighted average expenses in the light trucks category are higher relative to total average expenses, while weighted average expenses in the mini vehicles category are relatively lower.

 

Japan

 

Total industry automobile sales in Japan* for the fiscal year 2011 decreased about 6%, to approximately 4.6 million units. In the first half of the fiscal year, automobile sales held firm because of the positive effects of government policies that provided tax breaks and subsidies for purchasing eco-cars and other factors. However, these subsidies terminated in the latter half of the fiscal year, resulting in a reactionary decline in sales.

 

Honda’s unit sales in Japan decreased 9.9% from the previous fiscal year, to 582 thousand units. Although sales of the new model the FREED SPIKE, the CR-Z, the StepWGN, which earned the top spot in accumulated sales through 2010 in the minivan category, and the Fit Hybrid were quite favorable, overall sales experienced a reactionary decline after the termination of subsidies for eco-cars.

 

Among production activities, unit output for the domestic market decreased following the termination of eco-car subsidies, but exports increased, with particularly strong unit sales of CR-V models in North America. During the fiscal year under review, Honda’s domestic unit production of automobiles was approximately 912 thousand units, about the same level as in the previous fiscal year.

 

Please note that Honda suspended production following the Great East Japan Earthquake, and, as a result, unit output was about 39 thousand units lower than the original plan.

 

*1:

Source: JAMA (as measured by the number of regular vehicle registrations (661cc or higher) and mini vehicles (660cc or lower))

 

*2:

Certain sales of automobiles that are financed with residual value type auto loans by our Japanese finance subsidiaries are accounted for as operating leases in conformity with U.S. generally accepted accounting principles. As a result, they are not included in total sales of our automobile segment or in our measure of unit sales.

 

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North America

 

In calendar 2010, total industry sales in the United States* increased about 11% over the previous year, to approximately 11.77 million units. Sales of light trucks were especially strong and rose approximately 18% over the level in 2009.

 

Honda’s consolidated automobile unit sales in North America rose 12.4%, to 1,458 thousand units. Sales of the CR-V, Pilot, MDX, the all-new Odyssey that was launched in September 2010, and light trucks were favorable. In addition, sales of the Crosstour and the launching of new models of the TSX Sports Wagon and TL contributed to growth.

 

In production activities, Honda manufactured approximately 1,292 thousand units in North America, 12.1% higher than in the previous fiscal year. This increase was led by higher production of the popular CR-V and Pilot, models and the all-new Odyssey.

 

*

Source: Ward’s Auto

 

Europe

 

During calendar 2010, total demand in Europe*1 decreased approximately 5% from the previous year, to approximately 13.79 million units. During the first half of the year, the market was supported by government subsidies in some countries, but in the second half consumer confidence declined significantly due to the impact of stringent credit policies in the principal countries of the region, and a marked decline was reported, especially in markets targeting individual retail customers. On the other hand, in Russia*2, sales increased about 30%, to approximately 1.91 million units.

 

Honda’s consolidated unit sales in Europe decreased 20.5%, to 198 thousand units due to the effects of the slump in the retail sales market, increased competition and other factors.

 

In the area of production, unit output at Honda’s U.K. plant rose 40.0% over the prior fiscal year, to approximately 139 thousand units, in part because of temporarily suspended production in the prior year.

 

*1:

Source: ACEA (Association des Constructeurs Europeens d’Automobiles (the European Automobile Manufacturers’ Association) (New passenger car registrations cover EU27 and EFTA3))

 

*2:

Source: AEB (The Association of European Businesses)

 

Asia

 

In Asia, total demand continued to increase due to robust economic growth and the positive effects of new car model launches. Unit sales in China rose about 32% over the previous year to approximately 18.06 million units.*1 In Asia, excluding China, units sales climbed 27%, to about 7.48 million units.*2

 

Honda’s unit sales in Asia outside Japan rose 6.1%, to 1,008 thousand units, supported by solid economic expansion in the region. Sales of the CR-V in Thailand, Indonesia, Malaysia and elsewhere in Asia, as well as sales of the City in Thailand, continued to be favorable. Together with sales growth in China, Honda’s overall sales in Asia expanded.

 

In the production area, in response to continued expansion in demand in China’s automobile market, Guangqi Honda Automobile Co., Ltd., an affiliate accounted for under the equity method, is scheduled to increase its annual production capacity from the current 360 thousand to 480 thousand units by the latter half of calendar 2011. In addition, Dongfeng Honda Automobile Co., Ltd., an affiliate accounted for under the equity method, started construction of a second plant in response to continued expansion in demand in China’s automobile market. Within the latter half of calendar 2012, that company’s total annual production capacity is scheduled to increase to 340 thousand units.

 

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*1:

Source: China Association of Automobile Manufacturers

 

*2:

The total is based on Honda research and includes the following 10 countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Singapore, Taiwan, Korea, India and Pakistan.

 

Other Regions

 

Total industry demand for automobiles in Brazil, one of the principal markets among the Other Regions, increased about 11%, to approximately 3.33 million*1 units in calendar 2010. This was the result of rising consumer confidence due to a surge in employment and income as well as an improvement in the purchasing environment for new automobiles due to lower interest rates and easier availability of credit in Brazil.

 

In Australia, total demand for automobiles expanded about 11% over the previous year, to approximately 1.04 million units, supported by continued favorable economic conditions.*2

 

Honda’s total sales in Other regions expanded 6.4%, to 266 thousand units, due primarily to increased sales of the City in Brazil, despite intensified competition in Australia and decreased sales in the Middle East.

 

*1:

Source: ANFAVEA (Associaçao Nacional dos Fabricantes de Veiculos Automotores (the Brazilian automobile association, includes passenger cars and light commercial vehicles))

 

*2:

Source: FCAI (Federal Chamber of Automotive Industries (the Australian automobile association))

 

Power Product and Other Businesses

 

Honda’s unit sales of power products totaled 5,509 thousand units, increased by 16.1% from the previous fiscal year, due to increased unit sales in all the regions.

 

Revenue from external customers increased ¥14.9 billion, or 5.4%, to ¥292.6 billion from the previous fiscal year, due mainly to the increased unit sales of power products, which was partially offset by negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have increased by approximately ¥27.5 billion, or 9.9%, compared to the increase as reported of ¥14.9 billion, which includes negative foreign currency translation effects. Revenue including intersegment sales increased ¥13.0 billion, or 4.4%, to ¥307.8 billion from the previous fiscal year.

 

Operating costs and expenses increased ¥1.8 billion, or 0.6%, to ¥313.3 billion from the previous fiscal year. Cost of sales decreased by ¥1.3 billion, or 0.6%, to ¥228.1 billion, due mainly to continuing cost reduction, which was partially offset by an increase in costs attributable to increased net sales. Selling, general and administrative expenses increased by ¥2.4 billion, or 4.6%, to ¥55.2 billion. R&D expenses increased by ¥0.7 billion, or 2.5%, to ¥29.9 billion.

 

Operating loss including that of other business was ¥5.5 billion, an improvement of ¥11.1 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales of power products, which was partially offset by increased selling, general and administrative expenses and negative foreign currency effects.

 

Japan

 

In the power products field, during the fiscal year under review, Honda’s sales increased 20.5%, to 388 thousand units. This was due to an increase in sales of general-purpose engines for OEM use to

 

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manufacturers of construction machinery in the United States and in the Middle East and Africa as well as an increase in Japan in sales of electric power generators, tillers, snow blowers and other types of machinery. In May 2010, Honda newly launched the ENEPO EU9iGB, a gas-powered electric power generation unit that runs on household butane gas canisters.

 

North America

 

Honda’s consolidated unit sales in North America increased 14.7%, to 2,085 thousand units. This increase was due to higher sales of general-purpose engines for OEM use to manufacturers of lawn mowers, construction machinery, pressure washers and other machinery as well as increased sales of generators accompanying the recovery in the economies of the region.

 

Europe

 

In Europe, consolidated unit sales increased 10.1% over the previous fiscal year, to 1,174 thousand units, because of strong demand for general-purpose engines for OEM use in construction machinery, and generators as well as sales of snow blowers, despite intensified competition in the lawn mower market.

 

Asia

 

In Asia outside of Japan, consolidated unit sales increased 23.9%, to 1,325 thousand units. This increase was due to favorable sales of engines for agricultural equipment and pumps, generators and brush cutters supported by economic expansion in the region, and continuation of government subsidies for farm households. Weather conditions also contributed to increased sales.

 

Other Regions

 

Unit sales in Other Regions increased 14.5% over the previous fiscal year, to 537 thousand units. Factors accounting for this increase were favorable sales of general-purpose engines for OEM use for installation in construction machinery and pumps to the Middle East and South America, due mainly to economic recovery.

 

Financial Services Business

 

To support the sale of its products, Honda provides retail lending and leasing to customers and wholesale financing to dealers through our finance subsidiaries in Japan, the United States, Canada, the United Kingdom, Germany, Brazil, Thailand and other countries.

 

Total amount of finance subsidiaries-receivables and property on operating leases of finance subsidiaries increased by ¥67.9 billion, or 1.4%, to ¥4,837.6 billion from the previous fiscal year, due mainly to an increase of finance subsidiaries-receivables attributable to the adoption of new accounting standards, which was partially offset by negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, total amount of finance subsidiaries-receivables and property on operating leases of finance subsidiaries as of the end of the year would have increased by approximately ¥595.9 billion, or 12.5%, compared to the increase as reported of ¥67.9 billion, which includes negative foreign currency translation effects.

 

Revenue from external customers in Financial services business decreased ¥44.4 billion, or 7.3%, to ¥561.8 billion from the previous fiscal year. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, revenue for the year would have decreased by approximately ¥1.2 billion, or 0.2%, compared to the decrease as reported of ¥44.4 billion, which includes negative foreign currency translation effects. Revenue including intersegment sales decreased ¥45.3 billion, or 7.3%, to ¥573.4 billion from the previous fiscal year.

 

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Operating costs and expenses decreased ¥36.7 billion, or 8.7%, to ¥387.1 billion from the previous fiscal year. Cost of sales decreased ¥11.6 billion, or 3.6%, to ¥309.8 billion from the previous fiscal year, due mainly to a decrease in costs related to lease residual values. Selling, general and administrative expenses decreased ¥25.0 billion, or 24.5%, to ¥77.3 billion from the previous fiscal year, due mainly to a decrease in provisions for credit losses.

 

Operating income decreased ¥8.6 billion, or 4.4%, to ¥186.2 billion from the previous fiscal year, due mainly to negative foreign currency effects, which was partially offset by a decrease in provisions for credit losses and losses on lease residual values.

 

Our finance subsidiaries in North America have historically accounted for all leases as direct financing leases. However, starting in the fiscal year ended March 31, 2007, some of the leases which do not qualify for direct financing leases accounting treatment are accounted for as operating leases. Generally, direct financing lease revenues and interest income consist of the recognition of finance lease revenue at inception of the lease arrangement and subsequent recognition of the interest income component of total lease payments using the effective interest method. In comparison, operating lease revenues include the recognition of the gross lease payment amounts on a straight line basis over the term of the lease arrangement, and operating lease vehicles are depreciated to their estimated residual value on a straight line basis over the term of the lease. It is not anticipated that the differences in accounting for operating leases and direct financing leases will have a material net impact on Honda’s results of operations overall, however, operating lease revenues and associated depreciation of leased assets do result in differing presentation and timing compared to those of direct financing leases.

 

Honda consolidated former Qualifying Special Purpose Entities (QSPEs) that were not consolidated as of March 31, 2010. As a result, previously derecognized finance subsidiaries receivables held by former QSPEs increased in the Company’s consolidated balance sheet as of April 1, 2010. In addition, Honda doesn’t recognize certain gains or losses related to securitization transactions such as gains or losses attributable to the change in the fair value of retained interests since the year ended March 31, 2011.

 

Information about credit losses and losses on lease residual values is provided at Item 5. Operating and Financial Review and Prospects A. “Operating Results, Application of Critical Accounting Policies”. Information about consolidation of former QSPEs, finance subsidiaries-receivables and securitizations is described in notes 1(c), (3) and (4) to the accompanying consolidated financial statements.

 

Geographical Information

 

Japan

 

In Japan, revenue from domestic and export sales increased ¥305.4 billion, or 9.2%, to ¥3,611.2 billion from the previous fiscal year, due mainly to an increase in revenue in Automobile business and revenue related to licensing agreements. Operating income was ¥66.1 billion, an increase of ¥95.2 billion of operating income from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and model mix, continuing cost reductions and income related to licensing agreements, which was partially offset by increased selling, general and administrative expenses and R&D expenses, negative foreign currency effects and the impact of the Great East Japan Earthquake.

 

North America

 

In North America, which mainly consists of the United States, revenue increased ¥239.6 billion, or 6.1%, to ¥4,147.8 billion from the previous fiscal year, due mainly to an increase in revenue in Automobile business, which was partially offset by negative foreign currency translation effects. Operating income increased ¥64.5 billion, or 27.3%, to ¥300.9 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and model mix, and a decrease in fixed costs per unit as a result of increased production, which was partially offset by increased selling, general and administrative expenses and negative foreign currency effects.

 

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Europe

 

In Europe, revenue decreased ¥126.1 billion, or 15.3%, to ¥699.2 billion from the previous fiscal year, due mainly to a decrease in revenue in the Automobile business and negative foreign currency translation effects. Operating loss was ¥10.2 billion, an improvement of ¥0.6 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses, which was partially offset by a decrease in income attributable to decreased net sales and model mix, negative foreign currency effects.

 

Asia

 

In Asia, revenue increased ¥322.5 billion, or 21.2%, to ¥1,841.1 billion from the previous fiscal year, due mainly to an increase in revenue in Automobile and Motorcycle businesses, which was partially offset by negative foreign currency translation effects. Operating income increased ¥37.6 billion, or 33.3%, to ¥150.6 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and model mix, which was partially offset by increased selling, general and administrative expenses and negative foreign currency effects.

 

Other Regions

 

In Other Regions, revenue increased ¥85.5 billion, or 9.5%, to ¥982.0 billion from the previous fiscal year, due mainly to an increase in revenue in Motorcycle and Automobile businesses and positive foreign currency translation effects. Operating income increased ¥23.7 billion, or 51.8%, to ¥69.5 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and model mix, positive foreign currency effects, which was partially offset by increased selling, general and administrative expenses.

 

Application of Critical Accounting Policies

 

Critical accounting policies are those which require us to apply the most difficult, subjective or complex judgments, often requiring us to make estimates about the effect of matters that are inherently uncertain and which may change in subsequent periods, or for which the use of different estimates that could have reasonably been used in the current period would have had a material impact on the presentation of our financial condition and results of operations. Further changes in the economic environment surrounding us, effects by market conditions, effects of currency fluctuations or other factors have combined to increase the uncertainty inherent in such estimates and assumptions.

 

The following is not intended to be a comprehensive list of all our accounting policies. Our significant accounting policies are more fully described in note (1) to the accompanying consolidated financial statements.

 

We have identified the following critical accounting policies with respect to our financial presentation.

 

Product Warranty

 

We warrant our products for specific periods of time.

 

Product warranties vary depending upon the nature of the product, the geographic location of their sales and other factors.

 

We recognize costs for general warranties on products we sell and product recalls. We provide for estimated warranty costs at the time products are sold to customers or the time new warranty programs are initiated. Estimated warranty costs are provided based on historical warranty claim experience with consideration given to the expected level of future warranty costs, including current sales trends, the expected number of units to be affected and the estimated average repair cost per unit for warranty claims. Our products contain certain parts manufactured by third party suppliers. Since suppliers typically warrant these parts, the expected receivables from warranties of these suppliers are deducted from our estimates of accrued warranty obligations.

 

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We believe our accrued warranty liability is a “critical accounting estimate” because changes in the calculation can materially affect net income attributable to Honda Motor Co., Ltd., and require us to estimate the frequency and amounts of future claims, which are inherently uncertain.

 

Our policy is to continuously monitor warranty cost accruals to determine the adequacy of the accrual. Therefore, warranty expense accruals are maintained at an amount we deem adequate to cover estimated warranty expenses.

 

Actual claims incurred in the future may differ from the original estimates, which may result in material revisions to the warranty expense accruals.

 

The changes in provisions for those product warranties and net sales and other operating revenue for each of the years in the three-year period ended March 31, 2012 are as follows:

 

     Yen (millions)  
     2010     2011     2012  

Provisions for product warranties

      

Balance at beginning of year

   ¥ 233,979      ¥ 226,038      ¥ 213,943   

Warranty claims paid during the period

     (86,886     (82,080     (82,547

Liabilities accrued for warranties issued during the period

     79,520        84,920        60,004   

Changes in liabilities for pre-existing warranties during the period*

     (3,571     (3,550     (17,697

Foreign currency translation

     2,996        (11,385     (3,141
  

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 226,038      ¥ 213,943      ¥ 170,562   
  

 

 

   

 

 

   

 

 

 

Net sales and other operating revenue

   ¥ 8,579,174      ¥ 8,936,867      ¥ 7,948,095   

 

* 

Changes in liabilities for pre-existing warranties during the period for the fiscal year ended March.31, 2012, was ¥17.6 billion, due mainly to the change of the expected level of future warranty costs, including the expected number of units to be affected and estimated average repair cost per unit for product recalls.

 

Credit Losses

 

Our finance subsidiaries provide retail lending and leasing to customers and wholesale financing to dealers primarily to support sales of our products. Honda classifies retail and direct financing lease receivables derived from those services as finance subsidiaries-receivables. Operating leases are classified as property on operating leases. Certain finance receivables related to sales of inventory are included in trade accounts and notes receivable and other assets in the consolidated balance sheets. Receivables on past due operating lease rental payments are included in other current assets in the consolidated balance sheets.

 

The majority of the credit risk is with consumer financing and to a lesser extent with dealer financing. Credit risk is affected by general economic conditions such as a rise in unemployment rates or declines in used vehicle prices. Our finance subsidiaries estimate losses incurred on retail and direct financing lease receivables (consumer finance receivables) and recognize them in the allowance for credit losses. Estimated losses on past due operating lease rental payments are also recognized in the allowance for credit losses. In the case of property on operating leases, estimated losses due to customer defaults are not recognized in the allowance for credit losses because a loss is realized on the disposition of the property. Therefore we present these losses as impairment losses on property on operating leases. Consumer finance receivables consist of a large number of smaller-balance homogenous loans and leases. Our finance subsidiaries segment these receivables into groups with common characteristics, and estimate collectively the allowance for credit losses on consumer finance receivables by the group. Our finance subsidiaries take into consideration various methodologies when estimating the allowance including vintage loss rate analysis and delinquency roll rate analysis. When

 

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performing the vintage loss rate analysis, consumer finance receivables are segregated between retail and direct financing lease, and further segmented into groups with common risk characteristics including collateral type, credit grades, and original terms. Loss rates are projected for these pools based on historical rates and adjusted for considerations of emerging trends and changing economic conditions. The roll rate analysis is used primarily by our finance subsidiaries in North America. This analysis tracks the migration of finance receivables through various stages of delinquency and ultimately to charge-offs. Roll rates are projected based on historical results while also taking into consideration trends and changing economic conditions. Similar to our portfolio of consumer finance receivables, our portfolio of receivables on past due operating lease rental payments is collectively evaluated for the allowance for credit losses. Property on operating leases are also collectively evaluated for impairment losses to be realized upon early disposition.

 

Wholesale receivables are considered to be impaired and recognized in the allowance for credit losses when it is probable that it will be unable to collect all amounts due according to the original terms of the contract. Our finance subsidiaries recognize estimated losses on them in allowance for credit losses. Credit risk on wholesale receivables is affected primarily by the financial strength of the dealers within the portfolio. Wholesale receivables are evaluated for impairment on an individual dealer basis. Ongoing evaluations of dealerships are performed to determine whether there is evidence of impairment. Factors can include payment performance, overall dealership financial performance, or known difficulties experienced by the dealership.

 

We believe our allowance for credit losses and impairment losses on operating leases is a “critical accounting estimate” because it requires significant judgment about inherently uncertain items. We regularly review the adequacy of the allowance for credit losses and impairment losses on operating leases. The estimates are based on information available as of each reporting date. However actual losses may differ from the original estimates as a result of actual results varying from those assumed in our estimates.

 

As an example of the sensitivity of the allowance calculation, the following scenario demonstrates the impact that a deviation in one of the primary factors estimated as a part of our allowance calculation would have on the provision and allowance for credit losses. If we had experienced a 10% increase in net credit losses during fiscal 2012, the provision for fiscal 2012 and the allowance balance at the end of fiscal 2012 would have increased by approximately ¥3.8 billion and ¥2.3 billion, respectively. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2012.

 

Additional Narrative of the Change in Credit Loss

 

The following tables summarize our allowance for credit losses on finance receivables:

 

     Yen (billions)  

For the year ended March 31, 2010

   Retail     Direct
financing
lease
    Wholesale     Total  

Provisions for credit losses

        

Balance at beginning of year

   ¥ 34.3      ¥ 1.8      ¥ 1.8      ¥ 38.0   

Provision

     30.0        1.9        0.3        32.3   

Charge-offs

     (43.7     (3.2     (0.6     (47.6

Recoveries

     13.9        1.1        0.0        15.1   

Adjustments from foreign currency translation

     (0.6     0.1        (0.0     (0.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 33.9      ¥ 1.7      ¥ 1.6      ¥ 37.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending receivable balance

   ¥ 3,246.4      ¥ 449.4      ¥ 331.7      ¥ 4,027.6   

Average receivable balance, net

   ¥ 3,181.0      ¥ 497.8      ¥ 325.5      ¥ 4,004.5   

Net Charge-offs as a % of average receivable balance

     0.94     0.42     0.18     0.81

Allowance as a % of ending receivable balance

     1.05     0.40     0.49     0.93

 

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     Yen (billions)  

For the year ended March 31, 2011

   Retail     Direct
financing
lease
    Wholesale     Total  

Provisions for credit losses

        

Balance at beginning of year

   ¥ 33.9      ¥ 1.7      ¥ 1.6      ¥ 37.3   

Adjustment resulting from the adoption of new accounting standards on variable interest entities (note 1(c))

     0.8        —          —          0.8   

Adjusted balance at beginning of year

   ¥ 34.8      ¥ 1.7      ¥ 1.6      ¥ 38.2   

Provision

     10.3        0.7        0.3        11.3   

Charge-offs

     (27.6     (1.5     (0.5     (29.7

Recoveries

     11.1        0.5        0.0        11.7   

Adjustments from foreign currency translation

     (3.0     (0.0     (0.0     (3.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 25.5      ¥ 1.4      ¥ 1.4      ¥ 28.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending receivable balance

   ¥ 3,368.0      ¥ 362.1      ¥ 301.6      ¥ 4,031.7   

Average receivable balance, net

   ¥ 3,346.5      ¥ 374.9      ¥ 309.5      ¥ 4,031.0   

Net Charge-offs as a % of average receivable balance

     0.49     0.26     0.15     0.45

Allowance as a % of ending receivable balance

     0.76     0.40     0.47     0.71
     Yen (billions)  

For the year ended March 31, 2012

   Retail     Direct
financing
lease
    Wholesale     Total  

Provisions for credit losses

        

Balance at beginning of year

   ¥ 25.5      ¥ 1.4      ¥ 1.4      ¥ 28.4   

Provision

     10.3        0.3        0.0        10.8   

Charge-offs

     (21.1     (0.7     (0.0     (21.9

Recoveries

     6.6        0.1        0.0        6.8   

Adjustments from foreign currency translation

     (0.9     (0.0     (0.0     (1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 20.4      ¥ 1.1      ¥ 1.4      ¥ 23.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending receivable balance

   ¥ 3,328.1      ¥ 380.3      ¥ 301.3      ¥ 4,009.8   

Average receivable balance, net

   ¥ 3,233.1      ¥ 366.1      ¥ 243.7      ¥ 3,843.0   

Net Charge-offs as a % of average receivable balance

     0.45     0.16     0.03     0.39

Allowance as a % of ending receivable balance

     0.62     0.30     0.46     0.57

 

The following table provides information related to losses on operating leases due to customer defaults:

 

     Yen (billions)  
         2010              2011              2012      

Provision for credit losses on past due rental payments

   ¥ 1.9       ¥ 1.6       ¥ 1.1   

Impairment losses on operating leases due to early termination

   ¥ 3.3       ¥ 0.8       ¥ 1.5   

 

Fiscal Year 2012 Compared with Fiscal Year 2011

 

The provision for credit losses on finance receivables decreased by ¥0.5 billion, or 5%, and net charge-offs decreased by ¥2.8 billion, or 16%. The decline in net charge-offs is due mainly to the improved credit quality of our North American portfolio and sustained strength in used vehicle prices.

 

Fiscal Year 2011 Compared with Fiscal Year 2010

 

The provision for credit losses on finance receivables decreased by ¥20.9 billion, or 65%, and net charge-offs decreased by ¥14.5 billion, or 45%. Impairment losses on operating leases due to early termination

 

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decreased by ¥2.4 billion, or 75%. These declines in losses are due mainly to the improvement in the overall credit quality of our North American portfolio and economic conditions and strength in used vehicle prices.

 

Losses on Lease Residual Values

 

Our finance subsidiaries in North America establish contract residual values of lease vehicles at lease inception based on expectations of future used vehicle values, taking into consideration external industry data. End-customers of leased vehicles typically have an option to buy the leased vehicle for the contractual residual value of the vehicle or to return the vehicle to our finance subsidiaries through the dealer at the end of the lease term. Likewise, dealers have the option to buy the vehicle returned by the customer or to return the vehicle to our finance subsidiaries. The likelihood that the leased vehicle will be purchased varies depending on the difference between the contractual residual value and the actual market value of the vehicle at the end of the lease term. We are exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values at the end of the lease term. For direct financing leases, our finance subsidiaries in North America purchase insurance to cover a portion of the estimated residual value.

 

We periodically review the estimate of residual values. For vehicle leases accounted for as operating leases, the adjustments to estimated residual values result in changes to the remaining depreciation expense to be recognized prospectively on a straight-line basis over the remaining term of the lease.

 

For vehicle leases accounted for as direct financing leases, downward adjustments are made for declines in estimated residual values that are deemed to be other-than-temporary. The adjustments on the uninsured portion of the vehicle’s residual value are recognized as a loss in the period in which the estimate changed.

 

The primary components in estimating losses on lease residual values are the expected frequency of returns, or the percentage of leased vehicles we expect to be returned by customers at the end of the lease term, and the expected loss severity, or the expected difference between the residual value and the amount we receive through sales of returned vehicles plus proceeds from insurance, if any. We estimate losses on lease residual values by evaluating several different factors, including trends in historical and projected used vehicle values and general economic measures.

 

We also test our operating leases for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable.

 

Recoverability of operating leases to be held is measured by a comparison of the carrying amount of operating leases to future net cash flows (undiscounted and without interest charges) expected to be generated by the operating leases. If such operating leases are considered to be impaired, impairment losses to be recognized is measured by the amount by which the carrying amount of the operating leases exceeds the estimated fair value of the operating leases.

 

We believe that our estimated losses on lease residual values and impairment losses is a “critical accounting estimate” because it is highly susceptible to market volatility and requires us to make assumptions about future economic trends and lease residual values, which are inherently uncertain. We believe that the assumptions used are appropriate. However actual losses incurred may differ from original estimates as a result of actual results varying from those assumed in our estimates.

 

If future auction values for all Honda and Acura vehicles in our North American operating lease portfolio as of March 31, 2012, were to decrease by approximately ¥10,000 per unit from our present estimates, holding all other assumption constant, the total impact would be an increase in depreciation expense by approximately ¥1.3 billion, which would be recognized over the remaining lease terms. Similarly, if future return rates for our existing portfolio of all Honda and Acura vehicles were to increase by one percentage point from our present estimates, the total impact would be an increase in depreciation expense by approximately ¥0.2 billion, which

 

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would be recognized over the remaining lease terms. With the same prerequisites shown above, if future auction values in our North American direct financing lease portfolio were to decrease by approximately ¥10,000 per unit from our present estimates, the total impact would be an increase in losses on lease residual values by approximately ¥0.3 billion. And if future return rates were to increase by one percentage point from our present estimates, the total impact would be slight. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2012. Also, declines in auction values are likely to have a negative effect on return rates which could affect the sensitivities.

 

Fiscal Year 2012 Compared with Fiscal Year 2011

 

Used vehicle prices remained strong during fiscal year 2012. Disruptions in the supply of new vehicles caused by the natural disasters in Japan and Thailand supported the demand for used vehicles. Losses related to lease residual value of our finance subsidiaries in North America declined for higher estimates of lease residual values. No impairment losses as a result of declines in estimated residual values were recognized during fiscal year 2012.

 

Incremental deprecation on operating leases declined by ¥2.1 billion, or 81%. Losses on lease residual values on direct financing leases declined by ¥1.7 billion, or 56%.

 

Fiscal Year 2011 Compared with Fiscal Year 2010

 

Used vehicle prices continued to improve during fiscal year 2011 due in part to the low supply of used vehicles. Losses related to lease residual value of our finance subsidiaries in North America declined for higher estimates of lease residual values. No impairment losses as a result of declines in estimated residual values were recognized during fiscal year 2011.

 

Incremental deprecation on operating leases declined by ¥11.4 billion, or 81%. Losses on lease residual values on direct financing leases declined by ¥3.9 billion, or 56%.

 

Pension and Other Postretirement Benefits

 

We have various pension plans covering substantially all of our employees in Japan and certain employees in foreign countries. Benefit obligations and pension costs are based on assumptions of many factors, including the discount rate, the rate of salary increase and the expected long-term rate of return on plan assets. The discount rate is determined mainly based on the rates of high quality corporate bonds currently available and expected to be available during the period to maturity of the defined benefit pension plans. The salary increase assumptions reflect our actual experience as well as near-term outlook. Honda determines the expected long-term rate of return based on the investment policies. Honda considers the eligible investment assets under investment policies, historical experience, expected long-term rate of return under the investing environment, and the long-term target allocations of the various asset categories. Our assumed discount rate and rate of salary increase as of March 31, 2012 were 2.0% and 2.1%, respectively, and our assumed expected long-term rate of return for the year ended March 31, 2012 was 3.0% for Japanese plans. Our assumed discount rate and rate of salary increase as of March 31, 2012 were 4.6~5.2% and 1.5~4.4%, respectively, and our assumed expected long-term rate of return for fiscal 2012 was 6.5~7.5% for foreign plans.

 

We believe that the accounting estimates related to our pension plans is “critical accounting estimate” because changes in these estimates can materially affect our financial condition and results of operations.

 

Actual results may differ from our assumptions, and the difference is accumulated and amortized over future periods. Therefore, the difference generally will be reflected as our recognized expenses in future periods. We believe that the assumptions currently used are appropriate, however, differences in actual expenses or changes in assumptions could affect our pension costs and obligations, including our cash requirements to fund such obligations.

 

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The following table shows the effect of a 0.5% change in the assumed discount rate and the expected long-term rate of return on our funded status, equity, and pension expense.

 

Japanese Plans

 

      Yen (billions)  

Assumptions

   Percentage
point
change (%)
     Funded
status
     Equity      Pension
expense
 

Discount rate

     +0.5/-0.5         -84.0/+94.4         +32.1/-42.1         -2.6/+3.4   

Expected long-term rate of return

     +0.5/-0.5         —           —           -3.9/+3.9   

 

Foreign Plans

 

      Yen (billions)  

Assumptions

   Percentage
point
change (%)
     Funded
status
     Equity      Pension
expense
 

Discount rate

     +0.5/-0.5         -50.0/+57.2         +21.0/-24.3         -4.8/+5.5   

Expected long-term rate of return

     +0.5/-0.5         —           —           -1.8/+1.8   

 

(*1) 

Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions at March 31, 2012.

 

(*2)

Funded status for fiscal 2012 is affected by March 31, 2012 assumptions.

     Pension expense for fiscal 2012 is affected by March 31, 2011 assumptions.

 

Income Taxes

 

Honda is subject to income tax examinations in many tax jurisdictions because Honda conducts its operations in various regions of the world. We recognize the tax benefit from an uncertain tax position based on the technical merits of the position when the position is more likely than not to be sustained upon examination. Benefits from tax positions that meet the more likely than not recognition threshold are measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate resolution. We performed a comprehensive review of any uncertain tax positions.

 

We believe our accounting for tax uncertainties is a “critical accounting estimate” because it requires us to evaluate and assess the probability of the outcome that could be realized upon ultimate resolution. Our estimates may change in the future due to new developments.

 

We believe that our estimates and assumptions of unrecognized tax benefits are reasonable, however, if our estimates of unrecognized tax benefits and potential tax benefits are not representative of actual outcomes, our consolidated financial statements could be materially affected in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution.

 

Valuation of Deferred Tax Assets

 

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income over the periods in which those temporary differences become deductible and operating loss carryforwards utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

 

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We believe that our accounting for the valuation of deferred tax assets is a “critical accounting estimate” because it required us to evaluate and assess the probability of future taxable income and our business plan, which are inherently uncertain.

 

Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences and operating loss carryforwards, net of the existing valuation allowances at March 31, 2011 and 2012. The amount of the deferred tax asset considered realizable, however, could be significantly reduced in the near term if estimates of future taxable income during the carryforward period are reduced due to further changes in the economic environment surrounding us, effects by market conditions, effects of currency fluctuations or other factors and our consolidated results of operation could be adversely affected.

 

B. Liquidity and Capital Resources

 

Overview of Capital Requirements, Sources and Uses

 

The policy of Honda is to support its business activities by maintaining sufficient capital resources, a sufficient level of liquidity and a sound balance sheet.

 

Honda’s main business is the manufacturing and sale of motorcycles, automobiles and power products. To support this business, it also provides retail financing and automobile leasing services for customers, as well as wholesale financing services for dealers.

 

Honda requires working capital mainly to purchase parts and raw materials required for production, as well as to maintain inventory of finished products and cover receivables from dealers and for providing financial services. Honda also requires funds for capital expenditures, mainly to introduce new models, upgrade, rationalize and renew production facilities, as well as to expand and reinforce sales and R&D facilities.

 

Honda meets its working capital requirements primarily through cash generated by operations, bank loans and the issuance of corporate bonds. Honda believes that its working capital is sufficient for the Company’s present requirements. The year-end balance of liabilities associated with the Company and its subsidiaries’ funding for non-Financial services businesses was ¥463.9 billion as of March 31, 2012. In addition, the Company’s finance subsidiaries fund financial programs for customers and dealers primarily from medium-term notes, bank loans, commercial paper, corporate bonds, securitization of finance receivables and intercompany loans. The year-end balance of liabilities associated with these finance subsidiaries’ funding for Financial services business was ¥4,113.3 billion as of March 31, 2012.

 

Cash Flows

 

Fiscal Year 2012 Compared with Fiscal Year 2011

 

Consolidated cash and cash equivalents on March 31, 2012 decreased by ¥31.9 billion from March 31, 2011, to ¥1,247.1 billion. The reasons for the increases or decreases for each cash flow activity, when compared with the previous fiscal year, are as follows:

 

Net cash provided by operating activities amounted to ¥737.4 billion of cash inflows. Cash inflows from operating activities decreased by ¥333.4 billion compared with the previous fiscal year due mainly to a decrease in cash received due to decreased unit sales in the Automobile business, which was partially offset by decreased payments for parts and raw materials primarily caused by a decrease in automobile production.

 

Net cash used in investing activities amounted to ¥673.0 billion of cash outflows. Cash outflows from investing activities decreased by ¥58.3 billion compared with the previous fiscal year, due mainly to a decrease

 

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in acquisitions of finance subsidiaries-receivables and a decrease in purchase of operating lease assets, which was partially offset by increased capital expenditure and a decrease in collections of finance subsidiaries-receivables.

 

Net cash used in financing activities amounted to ¥44.1 billion of cash outflows. Cash outflows from financing activities decreased by ¥56.2 billion, compared with the previous fiscal year, due mainly to an increase in proceeds from debt and a decrease in purchases of treasury stock, which was partially offset by an increase in dividends paid.

 

Fiscal Year 2011 Compared with Fiscal Year 2010

 

Consolidated cash and cash equivalents on March 31, 2011 increased by ¥159.1 billion from March 31, 2010, to ¥1,279.0 billion. The reasons for the increases or decreases for each cash flow activity, when compared with the previous fiscal year, are as follows:

 

Net cash provided by operating activities amounted to ¥1,070.8 billion of cash inflows. Cash inflows from operating activities decreased by ¥473.3 billion compared with the previous fiscal year, due mainly to increased payments for parts and raw materials primarily due to an increase in automobile production, which was partially offset by an increase in cash received from customers, primarily due to increased unit sales in the Automobile business.

 

Net cash used in investing activities amounted to ¥731.3 billion of cash outflows. Cash outflows from investing activities increased by ¥135.6 billion compared with the previous fiscal year, due mainly to an increase in acquisitions of finance subsidiaries-receivables and an increase in purchase of operating lease assets, which was partially offset by an increase in collections of finance subsidiaries-receivables and an increase in proceeds from sales of operating lease assets.

 

Net cash used in financing activities amounted to ¥100.4 billion of cash outflows. Cash outflows from financing activities decreased by ¥458.8 billion, compared with the previous fiscal year, due mainly to an increase in debts which decreased in the previous fiscal year, which was partially offset by purchases of treasury stock and an increase in dividends paid.

 

Liquidity

 

The ¥1,247.1 billion in cash and cash equivalents at the end of the fiscal year 2012 corresponds to approximately 1.9 months of net sales, and Honda believes it has sufficient liquidity for its business operations.

 

At the same time, Honda is aware of the possibility that various factors, such as recession-induced market contraction and financial and foreign exchange market volatility, may adversely affect liquidity. For this reason, finance subsidiaries that carry total short-term borrowings of ¥1,177.8 billion have committed lines of credit equivalent to ¥777.3 billion that serve as alternative liquidity for the commercial paper issued regularly to replace debt. Honda believes it currently has sufficient credit limits, extended by prominent international banks, as of the date of the filing of Honda’s Form 20-F.

 

Honda’s short- and long-term debt securities are rated by credit rating agencies, such as Moody’s Investors Service, Inc., Standard & Poor’s Rating Services, and Rating and Investment Information, Inc. The following table shows the ratings of Honda’s unsecured debt securities by Moody’s, Standard & Poor’s and Rating and Investment Information as of March 31, 2012.

 

     Credit ratings for  
     Short-term
unsecured debt securities
     Long-term
unsecured debt securities
 

Moody’s Investors Service

     P-1         A1   

Standard & Poor’s Rating Services

     A-1         A+   

Rating and Investment Information

     a-1+         AA   

 

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The above ratings are based on information provided by Honda and other information deemed credible by the rating agencies. They are also based on the agencies’ assessment of credit risk associated with designated securities issued by Honda. Each rating agency may use different standards for calculating Honda’s credit rating, and also makes its own assessment. Ratings can be revised or nullified by agencies at any time. These ratings are not meant to serve as a recommendation for trading in or holding Honda’s unsecured debt securities.

 

C. Research and Development

 

Honda and its consolidated subsidiaries use the most-advanced technologies to conduct R&D activities with the goal of creating distinctive products that are internationally competitive. To attain this goal, the Group’s main R&D divisions operate independently as subsidiaries, allowing technicians to pursue their tasks with significant freedom. Product-related R&D is spearheaded by Honda R&D Co., Ltd. in Japan; Honda R&D Americas, Inc. in the United States; and Honda R&D Europe (U.K.) Ltd. in the United Kingdom. R&D on production technologies centers around Honda Engineering Co., Ltd. in Japan and Honda Engineering North America, Inc. in the United States. All of these entities work in close association with our other entities and businesses in their respective regions.

 

Total consolidated R&D expenses for the fiscal year ended March 31, 2012 amounted to ¥519.8 billion.

 

Motorcycle Business

 

In the Motorcycle Business segment, Honda is aiming to deliver appealing products that offer outstanding environment performance and the joy of ownership to customers in a timely manner. To this end, Honda took initiatives to enhance product appeal, strengthen cost competitiveness, increase the speed of product and technology development, address the requirements of a low-carbon society, and ensure our continued dominance in major racing events.

 

One of the major developments in fiscal year 2012 was the launch of the New Mid Concept series in Japan, North America and Europe. This included the NC700S naked model which offers comfortable riding performance and high fuel economy; the fun to maneuver and incredibly fuel efficient NC700X; and the Integra, which combines a heightened dimension of motorcycle enjoyment with a level of riding comfort and convenience suitable for commuters. All three models are outfitted with 700cc mid-sized engines, which offer strong torque even at low and medium speeds in addition to low fuel consumption. Further, the Integra, comes equipped with a newly developed, second-generation dual-clutch transmission that is lighter and more compact than before. Honda also developed a 125cc global scooter engine, with improved durability, quietness and fuel efficiency. This engine was equipped in the Click 125i, a new 125cc scooter model launched in Thailand. For customers with smartphones, we rolled out Honda Moto LINC, a newly developed service for motorcycle owners based on the internavi LINC service offered to automobile owners.

 

R&D expenses in this segment in fiscal 2012 amounted to ¥63.3 billion.

 

In terms of major race results, Honda won the Triple Crown (Rider, Team, and Constructor’s Championship) in the MotoGP class of the FIM Road Racing World Championship series in 2011.

 

Automobile Business

 

In the Automobile business segment, we are working to develop innovative technologies and create products which offer new value in order to meet customer needs. We are also actively developing technologies that provide advanced safety performance and address environmental issues.

 

Among our major achievements in Japan during fiscal year 2012, we launched the N Box, which brings together Honda’s original center-tank-layout and a newly developed powerplant to create one of the most

 

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spacious interiors ever offered in a mini vehicle. In North America, Asia and other regions, we launched the fully remodeled Civic, with improved fuel economy and realizes a pleasant and refined interior space despite the vehicle’s compact body dimensions. In Europe, an idle stop system was offered as a standard feature on all MT-type models of the fully remodeled Civic five-door. These and other innovations have improved the fuel efficiency of gasoline-powered vehicles by roughly 10%, and diesel-powered vehicles by approximately 20%.

 

Other R&D-related news included the announcement of “Earth Dreams Technology,” a range of next-generation technologies for simultaneously realizing high-level driving performance and exceptional fuel efficiency. Through improved engine and transmission efficiency, together with advances in hybrid motors and other electric-powered motor technology, we built upon a base of outstanding environmental performance in pursuing the joy of driving which is characteristic of Honda. Honda also unveiled the NSX Concept, a next-generation sports supercar equipped with a next-generation V-6 VTEC direct-injection engine mated with a highly-efficient, high-output hybrid system, Sport Hybrid SH-AWD (Super Handling All Wheel Drive), offering excellent drivability and fuel economy. The NSX Concept embodies the pursuit of exceptional environmental and fuel economy along with the acceleration feel and sheer driving pleasure expected from a sports supercar.

 

R&D expenses in this segment in fiscal 2012 amounted to ¥427.8 billion.

 

Power Product and Other Businesses

 

In the Power product and other businesses segments, Honda introduced several measures in accordance with its business policy of proactively proposing new and useful ideas that will bring joy to customers worldwide. These centered on the creation of new technology for advanced industrial markets, the development of strategic products for emerging markets, the establishment of a foundation for addressing growth in overseas production, and efforts to strengthen the development operations supporting business operations.

 

Principal developments in this area included the sales launch to gas utility companies of a new model gas engine-based cogeneration unit for household use. This high-efficiency, household-use combined heat and power supply system, the MCHP1.0K2, generates power using a gas-powered engine, utilizing the subsequent waste heat to supply hot water. The MCHP1.0K2 incorporates EXLink (Extended Expansion Linkage Engine), an original Honda product that boosts the efficiency of both power generation and heat utilization. As the world’s smallest gas engine-based cogeneration unit, the MCHP1.0K2 can now be installed in more ordinary households than ever before. In the area of outboard motors, we released the BF250, featuring top-of-class fuel efficiency and superior output performance, in Japan, North America, Europe, Southeast Asia, and other regions. The BF250 has a newly developed 3.6 L V-6 VTEC engine, combined with a direct air intake system, the first ever application of this technology to an outboard motor. In the general-purpose engine category, Honda further reduced noise and vibration levels in a number of engines in the GX engine series. Sold in Japan, these engines also boast top-of-class low exhaust gas emissions and high fuel economy.

 

R&D expenses in this segment in fiscal 2012 amounted to ¥28.6 billion.

 

Fundamental Research

 

During fiscal 2012, Honda continued its fundamental research activities to develop technologies in a diverse range of fields that will support the products of the future.

 

The major initiative undertaken during the fiscal year was the evolution of the ASIMO humanoid robot. Equipping ASIMO for the first time ever with autonomous behavior control technology has made it more independent, enabling the robot to move continuously without navigation input from a human operator. In terms of intelligence and physical form, the ability of ASIMO to adapt to conditions has improved dramatically, bringing it one step closer to practical usage in environments of coexistence with humans. Development is also proceeding on a task-performing robot arm. For this device, Honda is applying the posture control technology

 

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that allows ASIMO to walk and run, along with multi-joint simultaneous trajectory control technology, which controls the motors in ASIMO’s hand and foot joints all at once, to enable tasks to be performed in locations too dangerous for humans or where footing is unstable.

 

Honda is committed to continuing its humanoid robotics research, and will take proactive steps to convert this research into products for mass production and practical or applied use.

 

Please note that expenses incurred in fundamental research are allocated among each business segment.

 

Patents and Licenses

 

At March 31, 2012, Honda owned more than 17,600 patents in Japan and more than 25,300 patents abroad. Honda also had applications pending for more than 13,200 patents in Japan and for more than 16,200 patents abroad. While Honda considers that, in the aggregate, Honda’s patents are important, it does not consider any one of such patents, or any related group of them, to be of such importance that the expiration or termination thereof would materially affect Honda’s business.

 

D. Trend Information

 

Honda uses principally the declining-balance method for calculating the depreciation of property, plant and equipment, and plans to change it to the straight-line method from the fiscal year ending March 31, 2013. We believe that the straight-line method better reflects the future usage of property plant and equipment. The effect of the change in depreciation method is recognized prospectively as a change in accounting estimate. The change in depreciation method is anticipated to cause a decrease in depreciation expense by approximately ¥40.0 billion for the fiscal year ending March 31, 2013.

 

See Item 5.A “Operating and Financial Review and Prospects” for information required by this item except the effect of the change in depreciation method above.

 

E. Off-Balance Sheet Arrangements

 

(Guarantee)

 

At March 31, 2012, we guaranteed ¥28.1 billion of employee bank loans for their housing costs. If an employee defaults on his/her loan payments, we are required to perform under the guarantee. The undiscounted maximum amount of our obligation to make future payments in the event of defaults is ¥28.1 billion. As of March 31, 2012, no amount was accrued for any estimated losses under the obligations, as it was probable that the employees would be able to make all scheduled payments.

 

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F. Tabular Disclosure of Contractual Obligations

 

The following table shows our contractual obligations at March 31, 2012:

 

Contractual Obligations

 

     At March 31, 2012  
     Yen (millions)  
     Payments due by period  
     Total      Less than
1 year
     1-3
years
     3-5
years
     After
5 years
 

Long-term debt

   ¥ 3,146,396         911,395         1,286,621         792,501         155,879   

Operating leases

     101,732         18,733         24,443         17,487         41,069   

Purchase commitments*1

     88,136         88,136         —           —           —     

Interest payments*2

     203,160         79,056         87,640         33,788         2,676   

Contributions to defined benefit pension plans*3

     93,555         93,555         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 3,632,979         1,190,875         1,398,704         843,776         199,624   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

*1

Honda had commitments for purchases of property, plant and equipment at March 31, 2012.

 

*2

To estimate the schedule of interest payments, the company utilized the balances and average interest rates of borrowings and debts and derivative instruments as of March 31, 2012.

 

*3

Since contributions beyond the next fiscal year are not currently determinable, contributions to defined benefit pension plans reflect only contributions expected for the next fiscal year.

 

If our estimates of unrecognized tax benefits and potential tax benefits are not representative of actual outcomes, our consolidated financial statements could be materially affected in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Since it is difficult to estimate actual payment in the future related to our uncertain tax positions, unrecognized tax benefit totaled ¥43,627 million is not represented in the table above.

 

At March 31, 2012, we had no material capital lease obligations or long-term liabilities reflected on our balance sheet under U.S. GAAP other than those set forth in the table above.

 

G. Safe Harbor

 

All information disclosed under Item 5. E and F contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

 

Such statements are based on management’s assumptions and beliefs taking into account information currently available to it. Therefore, please be advised that Honda’s actual results could differ materially from those described in these forward-looking statements as a result of numerous factors, including general economic conditions in Honda’s principal markets and foreign exchange rates between the Japanese yen and the U.S. dollar, the Euro and other major currencies, as well as other factors detailed from time to time.

 

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Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

 

Honda’s articles of incorporation provide for a Board of Directors of not more than 15 Directors and for a Board of Corporate Auditors of not more than seven Corporate Auditors. Directors and Corporate Auditors are elected by resolutions of the general meetings of shareholders. The Corporate Auditors are nominated by the Board of Directors as candidates for election with approval by the Board of Corporate Auditors. The normal term of office of a Director is one year and that of a Corporate Auditor is four years. Directors and Corporate Auditors may serve any number of consecutive terms.

 

The Board of Directors appoints one President and Director and may appoint one Chairman of the Board of Directors and several Executive Vice Presidents and Directors, Senior Managing Directors and Managing Directors from among its members. The President represents the Company. In addition, the Board of Directors may appoint, pursuant to its resolutions, Directors who shall each represent the Company. Under the Company Law, a representative director individually has authority to represent the Company generally in the conduct of its affairs. The Board of Directors has the ultimate responsibility for the administration of the affairs of the Company.

 

Under the Company Law, the Corporate Auditors of the Company have the duty to audit the Director’s execution of their duties. Corporate Auditors are not required to be, and the Corporate Auditors of the Company are not, certified public accountants, and may not at the same time be Directors or employees of the Company or any of its subsidiaries. They are entitled to participate in meetings of the Board of Directors but are not entitled to vote. Corporate Auditors of the Company form the Board of Corporate Auditors, which must consist of at least three Corporate Auditors. Not less than half of the members of the Board of Corporate Auditors must be outside Corporate Auditors, each of whom has never served as a director, accounting councilor, operating officer, manager or employee of the Company or any of its subsidiaries. Corporate Auditors are required to elect from among themselves at least one Standing Corporate Auditor. Corporate Auditors also have a statutory duty to provide their report to the Board of Corporate Auditors, which must submit its audit report to the Representative Director each year. A Corporate Auditor may note his or her opinion in the audit report if his or her opinion is different from the opinion expressed in the audit report. The Board of Corporate Auditors is empowered to establish audit principles, methods of investigation by Corporate Auditors of the status of the corporate affairs, and assets of the Company and other matters concerning the performance of the Corporate Auditors’ duties. In addition, the Company is required to appoint independent certified public accountants as accounting auditor. Such independent certified public accountants have as their primary statutory duties to audit the consolidated and non-consolidated financial statements of the Company prepared in accordance with the Company Law to be submitted by the Representative Director to general meetings of shareholders and to prepare an accounting audit report thereon and to notify the contents of such report to the specified Corporate Auditor and the specified Director in charge.

 

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The following table provides the names of all Directors and Corporate Auditors of the Company and the current positions held by such persons.

 

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Representative Directors

        

Takanobu Ito

(August 29, 1953)

  

Director of the Company from June 2000

 

President, Chief Executive Officer and

Representative Director of the Company,

appointed in April 2011 (presently held)

 

Chief Operating Officer for Automobile Operations

appointed in April 2011 (presently held)

 

President and Director of the Company,

appointed in June 2009

 

President and Director of Honda R&D Co., Ltd.,

appointed in April 2009

 

Senior Managing Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Automobile Operations,

appointed in April 2007

 

Managing Officer of the Company,

appointed in June 2005

 

General Manager of Suzuka Factory of Production Operations,

appointed in April 2005

 

General Supervisor, Motor Sports,

appointed in April 2004

 

Managing Director of the Company,

appointed in June 2003

 

Responsible for Motor Sports,

appointed in June 2003

 

President and Director of Honda R&D Co., Ltd.,

appointed in June 2003

 

Senior Managing Director of Honda R&D Co., Ltd.,

appointed in June 2001

   *3    21,800
  

Director of the Company,

appointed in June 2000

 

Executive Vice President of Honda R&D Americas, Inc.,

appointed in April 1998

 

Joined Honda in April 1978

     

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Tetsuo Iwamura

(May 30, 1951)

  

Director of the Company from June 2000 to June 2011, and from June 2012

 

Executive Vice President, Executive Officer and

Representative Director of the Company,

appointed in June 2012 (presently held)

 

Executive Vice President and Executive Officer

appointed in April 2012

 

Senior Managing Officer of the Company,

appointed in June 2011

 

Senior Managing Officer and Director of the Company, appointed in April 2011

 

Senior Managing Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Regional Operations (North America),

appointed in April 2007 (presently held)

 

President and Director of Honda North America, Inc., appointed in April 2007 (presently held)

 

President and Director of American Honda Motor Co., Inc., appointed in April 2007 (presently held)

 

Managing Director of the Company,

appointed in June 2006

 

Chief Operating Officer for Regional Operations (Latin America),

appointed in April 2003

 

President and Director of Honda South America Ltda., appointed in April 2003

 

President and Director of Moto Honda da Amazonia Ltda., appointed in April 2003

 

Director of the Company,

appointed in June 2000

 

Chief Operating Officer for Parts Operations,

appointed in April 2000

 

General Manager of Overseas Operation Office No. 1 for Regional Operations (the Americas),

appointed in June 1999

 

Joined Honda in April 1978

     *3         21,900   

Directors

        

Tatsuhiro Oyama

(July 9, 1950)

  

Director of the Company from June 2001

 

Senior Managing Officer and Director of the Company, appointed in April 2011 (presently held)

     *3         24,400   
  

Senior Managing Director of the Company,

appointed in June 2010

     

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Chief Officer of Driving Safety Promotion Center,

appointed in April 2010 (presently held)

 

Chief Operating Officer for Motorcycle Operations,

appointed in April 2008 (presently held)

 

Managing Director of the Company,

appointed in June 2006

 

Chief Operating Officer for Regional Operations (Asia & Oceania),

appointed in April 2006

 

President and Director of Asian Honda Motor Co., Ltd.,

appointed in April 2006

 

Chief Operating Officer for Parts Operations,

appointed in April 2003

 

President and Director of Honda Motorcycle Japan Co., Ltd., appointed in August 2001

 

Director of the Company,

appointed in June 2001

 

General Manager of Motorcycle Sales Division for Regional Sales Operations (Japan),

appointed in April 2001

 

Joined Honda in April 1969

     

Fumihiko Ike

(May 26, 1952)

  

Director of the Company from June 2003

 

Chief Operating Officer for IT Operations,

appointed in April 2012 (presently held)

 

Responsible for Government & Industrial Affairs,

appointed in April 2012 (presently held)

 

Senior Managing Officer and Director of the Company,

appointed in April 2011 (presently held)

 

Chief Operating Officer for Business Management Operations,

appointed in April 2011 (presently held)

 

Risk Management Officer,

appointed in April 2011 (presently held)

 

General Supervisor, Information Systems

appointed in April 2011

 

Chief Operating Officer for Regional Operations

(Asia & Oceania),

appointed in April 2008

   *3    23,200
  

President and Director of Asian Honda Motor Co., Ltd., appointed in April 2008

 

Managing Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Business Management Operations, appointed in April 2006

     

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Director of the Company,

appointed in June 2003

 

Chief Operating Officer for Power Product Operations, appointed in April 2003

 

Joined Honda in February 1982

     

Tomohiko Kawanabe

(May 17, 1952)

  

Director of the Company from June 2010

 

Senior Managing Officer and Director of the Company,

appointed in April 2011 (presently held)

 

Responsible for Quality, Certification and Regulation Compliance,

appointed in April 2011 (presently held)

 

Managing Director of the Company,

appointed in June 2010

 

President and Director of Honda R&D Co., Ltd.,

appointed in April 2010

 

Joined Honda in April 1977

   *3    15,500

Takashi Yamamoto

(January 12, 1953)

  

Director of the Company from June 2000

 

Senior Managing Officer and Director of the Company, appointed in June 2012 (presently held)

 

Senior Managing Officer of the Company,

appointed in April 2012

 

Chief Operating Officer for Production Operations,

appointed in April 2012 (presently held)

 

Managing Officer of the Company,

appointed in April 2011

 

General Manager of Automobile Production Planning Office in Production Operations,

appointed in April 2011 (presently held)

 

President and Director of Yutaka Giken Co., Ltd.,

appointed in June 2009

 

Managing Officer of the Company,

appointed in June 2007

 

General Manager of Saitama Factory of Production Operations, appointed in April 2007

   *3    14,200
  

Operating Officer of the Company,

appointed in June 2005

 

President and Director of Honda Manufacturing of Alabama, LLC,

appointed in April 2005

 

Responsible for Quality, Certification and Regulation Compliance,

appointed in April 2004

     

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Responsible for Quality, Certification and Regulation Compliance and Service Technology,

appointed in April 2002

 

Director of the Company,

appointed in June 2000

 

General Manager of Automobile Purchasing Division 1 for Purchasing Operations,

appointed in April 2000

 

Joined Honda in April 1977

     

Yoshiharu Yamamoto

(March 19, 1953)

  

Director of the Company from June 2011

 

Senior Managing Officer and Director of the Company, appointed in April 2012 (presently held)

 

Managing Officer and Director of the Company,

appointed in June 2011

   *3    14,200
  

Managing Officer of the Company,

appointed in April 2011

 

President, Chief Executive Officer and Director of

Honda R&D Co., Ltd.,

appointed in April 2011 (presently held)

 

Executive Vice President and Director of Honda R&D Co., Ltd.,

appointed in June 2010

 

Senior Managing Director of Honda R&D Co., Ltd.,

appointed in June 2007

 

Managing Director of Honda R&D Co., Ltd.,

appointed in June 2005

 

Joined Honda in April 1973

     

Kensaku Hogen

(August 2, 1941)

  

Director of the Company from June 2005

 

Director of the Company,

appointed in June 2005 (presently held)

 

Ambassador to Canada,

appointed in April 2001

   *3    1,900

Nobuo Kuroyanagi

(December 18, 1941)

  

Director of the Company from June 2009

 

Advisor of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU), appointed in April 2012 (presently held)

 

Director of Mitsubishi UFJ Financial Group, Inc. (MUFG), appointed in April 2010

 

Director of the Company,

appointed in June 2009 (presently held)

 

Chairman of BTMU,

appointed in April 2008

 

President and CEO of MUFG,

appointed in October 2005

   *3    1,400
        

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Takeo Fukui

(November 28, 1944)

  

Director of the Company from June 1988

 

Director and Advisor of the Company,

appointed in June 2009 (presently held)

   *3    40,800
  

President and Director of the Company,

appointed in June 2003

 

Responsible for Motor Sports,

appointed in June 1999

 

Senior Managing Director of the Company,

appointed in June 1999

 

President and Director of Honda R&D Co., Ltd.,

appointed in June 1998

 

Managing Director of the Company,

appointed in June 1996

 

President and Director of Honda of America Mfg., Inc., appointed in June 1996

 

Executive Vice President and Director of Honda of America Mfg., Inc.,

appointed in June 1994

 

Senior Managing Director of Honda R&D Co., Ltd.,

appointed in June 1990

 

Director of the Company,

appointed in June 1988

 

President and Director of Honda Racing Corporation,

appointed in May 1987

 

Managing Director of Honda R&D Co., Ltd.,

appointed in May 1987

 

Joined Honda in April 1969

     

Masahiro Yoshida

(March 5, 1957)

  

Director of the Company from June 2010

 

Compliance Officer,

appointed in April 2012 (presently held)

 

Operating Officer and Director of the Company,

appointed in April 2011 (presently held)

 

Director of the Company,

appointed in June 2010

 

Chief Operating Officer for Business Support Operations, appointed in April 2010 (presently held)

 

General Manager of Hamamatsu Factory of Production Operations,

appointed in April 2008

 

Operating Officer of the Company,

appointed in June 2007

 

Responsible for Human Resources and Associate Relations for Business Support Operations,

appointed in April 2007

 

Joined Honda in April 1979

   *3    17,900

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Yuji Shiga

(October 7, 1958)

  

Director of the Company from June 2012

 

Operating Officer and Director of the Company,

appointed in June 2012 (presently held)

 

Chief Operating Officer for Power Product Operations, appointed in April 2012 (presently held)

 

Operating Officer of the Company,

appointed in April 2011

 

Responsible for CIS countries, the Middle & Near East and Africa for Regional Operations,

appointed in April 2011

 

General Manager of Operation Office No. 2 in Regional Operations (Asia & Oceania),

appointed in April 2010

 

General Manager of Operation Office No. 1 in Regional Operations (North America),

appointed in April 2009

 

President of Jialing-Honda Motors Co., Ltd.,

appointed in June 2005

 

Joined Honda in April 1982

   *3    6,400

Corporate Auditors

        

Masaya Yamashita

(April 5, 1953)

  

Corporate Auditor of the Company (full-time),

appointed in June 2012 (presently held)

 

Managing Officer of the Company,

appointed in June 2011

   *6    20,700
  

Managing Officer and Director of the Company,

appointed in April 2011

 

Managing Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Purchasing Operations,

appointed in April 2008

 

General Manager of Kumamoto Factory of Production Operations,

appointed in April 2006

 

Operating Officer of the Company,

appointed in June 2005

 

Director of the Company,

appointed in June 2003

 

General Manager of Automobile Purchasing Division 1

for Purchasing Operations,

appointed in April 2002

 

Joined Honda in April 1977

     

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Hideki Okada

(June 1, 1953)

  

Corporate Auditor of the Company (full-time),

appointed in June 2009 (presently held)

 

General Manager of Regional Operation Planning Office (North America),

appointed in April 2007

 

Executive Vice President and Director of American Honda Motor Co., Inc.,

appointed in April 2007

 

Operating Officer of the Company,

appointed in June 2006

 

General Manager of Accounting Division for Business Management Operation,

appointed in June 2004

 

Joined Honda in April 1977

     *4         20,600   

Hirotake Abe

(November 13, 1944)

  

Corporate Auditor of the Company,

appointed in June 2011 (presently held)

 

Established the Certified Public Accountant

Hirotake Abe Office in January 2010 (presently held)

 

Senior Adviser of Deloitte Touche Tohmatsu (presently, Deloitte Touche Tohmatsu LLC) in June 2007

     *5         300   
  

Executive Member of Deloitte Touche Tohmatsu Limited in June 2004

 

Registered as certified public accountant in March 1974

     

Tomochika Iwashita

(November 14, 1946)

  

Corporate Auditor of the Company,

appointed in June 2011 (presently held)

 

President and Director of

Tokio Marine & Nichido Life Insurance Co., Ltd.,

appointed in June 2006

 

Vice President and Director of Tokio Marine &

Nichido Fire Insurance Co., Ltd.,

appointed in June 2005

 

Director of Millea Holdings, Inc.

(presently, Tokio Marine Holdings, Inc.),

appointed in June 2005

 

Senior Managing Director of Tokio Marine &

Nichido Fire Insurance Co., Ltd.,

appointed in October 2004

 

Senior Managing Director of Tokio Marine and Fire Insurance Co., Ltd.

(presently, Tokio Marine & Nichido Fire Insurance Co., Ltd.),

appointed in June 2003

 

Managing Director of Tokio Marine and Fire Insurance Co., Ltd.

(presently, Tokio Marine & Nichido Fire Insurance Co., Ltd.),

appointed in June 2002

     *5         300   

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Toshiaki Hiwatari

(August 4, 1945)

  

Corporate Auditor of the Company,

appointed in June 2012 (presently held)

 

Registered with the Daiichi Tokyo Bar Association

in September 2010

 

Advisor of TMI Associates

appointed in September 2010 (presently held)

 

Retired from office in June 2010

 

Prosecutor General appointed in July 2008

 

Superintending Prosecutor of the Tokyo High Public Prosecutors Office,

appointed in December 2006

 

Superintending Prosecutor of the Hiroshima High Public Prosecutors Office,

appointed in June 2006

 

Vice-Minister of Justice,

appointed in June 2004

     *6         None   
  

Director-General of the Criminal Affairs Bureau of the

Ministry of Justice,

appointed in August 2002

 

Director-General of General Affairs Department of the Supreme Public Prosecutors Office,

appointed in December 2001

 

Director of the Office for Promotion of Justice System Reform,

appointed in July 2001

 

Director-General of the Secretariat of the Justice System Reform Council, Cabinet Secretariat,

appointed in July 1999

 

Associate Vice-Minister of Justice,

appointed in June 1999

 

Chief Public Prosecutor in the Oita District Public Prosecutors Office,

appointed in July 1997

 

Appointed Public Prosecutor in the Supreme Public Prosecutors Office,

appointed in June 1997

 

Entered the Legal Training and Research Institute of the Supreme Court in April 1968

     

 

*1. Directors Mr. Kensaku Hogen and Mr. Nobuo Kuroyanagi satisfy the required conditions for the outside director provided for in Article 2, Paragraph 1, Item 15 of the Company Law.

 

*2. Corporate Auditors Mr. Hirotake Abe, Mr. Tomochika Iwashita and Mr. Toshiaki Hiwatari are outside corporate auditors as provided for in Article 2, Paragraph 1, Item 16 of the Company Law.

 

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*3. The term of office of a Director is one year after his/her election to office at the close of the ordinary general meeting of shareholders on June 21, 2012.

 

*4. The term of office of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 23, 2009.

 

*5. The term of office of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 23, 2011.

 

*6. The term of office of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 21, 2012.

 

*7. The Company has introduced an operating officer system to strengthen operations in regions and local workplaces, and implement quick and appropriate decisions. Executive Officers, Senior Managing Officers, Managing Officers and Operating Officers under the operating officer system are not statutory positions under the Company Law and do not conform to the definition of “Directors and Senior Management” as defined in Form 20-F. The Company’s Senior Managing Officers, Managing Officers and Operating Officers (excluding officers who also hold the position of Director) under the operating officer system, as voluntarily disclosed in Japan, are as follows:

 

Senior Managing Officers

Hidenobu Iwata

    

President and Director of Honda of America Mfg., Inc.

Managing Officers

    

Manabu Nishimae

    

Chief Operating Officer for Regional Operations

    

(Europe, the Middle &Near East and Africa)

    

President and Director of Honda Motor Europe Ltd.

Koichi Fukuo

    

Executive in Charge of Business Unit No. 1, Automobile Operations

Hiroshi Kobayashi

    

Chief Operating Officer for Regional Operations

    

(Asia & Oceania)

    

President and Director of Asian Honda Motor Co., Ltd.

Sho Minekawa

     Chief Operating Officer for Regional Sales Operations (Japan)

Toshihiko Nonaka

    

Responsible for Products, Automobile Operations

    

Executive Vice President and Director, Honda R&D Co., Ltd.

Takuji Yamada

    

Executive Vice President and Director of American Honda Motor Co., Inc.

Masahiro Takedagawa

    

Chief Operating Officer for Regional Operations

    

(Latin America)

    

President and Director of Honda South America Ltda.

    

President and Director of Honda Automoveis do Brazil Ltda.

Yoshiyuki Matsumoto

    

Executive in Charge of Business Unit No. 3, Automobile Operations

Ko Katayama

    

General Manager of Saitama Factory of Production Operations

 

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Operating Officers

    

Seiji Kuraishi

    

Chief Operating Officer for Regional Operations (China)

    

President of Honda Motor (China) Investment Co., Ltd.

Katsushi Watanabe

    

General Manager of Kumamoto Factory of Production Operations

Toshiaki Mikoshiba

    

President of Guangqi Honda Automobile Co., Ltd.

Yoshi Yamane

    

General Manager of Suzuka Factory of Production Operations

Takashi Sekiguchi

    

President and Director of Honda Canada Inc.

Takahiro Hachigo

    

Executive Vice President and Director of Honda Motor Europe Ltd.

Hiroshi Sasamoto

    

President, Chief Executive Officer and Director of Honda Engineering Co., Ltd.

Hiroyuki Yamada

    

Chief Operating Officer for Customer Service Operations

Chitoshi Yokota

    

Executive in Charge of Business Unit No. 2, Automobile Operations

Michimasa Fujino

    

President and Director of Honda Aircraft Company, LLC

Soichiro Takizawa

     Executive Vice President and Director of Honda Motor Europe Ltd.
     President and Director of Honda of the U.K. Manufacturing Ltd.

Kohei Takeuchi

     General Manager of Accounting Division for Business Management Operations

Naoto Matsui

     Chief Operating Officer for Purchasing Operations

Mitsugu Matsukawa

     Executive Vice President of Honda Motor (China) Investment Co., Ltd.

Shinji Aoyama

     General Manager of Motorcycle Business Planning Office for Motorcycle Operations

 

There is no family relationship between any director or executive officer and any other director or executive officer.

 

B. Compensation

 

Directors and Corporate Auditors receive remuneration, the aggregate maximum amount of which is approved at the annual general meeting of shareholders. The amounts of the remuneration approved to pay to Directors and Corporate Auditors are allocated among them at meeting of the Board of Directors and Corporate Auditors. Also, Directors and Corporate Auditors received bonuses, the aggregate amount of which was approved at the annual general meeting of shareholders. From fiscal year 2012, the amounts of the bonuses paid to Directors are allocated among them at meeting of the Board of Directors within the aggregate amount approved at the annual general meeting of shareholders. It is based on the Company’s performance for each fiscal year, Director’s bonuses in the past and other factors. The bonuses for Corporate Auditors are merged into remuneration from fiscal year 2012 as consideration for their duties after abolishing the bonuses for Corporate Auditors. All the Directors and Corporate Auditors contribute a portion of their remuneration to the officer shareholders’ association, purchase shares of the Company’s Common Stock and keep holding those shares during their services.

 

The total amount of remuneration paid to the Company’s Directors and Corporate Auditors during the fiscal year ended March 31, 2012 was ¥866 million. This amount includes remuneration paid to nine Directors and two Corporate Auditors who retired during the fiscal year. The amount of remuneration paid to the Directors includes amount of wages paid to those Directors who were also Directors of subsidiaries of the Company.

 

The total amount of bonuses paid to the Company’s Directors and Corporate Auditors during the fiscal year ended March 31, 2012 was ¥372 million.

 

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The amounts of remuneration and bonuses that were paid during the year ended March 31, 2012 are as follows:

 

    Yen (millions)
    Directors excluding
outside Directors
  Outside
Directors
  Corporate Auditors
excluding outside
Corporate Auditors
  Outside
Corporate  Auditors
  Total
    number   amount   number   amount   number   amount   number   amount   number   amount

Remuneration

  19      680   2   22   2   120   5   42   28      866

Bonus

  18      326   2     6   2     30   3     9   25      372
   

 

   

 

   

 

   

 

   

 

Total

    1,007     28     150     52     1,239
   

 

   

 

   

 

   

 

   

 

 

The amount of remuneration paid to Takanobu Ito during the fiscal year ended March 31, 2012 was ¥96 million. The amount of bonuses for Takanobu Ito accrued for the fiscal year ended March 31, 2012 was ¥26 million.

 

C. Board Practices

 

See Item 6.A “Directors and Senior Management” for information concerning the Company’s Directors and Corporate Auditors required by this item.

 

D. Employees

 

The following tables list the number of Honda full-time employees as of March 31, 2012, 2011 and 2010.

 

As of March 31, 2012

 

Total

   Motorcycle
Business
     Automobile
Business
     Financial Services
Business
     Power Product and
Other Businesses
 

187,094

     39,954         134,357         2,145         10,638   

 

  

 

 

    

 

 

    

 

 

    

 

 

 

 

At March 31, 2012, Honda had 187,094 full-time employees, including 118,923 local nationals employed in its overseas operations.

 

As of March 31, 2011

 

Total

   Motorcycle
Business
     Automobile
Business
     Financial Services
Business
     Power Product and
Other Businesses
 

179,060

     35,454         130,900         2,145         10,561   

 

  

 

 

    

 

 

    

 

 

    

 

 

 

 

At March 31, 2011, Honda had 179,060 full-time employees, including 109,400 local nationals employed in its overseas operations.

 

As of March 31, 2010

 

Total

   Motorcycle
Business
     Automobile
Business
     Financial Services
Business
     Power Product and
Other Businesses
 

176,815

     34,808         129,663         2,145         10,199   

 

  

 

 

    

 

 

    

 

 

    

 

 

 

 

At March 31, 2010, Honda had 176,815 full-time employees, including 106,230 local nationals employed in its overseas operations.

 

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Most of the Company’s regular employees in Japan, except management personnel, are required by the terms of the Company’s collective bargaining agreement with its labor union to become members of the Federation of All Honda Workers’ Union (AHWU), which is affiliated with the Japan Council of the International Metalworkers’ Federation. Approximately 86% of the employees of the Company and its Japanese subsidiaries were members of AHWU at March 31, 2012.

 

In Japan, basic wages are negotiated annually and the average increases in wages of the Company’s employees in fiscal 2010, 2011 and 2012 were 1.9%, 1.8% and 1.8%, respectively. In addition, in accordance with Japanese custom, each employee is paid a semi-annual bonus. Bonuses are negotiated during wage negotiations and are based on the overall performance of the Company or the applicable subsidiary in the previous year, the outlook for the current year and other factors.

 

The Company has had labor contracts with its labor union in Japan since 1970. These contracts are renegotiated with respect to basic wages and other working conditions. The regular employees of the Company’s Japanese subsidiaries are covered by similar contracts. Since 1957, neither the Company nor any of its subsidiaries has experienced any strikes or other labor disputes that materially affected its business activities. The Company considers labor relations with its employees to be very good.

 

E. Share Ownership

 

The total amount of the Company’s voting securities owned by its officers, Directors and Corporate Auditors as a group as of June 21, 2012 is as follows.

 

Title of Class

  Amount Owned   % of Class
Common Stock   245,500 shares   0.014%

 

The Company’s full-time employees are eligible to participate in the Honda Employee Shareholders’ Association, whereby participating employees contribute a portion of their salaries to the Association and the Association purchases shares of the Company’s Common Stock on their behalf. As of March 31, 2012, the Association owned 5,439,750 shares of the Company’s common stock.

 

Item 7. Major Shareholders and Related Party Transactions

 

A. Major Shareholders

 

As of March 31, 2012, 1,811,428,430 shares of Honda’s Common Stock were issued and 1,802,299,559 shares were outstanding.

 

The following table shows the shareholders that owned of record 5% or more of the issued shares of Honda’s Common Stock as of March 31, 2012:

 

Name

   Shares owned
(thousands)
   Ownership
(%)

Japan Trustee Services Bank, Ltd. (trust account)

   136,263    7.52%

 

According to a statement on Schedule 13G (Amendment No. 8) filed by Mitsubishi UFJ Financial Group, Inc. with the Securities and Exchange Commission on February 10, 2012, Mitsubishi UFJ Financial Group, Inc. directly and indirectly held, as of December 31, 2011, 109,130,094 shares, or 6.0% of the then issued shares, of Honda’s Common Stock.

 

None of the above shareholders has voting rights that are different from those of our other shareholders.

 

ADSs representing American Depositary Shares are issued by JPMorgan Chase Bank, N.A., as Depositary. The normal trading unit is 100 American Depositary Shares. Total issued shares of Honda as of the close of

 

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business on March 31, 2012 were 1,811,428,430 shares of Common Stock, of which 61,138,613 shares represented by ADSs and 282,184,586 shares not represented by ADSs were owned by residents of the United States. The number of holders of record of the Company’s shares of Common Stock in the United States was 258 at March 31, 2012.

 

To the knowledge of Honda, it is not directly or indirectly owned or controlled by any other corporation, by any government, or by any other natural or legal person or persons severally or jointly. As far as is known to the Company, there are no arrangements, the operation of which may at a subsequent date, result in a change in control of the Company.

 

B. Related Party Transactions

 

Honda purchases materials, supplies and services from numerous suppliers throughout the world in the ordinary course of business, including firms with which Honda is affiliated.

 

During the fiscal year ended March 31, 2012, Honda had sales of ¥561.4 billion and purchases of ¥762.4 billion with equity affiliates accounted under the equity method. As of March 31, 2012, Honda had receivables of ¥176.2 billion from affiliated companies, and had payables of ¥142.4 billion to affiliated companies.

 

Honda does not consider the amounts involved in such transactions to be material to its business.

 

C. Interests of Experts and Counsel

 

Not applicable.

 

Item 8. Financial Information

 

A. Consolidated Statements and Other Financial Information

 

1 – 3. Consolidated Financial Statements

 

Honda’s audited consolidated financial statements are included under “Item 18—Financial Statements”.

 

4. Not applicable.

 

5. Not applicable.

 

6. Export Sales.

 

See “Information on the Company—Marketing and Distribution—Overseas Sales”.

 

7. Legal Proceedings.

 

Various legal proceedings are pending against us. We believe that such proceedings constitute ordinary routine litigation incidental to our business. With respect to product liability, personal injury claims or lawsuits, we believe that any judgment that may be recovered by any plaintiff for general and special damages and court costs will be adequately covered by our insurance and accrued liabilities. Punitive damages are claimed in certain of these lawsuits. We are also subject to potential liability under other various lawsuits and claims.

 

Honda recognizes an accrued liability for loss contingencies when it is probable that an obligation has been incurred and the amount of loss can be reasonably estimated. Honda reviews these pending lawsuits and claims periodically and adjusts the amounts recorded for these contingent liabilities, if necessary, by considering the nature of lawsuits and claims, the progress of the case and the opinions of legal counsel. After consultation with

 

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legal counsel, and taking into account all known factors pertaining to existing lawsuits and claims, Honda believes that the ultimate outcome of such lawsuits and pending claims should not result in liability to Honda that would be likely to have an adverse material effect on its consolidated financial position, results of operations or cash flows.

 

8. Profit Redistribution Policy

 

The Company strives to carry out its operations from a global perspective and to increase its corporate value. With respect to the redistribution of profits to its shareholders, which it considers to be one of the most important management issues, its basic policy for dividends is to make distributions after taking into account its long-term consolidated earnings performance.

 

In addition, the Company’s basic policy for dividends is to make quarterly distributions. The Company may determine dividends from surplus by a resolution of the Board of Directors. Annual dividends for the fiscal year ended March 31 of each year require a resolution at the general meeting of shareholders.

 

The Company may also acquire its own shares at a timing that it deems optimal, with the goal of improving efficiency of the Company’s capital structure. The present goal is to maintain a shareholders’ return ratio (i.e. the ratio of the total of the dividend payment and the repurchase of the Company’s own shares to consolidated net income attributable to Honda Motor Co., Ltd.) of approximately 30%. Retained earnings will be allocated toward financing R&D activities that are essential for the future growth of the Company and capital expenditures and investment programs that will expand its operations for the purpose of improving business results and strengthening the Company’s financial condition.

 

The Company determined year-end dividends of ¥15 per share for the year ended March 31, 2012. As a result, total dividends for the year ended March 31, 2012, together with the first quarter dividends of ¥15, the second quarter dividends of ¥15 and the third quarter dividends of ¥15, were ¥60 per share, an increase of ¥6 from the annual dividends paid for the year ended March 31, 2011.

 

Details of Distribution of Surplus (Record dates of the fiscal year ended March 31, 2012)

 

    Resolution of
the Board of
Directors
  Resolution of
the Board of
Directors
  Resolution of
the Board of
Directors
  Resolution at
General Meeting of
Shareholders
    August 1, 2011   October 31, 2011   January 31, 2012   June 21, 2012

Dividend per Share of Common Stock (yen)

    15.00     15.00     15.00     15.00